1
Sequential Page
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 January 31, 1998
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 14,420,565 Class A Common Shares and 14,749,851 Class B Common
Shares outstanding on January 31, 1998.
The Exhibit Index is located at Sequential Page No. 13.
2
Sequential Page
No. 2
PART I. FINANCIAL INFORMATION
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Item 1. Financial Statements
--------------------
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in thousands, except per share data)
Net sales $ 130,658 $ 120,251 $ 423,234 $ 388,176
Cost of products sold 83,426 80,383 275,393 260,423
--------- --------- --------- ---------
47,232 39,868 147,841 127,753
Selling, distribution, and
administrative expenses 35,005 28,862 105,741 89,942
--------- --------- --------- ---------
12,227 11,006 42,100 37,811
Other income (expense)
Interest income 552 529 1,732 1,516
Interest expense (30) (371) (120) (1,790)
Other - net 412 (177) 712 (388)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting method 13,161 10,987 44,424 37,149
Income taxes 5,128 4,454 17,816 15,309
--------- --------- --------- ---------
Net income before cumulative effect of
change in accounting method 8,033 6,533 26,608 21,840
Cumulative effect of change in accounting
method, net of tax benefit of $1,980 (2,958) -- (2,958) --
--------- --------- --------- ---------
Net Income $ 5,075 $ 6,533 $ 23,650 $ 21,840
========= ========= ========= =========
Net income per Common Share (Basic and
Diluted)
Income before cumulative effect of
change in accounting method $ .27 $ .22 $ .91 $ .75
Cumulative effect of change in accounting
method (.10) - (.10) -
--------- --------- --------- ---------
Net income $ .17 $ .22 $ .81 $ .75
========= ========= ========= =========
Dividends declared on Class A and Class B Common
Shares $ .13 $ .13 $ .39 $ .39
========= ========= ========= =========
See notes to condensed consolidated financial statements
3
Sequential Page
No. 3
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31,1998 April 30,1997
(Unaudited) (Audited)
--------- ---------
(Dollars in Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,836 $ 24,091
Trade receivables, less allowances 42,238 48,140
Inventories:
Finished products 41,132 39,054
Raw materials, containers, and supplies 67,994 55,052
--------- ---------
109,126 94,106
Other current assets 9,404 12,135
--------- ---------
Total Current Assets 185,604 178,472
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements 14,028 13,820
Buildings and fixtures 79,554 74,709
Machinery and equipment 176,108 170,160
Construction in progress 8,830 6,881
--------- ---------
278,520 265,570
Accumulated depreciation (137,472) (125,935)
--------- ---------
Total Property, Plant and Equipment 141,048 139,635
OTHER NONCURRENT ASSETS
Intangible assets 42,417 45,393
Other assets 21,059 21,273
--------- ---------
Total Other Noncurrent Assets 63,476 66,666
--------- ---------
$ 390,128 $ 384,773
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,991 $ 36,582
Other current liabilities 42,523 35,434
--------- ---------
Total Current Liabilities 69,514 72,016
NONCURRENT LIABILITIES
Other noncurrent liabilities 21,733 20,866
SHARE HOLDERS' EQUITY
Class A Common Shares 3,605 3,606
Class B Common Shares (Non-Voting) 3,687 3,696
Additional capital 15,749 12,439
Retained income 292,497 284,605
Less:
Deferred compensation (2,382) (1,396)
Amount due from ESOP (9,787) (10,027)
Currency translation adjustment (4,488) (1,032)
--------- ---------
Total Shareholders' Equity 298,881 291,891
--------- ---------
$ 390,128 $ 384,773
========= =========
See notes to condensed consolidated financial statements
4
Sequential Page
No. 4
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
January 31,
-----------------------
1998 1997
-------- --------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 23,650 $ 21,840
Cumulative effect of change in accounting method 2,958 -
Adjustments 9,311 (3,220)
-------- --------
Net cash provided by operating activities 35,919 18,620
INVESTING ACTIVITIES
Proceeds from the sale of assets of
discontinued operations - 40,434
Additions to property, plant, and equipment (21,681) (8,174)
Proceeds from the sale of property, plant, and
equipment 341 588
Other - net 889 -
-------- --------
Net cash (used for) provided by investing activities (20,451) 32,848
FINANCING ACTIVITIES
Decrease in long-term debt - (45,200)
Purchase of common shares (3,220) -
Dividends paid (11,333) (11,346)
Other - net 708 96
-------- --------
Net cash used for financing activities (13,845) (56,450)
Cash flows provided by (used in) continuing operations 1,623 (4,982)
Cash flows used in discontinued operations - (277)
Effect of exchange rate change on cash (878) (192)
-------- --------
Net increase (decrease) in cash and cash equivalents 745 (5,451)
Cash and cash equivalents at beginning of period 24,091 17,647
-------- --------
Cash and cash equivalents at end of period $ 24,836 $ 12,196
======== ========
( ) Denotes use of cash
See notes to condensed consolidated financial statements
5
Sequential Page
No. 5
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 nine month period ended January 31, 1998, are not
necessarily indicative of the results that may be expected for the year ended
April 30, 1998. 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, 1997.
