SMUCKER J M CO 10-Q 2005
No. 1 of 20 Pages
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended July 31, 2005
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)
Registrants telephone number, including area code: (330) 682-3000
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
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
See notes to unaudited condensed consolidated financial statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.
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 Companys 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, Bicks 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 Companys 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 Companys consolidated financial statements from the date of the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
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 Companys 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.
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 Companys employee
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 Companys pro forma net income and earnings per share would have been as follows:
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 Companys overall cost base as well as service levels in support of its long-term strategy. The Companys 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.
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.
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 Companys restructuring initiative and are expensed as incurred. These costs include employee relocation, professional fees, and other closed facility costs.
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 Smuckers, 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:
Note G Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share assuming dilution:
Note H Pensions and Other Postretirement Benefits
The components of the Companys net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below.
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.
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 Companys 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 Companys 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 Companys 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.
Item 2. Managements 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 Companys 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.
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 segments 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 Smuckers 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 segments 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 years 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.
The following table presents components of operating income as a percentage of net sales.
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 Companys 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 quarters SD&A expenses were noncash charges of approximately $2.4 million representing compensation expense associated with the Companys 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 Companys new distribution network.
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 Companys 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.
Financial Condition Liquidity and Capital Resources
The Companys principal source of funds is cash generated from operations, supplemented by borrowings against the Companys 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 Companys 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 Companys 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 Companys 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 Companys Annual Report on Form 10-K for the year ended April 30, 2005.
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:
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation as of July 31, 2005, the Companys principal executive officers and principal financial officer have concluded that the Companys 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 Companys internal control over financial reporting.
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
Item 6. Exhibits
See the Index of Exhibits that appears on Sequential Page No. 20 of this report.
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.
INDEX OF EXHIBITS