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
six
-month periods ended
October 31, 2018
and
2017
. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted.
On May 14, 2018, we acquired the stock of Ainsworth Pet Nutrition, LLC (“Ainsworth”) in an all-cash transaction, which was funded by debt and valued at $1.9 billion, inclusive of a working capital adjustment. Ainsworth is a leading producer, distributor, and marketer of premium pet food and pet snacks, predominantly within the U.S. The majority of Ainsworth’s sales are generated by the
Rachael Ray
Nutrish
brand, which is driving significant growth in the premium pet food category. We anticipate the acquired business to contribute net sales of nearly $800.0 in 2019. Annual cost synergies of approximately $55.0 are expected to be fully realized within three years after the transaction date, with approximately $20.0 anticipated in 2019. The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of Ainsworth's operations, including
$184.2
and
$347.0
in net sales and
$4.5
and
$0.4
in operating income, are included in our consolidated financial statements for the three and six months ended October 31, 2018, respectively.
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, primarily in the U.S. Retail Consumer Foods segment. The transaction did not include our baking business in Canada. We received proceeds from the divestiture of
$372.1
, which were net of cash transaction costs, and are subject to a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax gain of
$26.6
during the second quarter of 2019, which is included in other operating expense (income) – net within the Condensed Statements
of Consolidated Income.
We are the owner of all trademarks, except for the following, which are used under license:
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
Rachael Ray
is a trademark of Ray Marks Co. LLC.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
|
% Increase (Decrease)
|
|
2018
|
|
2017
|
|
% Increase (Decrease)
|
Net sales
|
$
|
2,021.5
|
|
|
$
|
1,923.6
|
|
|
5
|
%
|
|
$
|
3,924.0
|
|
|
$
|
3,672.5
|
|
|
7
|
%
|
Gross profit
|
$
|
771.3
|
|
|
$
|
755.0
|
|
|
2
|
|
|
$
|
1,449.5
|
|
|
$
|
1,417.1
|
|
|
2
|
|
% of net sales
|
38.2
|
%
|
|
39.2
|
%
|
|
|
|
|
36.9
|
%
|
|
38.6
|
%
|
|
|
Operating income
|
$
|
330.5
|
|
|
$
|
332.1
|
|
|
—
|
|
|
$
|
557.4
|
|
|
$
|
567.3
|
|
|
(2
|
)
|
% of net sales
|
16.3
|
%
|
|
17.3
|
%
|
|
|
|
14.2
|
%
|
|
15.4
|
%
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
188.5
|
|
|
$
|
194.6
|
|
|
(3
|
)
|
|
$
|
321.5
|
|
|
$
|
321.4
|
|
|
—
|
|
Net income per common share –
assuming dilution
|
$
|
1.66
|
|
|
$
|
1.71
|
|
|
(3
|
)
|
|
$
|
2.83
|
|
|
$
|
2.83
|
|
|
—
|
|
Adjusted gross profit
(A)
|
$
|
771.4
|
|
|
$
|
746.2
|
|
|
3
|
|
|
$
|
1,471.6
|
|
|
$
|
1,396.4
|
|
|
5
|
|
% of net sales
|
38.2
|
%
|
|
38.8
|
%
|
|
|
|
37.5
|
%
|
|
38.0
|
%
|
|
|
Adjusted operating income
(A)
|
$
|
415.7
|
|
|
$
|
384.6
|
|
|
8
|
|
|
$
|
732.8
|
|
|
$
|
686.5
|
|
|
7
|
|
% of net sales
|
20.6
|
%
|
|
20.0
|
%
|
|
|
|
18.7
|
%
|
|
18.7
|
%
|
|
|
Adjusted income:
(A)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
$
|
246.5
|
|
|
$
|
229.5
|
|
|
7
|
|
|
$
|
448.9
|
|
|
$
|
401.1
|
|
|
12
|
|
Earnings per share – assuming dilution
|
$
|
2.17
|
|
|
$
|
2.02
|
|
|
7
|
|
|
$
|
3.95
|
|
|
$
|
3.53
|
|
|
12
|
|
|
|
(A)
|
We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
|
Increase
(Decrease)
|
|
%
|
|
2018
|
|
2017
|
|
Increase
(Decrease)
|
|
%
|
Net sales
|
$
|
2,021.5
|
|
|
$
|
1,923.6
|
|
|
$
|
97.9
|
|
|
5
|
%
|
|
$
|
3,924.0
|
|
|
$
|
3,672.5
|
|
|
$
|
251.5
|
|
|
7
|
%
|
Ainsworth acquisition
|
(184.2
|
)
|
|
—
|
|
|
(184.2
|
)
|
|
(10
|
)
|
|
(347.0
|
)
|
|
—
|
|
|
(347.0
|
)
|
|
(9
|
)
|
Baking divestiture
|
—
|
|
|
(74.2
|
)
|
|
74.2
|
|
|
4
|
|
|
—
|
|
|
(74.2
|
)
|
|
74.2
|
|
|
2
|
|
Foreign currency exchange
|
4.9
|
|
|
—
|
|
|
4.9
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
Net sales excluding acquisition, divestiture, and foreign currency exchange
(A)
|
$
|
1,842.2
|
|
|
$
|
1,849.4
|
|
|
$
|
(7.2
|
)
|
|
—
|
%
|
|
$
|
3,581.1
|
|
|
$
|
3,598.3
|
|
|
$
|
(17.2
|
)
|
|
—
|
%
|
Amounts may not add due to rounding.
