<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended FEBRUARY 28, 2002 Commission File Number 0-748
-------------------- ------
MCCORMICK & COMPANY, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-0408290
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 LOVETON CIRCLE, P.O. BOX 6000, SPARKS, MD 21152-6000
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 771-7301
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<Table>
<Caption>
Shares Outstanding
February 28, 2002
------------------
Common Stock 15,933,818
Common Stock Non-Voting 123,280,360
</Table>
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands except per share amounts)
<Table>
<Caption>
Three Months Ended
Feb. 28, Feb. 28,
2002 2001
---- ----
Net sales $518,906 $499,447
Cost of goods sold 333,655 329,818
-------- --------
Gross profit 185,251 169,629
Selling, general and
administrative expense 132,786 124,690
Special charges 367 -
-------- --------
Operating income 52,098 44,939
Interest expense 11,063 14,287
Other income, net 1,047 973
-------- --------
Income before income taxes 42,082 31,625
Income taxes 13,246 10,468
-------- --------
Net income from consolidated
operations 28,836 21,157
Income from unconsolidated
operations 5,678 6,079
Minority interest (673) (650)
--------- ---------
Net income $ 33,841 $ 26,586
======== ========
Earnings per common share -
Basic
Net income $0.24 $0.19
======== ========
Net income excluding goodwill (note 7) $0.24 $0.22
======== ========
Earnings per common share -
assuming dilution
Net income $0.24 $0.19
======== ========
Net income excluding goodwill (note 7) $0.24 $0.21
======== ========
Cash dividends declared per
common share $0.105 $0.10
========= ========
Basic and diluted earnings per common share and cash dividends declared per
common share have been adjusted for the stock split that was effective April 8,
2002.
See notes to condensed consolidated financial statements.
(1)
<Page>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
Feb. 28, Feb. 28, Nov. 30,
2002 2001 2001
-------- -------- --------
ASSETS (Unaudited) (Unaudited)
Current Assets
Cash and cash equivalents $ 62,181 $ 31,292 $ 31,331
Accounts receivable, net 269,894 264,118 295,539
Inventories
Raw materials and supplies 116,207 126,396 117,988
Finished products and work-in
process 165,675 158,560 160,085
------- --------- --------
281,882 284,956 278,073
Other current assets 31,282 20,672 30,857
------- --------- --------
Total current assets 645,239 601,038 635,800
------- --------- --------
Property, plant and equipment 917,309 802,266 887,318
Less: Accumulated depreciation (474,754) (420,500) (462,869)
--------- --------- --------
Total property, plant and
equipment, net 442,555 381,766 424,449
------- --------- --------
Goodwill, net 450,659 467,407 458,800
Intangible assets, net 5,793 6,032 5,842
Prepaid allowances 125,348 116,260 99,263
Investments and other assets 149,091 116,623 147,870
------- --------- --------
Total assets $1,818,685 $1,689,126 $1,772,024
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $295,142 $252,947 $209,843
Current portion of long-term debt 994 82,986 1,036
Trade accounts payable 184,269 162,242 183,974
Other accrued liabilities 259,579 236,668 318,990
------- --------- ---------
Total current liabilities 739,984 734,843 713,843
------- --------- ---------
Long-term debt 454,135 454,022 454,068
Other long-term liabilities 136,433 102,115 128,095
------- --------- ---------
Total liabilities 1,330,552 1,290,980 1,296,006
--------- ---------- ---------
Minority Interest 11,145 12,480 13,003
Shareholders' Equity
Common stock 68,887 55,119 60,364
Common stock non-voting 148,207 128,706 142,522
Retained earnings 358,873 270,904 344,068
Other comprehensive income (98,979) (69,063) (83,939)
-------- --------- --------
Total shareholders' equity 476,988 385,666 463,015
------- --------- ---------
Total liabilities and
shareholders' equity $1,818,685 $1,689,126 $1,772,024
========== ========= ==========
</Table>
See notes to condensed consolidated financial statements.
