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 understandMcCormick & Company, Incorporated , our operations and our present business environment from the perspective of management. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto contained in Item 8 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. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data. OnNovember 30, 2020 , the Company effected a two-for-one stock split in the form of a stock dividend on all shares of the Company's two classes of common stock. OnNovember 30, 2020 , one like share was issued for each share outstanding to shareholders of record as ofNovember 20, 2020 . All common stock and per share data have been retroactively adjusted to reflect the stock split. McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food and beverage industry-retailers, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and flavor solutions, as described in Item 1 of this report. Our long-term annual growth objectives in constant currency are to increase sales 4% to 6%, increase adjusted operating income 7% to 9% and increase adjusted earnings per share 9% to 11%. COVID-19 - As a result of the COVID-19 pandemic, governments around the world either recommended or mandated actions to slow the transmission of the virus that included shelter-in-place orders, quarantines, limitations on crowd size, closures of dine-in restaurants and bars, and significant restrictions on travel, as well as work restrictions that prohibited many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has significantly impacted not only our operating results but also the global economy. The extent and nature of government actions varied during the years endedNovember 30, 2021 and 2020 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. We continue to actively monitor the impact of COVID-19 on all aspects of our business. The effects of COVID-19 on consumer behavior have impacted the relative balance of at-home versus away-from-home food demand. The impact of COVID-19 on our consumer segment since the beginning of the pandemic has resulted in a significant increase in at-home consumption and related demand for our products. In 2021, our flavor solutions segment benefited from a recovery in away-from-home eating that more than offset the net sales declines experienced in 2020 as a result of restrictions imposed to reduce the spread of COVID-19. The COVID-19 mitigation measures in 2020 impacting certain of our flavor solutions customers included the following: (i) with respect to dine-in restaurants, closures, limitations on dine-in capacity, or restrictions on the operations of those restaurants to carry-out or delivery only; and (ii) with respect to quick service restaurants, limitations on operations to drive-through pick-up or delivery. Although certain restrictive measures were reinstated during certain periods of 2021, the prevalence and scale of closures and operating limitations were less severe as compared to 2020. For comparative purposes, the following provides a summary of growth in net sales as reported and on a constant currency basis for the year ended 2021 as compared to 2019: For the year
ended
November 30, 2019
Percentage change Impact of foreign Percentage change on
as reported currency exchange constant currency basis
Net sales:
Consumer segment 20.4 % 2.1 % 18.3 %
Flavor Solutions segment 14.6 % 0.8 % 13.8 %
Total net sales 18.1 % 1.6 % 16.5 %
The percentage change in reported net sales and the percentage change on a constant currency basis were
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favorably impacted by the acquisitions of Cholula and FONA, which, in aggregate,
contributed 2.6%, 7.1% and 4.3% to the consumer segment, flavor solutions
segment and total net sales growth rates, respectively, in the preceding table,
on both a reported and constant currency basis.
In early fiscal 2021, vaccines effective in combating COVID-19 were approved by
health agencies in certain countries/regions in which we operate (including the
U.S. , U.K. , European Union , Canada and Mexico) and began to be administered. The
availability of COVID-19 vaccines and their acceptance by individuals is
difficult to predict, and vaccination levels vary across jurisdictions. The pace
and shape of the COVID-19 recovery as well as the impact and extent of COVID-19
variants or potential resurgences is not presently known. These and other
uncertainties with respect to COVID-19 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, we may be unable to
fulfill 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 related to COVID-19 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.
Inflationary Cost Environment and Supply Chain Disruption - During fiscal 2021,
we experienced inflationary cost increases in our commodities, packaging
materials and transportation costs. We expect that these inflationary cost
increases will continue but we expect they will be partially mitigated by
pricing actions implemented in the fourth quarter of fiscal 2021, those that we
plan to implement in fiscal 2022 and by our Comprehensive Continuous Improvement
(CCI) program-led cost savings. During fiscal 2021, we also experienced
additional pressure in our supply chain due to strained transportation capacity,
as well as due to labor shortages and absenteeism associated with COVID-19,
together with the impact of the continued elevated demand. In response to these
supply chain pressures, we have taken actions build capacity as well as increase
our supply chain related resources. We expect these pressures to continue in
2022.
Sales growth: Over time, we expect to grow sales with similar contributions
from: 1) our base business - driven by brand marketing support, category
management, and differentiated customer engagement; 2) new products; and 3)
acquisitions.
Base business - We expect to drive sales growth by optimizing our brand
marketing investment through improved speed, quality and effectiveness. We
measure the return on our brand marketing investment and have identified digital
marketing as one of our highest return investments in brand marketing support.
Through digital marketing, we are connecting with consumers in a personalized
way to deliver recipes, provide cooking advice and help them discover new
products.
New Products - For our consumer segment, we believe that scalable and
differentiated innovation continues to be one of the best ways to distinguish
our brands from our competition, including private label. We are introducing
products for every type of cooking occasion, from gourmet, premium items to
convenient and value-priced flavors.
For flavor solutions customers, we are developing seasonings for snacks and
other food products, as well as flavors for new menu items. We have a solid
pipeline of flavor solutions products aligned with our customers' new product
launch plans, many of which include clean-label, organic, natural, and
"better-for-you" innovation. With over 20 product innovation centers around the
world, we are supporting the growth of our brands and those of our flavor
solutions customers with products that appeal to local consumers.
Acquisitions - Acquisitions are expected to approximate one-third of our sales
growth over time. Since the beginning of 2017, we have completed four
acquisitions, which are driving sales in both our consumer and flavor solutions
segments. We focus on acquisition opportunities that meet the growing demand for
flavor and health. Geographically, our focus is on acquisitions that build scale
where we currently have presence in both developed and emerging markets.
Information with respect to our three most recent acquisitions is provided
below:
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•On December 30, 2020 , we acquired FONA International, LLC and certain of its
affiliates (FONA), a privately owned company, for approximately $708 million ,
net of cash acquired. We financed this fiscal 2021 acquisition with cash and
short-term borrowings. FONA is a leading manufacturer of clean and natural
flavors providing solutions for a diverse customer base across various
applications for the food, beverage and nutritional markets which expands the
breadth of our flavor solutions segment into attractive categories, as well as
extends our technology platform, strengthens our capabilities, and accelerates
the strategic migration of our portfolio to more value-added and technically
insulated products.
