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, 1997 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, 1997 Common Stock 10,540,379 Common Stock Non-Voting 64,674,882
McCORMICK & COMPANY, INCORPORATED INDEX - FORM 10-Q May 31, 1997 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 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 Exhibit Index 13
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) (In Thousands Except Per Share Amounts) Three Months Ended Six Months Ended May 31, May 31, 1997 1996 1997 1996 Net sales $413,720 $393,828 $821,122 $789,627 Cost of goods sold 279,257 273,333 549,942 535,840 Gross profit 134,463 120,495 271,180 253,787 Selling, general and administrative expense 105,690 98,563 213,695 209,391 Restructuring charges 127 - 386 - Operating income 28,646 21,932 57,099 44,396 Interest expense 9,183 7,952 17,684 16,725 Other (inc.) expense-net (1,782) 818 (3,310) (368) Income from consolidated continuing operations before income taxes 21,245 13,162 42,725 28,039 Income taxes 7,860 4,695 15,808 10,056 Net income from consolidated continuing operations 13,385 8,467 26,917 17,983 Income from unconsolidated operations 1,426 929 3,109 1,225 Net income from continuing operations 14,811 9,396 30,026 19,208 Income from discontinued operations, net of income taxes - 1,599 - 1,137 Net income $ 14,811 $ 10,995 $ 30,026 $ 20,345 Earnings per common share: Continuing operations $0.20 $0.12 $0.39 $0.24 Discontinued operations - 0.02 - 0.01 Earnings per common share $0.20 $0.14 $0.39 $0.25 Average shares outstanding 75,761 81,305 76,536 81,275 Cash dividends declared per common share $0.15 $0.14 $0.30 $0.28 See notes to condensed consolidated financial statements. (2)
McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands) May 31, May 31, Nov. 30, 1997 1996 1996 (unaudited) (unaudited) ASSETS Current Assets Cash and cash equivalents $ 10,955 $ 20,787 $ 22,418 Accounts receivable - net 180,929 185,330 217,495 Inventories Raw materials and supplies 116,869 139,261 188,936 Finished products and work-in process 136,574 214,005 56,153 253,443 353,266 245,089 Other current assets 48,348 51,590 49,410 Total current assets 493,675 610,973 534,412 Property - net 388,356 528,434 400,394 Goodwill - net 160,536 175,500 165,066 Prepaid allowances 146,033 167,618 149,200 Other assets 80,675 68,688 77,537 Total assets $1,269,275 $1,551,213 $1,326,609 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $178,122 $281,247 $ 98,450 Current portion of long-term debt 9,902 13,101 10,477 Trade accounts payable 128,978 134,082 153,584 Other accrued liabilities 206,462 165,025 236,791 Total current liabilities 523,464 593,455 499,302 Long-term debt 277,818 337,805 291,194 Deferred income taxes 4,230 19,428 4,937 Other long-term liabilities 81,454 92,150 81,133 Total liabilities 886,966 1,042,838 876,566 Shareholders' Equity Common stock 45,580 49,843 48,541 Common stock non-voting 113,706 116,302 112,489 Retained earnings 254,254 378,354 313,847 Foreign currency translation adj. (31,231) (36,124) (24,834) Total shareholders' equity 382,309 508,375 450,043 Total liabilities and shareholders' equity $1,269,275 $1,551,213 $1,326,609 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, 1997 1996 Cash flows from operating activities Net income $ 30,026 $ 20,345 Adjustments to reconcile net income to net cash provided by (used in) operating activities Non cash charges and credits Depreciation and amortization 24,570 33,007 Income from unconsolidated operations (3,109) (1,225) Other 1,552 (1,362) Changes in selected working capital items Accounts receivable 32,329 36,020 Inventories (12,874) 24,075 Prepaid allowances 3,118 5,243 Accounts payable, trade (21,915) (11,053) Other assets and liabilities (16,212) (29,616) Net cash provided by operating activities 37,485 75,434 Cash flows from investing activities Capital expenditures (27,011) (40,144) Acquisitions of businesses (3,315) - Proceeds from sale of assets 2,784 15,074 Other investments (2,505) (1,089) Currency hedging contracts (300) - Net cash used in investing activities (30,347) (26,159) Cash flows from financing activities Short-term borrowings, net 81,124 (3,615) Long-term debt borrowings - 2,242 Long-term debt repayments (8,662) (13,176) Common stock issued 3,757 7,904 Common stock acquired by purchase (72,080) (9,586) Dividends paid (23,041) (22,768) Net cash used in financing activities (18,902) (38,999) Effect of exchange rate changes on cash and cash equivalents 301 (1,954) Increase (decrease) in cash and cash equivalents (11,463) 8,322 Cash and cash equivalents at beginning of period 22,418 12,465 Cash and cash equivalents at end of period $ 10,955 $ 20,787 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. Results for 1996 have been reclassified to separately report the results of discontinued operations in the Condensed Consolidated Income Statement. Certain other reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. As of January 1, 1997, the Company's Mexican operations were measured using the U.S. dollar as the functional currency due to the highly inflationary nature of the Mexican economy. The results of consolidated operations for the three and six month periods ended May 31, 1997 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, 1996. 