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SMUCKER J M CO 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
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 October 31, 2011

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 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)

 

     Three Months Ended     Six Months Ended  
     October 31,     October 31,  
     2011     2010     2011     2010  
     (Dollars in thousands, except per share data)  

Net sales

   $ 1,513,905      $ 1,278,913      $ 2,702,788      $ 2,326,225   

Cost of products sold

     1,002,517        772,171        1,749,890        1,401,595   

Cost of products sold — restructuring

     11,804        12,072        21,470        21,525   

Cost of products sold — merger and integration

     915        0        1,675        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     498,669        494,670        929,753        903,105   

Selling, distribution, and administrative expenses

     236,602        222,821        453,154        426,082   

Amortization

     20,559        18,501        40,794        36,998   

Other restructuring costs

     10,356        8,345        20,253        26,449   

Other merger and integration costs

     6,871        2,773        11,556        5,429   

Loss on sale of business

     11,287        0        11,287        0   

Other operating expense — net

     1,380        2,194        392        2,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     211,614        240,036        392,317        405,203   

Interest income

     324        572        626        1,005   

Interest expense

     (19,448     (18,505     (34,870     (35,044

Other income (expense) — net

     711        (376     1,954        317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     193,201        221,727        360,027        371,481   

Income taxes

     65,954        72,001        121,257        118,874   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 127,247      $ 149,726      $ 238,770      $ 252,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Net Income

   $ 1.12      $ 1.25      $ 2.09      $ 2.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income — Assuming Dilution

   $ 1.12      $ 1.25      $ 2.09      $ 2.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.48      $ 0.40      $ 0.96      $ 0.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


THE J. M. SMUCKER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     October 31, 2011     April 30, 2011  
     (Dollars in thousands)  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 496,288      $ 319,845   

Trade receivables, less allowances

     462,169        344,410   

Inventories:

    

Finished products

     704,537        518,243   

Raw materials

     439,414        345,336   
  

 

 

   

 

 

 
     1,143,951        863,579   

Other current assets

     91,299        109,165   
  

 

 

   

 

 

 

Total Current Assets

     2,193,707        1,636,999   

PROPERTY, PLANT, AND EQUIPMENT

    

Land and land improvements

     87,492        77,074   

Buildings and fixtures

     383,144        347,950   

Machinery and equipment

     1,077,776        1,022,670   

Construction in progress

     129,348        76,778   
  

 

 

   

 

 

 
     1,677,760        1,524,472   

Accumulated depreciation

     (729,535     (656,590
  

 

 

   

 

 

 

Total Property, Plant, and Equipment

     948,225        867,882   

OTHER NONCURRENT ASSETS

    

Goodwill

     2,897,981        2,812,746   

Other intangible assets, net

     3,099,067        2,940,010   

Other noncurrent assets

     76,440        66,948   
  

 

 

   

 

 

 

Total Other Noncurrent Assets

     6,073,488        5,819,704   
  

 

 

   

 

 

 
   $ 9,215,420      $ 8,324,585   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 260,653      $ 234,916   

Accrued trade marketing and merchandising

     97,023        62,588   

Other current liabilities

     187,245        185,172   
  

 

 

   

 

 

 

Total Current Liabilities

     544,921        482,676   

NONCURRENT LIABILITIES

    

Long-term debt

     2,071,852        1,304,039   

Deferred income taxes

     1,031,280        1,042,823   

Other noncurrent liabilities

     204,018        202,684   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     3,307,150        2,549,546   

SHAREHOLDERS’ EQUITY

    

Common shares

     28,463        28,543   

Additional capital

     4,389,605        4,396,592   

Retained income

     977,704        866,933   

Amount due from ESOP Trust

     (2,572     (3,334

Accumulated other comprehensive (loss) income

     (29,851     3,629   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     5,363,349        5,292,363   
  

 

 

   

 

 

 
   $ 9,215,420      $ 8,324,585   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

     Six Months Ended October 31,  
     2011     2010  
     (Dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 238,770      $ 252,607   

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

    

Depreciation

     55,796        56,646   

Depreciation — restructuring and merger and integration

     23,127        21,440   

Amortization

     40,794        36,998   

Share-based compensation expense

     12,554        12,268   

Other noncash restructuring charges

     1,769        5,367   

Loss on sale of assets - net

     2,726        1,027   

Loss on sale of business

     11,287        0   

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

    

