| Contents: | ||||
Passion for Flavor | 2 | |||
Power of People | 3 | |||
Taste You Trust | 5 | |||
Inspiring Healthy Choices | 6 | |||
Delivering High Performance | 7 | |||
Passion Points | 8 | |||
Financial Highlights | 9 | |||
Letter to Shareholders | 10 | |||
Questions and Answers with Alan | 14 | |||
Directors and Officers | 15 | |||
Management’s Discussion and Analysis | 16 | |||
Financial Information | 33 | |||
Investor Information | 59 | |||
 | CARDAMOM
In 721 B.C., the gardens of the King of Babylon included the cardamom plant. Cardamom was used in perfumes in Ancient Greece and Rome. Native to South India and Ceylon, it grows in tropical conditions at elevations above 2,000 feet. With a distinctive, floral aroma and clean flavor, to this day it continues to add a fragrant touch to a wide range of dishes. It is primarily used in India for curries and meat dishes. Cardamom is enjoyed as a flavoring for coffee in Middle Eastern countries and is popular in Chinese and Latin American cooking. Increasingly, dishes in the United States are using this intriguing flavor. This year’s annual report is scented with the wonderful aroma of cardamom. |
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Board of Directors
PICTURED FROM LEFT TO RIGHT, STANDING: Gordon Stetz, George Roche, Freeman Hrabowski, Michael Fitzpatrick, James Brady, John Bilbrey, Patricia Little; SEATED: Margaret Preston, Michael Mangan, Alan Wilson, William Stevens
Board of Directors
John P. Bilbrey54
Executive Vice President,
Chief Operating Officer
The Hershey Company
Hershey, Pennsylvania
Director since 2005
Compensation Committee
James T. Brady70
Managing Director, Mid-Atlantic
Ballantrae International, Ltd.
Ijamsville, Maryland
Director since 1998
Audit Committee*
J. Michael Fitzpatrick64
Chairman
Citadel Plastics Holdings, Inc.
Radnor, Pennsylvania
Director since 2001
Audit Committee
Freeman A. Hrabowski, III60
President
University of Maryland
Baltimore County
Baltimore, Maryland
Director since 1997
Nominating/Corporate Governance
Committee*
Patricia Little50
Executive Vice President and
Chief Financial Officer
Kelly Services, Inc.
Troy, Michigan
Director since 2010
Audit Committee
Michael D. Mangan54
Former President, Worldwide Power
Tools & Accessories
The Black & Decker Corporation
Towson, Maryland
Director since 2007
Audit Committee
Nominating/Corporate Governance
Committee
Margaret M.V. Preston53
Managing Director &
Regional Executive
U.S. Trust, Bank of America
Private Wealth Management
Greenwich, Connecticut
Director since 2003
Nominating/Corporate Governance
Committee
George A. Roche69
Retired Chairman & President
T. Rowe Price Group, Inc.
Baltimore, Maryland
Director since 2007
Compensation Committee
Gordon M. Stetz50
Executive Vice President &
Chief Financial Officer
McCormick & Company, Inc.
Director since 2011
William E. Stevens68
Chairman
BBI Group, Inc.
St. Louis, Missouri
Director since 1988
Compensation Committee*
Alan D. Wilson53
Chairman, President &
Chief Executive Officer
McCormick & Company, Inc.
Director since 2007
Executive Officers
Alan D. Wilson
Chairman, President & Chief Executive Officer
Gordon M. Stetz
Executive Vice President &
Chief Financial Officer
W. Geoffrey Carpenter
Vice President - General Counsel & Secretary
Kenneth A. Kelly, Jr.
Senior Vice President & Controller
Lawrence E. Kurzius
President - McCormick International
Charles T. Langmead
President - U.S. Industrial Group
Cecile K. Perich
Senior Vice President - Human Relations
Mark T. Timbie
President - North American Consumer Foods
| * | Indicates Chair Position on the Committee |
McCormick & Company 2010 Annual Report page 15
Management’s Discussion and Analysis
The purpose of Management’s Discussion and Analysis (MD&A) is to provide an understanding of McCormick’s business, financial results and financial condition. The MD&A is organized in the following sections:
Business Overview
Results of Operations
Non-GAAP Financial Measures
Liquidity and Financial Condition
Acquisitions
Other information, including critical accounting estimates and assumptions and forward-looking information
The information in the charts and tables in the MD&A are for the years ended November 30. All dollars and number of shares are in millions, except per share data. We analyze and measure the profitability of our two business segments and the total business excluding items impacting comparability. These items included the reversal of a significant tax accrual in 2010, charges related to our restructuring activities in 2009 and 2008, and an impairment charge that was recorded in 2008. While all consolidated financial results include the impact of these charges, certain results are also shown on a comparable basis, excluding the impact of these items.
page 16 McCormick & Company 2010 Annual Report
Management’s Discussion and Analysis
BUSINESS OVERVIEW
EXECUTIVE SUMMARY
McCormick is a global leader in flavor, with the manufacturing, marketing and distribution of spices, seasonings, specialty foods and flavorings to the entire food industry. Customers range from retail outlets and food manufacturers to foodservice businesses. The Company was founded in 1889 and built on a culture of Multiple Management which engages employees in problem-solving, high performance and professional development.
We have approximately 7,500 full-time employees in facilities located around the world. Our major sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in Mexico, Central America, Australia, China, Singapore, Thailand and South Africa. In 2010, 39% of sales were outside the United States.
Listed below are significant highlights of the discussion and analysis that follows:
| • | Net sales were $3.3 billion in 2010 and up 5% primarily due to higher volume and product mix, which was driven by product innovation, increased brand marketing and expanded distribution. |
| • | Earnings per share were $2.75 in 2010 compared to $2.27 in 2009. Earnings per share in 2010 included a $0.10 benefit of the reversal of a significant tax accrual. Earnings per share in 2009 included $0.08 of charges related to our restructuring program which was concluded that year. On a comparable basis, excluding these impacts, we grew adjusted earnings per share 13% in 2010. |
| • | With productivity improvement throughout the business, we achieved $54 million in cost savings related to our Comprehensive Continuous Improvement (CCI) program. |
| • | Cash generation remained strong with cash from operations of $388 million in 2010. We used part of this cash to complete our pay down of the debt related to the Lawry’s acquisition and to fund $138 million of dividend payments and $47 million of joint ventures and acquisitions. We resumed our share repurchase activity, completing a $400 million authorization from 2005 and beginning a new $400 million authorization approved by our Board of Directors mid-year in 2010. |
| • | In November 2010, our Board of Directors approved our 25th consecutive annual dividend increase and the annualized dividend as we began our 2011 fiscal year was $1.12 per share. |
BUSINESS SEGMENTS
We operate in two business segments, consumer and industrial. Consistent with market conditions in each segment, our consumer business has a higher overall profit margin than our industrial business. In 2010, the consumer business contributed 60% of sales and 79% of operating income and the industrial business contributed 40% of sales and 21% of operating income.
Across both segments, we have the customer base and product breadth to participate in all types of eating occasions, whether it is cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer our retailers and consumers a range of products from premium to value-priced.
Consumer Business
From locations around the world, our brands reach consumers in more than 100 countries. Our leading brands in the Americas are McCormick®, Lawry’s® and Club House®. We also market authentic ethnic brands such as Zatarain’s, El Guapo®, Thai Kitchen® and Simply Asia®, and specialty items such as Billy Bee® honey products. In Europe, the Middle East and Africa (EMEA) we sell the Ducros®, Schwartz, McCormick and Silvo® brands of spices, herbs and seasonings and an extensive line of Vahiné® brand dessert items. In the Asia/Pacific region our primary brand is McCormick, and we also own the Aeroplane® brand which is a leader in gelatins in Australia.
Our customers span a variety of retail outlets that include grocery, mass merchandise, warehouse clubs, discount and drug stores, served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands.
The largest portion of our consumer business is spices, herbs and seasonings. For these products, we are the category leader in our primary markets with a 40 to 60% share of sales. There are a number of competitors in the spices, herbs and seasoning category. More than 250 other brands are sold in the U.S. with additional brands in international markets. Some are owned by large food manufacturers, while others are supplied by small privately owned companies. Our leadership position allows us to efficiently innovate, merchandise and market our brands.
McCormick & Company 2010 Annual Report page 17
Management’s Discussion and Analysis
Industrial Business
In our industrial business, we provide a wide range of products to multinational food manufacturers and foodservice customers. The foodservice customers are supplied both directly and indirectly through distributors. Among food manufacturers and foodservice customers, many of our relationships have been established for decades. We focus our resources on our strategic partners that offer the greatest prospects for growth. Our range of products remains one of the broadest in the industry and includes seasoning blends, natural spices and herbs, wet flavors, coating systems and compound flavors. In addition to a broad range of flavor solutions, our customers benefit from our expertise in sensory testing, culinary research, food safety, flavor application and other areas.
Our industrial business has a number of competitors. Some tend to specialize in a particular range of products and have a limited geographic reach. Other competitors include larger publicly-held flavor companies that are more global in nature, but which also tend to specialize in a limited range of flavor solutions.
We have been increasing the profitability of the industrial business through productivity improvements, and a shift in our sales mix to more higher margin, value-added products.
OUR STRATEGY
Our strategy is straightforward—to increase sales and profits by investing in the business and to fund these investments with improved margins. This simple strategy has been driving our success for more than a decade and is our plan for growth in the future.
Product innovation is one of the leading investments to grow our business. New products launched in the past three years accounted for nearly 10% of net sales in 2010. We continue to invest in research and development and recently expanded and enhanced these facilities in the U.K., Turkey and South Africa, with plans for an R&D center of excellence in Asia underway. Product marketing is driving growth of our brands, and we have increased spending by 70% since 2005. Through acquisitions and joint ventures we seek to add leading brands to extend our reach into new regions with a particular interest in emerging markets. In our developed markets, we are adding brands that have a niche position and meet a growing consumer trend.
We have fueled our investments with improved margins. In 2010, gross profit margin rose to a record 42.5% from 41.6% in the prior year. This increase was driven by cost savings from our CCI program and a more favorable mix of products, particularly in the industrial business. Over time, our acquisition of consumer brands has also raised gross profit margin for the total business. Long-term we expect to achieve mid-single digit sales growth with one-third from category growth, share gains and new distribution, one-third from product innovation and one-third from acquisitions.
In some years, pricing and foreign currency exchange rates may also impact sales. In 2010, our pricing actions had a minor impact on sales, while the impact of currency rates was favorable.
Our business generates strong cash flow. Actions to grow net income and improve working capital are designed to lead to higher levels of cash generation. In 2010, we used $221 million of cash to repurchase shares and to fund dividends for our shareholders.
Our strategy, our execution and our success have led to higher shareholder value. We expect to be equally effective in building future value for our shareholders.
page 18 McCormick & Company 2010 Annual Report
RESULTS OF OPERATIONS—2010 COMPARED TO 2009
| 2010 | 2009 | |||||||
Net sales | $ | 3,336.8 | $ | 3,192.1 | ||||
Percent growth | 4.5 | % | ||||||
Sales for the fiscal year rose 4.5% from 2009 with strong growth in both the consumer and industrial businesses. New product introductions, brand marketing support and expanded distribution led to favorable volume and product mix, which combined, added 3.2% to sales. The impact of pricing was minimal in 2010, reducing sales 0.3%, while favorable foreign exchange rates increased sales 1.6%.
| 2010 | 2009 | |||||||
Gross profit | $ | 1,417.7 | $ | 1,327.2 | ||||
Gross profit margin | 42.5 | % | 41.6 | % | ||||
In 2010, gross profit increased 6.8% and gross profit margin rose 90 basis points. A significant part of this improvement was due to our CCI program which lowered costs $54 million in 2010 of which $45 million improved gross profit. In addition, the industrial business continued to shift its mix of business toward more higher margin, value-added products.
Most raw and packaging material costs did not change significantly from 2009 through the first half of 2010. One exception was the lower cost of dairy ingredients which was passed through in lower pricing to industrial customers. In the second half of 2010, input costs began to increase and unfavorably impacted gross profit margin in the fourth quarter. Pricing actions were taken toward the end of the year and continued in 2011 to offset a portion of these increases.
| 2010 | 2009 | |||||||
Selling, general & administrative expense (SG&A) | $ | 907.9 | $ | 846.6 | ||||
Percent of net sales | 27.2 | % | 26.6 | % | ||||
Selling, general and administrative expenses in total dollars and as a percentage of net sales increased in 2010 compared to 2009. The increases were mainly driven by incremental brand marketing support to invest in the growth of our leading brands, as well as higher retirement benefit costs. SG&A in 2009 included $7.5 million of expenses related to the bankruptcy of a U.K. foodservice distributor.
During 2010 we increased brand marketing support costs by $20.7 million or 14%. The increased funding supported the launch of Recipe Inspirations, Perfect Pinch and other new products. We also drove sales with incremental spending behind our holiday cooking and baking advertising, support for the Zatarain’s brand and information regarding the antioxidant levels in many spices and herbs. The increase in retirement benefit costs was primarily due to changes in actuarial assumptions.
The following is a summary of restructuring activities for 2009:
| 2009 | ||||
Pre-tax restructuring charges: | ||||
Recorded in cost of goods sold | $ | 2.5 | ||
Other restructuring charges | 13.7 | |||
Reduction in operating income | 16.2 | |||
Income tax effect | (5.3 | ) | ||
Reduction in net income | $ | 10.9 | ||
Reduction in earnings per share—diluted | $ | 0.08 | ||
As of November 30, 2009, this restructuring program was completed. Pre-tax restructuring charges related to actions under our restructuring program to consolidate our global manufacturing, rationalize our distribution facilities, improve our go-to-market strategy and eliminate administrative redundancies. More details of the restructuring charges are discussed later in MD&A and in note 11 of the financial statements.
| 2010 | 2009 | |||||||
Interest expense | $ | 49.3 | $ | 52.8 | ||||
Other income, net | 2.2 | 2.4 | ||||||
Lower total average debt outstanding, coupled with lower short-term interest rates, led to a favorable variance in interest expense in 2010 when compared to 2009. In 2010, we completed the pay down of debt from the 2008 Lawry’s acquisition, primarily with cash generated from operations.
| 2010 | 2009 | |||||||
Income from consolidated operations before income taxes | $ | 462.7 | $ | 416.5 | ||||
Income taxes | 118.0 | 133.0 | ||||||
Effective tax rate | 25.5 | % | 31.9 | % | ||||
The decrease in the tax rate in 2010 was due to a higher level of net discrete tax benefits, increased U.S. foreign tax credits and a favorable mix of earnings among our different foreign tax jurisdictions.
Discrete tax benefits in 2010 were $20.1 million compared to $3.6 million in 2009. The $20.1 million in 2010 is mainly due to a $13.9 million reversal of a tax accrual for a closed tax year. This tax accrual was recorded in a prior period based on uncertainties about the tax aspects of transactions related to the reorganization of our European operations and divestment of certain of our joint ventures.
U.S. foreign tax credits increased as a result of a $108.5 million repatriation of cash from foreign subsidiaries in the fourth quarter of 2010. Due to the mix of foreign earnings related to this cash, the repatriation generated these tax credits.
McCormick & Company 2010 Annual Report page 19
Management’s Discussion and Analysis
In addition, see note 12 of the financial statements for a reconciliation of the U.S. federal statutory tax rate with the effective tax rate.
| 2010 | 2009 | |||||||
Income from unconsolidated operations | $ | 25.5 | $ | 16.3 | ||||
Income from unconsolidated operations increased $9.2 million in 2010 compared to 2009. This increase was mainly due to the performance of our McCormick de Mexico joint venture, which experienced a double-digit sales increase over the prior year. Also, this joint venture benefited from lower soybean oil costs and favorable foreign currency exchange rates for 2010 compared to 2009. Soybean oil is a main ingredient for mayonnaise, which is the leading product for this joint venture. In addition, our other smaller joint ventures experienced good growth in both sales and income in 2010.
On average, in 2009 and 2010 we owned 50% of our unconsolidated joint ventures. These joint ventures had 2010 annual sales of $538 million (at 100% of these businesses) with many products marketed under the McCormick name. In 2010, sales by these joint ventures increased 12% and net income increased 49%.
Our McCormick de Mexico joint venture represents over 60% of the sales and 75% of the net income of our unconsolidated joint ventures.
The following table outlines the major components of the change in diluted earnings per share from 2009 to 2010:
2009 Earnings per share—diluted | $ | 2.27 | ||
Increased operating income exclusive of restructuring charges | 0.14 | |||
Decrease in tax rate | 0.12 | |||
Reversal of significant tax accrual | 0.10 | |||
Lower restructuring charges | 0.08 | |||
Higher income from unconsolidated operations | 0.07 | |||
Lower interest expense | 0.02 | |||
Effect of higher shares outstanding | (0.05 | ) | ||
2010 Earnings per share—diluted | $ | 2.75 | ||
Consumer Business
| 2010 | 2009 | |||||||
Net sales | $ | 1,999.0 | $ | 1,911.2 | ||||
Percent growth | 4.6 | % | ||||||
Operating income, excluding restructuring charges | 402.4 | 397.9 | ||||||
Operating income margin, excluding restructuring charges | 20.1 | % | 20.8 | % | ||||
In our consumer business higher volume and product mix added 3.1% to sales, favorable foreign exchange rates increased sales 1.1% and higher pricing added 0.4% when compared to 2009.
In the Americas, consumer business sales rose 5.9%, primarily as a result of higher volume and product mix which rose 4.1%. Foreign exchange rates in this region increased sales 1.1% and pricing added 0.7%. Recipe Inspirations, Perfect Pinch and other new product introductions contributed to this sales growth. We also increased brand marketing support to build consumer awareness and trial of these new products, as well as to support our broader line of spices and seasonings and specialty foods. As a result, sales of gourmet items, grilling items, extracts, Lawry’s products and Zatarain’s products were particularly strong in 2010. Distribution gains added to sales including new placement in a warehouse club retail channel in the U.S. and new distribution of Billy Bee honey products in Canada. In the fourth quarter of 2010, sales growth of our products in the U.S. exceeded the increase in consumer purchases at retail by approximately 2%. We believe that customer purchases in advance of a late 2010 price increase contributed to this difference. As a result, we estimate that $10 million of sales may have shifted from the first quarter of 2011 into the fourth quarter of 2010.
In Europe, the Middle East and Africa (EMEA), consumer business sales declined 1.8%. Pricing decreased 1.0%, unfavorable foreign exchange rates reduced sales 0.5%, and unfavorable volume and product lowered sales 0.3%. Our largest markets, the U.K. and France, achieved an increase in volume and product mix with new products and marketing programs which supported products like Schwartz Flavourful seasoning mixes and Vahiné homemade dessert products. This growth was offset by declines in smaller markets, including Spain, Portugal, Italy, The Netherlands and Belgium, due in part to poor economies and competitive conditions in 2010. Consumer demand in these markets was weak and retail customers lowered their inventory levels. In total, these smaller markets account for about 20% of EMEA sales.
