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SMUCKER J M CO 10-K 2008 Documents found in this filing:Exhibit 13
Financial Highlights
The J. M. Smucker Company
~ On Our Cover ~
“Apple Butter Season” © 2008 Will
Moses
In the
painting commissioned for this year’s cover, artist
Will Moses, great-grandson of legendary painter Grandma Moses, transports us to an earlier time at J. M. Smucker’s Orrville home, where families are gathered to celebrate the goodness of the harvest. ~ Contents ~
Dear Shareholders and Friends:
* * *
Fiscal 2008 was another record year for The J. M.
Smucker Company. This is especially gratifying in
light of the year’s challenging economic environment and unprecedented commodity-driven cost
increases, which impacted all of our businesses.
We attribute our fiscal 2008 success to:
In fiscal 2008, we repurchased 2.9 million shares,
totaling almost $150 million. This action
demonstrates our confidence in our Company and is an
effective means for continuing to create shareholder
value.
~ Long-Term Performance ~
While we are proud of our fiscal 2008 results, they are
only a snapshot of a single year. We believe that
success is best
measured over the long term, and we are pleased to
report that our compounded net sales and earnings per
share grew over the past decade by 16 percent and 10
percent, respectively.
Just as important, we measure success by more than a
financial yardstick. Our long-held values and
philosophies tell the true story of who we are—and with
whom you, as a shareholder, have entrusted your
investment.
~ Our Purpose and Strategy ~
Our Company, brands, and people are about more than making and marketing products.
At Smucker, our purpose is to help families share memorable meals and moments. Key to
achieving our
purpose is our strategic vision of owning and marketing #1 food brands in North America. The
Smucker family
of brands is a trusted part of everyday meals, casual get-togethers, and special occasions—all of
which foster family connections and lasting memories.
Bringing families together is best accomplished by employees who feel like family themselves.
At Smucker, we maintain a unique family feeling by genuinely living our Basic Beliefs: Quality,
People, Ethics, Growth, and Independence.
Our purpose is what brings Smucker employees to work every day. Our strategy is what guides
our organization in a common direction and is the framework for serving our consumers, customers,
employees, suppliers, communities, and shareholders.
~ 2 ~
~ Serving Our Constituents ~
Consumers Meeting consumers’ needs is the heart of
all we do. We always seek to understand what consumers
want and to meet their needs with quality products that
are “good and good for you,” “easy for you,” and that
“make you smile.” That commitment, along with
responsible marketing, helps establish a bond between
our brands and consumers. Consumer trust, which takes
years to build, is something we never take for granted.
Customers We strive to satisfy our customers by
delivering outstanding service, offering fair prices,
and creating jointly developed business plans that
promise mutual benefits. Our emphasis on ethics,
fairness, and quality is vital to long-term,
productive customer relationships.
A recent industry initiative called New Ways of
Working Together aims to eliminate business
disruptions, so that—as a team—retailers and
manufacturers can focus more closely on satisfying
consumers and growing business. While this is not a
new objective for us, we have taken a leadership
position in this initiative, because we believe it
will benefit everyone: retailers, manufacturers, and
ultimately, consumers.
Employees Smucker employees are quality people,
each of whom brings important talents, perspectives,
and skills to our Company. We believe that every
employee makes a difference.
Suppliers Achieving our strategy depends on dedicated
suppliers and business partners who share our
willingness to go the extra mile in the name of
quality and service.
We view our suppliers and business partners as extended
family, and we treat them accordingly. Whether it is
the brokers who stock the retail
shelves, the drivers who deliver our products, the
farmers who supply our raw materials, or the people who
create our advertising— each supplier or partner plays
a key role that we appreciate and acknowledge.
Communities We take seriously our responsibility to be
good environmental stewards. Sustainability, a term
now popular throughout the industry, describes
what we have been doing for many years. We realize
that sustainability begins at home—in the 20 North
American communities in which we have offices and
manufacturing plants—and that our local efforts fan
out in concentric circles that ultimately impact the
world.
Shareholders In the final analysis, we are confident
that if we do a good job of serving our consumers,
customers, employees, suppliers, and communities, we
will ultimately deliver good returns for our
shareholders.
It is clear to us that to achieve lasting, measurable
results, we must serve each of our constituents with
sincerity, trust, creativity, and unwavering
dedication to doing what is right. This is a
longstanding commitment on the part of thousands of
thoughtful, capable people, working with shared
purpose in an atmosphere of collaboration—people who
strive every day to help families create memorable
meals and moments together.
All of us at The J. M. Smucker Company thank you for
your continued support and dedication.
Sincerely,
~ 3 ~
Business Overview
*** ~ U.S. Retail Segment ~
Sales and profits within our U.S. Retail segment grew
by 21 percent and four percent, respectively, in
fiscal 2008. Contributing to this growth were our core
business, new products, and the first full year of
sales and profits from the Eagle Brand acquisition. We
are especially pleased with the performance of our
U.S. Retail segment, given another year of record-high
commodity costs that impacted all of our businesses.
During uncertain economic times, the Smucker
family of brands steadfastly provides consumers with
highly proven, deeply trusted products.
Smucker’s, Jif, Pillsbury, Crisco, Eagle Brand, Hungry Jack, Martha
White, and White Lily are well-loved parts of the
everyday meals and special occasions that bring
families together.
We are passionate about serving our consumers and
customers, and we always seek better ways to meet their
needs. In January 2008, we appointed Advantage Sales
and Marketing as our single national broker for all of
our grocery business within the U.S. Retail segment.
This decision represents a major milestone in our
go-to-market strategy. It will help us further improve
customer service, realize a number of near-term
efficiencies, and position our Company for future
growth.
Fruit Spreads & Peanut Butter Our Smucker’s and Jif
brands delivered record market-share growth in fiscal
2008. Consumers continue to reach for our many fruit
spread varieties and peanut butter products, enjoying each on its own
or pairing them to create the “Great American PB&J.”
Our Smucker’s Organic fruit
spreads and Smucker’s Sugar
Free fruit spreads
sweetened with
Splenda®
continue to perform
well and now include
even more
varieties for consumers to choose from.
This past year, we reintroduced “The Boys”
television advertising campaign, featuring a young Tim
and Richard Smucker. Through a series of three new
television spots, consumers are reminded of the
heritage of the Smucker’s brand and the quality
ingredients we select for every jar of fruit spread.
Peanut butter, our largest category, sustained
impressive growth in fiscal 2008, as increasing
numbers of consumers include this “good for you” and
affordable protein in their pantries. We produced
record volumes of Jif peanut butter to satisfy growing
consumer demand and to help meet Customers’ need as a
result of a competitor’s supply disruption.
In fiscal 2008, we extended the
Jif brand to the snack nuts
category. Just as “choosy moms” and
“choosy dads” have trusted Jif
peanut butter for generations,
consumers who crave the
finest-quality peanuts, cashews, and
mixed nuts are drawn to Jif snack
nuts. New television advertising
reminds snack nut consumers, “We
have to be choosy.
We’re Jif.”
Uncrustables Sandwiches Smucker’s Uncrustables
sandwiches, which offer a convenient and fun way to
enjoy a peanut butter and jelly sandwich, continue to
bring smiles to the faces of consumers. Demand
remains strong, and the introduction this past year
of white whole wheat Smucker’s Uncrustables
sandwiches in strawberry and grape varieties affords
consumers another better-for-you alternative and
broadens our presence in the frozen aisle.
~ 6 ~
Ice
Cream Toppings Nothing says “celebration” like
Smucker’s
ice cream toppings. The introduction in fiscal
2008 of Smucker’s Triple Berry topping and Smucker’s Sugar
Free Chocolate and Sugar Free Caramel Sundae Syrups
heightens the fun and further expands our
better-for-you alternatives in this category.
Potatoes, Pancakes, and Syrup This past year, we
extended the reach of our Hungry Jack brand by
continuing to focus on new products and expanding our
product distribution and print and radio advertising.
We began testing several products that will offer
consumers even greater convenience. Included are
Hungry Jack refrigerated potatoes, Hungry Jack frozen
biscuits, and Hungry
Jack Snack’n Waffles ready-to-eat, pre-sweetened
waffles.
Baking and Oils We continued to strengthen and expand
our U.S. baking aisle leadership position in fiscal
2008. Through our portfolio of baking brands,
including Pillsbury, Eagle Brand, PET, Martha White,
and White Lily, we offer consumers products that meet
nearly all of their everyday and special-occasion
baking needs.
We enjoyed the first full year of sales
from brands that joined our portfolio as part of the
Eagle acquisition. The addition of Eagle Brand
sweetened condensed milk, Eagle Brand evaporated milk,
Eagle Brand dessert baking mixes, and Magnolia
sweetened condensed milk further broadened our
cross-promotional activities during the busy fall and
spring holiday baking periods.
Consumers often look
for something exceptional to serve to family and
friends on special occasions. Our newly introduced,
simple-to-prepare Pillsbury Mint Chocolate Brownies,
Pillsbury Pumpkin Caramel Delight, and Eagle Brand
Magic Cookie Bar and Decadent Fudge dessert kits
answer this desire with impossible-to-resist
convenience.
Consumers continue to respond positively to our
better-for-you baking alternatives, including
Pillsbury Reduced Sugar cake mixes and frostings,
Pillsbury Reduced Sugar brownies, and Martha White
whole-grain muffins and sweet yellow cornbread.
Our Crisco olive oil products, which offer
consumers a trusted brand in the “good for you” olive
oil category, are a growing success. Thanks to ongoing
momentum
and expanded distribution, these products will be
offered in the western United States in fiscal 2009.
Our introduction of Crisco Puritan canola oil
with Omega-3 DHA means consumers now have another
smart choice for adding nutritional value to their
meals.
Unprecedented soybean, wheat, and milk commodity
costs significantly challenged our Baking and Oils
business in fiscal 2008. It is expected that these
costs will continue to rise in the foreseeable future,
making the always-vital need for cost and price
management more critical than ever.
~ 7 ~
~Special Markets Segment~
Our
Special Markets segment saw another record year. Compared to fiscal 2007, sales in this segment,
excluding divested businesses, were up 25 percent. Profits increased 26 percent.
Canada Excluding divested businesses, our Canadian business experienced a 35 percent growth in
sales in fiscal 2008. This significant increase was driven largely by a full year of Eagle Brand
sales and our acquisition of Carnation, the #1 evaporated milk in Canada. Late in the fiscal year,
we also acquired Europe’s Best frozen fruits and vegetables.
Carnation
and Europe’s Best join our already strong portfolio of #1 brands in Canada,
including Smucker’s, Robin Hood, and Bick’s. The
Carnation acquisition further strengthens our
leadership position in the baking aisle, and Europe’s Best adds premium frozen fruits and
vegetables to our product portfolio.
Adding to a recent string of award-winning innovations in the baking category, we introduced
Robin Hood frozen muffins this past year. Together,
Europe’s best frozen fruits and vegetables and
Robin Hood frozen muffins enhance our presence in Canada’s retail freezer aisles.
Foodservice
Our Foodservice and Schools business grew by 27 percent in fiscal 2008. Key
contributors were our core portion control business, Smucker’s Uncrustables sandwiches, and recent
acquisitions of Eagle Brand and the Snack’n
Wiffles brand. Snack’n Waffles ready-to-eat,
pre-sweetened waffles offer consumers a convenient, handheld waffle to enjoy while away from home.
Beverage Our Beverage group continues to meet consumer desire for products that are “good and
good for you” and made in a sustainable manner. This business,
driven by our R. W. Knudsen Family
and Santa Cruz Organic brands, grew in sales by nine percent in fiscal 2008. We introduced new
products, including R. W. Knudsen Family Organic Pomegranate
Nectar, R. W. Knudsen Family Organic
Black Currant Nectar, and Sensible Sippers—juice boxes that provide parents with a convenient
alternative for offering children organic juice, blended with just the right amount of water, while
at home or on the go.
Our Beverage business is an industry sustainability leader, receiving the California Waste
Reductions Award for the eighth consecutive year.
International Consumers Consumers in more than
50 countries beyond the United States and Canada continue to enjoy our brands and products. The
International group remains focused on Mexico and the Caribbean, with business growing in these
markets by six percent and 66 percent, respectively, in fiscal 2008.
We are
pleased to welcome these additions to the Smucker family of brands: Snack’n Waffles
ready-to-eat, pre-sweetened waffles; king kelly California Orange Marmalade; and, in Canada,
Carnation evaporated milk and Europe’s best frozen fruits and vegetables.
~ 10 ~
Sweet ‘n’ Hot Southwestern Dip(Pictured on page 4)
Directions STIR together all ingredients in small serving bowl. COVER and chill 2 hours. Serve with corn chips or tortilla chips. TIP: This is a great sandwich and hamburger spread too! Zesty Pepper ‘n’Onion Dip
Directions BEAT cream cheese in medium bowl until smooth.
