REPORT ON OPERATIONS
CONSUMER PRODUCTS
McCormick's oldest and largest business consists of spices, herbs,
extracts, proprietary seasoning blends, and easy-to-use liquid
flavorings and marinades. These retail products are sold primarily
in the United States under the McCormick name in the East, the
Schilling and Crescent labels in the West, and the Club House
brand in Canada. Given the highly competitive nature of the
consumer products business and the recessionary economies in some
of our markets, 1993 was a very good year.
One part of our strategy to grow our retail business includes the
introduction of new products and line extensions. Some 40 new
products were introduced during 1993. Examples include:
Old Bay Seas'n Easy product line for fish,
A new line of Caribbean spices known as La Cocina de
McCormick,
A new line of dry seasoning mixes for rice,
Bag 'n Season for Hot 'n Spicy Wings,
McCormick International Collection of gourmet spices,and
Holiday Potpourri.
Consumer studies show the perimeter aisles of grocery stores are
the highest traffic areas. In order to take advantage of this
shopping pattern, we have successfully integrated recently acquired
brands from Golden Dipt, Produce Partners, and Prepco, dramatically
increasing our presence in the seafood and produce departments.
The Old Bay and Golden Dipt lines of products answer the increasing
consumer demand for quick and easy seasoning ideas for fish and
other seafood items. Emphasis is also being placed on Thai and
Hispanic style seasonings, both fast-growing categories. Focus on
total quality, statistical process control, and new computerized
communications with grocery customers continues to provide
productivity gains and cost savings.
INDUSTRIAL AND FOOD SERVICE
The McCormick Flavor Group, which includes our industrial and fast
food spice, seasonings and flavor businesses, had another strong
year of sales and profit growth.
The Flavor Division achieved significant sales increases in 1993
with leading food processors and fast food chains. Additionally,
the Division received the Best of the Best supplier award from a
major multinational food processor and has been named a preferred
supplier by several other major domestic as well as international
customers.
Growth is being supported by capital expenditures, such as the one
for the new Technical Resource Center which opened in early 1993.
This new center provides creative space for customers to use with
our technical specialists in the development of new products. This
expansion of technical laboratory facilities will help the Flavor
Division maintain its industry leadership in superior flavor
systems. The mission is to develop a customer-focused formula
management process which enables employees to be consistent in
exceeding customer expectations and thereby gain competitive
worldwide advantages for McCormick.
In 1993, this Division also experienced significant growth in sales
volumes in the coatings systems product line by concentrating
attention on select accounts which service major fast food chains
and multinational food processors. By continuing to supply
technologically superior flavor systems, we successfully serve more
than 80 of the top 100 food processors.
The Food Service Division primarily serves broad-line foodservice
distributors and warehouse clubs, areas characterized by continuing
consolidation.
This Division has expanded its business in a rapidly changing
environment through operating efficiencies, superior customer
service and contemporary new products. New items include Dry
Rotisserie Style Seasoning, Thai Seasoning, California Garlic
Blends, and the continued growth of 1992 favorites Montreal Steak
Seasoning and Caribbean Jerk Seasoning.
Gilroy Foods, McCormick's agriculturally -based California
subsidiary, experienced a short crop in 1992 which unfavorably
impacted earnings in 1993. This unit expects to return to normal
profit levels in 1994.
In support of McCormick's global expansion strategy, Gilroy Foods
acquired 80 percent of National Dehydration Company of Egypt. This
venture will primarily support the United Kingdom and European
markets. Another joint venture, Alimentos Deshidratados del Bajio,
was formed to produce and market chilies and dehydrated vegetables
in Mexico.
SupHerb Farms, McCormick's joint venture with Daragal of France,
which produces frozen and freeze-dried herbs, opened its new state-
of-the-art processing facility in Turlock, California. We continue
to be excited about the possibilities for this business venture.
Gilroy Energy Company, Gilroy Foods' cogeneration facility,
concluded its sixth very successful year of operations.Golden
West Foods significantly improved its performance in the latter
part of 1993 by expanding its product mix into higher margin
specialty frozen food items and improving productivity within its
operations.
INTERNATIONAL
1993 was an excellent year for the International Group. Sales
increased 16 percent in local currencies over the prior year.
Especially noteworthy was the performance of McCormick U.K. This
unit enjoyed solid profit growth despite a recessionary economy.
Part of the success came from the launch of new products, including
rice seasonings and liquid sauces featuring international flavors.
Cost containment measures also helped to improve gross margins.
Through careful cost controls and operations improvements,
McCormick Canada and McCormick Australia reported good years
despite difficult local economies. Our Latin American businesses
in El Salvador and Venezuela continued to perform very well.
Among unconsolidated units, substantial improvement occurred in the
sales and profit performance of McCormick-Lion, our consumer joint
venture in Japan. Our joint venture in Mexico also continued to
show strong sales growth. Profit performance was impacted by more
aggressive marketing programs to support additional capacity at the
San Luis Potosi plant.
Our joint ventures in China and the Philippines performed well,
with further progress expected in 1994. Based on the successful
launch of consumer products in the Shanghai and Beijing markets, we
plan to expand the sale of similar products in Southern China
during 1994.
PACKAGING
McCormick's Packaging Group - which includes Setco and Tubed
Products - continues to enjoy growth in specialized niche markets
while also supplying other McCormick units with plastic packaging
for foodservice and consumer products.
During 1993, Tubed Products completed renovation and increased
capacity at the facility in Freehold, New Jersey. Additional tube
manufacturing and decorating machines were installed at the
facilities in Oxnard, California, and Easthampton, Massachusetts.
In addition to expanding decorating production capacity, the
Easthampton plant has begun production of high barrier, multi-layer
plastic tubes. This provides new sales opportunities.
Setco completed the acquisition and integration of the Admiral
Plastics plant in New York in March of 1993. This acquisition
provides entry into a new market of the pharmaceutical business.
To meet increasing customer demands, capacity was added to Setco
plants in Cranbury, New Jersey, and Anaheim, California.
OVERVIEW - 1993
The Company earned $1.22 per share from continuing operations in
fiscal year 1993. This represents a 5% increase over the $1.16
reported in 1992 and compares to gains of 18% in both 1992 and
1991. The Company adopted the new accounting standard for
postretirement benefits (Statement of Financial Accounting
Standards [SFAS] No. 106) in 1993 causing a one-time charge to
earnings of $.33 per share resulting in net earnings of $.89 per
share. The adoption of SFAS No. 106 also reduced earnings in 1993
by an additional $.03 per share to reflect ongoing accrued expenses
associated with these benefits. The increase in the federal
corporate income tax rate retroactive to January 1 also reduced
earnings by approximately $.03 per share. Adjusting 1993 earnings
for the additional expenses described and excluding a $.02 gain on
the sale of a divested business in 1992, profits increased 12% over
1992 on a comparable basis. Operating performance was below the
Company's earnings growth objective of 15%. This was primarily
due to high cost onion inventories; other factors were competitive
pressures and weak economic conditions in a number of the markets
in which we operate.
Sales of $1.56 billion increased 5.8% over 1992. Excluding the
impact of unfavorable foreign currency exchange rates, particularly
in the United Kingdom and Canada, sales increased by 9%. Sales of
unconsolidated operations in 1993 were $310 million, an increase of
16% over 1992.
Return on equity from continuing operations declined slightly to
22.0% versus 23.3% in 1992 and 21.8% in 1991. Return on equity
after taking into effect the adoption of the accounting change
discussed above was 17.0%.
Net income from continuing operations was 6.4% of net sales in 1993
versus 6.5% in 1992 and 5.7% in 1991.
Dividends were increased in December 1992 to an annual rate of $.44
per share and again in December 1993 to $.48 per share. These
dividend increases reflect management's continued confidence in the
long-term outlook for the Company.
The 2 million share repurchase program authorized in October 1991
was completed. In June 1993, the Company authorized an additional
2 million share repurchase program which was approximately 12%
complete at fiscal yearend.
The consumer products business reported higher profits and sales as
it continued to expand its product offerings through line
extensions and niche acquisitions. The operating environment for
consumer products companies remains difficult as the industry
focuses on cost reductions and efficiencies in a highly competitive
environment.
Most of our industrial and foodservice operations reported
increased operating profits and sales during 1993. However, our
Gilroy Foods unit experienced significantly lower operating profits
due to high onion costs. This situation, a result of fewer acres
planted and lower crop yields of product produced in 1992 for sale
in 1993, materially affected Gilroy's margins. The crop harvested
in mid-year 1993 produced acceptable yields, and margins are
expected to return to normal levels. Our industrial flavor and
seasonings business had an excellent year participating as a key
ingredient supplier in several significant new product launches by
its customers.
Sales and operating profits at our international operating units
increased significantly in 1993 on a local currency basis. Both the
United Kingdom and Canada, our largest consolidated international
operations, achieved increases despite the difficult economic
environments in which they operated.
