10-K 1 sjm43019-10k.htm 10-K Document
 
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
 FORM 10-K
________________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 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 001-5111
_______________________________________________
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
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading symbol
Name of each exchange on which registered
Common shares, no par value
SJM
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
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  x    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  x    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. (Check one):
Large accelerated filer
 
x
  
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  x
The aggregate market value of the common shares held by nonaffiliates of the registrant at October 31, 2018, was $11,679,828,981. As of June 10, 2019, 113,742,653 common shares of The J. M. Smucker Company were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s definitive Proxy Statement to be filed in connection with its Annual Meeting of Shareholders to be held on August 14, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 
 
 




TABLE OF CONTENTS 
PART I.
Page No.
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
PART II.
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III.
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV.
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
Signatures






PART I
Item 1.    Business.
The Company: The J. M. Smucker Company (“Company,” “registrant,” “we,” “us,” or “our”), often referred to as Smucker’s (a registered trademark), was established in 1897 and incorporated in Ohio in 1921. We operate principally in one industry, the manufacturing and marketing of branded food and beverage products on a worldwide basis, although the majority of our sales are in the U.S. Our operations outside the U.S. are principally in Canada, although products are exported to other countries as well. Net sales outside the U.S., subject to foreign currency translation, represented 5 percent of consolidated net sales for 2019. Our branded food and beverage products include a strong portfolio of trusted, iconic, market-leading brands that are sold to consumers through retail outlets in North America.
On May 14, 2018, we completed the acquisition of Ainsworth Pet Nutrition, LLC (“Ainsworth”), 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. The all-cash transaction, which was funded with debt, was valued at $1.9 billion. For further information, refer to Note 2: Acquisition.
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 million in 2018. The transaction did not include our baking business in Canada. For further information, refer to Note 4: Divestiture.
On March 23, 2015, we completed the acquisition of Big Heart Pet Brands (“Big Heart”), a leading producer, distributor, and marketer of premium, branded pet food and pet snacks in the U.S. The cash and stock transaction was valued at $5.9 billion, which included the issuance of 17.9 million shares of our common stock to the shareholders of Blue Acquisition Group, Inc., Big Heart’s parent company. We assumed $2.6 billion in debt that we repaid at closing and paid an additional $1.2 billion in cash.
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 market segments in total comprised 86 percent of 2019 consolidated net sales and represent a major portion of our strategic focus – the sale of branded food and beverage products with leadership positions to consumers through retail outlets in North America. The International and Away From Home segment represents sales outside of the U.S. retail market segments.
Principal Products: Our principal products as of April 30, 2019, are coffee, dog food, pet snacks, cat food, peanut butter, fruit spreads, frozen handheld products, shortening and oils, portion control products, juices and beverages, and flour and baking ingredients. Product sales information for the years 2019, 2018, and 2017 is included within Note 5: Reportable Segments.
In the U.S. retail market segments, our products are primarily sold through a combination of direct sales and brokers to food retailers, club stores, pet specialty stores, discount and dollar stores, food wholesalers, online retailers, drug stores, natural foods stores and distributors, military commissaries, and mass merchandisers. In the International and Away From Home segment, our products are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., restaurants, lodging, schools and universities, health care operators).
Sources and Availability of Raw Materials: The raw materials used in each of our segments are primarily commodities and agricultural-based products. Green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, fruit, and other ingredients are obtained from various suppliers. The availability, quality, and costs of many of these commodities have fluctuated, and may continue to fluctuate, over time. Basis, futures, options, and fixed price contracts are used to manage price volatility for a significant portion of our commodity costs. Green coffee, along with certain other raw materials, is sourced solely from foreign countries and its supply and price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries. We source peanuts, animal protein meals, and oils and fats mainly from North America. The principal packaging materials we use are plastic, glass, metal cans, caps, carton board, and corrugate. For additional information on the commodities we

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purchase, see “Commodities Overview” within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Raw materials are generally available from numerous sources, although we have elected to source certain plastic packaging materials from single sources of supply pursuant to long-term contracts. While availability may vary year-to-year, we believe that we will continue to obtain adequate supplies and that alternatives to single-sourced materials are available. We have not historically encountered significant shortages of key raw materials. We consider our relationships with key raw material suppliers to be in good standing.
Trademarks and Patents: Our products are produced under certain patents and marketed under trademarks owned or licensed by us or one of our subsidiaries. Our major trademarks as of April 30, 2019, are listed below.
Primary Reportable Segment
  
Major Trademark
U.S. Retail Coffee
  
Folgers®, Dunkin’ Donuts®, and Café Bustelo®
U.S. Retail Consumer Foods
  
Smucker’s®, Jif®, Uncrustables®, and Crisco®
U.S. Retail Pet Foods
  
Rachael Ray Nutrish, Meow Mix®, Milk-Bone®, Natural Balance®, Kibbles ‘n Bits®, 9Lives®, Nature’s Recipe®, and Pup-Peroni®
International and Away From Home
  
Folgers and Smucker’s
Dunkin’ Donuts is a registered trademark of DD IP Holder LLC used under two licenses (the “Dunkin’ Licenses”) for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. The Dunkin’ Licenses do not pertain to Dunkin’ Donuts coffee or other products for sale in Dunkin’ Donuts restaurants. The terms of the Dunkin’ Licenses include the payment of royalties to an affiliate of DD IP Holder LLC and other financial commitments by the Company. The Dunkin’ Licenses are in effect until January 1, 2039.
We utilize Rachael Ray’s image and likeness and related Rachael Ray trademarks for premium pet food and pet snacks under an exclusive license which expires in 2063. The terms of the license include the payment of royalties to The Rachael Ray Foundation. Rachael Ray is a registered trademark of Ray Marks II LLC. Keurig® and K-Cup® are trademarks of Keurig Green Mountain, Inc. (“Keurig”), used with permission. In addition, we and our subsidiaries license the use of several other trademarks, none of which are individually material to our business.
Slogans or designs considered to be important trademarks include, without limitation, “With A Name Like Smucker’s, It Has To Be Good®,” “The Best Part of Wakin’ Up Is Folgers In Your Cup®,” “Choosy Moms Choose Jif®,” “Purely The Finest®,” “Goodness Gracious, It’s Good®,” “The Only One Cats Ask For By Name®,” “Say It With Milk-Bone®,” the Smucker’s banner, the Crock Jar shape, the Gingham design, the Mountain Grown design, and the Smucker’s Strawberry, Jif, Milk-Bone, and 9Lives logos.
We own several hundred patents worldwide in addition to proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.
We consider all of our owned and licensed intellectual property, taken as a whole, to be essential to our business.
Seasonality: The U.S. Retail Coffee and U.S. Retail Consumer Foods segments have historically been seasonal around the Fall Bake and Holiday period, which generally resulted in higher sales and profits in our second and third quarters. Our success in promoting and merchandising our coffee and baking brands during the Fall Bake and Holiday period has had a significant impact on our results for a fiscal year. The Back to School period and the Spring Holiday season are two other important promotional periods.

As a result of the U.S. baking business divestiture during the second quarter of 2019, we expect that the U.S. Retail Consumer Foods segment will experience less seasonality. Additionally, the U.S. Retail Pet Foods segment, which grew during 2019 as a result of the Ainsworth acquisition during the first quarter, does not experience significant seasonality, further reducing the overall impact of seasonality to the total Company.
Working Capital: Working capital requirements have historically been greatest during the first half of our fiscal year mainly due to the timing of the buildup of coffee, oil, and baking inventories necessary to support the Fall Bake and Holiday period and the additional buildup of coffee inventory in advance of the Atlantic hurricane season. The impact of seasonality on our overall working capital requirements has been partially reduced by the U.S. Retail Pet Foods segment, which does not

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experience significant seasonality. The divestiture of the U.S. baking business and the acquisition of Ainsworth during 2019 are expected to reduce the seasonality of our overall working capital requirements.
Customers: Sales to Walmart Inc. and subsidiaries amounted to 32 percent, 31 percent, and 30 percent of net sales in 2019, 2018, and 2017, respectively. These sales are primarily included in the U.S. retail market segments. No other customer exceeded 10 percent of net sales during 2019, 2018, or 2017.
During 2019, our top 10 customers, collectively, accounted for approximately 60 percent of consolidated net sales. Supermarkets, warehouse clubs, and food distributors continue to consolidate, and we expect that a significant portion of our revenues will continue to be derived from a limited number of customers. Although the loss of any large customer for an extended length of time could negatively impact our sales and profits, we do not anticipate that this will occur to a significant extent due to strong consumer demand for our brands.
Orders: Generally, orders are filled within a few days of receipt, and the backlog of unfilled orders at any particular time has not been material on a historical basis.
Government Business: No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the government.
Competition: We are the branded market leader in the coffee, dog snacks, peanut butter, fruit spreads, natural shelf stable juices, shortening, and ice cream toppings categories in the U.S. In Canada, we are the branded market leader in the flour, pickles, fruit spreads, canned milk, shortening, and ice cream toppings categories. Our business is highly competitive as all of our brands compete for retail shelf space with other branded products as well as private label products.
In order to remain competitive, companies in the food industry need to consider emerging consumer preferences, technological advances, product and packaging innovations, and the growth of certain retail channels, such as the
e-commerce market. The primary ways in which products and brands are distinguished are brand recognition, product quality, price, packaging, new product introductions, nutritional value, convenience, advertising, promotion, and the ability to identify and satisfy consumer preferences. Positive factors pertaining to our competitive position include well-recognized brands, high-quality products, consumer trust, experienced brand and category management, a single national grocery broker in the U.S., varied product offerings, product innovation, good customer service, and an integrated distribution network.
The packaged foods industry has been challenged by a general decline in sales volume in the center of the store. Certain evolving consumer trends have contributed to the decline, such as a heightened focus on health and wellness, an increased desire for fresh foods, and the growing impact of social media and e-commerce on consumer behavior. To address these dynamics, we continue to focus on innovation with an increased emphasis on products that satisfy evolving consumer trends.
In addition, private label continues to be a competitor in many of the categories in which we compete, partially due to improvements in private label quality and the increased emphasis of store brands by retailers in an effort to cultivate customer loyalty. In our total U.S. retail categories, private label held a 16.6 dollar average market share during the 52 weeks ended April 21, 2019, as compared to a 16.4 dollar average market share during the same period in the prior year. We believe that both private label and leading brands play an important role in the categories in which we compete, appealing to different consumer segments. We closely monitor the price gap or price premium between our brands and private label brands, with the view that value is about more than price and the expectation that number one brands will continue to be an integral part of consumers’ shopping baskets.

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Our primary brands and major competitors as of April 30, 2019, are listed below.
Our Primary Products
Our Primary Brands
Competing Brands
Competitors
U.S. Retail Coffee
 
 
 
Mainstream roast and ground coffee
Folgers(A) and Café Bustelo
Maxwell House, McCafe, and Yuban
The Kraft Heinz Company
 
 
Private Label Brands
Various
 
 
Chock full o’Nuts
Massimo Zanetti Beverage Group
 
 
Cafe La Llave
F. Gaviña & Sons, Inc.
Single serve coffee - K-Cup®
Dunkin’ Donuts, Folgers, Café Bustelo, and 1850TM
Green Mountain Coffee(A)
JAB Holding Company
 
 
Starbucks
Nestlé S.A.
 
 
Private Label Brands
Various
 
 
McCafe, Maxwell House, and Gevalia
The Kraft Heinz Company
Premium coffee
Dunkin’ Donuts and 1850
Starbucks(A) and Seattle’s Best Coffee
Nestlé S.A.
 
 
Private Label Brands
Various
 
 
Peet’s Coffee & Tea
JAB Holding Company
 
 
Eight O’Clock
Tata Global Beverages Limited
 
 
Gevalia and McCafe
The Kraft Heinz Company
U.S. Retail Consumer Foods
 
 
 
Peanut butter and specialty spreads
Jif (A)
Private Label Brands
Various
 
 
Skippy
Hormel Foods Corporation
 
 
Nutella
Ferrero SpA
 
 
Peter Pan
Conagra Brands, Inc.
Fruit spreads
Smucker’s(A)
Welch’s
Welch Foods Inc.
 
 
Private Label Brands
Various
Shortening and oils
Crisco(B)
Private Label Brands(B)
Various
 
 
Wesson
Richardson International Ltd.
Frozen sandwiches
Smucker’s Uncrustables(A)

AdvancePierre Foods PB Jamwich

Tyson Foods, Inc.
 