•On November 30, 2020 , we acquired the parent company of Cholula Hot Sauce®
(Cholula ) from L Catterton for approximately $801 million , net of cash acquired.
Cholula is a strong addition to McCormick's global branded flavor portfolio,
which broadens the Company's offering in the high growth hot sauce category to
consumers and foodservice operators and accelerates our condiment growth
opportunities with a complementary authentic Mexican flavor hot sauce in both
our consumer and flavor solutions segments.
•On August 17, 2017 , we acquired Reckitt Benckiser's Food Division (RB Foods )
for approximately $4.2 billion . The acquired iconic brands of RB Foods included
French's®, Frank's RedHot® and Cattlemen's®, which are a natural strategic fit
with our robust global branded flavor portfolio. We believe that these additions
moved us to a leading position in the attractive U.S. condiments category and
provide significant international growth opportunities for our consumer and
flavor solutions segments.
The FONA and Cholula acquisitions contributed approximately one-third of our
sales growth in 2021.
Cost savings and business transformation: We are fueling our investment in
growth with cost savings from our CCI program, an ongoing initiative to improve
productivity and reduce costs throughout the organization, that also includes
savings from the organization and streamlining actions described in note 3 of
notes to our consolidated financial statements. In addition to funding brand
marketing support, product innovation and other growth initiatives, our CCI
program helps offset higher costs and is contributing to higher operating income
and earnings per share.
We are making investments to build the McCormick of the future, including in our
Global Enablement (GE) organization to transform McCormick through globally
aligned, innovative services to enable growth. As more fully described in note 3
of notes to our consolidated financial statements, we expect to incur special
charges of approximately $60 million to $65 million associated with our GE
initiative of which approximately $40.7 million have been recognized through
November 30, 2021 . As technology provides the backbone for this greater process
alignment, information sharing and scalability, we are also making investments
in our information systems. From late 2018 through early 2020, we progressed in
implementing our global enterprise resource planning (ERP) replacement program
which will enable us to accelerate the transformation of our ways of working and
provide a scalable platform for growth. 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. During fiscal 2021,
we resumed activities related to our ERP replacement program.
We expect that, in total over the course of the ERP replacement program from
late 2018 through 2025, we will invest approximately $400 million , including
expenses related to the go-live activities in our operations, to enable the
anticipated completion of the global roll out of our new information technology
platform in 2024. Of that projected $400 million , we expect capitalized software
to account for approximately 50% and program expenses to account for
approximately 50%. Of the approximately $200 million of operating expenses
included in our projected total spending related to our ERP replacement program,
approximately $85 million has been recognized through November 30, 2021 . Of the
approximately $200 million of capitalized software included in our projected
total spending related to our ERP program, approximately $115 million has been
recognized through November 30, 2021 .
The GE initiative is expected to generate annual savings, ranging from
approximately $45 million to $55 million , once all actions are implemented,
including those that are dependent on the replacement of our global ERP
platform.
Cash flow: We continue to generate strong cash flow. Net cash provided by
operating activities was $828.3 million , $1,041.3 million and $946.8 million in
2021, 2020, and 2019, respectively. In 2021, we continued to have a balanced use
of cash for debt repayment, capital expenditures and the return of cash to
shareholders through dividends and share repurchases. We are using our cash to
fund shareholder dividends, with annual increases in each of the past 36 years,
and to fund capital expenditures and acquisitions. In 2021, the return of cash
to our shareholders through dividends and share repurchases was $371.9 million .
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Operating Results: On a long-term basis, we expect a combination of
acquisitions, share repurchases and debt repayments, and the resulting impact on
interest expense, to add about 2% to earnings per share growth.
In 2021, we achieved further growth of our business with net sales rising 12.8%
over the 2020 level due to the following factors:
•We grew volume and product mix, which added 5.5% of sales growth, exclusive of
acquisitions. This growth was driven by increases in both our consumer and
flavor solutions segments. Increased net sales within our consumer segment was
driven by strong demand due to a sustained shift in consumer behavior toward
at-home meal preparation, which was first seen in 2020 as a response to actions
taken to mitigate the spread of COVID-19. Increased net sales within our flavor
solutions segment was principally driven by sales of away-from-home products as
compared to 2020, when actions taken to mitigate the spread of COVID-19
significantly impacted demand.
•Pricing actions contributed 0.8% of the increase in net sales.
•Acquisitions contributed 4.1% of the increase in net sales.
•Net sales growth was positively impacted by fluctuations in currency rates that
increased sales growth by 2.4%. Excluding this impact, we grew sales by 10.4%
over the prior year on a constant currency basis.
Operating income was $1,015.1 million in 2021 and $999.5 million in 2020. We
recorded $51.1 million and $6.9 million of special charges in 2021 and 2020,
respectively, related to organization and streamlining actions. Special charges
in 2021 included $4.7 million in cost of goods sold related the exit of a low
margin business. In 2021 and 2020, we also recorded $35.3 million and $12.4
million of transaction and integration expenses, respectively, related to our
acquisitions of Cholula and FONA that reduced operating income. In 2021,
compared to the year-ago period, the favorable impact of higher sales, $117.0
million of cost savings from our CCI program, including organization and
streamlining actions, and lower incentive-based compensation more than offset
the impact of increased commodity, packaging materials and transportation costs,
higher conversion costs, which include costs associated with COVID-19, and
increased brand marketing costs. Excluding special charges and transaction and
integration expenses related to our acquisitions of Cholula and FONA, adjusted
operating income was $1,101.5 million in 2021, an increase of 8.1%, compared to
$1,018.8 million in the year-ago period. In constant currency, adjusted
operating income rose 6.2%. For further details and a reconciliation of non-GAAP
to reported amounts, see the subsequent discussion under the heading "Non-GAAP
Financial Measures".
Diluted earnings per share was $2.80 in 2021 and $2.78 in 2020. The year-on-year
increase in earnings per share was primarily driven by higher operating income.
