EXHIBIT 13
Report on Operations
CONSUMER BUSINESS
McCormick's consumer business manufactures and sells spices, herbs, extracts,
proprietary seasoning blends, sauces and marinades to grocery, mass merchandise,
drug and other retail outlets. We have consolidated operations in the U.S.,
Canada, El Salvador, United Kingdom, Switzerland, Finland, Australia and China.
The Company has consumer joint ventures located in the U.S., Mexico, Philippines
and Japan. Our consumer products are sold throughout the world. Worldwide net
sales for McCormick's consumer businesses grew 7% in 1999 over 1998.
As we invested more heavily in promotion and advertising, sales of our branded
products outpaced the category in many markets. Operating income for worldwide
consumer businesses grew 6% before special charges.
Market Environment
The market environment for McCormick's consumer products varies worldwide. In
the U.S., overall spice usage is up, and consumers are seeking new and bolder
tastes. Although many people use prepared foods and eat out, a Parade Magazine
survey published in November, 1999 reports that 75% of families polled eat
dinner together at least four nights a week. A study conducted by National Panel
Diary indicates that 70% of all meals are prepared at home, and a Canned Food
Association Survey reports that 51% of women 18 to 64 actually "scratch-cook"
meals six times a week.
Equally encouraging is the 1% increase in spice and seasoning sales volume
through U.S. grocery outlets in 1999. This reverses the downward trend of the
last five years in the U.S. In the Company's international markets for spices
and seasonings, 1999 volumes also increased in Canada, Australia and China. In
Europe this category was flat to slightly declining.
Worldwide, the retail grocery industry continues to consolidate, creating larger
customers. In many of our markets, the Company has multi-year contracts with
customers to secure the shelf space for our products. McCormick's capabilities
in category management and electronic data interchange, along with our high
quality products and service, also forge a link to our increasingly larger
customers. Our category management activity involves partnering with our
customers to optimize the store shelf space allocated to spices, seasonings and
our other product categories. In Canada, the retail grocery industry
consolidation has benefited our business as retailers streamline suppliers
through national procurement strategies.
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Key Strategies
McCormick's strategies for our consumer businesses are aimed at growing branded
sales volume in markets around the world.
In the U.S., we continue to roll out the Quest program, a pricing and
promotional initiative between McCormick and the customer. Quest prices most of
our best-selling spice items and all of our dry seasoning mixes (DSM) to the
customer, net of discounts and allowances, with the objective to increase
consumer sales. Using McCormick's category management capabilities, we are
working with our customers to provide a wide variety of products at attractive
pricing. This benefits our customers with higher volumes sold and the consumer
with a better price value. At year end, nearly 75% of sales to our U.S.
customers were invoiced under Quest. We are complementing category management
efforts with targeted advertising, sampling and consumer promotions. This
consumer support is aimed at those items for which we can build awareness,
encourage trial and increase usage.
Strong in-store promotion is a key element of growth in many markets. The U.K.
is growing the Schwartz brand through promotional programs and product
merchandising. In Canada, strong customer relationships allow us to obtain
supplementary product placement in the pasta aisle, near the meat case and in
other complementary store locations.
New products are meeting consumer interest in convenience, bold flavors and
variety. In mid-1999, a new line of zesty products was introduced in the U.S.
Flavor Medleys is a line of four liquid seasoning blends with appealing,
restaurant quality flavors like "Sun-dried Tomato & Basil." Spice Blends is a
line of three coarse ground, dry seasonings featuring flavors such as a
"Monterey Style" blend of roasted garlic and red bell peppers. All seven
varieties have gained shelf placement with more than 95% of our current
customers in the U.S. McCormick is providing strong consumer advertising to
encourage initial use of these products. Three dessert items, designed to add
interest as consumers eat more fruits and vegetables, have been added to our
Produce Partners line.
McCormick also launched products in our international markets in 1999. Based on
the success of "Italiano" and "Tex Mex" One Step Seasonings in Canada, we
introduced eight new flavors including "Parmesan and Herbs" and "Garlic Plus."
Within five weeks of launching these items, we had achieved distribution of all
eight items in nearly 90% of the Canadian retail trade.
Our El Salvador operation launched "Delicia De Loroco," a mayonnaise combined
with a developed flavor from the Salvadoran loroco flower.
In Australia, McCormick is aligning product offerings and market support with
consumer needs and preferences. New product introductions are a vital part of
this strategy. New products, including a multiserve pack for the Aeroplane
gelatin line, new DSMs and a
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reformulation and new packaging for the Keen's wet mustards, accounted for 7% of
total 1999 consumer sales in Australia.
In China, our seasoning mixes and dry soup mixes continue to grow as that market
expands and as we develop and launch new flavors. Our liquid industrial
production facility in Guangzhou has added several consumer products, including
ketchup, jams and ice cream toppings.
Performance Highlights
Promotions and advertising were directed to potential high growth items. In the
U.S. we grew the Grill Mates product line 45% in 1999, following 30% growth the
prior year. The La Grille(R) line in Canada grew 35% in 1999 over 1998.
Our U.S. grocery market share of branded spice and seasoning products grew
nearly 2 percentage points in 1999 due to the success of the Quest program,
consumer advertising and the addition of new customers.
Through advertising and in-store display activity, Golden Dipt cocktail sauce is
now the number one selling cocktail sauce in the U.S.
We entered into a strategic alliance with a fresh herb company and are licensing
the McCormick name and providing our distribution strength in the U.S. to
support a line of fresh herbs. This alliance is a good point of entry for
McCormick into a fast growing, niche market.
The success of the Schwartz Make It Fresh! line of fruit and vegetable sauces
and seasonings increased our share of the U.K. dry seasoning market by 5
percentage points in 1999. Launched in 1998, this new product accounted for 10%
of the Schwartz brand volume for 1999. Together with Potato WedgesTM, launched
nearly three years ago, these new products now account for 17% of Schwartz
volume.
In Switzerland, we have improved the profitability of the consumer business by
engaging one of the leading distributors to develop our business.
More than 25 new products were introduced in Australia in 1999. Market share in
the DSM category increased from 5% to 20% in less than two years as a result of
new products and improvements to existing items.
Opportunities
In markets around the world, McCormick's consumer businesses will achieve future
sales growth through new distribution, new products and increased sales of
existing products. We will grow current market share through value pricing,
promotion and advertising effectiveness and improved merchandising activity. In
addition to these sales initiatives,
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steps were taken in 1999 which will improve the future returns from these
businesses. Many of these actions occurred in our European operations, including
the transition to a retail distributor in Switzerland and a workforce reduction
in the U.K.
In the U.S., we will complete the rollout of Quest to our customers and make
further progress to improve the value of our product on the grocery shelf. The
high quality new products launched in 1999 are receiving a strong level of sales
and marketing support which increases our confidence that they will be
successful.
The U.K. is planning a relaunch of the Schwartz line of herbs and spices in the
first quarter of 2000 with new products and a new display format. Canada is
supporting its Club House brand with television, print, in-store and outdoor
media which will reach 95% of consumers, 50+ times between September 1999 and
November 2000. In Australia, a major new product initiative will be a grill and
barbecue line of six dry seasonings and six versatile, wet paste seasonings. And
in China, in addition to new products, our operation will expand its market
reach to western China.
INDUSTRIAL BUSINESS
McCormick's industrial business supplies products worldwide to a significant
majority of the top 100 food processors and to restaurant chains, distributors,
warehouse clubs, and institutional operations, such as schools and hospitals.
These products include spices, seasonings, condiments, coatings and compound
flavors. While the McCormick name may not be on the food package, our flavor is
in a wide range of snack foods, savory side dishes, desserts, beverages,
confectionery items, cereals, baked goods and more.
Net sales growth of 6% in 1999 was driven by new distribution gains with
warehouse clubs, new industrial products and growth with broadline distributors.
Excluding special charges, gross profit margin and operating income improved
substantially as a result of this increased volume and a positive shift in
product mix.
Market Environment
Consolidation is occurring in many areas of the industrial business with a
variety of implications. Mergers between consumer product companies are
resulting in actions to streamline suppliers. Those suppliers which offer a
range of flavor solutions will have an advantage. While competitors are now
beginning to move in this direction, McCormick already has a reputation for
providing a broad range of products to meet our customers' flavor needs. In the
U.S., the foodservice distributor channel is highly fragmented, but leaders such
as Sysco and U.S. Foodservice continue to grow through acquisition and market
initiatives. We have strong relationships with many of the leaders in this
industry.
Consumer interest in greater taste delivery, ethnic flavors and taste excitement
are favorable trends for this part of our business. Whether a consumer is
purchasing a meal from a quick service restaurant, a "white table cloth"
restaurant, or a grocery product such
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as a frozen dinner, meal kit or other convenience item, McCormick is often part
of the flavor. Customers are looking to suppliers like McCormick for more of the
research and development of new products.
For many years, McCormick has provided ingredients, such as basic herbs and
whole and ground spices, to the food industry. Ingredients have become more of a
commodity item as demand for more value-added products grows. This demand for
value-added products stems from the consumer's insatiable appetite for new and
different flavors. The cost of ingredients in 1999 was affected by fluctuating
commodity markets, global political uncertainties and natural disasters. These
factors have caused the ingredient markets in the U.S., U.K. and other locations
to become more challenging. Proficiency in sourcing from locations around the
world is an important capability in this part of the industrial business.
Key Strategies
An important part of 1999's gross profit margin improvement came from a more
profitable product mix. We are demonstrating our capabilities in the development
of higher margin compound flavors to our existing customers as well as
prospective customers. These compound flavors might be the fruit flavor in a
sports beverage, the savory flavor for a rice side dish, or a vanilla flavor for
a dessert. During 1999, McCormick developed compound flavors for a number of new
products for industrial customers. Our customers have commercialized these
products and are having success in marketing them to consumers.
In 1998, McCormick formed the Global Industrial Group to provide a management
structure which more closely aligns our organization with that of our global
customers. To serve our customers, we have production capabilities in strategic
markets worldwide. We will develop partnerships with local manufacturers in
regions where McCormick does not have production facilities.
The strength in our industrial business is due in large part to our focus on
technical innovation. We use technology to develop consumer preferred products
that meet the flavor needs of our customers. Through our advanced sensory
capabilities and with the help of our culinary expertise, we are able to provide
value-added products, services, technology and systems to help our customers
meet the needs of their customers. We are solidifying relationships with
customers while addressing the needs of the overall marketplace.
