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, 1995 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 August 31, 1995 Common Stock 12,465,000 Common Stock Non-Voting 68,710,000
McCORMICK & COMPANY, INCORPORATED INDEX Page No. Part I. FINANCIAL INFORMATION Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5,6,7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8,9,10 Part II. OTHER INFORMATION 11
PART I. FINANCIAL INFORMATION McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) Aug. 31, Aug. 31, Nov. 30, ASSETS 1995 1994 1994 Current Assets Cash and cash equivalents $ 30,528 $ 14,137 $ 15,566 Accounts receivable - net 191,935 200,476 208,811 Inventories Raw materials 131,278 116,953 125,413 Work in process 53,354 47,645 42,987 Finished goods 222,942 201,800 206,067 407,574 366,398 374,467 Prepaid expenses 21,407 6,385 15,343 Deferred income taxes 43,470 13,003 43,470 Total current assets 694,914 600,399 657,657 Investments 54,709 51,019 62,410 Property - net 514,024 497,997 504,599 Excess cost of acquisitions - net 183,933 197,221 196,166 Prepaid allowances 208,417 155,201 143,181 Other assets 5,376 5,452 4,688 Total assets $1,661,373 $1,507,289$1,568,701 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $371,080 $272,899 $202,542 Current portion long-term debt 12,242 10,864 11,532 Outstanding checks 15,078 11,676 17,955 Accounts payable, trade 140,081 113,874 128,236 Accrued payroll 21,646 26,715 30,424 Accrued sales allowances 24,148 24,822 38,373 Accrued restructuring costs 12,260 - 50,334 Other accrued expenses and liab. 99,988 93,196 107,125 Income taxes 5,711 7,148 14,307 Total current liabilities 702,234 561,194 600,828 Long-term debt 349,945 355,303 374,288 Deferred income taxes 27,260 30,169 19,229 Employee benefit liabilities 78,850 61,302 68,375 Other liabilities 17,413 4,083 16,017 Total liabilities 1,175,702 1,012,051 1,078,737 Shareholders' Equity Common Stock, no par value 48,733 49,808 50,006 Common Stock Non-Voting, no par 110,048 100,809 101,697 Retained earnings 354,199 357,235 343,285 Foreign currency translation adj. (27,309) (12,614) (5,024) Total shareholders' equity 485,671 495,238 489,964 Total liabilities and shareholders' equity $1,661,373 $1,507,289$1,568,701 See notes to financial statements. (2)
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars In Thousands Except Per Share Amounts) Three Months Ended Nine Months Ended August 31 August 31 1995 1994 1995 1994 Net sales $431,982 $422,141 $1,302,398 $1,186,206 Cost of goods sold 288,359 264,086 865,648 753,708 Gross profit 143,623 158,055 436,750 432,498 Selling, general and administrative expense 99,912 107,627 309,355 308,200 Profit from operations 43,711 50,428 127,395 124,298 Other income (expense)-net (380) (520) 201 (1,789) Interest expense 13,992 9,743 41,779 26,903 Income before income taxes 29,339 40,165 85,817 95,606 Provision for income taxes 10,130 15,030 30,890 36,480 Income from consolidated operations 19,209 25,135 54,927 59,126 Income from unconsolidated operations 706 1,307 376 4,755 Net income $ 19,915 $ 26,442 $ 55,303 $ 63,881 Earnings per common share $0.25 $0.33 $0.68 $0.79 Cash dividends declared per common share $0.13 $0.12 $0.39 $0.36 See notes to financial statements. (3)
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars In Thousands) Nine Months Ended Aug. 31, Aug. 31, 1995 1994 Cash flows from operating activities Net income $ 55,303 $ 63,881 Depreciation and amortization 45,749 44,518 Provision for deferred income taxes 2,312 3,614 Gain on sale of assets 167 245 Share of income unconsolidated oper. (376) (4,755) Dividend received unconsolidated subsidiary - 3,345 Changes in assets and liabilities net of businesses acquired and disposed (141,801) (132,571) Net cash used in operating activities (38,646) (21,723) Cash flows from investing activities Acquisitions of businesses (981) (82,413) Purchases of property, plant and equipment (58,659) (64,950) Proceeds from sale of assets 2,030 195 Proceeds (payments) from forward exchange contract 4,361 (520) Other investments (3,065) (4,595) Net cash used in investing activities (56,314) (152,283) Cash flows from financing activities Notes payable 169,299 122,055 Long-term debt Borrowings 1,194 102,425 Repayments (20,529) (14,899) Common stocks Issued 7,517 5,034 Acquired by purchase (14,766) (8,658) Dividends paid (31,652) (29,248) Net cash provided by financing activities 111,063 176,709 Effect of exchange rate changes on cash and cash equivalents (1,141) (1,404) Increase in cash and cash equivalents 14,962 1,299 Cash and cash equivalents at beginning of period 15,566 12,838 Cash and cash equivalents at end of period $ 30,528 $ 14,137 See notes to financial statements. (4)
McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands Except per Share Amounts) 1. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of August 31, 1995, August 31, 1994 and November 30, 1994, and the results of operations for the three and nine month periods ended August 31, 1995 and August 31, 1994, and the cash flows for the nine month periods ended August 31, 1995 and August 31, 1994. Certain reclassifications have been made to the 1994 financial statements to conform with the 1995 presentation. 2. The results of consolidated operations for the three and nine month periods ended August 31, 1995 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. 3. Earnings per common share for the three and nine month periods ended August 31, 1995 were computed by dividing net income by the weighted average number of common shares outstanding (81,194,000 - three months and 81,179,000 - nine months). Earnings per common share for the three and nine month periods ended August 31, 1994 were computed by dividing net income by the weighted average number of common shares outstanding (81,292,000 - three months and 81,244,000 - nine months). The dilutive effect of common stock equivalents is not material. 4. Interest paid during the nine month periods ended August 31, 1995 and August 31, 1994 was $38,700 and $29,900 respectively. Income taxes paid during the same periods were $26,800 and $54,100 respectively. 5. Changes in foreign currency exchange rates required adjustments to both the Excess Cost of Acquisition account and the Foreign Currency Translation Adjustments account at August 31, 1995 and are primarily responsible for the changes in the translation adjustment account for the periods presented. These exchange rate changes plus amortization of excess cost, largely account for the change in the Excess Cost of Acquisition account for the periods presented. 6. During the first nine months of 1995 the Company renewed certain prepaid allowance contracts. Payments associated with these contracts are reflected in the Prepaid Allowance account at August 31, 1995, less amortization as of that date. (5)
7. The estimated fair values of the Company's significant financial instruments at August 31, 1995 follows: Estimated Carrying Fair Value Amount Cash & cash equivalents................ $ 30,528 $ 30,528 Trade receivables...................... 173,303 173,303 Short-term borrowings.................. 371,080 371,080 Current portion of long-term debt...... 12,242 12,242 Accounts payable and accrued expenses.. 298,123 298,123 Long-term debt......................... 358,690 349,945 8. At August 31, 1995 the Company had available credit facilities with domestic and foreign banks in the aggregate of $370,000. There were no borrowings outstanding against these facilities. 9. In the fourth quarter of 1994, the Company recorded a $70,445 charge for restructuring its business operations. This restructuring charge reduced 1994 net income for the year and for the fourth quarter by $46,295 or $.57 per share. The charge provides for costs associated with reducing the work force and a program that will eliminate redundant facilities and positions, improve productivity and efficiency, and eliminate certain businesses and product lines. Specific actions include a reduction of approximately 600 positions worldwide through position eliminations and a voluntary special retirement program; closing an industrial products plant and a foodservice products plant and transferring the production to other existing facilities; realignment of some of our operations in the U.K.; offering for sale the Golden West Foods, Inc. frozen foods subsidiary; and consolidating certain administrative activities. As of August 31, 1995, the Company has reduced its work force by approximately 530 positions due to position eliminations and retirements; has begun the process of closing its production facilities in Hayward, California and Hunt Valley, Maryland and is transferring the production to other existing facilities; has sold its frozen food business, Golden West Foods, Inc.; and has consolidated several functional activities primarily at the Hunt Valley operations. The components of the restructuring charge and remaining liability at August 31, 1995 are as follows: Restructuring 11/30/94 8/31/95 Charge Liability Liability Work force reduction $ 24,375 $ 24,263 $ 1,302 Plant consolidations and closings 33,477 33,414 22,904 Other restructuring projects 12,593 6,513 2,135 70,445 64,190 26,341 Income tax benefits (24,150) (23,434) (9,030) $ 46,295 $ 40,756 $17,311 (6)
