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SMUCKER J M CO 10-Q 2007
Smuckers 10-Q
Table of Contents

 
 
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, 2007
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
(State or other jurisdiction of incorporation or
organization)
  34-0538550
(I.R.S. Employer Identification No.)
     
One Strawberry Lane
Orrville, Ohio
(Address of principal executive offices)
  44667-0280
(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 57,513,493 common shares outstanding on August 31, 2007.
The Exhibit Index is located at Page No. 22.
 
 

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
INDEX OF EXHIBITS
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-31.1
EX-31.2
EX-31.3
EX-32


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
                 
    Three Months Ended July 31,  
    2007     2006  
    (Dollars in thousands, except  
    per share data)  
Net sales
  $ 561,513     $ 526,509  
Cost of products sold
    375,529       361,342  
Cost of products sold – restructuring
          7,173  
 
           
Gross Profit
    185,984       157,994  
Selling, distribution, and administrative expenses
    116,750       108,397  
Other restructuring costs
    313       731  
Merger and integration costs
    432        
 
           
Operating Income
    68,489       48,866  
Interest income
    3,495       1,995  
Interest expense
    (10,093 )     (6,101 )
Other income (expense) – net
    1,932       (569 )
 
           
Income Before Income Taxes
    63,823       44,191  
Income taxes
    23,062       15,467  
 
           
Net Income
  $ 40,761     $ 28,724  
 
           
 
               
Earnings per common share:
               
Net Income
  $ 0.72     $ 0.51  
 
           
 
               
Net Income – Assuming Dilution
  $ 0.71     $ 0.50  
 
           
 
               
Dividends declared per common share
  $ 0.30     $ 0.28  
 
           
See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    July 31, 2007     April 30, 2007  
    (Dollars in thousands)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 206,662     $ 200,119  
Marketable securities
    144,580        
Trade receivables, less allowance for doubtful accounts
    148,061       124,048  
Inventories:
               
Finished products
    267,694       196,177  
Raw materials
    121,400       89,875  
 
           
 
    389,094       286,052  
Other current assets
    26,797       29,147  
 
           
Total Current Assets
    915,194       639,366  
PROPERTY, PLANT, AND EQUIPMENT
               
Land and land improvements
    43,302       41,456  
Buildings and fixtures
    189,721       176,950  
Machinery and equipment
    554,408       536,825  
Construction in progress
    30,516       25,284  
 
           
 
    817,947       780,515  
Accumulated depreciation
    (337,529 )     (326,487 )
 
           
Total Property, Plant, and Equipment
    480,418       454,028  
OTHER NONCURRENT ASSETS
               
Goodwill
    1,069,717       990,771  
Other intangible assets, net
    600,552       478,194  
Marketable securities
    41,532       44,117  
Other assets
    94,819       87,347  
 
           
Total Other Noncurrent Assets
    1,806,620       1,600,429  
 
           
 
  $ 3,202,232     $ 2,693,823  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 108,731     $ 93,500  
Current portion of long-term debt
    33,000       33,000  
Other current liabilities
    142,154       109,968  
 
           
Total Current Liabilities
    283,885       236,468  
NONCURRENT LIABILITIES
               
Long-term debt
    791,903       392,643  
Deferred income taxes
    154,967       158,418  
Other noncurrent liabilities
    125,788       110,637  
 
           
Total Noncurrent Liabilities
    1,072,658       661,698  
SHAREHOLDERS’ EQUITY
               
Common shares
    14,378       14,195  
Additional capital
    1,239,330       1,216,091  
Retained income
    574,251       553,631  
Less:
               
Amount due from ESOP
    (6,017 )     (6,017 )
Accumulated other comprehensive income
    23,747       17,757  
 
           
Total Shareholders’ Equity
    1,845,689       1,795,657  
 
           
 
  $ 3,202,232     $ 2,693,823  
 
           
See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    July 31,  
    2007     2006  
 