Sales and operating profits at our packaging operations increased
significantly in 1993. During the year, the Company completed the
acquisition of the bottle business of Admiral Plastics. With this
acquisition, the Company enhanced its position as a quality
supplier of plastic bottles for the food, cosmetic and
pharmaceutical industries. The plastic tube business of Peerless
Tube, acquired in 1992, was successfully integrated into our Tubed
Products unit.
Earnings of our unconsolidated joint ventures increased
approximately 4% in 1993. McCormick de Mexico brought additional
capacity on stream in 1993 and engaged in heavy sales promotional
efforts to build market share. McCormick-Lion, our consumer
products operation in Japan, reported improved results due to
successful implementation of cost reduction programs.
Management remains confident that our current focus on profitable
expansion and margin improvement, combined with continued emphasis
on total quality, will generate increased shareholder value.
SALES
Sales from consolidated operations grew by 5.8% in 1993 to a record
level of $1.56 billion. Excluding the unfavorable effects of
foreign exchange rates, sales increased 9% versus our stated sales
growth objective of 10%.
Our domestic consumer products business experienced modest sales
growth in an environment that is both mature and highly
competitive. Continued focus on adding products which cater to the
consumer's demand for more convenience and variety contributed to
the 4% unit sales increase. A primary marketing thrust is to
position more McCormick products around the perimeter of the
grocery store. This is evidenced by our recent acquisition of the
consumer products line of Golden Dipt, which provides us with a
more extensive presence in the seafood department. Also, the
acquisition of product lines and brands such as Produce Partners,
Zebbies and Great Guacamole, provides us with additional products
in high traffic produce departments. The impact of private label
products on the sales of branded consumer products was a prime
concern for the grocery industry during 1993. Within the spice
industry, private label products are not new and the category has
not shown any recent growth. The Company has packaged private label
spices for many years. As a supplier of these products, we do not
believe they are a significant threat to our branded consumer
business.
Our domestic consumer products business continues to experience
margin pressure. Higher discounts and allowances are being
required to defend our distribution base. We expect that these
intensely competitive market conditions will exist throughout 1994.
We intend to defend aggressively our share of the consumer spice
and seasoning market.
Industrial/Food Service sales were up in 1993 due in part to the
success of new consumer products launched by our industrial
customers. These combined operations provide a broad array of high
quality flavor systems and ingredients, product development and
support services. Such capabilities continue to position us as a
preferred source for major multinational food processors.
In the packaging area, acquisition of the Admiral Plastics' bottle
business and continued expansion in our existing business
contributed to significant sales growth. Our ability to provide
customers with high quality specialty packaging along with
excellent customer service has enhanced our niche position in this
industry.
International sales growth was affected by continued economic
weakness and unfavorable foreign exchange rates in many of the
countries in which we operate. In local currency, sales growth in
the United Kingdom was excellent. Our U.K. operations continue to
expand its retail product line and gain further penetration in the
industrial marketplace.
Sales by our joint venture units, which are not consolidated,
reached $310 million, a 16% increase over 1992. These companies
have become increasingly important as a method to grow our business
in new geographical markets or product categories. In these
ventures, our partner provides critical market knowledge or
distribution strength that complements our overall capabilities in
the spice and seasoning business.
Sales
Consolidated 1993 1992 1991 1993 1992 1991
(in millions) (percentage of total)
Consumer Products $ 531.0 $ 509.0 $ 483.5 34.1% 34.7% 33.9%
Industrial/Food Service 537.3 503.9 536.1 34.5% 34.2% 37.5%
International 321.6 317.0 292.6 20.7% 21.5% 20.5%
Packaging 124.9 97.2 73.4 8.0% 6.6% 5.1%
Total Food and
Packaging 1,514.8 1,427.1 1,385.6 97.3% 97.0% 97.0%
Gilroy Energy 41.8 44.3 42.3 2.7% 3.0% 3.0%
Total $1,556.6 $1,471.4 $1,427.9 100.0% 100.0% 100.0%
Percentage Change 1993 1992 1991
Volume Price Volume Price Volume Price
Total Change Change Total Change Change Total Change Change
Consumer Products 4.3% 4.0% 0.3% 5.3% 3.3% 2.0% 11.1% 6.0% 5.1%
Industrial/Food
Service 6.6% 8.4% (1.8)% (6.0)% (4.0)% (2.0)% 3.6% 3.8% (0.2)%
International 1.4% 8.8% (7.4)% 8.3% 7.9% 0.4% 14.1% 8.1% 6.0%
Packaging 28.6% 25.5% 3.1% 32.4% 34.3% (1.9)% 10.2% 5.2% 5.0%
Total Food and
Packaging 6.1% 7.7% (1.6)% 3.0% 3.1% (0.1)% 8.6% 5.5% 3.1%
Gilroy Energy (5.7)% (4.2)% (1.5)% 4.7% 4.3% 0.4% (10.8)% (12.4)% 1.6%
Total 5.8% 7.7% (1.9)% 3.0% 3.1% (0.1)% 7.9% 4.8% 3.1%
Excluding divested
businesses:
Industrial/Food Service 9.2% 11.2% (2.0)% 3.6% 3.8% (0.2)%
Total Food and Packaging 8.7% 8.7% 0.0% 8.6% 5.5% 3.1%
We believe growth opportunities exist in our businesses and have
outlined the prospects for our various operations below:
Our consumer products business operates in a mature market where
the consumer's primary interest is purchasing products which
provide convenience and variety. We have focused our efforts on
developing high quality products which meet these needs. There is
potential to market a number of new value-added products,
particularly in the seasoning mix category. Our focus on marketing
McCormick products in the perimeter and other sections of the store
will provide additional growth. We will continue to evaluate niche
acquisitions which support this effort. Given the current low
inflationary environment with modest price increase expectations
and the mature nature of this market, we expect our consumer
business to grow at a rate less than our Corporate objective.
Industrial/Food Service sales growth of 6.6% was affected somewhat
by lower inventories as a result of a smaller onion crop and lower
yields at our Gilroy Foods unit. Our Food Service spice and
seasoning business continues to supply high quality products to
foodservice distributors and wholesale clubs. Our industrial
ingredients and flavor business had an outstanding year. As a
premier supplier of flavor systems to many of the major global food
processors, we continue to position ourselves as a partner to our
customers in the product development area. The opening of a new
state-of-the-art technical service center provides complete product
development capabilities for our customers. We provide our
customers with full service from the initial product concept stage
through flavor development and final manufacturing process setup.
With our technical resources in flavor systems development, we
provide our customers with the ability to differentiate their
products in the marketplace. We believe these capabilities,
provided on a global basis, position us for significant growth
potential in the future.
International sales growth continues to be an area of primary
importance to the Company. We are pursuing alternatives to
increase our presence in the European consumer spice market. We
have also begun to focus more intensely on retail operations in the
Pacific Rim area. We believe there are significant opportunities to
expand our retail presence in this area as a number of economies
continue their rapid development. Our efforts to expand our
industrial capabilities in the international market continued
throughout the year. We anticipate significant growth from this
area of our business as we support global expansion of our
major customers.
We have continued to expand our capabilities in the specialized
packaging niche we serve and believe future growth in our packaging
business will come from further market penetration. We expect this
business to grow at a rate near our Company objective.
EARNINGS
Our objective is to grow earnings per share (EPS) at an average
rate of 15% per year over time. EPS from continuing operations
reached $1.22, an increase of 5% over 1992. Total earnings per
share for 1993 were $.89 after deducting the one-time charge of
$.33 per share due to the adoption of SFAS No. 106 relating to
postretirement benefits. Our earnings from continuing operations
were impacted by three significant factors: first, both gross and
operating margins were reduced during the first three quarters of
the year by high onion costs, a result of fewer acres planted and
lower crop yields of product produced at our Gilroy Foods unit;
second, adoption of SFAS No. 106 reduced earnings from continuing
operations by $.03 per share to reflect the ongoing portion of this
expense; and third, the higher federal corporate income tax rate
retroactive to January 1, 1993 reduced earnings by $.03 per share.
Earnings in 1992 included a $.02 gain on the sale of a divested
business. After adjusting each respective year's results for these
factors, earnings from continuing operations increased 12% on a
comparable basis over 1992.Due in part to the high onion costs
at our Gilroy Foods unit throughout most of 1993, gross profit
margins for the Company declined to 38.7% in 1993 from 39.7% in
1992. The graph on this page displays margins over the past five
years. With the harvest of the 1993 crop, Gilroy's onion cost will
return to normal in 1994. Gross profits were also affected by the
faster growth rate of our industrial/food service and packaging
businesses relative to the consumer business. The gross margin of
these industrial businesses is less than that of the consumer
business. Therefore, the mix of our business this year had the
impact of reducing overall gross profit margins. We continued to
remove costs from our business. The graph on page 1 of this report
displays the distribution of the sales dollar as compared to
previous years. As shown, we continue to make progress in reducing
our cost of materials as a percent of sales.
