Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Dollars and shares in millions, unless otherwise noted, except per share data
This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month and
nine
-month periods ended
January 31, 2018
and
2017
. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.
We are the owner of all trademarks, except for the following, which are used under license:
Pillsbury
, the Barrelhead logo, and the Doughboy character are trademarks of The Pillsbury Company, LLC;
Carnation
®
is a trademark of Société des Produits Nestlé S.A.;
Dunkin’ Donuts
is a registered trademark of DD IP Holder, LLC;
Sweet’N Low
®
,
NatraTaste
®
,
Sugar In The Raw
®
, and the other “In The Raw” trademarks are registered trademarks of Cumberland Packing Corp. and its affiliates; and
Douwe Egberts
®
and
Pickwick
®
are registered trademarks of Jacobs Douwe Egberts.
Dunkin’ Donuts
brand is licensed to us for packaged coffee products, including K-Cup
®
pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. Information in this document does not pertain to
Dunkin’ Donuts
coffee or other products for sale in
Dunkin’ Donuts
restaurants. K-Cup
®
is a trademark of Keurig Green Mountain, Inc., used with permission.
Results of Operations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
Nine Months Ended January 31,
|
|
2018
|
|
2017
|
|
% Increase (Decrease)
|
|
2018
|
|
2017
|
|
% Increase (Decrease)
|
Net sales
|
$
|
1,903.3
|
|
|
$
|
1,878.8
|
|
|
1
|
%
|
|
$
|
5,575.8
|
|
|
$
|
5,608.5
|
|
|
(1
|
)%
|
Gross profit
|
$
|
728.5
|
|
|
$
|
722.9
|
|
|
1
|
|
|
$
|
2,145.6
|
|
|
$
|
2,188.5
|
|
|
(2
|
)
|
% of net sales
|
38.3
|
%
|
|
38.5
|
%
|
|
|
|
|
38.5
|
%
|
|
39.0
|
%
|
|
|
Operating income
|
$
|
162.7
|
|
|
$
|
237.7
|
|
|
(32
|
)
|
|
$
|
727.2
|
|
|
$
|
834.8
|
|
|
(13
|
)
|
% of net sales
|
8.5
|
%
|
|
12.7
|
%
|
|
|
|
13.0
|
%
|
|
14.9
|
%
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
831.3
|
|
|
$
|
134.6
|
|
|
n/m
|
|
|
$
|
1,152.7
|
|
|
$
|
481.9
|
|
|
139
|
|
Net income per common share –
assuming dilution
|
$
|
7.32
|
|
|
$
|
1.16
|
|
|
n/m
|
|
|
$
|
10.15
|
|
|
$
|
4.14
|
|
|
145
|
|
Adjusted gross profit
(A)
|
$
|
731.5
|
|
|
$
|
722.6
|
|
|
1
|
|
|
$
|
2,127.9
|
|
|
$
|
2,199.0
|
|
|
(3
|
)
|
% of net sales
|
38.4
|
%
|
|
38.5
|
%
|
|
|
|
38.2
|
%
|
|
39.2
|
%
|
|
|
Adjusted operating income
(A)
|
$
|
399.8
|
|
|
$
|
382.8
|
|
|
4
|
|
|
$
|
1,083.5
|
|
|
$
|
1,143.0
|
|
|
(5
|
)
|
% of net sales
|
21.0
|
%
|
|
20.4
|
%
|
|
|
|
19.4
|
%
|
|
20.4
|
%
|
|
|
Adjusted income:
(A)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
$
|
283.7
|
|
|
$
|
232.8
|
|
|
22
|
|
|
$
|
684.8
|
|
|
$
|
689.2
|
|
|
(1
|
)
|
Earnings per share – assuming dilution
|
$
|
2.50
|
|
|
$
|
2.00
|
|
|
25
|
|
|
$
|
6.03
|
|
|
$
|
5.92
|
|
|
2
|
|
|
|
(A)
|
We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.
|
Net sales increased
1 percent
in the
third
quarter of
2018
, driven by gains within the U.S. Retail Coffee and U.S. Retail Pet Foods segments. The overall net sales increase was driven by the favorable impacts of volume/mix and foreign currency exchange. Operating income decreased
32 percent
, primarily due to the impact of a $176.9 noncash impairment charge recognized in the current quarter, while the prior year included a $75.7 noncash impairment charge. The increase in impairment charges was slightly offset by a reduction in special project costs. Net income per diluted share increased $6.16, reflecting a substantial nonrecurring income tax benefit related to new tax legislation enacted during the third quarter and the benefit of a decrease in weighted-average common shares outstanding as a result of our share repurchase activities during the fourth quarter of 2017.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, unallocated gains and losses on commodity and foreign currency exchange derivatives, and, beginning in the third quarter of 2018, certain one-time discrete tax adjustments. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for further information. Operating income excluding non-GAAP adjustments (“adjusted operating income”) increased
4 percent
in the
third
quarter of 2018. Income per diluted share excluding non-GAAP adjustments (“adjusted earnings per share”) increased
25 percent
, with the primary difference from the change in GAAP results being the
exclusion of a net benefit of $765.8 related to our discrete tax adjustments resulting from the new tax legislation as well as the impairment charges.
