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SMUCKER J M CO 10-Q 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended October 31, 2011 or
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)
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):
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 113,366,950 common shares outstanding on November 30, 2011. The Exhibit Index is located at Page No. 40.
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. THE J. M. SMUCKER COMPANY CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
See notes to unaudited condensed consolidated financial statements.
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THE J. M. SMUCKER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
See notes to unaudited condensed consolidated financial statements.
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THE J. M. SMUCKER COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
( ) Denotes use of cash See notes to unaudited condensed consolidated financial statements.
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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 six-month period ended October 31, 2011, 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. 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. This ASU 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. Note C – Rowland Coffee Acquisition 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 $5.7 million directly related to the merger and integration of Rowland Coffee, which includes approximately $1.7 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
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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 four years. Rowland Coffee was a leading producer of espresso coffee in the U.S., generating total net sales in excess of $110.0 million in calendar 2010. The acquisition 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.
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, $87.4 million is deductible for tax purposes. The purchase price allocated to the identifiable intangible assets acquired is as follows:
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 $30.5 million and $53.7 million of total net sales and $3.6 million and $5.3 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 six months ended October 31, 2011, respectively. If the acquisition had occurred on May 1, 2010, there would not have been a material impact to consolidated results for the three months or six months ended October 31, 2010. 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
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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. The Company expects to incur restructuring costs of approximately $235.0 million, of which $149.4 million has been incurred through October 31, 2011. The balance of the costs is anticipated to be recognized over the next three 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 facility closed in April 2011 and the last production run at the Dunnville and Delhi Township facilities was in November 2011. The following table summarizes the restructuring activity, including the reserves established and the total amount expected to be incurred.
During the three and six months ended October 31, 2011, total restructuring charges of $22,160 and $41,723, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $11,804 and $21,470 were reported in cost of products sold in the three and six months ended October 31, 2011, respectively. During the three and six months ended October 31, 2010, total restructuring charges of $20,417 and $47,974, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $12,072 and $21,525 were reported in cost of products sold in the three and six months ended October 31, 2010, 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
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Plan, and currently consist of restricted shares, restricted stock units, deferred shares, deferred stock units, performance units, and stock options. The following table summarizes amounts related to share-based payments.
As of October 31, 2011, total compensation cost related to nonvested share-based awards not yet recognized was approximately $40,217. The weighted-average period over which this amount is expected to be recognized is approximately 3.4 years. Note F – Common Shares The following table sets forth common share information.
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.
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The following table sets forth reportable segment information.
Note H – Debt and Financing Arrangements Long-term debt consists of the following:
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 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 the anticipated acquisition of the majority of Sara Lee Corporation’s North American foodservice coffee and hot beverage business, expected to close near the beginning of calendar 2012. 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
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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 will realize a $23.9 million reduction of future interest expense through November 1, 2018. The unamortized benefit at October 31, 2011, was $23.3 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 October 31, 2011, 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. 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.
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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.
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.
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 six months ended October 31, 2011 and 2010. Included above are charges recognized during the three months and six months ended October 31, 2010, for termination benefits and curtailment as a result of the restructuring plan.
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Note K – Comprehensive Income The following table summarizes the components of comprehensive income.
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 a defendant in a variety of 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
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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. 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. 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 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 following table sets forth the fair value of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
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 $13,309 and $12,292 at October 31, 2011 and April 30, 2011, respectively, that are included in other current assets in the Condensed Consolidated Balance Sheets.
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The following table presents information on pre-tax commodity contract gains and losses recognized on derivatives designated as cash flow hedges.
Included as a component of accumulated other comprehensive (loss) income at October 31, 2011 and April 30, 2011, were deferred pre-tax losses of $6,522 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 $2,372 and expense of $3,430 at October 31, 2011 and April 30, 2011, respectively. The entire amount of the deferred loss included in accumulated other comprehensive loss at October 31, 2011, is expected to be recognized in earnings within one year as the related commodity is sold. The following table presents information on the pre-tax losses recognized on the interest rate swap designated as a cash flow hedge.
Included as a component of accumulated other comprehensive loss at October 31, 2011, were deferred pre-tax losses of $6,174 related to the termination of the interest rate contract. The related tax benefit recognized in accumulated other comprehensive loss was $2,227 at October 31, 2011. 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.
The following table presents the gross contract notional value of outstanding derivative contracts.
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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. 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.
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.
