JM SMUCKER CO Management’s discussion and analysis of financial condition and results of operations. (Form 10-Q)
(Dollars and shares in millions, unless otherwise indicated, except per share data)
This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended
July 31, 2022and 2021. All comparisons presented are to the corresponding period of the prior year, unless otherwise noted. On January 31, 2022, we sold the natural beverage and grains businesses to Nexus. The transaction included products sold under the R.W. Knudsen and TruRoots brands, inclusive of certain trademarks, a licensing agreement for Santa Cruz Organic beverages, dedicated manufacturing and distribution facilities in Chico, California, and Havre de Grace, Maryland, and approximately 150 employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of $106.7in 2022, primarily included in the U.S. Retail Consumer Foodssegment. Final net proceeds from the divestiture were $98.7, which were inclusive of a working capital adjustment and cash transaction costs. We recognized a pre-tax gain of $28.3related to the natural beverage and grains businesses, including $1.6during the three months ended July 31, 2022, within other operating expense (income) - net in the Condensed Statement of Consolidated Income, upon finalization of the working capital adjustment. The remaining pre-tax gain was recognized during the second half of 2022. On December 1, 2021, we sold the private label dry pet food business to Diamond Pet Foods. The transaction included dry pet food products sold under private label brands, a dedicated manufacturing facility located in Frontenac, Kansas, and approximately 220 employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of $62.3in 2022, included in the U.S. Retail Pet Foodssegment. Final net proceeds from the divestiture were $32.9, which were net of cash transaction costs. Upon completion of this transaction during the third quarter of 2022, we recognized a pre-tax loss of $17.1. We are the owner of all trademarks referenced herein, except for the following, which are used under license: Dunkin' is a trademark of DD IP Holder LLC, and Rachael Rayis a trademark of Ray Marks II LLC. The Dunkin' brand is licensed to us for packaged coffee products, including K-Cup® pods, sold in retail channels such as grocery stores, mass merchandisers, club stores, e-commerce, and drug stores. Information in this document does not pertain to products for sale in Dunkin' restaurants. K-Cup® is a trademark of Keurig Green Mountain, Inc., used with permission. Trends Affecting our Business The spread of the novel coronavirus ("COVID-19") throughout the United Statesand the international community has had, and will continue to have, an impact on financial markets, economic conditions, and portions of our business and industry. During 2022, we experienced significant input cost inflation and a dynamic macroeconomic environment, which we anticipate will persist through 2023. In addition, the higher costs required us to implement material price increases across all of our businesses in 2022, and we anticipate the price elasticity of demand will continue to increase during 2023 as consumers respond to broader inflation pressures. During the first three months of 2023, we continued to experience disruption in our supply chain network, including labor shortages and the supply of certain ingredients, packaging, and other sourced materials, which has resulted in the continued elevation of transportation and other supply chain costs. It is possible that more significant disruptions could occur if the COVID-19 pandemic and certain geopolitical events continue to impact markets around the world, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances, as well as labor shortages. We also continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity, and maximize product availability. We have maintained production at all our facilities and availability of appointments at distribution centers. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. However, to the extent that high demand levels or the current supply chain environment continues to disrupt order fulfillment, we may experience volume loss and elevated penalties. Although we do not have any operations in Russiaor Ukraine, we continue to monitor the environment for any significant escalation or expansion of economic or supply chain disruptions, as well as broader inflationary costs. During the first three months of 2023, the conflict between Russiaand Ukraineprimarily impacted the price of grains, oils, and fat-based products, which may continue to have an adverse impact on our results of operations during 2023. 19
Overall, the impact of COVID-19 and the conflict between
Russiaand Ukraine, including broad-based supply chain disruptions and rising levels of inflation, remain uncertain and ultimately depend on the length and severity of the conflict and the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response to the pandemic; vaccination rates and effectiveness; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 and the conflict between Russiaand Ukrainewill impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity. Results of Operations Three Months Ended July 31, % Increase 2022 2021 (Decrease) Net sales $ 1,873.0 $ 1,858.01 % Gross profit $ 552.5 $ 639.4(14) % of net sales 29.5 % 34.4 % Operating income $ 179.7 $ 259.4(31) % of net sales 9.6 % 14.0 % Net income: Net income $ 109.8 $ 153.9(29) Net income per common share - assuming dilution $ 1.03 $ 1.42(27) Adjusted gross profit (A) $ 587.4 $ 646.2(9) % of net sales 31.4 % 34.8 % Adjusted operating income (A) $ 270.0 $ 323.4(17) % of net sales 14.4 % 17.4 % Adjusted income: (A) Income $ 178.1 $ 205.8(13) Earnings per share - assuming dilution $ 1.67 $ 1.90(12)
(A) We use non-GAAP financial measures to assess our performance. Refer to the “Non-GAAP Financial Measures” section in this discussion and analysis for a reconciliation to the comparable GAAP financial measure.
