SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended May 31, 1995 Commission File Number 0-748 McCORMICK & COMPANY, INCORPORATED (Exact name of registrant as specified in its charter) MARYLAND 52-0408290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18 Loveton Circle, P. O. Box 6000, Sparks, MD 21152-6000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 771-7301 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding May 31, 1995 Common Stock 12,616,000 Common Stock Non-Voting 68,555,000 10Q.mz McCORMICK & COMPANY, INCORPORATED INDEX Page No. Part I. FINANCIAL INFORMATION Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5,6,7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8,9,10 Part II. OTHER INFORMATION 11 PART I. FINANCIAL INFORMATION McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) May 31, May 31, Nov. 30, ASSETS 1995 1994 1994 Current Assets Cash and cash equivalents $ 18,607 $ 19,061 $ 15,566 Accounts receivable - net 201,106 169,199 208,811 Inventories Raw materials 136,681 118,745 125,413 Work in process 54,959 47,824 42,987 Finished goods 197,790 172,363 206,067 389,430 338,932 374,467 Prepaid expenses 18,054 6,061 15,343 Deferred income taxes 43,470 13,003 43,470 Total current assets 670,667 546,256 657,657 Investments 53,726 48,588 62,410 Property - net 512,770 485,544 504,599 Excess cost of acquisitions - net 186,265 146,916 196,166 Prepaid allowances 207,672 137,497 143,181 Other assets 3,648 4,954 4,688 Total assets $1,634,748 $1,369,755$1,568,701 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $327,821 $180,297 $202,542 Current portion long-term debt 8,119 9,693 11,532 Outstanding checks 12,360 14,421 17,955 Accounts payable, trade 140,623 97,394 128,236 Accrued payroll 19,923 23,423 30,424 Accrued sales allowances 26,457 23,410 38,373 Accrued restructuring costs 18,794 - 50,334 Other accrued expenses and liab. 117,511 89,680 107,125 Income taxes 7,498 4,591 14,307 Total current liabilities 679,106 442,909 600,828 Long-term debt 362,952 340,244 374,288 Deferred income taxes 23,120 31,622 19,229 Employee benefit liabilities 75,253 67,204 68,375 Other liabilities 16,488 4,896 16,017 Total liabilities 1,156,919 886,875 1,078,737 Shareholders' Equity Common Stock, no par value 49,180 50,181 50,006 Common Stock Non-Voting, no par 107,689 99,933 101,697 Retained earnings 346,802 343,671 343,285 Foreign currency translation adj. (25,842) (10,905) (5,024) Total shareholders' equity 477,829 482,880 489,964 Total liabilities and shareholders' equity $1,634,748 $1,369,755$1,568,701 See notes to financial statements. (2) McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars In Thousands Except Per Share Amounts) Three Months Ended Six Months Ended May 31 May 31 1995 1994 1995 1994 Net sales $444,983 $396,342 $870,416 $764,065 Cost of goods sold 293,672 254,670 577,289 489,622 Gross profit 151,311 141,672 293,127 274,443 Selling, general and administrative expense 111,570 104,041 209,443 200,573 Profit from operations 39,741 37,631 83,684 73,870 Other income (expense) - net (1,268) (1,206) 581 (1,269) Interest expense 14,137 9,034 27,787 17,160 Income before income taxes 24,336 27,391 56,478 55,441 Provision for income taxes 8,760 10,660 20,760 21,450 Income from consolidated operations 15,576 16,731 35,718 33,991 Income (loss) unconsolidated operations 466 2,398 (330) 3,448 Net income $ 16,042 $ 19,129 $ 35,388 $ 37,439 Earnings per common share $0.20 $0.24 $0.44 $0.46 Cash dividends declared per common share $0.13 $0.12 $0.26 $0.24 See notes to financial statements. (3) McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars In Thousands) Six Months Ended May 31, May 31, 1995 1994 Cash flows from operating activities Net income $ 35,388 $ 37,439 Depreciation and amortization 31,680 27,624 Provision for deferred income taxes 1,117 2,008 Gain on sale of assets 75 124 Share of (income) loss unconsolidated oper. 330 (3,448) Dividend received unconsolidated subsidiary - 3,345 Changes in assets and liabilities net of businesses acquired and disposed (113,951) (69,001) Net cash used in operating activities (45,361) (1,909) Cash flows from investing activities Acquisitions of businesses (981) (26,083) Purchases of property, plant and equipment (35,445) (41,903) Proceeds from sale of assets 383 124 Proceeds (payments) from forward exchange contract 4,361 (518) Other investments (2,898) (2,970) Net cash used in investing activities (34,580) (71,350) Cash flows from financing activities Notes payable 126,257 59,052 Long-term debt Borrowings 1,021 56,713 Repayments (17,028) (14,869) Common stocks Issued 5,326 4,236 Acquired by purchase (12,554) (5,245) Dividends paid (21,096) (19,489) Minority interest 703 - Net cash provided by financing activities 82,629 80,398 Effect of exchange rate changes on cash and cash equivalents 353 (916) Increase/(Decrease) in cash and cash equivalents 3,041 6,223 Cash and cash equivalents at beginning of period 15,566 12,838 Cash and cash equivalents at end of period $ 18,607 $ 19,061 See notes to financial statements. (4) McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands Except per Share Amounts) 1. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of May 31, 1995, May 31, 1994 and November 30, 1994, and the results of operations for the three and six month periods ended May 31, 1995 and May 31, 1994, and the cash flows for the six month periods ended May 31, 1995 and May 31, 1994. Certain reclassifications have been made to the 1994 financial statements to conform with the 1995 presentation. 2. The results of consolidated operations for the three and six month periods ended May 31, 1995 are not necessarily indicative of the results to be expected for the full year. Historically, the Company's consolidated sales and profits are lower in the first two quarters of the fiscal year, and increase in the third and fourth quarters. 3. Earnings per common share for the three and six month periods ended May 31, 1995 were computed by dividing net income by the weighted average number of common shares outstanding (81,161,000 - three months and 81,170,000 - six months). Earnings per common share for the three and six month periods ended May 31, 1994 were computed by dividing net income by the weighted average number of common shares outstanding (81,353,000 - three months and 81,227,000 - six months). The dilutive effect of common stock equivalents is not material. 4. Interest paid during the six month periods ended May 31, 1995 and May 31, 1994 was $22,990 and $20,840 respectively. Income taxes paid during the same periods were $21,300 and $38,900 respectively. 5. Changes in foreign currency exchange rates required adjustments to both the Excess Cost of Acquisition account and the Foreign Currency Translation Adjustments account at May 31, 1995 and are primarily responsible for the changes in the translation adjustment account for the periods presented. These exchange rate changes plus amounts recorded as a result of business acquisitions in the last half of fiscal 1994, largely account for the change in the Excess Cost of Acquisition account for the periods presented. 6. During the second quarter of 1995 the Company renewed certain prepaid allowance contracts. Payments associated with these contracts are reflected in the Prepaid Allowance account at May 31, 1995, less amortization as of that date. (5) 7. The estimated fair values of the Company's significant financial instruments at May 31, 1995 follows: Estimated Carrying Fair Value Amount Cash & cash equivalents................ $ 18,607 $ 18,607 Trade receivables...................... 184,741 184,741 Short-term borrowings.................. 327,821 327,821 Current portion of long-term debt...... 8,119 8,119 Accounts payable and accrued expenses.. 323,308 323,308 Long-term debt......................... 373,756 362,952 8. At May 31, 1995 the Company had available credit facilities with domestic and foreign banks in the aggregate of $340,000. There were no borrowings outstanding against these facilities. 9. In the fourth quarter of 1994, the Company recorded a $70,445 charge for restructuring its business operations. This restructuring charge reduced 1994 net income for the year and for the fourth quarter by $46,295 or $.57 per share. The charge provides for costs associated with reducing the work force and a program that will eliminate redundant facilities and positions, improve productivity and efficiency, and eliminate certain businesses and product lines. Specific actions include a reduction of approximately 600 positions worldwide through position eliminations and a voluntary special retirement program; closing an industrial products plant and a foodservice products plant and transferring the production to other existing facilities; realignment of some of our operations in the U.K.; offering for sale the Golden West Foods, Inc. frozen foods subsidiary; and consolidating certain administrative activities. As of May 31, 1995, the Company has reduced its work force by approximately 280 positions due to position eliminations and retirements; has begun the process of closing its production facilities in Hayward, California and Hunt Valley, Maryland and is transferring the production to other existing facilities; and has consolidated several functional activities primarily at the Hunt Valley operations. The components of the restructuring charge and remaining liability at May 31, 1995 are as follows: Restructuring 