           
    (Dollars in thousands)  
OPERATING ACTIVITIES
               
Net income
  $ 40,761     $ 28,724  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    14,770       15,127  
Amortization
    121       41  
Asset impairments and other restructuring charges
          7,173  
Share-based compensation expense
    2,826       2,659  
Changes in assets and liabilities, net of effect from businesses acquired:
               
Trade receivables
    (13,970 )     2,975  
Inventories
    (63,676 )     (31,321 )
Accounts payable and accrued items
    22,106       19,453  
Other – net
    6,689       15,977  
 
           
Net cash provided by operating activities
    9,627       60,808  
 
               
INVESTING ACTIVITIES
               
Businesses acquired, net of cash acquired
    (133,446 )     (19,408 )
Additions to property, plant, and equipment
    (16,787 )     (14,895 )
Proceeds from sale of business
    3,407        
Purchases of marketable securities
    (144,705 )     (20,000 )
Maturities of marketable securities
    2,330       12,193  
Disposals of property, plant, and equipment
    296       799  
Other – net
    305       (1,113 )
 
           
Net cash used for investing activities
    (288,600 )     (42,424 )
 
               
FINANCING ACTIVITIES
               
Proceeds from long-term debt
    400,000        
Repayments of long-term debt
    (115,000 )      
Revolving credit arrangements – net
          20,603  
Dividends paid
    (17,014 )     (15,809 )
Purchase of treasury shares
    (3,627 )     (1,047 )
Proceeds from stock option exercises
    16,327       3,149  
Other – net
    2,969       (1,167 )
 
           
Net cash provided by financing activities
    283,655       5,729  
Effect of exchange rate changes on cash
    1,861       71  
 
           
Net increase in cash and cash equivalents
    6,543       24,184  
Cash and cash equivalents at beginning of period
    200,119       71,956  
 
           
Cash and cash equivalents at end of period
  $ 206,662     $ 96,140  
 
           
 
( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.

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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, 2007, are not necessarily indicative of the results that may be expected for the year ending April 30, 2008. 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, 2007.
Note B – Eagle Acquisition
On May 1, 2007, the Company completed its acquisition of Eagle Family Foods Holdings, Inc. (“Eagle”), a privately held company headquartered in Columbus, Ohio, for $133 million in cash and the assumption of $115 million in debt, in a transaction valued at approximately $248 million. Results for the quarter ended July 31, 2007, include the operations of Eagle since the acquisition closing date. Eagle is the largest producer of canned milk in North America, with sales primarily in retail and foodservice channels. Eagle generated net sales of approximately $206 million during its fiscal year ended July 1, 2006. The acquisition expands the Company’s position in the baking aisle and complements the Company’s strategy, which is to own and market leading North American food brands sold in the center of the store. Eagle’s primary brands include Eagle Brand and Magnolia sweetened condensed milk.
The Company utilized cash on-hand and borrowings against its revolving credit facility to fund the cash portion of the purchase price and to deposit funds in escrow in exchange for a covenant defeasance on Eagle’s $115 million Senior Notes that were assumed as of the acquisition date. On May 31, 2007, the escrow was distributed to note holders in full payment of the Senior Notes.
The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The Company will determine the estimated fair values based on independent appraisals, discounted cash flow, quoted market prices, and estimates made by management. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be allocated to goodwill.
The initial estimated fair value of the net assets acquired is approximately $248 million, which consists of current assets of $51 million, property, plant, and equipment of $25 million, other intangible assets of $121 million, goodwill of $73 million, and current liabilities of $22 million. The allocation of the purchase price is preliminary and subject to adjustment following completion of the valuation process. The $73 million of goodwill will be assigned to the U.S. retail market and special markets segments upon finalization of the allocation of the purchase price.

