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 August 31, 1999 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, P. O. Box 6000, Sparks, MD 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
September 30, 1999
Common Stock 8,986,487
Common Stock Non-Voting 61,805,164
McCORMICK & COMPANY, INCORPORATED
INDEX - FORM 10-Q
August 31, 1999
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Income 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 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Exhibit Index 18
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
Net sales $476,761 $444,793 $1,386,482 $1,295,448
Cost of goods sold 312,532 298,518 919,179 874,713
Gross profit 164,229 146,275 467,303 420,735
Selling, general and
administrative expense 120,280 107,295 355,042 320,608
Special charges 3,039 129 17,704 808
Operating income 40,910 38,851 94,557 99,319
Interest expense 8,231 9,616 24,519 27,313
Other (income) expense, net (1,072) (1,162) (3,348) (3,903)
Income before income taxes 33,751 30,397 73,386 75,909
Income taxes 12,904 10,943 32,376 27,327
Net income from consolidated
operations 20,847 19,454 41,010 48,582
Income from unconsolidated
operations 4,514 1,996 8,317 5,168
Net income $ 25,361 $ 21,450 $ 49,327 $ 53,750
Earnings per common share -
basic $0.36 $0.29 $0.69 $0.73
Earnings per common share -
diluted $0.35 $0.29 $0.68 $0.73
Cash dividends declared per
common share $0.17 $0.16 $0.51 $0.48
See notes to condensed consolidated financial statements.
(2)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
August 31, August 31, Nov. 30,
1999 1998 1998
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 13,864 $ 8,934 $ 17,711
Accounts receivable, net 183,294 179,647 212,804
Inventories
Raw materials and supplies 111,229 113,424 112,254
Finished products and work-in
process 160,178 165,398 138,639
271,407 278,822 250,893
Other current assets 37,836 25,112 22,325
Total current assets 506,401 492,515 503,733
Property, plant and equipment 726,783 722,007 723,323
Less: Accumulated depreciation (362,325) (337,737) (346,291)
Total property, plant and
equipment, net 364,458 384,270 377,032
Intangible assets, net 145,364 158,264 160,901
Prepaid allowances 136,653 162,592 143,722
Other assets 81,067 76,268 73,665
Total assets $1,233,943 $1,273,909 $1,259,053
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $205,764 $240,543 $139,140
Current portion of long-term debt 7,256 13,540 24,539
Trade accounts payable 134,373 137,987 145,829
Other accrued liabilities 186,393 169,163 208,426
Total current liabilities 533,786 561,233 517,934
Long-term debt 242,197 262,016 250,363
Other long-term liabilities 101,680 90,023 102,585
Total liabilities 877,663 913,272 870,882
Shareholders' Equity
Common stock 50,248 48,893 48,991
Common stock non-voting 125,076 120,277 120,019
Retained earnings 221,240 233,994 262,346
Accumulated other comprehensive income (40,284) (42,527) (43,185)
Total shareholders' equity 356,280 360,637 388,171
Total liabilities and
shareholders' equity $1,233,943 $1,273,909 $1,259,053
See notes to condensed consolidated financial statements.
(3)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
August 31,
1999 1998
Cash flows from operating activities
Net income $ 49,327 $ 53,750
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 42,010 39,602
Special charges 17,704 808
Income from unconsolidated operations (8,317) (5,168)
Other 2,085 828
Changes in operating assets and liabilities
Receivables 27,829 33,518
Inventories (21,967) (30,241)
Prepaid allowances 7,183 (32,262)
Trade accounts payable (10,432) (9,756)
Other assets and liabilities (35,075) (49,294)
Net cash provided by operating activities 70,347 1,785
Cash flows from investing activities
Capital expenditures (34,199) (44,530)
Acquisitions of businesses - (8,940)
Proceeds from sale of assets 122 1,759
Other 325 (977)
Net cash used in investing activities (33,752) (52,688)
Cash flows from financing activities
Short-term borrowings, net 66,789 129,454
Long-term debt borrowings - 3,345
Long-term debt repayments (23,609) (10,441)
Common stock issued 11,361 14,780
Common stock acquired by purchase (58,923) (53,824)
Dividends paid (36,195) (35,299)
Net cash (used in) provided by financing activities (40,577) 48,015
Effect of exchange rate changes on cash and
cash equivalents 135 (1,678)
Decrease in cash and cash equivalents (3,847) (4,566)
Cash and cash equivalents at beginning of period 17,711 13,500
Cash and cash equivalents at end of period $ 13,864 $ 8,934
See notes to condensed consolidated financial statements.