Gradually mix in relish. Spoon into small serving
bowl.
COVER and
chill at least 1 hour. Serve with crackers.
TIP: For an easier option, unwrap the block of cream cheese and place on a decorative plate. Pour relish over top. Serve with a small knife and crackers.
Brownie Bites with Caramel Fluff (Pictured on page 5)
Directions HEAT oven to 350°F Coat an 8 x 8-inch baking pan lightly with no-stick cooking spray.
COMBINE brownie mix, oil, water and egg in
medium bowl. Stir 50 strokes with spoon. Spread
evenly in prepared pan.
BAKE 30 to 32 minutes. Cool completely. Cut into
cubes. Place half of cubes in 1 1/2-quart serving
dish.
STIR caramel topping in small bowl until smooth. Whisk
in whipped topping until blended. Spread half on top of
brownie cubes in dish. Make another layer of remaining
brownie cubes and topping.
Sprinkle with mini chocolate chips. Drizzle with
additional caramel topping, if desired.
Orange Pecan Waffles with Sweet Orange Syrup (Pictured on page 8)
Directions HEAT
waffle iron according to manufacturers instructions.
COMBINE pancake mix, nuts, 1/4 cup marmalade, water, oil and egg in medium bowl. Stir until large lumps disappear. Bake in hot waffle iron until steaming stops and waffle is golden brown. PLACE 1 1/4 cups marmalade in microwave-safe bowl.
Microwave on HIGH (100% power) 1 minute. Add cinnamon;
stir.
SERVE waffles with orange syrup and whipped cream or
whipped topping.
Fruit Kabobs with Creamy Cherry Peanut Butter Dip (Pictured on page 9)
Directions WHISK together yogurt, peanut butter and preserves in
small bowl until thoroughly mixed. Spoon into small
serving dish.
THREAD pieces of fruit onto wooden skewers. Arrange
skewers and dip on serving platter.
A Touch of Orange Apple Pie (Pictured on page 4)
Directions PREPARE recipe for double crust pie. Roll out dough for
bottom crust; place in 9-inch pie plate. Press to fit
without stretching dough. Trim even with pie plate. Heat
oven to 400ºF.
COMBINE sugar, cornstarch, cinnamon, orange peel, salt and
nutmeg in small bowl. Place apples in unbaked pie crust.
Sprinkle sugar mixture over apples. Dot with butter.
Moisten pastry edge with water.
ROLL out dough for top crust. Place onto filled pie. Trim
1/2-inch beyond edge. Fold top crust under bottom crust
edge to seal. Crimp and flute edges. Cut slits in top crust
or perforate with fork to allow steam to escape.
BAKE 35 minutes. Remove pie from oven. Brush with milk. Sprinkle with sugar. Cover edge of pie with foil, if necessary, to prevent overbrowning. Bake an additional 10 minutes or until filling in center is bubbly and crust is golden brown. Cool completely on wire rack.
Thai Peanut Butter Chicken Wraps (Pictured on page 5)
Directions STIR together peanut butter, pad thai sauce and
green onions in medium bowl.
PLACE tortilla on microwave-safe plate. Spread 1/4
peanut butter mixture on tortilla to about 1/2-inch
of edge. Microwave on HIGH (100% power) 20 seconds.
LAYER with 1/4 chicken; top with 1/2 cup lettuce. Wrap
burrito style: Fold one edge of tortilla up about 1 inch
over filling; fold right and left sides over folded
edge; roll up, ending with loose edge on bottom. Cut in
half diagonally.
REPEAT with remaining tortillas.
Grilled Seafood Salad (Pictured on page 8 )
Directions WHISK together lime juice, oil, salt and cayenne pepper in
shallow dish. instructions. Add scallops, shrimp and
sliced mushrooms; turn to coat. Cover and refrigerate 30
minutes.
COMBINE vinegar, mustard, salt, pepper and herbs in
blender or food processor. Process on high speed until
mixture is well blended. With the motor running, carefully
pour in olive oil in a steady stream. Set aside.
SPRAY grill pan or sauté pan with no-stick cooking spray;
heat to medium high heat. Remove seafood and mushrooms
from marinade; discard marinade. Cook shrimp and scallops
2 to 3 minutes per side or until seafood is cooked through
and has browned highlights. Remove from pan; set aside.
Add mushrooms to pan; grill 4 to 5 minutes, turning once.
Remove from pan.
ARRANGE salad ingredients on medium platter. Top with
grilled seafood and mushrooms. Drizzle dressing as desired
over salad. Top with Parmesan cheese, if desired.
Mocha Walnut Pie (Pictured on page 8 )
Directions PREPARE recipe for single crust pie. Roll out dough;
place in 9-inch pie plate. Press to fit without
stretching dough. Trim edge of dough, leaving a 3/4-inch
overhang. Fold edge under; flute dough as desired. Heat
oven to 350ºF.
MELT chocolate and butter in medium saucepan over low
heat. Stir in dissolved coffee, sweetened condensed
milk, eggs and vanilla; mix well. Pour into pie crust.
Top with walnuts.
BAKE 40 to 45 minutes or until center is set. Cool slightly. Serve warm or chilled, topped with whipped cream or whipped topping, if desired.
Financial Review
***
~ 13 ~
Five-Year Summary of Selected Financial Data
*** The following table presents selected financial data for each of the five years in the period ended
April 30, 2008. The selected financial data was derived from the consolidated financial statements
and should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and
Liquidity and Capital Resources” and the consolidated financial statements and notes thereto.
~ 14 ~
Summary of Quarterly Results of Operations
*** The following is a summary of unaudited quarterly results of operations for the years ended April
30, 2008 and 2007.
Annual earnings per share may not equal the sum of the individual quarters due to differences in
the average number of shares outstanding during the respective periods.
Stock Price Data
*** The Company’s common shares are listed on the New York Stock Exchange — ticker symbol SJM. The
table below presents the high and low market prices for the shares and the quarterly dividends
declared. There were approximately 267,380 shareholders as of June 17, 2008, of which 78,959 were
registered holders of common shares.
~ 15 ~
Comparison of Five-Year Cumulative Total Shareholder Return
*** 
The above graph compares the cumulative total shareholder return for the five years ended April 30,
2008, for the Company’s common shares, the S&P 500, and the S&P Packaged Foods and Meats index.
These figures assume all dividends are reinvested when received and are based on $100 invested in
the Company’s common shares and the referenced index funds on April 30, 2003.
Copyright (C) 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm ~ 16 ~
Management’s Discussion and Analysis
*** Executive Summary
*** The J. M. Smucker Company (the “Company”), headquartered in Orrville, Ohio, is the leading
marketer and manufacturer of fruit spreads, peanut butter, shortening and oils, ice cream
toppings, sweetened condensed milk, and health and natural foods beverages in North America.
The Company’s strategy is to own and market leading food brands found in the center of the store
and sold throughout North America. Its family of brands includes Smucker’s, Jif, Crisco,
Pillsbury, Eagle Brand, R.W. Knudsen Family, Hungry Jack, White Lily, and Martha White in the
United States, along with Robin Hood, Five Roses, Carnation, Europe’s Best, and
Bick’s in Canada. In addition to these brands, the Company
markets products under numerous other brands, including
Dickinson’s, Laura Scudder’s, Adams, Double Fruit (Canada), and Santa Cruz Organic. The Company is
widely known and trusted for quality food products.
The Company distributes its products through grocery and other retail outlets, foodservice
establishments, schools, specialty and gourmet shops, health and natural foods stores, and
consumer direct vehicles such as the Internet and a showcase store in Orrville, Ohio, and markets
a wide variety of other specialty products throughout North America and in many foreign countries.
Since 1998, the Company has appeared on FORTUNE magazine’s annual listing of the “100 Best
Companies to Work For,” in the United States, ranking number one in 2004.
Results of Operations
*** On May 1, 2007, the Company acquired Eagle Family Foods Holdings, Inc. (“Eagle”) in a transaction
valued at approximately $248 million. The transaction has been accounted for as a purchase
business combination and the results of Eagle are included in the Company’s consolidated financial
statements from the date of acquisition.
~ Summary of 2008 ~
The Company realized strong sales growth in 2008 as the impacts of Eagle and other recent
acquisitions, pricing and volume gains, and favorable foreign currency exchange rates were
realized. Company net sales increased 18 percent to $2,524.8 million in 2008 from $2,148.0 million
in 2007 while net income increased eight percent to $170.4 million in 2008 from $157.2 million in
2007. Net income per common share — assuming dilution was $3.00 in 2008, an increase of nine
percent from $2.76 in 2007, resulting from the increase in net income combined with a decrease in
common shares outstanding during the year.
~ Net Sales ~
2008 Compared to 2007. Net sales increased $376.8 million, or 18 percent, in 2008 from 2007. Net
sales increased 22 percent over the same period, excluding the divested Canadian non-branded,
grain-based foodservice and industrial businesses (“divested Canadian businesses”) sold in
September 2006. The acquired Eagle businesses contributed $236.2 million in net sales in 2008,
accounting for approximately one-half of the increase in net sales excluding the divested Canadian
businesses, while pricing contributed almost one-third of the increase. Also contributing to net
sales growth in 2008 were gains in the Smucker’s, Jif, Crisco, and Hungry Jack brands, the
acquired Carnation canned milk business in Canada, and the impact of favorable foreign exchange
rates.
In the U.S. retail market segment, comprised of the Company’s consumer and consumer oils and
baking strategic business areas, net sales were $1,874.5 million in 2008, up 21 percent compared
to $1,547.1 million in 2007. Net sales in the con-
~ 17 ~
sumer strategic business area increased nine percent led by strong sales in peanut butter, fruit
spreads, and Smucker’s Uncrustables sandwiches. Excluding the contribution of $198.9 million from
the acquired Eagle business in 2008, net sales in the oils and baking strategic business area
increased eight percent as sales gains were realized in baking mixes and oils.
The special markets segment is comprised of the foodservice, beverage, Canada, and international
strategic business areas. Net sales in this segment were $650.2 million in 2008, an increase of
eight percent compared to $601.0 million in 2007. Excluding the divested Canadian businesses, net
sales in the special markets segment increased 24 percent in 2008 compared to 2007. Canada
contributed significantly to the increase in special markets segment net sales due to the impacts
of the acquired Eagle and Carnation canned milk businesses and favorable foreign exchange rates.
The acquisition of Europe’s Best brand of premium, all natural, frozen fruit and vegetables during
the fourth quarter of 2008 also contributed slightly to the Canada sales increase. The foodservice
strategic business area net sales increased 27 percent in 2008 compared to 2007, or 14 percent,
excluding the contribution of $21.1 million of Eagle net sales. Contributing to the foodservice
improvement in 2008 was continued growth of Smucker’s Uncrustables sandwiches, which realized a 15
percent increase, and a 12 percent increase in traditional portion control products, primarily
peanut butter. Net sales in the beverage strategic business area increased nine percent in 2008
compared to 2007 resulting from increases in R.W. Knudsen Family, Santa Cruz Organic, and
nonbranded products of seven, 14, and nine percent, respectively. Net sales in the international
strategic business area increased two percent in 2008 despite the divestiture of the Scotland
business during the first quarter of 2008, driven by a 19 percent increase in export sales and a
six percent increase in net sales in Mexico.
2007 Compared to 2006. Net sales in 2007 decreased $6.7 million, or less than one percent, from
2006 reflecting the impact of divestitures. Net sales increased $107.5 million, or five percent
over the same period, excluding the divested Canadian businesses and the U.S. industrial
ingredient business (“divested businesses”). This net sales growth was led primarily by volume
gains in the Jif and Smucker’s brands, strong performance across the businesses in the special
markets segment, and the contribution of approximately $33.4 million from the White Lily and Five
Roses brands acquired during 2007. Price increases were also
taken on most brands during the year.
In the U.S. retail market segment net sales were $1,547.1 million in 2007, up $62.2 million, or
approximately four percent, over 2006. Net sales in the consumer strategic business area were up
seven percent for the year. The consumer increase was led by strong sales of Jif peanut butter,
particularly in the fourth quarter of the fiscal year resulting from increased demand for the
product upon the recall of a competitor’s products. In addition, growth in natural peanut butter,
fruit spreads, toppings, and a 29 percent increase in Smucker’s Uncrustables sandwiches during the
year also contributed. In the consumer oils and baking strategic business area, sales were flat
compared to the prior year as sales gains in retail oils, frosting, flour, and the contribution of
$14.8 million from the White Lily brand acquired in October 2006 offset declines in baking mixes
and a $14.7 million decrease in sales of industrial oils.
Net sales in the special markets segment were $601.0 million in 2007, a decrease of 10 percent,
compared to 2006. Excluding divested businesses, special market net sales increased nine percent
for the same period. All strategic business areas in special markets contributed to the increase.
