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, 1996 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, 1996
Common Stock 11,674,923
Common Stock Non-Voting 67,803,959
10Q.mz
McCORMICK & COMPANY, INCORPORATED
INDEX - FORM 10-Q
August 31, 1996
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 7
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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,
1996 1995 1996 1995
Net sales $405,451 $384,008 $1,195,078 $1,184,745
Cost of goods sold 269,115 260,621 804,955 793,411
Gross profit 136,336 123,387 390,123 391,334
Selling, general and
administrative expense 103,184 92,246 312,575 290,836
Restructuring charge (credit) 57,538 - 57,538 (3,904)
Profit (Loss) from operations (24,386) 31,141 20,010 104,402
Interest expense 8,082 9,655 24,807 28,818
Other (inc.) expense - net 524 459 156 (102)
Income (Loss) from
consolidated continuing
operations before income taxes (32,992) 21,027 (4,953) 75,686
Income taxes (benefits) (9,871) 7,109 185 27,361
Income (Loss) from consolidated
continuing operations (23,121) 13,918 (5,138) 48,325
Income from unconsolidated
operations 1,557 706 2,782 376
Income (Loss) from con-
tinuing operations (21,564) 14,624 (2,356) 48,701
Income from discontinued
operations, net of
income taxes 5,112 5,291 6,249 6,602
Income (Loss) before
extraordinary item (16,452) 19,915 3,893 55,303
Extraordinary loss from
early extinguishment of
debt, net of income
tax benefit (7,806) - (7,806) -
Net Income (Loss) $(24,258) $ 19,915 $ (3,913) $ 55,303
Earnings (Loss) per
common share:
Continuing operations $(0.26) $0.18 $(0.03) $0.60
Discontinued operations 0.06 0.07 0.08 0.08
Extraordinary loss from early
extinguishment of debt (0.10) - (0.10) -
Earnings (Loss) per
common share $(0.30) $0.25 $(0.05) $0.68
Cash dividends declared per
common share $0.14 $0.13 $0.42 $0.39
Weighted average common
shares outstanding 80,982 81,194 81,164 81,179
See notes to condensed consolidated financial statements.
(2)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
Aug. 31, Aug. 31, Nov. 30,
1996 1995 1995
ASSETS
Current Assets
Cash and cash equivalents $ 36,746 $ 30,528 $ 12,465
Accounts receivable - net 194,927 191,935 223,958
Inventories
Raw materials and supplies 125,969 131,278 132,357
Finished products and work-in
process 138,737 276,296 250,865
264,706 407,574 383,222
Other current assets 44,148 64,877 51,073
Total current assets 540,527 694,914 670,718
Property - net 400,322 514,024 524,807
Goodwill - net 160,238 183,933 180,751
Prepaid allowances 163,115 208,417 183,357
Other assets 76,158 60,085 54,708
Total assets $1,340,360 $1,661,373 $1,614,341
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $157,510 $383,322 $297,313
Accounts payable, trade 118,891 140,081 146,674
Accrued liabilities 230,477 178,831 202,880
Total current liabilities 506,878 702,234 646,867
Long-term debt 289,664 349,945 349,111
Employee benefit liabilities 75,261 78,850 72,088
Deferred income taxes 1,755 27,260 25,436
Other liabilities 2,694 17,413 1,586
Total liabilities 876,252 1,175,702 1,095,088
Shareholders' Equity
Common Stock 49,320 48,733 48,133
Common Stock Non-Voting 115,844 110,048 112,522
Retained earnings 332,342 354,199 387,657
Foreign currency translation adj. (33,398) (27,309) (29,059)
Total shareholders' equity 464,108 485,671 519,253
Total liabilities and
shareholders' equity $1,340,360 $1,661,373 $1,614,341
See notes to condensed consolidated financial statements.
