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SMUCKER J M CO 10-Q 2006

Documents found in this filing:

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

Sequential Page
No. 1 of 21 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 January 31, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer 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 58,204,661 common shares outstanding on February 28, 2006.
The Exhibit Index is located at Sequential Page No. 21.
 
 

 


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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
INDEX OF EXHIBITS
EX-10 First Amendment Agreement
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     Nine Months Ended  
    January 31,     January 31,  
    2006     2005     2006     2005  
    (Dollars in thousands, except per share data)  
Net sales
  $ 536,453     $ 550,234     $ 1,653,048     $ 1,552,423  
Cost of products sold
    371,981       375,521       1,120,193       1,043,379  
Cost of products sold — restructuring
    618       515       865       1,777  
 
                       
Gross Profit
    163,854       174,198       531,990       507,267  
Selling, distribution, and administrative expenses
    103,610       106,464       334,259       312,569  
Other restructuring costs
    4,783       2,837       8,248       6,358  
Merger and integration costs
    7,764       5,152       14,784       11,885  
 
                       
Operating Income
    47,697       59,745       174,699       176,455  
Interest income
    1,709       1,044       4,858       2,429  
Interest expense
    (5,984 )     (6,154 )     (18,116 )     (16,359 )
Other income — net
    6,150       883       6,269       485  
 
                       
Income from Continuing Operations Before Income Taxes
    49,572       55,518       167,710       163,010  
Income taxes
    18,260       19,994       60,057       59,336  
 
                       
Income from Continuing Operations
    31,312       35,524       107,653       103,674  
Gain on sale of discontinued operations, net of tax
                      2,037  
Discontinued operations, net of tax
          584             1,250  
 
                       
Net Income
  $ 31,312     $ 36,108     $ 107,653     $ 106,961  
 
                       
 
                               
Earnings per common share:
                               
Income from Continuing Operations
  $ 0.54     $ 0.61     $ 1.85     $ 1.83  
Discontinued operations
          0.01             0.06  
 
                       
Net Income
  $ 0.54     $ 0.62     $ 1.85     $ 1.89  
 
                       
 
                               
Income from Continuing Operations — Assuming Dilution
  $ 0.54     $ 0.60     $ 1.83     $ 1.81  
Discontinued operations — assuming dilution
          0.01             0.05  
 
                       
Net Income — Assuming Dilution
  $ 0.54     $ 0.61     $ 1.83     $ 1.86  
 
                       
 
                               
Dividends declared per common share
  $ 0.27     $ 0.25     $ 0.81     $ 0.75  
 
                       
See notes to unaudited condensed consolidated financial statements.

 


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No. 3
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    January 31, 2006     April 30, 2005  
    (Unaudited)     (Audited)  
    (Dollars in thousands)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 89,246     $ 58,085  
Marketable securities
    15,176       17,739  
Trade receivables, less allowances
    122,514       145,734  
Inventories:
               
Finished products
    206,104       176,205  
Raw materials
    115,380       108,282  
 
           
 
    321,484       284,487  
Other current assets
    52,417       49,806  
 
           
Total Current Assets
    600,837       555,851  
PROPERTY, PLANT, AND EQUIPMENT
               
Land and land improvements
    42,376       42,018  
Buildings and fixtures
    192,052       175,718  
Machinery and equipment
    544,026       533,340  
Construction in progress
    29,706       26,053  
 
           
 
    808,160       777,129  
Accumulated depreciation
    (284,099 )     (256,028 )
 
           
Total Property, Plant, and Equipment
    524,061       521,101  
OTHER NONCURRENT ASSETS
               
Goodwill
    950,253       951,208  
Other intangible assets, net
    472,477       469,758  
Marketable securities
    36,974       59,074  
Other assets
    81,702       78,902  
 
           
Total Other Noncurrent Assets
    1,541,406       1,558,942  
 
           
 
  $ 2,666,304     $ 2,635,894  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Notes payable
  $ 37,749     $ 33,378  
Accounts payable
    80,608       105,290  
Other current liabilities
    146,740       169,624  
 
