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| SJM > SEC Filings for SJM > Form 10-Q on 10-Mar-2009 | All Recent SEC Filings |
10-Mar-2009
Quarterly Report
Net Sales
Three Months Ended January 31, Nine Months Ended January 31,
Increase Increase
2009 2008 (Decrease) % 2009 2008 (Decrease) %
(Dollars in millions)
Net sales $ 1,182.6 $ 665.4 $ 517.2 78 % $ 2,689.4 $ 1,934.8 $ 754.6 39 %
Less:
Acquisitions (491.7 ) (491.7 ) (558.1 ) (558.1 )
Foreign exchange 16.0 16.0 19.0 19.0
Net sales without
acquisitions and
foreign exchange $ 706.9 $ 665.4 $ 41.5 6 % $ 2,150.3 $ 1,934.8 $ 215.5 11 %
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Net sales were $1,182.6 million in the third quarter of 2009, an increase of
$517.2 million or 78 percent, compared to the third quarter of 2008.
Acquisitions contributed approximately $491.7 million of the increase, including
$468.5 million from Folgers, while the foreign exchange impact, primarily due to
the weakening Canadian dollar, reduced net sales by approximately $16.0 million.
Excluding acquisitions and foreign exchange, net sales increased six percent
reflecting a 13 percent net pricing gain which offset a seven percent volume and
mix decline.
Over the last year, the Company has implemented price increases necessary to
offset rising costs. While pricing was the main driver of the net sales growth,
a number of categories experienced volume gains, including Pillsbury® baking
mixes and frostings, Hungry Jack® pancakes and syrups, and canned milk,
reflecting current back-to-home meal trends. Volume declines were concentrated
in oils and flour, as anticipated, due to significant price increases taken over
the prior year in these categories.
During January 2009, the U.S. Food and Drug Administration initiated a recall of
another manufacturer's foodservice peanut butter and ingredient peanut products.
As a result, volume in the retail peanut butter category declined approximately
22 percent in January 2009. The Company's products experienced a lesser decline
and these category pressures are expected to continue through the fourth
quarter.
Company net sales for the first nine months of 2009 were $2,689.4 million, an
increase of 39 percent, compared to $1,934.8 million in the first nine months of
2008. Acquisitions contributed approximately $558.1 million of the net sales
increase. Excluding acquisitions and foreign exchange, net sales increased
11 percent for the first nine months of 2009 compared to 2008 primarily
reflecting the net pricing gains over the prior year.
Operating Income
The following table presents components of operating income as a percentage of
net sales.
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Gross profit 33.9 % 29.4 % 31.7 % 31.0 %
Selling, distribution, and administrative
expenses:
Marketing and selling 10.0 % 9.4 % 10.0 % 9.8 %
Distribution 3.6 % 3.3 % 3.5 % 3.4 %
General and administrative 4.3 % 5.5 % 4.8 % 5.8 %
Total selling, distribution, and
administrative expenses 17.9 % 18.2 % 18.3 % 19.0 %
Amortization 1.7 % 0.2 % 0.9 % 0.2 %
Restructuring and merger and integration
costs 2.8 % 0.5 % 1.6 % 0.4 %
Other operating expense (income) 0.0 % 0.2 % 0.0 % (0.1 %)
Operating income 11.5 % 10.3 % 10.9 % 11.5 %
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Overall, gross profit increased $205.6 million and improved from 29.4 percent to
33.9 percent of net sales in the third quarter of 2009 compared to 2008. The
primary driver of the gross profit improvement was the addition of Folgers. The
Company improved gross profit on its base business by approximately 17 percent,
or 2.6 percentage points, despite higher costs on many key ingredients. Current
pricing is more in line with these higher costs, contributing to the gross
profit increase. In addition, lower costs have been realized on certain raw
materials allowing the Company to continue to recover margin lost over the past
few years while also returning some pricing to customers. Margin gains in oils,
canned milk, and regional baking brands also contributed to the increased gross
margin in the third quarter of 2009.
Selling, distribution, and administrative ("SD&A") expenses increased
$90.2 million, or 74 percent, for the third quarter of 2009 compared to 2008. An
increase in marketing and distribution expenses, much of which was related to
the addition of Folgers, accounted for approximately 70 percent of the SD&A
increase. Most SD&A expenses, particularly selling and corporate overhead,
increased at a lesser rate than net sales resulting in an overall decrease in
SD&A from 18.2 percent of net sales to 17.9 percent, further contributing to the
improvement in operating margin.
Amortization expense increased $19.0 million to 1.7 percent of net sales
compared to 0.2 percent of net sales in the same period in 2008 reflecting the
addition of intangible assets associated with the Folgers transaction. The
valuation of these intangible assets is preliminary, and amortization expense in
future periods may vary from the amounts recorded, depending on the final
values.
