J. M. Smucker Company — FY2020 Form 10-K
Reporting period: Fiscal year ended April 30, 2020. This is an annual report, not a calendar-quarter filing. Smucker manufactures and markets branded food and beverage products, primarily in the U.S., through four segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $7.801 billion | $7.838 billion |
| Gross profit / margin | $3.002 billion / 38.5% | $2.916 billion / 37.2% |
| Operating income / margin | $1.223 billion / 15.7% | $928.6 million / 11.8% |
| Net income | $779.5 million | $514.4 million |
| Diluted EPS | $6.84 | $4.52 |
| Adjusted operating income (non-GAAP) | $1.509 billion | $1.492 billion |
| Adjusted income / diluted EPS (non-GAAP) | $999.1 million / $8.76 | $942.7 million / $8.29 |
| Operating cash flow / free cash flow (non-GAAP) | $1.255 billion / $985.5 million | $1.141 billion / $781.4 million |
| Cash and cash equivalents | $391.1 million | $101.3 million |
| Total debt | $5.621 billion | $5.911 billion |
| Dividends declared per share | $3.52 | $3.40 |
Net sales were essentially flat overall. Excluding acquisition, divestiture, and foreign-exchange effects, sales increased 1%, with favorable volume/mix (+2 percentage points) offset partly by lower net pricing (-1 point). GAAP operating income rose 32%, but the increase mainly reflects lower impairment charges and special-project costs versus 2019. Adjusted operating income rose only 1%; adjusted EPS increased 6%. The 2020 effective tax rate was 24.1%, and net interest expense declined 9% to $189.2 million.
Segment results
- U.S. Retail Pet Foods: Sales decreased slightly to $2.870 billion; segment profit increased 10% to $552.7 million. Natural Balance and private-label dog food declined; profit benefited from synergies, pricing, and lower marketing costs.
- U.S. Retail Coffee: Sales increased 1% to $2.150 billion; segment profit rose 2% to $691.0 million. Higher at-home demand lifted volume/mix, partly offset by lower pricing and green coffee costs.
- U.S. Retail Consumer Foods: Sales declined 2% to $1.732 billion, including the prior-year comparison impact of the baking-business divestiture. Excluding that impact, sales rose 4%; segment profit fell 4% to $389.7 million, but increased 8% excluding the divestiture.
- International and Away From Home: Sales declined 2% to $1.050 billion; segment profit fell 13% to $173.4 million. COVID-19-related weakness in foodservice/away-from-home demand was a key pressure.
Cash, debt, and liquidity
Operating cash flow was $1.255 billion, up $113.6 million year over year; capital expenditures were $269.3 million, producing reported free cash flow of $985.5 million. The company repaid $900 million of long-term debt, issued $800 million of notes, reduced short-term borrowings by $185.8 million, and paid $396.8 million in dividends. It reported $248 million of commercial paper outstanding, access to a $1.8 billion revolving credit facility maturing in September 2022, and compliance with debt covenants. Management said available cash, operating cash flow, borrowing capacity, and capital-market access should cover the next 12 months, while noting COVID-19 could make financing more difficult or costly.
Material changes, outlook, and notable items
- COVID-19: Retail stock-up purchasing and increased at-home consumption contributed approximately $185 million of incremental sales, particularly in the fourth quarter; orders remained elevated at year-end. The company reported no significant production disruption, but away-from-home sales weakened and management warned retail demand could reverse as buying patterns normalize. COVID-related employee and operating initiatives cost approximately $13 million in the fourth quarter.
- Portfolio actions: Ainsworth integration was complete, with approximately $55 million of annual cost synergies reported as fully realized by year-end. The U.S. baking business had been sold in August 2018; its prior-year comparison also included a $27.7 million pretax gain.
- Impairment and interest-rate contracts: Smucker recorded a $52.4 million noncash impairment of the Natural Balance brand. A $239.8 million pretax loss on terminated interest-rate contracts was deferred in accumulated other comprehensive income and is being amortized to interest expense over the related debt’s life.
- Management objectives: Long-term strategic objectives remain average annual net-sales growth of 2–3%, adjusted operating-income growth of 5%, and adjusted EPS growth of 8%. These are long-term objectives, not specific FY2021 guidance. Management cited uncertainty about COVID-19’s duration and effects. The company anticipated an FY2021 effective tax rate of approximately 24%, capital expenditures of $300 million, dividends of approximately $400 million, and interest payments of approximately $190 million.
- Key risks and contingencies: Major exposures include COVID-19, commodity and input-cost volatility, reliance on Walmart (32% of sales), single-source suppliers and concentrated production sites, competition and private label, substantial debt, and potential impairment of goodwill and brands. The Pet Foods reporting unit’s estimated fair value exceeded carrying value by only about 3%; the filing reports that a 50-basis-point adverse change in either long-term growth or discount-rate assumptions would indicate impairment. The California Proposition 65 coffee-acrylamide case remained unresolved; no loss was accrued because loss was not considered probable or estimable.
Most important facts for investors to verify
- Whether COVID-era retail stock-up demand persists or reverses, and whether foodservice weakness continues.
- Underlying organic growth and segment profitability, particularly in Pet Foods and International and Away From Home, apart from acquisitions, divestitures, impairments, and derivative timing.
- Progress on debt repayment and refinancing, including the $1.85 billion of principal payments scheduled in fiscal 2022 and the effects of interest-rate changes.
- Assumptions and valuation headroom for Pet Foods goodwill and brand assets, plus any subsequent impairment indicators.
- Developments in the Proposition 65 litigation and any resulting warning, penalty, cost, or sales exposure.