The J. M. Smucker Company
Annual Report 2002

Plain-text annual report

A N N UA L R EPORT •2002• ® FINANCIAL HIGHLIGHTS The J. M. Smucker Company (Dollars in thousands, except per share data) Net sales Income and income per Common Share before merger and integration costs, nonrecurring charge, and cumulative effect of change in accounting method: Income Income per Common Share Income per Common Share – assuming dilution Net income and net income per Common Share: Net income Net income per Common Share Net income per Common Share – assuming dilution Common Shares outstanding at year end Number of employees Year Ended April 30, 2002 2001 $687,148 $651,242 $ 34,011 $ 1.39 $ 1.37 $ 29,511 $ 1.16 $ 1.15 $ 30,851 $ 1.26 1.24 $ $ 27,206 1.07 $ $ 1.06 24,869,463 24,359,281 2,300 2,250 ON OUR COVER CONTENTS “Snake River Morning” © 2000 Carol Swinney Letter to Shareholders Coasts, plains and mountains majestic: In tribute to the strength and beauty of America, our choice for this Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations year’s cover is “Snake River Morning,” an oil painting Stock Price Data by Carol Swinney. Ms. Swinney, who creates much of her work on location near her Casper, Wyoming, horse ranch, has won numerous honors and is repre- sented by galleries throughout the Western United States. It is the newest addition to our corporate art collection, which features still life studies of fruit, land- scapes and scenes of rural and small-town America. Management’s Discussion and Analysis Management’s Report on Responsibility for Financial Reporting Report of Independent Auditors Consolidated Financial Statements Notes to Consolidated Financial Statements Directors, Officers, and General Managers Properties Shareholder Information 1 10 11 11 12 18 18 19 24 40 40 41 DEAR FELLOW SHAREHOLDERS: Comments From Our Consumers “Your fine products have been on our breakfast table Fiscal 2002 was a landmark year for The J. M. Smucker Company. In October 2001, we announced an agreement with The Procter & Gamble Company to merge the Jif and Crisco for over 50 years and my brands into The J. M. Smucker Company. Our shareholders wife and I say it’s just not breakfast without Smucker’s jams and jellies. Hats off to you and your fine company…you are truly an American original.” overwhelmingly approved the merger at a special shareholder meeting held last April, and we thank you for your vote of support. The transaction closed this past June 1, and we now have under our banner three American icon brands: Smucker’s, Jif, and Crisco. Each is number one in its category, and each has a long and proven history with strong consumer equities. The addition of Jif and Crisco will nearly double our sales and more than double our profits in the coming year. In the past, approximately 50 percent of our sales came from fruit spreads across several business areas. The new Smucker Company, on the other hand, will be predominantly a consumer retail, branded business, with a good balance of product cate- gories. Roughly a quarter of our business will be in the peanut butter category; a quarter will be in fruit spreads; and another quarter will be in shortening and oils. We think this provides us with a more balanced, profitable basis for future growth. This transaction also adds more than 700,000 new share- holders to our existing shareholder base. As a result, many of you are receiving our annual report for the first time, and we wholeheartedly welcome you into the Smucker family. Our number of shares outstanding has doubled to more than 49,500,000, increasing the liquidity of our stock. Most impor- tant, in the course of the 2002 fiscal year, the market value of a common share increased more than 30 percent. Increasing shareholder value has always been a priority, and we will continue to manage the Company with the goal of providing our shareholders with a fair return on their investment. 1 Comments From Our Consumers “I love your Low Sugar and Sugar Free jams and jellies. Smucker’s has been a part of my family since I was born… Now that I am an adult, I appreciate the goodness of Smucker’s more than ever! Your Low Sugar products taste like fresh homemade preserves. Other jams and jellies on the market taste like pure sugar, but Smucker’s lets the fruit shine through!” 2 Our aim has been to complete the transition to “the new Smucker Company” as smoothly and seamlessly as possible, and we are pleased to report that our integration activities are virtually complete. Of course, the process required significant time and attention from all levels of our organization. We nev- ertheless maintained careful oversight of our core business and achieved record results in terms of sales and earnings per share. Sales for the year reached $687 million, an increase of six percent, while basic earnings per share, excluding merger costs and nonrecurring charges, grew from $1.16 to $1.39, a 20 per- cent increase. We are very appreciative of our employees’ extra efforts, and we are grateful to our customers and consumers for once again making the Smucker’s brand their number-one choice for fruit spreads, natural peanut butter, and ice cream toppings. We will review the year’s accomplishments by strategic business area, beginning with consumer, which is our largest and most profitable business area. CONSUMER Our U.S. consumer business had a record year, with sales and profits increasing four percent and five percent respectively. We continued to expand our share of the fruit spread market, reaching an all-time high in excess of 40 percent across all retail segments. The increase in our core business was driven primarily by double-digit growth of our Sugar Free fruit spreads and natural peanut butter products. Several exciting new products also contributed to our growth, including two new squeeze fruit spreads that exceeded our expectations in test markets and that we will offer in expanded distribution in fiscal 2003. Continuing our relationship with Masterfoods USA, a division of Mars, Inc., we also introduced two new cobranded ice cream toppings: Twix Magic Shell and Milky Way spoonable topping. Among the keys to long-term success are efforts to support our brands in ways that benefit our Company as well as our customers. Through television and print advertising, which this year emphasized our Sugar Free fruit spreads, and through carefully selected sponsorships, we seek to promote our brands and bring smiles to consumers the world over. Comments From Our Consumers “My 6-year-old is such a finicky eater. He refuses to buy lunch at school and doesn’t like sandwiches. The Uncrustables were recommended by a friend. Now, my son will not eat anything else!!! He absolutely loves them. The convenience is wonderful, too. I am a working mom and find these to be wonderful both nutritionally and conveniently. I quickly put them into his lunchbox and I don’t have to make any mess. It’s fast and easy. . . . Thanks again Smucker’s! You’ve made our life easier and better!” Our ongoing support of Willard Scott’s birthday segment on NBC’s “Today” is a prime example. This year we were a major sponsor of Walt Disney World Resorts’ “100 Years of Magic” Celebration, the World Figure Skating Championships, and a series of skating specials airing on NBC. Especially exciting is the recent announcement of our multiyear sponsorship of “Smucker’s Stars on Ice,” a premier ice skating tour that features Olympians and World Champions such as Tara Lipinski, Todd Eldredge, Alexei Yagudin, Kurt Browning, Jamie Sale and David Pelletier, and Elena Berezhnaya and Anton Silkharulidze. As mentioned, the Jif peanut butter and Crisco shortening and oils businesses became part of the Smucker Company in June. Jif will be added to our consumer business area. For Crisco, we have created a new strategic business area that will help provide focus on shortening and oils, and although this is a new category for us, we believe the Crisco brand is a great fit with our Company. Our intent is to successfully implement the strategies we have developed to fortify both brands’ already strong consumer image and gain market share. In the fourth quarter, we began to expand the retail availability of Smucker’s Uncrustables to an additional 45 percent of the United States, meaning that the product will be available in more than half of the country. This thaw-and-serve frozen peanut butter and jelly sandwich continues to be a hit with consumers of all ages, and we expect it to remain a star performer. Significant investment spending will be needed behind this unique product for the next couple of years, but we believe it has great potential and offers the Company a good platform for future growth. FOODSERVICE This business, which sells to restaurants, caterers, hotels, airlines, hospitals, and schools, saw its most challenging year as a result of a slow economy and the aftermath of the events of September 11. By the end of the year, however, foodservice sales were growing again. We were especially encouraged by the strength of our core Smucker’s portion control line, as it generated modest growth even in a difficult environment. 3 Comments From Our Consumers “Thank you for bringing good, wholesome food to America’s tables. Keep it up, eventually the rest of the world will catch up to Smucker’s standards.… I can’t help but think that you honor J. M. Smucker when you continue the tradition of making foods in the best methods you know how….” 4 4 Comments From Our Consumers Earlier in this letter, we discussed the consumer business “I was preparing some ice cream with Magic Shell for my 5-year-old and decided I had to let you know what a prominent place your product holds in our “spice” cabinet. . . . We love your product! There is always more than one bottle of Chocolate Fudge in our cabinet because we cannot risk running low.” 6 area’s plan to expand distribution of Smucker’s Uncrustables in the retail channel. This product is also the fastest growing line in the foodservice area. In foodservice, Smucker’s Uncrustables are sold primarily to school systems. Distribution to schools continues to increase at a high double-digit rate because the product meets the need on the part of schools to provide a healthful, protein-rich menu alternative that is readily accepted by children. Uncrustables sales in this channel reached $16 million for the year, and we anticipate continued growth thanks to the addition in the last quarter of the year of a prebrowned grilled cheese sandwich. The foodservice area also expects to reap dividends from expansions made in fiscal 2002 to our PlateScapers line of dessert decorating products. BEVERAGE Three health and natural foods brands — R.W. Knudsen Family, Santa Cruz Organic, and After The Fall — are the mainstays of this area. Interest in healthful eating continues to rise in America. As a result, our beverage business grew steadily this past year. Santa Cruz Organic remains the fastest growing line in our beverage area, as consumers remain very interested in products made from certified organic ingredients. We are the clear leader in all-natural and organic juices and introduced a number of new flavors this past year. At the same time, we discontinued certain items that did not meet our growth objectives. This allowed us to increase efficiencies in our production facilities, which translated into enhanced margins for this business area. INTERNATIONAL Our international business also saw record results this year, in spite of unfavorable exchange rates. In constant dollars, sales in the international business area grew by three percent. Our two biggest operations outside the United States continue to be in Canada and Australia. In Canada, we experienced solid growth and achieved record results by emphasizing our Smucker’s pure and No Sugar Added jams, which we supported Comments From Our Consumers “I wanted to write to let you know how very much I enjoy your Sugar Free syrup. . . . One of life’s greatest with an expanded national print advertising campaign. The Smucker’s line of retail ice cream toppings and foodservice portion control fruit spreads also were significant contributors. Our Canadian group looks forward to managing the Crisco brand, which has had a strong presence in that market for a number of years. pleasures is for me to enjoy In Australia, with our IXL and Allowrie fruit spread my wife’s buttermilk oat bran pancakes, and nothing tops them better than your Sugar Free syrup. The taste and texture are superb. So many other brands of sugar free syrup are brands, we became the largest manufacturer of fruit spreads — a first-time milestone for our Henry Jones Foods subsidiary. Competition in Australia continues to be a challenge, though, with two new fruit spread competitors entering the market in the past several years. In spite of that, IXL has maintained its number-one market share position thanks to growing total sales of nontraditional jam product lines, such as Light, Reduced Sugar, and 100% Fruit. watery and tasteless but We also are pleased with the performance of our businesses Smucker’s has a thick and rich texture and taste. Thank you for making life a little sweeter.” in Latin America and Mexico, where we experienced a total sales increase of 22 percent. Another focus for the international area is on profitable export business. Currently we distribute our products in more than 45 countries. INDUSTRIAL INGREDIENTS For the most part, this business area produces fruit fillings and preparations and markets them to other manufacturers for use in their food products. This past year, we acquired International Flavors and Fragrances Inc.’s formulated fruit and ingredient business. The addition of this business and its quality line of customers added about $15 million in sales for the Company in fiscal 2002. Also, as we announced in our third quarter report, we are continuing to review our industrial contracts and “rationalizing” those that do not meet our long-term margin objectives. As we also announced, the discontinuation of this business will reduce sales by $40 to $50 million over the next year or two, but will have only a minor impact on earnings. The new accounts acquired, com- bined with the elimination of lower-margin existing contracts, will provide us with a stronger, more viable ingredients busi- ness overall and a stellar list of branded customers. 