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, 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 June 30, 1996 Common Stock 11,779,473 Common Stock Non-Voting 69,359,717 10Q.mz
McCORMICK & COMPANY, INCORPORATED INDEX - FORM 10-Q May 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 4. Submission of matters to a vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except Per Share Amounts) Three Months Ended Six Months Ended May 31, May 31, 1996 1995 1996 1995 Net sales $435,664 $444,983 $867,486 $870,416 Cost of goods sold 301,786 293,672 590,574 577,289 Gross profit 133,878 151,311 276,912 293,127 Selling, general and administrative expense 105,607 111,570 223,501 209,443 Profit from operations 28,271 39,741 53,411 83,684 Other inc. (expense)-net (633) (1,268) 608 581 Interest expense 12,042 14,137 24,394 27,787 Income before income taxes 15,596 24,336 29,625 56,478 Income taxes 5,530 8,760 10,505 20,760 Income from consolidated operations 10,066 15,576 19,120 35,718 Income (loss) from uncon- solidated operations 929 466 1,225 (330) Net income $ 10,995 $ 16,042 $ 20,345 $ 35,388 Earnings per common share $0.14 $0.20 $0.25 $0.44 Cash dividends declared per common share $0.14 $0.13 $0.28 $0.26 Weighted average common shares outstanding 81,305 81,161 81,275 81,170 See notes to condensed consolidated financial statements. (2)
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands) May 31, May 31, Nov. 30, 1996 1995 1995 ASSETS Current Assets Cash and cash equivalents $ 20,787 $ 18,607 $ 12,465 Accounts receivable - net 185,330 201,106 223,958 Inventories Raw materials and supplies 139,261 136,681 132,357 Finished products and work-in process 214,005 252,749 250,865 353,266 389,430 383,222 Other current assets 51,590 61,524 51,073 Total current assets 610,973 670,667 670,718 Property - net 528,434 512,770 524,807 Goodwill - net 175,500 186,265 180,751 Prepaid allowances 167,618 207,672 183,357 Other assets 68,688 57,374 54,708 Total assets $1,551,213 $1,634,748 $1,614,341 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $294,348 $335,940 $297,313 Accounts payable, trade 134,082 152,983 146,674 Accrued liabilities 165,025 190,183 202,880 Total current liabilities 593,455 679,106 646,867 Long-term debt 337,805 362,952 349,111 Deferred income taxes 19,428 23,120 25,436 Employee benefit liabilities 89,824 75,253 72,088 Other liabilities 2,326 16,488 1,586 Total liabilities 1,042,838 1,156,919 1,095,088 Shareholders' Equity Common Stock 49,843 49,180 48,133 Common Stock Non-Voting 116,302 107,689 112,522 Retained earnings 378,354 346,802 387,657 Foreign currency translation adj. (36,124) (25,842) (29,059) Total shareholders' equity 508,375 477,829 519,253 Total liabilities and shareholders' equity $1,551,213 $1,634,748 $1,614,341 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, 1996 1995 Operating Activities Net income $ 20,345 $ 35,388 Adjustments to reconcile net income to net cash provided by (used in) operating activities Non cash charges and credits Depreciation and amortization 33,007 31,680 Restructuring credits 0 (3,904) (Income) loss from unconsolidated operations (1,225) 330 Other (1,362) 1,192 Changes in selected working capital items Accounts receivable 36,020 5,173 Inventories 24,075 (16,829) Prepaid allowances 5,243 (64,479) Accounts payable, trade (11,053) 8,022 Other assets and liabilities (29,616) (41,231) Net cash provided by (used in) operating activities 75,434 (44,658) Investing Activities Capital expenditures (40,144) (35,445) Proceeds from sale of assets 15,074 383 Other investments (1,089) (3,879) Proceeds from forward exchange contract 0 4,361 Net cash used in investing activities (26,159) (34,580) Financing Activities Short-term borrowings, net (3,615) 126,257 Long-term debt Borrowings 2,242 1,021 Repayments (13,176) (17,028) Common stock Issued 7,904 5,326 Acquired by purchase (9,586) (12,554) Dividends paid (22,768) (21,096) Net cash (used in) provided by financing activities (38,999) 81,926 Effect of exchange rate changes on cash and cash equivalents (1,954) 353 Increase in cash and cash equivalents 8,322 3,041 Cash and cash equivalents at beginning of period 12,465 15,566 Cash and cash equivalents at end of period $ 20,787 $ 18,607 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, consisting of only normal recurring accruals, necessary to present fairly the financial position and the results of operations for the interim periods. Certain reclassifications have been made to the 1995 financial statements to conform with the 1996 presentation. The results of consolidated operations for the three and six month periods ended May 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. 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: 5/31/96 11/30/95 Remaining Remaining Restructuring Liability Liability Charge Work force reduction $ 681 $ 977 $24,375 Plant consolidations and closings 16,563 17,563 33,477 Other restructuring projects 143 378 12,593 $17,387 $18,918 $70,445 (5)
McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands Except per Share Amounts) Subsequent Event In June 1996, the Company's Board of Directors approved and the Company announced a restructuring plan designed to position the organization for the future. In connection with this plan the Company will record a charge of approximately $57 million in the third quarter of 1996. This charge will reduce net income by $39 million or $.48 per share. In addition there are approximately $3 million of additional charges ($.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 decision to sell 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 million; a $45 million writedown of assets and businesses identified for disposal to net realizable value; and other exit costs of $2 million. The $3 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 related to these actions, principally the divestiture of certain small non-core businesses and Giza, were approximately 5% of consolidated net sales. (6)
McCORMICK & COMPANY, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview For the second quarter ended May 31, 1996 the Company reported net income of $11.0 million or $.14 per common share compared to $16.0 million or $.20 per common share for the comparable period last year. For the six months ended May 31, 1996 net income was $20.3 million or $.25 per common share compared to $35.4 million or $.44 per common share for the same period last year. The decrease in net income for the second quarter is mainly due to the effect of decreased sales volumes in domestic consumer products and a writeoff of obsolete product in the Company's Tubed Products packaging business. Net income for the six months decreased mainly due to the second quarter issues noted above 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. In the second quarter the Company announced the signing of letters of intent to sell the Gilroy Foods and Gilroy Energy businesses. Gilroy Foods is the Company's garlic and onion dehydration business and the letter of intent was signed with ConAgra, Inc. Gilroy Energy is a 120 megawatt cogeneration unit and the letter of intent was signed with Calpine Corporation. Both transactions are subject to Board approval by both companies and completion of definitive agreements. Combined 1995 sales of both businesses were $233 million, including sales to McCormick. 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's Board of Directors approved and the Company announced a business restructuring plan in June 1996. In connection with this plan the Company will record a charge of approximately $57 million in the third quarter of 1996. This charge will reduce net income by approximately $39 million or $.48 per share. In addition there are approximately $3 million of additional charges ($.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 decision to sell 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 million; a $45 million writedown of assets and businesses identified for disposal, to net realizable value; and other exit costs of $2 million. The $3 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 related to these actions, principally the divestiture of certain small non-core businesses and Giza, 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. Results of Operations Consolidated net sales for the quarter ended May 31, 1996 decreased 2% and were flat for the six month period ended May 31, 1996 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 were flat for the quarter and increased 5% for the six month period. For the second quarter unit volume increased 1% as compared to last year but was offset by the negative effects of translating sales of foreign operations. The combined effects of price changes and changes in mix of products had no effect on sales. U.S. sales of consumer products decreased significantly for the quarter as compared to last year. The two principal reasons for this decrease compared to last year were: the timing of price increases which caused 1996 sales to be higher in (8)
the first quarter while 1995 sales were affected in the second quarter, and a general trade movement to reduce inventories. The decrease in U.S. consumer product sales was offset by increases in most other businesses and geographic areas. For the six months the 5% increase over last year was all driven by unit volume increases. A 1% decrease due to foreign exchange effects was offset by a corresponding increase due to price and mix of product. Profit from operations as a percentage of sales decreased from 8.9% to 6.5% for the quarter and from 9.6% to 6.2% for the six months as compared to last year. Gross profit as a percentage of sales decreased from 34.0% to 30.7% and from 33.7% to 31.9% for the quarter ended and six months ended, respectively as compared to last year. The decrease in the gross margin percentage in the second quarter is due to the effect of sales volume decreases in U.S. consumer products, a writeoff of inventory for products that have