McCormick & Company, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended August 31, 2020, compared with the corresponding 2019 periods. McCormick manufactures and distributes spices, seasonings, condiments and other flavor products through its consumer and flavor solutions segments.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1,430.3 million | $1,329.2 million | $4,043.4 million | $3,862.6 million |
| Gross profit | $590.3 million | $539.9 million | $1,639.7 million | $1,515.3 million |
| Gross margin | 41.3% | 40.6% | 40.6% | 39.2% |
| Operating income | $273.0 million | $253.5 million | $724.6 million | $658.5 million |
| Net income | $206.1 million | $191.9 million | $546.7 million | $489.3 million |
| Diluted EPS | $1.53 | $1.43 | $4.06 | $3.65 |
- Q3 sales increased 7.6%; nine-month sales increased 4.7%. On a constant-currency basis, growth was 8.6% and 5.8%, respectively.
- Q3 operating margin was approximately 19.1%, versus 19.1% in the prior-year quarter; nine-month operating margin was approximately 17.9%, versus 17.0%.
- Operating cash flow for the first nine months was $626.7 million, up from $494.6 million. Capital expenditures were $145.6 million, compared with $107.1 million.
- Cash and equivalents were $221.0 million at August 31, 2020, versus $155.4 million at November 30, 2019.
- Total debt, including current and long-term portions, was approximately $4.17 billion at August 31, 2020. The reported long-term debt carrying amount, including current maturities, was $4.001 billion.
- Trailing twelve-month net debt was $4.023 billion and adjusted EBITDA was $1.294 billion, producing a reported leverage ratio of 3.1, compared with 3.4 at November 30, 2019 and 3.7 at August 31, 2019.
- Dividends paid during the first nine months were $247.4 million. The company had $586.0 million remaining under its $600 million share repurchase authorization.
Material changes versus the prior comparable period
- Consumer segment: Q3 sales increased 14.7% to $910.9 million and nine-month sales increased 11.7% to $2.573 billion. Segment operating margin rose to 22.9% in Q3 from 22.2% and to 21.8% for nine months from 19.5%, driven by stronger at-home demand, favorable mix, pricing and cost savings.
- Flavor solutions segment: Q3 sales declined 2.9% to $519.4 million and nine-month sales declined 5.7% to $1.470 billion. Segment operating margin fell to 12.3% in Q3 from 15.8% and to 11.5% for nine months from 14.5%, primarily because of reduced restaurant and foodservice demand, unfavorable mix, higher conversion costs and material costs.
- Special charges declined to $0.1 million in Q3 and $4.0 million for nine months, from $7.7 million and $16.9 million, respectively, in the prior-year periods.
- Interest expense declined by $7.8 million in Q3 and $23.5 million for nine months, reflecting lower average borrowings, lower interest rates and the benefit of currency swaps.
- In April 2020, McCormick issued $500.0 million of 2.50% notes due 2030, receiving net proceeds of $495.0 million. The proceeds were used to reduce borrowings and for general corporate purposes.
- The company fully repaid the $1.5 billion of term loans issued in connection with the 2017 RB Foods acquisition, including the scheduled 2020 and 2022 maturities.
Guidance, outlook and management commentary
- Management projected 2020 sales growth at the upper end of the 4% to 5% range, including an estimated 1% unfavorable currency impact, or 5% to 6% on a constant-currency basis.
- Gross margin was expected to increase by 75 to 100 basis points versus 2019. CCI cost savings were estimated at $105 million for 2020, partly offset by COVID-19-related costs.
- Operating income was expected to increase 6% to 7%; adjusted operating income was expected to increase 4% to 5% as reported, or 5% to 6% in constant currency.
- Reported diluted EPS guidance was $5.60 to $5.68. Adjusted diluted EPS guidance was $5.64 to $5.72, implying adjusted EPS growth of 5% to 7% as reported and 6% to 8% in constant currency.
- Management estimated a 2020 effective tax rate of approximately 20%, including favorable discrete tax items; the underlying tax rate excluding discrete items was expected to be approximately 24% to 25%.
- The global ERP replacement program was paused for the balance of fiscal 2020 because travel restrictions and border closures prevented planned implementation support.
Risks, contingencies and unusual items
- COVID-19 materially shifted demand toward at-home consumption, benefiting consumer products but reducing restaurant, foodservice and other away-from-home demand in flavor solutions. The pace of recovery and potential resurgences remained uncertain.
- Potential risks include supply-chain interruptions, raw-material availability and cost volatility, employee disruptions, customer financial stress, foreign-exchange volatility, higher borrowing costs, credit-market disruption, impairment of goodwill or intangible assets, and pension valuation changes.
- The company reported $40.1 million of discrete tax benefits for the first nine months, including benefits from share-based compensation, an intra-entity asset transfer, release of a deferred-tax valuation allowance and expiration of tax statutes. These benefits make period-to-period tax-rate comparisons less representative.
- The Global Enablement initiative is expected to cost approximately $60 million to $65 million over its multi-year course; cumulative spending was $38.3 million through November 30, 2019, with an additional $1.1 million incurred in the first nine months of 2020.
- McCormick stated that it expects available cash, operating cash flow and financing sources to meet requirements over the next twelve months. Its $1.0 billion revolving credit facility expires in August 2022 and is subject to financial covenants.
- On September 28, 2020, the board approved a 2-for-1 stock split, effective November 30, 2020 for shareholders of record as of November 20, 2020. The filing’s share and per-share data were not adjusted for the split.
- No material pending legal proceedings were disclosed, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether elevated consumer demand and the shift toward at-home consumption persist after COVID-19 restrictions ease.
- The pace of recovery in restaurants, foodservice and other flavor solutions customers, including the effect on segment margins and inventory utilization.
- Progress toward the 2020 sales, margin, operating income and EPS guidance, including currency and inflation assumptions.
- Debt maturities, refinancing requirements, interest-rate exposure and compliance with the revolving-credit-facility leverage covenant.
- Whether reported earnings and EPS are being materially influenced by discrete tax benefits, reduced special charges or other non-recurring items.
- Execution, timing and remaining cost of the Global Enablement initiative and the paused ERP implementation.
- Effects of raw-material inflation, supply-chain constraints, foreign-exchange movements and possible COVID-19 resurgences.