McCormick & Company, Inc. — Q3 2023 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 Flavor Solutions segments. The filing covers the three and nine months ended August 31, 2023, compared with the corresponding 2022 periods. Results are seasonal, with historically stronger sales, earnings and operating cash flow in the second half of the fiscal year.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $1,684.7 million | $1,595.6 million | $4,909.4 million | $4,654.8 million |
| Gross profit | $622.8 million | $566.7 million | $1,801.2 million | $1,650.1 million |
| Gross margin | 37.0% | 35.5% | 36.7% | 35.4% |
| Operating income | $245.0 million | $235.2 million | $665.8 million | $599.3 million |
| Net income | $170.1 million | $222.9 million | $461.3 million | $496.3 million |
| Diluted EPS | $0.63 | $0.82 | $1.71 | $1.83 |
| Operating cash flow | Not separately provided | Not separately provided | $660.1 million | $250.1 million |
Q3 sales increased 5.6%, while nine-month sales increased 5.5%. Pricing contributed 7.8% to Q3 sales growth and 9.7% to nine-month growth, offset by unfavorable volume and product mix of 2.1% and 2.5%, respectively. Q3 operating income margin was approximately 14.5%, compared with approximately 14.7% in the prior-year quarter; nine-month operating income margin was approximately 13.6%, compared with approximately 12.9%.
Adjusted operating income, excluding special charges and applicable transaction and integration expenses, was $251.1 million in Q3 and $712.9 million for nine months, compared with $238.6 million and $639.5 million, respectively. Adjusted operating margin was 14.9% in Q3 and 14.5% for nine months.
- Consumer: Q3 sales increased 1.0% to $937.1 million, while segment operating income declined 5.7% to $173.3 million and margin declined to 18.5% from 19.8%. APAC sales declined 15.8%, primarily reflecting China-related volume effects, foreign exchange and pricing elasticity.
- Flavor Solutions: Q3 sales increased 12.0% to $747.6 million, while segment operating income increased 41.7% to $77.8 million and margin increased to 10.4% from 8.2%.
- Interest and other income: Q3 interest expense rose to $52.7 million from $37.9 million. Other income declined to $7.1 million from $77.4 million, as the 2022 period included a $49.6 million gain on the Kitchen Basics sale and an $18.7 million treasury-lock settlement gain.
- Taxes: The effective tax rate was 21.4% in Q3 and 21.7% for nine months, including net discrete tax benefits of $3.3 million and $10.1 million, respectively.
Liquidity, debt and cash flow
Operating cash flow increased to $660.1 million for the first nine months, primarily due to improved working capital, including lower inventory. Investing cash outflow was $184.8 million, including $187.2 million of capital expenditures. Financing cash outflow was $701.2 million, reflecting reduced short-term borrowings, dividends and other financing activity.
At August 31, 2023, cash and cash equivalents were $154.7 million, compared with $334.0 million at November 30, 2022. Short-term borrowings were $387.0 million, current maturities of long-term debt were $1,004.8 million, and long-term debt was $3,385.3 million. Total long-term debt, including the current portion, had a carrying value of $4,390.1 million.
McCormick issued $500 million of 4.95% senior notes due 2033 in April 2023 and used the $496.4 million of net proceeds to repay commercial paper. The company maintains a $1.5 billion five-year revolving facility expiring in June 2026 and a $500 million 364-day facility expiring in June 2024. Management stated that available cash, operating cash flow, credit facilities, commercial paper and capital-market access should provide adequate liquidity for at least the next twelve months.
Expected 2023 capital expenditures are approximately $260 million. The company repaid its $250 million, 3.50% notes on September 1, 2023 and identified $700 million of 3.15% notes due in August 2024 as a significant upcoming debt maturity.
Material changes versus the prior comparable period
- Sales and gross margins improved as pricing actions and CCI and GOE savings more than offset inflationary costs and unfavorable volume and mix.
- Net income and diluted EPS declined because the 2022 results benefited from the Kitchen Basics sale and treasury-lock settlement, while 2023 incurred higher interest expense and special charges.
- Special charges increased to $47.1 million for nine months from $38.0 million, primarily due to the GOE program and other organizational and manufacturing actions. The company expects approximately $55 million of special charges for full-year 2023.
- Cash flow from operations increased substantially, but cash declined because of debt-related financing activity, capital expenditures, dividends and share repurchases.
- Accounts receivable sold under a new nonrecourse program totaled approximately $26.1 million during the quarter and nine-month period.
Guidance, outlook and risks
Management maintained 2023 expectations for reported net sales growth of 5% to 7%, gross margin expansion of 110 to 140 basis points versus 2022, operating income growth of 11% to 13%, and adjusted operating income growth of 10% to 12%. Projected diluted EPS is $2.46 to $2.51, while adjusted diluted EPS is $2.62 to $2.67. Estimated interest expense is $200 million to $210 million, and the projected effective tax rate is approximately 22%.
Management expects approximately $75 million of GOE and organizational streamlining savings in 2023 and approximately $85 million of CCI-led cost savings. The company expects annual capital expenditures over the next several years to approximate 4% of sales and annual ERP operating expenses through 2027 to approximate $35 million to $50 million.
Key risks include persistent commodity, packaging and transportation inflation; price elasticity and volume declines; supply-chain disruption, labor constraints and raw-material availability; elevated interest rates and debt-service costs; foreign-exchange volatility; the Russia-Ukraine conflict and related sanctions; China and broader APAC demand; customer credit risk; cyber and information-technology risks; execution of GOE, CCI and ERP initiatives; impairment of goodwill or intangible assets; litigation, regulation, tax changes and pension obligations. The filing reports no material changes to previously disclosed risk factors and no material pending legal proceedings.
Important facts for investors to verify
- Whether pricing-led sales growth can continue without further deterioration in volume and product mix, particularly in Consumer and APAC.
- Whether gross-margin improvement and the projected GOE and CCI savings are sustained after inflation and conversion-cost pressures.
- Progress toward the 2023 sales, operating-income, interest-expense and EPS guidance ranges.
- Liquidity and refinancing plans for the $700 million August 2024 debt maturity and other near-term obligations.
- The magnitude and timing of remaining GOE, EMEA manufacturing-transition and other special charges.
- Execution of the ERP transformation and its projected $35 million to $50 million of annual operating costs through 2027.
- Effects of foreign exchange, interest rates, commodity prices, China demand and geopolitical developments on reported results.