Quarterly Report (10-q)

Date : 11/22/2019 @ 9:19PM
Source : Edgar (US Regulatory)
Stock : JM Smucker Company (SJM)
Quote : 106.27  -0.92 (-0.86%) @ 12:59AM
JM Smucker share price Chart
After Hours
Last Trade
Last $ 106.27 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________ 
FORM 10-Q
___________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-5111
 ___________________________________________________
The J. M. Smucker Company
(Exact name of registrant as specified in its charter)
___________________________________________________ 
Ohio
 
34-0538550
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
One Strawberry Lane
 
 
 
 
Orrville,
Ohio
 
44667-0280
(Address of principal executive offices)
 
(Zip code)
 
 
 
                                                                           Registrant’s telephone number, including area code:
(330)
682-3000
 
 
 
 
N/A    
           (Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
 
 
       Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
                             Title of each class
Trading symbol
Name of each exchange on which registered
Common shares, no par value
SJM
New York Stock Exchange
 ___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 

 
 
 
 
Non-accelerated filer
 

Smaller reporting company
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  ý
The Company had 114,056,389 common shares outstanding on November 15, 2019.

 
 
 


TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
Item 1.
 
 
2
 
2
 
3
 
4
 
5
 
6
 
 
 
Item 2.
20
 
 
 
Item 3.
28
 
 
 
Item 4.
30
 
 
 
 
 
 
 
Item 1.
31
 
 
 
Item 1A.
31
 
 
 
Item 2.
31
 
 
 
Item 6.
31
 
 
 
32
 
 
 
33

1



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
 
Three Months Ended October 31,
 
Six Months Ended October 31,
Dollars in millions, except per share data
2019
 
2018
 
2019
 
2018
Net sales
$
1,957.8

 
$
2,021.5

 
$
3,736.7

 
$
3,924.0

Cost of products sold
1,203.8

 
1,250.2

 
2,283.1

 
2,474.5

Gross Profit
754.0

 
771.3

 
1,453.6

 
1,449.5

Selling, distribution, and administrative expenses
361.5

 
382.4

 
742.0

 
765.7

Amortization
58.8

 
59.7

 
117.6

 
120.2

Other special project costs (A)
3.3

 
25.4

 
6.6

 
33.1

Other operating expense (income) – net
0.6

 
(26.7
)
 

 
(26.9
)
Operating Income
329.8

 
330.5

 
587.4

 
557.4

Interest expense – net
(49.1
)
 
(53.6
)
 
(98.5
)
 
(107.2
)
Other income (expense) – net
(1.6
)
 
(7.5
)
 
(3.1
)
 
(7.7
)
Income Before Income Taxes
279.1

 
269.4

 
485.8

 
442.5

Income tax expense
67.9

 
80.9

 
120.0

 
121.0

Net Income
$
211.2

 
$
188.5

 
$
365.8

 
$
321.5

Earnings per common share:
 
 
 
 
 
 
 
Net Income
$
1.85

 
$
1.66

 
$
3.21

 
$
2.83

Net Income – Assuming Dilution
$
1.85

 
$
1.66

 
$
3.21

 
$
2.83

 
(A)
Other special project costs includes integration and restructuring costs. For more information, see Note 4: Integration and Restructuring Costs.
See notes to unaudited condensed consolidated financial statements.


THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended October 31,
 
Six Months Ended October 31,
Dollars in millions
2019
 
2018
 
2019
 
2018
Net income
$
211.2

 
$
188.5

 
$
365.8

 
$
321.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
0.6

 
(5.6
)
 
5.1

 
(11.7
)
Cash flow hedging derivative activity, net of tax
(33.8
)
 
6.1

 
(74.6
)
 
8.2

Pension and other postretirement benefit plans activity, net of tax
1.4

 
1.6

 
2.5

 
3.2

Available-for-sale securities activity, net of tax
0.1

 
0.3

 
0.4

 
0.6

Total Other Comprehensive Income (Loss)
(31.7
)
 
2.4

 
(66.6
)
 
0.3

Comprehensive Income
$
179.5

 
$
190.9

 
$
299.2

 
$
321.8

See notes to unaudited condensed consolidated financial statements.