           
Total Current Liabilities
    265,097       308,292  
NONCURRENT LIABILITIES
               
Long-term debt
    429,341       431,560  
Deferred income taxes
    135,352       110,505  
Other noncurrent liabilities
    94,899       94,737  
 
           
Total Noncurrent Liabilities
    659,592       636,802  
SHAREHOLDERS’ EQUITY
               
Common shares
    14,548       14,635  
Additional capital
    1,237,767       1,240,110  
Retained income
    492,973       447,831  
Less:
               
Deferred compensation
    (9,364 )     (4,573 )
Amount due from ESOP
    (6,524 )     (7,044 )
Accumulated other comprehensive income (loss)
    12,215       (159 )
 
           
Total Shareholders’ Equity
    1,741,615       1,690,800  
 
           
 
  $ 2,666,304     $ 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)
                 
    Nine Months Ended January 31,  
            (Revised)  
    2006     2005  
    (Dollars in thousands)  
OPERATING ACTIVITIES
               
Net income
  $ 107,653     $ 106,961  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    47,948       37,486  
Amortization
    5,963       1,544  
Gain on sale of assets
    (5,638 )     (3,079 )
Trade receivables
    26,133       12,716  
Inventories
    (30,266 )     (21,644 )
Accounts payable and accrued items
    (63,415 )     (25,092 )
Discontinued operations
          (371 )
Other adjustments
    36,202       11,879  
 
           
Net cash provided by operating activities
    124,580       120,400  
 
               
INVESTING ACTIVITIES
               
Business acquired, net of cash acquired
          (99,218 )
Proceeds from sale of assets and businesses
    8,754       46,516  
Additions to property, plant, and equipment
    (42,715 )     (50,175 )
Purchase of marketable securities
    (5,000 )     (65,547 )
Sales and maturities of marketable securities
    28,908       42,357  
Disposals of property, plant, and equipment
    1,804       162  
Discontinued operations
          (907 )
Other — net
    7,609       6,871  
 
           
Net cash used for investing activities
    (640 )     (119,941 )
 
               
FINANCING ACTIVITIES
               
Proceeds from long-term debt
          100,000  
Repayments of long-term debt
    (17,000 )     (37,500 )
Proceeds from revolving credit arrangement — net
    835       47,671  
Repayments of short-term debt
          (113,622 )
Dividends paid
    (47,044 )     (41,519 )
Purchase of treasury shares
    (30,122 )     (16,869 )
Other – net
    793       10,979  
 
           
Net cash used for financing activities
    (92,538 )     (50,860 )
Effect of exchange rate changes
    (241 )     1,302  
 
           
Net increase (decrease) in cash and cash equivalents
    31,161       (49,099 )
Cash and cash equivalents at beginning of period
    58,085       104,551  
 
           
Cash and cash equivalents at end of period
  $ 89,246     $ 55,452  
 
           
(  ) 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 nine-month period ended January 31, 2006, include an increase of approximately $6.7 million to net sales, or approximately $4.3 million after-tax to net income and $0.07 per share, reflecting a change in estimates of the expected liability for trade merchandising programs. Operating results for the three-month and nine-month periods ended January 31, 2006, 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.
The Condensed Statement of Consolidated Cash Flows for the nine months ended January 31, 2005, has been revised to separately disclose the operating, investing, and financing activities of the cash flows attributable to the Company’s discontinued operations, which were previously reported on a combined basis.
Note B – Multifoods Acquisition
On June 18, 2004, the Company completed its acquisition of International Multifoods Corporation (“Multifoods”) in a tax-free stock and cash transaction valued at approximately $871 million. 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.
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 $17 million in acquisition and integration costs in 2006 of which $14.8 million was incurred through the third 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 Control     Employee Separation  
 
Accrual charged to goodwill
  $ 12,271     $ 11,076  
Cash payments
    (12,271 )     (8,073 )
 
Balance at April 30, 2005
  $     $ 3,003  
Cash payments
          (2,720 )
 
Balance at January 31, 2006
  $     $ 283  
 
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 stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