Our industrial business is seeking to improve processes and practices worldwide
to increase operating margins. Activity based costing has been developed and
systematized to assign more accurately the costs to produce and deliver each of
our products. Better costing leads to better pricing, allowing us to streamline
product lines, segment customers, improve margins and be more competitive.
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Global sourcing is another avenue to improve business practices, reduce cost,
and develop a better supply of products. Our global sourcing efforts include
building upon existing joint ventures and strategic alliances, establishing new
supply points for key commodities, direct purchase from source countries, and in
some cases, transferring production to source locations.
In the U.K., the Company has consolidated three liquid production facilities
into two. These facilities are primarily in support of our industrial business
and will have a positive impact on our production costs and ability to price
competitively in the future. Announced in 1999, this portion of the streamlining
actions will be essentially complete as we begin 2000.
Performance Highlights
In the U.S., sales of our compound flavors grew more than 20% in 1999, driven by
successful new products for the beverage, dairy, confectionery and savory side
dish categories.
In the U.S. and the U.K., we were successful in winning new sales to
quick-service restaurants, particularly in condiments.
In addition to record sales and profits, McCormick was recognized as the
International Foodservice Distributor Association's Supplier of the Year for
1998. We continue to excel in service to our customers and have become a
catalyst for their success in the marketplace.
McCormick gained further new distribution in the U.S. warehouse club channel
with the addition of BJ's Wholesale Club in 1999.
The Dallas, Texas plant was expanded, enabling us to meet the increased demand
for dry seasoning products.
Streamlining actions were initiated in the U.K. which will improve profit
margins and allow more competitive pricing in our industrial business.
In China, additional sales volume produced margin gains in our Guangzhou
facility which serves major fast food chains and also produces liquid consumer
products.
Opportunities
McCormick's ability to outperform competition with unwavering service, to
deliver consumer preferred flavors and to closely align with industry leaders
will drive growth in the industrial business.
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We continue to focus on growing our compound flavor business. We will
demonstrate the strategic advantage that we can provide our customers through
our breadth of products and technical expertise.
In the U.S., we plan to launch Big `N Bold Spice Blends(C) to our foodservice
customers in 2000 and continue to explore the ethnic market with our line of
authentic Mexican and Asian products. In Canada, we will offer a foodservice
version of successful consumer products such as "Montreal Chicken" and selected
One Step Seasonings. We have entered into a three-year agreement with the
prestigious Culinary Institute of America to provide ongoing culinary training
to our U.S. sales and marketing staff. This is part of the Company's commitment
to the development of our employees and will also benefit our customers. There
is tremendous opportunity for growth into 2000 as we help our key distributor
customers gain market share.
In the U.K., a number of cost reduction actions were initiated in 1999 which
will lower cost and improve our competitive position beginning in 2000.
In all geographic areas, attention to production processes, product costing and
pricing will continue to improve gross profit margins and customer service.
PACKAGING BUSINESS
McCormick's packaging group manufactures and markets plastic bottles and tubes
for food, personal care and other industries. Our packaging business improved in
1999, with net sales growth of 7% and an operating income increase of 6%,
excluding special charges.
Market Environment
In 1998, our packaging business was adversely affected by decreased sales to our
customers who market into Asia. A milder winter in the U.S. also created
softness in demand for skin care products, a major use of our packaging. Today,
the market is recovering from the economic crisis in Asia, and sales of our
packaging products have improved. However, the outlook for demand is relatively
level and excess capacity in the bottle and tube industry creates a very
competitive environment.
Key Strategies
McCormick's strategy in 1998 was to defend market share in spite of margin
pressure, thereby preserving a base for future growth in 1999. Growth in 1999
was achieved as the Asian economy recovered and as new products gained customer
acceptance.
We will continue to seek new packaging opportunities. A line for vitamin and
generic drug applications has been developed which is superior to what our
competitors currently
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offer in design and functionality. We are working with another manufacturer to
support their newly patented "senior friendly" closure system.
A primary focus of McCormick's tube business is cost reduction. The Oxnard,
California facility constructed in 1998 is operating efficiently and developing
plans to automate the packing of finished goods.
Performance Highlights
Higher plant throughput, the new tube production facility in Oxnard, California
and a concerted cost reduction effort in all packaging plants significantly
increased gross profit margin and increased operating income by 6%, excluding
special charges.
McCormick's bottle manufacturing operation avoided a $3,000,000 investment in
new capital by reconfiguring existing equipment to produce new, higher quality
plastic vitamin packs.
Opportunities
McCormick's track record in innovation, superior quality and service reinforces
our leadership position in the manufacture of highly decorated tubes and
bottles. Our ability to innovate will open up opportunities for new uses and new
markets for our products.
We made significant strides in operating income improvement in 1999. Higher
plant volumes, additional automation and process improvement will continue to
increase returns from our packaging business.
Summary of Performance
Early in 1999, McCormick set specific financial goals for sales, gross profit
margin and earnings per share. Each of these goals was met for fiscal year 1999.
The net sales growth and gross profit margin improvement goals were achieved by
success in each of our three business segments: consumer, industrial and
packaging. A portion of this increased gross profit was reinvested in marketing
and cost reduction programs. Interest expense was reduced by $4.5 million
through a combination of lower debt levels and lower interest rates.
The Company also had improved results in our joint venture operations,
particularly in Mexico and Japan. These two operations were areas of particular
focus as we began our year and we dedicated specific management resources to
their improvement. Our Signature Brands joint venture concluded a year of strong
performance and recently acquired the PAAS(R) brand of egg decorating products.
This line of specialized holiday items fits well with Signature's cake
decorating business. In total, income from
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unconsolidated operations more than doubled from $6.2 million in 1998 to $13.4
million in 1999.
In March 1999, the Company completed a share repurchase authorization totaling
10 million shares. Based on the strong cash flow generated from operations, the
Board of Directors authorized a new share repurchase of $250 million. At
November 30, 1999, 1.5 million shares had been repurchased under this new
program and $204 million remains available for future repurchase. We expect this
current authorization to continue into 2002.
Excluding the impact of special charges and the cumulative effect of an
accounting change, 1999 net income increased $16.4 million, which was 15.6% over
1998. This result, together with the reduction in shares outstanding, led to
earnings per share growth of 18.2%, excluding special charges and the cumulative
effect of an accounting change.
A goal was set for each operating unit early in 1999 to reduce working capital,
specifically inventory and receivables. The goals were based on benchmarking
each business against industry peers and were incentive driven. Through supply
chain initiatives, more effective receivables collection and other process
improvements, many operating units are reducing working capital. McCormick's
average inventory balance over the last 12 months dropped from $270 million in
1998 to $257 million in 1999 and inventory turnover increased 9.6%. Average days
to collect accounts receivable decreased by one day.
Working capital management and other balance sheet controls, together with the
net income generated, grew economic value added (EVA) in 1999. EVA is a
comprehensive measure of shareholder value which McCormick defines as net income
from operations, excluding interest, in excess of a capital charge for average
capital employed. EVA rose by $9.2 million, from $33.1 million at the end of
1998 to $42.3 million for 1999.
The Company is pleased with the superior results of 1999, and actions are
underway to further improve gross profit margins and working capital. In all
segments of our business, top line sales growth will be achieved through new
products and new distribution in the U.S. and growth in our international
markets. We are seeking acquisition opportunities to build profitably on our
core food businesses. McCormick has excellent opportunities for growth and the
creation of shareholder value into 2000 and beyond.
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Management's Discussion and Analysis
Overview
For 1999, the Company reported net income of $103.3 million or $1.43 of
diluted earnings per share compared to $103.8 million or $1.41 of diluted
earnings per share in 1998. During 1999, the Company recorded special charges
related to streamlining operations and a cumulative effect of an accounting
change. Excluding the impact of special charges and the cumulative effect of
accounting change, net income on a comparable basis was $121.7 million in
1999 compared to $105.3 million last year.
The Company realized improved financial performance throughout its global
operations. In 1999, sales and operating income, excluding special charges, in
each business segment improved versus the prior year. New distribution and new
products favorably impacted sales growth in the consumer and industrial
segments, while the packaging segment benefited from improved market conditions.
Each segment also experienced improvements in gross profit margin and operating
income, excluding special charges. In addition, improved working capital
management reduced interest expense, while the Company's unconsolidated
operations achieved a record financial performance in 1999.
Results of Operations - 1999 compared to 1998
Sales from consolidated operations increased 6.7% to $2.0 billion in 1999.
Excluding the unfavorable effect of foreign currency exchange rates, primarily
in the U.K., sales grew nearly 8%. Sales improvements, which were realized in
all business segments, were primarily volume-related. Unit volume increased
nearly 8%, while the combined effects of price and product mix were slightly
unfavorable compared to 1998. The net impact of business disposals and
acquisitions decreased sales by .4%. Sales growth in the consumer segment was
primarily due to volume growth in the U.S. Promotional and marketing programs,
distribution gains and new product launches increased volumes in this market.
The Company's industrial segment was also favorably impacted by volume growth.
New distribution gains with warehouse clubs, new products and broadline
distributor growth increased U.S. sales. Increased industrial sales throughout
Asia were partially offset by reduced volumes in the U.K. In the packaging
segment, volume growth due to improved market conditions was partially offset by
the combined effect of price and product mix.
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(MILLIONS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net sales
Consumer $896.2 $836.4 $804.8
Industrial 941.0 885.9 816.3
Packaging 169.7 158.8 179.9
---------------------------------------------------
$2,006.9 $1,881.1 $1,801.0
===================================================
Operating income
Consumer $122.7 $126.5 $103.8
Industrial 61.0 62.7 71.6
Packaging 19.6 17.5 18.2
---------------------------------------------------
Combined segments (1) $203.3 $206.7 $193.6
===================================================
Operating income, excluding special charges (credits)
Consumer $136.5 $129.0 $108.7
Industrial 73.8 61.3 59.0
Packaging 19.8 18.7 22.8
---------------------------------------------------
Combined segments (1) $230.1 $209.0 $190.5
===================================================
(1) Excludes the impact of general corporate expenses included as Corporate
& Eliminations in Note 12 in the Notes to the Consolidated Financial
Statements.
Sales from unconsolidated operations in 1999 were up 10.0% versus 1998,
primarily due to increases in our McCormick de Mexico and Signature Brands joint
ventures.
