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 May 31, 1998 Commission File Number 0-748
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 52-0408290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Loveton Circle, 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
May 31, 1998
Common Stock 9,740,767
Common Stock Non-Voting 63,663,392
McCORMICK & COMPANY, INCORPORATED
INDEX - FORM 10-Q
May 31, 1998
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Income Statement 2
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Exhibit Index 14
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(In Thousands Except Per Share Amounts)
Three Months Ended Six Months Ended
May 31, May 31,
1998 1997 1998 1997
Net sales $435,453 $413,720 $850,655 $821,122
Cost of goods sold 294,165 279,257 576,195 549,942
Gross profit 141,288 134,463 274,460 271,180
Selling, general and
administrative expense 110,238 105,690 213,313 213,695
Restructuring charges 611 127 679 386
Operating income 30,439 28,646 60,468 57,099
Interest expense 9,308 9,183 17,697 17,684
Other (income) expense - net (1,226) (1,782) (2,741) (3,310)
Income before income taxes 22,357 21,245 45,512 42,725
Provision for income taxes 8,048 7,860 16,384 15,808
Net income from consolidated
operations 14,309 13,385 29,128 26,917
Income from unconsolidated
operations 1,782 1,426 3,172 3,109
Net income $ 16,091 $ 14,811 $ 32,300 $ 30,026
Earnings per common share - $0.22 $0.20 $0.44 $0.39
basic and diluted
Cash dividends declared per
common share $0.16 $0.15 $0.32 $0.30
See notes to condensed consolidated financial statements.
(2)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
May 31, May 31, Nov. 30,
1998 1997 1997
(unaudited) (unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 12,689 $ 10,955 $ 13,500
Accounts receivable - net 173,906 180,929 217,198
Inventories
Raw materials and supplies 121,525 116,869 124,998
Finished products and work-in
process 153,525 136,574 127,086
275,050 253,443 252,084
Other current assets 25,119 48,348 23,736
Total current assets 486,764 493,675 506,518
Property - net 380,023 388,356 380,015
Goodwill - net 151,157 160,536 157,962
Prepaid allowances 158,083 146,033 130,943
Other assets 76,038 80,675 80,794
Total assets $1,252,065 $1,269,275 $1,256,232
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $217,260 $178,122 $112,313
Current portion of long-term debt 14,390 9,902 8,989
Trade accounts payable 121,918 128,978 150,330
Other accrued liabilities 178,047 206,462 226,617
Total current liabilities 531,615 523,464 498,249
Long-term debt 258,971 277,818 276,489
Deferred income taxes 2,246 4,230 2,038
Other long-term liabilities 86,696 81,454 86,346
Total liabilities 879,528 886,966 863,122
Shareholders' Equity
Common stock 48,474 45,580 44,408
Common stock non-voting 121,159 113,706 115,042
Retained earnings 241,577 254,254 264,309
Foreign currency translation adj. (38,673) (31,231) (30,649)
Total shareholders' equity 372,537 382,309 393,110
Total liabilities and
shareholders' equity $1,252,065 $1,269,275 $1,256,232
See notes to condensed consolidated financial statements.
(3)
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
May 31, May 31,
1998 1997
Cash flows from operating activities
Net income $ 32,300 $ 30,026
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Non cash charges and credits
Depreciation and amortization 26,054 24,570
Income from unconsolidated operations (3,172) (3,109)
Other 212 1,552
Changes in selected working capital items
Accounts receivable 40,240 32,329
Inventories (25,995) (12,874)
Prepaid allowances (27,645) 3,118
Accounts payable, trade (26,709) (21,915)
Other assets and liabilities (40,083) (16,212)
Net cash (used in) provided by operating activities (24,798) 37,485
Cash flows from investing activities
Capital expenditures (27,302) (27,011)
Acquisitions of businesses - (3,315)
Proceeds from sale of assets 493 2,784
Other investments (173) (2,505)
Currency hedging contracts (576) (300)
Net cash used in investing activities (27,558) (30,347)
Cash flows from financing activities
Short-term borrowings, net 105,751 81,124
Long-term debt borrowings 48 -
Long-term debt repayments (9,291) (8,662)
Common stock issued 13,528 3,757
Common stock acquired by purchase (34,806) (72,080)
Dividends paid (23,570) (23,041)
Net cash provided by (used in) financing activities 51,660 (18,902)
Effect of exchange rate changes on cash and
cash equivalents (115) 301
Decrease in cash and cash equivalents (811) (11,463)
Cash and cash equivalents at beginning of period 13,500 22,418
Cash and cash equivalents at end of period $ 12,689 $ 10,955
See notes to condensed consolidated financial statements.
