10-Q 1 d286862d10q.htm FORM 10-Q FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-5111

 

 

THE J. M. SMUCKER COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-0538550
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
One Strawberry Lane
Orrville, Ohio
  44667-0280
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (330) 682-3000

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The Company had 112,018,740 common shares outstanding on February 29, 2012.

The Exhibit Index is located at Page No. 43.

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

 

     Three Months Ended
January 31,
    Nine Months Ended
January 31,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share data)  

Net sales

   $ 1,467,641      $ 1,312,351      $ 4,170,429      $ 3,638,576   

Cost of products sold

     988,825        821,086        2,738,715        2,222,681   

Cost of products sold - restructuring

     12,022        16,851        33,492        38,376   

Cost of products sold - merger and integration

     1,109        0        2,784        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     465,685        474,414        1,395,438        1,377,519   

Selling, distribution, and administrative expenses

     225,016        214,325        678,170        640,407   

Amortization

     22,031        18,515        62,825        55,513   

Impairment charges

     0        17,155        0        17,155   

Other restructuring costs

     13,549        8,414        33,802        34,863   

Other merger and integration costs

     5,873        2,746        17,429        8,175   

Loss on sale of business

     0        0        11,287        0   

Other operating (income) expense - net

     (1,150     297        (758     3,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     200,366        212,962        592,683        618,165   

Interest income

     464        779        1,090        1,784   

Interest expense

     (23,599     (18,132     (58,469     (53,176

Other income - net

     4        170        1,958        487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     177,235        195,779        537,262        567,260   

Income taxes

     60,391        63,784        181,648        182,658   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 116,844      $ 131,995      $ 355,614      $ 384,602   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Net Income

   $ 1.03      $ 1.12      $ 3.12      $ 3.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income - Assuming Dilution

   $ 1.03      $ 1.11      $ 3.12      $ 3.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.48      $ 0.44      $ 1.44      $ 1.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


THE J. M. SMUCKER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     January 31, 2012     April 30, 2011  
     (Dollars in thousands)  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 370,428      $ 319,845   

Trade receivables, less allowances

     364,724        344,410   

Inventories:

    

Finished products

     630,611        518,243   

Raw materials

     360,204        345,336   
  

 

 

   

 

 

 
     990,815        863,579   

Other current assets

     80,026        109,165   
  

 

 

   

 

 

 

Total Current Assets

     1,805,993        1,636,999   

PROPERTY, PLANT, AND EQUIPMENT

    

Land and land improvements

     88,429        77,074   

Buildings and fixtures

     407,870        347,950   

Machinery and equipment

     1,154,037        1,022,670   

Construction in progress

     171,604        76,778   
  

 

 

   

 

 

 
     1,821,940        1,524,472   

Accumulated depreciation

     (757,641     (656,590
  

 

 

   

 

 

 

Total Property, Plant, and Equipment

     1,064,299        867,882   

OTHER NONCURRENT ASSETS

    

Goodwill

     3,033,531        2,812,746   

Other intangible assets, net

     3,233,960        2,940,010   

Other noncurrent assets

     98,091        66,948   
  

 

 

   

 

 

 

Total Other Noncurrent Assets

     6,365,582        5,819,704   
  

 

 

   

 

 

 
   $ 9,235,874      $ 8,324,585   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 232,415      $ 234,916   

Accrued trade marketing and merchandising

     54,091        62,588   

Other current liabilities

     207,829        185,172   
  

 

 

   

 

 

 

Total Current Liabilities

     494,335        482,676   

NONCURRENT LIABILITIES

    

Long-term debt

     2,071,202        1,304,039   

Deferred income taxes

     1,029,921        1,042,823   

Other noncurrent liabilities

     256,276        202,684   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     3,357,399        2,549,546   

SHAREHOLDERS’ EQUITY

    

Common shares

     28,314        28,543   

Additional capital

     4,372,548        4,396,592   

Retained income

     1,018,576        866,933   

Amount due from ESOP Trust

     (2,572     (3,334

Accumulated other comprehensive (loss) income

     (32,726     3,629   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     5,384,140        5,292,363   
  

 

 

   

 

 

 
   $ 9,235,874      $ 8,324,585   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

     Nine Months Ended January 31,  
     2012     2011  
     (Dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 355,614      $ 384,602   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     83,756        83,475   

Depreciation - restructuring and merger and integration

     31,749        38,263   

Amortization

     62,825        55,513   

Impairment charges

     0        17,155   

Share-based compensation expense

     16,524        17,986   

Other noncash restructuring charges

     6,942        6,986   

Loss on sale of assets - net

     3,108        1,811   

Loss on sale of business

     11,287        0   

Changes in assets and liabilities, net of effect from businesses acquired:

    

Trade receivables

     (8,434     (50,183

Inventories

     (78,362     (78,598

Accounts payable and accrued items

     (653     36,592   

Proceeds from settlement of interest rate swaps - net

     17,718        0   

Defined benefit pension contributions

     (6,997     (13,432

Accrued and prepaid income taxes

     (30,116     (97,898

Other - net

     4,278        (7,892
  

 

 

   

 

 

 

Net cash provided by operating activities

     469,239        394,380   

INVESTING ACTIVITIES

    

Businesses acquired, net of cash acquired

     (742,355     0   

Additions to property, plant, and equipment

     (196,891     (111,133

Proceeds from sale of business

     9,268        0   

Sale and maturity of marketable securities

     18,600        37,100   

Purchases of marketable securities

     0        (75,637

Proceeds from disposal of property, plant, and equipment

     2,784        5,002   

Other - net

     (1,021     (99
  

 

 

   

 

 

 

Net cash used for investing activities

     (909,615     (144,767

FINANCING ACTIVITIES

    

Repayments of long-term debt

     0        (10,000

Proceeds from long-term debt - net

     748,560        400,000   

Quarterly dividends paid

     (159,389     (143,065

Purchase of treasury shares

     (90,522     (247,329

Proceeds from stock option exercises

     1,719        9,969   

Other - net

     (2,915     4,993   
  

 

 

   

 

 

 

Net cash provided by financing activities

     497,453        14,568   

Effect of exchange rate changes

     (6,494     1,832   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     50,583        266,013   

Cash and cash equivalents at beginning of period

     319,845        283,570   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 370,428      $ 549,583   
  

 

 

   

 

 

 

 

(    ) Denotes use of cash

See notes to unaudited condensed consolidated financial statements.

 

4


THE J. M. SMUCKER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, unless otherwise noted, except per share data)

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform to current year classifications.

Operating results for the nine-month period ended January 31, 2012, are not necessarily indicative of the results that may be expected for the year ending April 30, 2012. For further information, reference is made to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2011, as updated by the Current Report on Form 8-K filed on October 13, 2011.

Note B – Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 provides clarification about the application of existing fair value measurement and disclosure requirements and expands certain other disclosure requirements. This ASU will be effective February 1, 2012, for the Company. The Company anticipates the adoption of ASU 2011-04 will not impact the financial statements, but will expand the disclosures related to fair value measurements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity and requires the presentation of net income and other comprehensive income to be in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 does not change the components that are recognized in net income or other comprehensive income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income while the FASB further deliberates this aspect of the standard. ASU 2011-05, as amended by ASU 2011-12, will be effective May 1, 2012, for the Company; however, early adoption is permitted. Adoption of this guidance requires retrospective application and will affect the presentation of certain elements of the Company’s financial statements, but will not otherwise have an impact on the financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which simplifies the testing of goodwill for impairment. ASU 2011-08 will allow the Company the option to perform either a qualitative test or the first step of the two-step quantitative goodwill impairment test to assess the likelihood that the estimated fair value of a reporting unit is less than the carrying amount. This ASU will be effective May 1, 2012, for the Company; however, early adoption is permitted. The Company anticipates that adoption of ASU 2011-08 could change the annual process for goodwill impairment testing, but will not impact the financial statements.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires the disclosure of both gross and net information about instruments and transactions eligible for offset in the consolidated balance sheet. This ASU will be effective May 1, 2013, for the Company and will require retrospective application. The Company anticipates the adoption of ASU 2011-11 will not impact the financial statements, but will expand the disclosures related to derivative instruments.

 

5


Note C – Acquisitions

On January 3, 2012, the Company completed the acquisition of a majority of the North American foodservice coffee and hot beverage business of the Sara Lee Corporation (“Sara Lee”), including a state-of-the-art liquid coffee manufacturing facility in Suffolk, Virginia, for $425.7 million in an all-cash transaction. Utilizing proceeds from the 3.50 percent Notes issued in October 2011, the Company paid $380.7 million at closing and will pay Sara Lee an additional $50.0 million in declining installments over the next ten years. The additional $50.0 million obligation is included in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheet and is recorded at a present value of $45.0 million. In addition, the Company has incurred one-time costs of $4.2 million through January 31, 2012, directly related to the merger and integration of the acquired Sara Lee foodservice business and the charges were reported in other merger and integration costs in the Condensed Statements of Consolidated Income. Total one-time costs related to the acquisition are estimated to total approximately $25.0 million, nearly all of which are cash related and are primarily related to transition services provided by Sara Lee and employee separation and relocation costs. The Company expects these costs to be incurred over the next three fiscal years.

The acquisition included Sara Lee’s market-leading liquid coffee concentrate business sold under the licensed Douwe Egberts® brand, along with a variety of roast and ground coffee, cappuccino, tea, and cocoa products, sold through foodservice channels in North America. Liquid coffee concentrate adds a unique, high quality, and technology driven form of coffee to the Company’s existing foodservice product offering.

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company determined the estimated fair values based on independent appraisals, discounted cash flow analyses, and estimates made by management. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired, and as such the excess was allocated to goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

 

 

Assets acquired:

  

Cash and cash equivalents

   $ 1,221   

Other current assets

     42,619   

Property, plant, and equipment

     93,566   

Intangible assets

     156,900   

Goodwill

     135,549   

Other noncurrent assets

     863   
  

 

 

 

Total assets acquired

   $ 430,718   
  

 

 

 

Liabilities assumed:

  

Current liabilities

   $ 3,599   

Noncurrent liabilities

     1,389   
  

 

 

 

Total liabilities assumed

   $ 4,988   
  

 

 

 

Net assets acquired

   $ 425,730   
  

 

 

 

The allocation of the purchase price is preliminary and subject to adjustment following the completion of the valuation process and working capital adjustment. Goodwill of $135.5 million was assigned to the International, Foodservice, and Natural Foods segment. Of the total goodwill, $123.5 million is deductible for tax purposes.

 

6


The purchase price allocated to the identifiable intangible assets acquired is as follows:

 

 

Intangible assets with finite lives:

  

Customer relationships (10-year useful life)

   $ 110,000   

Technology (10-year useful life)

     24,200   

Trademark (6-year weighted-average useful life)

     22,700   
  

 

 

 

Total intangible assets

   $ 156,900   
  

 

 

 

The results of operations of the Sara Lee foodservice business are included in the Company’s consolidated financial statements from the date of acquisition and include $26.9 million of total net sales, included in the International, Foodservice, and Natural Foods segment financial results, and did not have a material impact on segment profit for the three and nine months ended January 31, 2012.