7 THE FUTURE The future of The J. M. Smucker Company is more promising than ever. We have just finished a year in which our core busi- nesses grew at a steady pace, both top- and bottom-line, and in which we added two more American icon brands, Jif and Crisco. This gives us brand leadership in seven U.S. food cate- gories and significantly supports our vision of “a company composed of American icon brands with the leadership position in their respective categories.” As we look to the years ahead, we expect to prosper by three strategies: (1) growing market share of our existing brands, (2) introducing new products, and (3) making strategic acquisitions. We have an extremely strong balance sheet that provides us with the ability to con- tinue to invest in our current brands and at the same time to support future growth through acquisitions of other leading brands. Most important, ours is a Company of very talented people who work well individually and in teams. All of us are dedicated to doing what is right as we strive to grow the business at a sustained rate. Although The J. M. Smucker Company has made significant changes this past year, the Company will continue to be grounded on its founding values, what we refer to as our Basic Beliefs: People, Quality, Ethics, Growth, and Independence. We are grateful to you, our shareholders, for your continued support; to our employees for their dedicated and talented service; to our customers for their faith in us; and to our consumers for making our products marketplace leaders. Sincerely, Tim Smucker Richard Smucker Comments From Our Consumers “We recently purchased Smucker’s Snackers. What a great idea!… No refrigeration makes it very convenient all of the time. It’s great for a pick-me-up when getting tired in the afternoon.” 8 FINANCIAL REVI EW Five-Year Summary of Selected Financial Data Summary of Quarterly Results of Operations Stock Price Data Management’s Discussion and Analysis Management’s Report on Responsibility for Financial Reporting Report of Independent Auditors Consolidated Financial Statements Notes to Consolidated Financial Statements 10 11 11 12 18 18 19 24 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The following table presents selected financial data for each of the five years in the period ended April 30, 2002, as restated for the change in accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method, as discussed in Note B to the consolidated financial statements. The selected financial data was derived from the consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and Capital Resources and Liquidity” and the consolidated finan- cial statements and notes thereto. Year Ended April 30, (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 Statement of Income: Net sales Income before cumulative effect of change in accounting method(1)(2) Cumulative effect of change in accounting method(3)(4) $687,148 $651,242 $641,885 $612,662 $574,855 $ 30,851 $ 28,198 $ 26,273 $ 38,233 $ 34,771 — (992) — — (2,958) Net income $ 30,851 $ 27,206 $ 26,273 $ 38,233 $ 31,813 Financial Position: Long-term debt Total assets Shareholders’ equity Other Data: Earnings per Common Share: Income before cumulative effect of change in accounting method(1)(2) Cumulative effect of change in accounting method(3)(4) $135,000 524,892 280,144 $135,000 479,104 250,785 $ 75,000 477,698 320,608 $ — $ — 410,695 308,926 437,657 331,548 $ 1.26 $ 1.11 $ 0.92 $ 1.32 $ 1.20 — (0.04) — — (0.10) Net income $ 1.26 $ 1.07 $ 0.92 $ 1.32 $ 1.10 Income before cumulative effect of change in accounting method – assuming dilution(1)(2) $ 1.24 $ 1.10 $ 0.91 $ 1.31 $ 1.18 Cumulative effect of change in accounting method – assuming dilution(3)(4) — (0.04) — — (0.10) Net income – assuming dilution $ 1.24 $ 1.06 $ 0.91 $ 1.31 $ 1.08 Dividends declared per Common Share $ 0.64 $ 0.64 $ 0.61 $ 0.57 $ 0.53 (1) Includes, in 2002, merger and integration costs of $5,031 ($3,160 after tax), or $0.13 per share, related to the Jif and Crisco transaction. (2) Includes, in 2001, a nonrecurring charge of $2,152 ($1,313 after tax), or $0.05 per share, relating to the sale of real estate, and in 2000, non- recurring charges of $14,492 ($9,626 after tax), or $0.34 per share, relating to the impairment of certain long-lived assets, as discussed in Note E to the consolidated financial statements. (3) Reflects, in 2001, the impact of adopting the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as discussed in Note A to the consolidated financial statements. Had SAB 101 been retroactively applied to all periods presented, earnings per Common Share would have been $0.01 lower in 1999. (4) Reflects, in 1998, the cumulative effect of adopting the provisions of the Emerging Issues Task Force of the Financial Accounting Standards Board Issue No. 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation (EITF 97-13). 10 SUMMARY OF QUARTERLY RESULTS OF OPERATIONS The following is a summary of unaudited quarterly results of operations for the years ended April 30, 2002 and 2001, as restated for the change in accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first- out (FIFO) method as discussed in Note B to the consolidated financial statements. (Dollars in thousands, except per share data) Earnings per Common Share Earnings per Common Share – Assuming Dilution Quarter Ended Net Sales Gross Profit Income Before Cumulative Effect of Change in Accounting Method (1)(2) (3) Income Before Cumulative Effect of Change in Net Accounting Method Income (1)(2) (3) Income Before Cumulative Effect of Change in Net Accounting Method Income (1)(2) (3) Net Income Fiscal 2002 Fiscal 2001 July 31, 2001 October 31, 2001 January 31, 2002 April 30, 2002 July 31, 2000 October 31, 2000 January 31, 2001 April 30, 2001 $169,792 172,844 168,392 176,120 $166,328 169,837 153,628 161,449 $57,180 55,820 55,001 56,990 $55,177 53,635 50,625 47,857 $8,547 7,704 7,947 6,653 $8,547 7,704 7,947 6,653 $9,104 5,759 5,905 7,430 $8,112 5,759 5,905 7,430 $0.35 0.32 0.32 0.27 $0.32 0.23 0.25 0.31 $0.35 0.32 0.32 0.27 $0.28 0.23 0.25 0.31 $0.35 0.31 $0.35 0.31 0.32 0.32 0.26 0.26 $0.32 0.23 0.24 0.30 $0.28 0.23 0.24 0.30 Annual earnings per share may not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods. (1) Includes merger and integration costs during fiscal 2002 third and fourth quarters of $558 ($0.02 per share) and $2,602 ($0.11 per share), respec- tively, related to the Jif and Crisco transaction. (2) Includes a nonrecurring charge during fiscal 2001 second quarter of $1,313 ($0.05 per share) relating to the sale of real estate, as discussed in Note E to the consolidated financial statements. (3) Fiscal 2001 fourth quarter income was increased by $1,100 ($0.05 per share) resulting from adjustments to the effective income tax rate. STOCK PRICE DATA The Company’s Common Shares are listed on the New York Stock Exchange – ticker symbol SJM. The table below presents the high and low market prices for the shares and the quarterly dividends declared. There were 148,652 shareholders of record as of June 14, 2002. Fiscal 2002 Fiscal 2001 Quarter Ended July 31, 2001 October 31, 2001 January 31, 2002 April 30, 2002 July 31, 2000 October 31, 2000 January 31, 2001 April 30, 2001 High $27.77 36.10 37.73 36.65 $19.50 25.00 29.00 29.00 Low Dividends $23.91 23.90 31.00 30.30 $15.75 17.88 21.63 23.95 $0.16 0.16 0.16 0.16 $0.16 0.16 0.16 0.16 11 MANAGEMENT’S DISCUSSION AND ANALYSIS The J. M. Smucker Company (Company) is a leading North American manufacturer and marketer of fruit spreads, natural peanut butter, dessert toppings, and health and natural foods beverages. The Company’s operations and distribution outside of North America are principally in Australia, Brazil, China and the Pacific Rim, Europe, and the Middle East. On June 1, 2002, the Company consummated a trans- action with The Procter & Gamble Company (P&G), whereby the Jif and Crisco businesses of P&G were merged with and into the Company. The merger will be accounted for as a purchase business combination, with the Company as the accounting acquirer. The addition of these two brands has created a new company with a leading brand position in seven food categories. The expected operating results and financial position of this new company are significantly different than those of the Company as reported in this annual report, in Management’s Discussion and Analysis, and in the con- solidated financial statements. See Note C to the consol- idated financial statements for additional information on the merger and for pro forma financial information of the combined Company. During fiscal 2002, the Company changed from the last- in, first-out (LIFO) method of accounting for certain inventory to the first-in, first-out (FIFO) method. The results of operations included in this section for years prior to fiscal 2002 have been restated to reflect this change. RESULTS OF OPERATIONS COMPARISON OF FISCAL 2002 WITH FISCAL 2001 Sales in fiscal 2002 were $687.1 million, up 6% over the $651.2 million in sales in the prior year. Excluding the impact of acquisitions, sales were up approximately $21 million or 3%. Sales in the domestic segment were $590.3 million, up 6%, while international segment sales were $96.8 million, a 4% increase. Company oper- ating income was $59.8 million compared to $51.3 mil- lion in fiscal 2001, excluding the impact of $5 million ($3.2 million after tax, or $0.13 per share) in merger 12 and integration costs associated with the Jif and Crisco merger in fiscal 2002 and excluding a $2.1 million ($1.3 million after tax, or $0.05 per share) nonrecurring charge in fiscal 2001. Fiscal 2002 net income, excluding the impact of merger and integration costs, was $34.0 mil- lion, or $1.39 per share ($1.37 per share, assuming dilu- tion), compared to $29.5 million, or $1.16 per share ($1.15 per share, assuming dilution), last year. The fiscal 2001 results noted exclude the nonrecurring charge and the cumulative effect of an accounting change of $1.6 million ($1 million after tax, or $0.04 per share). During the fourth quarter of fiscal 2002, the Company elected to change the method of accounting for certain inven- tory from the LIFO method to the FIFO method. As a result, the Company restated its fiscal 2001 financial results, resulting in a reduction in net income of $3.5 million, or $0.14 per share. Sales in the domestic segment were up 6% due primarily to increases in the consumer, foodservice, and industrial business areas. The Company’s consumer business grew 4%, due mostly to new products and growth in Sugar Free fruit spreads, natural peanut butters, and Goober peanut butter and jelly combination products. During the year, the Company discontinued selling its low-margin, value-priced Sunberry Farms brand. Consumer area sales increased in the grocery, club store, and mass retail channels and decreased modestly in the military and con- sumer direct channels. The Company’s share of market in the fruit spreads category continues to grow, reaching an all-time high in excess of 40% across all retail segments. In the foodservice area, sales were up 9% as sales and distribution of Smucker’s Uncrustables to schools con- tinued to increase. Total foodservice sales of this product reached approximately $16 million, double the prior