(4)
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands Except As Otherwise Noted)
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain
all adjustments necessary to present fairly the financial position
and the results of operations for the interim periods.
The results of consolidated operations for the three and six month
periods ended May 31, 1998 are not necessarily indicative of the
results to be expected for the full year. Historically, the
Company's consolidated sales and profits are lower in the first
half of the fiscal year, and increase in the second half.
For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on
Form 10-K for the year ended November 30, 1997.
Business Restructuring
In the third quarter of 1996, the Company began implementation of
a restructuring plan and recorded a restructuring charge of $58,095
in 1996. This charge reduced net income by $39,582 or $.49 per
share. In addition there are additional charges directly related
to the restructuring plan which could not be accrued in 1996. In
the fourth quarter of 1994, the Company recorded a charge of
$70,445 for restructuring its business operations. Except for the
realignment of some of the Company's overseas operations, this
restructuring plan is complete.
In the third quarter of 1997, the Company reevaluated its
restructuring plans. Most of the actions under these plans are
completed or near completion and have resulted in losses being less
than originally anticipated. In addition, an agreement in
principal to dispose of an overseas food brokerage and distribution
business with 6% of consolidated net sales was not consummated,
resulting in a restructuring credit of $9,493. Concurrent with the
reevaluation of restructuring plans, the Company initiated plans to
streamline the food brokerage and distribution business and close
a domestic packaging plant, resulting in a restructuring charge of
$5,734. Charges related to these initiatives included severance
and personnel costs of $2,516 and a $3,218 writedown of assets to
net realizable value.
The restructuring liability remaining at May 31, 1998 was $3,675
for severance and personnel and $770 for other exit costs. The
Company expects to have all restructuring programs completed in
1998.
(5)
Accounting and Disclosure Changes
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132). This statement, which is
effective for fiscal years beginning after December 15, 1997, does
not change the recognition or measurement of pension or
postretirement benefit plans, but revises and standardizes
disclosure requirements. Any effect, while not yet determined by
the Company, will be limited to the presentation of its
disclosures.
In March 1998, the AICPA issued Statement of Position 98-1
"Accounting For the Costs of Computer Software Developed For or
Obtained For Internal-Use" (SOP 98-1). This statement, which is
effective for fiscal years beginning after December 15, 1998, will
require the capitalization of certain costs incurred in connection
with developing or obtaining software for internal-use. The
Company is substantially in compliance with the provisions of
SOP 98-1 and does not anticipate a material effect on its financial
statements.
In April 1998, the AICPA issued Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). This
statement, which is effective for fiscal years beginning after
December 15, 1998, requires that costs of start-up activities,
including organization costs, be expensed as incurred. The Company
is currently assessing the impact of SOP 98-5.
In the first quarter of 1998, the Company adopted SFAS No. 128,
"Earnings per Share" (SFAS No. 128). This statement revised the
standards for computation and presentation of earnings per share
(EPS), requiring the presentation of basic and diluted EPS on the
income statement. Basic EPS is based on the weighted average
shares outstanding during the applicable period. Diluted EPS
reflects the potential dilution which could occur if all dilutive
securities (such as outstanding stock options) were converted to
common shares. The EPS amounts for all periods have been presented
in compliance with SFAS No. 128. No changes to previously
presented EPS were necessary.
