10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended January 31, 2013

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 107,257,848 common shares outstanding on February 28, 2013.

The Exhibit Index is located at Page No. 42.

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

 

     Three Months Ended
January 31,
    Nine Months Ended
January 31,
 
     2013     2012     2013     2012  
     (Dollars in thousands, except per share data)  

Net sales

   $ 1,559,558      $ 1,467,641      $ 4,558,007      $ 4,170,429   

Cost of products sold

     1,022,163        988,825        3,002,506        2,738,715   

Cost of products sold—restructuring and merger and integration

     1,166        13,131        7,588        36,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     536,229        465,685        1,547,913        1,395,438   

Selling, distribution, and administrative expenses

     251,016        225,016        740,419        678,170   

Amortization

     24,200        22,031        72,594        62,825   

Other restructuring and merger and integration costs

     6,870        19,422        35,522        51,231   

Other special project costs

     —          —          6,669        —     

Loss on divestiture

     —          —          —           11,287   

Other operating income—net

     (4,164     (1,150     (3,665     (758
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     258,307        200,366        696,374        592,683   

Interest income

     466        464        1,122        1,090   

Interest expense

     (24,226     (23,599     (72,374     (58,469

Other (expense) income—net

     (553     4        355        1,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     233,994        177,235        625,477        537,262   

Income taxes

     79,826        60,391        211,599        181,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 154,168      $ 116,844      $ 413,878      $ 355,614   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Net Income

   $ 1.42      $ 1.03      $ 3.78      $ 3.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income—Assuming Dilution

   $ 1.42      $ 1.03      $ 3.78      $ 3.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.52      $ 0.48      $ 1.56      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
January 31,
    Nine Months Ended
January 31,
 
     2013     2012     2013     2012  
     (Dollars in thousands, except per share data)  

Net Income

   $ 154,168      $ 116,844      $ 413,878      $ 355,614   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     1,072        (459     (2,516     (18,672

Cash flow hedging derivative activity, net of tax

     2,628        634        5,129        (13,464

Pension and other postretirement benefit plans activity, net of tax

     1,910        (4,008     6,144        (4,008

Available-for-sale securities activity, net of tax

     (256     958        375        (211
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     5,354        (2,875     9,132        (36,355
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 159,522      $ 113,969      $ 423,010      $ 319,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


THE J. M. SMUCKER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     January 31, 2013     April 30, 2012  
     (Dollars in thousands)  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 438,814      $ 229,708   

Trade receivables, less allowance for doubtful accounts

     360,205        347,518   

Inventories:

    

Finished products

     575,850        643,517   

Raw materials

     302,306        318,059   
  

 

 

   

 

 

 
     878,156        961,576   

Other current assets

     68,770        104,663   
  

 

 

   

 

 

 

Total Current Assets

     1,745,945        1,643,465   

PROPERTY, PLANT, AND EQUIPMENT

    

Land and land improvements

     96,020        89,599   

Buildings and fixtures

     490,283        460,242   

Machinery and equipment

     1,227,999        1,160,307   

Construction in progress

     121,327        142,983   
  

 

 

   

 

 

 
     1,935,629        1,853,131   

Accumulated depreciation

     (814,014     (757,042
  

 

 

   

 

 

 

Total Property, Plant, and Equipment

     1,121,615        1,096,089   

OTHER NONCURRENT ASSETS

    

Goodwill

     3,053,746        3,054,618   

Other intangible assets—net

     3,114,024        3,187,007   

Other noncurrent assets

     149,124        134,047   
  

 

 

   

 

 

 

Total Other Noncurrent Assets

     6,316,894        6,375,672   
  

 

 

   

 

 

 
   $ 9,184,454      $ 9,115,226   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 251,584      $ 274,725   

Accrued trade marketing and merchandising

     89,829        62,111   

Current portion of long-term debt

     50,000        50,000   

Other current liabilities

     202,050        230,136   
  

 

 

   

 

 

 

Total Current Liabilities

     593,463        616,972   

NONCURRENT LIABILITIES

    

Long-term debt

     2,018,508        2,020,543   

Deferred income taxes

     999,324        992,692   

Other noncurrent liabilities

     312,923        321,633   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     3,330,755        3,334,868   

SHAREHOLDERS’ EQUITY

    

Common shares

     27,121        27,571   

Additional capital

     4,198,713        4,261,171   

Retained income

     1,111,042        961,207   

Amount due from ESOP Trust

     (1,781     (2,572

Accumulated other comprehensive loss

     (74,859     (83,991
  

 

 

   

 

 

 

Total Shareholders’ Equity

     5,260,236        5,163,386   
  

 

 

   

 

 

 
   $ 9,184,454      $ 9,115,226   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

     Nine Months Ended January 31,  
     2013     2012  
     (Dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 413,878      $ 355,614   

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

    

Depreciation

     107,800        83,756   

Depreciation—restructuring and merger and integration

     7,242        31,749   

Amortization

     72,594        62,825   

Share-based compensation expense

     15,821        16,524   

Other restructuring activities

     (693     6,942   

Loss on sale of assets—net

     3,363        3,108   

Loss on divestiture

     —          11,287   

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

    

Trade receivables

     (12,988     (8,434

Inventories

     82,906        (78,362

Accounts payable and accrued items

     2,017        (653

Proceeds from settlement of interest rate swaps—net

     —          17,718   

Defined benefit pension contributions

     (30,535     (6,997

Accrued and prepaid taxes

     (6,783     (30,116

Other—net

     29,017        4,278   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     683,639        469,239   

INVESTING ACTIVITIES

    

Businesses acquired, net of cash acquired

     —          (742,355

Additions to property, plant, and equipment

     (146,539     (196,891

Proceeds from divestiture

     —          9,268   

Sales and maturities of marketable securities

     —          18,600   

Proceeds from disposal of property, plant, and equipment

     3,115        2,784   

Other—net

     17,197        (1,021
  

 

 

   

 

 

 

Net Cash Used for Investing Activities

     (126,227     (909,615

FINANCING ACTIVITIES

    

Proceeds from long-term debt—net

     —          748,560   

Quarterly dividends paid

     (166,475     (159,389

Purchase of treasury shares

     (175,490     (90,522

Proceeds from stock option exercises

     1,881        1,719   

Other—net

     (7,117     (2,915
  

 

 

   

 

 

 

Net Cash (Used for) Provided by Financing Activities

     (347,201     497,453   

Effect of exchange rate changes on cash

     (1,105     (6,494
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     209,106        50,583   

Cash and cash equivalents at beginning of period

     229,708        319,845   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 438,814      $ 370,428   
  

 

 

   

 

 

 

 

(    ) Denotes use of cash

See notes to unaudited condensed consolidated financial statements.

 

5


THE J. M. SMUCKER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1: Basis of Presentation

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

Operating results for the nine-month period ended January 31, 2013, are not necessarily indicative of the results that may be expected for the year ending April 30, 2013. 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, 2012.

Note 2: Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which eliminated the option to present the components of other comprehensive income as part of the statement of shareholders’ equity and required 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. ASU 2011-05 was effective May 1, 2012, for the Company and the Company elected to present net income and other comprehensive income in two separate but consecutive statements. In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. ASU 2013-02 will be effective May 1, 2013, for the Company and will be applied prospectively. The Company anticipates the adoption of ASU 2013-02 will not impact the financial statements, but will expand the disclosures related to amounts reclassified out of accumulated other comprehensive income.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires the disclosure of both gross and net information about financial instruments and transactions eligible for offset in the consolidated balance sheet. In January 2013, the FASB issued ASU 2013-01, Scope Clarification of Disclosures about Offsetting Assets and Liabilities, which limits the scope of ASU 2011-11 to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. ASU 2011-11, as clarified by ASU 2013-01, will be effective May 1, 2013, for the Company and will require retrospective application. The Company anticipates the adoption of 2011-11, as clarified by ASU 2013-01, will not impact the financial statements, but may expand the disclosures related to financial instruments.

The FASB issued ASU 2011-08, Testing Goodwill for Impairment, and ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, in September 2011 and July 2012, respectively. ASU 2011-08 and ASU 2012-02 simplify the guidance for testing impairment of goodwill and indefinite-lived intangible assets by allowing the Company the option to perform a qualitative test to assess the likelihood that the estimated fair value is less than the carrying amount. ASU 2011-08 will be effective for the Company’s February 1, 2013 annual impairment test. ASU 2012-02 will be effective for the Company’s February 1, 2014 annual impairment test, but early adoption is permitted. The adoption of ASU 2011-08 and ASU 2012-02 will not change the process for the February 1, 2013 impairment test and will not impact the financial statements or related disclosures.

 

6


Note 3: Acquisitions

On January 3, 2012, the Company completed the acquisition of a majority of the North American foodservice coffee and hot beverage business of Sara Lee Corporation (“Sara Lee foodservice business”), including a liquid coffee manufacturing facility in Suffolk, Virginia, for $420.6 million in an all-cash transaction. Utilizing proceeds from the 3.50 percent Notes issued in October 2011, the Company paid Sara Lee Corporation, recently renamed The Hillshire Brands Company, $375.6 million, net of a working capital adjustment, and will pay an additional $50.0 million in declining installments over the next 10 years to a subsidiary of D.E Master Blenders 1753 N.V., an independent public company recently separated from The Hillshire Brands Company. The additional $50.0 million obligation was included in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheet and recorded at a present value of $45.0 million as of the date of acquisition. During the nine months ended January 31, 2013, $10.0 million was paid and included in other – net financing on the Condensed Statement of Consolidated Cash Flows.

