The J. M. Smucker Company (NYSE: SJM) today announced results for the second quarter ended October 31, 2011, of its 2012 fiscal year. Results for the quarter and six months ended October 31, 2011, include the operations of Rowland Coffee Roasters, Inc. ("Rowland Coffee") since the completion of the acquisition on May 16, 2011.
GAAP and non-GAAP results for the second quarter and first six months of 2012 include a loss of approximately $11.3 million on the Company's divestiture of the Europe's Best® frozen fruit and vegetable business.
Non-GAAP income per diluted share was $1.29 and $1.38 for the second quarters of 2012 and 2011, and $2.41 and $2.42 for the first six months of 2012 and 2011, respectively, a decrease of 7 percent for the quarter and flat for the first six months.
Non-GAAP income per diluted share excludes restructuring and merger and integration costs ("special project costs") of $0.17 and $0.13 per diluted share in the second quarters of 2012 and 2011, and $0.32 and $0.31 for the first six months of 2012 and 2011, respectively.
Results for the second quarter of 2012 were impacted by a higher effective tax rate of 34.1 percent, compared to 32.5 percent in the second quarter of 2011.
Income per diluted share in the second quarter and first six months of 2012 benefited from a decrease in weighted-average common shares outstanding, as a result of the Company's share repurchase activities.
"We delivered record sales growth in the quarter including robust contributions from product innovation such as our K-Cups® and seasonal offerings. As we head into the key holiday period, our strong leading brands are trusted and remain well positioned to meet the varying needs of our consumers, including helping to bring their families together to share memorable meals and moments," commented Richard Smucker, Chief Executive Officer. "Additionally, we are effectively managing this period of significant cost inflation, where our cost of goods sold increased approximately 30 percent for the quarter, yet, we posted gross profit growth. As always, our focus remains on effectively managing the balance between volume, market share, and profitability, while continuing to invest in our brands."
Net sales in the second quarter of 2012 increased $235.0 million, or 18 percent, compared to the second quarter of 2011, due primarily to net price realization across many of the Company's brands. The Rowland Coffee brands acquired earlier in the year contributed approximately 2 percent to net sales for the second quarter of 2012 and, combined with the favorable impact of foreign exchange rates, offset a 1 percent decline in volume, compared to the second quarter of 2011. Volume gains were realized in Pillsbury® baking mixes and Jif® peanut butter, but were more than offset by declines in nonbranded beverages, Crisco® oils, Folgers® coffee, and Pillsbury® flour. The overall impact of sales mix was favorable.
Gross profit increased $4.0 million, or 1 percent, in the second quarter of 2012, compared to 2011, and increased $4.6 million, excluding special project costs. Price increases taken over the past year effectively offset higher commodity costs and contributed to gross profit, while margin contracted as expected. Gross margin declined from 39.6 percent in the second quarter of 2011 to 33.8 percent in the second quarter of 2012, excluding special project costs. Significantly higher costs were realized for green coffee in the second quarter of 2012, compared to 2011. Costs were also higher for edible oils, flour, milk, sweetener, peanuts, and other raw materials. The net unfavorable impact of a $4.3 million change in unrealized mark-to-market adjustments on derivative contracts in the second quarter of 2012, compared to 2011, also impacted gross profit.
While green coffee costs have moderated from earlier in the calendar year, the Company expects that it will continue to recognize considerably higher green coffee costs through the remainder of its fiscal year, compared to the prior year. Additionally, peanut costs are expected to escalate during the remainder of the year. Pricing actions to date take into account the Company's current cost expectations through the remainder of the fiscal year.
Selling, distribution, and administrative ("SD&A") expenses in the second quarter of 2012 increased 6 percent, compared to the second quarter of 2011, but decreased as a percentage of net sales from 17.4 percent to 15.6 percent. Marketing expenses in the second quarter of 2012, were comparable to the second quarter of 2011. Over the same period, selling and general and administrative expenses increased 17 percent and 10 percent, respectively, while distribution expenses decreased 1 percent. The addition of the Rowland Coffee business represented approximately one-half of the overall increase in SD&A expenses. In addition, higher amortization expense was recognized in the second quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the Rowland Coffee acquisition.
Operating income decreased $28.4 million, or 12 percent, in the second quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income decreased $21.7 million, or 8 percent, and declined from 20.6 percent of net sales in 2011 to 16.0 percent in 2012. Both operating income measures include a loss of $11.3 million on the divestiture of the Europe's Best® business in 2012.
Interest and Income Taxes
Interest expense increased $0.9 million in the second quarter of 2012, compared to 2011, representing the costs of higher debt outstanding somewhat offset by the benefit of the Company's interest rate swap activities and higher capitalized interest associated with the Company's capital expenditures. During the second quarter of 2012, the Company terminated two interest rate swaps prior to maturity resulting in a net settlement gain of $17.7 million, to be recognized over the remaining life of the underlying debt instruments, including $0.6 million in the current quarter.
On October 18, 2011, the Company completed a public placement of $750.0 million of 3.5 percent, 10-year Notes. A portion of the proceeds from the Notes was used to repay borrowings under the Company's revolving credit agreement. Remaining proceeds will be used for general corporate purposes and for funding of acquisitions, including the anticipated acquisition of the majority of Sara Lee Corporation's North American foodservice coffee and hot beverage business, expected to close in early calendar 2012.
Income taxes decreased $6.0 million in the second quarter of 2012, reflecting a $28.5 million decrease in income before income taxes and the offsetting impact of an increase in the effective tax rate to 34.1 percent, compared to 32.5 percent in the second quarter of 2011. The increase in the effective tax rate in the second quarter of 2012 is primarily due to a higher Canadian effective tax rate and an increase in state income tax expense, compared to the second quarter of 2011.