J. M. Smucker Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2013; filed March 1, 2013. Comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1,559.6 million, up 6% | $4,558.0 million, up 9% |
| Gross margin | 34.4%, versus 31.7% | 34.0%, versus 33.5% |
| Operating income | $258.3 million, up 29% | $696.4 million, up 17% |
| Operating margin | 16.6%, versus 13.7% | 15.3%, versus 14.2% |
| Net income | $154.2 million, versus $116.8 million | $413.9 million, versus $355.6 million |
| Diluted EPS | $1.42, versus $1.03 | $3.78, versus $3.12 |
- Excluding special project costs, diluted EPS was $1.47 for the quarter (up 20%) and $4.08 for the nine months (up 12%). These are non-GAAP measures.
- Sales growth included incremental Sara Lee foodservice business sales of $59.7 million in the quarter and $237.1 million for the nine months. Excluding acquisition, divestiture, and foreign-exchange effects, sales rose 2% and 4%, respectively.
- Quarterly declared dividends were $0.52 per share, up from $0.48.
Segments and material comparisons
- U.S. Retail Coffee: Quarterly sales fell 2%, while segment profit rose 27% to $175.2 million; nine-month sales and profit increased 1% and 10%. Lower green coffee costs and favorable K-Cup mix supported profit. K-Cup sales grew 51% in the quarter.
- U.S. Retail Consumer Foods: Quarterly sales rose 4%, but segment profit was essentially flat at $106.2 million; nine-month sales and profit increased 6% and 8%. Jif and Uncrustables grew, while Pillsbury volume was affected in part by cake-mix downsizing.
- International, Foodservice, and Natural Foods: Quarterly sales and profit rose 28%; nine-month sales and profit rose 35% and 28%. The Sara Lee acquisition was a major contributor. Excluding the prior-year divestiture loss, nine-month segment profit increased 16%.
- Quarterly gross-margin improvement reflected favorable mix, lower commodity costs—especially green coffee—and lower restructuring costs. For the nine months, overall commodity costs were relatively flat as lower coffee costs were offset by higher peanut costs.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $683.6 million, versus $469.2 million; capital expenditures were $146.5 million, producing reported free cash flow of $537.1 million, versus $272.3 million.
- Investing used $126.2 million, compared with $909.6 million in the prior period, which included $742.4 million for acquisitions. Financing used $347.2 million, including $175.5 million of treasury-share purchases and $166.5 million of dividends.
- Cash was $438.8 million at January 31, 2013, up from $229.7 million at April 30, 2012. Total debt was $2,068.5 million; the company had no balance on its $1.0 billion revolving facility and was in compliance with debt covenants.
- Management said available cash, operating cash flow, and credit-facility capacity should cover expected needs for the next 12 months, including capital spending, dividends, and debt service. About $140.5 million of cash was held by international subsidiaries and was not intended for repatriation.
Outlook, management commentary, risks, and unusual items
- No consolidated earnings or revenue guidance is stated in the provided filing text. Management said operating results for the nine-month period are not necessarily indicative of full-year results.
- In February 2013, the company announced an approximately 6% price reduction on most U.S. packaged coffee products, following lower green coffee costs. It also reduced peanut-butter prices by approximately 10% late in the quarter, anticipating lower future peanut costs.
- The company plans to exit the acquired Sara Lee business’s private-label roast-and-ground coffee activity, representing approximately $75–$100 million in annual sales. It expects a favorable margin effect; the fiscal 2014 sales reduction is estimated at approximately $50 million, with completion expected during fiscal 2014.
- The restructuring program had incurred $218.9 million of an estimated $245.0 million by January 31. A subsequent plan to repurpose facilities for peanut and specialty nut-butter production adds approximately $10 million of restructuring costs, raising the estimate to $255 million, plus approximately $60 million in capital investment; most spending is expected through fiscal 2015.
- Key risks cited include commodity-price volatility and hedging outcomes; pricing, competition, and consumer response; acquisition integration and restructuring execution; customer and supplier concentration; coffee preferences; foreign-exchange and interest-rate movements; and impairment, legal, and tax matters.
- The company reported ordinary-course legal proceedings but said their outcome was not expected to materially adversely affect financial position, results, or cash flows. It reported no material off-balance-sheet arrangements. A $6.7 million pension settlement loss was recorded in the nine-month period as a special project cost.
Important facts for investors to verify
- How much reported growth and margin improvement persists after accounting for acquisition timing, mix, commodity costs, and special project items.
- Whether coffee and peanut-butter price reductions, and anticipated commodity-cost changes, preserve segment profitability and volumes.
- Progress, total spending, expected savings, and execution risks for the restructuring and nut-butter capacity expansion.
- Results and margin effects of the Sara Lee private-label exit, including the projected fiscal 2014 sales reduction.
- Cash generation, capital expenditures, debt maturities, and share repurchases; after quarter-end, the company repurchased 1,226,028 shares for approximately $113.3 million.