Everyone likes a little spice in their lives, and McCormick (MKC 1.22%) provides a wide variety of spices and flavors for consumers as well as the restaurant and food industries. You'll find McCormick products not just in bottles in your local grocery store's spice aisle but also among the ingredients in snacks and other grocery items.
Coming into Tuesday's fiscal first-quarter financial report, McCormick investors wanted to see continued signs of growth. The spice specialist was able to deliver an extra kick in its bottom line, with especially good results coming from recent acquisitions and favorable growth trends in its international markets. Let's look more closely at McCormick to see how its latest news led to a nice surprise for its employees.
Image source: McCormick.
McCormick starts 2018 strong
McCormick's fiscal first-quarter results were well-received. Sales climbed by 19% to $1.24 billion, just about matching the consensus forecast among those following the stock. One-time items had a huge positive impact on McCormick's bottom line, but even after taking those factors out, adjusted net income soared 39% to $133.2 million, and the resulting adjusted earnings of $1 per share far exceeded the $0.91 per share that most investors were looking to see.
Tax reform provided a huge benefit to McCormick. The company reported a $297.9 million gain, as the revaluation of net U.S. deferred tax liabilities due to the lower corporate tax rate in future years more than offset the cost of the one-time tax on deemed repatriation of foreign earnings (an approach that assumes all foreign profits have been brought back and so they are taxed promptly).
Acquisitions continued to play a key role for McCormick. The purchases of RB Foods and Giotti represented 12 percentage points of the spice maker's year-over-year revenue growth. In the consumer segment, RB Foods in particular was responsible for two-thirds of the 19% rise in segment sales, with currency impacts adding another 4 percentage points. A similar story held for the flavor-solutions division, where acquisitions made up 12 points out of the overall 18% segment growth rate.
Fundamentally, McCormick also remained strong. Gross margin improved by nearly 2.5 percentage points during the period, largely because the spice maker was able to focus more attention on higher-value products. Operating income for the consumer segment jumped 35%, while flavor solutions saw an even bigger rise of more than half over year-ago figures. From a geographical standpoint, performance in the Asia-Pacific region was especially noteworthy, with China and India helping to drive consumer sales in the region higher by 12% and flavor solutions revenue by 11%. Favorable currency impacts helped most of McCormick's international market performance, but a rising number of quick-service restaurants in China has helped boost demand for the spice maker's products.
CEO Lawrence Kurzius was happy with the performance. "McCormick's first quarter results were a great start to fiscal year 2018," Kurzius said, "as we continue to build on the momentum of our milestone year in 2017." The CEO called out much stronger operating margin figures as key attributes of its success thus far.
Can McCormick stay spicy?
McCormick has high hopes for the coming year. According to Kurzius, "Through the execution of our strategies, we are becoming even better positioned to drive future growth and are confident in our continued success."
Positive adjustments to McCormick's guidance reflected that enthusiasm. The company increased its sales growth projections, now expecting 13% to 15% gains for fiscal 2018 due largely to better currency-exchange factors than expected. McCormick also raised its adjusted earnings guidance by $0.05 per share, with a new range of $4.85 to $4.95 per share. The company attributed this increase mostly to lower tax rates.
Separately, McCormick also said that it would offer hourly employees $1,000 one-time bonus payments as a reinvestment of savings from tax reform. The company also announced more lasting changes to accelerate hourly-wage increases to remain competitive and attract talented workers. The plan is just one element of McCormick's overall strategy to use tax savings effectively, and the spice specialist expects to pay down debt, return capital to shareholders, and potentially make other acquisitions to drive growth.
McCormick investors were pleased with the report, and the stock climbed more than 3% in pre-market trading following the announcement. The spice giant has done a good job so far of executing on its strategic priorities, and there's plenty of runway left for McCormick to keep taking advantage of improving industry conditions to bolster its growth.
