UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended August 31, 2007

Commission File Number 001-14920

McCORMICK & COMPANY, INCORPORATED

(Exact name of registrant as specified in its charter)

MARYLAND

 

52-0408290

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

18 Loveton Circle, P. O. Box 6000, Sparks, MD

 

21152-6000

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (410) 771-7301

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.   Yes x      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x      Accelerated Filer o      Non-Accelerated Filer    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
o      No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Shares Outstanding

 

 

 

August 31, 2007

 

Common Stock

 

12,989,543

 

Common Stock Non-Voting

 

114,757,416

 

 

 




 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

 

3

 

 

 

 

 

 

 

 

 

ITEM 1

 

FINANCIAL STATEMENTS

 

3

 

 

 

 

 

 

 

 

 

ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

18

 

 

 

 

 

 

 

 

 

ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

35

 

 

 

 

 

 

 

 

 

ITEM 4

 

CONTROLS AND PROCEDURES

 

35

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

36

 

 

 

 

 

 

 

 

 

ITEM 1

 

LEGAL PROCEEDINGS

 

36

 

 

 

 

 

 

 

 

 

ITEM 1A

 

RISK FACTORS

 

36

 

 

 

 

 

 

 

 

 

ITEM 2

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

36

 

 

 

 

 

 

 

 

 

ITEM 6

 

EXHIBITS

 

38

 

2




PART I — FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(in thousands except per share amounts)

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

716,227

 

$

663,095

 

$

2,056,081

 

$

1,912,702

 

Cost of goods sold

 

431,898

 

393,818

 

1,235,600

 

1,153,775

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

284,329

 

269,277

 

820,481

 

758,927

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

192,596

 

187,576

 

581,687

 

556,552

 

Restructuring charges

 

2,845

 

17,535

 

16,648

 

59,218

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

88,888

 

64,166

 

222,146

 

143,157

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

15,805

 

14,048

 

44,890

 

39,234

 

Other income, net

 

(2,411

)

(2,078

)

(6,482

)

(5,000

)

 

 

 

 

 

 

 

 

 

 

Income from consolidated operations before income taxes

 

75,494

 

52,196

 

183,738

 

108,923

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

23,200

 

13,647

 

55,944

 

30,739

 

 

 

 

 

 

 

 

 

 

 

Income from consolidated operations

 

52,294

 

38,549

 

127,794

 

78,184

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of unconsolidated operations

 

34

 

253

 

(811

)

26,781

 

Income from unconsolidated operations

 

4,596

 

4,398

 

16,192

 

16,442

 

Minority interest

 

(76

)

(132

)

(673

)

(2,307

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

56,848

 

$

43,068

 

$

142,502

 

$

119,100

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — basic

 

$

0.44

 

$

0.33

 

$

1.10

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding — basic

 

129,096

 

131,587

 

129,799

 

132,119

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — diluted

 

$

0.43

 

$

0.32

 

$

1.07

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding — diluted

 

132,405

 

134,829

 

133,326

 

135,197

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.20

 

$

0.18

 

$

0.60

 

$

0.54

 

 

See notes to condensed consolidated financial statements (unaudited).

3




McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)

 

 

August 31,
2007

 

August 31,
2006

 

November 30,
2006

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,724

 

$

37,712

 

$

49,043

 

Receivables, net

 

399,859

 

327,822

 

379,063

 

Inventories

 

 

 

 

 

 

 

Raw materials and supplies

 

180,574

 

185,235

 

172,196

 

Finished products and work-in-process

 

259,285

 

231,860

 

233,531

 

 

 

439,859

 

417,095

 

405,727

 

Prepaid expenses and other current assets

 

58,151

 

47,134

 

65,626

 

Total current assets

 

943,593

 

829,763

 

899,459

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

1,000,266

 

952,071

 

965,824

 

Less: accumulated depreciation

 

(530,752

)

(494,818

)

(496,360

)

Total property, plant and equipment, net

 

469,514

 

457,253

 

469,464

 

 

 

 

 

 

 

 

 

Goodwill, net

 

835,743

 

785,403

 

803,823

 

Intangible assets, net

 

204,365

 

192,226

 

193,570

 

Prepaid allowances

 

46,682

 

43,069

 

45,494

 

Investments and other assets

 

173,448

 

153,004

 

156,152

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,673,345

 

$

2,460,718

 

$

2,567,962

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Short-term borrowings

 

$

304,325

 

$

152,294

 

$

80,835

 

Current portion of long-term debt

 

151,361

 

549

 

573

 

Trade accounts payable

 

209,333

 

188,509

 

224,361

 

Other accrued liabilities

 

338,940

 

348,322

 

474,770

 

Total current liabilities

 

1,003,959

 

689,674

 

780,539

 

 

 

 

 

 

 

 

 

Long-term debt

 

417,972

 

566,140

 

569,591

 

Other long-term liabilities

 

272,851

 

285,134

 

281,001

 

Total liabilities

 

1,694,782

 

1,540,948

 

1,631,131

 

 

 

 

 

 

 

 

 

Minority interest

 

9,233

 

3,267

 

3,555

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock

 

197,106

 

171,266

 

177,898

 

Common stock non-voting

 

292,300

 

260,362

 

266,385

 

Retained earnings

 

298,787

 

378,893

 

348,681

 

Accumulated other comprehensive income

 

181,137

 

105,982

 

140,312

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

969,330

 

916,503

 

933,276

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

2,673,345

 

$

2,460,718

 

$

2,567,962

 

 

See notes to condensed consolidated financial statements (unaudited).

4




 

McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
(in thousands)

 

 

Nine months ended

 

 

 

August 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

142,502

 

$

119,100

 

Adjustments to reconcile net income to net cash flow from operating activities:

 

 

 

 

 

Depreciation and amortization

 

61,389

 

61,282

 

Stock-based compensation

 

17,489

 

20,500

 

Loss/(gain) on sale of unconsolidated operations

 

811

 

(26,781

)

Income from unconsolidated operations

 

(16,192

)

(16,442

)

Changes in operating assets and liabilities

 

(192,713

)

(46,789

)

Dividends from unconsolidated affiliates

 

9,674

 

9,100

 

Net cash flow from operating activities

 

22,960

 

119,970

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of business

 

(15,943

)

(102,616

)

Capital expenditures

 

(50,632

)

(51,750

)

Proceeds from redemption of unconsolidated operations

 

 

9,236

 

Proceeds from sale of property, plant and equipment

 

111

 

379

 

Net cash flow used in investing activities

 

(66,464

)

(144,751

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Short-term borrowings, net

 

223,642

 

46,907

 

Long-term debt borrowings

 

 

298,553

 

Long-term debt repayments

 

(344

)

(197,553

)

Proceeds from exercised stock options

 

34,118

 

34,070

 

Common stock acquired by purchase

 

(146,828

)

(87,952

)

Dividends paid

 

(78,095

)

(71,420

)

Net cash flow from financing activities

 

32,493

 

22,605

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

7,692

 

9,625

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(3,319

)

7,449

 

Cash and cash equivalents at beginning of period

 

49,043

 

30,263

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

45,724

 

$

37,712

 

 

See notes to condensed consolidated financial statements (unaudited).

5




 

McCORMICK & COMPANY, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.                             ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods.

The results of consolidated operations for the three and nine month periods ended August 31, 2007 are not necessarily indicative of the results to be expected for the full year. Historically, our consolidated sales and net income are lower in the first half of the fiscal year and increase in the second half. The increase in sales and earnings in the second half of the year is mainly due to the U.S. consumer business cycle, where customers typically purchase more products in the fourth quarter due to the holiday season.

For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2006.

Accounting and Disclosure Changes

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement will require us to (a) record a liability on our balance sheet for our pension plans’ underfunded status (b) record any changes in the funded status of our pension and postretirement plans in the year in which the changes occur (reported in comprehensive income) and (c) measure our pension and postretirement assets and liabilities at November 30 versus our current measurement date of September 30. The requirements to record the funded status and certain disclosure requirements are effective for our year ending November 30, 2007 and will be reflected in our year-end report. The requirement to change the measurement date is effective for our year ending November 30, 2009. Since our plans are currently in an underfunded status, we expect to record a liability of approximately $50 million, net of deferred taxes, with a corresponding decrease to shareholders’ equity upon adoption.

6




 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value and provides guidance for measuring fair value and the necessary disclosures.  This statement does not require any new fair value measurements but rather applies to all other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 will be effective for our first quarter ending February 29, 2008. We do not expect any material impact from initial adoption of this new accounting pronouncement on our financial statements.

In June 2006, the FASB issued Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes when it is uncertain how an income or expense item should be treated on an income tax return. FIN 48 describes when an uncertain tax item should be recorded in the financial statements and for how much, provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. FIN 48 is effective for our first quarter ending February 29, 2008. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.

Reclassifications

Certain amounts in the prior year have been reclassified to conform to the current year presentation. In the August 31, 2006 consolidated balance sheet, the net book value of in-store displays of $18.3 million has been reclassified from property, plant and equipment to other assets to conform to the current year presentation. In 2006, $5.2 million of expenditures for in-store displays were reclassified from investing activities to operating activities in the cash flow statement to conform to the current year presentation. The effect of these reclassifications is not material to the condensed consolidated financial statements.

2.                             ACQUISITIONS

Acquisitions of new brands are part of our strategy to improve margins and increase sales and profits.

