Annual Report 2007 Financial Highlights The J. M. Smucker Company (Dollars in thousands, except per share data) Net sales Net income and net income per common share: Net income Net income per common share – assuming dilution Income and income per common share before restructuring and merger and integration costs: (1) Income Income per common share – assuming dilution Common shares outstanding at year end Number of employees (1) Reconciliation to net income: Income before income taxes Merger and integration costs Cost of products sold – restructuring Other restructuring costs Income before income taxes, restructuring, and merger and integration costs Income taxes Year Ended April 30, 2007 2006 $2,148,017 $2,154,726 $ 157,219 2.76 $ $ 143,354 $ 2.45 $ 165,152 $ 2.89 56,779,850 3,025 $ 161,920 $ 2.77 56,949,044 3,500 $ 241,004 61 9,981 2,120 $ 215,570 17,934 2,263 7,722 $ 253,166 88,014 $ 243,489 81,569 Income before restructuring and merger and integration costs $ 165,152 $ 161,920 — Contents — Letter to Shareholders Business Overview Recipes Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations Stock Price Data Comparison of Five-Year Cumulative Total Shareholder Return Management’s Discussion and Analysis Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements Report of Management on Responsibility for Financial Reporting Consolidated Financial Statements Notes to Consolidated Financial Statements Directors, Officers, and General Managers Properties Corporate and Shareholder Information 1 4 9 12 13 13 14 15 25 26 27 28 29 34 66 66 67 — On Our Cover — “Happy Birthday” © 2007 Will Moses Painter Will Moses works from the same 200-year-old farm in Eagle Bridge, New York, as his legendary great-grandmother, Grandma Moses, creating miniature scenes from simpler times. In this charming oil on tempered board, Mr. Moses captures the celebration that every member of the family deserves — a day just for oneself. Dear Shareholders and Friends: ✥✥✥ Fiscal 2007 was another successful year for The J. M. Smucker Company. The year’s strong results were achieved despite commodity-driven cost increases incurred across the Company. Key financial highlights include: ✥ Sales, excluding divested businesses, were up five percent, and net income grew 10 percent. ✥ Net income per share was $2.76, up from $2.45 last “easy for you,” and that “make you smile.” Highlights include a line of Pillsbury Reduced Sugar cake mixes and frostings, a milestone reformulation of all Crisco shortening to contain zero grams trans fat per serving, and new vari- eties of Smucker’s Uncrustables sandwiches, adding to that line’s double-digit growth trend. These innovations and many others, along with a number of new organic items across our product categories, are key to our future growth. Our Commitment to Doing the Right Thing We are a principles-based company. Our Basic Beliefs — Quality, People, Ethics, Growth, and Independence — have been our foundation for 110 years. Our employees are committed to these values and to each other, as described in our state- ment “Why We Are — Who We Are... Our Culture.” This ensures our ability to provide the quality food products we are proud to stand behind. Why We Are — Who We Are... Our Culture A culture of dotting the i’s and crossing the t’s… Of doing the right things and doing things right… A culture of growth – individual and as a company. It’s who we are. It’s because of who we are. It’s a result of living our Basic Beliefs… Our Commitment to Each Other…to our customers… As we look to the future of unlimited possibilities, we recognize the principles that are instrumental to our success… A culture deeply rooted in our Basic Beliefs… Guideposts for decisions at every level... Why we are who we are. A culture that encourages commitment to each other… Clear communication and collaboration… Vision… A culture of appreciation…a family-sense of sharing Where every person can make a difference. year, a 13 percent increase. ✥ Cash flow from operations exceeded $273 million, allowing for a dividend increase for the 27th time in the last 30 years. Fiscal 2007 confirmed that and to our consumers. we have the right strategy, that our business remains strong during challenging economic conditions, and that we are blessed with talented and dedicated employees. For the 10th consecutive year, thanks to our employees’ efforts, our Company was listed among FORTUNE maga- zine’s “100 Best Companies to Work For.” Maintaining Our Vision We remain committed to our strategic vision of owning leading North American food brands, and — through con- sistent, creative marketing efforts — we continue to strengthen our brands in consumers’ hearts and minds. This strategy has yielded share-of-market growth in almost all of our brands. in a job well done… In the last several months, we completed three acquisi- tions that complement our core businesses: Eagle Brand, North America’s number-one brand of sweetened con- densed milk; White Lily flour, cornmeal, and frozen bis- cuits; and Five Roses flour in Canada. These acquisitions represent an incremental $250 million in annual sales, strengthening our leadership position in the baking aisle. In fiscal 2007, as part of our ongoing efforts to strategi- cally refine our portfolio, we divested our Canadian non- branded, grain-based foodservice and industrial businesses. We maintained the momentum of our new product initiatives with this year’s introduction of more than 40 items. These products were developed to provide con- sumers with choices that are “good and good for you,” Because of our long-held belief in “doing the right things” and “doing things right,” envi- ronmental and social responsi- bility is nothing new at The J. M. Smucker Company. We are dedicated to pursuing renewable energy, source reduction, and responsible disposal, and we support employee efforts to volunteer for activities that improve their communities. We believe encouraging families to eat together is also the right thing to do. As illustrated in Miriam Weinstein’s book, The Surprising Power of Family Meals, research shows that families who eat together are stronger, smarter, healthier, and happier. We feel privileged that people invite our brands into their homes and lives every day, making us part of that important ritual, the family meal. In summary, we are committed to all of our con- stituents, and we thank you for your confidence in our ability to grow your Company. Sincerely, Tim Smucker Richard Smucker 1 ✥✥✥ When families prepare and eat meals together, new traditions are formed, and children learn to be responsible, contributing team members. We are honored that our brands are part of these vital experi- ences. Today, more families than ever before count on our products to help them start each day right — whether they’re spreading the wholesome goodness of Smucker’s preserves or enjoying heart-warming baked goods made with Crisco, Hungry Jack, Robin Hood, Martha White, and White Lily products. Business Overview ✥✥✥ U.S. Retail Segment The largest of our two business segments, U.S. Retail Market, grew this year in spite of a challenging cost such enthusiasm that we added three new organic varieties: orange marmalade, environment, with total sales up four percent. The strength blackberry preserves, of the brands in this portfolio — Smucker’s, Jif, Pillsbury, and apricot preserves. Crisco, Hungry Jack, White Lily, and Martha White — We also added cherry preserves and seedless straw- demonstrates the power of the emotional bond con- berry jam to our line of Smucker’s Sugar Free fruit sumers have with our brands. As consumers turn to our spreads made with Splenda®. products to create meaningful family meal occasions, All of our peanut butter brands achieved excellent we hope to rekindle their excitement about family meals base business growth this year, and we expanded our through initiatives like our “Smucker’s Better Beginnings distribution of Smucker’s Organic Natural peanut butter. Breakfast Program,” featuring celebrity chef Jon Ashton and author Miriam Weinstein, and our sponsorship of Family Day, a national event each September that Uncrustables Sandwiches Even as our traditional peanut butter and jelly business continues to grow, many encourages Americans to make family dinners a regular families are discovering Smucker’s Uncrustables, a whole part of their children’s lives. Fruit Spreads and Peanut Butter Once again, we achieved new records in market share with both the Smucker’s and Jif brands. During the back-to-school season, we unveiled our first-ever joint Smucker’s and new way to enjoy America’s sandwich favorites. In fiscal 2007, Jif television commercial. This celebration of “The Great retail sales of Uncrustables sandwiches grew 29 percent. American PB&J” While core item sales drove this expansion, our two newest additions to the line — peanut butter, and peanut appeals to the butter and honey on wheat bread — also contributed. millions of families who rely Ice Cream Toppings Our ice cream toppings business had a successful summer season and reached a new on the nation’s record in market share. We also launched two new best-selling brands when it’s time for the simple enjoy- Smucker’s Toppings ment of a peanut butter and jelly sandwich. flavors: dark chocolate In addition, we helped strengthen our leadership with mint and Sugar position in fruit spreads and peanut butter by offering Free strawberry made more “good and good for you” products. The introduc- with Splenda®. tion of Smucker’s Organic fruit spreads was met with 4 Potatoes, Pancakes, and Syrup Our Hungry Jack brand of potatoes, pancake mixes, and breakfast syrups Two recent acquisitions this year greatly enhanced achieved more relevance to today’s consumers through our baking business. improved packaging and a new print and radio advertis- The addition ing campaign — the first in more than a decade. More of sweetened families are discovering that they can count on Hungry condensed milk Jack products to deliver consistent, quality breakfasts category leader and dinners. Eagle Brand makes us the largest producer of canned As our milk in North America. The acquisition of White Lily, new tagline known for its soft winter wheat flour and cornmeal, states, deepens our presence in the South, where long-held “Everybody’s baking traditions are a mainstay of family meals. happy when These brands increase our prominence in the baking it’s Hungry Jack.”TM aisle and provide new opportunities for cross marketing Baking and Oils We broadened our leadership position in the baking aisle by introducing new items and promotion with the Crisco, Pillsbury, Martha White, and PET brands in the United States and the Crisco, Robin Hood, and Five Roses brands in Canada. Continuing to lead the oils category through innova- and adding complementary brands and segments to tion, we converted the entire line of Crisco shortening our already strong presence in this section. Although products to a new formula that contains zero grams trans the baking and oils categories were impacted by highly fat per serving, yet maintains the quality and perform- volatile wheat and soybean costs, our performance ance that consumers count on from the Crisco brand. during the key holiday baking period — led by the Based on the positive results of our entry into the Pillsbury brand — still exceeded the prior year. fast-growing olive oil segment, we expanded our distri- We responded to consumer interest in better-for-you bution of Crisco olive oils and sprays. Similar results baking options, heating up the baking category with led us to introduce several sizes of Crisco peanut oil, a consumer favorite for holiday turkey frying. 15 new items. These included a line of Pillsbury Reduced Sugar cake mixes and frostings, which pro- vide the same great taste as our regular varieties but only half the sugar, and a line of Martha White Whole-Grain muffin mixes. Bringing more variety to the section, we extended our Pillsbury Funfetti line into brownie mixes and frostings and introduced Martha White family-sized cornbread mixes. 5 ✥✥✥ We believe in the power of family meals. Brands like Smucker’s, Jif, Pillsbury, Crisco, and Bick’s offer endless possibilities for encouraging families to eat together and enjoy each other’s company. Whether it’s a weekend picnic or a weekday supper, creating successful family gatherings by offering foods that are good and good for you, convenient, and that make you smile is what our Company is all about. Special Markets Segment Canada Our Canadian group divested its nonbranded, grain-based foodservice and industrial businesses this Beverage Despite increased costs for fruit and other raw materials, year to better focus on its branded retail business, 2007 was another including Smucker’s, Robin Hood, and Bick’s — all very good year number-one brands in their categories. for our Beverage Extending our position in baking, we acquired group. Overall sales grew 11 percent, driven by Five Roses, the leading brand of flour in Quebec, and our R. W. Knudsen Family and Santa Cruz Organic introduced Robin Hood Nutri Flour Blend, an award- brands. Part of that growth stemmed from our new winning, better-for-you baking flour. Also introduced R.W. Knudsen Family juices such as Organic Low Sodium was our line of Bick’s Gourmet Baby Dill pickles, avail- Very Veggie, Organic açaí berry, and Sparkling blueberry. able in Italian herb, roasted garlic, Our beverage business continued to set an example and spicy Thai flavors. Our fun and in environmental sustainability, receiving the California quirky Bick’s advertising Waste Reductions Award for the seventh consecutive campaign continued this year. In addition, our Chico, California, facility plans year, building on the to use sustainable solar and methane energy sources “craveable crunch” of to supply 25 percent of its needs. Bick’s pickles. International Mexico and Latin America remain the focus of our International group, which experienced Foodservice Our Foodservice business grew more than 13 percent. These very strong results came from another year of double-digit growth, with overall sales up 14 percent. To better support our increasing pres- both the core restaurant-supply side of the business, ence in Mexico, and in keeping with our strategic focus which introduced Smucker’s Sugar Free jams, and from on North America, we recently divested our fruit ingre- our schools market, which saw a double-digit increase dient operation in Scotland. We continue to export more in Uncrustables sandwich sales, due in part to our than 650 items to 40 countries with a concentration on on-trend wheat and reduced-fat items. the key Caribbean market. ✥✥✥ We welcome the newest members of the Smucker family of brands: 150-year-old Eagle Brand sweetened condensed milk and dessert kits, Hispanic favorite Magnolia sweetened condensed milk, White Lily flour and cornmeal, and Five Roses flour in Canada. 8 2 2 1/2 2 4 1 2 1/3 4 1 1/2 1 1/2 Filling: Prep time: Prep time: Prep time: Prep time: 10 minutes 30 minutes 25 minutes 20 minutes 35 minutes Cook time: Bake time: Rising time: Ingredients Makes 8 servings 1 hour 10 minutes Makes 10 servings Makes 4 –6 servings Ingredients Dough: Ingredients 2 Ingredients Dressing: 1 1 hour Bake time: Toasted coconut, if desired 11/2 cups chunky salsa, heated 11/2 cups water 3/4 *or Pillsbury BEST® All Purpose Flour Tropical Glazed Fruit Salad (page 3) Apricot Cheese Coffee Cake (page 2) Crisco® No-Stick Cooking Spray (8 oz.) container soft cream cheese Ham & Cheese Baked Frittata (page 2) cup miniature semi-sweet chocolate chips Crisco® No-Stick Cooking Spray 3/4 cup warm milk 1 large egg, beaten 2 3 Mini Chocolate Chip Pancakes with Fruit Topping (page 3) tablespoons butter cups Robin Hood® Best For Bread Homestyle White Flour* cups cut fresh fruit such as papaya, mango, pineapple, bananas, strawberries, oranges, kiwi 1 11/2 tablespoons Robin Hood ® Best For Bread Homestyle White Flour* 11/2 teaspoons salt, divided 1/2 1 12 1/4 cup Crisco® Pure Canola Oil cups frozen shredded potatoes or 4 Idaho or russet potatoes, peeled, shredded 1/4 cup sugar teaspoon salt 3/4 2 teaspoons grated orange zest 11/2 teaspoons bread machine yeast 1/3 cup Double Fruit® Apricot Fruit Spread or Smuckers® Apricot Preserves large egg, beaten tablespoons sliced almonds cup Smuckers® Organic Orange Marmalade tablespoons frozen orange juice concentrate, thawed teaspoon lemon juice teaspoon coconut flavoring cups mixed sliced fresh strawberries and blueberries cup sliced bananas cup Hungry Jack® Microwave Ready Original Syrup cups Hungry Jack® Buttermilk Complete Pancake & Waffle Mix (Just Add Water) teaspoon freshly ground black pepper pound baked ham, cut into 1/2-inch cubes large eggs cup milk teaspoon Italian seasoning Crisco® No-Stick Cooking Spray cups (8 oz.) shredded Cheddar, Monterey Jack or Swiss cheese ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ pound dry noodles or pasta cup plus 1 tablespoon Crisco® Pure Canola Oil cup Jif ® Creamy Peanut Butter cup orange juice cup lemon juice cup soy sauce tablespoon sugar cup chopped onion cup chopped red, yellow or green bell pepper, or any combination tablespoons minced garlic pound broccoli florets cup Smuckers® Apple Butter large Granny Smith apple, cored and sliced 3/8-inch thick crosswise large sweet onion, peeled and sliced 1/4-inch thick crosswise, keeping rings intact slices smoked Cheddar cheese onion rolls, sliced Crisco® Butter Flavor No-Stick Cooking Spray (12.25 oz.) jar Smuckers® Caramel Spoonable Topping tablespoons Pillsbury BEST® All Purpose Flour (6 oz.) package semi-sweet chocolate chips cup chopped nuts 1 11/2 tablespoons minced fresh rosemary 1/4 1 1/2 cup Crisco® Pure Olive Oil teaspoon salt teaspoon pepper cup mayonnaise cup grated Parmesan cheese Salt and pepper, to taste 2 2 1 1/8 11/4 pounds ground beef chuck tablespoons Worcestershire sauce tablespoons hickory smoke flavoring teaspoon salt teaspoon ground pepper Crisco® No-Stick Cooking Spray cups Pillsbury BEST® All Purpose Flour cups quick-cooking rolled oats Crisco® No-Stick Cooking Spray pounds red potatoes, diced into small chunks red onion, thinly sliced Hickory Smoked Burgers with Glazed Apples & Smoked Cheddar (page 6) 1 1/2 11/4 cups butter or margarine, softened Broccoli Noodle Salad with Asian Peanut Citrus Sauce (page 6) Ingredients Burgers: 1/2 cup Smuckers® Apple Butter 2 11/2 cups firmly packed light brown sugar teaspoon baking soda teaspoon salt Rosemary Roasted Potato Salad (page 6) Oatmeal Carmelitas (page 7) 30 minutes Cooling time: 2 hours 20 to 30 minutes Makes 6–8 servings 8–12 minutes Makes 4 servings Ingredients 1 1/2 Crisco® No-Stick Cooking Spray Ingredients Crust: Apples: 1 1 Makes 4–6 servings Makes 8 servings Ingredients Makes 36 bars Bake time: Cook time: 15 minutes 15 minutes 15 minutes 15 minutes 10 minutes 30 minutes Prep time: Prep time: 1/2 1 1 1/2 Bake time: Cook time: Prep time: Prep time: 