2



THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Dollars in millions

October 31, 2019
 
April 30, 2019
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
48.8

 
$
101.3

Trade receivables, less allowance for doubtful accounts
522.4

 
503.8

Inventories:
 
 
 
Finished products
667.3

 
590.8

Raw materials
346.0

 
319.5

Total Inventory
1,013.3

 
910.3

Other current assets
74.7

 
109.8

Total Current Assets
1,659.2

 
1,625.2

Property, Plant, and Equipment
 
 
 
Land and land improvements
123.4

 
122.1

Buildings and fixtures
953.2

 
903.2

Machinery and equipment
2,354.4

 
2,185.0

Construction in progress
171.6

 
321.8

Gross Property, Plant, and Equipment
3,602.6

 
3,532.1

Accumulated depreciation
(1,687.1
)
 
(1,619.7
)
Total Property, Plant, and Equipment
1,915.5

 
1,912.4

Other Noncurrent Assets
 
 
 
Operating lease right-of-use assets
153.2

 

Goodwill
6,313.6

 
6,310.9

Other intangible assets – net
6,602.7

 
6,718.8

Other noncurrent assets
146.8

 
144.0

Total Other Noncurrent Assets
13,216.3

 
13,173.7

Total Assets
$
16,791.0

 
$
16,711.3

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
 
 
 
Accounts payable
$
521.8

 
$
591.0

Accrued trade marketing and merchandising
214.2

 
142.7

Current portion of long-term debt
799.5

 
798.5

Short-term borrowings
327.9

 
426.0

Current operating lease liabilities

44.4

 

Other current liabilities
402.3

 
383.3

Total Current Liabilities
2,310.1

 
2,341.5

Noncurrent Liabilities
 
 
 
Long-term debt, less current portion
4,584.5

 
4,686.3

Deferred income taxes
1,377.6

 
1,398.6

Noncurrent operating lease liabilities
116.2

 

Other noncurrent liabilities
307.3

 
314.4

Total Noncurrent Liabilities
6,385.6

 
6,399.3

Total Liabilities
8,695.7

 
8,740.8

Shareholders’ Equity
 
 
 
Common shares
29.0

 
28.9

Additional capital
5,781.7

 
5,755.8

Retained income
2,533.0

 
2,367.6

Accumulated other comprehensive income (loss)
(248.4
)
 
(181.8
)
Total Shareholders’ Equity
8,095.3

 
7,970.5

Total Liabilities and Shareholders’ Equity
$
16,791.0

 
$
16,711.3

See notes to unaudited condensed consolidated financial statements.

3



THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
 
Six Months Ended October 31,
Dollars in millions
2019
 
2018
Operating Activities
 
 
 
Net income
$
365.8

 
$
321.5

Adjustments to reconcile net income to net cash provided by (used for) operations:
 
 
 
Depreciation
103.4

 
102.9

Amortization
117.6

 
120.2

Share-based compensation expense
13.7

 
10.5

Gain on divestiture

 
(26.6
)
Other noncash adjustments – net
6.6

 
3.0

Changes in assets and liabilities, net of effect from acquisition and divestiture:
 
 
 
Trade receivables
(18.2
)
 
(111.2
)
Inventories
(102.0
)
 
(60.4
)
Other current assets
13.3

 
17.6

Accounts payable
(41.3
)
 
15.2

Accrued liabilities
25.7

 
60.4

Income and other taxes
(32.6
)
 
18.5

Other – net
(6.5
)
 
(25.7
)
Net Cash Provided by (Used for) Operating Activities
445.5

 
445.9

Investing Activities
 
 
 
Business acquired, net of cash acquired

 
(1,903.0
)
Additions to property, plant, and equipment
(136.4
)
 