Gross profit margin, excluding special charges, increased to 35.8% in 1999 from
34.5% in 1998. Each segment experienced improvement over the previous year.
Gross profits were favorably impacted by volume growth in the higher margin
consumer segment, primarily in the U.S. Promotional and marketing programs and
new product launches in the consumer segment grew sales of branded products
throughout the world. Our industrial business in the U.S. experienced increased
sales of higher margin compound flavor products and new distribution gains,
which were partially offset by margin decreases in ingredient sales. Improved
operating efficiencies and product mix improved margins in the U.K. industrial
business, while increased volumes benefited our industrial businesses in Asia.
In the packaging segment, increased volumes and improved operating efficiencies
increased gross profit margin over 1998.
Selling, general and administrative expenses were higher in 1999 than 1998 on
both a dollar basis and as a percentage of sales. The dollar increase is
primarily due to expenditures in support of higher sales and income levels,
including promotional spending, incentive-based employee compensation and
research and development.
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Professional service expenses in support of the Company's process reengineering
effort also increased in 1999.
Operating income margin, excluding special charges, was 9.8% in 1999 and 1998.
Interest expense decreased in 1999 versus 1998 due to a combination of lower
average debt levels and lower interest rates.
Other income decreased in 1999 as compared to 1998. Income from the three-year
non-compete agreement with Calpine Corporation, entered into as a part of the
1996 sale of Gilroy Energy Company, Inc., decreased from $7.0 million in 1998 to
$4.6 million in 1999, the last year of the agreement.
Due to the impact of certain nondeductible expenses related to the special
charges, the effective tax rate was 40.2% for 1999, compared to 36.0% in 1998.
Excluding the impact of the special charges, the effective tax rate for 1999 was
35.9%.
Income from unconsolidated operations increased in 1999 versus 1998, primarily
due to improved operating performance at our Mexican and Japanese joint
ventures. In addition, the Company was negatively impacted in 1998 by
translation losses from the devaluation of the Mexican peso in accordance with
hyper-inflationary accounting rules. As of January 1, 1999, Mexico was no longer
considered a hyper-inflationary economy.
Results of Operations - 1998 compared to 1997
Sales from consolidated operations increased 4.4% to $1.9 billion in 1998. The
combined effects of price and product mix increased sales by 3.4% as compared to
1997, while unit volume increased 1.8%. The effect of foreign currency exchange
rate changes, primarily in our Australian and Canadian operations, decreased
sales by .9% when compared to 1997. Sales improvements, which were realized in
all major operating groups except the packaging segment, were primarily due to a
combination of price and mix changes and volume increases in the consumer and
industrial segments, primarily in the U.S. Sales increases in the consumer
business in the U.S. were primarily product mix related and were favorably
impacted by improved performance in the branded DSM and spice and herb
businesses. Growth initiatives, including the relaunch of the DSM line and the
Quest marketing program, contributed to this success. Although volumes for the
consumer business in the U.S. were up only slightly for the year, distribution
gains announced during the first half of 1998, combined with these growth
initiatives, resulted in higher volume growth during the last six months of the
year. Within the industrial segment, food service sales in the U.S. were
favorably impacted by volume growth, principally due to new distribution.
Product price changes, primarily to cover raw material cost increases, increased
net sales in the industrial business in the U.S. Sales increases within Europe
were the result of a combination of favorable price and product mix changes and
currency exchange translations. Weak demand for customers' products in Asian
countries as well
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as general market softness, principally for plastic tubes, contributed to volume
declines in the packaging segment.
Sales from unconsolidated operations in 1998 were down slightly versus 1997.
Increases in sales from Signature Brands and our Mexican joint venture were
offset by decreases due to foreign currency translation, primarily at the
Company's Japanese affiliates.
Gross profit margin decreased to 34.5% in 1998 from 34.9% in 1997. Raw material
pricing pressures, primarily for black pepper, were felt throughout the Company.
Product and customer mix issues negatively impacted margins within the
industrial business in the U.S., while decreased volume in the packaging segment
reduced efficiencies. Margins were also negatively impacted, primarily in
Australia and Canada, by adverse foreign exchange effects on raw material costs.
These were partially offset by continued gross profit improvements in the
consumer business in the U.S. due to a favorable product mix.
Selling, general and administrative expenses were higher in 1998 than 1997 on a
dollar basis, but were down slightly as a percentage of sales. The dollar
increase was mainly due to increased promotional and advertising spending within
the consumer business in the U.S., partially offset by lower incentive-based
employee compensation costs.
Operating income margin, excluding special charges (credits), increased to 9.8%
in 1998 from 9.3% in 1997.
Interest expense was up slightly in 1998 versus 1997 as higher average debt
levels were partially offset by lower interest rates.
Other income decreased in 1998 as compared to 1997. Income from the three-year
non-compete agreement with Calpine Corporation decreased to $7.0 million in 1998
from $8.0 million in 1997.
The Company's effective tax rate was 36.0% in 1998 compared to 37.0% in 1997.
This decrease was primarily due to various U.S. and international tax
initiatives.
Income from unconsolidated operations decreased in 1998 versus 1997 mainly due
to our Mexican joint venture, which realized translation losses from the
devaluation of the Mexican peso in accordance with hyper-inflationary accounting
rules. The Company also experienced earnings declines in its Japanese joint
ventures.
Financial Condition
Continued strong cash flows from operations enabled the Company to fund
operating projects and investments designed to meet our growth objectives,
continue share repurchase programs and reduce debt levels.
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In the Consolidated Statement of Cash Flows, cash provided by operating
activities increased from $144.0 million in 1998 to $229.3 million in 1999. The
increase is primarily due to changes in working capital components. Inventory
levels were favorably impacted by increased net sales and additional focus on
supply chain management. Cash outflows related to prepaid allowances were
favorably impacted by the timing of customer contract renewals and distribution
gains which occurred primarily in the first half of 1998.
Investing activities used cash of $45.9 million in 1999 versus $62.6 million in
1998. Capital expenditures decreased versus last year primarily because 1998
included a project to consolidate facilities in our packaging segment.
Acquisitions of businesses in 1998 included the purchase of a line of wet and
dry mustards, curry powders and various meal lines in Australia and Canada
marketed under the Keen's and Rice-a-Riso(R) brand names.
Financing activities used cash of $188.5 million in 1999 versus $77.0 million in
1998. In early 1999, the Company purchased 1.1 million shares, completing its
1996 share repurchase program. In March 1999, the Company announced a new
repurchase program to buy back up to $250 million of the Company's outstanding
stock from time to time in the open market. The Company purchased an additional
1.5 million shares under this program in 1999. In total, the Company purchased
2.6 million shares in 1999 and 2.0 million shares in 1998.
Dividend payments increased to $48.7 million in 1999, up 4% compared to $46.9
million in 1998. Dividends paid in 1999 totaled $.68 per share, up from $.64 per
share in 1998. In December 1999, the Board of Directors approved a 12% increase
in the quarterly dividend from $.17 to $.19 per share. Over the last 10 years,
dividends have increased 12 times and have risen at a compounded annual rate of
15%.
The Company's ratio of debt to total capital was 47.2% as of November 30, 1999,
a decrease from 51.6% at November 30, 1998. The decrease was due primarily to
improved cash provided by operating activities, partially offset by the effect
of the share repurchase program.
Management believes that internally generated funds and existing sources of
liquidity are sufficient to meet current and anticipated financing requirements
over the next 12 months.
Special Charges
During 1999, the Company announced plans to streamline operations. The
streamlining actions, primarily focused on our European operations, are
consistent with the Company's strategies to improve gross profit margins,
simplify operations, improve underperforming units and achieve growth through
new products, new distribution and acquisitions.
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The Company recorded special charges of $26.7 million ($23.2 million after-tax)
associated with the plan to streamline operations. Of this amount, $25.7 million
was classified as special charges and $1.0 million as cost of goods sold in the
Consolidated Statement of Income. The Company announced actions to consolidate
certain U.K. facilities, improve efficiencies within previously consolidated
European operations and realign operations between the U.K. and other European
locations. Specific actions under this plan include: the closure of the
Oswaldtwistle facility, one of three liquid manufacturing operations in the
U.K.; streamlining manufacturing and administrative functions at the recently
consolidated European operations; realignment of operations between the U.K. and
other European locations; and system and process improvements throughout the
Company's global operations.
The major components of the special charges include workforce reductions,
building and equipment disposals, write-downs of intangible assets and other
related exit costs. In total, the streamlining actions will result in the
elimination of approximately 300 positions, primarily outside the U.S. Asset
write-downs were recorded as a direct result of the Company's decision to exit
facilities, businesses or operating activities. Other exit costs consist
primarily of employee and equipment relocation costs, lease exit costs and
consulting fees, some of which will be recognized as incurred.
In its entirety, expenses associated with the streamlining actions are expected
to total $29.3 million. This includes amounts recognized in 1999 and future
expenses which could not be accrued, but will be expensed as the actions are
implemented. It is expected that $1.5 million of the future expenses will be
classified as cost of goods sold or selling, general and administrative expense.
The Company expects these actions will be completed in 2000 and will require net
cash outflows of $7.9 million in total, of which $4.6 million was incurred in
1999. Beginning in 2000, these actions are expected to generate $6 million in
annual after-tax savings. A portion of these savings will be reinvested in
programs to generate growth opportunities.
During previous years, management reassessed the global strategic direction of
the Company and conducted a portfolio review of its business to increase focus
on core businesses and improve its cost structure. During 1998 and 1997, the
Company completed special projects related to the consolidation of manufacturing
facilities, reduction of administrative staff and divestiture of non-core
businesses undertaken in these initiatives. Due to the net impact of estimate
changes, project modifications and the
20
recognition of project expenses not accruable in previous years, the Company
recorded special charges (credits) of $2.3 million and $(3.2) million in 1998
and 1997, respectively. In 1998, the realignment of several overseas operations
resulted in losses less than originally anticipated, and the Company
discontinued its manufacturing operations in Venezuela. In 1997, the agreement
in principle to dispose of an overseas food brokerage and distribution business
was not consummated, and the Company streamlined the food brokerage and
distribution business and closed a U.S. packaging plant.
Refer to Note 2 in the Notes to Consolidated Financial Statements for further
information.
