McCormick & Company, Incorporated — Q1 2023 Form 10-Q
Reporting period: Three months ended February 28, 2023; comparative period ended February 28, 2022. Financial statements are unaudited. McCormick operates through Consumer and Flavor Solutions segments and sells spices, seasonings, condiments and related products globally.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,565.5 million | $1,522.4 million | +2.8%; +5.3% constant currency |
| Gross profit / margin | $562.9 million / 36.0% | $560.4 million / 36.8% | Profit +0.4%; margin -80 bps |
| Operating income | $199.0 million | $206.9 million | -3.8% |
| Adjusted operating income | $226.8 million | $227.1 million | -0.1%; 14.5% vs. 14.9% margin |
| Net income | $139.1 million | $154.9 million | -10.2% |
| Diluted EPS | $0.52 | $0.57 | -$0.05 |
| Operating cash flow | $103.4 million | $17.9 million | +$85.5 million |
| Capital expenditures | $61.5 million | $43.7 million | +$17.8 million |
Pricing increased consolidated sales by 10.6%, while volume and product mix reduced sales by 4.6%. Foreign exchange reduced reported sales by 2.5%, and the Kitchen Basics divestiture reduced sales by 0.7%.
Segment Performance
- Consumer: Sales declined 1.8% to $909.5 million, but increased 0.8% on a constant-currency basis. Segment operating income rose 3.8% to $173.4 million, and margin increased to 19.1% from 18.0%.
- Flavor Solutions: Sales increased 10.0% to $656.0 million, or 12.3% on a constant-currency basis. Segment operating income declined 11.1% to $53.4 million, and margin fell to 8.1% from 10.1%, primarily because of higher conversion, scrapped inventory, supply-chain investment and SG&A costs.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $356.8 million at February 28, 2023, compared with $334.0 million at November 30, 2022.
- Total debt, including current maturities, was approximately $5.2 billion: $1.3 billion of short-term borrowings, $281.2 million of current long-term debt and $3.6 billion of long-term debt.
- Long-term debt carrying value was $3.901 billion; reported fair value was $3.575 billion.
- Operating cash flow was $103.4 million; investing cash flow was $(61.5) million and financing cash flow was $(44.7) million. Cash increased by $22.8 million during the quarter.
- Management stated that cash, operating cash flow, credit facilities, commercial paper capacity and capital-market access should provide sufficient liquidity for at least the next twelve months.
- Significant near-term obligations include $250 million of 3.50% notes due September 2023 and the $500 million 364-day revolving credit facility maturing in July 2023.
- Committed revolving facilities include a $1.5 billion facility expiring in June 2026 and a $500 million facility expiring in July 2023. The company reported compliance with its liquidity expectations and stated that debt covenants were not expected to restrict access to the facilities.
- Quarterly dividends increased to $0.39 per share from $0.37. The company had $532.4 million remaining under its $600 million share-repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by pricing, while volume and mix declined because of price elasticity, COVID-related disruption in China, the Russia consumer-business exit and the Kitchen Basics divestiture.
- Gross margin declined 80 basis points because pricing actions had a margin-dilutive timing effect and conversion costs increased, partly offset by CCI and GOE savings.
- Interest expense increased $17.5 million to $50.6 million because of higher interest rates, despite lower average borrowing levels. Other income increased $4.9 million to $11.1 million, primarily from higher interest income.
- Special charges increased to $27.8 million from $19.5 million, principally due to the Global Operating Effectiveness program and voluntary retirement actions. There were no transaction and integration expenses in Q1 2023 versus $0.7 million in Q1 2022.
- Net income from unconsolidated operations increased to $14.0 million from $9.3 million, primarily due to stronger results at McCormick de Mexico.
- Operating cash flow improved substantially, primarily because fewer employee benefits accrued at the prior year-end were paid during the current quarter.
Guidance, Outlook and Unusual Items
- For fiscal 2023, management expects net sales growth of 5% to 7%, including minimal foreign-exchange impact.
- Gross margin is expected to increase 25 to 75 basis points from the 2022 margin of 35.8%.
- Operating income is expected to increase 10% to 12%; adjusted operating income is expected to increase 9% to 11%.
- Management expects approximately $50 million of 2023 special charges, approximately $75 million of savings from GOE and organizational streamlining actions, and approximately $85 million of CCI-led cost savings.
- Interest expense is expected to range from $200 million to $210 million, reflecting higher variable-rate borrowing costs.
- The projected 2023 effective tax rate is approximately 22%, compared with 20.7% in 2022.
- Reported diluted EPS guidance is $2.42 to $2.47; adjusted diluted EPS guidance is $2.56 to $2.61, compared with adjusted 2022 diluted EPS of $2.53.
- Management expects 2023 capital expenditures of approximately $280 million.
- Special charges included $24.8 million related to GOE in Q1 2023. The company expects to recognize approximately $40 million in total costs associated with consolidating U.K. manufacturing operations, including severance, accelerated depreciation, equipment relocation and facility-related costs.
Risks and Contingencies
- Key risks include persistent commodity, packaging and transportation inflation; supply-chain disruption; labor shortages; price elasticity; foreign-exchange volatility; higher interest rates; and customer and counterparty credit risk.
- The Russia-Ukraine conflict and related sanctions could increase economic uncertainty, energy and input costs, currency volatility and supply-chain disruption. McCormick suspended operations in Russia and exited its Russian consumer business; operations in Russia and Ukraine are not material to total company results based on the filing.
- COVID-19 effects were moderating overall but continued to affect China during the quarter. Future impacts remain uncertain.
- The company is exposed to variable-rate debt, with approximately $1.361 billion of variable-rate debt outstanding at quarter-end, and uses interest-rate, foreign-exchange and cross-currency derivatives as hedges.
- Supplier-finance obligations included in trade accounts payable were approximately $320.1 million at February 28, 2023.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether pricing actions and GOE/CCI savings offset inflation, conversion costs and ongoing volume and mix pressure.
- The timing and funding of the $250 million September 2023 debt maturity and July 2023 revolving-credit-facility maturity.
- Progress toward the stated 2023 sales, operating-income, adjusted EPS and cost-savings guidance.
- Whether Flavor Solutions margins recover from the Q1 decline and whether Consumer segment volume stabilizes.
- The cash cost, timing and ultimate benefits of the GOE program, voluntary retirement plan and U.K. manufacturing consolidation.
- Exposure to higher interest rates, foreign-exchange movements, commodity costs, supply-chain disruptions and geopolitical developments.
- The impact of the Kitchen Basics divestiture, Russia exit, China COVID disruptions and price elasticity on full-year demand.