been discontinued in the Tubed Product packaging business, and continued competitive pressure. For the six months the gross profit percentage decreased due to the second quarter inventory writeoff and continued competitive pressure. Selling, general and administrative expenses for the second quarter were lower than last year on both a dollar basis and as a percentage of sales. The principal reason for the decrease as a percentage of sales was the effect of changes in sales mix between retail and industrial businesses on advertising and promotion. While advertising and promotion as a percentage of sales for the U.S. retail business was up slightly, on a decreased sales base, this was more than offset by the change in mix to more industrial business sales in the second quarter which require less advertising and promotion. For the six months, selling, general and administrative expenses have increased in both dollar terms and as a percentage of sales as compared to last year. This increase is due to increased advertising and promotion in the first quarter of 1996 and the reversal of restructuring reserves in the first quarter of 1995. Interest expense decreased $2.1 million and $3.4 million for the second quarter and six months ended May 31, 1996, respectively. This decrease is due to both declines in borrowing levels and lower borrowing rates. The Company's effective tax rate for the six months ended May 1996 was 35.5% as compared to 36.8% for the same period last year. The decrease in the effective tax rate reflects the Company's emphasis on increased tax planning. Income from unconsolidated operations improved in the second quarter and six months ended May 1996 mainly due to improved results of our Mexican joint venture. (9)
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. Return on equity (ROE) increased to 17% at May 31, 1996, from 12% at May 31, 1995. Restructuring - 1994 In the fourth quarter of 1994, the Company recorded a charge of $70.4 million for restructuring its business operations. As of May 31, 1996, $17.4 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 1997. Financial Condition In the Condensed Consolidated Statement of Cash Flows, cash flow from operating activities increased from a cash outflow of $44.7 million for the six months ended May 31, 1995 to a cash inflow of $75.4 million for the six months ended May 31, 1996. The reduction in 1996 net income was more than offset by reduced spending on restructuring and reductions in prepaid allowances and inventory as opposed to those balances increasing in 1995. Cash outflow from investing activities are less than last year. Capital expenditures are slightly higher in the first six months of 1996 as compared to last year, however, they are expected to be slightly below 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. The Company's ratio of interest-bearing debt to total capital was 55.4% as of May 31, 1996, comparable to 55.5% at November 30, 1995, but down significantly from 59.4% at May 31, 1995. The improvement in the debt to capital ratio from the prior year is the result of working capital improvement programs. Total debt decreased $14.3 million during the first six months of 1996 and $66.7 million since May 31, 1995. 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. (10)
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 20, 1996. (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 J. Albrecht - for 11,384,114, withheld 57,414; James S. Cook - for 11,381,267, withheld 60,261; Robert G. Davey - for 11,377,753, withheld 63,775; George W. Koch - for 11,381,337, withheld 60,191; Robert J. Lawless - for 11,390,235, withheld 51,293; Charles P. McCormick, Jr. - for 11,372,568, withheld 68,960; George V. McGowan - for 11,381,337, withheld 60,191; Carroll D. Nordhoff - for 11,385,739, withheld 55,789; Richard W. Single, Sr. - for 11,383,477, withheld 58,051; William E. Stevens - for 11,388,127, withheld 53,401; Karen D. Weatherholtz - for 11,392,567, withheld 48,961. 2. The ratification of the appointment of Ernst & Young as independent auditors. The number of votes for, against or abstaining is as follows: For 11,341,965; Against 32,995; Abstain 66,568. (d) No response required. 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 Registration Form S-8 Company, Incorporated Registration Statement dated April 1, 1992. No. 33-59842 as filed with the SEC on March 19, 1993. By-Laws of McCormick & Attached. Company, Incorporated - Restated and Amended as of June 17, 1996. (b) Report on Form 8-K. On June 13, 1996, the Company filed a report on Form 8-K, in response to Item 5 Other Events of Form 8-K, which incorporated by reference a Press Release dated June 7, 1996 announcing a major restructuring program. (11)
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 12, 1996 By: /s/ Robert G. Davey Robert G. Davey Vice President & Chief Financial Officer Date: July 12, 1996 By: /s/ J. Allan Anderson J. Allan Anderson Vice President & Controller 10Q-2.mz (12)