J. M. Smucker Company (SJM) — Form 10-Q summary
Business context and reporting period. This unaudited filing covers the quarter and six months ended October 31, 2019, in the company’s fiscal 2020. Smucker reports four segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. Comparisons below are with the corresponding prior-year periods.
Key financial results
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,957.8 million, down 3% | $3,736.7 million, down 5% |
| Gross profit / margin | $754.0 million; 38.5% vs. 38.2% | $1,453.6 million; 38.9% vs. 36.9% |
| Operating income / margin | $329.8 million; 16.8% vs. 16.3% | $587.4 million; 15.7% vs. 14.2% |
| Net income | $211.2 million, up 12%; diluted EPS $1.85 vs. $1.66 | $365.8 million, up 14%; diluted EPS $3.21 vs. $2.83 |
| Adjusted operating income (non-GAAP) | $391.0 million, down 6%; margin 20.0% vs. 20.6% | $681.7 million, down 7%; margin 18.2% vs. 18.7% |
| Adjusted income and diluted EPS (non-GAAP) | $257.5 million; $2.26 vs. $2.17 | $437.2 million; $3.84 vs. $3.95 |
| Operating cash flow / free cash flow | Six-month operating cash flow was $445.5 million, essentially unchanged; free cash flow was $309.1 million vs. $266.8 million. |
Six-month investing cash outflow was $104.2 million, including $136.4 million of capital expenditures. Financing cash outflow was $395.2 million, including $196.6 million of dividends, $102.9 million net repayment of short-term borrowings, and $100.0 million of long-term debt repayment. Cash declined to $48.8 million from $101.3 million at April 30, 2019.
At October 31, total debt was $5,711.9 million, comprising $799.5 million current long-term debt, $327.9 million short-term borrowings, and $4,584.5 million long-term debt. Current assets were $1,659.2 million and current liabilities were $2,310.1 million. The company had a $1.8 billion revolving credit facility, with no balance outstanding, and reported compliance with all debt covenants.
Material changes and operating trends
- Reported sales fell partly because the U.S. baking business was divested in August 2018. Excluding acquisition, divestiture, and foreign exchange effects, sales declined 1% in the quarter and 3% for six months. Lower net pricing affected both periods; six-month volume/mix was also unfavorable.
- Quarterly GAAP operating income was nearly flat: lower gross profit and the absence of the prior-year $26.6 million baking-sale gain were largely offset by lower special project costs and selling, distribution, and administrative expenses. For six months, GAAP operating income rose 5%, while adjusted operating income declined 7%.
- Quarterly segment sales were down 8% in Consumer Foods, 3% in International and Away From Home, and 2% in Pet Foods; Coffee was approximately flat. Pet Foods segment profit rose 11% in the quarter and 15% for six months. Consumer Foods segment profit fell 32% and 26%, respectively, including the effect of the baking divestiture and prior-year gain.
- The company had realized $47.4 million of cumulative Ainsworth synergies by October 31 and expected approximately $55 million of annual cost synergies fully realized by the end of 2020. Cumulative Ainsworth integration costs were $38.7 million; total costs were expected to be about $50 million, with remaining costs expected by the end of 2020.
Outlook, risks, and unusual items
- Management expected a full-year fiscal 2020 effective tax rate of approximately 24.5%. The filing does not provide a broader quantified revenue or earnings outlook.
- The company recognized $26.6 million of the $27.7 million pre-tax gain on the U.S. baking sale in the prior-year quarter. This and acquisition/divestiture comparisons affect year-over-year interpretation. Non-GAAP measures exclude, among other items, amortization, integration and restructuring costs, and unallocated derivative gains and losses.
- Ainsworth-related U.S. Retail Pet Foods goodwill and indefinite-lived trademarks remained susceptible to impairment because of narrow differences between estimated fair value and carrying value; adverse changes in forecasts or economic conditions could lead to impairment charges.
- In the California Proposition 65 coffee case concerning acrylamide warnings, the state’s coffee-warning regulation took effect October 1, 2019, but the plaintiff continued to challenge its validity. No loss was accrued because the outcome was not considered probable or estimable; potential penalties, labeling obligations, costs, or sales effects could be material. A hearing was scheduled for January 22, 2020.
- Market exposures include commodity, interest-rate, and foreign-currency fluctuations. Interest-rate cash-flow hedges had $146.2 million of unrealized losses at quarter-end; the filing also cites risks from input costs, pricing and promotion, competition, synergies, and potential impairment.
- The company adopted lease accounting in fiscal 2020, recognizing $153.2 million of operating lease right-of-use assets and $160.6 million of operating lease liabilities at October 31. It expected approximately $27 million of additional lease assets and liabilities when a distribution-center lease commenced.
Important facts for investors to verify
- Reconcile GAAP earnings growth with declining adjusted operating income and adjusted six-month EPS; review the non-GAAP adjustments and derivative effects.
- Assess sales and profit trends excluding the baking divestiture, including private-label and Natural Balance pet-food declines, coffee pricing and volume, and Consumer Foods pricing.
- Monitor working-capital needs: inventories rose to $1,013.3 million from $910.3 million, and management attributed cash-flow pressure partly to inventory and supplier payments.
- Review debt maturities and refinancing needs: $800 million of long-term debt was classified as current, including notes due December 2019 and March 2020; assess available liquidity and deleveraging progress.
- Track Ainsworth synergy realization and integration spending, impairment indicators for acquired pet-food goodwill and trademarks, and developments in the Proposition 65 coffee litigation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; the filing states no material off-balance-sheet arrangements.