The J. M. Smucker Company (SJM) 10-Q 2000 Q2 Quarterly report

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED STATEMENTS OF CONSOLIDATED INCOME
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis
		Results of Operations
		Financial Condition – Liquidity and Capital Resources
		Year 2000
		Recently Issued Accounting Standards
		Certain Forward-Looking Statements
PART II. OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX OF EXHIBITS

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No. 1 of 13 Pages

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 1999

OR

(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 1-5111

THE J. M. SMUCKER COMPANY

Ohio	34-0538550
State of Incorporation	IRS Identification No.

STRAWBERRY LANE
ORRVILLE, OHIO 44667
(330) 682-3000

The Company has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days.

The Company had 14,453,515 Class A Common Shares and 14,530,051 Class B Common Shares outstanding on October 31, 1999.

The Exhibit Index is located at Sequential Page No. 13.

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No. 2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE J. M. SMUCKER COMPANY

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

		Three Months Ended						Six Months Ended
		October 31,						October 31,
		1999			1998			1999			1998
		(Dollars in thousands, except per share data)
Net sales		$	163,965		$	154,894		$	325,460		$	305,394
Cost of products sold			109,092			103,204			212,559			199,842
			54,873			51,690			112,901			105,552
Selling, distribution, and administrative expenses			39,804			37,378			80,599			74,720
			15,069			14,312			32,302			30,832
Other income (expense)
	Interest income		755			438			1,478			1,063
	Interest expense		(853	)		(256	)		(1,333	)		(260	)
	Other – net		250			191			617			486
Income before income taxes			15,221			14,685			33,064			32,121
Income taxes			5,832			5,622			12,638			12,642
Net Income		$	9,389		$	9,063		$	20,426		$	19,479
Net income per Common Share		$	.33		$	.31		$	.71		$	.67
Net income per Common
Share – assuming dilution		$	.32		$	.31		$	.70		$	.67
Dividends declared on
Class A and Class B Common
Shares		$	.15		$	.14		$	.30		$	.28

See notes to condensed consolidated financial statements

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THE J. M. SMUCKER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

				October 31, 1999			April 30, 1999
				(Dollars in Thousands)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents			$	25,019		$	8,683
	Trade receivables, less allowances				66,410			51,858
	Inventories:
			Finished products		54,639			51,983
			Raw materials, containers, and supplies		91,756			62,217
					146,395			114,200
	Other current assets				12,575			11,401
			Total Current Assets		250,399			186,142
PROPERTY, PLANT, AND EQUIPMENT
	Land and land improvements				15,837			15,729
	Buildings and fixtures				85,442			83,290
	Machinery and equipment				207,752			201,913
	Construction in progress				28,764			23,296
					337,795			324,228
	Less allowances for depreciation				(166,095	)		(157,685	)
			Total Property, Plant and Equipment		171,700			166,543
OTHER NONCURRENT ASSETS
	Intangible assets				58,517			60,627
	Other assets				24,798			20,571
			Total Other Noncurrent Assets		83,315			81,198
				$	505,414		$	433,883
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Accounts payable			$	42,054		$	40,262
	Other current liabilities				37,788			47,369
			Total Current Liabilities		79,842			87,631
NONCURRENT LIABILITIES
	Long-term debt				75,000			—
	Other noncurrent liabilities				21,835			21,923
			Total Noncurrent Liabilities		96,835			21,923
SHAREHOLDERS’ EQUITY
	Class A Common Shares				3,613			3,608
	Class B Common Shares (Nonvoting)				3,633			3,682
	Additional capital				17,101			15,604
	Retained income				324,178			318,660
	Less:
		Deferred compensation			(3,462	)		(2,001	)
		Amount due from ESOP			(9,223	)		(9,526	)
		Accumulated other comprehensive loss			(7,103	)		(5,698	)
			Total Shareholders’ Equity		328,737			324,329
				$	505,414		$	433,883

