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McCormick Warns Supply Constraints May Result in Share Loss & Pauses Digital Transformation
New IT project is $50 million over budget and that the company technically breached a debt covenant.
January 29, 2021
McCormick & Company (MKC) regularly warns that its customers evaluate its product offerings and may purchase private label or other competitive products. In its 2020 10-K, McCormick adds language indicating consumers may have more incentive to switch brands if the company is supply constrained:

“In the event that we are unable to supply our products to customers in the time frame and quantities that they desire, whether due to increased demand or other factors, our customers may discontinue all or a portion of their purchases from us and source competitive brands.”

We suspect the new language may be directly related to operational concerns over the company's new IT system implementation.

The enterprise resource (ERP) system replacement begun in 2018 is on hold. In McCormick’s latest 10-K, the company reveals it temporarily paused the implementation:

“In the second quarter of fiscal 2020, we elected to pause activity related to our ERP for the balance of fiscal 2020 due, in part, to COVID-19 restrictions that restricted necessary travel by internal and external ERP team members and made it difficult for local McCormick personnel to actively participate in the ERP development, data cleansing, and testing prior to then scheduled pilots later in fiscal 2020.”

New language in the filing also reveals that the project will no longer be completed on time. In the 2019 10-K, McCormick disclosed this:

“We expect that, in total over the course of the ERP replacement program from late 2018 through 2022…”

In its 2020 10-K, McCormick disclosed a year-long delay:

“We expect that, in total over the course of the ERP replacement program from late 2018 through 2023…”

Likewise, the latest filing reveals the project is over budget. The prior year’s 10-K provided the following estimate:

“...we will invest from approximately $300 million to $350 million…”

In its 2020 10-K, McCormick revealed the price of the project has escalated:

“...we will invest from approximately $350 million to $400 million…”

The company did not detail why the project will cost at least 12% more than originally budgeted. McCormick is not expecting any additional value from the upgraded ERP as the company’s estimate of $45-$55 million in annual savings is unchanged from the prior year.

Separately, when McCormick acquired natural flavor manufacturer Fona International in fiscal 2021 (December 30, 2020), the company was technically in violation of its revolver covenant. New language in the latest 10-K indicates it wasn't until after the acquisition that McCormick and its creditor amended the terms of the credit agreement:

“In early fiscal 2021 following our acquisition of FONA, the levels specified in our revolving credit facilities under which we are required to maintain our leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios.”

The company also appears to have temporarily breached a second credit agreement connected with a to-be-constructed distribution center, which contained covenants similar to the company’s revolving credit facilities. That agreement was also amended after the acquisition.
Related: IFF, CAG, SJM, HRL
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