The J. M. Smucker Company — Form 10-Q
Reporting period: Quarter ended October 31, 2020 (the company’s second quarter of fiscal 2021), with six-month comparisons to the period ended October 31, 2019. Dollars are in millions except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $2,034.0, up 4% | $4,005.8, up 7% |
| Gross profit / margin | $818.2 / 40.2% (prior 38.5%) | $1,593.6 / 39.8% (prior 38.9%) |
| Operating income / margin | $380.8 / 18.7% (prior 16.8%) | $741.9 / 18.5% (prior 15.7%) |
| Net income | $230.8, up 9% | $467.8, up 28% |
| Diluted EPS | $2.02, up 9% | $4.10, up 28% |
| Adjusted diluted EPS (non-GAAP) | $2.39, up 6% | $4.76, up 24% |
Quarterly sales growth reflected stronger U.S. Retail Coffee and Consumer Foods results, partly offset by weakness in Away From Home. Operating income benefited from higher gross profit, including favorable derivative movements; higher selling, distribution, and administrative expenses partly offset the gain. Net interest expense declined, while other expense increased substantially due mainly to a pension settlement charge.
Segments and material changes
- U.S. Retail Coffee: Quarterly sales rose 9% and segment profit rose 11%, driven by elevated at-home consumption across Dunkin’, Café Bustelo, and Folgers.
- U.S. Retail Consumer Foods: Quarterly sales rose 12% and segment profit rose 48%; growth reflected at-home demand, peanut butter pricing and reduced promotions, and lower segment expenses.
- U.S. Retail Pet Foods: Quarterly sales were approximately flat; segment profit fell 9%, reflecting lower pricing and higher marketing expense.
- International and Away From Home: Quarterly sales fell 10% and segment profit fell 22%. Away From Home remained pressured by pandemic-related declines, partly offset by International growth.
Cash, debt, and liquidity
For the six months, operating cash flow was $787.7, compared with $445.5 a year earlier. Capital expenditures were $129.0; company-defined free cash flow was $658.7 versus $309.1. Management attributed the operating cash flow increase partly to lower working-capital requirements and higher adjusted net income. Financing used $675.8, including $500.0 of long-term debt repayments and $202.4 of dividends.
At October 31, cash was $405.6. Total debt was $5,151.8, down from $5,621.3 at April 30; $957.3 of long-term debt was classified as current, including notes due in October 2021. The company had $280.0 of commercial paper outstanding and no revolver borrowings; its revolving credit facility provides $1.8 billion of capacity, subject to commercial paper reducing available capacity. The company reported compliance with debt covenants and expects available cash, operating cash flow, and financing sources to meet requirements for the next 12 months, absent material acquisitions or other significant investments.
A supplier financing program contributed to working-capital management: suppliers had elected to sell $185.6 of outstanding company payment obligations to a financial institution as of October 31. The company stated that its obligations and payment terms to suppliers are unchanged by the program.
Outlook, risks, and unusual items
- Management expected elevated at-home demand to continue in the near term but said demand could change as the pandemic, consumer behavior, and restrictions evolve. COVID-19 continued to weigh on Away From Home; management cited potential supply-chain, freight, and shipping disruption risks, though production remained open with minimal disruption to date.
- Management anticipated a fiscal 2021 effective tax rate of approximately 24%, excluding any impact from the proposed Crisco divestiture. The filing provides no consolidated sales or earnings guidance.
- The company agreed to sell its Crisco oils and shortening business to B&G Foods, with closing expected in the third quarter of fiscal 2021, subject to customary conditions. The business generated approximately $270 million of 2020 sales; expected proceeds are approximately $550 million, with an estimated pretax gain of approximately $115 million. Both proceeds and gain are estimates subject to closing adjustments and conditions.
- A Canadian pension annuity transaction generated a $27.9 pretax noncash settlement charge in the quarter. Reported six-month pension settlement loss was $30.6.
- The Proposition 65 coffee-warning case was dismissed on summary judgment in August 2020; the plaintiff filed notice of appeal on November 20, 2020. No loss accrual was recorded because loss was not considered probable or estimable. Other ordinary-course legal matters were not expected by management to materially affect results, subject to the stated exception.
- Market risks include commodity, interest-rate, and foreign-exchange volatility. The company uses derivatives, whose mark-to-market effects can affect reported earnings; it noted that gains or losses generally are expected to be offset over time by changes in underlying exposures.
Important facts for investors to verify
- Progress, closing timing, final working-capital adjustment, proceeds, and gain on the Crisco divestiture.
- Whether elevated at-home demand persists and whether Away From Home sales recover or deteriorate as pandemic conditions change.
- Debt repayment and refinancing plans for obligations classified as current, including the $750 million senior notes due October 2021 and the remaining term loan due May 2021.
- Cash-flow quality and sustainability, including the effects of working-capital initiatives and supplier financing.
- Resolution and potential financial impact of the Proposition 65 appeal and other legal contingencies.
- Reported versus adjusted performance: non-GAAP measures exclude specified items, including amortization and unallocated derivative gains and losses, and may not be comparable with other companies’ measures.