On May 16, 2011, the Company completed the acquisition of the coffee brands and business operations of Rowland Coffee Roasters, Inc. (“Rowland Coffee”), a privately-held company headquartered in Miami, Florida, for $362.8 million. The acquisition included a manufacturing, distribution, and office facility in Miami. The Company utilized cash on hand and borrowed $180.0 million under its revolving credit facility to fund the transaction. In addition, the Company has incurred one-time costs of $7.6 million through January 31, 2012, directly related to the merger and integration of Rowland Coffee, which includes approximately $2.8 million in noncash expense items that were reported in cost of products sold. The remaining charges were reported in other merger and integration costs in the Condensed Statements of Consolidated Income. Total one-time costs related to the acquisition are estimated to be between $25.0 million and $30.0 million, including approximately $15.0 million of noncash charges, primarily accelerated depreciation, associated with consolidating coffee production currently in Miami into the Company’s existing facilities in New Orleans, Louisiana. The Company expects these costs to be incurred over the next two to three fiscal years.

The acquisition of Rowland Coffee, a leading producer of espresso coffee in the U.S., strengthens and broadens the Company’s leadership in the U.S. retail coffee category by adding the leading Hispanic brands, Café Bustelo® and Café PilonTM, to the Company’s portfolio of brands.

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company determined the estimated fair values based on independent appraisals, discounted cash flow analyses, and estimates made by management. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired, and as such the excess was allocated to goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

 

 

Assets acquired:

  

Current assets

   $ 33,971   

Property, plant, and equipment

     29,227   

Intangible assets

     213,500   

Goodwill

     91,675   
  

 

 

 

Total assets acquired

   $ 368,373   
  

 

 

 

Liabilities assumed:

  

Current liabilities

   $ 5,527   
  

 

 

 

Total liabilities assumed

   $ 5,527   
  

 

 

 

Net assets acquired

   $ 362,846   
  

 

 

 

Goodwill of $84.9 million and $6.8 million was assigned to the U.S. Retail Coffee and the International, Foodservice, and Natural Foods segments, respectively. Of the total goodwill, $87.1 million is deductible for tax purposes.

 

7


The purchase price allocated to the identifiable intangible assets acquired is as follows:

 

 

Intangible assets with finite lives:

  

Customer relationships (19-year weighted-average useful life)

   $ 147,800   

Trademark (10-year useful life)

     1,600   

Intangible assets with indefinite lives:

  

Trademarks

   $ 64,100   
  

 

 

 

Total intangible assets

   $ 213,500   
  

 

 

 

The results of operations of the Rowland Coffee business are included in the Company’s consolidated financial statements from the date of acquisition and include $33.0 million and $86.7 million of total net sales and $6.9 million and $12.2 million of total segment profit included in the U.S. Retail Coffee and International, Foodservice, and Natural Foods segment financial results for the three months and nine months ended January 31, 2012, respectively.

If the Rowland Coffee and Sara Lee foodservice business acquisitions had occurred on May 1, 2010, consolidated net sales would have been approximately $4.0 billion and $4.4 billion for the nine months ended January 31, 2011 and 2012, respectively, and the contribution of the acquired businesses would not have had a material impact to reported consolidated earnings for the nine months ended January 31, 2011 and 2012.

Note D – Restructuring

During calendar 2010, the Company announced its plan to restructure its coffee, fruit spreads, and Canadian pickle and condiments operations as part of its ongoing efforts to enhance the long-term strength and profitability of its leading brands. The initiative is a long-term investment to optimize production capacity and lower the overall cost structure. It includes capital investments for a new state-of-the-art food manufacturing facility in Orrville, Ohio, consolidation of coffee production in New Orleans, Louisiana, and the transition of the Company’s pickle and condiments production to third-party manufacturers.

During the third quarter of 2012, the Company increased anticipated restructuring costs from approximately $235.0 million to $245.0 million, consisting primarily of increases to employee separation and site preparation and equipment relocation charges. The Company has incurred restructuring costs of $175.0 million through January 31, 2012. The balance of the costs is anticipated to be recognized over the next two fiscal years.

Upon completion in 2014, the restructuring plan will result in a reduction of approximately 850 full-time positions and the closing of six of the Company’s facilities – Memphis, Tennessee; Ste. Marie, Quebec; Sherman, Texas; Kansas City, Missouri; Dunnville, Ontario; and Delhi Township, Ontario. The Sherman, Dunnville, and Delhi Township facilities have been closed.

 

8


The following table summarizes the restructuring activity, including the reserves established and the total amount expected to be incurred.

 

 

     Long-Lived
Asset
Charges
    Employee
Separation
    Site Preparation
and Equipment
Relocation
    Production
Start-up
    Other Costs     Total  

Total expected restructuring charge

   $ 105,000      $ 71,000      $ 31,000      $ 26,000      $ 12,000      $ 245,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 1, 2010

   $ 0      $ 1,089      $ 0      $ 0      $ 0      $ 1,089   

Charge to expense

     53,569        36,010        6,192        5,194        992        101,957   

Cash payments

     0        (18,361     (6,192     (5,194     (992     (30,739

Noncash utilization

     (53,569     (8,540     0        0        0        (62,109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2011

   $ 0      $ 10,198      $ 0      $ 0      $ 0      $ 10,198   

Charge to expense

     29,136        18,551        8,883        9,241        1,483        67,294   

Cash payments

     0        (11,634     (8,883     (9,241     (1,483     (31,241

Noncash utilization

     (29,136     (6,942     0        0        0        (36,078
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2012

   $ 0      $ 10,173      $ 0      $ 0      $ 0      $ 10,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Remaining expected restructuring charge

   $ 18,425      $ 15,300      $ 15,518      $ 11,549      $ 9,246      $ 70,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the three and nine months ended January 31, 2012, total restructuring charges of $25,571 and $67,294, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $12,022 and $33,492 were reported in cost of products sold in the three and nine months ended January 31, 2012, respectively. During the three and nine months ended January 31, 2011, total restructuring charges of $25,265 and $73,239, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $16,851 and $38,376 were reported in cost of products sold in the three and nine months ended January 31, 2011, respectively. The remaining charges were reported in other restructuring costs. The restructuring costs classified as cost of products sold primarily include long-lived asset charges for accelerated depreciation related to property, plant, and equipment that will be used at the affected production facilities until they are closed or sold.

Expected employee separation costs include severance, retention bonuses, and pension costs. Severance costs and retention bonuses are being recognized over the estimated future service period of the affected employees. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets. For additional information on the impact of the restructuring plan on defined benefit pension and other postretirement benefit plans, see Note J – Pensions and Other Postretirement Benefits.

Other costs include professional fees, costs related to closing the facilities, and miscellaneous expenditures associated with the Company’s restructuring initiative and are expensed as incurred.

Note E – Share-Based Payments

The Company provides for equity-based incentives to be awarded to key employees and non-employee directors. These incentives are administered primarily through the 2010 Equity and Incentive Compensation Plan, and currently consist of restricted shares, restricted stock units, deferred shares, deferred stock units, performance units, and stock options.

 

9


The following table summarizes amounts related to share-based payments.

 

 

     Three Months Ended      Nine Months Ended  
     January 31,      January 31,  
     2012      2011      2012      2011  

Share-based compensation expense included in selling, distribution, and administrative expenses

   $ 3,576       $ 4,495       $ 14,320       $ 14,803   

Share-based compensation expense included in other merger and integration costs

     394         1,223         2,204         3,183   

Share-based compensation expense included in other restructuring costs

     21         16         86         190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 3,991       $ 5,734       $ 16,610       $ 18,176   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related income tax benefit

   $ 1,366       $ 1,872       $ 5,616       $ 5,853   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of January 31, 2012, total compensation cost related to nonvested share-based awards not yet recognized was approximately $32,932. The weighted-average period over which this amount is expected to be recognized is approximately 3.1 years.

Note F – Common Shares

The following table sets forth common share information.

 

 

     January 31, 2012      April 30, 2011  

Common shares authorized

     150,000,000         150,000,000   

Common shares outstanding

     113,255,750         114,172,122   

Treasury shares

     15,349,415         14,432,043   

Note G – Reportable Segments

The Company operates in one industry: the manufacturing and marketing of food products. Effective May 1, 2011, the Company’s reportable segments have been modified to align segment financial results with the responsibilities of segment management, consistent with the executive appointments announced in March 2011. As a result, the Company has the following three reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods. The U.S. Retail Coffee segment primarily represents the domestic sales of Folgers®, Dunkin’ Donuts®, Millstone®, Café Bustelo®, and Café PilonTM branded coffee to retail customers; the U.S. Retail Consumer Foods segment primarily includes domestic sales of Smucker’s®, Crisco®, Jif®, Pillsbury®, Eagle Brand®, Hungry Jack®, and Martha White® branded products; and the International, Foodservice, and Natural Foods segment is comprised of products distributed domestically and in foreign countries through retail channels, foodservice distributors and operators (e.g., restaurants, schools and universities, health care operators), and health and natural foods stores and distributors.

Also effective May 1, 2011, certain specialty brands which were previously included in the U.S. Retail Consumer Foods segment are included in the International, Foodservice, and Natural Foods segment (“product realignments”). Segment performance for 2011 has been reclassified for these product realignments and the organizational changes described above.

 

10


The following table sets forth reportable segment information.

 

 

     Three Months Ended     Nine Months Ended  
     January 31,     January 31,  
     2012     2011     2012     2011  

Net sales:

        

U.S. Retail Coffee

   $ 637,886      $ 554,667      $ 1,755,518      $ 1,425,524   

U.S. Retail Consumer Foods

     556,549        518,492        1,631,241        1,510,059   

International, Foodservice, and Natural Foods

     273,206        239,192        783,670        702,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,467,641      $ 1,312,351      $ 4,170,429      $ 3,638,576   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit:

        

U.S. Retail Coffee

   $ 138,346      $ 158,093      $ 418,015      $ 419,074   

U.S. Retail Consumer Foods

     106,645        102,160        301,619        308,642   

International, Foodservice, and Natural Foods

     39,029        29,890        116,565        116,831   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment profit

   $ 284,020      $ 290,143      $ 836,199      $ 844,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     464        779        1,090        1,784   

Interest expense

     (23,599     (18,132     (58,469     (53,176

Share-based compensation expense

     (3,576     (4,495     (14,320     (14,803

Cost of products sold - restructuring

     (12,022     (16,851     (33,492     (38,376

Cost of products sold - merger and integration

     (1,109     0        (2,784     0   

Other restructuring costs

     (13,549     (8,414     (33,802     (34,863

Other merger and integration costs

     (5,873     (2,746     (17,429     (8,175

Corporate administrative expenses

     (47,525     (44,675     (141,689     (130,165

Other income - net

     4        170        1,958        487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 177,235      $ 195,779      $ 537,262      $ 567,260   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note H – Debt and Financing Arrangements

Long-term debt consists of the following:

 

 

     January 31, 2012      April 30, 2011  

4.78% Senior Notes due June 1, 2014

   $ 100,000       $ 100,000   

6.12% Senior Notes due November 1, 2015

     24,000         24,000   

6.63% Senior Notes due November 1, 2018

     398,601         380,039   

3.50% Notes due October 15, 2021

     748,601         0   

5.55% Senior Notes due April 1, 2022

     400,000         400,000   

4.50% Senior Notes due June 1, 2025

     400,000         400,000   
  

 

 

    

 

 

 

Total long-term debt

   $ 2,071,202       $ 1,304,039   
  

 

 

    

 

 

 

On October 18, 2011, the Company completed a public issuance of $750.0 million in aggregate principal amount of 3.50 percent Notes due October 15, 2021. Interest is payable semiannually beginning April 15, 2012. The Company received proceeds of approximately $748.6 million, net of an offering discount of $1.4 million. The discount is being amortized to interest expense over the life of the 3.50 percent Notes resulting in an effective rate of 3.52 percent. The 3.50 percent Notes may be redeemed at any time prior to maturity, at the option of the Company. The 3.50 percent Notes are senior unsecured obligations and rank equally with the Company’s other unsecured and unsubordinated debt and are guaranteed fully and unconditionally, on a joint and several basis, by J.M. Smucker LLC and The Folgers Coffee Company, two of the Company’s wholly-owned subsidiaries. A portion of the net proceeds was used to fund the Sara Lee foodservice business acquisition and for the repayment of borrowings outstanding under the Company’s revolving credit facility resulting from funding the Rowland Coffee acquisition. The remainder will be used for general corporate purposes, including share repurchases.