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Had the acquisition of Eagle occurred at the beginning of fiscal 2007, unaudited, pro forma consolidated results would have been as follows:
         
    Three Months Ended
    July 31, 2006
 
Net sales
  $ 566,000  
Operating income
  $ 49,000  
Net income
  $ 27,000  
Net income per common share – assuming dilution
  $ 0.48  
 
The unaudited, pro forma consolidated results are based on the Company’s historical financial statements and those of the acquired business and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented, nor is it indicative of the results of operations in future periods.
Note C – Share-Based Payments
The Company provides for equity-based incentives to be awarded to key employees and nonemployee directors. These incentives are administered through various plans, and currently consist of restricted shares, restricted stock units, deferred shares, deferred stock units, performance units, performance shares, and stock options.
During the three months ended July 31, 2007, the Company granted 11,390 deferred stock units and 188,500 restricted shares, with 67,440 of these representing the conversion of performance shares and performance units into restricted shares, all with a grant date fair value of $57.73 and a total fair value of $11,540. Also during the three months ended July 31, 2007, the Company granted performance units to certain executives. The performance units granted correspond to approximately 50,580 common shares with a grant date fair value of $57.73 and a total fair value of $2,920. The grant date fair value of these awards was the average of the high and low stock price on the date of grant.
Compensation expense related to share-based awards was $2,826 and $2,659 for the three months ended July 31, 2007 and 2006, respectively. The related tax benefit recognized was $1,020 and $931 for the three months ended July 31, 2007 and 2006, respectively.
As of July 31, 2007, total compensation cost related to nonvested share-based awards not yet recognized was approximately $21,451. The weighted-average period over which this amount is expected to be recognized is approximately 3.2 years.
Note D – Restructuring
In 2003, the Company announced its plan to restructure certain operations as part of its ongoing efforts to refine its portfolio, optimize its production capacity, improve productivity and operating efficiencies, and improve the Company’s overall cost base as well as service levels in support of its long-term strategy. The Company’s strategy is to own and market leading North American brands sold in the center of the store.
To date, the Company closed its fruit processing operations at its Watsonville, California, and Woodburn, Oregon, locations and subsequently sold these facilities; completed the combination of its two manufacturing facilities in Ripon, Wisconsin, into one expanded site; completed a restructuring program to streamline operations in Europe and the United Kingdom, including the exit of a contract packaging arrangement and certain portions of its retail business; completed the sale of its U.S. industrial ingredient business; completed the realignment of distribution warehouses; sold the Salinas, California, facility after production was relocated to plants in Orrville, Ohio, and Memphis, Tennessee; and sold the Canadian nonbranded businesses, which were acquired as part of International Multifoods Corporation, to Horizon

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Milling G.P., a subsidiary of Cargill and CHS Inc., as part of a strategic plan to focus the Canadian operations on its branded consumer retail and foodservice businesses. The restructurings resulted in the reduction of approximately 410 full-time positions.
The Canadian nonbranded divestiture was completed on September 22, 2006. The sale and related restructuring activities are expected to result in expense of approximately $18.6 million, which will be reported as a restructuring charge. Costs will include noncash, long-lived asset charges, as well as transaction, legal, severance, and pension costs. To date, charges of approximately $11.7 million were recognized related to the Canadian restructuring.
The Company expects to incur total restructuring costs of approximately $61 million related to these initiatives, of which $54.1 million has been incurred since the announcement of the initiatives in March 2003. The balance of the costs and remaining cash payments, estimated to be approximately $6.9 million and $7.1 million, respectively, are related to the Canadian restructuring and will primarily be incurred through 2008.
The following table summarizes the activity with respect to the restructuring and related long-lived asset 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
  $ 16,900     $ 19,500     $ 6,900     $ 17,700     $ 61,000  
 
Balance at May 1, 2006
  $ 1,694     $     $     $     $ 1,694  
First quarter charge to expense
    458       7,173       28       245       7,904  
Second quarter charge to expense
    (85 )     2,119       5       885       2,924  
Third quarter charge to expense
    (43 )                 533       490  
Fourth quarter charge to expense
    27             34       722       783  
Cash payments
    (1,415 )           (67 )     (1,696 )     (3,178 )
Noncash utilization
    (108 )     (9,292 )           (689 )     (10,089 )
 