(3)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
Aug. 31, Aug. 31,
1996 1995
Cash Flows from operating activities
Net income (loss) $ (3,913) $ 55,303
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Non cash charges and credits
Depreciation and amortization 48,113 45,749
Restructuring charges (credits) 57,538 (3,904)
(Income) loss from unconsolidated operations (2,782) (376)
Extraordinary loss 7,806 -
Other (2,684) 2,479
Changes in selected working capital items
Accounts receivable 13,540 12,477
Inventories (1,596) (37,374)
Prepaid allowances 9,746 (65,143)
Accounts payable, trade 2,798 13,672
Other assets and liabilities (42,539) (61,529)
Net cash provided by (used in) operating activities 86,027 (38,646)
Cash flows from investing activities
Capital expenditures (61,970) (58,659)
Proceeds from sale of discontinued operations 248,766 -
Proceeds from sale of assets 15,207 2,030
Other investments (282) (4,046)
Proceeds from forward exchange contract - 4,361
Net cash provided by (used in) investing activities 201,721 (56,314)
Cash flows from financing activities
Short-term borrowings, net (137,497) 169,299
Long-term debt
Borrowings 4,130 1,194
Repayments (81,479) (20,529)
Common stock
Issued 7,871 7,517
Acquired by purchase (20,927) (14,766)
Dividends paid (34,128) (31,652)
Net cash provided by (used in) financing activities (262,030) 111,063
Effect of exchange rate changes on cash and
cash equivalents (1,437) (1,141)
Increase in cash and cash equivalents 24,281 14,962
Cash and cash equivalents at beginning of period 12,465 15,566
Cash and cash equivalents at end of period $ 36,746 $ 30,528
See notes to condensed consolidated financial statements.
(4)
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Results for
1995 and 1996 have been reclassified to separately report the
results of discontinued operations in the Condensed Consolidated
Statement of Income. Certain other reclassifications have been
made to the 1995 financial statements to conform with the 1996
presentation.
The results of consolidated operations for the three and nine month
periods ended August 31, 1996 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 two
quarters of the fiscal year, and increase in the third and fourth
quarters.
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, 1995.
Business Restructuring
In the third quarter, the Company began implementation of a
restructuring plan and recorded a restructuring charge of $57.5
million. This charge reduced net income by $39.2 million or $.49
per share. In addition there are approximately $2.5 million of
additional charges ($.02 per share) directly related to the
restructuring plan which could not be accrued in the third quarter
but will be expensed as the plan is implemented.
Specific actions under this plan include the divestiture of certain
small non-core businesses; the divestiture of Giza National
Dehydration Company of Cairo, Egypt (Giza), which is consistent
with the Company's sale of Gilroy Foods, Giza's parent company;
closing the Brooklyn, NY packaging plant; the exit from certain
minor, non-core product lines; the rationalization of certain
overseas manufacturing facilities; and in our consumer business the
conversion from a direct sales force to a broker sales force for
certain regions in the U.S.
Major components of the restructuring charge include: severance and
personnel costs of $10.0 million; a $44.6 million writedown of
assets and businesses identified for disposal, to net realizable
value; and other exit costs of $2.9 million. The $2.5 million of
additional charges which will be expensed during the implementation
are principally costs to move equipment and personnel.
(5)
These actions are expected to be completed within one year and will
require net cash outflows of approximately $12 million. Net sales
of the small non-core businesses and Giza, which are being divested
by these actions, were approximately 5% of consolidated net sales.
The restructuring liability remaining at August 31, 1996 was $6.7
million for severance and personnel, $24.3 million for disposal of
businesses and $2.2 million for other exit costs.
Discontinued Operations
On August 29, 1996 the Company sold substantially all of the assets
of Gilroy Foods, Incorporated (GFI) and Gilroy Energy Company, Inc.
(GEC) to Conagra, Inc. and Calpine Corporation, respectively, for
$263 million. GFI manufactures and sells dehydrated onion, garlic,
capsicum and vegetable products. GEC operates an energy cogenera-
tion facility.
The sale of GFI and GEC resulted in a $.5 million loss ($.3 million
after tax) and has been included in the caption Income From
Discontinued Operations, Net of Income Taxes in the Condensed
Consolidated Statement of Income.
The operating results of GFI and GEC have been reclassified on the
Condensed Consolidated Statement of Income to the caption Income
from Discontinued Operations, Net of Income Taxes, for all periods
presented. This caption includes interest expense based on the
debt specifically associated with GEC and an allocation of interest
to GFI assuming a debt to capital ratio similar to the Company's.
Income taxes have also been allocated based on the statutory tax
rates applicable to GFI and GEC. Sales, interest expense and
income taxes applicable to discontinued operations are as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
1996 1995 1996 1995
Sales $51,514 $47,974 $129,373 $117,653
Interest expense 3,504 4,337 11,173 12,961
Income taxes 3,392 3,021 3,841 3,529
Restructuring - 1994
In the fourth quarter of 1994, the Company recorded a $70.4 million
charge for restructuring its business operations.
