10-Q 1 l91107ae10-q.htm THE JM SMUCKER COMPANY 10-Q/QTR END 10-31-01 The JM Smucker Company 10-Q/Qtr End 10-31-01
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Item 2. Management’s Discussion and Analysis
PART II. OTHER INFORMATION
SIGNATURES
INDEX OF EXHIBITS
EXHIBIT 10 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN

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No. 1 of 13 Pages

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

     
     Ohio             34-0538550     
 
State of Incorporation   IRS Identification No.

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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No. 2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

(Unaudited)

                                   
      Three Months Ended   Six Months Ended
      October 31,   October 31,
     
 
      2001   2000   2001   2000
     
 
 
 
      (Dollars in thousands, except per share data)
Net sales
   $ 172,844     $ 169,837     $ 342,636     $ 336,165  
Cost of products sold
     116,761       115,465       229,636       225,869  
 
    
     
     
     
 
 
     56,083       54,372       113,000       110,296  
Selling, distribution, and administrative expenses
     41,307       40,660       82,992       80,518  
Nonrecurring charge
     —       2,152       —       2,152  
 
    
     
     
     
 
 
     14,776       11,560       30,008       27,626  
Other income (expense)
                                
 
Interest income
     602       712       1,333       1,462  
 
Interest expense
     (2,356 )     (1,968 )     (4,637 )     (2,866 )
 
Other — net
     (130 )     (150 )     (63 )     (349 )
 
    
     
     
     
 
Income before income taxes and cumulative effect of change in accounting method
     12,892       10,154       26,641       25,873  
Income taxes
     5,028       3,945       10,390       10,106  
 
    
     
     
     
 
Income before cumulative effect of change in accounting method
     7,864       6,209       16,251       15,767  
Cumulative effect of change in accounting method, net of tax benefit of $572
     —       —       —       (992 )
 
    
     
     
     
 
Net income
   $ 7,864     $ 6,209     $ 16,251     $ 14,775  
 
    
     
     
     
 
Earnings per Common Share:
                                
Income before cumulative effect of change in accounting method
   $ 0.32     $ 0.25     $ 0.67     $ 0.59  
Cumulative effect of change in accounting method
     —       —       —       (0.04 )
 
    
     
     
     
 
Net income per Common Share
   $ 0.32     $ 0.25     $ 0.67     $ 0.55  
 
    
     
     
     
 
Earnings per Common Share — assuming dilution:
                                
Income before cumulative effect of change in accounting method
   $ 0.32     $ 0.24     $ 0.66     $ 0.59  
Cumulative effect of change in accounting method
     —       —       —       (0.04 )
 
    
     
     
     
 
Net income per Common Share — assuming dilution
   $ 0.32     $ 0.24     $ 0.66     $ 0.55  
 
    
     
     
     
 
Dividends declared on Common Shares
   $ 0.16     $ 0.16     $ 0.32     $ 0.32  
 
    
     
     
     
 

See notes to unaudited condensed consolidated financial statements.

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No. 3

THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

                         
            October 31, 2001   April 30, 2001
           
 
            (Dollars in thousands)
ASSETS
                
CURRENT ASSETS
                
 
Cash and cash equivalents
   $ 33,218     $ 51,125  
 
Trade receivables, less allowances
     60,627       55,986  
 
Inventories:
                
     
Finished products
     55,373       52,034  
     
Raw materials, containers, and supplies
     77,043       55,965  
 
    
     
 
 
     132,416       107,999  
 
Other current assets
     14,381       13,956  
 
    
     
 
     
Total Current Assets
     240,642       229,066  
PROPERTY, PLANT, AND EQUIPMENT
                
 
Land and land improvements
     17,739       17,684  
 
Buildings and fixtures
     80,700       79,862  
 
Machinery and equipment
     258,928       247,235  
 
Construction in progress
     14,113       17,072  
 
    
     
 
 
     371,480       361,853  
 
Less allowances for depreciation
     (200,394 )     (190,283 )
 
    
     
 
     
Total Property, Plant, and Equipment
     171,086       171,570  
OTHER NONCURRENT ASSETS
                
 
Intangible assets
     43,609       45,636  
 
Other assets
     33,070       24,197  
 
    
     
 
     
Total Other Noncurrent Assets
     76,679       69,833  
 
    
     
 
 
   $ 488,407     $ 470,469  
 
    
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
CURRENT LIABILITIES
                
 
Accounts payable
   $ 34,111     $ 29,967  
 
Other current liabilities
     44,918       37,136  
 
    
     
 
     
Total Current Liabilities
     79,029       67,103  
NONCURRENT LIABILITIES
           
 
Long-term debt
     135,000       135,000  
 
Other noncurrent liabilities
     21,021       21,255  
 
    
     
 
       
Total Noncurrent Liabilities
     156,021       156,255  
SHAREHOLDERS’ EQUITY
                
 
Common Shares
     6,110       6,090  
 
Additional capital
     21,847       19,278  
 
Retained income
     257,437       249,552  
 
Less:
                
   
Deferred compensation
     (3,349 )     (2,248 )
   
Amount due from ESOP
     (8,562 )     (8,926 )
   
Accumulated other comprehensive loss
     (20,126 )     (16,635 )
 
    
     
 
     
Total Shareholders’ Equity
     253,357       247,111  
 
    
     
 
 
   $ 488,407     $ 470,469  
 
    
     
 

    See notes to unaudited condensed consolidated financial statements.

