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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 October 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 14,412,332 Class A Common Shares and 14,708,279 Class B Common
Shares outstanding on October 31, 1998.
The Exhibit Index is located at Sequential Page No. 12.
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No. 2
PART I. FINANCIAL INFORMATION
THE J. M. SMUCKER COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Item 1. Financial Statements
--------------------
Three Months Ended Six Months Ended
October 31, October 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
Net sales $ 154,894 $ 145,187 $ 305,394 $ 292,576
Cost of products sold 103,204 95,974 199,842 191,967
------------ ------------ ------------ ------------
51,690 49,213 105,552 100,609
Selling, distribution, and
administrative expenses 37,378 35,346 74,720 70,736
------------ ------------ ------------ ------------
14,312 13,867 30,832 29,873
Other income (expense)
Interest income 438 482 1,063 1,180
Interest expense (256) (85) (260) (90)
Other - net 191 174 486 300
------------ ------------ ------------ ------------
Income before income taxes 14,685 14,438 32,121 31,263
Income taxes 5,622 5,836 12,642 12,688
------------ ------------ ------------ ------------
Net Income $ 9,063 $ 8,602 $ 19,479 $ 18,575
============ ============ ============ ============
Net income per Common Share $ .31 $ .30 $ .67 $ .64
============ ============ ============ ============
Net income per Common Share - assuming
dilution $ .31 $ .29 $ .67 $ .63
============ ============ ============ ============
Dividends declared on Class A and Class B
Common Shares $ .14 $ .13 $ .28 $ .26
============ ============ ============ ============
See notes to condensed consolidated financial statements
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No. 3
THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 1998 April 30,1998
(Unaudited) (Audited)
----------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,129 $ 36,484
Trade receivables, less allowances 53,606 48,732
Inventories:
Finished products 45,056 41,264
Raw materials, containers, and supplies 93,426 62,201
-------------- --------------
138,482 103,465
Other current assets 13,388 12,825
-------------- --------------
Total Current Assets 210,605 201,506
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements 15,318 15,058
Buildings and fixtures 79,089 78,658
Machinery and equipment 184,472 177,372
Construction in progress 31,088 13,147
-------------- --------------
309,967 284,235
Less allowances for depreciation (149,109) (140,521)
-------------- --------------
Total Property, Plant and Equipment 160,858 143,714
OTHER NONCURRENT ASSETS
Intangible assets 43,836 42,410
Other assets 19,084 20,343
-------------- --------------
Total Other Noncurrent Assets 62,920 62,753
-------------- --------------
$ 434,383 $ 407,973
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 38,006 $ 41,410
Other current liabilities 64,485 43,490
-------------- --------------
Total Current Liabilities 102,491 84,900
NONCURRENT LIABILITIES 21,052 20,896
SHAREHOLDERS' EQUITY
Class A Common Shares 3,603 3,597
Class B Common Shares (Non-Voting) 3,677 3,689
Additional capital 14,817 14,608
Retained income 308,257 298,316
Less:
Deferred compensation (2,095) (2,255)
Amount due from ESOP (9,526) (9,787)
Accumulated other comprehensive loss (7,893) (5,991)
-------------- --------------
Total Shareholders' Equity 310,840 302,177
-------------- --------------
$ 434,383 $ 407,973
============== ==============
See notes to condensed consolidated financial statements
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THE J. M. SMUCKER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
October 31,
---------------------------------
1998 1997
---- ----
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 19,479 $ 18,575
Adjustments (36,087) (9,870)
-------------- --------------
Net cash (used for) provided by operating activities (16,608) 8,705
INVESTING ACTIVITIES
Businesses acquired - net of cash (10,077) ---
Additions to property, plant, and equipment (21,219) (17,359)
Proceeds from the sale of property, plant, and
equipment 210 244
Other - net 632 587
-------------- --------------
Net cash used for investing activities (30,454) (16,528)
FINANCING ACTIVITIES
Proceeds from short-term debt - net 25,457 7,259
Purchase of common shares (811) (3,308)
Dividends paid (8,123) (7,563)
Other - net 16 60
-------------- --------------
Net cash provided by (used for) financing activities 16,539 (3,552)
Cash flows used in operations (30,523) (11,375)
Effect of exchange rate changes (832) (894)
-------------- --------------
Net decrease in cash and cash equivalents (31,355) (12,269)
Cash and cash equivalents at beginning of period 36,484 24,091
-------------- --------------
Cash and cash equivalents at end of period $ 5,129 $ 11,822
============== ==============
( ) Denotes use of cash
See notes to condensed consolidated financial statements
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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 six-month period ended October 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 October 31, 1998, 35,000,000 Class A Common Shares and 35,000,000
Class B Common Shares were authorized. At October 31, 1998, there were
14,412,332 and 14,708,279 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 1,799,956 Class A and 1,504,009 Class B treasury shares at October
31, 1998, and 1,824,886 Class A and 1,457,554 Class B treasury shares at April
30, 1998.