Profit from operations increased to 11.6% of sales versus 11.4% in
1992 and 10.2% in 1991. As shown by the graph on this page, gross
profit margin declined while operating profit margin increased. As
described, our growing industrial and packaging businesses
experience a lower gross margin than our consumer business.
However, these businesses require a considerably lower level of
selling and promotional expenses. Therefore, even with a lower
overall gross profit rate, our operating profit margin increased as
we continued our cost containment programs throughout the
Corporation.
Interest expense increased slightly in 1993 to $31.1 million versus
$30.9 million in 1992 and $27.5 million in 1991. This increase was
primarily due to higher debt levels resulting from acquisitions
made in 1993. The lower interest rates experienced throughout 1993
helped offset the increased expense from the higher debt levels.
Other income in 1993 was $2.4 million lower than 1992 because 1992
included a gain on the sale of an industrial cleaning supply
business.
The effective tax rate in 1993 was 40.4% versus 38.3% in 1992 and
37.2% in 1991. The increased 1993 effective tax rate was due to
the new federal tax legislation retroactive to January 1, 1993.
Unconsolidated income from joint ventures increased to $10.3
million, up from $9.9 million in 1992. Improved results achieved
by our consumer joint venture in Japan contributed to the increase.
Joint ventures will play an increasingly important role as we
continue to pursue growth opportunities around the world.
Earnings
1993 1992 1991 1993 1992 1991
(in millions) (percentage of sales)
Gross profit $603.2 $584.0 $541.3 38.7% 39.7% 37.9%
Profit from operations 180.5 167.2 145.5 11.6% 11.4% 10.2%
Income before taxes 149.9 138.3 114.9 9.6% 9.4% 8.1%
Net income before
accounting change 99.7 95.2 80.9 6.4% 6.5% 5.7%
Net income 73.1 95.2 80.9 4.7% 6.5% 5.7%
Earnings per share before
accounting change 1.22 1.16 .98
Earnings per share .89 $ 1.16 $ .98
[At this point, a bar graph depicting gross profit and operating profit
as a percent of sales over the last five years appears and is represented
by the following table.]
PROFIT MARGINS
Percent of Sales
Year Gross Profit Operating Profit
1989 35.3 8.2
1990 36.6 9.6
1991 37.9 10.2
1992 39.7 11.4
1993 38.7 11.6
We remain committed to the achievement of 15% earnings growth on
average. However, in the near-term, achieving this objective
remains a challenge and requires accomplishment of the following:
*10% sales growth,
*A four-year cost reduction program targeted to save 10% of cost of
goods sold. Fiscal 1993's target of saving 3% was achieved. Some
of the programs we are using to achieve these savings include the
following:
- - Continued cost reductions through our global sourcing program
which is expanding and providing incremental savings,
- - Our Total Quality process which fosters an environment conducive
to continuous improvements by empowering our employees who strive
to improve customer service and production processes,
- - Supply chain management which reduces the cost of operations by
eliminating any step in the process that does not add value,
- - Capital spending focused on providing our worldwide manufacturing
locations with the most efficient production equipment available.
This emphasis positions us globally as a low-cost producer and
enhances our ability to be a supplier to our customers worldwide.
*Continued operating profit margin improvement despite the impact
of sales mix,
*Increased contributions from our unconsolidated operations as they
grow at a faster rate.
We do not believe that current projected rates of inflation will
have a material effect on our operating results.As described
above, during the year the Company adopted SFAS No. 106, Employers
Accounting for Postretirement Benefits Other than Pensions. This
accounting change resulted in a one-time, non-cash charge of $26.6
million after tax or $.33 per share. Additionally, this new
accounting method resulted in an increase in the ongoing after-tax
cost of postretirement benefits of $2.2 million or $.03 per share.
During the year, the Company also adopted SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, which requires
disclosure of the estimated fair value of certain financial
instruments. Cash, receivables, short-term borrowings, accounts
payable, and accrued liabilities are reflected in the financial
statements at fair value because of the short-term maturity of
these instruments. Investments, principally in unconsolidated
affiliates, are not readily marketable and therefore it is not
practicable to estimate their fair value. The fair value of the
Company's long-term debt instruments is disclosed in Notes to
Financial Statements, Number 3.
In November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits. This standard requires
that employers accrue a liability for their obligation to provide
postemployment benefits as employees earn the right to receive
them, provided that payment of the benefits is probable and the
amount of the benefits can be reasonably estimated. The Company has
not yet determined when this standard will be adopted. The effect
of this accounting change on the Company's financial statements is
not expected to be material. The Company must adopt this standard
no later than in its fiscal year ending November 30, 1995.
LIQUIDITY
The Company's current ratio was 1.4 at yearend compared to 1.1 and
1.2 at the end of 1992 and 1991, respectively. The significant
improvement was attributable to the Company's refinancing of short-
term debt under our $150 million medium-term note program. The
Company's current ratio does not represent a complete measure of
the cash resources available to finance operating requirements. We
maintain relationships with a number of domestic and foreign banks
that provide credit facilities of $290 million which increase our
liquidity. These facilities were not in use at yearend.
During 1993, Moody's upgraded the Company's commercial paper rating
to P-1. Standard & Poor's reaffirmed the Company's A-1 rating.
Reported net income reflects the one-time non-cash charge of $26.6
million incurred with adoption of SFAS No. 106. Overall, cash flows
from operations were reduced by approximately $37 million versus
1992 due to an increase in operating assets. This was primarily a
result of a return to normal inventory levels at our Gilroy Foods
subsidiary and increased inventories associated with new product
introductions by our industrial customers. The accounts receivable
turnover rate stabilized at 12.9 times versus 12.9 and 13.3 times
in 1992 and 1991, respectively. Inventory turnover rate was 3.1
times in 1993 and 1992, and 3.5 times in 1991.
Liquidity
1993 1992 1991
(in millions)
Net income $ 73.1 $ 95.2 $ 80.9
Accounting change for
postretirement benefits 26.6
Depreciation and other
non-cash charges 39.4 31.5 36.8
Dividends received from
unconsolidated subsidiaries 10.4 5.6 3.2
Change in operating assets
and liabilities (68.9) (15.0) (46.5)
Cash flow from operations $ 80.6 $117.3 $ 74.4
Current ratio 1.4 1.1 1.2
RETURN ON EQUITY
Return on equity (ROE), calculated by dividing net income from
continuing operations by average shareholders' equity,
was 22.0% versus 23.3% in 1992 and 21.8% in 1991. After reducing
net income and equity for the impact of the one-time charge
relating to the adoption of SFAS No. 106, total ROE for 1993 was
17.0%.
As described previously, due to high onion costs, higher federal
corporate income tax rates, and the impact of SFAS No. 106,
operating earnings grew at a 5% rate in 1993, a deceleration from
the earnings growth rate experienced in previous years. The lower
earnings growth rate was the primary reason for the slight decline
in our ROE from continuing operations.
Management continues to focus on margins and asset utilization to
help us maintain our ROE at a level above 20%. Programs that
generate margin improvement include the following:
*Emphasis on our cost reduction program including continuing
benefit from our global sourcing efforts,
*Capital investments in plant and equipment focused on making us a
low cost producer,
*Company-wide emphasis on Total Quality to improve performance and
customer service.
Improving our asset utilization is also key to increasing our ROE.
Our efforts in this area include:
*Continual analysis of our worldwide production operations for
opportunities to improve efficiencies,
*Making working capital management a significant factor in our
incentive compensation program,
*Constant review of our entire asset base for areas where returns
are not meeting our objectives.
CAPITAL STRUCTURE/DEBT FINANCING
Our objective is to maintain total debt to total capital at 40% or
less, excluding non-recourse debt.
Total debt to total capital, excluding non-recourse debt of $59.7
million associated with Gilroy Energy Company, was 44.3% at yearend
versus 37.4% in 1992 and 36.4% in 1991.
The 1993 yearend ratio was affected by the adoption of SFAS No. 106
which created a one-time charge to equity of $26.6 million. On a
comparable basis to 1992, adding back the one-time charge, debt to
total capital was 42.9%. Over the course of 1993, several
acquisitions were completed and capital expenditures remained at a
relatively high level, the primary factors allowing the Company to
slightly exceed its objective.
In 1993, the Company's long-term debt rating of A was reaffirmed by
both major debt rating services. Operating cash flows remain strong
and should be sufficient to cover capital expenditures and dividend
payouts in 1994.
[At this point, a bar graph depicting debt to total capital over
the last five years appears and is represented by the following
table.]
