Exhibit 13
Five-Year Summary of Selected Financial Data
The following table presents selected financial data for each of the five years
in the period ended April 30, 2005, restated for discontinued operations, as
discussed in Note C to the consolidated financial statements. The selected
financial data was derived from the consolidated financial statements and should
be read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Liquidity and Capital Resources" and the consolidated financial
statements and notes thereto.
Year Ended April 30,
----------------------------------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003 2002 2001
- --------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Statement of Income:
Net sales $2,043,877 $1,369,556 $1,270,098 $ 649,997 $ 615,268
Income from continuing operations before cumulative
effect of change in accounting method $ 130,460 $ 111,298 $ 94,212 $ 29,324 $ 28,100
Discontinued operations (1,387) 52 2,130 1,527 122
Cumulative effect of change in accounting method -- -- -- -- (1,016)
---------- ---------- ---------- ---------- ----------
Net income $ 129,073 $ 111,350 $ 96,342 $ 30,851 $ 27,206
========== ========== ========== ========== ==========
Financial Position:
Long-term debt $ 431,560 $ 135,000 $ 135,000 $ 135,000 $ 135,000
Total assets 2,635,894 1,684,125 1,615,407 524,892 479,104
Shareholders' equity 1,690,800 1,210,693 1,124,171 280,144 250,785
========== ========== ========== ========== ==========
Other Data:
Earnings per common share:
Income from continuing operations before cumulative
effect of change in accounting method
$ 2.29 $ 2.23 $ 1.99 $ 1.27 $ 1.17
Discontinued operations (0.03) 0.01 0.05 0.06 --
Cumulative effect of change in accounting method -- -- -- -- (0.04)
---------- ---------- ---------- ---------- ----------
Net income $ 2.26 $ 2.24 $ 2.04 $ 1.33 $ 1.13
========== ========== ========== ========== ==========
Income from continuing operations before cumulative
effect of change in accounting method - assuming
dilution $ 2.26 $ 2.21 $ 1.97 $ 1.25 $ 1.16
Discontinued operations - assuming dilution (0.02) -- 0.05 0.06 --
Cumulative effect of change in accounting method -
assuming dilution -- -- -- -- (0.04)
---------- ---------- ---------- ---------- ----------
Net income - assuming dilution $ 2.24 $ 2.21 $ 2.02 $ 1.31 $ 1.12
========== ========== ========== ========== ==========
Dividends declared per common share $ 1.02 $ 0.94 $ 0.83 $ 0.68 $ 0.68
========== ========== ========== ========== ==========
- 1 -
Summary of Quarterly Results of Operations
The following is a summary of unaudited quarterly results of operations for the
years ended April 30, 2005 and 2004.
Earnings per -
Earnings per Common Common Share
(Dollars in thousands, except per share data) Share Assuming Dilution
- --------------------------------------------- ------------------- ---------------------
Income Income
from Income from from
Gross Continuing Net Continuing Net Continuing Net
Quarter Ended Net Sales Profit Operations Income Operations Income Operations Income
---------------- --------- --------- ---------- -------- ----------- ------ ---------- ------
2005 July 31, 2004 $ 413,267 $ 144,188 $ 27,487 $ 32,848 $ 0.51 $ 0.61 $ 0.50 $ 0.60
October 31, 2004 588,922 188,881 40,663 38,005 0.70 0.65 0.69 0.65
January 31, 2005 550,234 174,198 35,524 36,108 0.61 0.62 0.60 0.61
April 30, 2005 491,454 150,149 26,786 22,112 0.46 0.38 0.45 0.38
--------- --------- -------- -------- ------ ------ ------ ------
2004 July 31, 2003 $ 339,176 $ 119,426 $ 26,357 $ 25,785 $ 0.53 $ 0.52 $ 0.53 $ 0.51
October 31, 2003 374,203 132,970 32,719 32,067 0.66 0.64 0.65 0.64
January 31, 2004 343,788 126,526 31,120 31,318 0.62 0.63 0.62 0.62
April 30, 2004 312,389 103,679 21,102 22,180 0.42 0.44 0.42 0.44
========= ========= ======== ======== ====== ====== ====== ======
The first quarter of 2005 and all quarters of 2004 reflect the restatement of
previously reported quarterly information for discontinued operations, as
discussed in Note C to the consolidated financial statements.
Annual earnings per share may not equal the sum of the individual quarters due
to differences in the average number of shares outstanding during the respective
periods.
Stock Price Data
The Company's common shares are listed on the New York Stock Exchange - ticker
symbol SJM. The table below presents the high and low market prices for the
shares and the quarterly dividends declared. There were approximately 346,900
shareholders as of the June 20, 2005 record date, of which 89,141 were
registered holders of common shares.
Quarter Ended High Low Dividends
---------------- ------- ------- ---------
2005 July 31, 2004 $ 53.12 $ 40.80 $ 0.25
October 31, 2004 47.00 41.85 0.25
January 31, 2005 47.63 43.44 0.25
April 30, 2005 51.65 46.31 0.27
------- ------- ------
2004 July 31, 2003 $ 42.01 $ 35.64 $ 0.23
October 31, 2003 43.82 37.61 0.23
January 31, 2004 47.56 43.10 0.23
April 30, 2004 53.50 46.03 0.25
======= ======= ======
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
EXECUTIVE SUMMARY
The J. M. Smucker Company ("the Company"), headquartered in Orrville, Ohio, is
the leading manufacturer and marketer of jams, jellies, preserves, and other
fruit spreads in the U.S. It is also the leader in dessert toppings, peanut
butter, shortening and oils, and health and natural foods beverages in North
America under such icon brands as Smucker's, Jif, and Crisco, and markets a wide
variety of other specialty products throughout North America and in many foreign
countries. The Company is widely known and trusted for quality food products.
In addition to the Smucker's, Jif, and Crisco brands, the Company's expanded
portfolio in fiscal 2005 includes the following icon brands in the U.S.:
Pillsbury flour, baking mixes, and ready-to-spread frostings; Hungry Jack
pancake mixes, syrup, and potato side dishes; Martha White baking mixes and
ingredients; and Pet evaporated milk; in Canada: Robin Hood flour and baking
mixes; Bick's pickles and condiments; and Golden Temple atta flour and rice. In
addition to these leading brands, the Company markets products under numerous
other brands, including Dickinson's, Laura Scudder's, Adams, Double Fruit
(Canada), R. W. Knudsen Family, and Santa Cruz Organic.
The Company distributes its products through grocery and other retail outlets,
foodservice establishments, schools, specialty and gourmet shops, health and
natural foods stores, and consumer direct vehicles such as the Internet and a
showcase store in Orrville, Ohio.
Since the 1998 inception of Fortune magazine's annual survey of the "100 Best
Companies to Work For," the Company has consistently been recognized as one of
the top 25 companies to work for in the United States. The Company has over
3,500 employees worldwide and distributes products in more than 45 countries.
RESULTS OF OPERATIONS
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. Multifoods had consolidated
net sales for the fiscal year ended February 28, 2004, of approximately $908
million. With the acquisition, the Company added an array of North American icon
brands, marketed in the center of the store, to the existing Smucker family of
brands. This transaction has been accounted for as a purchase business
combination. The results of Multifoods' operations are included in the Company's
consolidated financial statements from the date of the acquisition.
3
The Company's strategy is to own and market leading North American icon brands
sold in the center of the store. In support of this strategy, on June 16, 2004,
the Company sold its Australian subsidiary, Henry Jones Foods ("HJF") to SPC
Ardmona Ltd. The transaction generated proceeds of approximately $35.7 million
in cash and resulted in a gain of approximately $9 million ($1.5 million, net of
tax). On October 6, 2004, the Company sold its Brazilian subsidiary, Smucker do
Brasil, Ltda., to Cargill, Incorporated generating proceeds of approximately
$6.9 million in cash and resulting in a loss of approximately $5.9 million ($2.8
million, net of tax).
On February 18, 2005, the Company sold the Multifoods U.S. foodservice and
bakery products businesses, including the Canadian foodservice locations
operated under the Gourmet Baker name, which were acquired as part of
Multifoods. This sale to Value Creations Partners, Inc. generated proceeds
consisting of $33 million in cash and a $10 million subordinated promissory
note.
The Australian subsidiary, the Brazilian subsidiary, and the Multifoods U.S.
foodservice and bakery products businesses are considered to be discontinued
operations and are excluded from the discussions below.
NET SALES
The following table presents net sales information.
Year Ended April 30,
------------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------ ---------- ---------- ----------
U.S. retail market:
Smucker's brand $ 354,260 $ 327,696 $ 293,140
Jif and Crisco brands 618,892 605,041 535,434
Multifoods brands 356,165 -- --
Other brands 75,874 69,569 61,297
---------- ---------- ----------
Total U.S. retail market $1,405,191 $1,002,306 $ 889,871
---------- ---------- ----------
Special markets:
Multifoods brands $ 270,066 $ -- $ --
Other brands 368,620 367,250 380,227
---------- ---------- ----------
Total special markets $ 638,686 $ 367,250 $ 380,227
---------- ---------- ----------
Total net sales $2,043,877 $1,369,556 $1,270,098
========== ========== ==========
Sales in 2005 increased $674.3 million, or 49 percent, from 2004. The acquired
Multifoods businesses contributed $626.2 million of the total increase.
Excluding the contribution of the Multifoods brands, sales were up nearly four
percent. Other factors favorably impacting sales in 2005 were foreign exchange
rates and the pricing environment in the shortening and oils business.
In the U.S. retail market segment, sales were $1,405.2 million in 2005, up
$402.9 million, or approximately 40 percent, from 2004. The Multifoods
contribution for 2005 was $356.2 million. The Company's sales of Smucker's, Jif,
and Crisco contributed approximately ten percent of the total sales increase for
the segment. In addition, sales of Uncrustables increased 37 percent in 2005 as
the Company continued to build on the success experienced in 2004.
4
The special markets segment is comprised of the foodservice, beverage, Canada,
international, and industrial business areas. The Canadian business acquired
from Multifoods has been combined with the Company's previous Canadian business
to form the new Canada business area. Sales in this segment were $638.7 million
in 2005 compared to $367.3 million in 2004, an increase of 74 percent. The
overall sales increase reflects the segment's addition of sales in our Canada
business and the growth in the foodservice and beverage areas, which were offset
by the divestiture of the industrial business. The Multifoods contribution for
2005 was $270.1 million. Excluding the contribution from Multifoods and the
industrial business, the special markets segment would have been up five percent
in 2005.
In the foodservice area, 2005 sales were up five percent from 2004 due to a
seven percent growth in traditional portion control items, primarily under the
Smucker's brand, and increased sales in the schools market. Sales of
Uncrustables increased six percent in 2005 in the schools market despite
capacity constraints that were experienced during the first half of the year.
Beverage area sales were up six percent in 2005. Sales of R. W. Knudsen Family
and Santa Cruz Organic products were up nine and five percent, respectively, for
2005, while sales of After The Fall continued to decline, as a result of the
strategic decision to regionalize this brand. Nonbranded sales for the business
area were up six percent in 2005.
In the international area, sales were up one percent in 2005 from 2004. Sales in
Mexico and Latin America experienced strong growth in 2005 with the entire
geographic region up over 26 percent from 2004. The South Asia export market was
also strong for the year with sales up ten percent. Sales in Scotland and other
export markets were down eight percent and 35 percent, respectively, from 2004
primarily due to the restructuring program in Europe and the United Kingdom in
the first quarter of the year.
Finally, sales in the Company's industrial business were down 22 percent for
2005. Approximately 70 percent of this decline, or $10.5 million in sales, was
the result of planned decreases associated with the strategic decision to exit
certain low-margin contracts. The remaining shortfall was caused by the sale of
the ingredients business in 2005 resulting in a gain of approximately $1.2
million ($0.7 million, net of tax).
Sales in 2004 increased $99.5 million, or eight percent, over 2003. The Jif and
Crisco business contributed $85.0 million of the increase in 2004. Net sales for
2004 benefited from one additional month of Jif and Crisco sales totaling $47.3
million, as the merger closed on June 1, 2002, one month into the 2003 fiscal
year. Other factors favorably impacting sales in 2004 were foreign exchange
rates and price increases in the shortening and oils business.
In the U.S. retail market segment, sales were $1,002.3 million in 2004, up
$112.4 million, or nearly 13 percent, from 2003. Jif and Crisco contributed over
60 percent of the overall 2004 sales increase for the segment. Smucker's branded
sales also had strong growth during 2004, up 12 percent over 2003, as the
Company realized
5
increased sales in its fruit spreads and natural peanut butter categories. In
addition, sales of Uncrustables increased significantly in 2004 as the Company
completed its national rollout. The only area within the segment realizing
declines during 2004 was specialty foods, which was down three percent due to a
planned decrease in nonbranded business.
Sales in the special markets segment were $367.3 million in 2004 compared to
$380.2 million in 2003, a decrease of three percent. This decline reflects the
planned exit of certain low-margin contracts in both the industrial and
foodservice business areas. Excluding these planned decreases, the special
markets segment would have been up four percent in 2004. Sales in 2004 were up
in the Canada, beverage, and foodservice areas, while sales in the industrial
area were down from 2003.
In Canada, sales were up 24 percent in 2004 from 2003 due primarily to favorable
exchange rates, which contributed approximately $8.2 million to the overall
sales growth of $12.3 million. As measured in local currency, Canadian sales
were strong, up eight percent in 2004, due primarily to the impact of the
additional month of Crisco sales.
In the international area, sales were down three percent despite strong growth
in 2004 in Mexico and Latin America, up over 20 percent from 2003. All other
regions, including Scotland and other export markets, were down from 2003.
In the foodservice area, 2004 sales were up three percent from 2003 due to a six
percent growth in traditional portion control items, primarily under the
Smucker's brand, and increased sales in the schools market. Sales of
Uncrustables increased 39 percent in 2004 in the schools market despite capacity
constraints that were experienced during much of the year. Effective May 2003,
the Company discontinued its role as master distributor for the Lea & Perrins
brand. This decision resulted in the reduction in 2004 of approximately $8
million of sales that had been included in 2003. Excluding this impact, sales in
the foodservice area were up 11 percent in 2004.
Beverage area sales were up eight percent in 2004, due primarily to strong
growth in its nonbranded business, which was up nearly 40 percent. Sales of R.
