J. M. Smucker Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2018; filed February 23, 2018. The filing reports fiscal 2018 results, notwithstanding the request metadata’s “2017 Q3” label. Amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended Jan. 31, 2018 | Prior-year quarter | Nine months ended Jan. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,903.3 | $1,878.8 | $5,575.8 | $5,608.5 |
| Gross profit / margin | $728.5 / 38.3% | $722.9 / 38.5% | $2,145.6 / 38.5% | $2,188.5 / 39.0% |
| Operating income / margin | $162.7 / 8.5% | $237.7 / 12.7% | $727.2 / 13.0% | $834.8 / 14.9% |
| Net income | $831.3 | $134.6 | $1,152.7 | $481.9 |
| Diluted EPS | $7.32 | $1.16 | $10.15 | $4.14 |
| Operating cash flow | Quarterly figure not separately stated here | $903.6 | $794.8 |
- Quarterly sales rose 1%, with favorable volume/mix and foreign exchange; nine-month sales fell 1%, mainly from unfavorable volume/mix in coffee and consumer foods.
- Operating income fell 32% for the quarter and 13% for nine months. The key factor was impairment expense: $176.9 in the current quarter versus $75.7 in the prior-year quarter. Nine-month adjusted operating income, a non-GAAP measure, declined 5% to $1,083.5.
- Quarterly adjusted operating income increased 4% to $399.8; adjusted diluted EPS increased 25% to $2.50. For nine months, adjusted diluted EPS rose 2% to $6.03. These measures exclude specified items and are not GAAP results.
- Quarterly GAAP net income includes a $765.8 net discrete tax benefit related to the 2017 U.S. tax legislation. The resulting unusually high GAAP earnings and EPS are not representative of underlying operating performance.
Segments and material changes
- Quarter sales / segment profit: U.S. Retail Coffee $550.5 / $182.1; Consumer Foods $511.6 / $121.3; Pet Foods $561.9 / $118.0; International and Away From Home $279.3 / $52.6. Pet Foods profit declined 7%, while Coffee, Consumer Foods, and International and Away From Home profit increased.
- For the nine months, Coffee segment profit declined 14% to $458.5 and Pet Foods declined 7% to $339.2; Consumer Foods increased 4% to $363.1 and International and Away From Home increased 6% to $144.6.
- Pet Foods outlook deterioration prompted a $145.0 goodwill impairment and $31.9 impairment of indefinite-lived trademarks. Management said the carrying values of Pet Foods goodwill and trademarks remain susceptible to further impairment.
Cash, debt, liquidity, and capital allocation
- Nine-month operating cash flow was $903.6; capital expenditures were $210.3, yielding reported non-GAAP free cash flow of $693.3, versus $658.2 a year earlier. Cash and equivalents were $186.2 at January 31, 2018.
- Total debt was $4,942.5, down from $5,398.5 at April 30, 2017. This included $4,688.5 long-term debt and $254.0 commercial paper borrowings. The company had no borrowings outstanding under its $1.8 billion revolving credit facility and reported compliance with debt covenants.
- In December, the company issued $800.0 of senior notes, used proceeds to repay $500.0 of notes due March 2018, and prepaid the remaining $550.0 term loan. Dividends paid during the nine months were $261.4; dividends declared were $2.34 per share.
- Management said cash, operating cash flow, available borrowing capacity, and capital-market access should meet expected cash needs for the next 12 months, absent material acquisitions or other significant investments.
Outlook, commentary, and risks
- Management anticipated a fourth-quarter fiscal 2018 effective tax rate of approximately 28%; the 21% federal statutory rate applies to subsequent fiscal years, subject to base-broadening provisions. Tax accounting was provisional and could be revised during the permitted measurement period.
- The company expects approximately $50.0 of annual cost reductions from its organization optimization program, mainly during 2018, and plans to reinvest the savings. A separate cost management program targets approximately $200.0 annual reductions by the end of 2020. Big Heart integration synergies of $200.0 annually were reported as fully realized.
- The Wesson oil acquisition remained subject to FTC review after a second request for information. The proposed all-cash price was approximately $285.0, with anticipated annual sales of about $230.0 and expected annual synergies of about $20.0 within two years after closing. Either party could terminate if approval had not been obtained by March 31, 2018, unless otherwise agreed.
- Other risks include further Pet Foods impairments, commodity and input-cost volatility, competitive pricing and promotional activity, customer and supplier concentration, execution of savings and pricing initiatives, and foreign-exchange and interest-rate movements. The company disclosed ordinary-course legal proceedings but did not expect their outcome to materially adversely affect its financial position, results, or cash flows.
- The company was constructing a Longmont, Colorado, Uncrustables facility, with production expected to begin in 2020; total potential investment was $340.0, including an initial phase of up to $200.0.
Important facts for investors to verify
- Whether Pet Foods sales forecasts and valuation assumptions stabilize, or trigger further goodwill or trademark impairments.
- The final tax effects of the Tax Cuts and Jobs Act, including deferred-tax adjustments, transition-tax payments, and future effective tax rates.
- FTC disposition and closing status of the Wesson transaction, including any revised terms or timing.
- Progress and realized benefits from the $50.0 organization savings and the separate $200.0 cost management target.
- Underlying operating trends apart from the one-time tax benefit, impairment charges, and other adjustments; compare GAAP results with management’s reconciled non-GAAP measures.
- Debt refinancing, capital expenditure, dividend, and cash-flow needs, including the planned Uncrustables facility investment.