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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5111
THE J. M. SMUCKER COMPANY
Registrant’s telephone number, including area code: (330) 682-3000
N/A(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes þ No o
The Company had 58,412,155 common shares outstanding on February 28, 2005.
The Exhibit Index is located at Sequential Page No. 24.
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PART I. FINANCIAL INFORMATIONFinancial Statements" -->
Item 1. Financial Statements
THE J. M. SMUCKER COMPANYCONDENSED STATEMENTS OF CONSOLIDATED INCOME(UNAUDITED)
See notes to unaudited condensed consolidated financial statements.
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THE J. M. SMUCKER COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)
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THE J. M. SMUCKER COMPANYCONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS(Unaudited)
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THE J. M. SMUCKER COMPANYNOTES 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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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 and nine-month periods ended January 31, 2005, are not necessarily indicative of the results that may be expected for the year ending April 30, 2005. 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, 2004.
Note B – Multifoods Acquisition
On June 18, 2004, the Company completed its acquisition of Minneapolis-based International Multifoods Corporation (Multifoods) in a tax-free stock transaction valued at approximately $870 million. Multifoods had consolidated net sales for the fiscal year ended February 28, 2004, of approximately $908 million. With the acquisition, the Company adds an array of North American icon brands, marketed in the center of the store, to the Smucker family of brands that includesSmucker’s, Jif, and Crisco. The Company, with the acquisition of Multifoods, added the Pillsburybaking 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 and dry creamer brands to the U.S. retail business. Multifoods’ primary Canadian brands include: Robin Hood flour and baking mixes, Bick’s pickles and condiments, and Golden Temple flour and rice in the growing ethnic food category.
Under the terms of the acquisition agreement, Multifoods’ shareholders received $25 per share in a combination of 80 percent Company common shares and 20 percent cash. Approximately $98 million in cash was paid and 8,032,997 common shares were issued to 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 $152 million, assumed $216 million of 6.602 percent, senior, unsecured notes, and expects to incur approximately $90 million in acquisition related expenses primarily to be incurred in fiscal 2005. In connection with the acquisition, the Company issued $100 million of 4.78 percent, ten-year senior, unsecured notes, and entered into a revolving credit facility of $180 million provided through a group of four banks, at prevailing market interest rates.
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 analyses, 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 recorded as goodwill. The Company currently expects to complete the purchase price allocation before May 31, 2005. 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 preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
The allocation of the purchase is preliminary and subject to adjustment following completion of the valuation process. The $409,490 of goodwill will be assigned to the U.S. retail market and special markets segments upon finalization of the allocation of purchase price and will not be deductible for tax purposes.
Had the acquisition of Multifoods occurred at the beginning of 2004, unaudited, pro forma consolidated results would have been as follows:
The unaudited, pro forma consolidated results are based on the Company’s historical financial statements and those of the acquired 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.
The unaudited, pro forma consolidated results for the nine months ended January 31, 2004, combines the unaudited Consolidated Condensed Statement of Operations of Multifoods for the nine months ended November 29, 2003, with the Company’s unaudited Condensed Statement of Consolidated Income for the nine months ended January 31, 2004. The pro forma consolidated results for the nine months ended January 31, 2005, combines the unaudited Consolidated Condensed Statement of Operations of Multifoods for the period from May 1, 2004 until the date of acquisition with the Company’s Condensed Statement of Consolidated Income for the nine months ended January 31, 2005. Included in the Company’s Condensed Statement of Consolidated Income for the nine months ended January 31, 2005 are certain nonrecurring expenses associated with the acquisition and the start up of the Company’s Scottsville, Kentucky, Uncrustables plant.
Upon acquisition, certain executives of Multifoods were terminated in accordance with change in control provisions contained in their employment contracts. In addition, the Company announced plans to centralize all administrative and supply chain functions performed in Minnetonka, Minnesota, with the Company’s current structure and to leverage existing selling, marketing, and distribution networks. This centralization will result in the relocation or involuntary termination of former employees of Multifoods as business processes are consolidated. The Minnetonka location is expected to close by June 30, 2005. Severance agreements have been entered into with all affected employees.
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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 liabilities established and the total amount expected to be incurred.