W. Knudsen Family and Santa Cruz Organic products also were up nine and 14
percent, respectively, for 2004, while sales of After The Fall declined 20
percent as a result of the strategic decision to regionalize this brand.
Finally, sales in the Company's industrial business were down 34 percent for
2004. Approximately half of this decline, or $20 million in sales, was the
result of planned decreases associated with the strategic decision to exit
certain low-margin contracts. The remaining shortfall was caused by softness in
sales of bakery ingredients.
6
OPERATING INCOME
The following table presents components of operating income as a percentage of
net sales.
Year Ended April 30,
--------------------------
2005 2004 2003
---- ---- ----
Gross profit 32.2% 35.2% 35.2%
Selling, distribution, and administrative:
Advertising 2.4% 3.9% 3.6%
Marketing and selling 7.7 7.8 8.1
Distribution 2.9 2.0 2.2
General and administrative 7.0 8.0 7.7
---- ---- ----
Total selling, distribution, and administrative 20.0% 21.7% 21.6%
==== ==== ====
Restructuring and merger and integration 1.4% 0.6% 0.9%
---- ---- ----
Operating income 10.8% 12.9% 12.7%
==== ==== ====
Operating income increased $43.8 million for 2005, or 25 percent, over 2004
while operating margin decreased from 12.9 percent to 10.8 percent, due to the
inclusion of the lower margin Multifoods brands. Included in 2005 operating
income was approximately $31.3 million of restructuring and merger and
integration related costs, while 2004 included $17.1 million of similar charges.
Positive contributors to operating income in 2005 included the overall growth of
the higher margin U.S. retail market segment, including gains in the Smucker's,
Jif, and Crisco brands. The Company's gross margin was 32.2 percent in 2005
versus 35.2 percent in 2004. The addition of the lower-margin Multifoods brands
was a primary contributor to this difference, along with higher raw material
costs and costs associated with the start up of the Scottsville, Kentucky,
facility.
Selling, distribution, and administrative ("SD&A") expenses increased 37 percent
during 2005, but decreased as a percent of net sales to 20.0 percent from 21.7
percent. The Company increased its marketing expense by 20 percent during 2005
in support of the Smucker's and Jif brands, the continued retail rollout of
Uncrustables, as well as support of the newly acquired Multifoods brands. In
addition, the Company incurred certain costs related to the maintenance of
Multifoods' Minnetonka, Minnesota, facility that will close by June 30, 2005.
Other factors contributing to the total expense increase in SD&A were increased
expenses to support the acquired business and increased costs associated with
regulatory requirements. This increase in costs was more than offset by the
overall increase in sales due to the acquisition.
Operating income increased $16.0 million for 2004, or ten percent, over 2003
while operating margin improved slightly to 12.9 percent compared to 12.7
percent. Included in 2004 operating income was approximately $17.1 million of
restructuring and merger related costs, while 2003 included $13.0 million of
similar charges. Positive contributors to operating income in 2004 included
margins earned on the additional month of Jif and Crisco sales in May and the
overall growth of the higher margin U.S. retail market segment. The Company's
gross margin was 35.2 percent in both years as strong margins in fruit spreads,
peanut butter, and beverage were offset by higher soybean oil costs in
shortening and oils.
7
Selling, distribution, and administrative expenses increased eight percent in
2004 and increased as a percent of net sales to 21.7 percent from 21.6 percent.
The Company increased its marketing expense by eight percent during 2004 in
support of Jif and Crisco and the retail rollout of Uncrustables. Other factors
contributing to the increase in SD&A during 2004 were overall higher employee
benefit costs, notably pension and health care, legal fees, and outside
services. These were somewhat offset by selling and distribution expenses which
increased at a rate less than sales.
INTEREST INCOME AND EXPENSE
Interest expense increased $16.3 million in 2005 due to an increase in the
Company's debt outstanding associated with the Multifoods acquisition. Interest
income increased by $1.9 million in 2005 due to an increase in the average
investment yield and interest earned on promissory notes received in conjunction
with divestitures during the year.
Interest expense decreased $2.2 million in 2004 due to an increase in interest
capitalized during the year and the effect of interest rate swaps associated
with the Company's long-term debt. The increase in capitalized interest was
related to the construction of the Uncrustables facility in Scottsville,
Kentucky. The impact of the swaps reduced interest expense by $2.1 million in
2004. Interest income increased by $1.1 million in 2004 due to an increase in
the average investment balance and a change in the Company's investment policy,
which allowed the Company to take advantage of higher yielding investment
instruments.
OTHER INCOME AND EXPENSE
In 2004, other income (net) was $3.6 million, which included a $2.1 million gain
recognized on the sale of the Watsonville, California, facility (see
Restructuring). In 2003, other expense (net) included a write down of certain
minor equity investments to their estimated fair value. The amount of the write
down included in other expense (net) was $1.4 million.
INCOME TAXES
Income taxes in 2005 were $74.2 million, up $8.3 million, or 13 percent, from
2004. The increase is due primarily to an increase in pretax earnings of $27.4
million, or 15 percent. The consolidated effective income tax rate in 2005 was
36.2 percent, compared to 37.2 percent in 2004. The reduction in the effective
tax rate was due primarily to benefits realized from the addition of the
Multifoods organization.
Income taxes in 2004 were $65.9 million, up $8.4 million, or 15 percent, from
2003. The increase is due primarily to an increase in pretax earnings of $25.5
million, or 17 percent. The consolidated effective income tax rate in 2004 was
37.2 percent, compared to 37.9 percent in 2003. The reduction in the effective
tax rate was due primarily to benefits realized from the organizational
restructuring associated with the Jif and Crisco merger.
8
RESTRUCTURING
During 2003, the Company announced plans to restructure certain operations as
part of its ongoing efforts to refine its portfolio, optimize its production
capacity, improve productivity and operating efficiencies, and improve the
Company's overall cost base as well as service levels in support of its
long-term strategy. As a result of these plans, the Company expects to record
total restructuring charges of approximately $40 million, to be recognized
through 2006. Included in the restructuring charge are expected cash outlays of
approximately $28 million that relate primarily to employee separation costs and
equipment relocation expenses. At the end of 2005, these restructurings were
proceeding as planned. 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 2006. 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 the retail business. In
the third quarter of fiscal 2005, the Company announced plans to discontinue
operations at its Salinas, California, facility and restructure its U.S.
distribution operations. Production from the Salinas facility will be relocated
to plants in Orrville, Ohio, and Memphis, Tennessee, by December 31, 2005. Also,
as part of the restructuring, the Company sold its U.S. industrial business in
two separate transactions in the last half of the year.
In conjunction with the restructurings, the Company has recorded a total charge
of $31.7 million, of which $2.5 million was recorded in 2003, $15.8 million in
2004, and $13.3 million in 2005. The Company estimates that it will incur an
additional $8.3 million in 2006 related to these programs. The majority of these
charges related to employee separation costs, accelerated depreciation on
machinery and equipment, equipment relocation expenses, and the disposition of
inventories. To date, cash payments related to the restructuring charges have
been approximately $16.7 million. The remaining cash payments, estimated to be
approximately $11 million, will be paid through 2006.
9
LIQUIDITY AND CAPITAL RESOURCES
Year Ended April 30,
----------------------------------------
(Dollars in thousands) 2005 2004 2003
- ----------------------------------------- -------- -------- --------
Net cash provided by operating activities $194,401 $118,573 $174,808
Net cash used for investing activities 119,449 160,693 51,566
Net cash used for financing activities 72,280 40,037 28,419
======== ======== ========
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 April 30, 2005, were $134.9 million compared to
$161.2 million at April 30, 2004. The decrease was primarily the result of the
Company's use of available funds to finance the cash portion of the Multifoods
acquisition.
OPERATING ACTIVITIES
Historically, the Company's working capital requirements are greatest during the
first half of its fiscal year. The addition of the Multifoods businesses further
increases the working capital needs during the first six months of the fiscal
year. This is due primarily to the need to build inventory levels in advance of
the "fall bake" season and the seasonal procurement of raw materials used in the
Company's pickle and condiment business in Canada. Working capital, excluding
cash and short-term investments, as a percent of annual sales decreased from
11.4 percent for the year ended April 30, 2004, to 8.4 percent for the year
ended April 30, 2005.
Cash provided by operating activities was approximately $194.4 million during
2005. The positive cash generated resulted from the increase in income from
continuing operations and an increase in depreciation, a noncash charge,
partially offset by increases in working capital requirements. The increase in
working capital consisted primarily of payments of accounts payable and accrued
items, and higher inventory and trade receivables balances. In addition, the
Company made contributions to its qualified and nonqualified retirement benefit
plans totaling approximately $18 million and funded restructuring and merger and
acquisition related costs of approximately $40 million.
INVESTING ACTIVITIES
Net cash used for investing activities during the year included the use of
approximately $99 million in cash to finance the Multifoods acquisition, offset
by the proceeds from the sale of HJF, the Brazilian subsidiary, the Multifoods
U.S. foodservice and bakery products business, and the U.S. industrial business.
Capital expenditures were approximately $87.6 million during 2005. This compares
to $97.7 million in 2004.
10
FINANCING ACTIVITIES
During the first quarter of 2005, the Company entered into two separate
financing arrangements in order to provide the necessary funding requirements to
retire Multifoods' debt outstanding at the time of the closing of the
acquisition, to fund merger related costs incurred during 2005, and to provide
for working capital requirements. On May 27, 2004, the Company issued $100
million of 4.78 percent, senior, unsecured notes due June 1, 2014. Subsequently,
on June 17, 2004, the Company entered into a five-year, $180 million unsecured
revolving credit facility with a group of four banks. Interest on this bank debt
is based on prevailing U.S. Prime, Canadian Base Rate, LIBOR, or Canadian CDOR,
as determined by the Company, and is payable either on a quarterly basis, or at
the end of the borrowing term.
At April 30, 2005, the Company had a balance outstanding of approximately $33.4
million against the revolver. In addition, the Company paid dividends of $56.1
million during the year.
During 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. In conjunction with this
program, the Company administered a voluntary odd-lot program which allowed
shareholders with fewer than 100 shares to either sell all of their shares or to
purchase additional shares to increase their holdings up to 100 shares. As a
result, the Company repurchased 59,478 common shares after taking into effect
shareholders who opted to increase their holdings to 100 shares. In addition to
the voluntary odd-lot program, the Company repurchased 309,200 shares on the
open market through April 30, 2005. The Company used cash of approximately $17
million for these repurchases.
Cash requirements for 2006 will include capital expenditures estimated to range
from $75 to $80 million. In addition, dividends are expected to approximate $63
million and interest payments on long-term debt to approximate $27 million for
the year. The Company will utilize $17 million during the year to payoff the
7.70 percent Series A Senior Notes that are due on September 1, 2005. The
Company also expects continued merger related costs requiring approximately $12
million in 2006 related to the Multifoods acquisition. Finally, contributions to
the Company's qualified and nonqualified retirement benefit plans are estimated
at $17 million.
Assuming there are no other material acquisitions or other significant
investments, the Company believes that cash on hand and investments, combined
with cash provided by operations, and borrowings available under the revolving
credit facility, will be sufficient to meet 2006 cash requirements, including
the payment of dividends, repayment of debt, repurchase of common shares, and
interest on debt outstanding.
11
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations at April
30, 2005.
More
One to Three to Than
Less Than Three Five Five
(Dollars in millions) Total One Year Years Years Years
- --------------------------- ---------- --------- -------- -------- --------
Long-term debt obligations $ 448.6 $ 17.0 $ 33.0 $ 288.6 $ 110.0
Operating lease obligations 10.5 1.7 2.8 2.2 3.8
Purchase obligations 470.3 339.3 120.0 9.4 1.6
Other long-term liabilities 205.2 -- -- -- 205.2
---------- -------- -------- -------- --------
Total $ 1,134.6 $ 358.0 $ 155.8 $ 300.2 $ 320.6
========== ======== ======== ======== ========
In conjunction with the acquisition of Multifoods, the Company has assumed
certain guarantees that resulted from the sale by Multifoods, in September 2002,
of its foodservice distribution business to Wellspring Distribution Corporation
(Wellspring). These guarantees relate to certain real estate and tractor-trailer
fleet lease obligations of the business. The guarantee requires the lessor to
pursue collection and other remedies against Wellspring before demanding payment
from the Company. In addition, the Company's obligation 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. At April 30, 2005, the Company's outstanding
guarantees for the lease obligations of Wellspring were $13.1 million related to
the tractor-trailer fleet lease and $10.9 million related to the real estate
lease.
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 and estimable.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that in certain circumstances affect amounts reported in the
accompanying consolidated financial statements. In preparing these financial
statements, management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates.
12
Accrued Trade Marketing and Merchandising. In order to support the Company's
products, various trade marketing programs are offered to customers, that
reimburse them for a portion, or all of their promotional activities related to
the Company's products. The Company regularly reviews and revises, when it deems
necessary, estimates of costs to the Company for these trade marketing and
merchandising programs based on estimates of what has been incurred by
customers. Actual costs incurred by the Company may differ significantly if
factors such as the level and success of the customers' programs or other
conditions differ from expectations.
Impairment of Long-Lived Assets. Historically, long-lived assets have been
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to future net cash flows estimated to be generated by such assets. If
such assets are considered to be impaired, the impairment to be recognized is
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. However, determining fair value is subject to estimates of both cash
flows and interest rates and different estimates could yield different results.
There are no events or changes in circumstances of which management is aware
indicating that the carrying value of the Company's long-lived assets may not be
recoverable, with the exception of planned restructuring activities noted under
Restructuring.
Goodwill and Other Indefinite-Lived Intangible Assets. The annual evaluation of
goodwill and other indefinite-lived intangible assets requires the use of
estimates about future operating results for each reporting unit to determine
estimated fair value. Changes in forecasted operations can materially affect
these estimates. Additionally, other changes in the estimates and assumptions,
including the discount rate and expected long-term growth rate, which drive the
valuation techniques employed to estimate the fair value of the reporting unit
could change and, therefore, impact the assessments of impairment in the future.
Pension Plans and Other Postretirement Benefit Plans. To determine the Company's
ultimate obligation under its defined benefit pension plans and other
postretirement benefit plans, management must estimate the future cost of
benefits and attribute that cost to the time period during which each covered
employee works. To record the related net assets and obligations of such benefit
plans, management uses assumptions related to inflation, investment returns,
mortality, employee turnover, rate of compensation increases, medical costs, and
discount rates. Management, along with third-party actuaries, reviews all of
these assumptions on an ongoing basis to ensure that the most reasonable
information available is being considered. For 2006 expense recognition, the
Company will use a discount rate of 5.75 percent and 5.50 percent, an expected
rate of return on plan assets of 8.5 percent and 8.0 percent, and a rate of
compensation increase of 4.4 percent and 4.0 percent, for U.S. and Canadian
plans, respectively.