(2)
<Page>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<Table>
<Caption>
Three Months Ended
Feb. 28, Feb. 28,
2002 2001
-------- --------
Operating activities
Net income $33,841 $26,586
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 14,906 17,285
Income from unconsolidated operations (5,678) (6,079)
Changes in operating assets and liabilities (60,238) (83,718)
Dividends from unconsolidated affiliates 2,250 6,662
Other 105 17
------- -------
Net cash used in operating activities (14,814) (39,247)
------- -------
Investing activities
Capital expenditures (35,817) (21,148)
Other 587 399
------- -------
Net cash used in investing activities (35,230) (20,749)
------- -------
Financing activities
Short-term borrowings, net 85,309 (220,175)
Long-term debt borrowings 0 297,987
Long-term debt repayments 67 0
Common stock issued 14,966 9,394
Common stock acquired by purchase (5,257) (6,168)
Dividends paid (14,536) (13,693)
------- -------
Net cash provided by financing activities 80,549 67,345
------- -------
Effect of exchange rate changes on cash and
cash equivalents 345 53
------- -------
Increase in cash and cash equivalents 30,850 7,402
Cash and cash equivalents at beginning of period 31,331 23,890
------- -------
Cash and cash equivalents at end of period $62,181 $31,292
======= =======
</Table>
See notes to condensed consolidated financial statements.
(3)
<Page>
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain all adjustments
necessary to present fairly the financial position and the results of operations
for the interim periods.
The results of consolidated operations for the three-month period ended February
28, 2002 are not necessarily indicative of the results to be expected for the
full year. Historically, the Company's consolidated sales and net income are
lower in the first half of the fiscal year and increase in the second half.
The increase in sales and earnings in the second half of the year is mainly
due to the U.S. consumer business, where customers purchase for the fourth
quarter holiday season.
For further information, refer to the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
November 30, 2001.
ACCOUNTING AND DISCLOSURE CHANGES
In November 2001, the Emerging Issues Task Force (EITF) issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products." This required the Company to reclassify certain
marketing expenses as a reduction of sales in the first quarter of 2002.
Concurrent with the adoption of EITF 01-09, the Company also reclassified
certain expenses from selling, general, and administrative expense to cost of
goods sold. Prior periods were also reclassified. The effect of these
reclassifications on the first quarter of 2001 was a decrease to sales of $34.1
million, an increase in cost of goods sold of $4.8 million, and a decrease in
selling, general and administrative expenses of $38.9 million. These
reclassifications decreased gross profit margin as a percentage of sales from
39.1% to 34.0% and increased operating income as a percentage of sales from 8.4%
to 9.0%. These reclassifications do not impact net income.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 applies to all business combinations with a closing date
after June 30, 2001. This statement eliminates the pooling-of-interest method of
accounting, and further clarifies the criteria for recognition of intangible
assets separately from goodwill. Under SFAS No. 142, goodwill and indefinite
lived intangible assets will no longer be amortized but will be subject to
annual impairment tests in accordance with the new standard. Separable
intangible assets that have finite lives will continue to be amortized over
their useful lives. The Company has adopted SFAS No. 141 and No. 142 as of
December 1, 2001. Refer to Note 7 for further information.
(4)
<Page>
2. SPECIAL CHARGES
During the fourth quarter of 2001, the Company adopted a plan to further
streamline its operations. This plan included the consolidation of several
distribution and manufacturing locations, the reduction of administrative and
manufacturing positions, and the reorganization of several joint ventures. The
total plan will cost approximately $32.6 million ($25.6 million after tax) and
will be completed by 2003. Total cash expenditures in connection with these
costs will approximate $13.7 million, which will be funded through internally
generated funds. Once fully implemented, annualized savings are expected to be
approximately $8.0 million ($5.3 million after tax). These savings will be used
for investment spending on initiatives such as brand support and supply chain
management. The aforementioned savings and administrative expenses are expected
to be included within the cost of goods sold and selling, general, and
administrative expenses in the consolidated statement of income.
In the fourth quarter of 2001, the Company recorded charges of $11.7 million
($7.7 million after tax) under this plan. Of this amount $10.8 million was
classified as special charges and $0.9 million as cost of goods sold in the
consolidated statement of income. Additional amounts under the plan were not
recorded since they were either incremental costs directly related to the
implementation of the plan, or the plans were not sufficiently detailed to allow
for accounting accrual.
The costs recorded in the fourth quarter of 2001 related to the consolidation of
manufacturing in Canada, a distribution center consolidation in the U.S., a
product line elimination and a realignment of our sales operations in the U.K.,
and a workforce reduction of 275 positions which encompasses plans in all
segments and across all geographic areas. As of February 28, 2002, 140 of the
275 position reductions had been realized.