Consumer business sales in the Asia/Pacific region rose 17.2%. Foreign exchange rates were favorable, adding 9.0% to sales. Favorable volume and product mix grew sales 7.9% and pricing added 0.3%. In China, we grew sales at a double-digit pace with the introduction of new products such as Thai Chili Sauce which takes advantage of our leadership position in bottled condiments. Sales also rose as we expanded distribution of our products beyond modern grocery stores and into wet markets, also known as “street” markets, which are frequently shopped by many Chinese consumers. Sales in Australia also rose at a double-digit rate, but in local currency were close to 2009’s result.
page 20 McCormick & Company 2010 Annual Report
Consumer business operating income excluding restructuring charges increased 1.1% from 2009. The profit impact of higher sales and CCI cost savings, were largely offset by a $19 million increase in brand marketing support, as well as higher retirement benefit costs. Operating income margin was 20.1% in 2010, which compares to our target of 20% for our consumer business. In the fourth quarter of 2010 there was a decline of operating income when compared to the fourth quarter of 2009, which was partially due to increasing commodity costs. We took pricing actions in late 2010 and early in fiscal year 2011 in response to these cost increases.
Industrial Business
| 2010 | 2009 | |||||||
Net sales | $ | 1,337.8 | $ | 1,280.9 | ||||
Percent growth | 4.4 | % | ||||||
Operating income, excluding restructuring charges | 107.4 | 85.2 | ||||||
Operating income margin, excluding restructuring charges | 8.0 | % | 6.7 | % | ||||
Sales for the industrial business grew 4.4% from 2009 with higher volume and product mix adding 3.3% to sales. Favorable foreign exchange rates increased sales 2.5% and lower pricing reduced sales 1.4%.
In the Americas, industrial business sales rose 1.8% with a 2.2% increase from favorable volume and product mix. This increase was primarily driven by increased demand by food manufacturers for new products in both the U.S. and Mexico. These customers were particularly interested in seasonings and other products with lower sodium, reduced fat content and simple ingredients. During 2010, sales to foodservice distributors, quick service restaurants and other foodservice customers were comparable to the prior year. Sales to quick service customers are expected to increase in 2011 as the result of new products and new distribution. The 2.2% increase in volume and product mix in 2010 was largely offset by the impact of reduced pricing as we passed through to our customers the lower cost of dairy ingredients. Foreign exchange rates in this region added 1.7% to sales. In 2011 we expect to raise prices as we pass through rising commodity costs such as wheat and soybean oil.
In EMEA, industrial business sales rose 7.9%, led by a 4.4% increase from favorable volume and product mix. Higher demand from quick service restaurants reflected increased consumer traffic and new product wins. Sales of branded foodservice products were higher compared to a weak performance in 2009 when sales were disrupted by the bankruptcy of a major foodservice distributor in the U.K. Favorable foreign exchange rates increased sales 3.0% and pricing added 0.5%.
Industrial business sales in the Asia/Pacific region rose 16.2%. Favorable volume and product mix grew sales 9.3%. Quick service restaurants led the increase in this region driven by new store openings in China and new product introductions including beverage flavors and chicken marinades. Foreign exchange rates added 6.9% to the sales increase.
Industrial business operating income, excluding restructuring charges increased 26.1% from 2009. Higher sales and a shift to more higher margin, value-added products increased profit, as well as the impact of CCI cost savings. Also, in 2009 we recorded $7.5 million of costs related to the foodservice distributor bankruptcy in the U.K. These increases more than offset the higher retirement benefit costs in 2010. Industrial business operating income margin excluding restructuring charges rose 130 basis points to 8.0%. This was strong progress toward our long-term goal of 9 to 10% operating income margin for this business.
RESULTS OF OPERATIONS—2009 COMPARED TO 2008
| 2009 | 2008 | |||||||
Net sales | $ | 3,192.1 | $ | 3,176.6 | ||||
Percent growth | 0.5 | % | ||||||
Sales for the fiscal year rose slightly from 2008. Pricing actions taken to offset higher costs added 3.8% to sales, while unfavorable foreign exchange rates reduced sales 5.0% for the year. Favorable volume and product mix, combined, added 1.7% to sales. This impact includes the acquisition of Lawry’s (less the reduction in sales from the disposition of Season-All), which increased sales by 3.1%. The Lawry’s acquisition and disposal of Season-All took place in July 2008.
| 2009 | 2008 | |||||||
Gross profit | $ | 1,327.2 | $ | 1,288.2 | ||||
Gross profit margin | 41.6 | % | 40.6 | % | ||||
In 2009, gross profit increased 3.0% and gross profit margin rose 100 basis points. The increase in gross profit margin was due equally to a more favorable mix of business and cost savings initiatives.
In 2009 sales in our consumer segment, which carries a higher gross profit margin, grew 3.3% while sales in our industrial segment declined 3.4%. The increase in consumer sales was driven by the Lawry’s acquisition.
Our CCI program also boosted margins. Total savings in 2009 were $37 million, of which $31 million improved gross profit.
Improvements due to business mix and cost reductions were partially offset by cost increases.
McCormick & Company 2010 Annual Report page 21
Management’s Discussion and Analysis
| 2009 | 2008 | |||||||
SG&A | $ | 846.6 | $ | 870.6 | ||||
Percent of net sales | 26.6 | % | 27.4 | % | ||||
Selling, general and administrative expenses in total dollars and as a percentage of net sales declined in 2009 compared to 2008. The underlying decrease in SG&A reflects our efforts to manage expenses, improve productivity and integrate the Lawry’s business with minimal incremental operating expenses. More specifically, lower expense levels were due to decreases in distribution costs, certain benefit expenses and other cost savings, partially offset by higher brand marketing support costs.
Lower distribution costs were driven by CCI initiatives and leveraging our existing distribution channels with the new Lawry’s business. Retirement plan expenses were lower due to changes in actuarial assumptions and higher income on marketable securities.
During 2009 we increased marketing support costs $19.5 million or 15%. A large portion of the increase funded a new marketing campaign for Lawry’s. Other products featured with incremental marketing support included our revitalized dry seasoning mixes, Grill Mates®, new Vahiné cake mixes, and in China, honey jams.
| 2009 | 2008 | |||||||
Impairment charge | — | $ | 29.0 | |||||
In 2008 we recorded a non-cash impairment charge to lower the value of our Silvo brand intangible asset in The Netherlands. More details of the impairment charge are discussed in note 4 of the financial statements.
The following is a summary of restructuring activities:
| 2009 | 2008 | |||||||
Pre-tax restructuring charges: | ||||||||
Recorded in cost of goods sold | $ | 2.5 | $ | 4.5 | ||||
Other restructuring charges | 13.7 | 12.1 | ||||||
Reduction in operating income | 16.2 | 16.6 | ||||||
Income tax effect | (5.3 | ) | (5.1 | ) | ||||
Reduction in net income | $ | 10.9 | $ | 11.5 | ||||
Reduction in earnings per share—diluted | $ | 0.08 | $ | 0.09 | ||||
As of November 30, 2009, this restructuring program was completed. Pre-tax restructuring charges for both 2009 and 2008 related to actions under our restructuring program to consolidate our global manufacturing, rationalize our distribution facilities, improve our go-to-market strategy and eliminate administrative redundancies. More details of the restructuring charges are discussed later in MD&A and in note 11 of the financial statements.
| 2009 | 2008 | |||||||
Interest expense | $ | 52.8 | $ | 56.7 | ||||
Other income, net | 2.4 | 18.0 | ||||||
The decrease in interest expense was due to lower interest rates, offsetting an increase in total average debt outstanding in 2009 when compared to 2008. The decrease in other income was due to the $12.9 million pre-tax gain recorded in 2008 on the sale of our Season-All business, sold in connection with the acquisition of Lawry’s (see note 2 of the financial statements) and reduced interest income.
| 2009 | 2008 | |||||||
Income from consolidated operations before income taxes | $ | 416.5 | $ | 337.8 | ||||
Income taxes | 133.0 | 100.6 | ||||||
Effective tax rate | 31.9 | % | 29.8 | % | ||||
The increase in the effective tax rate was due to our mix of income by taxing jurisdictions. Income taxes in 2009 and 2008 included $3.6 million and $2.9 million, respectively, of net discrete tax benefits. These tax benefits related to the settlement of tax audits and adjustments to prior tax provisions once actual tax returns were prepared and filed.
| 2009 | 2008 | |||||||
Income from unconsolidated operations | $ | 16.3 | $ | 18.6 | ||||
Income from unconsolidated operations decreased $2.3 million in 2009 compared to 2008. This decrease was primarily driven by our joint venture in Mexico, as well as some smaller joint ventures. Our joint venture in Mexico had a strong performance with sales in local currency up 19%. However, income from this business was unfavorably impacted by the stronger U.S. dollar during most of 2009 and to a lesser degree, higher soybean oil costs. Soybean oil is the primary ingredient in mayonnaise, which is the leading product for this joint venture.
On average in 2009 and 2008, we owned 50% of our unconsolidated joint ventures. For 2009, these joint ventures had 2009 annual sales of $481 million (at 100% of these businesses) with many products marketed under the McCormick name. In 2009, sales by these joint ventures decreased 1% and net income decreased 6%.
The following table outlines the major components of the change in diluted earnings per share from 2008 to 2009:
2008 Earnings per share—diluted | $ | 1.94 | ||
Increased operating income exclusive of restructuring and impairment charges | 0.33 | |||
Impairment charge recorded in 2008 | 0.15 | |||
Lower restructuring charges | 0.01 | |||
Lower interest expense | 0.02 | |||
Decrease in other income | (0.08 | ) | ||
Increase in tax rate | (0.07 | ) | ||
Lower income from unconsolidated operations | (0.02 | ) | ||
Effect of higher shares outstanding | (0.01 | ) | ||
2009 Earnings per share—diluted | $ | 2.27 | ||
page 22 McCormick & Company 2010 Annual Report
Consumer Business
| 2009 | 2008 | |||||||
Net sales | $ | 1,911.2 | $ | 1,850.8 | ||||
Percent growth | 3.3 | % | ||||||
Operating income, excluding restructuring and impairment charges | 397.9 | 343.3 | ||||||
Operating income margin, excluding restructuring and impairment charges | 20.8 | % | 18.5 | % | ||||
Higher volume and product mix added 3.6% to sales, including the net impact of the Lawry’s acquisition, which accounted for 4.6%. Pricing actions taken to offset higher costs added another 3.5% to sales, while unfavorable foreign exchange rates reduced consumer sales by 3.8% in 2009 compared to 2008.
In the Americas, consumer business sales increased 9.1%, including a 1.3% decrease due to unfavorable foreign exchange rates. Higher volume and product mix added 6.4% to sales, which included a 6.7% increase from the net impact of the Lawry’s acquisition. Sales volume increases included grilling products and dry seasoning mixes, while sales volumes of gourmet items declined. During 2009 a number of retailers reduced their inventory levels which impacted our sales growth. Higher pricing taken early in the year added 4.0% to consumer sales in the Americas.
In EMEA, consumer sales decreased 11.3%, which includes 9.8% from unfavorable foreign exchange rates. Pricing actions added 2.5% to sales and unfavorable volume and product mix reduced sales by 4.0%. The 2009 retail environment in the U.K. was difficult and caused weak sales of our Schwartz brand. Our business in France was strong, particularly with our Vahiné dessert items, and helped to offset some of the decline in the U.K.
Sales in the Asia/Pacific region decreased 0.4%, with 6.4% due to unfavorable foreign exchange rates. Sales volume and product mix grew by 6.1%, with China increasing at a double-digit pace and Australia growing at a low single-digit rate. Our growth in China was due to the launch of several new products and expanded distribution of our brands.
The increase in operating income excluding restructuring and impairment charges for the consumer business was driven by increased sales, improved margins from cost reductions and the integration of Lawry’s with minimal incremental expense, offset in part by higher brand marketing support.
Industrial Business
| 2009 | 2008 | |||||||
Net sales | $ | 1,280.9 | $ | 1,325.8 | ||||
Percent decrease | (3.4 | )% | ||||||
Operating income, excluding restructuring charges | 85.2 | 78.8 | ||||||
Operating income margin, excluding restructuring charges | 6.7 | % | 5.9 | % | ||||
The industrial business sales decrease was driven largely by unfavorable foreign exchange rates, which reduced sales 6.7%. Pricing actions, which offset increased costs of certain commodities, added 4.4% to sales. Volume and product mix lowered sales 1.1% due to a slower pace of new product introductions by industrial customers. This reduction included the Lawry’s acquisition, which added 1.0% to sales.
Sales in the Americas rose 0.2%, including a 3.3% decrease due to unfavorable foreign exchange rates. In this region, pricing actions increased sales by 4.1%. Lower volume and product mix reduced sales by 0.6% with less product innovation by our customers. The Americas volume and product mix impact included the Lawry’s acquisition, which added 1.4% to sales.
In EMEA, a 14.8% sales decrease was the result of a 19.3% unfavorable foreign exchange rate impact and a 2.9% decline from lower volume and product mix. Sales to the foodservice channel were affected by the bankruptcy of a major customer in 2009. Partially offsetting these declines was higher pricing, which added 7.4%.
In the Asia/Pacific region, sales decreased 3.9% due to unfavorable foreign exchange rates. Pricing had minimal impact in this region and volume and product mix were flat. During 2009, we experienced a slowdown in demand from the restaurant customers that we serve in China.
Despite the decrease in industrial sales, operating income excluding restructuring activities increased which was evidence of the effectiveness of our CCI program and progress toward a more favorable product mix. As a group, the new products that we layered into our portfolio during 2009 were accretive to the overall margins. Operating income in 2009 included $7.5 million of costs related to a foodservice customer bankruptcy in the U.K.
NON-GAAP FINANCIAL MEASURES
The tables below include financial measures of operating income and diluted earnings per share excluding restructuring charges in 2009 and 2008 and the benefit of a significant tax accrual in 2010. Also we are excluding unusual items that we recorded in 2008 for a non-cash impairment charge to reduce the value of the Silvo brand and amounts related to the acquisition of Lawry’s, including the gain on the sale of Season-All. These are all non-GAAP financial measures which are prepared as a complement to the results provided in accordance with United States generally accepted accounting principles. We believe this non-GAAP information is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. As of November 30, 2009 our restructuring program was completed.
| McCormick & Company 2010 Annual Report page 23 |
Management’s Discussion and Analysis
In 2010 our discrete tax benefits included a $13.9 million reversal of a tax accrual for a closed tax year. This tax accrual was recorded in a prior period based on uncertainties about the tax aspects of transactions related to the reorganization of our European operations and divestment of certain of our joint ventures. We are treating this $13.9 million discrete tax benefit as a non-GAAP adjustment to our diluted earnings per share. We are providing non-GAAP results that exclude the impact of this reversal as the item to which it relates was recorded as a restructuring charge, and it allows for a better comparison of 2010 financial results to the prior year and a more appropriate base for 2011 projections.
These non-GAAP measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. A reconciliation of these non-GAAP measures to GAAP financial results is provided below.
| 2010 | 2009 | 2008 | ||||||||||
Operating income | $ | 509.8 | $ | 466.9 | $ | 376.5 | ||||||
Impact of restructuring charges | — | 16.2 | 16.6 | |||||||||
Impact of impairment charge | — | — | 29.0 | |||||||||
Adjusted operating income | $ | 509.8 | $ | 483.1 | $ | 422.1 | ||||||
% increase versus prior year | 5.5 | % | 14.5 | % | ||||||||
| 2010 | 2009 | 2008 | ||||||||||
Net income | $ | 370.2 | $ | 299.8 | $ | 255.8 | ||||||
ReversaI of significant tax accrual | (13.9 | ) | — | — | ||||||||
Impact of restructuring charges | — | 10.9 | 11.5 | |||||||||
Impact of impairment charge | — | — | 20.1 | |||||||||
Net gain related to Lawry’s acquisition | — | — | (5.5 | ) | ||||||||
Adjusted net income | $ | 356.3 | $ | 310.7 | $ | 282.0 | ||||||
% increase versus prior year | 14.7 | % | 10.2 | % | ||||||||
| 2010 | 2009 | 2008 | ||||||||||
Earnings per share—diluted | $ | 2.75 | $ | 2.27 | $ | 1.94 | ||||||
ReversaI of significant tax accrual | (0.10 | ) | — | — | ||||||||
Impact of restructuring charges | — | 0.08 | 0.09 | |||||||||
Impact of impairment charge | — | — | 0.15 | |||||||||
Net gain related to Lawry’s acquisition | — | — | (0.04 | ) | ||||||||
Adjusted earnings per share—diluted | $ | 2.65 | $ | 2.35 | $ | 2.14 | ||||||
% increase versus prior year | 12.8 | % | 9.8 | % | ||||||||
LIQUIDITY AND FINANCIAL CONDITION
| 2010 | 2009 | 2008 | ||||||||||
Net cash provided by operating activities | $ | 387.5 | $ | 415.8 | $ | 314.6 | ||||||
Net cash used in investing activities | (129.7 | ) | (81.8 | ) | (747.0 | ) | ||||||
Net cash (used in) provided by financing activities | (261.1 | ) | (341.8 | ) | 433.4 | |||||||
We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, make share repurchases when appropriate, increase our dividend and fund capital projects.
In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.
The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates have been significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2010, the exchange rates for the Euro and British pound sterling were lower versus the U.S. dollar compared to 2009. Exchange rate fluctuations resulted in decreases to trade accounts receivable of $15 million, inventory of $8 million, goodwill of $72 million and other comprehensive income of $109 million since November 30, 2009.
Operating Cash Flow—When 2010 is compared to 2009, the decrease in operating cash flow was driven by increases in inventory and trade accounts receivable. These were partially offset by a higher level of cash generated from improved net income and lower pension contributions in 2010. Our total pension contributions were $49.5 million in 2010 as compared to $72.3 million in 2009. When 2009 is compared to 2008, most of the increase in operating cash flow was driven by more effective management of working capital items, such as inventory and receivables, and a higher level of cash generated from improved net income. Also, payments for income taxes were less in 2009 as compared to those made in the prior year. These increases were partially offset by $52.2 million in contributions made to our major U.S. pension plan in 2009. We did not make any contribution to our major U.S. pension plan in 2008 as the plan was overfunded as of November 30, 2007.
| page 24 McCormick & Company 2010 Annual Report |
In addition to operating cash flow, we also use cash conversion cycle (CCC) to measure our progress in working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of receivables. Our goal is to lower our CCC over time. We calculate CCC as follows:
Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory).
The following table outlines our cash conversion cycle (in days) over the last three years:
| 2010 | 2009 | 2008 | ||||||||||
Cash Conversion Cycle | 77.3 | 80.1 | 83.6 | |||||||||
The decreases in CCC in 2009 and 2010 when compared to the previous periods were mainly due to lower days sales outstanding. In the future we expect to reduce CCC by decreasing our days in inventory.
Investing Cash Flow—The changes in cash used in investing activities from 2008 to 2010 were primarily due to fluctuations in cash used for acquisition of businesses and joint venture interests in 2008 and 2010 with no acquisitions in 2009. We invested $46.9 million in acquisitions and joint venture interests in 2010 and we purchased Lawry’s and Billy Bee in 2008. The 2008 cash used in investing activities was offset by $14.0 million in net proceeds from the sale of our Season-All business and $18.1 million in proceeds from the disposal of various assets as a part of our restructuring plan. Capital expenditures were $89.0 million in 2010, $82.4 million in 2009 and $85.8 million in 2008. We expect 2011 capital expenditures to
be in line with depreciation and amortization expense.
