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SMUCKER J M CO 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-31.3
  5. Ex-32
  6. Ex-32
The J.M. Smucker Company 10-Q
Table of Contents

Sequential Page
No. 1 of 20 Pages
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2005
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-5111
THE J. M. SMUCKER COMPANY
(Exact name of registrant as specified in its charter)
     
Ohio   34-0538550
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
One Strawberry Lane    
Orrville, Ohio   44667-0280
(Address of principal executive offices)   (Zip code)
Registrant’s telephone number, including area code: (330) 682-3000
     
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes þ No o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act of 1934.
Yes o No þ
The Company had 58,418,708 common shares outstanding on August 31, 2005.
The Exhibit Index is located at Sequential Page No. 20.
 
 

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
INDEX OF EXHIBITS
EX-31.1 Certification
EX-31.2 Certification
EX-31.3 Certification
EX-32 Certification


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No. 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
                 
    Three Months Ended July 31,  
    2005     2004  
    (Dollars in thousands, except per share data)  
Net sales
  $ 510,331     $ 413,267  
Cost of products sold
    345,486       268,426  
Cost of products sold — restructuring
    132       653  
 
           
Gross Profit
    164,713       144,188  
Selling, distribution, and administrative expenses
    110,624       90,826  
Other restructuring costs
    1,489       2,355  
Merger and integration costs
    2,928       2,763  
 
           
Operating Income
    49,672       48,244  
Interest income
    1,820       718  
Interest expense
    (6,107 )     (4,423 )
Other income (expense) — net
    194       (1,182 )
 
           
Income from Continuing Operations Before Income Taxes
    45,579       43,357  
Income taxes
    15,682       15,870  
 
           
Income from Continuing Operations
    29,897       27,487  
Gain on sale of discontinued operation, net of tax
          5,678  
Discontinued operations, net of tax
          (317 )
 
           
 
               
Net Income
  $ 29,897     $ 32,848  
 
           
 
Earnings per common share:
               
Income from Continuing Operations
  $ 0.51     $ 0.51  
Discontinued operations
          0.10  
 
           
Net Income
  $ 0.51     $ 0.61  
 
           
 
               
Income from Continuing Operations — Assuming Dilution
  $ 0.51     $ 0.50  
Discontinued operations — assuming dilution
          0.10  
 
           
Net Income — Assuming Dilution
  $ 0.51     $ 0.60  
 
           
 
               
 
           
Dividends declared per common share
  $ 0.27     $ 0.25  
 
           
See notes to unaudited condensed consolidated financial statements.

 


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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    July 31, 2005     April 30, 2005  
    (Dollars in thousands)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 47,487     $ 58,085  
Marketable securities
    20,017       17,739  
Trade receivables, less allowances
    161,262       145,734  
Inventories:
               
Finished products
    215,388       176,205  
Raw materials
    128,821       108,282  
 
           
 
    344,209       284,487  
Other current assets
    45,840       49,806  
 
           
Total Current Assets
    618,815       555,851  
PROPERTY, PLANT, AND EQUIPMENT
               
Land and land improvements
    42,487       42,018  
Buildings and fixtures
    178,062       175,718  
Machinery and equipment
    540,342       533,340  
Construction in progress
    29,967       26,053  
 
           
 
    790,858       777,129  
Accumulated depreciation
    (268,894 )     (256,028 )
 
           
Total Property, Plant, and Equipment
    521,964       521,101  
OTHER NONCURRENT ASSETS
               
Goodwill
    948,431       951,208  
Other intangible assets, net
    470,481       469,758  
Marketable securities
    49,543       59,074  
Other assets
    77,325       78,902  
 
           
Total Other Noncurrent Assets
    1,545,780       1,558,942  
 
           
 
  $ 2,686,559     $ 2,635,894  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Notes payable
  $ 34,314     $ 33,378  
Accounts payable
    123,987       105,290  
Other current liabilities
    197,699       169,624  
 
           
Total Current Liabilities
    356,000       308,292  
NONCURRENT LIABILITIES
               
Long-term debt
    430,821       431,560  
Deferred income taxes
    110,368       110,505  
Other noncurrent liabilities
    95,207       94,737  
 
           
Total Noncurrent Liabilities
    636,396       636,802  
SHAREHOLDERS’ EQUITY
               
Common shares
    14,604       14,635  
Additional capital
    1,242,649       1,240,110  
Retained income
    453,746       447,831  
Less:
               
Deferred compensation
    (11,367 )     (4,573 )
Amount due from ESOP
    (7,044 )     (7,044 )
Accumulated other comprehensive income (loss)
    1,575       (159 )
 
           
Total Shareholders’ Equity
    1,694,163       1,690,800  
 
           
 
  $ 2,686,559     $ 2,635,894  
 
           
See notes to unaudited condensed consolidated financial statements.

