McCormick & Company, Incorporated — Form 10-Q Summary
Business context and reporting period
McCormick is a global manufacturer and marketer of spices, herbs, seasoning mixes, condiments and other flavorful products. It operates through consumer and industrial segments. This unaudited filing covers the three and six months ended May 31, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Three months ended May 31, 2013 | Six months ended May 31, 2013 |
|---|---|---|
| Net sales | $1,002.6 million | $1,936.9 million |
| Gross profit | $394.4 million; 39.3% margin | $756.1 million; 39.0% margin |
| Operating income | $116.0 million | $228.0 million |
| Net income | $78.6 million | $154.6 million |
| Diluted EPS | $0.59 | $1.16 |
| Operating cash flow | Not separately provided | $132.7 million |
- Second-quarter sales increased 1.9%; excluding a 1.2% unfavorable foreign-exchange effect, sales increased 3.1%. First-half sales increased 2.4%.
- Second-quarter operating income declined 4.4% and first-half operating income declined 2.5%. Net income declined 2.2% in the quarter and 0.2% for the first half.
- SG&A was $278.4 million in the quarter and $528.1 million for the first half, representing 27.7% and 27.2% of sales, respectively, versus 27.2% and 26.9% in the prior-year periods.
- At May 31, 2013, cash and cash equivalents were $72.1 million, total assets were $4.21 billion, and total liabilities were $2.48 billion.
- Total debt was $1.33 billion and total debt to trailing twelve-month EBITDA was 1.88x, above management’s target range of 1.5x to 1.7x, primarily because of acquisition financing and seasonal working-capital needs.
- Cash flow from operations declined from $144.4 million to $132.7 million year over year. Investing cash outflow increased to $149.4 million, including $116.7 million paid for the WAPC acquisition. Financing provided $5.6 million, including $158.9 million of increased short-term borrowings.
- Dividends paid were $90.1 million in the first half, compared with $82.4 million in 2012. Share repurchases totaled $92.1 million.
Material changes versus the prior comparable period
- Consumer sales increased 3.9% in the quarter and 5.2% for the first half, while consumer operating income decreased 1.1% in the quarter and increased 3.1% for the first half.
- Industrial sales decreased 0.9% in the quarter and 1.5% for the first half. Industrial operating income decreased 13.2% in the quarter and 17.5% for the first half; its operating margin fell to 6.9% from 7.9% in the quarter and to 6.8% from 8.1% for the first half.
- Gross margin declined 20 basis points in the quarter and 30 basis points for the first half, principally because of material-cost inflation and unfavorable industrial mix.
- SG&A increased because of higher retirement benefit expense, increased brand marketing, and $3.7 million of WAPC transaction costs.
- Income from unconsolidated operations increased to $5.9 million in the quarter and $11.4 million for the first half, helped by improved performance in Mexico and India.
- Comprehensive income was $57.8 million in the quarter, compared with a $10.8 million loss in 2012, primarily reflecting a substantially smaller currency-translation loss.
Guidance, outlook, risks and unusual items
- Management projected 2013 local-currency sales growth of 4% to 6% and diluted EPS of $3.13 to $3.19. The outlook reflects higher sales and CCI cost savings, partly offset by a higher tax rate and approximately $22 million of additional retirement benefit expense.
- Management expected at least $50 million of 2013 CCI cost savings, approximately 3% material-cost inflation, capital expenditures of $120 million to $130 million, and a second-half tax rate of approximately 29.5%.
- Industrial results were expected to remain under pressure in the third quarter, with recovery anticipated in the fourth quarter. Management also expected further gross-margin improvement in the fourth quarter as material-cost inflation eased.
- On May 31, 2013, McCormick acquired WAPC in China for approximately $146.7 million. The company paid $116.7 million at closing and recorded a $30.0 million contingent balance in accrued liabilities. Preliminary purchase accounting included $77.9 million of goodwill and $37.7 million of intangible assets.
- A $250 million debt maturity was scheduled for September 2013, which management intended to refinance with fixed-rate notes. The company had entered into $100 million of forward-starting interest-rate swaps at a weighted-average fixed rate of 1.94%.
- McCormick offered lump-sum pension distributions to approximately 3,300 former employees. If elections exceed approximately 40% of the associated obligation, the company expects a non-cash fourth-quarter settlement charge estimated at $25 million to $45 million.
- Key risks include raw-material and packaging-cost volatility, foreign-exchange movements, customer and quick-service-restaurant demand, acquisition integration, pension-market performance, credit-market and bank-counterparty availability, regulatory and economic conditions, cybersecurity, and brand or business interruptions.
- The filing reports no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether WAPC delivers the projected growth and is integrated without additional material costs.
- Progress toward reducing the 1.88x debt-to-EBITDA ratio and refinancing the $250 million September maturity.
- Whether industrial demand recovers in the fourth quarter and whether consumer momentum offsets industrial weakness.
- Achievement of the $50 million or greater CCI savings target and the expected margin recovery.
- The outcome of the pension lump-sum election and whether the estimated $25 million to $45 million settlement charge is triggered.
- Execution of the $3.13 to $3.19 diluted EPS outlook, including the effects of taxes, retirement costs, currency and material inflation.
- Remaining share-repurchase authorization: $45 million under the prior program, plus a newly authorized additional $400 million program.