MCCORMICK & CO INC quarterly report, Q1 FY2016

McCormick & Company, Incorporated — Q1 2016 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 industrial segments across North America, Europe, Asia/Pacific and other markets. The filing covers the three months ended February 29, 2016, compared primarily with the three months ended February 28, 2015. Results are seasonally weaker in the first half of the fiscal year.

Financial performance and liquidity

Metric	Q1 2016	Q1 2015	Change
Net sales	$1,030.2 million	$1,010.4 million	+2.0%
Gross profit	$405.0 million	$389.7 million	+3.9%
Gross margin	39.3%	38.6%	+70 bps
Operating income	$129.1 million	$93.7 million	+37.7%
Net income	$93.4 million	$70.5 million	+32.5%
Diluted EPS	$0.73	$0.55	+$0.18
Operating cash flow	$77.9 million	$95.9 million	-$18.0 million

Adjusted operating income, excluding special charges, was $130.7 million versus $122.1 million, an increase of 7.0% reported and 11.8% in constant currency.
Consumer sales rose 2.2% reported and 6.4% in constant currency; adjusted operating margin was 14.9% versus 14.8%.
Industrial sales rose 1.6% reported and 6.9% in constant currency; adjusted operating margin increased to 9.2% from 7.8%.
Foreign currency reduced reported sales growth by 4.6 percentage points and contributed to a $1.5 million decline in income from unconsolidated operations.
Cash and cash equivalents were $111.8 million at February 29, 2016, compared with $112.6 million at November 30, 2015 and $81.8 million a year earlier.
Capital expenditures were $22.4 million. Management expects full-year 2016 capital expenditures of $150 million to $160 million.
Total debt was $1,446.5 million, including $389.6 million of short-term borrowings and $1,056.9 million of long-term debt including its current portion. The trailing twelve-month total debt-to-adjusted EBITDA ratio was 1.89 versus 1.85 at November 30, 2015.
The company repurchased $47.8 million of stock and paid $54.6 million in dividends. Remaining share-repurchase authorization was $522 million of the $600 million approved in March 2015.

Material changes versus the prior comparable period

Operating income benefited substantially from special charges declining to $1.6 million from $28.4 million in Q1 2015. The 2015 amount included significant North American severance costs.
Gross margin improved through Comprehensive Continuous Improvement savings, organization and streamlining actions, scale benefits and pricing actions.
Sales growth included 3.0% from volume and product mix, 0.9% from pricing and 2.7% from acquisitions, offset by the unfavorable currency impact.
2015 acquisitions contributed to Q1 2016 sales: Brand Aromatics $7.2 million, Drogheria & Alimentari $14.6 million and Stubb’s $5.3 million. Their aggregate operating income contribution was not significant due to financing, acquisition and integration costs.
Net short-term borrowings increased $250.8 million, while the company repaid $201.7 million of long-term debt, including $200 million of 5.20% notes that matured in December 2015.
Operating cash flow declined primarily because of the timing of raw-material payments; Q1 2015 operating cash flow also benefited from the add-back of substantial non-cash special charges.

Guidance, outlook, risks and unusual items

For 2016, management projects reported sales growth of 1% to 3%, or 4% to 6% in constant currency.
Reported diluted EPS is projected at $3.65 to $3.72; adjusted diluted EPS, excluding an estimated $0.03 per-share impact from special charges, is projected at $3.68 to $3.75.
Management expects at least $95 million of 2016 cost savings, low-single-digit material-cost inflation, pricing actions to offset inflation and approximately $20 million of additional brand-marketing investment.
Management expects the 2016 annual effective tax rate to be approximately 28%, absent additional discrete items. Q1 included $3.8 million of discrete tax benefits.
Additional 2016 special charges are expected, including approximately $2.1 million to $4.4 million for EMEA reorganization actions and approximately $1.1 million to $3.1 million related to the Kohinoor profitability initiative.
The company targets $400 million of cost savings by November 30, 2019. EMEA actions are expected to generate approximately $3 million of savings in 2016 and $19 million by the end of 2017.
Key risks include foreign currency volatility, raw-material availability and inflation, pricing execution, competition and private-label products, customer concentration and credit risk, acquisition integration, supply-chain disruption, cybersecurity, product quality and labeling, pension obligations, tax-rate volatility, litigation and access to credit markets.
The D&A acquisition includes a potential 2018 earn-out of up to €35 million. Its recorded fair value was $28.4 million at February 29, 2016, subject to changes in estimates and foreign currency.
The company had no material pending legal proceedings, reported no material changes to previously disclosed risk factors, and concluded that disclosure controls and procedures were effective.

Important facts for investors to verify

Whether constant-currency growth and cost savings can offset continued foreign exchange pressure, material inflation and higher brand-marketing spending.
The pace and cash cost of remaining EMEA, North American and Kohinoor restructuring actions.
Debt reduction plans, short-term borrowing levels, interest-rate exposure and the 1.89 debt-to-adjusted-EBITDA ratio.
Integration performance and final purchase-accounting valuations for D&A and Stubb’s, including the D&A earn-out liability.
Underlying operating cash conversion, particularly as seasonal working-capital requirements increase later in the year.
Progress toward the 2016 sales, EPS, capital-expenditure and cost-savings guidance, recognizing that the filing does not guarantee these outcomes.