EX-13 3 l95505aexv13.txt EX-13 EXCERPTS ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 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, 2002, as restated for the change in accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method, as discussed in Note B to the consolidated financial statements. 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 Capital Resources and Liquidity" and the consolidated financial statements and notes thereto.
Year Ended April 30, ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- Statement of Income: Net sales $687,148 $651,242 $641,885 $612,662 $574,855 Income before cumulative effect of change in accounting method (1)(2) $30,851 $28,198 $26,273 $38,233 $34,771 Cumulative effect of change in accounting method (3)(4) --- (992) --- --- (2,958) ----------------------------------------------------------------------------------------------------------------------------------- Net income $30,851 $27,206 $26,273 $38,233 $31,813 =================================================================================================================================== Financial Position: Long-term debt $135,000 $135,000 $75,000 $ --- $ --- Total assets 524,892 479,104 477,698 437,657 410,695 Shareholders' equity 280,144 250,785 320,608 331,548 308,926 =================================================================================================================================== Other Data: Earnings per Common Share: Income before cumulative effect of change in accounting method (1)(2) $ 1.26 $ 1.11 $ 0.92 $ 1.32 $ 1.20 Cumulative effect of change in accounting method (3)(4) --- (0.04) --- --- (0.10) ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1.26 $ 1.07 $ 0.92 $ 1.32 $ 1.10 =================================================================================================================================== Income before cumulative effect of change in accounting method - assuming dilution (1)(2) $ 1.24 $ 1.10 $ 0.91 $ 1.31 $ 1.18 Cumulative effect of change in accounting method - assuming dilution (3)(4) --- (0.04) --- --- (0.10) ----------------------------------------------------------------------------------------------------------------------------------- Net income - assuming dilution $ 1.24 $ 1.06 $ 0.91 $ 1.31 $ 1.08 =================================================================================================================================== Dividends declared per Common Share 0.64 0.64 0.61 0.57 0.53 ===================================================================================================================================
(1) Includes, in 2002, merger and integration costs of $5,031 ($3,160 after tax), or $0.13 per share, related to the "Jif" and "Crisco" transaction. (2) Includes, in 2001, a nonrecurring charge of $2,152 ($1,313 after tax), or $0.05 per share, relating to the sale of real estate, and in 2000, nonrecurring charges of $14,492 ($9,626 after tax), or $0.34 per share, relating to the impairment of certain long-lived assets, as discussed in Note E to the consolidated financial statements. (3) Reflects, in 2001, the impact of adopting the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as discussed in Note A to the consolidated financial statements. Had SAB 101 been retroactively applied to all periods presented, earnings per Common Share would have been $0.01 lower in 1999. (4) Reflects, in 1998, the cumulative effect of adopting the provisions of the Emerging Issues Task Force of the Financial Accounting Standards Board Issue No. 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation (EITF 97-13). Summary of Quarterly Results of Operations The following is a summary of unaudited quarterly results of operations for the years ended April 30, 2002 and 2001, as restated for the change in accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method as discussed in Note B to the consolidated financial statements.
Earnings per Common Earnings per Common Share - Assuming (Dollars in thousands, except per share data) Share Dilution ----------------------------------------------------------------------------------------------------------------------------- Income Income Income Before Before Before Cumulative Cumulative Cumulative Effect of Effect of Effect of Change in Change in Change in Quarter Net Gross Accounting Net Accounting Net Accounting Ended Sales Profit Method(1)(2) Income Method(1)(2) Income Method Net (3) (3) (1)(2)(3) Income ----------------------------------------------------------------------------------------------------------------------------- Fiscal 2002 July 31, 2001 $169,792 $57,180 $ 8,547 $ 8,547 $0.35 $0.35 $0.35 $0.35 October 31, 2001 172,844 55,820 7,704 7,704 0.32 0.32 0.31 0.31 January 31, 2002 168,392 55,001 7,947 7,947 0.32 0.32 0.32 0.32 April 30, 2002 176,120 56,990 6,653 6,653 0.27 0.27 0.26 0.26 ----------------------------------------------------------------------------------------------------------------------------- Fiscal 2001 July 31, 2000 $166,328 $55,177 $ 9,104 $ 8,112 $0.32 $0.28 $0.32 $0.28 October 31, 2000 169,837 53,635 5,759 5,759 0.23 0.23 0.23 0.23 January 31, 2001 153,628 50,625 5,905 5,905 0.25 0.25 0.24 0.24 April 30, 2001 161,449 47,857 7,430 7,430 0.31 0.31 0.30 0.30 -----------------------------------------------------------------------------------------------------------------------------
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. (1) Includes merger and integration costs during fiscal 2002 third and fourth quarters of $558 ($0.02 per share) and $2,602 ($0.11 per share), respectively, related to the "Jif" and "Crisco" transaction. (2) Includes a nonrecurring charge during fiscal 2001 second quarter of $1,313 ($0.05 per share) relating to the sale of real estate, as discussed in Note E to the consolidated financial statements. (3) Fiscal 2001 fourth quarter income was increased by $1,100 ($0.05 per share) resulting from adjustments to the effective income tax rate. Stock Price Data The Company's Common Shares are listed on the New York Stock Exchange - ticker symbol SJM. The table below presents the high and low market prices for the shares and the quarterly dividends declared. There were 148,652 shareholders of record as of June 14, 2002.
Quarter Ended High Low Dividends --------------------------------------------------------------------------------------------------- Fiscal 2002 July 31, 2001 $27.77 $23.91 $0.16 October 31, 2001 36.10 23.90 0.16 January 31, 2002 37.73 31.00 0.16 April 30, 2002 36.65 30.30 0.16 --------------------------------------------------------------------------------------------------- Fiscal 2001 July 31, 2000 $19.50 $15.75 $0.16 October 31, 2000 25.00 17.88 0.16 January 31, 2001 29.00 21.63 0.16 April 30, 2001 29.00 23.95 0.16 ---------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS The J. M. Smucker Company (Company) is a leading North American manufacturer and marketer of fruit spreads, natural peanut butter, dessert toppings, and health and natural foods beverages. The Company's operations and distribution outside of North America are principally in Australia, Brazil, China and the Pacific Rim, Europe, and the Middle East. On June 1, 2002, the Company consummated a transaction with The Procter & Gamble Company (P&G), whereby the "Jif" and "Crisco" businesses of P&G were merged with and into the Company. The merger will be accounted for as a purchase business combination, with the Company as the accounting acquirer. The addition of these two brands has created a new company with a leading brand position in seven food categories. The expected operating results and financial position of this new company are significantly different than those of the Company as reported in this annual report, in Management's Discussion and Analysis, and in the consolidated financial statements. See Note C to the consolidated financial statements for additional information on the merger and for pro forma financial information of the combined Company. During fiscal 2002, the Company changed from the last-in, first-out (LIFO) method of accounting for certain inventory to the first-in, first-out (FIFO) method. The results of operations included in this section for years prior to fiscal 2002 has been restated to reflect this change. RESULTS OF OPERATIONS Comparison of fiscal 2002 with fiscal 2001 Sales in fiscal 2002 were $687.1 million, up 6% over the $651.2 million in sales in the prior year. Excluding the impact of acquisitions, sales were up approximately $21 million or 3%. Sales in the domestic segment were $590.3 million, up 6%, while international segment sales were $96.8 million, a 4% increase. Company operating income was $59.8 million compared to $51.3 million in fiscal 2001, excluding the impact of $5 million ($3.2 million after tax, or $0.13 per share) in merger and integration costs associated with the "Jif" and "Crisco" merger in fiscal 2002 and excluding a $2.1 million ($1.3 million after tax, or $0.05 per share) nonrecurring charge in fiscal 2001. Fiscal 2002 net income, excluding the impact of merger and integration costs, was $34.0 million, or $1.39 per share ($1.37 per share, assuming dilution), compared to $29.5 million, or $1.16 per share ($1.15 per share, assuming dilution), last year. The fiscal 2001 results noted exclude the nonrecurring charge and the cumulative effect of an accounting change of $1.6 million ($1 million after tax, or $0.04 per share). During the fourth quarter of fiscal 2002, the Company elected to change the method of accounting for certain inventory from the LIFO method to the FIFO method. As a result, the Company restated its fiscal 2001 financial results, resulting in a reduction in net income of $3.5 million, or $0.14 per share. Sales in the domestic segment were up 6% due primarily to increases in the consumer, foodservice, and industrial business areas. The Company's consumer business grew 4%, due mostly to new products and growth in "Sugar Free" fruit spreads, natural peanut butters, and "Goober" peanut butter and jelly combination products. During the year, the Company discontinued selling its low-margin, value-priced "Sunberry Farms" brand. Consumer area sales increased in the grocery, club store, and mass retail channels and decreased modestly in the military and consumer direct channels. The Company's share of market in the fruit spreads category continues to grow, reaching an all-time high in excess of 40% across all retail segments. In the foodservice area, sales were up 9% as sales and distribution of "Smucker's Uncrustables" to schools continued to increase. Total foodservice sales of this product reached approximately $16 million, double the prior year. This new business helped offset a general softness in traditional foodservice sales, which were impacted during most of the year by the weak economy and declines in the travel and leisure industry following the events of last September 11. Despite those events, the traditional foodservice business realized a small increase, up 1% over the prior year. Sales in the beverage area were up 7% over the prior year, due primarily to increased sales of "R.W. Knudsen Family" and "Santa Cruz Organic" products. Sales in the Company's industrial business were up 11% for the year. The increase was due to the acquisition of the International Flavors and Fragrances, Inc. (IFF) fruit and vegetable preparation businesses in October 2001. The IFF acquisition contributed approximately $13 million to domestic sales and $0.05 per share to earnings during the year. On an annual basis, the business acquired from IFF 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, along with the merger into the Company of the "Jif" and "Crisco" brands, has given the Company the opportunity to restructure its industrial business and focus on contracts that support long-term margin objectives. As a result, it is discontinuing select low-margin contracts. This will result in an approximate loss of $40 to $50 million in ingredient sales over the next two years; however, the impact on net income should be less than $1 million. 