McCormick’s Never Ending Special Charges Top $248.5 Million

Spice maker’s not so special charges now expected to linger into a second decade.

March 30, 2022

Turns out McCormick & Company’s (MKC) special charges aren’t so special. Like others, the spice and hot sauce maker routinely inflates adjusted earnings by stripping out items it says are special and not part of operations. Long time readers know we routinely add back tens of millions of dollars to provide investors a more accurate picture of McCormick’s operating earnings.

As we’ll document, McCormick’s special items— charges associated with reducing fixed costs and business streamlining initiatives— are not unusual, one-off items that deserve to be excluded from profitability calculations. The items McCormick labels special are recurring and have been a pillar of the company’s business model for the last decade.

We now know these charges will linger into a second decade.

In its latest 10-Q, McCormick revealed special charges associated with its net-zero carbon condiments manufacturing initiative in the U.K. will stretch into 2023. The company expects $30 million in related special charges through 2023, and recorded $19.5 million in the three months ending February 28, 2022.

If we include the current quarter, McCormick has recorded special charges totaling $248.5 million since 2013. If special charges occur in 2023 as stated, our analysis reveals McCormick will have taken such charges in each of the last eleven years.

Special charges (in millions) by year:

***2022: $19.5
***2021: $51.1
***2020: $6.9
***2019: $20.8
***2018: $16.3
***2017: $22.2
***2016: $16
***2015: $65.5
***2014: $5.2
***2013: $25

These charges do not include costs associated with integrating acquisitions, which we also argue are a recurring part of McCormick’s business. Nor is McCormick’s estimation of special charges always accurate. The company’s new enterprise resource planning (ERP) system— as we documented last year— ran $50 million over budget at the same time the company appears to have breached two debt covenants.

If the cost reduction initiatives that comprise special charges are generating a return, investors should see the results in McCormick’s profit margin. We calculate McCormick’s 10-year net operating profit after tax (NOPAT) margin at 13.31% and its 5-year average at 14.75%, an increase of 144 basis points.

The performance is undeniably improved but it’s not clear it’s organic.

We suspect the jump is attributable to the 2017 acquisition of Reckitt Benckiser's Food Division, which included French’s and Frank’s RedHot. Following the acquisition, McCormick’s NOPAT margin jumped from 12.6% in 2017 to 15.1% in 2018. With that in mind, McCormick’s annual NOPAT margin since 2013 has come in higher than its historical averages with the following frequency:

***NOPAT margin has been higher than the 10-year average in 4 out of 10 years
***NOPAT margin has been higher than the 5-year average in 4 out of 5 years

Though McCormick’s 2021 NOPAT margin of 14.79% was lower than the prior three year average of 15.43%, it has been trending in the right direction. However, the amount of capital necessary to engineer the improvement— including money spent on special charges— is certain to disappoint.

Though McCormick is a serial acquirer, it’s not clear if management is allocating capital as well as it might. Since 2013— when McCormick began stripping out the $248.5 million of special costs— our analysis indicates return on invested capital (ROIC) has declined from 12.2% to 8.2% in 2021. In the same period, McCormick’s weighted average cost of capital (WACC) has declined from approximately 4.3% to 3.8%.

Related: IFF, CAG, SJM, HRL, MDLZ

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