The components of the restructuring charge and remaining liability,
in thousands of dollars, are as follows:
8/31/96 11/30/95
Remaining Remaining Restructuring
Liability Liability Charge
Work force reduction $ 823 $ 977 $24,375
Plant consolidations
and closings 13,860 17,563 33,477
Other restructuring
projects - 378 12,593
$14,683 $18,918 $70,445
(6)
McCORMICK & COMPANY, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For the third quarter ended August 31, 1996 the Company reported a
net loss of $24.3 million or $(.30) per common share compared to
net income of $19.9 million or $.25 per share for the comparable
period last year. For the nine months ended August 31, 1996 the
net loss was $3.9 million or $(.05) per common share as compared to
net income of $55.3 million or $.68 per common share for the same
period last year. During the third quarter the Company recorded a
business restructuring, completed the sale of Gilroy Foods and
Gilroy Energy, and recorded a loss on prepayment of debt associated
with Gilroy Energy. Excluding these losses net income for the
third quarter and nine months (including operating results of
discontinued operations) would have been $23.2 million and $43.4
million or $.29 and $.54 per common share, respectively.
The increase in earnings in the third quarter, excluding the losses
described above, as compared to last year is mainly due to sales
volume increases, a reduction of interest expense and an increase
in income from unconsolidated operations. For the nine months, as
compared to last year, the favorability of the third quarter was
offset by a second quarter writeoff of obsolete product in the
Company's Tubed Products packaging business, competitive margin
pressure in the first half of the year and significant planned
spending increases in the first quarter of 1996 on consumer
advertising and promotion. Earnings for 1995 included net income
of $1.4 million for a change in accounting cycle for certain
foreign operations and $2.3 million net income for a reversal of
restructuring liability.
Business Restructuring
Over the past several years the Company has experienced a
significantly increased global competitive environment and expects
this to continue into the foreseeable future. Additionally, there
have been several changes in management of the Company. These two
factors have been the primary drivers in a reassessment of the
global strategic direction and focus of the Company. As a result
the Company has been conducting a portfolio review of its
businesses with the intent of increasing focus on core businesses.
Additionally, the Company is continually evaluating methods of
improving its cost structure as it responds to the competitive
environment.
As a result of both the portfolio review and the cost structure
improvement process, the Company began implementation of a business
restructuring plan and recorded a $57.5 million restructuring
charge in the third quarter of 1996. This charge reduced net
income by $39.2 million or $.49 per share. In addition, there are
approximately $2.5 million of additional charges ($.02 per share)
directly related to the restructuring plan which could not be
accrued in the third quarter but will be expensed as the plan is
implemented.
(7)
Specific actions under this plan include the divestiture of certain
small non-core businesses; the divestiture of Giza National
Dehydration Company of Cairo, Egypt (Giza), which is consistent
with the Company's sale of Gilroy Foods, Giza's parent company;
closing the Brooklyn, NY packaging plant; the exit from certain
minor, non-core product lines; the rationalization of certain
overseas manufacturing facilities; and in our consumer business the
conversion from a direct sales force to a broker sales force for
certain regions in the U.S.
Major components of the restructuring charge include: severance and
personnel costs of $10.0 million; a $44.6 million writedown of
assets and businesses identified for disposal, to net realizable
value; and other exit costs of $2.9 million. The $2.5 million of
additional charges which will be expensed during the implementation
are principally costs to move equipment and personnel.
These actions are expected to be completed within one year and will
require net cash outflows of approximately $12 million. Net Sales
of the small non-core businesses and Giza, which are being divested
by these actions, were approximately 5% of consolidated net sales.
The Company believes that the benefits from these actions will be
twofold. First, the Company will be strategically aligned to
concentrate on its core businesses. Secondly, the Company
anticipates savings as a result of these actions. These savings
will be used to invest in the Company's brands through product
development and consumer promotional activity, maintain low-cost
producer status in our core businesses, and support our global
expansion strategy.
The Company believes that this restructuring will significantly
enhance its ability to achieve its financial objectives.
Realization of the savings from these actions, however, is
dependent on the timing and effectiveness of the execution of these
actions and the response of our competitors and customers.
