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SJM > SEC Filings for SJM > Form 10-Q on 27-Feb-2014All Recent SEC Filings

Show all filings for SMUCKER J M CO

Form 10-Q for SMUCKER J M CO


27-Feb-2014

Quarterly Report


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

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

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, 2014 and 2013. Results for the quarter and nine months ended January 31, 2014, include the operations of Enray Inc. ("Enray") since the completion of the acquisition on August 20, 2013, and the impact of our licensing and distribution agreement with Cumberland Packing Corp. ("Cumberland"), which commenced on July 1, 2013.

We are 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; Sweet'N Low®, NatraTaste®, Sugar In The Raw®, and the other "In The Raw" trademarks are registered trademarks of Cumberland and its affiliates; Life is good® is a registered trademark of The Life is good Company; 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 us for packaged coffee products sold in retail channels such as grocery stores, mass merchandisers, club stores, and drug stores. Information in this document does not pertain to Dunkin' Donuts coffee or other products for sale in Dunkin' Donuts restaurants. K-Cup® is a trademark of Keurig, Incorporated, used with permission.

Results of Operations



                                                                   Three Months Ended January 31,                    Nine Months Ended January 31,
                                                                   2014                      2013                    2014                     2013
Net sales                                                     $       1,465.5           $       1,559.6         $      4,376.3           $      4,558.0
Gross profit                                                  $         545.2           $         536.2         $      1,590.7           $      1,547.9
% of net sales                                                           37.2 %                    34.4 %                 36.3 %                   34.0 %
Operating income                                              $         263.5           $         258.3         $        727.6           $        696.4
% of net sales                                                           18.0 %                    16.6 %                 16.6 %                   15.3 %
Net income:
Net income                                                    $         166.7           $         154.2         $        446.7           $        413.9
Net income per common share - assuming dilution               $          1.59           $          1.42         $         4.24           $         3.78
Gross profit excluding special project costs (1)              $         548.1           $         537.4         $      1,597.4           $      1,555.5
% of net sales                                                           37.4 %                    34.5 %                 36.5 %                   34.1 %
Operating income excluding special project costs (1)          $         273.5           $         266.3         $        754.1           $        746.2
% of net sales                                                           18.7 %                    17.1 %                 17.2 %                   16.4 %
Income excluding special project costs: (1)
Income                                                        $         173.5           $         159.3         $        464.5           $        446.8
Income per common share - assuming dilution                   $          1.66           $          1.47         $         4.41           $         4.08

(1) Refer to "Non-GAAP Measures" located on page 28 for a reconciliation to the comparable GAAP financial measure.

Net sales in the third quarter of 2014 decreased 6 percent, compared to the third quarter of 2013, reflecting pricing actions taken since the beginning of the third quarter of 2013 and the impact of the planned exit of certain portions of our business in the International, Foodservice, and Natural Foods segment. Operating income increased 2 percent in the third quarter of 2014, compared to the third quarter of 2013, reflecting gains in gross profit, and increased 3 percent excluding the impact of restructuring, merger and integration, and certain pension settlement costs ("special project costs"). Net income per diluted share increased 12 percent for the third quarter of 2014, as compared to the third quarter of 2013, while income per diluted share excluding special project costs increased 13 percent over the same period. Both measures reflect the benefit of a decrease in weighted-average common shares outstanding as a result of our share repurchase activities during the 12-month period ended January 31, 2014.


Net sales in the first nine months of 2014 decreased 4 percent, compared to the first nine months of 2013, reflecting pricing actions and the impact of the business exits in the International, Foodservice, and Natural Foods segment. Operating income increased 4 percent in the first nine months of 2014, compared to the first nine months of 2013, mainly driven by lower special project costs and an increase in gross profit, partially offset by an increase in selling, distribution, and administrative ("SD&A") expenses. Excluding the impact of special project costs, operating income increased 1 percent in the first nine months of 2014, as compared to the prior period. Net income per diluted share increased 12 percent for the first nine months of 2014, compared to the first nine months of 2013, while income per diluted share excluding special project costs increased 8 percent. Both measures reflect the benefit of a decrease in weighted-average common shares outstanding as a result of our share repurchase activities during 2013 and the first nine months of 2014.