Accrued Expenses. Management estimates certain material expenses in an effort to
record those expenses in the period incurred. The most material accrued
estimates are insurance-related expenses, including self-insurance. Workers'
compensation and general liability insurance accruals are recorded based on
insurance claims processed, as well as historical claims experience for claims
incurred but not yet reported. These estimates are
13
based on historical loss development factors. Employee medical insurance
accruals are recorded based on medical claims processed, as well as historical
medical claims experience for claims incurred but not yet reported. Differences
in estimates and assumptions could result in an accrual requirement materially
different from the calculated accrual.
Recovery of Trade Receivables. In the normal course of business, the Company
extends credit to customers that satisfy predefined criteria. The Company
evaluates the collectibility of trade receivables based on a combination of
factors. When aware of a specific customer's inability to meet its financial
obligations, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial position, the Company records a
specific reserve for bad debt to reduce the related receivable to the amount the
Company reasonably believes is collectible. The Company also records reserves
for bad debt for all other customers based on a variety of factors, including
the length of time the receivables are past due, historical collection
experience, and an evaluation of current and projected economic conditions at
the balance sheet date. Actual collections of trade receivables could differ
from management's estimates due to changes in future economic or industry
conditions or specific customers' financial conditions.
Restructuring. During 2003, the Company announced plans to restructure certain
operations as part of its ongoing efforts to refine its portfolio, optimize its
production capacity, improve productivity and operating efficiencies, and
improve the Company's overall cost base as well as service levels in support of
its long-term strategy. The expected restructuring charge includes estimates
related to employee separation costs, the closure and consolidation of
facilities, contractual obligations, and the valuation of certain assets
including property, plant, and equipment, and inventories. Estimates of such
costs are determined by contractual agreement or estimated by management based
on historical experience. Actual amounts could differ from the original
estimates.
Share-Based Payments. 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. In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised), Share-Based Payments ("SFAS
123R"). SFAS 123R is a revision of SFAS 123 and supersedes APB 25. SFAS 123R
requires that the cost of transactions involving share-based payments be
recognized in the financial statements based on a fair value-based measurement.
As required by SFAS 123R, the Company will recognize expenses related to stock
options granted to employees as of its first quarter in fiscal 2007. In
anticipation of adoption of SFAS 123R, the Company has also elected to replace
its current employee stock option incentive program with a restricted stock
program as of May 2005. All stock option awards that are outstanding and vest
after April 30, 2006, will be reflected in compensation expense over the period
in which they vest.
14
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK
The following discussions about the Company's market risk disclosures involve
forward-looking statements. Actual results could differ from those projected in
the forward-looking statements. 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 Company's cash and short-term
investment portfolio at April 30, 2005, approximates carrying value. Exposure to
interest rate risk on the Company's long-term debt is mitigated since it is at a
fixed rate until maturity. Market risk, as measured by the change in fair value
resulting from a hypothetical ten percent change in interest rates, is not
material. Based on the Company's overall interest rate exposure as of and during
the year ended April 30, 2005, including derivative and other instruments
sensitive to interest rates, a hypothetical ten percent movement in interest
rates would not materially affect the Company's results of operations. A
hypothetical 100 basis point increase in short-term interest rates would
increase the Company's interest expense by approximately $0.8 million. Interest
rate risk can also be measured by estimating the net amount by which the fair
value of the Company's financial liabilities would change as a result of
movements in interest rates. Based on a hypothetical, immediate 100 basis point
decrease in interest rates at April 30, 2005, the market value of the Company's
long-term debt and interest rate portfolio, in aggregate, would increase by
approximately $22 million.
Foreign Currency Exchange Risk. The Company utilizes foreign exchange contracts,
typically with maturities of less than one year, to hedge foreign exchange
fluctuation. The contracts are accounted for as cash flow hedges. A hypothetical
ten percent strengthening or weakening of the U.S. dollar would not have a
material impact on the cash flows or the financial results of the Company.
The Company has operations outside the United States 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
April 30, 2005, are not expected to result in a significant impact on future
earnings or cash flows.
Revenues from customers outside the United States represented 18 percent of net
sales during 2005. 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 or loss
to the extent effective, and reclassified into cost of products sold in the
period during which the hedged transaction
15
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"variable interest entities." Transactions with related parties are in the
ordinary course of business, are conducted at an arm's-length basis, and are not
material to the Company's results of operations, financial condition, or cash
flows.
CERTAIN FORWARD-LOOKING STATEMENTS
This annual 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 Company's ability to effectively ramp-up and manage capacity
related to Uncrustables products at the Scottsville, Kentucky,
facility, and the costs associated to do so;
- the success and cost of marketing and sales programs and strategies
intended to promote growth in the Multifoods businesses, the
Company's existing 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 oils and baking business;
- the success and cost of introducing new products;
- the timing and amount of capital expenditures, restructuring, and
merger and integration costs;
- the ability to achieve the amount and timing of the estimated
savings associated with the Multifoods acquisition;
- the strength of commodity markets from which raw materials are
procured and the related impact on costs;
- raw material, ingredient, and energy 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.
16
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Shareholders
The J. M. Smucker Company
Management of The J. M. Smucker Company is responsible for establishing and
maintaining adequate accounting and internal control systems over financial
reporting for the Company. The Company's internal control system is designed to
provide reasonable assurance that the Company has the ability to record,
process, summarize, and report reliable financial information on a timely basis.
The Company's management assessed the effectiveness of the Company's internal
controls over financial reporting as of April 30, 2005. In making this
assessment, management used the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
On June 18, 2004, the Company completed the acquisition of International
Multifoods Corporation ("Multifoods"). As permitted by the Securities and
Exchange Commission, management excluded the Multifoods Canadian operations from
its assessment of internal control over financial reporting as of April 30,
2005. Multifoods Canada constituted approximately eight percent of total assets
(excluding goodwill and other indefinite-lived intangible assets) as of April
30, 2005, and 13 percent of net sales for the year then ended. Multifoods Canada
will be included in the Company's assessment as of April 30, 2006.
Based on the Company's assessment of internal control over financial reporting
under Internal Control - Integrated Framework, management concluded the
Company's internal control over financial reporting was effective as of April
30, 2005.
Ernst & Young LLP, independent registered public accounting firm, audited the
Company's assessment of internal control over financial reporting as of April
30, 2005, and their report thereon is included on page 21 of this report.
Timothy P. Smucker Richard K. Smucker Mark R. Belgya
Chairman and President and Vice President,
Co-Chief Executive Officer Co-Chief Executive Officer Chief Financial Officer
and Treasurer
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Board of Directors and Shareholders
The J. M. Smucker Company
We have audited management's assessment, included in the accompanying Report of
Management on Internal Control Over Financial Reporting, that The J. M. Smucker
Company maintained effective internal control over financial reporting as of
April 30, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("the COSO criteria"). The J. M. Smucker Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transaction and disposition of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
As indicated in the accompanying Report of Management on Internal Control Over
Financial Reporting, on June 18, 2004, the Company completed the acquisition of
International Multifoods Corporation ("Multifoods"). As permitted by the
Securities and Exchange Commission, management excluded the Multifoods Canadian
18
operations from its assessment of internal control over financial reporting as
of April 30, 2005. Multifoods Canada constituted approximately eight percent of
total assets (excluding goodwill and other indefinite-lived intangible assets)
as of April 30, 2005, and 13 percent of net sales for the year then ended. Our
audit of internal control over financial reporting of The J. M. Smucker Company
as of April 30, 2005 also did not include an evaluation of the Multifoods
Canada.
In our opinion, management's assessment that The J. M. Smucker Company
maintained effective internal control over financial reporting as of April 30,
2005, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, The J. M. Smucker Company maintained, in all material
respects, effective internal control over financial reporting as of April 30,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The J. M. Smucker Company as of April 30, 2005 and 2004, and the related
statements of consolidated income, shareholders' equity, and cash flows for each
of the three years in the period ended April 30, 2005, and our report dated June
24, 2005, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Akron, Ohio
June 24, 2005
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
Board of Directors and Shareholders
The J. M. Smucker Company
We have audited the accompanying consolidated balance sheets of The J. M.
Smucker Company as of April 30, 2005 and 2004, and the related statements of
consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended April 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The J.
M. Smucker Company at April 30, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of The J. M.
Smucker Company's internal control over financial reporting as of April 30,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated June 24, 2005, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Akron, Ohio
June 24, 2005
20
Statements of Consolidated Income
The J. M. Smucker Company
Year Ended April 30,
-------------------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003
------------- ------------- -------------
Net sales $ 2,043,877 $ 1,369,556 $ 1,270,098
Cost of products sold 1,383,995 878,491 821,543
Cost of products sold - restructuring 2,466 8,464 1,256
------------- ------------- -------------
Gross Profit 657,416 482,601 447,299
Selling, distribution, and administrative expenses 407,839 296,954 274,440
Merger and integration costs 17,954 1,266 10,511
Other restructuring costs 10,854 7,362 1,281
------------- ------------- -------------
Operating Income 220,769 177,019 161,067
Interest income 4,683 2,761 1,626
Interest expense (22,555) (6,209) (8,375)
Other income (expense) - net 1,717 3,599 (2,608)
------------- ------------- -------------
Income From Continuing Operations Before Income Taxes 204,614 177,170 151,710
Income taxes 74,154 65,872 57,498
------------- ------------- -------------
Income From Continuing Operations 130,460 111,298 94,212
Discontinued operations, net of tax (134) 52 2,130
Loss on sale of discontinued operations, net of tax (1,253) -- --
============= ============= =============
Net Income $ 129,073 $ 111,350 $ 96,342
============= ============= =============
Earnings per Common Share:
Income From Continuing Operations $ 2.29 $ 2.23 $ 1.99
Discontinued operations (0.03) 0.01 0.05
============= ============= =============
Net Income $ 2.26 $ 2.24 $ 2.04
============= ============= =============
Income From Continuing Operations - Assuming Dilution $ 2.26 $ 2.21 $ 1.97
Discontinued operations - assuming dilution (0.02) -- 0.05
============= ============= =============
Net Income - Assuming Dilution $ 2.24 $ 2.21 $ 2.02
============= ============= =============
See notes to consolidated financial statements.
21
Consolidated Balance Sheets
The J. M. Smucker Company
Assets
April 30,
-------------------------------
(Dollars in thousands) 2005 2004
- ---------------------- ------------- -------------
Current Assets
Cash and cash equivalents $ 58,085 $ 104,551
Marketable securities 17,739 15,074
Trade receivables, less allowance for doubtful accounts 145,734 93,617
Inventories:
Finished products 176,205 104,663
Raw materials 108,282 75,200
------------- -------------
284,487 179,863
Assets of discontinued operations -- 46,202
Other current assets 49,806 11,544
------------- -------------
Total Current Assets 555,851 450,851
------------- -------------
Property, Plant, and Equipment
Land and land improvements 42,018 29,076
Buildings and fixtures 175,718 122,003
Machinery and equipment 533,340 313,362
Construction in progress 26,053 70,021
------------- -------------
777,129 534,462
Accumulated depreciation (256,028) (216,941)
------------- -------------
Total Property, Plant, and Equipment 521,101 317,521
------------- -------------
Other Noncurrent Assets
Goodwill 951,208 523,660
Other intangible assets, net 469,758 317,237
Marketable securities 59,074 41,589
Other assets 78,902 33,267
------------- -------------
Total Other Noncurrent Assets 1,558,942 915,753
------------- -------------
$ 2,635,894 $ 1,684,125
============= =============
22
Liabilities and Shareholders' Equity
April 30,
-----------------------------------
(Dollars in thousands) 2005 2004
--------------- ---------------
Current Liabilities
Accounts payable $ 105,290 $ 62,232
Notes payable 33,378 --
Salaries, wages, and additional compensation 56,796 51,114
Accrued trade marketing and merchandising 41,727 25,303
Income taxes 5,610 2,915
Dividends payable 15,807 12,544
Current portion of long-term debt 17,000 --
Liabilities of discontinued operations -- 8,548
Other current liabilities 32,684 12,564
--------------- ---------------
Total Current Liabilities 308,292 175,220
--------------- ---------------
Noncurrent Liabilities
Long-term debt 431,560 135,000
Defined benefit pensions 35,921 2,315
Postretirement benefits other than pensions 50,179 19,384
Deferred income taxes 110,505 136,255
Other noncurrent liabilities 8,637 5,258
--------------- ---------------
Total Noncurrent Liabilities 636,802 298,212
--------------- ---------------
Shareholders' Equity
Serial preferred shares - no par value:
Authorized - 3,000,000 shares; outstanding - none -- --
Common shares - no par value:
Authorized - 150,000,000 shares; outstanding - 58,540,386 in 2005 and
50,174,707 in 2004 (net of 6,585,055 and 6,493,226 treasury shares,
respectively), at stated value 14,635 12,543
Additional capital 1,240,110 829,323
Retained income 447,831 387,065
Less:
Deferred compensation (4,573) (6,069)
Amount due from ESOP Trust (7,044) (7,584)
Accumulated other comprehensive loss (159) (4,585)
--------------- ---------------
Total Shareholders' Equity 1,690,800 1,210,693
--------------- ---------------
$ 2,635,894 $ 1,684,125
=============== ===============
See notes to consolidated financial statements.