Foodservice net sales increased 13 percent, due to a 10 percent increase in sales of traditional
portion control products, as well as a 20 percent increase in Smucker’s Uncrustables sandwiches in
the schools market. Beverage net sales increased 11 percent in 2007 compared to 2006, as sales of
R. W. Knudsen Family, Santa Cruz Organic, and nonbranded products increased nine, 21, and 19
percent, respectively. Net sales in Canada increased five percent driven by the contribution of
approximately $18.6 million from the acquisition of the
~ 18 ~
Five Roses flour brand during the year and the impact of favorable exchange rates. In the
international strategic business area, net sales increased 14 percent primarily due to continued
growth in export markets.
~ Operating Income ~
The following table presents components of operating income as a percentage of net sales.
2008 Compared to 2007. Operating income increased 12 percent in 2008 to $284.2 million, compared
to 2007 while decreasing as a percentage of net sales from 11.8 percent in 2007 to 11.3 percent in
2008. The impact of the lower margin Eagle businesses, record costs for soybean oil and wheat, and
the mix of products sold during the year resulted in a decline in gross profit as a percentage of
net sales from 32.7 percent in 2007 to 31.0 percent in 2008. The margin on the Eagle businesses
was impacted by an increase in milk costs and an unfavorable mix of nonbranded sales during the
year and accounted for approximately one-half of the decrease in gross profit as a percentage of
net sales. The impact of price increases taken during the year across all businesses, while
essentially offsetting higher raw material cost increases of approximately $150 million compared to 2007, was not sufficient to
maintain margins.
Selling, distribution, and administrative (“SD&A”) expenses increased 11 percent from 2007 to
$490.7 million in 2008, resulting from increased marketing spending and additional costs related
to the acquired Eagle businesses. However, corporate overhead expenses increased at a lesser rate
than net sales resulting in SD&A as a percent of net sales improving from 20.6 percent in 2007 to
19.4 percent in 2008. Higher restructuring and merger and integration costs in 2008 compared to
2007 also negatively impacted operating income.
Other operating income — net of $3.9 million was recognized in 2008 resulting from a net insurance
settlement related to storm damage at a third-party distribution and warehouse facility in
Memphis, Tennessee. Other operating expense — net of $2.7 million was recognized in 2007
consisting of losses on disposal of assets.
2007 Compared to 2006. Operating income increased $22.2 million in 2007, or 10 percent, compared
to 2006, and increased from 10.8 percent of net sales in 2006 to 11.8 percent in 2007. The
increase in operating income in 2007 was primarily due to improvements in gross profit and a
decrease in merger and integration costs. Gross profit increased from $692.9 million, or 32.2
percent of net sales in 2006, to $702.1 million, or 32.7 percent of net sales in 2007. The
increase in gross profit occurred, despite a record high commodity price environment, due to the
divestiture of the lower margin Canadian non-branded businesses during the second quarter of 2007
and favorable product mix, particularly in the fourth quarter of 2007. These favorable
contributions to gross profit were offset in part by an increase in restructuring related
impairment charges in 2007 associated with the Canadian divestiture. Although the Company
implemented pricing actions to mitigate commodity cost increases totaling approximately $30
million during the year, these cost increases were not fully offset for the year.
~ 19 ~
SD&A expenses increased $4.4 million in 2007, or approximately one percent, from 2006, and
increased from 20.3 percent of net sales in 2006 to 20.6 percent in 2007 due to costs associated
with the Company’s transition to restricted stock-based compensation programs and the related
impact of adopting Statement of Financial Accounting Standards No. 123 (revised), Share-Based
Payment. Selling expenses were also up in 2007 compared to 2006. Marketing and distribution
expense decreased in 2007 from 2006 as the Company actively managed SD&A costs to help offset the
impact of higher raw material costs.
Other operating expense — net of $2.7 million was recognized in 2007 consisting of losses on
disposal of assets. Other operating income — net of $3.4 million was recognized in 2006 as the net
gain on the sale of the Salinas facility of $5.6 million offset losses on disposal of assets
during the year.
~ Interest Income and Expense ~
Interest expense increased $18.8 million in 2008 compared to 2007, resulting from the issuance
of $400 million in senior notes on May 31, 2007, a portion of which was used to repay
short-term debt used in financing the Eagle acquisition. The investment of excess proceeds
resulted in an increase in interest income of $4.0 million during 2008 compared to 2007.
Interest expense decreased $0.7 million in 2007 compared to 2006 as a portion of the proceeds from
the sale of the Canadian nonbranded businesses was utilized to pay off balances outstanding
against the Company’s revolving credit facility during the second quarter of 2007. Also during
2007 interest income increased $2.6 million compared to 2006, primarily related to an increase in
invested funds during the year resulting from the Canadian nonbranded businesses sale and an
overall increase in cash generated from operations.
~ Income Taxes ~
Income taxes in 2008 were $84.4 million, up $0.6 million, or one percent, from 2007. The increase
in income taxes that would have resulted from higher income in 2008 as compared to 2007 was mostly offset by a decrease in the effective tax rate from 34.8 percent in 2007 to
33.1 percent in 2008. The lower effective tax rate for 2008 was primarily attributable to a lower
state tax rate resulting from the favorable resolution of uncertain tax positions.
Income taxes were $83.8 million in 2007, an increase of $11.6 million, or 16 percent, from 2006.
The increase is due primarily to an increase in taxable income, combined with an increase in the
effective tax rate from 33.5 percent in 2006 to 34.8 percent in 2007. The effective tax rate in
2006 included certain one-time benefits of the Company’s legal entity realignment that did not
recur in 2007.
~ Restructuring ~
During 2003, the Company announced plans to restructure
certain operations as part of its ongoing efforts to refine
its portfolio, optimize its production capacity, improve
productivity and operating efficiencies, and improve the
Company’s overall cost base as well as service levels in
support of its long-term strategy. At the end of 2008, these
restructurings were proceeding as planned.
In conjunction with the restructurings, the Company has
recorded total charges of $58.5 million to date, including
$4.7 million in 2008, $12.1 million in 2007, and $10.0
million in 2006. The majority of these charges related to
impairment and accelerated depreciation on buildings and
machinery and equipment, system conversion costs, employee
separation costs, equipment relocation expenses, and the
disposition of inventories.
~ Subsequent Event ~
On June 4, 2008, the Company entered into a definitive
agreement with The Procter & Gamble Company (“P&G”) to merge
P&G’s Folgers coffee business with and into the Company.
Under the terms of the agreement, P&G will distribute the
Folgers business to P&G shareholders in a tax-free
transaction, with a simultaneous merger with and into the
Company. In the merger, current P&G shareholders will receive
approximately
~ 20 ~
53.5 percent of the Company’s shares and current Company
shareholders will own approximately 46.5 percent of the
combined company upon closing. Upon closing, the Company will
have approximately 118 million shares outstanding. As part of
the transaction, the Company will assume an estimated $350
million of Folgers debt. The transaction is expected to be
tax free to both companies and P&G shareholders. In addition,
Company shareholders as of the record date, prior to the
merger, will receive a special dividend of $5 per share. The
record date for the special dividend will be determined by
the Company at a future date.
The transaction is expected to close in the fourth quarter of
calendar 2008, subject to customary closing conditions
including regulatory and Company shareholder approvals. The
Company expects to incur approximately $100 million in
one-time costs related to the transaction over the next two
fiscal years.
The merger will be accounted for as a purchase business
combination. For accounting purposes, the Company will be
treated as the acquiring enterprise.
Liquidity and Capital Resources
***
The Company’s principal source of funds is cash generated
from operations, supplemented by borrowings against the
Company’s revolving credit facility. Total cash and
investments at April 30, 2008, were $200.2 million compared
to $244.2 million at April 30, 2007.
~ Operating Activities ~
The Company’s working capital requirements are greatest
during the first half of its fiscal year, primarily due to
the need to build inventory levels in advance of the “fall
bake” season, the seasonal procurement of fruit, and the
purchase of raw materials used in the Company’s pickle and
relish business in Canada. The acquisition of the Eagle
businesses added further to the cash requirements during the
first half of the year.
Cash provided by operating activities was $191.6 million
during 2008, a decrease of $81.8 million, or 30 percent, over
2007. The decrease in cash from operations was primarily due
to an increase in the cash required to support working
capital requirements. Working capital, excluding cash and
cash equivalents, as a percent of net sales increased to 14.0
percent in 2008 from 9.4 percent in 2007 primarily as a
result of higher inventory balances associated with increased
raw material costs.
~ Investing Activities ~
Net cash used for investing activities totaled approximately
$262.5 million in 2008, as $220.9 million was used for
business acquisitions, primarily Eagle, the Carnation canned
milk business in Canada, and Europe’s Best. Capital
expenditures were approximately $76.4 million during 2008, or
three percent of net sales.
~ Financing Activities ~
Net cash provided by financing activities during 2008
consisted primarily of the Company’s issuance of $400 million
in senior notes on May 31, 2007, offset by the repayment of
$148 million of debt, including $115 million assumed in the
Eagle acquisition, $152.5 million used to finance the
repurchases of treasury shares, and $68.1 million in dividend
payments.
The purchase of treasury shares was comprised largely of
2,927,600 common shares, representing approximately five
percent of common shares outstanding at the beginning of
2008.
~ 21 ~
The shares were repurchased under the Board of Directors’
authorized share repurchase program, including 2.5 million
common shares under Rule 10b5-1 trading plans announced and
completed during 2008. Since November 2004, the Company has
repurchased 6,255,778 common shares under Board
authorization, leaving 3,744,222 common shares authorized for
repurchase. Due to structuring requirements of the recently
announced Folgers transaction, there are specific conditions
which must be satisfied prior to any share repurchase, and as
a result, the Company does not anticipate that it will
repurchase shares for a period of two years following the
closing of the transaction.
Cash requirements for 2009, excluding funds necessary to
complete the Folgers merger, will include capital
expenditures estimated at approximately $85 million. In
addition, regular quarterly dividends are expected to
approximate $70 million and interest payments on long-term
debt to approximate $46 million for the year.
Assuming there are no other material acquisitions or other
significant investments, the Company believes that cash on
hand and marketable securities, combined with cash provided
by operations, new borrowings anticipated in connection with
the Folgers merger, and borrowings available under the
revolving credit facility, will be sufficient to meet 2009
cash requirements, including capital expenditures, the
payment of the special dividend, the payment of quarterly
dividends, repurchase of common shares, if any, and interest
on existing debt outstanding and any new borrowings.
Off-Balance Sheet Arrangements and
Contractual Obligations *** The Company does not have 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, are conducted at an arm’s length
basis, and are not material to the Company’s results of
operations, financial condition, or cash flows.
The following table summarizes the Company’s contractual
obligations at April 30, 2008.
Purchase obligations in the above table include agreements to
purchase goods or services that are enforceable and legally
binding on the Company. Included in this category are certain
obligations related to normal, ongoing purchase obligations
in which the Company has guaranteed payment to ensure availability of raw materials
and packaging supplies. The Company expects to receive
consideration for these purchase obligations in the form of
materials. The purchase obligations in the above table do not
represent the entire anticipated purchases in the future, but
represent only those items for which the Company is
contractually obligated.
~ 22 ~
Critical Accounting Estimates and Policies
*** The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that in
certain circumstances affect amounts reported in the
accompanying consolidated financial statements. In preparing
these financial statements, management has made its best
estimates and judgments of certain amounts included in the
financial statements, giving due consideration to
materiality. The Company does not believe there is a great
likelihood that materially different amounts would be
reported under different conditions or using different
assumptions related to the accounting policies described
below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results
could differ from these estimates.
Revenue Recognition. The Company recognizes revenue when all
of the following criteria have been met: a valid customer
order with a determinable price has been received; the
product has been shipped and title has transferred to the
customer; there is no further significant obligation to
assist in the resale of the product; and collectibility is
reasonably assured. A provision for estimated returns and
allowances is recorded as a reduction of sales at the time
revenue is recognized.
Trade Marketing and Merchandising Programs. In order to
support the Company’s products, various promotional
activities are conducted through the retail trade,
distributors, or directly with consumers, including in-store
display and product placement programs, feature price
discounts, coupons, and other similar activities. The Company
regularly reviews and revises, when it deems necessary,
estimates of costs to the Company for these promotional
programs based on estimates of what will be redeemed by the
retail trade, distributors, or consumers. These estimates are
made using various techniques including historical data on
performance of similar promotional programs. Differences
between estimated expense and actual performance are recognized as a change in management’s estimate in a
subsequent period. As the Company’s total promotional
expenditures, including amounts classified as a reduction of
net sales, represent approximately 26 percent of 2008 net
sales, the likelihood exists of materially different reported
results if factors such as the level and success of the
promotional programs or other conditions differ from
expectations.