year. This new business helped offset a general softness in traditional foodservice sales, which were impacted during most of the year by the weak economy and declines in the travel and leisure industry following the events of last September 11. Despite those events, the traditional foodservice business realized a small increase, up 1% over the prior year. Sales in the beverage area were up 7% over the prior year, due primarily to increased sales of R.W. Knudsen Family and Santa Cruz Organic products. Sales in the Company’s industrial business were up 11% for the year. The increase was due to the acquisition of the International Flavors and Fragrances, Inc. (IFF) fruit and vegetable preparation businesses in October 2001. The IFF acquisition contributed approximately $13 mil- lion to domestic sales and $0.05 per share to earnings during the year. On an annual basis, the business acquired from IFF is expected to contribute sales of approximately $25 million. This additional business is expected to offset a similar amount of current business in the industrial area that will be eliminated in fiscal 2003 due to low margins. The addition of the IFF busi- ness, along with the merger into the Company of the Jif and Crisco brands, has given the Company the oppor- tunity to restructure its industrial business and focus on contracts that support long-term margin objectives. As a result, it is discontinuing select low-margin contracts. This will result in an approximate loss of $40 to $50 million in ingredient sales over the next two years; however, the impact on net income should be less than $1 million. The addition of the IFF business and the rationalization of low-margin product lines are consis- tent with the Company’s overall strategic direction to diversify its customer base and improve profitability in the industrial area. In the international segment, the Company’s Canadian business continued to perform well, with sales increas- ing 4% in the local currency. Export sales increased 3% and sales in the Company’s Mexican market increased 22% over last year. Approximately $1.9 million of the $3.5 million increase in international sales was due to the addition of that portion of the business acquired from IFF that is located in Brazil. In Australia, the Henry Jones Foods business was up 1% in local cur- rency compared to fiscal 2001. The impact of the strong U.S. dollar as compared primarily to the local currencies in Australia, Brazil, and Canada resulted in fiscal 2002 sales being approximately $5.4 million less than they would have been had exchange rates remained constant with exchange rates last year. The Company’s gross profit margin was 32.7% in fiscal 2002, compared to 31.8% last year. The cost of prod- ucts sold for the majority of the Company’s businesses was consistent with last year, as raw material costs remained essentially flat. Selling, distribution, and admin- istrative (SD&A) costs were 24.8% of sales, as com- pared to 24.0% last year. However, if the $5 million of merger and integration costs associated with the Jif and Crisco merger are excluded, SD&A costs as a percent of sales would have been comparable to last year. The dollar increase in SD&A expenses was primarily due to higher amortization charges associated with previously capitalized information systems implementation costs. Marketing expenses were down 1% from the prior year, primarily due to lower expenditures in the beverage and consumer direct areas. Interest expense increased $1.4 million over the prior year as the long-term debt placement that was com- pleted during the second quarter of fiscal 2001 was on the books for a full year in fiscal 2002. The Company capitalized approximately $0.5 million in interest during fiscal 2002 that was associated with the Company’s information technology reengineering project. Also during the year, the Company entered into interest rate swap agreements in order to manage interest rate exposure and lower financing costs. The Company effectively converted $17 million of fixed-rate debt (7.70% notes due in September 2005) and $33 million of fixed-rate debt (7.87% notes due in September 2007) to variable-rate debt. The interest rate swaps are consid- ered fair value hedges and are 100% effective. The interest rate swaps reduced interest expense by approximately $0.6 million in fiscal 2002. The effective income tax rate for the year increased to 38.5% from 36.6% in fiscal 2001 due to a general increase in state and local taxes, foreign income taxes, and other nondeductible expenses. On June 1, 2002, the Company completed its merger of P&G’s Jif peanut butter and Crisco shortening and oils businesses with and into the Company. Under the terms of the transaction, the Jif and Crisco businesses were contributed by P&G to a wholly-owned subsidiary, the shares of which were then distributed by P&G to its shareholders. That former subsidiary was then merged into the Company with the shareholders of P&G receiv- ing one share of new Company stock for every 50 P&G shares that they held as of the record date for the distribu- tion. Existing Company shareholders received 0.9451 of a 13 new share for each existing share of the Company they held. As a result, 49.5 million shares were issued and are outstanding with the previous P&G shareholders hold- ing approximately 52.5% of the total. The total price of the transaction, based on an average share price of $30 per share (calculated at the time the transaction was announced), was approximately $781 million. COMPARISON OF FISCAL 2001 WITH FISCAL 2000 Sales in fiscal 2001 were $651.2 million, up from $641.9 million in fiscal 2000. Domestic sales were $557.9 million, up 1% over fiscal 2000, while the inter- national segment realized an increase of $2.8 million or 3%. Excluding the impact of nonrecurring charges in both years and the cumulative effect of an accounting change in fiscal 2001, earnings for the year were $29.5 million, or $1.16 per share ($1.15 per share, assuming dilution), compared to $35.9 million, or $1.26 per share ($1.25 per share, assuming dilution), in fiscal 2000. Including the impact of nonrecurring charges and change in accounting method, earnings were $27.2 mil- lion, or $1.07 per share ($1.06 per share, assuming dilu- tion), in fiscal 2001 compared to $26.3 million, or $0.92 per share ($0.91 per share, assuming dilution), in fiscal 2000. In the domestic segment, the Company’s consumer busi- ness grew 4%, due primarily to an increase in sales of Sugar Free fruit spreads and natural peanut butters, along with growth in the club store channel. The Company also saw 4% growth in its foodservice business, driven in large part by the Smucker’s Uncrustables line of thaw-and-serve peanut butter and jelly sandwiches in its schools market. Sales of traditional portion control items were flat compared to fiscal 2000. The specialty busi- ness was up for fiscal 2001 due primarily to new prod- uct sales. In the beverage area, sales of R.W. Knudsen Family and Santa Cruz Organic products continue to grow. However, overall beverage sales were flat compared to fiscal 2000 due to softness in After The Fall brand sales. In the industrial area, domestic sales were below fiscal 2000, as sales with new customers did not fully offset declines in sales with certain existing customers. In the international segment, the increase came from a full year inclusion of the Company’s Brazilian opera- tion. The Company’s Canadian business performed well, contributing to overall segment performance for the second consecutive year. Sales were negatively impacted by exchange rates and increased competitive activity in the Company’s Australian market. Sales in Mexico and the Company’s European and Middle East markets were also down. The impact of a strong U.S. dollar, primarily in comparison to the Australian and Canadian dollars, resulted in fiscal 2001 sales being approximately $6.6 million less than they would have been had exchange rates been equal to fiscal 2000 levels. Had exchange rates remained constant, international sales would have been up 10%. The cost of products sold as a percentage of net sales increased to 68.2%, compared to 67.5% in fiscal 2000. During the year, the Company benefited from the lower cost of fruit packed during the summer months. However, these savings were offset by the impact of revaluing carryover fruit inventories (i.e., fruit packed in fiscal 2000) to reflect the current lower cost. The sav- ings were also offset by increased energy costs, which were up 20% over fiscal 2000, and higher freight costs. SD&A expenses increased at approximately the same rate as sales. Marketing expenses were up 7% over fiscal 2000 related to the introduction of new products. This was somewhat offset by a 2% decrease in selling expenses and a less than 1% increase in administrative costs. During the second quarter of fiscal 2001, the Company finalized the sale of the former Mrs. Smith’s real estate in Pottstown, Pennsylvania, resulting in a pretax loss of approximately $2.1 million, or $0.05 per share. This transaction represented the final nonrecurring charge relating to the previously announced financial review of certain businesses and assets by the Company, initiated in fiscal 2000. The total amount of nonrecurring charges taken in connection with the review was $16.6 million, with $14.5 million of that amount taken in fiscal 2000. Interest expense increased over fiscal 2000 due to the long-term debt placement completed during the second quarter of the fiscal year. During the year, the Company capitalized approximately $0.9 million of interest, pri- marily associated with the Company’s information tech- nology reengineering project. The effective income tax rate for the year was 36.6% compared to 36.5% in fiscal 2000. 14 CAPITAL RESOURCES AND LIQUIDITY (Dollars in thousands) 2002 2001 2000 Year Ended April 30, Net cash provided by operating activities Net cash used for investing activities Net cash (used for) provided by financing activities $67,000 $88,196 $32,271 (20,510) (27,612) (39,818) (5,808) (32,325) 31,254 increase capacity and improve efficiencies in production of Smucker’s Uncrustables. Dividend payments in fiscal 2003 are also expected to increase as a result of the additional number of outstanding shares resulting from the merger of the Jif and Crisco businesses with and into the Company and a possible increase in the dividend rate. Assuming there are no other material acquisitions or other significant investments, the Company believes that cash on hand together with cash generated by opera- tions and existing lines of credit will be sufficient to meet fiscal 2003 requirements, including the payment of dividends and interest on outstanding debt. The financial position of the Company remains strong with an increase in cash and cash equivalents of $40.8 million during the year. The increase in cash and cash equivalents reflects cash generated from operations of $67.0 million. Additional debt was not required to com- plete the merger of the Jif and Crisco businesses with and into the Company and total long-term debt as a percent of total capitalization was reduced from approximately 33% at April 30, 2002, to 11% follow- ing the merger. Fiscal 2002 capital expenditures were $23.5 million, including capitalized software and consulting costs of $3.9 million. This was down from $29.4 million in the previous year. Other significant uses of cash during the year included the payment of dividends of $0.64 per share or $15.6 million, $5.7 million for the acquisition from International Flavors and Fragrances, Inc., and the payment of merger and integration costs of $5 million. Capital expenditures for fiscal 2003 are budgeted at $59 million, representing a significant increase over the Company’s historical levels. While capital expenditures in absolute terms are expected to more than double, the fiscal 2003 capital expenditures budget as a percent of sales is expected to be approximately 4.7% as compared to 3.4% in fiscal 2002. The planned increase in capital expenditures is primarily attributable to (i) building expansion projects at the corporate headquarters in Orrville, Ohio, necessary in order to consolidate func- tions and to house employees added in connection with the merger, and (ii) spending associated with plans to 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 state- ments, 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 assump- tions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assump- tions as to future uncertainties and, as a result, actual results could differ from these estimates. Accrued Marketing and Merchandising. In order to sup- port the Company’s products, various marketing pro- grams are offered to customers which reimburse them for a portion or all of their promotional activities related to the Company’s products. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these marketing and mer- chandising 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. 15 Impairment of Long-Lived Assets. Long-lived assets his- torically have been reviewed for impairment whenever events or changes in circumstances indicate that the car- rying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. There are no events or changes in circum- stances of which management is aware indicating that the carrying value of the Company’s long-lived assets may not be recoverable. As described below under “Recently Issued Accounting Standards,” the accounting treatment for goodwill and other intangible assets will change significantly in fiscal 2003. Pension Plans and Other Postretirement Benefit Plans. The measurement of liabilities related to defined benefit pen- sion plans and other postretirement benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trend rates. Actual pension plan asset performance will either reduce or increase unamortized pension losses at the end of fiscal 2003, which ultimately affects net income. Accrued Expenses. Management estimates certain mate- rial expenses in an effort to record those expenses in the period incurred. The most material accrued estimates relate to insurance-related expenses, including self- insurance. Workers’ compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These esti- mates 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 cal- culated accrual. Other Matters. The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.” Transactions with related parties are in the ordinary course of business, are conducted on an arm’s-length basis, and are not mate- rial to the Company’s results of operation, financial con- dition, or cash flows. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also provides new criteria to determine whether an acquired intangible asset should be recog- nized separately from goodwill. The adoption of SFAS 141 had no impact on the Company’s results of opera- tions or financial condition. SFAS 142 is effective for the Company as of May 1, 2002. In accordance with SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS 142 requires an initial goodwill and indefinite lived intangible asset impairment assessment in the year of adoption, and at a minimum, annual impair- ment testing thereafter. The discontinuance of goodwill and indefinite lived intangible asset amortization in fiscal 2003 will increase operating income by approximately $3.5 million. The Company has not completed its initial asset impairment assessment as required in adopting SFAS 142. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets to be held and used, to be disposed of other than by sale, and to be disposed of by sale. SFAS 144 is effective for the Company as of May 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company’s results of operations or financial condition. 16 DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK The following discussions about the Company’s market risk disclosures involve forward-looking statements. Actual results could differ from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. Interest Rate Risk. The fair value of the Company’s cash and short-term investment portfolio, and the fair value of notes receivable and payable at April 30, 2002, approximate carrying value. Interest rate swaps are used to hedge underlying debt obligations and reduce overall interest expense. Market risk, as measured by the change in fair value resulting from a hypothetical 10% change in interest rates, is not material. Based on the Company’s overall interest rate exposure as of and during the year ended April 30, 2002, including derivative and other instruments sensitive to interest rates, a hypothetical 10% movement in interest rates (relating to the Company’s variable rate borrowings) would not materially affect the Company’s results of operations. As of April 30, 2002, the Company had interest rate swap agreements on fixed rate obligations in the amount of $50 million. These exchange agreements are perfectly effective as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and had a fair value of $0.5 million at April 30, 2002. The weighted average interest rate for these agreements was 4.88% at April 30, 2002. Foreign Currency Exchange Risk. The Company has concluded that its foreign currency exposure on future earnings or cash flows is not significant, and has cur- rently chosen not to hedge its foreign currency exposure. The Company has operations outside the United States with foreign currency denominated assets and liabilities, primarily denominated in Australian, Brazilian, and Canadian currencies. Because the Company has foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of trans- actions and the movement of exchange rates. The for- eign currency balance sheet exposures as of April 30, 2002, are not expected to result in a significant impact on future earnings or cash flows. Revenues from customers outside the United States rep- resented approximately 14% of net sales during fiscal 2002. Thus, certain sales and expenses have been, and are expected to be, subject to the effect of foreign cur- rency fluctuations and these fluctuations may have an impact on operating results. CERTAIN FORWARD - LOOKING STATEMENTS This annual report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to: • the success and cost of integrating the Jif and Crisco businesses into the Company; • the success and cost of new marketing and sales programs and strategies intended to promote new growth in the Jif and Crisco businesses and in their respective market shares; • the success and cost of introducing new products; • general competitive activity in the market; • the ability of business areas to achieve sales targets and the costs associated with attempting to do so; • the ability of the Company from time to time to successfully effect price increases; • the ability to improve sales and earnings performance in the Company’s formulated ingredient business; • the exact time frame in which the loss of sales associated with discontinued industrial contracts will occur and the Company’s ability to successfully cover or eliminate the overhead associated with those sales; • costs associated with the implementation of new business and information systems; • raw material and ingredient cost trends; and • foreign currency exchange and interest rate fluctuations. 17 MANAGEMENT’S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING Management of The J. M. Smucker Company is responsible for the preparation, integrity, accuracy, and consistency of the consolidated financial statements and the related financial information in this report. Such information has been prepared in accordance with accounting principles generally accepted in the United States and is based on our best estimates and judgments. The Company maintains systems of internal accounting controls supported by formal policies and procedures which are communicated throughout the Company. There is an extensive program of audits performed by the Company’s internal audit staff and independent auditors designed to evaluate the adequacy of and adherence to these controls, policies, and procedures. Ernst & Young LLP, independent auditors, has audited the Company’s financial statements. Management has made all financial records and related data available to Ernst & Young LLP during its audit. The Company’s audit committee, comprising three nonemployee members of the Board, meets regularly with the independent auditors and management to review the work of the internal audit staff and the work, audit scope, timing arrangements, and fees of the independent auditors. The audit committee also regularly satisfies itself as to the adequacy of controls, systems, and financial records. The manager of the internal audit department is required to report directly to the chair of the audit committee as to internal audit matters. It is the Company’s best judgment that its policies and procedures, its program of internal and independent audits, and the oversight activity of the audit committee work together to provide reasonable assurance that the operations of the Company are conducted according to law and in compliance with the high standards of business ethics and conduct to which the Company subscribes. Timothy P. Smucker Chairman and Co-Chief Executive Officer Steven J. Ellcessor Vice President — Finance and Administration, Secretary, and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders The J. M. Smucker Company We have audited the accompanying consolidated balance sheets of The J. M. Smucker Company as of April 30, 2002 and 2001, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2002. These financial statements are the responsibility of the Company’s manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments 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 con- solidated financial position of The J. M. Smucker Company at April 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2002, in conformity with accounting principles generally accepted in the United States. As explained in Note B to the consolidated financial statements, the Company has given retroactive effect to a change in the method of accounting for certain inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Akron, Ohio June 6, 2002 18 STATEMENTS OF CONSOLIDATED INCOME The J. M. Smucker Company (Dollars in thousands, except per share data) Net sales Cost of products sold Gross Profit Selling, distribution, and administrative expenses Merger and integration costs Nonrecurring charge Operating Income Interest income Interest expense Other income – net Income Before Income Taxes and Cumulative Effect of Change in Accounting Method Income taxes Income Before Cumulative Effect of Change in Accounting Method Cumulative effect of change in accounting method, net of tax benefit of $572 Net Income Earnings per Common Share: Income Before Cumulative Effect of Change in Accounting Method Cumulative effect of change in accounting method Net Income per Common Share Earnings per Common Share – Assuming Dilution: Income Before Cumulative Effect of Change in Accounting Method Cumulative effect of change in accounting method Year Ended April 30, 2002 2001 2000 $687,148 462,157 $651,242 443,948 $641,885 432,993 224,991 165,172 5,031 — 54,788 2,181 (9,207) 2,436 207,294 155,973 — 2,152 49,169 2,918 (7,787) 192 208,892 153,297 — 14,492 41,103 2,706 (3,111) 701 50,198 19,347 44,492 16,294 41,399 15,126 30,851 28,198 26,273 — (992) — $ 30,851 $ 27,206 $ 26,273 $ 1.26 — $ 1.11 (0.04) $ 0.92 — $ 1.26 $ 1.07 $ 0.92 $ 1.24 — $ 1.10 (0.04) $ 0.91 — Net Income per Common Share – Assuming Dilution $ 1.24 $ 1.06 $ 0.91 See notes to consolidated financial statements. 19 April 30, 2002 2001 $ 91,914 $ 51,125 57,371 55,986 52,817 63,722 54,614 59,561 116,539 114,175 13,989 13,956 279,813 235,242 16,911 87,126 17,684 79,862 242,590 247,235 7,504 17,072 354,131 361,853 (191,342) (190,283) 162,789 171,570 33,510 14,825 33,955 33,788 11,848 26,656 82,290 72,292 $524,892 $479,104 CONSOLIDATED BALANCE SHEETS The J. M. Smucker Company ASSETS (Dollars in thousands) Current Assets Cash and cash equivalents Trade receivables, less allowance for doubtful accounts Inventories: Finished products Raw materials, containers, and supplies Other current assets Total Current Assets Property, Plant, and Equipment Land and land improvements Buildings and fixtures Machinery and equipment Construction in progress Accumulated depreciation Total Property, Plant, and Equipment Other Noncurrent Assets Goodwill Other intangible assets Other assets Total Other Noncurrent Assets 20 LIABILITIES AND SHAREHOLDERS’ EQUITY (Dollars in thousands) Current Liabilities Accounts payable Salaries, wages, and additional compensation Accrued marketing and merchandising Income taxes Dividends payable Other current liabilities Total Current Liabilities Noncurrent Liabilities Long-term debt Postretirement benefits other than pensions Deferred income taxes Other noncurrent liabilities Total Noncurrent Liabilities Shareholders’ Equity Serial Preferred Shares – no par value: Authorized – 3,000,000 shares; outstanding – none Common Shares – no par value: Authorized – 70,000,000 shares; outstanding – 24,869,463 in 2002 and 24,359,281 in 2001 (net of 7,555,113 and 8,065,295 treasury shares, respectively), at stated value Additional capital Retained income Less: Deferred compensation Amount due from ESOP Trust Accumulated other comprehensive loss Total Shareholders’ Equity April 30, 2002 2001 $ 32,390 22,866 11,563 2,078 3,979 7,555 $ 29,967 15,250 8,559 2,916 3,897 7,473 80,431 68,062 135,000 14,913 4,105 10,299 135,000 14,224 4,981 6,052 164,317 160,257 — — 6,217 33,184 267,793 6,090 19,278 253,226 (2,725) (8,562) (15,763) (2,248) (8,926) (16,635) 280,144 250,785 $524,892 $479,104 See notes to consolidated financial statements. 