The J. M. Smucker Company — Form 10-Q Summary
Business context and period: This filing covers the three months ended July 31, 2020, the first quarter of fiscal 2021, and compares results with the three months ended July 31, 2019. Smucker manufactures and markets food and beverage products, reporting three U.S. retail segments and combined International and Away From Home results.
Financial performance
- Sales: Net sales were $1.972 billion, up 11% from $1.779 billion. Growth reflected favorable volume and mix across retail businesses, particularly elevated at-home demand for coffee and consumer foods.
- Profit and margins: Gross profit rose 11% to $775.4 million; gross margin was unchanged at 39.3%. Operating income increased 40% to $361.1 million, and operating margin rose to 18.3% from 14.5%. Net income increased 53% to $237.0 million, or $2.08 per diluted share, versus $154.6 million, or $1.36 per share.
- Adjusted results (non-GAAP): Adjusted operating income was $404.5 million, up 39%, with a 20.5% margin versus 16.3%. Adjusted income was $270.0 million, or $2.37 per diluted share, compared with $179.7 million, or $1.58.
- Segments: Sales and segment profit increased in U.S. Retail Pet Foods (3% and 4%), U.S. Retail Coffee (23% and 42%), and U.S. Retail Consumer Foods (22% and 62%). International and Away From Home sales declined 9% and segment profit declined 4%; the Away From Home operating business was particularly affected by COVID-19.
- Cash flow: Operating cash flow was $409.0 million, versus $221.5 million. Capital expenditures were $76.6 million, and reported free cash flow (non-GAAP) was $332.4 million, versus $148.5 million. Management attributed stronger operating cash flow primarily to lower working-capital needs and higher net income.
- Liquidity and debt: Cash and equivalents were $396.6 million at July 31, compared with $391.1 million at April 30. Total debt was $5.369 billion, down from $5.621 billion; the balance included $296.0 million of commercial paper and $399.8 million of current long-term debt. The company had a $1.8 billion revolving facility with no balance outstanding and reported compliance with debt covenants.
- Other: Net interest expense declined to $46.1 million from $49.4 million. The effective tax rate was 24.4%, compared with 25.2%.
Material changes and management commentary
- At-home consumption and retailer restocking supported strong growth in coffee and consumer foods. Away From Home sales remained pressured by pandemic-related channel disruption, although management said they had improved from the pandemic’s initial months.
- Operating income benefited from higher gross profit and a $23.0 million reduction in selling, distribution, and administrative expenses. Adjusted measures exclude amortization, special project costs, and unallocated commodity and foreign-exchange derivative gains and losses; they are not substitutes for GAAP results.
- Cash used in financing included $300.0 million of long-term debt repayments and $100.1 million of dividends, partly offset by a $47.8 million net increase in short-term borrowings. The quarterly dividend declared was $0.90 per share.
- A supplier-financing program was in place: suppliers had elected to sell $192.3 million of outstanding payment obligations to a financial institution; Smucker reported paying $122.1 million to that institution during the quarter. Management said supplier payment terms and obligations were not changed by suppliers’ participation.
Outlook, risks, and unusual items
- Management anticipated a full-year fiscal 2021 effective tax rate of approximately 24.0%. It said cash on hand, operating cash flow, borrowing capacity, and access to capital markets should be sufficient for the next 12 months, absent material acquisitions or other significant investments. No broader sales or earnings guidance is stated in the provided filing text.
- COVID-19 effects remained uncertain. Management reported elevated retail demand, minimal supply-chain disruption to date, and continued production, while warning that demand could moderate and that Away From Home sales could remain adversely affected. More significant supply or financing disruption was possible.
- In 2020, terminated interest-rate contracts tied to new notes generated a $239.8 million pretax loss deferred in accumulated other comprehensive income and amortized as interest expense over the debt term; approximately $13.9 million of the net pretax loss was expected to be recognized over the next 12 months.
- The company faced the California Proposition 65 coffee acrylamide warning litigation. No loss was accrued because management said a loss was not considered probable or estimable. Potential penalties or warning requirements could materially affect costs, operations, or coffee sales; the ultimate outcome was not predictable.
- Other disclosed risks include commodity and energy price volatility, foreign-exchange and interest-rate exposure, supply and transportation constraints, competition, and possible impairment of goodwill or intangible assets. Management reported no material changes to previously disclosed contractual obligations or critical accounting estimates.
Important facts for investors to verify
- Whether elevated at-home demand and retailer restocking persist, and how quickly Away From Home demand recovers.
- How much of the reported cash-flow improvement reflects recurring earnings versus working-capital timing and the supplier-financing program.
- The debt maturity and refinancing plan, including the $399.8 million current portion of long-term debt and the term loan due May 2021.
- Developments in the Proposition 65 coffee case and any resulting financial or labeling exposure.
- The effects of derivative accounting and deferred terminated-hedge losses on future interest expense and comparisons of GAAP with adjusted results.