(179.1
)
Proceeds from divestiture

 
372.1

Other – net
32.2

 
(8.9
)
Net Cash Provided by (Used for) Investing Activities
(104.2
)
 
(1,718.9
)
Financing Activities
 
 
 
Short-term borrowings (repayments) – net
(102.9
)
 
246.0

Proceeds from long-term debt

 
1,500.0

Repayments of long-term debt
(100.0
)
 
(300.0
)
Quarterly dividends paid
(196.6
)
 
(184.9
)
Purchase of treasury shares
(3.5
)
 
(5.0
)
Proceeds from stock option exercises
7.0

 

Other – net
0.8

 
0.1

Net Cash Provided by (Used for) Financing Activities
(395.2
)
 
1,256.2

Effect of exchange rate changes on cash
1.4

 
(4.6
)
Net increase (decrease) in cash and cash equivalents
(52.5
)
 
(21.4
)
Cash and cash equivalents at beginning of period
101.3

 
192.6

Cash and Cash Equivalents at End of Period
$
48.8

 
$
171.2

( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.

4



THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(Unaudited)
Dollars in millions
Common
Shares Outstanding
 
Common Shares
 
Additional Capital
 
Retained Income
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’ Equity
Balance at May 1, 2019
113,742,296

 
$
28.9

 
$
5,755.8

 
$
2,367.6

 
$
(181.8
)
 
$
7,970.5

Net income


 


 


 
154.6

 


 
154.6

Other comprehensive income (loss)

 

 

 

 
(34.9
)
 
(34.9
)
Comprehensive income


 


 


 


 


 
119.7

Purchase of treasury shares
(22,793
)
 

 
(2.7
)
 
(0.2
)
 


 
(2.9
)
Stock plans
330,289

 
0.1

 
20.4

 


 


 
20.5

Cash dividends declared, $0.88 per common share


 


 


 
(100.1
)
 


 
(100.1
)
Other


 


 


 

 


 

Balance at July 31, 2019
114,049,792

 
$
29.0

 
$
5,773.5

 
$
2,421.9

 
$
(216.7
)
 
$
8,007.7

Net income


 


 


 
211.2

 


 
211.2

Other comprehensive income (loss)

 

 

 

 
(31.7
)
 
(31.7
)
Comprehensive income


 


 


 


 


 
179.5

Purchase of treasury shares
(4,930
)
 

 
(0.6
)
 

 


 
(0.6
)
Stock plans
14,882

 

 
8.8

 


 


 
8.8

Cash dividends declared, $0.88 per common share


 


 


 
(100.1
)
 


 
(100.1
)
Other


 


 


 

 


 

Balance at October 31, 2019
114,059,744

 
$
29.0

 
$
5,781.7

 
$
2,533.0

 
$
(248.4
)
 
$
8,095.3

Dollars in millions
Common Shares Outstanding
 
Common Shares
 
Additional Capital
 
Retained Income
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’ Equity
Balance at May 1, 2018
113,572,840

 
$
28.9

 
$
5,739.7

 
$
2,239.2

 
$
(116.7
)
 
$
7,891.1

Net income


 


 


 
133.0

 


 
133.0

Other comprehensive income (loss)

 

 

 

 
(2.1
)
 
(2.1
)
Comprehensive income


 


 


 


 


 
130.9

Purchase of treasury shares
(43,913
)
 

 
(4.6
)
 
(0.1
)
 


 
(4.7
)
Stock plans
243,521

 

 
10.0

 


 


 
10.0

Cash dividends declared, $0.85 per common share


 


 


 
(96.5
)
 


 
(96.5
)
Other


 


 


 

 


 

Balance at July 31, 2018
113,772,448

 
$
28.9

 
$
5,745.1

 
$
2,275.6

 
$
(118.8
)
 
$
7,930.8

Net income


 


 


 
188.5

 


 
188.5

Other comprehensive income (loss)

 

 

 

 
2.4

 
2.4

Comprehensive income


 


 


 


 


 
190.9

Purchase of treasury shares
(2,485
)
 

 
(0.3
)
 

 


 
(0.3
)
Stock plans
(9,883
)
 

 
5.1

 


 


 
5.1

Cash dividends declared, $0.85 per common share


 


 


 
(96.5
)
 


 
(96.5
)
Other


 

 


 

 


 

Balance at October 31, 2018
113,760,080

 
$
28.9

 
$
5,749.9

 
$
2,367.6

 
$
(116.4
)
 
$
8,030.0

See notes to unaudited condensed consolidated financial statements.