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. In the international segment, the Company's Canadian business continued to perform well, with sales increasing 4% in the local currency. Export sales increased 3% and sales in the Company's Mexican market increased 22% over last year. Approximately $1.9 million of the $3.5 million increase in international sales was due to the addition of that portion of the business acquired from IFF that is located in Brazil. In Australia, the Henry Jones Foods business was up 1% in local currency compared to fiscal 2001. The impact of the strong U. S. dollar as compared primarily to the local currencies in Australia, Brazil, and Canada resulted in fiscal 2002 sales being approximately $5.4 million less than they would have been had exchange rates remained constant with exchange rates last year. The Company's gross profit margin was 32.7% in fiscal 2002, compared to 31.8% last year. The cost of products sold for the majority of the Company's businesses was consistent with last year, as raw material costs remained essentially flat. Selling, distribution, and administrative (SD&A) costs were 24.8% of sales, as compared to 24.0% last year. However, if the $5 million of merger and integration costs associated with the "Jif" and "Crisco" merger are excluded, SD&A costs as a percent of sales would have been comparable to last year. The dollar increase in SD&A expenses was primarily due to higher amortization charges associated with previously capitalized information systems implementation costs. Marketing expenses were down 1% from the prior year, primarily due to lower expenditures in the beverage and consumer direct areas. Interest expense increased $1.4 million over the prior year as the long-term debt placement that was completed during the second quarter of fiscal 2001 was on the books for a full year in fiscal 2002. The Company capitalized approximately $0.5 million in interest during fiscal 2002 that was associated with the Company's information technology reengineering project. Also during the year, the Company entered into interest rate swap agreements in order to manage interest rate exposure and lower financing costs. The Company effectively 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 reduced interest expense by approximately $0.6 million in fiscal 2002. The effective income tax rate for the year increased to 38.5% from 36.6% in fiscal 2001 due to a general increase in state and local taxes, foreign income taxes, and other nondeductible expenses. On June 1, 2002, the Company completed its merger of P&G's "Jif" peanut butter and "Crisco" shortening and oils businesses with and into the Company. Under the terms of the transaction, the "Jif" and "Crisco" businesses were contributed by P&G to a wholly-owned subsidiary, the shares of which were then distributed by P&G to its shareholders. That former subsidiary was then merged into the Company with the shareholders of P&G receiving one share of new Company stock for every 50 P&G shares that they held as of the record date for the distribution. Existing Company shareholders received 0.9451 of a new share for each existing share of the Company they held. As a result, 49.5 million shares were issued and are outstanding with the previous P&G shareholders holding approximately 52.5% of the total. The total price of the transaction, based on an average share price of $30 per share (calculated at the time the transaction was announced), was approximately $781 million. Comparison of fiscal 2001 with fiscal 2000 Sales in fiscal 2001 were $651.2 million, up from $641.9 million in fiscal 2000. Domestic sales were $557.9 million, up 1% over fiscal 2000, while the international segment realized an increase of $2.8 million or 3%. Excluding the impact of nonrecurring charges in both years and the cumulative effect of an accounting change in fiscal 2001, earnings for the year were $29.5 million, or $1.16 per share ($1.15 per share, assuming dilution), compared to $35.9 million, or $1.26 per share ($1.25 per share, assuming dilution), in fiscal 2000. Including the impact of nonrecurring charges and change in accounting method, earnings were $27.2 million, or $1.07 per share ($1.06 per share, assuming dilution), in fiscal 2001 compared to $26.3 million, or $0.92 per share ($0.91 per share, assuming dilution), in fiscal 2000. In the domestic segment, the Company's consumer business grew 4%, due primarily to an increase in sales of "Sugar Free" fruit spreads and natural peanut butters, along with growth in the club store channel. The Company also saw 4% growth in its foodservice business, driven in large part by the "Smucker's Uncrustables" line of thaw-and-serve peanut butter and jelly sandwiches in its schools market. Sales of traditional portion control items were flat compared to fiscal 2000. The specialty business was up for fiscal 2001 due primarily to new product sales. In the beverage area, sales of "R. W. Knudsen Family" and "Santa Cruz Organic" products continue to grow. However, overall beverage sales were flat compared to fiscal 2000 due to softness in "After The Fall" brand sales. In the industrial area, domestic sales were below fiscal 2000, as sales with new customers did not fully offset declines in sales with certain existing customers. In the international segment, the increase came from a full year inclusion of the Company's Brazilian operation. The Company's Canadian business performed well, contributing to overall segment performance for the second consecutive year. Sales were negatively impacted by exchange rates and increased competitive activity in the Company's Australian market. Sales in Mexico and the Company's European and Middle East markets were also down. The impact of a strong U.S. dollar, primarily in comparison to the Australian and Canadian dollars, resulted in fiscal 2001 sales being approximately $6.6 million less than they would have been had exchange rates been equal to fiscal 2000 levels. Had exchange rates remained constant, international sales would have been up 10%. The cost of products sold as a percentage of net sales increased to 68.2%, compared to 67.5% in fiscal 2000. During the year, the Company benefited from the lower cost of fruit packed during the summer months. However, these savings were offset by the impact of revaluing carryover fruit inventories (i.e., fruit packed in fiscal 2000) to reflect the current lower cost. The savings were also offset by increased energy costs, which were up 20% over fiscal 2000, and higher freight costs. SD&A expenses increased at approximately the same rate as sales. Marketing expenses were up 7% over fiscal 2000 related to the introduction of new products. This was somewhat offset by a 2% decrease in selling expenses and a less than 1% increase in administrative costs. During the second quarter of fiscal 2001, the Company finalized the sale of the former "Mrs. Smith's" real estate in Pottstown, Pennsylvania, resulting in a pretax loss of approximately $2.1 million, or $0.05 per share. This transaction represented the final nonrecurring charge relating to the previously announced financial review of certain businesses and assets by the Company, initiated in fiscal 2000. The total amount of nonrecurring charges taken in connection with the review was $16.6 million, with $14.5 million of that amount taken in fiscal 2000. Interest expense increased over fiscal 2000 due to the long-term debt placement completed during the second quarter of the fiscal year. During the year, the Company capitalized approximately $0.9 million of interest, primarily associated with the Company's information technology reengineering project. The effective income tax rate for the year was 36.6% compared to 36.5% in fiscal 2000. CAPITAL RESOURCES AND LIQUIDITY
Year Ended April 30, ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities $67,000 $88,196 $32,271 Net cash used for investing activities (20,510) (27,612) (39,818) Net cash (used for) provided by financing activities (5,808) (32,325) 31,254 ------------------------------------------------------------------------------------------------------------------
