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, 2004. 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 Liquidity and
Capital Resources" and the consolidated financial statements and notes thereto.
Year Ended April 30,
-----------------------------------------------------------------
(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ----------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income:
Net sales $1,417,011 $ 1,311,744 $ 687,148 $ 651,242 $ 641,885
Income before cumulative effect of change in
accounting method $ 111,350 $ 96,342 $ 30,851 $ 28,198 $ 26,273
Cumulative effect of change in accounting method --- --- --- (992) ---
---------- ----------- ---------- ---------- ----------
Net income $ 111,350 $ 96,342 $ 30,851 $ 27,206 $ 26,273
========== =========== ========== ========== ==========
Financial Position:
Long-term debt $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 75,000
Total assets 1,684,125 1,615,407 524,892 479,104 477,698
Shareholders' equity 1,210,693 1,124,171 280,144 250,785 320,608
========== =========== ========== ========== ==========
Other Data:
Earnings per common share:
Income before cumulative effect of change in
accounting method $ 2.24 $ 2.04 $ 1.33 $ 1.17 $ 0.97
Cumulative effect of change in accounting method --- --- --- (0.04) ---
---------- ----------- ---------- ---------- ----------
Net income $ 2.24 $ 2.04 $ 1.33 $ 1.13 $ 0.97
========== =========== ========== ========== ==========
Income before cumulative effect of change in
accounting method - assuming dilution $ 2.21 $ 2.02 $ 1.31 $ 1.16 $ 0.97
Cumulative effect of change in accounting
method - assuming dilution --- --- --- (0.04) ---
---------- ----------- ---------- ---------- ----------
Net income - assuming dilution $ 2.21 $ 2.02 $ 1.31 $ 1.12 $ 0.97
========== =========== ========== ========== ==========
Dividends declared per common share $ 0.94 $ 0.83 $ 0.68 $ 0.68 $ 0.65
========== =========== ========== ========== ==========
- 1 -
Summary of Quarterly Results of Operations
The following is a summary of unaudited quarterly results of operations for the
years ended April 30, 2004 and 2003.
(Dollars in thousands, except per share data)
Net Net Income
Income per Common
per Share -
Quarter Net Gross Net Common Assuming
Ended Sales Profit Income Share Dilution
- ---- ---------------- --------- --------- -------- ------ ----------
2004 July 31, 2003 $ 350,307 $ 120,699 $ 25,785 $ 0.52 $ 0.51
October 31, 2003 385,998 135,229 32,067 0.64 0.64
January 31, 2004 355,297 129,408 31,318 0.63 0.62
April 30, 2004 325,409 107,442 22,180 0.44 0.44
---------------- --------- --------- -------- ------ ------
2003 July 31, 2002 $ 274,936 $ 92,352 $ 16,017 $ 0.39 $ 0.39
October 31, 2002 366,975 126,412 29,087 0.59 0.58
January 31, 2003 340,826 122,931 27,993 0.56 0.56
April 30, 2003 329,007 114,386 23,245 0.47 0.46
================ ========= ========= ======== ====== ======
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.
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 approximately 477,420
shareholders as of the June 14, 2004 record date, of which 129,565 were
registered holders of common shares.
Quarter Ended High Low Dividends
---------------- ------- ------- ---------
2004 July 31, 2003 $ 42.01 $ 35.64 $ 0.23
October 31, 2003 43.82 37.61 0.23
January 31, 2004 47.56 43.10 0.23
April 30, 2004 53.50 46.03 0.25
---------------- ------- ------- ------
2003 July 31, 2002 $ 37.50 $ 28.71 $ 0.20
October 31, 2002 38.84 32.03 0.20
January 31, 2003 42.25 33.30 0.20
April 30, 2003 40.80 33.00 0.23
================ ======= ======= ======
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
On June 18, 2004, the Company completed its acquisition of Minneapolis-based
International Multifoods Corporation (Multifoods). Multifoods' primary brands in
the United States include Pillsbury baking mixes and ready-to-spread frostings;
Hungry Jack pancake mixes, syrup, and potato side dishes; Martha White baking
mixes and ingredients; and Pet evaporated milk and dry creamer. In Canada,
Multifoods has market leadership positions with Robin Hood flour and baking
mixes, and Bick's pickles and condiments. This transaction will be accounted for
as a purchase business combination.
The operating results and financial position of the Company after the
acquisition are expected to be significantly different from those reported in
this annual report, including Management's Discussion and Analysis and the
consolidated financial statements. See Note B to the consolidated financial
statements for additional information on the acquisition and pro forma financial
information of the combined Company.
NET SALES
The following table presents net sales information.
Year Ended April 30,
------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------ ---------- ---------- ----------
U.S. retail market:
Smucker's brand $ 327,696 $ 293,140 $ 278,472
Jif and Crisco brands 631,607 553,394 ---
Other brands 43,003 43,337 45,164
---------- ---------- ----------
Total U.S. retail market $1,002,306 $ 889,871 $ 323,636
========== ========== ==========
Special markets $ 414,705 $ 421,873 $ 363,512
========== ========== ==========
Total net sales $1,417,011 $1,311,744 $ 687,148
========== ========== ==========
Sales in 2004 increased $105.3 million, or eight percent, from 2003. The Jif and
Crisco brands contributed $85.0 million of the increase in 2004. Net sales for
2004 benefited from one additional month of Jif and Crisco sales totaling $47.3
million, as the merger closed on June 1, 2002, one month into the 2003 fiscal
year. Other factors favorably impacting sales in 2004 were foreign exchange
rates and price increases in the shortening and oils business.
In the U.S. retail market segment, sales were $1,002.3 million in 2004, up
$112.4 million, or nearly 13 percent, from 2003. Jif and Crisco contributed
nearly 70 percent of the overall 2004 sales increase for the segment. Smucker's
branded sales also had strong growth during 2004, up 12 percent over 2003, as
the Company realized increased sales in its fruit spreads and natural peanut
butter categories. In addition, sales of Uncrustables increased significantly in
2004 as the Company completed its national rollout. The only area within the
segment realizing declines during 2004 was specialty foods, which was down three
percent due to a planned decrease in nonbranded business.
- 3 -
The special markets segment is comprised of the international, foodservice,
beverage, and industrial business areas. Sales in this segment were $414.7
million in 2004 compared to $421.9 million in 2003, a decrease of two percent.
This decline reflects the planned exit of certain low-margin contracts in both
the industrial and foodservice business areas. Excluding these planned
decreases, the special markets segment would have been up five percent in 2004.
Sales in 2004 were up in the international, beverage, and foodservice areas,
while sales in the industrial area were down from 2003.
In the international area, sales were up 14 percent in 2004 from 2003 due
primarily to favorable exchange rates, which contributed approximately $16.5
million to the overall sales growth of $17.2 million. As measured in local
currency, Canadian sales were strong, up eight percent in 2004, due primarily to
the impact of the additional month of Crisco sales. Sales of Henry Jones Foods
(HJF) in Australia were up six percent in 2004 due primarily to a growth in
sales to industrial customers. Sales in Mexico and Latin America experienced
strong growth in 2004 with the entire market up over 20 percent from 2003. All
other regions, including Brazil and Scotland, and other export markets were down
from 2003.
In the foodservice area, 2004 sales were up three percent from 2003 due to a six
percent growth in traditional portion control items, primarily under the
Smucker's brand, and increased sales in the schools market. Sales of
Uncrustables increased 39 percent in 2004 in the schools market despite capacity
constraints that were experienced during much of the year. Effective May 2003,
the Company discontinued its role as master distributor for the Lea & Perrins
brand. This decision resulted in the reduction in 2004 of approximately $8
million of sales that had been included in 2003. Excluding this impact, sales in
the foodservice area were up 11 percent in 2004.
Beverage area sales were up eight percent in 2004, due primarily to strong
growth in its nonbranded business, which was up nearly 40 percent. Sales of R.W.
Knudsen Family and Santa Cruz Organic products also were up nine and 14 percent,
respectively, for 2004, while sales of After The Fall declined 20 percent as a
result of the strategic decision to regionalize this brand.
Finally, sales in the Company's industrial business were down 34 percent for
2004. Approximately half of this decline, or $20 million in sales, was the
result of planned decreases associated with the strategic decision to exit
certain low-margin contracts. The remaining shortfall was caused by softness in
sales of bakery ingredients.
Overall, Company sales in 2003 were $1,311.7 million, up 91 percent, compared to
$687.1 million in 2002. The Jif and Crisco brands contributed $571.0 million to
2003 sales from the close of the transaction on June 1, 2002. Excluding the Jif
and Crisco contribution, sales increased $53.6 million or eight percent over
2002. Sales in the U.S. retail market segment were $889.9 million in 2003, up
$566.3 million, while special markets segment sales were $421.8 million compared
to $363.5 million in 2002.
In the U.S. retail market segment, Jif and Crisco contributed nearly 98 percent
of the overall 2003 sales increase for the segment. Sales of Smucker's branded
products increased five percent for 2003 as the Company realized increased sales
in its fruit spreads, toppings, natural peanut butter, and Goober categories.
The retail rollout
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during 2003 of Uncrustables to 70 percent of the country also contributed to the
segment's growth. The only area within the segment realizing a decline during
2003 was specialty foods, which was down nine percent.
In the Company's special markets, sales in 2003 were up 16 percent over 2002
with all business areas recording an increase in sales. In foodservice, sales in
2003 were up 16 percent due to a combination of growth in Smucker's traditional
portion control items and continued growth of sales of Uncrustables in the
schools market. International sales were up 26 percent in 2003 due primarily to
the addition of Crisco in the Canadian market. Excluding Jif and Crisco,
Canada's sales increased six percent as measured in local currency. The Canadian
business was favorably impacted by exchange rates throughout 2003 as sales were
up nine percent in U.S. dollars, excluding the impact of Jif and Crisco sales.
In Australia, HJF sales were up eight percent in U.S. dollars for 2003, but
relatively flat in local currency due to competitive activity in the fruit
spreads category. In Brazil, sales in 2003 were up over 61 percent in local
currency, but up 21 percent in U.S. dollars due to an unfavorable exchange rate
impact. On the whole, exchange rates did not have a significant impact on
international results in 2003, but they did fluctuate widely by country. Export
sales increased 14 percent in 2003 due to increases in Latin America.