Balance at April 30, 2007
  $ 528     $     $     $     $ 528  
First quarter charge to expense
    53                   260       313  
Cash payments
    (53 )                 (260 )     (313 )
 
Balance at July 31, 2007
  $ 528     $     $     $     $ 528  
 
Remaining expected restructuring charge
  $ 500     $ 300     $     $ 6,100     $ 6,900  
 
Total restructuring charges of $313 and $7,904 were recorded in the three months ended July 31, 2007 and 2006, respectively. During the three months ended July 31, 2006, $7,173 of the total restructuring charges recognized were reported in cost 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 cost of products sold include long-lived asset charges and inventory disposition costs. Expected employee separation costs 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 impairments and accelerated depreciation related to machinery and equipment that will be used at the affected production facilities until they close or are sold. Other costs include miscellaneous expenditures associated with the Company’s restructuring initiative and are expensed as incurred. These costs include employee relocation, professional fees, and other closed facility costs.

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Note E – Common Shares
At July 31, 2007, 150,000,000 common shares were authorized. There were 57,513,493 and 56,779,850 shares outstanding at July 31, 2007, and April 30, 2007, respectively. Shares outstanding are shown net of 7,914,435 and 8,619,519 treasury shares at July 31, 2007, and April 30, 2007, 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 and consumer oils and baking business areas. This segment primarily represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury, Eagle Brand, Hungry Jack, White Lily, and Martha White branded products to retail customers. The special markets segment is comprised of the international, foodservice, beverage, and Canada strategic business areas. Special markets segment products are distributed domestically and in foreign countries through retail channels, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), and health and natural foods stores and distributors.
The following table sets forth reportable segment information:
                 
    Three Months Ended July 31,
 
    2007     2006  
 
Net sales:
               
U.S. retail market
  $ 418,155     $ 353,335  
Special markets
    143,358       173,174  
 
Total net sales
  $ 561,513     $ 526,509  
 
 
               
Segment profit:
               
U.S. retail market
  $ 78,758     $ 69,306  
Special markets
    21,636       17,277  
 
Total segment profit
  $ 100,394     $ 86,583  
 
Interest income
    3,495       1,995  
Interest expense
    (10,093 )     (6,101 )
Amortization
    (121 )     (41 )
Share-based compensation expense
    (2,826 )     (2,659 )
Restructuring costs
    (313 )     (7,904 )
Merger and integration costs
    (432 )      
Corporate administrative expenses
    (28,131 )     (27,192 )
Other unallocated income (expense)
    1,850       (490 )
 
Income before income taxes
  $ 63,823     $ 44,191  
 

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Note G – Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
                 
    July 31, 2007     April 30, 2007  
 
6.77% Senior Notes due June 1, 2009
  $ 75,000     $ 75,000  
7.87% Series B Senior Notes due September 1, 2007
    33,000       33,000  
7.94% Series C Senior Notes due September 1, 2010
    10,000       10,000  
4.78% Senior Notes due June 1, 2014
    100,000       100,000  
6.60% Senior Notes due November 13, 2009
    206,903       207,643  
5.55% Senior Notes due April 1, 2022
    400,000        
 
Total long-term debt
  $ 824,903     $ 425,643  
Current portion of long-term debt
    33,000       33,000  
 
Total long-term debt less current portion
  $ 791,903     $ 392,643  
 
On May 31, 2007, the Company issued $400 million of 5.55 percent Senior Notes, due April 1, 2022, with required prepayments, the first of which is $50 million on April 1, 2013. Proceeds from this issuance were used to repay borrowings under the revolving credit facility used in financing the acquisition of Eagle Family Foods Holdings, Inc. Additional proceeds will be used to finance other strategic and long-term initiatives as determined by the Company.
The notes are unsecured and interest is paid annually on the 6.60 percent Senior Notes and semiannually on the other notes. The 6.60 percent Senior Notes are guaranteed by Diageo plc. The guarantee may terminate, in limited circumstances, prior to the maturity of the notes. Among other restrictions, the note purchase agreements contain certain covenants relating to liens, consolidated net worth, and sale of assets as defined in the agreements. The Company is in compliance with all covenants.
Note H – 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,  
 
