<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 MAY 31, 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
June 30, 2002
------------
Common Stock 15,914,807
Common Stock Non-Voting 123,994,446
</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 Six Months Ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $552,620 $531,168 $1,071,526 $1,030,615
Cost of goods sold 359,925 350,484 693,580 680,302
-------- -------- ---------- ----------
Gross profit 192,695 180,684 377,946 350,313
Selling, general and
administrative expense 135,534 131,114 268,320 255,804
Special charges 1,659 0 2,026 0
-------- -------- ---------- ----------
Operating income 55,502 49,570 107,600 94,509
Interest expense 11,118 13,458 22,181 27,745
Other (income)/expense 397 399 (650) (574)
-------- -------- ---------- ----------
Income before income taxes 43,987 35,713 86,069 67,338
Income taxes 13,794 11,821 27,040 22,289
-------- -------- ---------- ----------
Net income from consolidated
operations 30,193 23,892 59,029 45,049
Income from unconsolidated
operations 4,141 3,181 9,819 9,260
Minority interest (721) (437) (1,394) (1,087)
-------- -------- ---------- ----------
Net income $33,613 $26,636 $67,454 $53,222
======= ======= ======= =======
Earnings per common share - basic
Net income $.24 $.19 $.48 $.39
==== ==== ==== ====
Net income excluding goodwill (note 7) $.24 $.22 $.48 $.43
==== ==== ==== ====
Earnings per common share - assuming dilution
Net income $.24 $.19 $.47 $.38
==== ==== ==== ====
Net income excluding goodwill (note 7) $.24 $.21 $.47 $.43
==== ==== ==== ====
Cash dividends declared per
common share $.105 $.10 $.21 $.20
===== ==== ==== ====
</Table>
See notes to condensed consolidated financial statements.
2
<Page>
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<Table>
<Caption>
May 31, May 31,
2002 2001 Nov. 30,
(Unaudited) (Unaudited) 2001
----------- ----------- ----
ASSETS
Current Assets
Cash and cash equivalents $40,158 $47,484 $31,331
Accounts receivable, net 277,433 248,641 295,539
Inventories
Raw materials and supplies 118,732 127,770 117,988
Finished products and work-in
process 170,995 157,400 160,085
---------- ---------- ----------
289,727 285,170 278,073
Other current assets 31,490 20,158 30,857
---------- ---------- ----------
Total current assets 638,808 601,453 635,800
Property, plant and equipment 961,762 825,398 887,318
Less: accumulated depreciation (493,840) (430,739) (462,869)
---------- ---------- ----------
Total property, plant and
equipment, net 467,922 394,659 424,449
Goodwill, net 475,813 435,738 458,800
Intangible assets, net 6,327 5,476 5,842
Prepaid allowances 130,273 104,918 99,263
Other assets 131,161 108,898 147,870
---------- ---------- ----------
Total assets $1,850,304 $1,651,142 $1,772,024
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $270,801 $221,761 $209,843
Current portion of long-term debt 972 81,379 1,036
Trade accounts payable 165,539 169,930 183,974
Other accrued liabilities 275,123 236,351 318,990
---------- ---------- ----------
Total current liabilities 712,435 709,421 713,843
Long-term debt 453,989 454,298 454,068
Other long-term liabilities 141,472 117,176 141,098
---------- ---------- ----------
Total liabilities 1,307,896 1,280,895 1,309,009
Shareholders' Equity
Common stock 75,036 58,008 60,364
Common stock non-voting 153,074 135,232 142,522
Retained earnings 375,851 280,729 344,068
Accumulated other comprehensive income (61,553) (103,722) (83,939)
---------- ---------- ----------
Total shareholders' equity 542,408 370,247 463,015
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,850,304 $1,651,142 $1,772,024
========== ========== ==========
</Table>
See notes to condensed consolidated financial statements.