1–2 1 Filling: 1 4 4 1 2 3 2 1/2 1/2 1/2 1/2 1/2 1/2 1 crisco.com ©/® The J. M. Smucker Company ©/® The J. M. Smucker Company robinhood.ca doublefruit.ca crisco.com smuckers.com pillsburybaking .com ©/® The J.M. Smucker Company Pillsbury BEST is a trademark of The Pillsbury Company, used under license. NOTE: To toast coconut, heat oven to 350º F. Spread 1/2 cup coconut evenly on a baking sheet. BAKE 3–5 minutes until golden brown; cool. Tropical Glazed Fruit Salad Directions STIR all ingredients except fruit and coconut together in small bowl. Cover and refrigerate until serving time. PLACE cut fruit into a large serving bowl; pour dressing over fruit. TOSS gently to coat. SPRINKLE with toasted coconut if desired. Mini Chocolate Chip Pancakes with Fruit Topping Directions MIX strawberries, blueberries, bananas and syrup until well combined. Set aside. COMBINE pancake mix, water and chocolate chips; stir just until large lumps disappear. HEAT skillet over medium-high heat or griddle to 375º F. Spray with no-stick cooking spray. Pour 1 tablespoon batter for each pancake onto heated pan or griddle to form mini pancakes. COOK 1–11/2 minutes on each side or until golden brown. SERVE pancakes topped with fruit mixture. Ham & Cheese Baked Frittata Directions HEAT oven to 350º F. HEAT oil in 10-inch skillet on medium heat. Add pota- toes. Sprinkle with 1/2 teaspoon each salt and pepper. Cook 8 minutes or until almost brown. Add ham. Cook 2–3 minutes more. Turn occasionally with spatula. BLEND eggs with milk, Italian seasoning and remaining 1 tea- spoon salt while potatoes are cooking. SPRAY a 13 x 9-inch casserole dish with no-stick cooking spray; spoon potatoes into dish. Stir the eggs into the potatoes. BAKE covered with foil for 15 minutes. Remove from oven. Sprinkle with cheese and return to the oven. BAKE 15 minutes more or until cheese is melted and eggs are set. Turn oven to BROIL and continue to cook, about 2 minutes, or until top is nicely browned. Allow to cool 10 minutes before cutting into 8 squares. Serve topped with heated salsa. Apricot Cheese Coffee Cake Directions Dough: ADD ingredients for dough to bread machine according to manufac- turer’s directions. Select DOUGH cycle. When cycle is complete, remove dough from machine. Cover and let rest 10 minutes. Spray a 91/2-inch spring- form pan with no-stick cooking spray; remove side ring from pan. Roll out dough on lightly floured surface to a 15-inch circle. Place dough on pan bottom. Filling: COMBINE cream cheese and flour. Gently spread cheese mixture in center of dough to within 2 inches of edge. Spread preserves over cheese. MAKE cuts about 1 inch apart around edge of dough in a spoke fashion to about 1 inch from filling. Twist pairs of dough strips together three times. Bring up to center, covering the filling. Replace side ring onto pan bottom. Cover with towel. Let rise in warm place for 60 minutes, or until doubled. HEAT oven to 375º F. Brush dough with beaten egg. Sprinkle almonds on top. BAKE 30–35 minutes, or until golden. Cover with foil after 20 minutes if becoming too brown. ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ ✥ Hickory Smoked Burgers with Glazed Apples & Smoked Cheddar Directions COMBINE 1/2 cup apple butter, Worcestershire sauce, hickory smoke flavoring, salt and pepper in a medium bowl. Crumble ground chuck into bowl; gently combine the ingredients. Shape meat into four (5-inch) patties; refrigerate. COAT unheated grill grate with no-stick cooking spray. Heat grill to medium-high (350– 400°F). Coat apples and onions (keeping rings intact) with 1 cup apple butter. GRILL the burgers, apples and onions 4 to 6 minutes per side or until juices run clear on the burgers, and the apples and onions are tender. Toast rolls, if desired (see note). Top each burger with smoked Cheddar cheese during the last 2 minutes of grilling. PLACE a burger on each roll bottom, top with grilled apples and onions and the roll top; serve. NOTE: To toast the rolls: spray the inside of each roll with butter flavor no-stick cooking spray. Place the rolls (cut side down) around the outer edges of the cooking grate; grill until golden brown. Oatmeal Carmelitas Directions HEAT oven to 350º F. Spray a 13 x 9-inch pan with no-stick cooking spray. COMBINE all crust ingredients in a large bowl; mix at low speed until crumbly. Reserve half of crumb mixture (about 3 cups) for topping. Press remaining crumb mixture in bottom of prepared pan. BAKE at 350° F for 10 minutes. COMBINE caramel topping and 3 tablespoons flour in small bowl; blend well. Remove partially baked crust from oven. Sprinkle with chocolate chips and nuts. Drizzle evenly with caramel mixture. Sprinkle with reserved crumb mixture. RETURN to oven; bake an additional 18–22 minutes or until golden brown. COOL 1 hour or until completely cooled. Refrigerate 1–2 hours or until filling is set. Cut into bars. Broccoli Noodle Salad with Asian Peanut Citrus Sauce Directions COOK noodles or pasta according to package directions; drain well. Place in a large bowl and toss with 1 tablespoon oil. Set aside. WHISK peanut butter, orange juice, lemon juice, soy sauce and sugar in a medium bowl until blended. HEAT 1/2 cup oil in a large, deep-sided skillet over medium heat. Add chopped onion, chopped pepper, minced garlic and broccoli florets, cooking until crisp-tender. Add pasta and citrus sauce, tossing until well combined. Serve at room temperature. Rosemary Roasted Potato Salad Directions HEAT oven to 400º F. Spray a baking sheet with no-stick cooking spray; set aside. TOSS potatoes, onions, and rosemary in a large bowl; add olive oil, salt and pepper. Transfer to prepared baking sheet. BAKE 20–30 minutes or until lightly browned and fork-tender. Remove from oven; cool. SPOON potato mixture into a large serving bowl; add mayon- naise and Parmesan cheese; stir to combine. Season with salt and pepper, if needed. SERVE warm or chilled. ©/® The J. M. Smucker Company Pillsbury BEST is a trademark of The Pillsbury Company, used under license. pillsburybaking.com crisco.com smuckers.com hungryjack.com crisco.com smuckers.com crisco.com crisco.com jif.com ©/® The J. M. Smucker Company ©/® The J. M. Smucker Company ©/® The J. M. Smucker Company ©/® The J. M. Smucker Company smuckers.com crisco.com Financial Review ✥✥✥ Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations Stock Price Data Comparison of Five-Year Cumulative Total Shareholder Return Management’s Discussion and Analysis Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements Report of Management on Responsibility for Financial Reporting Consolidated Financial Statements Notes to Consolidated Financial Statements Directors, Officers, and General Managers Properties Corporate and Shareholder Information 12 13 13 14 15 25 26 27 28 29 34 66 66 67 11 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, 2007. 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 con- solidated financial statements and notes thereto. Year Ended April 30, (Dollars in thousands, except per share data) 2007 2006 2005 2004 2003 Statements of Income: Net sales $2,148,017 $2,154,726 $2,043,877 $1,369,556 $1,270,098 Income from continuing operations $ 157,219 $ 143,354 $ 130,460 $ 111,298 $ 94,212 Discontinued operations — — (1,387) 52 2,130 Net income $ 157,219 $ 143,354 $ 129,073 $ 111,350 $ 96,342 Financial Position: Total assets Cash and cash equivalents Long-term debt Shareholders’ equity Other Data: Capital expenditures Common shares repurchased Weighted-average shares $2,693,823 $2,649,744 $2,635,894 $1,684,125 $1,615,407 200,119 392,643 71,956 428,602 58,085 431,560 104,551 135,000 170,012 135,000 1,795,657 1,728,059 1,690,800 1,210,693 1,124,171 $ 57,002 $ 63,580 $ 87,576 $ 97,721 $ 48,083 1,067,400 1,892,100 368,678 — — 56,432,839 57,863,270 57,086,734 49,816,926 47,309,257 Weighted-average shares – assuming dilution 57,056,421 58,425,361 57,748,780 50,395,747 47,764,777 Earnings per common share: Income from continuing operations $ 2.79 $ 2.48 $ 2.29 $ 2.23 $ 1.99 Discontinued operations — — (0.03) 0.01 0.05 Net income $ 2.79 $ 2.48 $ 2.26 $ 2.24 $ 2.04 Income from continuing operations – assuming dilution $ 2.76 $ 2.45 $ 2.26 $ 2.21 $ 1.97 Discontinued operations – assuming dilution — — (0.02) — 0.05 Net income – assuming dilution $ 2.76 $ 2.45 $ 2.24 $ 2.21 $ 2.02 Dividends declared per common share $ 1.14 $ 1.09 $ 1.02 $ 0.94 $ 0.83 12 Summary of Quarterly Results of Operations ✥✥✥ The following is a summary of unaudited quarterly results of operations for the years ended April 30, 2007 and 2006. (Dollars in thousands, except per share data) 2007 2006 Quarter Ended Net Sales Gross Profit July 31, 2006 October 31, 2006 January 31, 2007 April 30, 2007 July 31, 2005 October 31, 2005 January 31, 2006 April 30, 2006 $526,509 604,955 523,081 493,472 $510,331 606,264 536,453 501,678 $157,994 191,191 172,967 179,903 $164,713 203,423 163,854 160,862 Net Income Earnings per Common Share Earnings per Common Share– Assuming Dilution $28,724 45,569 40,427 42,499 $29,897 46,444 31,312 35,701 $0.51 0.80 0.72 0.76 $0.51 0.80 0.54 0.63 $0.50 0.80 0.71 0.75 $0.51 0.79 0.54 0.62 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 pre- sents the high and low market prices for the shares and the quarterly dividends declared. There were approximately 275,500 shareholders as of the June 18, 2007 record date, of which 82,067 were registered holders of common shares. 2007 2006 Quarter Ended High Low Dividends July 31, 2006 October 31, 2006 January 31, 2007 April 30, 2007 July 31, 2005 October 31, 2005 January 31, 2006 April 30, 2006 $47.25 49.14 49.98 57.43 $51.04 49.41 46.84 44.26 $39.11 43.00 45.00 46.97 $45.94 44.56 43.33 37.15 $0.28 0.28 0.28 0.30 $0.27 0.27 0.27 0.28 13 Comparison of Five-Year Cumulative Total Shareholder Return ✥✥✥ Among The J. M. Smucker Company, the S&P 500 Index, and the S&P Packaged Foods & Meats Index ■ • ◆ ■ • ◆ ◆ • ■ ■ • ◆ ■ ◆ • $180 $160 $140 $120 $100 ■ $80 $60 $40 $20 $0 4/02 4/03 4/04 4/05 4/06 4/07 ■ ◆ • The J. M. Smucker Company S&P 500 S&P Packaged Foods & Meats 2002 2003 2004 2005 2006 2007 April 30, The J. M. Smucker Company $100.00 $100.93 $148.75 $144.14 $116.74 $170.14 S&P 500 S&P Packaged Foods & Meats 100.00 100.00 86.69 91.69 106.52 118.48 113.28 126.79 130.74 122.69 150.66 146.57 The above graph compares the cumulative total shareholder return for the five years ended April 30, 2007, for the Company’s common shares, the S&P 500, and the S&P Packaged Foods and Meats index. These figures assume all dividends are reinvested when received and are based on $100 invested in the Company’s common shares and the referenced index funds on April 30, 2002. Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm 14 Management’s Discussion and Analysis ✥✥✥ Executive Summary ✥✥✥ The J. M. Smucker Company (the “Company”), headquar- tered in Orrville, Ohio, is a leading marketer and manu- Results of Operations ✥✥✥ — Summary of 2007 — facturer of fruit spreads, peanut butter, shortening and The Company achieved strong sales and earnings growth oils, ice cream toppings, and health and natural foods in 2007. Net income increased from $143.4 million to beverages in the United States and Canada. $157.2 million, or 10 percent, as a result of gross margin The Company’s strategy is to own and market leading food brands found in the center of the store and sold throughout North America. Its family of brands includes Smucker’s, Jif, Crisco, Pillsbury, R. W. Knudsen Family, Hungry Jack, White Lily, and Martha White in the United States, along with Robin Hood, Five Roses, and Bick’s in Canada. In addition to these brands, the Company mar- kets products under numerous other brands, including Dickinson’s, Laura Scudder’s, Adams, Double Fruit (Canada), and Santa Cruz Organic. The Company is widely known and trusted for quality food products. In support of its strategy, the Company completed its acqui- sition of Eagle Family Foods Holdings, Inc. (“Eagle”), on May 1, 2007. The acquisition of Eagle brings Eagle Brand and Magnolia to the Company’s family of brands. The transaction will be accounted for as a purchase business combination. 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, and mar- kets a wide variety of other specialty products through- out North America and in many foreign countries. improvements due in part to a favorable mix of sales and a reduction in merger and integration costs. Net income per common share – assuming dilution was $2.76, an increase of 13 percent, benefiting not only from the increase in net income but also by a decrease in common shares outstanding. — Net Sales — Year Ended April 30, (Dollars in thousands) 2007 2006 2005 Net sales: U.S. retail market $1,547,064 $1,484,873 $1,405,191 Special markets 600,953 669,853 638,686 Total net sales $2,148,017 $2,154,726 $2,043,877 2007 Compared to 2006. Net sales in 2007 decreased $6.7 million, or less than one percent, from 2006 reflect- ing the impact of divestitures. Net sales increased $107.5 million, or five percent over the same period, excluding the Canadian nonbranded, grain-based foodservice and industrial businesses sold in Septmeber 2006 and the U.S. industrial ingredient business (“divested busi- nesses”). This net sales growth was led primarily by volume gains in the Jif and Smucker’s brands, strong Since the 1998 inception of FORTUNE magazine’s annual performance across the businesses in the special mar- survey of the “100 Best Companies to Work For,” the kets segment, and the contribution of approximately Company has consistently been recognized as one of the $33.4 million from the White Lily and Five Roses brands top companies to work for in the United States, ranking acquired during 2007. Price increases were also taken on number one in 2004. most brands during the year. 15 In the U.S. retail market segment, comprised of the results of Multifoods’ operations are included in the Company’s consumer and consumer oils and baking Company’s consolidated financial statements from the strategic business areas, net sales were $1,547.1 million date of the acquisition. Since the acquisition of Multifoods in 2007, up $62.2 million, or approximately four percent, closed midway through the first quarter of 2005, an addi- over 2006. Net sales in the consumer business area were tional six weeks of results are included in 2006. up seven percent for the year. The consumer increase was led by strong sales of Jif peanut butter, particularly in the fourth quarter of the fiscal year resulting from increased demand for the product upon the recall of a competitor’s products. In addition, growth in natural peanut butter, fruit spreads, toppings, and a 29 percent increase in Uncrustables during the year also con- tributed. In the consumer oils and baking strategic busi- ness area, sales were flat compared to the prior year as sales gains in retail oils, frosting, flour, and the contribu- tion of $14.8 million from the White Lily brand acquired in October 2006, offset declines in baking mixes and a $14.7 million decrease in sales of industrial oils. Also during 2005, in support of the Company’s stated strategy, the Company sold its Australian subsidiary, Henry Jones Foods; its Brazilian subsidiary, Smucker do Brasil, Ltda.; and the U.S. foodservice and bakery prod- ucts businesses, including the Canadian foodservice loca- tions operated under the Gourmet Baker name, which were acquired as part of Multifoods. The Australian sub- sidiary, the Brazilian subsidiary, and the Multifoods U.S. foodservice and bakery products businesses are consid- ered to be discontinued operations and are excluded from the discussions below. Net sales in 2006 increased $110.8 million, or five percent, The special markets segment is comprised of the food- over 2005. Excluding the additional Multifoods net sales service, beverage, Canada, and international strategic and divested businesses, net sales increased three per- business areas. Net sales in this segment were $601.0 cent. In addition to growth in several business areas, other million in 2007, a decrease of 10 percent, compared to factors impacting net sales in 2006 were a six percent 2006. Excluding divested businesses, special market net price decrease on Crisco products in effect for the entire sales increased nine percent for the same period. All year, favorable foreign exchange rates, and selective price strategic business areas in special markets contributed increases on fruit spreads and peanut butter items. to the increase. Foodservice net sales increased 13 per- cent, due to a 10 percent increase in sales of traditional portion control products, as well as a 20 percent increase in Uncrustables in the schools market. Beverage net sales increased 11 percent in 2007 compared to 2006, as sales of R. W. Knudsen Family, Santa Cruz Organic, and nonbranded products increased nine, 21, and 19 percent, respectively. Net sales in Canada increased five percent driven by the contribution of approximately $18.6 million from the acquisition of the Five Roses flour brand during the year and the impact of favorable exchange rates. In the international business area, net sales increased 14 percent primarily due to continued growth in export markets. In the U.S. retail market segment, net sales were $1,484.9 million in 2006, up $79.7 million, or approxi- mately six percent, over 2005. Net sales in the consumer strategic business area were up six percent for the year, led by sales of Smucker’s and Jif. In addition, sales of Uncrustables products increased 29 percent in 2006 as the Company continued the momentum experienced in 2005. Net sales in the consumer oils and baking strate- gic business area were up five percent over 2005 due primarily to the additional Multifoods sales. The addi- tional Multifoods sales accounted for almost half of the year-over-year growth in the segment. Net sales in the special markets segment were $669.9 2006 Compared to 2005. In 2005, the Company com- million in 2006 compared to $638.7 million in 2005, an pleted its acquisition of International Multifoods increase of five percent. Excluding divested businesses Corporation (“Multifoods”) in a tax-free stock and cash and the additional Multifoods sales, special market net transaction valued at approximately $871 million. The sales increased four percent. The overall sales increase 16 reflects growth in the foodservice and beverage areas 2007 Compared to 2006. Operating income increased and the impact of favorable exchange rates. In the food- $28.3 million in 2007, or 12 percent, compared to 2006, service area, 2006 net sales were up seven percent from and increased from 10.6 percent of net sales to 12.0 per- 2005 due to a two percent growth in traditional portion cent. The increase in operating income was primarily control items, primarily under the Smucker’s brand, and due to improvements in gross profit and a decrease in increased sales in the schools market, where merger and integration costs. Gross profit increased Uncrustables products increased 22 percent in 2006. from $692.9 million, or 32.2 percent of net sales in 2006, Beverage area net sales were up 13 percent in 2006. to $702.1 million, or 32.7 percent of net sales in 2007. Sales of R. W. Knudsen Family and Santa Cruz Organic The increase in gross profit occurred, despite a record products were up 18 and 28 percent, respectively, for high commodity price environment, due to the divesti- 2006, offset somewhat by nonbranded sales, which were ture of the lower margin Canadian nonbranded busi- down five percent in 2006. In the international area, net nesses during the second quarter of 2007 and favorable sales were up 49 percent in 2006 from 2005. Much of the product mix, particularly in the last quarter of the year. increase was attributed to a realignment of the export These favorable contributions to gross profit were offset business, acquired as part of the Multifoods acquisition, in part by an increase in restructuring related impair- as sales to export customers were previously included as ment charges associated with the Canadian divestiture. part of the Canadian business. Sales in Scotland were Although the Company has taken pricing actions to miti- down four percent in 2006 from 2005. Although nega- gate commodity cost increases totaling approximately tively impacted by planned rationalization of certain $30 million, these cost increases were not fully offset for unprofitable businesses and the realignment of the the year. export business, the Canada business was favorably impacted in 2006 by foreign exchange rates. — Operating Income — The following table presents components of operating income as a percentage of net sales. Year Ended April 30, 2007 2006 2005 32.7% 32.2% 32.2% 2.4% 7.6 3.5 7.1 2.6% 7.4 3.6 6.7 2.4% 7.7 2.9 7.0 Gross profit Selling, distribution, and administrative: Advertising Marketing and selling Distribution General and administrative Total selling, distribution, and administrative 20.6% 20.3% 20.0% Restructuring and merger and integration 0.1% 1.3% 1.4% Selling, distribution, and administrative (“SD&A”) expenses increased $4.4 million in 2007, or approxi- mately one percent, from 2006, and increased from 20.3 percent of net sales to 20.6 percent due to costs associ- ated with the Company’s transition to restricted stock- based compensation programs and the related impact of adopting Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment. Selling expenses were also up over the prior year. Marketing and distribu- tion expense decreased from 2006 as the Company actively managed SD&A costs to help offset the impact of higher raw material costs. 