5



THE J. M. SMUCKER COMPANY
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 six months ended October 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 six months ended October 31, 2019, we capitalized implementation costs related to third-party cloud computing services of $2.4, 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 elected certain practical expedients available under the guidance, including a package of practical expedients which allowed 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.

6



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 represented the value we expected to achieve through the implementation of operational synergies and growth opportunities as a result of integrating 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 $400.7 remains deductible at October 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 October 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 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 one-third 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.
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
Total Costs Incurred to Date at October 31, 2019
 
2019
 
2018
 
2019
 
2018
 
Employee-related costs
$
0.6

 
$
6.9

 
$
1.4

 
$
7.8

 
$
16.9

Other transition and termination costs
2.7

 
7.3

 
5.2

 
8.4

 
21.8

Total integration costs
$
3.3

 
$
14.2

 
$
6.6

 
$
16.2

 
$
38.7

Noncash charges of $0.2 and $1.0 were included in the integration costs incurred during the three months ended October 31, 2019 and 2018, respectively, and $0.4 and $1.8 during the six months ended October 31, 2019 and 2018, respectively. Cumulative noncash charges incurred to date were $4.5 and primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.3 and $1.6 at October 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 related costs during the three and six months ended October 31, 2019. We incurred restructuring costs of $11.2 and $16.9 during the three and six months ended October 31, 2018, respectively, 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 $0.9 and $1.0 were incurred during the three and six months

7



ended October 31, 2018, respectively. Noncash charges primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.1 and $0.8 at October 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. We recognized a pre-tax gain of $27.7 related to this transaction, of which $26.6 was recognized during the second quarter of 2019 and was included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.
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.

8



 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
U.S. Retail Pet Foods
$
709.9

 
$
728.1

 
$
1,379.8

 
$
1,399.3

U.S. Retail Coffee
543.4

 
544.9

 
1,009.1

 
1,034.4

U.S. Retail Consumer Foods
426.1

 
461.9

 
828.3

 
945.2

International and Away From Home
278.4

 
286.6

 
519.5

 
545.1

Total net sales
$
1,957.8

 
$
2,021.5

 
$
3,736.7

 
$
3,924.0

Segment profit:
 
 
 
 
 
 
 
U.S. Retail Pet Foods
$
137.0

 
$
123.9

 
$
257.1

 
$
224.3

U.S. Retail Coffee
182.5

 
174.3

 
311.4

 
322.1

U.S. Retail Consumer Foods
91.4

 
134.3

 
172.4

 
231.6

International and Away From Home
50.4

 
56.7

 
82.7

 
100.1

Total segment profit
$
461.3

 
$
489.2

 
$
823.6

 
$
878.1

Amortization
(58.8
)
 
(59.7
)
 
(117.6
)
 
(120.2
)
Interest expense – net
(49.1
)
 
(53.6
)
 
(98.5
)
 
(107.2
)
Unallocated derivative gains (losses)
0.9

 
(0.1
)
 
29.9

 
(22.1
)
Other special project costs (A)
(3.3
)
 
(25.4
)
 
(6.6
)
 
(33.1
)
Corporate administrative expenses
(70.3
)
 
(73.5
)
 
(141.9
)
 
(145.3
)
Other income (expense) – net
(1.6
)
 
(7.5
)
 
(3.1
)
 
(7.7
)
Income before income taxes
$
279.1

 
$
269.4

 
$
485.8

 
$
442.5


(A)
Other special project costs includes integration and restructuring costs. For more information, see Note 4: Integration and Restructuring Costs.