3
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McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<Table>
<Caption>
Six Months Ended
May 31,
2002 2001
---- ----
Cash flows from operating activities
Net income $67,454 $53,222
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,279 36,606
Income from unconsolidated operations (9,819) (9,260)
Changes in operating assets and liabilities (79,333) (51,214)
Dividends from unconsolidated affiliates 17,893 17,448
Other 2,188 39
-------- --------
Net cash provided by operating activities 30,662 46,841
-------- --------
Cash flows from investing activities
Capital expenditures (75,081) (51,635)
Other 1,503 526
-------- --------
Net cash used in investing activities (73,578) (51,109)
-------- --------
Cash flows from financing activities
Short-term borrowings, net 60,772 (251,362)
Long-term debt borrowings 0 296,656
Long-term debt repayments (167) 0
Common stock issued 26,327 19,212
Common stock acquired by purchase (7,567) (9,605)
Dividends paid (29,207) (27,470)
-------- --------
Net cash provided by financing activities 50,158 27,431
-------- --------
Effect of exchange rate changes on cash and cash
equivalents 1,585 431
-------- --------
Increase in cash and cash equivalents 8,827 23,594
Cash and cash equivalents at beginning of period 31,331 23,890
-------- --------
Cash and cash equivalents at end of period $ 40,158 $ 47,484
======== ========
</Table>
See notes to condensed consolidated financial statements.
4
<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 accounting principles generally accepted
in the United States 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 and six month periods ended
May 31, 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 classify certain marketing
expenses, which were previously classified as selling, general, and
administrative expenses, as a reduction of sales in 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
second quarter of 2001 was a decrease to sales of $35.9 million, an increase in
cost of goods sold of $4.9 million, and a decrease in selling, general, and
administrative expenses of $40.8 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 8.7% to 9.3%. The effect of these
reclassifications on the six months ended May 31, 2001 was a decrease to sales
of $70.0 million, an increase in cost of good sold of $9.7 million, and a
decrease in selling, general, and administrative expenses of $79.7 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
8.6% to 9.2%. These reclassifications do not impact net income.
5
<Page>
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 are no longer amortized but are 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 significantly changes the criteria
that would have to be met to classify an asset as held-for-sale, extends the
reporting of discontinued operations to all components of an entity, and
requires expected future operating losses from discontinued operations to be
recorded in the period in which the losses are incurred (rather than as of the
date management commits to a formal plan to dispose of a segment as previously
required). The Company has adopted SFAS No. 144 as of December 1, 2001. There
was no material effect upon adoption of this statement.
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 May 31, 2002, 173 of the 275
position
6
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reductions had been realized.
During the three and six months ended May 31, 2002, the Company recorded special
charges of $1.7 million and $2.0 million ($1.1 million and $1.3 million after
tax), respectively. The costs recorded in the first half of 2002 were part of
the streamlining actions announced in the fourth quarter of 2001, but could not
be accrued at that time. They included severance and other exit costs related to
a realignment of our sales and marketing operations in the U.S., severance and
relocation costs associated with the aforementioned closure of a U.S.
distribution center, and a loss on the sale of a Canadian manufacturing
facility. 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 May 31, 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 (0.5) (1.6) - (2.1)
----- ------ ----- -----
November 30, 2001 $5.8 $ - $3.8 $9.6
2002
Special charges $0.1 $1.0 $0.9 $2.0
Amounts utilized (1.4) (1.0) (1.4) (3.8)
----- ------ ----- -----
May 31, 2002 $4.5 $ - $3.3 $7.8
===== ====== ===== =====
</Table>
3. EARNINGS PER SHARE
The following table sets forth the reconciliation of shares outstanding:
<Table>
<Caption>
Three months ended Six months ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Average shares outstanding
- basic 139,668 137,648 139,163 137,338
Effect of dilutive
securities:
Stock options and
employee stock purchase
plan 3,316 2,460 3,034 2,054
-------- ------- ------- -------
Average shares outstanding
- assuming dilution 142,984 140,108 142,197 139,392
======= ======= ======= =======
</Table>
7
<Page>
4. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income:
<Table>
<Caption>
Three Months Ended Six Months Ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $33,613 $26,636 $67,454 $53,222
Other comprehensive income
(net of tax):
Minimum pension liability
adjustment 1,793 - (3,899) -
Net unrealized gain/(loss)
on pension assets 335 - 1,332 -
Foreign currency
translation adjustments 36,481 (36,640) 25,301 (17,428)
Derivative financial
instruments (1,183) 1,981 (348) (7,029)
------- ----- ------- -------
Comprehensive income $71,039 $(8,023) $89,840 $28,765
======= ======== ======= =======
</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, herbs, 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.
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. Intersegment
sales are generally accounted for at current market value or cost plus a 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.
