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 February 28, 1997 Commission File Number 0-748 McCORMICK & COMPANY, INCORPORATED (Exact name of registrant as specified in its charter) MARYLAND 52-0408290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18 Loveton Circle, Sparks, Maryland 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 March 31, 1997 Common Stock 10,730,440 Common Stock Non-Voting 65,250,610 McCORMICK & COMPANY, INCORPORATED INDEX - FORM 10-Q February 28, 1997 Page No. Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Income Statement 2 Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statement of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 10 Exhibit Index 11 McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) (In Thousands Except Per Share Amounts) Three Months Ended February 28, February 29, 1997 1996 Net sales $407,402 $395,799 Cost of goods sold 270,685 262,507 Gross profit 136,717 133,292 Selling, general and administrative expense 108,005 110,828 Restructuring charges 259 - Operating Income 28,453 22,464 Interest expense 8,501 8,773 Other (income) expense - net (1,528) (1,186) Income from consolidated continuing operations before income taxes 21,480 14,877 Income taxes 7,948 5,361 Net income from consolidated continuing operations 13,532 9,516 Income from unconsolidated operations 1,683 296 Net income from continuing operations 15,215 9,812 Loss from discontinued operations, net of income taxes - (462) Net income $ 15,215 $ 9,350 Earnings per common share: Continuing operations $.20 $.12 Discontinued operations - - Earnings per common share $.20 $.12 Average shares outstanding 77,239 81,255 Cash dividends declared per common share $.15 $.14 See notes to condensed consolidated financial statements. (2) McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands) Feb. 28, Feb. 29, Nov. 30, 1997 1996 1996 (Unaudited)(Unaudited) ASSETS Current Assets Cash and cash equivalents $ 23,475 $ 22,398 $ 22,418 Accounts receivable - net 196,081 201,937 217,495 Inventories Raw materials and supplies 115,256 124,536 188,936 Finished products and work-in process 134,429 243,976 56,153 249,685 368,512 245,089 Other current assets 47,089 54,861 49,410 Total current assets 516,330 647,708 534,412 Property - net 394,820 527,908 400,394 Goodwill - net 162,020 177,814 165,066 Prepaid allowances 149,500 178,952 149,200 Other assets 77,456 55,142 77,537 Total assets $1,300,126 $1,587,524 $1,326,609 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $177,830 $306,765 $ 98,450 Current portion of long-term debt 10,396 12,743 10,477 Trade accounts payable 122,745 132,867 153,584 Other accrued liabilities 216,804 171,305 236,791 Total current liabilities 527,775 623,680 499,302 Long-term debt 286,338 345,805 291,194 Deferred income taxes 4,890 21,408 4,937 Other long-term liabilities 81,024 80,648 81,133 Total liabilities 900,027 1,071,541 876,566 Shareholders' Equity Common Stock 46,077 49,163 48,541 Common Stock Non-Voting 111,590 114,538 112,489 Retained earnings 272,762 384,179 313,847 Foreign currency translation adj. (30,330) (31,897) (24,834) Total shareholders' equity 400,099 515,983 450,043 Total liabilities and shareholders' equity $1,300,126 $1,587,524 $1,326,609 See notes to condensed consolidated financial statements. (3) McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In Thousands) Three Months Ended Feb. 28, Feb. 29, 1997 1996 Cash flows from operating activities Net income $ 15,215 $ 9,350 Adjustments to reconcile net income to net cash provided by (used in) operating activities Non cash charges and credits Depreciation and amortization 12,769 16,136 Income from unconsolidated operations (1,683) (296) Other 43 (836) Changes in selected working capital items Accounts receivable 18,092 20,389 Inventories (7,427) 14,221 Prepaid allowances (351) 4,382 Accounts payable, trade (28,232) (13,893) Other assets and liabilities (11,568) (28,642) Net cash provided by (used in) operating activities (3,142) 20,811 Cash flows from investing activities Capital expenditures (12,174) (21,505) Acquisitions of businesses (3,315) - Proceeds from sale of assets 809 4,306 Other investments (308) (2,176) Net cash used in investing activities (14,988) (19,375) Cash flows from financing activities Short-term borrowings, net 81,189 21,856 Long-term debt borrowings - 1,549 Long-term debt repayments (1,773) (3,687) Common stock issued 349 4,887 Common stock acquired by purchase (48,382) (3,598) Dividends paid (11,632) (11,372) Net cash provided by financing activities 19,751 9,635 Effect of exchange rate changes on cash and cash equivalents (564) (1,138) Increase in cash and cash equivalents 1,057 9,933 Cash and cash equivalents at beginning of period 22,418 12,465 Cash and cash equivalents at end of period $ 23,475 $ 22,398 