UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 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.) |
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One Strawberry Lane Orrville, Ohio |
44667-0280 | |
(Address of principal executive offices) | (Zip code) |
Registrants 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 105,138,264 common shares outstanding on November 22, 2013.
The Exhibit Index is located at Page No. 39.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
October 31, |
Six Months Ended
October 31, |
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(Dollars in millions, except per share data) |
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales |
$ | 1,559.9 | $ | 1,628.7 | $ | 2,910.8 | $ | 2,998.4 | ||||||||
Cost of products sold |
1,005.0 | 1,084.4 | 1,861.5 | 1,980.3 | ||||||||||||
Cost of products soldrestructuring and merger and integration |
2.3 | 2.4 | 3.8 | 6.4 | ||||||||||||
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Gross Profit |
552.6 | 541.9 | 1,045.5 | 1,011.7 | ||||||||||||
Selling, distribution, and administrative expenses |
270.3 | 257.2 | 520.5 | 489.4 | ||||||||||||
Amortization |
24.7 | 24.2 | 49.2 | 48.4 | ||||||||||||
Other restructuring and merger and integration costs |
6.9 | 11.5 | 12.7 | 28.7 | ||||||||||||
Other special project costs |
| | | 6.7 | ||||||||||||
Other operating (income) expensenet |
(0.1 | ) | 1.4 | (1.0 | ) | 0.4 | ||||||||||
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Operating Income |
250.8 | 247.6 | 464.1 | 438.1 | ||||||||||||
Interest expensenet |
(20.5 | ) | (23.9 | ) | (44.3 | ) | (47.5 | ) | ||||||||
Other (expense) incomenet |
(0.3 | ) | 0.5 | (0.3 | ) | 0.9 | ||||||||||
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Income Before Income Taxes |
230.0 | 224.2 | 419.5 | 391.5 | ||||||||||||
Income taxes |
76.6 | 75.4 | 139.5 | 131.8 | ||||||||||||
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Net Income |
$ | 153.4 | $ | 148.8 | $ | 280.0 | $ | 259.7 | ||||||||
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Earnings per common share: |
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Net Income |
$ | 1.46 | $ | 1.36 | $ | 2.65 | $ | 2.37 | ||||||||
Net IncomeAssuming Dilution |
$ | 1.46 | $ | 1.36 | $ | 2.65 | $ | 2.36 | ||||||||
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Dividends Declared per Common Share |
$ | 0.58 | $ | 0.52 | $ | 1.16 | $ | 1.04 | ||||||||
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See notes to unaudited condensed consolidated financial statements.
2
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months
Ended October 31, |
Six Months Ended
October 31, |
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(Dollars in millions) |
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income |
$ | 153.4 | $ | 148.8 | $ | 280.0 | $ | 259.7 | ||||||||
Other comprehensive (loss) income: |
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Foreign currency translation adjustments |
(4.6 | ) | 1.6 | (10.6 | ) | (3.5 | ) | |||||||||
Cash flow hedging derivative activity, net of tax |
(0.3 | ) | (0.3 | ) | 1.6 | 2.5 | ||||||||||
Pension and other postretirement benefit plans activity, net of tax |
0.6 | 2.1 | 2.5 | 4.2 | ||||||||||||
Available-for-sale securities activity, net of tax |
0.6 | 0.8 | 0.1 | 0.6 | ||||||||||||
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Total Other Comprehensive (Loss) Income |
(3.7 | ) | 4.2 | (6.4 | ) | 3.8 | ||||||||||
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Comprehensive Income |
$ | 149.7 | $ | 153.0 | $ | 273.6 | $ | 263.5 | ||||||||
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See notes to unaudited condensed consolidated financial statements.
3
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, 2013 | April 30, 2013 | |||||||
(Dollars in millions) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ | 150.5 | $ | 256.4 | ||||
Trade receivables, less allowance for doubtful accounts |
464.2 | 313.7 | ||||||
Inventories: |
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Finished products |
672.5 | 618.9 | ||||||
Raw materials |
351.2 | 326.6 | ||||||
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1,023.7 | 945.5 | |||||||
Other current assets |
123.9 | 79.6 | ||||||
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Total Current Assets |
1,762.3 | 1,595.2 | ||||||
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Property, Plant, and Equipment |
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Land and land improvements |
103.2 | 98.5 | ||||||
Buildings and fixtures |
516.0 | 494.4 | ||||||
Machinery and equipment |
1,368.4 | 1,267.5 | ||||||
Construction in progress |
69.1 | 124.9 | ||||||
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2,056.7 | 1,985.3 | |||||||
Accumulated depreciation |
(893.5 | ) | (842.8 | ) | ||||
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Total Property, Plant, and Equipment |
1,163.2 | 1,142.5 | ||||||
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Other Noncurrent Assets |
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Goodwill |
3,100.7 | 3,052.9 | ||||||
Other intangible assetsnet |
3,076.2 | 3,089.4 | ||||||
Other noncurrent assets |
143.6 | 151.8 | ||||||
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Total Other Noncurrent Assets |
6,320.5 | 6,294.1 | ||||||
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Total Assets |
$ | 9,246.0 | $ | 9,031.8 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
$ | 261.6 | $ | 285.8 | ||||
Accrued trade marketing and merchandising |
71.4 | 57.4 | ||||||
Current portion of long-term debt |
150.0 | 50.0 | ||||||
Revolving credit facility |
207.0 | | ||||||
Other current liabilities |
206.0 | 203.6 | ||||||
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Total Current Liabilities |
896.0 | 596.8 | ||||||
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Noncurrent Liabilities |
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Long-term debt |
1,883.6 | 1,967.8 | ||||||
Deferred income taxes |
999.8 | 987.2 | ||||||
Other noncurrent liabilities |
298.7 | 331.2 | ||||||
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Total Noncurrent Liabilities |
3,182.1 | 3,286.2 | ||||||
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Total Liabilities |
4,078.1 | 3,883.0 | ||||||
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Shareholders Equity |
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Common shares |
26.3 | 26.6 | ||||||
Additional capital |
4,092.4 | 4,125.1 | ||||||
Retained income |
1,133.2 | 1,075.5 | ||||||
Amount due from ESOP Trust |
(1.0 | ) | (1.8 | ) | ||||
Accumulated other comprehensive loss |
(83.0 | ) | (76.6 | ) | ||||
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Total Shareholders Equity |
5,167.9 | 5,148.8 | ||||||
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Total Liabilities and Shareholders Equity |
$ | 9,246.0 | $ | 9,031.8 | ||||
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See notes to unaudited condensed consolidated financial statements.
4
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended October 31, | ||||||||
(Dollars in millions) |
2013 | 2012 | ||||||
Operating Activities |
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Net income |
$ | 280.0 | $ | 259.7 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
75.0 | 72.0 | ||||||
Depreciationrestructuring and merger and integration |
2.1 | 5.8 | ||||||
Amortization |
49.2 | 48.4 | ||||||
Share-based compensation expense |
12.3 | 10.5 | ||||||
Loss on sale of assetsnet |
1.0 | 2.7 | ||||||
Changes in assets and liabilities, net of effect from businesses acquired: |
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Trade receivables |
(147.3 | ) | (122.3 | ) | ||||
Inventories |
(74.5 | ) | (14.6 | ) | ||||
Accounts payable and accrued items |
4.9 | 98.9 | ||||||
Defined benefit pension contributions |
(3.0 | ) | (7.6 | ) | ||||
Accrued and prepaid taxes |
(33.0 | ) | (13.4 | ) | ||||
Othernet |
1.3 | 19.5 | ||||||
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Net Cash Provided by Operating Activities |
168.0 | 359.6 | ||||||
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Investing Activities |
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Businesses acquired, net of cash acquired |
(102.0 | ) | | |||||
Additions to property, plant, and equipment |
(83.4 | ) | (98.5 | ) | ||||
Proceeds from disposal of property, plant, and equipment |
1.4 | 0.6 | ||||||
Othernet |
(8.9 | ) | 5.9 | |||||
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Net Cash Used for Investing Activities |
(192.9 | ) | (92.0 | ) | ||||
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Financing Activities |
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Revolving credit facilitynet |
207.0 | | ||||||
Quarterly dividends paid |
(116.4 | ) | (110.2 | ) | ||||
Purchase of treasury shares |
(165.5 | ) | (175.3 | ) | ||||
Proceeds from stock option exercises |
0.3 | 0.8 | ||||||
Othernet |
(1.3 | ) | (7.6 | ) | ||||
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Net Cash Used for Financing Activities |
(75.9 | ) | (292.3 | ) | ||||
Effect of exchange rate changes on cash |
(5.1 | ) | (1.4 | ) | ||||
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Net decrease in cash and cash equivalents |
(105.9 | ) | (26.1 | ) | ||||
Cash and cash equivalents at beginning of period |
256.4 | 229.7 | ||||||
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Cash and Cash Equivalents at End of Period |
$ | 150.5 | $ | 203.6 | ||||
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( ) 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 millions, unless otherwise noted, except per share data)
Note 1: Basis of Presentation
The unaudited condensed consolidated financial statements of The J. M. Smucker Company (Company, we, us, or our) 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.
Operating results for the six-month period ended October 31, 2013, are not necessarily indicative of the results that may be expected for the year ending April 30, 2014. For further information, reference is made to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended April 30, 2013.
Note 2: Recently Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02, Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment . ASU 2012-02 simplifies the guidance for testing impairment of indefinite-lived intangible assets by allowing the option to perform a qualitative test to assess the likelihood that the estimated fair value is less than the carrying amount. ASU 2012-02 is effective for the annual impairment test we perform after May 1, 2013. We do not anticipate that the adoption of ASU 2012-02 will change the process for our February 1, 2014 impairment test.
Note 3: Acquisitions
During the quarter, we completed two acquisitions for aggregate net cash consideration of $102.0. Enray Inc. (Enray), a leading manufacturer and marketer of premium organic, gluten-free ancient grain products, was acquired on August 20, 2013. Silocaf of New Orleans, Inc. (Silocaf), a strategic investment related to our green coffee supply chain, was acquired on September 5, 2013.
The purchase price for each business acquired was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The purchase price allocations include total intangible assets of $37.6 for both Enray and Silocaf. To the extent the purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired, the excess was allocated to goodwill. Preliminary valuations resulted in Enray goodwill of $28.7, which was assigned to the International, Foodservice, and Natural Foods segment, and Silocaf goodwill of $22.0, which was assigned to the U.S. Retail Coffee segment, as detailed below.
U.S. Retail
Coffee |
U.S. Retail
Consumer Foods |
International,
Foodservice, and Natural Foods |
Total | |||||||||||||
Balance at May 1, 2012 |
$ | 1,720.3 | $ | 1,035.2 | $ | 299.1 | $ | 3,054.6 | ||||||||
Other |
| (0.6 | ) | (1.1 | ) | (1.7 | ) | |||||||||
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Balance at April 30, 2013 |
$ | 1,720.3 | $ | 1,034.6 | $ | 298.0 | $ | 3,052.9 | ||||||||
Acquisitions |
22.0 | | 28.7 | 50.7 | ||||||||||||
Other |
| (1.0 | ) | (1.9 | ) | (2.9 | ) | |||||||||
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Balance at October 31, 2013 |
$ | 1,742.3 | $ | 1,033.6 | $ | 324.8 | $ | 3,100.7 | ||||||||
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6
The results of operations for both of the acquired businesses are included in the condensed consolidated financial statements from the date of the transaction and did not have a material impact on the quarter ended October 31, 2013, nor expected to materially affect results of operations for the year ending April 30, 2014.
Note 4: 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. We expect to incur restructuring costs of approximately $260.0 for all of our restructuring plans, of which $239.6 has been incurred through October 31, 2013. 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 October 31, 2013, approximately 80 percent of the 850 full-time positions have been reduced and the impacted facilities have been closed, except the Ste. Marie, Quebec facility, which is anticipated to close in the fourth quarter of 2014.