 
Skippy P.B. & Jelly Minis
Hormel Foods Corporation
U.S. Retail Pet Foods
 
 
 
Mainstream pet food
Meow Mix, Kibbles ‘n Bits, 9Lives, and Nature’s Recipe
Dog Chow(A), One, Beneful, Cat Chow(A), Friskies, Kit & Kaboodle, and Fancy Feast
Nestlé Purina PetCare Company
 
 
Pedigree, Iams, and Sheba
Mars, Incorporated
Pet snacks
Milk-Bone(A) and Pup-Peroni
Beggin’ Strips and Waggin’ Train
Nestlé Purina PetCare Company
 
 
Dentastix and Greenies
Mars, Incorporated
Premium pet food
Rachael Ray Nutrish and Natural Balance
Blue Buffalo(A)
General Mills, Inc.
 
 
Nutro
Mars, Incorporated
 
 
Hill’s
Hill’s Pet Nutrition, Inc.
 
 
Pro Plan and Merrick
Nestlé Purina PetCare Company
International and Away From Home
 
 
 
Foodservice hot beverage
Folgers
Nescafé
Société des Produits Nestlé S.A.
 
 
Maxwell House
The Kraft Heinz Company
 
 
Private Label Brands
Various
Foodservice portion control
Smucker’s and Jif
Heinz, Welch’s, and Private Label Brands
The Kraft Heinz Company
 
 
Private Label Brands
Various
Canada coffee
Folgers
Tim Hortons(A)
Restaurant Brands International Inc.
 
 
Maxwell House
The Kraft Heinz Company
 
 
Private Label Brands
Various
Canada flour
Robin Hood®(A) and Five Roses®
Private Label Brands
Various
(A) Identifies the current market leader within the product category. In certain categories, the market leader is not identified as two or more brands compete for the largest share.
(B) Crisco is the market leader within the shortening category. In the oils category, private label brands, collectively, maintain the largest share.

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Environmental Matters: Compliance with environmental regulations and environmental sustainability is a key strategic focus as we consider it to be our responsibility as a good corporate citizen. We have public goals related to waste diversion, water usage intensity reduction, and greenhouse gas emissions intensity reduction. We have implemented and manage a variety of programs across our operations, including energy optimization, the utilization of renewable energy, water conservation, the reuse of resources, and the support of farmers who implement sustainable practices, in support of our commitment to environmental sustainability. We continue to evaluate and modify our processes on an ongoing basis to further reduce waste and limit our impact on the environment.
Compliance with the provisions of enacted or pending federal, state, and local environmental regulations regarding either the discharge of materials into the environment or the protection of the environment is not expected to have a material effect upon our capital expenditures, earnings, or competitive position in 2020.
Employees: At April 30, 2019, we had approximately 7,400 full-time employees worldwide, of which 24 percent, located at nine manufacturing locations, are covered by union contracts. These contracts vary in term depending on location, with seven contracts expiring in 2020, representing 19 percent of our total employees. We believe our relations with our employees are good.

Information about our Executive Officers: The names, ages as of June 15, 2019, and current positions of our executive officers are listed below. All executive officers serve at the pleasure of the Board of Directors, with no fixed term of office.
Name
 
Age
 
Years
with
Company
 
Position
 
Served as
an Officer
Since
Richard K. Smucker
 
71
 
46
 
Executive Chairman (A)
 
1974
Mark T. Smucker
 
49
 
21
 
President and Chief Executive Officer (B)
 
2001
Mark R. Belgya
 
58
 
34
 
Vice Chair and Chief Financial Officer (C)
 
1997
Tina R. Floyd
 
53
 
24
 
Senior Vice President and General Manager, Consumer Foods (D)
 
2018
Amy C. Held
 
45
 
6
 
Senior Vice President, Corporate Strategy, M&A, and International (E)

 
2018
Kevin G. Jackson
 
52
 
17
 
Senior Vice President, U.S. Retail Sales and Away From Home (F)
 
2018
Jeannette L. Knudsen
 
49
 
16
 
Senior Vice President, General Counsel and Secretary (G)
 
2009
David J. Lemmon
 
51
 
25
 
President, Pet Food and Pet Snacks (H)
 
2012
Jill R. Penrose
 
46
 
15
 
Senior Vice President, Human Resources and Corporate Communications (I)
 
2014
Joseph Stanziano
 
52
 
22
 
Senior Vice President and General Manager, Coffee (J)

 
2018
 
(A)
Mr. Richard Smucker was elected to his present position in May 2016, having served as Chief Executive Officer since August 2011.
(B)
Mr. Mark Smucker was elected to his present position in May 2016, having served as President and President, Consumer and Natural Foods since April 2015. Prior to that time, he served as President, U.S. Retail Coffee since May 2011.
(C)
Mr. Belgya was elected to his present position in May 2016, having served as Senior Vice President and Chief Financial Officer since October 2009.
(D)
Ms. Floyd was elected to her present position in February 2018, having served as Vice President and General Manager, Foodservice since February 2016. Prior to that time, she served as Vice President, Marketing – Consumer Foods since April 2012.
(E)
Ms. Held was elected to her present position in July 2018, having served as Senior Vice President, Strategy and M&A since March 2018. Prior to that time, she served as Vice President, Corporate Strategy and Development since May 2016 and Director, Corporate Strategy and Development since February 2013.
(F)
Mr. Jackson was elected to his present position in June 2018, having served as Senior Vice President, U.S. Retail Sales and Marketing Services since February 2018. Prior to that time, he served as Senior Vice President, U.S. Retail Sales and Market Development Organization since October 2017, Vice President, U.S. Retail Sales and Market Development Organization since January 2016, and Vice President and General Manager, Foodservice since May 2014.
(G)
Ms. Knudsen was elected to her present position in May 2016, having served as Vice President, General Counsel and Corporate Secretary since August 2010.


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(H)
Mr. Lemmon was elected to his present position in June 2018, having served as President, Canada, International, and
U. S. Away From Home since August 2017. Prior to that time, he served as Vice President and General Manager, International since January 2016, Vice President and Managing Director, Canada and International since April 2015, and Vice President and Managing Director, Canada since May 2012.
(I)
Ms. Penrose was elected to her present position in May 2016, having served as Vice President, Human Resources since June 2014. Prior to that time, she served as Vice President, Strategy and Organization Development since April 2010.
(J)
Mr. Stanziano was elected to his present position in February 2018, having served as Senior Vice President and General Manager, Consumer Foods since October 2017. Prior to that time, he served as Vice President and General Manager, Consumer since February 2016 and Vice President, General Manager - Peanut Butter and Snacking since April 2012.
Available Information: Access to all of our Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is provided, free of charge, on our website (jmsmucker.com/investor-relations/smuckers-sec-filings) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.
Item 1A.    Risk Factors.
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described below should be carefully considered, together with the other information contained or incorporated by reference in this Annual Report on Form 10-K and our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Annual Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition, and results of operations. 
We may be unable to grow market share of our products.

We operate in the competitive food industry whose growth potential is positively correlated to population growth. Our success depends in part on our ability to grow our brands faster than the population in general. We consider our ability to build and sustain the equity of our brands critical to our market share growth. If we do not succeed in these efforts, our market share growth may slow, which could have a material impact on our results of operations. 
Our proprietary brands, packaging designs, and manufacturing methods are essential to the value of our business, and the inability to protect these could harm the value of our brands and adversely affect our sales and profitability.

The success of our business depends significantly on our brands, know-how, and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights, and similar rights to protect our intellectual property. The success of our growth strategy depends on our continued ability to use our existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brands. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business. From time to time, we are engaged in litigation to protect our intellectual property, which could result in substantial costs as well as diversion of management attention.
In particular, we consider our proprietary coffee roasting methods essential to the consistent flavor and richness of our coffee products and, therefore, essential to our coffee brands. Because many of the roasting methods we use are not protected by patents, it may be difficult for us to prevent competitors from copying our roasting methods if such methods become known. We also believe that our packaging innovations, such as our AromaSeal canisters, are important to the coffee business’ marketing and operational efforts. If our competitors copy our roasting or packaging methods or develop more advanced roasting or packaging methods, the value of our coffee brands may be diminished, and we could lose customers to our competitors.

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We use a single national broker to represent a portion of our branded products to the retail grocery trade and any failure by the broker to effectively represent us could adversely affect our business.
We use a single national broker in the U.S. to represent a portion of our branded products to the retail grocery trade. Our business would suffer disruption if this broker were to fail to perform brokerage services or to effectively represent us to the retail grocery trade, which could adversely affect our business.
Loss or interruption of supply from single-source suppliers of raw materials and finished goods could have a disruptive effect on our business and adversely affect our results of operations.
We have elected to source certain raw materials, such as packaging for our Folgers coffee products, as well as our Jif peanut butter and Crisco oil products, and finished goods, such as K-Cup® pods and our Pup-Peroni dog snacks, from single sources of supply. While we believe that, except as set forth below, alternative sources of these raw materials and finished goods could be obtained on commercially reasonable terms, loss or an extended interruption in supplies from a single-source supplier would result in additional costs, could have a disruptive short-term effect on our business, and could adversely affect our results of operations.
Keurig is our single-source supplier for K-Cup® pods, which are used in its proprietary Keurig® K-Cup® brewing system. There are a limited number of manufacturers other than Keurig that are making cups that will work in such proprietary brewing system. If Keurig is unable to supply K-Cup® pods to us for any reason, it could be difficult to find an alternative supplier for such goods on commercially reasonable terms, which could have a material adverse effect on our results of operations.
Our results may be adversely impacted as a result of increased cost, limited availability, and/or insufficient quality of raw materials, including commodities and agricultural products.
We and our business partners purchase and use large quantities of many different commodities and agricultural products in the manufacturing of our products, including green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, and fruit. In addition, we and our business partners utilize significant quantities of plastic, glass, and cardboard to package our products and natural gas and fuel oil to manufacture, package, and distribute our products. The prices of these commodities, agricultural products, and other materials are subject to volatility and can fluctuate due to conditions that are difficult to predict, including global supply and demand, commodity market fluctuations, crop sizes and yield fluctuations, weather, natural disasters, foreign currency fluctuations, investor speculation, trade agreements, political unrest, consumer demand, and changes in governmental agricultural programs. In addition, we compete for certain raw materials, notably corn and soy-based agricultural products, with the biofuels industry, which has resulted in increased prices for these raw materials. Additionally, farm acreage currently devoted to other agricultural products we purchase may be utilized for biofuels crops resulting in higher costs for the other agricultural products we utilize. Although we use basis, futures, options, and fixed price contracts to manage commodity price volatility in some instances, commodity price increases ultimately result in corresponding increases in our raw material and energy costs.
Due to the significance of green coffee to our coffee business, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, significant increases or decreases in the cost of green coffee could have an adverse impact on our profitability, as compared to that of our competitors. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have a material adverse effect on our business, financial condition, and results of operations.
Our efforts to manage commodity, foreign currency exchange, and other price volatility through derivative instruments could adversely affect our results of operations and financial condition.
We use derivative instruments, including commodity futures and options, to reduce the price volatility associated with anticipated commodity purchases. The extent of our derivative position at any given time depends on our assessment of the markets for these commodities. If we fail to take a derivative position and costs subsequently increase, or if we institute a position and costs subsequently decrease, our costs may be greater than anticipated or higher than our competitors’ costs and our financial results could be adversely affected. In addition, our liquidity may be adversely impacted by the cash margin requirements of the commodities exchanges or the failure of a counterparty to perform in accordance with a contract.