On July 30, 2007, we purchased Thai Kitchen SA (Thai Kitchen), a business which operates in Europe and is included in our consumer segment from the date of acquisition. Thai Kitchen is an import export brand-owning enterprise and its acquisition complements our U.S. purchase of Simply Asia Foods in 2006. This acquisition of Thai Kitchen provides us with global ownership of the Thai Kitchen® brand. This business markets and sells Thai products, including curry pastes, kits, cooking sauces, snacks, coconut milk, soups and rice and noodle items. The annual sales are approximately $7.0 million. The total purchase price was $12.8 million in cash. The total purchase price has been allocated based on preliminary estimates, subject to revision after

7




 

appraisals have been finalized. Revisions to the allocation, which may be significant, will be reported as changes to various assets and liabilities, including goodwill and other intangible assets. We expect the final valuation to result in a value for brands and other intangible assets, a portion of which will be amortizable and a portion of which will be non-amortizable. Based on preliminary estimates, we have included amortization expense in the income statement.

On January 31, 2007, we purchased the assets of Fish Crisp Enterprises, Inc. (Fish Crisp), a business which operates in North America and has been included in our consumer segment from the date of acquisition. Fish Crisp markets and sells seafood products under the Rocky Madsen’s Fish Crisp Original® and Gourmet Grill® brands and has annual sales of approximately $2.0 million. The total purchase price for Fish Crisp was $3.1 million in cash.

On June 27, 2006, we purchased the assets of the Simply Asia Foods business for $97.6 million in cash.  This business operates in North America and has been included in our consumer segment since the date of acquisition. Simply Asia Foods develops, imports and markets a line of authentic, easy-to-prepare Asian products under the Thai Kitchen® and Simply Asia® brands. Its primary products include noodle and soup bowls, meal kits, coconut milk, and various sauces and pastes.

During the quarter ending August 31, 2007, we completed the final valuation of assets for Simply Asia Foods which resulted in $4.8 million being allocated to tangible net assets, $28.2 million allocated to other intangibles assets and $64.6 million allocated to goodwill. The value for brands and other intangible assets consists of $12.1 million which is amortizable and $16.1 million which is non-amortizable. The applicable amortization expense is included in the income statement.

On August 1, 2006, we invested $5.0 million in an industrial joint venture in South Africa.

3.                             STOCK-BASED COMPENSATION

The following table sets forth the stock-based compensation recorded in selling, general and administrative (SG&A) expense (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

4,050

 

$

4,431

 

$

17,302

 

$

18,111

 

 

The amount recorded for the nine months ended August 31, 2007 and 2006 includes $4.9 million and $5.1 million, respectively, for expenses associated with grants to individuals who were eligible

8




 

for retirement on or before the grant date. Additionally, we recorded $0.2 million and $2.4 million of stock-based compensation expense as part of our restructuring charges for the nine months ended August 31, 2007 and 2006, respectively. In the three months ended August 31, 2006, we recorded $1.3 million of stock-based compensation expense as part of our restructuring charges. These expenses were for the acceleration of vesting in accordance with the provisions of the awards for employees who were terminated pursuant to the restructuring plan and, therefore, are part of our severance charges (see Note 4).

The fair value of grants in the stated periods were computed using the following range of assumptions for our various stock compensation plans for the nine months ended August 31:

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Risk-free interest rates

 

4.5-5.1%

 

4.5-4.7%

 

Dividend yield

 

2.0-2.1%

 

2.0%

 

Expected volatility

 

13.4-24.9%

 

18.2-25.6%

 

Expected lives

 

1.9-5.3

 

5.4

 

 

The following is a summary of all option activity for the nine months ended August 31:

 

 

 

2007

 

2006

 

 

 

Number of
Shares

 

Weighted-Average
Exercise Price

 

Number of
Shares

 

Weighted-Average
Exercise Price

 

 

 

(shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

15,771

 

$

25.31

 

17,466

 

$

24.58

 

Granted

 

752

 

38.20

 

555

 

32.96

 

Exercised

 

(1,671

)

22.40

 

(1,434

)

19.91

 

Forfeited

 

(194

)

34.93

 

(200

)

34.19

 

Outstanding at August 31

 

14,658

 

26.17

 

16,387

 

25.15

 

 

 

 

 

 

 

 

 

 

 

Exercisable at August 31

 

11,968

 

$

24.07

 

11,833

 

$

22.42

 

 

The following is a summary of all of our restricted stock units (RSU) activity for the nine months ended August 31:

 

 

 

2007

 

2006

 

 

 

Number of
Shares

 

Weighted-Average
Grant-Date
Fair Value

 

Number of
Shares

 

Weighted-Average
Grant-Date
Fair Value

 

 

 

(shares in thousands)

 

Outstanding at beginning of year

 

280

 

$

32.88

 

 

 

Granted

 

257

 

38.28

 

290

 

$

32.88

 

Vested

 

(155

)

33.03

 

(2

)

32.83

 

Forfeited

 

(5

)

34.64

 

(5

)

32.83

 

Outstanding at August 31

 

377

 

$

36.47

 

283

 

$

32.88

 

 

No options or RSU’s were granted in the third quarters of 2007 or 2006. For the nine months ended August 31, 2007 and 2006, the weighted-average grant-date fair value of an option granted was $6.83 and $7.47, respectively. As of August 31, 2007 the

 

9




 

intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $148.8 million and the intrinsic value for all options exercisable was $144.0 million. The total intrinsic value of all options exercised was as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Total intrinsic value for all options exercised

 

$

9.2

 

$

5.4

 

$

25.7

 

$

19.9

 

 

4.                             RESTRUCTURING ACTIVITIES

In November of 2005, the Board of Directors approved a restructuring plan to consolidate our global manufacturing, rationalize our distribution facilities, improve our go-to-market strategy, eliminate administrative redundancies and rationalize our joint venture partnerships. We estimate total pre-tax charges of $110-$130 million for this program, inclusive of the $34 million pre-tax gain on the redemption of our Signature Brands, L.L.C. joint venture (see discussion below) recorded in 2006. The segment breakdown of the total charges is expected to be approximately 65% related to the consumer segment and approximately 35% related to the industrial segment. Of these charges, we expect approximately $85-$95 million will consist of severance and other personnel costs and approximately $50-$55 million for other exit costs. Asset write-offs are expected to be approximately $10-$15 million, exclusive of the $34 million pre-tax gain on the redemption of our Signature Brands, L.L.C. joint venture. We expect the cash related portion of the charges will be approximately $95-$105 million, of which approximately $45 million is expected to be spent in 2007. The actions being taken are expected to reduce our global workforce by approximately 1,200 over the three-year period.

Joint venture transactions—Previously, we participated in two separate joint ventures with the same joint venture partner, Hero A.G. We owned 50% of Signature Brands, L.L.C. (“Signature”) and 51% of Dessert Products International, S.A.S. (“DPI”) with Hero A.G. being the other owner of each of these businesses. Signature is a cake decorating business in the U.S. and DPI markets the Vahine brand of dessert aids in France and other European countries.

In the second quarter of 2006, we exchanged our 50% ownership investment in Signature for the 49% share of DPI owned by Hero A.G. In addition, we received $20.0 million in cash with this transaction. There was a purchase price adjustment which was settled in the third quarter of 2006 whereby we paid $10.8 million in cash to Hero A.G.

In recording this transaction, we valued both the investment received and the investment

 

10




 

given at their fair value. On the disposition of our Signature investment, the fair value of our investment was $56.0 million as compared to our book value of this unconsolidated subsidiary of $21.7 million.  After consideration of disposition costs of $0.6 million and taxes of $7.2 million, we recorded a net after-tax gain of $26.5 million which is shown on the line entitled “Gain on sale of unconsolidated operations” in our income statement. On the acquisition of the 49% minority interest of DPI, the fair value of these shares was assessed at $46.9 million. Since this business was consolidated, the book value of this 49% share was shown as $29.9 million of minority interest on our balance sheet.  After consideration of disposition costs of $0.7 million, we allocated $17.7 million to goodwill.

Also in the nine months ended August 31, 2007, in connection with unconsolidated joint venture transactions initially recorded in the prior year, we recorded a net loss of $0.8 million, after tax. This loss is shown on the line entitled “Gain (loss) on sale of unconsolidated operations” in our income statement.

Other Restructuring Costs—During the three months ended August 31, 2007, we recorded restructuring charges of $4.2 million ($3.0 million after-tax), of which $2.8 million is reflected in restructuring charges and $1.4 million is reflected in cost of goods sold in our income statement. We recorded $1.6 million of severance costs, primarily associated with the reduction of administrative personnel in Europe and the U.S. In addition, we recorded $3.9 million of other exit costs related to the consolidation of production facilities in Europe and closure of our manufacturing facility in Salinas, California. Partially offsetting these costs is a $1.3 million net asset related gain. This gain is composed of a gain from the sale of our manufacturing facility in Paisley, Scotland, mostly offset by write-downs of assets which are primarily the accelerated depreciation of assets related to the closure of the manufacturing facility in Salinas, California. Of the expected global workforce reduction of approximately 1,200 employees, approximately 975 employees have left the Company as of August 31, 2007.

During the nine months ended August 31, 2007, we recorded restructuring charges of $19.3 million ($13.3 million after-tax), of which $16.6 million is reflected in restructuring charges and $2.7 million is reflected in cost of goods sold in our income statement. We recorded $6.8 million of severance costs, primarily associated with the reduction of administrative personnel in the U.S. and Europe. In addition, we recorded $11.9 million of other exit costs related to closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland and to the consolidation of production facilities in Europe. The remaining $0.6 million is comprised of asset write-downs for inventory write-offs related to the closure of the manufacturing facilities in Salinas, California and Hunt Valley, Maryland and accelerated depreciation of assets, mostly offset by the asset related gain from the sale of our manufacturing facility in Paisley, Scotland.