The following table sets forth the computation of basic and diluted
earnings per common share in accordance with the provisions of SFAS
No. 128.
Three Months Ended Six Months Ended
5/31/98 5/31/97 5/31/98 5/31/97
Numerator:
Net income from continuing
operations for basic and
diluted earnings per
common share $16,091 $14,811 $32,300 $30,026
Denominator:
Denominator for basic
earnings per common share -
weighted average shares 73,457 75,761 73,615 76,536
(6)
Three Months Ended Six Months Ended
5/31/98 5/31/97 5/31/98 5/31/97
Effect of dilutive
securities:
Stock options 642 174 567 158
Employee stock purchase
plan 60 14 49 17
Denominator for diluted
earnings per common share -
adjusted weighted average
shares 74,159 75,949 74,231 76,711
Earnings per common share -
basic and diluted $0.22 $0.20 $0.44 $0.39
Financial Instruments
During the first quarter of 1998, the Company entered into a
foreign currency option contract to hedge the net investment in its
Mexican subsidiary and affiliate. This contract, which expires in
December 1998, has a notional amount of $9,393 at May 31, 1998.
(7)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts In Thousands Except As Otherwise Noted)
Overview
For the quarter ended May 31, 1998, the Company reported net income
of $16.1 million versus $14.8 million for the comparable period
last year. Basic and diluted earnings per share were $.22 for the
second quarter of 1998, compared to $.20 last year. For the six
months ended May 31, 1998, the Company reported net income of $32.3
million versus $30.0 million. Basic and diluted earnings per share
were $.44 for the first six months of 1998, compared to $.39 last
year.
The increase in second quarter earnings as compared to last year
was primarily due to increased sales and profits in the U.S.
consumer business. This was partially offset by the impact of
increased commodity pricing pressures, primarily in the Company's
industrial businesses.
During the second quarter of 1998, the U.S. consumer business
experienced improved performance, primarily due to marketing
initiatives designed to improve volume trends and timing issues.
Although U.S. consumer business sales for the first six months of
1998 were flat versus the previous year, the Company expects these
marketing initiatives, combined with the favorable impact of new
distribution, to generate consumer volume growth during the
remainder of the year.
Results of Operations
Net sales increased 5.3% for the quarter ended May 31, 1998 as
compared to the corresponding period of 1997. The effect of
foreign currency exchange rate changes, primarily in our Australian
and Canadian operations, decreased sales by less than 1% when
compared to last year. Unit volume increased 2.4% as compared to
last year, while the combined effects of price and mix changes of
products increased sales by 3.5%. Net sales of all operating
groups except the packaging business increased versus last year.
Net sales increases in our U.S. consumer business were both volume
and product mix related and were favorably impacted by improved
performance in the dry seasoning mix and core spice and herb
businesses. Sales from new distribution gains contributed slightly
to the second quarter's results. Weak demand for customers'
products from Asian countries as well as general market softness,
principally for plastic tubes, contributed to volume declines in
the packaging business. U.S. industrial and foodservice businesses
were favorably impacted by both volume growth and the combination
of price and mix changes.
For the six months ended May 31, 1998, the 3.6% increase in net
sales versus the prior year was mainly driven by a combination of
price and mix changes. The effect of foreign currency exchange
(8)
rate changes decreased sales by approximately 1% when compared to
last year. Net sales improved compared to last year in all
operating groups except the packaging business. Increases were
primarily due to favorable volume growth and a combination of price
and mix changes in the U.S. industrial and foodservice businesses.
Operating income as a percentage of net sales increased to 7.0%
from 6.9% for the quarter and increased to 7.1% from 7.0% for the
six months as compared to last year.
