NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, unless otherwise noted, except per share data)
Note 1: Basis of Presentation
The unaudited interim condensed consolidated financial statements of The J. M. Smucker Company (“Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included.
Operating results for the three months ended July 31, 2019, are not necessarily indicative of the results that may be expected for the year ending April 30, 2020. For further information, reference is made to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended April 30, 2019.
Note 2: Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for us on May 1, 2020, but we elected to early adopt on May 1, 2019, as permitted, on a prospective basis. During the three months ended July 31, 2019, we capitalized implementation costs related to third-party cloud computing services of $0.7, which is reflected in other noncurrent assets in the Condensed Consolidated Balance Sheet.
In August 2018, the FASB also issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20) Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial and adds new, as well as clarifies certain other, disclosure requirements. ASU 2018-14 will be effective for us on May 1, 2020, with the option to early adopt at any time prior to the effective date, and it will require adoption on a retrospective basis. We do not anticipate that the adoption of this ASU will have a material impact on our disclosures.
In August 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. This rule was effective on November 5, 2018, and as a result, we adopted a portion of the amendments during 2019. This rule also amended the disclosure requirements related to the analysis of shareholders’ equity, which was expanded to the interim financial statements and was effective for us on May 1, 2019. While the new shareholders’ equity disclosure requirements impacted our interim financial statements beginning May 1, 2019, the amendments in this rule did not have a material impact on our other financial statements and disclosures.
In February 2016, in an effort to increase transparency and comparability among organizations, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. We adopted the requirements of ASU 2016-02 and all related amendments on May 1, 2019, utilizing an optional transition method that allows for a cumulative-effect adjustment in the period of adoption with no restatement of prior periods. This transition method also does not require new lease disclosures for periods prior to the effective date. We have elected certain practical expedients available under the guidance, including a package of practical expedients which allows us to not reassess prior conclusions related to existing contracts containing leases, lease classification, and initial direct costs.
Adoption of ASU 2016-02 on May 1, 2019, resulted in the recognition of operating lease right-of-use assets and lease liabilities of $159.2 and $166.6, respectively, in the Condensed Consolidated Balance Sheet. The difference between the additional lease assets and lease liabilities was primarily due to an existing deferred rent balance that was reclassified to the operating lease liability. The new standard did not materially impact our Condensed Statement of Consolidated Income or Condensed Statement of Consolidated Cash Flows. The additional disclosures required are presented within Note 12: Leases.
Note 3: Acquisition
On May 14, 2018, we acquired the stock of Ainsworth Pet Nutrition, LLC (“Ainsworth”), a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S., in an all-cash transaction valued at $1.9 billion. The transaction was funded with a bank term loan and borrowings under our commercial paper program of approximately $1.5 billion and $400.0, respectively. For additional information on the financing associated with this transaction, refer to Note 8: Debt and Financing Arrangements.
During 2019, the final purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determined the estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and other estimates made by management. The purchase price allocation included total intangible assets of $1.3 billion. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired and, as a result, the excess was allocated to goodwill. As a result of the acquisition, we recognized total goodwill of $617.8 within the U.S. Retail Pet Foods segment, which represents the value we expect to achieve through the implementation of operational synergies and growth opportunities as we integrate Ainsworth into our U.S. Retail Pet Foods segment. Of the total goodwill, $446.0 was deductible for income tax purposes at the acquisition date, of which $408.5 remains deductible at July 31, 2019.
The carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment were $2.4 billion and $1.5 billion, respectively, as of July 31, 2019. The goodwill and indefinite-lived trademarks within the U.S. Retail Pet Foods segment, inclusive of the recently acquired Ainsworth business, remain susceptible to future impairment charges, due to the narrow differences between fair value and carrying value. Any significant adverse change in our near or long-term projections or macroeconomic conditions would result in future impairment charges.
Note 4: Integration and Restructuring Costs
Integration and restructuring costs primarily consist of employee-related costs and other transition and termination costs related to certain acquisition or restructuring activities. Employee-related costs include severance, retention bonuses, and relocation costs. Severance costs and retention bonuses are recognized over the estimated future service period of the affected employees, and relocation costs are expensed as incurred. Other transition and termination costs include fixed asset-related charges, contract and lease termination costs, professional fees, and other miscellaneous expenditures associated with the integration or restructuring activities, which are expensed as incurred. These integration and restructuring costs are not allocated to segment profit, and the majority of these costs are reported in other special project costs in the Condensed Statements of Consolidated Income. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.
Integration Costs: Total integration costs related to the acquisition of Ainsworth are anticipated to be approximately $50.0, the majority of which are expected to be cash charges. Of the total anticipated integration costs, we expect approximately half to be employee-related costs. All remaining integration costs are expected to be incurred by the end of 2020.
The following table summarizes our integration costs incurred related to the Ainsworth acquisition.
