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McCormick & Co. Inc. (MKC - Analyst Report) delivered second quarter 2013 earnings of 61 cents per share, in line with the Zacks Consensus Estimate. Earnings were ahead of both the company’s expectation and the prior-year quarter earnings of 60 cents by a penny. The results were driven by top-line growth and higher income from unconsolidated operations.
Revenue and Profits
Total revenue in the quarter grew 2% year over year to $1.003 billion. However, it lagged the Zacks Consensus Estimate of $1.005 billion. On a local currency basis, sales increased 3%, in line with the lower end of the company guided range of 3% to 5%. We believe that sluggish demand from quick service restaurants in the industrial segment is pressurizing sales even though McCormick’s consumer business segment is doing well.
Consolidated operating income declined 4.1% to $116 million as top-line growth and cost savings from McCormick's Comprehensive Continuous Improvement (‘CCI’) program were more than offset by transaction costs related to the completion of the Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) acquisition, retirement benefit costs, increase in brand marketing support, and material cost inflation.
In early-Jun 2013, this global leader in spices completed the acquisition of the assets of Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd, a privately-held company which manufactures and markets brands like DaQiao and ChuShiLe.
The addition of these brands will enhance McCormick’s product portfolio with new flavors. The deal will also help McCormick to expand its presence in the central regions of China through WAPC’s strong positioning in the country.
The acquisition is expected to accelerate McCormick’s earnings in 2014 and will be fully accretive to earnings in 2015. In 2013, the company anticipates the deal to be slightly dilutive to earnings per share due to integration and financing costs of $4 million, related to the acquisition.
Consumer Business: Segment revenues increased 4% to $591 million. On a local currency basis, segment revenues surged 5% year over year, mainly driven by improved volume and increased product mix. Sales on a constant currency basis grew in all three geographic regions of Americas, Europe, Middle East and Africa (EMEA) and Asia/Pacific.
Operating income of the segment declined 1% to $88 million in the quarter as the favorable impact of higher sales and CCI cost savings were more than offset by acquisition costs, higher retirement benefit costs, increased material costs and increase in brand marketing support.
Industrial Business: Segment revenues declined 1% year over year to $411.6 million in the second quarter of 2013, in line with management expectations of posting weak results in the quarter. However, sales improved slightly on a local currency basis on the back of improved pricing offset by lower volumes and product mix. The segment is witnessing poor demand from quick service restaurants in the U.S. and China due to concerns of bird flu among consumers.
Operating income of this McCormick segment declined 15.2% to $28.0 million, primarily due to lower sales, an unfavorable business mix, higher input costs and the impact of increased retirement benefit expenses partly offset by cost savings.
McCormick has re-visited its sales guidance for 2013 to include the impact of WAPC. McCormick has raised its sales projection by one percentage point to a range of 4% to 6%, compared with the prior expectation of 3% to 5%.
However, transaction costs related to the WAPC acquisition, along with a sluggish industrial business will lower operating income growth in 2013. The company expects its operating income to increase in the range of 5% to 7%, compared with the previous expectation of a 6% to 8% increase.
Based on this outlook for operating income growth, McCormick lowered its projecting earnings guidance to the range of $3.13 to $3.19 per share compared with $3.15 to $3.23 per share expected earlier.
McCormick expects earnings of 78 cents per share, flat year over year, for the third quarter of 2013. In addition, the company expects increased retirement benefit expense, higher tax rate and increase in its brand marketing investments to impact the third quarter, which will offset the favorable impact of higher sales and cost savings.
McCormick currently holds a Zacks Rank #3 (Hold). Other specialty food companies which are better positioned and warrant a look include Flower Foods Inc (FLO - Snapshot Report), Omega Protein Corp , and B&G Foods Inc (BGS - Snapshot Report), all of them holding a Zacks Rank #1 (Strong Buy).