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McCormick & Co. Inc. (MKC - Analyst Report) delivered fourth quarter 2012 earnings of $1.11 per share, ahead of the prior-year quarter earnings of 98 cents by 13.3%. The results were driven by a favorable operating income and tax rate and from higher income from unconsolidated operations. Earnings, however, lagged the Zacks Consensus Estimate of $1.14 by 2.6%.

Total revenue in the quarter grew 3% year over year to $1.15 billion. Revenues, however, lagged the Zacks Consensus Estimate of $1.17 billion. On a currency basis, revenues increased 4%, owing to positive volume and product mix and pricing actions in response to high input costs. McCormick’s deals completed in 2011 (acquisition of Poland-based Kamis S.A. and Kitchen Basics, a leading brand of liquid stock; and a joint venture with India-based Kohinoor Foods Ltd.) also contributed to overall revenue growth.

Operating income increased 4.2% to $200 million. However, the business mix between regions had an unfavorable impact on operating income of the industrial segment in the fourth quarter of 2012 versus the year-ago period.

Segment Details

Consumer Business: Segment revenues surged 3% year over year to $744.1 million in the reported quarter. On a currency basis, revenues increased 4%, where half of the increase was driven by benefit from acquisitions. Price actions to offset raw material costs also contributed to the gain.

Like revenues, operating income of the segment also increased 8% to $177.2 million in the quarter supported by increases in sales and cost savings.

Industrial Business: Segment revenue climbed 4% year over year to $401.7 million in the fourth quarter of 2012, attributable to increased prices in response to high input costs, with minimal currency impact.

Operating income of this McCormick segment declined 17.6% to $23.0 million, primarily due to unfavorable business mix and a $4 million charge related to a supplier quality issue. However, the company expects to recover a portion of this amount in 2013.

Fiscal 2012 Results

The company posted earnings of $3.04 per share, ahead of the prior-year quarter earnings of $2.79 by 9% and within the company’s guidance of $3.03 to $3.08 per share. The results were driven by a favorable operating income and tax rate, offset by lower income from unconsolidated operations and higher interest expenses. Earnings, however, lagged the Zacks Consensus Estimate of $3.08 by 1.3%.

Revenue increased 9% to $4.01 billion in fiscal 2012, missing the Zacks Consensus Estimate of $4.04 billion. In local currency, revenue increased 10%, which was within the company expected range of 9% to 11% sales growth. Pricing gains, benefits of acquisitions, growth in volume as well as product mix led to the growth. Emerging markets contributed 14% of the sales increase in fiscal 2012, higher than the contribution of 10% in the year-ago period.

Operating income surged 7% to $578 million in full year 2012 but was below the company's expectation of 9% to 11% growth. The year-over-year increase was primarily driven by higher sales and cost saving initiatives. Retirement benefit expenses as well as the favorable impact of acquisition related transaction costs also impacted the increase.

During 2012, the company generated cost savings of $56 million from its Comprehensive Continuous Improvement (‘CCI’) program, which exceeded the goal of achieving $40 million in cost savings. Apart from benefiting operating income and earnings, CCI cost savings along with pricing actions was able to offset the impact of increased material costs. The company also increased its brand marketing investment by $11 million in the year.

Other Financial Details

In Nov 2012, McCormick's board approved a 10% increase in dividend, marking the 27th consecutive annual increase. 

During fiscal 2012, the company rewarded its shareholders and returned $297 million of cash through dividends and share repurchases.

Guidance for Fiscal 2013

The global leader in flavors, McCormick continues to forecast a difficult global economic situation 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 on the back of strong demand and growth strategies.

In 2013, McCormick expects solid sales growth from innovation and brand marketing initiatives.  The company expects sales growth in the range of 3% to 5% in local currency, with minimal pricing and currency impact. This guidance does not include any acquisition impact.

The company expects material cost inflation to moderate to about 3% in 2013, compared to a high single-digit increase in 2012. Operating income is expected to grow 6% to 8%.

McCormick expects earnings in the range of $3.15 to $3.23, which reflects an underlying double-digit growth rate driven by higher sales and at least $45 million in CCI cost savings, offset in part by a year-on-year increase in tax rate and retirement benefit expenses.

McCormick holds a Zacks Rank #2 (Buy). Other specialty food companies which carry a Zacks Rank #1 (Strong Buy) are B&G Foods Inc (BGS), Flower Foods Inc (FLO - Snapshot Report) and Ingredion Inc (INGR - Snapshot Report).

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