The J. M. Smucker Company (SJM) 10-Q 2006 Q2 Quarterly report

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No. 1 of 23 Pages

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 1-5111

THE J. M. SMUCKER COMPANY

(Exact name of registrant as specified in its charter)

Ohio	34-0538550
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Strawberry Lane
Orrville, Ohio	44667-0280
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (330) 682-3000

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yesþ Noo

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act of 1934. Yeso Noþ

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

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits
SIGNATURES
INDEX OF EXHIBITS
EX-31.1 Certification
EX-31.2 Certification
EX-31.3 Certification
EX-32 Certification

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No. 2

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)

	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)
Net sales	$	606,264		$	588,922		$	1,116,595		$	1,002,189
Cost of products sold		402,726			399,432			748,212			667,858
Cost of products sold — restructuring		115			609			247			1,262
Gross Profit		203,423			188,881			368,136			333,069
Selling, distribution, and administrative expenses		120,025			115,279			230,649			206,105
Other restructuring costs		1,976			1,166			3,465			3,521
Merger and integration costs		4,092			3,970			7,020			6,733
Operating Income		77,330			68,466			127,002			116,710
Interest income		1,329			667			3,149			1,385
Interest expense		(6,025	)		(5,782	)		(12,132	)		(10,205	)
Other (expense) income — net		(75	)		784			119			(398	)
Income from Continuing Operations
Before Income Taxes		72,559			64,135			118,138			107,492
Income taxes		26,115			23,472			41,797			39,342
Income from Continuing Operations		46,444			40,663			76,341			68,150
(Loss) gain on sale of discontinued operations, net of tax		—			(3,641	)		—			2,037
Discontinued operations, net of tax		—			983			—			666
Net Income	$	46,444		$	38,005		$	76,341		$	70,853
Earnings per common share:
Income from Continuing Operations	$	0.80		$	0.70		$	1.31		$	1.22
Discontinued operations		—			(0.05	)		—			0.05
Net Income	$	0.80		$	0.65		$	1.31		$	1.27
Income from Continuing Operations — Assuming Dilution	$	0.79		$	0.69		$	1.30		$	1.20
Discontinued operations — assuming dilution		—			(0.04	)		—			0.05
Net Income — Assuming Dilution	$	0.79		$	0.65		$	1.30		$	1.25
Dividends declared per common share	$	0.27		$	0.25		$	0.54		$	0.50

See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

	October 31, 2005			April 30, 2005
	(Unaudited)			(Audited)
	(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	42,361		$	58,085
Marketable securities		19,879			17,739
Trade receivables, less allowances		187,185			145,734
Inventories:
Finished products		225,679			176,205
Raw materials		123,240			108,282
		348,919			284,487
Other current assets		48,690			49,806
Total Current Assets		647,034			555,851
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements		43,966			42,018
Buildings and fixtures		187,302			175,718
Machinery and equipment		550,950			533,340
Construction in progress		28,860			26,053
		811,078			777,129
Accumulated depreciation		(283,284	)		(256,028	)
Total Property, Plant, and Equipment		527,794			521,101
OTHER NONCURRENT ASSETS
Goodwill		949,317			951,208
Other intangible assets, net		471,451			469,758
Marketable securities		45,164			59,074
Other assets		79,637			78,902
Total Other Noncurrent Assets		1,545,569			1,558,942
	$	2,720,397		$	2,635,894
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable	$	39,790		$	33,378
Accounts payable		141,392			105,290
Other current liabilities		176,043			169,624
Total Current Liabilities		357,225			308,292
NONCURRENT LIABILITIES
Long-term debt		430,081			431,560
Deferred income taxes		110,053			110,505
Other noncurrent liabilities		94,786			94,737
Total Noncurrent Liabilities		634,920			636,802
SHAREHOLDERS’ EQUITY
Common shares		14,592			14,635
Additional capital		1,241,880			1,240,110
Retained income		482,032			447,831
Less:
Deferred compensation		(10,411	)		(4,573	)
Amount due from ESOP		(6,524	)		(7,044	)
Accumulated other comprehensive income (loss)		6,683			(159	)
Total Shareholders’ Equity		1,728,252			1,690,800
	$	2,720,397		$	2,635,894