Included in the remaining liability are fixed asset write-offs of $6,294 and other asset write-offs of $940. The pre-tax restructuring liability which is anticipated to be expended in the next 12 months is included as a current liability in the balance sheet. The remaining portion is included in other non-current liabilities. 10. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement requires that assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. The Company has not yet determined when this standard will be adopted. The effect of this accounting change on the Company's financial statements is not expected to be material. The Company must adopt this standard no later than in its fiscal year ending November 30, 1996. (7)
McCORMICK & COMPANY, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales for the three and nine months ended August 31, 1995 increased 2% and 10% respectively over the corresponding periods last year. These increases were largely attributable to sales volume gains with most operating units reporting volume increases for both periods with particularly strong performance coming from the foreign markets. Sales from newly acquired businesses contributed approximately two-thirds of the third quarter net sales increase. A price increase late in the third quarter of 1994 had the effect of increasing sales in the domestic consumer business, as customers made purchases prior to the price increase taking effect. No similar price increase occurred in the third quarter of 1995. The third quarter's gross profit margin declined to 33.2% versus 37.4% for the same period last year. Also the nine month margin dropped to 33.5% compared to 36.5% of the prior nine month period. The overall decline in margins was due to higher raw material costs, higher mix of lower margin industrial sales and lower crop yields for Gilroy garlic. Profit from operations was down 13.3% or $6.7 million for the third quarter but up 2.5% or $3.1 million for the first nine months. The weakening in quarterly profits, due mainly to lower margins, was somewhat offset by lower administrative expenses and marketing costs. The nine months' profits continue to benefit from an increase in earnings from our foreign operations and industrial spice and seasoning business, and favorable first quarter adjustments from our restructuring program. Net income of $19.9 million or $.25 per share for the three months ended August 31, 1995 was below the $26.4 million or $.33 per share reported for 1994's third quarter. Net income for the nine months ended August 31, 1995 decreased to $55.3 million or $.68 per share from $63.9 million or $.79 per share for the same period last year. Earnings continue to be unfavorably impacted by increased interest expense which was higher by $4.2 million for the quarter and $14.9 million for the first nine months due to both higher debt levels and higher interest rates. Net income was also negatively impacted by weakness in our Mexican operations brought on by the devaluation of the Mexican peso, as discussed below. These impacts were somewhat offset by a comparatively lower effective tax rate in fiscal 1995. (8)
Income from our unconsolidated joint ventures was down $4.4 million or $.05 per share for the first nine months compared to the respective period of the prior year, due primarily to economic problems in Mexico. The Mexican peso was devalued by approximately 45% during fiscal 1995. This devaluation had the effect of reducing shareholders' equity in the amount of approximately $20 million. During 1994, the Company had entered into a forward contract for the delivery of Mexican pesos in April of 1995 to hedge its exposure, therefore, the devaluation itself has not had a significant impact on the results of operations through nine months of fiscal 1995. The impact of the devaluation on the Mexican economy, however, has had a very unfavorable impact on sales and profits of our Mexican operations. Management has taken steps where possible to help mitigate the impact on earnings of the devaluation, including price increases, identifying U.S. import opportunities for Mexican-sourced raw materials and additional sales opportunities. The peso has further weakened during the fourth quarter and will likely have an additional unfavorable effect on quarterly earnings. Return on equity (ROE) calculated by dividing twelve months to date net income by average shareholders' equity during that period, decreased to 11.0% at August 31, 1995 from 12.8% at year-end 1994 versus 21.9% at August 31, 1994. The restructuring charge booked in the fourth quarter of FY 1994 is the primary reason for the decline in ROE versus the third quarter of 1994. Restructuring In the fourth quarter of 1994, the Company announced a comprehensive