8
<Page>
<Table>
<Caption>
Total Corporate &
Consumer Industrial Food Packaging Eliminations Total
-------- ---------- ---- --------- ------------ -----
(in millions)
QUARTER ENDED MAY 31, 2002
Net sales $245.4 $261.4 $506.8 $45.8 $ - $552.6
Intersegment sales - 2.0 2.0 10.0 (12.0) -
Operating income 30.8 27.1 57.9 4.9 (7.3) 55.5
Operating income excluding special
charges and goodwill amortization 31.8 27.7 59.5 5.0 (7.3) 57.2
Income from unconsolidated
operations 3.8 0.3 4.1 - - 4.1
SIX MONTHS ENDED MAY 31, 2002
Net sales $482.6 $505.9 $988.5 $83.0 $ - $1,071.5
Intersegment sales - 4.9 4.9 20.1 (25.0) -
Operating income 66.1 50.4 116.5 7.7 (16.6) 107.6
Operating income excluding special
charges and goodwill amortization 67.4 50.9 118.3 7.9 (16.6) 109.6
Income from unconsolidated
operations 9.1 0.7 9.8 - - 9.8
</Table>
<Table>
<Caption>
Total Corporate &
Consumer Industrial Food Packaging Eliminations Total
-------- ---------- ---- --------- ------------ -----
(in millions)
QUARTER ENDED MAY 31, 2001
Net sales $232.0 $249.9 $481.9 $49.3 $ - $531.2
Intersegment sales - 2.5 2.5 9.0 (11.5) -
Operating income 25.9 24.4 50.3 6.1 (6.8) 49.6
Operating income excluding special
charges and goodwill amortization 28.8 24.7 53.5 6.1 (6.8) 52.8
Income from unconsolidated
Operations 2.9 0.3 3.2 - - 3.2
SIX MONTHS ENDED MAY 31, 2001
Net sales $460.2 $476.1 $936.3 $94.3 $ - $1,030.6
Intersegment sales - 5.1 5.1 18.2 (23.3) -
Operating income 53.0 43.7 96.7 11.4 (13.6) 94.5
Operating income excluding special
charges and goodwill amortization 58.7 44.3 103.0 11.6 (13.6) 101.0
Income from unconsolidated
operations 8.7 0.6 9.3 - - 9.3
</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). 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
9
<Page>
included as a component of interest expense. With these costs considered, the
effective interest rate on the medium-term notes is 7.62%.
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
earnings per share based on "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 and six months ended May 31, 2001 is set forth below:
10
<Page>
<Table>
<Caption>
QUARTER ENDED MAY 31, 2001:
Reported net income $26,636
Adjustment for amortization of goodwill 3,022
-------
Adjusted net income $29,658
=======
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
=======
SIX MONTHS ENDED MAY 31, 2001:
Reported net income $53,222
Adjustment for amortization of goodwill 6,063
-------
Adjusted net income $59,285
=======
Reported basic earnings per share $0.39
Adjustment for amortization of goodwill 0.04
-------
Adjusted basic earnings per share $0.43
=======
Reported diluted earnings per share $0.38
Adjustment for amortization of goodwill 0.05
-------
Adjusted diluted earnings per share $0.43
=======
</Table>
The following table displays the intangible assets that continue to be subject
to amortization and intangible assets not subject to amortization as of May 31,
2002 (in thousands):
<Table>
<Caption>
Gross
Carrying Accumulated
Amount Amortization
------ ------------
Amortized intangible assets $150 $73
Unamortized intangible assets:
Goodwill $545,551 $69,738
Other Intangibles 6,833 583
-------- --------
$552,384 $70,321
$552,534 $70,394
======== =======
</Table>
11
<Page>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sales for the quarter were $552.6 million, an increase of 4.0% versus the second
quarter of 2001. The majority of the increase was due to higher volume for the
quarter, achieved through strong sales of both core items and new products, and
the positive impact of the timing of certain customer purchases. Gross profit
margin for the second quarter was 34.9%, 0.9 percentage points above last year.
This was due to higher volumes, continued success in shifting sales to
higher-margin, more value-added products, as well as favorable raw material
costs, global procurement initiatives and ongoing efforts to improve
efficiencies.
Diluted earnings per share reported for the second quarter were $0.24 versus
$0.19 in 2001. Excluding goodwill amortization, diluted earnings per share for
the second quarter of 2001 were $0.21. On this comparable basis, diluted
earnings per share for the second quarter increased 14.3%.