See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

	Six Months Ended October 31,
	2005			2004
	(Dollars in thousands)
OPERATING ACTIVITIES
Income from continuing operations	$	76,341		$	68,150
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		30,704			23,589
Amortization		4,590			1,047
Trade receivables		(39,447	)		(55,669	)
Inventories		(60,422	)		(46,504	)
Accounts payable and accrued items		26,383			21,588
Other adjustments		21,099			(4,068	)
Net cash provided by operating activities		59,248			8,133
INVESTING ACTIVITIES
Business acquired, net of cash acquired		—			(98,812	)
Proceeds from sale of businesses		—			42,527
Additions to property, plant, and equipment		(30,246	)		(30,257	)
Purchase of marketable securities		(5,000	)		(35,371	)
Sales and maturities of marketable securities		16,189			27,968
Disposals of property, plant, and equipment		984			696
Other — net		7,384			6,629
Net cash used for investing activities		(10,689	)		(86,620	)
FINANCING ACTIVITIES
Proceeds from long-term debt		—			100,000
Repayments of long-term debt		(17,000	)		(37,500	)
Proceeds from revolving credit arrangement — net		4,121			74,013
Repayments of short-term debt		—			(113,622	)
Dividends paid		(31,415	)		(26,976	)
Purchase of treasury shares		(20,823	)		—
Other — net		1,232			7,409
Net cash (used for) provided by financing activities		(63,885	)		3,324
Net cash provided by discontinued operations		—			1,973
Effect of exchange rate changes		(398	)		1,148
Net decrease in cash and cash equivalents		(15,724	)		(72,042	)
Cash and cash equivalents at beginning of period		58,085			104,551
Cash and cash equivalents at end of period	$	42,361		$	32,509

(  ) Denotes use of cash

See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note A —Basis of Presentation

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

Note B —Multifoods Acquisition

On June 18, 2004, the Company completed its acquisition of Minneapolis-based International Multifoods Corporation (“Multifoods”) in a tax-free stock and cash transaction valued at approximately $871 million. The acquisition of Multifoods added thePillsburyflour, baking mixes, and ready-to-spread frostings;Hungry Jackpancake mixes, syrup, and potato side dishes;Martha Whitebaking mixes and ingredients; andPetevaporated milk brands to the U.S. retail market business. Multifoods’ primary Canadian brands include:Robin Hoodflour and baking mixes,Bick’s pickles and condiments, andGolden Templeflour and rice.

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

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

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

Assets acquired:
Current assets	$	202,891
Property, plant, and equipment		164,355
Intangible assets not subject to amortization		154,000
Goodwill		422,796
Deferred income taxes		66,574
Other assets		35,651
Total assets acquired	$	1,046,267
Liabilities assumed:
Current liabilities	$	124,448
Postretirement benefits other than pensions		26,680
Other noncurrent liabilities		24,533
Total liabilities assumed	$	175,661
Net assets acquired	$	870,606

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.

				Other
	Change of			Employee
	Control			Separation
Accrual charged to goodwill	$	12,271		$	11,076
Cash payments		(12,271	)		(8,073	)
Balance at April 30, 2005	$	—		$	3,003
Cash payments		—			(2,498	)
Balance at October 31, 2005	$	—		$	505

Note C —Stock-Based Compensation

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

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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:

	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Net income, as reported	$	46,444		$	38,005		$	76,341		$	70,853
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit		1,151			255			2,933			510
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit		(1,696	)		(1,007	)		(4,382	)		(1,983	)
Net income, as adjusted	$	45,899		$	37,253		$	74,892		$	69,380
Earnings per common share:
Net income, as reported	$	0.80		$	0.65		$	1.31		$	1.27
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit		0.02			0.01			0.06			0.01
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit		(0.03	)		(0.02	)		(0.08	)		(0.04	)
Net income, as adjusted	$	0.79		$	0.64		$	1.29		$	1.24
Net income, as reported — assuming dilution	$	0.79		$	0.65		$	1.30		$	1.25
Add: Total stock-based compensation expense related to restricted stock awards included in the determination of net income as reported, net of tax benefit — assuming dilution		0.02			—			0.04			—
Less: Total stock-based compensation expense determined under fair value-based methods for all awards, net of tax benefit — assuming dilution		(0.03	)		(0.02	)		(0.07	)		(0.03	)
Net income, as adjusted — assuming dilution	$	0.78		$	0.63		$	1.27		$	1.22

Note D —Restructuring

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

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

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

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

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

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

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

				Long-Lived
	Employee			Asset			Equipment
	Separation			Charges			Relocation			Other Costs			Total
Total expected restructuring charge	$	15,900		$	8,400		$	7,700		$	8,000		$	40,000
Balance at May 1, 2004	$	4,397		$	—		$	—		$	1,149		$	5,546
First quarter charge to expense		770			149			1,169			920			3,008
Second quarter charge to expense		618			395			418			344			1,775
Third quarter charge to expense		2,336			296			335			385			3,352
Fourth quarter charge to expense		2,498			162			1,626			899			5,185
Cash payments		(6,660	)		—			(3,548	)		(2,159	)		(12,367	)
Noncash utilization		(737	)		(1,002	)		—			(1,538	)		(3,277	)
Balance at April 30, 2005	$	3,222		$	—		$	—		$	—		$	3,222
First quarter charge to expense		993			84			469			75			1,621
Second quarter charge to expense		521			113			699			758			2,091
Cash payments		(638	)		—			(1,168	)		(782	)		(2,588	)
Noncash utilization		—			(197	)		—			(51	)		(248	)
Balance at October 31, 2005	$	4,098		$	—		$	—		$	—		$	4,098
Remaining expected restructuring charge	$	1,346		$	33		$	2,157		$	1,069		$	4,605

Approximately $115 and $609 of the total restructuring charges of $2,091 and $1,775 recorded in the three months ended October 31, 2005 and 2004, respectively, and $247 and $1,262 of the total restructuring charges of $3,712 and $4,783 recorded in the six months ended October 31, 2005 and

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2004, respectively, were reported in costs of products sold in the accompanying Condensed Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. The restructuring costs included in costs of products sold include long-lived asset charges and inventory disposition costs. Expected employee separation costs of approximately $16 million are being recognized over the estimated future service period of the related employees. The obligation related to employee separation costs is included in other current liabilities in the Condensed Consolidated Balance Sheets.

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

Note E —Common Shares

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

Note F —Operating Segments

The Company operates in one industry: the manufacturing and marketing of food products. The Company has two reportable segments: U.S. retail market and special markets. The U.S. retail market segment includes the consumer spreads, oils, and baking business areas. This segment primarily represents the domestic sales ofSmucker’s,Jif,Crisco, Pillsbury,Hungry Jack,Martha White, andPetbranded 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.

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The following table sets forth reportable segment information:

	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Net sales:
U.S. retail market	$	429,761		$	410,432		$	771,490		$	698,518
Special markets		176,503			178,490			345,105			303,671
Total net sales	$	606,264		$	588,922		$	1,116,595		$	1,002,189
Segment profit:
U.S. retail market	$	92,061		$	84,534		$	162,165		$	148,913
Special markets		18,931			19,141			34,886			31,667
Total segment profit	$	110,992		$	103,675		$	197,051		$	180,580
Interest income		1,329			667			3,149			1,385
Interest expense		(6,025	)		(5,782	)		(12,132	)		(10,205	)
Amortization expense		(1,849	)		(523	)		(4,590	)		(1,047	)
Restructuring costs		(2,091	)		(1,775	)		(3,712	)		(4,783	)
Merger and integration costs		(4,092	)		(3,970	)		(7,020	)		(6,733	)
Corporate administrative expenses		(26,149	)		(28,589	)		(55,169	)		(51,178	)
Other unallocated income (expense)		444			432			561			(527	)
Income from continuing operations before income taxes	$	72,559		$	64,135		$	118,138		$	107,492

