Business context and reporting period
The J. M. Smucker Company’s Form 10-Q covers its first quarter of fiscal 2023, the three months ended July 31, 2022. Smucker manufactures and markets food and beverage products through U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home businesses. Comparisons are with the three months ended July 31, 2021.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,873.0 million | $1,858.0 million | Up 1%; up 4% excluding divestitures and foreign exchange |
| Gross profit / margin | $552.5 million / 29.5% | $639.4 million / 34.4% | Down 14%; margin down 4.9 percentage points |
| Operating income / margin | $179.7 million / 9.6% | $259.4 million / 14.0% | Down 31% |
| Net income | $109.8 million | $153.9 million | Down 29% |
| Diluted EPS | $1.03 | $1.42 | Down 27% |
| Adjusted operating income | $270.0 million | $323.4 million | Down 17% |
| Adjusted diluted EPS | $1.67 | $1.90 | Down 12% |
| Operating cash flow / free cash flow | $(39.0) million / $(127.3) million | $137.8 million / $69.8 million | Both turned negative |
Higher commodity, ingredient, manufacturing, and packaging costs, unfavorable volume/mix, and Jif recall impacts weighed on gross profit; higher pricing partly offset these pressures. GAAP operating income also benefited from $28.0 million of net other operating income, including an anticipated insurance recovery related to the recall and a $1.6 million gain recognized on finalization of the natural beverage and grains divestiture adjustment. Derivative accounting also affected comparability: the change in cumulative unallocated derivative gains and losses was an unfavorable $33.8 million, versus an unfavorable $2.2 million a year earlier.
Segments
- U.S. Retail Pet Foods: Sales of $729.0 million, up 13%; segment profit of $120.3 million, up 51%. Sales growth excluding the prior-year divested private label dry pet food business was 17%.
- U.S. Retail Coffee: Sales of $597.9 million, up 10%; segment profit of $145.9 million, down 4%. Pricing gains were offset in part by volume/mix declines.
- U.S. Retail Consumer Foods: Sales of $311.1 million, down 29%; segment profit of $54.8 million, down 54%. Recall-related manufacturing downtime and the prior-year natural beverage and grains business divestiture were significant factors.
- International and Away From Home: Sales of $235.0 million, up 2%; segment profit of $16.6 million, down 50%.
Liquidity, debt, and cash flow
Cash and cash equivalents were $151.6 million at July 31, 2022, versus $169.9 million at April 30, 2022. Total debt was $4,699.5 million, comprising $388.0 million of short-term commercial paper borrowings and $4,311.5 million of long-term debt. Commercial paper borrowings carried a 2.60% weighted-average rate. The company had no borrowings under its $2.0 billion revolving credit facility, which matures in August 2026, and reported compliance with debt covenants.
Operating cash flow was $(39.0) million, primarily reflecting a $70.0 million pension contribution, lower earnings, and higher working-capital needs, including increased inventory. Capital expenditures were $88.3 million. Financing cash flow included a $207.0 million net increase in short-term borrowings and $105.1 million in dividends paid. Management said available cash, operating cash flow, borrowing facilities, and capital-market access should be sufficient for requirements over the next 12 months, while noting macroeconomic conditions could make financing more costly or difficult.
Material changes, outlook, and risks
- Jif recall: A May 2022 voluntary recall of select Jif peanut butter products followed potential salmonella contamination. Manufacturing and shipments resumed in June. The company recognized approximately $65.0 million of direct recall costs, net of anticipated insurance recoveries, in the quarter; it expects total direct costs of about $90.0 million through 2023, with most remaining costs through the third quarter of 2023. It anticipates Jif availability returning to normal levels by the end of 2023. Five putative class-action cases related to the recall were pending; no loss contingency was recorded because losses were not considered probable or estimable.
- Pricing, inflation, and supply chain: Management reported significant input-cost inflation and supply-chain disruption, including labor and material constraints, and expected these pressures to persist through fiscal 2023. Price increases were implemented across businesses; management anticipated greater consumer price elasticity during 2023 and warned that fulfillment disruptions could cause lost volume and penalties.
- Portfolio and restructuring: The natural beverage and grains businesses were sold in January 2022 for final net proceeds of $98.7 million; the company reported a $28.3 million pretax gain in fiscal 2023, including $1.6 million in this quarter. The private label dry pet food business was sold in December 2021 for net proceeds of $32.9 million, with a $17.1 million pretax loss recognized upon completion. Restructuring costs are expected to total approximately $70.0 million; planned activities are expected to conclude by the end of 2023. The program includes closing the Ripon, Wisconsin, production facility by the end of calendar 2022.
- Investment and tax outlook: Construction began on the planned $1.1 billion Uncrustables manufacturing and distribution facility in McCalla, Alabama; production is expected to begin in calendar 2025. Management anticipated a fiscal 2023 effective tax rate of approximately 24.2%.
- Other risks: The filing highlights COVID-19, the Russia-Ukraine conflict, commodity and transportation costs, customer demand and pricing response, supply-chain availability, product safety, litigation, and execution of cost-saving initiatives. The CERT coffee Proposition 65 appeal and Folgers serving-size class actions were also pending; potential outcomes were not quantified. Management stated the quarter’s results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How quickly Jif production, shipments, and sales recover, and whether total recall costs remain within the estimated $90.0 million net of anticipated insurance recoveries.
- Whether pricing continues to offset inflation without further material volume declines, particularly in coffee and consumer foods.
- Whether inventory and working-capital needs normalize and operating cash flow recovers after the pension contribution and recall disruption.
- Progress on restructuring costs and savings, the Ripon facility closure, and the phased McCalla investment.
- Developments in the recall-related lawsuits and other disclosed legal matters, as well as the status and impact of anticipated climate-disclosure requirements.