J.M. Smucker Company - 10-Q quarterly report FY

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yes þ No o

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act of 1934. Yes o No þ

The Company had 58,373,408 common shares outstanding on November 30, 2005.

The Exhibit Index is located at Sequential Page No. 23.

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

(  ) Denotes use of cash

See notes to unaudited condensed consolidated financial statements.

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 and six-month periods ended October 31, 2005, include an increase of approximately $6.7 million to net sales, or approximately $4.3 million after-tax to net income and $0.07 per share, reflecting a change in estimates of the expected liability for trade merchandising programs. Operating results for the three-month and six-month periods ended October 31, 2005, are not necessarily indicative of the results that may be expected for the year ending April 30, 2006. For further information, reference is made to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

On June 18, 2004, the Company completed its acquisition of Minneapolis-based International Multifoods Corporation (“Multifoods”) in a tax-free stock and cash transaction valued at approximately $871 million. The acquisition of Multifoods added the Pillsbury flour, baking mixes, and ready-to-spread frostings; Hungry Jack pancake mixes, syrup, and potato side dishes; Martha White baking mixes and ingredients; and Pet evaporated milk brands to the U.S. retail market business. Multifoods’ primary Canadian brands include: Robin Hood flour and baking mixes, Bick’spickles and condiments, and Golden Temple flour and rice.

Under the terms of the acquisition agreement, Multifoods’ shareholders received $25 per share in a combination of 80 percent Company common shares and 20 percent cash. Approximately $98 million in cash was paid and 8,032,997 common shares were issued to the Multifoods’ shareholders, valued at approximately $386 million using the average closing price of the Company’s common shares for three days prior to the close of the transaction. In addition, the Company repaid Multifoods’ secured debt of approximately $151 million, assumed $216 million of 6.602 percent, senior, unsecured notes, and incurred $10 million of capitalized acquisition costs. In addition, the Company incurred costs of $18.0 million and $1.3 million, in 2005 and 2004, respectively, that were directly related to the acquisition and integration of Multifoods. Due to the nature of these costs, they were expensed as incurred. The Company expects to incur an additional $12 million in acquisition and integration costs in 2006 of which $7 million was incurred through the second quarter.

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The Company determined the estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and estimates made by management. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was recorded as goodwill. The results of Multifoods’ operations are included in the Company’s consolidated financial statements from the date of the acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

The $422,796 of goodwill was assigned to the U.S. retail market and special markets and will not be deductible for tax purposes.

Upon acquisition, certain executives of Multifoods were terminated, triggering change of control provisions contained in their employment contracts. In addition, the Company centralized all administrative and supply chain functions performed in Minnetonka, Minnesota, with the Company’s existing structure to leverage existing administrative, selling, marketing, and distribution networks. As a result, the Minnetonka location closed on June 30, 2005, resulting in the relocation or involuntary termination of all employees. Severance agreements were entered into with all affected employees.

The Company has recognized the severance costs as a liability assumed as of the acquisition date, resulting in additional goodwill. The following table summarizes the activity with respect to the severance reserves established and the total amount expected to be incurred.

Note C — Stock-Based Compensation

As provided under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

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:

During 2003, the Company announced its plan to restructure certain operations as part of its ongoing efforts to refine its portfolio, optimize its production capacity, improve productivity and operating efficiencies, and improve the Company’s overall cost base as well as service levels in support of its long-

term strategy. The Company’s strategy is to own and market leading North American icon brands sold in the center of the store.

During 2004, the Company closed its fruit processing operations at its Watsonville, California, and Woodburn, Oregon, locations and subsequently sold these facilities. Uncrustables production at the West Fargo, North Dakota, location is expected to be discontinued in the first quarter of fiscal 2007. In Ripon, Wisconsin, the Company completed the combination of its two manufacturing facilities into one expanded site.

