Company Quick10K Filing
Quick10K
JM Smucker
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$118.93 114 $13,530
10-Q 2019-01-31 Quarter: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-K 2018-04-30 Annual: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-K 2017-04-30 Annual: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-K 2016-04-30 Annual: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-K 2015-04-30 Annual: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-K 2014-04-30 Annual: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2018-11-28 Earnings, Exhibits
8-K 2018-08-21 Earnings, Exhibits
8-K 2018-08-15 Shareholder Vote
8-K 2018-06-25 Shareholder Rights, Exhibits
8-K 2018-06-07 Earnings, Exhibits
8-K 2018-05-14 M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-04-26 Enter Agreement, Off-BS Arrangement, Officers, Other Events, Exhibits
8-K 2018-04-04 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-03-02 Officers
8-K 2018-02-16 Earnings, Exhibits
8-K 2018-01-19 Officers, Code of Ethics, Other Events, Exhibits
RHI Half Robert 8,000
VSM Versum Materials 5,670
GDEN Golden Entertainment 444
ATLC Atlanticus 54
UNL United States 12 Month Natural Gas Fund 0
PMCB Pharmacyte Biotech 0
FTLF Fitlife Brands 0
CNNA Cannamed Enterprises 0
MADL Man AHL Diversified I 0
CTV Commscope 0
SJM 2019-01-31
Part I. Financial Information
Item 1. Financial Statements.
Note 1: Basis of Presentation
Note 2: Revenue Recognition
Note 3: Recently Issued Accounting Standards
Note 4: Acquisition
Note 5: Integration and Restructuring Costs
Note 6: Divestiture
Note 7: Reportable Segments
Note 8: Earnings per Share
Note 9: Goodwill and Other Intangible Assets
Note 10: Debt and Financing Arrangements
Note 11: Pensions and Other Postretirement Benefits
Note 12: Derivative Financial Instruments
Note 13: Other Financial Instruments and Fair Value Measurements
Note 14: Income Taxes
Note 15: Accumulated Other Comprehensive Income (Loss)
Note 16: Contingencies
Note 17: Common Shares
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 sjm20190131-10qex311.htm
EX-31.2 sjm20190131-10qex312.htm
EX-32 sjm20190131-10qex32.htm

JM Smucker Earnings 2019-01-31

SJM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sjm20190131-10q.htm 10-Q Document

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  ý
The Company had 113,746,566 common shares outstanding on February 19, 2019.

 
 
 


TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 

1



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
Dollars in millions, except per share data
2019
 
2018
 
2019
 
2018
Net sales
$
2,011.9

 
$
1,903.3

 
$
5,935.9

 
$
5,575.8

Cost of products sold
1,238.1

 
1,174.8

 
3,712.6

 
3,430.2

Gross Profit
773.8

 
728.5

 
2,223.3

 
2,145.6

Selling, distribution, and administrative expenses
373.1

 
330.6

 
1,138.8

 
1,038.9

Amortization
59.7

 
51.6

 
179.9

 
154.7

Goodwill impairment charge

 
145.0

 

 
145.0

Other intangible assets impairment charges
107.2

 
31.9

 
107.2

 
31.9

Other special project costs (A)
18.8

 
5.6

 
51.9

 
42.4

Other operating expense (income) – net
(2.6
)
 
(0.2
)
 
(29.5
)
 
1.4

Operating Income
217.6

 
164.0

 
775.0

 
731.3

Interest expense – net
(51.6
)
 
(43.1
)
 
(158.8
)
 
(126.7
)
Other income (expense) – net
(8.8
)
 
(4.9
)
 
(16.5
)
 
(7.8
)
Income Before Income Taxes
157.2

 
116.0

 
599.7

 
596.8

Income tax expense (benefit)
35.8

 
(715.3
)
 
156.8

 
(555.9
)
Net Income
$
121.4

 
$
831.3

 
$
442.9

 
$
1,152.7

Earnings per common share:
 
 
 
 
 
 
 
Net Income
$
1.07

 
$
7.32

 
$
3.89

 
$
10.15

Net Income – Assuming Dilution
$
1.07

 
$
7.32

 
$
3.89

 
$
10.15

Dividends Declared per Common Share
$
0.85

 
$
0.78

 
$
2.55

 
$
2.34

 
(A)
Other special project costs includes integration and restructuring costs. For more information, see Note 5: Integration and Restructuring Costs.
See notes to unaudited condensed consolidated financial statements.

2



THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
Dollars in millions
2019
 
2018
 
2019
 
2018
Net income
$
121.4

 
$
831.3

 
$
442.9

 
$
1,152.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
1.6

 
21.9

 
(10.1
)
 
43.8

Cash flow hedging derivative activity, net of tax
(37.0
)
 
(0.5
)
 
(28.8
)
 
1.9

Pension and other postretirement benefit plans activity, net of tax
(0.5
)
 
1.1

 
2.7

 
6.8

Available-for-sale securities activity, net of tax
(1.0
)
 
0.1

 
(0.4
)
 
(0.2
)
Total Other Comprehensive Income (Loss)
(36.9
)
 
22.6

 
(36.6
)
 
52.3

Comprehensive Income
$
84.5

 
$
853.9

 
$
406.3

 
$
1,205.0

See notes to unaudited condensed consolidated financial statements.

3



THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
January 31, 2019
 
April 30, 2018
Dollars in millions
 
 
 
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
206.5

 
$
192.6

Trade receivables, less allowance for doubtful accounts
502.6

 
385.6

Inventories:
 
 
 
Finished products
582.4

 
542.1

Raw materials
342.3

 
312.3

Total Inventory
924.7

 
854.4

Other current assets
92.4

 
122.4

Total Current Assets
1,726.2

 
1,555.0

Property, Plant, and Equipment
 
 
 
Land and land improvements
117.6

 
120.1

Buildings and fixtures
825.0

 
812.6

Machinery and equipment
2,154.8

 
2,111.5

Construction in progress
325.5

 
212.1

Gross Property, Plant, and Equipment
3,422.9

 
3,256.3

Accumulated depreciation
(1,575.0
)
 
(1,527.2
)
Total Property, Plant, and Equipment
1,847.9

 
1,729.1

Other Noncurrent Assets
 
 
 
Goodwill
6,438.9

 
5,942.2

Other intangible assets – net
6,759.0

 
5,916.5

Other noncurrent assets
155.6

 
158.4

Total Other Noncurrent Assets
13,353.5

 
12,017.1

Total Assets
$
16,927.6

 
$
15,301.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
 
 
 
Accounts payable
$
519.6

 
$
512.1

Accrued trade marketing and merchandising
117.1

 
101.6

Current portion of long-term debt
299.3

 

Short-term borrowings
504.0

 
144.0

Other current liabilities
376.4

 
276.1

Total Current Liabilities
1,816.4

 
1,033.8

Noncurrent Liabilities
 
 
 
Long-term debt, less current portion
5,285.8

 
4,688.0

Deferred income taxes
1,449.6

 
1,377.2

Other noncurrent liabilities
354.2

 
311.1

Total Noncurrent Liabilities
7,089.6

 
6,376.3

Total Liabilities
8,906.0

 
7,410.1

Shareholders’ Equity
 
 
 
Common shares
28.9

 
28.9

Additional capital
5,753.4

 
5,739.7

Retained income
2,392.6

 
2,239.2

Accumulated other comprehensive income (loss)
(153.3
)
 
(116.7
)
Total Shareholders’ Equity
8,021.6

 
7,891.1

Total Liabilities and Shareholders’ Equity
$
16,927.6

 
$
15,301.2

See notes to unaudited condensed consolidated financial statements.