The following table presents certain geographical information.
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
United States
$
1,815.9

 
$
1,873.2

 
$
3,473.5

 
$
3,645.5

International:
 
 
 
 
 
 
 
Canada
$
113.4

 
$
114.3

 
$
210.2

 
$
212.5

All other international
28.5

 
34.0

 
53.0

 
66.0

Total international
$
141.9

 
$
148.3

 
$
263.2

 
$
278.5

Total net sales
$
1,957.8

 
$
2,021.5

 
$
3,736.7

 
$
3,924.0



The following table presents product category information.
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
 
 
2019
 
2018
 
2019
 
2018
 
Primary Reportable Segment (A)
Coffee
$
627.1

 
$
635.5

 
$
1,173.8

 
$
1,213.8

 
U.S. Retail Coffee
Dog food
302.6

 
334.9

 
598.2

 
643.4

 
U.S. Retail Pet Foods
Cat food
213.8

 
207.3

 
409.7

 
396.3

 
U.S. Retail Pet Foods
Pet snacks
210.0

 
201.9

 
403.2

 
389.7

 
U.S. Retail Pet Foods
Peanut butter
175.4

 
186.9

 
353.3

 
386.1

 
U.S. Retail Consumer Foods
Fruit spreads
86.5

 
83.0

 
175.7

 
168.6

 
U.S. Retail Consumer Foods
Frozen handheld
93.4

 
78.7

 
164.9

 
143.2

 
U.S. Retail Consumer Foods
Shortening and oils
71.8

 
79.3

 
123.3

 
132.2

 
U.S. Retail Consumer Foods
Portion control
42.5

 
41.6

 
81.9

 
82.5

 
International and Away From Home
Juices and beverages
32.4

 
33.9

 
63.6

 
66.1

 
U.S. Retail Consumer Foods
Baking mixes and ingredients
26.0

 
58.4

 
39.7

 
142.7

 
International and Away From Home (B)
Other
76.3

 
80.1

 
149.4

 
159.4

 
International and Away From Home
Total net sales
$
1,957.8

 
$
2,021.5

 
$
3,736.7

 
$
3,924.0

 
 
(A)
The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.

9



(B)
During the three and six months ended October 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.
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.
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
211.2

 
$
188.5

 
$
365.8

 
$
321.5

Less: Net income allocated to participating securities
1.3

 
1.0

 
2.1

 
1.7

Net income allocated to common stockholders
$
209.9

 
$
187.5

 
$
363.7

 
$
319.8

Weighted-average common shares outstanding
113.4

 
113.2

 
113.3

 
113.1

Add: Dilutive effect of stock options

 

 

 

Weighted-average common shares outstanding – assuming dilution
113.4

 
113.2

 
113.3

 
113.1

Net income per common share
$
1.85

 
$
1.66

 
$
3.21

 
$
2.83

Net income per common share – assuming dilution
$
1.85

 
$
1.66

 
$
3.21

 
$
2.83


Note 8: Debt and Financing Arrangements
Long-term debt consists of the following:
 
October 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

 
$
300.0

 
$
300.0

 
$
299.5

2.50% Senior Notes due March 15, 2020
500.0

 
499.5

 
500.0

 
499.0

3.50% Senior Notes due October 15, 2021
750.0

 
764.8

 
750.0

 
768.4

3.00% Senior Notes due March 15, 2022
400.0

 
398.3

 
400.0

 
398.0

3.50% Senior Notes due March 15, 2025
1,000.0

 
995.6

 
1,000.0

 
995.2

3.38% Senior Notes due December 15, 2027
500.0

 
496.5

 
500.0

 
496.2

4.25% Senior Notes due March 15, 2035
650.0

 
643.7

 
650.0

 
643.5

4.38% Senior Notes due March 15, 2045
600.0

 
586.3

 
600.0

 
586.0

Term Loan Credit Agreement due May 14, 2021
700.0

 
699.3

 
800.0

 
799.0

Total long-term debt
$
5,400.0

 
$
5,384.0

 
$
5,500.0

 
$
5,484.8

Current portion of long-term debt
800.0

 
799.5

 
800.0

 
798.5

Total long-term debt, less current portion
$
4,600.0

 
$
4,584.5

 
$
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.