In the first quarter of 2005, the Company completed a restructuring program to streamline operations in Europe and the United Kingdom, including the exit of a contract packaging arrangement and certain segments of its retail business. During the last half of 2005, the Company completed the sale of its U.S. industrial ingredient business. In the third quarter of fiscal 2005, the Company announced its intent to discontinue operations at its Salinas, California, facility and restructure its U.S. distribution operations. The Company effectively completed the realignment of its distribution warehouses during the second quarter of 2006. The Company anticipates the Salinas facility will close and production will be relocated to plants in Orrville, Ohio, and Memphis, Tennessee, by the end of the third quarter of 2006.

Upon completion, the restructurings will result in the elimination of approximately 535 full-time positions.

The Company expects to incur total restructuring costs of approximately $40 million related to these initiatives, of which $35 million has been incurred from the fourth quarter of fiscal 2003 through the second quarter of 2006. The balance of the costs will be incurred through the first quarter of 2007. The remaining cash payments, estimated to be approximately $9 million, will be paid through the second quarter of 2007.

The following table summarizes the activity with respect to the restructuring and related asset impairment charges recorded and reserves established and the total amount expected to be incurred.

Approximately $115 and $609 of the total restructuring charges of $2,091 and $1,775 recorded in the three months ended October 31, 2005 and 2004, respectively, and $247 and $1,262 of the total restructuring charges of $3,712 and $4,783 recorded in the six months ended October 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 $16 million are being recognized over the estimated future service period of the related employees. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.

Long-lived asset charges include accelerated depreciation related to machinery and equipment that will be used at the affected production facilities until they close. Other costs include miscellaneous expenditures associated with the Company’s restructuring initiative and are expensed as incurred. These costs include employee relocation, professional fees, and other closed facility costs.

At October 31, 2005, 150,000,000 common shares were authorized. There were 58,367,914 and 58,540,386 shares outstanding at October 31, 2005, and April 30, 2005, respectively. Shares outstanding are shown net of 6,764,501 and 6,585,055 treasury shares at October 31, 2005, and April 30, 2005, respectively.

The Company operates in one industry: the manufacturing and marketing of food products. The Company has two reportable segments: U.S. retail market and special markets. The U.S. retail market segment includes the consumer spreads, oils, and baking business areas. This segment primarily represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury, Hungry Jack, Martha White, and Pet branded products to retail customers. The special markets segment is comprised of the international, foodservice, beverage, industrial, and Canada strategic business areas. Special markets segment products are distributed through retail channels, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), other food manufacturers, health and natural food stores, and in foreign countries.

The following table sets forth reportable segment information:

The following table sets forth the computation of earnings per common share and earnings per common share — assuming dilution:

The components of the Company’s net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below.

During the three-month periods ended October 31, 2005 and 2004, total comprehensive income was $51,552 and $56,430, respectively. Total comprehensive income for the six-month periods ended October 31, 2005 and 2004, was $83,183 and $88,689, 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.

In September 2002, Multifoods sold its foodservice distribution business to Wellspring Distribution Corporation (“Wellspring”) while continuing to guarantee certain real estate and tractor-trailer fleet lease obligations of the business. As a result of the Company’s acquisition of Multifoods, the Company now is obligated under these guarantees. The guarantee requires the lessor to pursue collection and other remedies against Wellspring before demanding payment from the Company. In addition, the Company’s obligation related to the tractor-trailer fleet lease is limited to 75 percent of the amount outstanding after the lessor has exhausted its remedies against Wellspring. The fleet guarantee will expire in September 2006 and the real estate guarantees will expire in September 2010.

The possibility that the Company would be required to honor the contingent liabilities under the guarantee is largely dependent upon the future operations of Wellspring and the value of the underlying leased properties. The Company currently has no liability recorded related to the guarantee. Should a reserve be required in the future, it would be recorded at the time the obligation was considered to be probable.

At October 31, 2005, the Company’s guarantees outstanding for the lease obligations of Wellspring were $11,276 related to the tractor-trailer fleet lease and $9,767 related to the real estate lease.

Certain prior year amounts have been reclassified to conform to current year classifications.

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month and six-month periods ended October 31, 2005 and 2004, respectively.

On June 18, 2004, the Company completed its acquisition of International Multifoods Corporation (“Multifoods”). The results of Multifoods are included in the Company’s consolidated financial statements from the date of the acquisition. Since the acquisition of Multifoods closed midway through the first quarter of 2005, an additional six weeks of results are included in 2006.

