The J. M. Smucker Company — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2023 (FY2023), compared primarily with the year ended April 30, 2022. Although the request metadata says “2022 Q4,” this filing reports FY2023 annual results.
Business context
Smucker manufactures and markets branded food and beverage products, primarily in the United States. Its reportable segments are U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods; International and Away From Home combines other operations. The U.S. retail segments accounted for 87% of FY2023 net sales.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $8,529.2 million | $7,998.9 million |
| Gross profit / margin | $2,801.8 million / 32.8% | $2,700.7 million / 33.8% |
| Operating income / margin | $157.5 million / 1.8% | $1,023.8 million / 12.8% |
| Net income (loss) | $(91.3) million | $631.7 million |
| Diluted GAAP EPS | $(0.86) | $5.83 |
| Adjusted operating income (non-GAAP) | $1,415.4 million; 16.6% margin | $1,440.1 million; 18.0% margin |
| Adjusted income / diluted EPS (non-GAAP) | $950.8 million / $8.92 | $962.2 million / $8.88 |
| Operating cash flow | $1,194.4 million | $1,136.3 million |
| Capital expenditures / free cash flow (non-GAAP) | $477.4 million / $717.0 million | $417.5 million / $718.8 million |
Reported sales rose 7%; excluding divestitures and foreign exchange, sales increased 9%. Higher net pricing added 14 percentage points to sales, while volume/mix reduced sales by 5 points. The company attributed the sharp fall in GAAP operating income primarily to a $1,018.5 million pretax loss on the pet-food divestiture. Adjusted operating income declined 2%, reflecting cost pressure and lower volume/mix. Non-GAAP measures are defined by the company and are not substitutes for GAAP results.
Segments and material changes
- U.S. Retail Pet Foods: Sales increased 10% reported and 13% excluding divested businesses; segment profit rose 25% to $494.9 million. Segment margin increased to 16.3% from 14.3%.
- U.S. Retail Coffee: Sales rose 10%; segment profit was essentially flat at $737.7 million. Higher pricing was offset by lower volume/mix; margin declined to 27.0% from 29.5%.
- U.S. Retail Consumer Foods: Sales declined 4% reported, but increased 2% excluding the prior-year natural beverages and grains divestiture. Segment profit fell 17% to $352.6 million; margin declined to 21.6% from 24.8%, reflecting input costs and the Jif recall.
- International and Away From Home: Sales increased 9% reported, and 12% excluding foreign exchange and divestitures; segment profit increased 1% to $143.3 million.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $655.8 million at year-end, up from $169.9 million. The company reported total debt of $4,314.2 million, down from $4,490.6 million, with no commercial-paper balance outstanding. It had a $2.0 billion revolving credit facility maturing in August 2026 and reported compliance with debt covenants. Operating cash flow increased to $1,194.4 million; free cash flow was $717.0 million.
FY2023 investing cash flow included $684.7 million of net cash proceeds from the pet-food sale, partly offset by capital expenditures. Financing cash use included $430.2 million of dividends and $367.5 million of treasury-share purchases. The annual dividend declared per share rose to $4.08 from $3.96.
Outlook, commentary, and risks
- Management expects elevated inflationary and supply-chain pressures to persist into FY2024, with consumer price sensitivity remaining elevated. Pricing actions and a company-wide transformation initiative are intended to mitigate costs and improve margins.
- Management’s long-term objectives are average annual net-sales growth in the low single digits, adjusted operating-income growth in the mid single digits, and adjusted EPS growth in the high single digits. These are long-term objectives, not specific FY2024 earnings guidance.
- The company expects an FY2024 effective tax rate of approximately 24.2% and capital expenditures of approximately $565 million. It expects Jif recall costs to be minimal in FY2024.
- The $1.1 billion Uncrustables facility and distribution-center project in McCalla, Alabama is under construction; production is expected to begin in calendar 2025.
- Material risks include commodity and packaging inflation, labor and supply-chain disruption, consumer trade-down and pricing elasticity, customer concentration, single-source suppliers and facilities, and weather and geopolitical disruption. Walmart represented 34% of net sales in FY2023.
Divestiture, recall, and contingencies
On April 28, 2023, Smucker sold specified pet-food brands and its private-label pet-food business to Post Holdings. The divested businesses generated $1.5 billion of sales during FY2023 while owned by Smucker. Consideration included $684.7 million in cash, net of preliminary adjustments and costs, and approximately 5.4 million Post shares valued at $491.6 million. Smucker recorded a $1.0 billion pretax loss; final proceeds and loss remained subject to working-capital and transaction-cost adjustments.
The May 2022 voluntary recall of select Jif peanut-butter products resulted in approximately $120 million of direct costs, net of insurance recoveries. Jif production resumed in June 2022 and the company said product availability had returned to normal by April 30, 2023. The FDA issued a Warning Letter concerning practices and controls at the Lexington facility. The company recorded no loss contingency for related consumer litigation or possible regulatory action because the outcome was not considered probable or estimable.
Other disclosed litigation includes putative class actions alleging misleading serving-count claims on Folgers coffee packaging; no loss contingency was recorded because the outcome and financial impact were not estimable. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How the pet-food sale’s final working-capital adjustment and transaction costs affect proceeds and the recorded divestiture loss.
- Whether post-divestiture sales, volume/mix, and margins meet management’s long-term objectives as pricing and input-cost pressures evolve.
- Progress on the Jif recall response, FDA follow-up, and related consumer litigation or regulatory exposure.
- Cash generation and debt levels relative to planned capital expenditures, dividends, and share repurchases.
- The valuation and eventual disposition of the 5.4 million Post shares, including the effect of Post’s share-price changes.