21 STATEMENTS OF CONSOLIDATED CASH FLOWS The J. M. Smucker Company (Dollars in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Nonrecurring charge, net of tax benefit Cumulative effect of change in accounting method, net of tax benefit Deferred income tax expense (benefit) Changes in assets and liabilities, net of effect from business acquisitions: Trade receivables Inventories Other current assets Accounts payable and accrued items Income taxes Other – net Year Ended April 30, 2002 2001 2000 $30,851 $27,206 $26,273 23,932 4,625 — — 1,545 (1,217) (2,063) (11) 12,483 25 (3,170) 22,521 4,400 1,313 992 2,040 5,196 17,326 3,830 10,558 (1,084) (6,102) 21,674 4,524 9,626 — (3,872) (11,678) (6,792) (733) (9,174) 2,580 (157) Net Cash Provided by Operating Activities 67,000 88,196 32,271 Investing Activities Additions to property, plant, and equipment Businesses acquired, net of cash acquired Disposal of property, plant, and equipment Other – net Net Cash Used for Investing Activities Financing Activities Proceeds from long-term debt Repayment of short-term debt – net Purchase of treasury shares Dividends paid Net amount received from ESOP Trust Other – net Net Cash (Used for) Provided by Financing Activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year (23,464) (5,714) 7,060 1,608 (29,385) — 278 1,495 (32,240) (9,056) 91 1,387 (20,510) (27,612) (39,818) — — (1,128) (15,568) 364 10,524 (5,808) 107) 40,789 51,125 60,000 — (80,964) (16,686) 297 5,028 (32,325) (907) 27,352 23,773 75,000 (8,966) (17,654) (17,212) 303 (217) 31,254 (615) 23,092 681 Cash and Cash Equivalents at End of Year $91,914 $51,125 $23,773 ( ) Denotes use of cash See notes to consolidated financial statements. 22 STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY The J. M. Smucker Company (Dollars in thousands) Balance at May 1, 1999, as previously stated Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (see Note B) Balance at May 1, 1999, as restated Net income Foreign currency translation adjustment Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $0.61 a share Tax benefit of stock plans Other Common Shares Additional Capital Retained Income Deferred Compen- sation Amount Due From ESOP Trust Accumulated Other Compre- hensive Loss Total Shareholders’ Equity $7,290 $15,604 $318,660 $(2,001) $(9,526) $ (5,698) $324,329 7,219 7,219 7,290 15,604 325,879 (2,001) (9,526) (5,698) 331,548 26,273 (3,629) (237) 28 (566) 1,570 (16,851) (1,090) (17,323) 582 303 26,273 (3,629) 22,644 (17,654) 508 (17,323) 582 303 Balance at April 30, 2000 7,081 17,190 317,978 (3,091) (9,223) (9,327) 320,608 Net income Foreign currency translation adjustment Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $0.64 a share Tax benefit of stock plans Other 27,206 27,206 (7,308) (7,308) (1,074) 83 (4,027) 4,820 (75,863) 843 (16,095) 1,295 297 19,898 (80,964) 5,746 (16,095) 1,295 297 Balance at April 30, 2001 6,090 19,278 253,226 (2,248) (8,926) (16,635) 250,785 Net income Foreign currency translation adjustment Minimum pension liability Comprehensive Income Purchase of treasury shares Stock plans Cash dividends declared – $0.64 a share Tax benefit of stock plans Other 30,851 (11) 138 (483) 11,590 (634) (477) (15,650) 2,799 364 1,669 (797) 30,851 1,669 (797) 31,723 (1,128) 11,251 (15,650) 2,799 364 Balance at April 30, 2002 $6,217 $33,184 $267,793 $(2,725) $(8,562) $(15,763) $280,144 See notes to consolidated financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The J. M. Smucker Company NOTE A: ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its sub- sidiaries, all of which are wholly owned. All significant intercompany transactions and accounts are eliminated in consolidation. Financial Instruments: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents. With respect to accounts receivable, concentration of credit risk is limited due to the large number of customers. The Company does not require collateral from its customers. The fair value of the Company’s financial instruments, other than certain of its fixed-rate long-term debt, approximates their carrying amounts (see Note K). The fair value of the Company’s fixed-rate long-term debt, estimated using current market rates and a discounted cash flow analysis, was approximately $129,470,000 at April 30, 2002. Derivative Financial Instruments: Effective May 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all derivative financial instruments, such as foreign exchange contracts and interest rate swap agreements, be rec- ognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or share- holders’ equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have a material effect on the Company’s results of operations, financial position, or cash flows in fiscal 2002. By policy, the Company has not his- torically entered into derivative financial instruments for trading purposes or for speculation. The Company has entered into interest rate swap agreements (see Note K). The interest rate swap agreements effec- tively modify the Company’s exposure to interest risk by converting a portion of the Company’s fixed-rate debt to a floating rate. Based on criteria defined in SFAS 133, the interest rate swaps are considered fair value hedges and are 100% effective. The interest rate swap and instrument being hedged is marked to market in the balance sheet. The mark-to-market value of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains or losses in other expense. No other cash payments are made unless the contract is termi- nated 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 obli- gations to exchange payments under the terms of the contract. Any gains or losses upon the early termination of the interest rate swap contracts would be deferred and recognized over the remaining life of the contract. Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles gen- erally 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 con- solidated financial statements include nonrecurring charges, allowances for doubtful accounts receivable, estimates of future cash flows associated with assets, asset impairments, useful lives for depreciation and amortization, loss con- tingencies, net realizable value of inventories, accruals for marketing and merchandising programs, and the determi- nation of discount and other rate assumptions for defined benefit pension and other postretirement benefit expenses. Actual results could differ from these estimates. Revenue Recognition: The Company recognizes revenue when products are shipped and title has transferred to the customer. 24 In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarified the Staff’s view on various rev- enue recognition and reporting matters. The implementation of SAB 101 was accounted for as a change in accounting method and applied cumulatively as if the change occurred as of May 1, 2000. The effect of the change was a one-time, noncash reduction to the Company’s earnings of $992,000 (net of tax of $572,000), or approximately $0.04 per share. Shipping and Handling Costs: Shipping and handling costs are included in cost of products sold. Stock Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized (see Note J). Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method (see Note B). Goodwill and Other Intangible Assets: Goodwill and other intangible assets, principally trademarks and patents, are being amortized using the straight-line method over periods ranging from 5 to 40 years for acquisitions prior to July 1, 2001. During the periods presented, the Company continually evaluated whether events or circumstances occurred which would indicate that the carrying value may not be recoverable or that the useful life warrants revision. When events or circumstances indicated, the Company analyzed the future recoverability of the asset using an estimate of the related undiscounted future cash flows of the related business, and recognized any adjustment to the asset’s car- rying value on a current basis. Accumulated amortization of goodwill and other intangible assets at April 30, 2002 and 2001, was $34,189,000 and $30,300,000, respectively. Effective May 1, 2002, the Company is required to adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with this standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment testing. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS 142 requires an initial goodwill and indef- inite lived intangible asset impairment assessment in the year of adoption and, at a minimum, annual impairment tests thereafter. The discontinuation of goodwill and indefinite lived intangible asset amortization in fiscal 2003 will increase operating income by approximately $3,500,000. The Company has not completed its initial asset impair- ment assessment as required in adopting SFAS 142. Property, Plant, and Equipment: Property, plant, and equipment are recorded at cost and are depreciated on a straight- line basis over the estimated useful lives of the assets (3 to 15 years for machinery and equipment, and 10 to 40 years for buildings, fixtures, and improvements). The Company leases certain land, buildings, and equipment for varying periods of time, with renewal options. Leases of cold storage facilities are continually renewed. Total rental expense in fiscal 2002, 2001, and 2000 totaled $10,430,000, $11,827,000, and $10,242,000, respectively. Rental expense for cold storage facilities, which is based on quantities stored, amounted to $2,324,000, $3,319,000, and $1,490,000 in fiscal 2002, 2001, and 2000, respectively. Software Costs: The Company capitalizes significant costs associated with the development and installation of inter- nal use software. Amounts capitalized are amortized over the estimated useful lives of the software, ranging from 3 to 7 years, beginning with the project’s completion. Net capitalized software costs as of April 30, 2002 and 2001, were $28,173,000 and $29,805,000, respectively, of which $3,484,000 and $7,382,000 were included in construc- tion in progress. Interest costs of $524,000, $891,000, and $1,069,000 were capitalized during fiscal 2002, 2001, and 2000, respectively. 25 Foreign Currency Translation: Assets and liabilities of the Company’s foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, while income and expenses are translated using average rates. Translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive loss. Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $15,525,000, $14,178,000, and $12,855,000 in fiscal 2002, 2001, and 2000, respectively. Recently Issued Accounting Standards: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. The adoption of SFAS 141 had no impact on the Company’s results of operations or financial condition. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial account- ing and reporting for the impairment or disposal of long-lived assets to be held and used, to be disposed of other than by sale, and to be disposed of by sale. SFAS 144 is effective for the Company as of May 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company’s results of operations or financial condition. Reclassifications: Certain prior year amounts have been reclassified to conform to current year classifications. Risks and Uncertainties: In the domestic markets, the Company’s products are primarily sold through brokers to food retailers, food wholesalers, club stores, mass merchandisers, military commissaries, health and natural food stores, foodservice distributors and chain operators including hotels and restaurants, schools and other institutions, and to other food manufacturers. The Company’s distribution outside the United States is principally in Canada, Australia, Brazil, Mexico, China and the Pacific Rim, Europe, and the Middle East. The fruit raw materials used by the Company are generally purchased from independent growers and suppliers. Because of the seasonal nature and volatility of quantities of most of the crops on which the Company depends, it is necessary to prepare and freeze stocks of fruit and fruit juices and to maintain them in cold storage warehouses. The Company believes there is no concentration of risk with any single customer or supplier whose failure or nonperformance would materially affect the Company’s results. In addition, the Company insures its business and assets in each country against insurable risks, as and to the extent that it deems appropriate, based upon an analysis of the relative risks and costs. The Company believes that the risk of loss from noninsurable events would not have a material adverse effect on the Company’s operations as a whole. NOTE B: CHANGE IN ACCOUNTING PRINCIPLE During the fourth quarter of fiscal 2002, the Company changed its method of accounting for certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The effect of the change on fiscal 2002 net income and previously reported quarterly results in fiscal 2002 was not significant. The impact of the retroactive restatement on retained earnings as of May 1, 1999, was an increase of $7,219,000. 