McCormick & Company, Inc. Form 10-Q Summary
Business context and reporting period
McCormick manufactures, markets and distributes spices, herbs, seasoning mixes, condiments and other flavor products through consumer and industrial businesses worldwide. The filing covers the three and six months ended May 31, 2012, compared with the corresponding 2011 periods. Results are seasonally weighted toward the second half of the fiscal year, particularly the fourth quarter.
Key financial metrics
| Metric | Three months ended May 31, 2012 | Three months ended May 31, 2011 | Six months ended May 31, 2012 | Six months ended May 31, 2011 |
|---|---|---|---|---|
| Net sales | $984.0 million | $883.7 million | $1,890.7 million | $1,666.5 million |
| Gross profit | $388.4 million | $350.7 million | $743.7 million | $678.9 million |
| Gross margin | 39.5% | 39.7% | 39.3% | 40.7% |
| Operating income | $121.3 million | $109.3 million | $233.9 million | $219.9 million |
| Net income | $80.4 million | $73.6 million | $154.9 million | $150.4 million |
| Diluted EPS | $0.60 | $0.55 | $1.15 | $1.12 |
| Operating cash flow | Not separately provided | Not separately provided | $144.4 million | $36.3 million |
Second-quarter sales increased 11.3%; six-month sales increased 13.5%. Second-quarter operating income rose 11.0%, while net income increased 9.2%. Six-month operating income increased 6.4%, and net income increased 3.0%. Second-quarter diluted EPS rose 9.1%, and six-month diluted EPS rose 2.7%.
SG&A was $267.1 million in the quarter and $509.8 million year to date. SG&A declined to 27.2% of quarterly sales and 26.9% of six-month sales, compared with 27.3% and 27.5%, respectively, in the prior-year periods. Interest expense increased to $13.9 million in the quarter and $27.4 million year to date, primarily because of higher debt balances following 2011 acquisitions.
At May 31, 2012, cash and cash equivalents were $61.4 million. Short-term borrowings were $242.2 million, current long-term debt was $2.2 million and long-term debt was $1,027.7 million. Debt-to-total-capital was 43.7%, compared with 37.6% a year earlier and 43.6% at November 30, 2011.
Year-to-date investing cash flow used $34.9 million, including $35.2 million of capital expenditures. Financing cash flow used $100.3 million, including $68.6 million for share repurchases and $82.4 million for dividends. The company had $201 million remaining under its $400 million share-repurchase authorization.
Material changes versus the prior comparable period
- Acquisitions completed in 2011 contributed $50.2 million of second-quarter sales and $102.8 million of six-month sales. The acquisitions included Kitchen Basics, Kohinoor Speciality Foods India and Kamis.
- Excluding acquisitions and foreign exchange, second-quarter sales grew 7.1%, supported by 5.0% pricing and 2.1% volume and product mix. Foreign exchange reduced reported sales growth by 1.5%.
- Consumer sales increased 14.0% in the quarter and 15.7% year to date. Consumer operating income increased 15.1% in the quarter but only 3.7% year to date; the year-to-date margin declined to 15.4% from 17.2%.
- Industrial sales increased 7.9% in the quarter and 10.4% year to date. Industrial operating income increased only 1.2% in the quarter, partly due to unfavorable sales mix and higher benefit costs, but rose 14.1% year to date.
- Gross margin declined 20 basis points in the quarter and 140 basis points year to date, reflecting higher material costs. Pricing actions and Comprehensive Continuous Improvement savings helped stabilize margins.
- Income from unconsolidated operations declined to $3.9 million from $6.1 million in the quarter and to $8.5 million from $14.0 million year to date, primarily because of unfavorable Mexican peso exchange effects on McCormick de Mexico.
- Operating cash flow improved by $108.1 million year to date, mainly because inventory increased less than in the prior-year period. Pension contributions were $54.7 million, up from $39.0 million.
- Accumulated other comprehensive income changed from income of $112.4 million at May 31, 2011 to a loss of $127.3 million at May 31, 2012, principally due to currency translation effects and pension-related amounts.
Guidance, outlook, risks and unusual items
- Management projected 2012 local-currency sales growth of 10% to 12%, with approximately a 2% reduction from unfavorable currency exchange rates, and diluted EPS of $3.01 to $3.06.
- Management expected high-single-digit material-cost inflation, at least $45 million of 2012 CCI cost savings, approximately $15 million of incremental brand marketing, and $9 million of additional retirement benefit expense.
- Management projected a tax rate of approximately 30% for the remainder of 2012 and expected at least a 20% full-year decline in income from unconsolidated operations.
- 2012 capital expenditures were expected to be $100 million to $110 million; pension contributions were expected to be approximately $66 million.
- The second-quarter and year-to-date tax provisions included a $1.5 million discrete tax benefit from reversing part of a valuation allowance. The IRS had issued Notices of Proposed Adjustments concerning the company’s 2007 and 2008 federal tax returns; management stated that appropriate tax accruals had been established.
- Principal risks include raw-material and packaging-cost volatility, foreign exchange movements, customer concentration and credit risk, acquisition integration, execution of cost savings, pension funding requirements, financing and bank-counterparty availability, business interruptions, regulatory changes, information technology risks and cyber threats.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors and no material changes in contractual obligations outside the ordinary course of business.
- Management concluded that disclosure controls and procedures were effective as of May 31, 2012, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether pricing actions and CCI savings can offset high-single-digit material inflation without further erosion of gross margin.
- The sustainability of underlying, acquisition-excluded sales growth after pricing increases and the effect of foreign exchange on reported results.
- Debt reduction and liquidity capacity, including seasonal borrowing needs and the 43.7% debt-to-total-capital ratio.
- The integration and performance of Kamis, Kohinoor and Kitchen Basics, including their contribution to sales, goodwill and intangible assets.
- The magnitude and timing of the expected decline in unconsolidated income, particularly from McCormick de Mexico.
- Actual full-year EPS, sales, tax rate, capital expenditures, pension contributions and share repurchases versus management’s stated expectations.
- Potential exposure from the IRS tax examination and Notices of Proposed Adjustments for 2007 and 2008.