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 October 31, 2019, unrealized losses of $146.2 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 October 31, 2019, we have prepaid $800.0 on the Term Loan to date, including $100.0 in the second quarter of 2020. The interest rate on the Term Loan at October 31,

10



2019, was 2.94 percent. Subsequent to the second quarter, on November 14, 2019, we entered into an amendment to the Term Loan that decreased the applicable margins on LIBOR, based on our long-term unsecured debt rating. This amendment did not have a material impact on our condensed consolidated financial statements.
All of our Senior Notes outstanding at October 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 October 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 October 31, 2019, and April 30, 2019, we had $327.9 and $426.0 of short-term borrowings outstanding, respectively, which were issued under our commercial paper program at weighted-average interest rates of 2.07 percent and 2.75 percent, respectively.
Interest paid totaled $78.4 and $84.1 for the three months ended October 31, 2019 and 2018, respectively, and $100.0 and $107.4, for the six months ended October 31, 2019 and 2018, respectively. This differs from interest expense due to the effect of interest rate contracts, amortization of debt issuance costs and discounts, capitalized interest, 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.
 
Three Months Ended October 31,
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
0.4

 
$
0.5

 
$
0.4

 
$
0.5

Interest cost
5.3

 
5.8

 
0.6

 
0.6

Expected return on plan assets
(6.1
)
 
(6.7
)
 

 

Amortization of net actuarial loss (gain)
2.0

 
2.1

 

 
(0.2
)
Amortization of prior service cost (credit)
0.2

 
0.3

 
(0.3
)
 
(0.3
)
Net periodic benefit cost
$
1.8

 
$
2.0

 
$
0.7

 
$
0.6

 
Six Months Ended October 31,
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
0.8

 
$
1.1

 
$
0.9

 
$
0.9

Interest cost
10.5

 
11.7

 
1.2

 
1.2

Expected return on plan assets
(12.1
)
 
(13.5
)
 

 

Amortization of net actuarial loss (gain)
4.0

 
4.1

 
(0.1
)
 
(0.3
)
Amortization of prior service cost (credit)
0.4

 
0.5

 
(0.6
)
 
(0.6
)
Net periodic benefit cost
$
3.6

 
$
3.9

 
$
1.4

 
$
1.2



11



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, edible oils, soybean meal, 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 net 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 $146.2 were deferred in accumulated other comprehensive income (loss) at October 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 $37.1 of the gain, of which $2.1 and $4.1 was recognized during the three and six months ended October 31, 2019, respectively. The remaining gain will be recognized as follows: $4.0 through the remainder of 2020, $8.4 in 2021, and $4.0 in 2022.

12



The following tables set forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
 
October 31, 2019
 
Other
Current
Assets
 
Other
Current
Liabilities
 
Other
Noncurrent
Assets
 
Other
Noncurrent
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
146.2

 
$

 
$

Total derivatives designated as hedging instruments
$

 
$
146.2

 
$

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
$
5.6

 
$
3.0

 
$
0.5

 
$
0.5

Foreign currency exchange contracts
0.2

 
0.3

 

 

Total derivatives not designated as hedging instruments
$
5.8

 
$
3.3

 
$
0.5

 
$
0.5

Total derivative instruments
$
5.8

 
$
149.5

 
$
0.5

 
$
0.5

 
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 October 31, 2019, and April 30, 2019, we maintained cash margin account balances of $8.6 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 exchange-traded 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 $49.1 and $53.6 for the three
months ended October 31, 2019 and 2018, respectively, and was $98.5 and $107.2 for the six months ended October 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 October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Gains (losses) recognized in other comprehensive income (loss)
$
(44.1
)
 