4



THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
 
Nine Months Ended January 31,
Dollars in millions
2019
 
2018
Operating Activities
 
 
 
Net income
$
442.9

 
$
1,152.7

Adjustments to reconcile net income to net cash provided by (used for) operations:
 
 
 
Depreciation
154.1

 
157.2

Amortization
179.9

 
154.7

Goodwill impairment charge

 
145.0

Other intangible assets impairment charges
107.2

 
31.9

Share-based compensation expense
16.5

 
16.8

Remeasurement of U.S. deferred tax assets and liabilities

 
(791.9
)
Gain on divestiture
(27.6
)
 

Loss on disposal of assets – net
3.7

 
5.3

Other noncash adjustments – net
0.9

 
4.0

Defined benefit pension contributions
(20.1
)
 
(32.4
)
Changes in assets and liabilities, net of effect from acquisition and divestiture:
 
 
 
Trade receivables
(51.4
)
 
18.6

Inventories
(18.8
)
 
1.6

Other current assets
19.5

 
19.4

Accounts payable
(11.2
)
 
15.9

Accrued liabilities
73.1

 
11.7

Income and other taxes
10.1

 
(33.9
)
Other – net
(11.8
)
 
27.0

Net Cash Provided by (Used for) Operating Activities
867.0

 
903.6

Investing Activities
 
 
 
Business acquired, net of cash acquired
(1,903.0
)
 

Additions to property, plant, and equipment
(267.2
)
 
(210.3
)
Proceeds from divestiture
371.4

 

Proceeds from disposal of property, plant, and equipment
0.5

 
8.9

Other – net
(24.5
)
 
29.6

Net Cash Provided by (Used for) Investing Activities
(1,822.8
)
 
(171.8
)
Financing Activities
 
 
 
Short-term borrowings (repayments) – net
360.0

 
(200.0
)
Proceeds from long-term debt
1,500.0

 
799.6

Repayments of long-term debt
(600.0
)
 
(1,050.3
)
Quarterly dividends paid
(281.4
)
 
(261.4
)
Purchase of treasury shares
(5.2
)
 
(6.9
)
Other – net
0.2

 
(6.2
)
Net Cash Provided by (Used for) Financing Activities
973.6

 
(725.2
)
Effect of exchange rate changes on cash
(3.9
)
 
12.8

Net increase (decrease) in cash and cash equivalents
13.9

 
19.4

Cash and cash equivalents at beginning of period
192.6

 
166.8

Cash and Cash Equivalents at End of Period
$
206.5

 
$
186.2

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

5



THE J. M. SMUCKER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, unless otherwise noted, except per share data)
Note 1: Basis of Presentation
The unaudited interim condensed consolidated financial statements of The J. M. Smucker Company (“Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Certain items previously reported in the financial statements have been reclassified to conform with the current year presentation.
Operating results for the nine months ended January 31, 2019, are not necessarily indicative of the results that may be expected for the year ending April 30, 2019. For further information, reference is made to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended April 30, 2018.
Note 2: Revenue Recognition
The majority of our revenue is derived from the sale of food and beverage products to food retailers and foodservice distributors and operators. We recognize revenue when obligations under the terms of a contract with a customer have been satisfied. This occurs when control of our products transfers, which typically takes place upon delivery to or pick up by the customer. Amounts due from our customers are classified as trade receivables in the Condensed Consolidated Balance Sheets and require payment on a short-term basis.
Transaction price is based on the list price included in our published price list, which is then reduced by the estimated impact of trade marketing and merchandising programs, discounts, unsaleable product allowances, returns, and similar items in the same period that the revenue is recognized. To estimate the impact of these costs, we consider customer contract provisions, historical data, and our current expectations.
Our trade marketing and merchandising programs consist of various promotional activities conducted through retail trade, distributors, or directly with consumers, including in-store display and product placement programs, feature price discounts, coupons, and other similar activities. We regularly review and revise, when we deem necessary, estimates of costs for these promotional programs based on estimates of what will be redeemed by retail trade, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expenditures and actual performance are recognized as a change in estimate in a subsequent period.
For revenue disaggregated by reportable segment, geographical region, and product category, see Note 7: Reportable Segments.
Note 3: Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. It will be effective for us on May 1, 2020, with the option to early adopt at any time prior to the effective date, and will require adoption on either a retrospective or prospective basis for all implementation costs incurred after the date of adoption. We are currently evaluating our adoption date and the impact the application of ASU 2018-15 will have on our financial statements and disclosures. We expect to apply this standard on a prospective basis upon adoption.

In August 2018, the FASB also issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20) Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial and adds new and clarifies certain other disclosure requirements. ASU 2018-14 will be effective for us on May 1, 2020, with the option to early adopt at any time prior to the

6



effective date, and it will require adoption on a retrospective basis. We do not anticipate that the adoption of this ASU will have a material impact on our disclosures.

In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments remove the requirement to provide the ratio of earnings to fixed charges exhibit and reduce the requirements for supplemental pro forma information related to business combinations. The annual requirement to disclose the high and low trading prices of our common stock is also removed. In addition, the disclosure requirements related to the analysis of shareholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement, as well as the amount of dividends per share for each class of shares. Although this rule was effective on November 5, 2018, the SEC is allowing an extended transition period to implement the expanded shareholders' equity disclosure requirements, which will be effective for us on May 1, 2019. We are continuing to evaluate the impact the application of this rule will have on our future financial statements and disclosures.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the service cost component of the net periodic pension cost to be presented separately from the other components of the net periodic pension cost in the income statement. Additionally, only the service cost component of the net periodic pension cost is eligible for capitalization. ASU 2017-07 was effective for us on May 1, 2018. The change in presentation of service cost was applied retrospectively, while the capitalization of service cost will be applied on a prospective basis. The adoption of this ASU did not have a material impact on our financial statements and disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than deferring such recognition until the asset is sold to an outside party. ASU 2016-16 was effective for us on May 1, 2018, and required adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this ASU did not have an impact on our financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which makes changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 was effective for us on May 1, 2018, and required adoption on a retrospective basis. The adoption of this ASU did not impact the presentation of our financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. ASU 2016-02 will be effective for us on May 1, 2019, and requires a modified retrospective application. However, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an additional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. We expect to utilize this transition method upon adoption. We have compiled an inventory of our lease arrangements in order to determine the impact the new guidance will have on our financial statements and disclosures, and we are implementing new lease accounting software in preparation for the standard's additional reporting requirements. Based on our assessment to date, we expect that the adoption of ASU 2016-02 will result in a material increase in lease-related assets and liabilities recognized in our Consolidated Balance Sheets, but we are unable to quantify the impact at this time.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the new guidance is that an entity must recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It requires additional disclosures to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. We adopted the requirements of ASU 2014-09 and all related amendments on May 1, 2018, using the modified retrospective transition method. Adoption did not have an impact on our financial statements. The additional disclosures required are presented within Note 2: Revenue Recognition and Note 7: Reportable Segments.
Note 4: Acquisition
On May 14, 2018, we acquired the stock of Ainsworth Pet Nutrition, LLC (“Ainsworth”) in an all-cash transaction, valued at $1.9 billion, inclusive of a working capital adjustment. The transaction was funded with a bank term loan and borrowings under

