McCormick & Company, Incorporated — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended November 30, 2012. The filing also provides unaudited fourth-quarter data. McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor products, operating through consumer and industrial segments.
Business Context and Reporting Period
- Consumer products represented 60% of 2012 sales and 79% of operating income; industrial products represented 40% of sales and 21% of operating income.
- Approximately 40% of sales came from non-U.S. operations. Major markets include North America, Europe, Asia-Pacific and emerging markets.
- Fiscal fourth-quarter seasonality is significant: fourth-quarter 2012 sales were $1,145.8 million and net income was $148.5 million, compared with annual sales of $4,014.2 million and net income of $407.8 million.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $4,014.2 million | $3,697.6 million | 8.6% increase |
| Gross profit | $1,617.8 million | $1,522.5 million | 6.3% increase |
| Gross margin | 40.3% | 41.2% | Down 90 basis points |
| Operating income | $578.3 million | $540.3 million | 7.0% increase |
| Operating margin | 14.4% | 14.6% | Down 20 basis points |
| Net income | $407.8 million | $374.2 million | 9.0% increase |
| Diluted EPS | $3.04 | $2.79 | 9.0% increase |
| Operating cash flow | $455.0 million | $340.0 million | 34% increase |
| Total debt | $1,171.8 million | $1,252.1 million | Decrease |
| Total debt/EBITDA | 1.66x | 1.88x | Improved |
- Consumer sales increased 9.8% to $2,415.3 million; operating income increased 6.4% to $456.1 million, while margin declined to 18.9% from 19.5%.
- Industrial sales increased 6.8% to $1,598.9 million; operating income increased 9.2% to $122.2 million, and margin improved to 7.6% from 7.5%.
- Pricing actions contributed 4.4% to consolidated sales, acquisitions contributed 4.3%, and base-business volume and mix contributed 1.4%. Foreign exchange reduced sales by 1.5%.
- Cash and cash equivalents were $79.0 million at year-end. Current assets were $1,285.4 million versus current liabilities of $1,187.6 million.
- Capital expenditures were $110.3 million, compared with depreciation and amortization of $102.8 million.
- Dividends paid totaled $164.7 million, or $1.24 per share. The quarterly dividend was increased 9.7% in November 2012, from $0.31 to $0.34 per share.
- Share repurchases totaled $132.2 million in 2012. Approximately $137 million remained under the $400 million authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth remained strong but moderated from 10.8% in 2011 to 8.6% in 2012.
- Margins continued to contract because of high raw-material and packaging inflation, unfavorable geographic and segment mix, and higher international sales. Pricing and Comprehensive Continuous Improvement savings offset the dollar impact of higher costs but did not fully preserve percentage margins.
- CCI savings totaled $56 million in 2012, including $39 million in cost of goods sold and $17 million in SG&A savings.
- Operating cash flow improved primarily because inventory was approximately unchanged, compared with a substantial inventory build in 2011.
- Debt declined following the 2011 acquisitions of Kamis, Kohinoor and Kitchen Basics. Current debt increased because $250 million of notes due in 2013 was classified as current.
- The effective tax rate fell to 26.6% from 29.0%, principally because a $70.0 million foreign cash repatriation generated $9.7 million of U.S. foreign tax credits.
- Income from unconsolidated operations declined to $21.5 million from $25.4 million, primarily because McCormick de Mexico was affected by foreign exchange and higher soybean oil costs.
- Emerging-market sales increased 47% and reached 14% of consolidated sales, compared with 10% in 2011. More than 250 consumer branded products were launched, and products introduced during the prior three years contributed 8% to 2012 sales.
Guidance, Outlook, Risks and Unusual Items
- Long-term objectives are sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%. Management stated that 2012 sales and EPS met or exceeded these objectives, while operating-income growth was within the target but below management’s 2012 expectation of 9% to 11%.
- Management expected 2013 material-cost inflation to moderate to approximately 3%, but anticipated retirement-benefit expense to increase by approximately $22 million because of the low-interest-rate environment.
- Management expected 2013 capital expenditures to be slightly above depreciation and amortization and pension and postretirement contributions of approximately $45 million.
- McCormick agreed to acquire Wuhan Asia-Pacific Condiments Co., Ltd. for approximately $141 million, subject to closing adjustments and regulatory approval, with closing expected in mid-2013. The transaction was expected to be funded partly with operating cash flow.
- The company had a $600 million committed revolving credit facility expiring in 2016, supporting commercial paper, with $461.6 million of capacity available at year-end. It also had $53.6 million of unused uncommitted lines.
- The company intended to issue fixed-rate notes in 2013 to retire $250 million of notes maturing in September 2013 and entered into $50 million of forward-starting interest-rate swaps at a fixed rate of 1.90%.
- Key risks include raw-material price and availability volatility, customer consolidation and pricing pressure, food safety and product recalls, brand damage, intense competition, foreign exchange, international economic and political conditions, acquisitions and integration, pension funding, tax audits, credit-market access, information-technology failures and cybersecurity.
- The IRS proposed adjustments relating to the 2007 and 2008 federal tax years. McCormick deposited $18.8 million with the IRS in November 2012 to stop potential interest accrual; management believed appropriate tax accruals had been recorded.
- Defined-benefit pension plans were underfunded by approximately $268.6 million in aggregate at year-end, and 2012 pension contributions were $104.3 million. Lower discount rates and investment performance could increase future contributions and expense.
- No material pending legal proceedings, material environmental capital expenditures, or off-balance-sheet arrangements were reported. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether pricing actions, CCI savings and moderating commodity inflation can stabilize or expand gross and operating margins.
- The funding and integration status, purchase price and financial contribution of the planned Wuhan Asia-Pacific acquisition.
- Refinancing terms for the $250 million of notes maturing in 2013 and the effect on interest expense and liquidity.
- Progress in reducing the cash conversion cycle, inventory levels and seasonal commercial-paper reliance.
- Future pension contributions and sensitivity to discount-rate and asset-return assumptions.
- Resolution of the IRS examination and other uncertain tax positions, including $46.7 million of unrecognized tax benefits at year-end.
- Performance of McCormick de Mexico and other unconsolidated affiliates, particularly under foreign-exchange and commodity-cost pressures.
- Customer concentration and bargaining risk: Wal-Mart and PepsiCo each represented 11% of 2012 consolidated sales, while the top three industrial customers represented 50% to 53% of industrial sales.