McCormick & Company, Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended August 31, 2014. The filing is unaudited. McCormick operates consumer and industrial businesses supplying spices, seasonings, condiments and flavor products globally. Results are typically stronger in the second half of the fiscal year, particularly the fourth quarter.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $1,042.8 million | $1,016.4 million | $3,069.6 million | $2,953.4 million |
| Gross profit | $420.1 million | $407.6 million | $1,224.1 million | $1,163.6 million |
| Gross margin | 40.3% | 40.1% | 39.9% | 39.4% |
| Operating income | $157.3 million | $148.4 million | $403.6 million | $376.4 million |
| Net income | $122.9 million | $104.4 million | $289.9 million | $259.0 million |
| Diluted EPS | $0.94 | $0.78 | $2.21 | $1.94 |
- Q3 sales increased 2.6%; excluding currency, sales increased 2.0%, driven by 1.5% pricing and 0.5% volume and mix. Nine-month sales increased 3.9%, including a 2.5% contribution from the WAPC acquisition.
- Q3 operating income increased 6.0% and nine-month operating income increased 7.2%. Adjusted operating income, excluding special charges, was $159.6 million in Q3 and $405.9 million for nine months.
- Q3 net income increased 17.7% and diluted EPS increased 20.5%. The effective tax rate was 21.4% in Q3 and 26.5% for nine months, aided by discrete tax benefits.
- Consumer Q3 sales increased 1.5%, while operating income excluding special charges increased 2.9%; consumer margin was 19.6% versus 19.4%.
- Industrial Q3 sales increased 4.2%, while operating income excluding special charges increased 26.3%; industrial margin improved to 8.9% from 7.4%.
- Net cash provided by operating activities was $275.8 million for nine months, up from $227.4 million. Capital expenditures were $78.0 million versus $54.0 million.
- Cash and cash equivalents were $93.8 million at August 31, 2014, compared with $146.8 million a year earlier and $63.0 million at November 30, 2013.
- Total debt was $1,367.7 million, consisting of $352.2 million of short-term borrowings, $1.2 million of current long-term debt and $1,014.3 million of long-term debt. Total debt to adjusted EBITDA was 1.81, versus 1.95 a year earlier.
- The company repurchased $178.4 million of stock during the first nine months and paid $144.7 million in dividends. $181 million remained under the $400 million repurchase authorization at August 31, 2014.
Material Changes Versus Prior Comparable Period
- Profitability improved primarily through higher sales, Comprehensive Continuous Improvement cost savings, improved industrial product mix and lower pension and interest expense.
- Gross margin expanded 20 basis points in Q3 and 50 basis points for the first nine months.
- Interest expense declined to $12.4 million in Q3 from $14.0 million and to $37.3 million for nine months from $41.4 million, primarily following the 2013 refinancing of higher-cost debt.
- Operating cash flow increased by $48.4 million, largely due to lower pension contributions and improved receivables collections.
- Financing cash flow shifted to a $165.6 million use, compared with an $18.9 million source in the prior-year period, reflecting increased share repurchases, dividends and reduced net long-term borrowings.
- Comprehensive income declined to $84.9 million in Q3 from $105.1 million, primarily because of a larger unfavorable currency translation adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2014 sales growth of 3% to 5% in local currency and operating income above 2013 levels. Adjusted operating income was expected to increase 4% to 5% versus 2013 adjusted operating income of $590.8 million.
- Adjusted diluted EPS guidance was $3.30 to $3.37, compared with 2013 adjusted diluted EPS of $3.13. Management projected an approximately 27% full-year effective tax rate.
- 2014 capital expenditures were expected to be $120 million to $130 million. CCI savings were expected to reach at least $50 million, while material cost inflation was expected in the low single-digit range.
- The company recorded $2.3 million of Q3 and year-to-date special charges: $1.0 million for the EMEA reorganization and $1.3 million for U.S. industrial manufacturing realignment. Remaining EMEA charges and related actions were expected to be completed by 2015, with approximately $10 million of annual savings expected by 2015.
- Q3 income taxes included $6.2 million of discrete benefits; nine-month taxes included $5.5 million of discrete benefits, including French tax matters and prior-year tax accrual adjustments. The IRS examination of 2007–2008 U.S. federal tax years remained in administrative appeals; the company had deposited $18.8 million with the IRS.
- Management noted risks from foreign exchange, raw-material prices and availability, customer and competitor conditions, product quality and safety, supply-chain disruptions, acquisitions, pension obligations, tax-rate volatility, credit markets, cyber risks, regulation, litigation and climate effects on raw materials.
- Demand from quick-service restaurant customers in Asia/Pacific slowed during Q3 following quality-issue news involving a major restaurant supplier in China. Consumer sales in the Americas were also affected by holiday-display purchases shifting from Q3 toward Q4.
- The company adopted additional accumulated other comprehensive income disclosures. Revenue standard ASU 2014-09 was not yet adopted and its impact had not been determined.
Investor Verification Points
- Verify the sustainability of sales growth after excluding WAPC, pricing and foreign-exchange effects, particularly the consumer volume decline.
- Assess whether CCI savings and industrial mix improvements can offset material-cost inflation and increased brand marketing investment.
- Reconcile reported EPS growth with the $6.2 million Q3 discrete tax benefit and other nonrecurring items.
- Monitor the timing and cash cost of the EMEA and U.S. manufacturing reorganizations and whether projected savings are achieved.
- Evaluate liquidity and refinancing needs given $1.37 billion of total debt, seasonal working-capital requirements and only $93.8 million of reported cash.
- Review the IRS tax appeal, pension contribution requirements, foreign-exchange exposure and risks associated with customer quality issues in Asia/Pacific.