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Three Months Ended July 31,
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|
Total Costs Incurred to Date at July 31, 2019
|
|
2019
|
|
2018
|
|
Employee-related costs
|
$
|
0.8
|
|
|
$
|
0.9
|
|
|
$
|
16.3
|
|
Other transition and termination costs
|
2.5
|
|
|
1.1
|
|
|
19.1
|
|
Total integration costs
|
$
|
3.3
|
|
|
$
|
2.0
|
|
|
$
|
35.4
|
|
Noncash charges of $0.2 and $0.8 were included in the integration costs incurred during the three months ended July 31, 2019 and 2018, respectively. Cumulative noncash charges incurred to date were $4.3 and primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.3 and $1.6 at July 31, 2019, and April 30, 2019, respectively.
Restructuring Costs: We completed the restructuring activities associated with our organization optimization program as of April 30, 2019, and as a result, we did not incur any costs during the three months ended July 31, 2019. We incurred restructuring costs of $5.7 during the three months ended July 31, 2018, primarily consisting of employee-related costs. Total restructuring costs of $74.6 were incurred related to the program, which included $48.7 and $25.9 of employee-related costs and other transition and termination costs, respectively. Noncash charges included in the total restructuring costs were $15.2, of
which $0.1 were incurred during the three months ended July 31, 2018. Noncash charges primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.4 and $0.8 at July 31, 2019, and April 30, 2019, respectively.
Note 5: Divestiture
On August 31, 2018, we sold our U.S. baking business to Brynwood Partners VII L.P. and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party. The transaction included products that were primarily sold in U.S. retail channels under the Pillsbury®, Martha White®, Hungry Jack®, White Lily®, and Jim Dandy® brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio. This business generated net sales of approximately $370.0 in 2018. The transaction did not include our baking business in Canada.
The operating results for this business were primarily included in the U.S. Retail Consumer Foods segment prior to the sale. We received proceeds from the divestiture of $369.5, which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction during the second quarter of 2019, we recognized a pre-tax gain of $27.7.
Note 6: Reportable Segments
We operate in one industry: the manufacturing and marketing of food and beverage products. We have four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home.
The U.S. Retail Pet Foods segment primarily includes the domestic sales of Rachael RayTM Nutrish®, Meow Mix®, Milk-Bone®, Natural Balance®, Kibbles ’n Bits®, 9Lives®, Nature’s Recipe®, and Pup-Peroni® branded products; the U.S. Retail Coffee segment primarily includes the domestic sales of Folgers®, Dunkin’ Donuts®, and Café Bustelo® branded coffee; and the U.S. Retail Consumer Foods segment primarily includes the domestic sales of Smucker’s®, Jif®, and Crisco® branded products. The International and Away From Home segment comprises products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., restaurants, lodging, schools and universities, health care operators).
Segment profit represents net sales, less direct and allocable operating expenses, and is consistent with the way in which we manage our segments. However, we do not represent that the segments, if operated independently, would report operating profit equal to the segment profit set forth below, as segment profit excludes certain expenses such as corporate administrative expenses, unallocated gains and losses on commodity and foreign currency exchange derivative activities, as well as amortization expense and impairment charges related to intangible assets.
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. We would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by a change in the estimated fair value of the underlying exposures.
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Three Months Ended July 31,
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2019
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2018
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Net sales:
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U.S. Retail Pet Foods
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$
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669.9
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$
|
671.2
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U.S. Retail Coffee
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465.7
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|
|
489.5
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U.S. Retail Consumer Foods
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402.2
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|
|
483.3
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International and Away From Home
|
241.1
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|
|
258.5
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Total net sales
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$
|
1,778.9
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|
|
$
|
1,902.5
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Segment profit:
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|
|
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U.S. Retail Pet Foods
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$
|
120.1
|
|
|
$
|
100.4
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U.S. Retail Coffee
|
128.9
|
|
|
147.8
|
|
U.S. Retail Consumer Foods
|
81.0
|
|
|
97.3
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|
International and Away From Home
|
32.3
|
|
|
43.4
|
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Total segment profit
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$
|
362.3
|
|
|
$
|
388.9
|
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Amortization
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(58.8
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)
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|
(60.5
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)
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Interest expense – net
|
(49.4
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)
|
|
(53.6
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)
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Unallocated derivative gains (losses)
|
29.0
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|
|
(22.0
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)
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Other special project costs (A)
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(3.3
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)
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|
(7.7
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)
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Corporate administrative expenses
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(71.6
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)
|
|
(71.8
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)
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Other income (expense) – net
|
(1.5
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)
|
|
(0.2
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)
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Income before income taxes
|
$
|
206.7
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|
|
$
|
173.1
|
|
|
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(A)
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Other special project costs includes integration and restructuring costs. For more information, see Note 4: Integration and Restructuring Costs.
