Business context and reporting period
The J. M. Smucker Company’s Form 10-Q covers the three months ended July 31, 2023—its first quarter of fiscal 2024—and compares results with the prior-year quarter. The company reports U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Away From Home. Results are affected by the April 2023 sale of certain pet food brands.
Key financial results
| Metric | Quarter ended July 31, 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,805.2 million | $1,873.0 million | Down 4% |
| Gross profit / margin | $654.8 million / 36.3% | $552.5 million / 29.5% | Up 19%; margin +6.8 pts |
| Operating income / margin | $303.5 million / 16.8% | $179.7 million / 9.6% | Up 69%; margin +7.2 pts |
| Net income | $183.6 million | $109.8 million | Up 67% |
| Diluted EPS | $1.79 | $1.03 | Up 74% |
| Operating cash flow | $217.9 million | ($39.0) million | Improved $256.9 million |
| Capital expenditures / free cash flow | $150.3 million / $67.6 million | $88.3 million / ($127.3) million | Free cash flow improved |
Adjusted gross profit was $644.4 million (35.7% margin), adjusted operating income was $331.7 million (18.4% margin), adjusted net income was $227.0 million, and adjusted diluted EPS was $2.21. These are non-GAAP measures; the filing provides reconciliations.
Balance sheet and liquidity
At July 31, 2023, cash and cash equivalents were $241.1 million, down from $655.8 million at April 30, 2023. Long-term debt was $4,315.1 million, with $4,350.0 million principal outstanding; shareholders’ equity was $7,003.4 million. The company had no outstanding commercial paper or revolver borrowings and had a $2.0 billion revolving credit facility maturing in August 2026. It reported compliance with debt covenants and said available cash, operating cash flow, borrowing capacity, and capital-market access should cover requirements for the next 12 months.
Material changes and drivers
- Reported sales declined because the prior-year quarter included $374.1 million of sales from brands divested in April 2023. Excluding the divestiture and foreign exchange, sales increased 21%, driven by favorable volume/mix and higher net price realization.
- Gross profit benefited from pricing, volume/mix, and comparison with Jif peanut butter recall-related costs and effects in the prior year; the divestiture partly offset the increase. Operating income also benefited from lower SD&A and amortization, partly offset by lower other operating income, including the comparison with a prior-year recall insurance recovery.
- Segment sales and profit: Coffee sales rose 5% and profit rose 17%; Consumer Foods sales rose 49% and profit rose 93%; Pet Foods sales fell 40% and profit fell 32%, reflecting divested brands; International and Away From Home sales rose 17% and profit rose 119%.
- Operating cash flow turned positive, primarily due to lower working-capital requirements, no repeat of the prior-year $70.0 million pension contribution, and higher net income. Financing used $481.3 million, mainly for $372.0 million of treasury-share purchases and $105.2 million of dividends.
Outlook, risks, and unusual items
- Management expects a dynamic macroeconomic environment to continue through fiscal 2024, though with less volatility than in 2023. It noted possible further cost increases, elevated consumer price sensitivity, and potential supply-chain disruption, labor shortages, shipping delays, and volume loss or customer penalties if fulfillment is disrupted.
- The company launched a transformation initiative focused on sustainable productivity, margin growth, and reinvestment. It expects a full-year fiscal 2024 effective tax rate of approximately 23.9%. The filing does not provide a clear full-year sales, profit, or EPS outlook.
- The Jif recall generated approximately $120 million of direct costs, net of insurance recoveries; no significant direct recall costs were recognized in this quarter. FDA and consumer-litigation outcomes remain uncertain, and no loss contingency was recorded because loss was not considered probable or estimable.
- Putative Folgers coffee labeling class actions are pending; the outcome and potential financial effect cannot be predicted, and no loss contingency was recorded.
- Other income/expense included a $27.4 million unrealized loss on the Post investment and a $3.2 million noncash pension settlement charge. The Post shares received in the pet-brand sale were valued at $459.8 million at quarter-end; subsequent to quarter-end, all 5.4 million shares were hedged for settlement of $466.3 million in the third quarter of fiscal 2024.
- The company repurchased approximately 2.4 million shares for $362.8 million under its plan and declared a $1.06-per-share dividend. The McCalla, Alabama Uncrustables facility is part of a planned $1.1 billion investment, with production expected to begin in calendar 2025.
Important facts for investors to verify
- How much of sales and profit growth excluding the divestiture reflects sustainable volume and pricing versus recall comparisons and temporary contract manufacturing sales.
- Execution and final proceeds/loss accounting for the pet-brand divestiture, and the eventual disposition or settlement of the Post shares.
- Whether input-cost inflation, consumer price sensitivity, and supply-chain conditions affect margins, volumes, or cash flow.
- Developments in FDA review and Jif-related consumer litigation, as well as the Folgers labeling cases.
- Capital allocation and liquidity, including share repurchases, dividends, capital spending, and the $434.6 million of supplier payment obligations elected and sold by participating suppliers under the supplier-financing program.