In anticipation of the 3.50 percent Notes public issuance, the Company entered into a forward-starting interest rate swap agreement in August 2011 to partially hedge the risk of an increase in the benchmark interest rate during the period leading up to the public issuance. The interest rate swap was designated as a cash flow

 

11


hedge with a notional amount of $500.0 million. On October 13, 2011, in conjunction with the pricing of the 3.50 percent Notes, the Company terminated the interest rate swap prior to maturity. The termination resulted in a loss of $6.2 million, which will be amortized over the life of the related debt offering. For additional information, see Note M – Derivative Financial Instruments.

In 2011, the Company entered into an interest rate swap on the 6.63 percent Senior Notes due November 1, 2018, converting the Senior Notes from a fixed to a variable-rate basis until maturity. The interest rate swap was designated as a fair value hedge of the underlying debt obligation with a notional amount of $376.0 million. In August 2011, the Company terminated the interest rate swap agreement prior to maturity. As a result of the early termination, the Company received $27.0 million in cash, which included $3.1 million of interest receivable, and realized a gain of $23.9 million, which was deferred and will be recognized as a reduction of future interest expense through November 1, 2018. The unamortized benefit at January 31, 2012, was $22.6 million and the fair value adjustment of the interest rate swap at April 30, 2011, was $4.0 million and both were recorded as an increase in the long-term debt balance. For additional information, see Note M – Derivative Financial Instruments.

All of the Company’s Senior Notes are unsecured and interest is paid semiannually. Scheduled payments are required on the 5.55 percent Senior Notes, the first of which is $50.0 million on April 1, 2013, and on the 4.50 percent Senior Notes, the first of which is $100.0 million on June 1, 2020.

On July 29, 2011, the Company entered into a second amended and restated credit agreement with a group of ten banks. The credit facility, which amends and restates in its entirety the $600.0 million credit agreement dated as of January 31, 2011, provides for an unsecured revolving credit line of $1.0 billion and matures July 29, 2016. The Company’s borrowings under the credit facility bear interest based on prevailing U.S. Prime Rate, Canadian Base Rate, London Interbank Offered Rate, or Canadian Dealer Offered Rate, as determined by the Company. Interest is payable either on a quarterly basis or at the end of the borrowing term. At January 31, 2012, the Company did not have a balance outstanding under the revolving credit facility.

The Company’s debt instruments contain certain financial covenant restrictions including consolidated net worth, a leverage ratio, and an interest coverage ratio. The Company is in compliance with all covenants.

 

12


Note I – Earnings per Share

The following tables set forth the computation of net income per common share and net income per common share – assuming dilution.

 

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2012      2011      2012      2011  

Computation of net income per share:

           

Net income

   $ 116,844       $ 131,995       $ 355,614       $ 384,602   

Net income allocated to participating securities

     974         1,311         3,394         3,788   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 115,870       $ 130,684       $ 352,220       $ 380,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     112,493,822         117,155,509         112,783,014         117,875,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share

   $ 1.03       $ 1.12       $ 3.12       $ 3.23   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended January 31,      Nine Months Ended January 31,  
     2012      2011      2012      2011  

Computation of net income per share - assuming dilution:

           

Net income

   $ 116,844       $ 131,995       $ 355,614       $ 384,602   

Net income allocated to participating securities

     973         1,311         3,394         3,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 115,871       $ 130,684       $ 352,220       $ 380,816   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     112,493,822         117,155,509         112,783,014         117,875,340   

Dilutive effect of stock options

     49,125         103,246         52,811         124,402   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding - assuming dilution

     112,542,947         117,258,755         112,835,825         117,999,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share - assuming dilution

   $ 1.03       $ 1.11       $ 3.12       $ 3.23   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reconciles the weighted-average common shares used in the basic and diluted earnings per share disclosures to the total weighted-average shares outstanding.

 

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2012      2011      2012      2011  

Weighted-average common shares outstanding

     112,493,822         117,155,509         112,783,014         117,875,340   

Weighted-average participating shares outstanding

     945,330         1,175,525         1,086,897         1,172,646   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding

     113,439,152         118,331,034         113,869,911         119,047,986   

Dilutive effect of stock options

     49,125         103,246         52,811         124,402   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding - assuming dilution

     113,488,277         118,434,280         113,922,722         119,172,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Note J – Pensions and Other Postretirement Benefits

The components of the Company’s net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.

 

 

     Three Months Ended January 31,  
     Defined Benefit Pension Plans     Other Postretirement Benefits  
     2012     2011     2012     2011  

Service cost

   $ 2,003      $ 1,884      $ 586      $ 405   

Interest cost

     6,523        6,373        762        695   

Expected return on plan assets

     (6,672     (6,729     0        0   

Recognized net actuarial loss (gain)

     2,151        3,160        (10     (134

Termination benefit cost

     1,838        178        2,030        0   

Curtailment loss (gain)

     1,124        0        (115     0   

Other

     271        294        (106     (122
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 7,238      $ 5,160      $ 3,147      $ 844   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended January 31,  
     Defined Benefit Pension Plans     Other Postretirement Benefits  
     2012     2011     2012     2011  

Service cost

   $ 6,041      $ 5,603      $ 1,656      $ 1,215   

Interest cost

     19,646        19,079        2,314        2,076   

Expected return on plan assets

     (20,271     (20,060     0        0   

Recognized net actuarial loss (gain)

     7,424        7,085        (33     (402

Termination benefit cost

     1,838        8,375        2,030        2,413   

Curtailment loss (gain)

     1,124        4,091        (115     0   

Other

     856        871        (319     (366
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 16,658      $ 25,044      $ 5,533      $ 4,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Upon completion of the restructuring plan discussed in Note D – Restructuring, approximately 850 full-time positions will be reduced. The Company has included the estimated impact of the planned reductions in measuring the net periodic benefit cost of the defined benefit pension and other postretirement benefit plans for the three months and nine months ended January 31, 2012 and 2011. Included above are charges recognized during the three months and nine months ended January 31, 2012 and 2011, for termination benefits and curtailment as a result of the restructuring plan.

Note K – Comprehensive Income

The following table summarizes the components of comprehensive income.

 

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2012     2011     2012     2011  

Net income

   $ 116,844      $ 131,995      $ 355,614      $ 384,602   

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (459     6,387        (18,672     5,321   

Unrealized gain (loss) on available-for-sale securities

     1,499        794        (330     758   

Unrealized gain (loss) on cash flow hedging derivatives, net

     995        (885     (21,131     5,857   

Unrealized (loss) gain on pension and other postretirement liabilities

     (6,270     819        (6,270     519   

Income tax benefit (expense)

     1,360        (234     10,048        (2,780
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 113,969      $ 138,876      $ 319,259      $ 394,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Note L – Contingencies

The Company, like other food manufacturers, is from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. The Company is currently a defendant in a variety of such legal proceedings. The Company cannot predict with certainty the ultimate results of these proceedings or reasonably determine a range of potential loss. The Company’s policy is to accrue costs for contingent liabilities when such liabilities are probable and amounts can be reasonably estimated. Based on the information known to date, the Company does not believe the final outcome of these proceedings will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Note M – Derivative Financial Instruments

The Company is exposed to market risks, such as changes in commodity prices, foreign currency exchange rates, and interest rates. To manage the volatility relating to these exposures, the Company enters into various derivative transactions. By policy, the Company historically has not entered into derivative financial instruments for trading purposes or for speculation.

Commodity Price Management. The Company enters into commodity futures and options contracts to manage the price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, edible oils, and flour. The Company also enters into commodity futures and options contracts to manage price risk for energy input costs, including natural gas and diesel fuel. The derivative instruments generally have maturities of less than one year.

Certain of the derivative instruments associated with the Company’s U.S. Retail Coffee and U.S. Retail Consumer Foods segments meet the hedge criteria and are accounted for as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are deferred and included as a component of accumulated other comprehensive (loss) income to the extent effective, and reclassified to cost of products sold in the period during which the hedged transaction affects earnings. Cash flows related to qualifying hedges are classified consistently with the cash flows from the hedged item in the Condensed Statements of Consolidated Cash Flows. In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in the fair value of the commodity’s futures contracts are highly effective in hedging price risks associated with the commodity purchased. Hedge effectiveness is measured and assessed at inception and on a monthly basis. The mark-to-market gains or losses on nonqualifying and ineffective portions of commodity hedges are recognized in cost of products sold immediately.

Foreign Currency Exchange Rate Hedging. The Company utilizes foreign currency forwards and options contracts to manage the effect of foreign currency exchange fluctuations on future cash payments primarily related to purchases of certain raw materials, finished goods, and fixed assets. The contracts generally have maturities of less than one year. At the inception of the contract, the derivative is evaluated and documented for hedge accounting treatment. Instruments currently used to manage foreign currency exchange exposures do not meet the requirements for hedge accounting treatment and the change in value of these instruments is immediately recognized in cost of products sold. If the contract qualifies for hedge accounting treatment, to the extent the hedge is deemed effective, the associated mark-to-market gains and losses are deferred and included as a component of accumulated other comprehensive (loss) income. These gains or losses are reclassified to earnings in the period the contract is executed. The ineffective portion of these contracts is immediately recognized in earnings.

Interest Rate Hedging. The Company utilizes interest rate swaps to mitigate the exposure to interest rate risk. At the inception of the contract, the instrument is evaluated and documented for hedge accounting treatment.

