The J. M. Smucker Company — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended January 31, 2022. Amounts are in millions of dollars except per-share data. The quarter reflects ongoing portfolio changes, inflation and supply-chain pressures, and an impairment charge in Pet Foods.
Financial performance
| Metric | Three months ended Jan. 31, 2022 | Year-over-year | Nine months ended Jan. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $2,057.1 | Down 1% | $5,965.1 | Down 2% |
| Net sales, excluding divestitures and FX | $2,055.3 | Up 4% | $5,947.3 | Up 4% |
| Gross profit / margin | $683.1 / 33.2% | Down 16%; margin down from 39.0% | $2,034.0 / 34.1% | Down 15%; margin down from 39.5% |
| Operating income / margin | $150.6 / 7.3% | Down 63% | $721.8 / 12.1% | Down 37% |
| Net income | $69.7 | Down 73% | $429.6 | Down 41% |
| Diluted EPS | $0.64 | Down from $2.32 | $3.96 | Down from $6.42 |
| Adjusted diluted EPS (non-GAAP) | $2.33 | Down 5% | $6.66 | Down 8% |
Reported sales comparisons include prior-year sales from businesses since divested. On the company’s adjusted basis, gross profit was $712.3 in the quarter and $2,089.4 for nine months, down 8% and 10%, respectively. Adjusted operating income was $377.9 and $1,089.2, down 6% and 11%.
Segments and material changes
- U.S. Retail Pet Foods: Quarterly sales were $696.6, down 9%; segment profit was $95.7, down 29%. Excluding divested businesses, quarterly sales declined 1%, as pricing was offset by weaker volume/mix, especially dog food. Nine-month segment profit fell 29%.
- U.S. Retail Coffee: Quarterly sales were $661.8, up 6%, while segment profit increased 1% to $213.4. Higher pricing offset weaker volume/mix. Nine-month profit declined 4% amid higher commodity costs.
- U.S. Retail Consumer Foods: Quarterly sales were $433.1, down 3%; excluding Crisco, sales increased 4%. Segment profit fell 10% to $99.5. Pricing and growth in Uncrustables were offset by higher costs and unfavorable volume/mix in some products.
- International and Away From Home: Quarterly sales rose 13% to $265.6 and segment profit rose 40% to $34.2, with improved Away From Home demand and higher pricing.
Higher commodity, ingredient, manufacturing, packaging, and transportation costs, together with unfavorable volume/mix, weighed on gross profit. Quarterly operating income also included a $150.4 noncash impairment charge related to the Rachael Ray Nutrish brand. The brand was reclassified as finite-lived, with annual amortization of $10.5 expected. Pet Foods goodwill remained susceptible to further impairment if projections or market conditions deteriorate.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $742.6, versus $1,274.0; capital expenditures were $244.5, yielding reported free cash flow of $498.1 versus $1,075.3. Management attributed lower operating cash flow mainly to working-capital needs and lower earnings.
- Cash and equivalents were $284.3 at January 31, 2022, versus $334.3 at April 30, 2021. Current assets were $1,988.2 and current liabilities $1,664.6.
- Total debt was $4,403.7, down from $4,751.7 at April 30, 2021. The company issued $800.0 of senior notes and used proceeds primarily to repay $750.0 of notes; it also prepaid $400.0 of notes and recorded a $6.9 loss on extinguishment. Short-term commercial paper borrowings were $94.0.
- The company had a $2.0 billion revolving credit facility, had not drawn on it at quarter-end, and reported compliance with debt covenants. It stated available cash, operating cash flow, borrowing capacity, and capital-market access should cover requirements for the next 12 months.
- Nine-month dividends paid were $311.1. No shares were repurchased under the Board-authorized program; the quarter’s small share purchases were from stock-plan recipients.
Outlook, management commentary, and risks
- Management expected a full-year FY2022 effective tax rate of approximately 25.5% and capital expenditures of approximately $400.0.
- The restructuring program is expected to cost approximately $110.0 in total, with most costs expected by the end of calendar 2022 and completion by the end of 2023. Actions include organizational changes and facility closures, including the planned Ripon, Wisconsin, closure.
- The company announced a planned $1.1 billion Uncrustables manufacturing facility and distribution center in Alabama; production is expected to begin in calendar 2025, subject to the stated property transaction contingencies.
- Management described elevated at-home consumption but continued supply-chain disruption, labor shortages, and higher input, packaging, and transportation costs. It warned that fulfillment disruptions could cause lost volume or customer penalties. COVID-19 effects and Away From Home recovery remained uncertain.
- Divestitures during the quarter included natural beverage and grains businesses, with preliminary net proceeds of $97.3, and private-label dry pet food, with final net proceeds of $32.9. The company recorded a $26.7 gain and a $17.1 loss, respectively. Net proceeds for the natural beverage and grains sale remained subject to final working-capital adjustment.
- Legal matters include a pending appeal in a Proposition 65 coffee-warning case and Folgers serving-count class actions. No loss contingency was recorded for the latter because loss was not considered probable or estimable; a significant adverse outcome could affect results and sales.
Key facts for investors to verify
- Whether pricing can offset persistent input and supply-chain cost inflation without further volume deterioration.
- Pet Foods performance, especially dog food, and the assumptions underpinning the Nutrish impairment and remaining segment goodwill valuations.
- Actual restructuring costs, savings, facility-closure execution, and timing versus the approximately $110.0 estimate.
- Cash conversion and working-capital trends, capital spending, and funding of the Alabama facility alongside dividends and debt obligations.
- Final proceeds and adjustments for the natural beverage and grains divestiture, and developments in the disclosed litigation.