Gross profit as a percentage of net sales decreased to 32.4% from
32.5% for the second quarter as compared to last year. Gross
profit percentage improvements in the U.S. consumer business,
primarily due to favorable product mix, were offset by declines in
margins in our U.S. industrial business, which had difficulty
recouping raw material cost increases from certain commodities,
including black pepper. For the six months ended May 31, 1998,
gross profit as a percentage of net sales decreased to 32.3% from
33.0%. The gross profit percentage of most operating groups
decreased versus last year, in part due to the increased commodity
costs. While the future movement of commodity costs are uncertain,
a variety of programs, including periodic commodity purchases and
customer price adjustments, are being used by the Company to
address these fluctuations.
Selling, general, and administrative expenses as a percentage of
sales decreased slightly in the second quarter and the six months
ended May 31, 1998 as compared to last year's comparable periods.
For the second quarter, selling, general and administrative
expenses increased in dollar terms versus last year mainly due to
increased promotional spending within the U.S. consumer group in
support of the dry seasoning business. Advertising expenses were
approximately equal to the prior year for both the second quarter
and six months ended May 31, 1998.
Interest expense for the second quarter and the first six months of
1998 was up slightly as compared to last year primarily due to
higher debt levels. Short-term borrowing rates in the second
quarter and first six months of 1998 were slightly higher than the
corresponding periods last year.
Other income for the second quarter of 1998 and 1997 includes $1.8
and $2.0 million, respectively, of income from the three year non-
compete agreement with Calpine Corporation, entered into as a part
of the 1996 sale of Gilroy Energy Company, Inc. For the first six
months of 1998 and 1997, $3.5 and $4.0 million, respectively, has
been realized.
The Company's effective tax rate for the second quarter and first
six months of 1998 was 36% as compared to 37% last year. The
decrease in the tax rate is primarily due to tax planning
initiatives associated with our foreign operations.
(9)
Income from unconsolidated operations increased to $1.8 million in
the second quarter of 1998 from $1.4 million in the comparable
quarter last year. The increase is primarily due to the improved
performance of our Mexican joint venture, partially offset by
weakness in earnings from our Japanese joint ventures. For the
first six months of 1998, income from unconsolidated operations is
up slightly over last year.
Business Restructuring
In the third quarter of 1996, the Company began implementation of
a restructuring plan and recorded a restructuring charge of $58,095
in 1996. This charge reduced net income by $39,582 or $.49 per
share. In addition there are additional charges directly related
to the restructuring plan which could not be accrued in 1996. In
the fourth quarter of 1994, the Company recorded a charge of
$70,445 for restructuring its business operations. Except for the
realignment of some of the Company's overseas operations, this
restructuring plan is complete.
In the third quarter of 1997, the Company reevaluated its
restructuring plans. Most of the actions under these plans are
completed or near completion and have resulted in losses being less
than originally anticipated. In addition, an agreement in
principal to dispose of an overseas food brokerage and distribution
business with 6% of consolidated net sales was not consummated,
resulting in a restructuring credit of $9,493. Concurrent with the
reevaluation of restructuring plans, the Company initiated plans to
streamline the food brokerage and distribution business and close
a domestic packaging plant, resulting in a restructuring charge of
$5,734. Charges related to these initiatives included severance
and personnel costs of $2,516 and a $3,218 writedown of assets to
net realizable value.
The restructuring liability remaining at May 31, 1998 was $3,675
for severance and personnel and $770 for other exit costs. The
Company expects to have all restructuring programs completed in
1998.
Financial Condition
In the Condensed Consolidated Statement of Cash Flows, cash flows
from operating activities decreased from a cash inflow of $37.5
million at May 31, 1997 to a cash outflow of $24.8 million at
May 31, 1998. This decrease is primarily due to changes in working
capital components. Prepaid allowances increased as the Company
added new distribution and completed a period of numerous customer
renewals in the first six months of 1998. Inventories increased
due to higher costs associated with certain commodities and higher
inventories required for new distribution gains. In addition,
other accrued liabilities were negatively impacted by increased tax
payments and earnings-based employee compensation costs.