In August 2011, the Company entered into a forward-starting interest rate swap agreement to partially hedge the risk of an increase in the benchmark interest rate during the period leading up to the $750.0 million 3.50 percent Notes public offering. The hedge was designated as a cash flow hedge. The mark-to-market gains or losses on the swap were deferred and included as a component of accumulated other comprehensive (loss) income to the extent effective, and reclassified to interest expense in the period during which the hedged

 

15


transaction affected earnings. In October 2011, in conjunction with the pricing of the 3.50 percent Notes, the Company terminated the interest rate swap prior to maturity resulting in a loss of $6.2 million. The resulting loss will be recognized in interest expense ratably over the life of the related debt. The ineffective portion of the hedge was reclassified to interest expense upon termination of the swap. For additional information, see Note H – Debt and Financing Arrangements.

The Company’s interest rate swap on the 6.63 percent Senior Notes due November 1, 2018, met the criteria to be designated as a fair value hedge. The Company received a fixed rate and paid variable rates, hedging the underlying debt and the associated changes in the fair value of the debt. The interest rate swap was recognized at fair value in the Condensed Consolidated Balance Sheet at April 30, 2011, and changes in the fair value were recognized in interest expense. Gains and losses recognized in interest expense on the instrument had no net impact to earnings as the change in the fair value of the derivative was equal to the change in fair value of the underlying debt. In August 2011, the Company terminated the interest rate swap on the 6.63 percent Senior Notes prior to maturity resulting in a gain of $23.9 million which was deferred and will be recognized over the remaining life of the underlying debt as a reduction of future interest expense. The gain will be recognized as follows: $2.5 million in 2012, $3.3 million annually in 2013 through 2018, and $1.6 million in 2019. For additional information, see Note H – Debt and Financing Arrangements.

The following table sets forth the fair value of derivative instruments recognized in the Condensed Consolidated Balance Sheets.

 

 

     January 31, 2012      April 30, 2011  
     Other
Current
Assets
     Other
Current
Liabilities
     Other
Current
Assets
     Other
Current
Liabilities
     Other
Noncurrent
Liabilities
 

Derivatives designated as hedging instruments:

              

Commodity contracts

   $ 350       $ 1,754       $ 3,408       $ 0       $ 0   

Interest rate contract

     0         0         5,423         0         1,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ 350       $ 1,754       $ 8,831       $ 0       $ 1,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

              

Commodity contracts

   $ 2,223       $ 2,921       $ 9,887       $ 5,432       $ 0   

Foreign currency exchange contracts

     56         224         317         3,204         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 2,279       $ 3,145       $ 10,204       $ 8,636       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives instruments

   $ 2,629       $ 4,899       $ 19,035       $ 8,636       $ 1,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has elected to not offset fair value amounts recognized for commodity derivative instruments and its cash margin accounts executed with the same counterparty. The Company maintained cash margin accounts of $10,289 and $12,292 at January 31, 2012 and April 30, 2011, respectively, that are included in other current assets in the Condensed Consolidated Balance Sheets.

The following table presents information on pre-tax commodity contract gains and losses recognized on derivatives designated as cash flow hedges.

 

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2012     2011     2012     2011  

(Losses) gains recognized in other comprehensive (loss) income (effective portion)

   $ (681   $ 4,788      $ (10,941   $ 17,822   

(Losses) gains reclassified from accumulated other comprehensive (loss) income to cost of products sold (effective portion)

     (1,546     5,673        4,146        11,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive (loss) income

   $ 865      $ (885   $ (15,087   $ 5,857   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) recognized in cost of products sold (ineffective portion)

   $ 15      $ 84      $ (498   $ 458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Included as a component of accumulated other comprehensive (loss) income at January 31, 2012 and April 30, 2011, were deferred pre-tax losses of $5,657 and deferred pre-tax gains of $9,430, respectively, related to commodity contracts. The related tax impact recognized in accumulated other comprehensive (loss) income was a benefit of $2,057 and expense of $3,430 at January 31, 2012 and April 30, 2011, respectively. The entire amount of the deferred loss included in accumulated other comprehensive loss at January 31, 2012, is expected to be recognized in earnings within one year as the related commodity is sold.

 

16


The following table presents information on the pre-tax losses recognized on the interest rate swap designated as a cash flow hedge.

 

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2012         2011          2012         2011      

Losses recognized in other comprehensive (loss) income (effective portion)

   $ 0      $ 0       $ (6,192   $ 0   

Losses reclassified from accumulated other comprehensive (loss) income to interest expense (effective portion)

     (130     0         (148     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Change in accumulated other comprehensive (loss) income

   $ 130      $ 0       $ (6,044   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Losses recognized in interest expense (ineffective portion)

   $ 0      $ 0       $ (19   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Included as a component of accumulated other comprehensive loss at January 31, 2012, were deferred pre-tax losses of $6,044 related to the termination of the interest rate contract. The related tax benefit recognized in accumulated other comprehensive loss was $2,180 at January 31, 2012. Approximately $300 of the loss will be recognized over the next 12 months.

The following table presents the net realized and unrealized gains and losses recognized in cost of products sold on derivatives not designated as qualified hedging instruments.

 

 

     Three Months Ended     Nine Months Ended  
     January 31,     January 31,  
     2012      2011     2012      2011  

Gains (losses) on commodity contracts

   $ 1,008       $ (359   $ 16,812       $ 4,488   

Gains (losses) on foreign currency exchange contracts

     117         (863     1,772         (593
  

 

 

    

 

 

   

 

 

    

 

 

 

Gains (losses) recognized in cost of products sold (derivatives not designated as hedging instruments)

   $ 1,125       $ (1,222   $ 18,584       $ 3,895   
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the gross contract notional value of outstanding derivative contracts.

 

 

     January 31, 2012      April 30, 2011  

Commodity contracts

   $ 462,604       $ 869,107   

Foreign currency exchange contracts

     74,255         73,158   

Interest rate contract

     0         376,000   

Note N – Other Financial Instruments and Fair Value Measurements

Financial instruments, other than derivatives, that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and trade receivables. Under the Company’s investment policy, it may invest in securities deemed to be investment grade at the time of purchase. The Company determines the appropriate categorization of debt securities at the time of purchase and reevaluates such designation at each balance sheet date.

 

17


The fair value of the Company’s financial instruments, other than its long-term debt, approximates their carrying amounts. The following table provides information on the carrying amount and fair value of the Company’s financial instruments.

 

 

     January 31, 2012     April 30, 2011  
     Carrying
Amount
    Fair Value     Carrying
Amount
     Fair Value  

Marketable securities

   $ 0      $ 0      $ 18,600       $ 18,600   

Other investments

     41,673        41,673        41,560         41,560   

Derivatives financial instruments, net

     (2,270     (2,270     9,015         9,015   

Long-term debt

     2,071,202        2,570,053        1,304,039         1,648,614   

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions.

The following table summarizes the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for the Company’s financial assets (liabilities) measured at fair value on a recurring basis.

 

 

     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
     Fair Value at
January 31,
2012
    Fair Value at
April 30,
2011
 

Marketable securities: (A)

   $ 0      $ 0      $ 0       $ 0      $ 18,600   

Other investments: (B)

           

Equity mutual funds

     13,152        0        0         13,152        14,011   

Municipal obligations

     0        20,575        0         20,575        20,042   

Other investments

     903        7,043        0         7,946        7,507   

Derivatives: (C)

           

Commodity contracts, net

     (1,173     (929     0         (2,102     7,863   

Foreign currency exchange contracts, net

     56        (224     0         (168     (2,887

Interest rate contract, net

     0        0        0         0        4,039   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total financial assets measured at fair value

   $ 12,938      $ 26,465      $ 0       $ 39,403      $ 69,175   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(A) 

The Company’s marketable securities consisted entirely of commercial paper at April 30, 2011, and were broker-priced and valued by a third party using an evaluated pricing methodology. An evaluated pricing methodology is a valuation technique which uses inputs that are derived principally from or corroborated by observable market data. All securities had matured or were sold prior to January 31, 2012.

(B) 

The Company’s other investments consist of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include equity securities listed in active markets and municipal obligations valued by a third party using an evaluated pricing methodology. As of January 31, 2012 the Company’s municipal obligations are scheduled to mature as follows: $304 in 2012, $3,344 in 2013, $740 in 2014, $2,751 in 2015, and $13,436 in 2016 and beyond.

(C) 

The Company’s commodity contract and foreign currency exchange contract derivatives are valued using quoted market prices. Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. The Company’s interest rate contract derivative was valued using the income approach, observable Level 2 market expectations at the measurement date, and standard valuation techniques to convert future amounts to a single discounted present value. For additional information, see Note M – Derivative Financial Instruments.

 

18


Note O – Income Taxes

During the three-month period ended January 31, 2012, the Company’s effective tax rate increased to 34.1 percent, compared to 32.6 percent for the three-month period ended January 31, 2011. The increase in the effective tax rate is primarily due to an increase in state income tax expense and a lower domestic manufacturing deduction in 2012, and the release of unrecognized tax benefits due to the expiration of the statute of limitations periods in 2011.

During the nine-month period ended January 31, 2012, the Company’s effective tax rate increased to 33.8 percent compared to 32.2 percent for the nine-month period ended January 31, 2011. The increase in the effective tax rate is primarily due to higher state income tax expense in 2012, and the release of unrecognized tax benefits due to the expiration of the statute of limitations periods and a favorable federal income tax determination in 2011.

At January 31, 2012, the effective income tax rate varied from the U.S. statutory income tax rate primarily due to the domestic manufacturing deduction partially offset by state income taxes.

Within the next 12 months, it is reasonably possible that the Company could decrease its unrecognized tax benefits by an additional $1.1 million, primarily as a result of expiring statute of limitations periods.

Note P – Guarantor and Non-Guarantor Financial Information

On October 13, 2011, the Company filed a registration statement on Form S-3 registering certain securities described therein, including debt securities which are guaranteed by certain of the Company’s subsidiaries. The Company issued $750.0 million of 3.50 percent Notes pursuant to the registration statement that are fully and unconditionally guaranteed, on a joint and several basis, by the following wholly-owned subsidiaries of the Company: J.M. Smucker LLC and The Folgers Coffee Company (the “subsidiary guarantors”). The following condensed consolidated financial information for the Company, the subsidiary guarantors, and the non-guarantor subsidiaries is provided. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for investments in subsidiaries using the equity method.