See notes to condensed consolidated financial statements. (4) McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts In Thousands Except As Otherwise Noted) (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position and the results of operations for the interim periods. Results for 1996 have been reclassified to separately report the results of discontinued operations in the Condensed Consolidated Statement of Income. Certain other reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. As of January 1, 1997, the Company's Mexican operations were measured using the U.S. dollar as the functional currency due to the highly inflationary nature of the Mexican economy. The results of consolidated operations for the three month period ended February 28, 1997 are not necessarily indicative of the results to be expected for the full year. Historically, the Company's consolidated sales and profits are lower in the first half of the fiscal year, and increase in the second half. For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended November 30, 1996. Business Restructuring In the third quarter of 1996, the Company began implementation of a restructuring plan and recorded a restructuring charge of $58,095 in 1996. This charge reduced net income by $39,582 or $.49 per share. In addition there are additional charges directly related to the restructuring plan which could not be accrued in 1996. The Company has expensed $259 of these costs in the first quarter of 1997. Under the restructuring plan the Company has closed the Brooklyn, New York packaging plant, converted from a direct sales force to a broker sales force for certain regions in the U.S., and sold the Minipack business. Subsequent to the first quarter of 1997, as a result of the restructuring plan, the Company sold Giza National Dehydration Company of Egypt. The Company plans to complete the restructuring program in 1997. (5) The components of the restructuring charge and remaining liability are as follows: 2/28/97 Restructuring Remaining Charge Amount Severance and personnel costs $ 9,983 $ 1,232 Writedown of assets and businesses 44,562 20,759 Other exit costs 3,550 1,317 $58,095 $23,308 In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. At February 28, 1997, the remaining liability was $8,161, principally for realignment of some of our operations in the United Kingdom which will be completed in 1997. Accounting and Disclosure Changes In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." The Statement is effective for financial statements issued for periods ending after December 15, 1997. The Statement will have no significant effect on the reported earnings per share for the Company. (6) McCORMICK & COMPANY, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts In Thousands Except As Otherwise Noted) Overview Net income for the first quarter of 1997 was $15.2 million or $.20 per common share compared to $9.4 million or $.12 per common share for the first quarter of 1996. During the quarter the Company purchased a line of dry seasoning mixes in Canada which will be marketed under the French's brand name. This acquisition will expand the Company's market areas in Canada. In addition the Company also agreed to dissolve the McCormick & Wild joint venture and the business was split between the partners. Results of Operations Net sales for the quarter ended February 28, 1997 increased 2.9% over the corresponding quarter of 1996. The effects of higher foreign currency exchange rates increased sales by slightly over 1% but were offset by the negative effect of business disposals (primarily sales transferred to the Signature joint venture and the disposal of Minipack). Net sales of all operating groups except U.S. retail were improved to last year with strong performances in the U.S. industrial and food service businesses and McCormick Canada. Net sales in our U.S. retail business decreased and were negatively impacted by the timing and extent of price increases between the two years. Operating income as a percentage of net sales increased to 7.0% from 5.7% in the first quarter of last year. Gross profit as a percentage of net sales at 33.6% remained consistent with the first quarter of last year at 33.7%. Most major operating groups gross profit percentage improved to last year, including the U.S. retail business. The Company's gross profit percentage did not improve, however, because of the effect of mix of our different businesses. In the first quarter of 1997 there was a lower mix of the more profitable U.S. retail business, as compared to the prior year. Selling, general and administrative expenses decreased in the first quarter as compared to last year in both dollar terms and as a percentage of net sales. Promotional spending is down due to lower U.S. retail sales and the