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 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 filerþ   Accelerated filero   Non-accelerated filer o

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

The Company had 58,204,661 common shares outstanding on February 28, 2006.

The Exhibit Index is located at Sequential Page No. 21.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine-month period ended January 31, 2006, include an increase of approximately $6.7 million to net sales, or approximately $4.3 million after-tax to net income and $0.07 per share, reflecting a change in estimates of the expected liability for trade merchandising programs. Operating results for the three-month and nine-month periods ended January 31, 2006, are not necessarily indicative of the results that may be expected for the year ending April 30, 2006. For further information, reference is made to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

The Condensed Statement of Consolidated Cash Flows for the nine months ended January 31, 2005, has been revised to separately disclose the operating, investing, and financing activities of the cash flows attributable to the Company’s discontinued operations, which were previously reported on a combined basis.

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

Under the terms of the acquisition agreement, Multifoods’ shareholders received $25 per share in a combination of 80 percent Company common shares and 20 percent cash. Approximately $98 million in cash was paid and 8,032,997 common shares were issued to the Multifoods’ shareholders, valued at approximately $386 million using the average closing price of the Company’s common shares for three days prior to the close of the transaction. In addition, the Company repaid Multifoods’ secured debt of approximately $151 million, assumed $216 million of 6.602 percent, senior, unsecured notes, and incurred $10 million of capitalized acquisition costs. In addition, the Company incurred costs of $18.0 million and $1.3 million, in 2005 and 2004, respectively, that were directly related to the acquisition and integration of Multifoods. Due to the nature of these costs, they were expensed as incurred. The Company expects to incur an additional $17 million in acquisition and integration costs in 2006 of which $14.8 million was incurred through the third quarter.

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

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.

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. In Ripon, Wisconsin, the Company completed the combination of its two manufacturing facilities into one expanded site.

In the first quarter of 2005, the Company completed a restructuring program to streamline operations in Europe and the United Kingdom, including the exit of a contract packaging arrangement and certain segments of its retail business. During the last half of 2005, the Company completed the sale of its U.S. industrial ingredient business. In the third quarter of fiscal 2005, the Company announced its intent to discontinue operations at its Salinas, California, facility and restructure its U.S. distribution operations. The Company effectively completed the realignment of its distribution warehouses during the second quarter of 2006. The Salinas facility was sold in January 2006, and production was relocated to plants in Orrville, Ohio, and Memphis, Tennessee.Uncrustables production at the West Fargo, North Dakota, location is expected to be discontinued in the first quarter of fiscal 2007.

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

The Company expects to incur total restructuring costs of approximately $46 million related to these initiatives, of which $40.8 million has been incurred from the fourth quarter of fiscal 2003 through the third quarter of 2006. The balance of the costs will be incurred through the first quarter of 2007. The remaining cash payments, estimated to be approximately $5 million, will be paid through the second quarter of 2007.

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

Approximately $618 and $515 of the total restructuring charges of $5,401 and $3,352 recorded in the three months ended January 31, 2006 and 2005, respectively, and $865 and $1,777 of the total restructuring charges of $9,113 and $8,135 recorded in the nine months ended January 31, 2006 and

2005, respectively, were reported in costs of products sold in the accompanying Condensed Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. The restructuring costs included in costs of products sold include long-lived asset charges and inventory disposition costs. Total expected employee separation costs of approximately $16.7 million are being recognized over the estimated future service period of the related employees. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.

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

At January 31, 2006, 150,000,000 common shares were authorized. There were 58,193,430 and 58,540,386 shares outstanding at January 31, 2006, and April 30, 2005, respectively. Shares outstanding are shown net of 6,939,088 and 6,585,055 treasury shares at January 31, 2006, and April 30, 2005, respectively.

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 January 31, 2006 and 2005, total comprehensive income was $36,844 and $30,049 respectively. Total comprehensive income for the nine-month periods ended January 31, 2006 and 2005, was $120,027 and $118,738, respectively. Comprehensive income consists of net income, foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains and losses on available-for-sale securities, and unrealized gains and losses on commodity hedging activity, net of income taxes.

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 January 31, 2006, the Company’s guarantees outstanding for the lease obligations of Wellspring were $10,266 related to the tractor-trailer fleet lease and $9,193 related to the real estate lease.

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

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three-month and nine-month periods ended January 31, 2006 and 2005, respectively.

