FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-5111
THE J. M. SMUCKER COMPANY
(Exact name of registrant as specified in its charter)
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Ohio
(State or other jurisdiction of incorporation or
organization)
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34-0538550
(I.R.S. Employer Identification No.) |
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One Strawberry Lane
Orrville, Ohio
(Address of principal executive offices)
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44667-0280
(Zip code) |
Registrants 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company 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 118,949,244 common shares outstanding on August, 31, 2009.
The Exhibit Index is located at Page No. 25.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
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Three Months Ended July 31, |
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2009 |
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2008 |
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(Dollars in thousands, |
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except per share data) |
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Net sales |
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$ |
1,051,526 |
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$ |
663,657 |
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Cost of products sold |
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645,497 |
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455,878 |
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Gross Profit |
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406,029 |
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207,779 |
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Selling, distribution, and administrative expenses |
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201,177 |
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130,413 |
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Amortization |
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18,377 |
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1,471 |
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Merger and integration costs |
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16,476 |
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3,400 |
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Restructuring costs |
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519 |
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Other operating expense net |
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1,438 |
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148 |
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Operating Income |
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168,561 |
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71,828 |
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Interest income |
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1,371 |
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1,338 |
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Interest expense |
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(18,951 |
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(10,744 |
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Other income net |
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253 |
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1,025 |
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Income Before Income Taxes |
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151,234 |
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63,447 |
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Income taxes |
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53,171 |
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21,156 |
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Net Income |
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$ |
98,063 |
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$ |
42,291 |
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Earnings per common share: |
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Net Income |
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$ |
0.83 |
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$ |
0.77 |
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Net Income Assuming Dilution |
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$ |
0.83 |
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$ |
0.77 |
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Dividends declared per common share |
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$ |
0.35 |
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$ |
0.32 |
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See notes to unaudited condensed consolidated financial statements.
2
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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July 31, 2009 |
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April 30, 2009 |
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(Dollars in thousands) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
289,772 |
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$ |
456,693 |
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Trade receivables, less allowances |
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307,507 |
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266,037 |
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Inventories: |
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Finished products |
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497,619 |
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409,592 |
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Raw materials |
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289,223 |
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194,334 |
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786,842 |
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603,926 |
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Other current assets |
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58,318 |
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72,235 |
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Total Current Assets |
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1,442,439 |
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1,398,891 |
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PROPERTY, PLANT, AND EQUIPMENT |
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Land and land improvements |
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54,772 |
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51,131 |
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Buildings and fixtures |
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283,183 |
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273,343 |
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Machinery and equipment |
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921,689 |
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901,614 |
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Construction in progress |
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45,399 |
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48,593 |
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1,305,043 |
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1,274,681 |
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Accumulated depreciation |
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(466,653 |
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(436,248 |
) |
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Total Property, Plant, and Equipment |
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838,390 |
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838,433 |
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OTHER NONCURRENT ASSETS |
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Goodwill |
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2,802,806 |
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2,791,391 |
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Other intangible assets, net |
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3,088,440 |
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3,098,976 |
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Marketable securities |
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10,511 |
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12,813 |
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Other noncurrent assets |
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52,173 |
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51,657 |
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Total Other Noncurrent Assets |
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5,953,930 |
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5,954,837 |
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$ |
8,234,759 |
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$ |
8,192,161 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
196,129 |
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$ |
198,954 |
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Note payable |
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350,000 |
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350,000 |
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Current portion of long-term debt |
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200,986 |
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276,726 |
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Other current liabilities |
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253,638 |
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235,556 |
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Total Current Liabilities |
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1,000,753 |
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1,061,236 |
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NONCURRENT LIABILITIES |
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Long-term debt |
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910,000 |
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910,000 |
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Deferred income taxes |
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1,149,669 |
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1,145,808 |
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Other noncurrent liabilities |
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140,007 |
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135,186 |
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Total Noncurrent Liabilities |
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2,199,676 |
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2,190,994 |
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SHAREHOLDERS EQUITY |
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Common shares |
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29,736 |
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29,606 |
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Additional capital |
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4,558,946 |
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4,547,921 |
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Retained income |
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481,013 |
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424,504 |
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Amount due from ESOP Trust |
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(4,069 |
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(4,830 |
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Accumulated other comprehensive loss |
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(31,296 |
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(57,270 |
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Total Shareholders Equity |
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5,034,330 |
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4,939,931 |
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$ |
8,234,759 |
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$ |
8,192,161 |
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See notes to unaudited condensed consolidated financial statements.
3
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
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Three Months Ended July 31, |
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2009 |
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2008 |
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(Dollars in thousands) |
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OPERATING ACTIVITIES |
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Net income |
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$ |
98,063 |
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$ |
42,291 |
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Adjustments to reconcile net income to net cash provided by |
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operating activities: |
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Depreciation |
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25,271 |
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15,036 |
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Amortization |
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18,377 |
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1,471 |
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Share-based compensation expense |
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6,412 |
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2,799 |
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Changes in assets and liabilities, net of effect from
businesses acquired: |
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Trade receivables |
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(38,672 |
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(20,757 |
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Inventories |
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(174,957 |
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(80,937 |
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Accounts payable and accrued items |
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16,453 |
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73,901 |
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Other adjustments |
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22,821 |
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26,372 |
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Net cash (used for) provided by operating activities |
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(26,232 |
) |
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60,176 |
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INVESTING ACTIVITIES |
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Businesses acquired, net of cash acquired |
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(55,593 |
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Additions to property, plant, and equipment |
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(27,271 |
) |
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(22,197 |
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Maturities of marketable securities |
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2,404 |
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452 |
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Disposals of property, plant, and equipment |
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384 |
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1,072 |
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Other net |
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(160 |
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170 |
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Net cash used for investing activities |
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(24,643 |
) |
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(76,096 |
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FINANCING ACTIVITIES |
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Repayments of long-term debt |
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(75,000 |
) |
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Dividends paid |
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(41,407 |
) |
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(17,451 |
) |
Purchase of treasury shares |
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(4,873 |
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(3,356 |
) |
Proceeds from stock option exercises |
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1,202 |
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633 |
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Other net |
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713 |
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(311 |
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Net cash used for financing activities |
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(119,365 |
) |
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(20,485 |
) |
Effect of exchange rate changes |
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3,319 |
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(398 |
) |
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Net decrease in cash and cash equivalents |
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(166,921 |
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(36,803 |
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Cash and cash equivalents at beginning of period |
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456,693 |
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171,541 |
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Cash and cash equivalents at end of period |
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$ |
289,772 |
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$ |
134,738 |
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( ) Denotes use of cash
See notes to unaudited condensed consolidated financial statements.
4
THE J. M. SMUCKER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the U.S. for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting
principles in the U.S. for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. Operating results for
the three-month period ended July 31, 2009, are not necessarily indicative of the results that may
be expected for the year ending April 30, 2010. For further information, reference is made to the
consolidated financial statements and footnotes included in the Companys Annual Report on Form
10-K for the year ended April 30, 2009.
