McCormick discussing settlement

Price-discrimination investigation has depressed shares

Record quarter reported

Sales, earnings gains attributed to efficiency, spice line

Food industry

January 14, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

McCormick & Co. Inc. is negotiating with federal regulators over alleged price-discrimination practices and expects to reach a settlement within the next few weeks, the company said yesterday.

The announcement came as the Sparks-based spice giant reported record fourth-quarter and year-end sales and earnings per share. Improved efficiency and strong sales in its line of dry spice mixes drove the better-than-expected results, analysts said.

"We believe it is in the best interest of our stockholders to enter into a settlement as long as it does not impair our ability to compete in the future," said Robert J. Lawless, chairman, president and chief executive officer of McCormick.

The Federal Trade Commission investigation, begun in 1996, originally was focused on exclusive agreements with retailers that prevented them from selling other spice brands, Lawless said. McCormick had only three to five such exclusive contracts, which were later amended to remove the exclusivity clause, he said.

The focus then shifted to the Robinson-Patman Act, which protects small grocers from large chains that can undercut prices. The law requires manufacturers to offer all retailers the same deals. Volume discounts and advertising supplements are allowed, but they must be offered to everyone equally.

Lawless said the FTC staff reviewed more than 2,000 of McCormick's contracts with customers and found that McCormick violated price-discrimination rules in three of those contracts. "We have a view that we met competition, which is appropriate and allowed, and they have the view we did not," Lawless said.

The investigation has contributed to recent drops in McCormick's stock price. McCormick shares had been trading above $34 per share in November but fell steadily as more details of the FTC probe came out in December. McCormick rose 62.5 cents yesterday to close at $27.25.

Analysts applauded the move yesterday to head off a likely formal complaint by the FTC.

"Management is doing a pragmatic thing by trying to settle," said John M. McMillin of Prudential Securities.

Food stocks in general have been out of favor and undervalued, and the FTC investigation hasn't helped, said Kurt Funderburg, an equity analyst at Ferris Baker Watts in Baltimore. McCormick "intimated they are in pretty intense negotiations with the FTC to sign a consent decree to put the matter behind them," Funderburg said. "Once the FTC situation is corrected, you will see the stock perform better."

The company should also be helped by more investors looking for steady and lower-risk ways to achieve growth in the stock market, he said.

In its earnings report, the company posted net income of 77 cents per share, excluding special charges, for the three months that ended Nov. 30, up 10 percent from 70 cents in the corresponding period a year earlier. The charges are related to the layoffs of 300 workers and a plant closing in the United Kingdom. Earnings per share were 76 cents including the charges.

Sales during the quarter rose 6 percent to $620 million, compared with the year-earlier period, the manufacturer said. Net income was $54 million -- an 8 percent jump. The company had 71.4 million diluted shares outstanding in the quarter vs. 73.2 million a year earlier.

For fiscal 1999, net income was $103.3 million -- down 4.8 percent -- on sales of $2 billion, a 6.6 percent increase. Earnings per share, excluding charges, soared 18 percent to $1.69. Including the charges, the figure was $1.43, up from $1.41 in the previous year. The gross margin for the year was 35.7 percent, up from 34.5 percent in 1998.

Last January, the company had set three goals: to increase sales 5 percent to 7 percent, increase the gross margin by 1 percentage point, and raise earnings per share by about 12 percent to 15 percent. It met its goals by focusing on cost savings, increased advertising and a strong new-product program, Lawless said.

"We put people in the right jobs, set appropriate goals for the teams to work with and set up an appropriate reward system," Lawless said. "Morale is very high at McCormick."

The company has outpaced its rivals, with one of the strongest growth rates of any packaged food company, said Funderburg. The bottom-line numbers would have been even stronger, but the company chose instead to invest additional profit in marketing, he said.

Still, "their performance was ahead of our expectations," said Funderburg, who had called for earnings of 75 cents per share for the quarter. "These are pretty strong results across all major divisions."

Sun staff writer Kristine Henry contributed to this article.

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