The J. M. Smucker Company — Form 10-Q
Reporting period: Quarter and nine months ended January 31, 2021 (fiscal 2021 third quarter). Comparisons are with the corresponding prior-year periods unless noted. Dollar amounts are in millions, except per-share data.
Financial performance
- Quarter revenue: Net sales were $2,076.7, up 5% reported and 7% excluding divestitures and foreign exchange. Growth reflected stronger retail volume/mix, partly offset by weaker Away From Home sales.
- Quarter earnings and margins: Gross profit was $809.4, up 7%; gross margin was 39.0%, versus 38.5%. Operating income was $406.2, up 41%, with a 19.6% margin versus 14.7%. Net income was $261.5, up 40%, and diluted EPS was $2.32 versus $1.64. Adjusted operating income increased 2% to $403.9; adjusted diluted EPS increased 4% to $2.45.
- Nine-month results: Net sales were $6,082.5, up 7%; gross profit was $2,403.0, up 9%, and operating income was $1,148.1, up 31%. Net income rose 32% to $729.3 and diluted EPS rose 32% to $6.42. Adjusted operating income increased 13% to $1,217.2; adjusted diluted EPS increased 16% to $7.21.
- Cash flow: Nine-month operating cash flow was $1,274.0, versus $967.1; capital expenditures were $198.7. Company-reported free cash flow, a non-GAAP measure, was $1,075.3 versus $774.2. Investing cash flow included $569.3 in net divestiture proceeds. Financing cash outflow was $1,590.6, including $700.0 of long-term debt repayments, $504.1 of treasury-share purchases, and $304.8 of dividends.
- Liquidity and debt: Cash was $501.5 at January 31, compared with $391.1 at April 30, 2020. Total debt was $4,836.7, down from $5,621.3; $755.4 was classified as current. Short-term borrowings were $166.0, and the $1.8 billion revolving credit facility had no balance outstanding. The company reported compliance with debt covenants.
Material changes and business drivers
- U.S. Retail Coffee sales rose 12% in the quarter and segment profit rose 11%, reflecting elevated at-home consumption. U.S. Retail Consumer Foods sales rose 6% reported; excluding the prior-year Crisco sales comparison, sales increased 16%, with segment profit up 32%.
- U.S. Retail Pet Foods sales rose 6%, but segment profit fell 7%, reflecting lower pricing, higher costs, and the prior-year supplier-settlement recovery. International and Away From Home sales fell 13% and segment profit fell 50%, primarily due to continued weakness in Away From Home channels.
- The company sold the Crisco business on December 1, 2020, for net proceeds of $533.4 and recorded a $114.9 pretax gain. It sold Natural Balance on January 29, 2021, for net proceeds of $35.9 and recorded an $87.7 pretax loss. Net proceeds and working-capital adjustments remained subject to finalization in the fourth quarter of fiscal 2021.
- Quarter GAAP operating-income growth was affected by the prior-year $52.4 intangible impairment charge and the current-year $27.2 net divestiture gain. The adjusted measures exclude specified items, including amortization, derivative gains and losses, divestiture gains/losses, and special project costs.
Outlook, risks, and unusual items
- Management expected elevated at-home demand to continue through the remainder of fiscal 2021, subject to the pandemic’s course and vaccine availability and effectiveness. Away From Home demand had improved from early-pandemic levels, but could weaken again if restrictions increased.
- The company projected a fiscal 2021 effective tax rate of approximately 25.5%. It did not provide a consolidated revenue or earnings forecast in the supplied filing text.
- A restructuring program approved in the quarter is expected to incur approximately $60.0 of costs, with most expected in fiscal 2022 and completion by the end of 2023. Management expects approximately $60.0 of annual cost reductions by 2023; $1.7 of costs had been incurred through January 31, 2021.
- A Canadian pension-obligation transfer generated a noncash pretax settlement charge of $27.9 during the first half of fiscal 2021. The nine-month income statement also included $30.8 of pension settlement loss.
- COVID-19 risks include supply-chain and freight disruption, uncertain consumer demand, and continued pressure on Away From Home. Management reported minimal supply-chain disruption to date and said all production operations remained open.
- Goodwill and indefinite-lived pet-food trademarks were identified as susceptible to future impairment if projections or economic conditions deteriorate. The filing also describes pending Folgers serving-size advertising class actions and an appeal in a Proposition 65 coffee-warning case; no loss was recorded for these matters because loss was not considered probable or estimable.
Important facts for investors to verify
- Whether retail demand and Away From Home recovery persist, and how post-divestiture sales comparisons affect reported growth.
- Progress against the restructuring timeline, estimated $60.0 annual savings, and expected costs.
- Final Crisco and Natural Balance working-capital adjustments and any related financial-statement effects.
- Cash generation and planned allocation among debt repayment, dividends, capital spending, and share repurchases; supplier-financing obligations were $260.2 at January 31, 2021.
- Developments in pet-food goodwill and trademark impairment sensitivity, COVID-19 exposure, and the identified legal proceedings.