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
During the three and nine months ended August 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.
The impact of the global COVID-19 pandemic 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 and third quarters 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.
The extent and nature of government actions have varied during the nine months
ended August 31, 2020 based upon the then-current extent and severity of the
COVID-19 pandemic within their respective countries and localities. 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.
29
--------------------------------------------------------------------------------
Table of Contents
•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.
We implemented 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.
In the nine months ended August 31, 2020 , our sales increased by 4.7% over the
prior year level. That increase was driven by an 11.7% increase in sales of our
consumer segment, partially offset by a 5.7% decline in sales of our flavor
solutions segment. Our operating results have and will continue to be impacted
by COVID-19, including the related recovery and the shift in consumer demand
resulting from the pandemic. We have partnered with our customers to monitor
consumer demand changes and address the shift to at-home versus away-from-home
consumption. We estimate that away-from-home consumption has historically
represented approximately 20% of our consolidated sales. The effects of COVID-19
on consumer behavior have, on a net basis, favorably impacted the operating
results of our consumer segment and unfavorably impact the operating results of
our flavor solutions segment in the three and nine months ended August 31, 2020 .
The impact of COVID-19 on our consumer segment during those periods resulted in
a significant increase in at-home consumption and related demand for our
products. The unfavorable impact on our flavor solutions segment during the same
periods was principally attributable to decreased demand from certain customers
that were affected by government mandates related to COVID-19 in many of our
markets. Those measures required closures of dine-in restaurants or restricted
operations of those restaurants to carry-out or delivery only and also
restricted operations of quick service restaurants to drive-through pick-up or
delivery. Those negative demand impacts in our flavor solutions segment were
partially offset by increased at-home consumption from certain customers in our
flavor solutions segment that use our products to flavor their own brands for
at-home consumption.
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.
2020 Outlook
We project another year of strong financial performance in 2020. The operating
environment continues to evolve and there remains a degree of uncertainty about
the pace and shape of the COVID-19 recovery. The Company's guidance considers
its year-to-date fiscal 2020 performance and the expected shift in consumer
demand to at-home consumption and from away-from-home consumption that has
impacted our consumer and flavor solutions segments.
30
--------------------------------------------------------------------------------
Table of Contents
In 2020, we expect to grow sales at the upper end of a 4% to 5% range, including
an estimated 1% unfavorable impact from currency rates, or 5% to 6% on a
constant currency basis. That anticipated 2020 sales growth is primarily driven
by new products, brand marketing and expanded distribution as well as the impact
of the consumer shift in demand as a result of COVID-19 and the consumer's
sustained preference for cooking at home. Sales growth is also expected to
include the impact of pricing, which in conjunction with cost savings, is
expected to offset an anticipated mid-single digit inflationary pressure. Our
anticipated sales growth consists entirely of organic growth as we do not
anticipate an incremental sales impact from acquisitions in 2020. We expect our
gross profit margin to be 75 to 100 basis points higher in 2020 than in 2019, in
part driven by our CCI-led cost savings, which we expect to be $105 million in
2020, and favorable product mix, partially offset by COVID-19 related costs.
In 2020, we expect an increase in operating income of 6% to 7%, which includes
an estimated 1% unfavorable impact from currency rates. That increase in
operating income reflects the impact of lower special charges, estimated at $7.0
million in 2020 compared to $20.8 million in 2019. Excluding special charges, we
expect 2020's adjusted operating income to increase 4% to 5%, which includes an
estimated 1% unfavorable impact from currency rates, or 5% to 6% on a constant
currency basis. In addition to the factors noted in the preceding paragraph, we
expect to support our 2020 sales growth with a mid-single digit increase in
brand marketing investment as compared to the 2019 level. We also estimate
increased incentive compensation as a result of our projected fiscal year 2020
operating performance.
Our underlying effective tax rate is projected to be higher in 2020 than in
2019. Absent the impact of discrete tax items, we estimate our underlying tax
rate to be approximately 24% to 25% in 2020. Including the projected impact of
discrete tax items, including the favorable impact of discrete items that
occurred through August 31, 2020 , we estimate that our consolidated effective
tax rate will approximate 20% in fiscal 2020. Including the non-recurring
benefit of $1.5 million associated with the U.S. Tax Act and taxes associated
with special charges recognized in fiscal 2019, our adjusted effective rate was
approximately 19.5% in 2019. We expect our adjusted effective tax rate in 2020
to approximate our effective tax rate under U.S. GAAP of 20%.
Diluted earnings per share was $5.24 in 2019. Diluted earnings per share for
2020 are projected to range from $5.60 to $5.68 . Excluding the per share impact
of special charges of $0.12 and the per share impact of the non-recurring
benefit from the U.S. Tax Act of $0.01 in 2019, adjusted diluted earnings per
share was $5.35 in 2019. Adjusted diluted earnings per share excluding an
estimated $0.04 per share impact from special charges are projected to be $5.64
to $5.72 in 2020. We expect adjusted diluted earnings per share in 2020 to grow
5% to 7%, which includes a 1% unfavorable impact from currency rates, or to grow
6% to 8% in constant currency over adjusted diluted earnings per share of $5.35
in 2019.