Net sales decreased
1 percent
in the first
nine
months of
2018
, reflecting declines within the U.S. Retail Consumer Foods and U.S. Retail Coffee segments, partially offset by gains in the U.S. Retail Pet Food and International and Away From Home segments. The overall net sales decline was driven by unfavorable volume/mix, which was partially offset by higher net price realization in the current year. Operating income decreased
13 percent
, primarily due to the increase in impairment charges and reduced gross profit, mainly driven by the U.S. Retail Coffee segment, partially offset by a reduction in special project costs. Net income per diluted share increased $6.01, reflecting the benefits related to our discrete tax adjustments of $765.8 and the decrease in weighted-average common shares outstanding as a result of our share repurchase activities during the fourth quarter of 2017.
Adjusted operating income decreased
5 percent
in the first
nine
months of 2018. Adjusted earnings per share increased
2 percent
, with the primary difference from the change in GAAP results being the exclusion of the benefits related to our discrete tax adjustments, a favorable change in the impact of unallocated derivative gains and losses as compared to the prior year, and lower special project costs. The increase in impairment charges was also excluded from our non-GAAP results.
Net Sales
Net sales in the
third
quarter of 2018 increased $24.5, or
1 percent
. Favorable volume/mix increased net sales by 1 percentage point, primarily driven by growth in pet food and coffee, partially offset by a decline in oils. Net price realization slightly offset some of the volume/mix gains, driven by lower net pricing within pet food. Favorable foreign currency exchange contributed $5.8 to net sales.
Net sales in the first
nine
months of 2018 decreased $32.7, or
1 percent
, reflecting a 1 percentage point impact from unfavorable volume/mix. This was driven by declines in the oils and baking categories and coffee, which were partially offset by gains in pet food. Net price realization contributed 1 percentage point to net sales, as higher net pricing for the
Smucker's
brand, peanut butter, coffee, and oils was partially offset by lower net pricing for pet food and pet snacks.
Operating Income
The following table presents the components of operating income as a percentage of net sales.
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
Nine Months Ended January 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross profit
|
38.3
|
%
|
|
38.5
|
%
|
|
38.5
|
%
|
|
39.0
|
%
|
Selling, distribution, and administrative expenses:
|
|
|
|
|
|
|
|
Marketing
|
5.4
|
%
|
|
5.2
|
%
|
|
6.0
|
%
|
|
5.8
|
%
|
Selling
|
2.9
|
|
|
3.2
|
|
|
3.4
|
|
|
3.4
|
|
Distribution
|
3.3
|
|
|
3.3
|
|
|
3.2
|
|
|
3.3
|
|
General and administrative
|
5.9
|
|
|
6.2
|
|
|
6.1
|
|
|
6.3
|
|
Total selling, distribution, and administrative expenses
|
17.4
|
%
|
|
17.9
|
%
|
|
18.7
|
%
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
Amortization
|
2.7
|
|
|
2.8
|
|
|
2.8
|
|
|
2.8
|
|
Impairment charges
|
9.3
|
|
|
4.0
|
|
|
3.2
|
|
|
1.3
|
|
Other special project costs
|
0.3
|
|
|
1.0
|
|
|
0.8
|
|
|
1.2
|
|
Other operating expense (income) – net
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Operating income
|
8.5
|
%
|
|
12.7
|
%
|
|
13.0
|
%
|
|
14.9
|
%
|
Amounts may not add due to rounding.
Gross profit increased
$5.6
, or
1 percent
, in the
third
quarter of
2018
, reflecting favorable volume/mix, primarily related to coffee. Selling, distribution, and administrative (“SD&A”) expenses decreased
$5.3
, driven by benefits from our cost savings initiatives and lower selling expense, which more than offset an increase in marketing expense. Operating income decreased
$75.0
, or
32 percent
, primarily reflecting a
$176.9
noncash impairment charge associated with the goodwill and certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, while the prior year included a $75.7 noncash impairment charge. For further information on these charges, refer to “Critical Accounting Estimates and Policies” in this discussion and analysis. A $10.6 reduction in special project costs also contributed to the change in operating income.
Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) increased $8.9, or
1 percent
, in the
third
quarter of
2018
. Adjusted operating income increased $17.0, or
4 percent
, with the primary difference from the change in GAAP results being the exclusion of the impairment charges and special project costs.
Gross profit decreased
$42.9
, or
2 percent
, in the first
nine
months of
2018
, mainly driven by the U.S. Retail Coffee segment. The overall decline was primarily due to unfavorable volume/mix, partially offset by a net favorable impact of higher pricing and costs. SD&A expenses decreased
$13.3
, driven by benefits from our cost savings initiatives. Special project costs decreased $25.3, primarily due to a reduction in integration costs, partially offset by an increase in restructuring costs in the current year. Operating income decreased
$107.6
, or
13 percent
, reflecting the increase in impairment charges.
Adjusted gross profit decreased $71.1, or
3 percent
, in the first
nine
months of
2018
, while adjusted operating income decreased $59.5, or
5 percent
. The primary difference from the change in GAAP results was the exclusion of the impairment charges, the $27.3 favorable change in the impact of unallocated derivative gains and losses as compared to the prior year, and special project costs.
