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, 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, 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, 1999
Common Stock 9,460,850
Common Stock Non-Voting 61,987,230
<PAGE>
McCORMICK & COMPANY, INCORPORATED
INDEX - FORM 10-Q
February 28, 1999
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
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Exhibit Index 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(In Thousands Except Per Share Amounts)
Three Months Ended
February 28,
1999 1998
Net sales $441,543 $415,202
Cost of goods sold 296,204 282,030
Gross profit 145,339 133,172
Selling, general and
administrative expense 112,678 103,143
Operating income 32,661 30,029
Interest expense 8,134 8,389
Other (income) expense, net (1,095) (1,515)
Income before income taxes 25,622 23,155
Income taxes 9,198 8,336
Net income from consolidated
operations 16,424 14,819
Income from unconsolidated operations 1,746 1,390
Net income $ 18,170 $ 16,209
Earnings per common share - basic
and diluted $.25 $.22
Cash dividends declared per
common share $.17 $.16
See notes to condensed consolidated financial statements.
(2)<PAGE>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
February February November
28, 1999 28, 1998 30, 1998
(Unaudited)(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 16,071 $ 8,360 $ 17,711
Accounts receivable, net 176,367 171,214 212,804
Inventories
Raw materials and supplies 108,678 126,980 112,254
Finished products and work-in
process 137,714 141,153 138,639
246,392 268,133 250,893
Other current assets 21,518 24,926 22,325
Total current assets 460,348 472,633 503,733
Property, plant and equipment 725,326 700,367 723,323
Less: Accumulated depreciation (353,117) (320,127) (346,291)
Total property, plant and
equipment, net 372,209 380,240 377,032
Intangible assets, net 156,761 154,658 160,901
Prepaid allowances 153,729 150,243 143,722
Other assets 74,119 79,749 73,665
Total assets $1,217,166 $1,237,523 $1,259,053
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $173,650 $178,209 $139,140
Current portion of long-term debt 17,114 15,782 24,539
Trade accounts payable 140,020 128,998 145,829
Other accrued liabilities 171,615 181,510 208,426
Total current liabilities 502,399 504,499 517,934
Long-term debt 247,956 266,526 250,363
Other long-term liabilities 99,225 88,669 102,585
Total liabilities 849,580 859,694 870,882
Shareholders' Equity
Common stock 49,674 47,404 48,991
Common stock non-voting 120,040 118,006 120,019
Retained earnings 245,744 247,274 262,346
Accumulated other comprehensive income (47,872) (34,855) (43,185)
Total shareholders' equity 367,586 377,829 388,171
Total liabilities and
shareholders' equity $1,217,166 $1,237,523 $1,259,053
See notes to condensed consolidated financial statements.
(3)<PAGE>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
February 28,
1999 1998
Cash flows from operating activities
Net income $ 18,170 $ 16,209
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 13,563 13,029
Income from unconsolidated operations (1,746) (1,390)
Other 186 (102)
Changes in operating assets and liabilities
Receivables 34,838 44,499
Inventories 3,206 (18,375)
Prepaid allowances (9,917) (19,299)
Trade accounts payable (4,829) (20,179)
Other assets and liabilities (37,775) (43,603)
Net cash provided by (used in) operating activities 15,696 (29,211)
Cash flows from investing activities
Capital expenditures (9,756) (13,600)
Proceeds from sale of assets 29 478
Other 159 (9)
Net cash used in investing activities (9,568) (13,131)
Cash flows from financing activities
Short-term borrowings, net 28,002 66,120
Long-term debt borrowings - 48
Long-term debt repayments (1,861) (1,963)
Common stock issued 2,578 7,566
Common stock acquired by purchase (24,315) (23,037)
Dividends paid (12,330) (11,813)
Net cash (used in) provided by financing activities (7,926) 36,921
Effect of exchange rate changes on cash and
cash equivalents 158 281
Decrease in cash and cash equivalents (1,640) (5,140)
Cash and cash equivalents at beginning of period 17,711 13,500
Cash and cash equivalents at end of period $ 16,071 $ 8,360
See notes to condensed consolidated financial statements.
(4)<PAGE>
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 month period
ended February 28, 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
the balance sheet at fair value. Derivatives that do not qualify
(5)<PAGE>
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. 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
February 28,
1999 1998
(In Thousands)
Average shares outstanding - basic 72,326 73,753
Effect of dilutive securities:
Stock options and
Employee stock purchase plan 627 530
Average shares outstanding - diluted 72,953 74,283
3. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive
income in accordance with the provisions of SFAS No. 130.
Three Months Ended
February 28,
1999 1998
(In Thousands)
Net income $18,170 $16,209
Other comprehensive loss:
Foreign currency
translation adjustments (4,356) (4,206)
Other (331) -
Comprehensive income $13,483 $12,003
4. SUBSEQUENT EVENT
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. The Company's most recent
repurchase program (10 million shares) was completed in March 1999.
(6)<PAGE>
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 February 28, 1999, the Company reported net
income of $18.2 million versus $16.2 million for the comparable
period last year. Basic and diluted earnings per share were $.25
for the first quarter of 1999 compared to $.22 last year.
The increase in net income as compared to last year is primarily
due to increased sales in the Company's worldwide consumer food
business, which experienced 10% sales growth and a comparable
operating income increase. Improvements were experienced in each
of the Company's major consumer food markets. The U.S. Consumer
business' branded dry seasoning mix (DSM) and spice and herb
businesses were favorably impacted by promotional and marketing
programs and distribution gains.