Note B Folgers Merger
On November 6, 2008, the Company merged The Folgers Coffee Company (Folgers), a subsidiary of The
Procter & Gamble Company (P&G), with a wholly-owned subsidiary of the Company. Under the terms
of the agreement, P&G distributed the Folgers common shares to electing P&G shareholders in a
tax-free transaction, which was immediately followed by the conversion of Folgers common stock into
Company common shares. As a result of the merger, Folgers became a wholly-owned subsidiary of the
Company. In the merger, P&G shareholders received approximately 63.2 million common shares of the
Company valued at approximately $3,366.4 million based on the average closing price of the
Companys common shares for the period beginning two trading days before and concluding two trading
days after the announcement of the transaction on June 4, 2008. After closing of the transaction
on November 6, 2008, the Company had approximately 118 million common shares outstanding. As part
of the transaction, the Companys debt obligations increased by $350.0 million as a result of
Folgers LIBOR-based variable rate note.
The transaction with Folgers, the leading producer of retail packaged coffee products in the United
States, is consistent with the Companys strategy to own and market number one brands in North
America. For accounting purposes, the Company is the acquiring enterprise. The merger was
accounted for as a purchase business combination. Accordingly, the results of the Folgers business
are included in the Companys consolidated financial statements from the date of the merger. The
aggregate purchase price was approximately $3,735.8 million, including $19.4 million of capitalized
transaction related expenses. In addition, the Company incurred costs of $79.5 million to date,
that were directly related to the merger and integration of Folgers. Due to the nature of these
costs, they were expensed as incurred. Total transaction costs of $98.9 million incurred to date
include approximately $9.9 million in noncash expense items.
The Folgers purchase price was allocated to the underlying assets acquired and liabilities assumed
based upon their estimated fair values at the date of the merger. The Company determined the
estimated fair values with the assistance of independent appraisals, discounted cash flow analyses,
quoted market prices, and estimates made by management. To the extent the purchase price exceeded
the fair value of the net identifiable tangible and intangible assets acquired, such excess was
allocated to goodwill.
5
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the transaction date.
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Assets acquired: |
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Current assets |
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$ |
300,588 |
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Property, plant, and equipment |
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317,574 |
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Intangible assets |
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2,515,000 |
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Goodwill |
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1,642,744 |
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Other noncurrent assets |
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4,278 |
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Total assets acquired |
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$ |
4,780,184 |
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Liabilities assumed: |
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Current liabilities |
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$ |
85,463 |
|
Deferred tax liabilities |
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|
955,217 |
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Noncurrent liabilities |
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|
3,750 |
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Total liabilities assumed |
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$ |
1,044,430 |
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Net assets acquired |
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$ |
3,735,754 |
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|
The Company has completed its valuation of Folgers property, plant, and equipment and intangible
assets. However, the purchase price allocation is subject to final adjustment pending the
completion of the Companys analysis of certain acquired tax attributes and tax positions.
Had the merger occurred on May 1, 2008, unaudited, pro forma consolidated results would have been
as follows:
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Three Months Ended |
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July 31, 2008 |
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Net sales |
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$ |
1,054,505 |
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Net income |
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|
69,034 |
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Net income per common share assuming dilution |
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|
0.59 |
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|
The unaudited, pro forma consolidated results are based on the Companys historical financial
statements and those of the Folgers business and do not necessarily indicate the results of
operations that would have resulted had the merger been completed at the beginning of the
applicable period presented. The unaudited, pro forma consolidated results do not give effect to
the synergies of the merger and are not indicative of the results of operations in future periods.
Note C Share-Based Payments
The Company provides for equity-based incentives to be awarded to key employees and nonemployee
directors. These incentives are administered through various plans, and currently consist of
restricted shares, restricted stock units, deferred shares, deferred stock units, performance
units, and stock options.
Compensation expense related to share-based awards was $6,412 and $2,799 for the three months ended
July 31, 2009 and 2008, respectively. Of the total compensation expense for share-based awards
recorded, $1,859 is included in merger and integration costs in the Condensed Statements of
Consolidated Income for the three months ended July 31, 2009. The related tax benefit recognized
was $2,254 and $933 for the three months ended July 31, 2009 and 2008, respectively.
As of July 31, 2009, total compensation cost related to nonvested share-based awards not yet
recognized was approximately $45,551. The weighted-average period over which this amount is
expected to be recognized is approximately 3.2 years.
6
Note D Common Shares
At July 31, 2009, 150,000,000 common shares were authorized. There were 118,943,477 and
118,422,123 shares outstanding at July 31, 2009 and April 30, 2009, respectively. Shares
outstanding are shown net of 9,660,688 and 10,179,989 treasury shares at July 31, 2009 and April
30, 2009, respectively.
Note E Reportable Segments
The Company operates in one industry: the manufacturing and marketing of food products. The
Company has four reportable segments: U.S. retail coffee market, U.S. retail consumer market, U.S.
retail oils and baking market, and special markets. The U.S. retail coffee market segment
represents the domestic sales of Folgers®, Dunkin Donuts®, and Millstone® branded coffee to retail
customers; the U.S. retail consumer market segment primarily includes domestic sales of Smuckers®,
Jif®, and Hungry Jack® branded products; the U.S. retail oils and baking market segment includes
domestic sales of Crisco®, Pillsbury®, Eagle Brand®, Martha White®, and White Lily® branded
products; and the special markets segment is comprised of the Canada, foodservice, natural foods
(formerly beverage), and international strategic business areas. Special markets segment products
are distributed domestically and in foreign countries through retail channels, foodservice
distributors and operators (i.e., restaurants, schools and universities, health care operations),
and health and natural foods stores and distributors.
The following table sets forth reportable segment information.