Income Taxes
On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). The Act provides for comprehensive tax legislation that reduces the U.S. federal statutory corporate tax rate from
35.0 percent
to
21.0 percent
effective January 1, 2018, broadens the U.S. federal income tax base, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and creates new taxes on certain foreign sourced earnings. As we have an April 30 fiscal year-end, the lower corporate income tax rate is administratively phased in, resulting in a blended U.S. federal statutory tax rate of approximately
30.4 percent
for our fiscal year ending April 30, 2018, and
21.0 percent
for our fiscal years thereafter.
The U.S. Securities and Exchange Commission (“SEC”) has issued rules to allow a measurement period of up to 12 months following the enactment of the Act for registrants to finalize their accounting for the related income tax effects. As of January 31, 2018, we have not completed our accounting for the income tax effects of the enactment of the Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. Accordingly, our income tax provision as of January 31, 2018, reflects the current year impacts of the Act on the estimated annual effective tax rate and provisional estimates of our discrete adjustments resulting directly from the enactment of the Act based on information available, prepared, or analyzed to date in reasonable detail.
The income tax benefit of
$715.3
and
$555.9
for the
third
quarter and first
nine
months of
2018
, respectively, reflects a net benefit of $765.8 related to our discrete adjustments resulting directly from the Act, slightly offset by additional income tax expense related to the Pet Foods reporting unit goodwill impairment charge. Income tax expense was $63.0 and $234.6 for the
third
quarter and first
nine
months of 2017, respectively. As a result of the new legislation, we anticipate an effective tax rate for the fourth quarter of 2018 of approximately 28.0 percent. Within our calculations of the income tax effects of the Act, we used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board and/or various other taxing jurisdictions. In particular, we anticipate that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Act, either in its entirety or with respect to specific provisions. All of these potential legislative and interpretive actions could result in adjustments to any of the provisional estimates when the accounting for the income tax effects of the Act is completed.
We anticipate that the effective tax rate in 2019 and in future years will be favorably impacted by the lower federal statutory corporate tax rate of
21.0 percent
, offset to some extent by the base broadening changes, such as the elimination of the domestic manufacturing deduction. For further information, refer to Note 12: Income Taxes.
Integration Activities
Total one-time costs related to the acquisition of Big Heart Pet Brands (“Big Heart”) are anticipated to be approximately $290.0 and will be incurred through 2018. These costs primarily consist of employee-related costs, outside service and consulting costs, and other costs related to the acquisition. We have incurred total cumulative costs of
$269.0
related to the integration of Big Heart, including
$4.8
and
$23.7
in the
third
quarter and first
nine
months of
2018
, respectively. We have fully realized our goal of $200.0 in annual synergies.
Restructuring Activities
An organization optimization program was approved by the Board of Directors during the fourth quarter of 2016. Under this program, we identified opportunities to reduce costs and optimize the organization, which we expect to achieve by the end of 2018. Related projects include an organizational redesign and the optimization of our manufacturing footprint. During 2017, we exited two leased facilities in Livermore, California, and consolidated all ancient grains and pasta production into our facility in Chico, California. We consolidated all of our coffee produced at our Harahan, Louisiana, facility into one of our facilities in New Orleans, Louisiana, which was completed during the third quarter of 2018. The organization optimization program is nearly complete and has resulted in total headcount reductions of approximately
275
full-time positions.
Upon completion of this program in 2018, total restructuring costs related to the program are expected to be approximately
$45.0
, of which the majority represents employee-related costs, while the remainder primarily consists of site preparation, equipment relocation, and production start-up costs at the impacted facilities. We have incurred total cumulative restructuring costs of
$42.5
,
$22.6
of which was incurred during 2018, including
$3.1
in the
third
quarter.
We expect to achieve approximately $50.0 of annual cost reductions related to our organization optimization program, mainly during 2018, and plan to invest these savings in our businesses.
Cost Management Program
In addition to our organization optimization program, we announced a separate cost management program during the fourth quarter of 2017, which is comprised of several cost reduction initiatives, including SKU rationalization, revenue growth management, and our Right Spend zero-based budgeting initiative. We expect to realize approximately $200.0 of cost reductions annually by the end of 2020 as a result of these initiatives.
Segment Results
We have
four
reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Away From Home. During the second quarter of 2018, we added the International and Away From Home reportable segment, as a single segment manager was named to oversee the entire operating segment. Prior year segment results have not been modified, as the new reportable segment represents the previously reported combination of the International and Away From Home strategic business areas, which were previously managed separately and not individually significant.
The U.S. Retail Coffee segment primarily includes the domestic sales of
Folgers,
Dunkin’ Donuts,
and
Café
Bustelo
branded coffee; the U.S. Retail Consumer Foods segment primarily includes domestic sales of
Jif
,
Smucker’s
,
Crisco
, and
Pillsbury
branded products; and the U.S. Retail Pet Foods segment primarily includes domestic sales of
Meow Mix
,
Milk-Bone
,
Natural Balance
,
Kibbles ’n Bits
,
9Lives
,
Pup-Peroni
, and
Nature’s Recipe
branded products. The International and Away From Home segment is comprised of 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).
