The J. M. Smucker Company — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019. The request metadata says “2018 Q4,” but this filing is an annual report for FY2019; it also presents unaudited fourth-quarter results.
Business context and material changes
Smucker manufactures and markets branded food and beverage products, primarily in the U.S., through four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Away From Home. The U.S. retail segments generated 86% of FY2019 sales.
- Acquired Ainsworth Pet Nutrition on May 14, 2018, for approximately $1.9 billion, adding the Rachael Ray Nutrish brand. FY2019 included $747 million of Ainsworth sales and $40.8 million of operating income. Management expects approximately $55 million of annual cost synergies by the end of 2021; $23.5 million was realized in FY2019.
- Sold the U.S. baking business on August 31, 2018, for net proceeds of $369.5 million and recorded a $27.7 million pretax gain. The divested business had generated approximately $370 million of FY2018 sales.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $7,838.0 million | $7,357.1 million | +7% |
| Gross profit / margin | $2,915.7 million / 37.2% | $2,836.1 million / 38.5% | +3%; margin down 1.3 points |
| Operating income / margin | $928.6 million / 11.8% | $1,044.0 million / 14.2% | Down 11%; margin down 2.4 points |
| Net income | $514.4 million | $1,338.6 million | Down 62% |
| Diluted GAAP EPS | $4.52 | $11.78 | Down 62% |
| Adjusted operating income (non-GAAP) | $1,492.3 million | $1,439.7 million | +4% |
| Adjusted diluted EPS (non-GAAP) | $8.29 | $7.96 | +4% |
Reported sales growth primarily reflected Ainsworth; excluding acquisitions, divestitures, and foreign exchange, sales were essentially flat. Lower net pricing was offset by favorable volume/mix. GAAP earnings comparisons were materially affected by FY2018’s $765.8 million net tax-reform benefit. FY2019 also included $205.1 million in goodwill and intangible-asset impairment charges, higher amortization and special-project costs, and increased interest expense. The effective tax rate was 26.7% in FY2019 versus a tax benefit in FY2018.
FY2019 fourth-quarter sales were $1,902.1 million versus $1,781.3 million in FY2018; gross profit was $692.4 million versus $690.5 million; net income was $71.5 million versus $185.9 million; and diluted EPS was $0.63 versus $1.64.
Cash flow, debt, and liquidity
- Operating cash flow was $1,141.2 million, down from $1,218.0 million. Capital expenditures were $359.8 million, producing reported free cash flow (non-GAAP) of $781.4 million versus $896.1 million.
- Cash and equivalents were $101.3 million at year-end, down from $192.6 million. Investing cash outflow was $1,924.2 million, primarily reflecting the Ainsworth acquisition, partly offset by baking-sale proceeds.
- Total debt was $5,910.8 million, up from $4,832.0 million; shareholders’ equity was $7,970.5 million. The balance included $426 million of commercial paper and $798.5 million current portion of long-term debt.
- The company reported compliance with debt covenants and had a $1.8 billion revolving credit facility maturing in September 2022, with no balance drawn at April 30, 2019. Management said available cash, operating cash flow, borrowing capacity, and capital-market access should cover expected needs for the next 12 months.
- FY2020 estimated cash requirements included $800 million of principal payments, $390 million of dividends, $310 million of capital expenditures, and $205 million of interest payments, before any debt refinancing.
Segments, outlook, and management commentary
- U.S. Retail Coffee sales rose 2% and segment profit rose 10%, supported by lower input costs and favorable volume/mix.
- U.S. Retail Consumer Foods sales fell 11%, primarily reflecting the baking divestiture; excluding that effect, sales rose 1%. Segment profit fell 15%, affected by pricing, input costs, and marketing.
- U.S. Retail Pet Foods sales rose 33% with Ainsworth; excluding Ainsworth, sales declined. Segment profit rose 15%, while excluding Ainsworth it declined.
- International and Away From Home sales fell 4% and segment profit fell 1%, reflecting pricing, foreign exchange, and volume/mix headwinds.
- Long-term objectives are average annual net-sales growth of 2–3%, adjusted operating-income growth of 5%, and adjusted diluted-EPS growth of 8%. These are long-term objectives, not specific FY2020 earnings guidance. Management expects a FY2020 effective tax rate of 24.5–25.0%.
- Management expects the baking divestiture and pet-food growth to reduce business seasonality. A new Uncrustables facility in Longmont, Colorado, was expected to begin production in the second half of calendar 2019.
Risks, contingencies, and unusual items
- Pet Foods goodwill and indefinite-lived trademarks remain sensitive to assumptions: the Pet Foods reporting unit’s fair value exceeded carrying value by approximately 1%, and specified sensitivity scenarios produced estimated fair value below carrying value. Further impairment could be material.
- Commodity costs, especially green coffee, agricultural supply and quality, foreign exchange, and the effectiveness and accounting volatility of derivatives may affect margins and earnings. The company does not use hedge accounting for commodity and foreign-currency derivatives.
- Customer concentration is significant: Walmart accounted for 32% of FY2019 sales and 27% of year-end trade receivables. Reliance on single-source suppliers, concentrated production sites, transportation, and labor agreements are additional operating risks.
- The Proposition 65 coffee acrylamide case had no recorded loss contingency because loss was not considered probable or estimable. California approved a coffee-warning regulation effective October 1, 2019, which the company expected should result in dismissal, but a challenge to the regulation remained. Potential penalties or warnings could adversely affect sales and costs.
- Most lawsuits concerning alleged pre-2011 tuna price-fixing by a business formerly owned by Big Heart were settled during FY2019; the remainder was expected to be resolved. The company accrued probable and reasonably estimable losses.
- FY2019 included $32.1 million of Ainsworth integration costs and $32.0 million of restructuring costs. Approximately $50 million of Ainsworth integration costs in total was expected, with remaining costs forecast by the end of 2020.
Investor facts to verify
- Confirm the period distinction: this is FY2019, not a standalone FY2018 fourth-quarter filing; compare the fourth-quarter figures separately from full-year results.
- Assess underlying performance against GAAP results, including the FY2018 tax-reform benefit, FY2019 impairments, derivative mark-to-market losses, and management’s non-GAAP adjustments.
- Track debt repayment and refinancing needs, particularly the $800 million FY2020 principal payment and the company’s cash-deleveraging progress.
- Monitor Ainsworth integration, delivery of expected synergies, and Pet Foods impairment headroom.
- Follow the Proposition 65 case and remaining tuna-related proceedings, as well as commodity costs, Walmart concentration, and supply-chain continuity.
Ernst & Young issued unqualified opinions on the FY2019 consolidated financial statements and internal control over financial reporting.