Income Taxes. The future tax benefit arising from the net
deductible temporary differences and tax carryforwards is
approximately $59.7 million and $63.2 million, at April 30,
2008 and 2007, respectively. Management believes that the
Company’s earnings during the periods when the temporary
differences become deductible will be sufficient to realize
the related future income tax benefits. For those
jurisdictions where the expiration date of tax carryforwards
or the projected operating results of the Company indicate
that realization is not likely, a valuation reserve has been
provided.
In assessing the need for a valuation allowance, the Company
estimates future taxable income, considering the viability of
ongoing tax planning strategies and the probable recognition
of future tax deductions and loss carryforwards. Valuation
allowances related to deferred tax assets can be affected by
changes in tax laws, statutory tax rates, and projected future taxable income levels. Under
current accounting rules, changes in estimated realization of
deferred tax assets would result in either an adjustment to
goodwill, if the change relates to tax benefits associated
with a business combination, or an adjustment to income, in
the period in which that determination is made.
In the ordinary course of business, the Company is exposed to
uncertainties related to tax filing positions and
periodically assesses these tax positions for all tax years
that remain subject to examination, based upon the latest
information available. For uncertain tax positions, the
Company has recorded tax reserves, including any applicable
interest and penalty charges, in accordance with Financial
Accounting Standards Board Interpretation No. 48.
~ 23 ~
Long-Lived Assets. Historically, long-lived assets have been
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset
may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount
of the assets to future net cash flows estimated to be
generated by such assets. If such assets are considered to be
impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds the fair
value of the assets. However, determining fair value is
subject to estimates of both cash flows and interest rates
and different estimates could yield different results. There
are no events or changes in circumstances of which management
is aware indicating that the carrying value of the Company’s
long-lived assets may not be recoverable.
Goodwill and Indefinite-Lived Intangible Assets. The annual
evaluation of goodwill and indefinite-lived intangible assets
requires the use of estimates about future operating results
for each reporting unit to determine estimated fair value.
Changes in forecasted operations can materially affect these
estimates. Additionally, other changes in the estimates and
assumptions, including the discount rate and expected
long-term growth rate, which drive the valuation techniques
employed to estimate the fair value of the reporting unit
could change and, therefore, impact the assessments of
impairment in the future.
Pension and Other Postretirement Benefit Plans. To determine
the Company’s ultimate obligation under its defined benefit
pension plans and other postretirement benefit plans,
management must estimate the future cost of benefits and
attribute that cost to the time period during which each
covered employee works. Various actuarial assumptions must be
made in order to predict and measure costs and obligations
many years prior to the settlement date, the most significant
being the interest rates used to discount the obligations of
the plans, the long-term rates of return on the plans’
assets, assumed pay increases, and the health care cost trend
rates. Management, along with third-party actuaries and
investment managers, reviews all of these assumptions on an ongoing basis to
ensure that the most reasonable information available is
being considered. For 2009 expense recognition, the Company
will use a discount rate of 6.6 percent and 6.1 percent, and
a rate of compensation increase of 3.8 percent and 4.0
percent, for U.S. and Canadian plans, respectively. The
Company will use an expected rate of return on plan assets of
7.75 percent for U.S. plans. For the Canadian plans, the
Company will use an expected rate of return on plan assets of
7.0 percent for the hourly plan and 7.5 percent for all other
plans.
Recovery of Trade Receivables. In the normal course of
business, the Company extends credit to customers that
satisfy predefined criteria. The Company evaluates the
collectibility of trade receivables based on a combination of
factors. When aware that a specific customer may be unable to
meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer’s
operating results or financial position, the Company records
a specific reserve for bad debt to reduce the related
receivable to the amount the Company reasonably believes is
collectible. The Company also records reserves for bad debt
for all other customers based on a variety of factors,
including the length of time the receivables are past due,
historical collection experience, and an evaluation of
current and projected economic conditions at the balance
sheet date. Actual collections of trade receivables could differ from management’s estimates
due to changes in future economic or industry conditions or
specific customers’ financial conditions.
Derivative Financial Instruments
and Market Risk *** The following discussions about the Company’s market risk
disclosures involve forward-looking statements. Actual
results could differ from those projected in the
forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency
exchange rates, and commodity prices.
~ 24 ~
Interest Rate Risk. The fair value of the Company’s cash and
short-term investment portfolio at April 30, 2008,
approximates carrying value. Exposure to interest rate risk
on the Company’s long-term debt is mitigated since it is at a
fixed rate until maturity. Market risk, as measured by the
change in fair value resulting from a hypothetical 10 percent
change in interest rates, is not material. Based on the
Company’s overall interest rate exposure as of and during the
year ended April 30, 2008, including derivative and other
instruments sensitive to interest rates, a hypothetical 10
percent movement in interest rates would not materially
affect the Company’s results of operations. A hypothetical
100 basis point increase in short-term interest rates would
increase the Company’s interest expense by approximately $0.1
million. Interest rate risk can also be measured by
estimating the net amount by which the fair value of the
Company’s financial liabilities would change as a result of
movements in interest rates. Based on a hypothetical,
immediate 100 basis point decrease in interest rates at April
30, 2008, the fair value of the Company’s long-term debt and
interest rate portfolio, in aggregate, would increase by
approximately $41.3 million.
Foreign Currency Exchange Risk. The Company has operations
outside the United States with foreign currency denominated
assets and liabilities, primarily denominated in Canadian
currency. Because the Company has 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 April 30, 2008, are not expected to
result in a significant impact on future earnings or cash
flows.
Revenues from customers outside the United States represented
13 percent of net sales during 2008. 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. Raw materials and other commodities
used by the Company are subject to price volatility caused by
supply and demand conditions, political and economic
variables, and other unpredictable factors. To manage the
volatility related to anticipated commodity purchases, the
Company uses futures and options with maturities 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 other
comprehensive income to the extent effective, and
reclassified into 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.
The following sensitivity analysis presents the Company’s
potential loss of fair value resulting from a hypothetical 10
percent change in market prices.
Fair value was determined using quoted market prices and was
based on the Company’s net derivative position by commodity
at each quarter end during the fiscal year. The calculations
are not intended to represent actual losses in fair value
that the Company expects to incur. In practice, as markets
move, the Company actively manages its risk and adjusts
hedging strategies as appropriate. The commodities hedged
have a high inverse correlation to price changes of the
derivative commodity instrument; thus, the Company would
expect that any gain or loss in fair value of its derivatives
would generally be offset by an increase or decrease in the
fair value of the underlying exposures.
~ 25 ~
Forward-Looking Statements
*** Certain statements included in this Annual Report contain
forward-looking statements within the meaning of federal
securities laws. The forward-looking statements may include
statements concerning the Company’s 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. The Company is 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 the Company’s control and could
cause actual results to differ materially from such
statements and from the Company’s historical results and
experience. These risks and uncertainties include, but are
not limited to, those set forth under the caption “Risk
Factors” in the Company’s Annual Report on Form 10-K, as well
as the following:
~ 26 ~
Report of Management on Internal Control Over Financial Reporting
*** Shareholders
The J. M. Smucker Company Management of The J. M. Smucker Company is responsible for establishing and maintaining adequate
accounting and internal control systems over financial reporting for the Company. The Company’s
internal control system is designed to provide reasonable assurance that the Company has the
ability to record, process, summarize, and report reliable financial information on a timely basis.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of April 30, 2008. In making this assessment, management used the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“the COSO criteria”).
Based on the Company’s assessment of internal control over financial reporting under the COSO
criteria, management concluded the Company’s internal control over financial reporting was
effective as of April 30, 2008.
Ernst & Young LLP, independent registered public accounting firm, audited the effectiveness of the
Company’s internal control over financial reporting as of April 30, 2008, and their report thereon
is included on page 28 of this report.
~ 27 ~
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting *** Board of Directors and Shareholders
The J. M. Smucker Company We have audited The J. M. Smucker Company’s internal control over financial reporting as of April
30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). The J. M.
Smucker Company’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The J. M. Smucker Company maintained, in all material respects, effective internal
control over financial reporting as of April 30, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of The J. M. Smucker Company as of April 30,
2008 and 2007, and the related statements of consolidated income, shareholders’ equity, and cash
flows for each of the three years in the period ended April 30, 2008, and our report dated June 19,
2008, expressed an unqualified opinion thereon.
Akron, Ohio
June 19, 2008 ~ 28 ~
Report of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements *** Board of Directors and Shareholders
The J. M. Smucker Company We have audited the accompanying consolidated balance sheets of The J. M. Smucker Company as of
April 30, 2008 and 2007, and the related statements of consolidated income, shareholders’ equity,
and cash flows for each of the three years in the period ended April 30, 2008. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The J. M. Smucker Company at April 30,
2008 and 2007, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended April 30, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note P, effective May 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Also, as discussed in Note I,
effective April 30, 2007, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 158, Employees Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statement Nos. 87, 88, 106, and 132(R); and as discussed in Note A, effective May
1, 2006, the Company adopted SFAS 123(R), Share-Based Payment.
We also have audited in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of The J. M. Smucker Company’s internal control over
financial reporting as of April 30, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated June 19, 2008, expressed an unqualified opinion thereon.
Akron, Ohio
June 19, 2008 ~ 29 ~
Report of Management on Responsibility for Financial Reporting
*** Shareholders
The J. M. Smucker Company Management of The J. M. Smucker Company is responsible for the preparation, integrity, accuracy,
and consistency of the consolidated financial statements and the related financial information in
this report. Such information has been prepared in accordance with U.S. generally accepted
accounting principles and is based on our best estimates and judgments.
The Company maintains systems of internal accounting controls supported by formal policies and
procedures that are communicated throughout the Company. There is a program of audits performed by
the Company’s internal audit staff designed to evaluate the adequacy of and adherence to these
controls, policies, and procedures.
Ernst & Young LLP, independent registered public accounting firm, has audited the Company’s
financial statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Management has made all financial records and related data available to
Ernst & Young LLP during its audit.
The Company’s audit committee, comprised of three nonemployee members of the Board of Directors,
meets regularly with the independent registered public accounting firm and management to review the
work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the
independent registered public accounting firm. The audit committee also regularly satisfies itself
as to the adequacy of controls, systems, and financial records. The manager of the internal audit
department is required to report directly to the chair of the audit committee as to internal audit
matters.
It is the Company’s best judgment that its policies and procedures, its program of internal and
independent audits, and the oversight activity of the audit committee work together to provide
reasonable assurance that the operations of the Company are conducted according to law and in
compliance with the high standards of business ethics and conduct to which the Company subscribes.
~ 30 ~
Statements of Consolidated Income
The J. M. Smucker Company
See notes to consolidated financial statements.
~ 31 ~
Consolidated Balance Sheets
The J. M. Smucker Company ~ Assets ~
~ 32 ~
~ Liabilities and Shareholders’ Equity ~
See notes to consolidated financial statements.
~ 33 ~
Statements of Consolidated Cash Flows
The J. M. Smucker Company
( ) Denotes use of cash
See notes to consolidated financial statements.
~ 34 ~
Statements of Consolidated Shareholders’ Equity
The J. M. Smucker Company
See notes to consolidated financial statements.
~ 35 ~
Notes to Consolidated Financial Statements
The J. M. Smucker Company (Dollars in thousands, except per share data)
Note A: Accounting Policies
*** Principles of Consolidation: The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, and any majority-owned investment. Intercompany
transactions and accounts are eliminated in consolidation.
Use of Estimates: The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Significant estimates in these consolidated financial statements include:
allowances for doubtful trade receivables, estimates of future cash flows associated with assets,
asset impairments, useful lives for depreciation and amortization, loss contingencies, net
realizable value of inventories, accruals for trade marketing and merchandising programs, income
taxes, and the determination of discount and other rate assumptions for defined benefit pension and
other postretirement benefit expenses. Actual results could differ from these estimates.
Revenue Recognition: The Company recognizes revenue, net of estimated returns and allowances, when
all of the following criteria have been met: a valid customer order with a determinable price has
been received; the product has been shipped and title has transferred to the customer; there is no
further significant obligation to assist in the resale of the product; and collectibility is
reasonably assured.
Major Customer: Sales to Wal-Mart Stores, Inc. and subsidiaries amounted to approximately 20
percent, 20 percent, and 18 percent of net sales in 2008, 2007, and 2006, respectively. These sales
are primarily included in the U.S. retail market segment. No other customer exceeded 10 percent of
net sales for any year. Trade receivables at April 30, 2008 and 2007, included amounts due from
Wal-Mart Stores, Inc. and subsidiaries of $34,210 and $28,274, respectively.
Shipping and Handling Costs: Shipping and handling costs are included in cost of products sold.
Trade Marketing and Merchandising Programs: In order to support the Company’s products, various
promotional activities are conducted through the retail trade, distributors, or directly with
consumers, including in-store display and product placement programs, feature price discounts,
coupons, and other similar activities. The Company regularly reviews and revises, when it deems
necessary, estimates of costs to the Company for these promotional programs based on estimates of
what will be redeemed by the retail trade, distributors, or consumers. These estimates are made
using various techniques including historical data on performance of similar promotional programs.