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

Company sales were $536.5 million for the third quarter of 2006, down three percent compared to $550.2 million in the third quarter of 2005. Excluding the U.S. industrial business, which was divested in the fourth quarter of 2005, sales were down one percent for the quarter. The quarter’s results were adversely affected by a decrease in sales in the consumer oils and baking business area due to an overall decline in the categories during December and January and unplanned inventory reductions by certain key customers.

Sales for the nine-month period ended January 31, 2006, were up six percent to $1,653.0 million compared to $1,552.4 million for the first nine months of 2005. An additional six weeks of Multifoods sales, totaling approximately $78.8 million, were realized in the first nine months. Excluding the additional six weeks and the U.S. industrial business, sales were up three percent.

Results for the nine-month period ended January 31, 2006, include a favorable adjustment of approximately $6.7 million to sales reflecting a change in estimate of the expected liability for trade merchandising programs. The adjustment relates to the liability for trade merchandising programs offered to customers during 2005, including programs established by Multifoods prior to the acquisition. The liability was adjusted to reflect updated information pertaining to factors affecting the liability, including actual performance data, competitive programs, and changes in administration of promotional programs.

Sales in the U.S. retail market segment for the third quarter of 2006 were $375.8 million compared to $381.4 million in the third quarter of 2005, a decrease of one percent. During the third quarter of 2006, sales in the consumer business area increased four percent over the third quarter of 2005 as sales of fruit spreads, toppings, and peanut butter were all up. Solid performance in the Hungry Jack brand and significant growth in Uncrustables also contributed. In the consumer oils and baking business area, sales for the quarter were down eight percent as the Company faced significant competitive activity in addition to the decrease in categories and customer inventory reductions noted above. Crisco branded sales were down ten percent, and the baking brands decreased six percent in the third quarter of 2006 compared to 2005.

Sales in the U.S. retail market segment for the first nine months of 2006 were $1,147.2 million, compared to $1,079.9 million for the comparable period in 2005, an increase of six percent. The additional six weeks of Multifoods sales accounted for approximately half of the segment’s increase over the prior year.

For the first nine months of 2006, sales in the consumer business area were up seven percent compared to last year. Excluding the additional six weeks, sales in the oils and baking business area were down one percent for the first nine months of 2006 compared to the same period in 2005. Although sales of Crisco were up over last year for the first nine months, much of the gain was given back in December and January as a result of lower sell through and inventory reductions by key customers. Sales of Crisco were also impacted by a six percent price decrease taken in January 2005, as Crisco volume increased in 2006 over 2005. The Pillsbury brand had a solid first six months but reflected similar declines in the category during December and January. Sales in the consumer oils and baking business area were up

slightly during the “fall bake” period running from September through December, compared to the same period last year.

Sales in the special markets segment for the third quarter of 2006 were $160.7 million compared to $168.9 million in the third quarter of 2005, a decrease of five percent. Excluding the U.S. industrial business, sales in the special markets segment were up two percent in the third quarter of 2006 compared to 2005. Key growth contributors for the quarter included the beverage business area, up 16 percent, and the foodservice business area, up five percent. In the foodservice business area sales increased in both the traditional and schools markets. Sales in Canada were down six percent, as increases in the retail spreads business and the impact of favorable exchange rates partially offset declines in baking and the planned rationalization of certain unprofitable businesses.

Sales in the special markets segment for the nine-month period ended January 31, 2006, were $505.8 million compared to $472.5 million in 2005, an increase of seven percent. Excluding the additional Multifoods sales and the U.S. industrial business, sales in the special markets segment increased four percent in the first nine months of 2006 as compared to the first nine months of last year.

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

Operating income in the third quarter of 2006 decreased $12.0 million, or 20 percent, from the third quarter last year. Operating margin for the third quarter decreased from 10.9 percent in 2005 to 8.9 percent in 2006. Approximately one-half of the decline in operating margin for the quarter was due to the increase in restructuring and merger and integration costs over last year. The remainder was due to changes in gross margin. Gross margin declined primarily due to the volume decrease in the consumer oils and baking business area, increased trade merchandising expenses, and higher commodity and freight costs.

Selling, distribution, and administrative (“SD&A”) expenses as a percentage of sales in the third quarter of 2006 remained consistent with 2005 at 19.3 percent as increased costs of approximately $4 million associated with the Company’s new distribution network were offset by a reduction in marketing and selling expenses and lower administrative overhead costs.