During the first quarter of 2002, the Company recorded special charges of $0.4
million ($0.2 million after tax). The costs recorded in the first quarter of
2002 primarily related to a realignment of our sales and marketing operations in
the U.S. These expenses were classified as special charges in the consolidated
statement of income.
The major components of the special charges and the remaining accrual balance as
of February 28, 2002 follow:
<Table>
<Caption>
Severance
and personnel Asset Other
costs write-downs exit costs Total
------------ ----------- ---------- -----
2001
Special charges $6.3 $1.6 $3.8 $11.7
Amounts utilized (.5) (1.6) - (2.1)
----- ----- ----- -----
November 30, 2001 $5.8 $ - $3.8 $9.6
2002
Special charges $ - $.1 $.3 $.4
Amounts utilized (.3) (.1) (.4) (.8)
----- ----- ----- -----
February 28, 2002 $5.5 $- $3.7 $9.2
===== ===== ===== =====
</Table>
(5)
<Page>
3. EARNINGS PER SHARE
The following table sets forth the reconciliation of shares outstanding:
<Table>
<Caption>
Three Months Ended
Feb. 28, Feb. 28,
2002 2001
---- ----
(in thousands)
Average shares outstanding -
basic 138,671 137,010
Effect of dilutive securities:
Stock options and
Employee stock purchase plan 2,672 1,510
------- -------
Average shares outstanding -
assuming dilution 141,343 138,520
======= =======
</Table>
Basic and diluted earnings per common share have been adjusted for the stock
split that was effective April 8, 2002.
4. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income:
<Table>
<Caption>
Three Months Ended
Feb. 28, Feb. 28,
2002 2001
---- ----
(in thousands)
Net income $ 33,841 $ 26,586
Other comprehensive income:
Minimum pension liability
adjustment (5,692) -
Net unrealized gain on pension
assets 997 -
Foreign currency
translation adjustments (11,180) 19,212
Derivative financial
instruments 835 (9,010)
------ ---------
Comprehensive income $18,801 $ 36,788
======= ========
</Table>
5. BUSINESS SEGMENTS
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 brand in the
U.S., Ducros in continental Europe, 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.
(6)
<Page>
In each of its segments, the Company produces and sells many individual products
that are similar in composition and nature. It is impractical to segregate and
identify profits for each of these individual product lines.
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. Corporate and eliminations
include general corporate expenses, intercompany eliminations and other charges
not directly attributable to the segments.
<Table>
<Caption>
Total Corporate &
Consumer Industrial Food Packaging Eliminations Total
-------- ---------- ----- --------- ------------ -----
(in millions)
THREE MONTHS ENDED FEB. 28, 2002
Net sales $237.3 $244.5 $481.8 $37.1 $ - $518.9
Intersegment sales - 2.9 2.9 10.1 (13.0) -
Operating income 35.2 23.3 58.5 2.9 (9.3) 52.1
Operating income excluding special
charges and goodwill amortization 35.6 23.3 58.9 2.9 (9.3) 52.5
Income from unconsolidated
operations 5.4 0.3 5.7 - - 5.7
THREE MONTHS ENDED FEB. 28, 2001
Net sales $228.2 $226.2 $454.4 $45.0 $ - $499.4
Intersegment sales - 2.6 2.6 9.2 (11.8) -
Operating income 27.0 19.4 46.4 5.3 (6.8) 44.9
Operating income excluding special
charges and goodwill amortization 29.9 19.6 49.5 5.4 (6.7) 48.2
Income from unconsolidated
operations 5.8 0.3 6.1 - - 6.1
</Table>
6. LONG-TERM DEBT
During the first quarter of 2001 the Company issued a total of $300 million in
medium-term notes under a $375 million shelf registration statement filed with
the Securities and Exchange Commission (SEC) in January 2001. The primary
purpose of these notes was to finance the acquisition of Ducros, which was
completed in August 2000, and replace substantially all of the existing
commercial paper notes that were used to temporarily finance the acquisition.
Medium-term notes in the amount of $150 million were issued in January 2001 and
mature in 2006, with interest paid semi-annually at the rate of 6.4%. Additional
medium-term notes in the amount of $150 million were issued in January 2001 and
mature in 2008, with interest paid semi-annually at the rate of 6.8%.