The financial position of the Company remains strong with an increase in cash and cash equivalents of $40.8 million during the year. The increase in cash and cash equivalents reflects cash generated from operations of $67.0 million. 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% following the merger. Fiscal 2002 capital expenditures were $23.5 million, including capitalized software and consulting costs of $3.9 million. This was down from $29.4 million in the previous year. Other significant uses of cash during the year included the payment of dividends of $0.64 per share or $15.6 million, $5.7 million for the acquisition from International Flavors and Fragrances, Inc., and the payment of merger and integration costs of $5 million. Capital expenditures for fiscal 2003 are budgeted at $59 million, representing a significant increase over the Company's historical levels. While capital expenditures in absolute terms are expected to more than double, the fiscal 2003 capital expenditures budget as a percent of sales is expected to be approximately 4.7% as compared to 3.4% in fiscal 2002. The planned increase in capital expenditures is primarily attributable to (i) building expansion projects at the corporate headquarters in Orrville, Ohio, necessary in order to consolidate functions and to house employees added in connection with the merger, and (ii) spending associated with plans to increase capacity and improve efficiencies in production of "Smucker's Uncrustables". Dividend payments in fiscal 2003 are also expected to increase as a result of the additional number of outstanding shares resulting from the merger of the "Jif" and "Crisco" businesses with and into the Company and a possible increase in the dividend rate. Assuming there are no other 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 fiscal 2003 requirements, including the payment of dividends and interest on outstanding debt. 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 financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. ACCRUED MARKETING AND MERCHANDISING. In order to support the Company's products, various marketing programs are offered to customers which reimburse them for a portion or all of their promotional activities related to the Company's products. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these marketing and merchandising programs based on estimates of what has been incurred by customers. Actual costs incurred by the Company may differ significantly if factors such as the level and success of the customers' programs or other conditions differ from expectations. IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets historically have been reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the 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 to be generated by such assets. If such assets are considered 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. There are no 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. As described below under "Recently Issued Accounting Standards," the accounting treatment for goodwill and other intangible assets will change significantly in fiscal 2003. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS. The measurement of liabilities related to defined benefit pension plans and other postretirement benefit plans is based on management's assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trend rates. Actual pension plan asset performance will either reduce or increase unamortized pension losses at the end of fiscal 2003, which ultimately affects net income. ACCRUED EXPENSES. Management estimates certain material expenses in an effort to record those expenses in the period incurred. The most material accrued estimates relate to insurance-related expenses, including self-insurance. Workers' compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These estimates are based on historical loss development factors. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. OTHER MATTERS. The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities." Transactions with related parties are in the ordinary course of business, are conducted on an arm's-length basis, and are not material to the Company's results of operation, financial condition, or cash flows. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. The adoption of SFAS 141 had no impact on the Company's results of operations or financial condition. SFAS 142 is effective for the Company as of May 1, 2002. In accordance with SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS 142 requires an initial goodwill and indefinite lived intangible asset impairment assessment in the year of adoption, and at a minimum, annual impairment testing thereafter. The discontinuance of goodwill and indefinite lived intangible asset amortization in fiscal 2003 will increase operating income by approximately $3.5 million. The Company has not completed its initial asset impairment assessment as required in adopting SFAS 142. 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. SFAS 144 is effective for the Company as of May 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company's results of operations or financial condition. DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK The following discussions about the Company's market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. INTEREST RATE RISK. The fair value of the Company's cash and short-term investment portfolio, and the fair value of notes receivable and payable at April 30, 2002, approximate carrying value. Interest rate swaps are used to hedge underlying debt obligations and reduce overall interest expense. Market risk, as measured by the change in fair value resulting from a hypothetical 10% change in interest rates, is not material. Based on the Company's overall interest rate exposure as of and during the year ended April 30, 2002, including derivative and other instruments sensitive to interest rates, a hypothetical 10% movement in interest rates (relating to the Company's variable rate borrowings) would not materially affect the Company's results of operations. As of April 30, 2002, the Company had interest rate swap agreements on fixed rate obligations in the amount of $50 million. These exchange agreements are perfectly effective as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and had a fair value of $0.5 million at April 30, 2002. The weighted average interest rate for these agreements was 4.88% at April 30, 2002. FOREIGN CURRENCY EXCHANGE RISK. The Company has concluded that its foreign currency exposure on future earnings or cash flows is not significant, and has currently chosen not to hedge its foreign currency exposure. The Company has operations outside the United States with foreign currency denominated assets and liabilities, primarily denominated in Australian, Brazilian, and Canadian currencies. 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, 2002, are not expected to result in a significant impact on future earnings or cash flows. Revenues from customers outside the United States represented approximately 14% of net sales during fiscal 2002. Thus, certain sales and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations and these fluctuations may have an impact on operating results. CERTAIN FORWARD-LOOKING STATEMENTS This annual 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 success and cost of integrating the "Jif" and "Crisco" businesses into the Company; - the success and cost of new marketing and sales programs and strategies intended to promote new growth in the "Jif" and "Crisco" businesses and in their respective market shares; - 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 from time to time to successfully effect price increases; - the ability to improve sales and earnings performance in the Company's formulated ingredient business; - the exact time frame in which the loss of sales associated with discontinued industrial contracts will occur and the Company's ability to successfully cover or eliminate the overhead associated with those sales; - 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. Report of Independent Auditors 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, 2002 and 2001, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles 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 consolidated financial position of The J. M. Smucker Company at April 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2002, in conformity with accounting principles generally accepted in the United States. As explained in Note B to the consolidated financial statements, the Company has given retroactive effect to a change in the method of accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Ernst & Young LLP Akron, Ohio June 6, 2002 Statements of Consolidated Income The J. M. Smucker Company
Year Ended April 30, ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------- Net sales $ 687,148 $ 651,242 $ 641,885 Cost of products sold 462,157 443,948 432,993 ----------------------------------------------------------------------------------------------------------------------- Gross Profit 224,991 207,294 208,892 Selling, distribution, and administrative expenses 165,172 155,973 153,297 Merger and integration costs 5,031 --- --- Nonrecurring charge --- 2,152 14,492 ----------------------------------------------------------------------------------------------------------------------- Operating Income 54,788 49,169 41,103 Interest income 2,181 2,918 2,706 Interest expense (9,207) (7,787) (3,111) Other income - net 2,436 192 701 ----------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes and Cumulative Effect of Change in Accounting Method 50,198 44,492 41,399 Income taxes 19,347 16,294 15,126 ----------------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Method 30,851 28,198 26,273 Cumulative effect of change in accounting method, net of tax benefit of $572 --- (992) --- ----------------------------------------------------------------------------------------------------------------------- Net Income $ 30,851 $ 27,206 $ 26,273 ======================================================================================================================= Earnings per Common Share: Income Before Cumulative Effect of Change in Accounting Method $ 1.26 $ 1.11 $ 0.92 Cumulative effect of change in accounting method --- (0.04) --- ----------------------------------------------------------------------------------------------------------------------- Net Income per Common Share $ 1.26 $ 1.07 $ 0.92 ======================================================================================================================= Earnings per Common Share--Assuming Dilution: Income Before Cumulative Effect of Change in Accounting Method $ 1.24 $ 1.10 $ 0.91 Cumulative effect of change in accounting method --- (0.04) --- ----------------------------------------------------------------------------------------------------------------------- Net Income per Common Share - Assuming Dilution $ 1.24 $ 1.06 $ 0.91 =======================================================================================================================
See notes to consolidated financial statements. Consolidated Balance Sheets The J. M. Smucker Company
