By Zacks Equity Research
‎    

McCormick & Co. Inc. (MKC) delivered better-than-expected​ first quarter 2012 earnings of 55 cents per share, surpassing the Zacks Consensus Estimate by 2 cents. The results were also ahead of the company's guidance of 51 to 54 cents per share.

The earnings were driven by robust sales and cost management under the company's Comprehensive Continuous Improvement (CCI) program. Product innovation and investments in brand marketing also boosted growth in the quarter. 

However, earnings lagged behind the same quarter last year by 2 cents.  

Sales and margin details

Total revenue in the quarter grew 16% year-over-year to $906.7 million. Revenue also exceeded the Zacks Consensus Estimate of $868.0 million. The completed acquisition of Kamis S.A. of Poland and a joint venture with India-based Kohinoor Foods in fiscal 2011 contributed to the 7% sales growth in the quarter. McCormick's volume and product mix also added 4% to the sales growth, while price increases made in response to high input costs added 5% to overall revenue growth.

Gross profits increased 8% to $355.3 million, while gross margins contracted 270 basis points to 39.2% in the reported quarter, owing to material cost inflation.

Operating income increased 2% in the first quarter of 2012 to $112.5 million, driven by the favorable impact of higher sales and cost savings under the CCI program. However, the results were negatively impacted by a sharp rise in material costs, increases in brand marketing expenses and currency headwinds.

Segment details

Consumer Business: Segment revenue surged 18% year-over-year to $534.2 million in the reported quarter, owing to price increases, favorable volume and product mix and benefit from acquisitions. The foreign currency exchange rates did not have material impact on the segment in this quarter.

Despite increase in revenues, operating income for the segment decreased to $81.4 million in the quarter compared with $86.9 million from the prior-year quarter, due to high material costs. Operating margin declined 390 basis points to 15.2% in the quarter.

Industrial Business: Segment revenue climbed 13% year-over-year to $372.5 million in the first quarter of 2012, attributable to increased prices, favorable volume and product mix.

Operating income for the segment climbed 31% to $31.1 million, mainly from increased sales growth and CCI cost savings. Operating margin increased 110 basis points to 8.3% in the quarter.

Capital structure

The global leader in flavor, McCormick generated cash flows from operations of $23 million in the first quarter of 2012, as compared to the negative $23 million in the year-ago period. The year-over-year improvement was mainly due to a $21 million increase in pension contributions and better inventory management in the quarter.

Guidance

For fiscal 2012, McCormick forecasts a difficult global economy 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 reiterates its sales guidance growth of 9% to 11%, which includes an expected 4% tailwind from acquisitions completed in 2011 as well as benefits from pricing actions. The company however expects foreign currency exchange rates to lower sales growth by 2%.

For fiscal year 2012, management re-affirmed its earnings guidance in a range of $3.01 to $3.06 per share, and expects cost savings of at least $45 million under the CCI program to offset the rising cost prices.

Our recommendation

We are impressed by the company's results in the first quarter. Even though it has completed multiple acquisitions and expanded its product portfolio in 2011, we remain concerned with the inherent risks involved. Additionally, we expect a tough environment ahead with rising cost pressures.

McCormick which competes with ConAgra Foods, Inc. (CAG) and Kraft Foods Inc. (KFT) currently holds a Zacks No. 3 Rank (a short-term "hold" rating). Over the long term, we provide a "neutral" recommendation on the stock.

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