7



our commercial paper program of approximately $1.5 billion and $400.0, respectively. For additional information on the financing associated with this transaction, refer to Note 10: Debt and Financing Arrangements.
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. Ainsworth also sells pet food and pet snacks under several additional branded and private label trademarks. Prior to acquisition, Ainsworth was a privately-held company headquartered in Meadville, Pennsylvania. In addition to its headquarters, the transaction included two manufacturing facilities owned by Ainsworth, which are located in Meadville, Pennsylvania, and Frontenac, Kansas, and a leased distribution facility in Greenville, Pennsylvania.
The transaction was accounted for under the acquisition method of accounting, and accordingly, the results of Ainsworth's operations, including $199.2 and $546.2 in net sales and $17.2 and $17.6 in operating income, are included in our consolidated financial statements for the three and nine months ended January 31, 2019, respectively. The operating income for the nine months ended January 31, 2019, includes the recognition of an unfavorable fair value purchase accounting adjustment of $10.9, attributable to the acquired inventory.
The purchase price was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and other estimates made by management. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired, and the excess was recognized as goodwill.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
Assets acquired:
 
 
Cash and cash equivalents
 
$
1.6

Trade receivables
 
66.3

Inventories
 
97.8

Other current assets
 
4.8

Property, plant, and equipment
 
83.8

Goodwill
 
644.7

Other intangible assets

 
1,239.6

Other noncurrent assets
 
0.3

Total assets acquired
 
$
2,138.9

Liabilities assumed:
 
 
Current liabilities
 
$
83.2

Deferred tax liabilities
 
132.3

Other noncurrent liabilities
 
18.8

Total liabilities assumed
 
$
234.3

Net assets acquired
 
$
1,904.6

Estimated fair values for the acquisition, including goodwill, other intangible assets, contingent liabilities, and income taxes, are not yet finalized. The purchase price was preliminarily allocated based on information available at the date of acquisition and is subject to change as we complete our analysis of the fair values at the date of acquisition during the measurement period, not to exceed one year, as permitted under FASB Accounting Standards Codification ("ASC") 805, Business Combinations.
As a result of the acquisition, we recognized goodwill of $644.7 within the U.S. Retail Pet Foods segment. A portion of goodwill will be deductible for income tax purposes, the amount of which will be finalized during the remaining measurement period. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities as we integrate Ainsworth into our U.S. Retail Pet Foods segment. The goodwill and indefinite-lived trademarks within the U.S. Retail Pet Foods segment, inclusive of the recently acquired Ainsworth business, remain susceptible to future impairment charges, as the carrying values approximate estimated fair values. Any significant adverse change in our near or long-term projections or macroeconomic conditions would result in future impairment charges. For more information, see Note 9: Goodwill and Other Intangible Assets.

8



The purchase price was preliminarily allocated to the identifiable other intangible assets acquired as follows:
Intangible assets with finite lives:
 
 
Customer and contractual relationships (25-year useful life)
 
$
935.0

Trademarks (5-year useful life)
 
1.6

Intangible assets with indefinite lives:
 
 
Trademarks
 
303.0

Total other intangible assets
 
$
1,239.6

Ainsworth's results of operations are included in our consolidated financial statements from the date of the transaction within the U.S. Retail Pet Foods segment. Had the transaction occurred on May 1, 2017, unaudited pro forma consolidated results for the three and nine months ended January 31, 2019 and 2018, would have been as follows:
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
2,011.9

 
$
2,080.0

 
$
5,963.3

 
$
6,069.9

Net income
127.1

 
743.1

 
449.9

 
1,036.7

The unaudited pro forma consolidated results are based on our historical financial statements and those of Ainsworth, and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented. The most significant pro forma adjustments relate to the elimination of nonrecurring acquisition-related costs incurred prior to the close of the transaction, amortization of acquired intangible assets, depreciation of acquired property, plant, and equipment, and higher interest expense associated with acquisition-related financing. The unaudited pro forma consolidated results do not give effect to the synergies of the acquisition and are not indicative of the results of operations in future periods.
Note 5: Integration and Restructuring Costs
Integration and restructuring costs primarily consist of employee-related costs and other transition and termination costs related to certain acquisition or restructuring activities. Employee-related costs include severance, retention bonuses, and relocation costs. Severance costs and retention bonuses are recognized over the estimated future service period of the affected employees, and relocation costs are expensed as incurred. Other transition and termination costs include fixed asset-related charges, contract and lease termination costs, professional fees, and other miscellaneous expenditures associated with the integration or restructuring activities, which are expensed as incurred. These one-time costs are not allocated to segment profit, and the majority of these costs are reported in other special project costs in the Condensed Statements of Consolidated Income. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.
Integration Costs: Total one-time costs related to the acquisition of Ainsworth are anticipated to be approximately $50.0, the majority of which are expected to be cash charges. Of the total anticipated one-time costs, we expect approximately half to be employee-related costs. Approximately two-thirds of the total one-time costs are expected to be incurred by the end of 2019.
The following table summarizes our one-time costs incurred related to the Ainsworth acquisition.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
Total Costs Incurred to Date at January 31, 2019
 
2019
 
2019
 
Employee-related costs
$
5.4

 
$
13.2

 
$
13.2

Other transition and termination costs
2.3

 
10.7

 
10.7

Total one-time costs
$
7.7

 
$
23.9

 
$
23.9

Noncash charges of $1.0 and $2.8 were included in the one-time costs incurred during the three and nine months ended January 31, 2019, respectively. Noncash charges included in total one-time costs incurred to date were $2.8 and primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $6.0 at January 31, 2019.
All integration activities related to the acquisition of Big Heart Pet Brands (“Big Heart”) were complete as of April 30, 2018, and as a result, we did not incur any integration costs during the three and nine months ended January 31, 2019. During the

9



three and nine months ended January 31, 2018, we incurred one-time costs of $4.8 and $23.7, respectively. Noncash charges of $0.3 and $2.8 were included in the one-time costs incurred during the three and nine months ended January 31, 2018, respectively, and primarily consisted of share-based compensation and accelerated depreciation. The obligation related to severance costs and retention bonuses was $0.1 at April 30, 2018, and was fully satisfied at January 31, 2019.
Restructuring Costs: 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, all coffee production at our Harahan, Louisiana, facility was consolidated into one of our coffee facilities in New Orleans, Louisiana, during 2018. We also 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.
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, the majority of which have been separated as of January 31, 2019. Total restructuring costs are expected to be approximately $75.0, which primarily represent employee-related costs. The majority of the remaining restructuring costs are expected to be incurred through the end of 2019.
The following table summarizes our one-time costs incurred related to the organization optimization program.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
Total Costs Incurred to Date at January 31, 2019
 