Trade receivables

     (106,362     (177,018

Inventories

     (272,613     (167,945

Accounts payable and accrued items

     71,133        95,208   

Proceeds from settlement of interest rate swaps - net

     17,718        0   

Defined benefit pension contributions

     (4,496     (12,312

Accrued and prepaid income taxes

     (33,069     (105,166

Other — net

     800        426   
  

 

 

   

 

 

 

Net cash provided by operating activities

     59,934        19,546   

INVESTING ACTIVITIES

    

Business acquired, net of cash acquired

     (362,846     0   

Additions to property, plant, and equipment

     (135,707     (62,073

Proceeds from sale of business

     9,268        0   

Sale and maturity of marketable securities

     18,600        9,000   

Purchases of marketable securities

     0        (57,037

Proceeds from disposal of property, plant, and equipment

     903        339   

Other — net

     (2,250     11   
  

 

 

   

 

 

 

Net cash used for investing activities

     (472,032     (109,760

FINANCING ACTIVITIES

    

Repayments of long-term debt

     0        (10,000

Proceeds from long-term debt - net

     748,560        400,000   

Quarterly dividends paid

     (104,825     (95,333

Purchase of treasury shares

     (44,592     (5,147

Proceeds from stock option exercises

     518        2,100   

Other — net

     (5,101     2,476   
  

 

 

   

 

 

 

Net cash provided by financing activities

     594,560        294,096   

Effect of exchange rate changes

     (6,019     11   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     176,443        203,893   

Cash and cash equivalents at beginning of period

     319,845        283,570   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 496,288      $ 487,463   
  

 

 

   

 

 

 

(    ) 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 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

 

5


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.

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, $87.4 million is deductible for tax purposes.

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 $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

 

6


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.

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

Total expected restructuring charge

   $ 118,000      $ 60,000      $ 23,500      $ 23,000      $ 10,500      $ 235,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     21,451        11,051        5,537        3,000        684        41,723   

Cash payments

     0        (4,929     (5,537     (3,000     (684     (14,150

Noncash utilization

     (21,451     (1,769     0        0        0        (23,220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 31, 2011

   $ 0      $ 14,551      $ 0      $ 0      $ 0      $ 14,551   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Remaining expected restructuring charge

   $ 39,110      $ 11,800      $ 11,364      $ 14,790      $ 8,545      $ 85,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

7


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.

     Three Months Ended      Six Months Ended  
     October 31,      October 31,  
     2011      2010      2011      2010  

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

   $ 5,593       $ 5,968       $ 10,744       $ 10,308   

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

     929         973         1,810         1,960   

Share—based compensation expense included in other restructuring costs

     22         109         65         174   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 6,544       $ 7,050       $ 12,619       $ 12,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related income tax benefit

   $ 2,236       $ 2,293       $ 4,250       $ 3,981   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

     October 31, 2011      April 30, 2011  

Common shares authorized

     150,000,000         150,000,000   

Common shares outstanding

     113,851,792         114,172,122   

Treasury shares

     14,753,373         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.

 

8


The following table sets forth reportable segment information.

     Three Months Ended     Six Months Ended  
     October 31,     October 31,  
     2011     2010     2011     2010  

Net sales:

        

U.S. Retail Coffee

   $ 617,523      $ 477,287      $ 1,117,632      $ 870,857   

U.S. Retail Consumer Foods

     615,192        543,045        1,074,692        991,567   

International, Foodservice, and Natural Foods

     281,190        258,581        510,464        463,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,513,905      $ 1,278,913      $ 2,702,788      $ 2,326,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit:

        

U.S. Retail Coffee

   $ 139,958      $ 149,099      $ 279,669      $ 260,981   

U.S. Retail Consumer Foods

     115,955        113,127        194,974        206,482   

International, Foodservice, and Natural Foods

     38,991        51,420        77,536        86,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment profit

   $ 294,904      $ 313,646      $ 552,179      $ 554,404   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     324        572        626        1,005   

Interest expense

     (19,448     (18,505     (34,870     (35,044

Share-based compensation expense

     (5,593     (5,968     (10,744     (10,308

Cost of products sold — restructuring

     (11,804     (12,072     (21,470     (21,525

Cost of products sold — merger and integration

     (915     0        (1,675     0   

Other restructuring costs

     (10,356     (8,345     (20,253     (26,449

Other merger and integration costs

     (6,871     (2,773     (11,556     (5,429

Corporate administrative expenses

     (47,751     (44,452     (94,164     (85,490

Other income (expense) — net

     711        (376     1,954        317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 193,201      $ 221,727      $ 360,027      $ 371,481   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note H – Debt and Financing Arrangements

Long-term debt consists of the following:

     October 31, 2011      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

     399,286         380,039   

3.50% Notes due October 15, 2021

     748,566         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

   $ 2,071,852       $ 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 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

 

9


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.