Total one-time costs related to the acquisition are estimated to be approximately $28.0 million, consisting primarily of transition services provided by Sara Lee Corporation and employee separation and relocation costs, nearly all of which are cash related. The Company has incurred one-time costs of $24.2 million through January 31, 2013, directly related to the merger and integration of the acquired business, and the charges were reported in other restructuring and merger and integration costs in the Condensed Statements of Consolidated Income. The Company expects the remainder of the costs to be incurred through fiscal 2014.

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

During the second quarter of 2013, the Company announced its plan to exit the private label roast and ground coffee portion of the acquired Sara Lee foodservice business representing approximately $75.0 to $100.0 million in annual net sales. While the Company anticipates a future reduction in net sales, the exit is expected to have a favorable impact on profit margins within the International, Foodservice, and Natural Foods segment. One-time costs associated with the exit are not expected to be significant and primarily include employee separation costs. Although the exit began in the third quarter, it is not expected to have a material impact on 2013 results. The Company expects to complete the exit during fiscal 2014. The net sales reduction in fiscal 2014 is expected to be approximately $50.0 million as exits will occur throughout the first half of the fiscal year.

 

7


The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their 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 fair value of the net identifiable tangible and intangible assets acquired, and, as such, the excess was allocated to goodwill. The amount allocated to goodwill was primarily attributable to anticipated synergies and market expansion. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.

 

Assets acquired:

  

Cash and cash equivalents

   $ 1,221   

Other current assets

     42,619   

Property, plant, and equipment

     92,775   

Intangible assets

     138,900   

Goodwill

     149,948   

Other noncurrent assets

     863   
  

 

 

 

Total assets acquired

   $ 426,326   
  

 

 

 

Liabilities assumed:

  

Current liabilities

   $ 3,599   

Noncurrent liabilities

     2,097   
  

 

 

 

Total liabilities assumed

   $ 5,696   
  

 

 

 

Net assets acquired

   $ 420,630   
  

 

 

 

Of the total goodwill assigned to the International, Foodservice, and Natural Foods segment, $136.0 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 (10-year useful life)

   $ 92,000   

Technology (10-year useful life)

     23,800   

Trademarks (6-year weighted-average useful life)

     23,100   
  

 

 

 

Total intangible assets

   $ 138,900   
  

 

 

 

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 $12.3 million through January 31, 2013, directly related to the merger and integration of Rowland Coffee, which includes approximately $5.7 million in noncash expense items that were reported in cost of products sold – restructuring and merger and integration. The remaining charges were reported in other restructuring and merger and integration costs in the Condensed Statements of Consolidated Income. Total one-time costs related to the acquisition are estimated to be approximately $25.0 million, including approximately $10.0 million of noncash charges, primarily accelerated depreciation, associated with consolidating coffee production currently in Miami into the Company’s existing facilities in New Orleans, Louisiana. The Company expects these costs to be incurred through fiscal 2015.

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

 

8


The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their 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 fair value of the net identifiable tangible and intangible assets acquired, and, as such, the excess was allocated to goodwill. The amount allocated to goodwill was primarily attributable to anticipated synergies and market expansion. The following table summarizes the 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 $84.8 million and $6.9 million was assigned to the U.S. Retail Coffee and the International, Foodservice, and Natural Foods segments, respectively. Of the total goodwill, $84.0 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   
  

 

 

 

If the Sara Lee foodservice business and Rowland Coffee acquisitions had occurred on May 1, 2011, pro forma consolidated net sales would have been approximately $4.4 billion for the nine months ended January 31, 2012, and the contribution of the acquired businesses would not have had a material impact to reported consolidated earnings for the nine months ended January 31, 2012. The pro forma consolidated results do not give effect to the synergies of the acquisitions and are not indicative of operations in current or future periods.

Note 4: Equity Method Investment

On March 26, 2012, the Company acquired a 25 percent equity interest in Guilin Seamild Biologic Technology Development Co., Ltd. (“Seamild”), a privately-owned manufacturer and marketer of oats products headquartered in Guilin in the Guangxi province of China, for $35.9 million. Seamild’s products, primarily oatmeal and oat-based cereals, are sold under the leading Seamild brand with distribution in retail channels throughout China. Seamild’s portfolio of quality, trusted products aligns with the Company’s strategy of owning and marketing leading food brands.

The initial investment in Seamild was recorded at cost and is included in other noncurrent assets in the Consolidated Balance Sheets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. Under the equity method of accounting, the investment is adjusted for the Company’s proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of

 

9


the investment and the underlying equity in net assets. The investment did not have a material impact on the International, Foodservice, and Natural Foods segment or the Company’s consolidated financial statements for the three or nine months ended January 31, 2013.

Note 5: Restructuring

In 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 includes capital investments for a new state-of-the-art food manufacturing facility in Orrville, Ohio; consolidation of coffee production in New Orleans, Louisiana; and the transition of the Company’s pickle and condiments production to third-party manufacturers.

Upon completion, the restructuring plan will result in a reduction of approximately 850 full-time positions. As of January 31, 2013, approximately 80 percent of the 850 full-time positions have been reduced and the Sherman, Texas; Dunnville, Ontario; Delhi Township, Ontario; and Kansas City, Missouri facilities have been closed. The Ste. Marie, Quebec facility is anticipated to close in the next fiscal year.

The Company expects to incur restructuring costs of approximately $245.0 million, of which $218.9 million has been incurred through January 31, 2013.

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

 

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

Total expected restructuring charge

   $ 105,000      $ 66,000      $ 35,000      $ 29,000      $ 10,000      $ 245,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 1, 2011

   $ —        $ 10,198      $ —        $ —        $ —        $ 10,198   

Charge to expense

     34,195        20,364        12,963        10,689        2,930        81,141   

Cash payments

     —          (13,754     (12,963     (10,689     (2,930     (40,336

Noncash utilization

     (34,195     (8,030     —          —          —          (42,225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2012

   $ —        $ 8,778      $ —        $ —        $ —        $ 8,778   

Charge to expense—net

     5,370        3,742        10,609        8,292        2,121        30,134   

Cash payments

     —          (4,111     (10,609     (8,292     (2,121     (25,133

Noncash utilization

     (5,370     (6     —          —          —          (5,376
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2013

   $ —        $ 8,403      $ —        $ —        $ —        $ 8,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Remaining expected restructuring charge

   $ 7,996      $ 4,745      $ 4,829      $ 4,809      $ 3,678      $ 26,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the three and nine months ended January 31, 2013, total restructuring charges of $5.4 million and $30.1 million, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $0.8 million and $6.4 million were reported in cost of products sold – restructuring and merger and integration in the three and nine months ended January 31, 2013, respectively, while the remaining charges were reported in other restructuring and merger and integration costs. During the three and nine months ended January 31, 2012, total restructuring charges of $25.6 million and $67.3 million, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $12.0 million and $33.5 million were reported in cost of products sold – restructuring and merger and integration in the three and nine months ended January 31, 2012, respectively, while the remaining charges were reported in other restructuring and merger and integration 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 had been used at the affected production facilities until they were closed or sold.

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

 

10


benefit pension and other postretirement benefit plans, see Note 11: 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.

Subsequent to January 31, 2013, the Company announced its plan to expand capacity in order to support the Company’s growth expectations for its peanut and other nut butter businesses. Production expansion will include converting the Memphis, Tennessee fruit spreads facility into a peanut butter plant. The Memphis facility was originally scheduled to close as part of the previously announced fruit spreads restructuring plan.

Upon conversion of the Memphis facility, the Company intends to relocate its natural peanut butter production, currently produced at its New Bethlehem, Pennsylvania facility, to the Memphis facility. The New Bethlehem facility will then be converted to produce specialty nut butters, which are currently produced by third-party manufacturers. The Company expects to incur additional restructuring costs of approximately $10.0 million, increasing the total estimated restructuring costs to approximately $255.0 million. These additional costs are anticipated to be recognized through fiscal 2015 and primarily consist of site preparation and equipment relocation and production start-up costs. These changes to the restructuring program will not result in an additional reduction in the total number of full-time employees.

Note 6: 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 Company’s 2010 Equity and Incentive Compensation Plan, and currently consist of restricted shares, restricted stock units (which may also be referred to as deferred stock units), performance units, and stock options.

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

 

     Three Months Ended
January 31,
     Nine Months Ended
January 31,
 
     2013      2012      2013      2012  

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

   $ 5,131       $ 3,576       $ 15,256       $ 14,320   

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

     185         415         571         2,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 5,316       $ 3,991       $ 15,827       $ 16,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related income tax benefit

   $ 1,816       $ 1,366       $ 5,354       $ 5,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of January 31, 2013, total compensation cost related to nonvested share-based awards not yet recognized was approximately $35.8 million. The weighted-average period over which this amount is expected to be recognized is 3.0 years.

Note 7: Common Shares

The following table sets forth common share information.

