MCCORMICK & CO INC annual report, FY2020

McCormick & Company, Inc. 2020 Form 10-K Summary

Reporting period: Fiscal year ended November 30, 2020. The filing includes unaudited fourth-quarter data, but this is an annual Form 10-K rather than a quarterly filing. McCormick is a global manufacturer and distributor of spices, seasonings, condiments and other flavor products, operating through Consumer and Flavor Solutions segments.

Business Context

Consumer represented approximately 64% of consolidated sales and 77% of consolidated operating income.
Flavor Solutions represented approximately 36% of sales and 23% of operating income.
Approximately 38% to 40% of sales were generated outside the United States, depending on the filing measure used.
Major customers included Walmart at approximately 12% of consolidated sales and PepsiCo at approximately 11%; together, the two represented approximately 23% of sales.
COVID-19 increased at-home consumption and benefited Consumer demand, while restaurant and foodservice disruption reduced Flavor Solutions demand.

Financial Performance and Key Metrics

Metric	2020	2019	Change
Net sales	$5,601.3 million	$5,347.4 million	Up 4.7%
Gross profit	$2,300.4 million	$2,145.3 million	Up 7.2%
Gross margin	41.1%	40.1%	Up 100 bps
Operating income	$999.5 million	$957.7 million	Up 4.4%
Operating margin	17.8%	17.9%	Down 10 bps
Net income	$747.4 million	$702.7 million	Up 6.4%
Diluted EPS	$2.78	$2.62	Up 6.1%
Adjusted diluted EPS	$2.83	$2.68	Up 5.6%
Operating cash flow	$1,041.3 million	$946.8 million	Up $94.5 million

Reported sales growth reflected 3.7% from volume and product mix, 1.6% from pricing and a 0.6% unfavorable foreign-exchange impact. Constant-currency sales growth was 5.3%.
Consumer sales increased 10.0% to $3,596.7 million, and segment operating margin improved to 21.7% from 20.7%.
Flavor Solutions sales declined 3.5% to $2,004.6 million, and segment operating margin declined to 11.9% from 14.5%.
Adjusted operating income was $1,018.8 million, up 4.1%; CCI-led cost savings totaled approximately $113 million.
Interest expense declined to $135.6 million from $165.2 million, primarily due to lower average borrowings and interest rates. The effective tax rate increased to 19.8% from 19.2%.
Capital expenditures were $225.3 million, compared with $173.7 million in 2019. Dividends paid were $330.1 million and share repurchases were $47.3 million.

Liquidity, Debt and Balance Sheet

Cash and cash equivalents were $423.6 million at year-end, compared with $155.4 million in 2019.
Total debt was approximately $4.9 billion, consisting of $886.7 million of short-term borrowings and $4,017.7 million of long-term debt including the current portion.
Net debt under the company’s non-GAAP definition was $4,555.8 million; reported leverage was 3.6x Adjusted EBITDA, compared with 3.4x in 2019. The covenant leverage ratio including pro forma acquisitions was 3.5x.
The company had a $1.0 billion revolving credit facility expiring in August 2022, with approximately $154.2 million of capacity after supporting commercial paper at year-end. It also had $316.6 million of uncommitted facilities.
McCormick issued $500 million of 2.50% notes due 2030 in April 2020 and used cash and short-term borrowings to fund the Cholula acquisition.
Net cash used in investing activities was $1,025.6 million, primarily reflecting the $803 million Cholula acquisition and $225.3 million of capital expenditures.

Material Changes Versus the Prior Comparable Period

COVID-19 shifted demand toward at-home cooking, driving strong Consumer growth, while restaurant and foodservice restrictions materially reduced Flavor Solutions volumes and margins.
Gross margin improved by 100 basis points, helped by CCI savings, pricing and mix, but operating margin was slightly lower because of higher SG&A, COVID-related costs and acquisition expenses.
Special charges declined to $6.9 million from $20.8 million, but 2020 included $12.4 million of transaction and integration expenses related to Cholula and FONA.
Inventory increased to $1,032.6 million from $801.2 million, reflecting higher demand and supply-chain requirements.
Total assets rose to $12.1 billion from $10.4 billion, primarily due to acquisitions and higher goodwill and intangible assets.
The company completed a two-for-one stock split effective November 30, 2020; historical per-share data was retroactively adjusted.