Discontinued Operations
On August 29, 1996 the Company sold substantially all of the assets
of Gilroy Foods, Incorporated (GFI) and Gilroy Energy Company, Inc.
(GEC) to Conagra, Inc. and Calpine Corporation, respectively, for
$263 million. GFI manufactures and sells dehydrated onion, garlic,
capsicum and vegetable products. GEC operates an energy cogenera-
tion facility.
The sale of GFI and GEC resulted in a $.5 million loss ($.3 million
after tax) and has been included in the caption Income From
Discontinued Operations, Net of Income Taxes in the Condensed
Consolidated Statement of Income.
(8)
The operating results of GFI and GEC have been reclassified on the
Condensed Consolidated Statement of Income to the caption Income
from Discontinued Operations, Net of Income Taxes, for all periods
presented. See Notes to Condensed Consolidated Financial
Statements included in the filing for additional information.
Results of Operations
Consolidated net sales increased 6% and 1% for the quarter and for
the nine month period ended August 31, 1996, respectively, as
compared to the corresponding periods of 1995. Net sales in 1995
included the effect of an accounting cycle change for certain
foreign operations and sales of certain divested businesses.
Excluding these factors, net sales increased 7% for the quarter and
6% for the nine month period. For the third quarter unit volume
increased 2% as compared to last year. The combined effects of
price changes and changes in mix of products increased sales by 4%
while the effect of translating sales of foreign operations had no
effect in the quarter. Sales of U.S. consumer products contributed
the most to the improvement during the quarter, however, sales in
Canada and the United Kingdom were also up for the quarter as
compared to last year. For the nine months the 6% increase over
last year was mainly driven by unit volume increases of 4%. A 1%
decrease due to foreign exchange effects was offset by a 3%
increase due to price and mix of product.
Profit from operations, excluding restructuring, as a percentage of
sales increased from 8.1% to 8.2% for the quarter and decreased
from 8.5% to 6.5% for the nine months as compared to last year.
Gross profit as a percentage of sales increased from 32.1% to 33.6%
for the quarter as compared to last year. The increase in this
percentage is due to improved margins in our U.S. consumer products
business, and a larger percentage of sales coming from the consumer
products business which carries a higher margin percentage. For
the nine months ended August 31, 1996 gross profit as a percentage
of sales decreased from 33.0% to 32.6% as compared to last year.
This decrease is mainly due to a writeoff of inventory for products
that have been discontinued in the Tubed Product packaging
business, and competitive pressure on margins in the first half of
the year. This was partially offset by the favorable gross margin
performance in the third quarter.
Selling, general and administrative expenses for the third quarter
and nine months were higher than last year on both a dollar basis
and as a percentage of sales. The increase for the third quarter
as compared to last year is mainly due to the adjustment of certain
benefit accruals in the third quarter of both years, a receivable
writeoff due to a customer bankruptcy and continued spending to
allow the Company's systems to cope with the change to the year
2000. The increase for the nine months is mainly due to the items
noted in the third quarter and increased advertising and promotion
in the first quarter of 1996.
(9)
Interest expense decreased $1.6 million and $4.0 million for the
third quarter and nine months ended August 31, 1996, respectively.
This decrease is due to both declines in borrowing levels and lower
borrowing rates. In reclassifying the Statement of Income for
discontinued operations interest expense was allocated to
discontinued operations. See Notes to Condensed Consolidated
Financial Statements for the amounts and methods of allocation
used.
The Company recorded tax benefits on the loss from continuing
operations in the third quarter of 1996 at an effective rate of
29.9% as compared to last year's rate for the third quarter of
33.8%. The lower rate is due to certain restructuring charges
which are not tax deductible and the mix of tax rates from
differing tax jurisdictions. Excluding the effects of the
restructuring the Company's effective tax rate is approximately
35.5% for 1996. In reclassifying the Statement of Income for
discontinued operations, income taxes were allocated to
discontinued operations. See Notes to Condensed Consolidated
Financial Statements for the amounts and methods of allocation
used.
Income from unconsolidated operations improved in the third quarter
and nine months ended August 31, 1996 mainly due to improved
results of our Mexican joint venture, and the results of the
Company's new joint venture, Signature Brands LLC.
In the first quarter of fiscal 1995, the Company changed the end of
the reporting period for foreign subsidiaries from October 31 to
November 30 to provide uniform reporting on a worldwide basis.
