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McCormick Finishes 2011 With Strong Fourth Quarter

Posted: January 26, 2012

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Looking into McCormick’s fiscal year 2011 results in more detail, the company grew sales 11% in 2011 with a 5% increase in pricing, 4% from higher volume and product mix, and favorable foreign currency exchange rates that added 2%. Approximately half of the increase in volume and product mix was driven by acquisitions, and half by sales of new products, distribution gains and increased brand marketing support. The company took price increases during the year in response to a double-digit increase in material costs. Operating income rose 6% to $540 million. The higher sales and $65 million of CCI cost savings more than offset the unfavorable impact of increased material costs, and helped fund $20 million of incremental brand marketing support, which was a 12% increase from the amount spent in 2010. The 6% increase in operating income also included an $11 million unfavorable impact of transaction costs related to acquisitions completed in 2011.

Earnings per share for the fiscal year were $2.79 compared to $2.75 in 2010. In 2010, the reversal of a significant tax accrual increased earnings per share $0.10 and excluding this impact, adjusted earnings per share was $2.65. On a comparable basis, 2011 earnings per share rose $0.14 with the increase due to higher operating income, which included the $0.07 unfavorable impact of acquisition-related transaction costs. The company also reported $340 million in net cash flow from operating activities in 2011 compared to $388 million in 2010. Cash flow in 2011 was affected by an increase in inventory that was primarily related to increased material costs, as well as strategic inventory positions of certain spices and herbs. During the year, $441 million of cash and increased borrowings were used to fund acquisitions and a joint venture. In addition, the company returned cash to shareholders through $149 million of dividends and $89 million of share repurchases.

In the fourth quarter, McCormick achieved 13% sales growth. Pricing actions added 6% to sales and favorable foreign currency exchange rates added 1%. Volume and product mix grew 6% with 5% driven by acquisitions. New products, distribution gains and increased brand marketing support also grew volume and product mix. These increases were offset in part by a shift in sales that was due to retailer purchases in advance of pricing actions, which lowered sales volume by approximately 2% in the fourth quarter of 2011 compared to the year ago period. Operating income rose $7 million to $192 million, an increase of 4%. This increase included a $7 million unfavorable impact of transaction costs related to completed acquisitions, which lowered operating income by 4% in the fourth quarter. During the quarter, pricing actions and CCI cost savings more than offset the impact of increased material costs. Recognizing the importance of brand marketing support during the holiday season and in a period of increased pricing, the Company increased marketing by $10 million, including $4 million related to acquisitions. Excluding marketing support related to acquisitions, this was an 11% increase from the level of spending in the fourth quarter of 2010.

Earnings per share for the fourth quarter of 2011 was $0.98 compared to $0.99 in the fourth quarter of 2010. While higher operating income, including a $0.05 unfavorable impact from acquisition-related transaction costs, increased earnings per share, this was offset by an unfavorable tax rate, higher interest expense and lower income from unconsolidated operations. In the fourth quarter of 2010, the company had a more favorable tax rate due to increased U.S. foreign tax credits that resulted from the repatriation of cash from foreign subsidiaries. In 2012, the company expects to increase net cash provided from operations as a result of higher income and a reduction in inventory.

Looking at the company’s fourth quarter 2011 fiscal results by business segment, for its industrial business, McCormick saw sales rise 13% from the fourth quarter of 2010 as a result of favorable volume and product mix, as well as pricing actions. The impact of foreign currency exchange rates was minimal. Industrial sales in the Americas rose 11% with about 60% of the increase from pricing actions and 40% from higher volume and product mix. McCormick achieved strong growth in sales of snack seasonings, ingredients and other products sold to food manufacturers. A number of the new items developed feature all natural ingredients, reduced sodium and reduced calories for which there continues to be high demand. Demand in certain sectors of the food service industry remained weak, although sales rose this period primarily as a result of pricing actions. In EMEA (Europe, Middle East and Africa), industrial sales rose 12%, and in local currency increased 13%. Demand from quick service restaurants remained strong in this region for products supplied from operations in the U.K., Turkey and South Africa. Sales of snack seasonings were also strong this period. The impact from pricing actions was minimal in the fourth quarter of 2011. And in the Asia-Pacific region, sales rose 29% and in local currency grew 22%. Higher volume and product mix drove the majority of this growth with pricing actions adding about a quarter of the increase. Industrial business operating income rose 5% to $28 million largely as a result of strong sales growth. During this period, pricing actions and CCI cost savings more than offset increased material costs and a $1 million in increase in marketing support for branded food service products.