    2007     2006  
 
Numerator:
               
 
Net income
  $ 40,761     $ 28,724  
 
 
               
Denominator:
               
 
Weighted-average shares
    56,645,611       56,677,665  
Effect of dilutive securities:
               
Stock options
    367,793       337,856  
Restricted stock
    251,729       178,640  
 
Weighted-average shares – assuming dilution
    57,265,133       57,194,161  
 
 
               
Net income per common share
  $ 0.72     $ 0.51  
 
Net income per common share – assuming dilution
  $ 0.71     $ 0.50  
 

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Note I – 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  
 
    2007     2006     2007     2006  
 
Service cost
  $ 1,865     $ 2,110     $ 423     $ 527  
Interest cost
    6,427       6,007       666       810  
Expected return on plan assets
    (8,704 )     (8,072 )            
Recognized net actuarial loss
    253       309       (127 )     31  
Other
    340       357       (51 )     (51 )
 
Net periodic benefit cost
  $ 181     $ 711     $ 911     $ 1,317  
 
Note J – Comprehensive Income
The following table summarizes the components of comprehensive income.
                 
    Three Months Ended  
    July 31,  
 
    2007     2006  
 
Net income
  $ 40,761     $ 28,724  
Other comprehensive income:
               
Foreign currency translation adjustments
    7,117       (2,283 )
Unrealized (loss) gain on available-for-sale securities
    (239 )     541  
Unrealized (loss) gain on cash flow hedging derivatives
    (310 )     1,445  
Pension and other postretirement liabilities
    (578 )     (90 )
 
Comprehensive income
  $ 46,751     $ 28,337  
 
Note K – Commitments and Contingencies
The Company, like other food manufacturers, is from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. The Company is not currently party to any pending proceedings which could reasonably be expected to have a material adverse effect on the Company.
The Company is currently involved with an environmental investigation at one of its production facilities. The former owner of the site is also involved in the investigation and is expected to have primary responsibility for the site remediation. Due to uncertainties surrounding the environmental investigation and the nature and extent of remediation, the Company’s liability cannot be reasonably estimated and measured at this time, but the Company does not anticipate the liability to have a material impact on its consolidated financial statements.

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Note L – Sale of Scotland Facility
On June 7, 2007, the Company sold its Livingston, Scotland, facility to the facility’s primary customer, Kellogg Company. The transaction generated cash proceeds of approximately $3.4 million and resulted in a pretax gain of approximately $1.9 million. The sale is consistent with the Company’s overall strategy, which is to own and market leading North American brands.
Note M – Income Taxes
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which is an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 as of May 1, 2007.
The cumulative effect of applying this interpretation has been recorded as a decrease of $2,374 to retained income. The Company’s unrecognized tax benefits upon adoption on May 1, 2007, were $19,591, of which $11,231 would affect the effective tax rate, if recognized.
In accordance with the requirements of FIN 48, uncertain tax positions have been classified in the Condensed Consolidated Balance Sheets as long-term, except to the extent payment is expected within one year. As of May 1, 2007, the long-term portion of the Company’s uncertain tax positions was $19,135. The Company recognizes net interest and penalties related to unrecognized tax benefits in income tax expense, consistent with the accounting method used prior to adopting FIN 48. As of May 1, 2007, the Company’s accrual for tax-related net interest and penalties totaled $5,247.
The Company files income tax returns in the U.S. and various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to examination of U.S. federal, state and local, or foreign income taxes for fiscal years prior to 2003. The Company is currently under examination by the Internal Revenue Service for fiscal years 2004 and 2005, and the Canadian and provincial governments for fiscal years 2003 and 2004. Although it is reasonably possible that the Company could recognize additional tax benefits relating to U.S. federal, state and local, and foreign uncertain tax positions as a result of the expiration of the statute of limitations or the conclusion of various tax examinations, any change in the amount of unrecognized tax benefits within the next twelve months is not expected to result in a significant impact to the Company’s consolidated financial statements.
The Company’s unrecognized tax benefits as of July 31, 2007, were $18,136, of which $10,430 would affect the effective tax rate, if recognized. The decrease in unrecognized tax benefits during the three months ended July 31, 2007, resulted primarily from the conclusion of tax examinations and the expiration of various statute of limitations periods.
Note N – Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The Company is currently assessing the impact of SFAS 157 on the consolidated financial statements.