DEBT TO TOTAL CAPITAL
(Excludes non-recourse debt)
Year Percent
1989 32.6
1990 32.9
1991 36.4
1992 37.4
1993 44.3
During 1993, the Company negotiated revolving credit facilities
aggregating $290 million on favorable terms with a syndicate of
domestic and foreign banks. These revolvers replaced credit
facilities aggregating $236 million. During 1993, the Company also
put in place a $150 million medium-term note program for the
purpose of refinancing short-term debt. At yearend, $30 million of
the notes had been issued with a term of 12 years at rates of 5.78%
to 6.1%. This credit facility also enabled reclassification of
$120 million of commercial paper as long-term debt in 1993.
We continue to seek acquisitions throughout the world that fit our
mission and strategy. Our primary justification for making an
acquisition continues to be the timely achievement of an acceptable
return on investment. When a strategic acquisition of significant
size occurs which provides the Company with important marketing and
growth opportunities, management may decide to increase the debt to
total capital ratio for a period of time. In such an event,
management would require plans and programs be in place that
provide reasonable assurance the Company would again be operating
within its capital structure objective.
CAPITAL EXPENDITURES
Capital expenditures were $76 million in 1993 versus $79 million in
1992 and $73 million in 1991. The majority of our capital spending
is oriented toward projects that increase efficiency and improve
yields or expand capacity. Major capital spending projects in 1993
included the following:
*Opened a condiment manufacturing and distribution center in
Scotland,
*Increased manufacturing capacity and expanded product capabilities
at Tubed Products,
*Added spray drying and liquid compounding capacity for our
industrial customer base,
*Expanded production capabilities and capacity of Setco,
*Installed an electrical substation and support equipment at
Gilroy Foods to reduce utility costs.
We will continue to pursue capital spending projects which will
help ensure our position as a low-cost producer. We anticipate that
capital spending in 1994 will be somewhat lower than the 1993
level.
[At this point, a bar graph depicting property additions and
depreciation over the last five years appears, and is represented
by the following table.]
CAPITAL EXPENDITURES
$ In Millions
Year Property Additions Depreciation
1989 53 32
1990 58 33
1991 73 37
1992 79 40
1993 76 47
DIVIDENDS
Dividends have increased 11 times since 1987 and have risen at a
compounded rate of 23%. Total dividends paid during fiscal 1993
were $35.6 million versus $30.4 million in 1992 and $22.4 million
in 1991. In December 1992, the Board of Directors authorized an
increase in the annual dividend rate from $.40 per share to $.44
per share. The quarterly dividends paid during the past three years
are summarized below.
1993 1992 1991
First Quarter $.11 $.09 $.065
Second Quarter .11 .09 .065
Third Quarter .11 .10 .075
Fourth Quarter .11 .10 .075
Total $.44 $.38 $.280
In December 1993, the Board of Directors approved an increase
in the quarterly dividend from $.11 to $.12 per share, a 9%
increase. Our objective is to pay dividends equal to 25%-35% of
current net income to shareholders of common stocks.
PRICE RANGE OF COMMON STOCK
The high and low closing prices of common stock during fiscal
quarters as reported on the NASDAQ national market follow:
1993 1992
Quarter ended High Low High Low
February 28 $30.25 $24.75 $28.25 $21.25
May 31 26.00 22.50 28.00 21.75
August 31 24.75 20.50 26.00 20.63
November 30 26.25 21.63 28.75 25.25
HISTORICAL FINANCIAL SUMMARY(DOLLARS IN MILLIONS EXCEPT PER-SHARE DATA)
OPERATING RESULTS 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
Net sales 1,556.6 1,471.4 1,427.9 1,323.0 1,246.1 1,220.3 1,078.5 975.7 873.0 788.4
Cost of goods sold 953.4 887.4 886.6 838.2 805.9 812.6 710.2 637.4 564.5 503.1
Gross profit 603.2 584.0 541.3 484.8 440.2 407.7 368.3 338.3 308.5 285.3
Selling, general &
admin. exp. 422.7 416.8 395.8 357.7 338.2 312.9 305.2 271.3 247.9 220.1
Operating profit 180.5 167.2 145.5 127.1 102.0 94.8 63.1 67.0 60.6 65.2
Interest & other
income/exp. (30.6) (28.9) (30.6) (22.8) (23.5) (31.0) (22.5) (23.5) (21.4) (13.6)
Income before
income taxes 149.9 138.3 114.9 104.3 78.5 63.8 40.6 43.5 39.2 51.6
Provision for income
taxes (60.5) (53.0) (42.8) (38.6) (29.5) (27.8) (16.6) (19.4) (18.1) (24.8)
Income consolidated
ops. 89.4 85.3 72.1 65.7 49.0 36.0 24.0 24.1 21.1 26.8
Income unconsolidated
ops. 10.3 9.9 8.8 3.7 3.5 (.4) .4 .3 .5 .8
Income continuing
ops. 99.7 95.2 80.9 69.4 52.5 35.6 24.4 24.4 21.6 27.6
Income discont. real
estate ops. 83.0 .7 6.2 5.3 6.2 27.0
Accounting changes (26.6) 6.4
Net income 73.1 95.2 80.9 69.4 135.5 42.7 30.6 29.7 27.8 54.6
Gross profit margin 38.7% 39.7% 37.9% 36.6% 35.3% 33.4% 34.1% 34.7% 35.3% 36.2%
Operating profit
margin 11.6% 11.4% 10.2% 9.6% 8.2% 7.8% 5.9% 6.9% 6.9% 8.3%
Profit margin
consolidated 5.7% 5.8% 5.1% 5.0% 3.9% 3.0% 2.2% 2.5% 2.4% 3.4%
Percent change over prior year
Net sales 5.8% 3.0% 7.9% 6.2% 2.1% 13.2% 10.5% 11.8% 10.7% 6.1%
Income continuing
ops. 4.7% 17.7% 16.6% 32.1% 47.5% 45.9% .0% 13.0% (21.7)% .0%
Effective tax rate 40.4% 38.3% 37.2% 37.0% 37.6% 43.6% 40.9% 44.6% 46.2% 48.1%
LIQUIDITY
Depreciation and
amortization 50.5 43.8 40.5 36.6 34.8 29.8 30.4 24.5 23.5 20.9
Capital expenditures 76.1 79.3 73.0 58.4 53.4 50.4 81.7 82.9 41.3 31.3
Current ratio 1.4 1.1 1.2 1.3 1.7 1.4 1.4 1.4 1.3 1.4
CAPITAL STRUCTURE
Current debt 82.6 120.5 76.7 30.4 20.3 49.5 76.7 51.9 56.5 44.8
Long-term debt 288.8 141.3 145.8 148.2 147.2 166.1 139.5 102.2 94.8 96.6
Non-recourse debt 59.7 61.8 63.3 63.3 63.3 63.3 58.6 24.6
Total debt 431.1 323.6 285.8 241.9 230.8 278.9 274.8 178.7 151.3 141.4
Shareholders' equity 466.8 437.9 389.2 364.4 346.2 294.3 280.6 271.6 261.1 243.7
Total capital 897.9 761.5 675.0 606.3 577.0 573.2 555.4 450.3 412.4 385.1
Total assets 1,313.2 1,130.9 1,037.4 946.9 864.5 846.4 776.5 648.1 582.4 542.5
Return on equity -
continuing ops. 22.0% 23.3% 21.8% 20.4% 15.5% 14.6% 11.1% 11.9% 11.9% 15.5%
Return on equity -
total 17.0% 23.3% 21.8% 20.4% 40.0% 14.6% 11.3% 11.3% 11.3% 23.2%
Percent debt to
total capital 48.0% 42.5% 42.3% 39.9% 40.0% 48.7% 49.5% 39.7% 36.7% 36.7%
Debt to capital excluding -
non-recourse 44.3% 37.4% 36.4% 32.9% 32.6% 42.3% 43.5% 36.2% 36.7% 36.7%
PER COMMON SHARE (1)
Income - continuing
ops. 1.22 1.16 .98 .83 .60 .38 .26 .25 .22 .28
Income - discont. real
estate ops. .94 .01 .06 .06 .06 .27
Income before accounting
changes 1.22 1.16 .98 .83 1.54 .39 .32 .31 .28 .55
Accounting changes (.33) .07
Total earnings .89 1.16 .98 .83 1.54 .46 .32 .31 .28 .55
EPS growth from
continuing ops. 5% 18% 18% 38% 58% 46% 4% 14% (21)% 0%
Book value 5.70 5.45 4.88 4.56 4.18 3.27 3.00 2.83 2.68 2.50
Common dividends
declared (2) .45 .40 .31 .24 .19 .14 .13 .11 .11 .14
Market closing price:
High 30.25 28.75 22.88 13.38 12.50 7.25 6.44 5.66 4.75 4.27
Low 20.50 20.63 11.88 9.13 6.31 3.85 4.10 4.16 3.85 3.57
Dividend payout
ratio (3) 36.1% 32.8% 28.6% 28.9% 30.8% 36.5% 38.5% 37.4% 38.6% 25.5%
Average shares outstanding -
and equivalents(000's) 81,766 81,918 82,396 83,720 87,772 93,068 94,408 96,848 98,000 99,184 (1)
(1) All share data adjusted for 2-for-1 stock splits in January 1992,
January 1990 and April 1988.