Included in operating income were two unusual events this quarter. In our U.S.
consumer business, certain customers "bought-in" additional products in advance
of a price increase at the end of the first quarter of 2002. This caused a first
quarter increase and a second quarter decrease in sales and earnings when
comparing 2002 to 2001. In addition, certain customers of our U.S. consumer
business, bought-in additional product as safety stock in the second quarter in
anticipation of our divisional implementation of new systems under our Beyond
2000 program in early June. While the effect of a buy-in cannot be precisely
quantified, we estimate that the buy-in between the first and second quarter
decreased second quarter earnings per share $.01 to $.02 and the buy-in between
the second and third quarter increased second quarter earnings per share $.02 to
$.03. This second quarter buy-in will have a negative effect on the third
quarter. These events are timing issues and are not expected to effect full year
results.
Also in the second quarter we recorded $3.0 million of inventory and receivable
write-offs in our U.K. brokerage business. Late last year, we outsourced the
customer service function for this business to its distributor. The distributor
did not adequately control the customer service process, which led to these
charges. We have brought the customer service function back in-house and are
switching distributors at the end of June. We do not anticipate additional
charges and we are considering several alternatives for this part of our
operation. In addition, the brokerage business has not been performing to
expectations. When this profit shortfall is added to the charges noted above it
decreased our earnings per share by $.02, when comparing the second quarter of
2002 to 2001.
Special charges for the period were costs associated with previously announced
streamlining actions that could not be accrued last year. They include costs of
the consolidation of a manufacturing facility in Canada and the closure of a
U.S. distribution center.
12
<Page>
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 May 31, 2002, increased 4.0% over the comparable
quarter of 2001. Excluding the favorable impact of foreign exchange, sales
increased 3.8% in 2002.
For the six months ended May 31, 2002, net sales increased 4.0% over the
comparable period last year. Excluding the impact of foreign exchange, sales
increased 4.4% in 2002.
<Table>
<Caption>
Three months ended Six months ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
(in millions)
NET SALES
Consumer $245.4 $232.0 $482.6 $460.2
Industrial 261.4 249.9 505.9 476.1
Packaging 45.8 49.3 83.0 94.3
------ ------ ------ ------
$552.6 $531.2 $1,071.5 $1,030.6
</Table>
Consumer sales for the second quarter rose 5.8% versus last year's second
quarter. Excluding a favorable impact from foreign exchange, sales rose 5.4%
with increases in both volume and price. The Company achieved higher sales of
new products, as well as core products. In local currency, consumer sales rose
7.6% in the Americas, due to the benefit of customer purchases in advance of the
Company's U.S. implementation of new systems under its Beyond 2000 program and
U.S. price increases. These increases were offset in part by lower second
quarter sales resulting from higher customer purchases in advance of a U.S.
price increase at the end of the first quarter. In Europe, sales in local
currency were up 2.1%. This increase is mainly attributable to higher volumes.
In local currency, sales in Asia/Pacific increased 2.3% due primarily to
favorable product mix in China. The increase in sales in China has slowed from
the first quarter of this year due to competitive pricing pressures as well as a
reorganization of our sales force. For the six months ended May 31, 2002,
consumer sales increased $22.5 million or 4.9%. Excluding the impact of foreign
exchange, sales increased 5.5% due to increased volume.
Industrial sales in the second quarter increased 4.6% versus last year's second
quarter. Higher volume drove this increase. In local currency, industrial sales
increased 4.4% in the Americas. A portion of this increase was due to U.S.
customer purchases in advance of the implementation of Beyond 2000, which had a
positive impact on sales to food service customers. In addition, second quarter
seasonings and flavors sales were strong in the U.S. In local currency, sales in
Europe increased 3.2% due to increased volume. Sales in Asia/Pacific,
13
<Page>
in local currency, rose 8.8% also attributable to increased volume. Sales in
China and Australia were up due to increased promotional activities. For the six
months ended May 31, 2002, industrial sales increased $29.8 million or 6.3%.
Excluding the impact of foreign exchange, sales increased 6.6% due to volume
growth offset slightly by product mix.
Difficult results from the packaging business continued through the first half
of 2002. The packaging business reported third party sales for the second
quarter down 7.1% versus last year. Sales for the six months ended May 31, 2002,
decreased $11.4 million or 12.0%. These sales declines were primarily due to a
decrease in demand for products supplied to the health and personal care
industry.
