J.M. Smucker Co. ($SJM) filed its annual report earlier this week, and at first glance the numbers looked, shall we say, less than sweet.
Net sales rose by 6.5 percent to $7.84 billion, but Smuckers’ cost of goods sold rose even faster, which led to gross profit only rising a modest 2.9 percent. Then came SG&A costs, amortization, and the always-popular “other” costs, all rising compared to the year-prior periods, and suddenly, this week’s numbers were not looking good. See Figure 1, below.
Most interesting, however, is this: $97.9 million in goodwill impairment, and another $107.2 million in impairment to other intangible assets.
Hmmm. We’re always game to nose around a company’s impairment charges, so we fired up the Interactive Disclosures database to look.
Smuckers does a respectable job disclosing where those goodwill impairments happened within its food product empire. We can clearly see that the $97.9 million impairment to goodwill happened in its U.S. Retail Foods operation, and also that Smuckers had a goodwill increase of $617.8 million in its Pet Foods operation.
Remember that part about the pet foods, because we’ll return to it later.
Further down, Smuckers says this about the impairments to its other intangible assets—
[W]e made some decisions related to certain brands resulting in a reduction in our long-term forecasted net sales of certain indefinite-lived trademarks within the U.S. Retail Pet Foods segment, excluding the acquired Ainsworth business. As a result of the strategic decisions made at that time, the reduction in long-term forecasted net sales for these indefinite-lived trademarks… resulted in an impairment charge of $107.2.
So, wait — Smuckers impaired $107.2 million of intangible assets related to the Pet Foods segment, but also increased the goodwill in that segment by a whopping $617.8 million? What’s that about?
The crucial detail is “excluding the acquired Ainsworth business.” We jumped from the Goodwill disclosures to the Acquisitions disclosures, and found that at the beginning of Smuckers’ 2019 fiscal year it acquired Ainsworth for $1.9 billion. For those unfamiliar with Ainsworth, Smuckers helpfully notes that “the majority of Ainsworth’s sales are generated by the Rachael Ray Nutrish brand, which is driving significant growth in the premium pet food category.”
This is also where Smuckers gives up the purchase price allocation (PPA) for the Ainsworth deal, and that’s where we find that Smuckers included $617.8 million in goodwill, plus another $1.26 billion in other intangible assets. So almost all of the Ainsworth deal’s $1.9 billion net purchase price is tied up in goodwill, licensing agreements, trademarks, and so forth. Thirty-two percent of the deal price is tied up in goodwill alone — which may be reasonable, if you believe that Rachel Ray has brand appeal and customer loyalty.
String all of those disclosures together, and a certain logic emerges. Smuckers decided to bet big on Ainsworth to revitalize the Pet Foods division; and as part of that strategic shift, put a few long-standing intangible assets out to pasture.
It’s worth noting that those two impairments equal 22.1 percent of Smuckers’ $928.6 million in operating income. If those two charges hadn’t hit Smuckers’ income statement, operating income would have been $1.13 billion — the highest since 2016.
Here in the real world, however, that didn’t happen. Smuckers made a big bet with its Ainsworth deal. That harkens back to our Calcbench Masterclass earlier this spring with Jason Voss, who encouraged people to connect numbers to narrative.
This is Smuckers’ connection. Let’s see how sweet things look in another 12 months.
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