Company sales were $606.3 million for the second quarter of 2006, up three percent compared to $588.9 million in the second quarter of 2005. All core businesses experienced sales growth during the quarter. Excluding the U.S. industrial business, which was divested in the fourth quarter of 2005, sales were up four percent.

Sales for the six-month period ended October 31, 2005, were up 11 percent to $1,116.6 million compared to $1,002.2 million for the first six months of 2005. An additional six weeks of Multifoods sales, totaling approximately $78.8 million, were realized in this year’s first six months. Excluding the additional six weeks and the U.S. industrial business, sales were up five percent.

The three-month and six-month periods ended October 31, 2005, results include a favorable adjustment of approximately $6.7 million to sales reflecting a change in estimate of the expected liability for trade merchandising programs. The adjustment relates to the liability for trade merchandising programs offered to customers during 2005, including programs established by Multifoods prior to the acquisition. The liability was adjusted to reflect updated information pertaining to factors affecting the liability, including actual performance data, competitive programs, and changes in administration of promotional programs.

Sales in the U.S. retail market segment for the second quarter of 2006 were $429.8 million compared to $410.4 million in the second quarter of 2005, an increase of five percent. U.S. retail market sales were up three percent, excluding adjustment for the trade liability change in estimate, with the consumer business area up four percent, and the oils and baking business area up two percent. Increases in the consumer business area were driven by growth in the Smucker’s, Jif, and Hungry Jack brands, and Uncrustables in the retail channel. Results for the second quarter of 2006 include the impact of a three to four percent price increase taken in the first quarter of 2006 on U.S. fruit spreads and peanut butter items. In the consumer oils and baking business area, sales increased due to growth in the Crisco brand which was up eight percent over last year. The Criscoresults include an 11 percent increase in volume partially offset by the impact of the six percent price decrease implemented in January 2005. Sales in the baking area were flat as the Company refocused sales away from certain nontraditional customers and towards its core grocery business.

Sales in the U.S. retail market for the first six months of 2006 were $771.5 million, compared to $698.5 million last year, an increase of ten percent. The additional six weeks of Multifoods sales accounted for approximately half of the segment’s increase over the prior year. Excluding these additional sales, the segment was up five percent for the first six months driven by growth in theSmucker’s, Jif, and Crisco brands and Uncrustables.

Sales in the special markets segment for the second quarter of 2006 were $176.5 million compared to $178.5 million in the second quarter of 2005, a decrease of one percent. Excluding the discontinued U.S. industrial business, sales in the special markets segment were up four percent from the prior year. Key growth contributors for the quarter included the beverage business area, up six percent, and the foodservice business area, up nine percent due to growth in portion control and Uncrustables in the

school market. Sales of Uncrustables across all channels were approximately $22 million for the quarter and $37 million for the first six months a 22 percent increase over the comparable periods last year. Sales in Canada were down two percent as increases in the core retail business and favorable foreign exchange rate impact partially offset the planned rationalization of certain unprofitable industrial business.

Sales in the special markets for the first six months of 2006 were $345.1 million compared to $303.7 million in 2005, an increase of 14 percent. Excluding the additional Multifoods sales and the U.S. industrial business, special market sales were up five percent with growth in all other businesses.

The following table presents components of operating income as a percentage of net sales.

Operating income in the second quarter of 2006 increased $8.9 million, or 13 percent, from the second quarter last year. Operating margin improved from 11.6 percent to 12.8 percent. Gross margin improvements were driven by a more profitable mix of sales, including the impact of a four percent price increase on U.S. fruit spreads and peanut butter items in the first quarter of 2006, and improved costs in the oils and baking business area, partially offset by higher commodity and freight costs. The trade liability change in estimate contributed approximately half of the gross margin improvement.

Selling, distribution, and administrative (SD&A) expenses as a percentage of sales increased slightly from 19.6 percent to 19.8 percent primarily as a result of the planned increase in marketing costs and increased distribution costs related to the implementation of the new distribution network. These increases were partially offset by a decrease in administrative overhead costs, reflecting the Company’s efforts to offset cost pressures noted above, and lower selling expenses.