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We currently do not qualify any of our commodity or foreign currency exchange derivatives for hedge accounting. We instead mark-to-market our derivatives through the Statement of Consolidated Income, which results in changes in the fair value of all of our derivatives being immediately recognized in consolidated earnings, resulting in potential volatility in both gross profit and net income. These gains and losses are reported in cost of products sold in our Statement of Consolidated Income but are excluded from our segment operating results and non-GAAP earnings until the related inventory is sold, at which time the gains and losses are reclassified to segment profit and non-GAAP earnings. Although this accounting treatment aligns the derivative gains and losses with the underlying exposure being hedged within segment results, it may result in volatility in our consolidated earnings.
We may be limited in our ability to pass cost increases on to our customers in the form of price increases or may realize a decrease in sales volume to the extent price increases are implemented.
We may not be able to pass some or all of any increases in the price of raw materials, energy, and other input costs to our customers by raising prices. To the extent competitors do not also increase their prices, customers and consumers may choose to purchase competing products or may shift purchases to private label or other lower-priced offerings, which may adversely affect our results of operations.
Consumers may be less willing or able to pay a price differential for our branded products and may increasingly purchase lower-priced offerings and may forego some purchases altogether, especially during economic downturns. Retailers may also increase levels of promotional activity for lower-priced offerings as they seek to maintain sales volumes during times of economic uncertainty. Accordingly, sales volumes of our branded products could be reduced or lead to a shift in sales mix toward our lower-margin offerings. As a result, decreased demand for our products may adversely affect our results of operations.
Certain of our products are produced at single manufacturing sites.
We have consolidated our production capacity for certain products into single manufacturing sites, including substantially all of our coffee, Milk-Bone dog snacks, fruit spreads, toppings, and syrups. We could experience a production disruption at these or any of our manufacturing sites resulting in a reduction or elimination of the availability of some of our products. If we are not able to obtain alternate production capability in a timely manner, our business, financial condition, and results of operations could be adversely affected.
A significant interruption in the operation of any of our supply chain or distribution capabilities could have an adverse effect on our business, financial condition, and results of operations.
Our ability and the ability of our third-party suppliers and service providers, distributors, and contract manufacturers to manufacture, distribute, and sell products is critical to our success. A significant interruption in the operation of any of our manufacturing or distribution capabilities, or the manufacturing or distribution capabilities of our suppliers, distributors, or contract manufacturers, or a service failure by a third-party service provider, whether as a result of adverse weather conditions or a natural disaster, work stoppage, terrorism, pandemic illness, or other causes, could significantly impair our ability to operate our business. Notably, substantially all of our coffee production takes place in New Orleans, Louisiana, which is subject to risks associated with hurricane and other weather-related events. Additionally, some of our production facilities are located in places where tornadoes or wildfires can frequently occur, such as Alabama, Kansas, and California. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition, and results of operations.
Our business could be harmed by strikes or work stoppages.
As of April 30, 2019, 24 percent of our full-time employees, located at nine manufacturing locations, are covered by collective bargaining agreements. These contracts vary in term depending on location, with seven contracts expiring in 2020, representing 19 percent of our total employees. We cannot assure that we will be able to renew these collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, without production interruptions caused by labor stoppages. If a strike or work stoppage were to occur in connection with negotiations of new collective bargaining agreements or as a result of disputes under collective bargaining agreements with labor unions, our business, financial condition, and results of operations could be materially adversely affected.

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Our ability to competitively serve customers depends on the availability of reliable transportation. Increases in logistics and other transportation-related costs could adversely impact our results of operations.
Logistics and other transportation-related costs have a significant impact on our earnings and results of operations. We use multiple forms of transportation, including ships, trucks, and railcars, to bring our products to market. Disruption to the timely supply of these services or increases in the cost of these services for any reason, including availability or cost of fuel, regulations affecting the industry, labor shortages in the transportation industry, service failures by third-party service providers, accidents, or natural disasters, which may impact the transportation infrastructure or demand for transportation services, could have an adverse effect on our ability to serve our customers, and could have a material adverse effect on our business, financial condition, and results of operations.
Our operations are subject to the general risks of the food industry.
The food industry is subject to risks posed by food spoilage and contamination, product tampering, product recall, and consumer product liability claims. Our operations could be impacted by both genuine and fictitious claims regarding our products as well as our competitors’ products. In the event of product contamination or tampering, we may need to recall some of our products. A widespread product recall could result in significant loss due to the cost of conducting a product recall, including destruction of inventory and the loss of sales resulting from the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or a product liability judgment, involving either us or our competitors, could also result in a loss of consumer confidence in our food products or the food category, and an actual or perceived loss of value of our brands, materially impacting consumer demand.
Changes in our relationships with significant customers, including the loss of our largest customer, could adversely affect our results of operations.
Sales to Walmart Inc. and subsidiaries amounted to 32 percent of net sales in 2019. These sales are primarily included in the U.S. retail market segments. Trade receivables at April 30, 2019, included amounts due from Walmart Inc. and subsidiaries of $137.7 million, or 27 percent of the total trade receivables balance. During 2019, our top 10 customers, collectively, accounted for approximately 60 percent of consolidated net sales. We expect that a significant portion of our revenues will continue to be derived from a limited number of customers. Our customers are generally not contractually obligated to purchase from us. These customers make purchase decisions based on a combination of price, promotional support, product quality, consumer demand, customer service performance, their desired inventory levels, and other factors. Changes in customers’ strategies, including a reduction in the number of brands they carry or a shift of shelf space to private label products, may adversely affect sales. Customers also may respond to price increases by reducing distribution, resulting in reduced sales of our products. Additionally, our customers may face financial or other difficulties that may impact their operations and their purchases from us, which could adversely affect our results of operations. A reduction in sales to one or more major customers could have a material adverse effect on our business, financial condition, and results of operations.
We operate in the competitive food industry and continued demand for our products may be affected by our failure to effectively compete or by changes in consumer preferences.
We face competition across our product lines from other food companies with the primary methods and factors in competition being product quality, price, packaging, product innovation, nutritional value, convenience, customer service, advertising, and promotion. Continued success is dependent on product innovation, the ability to secure and maintain adequate retail shelf space and to compete in new and growing channels, and effective and sufficient trade merchandising, advertising, and marketing programs. In particular, technology-based systems, which give consumers the ability to shop through e-commerce websites and mobile commerce applications, are also significantly altering the retail landscape in many of our markets. We are committed to expanding our presence in e-commerce, transforming our manufacturing, commercial, and corporate operations through digital technologies, and enhancing our data analytics capabilities to develop new commercial insights. However, if we are unable to effectively compete in the expanding e-commerce market, adequately leverage technology to improve operating efficiencies, or develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
Some of our competitors have substantial financial, marketing, and other resources, and competition with them in our various markets, channels, and product lines could cause us to reduce prices, increase marketing or other expenditures, or lose category share. Category share and growth could also be adversely impacted if we are not successful in introducing new

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products. Introduction of new products and product extensions requires significant development and marketing investment. If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits through investment in innovation will be less successful. In order to generate future revenues and profits, we must continue to sell products that appeal to our customers and consumers. Specifically, there are a number of trends in consumer preferences that may impact us and the food industry as a whole, including convenience, flavor variety, an emphasis on protein and snacking, and the desire for transparent product labeling and simple and natural ingredients.
The success of our business depends substantially on consumer perceptions of our brands.
We are the branded market leader in several categories both in the U.S. and Canada. We believe that maintaining and continually enhancing the value of our brands is critical to the success of our business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly as a result of a number of factors, such as if we fail to preserve the quality of our products, if we are perceived to act in an irresponsible manner, if the Company or our brands otherwise receive negative publicity, if our brands fail to deliver a consistently positive consumer experience, or if our products become unavailable to consumers. The growing use of social and digital media by consumers increases the speed and extent that information and opinions can be shared. Negative posts or comments about us or our brands or products on social or digital media could damage our brands and reputation. If we are unable to build and sustain brand equity by offering recognizably superior products, we may be unable to maintain premium pricing over generic and private label products. If our brand values are diminished, our revenues and operating results could be materially adversely affected. In addition, anything that harms the Dunkin’ Donuts or Rachael Ray brands could adversely affect the success of our exclusive licensing agreements with the owners of these brands.
We could be subject to adverse publicity or claims from consumers.
Certain of our products contain ingredients which are the subject of public scrutiny, including the suggestion that consumption may have adverse health effects. Although we strive to respond to consumer preferences and social expectations, we may not be successful in these efforts. An unfavorable report on the effects of ingredients present in our products, product recalls, or negative publicity or litigation could influence consumer preferences, significantly reduce the demand for our products, and adversely affect our profitability.
We may also be subject to complaints from or litigation by consumers who allege food and beverage-related illness, or other quality, health, or operational concerns. Adverse publicity resulting from such allegations could materially adversely affect us, regardless of whether such allegations are true or whether we are ultimately held liable. A lawsuit or claim could result in an adverse decision against us, which could have a material adverse effect on our business, financial condition, and results of operations.

We may not be able to attract, develop, and retain the highly skilled people we need to support our business.

We depend on the skills and continued service of key employees, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, hire, train, and retain qualified individuals. We compete with other companies both within and outside of our industry for talented people, and we may lose key employees or fail to attract, recruit, train, develop, and retain other talented individuals. Any such loss, failure, or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring, integrating, and training qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any key employees who leave or offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and financial results.
Our operations are subject to the general risks associated with acquisitions and divestitures. Specifically, we may not realize all of the anticipated benefits of the Ainsworth acquisition or those benefits may take longer to realize than expected.
Our stated strategic vision is to own and market a portfolio of food and beverage brands that combines number one and leading brands with emerging, on-trend brands to drive balanced, long-term growth, primarily in North America. We have historically made strategic acquisitions of brands and businesses, including Ainsworth, and intend to do so in the future in support of this strategy. If we are unable to complete acquisitions or to successfully integrate and develop acquired businesses, including the effective management of integration and related restructuring costs, we could fail to achieve the

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anticipated synergies and cost savings, or the expected increases in revenues and operating results, either of which could have a material adverse effect on our financial results.
In addition, we have made strategic divestitures of brands and businesses, including the sale of our U.S. baking business, and we may do so in the future. If we are unable to complete divestitures or to successfully transition divested businesses, including the effective management of the related separation and stranded overhead costs, our business and financial results could be negatively impacted.
We may not realize the benefits we expect from our cost reduction and other cash management initiatives.
We continuously pursue initiatives to reduce costs, increase effectiveness, and optimize cash flow. We may not realize all or part of the anticipated cost savings or other benefits from such initiatives. Other events and circumstances, such as financial or strategic difficulties, delays, or unexpected costs, may also adversely impact our ability to realize all or part of the anticipated cost savings or other benefits, or cause us not to realize such cost savings or other benefits on the expected timetable. If we are unable to realize the anticipated benefits, our ability to fund other initiatives may be adversely affected. Finally, the complexity of the implementation will require a substantial amount of management and operational resources. Our management team must successfully execute the administrative and operational changes necessary to achieve the anticipated benefits of the initiatives. These and related demands on our resources may divert the organization’s attention from other business issues, have adverse effects on existing business relationships with suppliers and customers, and impact employee morale. Any failure to implement these initiatives in accordance with our plans could adversely affect our business and financial results.
Weak financial performance, downgrades in our credit ratings, or disruptions in the financial markets may adversely affect our ability to access capital in the future.
We may need new or additional financing in the future to conduct our operations, expand our business, or refinance existing indebtedness, which would be dependent upon our financial performance. Any downgrade in our credit ratings, particularly our short-term rating, would likely impact the amount of commercial paper we could issue and increase our commercial paper borrowing costs. The liquidity of the overall capital markets and the state of the economy, including the food and beverage industry, may make credit and capital markets more difficult for us to access, even though we have an established revolving credit facility. From time to time, we have relied, and also may rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions, and general corporate purposes. In particular, our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to that facility to meet their funding commitments. The obligations of the financial institutions under our revolving credit facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others. In addition, long-term volatility and disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives, or the failure of significant financial institutions could adversely affect our access to the liquidity needed for our businesses in the longer term. Such disruptions could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Disruptions in the capital and credit markets could also result in higher interest rates on publicly issued debt securities and increased costs under credit facilities. Continuation of these disruptions would increase our interest expense and capital costs and could adversely affect our results of operations and financial position.
Our substantial debt obligations could restrict our operations and financial condition. Additionally, our ability to generate cash to make payments on our indebtedness depends on many factors beyond our control.
As of April 30, 2019, we had approximately $5.9 billion of short-term borrowings and long-term debt, partially as a result of new borrowings this year to finance the Ainsworth acquisition. We may also incur additional indebtedness in the future. Our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal on indebtedness rather than for other corporate purposes, including funding future expansion of our business and ongoing capital expenditures, which could impede our growth. Our substantial indebtedness could have other adverse consequences, including:
making it more difficult for us to satisfy our financial obligations;
increasing our vulnerability to adverse economic, regulatory, and industry conditions, and placing us at a disadvantage compared to our competitors that are less leveraged;
limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