Special charges and transaction and integration expenses lowered earnings per
share by $0.30 and $0.05 in 2021 and 2020, respectively. A gain on our sale of
an unconsolidated operation increased earnings per share by $0.05 in 2021.
Excluding the effects of special charges, transaction and integration expenses,
and the gain realized from the sale of an unconsolidated operation, adjusted
diluted earnings per share was $3.05 in 2021 and $2.83 in 2020, or an increase
of 7.8%.
2022 Outlook
In 2022, we expect to grow net sales over the 2021 level by 3% to 5%, which
includes an estimated 1% unfavorable impact from currency rates, or 4% to 6% on
a constant currency basis. That anticipated 2022 sales growth includes the
impact of pricing actions, including those taken in 2021, to partially offset
cost increases. We expect the impact of pricing to be a significant driver of
our sales growth. We expect volume and product mix to be impacted by pricing
elasticities, although at a lower level than we have experienced historically.
We anticipate that our volume and product mix will also be impacted by the exit
of a lower margin product line in late 2021.
We expect our 2022 gross profit margin to range from an increase of 20 basis
points to a decline of 30 basis points from our gross profit margin of 39.5% in
2021. The projected 2022 change in gross profit margin is principally due to the
net effect of (i) a mid-teen percentage impact of inflation in 2022 compared to
2021, (ii) the favorable impact of pricing actions in response to increased
commodity, packaging materials and transportation costs, (iii) anticipated
unfavorable sales mix in 2022 between our consumer and flavor solutions segments
as compared to 2021, (iv) the favorable impact of anticipated CCI cost savings,
and (v) the lack of $11.0 million of transaction and integration expenses and
special charges reflected in cost of goods sold in 2021. We expect our 2022
gross profit margin, excluding the $11.0 million of transaction and integration
expenses and special charges in 2021, to range from comparable to a decline of
50 basis points from our 2021 adjusted gross profit margin of 39.7%.
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In 2022, we expect an increase in operating income of 13% to 15%, which includes
an estimated 1% unfavorable impact from currency rates, over the 2021 level. Our
CCI-led cost savings target in 2022 is approximately $85 million . We anticipate
integration expenses related to the FONA acquisition of approximately $3 million
to favorably impact operating income in 2022, as compared to $35.3 million of
transaction and integration expenses in 2021. We also expect approximately $30
million of special charges in 2022 that relate to previously announced
organization and streamlining actions; in 2021, special charges were $51.1
million . Excluding special charges and transaction and integration expenses, we
expect 2022's adjusted operating income to increase by 7% to 9%, which includes
an estimated 1% unfavorable impact from currency rates, or to increase by 8% to
10% on a constant currency basis over the 2021 level.
Our underlying effective tax rate is projected to be higher in 2022 than in
2021. We estimate that our 2022 effective tax rate, including the net favorable
impact of anticipated discrete tax items, will be 22% to 23% as compared to
21.5% in 2021. Excluding projected taxes associated with special charges and
transaction and integration expenses, we estimate that our adjusted effective
tax rate will be 22% to 23% in 2022, as compared to an adjusted effective tax
rate of 20.1% in 2021.
Diluted earnings per share was $2.80 in 2021. Diluted earnings per share for
2022 is projected to range from $3.07 to $3.12 . Excluding the per share impact
of i) special charges of $0.16 ; ii) transaction and integration expenses,
including the unfavorable impact of a discrete tax item of $0.04 related to our
acquisition of FONA, of $0.14 ; and iii) the gain realized upon our sale of an
unconsolidated operation of $0.05 , adjusted diluted earnings per share was $3.05
in 2021. Adjusted diluted earnings per share, excluding an estimated per share
impact from special charges of $0.09 and from integration expenses of $0.01 , is
projected to range from $3.17 to $3.22 in 2022. We expect adjusted diluted
earnings per share to grow by 4% to 6%, which includes a 1% unfavorable impact
from currency rates, or to grow by 5% to 7% on a constant currency basis over
adjusted diluted earnings per share of $3.05 in 2021.
RESULTS OF OPERATIONS-2021 COMPARED TO 2020
2021 2020
Net sales $ 6,317.9 $ 5,601.3
Percent growth 12.8 % 4.7 %
Components of percent growth in net sales-increase (decrease):
Volume and product mix 5.5 % 3.7 %
Pricing actions 0.8 % 1.6 %
Acquisitions 4.1 % - %
Foreign exchange 2.4 % (0.6) %
Sales for 2021 increased by 12.8% from 2020 and by 10.4% on a constant currency
basis. That 12.8% sales increase was driven by higher sales in both our consumer
and flavor solutions segments. On a consolidated basis, higher volume and
favorable product mix increased sales by 5.5% while pricing actions, which were
primarily taken in the fourth quarter, added 0.8% to sales. That net volume
increase and favorable mix was driven by continued levels of strong demand
within our consumer segment, as the shift in consumer behavior toward at-home
meal preparation, first seen in 2020 as a response to actions taken to mitigate
the spread of COVID-19, has persisted. In addition, our flavor solutions segment
volume increased principally due to a recovery in demand for away-from-home
products, including higher sales to our branded food service customers, as
compared to 2020. Sales were also impacted by favorable foreign currency rates
that increased net sales 2.4% compared to 2020 and is excluded from our measure
of sales growth of 10.4% on a constant currency basis.
2021 2020
Gross profit $ 2,494.6 $ 2,300.4
Gross profit margin 39.5 % 41.1 %
In 2021, our gross profit margin decreased 160 basis points to 39.5% from 41.1%
in 2020. The decline was driven by the impact of increased commodity, packaging
materials and transportation costs, higher conversion costs, which includes
costs associated with COVID-19, and a less favorable mix in sales between our
consumer and flavor solutions segments as compared to 2020. These unfavorable
impacts were partially offset by savings from our CCI program, pricing actions,
improved product mix and the accretive impact of the Cholula and FONA
acquisitions, each as compared to the prior year period. In addition, our 2021
gross profit margin was burdened by (i) $6.3 million of transaction expense,
representing the amortization of the fair value adjustment to the acquired
inventories of Cholula and FONA upon our sale of those acquired inventories, and
(ii) a non-cash special charge of $4.7 million
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associated with the exit of a low margin business in our Asia/Pacific region.