Beverage area sales were up 23 percent over 2002, due primarily to increased
sales of R.W. Knudsen Family and Santa Cruz Organic products and the success of
new products introduced early in the 2003 fiscal year. Finally, sales in the
Company's industrial business were up two percent for 2003, despite the planned
loss of approximately $21 million in sales resulting from the strategic decision
to exit certain low-margin contracts. Helping to offset this loss was the full
year inclusion of sales from the International Flavors & Fragrances Inc.
business, acquired in October 2001.
OPERATING INCOME
The following table presents components of operating income as a percentage of
net sales.
Year Ended April 30,
------------------------
2004 2003 2002
------ ------ ------
Gross profit 34.8% 34.8% 32.7%
Selling, distribution, and administrative:
Advertising (3.9) (3.5) (2.3)
Marketing and selling (7.8) (8.1) (9.9)
Distribution (2.0) (2.1) (1.9)
General and administrative (7.9) (7.6) (9.9)
----- ----- -----
Total selling, distribution, and administrative (21.6)% (21.3)% (24.0)%
===== ===== =====
Restructuring and merger and integration (0.6)% (1.0)% (0.7)%
----- ----- -----
Operating income 12.6% 12.5% 8.0%
===== ===== =====
- 5 -
Operating income increased $14.1 million for 2004, or nine percent, over 2003
while operating margin remained relatively unchanged at 12.6 percent compared to
12.5 percent. Included in 2004 operating income was approximately $17.1 million
of restructuring and merger related costs, while 2003 included $13.0 million of
similar charges. Positive contributors to operating income in 2004 included
margins earned on the additional month of Jif and Crisco sales in May and the
overall growth of the higher margin U.S. retail segment. The Company's gross
margin was 34.8 percent in 2004 and 2003. Strong margins in fruit spreads,
peanut butter, and beverage were offset by higher soybean oil costs in
shortening and oils.
Selling, distribution, and administrative (SD&A) expenses increased nine percent
in 2004 and increased as a percent of net sales to 21.6 percent from 21.3
percent. The Company increased its marketing expense by ten percent during 2004
in support of Jif and Crisco and the retail rollout of Uncrustables. Other
factors contributing to the increase in SD&A during 2004 were overall higher
employee benefit costs, notably pension and health care, legal fees, and outside
services. These were somewhat offset by selling and distribution expenses which
increased at a rate less than sales.
In 2003, operating income was $164.5 million, or 12.5 percent of sales, for the
year representing a significant increase in both dollars and as a percentage of
sales compared to 2002. This increase was attributable to improvements in both
gross margin and lower SD&A, as a percent of sales. The Company's gross margin
was 34.8 percent in 2003, compared to 32.7 percent in 2002. The addition of the
higher margin Jif and Crisco businesses and the impact of lower peanut costs
resulting from the 2002 Farm Bill drove the overall improvement in gross margin
during 2003. Excluding Jif and Crisco, cost of products sold for the remainder
of the business was constant with 2002, as raw material costs remained
essentially flat.
SD&A costs were 21.3 percent and 24.0 percent of sales in 2003 and 2002,
respectively. The improvement in the expense ratio during 2003 reflects the
impact of the Jif and Crisco merger where the Company has been able to utilize
its existing administrative infrastructure and thus allocate costs over a
broader revenue base. This reduction in SD&A as a percent of sales was in-line
with the Company's expectations from the merger. Marketing expenses increased at
a greater rate than sales in 2003 as the Company implemented its strategic plans
to increase support for both the Jif and Crisco brands and to accelerate its
rollout of Uncrustables.
As of May 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, and in accordance with
this pronouncement, goodwill and indefinite-lived intangible assets are not
amortized but are reviewed at least annually for impairment. The adoption of
this standard resulted in a decrease in 2003 SD&A costs of approximately $3.5
million compared to 2002.
INTEREST INCOME AND EXPENSE
Interest expense decreased $2.4 million in 2004 due to an increase in interest
capitalized during the year and the effect of interest rate swaps associated
with the Company's long-term debt. The increase in capitalized interest was
related to the construction of the Uncrustables facility in Scottsville,
Kentucky. The impact of the swaps
- 6 -
reduced interest expense by $2.1 million in 2004. Interest income increased by
$1.3 million in 2004 due to an increase in the average investment balance and a
change in the Company's investment policy, which allowed the Company to take
advantage of higher yielding investment instruments.
In 2003, interest expense decreased $0.5 million from 2002, also as a result of
favorable interest rate swaps, which lowered expense by $1.4 million. This was
offset by a decrease in capitalized interest of $0.1 million during 2003
compared to the amount capitalized in 2002 of $0.5 million. Interest income
decreased slightly in 2003 despite an overall increase in investment balances
due to lower interest rates throughout the year.
OTHER INCOME AND EXPENSE
In 2004, other income (net) was $3.1 million, which included the $2.1 million
gain recognized on the sale of the Watsonville, California, facility (see
Restructuring). In 2003, other expense (net) included a write down of certain
minor equity investments to their estimated fair value. The amount of the write
down included in other expense (net) was $1.4 million.
INCOME TAXES
Income taxes in 2004 were $67,469, up $8,421, or 14 percent, from 2003. The
increase is due primarily to an increase in pretax earnings of $23,429, or 15
percent. The consolidated effective income tax rate in 2004 was 37.7 percent,
compared to 38.0 percent in 2003. The reduction in the effective tax rate was
due primarily to benefits realized from the organizational restructuring
associated with the Jif and Crisco merger.
Income taxes in 2003 were $59,048, up $39,701, or 205 percent, from 2002 due
primarily to an increase in pretax earnings of $105,192, or 210 percent. The
consolidated effective tax rate was 38.0 percent in 2003, compared to 38.5
percent in 2002. The reduction in the effective tax rate was primarily due to
the Company's adoption of SFAS 142 on May 1, 2002.
RESTRUCTURING
During 2003, the Company announced plans to restructure certain operations as
part of its ongoing efforts to optimize its production capacity, improve
productivity and operating efficiencies, and lower the Company's overall cost
base. These initiatives included reducing the Company's involvement in fruit
processing, centralizing production and distribution of Uncrustables, and
reducing the number of stock keeping units (SKU) produced by the Company. As a
result of the plan, the Company expected to record a restructuring charge of
approximately $18 million, to be recognized through 2005. Included in the
restructuring charge were expected cash outlays of approximately $12 million
that relate primarily to employee separation costs and equipment relocation
expenses. The Company estimated that the annual pretax benefit from the plan
would be approximately $10 million upon full implementation in 2006. These
benefits represent a combination of eliminated overhead related to the closed
facilities and a reduction in Uncrustables operating costs. At the end of 2004,
these restructurings were
- 7 -
proceeding as planned. During 2004, the Company closed down its fruit processing
operations at both its Watsonville, California, and Woodburn, Oregon, facilities
and subsequently sold these facilities. Space within the Watsonville facility is
being leased back from the buyer until Uncrustables production is closed down at
this facility. The Company plans to discontinue Uncrustables production at its
Watsonville site and close its West Fargo, North Dakota, facility during 2005.
In Ripon, Wisconsin, the Company completed the combination of its two
manufacturing facilities into one expanded site. In the area of SKU reduction,
the Company has eliminated over 80 percent of the total items identified.
In addition to the plan discussed above, during the fourth quarter of 2004 the
Company undertook another restructuring program to streamline its operations in
Europe and the United Kingdom. This included the exit of a contract packaging
arrangement and certain segments of the retail business in Europe and the United
Kingdom, which generated annual sales of approximately $3 million. The Company
will continue to manufacture industrial fruit products at its facility located
in Scotland. This restructuring will be completed during the first quarter of
2005.
In conjunction with the restructurings, the Company has recorded a total charge
of $18.3 million, of which $2.5 million was recorded in 2003 and $15.8 million
in 2004. The Company estimates that it will incur an additional $3 million in
2005 related to these programs. The majority of these charges related to
employee separation costs, accelerated depreciation on machinery and equipment,
equipment relocation expenses, and the disposition of inventories. To date, cash
payments related to the restructuring charges have been approximately $4.3
million. The remaining cash payments, estimated to be approximately $7 million,
will be paid through 2005.
SUBSEQUENT EVENTS
On June 18, 2004, the Company completed its acquisition of Multifoods in a
transaction valued at approximately $850 million. The transaction was paid in
approximately 8 million shares of Company common stock valued at approximately
$387 million, cash of approximately $98 million, the assumption of $200 million
of debt, and the payoff of $152 million of Multifoods' existing secured debt.
Available cash and proceeds of new debt issued were used to fund the cash
requirements of the acquisition. Under the terms of the agreement, Multifoods'
shareholders received $25 per share in a combination of 80 percent stock and 20
percent cash.
On May 10, 2004, the Company entered into an agreement to sell HJF to SPC
Ardmona Ltd., an Australian food company, in an all cash transaction. The
transaction closed during the first quarter of 2005, resulting in net proceeds
of approximately $35.7 million and a net gain of approximately $9.5 million.
Results of HJF's operations are included in the international business area of
the Company's special markets. During 2004, HJF contributed approximately $37
million in sales and $3 million in operating income.
- 8 -
LIQUIDITY AND CAPITAL RESOURCES
Year Ended April 30,
-----------------------------------
(Dollars in thousands) 2004 2003 2002
--------- --------- ---------
Net cash provided by operating activities $ 125,936 $ 167,600 $ 69,799
Net cash used for investing activities $(162,539) $ (52,979) $ (20,510)
Net cash used for financing activities $ (40,038) $ (28,419) $ (8,607)
========= ========= =========
The Company's principal source of funds is cash generated from operations. Due
to an increase in cash generated from operations since the Jif and Crisco
merger, the Company expanded its range of investments during the year beyond
cash and cash equivalents. For comparative purposes, total cash and investments
were $163.3 million at April 30, 2004, compared to $181.2 million at April 30,
2003. Under the Company's investment policy, it will invest in securities deemed
to be investment grade. Currently, these investments are defined as
government-backed mortgage obligations, corporate bonds, municipal bonds, and
commercial paper.
Cash provided by operations was nearly $125.9 million in 2004, compared to
$167.6 million last year. The decrease in cash from operations was primarily due
to an increase in the use of cash necessary to support working capital
requirements. Working capital, excluding cash and investments, increased from
$118.2 million at April 30, 2003, to $128.7 million at April 30, 2004. The
primary cause for the increase was higher inventory balances resulting from the
increase in soybean costs both in raw materials and finished goods and general
growth in the business. In addition, the Company made contributions to its
qualified and nonqualified pension plans totaling approximately $12 million.