The following table summarizes the restructuring activity, including the liabilities recorded 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 |
$ | 102.0 | $ | 67.0 | $ | 42.5 | $ | 39.0 | $ | 9.5 | $ | 260.0 | ||||||||||||
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Balance at May 1, 2012 |
$ | | $ | 8.8 | $ | | $ | | $ | | $ | 8.8 | ||||||||||||
Charge to expense |
8.2 | 3.4 | 13.4 | 10.8 | 3.0 | 38.8 | ||||||||||||||||||
Cash payments |
| (4.5 | ) | (13.4 | ) | (10.8 | ) | (3.0 | ) | (31.7 | ) | |||||||||||||
Noncash utilization |
(8.2 | ) | | | | | (8.2 | ) | ||||||||||||||||
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Balance at April 30, 2013 |
$ | | $ | 7.7 | $ | | $ | | $ | | $ | 7.7 | ||||||||||||
Charge to expense |
1.7 | 2.5 | 3.9 | 3.4 | 0.5 | 12.0 | ||||||||||||||||||
Cash payments |
| (2.1 | ) | (3.9 | ) | (3.4 | ) | (0.5 | ) | (9.9 | ) | |||||||||||||
Noncash utilization |
(1.7 | ) | (0.2 | ) | | | | (1.9 | ) | |||||||||||||||
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Balance at October 31, 2013 |
$ | | $ | 7.9 | $ | | $ | | $ | | $ | 7.9 | ||||||||||||
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Remaining expected restructuring charge |
$ | 0.4 | $ | 3.6 | $ | 5.6 | $ | 9.0 | $ | 1.8 | $ | 20.4 | ||||||||||||
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In the three and six months ended October 31, 2013, total restructuring charges of $6.8 and $12.0, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $2.1 and $3.5 were reported in cost of products sold in the three and six months ended October 31, 2013, respectively, while the remaining charges were reported in other restructuring and merger and integration costs. In the three and six months ended October 31, 2012, total restructuring charges of $10.3 and $24.8, respectively, were reported in the Condensed Statements of Consolidated Income. Of the total restructuring charges, $2.0 and $5.6 were reported in cost of products sold in the three and six months ended October 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 include plant start-up costs at the new facilities and long-lived asset charges for accelerated depreciation related to property, plant, and equipment that had been used at the affected production facilities prior to closure.
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.
Other costs include professional fees, costs related to closing the facilities, and miscellaneous expenditures associated with the restructuring initiative and are expensed as incurred.
7
Note 5: Common Shares
The following table sets forth common share information.
October 31, 2013 | April 30, 2013 | |||||||
Common shares authorized |
300,000,000 | 150,000,000 | ||||||
Common shares outstanding |
105,138,908 | 106,486,935 | ||||||
Treasury shares |
23,466,257 | 22,118,230 |
We repurchased 1.5 million common shares for $152.2 during the first quarter of 2014. During 2013, we repurchased 4.0 million common shares for $359.4. As of October 31, 2013, we had 3.4 million common shares remaining available for repurchase under our Board of Directors most recent authorization.
During the second quarter of 2014, our shareholders approved an amendment to our Amended Articles of Incorporation to increase the number of common shares authorized for issuance by the Company from 150.0 million common shares to 300.0 million common shares.
Note 6: Reportable Segments
We operate in one industry: the manufacturing and marketing of food products. We have 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 Jif ® , Smuckers ® , Pillsbury ® , Crisco ® , Martha White ® , Hungry Jack ® , and Eagle Brand ® 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 net sales, less direct and allocable operating expenses, and is consistent with the way in which we manage our segments. However, we do not represent that the segments, if operated independently, would report operating profit equal to the segment profit set forth below, as segment profit excludes certain operating expenses such as corporate administrative expenses.
Three Months Ended
October 31, |
Six Months Ended
October 31, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Net sales: |
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U.S. Retail Coffee |
$ | 594.9 | $ | 622.5 | $ | 1,109.3 | $ | 1,143.3 | ||||||||
U.S. Retail Consumer Foods |
612.6 | 619.3 | 1,149.0 | 1,147.7 | ||||||||||||
International, Foodservice, and Natural Foods |
352.4 | 386.9 | 652.5 | 707.4 | ||||||||||||
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Total net sales |
$ | 1,559.9 | $ | 1,628.7 | $ | 2,910.8 | $ | 2,998.4 | ||||||||
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Segment profit: |
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U.S. Retail Coffee |
$ | 180.6 | $ | 158.2 | $ | 326.6 | $ | 284.6 | ||||||||
U.S. Retail Consumer Foods |
99.2 | 111.1 | 195.6 | 218.9 | ||||||||||||
International, Foodservice, and Natural Foods |
47.4 | 58.2 | 90.8 | 98.9 | ||||||||||||
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Total segment profit |
$ | 327.2 | $ | 327.5 | $ | 613.0 | $ | 602.4 | ||||||||
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Interest expensenet |
(20.5 | ) | (23.9 | ) | (44.3 | ) | (47.5 | ) | ||||||||
Cost of products soldrestructuring and merger and integration |
(2.3 | ) | (2.4 | ) | (3.8 | ) | (6.4 | ) | ||||||||
Other restructuring and merger and integration costs |
(6.9 | ) | (11.5 | ) | (12.7 | ) | (28.7 | ) | ||||||||
Other special project costs |
| | | (6.7 | ) | |||||||||||
Corporate administrative expenses |
(67.2 | ) | (66.0 | ) | (132.4 | ) | (122.5 | ) | ||||||||
Other (expense) incomenet |
(0.3 | ) | 0.5 | (0.3 | ) | 0.9 | ||||||||||
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Income before income taxes |
$ | 230.0 | $ | 224.2 | $ | 419.5 | $ | 391.5 | ||||||||
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8
Note 7: Debt and Financing Arrangements
Long-term debt consists of the following:
October 31, 2013 | April 30, 2013 | |||||||
4.78% Senior Notes due June 1, 2014 |
$ | 100.0 | $ | 100.0 | ||||
6.12% Senior Notes due November 1, 2015 |
24.0 | 24.0 | ||||||
6.63% Senior Notes due November 1, 2018 |
393.5 | 395.0 | ||||||
3.50% Senior Notes due October 15, 2021 |
766.1 | 748.8 | ||||||
5.55% Senior Notes due April 1, 2022 |
350.0 | 350.0 | ||||||
4.50% Senior Notes due June 1, 2025 |
400.0 | 400.0 | ||||||
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Total long-term debt |
$ | 2,033.6 | $ | 2,017.8 | ||||
Current portion of long-term debt |
150.0 | 50.0 | ||||||
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Total long-term debt, less current portion |
$ | 1,883.6 | $ | 1,967.8 | ||||
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The 3.50 percent Senior Notes were issued in a public offering and the remaining Senior Notes were privately placed. The Senior Notes are unsecured and interest is paid semiannually. Scheduled payments are required on the 5.55 percent Senior Notes, of which $50.0 is due on April 1, 2014, and on the 4.50 percent Senior Notes, the first of which is $100.0 due on June 1, 2020. The $100.0 balance of the 4.78 percent Senior Notes is due on June 1, 2014. We 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.
Interest paid totaled $22.8 and $26.7 for the three months ended October 31, 2013 and 2012, respectively, and $45.2 and $48.9 for the six months ended October 31, 2013 and 2012, respectively. This differs from interest expense due to the timing of payments, amortization of fair value adjustments, amortization of debt issue costs, and interest capitalized.
In the second quarter of 2014, we entered into an interest rate swap, with a notional amount of $750.0, on the 3.50 percent Senior Notes due October 15, 2021, converting the Senior Notes from a fixed to a variable rate basis. The interest rate swap was designated as a fair value hedge of the underlying debt obligation. At October 31, 2013, a net gain from changes in the fair value of the interest rate swap of $17.2 was recognized in interest expense with a corresponding offset due to changes in the fair value of the hedged underlying debt, resulting in no net impact to interest expense. For additional information, see Note 11: Derivative Financial Instruments.
On September 6, 2013, we entered into an amended and restated credit agreement with a group of eleven banks. The credit facility, which amends and restates our $1.0 billion credit agreement dated as of July 29, 2011, provides for a revolving credit line of $1.5 billion and extends the maturity to September 6, 2018. Borrowings under the revolving credit facility bear interest based on the prevailing U.S. Prime Rate, Canadian Base Rate, London Interbank Offered Rate (LIBOR), or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. At October 31, 2013, we had a balance outstanding under the revolving credit facility of $207.0 at a weighted-average interest rate of 1.10 percent.
Our debt instruments contain certain financial covenant restrictions including consolidated net worth, a leverage ratio, and an interest coverage ratio. We are in compliance with all covenants.
9
Note 8: 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 October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income |
$ | 153.4 | $ | 148.8 | $ | 280.0 | $ | 259.7 | ||||||||
Net income allocated to participating securities |
1.2 | 1.2 | 2.3 | 2.2 | ||||||||||||
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Net income allocated to common stockholders |
$ | 152.2 | $ | 147.6 | $ | 277.7 | $ | 257.5 | ||||||||
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Weighted-average common shares outstanding |
104,311,146 | 108,269,499 | 104,694,335 | 108,844,046 | ||||||||||||
Dilutive effect of stock options |
15,251 | 26,600 | 16,003 | 28,068 | ||||||||||||
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Weighted-average common shares outstandingassuming dilution |
104,326,397 | 108,296,099 | 104,710,338 | 108,872,114 | ||||||||||||
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Net income per common share |
$ | 1.46 | $ | 1.36 | $ | 2.65 | $ | 2.37 | ||||||||
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Net income per common shareassuming dilution |
$ | 1.46 | $ | 1.36 | $ | 2.65 | $ | 2.36 | ||||||||
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Note 9: Pensions and Other Postretirement Benefits
The components of our net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below.
Three Months Ended October 31, | ||||||||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Service cost |
$ | 2.2 | $ | 2.3 | $ | 0.5 | $ | 0.5 | ||||||||
Interest cost |
5.6 | 6.0 | 0.5 | 0.8 | ||||||||||||
Expected return on plan assets |
(6.4 | ) | (6.3 | ) | | | ||||||||||
Recognized net actuarial loss |
3.3 | 3.2 | | | ||||||||||||
Other |
0.3 | 0.3 | (0.2 | ) | (0.1 | ) | ||||||||||
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Net periodic benefit cost |
$ | 5.0 | $ | 5.5 | $ | 0.8 | $ | 1.2 | ||||||||
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Six Months Ended October 31, | ||||||||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Service cost |
$ | 4.4 | $ | 4.6 | $ | 1.1 | $ | 1.2 | ||||||||
Interest cost |
11.0 | 12.0 | 1.1 | 1.5 | ||||||||||||
Expected return on plan assets |
(12.8 | ) | (12.6 | ) | | | ||||||||||
Recognized net actuarial loss |
6.6 | 6.6 | | | ||||||||||||
Settlement loss |
| 6.7 | | | ||||||||||||
Other |
0.6 | 0.5 | (0.5 | ) | (0.1 | ) | ||||||||||
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Net periodic benefit cost |
$ | 9.8 | $ | 17.8 | $ | 1.7 | $ | 2.6 | ||||||||
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Note 10: Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings. We cannot predict with certainty the ultimate results of these proceedings or reasonably determine a range of potential loss. Our 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, we do not believe the final outcome of these proceedings will have a material adverse effect on our financial position, results of operations, or cash flows.
10
Note 11: Derivative Financial Instruments
We are 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, we enter into various derivative transactions. We have policies in place that define acceptable instrument types we may enter into and establish controls to limit our market risk exposure.
Commodity Price Management: We enter into commodity futures and options contracts to manage the price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of key raw materials, notably green coffee, edible oils, and flour. We also enter 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 meet the hedge accounting 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 commoditys 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 realized and unrealized 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, we would expect that any gain or loss in the estimated fair value of the derivatives would generally be offset by an increase or decrease in the estimated fair value of the underlying exposures.
Foreign Currency Exchange Rate Hedging: We utilize 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 deferred gains or losses are reclassified to earnings in the period in which the hedged transaction affects earnings. The ineffective portion of these contracts is immediately recognized in earnings.
Interest Rate Hedging: We utilize derivative instruments to manage changes in the fair value and cash flows of our 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 interest rate swap would be recognized at fair value on the balance sheet and changes in the fair value would be recognized in interest expense. Generally, gains and losses recognized on the instrument have no net impact to earnings as the change in the fair value of the derivative is equal to the change in the fair value of the underlying debt.