Differences between estimated expense and actual performance are recognized as a change in
management’s estimate in a subsequent period. As the Company’s total promotional expenditures,
including amounts classified as a reduction of net sales, represent approximately 26 percent of
2008 net sales, the likelihood exists of materially different reported results if factors such as
the level and success of the promotional programs or other conditions differ from expectations.
Operating results for the year ended April 30, 2006, include an increase of approximately $6.7
million to net sales reflecting a change in estimate of the expected liability for trade
merchandising programs.
Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $55,522,
$51,446, and $56,647 in 2008, 2007, and 2006, respectively.
Product Development Cost: Total product development costs including research and development costs
and product formulation costs were $9,547, $9,680, and $10,781 in 2008, 2007, and 2006,
respectively.
Share-Based Payments: In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised), Share-Based Payment (“SFAS 123R”). SFAS 123R
is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (“APB 25”), and also amends Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows. SFAS 123R requires that the cost of
transactions involving share-based payments be recognized in the
~ 36 ~
financial statements based on a fair value-based measurement. The Company adopted SFAS 123R on May
1, 2006, using the modified prospective method. Under this method of adoption, prior year’s
financial information was not restated. Prior to the adoption of SFAS 123R, the Company accounted
for share-based payments to employees using the intrinsic value method of APB 25. Under APB 25,
because the exercise price of the Company’s employee stock options equaled the market price of the
underlying shares on the date of grant, no compensation expense was recognized. Compensation
expense recognized related to other share-based awards was $11,531, $11,257, and $7,255 in 2008,
2007, and 2006, respectively. The related tax benefit recognized in the Statements of Consolidated
Income was $3,820, $3,913, and $2,430 in 2008, 2007, and 2006, respectively. Upon adoption of SFAS
123R, compensation expense is recognized over the requisite service period, which includes a
one-year performance period plus the defined forfeiture period, which is typically four years of
service or the attainment of a defined age and years of service. No compensation expense was
capitalized related to share-based awards in 2008, 2007, and 2006.
As a result of adopting SFAS 123R on May 1, 2006, the Company’s income before income taxes and net
income were $1,923 and $1,255 lower in 2007, respectively, than if it had continued to account for
share-based compensation under APB 25. The impact of adopting SFAS 123R in 2007 was approximately
$0.02 on both net income per common share and net income per common share —assuming dilution.
Had the Company applied the fair value recognition provisions of SFAS 123 to share-based
compensation for the period ended April 30, 2006, the effect on net income and earnings per common
share would have been as follows:
Management estimated the fair value of stock option awards on the date of grant or modification
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of highly subjective
assumptions, including the expected share price volatility and average expected term. The main
inputs into the model are estimated by management based on historical performance and management’s
expectation of future results on the date of grant or
~ 37 ~
modification. The fair value of each option grant was estimated at the date of grant or
modification using the following weighted-average assumptions:
As of April 30, 2008, total compensation cost related to nonvested share-based awards not yet
recognized was approximately $14,133. The weighted-average period over which this amount is
expected to be recognized is approximately three years.
Corporate income tax benefit realized upon exercise or vesting of an award in excess of that
previously recognized in earnings, referred to as an excess tax benefit, is presented in the
Statements of Consolidated Cash Flows as a financing activity. Realized excess tax benefits are
credited to additional capital in the Consolidated Balance Sheets. Realized shortfall tax benefits,
amounts which are less than that previously recognized in earnings, are first offset against the
cumulative balance of excess tax benefits, if any, and then charged directly to income tax expense.
Under the transition rules for adopting SFAS 123R using the modified prospective method, the
Company calculated a cumulative balance of excess tax benefits from post-1995 years for the purpose
of accounting for future shortfall tax benefits and, as a result, has sufficient cumulative excess
tax benefits to absorb arising shortfalls, such that earnings were not affected in 2008 or 2007.
For 2008 and 2007, the actual tax deductible benefit realized from share-based compensation was
$11,231 and $3,161, including $11,107 and $3,346, respectively, of excess tax benefits realized
upon exercise or vesting of share-based compensation, and classified as other-net under financing
activities on the Statement of Consolidated Cash Flows.
Income Taxes: The Company accounts for income taxes using the liability method. Accordingly,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in the tax rate is recognized in income or expense in the period that the change is effective. A
valuation allowance is established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. A tax benefit is recognized when it is more likely than
not to be sustained.
Cash and Cash Equivalents: The Company considers all short-term investments with a maturity of
three months or less when purchased to be cash equivalents.
Trade Receivables: In the normal course of business, the Company extends credit to customers. Trade
receivables, less allowance for doubtful accounts, reflect the net realizable value of receivables,
and approximate fair value. In the domestic markets, the Company’s products are primarily sold
through brokers to food retailers, food wholesalers, club stores, mass merchandisers, discount
stores, military commissaries, health and natural foods stores, foodservice distributors, and chain
operators including: hotels and restaurants, schools and other institutions. The Company’s
operations outside the United States are principally in Canada where the Company’s products are
primarily sold through brokers to a concentration of food retailers and other retail and
foodservice channels similar to those in domestic markets. The Company believes there is no
concentration of risk with any single customer whose failure or nonperformance would materially
affect the Company’s results other than as discussed in Major Customer. On a regular basis, the
Company evaluates its trade receivables and establishes an allowance for doubtful accounts based on
a combination of specific customer circumstances, credit conditions, and historical write-offs and
collections. A receivable is considered past due if payments have not been received within the
agreed upon invoice terms. The allowance for doubtful accounts at April 30, 2008 and 2007, was $911
and $821, respectively. Trade receivables are charged off against the allowance after management
determines the potential for recovery is remote.
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Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
Derivative Financial Instruments: The Company utilizes derivative instruments such as commodity
futures and options contracts, interest rate swaps, and foreign currency futures contracts to
manage exposure to changes in commodity prices, interest rates, and foreign currency exchange
rates. The Company accounts for these derivative instruments in accordance with Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (“SFAS 133”). SFAS 133 requires that all derivative instruments be recognized in the
financial statements and measured at fair value regardless of the purpose or intent for holding
them. For derivatives that are designated as a fair value hedge and used to hedge an existing asset
or liability, both the derivative and hedged item are recognized at fair value with any changes
recognized immediately in the Statements of Consolidated Income. For derivatives designated as a
cash flow hedge that are used to hedge an anticipated transaction, changes in fair value are
deferred and recorded in shareholders’ equity as a component of accumulated other comprehensive
income to the extent the hedge is effective and then recognized in the Statements of Consolidated
Income in the period during which the hedged transaction affects earnings. The Company utilizes
regression analysis to determine correlation between the value of the hedged item and the value of
the derivative instrument utilized to identify instruments that meet the criteria for hedge
accounting. Any ineffectiveness associated with the hedge or changes in fair value of derivatives
that are nonqualifying are recognized immediately in the Statements of Consolidated Income. By
policy, the Company has not historically entered into derivative financial instruments for trading
purposes or for speculation. For additional information, see Note N: Derivative Financial
Instruments.
Property, Plant, and Equipment: Property, plant, and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of the assets (3 to 20 years
for machinery and equipment, and 10 to 40 years for buildings, fixtures, and improvements).
The Company leases certain land, buildings, and equipment for varying periods of time, with renewal
options. Rent expense in 2008, 2007, and 2006 totaled $23,902, $20,261, and $19,866, respectively.
Impairment of Long-Lived Assets: In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, except
goodwill and indefinite-lived intangible assets, are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the assets to future net cash flows
estimated by the Company to be generated by such assets. If such assets are considered to be
impaired, the impairment to be recognized is the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for
sale at the lower of carrying value or estimated net realizable value. During 2007, the Company
recorded impairment of approximately $8.5 million on long-lived assets associated with the Canadian
nonbranded, grain-based foodservice and industrial businesses divested during the year.
Goodwill and Other Intangible Assets: Goodwill is the excess of the purchase price paid over the
fair value of the net assets of the business acquired. In accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived
intangible assets are not amortized but are reviewed at least annually for impairment. The Company
conducts its annual test for impairment of goodwill and indefinite-lived intangible assets as of
February 1, of each year. For annual impairment testing purposes, the Company’s reporting units are
its operating segments. In addition, the Company will test for impairment if events or
circumstances occur that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. Finite-lived intangible assets are amortized over their estimated useful
lives.
Other Investments in Securities: The Company maintains funds for the payment of benefits associated
with nonqualified retirement plans. These funds include investments considered to be
available-for-sale marketable securities. The fair value of these investments included in other
assets at April 30, 2008 and 2007, was $31,130 and $31,727, respectively. At April 30, 2008 and
2007, the deferred gain included in accumulated other comprehensive income was $1,404 and $2,089,
respectively.
Foreign Currency Translation: Assets and liabilities of the Company’s foreign subsidiaries are
translated using the exchange rates in effect at the balance sheet date, while income and expenses
are translated using average rates. Translation adjustments are reported as a component of
shareholders’ equity in accumulated other comprehensive income.
~ 39 ~
Recently Issued Accounting Standards: In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS
157”). SFAS 157 and related interpretations provide guidance for using fair value to measure assets
and liabilities and only applies when other standards require or permit the fair value measurement
of assets and liabilities. It does not expand the use of fair value measurement. In February 2008,
the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP SFAS
157-2”). FSP SFAS 157-2 amends SFAS 157 to delay the effective date of the standard, as it relates
to nonfinancial assets and nonfinancial liabilities, to fiscal years beginning after November 15,
2008, (May 1, 2009, for the Company). SFAS 157 for financial assets and financial liabilities is
effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The
Company is currently assessing the impact of SFAS 157, and related interpretations and amendments,
on the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at fair value. The
objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is
effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The
Company is currently assessing the impact of SFAS 159 on the consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(revised),
Business Combinations (“SFAS 141R”). SFAS 141R continues to require the purchase method of
accounting to be applied to all business combinations, but it significantly changes the accounting
for certain aspects of business combinations. SFAS 141R establishes principles and requirements for
how the Company recognizes the assets acquired and liabilities assumed, recognizes the goodwill
acquired, and determines what information to disclose to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008, (May 1, 2009, for the Company).
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 seeks to improve financial reporting of derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008, (February 1, 2009, for the Company).
Risks and Uncertainties: The Company insures its business and assets in each country against
insurable risks, to the extent that it deems appropriate, based upon an analysis of the relative
risks and costs.
The raw materials used by the Company are primarily commodities and agricultural-based products.
Glass, plastic, caps, carton board, and corrugate are the principle packaging materials used by the
Company. The fruit and vegetable raw materials used by the Company in the production of its food
products are purchased from independent growers and suppliers. Sweeteners, peanuts, oils, wheat and
flour, milk, corn, and other ingredients are obtained from various suppliers. The cost and
availability of many of these commodities have fluctuated, and may continue to fluctuate over time.
Raw materials are available from numerous sources and the Company believes that it will continue to
be able to obtain adequate supplies. The Company has not historically encountered shortages of key
raw materials. The Company considers its relationship with key material suppliers to be good.
Approximately 31 percent of the Company’s employees, located at 10 facilities, are covered by union
contracts. The contracts vary in term depending on the location with one contract expiring in 2009.
Reclassifications: Certain prior year amounts have been reclassified to conform to current year
classifications.
~ 40 ~
Note B: Subsequent Events
*** On June 4, 2008, the Company entered into a definitive agreement with The Procter & Gamble Company
(“P&G”) to merge P&G’s Folgers coffee business with and into the Company. Under the terms of the
agreement, P&G will distribute the Folgers business to P&G shareholders in a tax-free transaction,
with a simultaneous merger with and into the Company. In the merger, current P&G shareholders will
receive approximately 53.5 percent of the Company’s shares and current Company shareholders will
own approximately 46.5 percent of the combined company upon closing. Upon closing, the Company will
have approximately 118 million shares outstanding. As part of the transaction, the Company will be
assuming an estimated $350 million of Folgers debt. The transaction is expected to be tax free to
both companies and P&G shareholders. In addition, Company shareholders as of the record date, prior
to the merger, will receive a special dividend of $5 per share. The record date for the special
dividend will be determined by the Company at a future date.
The transaction is expected to close in the fourth quarter of calendar 2008, subject to customary
closing conditions including regulatory and Company shareholder approvals. The Company expects to
incur approximately $100 million in one-time costs related to the transaction over the next two
fiscal years.
The merger will be accounted for as a purchase business combination. For accounting purposes, the
Company will be treated as the acquiring enterprise.
In addition, on May 13, 2008, the Company completed an acquisition of the Knott’s Berry Farm food
brand and certain manufacturing equipment from ConAgra Foods, Inc.