11




From inception of the project in November 2005, we have incurred $80.3 million of restructuring charges, including the $33.7 million gain recorded on the redemption of our Signature investment in 2006.

During the three months ended August 31, 2006, we recorded restructuring charges of $19.3 million ($13.5 million after-tax), of which $17.5 million was reflected in restructuring charges and $1.8 million was reflected in cost of goods sold in our income statement. We recorded $12.5 million of severance costs, primarily associated with the closure of an industrial plant in Scotland, additional costs of our voluntary separation program in the U.S. and the reduction of both administrative and plant personnel at other global locations.  In addition, we recorded $1.1 million of other exit costs related to these same programs.  The $5.7 million of asset write-downs was primarily related to the closure of the plant in Scotland and accelerated depreciation related to the closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland.

During the nine months ended August 31, 2006, we recorded restructuring charges, exclusive of the gain on Signature, of $65.6 million ($44.0 million after-tax), of which $59.2 million was reflected in restructuring charges and $6.4 million was reflected in cost of goods sold in our income statement.  We recorded $48.6 million of severance costs and special early retirement benefits associated with our voluntary separation program in several functions in the U.S.; closures of manufacturing facilities in Salinas, California, Hunt Valley, Maryland, Sydney, Australia, Paisley, Scotland and Kerava, Finland; and the reduction of both administrative and plant personnel at other global locations. In addition, we recorded $6.6 million of other exit costs associated with the consolidation of production facilities, the reorganization of the sales and distribution networks in the U.S. and Europe and contract termination costs associated with customers and distributors in connection with the closure of the business in Finland. The $10.4 million of asset write-downs was primarily accelerated depreciation related to the closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland and the closure of the plant in Scotland.

The business segment components of the restructuring charges recorded in 2007 and 2006 are as follows (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$

4,210

 

$

11,419

 

$

13,769

 

$

41,454

 

Industrial

 

 

7,839

 

5,493

 

24,190

 

Total restructuring charges

 

$

4,210

 

$

19,258

 

$

19,262

 

$

65,644

 


Consumer: The restructuring charges in 2007 include severance

 

12




costs associated with the reduction of administrative personnel in the U.S. and Europe, other exit and inventory write-off costs related to the closure of the manufacturing facility in Salinas, California and accelerated depreciation of assets. The restructuring charges in 2006 include severance costs associated with our voluntary separation program in the U.S. and closure of manufacturing facilities and reorganization of administration in Europe, other exit costs related to the consolidation of production facilities and costs associated with the reorganization of the sales and distribution networks in the U.S. and Europe.

Industrial: The restructuring charges in 2007 include severance costs associated with the reduction of administrative personnel in the U.S. and Europe, other exit costs related to closure of a manufacturing facility in Hunt Valley, Maryland and consolidation of production facilities in Europe, offset by the asset related gain on the sale of our manufacturing facility in Paisley, Scotland. The restructuring charges recorded in 2006 include severance costs associated with our voluntary separation program and closure of manufacturing facilities and other exit costs associated with the consolidation of production facilities and accelerated depreciation related to the closure of manufacturing facilities.

During the three months ended August 31, 2007 and 2006, we spent $3.6 million and $22.3 million, respectively, in cash on the restructuring plan. During the nine months ended August 31, 2007 and 2006, we spent $33.6 million and $14.5 million, respectively, in cash on the restructuring plan. From inception of the project in November 2005, $74.6 million in cash has been spent on the restructuring plan, including the $9.2 million net cash received on redemption of our Signature investment in 2006.

The major components of the restructuring charges and the remaining accrual balance related to the restructuring plan are as follows (in thousands):

 

 

 

Severance
and personnel
costs

 

Asset
related
(gain) charges

 

Other
exit costs

 

Total

 

Third Quarter 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2007

 

$

5,542

 

$

 

$

652

 

$

6,194

 

Restructuring charges (gain)

 

1,569

 

(1,288

)

3,929

 

4,210

 

Amounts utilized

 

(4,148

)

1,288

 

(3,862

)

(6,722

)

Balance at Aug 31, 2007

 

$

2,963

 

$

 

$

719

 

$

3,682

 

 

 

 

 

 

 

 

 

 

 

Nine months ended August 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Nov 30, 2006

 

$

20,348

 

$

 

$

3,091

 

$

23,439

 

Restructuring charges

 

6,741

 

629

 

11,892

 

19,262

 

Amounts utilized

 

(24,126

)

(629

)

(14,264

)

(39,019

)

Balance at Aug 31, 2007

 

$

2,963

 

$

 

$

719

 

$

3,682

 

 

 

 

 

 

 

 

 

 

 

Third Quarter 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2006

 

$

33,988

 

$

 

$

3,082

 

$

37,070

 

Restructuring charges

 

12,457

 

5,672

 

1,129

 

19,258

 

Amounts utilized

 

(11,910

)

(5,672

)

(966

)

(18,548

)

Balance at Aug 31, 2006

 

$

34,535

 

$

 

$

3,245

 

$

37,780

 

 

 

 

 

 

 

 

 

 

 

Nine months ended August 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Nov 30, 2005

 

$

8,023

 

$

 

$

649

 

$

8,672

 

Restructuring charges

 

48,623

 

10,374

 

6,647

 

65,644

 

Amounts utilized

 

(22,111

)

(10,374

)

(4,051

)

(36,536

)

Balance at Aug 31, 2006

 

$

34,535

 

$

 

$

3,245

 

$

37,780

 

 

 

 

 

 

 

 

 

 

 

 

13




5.                             EARNINGS PER SHARE AND COMMON STOCK TRANSACTIONS

The following table sets forth the reconciliation of average shares outstanding (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding—basic

 

129,096

 

131,587

 

129,799

 

132,119

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options, restricted stock units and employee stock purchase plan

 

3,309

 

3,242

 

3,527

 

3,078

 

Average shares outstanding—diluted

 

132,405

 

134,829

 

133,326

 

135,197

 

 

The following table sets forth the common stock activity for the three and nine months ended August 31, 2007 and 2006 under our stock option and employee stock purchase plans and the repurchases of common stock under our stock repurchase program (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock option and employee stock purchase plans

 

360

 

367

 

1,545

 

1,426

 

Shares repurchased in connection with the stock repurchase program

 

2,452

 

796

 

3,972

 

2,589

 

 

14




 

6.                             COMPREHENSIVE INCOME

The following table sets forth the components of comprehensive income (in thousands):

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

56,848

 

$

43,068

 

$

142,502

 

$

119,100

 

Other comprehensive income (loss), (net of tax):

 

 

 

 

 

 

 

 

 

Minimum pension liabilityadjustment

 

(597

)

(603

)

(1,247

)

(2,960

)

Foreign currency translation adjustments

 

14,833

 

626

 

43,188

 

79,338

 

Derivative financial instruments

 

(1,398

)

115

 

(1,115

)

2,039

 

Comprehensive income

 

$

69,686

 

$

43,206

 

$

183,328

 

$

197,517

 

 

7.                             PENSION AND POSTRETIREMENT BENEFITS

The following table presents the components of our pension expense of the defined benefit plans for the three months ended August 31 (in thousands):

 

 

 

United States

 

International

 

 

 

2007

 

2006

 

2007

 

2006

 

Defined benefit plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,943

 

$

3,300

 

$

1,677

 

$

1,566

 

Interest costs

 

6,132

 

5,530

 

2,677

 

2,257

 

Expected return on plan assets

 

(6,182

)

(5,637

)

(2,479

)

(1,925

)

Amortization of prior service costs

 

21

 

24

 

31

 

25

 

Amortization of transition assets

 

 

 

 

(1

)

Recognized net actuarial loss

 

2,500

 

2,630

 

793

 

733

 

Total pension expense

 

$

5,414

 

$

5,847

 

$

2,699

 

$

2,655

 

 

The following table presents the components of our pension expense of the defined benefit plans for the nine months ended August 31 (in thousands):

 

 

 

United States

 

International

 

 

 

2007

 

2006

 

2007

 

2006

 

Defined benefit plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

8,829

 

$

9,899

 

$

4,964

 

$

4,547

 

Interest costs

 

18,396

 

16,591

 

7,826

 

6,548

 

Expected return on plan assets

 

(18,546

)

(16,911

)

(7,248

)

(5,593

)

Amortization of prior service costs

 

63

 

71

 

79

 

73

 

Amortization of transition assets

 

 

 

 

(3

)

Recognized net actuarial loss

 

7,500

 

7,890

 

2,330

 

2,122

 

Total pension expense

 

$

16,242

 

$

17,540

 

$

7,951

 

$

7,694

 

 

On December 29, 2006, we made a $22 million contribution to our major U.S. pension plan. Contributions to international plans are generally funded throughout the year. Total contributions to our pension plans in 2007 are expected to be approximately $45 million. Through the end of the third quarter of 2007, we have made $41 million in total contributions to our pension plans.

The following table presents the components of our other postretirement benefits expense (in thousands):

15




 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Other postretirement benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

879

 

$

905

 

$

2,637

 

$

2,713

 

Interest costs

 

1,432

 

1,408

 

4,298

 

4,224

 

Amortization of prior service costs

 

(284

)

(284

)

(851

)

(851

)

Amortization of (gains)/losses

 

207

 

253

 

620

 

759

 

Total other postretirement expense

 

$

2,234

 

$

2,282

 

$

6,704

 

$

6,845

 

 

8.                             INCOME TAXES

Income taxes for the third quarter of 2007 include $0.6 million of discrete tax expense adjustments related to the reduction of the UK deferred tax asset, mostly offset by other discrete U.S. tax adjustments. Tax legislation was enacted in July 2007 for the United Kingdom that reduced the corporate income tax rate. In accordance with SFAS No. 109, the net deferred tax asset was revalued to the enacted tax rate. For the nine months ended August 31, 2007, income taxes include $1.3 million of discrete tax benefits primarily the result of new tax legislation enacted in The Netherlands in December 2006 that reduced the corporate income tax rate, partially offset by the UK tax rate change and other U.S. tax adjustments.

