SEC Filing | McCormick & Company, Inc.

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

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

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)

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)

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)

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)

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)

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)

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)

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)

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)

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)

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)

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)

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)

(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)

(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)

5 1,000 3-MOS NOV-30-1999 FEB-28-1999 16,071 0 180,430 4,063 246,392 460,348 725,326 353,117 1,217,166 502,399 247,956 0 0 169,714 197,872 1,217,166 441,543 441,543 296,204 112,678 (1,095) 0 8,134 25,622 9,198 18,170 0 0 0 18,170 0.25 0.25