Accordingly, an additional month of operating results for those
subsidiaries is included in the first quarter 1995 results, which
increased net income by $1.4 million.
Restructuring - 1994
In the fourth quarter of 1994, the Company recorded a charge of
$70.4 million for restructuring its business operations. As of
August 31, 1996, $14.7 million remains to be spent against the
restructuring liability. The Company has reduced its workforce by
approximately 540 positions, an industrial products plant has been
closed, a frozen food business has been sold and a number of
administrative activities have been consolidated. A foodservice
products plant was closed in the second quarter of 1996, and
production was transferred to another facility. A consolidated
distribution facility was also completed in the second quarter of
1996. A realignment of some of our operations in the United
Kingdom will occur over the balance of 1996 and be completed in
early 1997.
(10)
Financial Condition
In the Condensed Consolidated Statement of Cash Flows, cash flow
from operating activities increased from a cash outflow of
$38.6 million for the nine months ended August 31, 1995 to a cash
inflow of $86.0 million for the nine months ended August 31, 1996.
The reduction in 1996 net income was more than offset by reductions
in prepaid allowances as opposed to those balances increasing in
1995, and less of a seasonal inventory build as compared to last
year.
Investing activities generated cash of $201.7 million in 1996 as
compared to a cash outflow of $56.3 million last year. The
significant change is mainly due to cash proceeds received on the
sale of GFI and GEC. An additional $16 million is still due in the
form of a note receivable on these sales. Capital expenditures are
slightly higher in the first nine months of 1996 as compared to
last year, however, they are expected to be comparable to last year
on a full year basis. The proceeds from sale of assets include the
sale of certain assets to a joint venture which is now operating
the Cake Mate business and the sale of property no longer used in
the business.
Cash flow from financing activities was a significant use of funds
in 1996 as the proceeds from the sale of GFI and GEC were used to
reduce both short term and long term debt.
On August 29, 1996 the Company announced a new repurchase program
to buy back up to 10 million shares of the company's outstanding
stock from time to time in the open market. The Company's most
recent repurchase program (2 million shares) is complete.
The Company's ratio of debt to total capital was 49.1% as of
August 31, 1996, down significantly from 55.5% at November 30,
1995, and 60.2% at August 31, 1995. The improvement in the debt to
capital ratio is the result of the sale of GFI and GEC and working
capital improvement programs.
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.
(11)
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Item 601 Exhibit No.:
(3) Articles of Incorporation
and By-Laws
Restatement of Charter of Incorporated by reference
McCormick & Company, from Registrant's Form S-8
Incorporated dated Registration Statement
April 16, 1990. No. 33-39582 as filed with
the Securities and Exchange
Commission on March 25, 1991
Articles of Amendment to Incorporated by reference
Charter of McCormick & from Registrant's Form S-8
Company, Incorporated Registration Statement
dated April 1, 1992. No. 33-59842 as filed with
the Securities and Exchange
Commission on March 19, 1993.
By-Laws of McCormick & Incorporated by reference
Company, Incorporated - from Registrant's Form 10-Q
Restated and Amended as dated July 12, 1996.
of June 17, 1996.
(10) Material Contracts Consulting letter agreement
between Registrant and Charles
P. McCormick, Jr. incorporated
by reference from Registrant's
Form 10-Q dated April 12, 1996.
(b) Report on Form 8-K. On September 13, 1996, the Registrant filed
a report on Form 8-K, dated September 13, 1996, in response to
Item 2, Acquisition or Disposition of Assets, of Form 8-K which
report included unaudited pro forma financial information and
certain agreements between Registrant and other parties.
(12)
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 14, 1996 By: /s/ Robert G. Davey
Robert G. Davey
Vice President &
Chief Financial Officer
Date: October 14, 1996 By: /s/ J. Allan Anderson
J. Allan Anderson
Vice President & Controller
10Q.mz (13)
5
1,000
9-MOS
NOV-30-1996
AUG-31-1996
36,746
0
198,267
3,340
264,706
540,527
690,460
290,138
1,340,360
506,878
289,664
0
0
165,164
298,944
1,340,360
1,195,078
1,195,078
804,955
370,113
156
0
24,807
(4,953)
185
(2,356)
6,249
(7,806)
0
(3,913)
(.05)
(.05)