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Note O – Income Taxes During the three months ended October 31, 2011, the Company’s effective tax rate increased to 34.1 percent, compared to 32.5 percent in the three months ended October 31, 2010. The increase in the effective tax rate in the three months ended October 31, 2011, is primarily due to a higher Canadian effective tax rate and an increase in state income tax expense compared to the three months ended October 31, 2010. During the six months ended October 31, 2011, the Company’s effective tax rate increased to 33.7 percent compared to 32.0 percent for the six months ended October 31, 2010. The increase in the effective tax rate in the six months ended October 31, 2011, is primarily due to an increase in the Canadian effective tax rate and higher state income tax expense compared to the six months ended October 31, 2010. Also contributing to the higher effective tax rate in the six months ended October 31, 2011, was a favorable federal income tax determination that was included in the six months ended October 31, 2010. At October 31, 2011, 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 twelve 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 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"). Therefore, 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 October 31, 2011
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CONDENSED STATEMENTS OF CONSOLIDATED INCOME Three Months Ended October 31, 2010
Six Months Ended October 31, 2011
Six Months Ended October 31, 2010
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CONDENSED CONSOLIDATED BALANCE SHEETS October 31, 2011
April 30, 2011
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CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS Six Months Ended October 31, 2011
Six Months Ended October 31, 2010
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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 six-month periods ended October 31, 2011 and 2010. Results for the three and six months ended October 31, 2011, include the operations of Rowland Coffee Roasters, Inc. (“Rowland Coffee”) since the completion of the acquisition on May 16, 2011. The Company is the owner of all trademarks, except Pillsbury®, the Barrelhead logo, and the Doughboy character are trademarks of The Pillsbury Company LLC, used under license; Carnation® is a trademark of Société des Produits Nestlé S.A., used under license; Dunkin’ Donuts® is a registered trademark of DD IP Holder LLC, used under license; Borden® and Elsie are trademarks used under license; and K-Cup® and K-Cups® are trademarks of Keurig, Incorporated. 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. Results of Operations
Net sales in the second quarter and first six months of 2012 increased 18 percent and 16 percent, respectively, compared to 2011, as the impact of price increases and the contribution of the Rowland Coffee brands more than offset a one percent and two percent decline in volume in the second quarter and first six months of 2012, respectively, compared to 2011. Gross profit increased approximately one percent and three percent in the second quarter and first six months of 2012, respectively, compared to the same periods of 2011. Operating income decreased 12 percent and three percent in the second quarter and first six months of 2012, respectively, compared to 2011. The second quarter and first six months of 2012 were impacted by the loss on the sale of the Europe’s Best® frozen fruit and vegetable business of $11.3 million, sold in October, 2011. Restructuring and merger and integration costs (“special project costs”) increased in both the second quarter and first six months of 2012, compared to 2011. Excluding special project costs, operating income decreased eight percent and two percent in the second quarter and first six months of 2012, respectively, compared to 2011.
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The Company’s net income per diluted share was $1.12 and $1.25 for the second quarters of 2012 and 2011, and $2.09 and $2.11 for the first six months of 2012 and 2011, respectively, a decrease of 10 percent for the quarter and one percent for the first six months. The Company’s income per diluted share excluding special project costs decreased seven percent in the second quarter of 2012 to $1.29, compared to $1.38 in the second quarter of 2011, and was flat in the first six months of 2012 compared to 2011. Net income and net income excluding special project costs were impacted in the second quarter and the first six months of 2012 by an increase in the effective tax rate compared to 2011. The effective tax rate was 34.1 percent in the second quarter of 2012, compared to 32.5 percent in the second quarter of 2011, and increased from 32.0 percent in the first six months of 2011 to 33.7 percent in the first six months of 2012. The second quarter and first six 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 quarter of 2012. Net Sales
Amounts may not add due to rounding. Net sales in the second quarter of 2012 increased $235.0 million, or 18 percent, compared to the second quarter of 2011, due primarily to net price realization across many of the Company’s brands. The Rowland Coffee brands acquired earlier in the year contributed approximately two percent to net sales for the second quarter of 2012 and, combined with the favorable impact of foreign exchange rates and sales mix, offset a one percent decline in volume, compared to the second quarter of 2011. Volume gains were realized in Pillsbury® baking mixes and Jif® peanut butter, but were more than offset by declines in nonbranded beverages, Crisco® oils, Folgers® coffee, and Pillsbury® flour. Net sales for the first six months were $2,702.8 million in 2012, and increased $376.6 million, or 16 percent, compared to the first six months of 2011, driven primarily by net price realization. The Rowland Coffee brands acquired during the first quarter of 2012 contributed approximately two percent to net sales for the first six months of 2012, and combined with favorable sales mix and the impact of foreign exchange, offset a two percent decline in volume, compared to the first six months of 2011. Volume gains were realized in Pillsbury® baking mixes, Santa Cruz Organic® beverages, Bick’s® pickles, and Jif® peanut butter, but were more than offset by volume declines in Crisco® shortening and oils, Folgers® coffee, and Pillsbury® flour.
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Operating Income The following table presents components of operating income as a percentage of net sales.
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