SJM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended July 31, 2004 for The J. M. Smucker Company. The reporting period is defined by two major corporate events: the acquisition of International Multifoods Corporation (Multifoods) on June 18, 2004, and the sale of its Australian subsidiary, Henry Jones Foods (HJF), on June 16, 2004. The Multifoods acquisition added significant brands including Pillsbury, Hungry Jack, and Martha White to Smucker's portfolio. Results for the sold Australian subsidiary and the planned divestiture of the U.S. foodservice business are reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 22% to $415.8 million, driven primarily by the inclusion of Multifoods brands which contributed $75.5 million in sales. Excluding Multifoods, branded product sales increased, offset by declines in nonbranded industrial sales.
• Profitability: Operating income rose 16% to $48.3 million. Gross margin improved slightly to 34.8% from 34.6%, aided by supply chain optimization and favorable manufacturing costs, though partially offset by start-up costs at the new Scottsville, Kentucky Uncrustables plant.
• Discontinued Operations: The quarter included a $5.7 million net gain on the sale of the Australian subsidiary (HJF). Prior periods were restated to exclude these operations.
• Debt and Liquidity: Long-term debt increased significantly to $451.1 million due to the assumption of Multifoods debt ($216 million) and the issuance of new notes ($100 million) to finance the acquisition. Cash and cash equivalents decreased by $60.1 million, primarily due to the cash portion of the Multifoods acquisition ($98 million) and increased inventory levels.
• Restructuring: The company incurred $3.0 million in restructuring costs and $2.8 million in merger and integration costs during the quarter.

Guidance, Outlook, and Risks

• Integration Costs: Management expects to incur approximately $90 million in total merger-related expenses during fiscal 2005. Additional start-up costs for the Scottsville plant are expected, with the majority occurring in the second quarter of 2005.
• Raw Materials: The company faces escalating raw material costs, particularly for certain fruit varieties and packaging. Management plans to offset these through cost reduction and pricing measures.
• Divestitures: The company plans to divest the U.S. foodservice business acquired from Multifoods, with a transaction expected to complete prior to the end of the fiscal year.
• Share Repurchase: Subsequent to the quarter end, the Board authorized a repurchase program for up to 1 million shares of common stock.
• Legal Contingencies: The company is a defendant in 19 class action lawsuits regarding its "Simply 100% Fruit" product, alleging it does not contain 100% fruit. Management believes these suits are without merit.
• Guarantees: Following the Multifoods acquisition, Smucker assumed guarantees for lease obligations of Wellspring Distribution Corporation totaling approximately $30.3 million ($17.5 million for fleet and $12.7 million for real estate).

Investor Verification Checklist

• Verify the final allocation of the $865 million Multifoods purchase price, specifically the amount assigned to goodwill ($465.4 million preliminary) and its impact on future amortization.
• Monitor the timeline and financial impact of the planned divestiture of the U.S. foodservice business.
• Track the execution of the new $180 million revolving credit facility and the $100 million senior notes issued to fund the acquisition.
• Assess the progress of the Scottsville, Kentucky Uncrustables plant ramp-up and associated start-up costs.
• Review the status of the 19 class action lawsuits regarding the "Simply 100% Fruit" product labeling.
• Confirm the realization of cost savings from the integration of Multifoods and the closure of the Minnetonka, Minnesota headquarters.