 


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No. 4
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
                 
    Three Months Ended July 31,  
    2005     2004  
    (Dollars in thousands)  
OPERATING ACTIVITIES
               
Income from continuing operations
  $ 29,897     $ 27,487  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation
    15,898       10,279  
Amortization
    2,741       524  
Trade receivables
    (14,848 )     (7,393 )
Inventories
    (58,192 )     (51,788 )
Accounts payable and accrued items
    30,440       (24,947 )
Other adjustments
    14,252       35,844  
 
           
Net cash provided by (used for) operating activities
    20,188       (9,994 )
 
               
INVESTING ACTIVITIES
               
Business acquired, net of cash acquired
          (97,294 )
Proceeds from sale of business
          35,670  
Additions to property, plant, and equipment
    (13,615 )     (13,802 )
Purchase of marketable securities
    (15,081 )     (5,275 )
Sale and maturities of marketable securities
    21,885       22,744  
Disposals of property, plant, and equipment
    649       164  
Other — net
    7,306       2,764  
 
           
Net cash provided by (used for) investing activities
    1,144       (55,029 )
 
               
FINANCING ACTIVITIES
               
Proceeds from long-term debt
          100,000  
Repayments of long-term debt
          (37,500 )
Proceeds from revolving credit arrangement — net
          96,400  
Repayments of short-term debt
          (113,622 )
Dividends paid
    (15,707 )     (12,466 )
Purchase of treasury shares
    (16,201 )      
Other — net
    131       2,848  
 
           
Net cash (used for) provided by financing activities
    (31,777 )     35,660  
 
               
Net cash used for discontinued operations
          (30,165 )
Effect of exchange rate changes
    (153 )     136  
 
           
 
               
Net decrease in cash and cash equivalents
    (10,598 )     (59,392 )
Cash and cash equivalents at beginning of period
    58,085       104,551  
 
           
Cash and cash equivalents at end of period
  $ 47,487     $ 45,159  
 
           
( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.

 


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No. 5
THE J. M. SMUCKER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note A — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2005, are not necessarily indicative of the results that may be expected for the year ending April 30, 2006. For further information, reference is made to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.
Note B — Multifoods Acquisition
On June 18, 2004, the Company completed its acquisition of Minneapolis-based International Multifoods Corporation (“Multifoods”) in a tax-free stock and cash transaction valued at approximately $871 million. With the acquisition, the Company adds an array of North American icon brands, marketed in the center of the store, to the Smucker family of brands. The acquisition of Multifoods added the Pillsbury flour, baking mixes, and ready-to-spread frostings; Hungry Jack pancake mixes, syrup, and potato side dishes; Martha White baking mixes and ingredients; and Pet evaporated milk brands to the U.S. retail market business. Multifoods’ primary Canadian brands include: Robin Hood flour and baking mixes, Bick’s pickles and condiments, and Golden Temple flour and rice in the growing ethnic food category.
Under the terms of the acquisition agreement, Multifoods’ shareholders received $25 per share in a combination of 80 percent Company common shares and 20 percent cash. Approximately $98 million in cash was paid and 8,032,997 common shares were issued to the Multifoods’ shareholders, valued at approximately $386 million using the average closing price of the Company’s common shares for three days prior to the close of the transaction. In addition, the Company repaid Multifoods’ secured debt of approximately $151 million, assumed $216 million of 6.602 percent, senior, unsecured notes, and incurred $10 million of capitalized acquisition costs. In addition, the Company incurred costs of $18.0 million and $1.3 million, in 2005 and 2004, respectively, that were directly related to the acquisition and integration of Multifoods. Due to the nature of these costs, they were expensed as incurred. The Company expects to incur an additional $12 million in acquisition and integration costs in 2006 of which $2.9 million was incurred in the first quarter.
The 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. The results of Multifoods’ operations are included in the Company’s consolidated financial statements from the date of the acquisition.