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
Nine Months Ended January 31,
|
|
2018
|
|
2017
|
|
% Increase
(Decrease)
|
|
2018
|
|
2017
|
|
% Increase
(Decrease)
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
$
|
550.5
|
|
|
$
|
537.6
|
|
|
2
|
%
|
|
$
|
1,584.0
|
|
|
$
|
1,602.7
|
|
|
(1
|
)%
|
U.S. Retail Consumer Foods
|
511.6
|
|
|
517.3
|
|
|
(1
|
)
|
|
1,535.5
|
|
|
1,611.6
|
|
|
(5
|
)
|
U.S. Retail Pet Foods
|
561.9
|
|
|
550.9
|
|
|
2
|
|
|
1,635.7
|
|
|
1,601.4
|
|
|
2
|
|
International and Away From Home
|
279.3
|
|
|
273.0
|
|
|
2
|
|
|
820.6
|
|
|
792.8
|
|
|
4
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
$
|
182.1
|
|
|
$
|
172.2
|
|
|
6
|
%
|
|
$
|
458.5
|
|
|
$
|
532.5
|
|
|
(14
|
)%
|
U.S. Retail Consumer Foods
|
121.3
|
|
|
119.2
|
|
|
2
|
|
|
363.1
|
|
|
349.5
|
|
|
4
|
|
U.S. Retail Pet Foods
|
118.0
|
|
|
126.3
|
|
|
(7
|
)
|
|
339.2
|
|
|
363.0
|
|
|
(7
|
)
|
International and Away From Home
|
52.6
|
|
|
45.5
|
|
|
16
|
|
|
144.6
|
|
|
136.7
|
|
|
6
|
|
Segment profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
33.1
|
%
|
|
32.0
|
%
|
|
|
|
|
28.9
|
%
|
|
33.2
|
%
|
|
|
U.S. Retail Consumer Foods
|
23.7
|
|
|
23.0
|
|
|
|
|
|
23.6
|
|
|
21.7
|
|
|
|
U.S. Retail Pet Foods
|
21.0
|
|
|
22.9
|
|
|
|
|
|
20.7
|
|
|
22.7
|
|
|
|
International and Away From Home
|
18.8
|
|
|
16.7
|
|
|
|
|
|
17.6
|
|
|
17.2
|
|
|
|
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased
$12.9
in the
third
quarter of
2018
. Favorable volume/mix contributed 3 percentage points, driven by
Dunkin’ Donuts
K-Cup
®
pods and the
Café Bustelo
brand. The favorable volume/mix was slightly offset by lower net price realization for the
Folgers
brand. Segment profit increased
$9.9
, primarily due to favorable volume/mix and lower input costs, partially offset by an increase in marketing expense.
The U.S. Retail Coffee segment net sales decreased
$18.7
in the first
nine
months of
2018
. Volume/mix reduced net sales by 2 percentage points, driven by declines for the
Folgers
brand, partially offset by gains for
Dunkin’
Donuts
K-Cup
®
pods and the
Café Bustelo
brand. Net price realization improved slightly, contributing 1 percentage point to net sales. Segment profit decreased
$74.0
, primarily due to the impact of volume/mix and the net unfavorable impact of
higher green coffee costs and higher pricing
. During the fourth quarter of 2018, we expect to realize the benefit of lower green coffee costs as compared to the fourth quarter of 2017.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased
$5.7
in the
third
quarter of
2018
. Volume/mix reduced net sales by 3 percentage points, primarily driven by the
Crisco
and
Pillsbury
brands, partially offset by gains for the
Smucker’s
brand. Net price realization increased net sales by 2 percentage points. Segment profit increased
$2.1
, due to the net favorable impact of higher prices and higher costs and operational efficiencies, which were partially offset by unfavorable volume/mix.
The U.S. Retail Consumer Foods segment net sales decreased
$76.1
in the first
nine
months of
2018
. Volume/mix reduced net sales by 8 percentage points, primarily driven by the
Crisco
and
Pillsbury
brands. Net price realization contributed 3 percentage points to net sales, primarily attributed to the
Smucker's
,
Jif
, and
Crisco
brands. Segment profit increased
$13.6
, as the unfavorable impact of volume/mix was more than offset by the net favorable impact of higher prices and higher costs and reduced marketing expense.
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales increased
$11.0
in the
third
quarter of
2018
. Favorable volume/mix increased net sales by 3 percentage points, driven by the
Nature’s Recipe
brand and gains in pet snacks. We expanded distribution of the
Nature's Recipe
brand into grocery and mass merchandise outlets during the third quarter of 2017. Lower net price realization reduced net sales by 1 percentage point. Segment profit decreased
$8.3
, primarily reflecting a $7.1 increase in obsolete inventory expense. Higher marketing expense also contributed to the segment profit decline.
The U.S. Retail Pet Foods segment net sales increased
$34.3
in the first
nine
months of
2018
. Favorable volume/mix, primarily driven by the
Nature’s Recipe
and
Meow Mix
brands, increased net sales by 3 percentage points. The impact of volume/mix was partially offset by lower net price realization, which reduced net sales by 1 percentage point. Segment profit decreased
$23.8
, primarily due to increased marketing expense, mainly related to the
Nature's Recipe
brand, and the $7.1 increase in obsolete inventory expense during the third quarter of 2018.