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limiting our ability to borrow additional funds for working capital, capital expenditures, acquisitions, and general corporate or other purposes; and
exposing us to greater interest rate risk, including the risk to variable borrowings of a rate increase and the risk to fixed borrowings of a rate decrease.
Our ability to make payments on our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us in an amount sufficient to enable us to pay our indebtedness when scheduled payments are due or to fund other liquidity needs. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. Any refinancing of our debt could be at higher interest rates and may require make-whole payments and compliance with more onerous covenants, which could further restrict our business operations. Our ability to refinance our indebtedness or obtain additional financing would depend on, among other things, our financial condition at the time, restriction in the agreements governing our indebtedness, and the condition of the financial markets and the industry in which we operate. As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Without this financing, we may have to seek additional equity or debt financing or restructure our debt, which could harm our long-term business prospects. Our failure to comply with the terms of any existing or future indebtedness could result in an event of default which, if not cured or waived, could result in the acceleration of the payment of all of our debt.
A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect our consolidated operating results and net worth.
A significant portion of our assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually on February 1, and more often if indicators of impairment exist. At
April 30, 2019, the carrying value of goodwill and other intangible assets totaled $13.0 billion, compared to total assets of
$16.7 billion and total shareholders’ equity of $8.0 billion. If the carrying value of these assets exceeds the current estimated fair value, the asset would be considered impaired, and this would result in a noncash charge to earnings, which could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results.
As of April 30, 2019, the carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment were $2.4 billion and $1.5 billion, respectively. These intangible assets are susceptible to future impairment charges due to narrow differences between fair value and carrying value as a result of recent impairment charges and the acquisition of Ainsworth in May 2018. To date, we have recognized $412.6 million of impairment charges related to the goodwill and indefinite-lived intangible assets acquired as part of the Big Heart acquisition in 2015, primarily as a result of reductions in our long-term net sales and profitability projections. We do not believe that our Pet Foods reporting unit or any of the indefinite-lived trademarks within the U.S. Retail Pet Foods segment are more likely than not impaired as of
April 30, 2019. However, further changes to the assumptions regarding the future performance of the U.S. Retail Pet Foods segment or its brands, an adverse change to macro-economic conditions, or a change to other assumptions could result in additional impairment losses in the future, which could be significant. As of April 30, 2019, the estimated fair value was substantially in excess of the carrying value for the majority of the remaining reporting units and material indefinite-lived intangible assets, and in all instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the Natural Foods reporting unit, which has no remaining goodwill as a result of the impairment charge recorded during the fourth quarter of 2019. For further information, refer to Note 7: Goodwill and Other Intangible Assets.
Changes in tax, environmental, or other regulations and laws, or their application, or failure to comply with existing licensing, trade, and other regulations and laws could have a material adverse effect on our financial condition.
Our operations are subject to various regulations and laws administered by federal, state, and local government agencies in the U.S. as well as to regulations and laws administered by government agencies in Canada and other countries in which we have operations and our products are sold. In particular, the manufacturing, marketing, packaging, labeling, distribution, and sale of food products are each subject to governmental regulation that is increasingly extensive, encompassing such matters as ingredients (including whether a product contains genetically modified ingredients), packaging, advertising, relations with distributors and retailers, health, safety, data privacy, and the environment. Additionally, we are routinely subject to new or modified tax and securities regulations, other laws and regulations, and accounting and reporting standards.

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In the U.S., we are required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Food Safety Modernization Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Tariff Act, laws governing equal employment opportunity, and various other federal statutes and regulations. We are also subject to various state and local statutes and regulations. For instance, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (better known as “Proposition 65”) requires that a specific warning appear on any product sold in the State of California that contains a substance listed by that state as having been found to cause cancer or birth defects. This law exposes all food and beverage producers to the possibility of having to provide warnings on their products, as well as civil penalties. The detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. Products containing listed substances that occur naturally or that are contributed to such products solely by a municipal water supply are generally exempt from the warning requirement. In particular, we are currently a defendant in Council for Education and Research on Toxics (“Plaintiff” or “CERT”) v. Brad Barry LLC, et al., which alleges that we, in addition to nearly eighty other defendants who manufacture, package, distribute, or sell packaged coffee, failed to warn persons in California that our coffee products expose persons to the chemical acrylamide, which is not added to coffee but is present in all coffee in small amounts (measured in parts per billion) as a byproduct of the coffee bean roasting process, in violation of Proposition 65. 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.
We regularly move data across national and state borders to conduct our operations and, consequently, are subject to a variety of laws and regulations in the U.S. and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. There is significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, because they are continuously evolving and developing and may be interpreted and applied differently from country to country and state to state and may create inconsistent or conflicting requirements.
Complying with new regulations and laws, or changes to existing regulations and laws, or their application could increase our costs or adversely affect our sales of certain products. In addition, our failure or inability to comply with applicable regulations and laws could subject us to civil remedies, including fines, injunctions, recalls or seizures, and potential criminal sanctions, which could have a material adverse effect on our business and financial condition.
Our operations in certain developing markets expose us to regulatory risks.
In many countries outside of the U.S., particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act or similar local anti-bribery or anti-corruption laws. These laws generally prohibit companies and their employees, contractors, or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could have a material adverse effect on our financial condition and results of operations.
Changes in climate or legal, regulatory, or market measures to address climate change may negatively affect our business and operations.
There is significant political and scientific concern that emissions of carbon dioxide and other greenhouse gases may alter the composition of the global atmosphere in ways that are affecting and are expected to continue affecting the global climate. The emission of such greenhouse gases may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as green coffee, peanuts, animal protein meals, oils and fats, sweeteners, grains, and fruit. We may also be subjected to decreased availability or less favorable pricing for water as a result of such change, which could impact our manufacturing and distribution operations. In addition, natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain.
Increasing concern over climate change also may result in more regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulations are enacted and are more rigorous than existing regulations, we may experience significant increases in costs of operation and delivery. In particular, increased regulation of utility providers, fuel emissions, or suppliers could substantially increase our operating, distribution, or supply chain costs. We could also face

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increased costs related to defending and resolving legal claims and other litigation related to climate change. As a result, climate change could negatively affect our results of operations, cash flows, or financial position.
If our information technology systems fail to perform adequately or we are unable to protect such information technology systems against data corruption, cyber-based attacks, or network security breaches, our operations could be disrupted, and we may suffer financial damage or loss because of lost or misappropriated information.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure to effectively manage our business data, supply chain, logistics, finance, and other business processes and for digital marketing activities and electronic communications between Company personnel and our customers and suppliers. If we do not allocate and effectively manage the resources necessary to build, sustain, and protect an appropriate technology infrastructure, or we do not effectively implement system upgrades, our business or financial results could be negatively impacted. We are regularly the target of attempted cyber and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact. We invest in industry standard security technology to protect our data and business processes against the risk of data security breaches and cyber-based attacks. We believe our security technology tools and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks. Nevertheless, despite continued vigilance in these areas, security breaches or system failures of our infrastructure, whether due to attacks by hackers, employee error, or other causes, can create system disruptions, shutdowns, transaction errors, or unauthorized disclosure of confidential information. If we are unable to prevent such breaches or failures, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber-based attack could be significant.
Further, we have outsourced several information technology support services and administrative functions, including benefit plan administration and other functions, to third-party service providers, and may outsource other functions in the future to achieve cost savings and efficiencies. In addition, certain of our processes rely on third-party cloud computing services. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected benefits and may have to incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, inaccurate financial reporting, the loss of or damage to intellectual property through security breach, the loss of sensitive data through security breach, or otherwise.
Item 1B.    Unresolved Staff Comments.
None.


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Item 2.
Properties.
The table below lists all of our manufacturing and processing facilities at April 30, 2019. All of our properties are maintained and updated on a regular basis, and we continue to make investments for expansion and safety and technological improvements. We believe that the capacity at our existing facilities will be sufficient to sustain current operations and the anticipated near-term growth of our businesses.
We own all of the properties listed below, except as noted. Additionally, our principal distribution centers in the U.S. include three that we own and seven that we lease. We also lease our principal distribution center in Canada. Our distribution facilities are in good condition, and we believe that they have sufficient capacity to meet our distribution needs in the near future. We lease eight sales and administrative offices in the U.S. and one in Canada. Our corporate headquarters is located in Orrville, Ohio, and our Canadian headquarters is located in Markham, Ontario.
Locations
  
Products Produced/Processed/Stored
  
Primary Reportable Segment
Bloomsburg, Pennsylvania
 
Wet dog and cat food and dry dog and cat food
 
U.S. Retail Pet Foods
Buffalo, New York
 
Dog snacks
 
U.S. Retail Pet Foods
Chico, California
 
Fruit and vegetable juices and beverages and grain products
 
U.S. Retail Consumer Foods
Cincinnati, Ohio
 
Shortening and oils
 
U.S. Retail Consumer Foods
Decatur, Alabama
 
Dry dog and cat food
 
U.S. Retail Pet Foods
Frontenac, Kansas
 
Dry dog and cat food
 
U.S. Retail Pet Foods
Grandview, Washington
 
Fruit
 
U.S. Retail Consumer Foods
Havre de Grace, Maryland
 
Fruit and vegetable juices and beverages
 
U.S. Retail Consumer Foods
Lawrence, Kansas
 
Dry dog food
 
U.S. Retail Pet Foods
Lexington, Kentucky
 
Peanut butter
 
U.S. Retail Consumer Foods
Longmont, Colorado (A)
 
Frozen sandwiches
 
U.S. Retail Consumer Foods
Meadville, Pennsylvania
 
Dry dog and cat food
 
U.S. Retail Pet Foods
Memphis, Tennessee
 
Peanut butter and fruit spreads
 
U.S. Retail Consumer Foods
New Bethlehem, Pennsylvania
 
Peanut butter and combination peanut butter and jelly products
 
U.S. Retail Consumer Foods
New Orleans, Louisiana (four facilities) (B)
Coffee
 
U.S. Retail Coffee
Orrville, Ohio
 
Fruit spreads, toppings, and syrups
 
U.S. Retail Consumer Foods
Oxnard, California
 
Fruit
 
U.S. Retail Consumer Foods
Ripon, Wisconsin
 
Fruit spreads, toppings, syrups, and condiments
 
U.S. Retail Consumer Foods
Scottsville, Kentucky
 
Frozen sandwiches
 
U.S. Retail Consumer Foods
Seattle, Washington (B)
 
Nut mix products
 
U.S. Retail Consumer Foods
Sherbrooke, Quebec
 
Canned milk
 
International and Away From Home
Suffolk, Virginia
 
Coffee
 
International and Away From Home
Topeka, Kansas
 
Dry dog and cat food and dog and cat snacks
 
U.S. Retail Pet Foods
(A)
Our new facility in Longmont will help meet growing demand for Smucker’s Uncrustables frozen sandwiches and will complement our existing facility in Scottsville. Production is expected to begin at the Longmont facility during the second half of calendar year 2019.
(B)
We lease our coffee silo facility in New Orleans and our facilities in Seattle.
Item 3.    Legal Proceedings.
The information required for this Item is incorporated herein by reference to Note 15: Contingencies.
Item 4.    Mine Safety Disclosures.
Not applicable.

16




PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are listed on the New York Stock Exchange – ticker symbol SJM. There were approximately 311,613 shareholders of record as of June 10, 2019, of which approximately 37,413 were registered holders of common shares.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The following table presents the total number of shares of common stock purchased during the fourth quarter of 2019, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, if any, and the approximate dollar value of the maximum number of shares that may yet be purchased under the share repurchase program:
Period
 
(a)
 
(b)
 
(c)
 
(d)
 
 
Total number 
of shares
purchased
 
Average
price paid per share
 
Total number of shares purchased as part 
of publicly announced
plans or programs
 
Maximum number (or approximate
dollar value) of shares that may 
yet be purchased under the
plans or programs
February 1, 2019 - February 28, 2019
 
899

 
$
104.17

 

 
3,586,598

March 1, 2019 - March 31, 2019
 
518

 
103.11

 

 
3,586,598

April 1, 2019 - April 30, 2019
 
1,162

 
120.90

 

 
3,586,598

Total
 
2,579

 
$
111.50

 

 
3,586,598

(a)
Shares in this column include shares repurchased from stock plan recipients in lieu of cash payments.
(d)
As of April 30, 2019, there were 3,586,598 common shares remaining available for future repurchase pursuant to our Board of Directors’ authorizations.