 


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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
         
Assets acquired:
       
Current assets
  $ 202,891  
Property, plant, and equipment
    164,355  
Intangible assets not subject to amortization
    154,000  
Goodwill
    422,796  
Deferred income taxes
    66,574  
Other assets
    35,651  
 
Total assets acquired
  $ 1,046,267  
 
Liabilities assumed:
       
Current liabilities
  $ 124,448  
Postretirement benefits other than pensions
    26,680  
Other noncurrent liabilities
    24,533  
 
Total liabilities assumed
  $ 175,661  
 
Net assets acquired
  $ 870,606  
 
The $422,796 of goodwill was assigned to the U.S. retail market and special markets and will not be deductible for tax purposes.
Upon acquisition, certain executives of Multifoods were terminated, triggering change of control provisions contained in their employment contracts. In addition, the Company centralized all administrative and supply chain functions performed in Minnetonka, Minnesota, with the Company’s existing structure to leverage existing administrative, selling, marketing, and distribution networks. As a result, the Minnetonka location closed on June 30, 2005, resulting in the relocation or involuntary termination of all employees. Severance agreements were entered into with all affected employees.
The Company has recognized the severance costs as a liability assumed as of the acquisition date, resulting in additional goodwill. The following table summarizes the activity with respect to the severance reserves established and the total amount expected to be incurred.
                 
            Other  
    Change of     Employee  
    Control     Separation  
 
Accrual charged to goodwill
  $ 12,271     $ 11,076  
Cash payments
    (12,271 )     (8,073 )
 
Balance at April 30, 2005
  $     $ 3,003  
Accrual charged to goodwill
           
Cash payments
          (2,156 )
 
Balance at July 31, 2005
  $     $ 847  
 
Note C — Stock-Based Compensation
As provided under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee

 


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stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
If compensation costs for the stock options granted had been determined based on the fair market value method of SFAS 123, the Company’s pro forma net income and earnings per share would have been as follows:
                 
    Three Months Ended  
    July 31,  
    2005     2004  
 
Net income, as reported
  $ 29,897     $ 32,848  
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit
    1,782       255  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit
    (2,686 )     (976 )
 
Net income, as adjusted
  $ 28,993     $ 32,127  
 
 
               
Earnings per common share:
               
Net income, as reported
  $ 0.51     $ 0.61  
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit
    0.04       0.01  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit
    (0.05 )     (0.02 )
 
Net income, as adjusted
  $ 0.50     $ 0.60  
 
 
               
Net income, as reported — assuming dilution
  $ 0.51     $ 0.60  
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit — assuming dilution
    0.03       0.01  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit — assuming dilution
    (0.05 )     (0.02 )
 
Net income, as adjusted — assuming dilution
  $ 0.49     $ 0.59  
 
Note D — Restructuring
During 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 icon brands sold in the center of the store.
During 2004, the Company closed its fruit processing operations at its Watsonville, California, and Woodburn, Oregon, locations and subsequently sold these facilities. Uncrustables production at the West Fargo, North Dakota, location is expected to be discontinued in fiscal 2006. In Ripon, Wisconsin, the Company completed the combination of its two manufacturing facilities into one expanded site.

 


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In the first quarter of fiscal 2005, the Company completed a restructuring program to streamline operations in Europe and the United Kingdom, including the exit of a contract packaging arrangement and certain segments of its retail business. In the third quarter of fiscal 2005, the Company announced its intent to discontinue operations at its Salinas, California, facility and restructure its U.S. distribution operations. The Company anticipates production from the Salinas facility will be relocated to plants in Orrville, Ohio, and Memphis, Tennessee, by December 31, 2005. During the last half of fiscal 2005, the Company completed the sale of its U.S. industrial ingredient business.
Upon completion, the restructurings will result in the elimination of approximately 535 full-time positions.
The Company expects to incur total restructuring costs of approximately $40 million related to these initiatives, of which $33.3 million has been incurred from the fourth quarter of fiscal 2003 through the first quarter of 2006. The balance of the costs will be incurred through the third quarter of 2006. The remaining cash payments, estimated to be approximately $10 million, will be paid through the end of 2006.
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.
                                         
            Long-Lived                    
    Employee     Asset     Equipment              
    Separation     Charges     Relocation     Other Costs     Total  
 
Total expected restructuring charge
  $ 15,400     $ 8,400     $ 7,800     $ 8,400     $ 40,000  
 
