McCormick & Company, Incorporated — 2011 Q2 Form 10-Q
Reporting period: Three and six months ended May 31, 2011. The filing was signed July 1, 2011. McCormick operates consumer and industrial businesses selling spices, seasonings, condiments and related products globally. Approximately 40% of annual sales historically originate outside the United States.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|
| Net sales | $883.7 million | $798.3 million | $1,666.5 million | $1,562.8 million |
| Operating income | $109.3 million | $97.5 million | $219.9 million | $198.4 million |
| Net income | $73.6 million | $66.2 million | $150.4 million | $134.2 million |
| Diluted EPS | $0.55 | $0.49 | $1.12 | $1.00 |
| Gross margin | 39.7% | 40.9% | 40.7% | 40.8% |
| Effective tax rate | 31.1% | 30.2% | 30.7% | 30.5% |
- Second-quarter sales increased 10.7%, including a 2.9% favorable foreign-exchange impact; constant-currency growth was 7.8%, driven by 4.8% pricing and 3.0% volume and product mix.
- Six-month sales increased 6.6%. Operating income rose 12.6% in the quarter and 10.8% for the six-month period; net income rose 11.2% and 12.1%, respectively.
- Gross profit increased 7.3% in Q2, but gross margin declined 120 basis points as higher raw-material and packaging costs flowed through cost of goods sold.
- SG&A was $241.4 million in Q2 and $459.0 million for six months. SG&A as a percentage of sales improved to 27.3% and 27.5%, respectively, from 28.7% and 28.1%.
- Consumer Q2 sales increased 10.2% to $499.0 million, with operating income up 12.9% to $77.0 million and a 15.4% operating margin.
- Industrial Q2 sales increased 11.3% to $384.7 million, with operating income up 10.2% to $32.3 million and an 8.4% operating margin.
Cash flow, liquidity and debt
| Metric | Six months 2011 | Six months 2010 |
|---|
| Operating cash flow | $36.3 million | $65.2 million |
| Capital expenditures | $33.4 million | $32.4 million |
| Cash used in financing | $22.4 million | $31.8 million |
| Ending cash | $47.9 million | $23.1 million |
- Operating cash flow declined primarily because of higher inventories, including inventory accumulated in response to higher material costs and potential supply issues.
- At May 31, 2011, short-term borrowings were $108.2 million, current long-term debt was $100.3 million and long-term debt was $781.2 million.
- Debt-to-total-capital was 37.6%, compared with 43.8% at May 31, 2010.
- Six-month financing activities included $107.9 million of net short-term borrowings, $89.2 million of share repurchases and $74.3 million of dividends paid.
- Capital expenditures for fiscal 2011 were expected to be $90 million to $100 million. Pension contributions were expected to be approximately $46 million.
- In June 2011, McCormick entered a new five-year $600 million revolving credit facility expiring in June 2016, replacing the prior $500 million facility. The stated fully drawn interest rate is LIBOR plus 0.875%.
Material changes and unusual items
- Management raised projected 2011 CCI cost savings to at least $45 million from the prior estimate of at least $40 million.
- Raw-material and packaging costs were expected to increase by more than the initial 7% to 8% estimate in the second half of 2011. Management expects second-half gross margin to be below the prior-year period.
- Q2 2011 included $2 million of acquisition-related costs. Management expected an additional $7 million in the third quarter, for approximately $9 million in total costs related to the planned Kohinoor and Kamis transactions.
- Prior-year comparisons benefited from discrete tax benefits of $2.9 million in Q2 and $4.7 million for six months from tax-audit settlements. The 2011 six-month period included only a $0.8 million discrete tax benefit.
- Operating income comparisons benefited from the absence of 2010 product-recall costs totaling $1.3 million in the consumer business and $4.4 million in the industrial business.
- Foreign-currency translation increased accumulated other comprehensive income to $112.4 million at May 31, 2011, from a loss of $76.7 million at May 31, 2010.
Guidance, outlook and risks
- Fiscal 2011 guidance called for 6% to 8% sales growth in local currency and diluted EPS of $2.74 to $2.79, including expected acquisition-related costs.
- Long-term objectives were 4% to 6% annual sales growth and 9% to 11% annual EPS growth.
- Management expected the acquisitions to contribute minimal profit in 2011 but to add $0.07 to $0.09 to diluted EPS in 2012.
- Management projected an approximately 31% tax rate for 2011 and expected unconsolidated-operations income to be slightly below 2010 levels, partly because of higher soybean-oil costs at the Mexico joint venture.
- In June 2011, McCormick agreed to invest $115 million for an 85% interest in a new Indian joint venture with Kohinoor Foods and agreed to acquire Poland-based Kamis for approximately $291 million, subject to regulatory and other approvals.
- Key risks include raw-material availability and inflation, foreign-exchange movements, customer and credit concentration, competitive private-label activity, acquisition execution and integration, achievement of CCI savings, financing-market access, pension funding requirements and global economic conditions.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether pricing actions and CCI savings continue to offset accelerating raw-material and packaging inflation without further gross-margin erosion.
- The completion, financing, integration costs and operating performance of the Kohinoor and Kamis transactions.
- Actual second-half sales, EPS and tax-rate performance relative to the $2.74 to $2.79 EPS guidance.
- Inventory normalization and recovery of operating cash flow, which was substantially below the prior-year six-month level.
- Debt financing needs following acquisitions, share repurchases and seasonal working-capital requirements.
- Foreign-exchange effects on reported sales, goodwill, equity and comprehensive income.