Comparison of Cumulative Total Return: The following graph compares the cumulative total shareholder return for the five years ended April 30, 2019, for our common shares, the Standard & Poor’s (“S&P”) Packaged Foods & Meats Index, and the S&P 500 Index. These figures assume all dividends are reinvested when received and are based on $100.00 invested in our common shares and the referenced index funds on April 30, 2014.chart-148ef18824825e87851.jpg
  
April 30,
  
2014
 
2015
 
2016
 
2017
 
2018
 
2019
The J. M. Smucker Company
$
100.00

 
$
122.83

 
$
137.63

 
$
140.28

 
$
129.67

 
$
143.66

S&P Packaged Foods & Meats
100.00

 
114.98

 
133.99

 
141.72

 
121.42

 
134.16

S&P 500
100.00

 
112.98

 
114.34

 
134.83

 
152.72

 
173.32


17




Item 6.    Selected Financial Data.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the five years in the period ended April 30, 2019. The selected financial data should be read in conjunction with the “Results of Operations” and “Liquidity and Capital Resources” sections within Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto.
  
          Year Ended April 30,
(Dollars and shares in millions, except per share data)
2019
 
2018
 
2017
 
2016
 
2015
Statements of Income:
 
 
 
 
 
 
 
 
 
Net sales
$
7,838.0

 
$
7,357.1

 
$
7,392.3

 
$
7,811.2

 
$
5,692.7

Gross profit
$
2,915.7

 
$
2,836.1

 
$
2,835.3

 
$
2,967.8

 
$
1,968.7

% of net sales
37.2
%
 
38.5
%
 
38.4
%
 
38.0
%
 
34.6
%
Operating income
$
928.6

 
$
1,044.0

 
$
1,042.6

 
$
1,146.3

 
$
785.3

% of net sales
11.8
%
 
14.2
%
 
14.1
%
 
14.7
%
 
13.8
%
Net income
$
514.4

 
$
1,338.6

 
$
592.3

 
$
688.7

 
$
344.9

Financial Position:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
101.3

 
$
192.6

 
$
166.8

 
$
109.8

 
$
125.6

Total assets
16,711.3

 
15,301.2

 
15,639.7

 
15,984.1

 
16,806.3

Total debt
5,910.8

 
4,832.0

 
5,398.5

 
5,430.0

 
6,170.9

Total shareholders’ equity
7,970.5

 
7,891.1

 
6,850.2

 
7,008.5

 
7,086.9

Liquidity:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
1,141.2

 
$
1,218.0

 
$
1,059.0

 
$
1,461.0

 
$
739.1

Additions to property, plant, and equipment
359.8

 
321.9

 
192.4

 
201.4

 
247.7

   Free cash flow (A)
781.4

 
896.1

 
866.6

 
1,259.6

 
491.4

Quarterly dividends paid
377.9

 
350.3

 
339.3

 
316.6

 
254.0

Purchase of treasury shares
5.4

 
7.0

 
437.6

 
441.1

 
24.3

EBITDA (as adjusted) (A)
1,560.9

 
1,625.1

 
1,593.7

 
1,579.1

 
871.3

Share Data:
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
113.7

 
113.6

 
116.0

 
119.4

 
103.7

Weighted-average shares outstanding – assuming dilution
113.7

 
113.6

 
116.1

 
119.5

 
103.7

Dividends declared per common share
$
3.40

 
$
3.12

 
$
3.00

 
$
2.68

 
$
2.56

Earnings per Common Share:
 
 
 
 
 
 
 
 
 
Net income
$
4.52

 
$
11.79

 
$
5.11

 
$
5.77

 
$
3.33

Net income – assuming dilution
4.52

 
11.78

 
5.10

 
5.76

 
3.33

Other Non-GAAP Measures: (A)
 
 
 
 
 
 
 
 
 
Adjusted gross profit
$
2,969.9

 
$
2,802.7

 
$
2,868.2

 
$
2,968.0

 
$
1,999.4

% of net sales
37.9
%
 
38.1
%
 
38.8
%
 
38.0
%
 
35.1
%
Adjusted operating income
$
1,492.3

 
$
1,439.7

 
$
1,492.9

 
$
1,490.8

 
$
983.5

% of net sales
19.0
%
 
19.6
%
 
20.2
%
 
19.1
%
 
17.3
%
Adjusted income and earnings per share:
 
 
 
 
 
 
 
 
 
Adjusted income
$
942.7

 
$
904.6

 
$
895.9

 
$
931.3

 
475.6

Adjusted earnings per share – assuming dilution
$
8.29

 
$
7.96

 
$
7.72

 
$
7.79

 
$
4.59

(A)
We use non-GAAP financial measures to evaluate our performance. Refer to “Non-GAAP Financial Measures” within Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation to the comparable GAAP financial measure.

18




Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars and shares in millions, unless otherwise noted, except per share data)
Company Background
Inspired by more than 120 years of business success and five generations of family leadership, The J. M. Smucker Company makes food that people and pets love. The Company’s portfolio of 40+ brands, which are found in 90 percent of U.S. homes and countless restaurants, include iconic products consumers have always loved such as Folgers, Jif, and Milk-Bone plus new favorites like Café Bustelo, Smucker’s Uncrustables, and Rachael Ray Nutrish. Over the past two decades, the Company has grown rapidly by thoughtfully acquiring leading and emerging brands, while ensuring the business has a positive impact on its 7,000+ employees, the communities it is a part of, and the planet.
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 market segments in total comprised 86 percent of net sales in 2019 and represent a major portion of our strategic focus – the sale of branded food and beverage products with leadership positions to consumers through retail outlets in North America. In the U.S. retail market segments, our products are sold primarily to food retailers, club stores, pet specialty stores, discount and dollar stores, food wholesalers, online retailers, drug stores, natural foods stores and distributors, military commissaries, and mass merchandisers. The products included in the International and Away From Home segment are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., restaurants, lodging, schools and universities, health care operators).
Strategic Overview
We remain rooted in our Basic Beliefs of Quality, People, Ethics, Growth, and Independence established by our founder and namesake, Jerome Smucker, more than a century ago. Today, these Basic Beliefs are the core of our unique corporate culture and serve as a foundation for decision-making and actions. We have been led by five generations of family leadership, having had only six chief executive officers in 122 years. This continuity of management and thought extends to the broader leadership team that embodies the values and embraces the business practices that have contributed to our consistent growth. Our strategic vision is to own and market a portfolio of food and beverage brands that combines number one and leading brands with emerging, on-trend brands to drive balanced, long-term growth, primarily in North America.

Our strategic long-term growth objectives are to increase net sales by 2 to 3 percent and operating income excluding non-GAAP adjustments (“adjusted operating income”) by 5 percent annually on average. Our long-term growth objective related to income per diluted share excluding non-GAAP adjustments (“adjusted earnings per share”) is to achieve an average increase of 8 percent annually. We expect organic growth, including new products, to drive much of our top-line growth, while the contribution from acquisitions will vary from year to year. Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, integration and restructuring costs, unallocated gains and losses on commodity and foreign currency exchange derivatives, and, beginning in 2018, certain one-time discrete tax adjustments. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for further information.
Net sales has increased at a compound annual growth rate of 7 percent over the past five years, driven by the acquisitions of
Big Heart in 2015 and Ainsworth in the current year, while adjusted operating income and adjusted earnings per share have increased at a rate of 7 percent and 6 percent, respectively, over the same period. Net cash provided by operating activities has increased at a compound annual growth rate of 6 percent. Our cash deployment strategy is to balance reinvesting in our business through acquisitions and capital expenditures with returning cash to our shareholders through the payment of dividends and share repurchases. Our strategy also includes a significant focus on debt repayment.

On May 14, 2018, we acquired the stock of 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. Annual cost synergies of approximately $55.0 are expected to be fully realized by the end of 2021, most of which will be achieved by the end of 2020. We realized synergies of $23.5 in 2019. The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of Ainsworth’s operations, including $747.0 and $40.8 in net sales and operating income, respectively, are included in our consolidated financial statements in 2019.


19




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 $369.5, which were net of cash transactions costs and a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax gain of $27.7 during 2019, which is included in other operating expense (income) – net within the Statement of Consolidated Income.
Results of Operations
This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for the years ended April 30, 2019 and 2018. For the comparisons of the years ended April 30, 2018 and 2017, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2018 Annual Report on Form 10-K.
  
Year Ended April 30,
  
2019
 
2018
 
% Increase
(Decrease)
Net sales
$
7,838.0

 
$
7,357.1

 
7
 %
Gross profit
$
2,915.7

 
$
2,836.1

 
3

% of net sales
37.2
%
 
38.5
%
 


Operating income
$
928.6

 
$
1,044.0

 
(11
)
% of net sales
11.8
%
 
14.2
%
 


Net income:
 
 
 
 


Net income
$
514.4

 
$
1,338.6

 
(62
)
Net income per common share – assuming dilution
$
4.52

 
$
11.78

 
(62
)
Adjusted gross profit (A)
$
2,969.9

 
$
2,802.7

 
6

% of net sales
37.9
%
 
38.1
%
 


Adjusted operating income (A)
$
1,492.3

 
$
1,439.7

 
4

% of net sales
19.0
%
 
19.6
%
 


Adjusted income: (A)
 
 
 
 


Income
$
942.7

 
$
904.6

 
4

Earnings per share – assuming dilution
$
8.29

 
$
7.96

 
4

(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
 
Year Ended April 30,
 
2019
 
2018
 
Increase  
(Decrease)
 
  %    
Net sales
$
7,838.0

 
$
7,357.1

 
$
480.9

 
7
 %
Ainsworth acquisition
(747.0
)
 

 
(747.0
)
 
(10
)
Baking divestiture

 
(254.0
)
 
254.0

 
3

Foreign currency exchange
13.7

 

 
13.7

 

Net sales excluding acquisition, divestiture, and foreign currency exchange (A)
$
7,104.7

 
$
7,103.1

 
$
1.6

 
 %
Amounts may not add due to rounding.
(A)
Net sales excluding acquisition, divestiture, and foreign currency exchange is a non-GAAP measure used to evaluate performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis.

Net sales in 2019 increased $480.9, or 7 percent, reflecting a $747.0 contribution from the Ainsworth acquisition, partially offset by the impact of $254.0 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 was comparable to the prior year, as the impact of lower net price realization, which reduced net sales by 1 percentage point, was offset by the impact of favorable volume/mix, which contributed 1 percentage point to net sales. The lower net price

20




realization was mostly related to coffee, peanut butter, and oils, and the favorable volume/mix was primarily driven by growth in coffee, Smucker’s Uncrustables, and Jif Power-UpsTM, partially offset by a decline in pet food and pet snacks.
Operating Income
The following table presents the components of operating income as a percentage of net sales.
  
Year Ended April 30,
  
2019
 
2018
Gross profit
37.2
 %
 
38.5
%
Selling, distribution, and administrative expenses:
 
 
 
Marketing
3.9
 %
 
3.2
%
Advertising
3.0

 
2.6

Selling
3.2

 
3.3

Distribution
3.3

 
3.2

General and administrative
5.9

 
6.2

Total selling, distribution, and administrative expenses
19.2
 %
 
18.5
%
Amortization
3.1

 
2.8

Goodwill impairment charges
1.2

 
2.0

Other intangible assets impairment charges
1.4

 
0.4

Other special project costs
0.8

 
0.6

Other operating expense (income) – net
(0.4
)
 

Operating income
11.8
 %
 
14.2
%
Amounts may not add due to rounding.

Gross profit increased $79.6, or 3 percent, in 2019, primarily driven by the addition of Ainsworth, partially offset by the noncomparable impact related to the U.S. baking business divestiture. An unfavorable net impact of lower prices and higher costs was mostly driven by an unfavorable change in the impact of derivative gains and losses, which was partially offset by the impact of favorable volume/mix.

Operating income decreased $115.4, or 11 percent, as higher gross profit and a $27.7 pre-tax gain related to the sale of the U.S. baking business were more than offset by a $145.7 increase in selling, distribution, and administrative expenses and a $33.5 increase in amortization expense, both of which were primarily due to the Ainsworth acquisition. In addition, intangible asset impairment charges increased by $28.2 as a result of charges in the U.S. Retail Pet Foods and U.S. Retail Consumer Foods segments in 2019, and special project costs increased by $14.8, driven by an increase in restructuring costs. For further information on the impairment charges, refer to “Critical Accounting Estimates and Policies” in this discussion and analysis.