restructuring of its business operations. As a result of this program, the Company recorded a restructuring charge in the amount of $70 million before tax and $46 million after tax. The majority of the restructuring plan will be completed in 1995, the following progress has been made during the first nine months of 1995: * The worldwide work force has been reduced by approximately 530 positions since February 1, 1995 through position eliminations and a special early retirement program. In conjunction with this work force reduction, termination benefits of approximately $5.4 million were paid and charged to the restructuring liability in the first nine months of 1995. The remaining cost of this portion of the work force reduction will be paid by the Company's employee benefit plans as retirement benefits. The additional employee benefit plan liabilities associated with these retirement benefits approximate $18.0 million and have been charged to the restructuring liability in 1995. The remainder of the work force reduction will be completed as production facilities identified for closure in the restructuring plan are closed. Severance costs were reduced by approximately $0.5 million as a result of a higher than expected rate of employee elections to transfer to positions at other locations and other opportunities to continue employment. (9)
* The process of closing the McCormick Flavor Group's plant in Hayward, California and the Food Service Division's plant in Hunt Valley, Maryland is underway. It is expected that these plants will be closed and their production needs absorbed by other facilities by the end of the first quarter of 1996. The sale of Golden West Foods, Inc. was completed July 6, 1995. The expected before tax loss on the disposal of these facilities was reduced by $1.5 million in the first quarter. The current adjusted restructuring reserve is adequate to cover losses associated with the disposal of these facilities. * The realignment of certain operating facilities in the U.K. has begun and is expected to be completed in 1997. * In conjunction with the work force reduction effected February 1, 1995, the Company has substantially completed the consolidation of certain administrative functions. * The Company will lease a $20 million consolidated distribution center to distribute the finished goods produced by all of its Hunt Valley plants. Construction of this facility has begun and is expected to be completed in early 1996. The restructuring reserve for costs associated with this project were reduced by $0.9 million in the first quarter. The adjusted reserve balance is adequate to cover remaining costs associated with this project. Cash and capital expenditures associated with the restructuring plan during the first nine months of 1995 were approximately $16 million net of anticipated tax benefits. Savings from the portions of the restructuring plan that were completed in the first nine months of 1995 will consist principally of lower personnel costs after February 1, 1995. These savings will be invested in the Company's brands through product development and consumer promotion activities. Financial Condition The Company's capital structure (excluding $55.4 million non-recourse debt) was 58.3% debt to total capital at August 31, 1995, up from 52.0% at year-end 1994 and 54.0% at August 31, 1994. During the third quarter the Company increased its net short-term borrowings by $40 million. This cash, plus cash generated from operations, was used to meet cash needs that mainly included seasonal working capital requirements, capital asset additions and shareholder dividends. The Company has begun a plan to improve working capital management which is anticipated to result in reductions in the investment in inventories, most of which reduction will occur in the fourth quarter. Further reductions are planned for 1996. Working capital reductions under this plan will be used to reduce debt and fund the costs of the restructuring plan. The Company's current ratio remained the same during the third quarter at 1.0, down from 1.1 at year-end 1994 largely due to the Company's increased use of commercial paper borrowings. The Company maintains $370 million of committed credit facilities that provide additional liquidity. These facilities were not in use at the end of the third quarter. (10)
PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) No response required. (b) None. 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 16, 1995 By: /s/ Robert G. Davey Robert G. Davey Vice President & Chief Financial Officer Date: October 16, 1995 By: /s/ J. Allan Anderson J. Allan Anderson Vice President & Controller 10Q.mz (11)