Business context and reporting period
The J. M. Smucker Company filed this unaudited Form 10-Q for the quarter ended October 31, 2013 (fiscal 2014 second quarter), with comparative results for the three and six months ended October 31, 2012. The company manufactures and markets food products through U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods.
Financial performance
All dollar amounts are in millions, except per-share data.
- Quarter: Net sales were $1,559.9, down 4% year over year. Gross profit was $552.6, up 2%, and gross margin rose to 35.4% from 33.3%. Operating income was $250.8, up 1% (16.1% margin versus 15.2%); excluding special project costs, operating income was $260.0 versus $261.5. Net income was $153.4 versus $148.8, and diluted EPS was $1.46 versus $1.36.
- Six months: Net sales were $2,910.8, down 3%. Gross profit was $1,045.5, up 3%, and gross margin was 35.9% versus 33.7%. Operating income was $464.1, up 6%; excluding special project costs, it was $480.6 versus $479.9. Net income was $280.0 versus $259.7, and diluted EPS was $2.65 versus $2.36.
- Cash flow: Six-month operating cash flow was $168.0, down from $359.6. Capital expenditures were $83.4, producing reported free cash flow of $84.6 versus $261.1. The cash flow decline mainly reflected working-capital needs, including higher inventories and lower accrued liabilities. Cash and equivalents were $150.5 at October 31, down from $256.4 at April 30.
- Debt and liquidity: Total debt was $2,240.6, including $207.0 drawn on the revolving facility, versus $2,017.8 at April 30. Shareholders’ equity was $5,167.9. The amended revolving facility provides $1.5 billion of capacity and matures September 6, 2018; the company reported compliance with debt covenants. It said available cash, operating cash flow, and facility borrowings should meet requirements for the next 12 months, absent material acquisitions or other significant investments. Revolver borrowings had declined to $95.0 by November 26.
- Dividends and repurchases: Six-month dividends paid were $116.4; treasury-share purchases were $165.5. Dividends declared were $0.58 per share in the quarter, compared with $0.52 a year earlier.
Material changes versus prior comparable periods
- Sales declines reflected lower net price realization—about 4% in the quarter and first half—following price reductions, notably in coffee and peanut butter, as well as planned exits from parts of the foodservice business. Favorable mix and the Enray acquisition and Cumberland distribution agreement partly offset the decline.
- U.S. Retail Coffee sales fell 4% in the quarter, but segment profit rose 14% to $180.6, supported by lower green coffee costs and improved derivative mark-to-market results. U.S. Retail Consumer Foods sales fell 1% and segment profit fell 11% to $99.2, primarily due to lower pricing on peanut butter and fruit spreads and temporary facility costs. International, Foodservice, and Natural Foods sales fell 9% and segment profit fell 18% to $47.4, principally due to planned business exits and lower pricing.
- Quarterly gross profit benefited from an $8.8 year-over-year improvement in unrealized derivative mark-to-market effects. First-half gross profit also improved, with favorable mix and lower commodity costs partly offset by price declines and the effect of exited businesses.
- Diluted EPS growth benefited in part from lower weighted-average shares following repurchases. Adjusted diluted EPS, excluding special project costs, rose 5% both for the quarter ($1.52 versus $1.45) and first half ($2.76 versus $2.62).
Outlook, management commentary, risks, and unusual items
- No specific earnings or sales guidance is stated in the provided filing text. Management expected second-half operating cash flow to significantly exceed first-half cash flow as seasonal working-capital needs unwind.
- The company completed acquisitions of Enray and Silocaf for aggregate net cash consideration of $102.0. Enray contributed to International, Foodservice, and Natural Foods; Silocaf was a strategic green-coffee supply-chain investment. Acquired businesses did not materially affect the quarter, and management did not expect a material effect on fiscal-year results.
- Restructuring plans are expected to cost approximately $260.0 in total; $239.6 had been incurred by October 31, 2013. The majority of the remaining costs are expected through 2015. About 80% of approximately 850 planned job reductions had occurred; the Ste. Marie, Quebec facility was expected to close in the fourth quarter of 2014.
- A $750.0 interest-rate swap was entered into during the quarter on fixed-rate notes due 2021, converting that portion to a variable-rate basis. Its fair-value gain was offset by the change in fair value of the hedged debt, with no net earnings impact reported for the quarter.
- Key disclosed risks include commodity-price volatility and hedging outcomes; consumer, retailer, and competitive responses to pricing; customer and supplier concentration; acquisition integration and restructuring execution; foreign exchange and interest-rate changes; impairment of goodwill or intangible assets; and tax, regulatory, and legal matters. The company said pending ordinary-course legal proceedings were not expected to materially adversely affect its financial position, results, or cash flows, but it could not predict outcomes or reasonably estimate a loss range.
- Approximately $140.0 of cash was held by international subsidiaries and was not intended for repatriation to fund domestic obligations. The filing also reports contractual obligations of $3,766.8, including debt, interest, leases, purchase obligations, and other liabilities.
Most important facts for investors to verify
- Whether lower pricing and planned business exits continue to pressure sales, and whether volume and favorable mix can offset that pressure.
- Whether coffee cost benefits and improved segment performance persist, particularly as commodity prices and pricing actions change.
- Whether seasonal working-capital reversals lift second-half operating cash flow as management expected; first-half operating cash flow and free cash flow were substantially lower year over year.
- Debt maturity and refinancing requirements, revolver utilization, covenant compliance, and the effects of the $750.0 variable-rate swap.
- Progress and remaining costs of restructuring, including the timing of the Quebec facility closure, and integration of Enray and Silocaf.
- The comparability and exclusions in management’s non-GAAP measures; reported and adjusted results differ, and EPS growth also reflects share repurchases.