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Three Months Ended July 31, |
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|
2009 |
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|
2008 |
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|
Net sales: |
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|
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|
U.S. retail coffee market |
|
$ |
366,229 |
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|
$ |
|
|
U.S. retail consumer market |
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|
291,002 |
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|
273,976 |
|
U.S. retail oils and baking market |
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|
194,416 |
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|
198,165 |
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Special markets |
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|
199,879 |
|
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|
191,516 |
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Total net sales |
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$ |
1,051,526 |
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$ |
663,657 |
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Segment profit: |
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|
U.S. retail coffee market |
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$ |
127,311 |
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|
$ |
|
|
U.S. retail consumer market |
|
|
66,979 |
|
|
|
59,795 |
|
U.S. retail oils and baking market |
|
|
28,616 |
|
|
|
28,066 |
|
Special markets |
|
|
28,219 |
|
|
|
20,738 |
|
|
Total segment profit |
|
$ |
251,125 |
|
|
$ |
108,599 |
|
|
Interest income |
|
|
1,371 |
|
|
|
1,338 |
|
Interest expense |
|
|
(18,951 |
) |
|
|
(10,744 |
) |
Amortization |
|
|
(18,377 |
) |
|
|
(1,471 |
) |
Share-based compensation expense |
|
|
(4,553 |
) |
|
|
(2,799 |
) |
Restructuring costs |
|
|
|
|
|
|
(519 |
) |
Merger and integration costs |
|
|
(16,476 |
) |
|
|
(3,400 |
) |
Corporate administrative expenses |
|
|
(39,801 |
) |
|
|
(28,892 |
) |
Other unallocated (expense) income |
|
|
(3,104 |
) |
|
|
1,335 |
|
|
Income before income taxes |
|
$ |
151,234 |
|
|
$ |
63,447 |
|
|
7
Note F Debt and Financing Arrangements
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
April 30, 2009 |
|
|
6.77% Senior Notes due June 1, 2009 |
|
$ |
|
|
|
$ |
75,000 |
|
6.60% Senior Notes due November 13, 2009 |
|
|
200,986 |
|
|
|
201,726 |
|
7.94% Series C Senior Notes due
September 1, 2010 |
|
|
10,000 |
|
|
|
10,000 |
|
4.78% Senior Notes due June 1, 2014 |
|
|
100,000 |
|
|
|
100,000 |
|
6.12% Senior Notes due November 1, 2015 |
|
|
24,000 |
|
|
|
24,000 |
|
6.63% Senior Notes due November 1, 2018 |
|
|
376,000 |
|
|
|
376,000 |
|
5.55% Senior Notes due April 1, 2022 |
|
|
400,000 |
|
|
|
400,000 |
|
|
Total long-term debt |
|
$ |
1,110,986 |
|
|
$ |
1,186,726 |
|
Current portion of long-term debt |
|
|
200,986 |
|
|
|
276,726 |
|
|
Total long-term debt less current portion |
|
$ |
910,000 |
|
|
$ |
910,000 |
|
|
All of the Companys Senior Notes are unsecured and interest is paid annually on the 6.60 percent
Senior Notes and semiannually on the other notes. Prepayments are required on the 5.55 percent
Senior Notes, the first of which is $50.0 million on April 1, 2013. The 6.60 percent Senior Notes
are guaranteed by Diageo plc, an unrelated third party. The guarantee may terminate, in limited
circumstances, prior to the maturity of the notes.
The Companys debt instruments contain certain financial covenant restrictions including
consolidated net worth and debt to capitalization requirements. The Folgers $350 million term
loan facility due on November 9, 2009, also contains leverage and interest coverage ratios. The
Company is in compliance with all covenants.
Note G Earnings per Share
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position Emerging
Issues Task Force
03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities (FSP EITF
03-6-1). FSP EITF 03-6-1 clarifies that
unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, are participating securities and are to be included in the
computation of earnings per share under the two-class method described in SFAS No. 128, Earnings
per Share.
Effective May 1, 2009, the Company adopted FSP EITF 03-6-1. The Companys unvested restricted
shares contain rights to receive nonforfeitable dividends and are participating securities, as
described in EITF 03-6-1, requiring the two-class method of computing earnings per share. All
presented prior period earnings per share data has been adjusted retrospectively for the three
months ended July 31, 2008, resulting in a reduction of the Companys net income per common share
of $0.01 per share while net income per common share assuming dilution remains unchanged.
Additionally, the adoption of FSP EITF 03-6-1 resulted in a reduction of the Companys net income
per common share and net income per common share assuming dilution for the year ended April 30,
2009, of $0.03 and $0.01 per share, respectively.
8
The following tables set forth the computation of earnings per common share and earnings per common
share assuming dilution in accordance with FSP EITF 03-6-1.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
2009 |
|
|
2008 |
|
|
Computation of Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,063 |
|
|
$ |
42,291 |
|
Net income allocated to participating securities |
|
|
820 |
|
|
|
307 |
|
|
Net income allocated to common stockholders |
|
$ |
97,243 |
|
|
$ |
41,984 |
|
|
Weighted-average common shares outstanding basic |
|
|
117,654,929 |
|
|
|
54,282,700 |
|
|
Net income per common share basic |
|
$ |
0.83 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
2009 |
|
|
2008 |
|
|
Computation of Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,063 |
|
|
$ |
42,291 |
|
Net income allocated to participating securities |
|
|
820 |
|
|
|
306 |
|
|
Net income allocated to common stockholders |
|
$ |
97,243 |
|
|
$ |
41,985 |
|
|
Weighted-average common shares outstanding basic |
|
|
117,654,929 |
|
|
|
54,282,700 |
|
Dilutive effect of stock options |
|
|
81,591 |
|
|
|
142,428 |
|
|
Weighted-average common shares outstanding assuming dilution |
|
|
117,736,520 |
|
|
|
54,425,128 |
|
|
Net income per common share assuming dilution |
|
$ |
0.83 |
|
|
$ |
0.77 |
|
|
The following table reconciles the number of shares used in the basic and diluted earnings per
share disclosures.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
2009 |
|
|
2008 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,063 |
|
|
$ |
42,291 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
117,654,929 |
|
|
|
54,282,700 |
|
Weighted-average participating shares outstanding |
|
|
1,009,724 |
|
|
|
403,546 |
|
|
Weighted-average shares outstanding basic |
|
|
118,664,653 |
|
|
|
54,686,246 |
|
Dilutive effect of stock options |
|
|
81,591 |
|
|
|
142,428 |
|
|
Weighted-average shares outstanding assuming dilution |
|
|
118,746,244 |
|
|
|
54,828,674 |
|
|
Net income per common share basic |
|
$ |
0.83 |
|
|
$ |
0.77 |
|
|
Net income per common share assuming dilution |
|
$ |
0.83 |
|
|
$ |
0.77 |
|
|
9
Note H Pensions and Other Postretirement Benefits
The components of the Companys net periodic benefit cost for defined benefit pension plans and
other postretirement benefits are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
Defined Benefit Pension Plans |
|
|
Other Postretirement Benefits |
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Service cost |
|
$ |
1,410 |
|
|
$ |
1,492 |
|
|
$ |
494 |
|
|
$ |
243 |
|
Interest cost |
|
|
6,097 |
|
|
|
6,813 |
|
|
|
643 |
|
|
|
655 |
|
Expected return on plan assets |
|
|
(5,641 |
) |
|
|
(7,783 |
) |
|
|
|
|
|
|
|
|
Recognized net actuarial loss
(gain) |
|
|
1,547 |
|
|
|
358 |
|
|
|
(261 |
) |
|
|
(183 |
) |
Other |
|
|
307 |
|
|
|
324 |
|
|
|
(122 |
) |
|
|
(122 |
) |
|
Net periodic benefit cost |
|
$ |
3,720 |
|
|
$ |
1,204 |
|
|
$ |
754 |
|
|
$ |
593 |
|
|
Note I Comprehensive Income
The following table summarizes the components of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
2009 |
|
|
2008 |
|
|
Net income |
|
$ |
98,063 |
|
|
$ |
42,291 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
25,751 |
|
|
|
(4,495 |
) |
Unrealized gain (loss) on available-for-sale securities |
|
|
565 |
|
|
|
(1,139 |
) |
Unrealized loss on cash flow hedging derivatives |
|
|
(244 |
) |
|
|
(9,398 |
) |
Income tax (expense) benefit |
|
|
(98 |
) |
|
|
3,745 |
|
|
Comprehensive income |
|
$ |
124,037 |
|
|
$ |
31,004 |
|
|
Note J Commitments and Contingencies
The Company, like other food manufacturers, is from time to time subject to various administrative,
regulatory, and other legal proceedings arising in the ordinary course of business. The Company is
a defendant in a variety of legal proceedings, some of which involve
claims for damages in unspecified amounts. The Company cannot predict with certainty the results of these proceedings or reasonably
determine a range of potential loss. The Companys policy is to
accrue costs for contingent liabilities when such liabilities are
probable and the amounts can be reasonably estimated. Based on
information known to date, the Company does not believe
the final outcome of these proceedings will have a materially
adverse effect on the Companys financial position, results of operations, or cash flows.