Financing Cash Flow—In 2010 and 2009, we repaid borrowings of $114.0 million and $252.2 million, respectively. This compares to increases in borrowings of $509.1 million in 2008. In 2010, we repaid short-term borrowings of $99.6 million and repaid $14.4 million in long-term debt. In 2009, we repaid $50.4 million of long-term debt as it became due and repaid short-term borrowings of $201.8 million. In 2008, our increase in total borrowings, along with internally generated cash flow, were used to fund $693.3 million for the purchases of the Lawry’s and Billy Bee businesses. In September 2008, we issued $250 million of 5.25% notes due 2013, with net cash proceeds received of $248.0 million. The net proceeds from this offering were used to pay down commercial paper which was issued for the purchase of the Lawry’s business. In December 2007, we issued $250 million of 5.75% medium-term notes which are due in 2017. The net proceeds of $248.3 million were used to repay $150 million of debt maturing in 2008 with the remainder used to repay short-term debt.
The following table outlines the activity in our share repurchase programs:
| 2010 | 2009 | 2008 | ||||||||||
Number of shares of common stock | 2.0 | — | 0.3 | |||||||||
Dollar amount | $ | 82.5 | — | $ | 11.0 | |||||||
In June 2010, our Board of Directors authorized a new share repurchase program to purchase up to $400 million of our outstanding shares. In September 2010, we completed a $400 million share repurchase program authorized by the Board in June 2005. As of November 30, 2010, $358.9 million remained of the new share repurchase program. There were no shares repurchased during 2009 and the amount of share repurchases in 2008 was less than prior years
2010 CASH UTILIZATION
(in millions)
Cash for capital expenditures is net of proceeds from the sale of property, plant and equipment
McCormick & Company 2010 Annual Report page 25
Management’s Discussion and Analysis
due to the funding required for the Lawry’s and Billy Bee acquisitions. Our priorities for cash continue to be our dividend payments, the acquisition of strong brands and, through the end of fiscal year 2010, debt reduction. In the absence of significant acquisition activity, we will use a portion of cash to repurchase shares. The common stock issued in 2010, 2009 and 2008 relates to our stock compensation plans.
Our dividend history over the past three years is as follows:
| 2010 | 2009 | 2008 | ||||||||||
Total dividends paid | $ | 138.2 | $ | 125.4 | $ | 113.5 | ||||||
Dividends paid per share | 1.04 | 0.96 | 0.88 | |||||||||
Percentage increase per share | 8.3 | % | 9.1 | % | 10.0 | % | ||||||
In November 2010, the Board of Directors approved a 7.7% increase in the quarterly dividend from $0.26 to $0.28 per share. During the past five years, dividends per share have risen at a compound annual rate of 9.2%.
| 2010 | 2009 | 2008 | ||||||||||
Debt-to-total-capital ratio | 37.6 | % | 42.5 | % | 53.8 | % | ||||||
The decrease in the debt-to-capital ratio from 2008 to 2010 is mainly due to our decrease in debt after the Lawry’s and Billy Bee acquisitions in 2008.
Most of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The permanent repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. At year-end, we temporarily used $194.2 million of cash from our foreign subsidiaries to pay down short-term debt. The average short-term borrowings outstanding for the years ended November 30, 2010 and 2009 were $376.3 million and $503.9 million, respectively. The total average debt outstanding for the years ended November 30, 2010 and 2009 was $1,237.2 million and $1,390.0 million, respectively.
During 2008, we entered into three separate forward treasury lock agreements totaling $100 million to manage the interest rate risk associated with the issuance of $250 million of fixed rate medium-term notes in September 2008. We also issued $250 million of fixed rate medium-term notes in December 2007 with an associated $150 million of forward treasury lock agreements to manage the interest rate risk. See notes 6 and 7 of the financial statements for further details of these transactions.
Credit and Capital Markets—Credit market conditions were volatile during 2008 and 2009 but have recently improved. The following summarizes the more significant impacts on our business:
CREDIT FACILITIES—Cash flows from operating activities are our primary source of liquidity for funding growth, dividends and capital expenditures. In the second half of 2010, we also used this cash to make share repurchases. In the second half of 2008, all of 2009 and the first half of 2010, we used operating cash flow to pay down debt incurred in the Lawry’s acquisition and did not repurchase shares. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements. Our major revolving credit facility has a total committed capacity of $500 million, which expires in 2012. We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities for $91.4 million as of November 30, 2010. We engage in regular communication with all of the banks participating in our credit facility. During these communications none of the banks has indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. See also note 6 of the financial statements for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to fund ongoing operations.
PENSION ASSETS—We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash payments to pension plans, including unfunded plans, were $49.5 million in 2010, $72.3 million in 2009 and $19.2 million in 2008. It is expected that the 2011 total pension plan contributions will be approximately $40 million. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all plans, approximately 67% of assets are invested in equities, 29% in fixed income investments and 4% in other investments. See also note 9 of the financial statements which details more on our pension funding.
page 26 McCormick & Company 2010 Annual Report
CUSTOMERS AND COUNTERPARTIES—See the subsequent section of this MD&A under Market Risk Sensitivity—Credit Risk.
ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits and to improve margins. We have a particular interest in emerging markets.
In 2010, we purchased a 26% non-controlling interest in Eastern Condiments Private Limited (Eastern), based in India, for $37.7 million in cash. We also purchased the assets of a consumer business in North America that sells Mexican specialty food items for $11.5 million in cash.
Also in 2010, our EMEA region completed a joint venture agreement with Yildiz Holding, a leading food manufacturer in Turkey. This joint venture will be a consumer business. The goal of the partnership is to launch a leading brand of spices, herbs and seasoning products in Turkey. This is a start-up operation and, accordingly, there was no current investment or revenues in 2010.
In 2008, we purchased the assets of the Lawry’s business for $603.5 million in cash, the assumption of certain liabilities relating to the purchased assets and transaction costs of $11.5 million. Lawry’s manufactures and sells a variety of marinades and seasoning blends under the well-known Lawry’s brand in North America. During 2009, we completed the final valuation of assets for Lawry’s.
Also in 2008, we purchased Billy Bee for $76.4 million in cash. Billy Bee markets and sells under the Billy Bee brand in North America. During 2009, we completed the final valuation of assets for Billy Bee.
These businesses have been successfully integrated into our existing business platform and are now part of the many product lines that we market.
See note 2 of the financial statements for further details of these acquisitions.
RESTRUCTURING ACTIVITIES
As part of our plan to improve margins, we announced in September 2005 significant actions to improve the effectiveness of our supply chain and reduce costs. This restructuring plan was approved by the Board of Directors in November 2005. As part of this plan, we consolidated our global manufacturing, rationalized our distribution facilities, improved our go-to-market strategy, eliminated administrative redundancies and rationalized our joint venture partnerships. As of November 30, 2009 this restructuring program was completed.
The restructuring plan reduced complexity and increased the organizational focus on growth opportunities in both the consumer and industrial businesses. We realized $66 million of annual cost savings by the end of 2010. This has improved margins, offset higher costs and increased earnings per share. We invested a portion of these savings in sales growth drivers such as marketing support for our brands. These savings are reflected in both cost of goods sold and selling, general and administrative expenses in the income statement.
In 2009, we recorded restructuring charges of $16.2 million. These charges were for the closure of our manufacturing plant in The Netherlands and the reduction of administrative personnel in Europe.
In 2008, we recorded restructuring charges of $16.6 million. These charges were primarily associated with the reduction of administrative personnel in Europe, the U.S. and Canada and the consolidation of production facilities in Europe and the reorganization of distribution networks in the U.S. and U.K.
See note 11 of the financial statements for further details of these restructuring charges.
PERFORMANCE GRAPH—SHAREHOLDER RETURN
Below is a line graph comparing the yearly change in McCormick’s cumulative total shareholder return (stock price appreciation plus reinvestment of dividends) on McCormick’s Non-Voting Common Stock with (1) the cumulative total return of the Standard & Poor’s 500 Stock Price Index, assuming reinvestment of dividends, and (2) the cumulative total return of the Standard & Poor’s Packaged Foods & Meats Index, assuming reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among McCormick, the S&P 500 Stock Price Index and the S&P Packaged Foods & Meats Index
The graph assumes that $100 was invested on November 30, 2005 in McCormick Non-Voting Common Stock, the Standard & Poor’s 500 Stock Price Index and the Standard & Poor’s Packaged Foods & Meats Index, and that all dividends were reinvested through November 30, 2010.
MARKET RISK SENSITIVITY
We utilize derivative financial instruments to enhance our ability to manage risk, including foreign exchange and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. The information presented below should be read in conjunction with notes 6 and 7 of the financial statements.
| McCormick & Company 2010 Annual Report page 27 |
Management’s Discussion and Analysis
Foreign Exchange Risk—We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the value of foreign currency investments in subsidiaries and unconsolidated affiliates and cash flows related to repatriation of these investments. Primary exposures include the British pound sterling versus the Euro, and the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Australian dollar, Mexican peso, Chinese renminbi, Swiss franc and Thai baht. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks.
During 2010, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in France, the U.K., Canada and Australia. We did not hedge our net investments in subsidiaries and unconsolidated affiliates.
The following table summarizes the foreign currency exchange contracts held at November 30, 2010. All contracts are valued in U.S. dollars using year-end 2010 exchange rates and have been designated as hedges of foreign currency transactional exposures, firm commitments or anticipated transactions.
FOREIGN CURRENCY EXCHANGE CONTRACTS AT NOVEMBER 30, 2010
Currency sold | Currency received | Notional value | Average contractual exchange rate | Fair value | ||||||||||
Euro | U.S. dollar | $ | 15.1 | 1.26 | $ | (0.4 | ) | |||||||
British pound sterling | U.S. dollar | 10.2 | 1.49 | (0.4 | ) | |||||||||
Canadian dollar | U.S. dollar | 20.5 | 0.96 | (0.2 | ) | |||||||||
Australian dollar | U.S. dollar | 5.0 | 0.90 | (0.2 | ) | |||||||||
U.S. dollar | Thai baht | 3.7 | 31.8 | 0.2 | ||||||||||
U.S. dollar | Euro | 92.5 | 1.32 | (1.1 | ) | |||||||||
U.S. dollar | British pound sterling | 40.5 | 1.56 | (0.2 | ) | |||||||||
British pound sterling | Euro | 16.5 | 0.85 | (0.2 | ) | |||||||||
We have a number of smaller contracts with an aggregate notional value of $4.2 million to purchase or sell other currencies, such as the Swiss franc and the Singapore dollar as of November 30, 2010. The aggregate fair value of these contracts was $(0.1) million at November 30, 2010.
Included in the table above are $133.0 million notional value of contracts that have durations of less than 15 days that are used to hedge short-term cash flow funding. Remaining contracts have durations of one to thirteen months.
At November 30, 2009, we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar and Thai baht with a notional value of $159.7 million, all of which matured in 2010. The aggregate fair value of these contracts was $(0.8) million at November 30, 2009.
page 28 McCormick & Company 2010 Annual Report
Interest Rate Risk—Our policy is to manage interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. The table that follows provides principal cash flows and related interest rates, excluding the effect of interest rate swaps and the amortization of any discounts or fees, by fiscal year of maturity at November 30, 2010 and 2009. For foreign currency-denominated debt, the information is presented in U.S. dollar equivalents. Variable interest rates are based on the weighted-average rates of the portfolio at the end of the year presented.
YEAR OF MATURITY AT NOVEMBER 30, 2010
| 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | ||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||
Fixed rate | $ | 100.0 | — | $ | 250.0 | — | $ | 505.0 | $ | 855.0 | $ | 950.5 | ||||||||||||||||
Average interest rate | 5.80 | % | — | 5.25 | % | — | 5.77 | % | — | — | ||||||||||||||||||
Variable rate | $ | 0.4 | $ | 0.3 | $ | 0.3 | $ | 0.4 | $ | 7.7 | $ | 9.1 | $ | 9.1 | ||||||||||||||
Average interest rate | 8.69 | % | 8.62 | % | 8.62 | % | 8.62 | % | 8.62 | % | — | — | ||||||||||||||||
YEAR OF MATURITY AT NOVEMBER 30, 2009
| ||||||||||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | Thereafter | Total | Fair value | ||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||
Fixed rate | $ | 0.4 | $ | 100.0 | — | $ | 250.0 | $ | 505.0 | $ | 855.4 | $ | 933.0 | |||||||||||||||
Average interest rate | 0.00 | % | 5.80 | % | — | 5.25 | % | 5.77 | % | — | — | |||||||||||||||||
Variable rate | $ | 115.7 | $ | 0.2 | $ | 0.3 | $ | 1.3 | $ | 4.8 | $ | 122.3 | $ | 122.3 | ||||||||||||||
Average interest rate | 0.49 | % | 9.58 | % | 9.58 | % | 9.58 | % | 9.58 | % | — | — | ||||||||||||||||
The table above displays the debt by the terms of the original debt instrument without consideration of fair value, interest rate swaps and any loan discounts or origination fees. Interest rate swaps have the following effects. The fixed interest rate on $100 million of the 5.20% medium-term note due in 2015 is effectively converted to a variable rate by interest rate swaps through 2015. Net interest payments are based on 3 month LIBOR minus 0.05% during this period. We issued $250 million of 5.75% medium-term notes due in 2017 in December 2007. Forward treasury lock agreements of $150 million were settled upon the issuance of these medium-term notes and effectively fixed the interest rate on the full $250 million of notes at a weighted-average fixed rate of 6.25%. We issued $250 million of 5.25% medium-term notes due in 2013 in September 2008. Forward treasury lock agreements of $100 million were settled upon the issuance of these medium-term notes and effectively fixed the interest rate on the full $250 million of notes at a weighted-average fixed rate of 5.54%.
Commodity Risk—We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw materials are dairy products, pepper, capsicums (red peppers and paprika), onion, wheat, soybean oil and garlic. While future movements of raw material costs are uncertain, we respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery and customer price adjustments. We have not used derivatives to manage the volatility related to this risk.
Credit Risk—The customers of our consumer business are predominantly food retailers and food wholesalers. Consolidations in these industries have created larger customers. In addition, competition has increased with the growth in alternative channels including mass merchandisers, dollar stores, warehouse clubs and discount chains. This has caused some customers to be less profitable and increased our exposure to credit risk. Some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties. We feel that the allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.
McCormick & Company 2010 Annual Report page 29
Management’s Discussion and Analysis
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual obligations and commercial commitments as of November 30, 2010:
CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR
| Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | ||||||||||||||||
Short-term borrowings | $ | 0.2 | $ | 0.2 | — | — | — | |||||||||||||
Long-term debt | 863.9 | 100.2 | $ | 250.6 | $ | 201.0 | $ | 312.1 | ||||||||||||
Operating leases | 81.4 | 20.4 | 27.2 | 17.5 | 16.3 | |||||||||||||||
Interest payments | 259.3 | 45.3 | 79.0 | 52.6 | 82.3 | |||||||||||||||
Raw material purchase obligations(a) | 276.5 | 276.5 | — | — | — | |||||||||||||||
Electricity contracts | 10.5 | 4.5 | 6.0 | — | — | |||||||||||||||
Other purchase obligations(b) | 13.7 | 13.3 | .4 | — | — | |||||||||||||||
Total contractual cash obligations | $ | 1,505.5 | $ | 460.4 | $ | 363.2 | $ | 271.1 | $ | 410.7 | ||||||||||
| (a) | Raw material purchase obligations outstanding as of year-end may not be indicative of outstanding obligations throughout the year due to our response to varying raw material cycles. |
| (b) | Other purchase obligations primarily consist of advertising media commitments. |
In 2011, our pension and postretirement contributions are expected to be approximately $40 million. Pension and postretirement funding can vary significantly each year due to changes in legislation, our significant assumptions and investment return on plan assets. As a result, we have not presented pension and postretirement funding in the table above.
COMMERCIAL COMMITMENTS EXPIRATION BY YEAR
| Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | ||||||||||||||||
Guarantees | $ | 0.6 | $ | 0.6 | — | — | — | |||||||||||||
Standby and trade letters of credit | 28.7 | 28.7 | — | — | — | |||||||||||||||
Total commercial commitments | $ | 29.3 | $ | 29.3 | — | — | — | |||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of November 30, 2010 and 2009.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of the financial statements for further details of these impacts.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. In preparing the financial statements, we make routine estimates and judgments in
determining the net realizable value of accounts receivable, inventory, fixed assets and prepaid allowances. Our most critical accounting estimates and assumptions are in the following areas:
Customer Contracts
In several of our major geographic markets, the consumer business sells our products by entering into annual or multi-year customer contracts. These contracts include provisions for items such as sales discounts, marketing allowances and performance incentives. These items are expensed based on certain estimated criteria such as sales volume of indirect customers, customers reaching anticipated volume thresholds and marketing spending. We routinely review these criteria and make adjustments as facts and circumstances change.
Goodwill and Intangible Asset Valuation
We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test non-amortizing
page 30 McCormick & Company 2010 Annual Report
intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.
Goodwill Impairment
Our reporting units are the same as our business segments. We calculate fair value of a reporting unit by using a discounted cash flow model. Our discounted cash flow model calculates fair value by present valuing future expected cash flows of our reporting units using our internal cost of capital as the discount rate. We then compare this fair value to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the calculated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. As of November 30, 2010, we had $1,417.4 million of goodwill recorded in our balance sheet ($1,273.2 million in the consumer segment and $144.2 million in the industrial segment). Our testing indicates that the current fair values of our reporting units are significantly in excess of carrying values. Accordingly we believe that only significant changes in the cash flow assumptions would result in an impairment of goodwill.
Non-Amortizable Intangible Asset Impairment
Our non-amortizable intangible assets consist of brand names and trademarks. We calculate fair value by using a discounted cash flow model or relief-from-royalty method and then compare that to the carrying amount of the non-amortizable intangible asset. As of November 30, 2010, we had $199.4 million of brand name assets and trademarks recorded in our balance sheet and none of the balances exceed their estimated fair values. We intend to continue to support our brand names. Below is a table which outlines the book value of our major brand names and trademarks as of November 30, 2010:
Zatarain’s | $ | 106.4 | ||
Lawry’s | 48.0 | |||
Simply Asia/Thai Kitchen | 18.5 | |||
Other | 26.5 | |||
Total | $ | 199.4 | ||
The majority of products marketed under our brand name intangible assets which have a value on the balance sheet are sold in the United States.
Income Taxes
We estimate income taxes and file tax returns in each of the taxing jurisdictions in which we operate and are required to file a tax return. At the end of each year, an estimate for income taxes is recorded in the financial statements. Tax returns are generally filed in the third or fourth quarter of the subsequent year. A reconciliation of the estimate to the final tax return is done at that time which will result in changes to the original estimate. Income tax expense for 2010 includes $1.6 million of adjustments from the reconciliation of prior year tax estimates to actual tax filings. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions. We evaluate our uncertain tax positions in accordance with the U.S. GAAP guidance for uncertainty in income taxes. We believe that our reserve for uncertain tax positions, including related interest, is adequate. The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Also, management has recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized. In doing so, management has considered future taxable income and tax planning strategies in assessing the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates.