Assets April 30, ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2002 2001 ------------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents $ 91,914 $ 51,125 Trade receivables, less allowance for doubtful accounts 57,371 55,986 Inventories: Finished products 52,817 54,614 Raw materials, containers, and supplies 63,722 59,561 ------------------------------------------------------------------------------------------------------------ 116,539 114,175 Other current assets 13,989 13,956 ------------------------------------------------------------------------------------------------------------ Total Current Assets 279,813 235,242 ------------------------------------------------------------------------------------------------------------ Property, Plant, and Equipment Land and land improvements 16,911 17,684 Buildings and fixtures 87,126 79,862 Machinery and equipment 242,590 247,235 Construction in progress 7,504 17,072 ------------------------------------------------------------------------------------------------------------ 354,131 361,853 Accumulated depreciation (191,342) (190,283) ------------------------------------------------------------------------------------------------------------ Total Property, Plant, and Equipment 162,789 171,570 ------------------------------------------------------------------------------------------------------------ Other Noncurrent Assets Goodwill 33,510 33,788 Other intangible assets 14,825 11,848 Other assets 33,955 26,656 ------------------------------------------------------------------------------------------------------------ Total Other Noncurrent Assets 82,290 72,292 ------------------------------------------------------------------------------------------------------------ $ 524,892 $ 479,104 ============================================================================================================
Liabilities and Shareholders' Equity April 30, ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable $ 32,390 $ 29,967 Salaries, wages, and additional compensation 22,866 15,250 Accrued marketing and merchandising 11,563 8,559 Income taxes 2,078 2,916 Dividends payable 3,979 3,897 Other current liabilities 7,555 7,473 ----------------------------------------------------------------------------------------------------------------- Total Current Liabilities 80,431 68,062 ================================================================================================================= Noncurrent Liabilities Long-term debt 135,000 135,000 Postretirement benefits other than pensions 14,913 14,224 Deferred income taxes 4,105 4,981 Other noncurrent liabilities 10,299 6,052 ----------------------------------------------------------------------------------------------------------------- Total Noncurrent Liabilities 164,317 160,257 ----------------------------------------------------------------------------------------------------------------- Shareholders' Equity Serial Preferred Shares - no par value: Authorized - 3,000,000 shares; outstanding - none --- --- Common Shares - no par value: Authorized - 70,000,000 shares; outstanding - 24,869,463 in 2002 and 24,359,281 in 2001 (net of 7,555,113 and 8,065,295 treasury shares, respectively), at stated value 6,217 6,090 Additional capital 33,184 19,278 Retained income 267,793 253,226 Less: Deferred compensation (2,725) (2,248) Amount due from ESOP Trust (8,562) (8,926) Accumulated other comprehensive loss (15,763) (16,635) ----------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 280,144 250,785 ----------------------------------------------------------------------------------------------------------------- $ 524,892 $ 479,104 =================================================================================================================
See notes to consolidated financial statements. Statements of Consolidated Cash Flows The J. M. Smucker Company
Year Ended April 30, --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 30,851 $ 27,206 $ 26,273 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 23,932 22,521 21,674 Amortization 4,625 4,400 4,524 Nonrecurring charge, net of tax benefit --- 1,313 9,626 Cumulative effect of change in accounting method, net of tax benefit --- 992 --- Deferred income tax expense (benefit) 1,545 2,040 (3,872) Changes in assets and liabilities, net of effect from business acquisitions: Trade receivables (1,217) 5,196 (11,678) Inventories (2,063) 17,326 (6,792) Other current assets (11) 3,830 (733) Accounts payable and accrued items 12,483 10,558 (9,174) Income taxes 25 (1,084) 2,580 Other - net (3,170) (6,102) (157) --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 67,000 88,196 32,271 --------------------------------------------------------------------------------------------------------------------------- Investing Activities Additions to property, plant, and equipment (23,464) (29,385) (32,240) Businesses acquired, net of cash acquired (5,714) --- (9,056) Disposal of property, plant, and equipment 7,060 278 91 Other - net 1,608 1,495 1,387 --------------------------------------------------------------------------------------------------------------------------- Net Cash Used for Investing Activities (20,510) (27,612) (39,818) --------------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt --- 60,000 75,000 Repayment of short-term debt - net --- --- (8,966) Purchase of treasury shares (1,128) (80,964) (17,654) Dividends paid (15,568) (16,686) (17,212) Net amount received from ESOP Trust 364 297 303 Other - net 10,524 5,028 (217) --------------------------------------------------------------------------------------------------------------------------- Net Cash (Used for) Provided by Financing Activities (5,808) (32,325) 31,254 Effect of exchange rate changes on cash 107 (907) (615) --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 40,789 27,352 23,092 Cash and cash equivalents at beginning of year 51,125 23,773 681 --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 91,914 $ 51,125 $ 23,773 ===========================================================================================================================
( ) Denotes use of cash See notes to consolidated financial statements. Statements of Consolidated Shareholders' Equity The J. M. Smucker Company
Amount Accumulated Total Due Other Share- Deferred From Comprehen- holders' Common Additional Retained Compen- ESOP sive Equity (Dollars in thousands) Shares Capital Income sation Trust Loss --------------------------------------------------------------------------------------------------------------------- Balance at May 1, 1999, as $7,290 $15,604 $318,660 $(2,001) $(9,526) $(5,698) $324,329 previously stated Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (see Note B) 7,219 7,219 --------------------------------------------------------------------------------------------------------------------- Balance at May 1, 1999, as restated 7,290 15,604 325,879 (2,001) (9,526) (5,698) 331,548 Net income 26,273 26,273 Foreign currency translation adjustment (3,629) (3,629) ----------- Comprehensive Income 22,644 Purchase of treasury shares (237) (566) (16,851) (17,654) Stock plans 28 1,570 (1,090) 508 Cash dividends declared - $0.61 a share (17,323) (17,323) Tax benefit of stock plans 582 582 Other 303 303 --------------------------------------------------------------------------------------------------------------------- Balance at April 30, 2000 7,081 17,190 317,978 (3,091) (9,223) (9,327) 320,608 Net income 27,206 27,206 Foreign currency translation adjustment (7,308) (7,308) ----------- Comprehensive Income 19,898 Purchase of treasury shares (1,074) (4,027) (75,863) (80,964) Stock plans 83 4,820 843 5,746 Cash dividends declared - $0.64 a share (16,095) (16,095) Tax benefit of stock plans 1,295 1,295 Other 297 297 --------------------------------------------------------------------------------------------------------------------- Balance at April 30, 2001 6,090 19,278 253,226 (2,248) (8,926) (16,635) 250,785 Net income 30,851 30,851 Foreign currency translation adjustment 1,669 1,669 Minimum pension liability (797) (797) ----------- Comprehensive Income 31,723 Purchase of treasury shares (11) (483) (634) (1,128) Stock plans 138 11,590 (477) 11,251 Cash dividends declared - $0.64 a share (15,650) (15,650) Tax benefit of stock plans 2,799 2,799 Other 364 364 --------------------------------------------------------------------------------------------------------------------- Balance at April 30, 2002 $6,217 $33,184 $267,793 $(2,725) $(8,562) $(15,763) $ 280,144 =====================================================================================================================
See notes to consolidated financial statements. Notes to Consolidated Financial Statements The J. M. Smucker Company Note A: Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and accounts are eliminated in consolidation. Financial Instruments: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents. With respect to accounts receivable, 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 (see Note K). 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 $129,470,000 at April 30, 2002. Derivative Financial Instruments: Effective May 1, 2001, the Company adopted Statement of Financial Accounting Standards 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 other 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 results of operations, financial position, or cash flows in fiscal 2002. By policy, the Company has not historically entered into derivative financial instruments for trading purposes or for speculation. The Company has entered into interest rate swap agreements (see Note K). The interest rate swap agreements effectively modify the Company's exposure to interest risk by converting a portion of the Company's fixed-rate debt to a floating rate. Based on criteria defined in SFAS 133, the interest rate swaps are considered fair value hedges and are 100% effective. The interest rate swap and instrument being hedged is marked to market in the balance sheet. 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. 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. Any gains or losses upon the early termination of the interest rate swap contracts would be deferred and recognized over the remaining life of the contract. Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 nonrecurring charges, allowances for doubtful accounts receivable, 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 marketing and merchandising programs, and the determination of discount 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 when products are shipped and title has transferred to the customer. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarified the Staff's view on various revenue recognition and reporting matters. The implementation of SAB 101 was accounted for as a change in accounting method and applied cumulatively as if the change occurred as of May 1, 2000. The effect of the change was a one-time, noncash reduction to the Company's earnings of $992,000 (net of tax of $572,000), or approximately $0.04 per share. Shipping and Handling Costs: Shipping and handling costs are included in cost of products sold. Stock Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized (see Note J). Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method (see Note B). Goodwill and Other Intangible Assets: Goodwill and other intangible assets, principally trademarks and patents, are being amortized using the straight-line method over periods ranging from 5 to 40 years for acquisitions prior to July 1, 2001. During the periods presented, the Company continually evaluated whether events or circumstances occurred which would indicate that the carrying value may not be recoverable or that the useful life warrants revision. When events or circumstances indicated, the Company analyzed the future recoverability of the asset using an estimate of the related undiscounted future cash flows of the related business, and recognized any adjustment to the asset's carrying value on a current basis. Accumulated amortization of goodwill and other intangible assets at April 30, 2002 and 2001, was $34,189,000 and $30,300,000, respectively. Effective May 1, 2002, the Company is required to adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with this standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS 142 requires an initial goodwill and indefinite lived intangible asset impairment assessment in the year of adoption and, at a minimum, annual impairment tests thereafter. The discontinuation of goodwill and indefinite lived intangible asset amortization in fiscal 2003 will increase operating income by approximately $3,500,000. The Company has not completed its initial asset impairment assessment as required in adopting SFAS 142. 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 15 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. Total rental expense in fiscal 2002, 2001, and 2000 totaled $10,430,000, $11,827,000, and $10,242,000, respectively. Rental expense for cold storage facilities, which is based on quantities stored, amounted to $2,324,000, $3,319,000, and $1,490,000 in fiscal 2002, 2001, and 2000, respectively. Software Costs: The Company capitalizes significant costs associated with the development and installation of internal use software. Amounts capitalized are amortized over the estimated useful lives of the software, ranging from 3 to 7 years, beginning with the project's completion. Net capitalized software costs as of April 30, 2002 and 2001, were $28,173,000 and $29,805,000, respectively, of which $3,484,000 and $7,382,000 were included in construction in progress. Interest costs of $524,000, $891,000, and $1,069,000 were capitalized during fiscal 2002, 2001, and 2000, 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 loss. Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $15,525,000, $14,178,000, and $12,855,000 in fiscal 2002, 2001, and 2000, respectively. Recently Issued Accounting Standards: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. The adoption of SFAS 141 had no impact on the Company's results of operations or financial condition. 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. SFAS 144 is effective for the Company as of May 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company's results of operations or financial condition. Reclassifications: Certain prior year amounts have been reclassified to conform to current year classifications. Risks and Uncertainties: In the domestic markets, the Company's products are primarily sold through brokers to food retailers, food wholesalers, club stores, mass merchandisers, military commissaries, health and natural food stores, foodservice distributors and chain operators including hotels and restaurants, schools and other institutions, and to other food manufacturers. The Company's distribution outside the United States is principally in Canada, Australia, Brazil, Mexico, China and the Pacific Rim, Europe, and the Middle East. The fruit raw materials used by the Company are generally purchased from independent growers and suppliers. Because of the seasonal nature and volatility of quantities of most of the crops on which the Company depends, it is necessary to prepare and freeze stocks of fruit and fruit juices and to maintain them in cold storage warehouses. The Company believes there is no concentration of risk with any single customer or supplier whose failure or nonperformance would materially affect the Company's results. In addition, the Company insures its business and assets in each country against insurable risks, as and to the extent that it deems appropriate, based upon an analysis of the relative risks and costs. The Company believes that the risk of loss from noninsurable events would not have a material adverse effect on the Company's operations as a whole. Note B: Change in Accounting Principle During the fourth quarter of fiscal 2002, the Company changed its method of accounting for certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The effect of the change on fiscal 2002 net income and previously reported quarterly results in fiscal 2002 was not significant. The impact of the retroactive restatement on retained earnings as of May 1, 1999, was an increase of $7,219,000. The effect of the change on previously reported net income and per share amounts is as follows:
Year Ended April 30, ------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2001 2000 ------------------------------------------------------------------------------------------------- Net income: Net income, as previously stated using the LIFO method $ 30,667 $ 26,357 Effect of the change to the FIFO method (3,461) (84) ------------------------------------------------------------------------------------------------- Net income, as restated $ 27,206 $ 26,273 ------------------------------------------------------------------------------------------------- Earnings per Common Share: Net income per Common Share, as previously stated using the LIFO method $ 1.21 $ 0.92 Effect of the change to the FIFO method (0.14) --- ------------------------------------------------------------------------------------------------- Net income per Common Share, as restated $ 1.07 $ 0.92 -------------------------------------------------------------------------------------------------
The Company adopted LIFO in fiscal 1977, when it was experiencing significant inflation in the cost of fruit and other raw materials, in order to better match current costs with current revenues. However, during the last ten years, on a cumulative basis, the Company has experienced deflation in fruit costs, primarily resulting from the global sourcing of fruit. The Company believes this trend will continue. The change to FIFO will conform all of the Company's inventory accounting to FIFO and will align the Company's inventory accounting with the majority of consumer product food companies. Further, the change to FIFO will result in an improvement to reporting interim results by eliminating the fluctuations resulting from the need to estimate the Company's fruit costs before the completion of the growing seasons and final pricing by vendors. Note C: Subsequent Event On June 1, 2002, the Company merged the "Jif" peanut butter and "Crisco" shortening 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" and "Crisco" 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 resulting in an aggregate purchase price of approximately $781,000,000 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 acquisition were announced. Upon completion of the merger, the Company had 49,531,376 shares outstanding. The merger and the combination of three brands - "Smucker's", "Jif" and "Crisco" - enhances the Company's strategic and market position. For accounting purposes, the Company is the acquiring enterprise. The merger was accounted for as a purchase business combination. Accordingly, the results of the "Jif" and "Crisco" operations will be included in the Company's fiscal 2003 consolidated financial statements from the date of the merger. The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company will determine the estimated fair values based on independent appraisals, discounted cash flows, quoted market prices, and estimates made by management. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be allocated to goodwill. The following table summarizes the initial estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is preliminary and subject to adjustment following completion of the valuation process. (Dollars in thousands) June 1, 2002 --------------------------------------------------------------------------- Assets: Tangible assets $156,460 Intangible assets not subject to amortization 280,000 Intangible assets subject to amortization (15 year weighted-average useful life) 37,333 Goodwill 454,094 --------------------------------------------------------------------------- Total assets acquired 927,887 =========================================================================== Total liabilities assumed (146,887) =========================================================================== Net assets acquired $781,000 =========================================================================== The $454,094,000 of goodwill relates to the domestic 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 2001, pro forma consolidated results would have been as follows: Year Ended April 30, ------------------------------------------------------------------------------ (Dollars in thousands) 2002 2001 ------------------------------------------------------------------------------ Net sales $1,283,000 $1,267,000 Operating income, excluding indirect expenses of the "Jif" and "Crisco" businesses $235,000 $230,000 ============================================================================== Note D: Operating Segments The Company operates in one industry: the manufacturing and marketing of food products. 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. Food products are distributed through various retail channels including grocery, mass retail, military, club store, health food, and specialty food markets along with restaurants, health care facilities, schools, and other institutions throughout the United States. These products include a variety of fruit spreads, dessert toppings, peanut butters, frozen peanut butter and jelly sandwiches, industrial fruit products, fruit and vegetable juices, beverages, syrups, condiments, and gift packages. The international segment consists of products that are similar in nature to those in the domestic segment but are distributed to geographical markets outside of the United States. The following table sets forth reportable segment information:
Year Ended April 30, ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------------ Net sales: Domestic $ 590,327 $ 557,921 $ 551,324 International 96,821 93,321 90,561 ------------------------------------------------------------------------------------------------------------------------ Total net sales $ 687,148 $ 651,242 $ 641,885 ======================================================================================================================== Depreciation: Domestic $ 21,838 $ 20,484 $ 19,789 International 2,094 2,037 1,885 ------------------------------------------------------------------------------------------------------------------------ Total depreciation $ 23,932 $ 22,521 $ 21,674 ======================================================================================================================== Segment profit: Domestic $ 101,530 $ 87,276 $ 89,570 International 9,949 8,415 10,387 ------------------------------------------------------------------------------------------------------------------------ Total segment profit 111,479 95,691 99,957 ======================================================================================================================== Interest income 2,181 2,918 2,706 Interest expense (9,207) (7,787) (3,111) Amortization expense (4,625) (4,400) (4,524) Nonrecurring charge --- (2,152) (14,492) Corporate administrative expenses (46,681) (39,443) (39,371) Merger and integration costs (5,031) --- --- Other unallocated income (expenses) 2,082 (335) 234 ------------------------------------------------------------------------------------------------------------------------ Income before income taxes and cumulative effect of change in accounting method $ 50,198 $ 44,492 $ 41,399 ======================================================================================================================== Assets: Domestic $ 438,644 $ 402,021 $ 399,237 International 86,248 77,083 78,461 ------------------------------------------------------------------------------------------------------------------------ Total assets $ 524,892 $ 479,104 $ 477,698 ======================================================================================================================== Long-lived assets: Domestic $ 211,380 $ 210,222 $ 207,478 International 33,699 33,640 38,774 ------------------------------------------------------------------------------------------------------------------------ Total long-lived assets $ 245,079 $ 243,862 $ 246,252 ======================================================================================================================== Expenditures for additions to long-lived assets: Domestic $ 26,371 $ 27,714 $ 26,012 International 2,682 1,671 13,824 ------------------------------------------------------------------------------------------------------------------------ Total expenditures for additions to long-lived assets 29,053 29,385 39,836 ======================================================================================================================== Current assets and liabilities included in businesses acquired, net of cash acquired 125 --- 1,460 ------------------------------------------------------------------------------------------------------------------------ Total of additions to property, plant, and equipment and businesses acquired, net of cash acquired $ 29,178 $ 29,385 $ 41,296 ------------------------------------------------------------------------------------------------------------------------
Segment profit represents revenue less direct and allocable operating expenses and excludes pretax nonrecurring charges of $2,152,000, relating to the domestic segment in fiscal 2001 and $13,536,000 and $956,000, relating to the domestic and international segments, respectively in fiscal 2000 (see Note E). The following table presents product sales information: Year Ended April 30, ----------------------------------------------------------------------------- 2002 2001 2000 ----------------------------------------------------------------------------- Fruit spreads 37% 38% 39% Industrial ingredients 16 15 15 Portion control 11 12 12 Juices and beverages 10 10 10 Toppings and syrups 8 9 9 Peanut butter 7 7 7 Other 11 9 8 ----------------------------------------------------------------------------- Total 100% 100% 100% ============================================================================= Note E: Nonrecurring Charge During fiscal 2001, the Company finalized the sale of the Pottstown manufacturing facility, representing a continuation of the Company's divestiture of the "Mrs. Smith's" pie business. In connection with this sale, the Company recorded a nonrecurring, noncash charge of $2,152,000 ($1,313,000 net of tax), or $0.05 per share. This transaction represented the final nonrecurring charge relating to the review of certain businesses and assets as discussed below. During fiscal 2000, the Company recorded a nonrecurring, noncash charge of $14,492,000 ($9,626,000 net of tax), or $0.34 per share. This charge was the result of a financial review by the Company of its businesses and assets, with a focus on those assets considered nonstrategic or underperforming. Approximately $10,700,000 of the charge resulted from the write-down of the carrying value of certain intangible assets, primarily goodwill, resulting from previous acquisitions of the "After The Fall" (ATF) beverage business in fiscal 1994 and "Kraft" brand fruit spreads acquired in fiscal 1997. The impairment charge related to the ATF intangible assets was prompted by a declining sales trend beginning in fiscal 1996 despite attempts by the Company to reverse this trend. The impairment charge related to the "Kraft" intangible assets resulted from sharp sales declines following the Company's relaunch of the products under the "Sunberry Farms" brand. Both of these acquisitions are included in the domestic segment. In addition, certain capitalized costs associated with unused or abandoned software acquired as part of the Company's information technology reengineering project and other abandoned fixed assets were written off. The write-down of the intangible assets was based on the Company's estimate of fair market value using future discounted cash flows projected to be generated by the respective assets under review over their estimated useful lives. Based upon the results of this analysis, the expected useful lives of the assets were reduced from periods ranging from five to forty years, to a range of two to ten years. Note F: Earnings per Share The following table sets forth the computation of earnings per Common Share and earnings per Common Share - assuming dilution:
Year Ended April 30, ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------------ Numerator: Net income for earnings per Common Share and earnings per Common Share - assuming dilution $ 30,851 $ 27,206 $ 26,273 ------------------------------------------------------------------------------------------------------------------------ Denominator: Denominator for earnings per Common Share - weighted-average shares 24,457,194 25,428,117 28,670,770 Effect of dilutive securities: Stock options 336,582 148,698 56,380 Restricted stock 64,297 81,442 23,205 ------------------------------------------------------------------------------------------------------------------------ Denominator for earnings per Common Share - assuming dilution 24,858,073 25,658,257 28,750,355 ======================================================================================================================== Net income per Common Share $ 1.26 $ 1.07 $ 0.92 ======================================================================================================================== Net income per Common Share - assuming dilution $ 1.24 $ 1.06 $ 0.91 ========================================================================================================================
Note G: Mergers and Acquisitions During fiscal 2002, the Company utilized cash on hand to complete one acquisition for $5,714,000. The acquisition was accounted for as a purchase business combination and the results of operations of the acquired company were included in the consolidated results of the Company from the acquisition date. As a result of this acquisition, approximately $1,702,000 in goodwill and $3,887,000 in other intangible assets were recorded in fiscal 2002. As the acquisition occurred subsequent to July 1, 2001, the resulting goodwill was not amortized during fiscal 2002. The other intangible assets are being amortized over their estimated useful life of ten years. During fiscal 2000, the Company utilized cash on hand to complete two acquisitions for a total of $9,056,000. Each of the acquisitions was accounted for as a purchase business combination and the results of operations of the acquired companies were included in the consolidated results of the Company from their respective acquisition dates. As a result of these acquisitions, approximately $2,869,000 in goodwill and $2,213,000 of other intangible assets were recorded in fiscal 2000. Note H: Pensions and Other Postretirement Benefits The Company has pension plans covering substantially all of its domestic employees. Benefits are based on the employee's years of service and compensation. The Company's plans are funded in conformity with the funding 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 substantially all active and retired domestic employees not covered by certain collective bargaining agreements, and their covered dependents and beneficiaries. 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. Net periodic benefit cost included the following components:
Defined Benefit Pension Other Postretirement (Dollars in thousands) Plans Benefits -------------------------------------------------------------------------------------------------------------------------- Year Ended April 30, 2002 2001 2000 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Service cost $ 2,414 $ 2,133 $ 2,216 $ 506 $ 424 $ 513 Interest cost 5,504 5,303 4,668 737 673 717 Expected return on plan assets (6,444) (6,571) (6,053) --- --- --- Amortization of prior service cost (credit) 1,087 1,086 927 (61) (61) (61) Amortization of initial net asset (234) (142) (91) --- --- --- Recognized net actuarial gain (177) (823) (272) (160) (218) (28) -------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 2,150 $ 986 $ 1,395 $1,022 $ 818 $1,141 ==========================================================================================================================
The following table sets forth the combined status of the plans as recognized in the consolidated balance sheets:
Defined Benefit Other Postretirement Pension Plans Benefits ------------------------------------------------------------------------------------------------------------ April 30, April 30, ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at beginning of the year $ 74,898 $ 67,670 $ 9,991 $ 8,560 Service cost 2,414 2,133 506 424 Interest cost 5,504 5,303 737 673 Amendments 197 30 -- -- Actuarial loss 1,457 2,529 887 522 Participant contributions -- -- 193 188 Benefits paid (3,017) (2,767) (526) (376) ------------------------------------------------------------------------------------------------------------ Benefit obligation at end of the year $ 81,453 $ 74,898 $ 11,788 $ 9,991 ============================================================================================================ Change in plan assets: Fair value of plan assets at beginning of the year $ 72,685 $ 74,226 $ -- $ -- Actual return on plan assets (2,499) 510 -- -- Company contributions 1,578 716 333 188 Participant contributions -- -- 193 188 Benefits paid (3,017) (2,767) (526) (376) ------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of the year $ 68,747 $ 72,685 $ -- $ -- ============================================================================================================ Net amount recognized: Funded status of the plans $(12,706) $ (2,213) $(11,788) $ (9,991) Unrecognized net actuarial loss (gain) 1,370 (9,208) (2,433) (3,480) Unrecognized prior service cost (credit) 9,332 10,222 (692) (753) Unrecognized initial asset (765) (999) -- -- ------------------------------------------------------------------------------------------------------------ Net benefit liability recognized $ (2,769) $ (2,198) $(14,913) $(14,224) ============================================================================================================ Prepaid benefit costs $ 5,589 $ 5,582 $ -- $ -- Accrued benefit liability (13,996) (10,239) (14,913) (14,224) Intangible asset 4,410 2,459 -- -- Minimum pension liability 1,228 -- -- -- ------------------------------------------------------------------------------------------------------------ Net benefit liability recognized $ (2,769) $ (2,198) $(14,913) $(14,224) ============================================================================================================ Weighted average assumptions: Discount rate 7.25% 7.50% 7.25% 7.50% Expected return on plan assets 9.00% 9.00% -- -- Rate of compensation increase 4.50% 4.50% -- -- ============================================================================================================
For fiscal 2003, the assumed health care cost trend rates are 8.5% for all participants. The rate for participants under age 65 is assumed to decrease to 5% in 2007. The health care cost trend rate assumption has a significant effect on the amount of the other postretirement benefit obligation and periodic other postretirement benefit 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, 2002:
One Percentage Point ------------------------------------------------------------------------------------------- (Dollars in thousands) Increase Decrease ------------------------------------------------------------------------------------------- Effect on total service and interest cost components $ 270 $ (213) Effect on benefit obligation $ 1,999 $(1,597) ===========================================================================================
The projected benefit obligation and plan assets applicable to pension plans with projected benefit obligations in excess of plan assets was $36,626,000 and $20,065,000, respectively, at April 30, 2002, and $32,876,000 and $19,979,000, respectively, at April 30, 2001. Pension plan assets consist of listed stocks and government obligations, including 336,000 of the Company's Common Shares at April 30, 2002 and 2001. The market value of these shares is $11,659,000 at April 30, 2002. The Company paid dividends of $215,000 on these shares during the year. Prior service costs are being amortized over the average remaining service lives of the employees expected to receive benefits. The Company also charged to operations approximately $958,000, $870,000, and $854,000 in fiscal 2002, 2001, and 2000, respectively, for contributions to foreign pension plans and to plans not administered by the Company on behalf of employees subject to certain labor contracts. These amounts were determined in accordance with foreign actuarial computations and provisions of the labor contracts. The Company is unable to determine its share of either the accumulated plan benefits or net assets available for benefits under such plans. In addition, certain of the Company's active employees participate in multiemployer plans which provide defined postretirement health care benefits. The aggregate amount contributed to these plans, including the charge for net periodic postretirement benefit costs, totaled $1,851,000, $1,719,000, and $1,687,000 in fiscal 2002, 2001, and 2000, respectively. Note I: Savings Plans ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust (ESOP) for domestic, nonrepresented 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 1,200,000 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 1/2% over prime and are payable as shares are allocated to participants. Interest incurred on ESOP debt was $538,000, $768,000, and $846,000 in fiscal 2002, 2001, and 2000, respectively. Contributions to the plan are made annually in amounts sufficient to fund ESOP debt repayment. Dividends on unallocated shares are used to reduce expense and were $336,000, $362,000, and $363,000 in fiscal 2002, 2001, and 2000, respectively. The principal payments received from the ESOP in fiscal 2002, 2001, and 2000 were $364,000, $297,000, and $303,000, respectively. As permitted by Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans (SOP 93-6), 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, 2002, the ESOP held 525,048 unallocated shares. All shares held by the ESOP were considered outstanding in earnings per share calculations for all periods presented. 401(k) Plan: The Company offers employee savings plans under Section 401(k) of the Internal Revenue Code for all domestic 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 fiscal 2002, 2001, and 2000 were $1,445,000, $1,421,000, and $1,193,000, respectively. Note J: Stock Benefit Plans The Company provides for equity-based incentives to be awarded to key employees through the 1998 Equity and Performance Incentive Plan, the Restricted Stock Bonus Plan adopted in 1979, and the 1987 Stock Option Plan, and to nonemployee directors through the Nonemployee Director Stock Option Plan adopted in fiscal 2002. 1998 Equity and Performance Incentive Plan: This plan provides for the issuance of stock options and restricted stock, which may include performance criteria, as well as stock appreciation rights, deferred shares, and performance shares. At April 30, 2002, there are 797,522 Common Shares available for future issuance under this plan. Of this total amount available for issuance, the amount of restricted stock available for issuance is limited to 436,700 Common Shares. Restricted stock issued under this plan is 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. All restricted shares issued to date under the plan are subject to a four-year forfeiture period. Options granted under this plan become exercisable at the rate of one-third per year, beginning 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. Restricted Stock Bonus Plan: Shares awarded under this plan contain certain restrictions for four years relating, among other things, to forfeiture in the event of termination of employment and to transferability. Shares awarded are issued as of the date of the award and a deferred compensation charge is recorded at the market value of the shares on the date of the award. The deferred compensation charge is recognized as expense over the period during which restrictions are in effect. There are no Common Shares available for future issuance under this plan. In fiscal 2002 and 2000, 49,200 and 82,000 Common Shares were awarded under this plan, respectively. No awards were granted in fiscal 2001. 1987 Stock Option Plan: Options granted under this plan become exercisable at the rate of one-third per year, beginning 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. There are 554,827 Common Shares available for future grant under this plan. Nonemployee Director Stock Option Plan: This plan provides for the issuance of 1,500 stock options to nonemployee directors annually, on September 1 of each year. Options granted under this plan become 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. There are 100,000 Common Shares available for future grant under this plan. No grants were made under this plan in fiscal 2002 due to the pending "Jif" and "Crisco" transaction. As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), the Company has elected to account for the stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). If compensation costs for the stock options granted in fiscal 2002, 2001, and 2000 had been determined based on the fair market value method of SFAS 123, the Company's pro forma net income and earnings per share would have been:
Year Ended April 30, ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2002 2001 2000 ---------------------------------------------------------------------------------------------------------- Net income As reported $30,851 $27,206 $26,273 Pro forma 29,790 26,018 25,229 Net income per Common Share As reported $1.26 $1.07 $0.92 Pro forma 1.22 1.02 0.88 Net income per Common Share - assuming dilution As reported $1.24 $1.06 $0.91 Pro forma 1.20 1.01 0.88 ==========================================================================================================
The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Year Ended April 30, ------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------ Average expected term (years) 5 5 Risk-free interest rate 5.75% 6.20% Dividend yield 2.60% 2.50% Volatility 27.00% 26.00% ------------------------------------------------------------------------------ Fair value of options granted $ 6.13 $ 5.22 ============================================================================== A summary of the Company's stock option activity, and related information follows:
Weighted- Average Exercise Options Price ---------------------------------------------------------------------------------------- Outstanding at May 1, 1999 2,525,702 $21.41 Granted 409,000 18.22 Exercised (245,734) 18.50 Forfeited (47,000) 18.78 ---------------------------------------------------------------------------------------- Outstanding at April 30, 2000 2,641,968 $21.24 Granted 411,000 23.63 Exercised (562,261) 18.45 Forfeited (178,324) 23.93 ---------------------------------------------------------------------------------------- Outstanding at April 30, 2001 2,312,383 $22.13 Granted --- --- Exercised (614,832) 23.59 Forfeited (31,135) 29.90 ---------------------------------------------------------------------------------------- Outstanding at April 30, 2002 1,666,416 $21.45 Exercisable at April 30, 2000 1,918,301 $21.66 Exercisable at April 30, 2001 1,558,282 $22.41 Exercisable at April 30, 2002 1,298,028 $21.28 ========================================================================================
