SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 28, 1998 Commission File Number 0-748
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 52-0408290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Loveton Circle, Sparks, Maryland 21152-6000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 771-7301
Indicate by check mark whether the registrant (1) 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 (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for
the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Shares Outstanding
March 31, 1998
Common Stock 9,832,090
Common Stock Non-Voting 63,634,834
10Q.mz<PAGE>
McCORMICK & COMPANY, INCORPORATED
INDEX - FORM 10-Q
February 28, 1998
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Income Statement 2
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Exhibit Index 13
<PAGE>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(In Thousands Except Per Share Amounts)
Three Months Ended
February 28, February 28,
1998 1997
Net sales $415,202 $407,402
Cost of goods sold 282,030 270,685
Gross profit 133,172 136,717
Selling, general and
administrative expense 103,075 108,005
Restructuring charges 68 259
Operating income 30,029 28,453
Interest expense 8,389 8,501
Other (income) expense - net (1,515) (1,528)
Income before income taxes 23,155 21,480
Provision for income taxes 8,336 7,948
Net income from consolidated
operations 14,819 13,532
Income from unconsolidated operations 1,390 1,683
Net income $ 16,209 $ 15,215
Earnings per common share - basic $.22 $.20
and diluted
Cash dividends declared per
common share $.16 $.15
See notes to condensed consolidated financial statements.
(2)<PAGE>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
Feb. 28, Feb. 28, Nov. 30,
1998 1997 1997
(Unaudited)(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 8,360 $ 23,475 $ 13,500
Accounts receivable - net 171,214 196,081 217,198
Inventories
Raw materials and supplies 126,980 115,256 124,998
Finished products and work-in
process 141,153 134,429 127,086
268,133 249,685 252,084
Other current assets 24,926 47,089 23,736
Total current assets 472,633 516,330 506,518
Property - net 380,240 394,820 380,015
Goodwill - net 154,658 162,020 157,962
Prepaid allowances 150,243 149,500 130,943
Other assets 79,749 77,456 80,794
Total assets $1,237,523 $1,300,126 $1,256,232
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $178,209 $177,830 $112,313
Current portion of long-term debt 15,782 10,396 8,989
Trade accounts payable 128,998 122,745 150,330
Other accrued liabilities 181,510 216,804 226,617
Total current liabilities 504,499 527,775 498,249
Long-term debt 266,526 286,338 276,489
Deferred income taxes 1,753 4,890 2,038
Other long-term liabilities 86,916 81,024 86,346
Total liabilities 859,694 900,027 863,122
Shareholders' Equity
Common stock 47,404 46,077 44,408
Common stock non-voting 118,006 111,590 115,042
Retained earnings 247,274 272,762 264,309
Foreign currency translation adj. (34,855) (30,330) (30,649)
Total shareholders' equity 377,829 400,099 393,110
Total liabilities and
shareholders' equity $1,237,523 $1,300,126 $1,256,232
See notes to condensed consolidated financial statements.
(3)<PAGE>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
Feb. 28, Feb. 29,
1998 1997
Cash flows from operating activities
Net income $ 16,209 $ 15,215
Adjustments to reconcile net income to net cash
used in operating activities
Non cash charges and credits
Depreciation and amortization 13,029 12,769
Income from unconsolidated operations (1,390) (1,683)
Other (102) 43
Changes in selected working capital items
Accounts receivable 44,499 18,092
Inventories (18,375) (7,427)
Prepaid allowances (19,299) (351)
Accounts payable, trade (20,179) (28,232)
Other assets and liabilities (43,603) (11,568)
Net cash used in operating activities (29,211) (3,142)
Cash flows from investing activities
Capital expenditures (13,600) (12,174)
Acquisitions of businesses - (3,315)
Proceeds from sale of assets 478 809
Other investments (9) (308)
Net cash used in investing activities (13,131) (14,988)
Cash flows from financing activities
Short-term borrowings, net 66,120 81,189
Long-term debt borrowings 48 -
Long-term debt repayments (1,963) (1,773)
Common stock issued 7,566 349
Common stock acquired by purchase (23,037) (48,382)
Dividends paid (11,813) (11,632)
Net cash provided by financing activities 36,921 19,751
Effect of exchange rate changes on cash and
cash equivalents 281 (564)
(Decrease) increase in cash and cash equivalents (5,140) 1,057
Cash and cash equivalents at beginning of period 13,500 22,418
Cash and cash equivalents at end of period $ 8,360 $ 23,475
See notes to condensed consolidated financial statements.