Net cash used for investing activities in 2004 included a record year of capital
expenditures of $100.1 million, up from $49.5 million in the previous year. The
majority of these expenditures were associated with the construction of the
Scottsville facility and equipment additions at the Jif facility located in
Lexington, Kentucky. Other investing activities included the payment of merger
and integration related expenses and the acquisition of the Crosse & Blackwell
brand of fruit spreads, chutneys, sauces, and glazes during the fourth quarter
of 2004.
Net cash used for financing activities in 2004 primarily consisted of the
payment of dividends of $0.92 per share, or $45.7 million, up from $33.6 million
in 2003.
Cash requirements for 2005 will include funds necessary to complete the
acquisition of Multifoods. The Company expects to utilize approximately $100
million of existing cash on hand to help finance the acquisition, in addition to
borrowings described below. Capital expenditures for 2005 are estimated to range
from $80 to $85 million, including approximately $20 to $30 million related to
the Multifoods' businesses. In addition, based on current rates, dividends are
expected to approximate $56 million and interest payments to approximate $28
million. The Company also expects to incur approximately $90 million in costs
associated with the Multifoods transaction.
Subsequent to April 30, 2004, the Company entered into two separate financing
arrangements in order to provide the necessary funding required to complete the
acquisition of Multifoods. On May 27, 2004, the Company issued
- 9 -
$100 million of 4.78 percent senior, unsecured notes due June 1, 2014.
Subsequently, on June 17, 2004, the Company entered into a five-year, $180
million revolving credit facility with a group of four banks. Interest on this
bank debt is based on prevailing prime, federal funds rate, or LIBOR, as
determined by the Company, and is payable on a quarterly basis. At the close of
the Multifoods transaction, the Company drew down $52 million of the $180
million available under this revolving credit facility. Among other
restrictions, both the senior, unsecured notes and the revolving credit facility
carry certain covenants relating to liens, consolidated net worth, and sale of
assets. These covenants are consistent with those included in the Company's
senior, unsecured notes outstanding at April 30, 2004. Proceeds from these
financing arrangements were used to retire existing secured debt of Multifoods,
fund transaction related costs, and provide for general corporate purposes.
Assuming there are no other material acquisitions or other significant
investments, the Company believes that cash on hand combined with the cash
provided by operations, proceeds received from the previously discussed
financing instruments, and borrowings available under the revolving credit
facility, will be sufficient to meet 2005 requirements, including the payment of
dividends and interest on outstanding debt.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations at April
30, 2004.
One to
Less than three Three to More than
(Dollars in millions) Total one year years five years five years
-------------- --------------- --------------- -------------- --------------
Long-term debt obligations $ 135.0 $ -- $ 17.0 $ 33.0 $ 85.0
Operating lease obligations 3.9 2.0 1.8 0.1 --
Purchase obligations 368.8 233.7 117.1 14.8 3.2
Other long-term liabilities 163.5 -- -- -- 163.5
-------------- -------------- -------------- ------------- -------------
Total 671.2 235.7 135.9 47.9 251.7
============== ============== ============== ============= =============
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
- 10 -
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. Historically, long-lived assets 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. However, determining fair value is subject to estimates of both cash
flows and interest rates and different estimates could yield different results.
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, with the exception of planned restructuring activities noted under
Restructuring.
Goodwill and Other Indefinite-Lived Intangible Assets. The annual evaluation of
goodwill and other indefinite-lived intangible assets requires the use of
estimates about future operating results for each reporting unit to determine
estimated fair value. Changes in forecasted operations can materially affect
these estimates. Additionally, other changes in the estimates and assumptions,
including the discount rate and expected long-term growth rate, which drive the
valuation techniques employed to estimate the fair value of the reporting unit
could change and, therefore, impact the assessments of impairment in the future.
Pension Plans and Other Postretirement Benefit Plans. To determine the Company's
ultimate obligation under its defined benefit pension plans and other
postretirement benefit plans, management must estimate the future cost of
benefits and attribute that cost to the time period during which each covered
employee works. To record the related net assets and obligations of such benefit
plans, management uses assumptions related to inflation, investment returns,
mortality, employee turnover, rate of compensation increases, medical costs, and
discount rates. Management, along with third-party actuaries, reviews all of
these assumptions on an ongoing basis to ensure that the most reasonable
information available is being considered. For 2005 expense recognition, the
Company will use a discount rate of 6.25 percent, an expected rate of return on
plan assets of 8.50 percent, and a rate of compensation increase of 4.50
percent.
Accrued Expenses. Management estimates certain material expenses in an effort to
record those expenses in the period incurred. The most material accrued
estimates are 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.
- 11 -
Recovery of Accounts Receivable. In the normal course of business, the
Company extends credit to customers that satisfy predefined criteria. The
Company evaluates the collectibility of accounts receivable based on a
combination of factors. When aware of a specific customer's inability to meet
its financial obligations, such as in the case of bankruptcy filings or
deterioration in the customer's operating results or financial position, the
Company records a specific reserve for bad debt to reduce the related receivable
to the amount the Company reasonably believes is collectible. The Company also
records reserves for bad debt for all other customers based on a variety of
factors, including the length of time the receivables are past due, historical
collection experience, and an evaluation of current and projected economic
conditions at the balance sheet date. Actual collections of accounts receivable
could differ from management's estimates due to changes in future economic or
industry conditions or specific customers' financial conditions.
Restructuring. During 2003 and 2004, the Company announced its plans to
restructure certain operations as part of its ongoing efforts to optimize its
production capacity, improve productivity and operating efficiencies, and lower
the Company's overall cost base. The expected restructuring charge includes
estimates related to employee separation costs, the closure and consolidation of
facilities, contractual obligations, and the valuation of certain assets
including property, plant, and equipment, and inventories. Estimates of such
costs are determined by contractual agreement or estimated by management based
on historical experience. Actual amounts could differ from the original
estimates.
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, foreign currency exchange rates, and commodity
prices.
Interest Rate Risk. The fair value of the Company's cash and short-term
investment portfolio at April 30, 2004, approximates carrying value. Exposure to
interest rate risk on the Company's long-term debt is mitigated since it is at a
fixed rate until maturity. Market risk, as measured by the change in fair value
resulting from a hypothetical ten percent 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, 2004, including derivative and other instruments
sensitive to interest rates, a hypothetical ten percent movement in interest
rates would not materially affect the Company's results of operations.
Foreign Currency Exchange Risk. The Company utilizes foreign exchange contracts,
typically with maturities of less than one year, to hedge foreign exchange
fluctuation. The contracts are accounted for as cash flow hedges. A hypothetical
ten percent strengthening or weakening of the U.S. dollar would not have a
material impact on the cash flows or the financial results of the Company.
The Company has operations outside the United States with foreign currency
denominated assets and liabilities, primarily denominated in Canadian currency.
Because the Company has foreign currency denominated assets and liabilities,
financial exposure may result, primarily from the timing of transactions and the
movement of
- 12 -
exchange rates. The foreign currency balance sheet exposures as of April 30,
2004, are not expected to result in a significant impact on future earnings or
cash flows.
Revenues from customers outside the United States represented less than ten
percent of net sales during 2004. 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.
Commodity Price Risk. Raw materials used by the Company's consumer oils business
are subject to price volatility caused by supply conditions, political and
economic variables, and other unpredictable factors. To manage the volatility
related to anticipated inventory purchases to be made by the consumer oils
business, the Company uses futures and options with maturities generally less
than one year. These instruments are designated as cash flow hedges. The
mark-to-market gains or losses on qualifying hedges are included in other
comprehensive income or loss to the extent effective, and reclassified into cost
of products sold in the period during which the hedged transaction affects
earnings. The mark-to-market gains or losses on nonqualifying, excluded, and
ineffective portions of hedges are recognized in cost of products sold
immediately and were not significant.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"variable interest entities." Transactions with related parties are in the
ordinary course of business, are conducted at an arm's-length basis, and are not
material to the Company's results of operations, financial condition, or cash
flows.
- 13 -
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 Multifoods into the Company;
- the finalization of the allocation of the Multifoods purchase price
to the underlying assets acquired and liabilities assumed and the
impact it could have on future depreciation and amortization
expense;
- the success and cost of marketing and sales programs and strategies
intended to promote growth in the Multifoods' businesses, the
Company's existing businesses, and in their respective markets;
- the ability of the business areas to achieve sales targets and the
costs associated with attempting to do so;
- the ability to successfully implement price changes, particularly in
the consumer oils business;
- the success and cost of introducing new products, notably
Uncrustables products;
- the exact time frame in which the new manufacturing facility in
Scottsville, Kentucky, will attain peak operating efficiency and the
Company's ability to effectively manage capacity constraints related
to Uncrustables products until that time;
- the estimated costs and benefits associated with the Company's plan
to restructure certain of its operations;
- the strength of commodity markets from which raw materials are
procured and the related impact on costs;
- raw material and ingredient cost trends;
- foreign currency exchange and interest rate fluctuations;
- general competitive activity in the market; and
- other factors affecting share prices and capital markets generally.
- 14 -
Report of Registered Public Accounting Firm
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, 2004 and 2003, and the related statements of
consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended April 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note C to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No.142, Goodwill and Other
Intangible Assets, as of May 1, 2002.
Akron, Ohio
June 7, 2004
- 15 -
Statements of Consolidated Income
The J. M. Smucker Company
Year Ended April 30,
-------------------------------------------------------------
(Dollars in thousands, except per share data) 2004 2003 2002
---- ---- ----
Net sales $ 1,417,011 $ 1,311,744 $ 687,148
Cost of products sold 915,769 854,407 462,157
Cost of products sold - restructuring 8,464 1,256 ---
------------------- -------------------- -----------------
Gross Profit 492,778 456,081 224,991
Selling, distribution, and administrative expenses
305,475 279,760 165,172
Merger and integration costs 1,266 10,511 5,031
Other restructuring costs 7,362 1,281 ---
------------------- -------------------- -----------------
Operating Income 178,675 164,529 54,788
Interest income 3,379 2,039 2,181
Interest expense (6,374) (8,752) (9,207)
Other income (expense) - net 3,139 (2,426) 2,436
------------------- -------------------- -----------------
Income Before Income Taxes 178,819 155,390 50,198
Income taxes 67,469 59,048 19,347
------------------- -------------------- -----------------
Net Income $ 111,350 $ 96,342 $ 30,851
=================== ==================== =================
Earnings per Common Share:
Net Income per Common Share $ 2.24 $ 2.04 $ 1.33
=================== ==================== =================
Net Income per Common Share - Assuming Dilution $ 2.21 $ 2.02 $ 1.31
=================== ==================== =================
See notes to consolidated financial statements.
