McCormick & Company, Inc. — Fiscal 2022 Form 10-K Summary
Business Context and Reporting Period
McCormick is a global manufacturer, marketer and distributor of spices, seasoning mixes, condiments, sauces and other flavor products. It operates through two segments: Consumer and Flavor Solutions, serving retail, food manufacturers and foodservice customers worldwide. The filing covers the fiscal year ended November 30, 2022; fourth-quarter results are not separately presented in the supplied filing text.
- Approximately 38% of fiscal 2022 sales came from non-U.S. operations.
- Consumer represented approximately 59% of consolidated sales and 80% of consolidated operating income; Flavor Solutions represented approximately 41% of sales and 20% of operating income.
- Wal-Mart represented approximately 12% of consolidated sales and PepsiCo approximately 11% in 2022.
Financial Results and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $6,350.5 million | $6,317.9 million | 0.5% |
| Gross profit | $2,274.5 million | $2,494.6 million | (8.8%) |
| Gross margin | 35.8% | 39.5% | (370 bps) |
| Operating income | $863.6 million | $1,015.1 million | (14.9%) |
| Operating margin | 13.6% | 16.1% | (250 bps) |
| Net income | $682.0 million | $755.3 million | (9.7%) |
| Diluted EPS | $2.52 | $2.80 | (10.0%) |
| Operating cash flow | $651.5 million | $828.3 million | (21.3%) |
- Adjusted operating income was $917.4 million, or 14.4% of sales, down 16.7% from $1,101.5 million, or 17.4%, in 2021.
- Adjusted diluted EPS was $2.53, down 17.0% from $3.05.
- Consumer net sales declined 4.6% to $3,757.9 million; segment operating income declined 11.7% to $710.7 million and margin fell to 18.9% from 20.4%.
- Flavor Solutions net sales increased 8.9% to $2,592.6 million; segment operating income declined 30.3% to $206.7 million and margin fell to 8.0% from 12.5%.
- Reported sales growth reflected 7.7% from pricing, a 4.5% unfavorable volume and mix impact, 0.2% from acquisitions, a 0.4% divestiture impact and a 2.5% foreign-exchange headwind. Constant-currency sales growth was 3.0%.
- Brand marketing support was $240.4 million, compared with $237.8 million in 2021. Research and development expense was $87.5 million.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $334.0 million at November 30, 2022, compared with $351.7 million at the prior year-end.
- Total debt, including short-term borrowings and long-term debt, was approximately $5.1 billion. Short-term borrowings were $1,236.7 million, including $1,224.6 million of commercial paper; long-term debt was $3,912.9 million including the current portion.
- Variable-rate debt totaled approximately $1,294.7 million at a weighted-average rate of approximately 4.2%; fixed-to-variable interest-rate swaps had a $600 million notional value.
- Committed revolving credit facilities totaled $2.0 billion: a $1.5 billion facility expiring in 2026 and a $500 million facility expiring in July 2023. Approximately $775.4 million of capacity remained after commercial paper support. Additional uncommitted facilities totaled $302.5 million.
- Management stated that available cash, operating cash flow, credit facilities, commercial paper capacity and capital-market access should provide sufficient liquidity for at least the next twelve months.
- Capital expenditures, including capitalized software, were $262.0 million. The company expected approximately $280 million of capital expenditures in 2023.
- Dividends paid were $396.7 million, or $1.48 per share. The quarterly dividend was increased 5.4% to $0.39 per share in November 2022.
- Share repurchases totaled $38.8 million in 2022; approximately $537 million remained under the $600 million authorization at year-end.
- The cash conversion cycle increased to 51 days from 46 days, primarily because of higher inventory levels.
Material Changes Versus the Prior Comparable Period
- Pricing actions largely offset lower volume and mix in reported sales, but inflation in commodities, packaging, transportation, labor and conversion costs compressed gross and operating margins.
- Consumer volume and mix declined 9.3%, while Flavor Solutions volume and mix increased 3.5%, supported by packaged-food demand and the recovery of away-from-home consumption.
- Operating cash flow decreased by $176.8 million, principally due to lower earnings, higher inventory investment and timing of employee incentive payments.
- Special charges were $51.6 million in 2022 versus $51.1 million in 2021. The 2022 charges principally related to exiting the Russian consumer business, transitioning an EMEA manufacturing facility, regional streamlining and a voluntary retirement program.
- Transaction and integration expenses declined to $2.2 million from $35.3 million as the integration of the Cholula and FONA acquisitions progressed.
- McCormick sold the Kitchen Basics business for $95.2 million of net cash proceeds and recognized a $49.6 million pretax gain.
- Long-term debt repayments totaled $772.0 million, including repayment of $750 million of notes maturing in August 2022, while short-term borrowings increased by $698.3 million.
- Inventory increased to $1,340.1 million from $1,182.3 million, and supplier-finance obligations included in trade accounts payable increased to approximately $347.0 million from $274.3 million.
Guidance, Outlook, Commentary and Risks
- For 2023, management projected net sales growth of 5% to 7%, with minimal foreign-currency impact; operating income growth of 10% to 12%; and reported diluted EPS of $2.42 to $2.47.
- Adjusted 2023 diluted EPS was projected at $2.56 to $2.61, representing 1% to 3% growth over adjusted 2022 EPS of $2.53.
- Management expected 2023 gross margin to improve by 25 to 75 basis points from 35.8%, supported by pricing and cost savings, despite continued inflation.
- Expected 2023 interest expense was $200 million to $210 million, reflecting higher interest rates on variable-rate debt. The projected effective tax rate was approximately 22%.
- Management targeted approximately $85 million of CCI savings in 2023 and approximately $75 million of savings from CCI, Global Operating Effectiveness and streamlining actions. The broader Global Operating Effectiveness program targets approximately $125 million of cost elimination during 2023 and 2024.
- The company expects approximately $50 million of special charges in 2023 and total ERP transformation investment of approximately $400 million through 2025, with approximately $122 million of operating expenses and $137 million of capitalized software recognized through November 30, 2022.
- Principal risks include persistent inflation and pricing elasticity, commodity availability and supply-chain disruption, labor shortages, foreign-exchange volatility, higher interest rates, significant leverage, customer concentration, private-label competition, geopolitical effects from the Russia-Ukraine conflict, COVID-19-related disruption, cyber risk, regulatory and food-safety matters, and potential impairment of goodwill or brand-related intangible assets.
- Goodwill was $5.2 billion and brand names and trademarks were $3.0 billion at year-end. The annual impairment testing indicated substantial excess fair value over carrying value, but management noted sensitivity to changes in forecasts, discount rates, royalty rates and market conditions.
- The filing reported no material pending legal proceedings and no material recorded litigation reserves. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Priorities
- Verify whether 2023 pricing actions and cost savings offset inflation without causing further volume and mix deterioration.
- Monitor inventory reduction, the 51-day cash conversion cycle and the effect of supplier-finance obligations on working capital and operating cash flow.
- Assess refinancing and interest-rate exposure, particularly the $250 million notes due in September 2023, the $500 million revolving facility expiring in July 2023 and variable-rate commercial paper.
- Reconcile reported results with adjusted measures, including the Kitchen Basics gain, special charges and acquisition integration expenses.
- Evaluate execution of the $125 million Global Operating Effectiveness target and the ERP transformation budget and timetable.
- Review impairment sensitivity for Cholula, FONA and other recently acquired brand assets amid higher interest rates and changing sales or margin assumptions.
- Track consumer demand, private-label substitution, customer concentration and the performance gap between the Consumer and Flavor Solutions segments.