 


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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     Nine Months Ended  
    January 31,     January 31,  
    2006     2005     2006     2005  
 
Net income, as reported
  $ 31,312     $ 36,108     $ 107,653     $ 106,961  
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit
    848       257       3,781       767  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit
    (1,408 )     (1,372 )     (5,790 )     (3,355 )
 
Net income, as adjusted
  $ 30,752     $ 34,993     $ 105,644     $ 104,373  
 
 
                               
Earnings per common share:
                               
Net income, as reported
  $ 0.54     $ 0.62     $ 1.85     $ 1.89  
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit
    0.01             0.07       0.01  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit
    (0.02 )     (0.02 )     (0.10 )     (0.06 )
 
Net income, as adjusted
  $ 0.53     $ 0.60     $ 1.82     $ 1.84  
 
 
                               
Net income, as reported — assuming dilution
  $ 0.54     $ 0.61     $ 1.83     $ 1.86  
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
    0.01       0.01       0.07       0.02  
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit — assuming dilution
    (0.02 )     (0.02 )     (0.10 )     (0.06 )
 
Net income, as adjusted — assuming dilution
  $ 0.53     $ 0.60     $ 1.80     $ 1.82  
 
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-

 


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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. In Ripon, Wisconsin, the Company completed the combination of its two manufacturing facilities into one expanded site.
In the first quarter of 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. During the last half of 2005, the Company completed the sale of its U.S. industrial ingredient 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 effectively completed the realignment of its distribution warehouses during the second quarter of 2006. The Salinas facility was sold in January 2006, and production was relocated to plants in Orrville, Ohio, and Memphis, Tennessee. Uncrustables production at the West Fargo, North Dakota, location is expected to be discontinued in the first quarter of fiscal 2007.
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 $46 million related to these initiatives, of which $40.8 million has been incurred from the fourth quarter of fiscal 2003 through the third quarter of 2006. The balance of the costs will be incurred through the first quarter of 2007. The remaining cash payments, estimated to be approximately $5 million, will be paid through the second quarter of 2007.
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
  $ 16,700     $ 11,200     $ 8,900     $ 9,200     $ 46,000  
 
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  
Second quarter charge to expense
    521       113       699       758       2,091  
Third quarter charge to expense
    1,077       618       2,329       1,377       5,401  
Cash payments
    (3,593 )           (3,497 )     (2,159 )     (9,249 )
Noncash utilization
          (815 )           (51 )     (866 )
 
Balance at January 31, 2006
  $ 2,220     $     $     $     $ 2,220  
 
Remaining expected restructuring charge
  $ 1,069     $ 2,215     $ 1,028     $ 892     $ 5,204  
 
Approximately $618 and $515 of the total restructuring charges of $5,401 and $3,352 recorded in the three months ended January 31, 2006 and 2005, respectively, and $865 and $1,777 of the total restructuring charges of $9,113 and $8,135 recorded in the nine months ended January 31, 2006 and

 


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2005, 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. Total expected employee separation costs of approximately $16.7 million 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.
Note E — Common Shares
At January 31, 2006, 150,000,000 common shares were authorized. There were 58,193,430 and 58,540,386 shares outstanding at January 31, 2006, and April 30, 2005, respectively. Shares outstanding are shown net of 6,939,088 and 6,585,055 treasury shares at January 31, 2006, 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.

 


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The following table sets forth reportable segment information:
                                 
    Three Months Ended   Nine Months Ended
    January 31,   January 31,
    2006   2005   2006   2005
 
Net sales:
                               
U.S. retail market
  $ 375,750     $ 381,381     $ 1,147,240     $ 1,079,899  
Special markets
    160,703       168,853       505,808       472,524  
 
Total net sales
  $ 536,453     $ 550,234     $ 1,653,048     $ 1,552,423  
 
 
                               
Segment profit:
                               
U.S. retail market
  $ 72,122     $ 80,296     $ 234,287     $ 229,209  
Special markets
    16,313       16,559       51,199       48,226  
 