Net SalesThree Months Ended July 31, Increase 2022 2021 (Decrease) % Net sales $ 1,873.0 $ 1,858.0 $ 15.01 % Private label dry pet food divestiture - (25.1) 25.1 1 Natural beverage and grains divestiture - (33.4) 33.4 2 Foreign currency exchange 4.4 - 4.4 -
Revenue excluding disposals and foreign exchange (A)
$ 1,877.4 $ 1,799.5 $ 77.94 %
Amounts may not add up due to rounding.
(A) Net sales excluding disposals and foreign exchange is a non-GAAP financial measure used to assess performance internally. This measure provides useful information to investors because it allows comparison of results from year to year.
Net sales in the first three months of 2023 increased
$15.0, or 1 percent, which includes $58.5of noncomparable net sales in the prior year related to divestitures. Net sales excluding divestitures and foreign currency exchange increased $77.9, or 4 percent. Higher net price realization contributed 14 percentage points to net sales, primarily reflecting list price increases for the U.S.Retail Coffee, U. S Retail Pet Foods, and International and Away From Home businesses, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall. The favorable net price realization was partially offset by a 9 percentage point decrease from volume/mix, primarily due to manufacturing downtime related to the recall, as well as declines for mainstream roast and ground coffee. 20
The following table presents the components of operating income as a percentage of net sales. Three Months Ended July 31, 2022 2021 Gross profit 29.5 % 34.4 % Selling, distribution, and administrative expenses: Marketing 5.1 % 5.3 % Selling 3.7 3.3 Distribution 3.9 3.7 General and administrative 5.6 5.1 Total selling, distribution, and administrative expenses 18.4 % 17.4 % Amortization 3.0 3.0 Other special project costs 0.1 0.1 Other operating expense (income) - net (1.5) (0.1) Operating income 9.6 % 14.0 %
Amounts may not add up due to rounding.
Gross profit decreased
Operating income decreased
$79.7, or 31 percent, primarily reflecting the decrease in gross profit and a $19.8increase in selling, distribution, and administrative ("SD&A") expenses, partially offset by a $26.8increase in net other operating income, primarily reflecting an anticipated insurance recovery related to the Jif peanut butter product recall, as discussed in Note 14: Contingencies. Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. Refer to "Non-GAAP Financial Measures" in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments ("adjusted gross profit") decreased $58.8, or 9 percent, in the first quarter of 2023, primarily reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses, as compared to GAAP gross profit. Operating income excluding non-GAAP adjustments ("adjusted operating income") decreased $53.4, or 17 percent, as compared to the prior year.
Net interest expense decreased
$4.0in the first three months of 2023, primarily driven by prepaying the $400.0Senior Notes due March 15, 2022, during the first quarter of 2022, partially offset by increased debt outstanding as compared to the prior year. For additional information, see "Capital Resources" in this discussion and analysis.