11/30/94 5/31/95 Charge Liability Liability Work force reduction $ 24,375 $ 24,263 $ 1,978 Plant consolidations and closings 33,477 33,414 27,906 Other restructuring projects 12,593 6,513 2,991 70,445 64,190 32,875 Income tax benefits (24,150) (23,434) (11,270) $ 46,295 $ 40,756 $ 21,605 (6) Included in the remaining liability are fixed asset write-offs of $11,780 and other asset write-offs of $1,394. The pre-tax restructuring liability which is anticipated to be expended in the next 12 months is included as a current liability in the balance sheet. The remaining portion is included in other non-current liabilities. (7) McCORMICK & COMPANY, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales for the three and six months ended May 31, 1995 increased 12% and 14% respectively over the corresponding periods last year. These increases were largely attributable to sales volume gains with most operating units reporting volume increases for both the second quarter and the first half. In terms of volume alone, the increases were 11% for the quarter and 9% for the year. Sales from newly acquired businesses contributed approximately 3% to the second quarter net sales increase. The gross profit margin for the second quarter was up slightly at 34.0% versus 33.3% in the first quarter but down from the 35.7% posted in the second quarter of the previous year. The six month margin was also down at 33.7% compared to 35.9% of the prior six month period. The overall decline in margins was due to higher raw material costs and to a higher mix of industrial sales which have a lower gross profit margin than the Company as a whole. Profit from operations was up 6% or $2.1 million for the second quarter and 13% or $9.8 million for the first half. This was due to an increase in earnings from our foreign operations, our industrial spice business and favorable first quarter adjustments from our restructuring program announced in the fourth quarter of 1994. Net income of $16.0 million or $.20 per share for the three months ended May 31, 1995 was below the $19.1 million or $.24 per share reported for 1994's second quarter. Net income for the six months ended May 31, 1995 decreased to $35.4 million or $.44 per share from $37.4 million or $.46 per share for the same period last year. Earnings continue to be unfavorably impacted by increased interest expense of $5.1 million for the quarter and $10.6 million for the first half due to both higher debt levels and higher interest rates. These increases were somewhat offset by comparatively lower tax provisions in fiscal 1995. Income from our unconsolidated joint ventures was down $1.9 million or $.02 per share in the second quarter and down $3.8 million or $.05 per share for the first six months compared to the respective periods of the prior year, due primarily to economic problems in Mexico. The Mexican peso was devalued by approximately 43% in the first half of fiscal 1995. This devaluation had the effect of reducing shareholders' equity in the amount of approximately $20 million. During 1994, the Company had entered into a forward contract for the delivery of Mexican pesos in April of 1995 to hedge its exposure, therefore, the devaluation did not have a significant impact on the results of operations for the first half of 1995. (8) Management is taking steps to help mitigate the impact on future earnings of the devaluation, including price increases where possible, identifying U.S. import opportunities for Mexican-sourced raw materials and additional sales opportunities. Return on equity (ROE) calculated by dividing twelve months to date net income by average shareholders' equity during that period, decreased to 12.4% at May 31, 1995 from 12.8% at year-end 1994 versus 21.7% at May 31, 1994. The restructuring charge booked in the fourth quarter of FY 1994 is the primary reason for the decline in ROE versus the second quarter of 1994. Restructuring In the fourth quarter of 1994, the Company announced a comprehensive restructuring of its business operations. As a result of this program, the Company recorded a restructuring charge in the amount of $70 million before tax and $46 million after tax. While the majority of the restructuring plan will be completed late in 1995, the following progress has been made during the first half of 1995: * The worldwide work force has been reduced by approximately 280 positions since February 1, 1995 through position eliminations and a special early retirement program. In conjunction with this work force reduction, termination benefits of approximately $4.7 million were paid and charged to the restructuring liability in the first half of 1995. The remaining cost of this portion of the work force reduction will