Gross profit excluding non-GAAP adjustments (“adjusted gross profit”) increased $167.2, or 6 percent, in 2019, with the primary difference from GAAP results being the exclusion of a $91.5 unfavorable change in the impact of unallocated derivative gains and losses as compared to the prior year. Adjusted operating income increased $52.6, or 4 percent, further reflecting the exclusion of amortization expense, the impairment charges, and special project costs.
Interest Expense
Net interest expense increased $33.8, or 19 percent, in 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
The effective tax rate of 26.7 percent for 2019 varied from the U.S. statutory tax rate of 21.0 percent primarily due to the impact of state income taxes, additional income tax expense associated with the sale of the U.S. baking business, and a goodwill impairment charge within the U.S. Retail Consumer Foods segment, partially offset by a noncash deferred tax benefit related to the integration of Ainsworth.

Income tax expense of $187.2 for 2019 reflects an immaterial adjustment related to the completion of the accounting for the income tax effects of the U.S. Tax Cuts and Jobs Act (the “Act”) during the third quarter. Despite the completion of the accounting, 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

21




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. We anticipate a full-year effective tax rate for 2020 in the range of 24.5 to 25.0 percent.

The income tax benefit of $477.6 for 2018 reflected the recognition of a net benefit of $765.8 related to our discrete adjustments resulting directly from the Act, partially offset by additional income tax expense related to a Pet Foods reporting unit goodwill impairment charge. The net benefit of $765.8 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. For further information, refer to Note 13: Income Taxes.

Integration Activities
We expect to incur approximately $50.0 in integration costs related to the Ainsworth acquisition, the majority of which are expected to be cash charges. Of the total anticipated integration costs, we expect approximately half to be employee-related. During 2019, we incurred integration charges of $32.1. All remaining integration costs are expected to be incurred by the end of 2020. For further information, refer to Note 3: Integration and Restructuring Costs.
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 expanded at the end of 2018 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.

The organization optimization program was completed during 2019, and as a result, we closed our international offices in China and Mexico, as well as the San Francisco and Burbank, California, offices. We incurred total cumulative restructuring costs of $74.6, of which $32.0 was incurred during 2019. The costs incurred were primarily employee-related, as the program resulted in total headcount reductions of approximately 450 full-time positions. For further information, refer to Note 3: Integration and Restructuring Costs.

Commodities Overview
The raw materials we use are primarily commodities, agricultural-based products, and packaging materials. The most significant of these materials, based on 2019 annual spend, are green coffee, peanuts, animal protein meals, oils and fats, and plastic containers. Green coffee and certain oils are traded on active regulated exchanges, and the price of these commodities fluctuates based on market conditions. Derivative instruments, including futures and options, are used to minimize the impact of price volatility for these commodities.

We source green coffee from more than 20 coffee-producing countries. Its price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries.

We source peanuts, animal protein meals, and oils and fats mainly from North America. We are one of the largest procurers of peanuts in the U.S. and frequently enter into long-term purchase contracts for various periods of time to mitigate the risk of a shortage of this commodity. The oils we purchase are mainly soybean and canola. The price of peanuts, animal protein meals, and oils are driven primarily by weather, which impacts crop sizes and yield, as well as global demand, especially from large importing countries such as China and India. In addition, the price of oils has been impacted by demand from the biofuels industry.

We frequently enter into long-term contracts to purchase plastic containers, which are sourced mainly from within the U.S. Plastic resin is made from petrochemical feedstock and natural gas feedstock, and the price can be influenced by feedstock, energy, and crude oil prices as well as global economic conditions.
Excluding the impact of derivative gains and losses, our overall commodity costs in 2019 were lower than in 2018, primarily due to lower costs for green coffee, slightly offset by higher costs for peanuts.
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,

22




and Café Bustelo branded coffee; the U.S. Retail Consumer Foods segment primarily includes domestic sales of Smucker’s, Jif, 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, Nature’s Recipe, and Pup-Peroni 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 2018 has been reclassified for this realignment.
  
Year Ended April 30,
  
2019
 
2018
 
% Increase    
(Decrease)    
Net sales:
 
 
 
 
 
U.S. Retail Coffee
$
2,122.3

 
$
2,086.8

 
2
 %
U.S. Retail Consumer Foods
1,761.5

 
1,985.6

 
(11
)
U.S. Retail Pet Foods
2,879.5

 
2,165.3

 
33

International and Away From Home
1,074.7

 
1,119.4

 
(4
)
Segment profit:
 
 
 
 
 
U.S. Retail Coffee
$
676.3

 
$
612.4

 
10
 %
U.S. Retail Consumer Foods
406.1

 
475.3

 
(15
)
U.S. Retail Pet Foods
503.4

 
439.4

 
15

International and Away From Home
198.5

 
200.1

 
(1
)
Segment profit margin:
 
 
 
 
 
U.S. Retail Coffee
31.9
%
 
29.3
%
 
 
U.S. Retail Consumer Foods
23.1

 
23.9

 
 
U.S. Retail Pet Foods
17.5

 
20.3

 
 
International and Away From Home
18.5

 
17.9

 
 

U.S. Retail Coffee
The U.S. Retail Coffee segment net sales increased $35.5 in 2019. Favorable volume/mix contributed 4 percentage points, driven by the Dunkin’ Donuts1850, 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 2 percentage points, primarily driven by the Folgers brand. Segment profit increased $63.9, primarily due to lower input costs and favorable volume/mix, partially offset by lower net price realization and an increase in marketing expense, the majority of which related to the 1850 launch.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment net sales decreased $224.1 in 2019, reflecting the impact of $247.3 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, driven by favorable volume/mix, which contributed 4 percentage points, primarily related to Smucker’s UncrustablesJif Power-Ups, and Crisco oils. The favorable volume/mix was partially offset by lower net price realization, which reduced net sales by 2 percentage points, driven by the Jif brand and a price decline on the Crisco brand at the beginning of the fiscal year. Segment profit decreased $69.2, and decreased $55.2 excluding the noncomparable segment profit in the prior year and the gain from the divestiture. The segment profit decline primarily resulted from lower net price realization and higher input costs, mostly related to peanut butter, and an increase in marketing expense driven by Jif Power-Ups. These factors were partially offset by the impact of favorable volume/mix. In response to an anticipated decline in our peanut costs, we implemented a list price decrease on select Jif products sold in the U.S. effective March 2019. Although not reflected in segment profit, a goodwill impairment charge of $97.9 related to the Natural Foods reporting unit within the U.S. Retail Consumer Foods segment was recognized in the fourth quarter of 2019. For additional information, see Note 7: Goodwill and Other Intangible Assets.
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment net sales increased $714.2 in 2019, reflecting the $747.0 contribution from Ainsworth. Excluding Ainsworth, net sales declined $32.8, primarily due to unfavorable volume/mix, which reduced net sales by

23




2 percentage points. The impact of the discontinuation of certain private label and Gravy Train® wet dog food products and declines for the Natural Balance brand were partially offset by gains for the Meow Mix and Nature’s Recipe brands. Segment profit increased $64.0, driven by the addition of Ainsworth. Excluding Ainsworth, segment profit decreased $29.1, as the impact of higher input costs was only partially offset by a reduction in marketing expense. In response to a sustained increase in input costs, we implemented a list price increase on select pet food products sold in the U.S. effective February 2019. Although not reflected in segment profit, an impairment charge of $107.2 associated with certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment was recognized in the third quarter of 2019, while the prior year included impairment charges of $176.9 related to the goodwill of the Pet Foods reporting unit and certain indefinite-lived trademarks within the segment. For additional information, see Note 7: Goodwill and Other Intangible Assets.
International and Away From Home
The International and Away From Home segment net sales decreased $44.7 in 2019, due to lower net price realization, $13.7 of unfavorable foreign currency exchange, and unfavorable volume/mix, each of which reduced net sales by 1 percentage point. The net sales decline also reflects the impact of $6.7 of noncomparable net sales in the prior year related to the divested U.S. baking business. Segment profit decreased $1.6, reflecting lower net price realization, the unfavorable impact of foreign currency exchange, and unfavorable volume/mix, which were offset by the impacts of lower input costs and lower marketing expense.

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. Total cash and cash equivalents decreased to $101.3 at April 30, 2019, 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.
  
Year Ended April 30,
  
2019
 
2018
Net cash provided by (used for) operating activities
$
1,141.2

 
$
1,218.0

Net cash provided by (used for) investing activities
(1,924.2
)
 
(277.6
)
Net cash provided by (used for) financing activities
699.0

 
(922.0
)
 
 
 
 
Net cash provided by (used for) operating activities
$
1,141.2

 
$
1,218.0

Additions to property, plant, and equipment
(359.8
)
 
(321.9
)
Free cash flow (A)
$
781.4

 
$
896.1

(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 $76.8 decrease in cash provided by operating activities in 2019 was mainly due to lower net income adjusted for noncash items. The reduction in working capital during the current year was comparable to the prior year, as an unfavorable impact related to trade receivables was mostly offset by a favorable impact related to income taxes. Trade receivables increased during the current year as a result of higher sales, while trade receivables decreased during the prior year. The favorable impact related to income taxes was due to lower federal payments and a $30.0 income tax refund during 2019. The lower federal payments in the current year were driven by the reduced statutory tax rate that resulted from U.S. tax reform.

24





Cash used for investing activities in 2019 consisted of $1.9 billion related to the Ainsworth acquisition, $359.8 in capital expenditures, and a $29.8 increase in our derivative cash margin account balances, partially offset by net proceeds from the divestiture of the U.S. baking business of $369.5. Cash used for investing activities in 2018 consisted primarily of $321.9 in capital expenditures, partially offset by a $30.9 reduction in our derivative cash margin account balances.

Cash provided by financing activities in 2019 consisted primarily of $1.5 billion in long-term debt proceeds and a $282.0 net increase in short-term borrowings, partially offset by long-term debt repayments of $700.0 and dividend payments of $377.9. For additional information on our new borrowings, see “Capital Resources” in this discussion and analysis. Cash used for financing activities in 2018 consisted primarily of $1.1 billion in long-term debt repayments, dividend payments of $350.3, and a $310.0 net decrease in short-term borrowings during the year, which were partially offset by $799.6 in long-term debt proceeds.

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 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 April 30, 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.

In addition to the legal proceedings discussed above, we are currently a defendant in CERT 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 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 April 30, 2019, 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.
  
April 30,
  
2019
 
2018
Current portion of long-term debt
$
798.5

 
$

Short-term borrowings
426.0

 
144.0

Long-term debt, less current portion
4,686.3

 
4,688.0

Total debt
$
5,910.8

 
$
4,832.0

Shareholders’ equity
7,970.5

 
7,891.1

Total capital
$
13,881.3

 
$
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 (“LIBOR”), 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. As of April 30, 2019, we have prepaid $700.0 on the Term Loan. The interest rate on the Term Loan at April 30, 2019, was 3.62 percent.


25




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 April 30, 2019, we had $426.0 of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 2.75 percent.
We are in compliance with all of our debt covenants. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 8: Debt and Financing Arrangements.
During 2019, we did not repurchase any common shares under a repurchase plan authorized by the Board. At April 30, 2019, 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, the first of which includes an initial investment of up to $250.0 to construct and equip the new facility. The scope of a phase 2 expansion will depend on product demand. Production is expected to begin at the new facility during the second half of calendar year 2019.
The following table presents certain cash requirements related to 2020 investing and financing activities based on our current expectations.
  
Projection
Year Ending
April 30, 2020
Principal payments – excludes the impact of potential debt refinancing
$
800.0

Dividend payments – based on current rates and common shares outstanding
390.0

Capital expenditures
310.0

Interest payments – excludes the impact of potential debt refinancing
 
205.0

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, principal and interest payments on debt outstanding, and share repurchases.
During 2019, we repatriated $122.9 of international cash in conjunction with the restructuring of our international holding and operating entities referenced in “Restructuring Activities” in this discussion and analysis to simplify and align our foreign structure with the current strategy of the International business. The applicable foreign withholding taxes and state income taxes were not significant. As of April 30, 2019, total cash and cash equivalents of $95.2 was held by our foreign subsidiaries, primarily in Canada. The undistributed earnings of our foreign subsidiaries remain permanently reinvested.

26




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; earnings before interest, taxes, depreciation, amortization, and impairment charges related to intangible assets (“EBITDA (as adjusted)”); 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 certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes.