Excluding the transaction expense and special charges, adjusted gross profit
margin decreased by 140 basis points from 41.1% in 2020 to 39.7% for the year
ended November 30, 2021 .
2021 2020
Selling, general & administrative expense
22.3 % 22.9 %
Selling, general and administrative (SG&A) expense was $1,404.1 million in 2021
compared to $1,281.6 million in 2020, an increase of $122.5 million . That
increase in SG&A expense was primarily a result of (i) SG&A associated with the
Cholula and FONA acquisitions; (ii) greater selling and distribution expenses
associated with the higher sales volume; and (iii) increased brand marketing
costs, all as compared to the corresponding period in 2020. Those increases were
partially offset by lower performance-based employee incentive expenses, as
compared to the prior year period. SG&A as a percent of net sales for 2021
decreased by 60 basis points from the prior year level, driven by the impact of
the leverage of fixed and semi-fixed expenses over a higher level of sales
during the 2021 period.
2021 2020
Special charges included in cost of goods sold
46.4 6.9
Total special charges $ 51.1 $ 6.9
We regularly evaluate whether to implement changes to our organization structure
to reduce fixed costs, simplify or improve processes, and improve our
competitiveness, and we expect to continue to evaluate such actions in the
future. From time to time, those changes are of such significance in terms of
both up-front costs and organizational/ structural impact that we obtain advance
approval from our Management Committee and classify expenses related to those
changes as special charges in our financial statements.
During 2021, we recorded $51.1 million of special charges, consisting
principally of (i) $19.5 million associated with our exit of our rice product
line in India , as more fully described below, (ii) $6.2 million associated with
the transition of a manufacturing facility in EMEA, (iii) streamlining actions
of $10.3 million in the Americas region and $4.8 million in the EMEA region, and
(iv) a non-cash asset impairment charge of $6.0 million associated with an
administrative site that was sold in conjunction with our decision to employ a
hybrid work environment. As more fully described in note 3 of our notes of
consolidated financial statements, the $19.5 million special charge associated
with the exit of our rice product line in India consisted of an $11.2 million
non-cash impairment charge associated with the impairment of certain intangible
assets, $3.6 million of employee severance and other related exit costs, and a
$4.7 million charge in cost of goods sold which represents a provision for the
excess of the carrying value of rice inventories over the estimated net
realizable value and a contractual obligation associated with terminating a rice
supply agreement.
During 2020, we recorded $6.9 million of special charges, consisting of $5.3
million related to streamlining actions in our EMEA region and $1.6 million
related to our GE initiative.
2021 2020
Transaction expenses included in cost of goods sold
29.0 12.4
Total transaction and integration expenses $ 35.3 $ 12.4
During 2021, we recorded transaction and integration expenses of $35.3 million
related to our acquisitions of Cholula and FONA. These costs consisted of (i)
$6.3 million of amortization of the acquisition-date fair value adjustment of
inventories that is included in Cost of goods sold, (ii) $13.8 million of other
transaction expenses primarily related to outside advisory, service and
consulting costs, and (iii) $15.2 million of integration expenses. Transaction
and integration expenses related to our acquisitions of Cholula and FONA of
$11.2 million and $1.2 million , respectively, were incurred late in fiscal 2020.
2021 2020
Operating income $ 1,015.1 $ 999.5
Percent of net sales 16.1 % 17.8 %
25-------------------------------------------------------------------------------- Operating income increased by$15.6 million , or 1.6%, from$999.5 million in 2020 to$1,015.1 million in 2021. Special charges and transaction and integration expenses increased by$67.1 million in 2021, as compared to 2020, and negatively impacted operating income. Operating income as a percentage of net sales declined by 170 basis points in 2021, to 16.1% in 2021 from 17.8% in 2020 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was$1,101.5 million in 2021 as compared to$1,018.8 million in 2020, an increase of$82.7 million or 8.1% over the 2020 level. Adjusted operating income as a percentage of net sales declined by 80 basis points in 2021, to 17.4% in 2021 from 18.2% in 2020. 2021 2020 Interest expense$ 136.6 $ 135.6 Other income, net 17.3 17.6 Interest expense was$1.0 million higher for 2021 as compared to the prior year as an increase in average total borrowings was largely offset by a decrease in interest rates. Other income, net for 2021 decreased by$0.3 million as lower non-service cost income associated with our pension and postretirement benefit plans was partially offset by higher interest income, as compared to 2020. The decrease was also impacted by non-operating foreign currency transaction gains in 2021, as compared to non-operating foreign currency transaction losses in the prior period. 2021
2020
Income from consolidated operations before income taxes$ 895.8 $ 881.5 Income tax expense 192.7 174.9 Effective tax rate 21.5 % 19.8 % The provision for income taxes is based on the estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements ofU.S. GAAP. Examples of such types of discrete items not related to ordinary income include, but are not limited to, excess tax benefits associated with share-based payments to employees, changes in estimates of the outcome of tax matters related to prior years, including reversals of reserves upon the lapsing of statutes of limitations, provision-to-return adjustments, the settlement of tax audits, changes in enacted tax rates, changes in the assessment of deferred tax valuation allowances and the tax effects of certain intra-entity asset transfers (other than inventory). The effective tax rate was 21.5% in 2021 as compared to 19.8% in 2020. The increase in our effective tax rate was principally attributable to the lower level of net discrete tax benefits in 2021 as compared to 2020. Net discrete tax benefits were$26.6 million in 2021, a decrease of$16.8 million from$43.4 million in 2020. Discrete tax benefits in both the 2021 and 2020 periods included excess tax benefits associated with share-based payments to employees ($4.3 million and$14.2 million in 2021 and 2020, respectively), the reversal of reserves for unrecognized tax benefits ($22.5 million and$4.9 million in 2021 and 2020, respectively) due to, in 2021, the partial release of certain reserves for an unrecognized tax benefit and related interest in a non-U.S. jurisdiction based on a change in our assessment of the technical merits of that position associated with the availability of new information, and in both years due to the expiration of the statues of limitations, the release of valuation allowances due to a change in judgment about realizability of deferred tax assets ($4.4 million and$11.9 million in 2021 and 2020, respectively) and other discrete items. In 2021, discrete tax items included$4.0 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation and$10.4 million of deferred state tax expense directly related to ourDecember 2020 acquisition of FONA. In 2020, discrete tax items included$9.9 million of tax benefits associated with intra-entity asset transfers that occurred. See note 13 of notes to our consolidated financial statements for a more detailed reconciliation of theU.S. federal tax rate with the effective tax rate. 2021 2020
