McCormick & Company, Incorporated — Q2 2022 Form 10-Q Summary
Business context and reporting period
McCormick is a global producer and distributor of spices, seasoning mixes, condiments and other flavor products serving retail, food manufacturing and foodservice customers through its Consumer and Flavor Solutions segments. The filing covers the three and six months ended May 31, 2022, compared with the corresponding 2021 periods.
Management identified inflation, supply-chain disruption, COVID-19 restrictions in China, the Russia-Ukraine conflict and foreign-exchange movements as major factors affecting fiscal 2022 results.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,536.8 million | $1,556.7 million | $3,059.2 million | $3,038.2 million |
| Net sales change | (1.3%) | 11.1% | 0.7% | 16.3% |
| Gross profit | $523.0 million | $614.6 million | $1,083.4 million | $1,192.1 million |
| Gross margin | 34.0% | 39.5% | 35.4% | 39.2% |
| Operating income | $157.2 million | $237.4 million | $364.1 million | $473.7 million |
| Net income | $118.5 million | $183.7 million | $273.4 million | $345.5 million |
| Diluted EPS | $0.44 | $0.68 | $1.01 | $1.28 |
Q2 adjusted operating income, excluding special charges and transaction and integration expenses, was $173.8 million, or 11.3% of sales, versus $258.0 million, or 16.6%, in Q2 2021. Six-month adjusted operating income was $400.9 million, or 13.1% of sales, versus $520.5 million, or 17.1%.
- Segment performance: Q2 Consumer sales declined 8.4% and segment operating income declined 29.4% to $124.8 million; Flavor Solutions sales increased 9.7%, but segment operating income declined 39.7% to $49.0 million.
- Cash flow: Six-month operating cash flow was $154.4 million, down from $228.7 million. Capital expenditures were $101.6 million, and investing cash flow was an outflow of $89.2 million.
- Liquidity: Cash and cash equivalents were $325.8 million at May 31, 2022, compared with $351.7 million at November 30, 2021. Management stated that available cash, operating cash flow, credit facilities, commercial paper and capital-market access should provide sufficient liquidity for at least the next twelve months.
- Debt: Short-term borrowings were $667.0 million, current long-term debt was $770.8 million and long-term debt was $3,920.3 million. The next significant maturity is $750.0 million of 2.70% notes due August 2022.
- Dividends and repurchases: Six-month dividends paid were $198.2 million, or $0.37 per share per quarter. The company repurchased $12.9 million of stock, with $563.1 million remaining under its $600 million authorization.
Material changes versus the prior comparable period
- Pricing actions increased Q2 sales by 6.8%, but volume and product mix reduced sales by 6.6%; foreign exchange reduced sales by 1.5%.
- Gross margin fell 550 basis points in Q2 and 380 basis points for the first six months, primarily because of commodity, packaging, transportation and conversion-cost inflation, price-related margin dilution and unfavorable mix.
- Consumer results were pressured by lower at-home consumption, price elasticity, COVID-related restrictions in China, the Russia and Ukraine disruptions, the India rice-product exit and an unfavorable comparison with a 2021 trade replenishment.
- Flavor Solutions benefited from recovering away-from-home demand and pricing, but profitability declined because of inflation, supply-chain investments and higher conversion costs.
- Income from unconsolidated operations declined to $10.4 million in Q2 and $19.7 million for six months, partly because the 2021 comparative period included a $13.4 million after-tax gain from the sale of the Eastern Condiments investment.
- Operating cash flow declined by $74.3 million year to date, primarily due to lower net income and increased inventory investment. Supplier-finance obligations included in accounts payable were approximately $351.3 million at May 31, 2022.
Guidance, outlook, risks and unusual items
- Fiscal 2022 guidance: Net sales growth of 3% to 5%, including an estimated 2% foreign-exchange headwind; constant-currency growth of 5% to 7%.
- Adjusted operating income is projected to range from comparable to 2% growth, or 2% to 4% growth on a constant-currency basis. Adjusted diluted EPS is projected at $3.03 to $3.08, compared with $3.05 in 2021, with constant-currency growth of 1% to 3%.
- Reported diluted EPS guidance is $2.89 to $2.94. Management expects gross-margin pressure, with a projected 130-to-180-basis-point decline from the 2021 reported margin and a 150-to-200-basis-point decline from the 2021 adjusted margin.
- Management expects approximately $85 million of 2022 CCI-led cost savings, approximately $46 million of special charges and approximately $3 million of FONA integration expenses. Capital expenditures are expected to approximate $320 million.
- Q2 2022 included $15.1 million of net special charges, including $22.2 million related to exiting the Russian consumer business, partly offset by a $13.6 million gain on the sale of the Kohinoor brand. The Russia-related charges included a $10.0 million non-cash impairment and a $7.9 million currency-translation reclassification.
- The company expects approximately $30 million of special charges through 2023 for consolidating U.K. manufacturing operations into a new EMEA facility. Cumulative Global Enablement initiative costs were $40.7 million through May 31, 2022.
- Principal risks include continued inflation and supply-chain disruption, commodity and transportation costs, labor shortages, price elasticity, COVID-19 restrictions, the Russia-Ukraine conflict and sanctions, foreign-exchange volatility, refinancing the August 2022 debt maturity, higher interest rates, acquisition integration, impairment of goodwill or intangible assets, cybersecurity and credit-market availability.
- The company reported no material changes to previously disclosed risk factors other than the Russia-Ukraine conflict. No material pending legal proceedings were reported, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether pricing actions and CCI savings can offset persistent inflation without causing greater volume and mix deterioration.
- The timing and cost of refinancing or repaying the $750.0 million August 2022 notes and the effect of higher interest rates on debt service.
- Progress toward the fiscal 2022 sales, adjusted operating income, EPS, gross-margin and cost-savings guidance.
- The operational and financial effects of the Russia exit, China COVID restrictions, the Ukraine disruption and the EMEA manufacturing consolidation.
- Inventory levels, working-capital trends and the effect of the $351.3 million supplier-finance balance on operating cash flow.
- The sustainability of reported earnings given $19.3 million of discrete tax benefits in the first six months and other special, non-cash and nonrecurring items.