McCormick & Company, Incorporated — Form 10-Q Summary
Business context and reporting period
McCormick is a global producer and distributor of spices, herbs, seasoning mixes, condiments and other flavorful products. It operates through consumer and industrial segments, with approximately 40% of annual sales historically generated outside the United States. This filing covers the three and nine months ended August 31, 2012. The financial statements are unaudited and results are seasonal, with sales, earnings and operating cash flow generally higher in the second half of the fiscal year.
Key financial metrics
| Metric | Three months ended Aug. 31, 2012 | Three months ended Aug. 31, 2011 | Nine months ended Aug. 31, 2012 | Nine months ended Aug. 31, 2011 |
|---|---|---|---|---|
| Net sales | $977.7 million | $920.4 million | $2,868.4 million | $2,586.9 million |
| Operating income | $144.2 million | $128.4 million | $378.0 million | $348.3 million |
| Net income | $104.4 million | $92.0 million | $259.3 million | $242.4 million |
| Diluted EPS | $0.78 | $0.69 | $1.93 | $1.81 |
| Gross margin | 40.1% | 39.6% | 39.6% | 40.3% |
| Operating cash flow | Not separately provided | Not separately provided | $256.3 million | $85.7 million |
Third-quarter sales increased 6.2%, operating income increased 12.3%, and net income increased 13.5% versus the prior-year quarter. Nine-month sales increased 10.9%, operating income increased 8.5%, and net income increased 7.0%. Third-quarter diluted EPS rose 13.0%, while nine-month diluted EPS increased 6.6%.
- Consumer segment third-quarter sales were $568.3 million, up 8.9%, and operating income was $108.9 million, up 8.4%. Consumer operating margin was 19.2%, compared with 19.3% in the prior-year quarter.
- Industrial segment third-quarter sales were $409.4 million, up 2.8%, and operating income was $35.3 million, up 27.0%. Industrial operating margin improved to 8.6% from 7.0%.
- Third-quarter gross profit increased 7.5%, and gross margin improved by 50 basis points, supported by consumer mix, pricing actions and Comprehensive Continuous Improvement cost savings.
- SG&A was $247.5 million in the quarter, or 25.4% of sales, compared with 25.6% in the prior-year quarter. Nine-month SG&A was 26.4% of sales versus 26.8%.
- Interest expense was $13.2 million in the quarter and $40.7 million year to date, compared with $13.1 million and $37.6 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $72.2 million at August 31, 2012, compared with $52.2 million at August 31, 2011 and $53.9 million at November 30, 2011.
- Total debt was approximately $1.26 billion, consisting of $229.0 million of short-term borrowings, $2.3 million of current long-term debt and $1.026 billion of long-term debt. Debt-to-total-capital was 42.2%, compared with 37.5% at August 31, 2011 and 43.6% at November 30, 2011.
- Nine-month investing cash outflow was $61.5 million, including $62.2 million of capital expenditures. Financing cash outflow was $177.0 million, including $98.2 million of share repurchases and $123.6 million of dividends.
- The company paid dividends of $0.31 per common share in the quarter and $0.93 per share year to date.
Material changes versus the prior comparable period
- Pricing actions contributed 4.5% to consolidated third-quarter sales growth, while volume and product mix contributed 0.3%. Acquisitions added 4.6%, and foreign exchange reduced reported growth by 3.2%.
- Acquisitions completed in 2011, including Kamis, Kohinoor and Kitchen Basics, contributed $42.7 million to third-quarter sales and $146.4 million to nine-month sales.
- Operating performance improved despite high single-digit expected material-cost inflation. Pricing and CCI savings substantially offset higher raw-material and packaging costs.
- Operating cash flow improved by $170.6 million year over year, primarily because inventory growth was lower and working-capital management improved.
- Income from unconsolidated operations declined to $5.5 million in the quarter and $14.0 million year to date, compared with $6.8 million and $20.9 million, respectively, mainly because of unfavorable foreign exchange effects on the McCormick de Mexico joint venture.
- The effective tax rate declined to 25.0% in the quarter and 27.7% year to date, compared with 26.8% and 29.3%, respectively. A $70.0 million foreign-cash repatriation is expected to generate approximately $8.9 million of U.S. foreign tax credits, including a $5.6 million benefit in the third quarter.
- Accumulated other comprehensive income changed from a $118.8 million gain at August 31, 2011 to an $89.5 million loss at August 31, 2012, largely reflecting currency translation and pension-related amounts.
Guidance, outlook, risks and unusual items
- Management projected 2012 local-currency sales growth of 9% to 11%, including approximately 4% growth from 2011 acquisitions, with an estimated 2% unfavorable currency effect at prevailing rates.
- Management projected 2012 diluted EPS of $3.03 to $3.08 and a fourth-quarter tax rate of approximately 28%.
- Expected 2012 capital expenditures were $100 million to $110 million, and pension-plan contributions were estimated at approximately $66 million.
- Management expected 2012 CCI cost savings to exceed $50 million and incremental brand-marketing support of at least $15 million versus 2011.
- In August 2012, McCormick agreed to acquire Wuhan Asia-Pacific Condiments Co. for approximately $141 million, subject to closing adjustments and regulatory approval. Completion was expected in mid-2013. The target had annual sales of approximately $115 million at signing.
- The IRS issued Notices of Proposed Adjustments relating to the company’s 2007 and 2008 U.S. federal tax returns. Management stated that appropriate tax accruals or deferred taxes had been established, but the final outcome and timing remain uncertain.
- Key risks include raw-material and packaging-cost volatility, foreign currency movements, economic weakness in Europe, customer concentration and credit risk, acquisition integration, pension funding requirements, financing-market availability, supply or business interruptions, regulatory changes, information-technology risks and cyberattacks.
- Management stated that no material changes occurred in contractual obligations, commercial commitments, legal proceedings or previously disclosed risk factors. Disclosure controls and procedures were evaluated as effective.
Important facts for investors to verify
- Whether pricing actions and CCI savings continue to offset high single-digit material-cost inflation without weakening volumes or market share.
- The sustainability of reported growth after separating pricing, acquisitions, foreign exchange and underlying volume/mix effects.
- The effect of foreign exchange on sales, unconsolidated earnings, goodwill and accumulated other comprehensive income.
- Progress toward the projected 2012 EPS range, approximately 28% fourth-quarter tax rate and planned capital expenditures.
- Liquidity and refinancing needs related to seasonal borrowings, total debt, interest-rate exposure and the company’s reliance on commercial paper and revolving credit facilities.
- The final resolution of the IRS tax examination and any resulting cash-tax or earnings impact.
- Regulatory approval, purchase price and integration risks associated with the planned Wuhan Asia-Pacific Condiments acquisition.
- Remaining share-repurchase authorization of approximately $171 million and the balance between repurchases, dividends, acquisitions and debt reduction.