23
Statements of Consolidated Cash Flows
The J. M. Smucker Company
Year Ended April 30,
----------------------------------------------
(Dollars in thousands) 2005 2004 2003
------------ ------------ ------------
Operating Activities
Income from continuing operations $ 130,460 $ 111,298 $ 94,212
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation 54,077 36,147 34,968
Amortization 1,971 2,414 1,420
Deferred income tax expense (benefit) 36,247 6,113 (3,680)
Changes in assets and liabilities, net of effect from
businesses acquired:
Trade receivables (2,015) (1,190) (42,135)
Inventories (5,257) (20,341) (11,903)
Other current assets 24,966 3,819 (965)
Accounts payable and accrued items (43,595) 3,478 55,579
Income taxes (3,394) (18,012) 23,722
Other - net 941 (5,153) 23,590
------------ ------------ ------------
Net Cash Provided by Operating Activities 194,401 118,573 174,808
------------ ------------ ------------
Investing Activities
Businesses acquired, net of cash acquired (99,062) (9,196) (10,767)
Proceeds from sale of businesses 80,027 -- --
Additions to property, plant, and equipment (87,576) (97,721) (48,083)
Purchase of marketable securities (88,803) (86,439) --
Sale and maturities of marketable securities 67,094 28,957 --
Disposal of property, plant, and equipment 2,406 9,161 1,150
Other - net 6,465 (5,455) 6,134
------------ ------------ ------------
Net Cash Used for Investing Activities (119,449) (160,693) (51,566)
------------ ------------ ------------
Financing Activities
Proceeds from long-term debt 100,000 -- --
Repayments of long-term debt (37,500) -- --
Proceeds from revolving credit arrangements - net 33,155 -- --
Repayments of short-term debt (113,622) -- --
Dividends paid (56,057) (45,724) (33,603)
Purchase of treasury shares (16,869) (1,148) --
Other - net 18,613 6,835 5,184
------------ ------------ ------------
Net Cash Used for Financing Activities (72,280) (40,037) (28,419)
Discontinued operations (46,005) 16,170 (10,585)
Effect of exchange rate changes on cash (3,133) 526 1,366
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (46,466) (65,461) 85,604
Cash and cash equivalents at beginning of year 104,551 170,012 84,408
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 58,085 $ 104,551 $ 170,012
============ ============ ============
( ) Denotes use of cash
See notes to consolidated financial statements.
24
Statements of Consolidated Shareholders' Equity
The J. M. Smucker Company
Amount Accumulated Total
Common Deferred Due from Other Share-
(Dollars in thousands, Shares Common Additional Retained Compen- ESOP Comprehen- holders'
except per share data) Outstanding Shares Capital Income sation Trust sive Loss Equity
- ---------------------- ----------- -------- ---------- ---------- --------- -------- ----------- ----------
Balance at May 1, 2002 23,504,129 $ 6,217 $ 33,184 $ 267,793 $ (2,725) $ (8,562) $ (15,763) $ 280,144
Net income 96,342 96,342
Foreign currency translation
adjustment 8,268 8,268
Minimum pension liability
adjustment (8,629) (8,629)
Unrealized loss on
available-for-sale
securities (296) (296)
Unrealized gain on cash flow
hedging derivatives 236 236
----------
Comprehensive Income 95,921
Business acquired 26,023,466 6,506 774,979 781,485
Stock plans 239,945 60 5,628 (100) 5,588
Cash dividends declared -
$0.83 a share (41,071) (41,071)
Tax benefit of stock plans 1,635 1,635
Other (341) 341 469 469
----------- -------- ---------- ---------- --------- -------- ----------- ----------
Balance at April 30, 2003 49,767,540 12,442 815,767 323,064 (2,825) (8,093) (16,184) 1,124,171
Net income 111,350 111,350
Foreign currency translation
adjustment 6,697 6,697
Minimum pension liability
adjustment 3,403 3,403
Unrealized gain on
available-for-sale
securities 545 545
Unrealized gain on cash flow
hedging derivatives 954 954
----------
Comprehensive Income 122,949
Stock plans 407,167 101 10,543 (528) (3,244) 6,872
Cash dividends declared -
$0.94 a share (46,821) (46,821)
Tax benefit of stock plans 3,013 3,013
Other 509 509
----------- -------- ---------- ---------- --------- -------- ----------- ----------
Balance at April 30, 2004 50,174,707 12,543 829,323 387,065 (6,069) (7,584) (4,585) 1,210,693
Net income 129,073 129,073
Foreign currency translation
adjustment 15,277 15,277
Minimum pension liability
adjustment (10,310) (10,310)
Unrealized loss on
available-for-sale
securities (275) (275)
Unrealized loss on cash flow
hedging derivatives (266) (266)
----------
Comprehensive Income 133,499
Business acquired 8,032,997 2,008 393,250 395,258
Purchase of treasury shares (368,678) (92) (7,790) (8,987) (16,869)
Stock plans 701,360 176 20,779 1,496 22,451
Cash dividends declared -
$1.02 a share (59,320) (59,320)
Tax benefit of stock plans 4,548 4,548
Other 540 540
----------- -------- ---------- ---------- --------- -------- ----------- ----------
Balance at April 30, 2005 58,540,386 $ 14,635 $1,240,110 $ 447,831 $ (4,573) $ (7,044) $ (159) $1,690,800
=========== ======== ========== ========== ========= ======== =========== ==========
See notes to consolidated financial statements.
25
Notes to Consolidated Financial Statements
The J. M. Smucker Company
(Dollars in thousands, except per share data)
Note A: Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries, and any
majority-owned investment. Intercompany transactions and accounts are eliminated
in consolidation.
Use of Estimates: The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Significant estimates in these consolidated financial statements include:
restructuring costs, allowances for doubtful trade receivables, estimates of
future cash flows associated with assets, asset impairments, useful lives for
depreciation and amortization, loss contingencies, net realizable value of
inventories, accruals for trade marketing and merchandising programs, and the
determination of discount and other rate assumptions for defined benefit pension
and other postretirement benefit expenses. Actual results could differ from
these estimates.
Revenue Recognition: The Company recognizes revenue, net of estimated
returns and allowances, when all of the following criteria have been met: a
valid customer order with a fixed price has been received; the product has been
shipped and title has transferred to the customer; there is no further
significant obligation to assist in the resale of the product; and
collectibility is reasonably assured.
Major Customer: Sales to Wal-Mart Stores, Inc., and subsidiaries amounted
to approximately 16 percent, 16 percent, and 14 percent of net sales in 2005,
2004, and 2003, respectively. These sales are primarily included in the U.S.
retail market. Trade receivables at April 30, 2005 and 2004, included amounts
due from Wal-Mart Stores, Inc., and subsidiaries of $22,951 and $12,732,
respectively. No other customer exceeded ten percent of net sales for any year.
Shipping and Handling Costs: Shipping and handling costs are included in
cost of products sold.
Trade Marketing and Merchandising Promotions: In order to support the
Company's products, various trade marketing programs are offered to customers,
which reimburse them for a portion, or all of their promotional expenses related
to the Company's products. The Company recognizes the cost of these programs
based on estimates of what has been incurred by customers. Such costs are
included as a reduction of sales.
Advertising Expense: Advertising costs are expensed as incurred.
Advertising expense was $50,002, $54,027, and $45,154 in 2005, 2004, and 2003,
respectively.
26
Product Development Cost: Total product development costs including
research and development costs and product formulation costs were $10,397,
$7,496, and $6,354 in 2005, 2004, and 2003, respectively.
Stock 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.
Compensation expense related to restricted stock awards was $1,609, $1,512, and
$706 in 2005, 2004, and 2003, respectively.
If compensation costs for 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:
Year Ended April 30,
-------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Net income, as reported $ 129,073 $ 111,350 $ 96,342
Add: Total stock-based compensation expense related to restricted stock
awards included in the determination of net income as reported, net
of tax benefit 1,026 950 439
Less: Total stock-based compensation expense determined under fair
value-based methods for all awards, net of tax benefit (4,686) (3,748) (3,024)
------------- ------------- -------------
Net income, as adjusted $ 125,413 $ 108,552 $ 93,757
============= ============= =============
Earnings per common share:
Net income, as reported $ 2.26 $ 2.24 $ 2.04
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 0.02 --
Less: Total stock-based compensation expense determined under fair
value-based methods for all awards, net of tax benefit (0.08) (0.08) (0.06)
------------- ------------- -------------
Net income, as adjusted $ 2.20 $ 2.18 $ 1.98
============= ============= =============
Net income, as reported - assuming dilution $ 2.24 $ 2.21 $ 2.02
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 0.01 0.01 --
Less: Total stock-based compensation expense determined under fair
value-based methods for all awards, net of tax benefit - assuming
dilution (0.08) (0.07) (0.06)
------------- ------------- -------------
Net income, as adjusted - assuming dilution $ 2.17 $ 2.15 $ 1.96
============= ============= =============
27
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended April 30,
----------------------------------
2005 2004 2003
-------- -------- --------
Average expected term (years) 7 5 5
Risk-free interest rate 3.74% 3.21% 4.08%
Dividend yield 2.25% 2.50% 2.50%
Volatility 26.31% 26.80% 27.70%
-------- -------- --------
Fair value of options granted $ 11.64 $ 9.45 $ 8.06
======== ======== ========
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected share price volatility and
average expected term.
Income Taxes: The Company accounts for income taxes using the liability
method. Accordingly, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rate is recognized in income or
expense in the period that the change is effective. Tax benefits are recognized
when it is probable that the deduction will be sustained. A valuation allowance
is established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized.
Cash and Cash Equivalents: The Company considers all short-term
investments with a maturity of three months or less when purchased to be cash
equivalents.
Trade Receivables: In the normal course of business, the Company extends
credit to customers. Trade receivables, less allowance for doubtful accounts,
reflect the net realizable value of receivables, and approximate fair value. In
the domestic markets, the Company's products are primarily sold through brokers
to food retailers, food wholesalers, club stores, mass merchandisers, military
commissaries, health and natural food stores, foodservice distributors, and
chain operators including: hotels and restaurants, schools and other
institutions. The Company's operations outside the United States are principally
in Canada where the Company's products are primarily sold through brokers to a
concentration of food retailers and other retail and foodservice channels
similar to those in domestic markets, and by a direct sales force to other food
manufacturers. The Company believes there is no concentration of risk with any
single customer whose failure or nonperformance would materially affect the
Company's results other than as discussed in Major Customer. On a regular basis,
the Company evaluates its trade receivables and establishes an allowance for
doubtful accounts based on a combination of specific customer circumstances,
credit conditions, and historical write-offs and collections. A receivable is
considered past due if payments have not been received within the agreed upon
invoice terms. The allowance for doubtful accounts at April 30, 2005 and 2004,
was $976 and $950, respectively. Trade receivables are charged off against the
allowance after management determines the potential for recovery is remote.
28
Inventories: Inventories, excluding grain-based inventories in Canada, are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. In Canada, grain-based inventories are valued on the basis of
replacement market prices prevailing at the end of the period.
Derivative Financial Instruments: The Company utilizes derivative
instruments such as commodity futures and options contracts, interest rate
swaps, and foreign currency futures contracts to hedge exposure to changes in
commodity prices, interest rates, and foreign currency exchange rates. The
Company accounts for these derivative instruments in accordance with Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. For derivatives that are
designated as a fair value hedge and used to hedge an existing asset or
liability, both the derivative and hedged item are recognized at fair value with
any changes recognized immediately in the Statements of Consolidated Income. For
derivatives designated as a cash flow hedge that are used to hedge an
anticipated transaction, changes in fair value are deferred and recorded in
shareholders' equity as a component of accumulated other comprehensive loss to
the extent the hedge is effective and then recognized in the Statements of
Consolidated Income in the period during which the hedged transaction affects
earnings. The Company utilizes regression analysis to determine correlation
between the value of the hedged item and the value of the derivative instrument
utilized to identify instruments that meet the criteria for hedge accounting.
Any ineffectiveness associated with the hedge or changes in fair value of
derivatives that are nonqualifying are recognized immediately in the Statements
of Consolidated Income. By policy, the Company has not historically entered into
derivative financial instruments for trading purposes or for speculation. For
additional information see Note O: Derivative Financial Instruments.
Property, Plant, and Equipment: Property, plant, and equipment are
recorded at cost and are depreciated on a straight-line basis over the estimated
useful lives of the assets (3 to 20 years for machinery and equipment, and 10 to
40 years for buildings, fixtures, and improvements).
The Company leases certain land, buildings, and equipment for varying periods of
time, with renewal options. Leases of cold storage facilities are continually
renewed. Rent expense in 2005, 2004, and 2003 totaled $18,191, $16,311, and
$16,967, respectively. Rent expense for cold storage facilities, which is based
on quantities stored, amounted to $5,206, $3,365, and $3,458 in 2005, 2004, and
2003, respectively.
Impairment of Long-Lived Assets: In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when circumstances indicate the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the
assets to future net cash flows estimated by the Company to be generated by such
assets. If such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying
29
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are recorded at the lower of carrying value or estimated net realizable
value.
Goodwill and Other Intangible Assets: Goodwill is the excess of the
purchase price paid over the fair value of the net assets of the business
acquired. In accordance with Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill and
indefinite-lived intangible assets are not amortized but are reviewed at least
annually for impairment. The Company conducts its annual test for impairment of
goodwill and indefinite-lived intangible assets as of February 1, of each year.
In addition, the Company will test for impairment if events or circumstances
occur that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. Finite-lived intangible assets are amortized over
their useful lives.
Other Investments in Securities: The Company maintains funds for the
payment of benefits associated with nonqualified retirement plans. These funds
include investments considered to be available-for-sale marketable securities.
The fair value of these investments included in other assets at April 30, 2005
and 2004, was $23,982 and $15,016, respectively.
Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated using the exchange rates in effect at the
balance sheet date, while income and expenses are translated using average
rates. Translation adjustments are reported as a component of shareholders'
equity in accumulated other comprehensive loss.
Recently Issued Accounting Standards: In November 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 151, Inventory Costs - an amendment of ARB No. 43 ("SFAS 151"). SFAS 151
clarifies that abnormal amounts of idle facility expense, freight, handling
costs and spoilage should be expensed as incurred and not included in overhead
absorbed and capitalized as an inventoriable cost. Further, SFAS 151 requires
that allocation of fixed production overheads to conversion costs should be
based on normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Companies must apply the standard prospectively. The Company has not yet
determined the impact of adopting SFAS 151; however, the Company does not expect
the impact, if any, to have a material impact on the Company's results of
operations or financial position.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised), Share-Based Payments ("SFAS
123R"). SFAS 123R is a revision of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
123R requires that the cost of transactions involving share-based payments be
recognized in the financial statements based on a fair value-based measurement.
SFAS 123R is effective for fiscal years beginning after June 15, 2005 (May 1,
2006 for the Company). The adoption of SFAS 123R will not have a material impact
on the Company's results of operations or financial position.