26 The effect of the change on previously reported net income and per share amounts is as follows: (Dollars in thousands, except per share data) Net income: Net income, as previously stated using the LIFO method Effect of the change to the FIFO method Net income, as restated Earnings per Common Share: Net income per Common Share, as previously stated using the LIFO method Effect of the change to the FIFO method Net income per Common Share, as restated Year Ended April 30, 2001 2000 $30,667 (3,461) $26,357 (84) $27,206 $26,273 $ 1.21 (0.14) $ 0.92 — $ 1.07 $ 0.92 The Company adopted LIFO in fiscal 1977, when it was experiencing significant inflation in the cost of fruit and other raw materials, in order to better match current costs with current revenues. However, during the last ten years, on a cumulative basis, the Company has experienced deflation in fruit costs, primarily resulting from the global sourc- ing of fruit. The Company believes this trend will continue. The change to FIFO will conform all of the Company’s inventory accounting to FIFO and will align the Company’s inventory accounting with the majority of consumer product food companies. Further, the change to FIFO will result in an improvement to reporting interim results by eliminating the fluctuations resulting from the need to estimate the Company’s fruit costs before the completion of the growing seasons and final pricing by vendors. NOTE C: SUBSEQUENT EVENT On June 1, 2002, the Company merged the Jif peanut butter and Crisco shortening and oils businesses of The Procter & Gamble Company (P&G) with and into the Company in a tax-free stock transaction. Under the terms of the agree- ment, P&G spun off its Jif and Crisco businesses to its shareholders and immediately thereafter those businesses were merged with and into the Company. P&G shareholders received one Company Common Share for every 50 P&G common shares that they held as of the record date for the distribution of the Jif and Crisco businesses to the P&G shareholders. The Company’s shareholders received 0.9451 of a new Company Common Share for each Company Common Share that they held immediately prior to the merger. Approximately 26,000,000 Common Shares were issued to the P&G shareholders resulting in an aggregate purchase price of approximately $781,000,000 based on the average market price of the Company’s Common Shares over the period from three days before to three days after the terms of the acquisition were announced. Upon completion of the merger, the Company had 49,531,376 shares outstanding. The merger and the combination of three brands — Smucker’s, Jif and Crisco — enhances the Company’s strategic and market position. For accounting purposes, the Company is the acquiring enterprise. The merger was accounted for as a purchase business combination. Accordingly, the results of the Jif and Crisco operations will be included in the Company’s fiscal 2003 consolidated financial statements from the date of the merger. The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company will determine the estimated fair values based on independent appraisals, discounted cash flows, quoted market prices, and estimates made by management. To the extent that the pur- chase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess will be allo- cated to goodwill. 27 The following table summarizes the initial estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is preliminary and subject to adjustment following comple- tion of the valuation process: (Dollars in thousands) Assets: Tangible assets Intangible assets not subject to amortization Intangible assets subject to amortization (15 year weighted-average useful life) Goodwill Total assets acquired Total liabilities assumed Net assets acquired June 1, 2002 $156,460 280,000 37,333 454,094 927,887 (146,887) $781,000 The $454,094,000 of goodwill relates to the domestic segment and will not be deductible for tax purposes. Had the merger of the Jif and Crisco businesses with and into the Company occurred at the beginning of fiscal 2001, pro forma consolidated results would have been as follows: (Dollars in thousands) Net sales Operating income, excluding indirect expenses of the Jif and Crisco businesses Year Ended April 30, 2002 2001 $1,283,000 $1,267,000 $ 235,000 $ 230,000 NOTE D: OPERATING SEGMENTS The Company operates in one industry: the manufacturing and marketing of food products. The Company has two reportable segments: domestic and international. The domestic segment represents the aggregation of the consumer, foodservice, beverage, specialty foods, and industrial business areas. Food products are distributed through various retail channels including grocery, mass retail, military, club store, health food, and specialty food markets along with restaurants, health care facilities, schools, and other institutions throughout the United States. These products include a variety of fruit spreads, dessert toppings, peanut butters, frozen peanut butter and jelly sandwiches, industrial fruit products, fruit and vegetable juices, beverages, syrups, condiments, and gift packages. The international segment con- sists of products that are similar in nature to those in the domestic segment but are distributed to geographical mar- kets outside of the United States. 28 The following table sets forth reportable segment information: (Dollars in thousands) Net sales: Domestic International Total net sales Depreciation: Domestic International Total depreciation Segment profit: Domestic International Total segment profit Interest income Interest expense Amortization expense Nonrecurring charge Corporate administrative expenses Merger and integration costs Other unallocated income (expenses) Income before income taxes and cumulative effect of change in accounting method Assets: Domestic International Total assets Long-lived assets: Domestic International Total long-lived assets Expenditures for additions to long-lived assets: Domestic International Year Ended April 30, 2002 2001 2000 $590,327 96,821 $557,921 93,321 $551,324 90,561 $687,148 $651,242 $641,885 $ 21,838 2,094 $ 20,484 2,037 $ 19,789 1,885 $ 23,932 $ 22,521 $ 21,674 $101,530 9,949 $ 87,276 8,415 $ 89,570 10,387 111,479 95,691 99,957 2,181 (9,207) (4,625) — (46,681) (5,031) 2,082 2,918 (7,787) (4,400) (2,152) (39,443) — (335) 2,706 (3,111) (4,524) (14,492) (39,371) — 234 $ 50,198 $ 44,492 $ 41,399 $438,644 86,248 $402,021 77,083 $399,237 78,461 $524,892 $479,104 $477,698 $211,380 33,699 $210,222 33,640 $207,478 38,774 $245,079 $243,862 $246,252 $ 26,371 2,682 $ 27,714 1,671 $ 26,012 13,824 Total expenditures for additions to long-lived assets 29,053 29,385 39,836 Current assets and liabilities included in businesses acquired, net of cash acquired 125 — 1,460 Total of additions to property, plant, and equipment and businesses acquired, net of cash acquired $ 29,178 $ 29,385 $ 41,296 29 Segment profit represents revenue less direct and allocable operating expenses and excludes pretax nonrecurring charges of $2,152,000, relating to the domestic segment in fiscal 2001 and $13,536,000 and $956,000, relating to the domestic and international segments, respectively in fiscal 2000 (see Note E). The following table presents product sales information: Fruit spreads Industrial ingredients Portion control Juices and beverages Toppings and syrups Peanut butter Other Total Year Ended April 30, 2002 2001 2000 37% 16 11 10 8 7 11 38% 15 12 10 9 7 9 39% 15 12 10 9 7 8 100% 100% 100% NOTE E: NONRECURRING CHARGE During fiscal 2001, the Company finalized the sale of the Pottstown manufacturing facility, representing a continua- tion of the Company’s divestiture of the Mrs. Smith’s pie business. In connection with this sale, the Company recorded a nonrecurring, noncash charge of $2,152,000 ($1,313,000 net of tax), or $0.05 per share. This transaction repre- sented the final nonrecurring charge relating to the review of certain businesses and assets as discussed below. During fiscal 2000, the Company recorded a nonrecurring, noncash charge of $14,492,000 ($9,626,000 net of tax), or $0.34 per share. This charge was the result of a financial review by the Company of its businesses and assets, with a focus on those assets considered nonstrategic or underperforming. Approximately $10,700,000 of the charge resulted from the write-down of the carrying value of certain intangible assets, primarily goodwill, resulting from pre- vious acquisitions of the After The Fall (ATF) beverage business in fiscal 1994 and Kraft brand fruit spreads acquired in fiscal 1997. The impairment charge related to the ATF intangible assets was prompted by a declining sales trend beginning in fiscal 1996 despite attempts by the Company to reverse this trend. The impairment charge related to the Kraft intangible assets resulted from sharp sales declines following the Company’s relaunch of the products under the Sunberry Farms brand. Both of these acquisitions are included in the domestic segment. In addition, certain capital- ized costs associated with unused or abandoned software acquired as part of the Company’s information technology reengineering project and other abandoned fixed assets were written off. The write-down of the intangible assets was based on the Company’s estimate of fair market value using future dis- counted cash flows projected to be generated by the respective assets under review over their estimated useful lives. Based upon the results of this analysis, the expected useful lives of the assets were reduced from periods ranging from five to forty years, to a range of two to ten years. 30 NOTE F: EARNINGS PER SHARE The following table sets forth the computation of earnings per Common Share and earnings per Common Share – assuming dilution: Year Ended April 30, (Dollars in thousands, except per share data) 2002 2001 2000 Numerator: Net income for earnings per Common Share and earnings per Common Share – assuming dilution Denominator: Denominator for earnings per Common Share – weighted-average shares Effect of dilutive securities: Stock options Restricted stock Denominator for earnings per Common Share – assuming dilution Net income per Common Share $30,851 $27,206 $26,273 24,457,194 25,428,117 28,670,770 336,582 64,297 148,698 81,442 56,380 23,205 24,858,073 25,658,257 28,750,355 $ 1.26 $ 1.07 $ 0.92 Net income per Common Share – assuming dilution $ 1.24 $ 1.06 $ 0.91 NOTE G: MERGERS AND ACQUISITIONS During fiscal 2002, the Company utilized cash on hand to complete one acquisition for $5,714,000. The acquisition was accounted for as a purchase business combination and the results of operations of the acquired company were included in the consolidated results of the Company from the acquisition date. As a result of this acquisition, approx- imately $1,702,000 in goodwill and $3,887,000 in other intangible assets were recorded in fiscal 2002. As the acqui- sition occurred subsequent to July 1, 2001, the resulting goodwill was not amortized during fiscal 2002. The other intangible assets are being amortized over their estimated useful life of ten years. During fiscal 2000, the Company utilized cash on hand to complete two acquisitions for a total of $9,056,000. Each of the acquisitions was accounted for as a purchase business combination and the results of operations of the acquired companies were included in the consolidated results of the Company from their respective acquisition dates. As a result of these acquisitions, approximately $2,869,000 in goodwill and $2,213,000 of other intangible assets were recorded in fiscal 2000. NOTE H: PENSIONS AND OTHER POSTRETIREMENT BENEFITS The Company has pension plans covering substantially all of its domestic employees. Benefits are based on the employee’s years of service and compensation. The Company’s plans are funded in conformity with the funding requirements of applicable government regulations. In addition to providing pension benefits, the Company sponsors several unfunded, defined postretirement plans that provide health care and life insurance benefits to substantially all active and retired domestic employees not covered by certain collective bargaining agreements, and their covered dependents and beneficiaries. These plans are contrib- utory, with retiree contributions adjusted periodically, and contain other cost-sharing features, such as deductibles and coinsurance. Covered employees generally are eligible for these benefits when they reach age 55 and have attained 10 years of credited service. 