(2) Includes fourth quarter dividends for the years 1986 and
1988-1993, which were declared in December of each of those years.
(3) Dividend payout ratio does not include gain on sale of
discontinued real estate operations, or cumulative effect of
accounting changes.
CONSOLIDATED INCOME
Year ended November 30
1993 1992 1991
(in thousands except per-share data)
Net sales $1,556,566 $1,471,369 $1,427,902
Cost of goods sold 953,409 887,394 886,514
Gross profit 603,157 583,975 541,388
Selling, general and administrative expense 422,700 416,788 395,811
Profit from operations 180,457 167,187 145,577
Other income 6,397 8,778 5,040
Interest expense 31,102 30,895 27,464
Other expense 5,862 6,757 8,205
Income before income taxes 149,890 138,313 114,948
Provision for income taxes 60,500 53,000 42,800
Income from consolidated operations 89,390 85,313 72,148
Income from unconsolidated operations 10,290 9,904 8,776
Net income before cumulative effect
on prior years of accounting change 99,680 95,217 80,924
Cumulative effect on prior years of
accounting change for postretirement benefits (26,626)
Net Income $ 73,054 $ 95,217 $ 80,924
Earnings per common share
Before cumulative effect of accounting change $1.22 $1.16 $.98
Cumulative effect on prior years of
accounting change (.33)
Earnings per common share $ .89 $1.16 $.98
See Notes to Financial Statements, pages 26-34.
Consolidated Balance Sheet November 30
Assets 1993 1992
(in thousands)
Current assets
Cash and cash equivalents $ 12,838 $ 1,806
Receivables
Trade 158,904 134,277
Other 18,727 26,348
Allowance for losses (2,530) (2,651)
175,101 157,974
Inventories
Finished products and
work-in-process 215,538 186,547
Raw materials and supplies 105,713 95,635
321,251 282,182
Prepaid expenses 17,960 19,748
Deferred income taxes 13,003 6,382
Total current assets 540,153 468,092
Investments 45,728 41,526
Property, plant and equipment
Land and improvements 28,566 27,199
Buildings and improvements 199,621 166,362
Machinery and equipment 494,143 433,040
Construction in progress 32,492 43,370
754,822 669,971
Less accumulated depreciation and
amortization 289,212 251,450
Property, plant and
equipment - net 465,610 418,521
Excess cost of acquisitions-net 130,638 87,619
Prepaid allowances 126,399 110,792
Other assets 4,706 4,327
Goodwill, trademarks, formulae, etc. 1 1
Human relations 1 1
$1,313,236 $1,130,879
See Notes to Financial Statements, pages 26-34.
November 30
Liabilities and Shareholders'
Equity 1993 1992
(in thousands)
Current liabilities
Notes payable $ 76,389 $ 111,557
Current portion of
long-term debt 8,299 10,916
Outstanding checks 25,401 24,149
Trade accounts payable 113,884 108,537
Accrued payroll 29,781 31,665
Accrued sales allowances 31,240 26,882
Other accrued expenses
and liabilities 90,980 88,057
Income taxes 16,893 17,803
Total current liabilities 392,867 419,566
Long-term debt 346,436 201,080
Deferred income taxes 39,006 58,219
Employee benefit
liabilities 63,875 10,412
Other liabilities 4,231 3,664
Total liabilities 846,415 692,941
Shareholders' equity
Common Stock, no par value;
authorized 160,000,000
shares; issued and
outstanding: 1993 -
14,562,000 shares, 1992
- - 14,357,000 shares 53,470 42,294
Common Stock Non-Voting,
no par value;
authorized 160,000,000
shares; issued and
outstanding: 1993 -
66,437,000 shares,
1992-65,951,000 shares 93,047 80,449
Retained earnings 330,327 318,711
Foreign currency
translation adjustments (10,023) (3,516)
Total shareholders'
equity 466,821 437,938
Commitments and contingent
liabilities $1,313,236 $1,130,879
See Notes to Financial Statements, pages 26-34.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Retained Currency Translation
CHANGES IN AMOUNTS Stocks Earnings Adjustments Total
(in thousands except per-share data)
Balance, December 1, 1990 $ 75,316 $274,357 $ 14,694 $364,367
Net income 80,924 80,924
Dividends declared ($.28/share) (22,435) (22,435)
Currency translation adjustments (6,320) (6,320)
Shares purchased (5,417) (52,274) (57,691)
Shares issued 30,358 30,358
Balance, November 30, 1991 100,257 280,572 8,374 389,203
Net income 95,217 95,217
Dividends declared ($.38/share) (30,435) (30,435)
Currency translation adjustments (11,890) (11,890)
Shares purchased (4,633) (26,643) (31,276)
Shares issued 27,119 27,119
Balance, November 30, 1992 122,743 318,711 (3,516) 437,938
Net income 73,054 73,054
Dividends declared ($.44/share) (35,553) (35,553)
Currency translation adjustments (6,507) (6,507)
Other adjustments (3,066) (3,066)
Shares purchased (3,580) (22,819) (26,399)
Shares issued 27,354 27,354
Balance, November 30, 1993 $146,517 $330,327 $(10,023) $466,821
CHANGES IN SHARES ISSUED AND OUTSTANDING
Common Common
Non-Voting
(in thousands)
Balance, November 30, 1990 14,444 65,422
Purchased and retired (624) (2,498)
Issued 1,087 1,851
Equal exchange (466) 466
Balance, November 30, 1991 14,441 65,241
Purchased and retired (393) (861)
Issued 1,073 807
Equal exchange (764) 764
Balance, November 30, 1992 14,357 65,951
Purchased and retired (286) (676)
Issued 791 862
Equal exchange (300) 300
Balance, November 30, 1993 14,562 66,437
See Notes to Financial Statements, pages 26-34.
CONSOLIDATED CASH FLOWS
Year ended November 30
1993 1992 1991
(in thousands)
Cash flows from operating activities
Net income $ 73,054 $ 95,217 $ 80,924
Adjustments to reconcile net income to
net cash providedby operating activities
Cumulative effect of accounting change 26,626
Depreciation and amortization 50,522 43,839 40,476
Provision for deferred income taxes (1,077) (706) 6,062
Loss/(gain) on sales of assets 201 (1,779) (940)
Share of income from unconsolidated operations (10,290) (9,904) (8,776)
Changes in operating assets and liabilities
net of effectsfrom businesses acquired or
sold
Receivables (increase)/decrease (26,293) 1,446 (7,537)
Inventories (increase) (34,089) (14,795) (33,049)
Prepaid expenses (increase)/decrease 1,719 (64) (71)
Prepaid allowances (increase) (15,763) (8,577) (20,672)
Other assets (increase)/decrease (393) 209 (182)
Outstanding checks increase/(decrease) 1,252 (10,068) 2,335
Accounts payable increase 7,117 15,408 1,266
Accrued payroll increase/(decrease) (1,884) 2,276 2,291
Accrued sales allowances increase/(decrease) 4,358 (1,378) (582)
Other accrued exp. and liabilities increase/(decrease) (4,070) (10,319) 13,421
Income taxes payable increase/(decrease) (6,185) 5,065 (6,284)
Other non-current liabilities increase 5,379 5,820 2,526
Dividend received from unconsolidated affiliate 10,391 5,635 3,182
Net cash provided by operating activities 80,575 117,325 74,390
Cash flows from investing activities
Acquisitions of businesses (75,915) (43,703) (246)
Purchases of property, plant and equipment (76,063) (79,345) (72,978)
Proceeds from sale of assets 1,461 5,726 14,583
Proceeds from forward exchange contract 9,288
Other investments (3,823) (3,965) (2,861)
Net cash (used in) investing activities (145,052) (121,287) (61,502)
Cash flows from financing activities
Notes payable increase 85,159 69,075 18,259
Long-term debt
Borrowings 38,535 4,714 76,873
Repayments (10,002) (34,954) (51,476)
Stocks
Issued 27,354 27,077 24,858
Acquired by purchase (26,399) (31,276) (57,691)
Dividends paid (35,551) (30,431) (22,433)
Net cash provided by/(used in) financing activities 79,096 4,205 (11,610)
Effect of exchange rate changes on cash and cash equivalents (3,587) (4,461) (601)
Increase/(decrease) in cash and cash equivalents 11,032 (4,218) 677
Cash and cash equivalents at beginning of year 1,806 6,024 5,347
Cash and cash equivalents at end of year $ 12,838 $ 1,806 $ 6,024
See Notes to Financial Statements, pages 26-34.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per-share data)
1. Summary of Accounting Policies:
Consolidation
The financial statements include all majority-owned
subsidiaries. Subsidiaries outside the United States and Canada are
consolidated using an October 31 yearend.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity date of three months or less to be cash
equivalents.