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

Three Months Ended January 31, 2012

 

     The J.M. Smucker
Company (Parent)
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 1,159,940      $ 396,539      $ 1,040,114      $ (1,128,952   $ 1,467,641   

Cost of products sold

     1,038,288        357,429        741,938        (1,135,699     1,001,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     121,652        39,110        298,176        6,747        465,685   

Selling, distribution, and administrative expenses, restructuring, and merger and integration costs

     60,727        19,867        163,844        0        244,438   

Amortization

     1,550        0        20,481        0        22,031   

Other operating (income) expense - net

     (627     (717     194        0        (1,150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     60,002        19,960        113,657        6,747        200,366   

Interest (expense) income - net

     (23,353     721        (503     0        (23,135

Other (expense) income - net

     (11     96        (81     0        4   

Equity in net earnings of subsidiaries

     95,637        55,084        20,048        (170,769     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     132,275        75,861        133,121        (164,022     177,235   

Income taxes

     15,431        245        44,715        0        60,391   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 116,844      $ 75,616      $ 88,406      $ (164,022   $ 116,844   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


CONDENSED STATEMENTS OF CONSOLIDATED INCOME

Three Months Ended January 31, 2011

 

     The J.M. Smucker     Subsidiary      Non-Guarantor              
     Company (Parent)     Guarantors      Subsidiaries     Eliminations     Consolidated  

Net sales

   $ 1,039,686      $ 724,452       $ 1,111,319      $ (1,563,106   $ 1,312,351   

Cost of products sold

     854,876        658,021         891,142        (1,566,102     837,937   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     184,810        66,431         220,177        2,996        474,414   

Selling, distribution, and administrative expenses, restructuring, and merger and integration costs

     53,336        16,315         155,834        0        225,485   

Amortization and impairment charges

     1,297        16,168         18,205        0        35,670   

Other operating expense (income) - net

     394        139         (236     0        297   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     129,783        33,809         46,374        2,996        212,962   

Interest (expense) income - net

     (17,565     975         (763     0        (17,353

Other income (expense) - net

     1        201         (32     0        170   

Equity in net earnings of subsidiaries

     56,541        23,556         18,610        (98,707     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     168,760        58,541         64,189        (95,711     195,779   

Income taxes

     36,765        5,400         21,619        0        63,784   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 131,995      $ 53,141       $ 42,570      $ (95,711   $ 131,995   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

Nine Months Ended January 31, 2012

 

     The J.M. Smucker     Subsidiary     Non-Guarantor              
     Company (Parent)     Guarantors     Subsidiaries     Eliminations     Consolidated  

Net sales

   $ 3,258,136      $ 1,179,939      $ 2,915,302      $ (3,182,948   $ 4,170,429   

Cost of products sold

     2,853,831        1,074,723        2,028,091        (3,181,654     2,774,991   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     404,305        105,216        887,211        (1,294     1,395,438   

Selling, distribution, and administrative expenses, restructuring, and merger and integration costs

     183,782        46,291        499,328        0        729,401   

Amortization

     4,228        0        58,597        0        62,825   

Loss on sale of business and other operating (income) expense - net

     (711     (469     11,709        0        10,529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     217,006        59,394        317,577        (1,294     592,683   

Interest (expense) income - net

     (58,071     2,671        (1,979     0        (57,379

Other income - net

     678        330        950        0        1,958   

Equity in net earnings of subsidiaries

     250,596        164,707        59,715        (475,018     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     410,209        227,102        376,263        (476,312     537,262   

Income taxes

     54,595        893        126,160        0        181,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 355,614      $ 226,209      $ 250,103      $ (476,312   $ 355,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

Nine Months Ended January 31, 2011

 

     The J.M. Smucker     Subsidiary      Non-Guarantor              
     Company (Parent)     Guarantors      Subsidiaries     Eliminations     Consolidated  

Net sales

   $ 2,855,653      $ 2,090,882       $ 3,105,275      $ (4,413,234   $ 3,638,576   

Cost of products sold

     2,326,332        1,890,370         2,440,741        (4,396,386     2,261,057   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     529,321        200,512         664,534        (16,848     1,377,519   

Selling, distribution, and administrative expenses, restructuring, and merger and integration costs

     156,278        62,810         464,357        0        683,445   

Amortization and impairment charges

     3,890        48,504         20,274        0        72,668   

Other operating (income) expense - net

     (326     1,132         2,435        0        3,241   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     369,479        88,066         177,468        (16,848     618,165   

Interest (expense) income - net

     (51,762     2,424         (2,054     0        (51,392

Other (expense) income - net

     (263     585         165        0        487   

Equity in net earnings of subsidiaries

     161,774        66,070         54,698        (282,542     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     479,228        157,145         230,277        (299,390     567,260   

Income taxes

     94,626        11,973         76,059        0        182,658   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 384,602      $ 145,172       $ 154,218      $ (299,390   $ 384,602   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

20


CONDENSED CONSOLIDATED BALANCE SHEETS

January 31, 2012

 

 

     The J.M. Smucker      Subsidiary      Non-Guarantor               
     Company (Parent)      Guarantors      Subsidiaries      Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 263,937       $ 0       $ 106,491       $ 0      $ 370,428   

Inventories

     0         221,194         790,616         (20,995     990,815   

Other current assets

     358,943         3,915         81,892         0        444,750   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Current Assets

     622,880         225,109         978,999         (20,995     1,805,993   

PROPERTY, PLANT, AND EQUIPMENT, NET

     215,436         375,513         473,350         0        1,064,299   

INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY

     5,625,918         963,785         736,061         (7,325,764     0   

OTHER NONCURRENT ASSETS

             

Goodwill

     976,617         0         2,056,914         0        3,033,531   

Other intangible assets, net

     438,516         0         2,795,444         0        3,233,960   

Other noncurrent assets

     58,325         15,188         24,578         0        98,091   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Noncurrent Assets

     1,473,458         15,188         4,876,936         0        6,365,582   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,937,692       $ 1,579,595       $ 7,065,346       $ (7,346,759   $ 9,235,874   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

CURRENT LIABILITIES

   $ 202,848       $ 125,889       $ 165,598       $ 0      $ 494,335   

NONCURRENT LIABILITIES

             

Long-term debt

     2,071,202         0         0         0        2,071,202   

Deferred income taxes

     111,424         0         918,497         0        1,029,921   

Other noncurrent liabilities

     168,078         16,765         71,433         0        256,276   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Noncurrent Liabilities

     2,350,704         16,765         989,930         0        3,357,399   

SHAREHOLDERS’ EQUITY

     5,384,140         1,436,941         5,909,818         (7,346,759     5,384,140   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,937,692       $ 1,579,595       $ 7,065,346       $ (7,346,759   $ 9,235,874   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

April 30, 2011

 

     The J.M. Smucker      Subsidiary      Non-Guarantor               
     Company (Parent)      Guarantors      Subsidiaries      Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 206,845       $ 0       $ 113,000       $ 0      $ 319,845   

Inventories

     0         182,531         700,750         (19,702     863,579   

Other current assets

     364,377         8,190         81,008         0        453,575   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Current Assets

     571,222         190,721         894,758         (19,702     1,636,999   

PROPERTY, PLANT, AND EQUIPMENT, NET

     193,321         305,519         369,042         0        867,882   

INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY

     4,872,622         802,936         1,209,603         (6,885,161     0   

OTHER NONCURRENT ASSETS

             

Goodwill

     981,606         0         1,831,140         0        2,812,746   

Other intangible assets, net

     440,174         3,116         2,496,720         0        2,940,010   

Other noncurrent assets

     50,012         15,106         1,830         0        66,948   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Noncurrent Assets

     1,471,792         18,222         4,329,690         0        5,819,704   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,108,957       $ 1,317,398       $ 6,803,093       $ (6,904,863   $ 8,324,585   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

CURRENT LIABILITIES

   $ 234,262       $ 81,239       $ 167,175       $ 0      $ 482,676   

NONCURRENT LIABILITIES

             

Long-term debt

     1,304,039         0         0         0        1,304,039   

Deferred income taxes

     115,985         0         926,838         0        1,042,823   

Other noncurrent liabilities

     162,308         16,447         23,929         0        202,684   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Noncurrent Liabilities

     1,582,332         16,447         950,767         0        2,549,546   

SHAREHOLDERS’ EQUITY

     5,292,363         1,219,712         5,685,151         (6,904,863     5,292,363   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,108,957       $ 1,317,398       $ 6,803,093       $ (6,904,863   $ 8,324,585   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

21


CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

Nine Months Ended January 31, 2012

 

 

     The J.M. Smucker
Company (Parent)
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operating activities

   $ 79,972      $ 94,057      $ 295,210      $ 0       $ 469,239   

INVESTING ACTIVITIES

           

Businesses acquired, net of cash acquired

     0        0        (742,355     0         (742,355

Additions to property, plant, and equipment

     (41,483     (101,333     (54,075     0         (196,891

Proceeds from sale of business

     0        0        9,268        0         9,268   

Sale and maturity of marketable securities

     18,600        0        0        0         18,600   

Proceeds from disposal of property, plant, and equipment

     262        320        2,202        0         2,784   

Other - net

     0        0        (1,021     0         (1,021
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used for investing activities

     (22,621     (101,013     (785,981     0         (909,615

FINANCING ACTIVITIES

           

Proceeds from long-term debt - net

     748,560        0        0        0         748,560   

Quarterly dividends paid

     (159,389     0        0        0         (159,389

Purchase of treasury shares

     (90,522     0        0        0         (90,522

Proceeds from stock option exercises

     1,719        0        0        0         1,719   

Intercompany

     (497,712     6,956        490,756        0         0   

Other - net

     (2,915     0        0        0         (2,915
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used for) provided by financing activities

     (259     6,956        490,756        0         497,453   

Effect of exchange rate changes

     0        0        (6,494     0         (6,494
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     57,092        0        (6,509     0         50,583   

Cash and cash equivalents at beginning of period

     206,845        0        113,000        0         319,845   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 263,937      $ 0      $ 106,491      $ 0       $ 370,428   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

Nine Months Ended January 31, 2011

 

     The J.M. Smucker
Company (Parent)
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operating activities

   $ 142,080      $ 94,310      $ 157,990      $ 0       $ 394,380   

INVESTING ACTIVITIES

           

Additions to property, plant, and equipment

     (42,681     (30,907     (37,545     0         (111,133

Sale and maturity of marketable securities

     37,100        0        0        0         37,100   

Purchases of marketable securities

     (75,637     0        0        0         (75,637

Proceeds from disposal of property, plant, and equipment

     1,096        299        3,607        0         5,002   

Other - net

     (43     36        (92     0         (99
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used for investing activities

     (80,165     (30,572     (34,030     0         (144,767

FINANCING ACTIVITIES

           

Repayments of long-term debt

     (10,000     0        0        0         (10,000

Proceeds from long-term debt

     400,000        0        0        0         400,000   

Quarterly dividends paid

     (143,065     0        0        0         (143,065

Purchase of treasury shares

     (247,329     0        0        0         (247,329

Proceeds from stock option exercises

     9,969        0        0        0         9,969   

Intercompany

     152,404        (63,738     (88,666     0         0   

Other - net

     4,993        0        0        0         4,993   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used for) financing activities

     166,972        (63,738     (88,666     0         14,568   

Effect of exchange rate changes

     0        0        1,832        0         1,832   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     228,887        0        37,126        0         266,013   

Cash and cash equivalents at beginning of period

     217,730        0        65,840        0         283,570   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 446,617      $ 0      $ 102,966      $ 0       $ 549,583   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month and nine-month periods ended January 31, 2012 and 2011. Results for the three and nine months ended January 31, 2012, include the operations of Rowland Coffee Roasters, Inc. (“Rowland Coffee”) and the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation (“Sara Lee foodservice business”) since the completion of each acquisition on May 16, 2011 and January 3, 2012, respectively.