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The following table presents certain geographical information.
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Three Months Ended July 31,
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2019
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2018
|
Net sales:
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United States
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$
|
1,657.6
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|
|
$
|
1,772.3
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International:
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Canada
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$
|
96.8
|
|
|
$
|
98.2
|
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All other international
|
24.5
|
|
|
32.0
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Total international
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$
|
121.3
|
|
|
$
|
130.2
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Total net sales
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$
|
1,778.9
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|
|
$
|
1,902.5
|
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The following table presents product category information.
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Three Months Ended July 31,
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2019
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2018
|
Primary Reportable Segment (A)
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Coffee
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$
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546.7
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|
$
|
578.3
|
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U.S. Retail Coffee
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Dog food
|
295.6
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|
|
308.5
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U.S. Retail Pet Foods
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Cat food
|
195.9
|
|
|
189.0
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U.S. Retail Pet Foods
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Pet snacks
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193.2
|
|
|
187.8
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U.S. Retail Pet Foods
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Peanut butter
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177.9
|
|
|
199.2
|
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U.S. Retail Consumer Foods
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Fruit spreads
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89.2
|
|
|
85.6
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U.S. Retail Consumer Foods
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Frozen handheld
|
71.5
|
|
|
64.5
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|
U.S. Retail Consumer Foods
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Shortening and oils
|
51.5
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|
|
52.9
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|
U.S. Retail Consumer Foods
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Portion control
|
39.4
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|
|
40.9
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International and Away From Home
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Juices and beverages
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31.2
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|
|
32.2
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|
U.S. Retail Consumer Foods
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Baking mixes and ingredients
|
13.7
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|
|
84.3
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|
International and Away From Home (B)
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Other
|
73.1
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|
|
79.3
|
|
International and Away From Home
|
Total net sales
|
$
|
1,778.9
|
|
|
$
|
1,902.5
|
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(A)
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The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.
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(B)
|
During the three months ended July 31, 2018, the primary reportable segment was U.S. Retail Consumer Foods, as the majority of the net sales within this category were related to the divested U.S. baking business. For more information, see Note 5: Divestiture.
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Note 7: Earnings per Share
The following table sets forth the computation of net income per common share and net income per common share – assuming dilution under the two-class method.
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Three Months Ended July 31,
|
|
2019
|
|
2018
|
Net income
|
$
|
154.6
|
|
|
$
|
133.0
|
|
Less: Net income allocated to participating securities
|
0.8
|
|
|
0.7
|
|
Net income allocated to common stockholders
|
$
|
153.8
|
|
|
$
|
132.3
|
|
Weighted-average common shares outstanding
|
113.2
|
|
|
113.1
|
|
Add: Dilutive effect of stock options
|
0.1
|
|
|
—
|
|
Weighted-average common shares outstanding – assuming dilution
|
113.3
|
|
|
113.1
|
|
Net income per common share
|
$
|
1.36
|
|
|
$
|
1.17
|
|
Net income per common share – assuming dilution
|
$
|
1.36
|
|
|
$
|
1.17
|
|
Note 8: Debt and Financing Arrangements
Long-term debt consists of the following:
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|
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|
July 31, 2019
|
|
April 30, 2019
|
|
Principal
Outstanding
|
|
Carrying
Amount (A)
|
|
Principal
Outstanding
|
|
Carrying
Amount (A)
|
2.20% Senior Notes due December 6, 2019
|
$
|
300.0
|
|
|
$
|
299.7
|
|
|
$
|
300.0
|
|
|
$
|
299.5
|
|
2.50% Senior Notes due March 15, 2020
|
500.0
|
|
|
499.3
|
|
|
500.0
|
|
|
499.0
|
|
3.50% Senior Notes due October 15, 2021
|
750.0
|
|
|
766.6
|
|
|
750.0
|
|
|
768.4
|
|
3.00% Senior Notes due March 15, 2022
|
400.0
|
|
|
398.2
|
|
|
400.0
|
|
|
398.0
|
|
3.50% Senior Notes due March 15, 2025
|
1,000.0
|
|
|
995.4
|
|
|
1,000.0
|
|
|
995.2
|
|
3.38% Senior Notes due December 15, 2027
|
500.0
|
|
|
496.3
|
|
|
500.0
|
|
|
496.2
|
|
4.25% Senior Notes due March 15, 2035
|
650.0
|
|
|
643.6
|
|
|
650.0
|
|
|
643.5
|
|
4.38% Senior Notes due March 15, 2045
|
600.0
|
|
|
586.1
|
|
|
600.0
|
|
|
586.0
|
|
Term Loan Credit Agreement due May 14, 2021
|
800.0
|
|
|
799.1
|
|
|
800.0
|
|
|
799.0
|
|
Total long-term debt
|
$
|
5,500.0
|
|
|
$
|
5,484.3
|
|
|
$
|
5,500.0
|
|
|
$
|
5,484.8
|
|
Current portion of long-term debt
|
800.0
|
|
|
799.0
|
|
|
800.0
|
|
|
798.5
|
|
Total long-term debt, less current portion
|
$
|
4,700.0
|
|
|
$
|
4,685.3
|
|
|
$
|
4,700.0
|
|
|
$
|
4,686.3
|
|
|
|
(A)
|
Represents the carrying amount included in the Condensed Consolidated Balance Sheets, which includes the impact of capitalized debt issuance costs, terminated interest rate contracts, and offering discounts.