Note C: Acquisitions
*** On May 1, 2007, the Company completed its acquisition of Eagle, a privately held company
headquartered in Columbus, Ohio, for $133 million in cash and the assumption of $115 million in
debt, in a transaction valued at approximately $248 million. Eagle is the largest producer of
canned milk in North America, with sales primarily in retail and foodservice channels. The
acquisition expands the Company’s position in the baking aisle and complements the Company’s
strategy, which is to own and market leading North American food brands sold in the center of the
store.
The Company utilized cash on-hand to fund the cash portion of the purchase price. The Company
borrowed $130 million against its revolving credit facility with a weighted-average interest rate
of 5.60 percent, a portion of which was used to deposit $118.8 million in escrow on the date of the
transaction. The escrow deposit was in exchange for a covenant defeasance on Eagle’s $115 million
8.75 percent Senior, subordinated Notes due January 2008, that were assumed on the acquisition
date, as well as accrued interest due through May 31, 2007. On May 31, 2007, the escrow was
distributed to note holders in full payment of the Senior Notes.
The Eagle purchase price was allocated to the underlying assets acquired and liabilities assumed
based upon their fair values at the date of acquisition. The Company determined the estimated fair
values based on independent appraisals, discounted cash flow analyses, quoted market prices, and
estimates made by management. To the extent the purchase price exceeded the fair value of the net
identifiable tangible and intangible assets acquired, such excess was recorded as goodwill.
~ 41 ~
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition.
In addition to Eagle, the Company completed a series of smaller acquisitions during 2008 including
Europe’s Best, Inc. (“Europe’s Best”), a privately owned company headquartered in Montreal, Quebec,
and the Canadian Carnation brand canned milk business from Nestlé Canada, for aggregate cash
consideration of approximately $87 million.
The purchase price allocation to the identifiable intangible assets acquired is as follows:
Of the total goodwill, $101,147 and $34,060 was assigned to the U.S. retail market and special
markets segments, respectively. For tax purposes, $23,327 is not deductible. The purchase price
allocations of Europe’s Best and the Canadian Carnation brand canned milk business are preliminary
and subject to adjustment following the completion of the valuation process.
The results of the operations of each of the acquired businesses are included in the Company’s
consolidated financial statements from the date of the acquisition. Had the acquisitions occurred
on May 1, 2006, unaudited, pro forma consolidated results for the years ended April 30, 2008 and
2007, would have been as follows:
The unaudited, pro forma consolidated results are based on the Company’s historical financial
statements and those of the acquired businesses and do not necessarily indicate the results of
operations that would have resulted had the acquisitions been completed at the beginning of the
applicable period presented, nor is it indicative of the results of operations in future periods.
~ 42 ~
Note D: Restructuring
*** In 2003, the Company announced its plan to restructure certain operations as part of its ongoing
efforts to refine its portfolio, optimize its production capacity, improve productivity and
operating efficiencies, and improve the Company’s overall cost base as well as service levels in
support of its long-term strategy. The Company’s strategy is to own and market leading North
American brands sold in the center of the store.
To date, the Company has closed its fruit processing operations at its Watsonville, California, and
Woodburn, Oregon, locations and subsequently sold these facilities; completed the combination of
its two manufacturing facilities in Ripon, Wisconsin, into one expanded site; completed a
restructuring program to streamline operations in Europe and the United Kingdom, including the exit
of a contract packaging arrangement and certain portions of its retail business; completed the sale
of its U.S. industrial ingredient business; completed the realignment of distribution warehouses;
sold the Salinas, California, facility after production was relocated to plants in Orrville, Ohio,
and Memphis, Tennessee; and sold the Canadian nonbranded businesses, which were acquired as part of
International Multifoods Corporation, to Horizon Milling G.P., a subsidiary of Cargill and CHS
Inc., as part of a strategic plan to focus the Canadian operations on its branded consumer retail
and foodservice businesses. The restructurings resulted in the reduction of approximately 410
full-time positions.
The Canadian nonbranded divestiture was completed on September 22, 2006. The sale and related
restructuring activities have resulted in expense of approximately $18.6 million, which was
reported as a restructuring charge. Costs included noncash, long-lived asset charges, as well as
transaction, legal, severance, and pension costs. To date, charges of approximately $16.1 million
were recognized related to the Canadian restructuring.
The Company expects to incur total restructuring costs of approximately $69 million related to
these initiatives, of which $58.5 million has been incurred since the announcement of the
initiative in March 2003. The balance of the costs and remaining cash payments, estimated to be
approximately $10.5 million and $2.5 million, respectively, are related to the Canadian
restructuring and will primarily be incurred through 2009.
The following table summarizes the activity with respect to the restructuring and related asset
impairment charges recorded and reserves established and the total amount expected to be incurred.
~ 43 ~
Approximately $1,510, $9,981, and $2,263 of the total restructuring charges of $4,747, $12,101, and
$9,985 in 2008, 2007, and 2006, respectively, were reported in cost of products sold in the
accompanying Statements of Consolidated Income, while the remaining charges were reported in other
restructuring costs. The restructuring costs classified as cost of products sold include long-lived
asset charges and inventory disposition costs. Total expected employee separation costs of
approximately $16,900 are being recognized over the estimated future service period of the related
employees. The obligation related to employee separation costs is included in salaries, wages, and
additional compensation in the Consolidated Balance Sheets.
Long-lived asset charges include impairments and accelerated depreciation related to machinery and
equipment that will be used at the affected production facilities until they close or are sold.
Other costs include miscellaneous expenditures associated with the Company’s restructuring
initiative and are expensed as incurred. These costs include employee relocation, professional
fees, and other closed facility costs.
Note E: Reportable Segments
*** The Company operates in one industry: the manufacturing and marketing of food products. The Company
has two reportable segments: U.S. retail market and special markets. The U.S. retail market segment
includes the consumer and consumer oils and baking strategic business areas. This segment primarily
represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury, Eagle Brand, Hungry Jack, White
Lily, and Martha White branded products to retail customers. The special markets segment is
comprised of the international, foodservice, beverage, and Canada strategic business areas. Special
markets segment products are distributed domestically and in foreign countries through retail
channels, foodservice distributors and operators (i.e., restaurants, schools and universities,
health care operations), and health and natural foods stores and distributors.
~ 44 ~
The following table sets forth reportable segment and geographical information.
Segment profit represents revenue less direct and allocable operating expenses.
~ 45 ~
The following table presents product sales information.
As a result of the pending Folgers merger disclosed in Note B: Subsequent Events, the Company is in
the process of evaluating its current management organization and reporting structure. As part of
this evaluation, the Company will evaluate its reportable segment presentation upon closing of the
pending transaction. If the evaluation results in a change in segment reporting, all historical
information will be retroactively conformed to the new presentation to the extent practical.
Note F: Earnings per Share
*** The following table sets forth the computation of earnings per common share and earnings per common
share – assuming dilution.
Options to purchase 24,248 and 200,967 common shares were outstanding during 2007 and 2006,
respectively, but were not included in the computation of earnings per common share – assuming
dilution, as the options’ exercise prices were greater than the average market price of the common
shares and, therefore, the effect would have been antidilutive.
~ 46 ~
Note G: Marketable Securities
*** Under the Company’s investment policy, it may invest in debt securities deemed to be investment
grade at time of purchase. Currently, these investments are defined as mortgage-backed obligations,
corporate bonds, municipal bonds, federal agency notes, and commercial paper. However, in light of
current market conditions, the Company has limited its investments primarily to high-quality money
market funds. The Company determines the appropriate categorization of debt securities at the time
of purchase and reevaluates such designation at each balance sheet date. The Company has
categorized all debt securities as available for sale because it currently has the intent to
convert these investments into cash if and when needed. Classification of these available-for-sale
marketable securities as current or noncurrent is based on whether the conversion to cash is
expected to be necessary for current operations, which is currently consistent with the securities
maturity date.
Securities categorized as available for sale are stated at fair value, with unrealized gains and
losses reported as a component of other comprehensive income. Approximately $257,536, $26,272, and
$31,101 of proceeds have been realized upon maturity or sale of available-for-sale marketable
securities in 2008, 2007, and 2006, respectively. The Company uses specific identification to
determine the basis on which securities are sold.
The following table is a summary of available-for-sale marketable securities, consisting entirely
of mortgage-backed securities, at April 30, 2008 and 2007.
Marketable securities in an unrealized loss position at April 30, 2008, consisted of two securities
for a period of less than twelve months. Based on management’s evaluation at April 30, 2008,
considering the nature of the investments, the credit worthiness of the issuers, and the intent and
ability of the Company to hold the securities for the period necessary to recover the cost of the
securities, the decline in the fair values was determined to be temporary.
Note H: Goodwill and Other Intangible Assets
*** A summary of changes in the Company’s goodwill during the years ended April 30, 2008 and 2007, by
reportable segment is as follows:
Included in the other category at April 30, 2008 and 2007, were tax adjustments related to various
items recognized in goodwill that are deductible for tax purposes.
~ 47 ~
The Company’s other intangible assets and related accumulated amortizations are as follows:
Amortization expense for finite-lived intangible assets was $3,895, $351, and $100 in 2008, 2007,
and 2006, respectively. The weighted-average useful life of the finite-lived intangible assets is
20 years. Based on the current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding five years is $4,500.
Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, the Company is required to review goodwill and indefinite-lived intangible assets at least
annually for impairment. The annual impairment review of all appropriate assets was performed as of
February 1, 2008. Goodwill impairment is tested at the reporting unit levels which are the
Company’s operating segments. No impairment was required to be recorded as a result of the annual
impairment review. Approximately $225 of impairment was recorded related to certain
indefinite-lived intangible assets in 2007.
Note I: Pensions and Other Postretirement Benefits
*** The Company has pension plans covering certain of its domestic and Canadian employees. Benefits are
based on the employee’s years of service and compensation. The Company’s plans are funded in
conformity with the funding requirements of applicable government regulations.
In addition to providing pension benefits, the Company sponsors several unfunded, defined
postretirement plans that provide health care and life insurance benefits to certain retired
domestic and Canadian employees. These plans are contributory, with retiree contributions adjusted
periodically, and contain other cost-sharing features, such as deductibles and coinsurance. Covered
employees generally are eligible for these benefits when they reach age 55 and have attained 10
years of credited service.
Effective April 30, 2007, the Company adopted Statement of Financial
Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R) (“SFAS 158”).
SFAS 158 requires the recognition of a plan’s funded status as an asset for fully funded plans and
as a liability for unfunded or under-funded plans. Previously unrecognized actuarial gains and
losses and prior service costs are now recorded in accumulated other comprehensive income. The
amounts recorded in accumulated other comprehensive income are modified as actuarial assumptions
and service costs change and such amounts are amortized to expense over a period of time through
the net periodic benefit cost.
~ 48 ~
The following table
summarizes the components of net periodic benefit cost and other comprehensive
income related to the defined benefit pension and other postretirement plans.
The Company uses a measurement date of April 30 to determine defined benefit pension plans’ and
other postretirement benefits’ assets and benefit obligations. As a result of the sale of the
Canadian nonbranded businesses in September 2006, a remeasurement of three Canadian plans was
performed.
~ 49 ~
The following table sets forth the combined status of the plans as recognized in the Consolidated
Balance Sheets.
The following table summarizes amounts recognized in accumulated other comprehensive income at April 30, 2008, before
income taxes.
During 2009, the Company expects to recognize amortization of net actuarial losses and prior
service cost of $1,358 and $1,296, respectively, in net periodic benefit costs.
~ 50 ~
The following table sets forth the assumptions used in determining the benefit obligations.
The rate of compensation increase is based on multiple graded scales and is weighted based on the
active liability balance. For 2009, the assumed health care trend rates are nine percent and seven
and one-half percent, for U.S. and Canadian plans, respectively. The rate for participants under
age 65 is assumed to decrease to five percent and four and one-half percent in 2014, for U.S. and
Canadian plans, respectively. The health care cost trend rate assumption has a significant effect
on the amount of the other postretirement benefits obligation and periodic other postretirement
benefits cost reported.
A one-percentage point annual change in the assumed health care cost trend rate would have the
following effect as of April 30, 2008:
The following table sets forth selective information pertaining to the Company’s foreign pension
and other postretirement benefit plans.
~ 51 ~
The following table sets forth additional information related to the Company’s defined benefit
pension plans.
The Company employs a total return on investment approach for the defined benefit pension plans’
assets. A mix of equities and fixed income investments are used to maximize the long-term rate of
return on assets for the level of risk. The objectives of this strategy are to achieve full funding
of the accumulated benefit obligation, and to achieve investment experience over time that will
minimize pension expense volatility and hold to a feasible minimum the Company’s contributions
required to maintain full funding status. In determining the expected long-term rate of return on
defined benefit pension plans’ assets, management considers the historical rates of return, the
nature of investments, the asset allocation, and expectations of future investment strategies.