Balance at May 1, 2004
  $ 4,397     $     $     $ 1,149     $ 5,546  
First quarter charge to expense
    770       149       1,169       920       3,008  
Second quarter charge to expense
    618       395       418       344       1,775  
Third quarter charge to expense
    2,336       296       335       385       3,352  
Fourth quarter charge to expense
    2,498       162       1,626       899       5,185  
Cash payments
    (6,660 )           (3,548 )     (2,159 )     (12,367 )
Noncash utilization
    (737 )     (1,002 )           (1,538 )     (3,277 )
 
Balance at April 30, 2005
  $ 3,222     $     $     $     $ 3,222  
First quarter charge to expense
    993       84       469       75       1,621  
Cash payments
    (264 )           (469 )     (27 )     (760 )
Noncash utilization
          (84 )           (48 )     (132 )
 
Balance at July 31, 2005
  $ 3,951     $     $     $     $ 3,951  
 
Remaining expected restructuring charge
  $ 1,367     $ 146     $ 2,956     $ 2,227     $ 6,696  
 
Approximately $132 and $653 of the total restructuring charges of $1,621 and $3,008 recorded in the three-months ended July 31, 2005 and 2004, respectively, were reported in costs of products sold in the accompanying Condensed Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. The restructuring costs included in costs of products sold include long-lived asset charges and inventory disposition costs. Expected employee separation costs of approximately $15,400 are being recognized over the estimated future service period of the related employees. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.
Long-lived asset charges include accelerated depreciation related to machinery and equipment that will be used at the affected production facilities until they close. 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.

 


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Note E — Common Shares
At July 31, 2005, 150,000,000 common shares were authorized. There were 58,417,508 and 58,540,386 shares outstanding at July 31, 2005, and April 30, 2005, respectively. Shares outstanding are shown net of 6,714,650 and 6,585,055 treasury shares at July 31, 2005, and April 30, 2005, respectively.
Note F — Operating 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 spreads, oils, and baking business areas. This segment primarily represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury, Hungry Jack, Martha White, and Pet branded products to retail customers. The special markets segment is comprised of the international, foodservice, beverage, industrial, and Canada strategic business areas. Special markets segment products are distributed through retail channels, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), other food manufacturers, health and natural food stores, and in foreign countries.
The following table sets forth reportable segment information:
                 
    Three Months Ended July 31,  
    2005     2004  
 
Net sales:
               
U.S. retail market
  $ 341,729     $ 288,086  
Special markets
    168,602       125,181  
 
Total net sales
  $ 510,331     $ 413,267  
 
 
               
Segment profit:
               
U.S. retail market
  $ 70,104     $ 64,379  
Special markets
    15,955       12,526  
 
Total segment profit
  $ 86,059     $ 76,905  
 
Interest income
    1,820       718  
Interest expense
    (6,107 )     (4,423 )
Amortization expense
    (2,741 )     (524 )
Restructuring costs
    (1,621 )     (3,008 )
Merger and integration costs
    (2,928 )     (2,763 )
Corporate administrative expenses
    (29,020 )     (22,589 )
Other unallocated income (expense)
    117       (959 )
 
Income from continuing operations before income taxes
  $ 45,579     $ 43,357  
 

 


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Note G — Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share — assuming dilution:
                 
    Three Months Ended  
    July 31,  
    2005     2004  
 
Numerator:
               
Income from continuing operations
  $ 29,897     $ 27,487  
 
               
Denominator:
               
Denominator for earnings per common share — weighted-average shares
    58,279,424       53,831,281  
 
               
Effect of dilutive securities:
               
Stock options
    521,801       566,622  
Restricted stock
    119,231       115,378  
 
Denominator for earnings per common share — assuming dilution
    58,920,456       54,513,281  
 
 
               
Income from continuing operations per common share
  $ 0.51     $ 0.51  
 
Income from continuing operations per common share — assuming dilution
  $ 0.51     $ 0.50  
 
Note H — Pensions and Other Postretirement Benefits
The components of the Company’s net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below.
                                 