Note C – Discontinued Operations
On June 16, 2004, the Company sold its Australian subsidiary, Henry Jones Foods (HJF) to SPC Ardmona Ltd. The transaction generated proceeds of approximately $35.7 million in cash and resulted in a gain of approximately $9 million ($5.7 million, net of tax). On October 6, 2004, the Company sold its Brazilian subsidiary, Smucker do Brasil, Ltda., to Cargill, Incorporated generating proceeds of approximately $6.8 million in cash and resulted in a loss of approximately $5.7 million ($3.6 million, net of tax).
In addition, on February 18, 2005, the Company sold the Multifoods U.S. foodservice and bakery products businesses, as well as the foodservice Canadian locations operated under the Gourmet Bakername, which were acquired as part of Multifoods. This sale to Value Creations Partners, Inc. generated proceeds of approximately $43 million, consisting of $33 million in cash and a $10 million subordinated promissory note.
The financial position, results of operations, and cash flows of these three businesses are reported as discontinued operations and all prior periods have been restated.
The following table summarizes the results of the discontinued operations included in the Condensed Statements of Consolidated Income.
Discontinued operations for the nine months ended January 31, 2005, includes a $2.0 million gain, net of taxes, on the divestitures of HJF and Smucker do Brasil, Ltda. Interest expense of $225 and $525 has been allocated to the Multifoods U.S. foodservice and bakery products businesses for the three-month and nine-month periods ended January 31, 2005, respectively.
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Note D – 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.
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:
Note E – Restructuring
During 2003, the Company announced its plan to restructure certain operations as part of its ongoing efforts to refine its portfolio, optimize its production capacity, improve productivity and operating efficiencies, and improve the Company’s overall cost base as well as service levels in support of its long-term strategy. The Company’s strategy is to own and market leading North American icon brands sold in the center of the store.
During 2004, the Company closed its fruit processing operations at its Watsonville, California, and Woodburn, Oregon, locations and subsequently sold these facilities. In the first quarter of 2005,Uncrustables production was discontinued at the Watsonville facility and production at the West Fargo,
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North Dakota, location is expected to be discontinued in fiscal 2006. In Ripon, Wisconsin, the Company completed the combination of its two manufacturing facilities into one expanded site.
In the first quarter of fiscal 2005, the Company completed a restructuring program to streamline operations in Europe and the United Kingdom including the exit of a contract packaging arrangement and certain segments of its retail business. In the third quarter of fiscal 2005, the Company announced its intent to sell its U.S. industrial business, discontinue operations at its Salinas, California, facility and restructure its U.S. distribution operations. Production from the Salinas facility will be relocated to plants in Orrville, Ohio, and Memphis, Tennessee by December 31, 2005.
Upon completion, the restructurings will result in the elimination of approximately 535 full-time positions.
The Company expects to incur total restructuring costs of approximately $40,000 related to these initiatives, of which $26,498 has been incurred from the fourth quarter of fiscal 2003 through January 31, 2005. The balance of the costs will be incurred through the third quarter of fiscal 2006. The remaining cash payments, estimated to be approximately $15 million, will be paid through the end of fiscal 2006.
The following table summarizes the activity with respect to the restructuring and related asset impairment charges recorded and reserves established during fiscal 2004 and 2005 and the total amount expected to be incurred.
Approximately $515 and $425 of the total restructuring charges of $3,352 and $2,499 recorded in the three months ended January 31, 2005 and 2004, respectively, and $1,777 and $3,619 of the total restructuring charges of $8,135 and $8,819 recorded in the nine months ended January 31, 2005 and 2004, respectively, were reported in costs of products sold in the accompanying Condensed Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. The restructuring costs included in costs of products sold include long-lived asset charges and inventory disposition costs. Expected employee separation costs of approximately $17 million are being recognized over the estimated future service period of the related employees. The obligation related to
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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 F – Common Shares
At January 31, 2005, 150,000,000 common shares were authorized. There were 58,254,831 and 50,174,707 shares outstanding at January 31, 2005, and April 30, 2004, respectively. Shares outstanding are shown net of 6,694,725 and 6,493,226 treasury shares at January 31, 2005, and April 30, 2004, respectively.