Net Sales



                                                                   Three Months Ended January 31,                             Nine Months Ended January 31,
                                                                                        Increase                                                  Increase
                                                           2014           2013         (Decrease)        %           2014           2013         (Decrease)        %
Net sales                                                $ 1,465.5      $ 1,559.6     $      (94.1 )      (6 )%    $ 4,376.3      $ 4,558.0     $     (181.7 )      (4 )%
Adjust for certain noncomparable items:
Enray acquisition                                            (14.7 )           -             (14.7 )      (1 )         (26.0 )           -             (26.0 )      (1 )
Cumberland distribution agreement                             (9.0 )           -              (9.0 )      (1 )         (21.6 )           -             (21.6 )      -
Foreign exchange                                               8.3             -               8.3         1            15.9             -              15.9        -

Net sales adjusted for certain noncomparable items (1)   $ 1,450.1      $ 1,559.6     $     (109.5 )      (7 )%    $ 4,344.6      $ 4,558.0     $     (213.4 )      (5 )%

Amounts may not add due to rounding.

(1) Net sales adjusted for the noncomparable impact of the Enray acquisition, the Cumberland distribution agreement, and foreign exchange is a non-GAAP measure used in evaluating performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis.

Net sales decreased $94.1, or 6 percent, in the third quarter of 2014, compared to the third quarter of 2013, primarily due to the impact of a 6 percent reduction in net price realization reflecting price declines taken since the beginning of the third quarter of 2013, notably on coffee and peanut butter. A combined $23.7 from the acquired Enray business and the Cumberland distribution agreement contributed positively to net sales in the third quarter of 2014. The unfavorable impacts of mix and foreign exchange each reduced net sales by 1 percent in the third quarter of 2014, compared to the third quarter of 2013. Volume gains realized in Crisco oils, Folgers coffee, and the Robin Hood® brand were offset by declines in Pillsbury baking mixes and flour, and the impact of the business exits in the International, Foodservice, and Natural Foods segment.

Net sales decreased $181.7, or 4 percent, in the first nine months of 2014, compared to the first nine months of 2013, primarily due to a 5 percent reduction in net price realization reflecting price declines. Enray and Cumberland contributed a combined $47.6 to net sales in the first nine months of 2014. Sales mix contributed 1 percent to net sales in the first nine months of 2014, as compared to the prior period. Volume gains realized in Crisco oils, Folgers coffee, and Jif peanut butter were more than offset by the impact of the business exits in the International, Foodservice, and Natural Foods segment, declines in Pillsbury baking mixes and flour, and planned declines in certain Santa Cruz Organic® beverages.


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,
                                                                              2014                     2013               2014                    2013
Gross profit                                                                       37.2 %                   34.4 %             36.3 %                  34.0 %
Selling, distribution, and administrative expenses:
Marketing                                                                           5.4 %                    4.8 %              5.5 %                   5.1 %
Selling                                                                             3.5                      3.3                3.5                     3.3
Distribution                                                                        2.7                      2.6                2.8                     2.6
General and administrative                                                          5.5                      5.4                5.8                     5.3

Total selling, distribution, and administrative expenses                           17.1 %                   16.1 %             17.6 %                  16.2 %

Amortization                                                                        1.7                      1.6                1.7                     1.6
Other restructuring, merger and integration, and special project costs              0.5                      0.4                0.5                     0.9
Other operating income - net                                                         -                      (0.3 )               -                     (0.1 )

Operating income                                                                   18.0 %                   16.6 %             16.6 %                  15.3 %

Amounts may not add due to rounding.

Gross profit increased $9.0, or 2 percent, in the third quarter of 2014, compared to the third quarter of 2013, due to lower commodity costs. Excluding special project costs, gross profit increased $10.7, or 2 percent, during the same period. Unrealized mark-to-market adjustments on derivative contracts contributed $4.5 to the increase in gross profit as the impact was a gain of $4.0 in the third quarter of 2014, compared to a loss of $0.5 in the third quarter of 2013.

Commodity costs were a net benefit to gross profit as lower costs, primarily for green coffee, peanuts, and oils, were not entirely offset by lower net price realization across the portfolio. The additions of Enray and Cumberland also contributed to gross profit in the third quarter of 2014, but were more than offset by the impact of the exited businesses in the International, Foodservice, and Natural Foods segment. Gross profit was reduced by an unplanned trade spending accrual adjustment which impacted net sales by approximately $10.0, primarily related to our foodservice hot beverage business.