(4)
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except As Otherwise Noted)
(Unaudited)
1. ACCOUNTING POLICIES
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 and nine month
periods ended August 31, 1999 are not necessarily indicative of the
results to be expected for the full year. Historically, the
Company's consolidated sales and net income 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, 1998.
Accounting and Disclosure Changes
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas
and major customers. The Company will adopt this statement in
1999. Adoption of this standard will not impact the Company's
results of operations and financial position and will be limited to
the presentation of its disclosures.
In the first quarter of 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". The adoption of this statement
had no impact on the Company's net income or shareholders' equity.
SFAS No. 130 establishes standards for reporting comprehensive
income in financial statements. Comprehensive income includes all
changes in equity during a period except those resulting from
investments by or distributions to shareholders. The Company's
comprehensive income for all periods presented consisted primarily
of net income and foreign currency translation adjustments.
Amounts in prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
In the first quarter of 1999, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
This statement requires the Company to recognize all derivatives on
(5)
the balance sheet at fair value. Derivatives that do not qualify
as hedges under the new standard are adjusted to fair value through
income. If a derivative qualifies as a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in value is immediately recognized in earnings. Adoption of
SFAS No. 133 did not have a material impact on the Company's
results of operations and financial position.
2. SPECIAL CHARGES
During the second quarter of 1999, the Company recorded special
charges of $22.4 million ($19.5 million after-tax or $0.27 per
share) associated with streamlining actions including workforce
reductions, building and equipment disposals, write-down of
intangible assets and other related expenses. In Europe, the
Company announced actions to consolidate certain United Kingdom
facilities, improve efficiencies within previously consolidated
European operations and realign operations between the United
Kingdom and other European locations.
Specifically, the Company announced that its Oswaldtwistle
facility, one of three liquid manufacturing operations in the
United Kingdom, would be closed and consolidated into the remaining
facilities, resulting in asset disposals and write-downs and
position eliminations. Capitalizing on improved systems and
processes at the recently consolidated European operations, the
Company identified additional opportunities to streamline
manufacturing and administrative functions. In addition, the
realignment of operations between the United Kingdom and other
European locations was expected to result in an overall reduction
of positions and the write-down of assets, primarily goodwill from
prior acquisitions in Finland and Switzerland. Finally, system and
process improvements throughout the Company's global operations
resulted in asset write-downs and position eliminations.
During the third quarter of 1999, the Company recorded special
charges of $3.0 million ($2.8 million after-tax or $0.04 per
share). These charges, which primarily related to severance and
personnel costs and other exit costs anticipated in the
streamlining actions discussed above, could not be recognized until
certain actions were implemented. In the third quarter of 1999,
the Company began transitioning its selling, administration and
distribution operations in Switzerland to a third party brokerage
based in that country.
In its entirety, expenses associated with the streamlining actions
are expected to total $29.3 million. This includes amounts
recognized in the second and third quarters of 1999 and future
expenses which could not be accrued, but will be expensed as the
actions are implemented. Although all expenses recorded through
August 31, 1999 are classified as special charges on the
Consolidated Statement of Income, it is expected that $2.8 million
(6)
of future expenses will be classified as cost of goods sold or
selling, general and administrative expense.
The Company expects these actions will be completed by the second
quarter of 2000 and will require net cash outflows of $7.9 million.
Beginning in 2000, these actions are expected to generate
$6 million in after-tax savings. A portion of these annual savings
will be reinvested in programs to generate growth opportunities.
In addition, the Company changed its actuarial method of
calculating the market-related value of plan assets used in
determining the expected return-on-asset component of annual
pension expense. This modification resulted in a one-time special
credit of $7.7 million ($4.8 million after-tax or $0.07 per share)
recorded in the second quarter of 1999. Under the previous method,
all realized and unrealized gains and losses were gradually
included in the calculated market-related value of plan assets over
a five-year period. Under the new method, the total expected
investment return, which anticipates realized and unrealized gains
and losses on plan assets, is included in the calculated market-
related value of plan assets each year. Only the difference
between total actual investment return, including realized and
unrealized gains and losses, and the expected investment return is
gradually included in the calculated market-related value of plan
assets over a five-year period.
