J. M. Smucker Company — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2012 (fiscal 2012), compared with the corresponding 2011 periods. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Business context
Smucker manufactures and markets food products through three reportable segments: U.S. Retail Coffee; U.S. Retail Consumer Foods; and International, Foodservice, and Natural Foods. Fiscal 2012 results include Rowland Coffee from its May 2011 acquisition and Sara Lee’s North American foodservice coffee business from its January 3, 2012 acquisition.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Three months ended Jan. 31, 2011 | Nine months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2011 |
|---|---|---|---|---|
| Net sales | $1,467.6 | $1,312.4 | $4,170.4 | $3,638.6 |
| Gross profit | $465.7 | $474.4 | $1,395.4 | $1,377.5 |
| Gross margin | 31.7% | 36.1% | 33.5% | 37.9% |
| Operating income | $200.4 | $213.0 | $592.7 | $618.2 |
| Operating margin | 13.7% | 16.2% | 14.2% | 17.0% |
| Net income | $116.8 | $132.0 | $355.6 | $384.6 |
| Diluted EPS | $1.03 | $1.11 | $3.12 | $3.23 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $469.2 | $394.4 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $196.9 | $111.1 |
| Free cash flow | Not provided for quarter | Not provided for quarter | $272.3 | $283.2 |
- Quarterly sales grew 12%; nine-month sales grew 15%. Excluding acquisitions, divestiture, and foreign exchange, sales increased 8% and 12%, respectively. Price increases and acquisitions more than offset volume declines of 10% for the quarter and 5% for the nine-month period.
- Reported diluted EPS declined 7% for the quarter and 3% for nine months. Management’s non-GAAP diluted EPS excluding special project costs was $1.22 for the quarter and $3.63 for nine months, versus $1.27 and $3.69, respectively. These measures are not substitutes for GAAP results.
- Higher costs for green coffee, edible oils, flour, and peanuts pressured gross margins. Price increases and acquisitions supported sales, but did not prevent margin contraction.
- Nine-month operating cash flow increased year over year, primarily due to lower working-capital cash needs, including the timing of tax payments and receivable collections. Free cash flow declined as capital spending rose.
Segments
| Segment | Q3 sales change | Q3 segment profit change | Nine-month sales change | Nine-month segment profit change |
|---|---|---|---|---|
| U.S. Retail Coffee | +15% | −12% | +23% | Approximately flat |
| U.S. Retail Consumer Foods | +7% | +4% | +8% | −2% |
| International, Foodservice, and Natural Foods | +14% | +31% | +11% | Approximately flat |
Reported segment comparisons reflect acquisitions and, in the International, Foodservice, and Natural Foods segment, the prior-year Europe’s Best impairment charge. Excluding that impairment, the segment’s quarterly profit declined, primarily due to lower volume and higher commodity costs.
Balance sheet, debt, and liquidity
- At January 31, 2012, cash and cash equivalents were $370.4 million, compared with $319.8 million at April 30, 2011. Current assets were $1,806.0 million and current liabilities were $494.3 million.
- Long-term debt increased to $2,071.2 million from $1,304.0 million, primarily following issuance of $750 million of 3.50% notes due 2021. The company had no balance outstanding on its $1.0 billion revolving credit facility and reported compliance with debt covenants.
- The company reported $497.5 million of net cash from financing activities for the nine months, including $748.6 million of net debt proceeds, offset in part by $159.4 million of dividends and $90.5 million of share repurchases.
- Management said cash on hand, operating cash flow, and available credit were expected to meet requirements for the next 12 months, including capital expenditures, dividends, repurchases, and debt interest, assuming no material acquisitions or other significant investments.
Outlook, risks, and unusual items
- Management expected higher green coffee costs to continue through fiscal Q4, though to a lesser degree than in Q3. Peanut costs were expected to rise significantly in Q4 as lower-cost inventory was depleted; the company said it believed supply would be adequate for the rest of the fiscal year.
- Fiscal 2012 capital expenditures were expected to be approximately $270 million. The restructuring program’s estimated total cost was increased to $245 million; $175 million had been incurred through January 31, 2012. The remaining costs were expected over the next two fiscal years. Completion in 2014 is expected to involve six facility closures and a reduction of about 850 full-time positions.
- The Sara Lee foodservice acquisition cost $425.7 million; an additional $50 million is payable in declining installments over ten years. Acquisition-related one-time costs were estimated at about $25 million. Rowland Coffee acquisition-related costs were estimated at $25 million to $30 million.
- Europe’s Best was sold in October 2011. The nine-month results include an $11.3 million loss on sale; the prior-year comparison includes a $17.2 million noncash impairment charge related to that business.
- Interest expense increased with higher debt. Prior interest-rate swap terminations generated a $17.7 million net settlement, with the benefit recognized over the remaining lives of the related debt; a separate $6.2 million swap loss is being amortized over the life of the 2021 notes.
- Key risks include commodity-price volatility and hedging outcomes, the ability to implement price increases without losing volume, consumer and retailer responses, acquisition integration, restructuring execution and savings, customer and supplier concentration, and foreign-exchange, interest-rate, legal, tax, and impairment risks. The company said ordinary-course legal proceedings were not expected to have a material adverse effect, though it could not estimate a potential loss range.
Important facts for investors to verify
- Whether pricing can offset commodity inflation without further volume declines, particularly in coffee, peanut butter, and oils.
- Acquisition contribution and integration costs, including the realization of expected benefits from Rowland Coffee and the Sara Lee foodservice business.
- Progress and final cost of the restructuring plan, planned closures, and expected operational savings.
- Debt levels, interest expense, capital spending, and the effect of share repurchases and dividends on liquidity.
- The effect of the Europe’s Best divestiture and other special project costs when comparing reported results with management’s non-GAAP measures.