Accounting Change
As further discussed in Note 2 of Notes to the Consolidated Financial
Statements, the Company changed its actuarial method of calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of the annual pension expense. This modification
resulted in a one-time cumulative effect of an accounting change of $4.8
million (net of tax of $2.9 million) or $0.07 per share. The use of the new
method did not have a material impact on the Company's results of operations
and financial condition in 1999 and is not expected to have a material impact
in future years.
Discontinued Operations
In 1996, the Company sold substantially all the assets of Gilroy Foods,
Incorporated and Gilroy Energy Company, Inc. Based on the settlement of the
contract terms, the Company recognized income from discontinued operations, net
of income taxes, of $1.0 million in 1997.
Market Risk Sensitivity
The Company utilizes derivative financial instruments to enhance its ability to
manage risk, including foreign exchange and interest rate exposures which exist
as part of its ongoing business operations. The Company does not enter into
contracts for trading purposes, nor is it a party to any leveraged derivative
instrument. The use of derivative financial instruments is monitored through
regular communication with senior management and the utilization of written
guidelines. The information presented below should be read in conjunction with
Notes 4 and 5 to the Consolidated Financial Statements.
Foreign Exchange Risk -- The Company is exposed to fluctuations in foreign
currency cash flows primarily related to raw material purchases. The Company is
also exposed to fluctuations in the value of foreign currency investments in
subsidiaries and unconsolidated affiliates and cash flows related to
repatriation of these investments. Additionally, the Company is exposed to
volatility in the translation of foreign currency
21
earnings to U.S. dollars. Primary exposures include the U.S. dollar versus
functional currencies of the Company's major markets (British pound, Australian
dollar, Canadian dollar, Mexican peso, Japanese yen and Chinese RMB). The
Company enters into forward and option contracts to manage foreign currency
risk.
The following table summarizes the foreign currency exchange contracts held at
November 30, 1999. All contracts are valued in U.S. dollars using year-end 1999
exchange rates and have been designated as hedges of firm commitments or
anticipated transactions with a maturity period of less than one year.
AVERAGE
CONTRAACTUAL
CURRENCY RECEIVED NOTIONAL VALUE EXCHANGE RATE FAIR VALUE
CURRENCY SOLD (MILLIONS) (FC/USD) (MILLIONS)
- -------------------------------------------------------------------------------------------------------------
GBP USD $22.9 .61 $.3
CAN USD 13.0 1.47 -
USD CHF 0.5 1.47 -
- -------------------------------------------------------------------------------------------------------------
Note: At November 30, 1998, the Company had foreign currency exchange contracts
for GBP, AUD, CAN and MXP with a notional value of $40.7 million, all of which
matured in 1999.
Interest Rate Risk -- The Company's policy is to manage interest cost using a
mix of fixed and variable debt. The Company uses interest rate swaps to achieve
a desired proportion. The table that follows provides principal cash flows and
related interest rates by fiscal year of maturity at November 30,1999. The
principal cash flows and related interest rates at November 30, 1998 were
similar to those presented below. For foreign currency-denominated debt, the
information is presented in U.S. dollar equivalents. Variable interest rates are
based on the weighted-average rates of the portfolio at November 30, 1999.
Year of Maturity
There- Fair
(MILLIONS) 2000 2001 2002 2003 after Total Value
- ---------------------------------------------------------------------------------------------------------------
DEBT
Fixed rate $7.7 $85.2 $.5 $.4 $155.3 $249.1 $254.7
Average interest rate 9.00% 8.81% 3.01% .99% 7.93%
- ---------------------------------------------------------------------------------------------------------------
Variable rate $92.9 - - - - $92.9 $92.9
Average interest rate 5.99% - - - - 5.99%
22
Commodity Risk -- The Company purchases certain raw materials which are subject
to price volatility caused by weather and other unpredictable factors. While
future movements of raw material costs are uncertain, a variety of programs,
including periodic raw material purchases and customer price adjustments help
the Company address this risk. Generally, the Company does not use derivatives
to manage the volatility related to this risk.
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs written using two
digits (rather than four) to define the applicable year. Without corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in miscalculations or system failures,
significantly impacting our business operations.
The Company's work on the Y2K compliance program officially began in 1996. A
Corporate project team, working with outside consultants, developed a process to
identify and correct Y2K issues on all information technology (IT) platforms and
non-IT systems. In addition, all operating units have undertaken Y2K initiatives
with direction from the Corporate project team. As a result of this process, the
Company inventoried and assessed all systems and developed remediation programs
where necessary for all business-critical information technology applications. A
similar program was also developed for non-IT systems. The Company completed its
remediation and testing work in 1999.
In order to mitigate the risk of internal business-critical computer systems
failure, the Company conducted extensive testing, verification and validation
efforts. These efforts, which included program and systems testing, simulated
operations in the year 2000. In addition, a review of the remediation process
and program code by independent third parties was completed, and contingency
plans, including system continuity plans, were developed in 1999.
In order to mitigate the risk of noncompliant external system failure, the
Company identified and contacted critical suppliers, customers and other third
parties to determine their stage of Y2K readiness. For certain third parties
with key system connections, interface testing was performed. The Company
developed contingency plans to mitigate potential disruptions to the Company's
operations. These included action plans to address system failures by third
parties, such as securing alternate sources of materials and developing backup
systems to ensure internal communications were not impacted by external
disruptions affecting voice and data transmission. The Company completed its
contingency plans in the fourth quarter of 1999.
A Company-wide Y2K readiness program was developed to educate all employees on
the risks associated with the Y2K changes. These include risks associated with
third-party transactions or the Company's internal processes. The Y2K readiness
program was in place throughout the Company at the end of 1999.
23
Since the compliance program began, the Company has incurred approximately $12.0
million in expenses, including consulting fees, internal staff costs and other
expenses. The Company has also procured replacement systems that, in addition to
being Y2K compliant, provide enhanced capability to benefit future operations.
The Company has not experienced significant Y2K issues subsequent to 1999's
fiscal year end. Although the Company believes it has taken the appropriate
steps to address Y2K readiness, there is no guarantee that the Company's efforts
will prevent a material adverse impact on the results of operations and
financial condition.
Forward-Looking Information
Certain statements contained in this report, including those related to future
operating results, position eliminations, cash requirements and savings related
to the special charges, expected Y2K readiness and cost, the impact of
accounting and disclosure changes, capital spending, the share repurchase
program, the holding period and market risks associated with financial
instruments, the impact of foreign exchange fluctuations and the adequacy of
internally generated funds and existing sources of liquidity are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934. 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, market acceptance of new products, actual amounts and timing of
special charge items, including severance payments, removal and disposal costs
and final negotiation of third-party contracts, third party Y2K readiness, the
impact of stock market conditions on the share repurchase program, fluctuations
in the cost and availability of supply-chain resources and global economic
conditions, including interest and currency rate fluctuations and inflation
rates.
24
Consolidated Statement of Income
Year ended November 30
1999 1998 1997
-----------------------------------------------
(IN MILLIONS EXCEPT PER SHARE DATA)
Net sales $2,006.9 $1,881.1 $1,801.0
Cost of goods sold 1,289.7 1,232.2 1,172.4
-----------------------------------------------
Gross profit 717.2 648.9 628.6
Selling, general and administrative expense 522.3 463.8 461.0
Special charges (credits) 25.7 2.3 (3.2)
-----------------------------------------------
Operating income 169.2 182.8 170.8
Interest expense 32.4 36.9 36.3
Other (income) expense, net (5.5) (6.6) (7.8)
-----------------------------------------------
Income from consolidated continuing operations before
income taxes 142.3 152.5 142.3
Income taxes 57.2 54.9 52.6
-----------------------------------------------
Net income from consolidated continuing operations 85.1 97.6 89.7
Income from unconsolidated operations 13.4 6.2 7.7
-----------------------------------------------
Net income from continuing operations 98.5 103.8 97.4
Cumulative effect of accounting change, net of income
taxes of $2.9 4.8 - -
Income from discontinued operations, net of income taxes - - 1.0
-----------------------------------------------
Net income $ 103.3 $ 103.8 $ 98.4
===============================================
Earnings per common share - basic
Continuing operations $ 1.38 $ 1.42 $ 1.29
Cumulative effect of accounting change .07 - -
Discontinued operations - - .01
-----------------------------------------------
Total earnings per share - basic $ 1.45 $ 1.42 $ 1.30
===============================================
Earnings per common share - assuming dilution
Continuing operations $ 1.36 $ 1.41 $ 1.29
Cumulative effect of accounting change .07 - -
Discontinued operations - - .01
-----------------------------------------------
Total earnings per share - assuming dilution $ 1.43 $ 1.41 $ 1.30
===============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
Consolidated Balance Sheet
November 30
1999 1998
---------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 12.0 $ 17.7
Receivables, less allowances of $3.8 for 1999 and $4.0 for 1998 213.9 212.8
Inventories 234.2 250.9
Prepaid expenses and other current assets 26.1 7.2
Deferred income taxes 4.4 15.2
---------------------------
Total current assets 490.6 503.8
---------------------------
Property, plant and equipment, net 363.3 377.0
Intangible assets, net 142.8 160.9
Prepaid allowances 109.3 143.7
Investments and other assets 82.8 73.7
---------------------------
Total assets $ 1,188.8 $ 1,259.1
===========================
CURRENT LIABILITIES
Short-term borrowings $ 92.9 $ 139.1
Current portion of long-term debt 7.7 24.5
Trade accounts payable 148.8 145.9
Other accrued liabilities 221.2 208.5
---------------------------
Total current liabilities 470.6 518.0
---------------------------
Long-term debt 241.4 250.4
Deferred income taxes 3.8 4.2
Other long-term liabilities 90.6 98.4
---------------------------
Total liabilities 806.4 871.0
---------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 160.0 shares; issued and
outstanding: 1999 - 8.9 shares, 1998 - 9.7 shares 49.8 49.0
Common stock non-voting, no par value; authorized 160.0 shares;
issued and outstanding: 1999 - 61.5 shares, 1998 - 62.8 shares 124.0 120.0
Retained earnings 242.8 262.3
Accumulated other comprehensive income (34.2) (43.2)
---------------------------
Total shareholders' equity 382.4 388.1
---------------------------
Total liabilities and shareholders' equity $ 1,188.8 $ 1,259.1
===========================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENT.