Income from unconsolidated operations
Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased$11.4 million in 2021 from the prior year, driven by an after-tax gain of$13.4 million on the sale of our 26% interest inEastern Condiments Private Ltd. (Eastern), an unconsolidated operation, during our second quarter of 2021, as more fully described in note 5 of the notes to the accompanying financial statements. We own 50% of most of our unconsolidated joint ventures, including our largest joint venture, 26 --------------------------------------------------------------------------------McCormick de Mexico , that comprised 62% and 75% of the income of our unconsolidated operations in 2021 and 2020, respectively. The relative impact ofMcCormick de Mexico on income from unconsolidated operations in 2021 was impacted by the gain on our sale of an unconsolidated operation. We reported diluted earnings per share of$2.80 in 2021, compared to$2.78 in 2020. The table below outlines the major components of the change in diluted earnings per share from 2020 to 2021. The increase in adjusted operating income in the table below includes the impact from favorable currency exchange rates in 2021. 2020 Earnings per share-diluted$ 2.78 Increase in operating income 0.25 Increase in special charges (0.15)
Increase in transaction and integration expenses, including impact of net discrete tax item related to FONA acquisition
(0.10)
Impact of income taxes, excluding taxes on special charges and transaction and integration expenses
(0.01)
Increase in income from unconsolidated operations, including an after-tax
gain on sale of unconsolidated operation of
0.04
Impact of higher shares
(0.01)
2021 Earnings per share-diluted
Results of Operations-Segments
We measure the performance of our business segments based on operating income,
excluding special charges and transaction and integration expenses related to
our acquisitions. See note 16 of notes to our consolidated financial statements
for additional information on our segment measures as well as for a
reconciliation by segment of operating income, excluding special charges and
transaction and integration expenses related to our acquisitions. In the
following discussion, we refer to our previously described measure of segment
profit as "Segment operating income".
Consumer Segment
2021 2020
Net sales $ 3,937.5 $ 3,596.7
Percent growth 9.5 % 10.0 %
Components of percent growth in net sales-increase (decrease):
Volume and product mix 4.3 % 8.8 %
Pricing actions 0.6 % 1.5 %
Acquisitions 2.4 % - %
Foreign exchange 2.2 % (0.3) %
Segment operating income $ 804.9 $ 780.9
Segment operating income margin 20.4 % 21.7 %
Sales of our consumer segment in 2021 grew by 9.5% as compared to 2020 and grew by 7.3% on a constant currency basis. This increase included higher sales of our consumer business in each of our three regions. Higher volume and product mix increased sales 4.3% while pricing actions added 0.6% to sales, both as compared to the prior year period. The incremental impact of theCholula acquisition added 2.4% to segment sales during 2021. The favorable impact of foreign currency exchange rates increased consumer segment sales by 2.2% compared to 2020 and is excluded from our measure of sales growth of 7.3% on a constant currency basis. In theAmericas region, consumer sales increased 7.3% in 2021 as compared to 2020, which experienced a 13.9% increase in sales from the 2019 level as a result of exceptionally strong demand for our products in the early stages of the COVID-19 pandemic, and increased by 6.7% on a constant currency basis. Favorable volume and product mix increased sales by 3.0% as compared to the corresponding period in 2020, as demand continues to be driven by consumers' sustained preference for eating more at home. In addition, pricing actions, taken in response to higher costs, increased sales by 0.4% as compared to the prior year period. The incremental impact of theCholula acquisition added 3.3% to sales in 2021. The favorable impact of foreign currency exchange rates increased sales by 0.6% compared to 2020 and is excluded from our measure of sales growth of 6.7% on a constant currency basis. In the EMEA region, consumer sales increased 5.8% in 2021 as compared to 2020, which experienced a 14.5% increase in sales from the 2019 level driven by the COVID-19 impact on greater consumer at-home meal 27 -------------------------------------------------------------------------------- preparation, and increased by 0.9% on a constant currency basis. Favorable volume and product mix increased sales by 0.3% as compared to the corresponding period of 2020. The impact of pricing actions increased sales by 0.6% as compared to the prior year period. The favorable impact of foreign currency exchange rates increased sales by 4.9% compared to 2020 and is excluded from our measure of sales growth of 0.9% on a constant currency basis. In theAsia/Pacific region, consumer sales increased 31.6% in 2021 as compared to 2020, which reflected a 16.6% decrease in sales from the 2019 level due mainly to COVID-19 disruption on foodservice sales inChina , and increased by 22.9% on a constant currency basis. Higher volume and favorable product mix increased sales by 21.5% as compared to the corresponding period in 2020. The increase was driven by sales related to the recovery of demand in away-from-home consumption inChina . Pricing actions increased sales by 1.4% as compared to 2020. The favorable impact from foreign currency exchange rates increased sales by 8.7% compared to 2020 and is excluded from our measure of sales growth of 22.9% on a constant currency basis. Segment operating income for our consumer segment increased by$24.0 million , or 3.1%, in 2021 as compared to 2020. The increase in segment operating income was driven by higher sales, including the impact of acquisitions, CCI-led cost savings and lower incentive-based compensation accruals which were partially offset by increased commodities, packaging materials and transportation costs, increased conversion costs, which include incremental expenses related to COVID-19, and higher brand marketing investment, all as compared to the prior year period. The impact of COVID-19 on segment operating income during 2021 reflected actions, including the incremental impact of temporary arrangements to utilize co-manufacturing, that increased our cost to produce certain products and measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning that reduced productivity. Segment operating margin for our consumer segment decreased by 130 basis points in 2021 to 20.4%, driven by a decrease in segment gross profit margin, including the impact of the inflationary cost environment, which was partially offset by the benefit from the leverage of fixed and semi-fixed expenses over a higher sales base as compared to the 2020 level. On a constant currency basis, segment operating income for our consumer segment increased by 1.3% in 2021, as compared to 2020. Flavor Solutions Segment 2021 2020 Net sales$ 2,380.4 $ 2,004.6 Percent growth (decline) 18.7 % (3.5) % Components of percent change in net sales-increase (decrease): Volume and product mix 7.2 % (4.2) % Pricing actions 1.4 % 1.8 % Acquisitions 7.3 % - % Foreign exchange 2.8 % (1.1) % Segment operating income$ 296.6 $ 237.9 Segment operating income margin