2006 Compared to 2005. Operating income increased $8.0 million in 2006, or four percent, over 2005 while operating income as a percentage of net sales decreased from 10.8 percent to 10.6 percent primarily due to an increase in distribution costs throughout the year. Included in 2006 operating income was approximately $27.9 million of restructuring and merger and integra- Operating income 12.0% 10.6% 10.8% tion related costs, while 2005 included $31.3 million of similar charges. Positive contributors to operating income 17 in 2006 included the overall growth of the higher margin to increases in the average investment balances, higher U.S. retail market segment, including gains in the interest rates throughout the year, and interest earned Smucker’s and Jif brands. The Company’s gross profit as on promissory notes. a percentage of net sales remained unchanged at 32.2 percent in 2006, despite higher commodity costs along with packaging and freight. These higher costs were offset — Other Income and Expense — by a favorable adjustment of approximately $6.7 million In 2006, other income (net) was $4.2 million, which to net sales reflecting a change in estimate of the included a gain of $5.6 million recognized on the sale of expected liability for trade merchandising programs the Salinas, California, facility during the third quarter offered to customers during 2005, improved profitability offset by other expenses, primarily associated with the of Uncrustables products, and favorable pricing on other write-off of certain manufacturing assets no longer in use. raw materials. SD&A expenses increased eight percent during 2006 over 2005. As a percent of net sales, SD&A increased from 20.0 percent to 20.3 percent, primarily due to increased expenses related to a new distribution net- work implemented during 2006. The Company increased its marketing expense by eight percent during 2006 in support of its major retail brands, as well as the contin- ued retail rollout of Uncrustables products. Also con- tributing to the increase in SD&A during 2006 were — Income Taxes — Income taxes were $83.8 million in 2007, an increase of $11.6 million, or 16 percent from 2006. The increase is due primarily to an increase in taxable income, combined with an increase in the effective tax rate from 33.5 percent in 2006 to 34.8 percent in 2007. The effective tax rate in 2006 included certain one-time benefits of the Company’s legal entity realignment that did not recur in 2007. amortization costs associated with the Company’s Income taxes in 2006 were $72.2 million, down $1.9 mil- expanded restricted stock program, which replaced its lion, or three percent, from 2005. The decrease is due stock option program. — Interest Income and Expense — Interest expense decreased $0.7 million in 2007 as a por- tion of the proceeds from the sale of the Canadian non- branded businesses were utilized to pay off balances outstanding against the Company’s revolving credit facil- ity during the second quarter of the fiscal year. Also during the year, interest income increased $2.6 million, or 39 percent, primarily related to an increase in invested funds during the year resulting from the Canadian nonbranded businesses sale and an overall increase in cash generated from operations. Interest expense increased $1.5 million in 2006 from primarily to a decrease in the consolidated effective tax rate to 33.5 percent, compared to 36.2 percent in 2005 as income from continuing operations before income taxes increased $11.0 million, or five percent, over 2005. The lower effective tax rate resulted from the Company’s realignment of its legal entity structure to better match the operations of the business and the flow of goods, cou- pled with recent state tax law and rate changes. This realignment was necessitated by changes made to the Company’s manufacturing and distribution networks resulting from its supply chain optimization project and the acquisition of Multifoods. — Restructuring — 2005 as the Company realized a full year of expense on During 2003, the Company announced plans to restruc- the additional debt associated with the acquisition of ture certain operations as part of its ongoing efforts to Multifoods. This increase in interest expense was offset refine its portfolio, optimize its production capacity, somewhat by a decrease in the Company’s outstanding improve productivity and operating efficiencies, and revolving credit balance and the payoff of $17 million in improve the Company’s overall cost base as well as serv- long-term debt in September 2005. Interest income ice levels in support of its long-term strategy. At the end of increased by $1.9 million in 2006 compared to 2005 due 2007, these restructurings were proceeding as planned. 18 During 2007, the Company sold the Canadian non- resulted from the increase in net income plus noncash branded businesses as part of its strategic plan to focus charges, and the collection of trade receivables associ- the Canadian operations on its branded consumer retail ated with the divested Canadian nonbranded businesses. and foodservice businesses. In conjunction with the restructurings, the Company has recorded a total charge of $53.8 million to date, includ- ing $12.1 million in 2007, of which $11.4 million was associated with the sale of the Canadian nonbranded businesses, $10.0 million in 2006, and $13.3 million in 2005. The majority of these charges related to impair- ment and accelerated depreciation on buildings and machinery and equipment, employee separation costs, equipment relocation expenses, and the disposition of inventories. Liquidity and Capital Resources ✥✥✥ (Dollars in thousands) 2007 2006 2005 Year Ended April 30, Accounts receivable turnover improved to 17.3 in 2007 from 14.6 in 2006, while inventory turnover remained relatively even at 5.1 in 2007 compared to 5.2 in 2006. Working capital, excluding cash and cash equivalents, as a percent of net sales remains favorable at 9.4 percent in 2007 compared to 12.3 percent in 2006. — Investing Activities — Net cash used for investing activities totaled approxi- mately $27.0 million, as $84.1 million of proceeds from the sale of the Canadian nonbranded businesses were offset by $60.5 million used to purchase the Five Roses and White Lily brands. Capital expenditures were approximately $57.0 million during 2007, or approxi- mately 2.7 percent of net sales. — Financing Activities — Net cash provided by operating activities Net cash used for $273,424 $198,689 $149,764 Net cash used for financing activities during 2007 con- investing activities 27,041 16,255 120,817 Net cash used for financing activities 117,625 169,129 72,280 The Company’s principal source of funds is cash gener- ated from operations, supplemented by borrowings against the Company’s revolving credit instrument. Total sisted primarily of $63.6 million in dividend payments and $52.1 million to finance the repurchases of 1,067,400 common shares. One million of the common shares were repurchased as part of the Company’s August 2006 Rule 10b5-1 trading plan with a broker. At April 30, 2007, the Company had repurchased a total of 3,328,178 common shares under Board authorization leaving 1,671,822 common shares authorized for repur- cash and investments at April 30, 2007, were $244.2 mil- chase. lion compared to $120.9 million at April 30, 2006. — Operating Activities — The Company’s working capital requirements are great- est during the first half of its fiscal year, primarily due to the need to build inventory levels in advance of the “fall bake” season, and the seasonal procurement of fruit and raw materials used in the Company’s pickle and relish business in Canada. Cash requirements for 2008 will include the May 1, 2007, acquisition of Eagle for $248 million in cash, including the placement in escrow of $115 million, rep- resenting the principal balance of Eagle’s Senior Notes, in exchange for a covenant defeasance. Capital expendi- tures are estimated at approximately $75 million. In addition, dividends are expected to approximate $68 million and interest payments on long-term debt to approximate $44 million for the year, including pay- ments associated with the Company’s $400 million 5.55 Cash provided by operating activities was a record percent Senior Notes issued May 31, 2007. The Company $273.4 million during 2007, an increase of $74.7 million, will also be repaying $33 million of Senior Notes due or 38 percent, over 2006. The increased cash generated September 1, 2007. 19 Assuming there are no other material acquisitions or The following table summarizes the Company’s contrac- other significant investments, the Company believes that tual obligations at April 30, 2007. cash on hand and marketable securities, combined with cash provided by operations, proceeds from the May 31, 2007, issuance of Senior Notes, and borrowings available under the revolving credit facility, will be sufficient to (Dollars in millions) meet 2008 cash requirements, including capital expendi- Long-term Less Than Total One Year One to Three Years Three to Five Years More Than Five Years tures, the payment of dividends, repurchase of common debt obligations $ 425.6 $ 33.0 $282.6 $10.0 $100.0 shares, if any, and interest on debt outstanding. Off-Balance Sheet Arrangements and Contractual Obligations ✥✥✥ The Company does not have off-balance sheet arrange- ments, financings, or other relationships with unconsoli- dated 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. 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 guaran- tees relate to certain real estate and tractor-trailer fleet lease obligations of the business. The guarantees require the lessor to pursue collection and other remedies against Wellspring before demanding payment from the Company. The tractor-trailer fleet guarantee expired in September 2006, and the real estate guarantees will expire in September 2010. At April 30, 2007, the Company’s outstanding guarantees for the real estate lease obligations of Wellspring were $6.4 million. Operating lease obligations Purchase 9.0 1.6 2.5 2.0 2.9 obligations 563.4 391.3 154.2 8.3 9.6 Other long-term liabilities 269.1 — — — 269.1 Total $1,267.1 $425.9 $439.3 $20.3 $381.6 Purchase obligations in the above table include agree- ments to purchase goods or services that are enforceable and legally binding on the Company. Included in this cat- egory are certain obligations related to normal, ongoing purchase obligations in which the Company has guaran- teed payment to ensure availability of raw materials and packaging supplies. The Company expects to receive consideration for these purchase obligations in the form of materials. The purchase obligations in the above table do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated. 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 The possibility that the Company would be required to financial statements. In preparing these financial state- honor the contingent liabilities under the real estate ments, management has made its best estimates and guarantee is largely dependent upon the future opera- judgments of certain amounts included in the financial tions of Wellspring and the value of the underlying leased statements, giving due consideration to materiality. The properties. The Company currently has no liability Company does not believe there is a great likelihood that recorded related to the guarantee. Should a reserve be materially different amounts would be reported under required in the future, it would be recorded at the different conditions or using different assumptions time the obligation was considered to be probable and related to the accounting policies described below. estimable. However, application of these accounting policies 20 involves the exercise of judgment and use of assumptions In assessing the need for a valuation allowance, the as to future uncertainties and, as a result, actual results Company estimates future taxable income, considering could differ from these estimates. the viability of ongoing tax planning strategies and the Revenue Recognition. The Company recognizes revenue when all of the following criteria have been met: a valid customer order with a determinable price has been received; the product has been shipped and title has transferred to the customer; there is no further signifi- cant obligation to assist in the resale of the product; and collectibility is reasonably assured. A provision for esti- mated returns and allowances is recorded as a reduction of sales at the time revenue is recognized. Trade Marketing and Merchandising Programs. In order to support the Company’s products, various pro- motional activities are conducted through the retail trade, distributors, or directly with consumers, including in-store display and product placement programs, fea- ture price discounts, coupons, and other similar activi- ties. The Company regularly reviews and revises, when it probable recognition of future tax deductions and loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes in tax laws, statu- tory tax rates, and projected future taxable income levels. Changes in estimated realization of deferred tax assets would result in either an adjustment to goodwill, if the change relates to tax benefits associated with a business combination, or an adjustment to income, in the period in which that determination is made. In the ordinary course of business, the Company is exposed to uncertainties related to tax filings and peri- odically assesses the liabilities and contingencies for all tax years under audit based upon the latest information available. In the event the Company believes a claim will be asserted, an estimate of the tax liability, including applicable interest charges, has been recorded. deems necessary, estimates of costs to the Company for Long-Lived Assets. Historically, long-lived assets have these promotional programs based on estimates of what been reviewed for impairment whenever events or will be redeemed by the retail trade, distributors, or con- changes in circumstances indicate that the carrying sumers. These estimates are made using various tech- amount of the asset may not be recoverable. niques including historical data on performance of Recoverability of assets to be held and used is measured similar promotional programs. Differences between esti- by a comparison of the carrying amount of the assets to mated expense and actual performance are recognized future net cash flows estimated to be generated by such as a change in management’s estimate in a subsequent assets. If such assets are considered to be impaired, the period. As the Company’s total promotional expendi- impairment to be recognized is the amount by which the tures, including amounts classified as a reduction of net carrying amount of the assets exceeds the fair value of sales, represent approximately 27 percent of 2007 net the assets. However, determining fair value is subject to sales, the likelihood exists of materially different estimates of both cash flows and interest rates and dif- reported results if factors such as the level and success ferent estimates could yield different results. During of the promotional programs or other conditions differ 2007, the Company recorded impairment of approxi- from expectations. Income Taxes. The future tax benefit arising from the net deductible temporary differences and tax carryfor- wards is approximately $63.2 million and $78.7 million, at April 30, 2007 and 2006, respectively. Management mately $8.5 million associated with the Canadian non- branded businesses divested during the year. There are no other 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. believes that the Company’s earnings during the periods Goodwill and Indefinite-Lived Intangible Assets. The when the temporary differences become deductible will annual evaluation of goodwill and indefinite-lived intan- be sufficient to realize the related future income tax ben- gible assets requires the use of estimates about future efits. For those jurisdictions where the expiration date of operating results for each reporting unit to determine tax carryforwards or the projected operating results of estimated fair value. Changes in forecasted operations the Company indicate that realization is not likely, a val- can materially affect these estimates. Additionally, other uation reserve has been provided. changes in the estimates and assumptions, including the 21 discount rate and expected long-term growth rate, which postretirement benefits other than pensions of $12.8 mil- drive the valuation techniques employed to estimate the lion, an increase in pension liabilities of $4.8 million, an fair value of the reporting unit could change and, there- increase in deferred tax assets of $7.4 million, and a fore, impact the assessments of impairment in the future. decrease in accumulated other comprehensive income Pension 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. Various actuarial assumptions must be made in order to predict and measure costs and obligations many years prior to the settlement date, the most significant being the inter- est rates used to discount the obligations of the plans, the long-term rates of return on the plans’ assets, and the health care cost trend rates. Management, along with third-party actuaries and investment managers, reviews all of these assumptions on an ongoing basis to ensure that the most reasonable information available is being considered. For 2008 expense recognition, the Company will use a discount rate of 6.0 percent and 5.25 percent, an expected rate of return on plan assets of 8.25 percent and 8.0 percent, and a rate of compensation increase of 4.1 percent and 4.0 percent, for U.S. and Canadian plans, respectively. Effective April 30, 2007, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R) (“SFAS 158”). Along with disclosure requirements, SFAS 158 requires the recognition of a plan’s funded status as an asset for fully funded plans and as a liability for unfunded or under-funded plans. Previously unrecognized actuarial gains and losses and prior service costs are now (loss) of $14.0 million. See Note J: Pensions and Other Postretirement Benefits for information concerning the Company’s pension and other postretirement benefit plans. 