In September 2000 the Company entered into forward starting interest rate swaps
to manage the interest rate risk associated with the anticipated issuance of
fixed-rate medium-term notes. These forward starting swaps were settled in the
first quarter of 2001, concurrent with the issuance of the medium-term notes.
The settlement costs on these swaps in the first quarter of 2001 included in
other comprehensive income was $14.7 million. The notes were issued at a
discount of $2.2 million and $1.1 million of debt origination fees were
incurred. The discount, swap settlement and debt issuance costs are being
amortized over the life of the medium-term notes and included as a component of
interest expense. With these costs considered, the effective interest rate on
the medium-term notes is 7.62%.
(7)
<Page>
In July 2001 the Company retired $75.0 million of 8.95% fixed-rate notes with
commercial paper. The variable interest on the commercial paper is being hedged
by interest rate swaps from 2001 through 2011. Net interest payments will be
fixed at 6.35% over that period. The interest rate swaps settle at six month
intervals. The first settlement in January 2002 was $.9 million. Hedge
ineffectiveness was not material.
7. GOODWILL AND INTANGIBLE ASSETS
Effective December 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes financial accounting and reporting
for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill
and indefinite-lived intangible assets are no longer amortized but are reviewed
at least annually for impairment. Separable intangible assets that have finite
useful lives will continue to be amortized over their useful lives.
SFAS No. 142 required that goodwill be tested for impairment at the reporting
unit level at adoption and at least annually thereafter, utilizing a two-step
methodology. The initial step required the Company to determine the fair value
of each reporting unit and compare it to the carrying value, including goodwill,
of such unit. If the fair value exceeded the carrying value, no impairment loss
was recognized. However, if the carrying value of the reporting unit exceeded
its fair value, the goodwill of this unit might have been impaired. The amount,
if any, of the impairment would then be measured in the second step.
In connection with adopting this standard as of December 1, 2001, the Company
completed step one of the test for impairment, which indicated that the fair
values of the reporting units exceeded their carrying values, as determined
utilizing a discounted cash flow model; therefore no impairment has been
recognized.
In the condensed consolidated statement of income, the Company has presented
"Net income excluding goodwill." This represents a pro-forma restatement of 2001
as if SFAS No. 141 and No. 142 had been adopted at the beginning of the year and
accordingly goodwill amortization has been eliminated. The impact on net income,
and basic and diluted earnings per share for the quarter ended February 28, 2001
is set forth below:
<Table>
<Caption>
Reported net income $26,586
Adjustment for amortization of goodwill 3,041
=======
Adjusted net income $29,627
=======
Reported basic earnings per share $0.19
Adjustment for amortization of goodwill 0.03
-------
Adjusted basic earnings per share $0.22
=======
Reported diluted earnings per share $0.19
Adjustment for amortization of goodwill 0.02
-------
Adjusted diluted earnings per share $0.21
=======
</Table>
(8)
<Page>
The following table displays the intangible assets that continue to be subject
to amortization and intangible assets not subject to amortization as of February
28, 2002(in thousands):
<Table>
<Caption>
Gross
Carrying Accumulated
Amount Amortization
--------- ------------
Amortized intangible assets $150 $65
Unamortized intangible assets:
Goodwill $517,568 $66,909
Other Intangibles 6,240 532
-------- --------
$523,808 $67,441
$523,958 $67,506
======== =======
</Table>
8. STOCK SPLIT
On February 19, 2002, the Company's Board of Directors announced a two-for-one
stock split of both classes of common stock, effective April 8, 2002. As a
result of the stock split, the Company's shareholders have received an
additional common share for each share held. All per share amounts and numbers
of shares outstanding in this report have been restated for the stock split for
all periods presented.
(9)
<Page>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended February 28, 2002, the Company reported net income of
$33.8 million versus $26.6 million in the first quarter last year. Excluding
goodwill amortization, net income was $33.8 million for the quarter ended
February 28, 2002 versus $29.6 million for the comparable period last year.
Diluted earnings per share were $.24 for the first quarter of 2002 compared to
$.19 last year. Excluding goodwill amortization, diluted earnings per share were
$.24 for the first quarter of 2002 compared to $.21 last year, an increase of
14.3%. Special charges did not have a significant impact on either period. The
primary drivers of the first quarter earnings improvement were $.02 from
operations and $.02 from interest rates, partially offset by lower income from
unconsolidated operations and the effect of more shares outstanding.