 

     January 31, 2013      April 30, 2012  

Common shares authorized

     150,000,000         150,000,000   

Common shares outstanding

     108,482,773         110,284,715   

Treasury shares

     20,122,392         18,320,450   

 

11


Subsequent to January 31, 2013, the Company repurchased 1,226,028 common shares for approximately $113.3 million, resulting in 5,718,272 common shares remaining available for repurchase under the Board of Directors’ authorizations as of February 28, 2013.

Note 8: Reportable Segments

The Company operates in one industry: the manufacturing and marketing of food products. The Company has 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 Pilon branded coffee; the U.S. Retail Consumer Foods segment primarily includes domestic sales of Smucker’s®, Jif®, Crisco®, 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, lodging, schools and universities, health care operators), and health and natural foods stores and distributors.

Segment profit represents revenue, less direct and allocable operating expenses, and is consistent with the way in which the Company manages its segments. However, the Company does not represent that the segments, if operated independently, would report the segment profit set forth below, as segment profit excludes certain operating expenses such as corporate administrative expenses.

 

     Three Months Ended
January 31,
    Nine Months Ended
January 31,
 
     2013     2012     2013     2012  

Net sales:

        

U.S. Retail Coffee

   $ 627,717      $ 637,886      $ 1,770,980      $ 1,755,518   

U.S. Retail Consumer Foods

     581,278        556,549        1,729,030        1,631,241   

International, Foodservice, and Natural Foods

     350,563        273,206        1,057,997        783,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,559,558      $ 1,467,641      $ 4,558,007      $ 4,170,429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit:

        

U.S. Retail Coffee

   $ 175,178      $ 138,346      $ 459,777      $ 418,015   

U.S. Retail Consumer Foods

     106,161        106,645        325,122        301,619   

International, Foodservice, and Natural Foods

     49,870        39,029        148,736        116,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment profit

   $ 331,209      $ 284,020      $ 933,635      $ 836,199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     466        464        1,122        1,090   

Interest expense

     (24,226     (23,599     (72,374     (58,469

Share-based compensation expense

     (5,131     (3,576     (15,256     (14,320

Cost of products sold—restructuring and merger and integration

     (1,166     (13,131     (7,588     (36,276

Other restructuring and merger and integration costs

     (6,870     (19,422     (35,522     (51,231

Other special project costs

     —          —          (6,669     —     

Corporate administrative expenses

     (59,735     (47,525     (172,226     (141,689

Other (expense) income—net

     (553     4        355        1,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 233,994      $ 177,235      $ 625,477      $ 537,262   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Note 9: Debt and Financing Arrangements

Long-term debt consists of the following:

 

     January 31, 2013      April 30, 2012  

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

     395,762         397,906   

3.50% Notes due October 15, 2021

     748,746         748,637   

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

   $ 2,068,508       $ 2,070,543   

Current portion of long-term debt

     50,000         50,000   
  

 

 

    

 

 

 

Total long-term debt, less current portion

   $ 2,018,508       $ 2,020,543   
  

 

 

    

 

 

 

All of the Company’s Senior Notes are unsecured and interest is paid semiannually. Scheduled principal 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. The Company may prepay at any time all or part of the Senior Notes at 100 percent of the principal amount thereof, together with accrued and unpaid interest, and any applicable make-whole amount.

The Company has available a $1.0 billion revolving credit facility with a group of nine banks that matures in July 2016. The Company did not have a balance outstanding under the revolving credit facility at January 31, 2013.

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 10: Earnings per Share

The following table sets forth the computation of net income per common share and net income per common share – assuming dilution under the two-class method.

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2013      2012      2013      2012  

Computation of net income per common share:

           

Net income

   $ 154,168       $ 116,844       $ 413,878       $ 355,614   

Net income allocated to participating securities

     1,341         974         3,594         3,394   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stockholders

   $ 152,827       $ 115,870       $ 410,284       $ 352,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     107,528,722         112,493,822         108,405,604         112,783,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share

   $ 1.42       $ 1.03       $ 3.78       $ 3.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Computation of net income per common share—assuming dilution:

           

Net income

   $ 154,168       $ 116,844       $ 413,878       $ 355,614   

Net income allocated to participating securities

     1,341         973         3,593         3,394   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stockholders

   $ 152,827       $ 115,871       $ 410,285       $ 352,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     107,528,722         112,493,822         108,405,604         112,783,014   

Dilutive effect of stock options

     19,655         49,125         25,263         52,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding—assuming dilution

     107,548,377         112,542,947         108,430,867         112,835,825   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share—assuming dilution

   $ 1.42       $ 1.03       $ 3.78       $ 3.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


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

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2013      2012      2013      2012  

Weighted-average common shares outstanding

     107,528,722         112,493,822         108,405,604         112,783,014   

Weighted-average participating shares outstanding

     943,545         945,330         949,527         1,086,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding

     108,472,267         113,439,152         109,355,131         113,869,911   

Dilutive effect of stock options

     19,655         49,125         25,263         52,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average shares outstanding—assuming dilution

     108,491,922         113,488,277         109,380,394         113,922,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 11: Pensions and Other Postretirement Benefits

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

 

     Three Months Ended January 31,  
     Defined Benefit Pension Plans     Other Postretirement Benefits  
     2013     2012     2013     2012  

Service cost

   $ 2,211      $ 2,003      $ 616      $ 586   

Interest cost

     5,975        6,523        774        762   

Expected return on plan assets

     (6,321     (6,672     —          —     

Recognized net actuarial loss (gain)

     3,280        2,151        —          (10

Termination benefit cost

     —          1,838        —          2,030   

Curtailment loss (gain)

     —          1,124        —          (115

Other

     253        271        (106     (106
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 5,398      $ 7,238      $ 1,284      $ 3,147   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended January 31,  
     Defined Benefit Pension Plans     Other Postretirement Benefits  
     2013     2012     2013     2012  

Service cost

   $ 6,829      $ 6,041      $ 1,848      $ 1,656   

Interest cost

     18,000        19,646        2,320        2,314   

Expected return on plan assets

     (18,970     (20,271     —          —     

Recognized net actuarial loss (gain)

     9,917        7,424        —          (33

Termination benefit cost

     —          1,838        —          2,030   

Curtailment loss (gain)

     —          1,124        —          (115

Settlement loss

     6,669        —          —          —     

Other

     759        856        (318     (319
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 23,204      $ 16,658      $ 3,850      $ 5,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Upon completion of the restructuring plan discussed in Note 5: 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 and nine months ended January 31, 2013 and 2012. During the nine months ended January 31, 2013, the Company paid a portion of its terminated pension participants lump-sum cash settlements in order to reduce the Company’s future pension obligation and administrative costs. The charges related to the lump-sum cash settlements are included above in settlement loss and were reported in other special project costs in the Condensed Statement of Consolidated Income during the nine months ended January 31, 2013.

Note 12: Contingencies

The Company, like other food manufacturers, is from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. The Company is currently a defendant in a variety of such legal proceedings. The Company cannot predict with certainty the ultimate results of these

 

14


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 13: 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 related 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, corn, corn sweetener, 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 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.

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 the estimated fair value of its derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.

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 in Canada. The contracts generally have maturities of less than one year. At the inception of the contract, the derivative is evaluated and documented for hedge accounting treatment. Instruments currently used to manage foreign currency exchange exposures do not meet the requirements for hedge accounting treatment and the change in value of these instruments is immediately recognized in cost of products sold. If the contract qualifies for hedge accounting treatment, to the extent the hedge is deemed effective, the associated mark-to-market gains and losses are deferred and included as a component of accumulated other comprehensive loss. 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 derivative instruments to manage changes in the fair value of its debt. Interest rate swaps mitigate the risk associated with the underlying hedged item. At the inception of the contract, the instrument is evaluated and documented for hedge accounting treatment. If the contract is designated as a cash flow hedge, the mark-to-market gains or losses on the swap are deferred and included as a component of accumulated other comprehensive loss to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings. If the contract is designated as a fair value hedge, the swap would be recognized at fair value on the balance sheet and changes in the fair value would be recognized in interest expense. Generally, changes in the fair value of the derivative are equal

 

15


to changes in the fair value of the underlying debt and have no impact to earnings. There were no interest rate swaps outstanding at January 31, 2013 and April 30, 2012.

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

 

     January 31, 2013      April 30, 2012  
     Other
Current
Assets
     Other
Current
Liabilities
     Other
Current
Assets
     Other
Current
Liabilities
 

Derivatives designated as hedging instruments:

           

Commodity contracts

   $ 1,184       $ 923       $ 6,569       $ 19,510   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity contracts

   $ 9,157       $ 3,364       $ 3,166       $ 3,631   

Foreign currency exchange contracts

     1,119         107         436         982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 10,276       $ 3,471       $ 3,602       $ 4,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives instruments

   $ 11,460       $ 4,394       $ 10,171       $ 24,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $5.9 million and $32.5 million at January 31, 2013 and April 30, 2012, respectively, that are included in other current assets in the Condensed Consolidated Balance Sheets.