The Company's central cash management system is designed to
maintain zero balances at certain banks. Accounting records
classify checks written but not presented to these banks as
outstanding checks.
Inventories
Inventories are stated at the lower of cost (first-in, first-
out) or market.
Prepaid Allowances
The Company incurs costs in connection with certain contracts
which extend beyond a one-year period. These costs are deferred
and amortized over the life of the contracts.
Investments
Investments in the Company's unconsolidated affiliates are
carried on the equity basis; other investments are stated at
cost.
The excess cost of acquisition of subsidiaries and affiliates
is being amortized using the straight-line method principally over
40 years. Accumulated amortization of excess cost of acquisitions
was $23,994 at November 30, 1993 and $19,936 at November 30, 1992.
Property, Plant and Equipment
Property, plant and equipment is stated on the basis of
historical cost. Depreciation is computed using principally the
straight-line method. Depreciation expense was $46,702 in 1993;
$40,033 in 1992 and $37,046 in 1991.
Upon sale or retirement of property, plant and equipment,
related costs and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in other
income or other expense, respectively.
Capitalized leased assets and leasehold improvements are
amortized over the shorter of their estimated life or the period of
the related leases.
Revenue Recognition
Sales revenue is recorded and recognized as products are
shipped and services are rendered.
Income Taxes
The Company provides for income taxes using the liability
method pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes
are provided for temporary differences arising between the tax
basis of assets and liabilities and their book basis as reported in
the financial statements.
Research and Development
Research and development costs are charged to operations as
incurred. Such costs were $12,259 in 1993; $11,844 in 1992 and
$11,438 in 1991.
Earnings Per Share
Earnings per common share have been computed by dividing net
income by the weighted average number of common shares outstanding
during the period (80,799,000 shares in 1993; 80,116,000 shares in
1992 and 80,030,000 shares in 1991), plus dilutive common
equivalent shares applicable to outstanding stock option and
purchase plans (967,000 shares in 1993; 1,802,000 shares in 1992
and 2,366,000 shares in 1991).
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Because the Company has a large and diverse customer
base with no single customer accounting for a significant
percentage of trade accounts receivable, there was no material
concentration of credit risk at November 30, 1993.
Accounting Change
In November 1993, the Company decided to adopt SFAS No. 106,
Employers Accounting for Postretirement Benefits Other than
Pensions effective as of December 1, 1992. This accounting
standard requires the expected cost of postretirement benefits be
accrued during the years that employees render services. Prior to
1993, the Company recognized these expenses based on claims
paid.
The Company is immediately recognizing a transition obligation
which is based on the aggregate amount that would have been
recorded in prior years had the new standard been in effect for
those years, as a one-time charge to 1993 income of $26.6 million
or $.33 per share, net of approximately $17.2 million of income tax
benefit. The incremental change to 1993 net income by applying SFAS
106 rather than the previous accounting method was $2.2 million net
of income tax benefit, or $.03 per share.
Results for the first three quarters of 1993 have been restated to
reflect this change. Prior year financial statements have not been
restated (see Note 11).
Fair Value of Financial Instruments
SFAS No. 107 Disclosures About Fair Value of Financial
Instruments requires disclosure of the estimated fair value of
certain financial instruments. Cash, receivables, short-term
borrowings, accounts payable, and accrued liabilities are reflected
in the financial statements at fair value because of the short-term
maturity of these instruments. Investments, principally in
unconsolidated affiliates, are not readily marketable and therefore
it is not practicable to estimate their fair value. The fair value
of thnme Company's long-term debt instruments is disclosed in Note
3.
2. Investments:
The Company owns from 21.9% to 50% of its unconsolidated food
products affiliates. Although the Company reports its share of
earnings from the affiliates, their financial statements are not
consolidated with those of the Company. The Company's share of
undistributed earnings of the affiliates was $17,200 at November
30, 1993.
Summarized yearend information from the financial statements
of these companies representing 100% of their businesses follows:
UNCONSOLIDATED AFFILIATES
1993 1992 1991
Current assets $136,713 $120,410 $ 94,508
Non-current assets 68,974 57,611 46,303
Current liabilities 87,512 80,748 77,517
Non-current liabilities 35,138 26,566 16,798
Net sales 309,527 268,182 218,564
Gross profit 122,515 110,001 91,042
Net income $ 20,557 $ 19,756 $ 18,140
3. Financing Arrangements and Long-Term Debt:
At November 30, 1990, the Company had committed credit
facilities with domestic and foreign banks in aggregate of
$256,000. The Company maintains these credit facilities largely to
assure liquidity and support commercial paper issuance. There were
no borrowings outstanding against these facilities at November 30,
1990. The Company is required to pay a commitment fee on the
unused portion of these facilities.
The Company has short-term lending arrangements for the
benefit of its foreign subsidiaries which provide for lines of
credit aggregating $33,000. Borrowings under these agreements
totaled $4,700. The Company also has informal money market rate
borrowing agreements with its domestic and foreign banks in excess
of $100,000, subject to availability of funds; compensation is not
required. Short-term borrowings under these arrangements totaled
$3,600 at November 30, 1990.
The Company's long-term debt at November 30 consisted of the
following:
1993 1992
8.95% note due 2001 $ 74,279 $ 74,215
9.00% installment note due 2001 15,909 20,455
9.75% installment note due 2003 31,500 35,000
5.78% - 6.10% notes due 2005 30,000
10.00% Bond due 1999 7,489
Commercial paper notes supported
by note agreements 120,000
Industrial revenue bonds 7,054 9,664
Other 2,617 2,007
288,848 201,080
11.68% non-recourse installment
note due 2006 57,588 59,739
Total $346,436 $260,819
The installment note agreements require sinking fund payments.
The Company's long-term debt agreements contain various restrictive
covenants including payment of cash dividends. Under the most
restrictive covenant, $239,282 of retained earnings was available
for dividends at November 30, 1993.
In August 1993, the Company filed a shelf registration to
establish a medium-term note program in the amount of $150,000.
This program will allow the Company to issue notes in various
maturities ranging from 9 months to 30 years. At November 30, 1993,
the Company had issued $30,000 of notes with maturities of 12 years
and an average coupon of 5.95%.
Certain commercial paper notes have been classified as
long-term debt, reflecting the Company's ability and intention to
refinance this amount on a long-term basis through existing credit
facilities.
Industrial revenue bonds are payable in installments from 1993
to 2002 with interest rates ranging from 3.48% to 7.63%.
The non-recourse installment note is secured by property and
equipment owned by Gilroy Energy Company, Inc. with a net book
value of $65,745.
Maturities of long-term debt during the four years
subsequent to November 30, 1994 are as follows:
1995 - $10,110 1997 - $9,910
1996 - $ 8,705 1998 - $9,114
The estimated fair value of long-term debt at November 30,
1993, using discounted cash flow analysis based on the Company's
current incremental borrowing rate for debt of similar remaining
maturities was $378,701. This amount excludes $8,299 current
portion of long-term debt which in considered to be at fair value.
The Company enters into forward exchange contracts to hedge
the impact of foreign currency fluctuations on its net investments
in certain foreign subsidiaries. At November 30, 1993, the Company
had outstanding $29,838 of forward exchange contracts with
commercial banks expiring in 1994. The gains or losses on these
contracts are included in the foreign currency translation
adjustments account within shareholders' equity. The fair value of
these contracts using market prices for comparable instruments was
$29,700.
Interest paid in 1993, 1992 and 1991 was $31,739, $32,243 and
$25,233 respectively, of which $73, $127 and $741 was capitalized
in 1993, 1992 and 1991 respectively.
4. Employee Benefit Plans:
Pension Plans
The Company has two non-contributory defined benefit pension
plans, one covering substantially all domestic employees other than
those covered under union-sponsored multi-employer plans, and
another to provide supplemental retirement benefits for certain
officers. Plan benefits are generally based on the employee's years
of service and compensation during the last five years of
employment. At November 30, 1993, Company employees numbering
approximately 4,466 were eligible to participate, and were
participants in the Plans. The Company's funding policy is to
comply with federal laws and regulations and to provide the
principal plan with assets sufficient to meet future benefit
payments. The Company contributed $13,370 to its principal plan in
1993. The Plans' assets consist primarily of short-term money
market investments, fixed income investments and equity securities,
which included 149,742 shares of Company stocks at November 30,
1993.