The Company adopted SFAS No. 141 and No. 142 effective December 1, 2001. Items
referred to as "excluding goodwill amortization" are provided in order to make
the years presented comparable. Gross profit margin, operating income and net
income "excluding special charges" presents the applicable measure excluding the
impact of items identified in the consolidated financial statements as special
charges.
RESULTS OF OPERATIONS
Net sales for the quarter ended February 28, 2002 increased 3.9% versus the
first quarter of 2001. Excluding the impact of foreign exchange, sales increased
5.0% in 2002. Unit volume increased 7.3% as compared to last year, while the
combined effects of price and product mix had a negative impact of 2.3% on
sales. The negative impact of foreign currency exchange rates was attributable
to Europe, Canada, and Australia.
<Table>
<Caption>
Three months ended
Feb. 28, Feb. 28,
2002 2001
---- ----
(in millions)
NET SALES
Consumer $237.3 $228.2
Industrial 244.5 226.2
Packaging 37.1 45.0
------ -------
$518.9 $499.4
</Table>
Consumer sales for the first quarter of 2002 increased 4.0% over the comparable
period last year. Excluding the impact of foreign exchange, sales rose 5.7%. In
local currency, consumer sales rose 10.3% in the Americas. Sales benefited from
core category growth, new products, recent new business gains, and from customer
purchases in advance of a price increase. In Europe, sales in local currency
declined 0.8% mainly due to changes in the competitive environment and a decline
in
(10)
<Page>
our brokerage business in the U.K. In Asia/Pacific, sales in local currency rose
8.3% due to strong sales volumes in China.
Industrial sales increased 8.1% in the first quarter of 2002 versus the same
quarter last year. Excluding the effect of foreign exchange, sales increased
8.8%. In local currency, sales in the Americas increased 11.7%. The increase was
attributable to sales to restaurant customers and warehouse clubs, and sales of
snack seasonings were particularly strong. In Europe, sales in local currency
declined 5.9%. The decline occurred primarily in lower-margin ingredient sales.
In Asia/Pacific, sales in local currency increased 13.0% mainly due to favorable
volumes in China.
Packaging sales decreased 17.5% versus the prior year due to a decline in demand
for products supplied to the health and personal care industry.
Gross profit margin for the quarter was 35.7% compared to 34.0% in the first
quarter last year. In our consumer business, gross profit margin improvement was
mainly due to lower black pepper costs and higher volumes. In our industrial
business, gross profit margin improvement was mainly due to a continued shift in
sales to higher-margin, more value-added products. Global procurement
initiatives and efforts to improve efficiencies benefited both the consumer and
industrial businesses.
Selling, general and administrative expenses increased in the first quarter as
compared to last year in both dollar terms and as a percentage of net sales.
These increases were primarily due to increased distribution expenses, higher
employee benefits, pension, insurance costs, and a higher investment for the
Beyond 2000 (B2K) program. The increase in employee benefits is mainly due to
higher earnings, while pension expense increased due to a reduced discount rate
assumption and reduced investment income. The Company's insurance costs have
increased concurrent with an industry wide trend. These increases were partially
offset by the elimination of goodwill amortization expense due to the
implementation of SFAS No. 142 "Goodwill and Other Intangible Assets".
<Table>
<Caption>
Three months ended
Feb. 28, Feb. 28,
2002 2001
---- ----
(in millions)
OPERATING INCOME
Consumer $35.2 $27.0
Industrial 23.3 19.4
Packaging 2.9 5.3
----- -----
Combined segments (1) $61.4 $51.7
</Table>
(1)- Excludes impact of general corporate expenses included as Corporate &
Eliminations. See Note 5 in the Notes to Condensed Consolidated Financial
Statements.
Total operating income increased $7.2 million or 15.9% and operating income
margin increased to 10.0% from 9.0% for the three months ended February 28, 2002
as compared to last year. Excluding special charges and
(11)
<Page>
goodwill amortization, operating income increased $4.3 million or 8.9% and
operating income margin increased to 10.1% from 9.6%. In the consumer segment,
operating income excluding special charges and goodwill amortization increased
18.9% versus the prior period. On the same basis, operating income margin for
the quarter was 15.0% compared to 13.1% last year as a result of higher sales,
favorable raw material costs and increased efficiencies. Industrial operating
income excluding special charges and goodwill amortization increased 18.5%
compared to the same period last year. On the same basis, operating income
margin improved to 9.5% from 8.7% last year, primarily from the shift in sales
to more higher-margin, value-added products, higher volumes and effective cost
reduction initiatives. Packaging operating income decreased $2.5 million, due to
the decline in demand for products supplied to the health and personal care
industry. Actions have been taken to adjust production activities, including a
reduction in the workforce.
