Sequential Page
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5111
THE J. M. SMUCKER COMPANY
Registrant’s telephone number, including area code (330) 682-3000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. þ Yes o No
The Company had 49,574,260 common shares outstanding on August 31, 2002.
The Exhibit Index is located at Sequential Page No. 20.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE J. M. SMUCKER COMPANYCONDENSED STATEMENTS OF CONSOLIDATED INCOME(Unaudited)
See notes to condensed consolidated financial statements.
THE J. M. SMUCKER COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)
THE J. M. SMUCKER COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
( ) Denotes use of cash
THE J. M. SMUCKER COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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-month period ended July 31, 2002, are not necessarily indicative of the results that may be expected for the year ending April 30, 2003. 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, 2002.
Note B – Merger
On June 1, 2002, the Company merged the Jif peanut butter and Criscoshortening and oils businesses of The Procter & Gamble Company (P&G) with and into the Company in a tax-free stock transaction. Under the terms of the agreement, P&G spun off its Jif and Crisco businesses to its shareholders and immediately thereafter those businesses were merged with and into the Company. P&G shareholders received one Company common share for every 50 P&G common shares that they held as of the record date for the distribution of the Jif andCrisco businesses to the P&G shareholders. The Company’s shareholders received 0.9451 of a new Company common share for each Company common share that they held immediately prior to the merger. Approximately 26,000,000 common shares were issued to the P&G shareholders, valued at approximately $781,485,000 based on the average market price of the Company’s common shares over the period from three days before to three days after the terms of the merger were announced. Upon completion of the merger, the Company had 49,531,376 common shares outstanding.
The conversion of the Company’s common shares into new Company common shares has been treated in a manner similar to a reverse stock split. All per share data for all periods presented have been restated to reflect the effects of the conversion.
The merger and the combination of three brands – Smucker’s, Jif, andCrisco – enhances the Company’s strategic and market position. The merger was accounted for as a purchase business combination. For accounting purposes, the Company is the acquiring enterprise. Accordingly, the results of the Jif andCrisco operations are included in the Company’s consolidated financial statements from the date of the merger.
The aggregate purchase price was approximately $790,788,000 including $9,303,000 of acquisition related expenses. The purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their preliminary estimated fair values at the date of acquisition. Final estimated fair values will be determined by independent appraisals, discounted cash flows, quoted market prices, and management estimates. The Company currently expects to finalize the purchase price allocation by May 31, 2003.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the merger. The allocation of the purchase price is preliminary and subject to adjustment following completion of the valuation process.
The $462,374,000 of goodwill relates to the U.S. retail market segment and will not be deductible for tax purposes.
Had the merger of the Jif and Crisco businesses with and into the Company occurred at the beginning of fiscal 2002, pro forma consolidated results would have been as follows:
Note C – Change in Accounting Principle
Effective May 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment.
Prior to the adoption of SFAS 142, amortization expense was recorded for goodwill and other intangible assets. The following table sets forth a reconciliation of net income and earnings per share information adjusted for the nonamortization provisions of SFAS 142.
The Company has not completed its initial asset impairment assessment as required in adopting SFAS 142.
Note D – Common Shares
At July 31, 2002, 150,000,000 common shares were authorized. There were 49,558,746 and 23,504,129 (restated) shares outstanding at July 31, 2002, and April 30, 2002, respectively. Shares outstanding are shown net of 7,109,187 and 7,140,338 (restated) treasury shares at July 31, 2002, and April 30, 2002, respectively.
Note E – Operating Segments
Effective June 1, 2002, the Company realigned its business segment structure in recognition of the changes resulting from the addition of the Jifand Crisco businesses. Prior year segment information has been restated to conform to the new structure.
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 the consumer oils business areas. This segment represents the primary strategic focus area for the Company – the sale of branded food products with leadership positions to consumers through mainstream domestic retail outlets. The special markets segment represents the aggregation of the foodservice, international, industrial, and beverage business areas. Special markets segment products are distributed through/to foreign countries, foodservice distributors and operators (i.e., restaurants, schools and universities, health care operations), other food manufacturers, and health and natural food stores.
