1 Sequential Page No. 1 of 12 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 July 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 14,398,723 Class A Common Shares and 14,727,842 Class B Common Shares outstanding on July 31, 1998. The Exhibit Index is located at Sequential Page No. 12. 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 July 31, ----------------------- 1998 1997 --------- --------- (Dollars in thousands, except per share data) Net sales $ 150,500 $ 147,389 Cost of products sold 96,638 95,993 --------- --------- 53,862 51,396 Selling, distribution, and administrative expenses 37,342 35,390 --------- --------- 16,520 16,006 Other income (expense) Interest income 625 698 Interest expense (4) (5) Other - net 295 126 --------- --------- Income before income taxes 17,436 16,825 Income taxes 7,020 6,852 --------- --------- Net Income $ 10,416 $ 9,973 ========= ========= Net income per Common Share $ .36 $ .34 ========= ========= Net income per Common Share - assuming dilution $ .36 $ .34 ========= ========= Dividends declared on Class A and Class B Common Shares $ .14 $ .13 ========= ========= See notes to condensed consolidated financial statements 3 Sequential Page No. 3 THE J. M. SMUCKER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS July 31, 1998 April 30,1998 (Unaudited) (Audited) --------- --------- (Dollars in Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,052 $ 36,484 Trade receivables, less allowances 46,276 48,732 Inventories: Finished products 43,176 41,264 Raw materials, containers, and supplies 94,466 62,201 --------- --------- 137,642 103,465 Other current assets 12,632 12,825 --------- --------- Total Current Assets 203,602 201,506 PROPERTY, PLANT, AND EQUIPMENT Land and land improvements 15,259 15,058 Buildings and fixtures 78,608 78,658 Machinery and equipment 179,116 177,372 Construction in progress 24,970 13,147 --------- --------- 297,953 284,235 Less allowances for depreciation (144,539) (140,521) --------- --------- Total Property, Plant and Equipment 153,414 143,714 OTHER NONCURRENT ASSETS Intangible assets 44,584 42,410 Other assets 19,970 20,343 --------- --------- Total Other Noncurrent Assets 64,554 62,753 --------- --------- $ 421,570 $ 407,973 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 46,379 $ 41,410 Other current liabilities 48,222 43,490 --------- --------- Total Current Liabilities 94,601 84,900 NONCURRENT LIABILITIES Other noncurrent liabilities 21,024 20,896 SHAREHOLDERS' EQUITY Class A Common Shares 3,600 3,597 Class B Common Shares (Non-Voting) 3,682 3,689 Additional capital 14,692 14,608 Retained income 304,036 298,316 Less: Deferred compensation (2,147) (2,255) Amount due from ESOP (9,787) (9,787) Accumulated other comprehensive loss (8,131) (5,991) --------- --------- Total Shareholders' Equity 305,945 302,177 --------- --------- $ 421,570 $ 407,973 ========= ========= See notes to condensed consolidated financial statements 4 Sequential Page No. 4 THE J. M. SMUCKER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended July 31, ------------------------- 1998 1997 ---------- ---------- (Dollars in Thousands) OPERATING ACTIVITIES Net income $ 10,416 $ 9,973 Adjustments (19,518) (2,295) ---------- ---------- Net cash (used for) provided by operating activities (9,102) 7,678 INVESTING ACTIVITIES Businesses acquired - net of cash (9,901) --- Additions to property, plant, and equipment (9,173) (10,076) Proceeds from the sale of property, plant, and equipment 46 136 Other - net 313 291 ---------- ---------- Net cash used for investing activities (18,715) (9,649) FINANCING ACTIVITIES Proceeds from short-term debt - net 3,473 96 Purchase of common shares --- (3,224) Dividends paid (4,064) (3,798) Other - net (447) 41 ---------- ---------- Net cash used for financing activities (1,038) (6,885) Cash flows used in operations (28,855) (8,856) Effect of exchange rate changes (577) (281) ---------- ---------- Net decrease in cash and cash equivalents (29,432) (9,137) Cash and cash equivalents at beginning of period 36,484 24,091 ---------- ---------- Cash and cash equivalents at end of period $ 7,052 $ 14,954 ========== ========== ( ) 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 three-month period ended July 31, 1998, are not necessarily indicative of the results that may be expected for the year ended April 30, 1999. 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, 1998. Note B - Common Shares ------------- At July 31, 1998, 35,000,000 Class A Common Shares and 35,000,000 Class B Common Shares were authorized. At July 31, 1998, there were 14,398,723 and 14,727,842 outstanding shares of Class A Common and Class B Common, respectively, while 14,387,402 Class A and 14,754,734 Class B Common Shares were outstanding at April 30, 1998. Outstanding shares of each class are shown net of 1,813,565 Class A and 1,484,446 Class B treasury shares at July 31, 1998, and 1,824,886 Class A and 1,457,554 Class B treasury shares at April 30, 1998. 6 Sequential Page No. 6 Note C - 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 July 31, ---------------------------- (Dollars in thousands, except per share data) 1998 1997 ------------ ------------ Numerator: ---------- Net income $ 10,416 $ 9,973 ============ ============ Denominator: ------------ Denominator for earnings per Common Share - weighted-average shares 29,026,846 29,074,445 Effect of dilutive securities: Stock options 239,599 115,238 Restricted stock 65,992 5,575 ------------ ------------ Denominator for earnings per Common Share - assuming dilution 29,332,437 29,195,258 ============ ============ Net income per Common Share $ .36 $ .34 ============ ============ Net income per Common Share - assuming dilution $ .36 $ .34 ============ ============ Note D - Comprehensive Income -------------------- The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), as of May 1, 1998, which established standards for reporting and displaying comprehensive income and its components in the financial statements. The adoption of SFAS 130, which had no impact on the Company's net income or shareholders' equity, requires foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. During the quarter ended July 31, 1998 and 1997, total comprehensive income was $8,276,000 and $9,106,000, respectively. 