McCormick & Company, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
McCormick manufactures and distributes spices, seasoning mixes, condiments and other flavor products through two segments: Consumer and Flavor Solutions. The filing covers the three and nine months ended August 31, 2021, compared with the corresponding 2020 periods. The company reported ongoing effects from COVID-19, inflation in commodities, packaging and transportation, supply-chain disruption, and the acquisitions of Cholula and FONA.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1,549.4 million | $1,430.3 million | $4,587.6 million | $4,043.4 million |
| Gross profit | $599.6 million | $590.3 million | $1,791.7 million | $1,639.7 million |
| Gross margin | 38.7% | 41.3% | 39.1% | 40.6% |
| Operating income | $265.2 million | $273.0 million | $738.9 million | $724.6 million |
| Net income | $212.4 million | $206.1 million | $557.9 million | $546.7 million |
| Diluted EPS | $0.79 | $0.76 | $2.07 | $2.03 |
| Operating cash flow | Not separately provided | Not separately provided | $372.9 million | $626.7 million |
Q3 sales increased 8.3%, while nine-month sales increased 13.5%. On a constant-currency basis, sales increased 5.3% in Q3 and 10.5% year to date. Q3 adjusted operating income was $272.3 million, compared with $273.1 million in the prior-year quarter; nine-month adjusted operating income was $792.8 million, compared with $728.6 million.
- Consumer segment Q3 sales increased 1.2% to $921.9 million, while segment operating income declined 10.1% to $187.8 million; margin decreased to 20.4% from 22.9%.
- Flavor Solutions Q3 sales increased 20.8% to $627.5 million, while segment operating income increased 31.8% to $84.5 million; margin increased to 13.5% from 12.3%.
- Year-to-date sales growth included 4.3% from acquisitions and 3.0% from foreign exchange. Q3 sales growth included 4.5% from acquisitions and 3.0% from foreign exchange.
- Cash and cash equivalents were $312.6 million at August 31, 2021, down from $423.6 million at November 30, 2020.
- Total long-term debt, including the current portion, was $4,753.5 million at August 31, 2021, compared with $4,017.7 million at November 30, 2020. Total short-term borrowings were $767.4 million.
- Total liabilities were $8,481.3 million and shareholders’ equity was $4,403.1 million at August 31, 2021.
- Capital expenditures were $189.9 million year to date; management expected approximately $275 million for fiscal 2021.
- Dividends paid were $272.4 million year to date, compared with $247.4 million in the prior-year period.
Material changes versus the prior comparable period
- Gross margin contracted 260 basis points in Q3 and 150 basis points year to date, primarily because of higher commodity, packaging and transportation costs, higher conversion costs and less favorable segment mix.
- Operating income declined 2.9% in Q3 despite higher sales, reflecting cost inflation, special charges and acquisition-related costs. Year-to-date operating income increased 2.0%.
- Net cash from operations declined $253.8 million year to date, primarily from higher working-capital usage, employee benefit payments and acquisition-related transaction and integration costs.
- Investing cash use increased to $830.6 million from $143.3 million, including $706.4 million for business acquisitions and $189.9 million of capital expenditures.
- Financing activities provided $347.0 million, compared with a $432.7 million use of cash in the prior-year period, driven largely by new long-term debt issuance.
- February 2021 debt issuances included $500 million of 0.90% notes due 2026 and $500 million of 1.85% notes due 2031. The company also entered into a new $1.5 billion revolving credit facility expiring in June 2026.
- Special charges increased to $5.8 million in Q3 and $20.6 million year to date, compared with $0.1 million and $4.0 million, respectively. Year-to-date charges included a $6.5 million non-cash impairment related to an administrative site.
- Transaction and integration expenses related to Cholula and FONA totaled $1.3 million in Q3 and $33.3 million year to date.
Guidance, outlook, commentary and risks
- Fiscal 2021 net sales guidance was 12% to 13% growth, including an estimated 3% favorable currency impact, or 9% to 10% constant-currency growth.
- Management projected fiscal 2021 gross margin to decline 160 to 180 basis points from the 2020 margin of 41.1%. Excluding $6.3 million of acquisition-related inventory costs, adjusted gross margin was expected to decline 150 to 170 basis points.
- Reported operating income was expected to increase 2% to 4%; adjusted operating income was expected to increase 6% to 8%, or 4% to 6% on a constant-currency basis.
- Reported diluted EPS guidance was $2.80 to $2.85. Adjusted diluted EPS guidance was $2.97 to $3.02.
- Management expected approximately $38 million of 2021 acquisition-related transaction and integration expenses, approximately $26 million of special charges and approximately $110 million of CCI-led cost savings.
- Management expected approximately $5 million of additional transaction and integration expenses in Q4 2021 and anticipated completing the remaining acquisition-related expenses by May 31, 2022.
- Primary risks include the pace of COVID-19 recovery and variants, changes in at-home versus away-from-home consumption, supply-chain constraints, labor shortages, commodity and transportation inflation, the ability to implement pricing, acquisition integration, increased debt service, foreign exchange volatility, LIBOR transition, impairment of goodwill or intangible assets, and ERP implementation risks.
- The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors other than updates concerning COVID-19 and LIBOR transition. Management concluded that disclosure controls were effective.
Most important facts for investors to verify
- Whether pricing actions and CCI savings offset inflation and restore gross-margin performance.
- Whether Consumer segment demand stabilizes after the comparison with unusually strong 2020 at-home consumption.
- Whether Flavor Solutions growth remains supported by away-from-home recovery and the FONA and Cholula acquisitions.
- Actual fourth-quarter sales, margins, adjusted EPS and acquisition-integration costs relative to guidance.
- Debt reduction, refinancing needs, interest coverage and compliance with the revolving-credit-facility covenant.
- Working-capital normalization and fourth-quarter operating cash flow, given the company’s seasonal cash-generation pattern.
- Progress and cost of the global ERP replacement and Global Enablement initiatives.
- Exposure to COVID-19-related disruptions, commodity and transportation inflation, labor availability, foreign exchange movements and LIBOR replacement.