The Company’s pension plans’ asset target and actual allocations are as follows:
Included in equity securities are 317,552 of the Company’s common shares at April 30, 2008 and
2007. The market value of these shares is $15,839 at April 30, 2008. The Company paid dividends of
$381 on these shares during 2008.
The Company expects to contribute approximately $2.1 million to the pension plans in 2009. The
Company expects to make the following benefit payments for all benefit plans: $27 million in 2009,
$27 million in 2010, $35 million in 2011, $30 million in 2012, $30 million in 2013, and $160
million in 2014 through 2018.
Note J: Savings Plans
*** ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust (“ESOP”) for certain
domestic, nonrepresented employees. The Company has entered into loan agreements with the Trustee
of the ESOP for purchases by the ESOP of the Company’s common shares in amounts not to exceed a
total of 1,134,120 unallocated common shares of the Company at any one time. These shares are to be
allocated to participants over a period of not less than 20 years.
ESOP loans bear interest at one-half percentage point over prime, are secured by the unallocated
shares of the plan, and are payable as a condition of allocating shares to participants. Interest
incurred on ESOP debt was $376, $530, and $506 in 2008, 2007, and 2006, respectively. Contributions
to the plan, representing compensation expense, are made annually in amounts sufficient to
~ 52 ~
fund ESOP debt repayment and were $690, $684, and $558 in 2008, 2007, and 2006, respectively.
Dividends on unallocated shares are used to reduce expense and were $334, $356, and $380 in 2008,
2007, and 2006, respectively. The principal payments received from the ESOP in 2008, 2007, and 2006
were $538, $508, and $519, respectively.
Dividends on allocated shares are credited to participant accounts and are used to purchase
additional common shares for participant accounts. Dividends on allocated and unallocated shares
are charged to retained income by the Company.
As permitted by Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership
Plans, the Company will continue to recognize future compensation using the cost basis as all
shares currently held by the ESOP were acquired prior to 1993. At April 30, 2008, the ESOP held
269,398 unallocated and 702,502 allocated shares. All shares held by the ESOP were considered
outstanding in earnings per share calculations for all periods presented.
Defined Contribution Plans: The Company offers employee savings plans for all domestic and Canadian
employees not covered by certain collective bargaining agreements. The Company’s contributions
under these plans are based on a specified percentage of employee contributions. Charges to
operations for these plans in 2008, 2007, and 2006 were $4,943, $4,138, and $4,213, respectively.
Note K: Share-Based Payments
*** The Company provides for equity-based incentives to be awarded to key employees and nonemployee
directors. Currently, these incentives consist of restricted shares, restricted stock units,
deferred shares, deferred stock units, performance units, and stock options. These awards are
administered through various plans, as described in the following paragraphs.
2006 Equity Compensation Plan: In August 2006, the Company’s shareholders approved the 2006 Equity
Compensation Plan. Awards under this plan may be in the form of stock options, stock appreciation
rights, restricted shares, deferred stock units, performance shares, performance units, incentive
awards, and other share-based awards. Awards under this plan may be granted to the Company’s
nonemployee directors, consultants, officers, and other employees. Deferred stock units granted to
nonemployee directors vest immediately. At April 30, 2008, there were 2,352,462 shares available
for future issuance under this plan. As a result of this plan becoming effective in August 2006, no
further awards will be made under the previously existing equity compensation plans listed below,
except for certain defined circumstances included in the new plan.
1998 Equity and Performance Incentive Plan: This plan provides for the issuance of stock options
and restricted shares, which may include performance criteria, as well as stock appreciation
rights, deferred shares, performance shares, and performance units. As a result of the adoption of
the 2006 Equity Compensation Plan, there are no common shares available for grant under this plan.
Options granted under this plan became exercisable at the rate of one-third per year, beginning one
year after the date of grant. The contractual term of the options is 10 years, and the option price
is equal to the market value of the shares on the date of the grant. Restricted shares and deferred
shares issued under this plan are subject to a risk of forfeiture for at least three years in the
event of termination of employment or failure to meet performance criteria, if any. Restricted
shares and deferred shares issued to date under the plan are generally subject to a four-year
forfeiture period, but may provide for the earlier termination of restrictions in the event of
retirement, the attainment of a defined age and service requirements, permanent disability or death
of an employee, or a change in control of the Company.
Upon adoption of Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment
(“SFAS 123R”), restricted shares, deferred stock units, performance units, and performance shares
are charged to expense over the requisite service period, which includes a one-year performance
period plus the defined forfeiture period. Performance units are granted to a limited
number of executives. At the beginning of each fiscal year, performance criteria are established
for the restricted shares, deferred stock units, and performance units to be earned during the
year. At the end of the one-year performance period, the restricted shares and deferred stock units
are granted and the performance units and performance shares are converted into restricted shares
and all are subject to normal vesting over the remaining forfeiture period. The actual number of
restricted shares issued on the conversion date will depend on the actual performance achieved.
~ 53 ~
1987 Stock Option Plan: Options granted under this plan became exercisable at the rate of one-third
per year, beginning one year after the date of grant, and the option price is equal to the market
value of the shares on the date of the grant. The maximum contractual term on options issued under
this plan is 10 years. As a result of the adoption of the 2006 Equity Compensation Plan, there are
no common shares available for future grant under this plan.
Nonemployee Director Stock Option Plan: This plan provides for the issuance of stock options to
nonemployee directors annually. Options granted under this plan became exercisable six months after
the date of grant, and the option price is equal to the market value of the shares on the date of
the grant. The maximum contractual term on options issued under this plan is 10 years. As a result
of the adoption of the 2006 Equity Compensation Plan, there are no common shares available for
future grant under this plan.
Amended and Restated 1997 Stock-Based Incentive Plan: This plan was
initially adopted by shareholders of International Multifoods Corporation (“Multifoods”) in 1997.
Effective with the Company’s acquisition of Multifoods, the Company assumed the plan. After the
acquisition, only former employees of Multifoods that are employed by the Company were eligible to
receive awards under the plan. The maximum contractual term on options issued under this plan is 10
years. As a result of the adoption of the 2006 Equity Compensation Plan, there are no common shares
available for future grant under this plan.
As a result of the Multifoods acquisition, the Company also assumed two additional stock benefit
plans. However, no common shares are available for future grant under these plans.
Under the 2006 Equity Compensation Plan, the Company has the option to settle share-based awards by
issuing common shares from treasury or issuing new Company common shares. For awards granted from
the Company’s other equity compensation plans, the Company issues common shares from treasury,
except for plans that were acquired as part of the Multifoods acquisition, which are settled by
issuing new Company common shares.
~ Stock Options ~
Beginning in fiscal 2006, the Company replaced its employee stock option incentive program with a
restricted shares program. No stock options were issued to employees during 2008, 2007, and 2006.
During 2006, 12,000 stock options were issued to non-employee directors, with a grant date fair
value of $11.45.
On April 12, 2006, the Executive Compensation Committee of the Company’s Board of Directors
approved accelerating the vesting of previously issued stock options that had exercise prices
greater than $39.31, the closing price of the Company’s common shares on the New York Stock
Exchange on April 11, 2006. As a result, approximately 441,000 stock options with exercise prices
of either $43.38 or $44.17 became immediately exercisable. Approximately 110,000 and 331,000 of
these options would originally have vested in 2007 and 2008, respectively. The Company accelerated
vesting in order to minimize future noncash compensation expense associated with stock options upon
adoption of SFAS 123R on May 1, 2006. By accelerating the vesting of those options, the Company did
not incur compensation expense related to those options of approximately $1.0 million and $2.7
million in 2008 and 2007, respectively, that otherwise would have been required to be recognized in
the respective periods upon adoption of SFAS 123R.
A summary of the Company’s stock option activity, and related information follows:
At April 30, 2008, the weighted-average remaining contractual term for stock options outstanding
and exercisable was 4.9 years, and the aggregate intrinsic value of these stock options was
$13,036.
The total intrinsic value of options exercised during 2008, 2007, and 2006, was approximately
$28,973, $9,409, and $3,674, respectively.
~ 54 ~
~ Other Equity Awards ~
A summary of the Company’s restricted shares, deferred shares, deferred stock units, performance
shares, and performance units activity follows:
The total fair value of equity awards other than stock options vesting in 2008, 2007, and 2006, was
approximately $8,547, $4,276, and $3,700, respectively. The weighted-average grant date fair value
of restricted shares, deferred shares, deferred stock units, performance shares, and performance
units is the average of the high and the low share price on the date of grant. The following table
summarizes the weighted-average grant date fair values of the equity awards granted in 2008, 2007,
and 2006.
The performance shares and units column represents the number of restricted shares received by
certain executive officers, subsequent to year end, upon conversion of the performance shares and
units earned during the year. Restricted stock generally vests four years from the date of grant or
upon the attainment of a defined age and years of service.
Note L: Long-Term Debt and Financing Arrangements
***
Long-term debt consists of the following:
The notes are unsecured and interest is paid annually on the 6.60 percent Senior Notes and
semiannually on the other notes. The 6.60 percent Senior Notes are guaranteed by Diageo plc. The
guarantee may terminate, in limited circumstances, prior to the
~ 55 ~
maturity of the notes. Among other restrictions, the note purchase agreements contain certain
covenants relating to liens, consolidated net worth, and sale of assets as defined in the
agreements. The Company is in compliance with all covenants.
On May 31, 2007, the Company issued $400 million of 5.55 percent Senior Notes, due April 1, 2022,
with required prepayments, the first of which is $50 million on April 1, 2013. Proceeds from this
issuance were used to repay borrowings under the revolving credit facility used in financing the
acquisition of Eagle. Additional proceeds were used to finance other strategic and long-term
initiatives as determined by the Company.
The Company has available a $180 million revolving credit facility with a group of three banks.
Interest on the revolving credit facility is based on prevailing U.S. prime, Canadian Base Rate,
LIBOR, or Canadian CDOR, as determined by the Company, and is payable either on a quarterly basis,
or at the end of the borrowing term. At April 30, 2008, the Company did not have a balance
outstanding under the revolving credit facility. At April 30, 2008, the Company had standby letters
of credit of approximately $9.5 million outstanding.
Interest paid totaled $44,584, $27,580, and $29,374 in 2008, 2007, and 2006, respectively. This
differs from interest expense due to the timing of payments, amortization of the fair value
adjustment on the 6.60 percent Senior Notes, amortization of deferred interest rate swap gains, and
interest capitalized.
Note M: Contingencies
***
The Company, like other food manufacturers, is from time to time subject to various administrative,
regulatory, and other legal proceedings arising in the ordinary course of business. The Company is
not currently party to any pending proceedings which could reasonably be expected to have a
material adverse effect on the Company.
Note N: Derivative Financial Instruments
***
The Company is exposed to market risks, such as changes in interest rates, currency exchange rates,
and commodity pricing. To manage the volatility relating to these exposures, the Company enters
into various derivative transactions.
Commodity Price Management: In connection with the purchase of inventories by the Company’s baking
business in Canada and the consumer oils and baking business in the United States, the Company
enters 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 flour, milk, and
edible oils. The Company also enters into commodity futures and options related to the delivery of
natural gas to its manufacturing plants in the United States. The derivative instruments generally
have maturities of less than one year. Certain of the derivative instruments associated with the
Company’s oils business meet the hedge criteria according to Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), 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 other comprehensive income to the extent effective, and
reclassified into cost of products sold in the period during which the hedged transaction affects
earnings.
In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in
the fair value of the commodities futures contracts are highly effective in hedging price risks
associated with the commodity purchased. Hedge ineffectiveness is measured on a quarterly basis.
The mark-to-market gains or losses on nonqualifying, excluded, and ineffective portions of hedges
are recognized in cost of products sold immediately.
~ 56 ~
The fair value of all derivative commodity instruments is included in current assets on the
Consolidated Balance Sheets. As of April 30, 2008 and 2007, the deferred gain, net of tax, included
in accumulated other comprehensive income was $8,046 and $858, respectively. The entire amount at
April 30, 2008, is expected to be recognized in earnings as the related commodity is utilized
during 2009. The impact of commodities futures contracts and options recognized in earnings was a
gain of $18,428, $4,940, and $637 in 2008, 2007, and 2006, respectively. Included in these amounts
are amounts related to nonqualifying, excluded, and ineffective portions of hedges resulting in a
gain of $7,851, $1,552, and $1,742 in 2008, 2007, and 2006, respectively.
Foreign Exchange Rate Hedging: The Company may periodically utilize forward currency exchange
contracts. The contracts generally have maturities of less than one year. These contracts are used
to manage the effect of the foreign exchange fluctuations on future cash payments related to
purchases of certain assets. At the inception of the contract, the derivative is evaluated and
documented for SFAS 133 accounting treatment. 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 other comprehensive income. As of April 30,
2008, the deferred gain, net of tax, included in accumulated other comprehensive income was $105.