|
|
(A)
|
Net sales excluding acquisition, divestiture, and foreign currency exchange is a non-GAAP financial measure used to evaluate performance internally. This measure provides useful information because it enables comparison of results on a year-over-year basis.
|
Net sales in the
second
quarter of
2019
increased $97.9, or
5 percent
, reflecting a $184.2 contribution from the Ainsworth acquisition, partially offset by the impact of $74.2 of noncomparable net sales in the prior year related to the divestiture of the U.S. baking business during the
second
quarter of
2019
. Net sales excluding acquisition, divestiture, and foreign currency exchange declined $7.2. Lower net price realization reduced net sales by 2 percentage points and was mostly attributable to coffee, peanut butter, pet snacks, and oils. Favorable volume/mix contributed 1 percentage point to net sales, primarily driven by growth in
Smucker's Uncrustables
®
,
Meow Mix
,
1850
TM
coffee, and
Jif
, driven by
Power-Ups
TM
snacking items.
Net sales in the first
six
months of 2019 increased $251.5, or
7 percent
, reflecting a $347.0 contribution from the Ainsworth acquisition, partially offset by the impact of the $74.2 noncomparable net sales in the prior year related to the divestiture of the U.S. baking business. Net sales excluding acquisition, divestiture, and foreign currency exchange declined $17.2, reflecting lower net price realization, which reduced net sales by 1 percentage point. This was mostly attributable to coffee, pet snacks, and oils. Favorable volume/mix contributed 1 percentage point to net sales, primarily driven by growth in
Smucker's Uncrustables
and coffee, partially offset by a decline in pet foods.
Operating Income
The following table presents the components of operating income as a percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross profit
|
38.2
|
%
|
|
39.2
|
%
|
|
36.9
|
%
|
|
38.6
|
%
|
Selling, distribution, and administrative expenses:
|
|
|
|
|
|
|
|
Marketing
|
6.8
|
%
|
|
6.1
|
%
|
|
7.1
|
%
|
|
6.3
|
%
|
Selling
|
3.3
|
|
|
3.4
|
|
|
3.4
|
|
|
3.6
|
|
Distribution
|
3.3
|
|
|
3.2
|
|
|
3.4
|
|
|
3.2
|
|
General and administrative
|
5.6
|
|
|
6.1
|
|
|
5.7
|
|
|
6.1
|
|
Total selling, distribution, and administrative expenses
|
18.9
|
%
|
|
18.7
|
%
|
|
19.5
|
%
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
Amortization
|
3.0
|
|
|
2.7
|
|
|
3.1
|
|
|
2.8
|
|
Other special project costs
|
1.3
|
|
|
0.5
|
|
|
0.8
|
|
|
1.0
|
|
Other operating expense (income) – net
|
(1.3
|
)
|
|
0.1
|
|
|
(0.7
|
)
|
|
—
|
|
Operating income
|
16.3
|
%
|
|
17.3
|
%
|
|
14.2
|
%
|
|
15.4
|
%
|
Amounts may not add due to rounding.
Gross profit increased $16.3, or
2 percent
, in the
second
quarter of
2019
, primarily driven by the addition of Ainsworth, partially offset by the noncomparable impact related to the U.S. baking business divestiture. The impact of lower pricing and higher costs for pet food, peanut butter, and pet snacks was mostly offset by lower input costs for coffee. Operating income was comparable to the prior year, as higher gross profit and a $26.6 pre-tax gain related to the sale of the U.S. baking business were offset by a $22.9 increase in selling, distribution, and administrative ("SD&A") expenses, a $14.8 increase in special project costs, and an $8.1 increase in amortization expense, all of which were primarily due to the Ainsworth acquisition.
Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, and unallocated gains and losses on commodity and foreign currency exchange derivatives. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for further information. On a non-GAAP basis, adjusted gross profit increased $25.2, or
3 percent
, in the
second
quarter of
2019
, with the primary difference from GAAP results being the exclusion of a $9.8 unfavorable change in the impact of unallocated derivative gains and losses. Adjusted operating income increased $31.1, or
8 percent
, further reflecting the exclusion of special project costs and amortization expense.
Gross profit increased $32.4, or
2 percent
, in the first
six
months of 2019, primarily driven by the addition of Ainsworth, partially offset by the noncomparable impact related to the U.S. baking business divestiture. In addition, the net impact of lower prices and higher costs had an unfavorable impact, a portion of which was attributable to an unfavorable change in the impact of derivative gains and losses. Operating income decreased $9.9, or
2 percent
, as higher gross profit and the $26.6 pre-tax gain related to the sale of the U.S. baking business were more than offset by a $57.4 increase in SD&A expenses and a $17.1 increase in amortization expense, both of which were primarily due to the Ainsworth acquisition.
Adjusted gross profit increased $75.2, or
5 percent
, in the first
six
months of 2019, with the primary difference from GAAP results being the exclusion of a $44.4 unfavorable change in the impact of unallocated derivative gains and losses. Adjusted operating income increased $46.3, or
7 percent
, further reflecting the exclusion of amortization expense.
Interest Expense
Net interest expense increased $12.0, or 29 percent, in the
second
quarter of
2019
and increased $23.6, or 28 percent, in the first
six
months of 2019, primarily due to the impact of the incremental debt issued to finance the Ainsworth acquisition. For additional information, see “Capital Resources” in this discussion and analysis.
Income Taxes
Income taxes decreased $16.3, or 17 percent, in the
second
quarter of 2019 and decreased $38.4, or 24 percent, in the first
six
months of 2019, due to a decrease in income before income taxes and lower effective tax rates in 2019 of 30.0 percent for the
second
quarter and 27.3 percent for the first
six
months. The 2018 effective tax rates were 33.3 percent for the second quarter and 33.2 percent for the first six months
.
The lower 2019 effective tax rates primarily resulted from the lower U.S. federal statutory tax rate of 21.0 percent following U.S. tax reform, compared to 35.0 percent previously. During the
second
quarter and first
six
months of 2019, the effective tax rates varied from the U.S. statutory tax rate primarily due to the impact of state income taxes and the income tax expense associated with the sale of the U.S. baking business. We anticipate a full-year effective tax rate for 2019 in the range of approximately 25.5 percent to 26.0 percent, which includes an estimate of the impact of the Ainsworth acquisition on our overall consolidated effective tax rate.
During the third quarter of 2018, we recorded a net provisional benefit of $765.8 related to U.S. tax reform, which included the revaluation of net deferred tax liabilities at the reduced federal income tax rate, offset in part by the estimated impact of a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”). The provisional amount recorded was based on assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service, the U.S. Securities and Exchange Commission, the Financial Accounting Standards Board, and various taxing jurisdictions. All of these potential legislative and interpretive actions could result in adjustment to our provisional estimates when the accounting for the income tax effects of U.S. tax reform is completed in the third quarter of 2019. During the
second
quarter and first
six
months of 2019, we continued to refine our analysis of the impacts of the Tax Cuts and Jobs Act, and there were no adjustments to the previously recorded provisional amounts.
Integration Activities
We expect to incur approximately
$50.0
in one-time costs related to the Ainsworth acquisition, of which the majority are expected to be cash charges. Approximately two-thirds of these one-time costs are expected to be incurred by the end of 2019. We incurred integration charges of $14.2 and $16.2 related to the Ainsworth acquisition in the
second
quarter and first
six
months of 2019, respectively.
Restructuring Activities
An organization optimization program was approved by the Board of Directors (the “Board”) during the fourth quarter of 2016. Under this program, we identified opportunities to reduce costs and optimize the organization. Related projects included an organizational redesign and the optimization of our manufacturing footprint. The program was recently expanded to include the restructuring of our geographic footprint, which includes the centralization of our pet food and pet snacks business, as well as certain international non-manufacturing functions, to our corporate headquarters in Orrville, Ohio, furthering collaboration and enhanced agility, while improving cost efficiency.
As a result of the program, we closed our international offices in China and Mexico during the second quarter of 2019, and we plan to close the San Francisco and Burbank, California, offices by the end of 2019. The majority of the related restructuring costs are expected to be incurred through the end of 2019. Upon completion of the remaining initiatives, we anticipate that the organization optimization program will result in total headcount reductions of approximately
450
full-time positions, of which approximately
75 percent
were reduced as of October 31, 2018. Total restructuring costs are expected to be approximately
$75.0
, of which the majority represents employee-related costs. We have incurred total cumulative restructuring costs of $59.5, of which $11.2 and $16.9 were incurred in the
second
quarter and first
six
months of 2019, respectively. For further information, refer to Note 5: Integration and Restructuring Costs.
