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McCormick & Co. Inc. (MKC) posted results for the second quarter of 2011 with operating earnings of 55 cents a share, surpassing the Zacks Consensus Estimate by one cent. The quarterly earnings benefited from higher operating income, as well as cost saving actions.

Quarterly Sales Details

Total revenue in the second quarter grew 11% year-over-year to $883.7 million from the year-ago quarter, benefiting from McCormick’s favorable volume, product mix and pricing actions taken to curtail increased raw and packaging material costs. Revenue also exceeded the Zacks Consensus Estimate of $855 million.

Segments and Margins

Consumer business

Segment revenue for the consumer business surged by 10% year-over-year to $499.0 million in the reported quarter, owing to favorable currency exchange rates. Revenue for the McCormick‘s segment also increased due to increased pricing, favorable volume and product mix.

Operating income for the segment also increased 13% to $77 million largely resulting from higher sales and Comprehensive Continuous Improvement (CCI) cost savings.

Industrial business

Segment revenue for the industrial business rose by 11% year-over-year to $384.7 million in the second quarter of 2011 attributable to increased pricing, favorable volume and product mix.

Operating income for the McCormick’s segment grew 10% to $32 million mainly from higher sales and CCI cost savings.

During the quarter, McCormick has offset the dollar impact of higher costs with pricing actions and CCI cost savings. However, the net effect of these factors led to a decline in gross margin in the second quarter of 2011 to 39.7% from 40.9% in the second quarter of 2010. Further, McCormick expects a decline in gross margin to continue through the second half of 2011.

Moreover, McCormick’s pricing actions and cost savings from CCI are expected to offset increased material costs for fiscal year 2011. Although the material costs have increased beyond the initial projection of McCormick, the company currently expects to achieve at least $45 million of cost savings from CCI in 2011, up from its initial projection of at least $40 million.

Capital Structure

McCormick has earned solid cash flows from continuing operations of $36 million till the second quarter of 2011 as against $65 million in the year-ago period due to higher inventory levels. Inventory increased due to higher cost of materials, the impact of currency exchange rates, and raw material possession to assure a constant supply of product. In order to improve inventory levels, McCormick is currently implementing a new inventory management process.

McCormick's Board also declared a dividend of 28 cents per share for the quarter, which is payable on July 25, 2011 to shareholders of record as on July 11, 2011.

Acquisition

Acquisitions and joint ventures have remained top priority for McCormick. During June, McCormick signed an agreement with India-based Kohinoor Foods Limited for an 85% interest in a joint venture to market a leading brand of basmati rice and other food products in India. McCormick will consolidate sales and profit from Kohinoor in its financial results, with a minority interest reduction to net income for the 15% of the business it does not own. The acquisition is expected to close in the third quarter of 2011.

McCormick also agreed to acquire 100% of the shares of Kamis S.A., which is a leader of spices, seasonings and mustard in Poland with annual sales of approximately $105 million. The acquisition is expected to close by the end of third quarter of 2011, and the profits in the businesses will be minimal in 2011 due to integration costs and initial investments in growth, but is expected to be 7 cents-9 cents accretive to earnings per share in 2012.

The acquisition has led to a decline in the second quarter with the remaining $7 million expected to lower earnings per share in the third quarter by 5 cents.

Besides, McCormick will invest in its brands in the third quarter of 2011 with at least $6 million of incremental marketing which includes an emphasis on brand value, a U.S. campaign behind Hispanic products and advertising for the Zatarain’s brand.

Outlook

For fiscal year 2011, management reaffirmed its earnings per share guidance in the range of $2.74 to $2.79, including the estimated transaction costs related to recent announcements of an acquisition and a joint venture. Sales are expected to grow 6 to 8% in local currency, including 1% of incremental sales from Kohinoor and Kamis. In addition, the sales impact of favorable currency exchange rates is now estimated to be 2%.

McCormick which competes with ConAgra Foods, Inc. (CAG) and Krafts Food Inc. (KFT) currently holds a Zacks #3 Rank translating into a short term ‘Neutral’ rating.

Source: McCormick Beats by a Penny, Revenue Up by 11% Over 2010