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In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The Company is currently assessing the impact of SFAS 159 on the consolidated financial statements.
Note O – 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 Financial Condition and Results of Operations.
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, 2007 and 2006, respectively. Results for the quarter ended July 31, 2007, include the operations of Eagle Family Foods Holdings, Inc. (“Eagle”) since the acquisition closing date of May 1, 2007.
Net Sales
Company net sales were $561.5 million for the first quarter of fiscal 2008, an increase of seven percent compared to $526.5 million in the first quarter of 2007. Net sales for the first quarter of 2008, excluding the Canadian nonbranded, grain-based foodservice and industrial businesses sold in September 2006, increased 17 percent. The acquired Eagle businesses contributed $43.5 million in the first quarter of 2008, accounting for approximately one-half of the increase in net sales excluding the divested Canadian businesses. The Company’s Jif, Crisco, Pillsbury, and Uncrustables businesses contributed to net sales growth in the quarter, approximately one-half of which is due to pricing gains. A temporary interruption in supply of peanut butter in the market continued through the first quarter, adding to demand for the Company’s products and resulting in incremental peanut butter sales of approximately $5 to $7 million in the quarter. The Company also realized strong performance across the special markets segment where pricing gains and the impact of favorable exchange rates contributed to net sales increases.
U.S. retail market segment net sales were $418.2 million for the first quarter of 2008, up 18 percent, compared to $353.3 million in 2007. Net sales in the consumer strategic business area increased six percent for the first quarter of 2008, compared to the same period last year, led by peanut butter and Uncrustables. Net sales in the consumer oils and baking strategic business area were up 42 percent in the first quarter of 2008 compared to the first quarter of 2007. Excluding the contribution of $38.3 million from the acquired Eagle business, consumer oils and baking net sales increased 10 percent due to growth in oils, baking mixes and frostings, and the impact of the White Lily brand acquired in the second quarter of 2007.
Net sales for the special markets segment decreased from $173.2 million in the first quarter of 2007 to $143.4 million in the first quarter of 2008. Net sales in the special markets segment, excluding the divested nonbranded Canadian business, increased 14 percent in the first quarter of 2008, primarily due to a 36 percent increase in the foodservice strategic business area. Foodservice net sales increased 21 percent excluding the contribution of Eagle and net sales in beverage were up 11 percent. Canada net sales were up six percent primarily resulting from the impact of favorable exchange rates.
Operating Income
The following table presents components of operating income as a percentage of net sales.
                 
    Three Months Ended July 31,  
 
    2007     2006  
 
Gross profit
    33.1 %     30.0 %
Selling, distribution, and administrative:
               
Marketing and selling
    10.7 %     10.2 %
Distribution
    3.4       3.5  
General and administrative
    6.7       6.9  
 