Note C - Credit Facilities
-----------------
The Company has available uncommitted lines of credit providing up to
$50,000,000 for short-term borrowings, of which $25,457,000 was outstanding at
October 31, 1998. The interest rate to be charged on any outstanding balance is
based on prevailing market rates.
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Note D - 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,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share data)
Numerator:
---------
Net income $ 9,063 $ 8,602 $ 19,479 $ 18,575
============== ============== ============== ==============
Denominator:
------------
Denominator for earnings per Common
Share - weighted-average shares 29,043,137 29,009,200 29,034,992 29,041,879
Effect of dilutive securities:
Stock options 163,529 297,651 201,564 206,445
Restricted stock 25,281 72,168 45,637 18,539
============== ============== ============== ==============
Denominator for earnings per Common
Share - assuming dilution 29,231,947 29,379,019 29,282,193 29,266,863
============== ============== ============== ==============
Net income per Common Share $ .31 $ .30 $ .67 $ .64
============== ============== ============== ==============
Net income per Common Share - assuming
dilution $ .31 $ .29 $ .67 $ .63
============== ============== ============== ==============
Note E - 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 three-month periods ended October 31, 1998 and 1997, total
comprehensive income was $9,301,000 and $6,656,000, respectively. Total
comprehensive income for the six-month periods ended October 31, 1998 and 1997
was $17,577,000 and $15,762,000, respectively.
Note F - Recently Issued Accounting Standards
------------------------------------
The Financial Accounting Standards Board has issued final statements
that change the method of determining and reporting business segments, change
the disclosure requirements for pensions and other postretirement benefits, and
change the accounting for derivative instruments.
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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. SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, is required to be adopted in the first quarter of fiscal 2001.
- --------------------------------------------------------------------------------
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, 1998 and 1997, respectively.
Results of Operations
- ---------------------
Sales for the second quarter ended October 31, 1998, were up
approximately 7%, to $154,894,000 from $145,187,000 in the same period last
year. Sales increased in all of the business areas, with the majority of the
increase occurring in the consumer, industrial, beverage, and international
areas.
In the consumer area, the majority of the increase was the result of
(i) a favorable mix of products sold within the fruit spreads category and (ii)
the launch of "Smucker's Snackers", the Company's new shelf-stable peanut butter
and jelly offering for lunches and snacks. Natural peanut butter sales were also
up over the prior year. In the industrial area, the growth came primarily from
sales of ingredients for new products of bakery and dairy customers. In
beverages, growth in "R. W. Knudsen Family" brand products and the addition of
sales from the recently acquired "Mrs. Wiggles Rocket Juice" beverage line
accounted for the majority of that area's increase.
In international, the Company realized sales growth, due in part to the
effect of acquisitions made in the last year, despite the fact that reported
sales continued to be adversely impacted by the strength of the American dollar
versus the Australian and Canadian currencies. Had the exchange rates held
constant with last year, consolidated sales for both the quarter and
year-to-date would have been approximately 2% higher.
Sales for the first six months of the fiscal year were $305,394,000
compared to $292,576,000 last year, an increase of over 4%. The consumer and
industrial areas accounted for nearly 70% of the growth.
The increase in earnings for both the three-month and six-month periods
resulted primarily from the growth in sales, offset by increases in distribution
and certain operations support costs. Margins also were impacted by investment
spending to support marketing and merchandising initiatives (including the
introduction of "Smucker's Snackers") and the Company's information technology
project. Marketing expenses, although up for the six-month period over the same
period last year, increased at a lesser rate than sales during the second
quarter.