These gains or losses are reclassified to earnings in the period the contracts are executed. The
ineffective portion of these contracts is immediately recognized in earnings. Certain instruments
used to manage foreign exchange exposures do not meet the requirements for hedge accounting
treatment and the change in value of these instruments is immediately recognized in earnings.
Note O: Other Financial Instruments
***
Financial instruments, other than derivatives, that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments, marketable securities, and
trade receivables. The Company places its cash investments with high quality financial institutions
and limits the amount of credit exposure to any one institution. The Company’s marketable
securities are in debt securities. Under the Company’s investment policy, it will invest in
securities deemed to be investment grade at time of purchase. Currently, these investments are
defined as mortgage-backed obligations, corporate bonds, municipal bonds, federal agency notes, and
commercial paper. However, in light of current market conditions, the Company has limited its
investments primarily to high-quality money market funds. The Company determines the appropriate
categorization of its debt securities at the time of purchase and reevaluates such designation at
each balance sheet date. With respect to trade receivables, concentration of credit risk is limited
due to the large number of customers. The Company does not require collateral from its customers.
The fair value of the Company’s financial instruments, other than certain of its fixed-rate
long-term debt, approximates their carrying amounts. The fair value of the Company’s fixed-rate
long-term debt, estimated using current market rates and a discounted cash flow analysis, was
approximately $807,583 at April 30, 2008.
The following table provides information on the carrying amount and fair value of financial
instruments, including derivative financial instruments.
~ 57 ~
Note P: Income Taxes
***
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax
reporting. Significant components of the Company’s deferred tax assets and liabilities are as
follows:
The following table summarizes domestic and foreign loss carryforwards at April 30, 2008.
Deferred tax assets at April 30, 2008, also include $990 of foreign tax credit carryforwards that
are due to expire from 2010 to 2011.
~ 58 ~
The valuation allowance decreased by $6,736, primarily due to the write-off of deferred tax assets
and corresponding full valuation allowances associated with foreign tax credit carryforwards. The
valuation allowance at April 30, 2008, includes approximately $9,210 for the domestic and foreign
loss and tax credit carryforwards. Approximately $4,751 of the valuation allowance, if subsequently
recognized as a tax benefit under current accounting rules, would be allocated to reduce goodwill.
Domestic income and foreign withholding taxes have not been recorded on undistributed earnings of
foreign subsidiaries since these amounts are considered to be permanently reinvested. Any
additional taxes payable on the earnings of foreign subsidiaries, if remitted, would be partially
offset by domestic tax credits or deductions for foreign taxes already paid. It is not practical to
estimate the amount of additional taxes that might be payable on such undistributed earnings.
Income (loss) before income taxes is as follows:
The components of the provision for income taxes are as follows:
A reconciliation of the statutory federal income tax rate and the effective income tax rate
follows:
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), which is an interpretation of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 clarifies the financial statement
recognition and measurement criteria of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 as of May 1,
2007.
~ 59 ~
The cumulative effect of applying this interpretation has been recorded as a decrease of $2,374 to
retained income as of May 1, 2007. The Company’s unrecognized tax benefits upon adoption on May 1,
2007, were $19,591, of which $11,231 would affect the effective tax rate, if recognized.
In accordance with the requirements of FIN 48, uncertain tax positions have been classified in the
Consolidated Balance Sheets as long term, except to the extent payment is expected within one year.
The Company recognizes net interest and penalties related to unrecognized tax benefits in income
tax expense, consistent with the accounting method used prior to adopting FIN 48. As of May 1,
2007, the Company’s accrual for tax-related net interest and penalties totaled $5,247.
The Company files income tax returns in the U.S. and various state, local, and foreign
jurisdictions. With limited exceptions, the Company is no longer subject to examination of U.S.
federal, state and local, or foreign income taxes for years prior to 2004. The Company is currently
under examination by the Internal Revenue Service (“IRS”) for years ending 2007 and 2006. During
2008, the Company reached an agreement with the IRS on proposed adjustments resulting from an
examination of its federal income tax returns for years ended in 2005 and 2004. As a result of this
agreement, the Company reduced its unrecognized tax benefits and net interest accrual by $4,871 and
$667, respectively, and paid $7,726 in taxes and interest. The agreement did not have a material
effect on the Company’s effective tax rate for the year.
Within the next twelve months, it is reasonably possible that the Company could decrease its
unrecognized tax benefits by an estimated $4,540, primarily as a result of state settlement
negotiations in process and the expiration of federal, state, and local statute of limitation
periods.
The Company’s unrecognized tax benefits as of April 30, 2008, are $21,902, of which $8,961 would
affect the effective tax rate, if recognized. As of April 30, 2008, the Company’s accrual for
tax-related net interest and penalties totaled $4,865. The amount of tax-related net interest and
penalties charged to earnings during 2008 totaled $36.
A reconciliation of the Company’s unrecognized tax benefits is as follows:
~ 60 ~
\ Note Q: Accumulated Other Comprehensive Income
***
Comprehensive income is included in the Statements of Consolidated Shareholders’ Equity. The
components of accumulated other comprehensive income as shown on the Consolidated Balance Sheets
are as follows:
~ 61 ~
Note R: Common Shares
***
Voting: The Company’s Amended Articles of Incorporation (“the Articles”) provide that each holder
of an outstanding common share is entitled to one vote on each matter submitted to a vote of the
shareholders except for the following specific matters:
On the matters listed above, common shares are entitled to 10 votes per share, if they meet the
requirements set forth in the Articles. Common shares which would be entitled to 10 votes per share
are:
In the event of a change in beneficial ownership, the new owner of that share will be entitled to
only one vote with respect to that share on all matters until four years pass without a further
change in beneficial ownership of the share.
~ 62 ~
Shareholders’ Rights Plan: Pursuant to a shareholders’ rights plan established in 1999, one share
purchase right is associated with each of the Company’s outstanding common shares.
Under the plan, the rights will initially trade together with the Company’s common shares and will
not be exercisable. In the absence of further action by the directors, the rights generally will
become exercisable and allow the holder to acquire the Company’s common shares at a discounted
price if a person or group acquires 10 percent or more of the outstanding common shares. Rights
held by persons who exceed the applicable thresholds will be void. Shares held by members of the
Smucker family are not subject to the thresholds. If exercisable, each right entitles the
shareholder to buy one common share at a discounted price. Under certain circumstances, the rights
will entitle the holder to buy shares in an acquiring entity at a discounted price.
The plan also includes an exchange option. In general, if the rights become exercisable, the
directors may, at their option, effect an exchange of part or all of the rights, other than rights
that have become void, for common shares. Under this option, the Company would issue one common
share for each right, in each case subject to adjustment in certain circumstances.
The Company’s directors may, at their option, redeem all rights for $0.01 per right, generally at
any time prior to the rights becoming exercisable. The rights will expire May 14, 2009, unless
earlier redeemed, exchanged, or amended by the directors.
~ 63 ~
Directors, Officers, and General Managers
The J. M. Smucker Company
— Directors —
Vincent C. Byrd
Senior Vice President, Consumer Market The J. M. Smucker Company R.
Douglas Cowan
A
Chairman The Davey Tree Expert Company Kent, Ohio Kathryn W. Dindo A, E
Retired Vice President FirstEnergy Corp. Akron, Ohio Paul J. Dolan E
President Cleveland Indians Cleveland, Ohio Elizabeth Valk Long A, E
Former Executive Vice President Time Inc. New York, New York Nancy Lopez Knight G
Founder Nancy Lopez Golf Company Albany, Georgia Gary A. Oatey G
Chairman and Chief Executive Officer Oatey Co. Cleveland, Ohio Richard K. Smucker
President and Co-Chief Executive Officer The J. M. Smucker Company Timothy P. Smucker
Chairman and Co-Chief Executive Officer The J. M. Smucker Company William H. Steinbrink G
Advisor to Business and Non-Profit Leaders Shaker Heights, Ohio A Audit Committee Member
E Executive Compensation Committee Member
G Nominating and Corporate Governance
Committee Member
— Officers & General Managers —
Timothy P. Smucker
Chairman and Co-Chief Executive Officer Richard K. Smucker
President and Co-Chief Executive Officer Dennis J. Armstrong
Vice President, Logistics and Operational Support Mark R. Belgya
Vice President, Chief Financial Officer and Treasurer Vincent C. Byrd
Senior Vice President, Consumer Market John W. Denman
Vice President and Controller Barry C. Dunaway
Vice President, Corporate Development M. Ann Harlan
Vice President, General Counsel and Secretary Donald D. Hurrle, Sr.
Vice President, Sales, Grocery Market John F. Mayer
Vice President, Customer Development Kenneth A. Miller
Vice President, Alternate Channels Steven Oakland
Vice President and General Manager, Consumer Oils and Baking Andrew G. Platt
Vice President, Information Services and Chief Information Officer Christopher P. Resweber
Vice President, Marketing Services Julia L. Sabin
Vice President and General Manager, Smucker Quality Beverages, Inc. Mark T. Smucker
Vice President, International Paul Smucker Wagstaff
Vice President, Foodservice and Beverage Markets Albert W. Yeagley
Vice President, Quality Assurance Jeannette L. Knudsen
Securities and Acquisition Counsel and Assistant Secretary Debra A. Marthey
Assistant Treasurer Larry W. Herman
General Manager, Foodservice Gary A. Jeffcott
General Manager, International Market David Lemmon
Managing Director, Canada — Properties —
Corporate Offices:
Orrville, Ohio Domestic Locations:
Chico, California Cincinnati, Ohio El Paso, Texas Grandview, Washington Havre de Grace, Maryland Lexington, Kentucky Memphis, Tennessee New Bethlehem, Pennsylvania Orrville, Ohio Oxnard, California Ripon, Wisconsin Scottsville, Kentucky Seneca, Missouri Toledo, Ohio West Fargo, North Dakota* International Manufacturing
Locations: Delhi Township, Ontario, Canada
Dunnville, Ontario, Canada Sherbrooke, Quebec, Canada Ste. Marie, Quebec, Canada Sales and Administrative Offices:*
Bentonville, Arkansas Markham, Ontario, Canada Mexico City, Mexico
~ 64 ~
Corporate and Shareholder Information
The J. M. Smucker Company
Corporate Offices
The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 Telephone: (330) 682-3000 Stock Listing
The J. M. Smucker
Company’s common shares are listed on the New
York Stock Exchange — ticker symbol SJM.
Corporate Web Site
To learn more about The J. M. Smucker Company, visit
www.smuckers.com.
Annual Meeting
The annual meeting will be held at 11:00 a.m. Eastern Daylight
Time, Thursday, August 21, 2008, in Fisher Auditorium at the Ohio
Agricultural Research and Development Center, 1680 Madison Avenue,
Wooster, Ohio 44691.
Corporate News and Reports
Corporate news releases, annual reports, and Securities and Exchange Commission filings, including
Forms 10-K, 10-Q, and 8-K, are available free of charge on the Company’s Web site. They are also
available without cost to shareholders who submit a written request to:
The J. M. Smucker Company
Attention: Corporate Secretary Strawberry Lane Orrville, Ohio 44667 Certifications
The Company’s Chief Executive Officers and Chief Financial
Officer have certified to the New York Stock Exchange that they
are not aware of any violation by the Company of New York Stock
Exchange corporate governance standards. The Company has also
filed with the Securities and Exchange Commission certain
certifications relating to the quality of the Company’s public
disclosures. These certifications are filed as exhibits to the
Company’s Annual Report on Form 10-K.
Independent Registered Public Accounting Firm
Ernst & Young LLP Akron, Ohio Dividends
The Company’s Board of Directors typically declares a cash
dividend each quarter. Dividends are generally payable on the
first business day of March, June, September, and December. The
record date is approximately two weeks before the payment date.
The Company’s dividend disbursement agent is Computershare
Investor Services, LLC.
Shareholder Services
The transfer agent and registrar for the Company,
Computershare Investor Services, LLC, is responsible for
assisting registered shareholders with a variety of matters
including:
Shareholders may contact Shareholder Relations at the
corporate offices regarding other shareholder inquiries.
Transfer Agent and Registrar
Computershare Investor Services, LLC 250 Royall Street Canton, MA 02021 Telephone: (800) 456-1169 Telephone outside the U.S., Canada, and Puerto Rico: (312) 360-5254 Web site: www.computershare.com/contactus This annual report includes certain forward-looking statements
that are based on current expectations and are subject to a
number of risks and uncertainties. Please reference
“Forward-Looking Statements” located on page 26 in the
Management’s Discussion and Analysis
section.
©/ ™/® The J. M. Smucker Company or its subsidiaries. Pillsbury, Pillsbury BEST, the Barrelhead logo and the Doughboy character are trademarks of The Pillsbury Company, LLC used under license. Borden and Elsie trademarks used under license. Splenda and Splenda design are trademarks of McNeil Nutritionals, LLC.
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