2019
 
2018
 
2019
 
2018
 
Employee-related costs
$
8.1

 
$
(0.5
)
 
$
23.2

 
$
11.1

 
$
47.0

Other transition and termination costs
3.0

 
3.6

 
4.8

 
11.5

 
23.6

Total one-time costs
$
11.1

 
$
3.1

 
$
28.0

 
$
22.6

 
$
70.6

Noncash charges of $1.2 and $2.9 were included in the one-time costs incurred during the three months ended January 31, 2019 and 2018, respectively, and $2.2 and $9.8 during the nine months ended January 31, 2019 and 2018, respectively. Noncash charges included in total one-time costs incurred to date were $14.1 and primarily consisted of accelerated depreciation. The obligation related to severance costs and retention bonuses was $7.1 and $0.3 at January 31, 2019, and April 30, 2018, respectively.
Note 6: Divestiture
On August 31, 2018, we sold our U.S. baking business to Brynwood Partners VII L.P. and Brynwood Partners VIII L.P., subsidiaries of Brynwood Partners, an unrelated party. The transaction included products that were primarily sold in U.S. retail channels under the Pillsbury®, Martha White®, Hungry Jack®, White Lily®, and Jim Dandy® brands, along with all relevant trademarks and licensing agreements, and our manufacturing facility in Toledo, Ohio. This business generated net sales of approximately $370.0 in 2018. The transaction did not include our baking business in Canada.
The operating results for this business were primarily included in the U.S. Retail Consumer Foods segment prior to the sale. We received proceeds from the divestiture of $371.4, 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 $27.6 during 2019, which is included in other operating expense (income) – net within the Condensed Statement of Consolidated Income.
Note 7: Reportable Segments
We operate in one industry: the manufacturing and marketing of food and beverage products. 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 the domestic sales of Jif®, Smucker’s®, and Crisco® branded products; and the U.S. Retail Pet Foods segment primarily includes the 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

10



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 nine months ended January 31, 2018, has been reclassified for this realignment.
Segment profit represents net sales, less direct and allocable operating expenses, and is consistent with the way in which we manage our segments. However, we do not represent that the segments, if operated independently, would report operating profit equal to the segment profit set forth below, as segment profit excludes certain expenses such as corporate administrative expenses, unallocated gains and losses on commodity and foreign currency exchange derivative activities, as well as amortization expense and impairment charges related to intangible assets.
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. We would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by a change in the estimated fair value of the underlying exposures.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
U.S. Retail Coffee
$
561.6

 
$
549.1

 
$
1,596.0

 
$
1,579.9

U.S. Retail Consumer Foods
422.7

 
508.4

 
1,367.9

 
1,524.1

U.S. Retail Pet Foods
759.0

 
561.0

 
2,158.3

 
1,632.8

International and Away From Home
268.6

 
284.8

 
813.7

 
839.0

Total net sales
$
2,011.9

 
$
1,903.3

 
$
5,935.9

 
$
5,575.8

Segment profit:
 
 
 
 
 
 
 
U.S. Retail Coffee
$
183.7

 
$
181.6

 
$
505.8

 
$
456.9

U.S. Retail Consumer Foods
95.9

 
121.4

 
327.5

 
361.7

U.S. Retail Pet Foods
147.9

 
117.6

 
372.2

 
337.8

International and Away From Home
52.5

 
53.4

 
152.6

 
149.0

Total segment profit
$
480.0

 
$
474.0

 
$
1,358.1

 
$
1,305.4

Amortization
(59.7
)
 
(51.6
)
 
(179.9
)
 
(154.7
)
Goodwill impairment charge

 
(145.0
)
 

 
(145.0
)
Other intangible assets impairment charges
(107.2
)
 
(31.9
)
 
(107.2
)
 
(31.9
)
Interest expense – net
(51.6
)
 
(43.1
)
 
(158.8
)
 
(126.7
)
Unallocated derivative gains (losses)
(2.9
)
 
(0.7
)
 
(25.0
)
 
21.6

Cost of products sold – special project costs (A)

 
(2.3
)
 

 
(3.9
)
Other special project costs (A)
(18.8
)
 
(5.6
)
 
(51.9
)
 
(42.4
)
Corporate administrative expenses
(73.8
)
 
(72.9
)
 
(219.1
)
 
(217.8
)
Other income (expense) – net
(8.8
)
 
(4.9
)
 
(16.5
)
 
(7.8
)
Income before income taxes
$
157.2

 
$
116.0

 
$
599.7

 
$
596.8

(A)
Special project costs includes integration and restructuring costs. For more information, see Note 5: Integration and Restructuring Costs.


11



The following table presents certain geographical information.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
United States
$
1,880.6

 
$
1,757.7

 
$
5,526.1

 
$
5,146.8

International:
 
 
 
 
 
 
 
Canada
$
106.7

 
$
111.7

 
$
319.2

 
$
324.6

All other international
24.6

 
33.9

 
90.6

 
104.4

Total international
$
131.3

 
$
145.6

 
$
409.8

 
$
429.0

Total net sales
$
2,011.9

 
$
1,903.3

 
$
5,935.9

 
$
5,575.8


The following table presents product category information.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Primary Reportable Segment (A)
Coffee
$
653.5

 
$
647.1

 
$
1,867.3

 
$
1,868.7

U.S. Retail Coffee
Dog food
337.5

 
187.6

 
980.9

 
572.0

U.S. Retail Pet Foods
Cat food
218.9

 
187.6

 
615.2

 
531.2

U.S. Retail Pet Foods
Pet snacks
217.9

 
200.9

 
607.6

 
574.2

U.S. Retail Pet Foods
Peanut butter
188.5

 
179.5

 
574.6

 
564.4

U.S. Retail Consumer Foods
Fruit spreads
86.0

 
89.2

 
254.6

 
267.3

U.S. Retail Consumer Foods
Frozen handheld
67.3

 
60.1

 
210.5

 
179.1

U.S. Retail Consumer Foods
Shortening and oils
74.8

 
76.1

 
207.0

 
210.1

U.S. Retail Consumer Foods
Baking mixes and ingredients
21.9

 
124.7

 
164.6

 
344.9

U.S. Retail Consumer Foods
Portion control
40.1

 
39.4

 
122.6

 
121.1

International and Away From Home
Juices and beverages
30.6

 
33.3

 
96.7

 
107.7

U.S. Retail Consumer Foods
Other
74.9

 
77.8

 
234.3

 
235.1

International and Away From Home
Total net sales
$
2,011.9

 
$
1,903.3

 
$
5,935.9

 
$
5,575.8

 
(A)
The primary reportable segment generally represents at least 75 percent of total net sales for each respective product category.
Note 8: Earnings per Share
The following table sets forth the computation of net income per common share and net income per common share – assuming dilution under the two-class method.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
121.4

 
$
831.3

 
$
442.9

 
$
1,152.7

Less: Net income allocated to participating securities
0.6

 
4.4

 
2.3

 
6.1

Net income allocated to common stockholders
$
120.8

 
$
826.9

 
$
440.6

 
$
1,146.6

Weighted-average common shares outstanding
113.2

 
113.0

 
113.1

 
113.0

Add: Dilutive effect of stock options

 