Note G – 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 the consumer oils and baking business areas. Prior to the acquisition of Multifoods, this segment primarily represented the domestic sales of Smucker’s, Jif, and Crisco branded products to retail customers. With the addition of Multifoods, domestic sales of Pillsbury baking products, Hungry Jack, Martha White, and Pet branded products to retail customers are now included in this segment. The special markets segment is comprised of the international, foodservice, beverage, industrial, and Canada business areas. The Canadian business acquired from Multifoods has been combined with the Company’s previous Canadian business to form the new Canada business area. Special markets segment products are distributed through/to foreign countries, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), other food manufacturers, and health and natural food stores.
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The following table sets forth reportable segment information:
Note H – Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share – assuming dilution:
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Note I – Financing Arrangements
Long-term debt consists of the following:
In connection with the acquisition of Multifoods, the Company assumed $200 million of 6.602 percent, senior, unsecured notes due November 13, 2009, with a fair value of approximately $216 million at the acquisition date. The notes assumed are guaranteed by Diageo plc. The guarantee may terminate, in a limited circumstance, prior to the maturity of the notes. In addition, on May 27, 2004, the Company issued $100 million of 4.78 percent, senior, unsecured notes due June 1, 2014.
All notes are unsecured and interest is paid annually on the notes assumed in the Multifoods acquisition and semiannually on the remaining 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.
Financing arrangements: On June 17, 2004, the Company entered into a five-year, $180 million unsecured revolving credit facility with a group of four banks. Interest on the revolving credit facility is based on prevailing U.S. Prime, Canadian Base Rate, LIBOR, or Canadian CDOR, as determined by the Company, and is payable either on a quarterly basis, or at the end of the borrowing term. At January 31, 2005, the Company had approximately $56 million outstanding under the revolving credit facility with a weighted average interest rate of 3.02 percent.
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Note J – Pension 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.
The Company expects to contribute approximately $12 million and $3 million to the pension and other postretirement benefit plans, respectively, in fiscal 2005.
Note K – Comprehensive Income
During the three-month periods ended January 31, 2005 and 2004, total comprehensive income was$30,049 and $35,019, respectively. Total comprehensive income for the nine-month periods ended January 31, 2005 and 2004, was $118,738 and $101,300, 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 L – 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 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. Should a reserve be required in the future, it would be recorded at the time the obligation was considered to be probable and estimable.
At January 31, 2005, the Company’s guarantees outstanding for the lease obligations of Wellspring were $14,613 related to the tractor/trailer fleet lease and $11,511 related to the real estate lease.
Note M – Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, Inventory Costs – An amendment of ARB No. 43 (SFAS 151). SFAS clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The Company has not yet determined the impact of adopting SFAS 151 on the results of operations or financial position.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payments (SFAS 123R). SFAS 123R is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). SFAS 123R requires that the cost of transactions involving share-based payments be recognized in the financial statements based on a fair-value-based measurement. SFAS 123R is effective for fiscal periods beginning after June 15, 2005. The adoption of SFAS 123R will not have a material impact on the Company’s results of operations or financial position.
The American Jobs Creation Act of 2004 (AJCA) was enacted on October 22, 2004. The AJCA repeals an export incentive, creates a new deduction for qualified domestic manufacturing activities, and includes a special one-time deduction of 85 percent of certain foreign earnings repatriated to the U.S. In December 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP FAS 109-1). In accordance with FSP FAS 109-1, the Company will treat the deduction for qualified domestic manufacturing activities as a special deduction in future years as realized. The deduction for qualified domestic manufacturing activities did not impact the Company’s Consolidated Financial Statements in 2005. The Company has not yet completed its evaluation of the deduction for qualified domestic manufacturing activities on the Company’s future effective tax rate. The phase-out of the export incentive is not expected to have a material impact on the Company’s effective tax rate in the future. In December 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allowing companies additional time to evaluate the effect of the AJCA on plans for reinvestment or repatriation of foreign earnings. The Company is in the process of evaluating the effects of the repatriation provision, however, the Company does not expect the impact of repatriation of foreign earnings, if any, to have a material impact on the Company’s results of operations or financial position.
Note N – 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, 2005 and 2004, respectively.
