OVERVIEW
Our Business
We are a global leader in flavor, with the manufacturing, marketing and distribution of spices, seasoning mixes, condiments and other flavorful products to the entire food industry. Customers range from retail outlets and food manufacturers to food service businesses. Our major sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in China, Australia, Mexico, India, Singapore, Central America, Thailand and South Africa. Annually, approximately 40% of our sales have been outside of the United States.
We operate in two business segments, consumer and industrial. Consistent with market conditions in each segment, our consumer business has a higher overall profit margin than our industrial business. In 2011, the consumer business contributed 59% of sales and 79% of operating income and the industrial business contributed 41% of sales and 21% of operating income. Across both segments, we have the customer base and product breadth to participate in all types of eating occasions, whether it is cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer consumers a range of products from premium to value-priced.
Our Strategy and Outlook
Our strategy is straightforward - we invest in the business to drive sales and profits and fund these investments with cost savings from our Comprehensive Continuous Improvement (CCI) program. This simple strategy has been the driver of our success and is our plan for growth in the future.
Increasing Sales and Profits - Our long-term goals are to grow sales 4 to 6%, increase operating income 7 to 9% and increase earnings per share 9 to 11%. Long-term, we expect to achieve mid-single digit sales growth with one-third from category growth, share gains and new distribution, one-third from product innovation and one-third from acquisitions. While no new acquisitions are included in our 2012 sales projections, we expect a 4% increase in 2012 from acquisitions completed in 2011 and a favorable impact from our pricing actions, in response to higher material costs. As a result, we project 9 to 11% sales growth in local currency for 2012, with an estimated 2% reduction in growth from unfavorable currency exchange rates based on prevailing rates. Also in 2012, we expect to achieve earnings per share of $3.03 to $3.08. This estimate includes the anticipated benefit of higher sales and CCI cost savings in 2012, a favorable comparison to 2011 when $10.9 million of acquisition-related transaction costs were recorded and a more favorable income tax rate in 2012 compared to last year. We anticipate that the positive effect on profit from these items will be offset in part by higher material costs, with anticipated increases at a high single digit range, as well as $9 million of increased retirement benefit expense. In addition to increased sales and profit, our business generates strong cash flow (we generated $340 million in cash flow from operations in 2011). Long-term, we expect higher cash flow and more efficient asset utilization as we anticipate growth in net income and further reductions in our working capital. We are increasing shareholder return with consistent dividend payments. We have paid dividends every year since 1925 and increased the dividend in each of the past 26 years.
Investing in the Business - We are investing in our consumer business with new products, new packaging and greater marketing support. In 2011, we increased brand marketing by $20 million, or 12%, over the prior year to support additional digital marketing (one of our highest return investments in brand marketing), Hispanic products in the U.S. and other new products. We have planned increases of at least $15 million in incremental brand marketing support for 2012 over 2011 levels, with the majority already incurred through the first nine months of the year.

As an industry leader, McCormick brings innovative ideas to consumer and to industrial customers. For our consumer business, we using new products to build on our global growth platforms of spices and seasonings, and recipe mixes, as well as brands that are regional leaders, such as Vahine dessert items in France or Zatarain's in the U.S. For our spices and seasonings platform, our 2012 product innovation includes the introduction of Recipe Inspirations in Europe and Australia, expansion of Perfect Pinch and Perfect Shake blends, and new varieties of Grill Mates and grinders. New recipe mixes include varieties to prepare traditional meals, slow cooker blends, a "Naturals" line and in China, Family Classics and World Flavor varieties. Among our brands that are regional leaders, our 2012 new products include features such as convenience, ethnic flavors and economy items. Across all regions, we expect to launch 250 new consumer items in 2012. On the industrial side of our business, we are partnering with our customers to drive their growth through new product development. Customers often turn to McCormick for great taste as they work to improve the health profile of their products. Through the McCormick Science Institute, founded by McCormick in 2007, we are funding the advancement of scientific knowledge of the potential health benefits of culinary spices and herbs. This institute is also committed to educating consumers, nutritionists and dietitians about these potential health benefits. In 2012, we completed a new technical innovation center in Mexico and new flavor labs in the U.S. and U.K. We also broke ground in China to create our Asian center for technical innovation, similar to our centers for North America and EMEA, where we are developing on-trend, consumer preferred products.