 

 

Weighted-average common shares outstanding – assuming dilution
113.2

 
113.0

 
113.1

 
113.0

Net income per common share
$
1.07

 
$
7.32

 
$
3.89

 
$
10.15

Net income per common share – assuming dilution
$
1.07

 
$
7.32

 
$
3.89

 
$
10.15


12



Note 9: Goodwill and Other Intangible Assets

A summary of changes in goodwill by reportable segment is as follows:
 
U.S. Retail Coffee
 
U.S. Retail Consumer Foods
 
U.S. Retail Pet Foods
 
International and Away From Home
 
Total
Balance at May 1, 2017
$
2,090.9

 
$
1,599.0

 
$
1,969.5

 
$
417.7

 
$
6,077.1

Impairment charge (A) 

 

 
(145.0
)
 

 
(145.0
)
Other (B)

 
1.4

 

 
8.7

 
10.1

Balance at April 30, 2018
$
2,090.9

 
$
1,600.4

 
$
1,824.5

 
$
426.4

 
$
5,942.2

Acquisition

 

 
644.7

 

 
644.7

Divestiture

 
(144.3
)
 

 

 
(144.3
)
Other (B)

 
0.4

 

 
(4.1
)
 
(3.7
)
Balance at January 31, 2019
$
2,090.9

 
$
1,456.5

 
$
2,469.2

 
$
422.3

 
$
6,438.9

(A)
There have been no goodwill impairment charges recognized prior to 2018.
(B)
The amounts classified as other represent foreign currency exchange adjustments.

The following table summarizes our other intangible assets and related accumulated amortization and impairment charges, including foreign currency exchange adjustments.
 
 
January 31, 2019
 
April 30, 2018
 
 
Acquisition Cost
 
Accumulated Amortization/Impairment Charges/Foreign Currency Exchange
 
Net
 
Acquisition Cost
 
Accumulated Amortization/Impairment Charges/Foreign Currency Exchange
 
Net
Finite-lived intangible assets subject to
   amortization:
 
 
 
 
 
 
 
 
 
 
 
 
Customer and contractual
   relationships
 
$
4,455.1

 
$
1,106.7

 
$
3,348.4

 
$
3,520.1

 
$
959.3

 
$
2,560.8

Patents and technology
 
168.5

 
124.2

 
44.3

 
168.5

 
114.4

 
54.1

Trademarks
 
499.9

 
159.5

 
340.4

 
556.4

 
145.0

 
411.4

Total intangible assets subject to
   amortization
 
$
5,123.5

 
$
1,390.4

 
$
3,733.1

 
$
4,245.0

 
$
1,218.7

 
$
3,026.3

Indefinite-lived intangible assets not
   subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
$
3,316.3

 
$
290.4

 
$
3,025.9

 
$
3,078.1

 
$
187.9

 
$
2,890.2

Total other intangible assets
 
$
8,439.8

 
$
1,680.8

 
$
6,759.0

 
$
7,323.1

 
$
1,406.6

 
$
5,916.5


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 2019, we began our annual planning cycle, inclusive of a strategy review within our strategic business areas. Our planning process was not complete as of January 31, 2019; however, we have made some decisions related to certain brands resulting in a reduction in our long-term forecasted net sales of certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, excluding the acquired Ainsworth business. As a result of the reduction in long-term forecasted net sales for these indefinite-lived trademarks and narrow differences between fair value and carrying value as of April 30, 2018, we performed an interim impairment analysis on these trademarks as of January 31, 2019, which resulted in an impairment charge of $107.2. This charge was included as a noncash charge in our Condensed Statement of Consolidated Income.

As of January 31, 2019, we do not believe that our Pet Foods reporting unit or any of the remaining indefinite-lived trademarks within the U.S. Retail Pet Foods segment are more likely than not impaired. The trademarks subject to the interim impairment analysis performed during the quarter do not represent a significant percentage of the Pet Foods reporting unit’s forecasted segment profit. In addition, we anticipate growth from other brands, inclusive of the recently acquired Ainsworth business, will mostly offset the declines noted on the impaired trademarks evaluated during the quarter. The U.S. Retail Pet Foods segment goodwill and indefinite-lived intangible assets of $2,469.2 and $1,496.1, respectively, remain susceptible to future impairment

13



charges given the narrow differences between fair value and carrying value. As we continue our planning process during the fourth quarter, any significant adverse changes to the current year or forecasted net sales or profitability, as well as any significant adverse changes in strategy, would result in additional impairment charges which could be material.

During the third quarter of 2018, as a result of a decline in forecasted net sales for the U.S. Retail Pet Foods segment in combination with the narrow differences between estimated fair value and carrying value of the Pet Foods reporting unit and indefinite-lived trademarks 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. These charges were included as a noncash charge in our Condensed Statement of Consolidated Income. Furthermore, at that time, we 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.
Note 10: Debt and Financing Arrangements
Long-term debt consists of the following:
 
January 31, 2019
 
April 30, 2018
 
Principal
Outstanding
 
Carrying
Amount (A)
 
Principal
Outstanding
 
Carrying
Amount (A)
2.20% Senior Notes due December 6, 2019
$
300.0

 
$
299.3

 
$
300.0

 
$
298.6

2.50% Senior Notes due March 15, 2020
500.0

 
498.7

 
500.0

 
497.8

3.50% Senior Notes due October 15, 2021
750.0

 
770.2

 
750.0

 
775.6

3.00% Senior Notes due March 15, 2022
400.0

 
397.8

 
400.0

 
397.3

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

 
995.0

 
1,000.0

 
994.4

3.38% Senior Notes due December 15, 2027
500.0

 
496.1

 
500.0

 
495.8

4.25% Senior Notes due March 15, 2035
650.0

 
643.4

 
650.0

 
643.1

4.38% Senior Notes due March 15, 2045
600.0

 
585.9

 
600.0

 
585.4

Term Loan Credit Agreement due May 14, 2021
900.0

 
898.7

 

 

Total long-term debt
$
5,600.0

 
$
5,585.1

 
$
4,700.0

 
$
4,688.0

Current portion of long-term debt
300.0

 
299.3

 

 

Total long-term debt, less current portion
$
5,300.0

 
$
5,285.8

 
$
4,700.0

 
$
4,688.0

 
(A)
Represents the carrying amount included in the Condensed Consolidated Balance Sheets, which includes the impact of terminated interest rate contracts, offering discounts, and capitalized debt issuance costs.

We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts are designated as cash flow hedges, and as a result, the mark-to-market gains or losses on these contracts are deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transactions affect earnings. At January 31, 2019, unrealized losses of $37.6 were deferred in accumulated other comprehensive income (loss) for these derivative instruments. For additional information, see Note 12: Derivative Financial Instruments.
In April 2018, we entered into a senior unsecured delayed-draw Term Loan Credit Agreement (“Term Loan”) with a syndicate of banks and an available commitment amount of $1.5 billion. The full amount of the Term Loan was drawn on May 14, 2018, to partially finance the Ainsworth acquisition, as discussed in Note 4: Acquisition. Borrowings under the Term Loan bear interest on the prevailing U.S. Prime Rate or London Interbank Offered Rate (“LIBOR”), based on our election, and is payable either on a quarterly basis or at the end of the borrowing term. The Term Loan does not require scheduled amortization payments. Voluntary prepayments are permitted without premium or penalty. As of January 31, 2019, we have prepaid $600.0 on the Term Loan to date, including $300.0 in the third quarter of 2019. The interest rate on the Term Loan at January 31, 2019, was 3.65 percent. We have incurred total capitalized debt issuance costs of $2.8, of which $2.0 was incurred upon drawing on the Term Loan in 2019 and is being amortized to interest expense over the time period for which the debt is outstanding.