During the second quarter of 2014, we entered into an interest rate swap on the 3.50 percent Senior Notes due October 15, 2021, which was designated as a fair value hedge and used to hedge against the changes in the fair value of the debt. We receive cash flows from the counterparty at a fixed rate and pay the counterparty variable rates based on the LIBOR. The interest rate swap was recognized at fair value in the Condensed
11
Consolidated Balance Sheet at October 31, 2013, and changes in the fair value were recognized in interest expense. The net gain of $17.2 recognized on the derivative instrument during the second quarter had no net impact to earnings, as the change in the fair value of the derivative was equal to the change in fair value of the underlying debt. There were no interest rate swaps outstanding at April 30, 2013.
The following table sets forth the gross fair value amounts of derivative instruments recognized in the Condensed Consolidated Balance Sheets.
October 31, 2013 | April 30, 2013 | |||||||||||||||||||
Other
Current Assets |
Other
Current Liabilities |
Other
Noncurrent Liabilities |
Other
Current Assets |
Other
Current Liabilities |
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Derivatives designated as hedging instruments: |
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Interest rate contract |
$ | 18.2 | $ | | $ | 1.0 | $ | | $ | | ||||||||||
Commodity contracts |
1.0 | 3.8 | | 2.1 | 2.0 | |||||||||||||||
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Total derivatives designated as hedging instruments |
$ | 19.2 | $ | 3.8 | $ | 1.0 | $ | 2.1 | $ | 2.0 | ||||||||||
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Derivatives not designated as hedging instruments: |
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Commodity contracts |
$ | 5.4 | $ | 4.6 | $ | | $ | 3.6 | $ | 2.3 | ||||||||||
Foreign currency exchange contracts |
0.8 | 0.2 | | 0.7 | 0.2 | |||||||||||||||
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Total derivatives not designated as hedging instruments |
$ | 6.2 | $ | 4.8 | $ | | $ | 4.3 | $ | 2.5 | ||||||||||
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Total derivative instruments |
$ | 25.4 | $ | 8.6 | $ | 1.0 | $ | 6.4 | $ | 4.5 | ||||||||||
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During the first quarter of 2014, we adopted FASB ASU 2011-11, Disclosures about Offsetting Assets and Liabilities , as clarified by ASU 2013-01, Scope Clarification of Disclosures about Offsetting Assets and Liabilities . ASU 2011-11, as clarified by ASU 2013-01, requires additional disclosures around netting of derivatives. We have elected to not offset fair value amounts recognized for our exchange-traded commodity derivative instruments and our cash margin accounts executed with the same counterparty that are generally subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of our open positions. At October 31, 2013 and April 30, 2013, we maintained cash margin account balances of $7.2 and $5.5, respectively, included in other current assets in the Condensed Consolidated Balance Sheets. In the event of default and immediate net settlement of all of our open positions with individual counterparties, all of our derivative liabilities would be fully offset by either our derivative asset positions or margin accounts based on the net asset or liability position with our individual counterparties.
The following table presents information on pre-tax commodity contract gains and losses recognized on derivatives designated as cash flow hedges.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Losses recognized in other comprehensive (loss) income (effective portion) |
$ | (4.6 | ) | $ | (13.1 | ) | $ | (10.6 | ) | $ | (15.3 | ) | ||||
Losses reclassified from accumulated other comprehensive loss to cost of products sold (effective portion) |
(3.9 | ) | (12.5 | ) | (12.7 | ) | (19.0 | ) | ||||||||
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Change in accumulated other comprehensive loss |
$ | (0.7 | ) | $ | (0.6 | ) | $ | 2.1 | $ | 3.7 | ||||||
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Gains (losses) recognized in cost of products sold (ineffective portion) |
$ | 0.1 | $ | (0.1 | ) | $ | 0.1 | $ | (0.2 | ) | ||||||
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Included as a component of accumulated other comprehensive loss at October 31, 2013 and April 30, 2013, were deferred pre-tax losses of $10.0 and $12.2, respectively, related to commodity contracts. The related tax impact recognized in accumulated other comprehensive loss was a benefit of $3.7 and $4.4 at October 31, 2013 and April 30, 2013, respectively. The entire amount of the deferred loss included in accumulated other comprehensive loss at October 31, 2013, is expected to be recognized in earnings within one year as the related commodities are sold.
Included as a component of accumulated other comprehensive loss at October 31, 2013 and April 30, 2013, were deferred pre-tax losses of $5.1 and $5.4, respectively, related to the termination of a prior interest rate swap in October 2011 on the 3.50 percent Senior Notes due October 15, 2021. The related tax benefit recognized in accumulated other comprehensive loss was $1.8 and $1.9 at October 31, 2013 and April 30, 2013, respectively. Approximately $0.6 of the pre-tax loss will be recognized over the next 12 months.
12
We reclassified $0.2 of the loss recognized on the interest rate swap designated as a cash flow hedge from other comprehensive loss to interest expense during the three months ended October 31, 2013 and 2012, respectively, and $0.3 during the six months ended October 31, 2013 and 2012, respectively.
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 October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Unrealized (losses) gains on commodity contracts |
$ | (1.5 | ) | $ | (11.2 | ) | $ | 3.0 | $ | 8.4 | ||||||
Unrealized gains on foreign currency exchange contracts |
| 0.9 | 0.1 | 1.0 | ||||||||||||
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Total unrealized (losses) gains recognized in cost of products sold |
$ | (1.5 | ) | $ | (10.3 | ) | $ | 3.1 | $ | 9.4 | ||||||
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Realized gains (losses) on commodity contracts |
$ | 0.3 | $ | 7.2 | $ | (6.1 | ) | $ | (0.6 | ) | ||||||
Realized gains (losses) on foreign currency exchange contracts |
0.8 | (0.3 | ) | 1.8 | (0.2 | ) | ||||||||||
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Total realized gains (losses) recognized in cost of products sold |
$ | 1.1 | $ | 6.9 | $ | (4.3 | ) | $ | (0.8 | ) | ||||||
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Total (losses) gains recognized in cost of products sold |
$ | (0.4 | ) | $ | (3.4 | ) | $ | (1.2 | ) | $ | 8.6 | |||||
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The following table presents the gross contract notional value of outstanding derivative contracts.
October 31, 2013 | April 30, 2013 | |||||||
Commodity contracts |
$ | 324.5 | $ | 347.6 | ||||
Foreign currency exchange contracts |
63.0 | 56.8 | ||||||
Interest rate contract |
750.0 | |
Note 12: Other Financial Instruments and Fair Value Measurements
Financial instruments, other than derivatives, that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade receivables. The carrying value of these financial instruments approximates fair value. Our other financial instruments, with the exception of long-term debt, are recognized at estimated fair value in the Condensed Consolidated Balance Sheets.
The following table provides information on the carrying amounts and fair values of our financial instruments.
October 31, 2013 | April 30, 2013 | |||||||||||||||
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value | |||||||||||||
Other investments |
$ | 52.2 | $ | 52.2 | $ | 48.8 | $ | 48.8 | ||||||||
Derivative financial instrumentsnet |
15.8 | 15.8 | 1.9 | 1.9 | ||||||||||||
Long-term debt |
(2,033.6 | ) | (2,290.5 | ) | (2,017.8 | ) | (2,388.1 | ) |
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 our market assumptions.
13
The following tables summarize the fair values and the levels within the fair value hierarchy in which the fair value measurements fall for our financial instruments.
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Fair Value at
October 31, 2013 |
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Other investments: (A) |
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Equity mutual funds |
$ | 22.7 | $ | | $ | | $ | 22.7 | ||||||||
Municipal obligations |
| 28.7 | | 28.7 | ||||||||||||
Other investments |
0.8 | | | 0.8 | ||||||||||||
Derivatives: (B) |
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Commodity contractsnet |
(1.7 | ) | (0.3 | ) | | (2.0 | ) | |||||||||
Foreign currency exchange contractsnet |
0.1 | 0.5 | | 0.6 | ||||||||||||
Interest rate contractnet |
| 17.2 | | 17.2 | ||||||||||||
Long-term debt (C) |
(757.5 | ) | (1,533.0 | ) | | (2,290.5 | ) | |||||||||
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Total financial instruments measured at fair value |
$ | (735.6 | ) | $ | (1,486.9 | ) | $ | | $ | (2,222.5 | ) | |||||
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Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Fair Value at
April 30, 2013 |
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Other investments: (A) |
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Equity mutual funds |
$ | 21.6 | $ | | $ | | $ | 21.6 | ||||||||
Municipal obligations |
| 26.6 | | 26.6 | ||||||||||||
Other investments |
0.6 | | | 0.6 | ||||||||||||
Derivatives: (B) |
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Commodity contractsnet |
0.7 | 0.7 | | 1.4 | ||||||||||||
Foreign currency exchange contractsnet |
| 0.5 | | 0.5 | ||||||||||||
Long-term debt (C) |
(803.6 | ) | (1,584.5 | ) | | (2,388.1 | ) | |||||||||
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Total financial instruments measured at fair value |
$ | (780.7 | ) | $ | (1,556.7 | ) | $ | | $ | (2,337.4 | ) | |||||
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(A) | Other investments consist of funds maintained for the payment of benefits associated with nonqualified retirement plans. The funds include Level 1 equity securities listed in active markets and Level 2 municipal obligations valued by a third party using valuation techniques that utilize inputs which are derived principally from or corroborated by observable market data. As of October 31, 2013, our municipal obligations are scheduled to mature as follows: $0.9 in 2014, $2.1 in 2015, $0.5 in 2016, $1.8 in 2017, and $23.4 in 2018 and beyond. |
(B) | Level 1 commodity contract derivatives are valued using quoted market prices for identical instruments in active markets. Level 2 commodity contract and foreign exchange contract derivatives are valued using quoted prices for similar assets or liabilities in active markets. The Level 2 interest rate contract derivative is valued using the income approach, observable Level 2 market expectations at the measurement date, and standard valuation techniques to convert future amounts to a single discounted present value. Level 2 inputs for the interest rate contract are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. For additional information, see Note 11: Derivative Financial Instruments. |
(C) | Long-term debt is comprised of public Senior Notes classified as Level 1 and private Senior Notes classified as Level 2. The public Senior 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 fair market yield curve. |
14
Note 13: Income Taxes
During the three-month and six-month period ended October 31, 2013, 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 12 months, it is reasonably possible that we could decrease our unrecognized tax benefits by an additional $3.9, primarily as a result of expiring statute of limitations periods.
Note 14: Accumulated Other Comprehensive Loss
On May 1, 2013, we adopted FASB ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . In accordance with ASU 2013-02, the components of accumulated other comprehensive loss, including the reclassification adjustments for items that are reclassified from accumulated other comprehensive loss to net income are shown below.
Unrealized | Unrealized | |||||||||||||||||||
Foreign | Pension and | Gain (Loss) | (Loss) Gain on | Accumulated | ||||||||||||||||
Currency | Other | on Available- | Cash Flow | Other | ||||||||||||||||
Translation | Postretirement | for-Sale | Hedging | Comprehensive | ||||||||||||||||
Adjustment | Liabilities (A) | Securities | Derivatives (B) | Loss | ||||||||||||||||
Balance at May 1, 2013 |
$ | 61.5 | $ | (131.4 | ) | $ | 4.5 | $ | (11.2 | ) | $ | (76.6 | ) | |||||||
Reclassification adjustments |
| 6.0 | | 13.0 | 19.0 | |||||||||||||||
Current period (charge) credit |
(10.6 | ) | (2.2 | ) | 0.2 | (10.6 | ) | (23.2 | ) | |||||||||||
Income tax expense |
| (1.3 | ) | (0.1 | ) | (0.8 | ) | (2.2 | ) | |||||||||||
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Balance at October 31, 2013 |
$ | 50.9 | $ | (128.9 | ) | $ | 4.6 | $ | (9.6 | ) | $ | (83.0 | ) | |||||||
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(A) | Amortization of net losses was reclassified from accumulated other comprehensive loss to selling, distribution, and administrative expenses. |
(B) | Of the total losses reclassified from accumulated other comprehensive loss, $12.7 was reclassified to cost of products sold related to commodity derivatives and $0.3 was reclassified to interest expense related to the interest rate swap. |
Note 15: Guarantor and Non-Guarantor Financial Information
Our 3.50 percent Senior Notes due October 15, 2021, are fully and unconditionally guaranteed, on a joint and several basis, by: J.M. Smucker LLC and The Folgers Coffee Company (the subsidiary guarantors), which are 100 percent wholly-owned subsidiaries of the Company. A subsidiary guarantor will be released from its obligations under the indenture governing the notes (a) if we exercise our legal or covenant defeasance option or if our obligations under the indenture are discharged in accordance with the terms of the indenture or (b) upon delivery of an officers certificate to the trustee that the subsidiary guarantor does not guarantee our obligations under any of our 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.