Gross profit margin for the second quarter was 34.9%, 0.9 percentage points
above last year. In the industrial business, gross profit margin improvement was
mainly due to higher volumes and continued success in shifting sales to
higher-margin, more value-added products. In our consumer business, gross profit
margin improvement was due to favorable raw material costs, and the impact of
the higher volume of sales on our production costs. Global procurement
initiatives and on-going efforts to improve efficiencies impacted both the
industrial and consumer businesses. These factors also impacted the six months
ended May 31, 2002, improving the Company's gross profit margin to 35.3% from
34.0% in the comparable period last year.
Selling, general and administrative expenses in the prior year included
amortization of goodwill of $3.2 million for the second quarter and $6.5 million
for the six months ended May 31, 2001. Excluding goodwill amortization, selling,
general and administrative expenses increased in the second quarter and six
months ended May 31, 2002, as compared to last year in both dollars and as a
percentage of net sales. These increases were primarily due to increased
distribution expenses, higher employee benefits, pension, and insurance costs,
and a higher investment for the Beyond 2000 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.
<Table>
<Caption>
Three months ended Six months ended
May 31, May 31,
2002 2001 2002 2001
---- ---- ---- ----
(in millions)
OPERATING INCOME
Consumer $30.8 $25.9 $66.1 $53.0
Industrial 27.1 24.4 50.4 43.7
Packaging 4.9 6.1 7.7 11.4
---- ---- ---- -----
Combined segments (1) $62.8 $56.4 $124.2 $108.1
</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 $5.9 million or 12.0% for the quarter ended May
31, 2002, as compared to last year. Excluding special
14
<Page>
charges and goodwill amortization, operating income increased $4.4 million or
8.3% and operating income margin increased to 10.3% from 9.9%.
In the consumer business, operating income was $30.8 million in the second
quarter. Excluding special charges and goodwill amortization for both years,
operating income for 2002 was $31.8 million versus $28.8 million in 2001, an
increase of 10.5%. Income from strong sales in the quarter was partially offset
by poor performance and inventory and receivables write-offs in the U.K.
brokerage business. In the industrial business, operating income for the quarter
was $27.1 million. Excluding special charges and goodwill amortization for both
years, operating income for 2002 was $27.7 million versus $24.7 million in 2001,
an increase of 12.2%. The increase was due to higher volumes, a shift in sales
to more higher-margin, value-added products, and effective cost reduction
initiatives. Operating income, including inter-segment business, for the
packaging business in the second quarter of 2002 declined to $4.9 million from
$6.1 million in 2001. Midway through 2001, the state of the economy caused a
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 our workforce. At the end of the second quarter, customer demand
for packaging was beginning to show signs of recovery.
For the six months ended May 31, 2002, operating income margin increased from
9.8% to 10.2% over the comparable period last year excluding special charges and
goodwill amortization.
Interest expense for the three and six months ended May 31, 2002, was $11.1
million and $22.2 million, respectively, versus $13.5 million and $27.7 million
for the comparable period last year. This decrease was due to favorable interest
rates and lower average debt levels.
The effective tax rate for both the quarter and six months ended May 31, 2002,
was 31.4% versus 33.1% for the comparable periods last year. The lower tax rate
was primarily attributable to the elimination of goodwill amortization, which is
generally a non-tax deductible expense.
Income from unconsolidated operations was $4.1 million and $9.8 million for the
three and six month periods ended May 31, 2002, respectively. Results for the
comparable period last year were $3.2 million and $9.3 million, respectively.
The increase was primarily attributable to strong performance by our North
American joint ventures.
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
15
<Page>
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 May 31, 2002, 173 of the 275
position reductions had been realized.
During the three and six months ended May 31, 2002, the Company recorded special
charges of $1.7 million and $2.0 million ($1.1 million and $1.3 million after
tax), respectively. The costs recorded in the first half of 2002 were part of
the streamlining actions announced in the fourth quarter of 2001, but could not
be accrued at that time. They included severance and other exit costs related to
a realignment of our sales and marketing operations in the U.S., severance and
relocation costs associated with the aforementioned closure of a U.S.
distribution center, and a loss on the sale of 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
$(.4) million and $.7 million as of May 31, 2002 and May 31, 2001, respectively.
INTEREST RATE RISK
The fair value of the Company's interest rate swaps was $(6.2) million and $(.7)
million as of May 31, 2002 and May 31, 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 the quarter. See Note 6 of Notes to Condensed
Consolidated Financial Statements for more details.