(10)
Investing activities used cash of $27.6 million in the first six
months of 1998 versus $30.3 million in the comparable period of
1997. Capital expenditures are at the same level as last year as
the Company continues to focus its efforts on implementing only
higher return projects. Full year capital expenditures in 1998 are
expected to be in line with depreciation.
Cash flows from financing activities include the purchase of
1.1 million shares of common stock under the Company's previously
announced 10 million share buyback program. To date 8.1 million
shares have been repurchased under this program.
The Company's ratio of debt to total capital was 56.8% as of
May 31, 1998, up from 54.9% at May 31, 1997 and up from 50.3% at
November 30, 1997. The increase was due primarily to the effect of
the stock buyback program, combined with higher working capital
requirements.
Management believes that internally generated funds and its
existing sources of liquidity are sufficient to meet current and
anticipated financing requirements over the next 12 months.
Forward-Looking Information
Certain statements contained in this report, including expected
trends in net sales performance, commodity price fluctuations, cost
recovery program results, restructuring program completion timing
and capital expenditure levels, are "forward-looking statements"
within the meaning of Section 21E of the Securities and Exchange
Act of 1934. Because forward-looking statements are based on
management's current views and assumptions and involve risks and
uncertainties that could significantly affect expected results,
operating results could be materially affected by external factors
such as: actions of competitors, customer relationships,
fluctuations in the cost and availability of supply chain resources
and foreign economic conditions, including currency rate
fluctuations and inflation rates.
(11)
PART II - OTHER INFORMATION
Item 4 Submission of matters to a vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on
March 18, 1998.
(b) No response required.
(c) 1. The following individuals were nominees for The Board of
Directors. The number of votes for or withheld for each
nominee is as follows: James S. Cook - for 9,417,348,
withheld 74,447; Robert G. Davey - for 9,382,631,
withheld 109,164; Freeman A. Hrabowski, III - for
9,420,643, withheld 71,152; Robert J. Lawless - for
9,389,140, withheld 102,655; Charles P. McCormick, Jr. -
for 9,422,277, withheld 69,518; George V. McGowan - for
9,419,924, withheld 71,871; Carroll D. Nordhoff - for
9,421,545, withheld 70,250; Robert W. Schroeder - for
9,421,562, withheld 70,233; William E. Stevens - for
9,421,246, withheld 70,549; Karen D. Weatherholtz - for
9,420,247, withheld 71,548.
2. Approval of Mid-Term Incentive Program. The number of
votes for, against or abstaining is as follows: For
8,791,250; Against 622,820; Abstain 77,725.
3. The ratification of the appointment of Ernst & Young as
independent auditors. The number of votes for, against
or abstaining is as follows: For 9,372,367; Against
42,930; Abstain 76,498.
(d) No response required.
Item 6 Exhibits and Reports on Form 8-K
(a) Item 601 Exhibit No.:
(27) Financial Data Schedule Submitted in electronic
format only.
(b) Reports on Form 8-K. None
(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: July 1, 1998 By: /s/ Francis A. Contino
Francis A. Contino
Executive Vice President
& Chief Financial Officer
Date: July 1, 1998 By: /s/ J. Allan Anderson
J. Allan Anderson
Vice President & Controller
(13)
Exhibit Index
Item 601
Exhibit
Number Reference or Page
(27) Financial Data Schedule Submitted in electronic format
only.
10Q.cj (14)
5
1,000
6-MOS
NOV-30-1998
MAY-31-1998
12,689
0
177,226
3,320
275,050
486,764
710,272
330,249
1,252,065
531,615
258,971
0
0
169,633
202,904
1,252,065
850,655
850,655
576,195
213,992
(2,741)
0
17,697
45,512
16,384
32,300
0
0
0
32,300
0.44
0.44