12.5 % 11.9 %
Sales of our flavor solutions segment increased 18.7% in 2021 as compared to 2020 and increased by 15.9% on a constant currency basis. Sales were favorably impacted by the recovery of demand as compared to the lower level of demand in 2020 due to the impact of the COVID-19 disruption on our quick service restaurant and branded food service customers, particularly in theAmericas and EMEA regions. Favorable volume and product mix increased segment sales by 7.2% as compared to 2020, while pricing actions taken in response to increased costs during the period increased sales by 1.4%. The incremental impact of theCholula and FONA acquisitions increased sales by 7.3% in 2021. The favorable impact of foreign currency rates increased flavor solutions segment sales by 2.8% as compared to 2020 and is excluded from our measure of sales growth of 15.9% on a constant currency basis. In theAmericas region, flavor solutions sales increased by 16.6% during 2021 as compared to 2020, which experienced a sales decline of 3.5% from the 2019 level driven by lower sales to quick service restaurant and branded food service customers as a result of COVID-19 restrictions imposed in the early stages of the pandemic, and increased by 15.4% on a constant currency basis. Favorable volume and improved product mix increased flavor solutions sales in theAmericas by 3.2% during 2021, driven primarily by increased sales to branded foodservice and quick service restaurant customers. Pricing actions increased sales by 1.7% as compared to the prior year period. The incremental impact of theCholula and FONA acquisitions increased sales by 10.5% in 2021. A favorable impact from foreign currency rates increased sales by 1.2% compared to 2020 and is excluded from our measure of sales growth of 15.4% on a constant currency basis. 28 -------------------------------------------------------------------------------- In the EMEA region, flavor solutions sales in 2021 increased by 27.3% as compared to 2020, which experienced a sales decline of 5.5% from the 2019 level primarily as a result of decreased sales to quick service restaurants and lower branded food service sales that were partially offset by higher demand from packaged food service companies in response to COVID-19 restrictions implemented in 2020, and increased by 21.5% on a constant currency basis. Favorable volume and product mix increased segment sales by 19.8% in 2021 as compared to 2020. The increase was primarily attributable to higher sales to branded foodservice, packaged food and quick service restaurant customers. Pricing actions increased sales by 1.7% in 2021 as compared the prior year level. A favorable impact from foreign currency rates increased sales by 5.8% compared to 2020 and is excluded from our measure of sales growth of 21.5% on a constant currency basis. In theAsia/Pacific region, flavor solutions sales increased 16.9% in 2021 as compared to 2020, which experienced a sales increase of 0.4% from the 2019 level driven by higher sales to quick service restaurant customers, and increased by 9.4% on a constant currency basis. Favorable volume and product mix increased sales by 10.6%, driven by higher sales to quick service restaurant customers. Pricing actions decreased sales by 1.2% as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 7.5% compared to 2020 and is excluded from our measure of sales growth of 9.4% on a constant currency basis. Segment operating income for our flavor solutions segment increased by$58.7 million , or 24.7%, in 2021 as compared to 2020. The increase in segment operating income was driven by higher sales, including the impact of acquisitions, CCI-led cost savings, lower incentive-based compensation accruals and favorable product mix, which was partially offset by increased commodities, packaging materials and transportation costs. Segment operating margin for our flavor solutions segment increased by 60 basis points in 2021 to 12.5% as the benefits from the leverage of fixed and semi-fixed expenses over a higher sales base as compared to the 2020 level, together with the accretive impact of theCholula and FONA acquisitions on gross margins, were partially offset by the impact of the inflationary cost environment as compared to 2020. On a constant currency basis, segment operating income for our flavor solutions segment increased by 22.5% in 2021, as compared to 2020. RESULTS OF OPERATIONS-2020 COMPARED TO 2019 2020 2019 Net sales$ 5,601.3 $ 5,347.4 Percent growth 4.7 % 0.8 % Components of percent growth in net sales-increase (decrease): Volume and product mix 3.7 % 2.5 % Pricing actions 1.6 % 0.2 % Foreign exchange (0.6) % (1.9) % Sales for 2020 increased by 4.7% from 2019 and by 5.3% on a constant currency basis. That 4.7% sales increase was driven by higher sales in our consumer segment, which increased by 10.0% over the 2019 level, partially offset by lower sales in our flavor solutions segment, which declined by 3.5% from the prior year level. On a consolidated basis, higher volume and favorable product mix increased sales by 3.7% while pricing actions added 1.6% to sales. That net volume increase and favorable mix was driven by higher demand within our consumer segment, as 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 restaurant and branded food service customers. Sales were also impacted by unfavorable foreign currency rates that decreased net sales 0.6% compared to 2019 and is excluded from our measure of sales growth of 5.3% on a constant currency basis. 2020 2019 Gross profit$ 2,300.4 $ 2,145.3 Gross profit margin 41.1 % 40.1 % In 2020, our gross profit margin increased 100 basis points to 41.1% from 40.1% in 2019. This improvement was driven by the favorable impact of CCI-led cost savings, favorable pricing actions and the mix of consumer and flavor solutions sales, partially offset by unfavorable conversion costs and increased material costs. Higher conversion costs during 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. 29 -------------------------------------------------------------------------------- 2020 2019
Selling, general & administrative expense
22.9 % 21.8 %
SG&A expense was $1,281.6 million in 2020 compared to $1,166.8 million in 2019,
an increase of $114.8 million . That increase in SG&A expense was primarily a
result of (i) higher performance-based employee incentive expense accruals, (ii)
higher distribution expenses associated with the higher sales volume, (iii)
increased brand marketing costs and (iv) a one-time fiscal 2019 expense
reduction from the alignment of an employee benefit plan to our global standard
that did not recur in 2020, all as compared to 2019. SG&A expense as a percent
of net sales increased by 110 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.