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No. 8
Financial Condition - Liquidity and Capital Resources
- -----------------------------------------------------
The financial position of the Company remains strong despite the
reduction in cash and cash equivalents of $31,355,000 during the first half of
the year. Historically, the first half of the year results in a net cash outflow
due to expenditures required for the seasonal procurement of fruit inventories.
More cash was used in the first six months for fruit procurement this year than
in the prior year, and that was due primarily to certain fruits (primarily
strawberries) being purchased in higher quantities and at increased costs this
year. In addition to fruit purchases, other significant uses of cash during the
first half of the year were capital expenditures, including capitalized software
and consulting costs, acquisitions costs, and the payment of dividends.
During the second quarter, the Company borrowed against existing lines
of credit in order to finance seasonal fruit purchases and other working capital
requirements. At October 31, 1998, the Company had $25,457,000 outstanding in
short-term debt. Based on projected investment spending through the remainder of
the fiscal year and assuming 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) to have borrowings outstanding at
the end of the year.
Subsequent to the end of the second quarter, the Company reached an
agreement in principle to acquire Nalley's Fine Foods' "Adams" brand peanut
butter business from Agrilink Foods. The acquisition, which is expected to be
completed in January, will not have a material impact on the future financial
results of the Company.
Impact of Year 2000
- -------------------
As part of the information technology reengineering (ITR) project
previously reported, the Company has completed an assessment of the Year 2000
problem as it may affect its information technology (IT) systems. The new IT
systems being installed are fully Year 2000 compliant and will replace 80% of
the Company's non-compliant IT systems. 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. To date, the Company has incurred approximately 62% of these costs.
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 IT
systems. Implementation of components of the ITR project has been prioritized to
ensure replacement of the IT systems most affected by the Year 2000 problem.
Implementation progress has proceeded as planned. The Company has all critical
components implemented in test locations and anticipates full implementation by
July 1999. With regard to the IT 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 plans in place to make corrections to the affected software. The
Company has engaged outside consultants to assist with these corrections, which
it estimates will cost approximately $2,000,000 in additional expense. The
Company expects to complete planned corrections by July 1999. 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 IT systems.
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The Company also has developed a plan to identify and replace all
non-compliant non-IT systems. The cost to replace non-IT systems has not yet
been determined, but is not expected to be material. In addition, the Company is
in the process of contacting all critical vendors to obtain status on their Year
2000 issues. The Company also has plans to contact all major customers in the
coming months.
The possible consequences 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 flow 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. Once developed,
contingency plans and related cost estimates will be continually updated as
additional information becomes available.
The costs of the ITR project, the date on which the Company believes it
will complete the Year 2000 modifications, and the statements with regard to the
potential effect of the Year 2000 issue on the Company's operations and
financial condition 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, change
the disclosure requirements for pensions and other postretirement benefits, and
change the accounting for derivative instruments.
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. SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, is required to be adopted in the first quarter of fiscal 2001.
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; level of capital
resources required for and success of future acquisitions; and the successful
implementation of the Company's information technology reengineering project and
Year 2000 modifications.
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No. 10
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
18, 1998. At the meeting, the names of Kathryn W. Dindo, Russell G. Mawby,
Richard K. Smucker, and William H. Steinbrink were placed in nomination for the
Board of Directors to serve three-year terms ending in 2001. All four nominees
were elected with the results as follows:
Votes For Votes Withheld
------------- --------------
Kathryn W. Dindo 61,328,801 418,918
Russell G. Mawby 61,315,306 432,413
Richard K. Smucker 61,328,541 419,178
William H. Steinbrink 61,318,463 429,256
The shareholders also voted on the ratification of the 1998 Equity and
Performance Incentive Plan and the appointment of Ernst & Young LLP as the
Company's independent auditors for the 1999 fiscal year. The measures were
approved as follows:
Votes For Votes Against Abstentions Non-Votes
----------------- ---------------- -------------- -------------
1998 Equity and
Performance
Incentive Plan 59,569,762 1,737,493 440,461 3
Appointment of
Auditors 61,459,931 141,255 146,533 0
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.
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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.
December 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
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No. 12
INDEX OF EXHIBITS
That are filed with the Commission and
The New York Stock Exchange
Assigned Sequential
Exhibit No. * Description Page No.
- -----------------------------------------------------------------------------------------------------------------------
10 1998 Equity and Performance Incentive Plan
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.