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 that a specific customer may be unable to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the cus- tomer’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 experi- ence, and an evaluation of current and projected eco- nomic conditions at the balance sheet date. Actual collections of trade receivables could differ from man- agement’s estimates due to changes in future economic or industry conditions or specific customers’ financial conditions. Share-Based Payments. Effective May 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment (“SFAS 123R”). SFAS 123R requires that the cost of transactions involving share-based payments be recog- nized in the financial statements based on a fair value- based measurement. recorded in accumulated other comprehensive income Prior to the adoption of SFAS 123R, the Company elected (loss), a component of shareholders’ equity. The amounts to account for share-based payments in accordance with recorded in accumulated other comprehensive income Accounting Principles Board Opinion No. 25, Accounting (loss) will continue to be modified as actuarial assump- for Stock Issued to Employees (“APB 25”), and related tions and service costs change and such amounts will be interpretations. Under APB 25, because the exercise amortized to expense over a period of time through net price of the Company’s employee stock options equaled periodic benefit cost. The adoption of SFAS 158 resulted the market price of the underlying stock on the date of in a decrease of $29.4 million in assets, a decrease in grant, no compensation expense was recognized. In antic- 22 ipation of adoption of SFAS 123R and concurrent with a financial liabilities would change as a result of move- review of competitive long-term incentive programs, the ments in interest rates. Based on a hypothetical, imme- Company replaced its employee stock option incentive diate 100 basis point decrease in interest rates at April program with a restricted stock program as of June 30, 2007, the market value of the Company’s long-term 2005. Additionally, on April 12, 2006, the Executive debt and interest rate portfolio, in aggregate, would Compensation Committee of the Board of Directors of the increase by approximately $14.2 million. Company approved accelerating the vesting of all out- standing unvested stock options with an exercise price greater than $39.31, the closing price of the Company’s common shares on the New York Stock Exchange on April 11, 2006. As a result of this acceleration of vesting, no compensation expense was recorded in 2007, nor will be recorded in future periods related to these stock options. See Note L: Stock Benefit Plans for more infor- mation related to the Company’s stock benefit plans. Derivative Financial Instruments and Market Risk ✥✥✥ Foreign Currency Exchange Risk. The Company has operations outside the United States with foreign cur- rency 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, 2007, are not expected to result in a significant impact on future earnings or cash flows. Revenues from customers outside the United States rep- resented 15 percent of net sales during 2007. Thus, cer- The following discussions about the Company’s market tain revenues and expenses have been, and are expected risk disclosures involve forward-looking statements. to be, subject to the effect of foreign currency fluctua- Actual results could differ from those projected in the tions and these fluctuations may have an impact on oper- forward-looking statements. The Company is exposed to ating results. market risk related to changes in interest rates, foreign currency exchange rates, and commodity prices. Commodity Price Risk. Raw materials and other com- modities used by the Company are subject to price Interest Rate Risk. The fair value of the Company’s cash volatility caused by supply and demand conditions, polit- and short-term investment portfolio at April 30, 2007, ical and economic variables, and other unpredictable approximates carrying value. Exposure to interest rate factors. To manage the volatility related to anticipated risk on the Company’s long-term debt is mitigated since commodity purchases, the Company uses futures and it is at a fixed rate until maturity. Market risk, as meas- options with maturities generally less than one year. ured by the change in fair value resulting from a hypo- Certain of these instruments are designated as cash flow thetical 10 percent change in interest rates, is not hedges. The mark-to-market gains or losses on qualify- material. Based on the Company’s overall interest rate ing hedges are included in other comprehensive income exposure as of and during the year ended April 30, 2007, to the extent effective, and reclassified into cost of prod- including derivative and other instruments sensitive to ucts sold in the period during which the hedged transac- interest rates, a hypothetical 10 percent movement in tion affects earnings. The mark-to-market gains or losses interest rates would not materially affect the Company’s on nonqualifying, excluded, and ineffective portions of results of operations. A hypothetical 100 basis point hedges are recognized in cost of products sold immedi- increase in short-term interest rates would increase the ately. Commodity price risk associated with the Company’s Company’s interest expense by approximately $0.2 mil- derivative position at April 30, 2007 and 2006, is not lion. Interest rate risk can also be measured by estimating material to the operating results or financial position of the net amount by which the fair value of the Company’s the Company. 23 Forward-Looking Statements ✥✥✥ ✥ raw material and ingredient cost trends; ✥ the ability to successfully implement price changes, particularly in the consumer oils and Certain statements included in this Annual Report con- baking business; tain forward-looking statements within the meaning of federal securities laws. The forward-looking state- ments may include statements concerning the Company’s current expectations, estimates, assump- tions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward- looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “plans,” and similar phrases. ✥ the success and cost of introducing new products and the competitive response, particularly in the consumer oils and baking area; ✥ the success and cost of marketing and sales pro- grams and strategies intended to promote growth in the Company’s businesses, and in their respective markets; ✥ the concentration of certain of the Company’s businesses with key customers and the ability to manage and maintain key customer relation- Federal securities laws provide a safe harbor for for- ships; ward-looking statements to encourage companies to provide prospective information. The Company is pro- ✥ the loss of significant customers or a substantial reduction in orders from these customers or the viding this cautionary statement in connection with the bankruptcy of any such customer; safe harbor provisions. Readers are cautioned not to ✥ the ability of the Company to obtain any required place undue reliance on any forward-looking state- financing; ments as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of the Company’s control and could cause actual results to differ materially from such statements and from the Company’s historical results and experi- ence. These risks and uncertainties include, but are not limited to, those set forth under the caption “Risk Factors” in the Company’s Annual Report on Form 10- K, as well as the following: ✥ the volatility of commodity markets from which raw materials are procured and the related impact on costs; ✥ crude oil price trends and its impact on trans- portation, energy, and packaging costs; ✥ the timing and amount of capital expenditures, restructuring, and merger and integration costs; ✥ foreign currency exchange and interest rate fluctuations; ✥ the timing and cost of acquiring common shares under the Company’s share repurchase authori- zations; ✥ general competitive activity in the market, including competitors’ pricing practices and pro- motional spending levels; and ✥ other factors affecting share prices and capital markets generally. 24 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, 2007. 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 (“the COSO criteria”). Based on the Company’s assessment of internal control over financial reporting under the COSO criteria, management concluded the Company’s internal control over financial reporting was effective as of April 30, 2007. Ernst & Young LLP, independent registered public accounting firm, audited the Company’s assessment of internal con- trol over financial reporting as of April 30, 2007, and their report thereon is included on page 26 of this report. Timothy P. Smucker Chairman and Co-Chief Executive Officer Richard K. Smucker President and Co-Chief Executive Officer Mark R. Belgya Vice President, Chief Financial Officer and Treasurer 25 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 report- ing as of April 30, 2007, 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 man- agement’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 obtain- ing 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 regard- ing the reliability of financial reporting and the preparation of financial statements for external purposes in accor- dance 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 trans- actions 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 accor- dance 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 dete- riorate. In our opinion, management’s assessment that The J. M. Smucker Company maintained effective internal control over financial reporting as of April 30, 2007, 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, 2007, 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, 2007 and 2006, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2007, and our report dated June 22, 2007, expressed an unqualified opinion thereon. Akron, Ohio June 22, 2007 26 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, 2007 and 2006, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2007. These financial statements are the responsibility of the Company’s manage- ment. 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 sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting prin- ciples 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 con- solidated financial position of The J. M. Smucker Company at April 30, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note J, effective April 30, 2007, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R). Also, as discussed in Note L, effective May 1, 2006, the Company adopted SFAS 123(R), Share-Based Payment. 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, 2007, 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 22, 2007, expressed an unqualified opinion thereon. Akron, Ohio June 22, 2007 27 Report of Management on Responsibility for Financial Reporting ✥✥✥ Shareholders The J. M. Smucker Company 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 inter- nal audit staff and independent registered public accounting firm designed to evaluate the adequacy of and adher- ence 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 (United States). 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 of Directors, meets regu- larly with the independent registered 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 registered public accounting firm. The audit committee also regularly satisfies itself as to the adequacy of controls, systems, and financial records. The manager of the internal audit department is required to report directly to the chair of the audit committee as to inter- nal 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 Chairman and Co-Chief Executive Officer Richard K. Smucker President and Co-Chief Executive Officer Mark R. Belgya Vice President, Chief Financial Officer and Treasurer 28 Statements of Consolidated Income The J. M. Smucker Company (Dollars in thousands, except per share data) Net sales Cost of products sold Cost of products sold – restructuring Gross Profit Selling, distribution, and administrative expenses Merger and integration costs Other restructuring costs Operating Income Interest income Interest expense Other (expense) income – net Income From Continuing Operations Before Income Taxes Income taxes Income From Continuing Operations Discontinued operations, net of tax Loss on sale of discontinued operations, net of tax Year Ended April 30, 2007 2006 2005 $2,148,017 $2,154,726 $2,043,877 1,435,981 1,459,611 1,383,995 9,981 702,055 442,814 61 2,120 257,060 9,225 (23,363) (1,918) 241,004 83,785 157,219 — — 2,263 692,852 438,457 17,934 7,722 228,739 6,630 (24,026) 4,227 215,570 72,216 143,354 — — 2,466 657,416 407,839 17,954 10,854 220,769 4,683 (22,555) 1,717 204,614 74,154 130,460 (134) (1,253) Net Income $ 157,219 $ 143,354 $ 129,073 Earnings per Common Share: Income From Continuing Operations $ 2.79 $ 2.48 $ 2.29 Discontinued operations Net Income — — (0.03) $ 2.79 $ 2.48 $ 2.26 Income From Continuing Operations – Assuming Dilution $ 2.76 $ 2.45 $ 2.26 Discontinued operations – assuming dilution — — (0.02) Net Income – Assuming Dilution $ 2.76 $ 2.45 $ 2.24 See notes to consolidated financial statements. 29 Consolidated Balance Sheets The J. M. Smucker Company ✥ Assets ✥ (Dollars in thousands) Current Assets Cash and cash equivalents Marketable securities Trade receivables, less allowance for doubtful accounts Inventories: Finished products Raw materials Assets held for sale Other current assets Total Current Assets Property, Plant, and Equipment Land and land improvements Buildings and fixtures Machinery and equipment Construction in progress Accumulated depreciation Total Property, Plant, and Equipment Other Noncurrent Assets Goodwill Other intangible assets, net Marketable securities Other assets Total Other Noncurrent Assets April 30, 2007 2006 $ 200,119 $ 71,956 — 124,048 196,177 89,875 14,882 148,014 190,302 88,786 286,052 279,088 — 29,147 90,250 38,648 639,366 642,838 41,456 176,950 536,825 25,284 38,165 170,057 513,593 19,923 780,515 741,738 (326,487) (285,184) 454,028 456,554 990,771 478,194 44,117 87,347 940,967 472,915 34,107 102,363 1,600,429 1,550,352 $2,693,823 $2,649,744 30 April 30, 2007 2006 $ 93,500 $ 88,963 — 32,580 24,672 7,265 17,034 33,000 28,417 28,620 34,578 29,185 13,584 15,946 — 24,564 236,468 235,440 392,643 45,881 46,349 158,418 18,407 661,698 428,602 37,656 55,767 155,579 8,641 686,245 — — 14,195 14,237 1,216,091 1,212,598 553,631 489,067 — (6,017) 17,757 (8,527) (6,525) 27,209 1,795,657 1,728,059 $2,693,823 $2,649,744 ✥ Liabilities and Shareholders’ Equity ✥ (Dollars in thousands) Current Liabilities Accounts payable Notes payable Salaries, wages, and additional compensation Accrued trade marketing and merchandising Income taxes Dividends payable Current portion of long-term debt Other current liabilities Total Current Liabilities Noncurrent Liabilities Long-term debt Defined benefit pensions Postretirement benefits other than pensions Deferred income taxes Other noncurrent liabilities Total Noncurrent Liabilities 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 – 56,779,850 in 2007 and 56,949,044 in 2006 (net of 8,619,519 and 8,185,015 treasury shares, respectively), at stated value Additional capital Retained income Less: Deferred compensation Amount due from ESOP Trust Accumulated other comprehensive income Total Shareholders’ Equity See notes to consolidated financial statements. 31 Statements of Consolidated Cash Flows The J. M. Smucker Company (Dollars in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operations: Depreciation Amortization Asset impairments and other restructuring charges Share-based compensation expense Gain on sale of assets Deferred income tax expense Changes in assets and liabilities, net of effect from businesses acquired: Trade receivables Inventories Other current assets Accounts payable and accrued items Income taxes Discontinued operations Other – net Year Ended April 30, 2007 2006 2005 $157,219 $143,354 $129,073 57,346 1,528 10,089 11,257 — 22,530 23,848 (8,146) 5,218 1,034 (15,079) — 6,580 62,452 190 2,264 7,255 (5,638) 33,124 1,444 (6,601) (24,369) (64,019) 44,756 — 4,477 53,075 362 3,277 1,609 (3,079) 36,247 (2,015) (6,795) (13,934) (44,332) (5,494) 868 902 Net Cash Provided by Operating Activities 273,424 198,689 149,764 Investing Activities Businesses acquired, net of cash acquired Additions to property, plant, and equipment Proceeds from sale of businesses Purchase of marketable securities Sale and maturities of marketable securities Disposal of property, plant, and equipment Discontinued operations Other – net Net Cash Used for Investing Activities Financing Activities Proceeds from long-term debt Repayments of long-term debt Revolving credit arrangements – net Repayments of short-term debt Dividends paid Purchase of treasury shares Proceeds from stock option exercises Other – net Net Cash Used for Financing Activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (60,488) (57,002) 84,054 (20,000) 26,272 2,313 — (2,190) (27,041) — — (28,144) — (63,632) (52,125) 25,766 510 (117,625) (595) 128,163 71,956 — (63,580) 8,754 (5,000) 31,101 3,747 — 8,723 (99,062) (87,576) 79,566 (88,803) 67,094 2,406 (907) 6,465 (16,255) (120,817) — (17,000) (8,434) — (62,656) (81,717) 3,783 (3,105) (169,129) 566 13,871 58,085 100,000 (37,500) 33,155 (113,622) (56,057) (16,869) 21,502 (2,889) (72,280) (3,133) (46,466) 104,551 Cash and Cash Equivalents at End of Year $200,119 $ 71,956 $ 58,085 ( ) Denotes use of cash See notes to consolidated financial statements. 