McCormick & Company, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasoning mixes, condiments and other flavor products. It operates through Consumer and Flavor Solutions segments. This report covers the three months ended February 28, 2022, compared with the three months ended February 28, 2021. Results are seasonally stronger later in the fiscal year, particularly in the fourth quarter.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,522.4 million | $1,481.5 million | Up 2.8%; up 4.0% constant currency |
| Gross profit | $560.4 million | $577.5 million | Down 3.0% |
| Gross margin | 36.8% | 39.0% | Down 220 basis points |
| Operating income | $206.9 million | $236.3 million | Down 12.4% |
| Operating margin | 13.6% | 16.0% | Down approximately 240 basis points |
| Net income | $154.9 million | $161.8 million | Down 4.3% |
| Diluted EPS | $0.57 | $0.60 | Down 5.0% |
| Operating cash flow | $17.9 million | $(32.2) million | Improved $50.1 million |
| Capital expenditures | $43.7 million | $48.6 million | Down $4.9 million |
Consumer sales were $926.1 million, down 2.2%, while Flavor Solutions sales were $596.3 million, up 11.5%. Consumer segment operating income declined 12.1% to $167.0 million, with margin decreasing to 18.0% from 20.1%. Flavor Solutions operating income declined 17.2% to $60.1 million, with margin decreasing to 10.1% from 13.6%.
Reported results included $19.5 million of special charges and $0.7 million of transaction and integration expenses. Adjusted operating income was $227.1 million, or 14.9% of sales, compared with $262.5 million, or 17.7%, in the prior-year quarter. Adjusted diluted EPS was $0.63 versus $0.72.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $338.4 million at February 28, 2022, compared with $351.7 million at November 30, 2021.
- Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $5.37 billion. Long-term debt, including the current portion, had a carrying amount of $4.74 billion.
- Short-term borrowings increased to $636.7 million from $539.1 million at fiscal year-end; the current portion of long-term debt was $770.8 million.
- The company had a $1.5 billion revolving credit facility expiring in June 2026 and stated that available liquidity should be sufficient for at least the next twelve months.
- A $750.0 million, 2.70% note maturity in August 2022 is the company’s most significant debt-service obligation over the next year.
- Dividends paid increased to $99.0 million, or $0.37 per share, from $90.8 million, or $0.34 per share. Approximately $567.4 million remained under the $600 million share-repurchase authorization.
- Inventory increased to $1,244.2 million from $1,182.3 million at November 30, 2021. Trade accounts payable included approximately $311.0 million owed to suppliers participating in the company’s supply-chain-financing program.
Material changes versus the prior comparable period
- Pricing actions increased sales by 4.8%, but volume and product mix reduced sales by 1.5%; unfavorable foreign exchange reduced sales by 1.2%.
- Gross margin contracted because of commodity, packaging, transportation and conversion-cost inflation, pricing-related margin dilution, and unfavorable segment mix. CCI cost savings and lower COVID-19-related costs partially offset these pressures.
- Special charges increased to $19.5 million from $1.1 million, primarily due to the planned transition and consolidation of an EMEA manufacturing facility.
- Transaction and integration expenses fell to $0.7 million from $25.1 million, reflecting the completion of much of the Cholula and FONA acquisition activity.
- The effective tax rate decreased to 19.1% from 28.3%, principally because Q1 2022 included $10.3 million of net discrete tax benefits, while Q1 2021 included $5.3 million of net discrete tax expense.
- Operating cash flow improved from an outflow of $32.2 million to an inflow of $17.9 million, while investing cash usage declined substantially because Q1 2021 included $706.6 million for business acquisitions.
Guidance, outlook and management commentary
- Fiscal 2022 net sales are expected to increase 3% to 5%, including an estimated 1% unfavorable foreign-exchange impact, or 4% to 6% on a constant-currency basis.
- Reported operating income is expected to increase 13% to 15%; adjusted operating income is expected to increase 7% to 9%, or 8% to 10% constant currency.
- Reported diluted EPS is projected at $3.07 to $3.12. Adjusted diluted EPS is projected at $3.17 to $3.22.
- Gross margin is expected to range from 20 basis points above to 30 basis points below the 2021 gross margin of 39.5%. Management expects approximately $85 million of CCI-led cost savings and approximately $320 million of 2022 capital expenditures.
- Management expects approximately $30 million of special charges in 2022 and approximately $3 million of FONA integration expenses.
- The company expects elevated inflation, supply-chain disruption, labor constraints and transportation pressure to continue, with mitigation from pricing actions, productivity improvements and cost savings.
- McCormick suspended operations in Russia after the quarter and paused operations in Ukraine for employee safety. Management stated that neither country represents a material portion of the business, but broader escalation could materially affect supply chains, inflation and results.
Risks, contingencies and unusual items
- Primary risks include inflation in commodities, packaging and transportation; pricing elasticity; supply-chain disruption; labor shortages; foreign-exchange volatility; and weaker consumer or away-from-home demand.
- The Russia-Ukraine conflict and related sanctions may affect logistics, customer activity, currencies, financing markets and the cost and availability of materials.
- Debt service and refinancing risk remain relevant, particularly the August 2022 $750 million maturity and the company’s reliance on commercial paper and capital markets.
- The company is implementing a United Kingdom manufacturing consolidation expected to cost approximately $30 million through 2023 and expects Global Enablement initiative costs of approximately $60 million to $65 million over its multi-year course; cumulative Global Enablement spending was $40.7 million through February 28, 2022.
- Management identified risks related to acquisition integration, ERP implementation, goodwill and intangible-asset impairment, pension obligations, cyberattacks, tax changes, climate and ESG matters, and the LIBOR transition.
- No material pending legal proceedings were reported. Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Facts investors should verify
- Whether pricing actions and CCI savings offset the continuing inflationary and supply-chain pressures without causing greater volume declines.
- The pace of margin recovery in both segments, particularly Flavor Solutions, where sales increased but operating margin fell to 10.1%.
- The company’s plan to refinance or repay the $750 million August 2022 note maturity and its ongoing commercial-paper requirements.
- Actual special charges and integration costs versus the 2022 guidance, including the EMEA manufacturing consolidation.
- The financial and operational effects of suspending Russia operations and pausing Ukraine operations as the conflict develops.
- Whether fiscal 2022 sales, adjusted operating income and adjusted EPS guidance remains achievable amid currency, inflation and demand volatility.