Total selling, distribution, and administrative
    20.8 %     20.6 %
 
Restructuring and merger and integration
    0.1 %     0.1 %
 
Operating income
    12.2 %     9.3 %
 

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Operating income for the first quarter of 2008 increased by $19.6 million or 40 percent, compared to the first quarter of 2007 and increased from 9.3 percent of net sales to 12.2 percent. The quarter’s operating income was favorably impacted by lower restructuring charges compared to last year. In addition, the current quarter’s margins benefited from the divestiture of the lower margin, nonbranded Canadian businesses. Improved Uncrustables profitability and favorable product mix, mainly attributable to increased peanut butter sales, also contributed to margin improvement.
The Company realized significantly higher commodity costs during the quarter as compared to the same period last year. Pricing actions taken by the Company over the last several quarters helped to offset a majority of the increased costs. Commodity costs are expected to continue to rise, particularly for milk, soybean oil, wheat, and peanuts. As a result, future pricing actions are anticipated.
Selling, distribution, and administrative expenses as a percentage of net sales increased to 20.8 percent in the first quarter of 2008, from 20.6 percent in the first quarter of 2007 as marketing and selling expenses increased at a higher rate than sales.
Other
Interest expense increased by $4.0 million in the first quarter of 2008 compared to the first quarter of 2007, resulting from the issuance of $400 million in senior notes, a portion of which was used to repay short-term debt used in financing the Eagle acquisition. The investment of excess proceeds resulted in an increase in interest income of $1.5 million during the quarter compared to the first quarter last year.
In June 2007, the Company divested its industrial ingredients business in Scotland resulting in a pretax gain of $1.9 million and an after-tax gain of $0.5 million. Although the Company expects an effective tax rate for the full year of approximately 34.5 percent, the tax rate for the first quarter of 2008 was 36.1 percent due primarily to the impact of taxes associated with the divestiture of the Scotland operation and the related repatriation of foreign earnings.
Financial Condition – Liquidity and Capital Resources
                 
    Three Months Ended July 31,  
 
(Dollars in thousands)   2007     2006  
 
Net cash provided by operating activities
  $ 9,627     $ 60,808  
Net cash used for investing activities
  $ 288,600     $ 42,424  
Net cash provided by financing activities
  $ 283,655     $ 5,729  
 
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, 2007, were $392.8 million compared to $244.2 million at April 30, 2007.
Historically, the Company’s working capital requirements are greatest during the first half of its fiscal year, primarily due to the need to build inventory levels in advance of the “fall bake” season, the seasonal procurement of fruit, and the purchase of raw materials used in the Company’s pickle and relish business in Canada. The addition of the Eagle business will add further to the cash requirements during the first half of the year.
Cash provided by operating activities was approximately $9.6 million during the first quarter of 2008. The positive cash generated by operations resulted primarily from net income plus noncash charges. However, cash provided by operating activities decreased $51.2 million in the first quarter of 2008 compared to 2007, primarily resulting from an increase in inventory balances due to the building of canned milk inventory along with generally higher raw material costs.

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Net cash used for investing activities was approximately $288.6 million in the first quarter of 2008 primarily consisting of $133.4 million used for business acquisitions, primarily Eagle, the purchase of marketable securities of $144.7 million, and capital expenditures of approximately $16.8 million.
Cash provided by financing activities during the first quarter of 2008 consisted primarily of the Company’s issuance of $400 million in senior notes on May 31, 2007, offset by the repayment of $115 million of debt assumed in the Eagle acquisition.
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 2008 cash requirements, including the payment of dividends, interest on debt outstanding, payment of maturing debt, and the repurchase of common shares, if applicable.
Contractual Obligations
The following table summarizes the Company’s contractual obligations at July 31, 2007.
                                         
                                    More  
            Less     One to     Three to     Than  
            Than     Three     Five     Five  
(Dollars in millions)   Total     One Year     Years     Years     Years  
 
Long-term debt obligations
  $ 824.9     $ 33.0     $ 281.9     $ 10.0     $ 500.0  
Operating lease obligations
    8.9       1.2       2.6       2.1       3.0  
Purchase obligations
    597.0       407.5       171.0       8.5       10.0  
Other long-term liabilities
    280.8                         280.8  
 
Total
  $ 1,711.6     $ 441.7     $ 455.5     $ 20.6     $ 793.8  
 
Purchase obligations in the above table include agreements to purchase goods or services that are enforceable and legally binding on the Company. Included in this category are certain obligations related to normal, ongoing purchase obligations in which the Company has guaranteed payment to ensure availability of raw materials and packaging supplies. The Company expects to receive consideration for these purchase obligations in the form of materials. The purchase obligations in the above table do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated.
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, 2007.

