J.M. Smucker Company - 10-Q quarterly report FY

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No. 1 of 14 Pages

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended January 31, 2002

OR

For the transition period from ____________ to ____________

Commission File Number      1-5111      

THE J. M. SMUCKER COMPANY

STRAWBERRY LANE
ORRVILLE, OHIO 44667
(330) 682-3000

The Company has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days.

The Company had 24,858,003 Common Shares outstanding on February 28, 2002. The Exhibit Index is located at Sequential Page No 14.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

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

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

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THE J. M. SMUCKER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A – Basis of Presentation

         The accompanying unaudited condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended January 31, 2002, are not necessarily indicative of the results that may be expected for the year ended April 30, 2002. For further information, reference is made to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2001.

         Effective May 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all derivative financial instruments, such as foreign exchange contracts and interest rate swap agreements, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders’ equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have a material effect on the Company’s earnings, financial position or cash flows in fiscal 2002.

         The Company has entered into interest rate swap agreements. The interest rate swap agreements effectively modify the Company’s exposure to interest rate risk by converting the Company’s fixed-rate debt to a floating rate. The interest rate swap and instrument being hedged is marked to market in the balance sheet. The net effect of this accounting on the Company’s operating results is that interest expense on the portion of fixed-rate debt being hedged is recorded based on the variable rate stated within the swap agreement. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. By policy, the Company does not enter into derivative financial instruments for trading purposes or for speculation.

Note B – Pending Merger

         On October 9, 2001, the Company entered into a definitive agreement with The Procter & Gamble Company (P&G) to merge P&G’s Jif peanut butter and Criscoshortening and oils businesses with and into the Company. Under the terms of the agreement, P&G will spin off its Jif and Crisco businesses to its shareholders and immediately thereafter those businesses will merge with and into the Company. P&G shareholders will receive one share of the Company’s stock for every 50 P&G shares that they hold as of the record date for the distribution of the Jif and Crisco businesses to P&G shareholders. The Company’s shareholders will receive new Company shares, and in some circumstances cash, for each Company share that they hold as of the record date. The merger is subject to a number of conditions, including Smucker

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shareholders’ approval at a shareholders’ meeting on April 5, 2002, P&G’s receipt of certain tax rulings from the Internal Revenue Service, and the Company’s shareholders’ receipt of at least 45% of the shares of the Company to be issued in the merger. The transaction is expected to close during the second calendar quarter of 2002. If the merger is terminated under certain circumstances, the Company may be required to pay to P&G a termination fee of $10 to $20 million. The Company does not consider the termination of the merger under those circumstances to be probable.

         The merger will be accounted for as a purchase business combination in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). For accounting purposes, the Company will be treated as the acquiring enterprise based on, among other things, the fact that the officers and the board of directors of the Company will not change as a result of the merger and will hold office from the time of the merger until their respective successors are duly elected or appointed.

Note C – Common Shares

         At January 31, 2002, 70,000,000 Common Shares were authorized. There were 24,831,836 and 24,359,281 shares outstanding at January 31, 2002 and April 30, 2001, respectively. Shares outstanding are shown net of 7,592,740 and 8,065,295 treasury shares at January 31, 2002 and April 30, 2001, respectively.

Note D – Operating Segments

         The Company has two reportable segments, domestic and international. The domestic segment represents the aggregation of the consumer, foodservice, beverage, specialty foods, and industrial business areas. The following table sets forth operating segments information:

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Note E – Financing Arrangements

         The Company has uncommitted lines of credit providing up to $90 million for short-term borrowings. No amounts were outstanding at January 31, 2002.

         During the quarter, the Company entered into interest rate swap agreements in order to manage interest rate exposure and minimize financing costs. Effectively, the Company converted $17 million of fixed-rate debt (7.70% notes due in September 2005) and $33 million of fixed-rate debt (7.87% notes due in September 2007) to variable-rate debt. The interest rate swaps are considered fair value hedges and are 100% effective. As a result, the mark-to-market value of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains or losses in other expense. The interest rate swaps had a fair value of $145,600 at January 31, 2002, with the corresponding adjustment to long-term debt included in other noncurrent liabilities.