Under the new actuarial method, the calculated market-related value
of plan assets more closely approximates fair value, while still
mitigating the effects of annual market value fluctuations. It
also reduces the growing difference between the fair value and
calculated market-related value of plan assets that has resulted
from the recent accumulation of unrecognized gains and losses.
While this change better represents the amount of ongoing pension
expense, the new method will not have a material impact on the
Company's results of operations and financial condition.
The major components of the special charges and the remaining
accrual balance as of August 31, 1999 were as follows:
Balance
1999 at
Special Amounts August 31,
Charges Utilized 1999
(In Thousands)
Severance and personnel costs $ 7,875 $ (2,547) $5,328
Write-down of assets 14,784 (14,784) -
Other exit costs 2,787 (491) 2,296
Actuarial method change (7,742) 7,742 -
$17,704 $(10,080) $7,624
Severance and personnel costs do not represent all of the amounts
to be recorded in connection with the elimination of positions, as
additional costs will be recognized in the future as eligibility
requirements are met. In total, the streamlining actions will
result in the elimination of approximately 300 positions, primarily
(7)
outside the U.S. As of August 31, 1999, approximately 200
positions have been eliminated. Write-down of assets consists
primarily of fixed asset or other long-term asset impairments
recorded as a direct result of the Company's decision to exit
facilities, businesses or operating activities. These actions
resulted in write-down of $5.2 million of property, plant and
equipment and $9.6 million in intangible assets. The fair value of
the intangible assets was based on a discounted value of estimated
future cash flows. Other exit costs consist primarily of employee
and equipment relocation costs, lease exit costs and consulting
fees, some of which will be recognized as incurred.
3. EARNINGS PER SHARE
The following table sets forth the reconciliation of shares
outstanding in accordance with the provisions of SFAS No. 128,
"Earnings Per Share."
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
(In Thousands)
Average shares outstanding -
basic 71,220 73,154 71,700 73,452
Effect of dilutive securities:
Stock options and
Employee stock purchase plan 580 702 530 645
Average shares outstanding -
diluted 71,800 73,856 72,230 74,097
4. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive
income in accordance with the provisions of SFAS No. 130.
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
(In Thousands)
Net income $25,361 $21,450 $49,327 $53,750
Other comprehensive income:
Foreign currency
translation adjustments (1,728) (3,854) (1,740) (11,878)
Other 3,233 - 4,641 -
Comprehensive income $26,866 $17,596 $52,228 $41,872
(8)
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands Except As Otherwise Noted)
OVERVIEW
For the quarter ended August 31, 1999, the Company reported net
income of $25.4 million versus $21.5 million for the comparable
period last year. Diluted earnings per share was $0.35 for the
third quarter of 1999 compared to $0.29 last year. For the nine
months ended August 31, 1999, net income was $49.3 million versus
$53.8 million for the comparable period last year. Diluted
earnings per share was $0.68 for the first nine months of 1999,
compared to $0.73 last year.
During the nine months ended August 31, 1999, the Company recorded
special charges related to streamlining operations and an actuarial
change. Excluding these special charges, net income for the
quarter and nine months ended August 31, 1999 would have been $28.1
million and $66.7 million, respectively, while diluted earnings per
share would have been $0.39 and $0.92, respectively.
The increase in third quarter net income, before the impact of
special charges, was due to sales and income increases throughout
the Company's worldwide businesses. Net sales for the food and
packaging businesses were up 7% and 8%, respectively, versus the
comparable period last year, while operating income, before special
charges, increased nearly 13%. Volume growth continued to
favorably impact the Company's results.
SPECIAL CHARGES
On June 7, 1999, the Company announced several actions to
streamline operations. These actions, primarily focused on our
European operations, are consistent with the Company's strategies
to improve gross margins, simplify operations, improve
underperforming units and achieve growth through new products, new
distribution and acquisitions. In addition, the Company announced
a change in the actuarial method used to estimate pension expense.