32 Statements of Consolidated Shareholders’ Equity The J. M. Smucker Company (Dollars in thousands, except per share data) Common Shares Outstanding Common Shares Additional Capital Retained Income Deferred Compen- sation ESOP Trust Amount Accumulated Other Due from Comprehensive Income (Loss) Total Shareholders’ Equity Balance at May 1, 2004 50,174,707 $12,543 $ 829,323 $387,065 $(6,069) $(7,584) $ (4,585) $1,210,693 Net income Foreign currency translation adjustment Minimum pension liability adjustment Unrealized loss on available-for-sale securities Unrealized loss on cash flow hedging derivatives Comprehensive Income Business acquired Purchase of treasury shares Stock plans Cash dividends declared – $1.02 a share Tax benefit of stock plans Other 129,073 129,073 8,032,997 (368,678) 701,360 2,008 (92) 176 393,250 (7,790) 20,779 (8,987) (59,320) 1,496 4,548 540 15,277 15,277 (10,310) (10,310) (275) (266) (275) (266) 133,499 395,258 (16,869) 22,451 (59,320) 4,548 540 Balance at April 30, 2005 58,540,386 14,635 1,240,110 447,831 (4,573) (7,044) (159) 1,690,800 Net income Foreign currency translation adjustment Minimum pension liability adjustment Unrealized loss on available-for-sale securities Unrealized loss on cash flow hedging derivatives Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $1.09 a share Tax benefit of stock plans Other 143,354 143,354 (1,936,423) 345,081 (484) 86 (41,910) 12,753 (39,323) (3,954) (62,795) 1,645 519 19,512 19,512 8,710 8,710 (650) (204) (650) (204) 170,722 (81,717) 8,885 (62,795) 1,645 519 Balance at April 30, 2006 56,949,044 14,237 1,212,598 489,067 (8,527) (6,525) 27,209 1,728,059 Net income Foreign currency translation adjustment Minimum pension liability adjustment Unrealized gain on available-for-sale securities Unrealized gain on cash flow hedging derivatives Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $1.14 a share Adjustments to initially apply Statement of Financial Accounting Standards No. 158, net of tax of $7,377 Tax benefit of stock plans Other 157,219 (1,100,194) 931,000 (275) 233 (23,915) 24,247 (27,935) 8,527 (64,720) 2,437 427 1,644 138 157,219 2,437 427 1,644 138 161,865 (52,125) 33,007 (64,720) 3,161 (14,098) (14,098) 3,161 508 508 Balance at April 30, 2007 56,779,850 $14,195 $1,216,091 $553,631 $ — $(6,017) $ 17,757 $1,795,657 See notes to consolidated financial statements. 33 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: 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, income taxes, and the determination of dis- count 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 determinable 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 20 percent, 18 percent, and 16 percent of net sales in 2007, 2006, and 2005, respectively. These sales are primarily included in the U.S. retail market segment. No other customer exceeded 10 percent of net sales for any year. Trade receivables at April 30, 2007 and 2006, included amounts due from Wal-Mart Stores, Inc., and subsidiaries of $28,274 and $22,087, respectively. Shipping and Handling Costs: Shipping and handling costs are included in cost of products sold. Trade Marketing and Merchandising Programs: In order to support the Company’s products, various promotional activities are conducted through the retail trade, distributors, or directly with consumers, including in-store display and product placement programs, feature price discounts, coupons, and other similar activities. The Company regu- larly reviews and revises, when it deems necessary, estimates of costs to the Company for these promotional programs based on estimates of what will be redeemed by the retail trade, distributors, or consumers. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual performance are recognized as a change in management’s estimate in a sub- sequent period. As the Company’s total promotional expenditures, including amounts classified as a reduction of net sales, represent approximately 27 percent of 2007 net sales, the likelihood exists of materially different reported results if factors such as the level and success of the promotional programs or other conditions differ from expecta- tions. Operating results for the year ended April 30, 2006, include an increase of approximately $6.7 million to net sales reflecting a change in estimate of the expected liability for trade merchandising programs. Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $51,446, $56,647, and $50,002 in 2007, 2006, and 2005, respectively. Product Development Cost: Total product development costs including research and development costs and product formulation costs were $9,680, $10,781, and $10,397 in 2007, 2006, and 2005, respectively. Share-Based Payments: In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment (“SFAS 123R”). SFAS 123R is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and also amends 34 Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. 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. The Company adopted SFAS 123R on May 1, 2006, using the modified prospective method. Under this method of adoption, prior year’s financial information was not restated. Prior to the adoption of SFAS 123R, the Company accounted for share-based payments to employees using the intrinsic value method of APB 25. Under APB 25, because the exercise price of the Company’s employee stock options equaled the market price of the underlying shares on the date of grant, no compensation expense was recognized. Compensation expense recognized related to other share-based awards was $11,257, $7,255, and $1,609 in 2007, 2006, and 2005, respectively. The related tax benefit recognized in the Statements of Consolidated Income was $3,913, $2,430, and $583 in 2007, 2006, and 2005, respec- tively. Upon adoption of SFAS 123R, compensation expense is recognized over the requisite service period, which includes a one-year performance period plus the defined forfeiture period, which is typically four years of service or the attainment of a defined age and years of service. No compensation expense was capitalized related to share-based awards in 2007, 2006, and 2005. As a result of adopting SFAS 123R on May 1, 2006, the Company’s income from con- tinuing operations before income taxes and net income were $1,923 and $1,255 lower in 2007, respectively, than if it had continued to account for share-based compensation under APB 25. The impact of adopting SFAS 123R in 2007, was approximately $0.02 on both net income per common share and net income per common share – assuming dilution. Had the Company applied the fair value recognition provisions of SFAS 123 to share-based compensation for the peri- ods ended April 30, 2006 and 2005, the effect on net income and earnings per common share would have been as follows: Net income, as reported Add: Total share-based compensation expense included in the Year Ended April 30, 2006 2005 $143,354 $129,073 determination of net income as reported, net of tax benefit 4,825 1,026 Less: Total share-based compensation expense determined under fair value-based methods for all awards, net of tax benefit Net income, as adjusted Earnings per common share: Net income, as reported (9,177) (4,686) $139,002 $125,413 $ 2.48 $ 2.26 Add: Total share-based compensation expense included in the determination of net income as reported, net of tax benefit 0.08 0.02 Less: Total share-based compensation expense determined under fair value-based methods for all awards, net of tax benefit Net income, as adjusted Net income, as reported – assuming dilution Add: Total share-based compensation expense included in the determination of net income as reported, net of tax benefit – (0.16) (0.08) $ 2.40 $ 2.20 $ 2.45 $ 2.24 assuming dilution 0.09 0.01 Less: Total share-based compensation expense determined under fair value-based methods for all awards, net of tax benefit – assuming dilution Net income, as adjusted – assuming dilution (0.16) (0.08) $ 2.38 $ 2.17 Management estimated the fair value of stock option awards on the date of grant or modification using the Black- Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair 35 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. The main inputs into the model are estimated by management based on historical performance and management’s expectation of future results on the date of grant or modification. The fair value of each option grant was estimated at the date of grant or modification using the following weighted-average assumptions: Average expected term (years) Risk-free interest rate Dividend yield Volatility Fair value of options granted Year Ended April 30, 2006 5.71 4.90% 2.00% 25.20% $8.76 2005 7.00 3.74% 2.25% 26.31% $11.64 As of April 30, 2007, total compensation cost related to nonvested share-based awards not yet recognized was approximately $13,963. The weighted-average period over which this amount is expected to be recognized is approx- imately three years. SFAS 123R also provides that any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings, referred to as an excess tax benefit, will be presented in the Statements of Consolidated Cash Flows as a financing activity, rather than an operating activity. Realized excess tax benefits are credited to additional capital in the Consolidated Balance Sheets. Realized shortfall tax benefits, amounts which are less than that previously recognized in earnings, are first offset against the cumulative balance of excess tax benefits, if any, and then charged directly to income tax expense. Under the transition rules for adopting SFAS 123R using the modified prospective method, the Company was permitted to calculate a cumulative balance of excess tax benefits from post-1995 years for the purpose of accounting for future shortfall tax benefits and, as a result, has sufficient cumulative excess tax benefits to absorb arising shortfalls, such that earnings were not affected in 2007. For 2007, the actual tax deductible benefit realized from share-based compensation was $3,161, including $3,346 of excess tax benefits realized upon exercise or vesting of share-based compensation, and classified as other-net under financing activities on the Statement of Consolidated Cash Flows. 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 dif- ferences 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, discount stores, military commissaries, health and natural foods stores, foodservice distributors, and chain operators including: hotels and restaurants, schools and other institutions. The Company’s 36 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. 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 reg- ular 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, 2007 and 2006, was $821 and $1,210, respectively. Trade receivables are charged off against the allowance after management determines the potential for recovery is remote. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 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 com- modity prices, interest rates, and foreign currency exchange rates. The Company accounts for these derivative instru- ments 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 deriv- atives 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 transac- tion, changes in fair value are deferred and recorded in shareholders’ equity as a component of accumulated other comprehensive income (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 2007, 2006, and 2005 totaled $20,261, $19,866, and $18,191, respectively. Rent expense for cold storage facilities, which is based on quantities stored, amounted to $4,331, $4,527, and $5,206 in 2007, 2006, and 2005, 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 con- sidered 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. Assets to be disposed of by sale are recorded as held for sale at the lower of car- rying value or estimated net realizable value. During 2007, the Company recorded impairment of approximately $8.5 million on long-lived assets associated with the Canadian nonbranded, grain-based foodservice and industrial businesses divested during the year. 37 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, 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. For annual impairment testing purposes, the Company’s reporting units are its operating segments. 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 intan- gible assets are amortized over their estimated useful lives. Other Investments in Securities: The Company maintains funds for the payment of benefits associated with non- qualified 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, 2007 and 2006, was $31,727 and $30,217, 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 income (loss). Pensions and Other Postretirement Benefit Plans: Effective April 30, 2007, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires each plan’s funded status to be recorded in the Consolidated Balance Sheets. See Note J: Pensions and Other Postretirement Benefits for information concerning the Company’s pension and other postretirement plans. The adoption of SFAS 158 resulted in a decrease of $29.4 million in assets, a decrease in postretirement benefits other than pensions of $12.8 million, an increase in pension liabilities of $4.8 million, an increase in deferred tax assets of $7.4 million, and a decrease in accumulated other comprehensive income (loss) of $14.0 million. Recently Issued Accounting Standards: In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which is an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, (May 1, 2007, for the Company). Based on a preliminary analysis, management believes that adoption will not result in a material impact on the consolidated financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The Company is currently assessing the impact of SFAS 157 on the consolidated financial statements. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in account- ing for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differ- ently. SFAS 159 is effective for fiscal years beginning after November 15, 2007, (May 1, 2008, for the Company). The Company is currently assessing the impact of SFAS 159 on the consolidated financial statements. 38 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 raw materials used by the Company are primarily commodities and agricultural-based products. Glass, plastic, caps, carton board, and corrugate are the principle packaging materials used by the Company. The fruit, pickle, and condiment raw materials used by the Company in the production of its food products are purchased from indepen- dent growers and suppliers. Sweeteners, peanuts, oils, wheat and flour, corn, and other ingredients are obtained from various suppliers. The cost and availability of many of these commodities has fluctuated, and may continue to fluc- tuate over time. Raw materials are available from numerous sources and the Company believes that it will continue to be able to obtain adequate supplies. The Company has not historically encountered shortages of key raw materi- als. The Company considers its relationship with key material suppliers to be good. Approximately 31 percent of the Company’s employees, located at eight facilities, are covered by union contracts. The contracts vary in term depending on the location with one contract expiring in 2008. Reclassifications: Certain prior year amounts have been reclassified to conform to current year classifications. The assets associated with the divested Canadian nonbranded businesses were reclassified to assets held for sale on the April 30, 2006 Consolidated Balance Sheet. Note B: Subsequent Event – Eagle Acquisition ✥✥✥ On May 1, 2007, the Company completed its acquisition of Eagle Family Foods Holdings, Inc. (“Eagle”), a privately held company headquartered in Columbus, Ohio, for $133 million in cash and the assumption of $115 million in debt, in a transaction valued at approximately $248 million. Eagle is the largest producer of canned milk in North America, with sales primarily in retail and foodservice channels. Eagle generated net sales of approximately $206 million during its fiscal year ended July 1, 2006. The acquisition expands the Company’s position in the baking aisle and com- plements the Company’s strategy, which is to own and market leading North American food brands sold in the center of the store. Eagle’s primary brands include Eagle Brand and Magnolia sweetened condensed milk. The Company utilized cash on-hand to fund the cash portion of the purchase price. The Company borrowed $130 mil- lion against its revolving credit facility with a weighted average interest rate of 5.60 percent, a portion of which was used to deposit $118.8 million in escrow on the date of the transaction. The escrow deposit was in exchange for a covenant defeasance on Eagle’s $115 million 8.75 percent Senior, subordinated Notes due January 2008, that was assumed on the acquisition date, as well as accrued interest due through May 31, 2007. On May 31, 2007, the escrow was distributed to note holders in full payment of the Senior Notes. In connection with the acquisition, on May 31, 2007, the Company issued $400 million 5.55 percent Senior, unsecured Notes due April 1, 2022. On June 1, 2007, proceeds from these notes were used to pay off the $130 million borrow- ing against the revolving credit facility. The notes are discussed in greater detail in Note M: Long-Term Debt and Financing Arrangements. The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The Company will determine the estimated fair values based on independent appraisals, discounted cash flow, quoted market prices, and estimates made by management. To the extent the pur- chase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be allocated to goodwill. 