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. 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
, and
Crisco
branded products; and the U.S. Retail Pet Foods segment primarily includes domestic sales of
Rachael Ray Nutrish,
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 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).
Effective May 1, 2018, the convenience store channel, which was previously included in the U.S. retail segments, is now included in the International and Away From Home segment. Segment performance for the three and six months ended October 31, 2017, has been reclassified for this realignment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
|
% Increase
(Decrease)
|
|
2018
|
|
2017
|
|
% Increase
(Decrease)
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
$
|
544.9
|
|
|
$
|
551.4
|
|
|
(1
|
)%
|
|
$
|
1,034.4
|
|
|
$
|
1,030.8
|
|
|
—
|
%
|
U.S. Retail Consumer Foods
|
461.9
|
|
|
527.8
|
|
|
(12
|
)
|
|
945.2
|
|
|
1,015.7
|
|
|
(7
|
)
|
U.S. Retail Pet Foods
|
728.1
|
|
|
551.1
|
|
|
32
|
|
|
1,399.3
|
|
|
1,071.8
|
|
|
31
|
|
International and Away From Home
|
286.6
|
|
|
293.3
|
|
|
(2
|
)
|
|
545.1
|
|
|
554.2
|
|
|
(2
|
)
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
$
|
174.3
|
|
|
$
|
152.1
|
|
|
15
|
%
|
|
$
|
322.1
|
|
|
$
|
275.3
|
|
|
17
|
%
|
U.S. Retail Consumer Foods
|
134.3
|
|
|
130.2
|
|
|
3
|
|
|
231.6
|
|
|
240.3
|
|
|
(4
|
)
|
U.S. Retail Pet Foods
|
123.9
|
|
|
122.4
|
|
|
1
|
|
|
224.3
|
|
|
220.2
|
|
|
2
|
|
International and Away From Home
|
56.7
|
|
|
55.4
|
|
|
2
|
|
|
100.1
|
|
|
95.6
|
|
|
5
|
|
Segment profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Retail Coffee
|
32.0
|
%
|
|
27.6
|
%
|
|
|
|
|
31.1
|
%
|
|
26.7
|
%
|
|
|
U.S. Retail Consumer Foods
|
29.1
|
|
|
24.7
|
|
|
|
|
|
24.5
|
|
|
23.7
|
|
|
|
U.S. Retail Pet Foods
|
17.0
|
|
|
22.2
|
|
|
|
|
|
16.0
|
|
|
20.5
|
|
|
|
International and Away From Home
|
19.8
|
|
|
18.9
|
|
|
|
|
|
18.4
|
|
|
17.3
|
|
|
|
U.S. Retail Coffee
The U.S. Retail Coffee segment net sales decreased $6.5 in the
second
quarter of
2019
. Lower net price realization reduced net sales by 2 percentage points. Favorable volume/mix contributed 1 percentage point to net sales, driven by the
1850
,
Café Bustelo
, and
Dunkin’ Donuts
brands, partially offset by declines in
Folgers
roast and ground coffee. Segment profit increased $22.2, primarily due to lower input costs, partially offset by an increase in marketing expense, the majority of which related to the recent launch of
1850
.
The U.S. Retail Coffee segment net sales increased $3.6 in the first
six
months of 2019. Favorable volume/mix contributed 2 percentage points, driven by the
Dunkin’ Donuts
,
1850
, and
Café Bustelo
brands, partially offset by declines in
Folgers
roast and ground coffee. The favorable volume/mix was partially offset by lower net price realization, which reduced net sales by 1 percentage point, primarily driven by the
Folgers
brand. Segment profit increased $46.8, primarily due to lower input costs, partially offset by an increase in marketing expense, a portion of which related to the recent launch of
1850
.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased $65.9 in the
second
quarter of
2019
, reflecting the impact of $72.4 of noncomparable net sales in the prior year related to the divested U.S. baking business. Excluding the noncomparable impact of the divested business, net sales increased 1 percent, primarily due to favorable volume/mix, which contributed 4 percentage points to net sales, driven by
Smucker’s Uncrustables
and the
Jif
and
Crisco
brands. These gains were mostly offset by lower net price realization, which reduced net sales by 3 percentage points, primarily related to peanut butter and oils. Segment profit increased $4.1, due to the recognition of a
$26.6
pre-tax gain related to the sale of the divested business. Excluding the gain from the divestiture and noncomparable segment profit in the prior year, segment profit decreased $11.0, due to lower prices, as well as higher input costs for peanut butter.