14



All of our Senior Notes outstanding at January 31, 2019, are unsecured and interest is paid semiannually, with no required scheduled principal payments until maturity. We may prepay all or part of the Senior Notes at 100 percent of the principal amount thereof, together with the accrued and unpaid interest, and any applicable make-whole amount.
We have available a $1.8 billion unsecured revolving credit facility with a group of 11 banks that matures in September 2022. Borrowings under the revolving credit facility bear interest on the prevailing U.S. Prime Rate, LIBOR, or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. We did not have a balance outstanding under the revolving credit facility at January 31, 2019, or April 30, 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. 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, 2019, and April 30, 2018, we had $504.0 and $144.0 of short-term borrowings outstanding, respectively, which were issued under our commercial paper program at weighted-average interest rates of 2.75 percent and 2.20 percent, respectively.
Interest paid totaled $24.4 and $4.7 for the three months ended January 31, 2019 and 2018, respectively, and $131.8 and $88.2 for the nine months ended January 31, 2019 and 2018, respectively. This differs from interest expense due to the timing of interest payments, amortization of debt issuance costs and discounts, effect of interest rate contracts, capitalized interest, and payment of other debt fees.
Our debt instruments contain certain financial covenant restrictions, including a leverage ratio and an interest coverage ratio. We are in compliance with all covenants.
Note 11: Pensions and Other Postretirement Benefits
The components of our net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.
 
Three Months Ended January 31,
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
0.6

 
$
1.3

 
$
0.5

 
$
0.5

Interest cost
5.9

 
5.4

 
0.6

 
0.5

Expected return on plan assets
(6.8
)
 
(7.2
)
 

 

Amortization of net actuarial loss (gain)
2.0

 
2.9

 
(0.1
)
 
(0.1
)
Amortization of prior service cost (credit)
0.2

 
0.2

 
(0.4
)
 
(0.4
)
Curtailment loss (gain)
0.3

 

 

 

Settlement loss (gain)
4.2

 

 

 

Net periodic benefit cost
$
6.4

 
$
2.6

 
$
0.6

 
$
0.5

 
Nine Months Ended January 31,
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
1.7

 
$
4.7

 
$
1.4

 
$
1.5

Interest cost
17.6

 
16.2

 
1.8

 
1.6

Expected return on plan assets
(20.3
)
 
(21.6
)
 

 

Amortization of net actuarial loss (gain)
6.1

 
8.6

 
(0.4
)
 
(0.3
)
Amortization of prior service cost (credit)
0.7

 
0.7

 
(1.0
)
 
(1.1
)
Curtailment loss (gain)
0.3

 

 

 

Settlement loss (gain)
4.2

 

 

 

Net periodic benefit cost
$
10.3

 
$
8.6

 
$
1.8

 
$
1.7


15



Note 12: Derivative Financial Instruments
We are exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility related to these exposures, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.
Commodity Price Management: We enter into commodity derivatives to manage price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, corn, edible oils, soybean meal, and wheat. We also enter into commodity derivatives to manage price risk for energy input costs, including diesel fuel and natural gas. Our derivative instruments generally have maturities of less than one year.
We do not qualify commodity derivatives for hedge accounting treatment, and as a result, the derivative gains and losses are immediately recognized in earnings. Although we do not perform the assessments required to achieve hedge accounting for derivative positions, we believe all of our commodity derivatives are economic hedges of our risk exposure.
The commodities hedged have a high inverse correlation to price changes of the derivative instrument. Thus, we would expect that over time any gain or loss in the estimated fair value of the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Rate Hedging: We utilize foreign currency derivatives to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials and finished goods. The contracts generally have maturities of less than one year. We do not qualify instruments used to manage foreign currency exchange exposures for hedge accounting treatment.
Interest Rate Hedging: We utilize derivative instruments to manage interest rate risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal to changes in the fair value of the underlying debt and have no impact on earnings.
We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts are designated as cash flow hedges, and as a result, unrealized losses of $37.6 were deferred in accumulated other comprehensive income (loss) at January 31, 2019.
In 2017, we terminated a treasury lock concurrent with the pricing of the Senior Notes due December 15, 2027, which was designated as a cash flow hedge and used to manage our exposure to interest rate volatility. 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 Senior Notes due October 15, 2021, which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. As a result of the early termination, we received $58.1 in cash, which included $4.6 of accrued and prepaid interest. The gain on termination was recorded as an increase in the long-term debt balance and is being recognized over the remaining life of the underlying debt as a reduction to interest expense. To date, we have recognized $31.0 of the gain, of which $2.0 and $6.0 was recognized during the three and nine months ended January 31, 2019, respectively. The remaining gain will be recognized as follows: $2.0 through the remainder of 2019, $8.1 in 2020, $8.4 in 2021, and $4.0 in 2022.

16



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

 
$

 
$

 
$
37.6

Total derivatives designated as hedging instruments
$

 
$

 
$

 
$
37.6

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
$
13.2

 
$
15.7

 
$

 
$

Foreign currency exchange contracts
1.0

 
0.4

 

 

Total derivatives not designated as hedging instruments
$
14.2

 
$
16.1

 
$

 
$

Total derivative instruments
$
14.2

 
$
16.1

 
$

 
$
37.6

 
April 30, 2018
 
Other
Current
Assets
 
Other
Current
Liabilities
 
Other
Noncurrent
Assets
 
Other
Noncurrent
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
$
14.8

 
$
6.8

 
$
0.4

 
$
0.2

Foreign currency exchange contracts
2.2

 
0.7

 

 

Total derivative instruments
$
17.0

 
$
7.5

 
$
0.4

 
$
0.2

We have elected to not offset fair value amounts recognized for our exchange-traded derivative instruments and our cash margin accounts executed with the same counterparty that are generally subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of our open positions. At January 31, 2019, and April 30, 2018, we maintained cash margin account balances of $33.7 and $10.9, respectively, included in other current assets in the Condensed Consolidated Balance Sheets. The change in the cash margin account balances is included in other – net, investing activities in the Condensed Statements of Consolidated Cash Flows. In the event of default and immediate net settlement of all of our open positions with individual counterparties, all of our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties.