On June 18, 2004, the Company completed its acquisition of Minneapolis-based International Multifoods Corporation (Multifoods). Multifoods’ primary brands in the United States includePillsbury 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 and dry creamer. In Canada, Multifoods has market leadership positions with Robin Hood flour and baking mixes, andBick’s pickles and condiments. This transaction has been accounted for as a purchase business combination. The results of Multifoods’ operations are included in the Company’s consolidated financial statements from the date of the acquisition.
On June 16, 2004, the Company sold its Australian subsidiary, Henry Jones Foods (HJF) to SPC Ardmona Ltd. The transaction generated proceeds of approximately $35.7 million in cash and resulted in a gain of approximately $9 million ($5.7 million, net of tax). On October 6, 2004, the Company sold its Brazilian subsidiary, Smucker do Brasil, Ltda., to Cargill, Incorporated generating cash proceeds of approximately $6.8 million and resulted in a loss of approximately $5.7 million ($3.6 million, net of tax).
On February 18, 2005, the Company sold the Multifoods U.S. foodservice and bakery products businesses, as well as the foodservice Canadian locations operated under the Gourmet Baker name, which were acquired as part of Multifoods. This sale to Value Creations Partners, Inc. generated proceeds of approximately $43 million, consisting of $33 million in cash and a $10 million subordinated promissory note.
The Australian subsidiary, the Brazilian subsidiary, and the Multifoods U.S. foodservice and bakery products businesses are considered to be discontinued operations and are excluded from the discussions below.
Net Sales
Company sales were $550.2 million for the third quarter of fiscal 2005, up 60 percent compared to $343.8 million in the third quarter of 2004. The acquired Multifoods businesses contributed $187.6 million to sales in the third quarter of 2005. Excluding the contribution of Multifoods, sales were up five percent.
Sales for the nine-month period ended January 31, 2005, were up 47 percent to $1,552.4 million compared to $1,057.2 million for the first nine months of fiscal 2004. The acquired Multifoods businesses contributed $472.1 million to sales in the first nine months of 2005. Excluding the contribution of Multifoods, sales were up two percent.
The U.S. retail market segment is comprised of the Company’s consumer and consumer oils and baking business areas. This segment represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury,Hungry Jack, Martha White, and Pet branded products to retail customers.
Sales in the U.S. retail market segment for the third quarter of 2005 were $381.4 million, compared to $254.3 million in the third quarter of 2004, an increase of 50 percent. The Multifoods brands contributed $111.2 million of the segment’s sales in the quarter. Sales of Smucker’s, Jif andCrisco combined to increase over six percent compared to last year. Sales in the first nine months of 2005 were $1,079.9 million, compared to $784.2 million last year, an increase of 38 percent. The Multifoods brands contributed $277.1 million of sales for the first nine months of 2005. Excluding the contribution from Multifoods, sales in the U.S. retail market segment increased two percent in the first nine months of 2005 compared to the first nine months of last year.
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During the third quarter of 2005, sales in the consumer area increased 21 percent over the third quarter of last year, driven by the addition of Hungry Jack, growth in the Smucker’s and Jifbrands, and continued growth of Uncrustables in the retail channel. In the consumer oils and baking area, sales more than doubled in the third quarter of 2005 compared to 2004, due to the addition of the Pillsbury, Martha White, and Pet brands and a six percent increase in Crisco sales. During the third quarter of 2005, the Company implemented a six percent price decrease on Criscooil products.
The special markets segment is comprised of the international, foodservice, beverage, industrial, and Canada business areas. The Canadian business acquired from Multifoods has been combined with the Company’s previous Canadian business to form the new Canada business area.
Sales in the special markets segment were $168.9 million in the third quarter of 2005, compared to $89.5 million for the third quarter of 2004. Multifoods contributed $76.5 million of the segment’s sales in the quarter. All business areas were up with the exception of the U.S. industrial business, which the Company previously announced was being divested. Key contributors included the beverage business, up seven percent, and the foodservice business, up ten percent with growth inUncrustables in the schools market and traditional portion control items. Excluding the contribution from Multifoods and the industrial business, sales in the special markets segment increased ten percent in the third quarter of 2005 as compared to the third quarter of last year.