Total segment profit
  $ 88,435     $ 96,855     $ 285,486     $ 277,435  
 
Interest income
    1,709       1,044       4,858       2,429  
Interest expense
    (5,984 )     (6,154 )     (18,116 )     (16,359 )
Amortization expense
    (1,373 )     (497 )     (5,963 )     (1,544 )
Restructuring costs
    (5,401 )     (3,352 )     (9,113 )     (8,135 )
Merger and integration costs
    (7,764 )     (5,152 )     (14,784 )     (11,885 )
Corporate administrative expenses
    (25,334 )     (27,110 )     (80,503 )     (78,288 )
Other unallocated income (expense)
    5,284       (116 )     5,845       (643 )
 
Income from continuing operations before income taxes
  $ 49,572     $ 55,518     $ 167,710     $ 163,010  
 
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   Nine Months Ended
    January 31,   January 31,
    2006   2005   2006   2005
 
Numerator:
                               
Income from continuing operations
  $ 31,312     $ 35,524     $ 107,653     $ 103,674  
 
 
                               
Denominator:
                               
Denominator for earnings per common share — weighted-average shares
    57,944,604       58,108,123       58,106,913       56,708,018  
Effect of dilutive securities:
                               
Stock options
    417,419       503,913       481,774       526,238  
Restricted stock
    124,389       131,486       119,522       122,397  
 
Denominator for earnings per common share — assuming dilution
    58,486,412       58,743,522       58,708,209       57,356,653  
 
Income from continuing operations per common share
  $ 0.54     $ 0.61     $ 1.85     $ 1.83  
 
Income from continuing operations per common share — assuming dilution
  $ 0.54     $ 0.60     $ 1.83     $ 1.81  
 

 


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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 January 31,        
                    Other
    Defined Benefit   Postretirement
    Pension Plans   Benefits
    2006   2005   2006   2005
 
Service cost
  $ 2,262     $ 3,333     $ 529     $ 661  
Interest cost
    5,624       10,555       837       1,479  
Expected return on plan assets
    (7,112 )     (14,124 )            
Recognized net actuarial loss
    695       206       38       87  
Other
    326       309       6       (11 )
 
Net periodic benefit cost
  $ 1,795     $ 279     $ 1,410     $ 2,216  
 
                                 
            Nine Months Ended January 31,        
                    Other
    Defined Benefit   Postretirement
    Pension Plans   Benefits
    2006   2005   2006   2005
 
Service cost
  $ 6,728     $ 5,577     $ 1,582     $ 1,383  
Interest cost
    16,748       14,225       2,493       2,321  
Expected return on plan assets
    (21,168 )     (17,830 )            
Recognized net actuarial loss
    2,082       618       115       261  
Other
    978       925       18       (33 )
 
Net periodic benefit cost
  $ 5,368     $ 3,515     $ 4,208     $ 3,932  
 
Note I — Comprehensive Income
During the three-month periods ended January 31, 2006 and 2005, total comprehensive income was $36,844 and $30,049 respectively. Total comprehensive income for the nine-month periods ended January 31, 2006 and 2005, was $120,027 and $118,738, 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 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.

 