Interest expense – net, as presented in the Condensed Statements of Consolidated Income, was $51.6 and $43.1 for the three
months ended January 31, 2019 and 2018, respectively, and was $158.8 and $126.7 for the nine months ended January 31, 2019
and 2018, respectively. The following table presents information on the pre-tax gains and losses recognized on interest rate contracts designated as cash flow hedges.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Gains (losses) recognized in other comprehensive
   income (loss)
$
(48.1
)
 
$
(0.8
)
 
$
(37.6
)
 
$
2.7

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

(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.4
)
Change in accumulated other comprehensive income
   (loss)

$
(48.0
)
 
$
(0.7
)
 
$
(37.3
)
 
$
3.1

Included as a component of accumulated other comprehensive income (loss) at January 31, 2019, and April 30, 2018, were deferred net pre-tax losses of $41.1 and $3.8, respectively, related to the active and terminated interest rate contracts. The related net tax benefit recognized in accumulated other comprehensive income (loss) at January 31, 2019, and April 30, 2018, was $9.4 and $0.9, respectively. Approximately $0.4 of the net pre-tax loss will be recognized over the next 12 months related to the terminated interest rate contracts.

17



The following table presents the net gains and losses recognized in cost of products sold on derivatives not designated as hedging instruments.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Gains (losses) on commodity contracts
$
(25.8
)
 
$
(1.8
)
 
$
(55.9
)
 
$
0.7

Gains (losses) on foreign currency exchange contracts
0.2

 
(4.9
)
 
1.7

 
(10.1
)
Total gains (losses) recognized in cost of products sold
$
(25.6
)
 
$
(6.7
)
 
$
(54.2
)
 
$
(9.4
)
Commodity and foreign currency exchange derivative gains and losses are reported in unallocated derivative gains and losses outside of segment operating results until the related inventory is sold. At that time, we reclassify the hedge gains and losses from unallocated derivative gains and losses to segment profit, allowing our segments to realize the economic effect of the hedge without experiencing any mark-to-market volatility. The following table presents the activity in unallocated derivative gains and losses.
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net gains (losses) on mark-to-market valuation of
   unallocated derivative positions

$
(25.6
)
 
$
(6.7
)
 
$
(54.2
)
 
$
(9.4
)
Less: Net gains (losses) on derivative positions
   reclassified to segment operating profit
(22.7
)
 
(6.0
)
 
(29.2
)
 
(31.0
)
Unallocated derivative gains (losses)
$
(2.9
)
 
$
(0.7
)
 
$
(25.0
)
 
$
21.6

The net cumulative unallocated derivative losses at January 31, 2019, were $23.3, and the net cumulative unallocated derivative gains at April 30, 2018, were $1.7.
The following table presents the gross notional value of outstanding derivative contracts.
 
January 31, 2019
 
April 30, 2018
Commodity contracts
$
927.1

 
$
658.0

Foreign currency exchange contracts
106.2

 
122.1

Interest rate contracts
800.0

 

Note 13: Other Financial Instruments and Fair Value Measurements
Financial instruments, other than derivatives, that potentially subject us to significant concentrations of credit risk consist principally of cash investments, short-term borrowings, and trade receivables. The carrying value of these financial instruments approximates fair value. Our remaining financial instruments, with the exception of long-term debt, are recognized at estimated fair value in the Condensed Consolidated Balance Sheets.
The following table provides information on the carrying amounts and fair values of our financial instruments.
 
January 31, 2019
 
April 30, 2018
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Marketable securities and other investments
$
44.9

 
$
44.9

 
$
45.8

 
$
45.8

Derivative financial instruments – net
(39.5
)
 
(39.5
)
 
9.7

 
9.7

Total long-term debt
$
(5,585.1
)
 
$
(5,486.1
)
 
$
(4,688.0
)
 
$
(4,579.8
)
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions.

18



The following tables summarize the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for our financial instruments.
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at January 31, 2019
Marketable securities and other investments: (A)
 
 
 
 
 
 
 
Equity mutual funds
$
9.0

 
$

 
$

 
$
9.0

Municipal obligations

 
35.9

 

 
35.9

Money market funds

 

 

 

Derivative financial instruments: (B)
 
 
 
 
 
 
 
Commodity contracts – net
(2.3
)
 
(0.2
)
 

 
(2.5
)
Foreign currency exchange contracts – net
(0.1
)
 
0.7

 

 
0.6

Interest rate contracts

 
(37.6
)
 

 
(37.6
)
Total long-term debt (C)
(4,507.7
)
 
(978.4
)
 

 
(5,486.1
)
Total financial instruments measured at fair value
$
(4,501.1
)
 
$
(979.6
)
 
$

 
$
(5,480.7
)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at
April 30, 2018
Marketable securities and other investments: (A)
 
 
 
 
 
 
 
Equity mutual funds
$
9.3

 
$

 
$

 
$
9.3

Municipal obligations

 
36.1

 

 
36.1

Money market funds
0.4

 

 

 
0.4

Derivative financial instruments: (B)
 
 
 
 
 
 
 
Commodity contracts – net
7.2

 
1.0

 

 
8.2

Foreign currency exchange contracts – net
0.1

 
1.4

 

 
1.5

Total long-term debt (C)
(4,579.8
)
 

 

 
(4,579.8
)
Total financial instruments measured at fair value
$
(4,562.8
)
 
$
38.5

 
$

 
$
(4,524.3
)
 
(A)
Marketable securities and other investments consist of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include equity securities listed in active markets, municipal obligations valued by a third party using valuation techniques that utilize inputs that are derived principally from or corroborated by observable market data, and money market funds with maturities of three months or less. Based on the short-term nature of these money market funds, carrying value approximates fair value. As of January 31, 2019, our municipal obligations are scheduled to mature as follows: $0.9 in 2019, $0.9 in 2020, $1.0 in 2021, $1.5 in 2022, and the remaining $31.6 in 2023 and beyond.
(B)
Level 1 commodity and foreign currency exchange derivatives are valued using quoted market prices for identical instruments in active markets. Level 2 commodity and foreign currency exchange derivatives are valued using quoted prices for similar assets or liabilities in active markets. The Level 2 interest rate contracts are valued using standard valuation techniques, the income approach, and observable Level 2 market expectations at the measurement date to convert future amounts to a single discounted present value. Level 2 inputs for the valuation of the interest rate contracts are limited to prices that are observable for the asset or liability. For additional information, see Note 12: Derivative Financial Instruments.
(C)
Long-term debt is composed of public Senior Notes classified as Level 1 and the Term Loan classified as Level 2. The public Senior Notes are traded in an active secondary market and valued using quoted prices. The fair value of the Term Loan is based on the net present value of each interest and principal payment calculated utilizing an interest rate derived from an estimated yield curve obtained from independent pricing sources for similar types of term loan borrowing arrangements.
Furthermore, during the third quarter of 2019, we recognized an impairment charge of $107.2, which related to certain indefinite-lived trademarks in the U.S. Retail Pet Foods segment. During the third quarter of 2018, we recognized impairment charges of $176.9, 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. These adjustments were included as noncash charges in our Condensed Statements of Consolidated Income. We utilized Level 3 inputs based on management’s best estimates and

19



assumptions to estimate the fair value of the reporting unit and indefinite-lived trademarks. For additional information, see Note 9: Goodwill and Other Intangible Assets.
Note 14: Income Taxes

The effective tax rates for the three months ended January 31, 2019 and 2018, were 22.8 and (616.6) percent, respectively, and for the nine months ended January 31, 2019 and 2018, were 26.1 and (93.1) percent, respectively. During the three months ended January 31, 2019, the effective tax rate varied from the U.S. statutory income tax rate of 21.0 percent primarily due to the impact of state income taxes. During the nine months ended January 31, 2019, the effective tax rate varied from the U.S. statutory income tax rate of 21.0 percent primarily due to the impact of state income taxes and the additional income tax expense related to the sale of the U.S. baking business during the second quarter. During the three and nine months ended January 31, 2018, the effective tax rate varied from the previous U.S. statutory income tax rate of 30.4 percent primarily due to the favorable discrete impacts that resulted from the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”), the impact of the lower blended rate on current year earnings, and the domestic manufacturing deduction, offset by additional income tax expense related to the goodwill impairment charge in the period and state income taxes.

