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MKC > SEC Filings for MKC > Form 10-Q on 26-Mar-2014All Recent SEC Filings

Show all filings for MCCORMICK & CO INC

Form 10-Q for MCCORMICK & CO INC


26-Mar-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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, Europe and China. Additional facilities are based in 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. Historically, the consumer business contributes approximately 60% of sales and 80% of operating income and the industrial business contributes approximately 40% of sales and 20% 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 Growth Model and Outlook
Our growth model is straightforward - we are increasing sales and profits by investing in the business and funding these investments, in part, with cost savings from our Comprehensive Continuous Improvement (CCI) program. This simple model 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 our sales growth with one-third from category growth, share gains and new distribution, one-third from product innovation and one-third from acquisitions. For our consumer business, we are driving sales with a robust pipeline of innovation and a significant increase in our brand marketing. We expect to increase industrial business sales and profit through new product development and support for the international expansion of our customers.
In 2014, sales are projected to grow 3% to 5% in local currency, driven by higher volumes, pricing and the incremental impact of the WAPC acquisition in the first half of the year (see note 2 of the financial statements for additional information). Operating income was $550.5 million in fiscal year 2013. Excluding special charges of $25.0 million related to reorganization activities in the EMEA region and a $15.3 million loss on a voluntary pension settlement, both of which were recorded in the fourth quarter of 2013, adjusted operating income in 2013 was $590.8 million. Due in large part from higher sales, as well as CCI cost savings, operating income is expected to increase in 2014 when compared to 2013. The projected increase in operating income in 2014, when compared to adjusted operating income in 2013 is 6% to 8%. Diluted earnings per share are projected to be between $3.22 and $3.29 in 2014. This compares to diluted earnings per share of $2.91 in 2013. Excluding the earnings per share impact of the aforementioned special charges and loss on voluntary pension settlement, adjusted diluted earnings per share in 2013 was $3.13. The projected increase in diluted earnings per share in 2014, when compared to adjusted diluted earnings per share in 2013 is 3% to 5%. This growth rate includes the unfavorable impact of a significant increase in the 2014 tax rate when compared to the 2013 tax rate.
In addition to increased sales and profit, our business generates strong cash flow. We generated $465 million and $455 million in cash flow from operations in fiscal years 2013 and 2012, respectively. 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 28 years.
Investing in the Business - We are investing for growth through innovation, brand marketing support and acquisitions.
In 2013, 9% of sales came from new products launched in the past three years. For our consumer business, innovation continues to be one of the best ways to distinguish our brands from private label and our competition. We are introducing products for every type of cooking occasion, from gourmet, premium items to convenient and value priced flavors. In 2014, these include seasoning blends for grilling burgers, Flavour Shot blends of oil and spices, gluten-free recipe mixes and value-priced grinders. For industrial customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. In 2014, we have a solid pipeline of new flavor solutions aligned with our customers' new product launch plans. With more than 20 technical innovation centers and product development facilities around the world, we are supporting the growth of our brands and those of our industrial customers with products that appeal to local consumers. In addition, much


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of our innovation is designed to meet the increasing consumer demand for healthy eating. We founded the McCormick Science Institute in 2007, to fund 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.

From 2008 through 2013, we increased our investment in brand marketing by 64%. An increase of at least 12% is planned in 2014. We measure the return on this investment and have identified digital marketing as one of the highest categories. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products. From 2011 to 2013, we doubled our spending on digital marketing and have a further increase planned in 2014.

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 China and India. In 2013, we completed our acquisition of the assets of WAPC in China. Sales in emerging markets accounted for 15% of total company net sales in fiscal year 2013, up from 10% of net sales in 2011. In our developed markets, we are seeking consumer brands that have a defensible market position and meet a growing consumer trend for flavor.
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 $63 million in fiscal year 2013, of which $48 million lowered cost of goods sold. In 2014, CCI-related cost savings are expected to reach at least $45 million, with a large portion impacting our cost of goods sold. Material cost inflation is expected to be in the low single-digit range in 2014, compared to approximately 3% in 2013. We anticipate the 2014 impact of material cost inflation will be offset largely by the cost savings from our CCI program.

RESULTS OF OPERATIONS - COMPANY

                         Three months ended February 28,
(in millions)              2014                   2013
Net sales           $         993.4         $         934.4
Percent increase                6.3 %                   3.1 %
Gross profit        $         391.5         $         361.7
Gross profit margin            39.4 %                  38.7 %

The sales increase of 6.3% for the first quarter of 2014 included a 1.2% unfavorable impact from foreign currency exchange rates and a 4.2% increase from our WAPC acquisition in 2013. Excluding the acquisition and foreign currency impact, we grew sales 3.3%. This increase was split between pricing actions, which added 1.7% to net sales, and higher volume and product mix, which rose 1.6%, driven by our industrial business.
For the consumer business, sales increased 8.0%, which included a 0.7% unfavorable impact from foreign exchange rates and a 6.8% increase from our WAPC acquisition. Pricing actions increased sales by 2.2%, while lower volume and product mix reduced sales by 0.3%. The lower volume and product mix was in the Americas region. Actions are underway to address competitive pressure in this region and include accelerated innovation, increased brand marketing support and more effective category leadership with retail customers.
For the industrial business, net sales increased 3.7%, which included a 2.0% unfavorable impact from foreign exchange rates. Volume and product mix increased 4.7%, due largely to innovation with international quick service restaurants and food and beverage company customers, and pricing actions which added 1.0% to industrial net sales.

Gross profit for the first quarter of 2014 increased by 8.2% over the comparable period from last year, while our gross profit margin improved by 70 basis points from the same period as last year. This margin improvement was primarily due to our CCI cost savings and a favorable mix of business.


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                                                          Three months ended February 28,
(in millions)                                               2014                    2013
Selling, general & administrative expense (SG&A)    $          266.9         $          249.7
Percent of net sales                                            26.9 %                   26.7 %

SG&A as a percentage of net sales increased by 20 basis points for the first quarter of 2014 as compared to the first quarter of 2013 primarily due to increased brand marketing support, which was $7.1 million higher in the first quarter of 2014 as compared to the same period in the prior year. In the first quarter of 2014, half of the incremental brand marketing was directed toward the U.S. market to drive sales of core products.

                          Three months ended February 28,
(in millions)                     2014                     2013
Interest expense  $           12.4                        $ 13.9
Other income, net              0.2                           0.6

Interest expense was lower in first quarter of 2014 compared to the first quarter of 2013 primarily due to the refinancing of long term debt in the second half of 2013. In August 2013, we issued $250 million of 3.50% Notes (at an effective interest rate of 3.30%), the net cash proceeds of which, plus cash on hand, were used to pay off $250 million of 5.25% Notes (at an effective interest rate of 5.54%) that matured in September 2013.

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