SD&A expenses were flat in the third quarter of 2014, compared to the third quarter of 2013, and increased as a percentage of net sales from 16.1 percent to 17.1 percent. Marketing expenses increased 5 percent in the third quarter of 2014, compared to 2013. General and administrative and distribution expenses decreased 4 percent and 2 percent, respectively, in the third quarter of 2014, compared to 2013, while selling expenses increased 1 percent.

Operating income increased $5.2, or 2 percent, in the third quarter of 2014, compared to the third quarter of 2013, mainly driven by the increase in gross profit. Excluding special project costs, operating income increased $7.2, or 3 percent, and increased from 17.1 percent of net sales in the third quarter of 2013 to 18.7 percent in the third quarter of 2014.

Gross profit increased $42.8, or 3 percent, in the first nine months of 2014, compared to the first nine months of 2013, primarily due to the net benefit of lower commodity costs. Excluding special project costs, gross profit increased $41.9, or 3 percent, and increased from 34.1 percent of net sales in the first nine months of 2013 to 36.5 percent in the first nine months of 2014.

Overall commodity costs were lower during the first nine months of 2014, compared to the first nine months of 2013, primarily due to green coffee. The net benefit of lower commodity costs was not entirely offset by lower net price realization. Mix and the additions of Enray and Cumberland also contributed to gross profit in the first nine months of 2014, but were partially offset by the impact of the exited businesses in the International, Foodservice, and Natural Foods segment.

SD&A expenses increased 4 percent in the first nine months of 2014, compared to the first nine months of 2013, and increased as a percentage of net sales from 16.2 percent to 17.6 percent. General and administrative expenses increased 6 percent in the first nine months of 2014, compared to the first nine months of 2013, driven by certain corporate initiatives. Marketing expenses increased 4 percent in the first nine months of 2014, compared to the first nine months of 2013. Selling and distribution expenses both increased 2 percent over the same period.


Operating income increased $31.2, or 4 percent, in the first nine months of 2014, compared to the first nine months of 2013, partially driven by a $23.3 decrease in special project costs. The decrease resulted from the substantial progress made on the projects, with lower costs incurred in the first nine months of 2014, compared to the first nine months of 2013. Additionally, the increase in gross profit more than offset the increase in SD&A expenses in the first nine months of 2014, compared to the first nine months of 2013. Excluding special project costs in both periods, operating income increased 1 percent, and increased from 16.4 percent of net sales in the first nine months of 2013 to 17.2 percent in the first nine months of 2014.

Other

Net interest expense decreased $5.4 and $8.6 in the third quarter and first nine months of 2014, respectively, compared to 2013, reflecting the impact of an interest rate swap entered into during the second quarter of 2014.

Income taxes were flat in the third quarter of 2014, compared to the third quarter of 2013, since the increase in income before income taxes was offset by the impact of a lower effective tax rate in 2014. Income taxes increased $7.7, or 4 percent, in the first nine months of 2014, compared to the first nine months of 2013, driven by the increase in income before income taxes, partially offset by a lower effective tax rate in 2014. The lower 2014 rate was impacted by a decrease in unrecognized tax benefits, and the 2013 rate reflected higher state taxes as a result of a tax legislative change.

Restructuring

During 2010, we announced plans to restructure our coffee and fruit spreads operations as part of our ongoing efforts to enhance the long-term strength and profitability of our leading brands. Subsequent to 2010, we expanded our restructuring plans to include the Canadian pickle and condiments operations and the capacity expansion of our peanut and other nut butter businesses. During the third quarter of 2014, we decided to maintain natural peanut butter production at the New Bethlehem, Pennsylvania facility and continue utilizing third-party manufacturers for the production of our specialty nut butters. With the exception of natural peanut butter, the Memphis, Tennessee facility conversion to a peanut butter plant remains as planned. We now anticipate a total capital investment of approximately $90.0 related to the peanut and other nut butter portion of the restructuring plan. The increase from our original estimate of $70.0 reflects plans to install enhanced roasting technologies, as well as additional building modifications at the Memphis facility.

