McCormick & Company, Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended May 31, 2014; filed June 27, 2014. McCormick operates consumer and industrial businesses that manufacture, market and distribute spices, seasonings, condiments and other flavor products globally. Results are seasonally weighted toward the second half of the fiscal year.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,033.4 million | $1,002.6 million | $2,026.8 million | $1,936.9 million |
| Gross profit | $412.5 million | $394.4 million | $804.0 million | $756.1 million |
| Gross margin | 39.9% | 39.3% | 39.7% | 39.0% |
| Operating income | $121.7 million | $116.0 million | $246.3 million | $228.0 million |
| Operating margin | 11.8% | 11.6% | 12.1% | 11.8% |
| Net income | $84.5 million | $78.6 million | $167.0 million | $154.6 million |
| Diluted EPS | $0.64 | $0.59 | $1.27 | $1.16 |
- Six-month operating cash flow was $182.1 million, up from $132.7 million. Capital expenditures were $47.4 million, versus $34.6 million.
- Cash and cash equivalents were $81.4 million at May 31, 2014, compared with $63.0 million at November 30, 2013.
- Total debt was approximately $1,325.2 million, consisting primarily of $307.1 million of short-term borrowings and $1,018.1 million of current and long-term debt. The total debt-to-adjusted-EBITDA ratio was 1.79.
- Six-month financing cash flow was a use of $113.8 million, including $126.3 million of share repurchases and $96.7 million of dividends, partially offset by $94.3 million of net short-term borrowings.
- Cash dividends paid per share increased to $0.37 in the quarter and $0.74 for the first six months.
Material changes versus the prior comparable period
- Second-quarter sales increased 3.1% and first-half sales increased 4.6%. The WAPC China acquisition contributed 3.4% of second-quarter sales growth and 3.8% of first-half growth; foreign exchange reduced growth by 0.3% and 0.7%, respectively.
- Excluding WAPC and currency, second-quarter sales were flat because 2.3% pricing benefits were offset by lower volume and product mix. First-half underlying sales increased 1.5%.
- Gross margin improved 60 basis points in the quarter and 70 basis points for the first half, primarily from Comprehensive Continuous Improvement savings and a more favorable industrial product mix.
- Consumer operating income declined 2.1% in the quarter but increased 2.8% for the first half. Higher brand marketing spending and unfavorable consumer volume and mix pressured quarterly results.
- Industrial operating income increased 26.4% in the quarter and 25.4% for the first half; margin improved to 8.6% and 8.3%, respectively, from 6.9% and 6.8%.
- Interest expense declined because the company refinanced $250 million of 5.25% notes maturing in 2013 with $250 million of 3.50% notes.
- Operating cash flow increased by $49.4 million, primarily due to lower pension contributions and improved receivables collections. Pension contributions were $11.3 million versus $37.7 million in the prior-year period.
- Average basic shares declined to 130.2 million from 132.1 million in the quarter, supported by share repurchases.
Guidance, outlook, risks and unusual items
- Management projected 2014 local-currency sales growth of 3% to 5%, operating-income growth of 6% to 8% versus adjusted 2013 operating income, and diluted EPS of $3.22 to $3.29. The EPS outlook represented expected growth of 3% to 5% versus adjusted 2013 EPS of $3.13.
- 2014 CCI cost savings were expected to reach at least $45 million, while material-cost inflation was expected in the low single-digit range. Capital expenditures were projected at $120 million to $130 million.
- The EMEA reorganization is expected to generate approximately $27 million of total cash and non-cash charges, including approximately $2 million in 2014, with approximately $10 million of annual cost savings by 2015. The remaining special-charge accrual was $13.2 million at May 31, 2014.
- The WAPC acquisition added $33.8 million of second-quarter sales and $72.7 million of first-half sales. Final purchase-price allocation included $68.1 million of goodwill and $46.1 million of other intangible assets.
- A French tax settlement produced a $5.8 million reversal of previously recorded uncertain-tax reserves, partly offset by other discrete international tax expenses. No discrete tax items were recognized in the second quarter.
- The company faces risks from consumer and private-label competition, raw-material cost and availability, foreign-exchange volatility, customer concentration and credit risk, pension obligations, tax matters, acquisitions, supply-chain interruptions, regulation, cybersecurity, litigation and capital-market conditions.
- The IRS administrative appeals process concerning proposed adjustments for the 2007 and 2008 tax years remained ongoing. The company had deposited $18.8 million with the IRS and stated that appropriate tax accruals had been established.
- Management stated that existing cash flows and credit facilities were sufficient for current liquidity needs. The filing reported no material changes in contractual obligations, legal proceedings or risk factors from the 2013 Form 10-K.
Investor verification priorities
- Verify whether underlying consumer volume and mix recover after competitive pressure in the Americas and pricing-related volume declines in EMEA.
- Track the sustainability of gross-margin expansion and CCI savings against material-cost inflation.
- Assess WAPC’s contribution after the acquisition anniversary and its integration and growth in China.
- Monitor debt levels, seasonal short-term borrowings, the 1.79 debt-to-adjusted-EBITDA ratio and dependence on commercial paper and revolving credit facilities.
- Reconcile reported GAAP results with management’s adjusted 2014 outlook and evaluate the effect of tax-rate changes and discrete tax items.
- Review the remaining share-repurchase authorization of $234 million, dividend growth and the effect of repurchases on per-share results.