The U.S. Retail Consumer Foods segment net sales decreased $70.5 in the first
six
months of 2019, driven by the $72.4 noncomparable impact of the U.S. baking business. Excluding the noncomparable impact of the divested business, net sales increased $1.9, as the impact of favorable volume/mix, primarily related to
Smucker’s Uncrustables
, was mostly offset by lower net price realization, partially driven by a price decline on the
Crisco
brand at the beginning of the fiscal year. Segment profit decreased $8.7, as the net impact of lower prices and higher input costs and the noncomparable impact of the divested business were only partially offset by the recognition of the
$26.6
pre-tax gain related to the sale of the divested business.
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales increased $177.0 in the
second
quarter of
2019
, reflecting the $184.2 contribution from Ainsworth. Excluding Ainsworth, net sales declined $7.2, or 1 percent, reflecting the discontinuation of certain
Gravy Train
®
products. The impact of volume/mix was neutral, as the discontinued
Gravy Train
products and declines for the
Milk-Bone
and
Natural Balance
brands were mostly offset by gains for the
Meow Mix
and
Nature’s Recipe
brands. Lower net price realization reduced net sales by 1 percentage point. Segment profit increased $1.5, reflecting the addition of Ainsworth. Excluding Ainsworth, segment profit declined $18.1, as the net impact of lower prices and higher raw material and freight costs was only partially offset by the impact of reduced marketing expense, primarily related to the
Natural Balance
and
Nature's Recipe
brands.
The U.S. Retail Pet Foods segment net sales increased $327.5 in the first
six
months of 2019, reflecting the $347.0 contribution from Ainsworth. Excluding Ainsworth, net sales declined $19.5, or 2 percent, driven by lower net price realization, which reduced net sales by 1 percentage point. Unfavorable volume/mix also reduced net sales by 1 percentage point, as declines for the
Natural Balance
and
Gravy Train
brands were mostly offset by gains for the
Meow Mix
and
Nature’s Recipe
brands. Segment profit increased $4.1, as the addition of Ainsworth and the impact of reduced marketing expense, primarily related to the
Natural Balance
and
Nature's Recipe
brands, were mostly offset by the net impact of lower prices and higher input costs.
International and Away From Home
The International and Away From Home segment net sales decreased $6.7 in the
second
quarter of
2019
, reflecting lower net price realization, which reduced net sales by 2 percentage points, $4.9 of unfavorable foreign currency exchange, and $1.8 of noncomparable net sales in the prior year related to the divested U.S. baking business. These factors were partially offset by favorable volume/mix, which contributed 2 percentage points to net sales. Segment profit increased $1.3, reflecting a net benefit of lower prices and costs and reduced marketing expense.
The International and Away From Home segment net sales decreased $9.1 in the first
six
months of 2019, reflecting lower net price realization, which reduced net sales by 2 percentage points, $4.1 of unfavorable foreign currency exchange, and the $1.8 noncomparable impact of the U.S. baking business. These factors were partially offset by favorable volume/mix, which contributed 1 percentage point to net sales. Segment profit increased $4.5, reflecting a net benefit of lower prices and costs, as well as lower marketing expense.
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
October 31, 2018
, total cash and cash equivalents was
$171.2
, compared to
$192.6
at
April 30, 2018
.
Within the U.S. Retail Coffee and U.S. Retail Consumer Foods segments, we have historically experienced 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, cash provided by operations in the second half of the fiscal year has significantly exceeded the amount in the first half of the year, upon completion of the Fall Bake and Holiday period. In contrast, the U.S. Retail Pet Foods segment has not experienced significant seasonality.
Due to the divestiture of the seasonal U.S. baking business during the
second
quarter of
2019
, we expect that the impact of seasonality on our future working capital requirements will be reduced. Further, we anticipate that the growth of the U.S. Retail Pet Foods segment as a result of the Ainsworth acquisition during the first quarter of
2019
will cause a further reduction in the seasonality of our overall working capital requirements.
The following table presents selected cash flow information.
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
Net cash provided by (used for) operating activities
|
$
|
445.9
|
|
|
$
|
434.6
|
|
Net cash provided by (used for) investing activities
|
(1,718.9
|
)
|
|
(106.3
|
)
|
Net cash provided by (used for) financing activities
|
1,256.2
|
|
|
(321.2
|
)
|
|
|
|
|
Net cash provided by (used for) operating activities
|
$
|
445.9
|
|
|
$
|
434.6
|
|
Additions to property, plant, and equipment
|
(179.1
|
)
|
|
(130.0
|
)
|
Free cash flow
(A)
|
$
|
266.8
|
|
|
$
|
304.6
|
|
|
|
(A)
|
Free cash flow is a non-GAAP financial measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.
|
The
$11.3
increase in cash provided by operating activities in the first
six
months of
2019
was mainly due to less cash required to fund working capital, as compared to the prior year, partially driven by coffee inventory. This change was partially offset by lower net income adjusted for noncash items.
