J. M. Smucker Company — Form 10-Q Summary
Business context and period. The filing covers the quarter and six months ended October 31, 2010, the second quarter and first half of fiscal 2011. Smucker manufactures and markets food products across four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer, U.S. Retail Oils and Baking, and Special Markets. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter ended Oct. 31, 2010 | Prior-year quarter | Six months ended Oct. 31, 2010 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,278.9 | $1,278.7 | $2,326.2 | $2,330.3 |
| Operating income | $240.0 | $231.2 | $405.2 | $400.0 |
| Operating margin | 18.8% | 18.1% | 17.4% | 17.2% |
| Net income | $149.7 | $140.0 | $252.6 | $238.1 |
| Diluted EPS | $1.25 | $1.18 | $2.11 | $2.00 |
| Gross margin | 38.7% | 38.5% | 38.8% | 38.5% |
- Sales were essentially flat in the quarter and first half. Volume declined 4% in each period; pricing and favorable mix largely offset volume pressure, while divestiture and foreign-exchange effects also affected comparisons.
- Excluding restructuring and merger/integration costs, operating income rose 10% in the quarter and 8% for the first half. Diluted EPS excluding those costs was $1.38 versus $1.22 for the quarter and $2.42 versus $2.14 for the first half; these are company-presented non-GAAP measures.
- The effective tax rate declined to 32.5% for the quarter and 32.0% for the first half, versus 34.9% and 35.0%, respectively, primarily reflecting increased U.S. manufacturing deduction benefits and lower state taxes.
- Dividends declared were $0.40 per share in the quarter and $0.80 for the first half, compared with $0.35 and $0.70 in the prior-year periods.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $19.5, down from $187.8; capital spending was $62.1, producing free cash flow of negative $42.5 versus positive $98.4. Lower operating cash flow mainly reflected higher income-tax payments, including an approximately $82.0 timing-related increase, and growth in receivables and inventories.
- At October 31, cash and cash equivalents were $487.5, marketable securities $48.1, and current assets $1,854.2 versus current liabilities of $476.9. Inventories were $822.6, up from $654.9 at April 30.
- Total debt was $1,300.0, up from $910.0 at April 30; shareholders’ equity was $5,504.0. The company issued $400.0 of 4.50% senior notes due 2025 and repaid $10.0 of notes. No borrowings were outstanding under its revolving credit facilities, and the company reported compliance with debt covenants.
- The $180.0 revolving facility expiring in January 2011 was not expected to be extended; a separate $400.0 facility runs to October 2012. Management said cash, operating cash generation, and available borrowing capacity should cover requirements for the next 12 months, absent material acquisitions or other significant investments.
Segment trends
- U.S. Retail Coffee: Quarterly sales rose 7% and segment profit rose 13%. Price increases helped offset a 7% volume decline and sharply higher green coffee costs. The filing says green coffee cost pressure was expected to accelerate during the remainder of the year.
- U.S. Retail Consumer: Reported quarterly sales fell 6% and profit rose 5%; sales excluding divested potato products declined about 2%, while volume increased 1%. Lower supply-chain and raw-material costs and favorable mix supported profit.
- U.S. Retail Oils and Baking: Quarterly sales fell 8% and profit fell 10%, with volume down 10%. Competitive conditions, product reductions, pricing, and higher milk, sugar, and soybean-oil costs weighed on results.
- Special Markets: Quarterly sales rose 4% and profit rose 24%, supported by volume growth, coffee pricing, lower flour costs, and favorable mix.
Outlook, material changes, and risks
- The company expects full-year fiscal 2011 capital expenditures of approximately $200.0, with spending increasing as restructuring investments accelerate. Management expects second-half operating cash flow to exceed first-half cash flow, following seasonal inventory buildup and promotional periods.
- A restructuring plan was expanded to include Canadian pickle and condiments production transitioning to U.S. third-party manufacturers. The overall plan is expected to cost approximately $235.0; $53.7 had been incurred through October 31, with remaining costs anticipated over four fiscal years. The plan includes six facility closures and a reduction of approximately 850 full-time positions.
- Commodity price volatility—especially green coffee—as well as the success of pricing actions, competition and promotions, restructuring execution and savings, consumer preferences, foreign exchange, and labor disruptions are important risks. About 32% of employees at 10 facilities were covered by union contracts; negotiations were ongoing at the Toledo facility.
- The company uses commodity and foreign-currency derivatives to manage exposures. It disclosed a hypothetical 10% commodity-price movement sensitivity averaging $12.2 of potential fair-value loss, and a hypothetical 10% foreign-exchange movement sensitivity of approximately $5.5 loss on hedged positions; these are sensitivities, not forecasts of actual losses.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect, but the company could not predict outcomes or reasonably determine a loss range. Disclosure controls were assessed as effective, with no material internal-control changes reported.
- After quarter-end, the company began a Rule 10b5-1 plan to potentially repurchase approximately 3.7 million shares; it repurchased 577,462 shares for about $36.2 through November 30, 2010.
Important facts for investors to verify
- Whether pricing can offset accelerating green coffee and other input costs without further volume losses.
- Whether the restructuring remains within its estimated $235.0 cost, meets its multiyear timetable, and delivers the expected operating benefits.
- Whether first-half working-capital and tax-payment pressures reverse as management expects, and how full-year capital spending affects cash generation.
- How the planned share repurchases, higher debt balance, dividends, and liquidity needs develop.
- Segment sales and profit trends, particularly continued weakness in Oils and Baking and performance in Coffee and Special Markets.