Exhibit 13
[Bottle of Whole Black Peppercorns]
McCormick & Company, Incorporated
1997 Annual Report
We Flavor the World -TM-
[Close-up of portion Whole Black Peppercorn bottle]
The primary mission of McCormick & Company,Incorporated is to profitably
expand its worldwide leadership position in the spice, seasoning and flavoring
markets.
McCormick & Company, Incorporated
1997 Annual Report
Contents . . . . . . . . . . . . . . . . . . . . . . 3
Financial Highlights . . . . . . . . . . . . . . . . 4
Letter to Shareholders . . . . . . . . . . . . . . . 5
Core Values. . . . . . . . . . . . . . . . . . . . . 6
Report on Operations . . . . . . . . . . . . . . . . 12
Historical Financial Summary . . . . . . . . . . . . 13
Consolidated Income Statement. . . . . . . . . . . . 14
Consolidated Balance Sheet . . . . . . . . . . . . . 16
Consolidated Statement of Cash Flows . . . . . . . . 17
Consolidated Statement of Shareholders' Equity . . . 18
Notes to Consolidated Financial Statements . . . . . 34
Management's Responsibilityfor Financial Statements. 34
Report of Independent Auditors . . . . . . . . . . . 35
Management's Discussion and Analysis . . . . . . . . 42
Directors and Officers . . . . . . . . . . . . . . . 43
McCormick WorldwideInvestor information. . . . . . . 44
Dividends have been paid every year since 1925.
The Annual Meeting will be held at 10 a.m., Wednesday,
March 18, 1998, at Marriott's Hunt Valley Inn, 245 Shawan
Road (exit 20A off I-83 north of Baltimore), Hunt Valley,
Maryland 21031.
[Bottle of Peppermint Extract]
The scent for this year's annual report is peppermint.
When people hear the name McCormick, they think of the spices they use every
day. Indeed, we are the world's largest spice company. Yet, the Company is
also the leader in the manufacture, marketing and distribution of not only
spices, but seasonings, flavors and other food products to the entire food
industry - to foodservice and food processing businesses as well as to retail
outlets. In addition,our packaging group manufactures and markets specialty
plastic bottles and tubes for food, personal care and other industries.
McCormick products a are sold in more than 100 countries. How do we manage
this complex business from the growing fields to the consumer purchase? It all
starts with Multiple Management, an enlightened corporate philosophy and
system of participative management begun in 1932. Multiple Management fosters
the importance and power of people by encouraging participation at all levels
of employment and sharing the rewards of success. This interaction of people
is instrumental in shaping our Corporate culture and enhancing strengths
throughout McCormick. Founded in 1889, McCormick has 7,600 employees. Many are
shareholders. They are the ones who flavor your world.
[line of 8 Gourmet spices] [chicken sandwich]
[world globe]
[tube of red Cake Mate decorating icing]
[spice drawing]
[Multiple Management Board committee meeting with four people]
[chef holding a can of Old Bay] [3 foil pack products from Australia]
[spice drawing]
[Photo of two people looking at U.S. Beef Stew foil pack in grocery store by
display]
Packages purchased from our Meal Idea Center provide shopping lists for other
ingredients needed to make quick, easy and flavorful meals.
We Flavor Your World-TM-
Financial Highlights
(dollars in millions except per-share data)
Year ended November 30
-------------------------------
1997 1996 1995
-------- -------- ---------
Net sales . . . . . . . . . . . . . . . . . . $1,801.0 $1,732.5 $1,691.1
Before restructuring (credits) charges
Net income from continuing operations . . . $ 95.4 $ 83.1 $ 84.5
Net income. . . . . . . . . . . . . . . . . 96.4 81.5 95.2
Earnings per share - continuing operations. 1.26 1.03 1.04
Earnings per share - total. . . . . . . . . 1.27 1.01 1.17
Return on shareholders' equity. . . . . . . 22.4% 16.2% 19.7%
After restructuring (credits) charges
Net income from continuing operations . . . $ 97.4 $ 43.5 $ 86.8
Net income. . . . . . . . . . . . . . . . . 98.4 41.9 97.5
Earnings per share - continuing operations. 1.29 .54 1.07
Earnings per share - total. . . . . . . . . 1.30 .52 1.20
Return on shareholders' equity. . . . . . . 25.2% 8.6% 20.3%
Dividends paid per share. . . . . . . . . . . $ .60 $ .56 $ .52
Margins
Gross profit. . . . . . . . . . . . . . . . 34.9% 34.9% 34.5%
Operating income. . . . . . . . . . . . . . 9.5% 5.4% 10.2%
Net income from continuing operations . . . 5.4% 2.5% 5.1%
Cash flows from operating activities. . . . . $ 181.2 $ 201.7 $ 59.4
Cash flows from investing activities. . . . . (46.7) 187.9 (78.5)
Cash flows from financing activities. . . . . (145.2) (380.8) 17.7
Economic value added or EVA*. . . . . . . . . $ 23.4 $ (44.6) $ (3.7)
Debt to total capital . . . . . . . . . . . . 50.3% 47.1% 55.5%
Shareholders' equity. . . . . . . . . . . . . $ 393.1 $ 450.0 $ 519.3
Average shares outstanding (000s) . . . . . . 75,658 80,641 81,181
Ending shares outstanding (000s). . . . . . . 74,024 78,205 81,218
* An "EVA" mark is owned by Stern Stewart & Co.
Market Capitalization in Billions
1987 $0.4
1997 $1.9
Ten-Year Growth of a Dollar Investment 11/30/87 to 11/30/97
(Includes dividend reinvestment)
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . $5.56
S&P Food. . . . . . . . . . . . . . . . . . . . . . . . $6.68
McCormick Stock . . . . . . . . . . . . . . . . . . . . $7.63
Ten-year average annual compound growth rate for McCormick Stock is 22.5%.
McCormick & Company, Incorporated
Letter To Shareholders
Last year, the theme of our Annual Report was "Turning Up the Heat!" We viewed
1996 as a turnaround year for the Company. As we entered 1997, our top
priorities were to win the battle against our largest consumer competitor and
complete the turnaround so that we would begin new earnings and sales growth
from a stronger base. As the year closed, the competitor had announced large
losses and a decision to withdraw from the spice business. That is about as
big a win as we could hope for.
Despite the intense competition that has existed in the marketplace,
McCormick earnings and EVA performance improved dramatically, and we approved
a 7 percent increase in the regular quarterly cash dividend. McCormick has
paid dividends every year since 1925, and during the last 10 years our
dividend has increased 380 percent. We have also repurchased seven million of
the 10 million shares authorized under the Company's current buyback program.
In summary, 1997 was a good year - and firmly established our new base for
future growth.
Our confidence in the future is a result of the foundation that has been
established in recent years. By focusing on a few key strategies building
global brands, leveraging our product development technologies and growing our
global consumer and industrial businesses we are creating shareholder value.
Margin gains will continue through improved productivity and operations
efficiency. By being more responsive, more flexible and using available
information systems technology, we expect to earn a greater competitive
advantage. We are positioned to grow globally with very focused initiatives.
[Photo of CEO Lawless and Chairman McCormick]
Picture of Robert J. Lawless, President & CEO, (left) and Charles P.
McCormick, Jr., Chairman
We continue our commitment to increase our industry leadership. A recent
initiative by our McCormick/Schilling Division is capitalizing on those
factors that are at the heart of consumer decisions: choice, convenience and
value. We have repositioned and relaunched our Dry Seasoning Mix (DSM) product
line. Packaging changes include stronger brand identification, updated food
graphics, a menu shopping list and easier-to-read instructions for
preparation. New items have been added, and the products have been grouped
into a newly created McCormick Meal Idea Center. It will be much more apparent
to the consumer that McCormick makes the product and is demonstrating
leadership in the category.
Despite all the talk about home meal replacements, the average consumer
still prepares nearly 70 percent of meals at home. On any given day, many meal
preparers do not know what they will have for dinner as late as two hours
ahead of time. The combination of the Meal Idea Center with substantial
advertising and increased promotional activity should generate unit growth for
McCormick and our trade partners in 1998 and beyond.
As we reinvigorate the spice business, another major initiative involves our
business relationship with the trade. In this program, the grocer takes a more
active role in selling the product. Relying on us for category management
expertise, the grocer takes steps necessary to sell the product like never
before. Sales have been lost at grocery stores because shelf prices have been
too high. In some cases, the consumer is driven to purchase spices elsewhere.
We Flavor The World
We are now working with a number of accounts who are using "everyday low
prices" on selected items. For those accounts, retail shelf prices have been
reduced significantly. With lower prices, they will watch their spice sales
grow and benefit with additional sales elsewhere in the store. The momentum of
the program is taking hold, and more major retailers will begin this
innovative strategy in 1998. Establishing a better price/value relationship
for the consumer is another important way to grow our business. This program
emphasizes our brands and allows us to leverage advertising. Our breadth of
experience and expertise in the food business rivals any of the other premier
food companies. That is why the grocery trade views McCormick as far more than
a supplier. We are a partner.
Our foodservice business, which serves broad-line distributors, national
restaurant accounts and warehouse clubs, was a valuable contributor to 1997's
performance. Since the early 1990s when we lost much of the warehouse club
business, sales have rebounded. For the past three years, the United States'
largest food distributor has ranked McCormick among its very best suppliers.
Our industrial flavor and seasoning business, which sells to food processors
and major restaurant chains, experienced strong sales growth in 1997. Combined
with the Food Service Group, it represented 42 percent of our consolidated
sales worldwide. We add flavor to a broad array of products that you eat every
day. We can be found in just about every item on the plate and around it as
well.
In addition, our Packaging Group, which represents approximately 10 percent of
consolidated sales, had a strong year. This business, with a U.S. focus,
manufactures and markets plastic bottles and tubes for food, personal care and
other products. Our Packaging Group has been innovative with high-end
packaging that wins industry awards on a consistent basis and is considered a
high growth performer.
As we proceed through 1998, we will continue to take the right steps to build
for the future. We are committed to growing sales, being a low-cost producer
and utilizing assets better, thereby increasing shareholder value. Factors
that will make a difference in creating success are accountability by our
people, unparalleled customer service, innovation, increased efficiency and
leveraging our core competencies.
During the year, Dr. Hamed Faridi was appointed Vice President-Research &
Development. He succeeds Dr. Marshall J. Myers who retired. Robert W. Skelton,
Vice President & General Counsel, was elected Secretary of the Corporation.
Susan L. Abbott was named Vice President-Regulatory & Environmental Affairs,
and Roger T. Lawrence succeeded her as Vice President-Quality Assurance. Paul
C. Beard was named President of McCormick Canada, Inc. In addition, Richard W.
Single, Sr., Vice President-Government Affairs, Secretary and Counsel to the
Board of Directors; Dr. James J. Albrecht, Vice President-Science & Technology
and George W. Koch, Of Counsel, Kirkpatrick & Lockhart, retired from the
Board. We thank them for their many years of outstanding service to the
Company.
We also wish to thank our loyal employees who have supported the organization
during the challenges of recent years. People are our greatest asset. They
helped us achieve much in 1997 including recognition by FORTUNE magazine as
one of the 100 best companies to work for in America. We have raised the bar
and have a management team capable of achieving goals previously unattainable.
Our Core Values
We Believe:
-- That our people are the most important ingredient to our success.
-- In continuously adding value for our shareholders.
-- Customers are the reason we exist.
-- In doing business honestly and ethically.
-- In focused achievement of goals and objectives through teamwork.
/s/ Charles P. McCormick
-----------------------------------------------------
Charles P. McCormick, Jr. Chairman of the Board
/s/ Robert J. Lawless
------------------------------------------------------
Robert J. Lawless President & Chief Executive Officer
McCormick & Company, Incorporated
Report on Operations 1997
Leveraging Our Leadership
It's been said, "The proof is in the numbers." Here are some to consider. In
more than 100 countries around the world, you can purchase McCormick products.
You would be able to make that selection from potentially 500 items carrying
McCormick brands. In more than 700 packaged foods in grocery stores and other
outlets, you can enjoy McCormick ingredients used by the world's premier food
manufacturers. Impressive numbers. When added together they equal "Number
One"- industry leadership.
McCormick is the leader in the manufacture, marketing and distribution of
spices, seasonings and flavors throughout the food industry. The activities of
the past year solidified that leadership position and propelled the Company on
a course for growth.
In last year's annual report, three areas of focus for 1997 were
identified: growth, asset management and performance. The three combined to be
McCormick's driving force during the year. The formula worked. We built on the
foundation of a good second half in 1996 to record a good year in 1997.
Several key initiatives were inaugurated in 1997 to fuel that pursuit of
growth. There is now a momentum within McCormick, and this report will detail
the focused initiatives and the other powerful strengths that have the Company
performing more like an industry leader than ever before.
A Brief Look at Who We Are
McCormick's consumer, foodservice and some industrial businesses are aligned
globally into three zones: the Americas market, the European market and the
Asia/Pacific market.
McCormick's oldest and largest business is dedicated to the manufacture
and consumer sale of spices, herbs, extracts, proprietary seasoning blends,
sauces and marinades. These consumer products are sold in the United States,
primarily under the McCormick brand in the East, the Schilling brand in the
West, in Canada under the Club House brand and in the United Kingdom under
the Schwartz brand. In other market zones, the McCormick brand name is
primarily used.
Our foodservice business serves foodservice distributors, national
restaurant accounts and membership warehouse clubs. McCormick's industrial
flavor and seasoning business supplies major food processors and restaurant
chains worldwide.
McCormick's Packaging Group, comprised of Setco, Inc. and Tubed Products,
Inc., is a U.S.-focused business that manufactures and markets plastic bottles
and tubes for food, personal care and other industries.
[illustration of world with ribbon graphic bearing the words
"We Flavor Your World"]
Brand Power
In recent years, the Company rediscovered the value and power of its brand.
The McCormick name, according to our extensive research, carries substantial
weight with the consumer. In 1995, the Company started in earnest to drive the
brand through advertising. The first noteworthy example was the start of the
"Flavor Up!" campaign that has continued as a tag line with our advertising.
The "all-star" of that first major brand push was Bag'n Season. In last
year's report, we chronicled the surge in sales for Bag 'n Season that was
driven by heavy advertising and a new-look foil package with a more pronounced
McCormick identification. The effort to make the McCormick name stand out
continued in 1997 with redesigned packages for our entire Dry Seasoning Mix
(DSM) line. It's very clear to the consumer that this new DSM package is from
McCormick. The familiar Corporate logo is "up front" and positioned over a
flowing red ribbon. It's a bold graphic that received great reaction during
initial testing. To the consumer, the McCormick name means quality meals.
We plan to use the McCormick logo on the packaging of our smaller and
lesser known brands, such as Golden Dipt and Produce Partners. The combined
approach will provide additional consumer recognition and credibility to those
brands while maintaining their own individual character. Along with our
brand-building consumer advertising program, maximizing the power of the
McCormick trademark will strengthen our leadership position and help drive
growth. And we're also focused on stretching our brand power into other areas
of the flavoring market.
