MCCORMICK & COMPANY, INCORPORATED OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand
McCormick & Company, Incorporated , our operations, and our present business
environment. MD&A is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes thereto,
included in Item 1 of this report. We use certain non-GAAP information - more
fully described below under the caption Non-GAAP Financial Measures - that we
believe is important for purposes of comparison to prior periods and development
of future projections and earnings growth prospects. This information is also
used by management to measure the profitability of our ongoing operations and
analyze our business performance and trends. Unless otherwise noted, the dollar
and share information in the charts and tables in MD&A are in millions, except
per share data.
Business profile
McCormick is a global leader in flavor. We manufacture, market and distribute
spices, seasoning mixes, condiments and other flavorful products to the entire
food industry - retailers, food manufacturers and the foodservice business. In
fiscal year 2019, approximately 40% of our sales were outside of the U.S. We
also are partners in a number of joint ventures that are involved in the
manufacture and sale of flavorful products, the most significant of which is
McCormick de Mexico . We manage our business in two business segments, consumer
and flavor solutions.
Recent Events and 2020 Outlook
During the three and six months ended May 31, 2020 , the effects of a new
coronavirus ("COVID-19") and related actions to attempt to control its spread
significantly impacted not only our operating results but also the global
economy. On March 11, 2020 , the World Health Organization designated COVID-19 as
a global pandemic.
The impact of COVID-19 on our consolidated operating results for the three
months ended February 29, 2020 was limited, in all material respects, to our
operations in China where the Chinese government mandated numerous measures,
including closures of businesses, limitations on movements of individuals and
goods, and the imposition of other restrictive measures, in its efforts to
mitigate the spread of COVID-19 within the country. In the first quarter of
2020, sales in our Asia/Pacific region declined by $39.6 million from the
corresponding quarter in 2019, driven by the decline in the first quarter of
2020 sales in our China operations, as compared to the corresponding period in
2019, that approximated $43 million . That $43 million decline was driven by
government-mandated measures, imposed to mitigate the spread of COVID-19,
including measures that caused us to institute work-at-home protocols for many
of our employees and to close our manufacturing facilities in our China
operations during a portion of the first quarter. Our plants in China have since
resumed operations, with our plants in Shanghai and Guangzhou resuming
operations in mid-February 2020 and our Wuhan plant in mid-March 2020 .
The pandemic spread outside of China during our second quarter of fiscal year
2020 to impact operations in our Americas and Europe , Middle East and Africa
("EMEA") regions in addition to elsewhere in our Asia/Pacific region. In the
U.S. , many state and local governments, based on local conditions, either
recommended or mandated actions to slow the transmission of COVID-19. These
measures ranged from limitations on crowd size, together with closures of bars
and dine-in restaurants, to mandatory orders for non-essential citizens to
shelter in place. Governments in non-U.S. jurisdictions also implemented
shelter-in-place orders, quarantines, significant restrictions on travel, as
well as restrictions that prohibited many employees from going to work. Borders
between countries have been closed to contain the spread of COVID-19 contagion.
Uncertainty with respect to the economic effects of the pandemic introduced
significant volatility in the financial markets.
We identified three priorities while navigating through the period of volatility and uncertainty associated with various stages of the COVID-19 pandemic:
•First, to ensure the health and safety of our employees and the quality and
integrity of our products.
•Second, to keep our brands and our customers' brands in supply and to maintain
the financial strength of our business.
•Third, to ensure McCormick emerges strong from this event. The pandemic will
come to an end and we believe that we will come out a better company by driving
our long-term strategies, responding to changing consumer behavior and
capitalizing on opportunities from our relative strength.
28
--------------------------------------------------------------------------------
Table of Contents
During the three months ended May 31, 2020 , we undertook numerous measures to
ensure that these priorities were achieved, including: (i) for our manufacturing
and distribution employees, who played a critical role in maintaining the supply
of our products to our customers and consumers, we instituted pre-shift
temperature checks, increased pay and benefits, and provided time to enable
social distancing and even greater sanitation procedures during shift changes;
(ii) for our other employees, we instituted work-from-home arrangements; (iii)
we maintained close communication with customers and suppliers to enable us to
react to changing demand; and (iv) throughout the organization, we empowered
global, regional and local crisis response teams that enabled us to react
quickly to the challenging environment.
