The J. M. Smucker Company — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2014, ended January 31, 2014. Comparisons are with the corresponding periods of fiscal 2013. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Three months ended Jan. 31, 2014 | Prior year | Nine months ended Jan. 31, 2014 | Prior year |
|---|---|---|---|---|
| Net sales | $1,465.5 | $1,559.6 | $4,376.3 | $4,558.0 |
| Gross profit | $545.2 | $536.2 | $1,590.7 | $1,547.9 |
| Gross margin | 37.2% | 34.4% | 36.3% | 34.0% |
| Operating income | $263.5 | $258.3 | $727.6 | $696.4 |
| Operating margin | 18.0% | 16.6% | 16.6% | 15.3% |
| Net income | $166.7 | $154.2 | $446.7 | $413.9 |
| Diluted EPS | $1.59 | $1.42 | $4.24 | $3.78 |
- Quarterly sales fell 6%; management attributed the decline mainly to lower pricing, particularly for coffee and peanut butter, and exited business in International, Foodservice, and Natural Foods. Adjusting for Enray, Cumberland, and foreign exchange, sales declined 7% for the quarter and 5% year to date.
- Lower commodity costs, especially green coffee, peanuts, and oils, supported gross profit and margins. For the quarter, reported operating income rose 2%; excluding special project costs, it rose 3%. For the first nine months, reported operating income rose 4%, but increased just 1% excluding special project costs.
- Per-share earnings benefited in part from share repurchases: diluted weighted-average shares declined to 104.0 million for the quarter from 107.5 million a year earlier.
- Quarter segment results: U.S. Retail Coffee sales fell 8% while segment profit rose 4%; U.S. Retail Consumer Foods sales fell 4% and profit fell 1%; International, Foodservice, and Natural Foods sales fell 6% and profit fell 10%.
- For the first nine months, segment profit rose 11% in U.S. Retail Coffee, but fell 7% in U.S. Retail Consumer Foods and 9% in International, Foodservice, and Natural Foods.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $589.1, down from $683.6. Capital expenditures were $148.9; company-defined free cash flow was $440.2, versus $537.1.
- Investing activities used $257.2, including $101.8 for the Enray and Silocaf acquisitions. Financing activities used $405.2, including $177.4 in dividends and $227.0 in treasury-share purchases.
- At January 31, cash was $168.6, compared with $256.4 at April 30, 2013. Current assets were $1,508.1 and current liabilities $608.3.
- Total debt was $2,029.4, compared with $2,017.8 at April 30; shareholders’ equity was $5,204.8. The $1.5 billion revolving credit facility had no borrowings outstanding at quarter-end. The company reported compliance with debt covenants.
- Management said cash, operating cash flow, and available credit should be sufficient for the next 12 months, absent material acquisitions or other significant investments. Approximately $144.2 of cash was held by international subsidiaries and was not intended for repatriation.
Outlook, material developments, and risks
- No specific earnings or sales guidance was provided in the filing. Management expected fiscal-year capital expenditures of approximately $240, down from the prior estimate of $270 because some projects were deferred.
- The restructuring program is expected to cost approximately $265 in total; $244.7 had been incurred through January 31, with most remaining costs expected through 2015. About 90% of approximately 850 planned position reductions had been completed. The Ste. Marie, Quebec facility was expected to close in the fourth quarter of 2014.
- The company revised its peanut and other nut butter plans: natural peanut butter production will remain at New Bethlehem, while the Memphis conversion to a peanut butter plant proceeds. Related capital investment is now estimated at approximately $90, up from $70.
- Enray, acquired in August 2013, and Silocaf, acquired in September 2013, had aggregate net cash consideration of $101.8. Their reported results were not material to the quarter, according to management. The Cumberland licensing and distribution agreement began July 1, 2013.
- An unplanned trade-spending accrual adjustment of approximately $10.0, primarily related to foodservice hot beverages, reduced quarterly sales and segment profit. Management also cited lower pricing, business exits, competitive promotions, and foreign exchange as pressures.
- Key disclosed risks include volatility in commodity prices and hedging, consumer and retailer response to pricing, competition, integration and restructuring execution, customer or supplier concentration, foreign exchange and interest rates, and potential impairment of goodwill or intangible assets. The company said pending ordinary-course legal proceedings were not expected to materially affect its financial position, results, or cash flows; it could not predict their outcomes or estimate a loss range.
Important facts for investors to verify
- Whether improved gross margins and coffee-segment profitability persist as pricing, commodity costs, and competitive conditions change.
- How much of reported earnings growth reflects lower special project costs and share-count reductions versus underlying operating improvement.
- Whether sales and profitability stabilize in the International, Foodservice, and Natural Foods segment after business exits and the trade-spending adjustment.
- Execution, remaining costs, timing, and expected benefits of the restructuring and revised nut-butter capital plans.
- Cash generation, working-capital trends, debt maturities, and the effect of continued dividends and share repurchases on liquidity.
- Management’s non-GAAP measures exclude specified costs and may not be comparable with similarly titled measures used by other companies.