- 16 -
Consolidated Balance Sheets
The J. M. Smucker Company
Assets
April 30,
---------------------------------------
(Dollars in thousands) 2004 2003
------------------ ------------------
Current Assets
Cash and cash equivalents $ 106,602 $ 181,225
Marketable securities 15,074 ---
Trade receivables, less allowance for doubtful accounts 102,707 101,364
Inventories:
Finished products 107,607 85,495
Raw materials 81,373 83,632
------------------ ------------------
188,980 169,127
Other current assets 11,895 14,944
------------------ ------------------
Total Current Assets 425,258 466,660
------------------ ------------------
Property, Plant, and Equipment
Land and land improvements 29,553 26,250
Buildings and fixtures 127,194 117,612
Machinery and equipment 328,235 331,325
Construction in progress 70,319 21,503
------------------ ------------------
555,301 496,690
Accumulated depreciation (225,593) (221,704)
------------------ ------------------
Total Property, Plant, and Equipment 329,708 274,986
------------------ ------------------
Other Noncurrent Assets
Goodwill 531,143 525,942
Other intangible assets, net 323,115 320,409
Marketable securities 41,589 ---
Other assets 33,312 27,410
------------------ ------------------
Total Other Noncurrent Assets 929,159 873,761
------------------ ------------------
$ 1,684,125 $ 1,615,407
================== ==================
- 17 -
Liabilities and Shareholders' Equity
April 30,
------------------------------
(Dollars in thousands) 2004 2003
------------- -------------
Current Liabilities
Accounts payable $ 66,300 $ 68,704
Salaries, wages, and additional compensation 52,507 31,788
Accrued marketing and merchandising 25,303 29,252
Income taxes 5,622 18,783
Dividends payable 12,544 11,447
Other current liabilities 12,607 7,300
------------- -------------
Total Current Liabilities 174,883 167,274
------------- -------------
Noncurrent Liabilities
Long-term debt 135,000 135,000
Defined benefit pensions 2,315 31,502
Postretirement benefits other than pensions 19,384 17,614
Deferred income taxes 136,255 134,018
Other noncurrent liabilities 5,595 5,828
------------- -------------
Total Noncurrent Liabilities 298,549 323,962
------------- -------------
Shareholders' Equity
Serial preferred shares - no par value:
Authorized - 3,000,000 shares; outstanding - none --- ---
Common shares - no par value:
Authorized - 150,000,000 shares; outstanding - 50,174,707 in 2004 and
49,767,540 in 2003 (net of 6,493,226 and 6,900,393 treasury shares,
respectively), at stated value 12,543 12,442
Additional capital 829,323 815,767
Retained income 387,065 323,064
Less:
Deferred compensation (6,069) (2,825)
Amount due from ESOP Trust (7,584) (8,093)
Accumulated other comprehensive loss (4,585) (16,184)
------------- -------------
Total Shareholders' Equity 1,210,693 1,124,171
------------- -------------
$ 1,684,125 $ 1,615,407
============= =============
See notes to consolidated financial statements.
- 18 -
Statements of Consolidated Cash Flows
The J. M. Smucker Company
Year Ended April 30,
-----------------------------------
(Dollars in thousands) 2004 2003 2002
--------- --------- ---------
Operating Activities
Net income $ 111,350 $ 96,342 $ 30,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 37,444 35,934 23,932
Amortization 2,414 1,817 4,625
Deferred income tax expense (benefit) 6,113 (3,680) 1,545
Changes in assets and liabilities, net of effect from
business acquisitions:
Trade receivables (92) (43,016) (1,217)
Inventories (16,692) (12,062) (2,063)
Other current assets 3,028 (889) (11)
Accounts payable and accrued items 3,353 56,169 12,483
Income taxes (15,979) 24,280 2,824
Other - net (5,003) 12,705 (3,170)
--------- --------- ---------
Net Cash Provided by Operating Activities 125,936 167,600 69,799
--------- --------- ---------
Investing Activities
Additions to property, plant, and equipment (100,094) (49,525) (23,464)
Purchase of marketable securities (86,439) -- --
Businesses acquired, net of cash acquired (9,196) (10,767) (5,714)
Sale and maturities of marketable securities 28,957 -- --
Disposal of property, plant, and equipment 9,687 1,179 7,060
Other - net (5,454) 6,134 1,608
--------- --------- ---------
Net Cash Used for Investing Activities (162,539) (52,979) (20,510)
--------- --------- ---------
Financing Activities
Dividends paid (45,724) (33,603) (15,568)
Other - net 5,686 5,184 6,961
--------- --------- ---------
Net Cash Used for Financing Activities (40,038) (28,419) (8,607)
Effect of exchange rate changes on cash 2,018 3,109 107
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (74,623) 89,311 40,789
Cash and cash equivalents at beginning of year 181,225 91,914 51,125
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 106,602 $ 181,225 $ 91,914
========= ========= =========
( ) Denotes use of cash
See notes to consolidated financial statements.
- 19 -
Statements of Consolidated Shareholders' Equity
The J. M. Smucker Company
Amount Accumulated
Due Other Total
Common Deferred From Comprehen- Share-
(Dollars in thousands, Shares Common Additional Retained Compen- ESOP sive holders'
except per share data) Outstanding Shares Capital Income sation Trust Loss Equity
- ---------------------------- ----------- -------- ---------- --------- -------- -------- ----------- -----------
Balance at May 1, 2001 23,021,956 $ 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
adjustment (797) (797)
-----------
Comprehensive Income 31,723
Purchase of treasury shares (40,341) (11) (483) (634) (1,128)
Stock plans 522,514 138 11,590 (477) 11,251
Cash dividends declared -
$0.68 a share (15,650) (15,650)
Tax benefit of stock plans 2,799 2,799
Other 364 364
----------- -------- ---------- --------- -------- -------- ----------- -----------
Balance at April 30, 2002 23,504,129 6,217 33,184 267,793 (2,725) (8,562) (15,763) 280,144
Net income 96,342 96,342
Foreign currency translation
adjustment 8,268 8,268
Minimum pension liability
adjustment (8,629) (8,629)
Unrealized loss on available
-for-sale)securities (296) (296)
Unrealized gain on cash flow
hedging derivatives 236 236
-----------
Comprehensive Income 95,921
Business acquired 26,023,466 6,506 774,979 781,485
Stock plans 239,945 60 5,628 (100) 5,588
Cash dividends declared
- $0.83 a share (41,071) (41,071)
Tax benefit of stock plans 1,635 1,635
Other (341) 341 469 469
----------- -------- ---------- --------- -------- -------- ----------- -----------
Balance at April 30, 2003 49,767,540 12,442 815,767 323,064 (2,825) (8,093) (16,184) 1,124,171
Net income 111,350 111,350
Foreign currency translation
adjustment 6,697 6,697
Minimum pension liability
adjustment 3,403 3,403
Unrealized gain on available
- -for-sale securities 545 545
Unrealized gain on cash flow
hedging derivatives 954 954
-----------
Comprehensive Income 122,949
Stock plans 407,167 101 10,543 (528) (3,244) 6,872
Cash dividends declared -
$0.94 a share (46,821) (46,821)
Tax benefit of stock plans 3,013 3,013
Other 509 509
----------- -------- ---------- --------- -------- -------- ----------- -----------
Balance at April 30, 2004 50,174,707 $ 12,543 $ 829,323 $ 387,065 $ (6,069) $ (7,584) $ (4,585) $ 1,210,693
=========== ======== ========== ========= ======== ======== =========== ===========
See notes to consolidated financial statements.
- 20 -
Notes to Consolidated Financial Statements
The J. M. Smucker Company
(Dollars in thousands, except per share data)
Note A: Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries, and any
majority-owned investment. All significant intercompany transactions and
accounts are eliminated in consolidation.
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:
restructuring costs, 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 all of the
following criteria have been met: a valid customer order with a fixed price has
been received; the product has been shipped and title has transferred to the
customer; there is no further significant obligation to assist in the resale of
the product; and collectibility is reasonably assured.
Marketing and Merchandising Promotions: 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 expenses related to the
Company's products. The Company recognizes the cost of these programs based on
estimates of what has been incurred by customers. Such costs are included as a
reduction of sales.
Financial Instruments: Financial instruments, other than derivatives, that
potentially subject the Company to significant concentrations of credit risk
consist principally of cash investments, marketable securities, 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. The Company's marketable
securities are primarily in debt securities. Under the Company's investment
policy, it will invest in securities deemed to be investment grade. Currently,
these investments are defined as government-backed mortgage obligations,
corporate bonds, municipal bonds, and commercial paper. The Company determines
the appropriate categorization of its debt securities at the time of purchase
and reevaluates such designation at each balance sheet date. The Company has
categorized all debt securities as available for sale, because it currently has
the intent to convert these investments into cash if and when needed. With
respect to accounts receivable,
- 21 -
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. 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 $139,000 at April 30, 2004.
Major Customer: Sales to Wal-Mart Stores, Inc., and subsidiaries amounted
to approximately 13 percent and 14 percent of net sales in 2004 and 2003,
respectively. These sales are primarily included in the U.S. retail market. No
other customer exceeded ten percent of net sales for any year.
Derivative Financial Instruments: The Company utilizes derivative
instruments such as commodity futures contracts, interest rate swaps, and
foreign currency futures contracts to hedge exposure to changes in commodity
prices, interest rates, and foreign currency exchange rates. The Company
accounts for these derivative instruments under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). SFAS 133 requires that all derivative instruments be
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them. For derivatives that are designated as a
hedge and used to hedge an existing asset or liability, both the derivative and
hedged item are recognized at fair value with any changes recognized immediately
in the Statements of Consolidated Income. For derivatives designated as a hedge
that are used to hedge an anticipated transaction, changes in fair value are
deferred and recorded in shareholders' equity as a component of accumulated
other comprehensive loss to the extent the hedge is effective and then
recognized in the Statements of Consolidated Income in the period during which
the hedged transaction affects earnings. Any ineffectiveness associated with the
hedge or changes in fair value of derivatives that are nonqualifying are
recognized immediately in the Statements of Consolidated Income. By policy, the
Company has not historically entered into derivative financial instruments for
trading purposes or for speculation.