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. The Company has expensed $386 of these costs in the first half of 1997. Under the restructuring plan the Company has closed the Brooklyn, New York packaging plant, converted from a direct sales force to a broker sales force for certain regions in the U.S., exited from certain minor non-core product lines, closed its manufacturing facility in Switzerland and moved that production to its U.K. facility, sold the Minipack business, and sold Giza National Dehydration Company of Egypt. (5)
The components of the restructuring charge and remaining liability are as follows: 5/31/97 Restructuring Remaining Charge Amount Severance and personnel costs $ 9,983 $ 902 Writedown of assets and businesses 44,562 9,290 Other exit costs 3,550 2,434 $58,095 $12,626 In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. At May 31, 1997, the remaining liability was $6,139, principally for realignment of some of our operations in the United Kingdom. The Company expects to have all restructuring programs completed in 1998. Accounting and Disclosure Changes In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." The Statement is effective for financial statements issued for periods ending after December 15, 1997. The Statement will have no significant effect on the reported earnings per share for the Company. Financial Instruments During the second quarter of 1997, the Company entered into foreign currency hedge contracts. The Company sold Mexican pesos forward to cover its net investment in its Mexican subsidiary and affiliate. These contracts, which expire in November 1997, have a combined nominal amount of $28,357 at May 31, 1997. (6)
McCORMICK & COMPANY, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in Thousands Except as Otherwise Noted) Overview For the second quarter ended May 31, 1997 the Company reported net income of $14.8 million or $.20 per common share compared to net income of $11.0 million or $.14 per common share for the comparable period last year. For the six months ended May 31, 1997 the net income was $30.0 million or $.39 per common share compared to $20.3 million or $.25 per common share for the same period last year. During the first quarter of 1997, the Company purchased a line of dry seasoning mixes in Canada which will be marketed under the French's (registered trademark) brand name. This acquisition will expand the Company's market areas in Canada. During the second quarter of 1997, the Company dissolved the McCormick & Wild joint venture and the business was split between the partners. Also, under the 1996 restructuring plan, the Company completed the sales of Giza National Dehydration Company of Egypt and Minipack Systems Limited of England, exited from certain non-core product lines, and closed its manufacturing facility in Switzerland and moved that production to its U.K. facility. Results of Operations Consolidated net sales increased 5.1% and 4.0% for the quarter and for the six month period ended May 31, 1997, respectively, as compared to the corresponding periods of 1996. For the quarter ended May 31, 1997 the effect of foreign currency exchange rate changes increased sales by less than 1% when compared to last year. This increase was offset by the net decrease in sales dollars resulting from business disposals, net of acquisitions (primarily sales transferred to the Signature joint venture and the disposals of Giza National Dehydration and Minipack). Unit volume increased 1.8% as compared to last year. The combined effects of price changes and changes in mix of products increased sales by 3.6%. There was improved performance in the U.S. industrial and food service businesses, the packaging business, the Europe group, and the Asia Pacific group. The U.S. retail business was flat compared to last year's quarter with volume decreases offset by favorable price changes and changes in mix. For the six months ended May 31, 1997, the 4.0% increase in consolidated net sales was mainly driven by unit volume increases. An approximate 1.0% increase due to foreign exchange effects was offset by a 1.0% decrease due to the effect of business disposals, net of acquisitions. Net sales improved compared to last year in all operating groups except the U.S. retail business whose volume decrease was partially offset by favorable price changes and changes in mix. (7)