International and Away From Home
The International and Away From Home segment net sales increased
$6.3
in the
third
quarter of
2018
, reflecting $5.8 of favorable foreign currency exchange and higher volume/mix driven by the
Jif
and
Smucker's
brands. Net price realization reduced net sales by 1 percentage point. Segment profit increased
$7.1
, reflecting the contribution from favorable volume/mix and foreign currency exchange, along with lower marketing expense.
The International and Away From Home segment net sales increased
$27.8
in the first
nine
months of
2018
, reflecting favorable volume/mix, which increased net sales by 2 percentage points, driven by the
Jif
and
Smucker's
brands. In addition, foreign currency exchange contributed $9.4 to net sales. Segment profit increased
$7.9
, primarily due to the contributions from favorable volume/mix and foreign currency exchange.
Financial Condition – Liquidity and Capital Resources
Liquidity
Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. At
January 31, 2018
, total cash and cash equivalents was
$186.2
, compared to
$166.8
at
April 30, 2017
.
Within the U.S. Retail Coffee and U.S. Retail Consumer Foods segments, we generally expect a significant use of cash to fund working capital requirements during the first half of each fiscal year, primarily due to the buildup of inventories to support the Fall Bake and Holiday period, the additional increase of coffee inventory in advance of the Atlantic hurricane season, and seasonal fruit procurement. In these businesses, we expect cash provided by operations in the second half of the fiscal year to significantly exceed the amount in the first half of the year, upon completion of the Fall Bake and Holiday period. However, the impact of seasonality on our overall working capital requirements is partially reduced by the U.S. Retail Pet Foods segment, which does not experience significant seasonality. Cash provided by operating activities in the third quarter of 2018 was $469.0, compared to $434.6 provided through the first half of 2018.
The following table presents selected cash flow information.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31,
|
|
2018
|
|
2017
|
Net cash provided by (used for) operating activities
|
$
|
903.6
|
|
|
$
|
794.8
|
|
Net cash provided by (used for) investing activities
|
(171.8
|
)
|
|
(148.1
|
)
|
Net cash provided by (used for) financing activities
|
(725.2
|
)
|
|
(612.4
|
)
|
|
|
|
|
Net cash provided by (used for) operating activities
|
$
|
903.6
|
|
|
$
|
794.8
|
|
Additions to property, plant, and equipment
|
(210.3
|
)
|
|
(136.6
|
)
|
Free cash flow
(A)
|
$
|
693.3
|
|
|
$
|
658.2
|
|
|
|
(A)
|
Free cash flow is a non-GAAP measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.
|
The
$108.8
increase in cash provided by operating activities in the first
nine
months of 2018 was mainly due to a decrease in working capital during 2018, as compared to an increase in the prior year, driven by inventory. The impact of the change in working capital was partially offset by lower net income adjusted for noncash items and an increase in contributions to the defined benefit pension plans during 2018.
Cash used for investing activities in the first
nine
months of 2018 consisted primarily of
$210.3
in capital expenditures, partially offset by a $29.6 reduction in our derivative cash margin account balances. Cash used for investing activities in the first
nine
months of 2017 consisted primarily of
$136.6
in capital expenditures.
Cash used for financing activities in the first
nine
months of
2018
consisted primarily of
$1,050.3
in long-term debt repayments, dividend payments of
$261.4
, and a $200.0 decrease in short-term borrowings during 2018, which were partially offset by
$799.6
in long-term debt proceeds. Cash used for financing activities in the first
nine
months of 2017 consisted primarily of dividend payments of
$252.1
, long-term debt repayments of
$200.0
, and a
$142.0
decrease in short-term borrowings during 2017. For additional information on our new borrowings and debt repayments, see “Capital Resources” in this discussion and analysis.
Capital Resources
The following table presents our capital structure.
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
April 30, 2017
|
Current portion of long-term debt
|
$
|
—
|
|
|
$
|
499.0
|
|
Short-term borrowings
|
254.0
|
|
|
454.0
|
|
Long-term debt, less current portion
|
4,688.5
|
|
|
4,445.5
|
|
Total debt
|
$
|
4,942.5
|
|
|
$
|
5,398.5
|
|
Shareholders’ equity
|
7,804.2
|
|
|
6,850.2
|
|
Total capital
|
$
|
12,746.7
|
|
|
$
|
12,248.7
|
|
In December 2017, we completed an offering of
$800.0
in Senior Notes due December 6, 2019 and December 15, 2027. The net proceeds from the offering were used to prepay the
$500.0
in principal amount of the Senior Notes due March 15, 2018. In addition, we prepaid, in full, the remaining outstanding balance of the
$1.8
billion senior unsecured delayed-draw Term Loan Credit Agreement (“Term Loan”). During the three and nine months ended January 31, 2018, we prepaid on the Term Loan
$400.0
and
$550.0
, respectively.
In September 2017, we entered into an unsecured revolving credit facility with a group of
11
banks, which provides for a revolving credit line of
$1.8 billion
and matures in September 2022. Additionally, we terminated the previous $1.5 billion credit facility. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, London Interbank Offered Rate, 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
no
t have a balance outstanding under the revolving credit facility at
January 31, 2018
.
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, which was increased from the previous limit of
$1.0 billion
in conjunction with entering into the new unsecured revolving credit facility in September 2017. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of
January 31, 2018
, we had
$254.0
of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of
1.75 percent
.
