McCormick & Company, Incorporated — Q3 2011 Form 10-Q Summary
Business context and reporting period
McCormick is a global producer and distributor of spices, seasonings, condiments and other flavorful products. It operates through consumer and industrial segments, serving retail, food manufacturers and foodservice customers. The filing covers the three and nine months ended August 31, 2011, compared with the corresponding 2010 periods.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $920.4 million | $794.6 million | $2,586.9 million | $2,357.4 million |
| Gross profit | $364.5 million | $334.8 million | $1,043.4 million | $971.7 million |
| Gross margin | 39.6% | 42.1% | 40.3% | 41.2% |
| Operating income | $128.4 million | $126.0 million | $348.3 million | $324.4 million |
| Net income | $92.0 million | $102.4 million | $242.4 million | $236.5 million |
| Diluted EPS | $0.69 | $0.76 | $1.81 | $1.76 |
- Q3 sales increased 15.8%, including a 4.6% favorable foreign-exchange impact; pricing contributed 4.8% and volume/product mix contributed 6.4%.
- Q3 operating income increased 1.9%, but gross margin declined 250 basis points because raw-material and packaging inflation outpaced pricing and cost savings.
- Q3 net income and diluted EPS declined primarily because the prior-year period benefited from substantially larger discrete tax benefits, including a $13.9 million tax-accrual reversal.
- Excluding that prior-year tax benefit, adjusted Q3 net income increased 4.0% and adjusted diluted EPS increased 4.5%; nine-month adjusted net income increased 8.9% and adjusted diluted EPS increased 9.0%.
- Consumer Q3 sales increased 15.0% and operating income increased 4.9% to $100.5 million; consumer operating margin was 19.3% versus 21.1%.
- Industrial Q3 sales increased 17.0%, but operating income declined 7.6% to $27.9 million; operating margin declined to 7.0% from 8.9%.
- Nine-month cash flow from operations was $85.7 million versus $145.2 million in 2010, principally reflecting higher inventories and working-capital requirements.
- Cash and cash equivalents were $52.2 million at August 31, 2011. Total current assets were $1.16 billion versus current liabilities of $639.5 million.
- Long-term debt was $1.03 billion, with total debt of approximately $1.03 billion including the current portion. Debt-to-total capital was 37.5%, compared with 41.4% a year earlier.
- The company issued $250 million of 3.90% notes due 2021 and entered into a new $600 million revolving credit facility expiring in June 2016.
- Nine-month capital expenditures were $58.8 million; full-year capital expenditures were expected at $90 million to $100 million. Dividends paid were $111.4 million, and $89.2 million was spent on share repurchases, although no shares were repurchased during Q3.
Material changes versus the prior comparable period
- Sales growth accelerated, supported by pricing, volume and product mix, foreign exchange and customer purchases ahead of planned price increases.
- Profitability weakened at the gross-margin and segment-margin levels because of escalating commodity and packaging costs. Management reported expected double-digit material-cost inflation for 2011, continuing into 2012.
- Operating cash generation declined despite higher net income, as inventory increased due to higher costs, strategic purchases and supply concerns in certain growing regions.
- Debt increased to finance acquisitions, including the $250 million notes issuance, while short-term borrowings and current debt declined substantially from the prior year.
- Accumulated other comprehensive income improved to $118.8 million from a $3.7 million loss at November 30, 2010, primarily because of foreign-currency translation gains.
Guidance, outlook, risks and unusual items
- Management projected 2011 local-currency sales growth of 6% to 8% and diluted EPS of $2.74 to $2.79, including approximately $11 million of acquisition-related costs expected to reduce EPS by about $0.07.
- Approximately $4 million of acquisition-related costs had been recorded through nine months, with an additional $7 million expected in Q4, reducing fourth-quarter EPS by approximately $0.05.
- Management expected at least $50 million of 2011 Comprehensive Continuous Improvement savings, but anticipated continued gross-margin pressure through Q4.
- Kitchen Basics was acquired in July 2011 for $38.0 million. The Kohinoor India joint venture and Kamis Poland acquisition closed after quarter-end and were expected to be recorded in Q4. Their stated transaction values were approximately $113 million and $286 million, respectively, financed with a combination of cash and debt.
- Management expected minimal 2011 profit contribution from the acquisitions, but projected 2012 diluted EPS accretion of $0.07 to $0.09.
- Key risks include raw-material and packaging-cost volatility, pricing execution and customer demand, foreign-exchange fluctuations, acquisition integration, customer credit exposure, pension funding requirements, access to commercial paper and bank financing, and global economic conditions.
- The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether pricing actions and CCI savings can offset the continuing inflation in spices, agricultural commodities, packaging and other inputs.
- The sustainability of consumer and industrial volume growth after the estimated $10 million customer buy-in shifted sales into Q3.
- The Q4 and full-year earnings impact of the Kamis and Kohinoor transactions, integration costs and acquisition financing.
- Working-capital normalization, inventory reduction and recovery of operating cash flow in Q4.
- Debt levels, interest expense and covenant or refinancing considerations following the acquisitions and the 2021 notes issuance.
- The effect of foreign-exchange movements on reported sales, assets, comprehensive income and future earnings.
- Actual 2011 results versus the company’s 6% to 8% sales-growth and $2.74 to $2.79 diluted-EPS outlook.