McCormick & Company, Incorporated — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended November 30, 2015. The filing also provides fourth-quarter 2015 data. McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor products serving consumer retail, food manufacturing and foodservice customers. Operations are reported in the Consumer and Industrial segments, with 43% of 2015 sales generated outside the United States.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $4,296.3 million | $4,243.2 million | +1.3% |
| Gross profit | $1,737.3 million | $1,730.2 million | +0.4% |
| Gross margin | 40.4% | 40.8% | -40 bps |
| Operating income | $548.4 million | $603.0 million | -9.0% |
| Operating margin | 12.8% | 14.2% | -140 bps |
| Net income | $401.6 million | $437.9 million | -8.3% |
| Diluted EPS | $3.11 | $3.34 | -6.9% |
| Adjusted diluted EPS | $3.48 | $3.37 | +3.3% |
| Cash flow from operations | $590.0 million | $503.6 million | +$86.4 million |
| Capital expenditures | $128.4 million | $132.7 million | -$4.3 million |
Reported results include $65.5 million of special charges in 2015 versus $5.2 million in 2014. Excluding special charges, adjusted operating income increased to $613.9 million from $608.2 million, while adjusted net income increased to $449.5 million from $441.6 million.
- Sales drivers: Volume and product mix contributed 3.9%, pricing contributed 1.1% and acquisitions contributed 1.4%; foreign exchange reduced reported sales growth by 5.1%. Constant-currency sales increased 6.4%.
- Consumer segment: Sales were $2,635.2 million, up 0.4%; adjusted operating income was $456.1 million, down 3.8%, and margin declined to 17.3% from 18.1%.
- Industrial segment: Sales were $1,661.1 million, up 2.7%; adjusted operating income was $157.8 million, up 17.8%, and margin increased to 9.5% from 8.3%.
- Cash returns: Dividends paid were $204.9 million, or $1.60 per share. Share repurchases totaled $145.8 million, representing approximately 1.9 million shares. A $600 million repurchase authorization remained, with approximately $570 million available at year-end.
- Liquidity: Cash and cash equivalents were $112.6 million. Current assets were $1,406.5 million versus current liabilities of $1,240.2 million.
Debt, liquidity and capital resources
- Total debt was $1,395.7 million at year-end, comprising $139.5 million of short-term borrowings and $1,256.2 million of long-term debt, including the current portion.
- The total-debt-to-adjusted-EBITDA ratio increased to 1.85 from 1.73, exceeding management’s stated target range of 1.5 to 1.8, primarily because of acquisition financing.
- McCormick issued $250 million of 3.25% notes due 2025, receiving net proceeds of $246.5 million. The company used short-term borrowings to repay $200 million of 5.20% notes that matured in December 2015.
- A new five-year $750 million revolving credit facility, expiring in June 2020, replaced the prior $600 million facility. Management stated that internally generated funds and existing credit facilities were sufficient for ongoing operations.
- Contractual cash obligations totaled $2,245.9 million, including $1,262.4 million of long-term debt, $415.2 million of raw-material purchase obligations and $291.1 million of interest payments.
Material changes, acquisitions and unusual items
- McCormick acquired Brand Aromatics for $62.4 million, Drogheria & Alimentari for $49.0 million plus potential earn-out consideration, and One World Foods, owner of the Stubb’s brand, for $99.4 million. Aggregate acquisition spending was $210.9 million.
- The acquisitions contributed $59.2 million of 2015 sales but were not significant to overall operating income because of financing, transaction and integration costs.
- Special charges included $29.2 million for North American effectiveness actions, $24.4 million for EMEA streamlining, and $14.2 million related to the Kohinoor business in India. The Kohinoor actions included a $9.6 million brand impairment and a $4.0 million inventory charge.
- Management expects additional 2016 special charges of approximately $3.2 million to $5.5 million for approved EMEA actions and $1.4 million to $3.4 million for future Kohinoor actions.
- Operating cash flow benefited from improved working capital, including higher accounts payable and receivables-related cash generation and a smaller inventory cash use. The cash conversion cycle improved to 90.2 days from 91.4 days.
- Other comprehensive loss was $221.1 million, principally reflecting a $239.8 million unfavorable currency translation adjustment. Accumulated other comprehensive loss was $406.1 million at year-end.
Guidance, outlook and management commentary
- Long-term objectives are annual sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%.
- For 2016, management expects constant-currency sales growth of 4% to 6%, with reported growth reduced by unfavorable foreign exchange. Pricing and cost savings are expected to offset a projected low-single-digit increase in raw-material and packaging costs.
- 2016 capital expenditures are expected to be $150 million to $160 million, and the effective tax rate is expected to be approximately 28%.
- Income from unconsolidated operations is expected to be comparable to 2015, while continued currency pressure and material costs are expected to affect the McCormick de Mexico joint venture.
- Management expects North American effectiveness actions to generate approximately $27 million of annual savings beginning in 2016; EMEA actions are expected to generate approximately $3 million of savings in 2016 and $19 million by the end of 2017.
Principal risks and contingencies
- Foreign-exchange volatility materially affected 2015 reported sales and earnings; the company remains exposed to the U.S. dollar against multiple currencies.
- Raw-material prices and availability are subject to weather, crop yields, market conditions, political events and governmental actions. Key inputs include pepper, dairy products, capsicums, rice, onion, wheat flour and garlic.
- Customer concentration and retailer consolidation may increase pricing, promotional and private-label pressure. Wal-Mart and PepsiCo each represented 11% of consolidated sales in 2015.
- Food safety, contamination, labeling, product recalls, import alerts, litigation and reputational damage could materially affect results.
- Acquisition integration, goodwill and intangible-asset valuation, restructuring execution and realization of Comprehensive Continuous Improvement savings remain important execution risks.
- Pension plans were underfunded by approximately $193.2 million in aggregate at year-end, and required contributions may vary with interest rates and investment returns.
- The company is exposed to cyberattacks, business interruptions, regulatory changes, tax disputes, credit-market conditions and customer counterparty risk.
- No material pending legal proceedings or off-balance-sheet arrangements were reported. The filing states that internal control over financial reporting was effective and the audit opinion was unqualified.
Investor verification checklist
- Verify the effect of foreign exchange on 2016 reported sales, operating income and EPS versus constant-currency growth.
- Assess whether pricing and CCI savings can offset raw-material inflation without further margin compression.
- Track integration, organic growth and profitability of Brand Aromatics, Drogheria & Alimentari and Stubb’s, including the D&A earn-out obligation.
- Monitor leverage against management’s 1.5-to-1.8 target and the company’s refinancing and seasonal commercial-paper needs.
- Evaluate execution of North American, EMEA and Kohinoor restructuring plans and the related future charges and savings.
- Review consumer-segment margin recovery, customer concentration and competitive pressure from private-label products.
- Reconcile GAAP results with management’s non-GAAP measures and confirm the sustainability of adjusted EPS growth.