    Three months ended July 31,  
                    Other  
    Defined Benefit     Postretirement  
    Pension Plans     Benefits  
    2005     2004     2005     2004  
 
Service cost
  $ 2,217     $ 1,122     $ 525     $ 361  
Interest cost
    5,528       1,835       824       421  
Expected return on plan assets
    (6,981 )     (1,853 )            
Recognized net actuarial loss
    692       206       38       87  
Other
    326       308       6       (11 )
 
Net periodic benefit cost
  $ 1,782     $ 1,618     $ 1,393     $ 858  
 
Note I — Comprehensive Income
During the three-month periods ended July 31, 2005 and 2004, total comprehensive income was $31,631 and $32,259, respectively. Comprehensive income consists of net income, foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains and losses on available-for-sale securities, and unrealized gains and losses on commodity hedging activity, net of income taxes.

 


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No. 11
Note J — Commitments and Contingencies
In September 2002, Multifoods sold its foodservice distribution business to Wellspring Distribution Corporation (“Wellspring”) while continuing to guarantee certain real estate and tractor-trailer fleet lease obligations of the business. As a result of the Company’s acquisition of Multifoods, the Company now is obligated under these guarantees. The guarantee requires the lessor to pursue collection and other remedies against Wellspring before demanding payment from the Company. In addition, the Company’s obligation related to the tractor-trailer fleet lease is limited to 75 percent of the amount outstanding after the lessor has exhausted its remedies against Wellspring. The fleet guarantee will expire in September 2006 and the real estate guarantees will expire in September 2010.
The possibility that the Company would be required to honor the contingent liabilities under the guarantee is largely dependent upon the future operations of Wellspring and the value of the underlying leased properties. The Company currently has no liability recorded related to the guarantee. Should a reserve be required in the future, it would be recorded at the time the obligation was considered to be probable.
At July 31, 2005, the Company’s guarantees outstanding for the lease obligations of Wellspring were $12,341 related to the tractor-trailer fleet lease and $10,348 related to the real estate lease.
Note K — Reclassifications
Certain prior year amounts have been reclassified to conform to current year classifications.

 


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No. 12
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month periods ended July 31, 2005 and 2004, respectively.
On June 18, 2004, the Company completed its acquisition of International Multifoods Corporation (“Multifoods”). The results of Multifoods are included in the Company’s consolidated financial statements from the date of the acquisition. Since the acquisition of Multifoods closed midway through the first quarter of 2005, an additional six weeks of results are included in the first quarter of 2006.
Net Sales
Company sales were $510.3 million for the first quarter of fiscal 2006, up 23 percent, compared to $413.3 million in the first quarter of 2005. The acquired Multifoods businesses contributed $154.3 million to sales in the first quarter of 2006, compared to $75.5 million last year, an increase of $78.8 million representing an additional six weeks of sales. Excluding the additional six weeks of Multifoods business, sales were up four percent.
Sales in the U.S. retail market segment for the first quarter of 2006 were $341.7 million, compared to $288.1 million in the first quarter of 2005, an increase of 19 percent. Sales for the brands acquired in the Multifoods acquisition in the first six weeks of the quarter accounted for approximately three-fourths of the segment’s increase over the first quarter of 2005. Excluding these additional sales, the segment was up five percent for the quarter.
During the first quarter of 2006, sales in the consumer area increased 11 percent over the first quarter of 2005, driven by the addition of Hungry Jack, growth in the Smucker’s and Jif brands, and continued growth of Uncrustables in the retail channel. In the consumer oils and baking area, sales increased 35 percent in the first quarter of 2006 compared to 2005, due to the additional six weeks of sales of the Pillsbury, Martha White, and Pet brands. Crisco sales in the first quarter of 2006 were up three percent over the first quarter of 2005 reflecting the impact of an eight percent volume increase offset by the six percent price decrease implemented in January 2005.
Sales in the special markets segment were $168.6 million in the first quarter of 2006, compared to $125.2 million for the first quarter of 2005. Canadian and export sales for the brands acquired in the Multifoods acquisition in the first six weeks of the quarter accounted for over 90 percent of the segment’s increase over the prior year. Other key growth contributors included the beverage business, up 15 percent due to growth in the R.W. Knudsen Family and Santa Cruz Organic brands, and the foodservice business, up eight percent due to growth in portion control and Uncrustables. Sales of Uncrustables across all channels were approximately $15 million, including approximately $8 million in retail channels, a 25 percent increase over last year’s first quarter. Excluding the additional six weeks contribution from Multifoods and the U.S. industrial business, which the Company divested last year, sales in the special markets segment increased six percent in the first quarter of 2006 as compared to the first quarter of 2005.

 


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No. 13
Operating Income
The following table presents components of operating income as a percentage of net sales.
                 