The Company is the owner of all trademarks, except for the following which are used under license: Pillsbury®, the Barrelhead logo and the Doughboy character are trademarks of The Pillsbury Company, LLC; Carnation® is a trademark of Société des Produits Nestlé S.A.; Dunkin’ Donuts® is a registered trademark of DD IP Holder, LLC; and Douwe Egberts® and Pickwick® are registered trademarks of Sara Lee/DE B.V. Borden® and Elsie are trademarks used under license.

Dunkin’ Donuts® brand is licensed to the Company for packaged coffee products sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. Information in this document does not pertain to Dunkin’ Donuts® coffee or other products for sale in Dunkin’ Donuts® restaurants. K-Cup® and K-Cups® are trademarks of Keurig, Incorporated.

Results of Operations

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2012     2011     2012     2011  
     (Dollars in millions, except per share data)  

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   

% of net sales

     31.7     36.1     33.5     37.9

Operating Income

   $ 200.4      $ 213.0      $ 592.7      $ 618.2   

% of net sales

     13.7     16.2     14.2     17.0

Net income:

        

Net income

   $ 116.8      $ 132.0      $ 355.6      $ 384.6   

Net income per common share — assuming dilution

   $ 1.03      $ 1.11      $ 3.12      $ 3.23   

Gross profit excluding special project costs (1)

   $ 478.8      $ 491.3      $ 1,431.7      $ 1,415.9   

% of net sales

     32.6     37.4     34.3     38.9

Operating income excluding special project costs (1)

   $ 232.9      $ 241.0      $ 680.2      $ 699.6   

% of net sales

     15.9     18.4     16.3     19.2

Income excluding special project costs: (1)

        

Income

   $ 138.3      $ 150.9      $ 413.5      $ 439.8   

Income per common share — assuming dilution

   $ 1.22      $ 1.27      $ 3.63      $ 3.69   

 

(1) Refer to “Non-GAAP Measures” located on page 32 for a reconciliation to the comparable GAAP financial measure.

Net sales in the third quarter and first nine months of 2012 increased 12 percent and 15 percent, respectively, compared to 2011, as the impact of price increases and the contribution from acquisitions more than offset a 10 percent and five percent decline in volume in the third quarter and first nine months of 2012, respectively, compared to 2011. Gross profit decreased approximately two percent and increased approximately one percent in the third quarter and first nine months of 2012, respectively, compared to the same periods of 2011. Operating income decreased six percent and four percent in the third quarter and first nine months of 2012, respectively, compared to 2011. Restructuring and merger and integration costs (“special project costs”) increased in both the third quarter and first nine months of 2012, compared to 2011. Excluding special project costs, operating income decreased three percent in both the third quarter and first nine months of 2012, respectively, compared to 2011. Both operating income measures include an approximate $11.3 million loss on sale of business in the first nine months of 2012, and a noncash impairment charge of $17.2 million in the third quarter and first nine months of 2011, both related to the Europe’s Best® frozen fruit and vegetable business, which was sold in October 2011.

 

23


The Company’s net income per diluted share was $1.03 and $1.11 for the third quarters of 2012 and 2011, and $3.12 and $3.23 for the first nine months of 2012 and 2011, respectively, a decrease of seven percent for the quarter and three percent for the first nine months. The Company’s income per diluted share excluding special project costs decreased four percent in the third quarter of 2012 to $1.22, compared to $1.27 in the third quarter of 2011, and decreased two percent in the first nine months of 2012 compared to 2011. Net income and net income excluding special project costs were impacted in the third quarter and the first nine months of 2012 by an increase in the effective tax rate compared to 2011. The effective tax rate was 34.1 percent in the third quarter of 2012, compared to 32.6 percent in the third quarter of 2011, and increased from 32.2 percent in the first nine months of 2011 to 33.8 percent in the first nine months of 2012. The third quarter and first nine months of 2012 benefited from a decrease in weighted-average common shares outstanding, as a result of the Company’s share repurchase activity during the second half of 2011 and the second and third quarters of 2012.

Net Sales

 

     Three Months Ended January 31,           Nine Months Ended January 31,        
     2012     2011     Increase
(Decrease)
    %     2012     2011     Increase
(Decrease)
    %  
     (Dollars in millions)  

Net sales

   $ 1,467.6      $ 1,312.4      $ 155.3        12   $ 4,170.4      $ 3,638.6      $ 531.9        15

Adjust for certain noncomparable items:

                

Acquisitions

     (59.9     —          (59.9     (5 %)      (113.7     —          (113.7     (3 %) 

Divestiture

     —          (6.9     6.9        1     —          (8.3     8.3        0

Foreign exchange

     1.9        —          1.9        0     (9.0     —          (9.0     (0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales adjusted for the noncomparable impact of acquisitions, divestiture, and foreign exchange

   $ 1,409.6      $ 1,305.5      $ 104.2        8   $ 4,047.8      $ 3,630.3      $ 417.5        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts may not add due to rounding.

Net sales in the third quarter of 2012 increased $155.3 million, or 12 percent, compared to the third quarter of 2011, reflecting a 16 percentage point impact of net price realization and a five percentage point impact from acquisitions, that were offset to a degree by a greater-than-anticipated decline in overall volume of 10 percent. The decline in volume was primarily driven by Crisco® shortening and oils, Folgers® coffee, and Jif® peanut butter. The addition of the Rowland Coffee business earlier in the fiscal year and the Sara Lee foodservice business during the most recent quarter contributed $33.0 million and $26.9 million to net sales in the third quarter of 2012, respectively. The overall impact of sales mix was modestly favorable, primarily due to K-Cups®.

Net sales for the first nine months were $4,170.4 million in 2012, and increased $531.9 million, or 15 percent, compared to the first nine months of 2011, driven primarily by net price realization. The acquisition of the Rowland Coffee brands and the Sara Lee foodservice business on a combined basis contributed approximately three percentage points of the net sales increase for the first nine months of 2012, and combined with favorable sales mix and the impact of foreign exchange offset a five percent decline in volume, compared to the first nine months of 2011. Volume declines in Crisco® shortening and oils, Folgers® coffee, non-branded beverages, Pillsbury® flour, and Jif® peanut butter were offset to a degree by gains in Pillsbury® baking mixes and Santa Cruz Organic® beverages.

 

24


Operating Income

The following table presents components of operating income as a percentage of net sales.

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2012     2011     2012     2011  

Gross profit

     31.7     36.1     33.5     37.9

Selling, distribution, and administrative expenses:

        

Marketing

     4.8     5.2     5.1     5.8

Selling

     3.2     3.2     3.2     3.2

Distribution

     2.6     3.0     2.8     3.2

General and administrative

     4.7     5.0     5.1     5.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, distribution, and administrative expenses

     15.3     16.3     16.3     17.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization

     1.5     1.4     1.5     1.5

Impairment charges

     0.0     1.3     0.0     0.5

Other restructuring and merger and integration costs

     1.3     0.9     1.2     1.2

Loss on sale of business

     0.0     0.0     0.3     0.0

Other operating (income) expense - net

     (0.1 %)      0.0     (0.0 %)      0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     13.7     16.2     14.2     17.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts may not add due to rounding.

Gross profit decreased $8.7 million, or two percent, in the third quarter of 2012, compared to 2011, and decreased $12.4 million, excluding special project costs, primarily due to lower sales volume. Costs were significantly higher for green coffee, edible oils, flour, and peanuts in the third quarter of 2012, compared to the third quarter of 2011. However, the net impact on gross profit resulting from the recognition of these higher costs and related pricing actions was mixed due to timing. Most significantly, the net impact of timing was favorable for peanut butter and more than offset the unfavorable impact on coffee. Gross margin declined from 37.4 percent in the third quarter of 2011 to 32.6 percent in the third quarter of 2012, excluding special project costs.

The Company expects that it will continue to recognize higher green coffee costs through the fourth quarter of 2012, compared to the fourth quarter of 2011, although to a lesser degree than in the third quarter of 2012. Peanut costs are expected to be significantly higher in the fourth quarter than in the third quarter of 2012 as the inventory of lower-cost peanuts is depleted.

Selling, distribution, and administrative (“SD&A”) expenses in the third quarter of 2012 increased five percent, compared to the third quarter of 2011, but decreased as a percentage of net sales from 16.3 percent to 15.3 percent. Marketing expenses in the third quarter of 2012 increased four percent compared to the third quarter of 2011. Over the same period, selling and general and administrative expenses increased 12 percent and seven percent, respectively, while distribution expenses decreased three percent. The addition of Rowland Coffee and the Sara Lee foodservice business represented over 70 percent of the overall increase in SD&A expenses, primarily related to selling. In addition, higher amortization expense was recognized in the third quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the acquisition of Rowland Coffee and the Sara Lee foodservice business. The third quarter of 2011 included a $17.2 million noncash impairment charge related to intangible assets of the Europe’s Best® business that was subsequently divested in the second quarter of 2012.

Operating income decreased $12.6 million, or six percent, in the third quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income decreased $8.1 million, or three percent, and declined from 18.4 percent of net sales in 2011 to 15.9 percent in 2012. Both operating income measures include the Europe’s Best® business impairment charge in 2011.

Gross profit increased $17.9 million, or one percent, in the first nine months of 2012, compared to 2011, as price increases and the contribution from the acquisition of Rowland Coffee and the Sara Lee foodservice business, effectively offset overall higher raw material costs, specifically green coffee, edible oils, flour, milk, sweetener, and peanuts and a decline in volume. Excluding special project costs, gross profit increased $15.8 million, or one percent. Price increases taken over the past year to offset higher commodity costs contributed to incremental gross profit, but gross margin declined from 38.9 percent in the first nine months of 2011 to 34.3 percent in 2012, excluding special project costs.

 

25


SD&A expenses in the first nine months of 2012 increased six percent, compared to the first nine months of 2011, but decreased as a percentage of net sales from 17.6 percent to 16.3 percent, reflecting the impact of price increases on net sales. Marketing expenses for the first nine months of 2012 increased one percent compared to 2011. Over the same period, selling and general and administrative expenses increased 14 percent and 10 percent, respectively, while distribution expenses were flat. The increase in selling expense in the first nine months of 2012, compared to 2011, was driven by the Rowland Coffee acquisition and the impact of price increases on the variable component of selling expense. The addition of Rowland Coffee and the Sara Lee foodservice business represented approximately one-half of the overall increase in SD&A expenses. Higher amortization expense was recognized in the first nine months of 2012, compared to 2011, primarily related to the intangible assets associated with the Rowland Coffee and Sara Lee foodservice business acquisitions. The first nine months of 2011 included a $17.2 million noncash impairment charge related to intangible assets of the Europe’s Best® business that was subsequently divested in the second quarter of 2012.

Operating income decreased $25.5 million, or four percent, in the first nine months of 2012, compared to 2011. Operating margin for the first nine months of 2012 was 14.2 percent, compared to 17.0 percent in 2011. Excluding the impact of special project costs in both periods, operating income decreased $19.4 million, or three percent, and declined from 19.2 percent of net sales in 2011, to 16.3 percent in 2012. Both operating income measures include the Europe’s Best® impairment charge in 2011 and an $11.3 million loss on the sale of the Europe’s Best® business in 2012.