Operating income increased 97 percent compared to the third quarter of 2008 and
improved from 10.3 percent to 11.5 percent of net sales. Restructuring and
merger and integration costs were $29.5 million higher in the third quarter of
2009 compared to 2008, as integration activities related to Folgers commenced,
reducing operating margin by 2.3 percentage points.
Year-to-date operating income increased $71.1 million, or 32 percent, from last
year but decreased from 11.5 percent to 10.9 percent of net sales. Gross profit
improved from 31.0 percent of net sales to 31.7 percent due to the addition of
Folgers. For the first nine months of 2009, SD&A as a percentage of net sales
decreased to 18.3 percent of net sales from 19.0 percent for the comparable
period in 2008, primarily due to corporate overhead expenses increasing at a
lesser rate than net sales.
Other
During the third quarter, the Company's debt obligations increased by Folgers'
$350 million of LIBOR-based variable rate debt. In addition, the Company issued
$400 million in Senior Notes with a weighted-average interest rate of
6.6 percent during the second quarter. As a result, interest expense increased
$11.2 million and $12.3 million during the third quarter and first nine months
of 2009, respectively, compared to 2008.
Income tax expense increased $16.7 million, or 84 percent during the third
quarter of 2009 compared to 2008, in line with the percentage increase in income
before taxes as the effective tax rate was 31.8 percent, consistent in both
periods. For the first nine months of 2009 income tax expense increased
$14.8 million, or 22 percent, compared to 2008 while the effective tax rate
decreased from 33.9 percent to 32.7 percent.
Folgers Merger
On November 6, 2008, the Company completed the transaction with Folgers, a
subsidiary of The Procter & Gamble Company ("P&G"). The value of the transaction
was approximately $3.7 billion, including the issuance of Smucker common shares
in connection with the merger and $350 million of Folgers debt. Under the terms
of the transaction agreements, P&G distributed common shares of Folgers to
participating P&G shareholders which were then automatically converted into the
right to receive Smucker common shares in the merger. Immediately following the
merger, P&G shareholders and pre-merger Company shareholders owned approximately
53.5 percent and 46.5 percent, respectively, of the Company's approximately
118 million common shares outstanding. The Company expects to incur one-time
costs related to the transaction over the two fiscal years following the merger
of approximately $100 million to $125 million, including certain amounts during
the first year expected to be allocated to goodwill.
The merger was accounted for as a purchase business combination, with the
Company treated as the acquiring entity.
Segment Results
Three Months Ended January 31, Nine Months Ended January 31,
% Increase % Increase
2009 2008 (Decrease) 2009 2008 (Decrease)
(Dollars in millions)
Net sales:
U.S. retail market $ 549.3 $ 502.2 9 % $ 1,656.4 $ 1,455.6 14 %
U.S. retail coffee market $ 442.9 $ - n/a $ 442.9 $ - n/a
Special markets $ 190.4 $ 163.2 17 % $ 590.1 $ 479.2 23 %
Segment profit:
U.S. retail market $ 110.3 $ 79.4 39 % $ 297.1 $ 256.5 16 %
% of net sales 20.1 % 15.8 % 17.9 % 17.6 %
U.S. retail coffee market $ 90.2 $ - n/a $ 90.2 $ - n/a
% of net sales 20.4 % n/a 20.4 % n/a
Special markets $ 27.0 $ 25.2 7 % $ 74.2 $ 67.6 10 %
% of net sales 14.2 % 15.4 % 12.6 % 14.1 %
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With the addition of Folgers, the Company added the U.S. retail coffee market
reportable segment representing the domestic sale of Folgers®, Millstone®, and
Dunkin' Donuts® branded coffee to retail customers. Coffee sales to other than
domestic retail customers are included in the special markets segment.
U.S. Retail Market
U.S. retail market segment net sales for the quarter were up nine percent, with
pricing accounting for the majority of the increase. Net sales in the consumer
strategic business area increased nine percent, with gains in Smucker's® fruit
spreads, Jif® and Hungry Jack®. Acquisitions contributed approximately
one-quarter of the consumer increase offsetting volume declines in fruit spreads
and peanut butter of approximately three percent on a combined basis. Net sales
in the consumer oils and baking strategic business area were also up nine
percent, with increases in Pillsbury®, Crisco®and Eagle Brand® canned milk,
primarily due to the effect of price increases. Volume gains were realized in
baking mixes, frostings, and canned milk. While total volume in the business
area was down 11 percent, much of the decline was expected and reflects the
impact of last year's price increases in oils and flour.
For the first nine months of 2009, U.S. retail market segment net sales
increased 14 percent compared to the first nine months of 2008 with net sales up
12 percent in the consumer strategic business area, and up 15 percent in the
consumer oils and baking strategic business area.
