McCormick & Company, Incorporated — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
McCormick manufactures, markets and distributes spices, seasoning mixes, condiments and other flavor products globally through its consumer and industrial segments. The filing covers the three and nine months ended August 31, 2013; fiscal year-end is November 30. Results are seasonally weighted toward the second half of the year, particularly the fourth quarter.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $1,016.4 million | $977.7 million | $2,953.4 million | $2,868.4 million |
| Operating income | $148.4 million | $144.2 million | $376.4 million | $378.0 million |
| Net income | $104.4 million | $104.4 million | $259.0 million | $259.3 million |
| Diluted EPS | $0.78 | $0.78 | $1.94 | $1.93 |
| Gross margin | 40.1% | 40.1% | 39.4% | 39.6% |
- Q3 sales increased 4.0%; nine-month sales increased 3.0%.
- Q3 operating margin was approximately 14.6%, compared with approximately 14.7% in the prior-year quarter. Nine-month operating margin was approximately 12.7%, compared with approximately 13.2% in 2012.
- Consumer Q3 sales rose 7.8% to $612.4 million and operating income rose 9.0% to $118.7 million. Industrial sales declined 1.3% to $404.0 million and operating income declined 15.9% to $29.7 million.
- Cash flow from operations was $227.4 million for the first nine months, down from $256.3 million in 2012, primarily because of higher receivables and the timing of tax payments.
- Investing cash outflow was $182.0 million, including $130.0 million paid for the WAPC acquisition and $54.0 million of capital expenditures. Full-year 2013 capital expenditures were expected to be approximately $120 million.
- Cash and cash equivalents were $146.8 million at August 31, 2013, compared with $79.0 million at November 30, 2012.
- Total debt was $1,378.6 million at August 31, 2013. Total debt to trailing twelve-month EBITDA was 1.95x, temporarily above the company’s 1.5x–1.7x target because new notes were issued before older notes matured.
- Current liabilities included $252.1 million of current long-term debt and $107.9 million of short-term borrowings. Management stated that internal funds and existing credit facilities were sufficient for current liquidity needs.
- Dividends paid during the first nine months increased to $135.0 million from $123.6 million; share repurchases totaled $92.1 million.
Material Changes Versus the Prior Comparable Period
- The May 31, 2013 acquisition of Wuhan Asia-Pacific Condiments Co. Ltd. added $26.7 million of Q3 sales. The approximately $146.7 million transaction was financed with cash and debt; $130.0 million had been paid by quarter-end and $16.7 million remained payable upon specified conditions.
- WAPC contributed no net income in Q3 because integration and financing costs offset its operating profit. The company recorded $4.1 million of related transaction expenses during the first nine months.
- Consumer performance improved, supported by pricing, volume and mix, the WAPC acquisition and CCI cost savings. Industrial performance weakened because of lower volume and mix, material inflation, higher retirement costs and unfavorable business mix.
- Q3 sales benefited from an estimated $30 million shift of customer purchases into the quarter, driven by an expanded holiday display program and purchases ahead of fourth-quarter pricing actions.
- In August 2013, the company issued $250 million of 3.50% notes due 2023, receiving net proceeds of $246.2 million. The proceeds and cash on hand were used to repay $250 million of 5.25% notes that matured in September 2013.
- Retirement benefit expense increased materially. The company expected approximately $20 million of fourth-quarter 2013 settlement charges related to a U.S. pension lump-sum program.
- Accumulated other comprehensive loss increased to $183.6 million at August 31, 2013 from $159.9 million at November 30, 2012, primarily reflecting pension and currency-related items.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 sales growth at the lower end of its initial 4%–6% range.
- Reported diluted EPS guidance was $3.03–$3.09, while adjusted guidance of $3.13–$3.19 excluded the estimated $20 million U.S. pension settlement charge. Management guided to the lower end of the ranges.
- Management expected a 2013 effective tax rate slightly above 28%, with an underlying rate of approximately 29%. Q3 included $3.3 million of discrete tax benefits; the first nine months included $4.5 million.
- CCI cost savings were expected to reach at least $55 million in 2013. Material cost inflation was expected to moderate to approximately 3%, with further gross-margin improvement anticipated in Q4.
- Management planned approximately $10 million of additional Q4 brand marketing support versus 2012 levels and expected retirement benefit expense to increase by approximately $22 million year over year.
- Key risks include raw-material and packaging cost volatility, foreign exchange movements, customer concentration and credit risk, competitive pressure, acquisition integration, pension funding and asset returns, interest rates, financing availability, supply interruptions, regulatory changes, information technology failures and cyberattacks.
- The filing reported no material changes to previously disclosed risk factors, no material pending legal proceedings and no material changes in contractual obligations outside the ordinary course of business.
- Management concluded that disclosure controls and procedures were effective as of August 31, 2013, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the estimated $30 million timing shift in Q3 consumer sales creates a corresponding Q4 sales headwind.
- Whether industrial volume, mix and operating margins recover as management expected in Q4.
- The final accounting, integration performance and sustainable earnings contribution of the WAPC acquisition.
- The actual fourth-quarter U.S. pension settlement charge and its effect on GAAP EPS, cash funding and adjusted EPS.
- Whether CCI savings and pricing actions fully offset material inflation and support the expected margin recovery.
- Post-refinancing debt levels and leverage after repayment of the 5.25% notes, including progress toward the 1.5x–1.7x debt-to-EBITDA target.
- Fourth-quarter operating cash flow, working-capital trends, capital expenditures and the sustainability of dividends and share repurchases.
- The effect of discrete tax benefits and the expected approximately 29% underlying tax rate on future earnings comparability.