(4)<PAGE>
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands Except As Otherwise Noted)
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain
all adjustments necessary to present fairly the financial position
and the results of operations for the interim periods.
The results of consolidated operations for the three month period
ended February 28, 1998 are not necessarily indicative of the
results to be expected for the full year. Historically, the
Company's consolidated sales and profits are lower in the first
half of the fiscal year, and increase in the second half.
For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on
Form 10-K for the year ended November 30, 1997.
Business Restructuring
In the third quarter of 1996, the Company began implementation of
a restructuring plan and recorded a restructuring charge of $58,095
in 1996. This charge reduced net income by $39,582 or $.49 per
share. In addition there are additional charges directly related
to the restructuring plan which could not be accrued in 1996. In
the fourth quarter of 1994, the Company recorded a charge of
$70,445 for restructuring its business operations. Except for the
realignment of some of our overseas operations, this restructuring
plan is complete.
In the third quarter of 1997, the Company reevaluated its
restructuring plans. Most of the actions under these plans are
completed or near completion and have resulted in losses being less
than originally anticipated. In addition, an agreement in
principal to dispose of an overseas food brokerage and distribution
business with 6% of consolidated net sales was not consummated,
resulting in a restructuring credit of $9,493. Concurrent with the
reevaluation of restructuring plans, the Company initiated plans to
streamline the food brokerage and distribution business and close
a domestic packaging plant resulting in a restructuring charge of
$5,734. Charges related to these initiatives include severance and
personnel costs of $2,516 and a $3,218 writedown of assets to net
realizable value.
The restructuring liability remaining at February 28, 1998 was
$4,398 for severance and personnel and $841 for other exit costs.
The Company expects to have all restructuring programs completed in
1998.
(5)<PAGE>
Accounting and Disclosure Changes
In February 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." SFAS No. 132, which is
effective for fiscal years beginning after December 15, 1997, does
not change the recognition or measurement of pension or
postretirement benefit plans, but revises and standardizes
disclosure requirements. Any effect, while not yet determined by
the Company, will be limited to the presentation of its
disclosures.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1
"Accounting For the Costs of Computer Software Developed For or
Obtained For Internal-Use." The SOP, which is effective for years
beginning after December 15, 1998, will require the capitalization
of certain costs incurred in connection with developing or
obtaining software for internal-use. The Company is currently
assessing the impact of the SOP.
In the first quarter of 1998, the Company adopted SFAS No. 128,
"Earnings per Share." SFAS No. 128 revised the standards for
computation and presentation of earnings per share (EPS), requiring
the presentation of basic and diluted EPS on the income statement.
Basic EPS is based on the weighted average shares outstanding
during the applicable period. Diluted EPS reflects the potential
dilution which could occur if all dilutive securities (such as
outstanding stock options) were converted to common shares. The
EPS amounts for all periods have been presented in compliance with
SFAS No. 128. No changes to previously presented EPS were
necessary.
The following table sets forth the computation of basic and diluted
earnings per common share in accordance with the provisions of SFAS
No. 128.
Three Months Ended
2/28/98 2/28/97
Numerator:
Net income from continuing operations for
basic and diluted earnings per
common share $16,209 $15,215
Denominator:
Denominator for basic earnings per common
share - weighted average shares 73,753 77,239
Effect of dilutive securities:
Stock options 493 141
Employee stock purchase plan 37 20
Denominator for diluted earnings
per common share - adjusted
weighted average shares 74,283 77,400
Earnings per common share - basic
and diluted $0.22 $0.20
(6)<PAGE>
Financial Instruments
During the first quarter of 1998, the Company entered into a
foreign currency hedge contract. The Company sold Mexican pesos
forward to cover its net investment in its Mexican subsidiary and
affiliate. This contract, which expires in December 1998, has a
nominal amount of $9,738 at February 28, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts In Thousands Except As Otherwise Noted)
Overview
For the quarter ended February 28, 1998, the Company reported net
income of $16.2 million versus $15.2 million for the comparable
period last year. Basic and diluted earnings per share were $.22
for the first quarter of 1998, compared to $.20 last year.
The increase in first quarter earnings as compared to last year is
due to the growth and character of the Company's sales. Net income
was favorably impacted by lower volume-based promotion and sales
costs in the U.S. consumer business and a larger mix of industrial
business, partially offset by higher pepper costs.
While U.S. consumer sales were disappointing in the first quarter
of 1998 compared to the previous year, the Company recently gained
important new distribution in the consumer and foodservice
businesses. Because of normal contract transition timing, it is
not expected that any material benefits of this new distribution
will be realized in 1998.