We elected to pause activities related to our global enterprise resource
planning ("ERP") replacement program in the balance of fiscal 2020. Current
travel restrictions and border closures imposed by governments to mitigate
COVID-19 contagion would make it impossible to provide on-the-ground support at
the times of pilot go-lives previously planned for fiscal 2020, and we do not
have a clear line of sight as to when those restrictions will be lifted. For
these reasons, we have chosen to refocus our employees on the three previously
described priorities while navigating through this period of volatility and
uncertainty.
During the second quarter of 2020, we partnered with our customers to monitor
consumer demand changes and address the shift to at-home consumption versus away
from home. We estimate that away-from-home consumption has historically
represented approximately 20% of our consolidated sales. As we expected, the
government-mandated closure of dine-in restaurants in many of our markets
reduced demand in our flavor solutions segment in the second quarter of 2020
from our foodservice customers as COVID-19 measures eliminated dine-in services
and limited restaurants to carry-out or delivery only. Also, as we expected in
the second quarter of 2020, the effects of COVID-19 measures, including
mandatory lock-downs, increased at-home consumption, and related demand, from
customers in our consumer segment as well as from customers in our flavor
solutions segment that use our products to flavor their own brands for at-home
consumption. In the three months ended May 31, 2020 , our sales increased by 7.6%
over the prior year level. That increase was driven by a 26.0% increase in sales
of our consumer segment, partially offset by an 18.5% decline in sales of our
flavor solutions segment.
Late in the second quarter of 2020, we saw some loosening of government-mandated
COVID-19 restrictions in certain locales as, dependent upon the local extent and
severity of COVID-19 infections, efforts to enter the first phase of recovery
began. To the extent that COVID-19 continues or worsens, governments may
maintain restrictions or impose additional restrictions. We believe that the
phasing and steps to COVID-19 recovery will vary among regions, countries or
local jurisdictions.
We also believe that the impact, extent and timing of COVID-19 and the recovery
from its effects are highly uncertain and could be far reaching. In light of the
evolving health, social, economic, and business environment, governmental
regulation or mandates, and business disruptions that could occur, the
short-term and long-term impact that COVID-19 could have on our financial
condition and operating results remains unknown.
Earlier this year, we withdrew the fiscal 2020 outlook, summarized in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included in our Annual Report on Form 10-K for the year ended
November 30, 2019 . The environment in which we operate continues to evolve, and
there remains a high degree of uncertainty about the pace and shape of the
COVID-19 recovery as well as the impact and extent of potential resurgences. As
a consequence of these uncertainties and the resultant variability that they may
introduce to our results during the remainder of this fiscal year, we are not
providing a fiscal 2020 financial outlook at this time.
As of the date of this filing, our current expectations with respect to certain
factors impacting our operations during the six-month period ending November 30,
2020 include the following: (i) we believe that the increased consumer
preference for cooking at home experienced in the second quarter will be
sustained, continuing a favorable impact in our consumer segment in the second
half of the year, but at a less elevated level than in our second quarter; (ii)
we expect demand from our packaged food customers in the flavor solutions
segment to return to pre-COVID-19 levels; (iii) we expect the away-from-home
component of our flavor solutions segment to gradually and partially recover
throughout the second half of the year, but remain below the prior year level;
(iv) we anticipate that the significant favorable impact on gross margin from a
higher mix of consumer segment sales in the first half of 2020 is unlikely to
continue to the same extent in the latter half of the year; and (v) as we did in
the second quarter, we expect to incur incremental COVID-19 costs during the
second half of the year, with those incremental costs more heavily weighted in
the third quarter rather than in the fourth quarter. In addition, our current
expectations with respect to certain factors impacting our operations for the
fiscal year ending November 30, 2020 include the following: (i) we continue to
project that the impact of COVID-19 on our sales in China will reduce our annual
consolidated net sales growth in fiscal 2020 by 1% to 2% as compared to the 2019
level; (ii) we continue to expect mid-single digit percentage inflationary
pressures, CCI savings of approximately $105 million , and a mid-single digit
percentage increase in brand marketing investments for fiscal 2020, all as
compared to the 2019 levels; (iii) we anticipate a negative impact from foreign
exchange rates on our fiscal 2020 annual results as compared to fiscal 2019; and
(iv) we expect a high to mid-single
29
--------------------------------------------------------------------------------
Table of Contents
digit percentage decline in our income from unconsolidated operations for fiscal
year 2020 from that of the prior year as a result of unfavorable foreign
currency rates.