We Flavor Your World
Brand recognition goes far beyond the U.S. domestic market. The names Club
House in Canada, Schwartz and Noel's in the United Kingdom and McCormick in
various global locations are all part of the Company's efforts to drive our
brands. One key spot in this initiative is China where there are few
established brands. We're building a solid platform to become the national
brand Chinese consumers think of when they buy spices and seasonings.
[photo of Montreal Steak Seasoning product from Club House Foods (Canada)]
Innovation
Innovation has been called the fuel of corporate longevity, and an innovative
mind-set has become more important to the success of McCormick than at any
time during our 108-year history. The lifestyles, tastes and purchasing habits
of consumers have changed so much and so quickly that those businesses married
to what may have worked in the past may face failure.
An exciting initiative begun in 1997 demonstrates McCormick's leadership
in the industry as well as our innovative approach to consumer trends. For
many years, the grocery aisle containing dry seasoning mixes was unorganized,
at times cluttered and often confusing for the consumer. Put simply, it was
one of the more difficult areas of the store to shop. Usually, the consumer
would stop by the DSM aisle, pick up his or her regular purchase and move on.
There was little time spent browsing. Data showed that each consumer made
fewer than 10 purchases from this department on average each year. The
potential for the DSM section is great, and McCormick has responded to that
potential by developing a section that answers a consumer need.
Research indicates that consumers are pressed for time, have limited
cooking experience and often have no idea what they'll be having for dinner
within a few hours of the meal. For some, the answer is the home meal
replacement (HMR). With the HMR, a consumer buys a meal prepared away from the
home, perhaps by the chef in the grocery store kitchen. Once home, the meal is
heated in the oven and then eaten. Although the HMR has received much
attention, it is a costly alternative that carries a price tag too high to
become a regular habit for many households. Research indicates that 70 percent
of consumers still prepare their meals in the home. And they want meals that
are fresh and convenient. They are in a "recipe rut," and they are looking for
help.
McCormick & Company, Incorporated
[photo of Light Mayonesa (mayonnaise) from Mexico]
The answer to their predicament is the McCormick Meal Idea Center.
When consumers see the Meal Idea Center, they will find a wide variety of
"meal solutions" in well-displayed sections. The McCormick DSMs have been
organized in eight color-coded product categories instead of the random jumble
of packages by various manufacturers too often seen in a DSM aisle. This
innovative arrangement will foster browsing. Just a few more purchases per
consumer per year should create growth in this under-performing category.
The consumer benefits, McCormick benefits - and so, too, will the grocery
store. A key part of the Meal Idea Center initiative calls for the retailer to
advertise and promote the center. Rather than a standard "commodity" promotion
like two packages for the price of one, the retailer would, for example,
promote the chili seasoning mix along with a sale on the price of the related
ingredients. The back of the new DSM package shows all the meal ingredients
necessary, so the consumer uses it as a shopping list for other areas of the
store.
The combination of the Meal Idea Center with fresh new packaging,
substantial advertising and increased promotional activity should generate
significant unit growth for McCormick and our trade partners. It is an
innovative effort that clearly reflects industry leadership and the quest to
drive McCormick brands. A commitment to the McCormick Meal Idea Center is
reflected in our continued advertising on television, radio and in print. We
want the consumer to know we have the brand to trust, and we have the answers
to their cooking needs.The message is being heard.
The source of so much innovation in the food industry is research and
development (R&D). And McCormick's R&D is yet another way that we
differentiate ourselves from the competition and demonstrate our industry
leadership. Our annual budget for R&D is on a par with the upper echelon of
the food industry. Out of a superb R&D facility in Maryland and with satellite
locations around the world, a team of scientists, sensory analysts and food
specialists creates flavor systems for the premier global food manufacturers
as well as McCormick.
In the past, the efforts of our R&D team have been largely focused on our
food processing and fast-food customers. With our commitment to
consumer-oriented marketing, we see the need for an intensified focus on new
product development for our consumer business. We have also added key
personnel who have extensive experience in new consumer product development.
R&D will play a critical role in our push for exciting, new products to
anticipate and respond to the needs and eating trends of the consuming public.
McCormick's R&D efforts have evolved. Historically, they were tactical and
project-oriented. In keeping with our quest to perform like the industry
leader we are, our R&D activities have become more strategic. Beyond the
pursuit of new products is our challenge and ultimate goal to create new
technologies that can then be used to serve various customers - industrial,
consumer or foodservice. With a new technology, we can create a "family" of
new products. An example is the FlavorCell technology developed in
McCormick's R&D labs a few years ago. Such technologies may have a longer
payback horizon. McCormick, however, considers it a wise investment,
ultimately benefiting our business, customers (both trade and consumer) and
shareholders.
Our food enhancement capabilities are some of the best in the industry -
another example of how McCormick remains the leader. We will continue to
leverage these and other technologies throughout all of our businesses in all
regions of the world.
One of our packaging businesses, Tubed Products, Inc. (TPI), enjoyed a
resounding turnaround year. After a poor 1996, they grew sales through a
combination of new technological innovations, improved customer service and
significant productivity improvements.
The tube market is now focused on more up-scale packaging, and TPI has the
latest technologies to meet those demands. The "soft-touch" tube introduced in
1997 for a hair-care line was named "Best of Show" by the National Association
of Container Distributors. Other examples of TPI's technological leadership
include three-color silk screening, advancements with the click-top
Dispens-R-Tube and the introduction of oval tubes. TPI, which celebrated its
50th anniversary in 1997, is the market leader in plastic squeeze tubes.
Setco, Inc., another part of our Packaging Group, also relies on
technological innovation in producing bottles for numerous businesses,
including many McCormick products and the fast-growing nutritional supplement
and herb markets.
Expertise
What does the McCormick name mean to consumers? "It stands for quality."
That was the majority response offered during consumer testing. Those
responses reaffirm how we work every day. After 108 years of "flavoring the
world," we state with pride and conviction - we know food! Few food companies
can match our breadth of experience.
We Flavor The World
That experience is evident in meals you eat, snacks you munch and drinks
you consume. The odds are strong that during one of the three main daily
meals, you will consume a McCormick product. Salad seasonings, soup
ingredients, blends for entree meals, ingredients for baked goods, flavorings
for drinks and the dessert that follows - McCormick is there. And that's just
a small sampling. Walk down the aisles of your grocery store, and you will see
the well-known McCormick brands on some shelves. In nearly every aisle where
there is food, even though you may not see our name on the package, but our
flavor or ingredient will be there. We supply the vast majority of the top 100
food processors and restaurant companies, and they produce hundreds of
packaged foods and countless prepared meals flavored by - McCormick.
At many of the restaurants, McCormick seasons the sandwich or flavors the
drink. Our expertise, borne of a century of experience, leads us to be not
only the supplier of choice for the world's largest food businesses - but the
partner of choice.
A small amount of the ingredients of many processed food items accounts
for a large amount of the flavor. That's where we come in. We are that
powerful, vital ingredient. But we bring much more. With our extensive
experience and breadth of knowledge in the food industry and the fact that few
ingredient companies have consumer experience, we act as consultants to food
manufacturers and the restaurant trade. To increase the chance for the success
of new products, food manufacturers and the restaurant trade bring McCormick
into the equation very early. Our R&D and sensory evaluation services are used
well "upstream" during the concept development. Far more than a supplier, we
are a partner benefiting our customers with consultation and expertise.
Our expertise actually starts from "square one" with our comprehensive,
global sourcing program that we have detailed in earlier reports. Our control
over raw materials allows us to provide customers with a consistent,
dependable supply of the highest quality spices and herbs. McCormick's global
sourcing program is unmatched in the industry.
We have the broadest line of flavor systems, know the food business from
commodity to "center of the plate" entrees and have experience in nearly every
aisle of the grocery store. What we bring to the consumer and our trade
customers is more than an ingredient. We bring unmatched expertise.
[photo of Jalisco (hot) Sauce from El Salvador]
Leadership
Over the years, McCormick has gained its leadership position for many reasons.
One is the Company's role in finding a better way. This broad statement can
be demonstrated by the Company's category manage- ment initiative with the
grocery trade. By again acting as the consultant, we offer marketing guidance
that will result in increased sales of our branded products, benefiting the
grocer and McCormick. The latest initiative that we believe will play a key
role in growing our consumer business involves pricing. As stated in the
Letter to Shareholders, we are working with our grocery trade partners to
price our products more favorably.
Our Food Service Group demonstrated leadership as it provided flavor
systems and training for HMR programs for meat, deli and seafood departments
in supermarkets. McCormick developed a "turn-key" supermarket foodservice
program to facilitate the grocers' expansion into this explosive trend. Our
foodservice HMR business nearly doubled in 1997 compared to the previous year.
In 1997, the Food Service Group again received recognition from its key
customers for service excellence.
McCormick & Company, Incorporated
Global Reach -- Global Growth
These are all pieces of a powerful equation with the result being market
leadership. Of the top 20 retailers/ wholesalers in the United States, 15
have McCormick as the primary core spice line. In gourmet spices, McCormick is
the primary line for 11 and shares in seven others. In seasoning mixes,
McCormick is the primary line in 16 and shares one. In the U.S., we are the
leader in dollar share of the spice and seasoning market.
Led by our Club House brand, we also hold a leading market position in
Canada. Driven by strong performances in the consumer and industrial
businesses, McCormick Canada had record sales and profits in 1997.
McCormick Flavor Division achieved double-digit sales growth, despite
lackluster overall food industry growth. Growth has been particularly strong
with key partners in snacks, restaurants and prepared foods. As the
multinational companies that we supply grow globally, we go with them.
An emerging global market trend that holds great opportunity for our
industrial business is the so-called "wellness foods" (nutraceuticals,
functional foods and health foods). These foods pose special flavoring
challenges as they often require flavor "masking" or enhancement.
[photo of American Frites (French fries) with Tomatoes foil pack]
We are developing new, specialized flavor systems to answer the demand.
In the United States foodservice business, we are again the leader
supplying spices, seasonings and other flavor systems for foodservice
distributors. The Food Service Group had an excellent year in both sales and
profits.
In other parts of the Americas Zone, we have the leading market share in
consumer spices and herbs in Central America and Venezuela. McCormick de
Centro America set a profit record for the seventh consecutive year. Overseas,
we also enjoy a leading market share in the United Kingdom. The Schwartz brand
enjoyed more success with sales growing for the fourth consecutive year to a
new record level. The introduction of Potato Wedges seasoning mix was the most
successful new consumer product introduction in our U.K. history. We were also
presented a prestigious "Supplier of the Year" award from a major global
fast-food restaurant chain. It recognized five years of our quality service in
Europe.
Our employees, shareholders and others who follow McCormick are well aware
of the excitement we feel about growth potential in the Asia/ Pacific Zone. We
have identified China as a region for accelerated growth, and much activity
took place in 1997 in pursuit of that goal. Shanghai McCormick Foods Company,
Limited has established a distribution network within China that now reaches
more than 80 cities.
Our product line in China has expanded to include: bottled spices, chicken
batters, authentic Chinese recipe mixes, rice seasonings, soups, ketchup,
puddings and gelatins. Our plan is to add two new product lines each year for
the foreseeable future.
Managing Our Business
Playing crucial roles in the revitalization of McCormick have been our
aggressive approach to managing our business and our steps to strengthen the
balance sheet.
In support of our objective to create shareholder value, the Company
adopted economic value added (EVA) in 1996 as a primary indicator to measure
the performance of the businesses. This value-based management tool combines
into one measure the profitability of our businesses after considering the
associated capital costs. Positive EVA is generated when the Company's net
operating profit after tax exceeds the cost to finance its capital. We believe
that consistent growth in EVA will directly translate into superior returns
for our shareholders over time. In order to grow EVA, we will focus on the
following: increasing our worldwide market share, effectively managing our
assets and growing earnings per share. Our strategies will concentrate on
global sales and profit growth, while concurrently improving asset
utilization.
Economic Value Added In Millions
--------------------------------
1995 ($ 4)
1996 ($45)
1997 $23
The Company also believes that linking EVA to compensation and properly
educating the work force in its use are critical components in the successful
implementation of a value-based management program. As a result, EVA has been
incorporated into the incentive compensation system. During the past two
years, many managerial personnel have been trained in the utilization of EVA
and are using it in daily business decisions. All major investment decisions,
including capital asset acquisitions, business acquisitions and working
capital decisions go through an EVA screen. The education of the work force is
a continual process. As the work force learns of the opportunities they have
to improve EVA, we believe the Company, our employees and ultimately our
shareholders will all benefit.
In 1997, the Company experienced significant improvement in the economic
value created for our shareholders. After a period of several years during
which the Company experienced declining EVA, we took action in 1996 to
improve the return performance of our businesses. A comprehensive portfolio
review of our operating businesses was completed in 1996, actions were taken
and a restructuring charge resulted in the third quarter of that year.
Additionally, as discussed in last year's report, Gilroy Foods and Gilroy
Energy Company were divested in August 1996, resulting in proceeds of $263
million. At the same time, a 10 million share buyback program was announced,
an indication of the Company's confidence in the future. These actions laid
the foundation for the substantial value growth that occurred during 1997.
With a streamlined and focused capital base, the Company was able to increase
the EVA of its businesses through sales growth, production efficiencies and
effective asset management. Our shareholders have been rewarded by these
initiatives. As of November 30, McCormick stock had appreciated nearly 40
percent since the announcement and implementation of these actions in August
1996. Our work is far from over. We are committed to achieving even greater
value creation for our shareholders in the coming years.
We are continuing our initiative to pay down debt. Our capital
expenditures were at their lowest level in recent history as a result of
efforts to leverage our existing fixed assets. We are also focusing attention
on improving the collection of accounts receivable. In 1997, our inventory
turnover improved as we continued to achieve efficiencies in the management
of our supply chain. With improved working capital management and through
judicious use of our fixed capital, we experienced improved return
performance in most of our businesses. These initiatives reflect an
aggressively managed business committed to bringing value to our shareholders.
We will also use a disciplined approach regarding acquisitions. Any
potential acquisition must have a correct "fit" with McCormick, resulting in
substantial benefit for our shareholders. It must be in line with our
Corporate objectives and offer a strong management team already in place.
[Photo of Aeroplane Dessert Whip product from McCormick Australia]
To Summarize
McCormick has undergone a transformation. Some of it was driven by the
competition, but much of it was driven from within. The past year saw us
continue initiatives to drive our brands, grow globally and reassert our
industry leadership. The coming year will see us demonstrate our commitment
to return to a premier position among our food industry peer group. With
continued growth, we will achieve that goal.