Income taxes for the third quarter of 2006 included $3.5 million of tax benefit related to the resolution of an international tax audit. The tax rate for nine months ended August 31, 2006 included the same favorable tax resolution plus $0.6 million of additional tax benefits related to the closure of a manufacturing facility in Finland.

9.                             FINANCIAL INSTRUMENTS

In August 2007, we entered into $150 million of forward treasury lock agreements to manage the interest rate risk associated with the anticipated issuance of fixed rate medium-term notes expected to be issued in December 2007. We intend to cash settle these agreements upon issuance of the medium-term notes thereby effectively locking in the fixed interest rate in effect at the time the agreements were initiated. The locked weighted average fixed rate of these agreements is 4.72%. We have designated these outstanding forward treasury lock agreements, which expire on December 17, 2007, as cash flow hedges. The proceeds upon issuance of the medium-term notes will be used to pay down long-term debt maturing in the first quarter of 2008. The gain or loss on these agreements is deferred in other comprehensive income and will be amortized over the ten-year life of the medium-term notes as a component of interest expense. Hedge ineffectiveness of these agreements was not material in the quarter.

In July 2007, we entered into a $500 million five-year revolving credit agreement with various domestic banks for general business purposes. Our current pricing under the new credit agreement, on a fully drawn basis, is LIBOR plus 0.25%. The agreement, which replaces a previously existing $400 million revolving credit agreement, expires in July 2012.

16




In July 2006, we issued $100 million of 5.80% medium-term notes due 2011. Net interest is payable semiannually in arrears in January and July of each year. The net proceeds from this offering were used to pay down the commercial paper debt placed in June 2006 for the acquisition of Simply Asia Foods.

In December 2005, we issued $200 million of 5.20% medium-term notes due 2015. Interest is payable semiannually in arrears in June and December of each year. The net proceeds of this offering were used to pay down long-term debt which matured in 2006.

10.                       BUSINESS SEGMENTS

We operate in two business segments: consumer and industrial.  The consumer and industrial segments manufacture, market and distribute spices, herbs, seasoning blends and other flavors throughout the world. Our consumer segment sells to retail outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores under the McCormick® brand and a variety of brands, including Zatarain’s®, Simply Asia® and Thai Kitchen® in the U.S., Ducros®, Vahine®, Silvo® and Thai Kitchen® in continental Europe, Schwartz® in the U.K and Club House® in Canada. Our industrial segment sells to other food manufacturers and the food service industry both directly and indirectly through distributors.

In each of our segments, we produce and sell many individual products which are similar in composition and nature. It is impractical to segregate and identify sales and profits for each of these individual product lines.

We measure segment performance based on operating income excluding restructuring charges from our restructuring programs as these programs are managed separately from the business segment.  Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies.  We do not segregate jointly utilized assets by individual segment for internal reporting, evaluating performance or allocating capital. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.

 

Consumer

 

Industrial

 

Total

 

 

 

(in thousands)

 

Three months ended August 31, 2007

 

 

 

 

 

 

 

Net sales

 

$

387,423

 

$

328,804

 

$

716,227

 

Restructuring charges

 

4,210

 

 

4,210

 

Operating income excluding restructuring charges

 

70,513

 

22,585

 

93,098

 

Income from unconsolidated operations

 

3,889

 

707

 

4,596

 

 

 

 

 

 

 

 

 

Three months ended August 31, 2006

 

 

 

 

 

 

 

Net sales

 

$

357,059

 

$

306,036

 

$

663,095

 

Restructuring charges

 

11,419

 

7,839

 

19,258

 

Operating income excluding restructuring charges

 

60,679

 

22,745

 

83,424

 

Income from unconsolidated operations

 

3,260

 

1,138

 

4,398

 

 

17




 

 

Consumer

 

Industrial

 

Total

 

 

 

(in thousands)

 

Nine months ended August 31, 2007

 

 

 

 

 

 

 

Net sales

 

$

1,134,704

 

$

921,377

 

$

2,056,081

 

Restructuring charges

 

13,769

 

5,493

 

19,262

 

Operating income excluding restructuring charges

 

183,843

 

57,565

 

241,408

 

Income from unconsolidated operations

 

13,136

 

3,056

 

16,192

 

 

 

 

 

 

 

 

 

Nine months ended August 31, 2006

 

 

 

 

 

 

 

Net sales

 

$

1,051,877

 

$

860,825

 

$

1,912,702

 

Restructuring charges

 

41,454

 

24,190

 

65,644

 

Operating income excluding restructuring charges

 

155,692

 

53,109

 

208,801

 

Income from unconsolidated operations

 

13,557

 

2,885

 

16,442

 

 

The following table is a reconciliation of operating income excluding restructuring charges to operating income (in thousands):

 

 

Three months
ended Aug 31,
2007

 

Three months
ended Aug 31,
2006

 

 

 

 

 

 

 

Operating income excluding restructuring charges

 

$

93,098

 

$

83,424

 

Less: Restructuring charges

 

4,210

 

19,258

 

Operating income

 

$

88,888

 

$

64,166

 

 

 

Nine months
ended Aug 31,
2007

 

Nine months
ended Aug 31,
2006

 

Operating income excluding restructuring charges

 

$

241,408

 

$

208,801

 

Less: Restructuring charges

 

19,262

 

65,644

 

Operating income

 

$

222,146

 

$

143,157

 

 

ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our Business

We are a global leader in the manufacture, marketing and distribution of spices, herbs, seasonings and other flavors to the entire food industry. Our major sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in Mexico, Central America, Australia, China, Singapore, Thailand and South Africa.

We operate in two business segments, consumer and industrial. Consistent with market conditions in each segment, our consumer

18




business has a higher overall profit margin than our industrial business. Across both segments, we have the customer base and product breadth to participate in all types of eating occasions, whether it is cooking at home, dining out, purchasing a quick service meal or enjoying a snack.

Our Financial Objectives

With good visibility into our business prospects and operating environment, growth objectives are used as internal goals and to provide a financial outlook for our shareholders. Annual objectives were set to grow sales 3-5% and earnings per share on a comparable basis (excluding the impact of restructuring charges) 8-10% through 2008. At the end of the second quarter, we improved our outlook for 2007 earnings per share growth to 9-11% on a comparable basis (excluding the impact of restructuring charges).

Our Strategy

Our strategy is to improve margins, invest in our business and increase sales and profits. We believe this strategy is as effective now as it was when we developed it in 1998.

Due to cost savings from restructuring projects, the elimination of lower margin business, acquisitions of high-margin brands and the introduction of higher-margin, more value-added products, our gross profit margin continues to improve. Our goal is to improve gross profit margin by at least 0.5% a year for the next five years. In the first half of 2007, we incurred some costs related to maintaining customer service levels during several facility consolidations. Beginning in the second quarter and continuing into the third quarter of 2007, we began to see the effects of higher commodity costs offsetting these savings in our industrial business. Material cost increases have also affected the consumer business, however to a much lesser extent and have been mostly offset by other cost efficiencies. We are striving to recoup some of these higher material costs with our industrial customers through pricing actions. However, we expect to see continued pressure on our gross profit margin for the remainder of fiscal year 2007 and will not achieve our goal of 0.5% gross profit margin improvement this year.

We are investing in our consumer business by revitalizing our McCormick brand spices and seasonings in the United States. New labels and new flip-top caps—along with new store shelving displays that make shopping easier for the consumer and restocking easier for retailers—continues to be rolled out and is expected to be completed in 2008. We also continue to introduce new products, placing particular emphasis on ethnic food items and the growing organic spices market. Increased promotion and marketing continues to be an important part of this investment strategy, including alternative media such as on-line advertising and new areas on our website where consumers can share recipes and view instructional videos for preparing foods.

 

19




To grow sales and profits, we have undertaken a restructuring program to improve our global supply chain. The plan, which was announced in 2005 and will extend through 2008, is intended to reduce our complexity and create an organization more focused on growth opportunities. Our goal is to reduce annual costs by $50 million by 2008.

We have made significant progress in transforming our U.S. industrial business. We are simplifying and focusing our resources on growing our business with large customers who have the greatest potential to add profitable sales.

Across all of our businesses, we are focused on monitoring and leading the latest trends through innovation. Convenience, freshness, wellness and ethnic flavors drive consumer demand and are a part of our new product development and acquisition strategy.

RESULTS OF OPERATIONS—COMPANY

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

Net sales

 

$

716,227

 

$

663,095

 

$

2,056,081

 

$

1,912,702

 

Percent growth

 

8.0

%

 

 

7.5

%

 

 

Gross profit

 

$

284,329

 

$

269,277

 

$

820,481

 

$

758,927

 

Gross profit margin

 

39.7

%

40.6

%

39.9

%

39.7

%

 

The sales increase of 8.0% for the third quarter includes 2.5% for the favorable impact of foreign currency. The remaining 5.5% increase results from higher volume, pricing actions and favorable product mix. A portion of the third quarter volume increase is due to an estimated $9-11 million of earlier shipments in the U.S. consumer business for the fall season. By encouraging customers to buy early, we were able to achieve operational efficiency by moving some production out of the peak fourth quarter. Third quarter sales also reflect the impact of actions to eliminate low margin business, which lowered sales approximately 1%.  For the nine months ended August 31, 2007, the sales increase of 7.5% versus the same period last year includes 2.6% for the favorable impact of foreign currency. The remaining 4.9% increase was due to higher volumes (including the Simply Asia impact of 1.2%), pricing actions and favorable product mix. Nine month sales also reflect the impact of actions to eliminate low margin business, which lowered sales approximately 1%.