16
<Page>
FINANCIAL CONDITION
In the condensed consolidated statement of cash flows, net cash provided by
operating activities was $30.7 million for the six months ended May 31, 2002
compared to $46.8 million provided for the six months ended May 31, 2001. This
decrease was due primarily to the timing of the working capital components of
receivables and prepaid allowances. There was a significant increase in U.S.
consumer receivables at the end of the second quarter due to a buy-in in
anticipation of our implementation of new systems under the Beyond 2000 program
in early June. Prepaid allowances increased over the same period last year due
to the timing of new contracts, as well as consolidation in the retail industry.
The six-month decrease was partially offset by favorable profits excluding
depreciation and amortization.
Cash flows related to investing activities used cash of $73.6 million in the six
months ended May 31, 2002 versus $51.1 million in the comparable period of 2001.
Increased capital expenditures versus the prior year made up the majority of the
increase in the cash used for investing activities. This increase was primarily
related to spending for our B2K project.
Cash flows from financing activities provided cash of $50.2 million in the first
half of 2002 compared to $27.4 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 Financial Statements. The
common stock issued and common stock acquired by purchase generally related to
the Company's stock compensation plans.
The Company's ratio of debt-to-total capital was 56.6% as of May 31, 2002, down
from 66.5% at May 31, 2001 and 58.3% at November 30, 2001. The decrease since
May 31, 2001 was due to the combination of lower average debt levels and
increases in shareholder's equity. Although debt has increased since November
30, 2001 it is not at the level from one year ago. The decrease in the ratio
from year-end was due primarily to increases in shareholder's equity.
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
17
<Page>
and circumstances arise. In preparing the financial statements, 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.
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 a 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.
18
<Page>
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, including those related to the
estimated expenditures and annualized savings related to 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 general
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.
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 4. Submission of matters to a vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on March 20, 2002.
(b) No response required.
(c) 1. The following individuals were nominees for the Board of Directors.
The number of votes for or withheld for each nominee is as follows:
Barry H. Beracha - for 7,089,519 , withheld 23,109; James T. Brady -
for 7,087,203, withheld 25,425; Francis A. Contino - for 7,036,619,
withheld 76,009; Robert G. Davey - for 7,079,247, withheld 33,381;
Edward S. Dunn, Jr. - for 7,090,027, withheld 22,601; Dr. J. Michael
Fitzpatrick - for 7,087,191, withheld 25,437; Dr. Freeman A. Hrabowski,
III - for 7,087,442, withheld 25,186; Robert J. Lawless - for
7,084,666, withheld 27,962; John Molan - for 7,038,860, withheld
73,768; Carroll D. Nordhoff - for 7,089,143 withheld 23,485; Robert W.
Schroeder - for 7,087,637, withheld 24,991; William E. Stevens - for
7,088,802, withheld 23,826; Karen D. Weatherholtz - for 7,085,215,
withheld 27,413.
19
<Page>
2. The approval of the 2002 McCormick Mid-Term Incentive Plan. The number
of votes for, against, abstaining or broker non-vote is as follows: For
6,901,587; Against 178,646; Abstain 32,395; Broker Non-Votes 0.
3. The ratification of the appointment of Ernst & Young as independent
auditors. The number of votes for, against or abstaining is as follows:
For 7,044,654; Against 63,506; Abstain 4,468; Broker Non-Votes 0.
(d) No response required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits See Exhibit Index at pages 21-23 of this
Report on Form 10-Q.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McCORMICK & COMPANY, INCORPORATED
Date: July 10, 2002 By: /s/ Francis A. Contino
---------------------- --------------------------
Francis A. Contino
Executive Vice President &
Chief Financial Officer
Date: July 10, 2002 By: /s/ Kenneth A. Kelly, Jr.
---------------------- ----------------------------
Kenneth A. Kelly, Jr.
Vice President & Controller
20
<Page>
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 & Incorporated by reference
Company, Incorporated dated April l6, from Registration Form S-8,
1990 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 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>
21
<Page>
<Table>
<Caption>
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
instrumentupon 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 Statements Nos. 333-23727 and 333-57590, as filed with the
Securities and Exchange Commission on March 21, 1997 and March 26, 2001
respectively, which statements are 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
22
<Page>
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 Commission on September 15, 2000, as amended on
Form 8-K/A filed with the Securities and Exchange Commission on
November 14, 2000.
(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.
23