Allowance for Doubtful Accounts: On a regular basis, the Company evaluates
its accounts receivable and establishes the allowance for doubtful accounts
based on a combination of specific customer circumstances, credit conditions,
and historical write-offs and collections. A receivable is considered past due
if payments have not been received within the agreed upon invoice terms. The
allowance for doubtful accounts at April 30, 2004 and 2003, was $1,047 and $972,
respectively.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
Goodwill and Other Intangible Assets: Goodwill is the excess of the
purchase price paid over the fair value of the net assets of the business
acquired. In accordance with the Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142), goodwill and
indefinite-lived intangible assets are not amortized but are reviewed at least
annually for impairment. The Company conducts its annual test of impairment for
goodwill and indefinite-lived intangible assets as of February 1, of each year.
In addition, the Company will test
- 22 -
for impairment if events or circumstances occur that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Other
finite-lived intangible assets are amortized over their useful lives. Prior to
the adoption of SFAS 142 in 2003, goodwill and other intangible assets,
principally trademarks and patents, were amortized using the straight-line
method over periods ranging from 5 to 40 years for acquisitions prior to July 1,
2001.
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. Rent expense in 2004, 2003, and 2002 totaled $16,783, $17,324, and
$10,430, respectively. Rent expense for cold storage facilities, which is based
on quantities stored, amounted to $2,671, $2,801, and $2,324 in 2004, 2003, and
2002, respectively.
Impairment of Long-Lived Assets: In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when circumstances indicate the
carrying value of an 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 by the Company 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. Assets to be disposed of are recorded at the lower of
carrying value or estimated net realizable value.
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
three to seven years, beginning with the project's completion. Net capitalized
software costs as of April 30, 2004 and 2003, were $28,682 and $27,504,
respectively, of which $5,834 and $4,400 were included in construction in
progress.
Shipping and Handling Costs: Shipping and handling costs are included in
cost of products sold.
Advertising Expense: Advertising costs are expensed as incurred.
Advertising expense was $55,101, $45,783, and $15,525 in 2004, 2003, and 2002,
respectively.
Stock Compensation: As provided under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), 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
- 23 -
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
If compensation costs for the stock options granted 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 as follows:
Year Ended April 30,
--------------------------------------
2004 2003 2002
---------- --------- ---------
Net income, as reported $ 111,350 $ 96,342 $ 30,851
Total stock-based compensation expense determined under fair value-based
methods for all awards, net of tax benefit (2,774) (2,581) (1,061)
---------- --------- ---------
Net income, as adjusted $ 108,576 $ 93,761 $ 29,790
========== ========= =========
Earnings per common share:
Net income, as reported $ 2.24 $ 2.04 $ 1.33
Total stock-based compensation expense determined under fair
value-based methods for all awards, net of tax benefit (0.06) (0.06) (0.04)
---------- --------- ---------
Net income, as adjusted $ 2.18 $ 1.98 $ 1.29
========== ========= =========
Net income, as reported - assuming dilution $ 2.21 $ 2.02 $ 1.31
Total stock-based compensation expense determined under fair
value-based methods for all awards, net of tax benefit - assuming
dilution (0.06) (0.06) (0.04)
---------- --------- ---------
Net income, as adjusted - assuming dilution $ 2.15 $ 1.96 $ 1.27
========== ========= =========
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,
-------------------
2004 2003
------ ------
Average expected term (years) 5 5
Risk-free interest rate 3.21% 4.08%
Dividend yield 2.50% 2.50%
Volatility 26.80% 27.70%
====== ======
Fair value of options granted $ 9.45 $ 8.06
====== ======
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected share price volatility.
Income Taxes: The Company accounts for income taxes using the liability
method. Under that method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
- 24 -
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in the
tax rate is recognized in income or expense in the period that the change is
effective.
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.
Recently Issued Accounting Standards: In April 2003, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The adoption of SFAS 149 did not have a material impact on the
Company's results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS
150 requires that certain financial instruments, which under previous guidance
could be accounted for as equity, be classified as liabilities in statements of
financial position. SFAS 150 is effective for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's results of operations or financial position.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN
46 requires unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively disperse the
risks and rewards of ownership among their owners and other parties involved.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to variable interest entities or
arrangements existing before February 1, 2003, in the fourth quarter of calendar
2003. The adoption of FIN 46 did not have a material impact on the Company's
results of operations or financial position.
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 other food manufacturers. The
Company's operations outside the United States are principally in Canada. 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, to the extent that it deems appropriate, based
upon
- 25 -
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.
Reclassifications: Certain prior year amounts have been reclassified to
conform to current year classifications.
Note B: Subsequent Event - Multifoods Acquisition (Unaudited)
On June 18, 2004, the Company completed its acquisition of Minneapolis-based
International Multifoods Corporation (Multifoods) in a tax-free stock
transaction valued at approximately $850 million. Multifoods had consolidated
2004 sales of approximately $908 million. With the acquisition, the Company adds
an array of North American icon brands, marketed in the center of the store, to
the Smucker family of brands. In addition to the Company's Smucker's, Jif, and
Crisco brands, the Company will include brands that hold leading positions in
virtually all of their categories or markets. Multifoods' primary U.S. brands
include: Pillsbury baking mixes and ready-to-spread frostings; Hungry Jack
pancake mixes, syrup, and potato side dishes; Martha White baking mixes and
ingredients; and Pet evaporated milk and dry creamer. Multifoods' primary
Canadian brands include: Robin Hood flour and baking mixes, Bick's pickles and
condiments, and the Golden Temple brand of flour and rice in the growing ethnic
food category.
Under the terms of the agreement, Multifoods' shareholders received $25 per
share in a combination of 80 percent Company stock and 20 percent cash.
Approximately $98 million in cash was paid and 8 million common shares were
issued to the Multifoods' shareholders, valued at approximately $387 million
using the average closing price of the Company's common shares for three days
prior to the close of the transaction. In addition, the Company paid off
Multifoods' existing secured debt of approximately $152 million, assumed $200
million of 6.60 percent senior, unsecured notes, and expects to incur
approximately $90 million in acquisition related expenses. In connection with
the acquisition, the Company issued $100 million of 4.78 percent ten-year,
senior, unsecured notes, and secured a revolving credit facility of $180 million
provided through a group of banks, at prevailing market interest rates.
Long-term debt principal after the close of the acquisition consists of the
following:
June 18, 2004
-------------
6.77% Senior Notes due June 1, 2009 $ 75,000
7.70% Series A Senior Notes due September 1, 2005 17,000
7.87% Series B Senior Notes due September 1, 2007 33,000
7.94% Series C Senior Notes due September 1, 2010 10,000
4.78% Senior Notes due June 1, 2014 100,000
6.60% Senior Notes due November 13, 2009 200,000
---------
Total long-term debt $ 435,000
=========
- 26 -
The purchase price will be allocated to the underlying assets acquired and
liabilities assumed based upon their fair values at the date of acquisition. The
Company will determine the estimated fair values based on independent
appraisals, discounted cash flow, quoted market prices, and estimates made by
management. To the extent 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.
June 18, 2004
-------------
Assets:
Tangible assets $ 620,000
Intangible assets not subject to amortization 187,000
Intangible assets subject to amortization (ten-year
weighted-average useful life) 8,000
Goodwill 320,000
-----------
Total assets acquired $ 1,135,000
===========
Total liabilities assumed $ (285,000)
===========
Net assets acquired $ 850,000
===========
The allocation of the purchase price is preliminary and subject to adjustment
following completion of the valuation process. The $320,000 of goodwill will be
allocated to the U.S. retail market and special markets upon finalization of the
allocation of purchase price and will not be deductible for tax purposes.
Had the acquisition of Multifoods occurred at the beginning of 2003, unaudited,
pro forma consolidated results would have been as follows:
Year Ended April 30,
------------------------------
2004 2003
------------ ------------
Net sales $ 2,336,000 $ 2,248,000
Operating income $ 232,000 $ 227,000
Net income $ 135,000 $ 120,000
Net income per common share - assuming
dilution $ 2.32 $ 2.16
============ ============
Note C: Changes in Accounting Principle
Effective May 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In
accordance with SFAS 142, goodwill and indefinite-lived intangible assets are
not amortized but are reviewed at least annually for impairment. Prior to the
adoption of SFAS 142, amortization expense was recorded for goodwill and other
intangible assets. Had the provisions of SFAS 142 been applied to all periods
presented, 2002 net income would have increased $2,177 to $33,028, resulting in
net income per common share of $1.43 and net income per common share -- assuming
dilution of $1.41.
- 27 -
Note D: Merger
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 26,023,000 common shares were
issued to the P&G shareholders, valued at approximately $781,485 based on the
average market price of the Company's common shares over the period from three
days before to three days after the terms of the merger were announced. Upon
completion of the merger, the Company had 49,531,376 common shares outstanding.
The conversion of the Company's common shares into new Company common shares has
been treated in a manner similar to a reverse stock split.
The merger and the combination of three brands - Smucker's, Jif, and Crisco -
enhances the Company's strategic and market position. The merger was accounted
for as a purchase business combination and for accounting purposes, the Company
was the acquiring enterprise. Accordingly, the results of the Jif and Crisco
operations are included in the Company's consolidated financial statements from
the date of the merger. The aggregate purchase price was approximately $792,252,
including $10,767 of capitalized acquisition related expenses. In addition, the
Company incurred costs of $10,511 and $5,031 in 2003 and 2002, respectively,
that were directly related to the merger and integration of Jif and Crisco. Due
to the nature of these costs, they were expensed as incurred.
The assets acquired and liabilities assumed in the merger of the Jif and Crisco
businesses were recorded at estimated fair values as determined by Company
management. The Company obtained independent appraisals for the fair value of
property, plant, and equipment and identified intangible assets. A summary of
the assets acquired and liabilities assumed in the merger follows:
June 1, 2002
------------
Assets:
Tangible assets $ 138,152
Intangible assets not subject to amortization 305,000
Intangible asset subject to amortization
(ten-year useful life) 1,000
Goodwill 488,950
-----------
Total assets acquired $ 933,102
===========
Total liabilities assumed $ (140,850)
===========
Net assets acquired $ 792,252
===========
The $488,950 of goodwill relates to the U.S. retail market segment and will not
be deductible for tax purposes.