A summary of the components of pension cost for the defined
benefit plans and the total costs charged to pension expense
follows:
1993 1992 1991
Defined benefit plans
Service cost - benefits earned during the period $ 6,137 $ 4,912 $ 4,401
Interest cost on projected benefit obligations 9,272 8,741 8,069
Actual return on plan assets including unrealized (gain)/loss (7,070) (7,238) (11,383)
Net amortization and deferral 852 700 4,685
Net pension cost 9,191 7,115 5,772
Multi-employer pension plans 1,591 1,477 1,488
Foreign retirement plans 1,907 1,988 1,900
Total pension expense $12,689 $10,580 $ 9,160
The following table sets forth the defined benefit plans' funded
status, amounts recognized in the Company's Consolidated Balance
Sheet and significant assumptions as of September 30:
1993 1992
Funded status
Actuarial present value of benefit
obligation Vested $108,071 $ 95,669
Non-vested 4,177 3,309
Accumulated benefit obligation 112,248 (a) $ 98,978 (c)
Balance sheet recognition
Projected benefit obligation
for service rendered to date (144,209) $(125,114)
Plan assets at fair value 103,207 (b) 87,261 (d)
Projected benefit obligation
in excess of plan assets (41,002) (37,853)
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions 39,512 28,876
Unrecognized net transition
asset and prior service cost (3,529) (4,222)
Accrued pension cost recognized
in Consolidated Balance Sheet (5,019) $ (13,199)
Significant assumptions
Weighted-average discount rate 7.0% 7.5%
Rate of increase in compensation
levels 5.0% 5.0%
Long-term rate of return on
plan assets 10.5% 10.5%
Principal Supplemental
Plan Plan
(a) Accumulated benefit
obligation - 1993 $98,562 $13,686
(b) Plan assets at fair
value - 1993 $94,233 $ 8,974
(c) Accumulated benefit
obligation - 1992 $88,290 $10,688
(d) Plan assets at
fair value - 1992 $82,372 $ 4,889
Profit Sharing Plan
The Company makes contributions to the McCormick Profit
Sharing Plan in accordance with the Plan's provisions.
Contributions were $6,500 in 1993; $5,700 in 1992 and
$4,900 in 1991. At November 30, 1993, Company employees numbering
approximately 5092 were eligible to participate, and were
participants in the Plan.
Postretirement Benefits
The Company provides health care and life insurance benefits
to eligible retirees having at least 10 years of service. Health
care benefits are also extended to eligible dependents of retirees
as long as the retiree remains covered. Medical benefits are
contributory based on the retiree's age and service at retirement
and require other cost-sharing features such as deductibles and
coinsurance. Life insurance protection is non-contributory. These
benefit plans are not funded. The Company pays for claims as
incurred. Amounts paid were $1,819 in 1993; $2,360 in 1992 and
$1,262 in 1991.
SFAS No. 106 requires companies to accrue the cost of
postretirement benefits during the years that employees render
service. As discussed in Note 1, the Company adopted SFAS No. 106,
effective December 1, 1992 and recorded a one-time charge of $26.6
million net of deferred income tax benefits for accumulated
postretirement benefits. In addition to this one-time charge, the
Company's postretirement benefit expense for 1993 increased
approximately $3.6 million due to SFAS No. 106. The net periodic
cost for postretirement health care and life insurance benefits
during 1993 includes the following:
Service cost $1,947
Interest cost 3,333
Net postretirement benefit cost $5,280
The accumulated postretirement benefit obligation (APBO) which
is classified with Employee benefit liabilities on the Consolidated
Balance Sheet, included the following at November 30, 1993:
Current retirees $18,357
Fully eligible active plan participants 10,725
Other active plan participants 18,377
Accrued Postretirement benefit liability $47,459
The weighted-average annual rate in increase in the per capita
cost of covered benefits (i.e., health care trend rate) assumed for
the medical plan is 13% for 1994 and is assumed to gradullay
decrease to 6% in 2006 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated
postretirement benefit obligation at November 30, 1993, by $6,100,
and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for 1993 by $800.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation at November 30, 1993,
was 7.75%.
Postemployment Benefits
In November 1992, the Financial Accounting Standards Board
issued SFAS No. 112, Employers' Accounting for Postemployment
Benefits. This standard requires that employers accrue a liability
for their obligation to provide postemployment benefits as
employees earn the right to receive them, provided that payment of
the benefits is probable and the amount of the benefits can be
reasonably estimated. The Company has not yet determined when the
Standard will be adopted. The effect of this accounting change on
the Company's financial statement is not expected to be material.
The Company must adopt this standard no later than in its fiscal
year ending November 30, 1995.
Stock Option Plans
Under the 1984 and 1990 Stock Option Plans, options to
purchase shares of the Company's common stocks have been or may be
granted to employees of the Company and its subsidiaries at the
fair market value on the date granted. Approximately 398 employees
of the Company were granted options under the Company's option
plans during the fiscal year ended November 30, 1993. At November
30, 1993, the average exercise price for outstanding options was
$15.50 per share and the expiration dates ranged from February 19,
1994 to March 16, 2003.
The Company also has an Employees Stock Purchase Plan in which
the purchase price is the lower of fair market value at the date
granted or exercised. There were subscriptions for 555,657 shares
under the Plan at November 30, 1993, at a purchase price of $22.63
per share or the closing price on the date of exercise, whichever
price is less. At November 30, 1993, Company employees numbering
4,254 were participants in the 1993 Employees Stock Purchase Plan.
Changes in outstanding stock options during the year were:
Common Price Range
Common Non-Voting Per Share
(shares in thousands)
Outstanding December 1, 1992 1,436 1,935 $3.55 - $26.00
Granted 192 784 $22.63
Exercised (413) (830) $3.55 - $22.63
Cancelled or expired (7) (73) $18.00 - $26.00
Outstanding November 30, 1993 1,208 1,816 $4.41 - $26.00
Under all plans, there were 4,205,919 shares reserved for future
grants and 2,406,408 shares exercisable as of November 30, 1993
5. Income Taxes:
For financial reporting purposes, income before income taxes
includes the following components:
1993 1992 1991
Pretax income:
Domestic $132,450 $125,249 $100,017
Foreign 17,440 13,064 14,931
149,890 $138,313 $114,948
Significant components of the income tax provision follows:
Current:
Federal $ 44,878 $ 40,298 $ 25,640
Foreign 7,577 5,122 6,146
State 9,122 8,286 4,952
Total current 61,577 53,706 36,738
Deferred:
Federal (968) (718) 5,091
Foreign 121 32 (36)
State (230) (20) 1,007
Total deferred (1,077) (706) 6,062
$ 60,500 $ 53,000 $ 42,800
Tax expense allocated directly to contributed capital relating
to employee stock options was $2,304 in 1993; $4,116 in 1992, and
$2,583 in 1991. Tax expense allocated directly to contributed
capital relating to translation adjustments was $(3,291) in 1993
and $(2,834) in 1992.
The significant components of the deferred income tax assets and
(liability) follow:
1993 1992
Current deferred income tax assets:
Inventory capitalization $ 5,041 $ 4,661
Casualty insurance 3,540
State income tax 2,261 1,938
Coupon expense 1,852 1,783
Other 4,568 3,653
Total current deferred income tax assets 17,262 12,035
Current deferred income tax liabilities:
Prepaid insurance (1,807)
(1,807)
Employee benefits (875) (4,234)
Other (1,577) (1,419)
Total current deferred income tax liabilities (4,259) (5,653)
Total net current deferred income tax asset $ 13,003 $ 6,382
Noncurrent deferred income tax assets:
Employee benefits $ 25,350 $ 4,182
Other 4,827 7,119
Total noncurrent deferred income tax assets 30,177 11,301
Noncurrent deferred income tax liabilities:
Tax over book depreciation (53,214) (51,360)
Property exchange (7,440) (10,184)
Other (8,529) (7,976)
Total noncurrent deferred income tax liabilities (69,183) (69,520)
Total net noncurrent deferred income tax liability $ (39,006) $(58,219)
No valuation allowance is provided for deferred income tax assets.
Income tax expense varies from the amount computed by applying
the statutory federal income tax rate to income before income taxes
as follows:
1993 1992 1991
Federal statutory tax rate 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefits 3.8 4.0 3.7
Foreign taxes in excess of federal statutory rate 1.1 .5 .9
Rehabilitation investment and other tax credits (.8) (.6) (.4)
Federal tax rate change effect on deferred taxes .8
Other items .5 .4 (1.0)
Actual income tax rate 40.4% 38.3% 37.2%
Income taxes are provided at rates applicable in the countries
in which the income is earned. Provision for United States income
taxes is not made for unremitted earnings of foreign subsidiaries
and affiliates as those earnings are considered to be indefinitely
reinvested. Upon distribution, these earnings would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign
countries. Determination of the unrecognized deferred tax
liability for temporary differences related to investments in
foreign subsidiaries and foreign corporate joint ventures at
November 30, 1993 and November 30, 1992 is not practicable.
Unremitted earnings of such entities were $54,457 at November 30,
1993.