U.S. retail market segment profit increased 39 percent for the quarter, ahead of
the increase in net sales, and 16 percent for the first nine months of 2009
compared to the same periods in 2008. Much of the gain for the quarter was in
the oils and baking area with almost half of the segment profit increase
attributable to improvements in the canned milk business. A better match of
prices to costs this year compared to last year accounted for most of the
remainder of the profit increase.
U.S. Retail Coffee Market
The U.S. retail coffee market contributed $442.9 million to net sales and
$90.2 million in segment profit for the third quarter and first nine months of
2009. On a pro forma basis, net sales increased four percent for the quarter led
by Dunkin' Donuts®, while Folgers® and Millstone® were essentially flat. The
increase in Dunkin' Donuts® reflects the continued shares growth of the brand
over the prior year.
Special Markets
Net sales in the third quarter for the special markets segment increased
17 percent. Canada strategic business area net sales were flat, as the impact of
the Europe's Best® acquisition and pricing gains were offset by unfavorable
foreign exchange. Net sales increased in the foodservice business area by
64 percent, as the acquisition of Folgers added $25.6 million of the increase
and the Knott's Berry Farm® acquisition also contributed. The gains from
acquisitions accounted for most of the increase, and more than offset declines
in the portion control business resulting from a general decline in
away-from-home dining. Net sales in the beverage business area were down seven
percent reflecting the impact of softening consumer demand attributable to the
current economic environment. For the first nine months of 2009, special markets
segment net sales are up 23 percent, primarily due to acquisitions.
Special markets segment profit increased seven percent for the quarter and
10 percent for the first nine months of 2009 compared to the same periods in
2008, again resulting from the impact of recent acquisitions which offset the
impact of higher costs, particularly in the Canada strategic business area.
Financial Condition
Liquidity
Nine Months Ended January 31,
(Dollars in thousands) 2009 2008
Net cash provided by operating activities $ 289,010 $ 181,242
Net cash used for investing activities $ (146,285 ) $ (188,689 )
Net cash provided by financing activities $ 50,321 $ 132,911
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The Company's principal source of funds is cash generated from operations,
supplemented as needed by borrowings against the Company's revolving credit
facility. Total cash and cash equivalents at January 31, 2009, were
$359.9 million compared to $171.5 million at April 30, 2008.
The Company's working capital requirements are greatest during the first half of
its fiscal year, primarily due to the need to build inventory levels in advance
of the "fall bake" season, and the seasonal procurement of fruit and vegetables.
Cash provided by operating activities was approximately $280.3 million and
$289.0 million during the three and nine-months ended January 31, 2009,
respectively. Cash provided by operating activities increased $107.8 million in
the first nine months of 2009 compared to 2008, as the impact of the Folgers
business has added to net income adjusted for noncash items.
Net cash used for investing activities was approximately $146.3 million in the
first nine months of 2009, compared to $188.7 million in the first nine months
of 2008, consisting of $72.1 million used for business acquisitions, primarily
the Knott's Berry Farm® brand, and capital expenditures of approximately
$84.9 million. The Company expects capital expenditures for fiscal 2009,
including amounts associated with Folgers, to total approximately $115 to
$120 million.
Cash provided by financing activities during the first nine months of 2009
consisted primarily of the proceeds from the Company's $400 million Senior Note
placement. A portion of the proceeds was used to fund the payment of the $5 per
share one-time special dividend, totaling approximately $274.0 million, on
October 31, 2008. In addition, quarterly dividend payments of approximately
$73.0 million were made in the first nine months of 2009, resulting in total
dividend payments of $347.0 million.
Capital Resources
The following table presents the Company's capital structure:
January 31, 2009 April 30, 2008
Note payable $ 350,000 $ -
Current portion of long-term debt 277,466 -
Long-term debt 910,000 789,684
Total debt $ 1,537,466 $ 789,684
Shareholders' equity 4,914,940 1,799,853
Total capital $ 6,452,406 $ 2,589,537
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In addition to borrowings outstanding, the Company has available a $180 million
revolving credit facility with a group of three banks that expires in 2011.
Total debt at January 31, 2009, includes $400 million in Senior Notes with a
weighted-average interest rate of 6.6 percent issued on October 23, 2008, and
$350 million resulting from the Company's guarantee of Folgers' LIBOR-based
variable rate note with an interest rate of 1.8 percent at January 31, 2009.
Approximately $625 million of debt will mature through November 2009. Absent any
other material acquisitions or other significant investments, the Company
believes that cash on hand, combined with cash provided by operations,
borrowings available under existing and anticipated credit facilities, and
potential future note placements will be sufficient to meet cash requirements
for the next twelve months, including capital expenditures, the payment of
quarterly dividends, and principle and interest on debt outstanding.