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We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts are designated as cash flow hedges, and as a result, the mark-to-market gains or losses on these contracts are deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transactions affect earnings. At July 31, 2019, unrealized losses of $102.1 were deferred in accumulated other comprehensive income (loss) for these derivative instruments. For additional information, see Note 10: Derivative Financial Instruments.
In April 2018, we entered into a senior unsecured delayed-draw Term Loan Credit Agreement (“Term Loan”) with a syndicate of banks and an available commitment amount of $1.5 billion. The full amount of the Term Loan was drawn on May 14, 2018, to partially finance the Ainsworth acquisition, as discussed in Note 3: Acquisition. Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate or London Interbank Offered Rate (“LIBOR”), based on our election, and are payable either on a quarterly basis or at the end of the borrowing term. The Term Loan does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. As of July 31, 2019, we have prepaid $700.0 on the Term Loan to date. The interest rate on the Term Loan at July 31, 2019, was 3.40 percent.
All of our Senior Notes outstanding at July 31, 2019, are unsecured and interest is paid semiannually, with no required scheduled principal payments until maturity. We may prepay all or part of the Senior Notes at 100 percent of the principal amount thereof, together with the accrued and unpaid interest, and any applicable make-whole amount.
We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, LIBOR, or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. We did not have a balance outstanding under the revolving credit facility at July 31, 2019, or April 30, 2019.
We participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $1.8 billion at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of July 31, 2019, and April 30, 2019, we had $295.9 and $426.0 of short-term borrowings outstanding, respectively, which were issued under our commercial paper program at weighted-average interest rates of 2.56 percent and 2.75 percent, respectively.
Interest paid totaled $21.6 and $23.3 for the three months ended July 31, 2019 and 2018, respectively. This differs from interest expense due to the timing of interest payments, capitalized interest, effect of interest rate contracts, amortization of debt issuance costs and discounts, and payment of other debt fees.
Our debt instruments contain certain financial covenant restrictions, including a leverage ratio and an interest coverage ratio. We are in compliance with all covenants.
Note 9: Pensions and Other Postretirement Benefits
The components of our net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Defined Benefit Pension Plans
|
|
Other Postretirement Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
0.4
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
Interest cost
|
5.2
|
|
|
5.9
|
|
|
0.6
|
|
|
0.6
|
|
Expected return on plan assets
|
(6.0
|
)
|
|
(6.8
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss (gain)
|
2.0
|
|
|
2.0
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Amortization of prior service cost (credit)
|
0.2
|
|
|
0.2
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Net periodic benefit cost
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
Note 10: Derivative Financial Instruments
We are exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility related to these exposures, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.
Commodity Price Management: We enter into commodity derivatives to manage price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, corn, soybean meal, edible oils, and wheat. We also enter into commodity derivatives to manage price risk for energy input costs, including diesel fuel and natural gas. Our derivative instruments generally have maturities of less than one year.
We do not qualify commodity derivatives for hedge accounting treatment, and as a result, the derivative gains and losses are immediately recognized in earnings. Although we do not perform the assessments required to achieve hedge accounting for derivative positions, we believe all of our commodity derivatives are economic hedges of our risk exposure.
The commodities hedged have a high inverse correlation to price changes of the derivative instrument. Thus, we would expect that over time any gain or loss in the estimated fair value of the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Rate Hedging: We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment.
Interest Rate Hedging: We utilize derivative instruments to manage interest rate risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal to changes in the fair value of the underlying debt and have no impact on earnings.
We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts are designated as cash flow hedges, and as a result, unrealized losses of $102.1 were deferred in accumulated other comprehensive income (loss) at July 31, 2019.
In 2015, we terminated the interest rate swap on the Senior Notes due October 15, 2021, which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. As a result of the early termination, we received $58.1 in cash, which included $4.6 of accrued and prepaid interest. The gain on termination was recorded as an increase in the long-term debt balance and is being recognized over the remaining life of the underlying debt as a reduction to interest expense. To date, we have recognized $35.0 of the gain, of which $2.0 was recognized during the three months ended July 31, 2019. The remaining gain will be recognized as follows: $6.1 through the remainder of 2020, $8.4 in 2021, and $4.0 in 2022.