30
The American Jobs Creation Act of 2004 ("AJCA") was enacted by the U.S. Congress
on October 22, 2004. The AJCA repeals an export incentive, creates a new
deduction for qualified domestic manufacturing activities, and includes a
special one-time deduction of 85 percent of certain foreign earnings repatriated
to the U.S. In December 2004, the Financial Accounting Standards Board issued
Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004" ("FSP FAS 109-1"). In
accordance with FSP FAS 109-1, the Company will treat the deduction for
qualified domestic manufacturing activities as a special deduction in future
years as realized. The deduction for qualified domestic manufacturing activities
did not impact the Company's results of operations or financial position in
2005. The Company has not yet completed its evaluation of the deduction for
qualified domestic manufacturing activities on the Company's future effective
tax rate. The phase-out of the export incentive is not expected to have a
material impact on the Company's effective tax rate in the future. In December
2004, the Financial Accounting Standards Board issued Staff Position No. FAS
109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," allowing companies
additional time to evaluate the effect of the AJCA on plans for reinvestment or
repatriation of foreign earnings. The Company is in the process of evaluating
the effects of the repatriation provision, however, the Company does not expect
the impact of repatriation of foreign earnings, if any, to have a material
impact on the Company's results of operations or financial position.
Risks and Uncertainties: The Company insures its business and assets in
each country against insurable risks, to the extent that it deems appropriate,
based upon an analysis of the relative risks and costs. The Company believes
that the risk of loss from noninsurable events would not have a material adverse
effect on the Company's operations as a whole.
The raw materials used by the Company are primarily commodities and
agricultural-based products. The fruit, pickle, and condiment raw materials used
by the Company in the production of food products are purchased from independent
growers and suppliers. Sweeteners, peanuts, oils, wheat and flour, and other
ingredients are obtained from various other sources. Although availability and
costs vary from year to year, raw materials are available from numerous sources
and the Company believes it will continue to be able to obtain adequate
supplies. Approximately 39 percent of the Company's employees, located at 12
facilities, are covered by union contracts. The contracts vary in term depending
on the location with one contract set to expire in 2006.
Reclassifications: Certain prior year amounts have been reclassified to
conform to current year classifications.
31
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. Multifoods had consolidated
net sales for the fiscal year ended February 28, 2004, of approximately $908
million. With the acquisition, the Company adds an array of North American icon
brands, marketed in the center of the store, to the Smucker family of brands.
The acquisition of Multifoods added the Pillsbury flour, baking mixes, and
ready-to-spread frostings; Hungry Jack pancake mixes, syrup, and potato side
dishes; Martha White baking mixes and ingredients; and Pet evaporated milk
brands to the U.S. retail market business. Multifoods' primary Canadian brands
include: Robin Hood flour and baking mixes, Bick's pickles and condiments, and
Golden Temple flour and rice in the growing ethnic food category.
Under the terms of the acquisition agreement, Multifoods' shareholders received
$25 per share in a combination of 80 percent Company common shares and 20
percent cash. Approximately $98 million in cash was paid and 8,032,997 common
shares were issued to 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 $17,954 and
$1,266, 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. In connection with the
acquisition, the Company issued $100 million of 4.78 percent, ten-year senior,
unsecured notes, and secured a revolving credit facility of $180 million
provided through a group of four banks, at prevailing market interest rates.
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.
32
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition, subject to final adjustment
in the first quarter of 2006.
Assets acquired:
Current assets $ 203,259
Property, plant, and equipment 164,355
Intangible assets not subject to amortization 154,000
Goodwill 426,232
Deferred income taxes 65,870
Other assets 35,652
=============
Total assets acquired $ 1,049,368
=============
Liabilities assumed:
Current liabilities $ 124,826
Postretirement benefits other than pensions 26,680
Other noncurrent liabilities 27,355
=============
Total liabilities assumed $ 178,861
=============
Net assets acquired $ 870,507
=============
The $426,232 of goodwill was assigned to the U.S. retail market and special
markets and will not be deductible for tax purposes.
Had the acquisition of Multifoods occurred at the beginning of 2004, unaudited,
pro forma consolidated results would have been as follows:
Year Ended April 30,
------------------------------
2005 2004
------------- -------------
Net sales $ 2,131,000 $ 2,086,000
Operating income 217,000 234,000
Net income 123,000 134,000
Net income per common share -
assuming dilution 2.09 2.29
============= =============
The unaudited, pro forma consolidated results are based on historical financial
statements of the Company and those of the acquired business and do not
necessarily indicate the results of operations that would have resulted had the
acquisition been completed at the beginning of the applicable period presented,
nor is it indicative of the results of operations in future periods.
The unaudited, pro forma consolidated results for the year ended April 30, 2004,
combines the Consolidated Statement of Operations of Multifoods for the year
ended February 28, 2004, with the Company's Statement of Consolidated Income for
the year ended April 30, 2004. The pro forma consolidated results for the year
ended April 30, 2005, combines the unaudited Consolidated Condensed Statement of
Operations of Multifoods for the period from May 1, 2004, until the date of
acquisition with the Company's Statement of Consolidated Income for the year
ended April 30, 2005. Included in the Company's Statement of Consolidated Income
for the year ended
33
April 30, 2005, are certain nonrecurring expenses associated with the
acquisition and the start up of the Company's Scottsville, Kentucky, plant.
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 will close by June 30, 2005, resulting in
the relocation or involuntary termination of all employees. Severance agreements
have been 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
---------- ----------
Note C: Discontinued Operations
During 2005, the Company sold several businesses consistent with its stated
long-term strategy. On June 16, 2004, the Company sold its Australian
subsidiary, Henry Jones Foods ("HJF") to SPC Ardmona Ltd. The transaction
generated proceeds of approximately $35.7 million in cash and resulted in a gain
of approximately $9 million ($1.5 million, net of tax). On October 6, 2004, the
Company sold its Brazilian subsidiary, Smucker do Brasil, Ltda., to Cargill,
Incorporated, generating proceeds of approximately $6.9 million in cash and
resulting in a loss of approximately $5.9 million ($2.8 million, net of tax).
In addition, on February 18, 2005, the Company sold the Multifoods U.S.
foodservice and bakery products businesses, as well as the Canadian foodservice
locations operated under the Gourmet Baker name, which were acquired as part of
Multifoods. The sale to Value Creations Partners, Inc. generated proceeds
consisting of $33 million in cash and a subordinated promissory note with a face
value of $10 million, and a fair value of approximately $6.8 million. No gain or
loss was recorded on this transaction.
The financial position, results of operations, and cash flows of these three
businesses are reported as discontinued operations and all prior periods have
been restated.
34
The following table summarizes the operating results of the discontinued
operations included in the Statements of Consolidated Income.
Year Ended April 30,
------------------------------------------
2005 2004 2003
----------- ----------- -----------
Net sales $ 135,658 $ 47,456 $ 41,645
Income from discontinued operations before income
tax 3,338 1,649 3,679
Income from discontinued operations (1,387) 52 2,130
----------- ----------- -----------
Income from discontinued operations for the year ended April 30, 2005, includes
a $1.3 million loss, net of taxes, on the divestitures of HJF and the Brazilian
subsidiary. Interest expense of $600 has been allocated to the U.S. foodservice
and bakery business for the year ended April 30, 2005.
The following table summarizes the carrying values of the assets and liabilities
of discontinued operations included in the Consolidated Balance Sheet at April
30, 2004.
Assets of discontinued operations:
Current assets $ 20,609
Property, plant, and equipment 12,187
Goodwill 7,483
Other intangible assets, net 5,878
Other assets 45
----------
Total assets of discontinued operations $ 46,202
==========
Liabilities of discontinued operations:
Current liabilities $ 8,211
Noncurrent liabilities 337
----------
Total liabilities of discontinued operations $ 8,548
==========
Note D: Merger
On June 1, 2002, the Company merged the Jif peanut butter and Crisco shortening
and oils businesses of The Procter & Gamble Company ("P&G") with and into the
Company in a tax-free stock transaction. Under the terms of the agreement, P&G
spun off its Jif and Crisco businesses to its shareholders and immediately
thereafter those businesses were merged with and into the Company. P&G
shareholders received one Company common share for every 50 P&G common shares
that they held as of the record date for the distribution of the Jif and Crisco
businesses to the P&G shareholders. The Company's shareholders received 0.9451
of a new Company common share for each Company common share that they held
immediately prior to the merger. Approximately 26,023,000 common shares were
issued to the P&G shareholders, valued at approximately $781,485 based on the
average market price of the Company's common shares over the period from three
days before to three days after the terms of the merger were announced.
35
The conversion of the Company's common shares into new Company common shares has
been treated in a manner similar to a reverse stock split.
The merger and the combination of three brands - Smucker's, Jif, and Crisco -
enhances the Company's strategic and market position. The merger was accounted
for as a purchase business combination and for accounting purposes, the Company
was the acquiring enterprise. Accordingly, the results of the Jif and Crisco
operations are included in the Company's consolidated financial statements from
the date of the merger. The aggregate purchase price was approximately $792,252,
including $10,767 of capitalized acquisition related expenses. In addition, the
Company incurred costs of $10,511 in 2003 that were directly related to the
merger and integration of Jif and Crisco. Due to the nature of these costs, they
were expensed as incurred.
The assets acquired and liabilities assumed in the merger of the Jif and Crisco
businesses were recorded at estimated fair values as determined by Company
management. The Company obtained independent appraisals for the fair value of
property, plant, and equipment and identified intangible assets. A summary of
the assets acquired and liabilities assumed in the merger follows:
Assets acquired:
Tangible assets $ 138,152
Intangible assets not subject to amortization 305,000
Intangible asset subject to amortization
(ten-year useful life) 1,000
Goodwill 488,950
----------
Total assets acquired $ 933,102
==========
Total liabilities assumed $ 140,850
==========
Net assets acquired $ 792,252
==========
The $488,950 of goodwill relates to the U.S. retail market segment and is not
deductible for tax purposes.
Note E: Restructuring
During 2003, the Company announced its plan to restructure certain operations as
part of its ongoing efforts to refine its portfolio, optimize its production
capacity, improve productivity and operating efficiencies, and improve the
Company's overall cost base as well as service levels in support of its
long-term strategy. The Company's strategy is to own and market leading North
American icon brands sold in the center of the store.
During 2004, the Company closed its fruit processing operations at its
Watsonville, California, and Woodburn, Oregon, locations and subsequently sold
these facilities. Uncrustables production at the West Fargo, North Dakota,
location is expected to be discontinued in fiscal 2006. In Ripon, Wisconsin, the
Company completed the combination of its two manufacturing facilities into one
expanded site.
36
In the first quarter of fiscal 2005, the Company completed a restructuring
program to streamline operations in Europe and the United Kingdom, including the
exit of a contract packaging arrangement and certain segments of its retail
business. In the third quarter of fiscal 2005, the Company announced its intent
to discontinue operations at its Salinas, California, facility and restructure
its U.S. distribution operations. Production from the Salinas facility will be
relocated to plants in Orrville, Ohio, and Memphis, Tennessee, by December 31,
2005. During the last half of fiscal 2005, the Company completed the sale of its
U.S. industrial business.
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 $31.7 million has been incurred
from the fourth quarter of fiscal 2003 through April 30, 2005. The balance of
the costs will be incurred through the third quarter of 2006. The remaining cash
payments, estimated to be approximately $11 million, will be paid through the
end of 2006.
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 Other
Separation Charges Relocation Costs Total
---------- ---------- ---------- ---------- ----------
Total expected
restructuring charge $ 14,700 $ 8,400 $ 7,900 $ 9,000 $ 40,000
========== ========== ========== ========== ==========
Balance at May 1, 2002 $ -- $ -- $ -- $ -- $ --
Charge to expense 1,116 1,055 -- 366 2,537
Cash payments -- -- -- (200) (200)
Noncash utilization -- (1,055) -- (166) (1,221)
---------- ---------- ---------- ---------- ----------
Balance at April 30, 2003 $ 1,116 $ -- $ -- $ -- $ 1,116
Charge to expense 5,702 6,113 827 3,184 15,826
Cash payments (2,421) -- (827) (843) (4,091)
Noncash utilization -- (6,113) -- (1,192) (7,305)
---------- ---------- ---------- ---------- ----------
Balance at April 30, 2004 $ 4,397 $ -- $ -- $ 1,149 $ 5,546
Charge to expense 6,222 1,002 3,548 2,548 13,320
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
========== ========== ========== ========== ==========
Remaining expected
restructuring charge $ 1,660 $ 230 $ 3,525 $ 2,902 $ 8,317
========== ========== ========== ========== ==========
Approximately $2,466, $8,464, and $1,256 of the total restructuring charges of
$13,320, $15,826, and $2,537 in 2005, 2004, and 2003, respectively, were
reported in costs of products sold in the accompanying Statements of
Consolidated Income, while the remaining charges were reported in other
restructuring costs. The restructuring costs included in cost of products sold
include long-lived asset charges and inventory disposition costs. Expected
employee separation costs of approximately $14,700 are being recognized over the
estimated future service period of the related employees. The obligation related
to employee separation costs is included in salaries, wages, and additional
compensation, in the Consolidated Balance Sheets.
37
Long-lived asset charges include accelerated depreciation related to machinery
and equipment that will be used by the 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
professional fees and other closed facility costs.
Note F: Reportable Segments
The Company operates in one industry: the manufacturing and marketing of food
products. The Company has two reportable segments: U.S. retail market and
special markets. The U.S. retail market segment includes the consumer and
consumer oils and baking business areas. Prior to the acquisition of Multifoods,
this segment primarily represented the domestic sales of Smucker's, Jif, and
Crisco branded products to retail customers. With the addition of Multifoods,
domestic sales of Pillsbury, Hungry Jack, Martha White, and Pet branded products
to retail customers are now included in this segment. The special markets
segment is comprised of the foodservice, beverage, Canada, international, and
industrial business areas. The Canadian business acquired from Multifoods has
been combined with the Company's previous Canadian business to form the new
Canada business area and includes sales of Smucker's, Jif, Crisco, Robin Hood,
Bick's, and Golden Temple. 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, and health and natural food stores, and in foreign countries.
38
The following table sets forth reportable segment and geographical information.
