McCormick & Company, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
McCormick is a global manufacturer, marketer and distributor of spices, seasonings, condiments and flavor products. It operates through two segments: Consumer and Flavor Solutions. The filing covers the fiscal year ended November 30, 2019, with fourth-quarter results included. Approximately 40% of fiscal 2019 sales were generated outside the United States.
- Consumer sales were $3,269.8 million, or approximately 61% of consolidated sales.
- Flavor Solutions sales were $2,077.6 million, or approximately 39% of consolidated sales.
- The 2017 acquisition of RB Foods, including French’s, Frank’s RedHot and Cattlemen’s, remained strategically important; no acquisitions were completed in fiscal 2019.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $5,347.4 million | $5,302.8 million | Up 0.8% |
| Gross profit | $2,145.3 million | $2,093.3 million | Up 2.5% |
| Gross margin | 40.1% | 39.5% | Up 60 bps |
| Operating income | $957.7 million | $891.1 million | Up 7.5% |
| Operating margin | 17.9% | 16.8% | Up 110 bps |
| Net income | $702.7 million | $933.4 million | Down 24.7% |
| Diluted EPS | $5.24 | $7.00 | Down $1.76 |
| Adjusted diluted EPS | $5.35 | $4.97 | Up 7.6% |
| Cash flow from operations | $946.8 million | $821.2 million | Up $125.6 million |
| Capital expenditures | $173.7 million | $169.1 million | Up $4.6 million |
Reported net income and EPS declined primarily because fiscal 2018 included a $301.5 million non-recurring benefit from the U.S. Tax Act. Excluding special charges, RB Foods transaction and integration costs, and U.S. Tax Act benefits, adjusted net income was $717.3 million in 2019 versus $662.0 million in 2018.
- Consumer segment sales increased 0.7% and segment operating margin improved to 20.7% from 19.6%.
- Flavor Solutions sales increased 1.1% and segment operating margin improved to 14.5% from 14.2%.
- Volume and product mix contributed 2.5% to consolidated sales growth, pricing contributed 0.2%, and foreign exchange reduced reported growth by 1.9%. Constant-currency sales growth was 2.7%.
- CCI productivity savings contributed $118.9 million in 2019. Adjusted operating income increased 5.2% to $978.5 million.
Liquidity, debt and shareholder returns
- Cash and cash equivalents were $155.4 million at November 30, 2019, compared with $96.6 million at the prior year-end.
- Total debt, including short-term borrowings and current long-term debt, was approximately $4.3 billion. Balance-sheet debt included $600.7 million of short-term borrowings and $3,625.8 million of long-term debt.
- Variable-rate debt was approximately $881.7 million at a weighted-average rate of approximately 2.6%.
- Net debt was $4,243.8 million and the leverage ratio was 3.4x, improved from 4.0x in 2018. Management’s long-term leverage target is 1.5x to 2.0x.
- The company had a $1.0 billion revolving credit facility expiring in August 2022, with $424.7 million of capacity available after supporting commercial paper.
- Dividends paid totaled $302.2 million, or $2.28 per share. The quarterly dividend was increased 8.8% in November 2019, from $0.57 to $0.62 per share.
- Share repurchases totaled $95.1 million in 2019. A new $600 million repurchase authorization was approved in November 2019, in addition to approximately $32 million remaining under the prior authorization.
Material changes versus the prior comparable period
- Sales growth slowed substantially from 12.1% in 2018 to 0.8% in 2019 as the incremental impact of the RB Foods acquisition no longer contributed to reported sales growth and foreign currency became a significant headwind.
- Operating profitability improved through CCI savings, higher sales and the absence of $22.5 million of RB Foods transaction and integration expenses recorded in 2018.
- Special charges increased to $20.8 million from $16.3 million, primarily for the Global Enablement transformation and streamlining actions.
- Interest expense declined to $165.2 million from $174.6 million as average borrowings decreased.
- Long-term debt declined by $427.1 million, including $447.7 million of long-term debt repayments during 2019.
- Cash conversion cycle improved to 43 days from 55 days, principally due to extended supplier payment terms and lower days sales outstanding, partly offset by higher days in inventory.
- Fiscal 2019 adopted revenue recognition and pension presentation standards retrospectively. The revenue standard did not affect operating income, net income or EPS, although prior-period sales and expense classifications were recast.
Guidance, outlook and management commentary
- For 2020, management expects net sales growth of 2% to 4%, driven by new products, brand marketing, expanded distribution and pricing; no incremental acquisition-related sales impact is currently expected.
- 2020 gross margin is expected to improve by 25 to 75 basis points.
- Reported operating income is expected to range from comparable to 2% higher than 2019, including an estimated 600-basis-point unfavorable impact from ERP investment expenses.
- 2020 adjusted operating income is expected to range from a 1% decline to a 1% increase, with approximately $105 million of targeted CCI savings.
- 2020 diluted EPS is projected at $5.15 to $5.25; adjusted diluted EPS is projected at $5.20 to $5.30, compared with 2019 adjusted diluted EPS of $5.35.
- The multi-year ERP replacement program is expected to require $300 million to $350 million from late 2018 through 2022, with approximately 40% capitalized software and 60% operating expenses. The Global Enablement initiative is expected to generate annual savings of approximately $45 million to $55 million once implemented.
Risks, contingencies and unusual items
- Major risks include commodity price and availability volatility, adverse weather and climate effects, foreign exchange movements, tariffs and trade restrictions, customer concentration, private-label competition, food safety or product recall events, regulatory changes, cyberattacks and supply-chain disruptions.
- Wal-Mart represented approximately 11% of consolidated sales, while PepsiCo represented approximately 10% in 2019. The top three Flavor Solutions customers represented approximately 49% to 52% of that segment’s sales.
- Debt-related risks include variable interest rates, credit-rating changes, refinancing requirements, restrictive covenants and the planned phase-out of LIBOR.
- Goodwill was $4.5 billion and brand names and trademarks were $2.6 billion at year-end. Fiscal 2019 impairment testing indicated that reporting-unit fair values significantly exceeded carrying values, but these assets remain sensitive to changes in growth, margins, discount rates and royalty assumptions.
- The company had $6.0 billion of contractual cash obligations, including debt, interest, leases, raw-material purchase obligations and other purchase commitments.
- No material pending legal proceedings, material off-balance-sheet arrangements or material environmental capital expenditures were reported. The company stated that its disclosure controls and internal control over financial reporting were effective, and the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Reconcile GAAP EPS and net income with adjusted measures, particularly the effect of the 2018 U.S. Tax Act benefit and recurring special charges.
- Track progress on ERP and Global Enablement spending, implementation timing, anticipated savings and the projected effect on 2020 margins and EPS.
- Monitor debt repayment, refinancing needs, variable-rate exposure, LIBOR transition and leverage relative to the company’s 1.5x to 2.0x long-term target.
- Assess whether constant-currency volume and product-mix growth can offset foreign exchange, commodity costs, customer pricing pressure and private-label competition.
- Review the valuation sensitivity of RB Foods-related goodwill and trademarks, particularly French’s, Frank’s RedHot and Cattlemen’s.
- Verify customer concentration, raw-material commitments, pension funding requirements and the sustainability of dividend and share-repurchase activity.