Non-GAAP measures exclude certain items affecting comparability, that can significantly affect the year-over-year assessment of operating results, which include amortization expense and impairment charges related to intangible assets, integration and restructuring costs (“special project costs”), and unallocated gains and losses on commodity and foreign currency exchange derivatives (“unallocated derivative gains and losses”). The special project costs in the following table relate to specific integration and restructuring projects, and the unallocated derivative gains and losses reflect the changes in fair value of our commodity and foreign currency exchange contracts. During 2018, we expanded our non-GAAP measures to also exclude certain one-time discrete tax adjustments. These adjustments, which were finalized in 2019, include the effect of the one-time items associated with the Act, comprised of the remeasurement of our U.S. deferred tax assets and liabilities and the recognition of the one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”). Also included in the one-time discrete tax adjustments are the permanent tax impacts related to the goodwill impairment charges recorded during 2019 and 2018. For further details on these adjustments, refer to Note 13: Income Taxes, and Note 7: Goodwill and Other Intangible Assets. We believe that excluding these one-time discrete tax adjustments from our non-GAAP measures provides comparability across the periods presented.

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.

27




The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure. See page 20 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.
  
Year Ended April 30,
  
2019
 
2018
 
2017
 
2016
 
2015
Gross profit reconciliation:
 
 
 
 
 
 
 
 
 
Gross profit
$
2,915.7

 
$
2,836.1

 
$
2,835.3

 
$
2,967.8

 
$
1,968.7

Unallocated derivative losses (gains)
54.2

 
(37.3
)
 
27.2

 
(12.0
)
 
24.5

Cost of products sold – special project costs

 
3.9

 
5.7

 
12.2

 
6.2

Adjusted gross profit
$
2,969.9

 
$
2,802.7

 
$
2,868.2

 
$
2,968.0

 
$
1,999.4

Operating income reconciliation:
 
 
 
 
 
 
 
 
 
Operating income
$
928.6

 
$
1,044.0

 
$
1,042.6

 
$
1,146.3

 
$
785.3

Amortization
240.3

 
206.8

 
207.3

 
208.4

 
109.7

Goodwill impairment charges
97.9

 
145.0

 

 

 

Other intangible assets impairment charges
107.2

 
31.9

 
133.2

 

 
1.2

Unallocated derivative losses (gains)
54.2

 
(37.3
)
 
27.2

 
(12.0
)
 
24.5

Cost of products sold – special project costs

 
3.9

 
5.7

 
12.2

 
6.2

Other special project costs
64.1

 
45.4

 
76.9

 
135.9

 
56.6

Adjusted operating income
$
1,492.3

 
$
1,439.7

 
$
1,492.9

 
$
1,490.8

 
$
983.5

Net income reconciliation:
 
 
 
 
 
 
 
 
 
Net income
$
514.4

 
$
1,338.6

 
$
592.3

 
$
688.7

 
$
344.9

Income tax expense (benefit)
187.2

 
(477.6
)
 
286.1

 
289.2

 
178.1

Amortization
240.3

 
206.8

 
207.3

 
208.4

 
109.7

Goodwill impairment charges
97.9

 
145.0

 

 

 

Other intangible assets impairment charges
107.2

 
31.9

 
133.2

 

 
1.2

Unallocated derivative losses (gains)
54.2

 
(37.3
)
 
27.2

 
(12.0
)
 
24.5

Cost of products sold – special project costs

 
3.9

 
5.7

 
12.2

 
6.2

Other special project costs
64.1

 
45.4

 
76.9

 
135.9

 
56.6

Adjusted income before income taxes
$
1,265.3

 
$
1,256.7

 
$
1,328.7

 
$
1,322.4

 
$
721.2

Income taxes, as adjusted (A)
322.6

 
352.1

 
432.8

 
391.1

 
245.6

Adjusted income
$
942.7

 
$
904.6

 
$
895.9

 
$
931.3

 
$
475.6

Weighted-average shares – assuming dilution
113.7

 
113.6

 
116.1

 
119.5

 
103.7

Adjusted earnings per share – assuming dilution
$
8.29

 
$
7.96

 
$
7.72

 
$
7.79

 
$
4.59

EBITDA (as adjusted) reconciliation:
 
 
 
 
 
 
 
 
 
Net income
$
514.4

 
$
1,338.6

 
$
592.3

 
$
688.7

 
$
344.9

Income tax expense (benefit)
187.2

 
(477.6
)
 
286.1

 
289.2

 
178.1

Interest expense – net
207.9

 
174.1

 
163.1

 
171.1

 
79.9

Depreciation
206.0

 
206.3

 
211.7

 
221.7

 
157.5

Amortization
240.3

 
206.8

 
207.3

 
208.4

 
109.7

Goodwill impairment charges
97.9

 
145.0

 

 

 

Other intangible assets impairment charges
107.2

 
31.9

 
133.2

 

 
1.2

EBITDA (as adjusted)
$
1,560.9

 
$
1,625.1

 
$
1,593.7

 
$
1,579.1

 
$
871.3

Free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash provided by (used for) operating activities
$
1,141.2

 
$
1,218.0

 
$
1,059.0

 
$
1,461.0

 
$
739.1

Additions to property, plant, and equipment
(359.8
)
 
(321.9
)
 
(192.4
)
 
(201.4
)
 
(247.7
)
Free cash flow
$
781.4

 
$
896.1

 
$
866.6

 
$
1,259.6

 
$
491.4

(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. Income taxes, as adjusted has been further adjusted to reflect the exclusion of certain one-time discrete tax adjustments related to U.S. tax reform and the goodwill impairment charges recorded during 2019 and 2018.

28




OFF-BALANCE SHEET ARRANGEMENTS
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 are not material to our results of operations, financial condition, or cash flows.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations by fiscal year at April 30, 2019.
 
Total
 
2020
 
2021–2022
 
2023–2024
 
2025 and
beyond
Long-term debt obligations, including current portion (A)
$
5,500.0

 
$
800.0

 
$
1,950.0

 
$

 
$
2,750.0

Interest payments (B)
1,664.5

 
192.5

 
302.8

 
211.5

 
957.7

Operating lease obligations (C)
165.8

 
43.0

 
67.2

 
37.1

 
18.5

Purchase obligations (D)
1,574.1

 
1,361.1

 
185.2

 
26.4

 
1.4

Other liabilities (E)
314.1

 
27.9

 
54.5

 
34.0

 
197.7

Total
$
9,218.5

 
$
2,424.5

 
$
2,559.7

 
$
309.0

 
$
3,925.3

(A)
Long-term debt obligations, including current portion, excludes the impact of offering discounts, make-whole payments, and debt issuance costs.
(B)
Interest payments consists of the interest payments on our long-term debt, which reflect estimated payments for our variable-rate debt based on the current interest rate outlook, and exclude the mark-to-market impact of active interest rate contracts.
(C)
Operating lease obligations consists of the minimum rental commitments under non-cancelable operating leases.
(D)
Purchase obligations includes agreements that are enforceable and legally bind us to purchase goods or services, which primarily consist of obligations related to normal, ongoing purchase obligations in which we have guaranteed payment to ensure availability of raw materials. We expect to receive consideration for these purchase obligations in the form of materials and services. These purchase obligations do not represent all future purchases expected, but represent only those items for which we are contractually obligated. Amounts included in the table above represent our current best estimate of payments due. Actual cash payments may vary due to the variable pricing components of certain purchase obligations.
(E)
Other liabilities consists primarily of projected commitments associated with our defined benefit pension and other postretirement benefit plans, as well as $5.4 related to capital lease obligations. The liability for unrecognized tax benefits and tax-related net interest of $17.1 under FASB Accounting Standards Codification (“ASC”) 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

The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Trade Marketing and Merchandising Programs: In order to support our products, various promotional activities are 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. The costs of these programs are classified as a reduction of sales. 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. During 2019, 2018, and 2017, subsequent period adjustments were less than 2 percent of both consolidated pre-tax income and cash provided by operating activities. These promotional expenditures, including amounts classified as a reduction of sales, represented 36 percent of net sales in 2019. The possibility exists that reported results could be different if factors such as the level and success of the promotional programs or other conditions differ from expectations.
 

29




Income Taxes: We account for income taxes using the liability method. In the ordinary course of business, we are exposed to uncertainties related to tax filing positions and periodically assess the technical merits of these tax positions for all tax years that remain subject to examination, based upon the latest information available. For material uncertain tax positions, we have recognized a liability for unrecognized tax benefits, including any applicable interest and penalty charges.

We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more likely than not that all or some portion of such assets will not be realized. Valuation allowances related to deferred tax assets can be affected by changes in tax laws, statutory tax rates, and projected future taxable income levels. Changes in estimated realization of deferred tax assets would result in an adjustment to income in the period in which that determination is made, unless such changes are determined to be an adjustment to goodwill within the allowable measurement period under the acquisition method of accounting.
The future tax benefit arising from the net deductible temporary differences and tax carryforwards is $163.6 and $129.1 at April 30, 2019 and 2018, respectively. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of operations. For those jurisdictions where the expiration date of tax carry-forwards or the projected operating results indicate that realization is not likely, a valuation allowance would have been provided.

As of April 30, 2019, the undistributed earnings of our foreign subsidiaries, primarily in Canada, remain permanently reinvested.
Goodwill and Other Indefinite-Lived Intangible Assets: A significant portion of our assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment on February 1, and more often if indicators of impairment exist. At April 30, 2019, the carrying value of goodwill and other intangible assets totaled $13.0 billion, compared to total assets of $16.7 billion and total shareholders’ equity of $8.0 billion. If the carrying value of these assets exceeds the current estimated fair value, the asset is considered impaired, and this would result in a noncash charge to earnings. Any such impairment charge would reduce earnings and could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results.
To test for goodwill impairment, we estimate the fair value of each of our reporting units using both a discounted cash flow valuation technique and a market-based approach. The impairment test incorporates estimates of future cash flows; allocations of certain assets, liabilities, and cash flows among reporting units; future growth rates; terminal value amounts; and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimates and projections used in the calculation of fair value are consistent with our current and long-range plans, including anticipated changes in market conditions, industry trends, growth rates, and planned capital expenditures. Changes in forecasted operations and other estimates and assumptions could impact the assessment of impairment in the future.
At April 30, 2019, goodwill totaled $6.3 billion. Goodwill is substantially concentrated within the U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods segments. During 2019, we recognized a goodwill impairment charge of $97.9 related to the goodwill of the Natural Foods reporting unit within the U.S. Retail Consumer Foods segment, which was driven by a reduction in our long-term net sales and profitability projections. There is no goodwill remaining within the Natural Foods reporting unit as a result of this charge. The estimated fair value of each remaining reporting unit was substantially in excess of its carrying value as of the annual test date, with the exception of the Pet Foods reporting unit, for which its fair value exceeded its carrying value by approximately 1 percent. A sensitivity analysis was performed for the Pet Foods reporting unit, assuming a hypothetical 50-basis-point decrease in the expected long-term growth rate or a hypothetical 50-basis-point increase in the weighted-average cost of capital, and both scenarios independently yielded an estimated fair value for the Pet Foods reporting unit below carrying value.
Other indefinite-lived intangible assets, consisting entirely of trademarks, are also tested for impairment at least annually and more often if events or changes in circumstances indicate their carrying value may not be recoverable. To test these assets for impairment, we estimate the fair value of each asset based on a discounted cash flow model using various inputs, including projected revenues, an assumed royalty rate, and a discount rate. Changes in these estimates and assumptions could impact the assessment of impairment in the future.

