J. M. Smucker Company — Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2016 (the second quarter and first half of fiscal 2017). Comparisons are with the corresponding periods ended October 31, 2015, unless otherwise noted. Amounts are in millions except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,913.9; down 8% | $3,729.7; down 7% |
| Gross profit / margin | $742.9 / 38.8% (37.9% prior year) | $1,465.6 / 39.3% (37.6% prior year) |
| Operating income / margin | $303.3 / 15.8% (15.1% prior year) | $597.1 / 16.0% (14.4% prior year) |
| Net income | $177.3; up 1% | $347.3; up 11% |
| Diluted EPS | $1.52; up 3% | $2.98; up 14% |
| Adjusted diluted EPS (non-GAAP) | $2.05; up 7% | $3.92; up 12% |
| Operating cash flow | Not presented as a quarterly figure | $375.3, versus $582.5 |
| Capital expenditures / free cash flow (non-GAAP) | Not presented for the quarter | $84.0 / $291.3, versus $117.4 / $465.1 |
Adjusted results exclude intangible amortization, special project costs, and unallocated commodity and foreign-currency derivative gains or losses. The company reported adjusted operating income of $396.2 for the quarter (roughly flat) and $760.2 for the half year (up 1%).
Business context and material changes
- Reported sales fell 8% for the quarter and 7% for the half year. Excluding the U.S. canned milk divestiture and foreign exchange, sales declined 5% in both periods, reflecting unfavorable volume/mix and lower net price realization.
- The canned milk business, with prior-year sales of approximately $200 annually, was sold on December 31, 2015. Management attributed $67.7 of the quarterly and $107.2 of the six-month reported sales declines to the noncomparable divestiture.
- Quarterly segment sales declined across U.S. Retail Coffee (6%), Consumer Foods (13%), Pet Foods (6%), and International and Foodservice (3%). Coffee segment profit rose 3%; Consumer Foods fell 7%; Pet Foods was approximately flat; and International and Foodservice fell 7%.
- Management said lower commodity and manufacturing overhead costs and Big Heart acquisition synergies helped support margins and offset some of the effects of lower sales and pricing.
Balance sheet, debt, and liquidity
- At October 31, 2016, cash was $121.8; current assets were $1,805.2 and current liabilities $1,306.3.
- Total debt was $5,351.4, comprising $406.0 of commercial paper and $4,945.4 of long-term debt. Total debt was down $78.6 from April 30, 2016; the company repaid $200.0 of term-loan debt while short-term borrowings increased $122.0.
- A $1.5 billion revolving credit facility, maturing September 2018, had no borrowings outstanding. The company reported compliance with debt covenants and stated available cash, operating cash flow, and borrowing capacity should cover expected needs for the next 12 months, subject to assumptions.
- Operating cash flow declined $207.2 year over year in the first half, primarily due to seasonal inventory buildup and the prior-year working-capital reduction and $49.6 tax refund. Dividends paid were $164.9, versus $156.5. Declared dividends were $0.75 per share for the quarter, versus $0.67.
Outlook, management commentary, and risks
- Management expected a fiscal 2017 effective tax rate of approximately 33.0%. The filing provides no clear full-year sales or EPS guidance.
- Big Heart integration costs are expected to total approximately $275.0 through 2018; $224.0 had been incurred by October 31, 2016. Management targeted approximately $200.0 in annual net synergies by the end of 2018, including about $100.0 of incremental savings in fiscal 2017 versus 2016. It reported $97.5 of the $200.0 goal realized to date.
- An organization optimization plan is expected to cost approximately $40.0, with $15.0–$17.0 of related capital spending, and to reduce approximately 125 positions. It includes facility and production consolidations, with most costs expected by the end of 2017 and remaining costs through 2018. Management also expects about $50.0 of incremental annual savings over the next few years, much of which it plans to reinvest.
- Pet Foods goodwill and indefinite-lived trademarks were tested for impairment in the quarter; no impairment was recorded, but estimated fair values were only slightly above carrying values. Sensitivity tests using a 50-basis-point lower long-term growth rate or higher discount rate indicated fair value could fall slightly below carrying value. Future impairment is a stated risk.
- Other identified risks include commodity and energy cost volatility, pricing and competitive pressure, ability to realize synergies and generate cash for debt reduction, foreign-exchange exposure, and possible impairment of acquired assets. The company reported ordinary-course legal proceedings but did not expect their outcomes to have a material adverse effect; it could not reasonably estimate a loss range.
Important facts for investors to verify
- Whether underlying sales and volume trends stabilize, particularly in Pet Foods, Coffee, Jif, and Pillsbury, and how price changes affect demand and margins.
- Progress toward the $200.0 Big Heart synergy target and the timing, cost, and savings from the restructuring plan.
- Pet Foods reporting-unit and brand valuation headroom, and whether updated forecasts or assumptions could trigger impairment.
- Working-capital and operating-cash-flow recovery in the second half, alongside debt repayment, dividends, and commercial-paper levels.
- The assumptions underlying the approximately 33% fiscal 2017 tax-rate outlook and the absence of full-year sales or EPS guidance in this filing.