McCormick & Company, Incorporated
Historical Financial Summary
(dollars in millions except per-share data)
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
For the Year 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net sales........................ 1,801.0 1,732.5 1,691.1 1,529.4 1,400.9 1,323.9 1,276.3 1,166.2 1,110.2
Percent change over prior year... 4.0% 2.4% 10.6% 9.2% 5.8% 3.7% 9.4% 5.0% 1.0%
Operating profit................. 170.8 93.3 172.6 86.0 142.1 121.4 100.6 86.9 74.5
Operating profit excluding
restructuring.................. 167.6 151.4 168.7 156.5 142.1 121.4 100.6 86.9 74.5
Income (loss) from unconsolidated
operations..................... 7.8 5.6 2.1 7.9 10.3 9.9 8.8 3.7 3.5
Net income - continuing
operations..................... 97.4 43.5 86.8 42.5 82.9 73.6 60.4 51.8 47.1
Net income(1).................... 98.4 41.9 97.5 61.2 73.1 95.2 80.9 69.4 135.5
Earnings per share:(2)
Continuing operations.......... 1.29 .54 1.07 .52 1.01 .90 .73 .62 .54
Discontinued operations........ .01 .08 .13 .23 .21 .26 .25 .21 1.00
Extraordinary item............. - (.10) - - - - - - -
Accounting changes(3).......... - - - - (.33) - - - -
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net earnings................... 1.30 .52 1.20 .75 .89 1.16 .98 .83 1.54
Percentage of net sales:
Gross profit................... 34.9% 34.9% 34.5% 36.5% 38.5% 38.9% 36.9% 36.0% 35.2%
Operating profit............... 9.5% 5.4% 10.2% 5.6% 10.1% 9.2% 7.9% 7.5% 6.7%
Income - continuing
operations................... 5.4% 2.5% 5.1% 2.8% 5.9% 5.6% 4.7% 4.4% 4.2%
Effective tax rate............... 37.0% 38.7% 36.1% 40.5% 41.4% 39.4% 38.4% 38.0% 38.1%
Depreciation and amortization.... 49.3 63.8 63.7 62.5 50.5 43.8 40.5 36.6 34.8
Capital expenditures............. 43.9 74.7 82.1 87.7 76.1 79.3 73.0 58.4 53.4
Common dividends declared(4)..... .61 .57 .53 .49 .45 .40 .31 .24 .19
Market closing price:
High......................... 27.06 25.00 26.50 24.63 30.25 28.75 22.88 13.38 12.50
Low.......................... 22.63 19.25 18.13 18.00 20.40 20.63 11.88 9.13 6.31
Dividend payout ratio(5)......... 47.6% 50.5% 44.4% 36.4% 36.1% 32.8% 28.6% 28.9% 30.8%
Average shares outstanding (000s) 75,658 80,641 81,181 81,240 81,766 81,918 82,396 83,720 87,772
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
At Year End
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Current debt..................... 121.3 108.9 297.3 214.0 84.7 122.6 78.2 30.4 20.3
Long-term debt................... 276.5 291.2 349.1 374.3 346.4 201.0 207.6 211.5 210.5
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total debt....................... 397.8 400.1 646.4 588.3 431.1 323.6 285.8 241.9 230.8
Shareholders' equity............. 393.1 450.0 519.3 490.0 466.8 437.9 389.2 364.4 346.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total capital.................... 790.9 850.1 1,165.7 1,078.3 897.9 761.5 675.0 606.3 577.0
Total assets..................... 1,256.2 1,326.6 1,614.3 1,555.7 1,313.2 1,130.9 1,037.4 946.9 864.5
Return on equity................. 25.2% 8.6% 20.3% 12.8% 17.0% 23.3% 21.8% 20.4% 40.0%
Debt to total capital............ 50.3% 47.1% 55.5% 54.6% 48.0% 42.5% 42.3% 39.9% 40.0%
Book value per common share(2)... 5.31 5.75 6.39 6.03 5.70 5.45 4.88 4.56 4.18
Market closing price............. 26.50 24.63 23.63 19.00 23.25 28.50 20.63 11.50 12.50
- ----------------------------------- --------
For the Year 1988
- ----------------------------------- --------
Net sales.......................... 1,099.1
Percent change over prior year... 8.7%
Operating profit................... 65.4
Operating profit excluding
restructuring.................... 65.4
Income (loss) from unconsolidated
operations....................... (0.4)
Net income - continuing
operations....................... 24.8
Net income(1)...................... 42.7
Earnings per share:(2)
Continuing operations............ .27
Discontinued operations.......... .12
Extraordinary item............... -
Accounting changes(3)............ .07
--------
Net earnings..................... .46
Percentage of net sales:
Gross profit..................... 32.6%
Operating profit................. 6.0%
Income - continuing
operations..................... 2.3%
Effective tax rate................. 46.6%
Depreciation and amortization...... 29.8
Capital expenditures............... 50.4
Common dividends declared(4)....... .14
Market closing price:
High.......................... 7.25
Low........................... 3.85
Dividend payout ratio(5)........... 36.5%
Average shares outstanding (000s).. 93,068
- ----------------------------------- --------
At Year End
- ----------------------------------- --------
Current debt....................... 49.5
Long-term debt..................... 229.4
--------
Total debt......................... 278.9
Shareholders' equity............... 294.3
Total capital...................... 573.2
--------
Total assets....................... 846.4
Return on equity................... 14.6%
Debt to total capital.............. 48.7%
Book value per common share(2)..... 3.27
Market closing price............... 6.88
- ---------------
(1) The Company disposed of its wholly-owned real estate subsidiary in 1989,
and both Gilroy Foods, Incorporated and Gilroy Energy Company, Inc. in 1996.
(2) All share data adjusted for 2-for-1 stock splits in January 1992, January
1990 and April 1988.
(3) In 1993, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," and in 1988, it adopted SFAS
No. 96, "Accounting for Income Taxes."
(4) Includes fourth quarter dividends for the years 1988-1997, which were
declared in December of each of those years.
(5) Dividend payout ratio does not include gain or losses on sale of
discontinued operations, cumulative effect of accounting changes and
restructuring charge or credit, and extraordinary items.
We Flavor The World
Consolidated Income Statement
(in thousands except per-share data)
Year ended November 30
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Net sales......................................... $1,800,966 $1,732,506 $1,691,086
Cost of goods sold................................ 1,172,328 1,128,032 1,106,935
----------- ----------- -----------
Gross profit...................................... 628,638 604,474 584,151
Selling, general and administrative expense....... 461,022 453,088 415,459
Restructuring (credit) charge..................... (3,227) 58,095 (3,904)
----------- ----------- -----------
Operating income.................................. 170,843 93,291 172,596
Interest expense.................................. 36,332 33,811 39,298
Other (income) expense - net. .................... (7,795) (2,254) 692
----------- ----------- -----------
Income from consolidated continuing operations
before income taxes............................. 142,306 61,734 132,606
Income taxes...................................... 52,653 23,871 47,866
----------- ----------- -----------
Net income from consolidated continuing
operations...................................... 89,653 37,863 84,740
Income from unconsolidated operations............. 7,762 5,612 2,068
----------- ----------- -----------
Net income from continuing operations............. 97,415 43,475 86,808
Income from discontinued operations, net of
income taxes.................................... 1,013 6,249 10,713
----------- ----------- -----------
Net income before extraordinary item.............. 98,428 49,724 97,521
Extraordinary loss from early extinguishment of debt,
net of income tax benefit....................... - (7,806) -
----------- ----------- -----------
Net income........................................ $ 98,428 $ 41,918 $ 97,521
----------- ----------- -----------
----------- ----------- -----------
Earnings per shareContinuing operations........... $ 1.29 $ .54 $ 1.07
Discontinued operations........................... .01 .08 .13
Extraordinary loss from early extinguishment
of debt. ....................................... - (.10) -
----------- ----------- -----------
Total earnings per share.......................... $ 1.30 $ .52 $ 1.20
----------- ----------- -----------
----------- ----------- -----------
- ---------------------
See Notes to Consolidated Financial Statements, pages 18-33.
McCormick & Company, Incorporated
Consolidated Balance Sheet
(in thousands)
Assets
November 30
----------------------
1997 1996
---------- ----------
Current assets
Cash and cash equivalents.................... $ 13,500 $ 22,418
Receivables, less allowances of $3,734
for 1997 and $3,527 for 1996............... 217,198 217,495
Inventories.................................. 252,084 245,089
Prepaid expenses............................. 9,790 15,648
Deferred income taxes........................ 13,946 33,762
---------- ----------
Total current assets....................... 506,518 534,412
Property, plant and equipment - net............ 380,015 400,394
Goodwill - net................................. 157,962 165,066
Prepaid allowances............................. 130,943 149,200
Investments and other assets................... 80,794 77,537
---------- ----------
$1,256,232 $1,326,609
---------- ----------
---------- ----------
- -----------------------
See Notes to Consolidated Financial Statements, pages 18-33.
We Flavor Your World
Liabilities and Shareholders' Equity
November 30
-----------------------
1997 1996
----------- -----------
Current liabilities
Short-term borrowings.................................. $ 112,313 $ 98,450
Current portion of long-term debt...................... 8,989 10,477
Trade accounts payable................................. 150,330 153,584
Other accrued liabilities.............................. 226,617 236,791
----------- -----------
Total current liabilities............................ 498,249 499,302
Long-term debt........................................... 276,489 291,194
Deferred income taxes.................................... 2,038 4,937
Other long-term liabilities.............................. 86,346 81,133
----------- -----------
Total liabilities.................................... 863,122 876,566
Shareholders' equity
Common Stock, no par value; authorized 160,000
shares; issued and outstanding: 1997 - 10,182 shares,
1996 - 11,533 shares................................. 44,408 48,541
Common Stock Non-Voting, no par value; authorized
160,000 shares; issued and outstanding: 1997 -
63,842 shares, 1996 - 66,672 shares................. 115,042 112,489
Retained earnings...................................... 264,309 313,847
Foreign currency translation adjustments............... (30,649) (24,834)
----------- -----------
Total shareholders' equity........................... 393,110 450,043
----------- -----------
$1,256,232 $1,326,609
----------- -----------
----------- -----------
- ---------------------
See Notes to Consolidated Financial Statements, pages 18-33.
McCormick & Company, Incorporated
Consolidated Statement of Cash Flows
(in thousands)
Year ended November 30
--------------------------------
1997 1996 1995
--------- --------- --------
Cash flows from operating activities
Net income.................................................. $ 98,428 $ 41,918 $ 97,521
Adjustments to reconcile net income to net cash provided by
operating activities
Restructuring (credit) charge............................. (3,227) 58,095 (3,904)
Depreciation and amortization............................. 49,344 63,788 63,698
Deferred income taxes..................................... 18,921 (26,368) 15,697
Other..................................................... 2,868 2,402 483
Income from unconsolidated operations..................... (7,762) (5,612) (2,068)
Extraordinary item........................................ - 7,806 -
Changes in operating assets and liabilities
Receivables............................................. (4,221) (5,363) (21,560)
Inventories............................................. (13,667) 21,811 (13,751)
Prepaid allowances...................................... 18,128 23,689 (40,133)
Accounts payable........................................ (634) 24,443 3,973
Other assets and liabilities............................ 13,492 (4,931) (40,549)
Dividends received from unconsolidated affiliates......... 9,501 - -
---------- ---------- ---------
Net cash provided by operating activities............ 181,171 201,678 59,407
Cash flows from investing activities
Acquisitions of businesses.................................. (3,315) - -
Capital expenditures........................................ (43,856) (74,654) (82,140)
Proceeds from sale of discontinued operations............... - 248,766 -
Proceeds from sale of assets................................ 3,792 15,283 1,910
Other....................................................... (3,341) (1,497) 1,703
---------- ---------- ---------
Net cash (used in) provided by investing
activities........................................ (46,720) 187,898 (78,527)
Cash flows from financing activities
Short-term borrowings - net................................. 16,125 (186,541) 85,148
Long-term debt borrowings................................... 573 4,454 -
Long-term debt repayments................................... (12,204) (83,178) (20,186)
Common stock issued......................................... 6,952 4,524 11,314
Common stock acquired by purchase........................... (111,167) (74,709) (16,330)
Dividends paid.............................................. (45,525) (45,322) (42,202)
---------- ---------- ---------
Net cash (used in) provided by financing
activities..................................... (145,246) (380,772) 17,744
Effect of exchange rate changes on cash and cash equivalents 1,877 1,149 (1,725)
(Decrease)/increase in cash and cash equivalents............ (8,918) 9,953 (3,101)
---------- ---------- ---------
Cash and cash equivalents at beginning of year.............. 22,418 12,465 15,566
---------- ---------- ---------
Cash and cash equivalents at end of year.................... $ 13,500 $ 22,418 $ 12,465
---------- ---------- ---------
---------- ---------- ---------
- ---------------------
See Notes to Consolidated Financial Statements, pages 18-33.
We Flavor The World
Consolidated Statement of Shareholders' Equity
(in thousands except per-share data)
Common Foreign
Common Stock Common Currency Total
Stock Non-Voting Stock Retained Translation Shareholders'
Shares Shares Amount Earnings Adjustments Equity
------- ---------- -------- --------- ------------ -------------
Balance, December 1, 1994........ 13,279 67,927 $151,703 $ 343,285 $ (5,024) $ 489,964
Net income....................... 97,521 97,521
Dividends declared ($.52/share).. (42,202) (42,202)
Currency translation
adjustments................. (24,035) (24,035)
Other adjustments................ 3,021 3,021
Shares purchased and retired..... (435) (336) (2,362) (13,968) (16,330)
Shares issued.................... 298 485 11,314 11,314
Equal exchange................... (1,053) 1,053
-------- ----------- --------- ---------- ----------- -----------
Balance, November 30, 1995....... 12,089 69,129 160,655 387,657 (29,059) 519,253
Net income....................... 41,918 41,918
Dividends declared ($.56/share).. (45,322) (45,322)
Currency translation
adjustments................. 4,225 4,225
Other adjustments................ 154 154
Shares purchased and retired..... (264) (3,111) (4,149) (70,560) (74,709)
Shares issued.................... 189 173 4,524 4,524
Equal exchange................... (481) 481
-------- ----------- --------- ---------- ----------- -----------
Balance, November 30, 1996....... 11,533 66,672 161,030 313,847 (24,834) 450,043
Net income....................... 98,428 98,428
Dividends declared ($.60/share).. (45,525) (45,525)
Currency translation
a djustments................ (5,815) (5,815)
Other adjustments................ 194 194
Shares purchased and retired..... (353) (4,152) (8,532) (102,635) (111,167)
Shares issued.................... 90 234 6,952 6,952
Equal exchange................... (1,088) 1,088
-------- ----------- --------- ---------- ----------- -----------
Balance, November 30, 1997....... 10,182 63,842 $159,450 $ 264,309 $ (30,649) $ 393,110
-------- ----------- --------- ---------- ----------- -----------
-------- ----------- --------- ---------- ----------- -----------
- -------------------
See Notes to Consolidated Financial Statements, pages 18-33.