The following table summarizes the range of exercise prices and weighted-average exercise prices for options outstanding and exercisable at April 30, 2002, under the Company's stock benefit plans:
Weighted- Weighted- Average Weighted- Average Remaining Average Range of Exercise Contractual Exercise Exercise Prices Outstanding Price Life (years) Exercisable Price -------------------------------------------------------------------------------------------------------------- $15.94--$23.00 866,762 $18.90 5.9 758,031 $18.99 $23.01--$31.50 799,654 $24.21 6.0 539,997 $24.49 ==============================================================================================================
The following table summarizes the Company's stock benefit plans in two categories - plans that have been approved by shareholders, and plans that have not:
Number of Common Number of Common Shares Shares to be issued Weighted-average available for future upon exercise of exercise price of issuance under equity Plan Category outstanding options outstanding options compensation plans ------------------------------------------------------------------------------------------------------------------- Stock benefit plans approved by shareholders 1,666,416 $21.45 1,452,349 Stock benefit plans not approved by shareholders --- --- --- ------------------------------------------------------------------------------------------------------------------ Total stock benefit plans 1,666,416 $21.45 1,452,349 ==================================================================================================================
Note K: Long-Term Debt and Financing Arrangements Long-term debt consists of the following:
April 30, -------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 -------------------------------------------------------------------------------------- 6.77% Senior Notes due June 1, 2009 $ 75,000 $ 75,000 7.70% Series A Senior Notes due September 1, 2005 17,000 17,000 7.87% Series B Senior Notes due September 1, 2007 33,000 33,000 7.94% Series C Senior Notes due September 1, 2010 10,000 10,000 -------------------------------------------------------------------------------------- Total long-term debt $135,000 $135,000 ======================================================================================
The notes are unsecured and interest is paid semiannually. Among other restrictions, the note purchase agreements contain 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. During fiscal 2002, 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 with an effective interest rate of 4.88% at April 30, 2002. 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 $508,000 at April 30, 2002, with the corresponding adjustment to long-term debt included in other noncurrent liabilities. The fair value of interest rate swap agreements, obtained from the respective financial institutions, is based on current rates of interest and is computed as the net present value of the remaining exchange obligations under the terms of the contract. Interest paid totaled $9,800,000, $8,328,000, and $2,293,000 in fiscal 2002, 2001, and 2000, respectively. Financing arrangements: The Company has uncommitted lines of credit providing up to $90,000,000 for short-term borrowings. No amounts were outstanding at April 30, 2002. The interest rate to be charged on any outstanding balance is based on prevailing market rates. Note L: Income Taxes Deferred income taxes reflect the net 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:
April 30, --------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 --------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $10,150 $12,639 Software and other deferred expenses 4,898 3,242 Change in inventory accounting method 1,769 --- Other (each less than 5% of total liabilities) 1,782 658 --------------------------------------------------------------------------------------------- Total deferred tax liabilities 18,599 16,539 ============================================================================================= Deferred tax assets: Postretirement benefits other than pensions 6,136 6,034 Other employee benefits 5,091 4,679 Intangible assets 3,337 3,396 Other (each less than 5% of total assets) 4,039 4,003 --------------------------------------------------------------------------------------------- Total deferred tax assets 18,603 18,112 Valuation allowance for deferred tax assets (1,560) (1,522) --------------------------------------------------------------------------------------------- Total deferred tax assets less allowance 17,043 16,590 ============================================================================================= Net deferred tax (liability) asset $(1,556) $ 51 =============================================================================================
The Company has recorded a valuation allowance related to certain foreign deferred tax assets due to the uncertainty of their realization. Domestic income and foreign withholding taxes have not been recorded on undistributed earnings of foreign subsidiaries since these amounts are considered to be permanently reinvested. Any additional taxes payable on the earnings of foreign subsidiaries, if remitted, would be partially offset by domestic tax credits and deductions for foreign taxes already paid. Income before income taxes and cumulative effect of change in accounting method is as follows:
Year Ended April 30, ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------- Domestic $44,668 $40,809 $36,584 Foreign 5,530 3,683 4,815 ---------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting method $50,198 $44,492 $41,399 ======================================================================================================================
The components of the provision for income taxes are as follow:
Year Ended April 30, ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------- Current: Federal $13,447 $10,681 $15,000 Foreign 2,449 1,938 2,048 State and local 1,906 1,635 1,950 Deferred 1,545 2,040 (3,872) ---------------------------------------------------------------------------------------------------------------------- Total income tax expense $19,347 $16,294 $15,126 ======================================================================================================================
A reconciliation of the statutory federal income tax rate and the effective income tax rate follows:
Percent of Pretax Income Year Ended April 30, -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in income taxes resulting from: State and local income taxes, net of federal income tax benefit 2.5 2.1 3.1 Research credits (1.9) (0.8) (1.6) Other items 2.9 0.3 --- -------------------------------------------------------------------------------------------------------------------------- Effective income tax rate 38.5% 36.6% 36.5% ========================================================================================================================== Income taxes paid $15,736 $17,792 $19,761 ==========================================================================================================================
Note M: Common Shares Reclassification of Common Shares: In August 2000, the Company combined its Class A and Class B Common Shares into a single class of common shares with terms similar to the former Class A Common Shares. In conjunction with this combination, on August 28, 2000, the Company repurchased 4,272,524 Common Shares at $18.50 per share. The Company incurred approximately $1,363,000 of cost related to the combination and repurchase of Common Shares. Such costs were recorded as a reduction of shareholders' equity. Voting: The Company's Amended Articles of Incorporation provide that holders of the Company's Common Shares generally will be entitled to cast one vote per share on matters submitted to a vote of the shareholders. There are certain matters specified in the Amended Articles (including any matters that relate to or would result in the dissolution or liquidation of the Company; the amendment of the articles of incorporation or regulations of the Company other than any amendment that increases the number of votes to which holders of new Common Shares are entitled or expand the matters to which time phase voting applies; any proposal or other action to be taken by shareholders relating to the Company's shareholder rights plan or any successor plan; any matter relating to any benefit, stock option, compensation, or other similar plan; any matter that relates to or may result in a change in control of the Company including any merger, consolidation, majority share acquisition, control share acquisition, sale or other disposition of all, or substantially all, of the Company's assets; or any matter relating to the issuance, redemption, or repurchase of shares of the Company or any of its subsidiaries), however, with respect to which parties acquiring the Company's Common Shares will be entitled to cast one vote per share until they have held their shares for four years, after which time they will be entitled to cast ten votes per share on those specified matters. Shareholders' Rights Plan: Pursuant to a shareholders' rights plan established during fiscal 1999, each of the Company's Common Shares outstanding carries a share purchase right issued as a result of a dividend distribution declared by the Company's Board of Directors in April 1999 and distributed to shareholders of record on May 14, 1999. 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% 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. Management's Report on Responsibility for Financial Reporting 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 accounting principles generally accepted in the United States and is based on our best estimates and judgments. The Company maintains systems of internal accounting controls supported by formal policies and procedures which are communicated throughout the Company. There is an extensive program of audits performed by the Company's internal audit staff and independent auditors designed to evaluate the adequacy of and adherence to these controls, policies, and procedures. Ernst & Young LLP, independent auditors, has audited the Company's financial statements. Management has made all financial records and related data available to Ernst & Young LLP during its audit. The Company's audit committee, comprising three nonemployee members of the Board, meets regularly with the independent auditors and management to review the work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the independent auditors. 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 internal 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 Steven J. Ellcessor Chairman and Co-Chief Vice President -- Finance and Executive Officer Administration, Secretary, and Chief Financial Officer