Note K Derivative Financial Instruments
The Company is exposed to market risks, such as changes in foreign currency exchange rates and
commodity pricing. To manage the volatility relating to these exposures, the Company enters into
various derivative
transactions. By policy, the Company historically has not entered into derivative financial
instruments for trading purposes or for speculation.
Commodity Price Management. The Company enters into commodity futures and options contracts to
manage the price volatility and reduce the variability of future cash flows related to anticipated
inventory purchases of green coffee, edible oils, flour, milk, and corn. The Company also enters
into commodity futures and options to manage price risk for energy input costs, including natural
gas and diesel fuel. The derivative instruments generally have maturities of less than one year.
Certain of the derivative instruments associated with the Companys U.S. retail oils and baking
market and U.S. retail coffee market segments meet the hedge criteria
10
according to Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), and are accounted for as cash flow hedges. The mark-to-market gains or
losses on qualifying hedges are deferred and included as a component of other comprehensive income
to the extent effective, and reclassified to cost of products sold in the period during which the
hedged transaction affects earnings. The mark-to-market gains or losses on nonqualifying,
excluded, and ineffective portions of hedges are recognized in cost of products sold immediately.
In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in
the fair value of the commoditys futures contracts are highly effective in hedging price risks
associated with the commodity purchased. Hedge effectiveness is measured at inception and on a
quarterly basis.
Foreign Currency Exchange Rate Hedging. The Company utilizes foreign currency forwards and options
contracts to manage the effect of foreign currency exchange fluctuations on future cash payments
primarily related to purchases of certain raw materials, finished goods, and fixed assets. The
contracts generally have maturities of less than one year. At the inception of the contract, the
derivative is evaluated and documented for SFAS 133 accounting treatment. If the contract
qualifies for hedge accounting treatment, to the extent the hedge is deemed effective, the
associated mark-to-market gains and losses are deferred and included as a component of other
comprehensive income. These gains or losses are reclassified to earnings in the period the
contract is executed. The ineffective portion of these contracts is immediately recognized in
earnings. Instruments currently used to manage foreign currency exchange exposures do not meet the
requirements for hedge accounting treatment and the change in value of these instruments is
immediately recognized in cost of products sold.
As of July 31, 2009, the Company had the following outstanding derivative contracts:
|
|
|
|
|
|
|
Gross Contract |
|
|
|
Notional Amount |
|
|
Commodity contracts |
|
$ |
254,000 |
|
Foreign currency exchange contracts |
|
|
71,400 |
|
|
The following table sets forth the fair value of derivative instruments as recognized in the
Condensed Consolidated Balance Sheet at July 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Other |
|
|
|
Current Assets |
|
|
Current Liabilities |
|
|
Derivatives designated as hedging instruments under SFAS 133: |
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
1,693 |
|
|
$ |
332 |
|
Derivatives not designated as hedging instruments under SFAS 133: |
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
1,365 |
|
|
$ |
4,043 |
|
Foreign currency exchange contracts |
|
|
|
|
|
|
4,942 |
|
|
Total |
|
$ |
1,365 |
|
|
$ |
8,985 |
|
|
Total derivatives |
|
$ |
3,058 |
|
|
$ |
9,317 |
|
|
The Company has elected to not offset fair value amounts recognized for derivative instruments and
its cash margin accounts executed with the same counterparty. The Company maintained cash margin
accounts of $16,034 and $16,619 at July 31, 2009 and April 30, 2009, respectively, that are
included in other current assets in the Condensed Consolidated Balance Sheets.
11
The following table presents information on gains recognized on derivatives in SFAS 133
cash flow hedging relationships, all of which hedge commodity price risk.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, 2009 |
|
|
Gain recognized in other comprehensive income (effective portion) |
|
$ |
775 |
|
Gain reclassified from accumulated other comprehensive loss to cost of products sold (effective portion) |
|
|
976 |
|
Gain recognized in cost of products sold (ineffective portion) |
|
|
43 |
|
|
Included as a component in accumulated other comprehensive loss at July 31, 2009 and April 30,
2009, were deferred gains of $1,435 and $1,570, respectively. The related tax impact recognized in
accumulated other comprehensive loss was $109 for the three months ended July 31, 2009. The entire
amount of the deferred gain included in accumulated other comprehensive loss at July 31, 2009, is
expected to be recognized in earnings within one year as the related commodity is utilized.
The following table presents the losses recognized in cost of products sold on derivatives not
designated as hedging instruments under SFAS 133.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, 2009 |
|
|
Commodity contracts |
|
$ |
604 |
|
Foreign currency exchange contracts |
|
|
5,863 |
|
|
Total |
|
$ |
6,467 |
|
|
Note L Other Financial Instruments and Fair Value Measurements
Financial instruments, other than derivatives, that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments, marketable securities, and
trade receivables. The Companys marketable securities are in debt securities. Under the
Companys investment policy, it may invest in securities deemed to be investment grade at the time
of purchase. Currently, these investments are defined as mortgage-backed obligations, corporate
bonds, municipal bonds, federal agency notes, and commercial paper. However, in light of recent
market conditions, the Company has limited recent investments primarily to high-quality money
market funds. The Company determines the appropriate categorization of its debt securities at the
time of purchase and reevaluates such designation at each balance sheet date. With respect to
trade receivables, concentration of credit risk is limited due to the large number of customers.
The Company does not require collateral from its customers.