Note B - COMMON SHARES
At January 31, 1998, 35,000,000 Class A Common Shares and 35,000,000
Class B Common Shares were authorized. At January 31, 1998, there were
14,420,565 and 14,749,851 outstanding shares of Class A Common and Class B
Common, respectively, while 14,423,126 Class A and 14,785,203 Class B Common
Shares were outstanding at April 30, 1997. Outstanding shares of each class are
shown net of 1,791,723 Class A and 1,462,437 Class B treasury shares at January
31, 1998, and 1,789,162 Class A and 1,427,085 Class B treasury shares at April
30, 1997.
6
Sequential Page
No. 6
Note C - INCOME PER SHARE
During the third quarter the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share, replacing the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants, and convertible
securities. All earnings per share amounts for all periods presented in this
report have been presented and, where necessary, restated to conform to the SFAS
No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per Common Share before the cumulative effect of change in accounting
method:
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Numerator:
- ----------
Net income before cumulative effect of
change in accounting method for basic
and diluted earnings per Common Share $ 8,033 $ 6,533 $ 26,608 $ 21,840
=========== =========== =========== ===========
Denominator:
- ------------
Denominator for basic earnings per Common
Share - Weighted-average shares 29,034,886 29,092,074 29,039,548 29,097,111
Effect of dilutive securities:
Stock options 271,000 31,774 228,000 44,774
Restricted stock 76,205 29,018 51,316 30,196
----------- ----------- ----------- -----------
Denominator for diluted earnings per
Common Share 29,382,091 29,152,866 29,318,864 29,172,081
=========== =========== =========== ===========
Earnings per Common Share before
cumulative effect of change in accounting
method (Basic and Diluted) $ .27 $ .22 $ .91 $ .75
=========== =========== =========== ===========
Note D - ACCOUNTING RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year classifications.
7
Sequential Page
No. 7
Note E - CHANGE IN ACCOUNTING METHOD
In November 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board issued a consensus ruling on accounting for
business process reengineering costs. EITF 97-13, Accounting for Costs Incurred
in Connection with a Consulting Contract That Combines Business Process
Reengineering and Information Technology Transformation, requires that the cost
of business process reengineering activities that are part of a project to
acquire, develop, or implement internal use software, whether done internally or
by third parties, be expensed as incurred. Previously, the Company capitalized
these costs as systems development costs.
In accordance with this ruling, the Company incurred a one-time, after
tax charge of $2,958,000 or $.10 per share in the third quarter, for the
cumulative effect of expensing these previously capitalized costs. Consistent
with the requirements of EITF 97-13, no restatement of prior year financial
statements has been made. Such costs had primarily been incurred during the
fourth quarter of fiscal 1997.
Note F - RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued final statements that
(a) require the disclosure of total comprehensive income, (b) change the method
of determining and reporting business segments and (c) change the disclosure
requirements for pensions and other postretirement benefits.
The Company will adopt the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, and SFAS No. 132, Employers' Disclosure about Pensions and Other
Postretirement Benefits, in fiscal 1999.
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
nine-month periods ended January 31, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
Sales for the third quarter were $130,658,000, up 9% over the same
period last year. The Consumer, Industrial, Beverage, and Specialty business
areas all reported sales increases for the quarter, with the Consumer and
Industrial areas contributing more than 95% of the overall increase.
8
Sequential Page
No. 8
In the Consumer area, the majority of the sales increase was the result
of growth in sales of fruit spreads in the grocery and mass retail markets,
including sales of "Kraft" brand products. The "Kraft" retail fruit spreads
business was acquired during the fourth quarter of fiscal 1997. Sales of dessert
toppings also were up over the previous year.
In the Industrial area, sales growth came from a combination of new and
existing products in the bakery, frozen dairy, and yogurt categories. Although
the Industrial area continued to enjoy good margins through the third quarter,
pricing pressures are increasing as Industrial customers respond to competition
in their products by seeking lower cost ingredients. To maintain current margins
in the area while meeting customer needs for lower costs, the Company will need
to lower the production cost of its Industrial products. While the Company is
confident that its ongoing cost reduction activities will enable it eventually
to achieve the lower production costs, it anticipates that a decline in
Industrial area margins is likely to occur during the coming fiscal year.
In the International area, profit contribution was up but sales were
flat, due primarily to the impact of a strong U. S. dollar versus Australian and
Canadian currencies. The Company's consumer market businesses in Australia and
Canada remain strong, with share of market gains in fruit spreads achieved in
both countries.
Sales for the first nine months were $423,234,000, compared to
$388,176,000 during the first three quarters of last year. The Consumer and
Industrial areas accounted for the majority of the growth. The weakness of the
Australian and Canadian currencies against the U.S. dollar adversely affected
International sales results for the first three quarters as a whole as well as
during the third quarter. Assuming a constant exchange rate, consolidated sales
for the quarter and year to date would have increased an additional 1%.