The pace and shape of the COVID-19 recovery described above as well as the
impact and extent of potential resurgences is not presently known. These and
other uncertainties could result in changes to our current expectations in
addition to a number of adverse impacts to our business, including but not
limited to additional disruption to the economy and consumers' willingness and
ability to spend, temporary or permanent closures by businesses that consume our
products, such as restaurants, additional work restrictions, and supply chains
being interrupted, slowed, or rendered inoperable or, in the case of significant
increased demand for our product, incapable of fulfilling that increased demand.
As a result, it may be challenging to obtain and process raw materials to
support our business needs, and individuals could become ill, quarantined, or
otherwise unable to work and/or travel due to health reasons or governmental
restrictions. Also, governments may impose other laws, regulations or taxes
which could adversely impact our business, financial condition or results of
operations. Further, if our customers' businesses are similarly affected, they
might delay or reduce purchases from us. The potential effects of COVID-19 also
could impact us in a number of other ways including, but not limited to,
variations in the level of our profitability, laws and regulations affecting our
business, fluctuations in foreign currency markets, the availability of future
borrowings, the cost of borrowings, valuation of our pension assets and
obligations, credit risks of our customers and counterparties, and potential
impairment of the carrying value of goodwill or other indefinite-lived
intangible assets.
RESULTS OF OPERATIONS - COMPANY
Three months ended Six months ended
May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019
Net sales $ 1,401.1 $
1,301.9
7.6 % - % 3.1 % 0.7 %
Components of percent growth in net sales -
increase (decrease):
Volume and product mix 7.4 % 2.1 % 2.6 % 3.1 %
Pricing actions 2.2 % 0.7 % 1.7 % 0.4 %
Foreign exchange (2.0) % (2.8) % (1.2) % (2.8) %
Gross profit $ 579.5 $ 508.5 $ 1,049.4 $ 975.4
Gross profit margin 41.4 % 39.1 % 40.2 % 38.5 %
Sales for the second quarter of 2020 increased by 7.6% from the prior year level
and by 9.6% on a constant currency basis (that is excluding the impact of
foreign currency exchange as more fully described under the caption, Non-GAAP
Financial Measures). That 7.6% sales increase was driven by higher sales in our
consumer segment, which increased by 26.0% over the 2019 level, partially offset
by lower sales in our flavor solutions segment, which declined by 18.5% from the
prior year level. On a consolidated basis, higher volume and favorable product
mix increased sales by 7.4% while pricing actions added 2.2% to sales. That net
volume increase and favorable mix was driven by sharply higher demand within our
consumer business, as government-mandated measures, imposed to mitigate the
spread of COVID-19 in the second quarter of 2020 and the ensuing change in
consumer behavior, resulted in a shift in consumer behavior toward at-home meal
preparation that more than offset sharply lower demand within our flavor
solutions business principally associated with our quick service restaurant and
branded food service customers. Sales were also impacted by unfavorable foreign
currency rates that reduced net sales 2.0% compared to the year-ago quarter and
is excluded from our measure of sales growth of 9.6% on a constant currency
basis.
Sales for the six months ended May 31, 2020 increased by 3.1% from the prior
year level and increased by 4.3% on a constant currency basis. Favorable volume
and product mix increased sales by 2.6% while pricing actions added 1.7% to
sales. Sales were impacted by unfavorable foreign currency rates that reduced
sales by 1.2% as compared to the same period in 2019 and is excluded from our
measure of sales growth of 4.3% on a constant currency basis.