Interest expense for the first quarter of 2002 was $11.1 million versus $14.3
million for the comparable period last year. This decrease is attributable to
lower average debt levels and favorable interest rates.
The effective tax rate for the first quarter of 2002 was 31.5% versus 33.1% in
the first quarter of last year. The lower tax rate is primarily attributable to
the elimination of goodwill amortization, which is generally a non-tax
deductible expense.
Income from unconsolidated operations was $5.7 million in the first quarter of
2002 versus $6.1 million last year. Continued strong performance from the
Signature Brands joint venture was offset slightly by diminished performance in
the McCormick de Mexico joint venture. This decrease in performance is due to
the competitive environment and increased spending on advertising to support the
brand.
SPECIAL CHARGES
During the fourth quarter of 2001, the Company adopted a plan to further
streamline its operations. This plan included the consolidation of several
distribution and manufacturing locations, the reduction of administrative and
manufacturing positions, and the reorganization of several joint ventures. The
total plan will cost approximately $32.6 million ($25.6 million after tax) and
will be completed by 2003. Total cash expenditures in connection with these
costs will approximate $13.7 million, which will be funded through internally
generated funds. Once fully implemented, annualized savings are expected to be
approximately $8.0 million ($5.3 million after tax). These savings will be used
for investment spending on initiatives such as brand support and supply chain
management. The aforementioned savings and administrative expenses are expected
to be included within the cost of goods sold and selling, general, and
administrative expenses in the consolidated statement of income.
In the fourth quarter of 2001, the Company recorded charges of $11.7 million
($7.7 million after tax) under this plan. Of this amount $10.8 million was
classified as special charges and $0.9 million as cost of goods sold in the
consolidated statement of income. Additional amounts under the plan were not
recorded since they were either incremental
(12)
<Page>
costs directly related to the implementation of the plan, or the plans were not
sufficiently detailed to allow for accounting accrual.
The costs recorded in the fourth quarter of 2001 related to the consolidation of
manufacturing in Canada, a distribution center consolidation in the U.S., a
product line elimination and a realignment of our sales operations in the U.K.,
and a workforce reduction of 275 positions which encompasses plans in all
segments and across all geographic areas. As of February 28, 2002, 140 of the
275 position reductions had been realized.
During the first quarter of 2002, the Company recorded special charges of $0.4
million ($0.2 million after tax). The costs recorded in the first quarter of
2002 related to a realignment of our sales and marketing operations in the U.S.,
and certain costs associated with the aforementioned closures of a U.S.
distribution center and a Canadian manufacturing facility. These expenses were
classified as special charges in the consolidated statement of income.
MARKET RISK SENSITIVITY
FOREIGN EXCHANGE RISK
The fair value of the Company's portfolio of forward and option contracts was
$0.9 million and $0.6 million as of February 28, 2002 and February 28, 2001,
respectively.
INTEREST RATE RISK
The fair value of the Company's interest rate swaps was $(5.4) million and
$(2.8) million as of February 28, 2002 and February 28, 2001, respectively. The
Company intends to hold the interest rate swaps until maturity.
During the first quarter of 2001, the Company settled the forward starting
interest rate swaps used to manage the interest rate risk associated with the
medium-term notes issued during that quarter. See Note 6 of Notes to Condensed
Consolidated Financial Statements for more details.
FINANCIAL CONDITION
In the condensed consolidated statement of cash flows, net cash used for
operating activities was $14.8 million for the three months ended February 28,
2002 compared to $39.2 million used for the three months ended February 28,
2001. This increased cash flow is primarily caused by the fact that in the first
quarter of 2001, there was a $14.7 million payment made in connection with our
interest rate hedges on the medium-term notes issued as part of the Ducros
acquisition financing, as well as increased earnings in the first quarter of
2002.
Cash flows related to investing activities used cash of $35.2 million in the
first three months of 2002 versus $20.7 million in the comparable period of
2001. Increased capital expenditures versus the prior year
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make up a majority of the increase in the cash used for investing activities.
This increase is primarily related to spending for our B2K project.