We are in compliance with all of our debt covenants. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 8: Debt and Financing Arrangements.
As of
January 31, 2018
, we had approximately
3.6 million
common shares available for repurchase under the Board of Directors' authorizations. There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur.
During 2017, we announced our plans to build a
Smucker's Uncrustables
®
frozen sandwich manufacturing facility in Longmont, Colorado. Construction of the facility began in June 2017, and production is expected to begin during 2020. The new facility will help meet growing demand for
Smucker's Uncrustables
frozen sandwiches and will complement our existing facility in Scottsville, Kentucky. The Longmont facility will be constructed in two phases, with a total potential investment of $340.0. Phase 1 will include up to an initial $200.0 investment to construct and equip the new facility, with an opportunity to invest an additional $140.0 for phase 2 expansion, dependent on product demand.
On May 30, 2017, we announced a definitive agreement to acquire the
Wesson
oil brand from Conagra Brands, Inc. (“Conagra”). The all-cash transaction, which is expected to be funded primarily with debt, is valued at approximately $285.0, subject to a post-closing working capital adjustment. We anticipate the addition of the
Wesson
brand will add annual net sales of approximately $230.0. Following the close of the transaction, Conagra will continue to manufacture products sold under the
Wesson
brand and provide certain other transition services for up to one year. After the transition period, we expect to
consolidate
Wesson
production into our existing oils manufacturing facility in Cincinnati, Ohio. Within two years after the closing, we expect to realize synergies of approximately $20.0 annually.
The transaction is subject to certain customary closing conditions, including the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). On August 28, 2017, both parties received a request for additional information under the HSR Act (a “second request”) from the U.S. Federal Trade Commission (“FTC”) in connection with the FTC's review of the transaction. Issuance of the second request extends the waiting period under the HSR Act until 30 days after both parties have substantially complied with the request, or as the parties otherwise agree, unless the waiting period is terminated earlier by the FTC. The agreement to acquire the
Wesson
brand provides that, unless otherwise agreed upon by both parties, if the closing of the transaction has not occurred on or prior to March 31, 2018, because HSR approval has not been received as of such date, then either party may terminate the agreement.
Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our commercial paper program and revolving credit facility, and access to capital markets, will be sufficient to meet cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, interest and principal payments on debt outstanding, and share repurchases.
As of
January 31, 2018
, total cash and cash equivalents of $178.8 was held by our international subsidiaries. During the third quarter of 2018, we recorded a provisional one-time transition tax of
$26.1
on the undistributed earnings of certain foreign subsidiaries that were previously deferred from U.S. income taxes, as required by the Act. This tax liability will be paid over an eight-year period beginning in 2018. As of
January 31, 2018
, the undistributed earnings of our foreign subsidiaries continue to be permanently reinvested and we do not intend to repatriate any of the amounts to meet our cash requirements. For further information, refer to Note 12: Income Taxes.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: adjusted gross profit, operating income, income, and free cash flow, as key measures for purposes of evaluating performance internally. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of our operating results. The Board of Directors also utilizes the adjusted earnings per share and free cash flow measures as components for measuring performance for incentive compensation purposes.
Non-GAAP measures exclude certain items affecting comparability, that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, integration and restructuring costs (“special project costs”), and unallocated gains and losses on commodity and foreign currency exchange derivatives (“unallocated derivative gains and losses”). The special project costs in the following table relate to specific integration and restructuring projects, and the unallocated derivative gains and losses reflect the changes in fair value of our commodity and foreign currency exchange contracts. During the third quarter of 2018, we expanded our non-GAAP measures to also exclude certain one-time discrete tax adjustments. These adjustments include the provisional effect of the one-time items associated with the Act, which includes certain discrete adjustments related to the U.S. deferred tax assets and liabilities remeasurement and transition tax. Also included in the one-time discrete tax adjustments is the permanent tax difference related to the goodwill impairment charge that was recorded during the third quarter of 2018. For further details on these adjustments, refer to Note 12: Income Taxes and Note 7: Goodwill and Other Intangible Assets. We believe that excluding these one-time discrete tax adjustments in our non-GAAP measures provides comparability across the periods presented and better reflects the benefit of a lower blended U.S. statutory tax rate on our current year earnings as a result of the Act.