RESULTS OF OPERATIONS
Net sales for the quarter ended February 28, 1999 increased 6.3%
over the corresponding quarter of 1998. The effect of foreign
currency exchange rate changes, primarily in our Canadian and
Mexican operations, decreased sales by slightly over 1% compared to
last year. Unit volume increased 5.3% as compared to last year,
while the combined effects of price and product mix increased sales
by 2.1%. The worldwide consumer food business experienced 10%
sales growth versus last year, primarily due to volume growth in
each of the Company's major consumer food markets. The U.S.
Consumer business experienced continued growth in the branded DSM
and spice and herb businesses, primarily due to promotional and
marketing programs and distribution gains. The Company's
industrial and food service businesses were favorably impacted by
both volume growth and a combination of price and product mix
changes. Packaging sales were up slightly versus the prior year
due to volume increases.
Operating income as a percentage of net sales increased to 7.4%
from 7.2% in the first quarter of last year.
Gross profit as a percentage of net sales increased to 32.9% from
32.1% in the first quarter of last year. This increase was
generated by additional sales from the higher margin U.S. Consumer
business, especially in the branded DSM and spice and herb
businesses. The continued shift from private label to branded
products contributed to this increase. Customer mix and raw
material pricing pressures negatively impacted the industrial and
food service businesses, while Packaging experienced competitive
pricing pressures versus the comparable period of the prior year.
Selling, general and administrative expenses increased in the first
quarter as compared to last year in both dollar terms and as a
percentage of net sales. This increase was primarily due to
increased promotional spending within the U.S. Consumer business.
(7)<PAGE>
Interest expense for the quarter decreased by $.3 million versus
last year due to lower debt levels and interest rates.
Other income in 1999 and 1998 includes $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.
The Company's effective tax rate for the first quarter of 1999 was
35.9% as compared to 36.0% in the first quarter of last year.
Income from unconsolidated operations increased to $1.7 million in
the first quarter of 1999 from $1.4 million in the comparable
quarter last year. The increase is due to additional sales and net
income related to Signature Brands, which operates our Cake Mate
business, and lower translation losses at our Mexican joint
venture. In the first quarter of 1998, translation 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. Also in the first
quarter of 1999, the Company entered into a foreign currency
forward contract to sell Mexican pesos. This contract, which
expires in 1999, had a notional value of $2.3 million as of
February 28, 1999.
The fair value of the Company's entire portfolio of forward and
option contracts was $0.5 million as of February 28, 1999.
Interest Rates
The cost to settle the Company's forward starting interest rate
swaps was $0.5 million as of February 28, 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 from a cash outflow of $29.2
million at February 28, 1998 to a cash inflow of $15.7 million at
February 28, 1999.
This increase is primarily due to changes in working capital
components. Inventory levels were favorably impacted by increased
focus on supply chain management. While higher net sales also
contributed to the inventory decrease, increased receivables were
realized versus the comparable period of 1998. Although customer
renewals and distribution gains increased the balance of prepaid
allowances versus February 28, 1998 and November 30, 1998, cash
(8)<PAGE>
outflows during the comparable period decreased due to a higher
level of customer renewals experienced in the first quarter of
1998. Accounts payable was favorably impacted by the increased
focus on working capital management.
Investing activities used cash of $9.6 million in the first quarter
of 1999 versus $13.1 million in the comparable quarter 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.
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. Through February 28,
1999, 9.8 million shares were repurchased under this program. This
repurchase program was completed in March 1999.
The Company's ratio of debt to total capital was 54.4% as of
February 28, 1999, down slightly from 54.9% at February 28, 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 better working capital
management.
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 extend into the third quarter of 1999.
The risk of internal business-critical computer systems failure is
mitigated by extensive testing, verification and validation
(9)<PAGE>
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. Plans are
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 late 1999.
A Company-wide Y2K readiness program is being 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 is expected to be in place by the second quarter
of 1999.
Since the compliance program began, the Company has incurred
approximately $10.6 million in expenses, including consulting fees,
internal staff costs and other expenses. The Company expects to
incur additional expenses of approximately $2.7 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 raw material price fluctuations, expected Y2K readiness
and cost, the impact of accounting and disclosure changes, the
market risks associated with financial instruments, the impact of
foreign 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
(l0)<PAGE>
results. Operating results could be materially affected by
external factors such as: actions of competitors, customer
relationships, third party Y2K readiness, 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.
(11)<PAGE>
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits See Exhibit Index at page 14
of this Report on Form 10-Q.
(b) Reports on Form 8-K. None.
(12)<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, 1999 By:/s/Francis A. Contino
Francis A. Contino
Executive Vice President
& Chief Financial Officer
Date: April 13, 1999 By:/s/J. Allan Anderson
J. Allan Anderson
Vice President & Controller
(13)<PAGE>
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 Registrant and its
subsidiaries on a
consolidated basis.
Registrant agrees to
furnish a copy of any
instrument upon request
of the Commission.
(14)<PAGE>
(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 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 Commission on February 24, 1999,
which report is incorporated by reference.
(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.
(15)<PAGE>
(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.
(16)
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 16,071
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<RECEIVABLES> 180,430
<ALLOWANCES> 4,063
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