We expect to incur restructuring costs of approximately $265.0 for all of our restructuring plans, of which $244.7 has been incurred through January 31, 2014. Restructuring costs of $5.1 and $17.1 have been incurred in the third quarter and first nine months of 2014, respectively, compared to $5.4 and $30.1 in the third quarter and first nine months of 2013, respectively. The majority of the remaining costs are anticipated to be recognized through 2015.

Upon completion, the overall restructuring plan will result in a reduction of approximately 850 full-time positions. As of January 31, 2014, approximately 90 percent of the 850 full-time positions have been reduced and the impacted facilities have been closed, with the exception of the Ste. Marie, Quebec facility, which is anticipated to close in the fourth quarter of 2014.


Segment Results



                                            Three Months Ended January 31,                       Nine Months Ended January 31,
                                                                       % Increase                                           % Increase
                                       2014              2013          (Decrease)            2014             2013          (Decrease)
Net sales:
U.S. Retail Coffee                  $    578.9        $    627.7                (8 )%    $    1,688.2       $ 1,771.0                (5 )%
U.S. Retail Consumer Foods               557.8             581.3                (4 )          1,706.8         1,729.0                (1 )
International, Foodservice, and
Natural Foods                            328.8             350.6                (6 )            981.3         1,058.0                (7 )
Segment profit:
U.S. Retail Coffee                  $    182.3        $    175.2                 4 %     $      508.9       $   459.8                11 %
U.S. Retail Consumer Foods               105.6             106.2                (1 )            301.2           325.1                (7 )
International, Foodservice, and
Natural Foods                             44.8              49.8               (10 )            135.6           148.7                (9 )
Segment profit margin:
U.S. Retail Coffee                        31.5 %            27.9 %                               30.1 %          26.0 %
U.S. Retail Consumer Foods                18.9              18.3                                 17.6            18.8
International, Foodservice, and
Natural Foods                             13.6              14.2                                 13.8            14.1

U.S. Retail Coffee

The U.S. Retail Coffee segment volume increased 2 percent in the third quarter of 2014, compared to the third quarter of 2013, mainly due to increases of 4 percent in the Folgers brand and 8 percent in Dunkin' Donuts packaged coffee, partially offset by a decline in the Millstone brand. Net sales for the segment decreased 8 percent in the third quarter of 2014, compared to the third quarter of 2013, impacted by lower net price realization and unfavorable sales mix. Pricing actions taken to reflect the pass through of lower commodity costs included both a price decline of approximately 6 percent taken in February 2013 and incremental promotional spending during the recent holiday season. Net sales of K-Cup packs decreased 3 percent while volume increased 2 percent compared to last year's third quarter.

The U.S. Retail Coffee segment profit increased $7.1, or 4 percent, in the third quarter of 2014, compared to the third quarter of 2013, as increased volume, the net benefit of lower green coffee costs relative to net price realization, and decreased marketing expenses and manufacturing overhead were only partially offset by unfavorable mix.

Net sales for the U.S. Retail Coffee segment decreased 5 percent for the first nine months of 2014, compared to the first nine months of 2013, reflecting lower net price realization driven by the price decline taken in February 2013. Volume growth of 3 percent in the first nine months of 2014, compared to the first nine months of 2013, was driven by increases of 3 percent in the Folgers brand and 8 percent in Dunkin' Donuts packaged coffee. Net sales of K-Cup packs increased $5.0, or 2 percent, in the first nine months of 2014, compared to the first nine months of 2013.

The U.S. Retail Coffee segment profit increased $49.1, or 11 percent, in the first nine months of 2014, compared to the first nine months of 2013, primarily due to the net benefit of lower green coffee costs relative to net price realization. The increase in segment volume also contributed.

U.S. Retail Consumer Foods

The U.S. Retail Consumer Foods segment volume for the third quarter of 2014 was flat, compared to the third quarter of 2013. Segment net sales decreased 4 percent in the third quarter of 2014, compared to the third quarter of 2013, primarily reflecting the impact of lower net price realization. Smucker's fruit spreads and Jif brand volume decreased 2 percent and 1 percent, respectively, in the third quarter of 2014, compared to 2013. Pricing actions taken since the beginning of the third quarter of 2013 caused net sales for both brands to decrease 7 percent over the same period. Net sales and volume of Smucker's Uncrustables® frozen sandwiches achieved another strong quarter, up 18 percent and 19 percent, respectively. Crisco brand volume increased 12 percent, while net sales increased 2 percent impacted by lower net price realization in the third quarter of 2014, compared to the third quarter of 2013. Net sales and volume for the overall Pillsbury brand both decreased 9 percent. Net sales and volume gains were realized in Pillsbury frostings, but were more than offset by declines in flour and baking mixes which were attributed to deeper promotional pricing by competitors in these categories that we chose not to match. Canned milk net sales increased 5 percent and volume was flat during the third quarter of 2014, compared to 2013.