Cash used for investing activities in the first
six
months of
2019
consisted of $1.9 billion related to the Ainsworth acquisition and
$179.1
in capital expenditures, partially offset by net proceeds from the divestiture of the U.S. baking business of
$372.1
. Cash used for investing activities in the first
six
months of 2018 consisted primarily of
$130.0
in capital expenditures, partially offset by a $23.7 reduction in our derivative cash margin account balances.
Cash provided by financing activities in the first
six
months of
2019
consisted primarily of
$1.5
billion in long-term debt proceeds and a
$246.0
net increase in short-term borrowings, partially offset by a long-term debt prepayment of
$300.0
and dividend payments of
$184.9
. For additional information on our new borrowings, see “Capital Resources” in this discussion and analysis. Cash used for financing activities in the first
six
months of 2018 consisted primarily of dividend payments of
$173.4
and a $150.0 long-term debt prepayment.
We, like other food manufacturers, are from time to time subject to legal proceedings arising in the ordinary course of business that could have a material adverse effect on our financial position, results of operations, or cash flows. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to companies that we have acquired, some of which we anticipate settling in the near future. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at October 31, 2018.
In addition to the legal proceedings discussed above, we are currently a defendant in Council for Education and Research on Toxics v. Brad Barry LLC, et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code Section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, commonly referred to as “Proposition 65.” As part of a joint defense group organized to defend against the lawsuit, we dispute these claims. Acrylamide is not added to coffee, but is inherently present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process. The outcome and the financial impact of the case, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for this matter as of October 31, 2018, as the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant statutory penalties or to add warning labels to any of our products or place warnings in certain locations where our products are sold as a result of Proposition 65, our business and financial results could be adversely impacted, and sales of those products could suffer not only in those locations but elsewhere. For additional information, see Note 15: Contingencies.
Capital Resources
The following table presents our capital structure.
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
April 30, 2018
|
Short-term borrowings
|
$
|
390.0
|
|
|
$
|
144.0
|
|
Long-term debt
|
5,885.1
|
|
|
4,688.0
|
|
Total debt
|
$
|
6,275.1
|
|
|
$
|
4,832.0
|
|
Shareholders’ equity
|
8,030.0
|
|
|
7,891.1
|
|
Total capital
|
$
|
14,305.1
|
|
|
$
|
12,723.1
|
|
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. Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate or London Interbank Offered Rate, based on our election, and is payable either on a quarterly basis or at the end of the borrowing term. The Term Loan matures on May 14, 2021, and does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. The interest rate on the Term Loan at October 31, 2018, was
3.42 percent
. Utilizing the proceeds received from the sale of the U.S. baking business and cash provided by operating activities, we repaid $440.0 of short-term and long-term borrowings during the second quarter of 2019, including a
$300.0
prepayment on the Term Loan.
We have available a
$1.8 billion
unsecured revolving credit facility with a group of
11
banks that matures in September 2022. Additionally, we participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed
$1.8 billion
at any time. The commercial paper program is backed by our revolving credit facility and reduces what we can borrow under the revolving credit facility by the amount of commercial paper outstanding. Commercial paper will be used as a continuing source of short-term financing for general corporate purposes. As of
October 31, 2018
, we had
$390.0
of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of
2.45 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 9: Debt and Financing Arrangements.
During the
second
quarter of
2019
, we did not repurchase any common shares under a repurchase plan authorized by the Board. At
October 31, 2018
, approximately
3.6 million
common shares remain available for repurchase pursuant to the Board's authorizations. There is no guarantee as to the exact number of shares that may be repurchased or when such purchases may occur.
In June 2017, we began construction of a
Smucker's Uncrustables
frozen sandwich manufacturing facility in Longmont, Colorado. 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 includes up to an initial $210.0 investment to construct and equip the new facility, with an opportunity to invest an additional $130.0 for phase 2 expansion, dependent on product demand. Production is expected to begin at the new facility during the second half of calendar year 2019.
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 our cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, interest payments on debt outstanding, and share repurchases.
During the second quarter of
2019
, we repatriated $26.0 of international cash associated with the restructuring of certain foreign subsidiaries referenced in “Restructuring Activities” in this discussion and analysis. As of
October 31, 2018
, total cash and cash equivalents of $159.5 was held by our foreign subsidiaries. The balance of the undistributed earnings of our foreign subsidiaries remain permanently reinvested, and we do not intend to repatriate any of the amounts to meet our cash requirements.