Income taxes decreased
$20.0, or 39 percent, in the first three months of 2023, primarily due to the decrease in income before income taxes and a lower effective income tax rate of 22.2 percent, as compared to 25.0 percent for the first quarter of 2022. During both the current and prior years, the effective income tax rates varied from the U.S.statutory income tax rate of 21.0 percent, primarily due to the impact of state income taxes. The effective income tax rate for the three months ended July 31, 2022, reflects the favorable deferred tax benefit of a state income tax rate reduction enacted during the quarter. We anticipate a full-year effective income tax rate for 2023 of approximately 24.2 percent. For further information, refer to Note 12: Income Taxes. 21
A restructuring program was approved by the Board during 2021, associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco, Natural Balance, private label dry pet food, and natural beverage and grains businesses. For additional information related to the divestitures, see Note 4: Divestitures. During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close our
Suffolk, Virginia, facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production to JDE Peet's N.V., as anticipated. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the recent divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the closure of our Ripon, Wisconsin, production facility by the end of calendar year 2022 to further optimize operations for our U.S. Retail Consumer Foodsbusiness. We expect to incur costs of approximately $70.0associated with the restructuring activities planned to date. More than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents employee-related costs. We anticipate the planned activities associated with this restructuring program will be completed by the end of 2023. We have incurred total cumulative restructuring costs of $55.1, of which $2.5and $6.4were incurred during the three months ended July 31, 2022and 2021, respectively. For further information, refer to Note 3: Integration and Restructuring Costs.
We have three reportable segments:
U.S. Retail Pet Foods, U.S.Retail Coffee, and U.S. Retail Consumer Foods. The presentation of International and Away From Home represents a combination of all other operating segments that are not individually reportable. The U.S. Retail Pet Foodssegment primarily includes the domestic sales of Rachael Ray Nutrish, Meow Mix, Milk-Bone, 9Lives, Kibbles 'n Bits, Pup-Peroni, and Nature's Recipe branded products; the U.S.Retail Coffee segment primarily includes the domestic sales of Folgers, Dunkin', and Café Bustelo branded coffee; and the U.S. Retail Consumer Foodssegment primarily includes the domestic sales of Smucker's and Jif branded products. International and Away From Home includes the sale of products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores). Three Months Ended July 31, % Increase 2022 2021 (Decrease) Net sales: U.S. Retail Pet Foods $ 729.0 $ 648.013 % U.S. Retail Coffee 597.9 543.2 10 U.S. Retail Consumer Foods 311.1 435.6 (29) International and Away From Home 235.0 231.2 2 Segment profit: U.S. Retail Pet Foods $ 120.3 $ 79.951 % U.S. Retail Coffee 145.9 151.3 (4) U.S. Retail Consumer Foods 54.8 118.7 (54) International and Away From Home 16.6 32.9 (50) Segment profit margin: U.S. Retail Pet Foods 16.5 % 12.3 % U.S. Retail Coffee 24.4 27.9 U.S. Retail Consumer Foods 17.6 27.2 International and Away From Home 7.1 14.2 22
The U.S. Retail Pet Foodssegment net sales increased $81.0in the first three months of 2023, inclusive of the impact of $25.1of noncomparable net sales in the prior year related to the divested private label dry pet food business. Excluding the noncomparable impact of the divested business, net sales increased $106.1, or 17 percent. Higher net price realization increased net sales by 20 percentage points, primarily reflecting list price increases across the portfolio, partially offset by a decreased contribution from volume/mix of 3 percentage points. Segment profit increased $40.4, primarily reflecting the favorable net impact of higher net price realization and increased commodity and ingredient, packaging, and manufacturing costs, as well as lower marketing spend, partially offset by the unfavorable volume/mix.
U.S.Retail Coffee segment net sales increased $54.7in the first three months of 2023. Net price realization contributed 24 percentage points to net sales, primarily reflecting list price increases across the portfolio. Unfavorable volume/mix decreased net sales by 14 percentage points, primarily driven by the Folgers and Dunkin' brands. Segment profit decreased $5.4, primarily reflecting the unfavorable volume/mix and increased marketing investment, partially offset by a favorable net impact of higher net price realization and increased commodity costs.
