Business context and reporting period
The J. M. Smucker Company’s Form 10-Q covers its fiscal second quarter and six months ended October 31, 2021 (the quarter and first half of fiscal 2022). The company sells pet foods, coffee, and consumer foods through U.S. retail, international, and away-from-home channels. Comparisons are affected by the 2020 divestitures of Crisco and Natural Balance.
Financial results
| Metric | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2021 |
|---|---|---|
| Net sales | $2,050.0 million, up 1% reported and 8% excluding divestitures and foreign exchange | $3,908.0 million, down 2% reported and up 4% excluding divestitures and foreign exchange |
| Gross profit / margin | $711.5 million / 34.7%, versus $818.2 million / 40.2% | $1,350.9 million / 34.6%, versus $1,593.6 million / 39.8% |
| Operating income / margin | $311.8 million / 15.2%, down 18% | $571.2 million / 14.6%, down 23% |
| Net income / diluted EPS | $206.0 million / $1.90, versus $230.8 million / $2.02 | $359.9 million / $3.32, versus $467.8 million / $4.10 |
| Adjusted diluted EPS (non-GAAP) | $2.43, up 2% | $4.33, down 9% |
| Operating cash flow / free cash flow (non-GAAP) | $302.9 million / $175.7 million, versus $787.7 million / $658.7 million in the prior-year half |
Margins and earnings fell as commodity, manufacturing, transportation, and packaging costs increased; pricing and favorable volume/mix partly offset those pressures. Lower selling, distribution, and administrative expenses provided a partial offset. Six-month operating cash flow declined mainly because of greater working-capital needs and lower income.
Segment performance
- U.S. Retail Pet Foods: Quarterly sales were down 1% reported, but up 7% excluding Natural Balance; segment profit fell 20% as input and transportation costs outweighed pricing.
- U.S. Retail Coffee: Quarterly sales rose 8% and segment profit 3%, supported by volume/mix and pricing. First-half profit fell 7%, mainly due to higher commodity costs.
- U.S. Retail Consumer Foods: Quarterly sales were down 8% reported, but up 9% excluding Crisco; comparable growth included Uncrustables and Jif. Segment profit fell 18% reported.
- International and Away From Home: Quarterly sales rose 4% and profit 2%; away-from-home improvement was partly offset by weaker international sales.
Financial position and liquidity
At October 31, 2021, cash was $155.3 million, down from $334.3 million at April 30. Total debt was $4,628.8 million, versus $4,751.7 million; shareholders’ equity was $8,286.4 million. The company had $320.0 million of commercial paper outstanding at a weighted-average rate of 0.17%, and a $2.0 billion revolving credit facility maturing in August 2026. It reported covenant compliance and expects its cash, operating cash flow, borrowing capacity, and capital-market access to cover requirements for the next 12 months. Dividends paid in the first half were $204.1 million; capital expenditures were $127.2 million.
Outlook, management commentary, risks, and unusual items
- Management cited ongoing COVID-related supply-chain strain, labor shortages, and higher-than-expected inflation, including transportation costs. At-home consumption remained elevated but was expected to moderate; away-from-home demand had improved, with future trends dependent on pandemic conditions.
- The company expects an approximately 24% full-year effective tax rate. No full-year earnings or sales guidance is provided in the supplied filing text.
- A restructuring program is expected to cost about $85 million; $37.9 million had been incurred by October 31. The program includes a planned Suffolk, Virginia, facility closure by the end of 2022 and is expected to finish by the end of 2023, with most costs incurred by the end of 2022.
- On November 18, 2021, the company announced a planned $1.1 billion Uncrustables manufacturing and distribution facility in Alabama. Construction was expected to start by January 2022, with production in 2025; fiscal 2022 capital expenditure expectations increased from $380 million to $400 million. The project is subject to incentive approvals and completion of the property purchase.
- The company issued $800 million of senior notes and used proceeds primarily to repay $750 million of notes due October 2021. It also prepaid $400 million of 2022 notes, recognizing a $6.9 million extinguishment loss. A prior-year $27.9 million pension settlement charge affected comparisons.
- Legal matters include a pending appeal in a California coffee-warning case and Folgers serving-size class actions. No loss contingency was recorded for the latter because loss was not considered probable or estimable. Management says other proceedings are not expected to materially affect results, subject to stated exceptions.
Important facts for investors to verify
- Whether price increases and volume/mix can offset persistent commodity, packaging, freight, and labor cost inflation.
- Whether working-capital demands ease and cash generation recovers after the sharp first-half decline.
- How segment margins evolve, particularly in pet foods and consumer foods, and whether away-from-home recovery continues.
- Actual restructuring costs and savings, and the timing, approvals, and capital requirements for the Alabama facility.
- Developments in the Folgers and Proposition 65 litigation, COVID-related supply and workforce risks, and the company’s debt and liquidity position.