Pension and Postretirement Benefits
Pension and other postretirement plans’ costs require the use of assumptions for discount rates, investment returns, projected salary increases, mortality rates and health care cost trend rates. The actuarial assumptions used in our pension and postretirement bene-fit reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension and postretirement benefit obligations. While we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results. A 1% increase or decrease in the actuarial assumption for the discount rate would impact 2011 pension and postretirement benefit expense by approximately $13 million. A 1% increase or decrease in the expected return on plan assets would impact 2011 pension expense by approximately $6 million. In addition, see the preceding sections of MD&A and note 9 of the financial statements for a discussion of these assumptions and the effects on the financial statements.
McCormick & Company 2010 Annual Report page 31
Management’s Discussion and Analysis
Stock-Based Compensation
We estimate the fair value of our stock-based compensation using fair value pricing models which require the use of significant assumptions for expected volatility of stock, dividend yield and risk-free interest rate. Our valuation methodology and significant assumptions used are disclosed in note 10 of the financial statements.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, including those related to: the expected results of operations of businesses acquired by us, the expected impact of raw materials costs and our pricing actions on our results of operations and gross margins, the expected productivity and working capital improvements, expected trends in net sales and earnings performance and other financial measures, the expectations of pension and postretirement plan contributions, the holding period and market risks associated with financial instruments, the impact of foreign exchange fluctuations, the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing, our ability to issue additional debt or equity securities, and our expectations regarding purchasing shares of our common stock under the existing authorizations.
Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by external factors such as: damage to our reputation or brand name, business interruptions due to natural disasters or similar unexpected events, actions of competitors, customer relationships and financial condition, the ability to achieve expected cost savings and margin improvements, the successful acquisition and integration of new businesses, fluctuations in the cost and availability of raw and packaging materials, changes in regulatory requirements, and global economic conditions generally which would include the availability of financing, interest and inflation rates as well as foreign currency fluctuations, fluctuations in the market value of pension plan assets and other risks described in our Form 10-K for the fiscal year ended November 30, 2010.
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
page 32 McCormick & Company 2010 Annual Report
Financial Information
34 | Report of Management | |||||
| 34 | Reports of Independent Registered Public Accounting Firm | |||||
| 36 | Consolidated Financial Statements | |||||
| 36 | Consolidated Income Statement | |||||
| 37 | Consolidated Balance Sheet | |||||
| 38 | Consolidated Cash Flow Statement | |||||
| 39 | Consolidated Statement of Shareholders’ Equity | |||||
| 40 | Notes to Consolidated Financial Statements | |||||
| 40 | Note 1 | Summary of Significant Accounting Policies | ||||
| 42 | Note 2 | Acquisitions | ||||
| 43 | Note 3 | Goodwill and Intangible Assets | ||||
| 43 | Note 4 | Impairment Charge | ||||
| 43 | Note 5 | Investments in Affiliates | ||||
| 43 | Note 6 | Financing Arrangements | ||||
| 44 | Note 7 | Financial Instruments | ||||
| 46 | Note 8 | Fair Value Measurements | ||||
| 47 | Note 9 | Employee Benefit and Retirement Plans | ||||
| 51 | Note 10 | Stock-based Compensation | ||||
| 52 | Note 11 | Restructuring Activities | ||||
| 53 | Note 12 | Income Taxes | ||||
| 54 | Note 13 | Earnings per Share | ||||
| 54 | Note 14 | Capital Stock | ||||
| 54 | Note 15 | Commitments and Contingencies | ||||
| 55 | Note 16 | Business Segments and Geographic Areas | ||||
| 56 | Note 17 | Supplemental Financial Statement Data | ||||
| 57 | Note 18 | Selected Quarterly Data (unaudited) | ||||
| 58 | Historical Financial Summary | |||||
McCormick & Company 2010 Annual Report page 33
Report of Management
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on our estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.
We are also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.
Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Business Ethics Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets periodically with members of management, the internal auditors and the independent auditors to review and discuss internal control over financial reporting and accounting and financial reporting matters. The independent auditors and internal auditors report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, we have concluded with reasonable assurance that our internal control over financial reporting was effective as of November 30, 2010.
Our internal control over financial reporting as of November 30, 2010 has been audited by Ernst & Young LLP.
Report of Independent Registered Public Accounting Firm
Internal Control Over Financial Reporting
The Board of Directors and Shareholders of
McCormick & Company, Incorporated
We have audited McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2010, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). McCormick & Company, Incorporated’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Alan D. Wilson | Chairman, President & Chief Executive Officer |
Gordon M. Stetz | Executive Vice President & Chief Financial Officer |
Kenneth A. Kelly, Jr. | Senior Vice President & Controller, Chief Accounting Officer |
| page 34 McCormick & Company 2010 Annual Report |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, McCormick & Company, Incorporated maintained, in all material respects, effective internal control over financial reporting as of November 30, 2010 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McCormick & Company, Incorporated as of November 30, 2010 and 2009 and the related consolidated income statements, statements of shareholders’ equity and cash flow statements for each of the three years in the period ended November 30, 2010, and our report dated January 27, 2011 expressed an unqualified opinion thereon.
Baltimore, Maryland
January 27, 2011
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
The Board of Directors and Shareholders of
McCormick & Company, Incorporated
We have audited the accompanying consolidated balance sheets of McCormick & Company, Incorporated as of November 30, 2010 and 2009, and the related consolidated income statements, statements of shareholders’ equity, and cash flow statements for each of the three years in the period ended November 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McCormick & Company, Incorporated at November 30, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 of the notes to consolidated financial statements, effective December 1, 2009 the Company changed its method of accounting for non-controlling interests with the adoption of the amendments to FASB ASC 810,Consolidation. Also as discussed in note 1 of the notes to consolidated financial statements, effective December 1, 2008 the Company changed the measurement date for pension and postretirement plan assets and liabilities to coincide with its year-end.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2010, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 27, 2011 expressed an unqualified opinion thereon.
Baltimore, Maryland
January 27, 2011
| McCormick & Company 2010 Annual Report page 35 |
Consolidated Income Statement
for the year ended November 30 (millions except per share data) | 2010 | 2009 | 2008 | |||||||||
Net sales | $ | 3,336.8 | $ | 3,192.1 | $ | 3,176.6 | ||||||
Cost of goods sold | 1,919.1 | 1,864.9 | 1,888.4 | |||||||||
Gross profit | 1,417.7 | 1,327.2 | 1,288.2 | |||||||||
Selling, general and administrative expense | 907.9 | 846.6 | 870.6 | |||||||||
Impairment charge | — | — | 29.0 | |||||||||
Restructuring charges | — | 13.7 | 12.1 | |||||||||
Operating income | 509.8 | 466.9 | 376.5 | |||||||||
Interest expense | 49.3 | 52.8 | 56.7 | |||||||||
Other income, net | 2.2 | 2.4 | 18.0 | |||||||||
Income from consolidated operations before income taxes | 462.7 | 416.5 | 337.8 | |||||||||
Income taxes | 118.0 | 133.0 | 100.6 | |||||||||
Net income from consolidated operations | 344.7 | 283.5 | 237.2 | |||||||||
Income from unconsolidated operations | 25.5 | 16.3 | 18.6 | |||||||||
Net income | $ | 370.2 | $ | 299.8 | $ | 255.8 | ||||||
Earnings per share—basic | $ | 2.79 | $ | 2.29 | $ | 1.98 | ||||||
Earnings per share—diluted | $ | 2.75 | $ | 2.27 | $ | 1.94 | ||||||
See Notes to Consolidated Financial Statements, pages 40–57.
page 36 McCormick & Company 2010 Annual Report
Consolidated Balance Sheet
at November 30 (millions) | 2010 | 2009 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 50.8 | $ | 39.5 | ||||
Trade accounts receivable, less allowances of $2.9 for 2010 and $4.5 for 2009 | 386.7 | 365.3 | ||||||
Inventories | 477.6 | 457.6 | ||||||
Prepaid expenses and other current assets | 100.8 | 108.1 | ||||||
Total current assets | 1,015.9 | 970.5 | ||||||
Property, plant and equipment, net | 488.0 | 489.8 | ||||||
Goodwill | 1,417.4 | 1,479.7 | ||||||
Intangible assets, net | 232.5 | 237.3 | ||||||
Investments and other assets | 265.9 | 210.5 | ||||||
Total assets | $ | 3,419.7 | $ | 3,387.8 | ||||
Liabilities | ||||||||
Short-term borrowings | $ | 0.2 | $ | 101.2 | ||||
Current portion of long-term debt | 100.2 | 14.9 | ||||||
Trade accounts payable | 302.7 | 298.7 | ||||||
Other accrued liabilities | 431.7 | 403.4 | ||||||
Total current liabilities | 834.8 | 818.2 | ||||||
Long-term debt | 779.9 | 875.0 | ||||||
Other long-term liabilities | 342.3 | 351.1 | ||||||
Total liabilities | 1,957.0 | 2,044.3 | ||||||
Shareholders’ equity | ||||||||
Common stock, no par value; authorized 320.0 shares; issued and outstanding: 2010—12.5 shares, 2009—12.3 shares | 282.7 | 235.1 | ||||||
Common stock non-voting, no par value; authorized 320.0 shares; issued and outstanding: 2010—120.6 shares, 2009—119.5 shares | 473.8 | 398.9 | ||||||
Retained earnings | 700.9 | 591.5 | ||||||
Accumulated other comprehensive (loss) income | (3.7 | ) | 109.1 | |||||
Non-controlling interests | 9.0 | 8.9 | ||||||
Total shareholders’ equity | 1,462.7 | 1,343.5 | ||||||
Total liabilities and shareholders’ equity | $ | 3,419.7 | $ | 3,387.8 | ||||
See Notes to Consolidated Financial Statements, pages 40–57.
McCormick & Company 2010 Annual Report page 37
Consolidated Cash Flow Statement
for the year ended November 30 (millions) | 2010 | 2009 | 2008 | |||||||||
Operating activities | ||||||||||||
Net income | $ | 370.2 | $ | 299.8 | $ | 255.8 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 95.1 | 94.3 | 85.6 | |||||||||
Stock-based compensation | 11.9 | 12.7 | 18.2 | |||||||||
Loss (gain) on sale of assets | (0.1 | ) | 0.3 | (22.9 | ) | |||||||
Impairment charge | — | — | 29.0 | |||||||||
Deferred income taxes | 10.5 | 24.0 | (8.8 | ) | ||||||||
Income from unconsolidated operations | (25.5 | ) | (16.3 | ) | (18.6 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade accounts receivable | (38.2 | ) | 45.8 | (7.7 | ) | |||||||
Inventories | (26.8 | ) | 15.6 | (26.8 | ) | |||||||
Trade accounts payable | 10.5 | 3.4 | 40.8 | |||||||||
Other assets and liabilities | (38.1 | ) | (74.7 | ) | (43.4 | ) | ||||||
Dividends received from unconsolidated affiliates | 18.0 | 10.9 | 13.4 | |||||||||
Net cash provided by operating activities | 387.5 | 415.8 | 314.6 | |||||||||
Investing activities | ||||||||||||
Acquisitions of businesses and joint venture interests | (46.9 | ) | — | (693.3 | ) | |||||||
Capital expenditures | (89.0 | ) | (82.4 | ) | (85.8 | ) | ||||||
Proceeds from sale of business | — | — | 14.0 | |||||||||
Proceeds from sale of property, plant and equipment | 6.2 | 0.6 | 18.1 | |||||||||
Net cash used in investing activities | (129.7 | ) | (81.8 | ) | (747.0 | ) | ||||||
Financing activities | ||||||||||||
Short-term borrowings, net | (99.6 | ) | (201.8 | ) | 156.5 | |||||||
Long-term debt borrowings | — | — | 503.0 | |||||||||
Long-term debt repayments | (14.4 | ) | (50.4 | ) | (150.4 | ) | ||||||
Proceeds from exercised stock options | 73.6 | 35.8 | 48.8 | |||||||||
Common stock acquired by purchase | (82.5 | ) | — | (11.0 | ) | |||||||
Dividends paid | (138.2 | ) | (125.4 | ) | (113.5 | ) | ||||||
Net cash (used in) provided by financing activities | (261.1 | ) | (341.8 | ) | 433.4 | |||||||
Effect of exchange rate changes on cash and cash equivalents | 14.6 | 8.4 | (8.0 | ) | ||||||||
Increase (decrease) in cash and cash equivalents | 11.3 | 0.6 | (7.0 | ) | ||||||||
Cash and cash equivalents at beginning of year | �� | 39.5 | 38.9 | 45.9 | ||||||||
Cash and cash equivalents at end of year | $ | 50.8 | $ | 39.5 | $ | 38.9 | ||||||
See Notes to Consolidated Financial Statements, pages 40–57.
page 38 McCormick & Company 2010 Annual Report
Consolidated Statement of Shareholders’ Equity
(millions) | Common Stock Shares | Common Stock Non-Voting Shares | Common Stock Amount | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non-controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||||
Balance, November 30, 2007 | 12.8 | 115.0 | $ | 501.0 | $ | 323.8 | $ | 260.3 | $ | 9.9 | $ | 1,095.0 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 255.8 | 255.8 | ||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | (0.3 | ) | (0.3 | ) | ||||||||||||||||||||||||
Currency translation adjustments | (240.4 | ) | (2.1 | ) | (242.5 | ) | ||||||||||||||||||||||
Change in derivative financial instruments, net of tax of $4.9 | 10.0 | 10.0 | ||||||||||||||||||||||||||
Unrealized components of pension plans, net of tax of $7.4 | 18.2 | 18.2 | ||||||||||||||||||||||||||
Comprehensive income | 41.2 | |||||||||||||||||||||||||||
Dividends | (116.7 | ) | (116.7 | ) | ||||||||||||||||||||||||
Adjustment for new tax accounting | (12.8 | ) | (12.8 | ) | ||||||||||||||||||||||||
Stock-based compensation | 18.2 | 18.2 | ||||||||||||||||||||||||||
Shares purchased and retired | (0.7 | ) | (0.2 | ) | (10.9 | ) | (24.7 | ) | (35.6 | ) | ||||||||||||||||||
Shares issued, including tax benefit of $14.4 | 2.4 | 0.8 | 73.5 | 73.5 | ||||||||||||||||||||||||
Equal exchange | (2.2 | ) | 2.2 | — | ||||||||||||||||||||||||
Balance, November 30, 2008 | 12.3 | 117.8 | $ | 581.8 | $ | 425.4 | $ | 48.1 | $ | 7.5 | $ | 1,062.8 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 299.8 | 299.8 | ||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 0.6 | 0.6 | ||||||||||||||||||||||||||
Currency translation adjustments | 187.0 | 0.8 | 187.8 | |||||||||||||||||||||||||
Change in derivative financial instruments, net of tax of $1.8 | (4.6 | ) | (4.6 | ) | ||||||||||||||||||||||||
Unrealized components of pension plans, net of tax of $55.8 | (121.4 | ) | (121.4 | ) | ||||||||||||||||||||||||
Comprehensive income | 362.2 | |||||||||||||||||||||||||||
Dividends | (128.5 | ) | (128.5 | ) | ||||||||||||||||||||||||
Adjustment for new pension accounting | (1.5 | ) | (1.5 | ) | ||||||||||||||||||||||||
Stock-based compensation | 12.7 | 12.7 | ||||||||||||||||||||||||||
Shares retired | (0.1 | ) | — | (3.1 | ) | (3.7 | ) | (6.8 | ) | |||||||||||||||||||
Shares issued, including tax benefit of $7.2 | 1.3 | 0.5 | 42.6 | 42.6 | ||||||||||||||||||||||||
Equal exchange | (1.2 | ) | 1.2 | — | ||||||||||||||||||||||||
Balance, November 30, 2009 | 12.3 | 119.5 | $ | 634.0 | $ | 591.5 | $ | 109.1 | $ | 8.9 | $ | 1,343.5 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 370.2 | 370.2 | ||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 0.6 | 0.6 | ||||||||||||||||||||||||||
Currency translation adjustments | (108.5 | ) | 0.1 | (108.4 | ) | |||||||||||||||||||||||
Change in derivative financial instruments, net of tax of $1.2 | (0.1 | ) | (0.1 | ) | ||||||||||||||||||||||||
Unrealized components of pension plans, net of tax of $3.6 | (4.2 | ) | (4.2 | ) | ||||||||||||||||||||||||
Comprehensive income | 258.1 | |||||||||||||||||||||||||||
Dividends | (141.3 | ) | (141.3 | ) | ||||||||||||||||||||||||
Dividends attributable to non-controlling interest | (0.6 | ) | (0.6 | ) | ||||||||||||||||||||||||
Stock-based compensation | 11.9 | 11.9 | ||||||||||||||||||||||||||
Shares purchased and retired | (1.5 | ) | (2.3 | ) | (38.8 | ) | (119.5 | ) | (158.3 | ) | ||||||||||||||||||
Shares issued, including tax benefit of $17.5 | 3.8 | 1.3 | 149.4 | 149.4 | ||||||||||||||||||||||||
Equal exchange | (2.1 | ) | 2.1 | — | ||||||||||||||||||||||||
Balance, November 30, 2010 | 12.5 | 120.6 | $ | 756.5 | $ | 700.9 | $ | (3.7 | ) | $ | 9.0 | $ | 1,462.7 | |||||||||||||||
See Notes to Consolidated Financial Statements, pages 40–57.
McCormick & Company 2010 Annual Report page 39
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The financial statements include the accounts of our majority-owned or controlled subsidiaries and affiliates. Intercompany transactions have been eliminated. Investments in unconsolidated affiliates, over which we exercise significant influence, but not control, are accounted for by the equity method. Accordingly, our share of net income or loss of unconsolidated affiliates is included in net income.
Use of Estimates
Preparation of financial statements that follow accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual amounts could differ from these estimates.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using standard or average costs which approximate the first-in, first-out costing method.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost and depreciated over its estimated useful life using the straight-line method for financial reporting and both accelerated and straight-line methods for tax reporting. The estimated useful lives range from 20 to 40 years for buildings and 3 to 12 years for machinery, equipment and computer software. Repairs and maintenance costs are expensed as incurred.
We capitalize costs of software developed or obtained for internal use. Capitalized software development costs include only (1) direct costs paid to others for materials and services to develop or buy the software, (2) payroll and payroll-related costs for employees who work directly on the software development project and (3) interest costs while developing the software. Capitalization of these costs stops when the project is substantially complete and ready for use. Software is amortized using the straight-line method over a range of 3 to 8 years, but not exceeding the expected life of the product. We capitalized $13.3 million of software during the year ended November 30, 2010, $20.1 million during the year ended November 30, 2009 and $12.1 million during the year ended November 30, 2008.
Goodwill and Other Intangible Assets
We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test goodwill for impairment if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount and test non-amortizing intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired. Separable intangible assets that have finite useful lives are amortized over those lives.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from these estimates.
Goodwill Impairment
Our reporting units used to assess potential goodwill impairment are the same as our business segments. We calculate fair value of a reporting unit by using a discounted cash flow model and then compare that to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the calculated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value.
Non-Amortizable Intangible Asset Impairment
Our non-amortizable intangible assets consist of brand names and trademarks. We calculate fair value by using a discounted cash flow model or relief-from-royalty method and then compare that to the carrying amount of the non-amortizable intangible asset. If the carrying amount of the non-amortizable intangible asset exceeds its fair value, an impairment charge would be recorded to the extent the recorded non-amortizable intangible asset exceeds the fair value.
See note 4 for a discussion of the Silvo brand name impairment charge recorded in 2008.
