The J. M. Smucker Company — Form 10-Q
Reporting period: Quarter and six months ended October 31, 2017 (the second quarter and first half of fiscal 2018). Dollar amounts are in millions unless noted.
Business context and results
Smucker operates in packaged food and beverages, with four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Away From Home.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,923.6; up 1% | $3,672.5; down 2% |
| Gross profit / margin | $755.0 / 39.2% | $1,417.1 / 38.6% |
| Operating income / margin | $330.7 / 17.2% | $564.5 / 15.4% |
| Net income | $194.6 | $321.4 |
| Diluted EPS | $1.71 | $2.83 |
| Adjusted operating income (non-GAAP) | $383.2; down 3% | $683.7; down 10% |
| Adjusted diluted EPS (non-GAAP) | $2.02; down 1% | $3.53; down 10% |
Quarterly GAAP operating income and diluted EPS increased 9% and 13%, respectively, helped by lower special project costs and fewer weighted-average shares. Adjusted results declined, reflecting weaker underlying performance and a more favorable year-over-year effect from unallocated derivative gains and losses in GAAP results. For the first half, GAAP operating income fell 5% and diluted EPS fell 5%, principally as gross profit declined, particularly in coffee.
Segments and material changes
- U.S. Retail Coffee: Quarterly sales were essentially flat, but segment profit fell 18% to $152.6, mainly from higher green coffee costs and unfavorable volume/mix. First-half sales fell 3% and profit fell 23%.
- U.S. Retail Consumer Foods: Quarterly sales fell 5% to $531.5, while profit rose 10% to $130.9 on pricing and lower marketing expense. First-half sales fell 6% and profit increased 5%.
- U.S. Retail Pet Foods: Quarterly sales rose 4% and profit rose 7%; first-half sales rose 2%, but profit fell 7%, primarily due to increased marketing expense.
- International and Away From Home: Quarterly sales rose 5% and profit rose 4%; first-half sales and profit rose 4% and 1%, respectively. Foreign exchange contributed to quarterly sales growth.
Quarterly sales growth reflected higher net pricing, partly offset by unfavorable volume/mix. First-half sales weakness was driven by volume/mix declines in oils, baking, and coffee; higher pricing partly offset those declines.
Cash flow, liquidity, and debt
- First-half operating cash flow was $434.6, versus $375.3 a year earlier. Capital expenditures were $130.0, up from $84.0; reported free cash flow (non-GAAP) was $304.6, versus $291.3.
- Cash and cash equivalents were $180.3 at October 31, 2017. Total debt was $5,257.6, down from $5,398.5 at April 30, 2017. Shareholders’ equity was $7,036.3.
- Debt included $499.6 current maturities, $463.9 of commercial paper borrowings, and $4,294.1 of long-term debt. The company prepaid $150.0 on its term loan during the first half and paid $173.4 in dividends.
- A new unsecured $1.8 billion revolving credit facility matures in September 2022; no balance was outstanding under it at quarter-end. Commercial paper capacity also increased to $1.8 billion. The company reported compliance with all debt covenants and said available cash, operating cash flow, financing access, and capital markets should meet anticipated needs for the next 12 months.
- Quarterly dividends declared were $0.78 per share, versus $0.75 a year earlier.
Outlook, commentary, and risks
- Management expected the impact of higher coffee costs to moderate over the remainder of the fiscal year. It provided no specific consolidated earnings guidance in the supplied filing text.
- Management targeted approximately $200 of annual Big Heart acquisition synergies by the end of 2018; $196.9 had been realized by quarter-end. Remaining Big Heart integration costs were included in an estimated total of approximately $290 through 2018.
- The organization optimization program was expected to produce approximately $50 of annual cost reductions, mainly during 2018, with approximately $45 of total restructuring costs. About 90% of the planned 275 position reductions had occurred by October 31, 2017. A separate cost management program targeted approximately $200 of annual cost reductions by the end of 2020; management planned to reinvest these savings in the business.
- The proposed Wesson oil brand acquisition was valued at approximately $285, expected to add approximately $230 of annual sales and approximately $20 of annual synergies within two years after closing. The FTC issued a second request for information, extending regulatory review; either party could terminate if required approval had not been received by March 31, 2018, subject to the agreement’s terms.
- Smucker expected to invest up to $340 in phases for a new Uncrustables facility in Longmont, Colorado; initial phase investment was up to $200, with production expected to begin in calendar 2019.
- Management cited exposure to commodity, energy, foreign exchange, and interest-rate volatility; competition, customer and supplier concentration, execution of pricing and cost programs, regulatory approvals, and tax-law changes. Proposed U.S. tax legislation could materially reduce deferred tax liabilities and produce a one-time noncash tax benefit if enacted in its then-current form.
- The company reported ordinary-course legal proceedings but said their ultimate outcomes could not be predicted and did not expect them, based on information then known, to materially adversely affect financial position, results, or cash flows. No material changes to previously reported contractual obligations or critical accounting estimates were disclosed.
Key facts for investors to verify
- Whether coffee input costs moderate as anticipated and whether pricing can offset volume/mix pressure across categories.
- Underlying performance excluding special project costs and derivative effects, including the decline in adjusted first-half operating income and EPS.
- Delivery and timing of the Big Heart synergies, restructuring savings, and separate cost-management targets, including their costs and reinvestment plans.
- FTC review and closing status of the Wesson transaction, its financing, and expected sales and synergy contribution.
- Capital spending, seasonal working-capital needs, commercial paper usage, debt maturities, and the company’s capacity to sustain dividends and other cash deployments.