McCormick & Company, Incorporated
Notes to Consolidated Financial Statements
(dollars in thousands except per-share data)
1. Summary of Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. In the first quarter of fiscal 1995, the
Company changed the end of the reporting period for foreign subsidiaries from
October 31 to November 30 to provide uniform reporting on a worldwide basis.
Accordingly, an additional month of operating results for those subsidiaries
is included in the 1995 financial statements. Investments in 20% to 50% owned
affiliates are accounted for under the equity method. Intercompany
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the presentation in 1997.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual amounts could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity date of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated over its
estimated useful life using straight-line methods for financial reporting and
both accelerated and straight-line methods for tax reporting.
Goodwill
Goodwill is amortized using the straight-line method over periods up to
40 years.
On a periodic basis, the Company estimates the future undiscounted cash
flows of the businesses to which goodwill relates in order to ensure that the
carrying value of such goodwill has not been impaired.
Prepaid Allowances
Prepaid allowances arise when the Company prepays sales discounts and
marketing allowances to certain customers in connection with multi-year sales
contracts. These costs are capitalized and amortized over the lives of the
contracts, generally ranging from three to five years. The amounts reported
in the Consolidated Balance Sheet are stated at the lower of unamortized cost
or management's estimate of the net realizable value of these costs.
Research and Development
Research and development costs are expensed as incurred.
Earnings Per Share
Earnings per share have been computed by dividing net income by the weighted
average number of common shares outstanding during the period.
Stock Compensation
The Company follows Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee
stock options and other stock-based compensation. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation
expense is recognized. The Company has elected to adopt the disclosure
provisions only of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation."
Foreign Currency
The functional currency for the majority of the Company's operations outside
of the United States is the applicable local currency. The translation from
the applicable foreign currencies to the United States dollar is performed
for balance sheet accounts using the current exchange rates in effect at the
balance sheet date and for revenue and expense accounts using the weighted
average exchange rate during the period. The resulting gains or losses are
included in the foreign currency translation adjustments account within
shareholders' equity.
We Flavor Your World
Gains or losses resulting from foreign currency transactions and the
translation of the financial statements for those operations in a
hyperinflationary environment are included in the income statement.
The Company periodically enters into foreign exchange contracts to hedge
the impact of foreign currency fluctuations on its investments in certain
foreign subsidiaries, the impact of foreign currency transactions and the
impact of firm foreign currency commitments. The gains and losses on foreign
investment hedges, net of income taxes, are included in the foreign currency
translation adjustments account within shareholders' equity. The gains and
losses on foreign currency transaction hedges are recognized in income and
offset the foreign exchange gains and losses on the underlying transactions.
Gains and losses of foreign currency firm commitment hedges are deferred and
included in the basis of the transactions underlying the commitments.
Credit Risk
The Company is potentially subjected to concentrations of credit risk with
trade accounts receivable, prepaid allowances and forward exchange contracts
for foreign currency. Because the Company has a large and diverse customer
base with no single customer accounting for a significant percentage of trade
accounts receivable and prepaid allowances, there was no material
concentration of credit risk in these accounts at November 30, 1997. The
Company evaluates the credit worthiness of the counterparties to forward
exchange contracts for foreign currency and considers nonperformance credit
risk to be remote.
Accounting and Disclosure Changes
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share." This Statement is effective for financial
statements issued for periods ending after December 15, 1997. The Statement
will have no significant effect on the reported earnings per share for the
Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report the change in its net
assets, by major components and as a single total, during the period from
non-owner sources. The FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual
and interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and major
customers. Both Statements are effective for fiscal years beginning after
December 15, 1997. Adoption of these standards will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect, while not yet determined by the Company, will be limited to the
presentation of its disclosures.
2. Investments:
The Company owns from 30% to 50% of its unconsolidated food products
affiliates. Although the Company reports its share of net income from the
affiliates, their financial statements are not consolidated with those of the
Company. The Company's share of undistributed earnings of the affiliates was
$31,379 at November 30, 1997.
Summarized year-end information from the financial statements of these
companies representing 100% of the businesses follows:
Unconsolidated Affiliates
----------------------------
1997 1996 1995
-------- -------- --------
Current assets . . . . $154,000 $149,860 $113,486
Noncurrent assets. . . 73,185 79,566 70,670
Current liabilities. . 90,755 96,085 77,229
Noncurrent liabilities 46,503 45,988 42,362
Net sales. . . . . . . 345,429 327,967 297,823
Gross profit . . . . . 131,727 121,469 107,257
Net income . . . . . . 15,720 12,907 3,730
McCormick & Company, Incorporated
3. Financing Arrangements:
The Company's outstanding debt is as follows:
1997 1996
-------- --------
Short-term borrowings
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $ 79,508 $ 59,282
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,805 39,168
--------- ---------
$112,313 $ 98,450
========= =========
Weighted-average interest rate at year end . . . . . . . . . . . 6.92% 6.54%
Long-term debt
8.95% note due 2001. . . . . . . . . . . . . . . . . . . . . . . $ 74,596 $ 74,504
9.00% and 9.75% installment notes due through 1999 and 2001. . . 10,341 16,114
5.78% - 7.77% medium-term notes due 2004 to 2006 . . . . . . . . 95,000 95,000
7.63% - 8.12% medium-term notes due 2024 with put option in 2004 55,000 55,000
9.34% pound sterling installment note due through 2001 . . . . . 14,807 17,252
10.00% Canadian dollar bond due 1999 . . . . . . . . . . . . . . 7,023 7,400
3.13% yen note due 1999. . . . . . . . . . . . . . . . . . . . . 902 2,953
9.74% Australian dollar note due 1999. . . . . . . . . . . . . . 8,167 9,792
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,653 13,179
--------- ---------
$276,489 $291,194
========= =========
The Company has available credit facilities with domestic and foreign
banks for various purposes. The available credit facilities and the amounts
outstanding under each category of facility (and included in debt above) are
as follows:
1997 1996
-------------------- --------------------
Total Amount Total Amount
Facility Borrowed Facility Borrowed
--------- --------- --------- ---------
Available credit facilities
In support of commercial paper issuance $ 300,000 $ - $ 300,000 $ -
For the benefit of foreign subsidiaries 109,935 32,711 90,577 39,168
Other . . . . . . . . . . . . . . . . . 100,000 94 245,000 -
--------- --------- --------- ---------
$ 509,935 $ 32,805 $ 635,577 $ 39,168
========= ========= ========= =========
The Company's long-term debt agreements contain various restrictive
covenants, including limitations on the payment of cash dividends. Under the
most restrictive covenants, $163,729 of retained earnings was available for
dividends at November 30, 1997. The holders of the medium-term notes due
2024 have a one-time option to require retirement of these notes during 2004.
Maturities of long-term debt during the four years subsequent to November
30, 1998 are as follows:
1999 - $28,446 2001 - $ 87,054
2000 - $ 7,959 2002 - $ 362
Credit facilities in support of commercial paper issuance require a
commitment fee of $225. All other credit facilities require no commitment fee.
Credit facilities for other purposes are subject to the availability of funds.
At November 30, 1997, the Company had unconditionally guaranteed $12,035
of the debt of unconsolidated affiliates.
Interest paid in 1997, 1996 and 1995 was $38,075; $47,330 and $51,641
respectively.
We Flavor The World
Rental expense under operating leases was $13,630 in 1997; $12,428 in
1996 and $11,616 in 1995. Future annual fixed rental payments for the years
ending November 30, are as follows:
1998 - $9,872
1999 - $8,449
2000 - $7,572
2001 - $5,774
2002 - $3,655
Thereafter - $8,255
The Company has guaranteed the residual value of a leased distribution
center at 85% of its original cost.
4. Pension and Profit Sharing Plans:
The net periodic cost of the Company's pension and profit sharing plans
follows:
1997 1996 1995
--------- --------- ---------
Pension plans
Defined benefit plans
Service cost . . . . . . . . . . . . . . . . . $ 5,473 $ 5,741 $ 5,509
Interest cost on projected benefit obligations 10,700 10,380 9,972
Actual return on plan assets . . . . . . . . . (18,920) (10,284) (14,067)
Net amortization and deferral. . . . . . . . . 9,830 1,425 6,904
--------- --------- ---------
Net pension cost . . . . . . . . . . . . . . . . 7,083 7,262 8,318
Foreign and other retirement plans . . . . . . . 3,384 3,072 2,957
--------- --------- ---------
Total pension expense. . . . . . . . . . . . . . . $ 10,467 $ 10,334 $ 11,275
========= ========= =========
Profit sharing plan expense. . . . . . . . . . . . $ 4,380 $ 3,350 $ 3,150
========= ========= =========
Pension Plans
The Company has a non-contributory defined benefit plan (the principal plan)
covering substantially all United States employees and a non-contributory
defined benefit plan (the supplemental plan) providing supplemental retirement
benefits to certain officers. The benefits provided by both plans are
generally based on the employee's years of service and compensation during the
last five years of employment. The Company's funding policy is to comply with
federal laws and regulations and to provide the principal plan with assets
sufficient to meet future benefit payments. The plan assets for both plans
consist principally of equity securities, fixed income securities and
short-term money market investments. The principal plan and supplemental plan
hold 427,000 and 46,000 shares, respectively, of the Company's common stock at
November 30, 1997.
The Company also contributed to certain retirement plans of its foreign
subsidiaries.
McCormick & Company, Incorporated
The following table sets forth the principal and supplemental plans'
funded status at September 30, the measurement date:
1997 1996
--------- ---------
Actuarial present value of vested benefit obligation . . . . $122,872 $117,077
--------- ---------
Accumulated benefit obligation . . . . . . . . . . . . . . . $129,083 $123,024
--------- ---------
Projected benefit obligations for service rendered to date . $156,169 $146,336
Plan assets at fair value. . . . . . . . . . . . . . . . . . 134,211 117,448
Projected benefit obligations in excess of plan assets . . . 21,958 28,888
Unrecognized net loss .. . . . . . . . . . . . . . . . . . (17,917) (24,074)
Unrecognized transition asset and prior service cost . . . . 46 1,352
--------- ---------
Pension liability included in the Consolidated Balance Sheet $ 4,087 $ 6,166
========= =========
1997 1996
Significant assumptions:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . 7.5% 7.5%
Salary scale . . . . . . . . . . . . . . . . . . . . . . . . 4.5% 4.5%
Expected return on plan assets . . . . . . . . . . . . . . . 10.0% 10.5%
Profit Sharing Plan
The Company makes contributions to the McCormick Profit Sharing Plan in
accordance with the Plan's provisions. The Profit Sharing Plan is available to
substantially all United States employees. The Profit Sharing Plan assets
consist principally of equity securities, fixed income securities and
short-term money market investments. The Profit Sharing Plan holds 2,571,000
shares of the Company's stock at November 30, 1997.
5. Other Postretirement Benefits:
The net periodic cost of the Company's other postretirement benefits follows:
1997 1996 1995
------- ------- -------
Other postretirement benefits
Service cost . . . . . . . . . . . . . . $1,894 $2,026 $1,829
Interest cost. . . . . . . . . . . . . . 4,294 4,603 4,614
Amortization of prior service cost . . . (75) (75) (111)
------- ------- -------
Total other postretirement benefit expense $6,113 $6,554 $6,332
======= ======= =======
The Company provides health care and life insurance benefits to eligible
retirees having at least 10 years of service. Health care benefits are also
extended to eligible dependents of retirees as long as the retiree remains
covered. Health care benefits are based on the retiree's age and service at
retirement and require other cost-sharing features, such as deductibles and
co-insurance. Life insurance protection is non-contributory. Other
postretirement benefit plans are generally not funded.
We Flavor Your World
The following table sets forth the amounts recognized in the Company's
Consolidated Balance Sheet as of November 30, the measurement date:
1997 1996
------- --------
Accumulated other postretirement benefit obligation
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . $38,552 $38,006
Fully eligible active participants. . . . . . . . . . . . 2,378 3,150
Other active participants . . . . . . . . . . . . . . . . 20,585 21,138
61,515 62,294
Unrecognized net gain/(loss). . . . . . . . . . . . . . . . 3,456 (496)
Unrecognized prior service cost . . . . . . . . . . . . . . 892 967
------- --------
Accrued other postretirement benefit liability included in
the Consolidated Balance Sheet. . . . . . . . . . . . . . $65,863 $62,765
======= ========
The assumed annual rate of increase in the cost of covered health care
benefits is 9.2% for 1998. It is assumed to decrease gradually to 4.5% in the
year 2007 and remain at that level thereafter. Increasing this assumed health
care cost trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation at November 30, 1997 by $5,933
and the aggregate of the service and interest cost components of net periodic
other postretirement benefit cost for 1997 by $755.
The assumed weighted average discount rates were 7.5% for 1997 and 1996.
6. Stock Purchase and Option Plans:
The Company has an Employee Stock Purchase Plan (ESPP) enabling substantially
all United States employees to purchase the Company's Common Stock Non-Voting
at the lower of the stock price on the grant date or the exercise date.
Similarly, options were granted for certain foreign-based employees in lieu of
their participation in the ESPP. Options granted under both plans have
two-year terms and are fully exercisable on the grant date.
Under the Company's 1990 and 1997 Stock Option Plans and the McCormick
(U.K.) Share Option Schemes, options to purchase shares of the Company's
common stock have been or may be granted to employees. The option price for
shares granted under these plans is the fair market value on the grant date.
Options have five- and ten-year terms and generally become fully exercisable
at the end of two and three years of continued employment for the U.S. and
U.K. plans, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following range of
assumptions for the Stock Option Plans, McCormick (U.K.) Share Option Schemes
and the ESPP (including options to foreign employees):
1997 1996
---------------- ----------------
Risk-free interest rates 5.9% - 6.7% 5.4% - 6.4%
Dividend yields. . . . . 2.0% 2.0%
Expected volatility. . . 23.0% 23.0%
Expected lives . . . . . 1.6 - 4.6 years 1.6 - 4.6 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1997 1996
------- -------
Pro forma net income . . . . $94,541 $40,558
Pro forma earnings per share $ 1.25 $ .50
The effects of applying SFAS No. 123 on pro forma net income are not
indicative of future amounts until the new rules are applied to all
outstanding non-vested awards.