A decrease of 0.9% in gross profit margin for the third quarter was primarily due to the impact of higher material costs on the industrial business. The impact of these higher costs on margin more than offset the benefit of savings from our restructuring program that are being realized in 2007.  While we continue to

20




take pricing actions to offset increased material costs, gross profit margin will continue to be under pressure through the remainder of fiscal year 2007 as commodity costs are expected to remain at a high level through the fourth quarter. Also, in a period of rising costs, our price increases to industrial customers maintain gross profit dollars, but result in a lower gross profit margin. Material cost increases have also affected the consumer business, however to a much lesser extent and have been mostly offset by other cost efficiencies. Gross profit margin for the nine months ended August 31, 2007 was 39.9% compared to 39.7% for the same period last year. Restructuring charges in the first nine months of 2007 were less than the same period in 2006 and accounted for 0.2% of the increase in gross profit margin year over year. During the first nine months of 2006 there was little margin benefit from the actions of our restructuring program. By the fourth quarter of 2006, however, we began to experience benefits from our restructuring actions. The effect of material cost increases noted for the third quarter also affected the results for the nine months.

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

Selling, general & administrative expense (SG&A)

 

$

192,596

 

$

187,576

 

$

581,687

 

$

556,552

 

Percent of net sales

 

26.9

%

28.3

%

28.3

%

29.1

%

 

The primary reason for the decrease in SG&A as a percentage of net sales in the third quarter is the benefit from reductions in operating expenses as part of our $30 million cost savings goal for 2007 as outlined in our restructuring plan, as well as lower incentive compensation expense. We recorded lower incentive compensation expense in the third quarter of 2007 compared to the third quarter of 2006 in which we increased our year-to-date accrual in line with our improved operating results last year. For the nine months ended August 31, 2007, SG&A as a percentage of net sales decreased to 28.3% from 29.1% for these same reasons.

Interest expense increased in the third quarter of 2007 and for the nine months ended August 31, 2007 by $1.8 million and $5.7 million, respectively, compared to the same periods last year. On a three and nine month basis, both average short-term borrowings and short-term borrowing rates were up in 2007 when compared to 2006. However, these effects were partially offset by the refinancing of higher interest rate long-term debt in 2006, which has reduced the average interest rate on our total debt when the first nine months of 2007 are compared to the first nine months of 2006.

The effective tax rate for the third quarter of 2007 was 30.7% compared to a 26.1% rate for the third quarter of 2006. The effective tax rate for the nine months ended August 31, 2007 was 30.4% compared to a 28.2% rate for the same period last year. The

21




tax rate for the first nine months of 2006 included $4.1 million of discrete tax benefits related to the resolution of an international tax audit and the closure of a manufacturing facility in Finland. The effective tax rate for the first nine months of 2007 includes $1.3 million of discrete tax benefits due to new tax legislation in The Netherlands that reduced the corporate income tax rate, offset by a UK tax rate change that reduced the UK deferred tax asset (see Note 8). Excluding the effect of these discrete tax benefits, the effective tax rate for fiscal year 2007 is estimated to be 31.1%. A tax rate of 31.1% is below our previous estimate of 32.0%, and is a result of changes in our income across the various tax jurisdictions in which we operate.

Income from unconsolidated operations and minority interest, combined, for the third quarter of 2007 increased by $0.3 million to $4.5 million when compared to the same period in 2006. This improvement was driven primarily by the termination of an unprofitable unconsolidated joint venture in Asia in the fourth quarter of 2006. For the nine months ended August 31, 2007, income from unconsolidated operations and minority interest, combined, increased by $1.4 million to $15.5 million compared to the same period in 2006 for the same reason.

Diluted earnings per share for the third quarter of 2007 were $0.43 compared to $0.32 for the third quarter of 2006, an increase of $0.11. Charges related to our restructuring program reduced earnings per share $0.02 in the third quarter of 2007 and $0.10 in the third quarter of 2006. Excluding the impact of these restructuring charges, diluted earnings per share was up $0.03 for the third quarter of 2007. We estimate that the earlier timing of sales for our U.S. consumer business added approximately $0.02.  Other sales increases and improved operating income margin added another $0.03. We had unfavorable effects from a higher tax rate versus 2006 of $0.02 and from higher interest expense of $0.01 while lower average shares outstanding increased diluted earnings per share $0.01. For the nine months ended August 31, 2007, diluted earnings per share increased by $0.19 to $1.07 compared to the same period in 2006. Excluding the impact of restructuring charges and credits in both years, diluted earnings per share increased by $0.16 for the nine months ended August 31, 2007 compared to the same period last year due to higher sales and improved gross profit margin. Higher interest expense reduced diluted earnings per share by $0.03, which was offset by the favorable impacts of lower average shares outstanding and the combined higher income from unconsolidated operations and minority interest.

RESULTS OF OPERATIONS—SEGMENTS

We measure segment performance based on operating income excluding restructuring charges from our restructuring programs as these programs are managed separately from our business segments.

22




 

CONSUMER BUSINESS

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

387,423

 

$

357,059

 

$

1,134,704

 

$

1,051,877

 

Percent growth

 

8.5

%

 

 

7.9

%

 

 

Operating income excluding restructuring charges

 

70,513

 

60,679

 

183,843

 

155,692

 

Operating income margin, excluding restructuring charges

 

18.2

%

17.0

%

16.2

%

14.8

%

 

Sales for the consumer business rose 8.5% in the third quarter of 2007 as compared to the third quarter of 2006, with an impact of 2.4% from favorable foreign currency rates. The remaining increase of 6.1% was primarily driven by higher volume.

Sales in the Americas were up 7.9% this quarter as compared to the same period last year, with foreign exchange rates adding 0.5%. Sales were affected significantly by an estimated $9 to $11 million of earlier sales for the fall season in the U.S. By encouraging certain customers to buy early, we were able to achieve operational efficiency by moving some production out of the peak fourth quarter. We also expect to benefit from early store placement for promoted items.  This move added 3.5-4.5% to third quarter sales in the Americas. While this action will lower fourth quarter sales, the percent reduction is expected to be closer to 3% as this is our peak sales period for the consumer business in the Americas. In the third quarter, areas of particular strength included Hispanic, seafood complements, Zatarain’s, and gourmet products in the U.S. and Club House brand products in Canada. For the second consecutive quarter, we were unfavorably impacted by the expansion into private label line by one of our warehouse club customers.  While we are a supplier for some of this private label, a number of our branded products are no longer carried by this customer.  This reduced sales in the region by approximately 1%. Offsetting this decrease was the incremental impact of Simply Asia Foods in the month of June.

Third quarter 2007 sales in Europe increased 9.7% from the third quarter of 2006, of which 6.2% was due to favorable foreign exchange rates. With improved and incremental marketing support, we grew sales volume of our Ducros branded products in France. Sales of our Schwartz brand in the U.K. had the benefit of product introductions, marketing support and higher pricing. In both of these key markets, we are continuing to make progress with improved merchandising for our retail customers.

In the Asia/Pacific region, sales for the third quarter of 2007 increased 10.6% as compared to the same period of 2006, with favorable foreign exchange rates adding 9.3%. Sales in China

23




continued at a strong growth rate, increasing at a double-digit rate in the third quarter. Expanded distribution and marketing support behind our core spice and seasoning products drove sales along with increases in a number of wet products.  Sales growth in China was offset in part by lower sales of our branded spices and herb line in Australia. This was due to the move by a large retailer earlier in 2007 to introduce a private label line of spices and herbs.  Our emphasis in Australia remains on value added items and we are achieving growth with product lines such as Aeroplane brand gelatin.

For the nine months ended August 31, 2007, sales from McCormick’s consumer business increased 7.9% compared to the same period last year. Higher volume, price and product mix added 5.1%, while favorable foreign exchange rates increased sales by 2.8%.

Third quarter 2007 operating income excluding restructuring charges for our consumer business increased $9.8 million, or 16.2%, compared to the same period of 2006. This increase was due to the benefit of higher sales, lower incentive compensation expense and the impact of cost savings resulting from actions related to our restructuring program.

In the third quarter of 2007, $4.2 million of restructuring charges were recorded in the consumer business, compared to $11.4 million in the third quarter of 2006. The charges in the third quarter of 2007 include severance costs associated with the reduction of administrative personnel in Europe and the U.S., other exit costs related to the consolidation of production facilities in Europe and the closure of the manufacturing facility in Salinas, California and accelerated depreciation of assets. The restructuring charges in the third quarter of 2006 included costs of our voluntary separation program in the U.S., the reduction of both administrative and plant personnel at other global locations and additional costs for accelerated depreciation related to the closure of the Salinas California manufacturing facility.

For the nine months ended August 31, 2007, operating income excluding restructuring charges for the consumer business increased 18.1% compared to the same period of 2006. Operating income margin excluding restructure charges for the nine months ended August 31, 2007 increased to 16.2% compared to 14.8% in the comparable period last year. These increases were mostly the result of higher sales, improved gross profit margins and the impact of cost savings resulting from actions related to our restructuring program.

During the nine months ended August 31, 2007, $13.8 million of restructuring charges were recorded in the consumer business, compared to $41.5 million for the same period of 2006. The charges in 2007 include severance costs associated with the reduction of administrative personnel in the U.S. and Europe, other exit and inventory write-off costs related to the closure of the manufacturing facility in Salinas, California and accelerated

24




depreciation of assets and to the consolidation of production facilities in Europe. The restructuring charges in 2006 included severance costs associated with our voluntary separation program in the U.S. and closure of manufacturing facilities and reorganization of administration in Europe, other exit costs associated with the consolidation of production facilities and costs associated with the reorganization of the sales and distribution networks in the U.S. and Europe.