26
Consolidated Statements of Cash Flows
Year ended November 30
1999 1998 1997
-----------------------------------------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income $ 103.3 $ 103.8 $ 98.4
Adjustments to reconcile net income to net cash provided
by operating activities
Special charges (credits) 26.7 2.3 (3.2)
Cumulative effect of accounting change (4.8) - -
Depreciation and amortization 57.4 54.8 49.3
Deferred income taxes 6.4 2.0 18.9
Other 1.6 (.3) 2.9
Income from unconsolidated operations (13.4) (6.2) (7.7)
Changes in operating assets and liabilities
Receivables (2.1) 1.6 (4.2)
Inventories 16.0 (1.7) (13.7)
Prepaid allowances 34.6 (13.1) 18.1
Trade accounts payable 3.2 (2.4) (.6)
Other assets and liabilities (7.6) (6.6) 13.5
Dividends received from unconsolidated affiliates 8.0 9.8 9.5
-----------------------------------------------
Net cash provided by operating activities 229.3 144.0 181.2
-----------------------------------------------
INVESTING ACTIVITIES
Acquisitions of businesses - (8.9) (3.3)
Capital expenditures (49.3) (54.8) (43.9)
Proceeds from sale of assets 3.0 3.0 3.8
Other .4 (1.9) (3.3)
-----------------------------------------------
Net cash used in investing activities (45.9) (62.6) (46.7)
-----------------------------------------------
FINANCING ACTIVITIES
Short-term borrowings, net (46.4) 27.5 16.1
Long-term debt borrowings .3 9.0 .6
Long-term debt repayments (24.3) (17.7) (12.2)
Common stock issued 11.6 14.1 7.0
Common stock acquired by purchase (81.0) (63.0) (111.2)
Dividends paid (48.7) (46.9) (45.5)
-----------------------------------------------
Net cash used in financing activities (188.5) (77.0) (145.2)
-----------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents (.6) (.2) 1.8
-----------------------------------------------
(Decrease)/increase in cash and cash equivalents (5.7) 4.2 (8.9)
Cash and cash equivalents at beginning of year 17.7 13.5 22.4
-----------------------------------------------
Cash and cash equivalents at end of year $ 12.0 $ 17.7 $ 13.5
===============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
Consolidated Statement of Shareholders' Equity
Common
Stock Accumulated
Common Non- Common Other Total
(MILLIONS EXCEPT PER Stock Voting Stock Retained Comprehensive Shareholders'
SHARE DATA) Shares Shares Amount Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------
Balance, November 30,
1996 11.5 66.7 $161.0 $313.8 $(24.8) $450.0
Comprehensive income:
Net income 98.4 98.4
Currency
translation
adjustments (5.8) (5.8)
-----------------
Comprehensive income 92.6
-----------------
Dividends paid
($.60/share) (45.5) (45.5)
Shares purchased and
retired (.3) (4.2) (8.6) (102.6) (111.2)
Shares issued .1 .2 7.0 7.0
Other .2 .2
Equal exchange (1.1) 1.1 -
------------------------------------------------------------------------------------
Balance, November 30,
1997 10.2 63.8 $159.4 $264.3 $(30.6) $393.1
Comprehensive income:
Net income 103.8 103.8
Currency
translation
adjustments (6.0) (6.0)
Minimum pension
liability
adjustment, net
of tax (6.6) (6.6)
-----------------
Comprehensive income 91.2
-----------------
Dividends paid
($.64/share) (46.9) (46.9)
Shares purchased and
retired (.2) (1.8) (4.5) (58.5) (63.0)
Shares issued .3 .2 14.1 14.1
Other (.4) (.4)
Equal exchange (.6) .6 -
------------------------------------------------------------------------------------
Balance, November 30,
1998 9.7 62.8 $169.0 $262.3 $(43.2) $388.1
28
Consolidated Statement of Shareholders' Equity (continued)
Common
Stock Accumulated
Common Non- Common Other Total
(MILLIONS EXCEPT PER Stock Voting Stock Retained Comprehensive Shareholders'
SHARE DATA) Shares Shares Amount Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------
Balance, November 30,
1998 9.7 62.8 $169.0 $262.3 $(43.2) $388.1
COMPREHENSIVE INCOME:
NET INCOME 103.3 103.3
CURRENCY
TRANSLATION
ADJUSTMENTS - -
MINIMUM PENSION
LIABILITY
ADJUSTMENT, NET
OF TAX 6.6 6.6
CHANGE IN REALIZED
AND UNREALIZED
GAINS ON
DERIVATIVE
FINANCIAL
INSTRUMENTS, NET
OF TAX 2.4 2.4
-----------------
COMPREHENSIVE INCOME 112.3
-----------------
DIVIDENDS PAID
($.68/SHARE) (48.7) (48.7)
SHARES PURCHASED AND
RETIRED (.5) (2.1) (6.8) (74.2) (81.0)
SHARES ISSUED .3 .2 11.6 11.6
OTHER .1 .1
EQUAL EXCHANGE (.6) .6 -
------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30,
1999 8.9 61.5 $173.8 $242.8 $(34.2) $382.4
====================================================================================
See Notes to Consolidated Financial Statements
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Investments in 20% to 50% owned affiliates are
accounted for under the equity method. Significant intercompany transactions
have been eliminated.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual amounts could differ from these estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity date of three
months or less are classified as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated over its
estimated useful life using the straight-line method for financial reporting and
both accelerated and straight-line methods for tax reporting.
INTANGIBLE ASSETS
Intangible assets resulting from acquisitions are amortized using the
straight-line method over periods up to 40 years. The recoverability of
intangible assets is evaluated periodically when events or circumstances
indicate a possible inability to recover the carrying amount. When factors
indicate that an intangible asset should be evaluated for impairment, the
Company uses various analyses, including projections of cash flows and other
profitability measures, to evaluate recoverability. An impaired intangible asset
is written down to fair value, which is generally the discounted value of
estimated future cash flows.
PREPAID ALLOWANCES
Prepaid allowances arise when the Company prepays sales discounts and marketing
allowances to certain customers in connection with multi-year sales contracts.
These costs are capitalized and amortized over the lives of the contracts,
generally ranging from three to five years. The amounts reported in the
Consolidated Balance Sheet are stated at the lower of unamortized cost or
management's estimate of the net realizable value of these costs.
30
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation is accounted for by using the intrinsic value-based
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries, other than those
located in highly inflationary countries, are translated at current exchange
rates, while income and expenses are translated at average rates for the period.
Translation gains and losses are reported in other comprehensive income in
shareholders' equity. For entities in highly inflationary countries, a
combination of current and historical rates is used to determine translation
gains and losses, which are reported in the Consolidated Statement of Income.
ACCOUNTING AND DISCLOSURE CHANGES
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income in financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by or distributions to shareholders. The adoption of this statement
had no impact on the Company's net income or shareholders' equity. Amounts in
prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which establishes annual and interim reporting
standards for a company's operating segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of this
standard did not impact the Company's results of operations and financial
position and was limited to the presentation of its disclosures.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in 1999. This statement requires the Company to recognize
all derivatives on the balance sheet at fair value. Adoption of SFAS No. 133 did
not have a material impact on the Company's results of operations and financial
position.
The Company adopted Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" in 1999. This statement requires the costs of start-up
activities, including organization costs, to be expensed as incurred. Adoption
of this standard did not have a material impact on the Company's results of
operations and financial position.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the 1999
presentation.
31
In 1999, the Company changed its actuarial method of calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of the annual pension expense. This modification
resulted in a one-time, pre-tax credit of $7.7 million which was previously
classified in the consolidated statement of income on the line entitled
special charges (credits). This item has been reclassified in these financial
statements as a $4.8 million cumulative effect of accounting change, net of
income taxes.
2. SPECIAL CHARGES, ACCOUNTING CHANGE AND DISCONTINUED OPERATIONS
SPECIAL CHARGES
During 1999, the Company recorded special charges of $26.7 million ($23.2
million after-tax) associated with a plan to streamline operations approved by
the Company's Board of Directors in May 1999. Of this amount, $25.7 million was
classified as special charges and $1.0 million as cost of goods sold in the
Consolidated Statement of Income.
In Europe, the Company announced actions to consolidate certain U.K. facilities,
improve efficiencies within previously consolidated European operations and
realign operations between the U.K. and other European locations. Specific
actions under this plan include: the closure of the Oswaldtwistle facility, one
of three liquid manufacturing operations in the U.K.; streamlining manufacturing
and administrative functions at the recently consolidated European operations;
realignment of operations between the U.K. and other European locations; and
system and process improvements throughout the Company's global operations.
The major components of the special charges include workforce reductions,
building and equipment disposals, write-downs of intangible assets and other
related exit costs. In total, the streamlining actions will result in the
elimination of approximately 300 positions, primarily outside the U.S. As of
November 30, 1999, approximately 220 positions were eliminated. These were
primarily related to European initiatives, including the closure of the
Oswaldtwistle facility. In addition, the Company transitioned its selling,
administration and distribution operations in Switzerland to a third party
distributor based in that country. Asset write-downs, including $5.7 million of
property, plant and equipment, $9.1 million of intangible assets and $1.0
million in inventory, were recorded as a direct result of the Company's decision
to exit facilities, businesses or operating activities. The fair value of the
intangible assets, primarily related to goodwill from prior acquisitions in
Finland and Switzerland, was based on a discounted value of estimated future
cash flows. Other exit costs consist primarily of employee and equipment
relocation costs, lease exit costs and consulting fees, some of which will be
recognized as incurred.
In its entirety, expenses associated with the streamlining actions are expected
to total $29.3 million. This includes amounts recognized in 1999 and future
expenses which could not be accrued, but will be expensed as the actions are
implemented. It is expected
32
that $1.5 million of the future expenses will be classified as cost of goods
sold or selling, general and administrative expense. The Company expects these
actions to be completed in 2000.
The major components of the special charges (credits) and the remaining accrual
balance as of November 30, 1999 follow:
Severance
and
personnel Asset write- Other exit
(MILLIONS) costs downs costs Total
- --------------------------------------------------------------------------------------------------------------
1999
SPECIAL CHARGES $7.9 $15.8 $3.0 $26.7
AMOUNTS UTILIZED (4.0) (15.8) (1.2) (21.0)
--------------------------------------------------------------------------
$3.9 $- $1.8 $5.7
==========================================================================
During 1998 and 1997, the Company completed special projects relating to the
consolidation of manufacturing facilities, reduction of administrative staff and
divestiture of non-core businesses undertaken in previous years. Due to the net
impact of estimate changes, project modifications and the recognition of project
expenses not accruable in previous years, the Company recorded special charges
(credits) of $2.3 million and $(3.2) million in 1998 and 1997, respectively. In
1998, the realignment of several overseas operations resulted in losses less
than originally anticipated and the Company discontinues its manufacturing
operations in Venezuela. In 1997, the agreement in principle to dispose of an
overseas food brokerage and distribution business was not consummated and the
Company streamlined the food brokerage and distribution business and closed a
U.S. packaging plant.