Through acquisitions we are adding leading brands to extend our reach into new geographic regions where we currently have little or no distribution. We have a particular interest in emerging markets that offer high growth potential, such as India and China. In our developed markets, we are seeking consumer brands that have a defensible market position and meet a growing consumer trend. Cost Savings from CCI - CCI is our ongoing initiative to improve productivity and reduce costs throughout the company. With CCI, each business unit develops cost reduction opportunities and sets specific goals. Our projects fall into the areas of cost optimization, cost avoidance and productivity that includes streamlining processes. However, the only amounts we report are actual cost reductions where costs have decreased from the prior year. CCI cost savings totaled $65 million in 2011, of which $45 million lowered cost of goods sold. In 2012, CCI-related cost savings are expected to exceed $50 million, with a large portion impacting our cost of goods sold.
While we continue to experience an environment of volatile costs for many raw and packaging materials, we have offset this impact with a combination of pricing and cost savings initiatives.

RESULTS OF OPERATIONS - COMPANY

                                        Three months ended August 31,          Nine months ended August 31,
(in millions)                              2012               2011               2012                 2011
Net sales                            $       977.7       $       920.4     $      2,868.4       $      2,586.9
Percent increase                               6.2 %                                 10.9 %
Gross profit                         $       391.7       $       364.5     $      1,135.4       $      1,043.4
Gross profit margin                           40.1 %              39.6 %             39.6 %               40.3 %

The sales increase of 6.2% for the third quarter of 2012 included a 4.6% increase due to acquisitions and a 3.2% unfavorable impact from foreign currency exchange rates. Excluding acquisitions and the foreign currency impact, we grew sales 4.8%. This was mostly the result of pricing actions, which added 4.5% to net sales, taken in response to increased raw and packaging material costs. Volume and product mix rose 0.3% when compared to the prior year period. For the consumer business, sales increased 8.9%, which included a 3.1% unfavorable impact from foreign exchange rates. Acquisitions completed in 2011 accounted for 8.2% of the increase and the remaining increase was largely due to pricing actions. Also, for 2011, our consumer business in the Americas had an estimated $10 million benefit in third quarter sales from some customer buy-in in anticipation of a fourth quarter price increase. For the industrial business, net sales rose 2.8%, which included a 3.4% unfavorable impact from foreign exchange rates. Most of the industrial sales increase was the result of pricing actions with a 0.7% increase due to volume and mix.

Gross profit for the third quarter of 2012 increased by 7.5% over the comparable period from last year, and our gross profit margin improved by 50 basis points. Gross profit margin this quarter improved sharply from the first half of 2012, which saw our gross profit margin decline by 140 basis points from the first half of 2011. Our third quarter improvement reflects the favorable sales mix in our consumer segment and faster growth of the consumer segment versus the industrial segment. In addition, our pricing actions and CCI cost savings are offsetting the impact of higher material costs. For the full year 2012 we expect material cost increases to be in the high single-digit range.

                                        Three months ended August 31,         Nine months ended August 31,
(in millions)                              2012               2011               2012               2011
Selling, general & administrative
expense (SG&A)                       $       247.5       $       236.1     $       757.4       $       695.1
Percent of net sales                          25.4 %              25.6 %            26.4 %              26.8 %

The decrease in SG&A as a percent of net sales was primarily driven by a leveraging effect of our higher sales on these costs. Our marketing support spending this quarter was about even with the third quarter of 2011 (our third quarter 2011 marketing spending reflected a 27% increase from the prior year). For the nine months ended August 31, 2012, marketing support was $13.0 million or 10% higher than the prior period. For the full year 2012, we anticipate increasing our incremental marketing support by at least $15 million over the prior year.

                                        Three months ended August 31,       Nine months ended August 31,
(in millions)                                2012              2011             2012              2011
Interest expense                       $          13.2     $     13.1     $          40.7     $     37.6
Other (expense) income, net                        0.9            1.1                 1.8            2.5

With higher average debt balances due to our 2011 acquisitions, interest expense for the nine months ended August 31, 2012 was higher by $3.1 million than the same period in the prior year. The impact of higher average debt balances in 2012 compared to 2011 was partially offset by the impact of lower interest rates for 2012 compared to 2011. For the third quarter, the impact of higher average debt balances was almost completely offset by the impact of lower interest rates.