Prepaid Allowances
Prepaid allowances arise when we prepay sales discounts and marketing allowances to certain customers on multi-year sales contracts. These costs are capitalized and amortized against net sales. The majority of our contracts are for a specific committed customer sales volume while others are for a specific time duration.
page 40 McCormick & Company 2010 Annual Report
Prepaid allowances on volume-based contracts are amortized based on the actual volume of customer purchases, while prepaid allowances on time-based contracts are amortized on a straight-line basis over the life of the contract. The amounts on the balance sheet are stated at the lower of unamortized cost or our estimate of the net realizable value of these allowances and are included in the line item “Investments and other assets.”
Revenue Recognition
We recognize revenue when we have an agreement with the customer, the product has been delivered to the customer, the sales price is fixed and collectibility is reasonably assured. We reduce revenue for estimated product returns, allowances and price discounts based on historical experience and contractual terms.
Trade allowances, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Revenue is recorded net of trade allowances.
Trade accounts receivable are amounts billed and currently due from customers. We have an allowance for doubtful accounts to reduce our receivables to their net realizable value. We estimate the allowance for doubtful accounts based on our history of collections and the aging of our receivables.
Shipping and Handling
Shipping and handling costs on our products sold to customers are included in selling, general and administrative expense in the income statement. Shipping and handling expense was $77.7 million, $73.5 million and $84.0 million for 2010, 2009 and 2008, respectively.
Research and Development
Research and development costs are expensed as incurred and are included in selling, general and administrative expense in the income statement. Research and development expense was $52.7 million, $48.9 million and $51.0 million for 2010, 2009 and 2008, respectively.
Brand Marketing Support
Total brand marketing support costs, which are included in selling, general and administrative expense in the income statement, were $167.2 million, $146.5 million and $127.0 million for 2010, 2009 and 2008, respectively. Brand marketing support costs include advertising, promotions and customer trade funds used for cooperative advertising. Promotion costs include consumer promotions, point of sale materials and sampling programs. Advertising costs include the development, production and communication of advertisements through print, television, radio, the internet and in-store displays. These advertisements are expensed in the period in which they first run. Advertising expense was $71.7 million, $63.8 million and $57.4 million for 2010, 2009 and 2008, respectively.
Recently Issued Accounting Pronouncements
In December 2008, the Financial Accounting Standards Board (FASB) issued guidance on providing disclosures about plan assets of an employer’s defined benefit pension plan. We have adopted this pronouncement effective for our year ending November 30, 2010 and have included the additional disclosures in note 9.
In December 2007, the FASB issued a standard that outlines the accounting and reporting for ownership interest in a subsidiary held by parties other than the parent company (formerly referred to as minority interests). Non-controlling interests of $8.9 million at November 30, 2009 were reclassified from other long-term liabilities to shareholders equity in our balance sheet. Elimination of the income attributable to non-controlling interests was not material and is recorded in income from unconsolidated operations.
In December 2007, the FASB issued a standard on business combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. It is effective for our acquisitions made after November 30, 2009. There were no material impacts from this standard for our acquisitions made in fiscal year 2010, although its implementation may have a material impact on our financial statements for businesses we acquire in future years.
In September 2006, the FASB issued a standard that requires us to (a) record an asset or a liability on our balance sheet for our pension plans’ overfunded or underfunded status (b) record any changes in the funded status of our pension and postretirement plans in the year in which the changes occur (reported in comprehensive income) and (c) measure our pension and postretirement assets and liabilities at November 30 versus our previous measurement date of September 30. We complied with the requirement to record the funded status and provided additional disclosures with our financial statements for our year ended November 30, 2007. Effective with our first quarter of 2009 financial statements, we adopted the portion of the standard to eliminate the difference between our plans’ measurement date and our November 30 fiscal year-end. The standard provides two approaches to transition to a fiscal year-end measurement date, both of which are to be applied prospectively. We elected to apply the transition option under which a 14-month measurement period (from September 30, 2008 through November 30, 2009) was used to determine our 2009 fiscal year pension expense. Because of the 14-month measurement period, we recorded a $2.3 million ($1.5 million, net of tax) decrease to retained earnings with a corresponding increase to other long-term liabilities effective December 1, 2008.
McCormick & Company 2010 Annual Report page 41
Notes to Consolidated Financial Statements
2. ACQUISITIONS
Acquisitions are part of our strategy to improve margins and increase sales and profits.
In November 2010, we completed our purchase of a 26% non-controlling interest in Eastern Condiments Private Limited (Eastern) in cash for a total cost of $37.7 million. Eastern, based in India, is a leading brand of spices, seasonings and other related food products sold in India and the Middle East.
In September 2010, we purchased the assets of Caamacosta, Inc. (“Caamacosta”) for $11.5 million in cash. This business operates in North America and is included in our consumer segment from the date of acquisition. Caamacosta packages, distributes and sells spices, herbs, chilies, corn husks and other Mexican specialty food items under the El Bravo brand. Prior to year-end, we completed the valuation of assets for Caamacosta which resulted in $0.5 million being allocated to tangible net assets, $1.9 million allocated to other amortizable intangible assets and $9.1 million allocated to goodwill.
In July 2008, we completed the purchase of the assets of the Lawry’s business. Lawry’s manufactures and sells a variety of marinades and seasoning blends under the well-known Lawry’s brand in North America. The acquisition included the rights to the brands as well as related inventory and a small number of dedicated production lines. It did not include any manufacturing facilities or employees. The distribution of Lawry’s sales was approximately 90% to our consumer segment and 10% to our industrial segment.
The purchase price was $603.5 million in cash, the assumption of certain liabilities relating to the purchased assets and transaction costs of $11.5 million. We used cash on hand and borrowings under our commercial paper program to initially fund the purchase price. In September 2008 we issued $250 million in medium-term debt ($248 million in net proceeds) to repay a portion of our outstanding commercial paper issued to fund the Lawry’s acquisition (see note 6). The transaction underwent a regulatory review and the Federal Trade Commission issued its final order. In compliance with that order, we sold our Season-All business to Morton International, Inc. in July 2008. With annual sales of approximately $18 million, the Season-All business was sold for $15 million in cash (with net cash proceeds of $14 million). This resulted in a pre-tax gain of $12.9 million which was recorded as part of Other income in our income statement for 2008.
During 2009, we completed the final valuation of assets for Lawry’s which resulted in $9.4 million being allocated to tangible net assets, $62.4 million allocated to other intangibles assets and $543.2 million allocated to goodwill. The final valuation was determined utilizing predominately discounted cash flow models and reflects a $135.5 million reclassification from brands and other intangible assets to goodwill from the preliminary allocation recorded in July 2008. The resulting change to amortization expense was not material. The value for brands and other intangible assets consists of $14.4 million which is amortizable and $48.0 million which is non-amortizable. The weighted average amortization period for the amortizable intangible assets is 23.8 years. For tax purposes, goodwill resulting from the acquisition is deductible.
In these financial statements we have not included pro-forma historical information, as if the results of Lawry’s had been included from the beginning of the periods presented, since the use of forward-looking information would be necessary in order to meaningfully present the effects of the acquisition. Forward-looking information, rather than historical information, would be required as Lawry’s was operated as a part of a larger business within Unilever N.V., and the expense structure and level of brand support would have been different under our ownership. Net incremental sales from this acquisition are approximately $150 million.
In February 2008, we purchased Billy Bee Honey Products Ltd. (Billy Bee) for $76.4 million in cash, a business which operates in North America and is primarily included in our consumer segment from the date of acquisition. Billy Bee markets and sells under the Billy Bee brand. The annual sales of this business were approximately $35.0 million at the time of acquisition and include branded, private label and industrial products.
During 2009, we completed the final valuation of assets for Billy Bee which resulted in $5.7 million being allocated to tangible net assets, $12.0 million allocated to other intangibles assets and $58.7 million allocated to goodwill. This valuation was not significantly different than the preliminary valuation recorded in February 2008. The value for brands and other intangible assets consists of $4.1 million which is amortizable and $7.9 million which is non-amortizable.
page 42 McCormick & Company 2010 Annual Report
3. GOODWILL AND INTANGIBLE ASSETS
The following table displays intangible assets as of November 30, 2010 and 2009:
| 2010 | 2009 | |||||||||||||||
(millions) | Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | ||||||||||||
Amortizable intangible assets | $ | 50.8 | $ | 17.7 | $ | 49.3 | $ | 14.4 | ||||||||
Non-amortizable intangible assets: | ||||||||||||||||
Goodwill | 1,417.4 | 1,479.7 | ||||||||||||||
Brand names | 188.8 | 192.4 | ||||||||||||||
Trademarks | 10.6 | 10.0 | ||||||||||||||
| 1,616.8 | 1,682.1 | |||||||||||||||
Total goodwill and intangible assets | $ | 1,667.6 | $ | 17.7 | $ | 1,731.4 | $ | 14.4 | ||||||||
Intangible asset amortization expense was $3.5 million, $1.3 million and $5.9 million for 2010, 2009 and 2008, respectively. At November 30, 2010, amortizable intangible assets had an average remaining life of approximately 16 years.
The changes in the carrying amount of goodwill by segment for the years ended November 30, 2010 and 2009 are as follows:
| 2010 | 2009 | |||||||||||||||
(millions) | Consumer | Industrial | Consumer | Industrial | ||||||||||||
Beginning of year | $ | 1,334.5 | $ | 145.2 | $ | 1,110.0 | $ | 120.2 | ||||||||
Purchase price allocation | — | — | 122.5 | 19.9 | ||||||||||||
Goodwill acquired | 9.1 | — | — | — | ||||||||||||
Foreign currency fluctuations | (70.3 | ) | (1.1 | ) | 102.0 | 5.1 | ||||||||||
End of year | $ | 1,273.3 | $ | 144.1 | $ | 1,334.5 | $ | 145.2 | ||||||||
4. IMPAIRMENT CHARGE
During our annual impairment testing in the fourth quarter of 2008, we calculated the fair value of the Silvo brand in The Netherlands using the relief-from-royalty method and determined that it was lower than its carrying value. Consequently, we recorded a non-cash impairment charge of $29.0 million in our consumer business segment.
5. INVESTMENTS IN AFFILIATES
Summarized annual and year-end information from the financial statements of unconsolidated affiliates representing 100% of the businesses follows:
(millions) | 2010 | 2009 | 2008 | |||||||||
Net sales | $ | 538.3 | $ | 480.6 | $ | 483.8 | ||||||
Gross profit | 205.2 | 163.8 | 167.0 | |||||||||
Net income | 51.6 | 34.6 | 36.7 | |||||||||
Current assets | $ | 245.2 | $ | 190.7 | $ | 178.7 | ||||||
Noncurrent assets | 81.5 | 54.1 | 54.1 | |||||||||
Current liabilities | 105.9 | 96.3 | 105.3 | |||||||||
Noncurrent liabilities | 26.5 | 9.6 | 9.3 | |||||||||
Our share of undistributed earnings of unconsolidated affiliates was $66.9 million at November 30, 2010. Royalty income from unconsolidated affiliates was $14.5 million, $12.8 million and $13.3 million for 2010, 2009 and 2008, respectively.
Our principal investment in unconsolidated affiliates is a 50% interest in McCormick de Mexico, S.A. de C.V.
6. FINANCING ARRANGEMENTS
Our outstanding debt is as follows:
(millions) | 2010 | 2009 | ||||||
Short-term borrowings | ||||||||
Commercial paper | — | $ | 100.0 | |||||
Other | $ | 0.2 | 1.2 | |||||
| $ | 0.2 | $ | 101.2 | |||||
Weighted-average interest rate of short-term borrowings at year-end | 8.8 | % | 0.4 | % | ||||
Long-term debt | ||||||||
5.80% medium-term notes due 2011 | $ | 100.0 | $ | 100.0 | ||||
5.25% medium-term notes due 2013(1) | 250.0 | 250.0 | ||||||
5.20% medium-term notes due 2015(2) | 200.0 | 200.0 | ||||||
5.75% medium-term notes due 2017(3) | 250.0 | 250.0 | ||||||
7.63%–8.12% medium-term notes due 2024 | 55.0 | 55.0 | ||||||
Other | 8.9 | 21.6 | ||||||
Unamortized discounts and fair value adjustments | 16.2 | 13.3 | ||||||
| 880.1 | 889.9 | |||||||
Less current portion | 100.2 | 14.9 | ||||||
| $ | 779.9 | $ | 875.0 | |||||
| (1) | Interest rate swaps, settled upon the issuance of these medium-term notes in 2008, effectively fixed the interest rate on the $250 million notes at a weighted average fixed rate of 5.54%. |
| (2) | The fixed interest rate on $100 million of the 5.20% medium-term notes due in 2015 is effectively converted to a variable rate by interest rate swaps through 2015. Net interest payments are based on 3 month LIBOR minus 0.05% during this period (our effective rate as of November 30, 2010 was 0.25%). |
| (3) | Interest rate swaps, settled upon the issuance of these medium-term notes in 2007, effectively fixed the interest rate on the $250 million notes at a weighted average fixed rate of 6.25%. |
| McCormick & Company ��2010 Annual Report page 43 |
Notes to Consolidated Financial Statements
Maturities of long-term debt during the years subsequent to November 30, 2011 are as follows (in millions):
2012 | $ | 0.3 | ||
2013 | 250.3 | |||
2014 | 0.4 | |||
2015 | 200.6 | |||
Thereafter | 312.1 |
In September 2008, we issued $250 million of 5.25% notes due 2013, with net cash proceeds received of $248.0 million. Interest is payable semiannually in arrears in March and September of each year. Of these notes, $100 million were subject to an interest rate hedge as further discussed in note 7. The net proceeds from this offering were used to pay down commercial paper which was issued for the purchase of the Lawry’s business (see note 2).
In December 2007, we issued $250 million of 5.75% medium-term notes which are due in 2017, with net cash proceeds received of $248.3 million. These notes were also subject to an interest rate hedge as further discussed in note 7. The net proceeds were used to repay $150 million of debt which matured in 2008 with the remainder used to repay short-term debt.
We have available credit facilities with domestic and foreign banks for various purposes. Some of these lines are committed lines and others are uncommitted lines and could be withdrawn at various times. In July 2007, we entered into a $500 million, five-year committed revolving credit agreement with various banks for general business purposes. Our current pricing under this credit agreement, on a fully drawn basis, is LIBOR plus 0.25%. This facility supports our commercial paper program and we have $500 million of capacity at November 30, 2010, of which none was used to support issued commercial paper. In addition, we have several uncommitted lines which have a total unused capacity at November 30, 2010 of $91.4 million. These lines by their nature can be withdrawn based on the lenders’ discretion. Committed credit facilities require a fee and annual commitment fees at November 30, 2010 and 2009 were $0.4 million.
Rental expense under operating leases was $27.3 million in 2010, $26.8 million in 2009 and $27.5 million in 2008. Future annual fixed rental payments for the years ending November 30 are as follows (in millions):
2011 | $ | 20.4 | ||
2012 | 15.5 | |||
2013 | 11.7 | |||
2014 | 9.5 | |||
2015 | 8.0 | |||
Thereafter | 16.3 |
At November 30, 2010, we had guarantees outstanding of $0.6 million with terms of one year or less. At November 30, 2010 and 2009, we had outstanding letters of credit of $28.7
million and $30.0 million, respectively. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The unused portion of our letter of credit facility was $44.8 million at November 30, 2010.
7. FINANCIAL INSTRUMENTS
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency and interest rate exposures, which exists as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument and all derivatives are designated as hedges. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
Foreign Currency
We are potentially exposed to foreign currency fluctuations affecting net investments, transactions and earnings denominated in foreign currencies. We selectively hedge the potential effect of these foreign currency fluctuations by entering into foreign currency exchange contracts with highly-rated financial institutions.
Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in other comprehensive income is also recognized in cost of goods sold. Gains and losses from hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.
At November 30, 2010, we had foreign currency exchange contracts to purchase or sell $208.2 million of foreign currencies versus $307.8 million at November 30, 2009. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material. At November 30, 2010, we had $133.0 million of notional contracts that have durations of less than 15 days that are used to hedge short-term cash flow funding. The remaining contracts have durations of one to thirteen months.
Interest Rates
We finance a portion of our operations with both fixed and variable rate debt instruments, primarily commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.
page 44 McCormick & Company 2010 Annual Report
We entered into three separate forward treasury lock agreements totaling $100 million in July and August of 2008. These forward treasury lock agreements were executed to manage the interest rate risk associated with the forecasted issuance of $250 million of fixed rate medium-term notes issued in September 2008. We cash settled these treasury lock agreements, which were designated as cash flow hedges, for a loss of $1.5 million simultaneous with the issuance of the notes and effectively fixed the interest rate on the $250 million notes at a weighted average fixed rate of 5.54%. The loss on these agreements was deferred in other comprehensive income and is being amortized over the five-year life of the medium-term notes as a component of interest expense. Hedge ineffectiveness of these agreements was not material.
In August 2007, we entered into $150 million of forward treasury lock agreements to manage the interest rate risk associated with the forecasted issuance of $250 million of fixed rate medium-term notes issued in December 2007. We cash settled these treasury lock agreements for a loss of $10.5 million simultaneous with the
issuance of the medium-term notes and effectively fixed the interest rate on the $250 million notes at a weighted-average fixed rate of 6.25%. We had designated these forward treasury lock agreements as cash flow hedges. The loss on these agreements was deferred in other comprehensive income and is being amortized over the 10-year life of the medium-term notes as a component of interest expense. Hedge ineffectiveness of these agreements was not material.
In March 2006, we entered into interest rate swap contracts for a total notional amount of $100 million to receive interest at 5.20% and pay a variable rate of interest based on three-month LIBOR minus .05%. We designated these swaps, which expire in December 2015, as fair value hedges of the changes in fair value of $100 million of the $200 million 5.20% medium-term notes due 2015 that we issued in December 2005. Any unrealized gain or loss on these swaps will be offset by a corresponding increase or decrease in value of the hedged debt. No hedge ineffectiveness is recognized as the interest rate swaps qualify for the “shortcut” treatment as defined under U.S. Generally Accepted Accounting Principles.
