SJM

Business Context and Reporting Period

Company: The J. M. Smucker Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2007 (Second Quarter of Fiscal 2008)
Business Overview: Smucker manufactures and markets food products, operating in two reportable segments: U.S. retail market and special markets. The period includes the operations of Eagle Family Foods Holdings, Inc. ("Eagle"), acquired on May 1, 2007, which expanded the company's presence in the baking aisle with brands like Eagle Brand and Magnolia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17% in the quarter and 12% year-to-date compared to the prior year. Excluding the impact of the Eagle acquisition and the divestiture of Canadian nonbranded businesses, organic sales grew approximately 9% in the quarter.
• Profitability: Operating income rose 13% in the quarter and 24% year-to-date. However, gross profit margin decreased slightly in the quarter (from 31.6% to 30.9%) due to higher raw material costs, specifically milk and wheat.
• Acquisition Impact: The Eagle acquisition contributed $81.4 million to net sales in the quarter and $124.9 million year-to-date. It also drove an increase in marketing and distribution expenses.
• Debt Structure: Long-term debt increased significantly due to the issuance of $400 million in 5.55% Senior Notes in May 2007 to finance the Eagle acquisition and repay short-term borrowings. Interest expense increased by $5.0 million in the quarter.
• Cash Flow: Operating cash flow decreased $67.0 million year-over-year in the six-month period, primarily due to increased inventory build-up for canned milk and higher accounts receivable.

Guidance, Outlook, and Risks

Management Commentary: Management attributes sales growth to price increases on key brands (Smucker's, Jif, Pillsbury, Uncrustables) and the Eagle acquisition. The company expects to incur approximately $6.3 million in remaining restructuring costs, primarily related to the Canadian restructuring, through 2008.

Liquidity and Capital Resources: The company believes cash on hand, investments, operating cash flow, and available credit facilities are sufficient to meet 2008 requirements, including dividends, debt service, and share repurchases. A Rule 10b5-1 trading plan was initiated in December 2007 to repurchase up to 1.5 million shares.

Risks and Contingencies:

• Commodity Prices: Volatility in raw material costs (milk, wheat, crude oil) impacts margins.
• Environmental: An ongoing environmental investigation at a production facility exists; liability cannot be reasonably estimated but is not expected to be material.
• Tax Matters: The company settled an IRS examination for fiscal years 2004-2005 subsequent to the period end, expecting to pay approximately $7.7 million in taxes and interest.
• Customer Concentration: Risks associated with the loss of significant customers or reduction in orders.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and cost savings from the Eagle Family Foods acquisition.
• Raw Material Costs: Monitor trends in milk and wheat prices and the company's ability to pass these costs to consumers via price increases.
• Debt Servicing: Review the impact of the new $400 million Senior Notes on future interest expenses and cash flow.
• Restructuring Completion: Track the remaining $6.3 million in expected restructuring costs and their timing.
• Share Repurchases: Monitor the execution of the new 1.5 million share repurchase plan under the Rule 10b5-1 trading plan.