The U.S. Retail Consumer Foodssegment net sales decreased $124.5in the first three months of 2023, inclusive of the impact of $31.4of noncomparable net sales in the prior year related to the divested natural beverage and grains businesses. Excluding the noncomparable impact of the divested businesses, net sales decreased $93.1, or 23 percent. Volume/mix decreased net sales by 20 percentage points, primarily driven by manufacturing downtime for Jif peanut butter, partially offset by an increase for Smucker's Uncrustables® frozen sandwiches. Furthermore, lower net price realization decreased net sales by 3 percentage points, primarily driven by Jif peanut butter, inclusive of the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall, partially offset by list price increases across the remainder of the portfolio. Segment profit decreased $63.9, primarily reflecting the impact of the recall and the noncomparable segment profit in the prior year related to the divested natural beverage and grains businesses. Excluding the estimated unfavorable impact of the recall and divested businesses, segment profit increased primarily due to a net favorable impact of higher net price realization and higher commodity and ingredient, manufacturing, and packaging costs, as well as favorable volume/mix.
International and away from home
International and Away From Home net sales increased
$3.8in the first three months of 2023, including the noncomparable impact of $2.0of net sales in the prior year related to the divested natural beverage and grains businesses and $4.4of unfavorable foreign currency exchange. Excluding the noncomparable impact of the divested businesses and foreign currency exchange, net sales increased $10.2, or 4 percent, reflecting a 15 percent increase for the Away From Home operating segment, partially offset by a 6 percent decrease for the International operating segment. Net price realization contributed a 4 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products and baking mixes and ingredients, partially offset by the unfavorable impact of customer returns and fees related to the Jif peanut butter product recall. Segment profit decreased $16.3, primarily reflecting the impact of the recall and higher commodity costs, partially offset by higher net pricing.
Financial position – Liquidity and capital resources
Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. At
July 31, 2022, total cash and cash equivalents was $151.6, compared to $169.9at April 30, 2022. 23
The following table presents certain cash flow information.
Three months completed
2022 2021 Net cash provided by (used for) operating activities
$ (39.0) $ 137.8Net cash provided by (used for) investing activities (71.5) (80.0) Net cash provided by (used for) financing activities 91.9 (223.3) Net cash provided by (used for) operating activities $ (39.0) $ 137.8Additions to property, plant, and equipment (88.3) (68.0) Free cash flow (A) $ (127.3) $ 69.8
(A) Free cash flow is a non-GAAP financial measure used by management to assess the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share buybacks and other business objectives.
$176.8decrease in cash provided by operating activities in the first three months of 2023 was primarily driven by the $70.0contribution to our U.S.qualified defined benefit pension plans during the first quarter of 2023, lower net income adjusted for noncash items in the current year, and greater working capital requirements in 2023. The increase in cash required to fund working capital, as compared to the prior year, reflected an increase in inventory levels compared to the prior year, primarily driven by the recent input cost inflation, as well as timing of payments for trade receivables and accounts payable and a decrease in accrued incentive compensation. Cash used for investing activities in the first three months of 2023 consisted primarily of $88.3in capital expenditures, primarily driven by investments in the new manufacturing and distribution facilities in McCalla, Alabama, and capacity expansions in Longmont, Colorado, to support growth for the Smucker's Uncrustables brand, as well as plant maintenance across our facilities. Partially offsetting the use of cash in 2023 was a decrease of $12.2in our derivative cash margin account balances. Cash provided by investing activities in the first three months of 2022 consisted primarily of $68.0in capital expenditures, which reflected capacity expansion at our Longmontfacility, as well as plant maintenance across our facilities. An increase of $11.4in our derivative cash margin account balances also contributed to the use of cash in 2022. Cash provided by financing activities in the first three months of 2023 consisted primarily of a net increase in short-term borrowings of $207.0, partially offset by dividend payments of $105.1. Cash used for financing activities in the first three months of 2022 consisted primarily of long-term debt repayments of $407.0and dividend payments of $97.2, partially offset by a net increase in short-term borrowings of $284.0.
