J. M. Smucker Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended July 31, 2016. Comparisons are with the three months ended July 31, 2015, unless stated otherwise. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $1,815.8 | $1,952.0 | Down 7% |
| Gross profit / margin | $722.7 / 39.8% | $728.7 / 37.3% | Profit down 1%; margin up |
| Operating income / margin | $293.8 / 16.2% | $267.1 / 13.7% | Up 10% |
| Net income | $170.0 | $136.4 | Up 25% |
| Diluted EPS | $1.46 | $1.14 | Up 28% |
| Operating cash flow | $238.9 | $307.0 | Down $68.1 |
| Capital expenditures | $50.2 | $53.0 | |
| Free cash flow (non-GAAP) | $188.7 | $254.0 | Down $65.3 |
Adjusted operating income, a non-GAAP measure, was $364.0, up 2%; adjusted diluted EPS was $1.86, up 16%. These measures exclude amortization, special project costs, and unallocated derivative gains or losses. The company reports that adjusted gross profit decreased 3% to $719.0.
Segments and material changes
- Sales declined in every segment: U.S. Retail Coffee $513.3 (down 9%); U.S. Retail Consumer Foods $537.0 (down 8%); U.S. Retail Pet Foods $519.5 (down 6%); International and Foodservice $246.0 (down 3%).
- Segment profit was $173.8 for Coffee (flat), $111.4 for Consumer Foods (down 7%), $122.2 for Pet Foods (up 5%), and $39.5 for International and Foodservice (up 9%).
- Reported sales fell $136.2. Excluding the prior-year U.S. canned milk business divested in December 2015 and foreign exchange, sales declined 5%, principally reflecting lower net pricing and unfavorable Pet Foods volume/mix.
- Management attributed higher operating income mainly to lower selling, distribution, and administrative expenses, including acquisition synergies and reduced selling expense. Lower commodity costs and synergies partly offset lower pricing and the loss of canned milk profit.
- Net income and EPS also benefited from a lower effective tax rate and fewer weighted-average shares. The prior-year tax rate was elevated by deferred state tax expense related to state tax-law changes.
Cash, debt, and liquidity
- Cash and cash equivalents were $109.6 at July 31, versus $109.8 at April 30, 2016. Current assets were $1,740.7 and current liabilities $1,288.4.
- Total debt was $5,351.7 ($306.0 short-term borrowings and $5,045.7 long-term debt), down from $5,430.0 at April 30. The company repaid $100.0 of its term loan during the quarter; short-term commercial paper borrowings increased by $22.0.
- Commercial paper borrowings carried a 0.65% weighted-average rate. The company had no balance outstanding on its $1.5 billion revolving credit facility, which matures in September 2018, and reported compliance with all debt covenants.
- Operating cash flow was lower mainly because of inventory buildup, particularly fruit and coffee, and a $49.6 prior-year tax refund comparison. Quarterly dividends paid were $77.8; dividends declared per share were $0.75, versus $0.67 a year earlier.
- Management expects cash on hand, operating cash flow, and available borrowing capacity to cover requirements for the next 12 months, including capital spending, dividends, debt service, and share repurchases, absent material acquisitions or other significant investments. It does not intend to repatriate $104.9 held by international subsidiaries.
Outlook, management commentary, and risks
- Management expects a full-year FY2017 effective tax rate of approximately 33.5%.
- The company targets approximately $200.0 in annual net realized savings from Big Heart integration and organizational optimization by the end of 2018. It expected $100.0 of incremental savings in FY2017 versus FY2016; $32.0 was realized in this quarter, and $69.0 had been realized toward the stated annual savings goal to date. An additional approximately $50.0 of annual savings is expected over the next few years, much of which management plans to reinvest.
- Big Heart integration costs are expected to total approximately $275.0 through 2018; $201.4 had been incurred through July 31, 2016. Restructuring costs are expected to total approximately $40.0, with $7.3 incurred to date, plus $15.0–$17.0 in capital expenditures. The plan is expected to eliminate approximately 125 positions and includes facility consolidations, principally targeted for completion by 2017.
- Key stated risks include realizing expected synergies and cash flow for debt reduction; commodity, energy, and foreign-exchange volatility; pricing and competitive pressures; supply, transportation, customer, and supplier concentration; weather and food-security events; and potential asset impairments, tax changes, and regulatory developments.
- The company is involved in ordinary-course legal proceedings but said it could not predict outcomes or reasonably estimate a loss range; based on information available, it does not expect a material adverse effect. It reported no material off-balance-sheet arrangements or material changes to previously disclosed contractual obligations.
Important facts for investors to verify
- Whether lower pricing and Pet Foods volume/mix continue to pressure comparable sales, and how segment trends develop.
- Whether reported and adjusted profit growth is sustained, including the effects of tax rates, derivative accounting, amortization, and special project exclusions.
- Progress toward savings targets and the remaining integration and restructuring costs, timing, and execution risks.
- Working-capital needs, free cash flow, and the pace of debt reduction, especially given seasonal inventory buildup and cash held overseas.
- Commodity, currency, competitive, and legal exposures, including the assumptions behind management’s stated liquidity outlook.