McCormick & Company, Incorporated — 2014 First-Quarter Form 10-Q
Reporting period: Three months ended February 28, 2014; filed March 26, 2014. McCormick operates consumer and industrial businesses producing and distributing spices, seasonings, condiments and related flavor products globally. Results are seasonally weighted toward the second half of the fiscal year.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $993.4 million | $934.4 million | +6.3% |
| Gross profit | $391.5 million | $361.7 million | +8.2% |
| Gross margin | 39.4% | 38.7% | +70 basis points |
| Operating income | $124.6 million | $112.0 million | +11.3% |
| Operating margin | 12.5% | 12.0% | Improved |
| Net income | $82.5 million | $76.0 million | +8.6% |
| Diluted EPS | $0.62 | $0.57 | +$0.05 |
| Net cash from operations | $76.7 million | $31.6 million | +$45.1 million |
- Sales drivers: Reported growth included a 4.2% contribution from the WAPC acquisition and a 1.2% unfavorable foreign-exchange impact. Excluding those factors, sales increased 3.3%, consisting of 1.7% pricing and 1.6% volume/product mix.
- Segments: Consumer sales increased 8.0% to $615.3 million and operating income increased 7.6% to $94.3 million. Industrial sales increased 3.7% to $378.1 million and operating income increased 24.3% to $30.3 million; industrial margin improved to 8.0% from 6.7%.
- Expenses and taxes: SG&A increased 6.9% to $266.9 million, partly due to $7.1 million of additional brand marketing. Interest expense declined to $12.4 million from $13.9 million. The effective tax rate rose to 31.1% from 28.5%.
- Cash and liquidity: Cash and equivalents were $89.4 million versus $63.0 million at November 30, 2013. Current assets were $1.34 billion and current liabilities were $1.01 billion. Operating cash flow funded $18.5 million of capital expenditures, $48.6 million of dividends and $56.9 million of share repurchases, with short-term borrowings increasing $68.4 million.
- Debt: Total debt was $1.30 billion at February 28, 2014, comprising $280.2 million of short-term borrowings, $1.8 million of current long-term debt and $1.02 billion of long-term debt. Trailing twelve-month total debt to adjusted EBITDA was 1.77 versus 1.74 a year earlier.
Material Changes Versus the Prior Comparable Period
- Gross and operating margins improved, primarily from Comprehensive Continuous Improvement savings and favorable business mix, despite higher marketing investment.
- Consumer performance benefited substantially from WAPC, while consumer volume and mix declined in the Americas amid competitive pressure. Management is responding with accelerated innovation, increased marketing and stronger category support.
- Industrial operating income recovered materially, supported by higher volume, innovation, CCI savings and favorable mix.
- Operating cash flow increased mainly because of lower pension contributions and lower incentive compensation payments. Pension contributions were $8.9 million versus $35.1 million in the prior-year quarter.
- The company adopted new accumulated-other-comprehensive-income disclosure guidance with no financial-statement impact.
Guidance, Outlook, Risks and Unusual Items
- 2014 outlook: Net sales are projected to grow 3% to 5% in local currency. Operating income is expected to increase 6% to 8% versus 2013 adjusted operating income of $590.8 million. Diluted EPS guidance is $3.22 to $3.29, representing 3% to 5% growth versus adjusted 2013 diluted EPS of $3.13.
- Cost and investment plans: CCI savings are expected to reach at least $45 million in 2014. Material-cost inflation is expected in the low single-digit range. Brand marketing investment is planned to increase at least 12%, and capital expenditures are expected to be $120 million to $130 million.
- Acquisition: The May 2013 WAPC acquisition in China cost $144.8 million and contributed $38.9 million of first-quarter sales. The purchase-price allocation remained preliminary at quarter-end.
- Restructuring: EMEA reorganization actions are expected to generate approximately $2 million of additional 2014 special charges, with approximately $16.1 million remaining in related accruals at February 28, 2014. Total program charges are expected to be approximately $27 million and annual savings approximately $10 million by 2015.
- Tax matters: A French tax settlement resulted in a $5.8 million reversal of previously recorded uncertain-tax-benefit reserves, offset by other French-related tax expenses. The company also faces unresolved IRS proposed adjustments for 2007–2008 tax years; an $18.8 million deposit was made in 2012, and management believes appropriate accruals have been established.
- Risks: Key exposures include foreign-exchange movements, raw-material price and availability volatility, customer and retailer concentration, competition and private-label growth, supply-chain interruptions, acquisition integration, pension funding, tax-rate volatility, credit-market access, cybersecurity and regulatory or litigation matters.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of quarter-end.
Investor Verification Items
- Reconcile reported 2014 sales and EPS growth with the WAPC acquisition, foreign-exchange effects, pricing, volume and mix.
- Monitor whether consumer Americas volume pressure improves and whether planned marketing and innovation investments generate sustainable growth.
- Assess the effect of higher tax rates, French tax-law changes and the unresolved IRS examination on full-year EPS.
- Track debt reduction, seasonal borrowing needs, cash generation and the 1.77 total-debt-to-adjusted-EBITDA ratio.
- Verify completion and final valuation of the WAPC acquisition and the timing, charges and savings from the EMEA reorganization.
- Compare actual CCI savings, material inflation, capital spending, pension contributions and share repurchases with management’s stated expectations.