Business Context and Reporting Period
McCormick & Company, Incorporated is a global producer and distributor of spices, seasonings, condiments, sauces and other flavor products. It serves retail consumers through the Consumer segment and food manufacturers and foodservice customers through the Flavor Solutions segment. The Form 10-K covers the fiscal year ended November 30, 2023; fourth-quarter results are seasonally significant because holiday demand generally increases sales, income and operating cash flow.
- Consumer represented approximately 57% of 2023 consolidated sales and 73% of consolidated operating income.
- Flavor Solutions represented approximately 43% of sales and 27% of operating income.
- Approximately 39% of sales came from non-U.S. operations.
- Major customer concentration included Walmart at approximately 12% of consolidated sales and PepsiCo at approximately 13%.
Key Financial Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $6,662.2 million | $6,350.5 million | +4.9% |
| Gross profit | $2,502.5 million | $2,274.5 million | +10.0% |
| Gross margin | 37.6% | 35.8% | +180 bps |
| Operating income | $963.0 million | $863.6 million | +11.5% |
| Operating margin | 14.5% | 13.6% | +90 bps |
| Net income | $680.6 million | $682.0 million | Essentially flat |
| Diluted EPS | $2.52 | $2.52 | Flat |
| Adjusted diluted EPS | $2.70 | $2.53 | +6.7% |
| Cash flow from operations | $1,237.3 million | $651.5 million | +89.9% |
Pricing actions contributed 8.5% to sales growth, while volume and product mix reduced sales by 2.6%, including the effects of price elasticity, the exit from Russia and the pruning of low-margin businesses. Foreign exchange reduced reported growth by 0.6%; constant-currency sales growth was 5.5%.
- Consumer: Sales increased 1.3% to $3,807.3 million; segment operating income increased 3.5% to $735.5 million, with a 19.3% margin versus 18.9%.
- Flavor Solutions: Sales increased 10.1% to $2,854.9 million; segment operating income increased 39.7% to $288.7 million, with a 10.1% margin versus 8.0%.
- Interest and taxes: Interest expense increased to $208.2 million from $149.1 million. The effective tax rate increased to 21.8% from 20.7%.
- Joint ventures: Income from unconsolidated operations increased to $56.4 million from $37.8 million, primarily due to McCormick de Mexico.
Liquidity, Debt and Capital Allocation
| Metric at November 30, 2023 | Amount |
|---|---|
| Cash and cash equivalents | $166.6 million |
| Short-term borrowings | $272.2 million |
| Current portion of long-term debt | $799.3 million |
| Long-term debt | $3,339.9 million |
| Total indebtedness referenced by management | Approximately $4.4 billion |
| Capital expenditures | $263.9 million |
| Dividends paid | $418.5 million |
- Net cash used in financing activities was $1,184.2 million, driven principally by repayment of short-term borrowings, debt repayments, dividends and share repurchases.
- McCormick issued $500 million of 4.95% notes due 2033 and repaid $268.1 million of long-term debt, including $250 million of notes maturing in September 2023.
- The company had $1.73 billion of capacity remaining under committed revolving credit facilities after supporting commercial paper and an additional $234.3 million of unused uncommitted facilities.
- The most significant near-term debt maturity is $700 million of 3.15% notes due August 2024.
- The cash conversion cycle improved to 40 days from 51 days, primarily because of lower inventory levels.
- The Board increased the quarterly dividend from $0.39 to $0.42 per share in November 2023. Approximately $501 million remained under the $600 million share repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Pricing and productivity savings restored gross margin by 180 basis points despite continued commodity, packaging, transportation and conversion-cost inflation.
- Volume and mix remained unfavorable, particularly in Consumer, where pricing elasticity affected demand. Consumer sales growth was substantially lower than Flavor Solutions growth.
- Operating income improved despite $61.2 million of special charges, compared with $51.6 million in 2022. The 2023 charges principally related to the GOE program, EMEA manufacturing transition and regional streamlining.
- Reported net income and diluted EPS were flat because higher operating income was offset by higher interest expense, lower other income and a higher tax rate. The 2022 period benefited from a $49.6 million gain on the Kitchen Basics sale and $18.7 million from treasury-lock settlements.
- Operating cash flow increased substantially because of inventory reductions, improved working capital and higher dividends received from unconsolidated affiliates.
- Inventory declined to $1,126.5 million from $1,340.1 million, while cash declined to $166.6 million from $334.0 million.
Guidance, Outlook, Risks and Unusual Items
Management expects 2024 net sales to decline 2% to 0% on a reported basis, including a 1% unfavorable currency impact, or decline 1% to increase 1% in constant currency. Gross margin is expected to improve 50 to 100 basis points from 37.6%. Operating income is expected to increase 8% to 10%, while adjusted operating income is expected to increase 3% to 5% reported or 4% to 6% in constant currency. Diluted EPS is projected at $2.76 to $2.81; adjusted diluted EPS is projected at $2.80 to $2.85.
- Management expects approximately $15 million of 2024 special charges, compared with $61.2 million in 2023.
- Brand marketing investment is expected to increase in the high-single digits, and income from unconsolidated operations is expected to increase at a mid-teens percentage rate.
- Capital expenditures are expected to approximate $290 million in 2024 and approximately 4% of sales over the next several years. Annual ERP-related operating expenses through 2027 are expected to be approximately $35 million to $50 million.
- Key risks include commodity and raw-material availability and pricing, inflation, price elasticity, customer concentration, private-label competition, supply-chain and labor disruptions, foreign exchange, interest rates and refinancing needs, geopolitical conflicts, cyberattacks, regulatory changes, product safety, litigation and climate-related impacts.
- Goodwill was $5.26 billion and brand names and trademarks were $3.05 billion at year-end. The 2023 impairment tests indicated substantial excess fair value over carrying value, but recent acquisitions and rising interest rates could increase future impairment sensitivity.
- The company reported no material pending legal proceedings and no material reserves for litigation. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Facts Investors Should Verify
- Whether 2024 sales and volume performance can meet guidance despite the projected reported sales decline and continued price elasticity.
- Whether GOE, CCI and other productivity savings offset inflation, higher marketing investment and distribution costs.
- How the $700 million August 2024 debt maturity will be refinanced or repaid, and the effect of interest rates on debt service.
- Whether cash conversion and inventory improvements are sustainable rather than primarily timing-related or seasonal.
- The durability of Flavor Solutions growth and the recovery of Consumer volume and mix.
- Potential impairment exposure for goodwill, Cholula, FONA and other brand-related intangible assets.
- Exposure to Walmart, PepsiCo and the concentrated top customers in Flavor Solutions.
- The financial and operational effects of the ERP transformation, EMEA facility transition and other restructuring actions.