See notes to condensed consolidated financial statements

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No. 4

THE J. M. SMUCKER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			Six Months Ended
			October 31,
			1999			1998
			(Dollars in Thousands)
OPERATING ACTIVITIES
	Net income		$	20,426		$	19,479
	Adjustments			(39,614	)		(36,087	)
Net cash used for operating activities				(19,188	)		(16,608	)
INVESTING ACTIVITIES
	Businesses acquired – net of cash			—			(10,077	)
	Additions to property, plant, and equipment			(16,462	)		(21,219	)
	Proceeds from the sale of property, plant, and
		equipment		131			210
	Other – net			681			632
Net cash used for investing activities				(15,650	)		(30,454	)
FINANCING ACTIVITIES
	Proceeds from long-term debt			75,000			—
	(Reduction in) proceeds from short-term debt – net			(8,966	)		25,457
	Purchase of common shares			(6,517	)		(811	)
	Dividends paid			(8,664	)		(8,123	)
	Other – net			212			16
Net cash provided by financing activities				51,065			16,539
Cash flows provided by (used for) operations				16,227			(30,523	)
Effect of exchange rate changes				109			(832	)
Net increase (decrease) in cash and cash equivalents				16,336			(31,355	)
Cash and cash equivalents at beginning of period				8,683			36,484
Cash and cash equivalents at end of period			$	25,019		$	5,129

( ) Denotes use of cash

See notes to condensed consolidated financial statements

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THE J. M. SMUCKER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

      The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six-month period ended October 31, 1999, are not necessarily indicative of the results that may be expected for the year ended April 30, 2000. For further information, reference is made to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended April 30, 1999.

Note B – Operating Segments

      The Company has two reportable segments, domestic and international. The domestic segment represents the aggregation of the consumer, foodservice, beverage, specialty foods, consumer direct, and industrial business areas. The following table sets forth operating segments information:

		Three Months Ended						Six Months Ended
		October 31,						October 31,
(Dollars in thousands)		1999			1998			1999			1998
Net sales:
	Domestic	$	144,087		$	136,480		$	284,552		$	270,061
	International		19,878			18,414			40,908			35,333
Total net sales		$	163,965		$	154,894		$	325,460		$	305,394
Segment profit:
	Domestic	$	24,551		$	24,290		$	51,051		$	49,358
	International		1,958			1,228			4,372			2,700
Total segment profit			26,509			25,518			55,423			52,058
	Interest income		755			438			1,478			1,063
	Interest expense		(853	)		(256	)		(1,333	)		(260	)
	Amortization expense		(1,170	)		(765	)		(2,137	)		(1,469	)
	Corporate administrative expenses		(9,606	)		(9,934	)		(19,550	)		(19,359	)
	Other unallocated (expense) /income		(414	)		(316	)		(817	)		88
Income before income taxes		$	15,221		$	14,685		$	33,064		$	32,121

Note C – Common Shares

      At October 31, 1999, 35,000,000 Class A Common Shares and 35,000,000 Class B Common Shares were authorized. At October 31, 1999, there were 14,453,515 and 14,530,051 outstanding shares of Class A Common and Class B Common, respectively, while 14,432,619 Class A and 14,726,576 Class B Common Shares were outstanding at April 30, 1999. Outstanding shares of each class are shown net of 1,758,773 Class A and 1,682,237 Class B treasury shares at October 31, 1999, and 1,779,669 Class A and 1,485,712 Class B treasury shares at April 30, 1999.

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No. 6

Note D – Financing Arrangements

      On June 18, 1999, the Company issued $75,000,000 of 6.77% senior, unsecured notes due June 1, 2009.

Note E – Income Per Share

      The following table sets forth the computation of earnings per Common Share and earnings per Common Share – assuming dilution:

		Three Months Ended				Six Months Ended
		October 31,				October 31,
		1999		1998		1999		1998
		(Dollars in thousands, except per share data)
Numerator:
Net income		$	9,389	$	9,063	$	20,426	$	19,479
Denominator:
Denominator for earnings per Common Share – weighted-average shares			28,840,103		29,043,137		28,943,816		29,034,992
Effect of dilutive securities:
	Stock options		74,007		163,529		102,268		201,564
	Restricted stock		41,854		25,281		12,755		45,637
Denominator for earnings per Common Share – assuming dilution			28,955,964		29,231,947		29,058,839		29,282,193
Net income per Common Share		$	.33	$	.31	$	.71	$	.67
Net income per Common Share – assuming dilution		$	.32	$	.31	$	.70	$	.67

Note F – Comprehensive Income

      During the three-month periods ended October 31, 1999 and 1998, total comprehensive income was $8,950,000 and $9,301,000, respectively. Total comprehensive income for the six-month periods ended October 31, 1999 and 1998 was $19,021,000 and $17,577,000, respectively. Comprehensive income consists of net income and foreign currency translation adjustments.

Note G – Recently Issued Accounting Standards

      In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 changes the accounting related to derivative instruments. Currently, the Company does not have significant participation in derivative instruments. Although the Company has not yet completed its evaluation of the potential impact of adopting SFAS 133 on future earnings, it does not expect the impact to be material.

