J. M. Smucker Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, three months ended July 31, 2015. Dollar amounts are in millions except per-share data. Results include Big Heart Pet Brands, acquired March 23, 2015, and Sahale Snacks.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $1,952.0 | $1,323.8 |
| Gross profit / margin | $728.7 / 37.3% | $478.7 / 36.2% |
| Operating income / margin | $267.1 / 13.7% | $191.6 / 14.5% |
| Net income | $136.4 | $116.0 |
| Diluted EPS | $1.14 | $1.14 |
| Operating cash flow | $305.1 | ($8.1) |
| Capital expenditures | $53.0 | $49.0 |
| Free cash flow (non-GAAP) | $252.1 | ($57.1) |
- Sales rose 47%; Big Heart contributed $561.3. Excluding acquisitions and foreign exchange, sales increased 6%, led by favorable volume/mix, including the Dunkin’ Donuts K-Cup pod launch.
- Gross profit increased 52%, while gross margin improved 1.1 percentage points. GAAP operating income rose 39%, but operating margin declined 0.8 percentage points, reflecting higher selling, administrative, amortization, and integration costs.
- Non-GAAP operating income increased 37% to $303.1. Non-GAAP diluted EPS was $1.32 versus $1.34. These measures exclude special project costs and unallocated derivative gains and losses.
- Net interest expense increased $27.0, primarily due to acquisition-related debt. The effective tax rate rose to 38.8% from 33.9%; management expected approximately 35% for full-year FY2016.
Segments and material changes
- U.S. Retail Coffee: Sales $565.0, up 12%; segment profit $155.1, up 13%. Dunkin’ Donuts K-Cup pods and higher coffee pricing supported results; Folgers volume declined 9%. A 6% list-price decrease was implemented for most U.S. packaged coffee products, excluding K-Cup pods.
- U.S. Retail Consumer Foods: Sales $582.2, essentially flat; segment profit $117.5, down 1%. Volume/mix gains were offset by lower pricing and higher manufacturing overhead.
- U.S. Retail Pet Foods: Sales $549.9 and segment profit $90.0, reflecting the acquired Big Heart business. Growth included Natural Balance distribution gains and Milk-Bone snacks; Kibbles ’n Bits declined.
- International and Foodservice: Sales $254.9, up 7%; segment profit $30.5, flat. Big Heart contributed to sales, while foreign exchange and higher Canadian costs affected results.
- Reported diluted EPS was unchanged despite higher net income, in part because acquisition financing and 17.9 million shares issued for the transaction increased interest expense and weighted-average shares.
Cash, debt, liquidity, and capital allocation
- At July 31, 2015, cash was $133.6; short-term borrowings were $302.6 and long-term debt was $5,694.7, for total debt of $5,997.3. Total debt was $6,170.9 at April 30, 2015.
- Operating cash flow improved from an $8.1 use of cash to $305.1 provided, mainly due to lower inventory working-capital needs and timing of tax payments and refunds. Management cautioned that this was contrary to the company’s usual first-half cash-flow pattern.
- The company repaid $250.0 on its term loan during the quarter. It had a $1.5 billion revolving credit facility, no balance outstanding under that facility, and a $1.0 billion commercial paper program; $302.6 of short-term borrowing was outstanding, mostly commercial paper. The company reported compliance with debt covenants.
- Management expected cash, operating cash flow, and available borrowing capacity to meet requirements for the next 12 months. It planned to prioritize debt repayment while maintaining dividends and business investment; it did not expect near-term share repurchases or significant acquisitions. International subsidiaries held $106.8 of cash that the company did not intend to repatriate.
- Quarterly dividends declared were $0.67 per share, up from $0.64. Cash dividends paid were $76.4.
Outlook, risks, and unusual items
- Management expected annualized Big Heart synergies of approximately $200 by the end of 2018, including $25 expected in FY2016. These savings had not materially affected the quarter.
- Expected Big Heart one-time costs were approximately $225, including about $150 of cash charges; roughly half were expected to be recognized in FY2016. The company had incurred $60.8 in acquisition integration costs through the quarter, including $24.8 in Q1 FY2016.
- A working-capital adjustment dispute associated with Big Heart’s prior sale of its consumer products business remained unresolved. The disputed amounts included a $16.3 claim and approximately $110 of preliminary proceeds. No receivable or liability was recorded; the outcome could affect the acquisition-date balance sheet allocation.
- Key disclosed risks include integration and synergy execution, meeting deleveraging objectives, commodity and foreign-exchange volatility, pricing and competitive responses, supply/customer concentration, impairment of goodwill or intangibles, and legal, regulatory, and tax matters. The filing reported no material off-balance-sheet arrangements and no material adverse outcome expected from ordinary-course proceedings, apart from the specifically described dispute.
- The filing gave no clear full-year sales or earnings guidance. Management’s stated outlook included the tax-rate and synergy expectations above.
Most important facts for investors to verify
- How much of sales and profit growth is attributable to Big Heart versus underlying organic performance, and whether organic growth persists.
- Progress toward the $200 synergy target, the timing and cash impact of integration charges, and the effect of acquisition amortization and financing costs.
- Debt reduction, interest expense, covenant headroom, and the company’s capacity to sustain dividends while prioritizing deleveraging.
- Whether operating cash flow remains strong after the unusually favorable working-capital and tax timing effects.
- The resolution and potential financial impact of the Big Heart-related working-capital dispute, and completion of the preliminary acquisition purchase-price allocation.