McCormick & Company, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
McCormick manufactures, markets and distributes spices, seasonings, condiments and other flavor products to retail, food manufacturing and foodservice customers. Operations are managed through the Consumer and Flavor Solutions segments. The filing covers the three months ended February 28, 2019; results are unaudited and seasonally weighted toward the second half of the fiscal year.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,231.5 million | $1,215.4 million | +1.3%; +4.1% constant currency |
| Gross profit / margin | $466.9 million / 37.9% | $460.4 million / 37.9% | Profit +1.4%; margin flat |
| Operating income | $196.9 million | $181.1 million | +8.7% |
| Adjusted operating income | $199.0 million | $192.0 million | +3.6%; margin 16.2% vs. 15.8% |
| Net income | $148.0 million | $422.6 million | Down from prior-year tax benefit |
| Diluted EPS | $1.11 | $3.18 | Down from prior-year tax benefit |
| Operating cash flow | $103.6 million | $(20.5) million | Improved $124.1 million |
Consumer sales were $744.9 million, essentially flat as reported and up 2.7% in constant currency. Flavor Solutions sales increased 3.4% as reported and 6.4% in constant currency. Segment operating margins were 18.2% for Consumer and 13.1% for Flavor Solutions.
Cash and cash equivalents were $102.3 million at February 28, 2019, compared with $179.6 million a year earlier. Total debt, including short-term borrowings and current maturities, was approximately $4.72 billion, versus approximately $5.13 billion a year earlier. Management reported a trailing-twelve-month leverage ratio of 4.0, down from 4.9 a year earlier. The company had a $1.0 billion revolving credit facility, and management stated that covenant compliance and liquidity were expected to be adequate for the foreseeable future.
Investing cash use was $25.3 million, including $25.4 million of capital expenditures. Financing cash use was $79.4 million, including $21.5 million of long-term debt repayments, $75.3 million of dividends and $30.5 million of share repurchases. Approximately $96.4 million remained under the $600 million repurchase authorization.
Material changes versus the prior comparable period
- Sales growth was primarily volume- and mix-driven, while unfavorable foreign exchange reduced reported sales by 2.8%.
- Operating income benefited from the absence of $8.7 million of RB Foods transaction and integration expenses incurred in Q1 2018. Special charges were broadly unchanged at $2.1 million versus $2.2 million.
- Net income and EPS were not comparable because Q1 2018 included a $297.9 million discrete tax benefit related to the U.S. Tax Act. Q1 2019 included $17.6 million of discrete tax benefits, principally a $16.2 million benefit from an intra-entity asset transfer.
- The company adopted revenue recognition and pension presentation standards retrospectively. The adoption changed classification of certain revenue, shipping and marketing costs but did not affect operating income, net income or EPS.
- Interest expense increased $1.2 million to $43.0 million, principally due to higher interest rates despite lower average debt.
Guidance, outlook, commentary and risks
- For fiscal 2019, management projected sales growth of 1% to 3%, or 3% to 5% in constant currency, including an estimated 2% unfavorable currency impact.
- Management projected operating income growth of 10% to 12% and adjusted operating income growth of 7% to 9%, including a 2% currency headwind. The 2019 gross margin was expected to improve by 25 to 75 basis points.
- Reported diluted EPS guidance was $5.09 to $5.19; adjusted diluted EPS guidance was $5.17 to $5.27. The company targeted approximately $110 million of CCI-led cost savings and approximately $210 million of capital expenditures.
- Special charges were expected to total approximately $15 million in 2019. The multi-year Global Enablement initiative was expected to cost $55 million to $65 million and ultimately generate annual savings of approximately $30 million to $40 million.
- Key risks include foreign exchange volatility, raw-material and packaging costs, customer and private-label competition, supply-chain disruption, acquisition integration, elevated debt service, interest rates, tax-rate volatility, pension funding, cybersecurity, regulatory matters and Brexit-related tariffs, logistics and currency effects.
- No material pending legal proceedings were reported, and management stated that there were no material changes in contractual obligations outside the ordinary course other than new cross-currency swaps.
Important facts for investors to verify
- Reconcile GAAP EPS and net income with adjusted measures, particularly the large Q1 2018 U.S. Tax Act benefit and Q1 2019 discrete tax benefit.
- Monitor debt reduction, leverage covenant headroom, interest expense and the company’s ability to fund dividends, capital expenditures and seasonal working capital.
- Assess whether CCI and Global Enablement savings offset inflation, distribution costs, product-mix pressure and currency headwinds.
- Track organic volume and mix growth by segment and region, especially Consumer performance in EMEA and Asia/Pacific.
- Verify fiscal 2019 sales, margin, EPS, special-charge and capital-expenditure guidance against subsequent filings.
- Review the effects of Brexit, raw-material volatility, customer concentration, acquisition integration and the planned lease-accounting adoption on future results and balance-sheet presentation.