39 The initial estimated fair value of the net assets acquired is approximately $248 million, which consists of current assets of $51 million, property, plant, and equipment of $25 million, intangible assets and goodwill of $194 million, current liabilities of $22 million, and debt of $115 million. The allocation of the purchase price is preliminary and subject to adjustment following completion of the valuation process. Goodwill will be assigned to the U.S. retail market and special markets segments upon finalization of the allo- cation of the purchase price. Note C: Multifoods Acquisition ✥✥✥ On June 18, 2004, the Company completed its acquisition of International Multifoods Corporation (“Multifoods”) in a tax-free stock and cash transaction valued at approximately $871 million. The acquisition of Multifoods added the Pillsbury flour, baking mixes, and ready-to-spread frostings; Hungry Jack pancake mixes, syrup, and potato side dishes; and Martha White baking mixes and ingredients to the U.S. retail market segment. Multifoods’ primary Canadian brands include: Robin Hood flour and baking mixes and Bick’s pickles and condiments. 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 $17,934 and $17,954, in 2006 and 2005, respectively, that were directly related to the acquisition and inte- gration of Multifoods. Due to the nature of these costs, they were expensed as incurred. 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 pur- chase 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 state- ments from the date of the acquisition. 40 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Assets acquired: Current assets Property, plant, and equipment Intangible assets not subject to amortization Goodwill Deferred income taxes Other assets Total assets acquired Liabilities assumed: Current liabilities Postretirement benefits other than pensions Other noncurrent liabilities Total liabilities assumed Net assets acquired $ 202,891 164,355 154,000 422,796 66,574 35,651 $1,046,267 $ 124,448 26,680 24,533 $ 175,661 $ 870,606 The $422,796 of goodwill was assigned to the U.S. retail market and special markets segments and is not deductible for tax purposes. Note D: Discontinued Operations ✥✥✥ During 2005, the Company sold several businesses consistent with its stated long-term strategy. In June 2004, the Company sold its Australian subsidiary, Henry Jones Foods 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). In October 2004, the Company sold its Brazilian subsidiary, Smucker do Brasil, Ltda., to Cargill, Incorporated, generat- ing 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, in February 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 of approximately $39.8 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. 41 The following table summarizes the operating results of the discontinued operations included in the Statements of Consolidated Income. Net sales Income from discontinued operations before income tax Loss from discontinued operations Interest expense of $600 was allocated to the U.S. foodservice and bakery business in 2005. Year Ended April 30, 2005 $135,658 3,338 (1,387) Note E: Restructuring ✥✥✥ In 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 brands sold in the center of the store. To date, the Company closed its fruit processing operations at its Watsonville, California, and Woodburn, Oregon, loca- tions and subsequently sold these facilities; completed the combination of its two manufacturing facilities in Ripon, Wisconsin, into one expanded site; completed a restructuring program to streamline operations in Europe and the United Kingdom, including the exit of a contract packaging arrangement and certain portions of its retail business; completed the sale of its U.S. industrial ingredient business; completed the realignment of distribution warehouses; sold the Salinas, California, facility after production was relocated to plants in Orrville, Ohio, and Memphis, Tennessee; and sold the Canadian nonbranded businesses, which were acquired as part of International Multifoods Corporation, to Horizon Milling G.P., a subsidiary of Cargill and CHS Inc., as part of a strategic plan to focus the Canadian opera- tions on its branded consumer retail and foodservice businesses. The restructurings resulted in the reduction of approximately 410 full-time positions. The Company has announced plans to continue to operate its West Fargo, North Dakota, location that was intended to be closed as part of the initially announced restructuring initiative. The Canadian nonbranded divestiture was completed on September 22, 2006. The sale and related restructuring activities are expected to result in expense of approximately $18.6 million, which will be reported as a restructuring charge. Costs will include noncash, long-lived asset charges, as well as transaction, legal, severance, and pension costs. During 2007, charges of approximately $11.4 million were recognized related to the Canadian restructuring, consisting primarily of the noncash write down of long-lived assets of $8.5 million to their estimated fair market value. The following table summarizes the carrying values of the Canadian nonbranded businesses’ assets held for sale included in the Consolidated Balance Sheet at April 30, 2006. Assets held for sale: Inventories Property, plant, and equipment – net Other assets Total assets held for sale $18,533 71,182 535 $90,250 The Company expects to incur total restructuring costs of approximately $61 million related to these initiatives, of which $53.8 million has been incurred since the announcement of the initiative in March 2003. The balance of the costs and remaining cash payments, estimated to be approximately $7.2 million and $7.4 million, respectively, are related to the Canadian restructuring and will primarily be incurred through 2008. 42 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. Total expected restructuring charge $16,900 $19,500 $6,900 $17,700 $61,000 Employee Separation Long-Lived Asset Charges Equipment Relocation Other Costs Total Balance at May 1, 2004 Charge to expense Cash payments Noncash utilization Balance at April 30, 2005 Charge to expense Cash payments Noncash utilization $ 4,397 $ — 6,222 (6,660) (737) 1,002 — (1,002) $ 3,222 $ — 2,984 (4,512) 1,699 — — (1,699) $ — 3,548 (3,548) — $ — 2,414 (2,414) — $ 1,149 2,548 (2,159) (1,538) $ 5,546 13,320 (12,367) (3,277) $ — $ 3,222 2,888 (2,323) (565) 9,985 (9,249) (2,264) Balance at April 30, 2006 $ 1,694 $ — $ — $ — $ 1,694 Charge to expense Cash payments Noncash utilization 357 (1,415) (108) 9,292 — (9,292) 67 (67) — 2,385 (1,696) 12,101 (3,178) (689) (10,089) Balance at April 30, 2007 $ 528 $ — $ — $ — $ 528 Remaining expected restructuring charge $ 500 $ 300 $ — $ 6,400 $ 7,200 Approximately $9,981, $2,263, and $2,466 of the total restructuring charges of $12,101, $9,985, and $13,320 in 2007, 2006, and 2005, respectively, were reported in cost of products sold in the accompanying Statements of Consolidated Income, while the remaining charges were reported in other restructuring costs. The restructuring costs classified as cost of products sold include long-lived asset charges and inventory disposition costs. Total expected employee separation costs of approximately $16,900 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 addi- tional compensation, in the Consolidated Balance Sheets. 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 employee relocation, profes- sional 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. This segment primarily represents the domestic sales of Smucker’s, Jif, Crisco, Pillsbury, Hungry Jack, White Lily, and Martha White branded products to retail customers. The special mar- kets segment is comprised of the international, foodservice, beverage, and Canada strategic business areas. Special markets segment products are distributed domestically and in foreign countries through retail channels, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), and health and natural foods stores and distributors. 43 The following table sets forth reportable segment and geographical information. Net sales: U.S. retail market Special markets Total net sales Segment profit: U.S. retail market Special markets Total segment profit Interest income Interest expense Amortization Share-based compensation expense Restructuring costs Merger and integration costs Corporate administrative expenses Other unallocated (expense) income Year Ended April 30, 2007 2006 2005 $1,547,064 $1,484,873 $1,405,191 600,953 669,853 638,686 $2,148,017 $2,154,726 $2,043,877 $ 319,795 $ 305,121 $ 295,045 72,974 68,033 64,049 $ 392,769 $ 373,154 $ 359,094 9,225 (23,363) (1,528) (11,257) (12,101) (61) (111,082) (1,598) 6,630 (24,026) (190) (7,255) (9,985) (17,934) (109,223) 4,399 4,683 (22,555) (362) (1,609) (13,320) (17,954) (103,843) 480 Income from continuing operations before income taxes $ 241,004 $ 215,570 $ 204,614 Net sales: Domestic International: Canada All other international Total international Total net sales Assets: Domestic International: Canada All other international Total international Total assets Long-lived assets: Domestic International: Canada All other international Total international Total long-lived assets $1,819,747 $1,746,111 $1,677,863 $ 282,069 $ 368,017 $ 338,798 46,201 40,598 27,216 $ 328,270 $ 408,615 $ 366,014 $2,148,017 $2,154,726 $2,043,877 $2,198,029 $2,101,109 $2,107,999 $ 484,641 $ 539,750 $ 517,343 11,153 8,885 10,552 $ 495,794 $ 548,635 $ 527,895 $2,693,823 $2,649,744 $2,635,894 $1,690,755 $1,662,389 $1,709,622 $ 357,486 $ 339,490 $ 298,098 6,216 5,027 6,087 $ 363,702 $ 344,517 $ 304,185 $2,054,457 $2,006,906 $2,013,807 Segment profit represents revenue less direct and allocable operating expenses. 44 The following table presents product sales information. Peanut butter Shortening and oils Fruit spreads Flour and baking ingredients Baking mixes and frostings Portion control Juices and beverages Toppings and syrups Uncrustables frozen sandwiches Pickles and condiments Industrial ingredients Other Total Year Ended April 30, 2007 21% 2006 19% 2005 20% 15 14 11 11 5 5 5 4 3 — 6 16 14 14 11 5 4 4 4 3 1 5 17 14 13 11 4 4 4 3 3 3 4 100% 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. Numerator: Income from continuing operations for earnings per common share and earnings per common share – assuming dilution Denominator: Weighted-average shares Effect of dilutive securities: Stock options Restricted stock Year Ended April 30, 2007 2006 2005 $157,219 $143,354 $130,460 56,432,839 57,863,270 57,086,734 389,247 234,335 435,361 126,730 533,875 128,171 Denominator for earnings per common share – assuming dilution 57,056,421 58,425,361 57,748,780 Income from continuing operations per common share $ 2.79 $ 2.48 $ 2.29 Income from continuing operations per common share – assuming dilution $ 2.76 $ 2.45 $ 2.26 Options to purchase 24,248 common shares at $57.09 per share were outstanding during 2007 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. 45 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 mortgage-backed obligations, corporate bonds, municipal bonds, federal agency notes, and commercial paper. The Company determines the appro- priate categorization of 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 con- vert 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 opera- tions, 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 (loss). Approximately $26,272, $31,101, and $67,094 of proceeds have been realized upon maturity or sale of available-for-sale marketable securities in 2007, 2006, and 2005, respectively, resulting in no gains or losses. The Company uses specific identification to determine the basis on which securities are sold. The following table is a summary of available-for-sale marketable securities at April 30, 2007 and 2006. Mortgage-backed securities Balance at April 30, 2007 U.S. corporate securities Mortgage-backed securities Federal agency note Balance at April 30, 2006 Gross Unrealized Gains Gross Unrealized Losses Cost Estimated Fair Value $44,679 $ 134 $ (696) $44,117 $44,679 $ 134 $ (696) $44,117 Gross Unrealized Gains Gross Unrealized Losses Cost Estimated Fair Value $10,020 $ — $ (93) $ 9,927 35,931 4,994 — — (1,824) (39) 34,107 4,955 $50,945 $ — $ (1,956) $48,989 The contractual maturities of these available-for-sale marketable securities were as follows: Due in one year or less Due after one to five years Mortgage-backed securities Total marketable securities April 30, 2007 April 30, 2006 Cost Estimated Fair Value Cost Estimated Fair Value $ — $ — $15,014 $14,882 — — — — 44,679 44,117 35,931 34,107 $44,679 $44,117 $50,945 $48,989 46 Marketable securities in an unrealized loss position at April 30, 2007, are presented in the following table by length of time the securities were in an unrealized loss position. Less than 12 months More than 12 months Balance at April 30, 2007 Cost $ — 29,754 Estimated Fair Value $ — 29,058 Unrealized Loss $ — (696) $29,754 $29,058 $ (696) Number of Securities — 3 3 Based on management’s evaluation at April 30, 2007, considering the nature of the investments, the credit worthi- ness 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, 2007 and 2006, by reportable seg- ment is as follows: Balance at May 1, 2005 Acquisition Other Balance at April 30, 2006 Acquisition Other U.S. Retail Market Special Markets Total $910,577 $40,631 $951,208 (3,247) (5,233) $902,097 34,800 (364) (189) (1,572) $38,870 15,434 (66) (3,436) (6,805) $940,967 50,234 (430) Balance at April 30, 2007 $936,533 $54,238 $990,771 Included in the other category at April 30, 2007 and 2006, were tax adjustments made related to various items rec- ognized in goodwill that are deductible for tax purposes. During 2007, the Company acquired the White Lily and the Five Roses brands and recognized goodwill of $34,800 and $15,434, respectively, related to these transactions. 47 The Company’s other intangible assets and related accumulated amortizations are as follows: April 30, 2007 April 30, 2006 Acquisition Accumulated Amortization Cost Net Acquisition Cost Accumulated Amortization Net $ 1,000 6,592 $492 251 $ 508 $ 1,000 $392 $ 608 6,341 — — — Finite-lived intangible assets subject to amortization: Patents Trademarks Total intangible assets subject to amortization $ 7,592 $743 $ 6,849 $ 1,000 $392 $ 608 Indefinite-lived intangible assets not subject to amortization: Trademarks $471,345 $ — $471,345 $472,307 $ — $472,307 Total other intangible assets $478,937 $743 $478,194 $473,307 $392 $472,915 During 2007, the Company acquired two finite-lived trademarks related to the White Lily and the Five Roses brands valued at $6,592. Amortization expense for finite-lived intangible assets was approximately $351, $100, and $361 in 2007, 2006, and 2005, respectively. The weighted-average useful life of the finite-lived intangible assets is 19 years. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding five years is $477. 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, 2007. Goodwill impairment is tested at the reporting unit level which are the Company’s operating segments. During 2007, approximately $225 of impair- ment was recorded related to certain indefinite-lived intangible assets, 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 fund- ing 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 10 years of credited service. Effective April 30, 2007, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires the recognition of a plan’s funded status as an asset for fully 48 funded plans and as a liability for unfunded or under-funded plans. Previously unrecognized actuarial gains and losses and prior service costs must now be recorded in accumulated other comprehensive income (loss). The amounts recorded in accumulated other comprehensive income (loss) will continue to be modified as actuarial assumptions and service costs change and such amounts will be amortized to expense over a period of time through the net peri- odic benefit cost. The following table summarizes the components of net periodic benefit cost and other comprehensive income related to the defined benefit pension and other postretirement plans: Year Ended April 30, Service cost Interest cost Defined Benefit Pension Plans Other Postretirement Benefits 2007 2006 2005 2007 2006 2005 $ 7,607 $ 9,002 $ 7,596 $ 2,016 $2,113 $1,866 23,740 22,399 19,593 3,081 3,332 3,171 Expected return on plan assets (32,008) (28,318) (24,655) Amortization of prior service cost (credit) 1,423 1,381 Amortization of initial net asset Recognized net actuarial loss Special termination benefits Curtailment loss (1) (78) 1,393 2,779 — 111 — — 1,457 (224) 825 193 544 — (204) — 49 — — — 24 — 156 — — — (43) — 347 — — Net periodic benefit cost $ 2,265 $ 7,165 $ 5,329 $ 4,942 $5,625 $5,341 Other changes in plan assets and benefit liabilities recognized in accumulated other comprehensive income (loss), before income taxes: Change prior to adoption of SFAS 158 $ 826 $ 13,527 $(16,122) $ — $ — $ — Change due to adoption of SFAS 158 $(34,272) $ — $ — $12,797 $ — $ — Weighted-average assumptions used in determining net periodic benefit costs: U.S. plans: Discount rate Expected return on plan assets Rate of compensation increase Canadian plans: Discount rate – before remeasurement Discount rate – after remeasurement Expected return on plan assets Rate of compensation increase 6.30% 8.25% 4.10% 5.50% 5.00% 8.00% 4.00% 5.75% 8.50% 4.40% 6.25% 8.50% 4.50% 5.50% 6.50% — 8.00% 4.00% — 8.50% 4.00% 6.30% 5.75% 6.25% — — — — — — 5.50% 5.00% — — 5.50% 6.50% — — — — — — The Company uses a measurement date of April 30 to determine defined benefit pension plans’ and other postretire- ment benefits’ assets and benefit obligations. As a result of the sale of the Canadian nonbranded businesses in September 2006, a remeasurement of three Canadian plans was performed. 