The J. M. Smucker Company — FY2022 Form 10-K
Reporting period: Fiscal year ended April 30, 2022. This is an annual report; it does not provide a separate fourth-quarter results summary. Unless noted otherwise, amounts are in millions of dollars.
Business context
Smucker manufactures and markets branded food and beverage products, primarily in the U.S. Its three reportable segments are U.S. Retail Pet Foods, U.S. Retail Coffee, and U.S. Retail Consumer Foods; International and Away From Home includes other operations. The U.S. retail segments represented 87% of consolidated sales.
During FY2022, the company sold its natural beverage and grains businesses and private label dry pet food business. Earlier divestitures included Natural Balance and Crisco.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $7,998.9 | $8,002.7 |
| Gross profit / gross margin | $2,700.7 / 33.8% | $3,138.7 / 39.2% |
| Operating income / operating margin | $1,023.8 / 12.8% | $1,386.8 / 17.3% |
| Net income | $631.7 | $876.3 |
| Diluted GAAP EPS | $5.83 | $7.79 |
| Adjusted operating income (non-GAAP) | $1,440.1 | $1,528.8 |
| Adjusted diluted EPS (non-GAAP) | $8.88 | $9.12 |
| Operating cash flow / capital expenditures | $1,136.3 / $417.5 | $1,565.0 / $306.7 |
| Free cash flow (non-GAAP) | $718.8 | $1,258.3 |
| Total debt at year-end | $4,490.6 | $4,751.7 |
| Cash and cash equivalents at year-end | $169.9 | $334.3 |
Reported sales were essentially flat. Excluding prior-year divestiture sales and foreign currency effects, sales increased 5%, mainly from higher pricing. Gross profit fell 14%, and operating income fell 26%; cost inflation, unfavorable volume/mix, recall-related costs, and a $150.4 Rachael Ray Nutrish impairment weighed on results. Lower marketing and incentive compensation expenses partly offset the pressure. Net interest expense declined 9%, primarily due to lower debt outstanding.
Operating cash flow declined $428.7, principally from higher working-capital needs and lower net income adjusted for noncash items. Cash used for financing included $1,157.0 of long-term debt repayments, $418.1 of dividends, and $270.4 of treasury-share purchases. The company reported a $2.0 billion revolving credit facility, maturing in 2026, and $180.0 of commercial paper borrowings; it said it was in compliance with debt covenants.
Material changes and segment performance
- U.S. Retail Pet Foods: Sales declined 3% as reported, but rose 4% excluding divested businesses; segment profit fell 19% to $395.9, mainly from higher costs and unfavorable volume/mix.
- U.S. Retail Coffee: Sales rose 5% to $2,497.3, primarily from pricing; segment profit fell 4% to $736.7 amid higher commodity costs and unfavorable volume/mix.
- U.S. Retail Consumer Foods: Sales fell 7% as reported, but rose 5% excluding divestitures; segment profit fell 10% to $424.2, reflecting divestitures and higher costs, among other factors.
- International and Away From Home: Sales rose 9% and segment profit rose 14% to $142.0; the Away From Home operation benefited from recovering demand.
Sales to Walmart were 34% of consolidated sales, up from 32% in FY2021; the top 10 customers accounted for approximately 60% of sales.
Outlook, commentary, risks, and unusual items
- Management’s long-term objectives are low-single-digit average annual sales growth, mid-single-digit adjusted operating-income growth, and high-single-digit adjusted EPS growth. These are long-term objectives, not a specific FY2023 earnings forecast.
- Management expected inflationary pressures to continue into FY2023, with pricing actions providing partial mitigation. It estimated a FY2023 effective tax rate of approximately 24.2% and projected $550.0 of FY2023 capital expenditures.
- The company expects approximately $70.0 of restructuring costs for planned activities, with most remaining costs expected in the first half of FY2023 and completion anticipated by the end of 2023.
- After year-end, Smucker recalled select Jif peanut butter products over potential salmonella contamination and temporarily halted production at its Lexington facility. It recorded $52.3 of reserves and a $49.8 insurance receivable as of April 30, 2022. Management estimated an approximately $125.0 unfavorable pre-tax FY2023 impact, net of remaining anticipated insurance recoveries; actual losses may differ. The company expected the matter to be substantially resolved in the first quarter of FY2023.
- In FY2022, the company recorded a $150.4 impairment charge for the Rachael Ray Nutrish brand. Pet Foods goodwill had a relatively narrow valuation cushion: estimated fair value exceeded carrying value by approximately 6%, and specified sensitivity scenarios produced estimated fair value below carrying value.
- Smucker announced a planned $1.1 billion Uncrustables manufacturing and distribution facility in Alabama, with production expected to begin in calendar 2025. Commodity, packaging, transportation, and labor costs; supply-chain disruption; customer concentration; product safety; and weather-related disruptions are significant disclosed risks.
- Two lawsuits disclosed include a pending appeal in a coffee acrylamide-warning case and putative class actions alleging Folgers serving-count misrepresentations. The filing says losses were not considered probable or estimable for the latter matters.
Important facts for investors to verify
- Whether pricing continues to offset commodity, packaging, transportation, and labor inflation without materially weakening volumes or mix.
- The realized sales, costs, insurance recoveries, and consumer response associated with the Jif recall, compared with management’s FY2023 estimate.
- Pet Foods results and assumptions underlying goodwill valuations, including the risk of further impairment.
- Cash conversion and working-capital trends, debt repayment capacity, and funding needs for planned capital spending and dividends.
- Progress and cost execution on restructuring, divestitures, and the Uncrustables facility, as well as exposure to major customers and single-source suppliers.
Audit: Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.