SJM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended October 31, 2002, and the six-month period ended on the same date for The J. M. Smucker Company. The reporting period is significantly impacted by the June 1, 2002, merger with the Jif peanut butter and Crisco shortening and oils businesses of The Procter & Gamble Company. This transaction was accounted for as a purchase business combination, resulting in the inclusion of Jif and Crisco operations in the consolidated financial statements from the merger date forward. The Company operates in two reportable segments: U.S. retail market and special markets.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Growth: Net sales for the three months ended October 31, 2002, more than doubled to $367.0 million from $172.8 million in the prior year. For the six-month period, sales increased 87% to $641.9 million. The Jif and Crisco brands contributed $173.4 million to Q2 sales and $260.4 million to the six-month total. Excluding these acquisitions, organic sales grew 12% in Q2 and 11% for the six-month period.
• Profitability: Net income for Q2 rose to $29.1 million from $7.7 million in the prior year. Operating income increased by $37 million in Q2. Gross margin improved from 32.3% to 34.4% in Q2, driven by operational efficiencies and the mix of acquired businesses.
• Merger Costs: The Company incurred $2.5 million in merger and integration costs in Q2 and $7.4 million for the six-month period. Excluding these costs, Q2 diluted EPS would have been $0.61.
• Balance Sheet: Total assets increased significantly to $1.56 billion from $524.9 million at the prior fiscal year-end, primarily due to the acquisition of goodwill ($463 million) and intangible assets ($280 million) from the P&G merger. Long-term debt remained stable at $135 million, but as a percentage of total capitalization, it decreased from 33% to 11%.

Guidance, Outlook, and Risks

• Merger Integration: Management anticipates total nonrecurring merger-related costs to aggregate approximately $10 million in fiscal 2003 and $15 million in total. Virtually all costs are expected to be incurred by the end of the current fiscal year.
• Capital Expenditures: Capital spending for fiscal 2003 is projected to be $45 to $50 million, which is $10 to $15 million less than originally budgeted due to timing differences.
• Product Rollout: The Company plans to accelerate the rollout of Smucker's Uncrustables, with increased investment spending expected in the fourth quarter to achieve availability in approximately 70% of the United States by year-end.
• Discontinued Contracts: The Company expects to discontinue approximately $20 million of low-margin industrial sales by the end of fiscal 2003, with the remainder occurring in fiscal 2004.
• Risks: Key risks include the success of pricing strategies for Jif and Crisco, raw material cost trends, foreign currency fluctuations, and the ability to achieve sales targets in the industrial business.

Investor Verification Checklist

• Verify the final purchase price allocation for the Jif and Crisco merger, as current values are preliminary and subject to adjustment by May 31, 2003.
• Monitor the timeline and financial impact of the discontinued industrial contracts, specifically the $20 million expected to be lost by fiscal year-end.
• Track the execution of the Smucker's Uncrustables rollout and the associated fourth-quarter marketing spend.
• Review the impact of commodity price volatility on the Crisco business, which utilizes futures and options for hedging.
• Confirm the realization of operational efficiencies in manufacturing facilities that contributed to the improved gross margins.