      In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB 133, which defers the effective date of SFAS 133 for the Company until fiscal 2002. The Company currently plans to adopt SFAS 133 as required in fiscal 2002.

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Item 2. Management’s Discussion and Analysis

      This discussion and analysis deals with comparisons of material changes in the condensed, consolidated financial statements for the three-month and six-month periods ended October 31, 1999 and 1998, respectively.

Results of Operations

      Sales for the second quarter ending October 31, 1999, were up approximately 6%, to $163,965,000 from $154,894,000 in the prior year second quarter. Sales increased in both the domestic and international segments. Domestic segment sales were up over 5% while the international segment realized an increase of 8%.

      Sales for the first six months of the fiscal year were $325,460,000 compared to $305,394,000 last year, an increase of over 6%, while earnings for the same period were up 5%. Domestic segment sales were up approximately 5%, while the international segment increased 16% over prior year.

      In the domestic segment, over 60% of the sales increase came from the foodservice and consumer markets, with the new consumer direct business (catalogue and Internet sales plus the Company’s new retail store) contributing 10%. In the foodservice area, the increase in sales was the result of volume growth in the portion control segment and the addition of Lea & Perrins products to the foodservice group’s offerings as a result of the distribution agreement entered into with Lea & Perrins, Inc. last year. In the consumer area, the continued rollout of Smucker’s Snackers, introduced last year, and the inclusion of the Adams natural peanut butter business, acquired in December 1998, were key causes for the increase in that market.

      In the international segment, the majority of the increase for the quarter occurred in Canada. The relative weakness of the U. S. dollar against both the Australian and Canadian currencies also favorably impacted international sales in the quarter and for the six-month period.

      Cost of products sold decreased slightly to 66.5% for the quarter and 65.3% for the first six months from 66.6% and 65.4% in the respective prior year periods as increases in certain fruit costs and manufacturing overhead were offset by improved plant efficiencies. Selling, distribution and administrative costs increased at a slightly greater rate than sales due to an increase in selling, marketing, and distribution costs. Amortization expense also increased as a result of the Company’s recent acquisitions.

      Interest expense increased significantly over the prior year due to the long-term debt placement completed during the first quarter. During the second quarter, approximately $278,000 in interest associated with the information technology reengineering project was capitalized. Year to date, the Company has capitalized approximately $498,000 in interest associated with the information technology reengineering project.

      The effective income tax rate for the six-month period decreased from 39.4% last year to 38.2% primarily due to lower state and local taxes. The effective rate for the second quarter was 38.3%, consistent with last year.

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      Subsequent to the end of the second quarter, the Company announced that it is in the process of reviewing its businesses and assets in order to identify opportunities to divest of certain assets and improve financial returns. The analysis will focus on assets and businesses considered nonstrategic or underperforming in comparison with the Company return objectives. The Company expects to complete its evaluation in the third quarter and anticipates that any impact on earnings resulting from the evaluation would occur during the third or fourth quarter of the current fiscal year. The Company does not anticipate that the project will result in any major changes in its business or structure and does not expect the assets divested to include any divisions or significant businesses.

Financial Condition – Liquidity and Capital Resources

      The financial position of the Company remains strong with an increase in cash and cash equivalents of $16,336,000 during the first half of the year. The increase in cash and cash equivalents resulted from the issuance of 10-year, senior, unsecured notes in the amount of $75,000,000 due June 1, 2009. The interest rate on these notes is 6.77% and is payable each June 1st and December 1st.

      Significant uses of cash during the first half of the year included the seasonal procurement of fruit inventories, capital expenditures, the repayment of short-term borrowings, and the payment of dividends. In addition, the Company completed the repurchase of 140,000 Class A and 154,700 Class B Common Shares as part of a previously announced stock repurchase program during the first half of the year. The Company anticipates that it will continue to purchase shares under the repurchase program during the last half of the year, and expects the rate of acquiring shares to exceed that of the first six months.

      On December 1, 1999 the Company completed its cash acquisition of a fruit ingredient production facility located in Sao Jose do Rio Pardo, Brazil, from Danone S.A., the Brazilian affiliate of the Danone Group of France. Included in the transaction is a supply agreement pursuant to which the Company will use the facility to supply Danone’s Brazilian fruit preparation needs.

      With the combination of cash provided from operations and proceeds from the long-term debt placement, the Company expects its cash to be sufficient to meet requirements.

