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 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.
2 Sequential Page No. 2 PART I. FINANCIAL INFORMATION THE J. M. SMUCKER COMPANY CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Unaudited) Item 1. Financial Statements -------------------- <TABLE> <CAPTION> Three Months Ended Six Months Ended October 31, October 31, ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> 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 ============ ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements
3 Sequential Page No. 3 THE J. M. SMUCKER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> October 31, 1998 April 30,1998 (Unaudited) (Audited) ----------- --------- <S> <C> <C> 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 ============== ============== </TABLE> See notes to condensed consolidated financial statements
4 Sequential Page No. 4 THE J. M. SMUCKER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended October 31, --------------------------------- 1998 1997 ---- ---- (Dollars in Thousands) <S> <C> <C> 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 ============== ============== </TABLE> ( ) 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 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.
6 Sequential Page No. 6 Note D - Income Per Share ---------------- The following table sets forth the computation of earnings per Common Share and earnings per Common Share assuming dilution: <TABLE> <CAPTION> Three Months Ended Six Months Ended October 31, October 31, -------------------------------- -------------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- -------------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> 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 ============== ============== ============== ============== </TABLE> 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.
7 Sequential Page No. 7 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.
8 Sequential Page 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.
9 Sequential Page No. 9 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.
10 Sequential Page 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: <TABLE> <CAPTION> Votes For Votes Against Abstentions Non-Votes ----------------- ---------------- -------------- ------------- <S> <C> <C> <C> <C> 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 </TABLE> 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. 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
12 Sequential Page No. 12 INDEX OF EXHIBITS That are filed with the Commission and The New York Stock Exchange <TABLE> <CAPTION> Assigned Sequential Exhibit No. * Description Page No. - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 10 1998 Equity and Performance Incentive Plan 27 Financial data schedules pursuant to Article 5 in Regulation S-X. </TABLE> * Exhibits 2, 3, 4, 11, 15, 18, 19, 22, 23, 24, and 99 are either inapplicable to the Company or require no answer.