Sales for the first nine months of 2005 in the special markets segment were $472.5 million, compared to $272.9 million last year. Multifoods contributed $194.9 million in sales for the first nine months of 2005. Excluding the Multifoods sales and the industrial business, special markets increased six percent in the first nine months of 2005 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.
Operating income in the third quarter of 2005 increased 21 percent from the third quarter last year. As expected, operating margin decreased from 14.4 percent in the third quarter of 2004 to 10.9 percent in the third quarter of 2005. The Company’s gross margin decreased from 36.8 percent in the third quarter of last year to 31.7 percent in the third quarter of this year, due primarily to the impact of the Multifoods businesses, which currently earns a lower margin than the Company’s base business, higher raw material costs, and costs associated with the start up of the Scottsville, Kentucky facility. During the first quarter of fiscal year 2005, the Company commenced operations of its Uncrustables facility in Scottsville. As previously announced, the new facility has experienced a longer ramp-up schedule than originally anticipated. The Company incurred approximately $6.1 million in costs associated with the start-up during the third quarter of 2005 and $12.2 million during the first nine months of 2005. These costs
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consist primarily of additional labor, materials, and unabsorbed overhead. An increase in restructuring costs, and merger and integration expenses further impacted operating margin.
Year-to-date operating income increased $31.2 million or 21 percent over last year and operating margin declined from 13.7 percent to 11.4 percent, due to the same factors noted above.
Selling, distribution, and administrative expenses (SD&A) as a percentage of sales declined from 21.8 percent in the third quarter of 2004 to 19.3 percent in the current quarter. For the first nine months of 2005, SD&A as a percentage of sales declined from 21.6 percent to 20.1 percent.
Other
Interest expense increased from $1.4 million in the third quarter of 2004 to $6.2 million in the third quarter of 2005, and from $4.9 million for the first nine months of 2004 to $16.4 million in the first nine months of 2005, as a result of an increase in the Company’s debt outstanding associated with the acquisition of Multifoods.
Income taxes in the third quarter of 2005 were $20.0 million compared to $18.2 million in the third quarter of 2004, an increase of ten percent. For the nine months ended January 31, 2005 and 2004, income taxes were $59.3 million and $52.9 million, respectively, an increase of 12 percent. The increase in income taxes was less than the percent increase in income from continuing operations due to a lower consolidated effective tax rate. The consolidated effective tax rate was 36.4 percent for the nine months ended January 31, 2005, compared to 37.0 percent for the nine months ended January 31, 2004. The lower effective tax rate resulted primarily from the tax structure of the acquired Multifoods business in Canada.
Financial Condition — Liquidity and Capital Resources
The Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit instrument. Total cash and investments at January 31, 2005, were $134.4 million compared to $161.2 million at April 30, 2004, and $172.6 million at January 31, 2004. The decrease was primarily the result of the Company’s use of available funds to finance the cash portion of the Multifoods acquisition.
Historically, the Company’s working capital requirements are greatest during the first half of its fiscal year. The addition of the Multifoods businesses further increases the working capital needs during the first six months of the fiscal year. This is due primarily to the need to build inventory levels in advance of the “fall bake” season and the seasonal procurement of raw materials used in the Company’s pickle and condiment business in Canada. Working capital, excluding cash and short-term investments, as a percent of twelve month sales decreased from 9.6 percent for the rolling twelve month period ended January 31, 2004, to 5.4 percent for the rolling twelve month period ended January 31, 2005.
Cash provided by operating activities was approximately $121 million during the first nine months of 2005. The positive cash generated during the first nine months resulted from the increase in income from continuing operations partially offset by increases in working capital requirements. The increase in working capital consisted primarily of higher inventory balances and a reduction in accounts payable and other current liabilities.
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Net cash used for investing activities in the first nine months of the year included the use of approximately $99 million in cash to finance the Multifoods acquisition, offset by the proceeds from the sale of HJF and the Brazilian subsidiary. Capital expenditures were approximately $50 million during the first nine months of 2005. This compares to $71 million for the comparable period last year. The majority of the capital expenditures during the comparable period last year were associated with the construction of the Uncrustables plant in Scottsville, Kentucky. The Company expects capital expenditures of approximately $70 million for the full 2005 fiscal year. The Company expects to incur approximately $90 million in merger related costs with the majority of the cash payments to occur in 2005.