Year Ended April 30,
----------------------------------------------
2005 2004 2003
------------- ------------- --------------
Net sales:
U.S. retail market $ 1,405,191 $ 1,002,306 $ 889,871
Special markets 638,686 367,250 380,227
------------- ------------- --------------
Total net sales $ 2,043,877 $ 1,369,556 $ 1,270,098
============= ============= ==============
Segment profit:
U.S. retail market $ 295,045 $ 231,068 $ 197,709
Special markets 64,049 47,649 50,102
------------- ------------- --------------
Total segment profit $ 359,094 $ 278,717 $ 247,811
============= ============= ==============
Interest income 4,683 2,761 1,626
Interest expense (22,555) (6,209) (8,375)
Amortization expense (1,971) (2,414) (1,420)
Restructuring costs (13,320) (15,826) (2,537)
Merger and integration costs (17,954) (1,266) (10,511)
Corporate administrative expenses (103,843) (80,468) (72,110)
Other unallocated income (expenses) 480 1,875 (2,774)
Income from continuing operations before income taxes ------------- ------------- --------------
$ 204,614 $ 177,170 $ 151,710
============= ============= ==============
Net sales:
Domestic $ 1,677,863 $ 1,278,243 $ 1,190,190
International:
Canada 338,798 64,295 51,964
All other international 27,216 27,018 27,944
============= ============= ==============
Total international $ 366,014 $ 91,313 $ 79,908
============= ============= ==============
Total net sales $ 2,043,877 $ 1,369,556 $ 1,270,098
============= ============= ==============
Assets:
Domestic $ 2,107,999 $ 1,592,829 $ 1,515,210
International:
Canada 517,343 33,213 34,126
All other international 10,552 58,083 66,071
============= ============= ==============
Total international $ 527,895 $ 91,296 $ 100,197
============= ============= ==============
Total assets $ 2,635,894 $ 1,684,125 $ 1,615,407
============= ============= ==============
Long-lived assets:
Domestic $ 1,709,622 $ 1,214,258 $ 1,108,407
International:
Canada 364,334 12,508 12,123
All other international 6,087 6,508 5,730
============= ============= ==============
Total international $ 370,421 $ 19,016 $ 17,853
============= ============= ==============
Total long-lived assets $ 2,080,043 $ 1,233,274 $ 1,126,260
============= ============= ==============
Segment profit represents revenue less direct and allocable operating expenses.
39
The following table presents product sales information.
Year Ended April 30,
---------------------------
2005 2004 2003
------- -------- ------
Peanut butter 20% 28% 26%
Shortening and oils 17 24 23
Fruit spreads 14 19 19
Flour and baking ingredients 13 -- --
Baking mixes and frostings 11 -- --
Portion control 4 7 6
Juices and beverages 4 6 6
Toppings and syrups 4 5 5
Pickles and condiments 3 -- --
Uncrustables frozen sandwiches 3 4 3
Industrial ingredients 3 4 7
Other 4 3 5
--- --- ---
Total 100% 100% 100%
=== === ===
Note G: Earnings per Share
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution.
Year Ended April 30,
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Numerator:
Income from continuing
operations for earnings per
common share and earnings
per common share
- assuming dilution $ 130,460 $ 111,298 $ 94,212
============ ============ ============
Denominator:
Denominator for earnings per
common share - weighted-
average shares 57,086,734 49,816,926 47,309,257
Effect of dilutive securities:
Stock options 533,875 502,166 366,629
Restricted stock 128,171 76,655 88,891
------------ ------------ ------------
Denominator for earnings per common
share - assuming dilution 57,748,780 50,395,747 47,764,777
============ ============ ============
Income from continuing
operations per common share $ 2.29 $ 2.23 $ 1.99
============ ============ ============
Income from continuing
operations per common share
- assuming dilution $ 2.26 $ 2.21 $ 1.97
============ ============ ============
40
Options to purchase 213,516 common shares at $49.60 to $57.09 per share were
outstanding during 2005 but were not included in the computation of earnings per
common share - assuming dilution, as the options' exercise prices were greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive.
Note H: Marketable Securities
The Company invests in debt securities. Under the Company's investment policy,
it will invest in securities deemed to be investment grade at time of purchase.
Currently, these investments are defined as government-backed mortgage
obligations, corporate bonds, municipal bonds, and commercial paper. The Company
determines the appropriate categorization of its debt securities at the time of
purchase and reevaluates such designation at each balance sheet date. The
Company has categorized all debt securities as available for sale because it
currently has the intent to convert these investments into cash if and when
needed. Classification of these available-for-sale marketable securities as
current or noncurrent is based on whether the conversion to cash is expected to
be necessary for current operations, which is currently consistent with the
securities maturity date.
Securities categorized as available for sale are stated at fair value, with
unrealized gains and losses reported as a component of other comprehensive
income or loss. Approximately $67,094 and $28,957 of proceeds have been realized
upon maturity of available-for-sale marketable securities in 2005 and 2004,
respectively, resulting in no gains or losses.
The following table is a summary of available-for-sale marketable securities.
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
U.S. corporate securities $ 28,012 $ -- $ (492) $ 27,520
Mortgage-backed securities 49,375 132 (214) 49,293
---------- ---------- ---------- ----------
Balance at April 30, 2005 $ 77,387 $ 132 $ (706) $ 76,813
========== ========== ========== ==========
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
U.S. corporate securities $ 23,187 $ 78 $ (35) $ 23,230
Government-backed obligations 9,015 7 -- 9,022
Mortgage-backed securities 24,453 100 (142) 24,411
-------- ---------- ---------- ----------
Balance at April 30, 2004 $ 56,655 $ 185 $ (177) $ 56,663
======== ========== ========== ==========
41
The contractual maturities of these available-for-sale marketable securities
were as follows:
April 30, 2005 April 30, 2004
------------------------ ------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
Due in one year or less $ 17,910 $ 17,739 $ 15,086 $ 15,074
Due after one to five years 10,102 9,781 17,116 17,178
Mortgage-backed securities 49,375 49,293 24,453 24,411
---------- ---------- ---------- ----------
Total marketable securities $ 77,387 $ 76,813 $ 56,655 $ 56,663
========== ========== ========== ==========
Marketable securities in an unrealized loss position at April 30, 2005, are
presented in the following table by length of time the securities were in an
unrealized loss position.
Estimate Unrealized Number of
Cost Fair Value Loss Securities
---------- ---------- ---------- ----------
Less than 12 months $ 61,671 $ 60,984 $ 687 7
More than 12 months 2,620 2,601 19 1
---------- ---------- ---------- ---------
Balance at April 30, 2005 $ 64,291 $ 63,585 $ 706 8
========== ========== ========== =========
Based on management's evaluation at April 30, 2005, considering the nature of
the investments, the credit worthiness of the issuers, and the intent and
ability of the Company to hold the securities for the period necessary to
recover the cost of the securities, the decline in the fair values was
determined to be temporary.
Note I: Goodwill and Other Intangible Assets
A summary of changes in the Company's goodwill during the years ended April 30,
2005 and 2004, by reportable segment is as follows:
U.S. Retail Special
Market Markets Total
----------- ---------- ----------
Balance at May 1, 2003 $ 502,303 $ 16,449 $ 518,752
Acquisition 4,759 -- 4,759
Other -- 149 149
----------- ---------- ----------
Balance at April 30, 2004 $ 507,062 $ 16,598 $ 523,660
Acquisition 403,515 23,443 426,958
Divestiture -- (1,420) (1,420)
Other -- 2,010 2,010
----------- ---------- ----------
Balance at April 30, 2005 $ 910,577 $ 40,631 $ 951,208
=========== ========== ==========
Included in the loss on sale of discontinued operations is the disposal of
approximately $7,483 of goodwill associated with HJF and the Company's Brazilian
subsidiary.
42
The Company's other intangible assets and related accumulated amortization are
as follows:
April 30, 2005 April 30, 2004
-------------------------------------------- --------------------------------------------
Acquisition Accumulated Acquisition Accumulated
Cost Amortization Net Cost Amortization Net
------------ ------------ ------------ ------------ ------------ ------------
Finite-lived intangible assets:
Patents $ 1,000 $ 292 $ 708 $ 1,000 $ 192 $ 808
Customer lists and formulas
-- -- -- 3,887 972 2,915
------------ ------------ ------------ ------------ ------------ ------------
Total intangible assets subject to
amortization $ 1,000 $ 292 $ 708 $ 4,887 $ 1,164 $ 3,723
============ ============ ============ ============ ============ ============
Indefinite-lived intangible assets:
Trademarks $ 469,050 $ -- $ 469,050 $ 313,514 $ -- $ 313,514
------------ ------------ ------------ ------------ ------------ ------------
Total intangible assets not
subject to amortization $ 469,050 $ -- $ 469,050 $ 313,514 $ -- $ 313,514
============ ============ ============ ============ ============ ============
Total other intangible assets $ 470,050 $ 292 $ 469,758 $ 318,401 $ 1,164 $ 317,237
============ ============ ============ ============ ============ ============
Amortization expense for finite-lived intangible assets was approximately $361,
$490, and $480 in 2005, 2004, and 2003, respectively. The weighted-average
useful life of the finite-lived intangible asset is ten years. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding five years is $100.
Approximately $154,000 was recorded to indefinite-lived intangible assets from
the Multifoods acquisition during 2005.
Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, the Company is required to review goodwill and
indefinite-lived intangible assets at least annually for impairment. The annual
impairment review of all appropriate assets was performed as of February 1,
2005. Goodwill impairment is tested at the reporting unit level which are the
Company's operating segments. No impairment was required to be recorded as a
result of the annual impairment review.
Note J: Pensions and Other Postretirement Benefits
The Company has pension plans covering substantially all of its domestic and
Canadian employees. Benefits are based on the employee's years of service and
compensation. The Company's plans are funded in conformity with the funding
requirements of applicable government regulations.
In addition to providing pension benefits, the Company sponsors several
unfunded, defined postretirement plans that provide health care and life
insurance benefits to certain retired domestic and Canadian employees. These
plans are contributory, with retiree contributions adjusted periodically, and
contain other cost-sharing features, such as deductibles and coinsurance.
Covered employees generally are eligible for these benefits when they reach age
55 and have attained ten years of credited service.
43
Net periodic benefit cost included the following components:
Defined Benefit Pension Plans Other Postretirement Benefits
-------------------------------- -------------------------------
Year Ended April 30, 2005 2004 2003 2005 2004 2003
- -------------------- -------- ------- ------- ------- ------- -------
Service cost $ 7,596 $ 4,152 $ 3,121 $ 1,866 $ 1,087 $ 695
Interest cost 19,593 6,617 5,976 3,171 1,342 990
Expected return on plan assets (24,655) (5,584) (6,106) -- -- --
Amortization of prior service cost (credit) 1,457 1,456 1,239 (43) (43) (45)
Amortization of initial net asset (224) (227) (234) -- -- --
Recognized net actuarial loss (gain) 825 1,397 131 347 150 (78)
Special termination benefits 193 -- -- -- -- --
Curtailment loss 544 -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 5,329 $ 7,811 $ 4,127 $ 5,341 $ 2,536 $ 1,562
======== ======= ======= ======= ======= =======
Weighted-average assumptions
used in determining net periodic
benefit costs:
U.S. plans:
Discount rate 6.25% 6.25% 7.25% 6.25% 6.25% 7.25%
Expected return on plan assets 8.50% 8.75% 9.00% -- -- --
Rate of compensation increase 4.50% 4.50% 4.50% -- -- --
Canadian plans:
Discount rate 6.50% -- -- 6.50% -- --
Expected return on plan assets 8.50% -- -- -- -- --
Rate of compensation increase 4.00% -- -- -- -- --
======== ======= ======= ======= ======= =======
The Company uses a measurement date of April 30 to determine defined benefit
pension plans' and other postretirement benefits' assets and benefit
obligations.
44
The following table sets forth the combined status of the plans as recognized in
the Consolidated Balance Sheets.
Defined Benefit Other Postretirement
Pension Plans Benefits
------------------------- --------------------------
April 30, April 30,
2005 2004 2005 2004
----------- ----------- ----------- ------------
Change in benefit obligation:
Benefit obligation at beginning of the year $ 119,294 $ 107,718 $ 27,175 $ 21,734
Service cost 7,596 4,152 1,866 1,087
Interest cost 19,593 6,617 3,171 1,342
Amendments 111 47 755 --
Acquisition 223,635 -- 26,680 --
Actuarial loss 42,278 4,055 364 3,778
Participant contributions 715 -- 1,414 220
Benefits paid (20,770) (3,295) (3,493) (986)
Curtailments (112) -- -- --
Special termination benefits 193 -- -- --
Foreign currency translation adjustments 7,933 -- 853 --
----------- ----------- ----------- ------------
Benefit obligation at end of the year $ 400,466 $ 119,294 $ 58,785 $ 27,175
=========== =========== =========== ============
Change in plan assets:
Fair value of plan assets at beginning
of the year $ 84,520 $ 64,173 $ -- $ --
Actual return on plan assets 20,078 17,132 -- --
Company contributions 14,102 6,510 2,079 766
Participant contributions 715 -- 1,414 220
Benefits paid (20,770) (3,295) (3,493) (986)
Acquisition 232,971 -- -- --
Foreign currency translation adjustments 8,250 -- -- --
----------- ----------- ----------- ------------
Fair value of plan assets at end of the year $ 339,866 $ 84,520 $ -- $ --
=========== =========== =========== ============
Net amount recognized:
Funded status of the plans $ (60,600) $ (34,774) $ (58,785) $ (27,175)
Unrecognized net actuarial loss 63,976 17,946 8,198 8,181
Unrecognized prior service cost (credit) 10,046 11,936 408 (390)
Unrecognized initial asset (80) (304) -- --
----------- ----------- ----------- ------------
Net benefit asset (liability) recognized $ 13,342 $ (5,196) $ (50,179) $ (19,384)
=========== =========== =========== ============
Accrued benefit liability $ (46,638) $ (23,641) $ (50,179) $ (19,384)
Prepaid benefit cost 24,249 4,803 -- --
Intangible asset 10,046 4,079 -- --
Minimum pension liability 25,685 9,563 -- --
----------- ----------- ----------- ------------
Net benefit asset (liability) recognized $ 13,342 $ (5,196) $ (50,179) $ (19,384)
=========== =========== =========== ============
45
The following table sets forth the assumptions used in determining the benefit
obligations.