INDUSTRIAL BUSINESS

 

 

 

Three months ended

 

Nine months ended

 

 

 

August 31,

 

August 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

328,804

 

$

306,036

 

$

921,377

 

$

860,825

 

Percent growth

 

7.4

%

 

 

7.0

%

 

 

Operating income excluding restructuring charges

 

22,585

 

22,745

 

57,565

 

53,109

 

Operating income margin, excluding restructuring charges

 

6.9

%

7.4

%

6.2

%

6.2

%

 

The third quarter sales increase of 7.4% from the third quarter of 2006 includes a favorable foreign exchange rate impact of 2.6%. An increase of 7.2% was driven equally by volume and by price and product mix. A reduction in certain low margin business reduced sales by 2.4%.

In the Americas, industrial sales increased 2.9% in the third quarter of 2007 compared to the same period in 2006. Excluding the impact of foreign exchange rates, sales were up 2.2%. In this region, customer and product rationalization reduced sales approximately 2.6%. A remaining sales increase of 4.8% was mainly due to price increases taken to keep pace with increases in material costs including pepper, soy oil and flour.  Higher volume this quarter was achieved with increased sales of snack seasonings, new beverage flavors and other new items to large food manufacturers. This part of our business is performing in line with our targets for 2007.  However, we have continued to experience reduced sales for the restaurant side of our business which is being affected by the general weakness in the food service industry.

In Europe, industrial sales increased 16.1% in the third quarter of 2007 compared to the same period of 2006, which included a favorable foreign exchange rate impact of 7.3%. In this region, the elimination of lower margin customers and products reduced sales 2.5%. The remaining increase of 11.3% was volume-related due to strong promotional and new product sales to quick service restaurants. Sales of Schwartz and Ducro branded products to the food service channel also rose this quarter. About one third of the increase was incremental sales of condiments from a

25




consolidated joint venture in South Africa, which was added in the fourth quarter of 2006.  Some moderation of our industrial sales growth in Europe is expected in the fourth quarter.

In the Asia/Pacific region, industrial sales increased 27.3% in the third quarter of 2007 compared to the third quarter of 2006, which included a favorable foreign exchange rate impact of 8.5%. We increased sales in both Australia and China, especially with quick service restaurant customers. These customers have awarded the supply of new items to us and we are benefiting from their promotions in these markets.

For the nine months ended August 31, 2007, total industrial sales increased 7.0% compared to the same period last year, with 4.7% from favorable pricing, product mix and volumes and 2.3% from favorable foreign exchange rates.

In the third quarter of 2007, industrial business operating income excluding restructuring charges decreased $0.2 million, or 0.7%, compared to the third quarter of 2006. Our 7.4% sales increase, lower incentive compensation expense and the benefit of cost savings were offset by higher material costs during this quarter. While we continue to take price increases to offset higher material costs, industrial operating income will continue to be under pressure through the fourth quarter. While our pricing policy will allow us to pass-through some higher material costs to industrial customers, in a period of rising costs, these actions maintain gross profit dollars but result in a lower gross profit margin percentage.

In the third quarter of 2007, no restructuring charges were recorded in the industrial business, compared to $7.8 million in the third quarter of 2006. In the third quarter of 2007, the asset related gain from the sale of our manufacturing facility in Paisley, Scotland offset charges for severance costs associated with the reduction of administrative personnel in Europe and the U.S. and other exit costs related to the consolidation of production facilities in Europe. The restructuring charges recorded in the third quarter of 2006 included costs of the closure of a plant in Scotland, our voluntary separation program in the U.S. and the reduction of both administrative and plant personnel at other global locations.

For the nine months ended August 31, 2007, operating income excluding restructuring charges for the industrial business increased 8.4% compared to the same period of 2006. Gains in operating income in the first half of the year were partially offset by the third quarter performance. This trend is expected to continue in the fourth quarter. Operating income margin excluding restructure charges for the nine months ended August 31, 2007 remained unchanged at 6.2% compared to the comparable period last year.

26




During the nine months ended August 31, 2007, $5.5 million of restructuring charges were recorded in the industrial business, compared to $24.2 million for the same period of 2006. The charges in 2007 include severance costs associated with the reduction of administrative personnel in the U.S. and Europe, other exit costs related to closure of a manufacturing facility in Hunt Valley, Maryland and consolidation of production facilities in Europe. These charges were partially offset by the asset related gain from the sale of our manufacturing facility in Paisley, Scotland. The restructuring charges recorded in 2006 included severance costs associated with our voluntary separation program and closure of manufacturing facilities and other exit costs associated with the consolidation of production facilities and accelerated depreciation related to the closure of manufacturing facilities.

RESTRUCTURING CHARGES

As part of our plan to improve margins, we announced in September 2005 significant actions to improve the effectiveness of our supply chain and reduce costs. At that time, we also stated that a comprehensive review of our global industrial business was underway to identify improvements. These actions were included in the comprehensive restructuring plan which the Board of Directors approved in November 2005. As part of this plan, over a three-year period, we are consolidating our global manufacturing, rationalizing our distribution facilities, improving our go-to-market strategy, eliminating administrative redundancies and rationalizing our joint venture partnerships. In addition, for the industrial business, we are reallocating resources to key customers and taking pricing actions on lower volume products to meet new margin targets. A new business-wide forecasting process is being installed and the use of technology is being accelerated to monitor and manage the business. Through 2008, these actions are intended to reduce the number of industrial business customers and products in the U.S. Sales related to these customers and products represent approximately 2-5% of industrial business sales in the U.S. As these sales have minimal profit, this reduction is expected to increase margins. These reductions are also leading to the consolidation of certain manufacturing facilities.

We expect that the restructuring plan will reduce complexity and increase the organizational focus on growth opportunities in both the consumer and industrial businesses. In addition, we are projecting at least $50 million ($34 million after-tax) of annual cost savings by 2008. In 2006, we realized $10 million ($7 million after-tax) of annual cost savings and expect to realize another $30 million ($20 million after-tax) in 2007. We expect that this will improve margins and increase earnings per share, as well as allow us to invest a portion of these savings in sales growth drivers such as brand advertising. These savings are expected to be reflected in both cost of goods sold and selling, general and administrative expense in the income statement.

27




Total pre-tax charges under this restructuring plan are estimated to be $110-$130 million, inclusive of the $34 million pre-tax gain on the redemption of our Signature Brands, L.L.C. joint venture (Signature) recorded in 2006. The total pre-tax restructuring charges are expected to be approximately 65% related to the consumer segment and approximately 35% related to the industrial segment. Of these charges, we expect that approximately $85-$95 million will consist of severance and other personnel costs and approximately $50-$55 million of other exit costs. Asset write-offs are expected to be approximately $10-$15 million, exclusive of the $34 million pre-tax gain on Signature recorded in 2006. In the fourth quarter of 2005, $10.7 million ($7.2 million after tax) of charges were recorded. Following the $10.7 million charge recorded in 2005, we recorded $50.4 million ($30.3 million after tax) during the 2006 fiscal year, including the offset of the gain on our Signature investment. In the three and nine months ended August 31, 2007, we recorded $4.2 million ($3.0 million after tax) and $19.3 million ($13.3 million after tax), respectively, of restructuring charges. We expect to incur a total of $36 million in charges in 2007, with the remainder in 2008. For the total plan, the cash related portion of the charges will be approximately $95-$105 million, of which approximately $45 million is expected to be spent in 2007. We intend to fund this spending through internally generated funds. A significant portion of the cash expenditures will be related to employee severance. The actions being taken pursuant to the restructuring plan are expected to reduce our global workforce by approximately 1,200 over the three-year period. Of the expected global workforce reduction, approximately 975 employees have left the Company as of August 31, 2007.

Joint venture transactions—Previously, we participated in two separate joint ventures with the same joint venture partner, Hero A.G. We owned 50% of Signature Brands, L.L.C. (“Signature”) and 51% of Dessert Products International, S.A.S. (“DPI”) with Hero A.G. being the other owner of each of these businesses. Signature is a cake decorating business in the U.S. and DPI markets the Vahine brand of dessert aids in France and other European countries.

In the second quarter of 2006, we exchanged our 50% ownership investment in Signature for the 49% share of DPI owned by Hero A.G. In addition, we received $20.0 million in cash with this transaction. There was a purchase price adjustment which was settled in the third quarter of 2006 whereby we paid $10.8 million in cash to Hero A.G. The purchase price adjustment was considered in the calculation of the gain on Signature and the purchase price allocation of DPI.

In recording this transaction, we valued both the investment received and the investment given at their fair value. On the disposition of our Signature investment, the fair value of our investment was $56.0 million as compared to our book value of this

28




unconsolidated subsidiary of $21.7 million.  After consideration of disposition costs of $0.6 million and taxes of $7.2 million, we recorded a net after-tax gain of $26.5 million which is shown on the line entitled “Gain on sale of unconsolidated operations” in our income statement. On the acquisition of the 49% minority interest of DPI, the fair value of these shares was assessed at $46.9 million. Since this business was consolidated, the book value of this 49% share was shown as $29.9 million of minority interest on our balance sheet.  After consideration of disposition costs of $0.7 million, we allocated $17.7 million to goodwill.

Also in the nine months ended August 31, 2007, in connection with unconsolidated joint venture transactions initially recorded in the prior year, we recorded a net loss of $0.8 million, after tax. This loss is shown on the line entitled “Gain (loss) on sale of unconsolidated operations” in our income statement.