The following tables set forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
|
Other
Noncurrent
Assets
|
|
Other
Noncurrent
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
102.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
$
|
—
|
|
|
$
|
102.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
5.9
|
|
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
0.3
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
$
|
6.2
|
|
|
$
|
13.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivative instruments
|
$
|
6.2
|
|
|
$
|
115.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2019
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
|
Other
Noncurrent
Assets
|
|
Other
Noncurrent
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
49.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
$
|
—
|
|
|
$
|
49.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
4.8
|
|
|
$
|
25.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
1.4
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
$
|
6.2
|
|
|
$
|
26.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivative instruments
|
$
|
6.2
|
|
|
$
|
75.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We have elected to not offset fair value amounts recognized for our exchange-traded derivative instruments and our cash margin accounts executed with the same counterparty that are generally subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of our open positions. At July 31, 2019, and April 30, 2019, we maintained cash margin account balances of $19.8 and $40.7, respectively, included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin account balances is included in other – net, investing activities in the Condensed Statements of Consolidated Cash Flows. In the event of default and immediate net settlement of all of our open positions with individual counterparties, all of our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties.
Interest expense – net, as presented in the Condensed Statements of Consolidated Income, was $49.4 and $53.6 for the three
months ended July 31, 2019 and 2018, respectively. The following table presents information on the pre-tax gains and losses recognized on interest rate contracts designated as cash flow hedges.
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
Gains (losses) recognized in other comprehensive income (loss)
|
$
|
(53.0
|
)
|
|
$
|
2.6
|
|
Less: Gains (losses) reclassified from accumulated other comprehensive income (loss)
to interest expense
|
(0.1
|
)
|
|
(0.1
|
)
|
Change in accumulated other comprehensive income (loss)
|
$
|
(52.9
|
)
|
|
$
|
2.7
|
|
Included as a component of accumulated other comprehensive income (loss) at July 31, 2019, and April 30, 2019, were deferred net pre-tax losses of $105.4 and $52.5, respectively, related to the active and terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) at July 31, 2019, and April 30, 2019, was $24.2 and $12.1, respectively. Approximately $2.5 of the net pre-tax loss will be recognized over the next 12 months related to the active and terminated interest rate contracts.
The following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as hedging instruments.
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
Gains (losses) on commodity contracts
|
$
|
12.6
|
|
|
$
|
(26.9
|
)
|
Gains (losses) on foreign currency exchange contracts
|
(1.0
|
)
|
|
0.7
|
|
Total gains (losses) recognized in cost of products sold
|
$
|
11.6
|
|
|
$
|
(26.2
|
)
|
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. The following table presents the activity in unallocated derivative gains and losses.
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
Net gains (losses) on mark-to-market valuation of unallocated derivative positions
|
$
|
11.6
|
|
|
$
|
(26.2
|
)
|
Less: Net gains (losses) on derivative positions reclassified to segment operating profit
|
(17.4
|
)
|
|
(4.2
|
)
|
Unallocated derivative gains (losses)
|
$
|
29.0
|
|
|
$
|
(22.0
|
)
|
The net cumulative unallocated derivative losses were $23.5 and $52.5 at July 31, 2019, and April 30, 2019, respectively.
The following table presents the gross notional value of outstanding derivative contracts.
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
April 30, 2019
|
Commodity contracts
|
$
|
579.2
|
|
|
$
|
544.8
|
|
Foreign currency exchange contracts
|
129.3
|
|
|
144.9
|
|
Interest rate contracts
|
800.0
|
|
|
800.0
|
|
Note 11: Other Financial Instruments and Fair Value Measurements
Financial instruments, other than derivatives, that potentially subject us to significant concentrations of credit risk consist principally of cash investments, short-term borrowings, and trade receivables. The carrying value of these financial instruments approximates fair value. Our remaining financial instruments, with the exception of long-term debt, are recognized at estimated fair value in the Condensed Consolidated Balance Sheets.
The following table provides information on the carrying amounts and fair values of our financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
April 30, 2019
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Marketable securities and other investments
|
$
|
40.9
|
|
|
$
|
40.9
|
|
|
$
|
40.9
|
|
|
$
|
40.9
|
|
Derivative financial instruments – net
|
(109.7
|
)
|
|
(109.7
|
)
|
|
(68.9
|
)
|
|
(68.9
|
)
|
Total long-term debt
|
(5,484.3
|
)
|
|
(5,656.6
|
)
|
|
(5,484.8
|
)
|
|
(5,504.0
|
)
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions.
