McCormick & Company, Incorporated — Fiscal 2021 Form 10-K Summary
Business Context and Reporting Period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor solutions. The filing covers the fiscal year ended November 30, 2021. Operations are organized into Consumer and Flavor Solutions segments, with approximately 40% of sales generated outside the United States.
- Consumer represented approximately 62% of consolidated sales and 75% of operating income.
- Flavor Solutions represented approximately 38% of consolidated sales and 25% of operating income.
- Fiscal 2021 included the full-year impact of the Cholula acquisition and the December 2020 acquisition of FONA.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $6,317.9 million | $5,601.3 million | 12.8% increase |
| Gross profit | $2,494.6 million | $2,300.4 million | 8.4% increase |
| Gross margin | 39.5% | 41.1% | Down 160 basis points |
| Operating income | $1,015.1 million | $999.5 million | 1.6% increase |
| Operating margin | 16.1% | 17.8% | Down 170 basis points |
| Net income | $755.3 million | $747.4 million | 1.1% increase |
| Diluted EPS | $2.80 | $2.78 | Increase of $0.02 |
| Adjusted diluted EPS | $3.05 | $2.83 | 7.8% increase |
| Operating cash flow | $828.3 million | $1,041.3 million | Decrease of $213.0 million |
Reported results included $51.1 million of special charges and $35.3 million of Cholula and FONA transaction and integration expenses. Excluding these items, adjusted operating income was $1,101.5 million, up 8.1%, while adjusted operating margin declined to 17.4% from 18.2%.
- Consumer sales increased 9.5% to $3,937.5 million; segment operating margin declined to 20.4% from 21.7%.
- Flavor Solutions sales increased 18.7% to $2,380.4 million; segment operating margin improved to 12.5% from 11.9%.
- Sales growth consisted of 5.5% from volume and mix, 0.8% from pricing, 4.1% from acquisitions and 2.4% from foreign exchange.
- Brand marketing support costs were $237.8 million, compared with $230.3 million in 2020.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $351.7 million at November 30, 2021, compared with $423.6 million a year earlier.
- Total outstanding debt was approximately $5.3 billion, including $539.1 million of short-term borrowings and $4,743.6 million of long-term debt, including current maturities.
- Variable-rate debt totaled approximately $612.7 million at a weighted-average rate of approximately 0.24%; short-term borrowings had a weighted-average rate of approximately 0.2%.
- In February 2021, McCormick issued $500 million of 0.90% notes due 2026 and $500 million of 1.85% notes due 2031, using proceeds primarily to reduce commercial paper borrowings.
- The company entered into a $1.5 billion revolving credit facility expiring in June 2026. Approximately $969.2 million of capacity remained after supporting commercial paper at year-end.
- Debt and interest contractual cash obligations totaled $6.13 billion, including $1.44 billion due within one year. The most significant near-term maturity was $750 million of 2.70% notes due in August 2022.
- Capital expenditures were $278.0 million, and 2022 capital expenditures were expected to approximate $320 million.
- Dividends paid were $363.3 million, or $1.36 per share. The quarterly dividend was increased 8.8% to $0.37 per share in November 2021.
- Approximately $576 million remained under the $600 million share repurchase authorization at November 30, 2021.
Material Changes Versus Prior Comparable Period
- Net sales benefited from continued elevated at-home consumption in Consumer and recovery in away-from-home demand in Flavor Solutions as COVID-19 restrictions eased relative to 2020.
- The FONA and Cholula acquisitions contributed approximately 4.1% to consolidated sales growth and approximately one-third of total sales growth during 2021.
- Inflation in commodities, packaging, labor and transportation, along with supply-chain disruption, reduced gross margin and operating leverage.
- Cash flow from operations declined because of higher inventory levels, employee incentive payments and acquisition-related transaction and integration payments. The cash conversion cycle increased to 46 days from 39 days.
- Special charges rose to $51.1 million from $6.9 million, including costs related to exiting the Kohinoor rice product line in India, manufacturing changes, streamlining, and asset impairments.
- The company sold its 26% interest in Eastern Condiments for $65.4 million and recognized a $13.4 million after-tax gain.
- Goodwill increased to $5.34 billion and brand names and trademarks totaled $3.07 billion, primarily reflecting the recent acquisitions. Fiscal 2021 impairment testing found fair values substantially above carrying values.
Guidance, Outlook, Risks and Unusual Items
For fiscal 2022, management projected reported net sales growth of 3% to 5%, including an estimated 1% unfavorable currency impact, and constant-currency growth of 4% to 6%. Reported adjusted operating income was expected to increase 7% to 9%, adjusted diluted EPS was projected at $3.17 to $3.22 excluding specified special charges and integration expenses, and adjusted EPS growth was expected at 4% to 6% reported or 5% to 7% in constant currency.
- Management expected approximately $85 million of CCI cost savings and approximately $30 million of special charges in 2022.
- Gross margin was projected to range from 20 basis points of expansion to 30 basis points of decline from 2021 reported gross margin, reflecting inflation, pricing, mix and productivity actions.
- Input-cost inflation and supply-chain pressures were expected to continue into 2022. Pricing actions were intended to offset only part of those pressures and could reduce volumes through price elasticity.
- COVID-19 remained a risk to demand, labor availability, manufacturing, transportation and customer operations.
- Other material risks include customer concentration, raw-material availability and pricing, foreign exchange, high leverage, interest rates and LIBOR transition, acquisition integration, impairment of goodwill or brands, ERP implementation, cybersecurity, regulatory compliance, litigation, climate change and ESG requirements.
- There were no material pending legal proceedings reported, and no material reserves were recorded for litigation at year-end.
- Management and Ernst & Young reported effective internal control over financial reporting and unqualified audit opinions.
Important Facts for Investors to Verify
- Whether pricing actions and CCI savings can offset continuing inflation without materially reducing volume or mix.
- The timing and funding of the $750 million debt maturity due in August 2022 and the company’s progress in reducing leverage.
- Actual performance and integration benefits from FONA and Cholula relative to acquisition assumptions.
- Inventory normalization, working-capital performance and the cash conversion cycle.
- Progress, cost and disruption risk associated with the global ERP and business transformation programs.
- Sensitivity of the $5.34 billion goodwill balance and $3.07 billion of brand assets to higher interest rates or weaker sales and margins.
- Exposure to major customers, including Walmart and PepsiCo, each representing approximately 11% of consolidated 2021 sales.
- Execution of 2022 guidance, particularly reported and adjusted EPS, margin expectations and the assumed foreign-exchange impact.