- 28 -
Had the merger of the Jif and Crisco businesses with and into the Company
occurred at the beginning of 2002, unaudited, pro forma consolidated results
would have been as follows:
Year Ended April 30,
--------------------
2003 2002
---- ----
Net sales $1,355,000 $1,283,000
Operating income, excluding indirect
expenses of the Jif and Crisco
businesses $ 188,000 $ 235,000
========== ==========
Note E: Restructuring
During 2003, the Company announced its plan to restructure certain operations as
part of its ongoing efforts to optimize its production capacity, improve
productivity and operating efficiencies, and lower the Company's overall cost
base. These initiatives include reducing the Company's involvement in fruit
processing, centralizing production and distribution of the Uncrustables product
line, and significantly reducing the number of items available for sale. The
program calls for the closing of three of the Company's plants - Watsonville,
California; Woodburn, Oregon; and West Fargo, North Dakota. At the end of 2004,
these restructurings were proceeding as planned. During 2004, the Company closed
down its fruit processing operations at both its Watsonville and Woodburn
locations and subsequently sold these facilities. Space within the Watsonville
facility is being leased back from the buyer until Uncrustables production is
closed down at this facility. Production at both the Watsonville and West Fargo
locations is expected to be completed in 2005. In Ripon, Wisconsin, the Company
completed the combination of its two manufacturing facilities into one expanded
site. Upon completion, the restructurings will result in the elimination of
approximately 335 full-time positions.
In addition, the Company undertook another restructuring program to streamline
operations in Europe and the United Kingdom during the fourth quarter of 2004.
This included the exit of a contract packaging arrangement and certain segments
of its retail business in Europe and the United Kingdom, which generated annual
sales of approximately $3 million. The Company will continue to manufacture
industrial fruit products at its facility located in Scotland. This
restructuring is expected to be completed during the first quarter of 2005.
The Company expects to incur restructuring costs of approximately $21,000, of
which $15,826 and $2,537 were recognized in 2004 and 2003, respectively. The
balance of the costs will be incurred in 2005. The remaining cash payments,
estimated to be approximately $7,000, will be paid through 2005.
- 29 -
The following table summarizes the activity with respect to the restructuring
and related asset impairment charges recorded and reserves established during
2004 and 2003, and the total amount expected to be incurred in connection with
the initiatives.
Long-Lived
Employee Asset Equipment Other
Separation Charges Relocation Costs Total
---------- ---------- ---------- ----- -----
Total expected
restructuring charge $ 7,900 $ 7,600 $ 1,700 $ 3,800 $ 21,000
======== ======== ======== ======== ========
Balance at May 1, 2002 $ -- $ -- $ -- $ -- $ --
Charge to expense 1,116 1,055 -- 366 2,537
Cash payments -- -- -- (200) (200)
Noncash utilization -- (1,055) -- (166) (1,221)
-------- -------- -------- -------- --------
Balance at April 30, 2003 $ 1,116 $ -- $ -- $ -- $ 1,116
Charge to expense 5,702 6,113 827 3,184 15,826
Cash payments (2,421) -- (827) (843) (4,091)
Noncash utilization -- (6,113) -- (1,192) (7,305)
-------- -------- -------- -------- --------
Balance at April 30, 2004 $ 4,397 $ -- $ -- $ 1,149 $ 5,546
======== ======== ======== ======== ========
Remaining expected
restructuring charge $ 1,082 $ 432 $ 873 $ 250 $ 2,637
======== ======== ======== ======== ========
Approximately $8,464 and $1,256 of the total restructuring charges of $15,826
and $2,537 in 2004 and 2003, respectively, were reported in costs of products
sold in the accompanying Statements of Consolidated Income, while the remaining
charges were reported in other restructuring costs. The restructuring costs
included in cost of products sold include long-lived asset charges and inventory
disposition costs. Expected employee separation costs of approximately $7,900
are being recognized over the estimated future service period of the related
employees. The obligation related to employee separation costs is included in
the current liabilities line item, salaries, wages, and additional compensation,
in the Consolidated Balance Sheets.
Long-lived asset charges include accelerated depreciation related to machinery
and equipment that will be used by the production facilities until they close.
Other costs include miscellaneous expenditures associated with the Company's
restructuring initiative and are expensed as incurred. These costs include
employee relocation, professional fees, and other closed facility costs.
Note F: Reportable Segments
The Company operates in one industry: the manufacturing and marketing of food
products. The Company has two reportable segments: U.S. retail market and
special markets. The U.S. retail market segment includes the consumer and the
consumer oils businesses. This segment represents the primary strategic focus
area for the Company - the sale of branded food products with leadership
positions to consumers through mainstream domestic retail outlets. The special
markets segment represents the aggregation of the foodservice, international,
industrial, and beverage businesses. Special markets segment products are
distributed through foreign countries, foodservice distributors and operators
(i.e., restaurants, schools and universities, and health care operations), other
food manufacturers, and health and natural food stores.
- 30 -
The following table sets forth reportable segment and geographical information.
Year Ended April 30,
--------------------
2004 2003 2002
---- ---- ----
Net sales:
U.S. retail market $ 1,002,306 $ 889,871 $ 323,636
Special markets 414,705 421,873 363,512
----------- ----------- -----------
Total net sales $ 1,417,011 $ 1,311,744 $ 687,148
=========== =========== ===========
Segment profit:
U.S. retail market $ 231,068 $ 197,709 $ 68,691
Special markets 49,298 53,960 42,788
----------- ----------- -----------
Total segment profit $ 280,366 $ 251,669 $ 111,479
=========== =========== ===========
Interest income 3,379 2,039 2,181
Interest expense (6,374) (8,752) (9,207)
Amortization expense (2,414) (1,817) (4,625)
Restructuring costs (15,826) (2,537) --
Merger and integration costs (1,266) (10,511) (5,031)
Corporate administrative expenses (80,459) (72,110) (46,681)
Other unallocated income (expenses) 1,413 (2,591) 2,082
----------- ----------- -----------
Income before income taxes $ 178,819 $ 155,390 $ 50,198
=========== =========== ===========
Net sales:
Domestic $ 1,278,243 $ 1,190,190 $ 590,327
International 138,768 121,554 96,821
----------- ----------- -----------
Total net sales $ 1,417,011 $ 1,311,744 $ 687,148
=========== =========== ===========
Assets:
Domestic $ 1,590,236 $ 1,511,553 $ 438,644
International 93,889 103,854 86,248
----------- ----------- -----------
Total assets $ 1,684,125 $ 1,615,407 $ 524,892
=========== =========== ===========
Long-lived assets:
Domestic $ 1,216,497 $ 1,109,859 $ 211,380
International 42,370 38,888 33,699
----------- ----------- -----------
Total long-lived assets $ 1,258,867 $ 1,148,747 $ 245,079
=========== =========== ===========
Segment profit represents revenue less direct and allocable operating expenses.
- 31 -
The following table presents product sales information.
Year Ended April 30,
--------------------
2004 2003 2002
---- ---- ----
Peanut butter 27% 26% 7%
Shortening and oils 23 22 --
Fruit spreads 20 20 37
Portion control 6 6 11
Juices and beverages 6 5 10
Toppings and syrups 5 5 8
Industrial ingredients 5 8 16
Uncrustables frozen sandwiches 4 3 3
Other 4 5 8
--- --- ---
Total 100% 100% 100%
=== === ===
Note G: 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,
--------------------
2004 2003 2002
---- ---- ----
Numerator:
Net income for earnings per common
share and earnings per common share
- assuming dilution $ 111,350 $ 96,342 $ 30,851
=========== =========== ===========
Denominator:
Denominator for earnings per common
share - weighted-average shares 49,816,926 47,309,257 23,114,494
Effect of dilutive securities:
Stock options 502,166 366,629 318,104
Restricted stock 76,655 88,891 60,767
----------- ----------- -----------
Denominator for earnings per common
share - assuming dilution 50,395,747 47,764,777 23,493,365
=========== =========== ===========
Net income per common share $ 2.24 $ 2.04 $ 1.33
=========== =========== ===========
Net income per common share -
assuming dilution $ 2.21 $ 2.02 $ 1.31
=========== =========== ===========
- 32 -
Note H: Marketable Securities
The Company invests primarily in debt securities. Under the Company's investment
policy, it will invest in securities deemed to be investment grade. Currently,
these investments are defined as government-backed mortgage obligations,
corporate bonds, municipal bonds, and commercial paper. The Company determines
the appropriate categorization of its debt securities at the time of purchase
and reevaluates such designation at each balance sheet date. The Company has
categorized all debt securities as available for sale, because it currently has
the intent to convert these investments into cash if and when needed.
Classification of these available-for-sale marketable securities as current or
noncurrent is based on whether the conversion to cash is expected to be
necessary for current operations, which is currently consistent with the
securities maturity date.
Securities categorized as available for sale are stated at fair value, with
unrealized gains and losses reported as a component of other comprehensive
income or loss. At April 30, 2004, the aggregate fair value of
available-for-sale marketable securities was $56,663. Net unrealized holding
gains of $8 were included as a component of other comprehensive income or loss.
The following table is a summary of available-for-sale marketable securities.
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ---------- ---------- ----------
U.S. corporate securities $23,187 $ 78 $ (35) $23,230
Government-backed obligations 9,015 7 -- 9,022
Mortgage-backed securities 24,453 100 (142) 24,411
------- ------- ------- -------
Balance at April 30, 2004 $56,655 $ 185 $ (177) $56,663
======= ======= ======= =======
The contractual maturities of these available-for-sale marketable securities as
of April 30, 2004, were as follows:
Estimated
Cost Fair Value
---- ----------
Due in one year or less $15,086 $15,074
Due after one to five years 17,116 17,178
Mortgage-backed securities 24,453 24,411
------- -------
Balance at April 30, 2004 $56,655 $56,663
======= =======
- 33 -
Note I: Goodwill and Other Intangibles
A summary of changes in the Company's goodwill during the years ended April 30,
2004 and 2003, by reportable segment is as follows:
U.S. Retail Special
Market Markets Total
----------- ------- -----
Balance at May 1, 2002 $ 13,353 $ 20,157 $ 33,510
Acquisition 488,950 -- 488,950
Other -- 3,482 3,482
-------- -------- --------
Balance at April 30, 2003 $502,303 $ 23,639 $525,942
Acquisition 4,759 -- 4,759
Other -- 442 442
-------- -------- --------
Balance at April 30, 2004 $507,062 $ 24,081 $531,143
======== ======== ========
The Company's other intangible assets and related accumulated amortization is as
follows:
April 30, 2004 April 30, 2003
-------------- --------------
Acquisition Accumulated Acquisition Accumulated
Cost Amortization Net Cost Amortization Net
----------- ------------ --- ----------- ------------ ---
Finite-lived intangible assets:
Patents $ 1,000 $ 192 $ 808 $ 1,000 $ 91 $ 909
Customer lists and formulas 3,887 972 2,915 3,887 583 3,304
-------- -------- -------- -------- -------- --------
Total intangible assets subject to
amortization $ 4,887 $ 1,164 $ 3,723 $ 4,887 $ 674 $ 4,213
======== ======== ======== ======== ======== ========
Indefinite-lived intangible assets:
Trademarks $319,392 $ -- $319,392 $316,196 $ -- $316,196
-------- -------- -------- -------- -------- --------
Total intangible assets not
subject to amortization $319,392 $ -- $319,392 $316,196 $ -- $316,196
======== ======== ======== ======== ======== ========
Total other intangible assets $324,279 $ 1,164 $323,115 $321,083 $ 674 $320,409
======== ======== ======== ======== ======== ========
Amortization expense for finite-lived intangible assets was approximately $490
and $480 in 2004 and 2003, respectively. The weighted-average useful life of the
finite-lived intangible assets is ten years. Based on the current amount of
intangible assets subject to amortization, the estimated amortization expense
for each of the succeeding five years is $490.
Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, the Company is required to review goodwill and
indefinite-lived intangible assets at least annually for impairment. The annual
impairment review of all appropriate assets was performed as of February 1,
2004. No impairment was required to be recorded as a result of the annual
impairment review.
- 34 -
Note J: 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 ten years of
credited service.
Net periodic benefit cost included the following components:
Defined Benefit Pension Other Postretirement
Plans Benefits
----------------------- --------------------
Year Ended April 30, 2004 2003 2002 2004 2003 2002
- -------------------- ---- ---- ---- ---- ---- ----
Service cost $ 4,152 $ 3,121 $ 2,414 $ 1,087 $ 695 $ 506
Interest cost 6,617 5,976 5,504 1,342 990 737
Expected return on plan assets (5,584) (6,106) (6,444) -- -- --
Amortization of prior service cost (credit) 1,456 1,239 1,087 (43) (45) (61)
Amortization of initial net asset (227) (234) (234) -- -- --
Recognized net actuarial loss (gain) 1,397 131 (177) 150 (78) (160)
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 7,811 $ 4,127 $ 2,150 $ 2,536 $ 1,562 $ 1,022
======= ======= ======= ======= ======= =======
Weighted-average assumptions
used in determining net periodic
benefit costs:
Discount rate 6.25% 7.25% 7.50% 6.25% 7.25% 7.50%
Expected return on plan assets 8.75% 9.00% 9.00% -- -- --
Rate of compensation increase 4.50% 4.50% 4.50% -- -- --
======= ======= ======= ======= ======= =======
The Company uses a measurement date of April 30 to determine defined benefit
pension plans' and other postretirement benefits' assets and benefit
obligations.
- 35 -
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,
2004 2003 2004 2003
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of the year $ 107,718 $ 81,453 $ 21,734 $ 11,788
Service cost 4,152 3,121 1,087 695
Interest cost 6,617 5,976 1,342 990
Amendments 47 5,252 -- 214
Acquisition -- -- -- 2,018
Actuarial loss 4,055 15,331 3,778 6,908
Participant contributions -- -- 220 205
Benefits paid (3,295) (3,415) (986) (1,084)
--------- --------- --------- ---------
Benefit obligation at end of the year $ 119,294 $ 107,718 $ 27,175 $ 21,734
========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at beginning
of the year $ 64,173 $ 68,747 $ -- $ --
Actual return on plan assets 17,132 (4,160) -- --
Company contributions 6,510 3,001 766 879
Participant contributions -- -- 220 205
Benefits paid (3,295) (3,415) (986) (1,084)
--------- --------- --------- ---------
Fair value of plan assets at end of the year $ 84,520 $ 64,173 $ -- $ --
========= ========= ========= =========
Net amount recognized:
Funded status of the plans $ (34,774) $ (43,545) $ (27,175) $ (21,734)
Unrecognized net actuarial loss 17,946 26,836 8,181 4,553
Unrecognized prior service cost (credit) 11,936 13,345 (390) (433)
Unrecognized initial asset (304) (531) -- --
--------- --------- --------- ---------
Net benefit liability recognized $ (5,196) $ (3,895) $ (19,384) $ (17,614)
========= ========= ========= =========
Accrued benefit liability $ (23,641) $ (32,385) $ (19,384) $ (17,614)
Prepaid benefit cost 4,803 -- -- --
Intangible asset 4,079 13,345 -- --
Minimum pension liability 9,563 15,145 -- --
--------- --------- --------- ---------
Net benefit liability recognized $ (5,196) $ (3,895) $ (19,384) $ (17,614)
========= ========= ========= =========
Weighted-average assumptions used in
determining benefit obligation:
Discount rate 6.25% 6.25% 6.25% 6.25%
Expected return on plan assets 8.75% 9.00% -- --
Rate of compensation increase 4.50% 4.50% -- --
========= ========= ========= =========
- 36 -
The following table sets forth additional information related to the Company's
defined benefit pension plans.
April 30,
---------
2004 2003
---- ----
(Decrease) increase in minimum liability
included in other comprehensive income or
loss $ (5,582) $ 13,917
Accumulated benefit obligation for all pension
plans $ 104,753 $ 96,560
========= =========
The following table sets forth additional information related to the Company's
defined benefit pension plans with an accumulated benefit obligation in excess
of plan assets.
April 30,
---------
2004 2003
---- ----
Accumulated benefit obligation $49,451 $96,560
Fair value of plan assets $25,811 $64,173
======= =======
The Company employs a total return on investment approach for the defined
benefit pension plans' assets. A mix of equities and fixed income investments
are used to maximize the long-term rate of return on assets for the level of
risk. The objectives of this strategy are to achieve full funding of the
accumulated benefit obligation, and to achieve investment experience over time
that will minimize pension expense volatility and hold to a feasible minimum the
Company's contributions required to maintain full funding status. In determining
the expected long-term rate of return on defined benefit pension plans' assets,
management considers the historical rates of return, the nature of investments,
and expectations of future investment strategies.
The Company's pension plans' asset target and actual allocations are as follows:
Actual Allocation
-----------------
April 30,
---------
Target
Allocation 2004 2003
---------- ---- ----
Equity securities 70% 71% 70%
Debt securities 30 27 28
Cash and other investments -- 2 2
--- --- ---
100% 100% 100%
=== === ===
Included in equity securities is 317,552 of the Company's common shares at April
30, 2004 and April 30, 2003. The market value of these shares is $15,643 at
April 30, 2004. The Company paid dividends of $292 on these shares during 2004.
Prior service costs are being amortized over the average remaining service lives
of the employees expected to receive benefits.
- 37 -
The Company expects to contribute approximately $16.5 million and $1 million to
the pension and other postretirement benefit plans, respectively, in 2005.
The Company also charged to operations approximately $1,031, $1,129, and $958 in
2004, 2003, and 2002, 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 May 2004, the Financial Accounting Standards Board issued Staff
Position No. 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP
106-2). FSP 106-2 permits a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) and requires certain disclosures pending
determination as to whether the sponsor's postretirement health care plan can
reasonably expect to qualify for beneficial treatment under the Act. The Company
sponsors several unfunded, defined, postretirement benefit plans that provide
health care benefits to substantially all active and retired domestic employees
not covered by collective bargaining agreements. Based on a preliminary analysis
of the Act, it appears that the Company's retiree medical plans can reasonably
expect to qualify for beneficial treatment under the Act without change to the
plans. The Company has included the estimated impact of the subsidy in measuring
the accumulated benefit obligation at April 30, 2004, resulting in a reduction
of $267 in the accumulated benefit obligation related to benefits attributed to
past service. The effect of the subsidy had no impact on net periodic benefit
cost in 2004.
For 2005, the assumed health care cost trend rates are nine percent for all
participants. The rate for participants under age 65 is assumed to decrease to
five percent in 2010. The health care cost trend rate assumption has a
significant effect on the amount of the other postretirement benefits obligation
and periodic other postretirement benefits 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, 2004:
One Percentage Point
--------------------
Increase Decrease
-------- --------
Effect on total service and interest cost components $ 542 $ (416)
Effect on benefit obligation $ 5,461 $(4,261)
======= =======
Certain of the Company's active employees participate in multiemployer plans
that provide defined postretirement health care benefits. The aggregate amount
contributed to these plans, including the charge for net periodic postretirement
benefit costs, totaled $1,639, $2,316, and $1,851 in 2004, 2003, and 2002,
respectively.
- 38 -
Note K: Savings Plans
ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust
(ESOP) for certain 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 1,134,120
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 one-half percentage point over prime, are secured by
the unallocated shares of the plan, and are payable as a condition of allocating
shares to participants. Interest incurred on ESOP debt was $356, $406, and $538
in 2004, 2003, and 2002, respectively. Contributions to the plan, representing
compensation expense, are made annually in amounts sufficient to fund ESOP debt
repayment and were $497, $558, and $707 in 2004, 2003, and 2002, respectively.
Dividends on unallocated shares are used to reduce expense and were $395, $368,
and $336 in 2004, 2003, and 2002, respectively. The principal payments received
from the ESOP in 2004, 2003, and 2002 were $509, $469, and $364, respectively.
Dividends on allocated shares are credited to participant accounts and are used
to purchase additional common shares for participant accounts. Dividends on
allocated and unallocated shares are charged to retained earnings by the
Company.
As permitted by Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans, 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, 2004, the ESOP held 420,615 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 2004, 2003, and 2002 were $3,455,
$2,635, and $1,445, respectively.
- 39 -
Note L: 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 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, 2004, there were 2,023,337 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 758,225
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 to, among other things, 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. In 2002, 46,499 common shares were awarded
under this plan. No awards were granted from this plan in 2003 and 2004. There
are no common shares available for future issuance under this plan.
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 10,162 common shares available for future grant under this
plan.
Nonemployee Director Stock Option Plan: This plan provides for the
issuance of 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 60,510 common shares available for
future grant under this plan.