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 U.S. tax reform. For further information, refer to Note 13: Income Taxes.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: net sales excluding acquisition, divestiture, and foreign currency exchange; adjusted gross profit; adjusted operating income; adjusted income; adjusted earnings per share; and free cash flow, as key measures for purposes of evaluating performance internally. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of our operating results. The Board of Directors also utilizes the adjusted operating income, 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.
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. See page 22 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Six Months Ended October 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross profit reconciliation:
|
|
|
|
|
|
|
|
Gross profit
|
$
|
771.3
|
|
|
$
|
755.0
|
|
|
$
|
1,449.5
|
|
|
$
|
1,417.1
|
|
Unallocated derivative losses (gains)
|
0.1
|
|
|
(9.7
|
)
|
|
22.1
|
|
|
(22.3
|
)
|
Cost of products sold – special project costs
|
—
|
|
|
0.9
|
|
|
—
|
|
|
1.6
|
|
Adjusted gross profit
|
$
|
771.4
|
|
|
$
|
746.2
|
|
|
$
|
1,471.6
|
|
|
$
|
1,396.4
|
|
Operating income reconciliation:
|
|
|
|
|
|
|
|
Operating income
|
$
|
330.5
|
|
|
$
|
332.1
|
|
|
$
|
557.4
|
|
|
$
|
567.3
|
|
Amortization
|
59.7
|
|
|
51.6
|
|
|
120.2
|
|
|
103.1
|
|
Unallocated derivative losses (gains)
|
0.1
|
|
|
(9.7
|
)
|
|
22.1
|
|
|
(22.3
|
)
|
Cost of products sold – special project costs
|
—
|
|
|
0.9
|
|
|
—
|
|
|
1.6
|
|
Other special project costs
|
25.4
|
|
|
9.7
|
|
|
33.1
|
|
|
36.8
|
|
Adjusted operating income
|
$
|
415.7
|
|
|
$
|
384.6
|
|
|
$
|
732.8
|
|
|
$
|
686.5
|
|
Net income reconciliation:
|
|
|
|
|
|
|
|
Net income
|
$
|
188.5
|
|
|
$
|
194.6
|
|
|
$
|
321.5
|
|
|
$
|
321.4
|
|
Income tax expense (benefit)
|
80.9
|
|
|
97.2
|
|
|
121.0
|
|
|
159.4
|
|
Amortization
|
59.7
|
|
|
51.6
|
|
|
120.2
|
|
|
103.1
|
|
Unallocated derivative losses (gains)
|
0.1
|
|
|
(9.7
|
)
|
|
22.1
|
|
|
(22.3
|
)
|
Cost of products sold – special project costs
|
—
|
|
|
0.9
|
|
|
—
|
|
|
1.6
|
|
Other special project costs
|
25.4
|
|
|
9.7
|
|
|
33.1
|
|
|
36.8
|
|
Adjusted income before income taxes
|
$
|
354.6
|
|
|
$
|
344.3
|
|
|
$
|
617.9
|
|
|
$
|
600.0
|
|
Income taxes, as adjusted
(A)
|
108.1
|
|
|
114.8
|
|
|
169.0
|
|
|
198.9
|
|
Adjusted income
|
$
|
246.5
|
|
|
$
|
229.5
|
|
|
$
|
448.9
|
|
|
$
|
401.1
|
|
Weighted-average shares – assuming dilution
|
113.7
|
|
|
113.6
|
|
|
113.7
|
|
|
113.6
|
|
Adjusted earnings per share – assuming dilution
|
$
|
2.17
|
|
|
$
|
2.02
|
|
|
$
|
3.95
|
|
|
$
|
3.53
|
|
|
|
(A)
|
Income taxes, as adjusted, is based upon our GAAP effective tax rate and reflects the impact of items excluded from GAAP net income to derive adjusted income.
|
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.