The following tables disclose the derivative instruments on our balance sheet as of November 30, 2010 and 2009, which are all recorded at fair value:
As of November 30, 2010:
(millions) | Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Derivatives | Balance sheet location | Notional amount | Fair value | Balance sheet location | Notional amount | Fair value | ||||||||||||||
Interest rate contracts | Other current assets | $ | 100.0 | $ | 19.2 | — | — | — | ||||||||||||
Foreign exchange contracts | Other current assets | 4.5 | 0.2 | Other accrued liabilities | $ | 203.7 | $ | 2.8 | ||||||||||||
Total | $ | 104.5 | $ | 19.4 | $ | 203.7 | $ | 2.8 | ||||||||||||
As of November 30, 2009:
|
| |||||||||||||||||||
(millions) | Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Derivatives | Balance sheet location | Notional amount | Fair value | Balance sheet location | Notional amount | Fair value | ||||||||||||||
Interest rate contracts | Other current assets | $ | 100.0 | $ | 17.0 | — | — | — | ||||||||||||
Foreign exchange contracts | Other current assets | 36.3 | 1.4 | Other accrued liabilities | $ | 271.5 | $ | 3.5 | ||||||||||||
Total | $ | 136.3 | $ | 18.4 | $ | 271.5 | $ | 3.5 | ||||||||||||
McCormick & Company 2010 Annual Report page 45
Notes to Consolidated Financial Statements
The following tables disclose the impact of derivative instruments on other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the years ended November 30, 2010 and 2009:
Fair value hedges(millions) | ||||||||||||||||||
| Income | ||||||||||||||||||
| Income statement | (expense) | |||||||||||||||||
Derivative | location | 2010 | 2009 | |||||||||||||||
Interest rate contracts | Interest expense | $ | 4.9 | $ | 4.1 | |||||||||||||
Cash flow hedges(millions) | ||||||||||||||||||
| Gain (loss) recognized | Income | Gain (loss) reclassified | ||||||||||||||||
| in OCI | statement | from AOCI | ||||||||||||||||
Derivative | 2010 | 2009 | location | 2010 | 2009 | |||||||||||||
Terminated interest rate contracts | — | — | Interest expense | $ | (1.4 | ) | $ | (1.4 | ) | |||||||||
Foreign exchange contracts | $ | (0.9 | ) | $ | (3.0 | ) | Cost of goods sold | (0.1 | ) | 5.3 | ||||||||
Total | $ | (0.9 | ) | $ | (3.0 | ) | $ | (1.5 | ) | $ | 3.9 | |||||||
The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The net amount of other comprehensive income expected to be reclassified into income in the next 12 months is a $2.4 million decrease to earnings.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments at November 30, 2010 and 2009 were as follows:
| 2010 | 2009 | |||||||||||||||
(millions) | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||
Long-term investments | $ | 65.8 | $ | 65.8 | $ | 54.5 | $ | 54.5 | ||||||||
Long-term debt | 880.1 | 959.4 | 889.9 | 954.1 | ||||||||||||
Derivatives related to: | ||||||||||||||||
Interest rates | 19.2 | 19.2 | 17.0 | 17.0 | ||||||||||||
Foreign currency assets | 0.2 | 0.2 | 1.4 | 1.4 | ||||||||||||
Foreign currency liabilities | 2.8 | 2.8 | 3.5 | 3.5 | ||||||||||||
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value.
Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value. Long-term investments are comprised of fixed income and equity securities held on behalf of employees in certain employee benefit plans and are stated at fair value on the balance sheet. The cost of these investments was $54.6 million and $55.6 million at November 30, 2010 and 2009, respectively.
Concentrations of Credit Risk
The customers of our consumer business are predominantly food retailers and food wholesalers. Consolidations in these industries have created larger customers. In addition, competition has increased with the growth in alternative channels including mass merchandisers, dollar stores, warehouse clubs and discount chains. This has caused some customers to be less profitable and increased our exposure to credit risk. We are potentially exposed to concentrations of credit risk with trade accounts receivable, prepaid allowances and financial instruments. Because we have a large and diverse customer base with no single customer accounting for a significant percentage of trade accounts receivable and prepaid allowances, there was no material concentration of credit risk in these accounts at November 30, 2010. Current credit markets are highly volatile and some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties. We feel that the allowance for doubtful accounts properly recognized trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.
8. FAIR VALUE MEASUREMENTS
Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| • | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| • | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| • | Level 3: Unobservable inputs that reflect management’s own assumptions. |
page 46 McCormick & Company 2010 Annual Report
Our population of assets and liabilities subject to fair value measurements on a recurring basis at November 30, 2010 are as follows:
| Fair value measurements | ||||||||||||||||
| using fair value hierarchy | ||||||||||||||||
(millions) | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 50.8 | $ | 50.8 | — | — | ||||||||||
Long-term investments | 65.8 | 13.0 | $ | 52.8 | — | |||||||||||
Interest rate derivatives | 19.2 | — | 19.2 | — | ||||||||||||
Foreign currency derivatives | 0.2 | — | 0.2 | — | ||||||||||||
Total | $ | 136.0 | $ | 63.8 | $ | 72.2 | — | |||||||||
Liabilities | ||||||||||||||||
Foreign currency derivatives | $ | 2.8 | — | $ | 2.8 | — | ||||||||||
Total | $ | 2.8 | — | $ | 2.8 | — | ||||||||||
The fair values of long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on quotations from various banks for similar instruments using models with market-based inputs.
9. EMPLOYEE BENEFIT AND RETIREMENT PLANS
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor 401(k) retirement plans in the U.S. and contribute to government-sponsored retirement plans in locations outside the U.S. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees.
We adopted new accounting and disclosures for pension plans in 2008, 2009 and 2010 (see note 1 for further details).
Included in accumulated other comprehensive income at November 30, 2010 was $272.4 million ($181.8 million net of tax) related to net unrecognized actuarial losses and unrecognized prior service credit that have not yet been recognized in net periodic pension or postretirement benefit cost. We expect to recognize $11.1 million ($7.6 million net of tax) of actuarial losses, net of prior service credit in net periodic pension and postretirement benefit expense during 2011.
Defined Benefit Pension Plans
The significant assumptions used to determine benefit obligations are as follows:
| United States | International | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Discount rate—funded plan | 6.0 | % | 6.3 | % | 5.6 | % | 5.9 | % | ||||||||
Discount rate—unfunded plan | 5.8 | % | 6.0 | % | — | — | ||||||||||
Salary scale | 3.8 | % | 3.8 | % | 3.0–3.8 | % | 3.0–3.8 | % | ||||||||
Expected return on plan assets | 8.3 | % | 8.3 | % | 7.2 | % | 7.2 | % | ||||||||
Annually, we undertake a process, with the assistance of our external investment consultants, to evaluate the appropriate projected rates of return to use for our pension plans’ assumptions. We engage our investment consultant’s research team to develop capital market assumptions for each asset category in our plans to project investment returns into the future. The specific methods used to develop expected return assumptions vary by asset category. We adjust the outcomes for the fact that plan assets are invested with actively managed funds and subject to tactical asset reallocation. This process and the outcomes are reviewed with our internal investment committee for approval as the final plan asset returns used in our valuations of the pension obligations.
Our pension expense was as follows:
| United States | International | |||||||||||||||||||||||
(millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Service cost | $ | 12.8 | $ | 8.4 | $ | 10.6 | $ | 5.6 | $ | 4.7 | $ | 5.0 | ||||||||||||
Interest costs | 29.2 | 27.9 | 26.1 | 11.5 | 10.3 | 9.9 | ||||||||||||||||||
Expected return on plan assets | (32.0 | ) | (28.0 | ) | (26.4 | ) | (13.7 | ) | (11.7 | ) | (10.5 | ) | ||||||||||||
Amortization of prior service costs | 0.1 | — | — | 0.3 | 0.3 | 0.3 | ||||||||||||||||||
Recognized net actuarial loss | 11.8 | 1.0 | 4.8 | 1.5 | — | 1.5 | ||||||||||||||||||
Other | — | — | — | 0.1 | — | 0.1 | ||||||||||||||||||
| $ | 21.9 | $ | 9.3 | $ | 15.1 | $ | 5.3 | $ | 3.6 | $6.3 | ||||||||||||||
McCormick & Company 2010 Annual Report page 47
Notes to Consolidated Financial Statements
The benefit obligation, fair value of plan assets and a reconciliation of the pension plans’ funded status as of November 30 follows:
| United States | International | |||||||||||||||
(millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 478.5 | $ | 342.6 | $ | 203.3 | $ | 146.4 | ||||||||
Adjustments due to new measurement date: | ||||||||||||||||
Service and interest cost | — | 6.1 | — | 2.3 | ||||||||||||
Benefit payments, employee contributions and expenses | — | (3.4 | ) | — | — | |||||||||||
Service cost | 12.8 | 8.4 | 5.6 | 4.7 | ||||||||||||
Interest costs | 29.2 | 27.9 | 11.5 | 10.3 | ||||||||||||
Employee contributions | — | — | 1.6 | 1.8 | ||||||||||||
Plan changes and other | — | — | (0.2 | ) | 0.3 | |||||||||||
Actuarial loss | 14.3 | 116.8 | 12.2 | 27.1 | ||||||||||||
Benefits paid | (19.2 | ) | (19.9 | ) | (7.8 | ) | (7.1 | ) | ||||||||
Expenses paid | — | — | (0.6 | ) | (1.8 | ) | ||||||||||
Net transfers in | — | — | 4.6 | — | ||||||||||||
Foreign currency impact | — | — | (6.5 | ) | 19.3 | |||||||||||
Benefit obligation at end of year | $ | 515.6 | $ | 478.5 | $ | 223.7 | $ | 203.3 | ||||||||
Change in fair value of plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 335.5 | $ | 281.3 | $ | 178.1 | $ | 138.6 | ||||||||
Adjustments due to new measurement date: | ||||||||||||||||
Service and interest cost | — | 4.3 | — | 1.8 | ||||||||||||
Benefit payments, employee contribu-tions and expenses | — | (3.3 | ) | — | (1.4 | ) | ||||||||||
Actual return on plan assets | 36.8 | 16.1 | 13.1 | 12.4 | ||||||||||||
Employer contributions | 30.2 | 57.0 | 19.3 | 15.3 | ||||||||||||
Employee contributions | — | — | 1.6 | 1.6 | ||||||||||||
Benefits paid | (19.2 | ) | (19.9 | ) | (7.8 | ) | (6.4 | ) | ||||||||
Expenses paid | — | — | (0.6 | ) | (0.9 | ) | ||||||||||
Net transfers in | — | — | 1.2 | — | ||||||||||||
Foreign currency impact | — | — | (5.7 | ) | 17.1 | |||||||||||
Fair value of plan assets at end of year | $ | 383.3 | $ | 335.5 | $ | 199.2 | $ | 178.1 | ||||||||
Funded status | $ | (132.3 | ) | $ | (143.0 | ) | $ | (24.5 | ) | $ | (25.2 | ) | ||||
Pension plans in which accumulated benefit obligation exceeded plan assets | ||||||||||||||||
Accumulated benefit obligation | $ | 455.8 | $ | 425.4 | $ | 126.0 | $ | 140.3 | ||||||||
Fair value of plan assets | 383.3 | 335.5 | 109.7 | 119.3 | ||||||||||||
Included in the U.S. in the preceding table is a benefit obligation of $63.0 million and $57.9 million for 2010 and 2009, respectively, related to a nonqualified defined benefit plan pursuant to which we will pay supplemental pension benefits to certain key employees upon retirement based upon employees’ years of service and compensation. The accrued liability related to this plan was $57.9 million and $54.6 million as of November 30, 2010 and 2009, respectively. The assets related to this plan are held in a rabbi trust and accordingly have not been included in the preceding table. These assets were $49.2 million and $40.9 million as of November 30, 2010 and 2009, respectively.
Amounts recorded in the balance sheet for all defined benefit pension plans consist of the following:
| United States | International | |||||||||||||||
(millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Prepaid pension cost | — | — | $ | 1.3 | $ | 3.4 | ||||||||||
Accrued pension liability | $ | (132.3 | ) | $ | (143.0 | ) | (25.8 | ) | (28.6 | ) | ||||||
Deferred income taxes | 74.3 | 75.2 | 14.4 | 10.6 | ||||||||||||
Accumulated other comprehensive income | 124.3 | 125.8 | 54.1 | 47.2 | ||||||||||||
The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligation for the U.S. pension plans was $455.8 million and $425.4 million as of November 30, 2010 and 2009, respectively. The accumulated benefit obligation for the international pension plans was $203.6 million and $190.8 million as of November 30, 2010 and 2009, respectively.
The investment objectives of the defined benefit pension plans are to provide assets to meet the current and future obligations of the plans at a reasonable cost to us. The goal is to optimize the long-term return across the portfolio of investments at a moderate level of risk. Higher-returning assets include mutual, co-mingled and other funds comprised of equity securities, utilizing both active and passive investment styles. These more volatile assets are balanced with less volatile assets, primarily mutual, co-mingled and other funds comprised of fixed income securities. Professional investment firms are engaged to provide advice on the selection and monitoring of investment funds, and to provide advice on the allocation of plan assets across the various fund managers. This advice is based in part on the duration of each plan’s liability as some of our plans are active while others are frozen. The investment return performances are evaluated quarterly against specific benchmark indices and against a peer group of funds of the same asset classification.
page 48 McCormick & Company 2010 Annual Report
Our allocations of U.S. pension plan assets as of November 30, 2010 and 2009, by asset category, were as follows:
| Actual | 2010 | |||||||||||
Asset Category | 2010 | 2009 | Target | |||||||||
Equity securities | 67.3 | % | 64.9 | % | 70 | % | ||||||
Fixed income securities | 26.5 | % | 24.3 | % | 25 | % | ||||||
Other | 6.2 | % | 10.8 | % | 5 | % | ||||||
Total | 100.0 | % | 100.0 | % | 100 | % | ||||||
The allocations of the international pension plans’ assets as of November 30, 2010 and 2009, by asset category, were as follows:
| Actual | 2010 | |||||||||||
Asset Category | 2010 | 2009 | Target | |||||||||
Equity securities | 67.0 | % | 55.4 | % | 57 | % | ||||||
Fixed income securities | 32.4 | % | 41.5 | % | 35 | % | ||||||
Other | 0.6 | % | 3.1 | % | 8 | % | ||||||
Total | 100.0 | % | 100.0 | % | 100 | % | ||||||
The following tables set forth by level, within the fair value hierarchy as described in note 8, pension plan assets at their fair value as of November 30, 2010 for the United States and International plans:
| United States | ||||||||||||||||
(millions) | Total fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents | $ | 1.5 | $ | 1.5 | — | — | ||||||||||
Equity securities: | ||||||||||||||||
U.S. equity securities(a) | 190.9 | 79.2 | $ | 111.7 | — | |||||||||||
International equity securities(b) | 67.1 | 67.1 | — | — | ||||||||||||
Fixed income securities: | ||||||||||||||||
U.S./government/corporate bonds(c) | 63.4 | 63.4 | — | — | ||||||||||||
High yield bonds(d) | 21.1 | — | 21.1 | — | ||||||||||||
International/government/corporate bonds(e) | 16.2 | 16.2 | — | — | ||||||||||||
Insurance contracts(f) | 1.0 | — | 1.0 | — | ||||||||||||
Other types of investments: | ||||||||||||||||
Hedge fund of funds(g) | 18.9 | — | — | $ | 18.9 | |||||||||||
Private equity funds(h) | 3.2 | — | — | 3.2 | ||||||||||||
Total investments | $ | 383.3 | $ | 227.4 | $ | 133.8 | $ | 22.1 | ||||||||
| International | ||||||||||||||||
(millions) | Total fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and cash equivalents | $1.4 | $1.4 | — | — | ||||||||||||
International equity securities(b) | 133.3 | — | $133.3 | — | ||||||||||||
Fixed income securities: | ||||||||||||||||
International/government/corporate bonds(e) | 47.1 | — | 47.1 | — | ||||||||||||
Insurance contracts(f) | 17.4 | — | 17.4 | — | ||||||||||||
Total investments | $ | 199.2 | $ | 1.4 | $ | 197.8 | — | |||||||||
| (a) | This category comprises equity funds and collective equity trust funds that most closely track the S&P index and other equity indices. |
| (b) | This category comprises international equity funds with varying benchmark indices. |
| (c) | This category comprises funds consisting of U.S. government and U.S. corporate bonds and other fixed income securities. An appropriate benchmark is the Barclays Capital Aggregate Bond Index. |
| (d) | This category comprises funds consisting of real estate related debt securities with an appropriate benchmark of the Barclays Investment Grade CMBS Index. |
| (e) | This category comprises funds consisting of international government/corporate bonds and other fixed income securities with varying benchmark indices. |
| (f) | This category comprises insurance contracts with an appropriate benchmark of the Lipper Institutional Money Market Index. |
| (g) | This category comprises Hedge Fund of Funds investing in strategies represented in the HFRI Fund of Funds Index. |
| (h) | This category comprises private equity, venture capital and limited partnerships. |
The change in fair value of the Plan’s Level 3 assets for 2010 is summarized as follows:
(millions) | Beginning of year | Realized gains | Unrealized gains | Net, purchases and sales | End of year | |||||||||||||||
Hedge fund of funds | $ | 16.3 | — | $ | 0.6 | $ | 2.0 | $ | 18.9 | |||||||||||
Private equity funds | 2.2 | — | 0.1 | 0.9 | 3.2 | |||||||||||||||
Total | $ | 18.5 | $ | — |
| $ | 0.7 | $ | 2.9 | $ | 22.1 | |||||||||
The value for the Level 3 assets is determined by the general partner or the general partner’s designee on a periodic basis. In addition, we engage an independent advisor to compare the venture capital fund’s returns to other funds with similar strategies. Each fund is required to have an annual audit by an independent accountant and that is provided to the independent advisor. This provides a basis of comparability relative to similar assets in this category.
Equity securities in the U.S. plan included McCormick stock with a fair value of $20.0 million (0.5 million shares and 5.2% of total U.S. pension plan assets) and $15.7 million (0.4 million shares and 4.7% of total U.S. pension plan assets) at November 30, 2010 and 2009, respectively. Dividends paid on these shares were $0.5 million and $0.4 million in 2010 and in 2009, respectively.
| McCormick & Company 2010 Annual Report page 49 |
Notes to Consolidated Financial Statements
Pension benefit payments in our most significant plans are made from assets of the pension plans. It is anticipated that future benefit payments for the U.S. plans for the next 10 fiscal years will be as follows:
(millions) | United States expected payments | |||
2011 | $ | 19.8 | ||
2012 | 21.0 | |||
2013 | 22.6 | |||
2014 | 25.0 | |||
2015 | 26.7 | |||
2016–2020 | 165.9 | |||
It is anticipated that future benefit payments for the international plans for the next 10 fiscal years will be as follows:
(millions) | International expected payments | |||
2011 | $ | 7.3 | ||
2012 | 8.0 | |||
2013 | 8.6 | |||
2014 | 9.4 | |||
2015 | 10.2 | |||
2016–2020 | 67.4 | |||
In 2011, we expect to contribute approximately $30 million to our U.S. pension plans and approximately $10 million to our international pension plans.
401(k) Retirement Plans
For the U.S. McCormick 401(k) Retirement Plan, we match 100% of a participant’s contribution up to the first 3% of the participant’s salary, and 50% of the next 2% of the participant’s salary. Certain of our smaller U.S. subsidiaries sponsor separate 401(k) retirement plans. Our contributions charged to expense under all 401(k) retirement plans were $6.8 million, $6.5 million and $6.1 million in 2010, 2009 and 2008, respectively.
At the participant’s election, 401(k) retirement plans held 2.8 million shares of McCormick stock, with a fair value of $122.0 million, at November 30, 2010. Dividends paid on these shares in 2010 were $2.9 million.
Postretirement Benefits Other Than Pensions
We currently provide postretirement medical and life insurance benefits to certain U.S. employees who were covered under the active employees’ plan and retire after age 55 with at least 5 years of service. Employees hired after December 31, 2008 are not eligible for a company subsidy. They are eligible for coverage on an access-only basis. The subsidy provided under these plans is based primarily on age at date of retirement. These benefits are not pre-funded but paid as incurred.