McCormick & Company, Incorporated
A summary of the Company's stock option activity and related information for
the years ended November 30 follows:
1997 1996
------------------------------------ -----------------------------------
Shares Weighted-average Shares Weighted-average
(000s) exercise price (000s) exercise price
--------------- ------------------ -------------- ------------------
Options outstanding -
beginning of year. . . . . . . 2,737 $ 22.71 2,559 $ 22.11
Granted. . . . . . . . . . . . . 1,311 $ 24.25 713 $ 22.35
Exercised. . . . . . . . . . . . (358) $ 21.94 (382) $ 18.38
Forfeited. . . . . . . . . . . . (477) $ 24.91 (153) $ 22.09
---------------- ---------------
Options outstanding -
end of year. . . . . . . . . . 3,213 $ 23.11 2,737 $ 22.71
================ ===============
Exercisable - end of year. . . . 1,833 $ 22.73 1,780 $ 22.95
Weighted-average fair value of
options granted during the year. $ 4.63 $ 4.56 N/A
1995
----------------------------------
Shares Weighted-average
(000s) exercise price
-------------- -----------------
Options outstanding -
beginning of year. . . . . . . 2,649 $ 19.92
Granted. . . . . . . . . . . . . 980 $ 22.00
Exercised. . . . . . . . . . . . (787) $ 14.46
Forfeited. . . . . . . . . . . . (283) $ 22.20
---------------
Options outstanding -
end of year. . . . . . . . . . 2,559 $ 22.11
===============
Exercisable - end of year. . . . 1,785 $ 22.03
Weighted-average fair value of
options granted during the year
<FN>
N/A: Information not applicable as the date of issue for the 1995 option grants precedes the effective date of SFAS No. 123
requirements.
Stock options outstanding at November 30, 1997 were as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Range of Shares Weighted-average Weighted-average Shares Weighted-average
exercise price (000s) remaining life in years exercise price (000s) exercise price
------ ----------------------- ---------------- ------- ----------------
$ 4.66 to $22.38 1,183 3.2 $ 21.99 732 $ 21.79
$22.63 to $24.25 2,003 2.5 $ 23.74 1,086 $ 23.32
$24.50 to $26.00 27 4.5 $ 25.31 15 $ 26.00
------- ------
3,213 2.8 $ 23.11 1,833 $ 22.73
======= ======
<FN>
Under all stock purchase and option plans, there were 6,126,000 and 1,928,000 shares reserved
for future grants at November 30, 1997 and 1996, respectively.
</FN>
We Flavor The World
7. Income Taxes:
For financial reporting purposes, sources of income from consolidated
continuing operations before income taxes were:
1997 1996 1995
--------- --------- ---------
Pretax income
United States. . . . . . . . . . . . . . . . . . . . $115,600 $ 59,309 $104,270
International. . . . . . . . . . . . . . . . . . . . 26,706 2,425 28,336
--------- --------- ---------
$142,306 $ 61,734 $132,606
========= ========= =========
Components of income taxes were:
Current
United States. . . . . . . . . . . . . . . . . . . . $ 24,443 $ 33,503 $ 17,793
State. . . . . . . . . . . . . . . . . . . . . . . . 5,447 8,448 5,177
International. . . . . . . . . . . . . . . . . . . . 3,842 8,288 8,212
--------- --------- ---------
Total current. . . . . . . . . . . . . . . . . . . 33,732 50,239 31,182
Deferred
United States. . . . . . . . . . . . . . . . . . . . 10,709 (20,036) 13,891
State. . . . . . . . . . . . . . . . . . . . . . . . 2,325 (2,822) 2,183
International. . . . . . . . . . . . . . . . . . . . 5,887 (3,510) 610
--------- --------- ---------
Total deferred . . . . . . . . . . . . . . . . . . 18,921 (26,368) 16,684
--------- --------- ---------
$ 52,653 $ 23,871 $ 47,866
========= ========= =========
Tax benefits allocated directly to equity components
are as follows:
Relating to employee stock options . . . . . . . . . . $ (123) $ (118) $ (439)
Differences between income taxes computed at the United States federal
statutory rate and actual income taxes are as follows:
1997 1996 1995
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Tax at United States statutory rate . $49,807 35.0% $21,607 35.0% $46,412 35.0%
State income taxes, net of
United States benefits . . . . . 6,105 4.3 2,648 4.3 5,689 4.3
Higher/(lower) effective income taxes
on earnings in other countries . 382 .3 3,929 6.4 (423) (.3)
General business and
other tax credits. . . . . . . . (3,663) (2.6) (2,674) (4.3) (3,553) (2.7)
Amended prior year tax return . . . . - - (3,938) (6.4) - -
Other items . . . . . . . . . . . . . 22 - 2,299 3.7 (259) (.2)
-------- -------- -------- -------- -------- --------
Income tax expense. . . . . . . . . . $52,653 37.0% $23,871 38.7% $47,866 36.1%
======== ======== ======== ======== ======== ========
McCormick & Company, Incorporated
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following:
1997 1996
--------- ---------
Current deferred income tax assets
Restructuring liability. . . . . . . . . . . . . $ 1,718 $ 13,183
Employee benefits. . . . . . . . . . . . . . . . 6,629 7,839
State income tax . . . . . . . . . . . . . . . . 3,392 5,677
Accrued liabilities. . . . . . . . . . . . . . . 2,900 3,807
Inventory. . . . . . . . . . . . . . . . . . . . 3,116 2,951
Bad debt reserve . . . . . . . . . . . . . . . . 1,078 2,320
Prepaid and other assets . . . . . . . . . . . . (2,590) (2,214)
Other. . . . . . . . . . . . . . . . . . . . . . (2,297) 199
--------- ---------
Total current deferred income tax assets . . . . . $ 13,946 $ 33,762
========= =========
Noncurrent deferred income tax assets
Employee benefits. . . . . . . . . . . . . . . . $ 24,884 $ 27,744
Property, plant and equipment. . . . . . . . . . (27,213) (26,699)
Accrued liabilities. . . . . . . . . . . . . . . 7,875 5,516
Intangible assets. . . . . . . . . . . . . . . . (3,376) (2,473)
Prepaid allowances . . . . . . . . . . . . . . . 1,601 1,649
Other. . . . . . . . . . . . . . . . . . . . . . 312 350
--------- ---------
Total noncurrent deferred income tax assets. . . . $ 4,083 $ 6,087
========= =========
Noncurrent deferred income tax (liabilities)
Property, plant and equipment. . . . . . . . . . $ (2,038) $ (4,937)
--------- ---------
Total noncurrent deferred income tax (liabilities) $ (2,038) $ (4,937)
========= =========
In addition to the deferred tax assets shown in the table, the Company
also has certain tax credit carryforwards of $2,830 in 1997 and $4,888 in
1996. These tax credit carryforwards have been fully reserved due to the
restrictive provisions for their use in offsetting future taxes.
Deferred tax assets are primarily in the United States. The Company has a
history of having taxable income and anticipates future taxable income to
realize these assets.
United States income taxes are not provided for unremitted earnings of
international subsidiaries and affiliates. The Company's intention is to
reinvest these earnings permanently or to repatriate the earnings only when it
is tax effective to do so. Accordingly, the Company believes that any United
States tax on repatriated earnings would be substantially offset by United
States foreign tax credits. Unremitted earnings of such entities were $107,992
at November 30, 1997.
Income taxes paid in 1997, 1996 and 1995 were $25,800; $44,875 and
$38,214 respectively.
We Flavor Your World
8. Capital Stocks:
Holders of Common Stock have full voting rights except that (1) the voting
rights of persons who are deemed to own beneficially 10% or more of the
outstanding shares of voting Common Stock are limited to 10% of the votes
entitled to be cast by all holders of shares of Common Stock regardless of how
many shares in excess of 10% are held by such person; (2) the Company has the
right to redeem any or all shares of stock owned by such person unless such
person acquires more than 90% of the outstanding shares of each class of the
Company's common stock; and (3) at such time as such person controls more than
50% of the vote entitled to be cast by the holders of outstanding shares of
voting Common Stock, automatically, on a share-for-share basis, all shares of
Common Stock Non-Voting will convert into shares of Common Stock.
Holders of Common Stock Non-Voting will vote as a separate class on all
matters on which they are entitled to vote. Holders of Common Stock Non-Voting
are entitled to vote on reverse mergers and statutory share exchanges where
the capital stock of the Company is converted into other securities or
property, dissolution of the Company and the sale of substantially all of the
assets of the Company, as well as forward mergers and consolidation of the
Company.
9. Fair Value and Financial Instruments:
Cash and cash equivalents, trade receivables, short-term borrowings, accounts
payable and accrued liabilities: The amounts reported in the Consolidated
Balance Sheet approximate fair value.
Investments: Investments, consisting principally of investments in
unconsolidated affiliates, are not readily marketable. Therefore, it is not
practicable to estimate their fair value.
Long-term debt: The fair value of long-term debt, including current
portion, based on a discounted cash flow analysis using the Company's current
incremental borrowing rate for debt of similar maturities is as follows:
1997 1996
------------------- -------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------- --------- -------- ---------
Long-term debt $308,277 $ 285,478 $312,697 $ 301,671
Forward exchange contracts for foreign currency: Forward exchange
contracts at November 30, 1997 are summarized as follows:
Nominal Fair
Value Value
-------- -------
Currency sold
Pound sterling $ 1,849 $ (26)
Deutsche mark. 1,425 (71)
Italian lira . 234 4
All contracts outstanding hedge foreign currency commitments and,
accordingly, have no carrying amount on the balance sheet. The loss explicitly
deferred is $119 and is expected to be realized in 1998 as these transactions
are realized.
The fair value of forward exchange contracts is estimated using quoted
market prices for comparable instruments.
McCormick & Company, Incorporated
10. Business Restructuring and Discontinued Operations:
Business Restructuring
In the third quarter of 1996, the Company began implementation of a
restructuring plan and recorded a restructuring charge of $58,095. This charge
reduced net income by $39,582 or $.49 per share. In addition, there were
additional charges directly related to the restructuring plan which could not
be accrued in 1996 but will be expensed as the plan is implemented. Under the
restructuring plan, the Company has closed the Brooklyn, New York packaging
plant, converted from a direct sales force to a broker sales force for certain
regions in the U.S., exited from certain minor non-core product lines, closed
its manufacturing facility in Switzerland and moved that production to its
U.K. facility, sold the Minipack business and sold Giza National Dehydration
Company of Egypt.
In the fourth quarter of 1994, the Company recorded a charge of $70,445
for restructuring its business operations. Except for the realignment of some
of our overseas operations, this restructuring plan is complete.
In the third quarter of 1997, the Company reevaluated its restructuring
plans. Most of the actions under these plans are completed or near completion
and have resulted in losses being less than originally anticipated. In
addition, an agreement in principle to dispose of an overseas food brokerage
and distribution business with 6% of consolidated net sales was not
consummated. As a result of these developments, the Company recognized a
restructuring credit of $9,493. Concurrent with the reevaluation of
restructuring plans, the Company initiated plans to streamline the food
brokerage and distribution business and close the Freehold, New Jersey
packaging plant, resulting in a $5,734 restructuring charge. Charges related
to these initiatives include severance and personnel costs of $2,516 and a
$3,218 writedown of assets to net realizable value and will require net cash
outflows of approximately $3,365. The credit for the restructuring
reevaluation, the charge for the new initiatives and charges directly related
to the restructuring plan which could not be accrued in 1996 resulted in a net
restructuring credit of $3,227 ($2,033 after tax) in 1997.
As of November 30, 1997, the restructuring liabilities are as follows:
$4,274 for severance and personnel costs and $1,287 for other exit costs. In
addition, approximately $1,711 of additional charges remain to be expensed
during the implementation, primarily costs to move equipment and personnel.
The Company expects to have all restructuring programs completed in 1998.
Discontinued Operations
On August 29, 1996, the Company sold substantially all the assets of Gilroy
Foods, Incorporated (GFI) and Gilroy Energy Company, Inc. (GEC) to ConAgra,
Inc. and Calpine Corporation, respectively, for $263.3 million in total. Based
on the settlement of terms related to assumptions used to estimate the gain or
loss from the disposals of GFI and GEC, the Company recognized income from
discontinued operations, net of income taxes of $1,013 in 1997. In 1996, an
after tax loss of $291 was included in the caption, "Income from discontinued
operations, net of income taxes" in the Consolidated Income Statement.
The operating results of GFI and GEC have been reclassified for all
required periods on the Consolidated Income Statement to the caption "Income
from discontinued operations, net of income taxes." This caption includes
interest expense based on the debt specifically associated with GEC and an
allocation of interest to GFI assuming a debt to capital ratio similar to the
Company's. Income taxes have also been allocated based on the statutory tax
rates applicable to GFI and GEC. The income and expense disclosures in Notes
to Consolidated Financial Statements exclude discontinued operations. Sales,
interest expense and income taxes applicable to discontinued operations are as
follows:
1996 1995
---------- -----------
Net sales ............. $129,373 $167,608
Interest expense....... 11,173 15,972
Income taxes........... 3,841 5,834
The Company signed a three year non-compete agreement with Calpine
Corporation. Under this agreement, McCormick received payments of $8,000 in
1997 and $4,500 in 1996, which are included in "Other (income) expense - net"
in the Consolidated Income Statement.
We Flavor The World
11. Business Segments and Geographic Areas:
Business Segments
The Company operates in two business segments, Food Products and Packaging
Products. The Food Products segment manufactures, markets and distributes
spices, seasonings, flavorings and other specialty food products and sells
these products to the consumer food market, the foodservice market and to
industrial food processors throughout the world. The Food Products segment
represents the majority of the Company and, accordingly, all corporate items
and eliminations have been included in this segment. The Packaging Products
segment manufactures and markets plastic packaging products for the food,
cosmetic and health care industry, predominately in the United States.
Food Packaging
Products Products Consolidated
---------- --------- ------------
1997:
Net sales. . . . . . . . . . . $1,595,142 $ 205,824 $ 1,800,966
Operating income . . . . . . . 150,415 20,428 170,843
Identifiable assets. . . . . . 1,133,094 123,138 1,256,232
Capital expenditures . . . . . 34,121 9,735 43,856
Depreciation and amortization. 38,587 10,757 49,344
1996:
Net sales. . . . . . . . . . . $1,532,296 $ 200,210 $ 1,732,506
Operating income (loss)(1) . . 99,169 (5,878) 93,291
Identifiable assets. . . . . . 1,196,514 130,095 1,326,609
Capital expenditures . . . . . 63,526 11,128 74,654
Depreciation and amortization. 51,758 12,030 63,788
1995:
Net sales. . . . . . . . . . . $1,501,763 $ 189,323 $ 1,691,086
Operating income . . . . . . . 153,287 19,309 172,596
Identifiable assets. . . . . . 1,473,006 141,335 1,614,341
Capital expenditures . . . . . 70,357 11,783 82,140
Depreciation and amortization. 51,083 12,615 63,698
<FN>
(1) Includes restructuring charges of $41,085 for Food Products and $17,010
for Packaging Products.
</FN>
Packaging net sales include sales to the Food Products segment of $25,960
in 1997; $30,186 in 1996 and $34,527 in 1995.