The fair value of the Companys financial instruments, other than certain of its fixed-rate
long-term debt, approximates their carrying amounts. The following table provides information on
the carrying amount and fair value of financial instruments, including derivative financial
instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
April 30, 2009 |
|
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
Marketable securities |
|
$ |
10,511 |
|
|
$ |
10,511 |
|
|
$ |
12,813 |
|
|
$ |
12,813 |
|
Other investments and securities |
|
|
29,661 |
|
|
|
29,661 |
|
|
|
29,273 |
|
|
|
29,273 |
|
Derivative financial
instruments net (liabilities)
assets |
|
|
(6,259 |
) |
|
|
(6,259 |
) |
|
|
24 |
|
|
|
24 |
|
Fixed rate long-term debt |
|
|
1,110,986 |
|
|
|
1,391,261 |
|
|
|
1,186,726 |
|
|
|
1,234,728 |
|
|
12
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Valuation
techniques are based on observable and unobservable inputs. Observable inputs reflect readily
obtainable data from independent sources, while unobservable inputs reflect the Companys market
assumptions. The fair value hierarchy consists of three levels to prioritize the inputs used in
valuations, as defined below:
Level 1 Inputs Quoted prices for identical instruments in active markets.
Level 2 Inputs Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs Instruments with primarily unobservable value drivers.
The following table is a summary of the fair values of the Companys financial assets
(liabilities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
Fair Value at |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
July 31, 2009 |
|
|
April 30, 2009 |
|
|
Marketable securities (A) |
|
$ |
|
|
|
$ |
10,511 |
|
|
$ |
|
|
|
$ |
10,511 |
|
|
$ |
12,813 |
|
Other investments
and securities (B) |
|
|
8,916 |
|
|
|
20,745 |
|
|
|
|
|
|
|
29,661 |
|
|
|
29,273 |
|
Derivatives financial
instruments (C) |
|
|
(6,259 |
) |
|
|
|
|
|
|
|
|
|
|
(6,259 |
) |
|
|
24 |
|
|
Total |
|
$ |
2,657 |
|
|
$ |
31,256 |
|
|
$ |
|
|
|
$ |
33,913 |
|
|
$ |
42,110 |
|
|
|
|
|
(A) |
|
The Companys marketable securities consist entirely of mortgage-backed
securities. The securities are broker-priced, and valued by a third party using an
evaluated pricing methodology. An evaluated pricing methodology is a valuation technique
which uses inputs that are derived principally from or corroborated by observable market
data. |
|
(B) |
|
The Company maintains funds for the payment of benefits associated with
nonqualified retirement plans. These funds consist of equity securities listed in active
markets and municipal bonds. The municipal bonds are valued by a third party using an
evaluated pricing methodology. |
|
(C) |
|
The Companys derivatives are valued using quoted market prices. For
additional information, see Note K Derivative Financial Instruments. |
Note M Income Taxes
During the three months ended July 31, 2009, the Companys effective tax rate increased to 35.2
percent as compared to 33.3 percent in the three months ended July 31, 2008, reflecting the higher
effective tax rate associated with the Folgers business and the net favorable settlement of
uncertain tax positions in the three
months ended July 31, 2008, as compared to the three months ended July 31, 2009. At July 31, 2009,
the income tax rate varies from the U.S. statutory income tax rate primarily due to state income
taxes partially offset by the domestic manufacturing deduction.
Within the next twelve months, it is reasonably possible that the Company could decrease its
unrecognized tax benefits by an additional $4,892, primarily as a result of expiring statute of
limitations periods.
13
Note N Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 141 (revised), Business Combinations (SFAS 141R). SFAS 141R continues
to require the purchase method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business combinations. SFAS 141R
establishes principles and requirements for how the Company recognizes the assets acquired and
liabilities assumed, recognizes the goodwill acquired, and determines what information to disclose
to enable the evaluation of the nature and financial effects of the business combination. SFAS
141R is effective for any future business combinations made by the Company after May 1, 2009.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement
Benefit Plan Assets (FSP FAS 132R-1). FSP FAS 132R-1 provides guidance on employers disclosures
about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective
April 30, 2010, for the Company.
The Company is currently assessing the impact, if any, on the consolidated financial statements of
recently issued accounting standards that are not yet effective for the Company.
Note O Subsequent Events
The Company evaluated subsequent events through the date of filing on September 8, 2009, and is not
aware of any significant events that occurred subsequent to the balance sheet date but prior to the
filing of this Quarterly Report on Form 10-Q that would have a material impact on the condensed
consolidated financial statements.
Note P Reclassifications
Certain prior year amounts have been reclassified to conform to current year classifications.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
This discussion and analysis deals with comparisons of material changes in the unaudited condensed
consolidated financial statements for the three-month periods ended July 31, 2009 and 2008.
Results for the three-month period ended July 31, 2009, include the results of The Folgers Coffee
Company (Folgers) since the completion of the merger on November 6, 2008.
The Company is the owner of all trademarks, except Pillsbury® is a trademark of The Pillsbury
Company, used under license; and Dunkin Donuts® is a registered trademark of DD IP Holder LLC used
under license.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
% |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,051.5 |
|
|
$ |
663.7 |
|
|
$ |
387.8 |
|
|
|
58 |
% |
Adjust for noncomparable items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Folgers |
|
$ |
(399.1 |
) |
|
$ |
|
|
|
$ |
(399.1 |
) |
|
|
|
|
Other |
|
|
(1.9 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(401.0 |
) |
|
$ |
|
|
|
$ |
(401.0 |
) |
|
|
|
|
Foreign currency exchange |
|
|
9.0 |
|
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales without acquisitions and foreign currency exchange |
|
$ |
659.5 |
|
|
$ |
663.7 |
|
|
$ |
(4.2 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales were $1,051.5 million in the first quarter of 2010, an increase of $387.8 million, or 58
percent, compared to the first quarter of 2009. Acquisitions contributed approximately $401.0
million of the increase, including $399.1 million from Folgers, while the foreign exchange impact,
primarily due to the weaker Canadian dollar in the first quarter of 2010 compared to the first
quarter of 2009, reduced net sales by approximately $9.0 million.
Excluding acquisitions and foreign exchange, net sales decreased one percent. Volume gains of
eight percent across the U.S. retail consumer and U.S. retail oils and baking segments led by
Pillsbury® flour, baking mixes, and frostings, Crisco® oils, Jif® peanut butter, and Smuckers®
fruit spreads were partially offset by decreases in special markets, resulting in an overall volume
increase of two percent. Volume gains were more than offset by price declines taken in calendar
2009, primarily in the U.S. retail oils and baking segment and higher promotional spending in
certain categories, primarily oils.