Vendor Financing Program
As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, range from 0 to 180 days. We have an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier's decision to enter into these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers' decisions to sell amounts under these arrangements. As of
July 31, 2022and April 30, 2022, $353.2and $314.3of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During the first three months of 2023 and 2022, we paid $338.8and $267.7, respectively, to a financial institution for payment obligations that were settled through the supplier financing program. 24
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 Pet Brands, the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable at July 31, 2022. Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings would 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 the Defendants who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. In June 2019, the state agency responsible for administering the Proposition 65 program, OEHHA, approved a regulation clarifying that cancer warnings are not required for coffee under Proposition 65, and in August 2020, the trial court granted the Defendants' motion for summary judgment based on the regulation. CERT appealed the ruling in November 2020to the California Court of Appeals for the Second Appellate District, which is currently pending. We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts in California, Florida, Illinois, Missouri, New York, Texas, Washington, and Washington D.C., but have been transferred to the United States District Court for the Western District of Missourifor coordinated pre-trial proceedings. The plaintiffs assert claims arising under various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products. We are a defendant in five putative class action lawsuits as a result of our voluntary recall of select Jif peanut butter products. The plaintiffs assert causes of action for negligence, breach of warranties, fraudulent concealment, unjust enrichment, and, in some of the lawsuits, violations of state consumer protection and deceptive trade practices laws. Their claims are premised on allegations that we engaged in business practices designed to mislead the public regarding the safety of Jif peanut butter for human consumption due to the alleged presence of salmonella. The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as of July 31, 2022, and the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere.
May 2022, we initiated a voluntary recall of select Jif peanut butter products produced at our Lexington, Kentucky, facility and sold primarily in the U.S., due to potential salmonella contamination. At that time, we also suspended the manufacturing of these products at our Lexingtonfacility and temporarily paused shipments from our Memphis, Tennessee, facility. No other products produced at our other facilities were affected by this recall. In June 2022, we resumed manufacturing and shipping at our Lexingtonfacility, as well as shipping from our Memphisfacility. We continue to partner with retailers to restock Jif peanut butter products as quickly as possible and anticipate a return to normal levels by the end of 2023. In addition to the impact of manufacturing downtime, we expect to incur total direct costs of approximately $90.0by the end of 2023, net of the remaining anticipated insurance recoveries, related to customer returns, fees, unsaleable inventory, and other product recall-related costs, primarily within our U.S. Retail Consumer Foodssegment. Approximately $65.0of direct costs were recognized, net of the remaining anticipated insurance recoveries, during the three months ended July 31, 2022. We expect the majority of the remaining costs will be incurred through the third quarter of 2023. 25
The following table shows our capital structure.