Year-to-date operating income decreased $1.8 million, or one percent, compared to last year and operating margin was 10.6 percent compared to 11.4 percent last year. Gross margin was down to 32.2 percent from 32.7 percent due to the impact of the additional six weeks of Multifoods sales with margins that are currently below corporate average, as well as higher commodity and freight costs. For the first nine months of 2006, SD&A as a percentage of sales increased slightly from 20.1 percent to 20.2 percent primarily as a result of increased distribution costs. During the same period, restructuring and

merger and integration costs increased $3.9 million, or as a percentage of sales, from 1.2 percent to 1.4 percent.

Interest expense decreased slightly from $6.2 million in the third quarter of 2005 to $6.0 million in the third quarter of 2006 reflecting a decrease in the notes payable balance and the payoff of $17 million in long-term debt in September 2005. Year-to-date interest expense increased from $16.4 million in the first nine months of 2005 to $18.1 million in the first nine months of 2006, as the Company realized an additional six weeks of interest expense on the debt associated with the acquisition of Multifoods. Interest income, for both the three-month and nine-month periods, increased due to higher average investment balances and an increase in interest rates.

During the third quarter of 2006, the Company completed its restructuring efforts around its Salinas, California, manufacturing and distribution facility and completed the sale of the property generating cash proceeds of $8.8 million and a gain on the sale of $5.6 million resulting in the increase in other income in the third quarter and first nine months of 2006 compared to applicable periods in 2005.

Income taxes in the third quarter of 2006 were $18.3 million compared to $20.0 million in the third quarter of 2005, a decrease of nine percent. For the nine months ended January 31, 2006 and 2005, income taxes were $60.1 million and $59.3 million, respectively, an increase of one percent. The change in income taxes was less than the percent change in income from continuing operations due to a lower consolidated effective tax rate. The consolidated effective tax rate was 35.8 percent for the nine months ended January 31, 2006, compared to 36.4 percent for the nine months ended January 31, 2005 resulting from the recognition of certain tax benefits specifically identifiable to the first nine months of 2006. The Company expects a tax rate for the full year of approximately 35.8 percent.

The Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit instrument. Total cash and investments at January 31, 2006, were $141.4 million compared to $134.9 million at April 30, 2005.

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

Cash provided by operating activities was approximately $124.6 million during the first nine months of 2006. The positive cash generated by operations resulted from the increase in net income adjusted for noncash charges of depreciation and amortization and collection of accounts receivable. This was partially offset by an increase in working capital requirements consisting primarily of higher inventory balances and payments made to trade creditors. The increase in inventory balances was primarily due to the higher inventory levels necessary to support the new distribution network and increased raw material costs.

Net cash used for investing activities was approximately $0.6 million in the first nine months of 2006 as approximately $42.7 million utilized for capital expenditures was mostly offset by maturities of marketable securities of approximately $28.9 million and proceeds from the sale of the Salinas facility.

Cash used for financing activities during the first nine months of 2006 consisted primarily of $47.0 million in dividend payments and $30.1 million to finance stock repurchases, including 598,700 common shares repurchased on the open market under a buyback program authorized by the Company’s Board of Directors in 2005. During the third quarter the Company purchased 200,000 shares toward the previously authorized one million shares leaving approximately 30,000 shares remaining under the original buyback program. In January 2006, the Company’s Board of Directors authorized an increase to its share repurchase plan. Under the plan, the Company is authorized to purchase an additional two million common shares. The buyback program will be implemented at management’s discretion. Also during the first nine months of the fiscal year, the Company paid off its $17 million, 7.70 percent Series A Senior Notes due on September 1, 2005.

On January 31, 2006, the Company amended its revolving credit facility. The primary reason for the amendment was to take advantage of a more favorable fee structure, extend the commitment period for five years from the amendment date, and reduce the number of participating banks from four to three.

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

On February 24, 2006, The Company announced that it had entered into a Rule 10b5-1 trading plan (“the Plan”) with a broker to facilitate the repurchase of up to one million common shares. The shares to be repurchased under the Plan would be part of the share repurchase authorization approved by the Company’s Board of Directors in January 2006 to repurchase up to two million common shares.

Purchases will be affected by a broker and will be based upon the guidelines and parameters of the Plan. The share purchase period commenced on February 27, 2006, and concluded on March 8, 2006, with one million shares repurchased under the Plan.

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 January 31, 2006, the Company’s principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls. In addition, no change in internal control over financial reporting occurred during the quarter ended January 31, 2006, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

See the Index of Exhibits that appears on Sequential Page No. 21 of this report.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.