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 our 100 percent wholly-owned subsidiary guarantors and non-guarantor subsidiaries. We have accounted for investments in subsidiaries using the equity method.
15
CONDENSED STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
16
CONDENSED STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME | ||||||||||||||||||||
Six Months Ended October 31, 2012 | ||||||||||||||||||||
The J.M. Smucker
Company (Parent) |
Subsidiary
Guarantors |
Non-Guarantor
Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 1,537.0 | $ | 676.4 | $ | 2,847.0 | $ | (2,062.0 | ) | $ | 2,998.4 | |||||||||
Cost of products sold |
1,287.2 | 620.9 | 2,138.3 | (2,059.7 | ) | 1,986.7 | ||||||||||||||
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Gross Profit |
249.8 | 55.5 | 708.7 | (2.3 | ) | 1,011.7 | ||||||||||||||
Selling, distribution, and administrative expenses, restructuring, merger and integration, and other special project costs |
116.0 | 22.7 | 386.1 | | 524.8 | |||||||||||||||
Amortization |
5.9 | | 42.5 | | 48.4 | |||||||||||||||
Other operating (income) expensenet |
(0.7 | ) | (1.3 | ) | 2.4 | | 0.4 | |||||||||||||
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Operating Income |
128.6 | 34.1 | 277.7 | (2.3 | ) | 438.1 | ||||||||||||||
Interest (expense) incomenet |
(47.9 | ) | 0.6 | (0.2 | ) | | (47.5 | ) | ||||||||||||
Other income (expense)net |
9.5 | 0.7 | (9.3 | ) | | 0.9 | ||||||||||||||
Equity in net earnings of subsidiaries |
199.1 | 73.4 | 34.7 | (307.2 | ) | | ||||||||||||||
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Income Before Income Taxes |
289.3 | 108.8 | 302.9 | (309.5 | ) | 391.5 | ||||||||||||||
Income taxes |
29.6 | 0.2 | 102.0 | | 131.8 | |||||||||||||||
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Net Income |
$ | 259.7 | $ | 108.6 | $ | 200.9 | $ | (309.5 | ) | $ | 259.7 | |||||||||
Other comprehensive income (loss), net of tax |
3.8 | 1.6 | (0.4 | ) | (1.2 | ) | 3.8 | |||||||||||||
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Comprehensive Income |
$ | 263.5 | $ | 110.2 | $ | 200.5 | $ | (310.7 | ) | $ | 263.5 | |||||||||
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17
CONDENSED CONSOLIDATED BALANCE SHEETS
18
19
Item 2. Managements 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 six-month periods ended October 31, 2013 and 2012. Results for the quarter and six months ended October 31, 2013, include the operations of 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; SweetN Low ® , NatraTaste ® , Sugar In The Raw ® , and the other In The Raw trademarks are registered trademarks of Cumberland Packing Corp. 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 October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net sales |
$ | 1,559.9 | $ | 1,628.7 | $ | 2,910.8 | $ | 2,998.4 | ||||||||
Gross profit |
$ | 552.6 | $ | 541.9 | $ | 1,045.5 | $ | 1,011.7 | ||||||||
% of net sales |
35.4 | % | 33.3 | % | 35.9 | % | 33.7 | % | ||||||||
Operating income |
$ | 250.8 | $ | 247.6 | $ | 464.1 | $ | 438.1 | ||||||||
% of net sales |
16.1 | % | 15.2 | % | 15.9 | % | 14.6 | % | ||||||||
Net income: |
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Net income |
$ | 153.4 | $ | 148.8 | $ | 280.0 | $ | 259.7 | ||||||||
Net income per common shareassuming dilution |
$ | 1.46 | $ | 1.36 | $ | 2.65 | $ | 2.36 | ||||||||
Gross profit excluding special project costs (1) |
$ | 554.9 | $ | 544.3 | $ | 1,049.3 | $ | 1,018.1 | ||||||||
% of net sales |
35.6 | % | 33.4 | % | 36.0 | % | 34.0 | % | ||||||||
Operating income excluding special project costs (1) |
$ | 260.0 | $ | 261.5 | $ | 480.6 | $ | 479.9 | ||||||||
% of net sales |
16.7 | % | 16.1 | % | 16.5 | % | 16.0 | % | ||||||||
Income excluding special project costs: (1) |
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Income |
$ | 159.5 | $ | 158.1 | $ | 291.0 | $ | 287.5 | ||||||||
Income per common shareassuming dilution |
$ | 1.52 | $ | 1.45 | $ | 2.76 | $ | 2.62 |
(1) | Refer to Non-GAAP Measures located on page 28 for a reconciliation to the comparable GAAP financial measure. |
Net sales in the second quarter of 2014 decreased 4 percent, compared to the second quarter of 2013, reflecting price declines taken over the past 12 months and the impact of the planned exit of certain portions of our business in the International, Foodservice, and Natural Foods segment. Operating income increased 1 percent in the second quarter of 2014, compared to the second quarter of 2013, driven by favorable mix and a decline in unrealized mark-to-market losses on derivative contracts, partially offset by an increase in selling, distribution, and administrative (SD&A) expenses. Operating income decreased 1 percent excluding the impact of restructuring, merger and integration, and certain pension settlement costs (special project costs). Net income per diluted share increased 7 percent for the second quarter of 2014, as compared to the second quarter of 2013, while income per diluted share excluding special project costs increased 5 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 over the past 12 months.
20
Net sales in the first six months of 2014 decreased 3 percent, compared to the first six months of 2013, reflecting price declines taken over the past 12 months and the impact of the planned exit of certain portions of our business in the International, Foodservice, and Natural Foods segment. Operating income increased 6 percent in the first six months of 2014, compared to the first six months of 2013, driven by favorable mix and lower special project costs, partially offset by an increase in SD&A expenses. Excluding the impact of special project costs, operating income was flat in the first six months of 2014, as compared to the prior period. Net income per diluted share increased 12 percent for the first six months of 2014, compared to the first six months of 2013, while income per diluted share excluding special project costs increased 5 percent. Both measures reflect the benefit of a decrease in weighted-average common shares outstanding as a result of our share repurchase activities over the past 12 months.
Net Sales
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||||||||||
2013 | 2012 |
Increase
(Decrease) |
% | 2013 | 2012 |
Increase
(Decrease) |
% | |||||||||||||||||||||||||
Net sales |
$ | 1,559.9 | $ | 1,628.7 | $ | (68.8 | ) | (4 | )% | $ | 2,910.8 | $ | 2,998.4 | $ | (87.6 | ) | (3 | )% | ||||||||||||||
Adjust for certain noncomparable items: |
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Enray acquisition |
(11.3 | ) | | (11.3 | ) | (1 | ) | (11.3 | ) | | (11.3 | ) | | |||||||||||||||||||
Cumberland distribution agreement |
(10.2 | ) | | (10.2 | ) | (1 | ) | (12.6 | ) | | (12.6 | ) | | |||||||||||||||||||
Foreign exchange |
6.7 | | 6.7 | | 7.6 | | 7.6 | | ||||||||||||||||||||||||
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Net sales adjusted for certain noncomparable items (1) |
$ | 1,545.1 | $ | 1,628.7 | $ | (83.6 | ) | (5 | )% | $ | 2,894.5 | $ | 2,998.4 | $ | (103.9 | ) | (3 | )% | ||||||||||||||
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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 $68.8, or 4 percent, in the second quarter of 2014, compared to the second quarter of 2013, due to the impact of a 4 percent reduction in net price realization reflecting price declines taken over the past 12 months, notably on coffee and peanut butter. Favorable sales mix contributed 1 percent to net sales in the second quarter of 2014 and was attributed to volume gains in retail coffee combined with a decrease in flour. Contributing to net sales in the second quarter of 2014 was a combined $21.5 from the acquired Enray business and Cumberland distribution agreement. Volume gains were realized in Crisco oils, Folgers coffee, Jif peanut butter, Smuckers fruit spreads, and Dunkin Donuts packaged coffee. Excluding the impact of the exited portions of our hot beverage and Smuckers Uncrustables ® frozen sandwich businesses with foodservice customers, volume decreased 1 percent, driven primarily by flour and canned milk. Both volume measures exclude the impact of Enray and Cumberland.
Net sales decreased $87.6, or 3 percent, in the first six months of 2014, compared to the first six months of 2013, primarily due to a 4 percent reduction in net price realization reflecting price declines taken over the past 12 months, partially offset by favorable sales mix, which contributed 1 percent to net sales in the first six months of 2014, and a combined $23.9 contribution from the Enray and Cumberland businesses. Volume gains were realized in Crisco oils, Jif peanut butter, and Folgers coffee. Excluding the impact of the exited portions of our hot beverage and Smuckers Uncrustables frozen sandwich businesses with foodservice customers, volume was flat. Both volume measures exclude the impact of Enray and Cumberland.
21
Operating Income
The following table presents the components of operating income as a percentage of net sales.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gross profit |
35.4 | % | 33.3 | % | 35.9 | % | 33.7 | % | ||||||||
Selling, distribution, and administrative expenses: |
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Marketing |
5.4 | % | 5.1 | % | 5.6 | % | 5.2 | % | ||||||||
Selling |
3.5 | 3.2 | 3.5 | 3.3 | ||||||||||||
Distribution |
2.7 | 2.5 | 2.8 | 2.6 | ||||||||||||
General and administrative |
5.7 | 5.0 | 6.0 | 5.2 | ||||||||||||
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Total selling, distribution, and administrative expenses |
17.3 | % | 15.8 | % | 17.9 | % | 16.3 | % | ||||||||
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Amortization |
1.6 | 1.5 | 1.7 | 1.6 | ||||||||||||
Other restructuring, merger and integration, and special project costs |
0.4 | 0.7 | 0.4 | 1.2 | ||||||||||||
Other operating (income) expensenet |
| 0.1 | | | ||||||||||||
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Operating income |
16.1 | % | 15.2 | % | 15.9 | % | 14.6 | % | ||||||||
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Amounts may not add due to rounding.
Gross profit increased $10.7, or 2 percent, in the second quarter of 2014, compared to the second quarter of 2013, and gross margin increased from 33.3 percent to 35.4 percent. Unrealized mark-to-market adjustments on derivative contracts contributed $8.8 to the increase in gross profit as the impact of losses decreased from $10.3 in the second quarter of 2013 to $1.5 in the second quarter of 2014.
The favorable impact of an increase in U.S. Retail Coffee segment volume and the addition of the Enray and Cumberland businesses contributed to gross profit in the second quarter of 2014, but were mostly offset by the impact of the exited foodservice businesses. In addition, gross profit in the second quarter of 2014 was impacted by an increase in temporary incremental costs at our new fruit spreads manufacturing facility and capacity expansion costs at our Smuckers Uncrustables frozen sandwich facility.
Overall commodity costs were lower during the second quarter of 2014, compared to the second quarter of 2013, due primarily to green coffee. However, the impact of price declines taken across all categories more than offset the benefit of these lower commodity costs resulting in a slightly unfavorable impact on gross profit.
SD&A expenses increased 5 percent in the second quarter of 2014, compared to the second quarter of 2013, and increased as a percentage of net sales from 15.8 percent to 17.3 percent. General and administrative expenses increased 10 percent in the second quarter of 2014, compared to the second quarter of 2013, primarily due to certain expenses in the prior year being favorably impacted by a cost savings program. Selling expenses increased 6 percent while marketing and distribution expenses increased 2 percent and 3 percent, respectively, in the second quarter of 2014, compared to the second quarter of 2013.
