McCormick's 3Q Mixed, Outlook Upped

Zacks

McCormick & Co. Inc. (MKC) delivered strong third quarter 2012 earnings of 78 cents, ahead of the prior-year quarter earnings by 13% or 9 cents per share. The results were driven by a favorable operating income and tax rate, offset by lower income from unconsolidated operations. Earnings in the quarter beat the Zacks Consensus Estimate by 2 cents.

Sales and Margin Details

Total revenue in the quarter grew 6% year over year to $978 million. Revenue, however, lagged the Zacks Consensus Estimate of $991 million.

On a currency basis, revenue increased 9%. Half of the increase was contributed by acquisitions completed in 2011 (acquisition of Poland-based Kamis S.A. and Kitchen Basics, a leading brand of liquid stock; and a joint venture with India-based Kohinoor Foods Ltd.). McCormick's price increase in response to high input costs also contributed to overall revenue growth.

Gross margin expanded 50 basis points to 40.1% in the reported quarter, owing to higher sales. Operating income increased 12% in the third quarter of 2012 to $144.0 million, driven by favorable impact of higher sales and cost savings under the company's Comprehensive Continuous Improvement (CCI) program. However, the results were negatively impacted by a sharp rise in material costs.

Segment Details

Consumer Business: Segment revenue surged 9% year over year to $568.3 million in the reported quarter. On a currency basis, revenue increased 12%, mainly driven by benefit from acquisitions and contribution from price increases. However, results were partially offset by higher raw material costs.

Like revenues, operating income of the segment also increased 8% to $109.0 million in the quarter, supported by increases in sales, pricing actions, and cost savings, offset by higher material costs.

Industrial Business: Segment revenue climbed 3% year over year to $409.4 million in the third quarter of 2012. On a currency basis, segment revenue increased 6% attributable to increased prices in response to high input costs.

Operating income of this McCormick segment increased 27% to $35.0 million, mainly from increased sales growth, higher CCI cost savings and operating expense leverage.

Guidance for Fiscal 2012

The global leader in flavors, McCormick continues to forecast a difficult global economic situation and volatility in material costs. However, the company expects to grow sales, generate cost savings, invest in brand marketing support and deliver solid profit growth.

McCormick reiterated its sales guidance growth range of 9% to 11%, which includes an expected 4% tailwind from the acquisitions completed in 2011. The company, however, expects foreign currency exchange rates to lower sales growth by 2%. McCormick also reaffirmed its operating income growth range of 9% to 11%, which includes approximately $15 million of incremental brand marketing support.

For fiscal year 2012, management has raised its earnings guidance in a range of $3.03 to $3.08 per share, owing to a favorable tax rate.

McCormick, which competes with ConAgra Foods, Inc. (CAG) and Kraft Foods Inc. (KFT) currently holds a Zacks #3 Rank (a short-term Hold rating). Over the long term, we provide a Neutral recommendation on the stock.

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