30




At April 30, 2019, other indefinite-lived intangible assets totaled $3.0 billion. Trademarks that represent our leading brands comprise more than 90 percent of the total carrying value of other indefinite-lived intangible assets. As of April 30, 2019, the estimated fair value was substantially in excess of the carrying value for the majority of these leading brand trademarks, and in all instances, the estimated fair value exceeded the carrying value by greater than 10 percent, with the exception of the indefinite-lived trademarks within the U.S. Retail Pet Foods segment. During 2019 and 2018, we recognized impairment charges of $107.2 and $31.9, respectively, related to certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, to the extent that the carrying value exceeded the estimated fair value.
The carrying values of the goodwill and indefinite-lived intangible assets within the U.S. Retail Pet Foods segment remain susceptible to future impairment charges given the narrow differences between fair value and carrying value at
April 30, 2019. In addition, any significant adverse changes to the forecasted net sales or profitability, as well as any significant adverse changes in strategy, could result in future impairment charges which could be material. For additional information, see Note 7: Goodwill and Other Intangible Assets.
Pension and Other Postretirement Benefit Plans: To determine the ultimate obligation under our defined benefit pension and other postretirement benefit plans, we must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. Various actuarial assumptions must be made in order to predict and measure costs and obligations many years prior to the settlement date, the most significant being the interest rates used to discount the obligations of the plans, the long-term rates of return on the plans’ assets, mortality assumptions, assumed pay increases, and the health care cost trend rates. We, along with third-party actuaries and investment managers, review all of these assumptions on an ongoing basis to ensure that the most reasonable information available is being considered.
We utilize a spot rate methodology for the estimation of service and interest cost for our plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. For 2020 expense recognition, we will use weighted-average discount rates for the U.S. defined benefit pension plans of 3.99 percent to determine benefit obligation, 4.20 percent to determine service cost, and 3.61 percent to determine interest cost, and a rate of compensation increase of 3.56 percent. For the Canadian defined benefit pension plans, we will use weighted-average discount rates of 3.21 percent to determine benefit obligation, 3.29 percent to determine service cost, and 2.86 percent to determine interest cost, and a rate of compensation increase of 3.00 percent. In addition, we anticipate using an expected rate of return on plan assets of 5.28 percent and 5.00 percent for the U.S. and Canadian defined benefit pension plans, respectively.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K 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, those set forth under the caption “Risk Factors” of this Annual Report on Form 10-K, as well as the following:

our ability to achieve synergies and cost savings related to the Ainsworth acquisition in the amounts and within the time frames currently anticipated;
our ability to achieve cost savings related to our cost management programs in the amounts and within the time frames currently anticipated;
our ability to generate sufficient cash flow to meet our cash deleveraging objectives;
volatility of commodity, energy, and other input costs;
risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks;
the availability of reliable transportation on acceptable terms;

31




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;
the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation;
general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
the impact of food security concerns involving either our products or our competitors’ products;
the impact of accidents, extreme weather, and natural disasters;
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;
the timing and amount of capital expenditures and share repurchases;
impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets;
the impact of new or changes to existing governmental laws and regulations and their application, including tariffs;
the outcome of tax examinations, changes in tax laws, and other tax matters;
foreign currency and interest rate fluctuations; and
risks related to other factors described under “Risk Factors” in other reports and statements we have filed with the Securities and Exchange Commission.
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 Annual 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 Annual Report on
Form 10-K.
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK

The following discussions about our market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices.
Interest Rate Risk: The fair value of our cash and cash equivalents at April 30, 2019, 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, LIBOR, and commercial paper rates in the U.S.
We utilize derivative instruments to manage interest risk associated with anticipated debt transactions, as well as to manage changes in the fair value of our long-term debt. At the inception of an interest rate contract, the instrument is evaluated and documented for qualifying hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the contract are deferred and included as a component of accumulated other comprehensive income (loss), and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the contract is recognized at fair value on the balance sheet, and changes in the fair value are recognized in interest expense. Generally, changes in the fair value of the contract are equal to changes in the fair value of the underlying debt and have no net impact on earnings.
We entered into interest rate contracts in November 2018 and June 2018, with notional values of $300.0 and $500.0, respectively, to manage our exposure to interest rate volatility associated with anticipated debt financing in 2020. These interest rate contracts are designated as cash flow hedges, and as a result, unrealized losses of $49.1 were deferred in accumulated other comprehensive income (loss) at April 30, 2019. A hypothetical 10 percent decrease in treasury rates at April 30, 2019, would result in a loss of $28.4 on the fair value of these interest rate contracts.
In 2018, 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.

32




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 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 April 30, 2019, the remaining benefit of $20.5 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 April 30, 2019, would increase the fair value of our long-term debt by $283.9.
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 April 30, 2019, 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 April 30, 2019, 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 2019. 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.
  
Year Ended April 30,
  
2019
 
2018
High
$
51.6

 
$
36.0

Low
25.3

 
17.0

Average
37.0

 
26.8

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 these derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.

33




Item 8.
Financial Statements and Supplementary Data.
THE J. M. SMUCKER COMPANY
INDEX TO FINANCIAL STATEMENTS
 
Page No.
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Report of Management on Responsibility for Financial Reporting
Consolidated Balance Sheets at April 30, 2019 and 2018
For the years ended April 30, 2019, 2018, and 2017:
 
Statements of Consolidated Income
Statements of Consolidated Comprehensive Income
Statements of Consolidated Cash Flows
Statements of Consolidated Shareholders’ Equity
Notes to Consolidated Financial Statements


34




REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

Shareholders
The J. M. Smucker Company
Management is responsible for establishing and maintaining adequate accounting and internal control systems over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance that we have the ability to record, process, summarize, and report reliable financial information on a timely basis.
Our management, with the participation of the principal financial officer and principal executive officer, assessed the effectiveness of the internal control over financial reporting as of April 30, 2019. In making this assessment, we used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“the COSO criteria”).
Based on our assessment of internal control over financial reporting under the COSO criteria, we concluded the internal control over financial reporting was effective as of April 30, 2019.
Ernst & Young LLP, an independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of April 30, 2019, and their report thereon is included on page 36 of this report.
 
Mark T. Smucker
 
Mark R. Belgya
 
 
President and
 
Vice Chair and
 
 
Chief Executive Officer
 
Chief Financial Officer
 
 

35




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
The J. M. Smucker Company
Opinion on Internal Control Over Financial Reporting
We have audited The J. M. Smucker Company’s internal control over financial reporting as of April 30, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). In our opinion, The J. M. Smucker Company (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of April 30, 2019 and 2018, and the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2019, and the related notes and our report dated June 17, 2019, expressed an unqualified opinion thereon.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP                             
Akron, Ohio
June 17, 2019

36




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Shareholders
The J. M. Smucker Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The J. M. Smucker Company (the “Company”) as of April 30, 2019 and 2018, and the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of April 30, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 17, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1955.
Akron, Ohio
June 17, 2019

37




REPORT OF MANAGEMENT ON RESPONSIBILITY
FOR FINANCIAL REPORTING

Shareholders
The J. M. Smucker Company
Management of The J. M. Smucker Company is responsible for the preparation, integrity, accuracy, and consistency of the consolidated financial statements and the related financial information in this report. Such information has been prepared in accordance with U.S. generally accepted accounting principles and is based on our best estimates and judgments.
We maintain systems of internal accounting controls supported by formal policies and procedures that are communicated throughout the Company. There is a program of audits performed by our internal audit staff designed to evaluate the adequacy of and adherence to these controls, policies, and procedures.
Ernst & Young LLP, an independent registered public accounting firm, has audited our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Management has made all financial records and related data available to Ernst & Young LLP during its audit.
Our audit committee, comprised of three independent non-employee members of the Board of Directors, meets regularly with the independent registered public accounting firm and management to review the work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the independent registered public accounting firm. The audit committee also regularly satisfies itself as to the adequacy of controls, systems, and financial records. The director of the internal audit department is required to report directly to the audit committee as to internal audit matters.
It is our best judgment that our policies and procedures, our program of internal and independent audits, and the oversight activity of the audit committee work together to provide reasonable assurance that our operations are conducted according to law and in compliance with the high standards of business ethics and conduct to which we subscribe.
 
Mark T. Smucker
 
Mark R. Belgya
 
 
President and
 
Vice Chair and
 
 
Chief Executive Officer
 
Chief Financial Officer
 

38




THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED INCOME
  
Year Ended April 30,
(Dollars in millions, except per share data)
2019
 
2018
 
2017
Net sales
$
7,838.0

 
$
7,357.1

 
$
7,392.3

Cost of products sold
4,922.3

 
4,521.0

 
4,557.0

Gross Profit
2,915.7

 
2,836.1

 
2,835.3

Selling, distribution, and administrative expenses
1,508.6

 
1,362.9

 
1,379.6

Amortization
240.3

 
206.8

 
207.3

Goodwill impairment charges
97.9

 
145.0

 

Other intangible assets impairment charges
107.2

 
31.9

 
133.2

Other special project costs (A)
64.1

 
45.4

 
76.9

Other operating expense (income) – net
(31.0
)
 
0.1

 
(4.3
)
Operating Income
928.6

 
1,044.0

 
1,042.6

Interest expense – net
(207.9
)
 
(174.1
)
 
(163.1
)
Other income (expense) – net
(19.1
)
 
(8.9
)
 
(1.1
)
Income Before Income Taxes
701.6

 
861.0

 
878.4

Income tax expense (benefit)
187.2

 
(477.6
)
 
286.1

Net Income
$
514.4

 
$
1,338.6

 
$
592.3

Earnings per common share:
 
 
 
 
 
Net Income
$
4.52

 
$
11.79

 
$
5.11

Net Income – Assuming Dilution
$
4.52

 
$
11.78

 
$
5.10

(A)
Other special project costs includes integration and restructuring costs. For more information, see Note 3: Integration and Restructuring Costs.
See notes to consolidated financial statements. 





THE J. M. SMUCKER COMPANY
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
  
Year Ended April 30,
(Dollars in millions)
2019
 
2018
 
2017
Net income
$
514.4

 
$
1,338.6

 
$
592.3

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
(19.1
)
 
26.6

 
(29.9
)
Cash flow hedging derivative activity, net of tax
(37.5
)
 
2.0

 
0.4

Pension and other postretirement benefit plans activity, net of tax
(9.0
)
 
14.3

 
34.1

Available-for-sale securities activity, net of tax
0.5

 
(1.2
)
 
0.4

Total Other Comprehensive Income (Loss)
(65.1
)
 
41.7

 
5.0

Comprehensive Income
$
449.3

 
$
1,380.3

 
$
597.3

See notes to consolidated financial statements.

39




THE J. M. SMUCKER COMPANY
CONSOLIDATED BALANCE SHEETS
  
  April 30,
(Dollars in millions)
2019
 
2018
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
101.3

 
$
192.6

Trade receivables, less allowance for doubtful accounts
503.8

 
385.6

Inventories:
 
 
 
Finished products
590.8

 
542.1

Raw materials
319.5

 
312.3

Total Inventory
910.3

 
854.4

Other current assets
109.8

 
122.4

Total Current Assets
1,625.2

 
1,555.0

Property, Plant, and Equipment
 
 
 
Land and land improvements
122.1

 
120.1

Buildings and fixtures
903.2

 
812.6

Machinery and equipment
2,185.0

 
2,111.5

Construction in progress
321.8

 
212.1

Gross Property, Plant, and Equipment
3,532.1

 
3,256.3

Accumulated depreciation
(1,619.7
)
 
(1,527.2
)
Total Property, Plant, and Equipment
1,912.4

 
1,729.1

Other Noncurrent Assets
 
 
 
Goodwill
6,310.9

 
5,942.2

Other intangible assets – net
6,718.8

 
5,916.5

Other noncurrent assets
144.0

 
158.4

Total Other Noncurrent Assets
13,173.7

 
12,017.1

Total Assets
$
16,711.3

 
$
15,301.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
 
 
 
Accounts payable
$
591.0

 
$
512.1

Accrued compensation
85.0

 
79.8

Accrued trade marketing and merchandising
142.7

 
101.6

Dividends payable
96.7

 
88.6

Current portion of long-term debt
798.5

 

Short-term borrowings
426.0

 
144.0

Other current liabilities
201.6

 
107.7

Total Current Liabilities
2,341.5

 
1,033.8

Noncurrent Liabilities
 
 
 
Long-term debt, less current portion
4,686.3

 
4,688.0

Defined benefit pensions
139.1

 
144.1

Other postretirement benefits
65.0

 
61.9

Deferred income taxes
1,398.6

 
1,377.2

Other noncurrent liabilities
110.3

 
105.1

Total Noncurrent Liabilities
6,399.3

 
6,376.3

Total Liabilities
8,740.8

 
7,410.1

Shareholders’ Equity
 
 
 
Serial preferred shares – no par value:
Authorized – 6,000,000 shares; outstanding – none

 

Common shares – no par value:
Authorized – 300,000,000 shares; outstanding – 113,742,296 at April 30, 2019, and 113,572,840
  at April 30, 2018 (net of 32,755,434 and 32,924,890 treasury shares, respectively), at stated value
28.9

 
28.9

Additional capital
5,755.8

 
5,739.7
</