The J. M. Smucker Company — Form 10-Q
Business context and reporting period. This filing covers the fiscal third quarter and first nine months ended January 31, 2020, compared with the corresponding prior-year periods. Smucker operates four reportable segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Quarter ended Jan. 31, 2020 | Prior-year quarter | Nine months ended Jan. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,972.3 | $2,011.9 | $5,709.0 | $5,935.9 |
| Gross profit / margin | $760.0 / 38.5% | $773.8 / 38.5% | $2,213.6 / 38.8% | $2,223.3 / 37.5% |
| Operating income / margin | $289.0 / 14.7% | $217.6 / 10.8% | $876.4 / 15.4% | $775.0 / 13.1% |
| Net income | $187.4 | $121.4 | $553.2 | $442.9 |
| Diluted EPS | $1.64 | $1.07 | $4.85 | $3.89 |
| Operating cash flow | Not separately provided | Not separately provided | $967.1 | $867.0 |
| Capital expenditures | Not separately provided | Not separately provided | $192.9 | $267.2 |
| Free cash flow (non-GAAP) | Not separately provided | Not separately provided | $774.2 | $599.8 |
Quarterly net sales fell 2%; nine-month sales fell 4%. GAAP operating income rose 33% for the quarter and 13% for the nine months, while adjusted operating income declined 3% and 5%, respectively. Adjusted diluted EPS was $2.35 for the quarter versus $2.26, and $6.19 for nine months versus $6.20. Adjusted measures are non-GAAP and exclude specified items.
Quarterly interest expense, net, was $45.1, down from $51.6; nine-month expense was $143.6, down from $158.8, primarily reflecting debt repayment. The effective tax rate was 22.7% for the quarter and 24.0% for nine months.
Balance sheet, debt, and liquidity
- At January 31, 2020, cash and cash equivalents were $74.4, versus $101.3 at April 30, 2019. Total debt was $5,393.1, down from $5,910.8; shareholders’ equity was $8,170.4.
- Debt included $499.8 current long-term debt, $310.0 of commercial paper, and $4,583.3 long-term debt. The $500.0 senior notes due March 2020 were classified as current. The $1.8 billion revolving credit facility had no balance outstanding; commercial paper borrowings were backed by that facility.
- Nine-month financing cash outflows included $400.0 of long-term debt repayments, $122.6 net repayment of short-term borrowings, and $296.7 of dividends. Cash declined $26.9 over the period.
- Management said available cash, operating cash flow, borrowing capacity, and capital-market access were expected to meet requirements for the next 12 months, including capital expenditures, dividends, and debt service, absent material acquisitions or other significant investments. The company was in compliance with debt covenants.
Material changes and segment results
- Pet Foods: Quarterly sales fell 5%, mainly on unfavorable volume/mix in Natural Balance and private-label dog food; segment profit declined 1%. For nine months, sales fell 3% and profit rose 8%, aided by Ainsworth and synergies.
- Coffee: Quarterly sales were approximately flat and profit rose 3%, as favorable volume/mix and lower marketing costs offset lower pricing. Nine-month sales and profit fell 2% and 1%, respectively.
- Consumer Foods: Quarterly sales were approximately flat, but segment profit fell 12%, including a $7.5 equipment write-off related to discontinuing Jif Power Ups. Nine-month sales fell 9%, largely reflecting the prior-year U.S. baking business divestiture; segment profit fell 22%.
- International and Away From Home: Quarterly sales were approximately flat and profit fell 7%. Nine-month sales fell 3% and profit fell 14%.
- Management reported that the Ainsworth acquisition’s approximately $55 million annual cost synergies had been fully realized by January 31, 2020. The U.S. baking business sale generated a $27.7 million pretax gain in the prior-year period, affecting comparisons.
Outlook, risks, and unusual items
- Management expected a full-year fiscal 2020 effective tax rate of approximately 24%. No full-year sales or earnings guidance is provided in the supplied filing text.
- A $52.4 noncash impairment charge was recorded for the Natural Balance brand, reflecting lower current and long-term sales expectations and a lower royalty rate. The brand was to be reclassified as finite-lived from February 1, 2020, with approximately $4.5 of annual amortization. Pet Foods goodwill and indefinite-lived trademarks remained exposed to further impairment if forecasts or economic conditions deteriorate.
- Ainsworth integration costs were expected to total approximately $50.0, mostly cash costs; $42.0 had been incurred cumulatively, with remaining costs expected by the end of 2020.
- The company faces a California Proposition 65 coffee-warning lawsuit alleging failure to warn about acrylamide. No loss contingency was recorded because loss was not considered probable or estimable; potential penalties, warning requirements, costs, and sales effects could be material. Most alleged tuna price-fixing lawsuits described in the filing had been settled and paid during the second half of 2019.
- Commodity, energy, interest-rate, foreign-exchange, competitive pricing, customer and supplier concentration, and impairment risks were identified. The filing also notes that market-risk sensitivity estimates are not forecasts of actual losses.
Investor verification priorities
- Check whether sales trends and adjusted profitability improved after the reporting date, especially for Natural Balance, dog food, Consumer Foods, and International and Away From Home.
- Review subsequent disclosures on repayment or refinancing of the $500.0 notes due March 2020 and progress in reducing debt.
- Monitor Pet Foods goodwill and trademark valuations, including any further impairment charges and the Natural Balance reclassification.
- Verify remaining Ainsworth integration spending against the $50.0 estimate and end-of-2020 timing.
- Track developments in the Proposition 65 coffee litigation and any potential financial, labeling, or sales consequences.
- Compare GAAP results with the company’s non-GAAP measures, which exclude impairment, amortization, project costs, and derivative effects.