July 31, 2022 April 30, 2022 Short-term borrowings
$ 388.0$ 180.0 Long-term debt 4,311.5 4,310.6 Total debt $ 4,699.5 $ 4,490.6Shareholders' equity 8,144.3 8,140.1 Total capital $ 12,843.8 $ 12,630.7We have available a $2.0 billionunsecured revolving credit facility with a group of 11 banks that matures in August 2026. Additionally, we participate in a commercial paper program under which we can issue short-term, unsecured commercial paper not to exceed $2.0 billionat 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 is used as a continuing source of short-term financing for general corporate purposes. As of July 31, 2022, we had $388.0of short-term borrowings outstanding, all of which were issued under our commercial paper program, at a weighted-average interest rate of 2.60 percent. We are in compliance with all our debt covenants as of July 31, 2022, and expect to be for the next 12 months. For additional information on our long-term debt, sources of liquidity, and debt covenants, see Note 7: Debt and Financing Arrangements. During the first three months of 2023 and 2022, we did not repurchase any common shares under a repurchase plan authorized by the Board. At July 31, 2022, approximately 5.8 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 November 2021, we announced plans to invest $1.1 billionto build a new manufacturing facility and distribution center in McCalla, Alabama, dedicated to production of Smucker's Uncrustables frozen sandwiches. Construction of this facility began in the third quarter of 2022, with production expected to begin in calendar year 2025. The project demonstrates our commitment to meet increasing demand for this highly successful product and deliver on our strategy to focus on brands with the most significant growth opportunities. Construction of the facility and production will occur in three phases over multiple years and will result in the creation of up to 750 jobs. Financial investments and job creation will align with each of the three phases. Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations, borrowings available under our revolving credit facility and commercial paper program, and access to capital markets, will be sufficient to meet our cash requirements for the next 12 months, including the payment of quarterly dividends, principal and interest payments on debt outstanding, and capital expenditures. However, as a result of the current macroeconomic environment, including the ongoing impacts of COVID-19 and the conflict between Russiaand Ukraine, we may experience an increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future. We continue to evaluate these risks, which could affect our financial condition or our ability to fund operations or future investment opportunities. As of July 31, 2022, total cash and cash equivalents of $29.2was held by our foreign subsidiaries, primarily in Canada. We have not repatriated foreign cash to the U.S.during the first three months of 2023.
Material cash needs
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.
Non-GAAP Financial Measures
We use non-GAAP financial measures, including: net sales excluding divestitures and foreign currency exchange, adjusted gross profit, adjusted operating income, adjusted income, adjusted earnings per share, and free cash flow, as key measures for purposes of evaluating performance internally. We believe that investors' understanding of our performance is enhanced by disclosing these performance measures. Furthermore, these non-GAAP financial measures are used by management in preparation of the annual budget and for the monthly analyses of our operating results. The Board also utilizes certain non-GAAP financial measures as components for measuring performance for incentive compensation purposes. Non-GAAP financial 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, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. Income taxes, as adjusted is calculated using an adjusted effective income tax rate that is applied to adjusted income before income taxes and reflects the exclusion of the previously discussed items, as well as any adjustments for one-time tax-related activities, when they occur. While this adjusted effective income tax rate does not generally differ materially from our GAAP effective income tax rate, certain exclusions from non-GAAP results can significantly impact our adjusted effective income tax rate. These non-GAAP financial measures are not intended to replace the presentation of financial results in accordance with
U.S.GAAP. Rather, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. The following table reconciles certain non-GAAP measures to the comparable GAAP financial measure. See page 20 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure. Three Months Ended July 31, 2022 2021 Gross profit reconciliation: Gross profit $ 552.5 $ 639.4Change in net cumulative unallocated derivative gains and losses 33.8 2.2 Cost of products sold - special project costs 1.1 4.6 Adjusted gross profit $ 587.4 $ 646.2Operating income reconciliation: Operating income $ 179.7 $ 259.4Amortization 55.6 55.4 Gain on divestiture (1.6) - Change in net cumulative unallocated derivative gains and losses 33.8 2.2 Cost of products sold - special project costs 1.1 4.6 Other special project costs 1.4 1.8 Adjusted operating income $ 270.0 $ 323.4Net income reconciliation: Net income $ 109.8 $ 153.9Income tax expense 31.3 51.3 Amortization 55.6 55.4 Gain on divestiture (1.6) - Change in net cumulative unallocated derivative gains and losses 33.8 2.2 Cost of products sold - special project costs 1.1 4.6 Other special project costs 1.4 1.8 Adjusted income before income taxes $ 231.4 $ 269.2Income taxes, as adjusted 53.3 63.4 Adjusted income $ 178.1 $ 205.8Weighted-average shares - assuming dilution 106.8 108.4 Adjusted earnings per share - assuming dilution $ 1.67 $ 1.9027
Critical accounting estimates and policies
A discussion of our critical accounting estimates and policies can be found in the "Management's Discussion and Analysis" section of our Annual Report on Form 10-K for the year ended
April 30, 2022. There were no material changes to the information previously disclosed.
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