McCormick & Company, Incorporated — Q1 2012 Form 10-Q
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and other flavorful products. It operates through Consumer and Industrial segments across North America, Europe, Asia/Pacific and other international markets. The filing covers the three months ended February 29, 2012, compared with February 28, 2011. Results are seasonally weighted toward the second half of the fiscal year.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $906.7 million | $782.8 million | 15.8% increase |
| Gross profit | $355.3 million | $328.2 million | 8.3% increase |
| Gross margin | 39.2% | 41.9% | Down 270 basis points |
| Operating income | $112.5 million | $110.6 million | 1.7% increase |
| Net income | $74.5 million | $76.8 million | 3.0% decrease |
| Diluted EPS | $0.55 | $0.57 | Decrease |
| Operating cash flow | $22.5 million | $(23.1) million | $45.6 million improvement |
- Estimated operating margin was approximately 12.4%, compared with approximately 14.1% in the prior-year quarter. Net margin was approximately 8.2%, compared with approximately 9.8%.
- Consumer sales increased 17.6% to $534.2 million, but consumer operating income declined 6.3% to $81.4 million; margin fell to 15.2% from 19.1%.
- Industrial sales increased 13.4% to $372.5 million, while operating income increased 31.2% to $31.1 million; margin improved to 8.3% from 7.2%.
- Cash and cash equivalents were $54.4 million at February 29, 2012. Total current assets were $1.19 billion and total current liabilities were $959.9 million.
- Debt consisted of $281.2 million of short-term borrowings, $1.9 million of current long-term debt and $1.03 billion of long-term debt. Debt-to-total-capital was 43.7%, versus 38.1% at February 28, 2011.
- Average total debt was $1.44 billion, compared with $1.13 billion in the prior-year quarter, primarily reflecting debt used to fund 2011 acquisitions.
- Capital expenditures were $15.1 million. Fiscal 2012 capital expenditures were expected to be $100 million to $110 million.
- The company paid $41.4 million in dividends and repurchased $42.3 million of common stock during the quarter. Approximately $227 million remained under the $400 million repurchase authorization.
Material changes versus the prior comparable period
- Sales growth included a 6.7% contribution from acquisitions, a 0.4% unfavorable currency impact, 5.2% from pricing and 4.3% from volume and product mix, excluding acquisitions and currency.
- Acquisitions of Kitchen Basics, Kohinoor and Kamis contributed $52.6 million of first-quarter sales. These acquisitions materially increased goodwill, intangible assets and debt.
- Higher raw and packaging material costs compressed gross margin despite pricing actions and Comprehensive Continuous Improvement savings.
- SG&A increased to $242.8 million but declined to 26.8% of sales from 27.8%, reflecting sales leverage. Marketing spending increased $9.0 million, or 22%.
- Interest expense increased $1.3 million to $13.5 million because of higher average debt balances.
- Income from unconsolidated operations decreased to $4.6 million from $7.9 million, primarily because of lower earnings from the Mexico joint venture due to unfavorable currency and higher soybean oil costs.
- Operating cash flow improved from an outflow of $23.1 million to an inflow of $22.5 million, although pension contributions increased by approximately $21 million year over year.
- Comprehensive income declined to $97.9 million from $144.6 million, mainly because the prior-year period had a larger foreign-currency translation gain.
Guidance, outlook, commentary and risks
- Management projected 2012 sales growth of 9% to 11% in local currency, including approximately 4% from 2011 acquisitions and a projected 2% unfavorable currency effect at prevailing exchange rates.
- Projected 2012 diluted EPS was $3.01 to $3.06. The outlook included higher sales, CCI savings and the absence of $10.9 million of 2011 acquisition-related transaction costs, partially offset by high-single-digit material-cost inflation and $9 million of higher retirement benefit expense.
- Management expected at least $45 million of 2012 CCI cost savings, compared with $65 million in 2011, and at least $10 million of additional brand marketing investment.
- Material-cost inflation was expected to have its greatest adverse effect in the first quarter and gradually improve over the remaining quarters. Income from unconsolidated operations was expected to decline slightly for the full year.
- 2012 pension contributions were expected to be approximately $66 million, compared with $42.7 million in 2011.
- Key risks include volatile raw-material and packaging costs, foreign-exchange movements, customer concentration and credit risk, acquisition integration, global economic conditions, financing availability, interest and inflation rates, supply-chain disruption, information-technology failures, data breaches and cyberattacks.
- The company uses foreign-exchange and interest-rate derivatives for hedging, not trading. It reported $100 million of interest-rate swap notional value and $137.3 million of foreign-exchange forward notional value at quarter-end.
- Management stated that existing internally generated funds and credit facilities were sufficient for current liquidity needs. No material changes to contractual obligations or commercial commitments were reported, and no material pending legal proceedings were disclosed.
Important facts for investors to verify
- Whether pricing and CCI savings can offset high-single-digit material-cost inflation without further gross-margin deterioration.
- The sustainability and integration performance of the Kamis, Kohinoor and Kitchen Basics acquisitions.
- Debt reduction, interest expense and liquidity trends following acquisition financing and ongoing share repurchases.
- Progress toward the $3.01 to $3.06 full-year diluted EPS outlook and the expected improvement in margins after the first quarter.
- Inventory levels, working-capital conversion and the seasonal buildup of operating cash flow in the second half of the year.
- Foreign-exchange exposure, pension funding requirements and the impact of commodity prices, particularly soybean oil and other key ingredients.