During the quarter ended May 31, 1999, the Company recorded special
charges of $22.4 million ($19.5 million after-tax or $0.27 per
share) associated with streamlining actions including workforce
reductions, building and equipment disposals, write-down of
intangible assets and other related expenses. In Europe, the
Company announced actions to consolidate certain United Kingdom
facilities, improve efficiencies within previously consolidated
European operations and realign operations between the United
Kingdom and other European locations.
Specifically, the Company announced that its Oswaldtwistle
facility, one of three liquid manufacturing operations in the
United Kingdom, would be closed and consolidated into the remaining
facilities, resulting in asset disposals and write-downs and
position eliminations. Capitalizing on improved systems and
processes at the recently consolidated European operations, the
(9)
Company identified additional opportunities to streamline
manufacturing and administrative functions. In addition, the
realignment of operations between the United Kingdom and other
European locations was expected to result in an overall reduction
of positions and the write-down of assets, primarily goodwill from
prior acquisitions in Finland and Switzerland. Finally, system and
process improvements throughout the Company's global operations
resulted in asset write-downs and position eliminations.
During the third quarter of 1999, the Company recorded special
charges of $3.0 million ($2.8 million after-tax or $0.04 per
share). These charges, which primarily related to severance and
personnel costs and other exit costs anticipated in the
streamlining actions discussed above, could not be recognized until
certain actions were implemented. In the third quarter of 1999,
the Company began transitioning its selling, administration and
distribution operations in Switzerland to a third party brokerage
based in that country.
In its entirety, expenses associated with the streamlining actions
are expected to total $29.3 million. This includes amounts
recognized in the second and third quarters of 1999 and future
expenses which could not be accrued, but will be expensed as the
future actions are implemented. Although all expenses recorded
through August 31, 1999 are classified as special charges on the
Consolidated Statement of Income, it is expected that $2.8 million
of future expenses will be classified as cost of goods sold or
selling, general and administrative expense.
The Company expects these actions will be completed by the second
quarter of 2000 and will require net cash outflows of $7.9 million.
Beginning in 2000, these actions are expected to generate $6
million in after-tax savings. A portion of these annual savings
will be reinvested in programs to generate growth opportunities.
In addition, the Company changed its actuarial method of
calculating the market-related value of plan assets used in
determining the expected return-on-asset component of annual
pension expense. This modification resulted in a one-time special
credit of $7.7 million ($4.8 million after-tax or $0.07 per share)
recorded in the second quarter of 1999. While this change better
represents the amount of ongoing pension expense, the new method
will not have a material impact on the Company's results of
operations and financial condition.
Refer to Note 2 in the Notes to Condensed Consolidated Financial
Statements for further information.
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1999 increased 7.2% over
the corresponding quarter of 1998. The effect of foreign currency
exchange rate changes, primarily in the United Kingdom, decreased
sales by 0.5% compared to last year. Unit volume increased 7.2% as
compared to last year, while the combined effects of price and
product mix increased sales by 0.5%. The worldwide food business
(10)
experienced 7% sales growth. Continued sales growth in the
worldwide consumer business was primarily due to promotional and
marketing programs, distribution gains and new product launches in
the U.S. Consumer business, which grew at nearly 11%. The
Company's industrial and food service businesses were also
favorably impacted by volume growth primarily related to new
products and distribution. Packaging sales were up 8% versus the
prior year with a combination of volume increases and price and
product mix changes.
For the nine months ended August 31, 1999, the 7.0% increase in net
sales versus the prior year was mainly driven by volume increases
in all operating groups. These volume increases, primarily from
new distribution and the promotional and marketing programs, were
partially offset by a 1% decrease due to the effect of foreign
currency exchange rate changes.
Operating income as a percentage of net sales, before special
charges, increased to 9.2% from 8.8% for the quarter and increased
to 8.1% from 7.7% for the nine months ended August 31, 1999 as
compared to last year.
Gross profit as a percentage of net sales increased to 34.4% from
32.9% in the third quarter of last year. Gross profits were
favorably impacted by volume growth in the higher margin U.S.
Consumer business and increased sales of higher margin flavor
products and new distribution in the U.S. Industrial and Food
Service businesses. Increased volumes in our Asian markets
contributed to improved margins during the third quarter.