Operating income increased $3.2, or 1 percent, in the second quarter of 2014, compared to the second quarter of 2013, as special project costs were $4.7 lower in the second quarter of 2014. Excluding special project costs in both periods, operating income decreased $1.5, but increased from 16.1 percent of net sales in the second quarter of 2013 to 16.7 percent in the second quarter of 2014.
Gross profit increased $33.8, or 3 percent, in the first six months of 2014, compared to the first six months of 2013, and gross margin increased from 33.7 percent to 35.9 percent over the same period. The increase in gross profit was due to favorable mix which was partially driven by coffee and the net benefit of lower commodity costs, partially offset by the impact of the exited foodservice businesses and the unfavorable impact of a $6.3 change in the amount of unrealized mark-to-market gains on derivative contracts. Unrealized mark-to-market gains were $3.1 in the first six months of 2014, compared to $9.4 in the first six months of 2013.
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Overall commodity costs were lower during the first six months of 2014, compared to the first six months of 2013, due primarily to green coffee. The benefit of lower commodity costs was somewhat reduced by price declines taken over the past year.
SD&A expenses increased 6 percent in the first six months of 2014, compared to the first six months of 2013, and increased as a percentage of net sales from 16.3 percent to 17.9 percent. General and administrative expenses increased 12 percent in the first six months of 2014, compared to the first six months of 2013, driven by certain corporate initiatives, employee compensation costs, and expenses associated with a major information system upgrade. Marketing expenses increased 4 percent, primarily due to an increase in coffee brand building investments in the first six months of 2014, compared to the first six months of 2013. Distribution and selling expenses increased 5 percent and 3 percent, respectively, over the same period.
Operating income increased $26.0, or 6 percent, in the first six months of 2014, compared to the first six months of 2013, as the increase in SD&A expenses was mostly offset by a $25.3 decrease in special project costs. The decrease in special project costs resulted from the substantial progress made on the related projects, with the majority of costs having been incurred in past years. Excluding special project costs in both periods, operating income was flat, but increased from 16.0 percent of net sales in the first six months of 2013 to 16.5 percent in the first six months of 2014.
Other
Net interest expense decreased $3.4 and $3.2 in the second quarter and first six 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 increased $1.2, or 2 percent, in the second quarter of 2014, compared to the second quarter of 2013, and increased $7.7, or 6 percent, in the first six months of 2014, compared to the first six months of 2013, due to an increase in income before income taxes, partially offset by a slightly lower effective tax rate in 2014, as compared to the prior year.
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. We expect to incur restructuring costs of approximately $260.0 for all of our restructuring plans, of which $239.6 has been incurred through October 31, 2013. Restructuring costs of $6.8 and $12.0 have been incurred in the second quarter and first six months of 2014, respectively, compared to $10.3 and $24.8 in the second quarter and first six 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 October 31, 2013, approximately 80 percent of the 850 full-time positions have been reduced and the impacted facilities have been closed, except the Ste. Marie, Quebec facility, which is anticipated to close in the fourth quarter of 2014. The majority of our retail and foodservice fruit spreads volume is now being produced at our new facility in Orrville, Ohio.
23
Segment Results
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||
2013 | 2012 |
% Increase
(Decrease) |
2013 | 2012 |
% Increase
(Decrease) |
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Net sales: |
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U.S. Retail Coffee |
$ | 594.9 | $ | 622.5 | (4 | )% | $ | 1,109.3 | $ | 1,143.3 | (3 | )% | ||||||||||||
U.S. Retail Consumer Foods |
612.6 | 619.3 | (1 | ) | 1,149.0 | 1,147.7 | 0 | |||||||||||||||||
International, Foodservice, and Natural Foods |
352.4 | 386.9 | (9 | ) | 652.5 | 707.4 | (8 | ) | ||||||||||||||||
Segment profit: |
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U.S. Retail Coffee |
$ | 180.6 | $ | 158.2 | 14 | % | $ | 326.6 | $ | 284.6 | 15 | % | ||||||||||||
U.S. Retail Consumer Foods |
99.2 | 111.1 | (11 | ) | 195.6 | 218.9 | (11 | ) | ||||||||||||||||
International, Foodservice, and Natural Foods |
47.4 | 58.2 | (18 | ) | 90.8 | 98.9 | (8 | ) | ||||||||||||||||
Segment profit margin: |
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U.S. Retail Coffee |
30.3 | % | 25.4 | % | 29.4 | % | 24.9 | % | ||||||||||||||||
U.S. Retail Consumer Foods |
16.2 | 17.9 | 17.0 | 19.1 | ||||||||||||||||||||
International, Foodservice, and Natural Foods |
13.5 | 15.0 | 13.9 | 14.0 |
U.S. Retail Coffee
Net sales for the U.S. Retail Coffee segment decreased 4 percent in the second quarter of 2014, compared to the second quarter of 2013, as net price realization was lower due primarily to a price decline of approximately 6 percent taken in February 2013 reflecting the pass through of lower commodity costs. Segment volume increased 2 percent in the second quarter of 2014, compared to the second quarter of 2013, led by increases of 1 percent in the Folgers brand and 11 percent in Dunkin Donuts packaged coffee. Net sales of K-Cup packs were flat compared to last years second quarter as the overall category remained dynamic and experienced increases in the number of new competitive entrants.
The U.S. Retail Coffee segment profit increased $22.4, or 14 percent, in the second quarter of 2014, compared to the second quarter of 2013, as green coffee costs were significantly lower in the second quarter of 2014, and were only partially offset by lower price realization. Unrealized mark-to-market adjustments on derivative contracts were a gain of $0.5 in the second quarter of 2014, compared to a loss of $4.5 in the second quarter of 2013.
Net sales for the U.S. Retail Coffee segment decreased 3 percent for the first six months of 2014, compared to the first six months of 2013, as lower net price realization driven by the price decline taken in February 2013 was partially offset by a 3 percent increase in volume. Volume growth in the first six months of 2014, compared to the first six months of 2013, was driven by increases of 3 percent in the Folgers brand and 9 percent in Dunkin Donuts packaged coffee. Net sales of K-Cup packs increased $7.7, or 6 percent, in the first six months of 2014, compared to the first six months of 2013.
The U.S. Retail Coffee segment profit increased $42.0, or 15 percent, in the first six months of 2014, compared to the first six months of 2013. The prior year was unfavorably impacted by the timing of price declines that were taken before lower costs were recognized later that year. Green coffee costs were significantly lower in the first six months of 2014, compared to the first six months of 2013, and were partially offset by lower price realization.
U.S. Retail Consumer Foods
Net sales for the U.S. Retail Consumer Foods segment decreased 1 percent in the second quarter of 2014, compared to the second quarter of 2013, as overall lower net price realization offset favorable sales mix. Segment volume for the second quarter of 2014 was flat, compared to the second quarter of 2013. Jif brand volume increased 2 percent in the second quarter of 2014, compared to 2013, while net sales decreased 5 percent over the same period due to the impact of a price decline taken in the third quarter of 2013. Smuckers fruit spreads volume increased 4 percent in the second quarter of 2014, compared to 2013, and net sales decreased 2 percent driven by price declines taken late in 2013. Net sales and volume of Smuckers Uncrustables frozen sandwiches both increased 25 percent. Crisco brand net sales and volume both increased 4 percent in the second quarter of 2014, compared to 2013, while net sales and volume for the
24
Pillsbury brand decreased 1 percent and 2 percent, respectively. Canned milk net sales and volume decreased 3 percent and 8 percent, respectively, during the second quarter of 2014, compared to 2013, as an increase in Eagle Brand sweetened condensed milk was offset by declines in our private label offerings.
Commodity costs in the segment were modestly lower in the second quarter of 2014, compared to the second quarter of 2013, as declines in peanut costs were mostly offset by higher milk costs. However, overall lower net price realization primarily related to peanut butter and fruit spreads drove the U.S. Retail Consumer Foods segment profit decrease of $11.9, or 11 percent, in the second quarter of 2014, compared to the second quarter of 2013. Additionally, temporary incremental costs were incurred at our new fruit spreads manufacturing facility along with capacity expansion costs at our Smuckers Uncrustables frozen sandwich facility during the second quarter of 2014. Unrealized mark-to-market adjustments on derivative contracts were a loss of $1.2 in the second quarter of 2014, compared to a loss of $5.0 in the second quarter of 2013.
Net sales for the U.S. Retail Consumer Foods segment in the first six months of 2014 were flat, compared to the first six months of 2013, as a 1 percent increase in segment volume and favorable sales mix offset overall lower net price realization. Jif brand volume increased 5 percent in the first six months of 2014, compared to the first six months of 2013, while net sales for the brand decreased 3 percent over the same period due to the impact of the price decline taken in the third quarter of 2013. Smuckers fruit spreads net sales decreased 3 percent driven by price declines taken late in 2013 while volume increased 2 percent in the first six months of 2014, compared to the first six months of 2013. Smuckers Uncrustables frozen sandwiches net sales and volume both increased 24 percent during the same period. Crisco brand net sales and volume both increased 6 percent in the first six months of 2014, compared to the first six months of 2013. Net sales for the Pillsbury brand were flat in the first six months of 2014, compared to the first six months of 2013, while volume for the brand decreased 1 percent. Canned milk net sales increased 2 percent during the first six months of 2014, compared to the first six months of 2013, while volume decreased 4 percent.
The U.S. Retail Consumer Foods segment profit decreased $23.3, or 11 percent, in the first six months of 2014, compared to the first six months of 2013, primarily driven by lower price realization related to peanut butter and fruit spreads. Segment profit was positively impacted by segment volume in the first six months of 2014, compared to the first six months of 2013.
International, Foodservice, and Natural Foods
Net sales in the International, Foodservice, and Natural Foods segment decreased 9 percent in the second quarter of 2014, compared to the second quarter of 2013. Excluding the impact of the acquired Enray business, the Cumberland distribution agreement, and foreign exchange, segment net sales decreased 13 percent over the same period. Segment volume decreased 10 percent, excluding the impact of Enray and Cumberland, primarily attributed to the exited portions of our hot beverage and Smuckers Uncrustables frozen sandwich businesses with foodservice customers and planned declines in Santa Cruz Organic ® lemonades. Although net sales of Smuckers Uncrustables frozen sandwiches in U.S. Retail Consumer Foods increased 25 percent during the second quarter of 2014, compared to the second quarter of 2013, the increase did not offset the impact of the brands exit of certain portions of the business in International, Foodservice, and Natural Foods. Excluding the planned exits and the declines in Santa Cruz Organic lemonades, segment volume declines were driven by the Robin Hood ® and Five Roses ® flour brands in Canada, mostly due to the timing of fall bake activities. Net price realization was lower in the second quarter of 2014, compared to the second quarter of 2013, primarily due to price declines on coffee.
The International, Foodservice, and Natural Foods segment profit decreased $10.8, or 18 percent, in the second quarter of 2014, compared to the second quarter of 2013, due primarily to the impact of the exited foodservice businesses. Overall commodity costs were lower but were more than offset by lower net price realization. Additionally, unfavorable foreign exchange negatively impacted profit growth during the period. The addition of the Cumberland and Enray businesses contributed modestly to segment profit in the second quarter of 2014. There was essentially no impact of unrealized mark-to-market adjustments on derivative contracts in the second quarter of 2014, compared to a loss of $2.4 in the second quarter of 2013.
25
Net sales for the International, Foodservice, and Natural Foods segment decreased 8 percent in the first six months of 2014, compared to the first six months of 2013. Excluding the impact of the Enray and Cumberland businesses and foreign exchange, segment net sales decreased 10 percent. Segment volume decreased 8 percent in the first six months of 2014, compared to the first six months of 2013, primarily due to the impact of the exited portions of our hot beverage and Smuckers Uncrustables frozen sandwich businesses with foodservice customers and planned declines in Santa Cruz Organic lemonades. Lower net price realization also contributed to the decrease in net sales.
The International, Foodservice, and Natural Foods segment profit decreased $8.1, or 8 percent, in the first six months of 2014, compared to the first six months of 2013, due primarily to the impact of the exited portions of our hot beverage and Smuckers Uncrustables frozen sandwich businesses, partially offset by favorable mix.