2020 2019
Total special charges
During 2020, we recorded$6.9 million of special charges, consisting of$5.3 million related to streamlining actions in our EMEA region and$1.6 million related to ourGE initiative. During 2019, we recorded$20.8 million of special charges, consisting primarily of (i)$14.1 million of costs related to our multi-yearGE business transformation initiative, including$10.6 million of third-party expenses,$2.1 million related to severance and related benefits, and$1.4 million related to other costs; (ii)$2.3 million of severance and related benefits associated with streamlining actions in theAmericas ; and (iii)$3.9 million related to streamlining actions in our EMEA region. 2020 2019 Transaction and integration expenses$ 12.4 $ -
Transaction and integration expenses related to our acquisitions of
2020 2019
Operating income $ 999.5 $ 957.7
Percent of net sales 17.8 % 17.9 %
Operating income increased by $41.8 million , or 4.4%, from $957.7 million in
2019 to $999.5 million in 2020. Operating income as a percent of net sales
declined by 10 basis points in 2020, to 17.8% in 2020 from 17.9% in 2019 as a
result of the factors previously described. Excluding the effect of special
charges and transaction and integration expenses previously described, adjusted
operating income was $1,018.8 million in 2020 as compared to $978.5 million in
2019, an increase of $40.3 million or 4.1% over the 2019 level. Adjusted
operating income as a percent of net sales declined by 10 basis points in 2020,
to 18.2% in 2020 from 18.3% in 2019.
2020 2019
Interest expense $ 135.6 $ 165.2
Other income, net 17.6 26.7
Interest expense was $29.6 million lower for 2020 as compared to the prior year
primarily due to a decline in average total borrowings and a lower interest rate
environment. Other income, net for 2020 decreased by $9.1 million from the 2019
level due principally to lower non-service cost income associated with our
pension and postretirement benefit plans that declined by $7.6 million in 2020
from the prior year level.
2020 2019
Income from consolidated operations before income taxes$ 881.5 $ 819.2 Income tax expense 174.9 157.4 Effective tax rate 19.8 % 19.2 % The effective tax rate was 19.8% in 2020 as compared to 19.2% in 2019. The effective tax rate of 19.2% in 2019 includes a non-recurring net tax benefit of$1.5 million associated with theU.S. Tax Act. Net discrete tax benefits were$43.4 million in 2020, which is a decrease of$0.3 million from$43.7 million in 2019, including the$1.5 million 30 -------------------------------------------------------------------------------- non-recurring benefit of theU.S. Tax Act in 2019. Discrete tax benefits in both the 2020 and 2019 periods include excess tax benefits associated with share-based payments to employees ($14.2 million and$22.4 million in 2020 and 2019, respectively), the tax benefits associated with intra-entity asset transfers that occurred ($9.9 million and$15.2 million in 2020 and 2019, respectively), the reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and other discrete items. In 2020, discrete tax benefits included$11.9 million associated with the release of valuation allowances due to a change in judgment about realizability of deferred tax assets. See note 13 of notes to our consolidated financial statements for a more detailed reconciliation of theU.S. federal tax rate with the effective tax rate. 2020 2019
Income from unconsolidated operations
Income from unconsolidated operations decreased$0.1 million in 2020 from the prior year. We own 50% of most of our unconsolidated joint ventures, including our largest joint venture,McCormick de Mexico , that comprised 75% and 72% of the income of our unconsolidated operations in 2020 and 2019, respectively. We reported diluted earnings per share of$2.78 in 2020, compared to$2.62 in 2019. The table below outlines the major components of the change in diluted earnings per share from 2019 to 2020. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2020. 2019 Earnings per share-diluted$ 2.62 Increase in operating income 0.12 Decrease in special charges 0.05
Increase in transaction and integration expenses (0.04) Decrease in interest expense
0.09
Decrease in other income (0.03)
Impact of income taxes (0.02)
Impact of higher shares outstanding (0.01)
2020 Earnings per share-diluted $ 2.78
Results of Operations-Segments
Consumer Segment
2020 2019
Net sales $ 3,596.7 $ 3,269.8
Percent growth 10.0 % 0.7 %
Components of percent growth in net sales-increase (decrease):
Volume and product mix 8.8 % 2.4 %
Pricing actions 1.5 % 0.1 %
Foreign exchange (0.3) % (1.8) %
Segment operating income $ 780.9 $ 676.3
Segment operating income margin 21.7 % 20.7 %
Sales of our consumer segment in 2020 grew by 10.0% as compared to 2019 and grew by 10.3% on a constant currency basis. This increase was driven by sharply higher sales of our consumer business in theAmericas and in EMEA, with a partial offset from a sales decline in theAsia/Pacific region.Asia/Pacific region sales declines were driven by lower sales inChina , which includes the impact of away-from-home products included in its consumer portfolio. Higher volume and product mix added 8.8% to sales as measures imposed to mitigate the spread of COVID-19 resulted in a shift in consumer behavior toward at-home meal preparation. Pricing actions added 1.5% to sales as compared to the prior year period. The unfavorable impact of foreign currency exchange rates decreased consumer segment sales by 0.3% compared to 2019 and is excluded from our measure of sales growth of 10.3% on a constant currency basis. In theAmericas , consumer sales rose 13.9% in 2020 as compared to 2019 and rose by 14.0% on a constant currency basis. Higher volume and product mix added 11.9% to sales driven by significant growth across the McCormick branded portfolio. In addition, pricing actions, taken in response to higher costs, increased sales by 2.1% as compared to the prior year period. The unfavorable impact of foreign currency exchange rates decreased 31 -------------------------------------------------------------------------------- sales by 0.1% compared to 2019 and is excluded from our measure of sales growth of 14.0% on a constant currency basis. In the EMEA region, consumer sales increased 14.5% in 2020 as compared to 2019 and rose by 14.3% on a constant currency basis. Volume and product mix increased sales by 13.9%. The increase was broad based across the region with particular strength in branded spices and seasonings and homemade dessert products inFrance . The impact of pricing actions increased sales by 0.4%. The favorable impact of foreign currency exchange rates increased sales by 0.2% compared to 2019 and is excluded from our measure of sales growth of 14.3% on a constant currency basis. In theAsia/Pacific region, consumer sales decreased 16.6% as compared to 2019 and decreased 15.1% on a constant currency basis. Lower volume and product mix reduced