Other Restructuring Costs—During the three months ended August 31, 2007, we recorded restructuring charges of $4.2 million ($3.0 million after-tax), of which $2.8 million is reflected in restructuring charges and $1.4 million is reflected in cost of goods sold in our income statement. We recorded $1.6 million of severance costs, primarily associated with the reduction of administrative personnel in Europe and the U.S. In addition, we recorded $3.9 million of other exit costs related to the consolidation of production facilities in Europe and closure of our manufacturing facility in Salinas, California. Partially offsetting these costs is a $1.3 million net asset related gain. This gain is composed of a gain from the sale of our manufacturing facility in Paisley, Scotland, mostly offset by write-downs of assets which are primarily the accelerated depreciation of assets related to the closure of the manufacturing facility in Salinas, California.

During the nine months ended August 31, 2007, we recorded restructuring charges of $19.3 million ($13.3 million after-tax), of which $16.6 million is reflected in restructuring charges and $2.7 million is reflected in cost of goods sold in our income statement. We recorded $6.7 million of severance costs, primarily associated with the reduction of administrative personnel in the U.S. and Europe. In addition, we recorded $11.9 million of other exit costs related to closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland and to the consolidation of production facilities in Europe. The remaining $0.6 million is comprised of asset write-downs for inventory write-offs related to the closure of the manufacturing facilities in Salinas, California and Hunt Valley, Maryland and accelerated depreciation of assets, mostly offset by the asset related gain from the sale of our manufacturing facility in Paisley, Scotland. From inception of the project in November 2005, we have incurred $80.3 million of restructuring charges, including the $33.7 million gain recorded on the redemption of our Signature investment in 2006.

29




During the three months ended August 31, 2006, we recorded restructuring charges of $19.3 million ($13.5 million after-tax), of which $17.5 million is reflected in restructuring charges and $1.8 million is reflected in cost of goods sold in our income statement. We recorded $12.5 million of severance costs, primarily associated with the closure of an industrial plant in Scotland, additional costs of our voluntary separation program in the U.S. and the reduction of both administrative and plant personnel at other global locations.  In addition, we recorded $1.1 million of other exit costs related to these same programs.  The $5.7 million of asset write-downs is primarily related to the closure of the plant in Scotland and accelerated depreciation related to the closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland.

During the nine months ended August 31, 2006, we recorded restructuring charges, exclusive of the gain on Signature, of $65.6 million ($44.0 million after-tax), of which $59.2 million is reflected in restructuring charges and $6.4 million is reflected in cost of goods sold in our income statement.  We recorded $48.6 million of severance costs and special early retirement benefits associated with our voluntary separation program in several functions in the U.S.; closures of manufacturing facilities in Salinas, California, Hunt Valley, Maryland, Sydney, Australia, Scotland and Finland; and the reduction of both administrative and plant personnel at other global locations. In addition, we recorded $6.6 million of other exit costs associated with the consolidation of production facilities, the reorganization of the sales and distribution networks in the U.S. and Europe and contract termination costs associated with customers and distributors in connection with the closure of the business in Finland. The $10.4 million of asset write-downs is primarily accelerated depreciation related to the closure of manufacturing facilities in Salinas, California and Hunt Valley, Maryland and the closure of the plant in Scotland.

During the nine months ended August 31, 2007 and 2006, we spent $33.6 million and $14.5 million, respectively, in cash on the restructuring plan. From inception of the project in November 2005, $74.6 million in cash has been spent on the restructuring plan, including the $9.2 million net cash received on redemption of our Signature investment in 2006.

MARKET RISK SENSITIVITY

Foreign Exchange Risk

We utilize foreign currency exchange contracts to enhance our ability to manage foreign currency exchange risk. The fair value of our portfolio of forward currency contracts was an unrealized loss of $0.8 million as of August 31, 2007, compared to unrealized losses of $0.6 million as of August 31, 2006 and $0.2 million as of November 30, 2006. The notional value of our portfolio of forward currency contracts was $57.4 million as of August 31,

30




2007, compared to the $34.1 million notional value as of August 31, 2006 and the $47.9 million notional value as of November 30, 2006. The quarterly fluctuation in notional value is a result of our decisions on foreign currency exposure coverage, based on foreign currency markets and the future outlook of foreign currency values.

Interest Rate Risk

We manage our interest rate exposure by entering into both fixed and variable rate debt arrangements. In addition, we use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt.

In August 2007, we entered into $150 million of forward treasury lock agreements to manage the interest rate risk associated with the anticipated issuance of fixed rate medium-term notes expected to be issued in December 2007. We intend to cash settle these agreements upon issuance of the medium-term notes thereby effectively locking in the fixed interest rate in effect at the time the agreements were initiated. The locked weighted average fixed rate of these agreements is 4.72%. We have designated these outstanding forward treasury lock agreements, which expire on December 17, 2007, as cash flow hedges. The proceeds upon issuance of the medium-term notes will be used to pay down long-term debt maturing in the first quarter of 2008. The gain or loss on these agreements is deferred in other comprehensive income and will be amortized over the ten-year life of the medium-term notes as a component of interest expense. Hedge ineffectiveness of these agreements was not material in the quarter.

Credit Risk

There has been no significant change to our credit risk since the disclosure in our Annual Report on Form 10-K for the year ended November 30, 2006.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of August 31, 2007, there have been no material changes in our contractual obligations and commercial commitments outside the ordinary course of business since November 30, 2006.

LIQUIDITY AND FINANCIAL CONDITION

 

 

Nine months ended

 

 

 

August 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net cash from operating activities

 

$

22,960

 

$

119,970

 

Net cash used in investing activities

 

(66,464

)

(144,751

)

Net cash provided by financing activities

 

32,493

 

22,605

 

 

31




Cash flows for the nine months ended August 31, 2006 reflect the reclassification of $5.2 million of expenditures for in-store displays from investing to operating activities to conform to the current year presentation.

In the statement of cash flows, the changes in operating assets and liabilities are presented excluding the translation effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the statement of cash flows do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.

Due to the cyclical nature of the business, we typically generate much of our cash flow in the fourth quarter of the fiscal year.

Operating Cash Flow—The decrease in operating cash flow is primarily the result of payments in the first quarter of 2007 for incentive compensation accrued at November 30, 2006 based upon prior year results, when compared to the same payments in the prior year; the increase in accounts receivables due to the increase and timing of sales, including an estimated $9 to $11 million of earlier sales for the fall season in the U.S. consumer business; increased cash payments for restructuring costs; and the timing of tax payments.

Investing Cash Flow—The decrease in cash flow used is due to $15.9 million in cash used for the acquisition of a business in 2007 compared to $102.6 million for the same period last year. We spent $50.5 million on net capital expenditures (capital expenditures less proceeds from sale of fixed assets) in the first nine months of fiscal 2007, compared to $51.4 million for the same period last year. Net capital expenditures for the fiscal year 2007 are expected to be approximately $85-$90 million.

Financing Cash Flow—The increase in cash provided by financing activities when compared to the prior year is primarily due to incremental short-term borrowings. The short-term borrowings were necessary to fund operating cash requirements and our share repurchase program.

The following table outlines the activity in our share repurchase program for the nine months ended August 31:

 

 

2007

 

2006

 

 

 

(in thousands)

 

Number of shares of common stock

 

3,972

 

2,589

 

Dollar amount

 

$

146,828

 

$

87,952

 

 

32




As of August 31, 2007, $59 million remained of the $400 million share repurchase authorization. In the absence of an acquisition or other unanticipated need for cash, we expect to spend $180 million for share repurchases during 2007, which is an amount similar to that spent in each of the past three years. During the nine months ended August 31, 2007, we received proceeds of $34.1 million from exercised options which was equal to the same period in the prior year. We increased dividends paid by 9.3% to $78.1 million for the nine months ended August 31, 2007 compared to $71.4 million in the same period last year. Dividends paid in the first quarter of 2007 were declared on November 28, 2006.

Our ratio of debt-to-total capital (total capital includes debt, minority interest and shareholders’ equity) was 47.2% as of August 31, 2007, up from 43.9% at August 31, 2006 and up from 41.0% at November 30, 2006. The increase in debt levels caused the increase in debt-to-total capital compared to August 31, 2006. This was partially offset by the increase in equity caused by foreign currency fluctuations. The increase in short-term borrowings as compared to November 30, 2006 is driving the increase in debt-to-total capital. During a quarter, our short-term borrowings vary. However, borrowings are lower at the end of a quarter.  The average short-term borrowings outstanding for the nine months ended August 31, 2007 and 2006 was $352.9 million and $264.2 million, respectively. Total average debt outstanding for the nine months ended August 31, 2007 and 2006 was $923.1 million and $806.6 million, respectively.

The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At August 31, 2007, the exchange rates for the Euro, the British pound sterling, the Canadian dollar and Australian dollar were higher than the same period last year. Exchange rate fluctuations resulted in increases in accounts receivable of approximately $12 million, inventory of approximately $9 million, goodwill of approximately $33 million and other comprehensive income of approximately $74 million since August 31, 2006. At August 31, 2007, the exchange rates for the Euro, the British pound sterling, the Canadian dollar and Australian dollar were also higher than at November 30, 2006. Exchange rate fluctuations resulted in increases in accounts receivable of approximately $8 million, inventory of approximately $6 million, goodwill of approximately $18 million and other comprehensive income of approximately $43 million since November 30, 2006.

Management believes that internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to meet current liquidity needs and longer-term financing requirements. If we were to undertake an acquisition that requires funds in excess of our existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances.