Year-to-date operating income increased $10.3 million, or nine percent, over last year and operating margin was 11.4 percent compared to 11.6 percent last year. Gross margin was down slightly due to the impact of the additional six weeks of Multifoods sales with margins that are currently below corporate average. For the first six months of 2006, SD&A as a percentage of sales increased slightly from 20.6 percent to 20.7 percent primarily as a result of increased marketing and distribution costs.

Interest expense remained relatively comparable in the second quarter of 2006 compared to last year while increasing from $10.2 million in the first six months of 2005 to $12.1 million in the first six months of 2006, as the Company realized an additional six weeks of expense on the debt associated with the acquisition of Multifoods. Interest income also increased due to higher average investment balances and an increase in interest rates.

Income taxes in the second quarter of 2006 were $26.1 million compared to $23.5 million in the second quarter of 2005, an increase of 11 percent. For the six months ended October 31, 2005 and 2004, income taxes were $41.8 million and $39.3 million, respectively, an increase of six 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 35.4 percent for the six months ended October 31, 2005, compared to 36.6 percent for the six months ended October 31, 2004 resulting from the recognition of certain tax benefits specifically identifiable to the first quarter of 2006. The Company expects a tax rate for the full year of approximately 35.5 percent.

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 October 31, 2005, were $107.4 million compared to $134.9 million at April 30, 2005.

The Company’s working capital requirements are greatest during the first half of its fiscal year. This is due primarily to the need to build inventory levels in advance of the “fall bake” season and the seasonal procurement of fruit and raw materials used in the Company’s pickle and condiment business in Canada.

Cash provided by operating activities was approximately $59.2 million during the first six months of 2006. The positive cash generated by operations resulted from the increase in income from continuing operations and an increase in noncash charges of depreciation and amortization. This was partially offset by an increase in working capital requirements consisting primarily of higher inventory and trade receivable balances. The increase in inventory balances was primarily due to the higher inventory levels necessary to support the start-up of the new distribution network, the build up of oil and baking inventory levels to support the “fall bake” season, and the seasonal procurement of pickles and various fruit varieties. The increase in trade receivable balances is due to the increase in net sales in the second quarter of 2006 compared to the fourth quarter of 2005.

Net cash used for investing activities was approximately $10.7 million in the first six months of 2006 as approximately $30.2 million utilized for capital expenditures was offset by maturities of marketable securities of approximately $16.2 million.

Cash used for financing activities during the first six months of 2006 consisted primarily of $31.4 million in dividend payments and $20.8 million to finance the purchase of treasury shares, including 398,700 common shares on the open market under a buyback program authorized by the Company’s Board of Directors in 2005. Also during the second quarter, the Company paid off its $17 million, 7.70 percent Series A Senior Notes due on September 1, 2005.

Absent any material acquisitions or other significant investments, the Company believes that cash on hand and investments, combined with cash provided by operations, and borrowings available under the revolving credit facility, will be sufficient to meet the remaining 2006 cash requirements, including the payment of dividends, repurchase of common shares, repayment of debt, and interest on debt outstanding.

The Company is exposed to market risk related to changes in interest rates, commodity prices, and foreign currency exchange rates. For further information, reference is made to the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

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:

Evaluation of disclosure controls and procedures. Based on their evaluation as of October 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 October 31, 2005, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     (a) Not applicable.

     (b) Not applicable.

     (c) Issuer Purchases of Equity Securities

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders of the Company was held on August 19, 2005. At the meeting, the names of Vincent C. Byrd, R. Douglas Cowan, and Elizabeth Valk Long were placed in nomination for the Board of Directors to serve three-year terms ending in 2008. All three nominees were elected with the results as follows:

The shareholders also voted on the ratification of the appointment of Ernst & Young LLP as the Company’s Independent Registered Public Accounting Firm for the 2006 fiscal year. The measure was approved as follows:

Item 6. Exhibits

See the Index of Exhibits that appears on Sequential Page No. 23 of this report.

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.