Note G —Earnings Per Share

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

	Three Months Ended				Six Months Ended
	October 31,				October 31,
	2005		2004		2005		2004
Numerator:
Income from continuing operations	$	46,444	$	40,663	$	76,341	$	68,150
Denominator:
Denominator for earnings per common share — weighted-average shares		58,096,308		58,184,654		58,188,067		56,007,967
Effect of dilutive securities:
Stock options		483,636		510,508		514,670		537,400
Restricted stock		115,934		120,328		117,088		117,853
Denominator for earnings per common share — assuming dilution		58,695,878		58,815,490		58,819,825		56,663,220
Income from continuing operations per common share	$	0.80	$	0.70	$	1.31	$	1.22
Income from continuing operations per common share — assuming dilution	$	0.79	$	0.69	$	1.30	$	1.20

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Note H —Pensions and Other Postretirement Benefits

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

	Three months ended October 31,
							Other
	Defined Benefit						Postretirement
	Pension Plans						Benefits
	2005			2004			2005		2004
Service cost	$	2,249		$	1,122		$	528	$	361
Interest cost		5,596			1,835			832		421
Expected return on plan assets		(7,075	)		(1,853	)		—		—
Recognized net actuarial loss		695			206			39		87
Other		326			308			6		(11	)
Net periodic benefit cost	$	1,791		$	1,618		$	1,405	$	858

	Six months ended October 31,
							Other
	Defined Benefit						Postretirement
	Pension Plans						Benefits
	2005			2004			2005		2004
Service cost	$	4,466		$	2,244		$	1,053	$	722
Interest cost		11,124			3,670			1,656		842
Expected return on plan assets		(14,056	)		(3,706	)		—		—
Recognized net actuarial loss		1,387			412			77		174
Other		652			616			12		(22	)
Net periodic benefit cost	$	3,573		$	3,236		$	2,798	$	1,716

Note I —Comprehensive Income

During the three-month periods ended October 31, 2005 and 2004, total comprehensive income was $51,552 and $56,430, respectively. Total comprehensive income for the six-month periods ended October 31, 2005 and 2004, was $83,183 and $88,689, respectively. Comprehensive income consists of net income, foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains and losses on available-for-sale securities, and unrealized gains and losses on commodity hedging activity, net of income taxes.

Note J —Commitments and Contingencies

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

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

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

Note K —Reclassifications

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

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

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

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

Net Sales

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

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

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

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

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

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

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

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

Operating Income

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

	Three Months Ended						Six Months Ended
	October 31,						October 31,
	2005			2004			2005			2004
Gross profit		33.6	%		32.1	%		33.0	%		33.2	%
Selling, distribution, and administrative:
Marketing and selling		10.3	%		10.2	%		10.5	%		10.9	%
Distribution		3.7			2.8			3.5			2.7
General and administrative		5.8			6.6			6.7			7.0
Total selling, distribution, and administrative		19.8	%		19.6	%		20.7	%		20.6	%
Restructuring and merger and integration		1.0	%		0.9	%		0.9	%		1.0	%
Operating income		12.8	%		11.6	%		11.4	%		11.6	%

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

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

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

Other

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

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

Financial Condition — Liquidity and Capital Resources

	Six Months Ended October 31,
(Dollars in thousands)	2005			2004
Net cash provided by operating activities	$	59,248		$	8,133
Net cash used for investing activities	$	(10,689	)	$	(86,620	)
Net cash (used for) provided by financing activities	$	(63,885	)	$	3,324

The Company’s principal source of funds is cash generated from operations, supplemented by borrowings against the Company’s revolving credit instrument. Total cash and investments at October 31, 2005, were $107.4 million compared to $134.9 million at April 30, 2005.