The U.S. Retail Consumer Foods segment profit decreased $0.6, or 1 percent, in the third quarter of 2014, compared to the third quarter of 2013, due to increased manufacturing overhead, marketing expenses, and other segment support costs. Segment profit benefited from overall lower commodity costs, primarily for peanuts, oils, and flour, which were not entirely offset by lower net price realization.

Net sales for the U.S. Retail Consumer Foods segment in the first nine months of 2014 decreased 1 percent, compared to the first nine months of 2013, as overall net price realization was lower. Segment volume increased 1 percent and sales mix was favorable. Smucker's fruit spreads and Jif brand volume increased 1 percent and 3 percent, respectively, in the first nine months of 2014, compared to the first nine months of 2013. Pricing actions caused net sales for both brands to decrease 4 percent over the same period. Smucker's Uncrustables frozen sandwiches net sales and volume both increased 22 percent during the same period. Crisco brand net sales and volume increased 5 percent and 8 percent, respectively, in the first nine months of 2014, compared to the first nine months of 2013. Net sales and volume for the Pillsbury brand both decreased 3 percent over the same time period. Canned milk net sales increased 3 percent during the first nine months of 2014, compared to the first nine months of 2013, while volume decreased 2 percent.

The U.S. Retail Consumer Foods segment profit decreased $23.9, or 7 percent, in the first nine months of 2014, compared to the first nine months of 2013. While commodity costs were lower, primarily for peanuts and oils, they were more than offset by lower net price realization across the portfolio and drove the decrease in segment profit. An increase in segment support costs also contributed to the segment profit decrease.

International, Foodservice, and Natural Foods

Net sales for the International, Foodservice, and Natural Foods segment decreased 6 percent in the third quarter of 2014, compared to the third quarter of 2013. Excluding the impact of Enray, Cumberland, and foreign exchange, segment net sales decreased 11 percent. The net sales decrease was driven by the exited portions of our hot beverage and Smucker's Uncrustablesfrozen sandwich businesses with foodservice customers, the previously discussed unplanned trade spending accrual adjustment of approximately $10.0, and unfavorable sales mix. Segment volume decreased 2 percent, excluding the impact of Enray and Cumberland, as increases in the Robin Hood and Five Roses® brands in Canada were more than offset by the impact of the exited foodservice businesses.

Segment profit decreased $5.0, or 10 percent, in the third quarter of 2014, compared to the third quarter of 2013, due to the trade spending accrual adjustment, the lost profit on the exited foodservice businesses, and an increase in marketing expenses. Foreign exchange also negatively impacted segment profit. Overall commodity costs were lower in the third quarter of 2014, compared to the third quarter of 2013. The additions of Enray and Cumberland were not significant to segment profit in the third quarter of 2014.

Net sales for the International, Foodservice, and Natural Foods segment decreased 7 percent in the first nine months of 2014, compared to the first nine months of 2013. Excluding the impact of the Enray and Cumberland businesses and foreign exchange, segment net sales decreased 10 percent. Segment volume decreased 6 percent, excluding the impact of Enray and Cumberland, in the first nine months of 2014, compared to the first nine months of 2013, primarily due to the impact of the exited portions of our hot beverage and Smucker's Uncrustables frozen sandwich businesses with foodservice customers and planned declines in Santa Cruz Organic lemonades. Lower net price realization, the trade spending accrual adjustment, and unfavorable sales mix also contributed to the decrease in net sales.

The International, Foodservice, and Natural Foods segment profit decreased $13.1, or 9 percent, in the first nine months of 2014, compared to the first nine months of 2013, primarily due to the trade spending accrual adjustment, the impact of the exited portions of our hot beverage and Smucker's Uncrustables . . .

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