Year 2000

      As part of the information technology reengineering (ITR) project previously reported, the Company has completed an assessment of the Year 2000 issue as it may affect its information technology (IT) systems. The new IT systems being installed are fully Year 2000 compliant and have replaced 80% of the Company’s noncompliant IT systems. The remaining 20% of such systems have been corrected, as discussed below. The total ITR project cost, which includes an enterprise-wide information system and business process reengineering, is estimated at approximately $34,000,000, excluding internal staff costs.

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      The portion of the ITR project that resolves the Year 2000 issue on the Company’s IT systems has been implemented in all domestic and international locations. With regard to the IT systems that will not be replaced in time to meet the change in millenium, the Company has completed all renovations. The Company utilized outside consultants to assist with these corrections at a cost of approximately $1,950,000 which was 2.5% below original expectations. The Company believes that with conversion to the new software and with the modifications to existing software, the Year 2000 issue will not pose significant operational problems for its IT systems.

      The Company believes it has identified and replaced all non-IT systems that have Year 2000 issues. The cost to replace non-IT systems was not material. In addition, the Company has contacted all critical vendors to obtain status on their Year 2000 issues, and is presently following up as needed. The Company currently is contacting all major customers to develop contingency plans with them as required. To date, none of the contingency plans have a material impact on the Company.

      The worst case scenario of the Company, its vendors, or its customers not being fully Year 2000 compliant include temporary plant closings, delays in delivery of finished goods or receipt of raw materials, invoice and collection errors, and possible inventory and supply obsolescence. Should these events occur, the impact on the Company’s results of operations, financial condition, and cash flows could be material. The Company believes that its approach to the Year 2000 issue should reduce the likelihood of any such disruptions and should help to minimize the adverse effects if they do occur.

      The statements with regard to the potential effect of the Year 2000 issue on the Company’s operations and financial condition are based on numerous assumptions of future events, including the continued availability of certain resources and other factors. However, actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.

Recently Issued Accounting Standards

      In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 changes the accounting related to derivative instruments. Currently, the Company does not have significant participation in derivative instruments. Although the Company has not yet completed its evaluation of the potential impact of adopting SFAS 133 on future earnings, it does not expect the impact to be material.

      In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB 133, which defers the effective date of SFAS 133 for the Company until fiscal 2002. The Company currently plans to adopt SFAS 133 as required in fiscal 2002.

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No. 10

Certain Forward-Looking Statements

      This quarterly report includes certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results may differ depending on a number of factors including: the success of the Company’s marketing programs during the year; competitive activity; the mix of products sold and level of marketing expenditures needed to generate sales; an increase in fruit costs or costs of other significant ingredients, including sweeteners; the ability of the Company to maintain and/or improve sales and earnings performance of its nonretail business areas; foreign currency exchange rate and interest rate fluctuations; level of capital resources required for and success of future acquisitions; the ability of the Company to divest of certain assets and businesses considered nonstrategic or underperforming; and the successful implementations of the Company’s operational efficiency improvement and overhead reduction plans and its information technology reengineering project and Year 2000 modifications.

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No. 11

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

      The annual meeting of shareholders of the Company was held on August 17, 1999. At the meeting, the names of Vincent C. Byrd, Elizabeth Valk Long and William Wrigley, Jr. were placed in nomination for the Board of Directors to serve three-year terms ending in 2002. All three nominees were elected with the results as follows:

	Votes For		Votes Withheld
Vincent C. Byrd		59,318,051		253,498
Elizabeth Valk Long		59,279,974		291,575
William Wrigley, Jr.		59,309,465		262,084

The shareholders also voted on the appointment of Ernst & Young LLP as the Company’s independent auditors for the 2000 fiscal year. The measure was approved as follows:

Votes For	Votes Against		Abstentions
59,344,075		106,673		120,801

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	See the Index of Exhibits that appears on Sequential Page No. 13 of this report.
(b)	Reports on Form 8-K
	No Reports on Form 8-K were required to be filed during the quarter for which this report is filed.

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No. 12

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

December 13, 1999	THE J. M. SMUCKER COMPANY
	/s/ Steven J. Ellcessor
	BY STEVEN J. ELLCESSOR
	Vice President-Finance and Administration,
	Secretary, and General Counsel
	/s/ Richard K. Smucker
	AND RICHARD K. SMUCKER
	President

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No. 13

INDEX OF EXHIBITS

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

Assigned		Sequential
Exhibit No. *	Description	Page No.
10	Amendment to Amended Articles of Incorporation.
27	Financial data schedules pursuant to Article 5 in Regulation S-X.

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