The J. M. Smucker Co. announced results for the second quarter ended Oct. 31, 2011, of its 2012 fiscal year. Results for the quarter and six months ended Oct. 31, 2011, include the operations of Rowland Coffee Roasters, Inc. since the completion of the acquisition on May 16, 2011.
GAAP and non-GAAP results for the second quarter and first six months of 2012 include a loss of approximately $11.3 million on the company's divestiture of the Europe's Best® frozen fruit and vegetable business.
Non-GAAP income per diluted share was $1.29 and $1.38 for the second quarters of 2012 and 2011, and $2.41 and $2.42 for the first six months of 2012 and 2011, respectively, a decrease of 7 percent for the quarter and flat for the first six months.
Non-GAAP income per diluted share excludes restructuring and merger and integration costs ("special project costs") of $0.17 and $0.13 per diluted share in the second quarters of 2012 and 2011, and $0.32 and $0.31 for the first six months of 2012 and 2011, respectively.
Results for the second quarter of 2012 were impacted by a higher effective tax rate of 34.1 percent, compared to 32.5 percent in the second quarter of 2011.
Income per diluted share in the second quarter and first six months of 2012 benefited from a decrease in weighted-average common shares outstanding, as a result of the company's share repurchase activities.
"We delivered record sales growth in the quarter including robust contributions from product innovation such as our K-Cups® and seasonal offerings. As we head into the key holiday period, our strong leading brands are trusted and remain well positioned to meet the varying needs of our consumers, including helping to bring their families together to share memorable meals and moments," commented Richard Smucker, chief executive officer in a prepared statement. "Additionally, we are effectively managing this period of significant cost inflation, where our cost of goods sold increased approximately 30 percent for the quarter, yet, we posted gross profit growth. As always, our focus remains on effectively managing the balance between volume, market share, and profitability, while continuing to invest in our brands."
Net sales in the second quarter of 2012 increased $235.0 million, or 18 percent, compared to the second quarter of 2011, due primarily to net price realization across many of the company's brands. The Rowland Coffee brands acquired earlier in the year contributed approximately 2 percent to net sales for the second quarter of 2012 and, combined with the favorable impact of foreign exchange rates, offset a 1 percent decline in volume, compared to the second quarter of 2011. Volume gains were realized in Pillsbury® baking mixes and Jif® peanut butter, but were more than offset by declines in nonbranded beverages, Crisco® oils, Folgers® coffee, and Pillsbury® flour. The overall impact of sales mix was favorable.
Gross profit increased $4.0 million, or 1 percent, in the second quarter of 2012, compared to 2011, and increased $4.6 million, excluding special project costs. Price increases taken over the past year effectively offset higher commodity costs and contributed to gross profit, while margin contracted as expected. Gross margin declined from 39.6 percent in the second quarter of 2011 to 33.8 percent in the second quarter of 2012, excluding special project costs. Significantly higher costs were realized for green coffee in the second quarter of 2012, compared to 2011. Costs were also higher for edible oils, flour, milk, sweetener, peanuts, and other raw materials. The net unfavorable impact of a $4.3 million change in unrealized mark-to-market adjustments on derivative contracts in the second quarter of 2012, compared to 2011, also impacted gross profit.
While green coffee costs have moderated from earlier in the calendar year, the company expects that it will continue to recognize considerably higher green coffee costs through the remainder of its fiscal year, compared to the prior year. Additionally, peanut costs are expected to escalate during the remainder of the year. Pricing actions to date take into account the company's current cost expectations through the remainder of the fiscal year.
Selling, distribution, and administrative (SD&A) expenses in the second quarter of 2012 increased 6 percent, compared to the second quarter of 2011, but decreased as a percentage of net sales from 17.4 percent to 15.6 percent. Marketing expenses in the second quarter of 2012, were comparable to the second quarter of 2011. Over the same period, selling and general and administrative expenses increased 17 percent and 10 percent, respectively, while distribution expenses decreased 1 percent. The addition of the Rowland Coffee business represented approximately one-half of the overall increase in SD&A expenses. In addition, higher amortization expense was recognized in the second quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the Rowland Coffee acquisition.
Operating income decreased $28.4 million, or 12 percent, in the second quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income decreased $21.7 million, or 8 percent, and declined from 20.6 percent of net sales in 2011 to 16.0 percent in 2012. Both operating income measures include a loss of $11.3 million on the divestiture of the Europe's Best® business in 2012.
Interest expense increased $0.9 million in the second quarter of 2012, compared to 2011, representing the costs of higher debt outstanding somewhat offset by the benefit of the company's interest rate swap activities and higher capitalized interest associated with the company's capital expenditures. During the second quarter of 2012, the company terminated two interest rate swaps prior to maturity resulting in a net settlement gain of $17.7 million, to be recognized over the remaining life of the underlying debt instruments, including $0.6 million in the current quarter.