Increased volumes and improved operating efficiencies increased
margins in the Packaging business. These factors also impacted the
nine months ended August 31, 1999, improving the Company's gross
profit as a percentage of net sales to 33.7% from 32.5% in the
comparable period last year.
Selling, general and administrative expenses increased in the third
quarter and nine months ended August 31, 1999 as compared to last
year in both dollar terms and as a percentage of net sales. These
increases were primarily due to expenditures in support of higher
sales and income levels, including promotional spending, research
and development, professional services and incentive-based employee
compensation.
Interest expense decreased $1.4 million and $2.8 million for the
third quarter and nine months ended August 31, 1999, respectively,
due to lower debt levels and interest rates.
Other income for the third quarter of 1999 and 1998 included
$1.2 million and $1.8 million, respectively, of income from the
three year non-compete agreement with Calpine Corporation, entered
into as a part of the 1996 sale of Gilroy Energy Company, Inc. For
the first nine months of 1999 and 1998, $3.5 million and
$5.3 million, respectively, has been realized.
(11)
Due to the impact of certain nondeductible expenses related to the
special charges, the effective tax rate for the quarter and nine
months ended August 31, 1999 was 38.2% and 44.1%, respectively,
versus 36.0% in the comparable periods last year. Excluding the
impact of these special charges, the effective tax rate for the
quarter and nine months ended August 31, 1999 was 35.9%.
Income from unconsolidated operations increased to $4.5 million in
the third quarter of 1999 from $2.0 million in the comparable
quarter last year. The increase is due to the improved performance
at our Mexican and Japanese joint ventures. Income from
unconsolidated operations for the first nine months of 1999 was
also favorably impacted by these joint ventures.
In 1998, translation gains and losses from the devaluation of the
Mexican peso were recognized in accordance with hyper-inflationary
accounting rules. As of January 1, 1999, Mexico was no longer
considered a hyper-inflationary economy.
MARKET RISK SENSITIVITY
Foreign Currency
In the first quarter of 1999, a Mexican peso option contract with
a notional value of $9.0 million matured. During the first nine
months of 1999, the Company entered into foreign currency forward
contracts to sell Mexican pesos. The current contract, which
expires in 1999, had a notional value of $3.2 million as of August
31, 1999.
In the third quarter of 1999, a foreign currency forward contract
to buy Australian dollars matured. This contract, which had a
notional value of $7.8 million, matured when the Company's 9.74%
Australian dollar note was repaid in August 1999.
The fair value of the Company's entire portfolio of forward and
option contracts was $0.2 million as of August 31, 1999.
Interest Rates
The fair value of the Company's forward starting interest rate
swaps was $4.6 million as of August 31, 1999. The Company intends
to hold the interest rate swaps until maturity.
FINANCIAL CONDITION
In the Condensed Consolidated Statement of Cash Flows, cash flows
from operating activities increased to a cash inflow of $70.3
million from a cash inflow of $1.8 million for the nine months
ended August 31, 1999 and 1998, respectively.
This increase is primarily due to changes in working capital
components. Inventory levels were favorably impacted by increased
net sales and additional focus on supply chain management. Cash
outflows related to prepaid allowances were favorably impacted by
(12)
a higher level of customer renewals and distribution gains
experienced primarily in the first half of 1998. In addition,
other liabilities were favorably impacted by decreased tax payments
and incentive-based employee compensation costs.
Investing activities used cash of $33.8 million in the first nine
months of 1999 versus $52.7 million in the comparable period of
1998. Capital expenditures decreased versus the prior year because
1998 contained expenditures to implement projects to support new
distribution in several businesses and the consolidation of
Packaging facilities. The Company continued its efforts to limit
capital expenditures to depreciation levels. Acquisitions of
businesses in 1998 were for the purchase of a line of wet and dry
mustards, curry powders and various meal lines in Australia and
Canada marketed under the Keen's and Rice-a-Riso brand names.
Cash flows from financing activities include the purchase of
1.1 million shares of common stock, completing the Company's
previously announced 10 million share buyback program. On
March 18, 1999, the Company announced a new repurchase program to
buy back up to $250 million of the Company's outstanding stock from
time to time in the open market. During the first nine months of
1999, 0.8 million shares were repurchased under this program.
