McCormick & Company, Incorporated — Q1 2021 Form 10-Q Summary
Business context and reporting period
McCormick is a global manufacturer and distributor of spices, seasonings, condiments and flavor solutions, operating through Consumer and Flavor Solutions segments. The filing covers the three months ended February 28, 2021, compared with February 29, 2020. Results reflect continued COVID-19-related shifts toward at-home consumption, the November 2020 acquisition of Cholula, and the December 2020 acquisition of FONA.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,481.5 million | $1,212.0 million | 22.2% increase |
| Gross profit | $577.5 million | $469.9 million | 22.9% increase |
| Gross margin | 39.0% | 38.8% | 20 basis-point increase |
| Operating income | $236.3 million | $194.2 million | 21.7% increase |
| Net income | $161.8 million | $144.7 million | 11.8% increase |
| Diluted EPS | $0.60 | $0.54 | 11.1% increase |
| Cash flow from operations | $(32.2) million | $44.8 million | $77.0 million decrease |
- Adjusted operating income was $262.5 million, or 17.7% of sales, compared with $195.2 million, or 16.1%, in the prior-year quarter.
- Adjusted net income was $193.6 million and adjusted diluted EPS was $0.72, compared with $145.4 million and $0.54, respectively, in Q1 2020.
- Consumer segment sales increased 35.4% to $946.8 million; segment operating margin rose to 20.1% from 17.1%.
- Flavor Solutions sales increased 4.3% to $534.7 million, while segment operating income declined 4.0% to $72.6 million and margin declined to 13.6% from 14.8%.
- Cash and cash equivalents were $256.1 million at February 28, 2021, versus $423.6 million at November 30, 2020.
- Total debt, including current and long-term portions, was $5,599.4 million at quarter-end, compared with $4,904.4 million at November 30, 2020. Long-term debt carrying value increased to $5,005.1 million from $4,017.7 million.
- The trailing-twelve-month leverage ratio was 3.8, compared with 3.5 at November 30, 2020, versus a permitted maximum of 4.5 for the applicable 2021 measurement dates.
- Capital expenditures were $48.6 million, and 2021 capital expenditures are expected to approximate $265 million.
- Cash dividends paid increased to $90.8 million from $82.4 million; the quarterly dividend was $0.34 per share versus $0.31.
Material changes versus the prior comparable period
- Sales growth was driven by 15.2% favorable volume and product mix, 4.0% from acquisitions, 2.2% from foreign exchange and 0.8% from pricing.
- Consumer sales benefited from increased at-home meal preparation across regions and a rebound in China from COVID-19 disruptions in Q1 2020. Flavor Solutions remained pressured by lower restaurant and foodservice demand.
- Cholula and FONA contributed approximately $25.1 million of transaction and integration expenses, including $6.3 million of acquired-inventory fair-value amortization, $13.8 million of transaction costs and $5.0 million of integration costs. The company expects an additional approximately $25 million of these expenses during the remainder of fiscal 2021.
- SG&A increased $46.6 million but declined to 21.7% of sales from 22.7% due primarily to sales leverage.
- The effective tax rate increased to 28.3% from 18.3%, reflecting a $5.3 million net discrete tax expense in 2021 versus a $10.4 million net discrete tax benefit in 2020. The 2021 discrete items included $11.4 million of deferred state tax expense related to FONA.
- Operating cash flow turned negative because of working-capital usage, employee benefit payments and acquisition-related transaction and integration costs. Investing cash outflows increased to $755.2 million, primarily from the $706.6 million FONA acquisition.
- Financing activities generated $612.7 million, including $999.3 million of net proceeds from long-term debt issuance and a $292.4 million reduction in short-term borrowings.
Guidance, outlook, risks and unusual items
- Fiscal 2021 net sales are expected to increase 8% to 10%, including a 2% favorable foreign-exchange impact, or 6% to 8% on a constant-currency basis.
- Adjusted operating income is expected to increase 9% to 11%, including a 2% foreign-exchange benefit, or 7% to 9% on a constant-currency basis.
- Reported diluted EPS is expected to range from $2.77 to $2.82; adjusted diluted EPS is expected to range from $2.97 to $3.02.
- Management expects 2021 gross margin to decline approximately 10 basis points from the 2020 level of 41.1%; excluding acquired-inventory amortization, adjusted gross margin is expected to be comparable to 2020.
- Management expects approximately $50 million of 2021 Cholula and FONA transaction and integration expenses, approximately $8 million of special charges, and approximately $30 million of additional ERP replacement-program expense versus 2020.
- COVID-19 remains a principal uncertainty. A prolonged or uneven recovery could affect consumer demand, restaurant and foodservice customers, supply chains, labor availability, raw-material costs, credit risk, goodwill and intangible-asset valuations.
- Other significant risks include commodity inflation, foreign-exchange volatility, increased debt service, interest rates, the transition away from LIBOR, acquisition integration, cybersecurity, tax-rate volatility and execution of the global ERP and cost-savings initiatives.
- The filing reports no material pending legal proceedings and no material changes to internal control over financial reporting. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the strong Consumer segment growth, particularly from at-home consumption and the China rebound, is sustainable as pandemic restrictions ease.
- Whether Flavor Solutions volume and margin recover as restaurant and foodservice demand normalizes.
- The final purchase-price allocations, goodwill and intangible-asset valuations for Cholula and FONA, which remained preliminary at quarter-end.
- Actual transaction, integration, ERP and special-charge spending versus management’s fiscal 2021 estimates.
- Debt reduction, refinancing needs, interest expense and compliance with the 4.5 leverage covenant.
- Working-capital trends and the company’s ability to convert earnings into operating cash flow, given seasonally weak first-quarter cash generation.
- The impact of inflation in raw materials, packaging and conversion costs, and the effectiveness of pricing and CCI cost savings.
- The effects of COVID-19 developments, vaccine adoption, supply-chain disruptions and the transition from LIBOR on future results.