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, 1998 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, 1998 Common Stock 9,832,090 Common Stock Non-Voting 63,634,834 10Q.mz McCORMICK & COMPANY, INCORPORATED INDEX - FORM 10-Q February 28, 1998 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 11 SIGNATURES 12 Exhibit Index 13 McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) (In Thousands Except Per Share Amounts) Three Months Ended February 28, February 28, 1998 1997 Net sales $415,202 $407,402 Cost of goods sold 282,030 270,685 Gross profit 133,172 136,717 Selling, general and administrative expense 103,075 108,005 Restructuring charges 68 259 Operating income 30,029 28,453 Interest expense 8,389 8,501 Other (income) expense - net (1,515) (1,528) Income before income taxes 23,155 21,480 Provision for income taxes 8,336 7,948 Net income from consolidated operations 14,819 13,532 Income from unconsolidated operations 1,390 1,683 Net income $ 16,209 $ 15,215 Earnings per common share - basic $.22 $.20 and diluted Cash dividends declared per common share $.16 $.15 See notes to condensed consolidated financial statements. (2) McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands) Feb. 28, Feb. 28, Nov. 30, 1998 1997 1997 (Unaudited)(Unaudited) ASSETS Current Assets Cash and cash equivalents $ 8,360 $ 23,475 $ 13,500 Accounts receivable - net 171,214 196,081 217,198 Inventories Raw materials and supplies 126,980 115,256 124,998 Finished products and work-in process 141,153 134,429 127,086 268,133 249,685 252,084 Other current assets 24,926 47,089 23,736 Total current assets 472,633 516,330 506,518 Property - net 380,240 394,820 380,015 Goodwill - net 154,658 162,020 157,962 Prepaid allowances 150,243 149,500 130,943 Other assets 79,749 77,456 80,794 Total assets $1,237,523 $1,300,126 $1,256,232 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $178,209 $177,830 $112,313 Current portion of long-term debt 15,782 10,396 8,989 Trade accounts payable 128,998 122,745 150,330 Other accrued liabilities 181,510 216,804 226,617 Total current liabilities 504,499 527,775 498,249 Long-term debt 266,526 286,338 276,489 Deferred income taxes 1,753 4,890 2,038 Other long-term liabilities 86,916 81,024 86,346 Total liabilities 859,694 900,027 863,122 Shareholders' Equity Common stock 47,404 46,077 44,408 Common stock non-voting 118,006 111,590 115,042 Retained earnings 247,274 272,762 264,309 Foreign currency translation adj. (34,855) (30,330) (30,649) Total shareholders' equity 377,829 400,099 393,110 Total liabilities and shareholders' equity $1,237,523 $1,300,126 $1,256,232 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, 1998 1997 Cash flows from operating activities Net income $ 16,209 $ 15,215 Adjustments to reconcile net income to net cash used in operating activities Non cash charges and credits Depreciation and amortization 13,029 12,769 Income from unconsolidated operations (1,390) (1,683) Other (102) 43 Changes in selected working capital items Accounts receivable 44,499 18,092 Inventories (18,375) (7,427) Prepaid allowances (19,299) (351) Accounts payable, trade (20,179) (28,232) Other assets and liabilities (43,603) (11,568) Net cash used in operating activities (29,211) (3,142) Cash flows from investing activities Capital expenditures (13,600) (12,174) Acquisitions of businesses - (3,315) Proceeds from sale of assets 478 809 Other investments (9) (308) Net cash used in investing activities (13,131) (14,988) Cash flows from financing activities Short-term borrowings, net 66,120 81,189 Long-term debt borrowings 48 - Long-term debt repayments (1,963) (1,773) Common stock issued 7,566 349 Common stock acquired by purchase (23,037) (48,382) Dividends paid (11,813) (11,632) Net cash provided by financing activities 36,921 19,751 Effect of exchange rate changes on cash and cash equivalents 281 (564) (Decrease) increase in cash and cash equivalents (5,140) 1,057 Cash and cash equivalents at beginning of period 13,500 22,418 Cash and cash equivalents at end of period $ 8,360 $ 23,475 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. The results of consolidated operations for the three month period ended February 28, 1998 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, 1997. 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. In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. Except for the realignment of some of our overseas operations, this restructuring plan is complete. In the third quarter of 1997, the Company reevaluated its restructuring plans. Most of the actions under these plans are completed or near completion and have resulted in losses being less than originally anticipated. In addition, an agreement in principal to dispose of an overseas food brokerage and distribution business with 6% of consolidated net sales was not consummated, resulting in a restructuring credit of $9,493. Concurrent with the reevaluation of restructuring plans, the Company initiated plans to streamline the food brokerage and distribution business and close a domestic packaging plant resulting in a restructuring charge of $5,734. Charges related to these initiatives include severance and personnel costs of $2,516 and a $3,218 writedown of assets to net realizable value. The restructuring liability remaining at February 28, 1998 was $4,398 for severance and personnel and $841 for other exit costs. The Company expects to have all restructuring programs completed in 1998. (5) Accounting and Disclosure Changes In February 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132, which is effective for fiscal years beginning after December 15, 1997, does not change the recognition or measurement of pension or postretirement benefit plans, but revises and standardizes disclosure requirements. Any