McCormick & Company, Incorporated
Geographic Areas
North Other
America Europe Countries Total
---------- --------- ----------- ----------
1997:
Net sales. . . . . . . . . . . . . . . . . . $1,346,905 $336,865 $ 117,196 $1,800,966
Net income -- continuing operations. . . . . 79,521 12,325 5,569 97,415
Assets . . . . . . . . . . . . . . . . . . . 941,980 237,759 76,493 1,256,232
1996:
Net sales. . . . . . . . . . . . . . . . . . $1,311,292 $325,683 $ 95,531 $1,732,506
Net income (loss) -- continuing
operations(1). . . . . . . . . . . . . . . 52,197 84 (8,806) 43,475
Assets . . . . . . . . . . . . . . . . . . . 984,676 254,576 87,357 1,326,609
1995:
Net sales. . . . . . . . . . . . . . . . . . $1,276,066 $325,019 $ 90,001 $1,691,086
Net income -- continuing operations. . . . . 74,090 10,016 2,702 86,808
Assets . . . . . . . . . . . . . . . . . . . 1,332,342 223,718 58,281 1,614,341
<FN>
(1) Includes net restructuring charges of $19,614 for North America, $10,195
for Europe and $9,773 for Other Countries.
</FN>
We Flavor Your World
12. Supplemental Financial Statement Data:
1997 1996
--------- ---------
Inventories:
Finished products and work-in-process. $ 136,650 $ 125,849
Raw materials and supplies . . . . . . 115,434 119,240
---------- ----------
Inventories. . . . . . . . . . . . . $ 252,084 $ 245,089
========== ==========
Property, plant and equipment:
Land and improvements. . . . . . . . . $ 29,288 $ 27,260
Buildings. . . . . . . . . . . . . . . 192,777 179,599
Machinery and equipment. . . . . . . . 445,938 432,525
Construction in progress . . . . . . . 25,513 54,410
Accumulated depreciation . . . . . . . (313,501) (293,400)
---------- ----------
Property, plant and equipment --
net. . . . . . . . . . . . . . . . $ 380,015 $ 400,394
========== ==========
Goodwill:
Cost . . . . . . . . . . . . . . . . . $ 205,526 $ 211,035
Accumulated amortization . . . . . . . (47,564) (45,969)
---------- ----------
Goodwill -- net. . . . . . . . . . . $ 157,962 $ 165,066
========== ==========
Other accrued liabilities:
Payroll and employee benefits. . . . . $ 48,544 $ 42,031
Restructuring. . . . . . . . . . . . . 5,561 42,332
Sales allowances . . . . . . . . . . . 46,029 37,036
Income taxes . . . . . . . . . . . . . 22,092 8,734
Other. . . . . . . . . . . . . . . . . 104,391 106,658
---------- ----------
Other accrued liabilities. . . . . . $ 226,617 $ 236,791
========== ==========
1997 1996 1995
--------- --------- --------
Income statement:
Depreciation . . . . . . . . . . . . . $ 43,856 $ 49,222 $45,064
Research and development . . . . . . . 16,077 12,216 12,015
Average shares outstanding (000s). . . . 75,658 80,641 81,181
McCormick & Company, Incorporated
13. Quarterly Data (Unaudited):
1997 Quarters
------------------------------------------------------
1st 2nd 3rd 4th Year
-------- -------- -------- -------- ----------
Net sales. . . . . . . . . . . . . . . . . . $407,402 $413,720 $422,870 $556,974 $1,800,966
Cost of goods sold . . . . . . . . . . . . . 270,685 279,257 284,326 338,060 1,172,328
--------- --------- --------- --------- -----------
Gross profit . . . . . . . . . . . . . . . . 136,717 134,463 138,544 218,914 628,638
Selling, general and administrative expense. 108,005 105,690 106,181 141,146 461,022
Restructuring charge (credit). . . . . . . . 259 127 (3,726) 113 (3,227)
--------- --------- --------- --------- -----------
Operating income . . . . . . . . . . . . . . 28,453 28,646 36,089 77,655 170,843
Interest expense . . . . . . . . . . . . . . 8,501 9,183 9,367 9,281 36,332
Other (income) expense -- net. . . . . . . . (1,528) (1,782) (1,090) (3,395) (7,795)
--------- --------- --------- --------- -----------
Income from consolidated continuing
operations before income taxes . . . . . . 21,480 21,245 27,812 71,769 142,306
Income taxes . . . . . . . . . . . . . . . . 7,948 7,860 10,930 25,915 52,653
--------- --------- --------- --------- -----------
Net income from consolidated continuing
operations . . . . . . . . . . . . . . . . 13,532 13,385 16,882 45,854 89,653
Income from unconsolidated operations. . . . 1,683 1,426 2,317 2,336 7,762
--------- --------- --------- --------- -----------
Net income from continuing operations. . . . 15,215 14,811 19,199 48,190 97,415
Income from discontinued operations, net of
income taxes . . . . . . . . . . . . . . . -- -- 1,013 -- 1,013
--------- --------- --------- --------- -----------
Net income . . . . . . . . . . . . . . . . . $ 15,215 $ 14,811 $ 20,212 $ 48,190 $ 98,428
========= ========= ========= ========= ===========
Earnings per share
Continuing operations. . . . . . . . . . . . $ .20 $ .20 $ .26 $ .65 $ 1.29
Discontinued operations. . . . . . . . . . . -- -- .01 -- .01
--------- --------- --------- --------- -----------
Total earnings per share . . . . . . . . . . $ .20 $ .20 $ .27 $ .65 $ 1.30
========= ========= ========= ========= ===========
Average shares outstanding (000s). . . . . . 77,239 75,761 75,117 74,397 75,658
We Flavor The World
1996 Quarters
------------------------------------------------------
1st 2nd 3rd 4th Year
-------- -------- -------- -------- ----------
Net sales . . . . . . . . . . . . . . . . . . . $395,799 $393,828 $405,451 $537,428 $1,732,506
Cost of goods sold. . . . . . . . . . . . . . . 262,507 273,333 269,115 323,077 1,128,032
--------- -------- --------- --------- -----------
Gross profit. . . . . . . . . . . . . . . . . . 133,292 120,495 136,336 214,351 604,474
Selling, general and administrative expense . . 110,828 98,563 103,184 140,513 453,088
Restructuring charge. . . . . . . . . . . . . . -- -- 57,538 557 58,095
--------- -------- --------- --------- -----------
Operating income (loss) . . . . . . . . . . . . 22,464 21,932 (24,386) 73,281 93,291
Interest expense. . . . . . . . . . . . . . . . 8,773 7,952 8,082 9,004 33,811
Other (income) expense -- net . . . . . . . . . (1,186) 818 524 (2,410) (2,254)
--------- -------- --------- --------- -----------
Income (loss) from consolidated continuing
operations before income taxes. . . . . . . . 14,877 13,162 (32,992) 66,687 61,734
Income taxes. . . . . . . . . . . . . . . . . . 5,361 4,695 (9,871) 23,686 23,871
--------- -------- --------- --------- -----------
Net income (loss) from consolidated continuing
operations. . . . . . . . . . . . . . . . . . 9,516 8,467 (23,121) 43,001 37,863
Income from unconsolidated operations . . . . . 296 929 1,557 2,830 5,612
--------- -------- --------- --------- -----------
Net income (loss) from continuing operations. . 9,812 9,396 (21,564) 45,831 43,475
Income from discontinued operations, net of
income taxes. . . . . . . . . . . . . . . . . (462) 1,599 5,112 -- 6,249
--------- -------- --------- --------- -----------
Net income (loss) before extraordinary item . . 9,350 10,995 (16,452) 45,831 49,724
Extraordinary loss from early extinguishment
of debt, net of income tax benefit. . . . . . -- -- (7,806) -- (7,806)
--------- -------- --------- --------- -----------
Net income (loss) . . . . . . . . . . . . . . . $ 9,350 $ 10,995 $(24,258) $ 45,831 $ 41,918
========= ======== ========= ========= ===========
Earnings (loss) per share
Continuing operations . . . . . . . . . . . . . $ .12 $ .12 $ (.26) $ .58 $ .54
Discontinued operations . . . . . . . . . . . . -- .02 .06 -- .08
Extraordinary loss from early extinguishment
of debt . . . . . . . . . . . . . . . . . . . -- -- (.10) -- (.10)
Total earnings (loss) per share . . . . . . . . $ .12 $ .14 $ (.30) $ .58 $ .52
--------- -------- --------- --------- -----------
Average shares outstanding (000s) . . . . . . . 81,255 81,305 80,982 79,339 80,641
========= ======== ========= ========= ===========
McCormick & Company, Incorporated
Management's Responsibility for Financial Statements
The consolidated financial statements of McCormick & Company, Incorporated and
subsidiaries have been prepared by the Company in accordance with generally
accepted accounting principles. Management has primary responsibility for the
financial information presented and has applied judgment to the information
available, made estimates and given due consideration to materiality in
preparing the financial information in this annual report.
The financial statements, in the opinion of management, present fairly the
consolidated financial position, results of operations and cash flows of the
Company and subsidiaries for the stated dates and periods in conformity with
generally accepted accounting principles. The financial statements in this
report have been audited by the Company's independent auditors, Ernst & Young
LLP. The independent auditors review and evaluate control systems and perform
such tests of the accounting information and records as they consider
necessary to reach their opinion on the Company's consolidated financial
statements. In addition, McCormick's internal audit resources perform audits
of accounting records, review accounting systems and internal controls, and
recommend improvements when appropriate.
The Audit Committee of the Board of Directors is composed of outside
directors. The committee meets periodically with the internal auditors, with
members of management and with the independent auditors in order to review
annual audit plans, financial information and the Company's internal
accounting and management controls.
The Company believes that it maintains accounting systems and related
controls, and communicates policies and procedures, which provide reasonable
assurance that the financial records are reliable, while providing appropriate
information for management of the business and maintaining accountability for
assets.
/s/ Robert G. Davey
----------------------
Robert G. Davey
President & Chief Executive Officer
/s/ Robert G. Davey
----------------------
Robert G. Davey
Executive Vice President & Chief Financial Officer
/s/ J. Allan Anderson
------------------------
J. Allan Anderson
Vice President & Controller, Chief Accounting Officer
Report of Independent Auditors
To the Shareholders
McCormick & Company, Incorporated
We have audited the accompanying consolidated balance sheets of McCormick &
Company, Incorporated and subsidiaries as of November 30, 1997 and 1996 and
the related consolidated statements of income, cash flows and shareholders'
equity for each of the three years in the period ended November 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McCormick &
Company, Incorporated and subsidiaries at November 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
- -------------------------
Ernst & Young LLP
Baltimore, Maryland
January 15, 1998
We Flavor Your World
Management's Discussion and Analysis
For 1997, the Company reported net income of $98.4 million or $1.30 per share
compared to $41.9 million or $.52 per share last year. During 1997, the
Company recorded adjustments relating to a favorable revaluation of reserves
for restructuring programs and discontinued operations and unfavorable
adjustments at its Venezuelan operation, principally related to the correction
of a prior period currency translation error. During 1996, the Company
recorded a business restructuring, completed the sale of both Gilroy Foods,
Incorporated (GFI) and Gilroy Energy Company, Inc. (GEC) and recorded a loss
on prepayment of debt associated with GEC. Excluding these transactions, net
income on a comparable basis was $98.4 million or $1.30 per share compared to
$83.1 million or $1.03 per share last year.
Net Sales (In Billions)
-----------------------
1993. . . . . . . . . . . . . $1.4
1994. . . . . . . . . . . . . $1.53
1995. . . . . . . . . . . . . $1.70
1996. . . . . . . . . . . . . $1.73
1997. . . . . . . . . . . . . $1.80
Results of Operations 1997 compared to 1996
Sales from operations increased 4.0% to $1.8 billion, principally due to a
combination of price and mix changes and unit volume increases. Sales
improvement was experienced in all operating groups except the consumer
businesses within the Americas and European Zones. While underlying sales
patterns in the grocery store have recently shown some improvement, the U.S.
consumer business experienced volume decreases, partially offset by the
combined favorable effect of price and mix changes. Our industrial and
foodservice businesses within the U.S. experienced strong sales growth, mainly
due to volume increases. Sales increases for the European Zone were the result
of volume gains and favorable currency exchange translations primarily within
the industrial and foodservice businesses. Volume and price increases
continued to fuel sales growth in the Asia/Pacific Zone. The Packaging Group
experienced increased sales, primarily due to a favorable combination of price
and mix changes.
Sales of unconsolidated operations increased 5.3% in 1997, due principally
to the sales from our Mexican joint venture and Signature Brands, which is now
operating the Cake Mate business. Foreign exchange translations, primarily
due to a weaker Japanese yen, had a negative effect on unconsolidated sales.
Operating income as a percentage of net sales, excluding restructuring,
increased to 9.3% in 1997 from 8.7% in 1996.
Gross profit as a percentage of net sales remained at the same level in 1997
as 1996. Excluding the impact of adjustments at the Company's Venezuelan
operation, gross profit as a percentage of net sales increased to 35.1% in
1997 from 34.9% in 1996. Gross margin percentages increased in 1997 in our
U.S. consumer, industrial and packaging businesses as compared to 1996. These
were partially offset by slightly reduced gross margin percentages in our
European and Asia/Pacific businesses. Gross margin improvements in the U.S.
consumer business were driven by continuing product rationalization efforts
and a change in mix to higher margin products. In the U.S. industrial and
packaging businesses, gross margins improved during 1997 due to stronger sales
of our higher margin, value-added products. Improvement in the packaging
business was also partially due to improved operating efficiencies in 1997 and
a write-off of packaging inventory for obsolete products in 1996.
Selling, general and administrative expenses were higher in 1997 than 1996
on a dollar basis, but were down slightly as a percentage of sales. The dollar
increase is mainly due to earnings-based employee compensation costs,
additional resources to support our R&D program and increased information
systems spending to allow the Company's systems to cope with the change to the
year 2000. These increases were partially offset by decreases in promotional
and advertising spending. Promotional spending is down due to the effect of
lower U.S. consumer sales on volume-based promotions combined with a shift to
promotional programs which encourage more efficient spending activities.
Advertising spending, while lower in 1997 than 1996 primarily because of
timing issues, is still higher than historical levels as the Company continues
its focus on brand recognition.
McCormick & Company, Incorporated
Interest expense increased $2.5 million in 1997 as compared to 1996,
primarily as a result of increased borrowing to fund the Company's stock
buyback program. Interest expense in 1996 excluded $11.2 million, which was
reclassified to discontinued operations on the Consolidated Income Statement.
Total interest expense decreased $8.7 million in 1997 compared to 1996. The
significant decrease in total interest is primarily due to reduced borrowing
levels as a result of the sales of GFI and GEC in 1996. See Notes to
Consolidated Financial Statements for amounts and methods of allocations used.
Other (income) expense -- net increased $5.5 million in 1997 as compared to
1996. This increase is primarily due to income from a non-compete agreement
relating to the sale of GEC, which totalled $8.0 million in 1997 versus a
total of $4.5 million in 1996.