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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 January 31, 2006, the Company’s guarantees outstanding for the lease obligations of Wellspring were $10,266 related to the tractor-trailer fleet lease and $9,193 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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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 and nine-month periods ended January 31, 2006 and 2005, 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 2006.
Net Sales
Company sales were $536.5 million for the third quarter of 2006, down three percent compared to $550.2 million in the third quarter of 2005. Excluding the U.S. industrial business, which was divested in the fourth quarter of 2005, sales were down one percent for the quarter. The quarter’s results were adversely affected by a decrease in sales in the consumer oils and baking business area due to an overall decline in the categories during December and January and unplanned inventory reductions by certain key customers.
Sales for the nine-month period ended January 31, 2006, were up six percent to $1,653.0 million compared to $1,552.4 million for the first nine months of 2005. An additional six weeks of Multifoods sales, totaling approximately $78.8 million, were realized in the first nine months. Excluding the additional six weeks and the U.S. industrial business, sales were up three percent.
Results for the nine-month period ended January 31, 2006, include a favorable adjustment of approximately $6.7 million to sales reflecting a change in estimate of the expected liability for trade merchandising programs. The adjustment relates to the liability for trade merchandising programs offered to customers during 2005, including programs established by Multifoods prior to the acquisition. The liability was adjusted to reflect updated information pertaining to factors affecting the liability, including actual performance data, competitive programs, and changes in administration of promotional programs.
Sales in the U.S. retail market segment for the third quarter of 2006 were $375.8 million compared to $381.4 million in the third quarter of 2005, a decrease of one percent. During the third quarter of 2006, sales in the consumer business area increased four percent over the third quarter of 2005 as sales of fruit spreads, toppings, and peanut butter were all up. Solid performance in the Hungry Jack brand and significant growth in Uncrustables also contributed. In the consumer oils and baking business area, sales for the quarter were down eight percent as the Company faced significant competitive activity in addition to the decrease in categories and customer inventory reductions noted above. Crisco branded sales were down ten percent, and the baking brands decreased six percent in the third quarter of 2006 compared to 2005.
Sales in the U.S. retail market segment for the first nine months of 2006 were $1,147.2 million, compared to $1,079.9 million for the comparable period in 2005, an increase of six percent. The additional six weeks of Multifoods sales accounted for approximately half of the segment’s increase over the prior year.
For the first nine months of 2006, sales in the consumer business area were up seven percent compared to last year. Excluding the additional six weeks, sales in the oils and baking business area were down one percent for the first nine months of 2006 compared to the same period in 2005. Although sales of Crisco were up over last year for the first nine months, much of the gain was given back in December and January as a result of lower sell through and inventory reductions by key customers. Sales of Crisco were also impacted by a six percent price decrease taken in January 2005, as Crisco volume increased in 2006 over 2005. The Pillsbury brand had a solid first six months but reflected similar declines in the category during December and January. Sales in the consumer oils and baking business area were up

 


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slightly during the “fall bake” period running from September through December, compared to the same period last year.
Sales in the special markets segment for the third quarter of 2006 were $160.7 million compared to $168.9 million in the third quarter of 2005, a decrease of five percent. Excluding the U.S. industrial business, sales in the special markets segment were up two percent in the third quarter of 2006 compared to 2005. Key growth contributors for the quarter included the beverage business area, up 16 percent, and the foodservice business area, up five percent. In the foodservice business area sales increased in both the traditional and schools markets. Sales in Canada were down six percent, as increases in the retail spreads business and the impact of favorable exchange rates partially offset declines in baking and the planned rationalization of certain unprofitable businesses.
Sales in the special markets segment for the nine-month period ended January 31, 2006, were $505.8 million compared to $472.5 million in 2005, an increase of seven percent. Excluding the additional Multifoods sales and the U.S. industrial business, sales in the special markets segment increased four percent in the first nine months of 2006 as compared to the first nine months of last year.
Operating Income
The following table presents components of operating income as a percentage of net sales.
                                 
    Three Months Ended   Nine Months Ended
    January 31,   January 31,
    2006   2005   2006   2005
 
Gross profit
    30.5 %     31.7 %     32.2 %     32.7 %
Selling, distribution, and administrative:
                               
Marketing and selling
    9.5 %     9.8 %     10.2 %     10.5 %
Distribution
    3.7       2.9       3.5       2.8  
General and administrative
    6.1       6.6       6.5       6.8  
 
Total selling, distribution, and administrative
    19.3 %     19.3 %     20.2 %     20.1 %
 