    Three Months Ended July 31,  
    2005     2004  
 
Gross profit
    32.3 %     34.9 %
Selling, distribution, and administrative:
               
Marketing and selling
    10.8 %     11.8 %
Distribution
    3.2       2.5  
General and administrative
    7.7       7.7  
 
Total selling, distribution, and administrative
    21.7 %     22.0 %
 
Restructuring and merger and integration
    0.9 %     1.2 %
 
Operating income
    9.7 %     11.7 %
 
Operating income in the first quarter of 2006 increased three percent from the first quarter last year. Operating margin was 9.7 percent in the first quarter of 2006, compared to 11.7 percent last year. Gross margin was 32.3 percent in the first quarter, compared to 34.9 percent last year, primarily due to higher commodity costs and the impact of the incremental Multifoods businesses, which currently earn a lower margin than the Company’s base business. The Company implemented a four percent price increase on its U.S. fruit spreads and peanut butter items during the first quarter to address commodity price increases. The effective date of the price increase did not allow the Company to fully cover the higher costs for the entire quarter contributing to the lower gross margin. In addition, as part of the sale of its industrial ingredients business last fiscal year, the Company agreed to continue to supply the purchaser with certain industrial products through August 2005. Sales of these products are recognized on a cost-plus basis, which also results in a negative impact on gross margins.
Selling, distribution, and administrative (SD&A) expenses as a percentage of sales declined from 22.0 percent in the first quarter of 2005 to 21.7 percent in the current quarter, despite a planned increase in marketing expenses, which were up 15 percent over last year. Also included in the quarter’s SD&A expenses were noncash charges of approximately $2.4 million representing compensation expense associated with the Company’s new restricted stock program, and $1.2 million in accelerated depreciation of certain discontinued software. Finally, distribution costs were up during the quarter due to start-up costs associated with implementing the Company’s new distribution network.
Other
Interest expense increased from $4.4 million in the first quarter of 2005 to $6.1 million in the first quarter of 2006, as the Company realized a full quarter of expense on the additional debt associated with the acquisition of Multifoods. Interest income also increased due to higher average investment balances and an increase in interest rates.
The Company’s first quarter earnings benefited from a decrease in the effective tax rate from 36.6 percent in 2005 to 34.4 percent this quarter resulting from the recognition of certain tax benefits specifically identifiable to the quarter. The Company expects a tax rate for the full year of approximately 35.5 percent.

 


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No. 14
Financial Condition — Liquidity and Capital Resources
                 
    Three Months Ended July 31,  
(Dollars in thousands)   2005     2004  
 
Net cash provided by (used for) operating activities
  $ 20,188     $ (9,994 )
Net cash provided by (used for) investing activities
  $ 1,144     $ (55,029 )
Net cash (used for) provided by financing activities
  $ (31,777 )   $ 35,660  
 
The Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit instrument. Total cash and investments at July 31, 2005, were $117.0 million compared to $134.9 million at April 30, 2005.
Historically, the Company’s working capital requirements are greatest during the first half of its fiscal year. This is due primarily to the need to build inventory levels in advance of the “fall bake” season and the seasonal procurement of raw materials used in the Company’s pickle and condiment business in Canada.
Cash provided by operating activities was approximately $20.2 million during the first quarter of 2006. The positive cash generated by operations resulted from the increase in income from continuing operations and an increase in depreciation and amortization, both noncash charges. This was partially offset by an increase in working capital requirements consisting primarily of higher inventory and trade receivable balances. The increase in inventory balances was primarily due to the building of oil and baking mix inventory levels, and the seasonal procurement of pickles and various fruit varieties. The increase in trade receivable balances is due to the increase in net sales in the first quarter of 2006 compared to the fourth quarter of 2005.
Net cash provided by investing activities was approximately $1.1 million in the first quarter of 2006 as the net sale and maturities of marketable securities were mostly offset by capital expenditures of approximately $13.6 million.
Cash used for financing activities during the quarter consisted primarily of $15.7 million in dividend payments and $16.2 million to finance the purchase of treasury shares including 300,000 common shares on the open market under a buyback program authorized by the Company’s Board of Directors in 2005.
During the second quarter the Company will payoff its $17 million, 7.70 percent Series A Senior Notes due on September 1, 2005.
Absent any other material acquisitions or other significant investments, the Company believes that cash on hand and investments, combined with cash provided by operations, and borrowings available under the revolving credit facility, will be sufficient to meet 2006 cash requirements, including the payment of dividends, repurchase of common shares, repayment of debt, and interest on debt outstanding.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to changes in interest rates, commodity prices, and foreign currency exchange rates. For further information, reference is made to the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