Operating income as a percentage of net sales increased from 5.6% to 6.9% for the quarter and increased from 5.6% to 7.0% for the six months as compared to last year. Gross profit as a percentage of net sales increased from 30.6% to 32.5% for the quarter as compared to last year. Gross margin percentage improvements were led by the U.S. retail, industrial, and packaging businesses. The improvement in the Company's packaging business was partially due to a write-off of packaging inventory for obsolete products during the second quarter of 1996. For the six months ended May 31, 1997, gross profit as a percentage of net sales increased from 32.1% to 33.0%. Gross margin percentage improvements for the six months ended May 31, 1997 were again led by the U.S. retail, industrial, and packaging businesses. For both the quarter and six months ended May 31, 1997, gross profit improved as a result of the favorable impact of restructuring moves, and favorable product mix. Selling, general, and administrative expenses as a percentage of sales increased slightly in the second quarter and decreased slightly in the six months ended May 31, 1997 as compared to last year's comparable periods. For the six months ended May 31, 1997, promotional spending is down due to lower U.S. retail sales and the effect on volume based promotions. Advertising spending, while lower than last year, is still higher than historical levels as the Company continues its focus on brand recognition. The decreases in advertising and promotion were partially offset by increases in earnings-based employee compensation costs. Interest expense decreased $2.9 million and $6.7 million for the quarter and six months as compared to last year. Interest expense for the second quarter and six months of 1996 excludes $4.1 million and $7.7 million of interest allocated to discontinued operations. The significant decrease in total interest is primarily due to reduced borrowings as a result of the sale of Gilroy Foods and Gilroy Energy in 1996. Short term borrowing rates for the quarter and six months ended May 31, 1997 were slightly lower than the comparable periods last year. Other income includes $2.0 million for the quarter and $4.0 million for the six months ended May 31, 1997 from the three year non- compete agreement with Calpine Corporation. The total income expected for fiscal 1997 for this agreement is $8.0 million. The other income for the six months ended May 31, 1996 includes a $1.4 million gain on the sale of a building. The Company's effective tax rate for 1997 is 37% as compared to 36% in 1996. The increase in the tax rate is primarily due to the favorable effect, recorded in 1996, of refunds of certain U.S. tax credits from prior years. Income from unconsolidated operations improved in the second quarter and six months ended May 31, 1997 mainly due to improved earnings in our Mexican joint venture and earnings from our Signature Brands joint venture which was formed in the second quarter of 1996. (8)
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. The Company has expensed $386 of these costs in the first half of 1997. Under the restructuring plan the Company has closed the Brooklyn, New York packaging plant, converted from a direct sales force to a broker sales force for certain regions in the U.S., exited from certain minor non-core product lines, closed its manufacturing facility in Switzerland and moved that production to its U.K. facility, sold the Minipack business, and sold Giza National Dehydration Company of Egypt. The components of the restructuring charge and remaining liability are as follows: 5/31/97 Restructuring Remaining Charge Amount Severance and personnel costs $ 9,983 $ 902 Writedown of assets and businesses 44,562 9,290 Other exit costs 3,550 2,434 $58,095 $12,626 In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. At May 31, 1997, the remaining liability was $6,139, principally for realignment of some of our operations in the United Kingdom. The Company expects to have all restructuring programs completed in 1998. Financial Condition Cash flows from operating activities decreased from a cash inflow of $75.4 million at May 31, 1996 to a cash inflow of $37.5 million at May 31, 1997. This decrease is mainly driven by a change in inventory levels. In May 1996, the Gilroy Foods operation showed a $31.0 million decrease in inventory from year end 1995. This was a result of a thorough inventory review that was performed in 1996 on all operations, as well as the seasonality of the Gilroy Foods business. The increase in inventory since year end 1996 is due to the normal building of inventory to supply our busier second half of the year. Investing activities used cash of $30.3 million in the first six months of 1997 versus $26.2 million in the comparable period last year. Capital expenditures are lower than last year as the Company focuses its efforts on completion of the restructuring programs and implementing only higher return projects. Full year capital expenditures in 1997 are expected to be below the 1996 level. The proceeds from sale of assets in 1996 include the sale of certain (9)