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Note F – Income Per Share

         The following table sets forth the computation of earnings per Common Share and earnings per Common Share – assuming dilution:

Note G – Comprehensive Income

         During the three-month periods ended January 31, 2002 and 2001, total comprehensive income was $10,602,000 and $8,350,000, respectively. Total comprehensive income for the nine-month periods ended January 31, 2002 and 2001 was $23,362,000 and $18,586,000, respectively. Comprehensive income consists of net income and foreign currency translation adjustments.

Note H – Recently Issued Accounting Standards

         In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) which is effective for business combinations completed subsequent to June 30, 2001, and No. 142, Goodwill and Other Intangible Assets (SFAS 142) which is effective for the Company in the first quarter of fiscal 2003. Under the new rules, goodwill and intangibles deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Other intangible assets will continue to be amortized over their useful lives. The Company has not yet completed its evaluation of the impact of adopting SFAS 141 and SFAS 142.

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Item 2. Management’s Discussion and Analysis

         During the second fiscal quarter of 2002, the Company announced its intended merger with The Procter & Gamble Company’sJif peanut butter andCrisco shortening and oils businesses. The merger, which is subject to Smucker shareholder approval at a special shareholders’ meeting on April 5, 2002, and other conditions, is anticipated to be completed during the second calendar quarter of 2002. This consolidation will add two icon brands with leading market positions. Subsequent to the merger, the Company’s reporting segments will be restated to U.S. Retail Markets and Special Markets.

         This discussion and analysis deals with comparisons of material changes in the unaudited condensed, consolidated financial statements for the three-month and nine-month periods ended January 31, 2002 and 2001, respectively.

Results of Operations

         Sales for the third quarter ended January 31, 2002, were $168.4 million, up ten percent from $153.6 million for the quarter ended January 31, 2001. Sales for the nine-month period ended January 31, 2002, were up four percent to $511.0 million, compared to $489.8 million for the nine months ended January 31, 2001.

         Sales in the domestic business segment were up nine percent for the quarter and five percent for the nine-month period over the prior year resulting from increased sales in the consumer, foodservice, beverage, and industrial business areas.

         Sales in the Company’s consumer business were up six percent in the third quarter as compared to the same period last year. The increase came primarily in the grocery and warehouse club store channels with sales of natural peanut butter, toppings, sugar-free fruit spreads, and Goober peanut butter and jelly combination products driving sales. The Company’s share of market in the fruit spreads category continues to grow.

         Sales in the foodservice area for the third quarter increased over 13 percent, marking this area’s third consecutive quarter of double-digit growth. Sales and distribution of Smucker’s Uncrustables to schools accounted for nearly 60 percent of the total increase. Additionally, the traditional foodservice channel, which services the dining, travel, and leisure industries, rebounded from a soft second quarter, posting an increase in sales of six percent.

         Sales in the beverage area were up nine percent, with approximately one-half of the increase coming from The R.W. Knudsen Family and Santa Cruz Organic brands. For the year, beverage sales are up nearly seven percent over last year.

         Sales in the Company’s industrial business were up over 30 percent for the third quarter. The increase was due primarily to the acquisition of the International Flavors and Fragrances, Inc. (IFF) fruit and vegetable preparation businesses in October 2001. IFF contributed approximately $5.4 million to sales and $0.02 per share to earnings during the quarter. A similar contribution is expected in the fourth quarter.

         The acquisition of the IFF business, along with the future addition of theJif and Crisco brands, has given the Company the opportunity to restructure its industrial business and focus on contracts that support long-term margin objectives and, as a result, it is discontinuing select low margin contracts. This will result in an approximate loss of $40-50 million in ingredient sales

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over the next two years; however, the after tax earnings impact from these sales is less than one million dollars.

         The Company’s international business segment also recorded a strong third quarter with sales up $2.5 million, an 11 percent increase over the third quarter of fiscal 2001. Overall, exchange rates continue to have a negative impact on the Company’s international results. Had exchange rates remained constant with last year, overall international sales would have been approximately $1.4 million higher in the third quarter and nearly $5 million higher on a year-to-date basis compared to last year.

