J. M. Smucker Company — Form 10-Q Summary
Business context and reporting period
This unaudited filing covers the three months ended July 31, 2013, the first quarter of fiscal 2014, and compares results with the same quarter of fiscal 2013. Smucker manufactures and markets food products through U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods segments. Financial amounts below are in millions except per-share data.
Financial performance and position
- Sales: $1,350.9, down 1% from $1,369.7. Net price realization fell 4%; volume by weight rose 1% and mix was favorable.
- Profit and margins: Gross profit was $492.9, or 36.5% of sales, versus $469.8 and 34.3%. Operating income was $213.3, or 15.8% of sales, versus $190.5 and 13.9%. Net income was $126.6 versus $110.9; diluted EPS was $1.19 versus $1.00. The declared dividend was $0.58 per share versus $0.52.
- Adjusted results: Excluding special project costs, gross profit was $494.4 versus $473.8, operating income $220.6 versus $218.4, and diluted EPS $1.24 versus $1.17. These are non-GAAP measures; reported operating income rose 12%, while adjusted operating income rose 1%.
- Cash flow: Operating cash flow was $82.1 versus $176.7; capital expenditures were $36.3 versus $46.3; free cash flow, as defined by the company, was $45.8 versus $130.4. The company attributed the operating cash flow decline mainly to working-capital needs, particularly inventory buildup.
- Liquidity and debt: Cash was $157.5 at July 31, down from $256.4 at April 30. Total debt was $2,102.1, including $85.0 drawn on the revolving facility; debt less cash was approximately $1,944.6. Current assets were $1,629.9 and current liabilities $803.1. A $1.0 billion revolver matures in July 2016; the company reported covenant compliance. The revolver balance rose to $210.0 by August 27.
- Balance sheet: Total assets were $9,033.9 and shareholders’ equity $5,075.1. Inventories increased to $1,059.3 from $945.5 between April 30 and July 31.
Material changes versus the prior comparable period
- Gross profit improved on lower commodity costs, favorable mix, and higher volume, partly offset by lower prices and a $15.1 year-over-year reduction in unrealized derivative gains.
- Operating income benefited from special project costs declining to $7.3 from $27.9. Higher selling, distribution, and administrative expenses partially offset the improvement; those expenses rose 8% and reached 18.5% of sales versus 17.0%.
- Segment results were mixed: U.S. Retail Coffee sales fell 1% to $514.4 while segment profit rose 16% to $146.0; U.S. Retail Consumer Foods sales rose 1% to $536.4 while profit fell 11% to $96.4; International, Foodservice, and Natural Foods sales fell 6% to $300.1 while profit rose 7% to $43.4.
- The Coffee segment’s profit benefited from lower green coffee costs, but management expected the favorable net price-to-cost relationship to decrease significantly in the second half of the year. Consumer Foods profit was pressured by lower peanut butter prices and reduced derivative gains.
- Financing cash outflow included $165.4 for treasury-share purchases; the company said it repurchased 1.5 million shares for $152.2 during the quarter. Cash also funded $55.4 of dividends, while $85.0 was borrowed on the revolver.
Outlook, commentary, risks, and unusual items
- Management expects operating cash flow in the second half of the fiscal year to significantly exceed first-half cash flow, reflecting seasonal working-capital patterns. It believes cash, operating cash flow, and available credit will meet requirements for the next 12 months, absent material acquisitions or other significant investments. No specific earnings or sales guidance is provided in the supplied filing text.
- The company expects total restructuring charges of approximately $260.0; $232.8 had been incurred through July 31, leaving $27.2 expected, mostly through 2015. The plans are expected to eliminate about 850 full-time positions; approximately 80% had been eliminated. The Ste. Marie, Quebec facility was expected to close in 2014.
- Cash held by international subsidiaries was approximately $134.6, which the company did not intend to repatriate for domestic obligations; repatriation could result in additional taxes.
- Key risks include commodity-cost volatility, particularly coffee, peanuts, oils, and wheat; pricing and competitive responses; derivative strategy and liquidity exposure; customer and supplier concentration; execution of restructuring and integration plans; foreign exchange and interest-rate movements; and impairment, regulatory, tax, legal, and information-technology risks.
- The company was involved in ordinary-course legal proceedings and said it could not reliably predict their outcomes or estimate a loss range; it did not expect the known matters to materially adversely affect financial position, results, or cash flows.
- A major enterprise resource planning system upgrade was completed and used for the quarter’s financial statements. Management reported that implemented controls had identified no related internal-control issues and that disclosure controls were effective.
Important facts for investors to verify
- Whether second-half coffee cost and pricing trends evolve as management anticipated, given its warning that the favorable relationship would diminish.
- Whether inventory buildup converts to cash as expected and whether seasonal operating cash flow supports dividends, capital spending, and debt service.
- Progress and remaining costs of the restructuring program, including the planned Quebec facility closure and capacity expansion for nut butters.
- The sustainability of reported profit growth: compare GAAP results with non-GAAP results and assess the effect of derivative mark-to-market gains and special project costs.
- Use of the revolving credit facility, near-term debt maturities, covenant headroom, and the impact of ongoing share repurchases.
- Potential tax implications of international cash balances and developments in legal proceedings, commodity exposures, and information-technology controls.