The Company's ratio of debt to total capital was 56.1% as of
August 31, 1999, down from 58.9% at August 31, 1998 and up from
51.6% at November 30, 1998. The increase since year end was due to
the Company's historical trend of lower income in the first half of
the fiscal year and the effect of the stock buyback program,
partially offset by improved cash flows from operating activities.
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.
YEAR 2000
The Year 2000 (Y2K) issue is the result of computer programs
written using two digits (rather than four) to define the
applicable year. Without corrective actions, programs with date-
sensitive logic may recognize "00" as 1900 rather than 2000. This
could result in miscalculations or system failures, significantly
impacting our business operations.
The Company's work on the Y2K compliance program officially began
in 1996. A Corporate project team, working with outside
consultants, developed a process to identify and correct Y2K issues
on all information technology (IT) platforms and non-IT systems.
In addition, all operating units have undertaken Y2K initiatives
with direction from the Corporate project team. As a result of
this process, the Company has inventoried and assessed all systems
and developed remediation programs where necessary for all
business-critical information technology applications. The Company
is on target with its remediation and testing work. A similar
program is also in place for non-IT systems. Final completion and
implementation will occur in October 1999.
(13)
The risk of internal business-critical computer systems failure is
mitigated by extensive testing, verification and validation
efforts. These efforts, which include program and systems testing,
simulate operations in the year 2000. Review of the remediation
process and program code by independent third parties has been
completed. Contingency plans, including system continuity plans,
are being developed to mitigate this risk.
Because noncompliant external systems could cause disruptions to
various business activities and significant additional costs, the
Company has identified and contacted critical suppliers, customers
and other third parties to determine their stage of Y2K readiness.
For certain third parties with key system connections, interface
testing is being performed. Although the Company believes it is
taking the appropriate steps to assess Y2K readiness, there is no
guarantee that the Company's efforts will prevent a material
adverse impact on the results of operations and financial
condition. The Company believes its Y2K program, including the
contingency plans and readiness program discussed below, should
significantly reduce this risk.
The Company is developing contingency plans to mitigate potential
disruptions to the Company's operations. These include action
plans to address system failures by third parties, including
identifying and securing alternate sources of materials and
developing backup systems to ensure internal communications are not
impacted by external disruptions affecting voice and data
transmission. Plans are also being developed to address individual
location failures since the most likely impact will occur within
individual systems or at specific locations. The Company expects
to complete its contingency plans in the fourth quarter of 1999.
A Company-wide Y2K readiness program was developed to ensure that
all employees are aware of the risks associated with the Y2K
changes. These include risks associated with third-party
transactions or the Company's internal processes. The Y2K
readiness program has been launched throughout the Company.
Since the compliance program began, the Company has incurred
approximately $11.6 million in expenses, including consulting fees,
internal staff costs and other expenses. The Company expects to
incur additional expenses of approximately $1.4 million through
2000. The Company has also procured replacement systems that, in
addition to being Y2K compliant, provide enhanced capability to
benefit future operations. Management believes that internally
generated funds and existing sources of liquidity are sufficient to
meet the expected funding requirements.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, including those
related to position eliminations, cash requirements and savings
related to the special charges, expected Y2K readiness and cost,
the impact of accounting and disclosure changes, capital spending,
the stock buyback program, the holding period and market risks
associated with financial instruments, the impact of foreign
(14)
exchange fluctuations and the adequacy of internally generated
funds and existing sources of liquidity are "forward-looking
statements" within the meaning of Section 21E of the Securities and
Exchange Act of 1934. 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, actual
amounts and timing of special charge items, including severance
payments, removal and disposal costs and final negotiation of
third-party contracts, third party Y2K readiness, the impact of
stock market conditions on the stock buyback program, fluctuations
in the cost and availability of supply-chain resources and global
economic conditions, including interest and currency rate
fluctuations and inflation rates.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market
risks, see Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, in the Annual Report on Form 10-K for the year ended
November 30, l998. Except as described in the Management's
Discussion and Analysis of Financial conditions and Results of
Operations, there have been no significant changes in the Company's
financial instrument portfolio or market risk exposures since year
end.
(15)
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits See Exhibit Index at pages 18-20
of this Report on Form 10-Q.
(b) Reports on Form 8-K. None.