Restructuring and merger and integration
    2.3 %     1.5 %     1.4 %     1.2 %
 
Operating income
    8.9 %     10.9 %     10.6 %     11.4 %
 
Operating income in the third quarter of 2006 decreased $12.0 million, or 20 percent, from the third quarter last year. Operating margin for the third quarter decreased from 10.9 percent in 2005 to 8.9 percent in 2006. Approximately one-half of the decline in operating margin for the quarter was due to the increase in restructuring and merger and integration costs over last year. The remainder was due to changes in gross margin. Gross margin declined primarily due to the volume decrease in the consumer oils and baking business area, increased trade merchandising expenses, and higher commodity and freight costs.
Selling, distribution, and administrative (“SD&A”) expenses as a percentage of sales in the third quarter of 2006 remained consistent with 2005 at 19.3 percent as increased costs of approximately $4 million associated with the Company’s new distribution network were offset by a reduction in marketing and selling expenses and lower administrative overhead costs.
Year-to-date operating income decreased $1.8 million, or one percent, compared to last year and operating margin was 10.6 percent compared to 11.4 percent last year. Gross margin was down to 32.2 percent from 32.7 percent due to the impact of the additional six weeks of Multifoods sales with margins that are currently below corporate average, as well as higher commodity and freight costs. For the first nine months of 2006, SD&A as a percentage of sales increased slightly from 20.1 percent to 20.2 percent primarily as a result of increased distribution costs. During the same period, restructuring and

 


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merger and integration costs increased $3.9 million, or as a percentage of sales, from 1.2 percent to 1.4 percent.
Other
Interest expense decreased slightly from $6.2 million in the third quarter of 2005 to $6.0 million in the third quarter of 2006 reflecting a decrease in the notes payable balance and the payoff of $17 million in long-term debt in September 2005. Year-to-date interest expense increased from $16.4 million in the first nine months of 2005 to $18.1 million in the first nine months of 2006, as the Company realized an additional six weeks of interest expense on the debt associated with the acquisition of Multifoods. Interest income, for both the three-month and nine-month periods, increased due to higher average investment balances and an increase in interest rates.
During the third quarter of 2006, the Company completed its restructuring efforts around its Salinas, California, manufacturing and distribution facility and completed the sale of the property generating cash proceeds of $8.8 million and a gain on the sale of $5.6 million resulting in the increase in other income in the third quarter and first nine months of 2006 compared to applicable periods in 2005.
Income taxes in the third quarter of 2006 were $18.3 million compared to $20.0 million in the third quarter of 2005, a decrease of nine percent. For the nine months ended January 31, 2006 and 2005, income taxes were $60.1 million and $59.3 million, respectively, an increase of one percent. The change in income taxes was less than the percent change in income from continuing operations due to a lower consolidated effective tax rate. The consolidated effective tax rate was 35.8 percent for the nine months ended January 31, 2006, compared to 36.4 percent for the nine months ended January 31, 2005 resulting from the recognition of certain tax benefits specifically identifiable to the first nine months of 2006. The Company expects a tax rate for the full year of approximately 35.8 percent.
Financial Condition — Liquidity and Capital Resources
                 
    Nine Months Ended January 31,
(Dollars in thousands)   2006   2005
 
Net cash provided by operating activities
  $ 124,580     $ 120,400  
Net cash used for investing activities
  $ (640 )   $ (119,941 )
Net cash used for financing activities
  $ (92,538 )   $ (50,860 )
 
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 January 31, 2006, were $141.4 million compared to $134.9 million at April 30, 2005.
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 fruit, and the purchase of raw materials used in the Company’s pickle and condiment business in Canada.
Cash provided by operating activities was approximately $124.6 million during the first nine months of 2006. The positive cash generated by operations resulted from the increase in net income adjusted for noncash charges of depreciation and amortization and collection of accounts receivable. This was partially offset by an increase in working capital requirements consisting primarily of higher inventory balances and payments made to trade creditors. The increase in inventory balances was primarily due to the higher inventory levels necessary to support the new distribution network and increased raw material costs.
Net cash used for investing activities was approximately $0.6 million in the first nine months of 2006 as approximately $42.7 million utilized for capital expenditures was mostly offset by maturities of marketable securities of approximately $28.9 million and proceeds from the sale of the Salinas facility.