Our other postretirement benefit expense follows:
(millions) | 2010 | 2009 | 2008 | |||||||||
Service cost | $ | 5.0 | $ | 3.1 | $ | 3.5 | ||||||
Interest costs | 5.0 | 6.7 | 6.4 | |||||||||
Amortization of prior service costs | (5.5 | ) | (3.6 | ) | (1.3 | ) | ||||||
Amortization of (gains)/losses | 1.3 | (0.3 | ) | 0.9 | ||||||||
Special termination benefits | — | (0.3 | ) | — | ||||||||
Postretirement benefit expense | $ | 5.8 | $ | 5.6 | $ | 9.5 | ||||||
Rollforwards of the benefit obligation, fair value of plan assets and a reconciliation of the plans’ funded status at November 30, the measurement date, follow:
(millions) | 2010 | 2009 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 102.2 | $ | 82.2 | ||||
Service cost | 5.0 | 3.2 | ||||||
Interest costs | 5.0 | 6.7 | ||||||
Employee contributions | 2.9 | 3.0 | ||||||
Medicare prescription subsidy | 0.4 | 0.5 | ||||||
Plan amendments | (3.3 | ) | (8.0 | ) | ||||
Other plan assumptions | (3.2 | ) | 1.0 | |||||
Trend rate assumption change | 0.5 | 2.2 | ||||||
Discount rate change | 4.0 | 23.2 | ||||||
Actuarial gain | (2.9 | ) | (2.2 | ) | ||||
Benefits paid | (8.8 | ) | (9.6 | ) | ||||
Benefit obligation at end of year | $ | 101.8 | $ | 102.2 | ||||
Change in fair value of plan assets: | ||||||||
Fair value of plan assets at beginning of year | — | — | ||||||
Employer contributions | $ | 5.5 | �� | $ | 6.1 | |||
Employee contributions | 2.9 | 3.0 | ||||||
Medicare prescription subsidy | 0.4 | 0.5 | ||||||
Benefits paid | (8.8 | ) | (9.6 | ) | ||||
Fair value of plan assets at end of year | — | — | ||||||
Other postretirement benefit liability | $ | (101.8 | ) | $ | (102.2 | ) | ||
Estimated future benefit payments (net of employee contributions) for the next 10 fiscal years are as follows:
(millions) | Retiree medical | Retiree life insurance | Total | |||||||||
2011 | $ | 7.6 | $ | 1.1 | $ | 8.7 | ||||||
2012 | 7.5 | 1.2 | 8.7 | |||||||||
2013 | 7.5 | 1.2 | 8.7 | |||||||||
2014 | 7.4 | 1.2 | 8.6 | |||||||||
2015 | 7.4 | 1.3 | 8.7 | |||||||||
2016–2020 | 35.6 | 6.6 | 42.2 | |||||||||
The assumed discount rate was 4.7% and 5.2% for 2010 and 2009, respectively.
page 50 McCormick & Company 2010 Annual Report
For 2011, the assumed annual rate of increase in the cost of covered health care benefits is 9.0% (9.0% last year). It is assumed to decrease gradually to 5.0% in the year 2018 (5.0% in 2017 last year) and remain at that level thereafter. Changing the assumed health care cost trend would have the following effect:
(millions) | One percentage point increase | One percentage point decrease | ||||||
Effect on total of service and interest cost components in 2010 | $ | 0.3 | $ | (0.2 | ) | |||
Effect on benefit obligation as of November 30, 2010 | — | — | ||||||
10. STOCK-BASED COMPENSATION
We calculate and record compensation expense on the fair value of grants of various stock-based compensation programs over the vesting period of the awards. Awards are calculated at their fair value at date of grant. The resulting compensation expense is recorded in the income statement ratably over the shorter of the period until vesting or the employee’s retirement eligibility date. For employees eligible for retirement on the date of grant, compensation expense is recorded immediately.
For all grants, the amount of compensation expense to be recorded is adjusted for an estimated forfeiture rate which is based on historical data.
Total stock-based compensation expense for 2010, 2009 and 2008 was $11.9 million, $12.7 million and $18.2 million, respectively. Total unrecognized stock-based compensation expense at November 30, 2010 was $10.0 million and the weighted-average period over which this will be recognized is 1.3 years.
We have two types of stock-based compensation awards; restricted stock units (RSUs) and stock options. Below, we have summarized the key terms and methods of valuation for our stock-based compensation awards.
RSUs
RSUs are valued at the market price of the underlying stock on the date of grant. Substantially all of the RSUs vest over a two-year term and are expensed ratably over that period, subject to the retirement eligibility rules discussed above.
A summary of our RSU activity for the years ended November 30 follows:
(shares in thousands) | 2010 | 2009 | 2008 | |||||||||||||||||||||
| Shares | Weighted- average price | Shares | Weighted- average price | Shares | Weighted- average price | |||||||||||||||||||
Beginning of year | 353 | $ | 32.40 | 370 | $ | 36.78 | 373 | $ | 36.47 | |||||||||||||||
Granted | 177 | 38.36 | 223 | 29.89 | 279 | 36.21 | ||||||||||||||||||
Vested | (238 | ) | 33.15 | (237 | ) | 36.27 | (277 | ) | 35.77 | |||||||||||||||
Forfeited | (3 | ) | 32.71 | (3 | ) | 32.67 | (5 | ) | 37.04 | |||||||||||||||
Outstanding—end of year | 289 | $ | 35.42 | 353 | $ | 32.40 | 370 | $ | 36.78 | |||||||||||||||
Stock Options
Stock options are granted with an exercise price equal to the market price of the stock at the date of grant. Substantially all of the options granted vest ratably over a four-year period and are exercisable over a ten-year period. Upon exercise of the option, shares would be issued from our authorized and unissued shares.
The fair value of the options are estimated using a lattice option pricing model which uses the assumptions in the table below. We believe the lattice model provides a better estimated fair value of our options as it uses a range of possible outcomes over an option term and can be adjusted for changes in certain assumptions over time. Expected volatilities are based on the historical performance of our stock. We also use historical data to estimate the timing and amount of option exercises and forfeitures within the valuation model. The expected term of the options is an output of the option pricing model and estimates the period of time that options are expected to remain unexercised. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
The per share weighted-average fair value for all options granted was $6.88, $5.04 and $7.20 in 2010, 2009 and 2008, respectively. These fair values were computed using the following range of assumptions for our various stock compensation plans for the years ended November 30:
| 2010 | 2009 | 2008 | ||||
Risk-free interest rates | 0.2–3.8% | 0.2–2.7% | 1.4–3.6% | |||
Dividend yield | 2.7% | 3.2% | 2.3% | |||
Expected volatility | 20.4–24.2% | 24.9% | 18.7–24.7% | |||
Expected lives | 6.2 years | 6.2 years | 6.1 years |
McCormick & Company 2010 Annual Report page 51
Notes to Consolidated Financial Statements
Under our stock option plans, we may issue shares on a net basis at the request of the option holder. This occurs by netting the option cost in shares from the shares exercised.
A summary of our stock option activity for the years ended November 30 follows:
(shares in millions) | 2010 | 2009 | 2008 | |||||||||||||||||||||
| Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | |||||||||||||||||||
Beginning of year | 11.3 | $ | 29.45 | 11.9 | $ | 28.33 | 14.2 | $ | 26.38 | |||||||||||||||
Granted | 1.0 | 38.39 | 1.2 | 29.89 | 0.6 | 37.58 | ||||||||||||||||||
Exercised | (4.8 | ) | 27.25 | (1.7 | ) | 20.89 | (2.8 | ) | 20.50 | |||||||||||||||
Forfeited | (0.1 | ) | 33.97 | (0.1 | ) | 35.71 | (0.1 | ) | 34.23 | |||||||||||||||
End of year | 7.4 | 32.01 | 11.3 | 29.45 | 11.9 | 28.33 | ||||||||||||||||||
Exercisable—end of year | 5.2 | $ | 30.86 | 9.5 | $ | 28.97 | 10.6 | $ | 27.23 | |||||||||||||||
As of November 30, 2010, the intrinsic value (the difference between the exercise price and the market price) for the options outstanding was $88.5 million and for options exercisable was $68.6 million. The total intrinsic value of all options exercised during the years ended November 30, 2010, 2009 and 2008 was $63.9 million, $21.9 million and $53.3 million, respectively. A summary of our stock options outstanding and exercisable at November 30, 2010 follows:
(shares in millions) | Options outstanding | Options exercisable | ||||||||||||||||||||||
Range of exercise price | Shares | Weighted- average remaining life (yrs) | Weighted- average exercise price | Shares | Weighted- average remaining life (yrs) | Weighted- average exercise price | ||||||||||||||||||
$17.00–$24.33 | 1.4 | 1.5 | $ | 21.31 | 1.4 | 1.5 | $ | 21.31 | ||||||||||||||||
$24.34–$31.67 | 2.6 | 5.3 | 30.28 | 1.7 | 3.7 | 30.48 | ||||||||||||||||||
$31.68–$39.00 | 3.4 | 6.2 | 37.92 | 2.1 | 4.6 | 37.73 | ||||||||||||||||||
| 7.4 | 4.9 | $ | 32.01 | 5.2 | 3.3 | $ | 30.86 | |||||||||||||||||
11. RESTRUCTURING ACTIVITIES
In November 2005, the Board of Directors approved a restructuring plan to consolidate our global manufacturing, rationalize our distribution facilities, improve our go-to-market strategy, eliminate administrative redundancies and rationalize our joint venture partnerships. From 2005 through 2009, we recorded total pre-tax charges of $128.7 million for this program.
As of November 30, 2009 this restructuring program was completed.
The following is a summary of restructuring activities for 2009 and 2008:
(millions) | 2009 | 2008 | ||||||
Pre-tax restructuring charges | ||||||||
Other restructuring charges | $ | 13.7 | $ | 12.1 | ||||
Recorded in cost of goods sold | 2.5 | 4.5 | ||||||
Reduction in operating income | 16.2 | 16.6 | ||||||
Income tax effect | (5.3 | ) | (5.1 | ) | ||||
Reduction in net income | $ | 10.9 | $ | 11.5 | ||||
In 2009, we recorded $8.2 million of severance costs, primarily associated with the reduction of administrative personnel in Europe and to the planned closure of a manufacturing facility in The Netherlands. In addition, we recorded $2.5 million of other exit costs and $5.5 million for asset write-downs related to The Netherlands plant closure. The asset write-downs were for accelerated depreciation and inventory write-offs.
In 2008, we recorded $13.0 million of severance costs, primarily associated with the reduction of administrative personnel in Europe, the U.S. and Canada. In addition, we recorded $9.1 million of other exit costs related to the consolidation of production facilities in Europe and the reorganization of distribution networks in the U.S. and the U.K. These restructuring charges were offset by a $5.5 million credit related to the disposal of assets. This credit was primarily the result of a gain on the disposal of our Salinas, California manufacturing facility, which was consolidated with other manufacturing facilities in 2007.
The business segment components of the restructuring charges recorded in 2009 and 2008 are as follows:
(millions) | 2009 | 2008 | ||||||
Consumer | $ | 12.3 | $ | 9.7 | ||||
Industrial | 3.9 | 6.9 | ||||||
Total restructuring charges | $ | 16.2 | $ | 16.6 | ||||
The restructuring charges recorded in the consumer business include severance costs and special early retirement benefits associated with our voluntary separation program in several functions in Europe and Canada; consolidation of certain manufacturing facilities in Europe; the reorganization of distribution networks in the U.S. and the U.K.; and closure of a manufacturing facility in The Netherlands, partially offset by the Salinas gain.
The restructuring charges recorded in the industrial business include severance costs and special early retirement benefits associated with our voluntary separation program in several functions in Europe.
page 52 McCormick & Company 2010 Annual Report
During 2010, 2009 and 2008, we spent $4.2 million, $9.0 million and $0.8 million, respectively, in cash on the restructuring plan.
12. INCOME TAXES
The provision for income taxes consists of the following:
(millions) | 2010 | 2009 | 2008 | |||||||||
Income taxes | ||||||||||||
Current | ||||||||||||
Federal | $ | 78.0 | $ | 83.4 | $ | 85.7 | ||||||
State | 10.6 | 10.9 | 7.7 | |||||||||
International | 18.9 | 14.7 | 16.0 | |||||||||
| 107.5 | 109.0 | 109.4 | ||||||||||
Deferred | ||||||||||||
Federal | 9.4 | 24.5 | 5.3 | |||||||||
State | 2.1 | 2.7 | 0.2 | |||||||||
International | (1.0 | ) | (3.2 | ) | (14.3 | ) | ||||||
| 10.5 | 24.0 | (8.8 | ) | |||||||||
Total income taxes | $ | 118.0 | $ | 133.0 | $ | 100.6 | ||||||
The components of income from consolidated operations before income taxes follow:
(millions) | 2010 | 2009 | 2008 | |||||||||
Pretax income | ||||||||||||
United States | $ | 357.4 | $ | 338.3 | $ | 256.8 | ||||||
International | 105.3 | 78.2 | 81.0 | |||||||||
| $ | 462.7 | $ | 416.5 | $ | 337.8 | |||||||
A reconciliation of the U.S. federal statutory rate with the effective tax rate follows:
| 2010 | 2009 | 2008 | ||||||||||
Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal benefits | 1.8 | 2.1 | 1.9 | |||||||||
International tax at different rates | (4.1 | ) | (3.7 | ) | (7.5 | ) | ||||||
U.S. tax on remitted and unremitted earnings | (1.6 | ) | 0.4 | 0.5 | ||||||||
U.S. tax credits | (0.1 | ) | (0.3 | ) | (0.3 | ) | ||||||
U.S. manufacturing deduction | (1.3 | ) | (0.8 | ) | (1.6 | ) | ||||||
Retirement plans | (0.3 | ) | (0.8 | ) | 1.7 | |||||||
Finalization of open tax years and changes in tax contingencies | (3.8 | ) | (0.4 | ) | 0.2 | |||||||
Other, net | (0.1 | ) | 0.4 | (0.1 | ) | |||||||
Total | 25.5 | % | 31.9 | % | 29.8 | % | ||||||
Deferred tax assets and liabilities are comprised of the following:
(millions) | 2010 | 2009 | ||||||
Deferred tax assets | ||||||||
Employee benefit liabilities | $ | 127.5 | $ | 131.1 | ||||
Other accrued liabilities | 24.6 | 25.9 | ||||||
Inventory | 9.5 | 9.3 | ||||||
Net operating and capital loss carryforwards | 24.2 | 22.9 | ||||||
Other | 20.0 | 12.8 | ||||||
Valuation allowance | (22.9 | ) | (20.5 | ) | ||||
| 182.9 | 181.5 | |||||||
Deferred tax liabilities | ||||||||
Depreciation | 41.4 | 43.9 | ||||||
Intangible assets | 114.0 | 98.3 | ||||||
Other | 5.7 | 6.2 | ||||||
| 161.1 | 148.4 | |||||||
Net deferred tax asset | $ | 21.8 | $ | 33.1 | ||||
At November 30, 2010, our non-U.S. subsidiaries have tax loss carryforwards of $121.9 million, of which $11.4 million are from the excess tax benefits related to stock-based compensation deductions which will increase equity once the benefit is realized through a reduction of income taxes payable. Of these carryforwards, $39.3 million expire through 2015, $31.9 million from 2016 through 2024 and $50.7 million may be carried forward indefinitely.
At November 30, 2010, our non-U.S. subsidiaries have capital loss carryforwards of $5.9 million. All of these carryforwards may be carried forward indefinitely.
At November 30, 2010, we have tax credit carryforwards of $7.9 million, which expire in 2020.
A valuation allowance has been provided to record deferred tax assets at their net realizable value. The $2.4 million net increase in the valuation allowance was mainly due to an additional valuation allowance related to losses generated in 2010 which may not be realized in future periods.
U.S. income taxes are not provided for unremitted earnings of international subsidiaries and affiliates where our intention is to reinvest these earnings permanently. Unremitted earnings of such entities were $686.3 million at November 30, 2010.
The total amount of unrecognized tax benefits as of November 30, 2010 and November 30, 2009 were $20.7 million and $31.2 million, respectively. This includes $20.7 million and $30.9 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
McCormick & Company 2010 Annual Report page 53
Notes to Consolidated Financial Statements
The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended November 30, 2010, 2009 and 2008:
(millions) | 2010 | 2009 | 2008 | |||||||||
Balance at beginning of year | $ | 31.2 | $ | 28.6 | $ | 26.5 | ||||||
Additions for current year tax positions | 5.1 | 3.7 | 4.5 | |||||||||
Additions for prior year tax positions | 3.4 | 1.7 | 4.8 | |||||||||
Reductions for prior year tax positions | (2.6 | ) | (3.6 | ) | (2.0 | ) | ||||||
Settlements | (0.6 | ) | — | (1.7 | ) | |||||||
Statute expirations | (15.8 | ) | — | (2.4 | ) | |||||||
Foreign currency translation | — | 0.8 | (1.1 | ) | ||||||||
Balance at November 30, | $ | 20.7 | $ | 31.2 | $ | 28.6 | ||||||
The $15.8 million of statute expirations is mainly composed of a $13.9 million reserve reversal that was originally recorded based on uncertainties about the tax aspects of transactions related to the reorganization of our European operations and divestment of certain of our joint ventures.
We record interest and penalties on income taxes in income tax expense. We recognized interest and penalty income of $2.2 million and interest and penalty expense of $0.7 million for the years ended November 30, 2010 and 2009, respectively. As of November 30, 2010 and 2009, we had accrued $1.2 million and $3.9 million, respectively, of interest and penalties related to unrecognized tax benefits.
We file income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. The open years subject to tax audits varies depending on the tax jurisdictions. In major jurisdictions, we are no longer subject to income tax audits by taxing authorities for years before 2006. In 2010, the Internal Revenue Service commenced an examination of our U.S. income tax return for the tax years 2007 and 2008.
It is possible that the amount of the liability for unrecognized tax benefits could change during the next 12 months as a result of the resolution of previously filed tax returns in various jurisdictions. We do not anticipate any significant impact to the unrecognized tax benefit balance.
13. EARNINGS PER SHARE
The reconciliation of shares outstanding used in the calculation of basic and diluted earnings per share for the years ended November 30, 2010, 2009 and 2008 follows:
(millions) | 2010 | 2009 | 2008 | |||||||||
Average shares outstanding—basic | 132.9 | 130.8 | 129.0 | |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options | 1.8 | 1.5 | 2.8 | |||||||||
Average shares outstanding—diluted | 134.7 | 132.3 | 131.8 | |||||||||
The following table sets forth the stock options and RSUs for the years ended November 30, 2010, 2009 and 2008 which were not considered in our earnings per share calculation since they were antidilutive.
(millions) | 2010 | 2009 | 2008 | |||||||||
Antidilutive securities | 0.6 | 4.4 | 3.4 | |||||||||
14. CAPITAL STOCK
Holders of Common Stock have full voting rights except that (1) the voting rights of persons who are deemed to own beneficially 10% or more of the outstanding shares of Common Stock are limited to 10% of the votes entitled to be cast by all holders of shares of Common Stock regardless of how many shares in excess of 10% are held by such person; (2) we have the right to redeem any or all shares of stock owned by such person unless such person acquires more than 90% of the outstanding shares of each class of our common stock; and (3) at such time as such person controls more than 50% of the vote entitled to be cast by the holders of outstanding shares of Common Stock, automatically, on a share-for-share basis, all shares of Common Stock Non-Voting will convert into shares of Common Stock.
