Spice and condiments giant McCormick (MKC 0.43%) is coasting on a financial framework its management team probably couldn't have envisioned this time last year. Its consumer-facing business is expanding at a higher than normal double-digit clip, while its formerly stable institutional flavorings segment is experiencing a revenue decline. 

The consumer goods behemoth released fiscal third-quarter 2020 results Tuesday morning, and in addition to reporting continued overall progress in an unusual year, management announced an impending stock split and reinstated its earnings guidance. Below, let's dive into details of the quarter, and look ahead to McCormick's prospects as it closes out its fiscal year over the next three months.

Five spoons filled with colorful spices rest on a wooden table.

Image source: Getty Images.

Revenue powered by retail sales

McCormick reported a year-over-year revenue advance of 8% this quarter to $1.4 billion, or 9% in constant-currency terms. Consumer segment sales jumped 15% to $911 million, as the COVID-19 pandemic continued to drive eat-at-home consumer trends, which benefited McCormick's retail spice and condiment sales. Strong trends in the Americas and EMEA (Europe, Middle East, and Africa) region offset high single-digit sales declines in the Asia/Pacific region.

In the company's second major business line, its "Flavor Solutions" segment, revenue dipped 3% against the prior-year quarter, to $519 million. Investors should note that this actually represents a sequential improvement, as the segment's top line fell 18% on a year-over-year basis last quarter. The flavor solutions business supplies flavoring technology to food manufacturers and packaged condiments and spices to quick-service restaurants and foodservice organizations. Sales have suffered this year due to the same COVID-19 impacts that have provided a tailwind in McCormick's consumer business; namely, a shift toward eating at home, and a resulting dip in restaurant and foodservice demand.

The flavorings revenue stream was hit hardest in the Americas and the EMEA region, which saw regional sales decline by 5% and 1%, respectively, while Asia/Pacific sales increased by 5%, mainly on the strength of stronger quick-service sales in China and Australia, as these two economies have reopened at a faster pace than many other developed nations. 

Rising profitability and ample cash flow

On the whole, McCormick was able to lift its profitability this quarter. Gross margin improved by 70 basis points to 41.3%, which management attributed to productivity gains from the company's "Comprehensive Continuous Improvement" (CCI) program. Operating expenses crept up 12%, due in part to higher incentive compensation as employees and management met financial benchmarks during the quarter. This offset McCormick's sales increase and gross margin expansion somewhat: Operating margin remained unchanged year-over-year at 19.1%, while diluted earnings per share rose incrementally by 7% to $1.53.

The organization continues to exhibit robust cash flow. Through the first nine months of the year, it's generated $627 million in operating cash flow, an improvement of roughly 27% against the same period in 2019. McCormick is within striking distance of 2019's healthy operating cash flow generation of $947 million as it heads into the final quarter of the year. The company has used some of its excess cash this year to reduce its debt load. Total borrowings at quarter-end (Aug. 31, 2020) of $4.2 billion are roughly $500 million lower versus the end of the same quarter in 2019.

Looking ahead

Given the ongoing strength in its consumer-facing sales and sequential improvement in the flavorings unit, management felt confident enough to reinstate forward earnings guidance, which it had suspended in March during the peak of shutdowns and quarantines in the U.S. McCormick provided the following full-year expectations in today's release:

  • Year-over-year sales growth of 4% to 5% (5% to 6% in constant currency)
  • Operating income expansion of 6% to 7% over the $958 million in operating income booked in 2019
  • Earnings per share of $5.60 to $5.68 against $5.24 per share earned in 2019

McCormick also surprised shareholders by revealing an impending 2-for-1 stock split, which will occur on Nov. 30 of this year. Shareholders of record on Nov. 20 will receive the distribution; the company last initiated a stock split in 2002. The news didn't inspire fervid buying as it has with some recent stock splits in the tech sector: On a day when the market was down slightly, McCormick shares were trading down 3% at mid-afternoon.

Finally, of paramount importance to dividend investors as we move forward, McCormick appears in great financial shape to continue its status as a Dividend Aristocrat. The company has provided shareholders with 96 consecutive years of dividend payments and has increased its payout for 34 years running. McCormick typically announces its yearly increase in the fourth quarter. Based on business conditions and continued excellent cash generation, the consumer goods giant is poised to carry its aristocratic payout streak into a 35th consecutive year.