 


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Cash used for financing activities during the first nine months of 2006 consisted primarily of $47.0 million in dividend payments and $30.1 million to finance stock repurchases, including 598,700 common shares repurchased on the open market under a buyback program authorized by the Company’s Board of Directors in 2005. During the third quarter the Company purchased 200,000 shares toward the previously authorized one million shares leaving approximately 30,000 shares remaining under the original buyback program. In January 2006, the Company’s Board of Directors authorized an increase to its share repurchase plan. Under the plan, the Company is authorized to purchase an additional two million common shares. The buyback program will be implemented at management’s discretion. Also during the first nine months of the fiscal year, the Company paid off its $17 million, 7.70 percent Series A Senior Notes due on September 1, 2005.
On January 31, 2006, the Company amended its revolving credit facility. The primary reason for the amendment was to take advantage of a more favorable fee structure, extend the commitment period for five years from the amendment date, and reduce the number of participating banks from four to three.
Absent any 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 the remaining 2006 cash requirements, including the payment of dividends, repurchase of common shares, repayment of debt, and interest on debt outstanding.
Subsequent Event
On February 24, 2006, The Company announced that it had entered into a Rule 10b5-1 trading plan (“the Plan”) with a broker to facilitate the repurchase of up to one million common shares. The shares to be repurchased under the Plan would be part of the share repurchase authorization approved by the Company’s Board of Directors in January 2006 to repurchase up to two million common shares.
Purchases will be affected by a broker and will be based upon the guidelines and parameters of the Plan. The share purchase period commenced on February 27, 2006, and concluded on March 8, 2006, with one million shares repurchased under the Plan.
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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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 strength of 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;
 
    the success and cost of introducing new products and the competitive response, particularly in the consumer oils and baking area;
 
    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 to successfully implement price changes, particularly in the consumer oils and baking business;
 
    the concentration of certain of the Company’s businesses with key customers and the ability to manage and maintain key customer relationships;
 
    the loss of significant customers or a substantial reduction in orders from these customers or the bankruptcy of any such customer;
 
    the Company’s ability to effectively manage production capacity and costs related to Uncrustables;
 
    the ability to achieve the amount and timing of the estimated savings associated with the Multifoods acquisition;
 
    the timing and amount of capital expenditures, restructuring, and merger and integration costs;
 
    foreign currency exchange and interest rate fluctuations;
 
    the timing and cost of acquiring common shares under the two million share repurchase authorization;
 
    general competitive activity in the market, including competitors’ pricing practices and promotional spending levels; and
 
    other factors affecting share prices and capital markets generally.

 


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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation as of January 31, 2006, 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 January 31, 2006, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

 


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PART II.   OTHER INFORMATION
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  
 
November 1, 2005 — November 30, 2005
    79,772     $ 45.40       75,000       157,622  
December 1, 2005 — December 31, 2005
    125,000     $ 45.46       125,000       32,622  
January 1, 2006 — January 31, 2006
    2,568     $ 44.37             2,032,622  
 
 
                               
Total
    207,340     $ 45.42       200,000       2,032,622  
 
 
(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. In January 2006, the Company’s Board of Directors authorized management to repurchase up to an additional two million common shares. 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 967,378 common shares through January 31, 2006. From February 22, 2006, through March 8, 2006, the Company repurchased an additional 1,293,400 common shares, including 1,000,000 common shares under the Company’s Rule 10b5-1 trading plan. 739,222 common shares remain available for repurchase under the buyback program authorized by the Company’s Board of Directors.
Item 6.   Exhibits
See the Index of Exhibits that appears on Sequential Page No. 21 of this report.

 


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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.
         
 
       
March 10, 2006
  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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INDEX OF EXHIBITS
     
Assigned    
Exhibit    
No. *   Description
10
  First Amendment (dated as of January 31, 2006) to Credit Agreement (dated as of June 18, 2004), by and among The J. M. Smucker Company, as U.S. Borrower, Smucker Foods of Canada Co., as Canadian Borrower, the lenders named therein, as lenders, KeyBank National Association, as Lead Arranger and Administrative Agent, and Bank of Montreal, as Canadian Funding Agent and Syndication Agent.
 
   
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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