     Three Months Ended October 31,      Six Months Ended October 31,  
     2011      2010      2011      2010  

Computation of net income per share:

           

Net income

   $ 127,247       $ 149,726       $ 238,770       $ 252,607   

Net income allocated to participating securities

     1,297         1,501         2,424         2,478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 125,950       $ 148,225       $ 236,346       $ 250,129   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     112,731,758         118,313,698         112,927,273         118,235,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share

   $ 1.12       $ 1.25       $ 2.09       $ 2.12   
  

 

 

    

 

 

    

 

 

    

 

 

 
      Three Months Ended October 31,      Six Months Ended October 31,  
     2011      2010      2011      2010  

Computation of net income per share—assuming dilution:

           

Net income

   $ 127,247       $ 149,726       $ 238,770       $ 252,607   

Net income allocated to participating securities

     1,297         1,500         2,423         2,476   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 125,950       $ 148,226       $ 236,347       $ 250,131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     112,731,758         118,313,698         112,927,273         118,235,258   

Dilutive effect of stock options

     51,670         130,397         54,654         134,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding assuming dilution

     112,783,428         118,444,095         112,981,927         118,370,238   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share—assuming dilution

   $ 1.12       $ 1.25       $ 2.09       $ 2.11   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


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 October 31,      Six Months Ended October 31,  
     2011      2010      2011      2010  

Weighted-average common shares outstanding

     112,731,758         118,313,698         112,927,273         118,235,258   

Weighted-average participating shares outstanding

     1,161,277         1,198,303         1,158,018         1,171,207   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding

     113,893,035         119,512,001         114,085,291         119,406,465   

Dilutive effect of stock options

     51,670         130,397         54,654         134,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding—assuming dilution

     113,944,705         119,642,398         114,139,945         119,541,445   
  

 

 

    

 

 

    

 

 

    

 

 

 

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  October 31,              
     Defined Benefit Pension Plans     Other Postretirement Benefits  
                     2011                     2010                     2011                     2010  

Service cost

   $ 1,976      $ 1,861      $ 545      $ 405   

Interest cost

     6,600        6,360        772        691   

Expected return on plan assets

     (6,714     (6,674     0        0   

Recognized net actuarial loss (gain)

     3,072        2,198        2        (134

Termination benefit cost

     0        735        0        0   

Curtailment

     0        181        0        0   

Other

     285        289        (113     (122
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 5,219      $ 4,950      $ 1,206      $ 840   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

                  Six Months Ended  October 31,              
     Defined Benefit Pension Plans     Other Postretirement Benefits  
                     2011                     2010                     2011                     2010  

Service cost

   $ 4,038      $ 3,719      $ 1,070      $ 810   

Interest cost

     13,123        12,706        1,552        1,381   

Expected return on plan assets

     (13,599     (13,331     0        0   

Recognized net actuarial loss (gain)

     5,273        3,925        (23     (268

Termination benefit cost

     0        8,197        0        2,413   

Curtailment

     0        4,091        0        0   

Other

     585        577        (213     (244
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 9,420      $ 19,884      $ 2,386      $ 4,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

11


Note K – Comprehensive Income

The following table summarizes the components of comprehensive income.

     Three Months Ended October 31,     Six Months Ended October 31,  
     2011     2010     2011     2010  

Net income

   $ 127,247      $ 149,726      $ 238,770      $ 252,607   

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (14,892     2,542        (18,213     (1,066

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

     (1,623     1,361        (1,829     (36

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

     (10,004     (2,226     (22,126     6,742   

Unrealized loss on pension and other postretirement liabilities

     0        0        0        (300

Income tax benefit (expense)

     4,206        317        8,688        (2,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 104,934      $ 151,720      $ 205,290      $ 255,401   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

12


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.