Results of Operations
Net sales for the quarter ended February 28, 1998 increased 1.9%
over the corresponding quarter of 1997. The effects of unfavorable
foreign currency exchange rates decreased sales by slightly over
1%, primarily in our Australian and Canadian operations. Net sales
of all operating groups except the U.S. consumer and packaging
businesses were improved to last year with strong performances in
the U.S. industrial and food service businesses. Net sales
decreases in our U.S. consumer business are primarily volume-
related and were negatively impacted by increased competitive
activity and product relaunch implementation issues in the dry
seasoning mix business. General market softness, principally for
plastic tubes, contributed to volume declines in the packaging
business. U.S. industrial and foodservice businesses were
favorably impacted by both volume and the combination of price and
mix changes.
Operating income as a percentage of net sales increased to 7.2%
from 7.0% in the first quarter of last year.
(7)<PAGE>
Gross profit as a percentage of net sales at 32.1% decreased as
compared to the first quarter of last year at 33.6%. The gross
profit percentage of most major operating groups decreased versus
last year. Factors contributing to this decline include a higher
mix of lower margin industrial business and the negative impact of
higher pepper costs. While the future movement of commodity costs
are uncertain, a variety of programs, including periodic commodity
purchases and customer price adjustments, are being used by the
Company to address these fluctuations.
Selling, general and administrative expenses decreased in the first
quarter as compared to last year in both dollar terms and as a
percentage of net sales. Lower U.S. consumer sales and a higher
mix of industrial business, which generally requires less support
costs, reduced selling and promotional spending in the quarter.
Interest expense for the quarter decreased by $.1 million as
compared to last year primarily due to lower debt levels. Short-
term borrowing rates in the first quarter of 1998 were slightly
higher than the first quarter of 1997.
Other income in 1998 and 1997 includes $1.8 and $2.0 million,
respectively, of income from the three year non-compete agreement
with Calpine Corporation, entered into as a part of the sale of
Gilroy Energy Company, Inc.
The Company's effective tax rate for the first quarter of 1998 was
36% as compared to 37% in the first quarter of last year. The
decrease in the tax rate is primarily due to more effective tax
planning associated with our foreign operations.
Income from unconsolidated operations decreased to $1.4 million in
the first quarter of 1998 from $1.7 million in the comparable
quarter of last year. The decrease is primarily due to our Mexican
joint venture, which realized translation losses from the
devaluation of the Mexican Peso, recognized in accordance with
hyper-inflationary accounting rules.
Business Restructuring
In the third quarter of 1996, the Company began implementation of
a restructuring plan and recorded a restructuring charge of $58,095
in 1996. This charge reduced net income by $39,582 or $.49 per
share. In addition there are additional charges directly related
to the restructuring plan which could not be accrued in 1996. In
the fourth quarter of 1994, the Company recorded a charge of
$70,445 for restructuring its business operations. Except for the
realignment of some of our overseas operations, this restructuring
plan is complete.
In the third quarter of 1997, the Company reevaluated its
restructuring plans. Most of the actions under these plans are
completed or near completion and have resulted in losses being less
than originally anticipated. In addition, an agreement in
principal to dispose of an overseas food brokerage and distribution
business with 6% of consolidated net sales was not consummated,
(8)<PAGE>
resulting in a restructuring credit of $9,493. Concurrent with the
reevaluation of restructuring plans, the Company initiated plans to
streamline the food brokerage and distribution business and close
a domestic packaging plant resulting in a restructuring charge of
$5,734. Charges related to these initiatives include severance and
personnel costs of $2,516 and a $3,218 writedown of assets to net
realizable value.
The restructuring liability remaining at February 28, 1998 was
$4,398 for severance and personnel and $841 for other exit costs.
The Company expects to have all restructuring programs completed in
1998.
Financial Condition
In the Condensed Consolidated Statement of Cash Flows, cash flows
from operating activities decreased from a cash outflow of $3.1
million at February 28, 1997 to a cash outflow of $29.2 million at
February 28, 1998.
This decrease is primarily due to changes in working capital
components. Prepaid allowances increased as the Company completed
a period of numerous customer renewals in the first quarter of
1998. Reduced net sales in the U.S. consumer business contributed
to a reduction in receivables and an increase in inventories versus
the comparable quarter of 1997. Income tax payments increased in
the first quarter of 1998 versus the comparable period in 1997.
