Business Context and Reporting Period
McCormick & Company, Incorporated is a global manufacturer and distributor of spices, seasonings, condiments and other flavor products. It operates through Consumer and Flavor Solutions segments, serving retail, food manufacturing and foodservice customers. This Form 10-Q covers the three and six months ended May 31, 2023, compared with the corresponding 2022 periods.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2023 | Year-over-Year Change | Six Months Ended May 31, 2023 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $1,659.2 million | 8.0% | $3,224.7 million | 5.4% |
| Gross profit | $615.5 million | 17.7% | $1,178.4 million | 8.8% |
| Gross margin | 37.1% | Up 310 bps | 36.5% | Up 110 bps |
| Operating income | $221.8 million | 40.9% | $420.8 million | 15.6% |
| Net income | $152.1 million | 28.0% | $291.2 million | 6.5% |
| Diluted EPS | $0.56 | From $0.44 | $1.08 | From $1.01 |
| Operating cash flow | Not separately provided | — | $394.2 million | From $154.4 million |
Reported operating margin was approximately 13.4% for the quarter and 13.0% for the six-month period. Net margin was approximately 9.2% and 9.0%, respectively. Adjusted operating income, excluding special charges and applicable integration expenses, was $235.0 million for the quarter and $461.8 million for the six-month period, compared with $173.8 million and $400.9 million, respectively, in the prior-year periods.
- Segment performance: Second-quarter Consumer sales increased 5.3% to $912.1 million, while segment operating income increased 23.1% to $153.6 million and margin expanded to 16.8%. Flavor Solutions sales increased 11.4% to $747.1 million, while segment operating income increased 66.1% to $81.4 million and margin expanded to 10.9%.
- Pricing and volume: Second-quarter pricing actions increased sales by 10.8%, partially offset by a 0.9% decline from volume and product mix. Foreign exchange reduced reported sales by 1.5%; constant-currency sales growth was 9.5%.
- Cash flow and capital spending: Operating cash flow was $394.2 million for the first six months. Capital expenditures were $118.6 million, and management expects approximately $260 million of capital expenditures for fiscal 2023.
- Liquidity and debt: Cash and cash equivalents were $127.4 million at May 31, 2023, compared with $334.0 million at November 30, 2022. Total borrowings, including short-term borrowings and current and long-term debt, were approximately $4.9 billion. Long-term debt carrying value was $4,403.3 million.
- Shareholder returns: The company paid $209.2 million in dividends during the first six months and repurchased $18.6 million of common stock. The quarterly dividend was $0.39 per share, and $518.6 million remained under the $600 million repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth was primarily price-driven, while volume and mix remained negative because of price elasticity, discontinued low-margin businesses and the Kitchen Basics divestiture.
- Gross margin improved substantially as pricing actions, CCI cost savings and the Global Operating Effectiveness program more than offset higher commodity and conversion costs.
- Interest expense increased by $18.5 million in the quarter and $36.0 million year to date, reflecting higher interest rates despite lower average borrowing levels. Other income increased primarily because of higher interest income.
- The company issued $500 million of 4.950% unsecured senior notes due 2033 in April 2023. Net proceeds of $496.4 million were used to repay commercial paper borrowings.
- Special charges were $13.2 million in the quarter and $41.0 million year to date, compared with $15.1 million and $34.6 million, respectively, in 2022. The 2023 charges were principally related to the GOE program, EMEA manufacturing changes and regional streamlining.
- Prior-year results included FONA integration expenses and charges related to the Russia business exit, partly offset by a gain on the sale of the Kohinoor brand. No FONA integration expenses were recorded in 2023.
- Operating cash flow improved by $239.8 million year to date, supported by higher earnings and more favorable working-capital movements, including lower inventory.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2023 net sales growth of 5% to 7%, gross margin 50 to 100 basis points above the 2022 margin of 35.8%, and operating income growth of 11% to 13%.
- Adjusted operating income is expected to increase 10% to 12%. Adjusted diluted EPS is projected at $2.60 to $2.65, while reported diluted EPS is projected at $2.44 to $2.49.
- Management expects approximately $55 million of 2023 special charges, approximately $75 million of GOE savings and approximately $85 million of CCI-led cost savings. The company’s broader GOE program targets approximately $125 million of cost elimination during 2023 and 2024.
- Fiscal 2023 interest expense is estimated at $200 million to $210 million, and the effective tax rate is expected to be approximately 22%.
- Key risks include persistent commodity, packaging and transportation inflation; pricing-related volume declines; supply-chain disruption and labor shortages; higher interest rates; foreign exchange volatility; customer credit exposure; cyber and information-technology risks; the Russia-Ukraine conflict; COVID-19 uncertainty; impairment of goodwill or intangible assets; and the ability to realize projected cost savings.
- The company expects sufficient liquidity for at least the next twelve months from cash, operating cash flow, commercial paper, credit facilities and capital-market access. A significant near-term obligation is the $250 million of 3.50% notes due in September 2023.
- Management reported effective disclosure controls and procedures, no material change in internal control over financial reporting, no material pending legal proceedings and no material changes to previously disclosed risk factors.
Investor Verification Priorities
- Verify whether pricing-led sales growth can continue without further deterioration in volume and product mix.
- Assess the sustainability of gross-margin improvement and the timing and realization of GOE and CCI savings.
- Monitor interest expense, refinancing of the September 2023 debt maturity and compliance with credit-facility covenants.
- Reconcile reported results with management’s adjusted measures, including special charges, tax benefits and other excluded items.
- Evaluate cash conversion, working-capital trends, capital expenditures and the effect of dividends and share repurchases on liquidity.
- Track foreign exchange, commodity costs, supply-chain execution and exposure to geopolitical and macroeconomic conditions.