The following table sets forth operating segments information:
Note F – Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share – assuming dilution:
Note G – Derivative Financial Instruments
The Company is exposed to market risks, such as changes in interest rates, currency exchange rates, and commodity pricing. To manage the volatility relating to these exposures, the Company enters into various derivative transactions pursuant to the Company’s policies in areas such as counterparty exposure and hedging practices. Hedge effectiveness designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in fair value or cash flows of the underlying exposures being hedged.
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 enters 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.
Commodity price management. Raw materials used by the Company’s Criscobusiness are subject to price volatility caused by supply conditions, political and economic variables, and other unpredictable factors. In connection with the acquisition of Crisco, to manage the volatility related to anticipated inventory purchases to be made by Crisco, the Company uses futures and options with maturities generally less than one year. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of products sold in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on nonqualifying, excluded, and ineffective portions of hedges are recognized in cost of products sold immediately.
Note H – Financing Arrangements
The Company has uncommitted lines of credit providing up to $90,000,000 for short-term borrowings. No amounts were outstanding at July 31, 2002.
Note I – Comprehensive Income
During the quarter ended July 31, 2002 and 2001, total comprehensive income was $17,098,000 and $6,954,000, respectively. Comprehensive income consists of net income, foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on commodity hedging activity.
Note J – Goodwill and Other Intangibles
A summary of changes in the Company’s goodwill during the three months ended July 31, 2002, by reportable operating segment is as follows:
The Company’s intangible assets and related accumulated amortization is as follows:
The amounts above include preliminary estimates related to the goodwill and intangible assets acquired in the Jif and Crisco merger.
Amortization expense for intangible assets was approximately $512,000 for the three months ended July 31, 2002. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years is $2,670,000 for fiscal 2003 and $2,878,000 for fiscal 2004 through 2007.
Note K – Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets to be held and used, to be disposed of other than by sale and to be disposed of by sale. The Company adopted SFAS 144 as of May 1, 2002. The adoption of SFAS 144 did not have an impact on the Company’s consolidated financial statements.
In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the Company’s consolidated financial statements.
Note L – Reclassifications
Certain prior year amounts have been reclassified to conform to current year classifications.
Item 2. Management’s Discussion and Analysis
This discussion and analysis deals with comparisons of material changes in the condensed, consolidated financial statements for the three-month periods ended July 31, 2002 and July 31, 2001, respectively.
On June 1, 2002, The Company merged the Jif peanut butter and Criscoshortening and oils businesses of The Procter & Gamble Company with and into the Company in a tax-free stock transaction. The Company successfully transitioned the Jif and Crisco businesses ahead of schedule on July 1, 2002.
With the addition of the Jif and Crisco businesses, reportable segments have been restated to U.S. retail market and special markets. The U. S. retail market segment is composed of the Company’s consumer and consumer oils business areas and includes domestic sales of Smucker’s, Jif, and Crisco brand products at retail. The special markets segment is composed of the foodservice, international, industrial, and beverage business areas.
Results of Operations
Sales were $274.9 million for the first quarter ended July 31, 2002, up 62 percent versus $169.8 million during the comparable period last year. The Jifand Crisco brands contributed $87.0 million to sales in the first quarter of fiscal 2003. Excluding the Jif and Crisco contribution, first quarter sales were $187.9 million, up 11 percent versus the prior year.
Net income was $16.0 million, or $0.39 per share, for the first quarter versus $8.5 million or $0.37 per share for the first quarter of last year. Income in the first quarter included $4.9 million, or $0.07 per share, of costs associated with the merger of the Jif and Crisco brands into the Company. Excluding those costs, the Company’s earnings per share would have been $0.46 in the first quarter. Earnings per share for the first quarter of fiscal 2002 have been restated to reflect the effect of the merger exchange ratio of 0.9451 on the weighted average shares outstanding during that quarter and include, on a diluted basis, $0.02 of amortization expense not included in the current year.
Sales for the first quarter in the U. S. retail market segment were up 96 percent over the prior year due to the addition of the Jif and Criscobusinesses. Sales of Jif were responsible for consumer area revenues increasing over the prior year by more than 50%. In the consumer oils area, Criscooperations transitioned smoothly. Sales of Crisco were under competitive pressure during the last year of P&G’s ownership of that brand. Sales of the product line in June and July were consistent with the pre-merger trend.