Other

Interest expense increased $5.5 million and $5.3 million in the third quarter and first nine months of 2012, compared to 2011, respectively, representing the costs of higher debt outstanding reflecting the Company’s October 2011 public debt issuance, somewhat offset by the benefit of the Company’s interest rate swap activities and higher capitalized interest associated with the Company’s capital expenditures. During the second quarter of 2012, the Company terminated two interest rate swaps resulting in a net settlement gain of $17.7 million, to be recognized over the remaining life of the underlying debt instruments, including $0.6 million and $1.2 million in the third quarter and first nine months of 2012, respectively.

Income taxes decreased $3.4 million in the third quarter of 2012, due to an $18.5 million decrease in income before income taxes which more than offset the impact of an increase in the effective tax rate to 34.1 percent, compared to 32.6 percent in the third quarter of 2011. The increase in the effective tax rate in the third quarter of 2012 is primarily due to an increase in state income tax expense and a lower domestic manufacturing deduction, compared to the third quarter of 2011, and the release of unrecognized tax benefits due to the expiration of the statute of limitations periods in the third quarter of 2011. Income taxes decreased $1.0 million in the first nine months of 2012, compared to 2011, as an increase in the effective tax rate from 32.2 percent in the first nine months of 2011 to 33.8 percent in the first nine months of 2012 was offset by a decrease in income before income taxes of $30.0 million. The increase in the effective tax rate in the first nine months of 2012, compared to 2011, is primarily due to higher state income tax expense in the first nine months of 2012, additionally, the rate for the first nine months of 2011 benefited from the release of unrecognized tax benefits due to the expiration of the statute of limitations periods and a favorable federal income tax determination.

Restructuring

During calendar 2010, the Company announced its plan to restructure its coffee, fruit spreads, and Canadian pickle and condiments operations as part of its ongoing efforts to enhance the long-term strength and profitability of its leading brands. The initiative is a long-term investment to optimize production capacity and lower the overall cost structure. It includes estimated capital investments of approximately $220.0 million, to be incurred through 2014, for a new state-of-the-art food manufacturing facility in Orrville, Ohio, and consolidation of coffee production in New Orleans, Louisiana. The Company’s pickle and condiments production has been transitioned to third-party manufacturers.

 

26


Upon completion in 2014, the restructuring plan will result in the closing of six of the Company’s facilities – Memphis, Tennessee; Ste. Marie, Quebec; Sherman, Texas; Kansas City, Missouri; Dunnville, Ontario; and Delhi Township, Ontario; and the reduction of approximately 850 full-time positions. The Sherman, Dunnville, and Delhi Township facilities have been closed.

During the third quarter of 2012, the Company increased anticipated restructuring costs from approximately $235.0 million to $245.0 million, consisting primarily of increases to employee separation, site preparation and equipment relocation charges. The Company has incurred restructuring cost of $175.0 million through January 31, 2012. Restructuring costs of $25.6 million and $67.3 million have been incurred in the third quarter and first nine months of 2012, respectively, compared to $25.3 million and $73.2 million in the third quarter and first nine months of 2011, respectively. The restructuring is proceeding as planned and the balance of the costs is anticipated to be recognized over the next two fiscal years as the facilities are closed.

Acquisitions

On January 3, 2012, the Company completed the acquisition of a majority of the North American foodservice coffee and hot beverage business of Sara Lee Corporation (“Sara Lee”) for $425.7 million in an all-cash transaction. Utilizing proceeds from the 3.50 percent Notes issued in October 2011, the Company paid $380.7 million at closing and will pay Sara Lee an additional $50.0 million in declining installments over the next ten years. The additional $50.0 million obligation is included in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheet and is recorded at a present value of $45.0 million. Total one-time costs related to the acquisition are estimated to total approximately $25.0 million, nearly all of which are cash related and are primarily related to transition services provided by Sara Lee and employee separation and relocation costs. The Company expects these costs to be incurred over the next three fiscal years. The acquisition included Sara Lee’s market-leading liquid coffee concentrate business sold under the licensed Douwe Egberts® brand, along with a variety of roast and ground coffee, cappuccino, tea, and cocoa products, sold through foodservice channels in North America. Liquid coffee concentrate adds a unique, high quality, and technology-driven form of coffee to the Company’s existing foodservice product offering. In addition, the companies agreed to collaborate on liquid coffee technology by entering into a long-term foodservice innovation partnership.

The acquisition added approximately 475 employees to the Company; a state-of-the-art liquid coffee manufacturing facility in Suffolk, Virginia; and a leased roast and ground coffee manufacturing facility in Harahan, Louisiana. In addition to licensing the Douwe Egberts® brand, the Company will also license the Pickwick® brand.

On May 16, 2011, the Company acquired the coffee brands and business operations of Rowland Coffee, a privately-held company headquartered in Miami, Florida, for $362.8 million in cash. The Company completed the transaction with cash on hand and borrowings of $180.0 million under its revolving credit facility.

Rowland Coffee’s products are primarily sold under the leading Hispanic Café Bustelo® and Café PilonTM brands with distribution in retail and foodservice channels concentrated in southern Florida and the northeastern U.S. The acquisition included a manufacturing, distribution, and office facility in Miami. Manufacturing operations are expected to be consolidated into the Company’s existing coffee facilities in New Orleans, Louisiana, over the next two to three fiscal years. The total one-time costs of the acquisition are estimated to be between $25.0 million and $30.0 million, including approximately $15.0 million of noncash charges associated with the closing of the Miami facilities, primarily accelerated depreciation.

 

27


Segment Results

Effective May 1, 2011, the Company’s reportable segments have been modified to align segment financial results with the responsibilities of segment management, consistent with the executive appointments announced in March 2011. As a result, the Company has the following three reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods.

Also effective May 1, 2011, certain specialty brands which were previously included in the U.S. Retail Consumer Foods segment are included in the International, Foodservice, and Natural Foods segment (“product realignments”). As a result, segment performance for 2011 has been reclassified for the organizational changes and product realignments.

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2012     2011     % Increase
(Decrease)
    2012     2011     % Increase
(Decrease)
 
     (Dollars in millions)  

Net sales:

            

U.S. Retail Coffee

   $ 637.9      $ 554.7        15   $ 1,755.5      $ 1,425.5        23

U.S. Retail Consumer Foods

     556.5        518.5        7     1,631.2        1,510.1        8

International, Foodservice, and Natural Foods

     273.2        239.2        14     783.7        703.0        11

Segment profit:

            

U.S. Retail Coffee

   $ 138.3      $ 158.1        (12 %)    $ 418.0      $ 419.1        (0 %) 

U.S. Retail Consumer Foods

     106.6        102.2        4     301.6        308.6        (2 %) 

International, Foodservice, and Natural Foods

     39.0        29.9        31     116.6        116.8        (0 %) 

Segment profit margin:

            

U.S. Retail Coffee

     21.7     28.5       23.8     29.4  

U.S. Retail Consumer Foods

     19.2     19.7       18.5     20.4  

International, Foodservice, and Natural Foods

     14.3     12.5       14.9     16.6  

U.S. Retail Coffee

The U.S. Retail Coffee segment net sales increased 15 percent in the third quarter of 2012, compared to the third quarter of 2011, reflecting the net realization of price increases taken over the last 12 months. The acquisition of Rowland Coffee contributed approximately $28.5 million to segment net sales, representing five percentage points of the segment net sales increase. Segment volume decreased 11 percent for the third quarter of 2012, compared to the third quarter of 2011, excluding Rowland Coffee. Volume declined for the Folgers® brand in line with the overall segment in the third quarter of 2012, compared to 2011, and was primarily attributed to consumer response to higher price points on shelf and aggressive private label price points at certain key retailers. Dunkin’ Donuts® packaged coffee volume was up four percent. Contributing to favorable sales mix in the third quarter of 2012, net sales of Folgers Gourmet Selections® and Millstone® K-Cups® increased $38.2 million, compared to the third quarter of 2011, and represented seven percentage points of segment net sales growth, while contributing only one percentage point growth to volume.

U.S. Retail Coffee segment profit decreased $19.7 million, or 12 percent, in the third quarter of 2012, compared to a record level in the third quarter of 2011, primarily due to lower sales volume. In addition, overall pricing, while higher in the third quarter of 2012, compared to 2011, did not fully offset higher green coffee costs recognized. Higher green coffee costs will continue to be recognized through the remainder of fiscal 2012, compared to 2011.

For the first nine months of 2012, net sales for the U.S. Retail Coffee segment increased 23 percent, compared to the first nine months of 2011. Net price realization, the Rowland Coffee acquisition, and favorable sales mix, more than offset an eight percent decline in volume, compared to 2011. Segment profit for the first nine months of 2012 decreased $1.1 million, compared to 2011, and segment profit margin decreased from 29.4 percent in 2011 to 23.8 percent in 2012, primarily due to the decline in volume.

 

28


U.S. Retail Consumer Foods

The U.S. Retail Consumer Foods segment net sales increased seven percent in the third quarter of 2012, compared to 2011, as the impact of price increases offset an 11 percent decline in volume. Jif® peanut butter net sales increased 17 percent in the third quarter of 2012, compared to 2011, reflecting the recent approximately 30 percent price increase and a 13 percent volume decline. The overall decline in peanut butter volume in the third quarter of 2012, compared to 2011, is attributed to a combination of consumer buy-in in advance of the November 2011 price increase, aggressive price points by certain competitors during the period, and overall higher price points. Smucker’s® fruit spreads net sales were flat and volume was down eight percent during the same period. Crisco® brand net sales decreased six percent and volume was down 29 percent in the third quarter of 2012, compared to 2011, reflecting the impact of substantial price competition of private label offerings by certain retailers. For the same period, net sales and volume for the Pillsbury® brand increased 28 percent and seven percent, respectively, with gains mostly in baking mixes. Canned milk net sales increased eight percent and volume was flat during the third quarter of 2012, compared to 2011.

The U.S. Retail Consumer Foods segment profit increased $4.5 million, or four percent, in the third quarter of 2012, compared to the third quarter of 2011. Costs were higher for oils, flour, and peanuts in the third quarter of 2012, compared to 2011. Segment profit grew as the net impact of these higher costs was more than offset by pricing actions, primarily due to timing related to peanut butter. The Company expects peanut costs to be significantly higher in the fourth quarter than in the third quarter of 2012 as the inventory of lower-cost peanuts is depleted. Higher peanut costs are being driven by shortages in the 2011 peanut crop. The Company has taken actions to manage the challenges related to the 2011 peanut crop and believes its supply will be adequate for the remainder of the fiscal year. Segment selling, distribution, and marketing expenses were also higher, generally in line with the increase in net sales. Segment profit margin was 19.2 percent in the third quarter of 2012, compared to 19.7 percent in 2011.