ACCOUNTING CHANGE
In 1999, the Company changed its actuarial method of calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual pension expense. This modification
resulted in a one-time cumulative effect of an accounting change of $4.8
million (net of tax of $2.9 million) or $0.07 per share. Under the previous
method, all realized and unrealized gains and losses were gradually included
in the calculated market-related value of plan assets over a five-year
period. Under the new method, the total expected investment return, which
anticipates realized and unrealized gains and losses on plan assets, is
included in the calculated market-related value of plan assets each year.
Only the difference between total actual investment return, including
realized and unrealized gains and losses, and the expected investment return
is gradually included in the calculated market-related value of plan assets
over a five-year period.
Under the new actuarial method, the calculated market-related value of plan
assets more closely approximates fair value, while still mitigating the effect
of annual market value
33
fluctuations. It also reduces the growing difference between the fair value
and calculated market-related value of plan assets that has resulted from the
recent accumulation of unrecognized gains and losses. While this change
better represents the amount of ongoing pension expense, the new method did
not have a material impact on the Company's results of operations in 1999 and
is not expected to have a material impact in future years. The pro-forma
impact of applying the change to 1998 and 1997 was not material.
DISCONTINUED OPERATIONS
In 1996, the Company sold substantially all the assets of Gilroy Foods,
Incorporated and Gilroy Energy Company, Inc. Based on the settlement of contract
terms, the Company recognized income from discontinued operations, net of income
taxes, of $1.0 million in 1997.
Under a non-compete agreement signed with Calpine Corporation, McCormick
received payments of $4.6 million, $7.0 million and $8.0 million in 1999, 1998
and 1997, respectively, which were included in other income in the Consolidated
Statement of Income. As of the end of 1999, this non-compete agreement was
complete.
3. INVESTMENTS
The Company owns from 20% to 50% of its unconsolidated food products affiliates.
Although the Company reports its share of net income 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 $38.5 million at
November 30, 1999.
Summarized year-end information from the financial statements of these companies
representing 100% of the businesses follows:
(MILLIONS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net sales $378.3 $344.4 $345.4
Gross profit 158.7 131.1 131.7
Net income 26.7 11.9 15.7
Current assets $168.0 $161.2 $154.0
Noncurrent assets 82.6 71.7 73.2
Current liabilities 97.1 106.1 90.8
Noncurrent liabilities 46.1 39.5 46.5
4. FINANCING ARRANGEMENTS
The Company's outstanding debt is as follows:
(MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Short-term borrowings
Commercial paper (1) $59.6 $94.4
Other 33.3 44.7
----------------------------------
$92.9 $139.1
==================================
34
(MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Weighted-average interest rate of short-term borrowings at year end 5.99% 6.57%
Long-term debt
8.95% note due 2001(1) $74.8 $74.7
9.75% installment notes due through 2001 5.2 8.8
9.00% installment notes due 1999 - 1.6
5.78% - 7.77% medium-term notes due 2004 to 2006 95.0 95.0
7.63% - 8.12% medium-term notes due 2024 (2) 55.0 55.0
9.34% pound sterling installment note due through 2001 7.1 11.3
10.00% Canadian dollar bond due 1999 - 6.5
3.13% yen note due 1999 - .9
9.74% Australian dollar note due 1999 - 7.5
Other 12.0 13.6
----------------------------------
Total long-term debt 249.1 274.9
Less current portion 7.7 24.5
----------------------------------
$241.4 $250.4
==================================
(1) The variable interest on commercial paper which will be used to retire the
8.95% note due 2001 is hedged by forward starting interest rate swaps for
the period 2001 through 2011. Net interest payments will be fixed at 6.35%
during the period.
(2) The holders have a one-time option to require retirement of these notes
during 2004.
The fair value of the Company's short-term borrowings approximated the recorded
value. The fair value of long-term debt including the current portion of
long-term debt was $254.7 million and $298.8 million at November 30, 1999 and
1998, respectively.
The Company's long-term debt agreements contain various restrictive covenants,
including limitations on the payment of cash dividends. Under the most
restrictive covenants, $156.0 million of retained earnings was available for
dividends at November 30, 1999.
Maturities of long-term debt during the four years subsequent to November 30,
2000 are as follows (in millions):
2001 - $85.2 2003 - $ .4
2002 - $ .5 2004 - $16.3
The Company has available credit facilities with domestic and foreign banks for
various purposes. The amount of unused credit facilities at November 30, 1999
was $376.6 million, of which $300.0 million supports a commercial paper
borrowing arrangement. Credit facilities in support of commercial paper issuance
require a commitment fee of $.2
35
million. All other credit facilities require no commitment fee and are subject
to the availability of funds.
Rental expense under operating leases was $17.4 million in 1999, $14.1 million
in 1998 and $13.6 million in 1997. Future annual fixed rental payments for the
years ending November 30 are as follows (in millions):
2000 - $12.8 2003 - $4.3
2001 - $10.7 2004 - $2.9
2002 - $ 8.0 Thereafter - $6.2
At November 30, 1999, the Company had unconditionally guaranteed $5.3 million of
the debt of unconsolidated affiliates. The Company has guaranteed the residual
value of a leased distribution center at 85% of its original cost.
5. FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to enhance its ability to
manage risk, including foreign currency and interest rate exposures which exist
as part of its ongoing business operations. The Company does not enter into
contracts for trading purposes, nor is it a party to any leveraged derivative
instrument. The use of derivative financial instruments is monitored through
regular communication with senior management and the utilization of written
guidelines.
The Company's derivatives are accounted for under the requirements of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." All
derivatives are recognized at fair value in the Consolidated Balance Sheet. In
evaluating the fair value of financial instruments, including derivatives, the
Company generally uses third-party market quotes or calculates an estimated fair
value on a discounted cash flow basis using the rates available for instruments
with the same remaining maturities.
FOREIGN CURRENCY
The Company is potentially exposed to foreign currency fluctuations affecting
net investments and earnings denominated in foreign currencies. The Company
selectively hedges the potential effect of these foreign currency fluctuations
by entering into foreign currency exchange contracts with highly-rated financial
institutions.
Gains and losses from hedges of assets, liabilities or firm commitments are
recognized through income, offsetting the change in fair value of the hedged
item. The gains or losses on contracts which are designated as a hedge of
anticipated purchases are deferred in other comprehensive income in
shareholders' equity until the hedged item is recognized in income. Realized and
unrealized gains and losses on contracts that hedge net investments are also
recognized in other comprehensive income.
36
At November 30, 1999, the Company had foreign currency exchange contracts
maturing in 2000 to purchase or sell $36.4 million of foreign currencies versus
$40.7 million at November 30, 1998. The fair value of these contracts was $0.3
million and $1.1 million at November 30, 1999 and 1998, respectively.
INTEREST RATES
The Company finances a portion of its operations through debt instruments,
primarily commercial paper, notes and bank loans whose fair values are indicated
in Note 4. The Company utilizes interest rate swap agreements to achieve a
desired proportion of variable versus fixed rate debt. The reflected gains or
losses on these contracts are deferred in other comprehensive income until the
contracts' effective date in 2001, after which the amounts paid or received on
the contracts will be recorded as an adjustment to interest expense.
The variable interest on commercial paper which will be used to retire the 8.95%
note due 2001 is hedged by forward starting interest rate swaps for the period
2001 through 2011. Net interest payments will be fixed at 6.35% during the
period.
The notional amount of interest rate swaps was $75.0 million at November 30,
1999. The fair value of the swaps was $3.9 million and $(2.0) million at
November 30, 1999 and 1998, respectively. The Company intends to hold the
forward starting interest rate swaps until maturity.
OTHER FINANCIAL INSTRUMENTS
The Company's other financial instruments include cash and cash equivalents,
receivables and accounts payable. As of November 30, 1999 and 1998, the fair
value of other financial instruments held by the Company approximated the
recorded value.
Investments, consisting principally of investments in unconsolidated affiliates,
are not readily marketable. Therefore, it is not practicable to estimate their
fair value.
CONCENTRATIONS OF CREDIT RISK
The Company is potentially exposed to concentrations of credit risk with trade
accounts receivable, prepaid allowances and financial instruments. Because the
Company has a large and diverse customer base with no single customer accounting
for a significant percentage of trade accounts receivable and prepaid
allowances, there was no material concentration of credit risk in these accounts
at November 30, 1999. The Company evaluates the credit worthiness of the
counterparties to financial instruments and considers nonperformance credit risk
to be remote.
37
6. PENSION AND PROFIT SHARING PLANS
PENSION PLAN
The Company's pension expense follows:
United States International
(MILLIONS) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Defined benefit plans
Service cost $7.4 $6.2 $5.5 $2.8 $2.7 1.8
Interest cost 12.7 11.4 10.7 3.2 3.2 2.9
Expected return on plan assets (13.2) (11.2) (10.2) (5.2) (4.9) (3.9)
Amortization of prior service cost .1 .1 - .1 .1 .1
Amortization of transition asset (.6) (.5) (.5) (.1) (.1) (.1)
Curtailment loss - - - .2 - -
Recognized net actuarial loss (gain) 3.3 1.6 1.6 (.1) (.3) (.3)
Other retirement plans .1 .2 - .7 .8 1.2
--------------------------------------------------------------
$9.8 $7.8 $7.1 $1.6 $1.5 $1.7
==============================================================
The Company's U.S. plans held .5 million shares, with a fair value of $15.0
million, of the Company's stock at November 30, 1999. Dividends paid on these
shares in 1999 were $.3 million.
