Business context and reporting period
The J. M. Smucker Company’s Form 10-Q covers the quarter and six months ended October 31, 2012, in fiscal 2013; comparisons are with the corresponding fiscal 2012 periods. The company manufactures and markets food products across U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods. Results include the Sara Lee North American foodservice coffee business, acquired January 3, 2012.
Financial performance
Amounts below are in millions, except per-share data.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,628.7, up 8% | $2,998.4, up 11% |
| Gross profit | $541.9, up 9%; 33.3% margin vs. 32.9% | $1,011.7, up 9%; 33.7% margin vs. 34.4% |
| Operating income | $247.5, up 17%; 15.2% margin vs. 14.0% | $438.1, up 12%; 14.6% margin vs. 14.5% |
| Net income | $148.8 vs. $127.2 | $259.7 vs. $238.8 |
| Diluted EPS | $1.36 vs. $1.12 | $2.36 vs. $2.09 |
Management’s non-GAAP diluted EPS excluding special project costs was $1.45 for the quarter and $2.62 for six months, versus $1.29 and $2.41, respectively. These measures exclude restructuring, merger and integration, and specified other costs; they are not GAAP results. Quarter sales growth reflected the Sara Lee acquisition and favorable mix; excluding acquisition, divestiture, and foreign exchange, sales rose 2% for the quarter and 5% for six months. Coffee-brand and K-Cup mix helped, while reported volume excluding acquisition fell 2% for the quarter and was flat for six months.
Quarter segment results were mixed: U.S. Retail Coffee sales rose 1% and profit 13%; Consumer Foods sales rose 1% but profit fell 4%; International, Foodservice, and Natural Foods sales rose 38% and profit 49%, with acquisition contribution and a prior-year divestiture loss affecting comparisons. For six months, segment profit rose 2%, 12%, and 28%, respectively.
Cash flow, debt, and liquidity
Six-month operating cash flow was $359.6, versus $59.9 a year earlier; capital expenditures were $98.5, producing reported free cash flow of $261.2 versus negative $75.8. The improvement principally reflected less cash absorbed by inventory. Investing cash use was $92.0, compared with $472.0, including the prior-year $362.8 Rowland Coffee acquisition. Financing cash use was $292.3, including $110.2 in dividends and $175.3 in treasury-share purchases. Cash was $203.6 at October 31, down from $229.7 at fiscal year-end.
Total debt was $2,069.2, nearly unchanged from April 30; shareholders’ equity was $5,152.7. The company had no revolver balance at October 31 and had a $1.0 billion revolving facility maturing in July 2016. It reported compliance with debt covenants and stated available cash, operating cash flow, and borrowing capacity should meet requirements for the next 12 months, absent material acquisitions or other significant investments. About $134.9 of cash was held by international subsidiaries and was not intended for repatriation.
Outlook, commentary, risks, and unusual items
- No quantified consolidated earnings or sales guidance is provided in the filing text. Management expects second-half operating cash flow to significantly exceed first-half cash flow, reflecting seasonal patterns.
- The company plans to exit the acquired private-label roast and ground coffee business by fiscal 2014. Management anticipates $75–$100 of annual sales reduction and improved segment margins; exit costs are not expected to be significant.
- A retail coffee-canister supply constraint was expected to be resolved in fiscal Q3, with no material fiscal 2013 financial effect anticipated.
- The multi-year restructuring plan is expected to cost about $245; $213.6 had been incurred by October 31. Four of six facilities were closed and about 75% of planned 850 job reductions completed. Most remaining costs are expected through fiscal 2014.
- Six-month results included a $6.7 pension settlement charge, classified as an other special project cost. Commodity price, hedging, pricing and competitive responses, acquisition integration, restructuring execution, customer/supplier concentration, and foreign-exchange risks are among the disclosed uncertainties.
- The company is involved in ordinary-course legal proceedings; it says outcomes cannot be predicted but does not currently expect a material adverse effect. It is also possible unrecognized tax benefits could decline by about $0.7 within 12 months.
Important facts for investors to verify
- How much reported sales and profit growth reflects the Sara Lee acquisition versus organic performance, and the effect of the planned private-label exit.
- Whether weaker Consumer Foods volumes and margins, coffee pricing, and K-Cup growth persist.
- Whether restructuring reaches expected savings and remaining cost estimates, and whether the coffee supply constraint is resolved as expected.
- How commodity costs, long-term peanut contracts, and derivative gains or losses affect future margins and cash flow.
- Debt maturities, covenant headroom, cash availability, and the sustainability of repurchases and dividends alongside capital spending and contractual obligations.