J. M. Smucker(SJM) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Q2 2024 financials show 12% net sales decrease from divestitures, but net income and operating cash flow improved, with debt rising for Hostess Brands acquisition Condensed Statements of Consolidated Income Highlights | Indicator | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2023 | Six Months Ended Oct 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,938.6 M | $2,205.1 M | $3,743.8 M | $4,078.1 M | | Gross Profit | $724.2 M | $701.1 M | $1,379.0 M | $1,253.6 M | | Operating Income | $298.9 M | $293.4 M | $602.4 M | $473.1 M | | Net Income | $194.9 M | $191.1 M | $378.5 M | $300.9 M | | Net Income per Share (Diluted) | $1.90 | $1.79 | $3.69 | $2.82 | Condensed Consolidated Balance Sheet Highlights | Indicator | October 31, 2023 | April 30, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,623.9 M | $655.8 M | | Total Assets | $18,123.7 M | $14,991.4 M | | Long-term debt | $7,771.7 M | $4,314.2 M | | Total Liabilities | $11,034.8 M | $7,700.6 M | | Total Shareholders' Equity | $7,088.9 M | $7,290.8 M | Condensed Statements of Consolidated Cash Flows Highlights (Six Months Ended) | Indicator | October 31, 2023 | October 31, 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $394.8 M | $166.0 M | | Net Cash Used for Investing Activities | ($293.7 M) | ($209.3 M) | | Net Cash Provided by (Used for) Financing Activities | $2,867.7 M | ($98.8 M) | | Net increase (decrease) in cash | $2,968.1 M | ($142.8 M) | Note 3: Acquisition - On November 7, 2023, the company completed the acquisition of Hostess Brands, Inc. for approximately $5.5 billion. The transaction was funded through a combination of new debt and the issuance of common shares[23] - The acquisition includes brands like Hostess Donettes, Twinkies, and Voortman cookies, along with six manufacturing facilities and approximately 3,000 employees[24] Note 4: Divestitures - The company entered into agreements to sell its Canada condiment business (Bick's, Habitant, etc.) to TreeHouse Foods for approximately $20.0 million and its Sahale Snacks business to Second Nature Brands for approximately $34.0 million. Both were classified as held for sale as of October 31, 2023[25] - On April 28, 2023, the company completed the sale of certain pet food brands (Rachael Ray Nutrish, 9Lives, etc.) to Post Holdings, Inc. for final net proceeds of $1.2 billion, consisting of $683.9 million in cash and 5.4 million shares of Post common stock[27] Note 6: Reportable Segments Net Sales by Segment (Three Months Ended Oct 31) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | U.S. Retail Coffee | $685.7 M | $709.8 M | | U.S. Retail Consumer Foods | $464.3 M | $432.2 M | | U.S. Retail Pet Foods | $464.0 M | $765.2 M | | International and Away From Home | $324.6 M | $297.9 M | Segment Profit by Segment (Three Months Ended Oct 31) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | U.S. Retail Coffee | $171.0 M | $187.7 M | | U.S. Retail Consumer Foods | $128.5 M | $100.3 M | | U.S. Retail Pet Foods | $97.2 M | $120.1 M | | International and Away From Home | $60.2 M | $41.5 M | - Following the Hostess Brands acquisition, a new reportable segment, Sweet Baked Snacks, will be created starting in Q3 2024. The U.S. Retail Consumer Foods segment will be renamed U.S. Retail Frozen Handheld and Spreads[39] Note 8: Debt and Financing Arrangements - Total long-term debt increased to $7.85 billion from $4.35 billion, primarily due to financing for the Hostess Brands acquisition[53] - In October 2023, the company issued $3.5 billion in new Senior Notes. In September 2023, it entered into an $800.0 million Term Loan and a $5.2 billion Bridge Loan facility (which was subsequently terminated) to secure financing for the acquisition[54][55][56] Note 15: Contingencies - The company is a defendant in class action lawsuits alleging misrepresentation of the number of servings in Folgers coffee canisters. The outcome and financial impact cannot be predicted at this time[107][108] - The May 2022 voluntary recall of Jif peanut butter resulted in total direct costs of approximately $120.0 million, net of insurance recoveries. The FDA issued a Warning Letter in January 2023 regarding the Lexington facility, and the outcome of any potential regulatory action or ongoing consumer litigation is not yet estimable[109][111] Note 16: Common Shares - During the six months ended October 31, 2023, the company repurchased approximately 2.4 million common shares for $362.8 million under its 10b5-1 plan[113] - In connection with the Hostess Brands acquisition on November 7, 2023, the company issued approximately 4.0 million new common shares valued at $450.2 million[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 net sales decline to divestitures, with underlying sales growth, improved gross margin, and increased operating cash flow, following the Hostess Brands acquisition Results of Operations Net Sales Reconciliation (Q2 2024 vs Q2 2023) | Metric | Amount | % Change vs PY | | :--- | :--- | :--- | | Net Sales (GAAP) | ($266.5 M) | (12)% | | Less: Pet food brands divestiture | $385.0 M | 17% | | Net sales excluding divestiture & FX | $121.0 M | 7% | - Q2 net sales decline of 12% was driven by the pet food brand divestiture. Excluding