MCCORMICK & COMPANY 2004 ANNUAL REPORT management’s discussion and analysis operating income due to significant volatility in this com- modity. The savings on supply chain initiatives were offset by cost increases in pension and other benefit costs. Special charges in the industrial business increased to $2.3 million in 2003 from $1.8 million in 2002. Special charges in the industrial business for 2003 consisted of additional costs associated with the consolidation of production facili- ties in Canada and severance and other costs related to the consolidation of industrial manufacturing in the U.K. Special charges in the industrial business for 2002 primarily con- sisted of further severance and other costs related to the workforce reduction initiated in 2001 and further costs related to the closure of a U.S. distribution center. decreased to $1.8 million in 2003 from $2.7 million in 2002. Special charges in the consumer business for 2003 consisted of additional costs associated with the consoli- dation of production facilities in Canada and the realign- ment of consumer sales operations in Australia. Special charges in the consumer business for 2002 primarily con- sisted of severance, lease exit and relocation costs related to the workforce reduction and realignment of consumer sales operations in the U.S. The Company sold its Jenks brokerage business in the U.K. on July 1, 2003 and accordingly, results of this busi- ness were reclassified from the consumer segment to discontinued operations. Strong cash flows from operations enabled the Company to fund operating projects and investments that are designed to meet the Company’s growth objectives, to make strategic acquisitions and to repurchase stock. In the consolidated statement of cash flows, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the consolidated statement of cash flows do not agree with changes in the operating assets and liabilities that are presented in the consolidated balance sheet. In addition, the net cash flows from operat- ing, investing and financing activities are presented excluding the effects of discontinued operations. For the fiscal year 2003, sales from the industrial business rose 5.4% as compared to 2002. The acquisition of Uniqsauces contributed 2.7% of sales increase and for- eign exchange added another 2.6%. Sales rose 0.4% in the Americas, with foreign exchange contributing 0.5% of the increase. In the Americas, the restaurant industry was affected by a slowdown in consumer traffic in 2003. While this adversely affected the Company’s sales to food serv- ice distributors, direct sales to restaurant chains had strong growth resulting from successful new products and customer promotions of existing products. Sales to food processors were largely affected by lower pricing in response to a decrease in raw material costs, particularly for snack food seasonings. In Europe, sales rose 27.9% with Uniqsauces contributing 17.7% of increase and for- eign exchange contributing 12.0% of increase. The remaining decrease of 0.5% was due to lower demand for seasoning products, which more than offset strong condi- ment sales. In the Asia/Pacific region, sales increased 11.9%, with 5.9% of increase from foreign exchange and 6.0% from higher volume. Operating income from continuing operations for the industrial business rose 1.5% to $108.9 million. Operating income margin was 9.8% in 2003 compared to 10.2% in 2002. The operating income increase was generally in line with the sales increase, excluding the Uniqsauces acquisi- tion. This acquisition was strategically made for its condi- ment production facility and certain of its customer relationships. In the industrial segment, commodity cost increases and decreases are generally offset by pricing actions. However, in 2003 vanilla had a negative effect on In the consolidated statement of cash flows, net cash provided by continuing operating activities was $349.5 mil- lion in 2004 compared to $201.8 million in 2003 and $208.6 million in 2002. The significant increase in operating cash flow in 2004 is primarily the result of a reduction in inven- tory in 2004 as compared to 2003 when inventory increased, an increase in other liabilities in 2004 compared to a decrease in 2003 and the benefit of higher net income from continuing operations. These favorable cash flows were partially offset by increases in accounts receivable which are in line with increases in sales. The higher inven- tory in 2003 was due to the Company’s strategic decision to purchase vanilla beans in order to ensure an ongoing supply and manage the cost for this raw material. The Company decreased its vanilla bean inventory by $28 mil- lion in 2004 in anticipation of lower cost beans in 2005. The increase in other assets and liabilities in 2004 compared to a decrease in 2003 was due to the timing of liability pay- ments and a higher tax benefit on the exercise of stock options in 2004 compared to 2003. The Company gener- ally receives a tax deduction on the exercise of stock Financial Condition Industrial Business for the year ended November 30 (millions) 2003 2002 Net sales $1,107.3 $1,051.0 Operating income 108.9 107.3 Operating income margin 9.8% 10.2% 26