Defined Benefit Other Postretirement
Pension Plans Benefits
------------------------- -------------------------
April 30, April 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Weighted-average assumptions used in
determining benefit obligation:
U.S. plans:
Discount rate 5.75% 6.25% 5.75% 6.25%
Rate of compensation increase 4.40% 4.50% -- --
Canadian plans:
Discount rate 5.50% -- 5.50% --
Rate of compensation increase 4.00% -- -- --
For 2006, the assumed health care trend rates are ten percent and nine percent,
for U.S. and Canadian plans, respectively. The rate for participants under age
65 is assumed to decrease to five percent in 2011, and four and one-half percent
in 2014, for U.S. and Canadian plans, respectively. The health care cost trend
rate assumption has a significant effect on the amount of the other
postretirement benefits obligation and periodic other postretirement benefits
cost reported.
A one-percentage point annual change in the assumed health care cost trend rate
would have the following effect as of April 30, 2005:
One Percentage Point
------------------------
Increase Decrease
---------- ----------
Effect on total service and interest cost components $ 1,018 $ (798)
Effect on benefit obligation 10,030 (8,153)
========== ==========
46
The following table sets forth additional information related to the Company's
defined benefit pension plans.
April 30,
---------------------------------
2005 2004
--------------- ---------------
Increase (decrease) in minimum liability included in other
comprehensive income or loss $ 16,122 $ (5,582)
Accumulated benefit obligation for all pension plans 373,744 104,753
=============== ===============
The following table sets forth additional information related to the Company's
defined benefit pension plans with an accumulated benefit obligation in excess
of plan assets and defined benefit pension plans with a projected benefit
obligation in excess of plan assets.
April 30,
-------------------------
2005 2004
----------- -----------
Plans with an accumulated benefit obligation
in excess of plan assets:
Accumulated benefit obligation $ 187,002 $ 49,451
Fair value of plan assets 140,372 25,810
Plans with a projected benefit obligation
in excess of plan assets:
Accumulated benefit obligation 242,278 104,753
Fair value of plan assets 197,233 84,520
=========== ===========
The Company employs a total return on investment approach for the defined
benefit pension plans' assets. A mix of equities and fixed income investments
are used to maximize the long-term rate of return on assets for the level of
risk. The objectives of this strategy are to achieve full funding of the
accumulated benefit obligation, and to achieve investment experience over time
that will minimize pension expense volatility and hold to a feasible minimum the
Company's contributions required to maintain full funding status. In determining
the expected long-term rate of return on defined benefit pension plans' assets,
management considers the historical rates of return, the nature of investments,
the asset allocation, and expectations of future investment strategies.
47
The Company's pension plans' asset target and actual allocations are as follows:
Actual Allocation
April 30,
---------------------
Target
Allocation 2005 2004
---------- --------- ---------
Equity securities 67% 61% 71%
Debt securities 33 37 27
Cash and other investments -- 2 2
--- --- ---
100% 100% 100%
=== === ===
Included in equity securities are 317,552 of the Company's common shares at
April 30, 2005 and 2004. The market value of these shares is $15,757 at April
30, 2005. The Company paid dividends of $318 on these shares during 2005.
The Company expects to contribute approximately $15 million and $2 million to
the pension and other postretirement benefit plans, respectively, in 2006. The
Company expects to make the following benefit payments for all benefit plans:
$28 million in 2006, $23 million in 2007, $32 million in 2008, $25 million in
2009, $26 million in 2010, and $139 million in 2011 through 2015.
The Company also charged to operations approximately $123, $488, and $707 in
2005, 2004, and 2003, respectively, for contributions to plans not administered
by the Company on behalf of employees subject to certain labor contracts. These
amounts were determined in accordance with provisions of the labor contracts.
The Company is unable to determine its share of either the accumulated plan
benefits or net assets available for benefits under such plans.
Certain of the Company's active employees participate in multiemployer plans
that provide defined postretirement health care benefits. The aggregate amount
contributed to these plans, including the charge for net periodic postretirement
benefit costs, totaled $1,408, $1,639, and $2,316 in 2005, 2004, and 2003,
respectively.
Note K: Savings Plans
ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust
("ESOP") for certain domestic, nonrepresented employees. The Company has entered
into loan agreements with the Trustee of the ESOP for purchases by the ESOP of
the Company's common shares in amounts not to exceed a total of 1,134,120
unallocated common shares of the Company at any one time. These shares are to be
allocated to participants over a period of not less than 20 years.
ESOP loans bear interest at one-half percentage point over prime, are secured by
the unallocated shares of the plan, and are payable as a condition of allocating
shares to participants. Interest incurred on ESOP debt was $407, $356, and $406
in 2005, 2004, and 2003, respectively. Contributions to the plan, representing
48
compensation expense, are made annually in amounts sufficient to fund ESOP debt
repayment and were $476, $497, and $558 in 2005, 2004, and 2003, respectively.
Dividends on unallocated shares are used to reduce expense and were $398, $395,
and $368 in 2005, 2004, and 2003, respectively. The principal payments received
from the ESOP in 2005, 2004, and 2003 were $540, $509, and $469, respectively.
Dividends on allocated shares are credited to participant accounts and are used
to purchase additional common shares for participant accounts. Dividends on
allocated and unallocated shares are charged to retained earnings by the
Company.
As permitted by Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans, the Company will continue to recognize future
compensation using the cost basis as all shares currently held by the ESOP were
acquired prior to 1993. At April 30, 2005, the ESOP held 382,810 unallocated and
639,473 allocated shares. All shares held by the ESOP were considered
outstanding in earnings per share calculations for all periods presented.
Defined Contribution Plans: The Company offers employee savings plans for
all domestic and Canadian employees not covered by certain collective bargaining
agreements. The Company's contributions under these plans are based on a
specified percentage of employee contributions. Charges to operations for these
plans in 2005, 2004, and 2003 were $4,654, $3,455, and $2,635, respectively.
Note L: Stock Benefit Plans
The Company provides for equity-based incentives to be awarded to key employees
through the 1998 Equity and Performance Incentive Plan, the 1987 Stock Option
Plan, and the Amended and Restated 1997 Stock-Based Incentive Plan, and to
nonemployee directors through the Nonemployee Director Stock Option Plan adopted
in 2002.
1998 Equity and Performance Incentive Plan: This plan provides for the
issuance of stock options and restricted stock, which may include performance
criteria, as well as stock appreciation rights, deferred shares, restricted
stock units, and performance shares. At April 30, 2005, there were 1,536,003
common shares available for future issuance under this plan. Of this total
amount available for issuance, the amount of restricted stock available for
issuance is limited to 759,225 common shares. Restricted stock issued under this
plan is subject to a risk of forfeiture for at least three years in the event of
termination of employment or failure to meet performance criteria, if any. All
restricted shares issued to date under the plan are subject to a four-year
forfeiture period. Options granted under this plan become exercisable at the
rate of one-third per year, beginning one year after the date of grant, and the
option price is equal to the market value of the shares on the date of the
grant.
49
1987 Stock Option Plan: Options granted under this plan become exercisable
at the rate of one-third per year, beginning one year after the date of grant,
and the option price is equal to the market value of the shares on the date of
the grant. There are 4,494 common shares available for future grant under this
plan.
Amended and Restated 1997 Stock-Based Incentive Plan: This plan was
initially adopted by shareholders of Multifoods in 1997. Effective with the
Company's acquisition of Multifoods, the Company assumed the plan. After the
acquisition, only former employees of Multifoods that are employed by the
Company will be eligible to receive awards under the plan. There are 220,294
common shares available for future grant under this plan.
As a result of the acquisition, the Company also assumed two additional stock
benefit plans. However, no common shares are available for future grant under
the plans.
Nonemployee Director Stock Option Plan: This plan provides for the
issuance of stock options to nonemployee directors annually, on September 1 of
each year. Options granted under this plan become exercisable six months after
the date of grant, and the option price is equal to the market value of the
shares on the date of the grant. There are 48,510 common shares available for
future grant under this plan.
A summary of the Company's stock option activity, and related information
follows:
Weighted-
Average
Exercise
Options Price
---------- ----------
Outstanding at May 1, 2002 1,574,688 $ 22.69
Granted 1,275,000 33.72
Exercised (220,356) 22.69
Forfeited (13,247) 30.15
---------- ----------
Outstanding at April 30, 2003 2,616,085 $ 28.03
Granted 388,000 43.32
Exercised (385,455) 25.22
Forfeited (55,057) 33.98
---------- ----------
Outstanding at April 30, 2004 2,563,573 $ 30.64
Assumed in the Multifoods acquisition 921,824 41.77
Granted 549,000 44.21
Exercised (740,024) 30.87
Forfeited (122,191) 47.31
---------- ----------
Outstanding at April 30, 2005 3,172,182 $ 35.53
Exercisable at April 30, 2003 1,258,103 $ 22.73
Exercisable at April 30, 2004 1,407,281 25.58
Exercisable at April 30, 2005 2,024,247 32.68
========== ==========
50
The following table summarizes the range of exercise prices and weighted-average
exercise prices for options outstanding and exercisable at April 30, 2005, under
the Company's stock benefit plans.
Weighted-
Weighted- Average Weighted-
Range of Average Remaining Average
Exercise Exercise Contractual Exercise
Prices Outstanding Price Life (years) Exercisable Price
- ---------------- ----------- ---------- ------------- ----------- ---------
$ 16.87- $25.00 678,080 $ 21.78 4.1 678,080 $ 21.78
$ 25.01- $37.50 1,197,913 32.90 6.6 818,915 32.55
$ 37.51- $57.09 1,296,189 45.14 7.0 527,252 46.92
================ ========= ========== === ======= =========
Note M: Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
April 30,
------------------------
2005 2004
---------- ----------
6.77% Senior Notes due June 1, 2009 $ 75,000 $ 75,000
7.70% Series A Senior Notes due September 1, 2005 17,000 17,000
7.87% Series B Senior Notes due September 1, 2007 33,000 33,000
7.94% Series C Senior Notes due September 1, 2010 10,000 10,000
4.78% Senior Notes due June 1, 2014 100,000 --
6.60% Senior Notes due November 13, 2009 213,560 --
---------- ----------
Total long-term debt $ 448,560 $ 135,000
Current portion of long-term debt 17,000 --
========== ==========
Total long-term debt less current portion $ 431,560 $ 135,000
========== ==========
In connection with the acquisition of Multifoods, the Company assumed $200
million of 6.602 percent, senior, unsecured notes due November 13, 2009, with a
fair value of approximately $216 million at the acquisition date. The notes
assumed are guaranteed by Diageo plc. The guarantee may terminate, in a limited
circumstance, prior to the maturity of the notes. In addition, on May 27, 2004,
the Company issued $100 million of 4.78 percent, senior, unsecured notes due
June 1, 2014.
The notes are unsecured and interest is paid annually on the notes assumed in
the Multifoods acquisition and semiannually on the remaining notes. Among other
restrictions, the note purchase agreements contain certain covenants relating to
liens, consolidated net worth, and sale of assets as defined in the agreements.
The Company is in compliance with all covenants.
On June 17, 2004, the Company entered into a five-year, $180 million revolving
credit facility with a group of four banks. Interest on the revolving credit
facility is based on prevailing U.S. prime, Canadian Base Rate, LIBOR, or
Canadian CDOR, as determined by the Company, and is payable either on a
quarterly basis, or at the end of the
51
borrowing term. At April 30, 2005, the Company had approximately $33.4 million
outstanding under the revolving credit facility at a weighted average interest
rate of 3.04 percent. At April 30, 2005, the Company had standby letters of
credit of approximately $20.3 million outstanding.
Interest paid totaled $29,075, $10,364, and $10,061 in 2005, 2004, and 2003,
respectively. This differs from interest expense due to the timing of payments,
amortization of the fair value adjustment on the notes assumed in the Multifoods
acquisition, amortization of deferred interest rate swap gains, and interest
capitalized of $1,000, $1,850, and $442 in 2005, 2004, and 2003, respectively.
Note N: Guarantees
In September 2002, Multifoods sold its foodservice distribution business to
Wellspring Distribution Corporation ("Wellspring") while continuing to guarantee
certain real estate and tractor-trailer fleet lease obligations of the business.
As a result of the Company's acquisition of Multifoods, the Company now is
obligated under these guarantees. The guarantee requires the lessor to pursue
collection and other remedies against Wellspring before demanding payment from
the Company. In addition, the Company's obligation related to the
tractor-trailer fleet lease is limited to 75 percent of the amount outstanding
after the lessor has exhausted its remedies against Wellspring. The fleet
guarantee will expire in September 2006, and the real estate guarantees will
expire in September 2010.
The possibility that the Company would be required to honor the contingent
liabilities under the guarantee is largely dependent upon the future operations
of Wellspring and the value of the underlying leased properties. The Company
currently has no liability recorded related to the guarantee. Should a reserve
be required in the future, it would be recorded at the time the obligation was
considered to be probable and estimable.
At April 30, 2005, the Company's guarantees outstanding for the lease
obligations of Wellspring were $13,116 related to the tractor-trailer fleet
lease and $10,930 related to the real estate lease.
Note O: Derivative Financial Instruments
The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates, and commodity pricing. To manage the volatility
relating to these exposures, the Company enters into various derivative
transactions.
Commodity Price Management: In connection with the purchase of raw
materials used by the Company's flour and baking business in Canada, and the
consumer oils and baking business in the United States, 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 wheat, flour, and edible oils. The Company also enters into
commodity futures and options related to the delivery of natural gas to the
manufacturing plants in the United States. The derivative instruments generally
have maturities of less than one year. Certain of
52
the derivative instruments associated with the Company's oils business meet the
hedge criteria according to Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, 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 or loss
to the extent effective, and reclassified into cost of products sold in the
period during which the hedged transaction affects earnings.
In order to qualify as a hedge of commodity price risk, it must be demonstrated
that the changes in the fair value of the commodities futures contracts are
highly effective in hedging price risks associated with the commodity purchased.
Hedge ineffectiveness is measured on a quarterly basis. The mark-to-market gains
or losses on nonqualifying, excluded, and ineffective portions of hedges are
recognized in cost of products sold immediately.
The mark-to-market value of all derivative commodity instruments is included in
current assets on the Consolidated Balance Sheets. As of April 30, 2005 and
2004, the deferred gain, net of tax, included in accumulated other comprehensive
loss was $916 and $1,237, respectively. This entire amount at April 30, 2005, is
expected to be recognized in earnings as the related commodity is utilized
during 2006. The impact of commodities futures contracts and options recognized
in earnings was a loss of $10,915 in 2005, and a gain of $3,967 and $4,050, in
2004 and 2003, respectively. Included in these amounts are amounts related to
nonqualifying, excluded, and ineffective portions of hedges resulting in a loss
of $2,389 in 2005, and a gain of $351 and $3,226, in 2004 and 2003,
respectively.