Holders of Common Stock Non-Voting will vote as a separate class on all matters on which they are entitled to vote. Holders of Common Stock Non-Voting are entitled to vote on reverse mergers and statutory share exchanges where our capital stock is converted into other securities or property, dissolution of the Company and the sale of substantially all of our assets, as well as forward mergers and consolidation of the Company.
15. COMMITMENTS AND CONTINGENCIES
During the normal course of our business, we are occasionally involved with various claims and litigation. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. At November 30, 2010 and 2009, no material reserves were recorded. No reserves are established for losses which are only reasonably possible. The determination of probability and the estimation of the actual amount of any such loss is inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. However, we believe that the likelihood that any such excess might have a material adverse effect on our financial statements is remote.
page 54 McCormick & Company 2010 Annual Report
16. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
Business Segments
We operate in two business segments: consumer and industrial. The consumer and industrial segments manufacture, market and distribute spices, herbs, seasonings, specialty foods and flavors throughout the world. The consumer segment sells to retail outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores under the McCormick brand and a variety of brands around the world, including Lawry’s, Zatarain’s, Simply Asia, Thai Kitchen, Old Bay, El Guapo, Ducros, Schwartz, Vahiné, Silvo, Club House, Billy Bee and Aeroplane. The industrial segment sells to other food manufacturers and the foodservice industry both directly and indirectly through distributors.
In each of our segments, we produce and sell many individual products which are similar in composition and nature. It is impractical to segregate and identify profits for each of these individual product lines.
We measure segment performance based on operating income excluding restructuring charges from our restructuring programs as this activity is managed separately from the business segment. In 2008 we also measured our segments excluding the non-cash
impairment charge to reduce the value of the Silvo brand. Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for internal reporting, evaluating performance or allocating capital. Therefore, asset-related information has been disclosed in the aggregate.
We have a large number of customers for our products. Sales to one of our industrial business customers, PepsiCo, Inc., accounted for 10% of consolidated sales in 2010, 11% of consolidated sales in 2009 and 10% of consolidated sales in 2008. In 2010 and 2009, sales to Wal-Mart Stores, Inc., a consumer business customer, accounted for 11% of consolidated sales.
Accounting policies for measuring segment operating income and assets are consistent with those described in note 1. Because of integrated manufacturing for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Inter-segment sales are not material. Corporate assets include cash, deferred taxes, investments and certain fixed assets.
BUSINESS SEGMENT RESULTS
(millions) | Consumer | Industrial | Total segments | Corporate & other | Total | |||||||||||||||
2010 | ||||||||||||||||||||
Net sales | $ | 1,999.0 | $ | 1,337.8 | $ | 3,336.8 | — | $ | 3,336.8 | |||||||||||
Operating income | 402.4 | 107.4 | 509.8 | — | 509.8 | |||||||||||||||
Income from unconsolidated operations | 20.2 | 5.3 | 25.5 | — | 25.5 | |||||||||||||||
Goodwill | 1,273.2 | 144.2 | 1,417.4 | — | 1,417.4 | |||||||||||||||
Assets | — | — | 3,211.8 | $ | 207.9 | 3,419.7 | ||||||||||||||
Capital expenditures | — | — | 66.1 | 22.9 | 89.0 | |||||||||||||||
Depreciation and amortization | — | — | 75.4 | 19.7 | 95.1 | |||||||||||||||
2009 | ||||||||||||||||||||
Net sales | $ | 1,911.2 | $ | 1,280.9 | $ | 3,192.1 | — | $ | 3,192.1 | |||||||||||
Operating income excluding restructuring charges | 397.9 | 85.2 | 483.1 | — | 483.1 | |||||||||||||||
Income from unconsolidated operations | 12.1 | 4.2 | 16.3 | — | 16.3 | |||||||||||||||
Goodwill | 1,334.5 | 145.2 | 1,479.7 | — | 1,479.7 | |||||||||||||||
Assets | — | — | 3,207.4 | $ | 180.4 | 3,387.8 | ||||||||||||||
Capital expenditures | — | — | 64.4 | 18.0 | 82.4 | |||||||||||||||
Depreciation and amortization | — | — | 77.8 | 16.5 | 94.3 | |||||||||||||||
2008 | ||||||||||||||||||||
Net sales | $ | 1,850.8 | $ | 1,325.8 | $ | 3,176.6 | — | $ | 3,176.6 | |||||||||||
Operating income excluding impairment and restructuring charges | 343.3 | 78.8 | 422.1 | — | 422.1 | |||||||||||||||
Income from unconsolidated operations | 13.4 | 5.2 | 18.6 | — | 18.6 | |||||||||||||||
Goodwill | 1,110.0 | 120.2 | 1,230.2 | — | 1,230.2 | |||||||||||||||
Assets | — | — | 3,091.6 | $ | 128.7 | 3,220.3 | ||||||||||||||
Capital expenditures | — | — | 77.1 | 8.7 | 85.8 | |||||||||||||||
Depreciation and amortization | — | — | 66.2 | 19.4 | 85.6 | |||||||||||||||
McCormick & Company 2010 Annual Report page 55
Notes to Consolidated Financial Statements
A reconciliation of operating income excluding impairment and restructuring charges (which we use to measure segment profitability) to operating income is as follows:
(millions) | Total | |||
2009 | ||||
Operating income, excluding restructuring charges | $ | 483.1 | ||
Less: Restructuring charges | 16.2 | |||
Operating income | $ | 466.9 | ||
2008 | ||||
Operating income, excluding impairment and restructuring charges | $ | 422.1 | ||
Less: Impairment charge | 29.0 | |||
Less: Restructuring charges | 16.6 | |||
Operating income | $ | 376.5 | ||
Geographic Areas
We have net sales and long-lived assets in the following geographic areas:
(millions) | United States | EMEA | Other countries | Total | ||||||||||||
2010 | ||||||||||||||||
Net sales | $ | 2,041.3 | $ | 681.8 | $ | 613.7 | $ | 3,336.8 | ||||||||
Long-lived assets | 1,240.9 | 690.3 | 206.7 | 2,137.9 | ||||||||||||
2009 | ||||||||||||||||
Net sales | $ | 1,981.5 | $ | 671.0 | $ | 539.6 | $ | 3,192.1 | ||||||||
Long-lived assets | 1,230.0 | 778.3 | 198.5 | 2,206.8 | ||||||||||||
2008 | ||||||||||||||||
Net sales | $ | 1,846.5 | $ | 767.4 | $ | 562.7 | $ | 3,176.6 | ||||||||
Long-lived assets | 1,225.0 | 676.8 | 164.3 | 2,066.1 | ||||||||||||
Long-lived assets include property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization.
17. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Supplemental income statement, balance sheet and cash flow information follows:
(millions) | 2010 | 2009 | ||||||
Inventories | ||||||||
Finished products | $ | 234.1 | $ | 237.6 | ||||
Raw materials and work-in-process | 243.5 | 220.0 | ||||||
| $ | 477.6 | $ | 457.6 | |||||
Prepaid expenses | $ | 13.6 | $ | 11.5 | ||||
Other current assets | 87.2 | 96.6 | ||||||
| $ | 100.8 | $ | 108.1 | |||||
Property, plant and equipment | ||||||||
Land and improvements | $ | 29.5 | $ | 29.7 | ||||
Buildings | 282.6 | 290.1 | ||||||
Machinery and equipment | 567.6 | 542.4 | ||||||
Software | 244.3 | 231.6 | ||||||
Construction-in-progress | 39.3 | 34.6 | ||||||
Accumulated depreciation | (675.3 | ) | (638.6 | ) | ||||
| $ | 488.0 | $ | 489.8 | |||||
Investments and other assets | ||||||||
Investments in affiliates | $ | 121.2 | $ | 68.4 | ||||
Long-term investments | 65.8 | 54.5 | ||||||
Prepaid allowances | 24.0 | 26.6 | ||||||
Other assets | 54.9 | 61.0 | ||||||
| $ | 265.9 | $ | 210.5 | |||||
Other accrued liabilities | ||||||||
Payroll and employee benefits | $ | 139.5 | $ | 122.1 | ||||
Sales allowances | 138.8 | 126.0 | ||||||
Other | 153.4 | 155.3 | ||||||
| $ | 431.7 | $ | 403.4 | |||||
Other long-term liabilities | ||||||||
Pension | $ | 154.7 | $ | 171.9 | ||||
Postretirement benefits | 92.9 | 93.9 | ||||||
Deferred taxes | 48.5 | 32.8 | ||||||
Income taxes payable | 21.9 | 34.9 | ||||||
Other | 24.3 | 17.6 | ||||||
| $ | 342.3 | $ | 351.1 | |||||
(millions) | 2010 | 2009 | 2008 | |||||||||
Depreciation | $ | 79.0 | $ | 80.8 | $ | 67.6 | ||||||
Interest paid | 49.3 | 54.3 | 51.6 | |||||||||
Income taxes paid | 83.2 | 107.1 | 102.7 | |||||||||
Interest capitalized | — | 0.2 | 0.9 | |||||||||
page 56 McCormick & Company 2010 Annual Report
(millions) | 2010 | 2009 | ||||||
Accumulated other comprehensive (loss) income, net of tax where applicable | ||||||||
Foreign currency translation adjustment | $ | 184.7 | $ | 293.3 | ||||
Unrealized loss on foreign currency exchange contracts | (0.7 | ) | (0.5 | ) | ||||
Unamortized value of settled interest rate swaps | (5.9 | ) | (6.1 | ) | ||||
Pension and other postretirement costs | (181.8 | ) | (177.6 | ) | ||||
| $ | (3.7 | ) | $ | 109.1 | ||||
Dividends paid per share were $1.04 in 2010, $0.96 in 2009 and $0.88 in 2008.
18. SELECTED QUARTERLY DATA ( UNAUDITED)
(millions except per share data) | First | Second | Third | Fourth | ||||||||||||
2010 | ||||||||||||||||
Net sales | $ | 764.5 | $ | 798.3 | $ | 794.6 | $ | 979.5 | ||||||||
Gross profit | 310.2 | 326.7 | 334.8 | 446.0 | ||||||||||||
Operating income | 100.8 | 97.5 | 126.0 | 185.4 | ||||||||||||
Net income | 67.9 | 66.2 | 102.4 | 133.6 | ||||||||||||
Basic earnings per share | 0.51 | 0.50 | 0.77 | 1.00 | ||||||||||||
Diluted earnings per share | 0.51 | 0.49 | 0.76 | 0.99 | ||||||||||||
Dividends paid per share— | ||||||||||||||||
Common Stock and Common Stock Non-Voting | 0.26 | 0.26 | 0.26 | 0.26 | ||||||||||||
Market price—Common Stock | ||||||||||||||||
High | 37.71 | 39.75 | 40.89 | 48.00 | ||||||||||||
Low | 35.72 | 37.23 | 37.69 | 40.38 | ||||||||||||
Market price—Common Stock Non-Voting | ||||||||||||||||
High | 37.76 | 39.77 | 40.90 | 44.81 | ||||||||||||
Low | 35.56 | 37.33 | 37.53 | 40.36 | ||||||||||||
2009 | ||||||||||||||||
Net sales | $ | 718.5 | $ | 757.3 | $ | 791.7 | $ | 924.5 | ||||||||
Gross profit | 284.2 | 302.2 | 319.0 | 421.7 | ||||||||||||
Operating income | 89.8 | 82.5 | 116.6 | 178.0 | ||||||||||||
Net income | 57.7 | 50.7 | 75.1 | 116.4 | ||||||||||||
Basic earnings per share | 0.44 | 0.39 | 0.57 | 0.89 | ||||||||||||
Diluted earnings per share | 0.44 | 0.38 | 0.57 | 0.87 | ||||||||||||
Dividends paid per share— | ||||||||||||||||
Common Stock and Common Stock Non-Voting | 0.24 | 0.24 | 0.24 | 0.24 | ||||||||||||
Market price—Common Stock | ||||||||||||||||
High | 33.05 | 33.17 | 33.35 | 36.46 | ||||||||||||
Low | 28.57 | 28.32 | 30.64 | 32.40 | ||||||||||||
Market price—Common Stock Non-Voting | ||||||||||||||||
High | 33.23 | 33.44 | 33.32 | 36.45 | ||||||||||||
Low | 28.82 | 28.53 | 30.49 | 32.42 | ||||||||||||
McCormick & Company 2010 Annual Report page 57
Historical Financial Summary
(millions except per share and ratio data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
For the Year | ||||||||||||||||||||
Net sales | $ | 3,336.8 | $ | 3,192.1 | $ | 3,176.6 | $ | 2,916.2 | $ | 2,716.4 | ||||||||||
Percent increase | 4.5 | % | 0.5 | % | 8.9 | % | 7.4 | % | 4.8 | % | ||||||||||
Operating income | 509.8 | 466.9 | 376.5 | 354.2 | 269.6 | |||||||||||||||
Income from unconsolidated operations | 25.5 | 16.3 | 18.6 | 20.7 | 17.1 | |||||||||||||||
Net income | 370.2 | 299.8 | 255.8 | 230.1 | 202.2 | |||||||||||||||
Per Common Share | ||||||||||||||||||||
Earnings per share—diluted | $ | 2.75 | $ | 2.27 | $ | 1.94 | $ | 1.73 | $ | 1.50 | ||||||||||
Earnings per share—basic | 2.79 | 2.29 | 1.98 | 1.78 | 1.53 | |||||||||||||||
Common dividends declared | 1.06 | 0.98 | 0.90 | 0.82 | 0.74 | |||||||||||||||
Market Non-Voting closing price—end of year | 44.01 | 35.68 | 29.77 | 38.21 | 38.72 | |||||||||||||||
Book value per share | 11.00 | 10.19 | 8.17 | 8.57 | 7.20 | |||||||||||||||
At Year-End | ||||||||||||||||||||
Total assets | $ | 3,419.7 | $ | 3,387.8 | $ | 3,220.3 | $ | 2,787.5 | $ | 2,568.0 | ||||||||||
Current debt | 100.4 | 116.1 | 354.0 | 149.6 | 81.4 | |||||||||||||||
Long-term debt | 779.9 | 875.0 | 885.2 | 573.5 | 569.6 | |||||||||||||||
Shareholders’ equity | 1,462.7 | 1,343.5 | 1,062.8 | 1,095.0 | 936.9 | |||||||||||||||
Total capital | 2,343.0 | 2,334.6 | 2,302.0 | 1,818.1 | 1,587.9 | |||||||||||||||
Other Financial Measures | ||||||||||||||||||||
Percentage of net sales | ||||||||||||||||||||
Gross profit | 42.5 | % | 41.6 | % | 40.6 | % | 40.9 | % | 41.0 | % | ||||||||||
Operating income | 15.3 | % | 14.6 | % | 11.9 | % | 12.1 | % | 9.9 | % | ||||||||||
Capital expenditures | $ | 89.0 | $ | 82.4 | $ | 85.8 | $ | 78.5 | $ | 84.8 | ||||||||||
Depreciation and amortization | 95.1 | 94.3 | 85.6 | 82.6 | 84.3 | |||||||||||||||
Common share repurchases | 82.5 | — | 11.0 | 157.0 | 155.9 | |||||||||||||||
Debt-to-total capital | 37.6 | % | 42.5 | % | 53.8 | % | 39.8 | % | 41.0 | % | ||||||||||
Average shares outstanding | ||||||||||||||||||||
Basic | 132.9 | 130.8 | 129.0 | 129.3 | 131.8 | |||||||||||||||
Diluted | 134.7 | 132.3 | 131.8 | 132.7 | 135.0 | |||||||||||||||
Total capital includes debt and shareholders’ equity.
The historical financial summary includes the impact of certain items that affect the comparability of financial results year to year. In 2010, we have the benefit of the reversal of a significant tax accrual and, from 2006 to 2009, restructuring charges were recorded. Also, in 2008 an impairment charge of $29.0 million was recorded to reduce the value of the Silvo brand. Related to the acquisition of Lawry’s in 2008, we recorded a gain. The net impact of these items is reflected in the following table:
(millions except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Operating income | — | $ | (16.2 | ) | $ | (45.6 | ) | $ | (34.0 | ) | $ | (84.1 | ) | |||||||
Net income | $ | 13.9 | (10.9 | ) | 26.2 | (24.2 | ) | (30.3 | ) | |||||||||||
Earnings per share | 0.10 | (0.08 | ) | (0.20 | ) | (0.18 | ) | (0.22 | ) | |||||||||||
An eleven-year financial summary is available at ir.mccormick.com, as well as a report on EVA (Economic Value Added) and return on invested capital.
page 58 McCormick & Company 2010 Annual Report
| Investor Information | ||||||
World Headquarters McCormick & Company, Incorporated 18 Loveton Circle Sparks, MD 21152-6000 U.S.A. (410) 771-7301 www.mccormickcorporation.com
Stock Information New York Stock Exchange Symbol: MKC
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You may access your account information via the Internet at www.shareowneronline.com
Investor Services Plan (Dividend Reinvestment and Direct Purchase Plan)
We offer an Investor Services Plan which provides shareholders of record the opportunity to automatically reinvest dividends, make optional cash purchases of stock, place stock certificates into safekeeping and sell shares. Individuals who are not current shareholders may purchase their initial shares directly through the Plan. All transactions are subject to the limitations set forth in the Plan prospectus, which may be obtained by contacting Wells Fargo Shareowner Services at: (877) 778-6784 or (651) 450-4064 www.wellsfargo.com/shareownerservices
Annual Meeting—NOTE NEW LOCATION FOR 2011
The annual meeting of shareholders will be held at 10 a.m., Wednesday, March 30, 2011, atMartin’s Valley Mansion, 594 Cranbrook Road, Hunt Valley, Maryland 21030.
Online Receipt of Annual Report and Proxy Statement
If you would like to access next year’s proxy statement and annual report via the Internet, you may enroll on the website below: http://enroll.icsdelivery.com/mkc
Trademarks
Use of® or ™ in this annual report indicates trade-marks owned or used by McCormick & Company, Incorporated and its subsidiaries and affiliates. | |||||
Record Date 4/11/11 7/11/11 10/10/11 12/30/11 | Payment Date 4/25/11 7/25/11 10/24/11 1/13/12 | |||||
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McCormick has paid dividends every year since 1925.
Independent Registered Public Accounting Firm Ernst & Young LLP 621 East Pratt Street Baltimore, MD 21202
Investor Inquiries
Our investor website, ir.mccormick.com, has our annual reports, Securities & Exchange Commission (SEC) filings, press releases, webcasts, corporate governance principles and other information.
To obtainwithout costa copy of the annual report filed with the SEC on Form 10-K or for general questions about McCormick or the information in our annual or quarterly reports, contact Investor Relations at the world headquarters address, investor website or telephone:
Report ordering: Proxy materials: (800) 579-1639 Other materials: (800) 424-5855, (410) 771-7537 or ir.mccormick.com
Investor and securities analysts’ inquiries: (410) 771-7244
Registered Shareholder Inquiries
For questions on your account, statements, dividend payments, reinvestment and direct deposit, and for address changes, lost certificates, stock transfers, ownership changes or other administrative matters, contact our transfer agent. | |||||
McCormick & Company 2010 Annual Report page 59
McCormick & Company, Incorporated
18 Loveton Circle Sparks, Maryland 21152-6000 U.S.A.
410-771-7301 www.mccormickcorporation.com