These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). Rather, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
Nine Months Ended January 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross profit reconciliation:
|
|
|
|
|
|
|
|
Gross profit
|
$
|
728.5
|
|
|
$
|
722.9
|
|
|
$
|
2,145.6
|
|
|
$
|
2,188.5
|
|
Unallocated derivative losses (gains)
|
0.7
|
|
|
(0.8
|
)
|
|
(21.6
|
)
|
|
5.7
|
|
Cost of products sold – special project costs
|
2.3
|
|
|
0.5
|
|
|
3.9
|
|
|
4.8
|
|
Adjusted gross profit
|
$
|
731.5
|
|
|
$
|
722.6
|
|
|
$
|
2,127.9
|
|
|
$
|
2,199.0
|
|
Operating income reconciliation:
|
|
|
|
|
|
|
|
Operating income
|
$
|
162.7
|
|
|
$
|
237.7
|
|
|
$
|
727.2
|
|
|
$
|
834.8
|
|
Amortization
|
51.6
|
|
|
51.7
|
|
|
154.7
|
|
|
155.2
|
|
Impairment charges
|
176.9
|
|
|
75.7
|
|
|
176.9
|
|
|
75.7
|
|
Unallocated derivative losses (gains)
|
0.7
|
|
|
(0.8
|
)
|
|
(21.6
|
)
|
|
5.7
|
|
Cost of products sold – special project costs
|
2.3
|
|
|
0.5
|
|
|
3.9
|
|
|
4.8
|
|
Other special project costs
|
5.6
|
|
|
18.0
|
|
|
42.4
|
|
|
66.8
|
|
Adjusted operating income
|
$
|
399.8
|
|
|
$
|
382.8
|
|
|
$
|
1,083.5
|
|
|
$
|
1,143.0
|
|
Net income reconciliation:
|
|
|
|
|
|
|
|
Net income
|
$
|
831.3
|
|
|
$
|
134.6
|
|
|
$
|
1,152.7
|
|
|
$
|
481.9
|
|
Income tax expense (benefit)
|
(715.3
|
)
|
|
63.0
|
|
|
(555.9
|
)
|
|
234.6
|
|
Amortization
|
51.6
|
|
|
51.7
|
|
|
154.7
|
|
|
155.2
|
|
Impairment charges
|
176.9
|
|
|
75.7
|
|
|
176.9
|
|
|
75.7
|
|
Unallocated derivative losses (gains)
|
0.7
|
|
|
(0.8
|
)
|
|
(21.6
|
)
|
|
5.7
|
|
Cost of products sold – special project costs
|
2.3
|
|
|
0.5
|
|
|
3.9
|
|
|
4.8
|
|
Other special project costs
|
5.6
|
|
|
18.0
|
|
|
42.4
|
|
|
66.8
|
|
Adjusted income before income taxes
|
$
|
353.1
|
|
|
$
|
342.7
|
|
|
$
|
953.1
|
|
|
$
|
1,024.7
|
|
Income taxes, as adjusted
(A)
|
69.4
|
|
|
109.9
|
|
|
268.3
|
|
|
335.5
|
|
Adjusted income
|
$
|
283.7
|
|
|
$
|
232.8
|
|
|
$
|
684.8
|
|
|
$
|
689.2
|
|
Weighted-average shares – assuming dilution
|
113.6
|
|
|
116.5
|
|
|
113.6
|
|
|
116.5
|
|
Adjusted earnings per share – assuming dilution
|
$
|
2.50
|
|
|
$
|
2.00
|
|
|
$
|
6.03
|
|
|
$
|
5.92
|
|
|
|
(A)
|
Income taxes, as adjusted is based upon our GAAP effective tax rate for the nine months ended January 31, 2018 and 2017, and reflects the impact of items excluded from GAAP net income to derive adjusted income. Income taxes, as adjusted also reflects the exclusion of certain one-time discrete tax adjustments for the three and nine months ended January 31, 2018.
|
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and not material to our results of operations, financial condition, or cash flows.
As of
January 31, 2018
, there were no material changes to our future contractual obligations as previously reported in our Annual Report on Form 10-K for the year ended April 30, 2017.
Critical Accounting Estimates and Policies
A discussion of our critical accounting estimates and policies can be found in the “Management's Discussion and Analysis” section of our Annual Report on Form 10-K for the year ended April 30, 2017. There were no material changes to the information previously disclosed, with the exception of the item discussed below.
We review goodwill and other indefinite-lived intangible assets at least annually on February 1 for impairment, and more often if indicators of impairment exist.
During the third quarter of 2018, we completed our long-range planning process which resulted in a decline in forecasted net sales for the U.S. Retail Pet Foods segment. As a result of the decreased projections, as well as the narrow differences between estimated fair value and carrying value as of April 30, 2017, we performed an interim impairment analysis on the goodwill of the Pet Foods reporting unit and the indefinite-lived trademarks included within the U.S. Retail Pet Foods segment. We recognized total impairment charges of
$176.9
during the third quarter of 2018, of which
$145.0
and
$31.9
related to the
goodwill of the Pet Foods reporting unit and certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, respectively, to the extent the carrying values exceeded the estimated fair values. These charges were included as a noncash charge in our Condensed Statement of Consolidated Income. Furthermore, we early adopted ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
in connection with the
third quarter of 2018 interim impairment analysis. As a result, we did not perform Step 2 of the goodwill impairment test for the goodwill of the Pet Foods reporting unit, and recorded the impairment charge based on the excess of the reporting unit's carrying value over its fair value. For further details, refer to Note 2: Recently Issued Accounting Standards.
During the third quarter of 2017, we completed an interim impairment analysis on the goodwill of the Pet Foods reporting unit and the indefinite-lived trademarks included within the U.S. Retail Pet Foods segment as a result of a decline in the 2017 actual and forecasted net sales for the U.S. Retail Pet Foods segment, as well as an increase in our weighted-average cost of capital, which reflected the rising market-based interest rates throughout the year. As a result, we recognized an impairment charge of $75.7 related to certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, to the extent that carrying value exceeded the estimated fair value, which was included as a noncash charge in our Condensed Statement of Consolidated Income.