31 Net periodic benefit cost included the following components: (Dollars in thousands) Year Ended April 30, Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Amortization of initial net asset Recognized net actuarial gain Defined Benefit Pension Plans Other Postretirement Benefits 2002 2001 2000 2002 2001 2000 $2,414 5,504 (6,444) 1,087 (234) (177) $2,133 5,303 (6,571) 1,086 (142) (823) $2,216 4,668 (6,053) 927 (91) (272) $ 506 737 — (61) — (160) $424 673 — (61) — (218) $ 513 717 — (61) — (28) Net periodic benefit cost $2,150 $ 986 $1,395 $1,022 $818 $1,141 The following table sets forth the combined status of the plans as recognized in the consolidated balance sheets: Defined Benefit Pension Plans Other Postretirement Benefits April 30, April 30, (Dollars in thousands) 2002 2001 2002 2001 Change in benefit obligation: Benefit obligation at beginning of the year Service cost Interest cost Amendments Actuarial loss Participant contributions Benefits paid $ 74,898 2,414 5,504 197 1,457 — (3,017) $67,670 2,133 5,303 30 2,529 — (2,767) $ 9,991 506 737 — 887 193 (526) $ 8,560 424 673 — 522 188 (376) Benefit obligation at end of the year $ 81,453 $74,898 $ 11,788 $ 9,991 Change in plan assets: Fair value of plan assets at beginning of the year Actual return on plan assets Company contributions Participant contributions Benefits paid $ 72,685 (2,499) 1,578 — (3,017) $74,226 510 716 — (2,767) $ — — 333 193 (526) $ — — 188 188 (376) Fair value of plan assets at end of the year $ 68,747 $72,685 $ — $ — Net amount recognized: Funded status of the plans Unrecognized net actuarial loss (gain) Unrecognized prior service cost (credit) Unrecognized initial asset $(12,706) 1,370 9,332 (765) $ (2,213) (9,208) 10,222 (999) $(11,788) (2,433) (692) — $ (9,991) (3,480) (753) — Net benefit liability recognized $ (2,769) $ (2,198) $(14,913) $(14,224) Prepaid benefit cost Accrued benefit liability Intangible asset Minimum pension liability $ 5,589 (13,996) 4,410 1,228 $ 5,582 (10,239) 2,459 — $ — (14,913) — — $ — (14,224) — — Net benefit liability recognized $ (2,769) $ (2,198) $(14,913) $(14,224) Weighted average assumptions: Discount rate Expected return on plan assets Rate of compensation increase 32 7.25% 9.00% 4.50% 7.50% 9.00% 4.50% 7.25% — — 7.50% — — For fiscal 2003, the assumed health care cost trend rates are 8.5% for all participants. The rate for participants under age 65 is assumed to decrease to 5% in 2007. The health care cost trend rate assumption has a significant effect on the amount of the other postretirement benefit obligation and periodic other postretirement benefit cost reported. A one percentage point annual change in the assumed health care cost trend rate would have the following effect as of April 30, 2002: (Dollars in thousands) Effect on total service and interest cost components Effect on benefit obligation One Percentage Point Increase Decrease $ 270 $1,999 $ (213) $(1,597) The projected benefit obligation and plan assets applicable to pension plans with projected benefit obligations in excess of plan assets was $36,626,000 and $20,065,000, respectively, at April 30, 2002, and $32,876,000 and $19,979,000, respectively, at April 30, 2001. Pension plan assets consist of listed stocks and government obligations, including 336,000 of the Company’s Common Shares at April 30, 2002 and 2001. The market value of these shares is $11,659,000 at April 30, 2002. The Company paid dividends of $215,000 on these shares during the year. Prior service costs are being amortized over the average remaining service lives of the employees expected to receive benefits. The Company also charged to operations approximately $958,000, $870,000, and $854,000 in fiscal 2002, 2001, and 2000, respectively, for contributions to foreign pension plans and to plans not administered by the Company on behalf of employees subject to certain labor contracts. These amounts were determined in accordance with foreign actuarial computations and provisions of the labor contracts. The Company is unable to determine its share of either the accumulated plan benefits or net assets available for benefits under such plans. In addition, certain of the Company’s active employees participate in multiemployer plans which provide defined postretirement health care benefits. The aggregate amount contributed to these plans, including the charge for net periodic postretirement benefit costs, totaled $1,851,000, $1,719,000, and $1,687,000 in fiscal 2002, 2001, and 2000, respectively. NOTE I: SAVINGS PLANS ESOP: The Company sponsors an Employee Stock Ownership Plan and Trust (ESOP) for domestic, nonrepresented employees. The Company has entered into loan agreements with the Trustee of the ESOP for purchases by the ESOP of the Company’s Common Shares in amounts not to exceed a total of 1,200,000 unallocated Common Shares of the Company at any one time. These shares are to be allocated to participants over a period of not less than 20 years. ESOP loans bear interest at 1/2% over prime and are payable as shares are allocated to participants. Interest incurred on ESOP debt was $538,000, $768,000, and $846,000 in fiscal 2002, 2001, and 2000, respectively. Contributions to the plan are made annually in amounts sufficient to fund ESOP debt repayment. Dividends on unallocated shares are used to reduce expense and were $336,000, $362,000, and $363,000 in fiscal 2002, 2001, and 2000, respectively. The principal payments received from the ESOP in fiscal 2002, 2001, and 2000 were $364,000, $297,000, and $303,000, respectively. As permitted by Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans (SOP 93-6), the Company will continue to recognize future compensation using the cost basis as all shares currently held by the ESOP were acquired prior to 1993. At April 30, 2002, the ESOP held 525,048 unallocated shares. All shares held by the ESOP were considered outstanding in earnings per share calculations for all periods presented. 33 401(k) Plan: The Company offers employee savings plans under Section 401(k) of the Internal Revenue Code for all domestic employees not covered by certain collective bargaining agreements. The Company’s contributions under these plans are based on a specified percentage of employee contributions. Charges to operations for these plans in fiscal 2002, 2001, and 2000 were $1,445,000, $1,421,000, and $1,193,000, respectively. NOTE J: STOCK BENEFIT PLANS The Company provides for equity-based incentives to be awarded to key employees through the 1998 Equity and Performance Incentive Plan, the Restricted Stock Bonus Plan adopted in 1979, and the 1987 Stock Option Plan, and to nonemployee directors through the Nonemployee Director Stock Option Plan adopted in fiscal 2002. 1998 Equity and Performance Incentive Plan: This plan provides for the issuance of stock options and restricted stock, which may include performance criteria, as well as stock appreciation rights, deferred shares, and performance shares. At April 30, 2002, there are 797,522 Common Shares available for future issuance under this plan. Of this total amount available for issuance, the amount of restricted stock available for issuance is limited to 436,700 Common Shares. Restricted stock issued under this plan is subject to a risk of forfeiture for at least three years in the event of termination of employment or failure to meet performance criteria, if any. All restricted shares issued to date under the plan are subject to a four-year forfeiture period. Options granted under this plan become exercisable at the rate of one-third per year, beginning one year after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. Restricted Stock Bonus Plan: Shares awarded under this plan contain certain restrictions for four years relating, among other things, to forfeiture in the event of termination of employment and to transferability. Shares awarded are issued as of the date of the award and a deferred compensation charge is recorded at the market value of the shares on the date of the award. The deferred compensation charge is recognized as expense over the period during which restrictions are in effect. There are no Common Shares available for future issuance under this plan. In fiscal 2002 and 2000, 49,200 and 82,000 Common Shares were awarded under this plan, respectively. No awards were granted in fiscal 2001. 1987 Stock Option Plan: Options granted under this plan become exercisable at the rate of one-third per year, begin- ning one year after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. There are 554,827 Common Shares available for future grant under this plan. Nonemployee Director Stock Option Plan: This plan provides for the issuance of 1,500 stock options to nonemployee directors annually, on September 1 of each year. Options granted under this plan become exercisable six months after the date of grant, and the option price is equal to the market value of the shares on the date of the grant. There are 100,000 Common Shares available for future grant under this plan. No grants were made under this plan in fiscal 2002 due to the pending Jif and Crisco transaction. As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), the Company has elected to account for the stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). If compensation costs for the stock options granted in 34 fiscal 2002, 2001, and 2000 had been determined based on the fair market value method of SFAS 123, the Company’s pro forma net income and earnings per share would have been: (Dollars in thousands, except per share data) 2002 2001 2000 Year Ended April 30, Net income As reported Pro forma Net income per Common Share As reported Pro forma Net income per Common Share – assuming dilution As reported Pro forma $30,851 29,790 $27,206 26,018 $26,273 25,229 $ 1.26 1.22 $ 1.07 1.02 $ 0.92 0.88 $ 1.24 1.20 $ 1.06 1.01 $ 0.91 0.88 The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Average expected term (years) Risk-free interest rate Dividend yield Volatility Fair value of options granted A summary of the Company’s stock option activity, and related information follows: Outstanding at May 1, 1999 Granted Exercised Forfeited Outstanding at April 30, 2000 Granted Exercised Forfeited Outstanding at April 30, 2001 Granted Exercised Forfeited Outstanding at April 30, 2002 Exercisable at April 30, 2000 Exercisable at April 30, 2001 Exercisable at April 30, 2002 Year Ended April 30, 2001 2000 5 5.75% 2.60% 27.00% 5 6.20% 2.50% 26.00% $6.13 $5.22 Options 2,525,702 409,000 (245,734) (47,000) 2,641,968 411,000 (562,261) (178,324) 2,312,383 — (614,832) (31,135) 1,666,416 1,918,301 1,558,282 1,298,028 Weighted- Average Exercise Price $21.41 18.22 18.50 18.78 $21.24 23.63 18.45 23.93 $22.13 — 23.59 29.90 $21.45 $21.66 $22.41 $21.28 35 The following table summarizes the range of exercise prices and weighted-average exercise prices for options out- standing and exercisable at April 30, 2002, under the Company’s stock benefit plans: Range of Exercise Prices $15.94 – $23.00 $23.01 – $31.50 Outstanding 866,762 799,654 Weighted- Average Exercise Price $18.90 $24.21 Weighted- Average Remaining Contractual Life (years) 5.9 6.0 Exercisable 758,031 539,997 Weighted- Average Exercise Price $18.99 $24.49 The following table summarizes the Company’s stock benefit plans in two categories — plans that have been approved by shareholders, and plans that have not: Plan Category Stock benefit plans approved by shareholders Stock benefit plans not approved by shareholders Total stock benefit plans Number of Common Shares to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options 1,666,416 — 1,666,416 $21.45 — $21.45 Number of Common Shares available for future issuance under equity compensation plans 1,452,349 — 1,452,349 NOTE K: LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt consists of the following: (Dollars in thousands) 6.77% Senior Notes due June 1, 2009 7.70% Series A Senior Notes due September 1, 2005 7.87% Series B Senior Notes due September 1, 2007 7.94% Series C Senior Notes due September 1, 2010 Total long-term debt April 30, 2002 2001 $ 75,000 17,000 33,000 10,000 $ 75,000 17,000 33,000 10,000 $135,000 $135,000 The notes are unsecured and interest is paid semiannually. Among other restrictions, the note purchase agreements contain certain covenants relating to liens, consolidated net worth, and sale of assets as defined in the agreements. The Company is in compliance with all covenants. During fiscal 2002, the Company entered into interest rate swap agreements in order to manage interest rate expo- sure and minimize financing costs. Effectively, the Company converted $17 million of fixed-rate debt (7.70% notes due in September 2005) and $33 million of fixed-rate debt (7.87% notes due in September 2007) to variable-rate debt with an effective interest rate of 4.88% at April 30, 2002. The interest rate swaps are considered fair