Gross profit for the second quarter of 2020 increased by $71.0 million , or
14.0%, over the comparable period in 2019. Gross profit for the six months ended
May 31, 2020 increased by $74.0 million , or 7.6% over the comparable period in
2019. Our gross profit margins for the three and six months ended May 31, 2020
were 41.4% and 40.2%, respectively, an increase of 230 basis points and 170
basis points, respectively, from the same periods in 2019. This improvement was
driven by the mix of consumer and flavor solutions sales in both the quarter and
year-to-date periods. Also, as a percentage of sales, the gross margin impact of
CCI-led cost savings were offset, in part, by higher conversion costs and
increased material costs in both the quarter and year-to-date periods. Increased
conversion costs during the three months ended May 31, 2020 included certain
matters associated with COVID-19, such as the impact of lower production volumes
of flavor solutions inventories, reduced
30
--------------------------------------------------------------------------------
Table of Contents
productivity related to measures to enable manufacturing and distribution staff
to maintain social distancing and permit enhanced cleaning between shifts, and
higher inventory provisions in response to lower demand by certain customers.
Three months ended Six months ended
May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019
Selling, general & administrative expense (SG&A)
293.3$ 593.9 $ 561.2 Percent of net sales 22.8 % 22.6 % 22.8 % 22.2 % SG&A increased by$25.9 million in the second quarter of 2020 compared to the 2019 level, driven by (i) higher performance-based employee incentive expense accruals; (ii) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard did not recur in 2020; and (iii) less favorable investment results associated with non-qualified retirement plan assets, all as compared to the corresponding period in 2019. SG&A as a percent of net sales increased by 20 basis points from the prior year level, primarily as a result of the previously mentioned factors, partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2020 quarter. SG&A increased by$32.7 million in the six months endedMay 31, 2020 compared to the 2019 level, primarily as a result of (i) higher performance-based employee incentive expense accrual, (ii) higher expenses associated with efforts related to implementation of a global ERP platform; (iii) increased brand marketing expenses; (iv) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard did not recur in 2020; and (v) less favorable investment results associated with non-qualified retirement plan assets, all as compared to the corresponding period in 2019. SG&A as a percent of net sales for the six months endedMay 31, 2020 increased by 60 basis points from the prior year level, primarily as a result of the previously mentioned factors, partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2020 period. Three months ended Six months ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Total special charges$ 2.9 $ 7.1 $ 3.9 $ 9.2 During the three months endedMay 31, 2020 , we recorded$2.9 million of special charges consisting primarily of$2.8 million of streamlining actions in EMEA, including$1.9 million related to severance and related benefits,$0.6 million of third-party expenses, and$0.3 million related to other costs.
During the six months ended
During the three months endedMay 31, 2019 , we recorded$7.1 million of special charges, consisting primarily of (i)$4.1 million related to ourGE initiative, including$2.5 million of third-party expenses,$1.1 million related to employee severance and related benefits, and$0.5 million related to other costs, (ii)$2.3 million of employee severance and related benefits associated with streamlining actions in theAmericas and (iii)$0.6 million of streamlining actions in EMEA. During the six months endedMay 31, 2019 , we recorded$9.2 million of special charges, consisting primarily of (i) costs related to ourGE initiative, including$3.5 million related to third party expenses,$1.7 million related to employee severance and related benefits, and$1.0 million related to other costs, (ii)$2.3 million of employee severance and related benefits associated with streamlining actions in theAmericas and (iii)$0.6 million of streamlining actions in EMEA. Three months ended Six months ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Interest expense$ 34.4 $ 42.4 $ 69.7 $ 85.4 Other income, net 3.1 6.3 8.6 12.4 Interest expense decreased by$8.0 million in the second quarter of 2020, compared to the same period in 2019, due primarily to a decline in average total borrowings and the lower interest rate environment. Interest expense was$15.7 million lower for the six months endedMay 31, 2020 than the same period of the prior year. That decline was primarily due to a decrease in average borrowings, a lower interest rate environment and the favorable impact of the cross currency interest rate swap contracts entered into duringFebruary 2019 . Other income, net for the three and six months endedMay 31, 2020 decreased by$3.2 million and$3.8 million , respectively, from the 2019 levels due principally to lower non-service cost income associated with our pension and postretirement benefit plans and lower interest income in the three and six months endedMay 31, 2020 . 31
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
