The J. M. Smucker Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2015, ended October 31, 2014. Comparisons are with the corresponding 2013 periods. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,481.8, down 5% | $2,805.6, down 4% |
| Gross profit / margin | $536.5 / 36.2%, versus $552.6 / 35.4% | $1,015.2 / 36.2%, versus $1,045.5 / 35.9% |
| Operating income / margin | $254.8 / 17.2%, versus $250.8 / 16.1% | $446.4 / 15.9%, versus $464.1 / 15.9% |
| Net income | $158.3, versus $153.4 | $274.3, versus $280.0 |
| Diluted EPS | $1.55, versus $1.46 | $2.69, versus $2.65 |
- For the quarter, reported operating income rose 2% and diluted EPS rose 6%; excluding the company’s specified comparability items, operating income fell 4% and EPS was flat. For the six months, reported operating income fell 4%, while adjusted operating income fell 1%; adjusted diluted EPS increased 4%.
- Operating cash flow was $83.9 for the six months, down from $168.0. Capital expenditures were $113.7, producing negative free cash flow of $29.8, compared with positive $84.6 a year earlier. Management attributed lower operating cash flow chiefly to working-capital needs, including higher green coffee costs and inventory.
- Cash was $105.3 at October 31, versus $153.5 at April 30. Total debt was $2,436.7, up from $2,228.2, including $545.9 of commercial paper borrowings at a 0.31% weighted-average rate. Long-term debt was $1,890.8. The company reported compliance with debt covenants and no outstanding balance on its $1.5 billion revolving facility.
- Shareholders’ equity was $5,165.0. Dividends declared were $0.64 per share for the quarter and $1.28 for the six months.
Segment results and material changes
- U.S. Retail Coffee: Quarterly sales fell 10% and segment profit fell 16%. Segment volume declined 18%, including a 20% decline for Folgers, amid higher promoted shelf prices, competitive activity, and reduced promotional effectiveness. K-Cup pack sales increased 12% for the quarter.
- U.S. Retail Consumer Foods: Quarterly sales fell 1%, while segment profit rose 17%, reflecting lower peanut and oil costs and lower prior-year facility and capacity-expansion costs. Uncrustables sales increased 21% for the quarter. In November, the company reduced prices on most U.S. peanut butter items by 7% in response to lower peanut costs.
- International, Foodservice, and Natural Foods: Quarterly sales fell 2% and segment profit fell 5%. The company cited planned exits from private-label hot beverage business, Canadian costs associated with sourcing from the U.S. and a weaker Canadian dollar, and higher green coffee costs.
- Quarterly sales weakness was primarily volume-driven, particularly in coffee; sales mix was unfavorable. Six-month sales also reflected lower net price realization. Lower commodity costs benefited consumer foods, while coffee cost recovery and promotional pricing remained challenging.
Outlook, risks, and unusual items
- Management expects operating cash flow in the second half of fiscal 2015 to significantly exceed the first half, as seasonal working-capital requirements ease. It believes available cash, operating cash flow, and borrowing capacity should cover the next 12 months’ needs, including capital spending, dividends, debt service, and repurchases, absent material acquisitions or other significant investments. No specific full-year earnings guidance is stated in the provided filing text.
- Management anticipated an unfavorable relationship between coffee net price realization and green coffee costs in the second half of fiscal 2015. Commodity prices, competitive pricing and promotions, consumer responses to price changes, and foreign exchange remain material risks.
- The company acquired Sahale Snacks on September 2, 2014, for $80.3. Its results were included from the acquisition date and were not expected to materially affect fiscal-year results. Goodwill was preliminarily valued at $46.9.
- The long-running restructuring program had incurred $253.9 of an expected $265.0 by October 31, leaving $11.1, mostly for conversion of the Memphis fruit spreads facility to a peanut butter plant. Most remaining costs were expected in fiscal 2015.
- Beginning May 1, 2014, the company stopped qualifying commodity and foreign-currency derivatives for hedge accounting; gains and losses are recognized immediately in earnings, creating timing volatility. The company says the positions are economic hedges and generally expects derivative movements to be offset by changes in underlying exposures.
- Legal proceedings arise in the ordinary course of business. The company said it could not predict outcomes or reasonably estimate a potential loss range, but did not expect a material adverse effect based on information then known.
- Foreign subsidiaries held $92.5 of cash that the company did not intend to repatriate. The company was evaluating the effect of the new revenue-recognition standard, effective for it May 1, 2017.
Key facts for investors to verify
- Whether Folgers and overall U.S. Retail Coffee volumes recover, and the impact of promotional and pricing decisions on margins.
- Whether lower peanut and oil costs, including the November peanut-butter price reduction, sustain consumer-foods profitability.
- Second-half operating cash flow and working-capital normalization, given first-half negative free cash flow.
- Commercial-paper balances, liquidity headroom, and the effect of short-term borrowing on interest expense and leverage.
- Remaining restructuring costs and execution of the Memphis facility conversion.
- How immediate derivative mark-to-market recognition, commodity prices, and foreign exchange affect reported results versus underlying performance.