McCormick & Company, Inc. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and other flavor products. It operates through consumer and industrial segments and sells in more than 110 countries. The report covers the fiscal year ended November 30, 2011; fourth-quarter results are included in the filing’s unaudited quarterly data.
- Consumer represented 59% of sales and 79% of operating income; industrial represented 41% of sales and 21% of operating income.
- Approximately 40% of fiscal 2011 sales came from non-U.S. operations.
- Key customers included Wal-Mart and PepsiCo, each representing approximately 11% of consolidated sales; the five largest customers represented approximately 35%.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $3,697.6 million | $3,336.8 million | +10.8% |
| Gross profit | $1,522.5 million | $1,417.7 million | +7.4% |
| Gross margin | 41.2% | 42.5% | Down 130 bps |
| Operating income | $540.3 million | $509.8 million | +6.0% |
| Operating margin | 14.6% | 15.3% | Down 70 bps |
| Net income | $374.2 million | $370.2 million | +1.1% |
| Diluted EPS | $2.79 | $2.75 | +1.5% |
| Operating cash flow | $340.0 million | $387.5 million | Down $47.5 million |
| Capital expenditures | $96.7 million | $89.0 million | +8.7% |
- Consumer sales were $2,199.9 million, up 10.0%, with operating income of $428.4 million and a 19.5% margin versus 20.1% in 2010.
- Industrial sales were $1,497.7 million, up 11.9%, with operating income of $111.9 million and a 7.5% margin versus 8.0% in 2010.
- Pricing contributed 4.6% to consolidated sales growth, favorable foreign exchange contributed 2.1%, volume and mix contributed 2.5%, and acquisitions contributed 1.6%.
- Net cash used in investing activities was $537.5 million, including $441.4 million for acquisitions and joint venture interests.
- Cash and cash equivalents were $53.9 million at year-end, compared with $50.8 million in 2010.
Debt, liquidity and capital allocation
- Short-term borrowings were $217.0 million and long-term debt was $1,029.7 million at November 30, 2011.
- Debt-to-total-capital increased to 43.6% from 37.6%, primarily because of acquisition financing.
- The company issued $250 million of 3.90% notes due 2021, receiving net proceeds of $247.5 million.
- McCormick had a $600 million committed revolving credit facility expiring in 2016, with $384 million of capacity available after supporting commercial paper.
- The company repurchased $89.3 million of shares in 2011; approximately $270 million remained under its $400 million authorization at year-end.
- Dividends paid totaled $148.5 million, or $1.12 per share. The quarterly dividend was increased 10.7% to $0.31 per share in November 2011.
Material changes versus the prior comparable period
- Sales growth accelerated substantially from 4.5% in 2010 to 10.8% in 2011, driven principally by pricing, foreign exchange, acquisitions and volume gains.
- Higher raw-material and packaging costs pressured profitability. Pricing and $65 million of CCI productivity savings offset the dollar impact of these costs but did not prevent gross-margin compression.
- Acquisitions of Kitchen Basics, Kamis and an 85% interest in Kohinoor Speciality Foods added $52.6 million of 2011 sales. Transaction costs of $10.9 million reduced 2011 earnings per share by approximately $0.07.
- Operating cash flow declined because inventories increased by $111.3 million, reflecting strategic purchases, higher input costs and acquired inventories. The cash conversion cycle increased to 86.2 days from 77.3 days.
- Net income and EPS growth were limited by a higher effective tax rate of 29.0% versus 25.5% in 2010. The prior year benefited from a $13.9 million tax-accrual reversal and other discrete tax benefits.
- Fourth-quarter 2011 sales were $1,110.7 million, operating income was $192.0 million, net income was $131.7 million and diluted EPS was $0.98, compared with fourth-quarter 2010 sales of $979.5 million, operating income of $185.4 million, net income of $133.6 million and diluted EPS of $0.99.
Guidance, outlook, risks and unusual items
- Long-term objectives are annual sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%. Management expects acquisitions and share repurchases together to contribute approximately 2% to EPS growth over time.
- Management projected raw-material and packaging costs to rise at a high-single-digit rate in fiscal 2012, with planned price increases and CCI savings expected to offset the increases.
- The 2011 acquisitions were expected to be accretive to 2012 EPS. Management also expected to pay down acquisition-related debt, resume share repurchases absent significant acquisition activity, and keep 2012 capital expenditures broadly in line with depreciation and amortization.
- Expected 2012 pension and postretirement contributions were approximately $60 million.
- Principal risks include commodity cost and availability volatility, pricing and customer concentration pressures, brand or product-safety damage, intense competition and private-label substitution, foreign exchange and international-market risks, acquisition integration, interest rates, credit-market access, customer credit risk, pension underfunding and operational disruptions.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management and Ernst & Young reported effective internal control over financial reporting and issued unqualified audit opinions.
- Goodwill totaled $1,694.2 million and brand names and trademarks totaled $277.0 million. Management stated that reporting-unit fair values were significantly above carrying values, but impairment remains sensitive to future cash-flow assumptions.
Most important facts for an investor to verify
- Whether pricing actions and CCI savings can offset the projected high-single-digit increase in 2012 input costs without further margin erosion.
- The pace and profitability of integrating Kamis, Kohinoor and Kitchen Basics, including whether the acquisitions become accretive as projected.
- Debt reduction, commercial-paper usage and compliance with available liquidity arrangements following the 2011 acquisition spending.
- Inventory normalization and improvement in the 86.2-day cash conversion cycle.
- Exposure to Wal-Mart, PepsiCo and other large customers, including pricing and private-label pressures.
- The effect of foreign exchange, European economic conditions and emerging-market execution on reported sales and earnings.
- Potential cash requirements from pension obligations, tax audits and unrecognized tax benefits totaling $33.2 million at year-end.