     October 31, 2011      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

   $ 976       $ 537       $ 3,408       $ 0       $ 0   

Interest rate contract

     0         0         5,423         0         1,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ 976       $ 537       $ 8,831       $ 0       $ 1,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

              

Commodity contracts

   $ 3,521       $ 6,497       $ 9,887       $ 5,432       $ 0   

Foreign currency exchange contracts

     44         71         317         3,204         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 3,565       $ 6,568       $ 10,204       $ 8,636       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives instruments

   $ 4,541       $ 7,105       $ 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 $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.

 

13


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

     Three Months Ended October 31,     Six Months Ended October 31,  
     2011     2010     2011     2010  

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

   $ (4,246   $ 4,103      $ (10,260   $ 13,034   

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

     (416     6,329        5,692        6,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive (loss) income

   $ (3,830   $ (2,226   $ (15,952   $ 6,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Losses) gains recognized in cost of products sold (ineffective portion)

   $ (392   $ 203      $ (513   $ 374   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

     Three Months Ended October 31,      Six Months Ended October 31,  
     2011     2010      2011     2010  

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

   $ (6,192   $        0       $ (6,192   $          0   

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

     (18     0         (18     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Change in accumulated other comprehensive (loss) income

   $ (6,174   $ 0       $ (6,174   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Losses recognized in interest expense (ineffective portion)

   $ (19   $ 0       $ (19   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

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.

     Three Months Ended October 31,     Six Months Ended October 31,  
     2011      2010     2011      2010  

Gains on commodity contracts

   $  2,107       $ 454      $ 15,804       $ 4,847   

Gains (losses) on foreign currency exchange contracts

     1,570         (207     1,655         270   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 3,677       $ 247      $ 17,459       $ 5,117   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     October 31, 2011      April 30, 2011  

Commodity contracts

   $ 944,265       $ 869,107   

Foreign currency exchange contracts

     66,015         73,158   

Interest rate contract

     0         376,000   
  

 

 

    

 

 

 

 

14


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.

     October 31, 2011     April 30, 2011  
      Carrying
Amount
    Fair Value     Carrying
Amount
     Fair Value  

Marketable securities

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

Other investments

     40,136        40,136        41,560         41,560   

Derivatives financial instruments, net

     (2,564     (2,564     9,015         9,015   

Long-term debt

     2,071,852        2,550,850        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
October  31,
2011
    Fair
Value at
April 30,
2011
 

Marketable securities (A)

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

Other investments: (B)

            

Equity mutual funds

     11,876        0         0         11,876        14,011   

Municipal obligations

     0        20,681         0         20,681        20,042   

Other investments

     536        7,043         0         7,579        7,507   

Derivatives: (C)

            

Commodity contracts, net

     (2,537     0         0         (2,537     7,863   

Foreign currency exchange contracts, net

     (27     0         0         (27     (2,887

Interest rate contract, net

     0        0         0         0        4,039   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total financial assets measured at fair value

   $ 9,848      $ 27,724       $ 0       $ 37,572      $ 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 October 31, 2011.

 

(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 October 31, 2011, the Company’s municipal obligations are scheduled to mature as follows: $647 in 2012, $3,371 in 2013, $742 in 2014, $2,766 in 2015, and $13,155 in 2016 and beyond.

 

(C) 

The Company’s commodity contract and foreign currency exchange contract derivatives are valued using quoted market prices. 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. Level 2 inputs for

 

15


  the interest rate contract were 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. For additional information, see Note M – Derivative Financial Instruments.

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

 

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

Net sales

   $ 1,181,087      $ 435,912       $ 1,121,799      $ (1,224,893   $ 1,513,905   

Cost of products sold

     1,034,958        398,999         801,196        (1,219,917     1,015,236   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     146,129        36,913         320,603        (4,976     498,669   

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

     63,740        14,222         175,867        0        253,829   

Amortization

     1,381        0         19,178        0        20,559   

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

     (151     746         12,072        0        12,667   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     81,159        21,945         113,486        (4,976     211,614   

Interest (expense) income—net

     (19,344     975         (755     0        (19,124

Other (expense) income—net

     (102     117         696        0        711   

Equity in net earnings of subsidiaries

     85,373        63,304         22,059        (170,736     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     147,086        86,341         135,486        (175,712     193,201   