assets to the Signature Brands joint venture which is now operating the Cake Mate business, and also includes the sale of property no longer used in the business. The proceeds from sale of assets in 1997 include the sale of Giza National Dehydration and the proceeds received from the dissolution of the McCormick & Wild joint venture as well as the sale of property no longer used in the business. Acquisitions of businesses in 1997 are for the purchase of a line of dry seasoning mixes in Canada which will be marketed under the French's (registered trademark) brand name. This acquisition will expand the Company's market areas in Canada. Cash flows from financing activities include the purchase of 2.9 million shares of common stock under the Company's previously announced 10 million share buyback program. To date 5.4 million shares have been repurchased under this program. The Company's ratio of debt to total capital was 54.9% as of May 31, 1997, down from 55.4% at May 31, 1996, but up from 47.1% at November 30, 1996. The improvement in the ratio from one year ago is the result of the sale of Gilroy Foods and Gilroy Energy and working capital improvement programs partially offset by the effect of the stock buyback program. The change in the ratio since year end is due to the stock buyback program. 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 19, 1997. (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 10,751,910, withheld 61,267; James S. Cook - for 10,751,017, withheld 62,160; Robert G. Davey - for 10,709,325, withheld 103,852; Freeman A. Hrabowski, III - for 10,750,715, withheld 62,462; Robert J. Lawless - for 10,720,012, withheld 93,165; Charles P. McCormick, Jr. - for 10,742,641, withheld 70,536; George V. McGowan - for 10,742,466, withheld 70,711; Carroll D. Nordhoff - for 10,737,299, withheld 75,878; Robert W. Schroeder - for 10,752,748, withheld 60,429; Richard W. Single, Sr. - for 10,743,324, withheld 69,853; William E. Stevens - for 10,753,410, withheld 59,767; Karen D. Weatherholtz - for 10,750,943, withheld 62,234. 2. Approval of 1997 Employee Stock Purchase Plan. The number of votes for, against or abstaining is as follows: For 10,173,155; Against 115,932; Abstain 524,090. 3. Approval of the 1997 Stock Option Plan. The number of votes for, against or abstaining is as follows: For 10,099,755; Against 156,439, Abstain 556,983. 4. The ratification of the appointment of Ernst & Young LLP as independent auditors. The number of votes for, against or abstaining is as follows: For 10,681,988; Against 28,125; Abstain 103,064. (d) No response required. Item 6 Exhibits and Reports on Form 8-K (a) Item 601 Exhibit No.: (11) Statement regarding Page 14 of this report on computation of per share Form 10-Q. earnings. (27) Financial Data Schedule Submitted in electronic format only. (b) Reports on Form 8-K. None (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 14, 1997 By: /s/ Carroll D. Nordhoff Carroll D. Nordhoff Executive Vice President Date: July 14, 1997 By: /s/ J. Allan Anderson J. Allan Anderson Vice President & Controller (12)
Exhibit Index Item 601 Exhibit Number Reference or Page (11) Statement re computation of Page 14 of this report on per-share earnings. Form 10-Q. (27) Financial Data Schedule Submitted in electronic format only. (13)
McCormick and Company, Inc. Part I - Exhibit 11 (In Thousands Except Per Share Amounts) Statement re Computation of Per-Share Earnings* Three Six Months Ended Months Ended Computation for Statement of Income 5/31/97 5/31/96 5/31/97 5/31/96 Net Income $14,811 $10,995 $30,026 $20,345 Reconciliation of Weighted Average Number of Shares Outstanding to Amount used in Primary Earnings Per Share Computation Weighted Average Number of Shares Outstanding 75,761 81,305 76,536 81,275 Add - Dilutive Effect of Outstanding Options (as Determined by the Application of the Treasury Stock Method) (1) 188 18 175 64 Weighted Average Number of Shares Outstanding As Adjusted for Equivalent Shares 75,949 81,323 76,711 81,339 PRIMARY EARNINGS PER SHARE $0.20 $0.14 $0.39 $0.25 Three Six Months Ended Months Ended Computation for Statement of Income 5/31/97 5/31/96 5/31/97 5/31/96 Net Income $14,811 $10,995 $30,026 $20,345 Reconciliation of Weighted Average Number of Shares Outstanding to Amount used in Fully Diluted Earnings Per Share Computation Weighted Average Number of Shares Outstanding 75,761 81,305 76,536 81,275 Add - Dilutive Effect of Outstanding Options (as Determined by the Application of the Treasury Stock Method) (1) 296 57 229 84 Weighted Average Number of Shares Outstanding As Adjusted for Equivalent Shares 76,057 81,362 76,765 81,359 FULLY DILUTED EARNINGS PER SHARE $0.19 $0.14 $0.39 $0.25 *See 1996 Annual Report, Note (1) of the Notes to Financial Statements. (1) "This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%." (14)