Cash flows from financing activities provided cash of $80.5 million in the first
quarter of 2002 compared to $67.3 million in the same period last year. The
Company finalized its medium-term note program for the Ducros acquisition in the
first quarter of 2001. See Note 6 of Notes to Condensed Consolidated Financial
Statements. The common stock issued and common stock acquired by purchase
generally relates to the Company's stock compensation plans.
The Company's ratio of debt-to-total capital was 60.6% as of February 28,
2002, down from 66.5% at February 28, 2001 and up from 58.3% at November 30,
2001. The increase since year-end was primarily due to seasonal increases
in short-term borrowings for operating purposes and the decrease since
February 28, 2001 was primarily due to lower average debt levels.
Management believes that internally generated funds and its existing sources of
liquidity are sufficient to meet current and anticipated financing requirements
over the next 12 months.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements in accordance with generally accepted
accounting principles (GAAP), management is required to make estimates and
assumptions that have an impact on the assets, liabilities, revenue, and expense
amounts reported. These estimates can also affect supplemental information
disclosures of the Company, including information about contingencies, risk, and
financial condition. The Company believes, given current facts and
circumstances, its estimates and assumptions are reasonable, adhere to generally
accepted accounting principles, and are consistently applied. Inherent in the
nature of an estimate or assumption is the fact that actual results may differ
from estimates and estimates may vary as new facts and circumstances arise. The
Company makes routine estimates and judgments in determining the net realizable
value of accounts receivable, inventory, fixed assets, and prepaid allowances.
Management believes the Company's most critical accounting estimates and
assumptions are in the following areas:
Customer Contracts
In several of its major markets, the Consumer segment sells its products by
entering into annual or multi-year contracts with its customers. These contracts
include provisions for items such as sales discounts, marketing allowances and
performance incentives. The discounts, allowances, and incentives are expensed
based on certain estimated criteria such as sales volume of indirect customers,
customers reaching anticipated volume thresholds, and marketing spending. The
Company routinely reviews these criteria, and makes adjustments as facts and
circumstances change.
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Goodwill Valuation
The Company reviews the carrying value of goodwill annually utilizing a
discounted cash flow model. Changes in estimates of future cash flows caused by
items such as unforeseen events or changes in market conditions, could
negatively affect the reporting unit's fair value and result in an impairment
charge. However, the current fair values of our reporting units are
significantly in excess of carrying values, and accordingly management believes
that only significant changes in the cash flow assumptions would result in
impairment.
Income Taxes
The Company files income tax returns and estimates income taxes in each of the
taxing jurisdictions in which it operates. The Company is subject to a tax audit
in each of these jurisdictions, which could result in changes to the estimated
taxes. The amount of these changes would vary by jurisdiction and would be
recorded when known. Management has recorded valuation allowances to reduce its
deferred tax assets to the amount that is more likely than not to be realized.
In doing so, management has considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance.
Pension and Post Retirement Benefits
Pension and other post-retirement plans' costs require the use of assumptions
for discount rates, investment returns, projected salary increases and benefits,
mortality rates, and health care cost trend rates. The actuarial assumptions
used in the Company's pension reporting are reviewed annually and compared with
external benchmarks to ensure that they accurately account for the Company's
future pension obligations. See Notes 7 and 8 of the Company's Annual Report on
Form 10-K for the year ended November 30, 2001, for a discussion of these
assumptions and how a change in certain of these assumptions could affect the
Company's earnings.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, including those related to the
annualized savings from the Company's streamlining activities, 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 may be materially affected by external
factors such as: competitive conditions, customer relationships and financial
condition, availability and cost of raw and packaging materials, governmental
actions and political events, and economic conditions, including fluctuations in
interest and exchange rates for foreign currency. The Company undertakes no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Company's Annual Report on Form 10-K for the year ended November 30, 2001.
Except as described in the Management's Discussion and Analysis of Financial
Condition and Results of Operations, there have been no significant changes in
the Company's financial instrument portfolio or market risk exposures since year
end.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits See Exhibit Index on pages 17-19
of this Report on Form 10-Q.
(b) Reports on Form 8-K. The Registrant filed a report on
Form 8-K on January 23, 2002 that
reported certain accounting changes
in its financial reporting for
fiscal year 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McCORMICK & COMPANY, INCORPORATED
Date: APRIL 11, 2002 By: /S/ FRANCIS A. CONTINO
------------------------- -----------------------------
Francis A. Contino
Executive Vice President & Chief
Financial Officer
Date: APRIL 11, 2002 By: /S/ KENNETH A. KELLY, JR.