Investing activities used cash of $13.1 million in the first
quarter of 1998 versus $15.0 million in the comparable quarter of
1997. Although capital expenditures are slightly higher than last
year, the Company continues to focus its efforts on implementing
only higher return projects. Full year capital expenditures in
1998 are expected to be in line with depreciation.
Cash flows from financing activities include the purchase of
0.8 million shares of common stock under the Company's previously
announced 10 million share buyback program. To date 7.8 million
shares have been repurchased under this program.
The Company's ratio of debt to total capital was 54.9% as of
February 28, 1998, up from 54.3% at February 28, 1997 and up from
50.3% at November 30, 1997. The increase was due primarily to the
effect of the stock buyback program.
Management believes that internally generated funds and its
existing sources of liquidity are sufficient to meet current and
anticipated financing requirements over the next 12 months.
Forward-Looking Information
Certain statements contained in this report, including expected
trends in net sales performance, commodity price fluctuations, cost
recovery program results, restructuring program completion timing
(9)<PAGE>
and capital expenditure levels, are "forward-looking statements"
within the meaning of Section 21E of the Securities and Exchange
Act of 1934. Because forward-looking statements are based on
management's current views and assumptions, and involve risks and
uncertainties that could significantly affect expected results,
operating results could be materially affected by external factors
such as: actions of competitors, customer relationships,
fluctuations in the cost and availability of supply chain resources
and foreign economic conditions, including currency rate
fluctuations and inflation rates.
(10)<PAGE>
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) EXHIBITS
Item 601
Exhibit
Number
PART I EXHIBIT
(27) Financial Data Schedule Submitted in electronic format
only.
PART II EXHIBIT
(10) Material Contracts.
Consulting letter agreement Page 14 of this report on
between Registrant and Form 10-Q.
Charles P. McCormick, Jr.
dated December 17, 1997.
(b) REPORTS ON FORM 8-K. NONE.
(11)<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
McCORMICK & COMPANY, INCORPORATED
Date: April 13, 1998 By:/s/Robert G. Davey
Robert G. Davey
Executive Vice President & Chief
Financial Officer
Date: April 13, 1998 By:/s/J. Allan Anderson
J. Allan Anderson
Vice President & Controller
(12)<PAGE>
Exhibit Index
Item 601
Exhibit
Number Reference or Page
(10) Material Contracts.
Consulting letter agreement Page 14 of this report on
between Registrant and Form 10-Q.
Charles P. McCormick, Jr.
dated December 17, 1997.
(27) Financial Data Schedule Submitted in electronic format
only.
(13)<PAGE>
Part II - Exhibit 10
December 17, 1997
Mr. Charles P. McCormick, Jr.
6761 S.E. North Marina Way
Stuart, Florida 34996
Dear Buzz:
This letter will confirm your consulting arrangement for 1998. You
have expressed a desire to reduce the amount of time which you make
available to the Company for consultation services.
For its part, the Company is amenable to limiting its requests for
your services to approximately four days a month, on average, during
1998. You have indicated that you would be available to provide your
counsel, guidance and expertise on that basis. As in the past, all
requests for services would come from the Board of Directors or the
President of the Company.
In consideration of your agreement to render such services, you
will receive a monthly stipend of Seven Thousand Eighty-Three Dollars
and Thirty-Three Cents ($7,083.33), payable on or about the fifteenth
day of each month, together with such additional cash payments as may
be deemed appropriate by the Compensation Committee of the Board of
Directors consistent with the performance of the Company. In
addition, the Company will reimburse you for reasonable and customary
expenses incurred by you in providing such services, including, but
not necessarily limited to, travel expenses, meals, lodging, and
business related entertainment.
If the foregoing correctly expresses our understanding, please sign
a copy of this letter in the space provided below and return it to me.
Very truly yours,
McCORMICK & COMPANY, INCORPORATED
By:/s/Robert J. Lawless
Robert J. Lawless
President, Chief Executive Officer and
Chief Operating Officer
By:/s/Karen D. Weatherholtz
Karen D. Weatherholtz
Vice President - Human Relations
Secretary - Compensation Committee
AGREED AND ACCEPTED THIS
19th day of December, 1997.
By:/s/Charles P. McCormick, Jr.
Charles P. McCormick, Jr.
(14)
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<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 8,360
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<RECEIVABLES> 174,835
<ALLOWANCES> 3,621
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<PP&E> 700,367
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<BONDS> 266,526
0
0
<COMMON> 165,410
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<TOTAL-LIABILITY-AND-EQUITY> 1,237,523
<SALES> 415,202
<TOTAL-REVENUES> 415,202
<CGS> 282,030
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<INCOME-TAX> 8,336
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