McCormick & Company, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor solutions. It operates through Consumer and Industrial segments and sells in approximately 150 countries and territories. The filing covers the fiscal year ended November 30, 2016, including fourth-quarter results. Approximately 42% of fiscal 2016 sales came from outside the United States.
- Consumer sales were approximately 60% of consolidated sales and contributed approximately 75% of operating income.
- Industrial sales were approximately 40% of consolidated sales and contributed approximately 25% of operating income.
- Wal-Mart and PepsiCo each represented approximately 11% of consolidated sales; together, the two customers represented approximately 22%.
Financial performance and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4,411.5 million | $4,296.3 million |
| Gross profit | $1,831.7 million | $1,737.3 million |
| Gross margin | 41.5% | 40.4% |
| Operating income | $641.0 million | $548.4 million |
| Operating margin | 14.5% | 12.8% |
| Net income | $472.3 million | $401.6 million |
| Diluted EPS | $3.69 | $3.11 |
| Net cash from operations | $658.1 million | $590.0 million |
| Capital expenditures | $153.8 million | $128.4 million |
| Total debt | $1,447.2 million | $1,394.4 million |
| Total debt/EBITDA | 1.83x | 2.01x |
- Adjusted operating income, excluding special charges, was $657.0 million, up 7% from $613.9 million; adjusted diluted EPS was $3.78, up 9% from $3.48.
- Reported results included $16.0 million of special charges, reducing diluted EPS by approximately $0.09.
- Consumer sales increased 4.5% to $2,753.2 million, while segment operating margin excluding special charges increased to 17.8% from 17.3%.
- Industrial sales declined 0.2% to $1,658.3 million on a reported basis, but segment operating margin excluding special charges improved to 10.0% from 9.5%.
- Sales growth consisted of 1.7% volume and product mix, 1.5% pricing, 2.3% acquisitions and a 2.8% unfavorable foreign-exchange impact. Constant-currency sales growth was 5.5%.
- Cash and cash equivalents were $118.4 million at year-end. Current assets were $1,421.8 million versus current liabilities of $1,422.7 million.
- Short-term borrowings were $390.3 million, with a weighted-average year-end interest rate of approximately 1.4%. Long-term debt was $1,054.0 million.
- The company had a $750 million revolving credit facility expiring in 2020, with $393.1 million of capacity available after supporting commercial paper.
- Dividends paid totaled $217.8 million, and share repurchases totaled $242.7 million. The remaining share repurchase authorization was approximately $327 million at November 30, 2016.
Material changes versus the prior comparable period
- Net sales increased 2.7%, despite a stronger U.S. dollar; constant-currency growth was 5.5%.
- Gross margin increased 110 basis points, primarily from pricing, CCI productivity savings and business mix, partially offset by higher material costs.
- Operating income increased $92.6 million, largely because 2016 special charges were substantially lower than in 2015.
- Special charges declined to $16.0 million from $65.5 million. The 2016 charges primarily related to EMEA restructuring, the South Africa joint venture exit, the Kohinoor business in India, planned exits from facilities in Singapore and Thailand, and North American workforce actions.
- Net cash from operations increased $68.1 million, while capital expenditures increased $25.4 million.
- Total debt increased $52.8 million, but leverage improved because EBITDA increased to $790.0 million from $692.1 million.
- Fiscal 2016 acquisitions included Gourmet Garden for $116.2 million and Cajun Injector for $4.4 million. These acquisitions contributed $40.0 million of sales but were not significant to overall operating income because of financing, acquisition and integration costs.
- On December 15, 2016, after year-end, McCormick acquired Italian flavor manufacturer Enrico Giotti SpA for $125.5 million, subject to post-closing adjustments, funded with cash and short-term borrowings.
Guidance, outlook, commentary and unusual items
- Long-term annual objectives, on a constant-currency basis, are sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%.
- For 2017, management expected sales growth of 3% to 5%, gross margin comparable to approximately 50 basis points higher than 2016, and an effective tax rate of approximately 28%.
- Management expected 2017 capital expenditures of $170 million to $190 million and income from unconsolidated operations to be comparable with 2016.
- Management expected unfavorable foreign-exchange effects in 2017, partly offsetting sales growth. It also expected higher material costs, pricing actions and continued CCI savings.
- Additional special charges were expected in 2017, including approximately $1.6 million related to EMEA initiatives and approximately $2.2 million over two years related to exits from leased facilities in Singapore and Thailand.
- Management expected approximately $13 million of pension contributions in 2017. Subsequent pension-plan freezes were expected to reduce retirement benefit expense in 2017 and later periods, partially offset by employee mitigation costs.
- Key risks include raw-material price and availability volatility, foreign-exchange exposure, customer concentration and bargaining power, competition and private-label substitution, food safety and product recalls, regulatory changes, supply-chain disruption, acquisitions and integration, pension funding, tax disputes, cybersecurity, climate-related agricultural effects and litigation.
- The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Important facts for investors to verify
- Reconcile reported GAAP earnings with adjusted results and assess the recurring nature of the $16.0 million special charges.
- Evaluate whether pricing and CCI savings can continue to offset raw-material inflation without impairing volume or customer relationships.
- Assess the effect of foreign-exchange movements, particularly in EMEA and Asia/Pacific, on reported sales, margins and the McCormick de Mexico joint venture.
- Review customer concentration, especially the combined approximately 22% contribution from Wal-Mart and PepsiCo.
- Monitor debt maturities, commercial-paper reliance, interest-rate exposure and the impact of the Giotti acquisition on leverage.
- Assess integration performance and goodwill or brand-asset impairment risk, including the preliminary valuation of the Gourmet Garden brand.
- Review the potential D&A earn-out liability, estimated at $28.9 million at year-end and potentially payable in 2018, with a contractual maximum of €35 million.
- Consider pension underfunding, tax contingencies, the planned headquarters lease and the company’s exposure to food safety, supply-chain, regulatory and cybersecurity events.