Rollforwards of the benefit obligation, fair value of plan assets and a
reconciliation of the plans' funded status at September 30, the measurement
date, follow:
United States International
(MILLIONS) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Beginning of the year $185.5 $156.2 $49.8 $43.8
Service cost 7.4 6.2 2.8 2.7
Interest cost 12.7 11.4 3.2 3.2
Employee contributions - - 1.1 1.1
Plan changes .3 - - -
Curtailment - - .4 -
Actuarial (gain) loss (17.7) 21.3 4.2 2.4
Benefits paid (11.7) (9.6) (2.2) (1.8)
Foreign currency impact - - (.4) (1.6)
-------------------------------------------------------
End of year $176.5 $185.5 $58.9 $49.8
-------------------------------------------------------
Change in fair value of plan assets
Beginning of the year $141.2 $134.2 $57.9 $55.2
Actual return on plan assets 16.9 5.4 4.4 5.4
Transfer .4 - - -
Employer contributions 22.2 11.2 - -
Employee contributions - - 1.1 1.1
Benefits paid (11.7) (9.6) (2.2) (1.8)
Foreign currency impact - - (.5) (2.0)
-------------------------------------------------------
End of year $169.0 $141.2 $60.7 $57.9
-------------------------------------------------------
Reconciliation of funded status
Funded status $(7.5) $(44.3) $1.8 $8.1
Unrecognized net actuarial loss (gain) 26.2 43.4 (2.9) (8.5)
Unrecognized prior service cost .3 .4 .7 1.0
Unrecognized transition asset (liability) .6 - (.4) (.5)
-------------------------------------------------------
Net pension asset (liability) $19.6 $(.5) $(.8) $.1
=======================================================
38
Amounts recognized in the Consolidated Balance Sheet consist of the following:
United States International
(MILLIONS) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Prepaid pension cost $19.6 $5.1 $.4 $.8
Accrued pension liability - (17.9) (1.2) (.7)
Intangible asset - 2.0 - -
Deferred income taxes - 3.7 - -
Minimum pension liability - 6.6 - -
--------------------------------------------------------
$19.6 $(.5) $(.8) $.1
========================================================
The accumulated benefit obligation for the U.S. plans was $144.5 million and
$153.9 million as of September 30, 1999 and 1998, respectively.
United States International
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Significant assumptions
Discount rate 8.0% 7.0% 6.0-6.5% 6.5%
Salary scale 4.5% 4.0% 3.5-4.0% 3.5-4.0%
Expected return on plan assets 10.0% 10.0% 8.5% 8.5-9.5%
PROFIT SHARING PLAN
Profit sharing plan expense was $6.0 million, $4.2 million and $4.4 million in
1999, 1998 and 1997, respectively.
The Profit Sharing Plan held 2.4 million shares, with a fair value of $78.3
million, of the Company's stock at November 30, 1999. Dividends paid on these
shares in 1999 were $1.6 million.
7. OTHER POSTRETIREMENT BENEFITS
The Company's other postretirement benefit expense follows:
(MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Other postretirement benefits
Service cost $2.6 $2.1 $1.9
Interest cost 4.9 4.4 4.3
Amortization of prior service cost (.1) (.1) (.1)
-----------------------------------------
$7.4 $6.4 $6.1
=========================================
39
Rollforwards of the benefit obligation, fair value of plan assets and a
reconciliation of the plan's funded status at November 30, the measurement date,
follow:
(MILLIONS) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Beginning of the year $69.8 $61.5
Service cost 2.6 2.1
Interest cost 4.9 4.4
Employee contributions 1.6 1.5
Plan changes (6.1) (.5)
Actuarial (gain) loss (2.7) 5.9
Benefits paid (5.0) (5.1)
---------------------------
End of the year $65.1 $69.8
---------------------------
Change in fair value of plan assets
Beginning of the year $- $-
Employer contributions 3.4 3.6
Employee contributions 1.6 1.5
Benefits paid (5.0) (5.1)
---------------------------
End of the year $- $-
---------------------------
Reconciliation of funded status
Funded status $(65.1) $(69.8)
Unrecognized net actuarial (gain) loss (.2) 2.5
Unrecognized prior service cost (7.3) (1.3)
---------------------------
Other postretirement benefit liability $(72.6) $(68.6)
===========================
The assumed weighted-average discount rates were 8.0% and 7.0% for 1999 and
1998, respectively.
The assumed annual rate of increase in the cost of covered health care benefits
is 7.9% for 2000. It is assumed to decrease gradually to 4.5% in the year 2007
and remain at that level thereafter. Changing the assumed health care cost trend
would have the following effect:
1 Percentage Point 1 Percentage Point
(MILLIONS) Increase Decrease
- -------------------------------------------------------------------------------------------------------------
Effect on benefit obligation as of November 30, 1999 $6.5 $(5.8)
Effect on total of service and interest cost
components in 1999 $1.0 $(.8)
40
8. INCOME TAXES
The provision for income taxes consists of the following:
(MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Income taxes
Current
Federal $35.6 $37.6 $24.4
State 2.7 6.7 5.5
International 12.5 8.6 3.8
-----------------------------------------
50.8 52.9 33.7
-----------------------------------------
Deferred
Federal 4.8 .1 10.7
State 1.3 (.6) 2.3
International .3 2.5 5.9
-----------------------------------------
6.4 2.0 18.9
-----------------------------------------
Total income taxes $57.2 $54.9 $52.6
=========================================
The components of income from consolidated continuing operations before income
taxes follow:
(MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Pretax income
United States $119.3 $126.9 $115.6
International 23.0 25.6 26.7
-----------------------------------------
$142.3 $152.5 $142.3
=========================================
A reconciliation of the U.S. federal statutory rate with the effective tax rate
follows:
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefits 1.8 2.6 4.3
Tax effect of international operations .5 .6 .1
Tax credits (1.6) (2.2) (2.6)
Nondeductible special charges 4.2 - -
Other, net .3 - .2
-----------------------------------------
Effective tax rate 40.2% 36.0% 37.0%
-----------------------------------------
Deferred tax liabilities and assets are comprised of the following:
(MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets
Postretirement benefit obligations $36.7 $35.7
Accrued expenses and other reserves 12.0 15.3
Inventory 3.8 3.8
Net operating losses and tax credits 7.2 7.2
Other 19.1 16.0
Valuation allowance (7.2) (6.2)
---------------------------
71.6 71.8
---------------------------
Deferred tax liabilities
Depreciation 44.7 41.9
Other 22.2 16.0
---------------------------
66.9 57.9
---------------------------
Net deferred tax asset $4.7 $13.9
===========================
41
Deferred tax assets are primarily in the U.S. The Company has a history of
having taxable income and anticipates future taxable income to realize these
assets.
U.S. income taxes are not provided for unremitted earnings of international
subsidiaries and affiliates. The Company's intention is to reinvest these
earnings permanently or to repatriate the earnings only when it is tax effective
to do so. Accordingly, the Company believes that any U.S. tax on repatriated
earnings would be substantially offset by U.S. foreign tax credits. Unremitted
earnings of such entities were $104.3 million at November 30, 1999.
9. STOCK PURCHASE AND OPTION PLANS
The Company has an Employee Stock Purchase Plan (ESPP) enabling substantially
all U.S. employees to purchase the Company's common stock at the lower of the
stock price on the grant date or the exercise date. Similarly, options were
granted for certain foreign-based employees in lieu of their participation in
the ESPP. Options granted under both plans have two-year terms and are fully
exercisable on the grant date.
Under the Company's 1990 and 1997 Stock Option Plans and the McCormick (U.K.)
Share Option Schemes, options to purchase shares of the Company's common stock
have been or may be granted to employees. The option price for shares granted
under these plans is the fair market value on the grant date. Options have five
and ten year terms and generally become fully exercisable between two and five
years of continued employment.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation expense
has been recognized for the Company's stock option plans. If the Company had
elected to recognize compensation based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123, net income and earnings per share
would have been as follows:
(MILLIONS EXCEPT PER SHARE DATA) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Pro forma net income $98.2 $100.1 $94.5
Pro forma earnings per share
Assuming dilution 1.36 1.36 1.25
Basic 1.38 1.37 1.25
42
The effects of applying SFAS No. 123 on pro forma net income are not indicative
of future amounts until the new rules are applied to all outstanding non-vested
awards.
The per share weighted-average fair value of options granted during the year was
$6.02, $7.20 and $4.63 in 1999, 1998 and 1997, respectively. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following range of assumptions for the Stock Option
Plans, McCormick (U.K.) Share Option Schemes and the ESPP (including options to
foreign employees):
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Risk-free interest rates 4.9%-5.4% 5.5%-5.7% 5.9%-6.7%
Dividend yields 2.0% 2.0% 2.0%
Expected volatility 24.2% 23.6% 23.0%
Expected lives 1.6-6.0 YEARS 1.3-5.3 years 1.6-4.6 years
A summary of the Company's stock option plans for the years ended November 30
follows:
(OPTIONS IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
-AVERAGE -average -average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
- --------------------------------------------------------------------------------------------------------------
Beginning of year 3.7 $26.50 3.2 $23.11 2.7 $22.71
Granted 1.6 $29.06 1.2 $33.15 1.3 $24.25
Exercised (.6) $23.54 (.6) $22.57 (.3) $21.94
Forfeited (.2) $25.91 (.1) $22.27 (.5) $24.91
- --------------------------------------------------------------------------------------------------------------
End of year 4.5 $27.86 3.7 $26.50 3.2 $23.11
- --------------------------------------------------------------------------------------------------------------
Exercisable - end
of year 2.3 $25.54 1.9 $23.06 1.8 $22.73
- --------------------------------------------------------------------------------------------------------------
(OPTIONS IN MILLIONS) Options outstanding Options exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
-average -average -average
Range of remaining exercise exercise
exercise price Shares life in years price Shares price
- --------------------------------------------------------------------------------------------------------------
$11.06 to $24.25 1.7 1.8 $23.17 1.6 $23.12
$24.50 to $33.13 1.7 7.5 $29.07 .4 $28.90
$33.25 1.1 8.2 $33.25 .3 $33.25
- --------------------------------------------------------------------------------------------------------------
4.5 5.5 $27.86 2.3 $25.54
- --------------------------------------------------------------------------------------------------------------
43
Under all stock purchase and option plans, there were 3.6 million and 4.8
million shares reserved for future grants at November 30, 1999 and 1998,
respectively.