Financial Condition Liquidity and Capital Resources
Liquidity
On an annual basis, our principal source of funds is cash generated from operations, supplemented by borrowings against our revolving credit facility. Total cash and cash equivalents at October 31, 2013, were $150.5, compared to $256.4 at April 30, 2013.
We typically expect a significant use of cash to fund working capital requirements during the first half of each fiscal year, primarily due to the buildup of inventories to support the Fall Bake and Holiday period, the additional increase of coffee inventory in advance of the Atlantic hurricane season, and seasonal fruit procurement. We expect cash provided by operations in the second half of the fiscal year to significantly exceed the amount in the first half of the year, upon completion of the Fall Bake and Holiday period.
The following table presents selected cash flow information.
Six Months Ended October 31, | ||||||||
2013 | 2012 | |||||||
Net cash provided by operating activities |
$ | 168.0 | $ | 359.6 | ||||
Net cash used for investing activities |
(192.9 | ) | (92.0 | ) | ||||
Net cash used for financing activities |
(75.9 | ) | (292.3 | ) | ||||
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Net cash provided by operating activities |
$ | 168.0 | $ | 359.6 | ||||
Additions to property, plant, and equipment |
(83.4 | ) | (98.5 | ) | ||||
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Free cash flow (1) |
$ | 84.6 | $ | 261.1 | ||||
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(1) | Free cash flow is a non-GAAP measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes. |
Cash provided by operating activities decreased $191.6 in the first six months of 2014, compared to the first six months of 2013, primarily due to an increase in the cash required to fund working capital. The increase was mainly a result of a decline in certain accrued liabilities and an increase in inventory quantities, particularly for coffee, as compared to the prior year.
Cash used for investing activities increased $100.9 in the first six months of 2014, compared to the first six months of 2013, primarily due to the net use of cash of $102.0 related to the acquisitions of Enray and Silocaf during the second quarter.
Cash used for financing activities was $75.9 in the first six months of 2014, consisting primarily of the purchase of treasury shares for $165.5 and dividends paid of $116.4, mostly offset by $207.0 of borrowings from our revolving credit facility. In the first six months of 2013, cash used for financing activities was $292.3, consisting primarily of the purchase of treasury shares for $175.3 and dividends paid of $110.2.
26
Capital Resources
The following table presents our capital structure.
October 31, 2013 | April 30, 2013 | |||||||
Current portion of long-term debt |
$ | 150.0 | $ | 50.0 | ||||
Revolving credit facility |
207.0 | | ||||||
Long-term debt, less current portion |
1,883.6 | 1,967.8 | ||||||
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Total debt |
$ | 2,240.6 | $ | 2,017.8 | ||||
Shareholders equity |
5,167.9 | 5,148.8 | ||||||
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Total capital |
$ | 7,408.5 | $ | 7,166.6 | ||||
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On September 6, 2013, we entered into an amended and restated credit agreement with a group of eleven banks. The credit facility, which amends and restates our $1.0 billion credit agreement dated as of July 29, 2011, provides for a revolving credit line of $1.5 billion and extends the maturity to September 6, 2018. Borrowings under the revolving credit facility bear interest based on the prevailing U.S. Prime Rate, Canadian Base Rate, London Interbank Offered Rate, or Canadian Dealer Offered Rate, based on our election. Interest is payable either on a quarterly basis or at the end of the borrowing term. At October 31, 2013, we had a balance outstanding under the revolving credit facility of $207.0 at a weighted-average interest rate of 1.10 percent.
Our debt instruments contain certain financial covenant restrictions including consolidated net worth, a leverage ratio, and an interest coverage ratio. We are in compliance with all covenants.
As of October 31, 2013, we had 3.4 million common shares remaining available for repurchase under our Board of Directors most recent authorization.
Absent any material acquisitions or other significant investments, we believe that cash on hand, combined with cash provided by operations and borrowings available under our credit facility, will be sufficient to meet cash requirements for the next 12 months, including capital expenditures, the payment of quarterly dividends, and interest and principal on debt outstanding. As of October 31, 2013, approximately $140.0 of total cash and cash equivalents was held by our international subsidiaries. We do not intend to repatriate these funds to meet these obligations. Should we repatriate these funds, we will be required to provide taxes based on the applicable U.S. tax rates net of any foreign tax credit consideration.
Subsequent to October 31, 2013, we paid down a portion of our revolving credit facility, bringing the total outstanding balance to $95.0 at November 26, 2013, at a weighted-average interest rate of 1.07 percent.
27
Non-GAAP Measures
We use non-GAAP financial measures including: net sales adjusted for the noncomparable impact of the Enray acquisition, the Cumberland distribution agreement, and foreign exchange rate; gross profit, operating income, income, and income per diluted share, excluding special project costs; and free cash flow, as key measures for purposes of evaluating performance internally. We believe that these measures provide useful information to investors because they are the measures we use to evaluate performance on a comparable year-over-year basis. The special project costs relate to specific restructuring, merger and integration, and pension settlement projects that are each nonrecurring in nature and can significantly affect the year-over-year assessment of operating results. These non-GAAP financial 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 financial measures supplements other metrics we use to internally evaluate our businesses and facilitate the comparison of past and present operations and liquidity. These non-GAAP financial 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. See page 26 for a reconciliation of free cash flow to the comparable GAAP financial measure.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Reconciliation to gross profit: |
||||||||||||||||
Gross profit |
$ | 552.6 | $ | 541.9 | $ | 1,045.5 | $ | 1,011.7 | ||||||||
Cost of products soldrestructuring and merger and integration |
2.3 | 2.4 | 3.8 | 6.4 | ||||||||||||
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Gross profit excluding special project costs |
$ | 554.9 | $ | 544.3 | $ | 1,049.3 | $ | 1,018.1 | ||||||||
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Reconciliation to operating income: |
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Operating Income |
$ | 250.8 | $ | 247.6 | $ | 464.1 | $ | 438.1 | ||||||||
Cost of products soldrestructuring and merger and integration |
2.3 | 2.4 | 3.8 | 6.4 | ||||||||||||
Other restructuring and merger and integration costs |
6.9 | 11.5 | 12.7 | 28.7 | ||||||||||||
Other special project costs |
| | | 6.7 | ||||||||||||
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Operating income excluding special project costs |
$ | 260.0 | $ | 261.5 | $ | 480.6 | $ | 479.9 | ||||||||
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Reconciliation to net income: |
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Net income |
$ | 153.4 | $ | 148.8 | $ | 280.0 | $ | 259.7 | ||||||||
Income taxes |
76.6 | 75.4 | 139.5 | 131.8 | ||||||||||||
Cost of products soldrestructuring and merger and integration |
2.3 | 2.4 | 3.8 | 6.4 | ||||||||||||
Other restructuring and merger and integration costs |
6.9 | 11.5 | 12.7 | 28.7 | ||||||||||||
Other special project costs |
| | | 6.7 | ||||||||||||
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Income before income taxes, excluding special project costs |
$ | 239.2 | $ | 238.1 | $ | 436.0 | $ | 433.3 | ||||||||
Income taxes, as adjusted |
79.7 | 80.0 | 145.0 | 145.8 | ||||||||||||
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Income excluding special project costs |
$ | 159.5 | $ | 158.1 | $ | 291.0 | $ | 287.5 | ||||||||
Weighted-average sharesassuming dilution |
105,145,966 | 109,251,455 | 105,560,298 | 109,824,632 | ||||||||||||
Income per common share excluding special project costsassuming dilution |
$ | 1.52 | $ | 1.45 | $ | 2.76 | $ | 2.62 | ||||||||
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28
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have material off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as variable interest entities. Transactions with related parties are in the ordinary course of business and not material to our results of operations, financial condition, or cash flows.
The following table summarizes our contractual obligations by fiscal year at October 31, 2013.
Total | 2014 | 2015-2016 | 2017-2018 |
2019 and
beyond |
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Long-term debt obligations, including current portion |
$ | 2,000.0 | $ | 50.0 | $ | 199.0 | $ | 75.0 | $ | 1,676.0 | ||||||||||
Interest payments |
604.6 | 47.4 | 176.2 | 161.3 | 219.7 | |||||||||||||||
Operating lease obligations |
96.1 | 14.0 | 34.1 | 28.4 | 19.6 | |||||||||||||||
Purchase obligations |
787.0 | 587.9 | 199.1 | | | |||||||||||||||
Other liabilities |
279.1 | 7.9 | 50.7 | 15.4 | 205.1 | |||||||||||||||
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Total |
$ | 3,766.8 | $ | 707.2 | $ | 659.1 | $ | 280.1 | $ | 2,120.4 | ||||||||||
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Long-term debt obligations, including current portion in the above table exclude the impact of any interest rate swaps or offering discounts. Purchase obligations in the above table include agreements that are enforceable and legally bind us to purchase goods or services. Included in this category are certain obligations related to normal, ongoing purchase obligations in which we have guaranteed payment to ensure availability of raw materials and packaging supplies. We expect to receive consideration for these purchase obligations in the form of materials. These purchase obligations do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated. Other liabilities in the above table mainly consist of projected commitments associated with our defined benefit pension plans and other postretirement benefits. The table excludes the liability for unrecognized tax benefits and tax-related net interest and penalties of approximately $30.7 under Financial Accounting Standards Board Accounting Standards Codification 740, Income Taxes , since we are unable to reasonably estimate the timing of cash settlements with the respective taxing authorities.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices.
Interest Rate Risk: The fair value of our cash and short-term investment portfolio at October 31, 2013, approximates carrying value. Exposure to interest rate risk on our long-term debt is mitigated due to fixed-rate maturities.
We utilize derivative instruments, at times, to manage changes in the fair value of our 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.
We entered into an interest rate swap in the second quarter of 2014 on a portion of fixed-rate Senior Notes in an effort to achieve a mix of variable versus fixed-rate debt under currently favorable market conditions.
Based on our overall interest rate exposure as of and during the six-month period ended October 31, 2013, including the impact of derivatives and other instruments sensitive to interest rates, a hypothetical 10 percent movement in interest rates would not materially affect our results of operations. In measuring interest rate risk by the amount of net change in the fair value of our financial liabilities, a hypothetical 1 percent decrease in interest rates at October 31, 2013, would increase the fair value of our long-term debt by approximately $92.1.
Foreign Currency Exchange Risk: We have operations outside the U.S. with foreign currency denominated assets and liabilities, primarily denominated in Canadian currency. Because we have foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. The foreign currency balance sheet exposures as of October 31, 2013, are not expected to result in a significant impact on future earnings or cash flows.
We utilize foreign currency exchange forwards and options contracts to manage the price volatility of foreign currency exchange fluctuations on future cash transactions. The contracts generally have maturities of less than one year. 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. Based on our hedged foreign currency positions as of October 31, 2013, a hypothetical 10 percent change in exchange rates would not result in a material loss of fair value.
Revenues from customers outside the U.S., subject to foreign currency exchange, represented approximately 8 percent of net sales during the six-month period ended October 31, 2013. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.
Commodity Price Risk: We use certain raw materials and other commodities that are subject to price volatility caused by supply and demand conditions, political and economic variables, weather, investor speculation, and other unpredictable factors. To manage the volatility related to anticipated commodity purchases, we use futures and options with maturities of generally less than one year. Certain of these instruments are designated as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are included in 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. The mark-to-market gains or losses on nonqualifying, excluded, and ineffective portions of hedges are recognized in cost of products sold immediately.
30
The following sensitivity analysis presents our potential loss of fair value resulting from a hypothetical 10 percent change in market prices related to raw material commodities.
October 31, 2013 | April 30, 2013 | |||||||
High |
$ | 17.1 | $ | 34.0 | ||||
Low |
4.6 | 7.6 | ||||||
Average |
10.3 | 20.7 |
The estimated fair value was determined using quoted market prices and was based on our net derivative position by commodity for the previous four quarters. The calculations are not intended to represent actual losses in fair value that we expect to incur. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. The commodities hedged have a high inverse correlation to price changes of the derivative commodity instrument; thus, we 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.