The following tables summarize the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for our financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value at July 31, 2019
|
Marketable securities and other investments: (A)
|
|
|
|
|
|
|
|
Equity mutual funds
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.7
|
|
Municipal obligations
|
—
|
|
|
31.9
|
|
|
—
|
|
|
31.9
|
|
Money market funds
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Derivative financial instruments: (B)
|
|
|
|
|
|
|
|
Commodity contracts – net
|
(7.3
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(7.4
|
)
|
Foreign currency exchange contracts – net
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Interest rate contracts
|
—
|
|
|
(102.1
|
)
|
|
—
|
|
|
(102.1
|
)
|
Total long-term debt (C)
|
(4,813.1
|
)
|
|
(843.5
|
)
|
|
—
|
|
|
(5,656.6
|
)
|
Total financial instruments measured at fair value
|
$
|
(4,811.6
|
)
|
|
$
|
(913.8
|
)
|
|
$
|
—
|
|
|
$
|
(5,725.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value at
April 30, 2019
|
Marketable securities and other investments: (A)
|
|
|
|
|
|
|
|
Equity mutual funds
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.7
|
|
Municipal obligations
|
—
|
|
|
31.7
|
|
|
—
|
|
|
31.7
|
|
Money market funds
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Derivative financial instruments: (B)
|
|
|
|
|
|
|
|
Commodity contracts – net
|
(20.7
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(21.0
|
)
|
Foreign currency exchange contracts – net
|
(0.1
|
)
|
|
1.3
|
|
|
—
|
|
|
1.2
|
|
Interest rate contracts
|
—
|
|
|
(49.1
|
)
|
|
—
|
|
|
(49.1
|
)
|
Total long-term debt (C)
|
(4,646.6
|
)
|
|
(857.4
|
)
|
|
—
|
|
|
(5,504.0
|
)
|
Total financial instruments measured at fair value
|
$
|
(4,658.2
|
)
|
|
$
|
(873.8
|
)
|
|
$
|
—
|
|
|
$
|
(5,532.0
|
)
|
|
|
(A)
|
Marketable securities and other investments consist of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include equity securities listed in active markets, municipal obligations valued by a third party using valuation techniques that utilize inputs that are derived principally from or corroborated by observable market data, and money market funds with maturities of three months or less. Based on the short-term nature of these money market funds, carrying value approximates fair value. As of July 31, 2019, our municipal obligations are scheduled to mature as follows: $0.3 in 2020, $1.0 in 2021, $1.6 in 2022,
|
$1.0 in 2023, and the remaining $28.0 in 2024 and beyond.
|
|
(B)
|
Level 1 commodity and foreign currency exchange derivatives are valued using quoted market prices for identical instruments in active markets. Level 2 commodity and foreign currency exchange derivatives are valued using quoted prices for similar assets or liabilities in active markets. The Level 2 interest rate contracts are valued using standard valuation techniques, the income approach, and observable Level 2 market expectations at the measurement date to convert future amounts to a single discounted present value. Level 2 inputs for the valuation of the interest rate contracts are limited to prices that are observable for the asset or liability. For additional information, see Note 10: Derivative Financial Instruments.
|
|
|
(C)
|
Long-term debt is composed of public Senior Notes classified as Level 1 and the Term Loan classified as Level 2. The public Senior Notes are traded in an active secondary market and valued using quoted prices. The fair value of the Term Loan is based on the net present value of each interest and principal payment calculated utilizing an interest rate derived from an estimated yield curve obtained from independent pricing sources for similar types of term loan borrowing arrangements. For additional information, see Note 8: Debt and Financing Arrangements.
|
Note 12: Leases
We lease certain warehouses, manufacturing facilities, office space, equipment, and vehicles, primarily through operating lease agreements. We have elected to not recognize leases with a term of 12 months or less on the balance sheet. Instead, we recognize the related lease expense on a straight-line basis over the lease term.
Although the majority of our right-of-use asset and lease liability balances consist of leases with renewal options, we are not reasonably certain to exercise them, and, therefore, the optional periods do not impact the lease term. Certain leases also include termination provisions or options to purchase the leased property. Since we are not reasonably certain to exercise these types of options, minimum lease payments do not include any amounts related to these termination or purchase options. Our lease agreements generally do not contain residual value guarantees or restrictive covenants that are material.
We determine if an agreement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of the arrangement. A lease commences when the lessor makes the identified asset available for our use. We generally account for lease and non-lease components as a single lease component. Minimum lease payments do not include variable lease payments other than those that depend on an index or rate.
For the majority of our leases, the interest rate implicit in the lease cannot be readily determined, so we utilize our incremental borrowing rate to present value lease payments using information available at the lease commencement date. We consider our credit rating and the current economic environment in determining this collateralized rate. For the initial implementation of the lease standard, the incremental borrowing rate at May 1, 2019, was used to calculate all operating lease liabilities.
As of July 31, 2019, we have entered into lease commitments related to two distribution centers for which the leases had not yet commenced as of that date. One of the leases will begin during the second quarter of 2020, and we anticipate that the other will begin during the third quarter of 2020. Upon commencement, we expect to recognize aggregate right-of-use assets and lease liabilities of approximately $40.0 in the Condensed Consolidated Balance Sheet.
