The J. M. Smucker Company — Form 10-Q
Reporting period: Third quarter and nine months of fiscal 2015, ended January 31, 2015; comparisons are with the corresponding periods of fiscal 2014. Amounts are in millions of dollars except per-share data.
Business context and financial performance
Smucker manufactures and markets food products through U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods. The quarter’s results reflected weaker coffee volume and higher green coffee costs, partly offset by lower marketing expenses and improved results in Consumer Foods.
| Metric | Quarter ended Jan. 31, 2015 | Year-over-year | Nine months ended Jan. 31, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $1,440.0 | Down 2% | $4,245.6 | Down 3% |
| Gross profit / margin | $522.9 / 36.3% | $545.2 / 37.2% | $1,538.1 / 36.2% | $1,590.7 / 36.3% |
| Operating income / margin | $255.1 / 17.7% | $263.5 / 18.0% | $701.5 / 16.5% | $727.6 / 16.6% |
| Net income | $160.9 | Down from $166.7 | $435.2 | Down from $446.7 |
| Diluted EPS | $1.58 | Down from $1.59 | $4.28 | Up from $4.24 |
| Adjusted diluted EPS excluding specified comparability items | $1.54 | Down from $1.63 | $4.40 | Up from $4.37 |
Quarterly adjusted operating income was $248.0, down 8%; nine-month adjusted operating income was $720.3, down 4%. These are company-defined non-GAAP measures and exclude special project costs and unallocated derivative gains and losses.
Segments and material changes
- U.S. Retail Coffee: Quarterly sales fell 1% to $571.8 and segment profit fell 17% to $150.5. Nine-month sales fell 5% to $1,607.5 and profit fell 13% to $439.3. Folgers volume declined 9% in the quarter and 10% over nine months; higher green coffee costs, volume declines, and promotional activity pressured results.
- U.S. Retail Consumer Foods: Quarterly sales fell 2% to $549.5 while segment profit rose 9% to $114.4. Nine-month sales fell 2% to $1,677.3 while profit rose 15% to $345.6, supported in part by lower peanut costs and lower marketing expense. Sahale contributed $10.3 of quarterly and $16.3 of nine-month segment sales.
- International, Foodservice, and Natural Foods: Quarterly sales fell 3% to $318.7 and profit rose 13% to $48.0, partly reflecting a prior-year trade-spending accrual adjustment. Nine-month sales fell 2% to $960.8 and profit fell 4% to $128.6. Currency weakness in Canada and higher green coffee costs weighed on results.
Quarterly selling, distribution, and administrative expense decreased $13.0, primarily due to lower marketing expense. General and administrative expense included $4.4 of pre-announcement costs for the pending Big Heart Pet acquisition. Interest expense was lower year over year; the company received $53.5 from terminating an interest-rate swap, with the benefit deferred and expected to reduce future interest expense.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $511.6, versus $589.1; capital expenditures were $162.1, versus $148.9. Company-defined free cash flow was $349.5, versus $440.2.
- Cash was $111.7 at January 31, 2015, compared with $153.5 at April 30, 2014. The company reported $427.7 of operating cash flow in the third quarter, following $83.9 through the first half.
- Total debt was $2,179.8, versus $2,228.2 at April 30, 2014, including $264.0 of commercial paper borrowings at a weighted-average rate of 0.35%. Shareholders’ equity was $5,224.2. The company reported compliance with debt covenants and no borrowings under its $1.5 billion revolving facility at January 31.
- Dividends paid during the nine months were $189.0; dividends declared were $1.92 per share, up from $1.74. The company said it did not expect near-term share repurchases as it planned to pay down acquisition-related debt.
Outlook, acquisition, and risks
On February 3, 2015, after quarter-end, Smucker agreed to acquire Big Heart Pet Brands for a preliminary value of approximately $5.8 billion. Consideration includes approximately 17.9 million Smucker shares and $1.3 billion cash, with assumption of approximately $2.6 billion of Big Heart Pet net debt. Closing was expected by the end of March, subject to customary conditions. The company anticipated approximately $6.5 billion of combined debt at closing and annual interest expense of approximately $200.0.
Smucker estimated $190.0–$220.0 of fourth-quarter earnings reductions from make-whole payments and related financing costs, with the amount dependent on economic conditions. It also expected approximately $225.0 of other one-time transaction costs, about $150.0 of which were expected to be cash charges; roughly half of the costs were expected in fiscal 2016. Committed bridge financing was $5.5 billion, which the company expected to refinance with a bank term loan and long-term bonds. The company said available cash, operating cash flow, and borrowing capacity were expected to meet requirements for the next 12 months, including acquisition-related needs.
Management anticipated an unfavorable relationship between coffee pricing and green coffee costs for the remainder of fiscal 2015. Key stated risks include commodity-price volatility, competitive and consumer responses to pricing and promotions, coffee demand, currency and interest-rate movements, financing and integration of Big Heart Pet, achieving expected synergies and deleveraging, and maintaining key customer and supplier relationships. The company reported no material off-balance-sheet arrangements and did not expect pending ordinary-course legal proceedings to have a material adverse effect based on information then available.
Most important facts for investors to verify
- Big Heart Pet transaction closing, final consideration, financing and refinancing terms, and resulting leverage and interest burden.
- Actual make-whole payments and transaction costs, and their timing and cash versus noncash components.
- Whether coffee volume and the price-cost relationship improve, particularly for Folgers and K-Cup products.
- Cash conversion and working-capital needs, including the sustainability of operating cash flow and free cash flow.
- Segment performance and the effects of currency, commodity prices, and derivative accounting on reported results and margins.