ORRVILLE, Ohio, U.S. – The J.M. Smucker Company, the makers of Folgers coffee, posted better-than-expected earnings in the third quarter of fiscal 2016, primarily driven by gains from its U.S. canned milk divestiture and acquisition of Big Heart Pet Brands (Mar 2015). The company said its bottom line advanced to $246.0 million, or $2.05 per share.
This was up from $173.3 million, or $1.70 per share, in last year’s third quarter.
The company said revenue for the quarter rose 36.8% to $1.97 billion. This was up from $1.44 billion last year.
Chief Executive Richard Smucker pointed to strength in the coffee business, specifically the launch of “on-trend products” such as Dunkin’ Donuts K-Cup pods and lower pricing on Folgers roast and ground offerings. He also highlighted expanded distribution for its Natural Balance brand into the largest pet specialty retailer.
Executive Summary
• Net sales increased $533.9 million, or 37 percent, reflecting the contribution of Big Heart Pet Brands (“Big Heart”), acquired in fiscal 2015.
• Net income per diluted share was $1.55, a decrease of 2 percent, as the benefit from Big Heart operations and the gain on the U.S. canned milk divestiture were offset by merger and integration costs, higher interest expense, and the impact of additional shares outstanding.
• Non-GAAP income per diluted share was $1.76, an increase of 14 percent. Adjusted non-GAAP income per diluted share, which excludes amortization, was $2.05, an increase of 21 percent. Both measures include a $0.14 per share gain on the U.S. canned milk divestiture.
• Free cash flow was $498.9 million, an increase of 32 percent.
• The Company updated its fiscal 2016 earnings outlook to account for the gain on the U.S. canned milk divestiture, with non-GAAP income per diluted share expected to range from $5.84 to $5.94 and its adjusted non-GAAP income per diluted share expected to range from $6.99 to $7.09.
Third Quarter Consolidated Results
Net sales increased reflecting the contribution of $580.3 million from Big Heart. Excluding Big Heart, the impact from foreign currency exchange, and the impact of the U.S. canned milk divestiture, net sales declined $17.9 million, or 1 percent.
Net price realization was 2 percentage points lower, reflecting lower net pricing on coffee. Favorable volume/mix contributed 1 percentage point to net sales, as the contribution from Dunkin’ Donuts® K-Cup® pods and Smucker’s® Uncrustables® frozen sandwiches was mostly offset by declines in several other brands, notably Folgers® and Jif®.
Gross profit increased $240.9 million, or 46 percent, primarily due to the addition of Big Heart. Excluding Big Heart, gross profit was higher, driven by Dunkin’ Donuts® K-Cup® pods. The impact of lower net pricing was more than offset by a reduction in commodity costs, primarily attributed to green coffee.
Selling, distribution, and administrative expenses increased $143.8 million, or 61 percent, primarily driven by the addition of Big Heart and a combined 31 percent increase in marketing expense within the U.S. Retail Consumer Foods and Coffee segments. Amortization expense also increased, driven by the Big Heart acquisition.
Operating income increased $63.2 million, or 25 percent, reflecting the addition of Big Heart and the gain on the U.S. canned milk divestiture, partially offset by an increase in merger and integration costs.
On a non-GAAP basis, gross profit increased $250.3 million, or 49 percent, and operating income increased $108.1 million, or 44 percent.
Net interest expense increased $26.8 million, due to the impact of acquisition-related debt issued in the fourth quarter of 2015. Income taxes increased $12.5 million due to an increase in income before income taxes and a slightly higher effective tax rate. The quarterly effective tax rate increased from 32.5 percent to 32.7 percent.
For the quarter, cash provided by operating activities was $542.3 million, compared to $427.7 million in the prior year.
The change in operating cash flow was primarily attributed to an increase in net income adjusted for noncash items, notably depreciation and amortization, and a decrease in working capital, driven by the timing of certain accrued liabilities.
These items were partially offset by the benefit of a $53.5 million interest rate swap settlement in the prior year.
U.S. Retail Coffee
Segment net sales increased $3.7 million. Favorable volume/mix contributed 5 percentage points of growth, driven by Dunkin’ Donuts K-Cup pods and Folgers mainstream roast and ground offerings, partially offset by declines in Folgers® K-Cup pods.
The favorable volume/mix was mostly offset by lower net price realization on Folgers® mainstream roast and ground offerings.
Segment profit increased $25.4 million reflecting the contribution from Dunkin’ Donuts® K-Cup pods, favorable manufacturing overhead costs, and the net benefit of lower commodity costs and pricing.
These factors were slightly offset by an increase in marketing expense.
