McCormick & Company, Incorporated — Form 10-Q Summary
Business context and reporting period
McCormick is a global producer and marketer of spices, seasoning mixes, condiments and other flavorful products. It operates through consumer and industrial segments across North America, Europe, Asia/Pacific and other markets. This unaudited report covers the three and six months ended May 31, 2016, with comparisons to the corresponding 2015 periods.
Financial performance and key metrics
| Metric | Three months ended May 31, 2016 | Three months ended May 31, 2015 | Six months ended May 31, 2016 | Six months ended May 31, 2015 |
|---|---|---|---|---|
| Net sales | $1,063.3 million | $1,024.1 million | $2,093.5 million | $2,034.5 million |
| Gross profit | $432.8 million | $404.0 million | $837.8 million | $793.7 million |
| Gross margin | 40.7% | 39.4% | 40.0% | 39.0% |
| Operating income | $125.0 million | $103.8 million | $254.1 million | $197.5 million |
| Net income | $93.8 million | $84.3 million | $187.2 million | $154.8 million |
| Diluted EPS | $0.73 | $0.65 | $1.46 | $1.20 |
Six-month operating cash flow was $212.7 million, compared with $185.9 million in the prior-year period. Investing cash flow used $171.4 million, including $118.1 million for the Gourmet Garden acquisition and $54.8 million of capital expenditures. Financing cash flow used $16.2 million and included $100.8 million of share repurchases and $109.3 million of dividends paid.
At May 31, 2016, cash and cash equivalents were $131.5 million. Short-term borrowings were $513.1 million, current long-term debt was $0.6 million and long-term debt was $1,055.2 million. Total debt was $1,568.9 million, and trailing twelve-month total debt to EBITDA was 2.09, compared with 2.07 at May 31, 2015. Management stated that existing cash, operating cash flow and available borrowing facilities should be adequate for the next twelve months.
Material changes versus the prior comparable period
- Second-quarter sales increased 3.8%, or 6.0% on a constant-currency basis. Six-month sales increased 2.9%, or 6.3% on a constant-currency basis.
- Volume and product mix, pricing and acquisitions increased sales, but reported results were reduced by unfavorable foreign-currency translation.
- Gross margin improved by 130 basis points in the quarter and 100 basis points year to date, primarily from cost savings, favorable mix and pricing.
- Operating income increased 20.5% in the quarter and 28.7% year to date. Special charges declined to $3.9 million in the quarter and $5.5 million year to date, from $19.0 million and $47.4 million, respectively, in 2015.
- SG&A increased to 28.6% of sales in the quarter and 27.6% year to date, reflecting higher brand marketing and acquisition-related costs.
- The company acquired Gourmet Garden on April 19, 2016, for $118.1 million. The acquisition contributed $7.4 million of second-quarter sales, but management did not expect a significant 2016 operating-income contribution because of financing, acquisition and integration costs.
- Income taxes included discrete benefits of $6.9 million in the quarter and $10.7 million year to date. The effective tax rate was 23.1% for the quarter and 25.1% year to date, versus 15.9% and 20.1% in the prior-year periods.
Guidance, outlook, risks and unusual items
For 2016, management projected sales growth of 1% to 3% as reported, or 4% to 6% in constant currency. Diluted EPS was projected at $3.63 to $3.70; adjusted diluted EPS, excluding an estimated $0.05 impact from special charges, was projected at $3.68 to $3.75. Management expected $100 million to $110 million of cost savings, low-single-digit material-cost inflation, approximately $20 million of additional brand-marketing investment and capital expenditures of $150 million to $160 million.
Long-term objectives remain sales growth of 4% to 6%, operating-income growth of 7% to 9% and EPS growth of 9% to 11%, all in constant currency. Management expected the 2016 effective tax rate to be approximately 27% to 28%, absent additional discrete items, and expected income from unconsolidated operations to decline approximately 10% because of foreign-currency effects.
- Additional 2016 special charges were expected, including approximately $3.7 million related to EMEA restructuring and $0.7 million to $2.7 million related to the Kohinoor profitability initiative.
- In June 2016, the company agreed to exit its South African joint venture, subject to regulatory approval and customary closing conditions, with closing expected around October 1, 2016. No material gain or loss was expected.
- Key risks include foreign-currency volatility, raw-material costs and availability, pricing pressure, private-label competition, customer concentration and credit risk, acquisition integration, supply-chain disruption, pension obligations, tax-rate volatility, cybersecurity, litigation and regulatory changes.
- The June 23, 2016 Brexit referendum adversely affected global markets and the British pound. U.K. operations represented approximately 8% of 2015 consolidated sales.
- The company’s controls and procedures were effective as of May 31, 2016, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Reconcile reported and constant-currency growth, particularly the effect of foreign-exchange translation on sales, operating income and EPS.
- Assess whether the projected cost savings and pricing actions offset material-cost inflation and increased brand-marketing spending.
- Monitor leverage, short-term borrowing levels and the effect of acquisitions on the 2.09 total-debt-to-EBITDA ratio.
- Evaluate the final purchase-price allocation and integration performance of Gourmet Garden, as well as the D&A contingent earn-out payable in fiscal 2018.
- Separate recurring operating performance from special charges and discrete tax benefits when assessing earnings quality.
- Follow the planned South African joint-venture exit, EMEA and Kohinoor restructuring costs, and the continuing effects of Brexit and currency volatility.