49 The following table sets forth the combined status of the plans as recognized in the Consolidated Balance Sheets. Defined Benefit Pension Plans April 30, Other Postretirement Benefits April 30, 2007 2006 2007 2006 Change in benefit obligation: Benefit obligation at beginning of the year $406,259 $400,466 $ 54,026 $ 58,785 Service cost Interest cost Amendments Divestiture Actuarial loss (gain) Participant contributions Benefits paid Foreign currency translation adjustments 7,607 23,740 2,831 (3,983) 21,755 628 9,002 22,399 — — (13,415) 938 (24,443) (26,007) 874 12,876 2,016 3,081 — (4,217) (6,941) 1,313 (2,944) 15 2,113 3,332 (2,386) — (7,781) 1,519 (2,905) 1,349 Benefit obligation at end of the year $435,268 $406,259 $ 46,349 $ 54,026 Change in plan assets: Fair value of plan assets at beginning of the year Actual return on plan assets Company contributions Participant contributions Benefits paid $402,599 $339,866 $ — $ — 40,257 10,955 628 48,787 24,994 938 — 1,631 1,313 — 1,386 1,519 (24,443) (26,007) (2,944) (2,905) Foreign currency translation adjustments 1,004 14,021 — — Fair value of plan assets at end of the year $431,000 $402,599 $ — $ — Funded status of the plans Unrecognized net actuarial loss Unrecognized prior service cost (credit) Unrecognized initial asset $ (4,268) $ (3,660) $(46,349) $(54,026) — — — 27,313 8,679 (2) — — — 261 (2,002) — Net benefit (liability) asset recognized $ (4,268) $ 32,330 $(46,349) $(55,767) Other assets Salaries, wages, and additional compensation Defined benefit pensions Postretirement benefits other than pensions Accumulated other comprehensive income $ 41,632 $ 57,783 $ — $ — (19) 27 (45,881) (37,656) — — — — — — — 12,176 (46,349) (55,767) — — Net benefit (liability) asset recognized $ (4,268) $ 32,330 $(46,349) $(55,767) 50 The following table summarizes amounts recognized in accumulated other comprehensive income (loss) at April 30, 2007, before income taxes. Net actuarial (loss) gain Prior service (cost) credit Initial asset Total Defined Benefit Pension Plans Other Postretirement Benefits $(35,650) $10,999 (9,973) 1 1,798 — $(45,622) $12,797 During 2008, the Company expects to recognize amortization of net actuarial losses, prior service cost, and initial asset of $1,070, $1,363, and $1, respectively, in net periodic benefit costs. The following table sets forth the assumptions used in determining the benefit obligations. Weighted-average assumptions used in determining benefit obligation: U.S. plans: Discount rate Rate of compensation increase Canadian plans: Discount rate Rate of compensation increase Defined Benefit Pension Plans April 30, Other Postretirement Benefits April 30, 2007 2006 2007 2006 6.00% 4.10% 5.25% 4.00% 6.30% 4.10% 5.50% 4.00% 6.00% — 5.25% — 6.30% — 5.50% — The rate of compensation increase is based on multiple graded scales and is weighted based on the active liability balance. For 2008, the assumed health care trend rates are nine and one-half percent and eight percent, for U.S. and Canadian plans, respectively. The rate for participants under age 65 is assumed to decrease to five percent 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 postretire- ment 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, 2007: Effect on total service and interest cost components Effect on benefit obligation One-Percentage Point Increase $1,008 6,863 Decrease $ (793) (5,638) 51 The following table sets forth selective information pertaining to the Company’s foreign pension and other postre- tirement benefit plans. Year Ended April 30, Defined Benefit Pension Plans Other Postretirement Benefits 2007 2006 2007 2006 Benefit obligation at end of the year $137,005 $128,964 $ 12,473 $ 15,920 Fair value of plan assets at end of the year 147,284 132,710 — — Funded status of the plans $ 10,279 $ 3,746 $(12,473) $(15,920) Service cost Interest cost Company contributions Participant contributions Benefits paid Net periodic benefit (income) cost $ 1,696 $ 2,992 $ 200 $ 272 6,607 8,465 628 (7,691) (1,710) 6,429 3,181 938 (7,119) 850 714 802 — (802) 964 771 609 — (609) 1,138 The following table sets forth additional information related to the Company’s defined benefit pension plans. Accumulated benefit obligation for all pension plans Plans with an accumulated benefit obligation in excess of plan assets: Accumulated benefit obligation Fair value of plan assets Plans with a projected benefit obligation in excess of plan assets: Projected benefit obligation Fair value of plan assets April 30, 2007 2006 $410,389 $379,764 80,324 39,183 85,084 39,183 73,313 35,695 138,400 95,494 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. The Company’s pension plans’ asset target and actual allocations are as follows: Equity securities Debt securities Cash and other investments Actual Allocation April 30, 2007 54% 40 6 100% 2006 54% 39 7 100% Target Allocation 50% 40 10 100% 52 Included in equity securities are 317,552 of the Company’s common shares at April 30, 2007 and 2006. The market value of these shares is $17,726 at April 30, 2007. The Company paid dividends of $356 on these shares during 2007. The Company expects to contribute approximately $1.8 million to the pension plans in 2008. The Company expects to make the following benefit payments for all benefit plans: $25 million in 2008, $25 million in 2009, $34 million in 2010, $27 million in 2011, $28 million in 2012, and $153 million in 2013 through 2017. 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 postre- tirement benefit costs, totaled $12, $929, and $1,408 in 2007, 2006, and 2005, respectively. Note K: Savings Plans ✥✥✥ ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust (“ESOP”) for certain domestic, nonrep- resented 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 $530, $506, and $407 in 2007, 2006, and 2005, respectively. Contributions to the plan, representing compensation expense, are made annually in amounts sufficient to fund ESOP debt repayment and were $684, $558, and $476 in 2007, 2006, and 2005, respectively. Dividends on unallocated shares are used to reduce expense and were $356, $380, and $398 in 2007, 2006, and 2005, respectively. The principal payments received from the ESOP in 2007, 2006, and 2005 were $508, $519, and $540, 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 income 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, 2007, the ESOP held 307,203 unallocated and 682,219 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 2007, 2006, and 2005 were $4,138, $4,213, and $4,654, respectively. 53 Note L: Stock Benefit Plans ✥✥✥ The Company provides for equity-based incentives to be awarded to key employees and nonemployee directors. Currently, these incentives consist of restricted shares, restricted stock units, deferred shares, deferred stock units, performance units, performance shares, and stock options. These awards are administered through various plans, as described in the following paragraphs. In August 2006, the Company’s shareholders approved the 2006 Equity 2006 Equity Compensation Plan: Compensation Plan. Awards under this plan may be in the form of stock options, stock appreciation rights, restricted shares, deferred stock units, performance shares, performance units, incentive awards, and other share-based awards. Awards under this plan may be granted to the Company’s nonemployee directors, consultants, officers, and other employees. Deferred stock units granted to nonemployee directors vest immediately. At April 30, 2007, there were 2,491,171 shares available for future issuance under this plan. As a result of this plan becoming effective in August 2006, no further awards will be made under the previously existing equity compensation plans listed below, except for certain defined circumstances included in the new plan. 1998 Equity and Performance Incentive Plan: This plan provides for the issuance of stock options and restricted shares, which may include performance criteria, as well as stock appreciation rights, deferred shares, performance shares, and performance units. As a result of the adoption of the 2006 Equity Compensation Plan, no further awards may be granted under this plan except for the potential conversion of performance units and performance shares granted in June 2006, into restricted shares once such performance units and performance shares are earned. Options granted under this plan became exercisable at the rate of one-third per year, beginning one year after the date of grant. The contractual term of the options is 10 years, and the option price is equal to the market value of the shares on the date of the grant. Restricted shares and deferred shares issued under this plan are 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. Restricted shares and deferred shares issued to date under the plan are generally subject to a four-year for- feiture period, but may provide for the earlier termination of restrictions in the event of retirement, the attainment of a defined age and service requirements, permanent disability or death of an employee, or a change in control of the Company. Upon adoption of Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment (“SFAS 123R”), restricted shares, deferred stock units, performance units, and performance shares are charged to expense over the requisite service period, which includes a one-year performance period plus the defined forfeiture period. Performance units and performance shares are granted to a limited number of executives. At the beginning of each fiscal year, performance criteria are established for the restricted shares, deferred stock units, performance shares, and performance units to be earned during the year. At the end of the one-year performance period, the restricted shares and deferred stock units are granted and the performance units and performance shares are converted into restricted shares and all are subject to normal vesting over the remaining forfeiture period. The actual number of restricted shares issued on the conversion date will depend on the actual performance achieved. 1987 Stock Option Plan: Options granted under this plan became exercisable at the rate of one-third per year, begin- ning 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. The maximum contractual term on options issued under this plan is 10 years. As a result of the adoption of the 2006 Equity Compensation Plan, there are no common shares available for future grant under this plan. 54 Nonemployee Director Stock Option Plan: This plan provides for the issuance of stock options to nonemployee direc- tors annually. Options granted under this plan became 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. The maximum contractual term on options issued under this plan is 10 years. As a result of the adoption of the 2006 Equity Compensation Plan, there are no 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 International Multifoods Corporation (“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 were eligible to receive awards under the plan. The maximum contractual term on options issued under this plan is 10 years. As a result of the adoption of the 2006 Equity Compensation Plan, there are no common shares available for future grant under this plan. As a result of the Multifoods acquisition, the Company also assumed two additional stock benefit plans. However, no common shares are available for future grant under these plans. Under the 2006 Equity Compensation Plan, the Company has the option to settle share-based awards by issuing common shares from treasury or issuing new Company common shares. For awards granted from the Company’s other equity compensation plans, the Company issues common shares from treasury, except for plans that were acquired as part of the Multifoods acquisition, which are settled by issuing new Company common shares. Stock Options Beginning in fiscal 2006, the Company replaced its employee stock option incentive program with a restricted shares program. No stock options were issued during 2007. During 2006, 12,000 stock options were issued to nonemployee directors, with a grant date fair value of $11.45. During 2005, 12,000 stock options were issued to nonemployee direc- tors with a grant date fair value of $12.18 and 537,000 stock options were granted to employees with a grant date fair value of $11.62. On April 12, 2006, the Executive Compensation Committee of the Company’s Board of Directors approved accelerat- ing the vesting of previously issued stock options that had exercise prices greater than $39.31, the closing price of the Company’s common shares on the New York Stock Exchange on April 11, 2006. As a result, approximately 441,000 stock options with exercise prices of either $43.38 or $44.17 became immediately exercisable. Approximately 110,000 and 331,000 of these options would originally have vested in 2007 and 2008, respectively. The Company accelerated vesting in order to minimize future noncash compensation expense associated with stock options upon adoption of SFAS 123R on May 1, 2006. By accelerating the vesting of those options, the Company did not incur com- pensation expense related to those options of approximately $2.7 million in 2007 and will not incur compensation expense of approximately $1.0 million in 2008, that otherwise would have been required to be recognized in the respective periods upon adoption of SFAS 123R. 55 A summary of the Company’s stock option activity, and related information follows: Outstanding at May 1, 2004 Assumed in the Multifoods acquisition Granted Exercised Forfeited Outstanding at April 30, 2005 Granted Exercised Forfeited Outstanding at April 30, 2006 Granted Exercised Forfeited Outstanding at April 30, 2007 Exercisable at April 30, 2005 Exercisable at April 30, 2006 Exercisable at April 30, 2007 Weighted- Average Exercise Price $30.64 41.77 44.21 30.87 47.31 $35.53 47.78 Options 2,563,573 921,824 549,000 (740,024) (122,191) 3,172,182 12,000 (191,464) 24.84 (54,606) 48.46 2,938,112 — (763,172) (27,582) 2,147,358 2,024,247 2,938,112 2,147,358 $36.03 — 36.56 51.30 $35.65 $32.68 36.03 35.65 At April 30, 2007, the weighted-average remaining contractual term for stock options outstanding and exercisable was 5.3 years, and the aggregate intrinsic value of these stock options was $43,319. The total intrinsic value of options exercised during 2007, 2006, and 2005, was approximately $9,409, $3,674, and $11,776, respectively. A summary of the Company’s restricted shares, deferred shares, deferred stock units, performance shares, and per- formance unit activity, follows: Other Equity Awards Outstanding at May 1, 2006 Granted Converted Unrestricted Forfeited Restricted/ Deferred Shares and Deferred Stock Units 301,350 172,669 63,310 (102,430) (7,054) Weighted- Average Grant Date Fair Value $ 44.03 40.80 40.41 41.74 44.45 Performance Shares and Units 63,310 69,915 (63,310) — — Weighted- Average Fair Value $ 39.26 40.41 40.41 — — Outstanding at April 30, 2007 427,845 $ 42.92 69,915 $ 55.82 56 The total fair value of equity awards other than stock options vesting in 2007 and 2006, was approximately $4,276 and $3,700, respectively. No equity awards other than stock options vested in 2005. The weighted-average grant date fair value of restricted shares, deferred shares, and deferred stock units is the average of the high and the low share price on the date of grant. During 2007, the Company granted 235,979 restricted shares and deferred stock units. Included in the grant is 13,500 deferred stock units and 213,750 restricted shares, with 63,310 of these representing the conversion of performance shares and performance units into restricted shares, all with a grant date fair value of $40.41 and a total fair value of $9,183 to employees, and 8,729 deferred stock units granted to nonemployee directors with a grant date fair value of $48.12 and a total fair value of $420. Also during 2007, the Company granted performance units and performance shares that corresponded to approximately 69,915 common shares with a grant date fair value of $40.41 and a total fair value of $2,825 on the date of grant. The actual number of performance units and performance shares earned may vary from the date of grant until the conversion to restricted shares based on actual Company performance and the average market value of the shares over the defined trading period. The performance units and performance shares granted in 2007 were converted into 67,440 restricted shares in June 2007 at a fair value of $57.73 per share. The grant date fair value of these awards was the average of the high and low share price on the date of grant. During 2006, the Company issued 189,240 restricted shares and 10,400 deferred stock units with a grant date fair value of $50.11. Also in 2006, the Company granted performance units and performance shares to certain executives. The performance units and performance shares granted in 2006 were converted into 63,310 restricted shares in June 2006 at a fair value of $40.41 per share. The restricted shares are subject to a forfeiture period as discussed above. No restricted shares or deferred stock units were granted in 2005. Note M: Long-Term Debt and Financing Arrangements ✥✥✥ Long-term debt consists of the following: 6.77% Senior Notes due June 1, 2009 7.87% Series B Senior Notes due September 1, 2007 7.94% Series C Senior Notes due September 1, 2010 4.78% Senior Notes due June 1, 2014 6.60% Senior Notes due November 13, 2009 Total long-term debt Current portion of long-term debt Total long-term debt less current portion April 30, 2007 2006 $ 75,000 $ 75,000 33,000 10,000 100,000 207,643 33,000 10,000 100,000 210,602 $425,643 $428,602 33,000 — $392,643 $428,602 The notes are unsecured and interest is paid annually on the 6.60 percent Senior Notes and semiannually on the remaining notes. The 6.60 percent Senior Notes are guaranteed by Diageo plc. The guarantee may terminate, in lim- ited circumstances, prior to the maturity of the notes. Among other restrictions, the note purchase agreements con- tain 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. 57 The Company has available a $180 million revolving credit facility with a group of three banks. Interest on the revolv- ing 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 borrowing term. At April 30, 2007, the Company did not have a balance outstanding under the revolving credit facility. At April 30, 2007, the Company had standby letters of credit of approximately $13.3 million outstanding. Interest paid totaled $27,580, $29,374, and $29,075 in 2007, 2006, and 2005, respectively. This differs from interest expense due to the timing of payments, amortization of the fair value adjustment on the 6.60 percent Senior Notes, amortization of deferred interest rate swap gains, and interest capitalized of $306, $507, and $1,000 in 2007, 2006, and 2005, respectively. Subsequent to year-end, on May 31, 2007, the Company issued $400 million of 5.55 percent Senior Notes, due April 1, 2022. The notes are unsecured and interest is paid semiannually. Proceeds from the issuance were used to pay off borrowings under the revolving credit facility used in financing the acquisition of Eagle Family Foods Holdings, Inc. Additional proceeds will be used to finance other strategic and long-term initiatives as determined by the Company. The notes have required prepayments, the first of which is $50 million, on April 1, 2013. Note N: Contingencies ✥✥✥ The Company, like other food manufacturers, is from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. The Company is not currently party to any pend- ing proceedings which could reasonably be expected to have a material adverse effect on the Company. The Company is currently involved with an environmental investigation at one of its production facilities. The former owner of the site is also involved in the investigation and is expected to have primary responsibility for the site reme- diation. Due to uncertainties surrounding the environmental investigation and the nature and extent of remediation, the Company’s liability cannot be reasonably estimated and measured at this time, but the Company does not antici- pate the liability to have a material impact on its consolidated financial statements. 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 guarantees require the lessor to pursue collection and other remedies against Wellspring before demanding payment from the Company. The tractor-trailer fleet guarantee expired in September 2006, and the real estate guarantees will expire in September 2010. At April 30, 2007, the Company’s outstanding guarantees for the real estate lease obligations of Wellspring were $6,395. The possibility that the Company would be required to honor the contingent liabilities under the real estate guaran- tee 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. 