value hedges and are 100% effective. As a result, the mark-to-market value of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains or losses in other expense. The interest rate swaps had a fair value of $508,000 at April 30, 2002, with the corresponding adjustment to long-term debt included 36 in other noncurrent liabilities. The fair value of interest rate swap agreements, obtained from the respective financial institutions, is based on current rates of interest and is computed as the net present value of the remaining exchange obligations under the terms of the contract. Interest paid totaled $9,800,000, $8,328,000, and $2,293,000 in fiscal 2002, 2001, and 2000, respectively. Financing arrangements: The Company has uncommitted lines of credit providing up to $90,000,000 for short-term borrowings. No amounts were outstanding at April 30, 2002. The interest rate to be charged on any outstanding bal- ance is based on prevailing market rates. NOTE L: INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the Company’s deferred tax assets and liabilities are as follows: (Dollars in thousands) Deferred tax liabilities: Depreciation Software and other deferred expenses Change in inventory accounting method Other (each less than 5% of total liabilities) Total deferred tax liabilities Deferred tax assets: Postretirement benefits other than pensions Other employee benefits Intangible assets Other (each less than 5% of total assets) Total deferred tax assets Valuation allowance for deferred tax assets Total deferred tax assets less allowance Net deferred tax (liability) asset April 30, 2002 2001 $10,150 4,898 1,769 1,782 $12,639 3,242 — 658 18,599 16,539 6,136 5,091 3,337 4,039 6,034 4,679 3,396 4,003 18,603 (1,560) 18,112 (1,522) 17,043 16,590 $ (1,556) $ 51 The Company has recorded a valuation allowance related to certain foreign deferred tax assets due to the uncertainty of their realization. Domestic income and foreign withholding taxes have not been recorded on undistributed earnings of foreign sub- sidiaries since these amounts are considered to be permanently reinvested. Any additional taxes payable on the earn- ings of foreign subsidiaries, if remitted, would be partially offset by domestic tax credits and deductions for foreign taxes already paid. 37 Income before income taxes and cumulative effect of change in accounting method is as follows: (Dollars in thousands) Domestic Foreign Income before income taxes and cumulative effect of change in accounting method The components of the provision for income taxes are as follow: (Dollars in thousands) Current: Federal Foreign State and local Deferred Total income tax expense Year Ended April 30, 2002 2001 2000 $44,668 5,530 $40,809 3,683 $36,584 4,815 $50,198 $44,492 $41,399 Year Ended April 30, 2002 2001 2000 $13,447 2,449 1,906 1,545 $10,681 1,938 1,635 2,040 $15,000 2,048 1,950 (3,872) $19,347 $16,294 $15,126 A reconciliation of the statutory federal income tax rate and the effective income tax rate follows: Percent of Pretax Income (Dollars in thousands) Statutory federal income tax rate Increase (decrease) in income taxes resulting from: State and local income taxes, net of federal income tax benefit Research credits Other items Effective income tax rate Income taxes paid Year Ended April 30, 2002 2001 2000 35.0% 35.0% 35.0% 2.5 (1.9) 2.9 2.1 (0.8) 0.3 3.1 (1.6) — 38.5% 36.6% 36.5% $15,736 $17,792 $19,761 38 NOTE M: COMMON SHARES Reclassification of Common Shares: In August 2000, the Company combined its Class A and Class B Common Shares into a single class of common shares with terms similar to the former Class A Common Shares. In conjunction with this combination, on August 28, 2000, the Company repurchased 4,272,524 Common Shares at $18.50 per share. The Company incurred approximately $1,363,000 of cost related to the combination and repurchase of Common Shares. Such costs were recorded as a reduction of shareholders’ equity. Voting: The Company’s Amended Articles of Incorporation provide that holders of the Company’s Common Shares generally will be entitled to cast one vote per share on matters submitted to a vote of the shareholders. There are cer- tain 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 relat- ing to the Company’s shareholder rights plan or any successor plan; any matter relating to any benefit, stock option, compensation, or other similar plan; any matter that relates to or may result in a change in control of the Company including any merger, consolidation, majority share acquisition, control share acquisition, sale or other disposition of all, or substantially all, of the Company’s assets; or any matter relating to the issuance, redemption, or repurchase of shares of the Company or any of its subsidiaries), however, with respect to which parties acquiring the Company’s Common Shares will be entitled to cast one vote per share until they have held their shares for four years, after which time they will be entitled to cast ten votes per share on those specified matters. Shareholders’ Rights Plan: Pursuant to a shareholders’ rights plan established during fiscal 1999, each of the Company’s Common Shares outstanding carries a share purchase right issued as a result of a dividend distribution declared by the Company’s Board of Directors in April 1999 and distributed to shareholders of record on May 14, 1999. Under the plan, the rights will initially trade together with the Company’s Common Shares and will not be exercis- able. In the absence of further action by the directors, the rights generally will become exercisable and allow the holder to acquire the Company’s Common Shares at a discounted price if a person or group acquires 10% or more of the outstanding Common Shares. Rights held by persons who exceed the applicable thresholds will be void. Shares held by members of the Smucker family are not subject to the thresholds. If exercisable, each right entitles the share- holder 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. 39 DIRECTORS, OFFICERS, AND GENERAL MANAGERS The J. M. Smucker Company DIRECTORS Vincent C. Byrd Vice President and General Manager, Consumer Market The J. M. Smucker Company Kathryn W. Dindo Vice President and Chief Risk Officer FirstEnergy Corp. Akron, Ohio Fred A. Duncan Vice President – Special Markets The J. M. Smucker Company Elizabeth Valk Long Former Executive Vice President Time Inc. New York, New York Charles S. Mechem, Jr. Retired Chairman Convergys Corporation Cincinnati, Ohio Timothy P. Smucker Chairman and Co-Chief Executive Officer The J. M. Smucker Company Richard K. Smucker President and Co-Chief Executive Officer The J. M. Smucker Company William H. Steinbrink Partner Jones, Day, Reavis & Pogue Cleveland, Ohio William Wrigley, Jr. President and Chief Executive Officer Wm. Wrigley Jr. Company Chicago, Illinois 40 OFFICERS & GENERAL MANAGERS Timothy P. Smucker Chairman and Co-Chief Executive Officer Richard K. Smucker President and Co-Chief Executive Officer Mark R. Belgya Treasurer Vincent C. Byrd Vice President and General Manager, Consumer Market Barry C. Dunaway Vice President – Corporate Development Paul Smucker Wagstaff Vice President and General Manager, Foodservice Market John W. Denman Assistant Corporate Controller Debra A. Marthey Assistant Treasurer Gary A. Jeffcott General Manager, Industrial Market Julia L. Sabin General Manager, Beverage Market PROPERTIES Fred A. Duncan Vice President – Special Markets Corporate Offices: Orrville, Ohio Steven J. Ellcessor Vice President – Finance and Administration, Secretary, and Chief Financial Officer Robert E. Ellis Vice President – Human Resources M. Ann Harlan General Counsel and Assistant Secretary Donald D. Hurrle, Sr. Vice President – Sales, Grocery Market Richard G. Jirsa Vice President – Information Services and Corporate Controller John D. Milliken Vice President – Logistics and Western Operations Steven T. Oakland Vice President and General Manager, Consumer Oils Mark T. Smucker Vice President and General Manager, International Market Richard F. Troyak Vice President – Operations Domestic Manufacturing Locations: Orrville, Ohio Cincinnati, Ohio Lexington, Kentucky Salinas, California Memphis, Tennessee Ripon, Wisconsin Chico, California Havre de Grace, Maryland New Bethlehem, Pennsylvania West Fargo, North Dakota* Fruit Processing Locations: Watsonville, California Woodburn, Oregon Grandview, Washington Oxnard, California International Manufacturing Locations: Ste-Marie, Quebec, Canada Kyabram, Victoria, Australia Livingston, Scotland São José do Rio Pardo, Brazil Sales Offices:* Toronto, Ontario, Canada Carlton, Victoria, Australia Mexico City, Mexico Staffordshire, England São Paulo, Brazil * Leased properties SHAREHOLDER INFORMATION The J. M. Smucker Company Company’s Principal Place of Business Transfer Agent and Registrar for Shareholder Inquiries The J. M. Smucker Company the Company’s Shares Inquiries regarding dividend payments, Strawberry Lane Orrville, Ohio 44667 (330) 682-3000 Annual Meeting The annual meeting will be held at 11:00 a.m. Eastern Daylight Time, Tuesday, August 13, 2002, in the Fisher Auditorium at the Ohio Agricultural Research and Development Center 1680 Madison Avenue Wooster, Ohio Form 10-K A copy of the Company’s Form 10-K is The transfer agent and registrar for the loss or nonreceipt of a dividend check, Company’s Common Shares is: address changes, stock transfers (including Computershare Investor Services, LLC 2 North LaSalle Street P.O. Box A3504 name changes, gifts, and inheritances), lost share certificates, and Form 1099 information should be addressed to: Chicago, Illinois 60602-3504 Computershare Investor Services, LLC (800) 456-1169 The transfer agent has primary respon- sibility for administering the Common Shares held by registered shareholders 2 North LaSalle Street P.O. Box A3504 Chicago, Illinois 60602-3504 (800) 456-1169 in the direct registration system, share All questions, inquiries, remittances, and transfers, payment of dividends whether other correspondences related to direct by check or reinvestment, and issuance stock purchases and dividend reinvestment of Form 1099 information. services should be addressed to: available on the Company’s Web site at Dividend Reinvestment/Direct Stock www.smuckers.com. It is also available Purchase Plan without cost to shareholders who Computershare Trust Company, Inc. request it by writing to: The J. M. Smucker Company sponsors and administers a direct stock purchase plan that includes dividend Computershare Investor Services, LLC 2 North LaSalle Street P.O. Box A3309 Chicago, Illinois 60602-3309 (800) 456-1169 reinvestment, Computershare BYDSSM, All other inquiries may be directed to: Strawberry Lane Orrville, Ohio 44667 Attention: Secretary Stock Listing for investors in Common Shares of The J. M. Smucker Company. The plan brochure can be downloaded from www.computershare.com. The J. M. Smucker Company’s Common Shares are listed on the New York Stock Dividends Exchange — ticker symbol SJM. The Company’s Board of Directors normally declares a cash dividend each quarter. Dividends are generally payable on the first business day of March, June, September, and December. The record date is two weeks before the payment date. The Company’s dividend disburse- ment agent is Computershare Investor Services, LLC. The J. M. Smucker Company Shareholder Relations Strawberry Lane Orrville, Ohio 44667 (330) 684-3838 For Additional Information To learn more about The J. M. Smucker Company, visit us at www.smuckers.com. Independent Auditors Ernst & Young LLP 222 South Main Street Akron, Ohio 44308 This annual report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Please reference “Certain Forward-Looking Statements” located on page 17 in the Management’s Discussion and Analysis section. Twix and Milky Way are registered trademarks of Mars, Inc. All other brand references in italics throughout this annual report represent trademarks of The J. M. Smucker Company. ® Now All the Goodness of Smucker’s® ln a Store You’ve come to love our delicious jams, jellies, and toppings. Now there’s a store with a whole lot more. It’s Simply Smucker’s, a showcase store brimming with all of your favorites. We have over 350 different flavors and varieties, including some of those “hard to find” products, as well as a wide array of household accessories, specialty gifts and gift baskets. We’re just south of Orrville, so stop by when you’re in the neighborhood, or learn more about us online at www.smuckers.com. 333 Wadsworth Road (Rt. 57, one-quarter mile north of Rt. 30) Orrville, Ohio 44667 (330) 684-1500 Monday – Saturday 9:00 a.m. to 6:00 p.m. Closed Sunday © 2002 The J. M. Smucker Company THE J. M. SMUCKER COMPANY Strawberry Lane Orrville, Ohio 44667 (330) 682-3000 www.smuckers.com 

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