McCormick & Company, Inc. — 2024 Q2 Form 10-Q Summary
Reporting period: Three and six months ended May 31, 2024. The filing is unaudited. McCormick operates through Consumer and Flavor Solutions segments, selling spices, seasonings, condiments and related products globally.
Financial performance and position
| Metric | Q2 2024 | Q2 2023 | Six months 2024 | Six months 2023 |
|---|
| Net sales | $1,643.2 million | $1,659.2 million | $3,245.9 million | $3,224.7 million |
| Gross profit | $619.6 million | $615.5 million | $1,218.9 million | $1,178.4 million |
| Gross margin | 37.7% | 37.1% | 37.6% | 36.5% |
| Operating income | $234.1 million | $221.8 million | $467.6 million | $420.8 million |
| Net income | $184.2 million | $152.1 million | $350.2 million | $291.2 million |
| Diluted EPS | $0.68 | $0.56 | $1.30 | $1.08 |
- Q2 sales declined 1.0%; six-month sales increased 0.7%. Q2 volume and product mix reduced sales by 0.7%, while divestitures reduced sales by 0.3%.
- Q2 operating income increased 5.5%, while adjusted operating income increased 0.3% to $235.9 million. Six-month adjusted operating income increased 2.6% to $473.6 million.
- SG&A increased to $383.7 million in Q2 from $380.5 million, with SG&A rising to 23.3% of sales from 22.9%, primarily due to higher advertising and promotion spending.
- Income tax expense was $26.2 million in Q2 and $75.8 million for the six months. Effective tax rates were 13.5% and 19.5%, respectively, benefiting from discrete tax items.
- Income from unconsolidated operations increased to $16.8 million in Q2 and $38.1 million for the six months, primarily due to improved results from McCormick de Mexico.
- Operating cash flow was $301.5 million for the first six months, down from $394.2 million in the prior-year period. Capital expenditures were $130.3 million, and dividends paid were $225.5 million.
- Cash and cash equivalents were $166.3 million at May 31, 2024. Short-term borrowings, current long-term debt and long-term debt totaled approximately $4.46 billion, implying debt net of cash of approximately $4.30 billion.
- Total shareholders’ equity was $5.35 billion, compared with $5.08 billion at November 30, 2023.
Segment performance
| Segment | Q2 sales | Q2 sales change | Q2 operating income | Q2 margin |
|---|
| Consumer | $904.5 million | (0.8%) | $149.3 million | 16.5% |
| Flavor Solutions | $738.7 million | (1.1%) | $86.6 million | 11.7% |
- Consumer segment operating income declined 2.8% in Q2, primarily because unfavorable pricing and higher conversion costs outweighed product mix and cost savings.
- Flavor Solutions operating income increased 6.3%, supported by pricing and CCI and GOE cost savings, despite weaker volume and mix. Management cited softness among quick-service restaurant and packaged-food customers.
- For the six months, Consumer sales increased 0.2% and Flavor Solutions sales increased 1.2%.
Material changes versus the prior comparable period
- Profitability improved despite lower Q2 sales. Gross margin increased 60 basis points in Q2 and 110 basis points for the six months, driven by pricing, product mix and CCI and GOE cost savings.
- Special charges declined substantially to $1.8 million in Q2 from $13.2 million and to $6.0 million for the six months from $41.0 million. Charges primarily related to the GOE program and an EMEA manufacturing transition.
- Q2 diluted EPS benefited from higher operating income, lower special charges, a lower tax rate and stronger unconsolidated operations.
- Operating cash flow declined because of cash payments for prior-year employee incentive compensation and the timing of income-tax payments.
- Dividends paid increased to $0.42 per share quarterly from $0.39 per share. Approximately $497 million remained under the $600 million share-repurchase authorization.
Guidance, outlook and unusual items
- Management expects fiscal 2024 sales to decline 2% to 0% as reported, or decline 1% to increase 1% on a constant-currency basis.
- Expected gross margin improvement is 50 to 100 basis points versus the 2023 margin of 37.6%.
- Reported operating income is expected to increase 8% to 10%; adjusted operating income is expected to increase 3% to 5%, or 4% to 6% in constant currency.
- Reported diluted EPS guidance is $2.76 to $2.81; adjusted diluted EPS guidance is $2.80 to $2.85.
- Management expects approximately $15 million of 2024 special charges, 2024 capital expenditures of approximately $290 million, and mid-teens growth in income from unconsolidated operations.
- Management expects persistent commodity, labor and other inflationary pressures, partly offset by pricing, CCI and GOE savings. Brand marketing investment is expected to increase in the high-single digits.
- A $700 million, 3.15% notes maturity is due in August 2024. Management expects existing cash, operating cash flow, credit facilities, commercial paper and capital-market access to meet obligations for at least the next twelve months.
- The 364-day $500 million revolving facility expired in June 2024. The company continues to maintain a committed five-year $1.5 billion revolving facility expiring in June 2026.
- The Q2 effective tax rate was unusually low because of $20.2 million of net discrete tax benefits, principally a $19.4 million benefit related to an international legal-entity reorganization.
Risks, contingencies and controls
- Key risks include commodity and packaging costs, labor availability and cost, pricing elasticity, consumer and foodservice demand, customer concentration and credit exposure, foreign-exchange movements, interest rates, supply-chain disruption, geopolitical conflicts, cyber risks, tax-law changes, leverage, pension obligations, litigation and execution of the CCI, GOE and business-transformation initiatives.
- The company uses foreign-exchange, cross-currency and interest-rate derivatives solely as hedges. At May 31, 2024, foreign-currency contract notional amounts were $939.6 million, cross-currency swaps were $959.9 million and interest-rate swaps were $600.0 million.
- Supplier-finance obligations included in trade accounts payable were approximately $360.4 million, compared with $300.5 million at November 30, 2023.
- Accruals associated with special charges were $13.8 million at May 31, 2024. No material pending legal proceedings were reported, and management reported no material changes to previously disclosed risk factors.
- Management concluded that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify the August 2024 repayment or refinancing of the $700 million notes and the resulting interest expense and leverage.
- Assess whether volume and product mix recover, particularly in Flavor Solutions, North America, EMEA and China.
- Compare realized cost savings and margin expansion with the company’s 2024 guidance.
- Separate recurring earnings from the Q2 discrete tax benefit and the reduced special-charge burden.
- Monitor operating cash conversion, inventory and supplier-finance balances, capital expenditures and dividend funding.
- Track foreign-exchange, commodity, labor and customer-demand trends, as well as execution of the GOE, CCI and manufacturing-transition programs.