58 Note O: Derivative Financial Instruments ✥✥✥ The Company is exposed to market risks, such as changes in interest rates, currency exchange rates, and commod- ity 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 inventories 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 com- modity futures and options contracts to manage the price volatility and reduce the variability of future cash flows related to anticipated inventory purchases of flour and edible oils. The Company also enters into commodity futures and options related to the delivery of natural gas to its manufacturing plants in the United States. The derivative instruments generally have maturities of less than one year. Certain of 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 (“SFAS 133”), and are accounted for as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are deferred and included as a component of other comprehensive income to the extent effective, and reclassified 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 pur- chased. Hedge ineffectiveness is measured on a quarterly basis. The mark-to-market gains or losses on nonqualify- ing, 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, 2007 and 2006, the deferred gain, net of tax, included in accumulated other compre- hensive income (loss) was $858 and $720, respectively. The entire amount at April 30, 2007, is expected to be rec- ognized in earnings as the related commodity is utilized during 2008. The impact of commodities futures contracts and options recognized in earnings was a gain of $4,940 and $637 in 2007 and 2006, respectively, and a loss of $10,915 in 2005. Included in these amounts are amounts related to nonqualifying, excluded, and ineffective portions of hedges resulting in a gain of $1,552 and $1,742 in 2007 and 2006, respectively, and a loss of $2,389 in 2005. 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. At April 30, 2007 and 2006, the balance of the deferred gains related to terminated swaps was $585 and $1,395, respectively, and is included in other noncurrent liabilities on the Consolidated Balance Sheets. Foreign Exchange Rate Hedging: The Company may periodically utilize forward currency exchange contracts. The contracts generally have maturities of less than one year. These contracts are used to hedge the effect of the foreign exchange fluctuations on future cash payments related to purchases of certain assets. At the inception of the contract, the derivative is evaluated and documented for SFAS 133 accounting treatment. If the contract qualifies for hedge accounting treatment, to the extent the hedge is deemed effective, the associated mark-to-market gains and losses are deferred and included as a component of other comprehensive income. These gains or losses are reclassified to earnings in the period the contracts are executed. The ineffective portion of these contracts is immediately recognized in earnings. Certain instruments used to manage foreign exchange exposures do not meet the requirements for hedge accounting treatment, the change in value of these instruments is immediately recognized in earnings. 59 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 insti- tution. 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 mortgage-backed obligations, corporate bonds, municipal bonds, federal agency notes, 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 $426,487 at April 30, 2007. The following table provides information on the carrying amount and fair value of financial instruments, including derivative financial instruments. Marketable securities Current Noncurrent Long-term debt April 30, 2007 April 30, 2006 Carrying Amount Fair Value Carrying Amount Fair Value $ — $ — 44,117 44,117 $ 14,882 34,107 $14,882 34,107 6.77% Senior Notes due June 1, 2009 7.87% Series B Senior Notes due September 1, 2007 7.94% Series C Senior Notes due September 1, 2010 4.78% Senior Notes due June 1, 2014 6.60% Senior Notes due November 13, 2009 Derivative financial instruments (net assets) 75,000 33,000 10,000 100,000 207,643 971 77,905 33,400 10,867 96,278 208,037 971 75,000 33,000 10,000 100,000 210,602 1,030 78,262 34,193 10,974 93,121 207,295 1,030 60 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: Deferred tax liabilities: Intangible assets Depreciation and amortization Pension and other employee benefits Other Total deferred tax liabilities Deferred tax assets: Loss carryforwards Post-employment and other employee benefits Tax credit carryforwards Intangible assets Other Total deferred tax assets Valuation allowance for deferred tax assets Total deferred tax assets less allowance Net deferred tax liability April 30, 2007 2006 $139,445 $134,011 54,925 10,976 4,434 64,293 11,409 4,522 $209,780 $214,235 $ 12,783 $ 37,867 42,240 12,203 4,579 8,031 35,461 12,203 4,990 12,216 $ 79,836 $102,737 (16,626) (24,024) $ 63,210 $ 78,713 $146,570 $135,522 The following table summarizes domestic and foreign loss carryforwards at April 30, 2007. Loss carryforwards: Federal net operating loss Federal capital loss State net operating loss Foreign net operating loss Total loss carryforwards Related Tax Deduction Deferred Tax Asset Expiration Date $ 17,251 $ 6,038 2024 4,586 113,980 2,072 1,632 4,430 683 2009 to 2012 2008 to 2027 2017 $137,889 $12,783 The following table summarizes tax credit carryforwards at April 30, 2007. Tax credit carryforwards: Foreign tax credit Alternative minimum tax credit Total tax credit carryforwards 61 Deferred Tax Asset Expiration Date $ 9,512 2010 to 2015 2,691 Indefinite $12,203 The valuation allowance decreased by $7,398 primarily to reflect the write-off of deferred tax assets and full valua- tion allowances associated with expired loss carryforwards. The valuation allowance at April 30, 2007, includes approximately $15,338 for the domestic and foreign loss and tax credit carryforwards. Approximately $4,874 of the valuation allowance, if subsequently recognized as a tax benefit, would be allocated to reduce goodwill. Domestic income and foreign withholding taxes have not been recorded on undistributed earnings of foreign sub- sidiaries since these amounts are considered to be permanently reinvested. Any additional taxes payable on the earn- ings of foreign subsidiaries, if remitted, would be partially offset by domestic tax credits or deductions for foreign taxes already paid. It is not practical to estimate the amount of additional taxes that might be payable on such undis- tributed earnings. Income (loss) from continuing operations before income taxes is as follows: Domestic Foreign Year Ended April 30, 2007 2006 2005 $241,349 $210,157 $187,780 (345) 5,413 16,834 Income from continuing operations before income taxes $241,004 $215,570 $204,614 The components of the provision for income taxes are as follows: Current: Federal Foreign State and local Deferred Year Ended April 30, 2007 2006 2005 $ 59,207 $ 34,460 $ 28,645 (3,756) 5,804 22,530 (81) 4,713 33,124 4,490 4,772 36,247 Total income tax expense – continuing operations $ 83,785 $ 72,216 $ 74,154 Total income tax expense – discontinued operations $ — $ — $ 4,725 A reconciliation of the statutory federal income tax rate and the effective income tax rate follows: Percent of Pretax Income Statutory federal income tax rate Increase (decrease) in income taxes resulting from: State and local income taxes, net of federal income tax benefit Other items – net Effective income tax rate Income taxes paid Year Ended April 30, 2007 35.0% 2.0 (2.2) 34.8% 2006 35.0% 0.8 (2.3) 33.5% 2005 35.0% 1.8 (0.6) 36.2% $ 54,581 $ 5,882 $ 60,359 62 Note R: Accumulated Other Comprehensive Income (Loss) ✥✥✥ Comprehensive income is included in the Statements of Consolidated Shareholders’ Equity. The components of accu- mulated other comprehensive income (loss) as shown on the Consolidated Balance Sheets are as follows: Balance at May 1, 2004 Reclassification adjustments Current period credit (charge) Income tax benefit Balance at April 30, 2005 Reclassification adjustments Current period credit (charge) Income tax (expense) benefit Balance at April 30, 2006 Reclassification adjustments Current period credit Adjustments to initially apply Statement of Financial Accounting Standards No. 158 Income tax benefit (expense) Foreign Currency Translation Adjustment $ (1) 92 Pension and Other Gain (Loss) on Postretirement Available-for-Sale Securities Unrealized Unrealized Gain on Cash Flow Hedging Derivatives Liabilities Accumulated Other Comprehensive Income (Loss) $ (6,023) $ 249 $ 1,190 $ (4,585) — 15,185 (16,122) — 5,812 — (436) 161 (1,889) (1,797) 1,467 156 94 6,129 $15,276 $(16,333) $ (26) $ 924 $ (159) — 19,512 — — 13,527 (4,817) — (1,025) 375 (1,467) 1,146 117 (1,467) 33,160 (4,325) $34,788 $ (7,623) $ (676) $ 720 $ 27,209 — 2,437 — 826 — 2,593 (1,146) 1,354 (1,146) 7,210 — — (21,475) 6,978 — (949) — (70) (21,475) 5,959 Balance at April 30, 2007 $37,225 $(21,294) $ 968 $ 858 $ 17,757 63 Note S: Subsequent Event – Sale of Scotland Facility ✥✥✥ On June 7, 2007, the Company sold its Livingston, Scotland, facility to the facility’s primary customer, the Kellogg Company. The transaction generated cash proceeds of approximately $4.3 million and resulted in a pretax gain of approximately $1.9 million. The sale is consistent with the Company’s overall strategy, which is to own and market leading North American brands. Note T: 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 of 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 adop- tion of amended articles of incorporation, other than the adoption of any amendment or amended articles of incor- poration 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; ✥ 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 non- corporate, 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. 64 On the matters listed above, common shares are entitled to 10 votes per share, if they meet the requirements set forth in the Articles. Common shares which would be entitled to 10 votes per share are: ✥ common shares beneficially owned for four consecutive years as of the June 18, 2007, annual meeting record date; ✥ common shares received as a result of the International Multifoods Corporation 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 10 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. 65 — Directors — Vincent C. Byrd Senior Vice President, Consumer Market The J. M. Smucker Company R. Douglas Cowan A Chairman The Davey Tree Expert Company Kent, Ohio Kathryn W. Dindo A, E Vice President and Chief Risk Officer FirstEnergy Corp. Akron, Ohio Paul J. Dolan E President Cleveland Indians Cleveland, Ohio Elizabeth Valk Long A, E Former Executive Vice President Time Inc. New York, New York Nancy Lopez Knight G Founder Nancy Lopez Golf Company Albany, Georgia Gary A. Oatey G Chairman and Chief Executive Officer Oatey Co. Cleveland, Ohio Richard K. Smucker President and Co-Chief Executive Officer The J. M. Smucker Company Directors, Officers, and General Managers The J. M. Smucker Company — Officers & General Managers — Timothy P. Smucker Chairman and Co-Chief Executive Officer Richard K. Smucker President and Co-Chief Executive Officer Dennis J. Armstrong Vice President, Logistics and Operational Support Mark R. Belgya Vice President, Chief Financial Officer and Treasurer Vincent C. Byrd Senior Vice President, Consumer Market John W. Denman Vice President and Controller Adam M. Ekonomon Assistant General Counsel and Assistant Secretary Debra A. Marthey Assistant Treasurer Sonal P. Robinson Assistant Secretary Gary A. Jeffcott General Manager, International Market David Lemmon Managing Director, Canada — Properties — Barry C. Dunaway Vice President, Corporate Development Corporate Offices: Orrville, Ohio Robert E. Ellis Vice President, Human Resources M. Ann Harlan Vice President, General Counsel and Secretary Donald D. Hurrle, Sr. Vice President, Sales, Grocery Market John F. Mayer Vice President, Customer Development Kenneth A. Miller Vice President, Alternate Channels Timothy P. Smucker Chairman and Co-Chief Executive Officer The J. M. Smucker Company John D. Milliken Vice President, Logistics and Fruit Processing William H. Steinbrink G Advisor to Business and Non-Profit Leaders A Audit Committee Member E Executive Compensation Committee Member G Nominating and Corporate Governance Committee Member Steven Oakland Vice President and General Manager, Consumer Oils and Baking Andrew G. Platt Vice President, Information Services and Chief Information Officer Christopher P. Resweber Vice President, Marketing Services Julia L. Sabin Vice President and General Manager, Smucker Quality Beverages, Inc. Mark T. Smucker Vice President, International Richard F. Troyak Vice President, Operations Paul Smucker Wagstaff Vice President, Foodservice and Beverage Markets Domestic Locations: Chico, California Cincinnati, Ohio Grandview, Washington Havre de Grace, Maryland Lexington, Kentucky Memphis, Tennessee New Bethlehem, Pennsylvania Orrville, Ohio Oxnard, California Ripon, Wisconsin Scottsville, Kentucky Toledo, Ohio West Fargo, North Dakota* International Manufacturing Locations: Delhi Township, Ontario, Canada Dunnville, Ontario, Canada Livingston, Scotland** Ste. Marie, Quebec, Canada Sales and Administrative Offices:* Bentonville, Arkansas Markham, Ontario, Canada Mexico City, Mexico Properties Acquired After April 30, 2007: El Paso, Texas Gahanna, Ohio* Seneca, Missouri Albert W. Yeagley Vice President, Quality Assurance * Leased properties ** The facility was sold on June 7, 2007 66 Corporate and Shareholder Information The J. M. Smucker Company Corporate Offices The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 Telephone: (330) 682-3000 Stock Listing The J. M. Smucker Company’s common shares are listed on the New York Stock Exchange — ticker symbol SJM. Corporate Web Site To learn more about The J. M. Smucker Company, visit www.smuckers.com. Annual Meeting The annual meeting will be held at 11:00 a.m. Eastern Daylight Time, Thursday, August 16, 2007, in Fisher Auditorium at the Ohio Agricultural Research and Develop- ment Center, 1680 Madison Avenue, Wooster, Ohio 44691. Corporate News and Reports Corporate news releases, annual reports, and Securities and Exchange Commission filings, including Forms 10-K, 10-Q, and 8-K, are available free of charge on the Company’s Web site. They are also available without cost to shareholders who submit a written request to: The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 Attention: Secretary Certifications The Company’s Chief Executive Officers and Chief Financial Officer have certified to the New York Stock Exchange that they are not aware of any violation by the Company of New York Stock Exchange corporate gover- nance standards. The Company has also filed with the Securities and Exchange Commission certain certifications relating to the quality of the Company’s public disclosures. These certifications are filed as exhibits to the Company’s Annual Report on Form 10-K. Independent Registered Public Accounting Firm Ernst & Young LLP Akron, Ohio Dividends The Company’s Board of Directors typically declares a cash dividend each quarter. Dividends are generally payable on the first business day of March, June, September, and December. The record date is approximately two weeks before the payment date. The Company’s dividend disbursement agent is Computershare Investor Services, LLC. Shareholder Services The transfer agent and registrar for the Company, Computershare Investor Services, LLC, is responsible for assisting registered shareholders with a variety of matters including: ✥ Shareholder investment program (BYDSSM) – direct purchase of Company common shares – dividend reinvestment – automatic monthly cash investments ✥ Book-entry share ownership ✥ Share transfer matters (including name changes, gifting, and inheritances) ✥ Direct deposit of dividend payments ✥ Nonreceipt of dividend checks ✥ Lost share certificates ✥ Changes of address ✥ Online shareholder account access ✥ Form 1099 income inquiries (including requests for duplicate copies) Shareholders may contact Shareholder Relations at the corporate offices regarding other shareholder inquiries. Transfer Agent and Registrar Computershare Investor Services, LLC P.O. Box 43078 Providence, RI 02940-3078 Telephone: (800) 456-1169 Telephone outside the U.S., Canada, and Puerto Rico: (312) 360-5254 Web site: www.computershare.com/contactus This annual report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Please reference “Forward-Looking Statements” located on page 24 in the Management’s Discussion and Analysis section. © / TM/ ® The J. M. Smucker Company or its subsidiaries. Pillsbury, Pillsbury BEST, the Barrelhead logo and the Doughboy character are trademarks of The Pillsbury Company, used under license. Borden is a trademark of BDS Two, Inc., used under license. Splenda and Splenda design are trademarks of McNeil Nutritionals, LLC. All the Goodness of Our Company in a Store ✥✥✥ Near the heart of Amish country, just a few short miles from our Orrville, Ohio, facility, there’s a place that captures all the goodness of the Smucker family of brands, our brand showcase store. ✥ This summer, we’ve expanded to include more of The J. M. Smucker Company experience, including a heritage museum and an enlarged café where you can savor delicious recipes made from our branded ingredients. ✥ Come shop our selection of unique gifts, kitchen accessories, and custom gift baskets. Of course, you can always find your favorite products from brands like Smucker’s®, Jif ®, Crisco®, Pillsbury®, Hungry Jack®, Martha White®, Eagle Brand®, R. W. Knudsen Family®, White Lily®, Robin Hood®, Bick’s®, Dickinson’s®, and Crosse & Blackwell®. We look forward to welcoming you soon! 333 Wadsworth Road (Rt. 57, one-quarter mile north of Rt. 30) Orrville, Ohio 44667 (800) 258-1928 Open Monday – Saturday 9:00 a.m. to 6:00 p.m. Closed Sunday. Just a Click Away… ✥✥✥ Unique gifts, hard-to-find flavors, and custom gift sets — all these and more are available from the comfort of your home through our Smucker’s® Online Store. Browse our selection of mail order items anytime, from anywhere at smuckers.com/onlinestore. The J. M. Smucker Company Strawberry Lane Orrville, Ohio 44667 (330) 682-3000 www.smuckers.com The papers, paper mills, and printers for this publication are all certified by the Rainforest Alliance’s SmartWood program for meeting the strict standards of the Forest Stewardship Council (FSC), which promotes environmen- tally appropriate, socially beneficial, and economically viable management of the world’s forests. C Printed on paper with a minimum of 25% post-consumer waste recycled content.