J. M. Smucker Company — Form 10-Q Summary
Business context and period: Fiscal 2012 first quarter, the three months ended July 31, 2011, compared with the three months ended July 31, 2010. The company manufactures and markets food products. Results include Rowland Coffee from its May 16, 2011 acquisition. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $1,188.9 | $1,047.3 | +14% |
| Gross profit / margin | $431.1 / 36.3% | $408.4 / 39.0% | Margin down 2.7 points |
| Operating income / margin | $180.7 / 15.2% | $165.2 / 15.8% | Income +9% |
| Net income | $111.5 | $102.9 | +8% |
| Diluted EPS | $0.98 | $0.86 | +14% |
| Operating cash flow | $(58.2) | $(27.2) | Greater cash use |
| Free cash flow, as defined by company | $(125.9) | $(54.2) | Greater cash use |
Sales growth reflected 13% contribution from pricing and approximately 2% from Rowland Coffee; volume fell 3%. Excluding acquisition and foreign exchange effects, sales rose 11%. Higher raw-material costs, especially green coffee, weighed on gross margin. Excluding restructuring and merger/integration costs, gross margin was 37.1% versus 39.9%, and operating margin was 17.3% versus 18.7%. Adjusted diluted EPS was $1.12 versus $1.04; these are non-GAAP measures.
Segment results: U.S. Retail Coffee sales rose 27% to $500.1 million and segment profit rose 25% to $139.7 million; coffee volume declined, and management said part of the profit increase reflected timing ahead of expected higher coffee costs. U.S. Retail Consumer Foods sales rose 2% to $459.5 million, while profit fell 15% to $79.0 million, with margin declining to 17.2% from 20.8%. International, Foodservice, and Natural Foods sales increased 12% to $229.3 million and profit rose 9% to $38.5 million; margin was 16.8% versus 17.3%.
Liquidity, debt, and capital
- Cash was $102.5 million at July 31, down from $319.8 million at April 30, 2011. Current assets were $1,739.8 million and current liabilities were $875.2 million.
- Total debt was $1,625.2 million, including $306.7 million drawn on the revolving facility, versus $1,304.0 million at April 30. Long-term debt was $1,318.5 million.
- The company entered into a $1.0 billion unsecured revolving credit facility maturing July 29, 2016. Borrowings were $480.0 million at August 31, 2011, at a weighted average rate of 1.42%. The company reported compliance with debt covenants.
- Operating cash use reflected working-capital needs, especially inventory increases associated with commodity costs, seasonal demand, and planned coffee-production consolidation. Investing cash use included $362.8 million for Rowland Coffee and $67.6 million of capital expenditures.
- Management expected fiscal 2012 capital expenditures of approximately $250–$275 million and said available cash, operating cash flow, and credit capacity should cover the next 12 months, absent material acquisitions or other significant investments.
Material developments, outlook, and risks
- Rowland Coffee acquisition: Purchased for $362.8 million in cash, partly funded with $180.0 million borrowed under the credit facility. Rowland contributed $23.2 million of quarterly sales and $1.7 million of segment profit. Estimated one-time integration costs are $25–$30 million over two to four years, including about $15 million of noncash charges tied to production consolidation.
- Restructuring: Expected costs total approximately $235 million; $127.2 million had been incurred through July 31. The plan includes approximately $220 million of capital investment, six facility closures, and a reduction of about 850 full-time positions by 2014. Management said it was proceeding as planned.
- Commodity and pricing outlook: Management expected significantly higher green coffee costs in fiscal 2012, especially in the second quarter. After quarter-end, it announced a 6% price reduction on most coffee products in response to green coffee market moderation. Poor weather was affecting the upcoming peanut crop; the company expected adequate supply but significantly higher costs and announced an approximately 30% peanut-butter price increase effective November 2011.
- Interest-rate swap: After quarter-end, the company terminated its swap and received $27.0 million, including $2.8 million of interest receivable; it expects a $24.2 million reduction in future interest expense through November 2018.
- Other items: The effective tax rate increased to 33.2% from 31.3%, partly because the prior-year quarter benefited from a favorable tax determination and other tax factors. The company cited commodity-price volatility, pricing and competitive responses, integration and restructuring execution, food safety, weather, customer/supplier concentration, foreign exchange, and potential impairment of goodwill and intangible assets as risks. Goodwill and other intangible assets totaled approximately $6.0 billion at quarter-end.
No full-year earnings or EPS guidance is provided in the supplied filing text. Management noted that cash generation typically improves in the second half of the fiscal year as promotional periods conclude.
Important facts for investors to verify
- Whether higher coffee, peanut, and other input costs are offset by pricing, and how the announced coffee price decrease affects volume and margins.
- Whether U.S. Retail Consumer Foods profitability recovers after its 15% segment-profit decline and margin contraction.
- Rowland Coffee integration costs, production-consolidation timing, and the realization of expected acquisition benefits.
- Inventory levels, operating cash flow, capital spending, and revolving-credit borrowings as seasonal working-capital needs unwind.
- The restructuring’s remaining costs, planned closures and job reductions, and progress toward expected operational benefits.
- The filing reports dividends declared of $0.48 per share, while the MD&A describes a $0.44 per-share dividend paid in the quarter; verify the distinction and timing. Also verify subsequent share repurchases and the swap termination’s cash and interest effects.