- 40 -
A summary of the Company's stock option activity, and related information
follows:
Weighted-
Average
Exercise
Options Price
--------- ----------
Outstanding at May 1, 2001 2,185,174 $ 23.41
Granted --- ---
Exercised (581,062) 24.96
Forfeited (29,424) 31.63
--------- ----------
Outstanding at April 30, 2002 1,574,688 $ 22.69
Granted 1,275,000 33.72
Exercised (220,356) 22.69
Forfeited (13,247) 30.15
--------- ----------
Outstanding at April 30, 2003 2,616,085 $ 28.03
Granted 388,000 43.32
Exercised (385,455) 25.22
Forfeited (55,057) 33.98
--------- ----------
Outstanding at April 30, 2004 2,563,573 $ 30.64
Exercisable at April 30, 2002 1,279,258 $ 22.45
Exercisable at April 30, 2003 1,258,103 $ 22.73
Exercisable at April 30, 2004 1,407,281 $ 25.58
========= ==========
The following table summarizes the range of exercise prices and weighted-average
exercise prices for options outstanding and exercisable at April 30, 2004, under
the Company's stock benefit plans.
Weighted-
Weighted- Average Weighted-
Range of Average Remaining Average
Exercise Exercise Contractual Exercise
Price Outstanding Price Life (years) Exercisable Price
- ----------------- ----------- --------- ------------ ----------- ---------
$ 16.87- $25.30 859,250 $ 21.61 4.8 859,250 $ 21.61
$ 25.31- $36.99 1,322,323 $ 32.84 7.6 539,031 $ 31.66
$ 37.00- $43.38 382,000 $ 43.31 9.5 9,000 $ 40.61
================= ========= ========= === ======= =========
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Note M: Long-Term Debt and Financing Arrangements
Long-term debt consists of the following:
April 30,
---------------------
2004 2003
-------- --------
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.
Interest paid totaled $10,300, $10,613, and $9,800 in 2004, 2003, and 2002,
respectively.
Financing arrangements: At April 30, 2004, the Company had uncommitted lines of
credit providing up to $105,000 for short-term borrowings. No amounts were
outstanding at April 30, 2004. The interest rate to be charged on any
outstanding balance is based on prevailing market rates. Subsequent to April 30,
2004, the uncommitted lines of credit were replaced with a $180,000 revolving
credit facility (see Note B).
Note N: Derivative Financial Instruments
The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates, and commodity pricing. To manage the volatility
relating to these exposures, the Company enters into various derivative
transactions.
Commodity price management: In connection with the purchase of raw
materials used by the Company's consumer oils business, primarily soybean and
canola oils, the Company enters into commodity futures and options contracts to
manage the price volatility related to anticipated inventory purchases. The
commodity futures contracts generally have maturities of less than one year,
meet the hedge criteria according to Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, and are
accounted for as cash flow hedges. The mark-to-market gains or losses on
qualifying hedges are deferred and included as a component of other
comprehensive income or loss to the extent effective, and reclassified into cost
of products sold in the period during which the hedged transaction affects
earnings.
In order to qualify as a hedge of commodity price risk, it must be
demonstrated that the changes in the fair value of the commodities futures
contracts are highly effective in hedging price risks associated with commodity
purchases and related transportation costs. Hedge ineffectiveness is measured on
a quarterly basis. The mark-
- 42 -
to-market gains or losses on nonqualifying, excluded, and ineffective portions
of hedges are recognized in cost of products sold immediately and were not
significant.
As of April 30, 2004 and 2003, the deferred gain, net of tax, included in
accumulated other comprehensive loss was $1,237 and $236, respectively. This
entire amount at April 30, 2004, is expected to be recognized in earnings during
2005. Gains on commodities futures contracts and options recognized in earnings
during 2004 and 2003 were $3,967 and $4,050, respectively.
Interest rate hedging: The Company's policy is to manage interest cost
using a mix of fixed- and variable-rate debt. To manage this mix in a cost
efficient manner, the Company may periodically enter into interest rate swaps in
which the Company agrees to exchange, at specified intervals, the difference
between fixed and variable interest amounts calculated by reference to an
agreed-upon notional principal amount. 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. The interest rate
swap and the 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 income or 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 are
deferred and recognized over the remaining life of the contract.
During 2003 and 2004, the Company terminated its interest rate swap agreements
prior to maturity. These agreements were originally entered in fiscal 2002, in
December 2002, and in July 2003. As a result of the early terminations, the
Company received $924 and $4,092 in cash in 2004 and 2003, respectively, and
realized corresponding gains, which have been deferred. These deferred gains
will be recognized in earnings over the remaining lives of the original swap
agreements as a reduction of future interest expense. At April 30, 2004 and
2003, the balance of the deferred gains related to the terminated swaps was
$3,530 and $3,640, respectively, and is included in other noncurrent
liabilities.
Foreign exchange rate hedging: During 2004, the Company entered into
several forward currency exchange contracts with maturities of less than one
year. These contracts are used to hedge the effect of foreign exchange
fluctuations on future cash payments related to purchases of equipment. These
contracts are accounted for as cash-flow hedges with associated mark-to-market
gains and losses deferred and included as a component of other comprehensive
income or loss. These gains or losses are reclassified to earnings in the period
the futures contracts are executed. At April 30, 2004, the deferred loss, net of
tax, included in accumulated other comprehensive loss was $47.
- 43 -
Note O: Income Taxes
Deferred income taxes reflect the 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,
-----------------------
2004 2003
---------- --------
Deferred tax liabilities:
Intangible assets $ 115,729 $118,925
Depreciation 28,021 28,109
Other (each less than five percent of total liabilities) 14,947 7,982
---------- --------
Total deferred tax liabilities $ 158,697 $155,016
========== ========
Deferred tax assets:
Postretirement benefits other than pensions $ 7,661 $ 7,217
Other employee benefits 7,780 7,267
Pensions 3,554 6,715
Intangible assets 3,945 4,041
Marketing accruals 1,652 2,036
Other (each less than five percent of total assets) 2,708 3,915
---------- --------
Total deferred tax assets $ 27,300 $ 31,191
Valuation allowance for deferred tax assets (2,078) (1,755)
---------- --------
Total deferred tax assets less allowance $ 25,222 $ 29,436
========== ========
Net deferred tax liability $ 133,475 $125,580
========== ========
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 is as follows:
Year Ended April 30,
----------------------------------
2004 2003 2002
---------- ---------- ---------
Domestic $ 169,004 $ 147,581 $ 44,668
Foreign 9,815 7,809 5,530
---------- ---------- ---------
Income before income taxes $ 178,819 $ 155,390 $ 50,198
========== ========== =========
- 44 -
The components of the provision for income taxes are as follows:
Year Ended April 30,
----------------------------------
2004 2003 2002
---------- --------- ---------
Current:
Federal $ 52,604 $ 53,767 $ 13,447
Foreign 4,289 2,881 2,449
State and local 4,463 6,080 1,906
Deferred 6,113 (3,680) 1,545
---------- --------- ---------
Total income tax expense $ 67,469 $ 59,048 $ 19,347
========== ========= =========
A reconciliation of the statutory federal income tax rate and the effective
income tax rate follows:
Year Ended April 30,
------------------------------------------
Percent of Pretax Income 2004 2003 2002
- ------------------------------------------------------ ------- ------- -------
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 1.6 2.5 2.5
Research credits --- (0.1) (1.9)
Other items 1.1 0.6 2.9
------- ------- -------
Effective income tax rate 37.7% 38.0% 38.5%
======= ======= =======
Income taxes paid $72,109 $46,119 $18,003
======= ======= =======
- 45 -
Note P: Accumulated Other Comprehensive Loss
Comprehensive income is included in the Statements of Consolidated Shareholders'
Equity. The components of accumulated other comprehensive loss as shown on the
Consolidated Balance Sheets are as follows:
Unrealized
(Gain) Loss Unrealized
Foreign Minimum on Gain On Accumulated
Currency Pension Available- Cash Flow Other
Translation Liability for-Sale Hedging Comprehensive
Adjustment Adjustment Securities Derivatives Loss
---------- ---------- ----------- ----------- -------------
Balance at May 1, 2001 $ 16,635 $ --- $ --- $ --- $ 16,635
Current period (credit) charge (1,669) 1,228 --- --- (441)
Income tax benefit --- (431) --- --- (431)
----------- ---------- ----------- ----------- -------------
Balance at April 30, 2002 $ 14,966 $ 797 $ --- $ --- $ 15,763
Current period (credit) charge (8,268) 13,917 477 (381) 5,745
Income tax (benefit)
expense --- (5,288) (181) 145 (5,324)
----------- ---------- ----------- ----------- -------------
Balance at April 30, 2003 $ 6,698 $ 9,426 $ 296 $ (236) $ 16,184
Reclassification adjustments --- --- --- 381 381
Current period credit (6,697) (5,582) (872) (1,889) (15,040)
Income tax expense --- 2,179 327 554 3,060
----------- ---------- ----------- ----------- -------------
Balance at April 30, 2004 $ 1 $ 6,023 $ (249) $ (1,190) $ 4,585
=========== ========== =========== =========== =============
Note Q: Common Shares
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.
- 46 -
Shareholders' Rights Plan: Pursuant to a shareholders' rights plan
established during 1999, one share purchase right is associated with each of the
Company's outstanding common shares.
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 ten percent 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.
Note R: Subsequent Event
On June 16, 2004, the Company sold its Australian subsidiary, Henry Jones Foods
(HJF) to SPC Ardmona Ltd. The transaction generated proceeds of approximately
$35.7 million in cash and resulted in a net gain of approximately $9.5 million.
The sale of the subsidiary is consistent with the Company's stated strategy of
owning and marketing North American icon brands.
Results of HJF's operations are included in the special markets segment.
- 47 -
The following table summarizes the carrying values of the assets and liabilities
of HJF included in the Consolidated Balance Sheets:
April 30,
--------------------
2004 2003
-------- --------
Assets:
Current assets $ 16,515 $ 25,136
Property, plant, and equipment 8,535 7,262
Goodwill 2,713 2,381
Other intangible assets, net 5,878 5,117
Other assets 687 363
-------- --------
Total assets disposed $ 34,328 $ 40,259
======== ========
Liabilities:
Current liabilities $ 4,962 $ 4,409
Noncurrent liabilities 336 304
-------- --------
Total liabilities $ 5,298 $ 4,713
======== ========
Accumulated other comprehensive (income) loss $ (2,353) $ 3,044
======== ========
Net assets $ 26,677 $ 38,590
======== ========
The following table summarizes the operating results of HJF included in the
Statements of Consolidated Income.
Year Ended April 30,
---------------------------
2004 2003 2002
------- ------- -------
Net sales $36,864 $27,996 $25,850
Operating income $ 3,435 $ 2,305 $ 2,253
======= ======= =======
- 48 -
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 that 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, comprised of 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 Richard K. Smucker
Chairman and Co-Chief President, Co-Chief Executive Officer,
Executive Officer and Chief Financial Officer
- 49 -