7 Sequential Page No. 7 Note E - Recently Issued Accounting Standards ------------------------------------ The Financial Accounting Standards Board has issued final statements that change the method of determining and reporting business segments and change the disclosure requirements for pensions and other postretirement benefits. The Company is currently evaluating the effects of these new standards and will adopt the disclosure requirements of Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, and SFAS 132, Employers' Disclosure about Pensions and Other Postretirement Benefits, in the fourth quarter of fiscal 1999, as required. - -------------------------------------------------------------------------------- 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 periods ended July 31, 1998 and 1997, respectively. Results of Operations - --------------------- Sales for the first quarter ended July 31, 1998, were up approximately 2 percent, to $150,500,000 from $147,389,000 in the prior year first quarter. Sales increased in the consumer, industrial, foodservice, and beverages business areas, with the majority of the increase occurring in consumer and industrial. Growth in the consumer area was the result of an increase in grocery market sales of the "Sunberry Farms", "Simply Fruit" and "Light" fruit spread products, and to the launch of "Smucker's Snackers", the Company's new shelf-stable peanut butter and jelly offering for lunches and snacks. In the industrial area, the sales growth came in the bakery, yogurt filling, and frozen dairy categories from a combination of both new and existing products. In the international area, sales continued to be adversely impacted by the strength of the American dollar versus the Australian and Canadian currencies. As a result, the international area reported sales for the quarter that were slightly behind those of the prior year, despite strong gains for the Australian business when measured in its domestic currency. Assuming a constant exchange rate (as compared to the first quarter of last year), consolidated sales for the quarter would have increased an additional 1%. Earnings for the first quarter ended July 31, 1998, were $10,416,000, up 4 percent over earnings of $9,973,000 for the same period last year. On a diluted basis, earnings per share were $.36 compared to $.34 per share last year. 8 Sequential Page No. 8 The increase in earnings resulted primarily from a combination of sales growth and a decrease in administrative expenses, offset by an increase in marketing expenditures. The increase in marketing represented investment spending for several new product initiatives, including "Smucker's Snackers", along with additional support for the fruit spreads business. Marketing support is expected to continue at a higher level through the remainder of the fiscal year. Financial Condition - Liquidity and Capital Resources - ----------------------------------------------------- The financial position of the Company remains strong despite the reduction in cash and cash equivalents of $29,432,000 during the first quarter. Historically, the first quarter results in a net cash outflow due to expenditures required for the seasonal procurement of fruit inventories. More cash was used in the first quarter for fruit procurement this year than in the prior year, and that was due primarily to certain fruits being purchased in higher quantities this year. In addition to fruit purchases, other significant uses of cash during the quarter were capital expenditures, including capitalized software and consulting costs, acquisitions costs, and the payment of dividends. During the second quarter, the Company will continue to borrow against its lines of credit in order to finance remaining seasonal fruit purchases and other working capital requirements. Assuming that there are no additional acquisitions or other investments requiring significant cash outlays and that the results of operations are as anticipated, the Company expects (i) cash provided from operations and borrowing to be sufficient to meet cash requirements and (ii) all short-term borrowing to be repaid by April 30, 1999. Impact of Year 2000 - ------------------- The Company is in the process of replacing its primary computer systems as part of its information technology reengineering (ITR) project, which is intended to increase efficiency in operations through both the addition of an enterprise-wide information system and the reengineering of business processes. In connection with the ITR project, the Company has completed an assessment of its Year 2000 requirements. The new systems being installed are fully Year 2000 compliant and will replace 80% of the Company's non-compliant systems. The total ITR project cost is estimated at approximately $34,000,000, which includes $21,000,000 for the purchase of software and other capital costs and $13,000,000 that will be expensed as incurred. To date, the Company has spent approximately $18,000,000 towards the project of which $10,000,000 has been capitalized at July 31, 1998. Capitalized costs will be expensed over a period ranging from three to seven years in accordance with the Company's accounting policy. 9 Sequential Page No. 9 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. Implementation of components of the ITR project have been prioritized to ensure replacement of those systems most affected by the Year 2000 problem. With regard to the systems that either are not being replaced by the ITR project or will not be replaced in time to meet the change in millenium, the Company has identified the software that will be affected by the Year 2000 problem and has plans in place to make corrections. The Company has engaged outside consultants to assist with these corrections and 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 - ------------------------------------ The Financial Accounting Standards Board has issued final statements that change the method of determining and reporting business segments and change the disclosure requirements for pensions and other postretirement benefits. The Company is currently evaluating the effects of these new standards and will adopt the disclosure requirements of Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, and SFAS 132, Employers' Disclosure about Pensions and Other Postretirement Benefits, in the fourth quarter of fiscal 1999, as required. 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 non-retail business areas; foreign currency exchange rate fluctuations; and the successful implementation of the Company's information technology reengineering project and Year 2000 modifications. 10 Sequential Page No. 10 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. 12 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. 11 Sequential Page No. 11 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. September 11, 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 12 Sequential Page No. 12 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.