Sales
-------------------------------------------------------
1997 1996 1995 1997 1996 1995
----------------------------- ------------------------
(in millions) (percentage increase)
Americas
Consumer . . . . . . . . . . . . $ 596.4 $ 621.5 $ 605.4 | (4.0)% 2.7% 3.0%
Industrial & foodservice . . . . 601.2 549.7 547.4 | 9.4 0.4 4.7
Europe |
Consumer . . . . . . . . . . . . 221.2 223.3 228.1 | (1.0) (2.1) 22.6
Industrial & foodservice . . . . 117.8 97.7 94.3 | 20.5 3.6 69.6
Asia/Pacific |
Consumer . . . . . . . . . . . . 43.2 36.2 29.4 | 19.6 22.9 119.0
Industrial & foodservice . . . . 41.3 34.1 31.7 | 21.3 7.3 42.5
Packaging. . . . . . . . . . . . . 179.9 170.0 154.8 | 5.8 9.8 9.2
|
Total. . . . . . . . . . . . . . $1,801.0 $1,732.5 $1,691.1 | 4.0% 2.4% 10.6%
Sales Increase Analysis
1997 1996 1995
---- ---- ----
Volume change . . . . . . . 2.6% 2.6% 4.6%
Price and mix change. . . . 1.4 4.8 3.2
Foreign currency change . . 0.4 (0.8) 0.3
Other changes(1). . . . . . (0.4) (4.2) 2.5
Total change from
continuing operations. 4.0% 2.4% 10.6%
<FN>
(1) Other changes include the disposal of businesses which are not accounted
for as discontinued operations, business acquisitions and the effect of the
1995 change in reporting period for foreign subsidiaries.
</FN>
The Company recorded income tax expense on net income from continuing
operations at an effective rate of 37.0% in 1997 as compared to a rate of
38.7% in 1996. Excluding the effects of the restructuring, the Company's
effective tax rate was approximately 35.5% for 1996. The effective tax rate
increased in 1997 due to the favorable effect in 1996 of refunds of certain
U.S. tax credits from prior years. In reclassifying the Consolidated Income
Statement for discontinued operations, income taxes were allocated to
discontinued operations. See Notes to Consolidated Financial Statements for
the amounts and methods of allocation used.
Income from unconsolidated operations improved in 1997 as compared to 1996
mainly due to improved results of our Mexican joint venture.
We Flavor The World
The raw materials most important to the Company are onion, garlic and
capsicums, which generally originate in the United States, and black pepper,
cinnamon and vanilla beans, from overseas sources. Although the price of black
pepper rose significantly in 1997 due to cyclical events in the worldwide
commodity markets, the Company did not experience a materially adverse impact
on earnings. While future movements of commodity costs are uncertain, a
variety of programs, including periodic commodity purchases and customer price
adjustments, help the Company address commodity cost fluctuations.
Results of Operations 1996 compared to 1995
Sales from continuing operations increased 2.4% to $1.7 billion. The sales
comparison is impacted by a number of non-recurring factors. First, in 1995,
the Company changed the year-end reporting period for foreign subsidiaries
from October 31 to November 30 to provide uniform reporting worldwide, which
had the effect of an additional month of sales for the foreign units in 1995.
Also in 1995, the Company sold its frozen food business in the third quarter.
Thus, seven months' sales for this divested business are included in 1995
sales. In 1996, the Cake Mate brand was transferred to a joint venture to form
Signature Brands, the sales of which are no longer accounted for in the
Company's consolidated results. These changes had the effect of reducing sales
by 4.2% versus 1995. On a comparable basis, after adjusting for these factors,
sales increased 6.6%.
Sales were up due to both volume and price increases, partially offset by
unfavorable foreign exchange translations. Consumer growth in the Americas
Zone was due to price increases and volume gains in a number of heavily
promoted product lines. Sales increases for the European Zone were masked by
the change in fiscal year mentioned above and unfavorable currency exchange
translations. Sales continue to grow strongly in the Asia/Pacific Zone as we
expand into new markets and introduce new products.
Sales of unconsolidated operations increased 10.1% in 1996 due principally
to the sales from Signature Brands, a new joint venture formed in 1996.
Foreign exchange translations, primarily due to a weaker Japanese yen and
Mexican peso, had a negative effect on unconsolidated sales.
Operating income, excluding restructuring, as a percentage of net sales
decreased from 10.0% in 1995 to 8.7% in 1996.
Gross profit as a percentage of sales increased from 34.5% in 1995 to 34.9%
in 1996. Gross margin percentages increased in 1996 in both our U.S. consumer
and industrial businesses as compared to 1995. These were partially offset by
a slightly reduced gross margin percentage in our European business and a
more significant reduction in our U.S. packaging business. In the U.S.
consumer business, gross margins improved in 1996 due to stronger sales in
our higher margin core businesses, particularly in the second half of the
year. The decreased gross margin percentage in packaging products was due to
competitive pricing pressures, a write-off of inventory for products that had
been discontinued and manufacturing inefficiencies.
Selling, general and administrative expenses were higher in 1996 than 1995
on both a dollar basis and as a percentage of sales. The increase was mainly
due to additional advertising and promotion spending as the Company continued
to market the McCormick brand name more aggressively, the adjustment of
certain employee benefit accruals in both years and increased information
systems spending to allow the Company's systems to cope with the change to the
year 2000.
Interest expense decreased $5.5 million in 1996 as compared to 1995. This
decrease was due to both declines in borrowing levels and lower borrowing
rates. In reclassifying the Consolidated Income Statement for discontinued
operations, interest expense was allocated to discontinued operations. See
Notes to Consolidated Financial Statements for the amounts and methods of
allocation used.
Other (income) expense -- net includes $4.5 million of income from the
non-compete agreement relating to the GEC sale.
McCormick & Company, Incorporated
Earnings Per Share -- Continuing Operations (after restructuring)
1993 $1.01
1994 $0.52
1995 $1.07
1996 $0.54
1997 $1.29
The Company recorded income tax expense on net income from continuing
operations at an effective rate of 38.7% in 1996 as compared to a rate of
36.1% in 1995. The increased rate was due to certain restructuring charges
which were not tax deductible and the mix of tax rates from differing tax
jurisdictions. Excluding the effects of the restructuring, the Company's
effective tax rate is approximately 35.5% for 1996. This tax rate was lower in
1996 than what can be expected in the future due to the favorable effect of
refunds of certain U.S. tax credits from prior years. In reclassifying the
Consolidated Income Statement for discontinued operations, income taxes were
allocated to discontinued operations. See Notes to Consolidated Financial
Statements for the amounts and methods of allocation used.
Deferred tax liabilities decreased significantly in 1996 primarily due to
deferred tax liabilities of GEC which was sold, causing these taxes to become
payable in 1996. The remaining deferred tax assets were primarily in the
United States. The Company has a history of having United States taxable
income and anticipates future taxable income to realize these assets.
Income from unconsolidated operations improved in 1996 as compared to 1995
mainly due to improved results of our Mexican joint venture and the results of
the Company's new joint venture, Signature Brands.
In the first quarter of fiscal 1995, the Company changed the end of the
reporting period for foreign subsidiaries from October 31 to November 30 to
provide uniform reporting on a worldwide basis. Accordingly, an additional
month of operating results for those subsidiaries was included in the first
quarter 1995 results, which increased net income by $1.4 million.
Business Restructuring
During the past several years, management has reassessed the global strategic
direction and focus of the Company. It conducted a portfolio review of its
businesses with the intent to increase focus on core businesses and improve
its cost structure. As a result of this review, the Company began
implementation of a restructuring plan and recorded a restructuring charge of
$58.1 million in 1996. This charge reduced net income by $39.6 million or
$.49 per share. In addition, there were additional charges directly related
to the restructuring plan which could not be accrued in 1996, but will be
expensed as the plan is implemented. Under the restructuring plan, the
Company closed the Brooklyn, New York packaging plant, converted from a
direct sales force to a broker sales force for certain regions in the U.S.,
exited from certain minor non-core product lines, closed its manufacturing
facility in Switzerland and moved that production to its U.K. facility, sold
the Minipack business, and sold Giza National Dehydration Company of Egypt.
In the fourth quarter of 1994, the Company recorded a charge of $70.4
million for restructuring its business operations. Except for the realignment
of some of our overseas operations, this restructuring plan is complete.
In the third quarter of 1997, the Company reevaluated its restructuring
plans. Most of the actions under these plans have been completed or are near
completion and have resulted in losses being less than originally anticipated.
In addition, an agreement in principle to dispose of an overseas food
brokerage and distribution business with 6% of consolidated net sales was not
consummated. As a result of these developments, the Company recognized a
restructuring credit of $9.5 million. Concurrent with the reevaluation of
restructuring plans, the Company initiated plans to streamline the food
brokerage and distribution business and close the Freehold, New Jersey
packaging plant. These actions resulted in a $5.7 million restructuring
charge. Charges related to these initiatives include severance and personnel
costs of $2.5 million and a $3.2 million writedown of assets to net realizable
value and will require net cash outflows of approximately $3.4 million. The
credit for the restructuring reevaluation, the charge for the new initiatives
and charges directly related to the restructuring plan which could not be
accrued in 1996 resulted in a net restructuring credit of $3.2 million ($2.0
million after tax) in 1997.
We Flavor Your World
The restructuring liability remaining at November 30, 1997 was $4.3
million for severance and personnel costs and $1.3 million for other exit
costs. In addition, approximately $1.7 million of additional charges remain to
be expensed during the implementation, primarily costs to move equipment and
personnel.
The Company expects to have all restructuring programs completed in 1998.
Discontinued Operations
On August 29, 1996, the Company sold substantially all the assets of GFI and
GEC for $263.3 million. Based on the settlement of terms related to
assumptions used to estimate the gain or loss from the disposals of GFI and
GEC, the Company recognized income from discontinued operations, net of income
taxes of $1.0 million in 1997. In 1996, a $0.3 million after tax loss was
included in the caption, "Income from discontinued operations, net of income
taxes" in the Consolidated Income Statement.
The operating results of GFI and GEC have been reclassified on the
Consolidated Income Statement to the caption, "Income from discontinued
operations, net of income taxes," for all required periods.
The sale of GEC necessitated prepayment of the 11.68% non-recourse
installment note. The prepayment resulted in an extraordinary net loss of $7.8
million in 1996.
Foreign Currency Management
The Company is subject to foreign currency translation risks at all of its
subsidiaries and affiliates located outside the United States, principally in
the United Kingdom, Canada, Australia, Mexico and China. Increases or
decreases in the value of the applicable foreign currency relative to the U.S.
dollar can increase or decrease the reported net assets of foreign
subsidiaries and reported net investments in foreign affiliates. Management
periodically enters into hedge contracts to further reduce translation
exposure. At year end, the Company did not have any hedges in place to cover
net asset exposures.
Due to the economic situation in Mexico, the Company considers Mexico
highly inflationary for accounting purposes. Beginning in 1997, all
translation gains or losses for our Mexican operations are recorded in the
income statement rather than the translation component of equity.
The Company is also exposed to foreign exchange risk for transactions that
are denominated in other than the applicable local currency. The Company
assesses its risk to foreign currency fluctuation along with other business
risks and opportunities that are caused by fluctuations in foreign currencies.
To reduce these risks, the Company may, from time to time, enter into hedging
contracts. The amount of hedge contracts outstanding and their fair market
value are summarized in the Notes to Consolidated Financial Statements.
Cash Flows From Operations In Millions
1993 $ 81
1994 $ 73
1995 $ 59
1996 $202
1997 $181
Year 2000
Recognizing the need to ensure operations will not be adversely impacted by
year 2000 software failures, the Company has developed plans to address this
possible exposure. Key financial information and operational systems are being
assessed, detailed plans have been developed and initial conversion efforts
are underway. Management believes that the necessary conversion efforts will
be completed by December 31, 1999. The Company is also communicating with
suppliers, dealers, financial institutions and others with which it does
business to coordinate year 2000 conversions. The annual financial impact of
making the required systems changes is not expected to be materially greater
than levels incurred by the Company in 1997.
Financial Condition
Strong cash flows from operating activities continued to provide the Company
with substantial financial resources to fund operating and investing
objectives and support the ongoing share repurchase program, while maintaining
a manageable debt level.
In the Consolidated Statement of Cash Flows, cash flows from operating
activities decreased from $201.7 million in 1996 to $181.2 million in 1997,
remaining significantly higher than historical levels.
This decrease is partially due to a change in working capital levels,
especially inventory. However, cash flows from operating activities in 1996
include the positive effect of a $30.6 million decrease in working capital in
the GFI and GEC businesses prior to their sale. This was due to a thorough
inventory review performed in 1996, as well as the seasonality of the GFI
business. After removing the impact of the GFI and GEC improvement in 1996,
cash flows from operating activities improved $10.1 million on a comparable
basis in 1997. In addition, favorable business trends continued to reduce
prepaid allowance levels, positively impacting operating cash flows.
Capital Expenditures In Millions
Capital Expenditures Depreciation
1993 $76 $47
1994 $88 $57
1995 $82 $56
1996 $75 $58
1997 $44 $44
Investing activities used cash of $46.7 million in 1997 versus cash
generation of $187.9 million in 1996. The significant change is principally
due to cash proceeds received on the sale of GFI and GEC in 1996. Capital
expenditures continue to trend lower as the Company focuses its efforts on
projects where returns exceed the associated cost of capital, consistent with
the Company's commitment to creating shareholder value. The Company was able
to maintain capital expenditures at the same level as depreciation in 1997.
Proceeds from sale of assets in 1997 include the sale of Giza National
Dehydration and the proceeds received from the dissolution of the McCormick &
Wild joint venture. Our only acquisition in 1997 was the purchase of a line of
dry seasoning mixes in Canada which are marketed under the French's brand
name.
Debt to Capital
1993 48%
1994 55%
1995 56%
1996 47%
1997 50%
Cash flows from financing activities were a significant use of funds in 1996
and 1997. Proceeds from the sale of GFI and GEC were used to reduce both
short-term and long-term debt in 1996. In addition, the Company began a
repurchase program in 1996 to buy back up to 10 million shares of the
Company's outstanding stock from time to time in the open market. To date, 7.0
million shares have been repurchased under this program, of which 4.5 million
were repurchased in 1997.
The Company's ratio of debt to total capital was 50.3% as of November 30,
1997, up slightly from 47.1% at November 30, 1996. The Company was able to
maintain this manageable debt level while continuing to fund its stock
repurchase program.
Management believes that internally generated funds and its existing sources
of liquidity are sufficient to meet current and anticipated financing
requirements over the next 12 months.
Over the last 10 years, dividends have increased 14 times and have risen at
a compounded annual rate of 17% since 1987. Total dividends paid during fiscal
1997 were $45.5 million versus $45.3 million in 1996 and $42.2 million in
1995.