15
Operating Income
The following table presents components of operating income as a percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Gross profit |
|
|
38.6 |
% |
|
|
31.3 |
% |
Selling, distribution, and administrative expenses: |
|
|
|
|
|
|
|
|
Marketing and selling |
|
|
10.0 |
% |
|
|
10.2 |
% |
Distribution |
|
|
3.5 |
% |
|
|
3.5 |
% |
General and administrative |
|
|
5.6 |
% |
|
|
6.0 |
% |
|
Total selling, distribution, and administrative expenses |
|
|
19.1 |
% |
|
|
19.7 |
% |
|
Amortization |
|
|
1.7 |
% |
|
|
0.2 |
% |
Restructuring and merger and integration costs |
|
|
1.6 |
% |
|
|
0.6 |
% |
Other operating expense net |
|
|
0.2 |
% |
|
|
0.0 |
% |
|
Operating income |
|
|
16.0 |
% |
|
|
10.8 |
% |
|
Overall, gross profit increased $198.3 million in the first quarter of 2010 compared to 2009 with
Folgers contributing over 95 percent of the increase. As a result, gross margin improved from 31.3
percent in the first quarter of 2009, to 38.6 percent in 2010. Folgers gross margin was favorably
impacted by its strong sales volume, favorable green coffee market conditions, product sales mix,
and volume related operating efficiencies. Gross profit on the Companys base business increased
approximately four percent, and improved gross margin by 1.7 percentage points primarily due to lower
commodity costs, including diesel.
Selling, distribution, and administrative (SD&A) expenses increased 54 percent for the first
quarter of 2010, compared to 2009, with the addition of Folgers accounting for the majority of the
increase. As a percentage of net sales, SD&A decreased from 19.7 percent in the first quarter of
2009 to 19.1 percent in 2010. Consistent with the Companys strategy of long-term investment in
its brands, marketing expense increased approximately 65 percent during the first quarter of 2010,
compared to 2009, in support of the Companys brand equity initiatives, including new advertising.
However, total marketing and selling expenses decreased as a percent of net sales, along with
corporate administrative expenses, reflecting the efficiencies realized upon integration of
Folgers.
Amortization expense, a noncash item, increased $16.9 million to 1.7 percent of net sales in the
first quarter of 2010, compared to 0.2 percent of net sales in the same period in 2009, reflecting
the addition of intangible assets associated with the Folgers transaction.
Operating income more than doubled compared to the first quarter of 2009, and improved from 10.8
percent to 16.0 percent of net sales. Merger and integration costs were $13.1 million higher in
the first quarter of 2010 compared to 2009, reducing operating margin by 1.6 percentage points, as
integration activities related to Folgers continued.
Other
Interest expense increased $8.2 million during the first quarter of 2010, compared to 2009, as a
result of an increase in 2009 in the Companys debt obligations associated with the Folgers
transaction, offset slightly by the retirement of $75.0 million in debt on June 1, 2009.
Income tax expense increased $32.0 million during the first quarter of 2010 compared to 2009
reflecting the increase in income before income tax. The effective tax rate increased to 35.2
percent in the first quarter of 2010 compared to 33.3 percent in 2009, reflecting the higher
effective tax rate associated with the Folgers business and the net favorable settlement
of uncertain tax positions in 2009 as compared to 2010.
16
Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. retail coffee market |
|
$ |
366.2 |
|
|
$ |
|
|
|
|
n/a |
|
U.S. retail consumer market |
|
|
291.0 |
|
|
|
274.0 |
|
|
|
6 |
% |
U.S. retail oils and baking market |
|
|
194.4 |
|
|
|
198.2 |
|
|
|
(2 |
%) |
Special markets |
|
|
199.9 |
|
|
|
191.5 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. retail coffee market |
|
$ |
127.3 |
|
|
$ |
|
|
|
|
n/a |
|
U.S. retail consumer market |
|
|
67.0 |
|
|
|
59.8 |
|
|
|
12 |
% |
U.S. retail oils and baking market |
|
|
28.6 |
|
|
|
28.1 |
|
|
|
2 |
% |
Special markets |
|
|
28.2 |
|
|
|
20.7 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit margin: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. retail coffee market |
|
|
34.8 |
% |
|
|
n/a |
|
|
|
|
|
U.S. retail consumer market |
|
|
23.0 |
% |
|
|
21.8 |
% |
|
|
|
|
U.S. retail oils and baking market |
|
|
14.7 |
% |
|
|
14.2 |
% |
|
|
|
|
Special markets |
|
|
14.1 |
% |
|
|
10.8 |
% |
|
|
|
|
|
U.S. Retail Coffee Market
The U.S. retail coffee market segment contributed $366.2 million to net sales in the first quarter
of 2010. Compared to the same three-month period last year, prior to the transaction, net sales
increased as volume gains of approximately nine percent more than offset total price declines of
approximately seven percent, taken in October and December 2008. The continued expansion of the
Dunkin Donuts® brand in the gourmet category and strong growth in traditional roast and ground led
to the growth compared to last year.
The U.S. retail coffee market segment added $127.3 million in segment profit for the first quarter
of 2010, representing a 34.8 percent segment profit margin. Margins in the coffee segment were
above expected long-term levels due to favorable commodity costs and volume related operating
efficiencies.
U.S. Retail Consumer Market
U.S. retail consumer market segment net sales for the first quarter of 2010 were up six percent
compared to the first quarter of 2009, primarily due to a seven percent volume gain led by Jif®
peanut butter, Smuckers® fruit spreads, and Hungry Jack® pancakes and syrups offset slightly by
mix. Sales of Smuckers Uncrustables® sandwiches were down approximately seven percent for the
quarter ended July 31, 2009, compared to 2008.
U.S.
retail consumer market segment profit increased 12 percent for the first quarter of 2010 compared to
the same period in 2009, mainly due to sales growth, product mix, and supply chain efficiencies.
Segment profit margin for the quarter improved from 21.8 percent of net sales in the first quarter
of 2009 to 23.0 percent in 2010.
17
U.S.
Retail Oils and Baking Market
Net sales in the U.S. retail oils and baking market segment were down two percent for the first
quarter of 2010 compared to 2009, reflecting the impact of higher promotional spending on Crisco®
oil and price declines
averaging 13 percent in January 2009 on shortening, oils and flour, and price declines of
approximately seven percent in June 2009 on canned milk. Total volume in the U.S. retail oils and
baking market was up eight percent, with double-digit gains in Crisco® oils and Pillsbury® flour,
baking mixes, and frostings, offsetting declines in canned milk.
U.S.
retail oils and baking market segment profit increased two percent for the first quarter of 2010,
compared to the same period in 2009. Segment profit margin improved to 14.7 percent of net sales
for the first quarter of 2010 from 14.2 percent in 2009, due to lower commodity costs and supply
chain efficiencies, which more than offset substantially higher marketing investments primarily in
support of Crisco® olive oil and the Pillsbury® brand.
Special Markets
Special markets segment net sales in the first quarter of 2010 increased four percent compared to
2009. The acquisition of Folgers added $32.9 million to special markets net sales, more than
offsetting a nine percent volume decline and the impact of foreign exchange. Volume declines in
foodservice and natural foods were due to the current economic environment while the business in
Canada continues to be impacted by the growth in private label brands.
