McCormick & Company, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2014. The filing also provides fourth-quarter results. McCormick manufactures and distributes spices, seasonings, condiments and other flavor products globally through consumer and industrial segments, with approximately 45% of fiscal 2014 sales generated outside the United States.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $4,243.2 million | $4,123.4 million | +2.9% |
| Gross profit | $1,730.2 million | $1,665.8 million | +3.9% |
| Gross margin | 40.8% | 40.4% | +40 bps |
| Operating income | $603.0 million | $550.5 million | +9.5% |
| Operating margin | 14.2% | 13.4% | +80 bps |
| Net income | $437.9 million | $389.0 million | +12.6% |
| Diluted EPS | $3.34 | $2.91 | +14.8% |
| Operating cash flow | $503.6 million | $465.2 million | +8.2% |
Fourth-quarter 2014 net sales were $1,173.6 million, operating income was $199.4 million, net income was $148.0 million and diluted EPS was $1.14. The business is seasonal, with sales and cash generation typically strongest in the fourth quarter.
- Consumer segment: Sales of $2,625.5 million, up 3.4%; adjusted operating income of $474.3 million, up 0.4%; adjusted operating margin declined to 18.1% from 18.6%.
- Industrial segment: Sales of $1,617.7 million, up 2.0%; adjusted operating income of $133.9 million, up 13.0%; adjusted operating margin increased to 8.3% from 7.5%.
- Pricing actions contributed 1.9% to consolidated sales growth, acquisitions contributed 1.8%, volume and mix reduced sales by 0.2%, and foreign exchange reduced sales by 0.6%.
- Adjusted operating income was $608.2 million and adjusted diluted EPS was $3.37, excluding 2014 special charges.
Cash flow, liquidity and capital structure
- Operating cash flow was $503.6 million. Investing cash flow used $131.6 million, including $132.7 million of capital expenditures. Financing cash flow used $348.9 million.
- Capital expenditures increased from $99.9 million in 2013. Management expected 2015 capital expenditures of $130 million to $140 million.
- Cash and cash equivalents were $77.3 million at year-end. Total debt was $1,284.9 million, consisting of $269.6 million of short-term borrowings and approximately $1,015.3 million of long-term debt before the current portion.
- Total debt to adjusted EBITDA was 1.73, within management’s stated target range of 1.5 to 1.8. The principal revolving credit facility provides $600 million of committed capacity and expires in 2016; $360.6 million was available after supporting commercial paper.
- Share repurchases totaled $244.3 million, and dividends paid totaled $192.4 million. Approximately $116 million remained under the $400 million repurchase authorization at November 30, 2014. The quarterly dividend was increased 8.1% to $0.40 per share.
- The cash conversion cycle increased to 91.4 days from 84.8 days, primarily because of higher strategic raw-material inventories.
Material changes versus the prior comparable period
- Sales growth improved modestly to 2.9% from 2.7%, while profitability benefited from lower special charges, cost savings and share repurchases.
- 2014 special charges were $5.2 million, compared with $25.0 million in 2013. The 2013 period also included a $15.3 million loss on a voluntary pension settlement.
- Adjusted operating income increased 2.9%, while adjusted diluted EPS increased approximately 7.7%, supported by higher unconsolidated income, lower shares outstanding, lower interest expense and a lower effective tax rate.
- Consumer margins declined because of increased brand marketing spending, higher material costs and a less favorable geographic mix. Industrial margins improved through higher sales, CCI savings and favorable mix.
- Foreign currency translation produced a $134.1 million reduction in other comprehensive income, and accumulated other comprehensive loss increased to $186.0 million from $0.3 million.
- No acquisition was completed in 2014. The 2013 Wuhan Asia-Pacific Condiments acquisition contributed approximately 1.8% to consolidated 2014 sales growth.
Guidance, outlook and unusual items
- Management’s long-term objectives remain annual sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%.
- For 2015, management expected local-currency sales growth of 4% to 6%, but forecast a significant reduction from unfavorable foreign exchange. Pricing and cost savings were expected to be largely offset by a mid-single-digit increase in raw-material and packaging costs.
- Management expected a 2015 effective tax rate of 27% to 28%, pension contributions of approximately $16 million and completion of the EMEA reorganization, with approximately $10 million of additional cash spending.
- The EMEA reorganization is expected to generate approximately $10 million of annual savings when completed in 2015. Additional U.S. and Australian streamlining actions are expected to generate approximately $4.3 million of annual savings.
- On January 26, 2015, the company approved a voluntary early-retirement plan. The expected cost was approximately $13 million, with total North American effectiveness initiative costs estimated at approximately $20 million. Management expected approximately $10 million of savings in 2015 and $25 million of annual savings beginning in 2016.
- Management reported no material pending legal proceedings, no off-balance-sheet arrangements and no material environmental capital expenditures planned for 2015. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Key risks and contingencies
- Volatility in agricultural raw-material prices and availability, particularly for pepper, dairy products, rice, capsicums, onion, garlic and wheat flour.
- Competitive pressure from private-label products, smaller brands and consolidated customers with greater purchasing power. Wal-Mart and PepsiCo each represented approximately 11% of consolidated sales in 2014.
- Food safety, contamination, labeling, product recall, import alerts and product-liability risks.
- Foreign currency, international economic and political conditions, tariffs, trade restrictions and regulatory changes.
- Execution and integration risks related to acquisitions, reorganizations, cost savings and supply-chain changes.
- Pension and postretirement obligations, including sensitivity to discount rates, asset returns and updated mortality assumptions. Defined-benefit pension plans were underfunded by approximately $188.4 million in aggregate at year-end.
- Cybersecurity, information-technology disruptions, customer credit risk, tax audits and uncertain tax positions. Unrecognized tax benefits totaled $55.7 million.
Investor verification checklist
- Reconcile GAAP results with management’s adjusted measures and evaluate the sustainability of the 2014 EPS increase.
- Assess whether U.S. consumer volume and category-share pressures improve after increased marketing and innovation spending.
- Monitor raw-material inflation, pricing realization, CCI savings and gross-margin performance.
- Review foreign-exchange effects and the sensitivity of 2015 guidance to currency movements.
- Evaluate debt maturities, commercial-paper dependence, refinancing needs and liquidity under seasonal working-capital requirements.
- Track completion costs and savings from the EMEA and North American effectiveness initiatives.
- Review pension funding, tax contingencies, customer concentration and food-safety or product-quality developments.