$
7.9

 
$
(97.1
)
 
$
10.5

Less: Gains (losses) reclassified from accumulated other
     comprehensive income (loss) to interest expense

(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Change in accumulated other comprehensive income (loss)
$
(44.0
)
 
$
8.0

 
$
(96.9
)
 
$
10.7


Included as a component of accumulated other comprehensive income (loss) at October 31, 2019, and April 30, 2019, were deferred net pre-tax losses of $149.4 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 October 31, 2019, and April 30, 2019, was $34.4 and $12.1, respectively. Approximately $5.6 of the net pre-tax loss will be recognized over the next 12 months related to the active and terminated interest rate contracts.

13



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 October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Gains (losses) on commodity contracts
$
(10.1
)
 
$
(3.2
)
 
$
2.5

 
$
(30.1
)
Gains (losses) on foreign currency exchange contracts
(0.1
)
 
0.8

 
(1.1
)
 
1.5

Total gains (losses) recognized in cost of products sold
$
(10.2
)
 
$
(2.4
)
 
$
1.4

 
$
(28.6
)

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 October 31,
 
Six Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Net gains (losses) on mark-to-market valuation of
    unallocated derivative positions
$
(10.2
)
 
$
(2.4
)
 
$
1.4

 
$
(28.6
)
Less: Net gains (losses) on derivative positions
    reclassified to segment operating profit
(11.1
)
 
(2.3
)
 
(28.5
)
 
(6.5
)
Unallocated derivative gains (losses)
$
0.9

 
$
(0.1
)
 
$
29.9

 
$
(22.1
)

The net cumulative unallocated derivative losses were $22.6 and $52.5 at October 31, 2019, and April 30, 2019, respectively.
The following table presents the gross notional value of outstanding derivative contracts.
 
October 31, 2019
 
April 30, 2019
Commodity contracts
$
432.8

 
$
544.8

Foreign currency exchange contracts
93.9

 
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.
 
October 31, 2019
 
April 30, 2019
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Marketable securities and other investments
$
40.5

 
$
40.5

 
$
40.9

 
$
40.9

Derivative financial instruments – net
(143.7
)
 
(143.7
)
 
(68.9
)
 
(68.9
)
Total long-term debt
(5,384.0
)
 
(5,640.7
)
 
(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.

14



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 October 31, 2019
Marketable securities and other investments: (A)
 
 
 
 
 
 
 
Equity mutual funds
$
8.8

 
$

 
$

 
$
8.8

Municipal obligations

 
31.3

 

 
31.3

Money market funds
0.4

 

 

 
0.4

Derivative financial instruments: (B)
 
 
 
 
 
 
 
Commodity contracts – net
2.6

 

 

 
2.6

Foreign currency exchange contracts – net
(0.1
)
 

 

 
(0.1
)
Interest rate contracts

 
(146.2
)
 

 
(146.2
)
Total long-term debt (C)
(4,910.1
)
 
(730.6
)
 

 
(5,640.7
)
Total financial instruments measured at fair value
$
(4,898.4
)
 
$
(845.5
)
 
$

 
$
(5,743.9
)
 
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 October 31, 2019, our municipal obligations are scheduled to mature as follows: $0.4 in 2020, $1.0 in 2021, $1.6 in 2022, $1.0 in 2023, and the remaining $27.3 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 generally are not reasonably certain to exercise them, and, therefore, the optional periods do not typically impact the lease term. Certain

15



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 October 31, 2019, we have entered into a lease commitment related to a distribution center for which the lease has not yet commenced. We anticipate that the lease will begin during the third quarter of 2020. Upon commencement, we expect to recognize a right-of-use asset and lease liability of approximately $27.0 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.
 
October 31, 2019
Operating lease right-of-use assets
$
153.2

Operating lease liabilities:
 
Current operating lease liabilities
$
44.4

Noncurrent operating lease liabilities
116.2

Total operating lease liabilities
$
160.6

 
 
Finance lease right-of-use assets:
 
Machinery and equipment