McCormick Inflates Quarterly Operating Income by $26.2 Million
Spice maker routinely strips out special charges and other items that it incurs year after year.
May 11, 2021
In its Q1 2021 10-Q, McCormick & Company (MKC), a spice and seasoning maker, added back $26.2 million in integration, transaction, and what the company calls special charges to adjusted operating income. Stripping out these charges, which we argue are recurring and part of McCormick’s operating model, is misleading to investors interested in the company’s economic earnings.

The bulk of the charges McCormick omits— $25.1 million— are transaction and integration expenses related to two acquisitions the company made in 2020. McCormick strips these charges out, presumably, because management believes they’re non-operating or one-time items. If that’s the rationale, it’s disingenuous as integration and other charges have been a staple at McCormick for the past five years.

In its 2020 10-K, McCormick acknowledges this in a footnote:

“In 2020, 2019, 2018, 2017, and 2016, we recorded special charges related to the completion of organization and streamlining actions, including, for 2016, special charges related to the discontinuance of bulk-packaged and broken basmati rice product lines for our business in India. In 2020, we recorded transaction and integration expenses related to our acquisitions of Cholula and FONA. In 2018 and 2017, we recorded transaction and integration expenses related to our acquisition of RB Foods.”

In a news release announcing the latest quarterly results, McCormick says adjusted operating income grew 35%. Investors who add back what McCormick conveniently omits discover that operating income grew just 21.6%, much slower than the company prefers to present. With the operating income growth rate for the quarter inflated by 62%, investors should expect McCormick to continue adjusting its way to better returns in 2021.

Expect more of the same in 2021. In McCormick’s filings, the company outlines tens of millions of additional integration, transaction, special, and other charges and expenses investors would be wise to add back in 2021:

-$30 million in additional expenses related to an ERP replacement program versus 2020
-$50 million in transaction and integration expenses related to the Cholula and FONA acquisitions of approximately versus $12.4 million of transaction and integration expenses in 2020
-$8 million of special charges in 2021 related to organizational and streamlining actions versus $6.9 million in 2020

To its credit, McCormick is transparent about everything it strips out. The items McCormick excludes add approximately 4% to the company’s 2021 operating income growth rate forecast:

“Excluding special charges and transaction and integration expenses, we expect 2021’s adjusted operating income to increase by 9% to 11%, which includes an estimated 2% favorable impact from currency rates, or to increase by 7% to 9% on a constant currency basis over the 2020 level.”

Investors looking even farther ahead will brace for at least a seventh consecutive year of charges McCormick prefers you not count. The company expects to take an additional $20-$25 million in special charges in 2022 and beyond.
Related: IFF, CAG, SJM, HRL
Become a DuDil Insider

Get our due diligence alerts before they're published & be first to know.