Income taxes

     19,839        325         45,790        0        65,954   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 127,247      $ 86,016       $ 89,696      $ (175,712   $ 127,247   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

16


CONDENSED STATEMENTS OF CONSOLIDATED INCOME

Three Months Ended October 31, 2010

 

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

Net sales

   $ 993,660      $ 747,173       $ 1,100,630      $ (1,562,550   $ 1,278,913   

Cost of products sold

     799,379        681,419         865,580        (1,562,135     784,243   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     194,281        65,754         235,050        (415     494,670   

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

     55,344        18,045         160,550        0        233,939   

Amortization

     1,296        16,168         1,037        0        18,501   

Other operating (income) expense—net

     (440     784         1,850        0        2,194   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     138,081        30,757         71,613        (415     240,036   

Interest (expense) income—net

     (18,042     474         (365     0        (17,933

Other (expense) income—net

     (185     226         (417     0        (376

Equity in net earnings of subsidiaries

     68,572        23,252         18,828        (110,652     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     188,426        54,709         89,659        (111,067     221,727   

Income taxes

     38,700        4,135         29,166        0        72,001   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 149,726      $ 50,574       $ 60,493      $ (111,067   $ 149,726   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended October 31, 2011

 

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

Net sales

   $ 2,098,196      $ 783,400       $ 1,875,188      $ (2,053,996   $ 2,702,788   

Cost of products sold

     1,815,543        717,294         1,286,153        (2,045,955     1,773,035   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     282,653        66,106         589,035        (8,041     929,753   

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

     123,055        26,424         335,484        0        484,963   

Amortization

     2,678        0         38,116        0        40,794   

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

     (84     248         11,515        0        11,679   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     157,004        39,434         203,920        (8,041     392,317   

Interest (expense) income—net

     (34,718     1,950         (1,476     0        (34,244

Other income—net

     689        234         1,031        0        1,954   

Equity in net earnings of subsidiaries

     154,959        109,623         39,667        (304,249     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     277,934        151,241         243,142        (312,290     360,027   

Income taxes

     39,164        648         81,445        0        121,257   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 238,770      $ 150,593       $ 161,697      $ (312,290   $ 238,770   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended October 31, 2010

 

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

Net sales

   $ 1,815,967      $ 1,366,430       $ 1,993,956      $ (2,850,128   $ 2,326,225   

Cost of products sold

     1,471,456        1,232,349         1,549,599        (2,830,284     1,423,120   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     344,511        134,081         444,357        (19,844     903,105   

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

     102,942        46,495         308,523        0        457,960   

Amortization

     2,593        32,336         2,069        0        36,998   

Other operating (income) expense—net

     (720     993         2,671        0        2,944   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Income

     239,696        54,257         131,094        (19,844     405,203   

Interest (expense) income—net

     (34,197     1,449         (1,291     0        (34,039

Other (expense) income—net

     (264     384         197        0        317   

Equity in net earnings of subsidiaries

     105,233        42,514         36,088        (183,835     0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     310,468        98,604         166,088        (203,679     371,481   

Income taxes

     57,861        6,573         54,440        0        118,874   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 252,607      $ 92,031       $ 111,648      $ (203,679   $ 252,607   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

17


CONDENSED CONSOLIDATED BALANCE SHEETS

October 31, 2011

 

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

ASSETS

          

CURRENT ASSETS

          

Cash and cash equivalents

   $ 378,441      $ 0       $ 117,847      $ 0      $ 496,288   

Inventories

     0        211,224        960,470        (27,743     1,143,951   

Other current assets

     472,970        7,526        72,972        0        553,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Assets

     851,411        218,750        1,151,289        (27,743     2,193,707   

PROPERTY, PLANT, AND EQUIPMENT, NET

     211,315        353,085        383,825        0        948,225   

INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY

     5,431,898        900,978        818,718        (7,151,594     0   

OTHER NONCURRENT ASSETS

          

Goodwill

     976,617        0        1,921,364        0        2,897,981   

Other intangible assets, net

     439,210        0        2,659,857        0        3,099,067   

Other noncurrent assets

     55,635        15,135        5,670        0        76,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Noncurrent Assets

     1,471,462        15,135        4,586,891        0        6,073,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,966,086      $ 1,487,948      $ 6,940,723      $ (7,179,337   $ 9,215,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

