J. M. Smucker Company — Form 10-Q Summary
Business context and reporting period. The filing covers the first quarter of fiscal 2011, the three months ended July 31, 2010, and compares results with the three months ended July 31, 2009. Smucker operates in food products across four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer, U.S. Retail Oils and Baking, and Special Markets. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended July 31, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,047.3 million | $1,051.5 million | Down 0.4% |
| Gross profit / margin | $408.4 million / 39.0% | $406.0 million / 38.6% | Margin up 0.4 percentage points |
| Operating income / margin | $165.2 million / 15.8% | $168.8 million / 16.1% | Down 2.2% |
| Net income | $102.9 million | $98.1 million | Up 4.9% |
| Diluted EPS | $0.86 | $0.83 | Up 3.6% |
| Operating cash flow | $(27.2) million | $(25.8) million | Greater cash use |
| Free cash flow, as defined by the company | $(54.1) million | $(53.1) million | Greater cash use |
Excluding restructuring and merger/integration costs, operating income was $195.4 million, or 18.7% of sales, versus $185.3 million, or 17.6%, a 5% increase. Adjusted income was $123.6 million and adjusted diluted EPS was $1.04, versus $108.7 million and $0.92. These are company-presented non-GAAP measures.
Cash and cash equivalents were $522.8 million at July 31, 2010, compared with $283.6 million at April 30, 2010; marketable securities were $57.1 million. Total debt was $1.31 billion, up from $910.0 million at April 30, primarily reflecting $400 million of 4.50% senior notes issued in June. No amounts were drawn on the $580 million of revolving credit facilities, and the company reported compliance with debt covenants. Management said available cash, operating cash flow, and credit facilities should cover expected requirements for the next 12 months, absent material acquisitions or other significant investments.
Operating cash use reflected seasonal inventory buildup and income-tax payments. Investing cash use was $83.7 million, including $57.0 million of marketable-security purchases and $26.9 million of capital expenditures. Financing provided $350.9 million, mainly from the note issuance, partly offset by $47.6 million in dividends. The declared quarterly dividend was $0.40 per share, up from $0.35.
Material changes and segment performance
- Sales were essentially flat: favorable mix and foreign exchange offset an overall 3% volume decline and the prior-year comparison impact of the potato-products business divested in the fourth quarter of fiscal 2010. Price changes had little overall effect.
- U.S. Retail Coffee sales increased 7%, with volume up 5%; segment profit rose 1%. Higher green coffee costs weighed on margin, which fell to 28.4% from 30.4%.
- U.S. Retail Consumer reported sales fell 4%, partly reflecting the divestiture; segment profit rose 8% and margin increased to 25.6% from 22.7%, aided by lower input and supply-chain costs, favorable mix, and the divestiture of a lower-margin business.
- U.S. Retail Oils and Baking sales declined 11% and segment profit fell 12%, amid competitive promotional conditions, lower volume, and higher production costs.
- Special Markets sales were flat; segment profit rose 31% and margin improved to 17.4% from 13.4%, supported by lower supply-chain costs, mix, and derivative mark-to-market effects.
Outlook, unusual items, and risks
- No specific earnings or sales guidance was provided. Management expected operating cash flow in the second half of the fiscal year to exceed the first half, reflecting seasonal patterns, and anticipated higher capital spending as restructuring projects progressed.
- The restructuring plan aims to optimize capacity and lower costs, including a new Orrville, Ohio, facility, consolidation of coffee production in New Orleans, and closure of four plants. It is expected to eliminate approximately 700 full-time positions. Estimated total charges are $190 million; $33.3 million had been incurred through July 31, 2010, including $27.6 million in the quarter. The remaining estimated charges were $156.7 million, expected over the next four fiscal years.
- Quarterly gross profit benefited from approximately $6.7 million of unrealized commodity-derivative gains. The effective tax rate declined to 31.3% from 35.2%, reflecting manufacturing-deduction benefits, lower state taxes, and a favorable prior-year federal tax determination; these factors helped lift reported net income despite lower operating income.
- Key exposures include volatile commodity prices, the effectiveness and potential losses of hedging strategies, transportation and logistics costs, competition and promotional activity, execution and savings from restructuring, food safety, weather and crop disruptions, foreign exchange, interest rates, and customer or supplier concentration. The company reported that ordinary-course legal proceedings were not expected, based on information then known, to materially adversely affect its financial position, results, or cash flows.
Important facts for investors to verify
- Whether the reported improvement in adjusted operating results persists after restructuring charges and favorable derivative mark-to-market effects are excluded or normalize.
- Whether the restructuring remains within its estimated $190 million cost and four-year timetable, and whether anticipated savings offset execution costs and plant closures.
- Whether Oils and Baking volume and profitability recover amid continued competitive promotions, and whether coffee margins withstand green coffee cost changes.
- How seasonal working-capital needs, capital spending, and the larger debt balance affect cash generation, liquidity, and dividend capacity.
- Whether the lower effective tax rate is repeatable; the filing identifies some benefits as related to a prior-year tax determination.