W
e did not recognize an impairment charge related to the goodwill of the Pet Foods reporting unit during the third quarter of 2017.
The goodwill and indefinite-lived trademarks within the U.S. Retail Pet Foods segment remain susceptible to future impairment charges as the carrying values approximate estimated fair values at January 31, 2018. In addition, the goodwill related to the Pet Foods reporting unit remains susceptible to future impairment charges, as the U.S. deferred tax assets and liabilities remeasurement that was recorded during the third quarter of 2018, as a result of the enactment of tax legislation in December 2017, is provisional. As such, we could have additional adjustments to the U.S. deferred tax assets and liabilities in the future as we refine our tax calculations, which could potentially affect the measurement of these balances or potentially give rise to new or additional deferred tax amounts, thus impacting the carrying value of the Pet Foods reporting unit. These adjustments would be reflected as a change in accounting estimate during the period identified. For further detail, refer to Note 12: Income Taxes.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
The following discussions about our market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices.
Interest Rate Risk: The fair value of our cash and cash equivalents at
January 31, 2018
, approximates carrying value. We are exposed to interest rate risk with regard to existing debt consisting of fixed- and variable-rate maturities. Our interest rate exposure primarily includes U.S. Treasury rates, London Interbank Offered Rate, and commercial paper rates in the U.S.
We utilize derivative instruments to manage changes in the fair value and cash flows of our debt. Interest rate contracts mitigate the risk associated with the underlying hedged item. At the inception of the contract, the instrument is evaluated and documented for 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.
In June 2017, we entered into a treasury lock, with a notional value of
$300.0
, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2018. This interest rate contract was designated as a cash flow hedge. In December 2017, concurrent with the pricing of the Senior Notes due December 15, 2027, we terminated the treasury lock prior to maturity. The termination resulted in a gain of
$2.7
, which was deferred and included as a component of accumulated other comprehensive income (loss) and will be amortized as a reduction to interest expense over the life of the debt.
In 2015, we terminated the interest rate swap on the 3.50 percent Senior Notes due October 15, 2021, which was designated as a fair value hedge, and used to hedge against the changes in fair value of debt. As a result of the early termination, we received $58.1 in cash, which included $4.6 of accrued and prepaid interest and a $53.5 benefit that is deferred as a component of the carrying value of the long-term debt and is being recognized ratably as a reduction to interest expense over the remaining life of the related debt. At
January 31, 2018
, the remaining benefit of
$30.4
was recorded as an increase in the long-term debt balance.
In measuring interest rate risk by the amount of net change in the fair value of our financial liabilities, a hypothetical 100 basis-point decrease in interest rates at
January 31, 2018
, would increase the fair value of our long-term debt by $368.5.
Foreign Currency Exchange Risk: We have operations outside the U.S. with foreign currency denominated assets and liabilities, primarily denominated in Canadian currency. Because we have foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The foreign currency balance sheet exposures as of
January 31, 2018
, are not expected to result in a significant impact on future earnings or cash flows.
We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments in Canada, 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. Therefore, the change in value of these instruments is immediately recognized in cost of products sold. Based on our hedged foreign currency positions as of
January 31, 2018
, a hypothetical 10 percent change in exchange rates would not materially impact the fair value.
Revenues from customers outside the U.S., subject to foreign currency exchange, represented 6 percent of net sales during the
nine
-month period ended
January 31, 2018
. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.
Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use derivatives with maturities of generally less than one year. We do not qualify commodity derivatives for hedge accounting treatment. As a result, the gains and losses on all commodity derivatives are immediately recognized in cost of products sold.
The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to commodities.
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
April 30, 2017
|
High
|
$
|
40.4
|
|
|
$
|
40.8
|
|
Low
|
16.7
|
|
|
13.2
|
|
Average
|
27.5
|
|
|
26.5
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The estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative instrument; thus, we would expect that any gain or loss in the estimated fair value of its derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Certain Forward-Looking Statements
Certain statements included in this Quarterly Report contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expect,” “anticipate,” “believe,” “intend,” “will,” “plan,” and similar phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements, as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include, but are not limited to, the following:
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our ability to achieve cost savings related to our organization optimization and cost management programs in the amounts and within the time frames currently anticipated;
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our ability to satisfy the closing conditions for the
Wesson
transaction, including receipt of required regulatory approvals;
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our ability to generate sufficient cash flow to meet our cash deployment objectives;
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volatility of commodity, energy, and other input costs;
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risks associated with derivative and purchasing strategies we employ to manage commodity pricing risks;
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the availability of reliable transportation on acceptable terms;
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our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period;
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the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation;
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general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
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the impact of food security concerns involving either our products or our competitors’ products, including our recent withdrawal of certain canned dog food products;
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the impact of accidents, extreme weather, and natural disasters;
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the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships;
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the timing and amount of capital expenditures and share repurchases;
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impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets;
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the impact of new or changes to existing governmental laws and regulations and their application;
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the outcome of tax examinations, changes in tax laws, and other tax matters;
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foreign currency and interest rate fluctuations; and
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risks related to other factors described under “Risk Factors” in other reports and statements we have filed with the U.S. Securities and Exchange Commission.
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Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances subsequent to the filing of this Quarterly Report.