31
Certain Forward-Looking Statements
Certain statements included in this Quarterly Report contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as expects, anticipates, believes, will, plans, and similar phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include, but are not limited to, the following:
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volatility of commodity markets from which raw materials, particularly green coffee beans, peanuts, soybean oil, wheat, milk, corn, and sugar, are procured and the related impact on costs; |
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risks associated with derivative and purchasing strategies we employ to manage commodity pricing risks, including the risk that such strategies could result in significant losses and adversely impact our liquidity; |
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crude oil price trends and their impact on transportation, energy, and packaging costs; |
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our ability to successfully implement and realize the full benefit of price changes that are intended to fully recover cost including the competitive, retailer, and consumer response, and the impact of the timing of the price changes to profits and cash flow in a particular period; |
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the success and cost of introducing new products and the competitive response; |
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the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses; |
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general competitive activity in the market, including competitors pricing practices and promotional spending levels; |
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our ability to successfully integrate acquired and merged businesses in a timely and cost-effective manner; |
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the successful completion of our restructuring programs and the ability to realize anticipated savings and other potential benefits within the time frames currently contemplated; |
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the impact of food security concerns involving either our products or our competitors products; |
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the impact of accidents and natural disasters, including crop failures and storm damage; |
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the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials, such as packaging for our Folgers coffee products, and finished goods, such as K-Cup packs, and the ability to manage and maintain key relationships; |
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the loss of significant customers, a substantial reduction in orders from these customers, or the bankruptcy of any such customer; |
32
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changes in consumer coffee preferences and other factors affecting the coffee business, which represents a substantial portion of our business; |
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a change in outlook or downgrade in our public credit rating by a rating agency; |
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our ability to obtain any required financing on a timely basis and on acceptable terms; |
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the timing and amount of capital expenditures, share repurchases, and restructuring costs; |
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impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in useful lives of other intangible assets; |
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the impact of new or changes to existing governmental laws and regulations and their application; |
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the impact of future legal, regulatory, or market measures regarding climate change; |
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the outcome of current and future tax examinations, changes in tax laws, and other tax matters, and their related impact on our tax positions; |
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foreign currency and interest rate fluctuations; |
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political or economic disruption; |
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other factors affecting share prices and capital markets generally; and |
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risks related to other factors described under Risk Factors in other reports and statements we have filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. |
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances.
33
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures . Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of October 31, 2013 (the Evaluation Date). Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during the quarter ended October 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
34
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2013, as revised in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2013, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition, and results of operations.
35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities
(a) | (b) | (c) | (d) | |||||||||||||
Period |
Total Number of
Shares Purchased |
Average Price
Paid Per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or
Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
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August 1, 2013August 31, 2013 |
768 | $ | 62.11 | | 3,444,300 | |||||||||||
September 1, 2013September 30, 2013 |
| | | 3,444,300 | ||||||||||||
October 1, 2013October 31, 2013 |
583 | 111.37 | | 3,444,300 | ||||||||||||
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Total |
1,351 | $ | 83.37 | | 3,444,300 | |||||||||||
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Information set forth in the table above represents the activity in our second fiscal quarter.
(a) | Shares in this column represent shares repurchased from stock plan recipients in lieu of cash payments. |
(d) | As of October 31, 2013, we had 3.4 million common shares remaining available for repurchase under our Board of Directors most recent authorization. |
36
Item 6. Exhibits.
See the Index of Exhibits that appears on Page No. 39 of this report.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 27, 2013 | THE J. M. SMUCKER COMPANY | |||
/s/ Richard K. Smucker | ||||
By: RICHARD K. SMUCKER | ||||
Chief Executive Officer | ||||
/s/ Mark R. Belgya | ||||
By: MARK R. BELGYA | ||||
Senior Vice President and Chief Financial Officer |
38
INDEX OF EXHIBITS
Exhibit
|
Description |
|
10.1 | Third Amended and Restated Credit Agreement, dated as of September 6, 2013, among the Company, Smucker Foods of Canada Corp., the Guarantors, the Lenders, and the Agent, incorporated herein by reference to the Companys Current Report on Form 8-K filed on September 10, 2013. | |
10.2 | The J. M. Smucker Company Nonemployee Director Deferred Compensation Plan (Amended and Restated Effective January 1, 2014).* | |
12 | Computation of Ratio of Earnings to Fixed Charges. | |
31.1 | Certifications of Richard K. Smucker pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
31.2 | Certifications of Mark R. Belgya pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
* |
Management contract or compensatory plan or agreement. |
39
Exhibit 10.2
THE J. M. SMUCKER COMPANY
NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN
(AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2014)
ARTICLE I
INTRODUCTION
1.1 Purpose of this Plan. The purpose of The J. M. Smucker Company Nonemployee Director Deferred Compensation Plan (this Plan) has been and continues to be to provide the nonemployee directors (each, a Director, and collectively, the Directors) of The J. M. Smucker Company (the Company) with the opportunity to defer receipt of all or a portion of compensation received for services as a Director, to set forth the rules with respect to the Deferred Stock Units granted annually to a Director as part of the Directors compensation and to continue to align the common interest of Directors and shareholders in enhancing the value of the Companys Common Shares. For the avoidance of doubt and for clarification, this Plan will apply to (a) Deferred Stock Units credited to a Directors Deferred Compensation Account upon the Directors election to reduce his or her cash compensation, (b) Deferred Stock Units granted to a Director as part of his or her annual Deferred Stock Unit award and credited to the Directors Deferred Compensation Account pursuant to Section 4.1, and (c) dividend equivalents paid on Deferred Stock Units described in subsections (a) and (b).
1.2 The Company adopts this amendment and restatement on October 22, 2013, effective with respect to deferral of compensation received for services performed as a Director on or after January 1, 2014.
ARTICLE II
DEFINITIONS
As used herein, the terms set forth below will have the following meanings:
2.1 Annual Subaccount has the meaning assigned thereto in Section 3.3.
2.2 Board means the Board of Directors of the Company.
2.3 Change in Control has the meaning assigned thereto in the Companys 2010 Equity and Incentive Compensation Plan.
2.4 Code means the Internal Revenue Code of 1986, as amended.
2.5 Committee means the Executive Compensation Committee of the Board.
2.6 Common Shares means the common shares, without par value, of the Company.
2.7 Company has the meaning assigned thereto in Section 1.1.
2.8 Corporate Secretary means Corporate Secretary of the Company, or such person as the Corporate Secretary of the Company may expressly designate.
2.9 Deferred Compensation Account has the meaning assigned thereto in Section 3.1 hereof.
2.10 Deferred Stock Units means deferred stock units, each equivalent to one Common Share, credited to a Directors Deferred Compensation Account pursuant to the terms of Section 3.3 or Section 4.1.
2.11 Director has the meaning assigned thereto in Section 1.1.
2.12 Market Value per Share means, as of any particular date, the last price at which the Common Shares trade as reported on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Common Shares are listed, or if there are no sales on such day, on the immediately preceding trading day during which a sale occurred. If there is no regular trading market for such Common Shares, the Market Value per Share will be determined by the Board.
2.13 Plan has the meaning assigned thereto in Section 1.1.
2.14 Separation from Service has the meaning assigned thereto in Section 5.1.
ARTICLE III
CASH COMPENSATION DEFERRAL AWARDS
3.1 Cash Compensation Deferral Election. Not later than December 31 of any calendar year, beginning with December 31, 2013 for the calendar year 2014, a Director may direct the Company (a) to reduce the cash compensation payable to him or her (determined without regard to the provisions of this Section 3.1) for services as a Director during the next calendar year (including annual retainer and committee meeting fees) in such amount as elected by the Director and (b) to credit the amount of such reduction to an account established in the name of the Director (a Deferred Compensation Account) with the amount of Deferred Stock Units described in Section 3.3. If a Director does not have any deferral election form on file with the Corporate Secretary, he or she will receive his or her Director compensation for the year (that would otherwise be paid in cash) in cash on a current basis.
3.2 Cash Compensation Deferral Payment Election. The election made pursuant to Section 3.1 will specify whether Deferred Stock Units credited to the Deferred Compensation Account pursuant to Section 3.1 for the following year will be distributed to the Director (or his or her beneficiary): (a) in a lump sum payment or (b) in up to ten annual installments. If a Director does not have an election form on file with the Corporate Secretary, the payment of the Deferred Stock Units credited to his or her Deferred Compensation Account for the following year pursuant to this Article III will be made in a lump sum payment in accordance with Article V.
- 2 -
3.3 Deferred Compensation Account. The Directors Deferred Compensation Account will be credited with a number of Deferred Stock Units equal to the cash amount identified in Section 3.1(a) that the Director has elected to defer divided by the Market Value per Share of one Common Share on the date on which such cash amount would have otherwise been paid. Each Directors Deferred Compensation Account will be subdivided into separate subaccounts for each year of participation (each, an Annual Subaccount). It is intended that the amount credited to each Annual Subaccount pursuant to this Section 3.3 will be considered a separate amount of deferred compensation under Section 409A of the Code. As such, a separate payment election made under Section 3.2 may apply to each Annual Subaccount.
3.4 Partial Years. If a Director first becomes a Director after January 1st of any calendar year, the Director may direct the Company (a) to reduce the cash compensation payable to him or her for future services as a Director during such calendar year in such amount as elected by the Director and (b) to credit the amount of such reduction to the Directors Deferred Compensation Account. Any such election will be made within thirty (30) calendar days after an individual becomes a Director, will apply only to cash compensation for services as a Director performed after the date of such election, and will include an election as to the form of payment as described in Section 3.2.
3.5 Elections. All deferral elections described in this Article III will be made annually on an election form specified by the Committee and delivered by a Director to the Corporate Secretary. The elections described in this Article III will remain in effect for future calendar years if a new written election form is not submitted. Any subsequent election or written termination of election will become effective as of the first day of the calendar year following the calendar year in which the notice is given and will be effective only for cash compensation earned in such following calendar year and thereafter.
3.6 Nonforfeitable Right. Each Deferred Stock Unit awarded under this Article III will be one hundred percent (100%) vested upon the award of such Deferred Stock Unit.
3.7 Dividend Equivalents. Dividend equivalents will be earned on Deferred Stock Units awarded under this Article III. Such dividend equivalents will be converted into equivalent amounts of Deferred Stock Units based on the Market Value per Share on the date the actual dividends on Common Shares are paid and credited to the appropriate Annual Subaccount of each Director. Such dividend equivalents will be one hundred percent (100%) vested at all times and will be paid in the same manner and at the same time as the Deferred Stock Units to which the dividend equivalents relate.
ARTICLE IV
ANNUAL GRANT AWARDS
4.1 Annual Deferred Stock Unit Grant. Each October beginning in October, 2014, each Directors Deferred Compensation Account will be credited with the number of Deferred Stock Units equal to the cash amount established by the Committee for determining the annual grant of Deferred Stock Units divided by the Market Value per Share of one Common Share on the date of the grant. Each Directors Deferred Compensation Account will be subdivided into Annual Subaccounts to reflect each grant of Deferred Stock Units made under this Section 4.1. It is intended that the amount credited to each such Annual Subaccount pursuant to this Section 4.1 will be considered a separate amount of deferred compensation under Section 409A of the Code. As such, a separate payment election made under Section 4.2 may apply to each Annual Subaccount.
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4.2 Annual Deferred Stock Unit Payment Election. Not later than December 31 of any calendar year, beginning with December 31, 2013 for the calendar year 2014, a Director will specify whether Deferred Stock Units credited to his or her Deferred Compensation Account for the following year pursuant to this Article IV will be distributed to the Director (or his or her beneficiary): (a) in a lump sum payment or (b) in up to ten annual installments. If a Director does not have an election form on file with the Corporate Secretary, the payment of the Deferred Stock Units credited to his or her Deferred Compensation Account for the following year pursuant to this Article IV will be made in a lump sum payment in accordance with Article V.
4.3 Partial Years. If a Director first becomes a Director after January 1st of any calendar year, the Director may make the payment election described in Section 4.2 with respect to an initial grant of Deferred Stock Units within thirty (30) calendar days after becoming a Director, provided that such election will apply only to compensation for services as a Director performed after the date of such election.
