J. M. Smucker Company — Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2011 (the second quarter and first half of fiscal 2012). Comparisons are with the corresponding periods ended October 31, 2010. Results include Rowland Coffee from its May 16, 2011 acquisition. Financial amounts are in U.S. dollars; income-statement and cash-flow amounts below are in millions unless noted.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,513.9; up 18% | $2,702.8; up 16% |
| Gross profit / margin | $498.7 / 32.9%, versus $494.7 / 38.7% | $929.8 / 34.4%, versus $903.1 / 38.8% |
| Operating income / margin | $211.6 / 14.0%, down 12% | $392.3 / 14.5%, down 3% |
| Net income | $127.2, versus $149.7 | $238.8, versus $252.6 |
| Diluted earnings per share | $1.12, versus $1.25 | $2.09, versus $2.11 |
Management’s non-GAAP results excluding restructuring and merger/integration costs showed diluted EPS of $1.29 for the quarter, down from $1.38, and $2.41 for the half year, versus $2.42. These measures are supplemental and exclude special project costs.
- Sales and margins: Price increases and Rowland Coffee more than offset lower volume. Excluding acquisition, divestiture, and foreign exchange effects, sales rose 16% for the quarter and 13% for the half year. Volume fell 1% and 2%, respectively. Higher commodity costs—especially green coffee, along with oils, flour, milk, sweetener, and peanuts—compressed gross margins.
- Segments: Quarterly sales rose 29% in U.S. Retail Coffee, 13% in U.S. Retail Consumer Foods, and 9% in International, Foodservice, and Natural Foods. Segment profit fell 6% in Coffee and 24% in International/Foodservice/Natural Foods, while Consumer Foods profit rose 2%. Coffee and Consumer Foods segment margins were pressured by costs; the International segment also absorbed the Europe’s Best divestiture loss.
- Cash flow: Six-month operating cash flow was $59.9, versus $19.5. Investing used $472.0, including $362.8 for Rowland Coffee and $135.7 of capital expenditures. Financing provided $594.6, principally from debt issuance. Company-defined free cash flow (operating cash flow less capital expenditures) was negative $75.8, versus negative $42.5.
- Liquidity and debt: Cash was $496.3 at October 31, versus $319.8 at April 30. Long-term debt increased to $2,071.9 from $1,304.0; shareholders’ equity was $5,363.3. The company issued $750 million of 3.50% notes due 2021, receiving $748.6 net. Its $1.0 billion revolving credit facility, maturing in 2016, had no balance outstanding at quarter-end. The company reported compliance with debt covenants.
- Other metrics: Inventory rose to $1,144.0 from $863.6, reflecting seasonal and restructuring-related buildup as well as higher commodity costs. Declared dividends were $0.48 per share for the quarter, versus $0.40 a year earlier.
Material developments, outlook, and risks
- Acquisitions and financing: Rowland Coffee was acquired for $362.8, adding Café Bustelo and Café Pilon. Management estimated $25–$30 of related one-time costs over the next two to four years. The company signed an agreement to acquire most of Sara Lee’s North American foodservice coffee and hot beverage business for $400, with closing anticipated near the beginning of calendar 2012; the filing describes this as a pending transaction, not a completed acquisition.
- Restructuring: The company expects total restructuring charges of about $235, of which $149.4 had been incurred through October 31. The plan includes approximately $220 of capital investment, facility closures, and a reduction of about 850 positions by 2014. Remaining charges were expected over the next three fiscal years.
- Management outlook: Fiscal 2012 capital expenditures were expected to be approximately $250–$275. Management expected higher green coffee costs through the remainder of the fiscal year and rising peanut costs, with a greater impact in the fourth quarter, while stating that pricing was expected to offset peanut costs. Management said operating cash flow typically strengthens in the second half and that available cash, operations, and the revolver should cover expected needs for the next 12 months, absent material acquisitions or other significant investments. No full-year earnings or EPS guidance is provided in the supplied filing text.
- Unusual items: The quarter and half year included an $11.3 loss on the October sale of the Europe’s Best frozen fruit and vegetable business. Interest-rate swap terminations generated $17.7 of net cash proceeds, with benefits and losses recognized over the relevant debt terms. Higher effective tax rates—34.1% for the quarter and 33.7% for the half year—also weighed on earnings comparisons.
- Risks and contingencies: Key risks include commodity price and supply volatility, effectiveness of pricing and hedging, competition and volume trends, integration of acquisitions, execution and savings from restructuring, and completion of the Sara Lee transaction. The company disclosed ordinary-course legal proceedings but said it did not expect their outcomes to materially adversely affect its financial position, results, or cash flows. A limited voluntary recall announced November 16, 2011, covered two best-if-used-by dates of 16-ounce Smucker’s Natural Peanut Butter Chunky; management did not expect a material financial effect.
Important facts for investors to verify
- Whether price increases can offset continued coffee and peanut cost inflation without further volume or margin deterioration.
- Actual fiscal 2012 capital expenditures, restructuring costs, cash generation, and realization of anticipated restructuring benefits.
- Completion, financing, integration costs, and expected returns for the pending Sara Lee foodservice acquisition.
- How debt and interest expense evolve following the $750 million note issuance and the planned acquisition, including continued covenant compliance.
- Whether the peanut-butter recall, commodity supply conditions, or other contingencies develop beyond management’s stated expectations.