Interest Rate Hedging: The Company's policy is to manage interest cost using a
mix of fixed- and variable-rate debt. To manage this mix in a cost efficient
manner, the Company may periodically enter into interest rate swaps in which the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount. The interest rate swap agreements effectively modify the
Company's exposure to interest risk by converting a portion of the Company's
fixed-rate debt to a floating rate. The interest rate swap and the instrument
being hedged is marked to market in the balance sheet. The mark-to-market value
of both the fair value hedging instruments and the underlying debt obligations
are recorded as equal and offsetting gains or losses in other income or expense.
No other cash payments are made unless the contract is terminated prior to
maturity, in which case the amount paid or received in settlement is established
by agreement at the time of termination, and usually represents the net present
value, at current rates of interest, of the remaining obligations to exchange
payments under the terms of the contract. Any gains or losses upon the early
termination of the interest rate swap contracts are deferred and recognized over
the remaining life of the contract.
During 2004 and 2003, the Company terminated its interest rate swap agreements
prior to maturity. As a result of the early terminations, the Company received
$924 and $4,092 in cash in 2004 and 2003, respectively, and realized
corresponding gains, which have been deferred. These deferred gains will be
recognized in earnings over the remaining lives of the original swap agreements
as a reduction of future interest expense. At April 30, 2005
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and 2004, the balance of the deferred gains related to the terminated swaps was
$2,334 and $3,530, respectively, and is included in other noncurrent liabilities
on the Consolidated Balance Sheets.
Foreign Exchange Rate Hedging: The Company utilizes forward currency
exchange contracts with maturities of less than one year. These contracts are
used to hedge the effect of foreign exchange fluctuations on future cash
payments related to purchases of certain assets. These contracts are accounted
for as cash-flow hedges with associated mark-to-market gains and losses deferred
and included as a component of other comprehensive income or loss. These gains
or losses are reclassified to earnings in the period the futures contracts are
executed. The mark-to-market value of all foreign exchange rate derivatives are
included in other current assets on the Consolidated Balance Sheets. Included in
accumulated other comprehensive loss was a deferred gain, net of tax, of $8 and
a deferred loss, net of tax, of $47 at April 30, 2005 and 2004, respectively.
The entire amount at April 30, 2005, is expected to be recognized in earnings
during 2006.
Note P: Other Financial Instruments
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 Company places
its cash investments with high quality financial institutions and limits the
amount of credit exposure to any one institution. The Company's marketable
securities are in debt securities. Under the Company's investment policy, it
will invest in securities deemed to be investment grade at time of purchase.
Currently, these investments are defined as government-backed mortgage
obligations, corporate bonds, municipal bonds, and commercial paper. The Company
determines the appropriate categorization of its debt securities at the time of
purchase and reevaluates such designation at each balance sheet date. The
Company has categorized all debt securities as available for sale because it
currently has the intent to convert these investments into cash if and when
needed. 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 Company's financial
instruments, other than certain of its fixed-rate long-term debt, approximates
their carrying amounts. The fair value of the Company's fixed-rate long-term
debt, estimated using current market rates and a discounted cash flow analysis,
was approximately $465,797 at April 30, 2005.
54
The following table provides information on the carrying amount and fair value
of financial instruments, including derivative financial instruments.
April 30, 2005 April 30, 2004
---------------------------- -----------------------------
Carrying Value Carrying Fair
Amount Fair Amount Value
------------ ------------ ------------ ------------
Marketable securities
Current $ 17,739 $ 17,739 $ 15,074 $ 15,074
Noncurrent 59,074 59,074 41,589 41,589
Long-term debt
6.77% Senior Notes due June 1, 2009 75,000 82,185 75,000 75,906
7.70% Series A Senior Notes due September 1, 2005 17,000 17,347 17,000 16,943
7.87% Series B Senior Notes due September 1, 2007 33,000 36,051 33,000 35,061
7.94% Series C Senior Notes due September 1, 2010 10,000 11,654 10,000 11,105
4.78% Senior Notes due June 1, 2014 100,000 98,892 -- --
6.60% Senior Notes due November 13, 2009 213,560 219,668 -- --
Derivative financial instruments 1,754 1,754 (424) (424)
------------ ------------ ------------ ------------
Note Q: Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax reporting. Significant components of the
Company's deferred tax assets and liabilities are as follows:
April 30,
---------------------------
2005 2004
------------ ------------
Deferred tax liabilities:
Intangible assets $ 130,711 $ 115,433
Depreciation and amortization 68,228 35,575
Other (each less than five percent of total liabilities) 13,816 7,396
------------ ------------
Total deferred tax liabilities $ 212,755 $ 158,404
============ ============
Deferred tax assets:
Loss carryforwards $ 64,160 $ 256
Employee benefits 41,237 18,510
Tax credit carryforwards 12,139 -
Intangible assets 7,103 1,860
Other (each less than five percent of total assets) 13,109 3,949
------------ ------------
Total deferred tax assets $ 137,748 $ 24,575
Valuation allowance for deferred tax assets (24,280) (266)
------------ ------------
Total deferred tax assets less allowance $ 113,468 $ 24,309
============ ============
Net deferred tax liability $ 99,287 $ 134,095
============ ============
The Company acquired a number of tax loss and credit carryforwards as a result
of the Multifoods acquisition. The valuation allowance for deferred tax assets
at April 30, 2005, primarily relates to these acquired deferred tax assets.
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The following table summarizes domestic and foreign loss carryforwards at April
30, 2005.
Related
Tax Deferred Tax
Deduction Asset Expiration Date
----------- ------------ ---------------
Loss carryforwards:
Federal net operating loss $ 141,462 $ 49,512 2021 to 2024
Federal capital loss 19,779 7,322 2009 to 2010
State net operating loss 101,936 6,959 2006 to 2027
Foreign net operating loss 1,117 367 2011 to 2014
----------- ------------
Total loss carryforwards $ 264,294 $ 64,160
----------- ------------
The following table summarizes tax credit carryforwards at April 30, 2005.
Deferred Tax
Asset Expiration Date
------------ ---------------
Tax credit carryforwards:
Foreign tax credit $ 9,448 2010 to 2015
Alternative minimum tax credit 2,691 Indefinite
------------
Total tax credit carryforwards $ 12,139
------------
The valuation allowance at April 30, 2005 includes approximately $23,195 for the
above domestic and foreign loss and tax credit carryforwards.
Domestic income and foreign withholding taxes have not been recorded on
undistributed earnings of foreign subsidiaries since these amounts are
considered to be permanently reinvested. Any additional taxes payable on the
earnings of foreign subsidiaries, if remitted, would be partially offset by
domestic tax credits and deductions for foreign taxes already paid.
Income from continuing operations before income taxes is as follows:
Year Ended April 30,
------------------------------------
2005 2004 2003
----------- ---------- -----------
Domestic $ 184,707 $ 169,004 $ 147,581
Foreign 19,907 8,166 4,129
----------- ---------- -----------
Income from continuing operations before income
taxes $ 204,614 $ 177,170 $ 151,710
=========== ========== ===========
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The components of the provision for income taxes are as follows:
Year Ended April 30,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Current:
Federal $ 28,645 $ 52,604 $ 53,767
Foreign 4,490 2,692 1,331
State and local 4,772 4,463 6,080
Deferred 36,247 6,113 (3,680)
---------- ---------- ----------
Total income tax expense - continuing operations $ 74,154 $ 65,872 $ 57,498
---------- ---------- ----------
Total income tax expense - discontinued operations $ 4,725 $ 1,597 $ 1,549
========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective
income tax rate follows:
Year Ended April 30,
------------------------------
Percent of Pretax Income 2005 2004 2003
- ------------------------ -------- --------- ---------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of federal income
tax benefit 1.8 0.7 2.5
Research credits -- -- (0.1)
Other items (0.6) 1.5 0.5
-------- --------- ---------
Effective income tax rate 36.2% 37.2% 37.9%
======== ========= =========
Income taxes paid $ 60,359 $ 70,927 $ 45,052
======== ========= =========
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Note R: Accumulated Other Comprehensive Loss
Comprehensive income is included in the Statements of Consolidated Shareholders'
Equity. The components of accumulated other comprehensive loss as shown on the
Consolidated Balance Sheets are as follows:
Unrealized
(Gain) Loss Unrealized
Foreign Minimum on Gain on Accumulated
Currency Pension Available- Cash Flow Other
Translation Liability for-Sale Hedging Comprehensive
Adjustment Adjustment Securities Derivatives Loss
----------- ---------- ----------- ----------- --------------
Balance at May 1, 2002 $ 14,966 $ 797 $ -- $ -- $ 15,763
Current period (credit) charge (8,268) 13,917 477 (381) 5,745
Income tax (benefit) expense -- (5,288) (181) 145 (5,324)
----------- ---------- ----------- ----------- ------------
Balance at April 30, 2003 $ 6,698 $ 9,426 $ 296 $ (236) $ 16,184
Reclassification adjustments -- -- -- 381 381
Current period credit (6,697) (5,582) (872) (1,889) (15,040)
Income tax expense -- 2,179 327 554 3,060
----------- ---------- ----------- ----------- ------------
Balance at April 30, 2004 $ 1 $ 6,023 $ (249) $ (1,190) $ 4,585
Reclassification adjustments (92) -- -- 1,889 1,797
Current period (credit) charge (15,185) 16,122 436 (1,467) (94)
Income tax benefit -- (5,812) (161) (156) (6,129)
----------- ---------- ----------- ----------- ----------
Balance at April 30, 2005 $ (15,276) $ 16,333 $ 26 $ (924) $ 159
=========== ========== =========== =========== ==========
Note S: Common Shares
Voting: The Company's Amended and Restated Articles of Incorporation ("the
Articles") provide that each holder of an outstanding common share is entitled
to one vote on each matter submitted to a vote for the shareholders except for
the following specific matters:
- any matter that relates to or would result in the dissolution or
liquidation of the Company;
- the adoption of any amendment of the articles of incorporation, or
the regulations of the Company, or the adoption of amended articles
of incorporation, other than the adoption of any amendment or
amended articles of incorporation that increases the number of votes
to which holders of common shares are entitled or expand the matters
to which time phase voting applies;
- any proposal or other action to be taken by the shareholders of the
Company, relating to the Company's rights agreement or any successor
plan;
- any matter relating to any stock option plan, stock purchase plan,
executive compensation plan, or other similar plan, arrangement, or
agreement;
58
- adoption of any agreement or plan of or for the merger,
consolidation, or majority share acquisition of the Company or any
of its subsidiaries with or into any other person, whether domestic
or foreign, corporate or noncorporate, or the authorization of the
lease, sale, exchange, transfer, or other disposition of all, or
substantially all, of the Company's assets;
- any matter submitted to the Company's benefit, stock option,
compensation, or other similar plan; and
- any matter relating to the issuance of common shares, or the
repurchase of common shares that the Company's board of directors
determines is required or appropriate to be submitted to the
Company's shareholders under the Ohio Revised Code or applicable
stock exchange rules.
On the matters listed above, common shares are entitled to ten votes per share,
if they meet the requirements set forth in the Articles. Shares which would be
entitled to ten votes per share are:
- common shares owned at the close of business on May 31, 2002;
- common shares received as a result of the Jif and Crisco brands
merger on June 1, 2002;
- common shares received as a result of the Multifoods acquisition on
June 18, 2004; or
- common shares received through the Company's various equity plans.
In the event of a change in beneficial ownership, the new owner of that share
will be entitled to only one vote with respect to that share on all matters
until four years pass without a further change in beneficial ownership of the
share.
Shareholders' Rights Plan: Pursuant to a shareholders' rights plan
established in 1999, one share purchase right is associated with each of the
Company's outstanding common shares.
Under the plan, the rights will initially trade together with the Company's
common shares and will not be exercisable. In the absence of further action by
the directors, the rights generally will become exercisable and allow the holder
to acquire the Company's common shares at a discounted price if a person or
group acquires ten percent or more of the outstanding common shares. Rights held
by persons who exceed the applicable thresholds will be void. Shares held by
members of the Smucker family are not subject to the thresholds. If exercisable,
each right entitles the shareholder to buy one common share at a discounted
price. Under certain circumstances, the rights will entitle the holder to buy
shares in an acquiring entity at a discounted price.
The plan also includes an exchange option. In general, if the rights become
exercisable, the directors may, at their option, effect an exchange of part or
all of the rights, other than rights that have become void, for common shares.
Under this option, the Company would issue one common share for each right, in
each case subject to adjustment in certain circumstances.
The Company's directors may, at their option, redeem all rights for $0.01 per
right, generally at any time prior to the rights becoming exercisable. The
rights will expire May 14, 2009, unless earlier redeemed, exchanged, or amended
by the directors.
59
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
Management of The J. M. Smucker Company is responsible for the preparation,
integrity, accuracy, and consistency of the consolidated financial statements
and the related financial information in this report. Such information has been
prepared in accordance with U.S. generally accepted accounting principles and is
based on our best estimates and judgments.
The Company maintains systems of internal accounting controls supported by
formal policies and procedures that are communicated throughout the Company.
There is an extensive program of audits performed by the Company's internal
audit staff and independent registered public accounting firm designed to
evaluate the adequacy of and adherence to these controls, policies, and
procedures.
Ernst & Young LLP, independent registered public accounting firm, has audited
the Company's financial statements in accordance with the Standards of the
Public Company Accounting Oversight Board. Management has made all financial
records and related data available to Ernst & Young LLP during its audit.
The Company's audit committee, comprised of three nonemployee members of the
Board, meets regularly with the independent public accounting firm and
management to review the work of the internal audit staff and the work, audit
scope, timing arrangements, and fees of the independent public accounting firm.
The audit committee also regularly satisfies itself as to the adequacy of
controls, systems, and financial records. The director of the internal audit
department is required to report directly to the chair of the audit committee as
to internal audit matters.
It is the Company's best judgment that its policies and procedures, its program
of internal and independent audits, and the oversight activity of the audit
committee work together to provide reasonable assurance that the operations of
the Company are conducted according to law and in compliance with the high
standards of business ethics and conduct to which the Company subscribes.
Timothy P. Smucker Richard K. Smucker Mark R. Belgya
Chairman and President and Vice President,
Co-Chief Executive Officer Co-Chief Executive Officer Chief Financial Officer
and Treasurer
60