Special markets segment profit increased 36 percent for the first quarter of 2010 compared to 2009,
with the addition of Folgers and lower commodity costs. Profit margin for the quarter improved
from 10.8 percent in the first quarter of 2009 to 14.1 percent in 2010.
Financial Condition Liquidity and Capital Resources
Liquidity
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
Net cash (used for) provided by operating activities |
|
$ |
(26,232 |
) |
|
$ |
60,176 |
|
Net cash used for investing activities |
|
|
(24,643 |
) |
|
|
(76,096 |
) |
Net cash used for financing activities |
|
|
(119,365 |
) |
|
|
(20,485 |
) |
|
On an annual basis, the Companys principal source of funds is cash generated from operations,
supplemented by borrowings against the Companys revolving credit facility. Total cash and cash
equivalents at July 31, 2009, were $289.8 million compared to $456.7 million at April 30, 2009.
Cash used by operating activities was approximately $26.2 million during the first quarter of 2010,
compared to cash provided of $60.2 million in 2009. The Company expected a significant use of cash
in the first quarter of 2010 for seasonal fruit and vegetable procurement, the buildup of
inventories to support the upcoming Fall Bake and Holiday period, and the additional buildup of
coffee inventory in advance of the Atlantic hurricane season. Approximately one-half of the cash
used to build inventory levels is attributable to coffee inventories. The Company expects
significant cash to be provided by operations in the second half of 2010 upon completion of its key
promotional periods.
Net cash used for investing activities was approximately $24.6 million in the first quarter of
2010, consisting primarily of capital expenditures, compared to cash used for investing of
approximately $76.1 million in 2009 that included the use of approximately $55.6 million for the
acquisition of the Knotts Berry Farm® business.
Cash used for financing activities during the first quarter of 2010 consisted primarily of dividend
payments of $41.4 million and the repayment of $75.0 million of long-term debt.
18
Capital Resources
The following table presents the Companys capital structure:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
April 30, 2009 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Note payable |
|
$ |
350,000 |
|
|
$ |
350,000 |
|
Current portion of long-term debt |
|
|
200,986 |
|
|
|
276,726 |
|
Long-term debt |
|
|
910,000 |
|
|
|
910,000 |
|
|
|
|
Total debt |
|
$ |
1,460,986 |
|
|
$ |
1,536,726 |
|
Shareholders equity |
|
|
5,034,330 |
|
|
|
4,939,931 |
|
|
|
|
Total capital |
|
$ |
6,495,316 |
|
|
$ |
6,476,657 |
|
|
|
|
In June 2009, the Company repaid $75.0 million of long-term debt and has approximately $550 million
of debt repayments due in November 2009.
In addition to borrowings outstanding, the Company has available a $180.0 million revolving credit
facility with a group of three banks that expires in 2011. The Company has negotiated terms and
conditions and secured signed commitment letters for a new $400.0 million three-year revolver,
which will supplement the existing facility. The Company expects to close the financing during the
second quarter of 2010, prior to the debt repayments due in November 2009.
Absent any other material acquisitions or other significant investments, the Company believes that
cash on hand, combined with cash provided by operations and borrowings available under existing and
anticipated credit facilities will be sufficient to meet cash requirements for the next twelve
months, including capital expenditures, the payment of quarterly dividends, and principal and
interest on debt outstanding.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk related to changes in interest rates, foreign currency
exchange rates, and commodity prices.
Interest Rate Risk. The fair value of the Companys cash and short-term investment portfolio at
July 31, 2009, approximates carrying value. Exposure to interest rate risk on the Companys
long-term debt is mitigated since it is at a fixed rate until maturity. Based on the Companys
overall interest rate exposure as of and during the three-month period ended July 31, 2009,
including derivative and other instruments sensitive to interest rates, a hypothetical 10 percent
movement in interest rates would not materially affect the Companys results of operations.
Interest rate risk can also be measured by estimating the net amount by which the fair value of the
Companys financial liabilities would change as a result of movements in interest rates. Based on
a hypothetical, immediate one-percentage point decrease in interest rates at July 31, 2009, the
fair value of the Companys long-term debt would increase by approximately $67.1 million.
Foreign Currency Exchange Risk. The Company has operations outside the U.S. with foreign currency
denominated assets and liabilities, primarily denominated in Canadian currency. Because the
Company has foreign currency denominated assets and liabilities, financial exposure may result,
primarily from the timing of transactions and the movement of exchange rates. The foreign currency
balance sheet exposures as of July 31, 2009, are not expected to result in a significant impact on
future earnings or cash flows.
Revenues from customers outside the U.S. represented nine percent of net sales during the
three-month period ended July 31, 2009. Thus, certain revenues and expenses have been, and are
expected to be, subject to the effect of foreign currency fluctuations and these fluctuations may
have an impact on operating results.
Commodity Price Risk. Raw materials and other commodities used by the Company are subject to price
volatility caused by supply and demand conditions, political and economic variables, and other
unpredictable factors. To manage the volatility related to anticipated commodity purchases, the
Company uses futures and options with maturities generally less than one year. Certain of these
instruments are designated as cash flow hedges. The mark-to-market gains or losses on qualifying
hedges are included in other comprehensive income to the extent effective, and reclassified into
cost of products sold in the period during which the hedged transaction affects earnings. The
mark-to-market gains or losses on nonqualifying, excluded, and ineffective portions of hedges are
recognized in cost of products sold immediately.
The following sensitivity analysis presents the Companys potential loss of fair value resulting
from a hypothetical 10 percent change in market prices.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
July 31, 2009 |
|
|
April 30, 2009 |
|
|
Raw material commodities: |
|
|
|
|
|
|
|
|
High |
|
$ |
17,717 |
|
|
$ |
16,374 |
|
Low |
|
|
3,718 |
|
|
|
3,949 |
|
Average |
|
|
10,524 |
|
|
|
9,785 |
|
|
Fair value was determined using quoted market prices and was based on the Companys net
derivative position by commodity for the previous four quarters. The calculations are not intended
to represent actual losses in fair value that the Company expects to incur. In practice, as
markets move, the Company actively manages its risk and adjusts hedging strategies as appropriate.
The commodities hedged have a high inverse correlation to price changes of the derivative commodity
instrument; thus, the Company would expect that any gain or loss in the fair value of its
derivatives would generally be offset by an increase or decrease in the fair value of the
underlying exposures.
20
Certain Forward-Looking Statements
Certain statements included in this quarterly report contain forward-looking statements within the
meaning of federal securities laws. The forward-looking statements may include statements
concerning the Companys current expectations, estimates, assumptions, and beliefs concerning
future events, conditions, plans, and strategies that are not historical fact. Any statement that
is not historical in nature is a forward-looking statement and may be identified by the use of
words and phrases such as expects, anticipates, believes, will, plans, and similar
phrases.