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

(Unaudited)

                       
          Six Months Ended
          October 31,
         
          2001   2000
         
 
          (Dollars in thousands)
OPERATING ACTIVITIES
                
 
Net income
   $ 16,251     $ 14,775  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                
     
Depreciation
     12,155       10,827  
     
Amortization
     2,317       2,228  
     
Cumulative effect of change in accounting method, net of tax benefit
     —       992  
     
Nonrecurring charge, net of tax benefit
     —       1,313  
     
Other adjustments
     (23,825 )     (1,187 )
 
    
     
 
Net cash provided by operating activities
     6,898       28,948  
INVESTING ACTIVITIES
 
Business acquired — net of cash acquired
     (5,639 )     —  
   
Additions to property, plant, and equipment
     (12,736 )     (16,202 )
   
Disposal of property, plant, and equipment
     103       140  
   
Other — net
     790       733  
 
    
     
 
Net cash used for investing activities
     (17,482 )     (15,329 )
FINANCING ACTIVITIES
                
   
Proceeds from long-term debt
     —       60,000  
   
Purchase of treasury shares
     (539 )     (80,419 )
   
Dividends paid
     (7,740 )     (8,997 )
   
Other — net
     1,271       1,832  
 
    
     
 
Net cash used for financing activities
     (7,008 )     (27,584 )
Effect of exchange rate changes
     (315 )     (601 )
 
    
     
 
Net decrease in cash and cash equivalents
     (17,907 )     (14,566 )
Cash and cash equivalents at beginning of period
     51,125       23,773  
 
    
     
 
Cash and cash equivalents at end of period
   $ 33,218     $ 9,207  
 
    
     
 

    See notes to unaudited condensed consolidated financial statements.

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No. 5

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 Crisco shortening 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:

                                   
      Three Months Ended   Six Months Ended
      October 31,   October 31,
     
 
(Dollars in thousands)   2001   2000   2001   2000
 
 
 
 
Net sales:
                                
 
Domestic
   $ 149,265     $ 145,900     $ 297,121     $ 288,156  
 
International
     23,579       23,937       45,515       48,009  
 
    
     
     
     
 
Total net sales
   $ 172,844     $ 169,837     $ 342,636     $ 336,165  
 
Segment profit:
                                
 
Domestic
   $ 24,663     $ 22,342     $ 50,191     $ 46,117  
 
International
     2,035       1,888       3,738       4,039  
 
    
     
     
     
 
Total segment profit
     26,698       24,230       53,929       50,156  
 
Interest income
     602       712       1,333       1,462  
 
Interest expense
     (2,356 )     (1,968 )     (4,637 )     (2,866 )
 
Amortization expense
     (1,171 )     (1,112 )     (2,317 )     (2,228 )
 
Nonrecurring charge
     —       (2,152 )     —       (2,152 )
 
Corporate administrative expenses
     (11,040 )     (10,163 )     (21,691 )     (19,770 )
 
Other unallocated income
     159       607       24       1,271  
 
    
     
     
     
 
Income before income taxes and cumulative effect of change in accounting method
   $ 12,892     $ 10,154     $ 26,641     $ 25,873  
 
    
     
     
     
 

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:

                                   
      Three Months Ended   Six Months Ended
      October 31,   October 31,
     
 
      2001   2000   2001   2000
     
 
 
 
      (Dollars in thousands, except per share data)
Numerator:
                                
Net income
   $ 7,864     $ 6,209     $ 16,251     $ 14,775  
 
    
     
     
     
 
Denominator:
                                
Denominator for earnings per Common Share — weighted-average shares
     24,285,486       25,213,864       24,277,163       26,700,608  
Effect of dilutive securities:
                                
 
Stock options
     369,050       111,617       295,143       57,205  
 
Restricted stock
     66,819       78,092       50,590       64,178  
 
    
     
     
     
 
Denominator for earnings per Common Share — assuming dilution
     24,721,355       25,403,573       24,622,896       26,821,991  
 
    
     
     
     
 
Net income per Common Share
   $ 0.32     $ 0.25     $ 0.67     $ 0.55  
 
    
     
     
     
 
Net income per Common Share - assuming dilution
   $ 0.32     $ 0.24     $ 0.66     $ 0.55  
 
    
     
     
     
 

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 Uncrustables and 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:

                           
    Votes For   Votes Withheld   Broker Nonvotes
   
 
 
Kathryn W. Dindo
     59,625,891       264,449         0  
Richard K. Smucker
     59,591,335       299,005         0  
William H. Steinbrink
     59,643,342       246,998         0  

     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:

                                   
    Votes For   Votes Against   Abstentions   Broker Nonvotes
   
 
 
 
Nonemployee Director Stock Plan
     57,554,546       2,006,578       329,216         0  
Appointment of Auditors
     59,597,185       224,424       68,731         0  

Item 6. Exhibits and Reports on Form 8-K
         
    (a)   Exhibits
        See the Index of Exhibits that appears on Sequential Page No. 13 of this report.
    (b)   Reports on Form 8-K
        On October 12, 2001, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting an agreement with The Procter & Gamble Company to merge the Jif peanut butter and Crisco shortening and oils businesses with and into the Company.

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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.

     
December  7, 2001   THE J. M. SMUCKER COMPANY
     
    /s/ Steven J. Ellcessor
   
    BY STEVEN J. ELLCESSOR
    Vice President-Finance and Administration,
    Secretary, and General Counsel
     
    /s/ Timothy P. Smucker
   
    AND TIMOTHY P. SMUCKER
    Chairman and Co-Chief Executive Officer

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No. 13

INDEX OF EXHIBITS

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

         
Assigned       Sequential
Exhibit No.* Description   Page No.
10       Nonemployee Director Stock Option Plan

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