(16)
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: October 13, 1999 By: /s/Francis A. Contino
Francis A. Contino
Executive Vice President & Chief
Financial Officer
Date: October 13, 1999 By: /s/J. Allan Anderson
J. Allan Anderson
Vice President & Controller
(17)
EXHIBIT INDEX
ITEM 601
EXHIBIT
NUMBER REFERENCE OR PAGE
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession Not applicable.
(3) Articles of Incorporation and By-Laws
Restatement of Charter of McCormick & Incorporated by reference
Company, Incorporated dated April l6, from Registration Form
1990 S-8, Registration No.
33-39582 as filed with
the Securities and
Exchange Commission on
March 25, 1991.
Articles of Amendment to Charter of Incorporated by reference
McCormick & Company, Incorporated from Registration Form
dated April 1, 1992 S-8 Registration
Statement No. 33-59842 as
filed with the Securities
and Exchange Commission
on March 19, 1993.
By-laws of McCormick & Company, Incorporated by reference
Incorporated-Restated and from Registrant's Form
Amended as of June 17, 1996. 10-Q for the quarter
ended May 31, 1996 as
filed with the Securities
and Exchange Commission
on July 12, 1996.
(4) Instruments defining the rights of With respect to rights of
security holders, including holders of equity
indentures. securities, see Exhibit 3
(Restatement of Charter).
No instrument of
Registrant with respect
to long-term debt
involves an amount of
authorized securities
which exceeds 10 percent
of the total assets of
the Registrant and its
subsidiaries on a
consolidated basis.
Registrant agrees to
furnish a copy of any
instrument upon request
of the Securities and
Exchange Commission.
(18)
(10) Material contracts.
(i) Registrant's supplemental pension plan for certain
senior officers is described in the McCormick
Supplemental Executive Retirement Plan, a copy of which
was attached as Exhibit 10.1 to the Registrant's Report
on Form 10-K for the fiscal year 1992 as filed with the
Securities and Exchange Commission on February 17,
1993, which report is incorporated by reference.
(ii) Stock option plans, in which directors, officers and
certain other management employees participate, are
described in Registrant's S-8 Registration Statements
Nos. 33-33725 and 33-23727 as filed with the Securities
and Exchange Commission on March 2, 1990 and March 23,
1997 respectively, which statements are incorporated by
reference.
(iii) Asset Purchase Agreement among the Registrant, Gilroy
Foods, Inc. and ConAgra, Inc. dated August 28, 1996
which agreement is incorporated by reference from
Registrant's Report on Form 8-K as filed with the
Securities and Exchange Commission on September 13,
1996.
(iv) Asset Purchase Agreement among the Registrant, Gilroy
Energy Company, Inc. and Calpine Gilroy Cogen, L.P.,
dated August 28, 1996 which agreement is incorporated
by reference from Registrant's Report on Form 8-K as
filed with the Securities and Exchange Commission on
September 13, 1996.
(v) Mid-Term Incentive Program provided to a limited number
of senior executives, a description of which is
incorporated by reference from pages 19 and 20 of the
Registrant's definitive Proxy Statement dated February
18, 1998, as filed with the Securities and Exchange
Commission on February 17, 1998, which pages are
incorporated by reference.
(vi) Amendment to the Letter Agreement between Registrant
and Charles P. McCormick, Jr. effective December 1,
1998, which letter is attached as Exhibit 10.1 to the
Registrant's Report on Form 10-K for the fiscal year
1998, as filed with the Securities and Exchange
Commission on February 24, 1999, which report is
incorporated by reference.
(vii) Directors' Non-Qualified Stock Option Plan provided to
members of the Registrant's Board of Directors who are
not also employees of the Registrant, is described in
Registrant's S-8 Registration Statement No. 333-74963
as filed with the Securities and Exchange Commission on
March 24, 1999, which statement is incorporated by
reference.
(19)
(11) Statement re computation of per-share Not applicable.
earnings.
(15) Letter re unaudited interim financial Not applicable.
information.
(18) Letter re change in accounting Not applicable.
principles.
(19) Report furnished to security holders. Not applicable.
(22) Published report regarding matters Not applicable.
submitted to vote of securities holders.
(23) Consent of experts. Not applicable.
(24) Power of attorney. Not applicable.
(27) Financial data schedule. Submitted in electronic
format only.
(99) Additional exhibits. Not applicable.
(20)
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