During the first quarter of 2005, the Company entered into two separate financing arrangements in order to provide the necessary funding requirements to complete the acquisition. On May 27, 2004, the Company issued $100 million of 4.78 percent, senior, unsecured notes due June 1, 2014. Subsequently, on June 18, 2004, the Company entered into a five-year, $180 million unsecured revolving credit facility with a group of four banks. Interest on this bank debt is based on prevailing U.S. Prime, Canadian Base Rate, LIBOR, or Canadian CDOR, as determined by the Company, and is payable either on a quarterly basis, or at the end of the borrowing term.
At January 31, 2005, the Company had a balance outstanding of approximately $56 million against the revolver. The Company used the proceeds to retire Multifoods’ debt outstanding at the time of the closing of the acquisition, to fund merger related costs incurred during the first nine months of 2005, and to provide for working capital requirements. In addition, the Company paid dividends of $42 million during the first nine months of 2005. During the third quarter, the Company paid down approximately $25 million of the borrowings against the revolver.
During the second quarter of 2005, the Company’s Board of Directors authorized management to repurchase up to one million shares of its common stock. The buyback program will be implemented throughout the fiscal year, and beyond if necessary, at management’s discretion. In conjunction with this program, on October 13, 2004, the Company announced a voluntary odd-lot program which allowed shareholders with fewer than 100 shares to either sell all of their shares or to purchase additional shares to increase their holdings up to 100 shares. The program ended on December 17, 2004, and the Company repurchased 59,478 common shares after taking into effect shareholders who opted to increase their holdings to 100 shares. In addition to the voluntary odd-lot program, the Company repurchased 309,200 shares on the open market through January 31, 2005. The Company used cash of approximately $17 million for these repurchases. As a result of these activities, the Company has reduced its shareholder base by approximately 63,000 shareholders or approximately 13 percent.
In conjunction with the acquisition of Multifoods, the Company has assumed certain guarantees that resulted from the sale by Multifoods, in September 2002, of its foodservice distribution business to Wellspring Distribution Corporation (Wellspring). These guarantees relate to certain real estate and tractor/trailer fleet lease obligations of the business. 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 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. At January 31, 2005, the Company’s outstanding guarantees for the lease obligations of Wellspring were $14.6 million related to the tractor/trailer fleet lease and $11.5 million related to the real estate lease.
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Assuming there are no other material acquisitions or other significant investments, the Company believes that cash on hand and investments combined with cash provided by operations, proceeds from the sale of the Company’s industrial business and the Multifoods U.S. foodservice and bakery products business, and borrowings available under the revolving credit facility, will be sufficient to meet the remainder of its 2005 cash requirements, including the payment of dividends, repurchase of common shares, and interest on debt outstanding.
Subsequent to the end of the quarter, a major U.S. food retailer declared Chapter 11 bankruptcy. The Company’s exposure related to this customer is not considered material.
Contractual Obligations
The following table summarizes the Company’s contractual obligations at January 31, 2005.
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, 2004.
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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:
Sequential PageNo. 21Controls and Procedures" -->
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation as of January 31, 2005, the Company’s principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls. In addition, no change in internal control over financial reporting occurred during the quarter ended January 31, 2005, 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 INFORMATIONLegal Proceedings" -->
Item 1. Legal Proceedings
On October 7, 2004, the Company entered into a Settlement Agreement with all plaintiffs and their counsel in all of the Simply 100% Fruit cases. On February 10, 2005, the Court in the lead case of Smith v JM Smucker Co (No. 03 CH 08522, Circuit Court of Illinois, Cook County, Chancery Division), granted final approval of the settlement agreement. The costs associated with the settlement of these suits will not have a material impact on the results of operations, financial position, or cash flows of the Company.
The Company continues to vigorously defend the two Dickinson’s Purely Fruit cases.Unregistered Sales of Equity Securities and Use of Proceeds" -->
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities
Item 6. Exhibits
See the Index of Exhibits that appears on Sequential Page No. 24 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.
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INDEX OF EXHIBITS