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

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012     2013     2012  

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

   $ (7,959   $ (681   $ (23,304   $ (10,941

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

     (11,953     (1,546     (30,959     4,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive loss

   $ 3,994      $ 865      $ 7,655      $ (15,087
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (386   $ 15      $ (604   $ (498
  

 

 

   

 

 

   

 

 

   

 

 

 

Included as a component of accumulated other comprehensive loss at January 31, 2013 and April 30, 2012, were deferred pre-tax losses of $16.6 million and $24.3 million, respectively, related to commodity contracts. The related tax impact recognized in accumulated other comprehensive loss was a benefit of $6.0 million and $8.8 million at January 31, 2013 and April 30, 2012, respectively. The entire amount of the deferred loss included in accumulated other comprehensive loss at January 31, 2013, is expected to be recognized in earnings within one year as the related commodities are 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 January 31,     Nine Months Ended January 31,  
     2013     2012     2013     2012  

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

   $ —        $ —        $ —        $ (6,192

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

     (134     (130   $ (398     (148
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive loss

   $ 134      $ 130      $ 398      $ (6,044
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses recognized in interest expense (ineffective portion)

   $ —        $ —        $ —        $ (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Included as a component of accumulated other comprehensive loss at January 31, 2013 and April 30, 2012, were deferred pre-tax losses of $5.5 million and $5.9 million, respectively, related to the interest rate swap which was terminated in October 2011. The related tax benefit recognized in accumulated other

 

16


comprehensive loss was $2.0 million and $2.1 million at January 31, 2013 and April 30, 2012, respectively. Approximately $0.5 million of the loss will be recognized over the next 12 months.

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

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012     2013     2012  

Unrealized (losses) gains on commodity contracts

   $ (409   $ 2,647      $ 7,979      $ (3,829

Unrealized (losses) gains on foreign currency exchange contracts

     (49     (554     942        (127
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized (losses) gains recognized in cost of products sold

   $ (458   $ 2,093      $ 8,921      $ (3,956
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized gains (losses) on commodity contracts

   $ 111      $ (1,639   $ (463   $ 20,641   

Realized gains (losses) on foreign currency exchange contracts

     120        671        (84     1,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized gains (losses) recognized in cost of products sold

   $ 231      $ (968   $ (547   $ 22,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (losses) gains recognized in cost of products sold

   $ (227   $ 1,125      $ 8,374      $ 18,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     January 31, 2013      April 30, 2012  

Commodity contracts

   $ 433,432       $ 983,381   

Foreign currency exchange contracts

     68,344         94,424   

Note 14: 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. The fair value of the Company’s financial instruments, other than its long-term debt, approximates their carrying amounts. The following table provides information on the carrying amount and fair value of the Company’s financial instruments.

 

     January 31, 2013     April 30, 2012  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Other investments

   $ 46,259      $ 46,259      $ 36,173      $ 36,173   

Derivative financial instruments—net

     7,066        7,066        (13,952     (13,952

Long-term debt

     (2,068,508     (2,423,370     (2,070,543     (2,443,514

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.

 

17


The following tables summarize the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for the Company’s financial instruments.

 

     Quoted Prices in     Significant     Significant         
     Active Markets for     Observable     Unobservable      Fair Value at  
     Identical Assets     Inputs     Inputs      January 31,  
     (Level 1)     (Level 2)     (Level 3)      2013  

Other investments: (A)

         

Equity mutual funds

   $ 19,212      $ —        $ —         $ 19,212   

Municipal obligations

     —          26,549        —           26,549   

Other investments

     498        —          —           498   

Derivatives: (B)

         

Commodity contracts—net

     5,868        186        —           6,054   

Foreign currency exchange contracts—net

     107        905        —           1,012   

Long-term debt (C)

     (794,049     (1,629,321     —           (2,423,370
  

 

 

   

 

 

   

 

 

    

 

 

 

Total financial instruments measured at fair value

   $ (768,364   $ (1,601,681   $ —         $ (2,370,045
  

 

 

   

 

 

   

 

 

    

 

 

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

Other investments: (A)

         

Equity mutual funds

   $ 14,649      $ —        $ —         $ 14,649   

Municipal obligations

     —          20,392        —           20,392   

Other investments

     1,132        —          —           1,132   

Derivatives: (B)

         

Commodity contracts—net

     (12,788     (618     —           (13,406

Foreign currency exchange contracts—net

     (1     (545     —           (546

Long-term debt (C)

     (777,023     (1,666,491     —           (2,443,514
  

 

 

   

 

 

   

 

 

    

 

 

 

Total financial instruments measured at fair value

   $ (774,031   $ (1,647,262   $ —         $ (2,421,293
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(A) 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 valuation techniques which utilize inputs that are derived principally from or corroborated by observable market data. As of January 31, 2013, the Company’s municipal obligations are scheduled to mature as follows: $1.1 million in 2013, $0.7 million in 2014, $2.7 million in 2015, $0.5 million in 2016, and $21.5 million in 2017 and beyond.
(B) The Company’s Level 1 derivatives are valued using quoted market prices for identical instruments in active markets. The Level 2 derivatives are valued using 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 13: Derivative Financial Instruments.
(C) The Company’s long-term debt is comprised of public Notes classified as Level 1 and private Senior Notes classified as Level 2. The public Notes are traded in an active secondary market and valued using quoted prices. The value of the private Senior Notes is based on the net present value of each interest and principal payment, calculated utilizing an interest rate derived from a market yield curve. For additional information, see Note 9: Debt and Financing Arrangements.

 

18


Note 15: Income Taxes

During the three months ended January 31, 2013 and 2012, the Company’s effective tax rate was 34.1 percent. During the nine months ended January 31, 2013 and 2012, the Company’s effective tax rate was 33.8 percent. 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 $3.1 million, primarily as a result of expiring statute of limitations periods.

Note 16: Guarantor and Non-Guarantor Financial Information

In October 2011, the Company filed a registration statement on Form S-3 registering certain securities described therein, including debt securities which are guaranteed by certain of the Company’s subsidiaries. The Company issued $750.0 million of 3.50 percent Notes pursuant to the registration statement that are fully and unconditionally guaranteed, on a joint and several basis, by the following 100 percent wholly-owned subsidiaries of the Company: J.M. Smucker LLC and The Folgers Coffee Company (the “subsidiary guarantors”). A subsidiary guarantor will be released from its obligations under the indenture governing the notes (a) if the Company exercises its legal defeasance option or its covenant defeasance option or if its obligations under the indenture are discharged in accordance with the terms of the indenture or (b) upon delivery of an officer’s certificate to the trustee that the subsidiary guarantor does not guarantee the Company’s obligations under any of the Company’s other primary senior indebtedness and that any other guarantees of such primary senior indebtedness of the subsidiary guarantor have been released other than through discharges as a result of payment by such guarantor on such guarantees.

The following condensed consolidated financial information for the Company, the subsidiary guarantors, and the non-guarantor subsidiaries is provided below. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Company’s 100 percent wholly-owned subsidiary guarantors and non-guarantor subsidiaries. The Company has accounted for investments in subsidiaries using the equity method.

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

 

     Three Months Ended January 31, 2013  
     The J.M. Smucker     Subsidiary     Non-Guarantor              
     Company (Parent)     Guarantors     Subsidiaries     Eliminations     Consolidated  

Net sales

   $ 1,144,268      $ 326,125      $ 1,465,800      $ (1,376,635   $ 1,559,558   

Cost of products sold

     994,229        300,108        1,099,700        (1,370,708     1,023,329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     150,039        26,017        366,100        (5,927     536,229   

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

     41,708        10,396        205,782        —          257,886   

Amortization

     1,195        —          23,005        —          24,200   

Other operating income—net

     (2,464     (793     (907     —          (4,164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     109,600        16,414        138,220        (5,927     258,307   

Interest (expense) income—net

     (24,115     299        56        —          (23,760

Other (expense) income—net

     (10,124     324        9,247        —          (553

Equity in net earnings of subsidiaries

     103,357        41,944        16,735        (162,036     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     178,718        58,981        164,258        (167,963     233,994   

Income taxes

     24,550        102        55,174        —          79,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 154,168      $ 58,879      $ 109,084      $ (167,963   $ 154,168   

Other comprehensive income, net of tax

     5,354        3,735        3,793        (7,528     5,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 159,522      $ 62,614      $ 112,877      $ (175,491   $ 159,522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

 

     Three Months Ended January 31, 2012  
     The J.M. Smucker     Subsidiary     Non-Guarantor              
     Company (Parent)     Guarantors     Subsidiaries     Eliminations     Consolidated  

Net sales

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

Cost of products sold

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

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

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

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

Amortization

     1,550        —          20,481        —          22,031   

Loss on divestiture and other operating (income) expense—net

     (627     (717     194        —          (1,150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

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

Interest (expense) income—net

     (23,353     721        (503     —          (23,135

Other (expense) income—net

     (11     96        (81     —          4   

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

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

Income taxes

     15,431        245        44,715        —          60,391   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

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

Other comprehensive (loss) income, net of tax

     (2,875     755        52        (807     (2,875
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 113,969      $ 76,371      $ 88,458      $ (164,829   $ 113,969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME   
     Nine Months Ended January 31, 2013  
     The J.M. Smucker     Subsidiary     Non-Guarantor              
     Company (Parent)     Guarantors     Subsidiaries     Eliminations     Consolidated  

Net sales

   $ 3,331,257      $ 1,002,619      $ 4,312,763      $ (4,088,632   $ 4,558,007   

Cost of products sold

     2,931,429        921,062        3,238,047        (4,080,444     3,010,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     399,828        81,557        1,074,716        (8,188     1,547,913   

Selling, distribution, and administrative expenses, restructuring, merger and integration, and other special project costs