4.4 Elections. All payment elections described in this Article IV will be made annually on an election form specified by the Committee and delivered by a Director to the Corporate Secretary. The election described in this Article IV will remain in effect for future calendar years if a new written election form is not submitted. Any subsequent election or written termination of election will become effective as of the first day of the calendar year following the calendar year in which the notice is given and will be effective only for compensation earned in such following calendar year and thereafter.
4.5 Nonforfeitable Right. Each Deferred Stock Unit awarded under this Article IV will be one hundred percent (100%) vested upon the award of such Deferred Stock Unit.
4.6 Dividend Equivalents. Dividend equivalents will be earned on Deferred Stock Units awarded under this Article IV. Such dividend equivalents will be converted into equivalent amounts of Deferred Stock Units based on the Market Value per Share on the date the actual dividends on Common Shares are paid and credited to the appropriate Annual Subaccount of each Director. Such dividend equivalents will be one hundred percent (100%) vested at all times and will be paid in the same manner and at the same time as the Deferred Stock Units to which the dividend equivalents relate.
ARTICLE V
PAYMENT OF ACCOUNTS
5.1 Time of Payment. Distribution of Deferred Stock Units in each Annual Subaccount included in a Directors Deferred Compensation Account will be made or commence in the manner described in Section 5.2 hereof as soon as is reasonably practicable, but not later than sixty (60) calendar days, after a Directors separation from service (as defined under Section 409A of the Code and Treasury Regulation Section §1.409A-1(h)(2) (a Separation from Service)). Notwithstanding anything to the contrary contained in this Plan (or in any election relating to this Plan), if a Change in Control of the Company occurs (but only to the extent the
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event constitutes a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company (as determined under Section 409A of the Code and the regulations promulgated thereunder)), the distribution of the Directors entire Deferred Compensation Account will be made in a lump sum as soon as practicable, but not later than sixty (60) calendar days, following the date of the Change in Control.
5.2 Method of Distribution. The Deferred Stock Units credited to each of the Directors Annual Subaccounts of his or her Deferred Compensation Account (including those converted from dividend equivalents) will be distributed or commence to be distributed to the Director or the Directors beneficiary at the time described in Section 5.1 hereof and, except as provided in Section 5.1 with respect to a Change in Control, in the manner specified in the Directors payment election under Section 3.2 or Section 4.2 with respect to such Annual Subaccount. The amount of any installment payment with respect to an Annual Subaccount in the Directors Deferred Compensation Account will be calculated by dividing the number of Deferred Stock Units in such Annual Subaccount at the time of each such payment by the number of remaining installments in such Annual Subaccount (including the current installment). Notwithstanding anything to the contrary contained in this Plan (or in any election relating to this Plan), if the aggregate amount credited to any Directors Deferred Compensation Account is less than $50,000 on the date of the Directors Separation from Service, the distribution of the Directors entire Deferred Compensation Account will be made in a lump sum as soon as is reasonably practicable, but not later than sixty (60) calendar days, following the Directors Separation from Service.
5.3 Form of Payment. The Deferred Stock Units will be distributed in Common Shares on a one-for-one basis. Fractional shares will be rounded down to the nearest whole Common Share, and any remainder will be paid in cash.
5.4 Designation of Beneficiary. Each Director participating in this Plan will designate a beneficiary or beneficiaries to whom distribution will be made in the event of the death of the Director before his or her entire Deferred Compensation Account is distributed and, in such case, the balance of the Directors Deferred Compensation Account will be distributed to the beneficiary or beneficiaries in a lump sum as soon as is reasonably practicable, but not later than sixty (60) calendar days following the Directors death, even if the Director elected distribution in installments. If there is no designated beneficiary, or no designated beneficiary surviving at a Directors death, the Directors beneficiary will be his or her estate. Beneficiary designations will be made in writing and will be delivered by a Director to the Corporate Secretary. A Director may designate a new beneficiary or beneficiaries at any time by delivering a new election to the Corporate Secretary.
5.5 Changes to Prior Elections. Changes to a prior election of the form of payment with respect to amounts in a Directors Annual Subaccount may be made, provided that the election satisfies the following requirements: (a) a change of election will not be effective until at least twelve (12) months after the date on which it is filed by the Director with the Corporate Secretary; (b) a change of election with respect to a payment commencing on, or made on, a specified date may not be filed with the Corporate Secretary less than twelve (12) months prior to such date; and (c) a change of election with respect to a time of payment or a method of payment must provide that the payment subject to the change be deferred for a period of not less
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than five (5) years from the date such payment would otherwise have been made except in the event of a payment made on account of the Directors death or total disability (as defined in Section 409A of the Code and the regulations promulgated thereunder).
5.6 Taxes. In the event any taxes are required by law to be withheld or paid from any distributions made pursuant to this Plan, the Company (or any trustee, if applicable) will deduct such amounts from such distributions and will transmit the withheld amounts to the appropriate taxing authority.
ARTICLE VI
FUNDING; CREDITORS AND INSOLVENCY
6.1 Funding Mechanism for Deferred Stock Units. The Company will be entitled, but not obligated, to establish a grantor trust or similar funding mechanism to fund the Companys obligations under this Plan; provided, however, that any funds contained therein will remain subject to the claims of the Companys general creditors. The funding mechanism will constitute an unfunded arrangement.
6.2 Claims of the Companys Creditors. The Companys obligation under this Plan will be merely that of an unfunded and unsecured promise of the Company to pay benefits in the future. All Deferred Stock Units (and any corresponding assets held in a trust established for this Plan), and any payment to be made pursuant to this Plan, will be subject to the claims of the general creditors of the Company, including judgment creditors and bankruptcy creditors. Neither any Director, nor his or her beneficiaries, nor his or her heirs, successors or assigns, will have any secured interest in or claim on any property or assets of the Company (or of any trust). The rights of a Director or his or her beneficiaries to his or her Deferred Compensation Account and to the Deferred Stock Units (and to any assets held in trust) will be no greater than the rights of an unsecured creditor of the Company.
ARTICLE VII
ADMINISTRATION
7.1 Powers of the Committee. The Committee, or other committee as may be expressly delegated by the Committee, will administer this Plan and resolve all questions of interpretation arising under this Plan. The Committee, or other committee as may be expressly delegated by the Committee, will have no discretion with respect to Plan contributions or distributions, but will act in an administrative capacity only.
7.2 Indemnity of Committee. The Company will indemnify the members of the Committee, and any other committee that may administer this Plan as set forth in Section 7.1, against all claims, losses, damages, expenses and liabilities arising from any action or failure to act with respect to this Plan to the extent provided in the Code of Regulations of the Company and any applicable indemnification agreement between the Company and such member.
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ARTICLE VIII
MISCELLANEOUS
8.1 Term of Plan. The Company reserves the right to amend this Plan or terminate this Plan at any time; provided, however, that no amendment or termination will affect the rights of Directors to amounts previously credited to their Deferred Compensation Accounts or to additional credits of Deferred Stock Units pursuant to Section 3.7 and Section 4.6 hereof; and provided further, that no amendment or termination will apply to the then current plan year, except as permitted under Section 409A of the Code. This Plan will remain in effect until such time as all Deferred Stock Units are distributed pursuant to Article V hereof.
8.2 Adjustments. In the event that, after the effective date of this Plan (as provided in Section 8.9 below), the number of outstanding Common Shares is increased or decreased or such shares are exchanged for a different number or kind of shares or other securities by reason of a recapitalization, reclassification, stock split-up or combination of shares, adjustments will be made by the Board in the number and kind of shares or other securities that are underlying Deferred Stock Units and/or credited to Deferred Compensation Accounts hereunder and that will be issued under this Plan.
8.3 Assignment. No right or interest of any Director or his or her beneficiary (or any person claiming through or under such Director or his or her beneficiary) in any benefit or payment herefrom will be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of such Director.
8.4 Tax Effect. This Plan is intended to be treated as an unfunded deferred compensation plan under the Code. It is the intention of the Company that the Deferred Stock Units credited to the Directors Deferred Compensation Accounts pursuant to this Plan will not be included in the gross income of the Directors or their beneficiaries until such time as such Deferred Stock Units are distributed from this Plan. If, at any time, it is determined by the Company that the Deferred Stock Units, or amounts attributable to Directors compensation reduction elections or Deferred Compensation Accounts are includible in the gross income of the Directors or their beneficiaries before distribution pursuant to Article V hereof due to a failure to comply with Section 409A of the Code, such amounts to the extent required to be included in income will be immediately distributed to the respective Directors or, in the case of deceased Directors, their beneficiaries.
8.5 Governing Law. This Plan will be governed by and construed in accordance with the laws of the United States, and to the extent not preempted by such laws, by the internal substantive laws of the State of Ohio.
8.6 Successors. The provisions of this Plan will bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein will include any corporate or other business entity which will, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of the Company and successors of any such corporation or other business entity.
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8.7 No Right to Continued Service. Nothing contained herein will be construed to confer upon any Director the right to continue to serve as a Director of the Company or in any other capacity.
8.8 Section 409A of the Code. It is intended that this Plan (including any amendments hereto) comply with the provisions of Section 409A of the Code so as to prevent the inclusion in gross income of any Deferred Stock Units credited to a Directors Deferred Compensation Account hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to the Director. This Plan will be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto. Any Plan provision that would cause this Plan to fail to satisfy Section 409A of the Code will have no force and effect.
8.9 Effective Date . The effective date of this Plan and the Amendment and Restatement of this Plan is January 1, 2014.
8.10 Distributions Subject to Tax. Notwithstanding the above provisions, if, at any time, a court or the Internal Revenue Service determines that an amount in a Directors Deferred Compensation Account is includable in the gross income of the Director and subject to tax, the Committee may, in its sole discretion, permit a lump sum distribution of an amount equal to the amount determined to be includable in the Directors gross income.
8.11 Distributions in Violation of Securities Laws. Notwithstanding the above provisions, a payment under this Plan may be delayed if the Company reasonably anticipates, in its sole discretion, that the making of such payment will violate Federal securities laws or other applicable law, provided that such payment is made on the earliest date at which the Company reasonably anticipates that the making of the payment will not cause such violation.
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Exhibit 12
The J. M. Smucker Company
Computation of Ratio of Earnings to Fixed Charges
(in millions of dollars)
October 31, 2013 | ||||||||
Three Months Ended | Six Months Ended | |||||||
Earnings before fixed charges: |
||||||||
Income before income taxes |
$ | 230.0 | $ | 419.5 | ||||
Total fixed charges |
26.7 | 56.5 | ||||||
Less: capitalized interest |
(0.5 | ) | (1.2 | ) | ||||
|
|
|
|
|||||
Earnings available for fixed charges |
$ | 256.2 | $ | 474.8 | ||||
Fixed charges: |
||||||||
Interest and other debt expense, net of capitalized interest |
$ | 20.9 | $ | 44.9 | ||||
Capitalized interest |
0.5 | 1.2 | ||||||
Estimated interest portion of rent expense (a) |
5.3 | 10.4 | ||||||
|
|
|
|
|||||
Total fixed charges |
$ | 26.7 | $ | 56.5 | ||||
Ratio of earnings to fixed charges |
9.6 | 8.4 | ||||||
|
|
|
|
(a) | For purposes of this calculation, management estimates approximately one-third of rent expense is representative of interest expense. |
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Richard K. Smucker, Chief Executive Officer of The J. M. Smucker Company, certify that:
(1) | I have reviewed this quarterly report on Form 10-Q of The J. M. Smucker Company; |
(2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
(5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 27, 2013
/s/ Richard K. Smucker |
Name: Richard K. Smucker |
Title: Chief Executive Officer |
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Mark R. Belgya, Senior Vice President and Chief Financial Officer of The J. M. Smucker Company, certify that:
(1) | I have reviewed this quarterly report on Form 10-Q of The J. M. Smucker Company; |
(2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
(5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 27, 2013
/s/ Mark R. Belgya |
Name: Mark R. Belgya |
Title: Senior Vice President and Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The J. M. Smucker Company (the Company) for the quarter ended October 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officers knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
/s/ Richard K. Smucker |
Name: Richard K. Smucker |
Title: Chief Executive Officer |
/s/ Mark R. Belgya |
Name: Mark R. Belgya |
Title: Senior Vice President and Chief Financial Officer |
Date: November 27, 2013
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.