McCormick & Company, Incorporated — Q3 2022 Form 10-Q Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasoning mixes, condiments and other flavor products. It operates through Consumer and Flavor Solutions segments. The filing covers the three and nine months ended August 31, 2022, compared with the corresponding 2021 periods. Results are unaudited and seasonally weighted toward the second half of the fiscal year.
Key financial metrics
| Metric | Three months ended August 31 | Nine months ended August 31 |
|---|---|---|
| Net sales | $1,595.6 million, up 3.0% | $4,654.8 million, up 1.5% |
| Gross profit | $566.7 million, down 5.5% | $1,650.1 million, down 7.9% |
| Gross margin | 35.5%, down 320 basis points | 35.4%, down 370 basis points |
| Operating income | $235.2 million, down 11.3% | $599.3 million, down 18.9% |
| Net income | $222.9 million, up 4.9% | $496.3 million, down 11.0% |
| Diluted EPS | $0.82, versus $0.79 | $1.83, versus $2.07 |
| Operating cash flow | Not separately provided | $250.1 million, versus $372.9 million |
Pricing increased third-quarter sales by 9.7%, while volume and product mix reduced sales by 3.1%, divestitures reduced sales by 0.5%, and foreign exchange reduced sales by 3.1%. Constant-currency sales growth was 6.1% for the quarter and 3.5% for the nine-month period.
- Consumer sales were $927.9 million in the quarter, up 0.7%, with segment operating income of $183.7 million and a 19.8% margin, versus 20.4% in the prior year.
- Flavor Solutions sales were $667.7 million, up 6.4%, but segment operating income fell to $54.9 million and margin declined to 8.2% from 13.5%.
- Cash and cash equivalents were $343.9 million at August 31, 2022, compared with $351.7 million at November 30, 2021.
- Inventories increased to $1,379.5 million from $1,182.3 million at fiscal year-end, while trade accounts payable increased to $1,143.5 million from $1,064.2 million.
- Short-term borrowings were $1,436.4 million, current long-term debt was $20.6 million, and long-term debt was $3,904.8 million. Total debt was approximately $5.36 billion, compared with approximately $5.28 billion at November 30, 2021.
- The company repaid $750 million of 2.70% notes due in August 2022 and entered into a $500 million, 364-day revolving credit facility expiring in July 2023. It also maintains a $1.5 billion revolving credit facility expiring in June 2026.
- Capital expenditures were $166.8 million for the nine months, and dividends paid were $297.5 million. The quarterly dividend increased to $0.37 per share from $0.34.
Material changes versus the prior comparable period
- Reported sales growth was primarily price-driven and was offset by unfavorable volume, mix and foreign exchange. Consumer sales declined 3.3% for the nine months, while Flavor Solutions sales increased 9.1%.
- Profitability deteriorated materially because of commodity, packaging, transportation and conversion-cost inflation, supply-chain investments and the margin dilution from pricing actions. Consolidated adjusted operating income declined 12.4% in the quarter and 19.3% for the nine-month period.
- Net income benefited from a $49.6 million pretax gain on the August 2022 sale of the Kitchen Basics business and an $18.7 million gain from settling treasury-lock arrangements. These gains helped offset lower operating income.
- Net special charges were $38.0 million for the nine months, versus $20.6 million in 2021, primarily reflecting the exit of the Russian consumer business and the EMEA manufacturing transition. Transaction and integration expenses fell to $2.2 million from $33.3 million.
- Operating cash flow declined by $122.8 million, primarily due to lower earnings and increased working-capital investment, including a $238.5 million use of cash for inventories.
- Accumulated other comprehensive loss increased to $590.0 million from $426.5 million, principally due to foreign-currency translation losses.
Guidance, outlook, commentary and risks
- Management maintained fiscal 2022 sales guidance of comparable to 2021 up 2%, including an estimated 3% unfavorable currency impact, or 3% to 5% growth on a constant-currency basis.
- Fiscal 2022 adjusted operating income is expected to decline 11% to 13%, including a 2% unfavorable currency impact, or 9% to 11% on a constant-currency basis.
- Reported diluted EPS guidance is $2.64 to $2.69; adjusted diluted EPS guidance is $2.63 to $2.68.
- Management expects a 280-to-330-basis-point decline in reported gross margin and a 300-to-350-basis-point decline in adjusted gross margin versus 2021. The company targets approximately $85 million of 2022 CCI cost savings and approximately $300 million of capital expenditures.
- Expected headwinds include persistent inflation, supply-chain disruption, labor constraints, pricing elasticity, higher interest rates, foreign-exchange volatility, COVID-19 uncertainty and the Russia-Ukraine conflict. McCormick suspended operations in Russia and approved the exit of its Russian consumer business; additional special charges may result.
- The company states that existing cash, operating cash flow, credit facilities, commercial paper capacity and capital-market access should provide sufficient liquidity for at least the next twelve months. Key liquidity considerations include seasonal working capital, debt service, the July 2023 revolving-credit maturity and variable-rate debt of approximately $1.495 billion.
- There were no material pending legal proceedings, no material changes to internal control over financial reporting, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether pricing actions can offset inflation without further volume and mix deterioration.
- The sustainability of gross-margin and segment-margin recovery, particularly in Flavor Solutions.
- Inventory levels, working-capital conversion and the expected seasonal fourth-quarter cash-flow increase.
- Refinancing plans and interest-rate exposure associated with short-term borrowings and the July 2023 credit-facility maturity.
- The ultimate cost and timing of the Russian exit, EMEA manufacturing consolidation and other special-charge programs.
- The effect of foreign-exchange movements, Russia-Ukraine developments, supply-chain disruption and consumer price elasticity on fiscal 2022 guidance.
- The extent to which reported earnings are influenced by the Kitchen Basics gain, treasury-lock settlement and other nonrecurring items.