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No. 1 of 13 PagesUNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended October 31, 1999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934For 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) 682-3000The 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. 2PART 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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Page No. 3THE 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. 4THE 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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Page No. 5THE 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 Companys 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. 6Note 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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No. 7Item 2. Managements 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 Companys 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 groups offerings as a result of the distribution agreement entered into with Lea & Perrins, Inc. last year. In the consumer area, the continued rollout of Smuckers 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 Companys 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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No. 8Subsequent 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 Danones 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 Companys 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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No. 9The portion of the ITR project that resolves the Year 2000 issue on the Companys 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 Companys 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 Companys 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. 10Certain 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 Companys 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 Companys operational efficiency improvement and overhead reduction plans and its information technology reengineering project and Year 2000 modifications.
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No. 11PART 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 Companys 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. 12SIGNATURES
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. 13INDEX 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.
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10-Q Filing
J.M. Smucker (SJM) 10-Q2000 Q2 Quarterly report
Filed: 13 Dec 99, 12:00am