 


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No. 15
Certain Forward-Looking Statements
This quarterly report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to:
    the success and cost of marketing and sales programs and strategies intended to promote growth in the Company’s businesses, and in their respective markets;
 
    the ability of the business areas to achieve sales targets and the costs associated with attempting to do so;
 
    the ability to successfully implement price changes, particularly in the consumer oils and baking business;
 
    the Company’s ability to effectively ramp-up and manage capacity related to Uncrustables and the costs associated to do so;
 
    the success and cost of introducing new products;
 
    the timing and amount of capital expenditures, restructuring, and merger and integration costs;
 
    the ability to achieve the amount and timing of the estimated savings associated with the Multifoods acquisition;
 
    the strength of, and impact of weather on, commodity markets from which raw materials are procured and the related impact on costs;
 
    crude oil price trends and its impact on transportation, energy, and packaging costs;
 
    raw material and ingredient cost trends;
 
    foreign currency exchange and interest rate fluctuations;
 
    general competitive activity in the market; and
 
    other factors affecting share prices and capital markets generally.

 


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No. 16
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation as of July 31, 2005, the Company’s principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls. In addition, no change in internal control over financial reporting occurred during the quarter ended July 31, 2005, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

 


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No. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     (a) Not applicable.
     (b) Not applicable.
     (c) Issuer Purchases of Equity Securities
                                 
    (a)     (b)     (c)     (d)  
                            Maximum  
                            number (or  
                    Total number of     approximate  
                    shares     dollar value) of  
                    purchased as     shares that may  
                    part of publicly     yet be  
    Total number of             announced     purchased  
    shares     Average price     plans or     under the plans  
Period   purchased     paid per share     programs     or programs  
 
May 1, 2005-May 31, 2005
        $             631,322  
June 1, 2005-June 30, 2005
    147,725     $ 48.43       125,000       506,322  
July 1, 2005-July 31, 2005
    177,227     $ 46.92       175,000       331,322  
     
 
                               
Total
    324,952     $ 47.61       300,000       331,322  
     
 
(a)   During the second quarter of 2005, the Company’s Board of Directors authorized management to repurchase up to one million shares of its common stock. The buyback program will be implemented at management’s discretion. Shares in this column include shares repurchased as part of this publicly announced plan as well as shares repurchased from stock plan recipients in lieu of cash payments.
 
(d)   The Company has repurchased 668,678 common shares through July 31, 2005.

 


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No. 18
Item 6. Exhibits
See the Index of Exhibits that appears on Sequential Page No. 20 of this report.

 


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No. 19
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
September 8, 2005
  THE J. M. SMUCKER COMPANY
 
   
 
  /s/ Timothy P. Smucker
 
   
 
  BY TIMOTHY P. SMUCKER
 
  Chairman and Co-Chief Executive Officer
 
   
 
  /s/ Richard K. Smucker
 
   
 
  BY RICHARD K. SMUCKER
 
  President and Co-Chief Executive Officer
 
   
 
  /s/ Mark R. Belgya
 
   
 
  BY MARK R. BELGYA
 
  Vice President, Chief Financial Officer and Treasurer

 


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No. 20
INDEX OF EXHIBITS
     
Assigned    
Exhibit No. *   Description
10.1
  1998 Equity and Performance Incentive Plan (As Amended and Restated) incorporated by reference to Exhibit 10.1 of the Form 8-K filed on June 9, 2005 (Commission File No. 1-5111).
 
   
10.2
  Form of Restricted Shares Agreement incorporated by reference to Exhibit 10.2 of the Form 8-K filed on June 9, 2005 (Commission File No. 1-5111).
 
   
10.3
  Form of Deferred Shares Agreement incorporated by reference to Exhibit 10.3 of the Form 8-K filed on June 9, 2005 (Commission File No. 1-5111).
 
   
31.1
  Certification of Timothy P. Smucker pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
 
   
31.2
  Certification of Richard K. Smucker pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
 
   
31.3
  Certification of Mark R. Belgya pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
 
   
32
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
 
*   Exhibits 2, 3, 11, 15, 18, 19, 22, 23, 24, and 99 are either inapplicable to the Company or require no answer.

 

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