-------------------------- ---------------------------------
Kenneth A. Kelly, Jr.
Vice President & Controller
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EXHIBIT INDEX
<Table>
<Caption>
ITEM 601
EXHIBIT
NUMBER REFERENCE OR PAGE
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession Not applicable.
(3) Articles of Incorporation and By-Laws
Restatement of Charter of McCormick & Company, Incorporated by reference
Incorporated dated April l6, 1990 from Registration Form S-8,
Registration No.
33-39582 as filed with
the Securities and
Exchange Commission on
March 25, 1991.
Articles of Amendment to Charter of Incorporated by reference
McCormick & Company, Incorporated from Registration Form
dated April 1, 1992 S-8 Registration
Statement No. 33-59842 as
filed with the Securities
and Exchange Commission
on March 19, 1993.
By-laws of McCormick & Company, Incorporated by reference
Incorporated-Restated and from Registrant's Form
Amended as of June 17, 1996. 10-Q for the quarter ended
May 31, 1996 as filed with
the Securities and Exchange
Commission on July 12, 1996.
(4) Instruments defining the rights of With respect to rights of
security holders, including holders of equity
indentures. securities, see Exhibit 3
(Restatement of Charter)
and the Summary of Certain
Exchange Rights, a copy of
which was attached as Exhibit
4.1 of the Registrant's
Form 10-Q for the quarter
ended August 31, 2001 as
filed with the Securities
and Exchange Commission
on October 12, 2001,
which report is incorporated
by reference. No instrument
of Registrant with respect
to long-term debt involves
an amount of
</Table>
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<Table>
authorized securities which
exceeds 10 percent
of the total assets of
the Registrant and its
subsidiaries on a
consolidated basis.
Registrant agrees to
furnish a copy of any
instrument upon request
of the Securities and
Exchange Commission.
</Table>
(10) Material Contracts
i) Registrant's supplemental pension plan for certain senior officers, as
amended and restated effective June 19, 2001, is described in the
McCormick Supplemental Executive Retirement Plan, a copy of which was
attached as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended August 31, 2001, as filed with the Securities and Exchange
Commission on October 12, 2001, which report is incorporated by
reference.
ii) Stock option plans, in which directors, officers and certain other
management employees participate, are described in Registrant's S-8
Registration Statement No. 333-57590 as filed with the Securities and
Exchange Commission on March 26, 2001, which statement is incorporated
by reference.
iii) The 2002 McCormick Mid-Term Incentive Plan, which is provided to a
limited number of senior executives, is described on pages 23 through
31 of the Registrant's definitive Proxy Statement dated February 15,
2002, as filed with the Commission on February 15, 2002, which pages
are incorporated by reference.
iv) Directors' Non-Qualified Stock Option Plan provided to members of the
Registrant's Board of Directors who are not also employees of the
Registrant, is described in Registrant's S-8 Registration Statement
No. 333-74963 as filed with the Securities and Exchange Commission on
March 24, 1999, which statement is incorporated by reference.
v) The Deferred Compensation Plan, in which directors, officers and
certain other management employees participate, is described in the
Registrant's S-8 Registration Statement No. 333-93231 as filed with
the Securities and Exchange Commission on December 21, 1999, which
statement is incorporated by reference.
vi) Stock Purchase Agreement among the Registrant, Eridania Beghin-Say and
Compagnie Francaise de Sucrerie - CFS, dated August 31, 2000, which
agreement is incorporated by reference from Registrant's Report on
Form 8-K, as filed with the Securities and Exchange
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vii) Commission on September 15, 2000, as amended on Form 8-K/A filed with
the Securities and Exchange Commission on November 14, 2000.
<Table>
(11) Statement re computation of per- Not applicable.
share earnings.
(15) Letter re unaudited interim Not applicable.
financial information.
(18) Letter re change in accounting Not applicable.
principles.
(19) Report furnished to security holders. Not applicable.
(22) Published report regarding matters Not applicable.
submitted to vote of securities holders.
(23) Consents of experts and counsel. Not applicable.
(24) Power of attorney. Not applicable.
(99) Additional exhibits. None.
</Table>
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