On Oct. 18, 2011, the company completed a public placement of $750.0 million of 3.5 percent, 10-year notes. A portion of the proceeds from the notes was used to repay borrowings under the company's revolving credit agreement. Remaining proceeds will be used for general corporate purposes and for funding of acquisitions, including the anticipated acquisition of the majority of Sara Lee Corp.'s North American foodservice coffee and hot beverage business, expected to close in early calendar 2012.
Income taxes decreased $6.0 million in the second quarter of 2012, reflecting a $28.5 million decrease in income before income taxes and the offsetting impact of an increase in the effective tax rate to 34.1 percent, compared to 32.5 percent in the second quarter of 2011. The increase in the effective tax rate in the second quarter of 2012 is primarily due to a higher Canadian effective tax rate and an increase in state income tax expense, compared to the second quarter of 2011.
The U.S. retail coffee segment net sales increased 29 percent in the second quarter of 2012, compared to the second quarter of 2011, primarily reflecting price increases taken over the last 12 months. Segment volume decreased 4 percent for the second quarter of 2012, excluding Rowland Coffee, compared to the second quarter of 2011. Volume declines for the Folgers® brand were in line with the overall segment while Dunkin' Donuts® packaged coffee experienced a 3 percent decline. The acquisition of Rowland Coffee contributed approximately $26.7 million to segment net sales, representing 6 percentage points of the segment net sales increase. Contributing to favorable sales mix in the second quarter of 2012, net sales of Folgers Gourmet Selections® and Millstone® K-Cups®, increased $29.8 million, compared to the second quarter of 2011, also representing 6 percentage points of segment net sales growth, while contributing only 1 percentage point growth to volume.
U.S. retail coffee segment profit decreased $9.1 million, or 6 percent, in the second quarter of 2012, compared to the second quarter of 2011, including the unfavorable impact of $7.4 million of unrealized mark-to-market adjustments on commodity contracts. While overall pricing was higher in the second quarter of 2012, compared to 2011, it was more than offset by higher green coffee costs recognized.
Although a portion of the favorable price-to-cost relationship in the first quarter of 2012 reversed in the second quarter as expected, segment profit for the first six months of 2012 is up $18.7 million, or 7 percent. Higher green coffee costs will continue to be recognized through the remainder of fiscal 2012, compared to 2011, most significantly in the third quarter.
The U.S. retail consumer foods segment net sales increased 13 percent in the second quarter of 2012, compared to 2011, primarily reflecting the impact of price increases while volume remained consistent with the prior year. Jif® peanut butter net sales increased 22 percent and volume was up 10 percent in the second quarter of 2012, compared to 2011, reflecting the resumption of promotional activities and incremental demand in advance of the previously announced significant price increase effective earlier this month. Smucker's® fruit spreads net sales increased 9 percent and volume was up 3 percent during the same period. Crisco® brand net sales increased 14 percent as a result of price increases, as volume was down 10 percent in the second quarter of 2012, compared to 2011. For the same period, net sales and volume for the Pillsbury® brand increased 10 percent and 2 percent, respectively, as volume gains in baking mixes exceeded declines in flour. Canned milk net sales increased 6 percent and volume was flat during the second quarter of 2012, compared to 2011.
The U.S. retail consumer foods segment profit increased $2.8 million, or 2 percent, in the second quarter of 2012, compared to the second quarter of 2011. Higher raw material costs were recognized in the quarter, most significantly for oils, flour, milk, sweetener, and peanuts. Peanut costs are expected to escalate during the remainder of the year, with more impact on the company's results in the fourth quarter. Selling, distribution, and marketing expenses were also higher, generally in line with the increase in net sales. Price increases and the net favorable impact of unrealized mark-to-market adjustments on commodity contracts in the second quarter of 2012, compared to the second quarter of 2011, more than offset these higher costs. Segment profit margin was 18.8 percent in the second quarter of 2012, compared to 20.8 percent in 2011.
Net sales in the international, foodservice, and natural foods segment increased 9 percent in the second quarter of 2012, compared to 2011. Excluding the impact of acquisition, divestiture, and foreign exchange, segment net sales increased 6 percent over the same period. Price increases more than offset a 3 percent decline in volume and unfavorable sales mix. Volume gains in Santa Cruz Organic® beverages, Five Roses® flour, and Bick's® pickles did not fully offset declines in nonbranded beverages, and Folgers® coffee.
Excluding the $11.3 million loss on the divestiture of the Europe's Best® business, segment profit decreased $1.1 million in the second quarter of 2012, compared to 2011, primarily due to an increase in marketing expenses in the second quarter of 2012. Excluding the 4.0 percentage point impact of the loss on the divestiture, segment profit margin was 17.9 percent, compared to 19.9 percent in the second quarter of 2012 and 2011, respectively.