33




In August 2007, we entered into $150 million of forward treasury lock agreements to manage the interest rate risk associated with the anticipated issuance of fixed rate medium-term notes expected to be issued in December 2007. The proceeds upon issuance of the medium-term notes will be used to pay down long-term debt maturing in the first quarter of 2008. We do not expect that the credit issues currently influencing the financial markets will have an impact on our ability to issue debt going forward.

ACCOUNTING AND DISCLOSURE CHANGES

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement will require us to (a) record a liability on our balance sheet for our pension plans’ underfunded status (b) record any changes in the funded status of our pension and postretirement plans in the year in which the changes occur (reported in comprehensive income) and (c) measure our pension and postretirement assets and liabilities at November 30 versus our current measurement date of September 30. The requirements to record the funded status and certain disclosure requirements are effective for our year ending November 30, 2007 and will be reflected in our year-end report. The requirement to change the measurement date is effective for our year ending November 30, 2009. Since our plans are currently in an underfunded status, we expect to record a liability of approximately $50 million, net of deferred taxes, with a corresponding decrease to shareholders’ equity upon adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value and provides guidance for measuring fair value and the necessary disclosures.  This statement does not require any new fair value measurements but rather applies to all other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 will be effective for our first quarter ending February 29, 2008. We do not expect any material impact from initial adoption of this new accounting pronouncement on our financial statements.

In June 2006, the FASB issued Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes when it is uncertain how an income or expense item should be treated on an income tax return. FIN 48 describes when an uncertain tax item should be recorded in the financial statements and for how much, provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. FIN 48 is effective for our first quarter ending February 29, 2008. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.

34




FORWARD-LOOKING INFORMATION

Certain statements contained in this report, including those related to the expected results of operations of businesses acquired by us, the expected impact of the prices of raw materials on our results of operations and gross margins, the expected margin improvements, expected trends in net sales and earnings performance and other financial measures, annualized savings and other benefits from our streamlining and restructuring activities, the holding period and market risks associated with financial instruments, the impact of foreign exchange fluctuations, the adequacy of internally generated funds and existing sources of liquidity, such as our ability to issue additional debt or equity securities, and our expectations regarding purchasing shares of our common stock under the existing authorizations, are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Operating results may be materially affected by external factors such as: competitive conditions, customer relationships and financial condition, availability and cost of raw and packaging materials, governmental actions and political events, and economic conditions, including fluctuations in interest and foreign currency exchange rates. Actual results may vary significantly from projections. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see “Market Risk Sensitivity” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations above and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended November 30, 2006. Except as described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations above, there have been no significant changes in our financial instrument portfolio or market risk exposures since our November 30, 2006 fiscal year end.

ITEM 4   CONTROLS AND PROCEDURES

Based on our evaluation as of August 31, 2007, the Chairman & Chief Executive Officer and the Executive Vice President, Strategic Planning & Chief Financial Officer, have concluded that our “disclosure controls and procedures” as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 are effective based upon the reasonable assurance level.

No change occurred in our “internal control over financial reporting” (as defined in Rule 13a-15(f)) during our last fiscal quarter which was identified in connection with the evaluation required by Rule 13a-15(a) as materially affecting, or reasonably likely to materially affect, our internal control over financial reporting.

35




 

PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

There are no material pending legal proceedings in which the Registrant or any of its subsidiaries is a party or in which any of their property is the subject.

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the Registrant’s Form 10-Q for Fiscal Quarter Ended May 31, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes our purchases of Common Stock (CS) and Common Stock Non-Voting (CSNV) during the third quarter of 2007:

 

36




 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or Programs

 

June 1, 2007 to

 

CS — 0

 

$

00.00

 

0

 

$

141.2 million

 

June 30, 2007

 

CSNV — 192,400

 

$

37.12

 

192,400

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2007 to

 

CS — 59,909

 

$

37.74

 

59,909

 

$

121.1 million

 

July 31, 2007

 

CSNV — 484,592

 

$

36.78

 

484,592

 

 

 

 

 

 

 

 

 

 

 

 

 

August 1, 2007 to

 

CS — 65,188

 

$

36.38

 

65,188

 

$

59.2 million

 

August 31, 2007

 

CSNV — 1,649,900

 

$

36.07

 

1,649,900

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

CS — 125,097

 

$

37.03

 

125,097

 

$

59.2 million

 

 

 

CSNV — 2,326,892

 

$

36.30

 

2,326,892

 

 

 

 

In June 2005, the Board of Directors approved an additional $400 million share repurchase authorization.  As of August 31, 2007, $59.2 million remained of the $400 million authorization.  This amount is expected to be sufficient for fiscal year 2007 share repurchases.

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ITEM 6. EXHIBITS

The following exhibits are attached or incorporated herein by reference:

 

Exhibit Number

 

 

 

Description

 

 

 

 

 

 

 

 

 

(3)

 

Articles of Incorporation and By-Laws

 

 

 

 

 

 

 

 

 

 

 

Restatement of Charter of McCormick & Company, Incorporated dated April 16, 1990

 

Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration No. 33-39582 as filed with the Securities and Exchange Commission on March 25, 1991.

 

 

 

 

 

 

 

 

 

Articles of Amendment to Charter of McCormick & Company, Incorporated dated April 1, 1992

 

Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration Statement No. 33-59842 as filed with the Securities and Exchange Commission on March 19, 1993.

 

 

 

 

 

 

 

 

 

Articles of Amendment to Charter of McCormick & Company, Incorporated dated March 27, 2003

 

Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration Statement No. 333-104084 as filed with the Securities and Exchange Commission on March 28, 2003.

 

 

 

 

 

 

 

 

 

By-Laws of McCormick & Company, Incorporated Amended and Restated on June 26, 2007

 

Incorporated by reference from Exhibit 3(i) of the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 2, 2007.

 

 

 

 

 

 

 

(4)

 

Instruments defining the rights of security holders, including indentures

 

 

 

 

 

 

 

 

 

 

 

(i)

 

See Exhibit 3 (Restatement of Charter)

 

 

 

 

 

 

 

(ii)

 

Summary of Certain Exchange Rights, incorporated by reference from Exhibit 4.1 of the Registrant’s Form 10-Q for the quarter ended August 31, 2001 as filed with the Securities and Exchange Commission on October 12, 2001.

 

 

 

 

 

 

 

(iii)

 

Indenture dated December 5, 2000 between Registrant and SunTrust Bank, incorporated by reference from Exhibit 4(iii) of Registrant’s Form 10-Q for the quarter ended August 31, 2003, as filed with the Securities and Exchange Commission on October 14, 2003. Registrant hereby undertakes to furnish to the Securities and Exchange Commission, upon its request, copies of additional instruments of Registrant with respect to long-term debt that involve an amount of securities that do not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis, pursuant to Regulation S-K, Item 601b(4)(iii)(A).

 

 

 

 

 

 

 

(iv)

 

Form of 5.20% Notes due 2015, incorporated by reference from Exhibit 4.2 of the Registrant’s Form 8-K dated December 1, 2005, as filed with the Securities and Exchange Commission on December 6, 2005.

 

 

 

 

 

 

 

(v)

 

Form of 5.80% Notes due 2011, incorporated by reference from Exhibit 4.2 of the Registrant’s Form 8-K dated July 10, 2006, as filed with the Securities and Exchange Commission on July 13, 2006.

 

 

 

 

 

 

 

(10)

 

 

 

Material contracts

 

 

 

 

 

 

 

 

 

 

 

(i)

 

Registrant’s supplemental pension plan for certain senior officers, as amended and restated effective June 19, 2001, is contained in the McCormick Supplemental Executive Retirement Plan, a copy of which was attached as Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended August 31, 2001, as filed with the Securities and Exchange Commission on October 12, 2001, and incorporated by reference herein. Amendment Number 1 to the Supplemental Executive Retirement Plan, effective January 1, 2005, which agreement is incorporated by reference from Exhibit 10(iv) of Registrant’s 10-K for the fiscal year ended November 30, 2004, as filed with the Securities and Exchange Commission on January 27, 2005. *

 

38




 

 

 

 

 

 

 

(ii)

 

The 2001 Stock Option Plan, in which officers and certain other management employees participate, is set forth on pages 33 through 36 of the Registrant’s definitive Proxy Statement dated February 15, 2001, as filed with the Securities and Exchange Commission on February 14, 2001, and incorporated by reference herein.*

 

 

 

 

 

 

 

(iii)

 

The 1997 Stock Option Plan, in which officers and certain other management employees participate, is set forth in Exhibit B of the Registrant’s definitive Proxy Statement dated February 19, 1997, as filed with the Securities and Exchange Commission on February 18, 1997, and incorporated by reference herein.*

 

 

 

 

 

 

 

(iv)

 

The 2002 McCormick Mid-Term Incentive Plan, which is provided to a limited number of senior executives, is set forth on pages 23 through 31 of the Registrant’s definitive Proxy Statement dated February 15, 2002, as filed with the Commission on February 15, 2002, and incorporated by reference herein.*

 

 

 

 

 

 

 

(v)

 

2004 Long-Term Incentive Plan, in which officers and certain other management employees participate, is set forth in Exhibit A of the Registrant’s definitive Proxy Statement dated February 17, 2004, as filed with the Securities and Exchange Commission on February 17, 2004, and incorporated by reference herein.*

 

 

 

 

 

 

 

(vi)

 

2004 Directors’ Non-Qualified Stock Option Plan, provided to members of the Registrant’s Board of Directors who are not also employees of the Registrant, is set forth in Exhibit B of the Registrant’s definitive Proxy Statement dated February 17, 2004 as filed with the Securities and Exchange Commission on February 17, 2004, and incorporated by reference herein.*

 

 

 

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