     157,670        33,134        591,806        —          782,610   

Amortization

     7,064        —          65,530        —          72,594   

Other operating (income) expense—net

     (3,174     (2,041     1,550        —          (3,665
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     238,268        50,464        415,830        (8,188     696,374   

Interest (expense) income—net

     (72,046     895        (101     —          (71,252

Other (expense) income—net

     (624     999        (20     —          355   

Equity in net earnings of subsidiaries

     302,396        115,404        51,454        (469,254     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     467,994        167,762        467,163        (477,442     625,477   

Income taxes

     54,116        304        157,179        —          211,599   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 413,878      $ 167,458      $ 309,984      $ (477,442   $ 413,878   

Other comprehensive income, net of tax

     9,132        5,338        3,395        (8,733     9,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 423,010      $ 172,796      $ 313,379      $ (486,175   $ 423,010   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME   
     Nine Months Ended January 31, 2012  
     The J.M. Smucker     Subsidiary     Non-Guarantor              
     Company (Parent)     Guarantors     Subsidiaries     Eliminations     Consolidated  

Net sales

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

Cost of products sold

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

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

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

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

Amortization

     4,228        —          58,597        —          62,825   

Loss on divestiture and other operating (income) expense—net

     (711     (469     11,709        —          10,529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

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

Interest (expense) income—net

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

Other income—net

     678        330        950        —          1,958   

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

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

Income taxes

     54,595        893        126,160        —          181,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

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

Other comprehensive loss, net of tax

     (36,355     (8,962     (28,055     37,017        (36,355
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 319,259      $ 217,247      $ 222,048      $ (439,295   $ 319,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


CONDENSED CONSOLIDATED BALANCE SHEETS

 

     January 31, 2013  
     The J.M. Smucker      Subsidiary      Non-Guarantor               
     Company (Parent)      Guarantors      Subsidiaries      Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 294,693       $ —         $ 144,121       $ —        $ 438,814   

Inventories

     —           134,825         766,382         (23,051     878,156   

Other current assets

     359,252         1,090         68,633         —          428,975   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Current Assets

     653,945         135,915         979,136         (23,051     1,745,945   

PROPERTY, PLANT, AND EQUIPMENT

     229,287         425,303         467,025         —          1,121,615   

INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY

     5,370,945         4,245,444         969,653         (10,586,042     —     

OTHER NONCURRENT ASSETS

             

Goodwill

     1,081,988         —           1,971,758         —          3,053,746   

Other intangible assets—net

     511,056         —           2,602,968         —          3,114,024   

Other noncurrent assets

     68,366         14,923         65,835         —          149,124   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Noncurrent Assets

     1,661,410         14,923         4,640,561         —          6,316,894   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,915,587       $ 4,821,585       $ 7,056,375       $ (10,609,093   $ 9,184,454   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

CURRENT LIABILITIES

   $ 312,261       $ 92,379       $ 188,823       $ —        $ 593,463   

NONCURRENT LIABILITIES

             

Long-term debt

     2,018,508         —           —           —          2,018,508   

Deferred income taxes

     108,103         —           891,221         —          999,324   

Other noncurrent liabilities

     216,479         19,928         76,516         —          312,923   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Noncurrent Liabilities

     2,343,090         19,928         967,737         —          3,330,755   

SHAREHOLDERS’ EQUITY

     5,260,236         4,709,278         5,899,815         (10,609,093     5,260,236   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,915,587       $ 4,821,585       $ 7,056,375       $ (10,609,093   $ 9,184,454   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
CONDENSED CONSOLIDATED BALANCE SHEETS   
     April 30, 2012  
     The J.M. Smucker      Subsidiary      Non-Guarantor               
     Company (Parent)      Guarantors      Subsidiaries      Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 108,281       $ —         $ 121,427       $ —        $ 229,708   

Inventories

     —           161,411         815,030         (14,865     961,576   

Other current assets

     334,220         3,499         114,462         —          452,181   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Current Assets

     442,501         164,910         1,050,919         (14,865     1,643,465   

PROPERTY, PLANT, AND EQUIPMENT

     220,354         389,163         486,572         —          1,096,089   

INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY

     5,684,496         4,241,145         702,550         (10,628,191     —     

OTHER NONCURRENT ASSETS

             

Goodwill

     981,606         —           2,073,012         —          3,054,618   

Other intangible assets—net

     435,713         —           2,751,294         —          3,187,007   

Other noncurrent assets

     59,992         11,137         62,918         —          134,047   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Noncurrent Assets

     1,477,311         11,137         4,887,224         —          6,375,672   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,824,662         4,806,355       $ 7,127,265       $ (10,643,056   $ 9,115,226   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

CURRENT LIABILITIES

   $ 323,608       $ 101,714       $ 191,650       $ —        $ 616,972   

NONCURRENT LIABILITIES

             

Long-term debt

     2,020,543         —           —           —          2,020,543   

Deferred income taxes

     104,822         311         887,559         —          992,692   

Other noncurrent liabilities

     212,303         20,031         89,299         —          321,633   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Noncurrent Liabilities

     2,337,668         20,342         976,858         —          3,334,868   

SHAREHOLDERS’ EQUITY

     5,163,386         4,684,299         5,958,757         (10,643,056     5,163,386   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 7,824,662       $ 4,806,355       $ 7,127,265       $ (10,643,056   $ 9,115,226   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

21


CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

 

     Nine Months Ended January 31, 2013  
     The J.M. Smucker     Subsidiary     Non-Guarantor               
     Company (Parent)     Guarantors     Subsidiaries     Eliminations      Consolidated  

Net Cash Provided by Operating Activities

   $ 119,090      $ 103,388      $ 461,161      $ —         $ 683,639   

INVESTING ACTIVITIES

           

Additions to property, plant, and equipment

     (24,941     (70,704     (50,894     —           (146,539

Proceeds from disposal of property, plant, and equipment

     —          69        3,046        —           3,115   

Other—net

     (9,449     3,911        22,735        —           17,197   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Cash Used for Investing Activities

     (34,390     (66,724     (25,113     —           (126,227

FINANCING ACTIVITIES

           

Quarterly dividends paid

     (166,475     —          —          —           (166,475

Purchase of treasury shares

     (175,490     —          —          —           (175,490

Proceeds from stock option exercises

     1,881        —          —          —           1,881   

Intercompany

     438,913        (36,664     (402,249     —           —     

Other—net

     2,883        —          (10,000     —           (7,117
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Cash Provided by (Used for) Financing Activities

     101,712        (36,664     (412,249             (347,201

Effect of exchange rate changes on cash

     —          —          (1,105             (1,105
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     186,412        —          22,694                209,106   

Cash and cash equivalents at beginning of period

     108,281        —          121,427                229,708   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents at End of Period

   $ 294,693      $      $ 144,121      $       $ 438,814   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS   
     Nine Months Ended January 31, 2012  
     The J.M. Smucker     Subsidiary     Non-Guarantor               
     Company (Parent)     Guarantors     Subsidiaries     Eliminations      Consolidated  

Net Cash Provided by Operating Activities

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

INVESTING ACTIVITIES

           

Businesses acquired, net of cash acquired

     —          —          (742,355     —           (742,355

Additions to property, plant, and equipment

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

Proceeds from divestiture

     —          —          9,268        —           9,268   

Sales and maturities of marketable securities

     18,600        —          —          —           18,600   

Proceeds from disposal of property, plant, and equipment

     262        320        2,202        —           2,784   

Other—net

     —          —          (1,021     —           (1,021
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Cash Used for Investing Activities

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

FINANCING ACTIVITIES

           

Proceeds from long-term debt—net

     748,560        —          —          —           748,560   

Quarterly dividends paid

     (159,389     —          —          —           (159,389

Purchase of treasury shares

     (90,522     —          —          —           (90,522

Proceeds from stock option exercises

     1,719        —          —          —           1,719   

Intercompany

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

Other—net

     (2,915     —          —          —           (2,915
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Cash (Used for) Provided by Financing Activities

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

Effect of exchange rate changes

     —          —          (6,494     —           (6,494
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     57,092        —          (6,509             50,583   

Cash and cash equivalents at beginning of period

     206,845        —          113,000                319,845   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents at End of Period

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

22


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

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month and nine-month periods ended January 31, 2013 and 2012. Results for the three and nine months ended January 31, 2013 and 2012, include the operations of the North American foodservice coffee and hot beverage business acquired from Sara Lee Corporation (“Sara Lee foodservice business”) since the completion of the acquisition on January 3, 2012.

The Company is the owner of all trademarks, except for the following which are used under license: Pillsbury, the Barrelhead logo, and the Doughboy character are trademarks of The Pillsbury Company, LLC; Carnation® is a trademark of Société des Produits Nestlé S.A.; Dunkin’ Donuts is a registered trademark of DD IP Holder, LLC; and Douwe Egberts and Pickwick® are registered trademarks of D.E Master Blenders 1753 N.V. Borden® and Elsie are also trademarks used under license.