effect, while not yet determined by the Company, will be limited to the presentation of its disclosures. In March 1998, the AICPA issued Statement of Position (SOP) 98-1 "Accounting For the Costs of Computer Software Developed For or Obtained For Internal-Use." The SOP, which is effective for years beginning after December 15, 1998, will require the capitalization of certain costs incurred in connection with developing or obtaining software for internal-use. The Company is currently assessing the impact of the SOP. In the first quarter of 1998, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 revised the standards for computation and presentation of earnings per share (EPS), requiring the presentation of basic and diluted EPS on the income statement. Basic EPS is based on the weighted average shares outstanding during the applicable period. Diluted EPS reflects the potential dilution which could occur if all dilutive securities (such as outstanding stock options) were converted to common shares. The EPS amounts for all periods have been presented in compliance with SFAS No. 128. No changes to previously presented EPS were necessary. The following table sets forth the computation of basic and diluted earnings per common share in accordance with the provisions of SFAS No. 128. Three Months Ended 2/28/98 2/28/97 Numerator: Net income from continuing operations for basic and diluted earnings per common share $16,209 $15,215 Denominator: Denominator for basic earnings per common share - weighted average shares 73,753 77,239 Effect of dilutive securities: Stock options 493 141 Employee stock purchase plan 37 20 Denominator for diluted earnings per common share - adjusted weighted average shares 74,283 77,400 Earnings per common share - basic and diluted $0.22 $0.20 (6) Financial Instruments During the first quarter of 1998, the Company entered into a foreign currency hedge contract. The Company sold Mexican pesos forward to cover its net investment in its Mexican subsidiary and affiliate. This contract, which expires in December 1998, has a nominal amount of $9,738 at February 28, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts In Thousands Except As Otherwise Noted) Overview For the quarter ended February 28, 1998, the Company reported net income of $16.2 million versus $15.2 million for the comparable period last year. Basic and diluted earnings per share were $.22 for the first quarter of 1998, compared to $.20 last year. The increase in first quarter earnings as compared to last year is due to the growth and character of the Company's sales. Net income was favorably impacted by lower volume-based promotion and sales costs in the U.S. consumer business and a larger mix of industrial business, partially offset by higher pepper costs. While U.S. consumer sales were disappointing in the first quarter of 1998 compared to the previous year, the Company recently gained important new distribution in the consumer and foodservice businesses. Because of normal contract transition timing, it is not expected that any material benefits of this new distribution will be realized in 1998. Results of Operations Net sales for the quarter ended February 28, 1998 increased 1.9% over the corresponding quarter of 1997. The effects of unfavorable foreign currency exchange rates decreased sales by slightly over 1%, primarily in our Australian and Canadian operations. Net sales of all operating groups except the U.S. consumer and packaging businesses were improved to last year with strong performances in the U.S. industrial and food service businesses. Net sales decreases in our U.S. consumer business are primarily volume- related and were negatively impacted by increased competitive activity and product relaunch implementation issues in the dry seasoning mix business. General market softness, principally for plastic tubes, contributed to volume declines in the packaging business. U.S. industrial and foodservice businesses were favorably impacted by both volume and the combination of price and mix changes. Operating income as a percentage of net sales increased to 7.2% from 7.0% in the first quarter of last year. (7) Gross profit as a percentage of net sales at 32.1% decreased as compared to the first quarter of last year at 33.6%. The gross profit percentage of most major operating groups decreased versus last year. Factors contributing to this decline include a higher mix of lower margin industrial business and the negative impact of higher pepper costs. While the future movement of commodity costs are uncertain, a variety of programs, including periodic commodity purchases and customer price adjustments, are being used by the Company to address these fluctuations. 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. Lower U.S. consumer sales and a higher mix of industrial business, which generally requires less support costs, reduced selling and promotional spending in the quarter. Interest expense for the quarter decreased by $.1 million as compared to last year primarily due to lower debt levels. Short- term borrowing rates in the first quarter of 1998 were slightly higher than the first quarter of 1997. Other income in 1998 and 1997 includes $1.8 and $2.0 million, respectively, of income from the three year non-compete agreement with Calpine Corporation, entered into as a part of the sale of Gilroy Energy Company, Inc. The Company's effective tax rate for the first quarter of 1998 was 36% as compared to 37% in the first quarter of last year. The decrease in the tax rate is primarily due to more effective tax planning associated with our foreign operations. Income from unconsolidated operations decreased to $1.4 million in the first quarter of 1998 from $1.7 million in the comparable quarter of last year. The decrease is primarily due to our Mexican joint venture, which realized translation losses from the devaluation of the Mexican Peso, recognized in accordance with hyper-inflationary accounting rules. 