this, sales grew 7% due to a 4 percentage point contribution from favorable volume/mix (led by Smucker's Uncrustables) and a 3 percentage point contribution from higher net pricing[130] - Q2 gross profit margin increased to 37.4% from 31.8% in the prior year, reflecting higher net price realization, lower green coffee costs, and favorable volume/mix, partially offset by the impact of the divested pet food brands[127][133] Segment Results - U.S. Retail Coffee: Q2 net sales decreased 3% due to lower net price realization. Segment profit fell 9%, primarily due to a $39.1 million unfavorable impact from terminating a supplier agreement[149][150] - U.S. Retail Consumer Foods: Q2 net sales grew 7%, driven by higher net pricing, including the favorable impact of lapping the prior-year Jif recall. Segment profit increased 28% due to higher pricing and lower costs[149][152] - U.S. Retail Pet Foods: Q2 net sales fell 39% due to the divestiture. Excluding the divestiture, sales grew 20%, driven by contract manufacturing for the divested brands and growth in dog snacks. Segment profit decreased 19% due to the noncomparable profit from the divested brands[149][154] - International and Away From Home: Q2 net sales increased 9%. Excluding divestitures and FX, sales grew 13%, driven by volume/mix in frozen handheld and coffee products. Segment profit rose 45%[149][156] Liquidity and Capital Resources Cash Flow Summary (Six Months Ended) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $394.8 M | $166.0 M | | Additions to property, plant, and equipment | ($299.0 M) | ($190.4 M) | | Free cash flow (Non-GAAP) | $95.8 M | ($24.4 M) | - Cash from operating activities increased by $228.8 million for the six-month period, driven by lower working capital requirements, lapping a $70.0 million pension contribution in the prior year, and higher net income[161] - Cash provided by financing activities was $2.87 billion, primarily from $3.49 billion in proceeds from long-term debt, partially offset by $372.4 million in treasury share purchases and $213.2 million in dividends[163] - The company plans a $1.1 billion investment to build a new manufacturing and distribution facility in McCalla, Alabama, for Smucker's Uncrustables, with production expected to begin in 2025[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, commodity prices, and foreign currency, using derivatives for volatility management, generally not qualifying for hedge accounting - Interest Rate Risk: A hypothetical 100 basis-point decrease in interest rates would increase the fair value of the company's long-term debt by $317.4 million as of October 31, 2023[198] - Commodity Price Risk: The company uses derivatives to manage price volatility for key raw materials like green coffee, soybean meal, corn, and oils. These are economic hedges but are not qualified for hedge accounting, so gains/losses are recognized immediately in earnings[199] - Foreign Currency Exchange Risk: Exposure is primarily from Canadian operations. Revenues from customers outside the U.S. represented 6% of net sales for the six-month period[202][205] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of October 31, 2023, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of October 31, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[211] - No changes in internal control over financial reporting occurred during the six months ended October 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[212] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates legal matters from Note 15, detailing contingencies related to Folgers coffee class action lawsuits and the Jif peanut butter recall - Information on legal proceedings is incorporated by reference from Note 15: Contingencies, which covers the Folgers servings lawsuit and the Jif peanut butter recall[215][106] Item 1A. Risk Factors New risk factors relate to the Hostess Brands acquisition, including integration challenges, failure to realize synergies, management diversion, and potential impairment of acquired goodwill and intangibles - New risk factors have been added related to the acquisition of Hostess Brands, including the risk of not realizing anticipated benefits and synergies, and difficulties in integrating the business[217][218] - Specific integration challenges include diverting management's attention, managing a larger and more complex company, retaining key personnel and customers, and dealing with unanticipated expenses or liabilities[220][221] - A significant portion of assets is goodwill and other intangibles ($9.6 billion of $18.1 billion total assets). The goodwill and intangibles from the Hostess acquisition will be recorded at fair value, making them more susceptible to future impairment charges[224][228] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2024, the company repurchased 3,164 common shares at an average price of $125.58, with 1.1 million shares remaining available for repurchase under authorized plans Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | August 2023 | 78 | $142.50 | | September 2023 | 3,086 | $125.15 | | October 2023 | 0 | N/A | | Total | 3,164 | $125.58 | - As of October 31, 2023, approximately 1.1 million common shares remained available for repurchase under the company's authorized plans[230]