effect on volume based promotions. Advertising spending, while lower than last year, is still higher than historical levels as the Company continues its focus on brand recognition. The decreases in advertising and promotion were partially offset by increased accruals for employee benefits on improved earnings and continued information system spending to allow the Company's computer systems to cope with the change to the year 2000. (7) Interest expense for the quarter decreased by $.3 million as compared to last year. Interest expense for the first quarter of 1996 excludes $3.6 million of interest allocated to discontinued operations. The significant decrease in total interest, including discontinued operations, is primarily due to reduced borrowings as a result of the sale of Gilroy Foods and Gilroy Energy in 1996. Short-term borrowing rates in the first quarter of 1997 were slightly less than in the first quarter of 1996. Other income in 1997 includes $2.0 million of income from the Gilroy Energy non-compete agreement, and 1996 other income includes a $1.4 million gain on the sale of a building. The Company's effective tax rate for the first quarter of 1997 was 37% as compared to 36% in the first quarter of last year. The increase in the tax rate is primarily due to the favorable effect, recorded in 1996, of refunds of certain U.S. tax credits from prior years. Income from unconsolidated operations increased to $1.7 million in the first quarter of 1997 from $.3 million in the comparable quarter of last year. The increase is due to improved earnings in our Mexican joint venture and earnings from our Signature Brands joint venture which was formed in the second quarter of 1996. Business Restructuring In the third quarter of 1996, the Company began implementation of a restructuring plan and recorded a restructuring charge of $58,095 in 1996. This charge reduced net income by $39,582 or $.49 per share. In addition there are additional charges directly related to the restructuring plan which could not be accrued in 1996. The Company has expensed $259 of these costs in the first quarter of 1997. Under the restructuring plan the Company has closed the Brooklyn, New York packaging plant, converted from a direct sales force to a broker sales force for certain regions in the U.S., and sold the Minipack business. Subsequent to the first quarter of 1997, as a result of the restructuring plan, the Company sold Giza National Dehydration Company of Egypt. The Company plans to complete the restructuring program in 1997. The components of the restructuring charge and remaining liability are as follows: 2/28/97 Restructuring Remaining Charge Amount Severance and personnel costs $ 9,983 $ 1,232 Writedown of assets and businesses 44,562 20,759 Other exit costs 3,550 1,317 $58,095 $23,308 (8) In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. At February 28, 1997, the remaining liability was $8,161, principally for realignment of some of our operations in the United Kingdom which will be completed in 1997. Financial Condition In the Condensed Consolidated Statement of Cash Flows, cash flows from operating activities decreased from a cash inflow of $20.8 million at February 29, 1996 to a cash outflow of $3.1 million at February 28, 1997. This decrease is mainly driven by a slight increase in inventories in the first quarter of 1997 versus a larger decrease in inventories in the first quarter of 1996. This inventory impact is partially due to the effect of lower sales in the U.S. retail business in the first quarter of 1997. Investing activities used cash of $15.0 million in the first quarter of 1997 versus $19.4 million in the comparable quarter of 1996. Capital expenditures are lower than last year as the Company focuses its efforts on more effective capital spending. Full year capital expenditures in 1997 are expected to be below the 1996 level. Acquisitions of businesses in 1997 are for the purchase of a line of dry seasoning mixes in Canada which will be marketed under the French's brand name. This acquisition will expand the Company's market areas in Canada. Cash flows from financing activities include the purchase of 2 million shares of common stock under the Company's previously announced 10 million share buyback program. To date 4.5 million shares have been repurchased under this program. The Company's ratio of debt to total capital was 54.3% as of February 28, 1997, down from 56.3% at February 29, 1996 but up from 47.1% at November 30, 1996. The improvement in the ratio from one year ago is the result of the sale of Gilroy Foods and Gilroy Energy and working capital improvement programs partially offset by the effect of the stock buyback program. Management believes that internally generated funds and its existing sources of liquidity are sufficient to meet current and anticipated financing requirements over the next 12 months. (9) PART II - OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) EXHIBITS Item 601 Exhibit Number PART I EXHIBITS (11) Statement re: computation Page 12 of this report on Form of per share earnings. 