Operating income increased $3.2 million in the second quarter of 2014, compared to 2013, as special project costs were $4.7 million lower in the second quarter of 2014, compared to 2013.
Excluding special project costs in both periods, operating income decreased $1.5 million, 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.
Interest Expense and Income Taxes
Interest expense decreased $3.4 million reflecting the impact of an interest rate swap the Company entered into during the second quarter of 2014, converting a portion of its debt from fixed-rate to variable-rate. Income taxes increased $1.2 million in the second quarter of 2014, compared to 2013, due to an increase in income before income taxes. The effective tax rate decreased slightly from 33.6 percent in the second quarter of 2013 to 33.3 percent in 2014.
U.S. Retail Coffee
The U.S. Retail Coffee 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.
Segment net sales 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.
Net sales of K-Cup packs were flat compared to last year’s second quarter as the overall category remained dynamic and experienced increases in the number of new competitive entrants.
Net sales of Folgers Gourmet Selections K-Cup packs increased 9 percent in the second quarter of 2014, compared to the second quarter of 2013, offset by a decrease in the Millstone branded offerings.
The U.S. Retail Coffee segment profit increased $22.4 million, or 14 percent, in the second quarter of 2014, compared to the second quarter of 2013, as green coffee costs were significantly lower and were only partially offset by lower price realization.
Unrealized mark-to-market adjustments on derivative contracts were a gain of $0.5 million in the second quarter of 2014, compared to a loss of $4.5 million in the second quarter of 2013.
In comparison to the strong prior year third and fourth quarters where record segment profits were achieved, segment profit growth is expected to be relatively flat in the last six months of the current fiscal year.
The Company anticipates that various pricing levers will be utilized to pass lower commodity costs on to retailers and consumers through the remainder of its fiscal year
Outlook
For fiscal 2014, the Company expects net sales to decrease by approximately 2 percent compared to 2013. Previously, net sales were expected to decrease 1 percent.
The Company expects non-GAAP income per diluted share to remain in the previously announced range of $5.72 to $5.82, excluding special project costs of approximately $0.20 per diluted share.
The range includes the impact of approximately $13 million in estimated lower interest expense associated with the interest rate swap entered into during the second quarter of 2014, which was not included in management’s previous guidance range.
Conference Call
The Company will conduct an earnings conference call and webcast today, Wednesday, November 20, 2013, at 8:30 a.m. E.T.
The webcast can be accessed from the Company’s new website at www.jmsmucker.com/investor-relations. For those unable to listen to the live webcast, the webcast replay will be available at www.jmsmucker.com/investor-relations following the call.
An audio replay will also be available following the call until Wednesday, November 27, 2013, and can be accessed by dialing 888-203-1112 or 719-457-0820, with an access code of 9167122.