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. In the fourth quarter of 1994, the Company recorded a charge of $70,445 for restructuring its business operations. Except for the realignment of some of our overseas operations, this restructuring plan is complete. In the third quarter of 1997, the Company reevaluated its restructuring plans. Most of the actions under these plans are completed or near completion and have resulted in losses being less than originally anticipated. In addition, an agreement in principal to dispose of an overseas food brokerage and distribution business with 6% of consolidated net sales was not consummated, (8) resulting in a restructuring credit of $9,493. Concurrent with the reevaluation of restructuring plans, the Company initiated plans to streamline the food brokerage and distribution business and close a domestic packaging plant resulting in a restructuring charge of $5,734. Charges related to these initiatives include severance and personnel costs of $2,516 and a $3,218 writedown of assets to net realizable value. The restructuring liability remaining at February 28, 1998 was $4,398 for severance and personnel and $841 for other exit costs. The Company expects to have all restructuring programs completed in 1998. Financial Condition In the Condensed Consolidated Statement of Cash Flows, cash flows from operating activities decreased from a cash outflow of $3.1 million at February 28, 1997 to a cash outflow of $29.2 million at February 28, 1998. This decrease is primarily due to changes in working capital components. Prepaid allowances increased as the Company completed a period of numerous customer renewals in the first quarter of 1998. Reduced net sales in the U.S. consumer business contributed to a reduction in receivables and an increase in inventories versus the comparable quarter of 1997. Income tax payments increased in the first quarter of 1998 versus the comparable period in 1997. Investing activities used cash of $13.1 million in the first quarter of 1998 versus $15.0 million in the comparable quarter of 1997. Although capital expenditures are slightly higher than last year, the Company continues to focus its efforts on implementing only higher return projects. Full year capital expenditures in 1998 are expected to be in line with depreciation. Cash flows from financing activities include the purchase of 0.8 million shares of common stock under the Company's previously announced 10 million share buyback program. To date 7.8 million shares have been repurchased under this program. The Company's ratio of debt to total capital was 54.9% as of February 28, 1998, up from 54.3% at February 28, 1997 and up from 50.3% at November 30, 1997. The increase was due primarily to 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. Forward-Looking Information Certain statements contained in this report, including expected trends in net sales performance, commodity price fluctuations, cost recovery program results, restructuring program completion timing (9) and capital expenditure levels, are "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934. Because forward-looking statements are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results, operating results could be materially affected by external factors such as: actions of competitors, customer relationships, fluctuations in the cost and availability of supply chain resources and foreign economic conditions, including currency rate fluctuations and inflation rates. (10) PART II - OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) EXHIBITS Item 601 Exhibit Number PART I EXHIBIT (27) Financial Data Schedule Submitted in electronic format only. PART II EXHIBIT (10) Material Contracts. Consulting letter agreement Page 14 of this report on between Registrant and Form 10-Q. Charles P. McCormick, Jr. dated December 17, 1997. (b) REPORTS ON FORM 8-K. NONE. (11) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McCORMICK & COMPANY, INCORPORATED Date: April 13, 1998 By:/s/Robert G. Davey Robert G. Davey Executive Vice President & Chief Financial Officer Date: April 13, 1998 By:/s/J. Allan Anderson J. Allan Anderson Vice President & Controller (12) Exhibit Index Item 601 Exhibit Number Reference or Page (10) Material Contracts. Consulting letter agreement Page 14 of this report on between Registrant and Form 10-Q. Charles P. McCormick, Jr. dated December 17, 1997. (27) Financial Data Schedule Submitted in electronic format only. (13) Part II - Exhibit 10 December 17, 1997 Mr. Charles P. McCormick, Jr. 6761 S.E. North Marina Way Stuart, Florida 34996 Dear Buzz: This letter will confirm your consulting arrangement for 1998. You have expressed a desire to reduce the amount of time which you make available to the Company for consultation services. For its part, the Company is amenable to limiting its requests for your services to approximately four days a month, on average, during 1998. You have indicated that you would be available to provide your counsel, guidance and expertise on that basis. As in the past, all requests for services would come from the Board of Directors or the President of the Company. In consideration of your agreement to render such services, you will receive a monthly stipend of Seven Thousand Eighty-Three Dollars and Thirty-Three Cents ($7,083.33), 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 By:/s/Karen D. Weatherholtz Karen D. Weatherholtz Vice President - Human Relations Secretary - Compensation Committee AGREED AND ACCEPTED THIS 19th day of December, 1997. By:/s/Charles P. McCormick, Jr. Charles P. McCormick, Jr. (14)