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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2001

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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 24,514,416 Common Shares outstanding on November 30, 2001.

The Exhibit Index is located at Sequential Page No. 13.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

(Unaudited)

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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

(Unaudited)

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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 six month periods ended October 31, 2001, 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.

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 held 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 held as of the record date. The merger is subject to a number of conditions, including Smucker shareholders’ approval, 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 first or second calendar quarter of 2002.

     The merger will be accounted for as a purchase business combination. For accounting purposes, the Company will be treated as the acquiring enterprise.

Note C — Common Shares

     At October 31, 2001, 70,000,000 Common Shares were authorized. There were 24,439,516 and 24,359,281 shares outstanding at October 31, 2001 and April 30, 2001, respectively. Shares outstanding are shown net of 7,985,060 and 8,065,295 treasury shares at October 31, 2001 and April 30, 2001, respectively.

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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:

Note E — Financing Arrangements

     The Company has uncommitted lines of credit providing up to $90,000,000 for short-term borrowings. No amounts were outstanding at October 31, 2001.

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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 October 31, 2001 and 2000, total comprehensive income was $5,966,000 and $2,507,000, respectively. Total comprehensive income for the six-month periods ended October 31, 2001 and 2000 was $12,760,000 and $10,236,000, 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

     This discussion and analysis deals with comparisons of material changes in the unaudited condensed, consolidated financial statements for the three-month and six-month periods ended October 31, 2001 and 2000, respectively.

Results of Operations

     Sales for the second quarter ended October 31, 2001, were $172.8 million, up two percent from $169.8 million for the quarter ended October 31, 2000. Sales for the six-month period ended October 31, 2001, were also up two percent to $342.6 million, compared to $336.2 million for the six months ended October 31, 2000.

     Sales in the domestic business segment were up two percent for the quarter and three percent for the six-month period over the prior year resulting from increased sales in the consumer, foodservice, and beverage business areas. Consumer area sales increased primarily in the grocery, club store, and mass retail channels. Sales of natural peanut butter, Goober peanut butter and jelly combination products, and sugar-free fruit spreads were the primary contributors to this increase. The Company’s record share of market in the fruit spreads category continues to grow and consumer area sales were up over four percent for the first six months as compared to the same period last year.

     Sales in the foodservice area were up 10 percent for the quarter and the six-month period, as sales and distribution of the Smucker’s Uncrustables to schools and traditional foodservice customers continued to increase. These increases offset continued softness in traditional foodservice sales due to the weakening economy and sharp declines in travel and leisure following the incidents of September 11.

     Sales in the beverage area were up three percent over the prior year quarter due primarily to increased sales of R.W. Knudsen Family and Santa Cruz Organic products. Beverage sales year-to-date are up six percent over last year.

     The industrial area of the domestic segment continued to be challenged during the quarter by price competition and soft sales with major customers. Sales were down three percent for the quarter and nine percent for the six-month period from the prior year. During the second quarter, however, the Company completed its previously announced acquisition of the formulated fruit and vegetable preparation businesses of International Flavors and Fragrances, Inc. (IFF). Although the acquisition did not have a material impact on the results for the quarter, the Company expects the IFF business to contribute sales of approximately $10 million for the remainder of the year. On an annual basis the IFF business is expected to contribute sales of approximately $25 million. This additional business is expected to offset a similar amount of current business in the industrial area that will be eliminated in fiscal 2003 due to low margins. The addition of the IFF business and the rationalization of low margin product lines are consistent with the Company’s overall strategic direction to diversify its customer base and improve profitability in the industrial area.

     The strong U.S. dollar as compared to Australian and Brazilian currencies continues to negatively impact the international business segment. International sales were down two percent from the second quarter of last year and five percent from the first six months of last year. However, if exchange rates had remained consistent with last year, sales would have

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been approximately $1.8 million higher in the second quarter and nearly $3.5 million higher for the first six months.

     Australian and Canadian sales were both down two percent from the prior year quarter, also due to weakened exchange rates. However, in local Australian currency, the business was up six percent for the quarter, marking a sharp rebound from a soft first quarter. The Canadian business continued to increase its share of the fruit spreads market in Canada, and sales were up in the Company’s Latin American, European, and Middle Eastern markets for the quarter.

     Cost of products sold as a percentage of sales was 67.6% for the quarter and 67.0% for the six month period, down from 68.0% and 67.2%, respectively last year as price increases implemented during the quarter offset increased costs associated with expanding production capacity for Smucker’s Uncrustablesand higher utility costs. Raw material costs overall were essentially flat.

     Selling, distribution, and administrative expenses increased primarily due to higher amortization charges associated with information systems implementations.

     Interest expense 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 $89,000 in interest associated with the Company’s information technology reengineering project. Year to date, the Company has capitalized approximately $245,000 in interest associated with the project.

     The Company and The Procter & Gamble Company (P&G) received early termination of the waiting period from U.S. antitrust authorities in connection with the previously announced Jif and Crisco transaction with P&G, clearing one of the regulatory steps required for completion of the merger. Plans for the merger of the Jif and Crisco businesses continue on schedule and we expect that a special shareholders’ meeting will be held on March 1, 2002, to vote on the transaction. We expect that the record date for that meeting will be December 31, 2001. The Company hopes to mail proxy materials in the latter part of January 2002, and anticipates closing the transaction in the first or second calendar quarter of 2002.

Financial Condition — Liquidity and Capital Resources

     The financial position of the Company remains strong. Notwithstanding the use of $17.9 million in cash during the first six months of the year, cash and cash equivalents were up $24.0 million at the end of the second quarter over the comparable date last year. Significant uses of cash during the quarter and six-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 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.

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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, the consummation of the proposed merger of the Jif and Crisco businesses with and into the Company and timing of the closing, costs associated with the merger should it fail to close, regulatory approval related to the proposed merger, the success and cost of integrating the merged companies, the success and cost of introducing new products, general competitive activity in the market, the ability of business areas to achieve sales targets and the costs associated with attempting to do so, the ability of the Company to successfully effect price increases, the ability to improve sales and earnings performance in the Company’s formulated ingredient business, costs associated with the implementation of new business and information systems, raw material and ingredient cost trends, and foreign currency exchange and interest rate fluctuations.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     The annual meeting of shareholders of the Company was held on August 14, 2001. At the meeting, the names of Kathryn W. Dindo, Richard K. Smucker, and William H. Steinbrink were placed in nomination for the Board of Directors to serve three-year terms ending in 2004. All three nominees were elected with the results as follows:

     The shareholders also voted on the ratification of the Nonemployee Director Stock Plan and the appointment of Ernst & Young LLP as the Company’s independent auditors for the 2002 fiscal year. The measures were approved as follows:

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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

     *     Exhibits 2, 3, 4, 11, 15, 18, 19, 22, 23, 24, 27 and 99 are either inapplicable to the Company or require no answer.