The following table sets forth the right-of-use assets and lease liabilities recognized in the Condensed Consolidated Balance Sheet.
|
|
|
|
|
|
July 31, 2019
|
Operating lease right-of-use assets
|
$
|
149.2
|
|
Operating lease liabilities:
|
|
Current operating lease liabilities
|
$
|
43.2
|
|
Noncurrent operating lease liabilities
|
112.9
|
|
Total operating lease liabilities
|
$
|
156.1
|
|
|
|
Finance lease right-of-use assets:
|
|
Machinery and equipment
|
$
|
12.1
|
|
Accumulated depreciation
|
(6.1
|
)
|
Total property, plant, and equipment
|
$
|
6.0
|
|
Finance lease liabilities:
|
|
Other current liabilities
|
$
|
2.5
|
|
Other noncurrent liabilities
|
3.7
|
|
Total finance lease liabilities
|
$
|
6.2
|
|
The following table summarizes the components of lease expense.
|
|
|
|
|
|
Three Months Ended July 31, 2019
|
Operating lease cost
|
$
|
12.4
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
0.8
|
|
Interest on lease liabilities
|
0.1
|
|
Variable lease cost
|
6.3
|
|
Short-term lease cost
|
7.7
|
|
Sublease income
|
(0.8
|
)
|
Net lease cost
|
$
|
26.5
|
|
The following table sets forth cash flow and noncash information related to leases.
|
|
|
|
|
|
Three Months Ended July 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
13.1
|
|
Operating cash flows from finance leases
|
0.1
|
|
Financing cash flows from finance leases
|
0.7
|
|
Right-of-use assets obtained in exchange for new lease liabilities:
|
|
Operating leases
|
—
|
|
Finance leases
|
0.5
|
|
The following table summarizes the maturity of our lease liabilities by fiscal year.
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
Operating Leases
|
|
Finance Leases
|
2020 (remainder of the year)
|
$
|
36.7
|
|
|
$
|
2.1
|
|
2021
|
40.0
|
|
|
1.9
|
|
2022
|
33.0
|
|
|
1.3
|
|
2023
|
26.7
|
|
|
0.5
|
|
2024
|
13.5
|
|
|
0.3
|
|
2025 and beyond
|
18.5
|
|
|
0.4
|
|
Total undiscounted minimum lease payments
|
$
|
168.4
|
|
|
$
|
6.5
|
|
Less: Imputed interest
|
12.3
|
|
|
0.3
|
|
Lease liabilities
|
$
|
156.1
|
|
|
$
|
6.2
|
|
As of April 30, 2019, our minimum operating lease obligations were as follows: $43.0 in 2020, $36.7 in 2021, $30.5 in 2022, $24.8 in 2023, and $12.3 in 2024.
The following table sets forth the weighted average remaining lease term and discount rate.
|
|
|
|
|
July 31, 2019
|
Weighted average remaining lease term (in years):
|
|
Operating leases
|
4.5
|
|
Finance leases
|
3.4
|
|
|
|
Weighted average discount rate:
|
|
Operating leases
|
3.2
|
%
|
Finance leases
|
3.3
|
%
|
Note 13: Income Taxes
The effective tax rates for the three months ended July 31, 2019 and 2018, were 25.2 and 23.2 percent, respectively. During the three months ended July 31, 2019 and 2018, the effective tax rate varied from the U.S. statutory income tax rate of 21.0 percent primarily due to the impact of state income taxes. The effective tax rate for the three months ended July 31, 2018, was favorably impacted by a deferred tax benefit from the Ainsworth acquisition.
Within the next 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an additional $2.8, primarily as a result of expiring statute of limitations periods.
As of July 31, 2019, the undistributed earnings of our foreign subsidiaries remain permanently reinvested.
