J. M. Smucker Company — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and six months ended October 31, 2022—the second quarter and first half of the company’s fiscal 2023. Smucker operates in food and beverage products, with reportable segments in U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods; International and Away From Home combines other operating segments.
Financial performance
| Metric | Three months ended October 31 | Six months ended October 31 |
|---|---|---|
| Net sales | $2,205.1 million, up 8% | $4,078.1 million, up 4% |
| Gross profit / margin | $701.1 million / 31.8%; prior year 34.7% | $1,253.6 million / 30.7%; prior year 34.6% |
| Operating income / margin | $293.4 million / 13.3%; down 6% | $473.1 million / 11.6%; down 17% |
| Net income | $191.1 million, down 7% | $300.9 million, down 16% |
| Diluted EPS | $1.79, versus $1.90 | $2.82, versus $3.32 |
| Adjusted operating income (non-GAAP) | $379.6 million, down 2% | $649.6 million, down 9% |
| Adjusted diluted EPS (non-GAAP) | $2.40, versus $2.43 | $4.07, versus $4.33 |
Quarterly sales growth excluding divestitures and foreign exchange was 11%; higher net pricing contributed 17 percentage points, partly offset by a 6-point decline in volume/mix. For the first half, comparable sales grew 8%, with pricing contributing 16 points and volume/mix declining 7 points. The company attributed margin pressure to lower volume/mix, divestitures, input and supply-chain cost inflation, and Jif recall impacts. Quarterly and first-half reported results also reflect significant derivative gains and losses outside segment results; adjusted measures exclude specified items and are non-GAAP.
Segments
- U.S. Retail Pet Foods: Second-quarter sales rose 9% to $765.2 million and segment profit rose 21% to $120.1 million. First-half sales rose 11% and profit rose 34%. Pricing supported results; volume/mix was unfavorable.
- U.S. Retail Coffee: Second-quarter sales rose 10% to $709.8 million, while profit fell 10% to $187.7 million. First-half sales rose 10% and profit fell 7%. Pricing was offset by unfavorable volume/mix, particularly for Folgers and Dunkin’.
- U.S. Retail Consumer Foods: Second-quarter sales declined 2% to $432.2 million and profit fell 10% to $100.3 million. First-half sales declined 15% and profit fell 32%. Jif recall disruption and the natural beverage and grains divestiture affected comparisons.
- International and Away From Home: Second-quarter sales rose 14% to $297.9 million and profit rose 3% to $41.5 million. First-half sales rose 8%, while profit fell 21% to $58.1 million.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $166.0 million, down from $302.9 million. Capital expenditures were $190.4 million, making reported free cash flow (a non-GAAP measure) negative $24.4 million, versus positive $175.7 million.
- Cash and equivalents were $27.1 million at October 31, down from $169.9 million at April 30. Inventory increased to $1,358.4 million from $1,089.3 million.
- Total debt was $4,614.4 million: $302.0 million short-term commercial paper and $4,312.4 million long-term debt. Short-term borrowings carried a 3.40% weighted-average rate. Net interest expense for the first half was $78.8 million.
- The company had a $2.0 billion revolving credit facility maturing in August 2026, with no revolver borrowings outstanding. It reported compliance with debt covenants and expected to remain compliant over the next 12 months.
- First-half dividends paid were $213.5 million. Capital spending included investment in the McCalla, Alabama, Uncrustables facility and capacity expansion in Longmont, Colorado.
Outlook, commentary, and material items
- Management said elevated input-cost inflation and a dynamic macroeconomic environment were expected to persist through fiscal 2023. Price increases had been implemented across businesses; management anticipated greater price elasticity as consumers respond to inflation. Supply-chain disruption, labor shortages, and elevated transportation costs remained concerns.
- The filing gives an expected full-year effective tax rate of approximately 24.1%. It does not provide a clear full-year revenue or earnings guidance figure in the supplied text.
- Jif recall: A May 2022 voluntary recall of select peanut butter products followed potential salmonella contamination. Manufacturing and shipments resumed in June. The company anticipated a return to normal product levels by the end of 2023 and approximately $100 million of total direct recall costs by then, net of anticipated insurance recoveries. It had recognized $90 million in the first half, including $25 million in the quarter, and expected most remaining costs through the third quarter of 2023. Five putative class actions were pending; no loss accrual was recorded because loss was not considered probable or estimable.
- Restructuring: Planned program costs were estimated at approximately $70 million, with activities expected to finish by the end of 2023. Cumulative costs incurred were $58.6 million. The program includes closing the Ripon, Wisconsin, facility by year-end 2022 and other cost and organizational initiatives.
- Divestitures: The natural beverage and grains businesses were sold in January 2022 for final net proceeds of $98.7 million; the company recognized a $28.3 million pretax gain, including a $1.6 million adjustment in the current first half. The private-label dry pet food business sale resulted in a $17.1 million pretax loss.
- Other risks cited include commodity and foreign-exchange volatility, COVID-19 and Russia-Ukraine-related disruption, transportation constraints, competitive and pricing pressures, and the possibility that price increases or restructuring savings may not meet expectations. The company stated that available cash, operating cash flow, borrowing capacity, and capital-market access should cover cash needs for the next 12 months, while noting financing could become more costly or difficult.
Important facts for investors to verify
- Whether higher pricing can offset inflation without further material volume declines, especially in U.S. Retail Coffee and Consumer Foods.
- Jif recovery milestones, remaining recall costs and insurance recoveries, and developments in related litigation.
- Inventory levels, operating cash generation, capital expenditure needs, and the sustainability of dividends given negative first-half free cash flow.
- Progress and final costs of restructuring, including expected savings and facility-closure execution.
- Debt and commercial-paper costs, and whether management’s liquidity and covenant expectations remain intact.
- The performance of non-GAAP adjusted measures alongside GAAP results, including the effect of derivative mark-to-market items and divestiture-related gains or losses.