Within the next 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an additional $9.4, primarily as a result of expiring statute of limitations periods.

U.S. Tax Reform: On December 22, 2017, the U.S. government enacted the Act, legislating comprehensive tax reform that reduced the U.S. federal statutory corporate tax rate from 35.0 percent to 21.0 percent effective January 1, 2018, broadened the U.S. federal income tax base, required companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and created new taxes on certain foreign sourced earnings as part of a new territorial tax regime.

During the three months ended January 31, 2018, we recorded a net provisional benefit of $765.8, which included the revaluation of net deferred tax liabilities at the reduced federal income tax rate, offset in part by the estimated impact of the one-time transition tax. During the three months ended January 31, 2019, we finalized our accounting for the income tax effects of enactment of the Act, as required by ASC 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Bulletin No. 118, which resulted in an immaterial adjustment to the amounts previously recorded in the consolidated financial statements.

Despite the completion of our accounting for the Act, the amounts recorded may change as a result of future guidance and interpretation from the Internal Revenue Service and various other taxing jurisdictions, all of which are continuing to analyze the complexities and interdependencies of the provisions of the Act. Any future legislative and interpretive actions could result in additional income tax impacts which could be material in the period any such changes are enacted.

As of January 31, 2019, the undistributed earnings of our foreign subsidiaries continue to be permanently reinvested. As a result, no additional income or withholding taxes have been provided for the period related to the undistributed earnings or any additional outside basis differences inherent in the foreign entities.

20



Note 15: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), including the reclassification adjustments for items that are reclassified from accumulated other comprehensive income (loss) to net income, are shown below.
 
Foreign
Currency
Translation
Adjustment
 
Net Gains (Losses)
on Cash Flow
Hedging
Derivatives (A)
 
Pension and
Other
Postretirement
Liabilities (B)
 
Unrealized 
Gain (Loss)
on Available-
for-Sale
Securities
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at May 1, 2018
$
(16.4
)
 
$
(2.9
)
 
$
(101.0
)
 
$
3.6

 
$
(116.7
)
Reclassification adjustments

 
0.3

 
6.0

 

 
6.3

Current period credit (charge)
(10.1
)
 
(37.6
)
 
(2.4
)
 
(0.5
)
 
(50.6
)
Income tax benefit (expense)

 
8.5

 
(0.9
)
 
0.1

 
7.7

Balance at January 31, 2019
$
(26.5
)
 
$
(31.7
)
 
$
(98.3
)
 
$
3.2

 
$
(153.3
)
 
Foreign
Currency
Translation
Adjustment
 
Net Gains (Losses)
on Cash Flow
Hedging
Derivatives (A)
 
Pension and
Other
Postretirement
Liabilities (B)
 
Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at May 1, 2017
$
(43.0
)
 
$
(4.4
)
 
$
(100.0
)
 
$
4.0

 
$
(143.4
)
Reclassification adjustments

 
0.4

 
8.0

 

 
8.4

Current period credit (charge)
43.8

 
2.7

 
2.0

 
(0.4
)
 
48.1

Income tax benefit (expense)

 
(1.2
)
 
(3.2
)
 
0.2

 
(4.2
)
Balance at January 31, 2018
$
0.8

 
$
(2.5
)
 
$
(93.2
)
 
$
3.8

 
$
(91.1
)
 
(A)
The reclassification from accumulated other comprehensive income (loss) to interest expense was related to terminated interest rate contracts. The current period charge relates to the unrealized losses on the interest rate contracts entered into in November 2018 and June 2018. The prior period credit relates to the gain on the interest rate contract terminated in 2017. For additional information, see Note 12: Derivative Financial Instruments.
(B)
Amortization of net losses was reclassified from accumulated other comprehensive income (loss) to other income (expense) – net.
Note 16: Contingencies

We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart, the significant majority of which we settled during the third quarter of 2019 and the remainder of which we anticipate resolving 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 January 31, 2019. Based on the information known to date, with the exception of the matter discussed below, we do not believe the final outcome of these proceedings could have a material adverse effect on our financial position, results of operations, or cash flows.

On May 9, 2011, an organization named Council for Education and Research on Toxics (“Plaintiff”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against us and additional defendants who manufacture, package, distribute, or sell packaged coffee. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al., and was a tag along to a 2010 lawsuit against companies selling “ready-to-drink” coffee based on the same claims. Both cases have since been consolidated and now include nearly eighty defendants, which constitute the great majority of the coffee industry in California. The Plaintiff alleges that we and the other defendants failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code Section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, commonly referred to as “Proposition 65.” The Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Proposition 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
As part of a joint defense group organized to defend against the lawsuit, we dispute the claims of the Plaintiff. Acrylamide is not added to coffee but is inherently present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process. We have asserted multiple affirmative defenses. Trial of the first phase of the case commenced on

21



September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to the defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of calendar year 2017. On March 28, 2018, the trial court issued a proposed ruling adverse to the defendants on the Phase 2 defense, our last remaining defense to liability. The trial court finalized and affirmed its Phase 2 ruling on May 7, 2018, and therefore, the trial on the third phase regarding remedies issues was scheduled to commence on October 15, 2018. The trial did not proceed on the scheduled date as further described below.
On June 15, 2018, the state agency responsible for administering the Proposition 65 program, the California Office of Environmental Health Hazard Assessment (“OEHHA”), issued a proposed regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The defendants requested that the California Court of Appeals stay the trial on remedies until a final determination has been made on OEHHA's proposed regulation. The California Court of Appeals initially granted such stay on October 12, 2018, and extended it on January 31, 2019, requesting an update of the proposed regulation by April 15, 2019. If the proposed regulation becomes final, the lawsuit will likely be dismissed. At this stage of the proceedings, prior to a trial on remedies issues, we are unable to predict or reasonably estimate the potential loss or effect on our operations. Accordingly, no loss contingency has been recorded for this matter as of January 31, 2019, as the likelihood of loss is not considered probable or estimable. The trial court has discretion to impose zero penalties against us or to impose significant statutory penalties if the case proceeds. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase our costs and adversely affect sales of our coffee products, as well as involve substantial expense and operational disruption, which could have a material adverse impact on our financial position, results of operations, or cash flows. Furthermore, a future appellate court decision could reverse the trial court rulings. The outcome and the financial impact of settlement, the trial, or the appellate court rulings of the case, if any, cannot be predicted at this time.
Note 17: Common Shares
The following table sets forth common share information.
 
January 31, 2019
 
April 30, 2018
Common shares authorized
300.0

 
300.0

Common shares outstanding
113.8

 
113.6

Treasury shares
32.7