J. M. Smucker Company — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended July 31, 2012, the first quarter of fiscal 2013; comparisons are with the three months ended July 31, 2011. Smucker manufactures and markets food products across U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods. Current-quarter results include the Sara Lee North American foodservice coffee business, acquired January 3, 2012.
Financial results and liquidity
| Metric | Quarter ended July 31, 2012 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $1,369.7 million | $1,188.9 million | Up 15%; up 9% excluding acquisition, divestiture, and foreign exchange effects |
| Gross profit / margin | $469.8 million / 34.3% | $431.1 million / 36.3% | Margin down 2.0 percentage points |
| Operating income / margin | $190.5 million / 13.9% | $180.7 million / 15.2% | Up 5%; margin down 1.3 points |
| Net income | $110.9 million | $111.5 million | Down 1% |
| Diluted EPS | $1.00 | $0.98 | Up 2% |
| Operating cash flow | $176.7 million | $(58.2) million | Improved $235.0 million |
| Capital expenditures / free cash flow | $46.3 million / $130.4 million | $67.6 million / $(125.9) million | Free cash flow as defined by the company |
Excluding special project costs, gross margin was 34.6% versus 37.1%, operating income was $218.3 million versus $205.7 million, and diluted EPS was $1.17 versus $1.12. These are non-GAAP measures; the filing cautions they may not be comparable to similarly named measures at other companies.
Cash and equivalents were $311.5 million at July 31, up from $229.7 million at April 30, 2012. Total debt was $2.07 billion, nearly unchanged from April 30; there was no borrowing under the $1.0 billion revolving facility, which matures in July 2016. The company reported compliance with debt covenants. Current assets were $1.80 billion and current liabilities $710.5 million. Quarterly dividends paid were $52.8 million; dividends declared were $0.52 per share.
Material changes and segment performance
- Acquisition of Sara Lee foodservice coffee contributed $86.7 million, or seven percentage points, to consolidated sales growth. Excluding the acquisition, divestiture, and foreign exchange, sales grew 9%; volume excluding the acquisition rose 2%.
- U.S. Retail Coffee sales rose 4%, but segment profit fell 10% to $126.4 million as lower pricing and higher green coffee costs affected results.
- U.S. Retail Consumer Foods sales rose 15% and segment profit rose 36% to $107.8 million, driven primarily by pricing and peanut butter performance; volume was flat.
- International, Foodservice, and Natural Foods sales rose 40%, largely reflecting Sara Lee; segment profit increased 6% to $40.7 million. Excluding acquisition, divestiture, and foreign exchange, segment sales rose 7%.
- Interest expense increased $8.5 million, primarily reflecting higher average debt after the October 2011 debt issuance. This offset operating-income growth and contributed to slightly lower net income.
Management commentary, outlook, risks, and unusual items
- Management said higher commodity costs were not fully offset by pricing. A $19.7 million unrealized derivative gain benefited current-quarter gross profit; the company expected a significant portion to reverse or be offset later in the fiscal year as contracts close.
- The company expects cash generated in the second half of its fiscal year to exceed the first half, reflecting seasonal working-capital patterns. Management believes cash, operating cash flow, and available credit will cover requirements for the next 12 months, including capital spending, dividends, and debt service. No specific earnings or sales guidance is provided in the supplied filing text.
- The ongoing restructuring is expected to cost approximately $245 million; $203.3 million had been incurred by July 31, with most remaining costs expected through the next fiscal year. The plan includes facility closures, workforce reductions of about 850 positions, coffee-production consolidation, and a new Orrville facility. About 75% of planned job reductions were complete; four of six identified facilities were closed.
- Current-quarter special items included restructuring and merger/integration costs and $6.7 million of other special project costs, principally a pension settlement loss. Sara Lee integration costs incurred to date were $20.1 million, with total one-time costs estimated at about $25 million.
- Key disclosed risks include volatile commodity and energy prices, effectiveness of pricing and hedging strategies, acquisition integration and restructuring execution, customer and supplier concentration, competition, consumer coffee preferences, foreign exchange and interest rates, and impairment of goodwill or intangible assets. The company reported ordinary-course legal proceedings, but did not expect their outcomes to materially adversely affect its financial position, results, or cash flows.
- After quarter-end, the company began a Rule 10b5-1 plan to repurchase up to 2.0 million shares; it repurchased 991,000 shares for approximately $84.2 million through August 31, 2012.
Most important facts for investors to verify
- How much of sales and profit growth reflects acquired businesses versus organic volume, pricing, and mix.
- Whether commodity cost pressures and the timing of pricing changes improve or further compress margins, particularly in retail coffee.
- The extent to which derivative mark-to-market gains reverse, and the underlying economics after hedged commodity purchases are realized.
- Progress, remaining cash costs, and expected savings from the restructuring and acquisition integrations.
- Debt-service capacity, seasonal cash generation, and the effect of share repurchases and dividends on liquidity and per-share results.