be paid by the Company's employee benefit plans as retirement benefits. The additional employee benefit plan liabilities associated with these retirement benefits approximate $18.0 million and have been charged to the restructuring liability in the first half of 1995. The remainder of the work force reduction up to our goal of the elimination of 600 positions will be completed as production facilities identified for closure in the restructuring plan are closed. Severance costs were reduced by approximately $0.5 million as a result of a higher than expected rate of employee elections to transfer to positions at other locations and other opportunities to continue employment. * The process of closing the McCormick Flavor Group's plant in Hayward, California and the Food Service Division's plant in Hunt Valley, Maryland is underway. It is expected that these plants will be closed and their production needs absorbed by other facilities by the end of the first quarter of 1996. The sale of Golden West Foods, Inc. was completed July 6, 1995. The expected before tax loss on the disposal of these facilities was reduced by $1.5 million in the first quarter. The current adjusted restructuring reserve is adequate to cover losses associated with the disposal of these facilities. (9) * Plans for the realignment of some operating facilities in the U.K. are being finalized. The physical realignment is expected to begin late in 1995 and be completed in 1996. * In conjunction with the work force reduction effected February 1, 1995, the Company has completed or has plans to complete the consolidation of certain administrative functions. These remaining consolidations will be completed during 1995. * The Company will lease a $20 million consolidated distribution center to distribute the finished goods produced by all of its Hunt Valley plants. Construction of this facility has begun and is expected to be completed in early 1996. The restructuring reserve for costs associated with this project were reduced by $0.9 million in the first quarter. The adjusted reserve balance is adequate to cover remaining costs associated with this project. Cash expenditures associated with the restructuring plan during the first half of 1995 totaled $4.3 million net of anticipated tax benefits. Savings from the portions of the restructuring plan that were completed in the first half of 1995 will consist principally of lower personnel costs after February 1, 1995. These savings will be invested in the Company's brands through product development and consumer promotion activities. Financial Condition The Company's capital structure (excluding $55.4 million non-recourse debt) was 57.4% debt to total capital at May 31, 1995, up from 52.0% at year-end 1994 and 49.5% at May 31, 1994. During the second quarter of 1995, the Company generated approximately $49 million in cash from operations. This cash was mostly used for repayment of long-term debt, capital spending, and shareholder dividends. For the six months ended May 31, 1995 the Company's net borrowings were approximately $110 million, down from $120 million at the end of the first quarter, where the funds were primarily used to secure long-term business contracts, provide for capital spending, fund seasonal working capital needs, and to temporarily fund the cash payments made under the restructuring plan. The Company has begun a plan to improve working capital management which is anticipated to result in reductions in the investment in inventories by the end of 1995. Working capital reductions under this plan will be used to reduce debt and fund the costs of the restructuring plan. The Company's current ratio remained the same during the second quarter at 1.0, down from 1.1 at year-end 1994 largely due to the Company's increased use of commercial paper borrowings in the first quarter. The Company maintains $340 million of committed credit facilities that provide additional liquidity. These facilities were not in use at the end of the second quarter. (10) PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders (a) The Company held its annual meeting of stockholders on March 15, 1995. (b) No response required. (c) A proposal to approve the 1995 Employees Stock Purchase Plan, as described in the Company's Proxy Statement dated February 15, 1995, was approved by a vote of 11,971,560 shares cast for; 17,286 shares cast against; and 555,256 shares abstaining. (d) No response required. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McCORMICK & COMPANY, INCORPORATED Date: July 14, 1995 By: /s/ Robert G. Davey Robert G. Davey Vice President & Chief Financial Officer Date: July 14, 1995 By: /s/ J. Allan Anderson J. Allan Anderson Vice President & Controller (11)