Net sales for the U.S. Retail Consumer Foods segment increased eight percent, as price increases and favorable sales mix more than offset a volume decline of four percent in the first nine months of 2012, compared to 2011. Segment profit decreased $7.0 million or two percent in the first nine months of 2012, compared to 2011, and decreased as a percent of net sales from 20.4 percent in 2011 to 18.5 percent in 2012, driven by higher selling, distribution, and general and administrative expenses.

International, Foodservice, and Natural Foods

Net sales in the International, Foodservice, and Natural Foods segment increased 14 percent in the third quarter of 2012, compared to 2011. Excluding the impact of acquisitions, divestiture, and foreign exchange, segment net sales increased five percent over the same period as price increases and favorable sales mix more than offset a nine percent decline in volume. Volume gains in Folgers® coffee were more than offset by declines in natural beverages, Bick’s® pickles, and Five Roses® flour.

Segment profit increased $9.1 million in the third quarter of 2012, compared to 2011 that included an impairment charge of $17.2 million related to intangible assets of the Europe’s Best® business. Excluding the impact of the impairment charge in the third quarter of 2011, segment profit decreased $8.0 million, primarily due to lower sales volume. In the third quarter of 2012, compared to 2011, commodity costs were higher and not fully offset by price increases, notably in coffee and natural beverages. Segment profit margin was 14.3 percent in the third quarter of 2012, compared to 12.5 percent in the third quarter of 2011 which included a 7.2 percentage point impact of the Europe’s Best® business impairment charge. As expected, the Sara Lee foodservice business did not have a material impact on segment profit in the third quarter of 2012.

The International, Foodservice, and Natural Foods segment net sales increased 11 percent in the first nine months of 2012, compared to 2011. Excluding acquisitions, divestiture, and foreign exchange, segment net sales increased six percent in the first nine months of 2012, compared to 2011. Segment profit was flat in the first nine months of 2012, compared to 2011, as the loss on the divestiture of the Europe’s Best® business and a decline in volume in the first nine months of 2012, compared to 2011, were offset by the Europe’s Best® business impairment charge in the first nine months of 2011. Segment profit margin declined from 16.6 percent in the first nine months of 2011 to 14.9 percent in 2012.

 

29


Financial Condition – Liquidity and Capital Resources

Liquidity

 

     Nine Months Ended January 31,  

(Dollars in millions)

   2012     2011  

Net cash provided by operating activities

   $ 469.2      $ 394.4   

Net cash used for investing activities

     (909.6     (144.8

Net cash provided by financing activities

     497.5        14.6   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 469.2      $ 394.4   

Additions to property, plant, and equipment

     (196.9     (111.1
  

 

 

   

 

 

 

Free cash flow

   $ 272.3      $ 283.2   
  

 

 

   

 

 

 

Amounts may not add due to rounding.

On an annual basis, the Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit facility. Total cash and cash equivalents at January 31, 2012, were $370.4 million compared to $319.8 million at April 30, 2011.

The Company typically expects a significant use of cash to fund working capital requirements during the first half of each fiscal year, primarily due to seasonal fruit and vegetable procurement, the buildup of inventories to support the Fall Bake and Holiday period, and the additional increase of coffee inventory in advance of the Atlantic hurricane season. The Company expects cash from operations in the second half of its fiscal year to exceed the amount in the first half of the year, upon completion of the Company’s Fall Bake and Holiday period.

Cash provided by operating activities in the first nine months of 2012 was $469.2 million, compared to $394.4 million in 2011, as cash generated from earnings offset working capital requirements in both periods. The increase in cash provided by operations in the first nine months of 2012, compared to 2011, was driven by a decrease in working capital requirements due to the timing of income tax payments and the collection of trade receivables balances. This more than offset a decrease in accounts payable and accrued items balances, which were largely due to the timing of marketing and merchandising related payments. As the Easter holiday occurred later in 2011, more of the collection cycle occurred in the first nine months of 2012, compared to the first nine months of 2011. Cash provided by operating activities in the first nine months of 2012 included the net proceeds from the settlement of interest rate swaps of $17.7 million.

Cash used for investing activities was $909.6 million in the first nine months of 2012, compared to $144.8 million in the same period of 2011. The increase in cash used for investing activities in 2012, compared to 2011, was primarily related to the use of $742.4 million for Rowland Coffee and the Sara Lee foodservice business acquisitions in 2012. Capital expenditures were $196.9 million in the first nine months of 2012, reflecting expenditures associated with the Company’s restructuring project, compared to $111.1 million in 2011. The Company expects total capital expenditures of approximately $270.0 million in 2012. In the first nine months of 2011 the Company purchased $75.6 million of marketable securities while in the first nine months of 2012 the Company has not purchased any marketable securities.

Cash provided by financing activities during the first nine months of 2012 was $497.5 million, consisting primarily of net proceeds of $748.6 million from the public debt issuance, offset by quarterly dividend payments of $159.4 million and the purchase of common shares of $90.5 million. During the first nine months of 2011, total cash of $14.6 million was provided by financing activities consisting primarily of the issuance of $400.0 million in Senior Notes offset by $143.1 million in quarterly dividend payments and the repurchase of common shares of $247.3 million. The increased dividend payments in 2012, compared to 2011, resulted from an increase in the quarterly dividend rate from $0.40 per common share paid in the first through third quarters of 2011 to $0.44 per common share paid in the first quarter of 2012 and $0.48 per common share paid in the second and third quarters of 2012, offset by fewer shares outstanding.

 

30


Capital Resources

The following table presents the Company’s capital structure:

 

     January 31, 2012      April 30, 2011  
     (Dollars in millions)  

Long-term debt

   $ 2,071.2       $ 1,304.0   

Shareholders’ equity

     5,384.1         5,292.4   
  

 

 

    

 

 

 

Total capital

   $ 7,455.3       $ 6,596.4   
  

 

 

    

 

 

 

Amounts may not add due to rounding.

On October 18, 2011, the Company completed a public offering of $750.0 million in aggregate principal amount of 3.50 percent Notes due October 15, 2021. Interest is payable semiannually beginning April 15, 2012. The Company received proceeds of approximately $748.6 million, net of an offering discount of $1.4 million. The 3.50 percent Notes may be redeemed at any time prior to maturity, at the option of the Company. A portion of the net proceeds was used to fund the acquisition of the Sara Lee foodservice business and for the repayment of borrowings outstanding under the Company’s revolving credit facility resulting from funding the Rowland Coffee acquisition. The remainder of the proceeds will be used for general corporate purposes, including share repurchases.

On July 29, 2011, the Company entered into a second amended and restated credit agreement with a group of ten banks. The credit facility, which amends and restates in its entirety the $600.0 million credit agreement dated as of January 31, 2011, provides for an unsecured revolving credit line of $1.0 billion and matures July 29, 2016. At January 31, 2012, the Company did not have a balance outstanding under the revolving credit facility.

During the third quarter of 2012, the Company repurchased 555,700 common shares for approximately $41.1 million. At January 31, 2012, the Company had 6,944,300 common shares remaining for repurchase under its Board of Directors’ authorizations, which includes 5,000,000 common shares authorized by the Board at its January 2012 meeting. On February 21, 2012, the Company entered into a Rule 10b5-1 trading plan (the “Plan”) to facilitate the potential repurchase of 3,000,000 common shares of the remaining 6,944,300 common shares authorized for repurchase. The effective date of the Plan was February 22, 2012, and the Plan expires on August 22, 2012. Purchases will be transacted by a broker based upon the guidelines and parameters of the Plan.

From the effective date of the Plan through March 8, 2012, the Company repurchased 2,600,000 common shares for approximately $194.9 million, resulting in 400,000 common shares remaining available for repurchase under the Plan. There are 4,344,300 common shares in total remaining available for repurchase under the Company’s Board of Directors’ authorizations. The Company anticipates that it will complete its repurchase of common shares under the Plan by the end of March 2012.

Absent any other material acquisitions or other significant investments, the Company believes that cash on hand, combined with cash provided by operations and borrowings available under its credit facility, will be sufficient to meet cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, share repurchases, and interest on debt outstanding.

 

31


Non-GAAP Measures

The Company uses non-GAAP measures including net sales adjusted for the noncomparable impact of acquisitions, divestiture, and foreign exchange rate; gross profit, operating income, income, and income per diluted share, excluding special project costs; and free cash flow as key measures for purposes of evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). Rather, the presentation of these non-GAAP measures supplements other metrics used by management to internally evaluate its businesses and facilitate the comparison of past and present operations. These non-GAAP measures may not be comparable to similar measures used by other companies and may exclude certain nondiscretionary expenses and cash payments. The following table reconciles certain non-GAAP financial measures to the comparable GAAP financial measure.

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2012      2011      2012      2011  
     (Dollars in millions, except per share data)  

Reconciliation to gross profit:

           

Gross Profit

   $ 465.7       $ 474.4       $ 1,395.4       $ 1,377.5   

Cost of products sold - restructuring

     12.0         16.9         33.5         38.4   

Cost of products sold - merger and integration

     1.1         —           2.8         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit excluding special project costs

   $ 478.8       $ 491.3       $ 1,431.7       $ 1,415.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation to operating income:

           

Operating income

   $ 200.4       $ 213.0       $ 592.7       $ 618.2   

Cost of products sold - restructuring

     12.0         16.9         33.5         38.4   

Cost of products sold - merger and integration

     1.1         —           2.8         —     

Other restructuring costs

     13.5         8.4         33.8         34.9   

Other merger and integration costs

     5.9         2.7         17.4         8.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income excluding special project costs

   $ 232.9       $ 241.0       $ 680.2       $ 699.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation to net income:

           

Income before income taxes

   $ 177.2       $ 195.8       $ 537.3       $ 567.3   

Cost of products sold - restructuring

     12.0         16.9         33.5         38.4   

Cost of products sold - merger and integration

     1.1         —           2.8         —     

Other restructuring costs

     13.5         8.4         33.8         34.9   

Other merger and integration costs

     5.9         2.7         17.4         8.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes, excluding special project costs

     209.8         223.8         624.8         648.7   

Income taxes, as adjusted

     71.5         72.9         211.2         208.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income excluding special project costs

   $ 138.3       $ 150.9       $ 413.5       $ 439.8   

Weighted-average shares - assuming dilution

     113,488,277         118,434,280         113,922,722         119,172,388   

Income per common share excluding special project costs - assuming dilution

   $ 1.22       $ 1.27       $ 3.63       $ 3.69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts may not add due to rounding.

 

32


Off-Balance Sheet Arrangements and Contractual Obligations

The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business, conducted at an arm’s length basis, and not material to the Company’s results of operations, financial condition, or cash flows.

The following table summarizes the Company’s contractual obligations at January 31, 2012.

 

(Dollars in millions)

   Total      Less Than
One Year
     One to
Three
Years
     Three to
Five
Years
     More Than
Five Years
 

Long-term debt obligations

   $ 2,071.2       $ —         $ 100.0       $ 199.0       $ 1,772.2   

Operating lease obligations

     85.0         6.6         41.4         23.0         14.0   

Purchase obligations

     1,219.0         510.0         709.0