Federal securities laws provide a safe harbor for forward-looking statements to encourage companies
to provide prospective information. The Company is providing this cautionary statement in
connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on
any forward-looking statements as such statements are by nature subject to risks, uncertainties,
and other factors, many of which are outside of the Companys control and could cause actual
results to differ materially from such statements and from the Companys historical results and
experience. These risks and uncertainties include, but are not limited to those set forth under
the caption Risk Factors in the Companys Annual Report on Form 10-K, as well as the following:
|
|
|
volatility of commodity markets from which raw materials, particularly green coffee
beans, wheat, soybean oil, milk, and peanuts are procured and the related impact on costs; |
|
|
|
risks associated with hedging and derivative strategies employed by the Company to
manage commodity pricing risks, including the risk that such strategies could result in
significant losses and adversely impact the Companys liquidity; |
|
|
|
the successful completion of the integration of the coffee business with the Companys
business, operations, and culture and the ability to realize synergies and other potential
benefits of the merger within the time frames currently contemplated; |
|
|
|
crude oil price trends and their impact on transportation, energy, and packaging costs; |
|
|
|
the ability to successfully implement price changes; |
|
|
|
the success and cost of introducing new products and the competitive response; |
|
|
|
the success and cost of marketing and sales programs and strategies intended to promote
growth in the Companys businesses; |
|
|
|
general competitive activity in the market, including competitors pricing practices and
promotional spending levels; |
|
|
|
the impact of food safety concerns involving either the Company or its competitors
products; |
|
|
|
the concentration of certain of the Companys businesses with key customers and
suppliers and the ability to manage and maintain key relationships; |
|
|
|
the loss of significant customers or a substantial reduction in orders from these
customers or the bankruptcy of any such customer; |
|
|
|
changes in consumer coffee preferences, and other factors affecting the coffee business,
which represents a substantial portion of the Companys business; |
|
|
|
the ability of the Company to obtain any required financing; |
|
|
|
the timing and amount of the Companys capital expenditures and merger and integration
costs; |
|
|
|
impairments in the carrying value of goodwill, other intangible assets, or other
long-lived assets or changes in useful lives of other intangible assets; |
|
|
|
the outcome of current and future tax examinations, changes in tax laws and other tax
matters, and their related impact on the Companys tax positions; |
|
|
|
foreign currency and interest rate fluctuations; |
|
|
|
political or economic disruption due to the global recession and credit crisis; |
|
|
|
other factors affecting share prices and capital markets generally; and |
|
|
|
the other factors described under Risk Factors in registration statements filed by the
Company with the Securities and Exchange Commission and in the other reports and statements
filed by the Company with the Securities and Exchange Commission, including its most recent
Annual Report on Form 10-K and proxy materials. |
21
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of
the date made, when evaluating the information presented in this quarterly report. The Company
does not assume any obligation to update or revise these forward-looking statements to reflect new
events or circumstances.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Companys management, including
the Companys principal executive officers and principal financial officer, evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)) as of July 31,
2009 (the Evaluation Date). Based on that evaluation, the Companys principal executive officers
and principal financial officer have concluded that as of the Evaluation Date, the Companys
disclosure controls and procedures were effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is (1)
recorded, processed, summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (2) accumulated and communicated to the Companys
management, including the chief executive officers and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Controls. There were no changes in the Companys internal
controls over financial reporting that occurred during the quarter ended July 31, 2009, that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
22
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
The Companys business, operations, and financial condition are subject to various risks and
uncertainties. The risk factors described in Part I, Item 1A. Risk Factors in the Companys
Annual Report on Form 10-K for the year ended April 30, 2009, should be carefully considered,
together with the other information contained or incorporated by reference in the Quarterly Report
on Form 10-Q and in the Companys other filings with the SEC in connection with evaluating the
Company, its business, and the forward-looking statements contained in this Report. Additional
risks and uncertainties not presently known to the Company or that the Company currently deems
immaterial also may affect the Company. The occurrence of any of these known or unknown risks
could have a material adverse impact on the Companys business, financial condition, and results of
operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value) of Shares |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
That May Yet Be |
|
|
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Period |
|
Shares Purchased |
|
|
Paid Per Share |
|
|
Programs |
|
|
Plans or Programs |
|
|
May 1, 2009 May 31, 2009 |
|
|
453 |
|
|
$ |
38.79 |
|
|
|
|
|
|
|
3,744,222 |
|
June 1, 2009 June 30, 2009 |
|
|
87,854 |
|
|
|
45.57 |
|
|
|
|
|
|
|
3,744,222 |
|
July 1, 2009 July 31, 2009 |
|
|
21,660 |
|
|
|
41.00 |
|
|
|
|
|
|
|
3,744,222 |
|
|
Total |
|
|
109,967 |
|
|
$ |
44.64 |
|
|
|
|
|
|
|
3,744,222 |
|
|
|
|
Information set forth in the table above represents activity in the Companys first fiscal
quarter. |
|
|
|
(a) |
|
Shares in this column include shares repurchased as part of publicly announced plans as
well as shares repurchased from stock plan recipients in lieu of cash payments. |
|
(d) |
|
Since August 2004, the Companys Board of Directors has authorized management to
repurchase up to 10 million common shares. Share repurchases will occur at managements
discretion with no established expiration date. The Company has repurchased a total of
6,255,778 common shares since November 2004 under the buyback program authorized by the
Companys Board of Directors. At July 31, 2009, 3,744,222 common shares remain available
for repurchase under this program. Under the transaction agreement relating to
the Folgers transaction and related ancillary agreements, the Company may repurchase common
shares only under specific conditions. As a result, the Company does not anticipate that
it will repurchase shares for a period of at least two years following the closing of the
merger on November 6, 2008. |
Item 6. Exhibits.
See the Index of Exhibits that appears on Page No. 25 of this report.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
September 8, 2009 |
THE J. M. SMUCKER COMPANY
|
|
|
/s/ Timothy P. Smucker
|
|
|
BY TIMOTHY P. SMUCKER |
|
|
Chairman of the Board and Co-Chief Executive Officer |
|
|
|
|
|
|
/s/ Richard K. Smucker
|
|
|
BY RICHARD K. SMUCKER |
|
|
Executive Chairman and Co-Chief Executive Officer |
|
|
|
|
|
|
/s/ Mark R. Belgya
|
|
|
BY MARK R. BELGYA |
|
|
Vice President and Chief Financial Officer |
|
24
INDEX OF EXHIBITS
|
|
|
Assigned |
|
|
Exhibit |
|
|
No. * |
|
Description |
|
31.1
|
|
Certification of Timothy P. Smucker
pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange
Act |
|
|
|
31.2
|
|
Certification of Richard K. Smucker
pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange
Act |
|
|
|
31.3
|
|
Certification of Mark. R. Belgya
pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange
Act |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley
Act of 2002. |
|
|
|
* |
|
Exhibits 2, 3, 10, 11, 15, 18, 19, 22, 23, 24, and 99 are either inapplicable
to the Company or require no answer. |
25