J. M. Smucker Company — Q1 FY2022 Form 10-Q
Reporting period: Three months ended July 31, 2021, compared with the three months ended July 31, 2020. Amounts are in millions except per-share data. Results are unaudited; the company cautions that quarterly results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1,858.0 | $1,971.8 | Down 6% |
| Gross profit / margin | $639.4 / 34.4% | $775.4 / 39.3% | Down 18%; margin down 4.9 points |
| Operating income / margin | $259.4 / 14.0% | $361.1 / 18.3% | Down 28%; margin down 4.3 points |
| Net income | $153.9 | $237.0 | Down 35% |
| Diluted EPS | $1.42 | $2.08 | Down 32% |
| Operating cash flow | $137.8 | $409.0 | Down $271.2 |
| Capital expenditures / free cash flow | $68.0 / $69.8 | $76.6 / $332.4 | Free cash flow down $262.6 |
Net sales excluding divestitures and foreign currency effects, a non-GAAP measure, increased 1% to $1,847.6. Higher commodity, transportation, and other input costs, unfavorable mix, and the prior-year comparison with now-divested businesses pressured reported results. Lower selling, distribution, and administrative expense, mainly from lower marketing costs, partly offset the decline in operating income.
Adjusted gross profit was $646.2, down 15%; adjusted operating income was $323.4, down 20%; adjusted net income was $205.8, down 24%; and adjusted diluted EPS was $1.90 versus $2.37. These are non-GAAP measures; the filing provides reconciliations and cautions that such measures may not be comparable across companies.
Segment performance
| Segment | Sales | Sales change | Segment profit | Profit change |
|---|---|---|---|---|
| U.S. Retail Pet Foods | $648.0 | Down 6% | $79.9 | Down 36% |
| U.S. Retail Coffee | $543.2 | Down 5% | $151.3 | Down 17% |
| U.S. Retail Consumer Foods | $435.6 | Down 11% | $118.7 | Down 10% |
| International and Away From Home | $231.2 | Up 6% | $32.9 | Up 6% |
Prior-year sales included $79.5 of Crisco and $56.0 of Natural Balance sales in the quarter; both businesses were divested during fiscal 2021. Excluding those divestitures and foreign exchange, Pet Foods sales rose 2% and Consumer Foods sales rose 4%. Coffee sales were affected by lower pricing, promotional spending, and lapping prior-year retailer restocking. Away From Home growth helped offset declines in International.
Cash, debt, and liquidity
- Cash and cash equivalents were $168.8 at July 31, 2021, down from $334.3 at April 30, 2021. Operating cash flow fell primarily because of higher working-capital needs, including inventory and receivables, and lower earnings.
- Total debt was $4,635.1, compared with $4,751.7 at April 30, 2021. This included $366.0 of commercial paper borrowings; the company had repaid $400.0 principal on notes due in March 2022 and recorded a $6.9 net debt-extinguishment loss.
- The company reported compliance with debt covenants. After quarter-end, it replaced its $1.8 billion revolving facility with a $2.0 billion facility maturing in August 2026, increased the commercial-paper limit to $2.0 billion, and amended covenants to remove the leverage ratio. The new revolver was undrawn.
- Quarterly dividends paid were $97.2. The company said available cash, operating cash flow, borrowing capacity, and capital-market access should be sufficient for the next 12 months, absent material acquisitions or other significant investments.
Outlook, commentary, and risks
- No full-year sales, earnings, or EPS guidance is stated in the provided filing text. Management anticipated a full-year effective tax rate of approximately 24.5%.
- Management expected at-home food consumption to remain elevated, but at a lower level than the prior year. COVID-19 case trends, vaccination rates, variants, and reopening conditions could affect demand, particularly in Away From Home.
- The company reported supply-chain disruption, labor shortages, and higher-than-expected inflation in ingredients, packaging, transportation, and other costs, along with unfavorable volume/mix as demand normalized against the prior-year period. Management warned that further disruption could occur.
- A restructuring program is expected to cost approximately $85.0; $30.5 had been incurred to date, including $6.4 in the quarter. The program includes organizational changes and the planned closure of the Suffolk, Virginia facility by the end of 2022. Most costs are expected by the end of 2022, with activities expected to conclude by the end of 2023.
- Notable contingencies include a pending appeal in a Proposition 65 coffee-warning case and nine putative class actions alleging Folgers canister serving-count misrepresentations. The company recorded no loss contingency for the Folgers matters because loss was not considered probable or estimable; significant damages could adversely affect results and sales.
- Other key risks include commodity and energy price volatility, transportation availability, pricing and promotional competition, supply-chain and customer/supplier concentration, and potential impairment of goodwill or intangible assets.
Important facts for investors to verify
- Whether input-cost inflation, freight expense, and supply and labor constraints continue to pressure margins, and whether pricing offsets those pressures.
- How sales and profitability trend after adjusting for the Crisco and Natural Balance divestitures and prior-year demand and retailer restocking effects.
- Whether working-capital demands and cash generation improve, and how the company deploys cash among debt repayment, dividends, capital spending, and repurchases.
- Actual restructuring costs, timing of savings, and execution of the planned Suffolk facility closure.
- Developments in the Folgers and Proposition 65 litigation, and any changes to the company’s outlook or liquidity assessment.