RESULTS OF OPERATIONS - COMPANY
Three months ended Nine months ended
August 31,
August 31, 2020 August 31, 2019 August 31, 2020 2019
Net sales $ 1,430.3 $ 1,329.2 $ 4,043.4 $ 3,862.6
Percent increase 7.6 % 0.8 % 4.7 % 0.7 %
Components of percent growth in net sales -
increase (decrease):
Volume and product mix 6.8 % 2.1 % 4.1 % 2.7 %
Pricing actions 1.8 % 0.1 % 1.7 % 0.3 %
Foreign exchange (1.0) % (1.4) % (1.1) % (2.3) %
Gross profit $ 590.3 $ 539.9 $ 1,639.7 $ 1,515.3
Gross profit margin 41.3 % 40.6 % 40.6 % 39.2 %
Sales for the third quarter of 2020 increased by 7.6% from the prior year level
and by 8.6% 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 14.7% over the 2019 level, partially offset
by lower sales in our flavor solutions segment, which declined by 2.9% from the
prior year level. On a consolidated basis, higher volume and favorable product
mix increased sales by 6.8% while pricing actions added 1.8% to sales. That net
volume increase and favorable mix was driven by sharply higher demand within our
consumer segment, as the
31
--------------------------------------------------------------------------------
Table of Contents
continuation of measures imposed to mitigate the spread of COVID-19 and the
related change in consumer behavior, resulted in a shift in consumer behavior
toward at-home meal preparation that more than offset lower demand within our
flavor solutions segment principally associated with our branded food service
customers. Sales were also impacted by unfavorable foreign currency rates that
reduced net sales 1.0% compared to the year-ago quarter and is excluded from our
measure of sales growth of 8.6% on a constant currency basis.
Sales for the nine months ended August 31, 2020 increased by 4.7% from the prior
year level and increased by 5.8% on a constant currency basis. Favorable volume
and product mix increased sales by 4.1% while pricing actions added 1.7% to
sales. Sales were impacted by unfavorable foreign currency rates that reduced
sales by 1.1% as compared to the same period in 2019 and is excluded from our
measure of sales growth of 5.8% on a constant currency basis.
Gross profit for the third quarter of 2020 increased by $50.4 million , or 9.3%,
over the comparable period in 2019. Gross profit for the nine months ended
August 31, 2020 increased by $124.4 million , or 8.2% over the comparable period
in 2019. Our gross profit margins for the three and nine months ended August 31,
2020 were 41.3% and 40.6%, respectively, an increase of 70 basis points and 140
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
cost savings led by our Comprehensive Continuous Improvement ("CCI") program and
favorable pricing actions were offset, in part, by higher conversion costs and
increased material costs in both the quarter and year-to-date periods. Higher
conversion costs during the three and nine months ended August 31, 2020
reflected certain matters associated with COVID-19, including the impact of
temporary arrangements that increased salaries and benefits paid to our
manufacturing employees, measures to enable manufacturing and distribution staff
to maintain social distancing and permit enhanced cleaning between shifts that
reduced productivity, and the impact of lower production volumes of flavor
solutions inventories.
Three months ended Nine months ended
August 31, 2020
278.7 $ 911.1 $ 839.9
Percent of net sales 22.2 % 20.9 % 22.6 % 21.7 %
SG&A increased by $38.5 million in the third quarter of 2020 compared to the
2019 level, driven by (i) higher performance-based employee incentive expense
accruals, (ii) higher distribution expenses associated with the higher sales
volume, and (iii) a one-time fiscal 2019 expense reduction from the alignment of
an employee benefit plan to our global standard did not recur in 2020, all as
compared to the corresponding period in 2019. SG&A as a percent of net sales
increased by 130 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 $71.2 million in the nine months ended August 31, 2020
compared to the 2019 level, primarily as a result of (i) higher
performance-based employee incentive expense accruals, (ii) higher distribution
expenses associated with the higher sales volume, (iii) higher expenses
associated with efforts related to implementation of a global ERP platform, and
(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, all as compared to
the corresponding period in 2019. SG&A as a percent of net sales for the nine
months ended August 31, 2020 increased by 90 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 Nine months ended
August 31,
2020 August 31, 2019 Aug 31, 2020 Aug 31, 2019
Total special charges $ 0.1 $
7.7 $ 4.0
During the three months endedAugust 31, 2020 , we recorded$0.1 million of special charges related to streamlining actions in our EMEA region. During the nine months endedAugust 31, 2020 , we recorded$4.0 million of special charges, consisting of$2.9 million related to streamlining actions in our EMEA region together with$1.1 million related to ourGE initiative.
During the three months ended
During the nine months endedAugust 31, 2019 , we recorded$16.9 million of special charges, consisting primarily of (i)$12.2 million costs related to ourGE initiative, including$8.9 million of third-party expenses,$2.0 million related to severance and related benefits, and$1.3 million related to other costs; (ii)$2.3 million of severance and related benefits associated with streamlining actions in theAmericas ; and (iii)$1.9 million related to streamlining actions in our EMEA region. 32
--------------------------------------------------------------------------------
Table of Contents
Three months ended Nine months ended
August 31,
August 31, 2020 August 31, 2019 August 31, 2020 2019
Interest expense $ 33.5 $ 41.3 $ 103.2 $ 126.7
Other income, net 3.9 6.9 12.5 19.3
Interest expense decreased by $7.8 million in the third 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 $23.5
million lower for the nine months ended August 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 during February 2019 .
Other income, net for the three and nine months ended August 31, 2020 decreased
by $3.0 million and $6.8 million , respectively, from the 2019 levels due
principally to lower non-service cost income associated with our pension and
postretirement benefit plans that declined by $2.4 million and $6.0 million from
the prior year level in the three and nine months ended August 31, 2020 ,
respectively.
© Edgar Online, source