10-Q. (27) Financial Data Schedule Submitted in electronic format only. PART II EXHIBIT (10) Material Contracts. Consulting letter agreement Pages 13 and 14 of this report between Registrant and on form 10-Q. Charles P. McCormick, Jr. dated January 2, 1997. (b) REPORTS ON FORM 8-K. NONE. 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: April 11, 1997 By: /s/ Robert J. Lawless Robert J. Lawless President & Chief Executive Officer Date: April 11, 1997 By: /s/ Robert G. Davey Robert G. Davey Executive Vice President & Chief Financial Officer (10) Exhibit Index Item 601 Exhibit Number Reference or Page (10) Material Contracts. Consulting letter agreement Pages 13 and 14 of this report between Registrant and on Form 10-Q. Charles P. McCormick, Jr. dated January 2, 1997. (11) Statement re computation of Page 12 of this report on per-share earnings. Form 10-Q. (27) Financial Data Schedule Submitted in electronic format only. (11) McCormick and Company, Inc. Part I - Exhibit 11 (In Thousands Except Per Share Amounts) Statement re Computation of Per-Share Earnings* Three Months Ended Computation for Statement of Income 2/28/97 2/29/96 Net Income $15,215 $ 9,350 Reconciliation of Weighted Average Number of Shares Outstanding to Amount used in Primary Earnings Per Share Computation Weighted Average Number of Shares Outstanding 77,239 81,255 Add - Dilutive Effect of Outstanding Options (as Determined by the Application of the Treasury Stock Method) (1) 161 110 Weighted Average Number of Shares Outstanding As Adjusted for Equivalent Shares 77,400 81,365 PRIMARY EARNINGS PER SHARE $0.20 $0.12 Three Months Ended Computation for Statement of Income 2/28/97 2/29/96 Reconciliation of Weighted Average Number of Shares Outstanding to Amount used in Fully Diluted Earnings Per Share Computation Weighted Average Number of Shares Outstanding 77,239 81,255 Add - Dilutive Effect of Outstanding Options (as Determined by the Application of the Treasury Stock Method) (1) 161 111 Weighted Average Number of Shares Outstanding As Adjusted for Equivalent Shares 77,400 81,366 FULLY DILUTED EARNINGS PER SHARE $0.20 $0.12 *See 1996 Annual Report, Note (1) of the Notes to Financial Statements. (1) "This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%." (12) Part II - Exhibit 10 January 2, 1997 Mr. Charles P. McCormick, Jr. 6761 S.E. North Marina Way Stuart, Florida 34996 Dear Buzz: This letter will confirm the terms of your new consulting arrangement with the Company. Under your existing arrangement, which is described in a letter dated February 14, 1996, you have provided services to the Company as Chief Executive Officer as well as Chairman of the Board. You have expressed a desire to limit your role to providing services as Chairman of the Board effective January 1, 1997. In your role as Chairman, you have agreed to provide your counsel, guidance and expertise regarding the affairs of the Company as from time to time may be requested by the Board of Directors and/or the President of the Company. To that end, it is anticipated that such consultative services will require that you devote approximately 8 - 10 days per month to the affairs of the Company. You have agreed to continue to provide such services as Chairman until such time as the Board of Directors has determined that an orderly transition of that position and its attendant duties can be effectuated. In consideration of your agreement to render such services, you will receive a monthly stipend of Thirteen Thousand Seven Hundred Twenty-Five Dollars ($13,725), payable on or about the fifteenth day of each month, together with such additional cash payments as may be deemed appropriate by the Compensation Committee of the Board of Directors consistent with the performance of the Company. In addition, the Company will reimburse you for reasonable and customary expenses incurred by you in providing such services, including, but not necessarily limited to, travel expenses, meals, lodging, and business related entertainment. If the foregoing correctly expresses our understanding, please sign a copy of this letter in the space provided below and return it to me. Very truly yours, McCORMICK & COMPANY, INCORPORATED By: /s/Robert J. Lawless Robert J. Lawless President, Chief Executive Officer and Chief Operating Officer (13) By: /s/Karen D. Weatherholtz Karen D. Weatherholtz Vice President - Human Relations Secretary - Compensation Committee AGREED AND ACCEPTED THIS 15th day of March, 1997. By: /s/Charles P. McCormick, Jr. Charles P. McCormick, Jr. (14)