Acquisitions, Guidance and Management Outlook

Cholula was acquired on November 30, 2020 for approximately $803 million, net of cash acquired. Its preliminary allocation included $410.5 million of goodwill and $401.0 million of intangible assets. The allocation remained subject to finalization.
FONA was acquired on December 30, 2020 for approximately $710 million, net of cash acquired, funded with cash and commercial paper. FONA’s results were not included in fiscal 2020 results.
For fiscal 2021, management projected sales growth of 7% to 9%, including approximately 2% favorable currency impact, or 5% to 7% on a constant-currency basis.
Management projected reported diluted EPS of $2.71 to $2.76 and adjusted diluted EPS of $2.91 to $2.96. Adjusted EPS growth was expected at 3% to 5%, or 1% to 3% in constant currency.
Reported operating income was expected to increase 4% to 6%; adjusted operating income was expected to increase 8% to 10%, or 6% to 8% in constant currency.
Management expected approximately $50 million of 2021 transaction and integration expenses related to Cholula and FONA, approximately $8 million of special charges and approximately $30 million of additional ERP-related expense.
2021 capital expenditures were expected to approximate $265 million. Share repurchases were expected to remain curtailed because of acquisition-related debt.
The Global Enablement initiative is expected to generate annual savings of approximately $45 million to $55 million once fully implemented. Total special charges for the initiative are expected to be approximately $60 million to $65 million, of which $39.9 million had been recognized through year-end.

Risks, Contingencies and Unusual Items

Key risks include the duration and severity of COVID-19, supply-chain disruptions, raw-material price and availability volatility, food safety or product recalls, customer concentration and private-label competition.
Higher leverage following the Cholula and FONA acquisitions may increase debt service, interest-rate exposure, refinancing needs and covenant sensitivity. A $250 million 3.90% note matures in July 2021.
LIBOR-based debt and derivatives require transition planning because LIBOR was expected to be phased out after 2021; the filing states that the financial impact was uncertain.
Goodwill was approximately $5.0 billion and brand names and trademarks were approximately $3.0 billion. No impairment was recorded, but recent acquisitions and changes in sales, margins, discount rates or interest rates could increase impairment risk.
The company had approximately $1.3 billion of indefinitely reinvested foreign earnings and $39.3 million of unrecognized tax benefits at year-end.
Contractual cash obligations totaled approximately $6.7 billion, including debt, leases, interest, raw-material purchase obligations, pension obligations and other purchase commitments.
No material pending legal proceedings, material litigation reserves or off-balance-sheet arrangements were reported. A synthetic lease for a distribution facility with estimated construction cost of $315 million is expected to commence in late fiscal 2022 and includes a residual value guarantee of approximately 75% of construction cost.
Management and Ernst & Young concluded that internal control over financial reporting was effective, and the financial statement audit opinion was unqualified.

Investor Verification Checklist

Verify the final purchase-price allocation, integration costs and operating contribution of Cholula and FONA.
Assess whether Consumer demand remains elevated after pandemic-related changes in eating and shopping behavior.
Monitor the recovery of Flavor Solutions, particularly restaurant, quick-service and foodservice customers.
Reconcile reported and adjusted earnings, including special charges, acquisition costs, ERP expenses and discrete tax items.
Track debt maturities, refinancing plans, commercial paper exposure, leverage covenant headroom and interest-rate sensitivity.
Evaluate goodwill and brand-asset impairment sensitivity, particularly for recently acquired brands.
Review inventory levels, supplier-finance obligations and the sustainability of working-capital-driven cash flow.
Compare fiscal 2021 results with management’s sales, margin, operating-income and EPS guidance.