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

Results of Operations

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012     2013     2012  
     (Dollars in millions, except per share data)  

Net sales

   $ 1,559.6      $ 1,467.6      $ 4,558.0      $ 4,170.4   

Gross profit

   $ 536.2      $ 465.7      $ 1,547.9      $ 1,395.4   

% of net sales

     34.4     31.7     34.0     33.5

Operating income

   $ 258.3      $ 200.4      $ 696.4      $ 592.7   

% of net sales

     16.6     13.7     15.3     14.2

Net income:

        

Net income

   $ 154.2      $ 116.8      $ 413.9      $ 355.6   

Net income per common share—assuming dilution

   $ 1.42      $ 1.03      $ 3.78      $ 3.12   

Gross profit excluding special project costs (1)

   $ 537.4      $ 478.8      $ 1,555.5      $ 1,431.7   

% of net sales

     34.5     32.6     34.1     34.3

Operating income excluding special project costs (1)

   $ 266.3      $ 232.9      $ 746.2      $ 680.2   

% of net sales

     17.1     15.9     16.4     16.3

Net income excluding special project costs: (1)

        

Income

   $ 159.4      $ 138.3      $ 446.8      $ 413.5   

Income per common share—assuming dilution

   $ 1.47      $ 1.22      $ 4.08      $ 3.63   

 

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

Net sales in the third quarter and first nine months of 2013 increased six percent and nine percent, respectively, compared to 2012, due to the contribution from the acquired Sara Lee foodservice business and favorable sales mix. Operating income increased 29 percent and 17 percent in the third quarter and first nine months of 2013, respectively, compared to 2012. Excluding the impact of restructuring, merger and integration, and certain pension settlement costs (“special project costs”), operating income increased 14

 

23


percent and 10 percent in the third quarter and first nine months of 2013, respectively. Included in the first nine months of 2012 was a loss on divestiture of $11.3 million.

The Company’s net income per diluted share was $1.42 and $1.03 for the third quarters of 2013 and 2012, respectively, and $3.78 and $3.12 for the first nine months of 2013 and 2012, respectively, an increase of 38 percent for the quarter and 21 percent for the first nine months. The Company’s net income per diluted share excluding special project costs increased 20 percent in the third quarter of 2013 to $1.47, compared to $1.22 in the third quarter of 2012, and increased 12 percent for the first nine months of 2013 to $4.08, compared to $3.63 in 2012. In addition to gross profit improvements, net income per diluted share and net income per diluted share excluding special project costs for the third quarter and first nine months of 2013 benefited from a decrease in weighted-average shares outstanding as a result of the Company’s share repurchase activity over the past year.

Net Sales

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012      Increase
(Decrease)
    %     2013     2012     Increase
(Decrease)
    %  
     (Dollars in millions)  

Net sales

   $ 1,559.6      $ 1,467.6       $ 91.9        6   $ 4,558.0      $ 4,170.4      $ 387.6        9

Adjust for certain noncomparable items:

                 

Acquisition

     (59.7     —            (59.7     (4     (237.1     —           (237.1     (6

Divestiture

     —          —            —          0        —           (8.0     8.0        0   

Foreign exchange

     (3.4     —            (3.4     (0     0.0        —           0.0        0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,496.5      $ 1,467.6       $ 28.9        2   $ 4,320.9      $ 4,162.5      $ 158.4        4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts may not add due to rounding.

Net sales increased $91.9 million, or six percent, in the third quarter of 2013, compared to the third quarter of 2012, primarily due to the Sara Lee foodservice business acquisition and favorable sales mix. As a result of the acquisition in January 2012, an additional two months of net sales, totaling $59.7 million, were recognized in the third quarter of 2013. Favorable sales mix in the quarter was driven by the Company’s K-Cups and peanut butter products, which are higher priced per pound, compared to other products within the Company’s portfolio. Overall net price realization was lower primarily due to price declines on coffee taken earlier in the fiscal year. Volume gains realized in Jif peanut butter and Smucker’s fruit spreads were offset by decreases in the Pillsbury brand and the Canadian Robin Hood® and Five Roses® flour brands. Overall volume, based on weight and excluding the incremental impact of the acquisition, decreased one percent in the third quarter of 2013, compared to the third quarter of 2012.

Net sales for the first nine months were $4,558.0 million in 2013, and increased $387.6 million, or nine percent, compared to the first nine months of 2012, due primarily to the incremental impact of the acquired Sara Lee foodservice business and favorable sales mix. Overall net price realization was slightly higher for the first nine months of 2013, compared to 2012, as price increases taken on peanut butter during fiscal 2012 more than offset the impact of coffee price declines. Overall volume, based on weight and excluding acquisition, was flat for the first nine months of 2013, compared to 2012. Volume gains were realized in Jif peanut butter, Folgers coffee, and Robin Hood and Five Roses flour in Canada but were offset by volume declines in Pillsbury baking mixes and Bicks® pickles. Favorable sales mix for the first nine months was driven by volume growth in the Company’s coffee brands, including K-Cups.

 

24


Operating Income

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

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012     2013     2012  

Gross profit

     34.4     31.7     34.0     33.5

Selling, distribution, and administrative expenses:

        

Marketing

     4.8     4.8     5.1     5.1

Selling

     3.3        3.2        3.3        3.2   

Distribution

     2.6        2.6        2.6        2.8   

General and administrative

     5.4        4.7        5.3        5.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, distribution, and administrative expenses

     16.1     15.3     16.2     16.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization

     1.6        1.5        1.6        1.5   

Other restructuring, merger and integration, and special project costs

     0.4        1.3        0.9        1.2   

Loss on divestiture

     0.0        0.0        0.0        0.3   

Other operating income—net

     (0.3     (0.1     (0.1     (0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     16.6     13.7     15.3     14.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts may not add due to rounding.

Gross profit increased $70.5 million, or 15 percent, in the third quarter of 2013, compared to 2012, and gross margin increased from 31.7 percent to 34.4 percent over the same period. The increase in gross profit was due to favorable mix, lower commodity costs, the impact of an additional two months of the Sara Lee foodservice business, and a decrease in special project costs. Lower commodity costs were driven by green coffee offset somewhat by higher peanut costs. Excluding special project costs, gross profit increased $58.6 million, or 12 percent, and improved to 34.5 percent of net sales in the third quarter of 2013, compared to 32.6 percent in the third quarter of 2012.

Selling, distribution, and administrative (“SD&A”) expenses increased 12 percent in the third quarter of 2013, compared to the third quarter of 2012, and increased as a percentage of net sales from 15.3 percent to 16.1 percent. Marketing, selling, and distribution expenses increased six percent, 10 percent, and five percent, respectively, and were primarily driven by the acquired Sara Lee foodservice business. General and administrative expenses increased 21 percent due to increased incentive compensation and employee benefit costs.

Restructuring and merger and integration costs decreased $24.5 million in the third quarter of 2013, compared to the third quarter of 2012, due primarily to the closing of several facilities included in the Company’s restructuring plan during 2012.

Operating income increased $57.9 million, or 29 percent, in the third quarter of 2013, compared to 2012, and operating margin increased from 13.7 percent to 16.6 percent over the same period. Excluding the impact of special project costs in both periods, operating income increased $33.4 million, or 14 percent, and increased from 15.9 percent of net sales in 2012 to 17.1 percent in 2013.

Gross profit increased $152.5 million, or 11 percent, in the first nine months of 2013, compared to 2012, and gross margin increased from 33.5 percent to 34.0 percent over the same period. The increase in gross profit was primarily due to the acquired Sara Lee foodservice business, favorable mix, and a $12.9 million increase in the benefit of unrealized mark-to-market adjustments on derivative contracts, which increased to a gain of $8.9 million in the first nine months of 2013 from a loss of $4.0 million in the first nine months of 2012. Overall commodity costs were relatively flat for the first nine months of 2013, compared to 2012, as lower green coffee costs were offset by higher costs for peanuts. The impact of lower green coffee costs was mostly offset by lower net price realization as a result of a coffee price decline in May 2012. Price increases taken on peanut butter during fiscal 2012 more than offset the impact of higher peanut costs. Excluding special project costs,

 

25


gross profit increased $123.8 million, or nine percent, and gross margin was 34.1 percent in the first nine months of 2013, compared to 34.3 percent in 2012.

SD&A expenses in the first nine months of 2013 increased nine percent, compared to the first nine months of 2012, but were relatively flat as a percentage of net sales. Marketing and selling expenses increased eight and 12 percent, respectively, generally in line with the increase in net sales and driven in part by the acquired Sara Lee foodservice business. General and administrative expenses increased 13 percent primarily due to increased incentive compensation and employee benefit costs.

Restructuring and merger and integration costs decreased $44.4 million in the first nine months of 2013, compared to 2012, due primarily to the closing of several facilities included in the Company’s restructuring plan during 2012.

Higher amortization expense was recognized in the first nine months of 2013, compared to 2012, primarily related to intangibles associated with the Sara Lee foodservice business acquisition.

Operating income increased $103.7 million, or 17 percent, in the first nine months of 2013, compared to 2012, and operating margin increased from 14.2 percent to 15.3 percent over the same period. Excluding the impact of special project costs in both periods, operating income increased $66.0 million, or 10 percent, and was 16.4 percent of net sales in the first nine months of 2013, compared to 16.3 percent in 2012. Both operating income measures include a loss on divestiture of $11.3 million in 2012.

Other

Interest expense increased $13.9 million in the first nine months of 2013, compared to 2012, primarily representing the cost of higher average debt outstanding due to the Company’s October 2011 public debt issuance.

Income taxes increased $19.4 million and $30.0 million in the third quarter and first nine months of 2013, respectively, compared to 2012, in line with the increase in income before taxes. The effective tax rate remained consistent during both the third quarter and first nine months of 2013, compared to 2012.