Contractual Obligations
The following table summarizes the Company's contractual obligations at
January 31, 2009.
One to Three to
Less Than Three Five More Than
(Dollars in millions) Total One Year Years Years Five Years
Debt obligations $ 1,537.5 $ 627.5 $ 10.0 $ - $ 900.0
Operating lease obligations 34.8 1.5 10.3 8.4 14.6
Purchase obligations 564.3 219.7 334.4 3.7 6.5
Deferred income taxes 1,176.6 - - - 1,176.6
Other long-term liabilities 121.5 - - - 121.5
Total $ 3,434.7 $ 848.7 $ 354.7 $ 12.1 $ 2,219.2
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Purchase obligations in the above table include agreements to purchase goods or services that are enforceable and legally binding on the Company. Included in this category are certain obligations related to normal, ongoing purchase obligations in which the Company has guaranteed payment to ensure availability of raw materials and packaging supplies. The Company expects to receive consideration for these purchase obligations in the form of materials. The purchase obligations in the above table do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated.
The Company expects cash provided by operations combined, as necessary, with
borrowings under existing and anticipated credit facilities, and potential
future note placements will be sufficient to repay debt obligations over the
next year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk related to changes in interest rates,
commodity prices, and foreign currency exchange rates. For further information
related to changes in interest rates and foreign currency exchange rates,
reference is made to the Company's Annual Report on Form 10-K for the year ended
April 30, 2008.
Commodity Price Risk. Raw materials and other commodities used by the Company
are subject to price volatility caused by supply and demand conditions,
political and economic variables, and other unpredictable factors. To manage the
volatility related to anticipated commodity purchases, the Company uses futures
and options with maturities generally less than one year. Certain of these
instruments are designated as cash flow hedges. The mark-to-market gains or
losses on qualifying hedges are included in other comprehensive income to the
extent effective, and reclassified into cost of products sold in the period
during which the hedged transaction affects earnings. The mark-to-market gains
or losses on nonqualifying, excluded, and ineffective portions of hedges are
recognized in cost of products sold immediately.
The following sensitivity analysis presents the Company's potential loss of fair
value resulting from a hypothetical 10 percent decrease in market prices.
(Dollars in thousands) January 31, 2009 April 30, 2008
Raw material commodities:
High $ 12,582 $ 13,229
Low 2,874 3,289
Average 7,929 8,474
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Fair value was determined using quoted market prices and was based on the Company's net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that the Company expects to incur. In practice, as markets move, the Company actively manages its risk and adjusts hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative commodity instrument; thus, the Company would expect that any gain or loss in fair value of its derivatives would generally be offset by an increase or decrease in the fair value of the underlying exposures.
Certain Forward-Looking Statements
This quarterly report contains forward-looking statements, such as projected
operating results, earnings and cash flows, that are subject to known and
unknown risks and uncertainties that could cause actual results to differ
materially from any future results, performance, or achievements expressed or
implied by those forward-looking statements. The risks, uncertainties, factors
and assumptions listed and discussed in this quarterly report, including the
following important factors and assumptions, could affect the future results of
the Company and could cause actual results to differ materially from those
expressed in the forward-looking statements:
• volatility of commodity markets from which raw materials, particularly green
coffee beans, wheat, soybean oil, milk, and peanuts are procured and the
related impact on costs;
• the successful integration of the coffee business with the Company's business, operations, and culture and the ability to realize synergies and other potential benefits of the merger within the time frames currently contemplated;
• crude oil price trends and their impact on transportation, energy, and packaging costs;
• the ability to successfully implement price changes;
• the success and cost of introducing new products and the competitive response;
• the success and cost of marketing and sales programs and strategies intended to promote growth in the Company's businesses;
• general competitive activity in the market, including competitors' pricing practices and promotional spending levels;
• the impact of food safety concerns, involving either the Company or its competitors' products;
• the concentration of certain of the Company's businesses with key customers and the ability to manage and maintain key customer relationships;
• the loss of significant customers or a substantial reduction in orders from these customers or the bankruptcy of any such customer;
• changes in consumer coffee preferences, and other factors affecting the coffee business, which represents a substantial portion of the Company's business;
• the ability of the Company to obtain any required financing;
• the timing and amount of the Company's capital expenditures, restructuring, and merger and integration costs;
• the outcome of current and future tax examinations, changes in tax laws, and other tax matters, and their related impact on the Company's tax positions;
• foreign currency and interest rate fluctuations;
• political or economic disruption due to the global recession and credit crisis;
• other factors affecting share prices and capital markets generally; and
• the other factors described under "Risk Factors" in registration statements filed by the Company with the Securities and Exchange Commission and in the other reports and statements filed by the Company with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and proxy materials.
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented . . .
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