         The increase in sales occurred in nearly every part of the Company’s international business segment with the majority of the growth coming from the Australian, Brazilian, and Export businesses. Sales of Henry Jones Foods, the Company’s Australian subsidiary, were up 12 percent for the quarter, despite the ongoing effects of a weak Australian dollar. Sales in Brazil increased 25 percent for the quarter due to the international portion of the IFF acquisition, offsetting the exchange rate impact.

         Cost of products sold as a percentage of sales was 67.3% for the quarter and 67.1% for the nine-month period, up from 65.9% and 66.8%, respectively last year. Although raw material costs remained essentially flat, increased costs were due to expenses associated with meeting capacity requirements forSmucker’s Uncrustables and the fact that the business acquired from IFF currently has margins that are below the corporate average.

         Selling, distribution, and administrative (SD&A) costs which were even with last year’s quarter, increased for the nine-month period primarily due to higher amortization charges associated with the information systems implementations. Marketing expenses for the quarter were down eight percent from the prior year, primarily due to lower expenditures in the beverage and consumer-direct areas. Subsequent to and as a result of the completion of theJif and Crisco transaction, the Company expects to see SD&A costs become a lower percentage of sales than they are today, even with the increased marketing support planned for the Jif and Crisco brands. In addition, the Company has incurred in the third quarter approximately $914,000 of integration expenses related to the Jif and Crisco transaction.

         Interest expense for the year increased over the prior year due to the long-term debt placement that was completed during the second quarter of last year. During the quarter, the Company capitalized approximately $230,000 in interest associated with the Company’s information technology reengineering and other capital projects. Year to date, the Company has capitalized approximately $475,000 in interest associated with the projects. During the quarter, the Company entered into interest rate swap agreements in order to manage interest rate exposure and minimize financing costs. Effectively, the Company converted $17 million of fixed-rate debt (7.70% notes due in September 2005) and $33 million of fixed-rate debt (7.87% notes due in September 2007) to variable-rate debt. The interest rate swaps are considered fair value hedges and are 100% effective. The interest rate swaps effectively reduced interest expense by approximately $206,000 for the quarter.

         Plans to merge the Jif and Crisco brands into the Company remain on track for closing in the second calendar quarter of this year. The Company has completed the mailing to its shareholders of the prospectus/proxy statement for the April 5, 2002 special meeting of shareholders to approve the transaction.

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Financial Condition – Liquidity and Capital Resources

         The financial position of the Company remains strong with an increase of $16.3 million in cash during the first nine months of the year. Cash and cash equivalents were up $36.7 million at the end of the third quarter over the comparable date last year. Significant uses of cash during the quarter and nine-month period included the seasonal procurement of fruit, expenditures related to the acquisition of the formulated fruit and vegetable preparation businesses of International Flavors and Fragrances, Inc. (IFF), capital expenditures, and the payment of dividends.

         The Company expects capital expenditures for the year to be approximately $30 million, up from $20 million originally projected. The increased expenditures relate primarily to acquisitions of real property around current facilities for potential future expansion of those facilities.

         The Company believes that cash on hand together with cash generated by operations and existing lines of credit will be sufficient to fund expenditures related to the Jif and Crisco transaction and meet fiscal 2002 requirements, including the payment of dividends and interest on outstanding debt. The Company expects the addition of the Jif and Crisco brands to improve cash flows from operation.

Recently Issued Accounting Standards

         In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) which is effective for business combinations completed subsequent to June 30, 2001, and No. 142, Goodwill and Other Intangible Assets (SFAS 142) which is effective for the Company in the first quarter of fiscal 2003. Under the new rules, goodwill and intangibles deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Other intangible assets will continue to be amortized over their useful lives. The Company has not yet completed its evaluation of the impact of adopting SFAS 141 and SFAS 142.

Certain Forward-Looking Statements

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

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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SIGNATURES

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

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INDEX OF EXHIBITS

That are filed with the Commission and
The New York Stock Exchange