Restructuring

In 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 includes capital investments for a new state-of-the-art food manufacturing facility in Orrville, Ohio; consolidation of coffee production in New Orleans, Louisiana; and the transition of the Company’s pickle and condiments production to third-party manufacturers and is a long-term investment to optimize production capacity and lower the overall cost structure.

Upon completion, the restructuring plan will result in a reduction of approximately 850 full-time positions and the closing of five of the Company’s facilities. As of January 31, 2013, approximately 80 percent of the 850 full-time positions have been reduced and the Sherman, Texas; Dunnville, Ontario; Delhi Township, Ontario; and Kansas City, Missouri facilities have been closed. The Ste. Marie, Quebec facility is anticipated to close in the next fiscal year. The Company’s pickle and condiments production was transitioned to third-party manufacturers during fiscal 2012. The consolidation of coffee production in New Orleans is complete. Approximately one-half of the retail fruit spreads production has been transitioned to the new manufacturing facility in Orrville with the remaining production expected to be transitioned by the end of calendar 2013. The overall restructuring initiative is delivering the savings expected to date.

The Company expects to incur restructuring costs of approximately $245.0 million, of which $218.9 million has been incurred through January 31, 2013. Restructuring costs of $5.4 million and $30.1 million have been incurred in the third quarter and first nine months of 2013, respectively, compared to $25.6 million and $67.3 million in the third quarter and first nine months of 2012, respectively.

 

26


Subsequent to January 31, 2013, the Company announced its plan to expand peanut butter production in order to support the Company’s growth expectations for the peanut and other nut butter businesses, including efforts to grow the Jif brand. Production expansion will include converting the Memphis, Tennessee fruit spreads facility into a peanut butter plant. The Memphis facility was originally scheduled to close as part of the previously announced fruit spreads restructuring plan.

Upon completion of the conversion of the Memphis facility, the Company also intends to relocate its natural peanut butter production, currently produced at its New Bethlehem, Pennsylvania facility, to the Memphis facility. The New Bethlehem facility will then be converted to produce specialty nut butters, which are currently produced by third-party manufacturers. The total capital investment for these peanut and nut butter projects is estimated at approximately $60.0 million. Additional restructuring costs will approximate $10.0 million, increasing the total estimated restructuring costs to approximately $255.0 million. The Company expects the majority of the spend related to this initiative to occur through fiscal 2015. The decision to utilize the Memphis facility for peanut butter production does not impact the total savings originally estimated related to the fruit spreads restructuring plan.

Segment Results

 

     Three Months Ended January 31,     Nine Months Ended January 31,  
     2013     2012     % Increase
(Decrease)
    2013     2012     % Increase
(Decrease)
 
     (Dollars in millions)  

Net sales:

            

U.S. Retail Coffee

   $ 627.7      $ 637.9        (2 )%    $ 1,771.0      $ 1,755.5        1

U.S. Retail Consumer Foods

     581.3        556.5        4        1,729.0        1,631.2        6   

International, Foodservice, and Natural Foods

     350.6        273.2        28        1,058.0        783.7        35   

Segment profit:

            

U.S. Retail Coffee

   $ 175.2      $ 138.3        27   $ 459.8      $ 418.0        10

U.S. Retail Consumer Foods

     106.2        106.6        (0     325.1        301.6        8   

International, Foodservice, and Natural Foods

     49.9        39.0        28        148.7        116.6        28   

Segment profit margin:

            

U.S. Retail Coffee

     27.9     21.7       26.0     23.8  

U.S. Retail Consumer Foods

     18.3        19.2          18.8        18.5     

International, Foodservice, and Natural Foods

     14.2        14.3          14.1        14.9     

U.S. Retail Coffee

The U.S. Retail Coffee segment net sales decreased two percent in the third quarter of 2013, compared to the third quarter of 2012, reflecting price declines taken over the past year. Segment volume increased one percent in the third quarter of 2013, compared to the third quarter of 2012, led by K-Cups, Café Bustelo, and Café Pilon. Volume of the overall Folgers brand was flat as the growth experienced in K-Cups was offset by a slight decline in roast and ground that was attributed to a supply constraint for certain retail coffee canisters that arose in the second quarter. The constraint was resolved by the end of the third quarter and did not have a material effect on the financial results for fiscal 2013. Dunkin’ Donuts packaged coffee volume decreased two percent, reflecting increased competitive activities. The impact of sales mix was favorable due to K-Cups. Net sales of K-Cups increased $30.4 million, or 51 percent, compared to the third quarter of 2012, and contributed five percentage points of growth to segment net sales, while contributing only one percentage point of growth to volume.

The U.S. Retail Coffee segment profit increased $36.8 million, or 27 percent, in the third quarter of 2013, compared to the third quarter of 2012. Green coffee costs were significantly lower in the third quarter of 2013, compared to the third quarter of 2012. The Company reduced coffee prices in May 2012 with the expectation that it would recognize lower green coffee costs as it progressed through its fiscal year. The majority of these lower costs was recognized during the quarter and, in large part, offset the unfavorable impact realized earlier in the year. Mix also contributed to the increase in segment profit in the third quarter of 2013, compared to

 

27


2012, offset somewhat by an increase in marketing expenses. Segment profit margin improved from 21.7 percent of net sales in the third quarter of 2012 to 27.9 percent in the third quarter of 2013.

For the first nine months of 2013, net sales for the U.S. Retail Coffee segment increased one percent, compared to the first nine months of 2012, as favorable sales mix driven primarily by K-Cups and increased volume more than offset the impact of price declines taken since the third quarter of 2012. Segment volume increased four percent in the first nine months of 2013, compared to the first nine months of 2012, as the Folgers and Café Bustelo brands increased three percent and 21 percent, respectively, and Dunkin’ Donuts packaged coffee increased six percent. Net sales of K-Cups increased $97.4 million, compared to the first nine months of 2012. K-Cups represented six percentage points of segment net sales growth, while contributing only one percentage point growth to volume.

Segment profit for the first nine months of 2013 increased $41.8 million, or 10 percent, compared to the first nine months of 2012, primarily due to favorable mix and volume growth. The net impact of lower prices and green coffee costs did not have a material effect on segment profit. Unrealized mark-to-market adjustments on derivative contracts, which were a gain of $3.9 million in the first nine months of 2013, compared to a loss of $0.6 million in 2012, represented $4.5 million of the segment profit increase. Segment profit margin was 26.0 percent in the first nine months of 2013, compared to 23.8 percent in 2012.

In February 2013, in response to sustained declines in green coffee costs, the Company announced an additional price decline of approximately six percent on the majority of its packaged coffee products sold in the United States, primarily consisting of items sold under the Folgers and Dunkin Donuts brands.

U.S. Retail Consumer Foods

The U.S. Retail Consumer Foods segment net sales increased four percent in the third quarter of 2013, compared to the third quarter of 2012, as the impact of favorable sales mix and higher net price realization offset a one percent decline in segment volume. Jif brand net sales increased 21 percent in the third quarter of 2013, compared to 2012, reflecting a 17 percent volume increase. Jif peanut butter volume in last year’s third quarter was impacted by the 30 percent price increase at the beginning of that quarter along with the consumer buy-in that occurred in advance of it. Smucker’s fruit spreads net sales and volume increased five percent and nine percent, respectively, in the third quarter of 2013, compared to 2012, due to more competitive pricing and increased promotional activities. Net sales and volume of Smucker’s Uncrustables® frozen sandwiches both increased 38 percent during the same period, benefiting from new distribution and new product introductions. Net sales for the Pillsbury brand decreased four percent, while volume decreased nine percent, in the third quarter of 2013, compared to 2012, with approximately one-half of the volume decline due to the tonnage impact of the previously announced cake mix downsizing. Canned milk net sales and volume decreased 10 percent and five percent, respectively, during the third quarter of 2013, compared to 2012.

The U.S. Retail Consumer Foods segment profit was flat in the third quarter of 2013, compared to the third quarter of 2012 which benefited from the timing of peanut butter pricing actions. Segment profit was positively impacted by mix along with decreases in marketing and selling expenses. Overall raw material costs recognized were higher in the third quarter of 2013, compared to 2012, primarily due to peanuts. Although elevated peanut costs are expected to continue in the fourth quarter due to long-term contracts in place, it is expected that the size and quality of the calendar 2012 U.S. peanut crop will lead to lower peanut costs in the future. In anticipation of lower peanut costs in future periods, the Company decreased peanut butter prices by approximately 10 percent late in the third quarter. As a result, higher peanut costs were not fully recovered by net price realization and contributed to the flat quarter-over-quarter segment profit. However, the Company believes that the price decline properly reflects its role as the peanut butter category leader and achieves the Company’s desired pricing objective based on its anticipated peanut costs over the course of the upcoming fiscal year. Segment profit margin was 18.3 percent in the third quarter of 2013, compared to 19.2 percent in 2012.