Income taxes paid in 1993; 1992 and 1991 were $66,143; $46,521
and $41,391 respectively.
6. Capital Stocks:
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 voting 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) the Company has 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 the Company's Common Stock; and (3) at such time as such
person controls more than 50% of the votes entitled to be cast by
the holders of outstanding shares of voting 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 are entitled to vote on reverse
mergers and statutory share exchanges where the capital stock of the
Company is converted into other securities or property, dissolution
of the Company and the sale of substantially all of the assets of
the Company, as well as forward mergers and consolidation of the
Company. Holders of Common Stock Non-Voting will vote as a separate
class on all matters on which the holders of Common Stock Non-
Voting are entitled to vote.
7. Foreign Currency Translation:
The Company has included in net income all foreign exchange
gains and losses arising from foreign currency transactions and the
effects of foreign exchange rate fluctuations on subsidiaries and
affiliates operating in highly inflationary economies. The
aggregate foreign exchange losses included in other expenses and
gains included in other income were $151 loss in 1993; $146 gain in
1992 and $100 gain in 1991.
Effects of foreign exchange rate fluctuations for other
foreign Company operations are included in the foreign currency
translation adjustments account within shareholders equity. The
change in the amount of this account at November 30, 1993 as
compared to November 30, 1992, is primarily due to differences in
the exchange rate for both the British pound sterling and the
Canadian dollar on those dates.
8. Leases:
Rental expense was $12,416 in 1993; $11,772 in 1992 and
$13,015 in 1991. Future annual fixed rental payments required
during the fiscal years 1994 through 1998, for noncancelable
operating leases are $9,067; $7,515; $5,889; $4,354, and $3,484
respectively. The remaining obligation after 1998 is $13,658.
9. Acquisitions:
In December 1992, the Company acquired the consumer products
business of Golden Dipt (a division of DCA Food Industries), and a
foil package line of consumer products from Prepared Products
Company. Also, the Company's wholly owned subsidiary, Gilroy Foods,
Inc., acquired an 80% interest in National Dehydration Company of
Giza, Egypt. In March 1993, the Company's wholly owned subsidiary,
Setco, Inc., acquired the assets of Admiral Plastics in New York;
Gilroy Foods, Inc. acquired the fresh and dehydrated onion and
garlic operations of Haas Foods, Inc., and the Company acquired
Produce Partners, a line of consumer products. In September 1993,
Gilroy Foods, Inc. acquired the assets and dehydrated vegetable
business of Cade Grayson Company.
The assets and liabilities acquired in these transactions have
been recorded using the purchase method of accounting at their
estimated fair values at the date of acquisition. The aggregate
purchase price of all acquisitions was $75,915, including $48,548
of excess cost which is being amortized over 40 years. The
accompanying financial statements include the results of operations
of these businesses from the date of acquisition. While these
acquistions are expected to contribute positively to the Company's
future sales and earnings, they are not material in relation to the
Company's consolidated financial statements for 1993, and
therefore, proforma financial information has not been presented.
10. Business Segment:
The Company operates in one segment, specialty foods, which
consists principally of manufacturing, marketing and distributing
seasonings, flavorings and food products. It also includes the
plastic packaging group. The following presents information about
operations in different geographic areas:
North Other
America Europe Countries Total
1993
Net sales $1,315,848 $201,178 $39,540 $1,556,566
Net income before accounting
change for postretirement
benefits 93,353 5,552 775 99,680
Assets 1,157,923 135,574 19,739 1,313,236
Liabilities 768,386 69,381 8,648 846,415
1992
Net sales $1,233,590 $201,025 36,754 1,471,369
Net income 91,261 2,671 1,285 95,217
Assets 986,186 126,429 18,264 1,130,879
Liabilities 620,942 64,859 7,140 692,941
1991
Net sales $1,220,006 $175,068 $32,828 $1,427,902
Net income 77,053 2,511 1,360 80,924
Assets 910,409 111,019 15,978 1,037,046
Liabilities 569,381 72,023 6,799 648,203
11. Quarterly Data (Unaudited):
1993 Quarters
1st 2nd 3rd 4th Year
Net sales $339,585 $361,300 $394,928 $460,753 $1,556,566
Gross profit 122,902 132,427 155,226 192,602 603,157
Income before cumulative effect
of accounting change 17,264(a) 17,536(b) 24,367(c) 40,513(d) 99,680
Cumulative effect of accounting
change for postretirement benefits (26,626) (26,626)
Net income (loss) (9,362)(a) 17,536(b) 24,367(c) 40,513(d) 73,054
Earnings per common share before
cumulative effect of accounting change .21 (a) .21(b) .30(c) .50(d) 1.22
Cumulative effect of accounting change
for postretirement benefits (.33) (.33)
Earnings (loss) per common share $(.12)(a) $.21(b) .30(c) .50(d) $.89
(a) Reflects $557 or $.01 per share reduction due to accounting change for postretirement benefits. As originally reported,
net income was $17,821 or $.22 per share.
(b) Reflects $557 or $.01 per share reduction due to accounting change for postretirement benefits. As originally reported,
net income was $18,093 or $.22 per share.
(c) Reflects $557 reduction due to accounting change for postretirement benefits. As originally reported, net income was
$24,924 or $.30 per share.Also reflects $.02 per share reduction due to the increase in the federal corporate tax rate.
(d) Reflects $558 or $.01 per share reduction due to accounting change for postretirement benefits and $.01 per share
reduction due to the increase in the federal corporate tax rate.
1st 2nd 3rd 4th Year
Net sales $322,255 $336,643 $360,300 $452,171 $1,471,369
Gross profit 123,525 128,179 141,448 190,823 583,975
Net income 17,324 18,948(a) 23,923 35,022 95,217(a)
Earnings per common share $.21 $.23(a) $.29 $.43 $1.16(a)
(a) Includes gain from sale of industrial cleaning supply business of $1,900 or $.02 per share.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements of McCormick & Company,
Incorporated and subsidiaries have been prepared by the Company in
accordance with generally accepted accounting principles.
Management has primary responsibility for the financial information
presented and has applied judgment to the information available,
made estimates, and given due consideration to materiality in
preparing the financial information in this annual report.
The financial statements, in the opinion of management,
present fairly the consolidated financial position, results of
operations, and cash flows of the Company and subsidiaries for the
stated dates and periods in conformity with generally accepted
accounting principles. These financial statements have been audited
by the Company's independent auditors, Ernst & Young, for each of
the three years in the period ended November 30, 1993. The
independent auditors review and evaluate control systems and
perform such tests of the accounting information and records as
they consider necessary to reach their opinion on the Company's
consolidated financial statements. In addition, McCormick's
Internal Audit function performs audits of accounting records,
reviews accounting systems and internal controls, and recommends
improvements when appropriate.
The Audit Committee of the Board of Directors is composed of
outside directors. The committee meets periodically with the
Internal Audit staff, with members of management, and with the
independent auditors, in order to review annual audit plans,
financial information, and the Company's internal accounting and
management controls.
The Company believes that it maintains accounting systems and
related controls, and communicates policies and procedures, which
provide reasonable assurance that the financial records are
reliable, while providing appropriate information for management of
the business and maintaining accountability for assets.
/s/Bailey A. Thomas
Chairman of the Board & Chief Executive Officer
/s/James A. Hooker
Vice President & Chief Financial Officer
/s/J. Allan Anderson
Vice President & Controller, Chief Accounting Officer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
McCormick & Company, Incorporated
We have audited the accompanying consolidated balance sheets of
McCormick & Company, Incorporated and subsidiaries as of November
30, 1993 and 1992, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three
years in the period ended November 30, 1993. 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 generally accepted
auditing standards. 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 and
subsidiaries at November 30, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended November 30, 1993 in conformity
with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial
statements, the Company changed its method of accounting for
postretirement benefits other than pensions in 1993.
/s/Ernst & Young
Baltimore, Maryland January 17, 1994
APPENDIX TO EXHIBIT 13: REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS
FOR 1993
GRAPHICS APPENDIX LIST
EDGAR VERSION TYPESET VERSION
Page 15 - Bar Graph Captioned Page 15 - Bar graph depicting
PROFIT MARGINS - omitted gross profit and operating
profit as a percent of sales
for fiscal years 1989 through
1993. The text and numbers
used in this graph appear in
the text of the EDGAR version.
Page 18 - Bar Graph Captioned Page 18 - Bar graph depicting
DEBT TO TOTAL CAPITAL - omitted debt to total capital for
fiscal years 1989 through 1993.
The text and numbers used in
this graph appear in the text
of the EDGAR version.
Page 18 - Bar Graph Captioned
CAPITAL EXPENDITURES - omitted Page 18 - Bar graph depicting
property additions and
depreciation for fiscal years
1989 through 1993. The text
and numbers used in this
graph appear in the text
of the EDGAR version.
[TEXT]