McCormick & Company, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor products serving consumer retail, food manufacturers and foodservice customers. It operates through consumer and industrial segments. The filing covers the three months ended February 28, 2015; results are unaudited and seasonally lower than later fiscal-year periods.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1,010.4 million | $993.4 million | 1.7% increase |
| Gross profit | $389.7 million | $391.5 million | 0.5% decrease |
| Gross margin | 38.6% | 39.4% | 80 basis-point decrease |
| Operating income | $93.7 million | $124.6 million | 24.8% decrease |
| Operating margin | 9.3% | 12.5% | Approximately 260 basis-point decrease |
| Net income | $70.5 million | $82.5 million | 14.5% decrease |
| Diluted EPS | $0.55 | $0.62 | 11.3% decrease |
| Operating cash flow | $95.9 million | $76.7 million | $19.2 million increase |
- Reported sales growth included a 3.9% unfavorable foreign-exchange impact; constant-currency sales increased 5.6%, driven by 4.6% volume and product mix growth and 1.0% pricing.
- Consumer sales increased 0.8% as reported and 4.9% in constant currency. Consumer operating income excluding special charges declined 3.0%, with margin declining to 14.8% from 15.3%.
- Industrial sales increased 3.2% as reported and 6.8% in constant currency. Industrial operating income excluding special charges increased 1.0%, while margin declined to 7.8% from 8.0%.
- Special charges were $28.4 million, reducing operating income and diluted EPS by approximately $0.15. Adjusted operating income was $122.1 million and adjusted diluted EPS was $0.70.
- Income from unconsolidated operations increased to $9.9 million from $5.1 million, principally due to improved performance at the Mexico joint venture.
- The effective tax rate was 24.8%, compared with 31.1%, including $3.8 million of discrete tax benefits in 2015.
Liquidity, debt and cash flow
- Cash and cash equivalents were $81.8 million at February 28, 2015, compared with $77.3 million at November 30, 2014.
- Total debt was $1,323.0 million, consisting of $310.5 million of short-term borrowings, $205.7 million of current long-term debt and $806.8 million of long-term debt.
- Total debt to trailing twelve-month adjusted EBITDA was 1.78, compared with 1.73 at November 30, 2014 and 1.77 at February 28, 2014.
- Capital expenditures were $15.5 million. Fiscal 2015 capital expenditures were expected to be $130 million to $140 million.
- Cash flow from operations benefited from unusually high receivable collections, including accelerated collection through a large customer’s vendor-financing program; management stated this benefit was not expected to recur for the balance of the year.
- Financing cash flow used $64.2 million, including $64.9 million for share repurchases and $51.3 million of dividends. The company had $51 million remaining under its prior $400 million repurchase authorization at quarter-end.
- Management stated that existing cash, operating cash flow and available borrowing facilities should be adequate for the next twelve months, including seasonal working capital, capital expenditures, acquisitions, interest and debt service.
Material changes versus the prior comparable period
- Sales growth slowed on a reported basis because of significant currency headwinds, although underlying constant-currency growth improved across both segments.
- Gross and operating profitability declined because higher material costs and retirement benefit expense exceeded the benefits of cost savings, pricing and operating leverage.
- Operating income was additionally reduced by $28.4 million of special charges, compared with no special charges in the prior-year quarter.
- Net income and EPS declined despite lower taxes, higher unconsolidated income and a lower share count.
- Accumulated other comprehensive loss increased to $314.9 million from $186.0 million at November 30, 2014, principally reflecting a $137.2 million unfavorable currency translation adjustment during the quarter.
- Average short-term borrowings increased to $484.7 million from $336.4 million, and average total debt increased to $1,489.7 million from $1,341.4 million.
Guidance, outlook, risks and unusual items
- Management projected 2015 sales growth of 4% to 6% on a constant-currency basis, with foreign exchange expected to reduce reported growth.
- Adjusted diluted EPS was projected at $3.44 to $3.51, including an estimated $0.16 per-share impact from special charges. This represented expected reported growth of 2% to 4% and constant-currency growth of 6% to 8% versus 2014 adjusted EPS of $3.37.
- CCI cost savings were expected to reach at least $65 million in 2015, supplemented by approximately $20 million from North American streamlining and EMEA reorganization activities. Material cost inflation was expected in the mid-single-digit range and was expected to be largely offset by cost savings and pricing.
- The North American effectiveness initiative was expected to cost approximately $26 million and generate approximately $10 million of 2015 savings and approximately $25 million of annual savings beginning in 2016. EMEA actions were expected to generate approximately $3 million of annual savings by 2016.
- In February 2015, McCormick agreed to acquire Italy-based Drogheria & Alimentari for approximately €50 million in cash, plus a potential earn-out of up to €35 million, subject to regulatory approval and closing conditions.
- On March 9, 2015, the company acquired Brand Aromatics for approximately $63 million. The acquisition was not expected to be accretive to 2015 EPS because of transaction, integration and financing costs.
- On March 25, 2015, the board authorized an additional $600 million share repurchase program.
- Principal risks include foreign-currency volatility, raw-material cost and availability, customer and credit concentration, private-label competition, supply-chain disruption, acquisition integration, pension obligations, tax-rate variability, cybersecurity, regulatory and product-quality matters, and access to credit markets.
- The filing reported no material changes to previously disclosed risk factors, no material pending legal proceedings and effective disclosure controls.
Investor verification checklist
- Verify the sustainability of constant-currency sales growth after separating pricing, volume, mix and foreign-exchange effects.
- Track whether CCI savings and pricing actions offset mid-single-digit material-cost inflation and restore gross margins.
- Confirm the timing, cash cost and realized savings from the North American and EMEA restructuring programs.
- Assess leverage and liquidity after the Brand Aromatics acquisition, the planned D&A acquisition and continued share repurchases.
- Reconcile reported EPS with adjusted EPS and evaluate the recurring versus discrete effects of special charges and tax benefits.
- Monitor currency translation effects, pension funding requirements and the unusually favorable first-quarter receivable collections.