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Certain Forward-Looking Statements
Certain statements included in this quarterly report contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning the Company’s current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “plans,” and similar phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. The Company is providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of the Company’s control and could cause actual results to differ materially from such statements and from the Company’s historical results and experience. These risks and uncertainties include, but are not limited to, those set forth under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K, as well as the following:
    the volatility 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 ability to successfully implement price changes;
 
    the success and cost of introducing new products and the competitive response;
 
    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;
 
    general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;
 
    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 ability of the Company to obtain any required financing;
 
    the timing and amount of capital expenditures and restructuring, and merger and integration costs;
 
    the outcome of current and future tax examinations and other tax matters, and their related impact on the Company’s tax positions;
 
    foreign currency exchange and interest rate fluctuations;
 
    the timing and cost of acquiring common shares under the Company’s share repurchase authorizations; 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. The Company’s management, including the Company’s principal executive officers and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of July 31, 2007, (the “Evaluation Date”). Based on that evaluation, the Company’s principal executive officers and principal financial officer have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring 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 SEC rules and forms.
     Changes in Internal Controls. There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended July 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1A. Risk Factors.
The Company’s business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2007, should be carefully considered, together with the other information contained or incorporated by reference in the Quarterly Report on Form 10-Q and in the Company’s other filings with the SEC, in connection with evaluating the Company, its business and the forward-looking statements contained in this Report. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial also may affect the Company. The occurrence of any of these known or unknown risks could have a material adverse impact on the Company’s business, financial condition, and results of operations.

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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  
                    Part of Publicly     May 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, 2007 - May 31, 2007
                      1,671,822  
June 1, 2007 - June 30, 2007
    306,032     $ 60.59             1,671,822  
July 1, 2007 - July 31, 2007
    6,161     $ 59.10             1,671,822  
 
 
                               
Total
    312,193     $ 60.56             1,671,822  
 
    Information set forth in the table above represents activity in the Company’s first fiscal quarter of 2008.
 
(a)   Since August 2004, the Company’s Board of Directors has authorized management to repurchase up to five million common shares as presented in the following table.
         
    Number of
    Common
Board of   Shares
Directors   Authorized for
Authorizations   Repurchase
 
August 2004     1,000,000
January 2006     2,000,000
April 2006     2,000,000
 
Total     5,000,000
 
    The repurchase of shares under the authorizations will be implemented at management’s discretion with no established expiration date. 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 a total of 3,328,178 shares from August 2004 through July 31, 2007, under the repurchase program authorized by the Company’s Board of Directors, including 1,000,000 common shares under the Company’s February 2006 Rule 10b5-1 trading plan and 1,000,000 common shares under the Company’s August 2006 Rule 10b5-1 trading plan. At July 31, 2007, 1,671,822 common shares remain available for repurchase under this program.

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Item 6. Exhibits.
See the Index of Exhibits that appears on Page No. 22 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.
         
 
       
September 7, 2007
  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
 
 
   
10.1
  Second Amendment, dated May 27, 2004, to Note Purchase Agreement, dated as of June 16, 1999.
 
   
10.2
  Third Amendment, dated May 31, 2007, to Note Purchase Agreement, dated as of June 16, 1999.
 
   
10.3
  Second Amendment, dated May 27, 2004, to Note Purchase Agreement, dated as of August 23, 2000.
 
   
10.4
  Third Amendment, dated May 31, 2007, to Note Purchase Agreement, dated as of August 23, 2000.
 
   
10.5
  First Amendment, dated May 31, 2007, to Note Purchase Agreement, dated as of May 27, 2004.
 
   
10.6
  Note Purchase Agreement, dated as of May 31, 2007, by and among The J. M. Smucker Company and each of the Purchasers signatory thereto.
 
   
10.7
  Third Amendment, dated as of May 31, 2007, to Credit Agreement, dated as of June 18, 2004, by and among The J. M. Smucker Company, as 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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