The following table summarizes our contractual obligations by fiscal year at October 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2019
|
|
2020-2021
|
|
2022-2023
|
|
2024 and beyond
|
Long-term debt obligations, including current portion
(A)
|
$
|
5,900.0
|
|
|
$
|
—
|
|
|
$
|
800.0
|
|
|
$
|
2,350.0
|
|
|
$
|
2,750.0
|
|
Interest payments
(B)
|
1,815.9
|
|
|
104.5
|
|
|
409.4
|
|
|
238.6
|
|
|
1,063.4
|
|
Operating lease obligations
(C)
|
197.1
|
|
|
23.0
|
|
|
76.0
|
|
|
62.2
|
|
|
35.9
|
|
Purchase obligations
(D)
|
1,258.7
|
|
|
801.2
|
|
|
432.2
|
|
|
22.2
|
|
|
3.1
|
|
Other liabilities
(E)
|
286.6
|
|
|
26.1
|
|
|
43.6
|
|
|
26.6
|
|
|
190.3
|
|
Total
|
$
|
9,458.3
|
|
|
$
|
954.8
|
|
|
$
|
1,761.2
|
|
|
$
|
2,699.6
|
|
|
$
|
4,042.7
|
|
|
|
(A)
|
Excludes the impact of offering discounts, make-whole payments, and debt issuance costs.
|
|
|
(B)
|
Includes interest payments on our long-term debt, which reflects estimated payments for our variable-rate debt based on the current interest rate outlook.
|
|
|
(C)
|
Includes the minimum rental commitments under non-cancelable operating leases.
|
|
|
(D)
|
Includes agreements that are enforceable and legally bind us to purchase goods and services, including certain obligations related to normal, ongoing purchase obligations in which we have guaranteed payment to ensure availability of raw materials, packaging supplies, and co-pack arrangements. We expect to receive consideration for these purchase obligations in the form of materials and services. These purchase obligations do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated.
|
|
|
(E)
|
Mainly consists of projected commitments associated with our defined benefit pension and other postretirement benefit plans. The liability for unrecognized tax benefits and tax-related net interest of $27.5 under FASB Accounting Standards Codification 740,
Income Taxes
, is excluded, since we are unable to reasonably estimate the timing of cash settlements with the respective taxing authorities.
|
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, 2018. There were no material changes to the information previously disclosed.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Dollars in millions, unless otherwise noted.
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
October 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 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.
In June 2018, we entered into an interest rate swap, with a notional value of $500.0, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. This interest rate contract is designated as a cash flow hedge, and as a result, an unrealized gain of
$10.5
was deferred in accumulated other comprehensive income (loss) at October 31, 2018.
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 is being 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 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 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
October 31, 2018
, the remaining benefit of
$24.5
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
October 31, 2018
, would increase the fair value of our long-term debt by $266.2.
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
October 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
October 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 5 percent of net sales during the
six
-month period ended
October 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.
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October 31, 2018
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|
April 30, 2018
|
High
|
$
|
55.5
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|
$
|
36.0
|
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Low
|
15.3
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|
|
17.0
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|
Average
|
34.8
|
|
|
26.8
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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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•
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our ability to successfully integrate the acquired Ainsworth business in a timely and cost-effective manner;
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•
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our ability to achieve synergies and cost savings related to the Ainsworth acquisition in the amounts and within the time frames currently anticipated;
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•
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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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•
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our ability to generate sufficient cash flow to meet our cash deleveraging objectives;
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•
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volatility of commodity, energy, and other input costs;
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•
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risks associated with derivative and purchasing strategies we employ to manage commodity pricing risks;
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•
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the availability of reliable transportation on acceptable terms;
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•
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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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•
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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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•
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general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
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•
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the impact of food security concerns involving either our products or our competitors’ products;
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•
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the impact of accidents, extreme weather, and natural disasters;
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•
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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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•
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the timing and amount of capital expenditures and share repurchases;
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•
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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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•
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the impact of new or changes to existing governmental laws and regulations and their application, including tariffs;
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•
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the outcome of tax examinations, changes in tax laws, and other tax matters;
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•
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foreign currency and interest rate fluctuations; and
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•
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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.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
October 31, 2018
(the “Evaluation Date”). Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
There were no changes in our internal control over financial reporting that occurred during the quarter ended
October 31, 2018
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted below.
On May 14, 2018, we acquired Ainsworth Pet Nutrition, LLC (“Ainsworth”) (see “Note 4: Acquisition” in Part 1, Item 1 in this Quarterly Report on Form 10-Q). As part of the purchase price allocation process, procedures were performed to validate the assets acquired and liabilities assumed, including existence testing and a preliminary valuation of the tangible and intangible assets acquired. We are currently integrating Ainsworth into our operations and internal control processes, and, as permitted by U.S. Securities and Exchange Commission rules and regulations, we have not yet included Ainsworth in our assessment of the effectiveness of our internal control over financial reporting. Ainsworth constituted $2.1 billion of our consolidated total assets at October 31, 2018. For the three and six months ended October 31, 2018, Ainsworth net sales was $184.2 million and $347.0 million, and operating income was $4.5 million and $0.4 million, respectively. We anticipate Ainsworth will be included in management’s evaluation of internal control over financial reporting as of April 30, 2019.