In August 2002, the Company announced that it was increasing the prices of its Crisco brand products in an effort to offset the substantial cost increases being seen in the market for soybean and canola oil. The increase for oils products averaged approximately 15 percent. This will be the first increase in the price of Crisco products since 1998. In addition, the Company plans to implement a price decrease on the Jif brand peanut butter products of approximately six percent, effective January 2003, in response to the decline in the cost of peanuts that is expected to result at the end of this calendar year from enactment of the Farm Security and Rural Investment Act of 2002. The decision to reduce prices on the Jif products is based on certain assumptions as to the amount of the expected decline in peanut costs and, therefore, is subject to actual cost to the Company of the 2002 peanut crop.
Sales in the special markets segment were up 27 percent over the prior year, with increases in the beverage and industrial areas accounting for 70 percent of the segment’s growth. International sales of Jif and Crisco, mostly in Canada, also contributed modestly.
In the beverage area, new products contributed heavily to the 48 percent sales increase in the first quarter. Contributing significantly to the increase were the seasonal Smucker’s powdered strawberry lemonade product sold in club stores and new products in the Santa Cruz Organic line.
Sales in the industrial area were up 40 percent in the first quarter. The increase was primarily due to the acquisition of the International Flavors and Fragrances Inc. (IFF) fruit preparations business in October 2001. The IFF acquisition contributed approximately $8.2 million to industrial sales in the first quarter. Industrial sales lost in the quarter as part of the previously announced decision to discontinue certain portions of the business were offset by the IFF acquisition contribution and by new products.
In the foodservice area, sales were up six percent as sales and distribution of Smucker’s Uncrustables to schools continued to expand. The Company’s traditional foodservice business continues to rebound from the effects of a soft economy and weakness in the travel and leisure industry and was up four percent, led by growth in Smucker’s portion control items.
Sales in the international area were up 23 percent over the prior year. Sales increased in several of the Company’s geographic markets, notably Canada, Brazil, and Scotland. The Company’s export business also was up over the prior year. Jif and Crisco added approximately $1.7 million to the international area, while the IFF business in Brazil contributed to that area’s overall growth for the quarter.
Cost of products sold rose 62 percent for the first quarter primarily as a result of the Jif and Crisco merger. Flat gross margin performance was the result of sales mix as strong sales in the industrial and beverage areas, which have lower margin structures than the Company’s retail businesses, lowered overall Company gross margins. Modest increases in certain fruit costs also contributed to the margin performance. Selling, distribution, and administrative (SD&A) costs, however, were 21.8 percent of sales in the first quarter versus 24.6 percent in the first quarter last year. As a result of the SD&A improvement, the Company’s operating margin as a percent of sales improved in the first quarter to 11.8 percent (excluding one-time merger related costs) versus 9.1 percent last year.
Financial Condition – Liquidity and Capital Resources
The financial position of the Company remains strong. Cash and cash equivalents decreased $17.8 million during the first quarter, primarily due to the customary seasonal procurement of fruit and the seasonal buildup of shortenings and oils inventories for the upcoming fall baking season. Other significant uses of cash during the quarter were the payment of merger related costs, capital expenditures, and the payment of dividends. Additional debt was not required to complete the merger of the Jif and Crisco businesses with and into the Company, and total long-term debt as a percent of total capitalization was reduced from approximately 33% at April 30, 2002, to 11% at July 31, 2002.
Assuming there are no material acquisitions or other significant investments, the Company believes that cash on hand together with cash generated by operations and existing lines of credit will be sufficient to meet its fiscal 2003 requirements, including the payment of dividends and interest on outstanding debt.
The Company increased quarterly dividends to $0.20 per share effective with the first quarterly dividend declared in fiscal 2003.
Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets to be held and used, to be disposed of other than by sale, and to be disposed of by sale. The Company adopted SFAS 144 as of May 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company’s consolidated financial statements.
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:
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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.
CERTIFICATION
In connection with the Form 10-Q of The J. M. Smucker Company for the period ended July 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy P. Smucker, Co-Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002, that:
In connection with the Form 10-Q of The J. M. Smucker Company for the period ended July 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard K. Smucker, Co-Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002, that:
In connection with the Form 10-Q of The J. M. Smucker Company for the period ended July 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven J. Ellcessor, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002, that:
In connection with the Form 10-Q of The J. M. Smucker Company for the period ended July 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
INDEX OF EXHIBITS
That are filed with the Commission andThe New York Stock Exchange