10. EARNINGS PER SHARE
The reconciliation of shares outstanding used in the calculation of the required
earnings per share measures, basic and assuming dilution, for the years ended
November 30 follows:
(MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Average shares outstanding - basic 71.4 73.3 75.7
Effect of dilutive securities Stock options and ESPP .6 .5 .2
Average shares outstanding - assuming dilution 72.0 73.8 75.9
11. 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 vote 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 will vote as a separate class on all matters
on which they are entitled to vote. Holders of Common Stock Non-Voting are
entitled to vote on reverse mergers and statutory share exchanges where 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.
12. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
BUSINESS SEGMENTS
In the fourth quarter of 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The previously reported segment information has been restated to conform to the
requirements of SFAS No. 131.
44
The Company operates in three business segments: consumer, industrial and
packaging. The consumer and industrial segments manufacture, market and
distribute spices, seasonings, flavorings and other specialty food products
throughout the world. The consumer segment sells consumer spices, herbs,
extracts, proprietary seasoning blends, sauces and marinades to the consumer
food market under a variety of brands, including the McCormick and Schilling
brands in the U.S., Club House in Canada, and Schwartz in the U.K. The
industrial segment sells to food processors, restaurant chains, distributors,
warehouse clubs and institutional operations. The packaging segment manufactures
and markets plastic packaging products for food, personal care and other
industries, predominantly in the U.S. Tubes and bottles are also produced for
the Company's food segments.
The Company measures segment performance based on operating income. Although the
segments are managed separately due to their distinct distribution channels and
marketing strategies, manufacturing and warehousing is often integrated across
the food segments to maximize cost efficiencies. Management does not segregate
jointly utilized assets by individual food segment for internal reporting,
evaluating performance or allocating capital. Asset-related information has been
disclosed in aggregate for the food segments.
Accounting policies for measuring segment operating income and assets are
substantially consistent with those described in Note 1, "Summary of Significant
Accounting Policies." Intersegment sales are generally accounted for at current
market value or cost plus markup. Because of manufacturing integration for
certain products within the food segments, inventory cost, including the
producing segment's overhead and depreciation, is transferred and recognized in
the operating income of the receiving segment. Corporate and eliminations
includes general corporate expenses, intercompany eliminations and other charges
not directly attributable to the segments. Corporate assets include cash,
deferred taxes and certain investments and fixed assets.
Corporate &
(MILLIONS) Consumer Industrial Total Food Packaging Eliminations Total
- --------------------------------------------------------------------------------------------------------------
1999
NET SALES $896.2 $941.0 $1,837.2 $169.7 $- $2,006.9
INTERSEGMENT SALES - 11.5 11.5 34.3 (45.8) -
OPERATING INCOME 122.7 61.0 183.7 19.6 (34.1) 169.2
OPERATING INCOME
EXCLUDING SPECIAL
CHARGES 136.5 73.8 210.3 19.8 (34.2) 195.9
INCOME FROM
UNCONSOLIDATED
OPERATIONS 13.4 - 13.4 - - 13.4
ASSETS - - 983.2 117.5 88.1 1,188.8
CAPITAL EXPENDITURES - - 39.7 8.3 1.3 49.3
DEPRECIATION AND
AMORTIZATION - - 44.5 11.5 1.4 57.4
- --------------------------------------------------------------------------------------------------------------
45
1998
Net sales $836.4 $885.9 $1,722.3 $158.8 $- $1,881.1
Intersegment sales - 5.0 5.0 30.0 (35.0) -
Operating income 126.5 62.7 189.2 17.5 (23.9) 182.8
Operating income
excluding special
charges 129.0 61.3 190.3 18.7 (23.9) 185.1
Income from
unconsolidated
operations 6.2 - 6.2 - - 6.2
Assets - - 1,045.9 124.7 88.5 1,259.1
Capital expenditures - - 36.7 16.9 1.2 54.8
Depreciation and
amortization - - 42.2 11.2 1.4 54.8
- --------------------------------------------------------------------------------------------------------------
1997
Net sales $804.8 $816.3 $1,621.1 $179.9 $- $1,801.0
Intersegment sales - 4.5 4.5 25.9 (30.4) -
Operating income 103.8 71.6 175.4 18.2 (22.8) 170.8
Operating income
excluding special
charges 108.7 59.0 167.7 22.8 (22.9) 167.6
Income from
unconsolidated
operations 8.2 (.5) 7.7 - - 7.7
Assets - - 1,047.2 123.6 85.4 1,256.2
Capital expenditures - - 33.2 10.0 .7 43.9
Depreciation and
amortization - - 36.4 11.0 1.9 49.3
- --------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREAS
The Company has significant net sales and long-lived assets in the following
geographic areas:
(MILLIONS) United States United Kingdom Other Countries Total
- --------------------------------------------------------------------------------------------------------------
1999
NET SALES $1,393.9 $322.8 $290.2 $2,006.9
LONG-LIVED ASSETS (1) 319.0 113.7 73.4 506.1
- --------------------------------------------------------------------------------------------------------------
1998
Net sales $1,291.2 $322.2 $267.7 $1,881.1
Long-lived assets (1) 331.7 126.7 79.5 537.9
- --------------------------------------------------------------------------------------------------------------
1997
Net sales $1,222.6 $308.3 $270.1 $1,801.0
Long-lived assets (1) 330.3 131.5 76.2 538.0
- --------------------------------------------------------------------------------------------------------------
(1) Long-lived assets include property, plant and equipment and intangible
assets, net of accumulated depreciation and amortization, respectively.
46
13. SUPPLEMENTAL FINANCIAL STATEMENT DATA
(MILLIONS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Inventories
Finished products and work-in-process $132.6 $138.6
Raw materials 101.6 112.3
---------------------------
$234.2 $250.9
===========================
Property, plant and equipment
Land and improvements $25.0 $26.2
Buildings 192.7 187.6
Machinery and equipment 488.4 477.4
Construction in progress 28.9 32.1
Accumulated depreciation (371.7) (346.3)
---------------------------
$363.3 $377.0
===========================
Intangible assets
Cost $196.8 $212.9
Accumulated amortization (54.0) (52.0)
---------------------------
$142.8 $160.9
===========================
Investments and other assets
Investments $61.2 $52.1
Other assets 21.6 21.6
---------------------------
$82.8 $73.7
===========================
Other accrued liabilities
Payroll and employee benefits $66.9 $47.1
Sales allowances 40.6 54.1
Income taxes 27.1 19.7
Other 86.6 87.6
---------------------------
$221.2 $208.5
===========================
Other long-term liabilities
Other postretirement benefits $72.6 68.6
Other 18.0 29.8
---------------------------
$90.6 $98.4
===========================
(MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Depreciation $52.5 $49.9 $43.9
Research and development 21.4 16.9 16.1
Interest paid 33.0 37.3 38.1
Income taxes paid 55.3 49.0 25.8
47
14. SELECTED QUARTERLY DATA (UNAUDITED)
(MILLIONS EXCEPT PER SHARE DATA) First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
1999
NET SALES $441.5 $468.2 $476.8 $620.4
GROSS PROFIT 145.3 157.7 164.2 250.0
OPERATING INCOME 32.7 13.3 40.9 82.3
NET INCOME BEFORE ACCOUNTING CHANGE 18.2 1.0 25.4 53.9
NET INCOME 23.0 1.0 25.4 53.9
EARNINGS PER SHARE - BASIC
NET INCOME BEFORE ACCOUNTING CHANGE .25 .01 .36 .76
NET INCOME .32 .01 .36 .76
EARNINGS PER SHARE - ASSUMING DILUTION
NET INCOME BEFORE ACCOUNTING CHANGE .25 .01 .35 .76
NET INCOME .32 .01 .35 .76
DIVIDENDS PAID PER SHARE .17 .17 .17 .17
MARKET PRICE
HIGH 34.25 31.88 34.44 34.50
LOW 28.00 26.75 29.94 31.31
- -------------------------------------------------------------------------------------------------------------
1998
Net Sales $415.2 $435.5 $444.8 585.6
Gross Profit 133.2 141.3 146.3 228.1
Operating income 30.0 30.4 38.9 83.5
Net income 16.2 16.1 21.5 50.0
Earnings per share
Basic .22 .22 .29 .69
Assuming dilution .22 .22 .29 .68
Dividends paid per share .16 .16 .16 .16
Market price
High 30.19 34.38 36.06 33.94
Low 26.38 28.81 29.06 27.13
- -------------------------------------------------------------------------------------------------------------
The cumulative impact from changing the method of determining the market-related
value of pension plan assets of $7.7 million ($4.8 million after tax) has been
reclassified in the above presentation from a special charge in the second
quarter of 1999 to a cumulative effect of accounting change in the first quarter
of 1999.
48
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, 1999 and 1998 and the
related consolidated statements of income, cash flows and shareholders' equity
for each of the three years in the period ended November 30, 1999. 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 have conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McCormick &
Company, Incorporated and subsidiaries at November 30, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1999 in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, the Company changed its
accounting method for calculating the market-related value of plan assets used
in determining the expected return-on-asset component of annual pension expense
in 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
January 19, 2000
49
Historical Financial Summary
(MILLIONS EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
For the Year ended November 30
Net sales $2,006.9 $1,881.1 $1,801.0 $1,732.5 $1,691.1
Net income - continuing operations 98.5 103.8 97.4 43.5 86.8
Net income (1)(2) 103.3 103.8 98.4 41.9 97.5
Per Common Share
Earnings per share - assuming
dilution (4)
Continuing operations $1.36 $1.41 $1.29 $.54 $1.07
Discontinued operations (2) - - .01 .08 .13
Extraordinary item - - - (.10) -
Accounting change (1) .07 - - - -
Net income 1.43 1.41 1.30 .52 1.20
Earning per share - basic (1) (2)
(4) 1.45 1.42 1.30 .52 1.20
Common dividends declared (3) .70 .65 .61 .57 .53
Total assets 1,188.8 1,259.1 1,256.2 1,326.6 1,614.3
Long-term debt 241.4 250.4 276.5 291.2 349.1
(1) In 1999, the Company changed an actuarial method used in the determination
of pension expense. The accounting change resulted in a $4.8 million after
tax increase in net income. The impact of this change on annual pension
expense other than the cumulative effect adjustment was not significant.
(2) The Company disposed of Gilroy Foods, Incorporated and Gilroy Energy
Company, Inc. in 1996.
(3) Includes fourth quarter dividends which were declared in December following
the close of each fiscal year.
(4) In 1998, the Company adopted SFAS No. 128, "Earnings Per Share" and prior
years' earnings per share have been restated.
50