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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Certain Forward-Looking Statements

This quarterly report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to:

• the strength of commodity markets from which raw materials are procured and the related impact on costs;

• crude oil price trends and its impact on transportation, energy, and packaging costs;

• the ability to achieve the amount and timing of the estimated savings associated with the Multifoods acquisition;

• the success and cost of introducing new products and the competitive response, particularly in the consumer oils and baking area;

• the success and cost of marketing and sales programs and strategies intended to promote growth in the Company’s businesses, and in their respective markets;

• the ability of the business areas to achieve sales targets and the costs associated with attempting to do so;

• the ability to successfully implement price changes, particularly in the consumer oils and baking business;

• the Company’s ability to effectively manage production capacity and costs related toUncrustables;

• the timing and amount of capital expenditures, restructuring, and merger and integration costs;

• raw material and ingredient cost trends;

• foreign currency exchange and interest rate fluctuations;

• general competitive activity in the market; and

• other factors affecting share prices and capital markets generally.

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Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures. Based on their evaluation as of October 31, 2005, the Company’s principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls. In addition, no change in internal control over financial reporting occurred during the quarter ended October 31, 2005, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

     (a) Not applicable.

     (b) Not applicable.

     (c) Issuer Purchases of Equity Securities

	(a)		(b)		(c)		(d)
							Maximum
							number (or
					Total number of		approximate
					shares		dollar value) of
					purchased as		shares that may
					part of publicly		yet be
	Total number of				announced		purchased
	shares		Average price		plans or		under the plans
Period	purchased		paid per share		programs		or programs
August 1, 2005-August 31, 2005		75,000	$	46.70		75,000		256,322
September 1, 2005-September 30, 2005		25,125	$	47.16		23,700		232,622
October 1, 2005-October 31, 2005		—		—		—		232,622
Total		100,125	$	46.82		98,700		232,622

(a)	During the second quarter of 2005, the Company’s Board of Directors authorized management to repurchase up to one million shares of its common stock. The buyback program will be implemented at management’s discretion. Shares in this column include shares repurchased as part of this publicly announced plan as well as shares repurchased from stock plan recipients in lieu of cash payments.
(d)	The Company has repurchased 767,378 common shares through October 31, 2005. During November and December 2005, the Company repurchased an additional 200,000 common shares resulting in 32,622 common shares that may be purchased under the buyback program authorized by the Company’s Board of Directors.

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

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

	Votes For		Votes Withheld		Broker Nonvotes
Vincent C. Byrd		50,715,629		2,196,504		0
R. Douglas Cowan		51,471,171		1,440,962		0
Elizabeth Valk Long		51,457,681		1,454,452		0

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

							Broker
	Votes For		Votes Against		Abstentions		Nonvotes
Appointment of Auditors		51,277,191		1,517,843		117,099		0

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Item 6.Exhibits

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

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SIGNATURES

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

December 9, 2005	THE J. M. SMUCKER COMPANY
	/s/ Timothy P. Smucker
	BY TIMOTHY P. SMUCKER
	Chairman and Co-Chief Executive Officer
	/s/ Richard K. Smucker
	BY RICHARD K. SMUCKER
	President and Co-Chief Executive Officer
	/s/ Mark R. Belgya
	BY MARK R. BELGYA
	Vice President, Chief Financial Officer and Treasurer

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INDEX OF EXHIBITS

Assigned
Exhibit
No. *	Description
10	Amended and Restated Nonemployee Director Stock Plan, effective August 19, 2005, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 24, 2005 (Commission File No. 1-5111).
31.1	Certification of Timothy P. Smucker pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
31.2	Certification of Richard K. Smucker pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
31.3	Certification of Mark R. Belgya pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

* Exhibits 2, 3, 11, 15, 18, 19, 22, 23, 24, and 99 are either inapplicable to the Company or require no answer.