CURRENT LIABILITIES

   $ 252,493      $ 110,933      $ 181,495      $ 0      $ 544,921   

NONCURRENT LIABILITIES

          

Long-term debt

     2,071,852        0        0        0        2,071,852   

Deferred income taxes

     113,099        0        918,181        0        1,031,280   

Other noncurrent liabilities

     165,293        16,429        22,296        0        204,018   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noncurrent Liabilities

     2,350,244        16,429        940,477        0        3,307,150   

SHAREHOLDERS’ EQUITY

     5,363,349        1,360,586        5,818,751        (7,179,337     5,363,349   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,966,086      $ 1,487,948      $ 6,940,723      $ (7,179,337   $ 9,215,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

April 30, 2011

 

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

18


CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

Six Months Ended October 31, 2011

 

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

Net cash (used for) provided by operating activities

   $ (11,177   $ 53,363      $ 17,748      $ 0       $ 59,934   

INVESTING ACTIVITIES

           

Business acquired, net of cash acquired

     0        0        (362,846     0         (362,846

Additions to property, plant, and equipment

     (31,087     (68,215     (36,405     0         (135,707

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

     26        158        719        0         903   

Other — net

     3        (1     (2,252     0         (2,250
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used for investing activities

     (12,458     (68,058     (391,516     0         (472,032

FINANCING ACTIVITIES

           

Proceeds from long-term debt - net

     748,560        0        0        0         748,560   

Quarterly dividends paid

     (104,825     0        0        0         (104,825

Purchase of treasury shares

     (44,592     0        0        0         (44,592

Proceeds from stock option exercises

     518        0        0        0         518   

Intercompany

     (399,329     14,695        384,634        0         0   

Other — net

     (5,101     0        0        0         (5,101
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by financing activities

     195,231        14,695        384,634        0         594,560   

Effect of exchange rate changes

     0        0        (6,019     0         (6,019
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     171,596        0        4,847        0         176,443   

Cash and cash equivalents at beginning of period

     206,845        0        113,000        0         319,845   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 378,441      $ 0      $ 117,847      $ 0       $ 496,288   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six Months Ended October 31, 2010

 

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

Net cash (used for) provided by operating activities

   $ (43,492   $ 31,206      $ 31,832      $ 0       $ 19,546   

INVESTING ACTIVITIES

           

Additions to property, plant, and equipment

     (26,168     (15,505     (20,400     0         (62,073

Sale and maturity of marketable securities

     9,000        0        0        0         9,000   

Purchases of marketable securities

     (57,037     0        0        0         (57,037

Proceeds from disposal of property, plant, and equipment

     0        300        39        0         339   

Other — net

     (48     36        23        0         11   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used for investing activities

     (74,253     (15,169     (20,338     0         (109,760

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

     (95,333     0        0        0         (95,333

Purchase of treasury shares

     (5,147     0        0        0         (5,147

Proceeds from stock option exercises

     2,100        0        0        0         2,100   

Intercompany

     6,378        (16,037     9,659        0         0   

Other — net

     2,476        0        0        0         2,476   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used for) financing activities

     300,474        (16,037     9,659        0         294,096   

Effect of exchange rate changes

     0        0        11        0         11   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     182,729        0        21,164        0         203,893   

Cash and cash equivalents at beginning of period

     217,730        0        65,840        0         283,570   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 400,459      $ 0      $ 87,004      $ 0       $ 487,463   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

19


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

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2011     2010     2011     2010  
     (Dollars in millions, except per share data)  

Net sales

   $ 1,513.9      $ 1,278.9      $ 2,702.8      $ 2,326.2   

Gross profit

   $ 498.7      $ 494.7      $ 929.8      $ 903.1   

% of net sales

     32.9     38.7     34.4     38.8

Operating income

   $ 211.6      $ 240.0      $ 392.3      $ 405.2   

% of net sales

     14.0     18.8     14.5     17.4

Net income:

        

Net income

   $ 127.2      $ 149.7      $ 238.8      $ 252.6   

Net income per common share — assuming dilution

   $ 1.12      $ 1.25      $ 2.09      $ 2.11   

Gross profit excluding special project costs (1)

   $ 511.4      $ 506.7      $ 952.9      $ 924.6   

% of net sales

     33.8