J. M. Smucker Company — Form 10-Q Summary
Reporting period: Three months ended July 31, 2014, the first quarter of fiscal 2015. Comparisons are with the three months ended July 31, 2013, unless otherwise stated. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $1,323.8 | $1,350.9 | (2%) |
| Gross profit / margin | $478.7 / 36.2% | $492.9 / 36.5% | Profit down $14.2 |
| Operating income / margin | $191.6 / 14.5% | $213.3 / 15.8% | (10%) |
| Net income | $116.0 | $126.6 | (8%) |
| Diluted EPS | $1.14 | $1.19 | (4%) |
| Operating cash flow | $(8.1) | $82.1 | Down $90.2 |
| Capital expenditures | $49.0 | $36.3 | Up $12.7 |
| Free cash flow (non-GAAP) | $(57.1) | $45.8 | Down $102.9 |
Reported operating income included a $21.4 unallocated derivative loss, compared with a $4.6 gain a year earlier. Excluding special project costs and unallocated derivative gains and losses, non-GAAP operating income was $222.0, up 3%, and diluted EPS was $1.34, up 11%. These non-GAAP measures are company-defined and should be considered alongside GAAP results.
Cash and cash equivalents were $149.4 at July 31, 2014, versus $153.5 at April 30. Total debt was $2,351.1, compared with $2,228.2 at April 30; it included $470.0 outstanding on the revolving facility. Current assets were $1,728.2 and current liabilities $1,019.3. Shareholders’ equity was $5,084.4. The company reported compliance with its debt covenants.
Material changes and segment results
- Sales declined primarily due to lower net price realization, including increased coffee promotions, and the continued exit of private-label foodservice hot beverages. On a company-adjusted basis excluding Enray, the incremental Cumberland distribution agreement, and currency, sales fell 3%.
- U.S. Retail Coffee sales were $502.7, down 2%; segment profit was $137.6, down 4%. Volume rose 2%, but pricing, mix, K-Cup profitability, and higher selling expenses weighed on profit.
- U.S. Retail Consumer Foods sales were $522.8, down 3%; segment profit increased 19% to $113.2, primarily reflecting lower peanut costs. Jif sales rose 3%; Pillsbury sales fell 11%.
- International, Foodservice, and Natural Foods sales were $298.3, down 1%; segment profit declined 18% to $35.4. Excluding acquisition, distribution-agreement, and currency effects, segment sales and volume each fell 7%.
- Gross profit excluding certain comparability items rose 2% to $500.5, with margin increasing to 37.8%, helped by lower costs for peanuts, coffee, and oils, favorable mix, and additions from Enray and Cumberland.
Cash, debt, outlook, and risks
- Operating cash use reflected increased working capital: receivables rose due to timing, and inventories increased, including from higher green coffee costs. Management said cash generation is typically seasonal and expects second-half operating cash flow to significantly exceed first-half levels as seasonal inventory is sold.
- The company repaid $100.0 of 4.78% Senior Notes due June 2014, borrowing under its revolver in part to fund cash needs. It amended its credit agreement to provide a $1.5 billion revolving facility maturing in September 2018. A $750.0 interest-rate swap converted a portion of fixed-rate notes to variable-rate exposure.
- After quarter-end, the company established a commercial paper program of up to $1.0 billion. As of August 26, short-term borrowings were $490.0: $250.0 of commercial paper and $240.0 under the revolver. Management said available cash, operating cash flow, and borrowing capacity should cover expected needs for the next 12 months, absent material acquisitions or other significant investments.
- After quarter-end, Smucker agreed to acquire Sahale Snacks for approximately $80.0, with closing anticipated in September 2014. The company also reported two prior acquisitions, Enray and Silocaf, for aggregate net cash consideration of $101.8.
- Management expected the 9% list-price increase on most packaged coffee products to be more fully realized in Q2 FY2015, partly to offset anticipated higher green coffee costs. No full-year earnings or revenue guidance is stated in the provided filing text.
- The restructuring plan was expected to cost approximately $265.0 in total; $251.2 had been incurred through July 31, leaving approximately $13.8, mostly anticipated during the fiscal year for the Memphis facility conversion. The plan had reduced 850 full-time positions.
- Effective May 1, 2014, the company stopped qualifying commodity and foreign-currency derivatives for hedge accounting. Mark-to-market gains and losses are now recognized in earnings before the related inventory is sold, creating potential period-to-period volatility. Principal disclosed risks include commodity prices, pricing and promotional competition, consumer demand, acquisitions, foreign exchange and interest rates, weather, key suppliers and customers, and financing conditions.
- The company said ordinary-course legal proceedings were not expected to materially affect its financial position, results, or cash flows, but it could not predict outcomes or reasonably estimate a range of potential losses.
Key facts for investors to verify
- Whether coffee price increases are realized as planned and sufficiently offset higher green coffee costs without weakening volume.
- Whether working-capital investment reverses and operating cash flow improves as management expects in the second half.
- How commodity-derivative mark-to-market losses affect reported results versus underlying segment performance.
- The closing, financing, integration, and performance of the planned Sahale acquisition, alongside remaining restructuring costs.
- Debt and liquidity after the new commercial paper program, and continued compliance with financial covenants.