Net sales for the U.S. Retail Consumer Foods segment increased six percent in the first nine months of 2013, compared to the first nine months of 2012, due primarily to higher net price realization and favorable sales mix, offset partially by a two percent decline in segment volume. Jif brand net sales increased 29 percent in the

 

28


first nine months of 2013, compared to the first nine months of 2012, primarily reflecting price increases taken since the third quarter of 2012. Volume of the Jif brand increased five percent over the same period last year. Smucker’s fruit spreads net sales and volume were both down two percent, impacted by higher pricing during key promotional periods and competitive activities during the first nine months of 2013. Net sales and volume of Smucker’s Uncrustables frozen sandwiches increased 26 percent and 23 percent, respectively, in the first nine months of 2013, compared to the first nine months of 2012, benefiting from new distribution. Crisco brand net sales and volume decreased five percent and two percent, respectively, in the first nine months of 2013, compared to 2012, resulting from declines at a key retailer. For the same period, net sales for the Pillsbury brand increased two percent, while volume decreased five percent mostly due to the tonnage impact of cake mix downsizing.

Segment profit increased $23.5 million, or eight percent, in the first nine months of 2013, compared to the first nine months of 2012, led by peanut butter. Overall raw material costs were higher for the first nine months of 2013 but were more than offset by higher net price realization. Price increases taken in fiscal 2012, which more than offset higher peanut costs in fiscal 2013, were the primary driver for the increase in profitability. Segment profit was also impacted by decreases in marketing expense and favorable mix, partially offset by the volume decline. Unrealized mark-to-market adjustments on derivative contracts, which were a gain of $2.0 million in the first nine months of 2013, compared to a loss of $1.7 million in 2012, represented $3.6 million of the segment profit increase. Segment profit margin improved from 18.5 percent of net sales in the first nine months of 2012 to 18.8 percent in the first nine months of 2013.

International, Foodservice, and Natural Foods

Net sales in the International, Foodservice, and Natural Foods segment increased 28 percent in the third quarter of 2013, compared to the third quarter of 2012. The additional two months of Sara Lee foodservice business net sales totaled $59.7 million and represented 22 percentage points of the net sales growth. Excluding the impact of acquisition and foreign exchange, segment net sales increased five percent over the same period last year primarily due to sales mix, driven by coffee, and higher net price realization. Volume declined one percent primarily driven by the Robin Hood and Five Roses Canadian flour brands, partially offset by gains in natural beverages.

Segment profit increased $10.8 million, or 28 percent, in the third quarter of 2013, compared to 2012. The Sara Lee foodservice business, including the profit from the additional two months of activity, contributed over one-half of the segment profit increase in the third quarter of 2013, compared to the third quarter of 2012. Favorable mix contributed most of the remaining segment profit increase, offset somewhat by higher distribution expenses. Overall higher raw material costs were more than offset by higher prices in the third quarter of 2013, compared to the third quarter of 2012 which was impacted by an unfavorable price to cost relationship, notably for coffee and natural beverages.

The International, Foodservice, and Natural Foods segment net sales increased 35 percent in the first nine months of 2013, compared to the first nine months of 2012, due primarily to the impact of the additional eight months of the acquired Sara Lee foodservice business, which contributed $237.1 million, or 30 percentage points, of the net sales growth. Excluding the impact of acquisition, divestiture, and foreign exchange, segment net sales increased six percent over the same period last year. Volume was up two percent with gains realized in the Robin Hood and Five Roses Canadian flour brands, as well as nonbranded beverages.

Segment profit increased $32.2 million, or 28 percent, in the first nine months of 2013, compared to the first nine months of 2012 which included an $11.3 million loss on divestiture. Excluding this loss, segment profit increased $20.9 million, or 16 percent, driven primarily by the contribution of the Sara Lee foodservice business. Unrealized mark-to-market adjustments on derivative contracts, which were a gain of $1.5 million in the first nine months of 2013, compared to a loss of $0.5 million in 2012, represented $2.0 million of the segment profit increase.

During the second quarter, the Company announced its plan to exit the private label roast and ground coffee portion of the acquired Sara Lee foodservice business representing approximately $75.0 to $100.0 million in annual net sales. While the Company anticipates a future reduction in net sales, the exit is expected to have a

 

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favorable impact on profit margins within the International, Foodservice, and Natural Foods segment. One-time costs associated with the exit are not expected to be significant and primarily include employee separation costs. Although the exit began in the third quarter, it is not expected to have a material impact on fiscal 2013 results. The Company expects to complete the exit during fiscal 2014. The net sales reduction in fiscal 2014 is expected to be approximately $50.0 million as exits will occur throughout the first half of the fiscal year.

Financial Condition – Liquidity and Capital Resources

Liquidity

On an annual basis, the Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit facility. Total cash and cash equivalents at January 31, 2013, were $438.8 million, compared to $229.7 million at April 30, 2012.

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

The following table presents selected cash flow information.

 

     Nine Months Ended January 31,  

(Dollars in millions)

   2013     2012  

Net cash provided by operating activities

   $ 683.6      $ 469.2   

Net cash used for investing activities

     (126.2     (909.6

Net cash (used for) provided by financing activities

     (347.2     497.5   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 683.6      $ 469.2   

Additions to property, plant, and equipment

     (146.5     (196.9
  

 

 

   

 

 

 

Free cash flow

   $ 537.1      $ 272.3   
  

 

 

   

 

 

 

Amounts may not add due to rounding.

Cash provided by operating activities was $683.6 million in the first nine months of 2013, compared to $469.2 million during the first nine months of 2012. The $214.4 million increase is primarily due to a significant reduction in the use of cash required to fund inventory, as well as higher net income in 2013. The reduction in the cash required to fund inventory during 2013 was mainly the result of lower green coffee costs and a reduction in inventory levels.

Cash used for investing activities was $126.2 million in the first nine months of 2013, compared to $909.6 million in the same period of 2012. The decrease in cash used for investing activities in 2013, compared to 2012, was primarily related to the use of $742.4 million for the acquisitions of Rowland Coffee and the Sara Lee foodservice business in 2012.

Cash used for financing activities during the first nine months of 2013 was $347.2 million, consisting of the purchase of treasury shares for $175.5 million, primarily representing the repurchase of 2.0 million common shares, and quarterly dividend payments of $166.5 million. During the first nine months of 2012, total cash of $497.5 million was provided by financing activities, consisting primarily of proceeds from the Company’s October 2011 public debt issuance of $748.6 million, partially offset by quarterly dividend payments of $159.4 million and the purchase of treasury shares for $90.5 million.

 

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Capital Resources

The following table presents the Company’s capital structure.

 

     January 31, 2013      April 30, 2012  
     (Dollars in millions)  

Current portion of long-term debt

   $ 50.0       $ 50.0   

Long-term debt

     2,018.5         2,020.5   
  

 

 

    

 

 

 

Total debt

   $ 2,068.5       $ 2,070.5   

Shareholders’ equity

     5,260.2         5,163.4   
  

 

 

    

 

 

 

Total capital

   $ 7,328.7       $ 7,233.9   
  

 

 

    

 

 

 

Amounts may not add due to rounding.

The Company has available a $1.0 billion revolving credit facility with a group of nine banks that matures in July 2016. The Company did not have a balance outstanding under the revolving credit facility at January 31, 2013.

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.

At January 31, 2013, the Company had 6,944,300 common shares remaining for repurchase under its Board of Directors’ authorizations, which includes 5,000,000 common shares authorized by the Board at its January 2013 meeting.

Subsequent to January 31, 2013, the Company repurchased 1,226,028 common shares for approximately $113.3 million, resulting in 5,718,272 common shares remaining available for repurchase under the Board of Directors’ authorizations as of February 28, 2013.

Absent any material acquisitions or other significant investments, the Company believes that cash on hand, combined with cash provided by operations and borrowings available under its credit facility, will be sufficient to meet cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, and the payment of interest and principal on debt outstanding. As of January 31, 2013, approximately $140.5 million of the Company’s total cash and cash equivalents was held by its international subsidiaries. The Company does not intend to repatriate these funds to meet these obligations. Should the Company repatriate these funds, the Company will be required to provide taxes on these funds based on the applicable U.S. tax rates net of any foreign tax credit consideration.

 

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Non-GAAP Measures

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

 

     Three Months Ended January 31,      Nine Months Ended January 31,  
     2013      2012      2013      2012  
     (Dollars in millions, except per share data)  

Reconciliation to gross profit:

           

Gross Profit

   $ 536.2       $ 465.7       $ 1,547.9       $ 1,395.4   

Cost of products sold—restructuring and merger and integration

     1.2         13.1         7.6         36.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit excluding special project costs

   $ 537.4       $ 478.8       $ 1,555.5       $ 1,431.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation to operating income:

           

Operating Income

   $ 258.3       $ 200.4       $ 696.4       $ 592.7   

Cost of products sold—restructuring and merger and integration

     1.2         13.1         7.6         36.3   

Other restructuring and merger and integration costs

     6.9         19.4         35.5         51.2   

Other special project costs

     —           —           6.7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income excluding special project costs

   $ 266.3       $ 232.9       $ 746.2       $ 680.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation to net income:

           

Net Income

   $ 154.2       $ 116.8       $ 413.9       $ 355.6   

Income taxes

     79.8         60.4         211.6         181.6   

Cost of products sold—restructuring and merger and integration

     1.2         13.1         7.6         36.3   

Other restructuring and merger and integration costs

     6.9         19.4         35.5         51.2   

Other special project costs

     —           —           6.7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes, excluding special project costs

     242.0         209.8         675.3         624.8   

Income taxes, as adjusted

     82.6         71.5         228.4         211.2