We Flavor The World
The quarterly dividends paid during the past three years are summarized
below:
1997 1996 1995
First Quarter. $ .15 $ .14 $ .13
Second Quarter .15 .14 .13
Third Quarter. .15 .14 .13
Fourth Quarter .15 .14 .13
Total. . . . . $ .60 $ .56 $ .52
In December 1997, the Board of Directors approved a 7% increase in the
quarterly dividend from $.15 to $.16 per share. The high and low closing
prices of common stock during fiscal quarters as reported on the NASDAQ
national market follow:
1997 1996
--------------- --------------
Quarter ended High Low High Low
- ---------------------------------- ------- ------ ----- ------
February 28........................ $25.38 $22.63 $24.25 $21.25
May 31............................. 26.88 22.81 23.13 21.88
August 31.......................... 26.88 23.31 22.38 19.25
November 30........................ 27.06 23.50 25.00 20.75
Forward-Looking Information
Certain statements contained in this report, including those related to
commodity price fluctuations, cost recovery program results, expected year
2000 and restructuring expenditure levels and the market risks associated with
financial instruments, are "forward-looking statements" within the meaning of
Section 21E of the Securities and Exchange Act of 1934. Because
forward-looking statements are based on management's current views and
assumptions, and involve risks and uncertainties that could significantly
affect expected results, operating results could be materially affected by
external factors such as: actions of competitors, customer relationships,
fluctuations in the cost and availability of supply chain resources and
foreign economic conditions, including currency rate fluctuations and
inflation rates.
McCormick Stock Price Performance Table
TRADE HISTORY - MONTHLY
Nasdaq Online-TM-
Sources: Nasdaq, IDC
MCCRK - McCORMICK & COMPANY INC - COMMON STOCK
START DATE: 11/1/94 END DATE: 11/1/97
Total Total Block Block Non-Block Non-Block
High Low Close Trades Volume Trades Volume Trades Volume
Summary 27.375 17.750 26.500 107,842 224,948,693 4,754 103,955,285 103,088 110,844,446
Average -- -- -- 3,081 6,079,694 136 2,970,151 2,945 3,182,943
11/94 20.000 17.750 19.000 -- 3,512,455 -- -- -- --
12/94 19.250 18.031 18.250 -- 6,077,954 -- -- -- --
1/95 21.875 18.125 21.875 3,942 7,051,304 192 2,959,574 3,750 4,091,730
2/95 22.750 21.125 22.125 4,362 8,142,350 201 3,599,887 4,161 4,542,463
3/95 23.375 21.875 22.625 3,302 6,854,893 199 3,339,413 3,103 3,515,480
4/95 23.125 21.750 22.000 2,322 5,258,647 123 2,598,910 2,199 2,659,737
5/95 22.625 20.125 21.000 3,580 13,036,040 287 8,731,751 3,293 4,304,289
6/95 22.250 20.250 21.500 2,772 5,325,825 118 2,418,179 2,654 2,907,646
7/95 23.250 21.375 22.500 2,455 4,278,876 88 1,694,705 2,367 2,584,171
8/95 23.500 21.500 22.125 2,678 4,882,361 95 2,248,075 2,583 2,634,286
9/95 24.250 21.375 23.875 2,846 4,502,254 72 1,393,721 2,774 3,108,533
10/95 26.625 23.125 24.750 4,063 7,377,280 157 2,897,903 3,906 4,479,377
11/95 26.000 22.625 23.625 3,058 6,006,397 135 2,571,130 2,923 3,435,267
12/95 24.500 22.875 24.125 2,545 5,326,179 114 2,512,682 2,431 2,813,497
1/96 24.500 20.375 22.875 3,484 7,459,806 171 3,492,483 3,313 3,967,323
2/96 23.750 21.750 22.875 3,447 8,876,180 201 5,300,713 3,246 3,575,467
3/96 23.375 21.875 22.000 3,066 6,329,236 154 3,115,581 2,912 3,213,655
4/96 24.625 22.000 22.250 2,375 5,145,074 129 2,846,308 2,246 2,298,766
5/96 23.000 21.750 22.750 2,985 6,943,196 132 3,855,695 2,853 3,087,501
6/96 22.750 21.500 22.125 3,115 5,008,734 108 1,986,890 3,007 3,021,844
7/96 22.375 19.875 19.875 2,691 3,838,137 68 1,225,900 2,623 2,612,237
8/96 20.750 18.875 20.500 3,557 9,258,756 179 5,602,800 3,378 3,655,956
9/96 24.250 20.250 23.375 3,869 7,469,007 179 3,595,384 3,690 3,873,623
10/96 24.625 23.375 24.125 2,726 4,698,291 94 2,065,895 2,632 2,632,396
11/96 25.375 22.500 24.625 2,882 6,236,970 121 3,277,532 2,761 2,959,438
12/96 25.125 22.625 23.563 2,882 5,278,459 89 2,208,235 2,793 3,070,224
1/97 25.125 23.500 24.750 2,945 5,471,173 115 2,606,600 2,830 2,433,415
Copyright 1997 The Nasdaq Stock Market, Inc. All rights reserved. 2
12/17/97 2:07:43 PM
TRADE HISTORY - MONTHLY
Nasdaq Online-TM-
Sources: Nasdaq, IDC
MCCRK - McCORMICK & COMPANY INC - COMMON STOCK
START DATE: 11/1/94 END DATE: 11/1/97
Total Total Block Block Non-Block Non-Block
High Low Close Trades Volume Trades Volume Trades Volume
Summary 27.375 17.750 26.500 107,842 224,948,693 4,754 103,955,285 103,088 110,844,446
Average -- -- -- 3,081 6,079,694 136 2,970,151 2,945 3,182,943
2/97 25.375 23.250 23.625 2,340 4,653,773 113 2,519,350 2,227 2,062,494
3/97 25.250 22.625 24.500 2,964 5,210,684 118 2,163,260 2,846 3,047,424
4/97 24.625 23.250 23.625 2,109 4,105,302 106 2,000,401 2,003 2,049,435
5/97 26.875 23.625 26.125 3,418 5,516,126 127 2,497,352 3,291 3,018,774
6/97 27.000 24.625 25.250 3,422 7,804,402 180 4,133,229 3,242 3,671,173
7/97 26.250 24.250 26.000 3,002 4,562,200 93 1,609,550 2,909 2,952,650
8/97 26.500 23.250 23.625 2,783 4,635,782 107 1,940,115 2,676 2,695,667
9/97 25.000 23.500 24.063 3,209 8,730,541 188 5,284,972 3,021 3,445,569
10/97 25.750 22.750 25.000 3,775 5,083,916 88 1,266,150 3,687 3,817,766
11/97 27.375 24.500 26.500 2,871 5,000,133 113 2,394,960 2,758 2,605,173
Copyright 1997 The Nasdaq Stock Market, Inc. All rights reserved. 3
12/17/97 2:07:43 PM
Dividends Paid Per Share
1993 $.44
1994 $.48
1995 $.52
1996 $.56
1997 $.60
McCormick & Company, Incorporated
Directors and Officers
[photo of Board of Directors]
Board of Directors
Executive Committee
Charles P. McCormick, Jr.
Robert J. Lawless
Robert G. Davey
Carroll D. Nordhoff
Dr. James J. Albrecht*
James S. Cook+D
Former Executive in Residence
College of Business Administration
Northeastern University
Dr. Freeman A. Hrabowski, III+
President
University of Maryland Baltimore County
George V. McGowanD
Chairman of the Executive Committee
Baltimore Gas and Electric Company
Robert W. Schroeder
Vice President & General Manager
McCormick/Schilling Division
William E. Stevens+D
Executive Vice President
Mills & Partners
Karen D. Weatherholtz
Corporate Officers
Charles P. McCormick, Jr.
Chairman of the Board
Robert J. Lawless
President & Chief Executive Officer
Susan L. Abbott
Vice President - Regulatory & Environmental Affairs
J. Allan Anderson
Vice President & Controller
Allen M. Barrett, Jr.
Vice President - Corporate Communications
Robert G. Davey
Executive Vice President & Chief Financial Officer
Dr. Hamed Faridi
Vice President - Research & Development
Randall B. Jensen
Vice President - Operations Resources
Christopher J. Kurtzman
Vice President & Treasurer
Roger T. Lawrence
Vice President - Quality Assurance
C. Robert Miller, II
Vice President - Management Information Systems
Carroll D. Nordhoff
Executive Vice President
Robert C. Singer
Vice President - Acquisitions & Financial Planning
Robert W. Skelton
Vice President, General Counsel & Secretary
Karen D. Weatherholtz
Vice President - Human Relations
W. Geoffrey Carpenter
Assistant Secretary & Associate General Counsel
David P. Smith
Assistant Treasurer
Gordon M. Stetz, Jr.
Assistant Treasurer - Financial Services
+Audit Committee Member
D Compensation Committee Member
*Retired January 1, 1998
We Flavor Your World
McCormick Worldwide
U.S.A.
Consolidated Operating Units
Food Service Group
Hunt Valley, Maryland
F. Christopher Cruger
Vice President & General Manager
McCormick Flavor Division
Hunt Valley, Maryland
Howard W. Kympton, III
Vice President & General Manager
McCormick Ingredients
Hunt Valley, Maryland
McCormick/Schilling Division
Hunt Valley, Maryland
Robert W. Schroeder
Vice President & General Manager
Setco, Inc.
Anaheim, California
Donald E. Parodi
President
Tubed Products, Inc.
Easthampton, Massachusetts
Alan D. Wilson
President
Affiliates
Signature Brands, L.L.C. (50%)
Ocala, Florida
SupHerb Farms (50%)
Turlock, California
Outside U.S.A.
Consolidated Operating Units
Global Food Ingredients Europe
Haddenham, England
Timothy J. Casey
Managing Director
McCormick Canada, Inc.
London, Ontario, Canada
Paul C. Beard
President
McCormick de Centro America, S.A. de C.V.
San Salvador, El Salvador
Arduino Bianchi
Managing Director
McCormick de Venezuela, C.A.
Caracas, Venezuela
Alberto Diaz
Managing Director
McCormick Foods Australia Pty. Ltd.
Clayton, Victoria, Australia
Bruce S. Galanter
Managing Director
McCormick (Guangzhou) Food Company, Ltd.
Guangzhou, China
Victor K. Sy
Managing Director
McCormick Ingredients Southeast Asia Private Limited
Jurong, Republic of Singapore
Hector Veloso
Managing Director
McCormick Pesa, S.A. de C.V.
Mexico City, Mexico
Robert E. Horn
President
McCormick S.A.
Regensdorf Z.H., Switzerland
Ernest Abouchar
Managing Director
McCormick U.K. plc
Haddenham, England
John C. Molan
Managing Director
McCormick Foodservice
Limited
Haddenham, England
Neville Beal
Managing Director
McCormick Glentham (Pty) Limited
Midrand, South Africa
John C. Eales
Managing Director
Oy McCormick Ab
Helsinki, Finland
John C. Molan
Chairman
Shanghai McCormick Foods Company, Limited (90%)
Shanghai, People's Republic of China
Victor K. Sy
President
Affiliates
AVT-McCormick Ingredients Limited (50%)
Cochin, India
McCormick de Mexico,
S.A. de C.V. (50%)
Mexico City, Mexico
McCormick Kutas Food Service Ltd. (50%)
Haddenham, England
McCormick-Lion Limited (49%)
Tokyo, Japan
McCormick Philippines, Inc. (50%)
Manila, Philippines
P.T. Kimballmas Sejati (50%)
Jakarta, Indonesia
P.T. McCormick Indonesia (50%)
Jakarta, Indonesia
P.T. Sumatera Tropical Spices (30%)
Padang, Sumatera, Indonesia
Stange (Japan) K.K. (50%)
Tokyo, Japan
Vaessen Schoemaker de Mexico, S.A. de C.V. (50%)
Mexico City, Mexico
McCormick & Company, Incorporated
Investor Information
Corporate Address and Telephone Number
McCormick & Company, Incorporated
18 Loveton Circle
Sparks, MD 21152-6000
U.S.A.
(410) 771-7301
Stock Information
Traded Over-the-Counter,
NASDAQ National Market List
Symbol: MCCRK
Stock Dividend Dates - 1998
---------------------------
Record Date Payment Date
----------- -------------
3/31/98 4/13/98
7/2/98 7/14/98
10/1/98 10/13/98
12/31/98 1/22/99
There were more than 12,000 shareholders of record, 4,100 holders in
McCormick's 401(K) plan for employees and an estimated more than 25,000
"street-name" beneficial holders whose shares are held in names other than
their own, for example, in brokerage accounts.
Investor Services
For inquiries concerning shareholder records, stock certificates, dividends or
dividend reinvestment, please contact Investor Services at the Corporate
address or telephone:
(800) 424-5855 or
(410) 771-7537
To obtain without cost a copy of the annual report filed with the
Securities & Exchange Commission (SEC) on Form 10-K, contact the Treasurer's
Office at the Corporate address or contact the SEC web site:
http://www.sec.gov
For general questions about McCormick or information in the annual or
quarterly reports, contact the Treasurer's Office at the Corporate address or
telephone:
Report Ordering: (800) 424-5855 or
(410) 771-7537
Analysts' Inquiries: (410) 771-7244
Another source of McCormick information is located on the Internet. Our
web site is: http://www.mccormick.com
Missing or Destroyed Certificates or Checks
Shareholders whose certificates or dividend checks are missing or destroyed
should notify Investor Services immediately so that a "stop" can be placed on
the old certificate or check, and a new certificate or check can be issued.
Address Change
Shareholders should advise Investor Services immediately of any change in
address. Please include the old address and the new address. All changes of
address must be submitted in writing.
Transfer Agent and Registrar
Contact Investor Services at the Corporate address or telephone:
(800) 424-5855 or
(410) 771-7786
Multiple Dividend Checks and Duplicate Mailings
Some shareholders hold their stock in different but similar names (for
example, as John Q. Doe and J. Q. Doe). When this occurs, it is necessary to
create a separate account for each name. Even though the mailing addresses are
the same, we are required to mail separate dividend checks and annual and
quarterly reports for each account.
We encourage shareholders to eliminate multiple dividend checks and
mailings by contacting Investor Services and requesting an account
consolidation.
Shareholders who want to eliminate duplicate mailings but still receive
multiple dividend checks and proxy material may do so by contacting Investor
Services.
Dividend Reinvestment Plan
Shareholders may automatically reinvest their dividends and make optional cash
purchases of stock through the Company's Dividend Reinvestment Plan, subject
to limitations set forth in the Plan prospectus. A Plan prospectus and
enrollment form may be obtained by contacting Investor Services at:
(800) 424-5855 or
(410) 771-7537
Trademarks
Use of -Registered Trademark- or -TM- in this annual report indicates
trademarks owned or used by McCormick & Company, Incorporated and its
subsidiaries and affiliates.
This Report is printed on recycled paper.
[McCormick/Schilling product coupons valued at $3.00 and $1.50]
[World illustration from page 6, screened to produce subtle graphic]