Note 14: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), including the reclassification adjustments for items that are reclassified from accumulated other comprehensive income (loss) to net income, are shown below.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Net Gains (Losses)
on Cash Flow
Hedging
Derivatives (A)
|
|
Pension and
Other
Postretirement
Liabilities (B)
|
|
Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at May 1, 2019
|
$
|
(35.5
|
)
|
|
$
|
(40.4
|
)
|
|
$
|
(110.0
|
)
|
|
$
|
4.1
|
|
|
$
|
(181.8
|
)
|
Reclassification adjustments
|
—
|
|
|
0.1
|
|
|
1.4
|
|
|
—
|
|
|
1.5
|
|
Current period credit (charge)
|
4.5
|
|
|
(53.0
|
)
|
|
—
|
|
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0.4
|
|
|
(48.1
|
)
|
Income tax benefit (expense)
|
—
|
|
|
12.1
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
11.7
|
|
Balance at July 31, 2019
|
$
|
(31.0
|
)
|
|
$
|
(81.2
|
)
|
|
$
|
(108.9
|
)
|
|
$
|
4.4
|
|
|
$
|
(216.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Net Gains (Losses)
on Cash Flow
Hedging
Derivatives (A)
|
|
Pension and
Other
Postretirement
Liabilities (B)
|
|
Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at May 1, 2018
|
$
|
(16.4
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(101.0
|
)
|
|
$
|
3.6
|
|
|
$
|
(116.7
|
)
|
Reclassification adjustments
|
—
|
|
|
0.1
|
|
|
2.2
|
|
|
—
|
|
|
2.3
|
|
Current period credit (charge)
|
(6.1
|
)
|
|
2.6
|
|
|
—
|
|
|
0.4
|
|
|
(3.1
|
)
|
Income tax benefit (expense)
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(1.3
|
)
|
Balance at July 31, 2018
|
$
|
(22.5
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(99.4
|
)
|
|
$
|
3.9
|
|
|
$
|
(118.8
|
)
|
|
|
(A)
|
The reclassification from accumulated other comprehensive income (loss) to interest expense was related to terminated interest rate contracts. The current period credit (charge) relates to the unrealized gains (losses) on the interest rate contracts entered into in November 2018 and June 2018. For additional information, see Note 10: Derivative Financial Instruments.
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|
|
(B)
|
Amortization of net losses and prior service costs was reclassified from accumulated other comprehensive income (loss) to other income (expense) – net.
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Note 15: Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart Pet Brands, the significant majority of which were settled and paid during the second half of 2019. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at July 31, 2019. Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows.
On May 9, 2011, an organization named Council for Education and Research on Toxics (“Plaintiff” or “CERT”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against us and additional defendants who manufacture, package, distribute, or sell packaged coffee. The lawsuit is CERT v. Brad Barry LLC, et al., and was a tag along to a 2010 lawsuit against companies selling “ready-to-drink” coffee based on the same claims. Both cases have since been consolidated
and now include nearly eighty defendants, which constitute the great majority of the coffee industry in California. The Plaintiff alleges that we and the other defendants failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code Section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (better known as “Proposition 65”). The Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Proposition 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
As part of a joint defense group organized to defend against the lawsuit, we dispute the claims of the Plaintiff. Acrylamide is not added to coffee but is inherently present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process. We have asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to the defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of calendar year 2017. On March 28, 2018, the trial court issued a proposed ruling adverse to the defendants on the Phase 2 defense, our last remaining defense to liability. The trial court finalized and affirmed its Phase 2 ruling on May 7, 2018, and therefore, the trial on the third phase regarding remedies issues was scheduled to commence on October 15, 2018. The trial did not proceed on the scheduled date as further described below.
On June 15, 2018, the state agency responsible for administering the Proposition 65 program, the California Office of Environmental Health Hazard Assessment (“OEHHA”), issued a proposed regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The California Court of Appeals granted defendants’ requests to stay the trial on remedies until a final determination was made on OEHHA’s proposed regulation. The California Office of Administrative Law approved the proposed regulation on June 3, 2019, and the regulation will go into effect on October 1, 2019, which should result in the dismissal of this case. However, prior to the approval of the proposed regulation, CERT challenged the authority of OEHHA to propose the regulation. Considering the regulation is final, we expect this challenge to continue. At this stage of the proceedings, prior to and without knowing whether the trial on remedies issues will move forward in light of the challenge, we are unable to predict or reasonably estimate the potential loss or effect on our operations. Accordingly, no loss contingency has been recorded for this matter as of July 31, 2019, as the likelihood of loss is not considered probable or estimable. The trial court has discretion to impose zero penalties against us or to impose significant statutory penalties if the case proceeds. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase our costs and adversely affect sales of our coffee products, as well as involve substantial expense and operational disruption, which could have a material adverse impact on our financial position, results of operations, or cash flows. Furthermore, a future appellate court decision could reverse the trial court rulings. The outcome and the financial impact of settlement, the trial, or the appellate court rulings of the case, if any, cannot be predicted at this time.
Note 16: Common Shares
The following table sets forth common share information.
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July 31, 2019
|
|
April 30, 2019
|
Common shares authorized
|
300.0
|
|
|
300.0
|
|
Common shares outstanding
|
114.0
|
|
|
113.7
|
|
Treasury shares
|
32.5
|
|
|
32.8
|
|
Repurchase Program: During the three months ended July 31, 2019 and 2018, we did not repurchase any common shares under a repurchase plan authorized by the Board of Directors (the “Board”). Share repurchases during the three months ended July 31, 2019 and 2018, consisted of shares repurchased from stock plan recipients in lieu of cash payments. At July 31, 2019, we had approximately 3.6 million common shares available for repurchase pursuant to the Board's authorizations.