McCormick & Company, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
McCormick is a global producer and distributor of spices, seasonings, condiments and flavor solutions. It operates through consumer and industrial segments across North America, Europe, Asia/Pacific and other international markets. The filing covers the three months ended February 28, 2017, compared with February 29, 2016. Results are seasonally weaker in the first half of the fiscal year.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,043.7 million | $1,030.2 million | Up 1.3%; up 3.6% constant currency |
| Gross profit | $413.0 million | $405.0 million | Up 2.0% |
| Gross margin | 39.6% | 39.3% | Up 30 basis points |
| Operating income | $134.2 million | $129.1 million | Up 4.0% |
| Adjusted operating income | $137.8 million | $130.7 million | Up 5.4%; up 8.2% constant currency |
| Net income | $93.5 million | $93.4 million | Essentially flat |
| Diluted EPS | $0.74 | $0.73 | Up $0.01 |
| Operating cash flow | $44.3 million | $78.6 million | Down $34.3 million |
Consumer sales increased 0.8% to $638.6 million, while consumer operating income excluding special charges rose 3.8% to $97.9 million. Industrial sales increased 2.2% to $405.1 million, and industrial operating income excluding special charges increased 9.6% to $39.9 million. Segment margins were 15.3% for consumer and 9.8% for industrial.
Cash and cash equivalents were $125.7 million at February 28, 2017. Total debt was $1,693.1 million, comprising $638.9 million of short-term borrowings, $250.7 million of current long-term debt and $803.5 million of long-term debt. Trailing-twelve-month total debt to EBITDA increased to 2.13 from 1.83 at November 30, 2016 and 1.98 a year earlier.
Investing cash flow included $124.0 million for the acquisition of Enrico Giotti SpA and $29.6 million of capital expenditures. Financing cash flow was $110.2 million, including $247.8 million of net short-term borrowings, $82.7 million of share repurchases and $58.9 million of dividends. The company paid $0.47 per share in dividends, compared with $0.43 in the prior-year quarter.
Material changes versus the prior comparable period
- Reported sales growth was constrained by a 2.3% unfavorable foreign-currency impact. Pricing contributed 2.0%, acquisitions contributed 2.7%, and lower volume and product mix reduced sales by 1.1%.
- Gross margin improved because of Comprehensive Continuous Improvement savings, streamlining actions, pricing and a shift toward higher-value products, partly offset by commodity and manufacturing cost inflation.
- Special charges increased to $3.6 million from $1.6 million, primarily for the planned Portugal plant closure, organizational-streamlining evaluation costs and other exit activities.
- Income from unconsolidated operations decreased to $7.0 million from $8.4 million, principally because of foreign-currency effects and lower income from the company’s Mexico joint venture.
- Interest expense increased to $14.5 million from $13.9 million because of higher average borrowings and short-term interest rates.
- Operating cash flow declined because of the timing of income-tax and incentive-compensation payments.
- Giotti added $11.1 million of first-quarter sales, while Gourmet Garden added $16.6 million. The acquisitions were not significant contributors to operating income because of financing, acquisition and integration costs.
- The company early adopted ASU 2016-09 for stock compensation, recognizing a $1.6 million discrete tax benefit in the quarter.
Guidance, outlook, commentary and risks
- For 2017, management projects reported sales growth of 3% to 5%, including an estimated 2% unfavorable foreign-currency impact; constant-currency sales growth is projected at 5% to 7%.
- Reported diluted EPS is projected at $3.98 to $4.06. Adjusted diluted EPS, excluding an estimated $0.07 impact from special charges, is projected at $4.05 to $4.13.
- Constant-currency adjusted EPS growth is expected at 9% to 11% over 2016 adjusted EPS of $3.78.
- Management expects approximately $100 million of 2017 cost savings, mid-single-digit material-cost inflation largely offset by pricing, and high-single-digit growth in brand-marketing spending.
- Capital expenditures are expected to be $170 million to $190 million, and pension contributions are estimated at approximately $14 million for 2017.
- An additional $7.4 million of special charges is expected during the remainder of 2017, including Portugal closure, organizational-streamlining and other exit costs.
- Key risks include foreign-currency volatility, Brexit-related uncertainty, commodity and packaging-cost inflation, weak retail and foodservice trends, private-label competition, customer concentration and credit exposure, supply-chain disruptions, acquisition integration, pension obligations, interest rates, tax-rate variability, cybersecurity, regulatory matters and product quality or safety issues.
- On March 24, 2017, the company entered into a 364-day $250 million revolving credit facility supporting its commercial-paper program. Management stated that available cash, operating cash flow and financing sources should be adequate for expected requirements over the next twelve months.
Important facts for investors to verify
- Whether pricing and cost savings can offset mid-single-digit material-cost inflation without weakening volume or consumer demand.
- The sustainability of reported sales and EPS growth after adjusting for acquisitions, foreign exchange, special charges and discrete tax benefits.
- The pace of debt reduction and whether leverage returns toward management’s stated total-debt-to-EBITDA target of 1.5 to 1.8.
- Execution of the Giotti and Gourmet Garden integrations and the timing of final purchase-price allocations.
- The magnitude and timing of the expected $7.4 million of additional 2017 special charges.
- Performance in the U.K. and EMEA, China, the Mexico joint venture and other markets exposed to currency and retail weakness.
- Liquidity, commercial-paper access and refinancing needs, including the $250 million revolving facility and debt maturities.