Net income for the third quarter excluding the effect of an accounting
change was up 23% to $8,033,000 or $.27 per share, compared to net income of
$6,533,000 or $.22 per share for the same period last year. Year to date
earnings, excluding the effect of the accounting change, were up 21% to $.91 per
share compared to $.75 per share for the same period last year.
During the quarter, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued a consensus ruling requiring that certain
"business process reengineering and information technology transformation" costs
that had previously been capitalized, now need to be expensed as incurred. In
accordance with this ruling, the Company incurred a one time, after tax charge
in this quarter of $2,958,000, or $.10 per share, for the cumulative effect of
expensing previously capitalized costs. This cumulative effect adjustment
reduced quarterly and year to date earnings per share to $.17 and $.81,
respectively.
Cost of products sold decreased from last year as a percentage of net
sales for both the third quarter and the first nine months of fiscal 1998. The
decrease was primarily due to lower costs for certain raw materials. The Company
expects favorable margin comparisons for the remainder of the fiscal year.
9
Sequential Page
No. 9
Selling, distribution, and administrative costs increased at a greater
percentage than sales during the third quarter and year to date due mostly to an
increase in marketing expenditures and corporate administrative expenses. The
increase in marketing expenses was primarily due to additional programs in
support of retail fruit spreads in the Consumer business area, and the majority
of the increase in administrative costs was related to the Company's information
technology reengineering project.
The Company's interest expense decreased in the third quarter and
year-to-date as compared to the prior year due to the repayment during fiscal
1997 of all long-term debt. The Company's improved cash position resulted in an
increase in interest income for the first three quarters of the year.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The financial position of the Company remains strong. Expenditures for
fruit procurement were largely completed by the end of the second quarter and
cash generated from operations, therefore, increased significantly during the
third quarter. Other major uses of cash during the first nine months of the year
were capital expenditures, including software and consulting costs, the payment
of dividends and the repurchase of approximately 150,000 shares of Class A and
Class B Common Shares as part of a previously announced stock repurchase
program.
During the third quarter, the Company repaid all short-term borrowings.
Assuming there are no additional acquisitions or other investments requiring
cash outlays and that the results of operations are as anticipated, the Company
expects cash provided from operations to be sufficient to meet all cash
requirements during the fourth quarter.
IMPACT OF YEAR 2000
In connection with the Company's information technology reengineering
("ITR") project, the Company has completed an assessment of its Year 2000
requirements. The Company is in the process of replacing its primary computer
systems as part of the ITR project, which is intended primarily to increase
efficiency in operations through both the addition of an enterprise-wide
information system and the reengineering of business processes. The new systems
will all be fully Year 2000 compliant. The total ITR project cost is estimated
at approximately $34,000,000, which includes $25,000,000 for the purchase of
software and other capital costs and $9,000,000 that will be expensed as
incurred. To date, the Company has spent approximately $14,500,000 towards the
project of which $8,000,000 has been capitalized at January 31, 1998.
Capitalized costs will be expensed over a period ranging from 3 to 7 years in
accordance with the Company's accounting policy.
10
Sequential Page
No. 10
A substantial portion of the ITR project is expected to be completed
prior to any anticipated impact of the Year 2000 problem on the Company's
operating systems. To the extent that the new systems will not resolve the
issues, the Company has identified the software that will be affected and has
plans in place to modify it. The Company estimates that $2,000,000, in addition
to the ITR costs, will be expensed specifically related to software
modifications to existing systems. The Company believes that with conversion to
the new software and with the scheduled modifications to existing software, the
Year 2000 Issue will not pose significant operational problems for its computer
systems.
The costs of the ITR project and the date on which the Company believes
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
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
During the third quarter the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, replacing the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants, and convertible
securities. All earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the Statement 128 requirements.
The Company will adopt the disclosure requirements of SFAS No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, and SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, in fiscal 1999.
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; the impact of the price increase
taken in the second quarter on sales results, and level of marketing
expenditures needed to generate those 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 of its non-retail business
areas; and the successful implementation of the Company's information technology
reengineering project and year 2000 modifications.
11
Sequential Page
No. 11
PART II. OTHER INFORMATION
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.
12
Sequential Page
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.
March 16, 1998
THE J. M. SMUCKER COMPANY
/s/ Steven J. Ellcessor
---------------------------------
BY STEVEN J. ELLCESSOR
Vice President-Administration,
Secretary, and General Counsel
/s/ Richard K. Smucker
---------------------------------
AND RICHARD K. SMUCKER
President
13
Sequential Page
No. 13
INDEX OF EXHIBITS
That are filed with the Commission and
The New York Stock Exchange
Assigned Sequential
Exhibit No. * Description Page No.
- --------------------------------------------------------------------------------
27 Financial data schedules pursuant to Article 5
in Regulation S-X.
* Exhibits 2, 3, 4, 10, 11, 15, 18, 19, 22, 23, 24, and 99 are either
inapplicable to the Company or require no answer.