sales by 15.0%. The decrease was driven by products related to away-from-home consumption inChina . Partially offsetting this decline was growth in cooking-at-home products, particularly inAustralia . Pricing actions reduced sales by 0.1% as compared to 2019. The unfavorable impact from foreign currency exchange rates decreased sales by 1.5% compared to 2019 and is excluded from our measure of sales decline of 15.1% on a constant currency basis. We grew segment operating income for our consumer segment by$104.6 million , or 15.5%, in 2020 as compared to 2019. The increase in segment operating income was driven by the impact of higher sales, as previously described, and CCI-led cost savings, partially offset by higher conversion costs, increased material costs, increased brand marketing costs and higher performance-based employee incentive expense accruals. Higher conversion costs during 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees as well as measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity. Segment operating margin for our consumer segment rose by 100 basis points in 2020 to 21.7%, driven by an increase in consumer gross profit margin that was partially offset by an increase in SG&A expense as a percentage of net sales as compared to the 2019 period. Segment operating margin in 2020 benefited from the leverage of fixed and semi-fixed expenses over a higher sales base than compared to the 2019 level. On a constant currency basis, segment operating income for our consumer segment rose by 15.7% in 2020 in comparison to the same period in 2019. Flavor Solutions Segment 2020 2019 Net sales$ 2,004.6 $ 2,077.6 Percent (decline) growth (3.5) % 1.1 % Components of percent change in net sales-increase (decrease): Volume and product mix (4.2) % 2.9 % Pricing actions 1.8 % 0.3 % Foreign exchange (1.1) % (2.1) % Segment operating income$ 237.9 $ 302.2 Segment operating income margin
11.9 % 14.5 %
Sales of our flavor solutions segment decreased 3.5% in 2020 as compared to 2019 and decreased by 2.4% on a constant currency basis. Driving that decrease in sales was lower demand due to the impact of the COVID-19 disruption on our restaurant and branded food service customers, particularly in theAmericas and EMEA regions. Unfavorable volume and product mix decreased segment sales by 4.2% as compared to 2019, while pricing actions, taken in response to increased costs, during the period increased sales by 1.8%. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 1.1% as compared to 2019 and is excluded from our measure of sales decline of 2.4% on a constant currency basis. In theAmericas , flavor solutions sales decreased by 3.5% in 2020 as compared to the prior year level and decreased by 2.5% on a constant currency basis. Unfavorable volume and product mix decreased flavor solutions sales in theAmericas by 4.4% during 2020, driven by lower sales to branded foodservice and quick service restaurant customers, but was partially offset by higher sales to packaged food companies. Pricing actions increased sales by 1.9% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 1.0% compared to 2019 and is excluded from our measure of sales decline of 2.5% on a constant currency basis. 32 -------------------------------------------------------------------------------- In the EMEA region, flavor solutions sales in 2020 decreased by 5.5% from the prior year level and decreased by 4.2% on a constant currency basis. Unfavorable volume and product mix decreased segment sales by 7.0% as compared to 2019. The decline was primarily attributable to lower sales to branded foodservice and quick service restaurant customers, partially offset by higher demand from packaged food companies. Pricing actions increased sales by 2.8% in 2020 as compared the prior year level. An unfavorable impact from foreign currency rates decreased sales by 1.3% compared to 2019 and is excluded from our measure of sales decline of 4.2% on a constant currency basis. In theAsia/Pacific region, flavor solutions sales increased 0.4% in 2020 from the prior year level and increased by 1.6% on a constant currency basis. Favorable volume and product mix increased sales by 2.2%, driven by higher sales to quick service restaurant customers. Pricing actions decreased sales by 0.6% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 1.2% compared to 2019 and is excluded from our measure of sales growth of 1.6% on a constant currency basis. Segment operating income for our flavor solutions segment decreased by$64.3 million , or 21.3%, in 2020 as compared to 2019. The decrease in segment operating income was driven by lower sales, increased conversion costs, the impact of lower production volumes, increased material costs and higher performance-based employee incentive expense accruals that were partially offset by CCI-led cost savings. Higher conversion costs during 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees as well as 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. Segment operating margin for our flavor solutions segment decreased by 260 basis points from the prior year level to 11.9% in 2020, driven by lower flavor solutions segment gross profit margin and an increase in SG&A expense as a percent of net sales. Segment operating margin in 2020 also declined due to the deleveraging impact of fixed and semi-fixed expenses over a lower sales base as compared to the 2019 period. On a constant currency basis, segment operating income for our flavor solutions segment declined by 19.7% in 2020, as compared to the same period in 2019. NON-GAAP FINANCIAL MEASURES The following tables include financial measures of adjusted gross profit, adjusted gross profit margin, adjusted operating income, adjusted operating income margin, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance withUnited States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following: •Special charges - Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. Upon presentation of any such proposed action (including details with respect to estimated costs, which generally consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee's advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an ongoing basis through completion. •Transaction and integration expenses associated with theCholula and FONA acquisitions - We exclude certain costs associated with our acquisitions ofCholula and FONA in November andDecember 2020 , respectively, and their subsequent integration into the Company. Such costs, which we refer to as "Transaction and integration expenses", include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventory, together with the impact of discrete tax items, if any, directly related to each acquisition. •Income from sale of unconsolidated operations - We exclude the gain realized upon our sale of an unconsolidated operation inMarch 2021 . As more fully described in note 5 of the notes to the accompanying financial statements, the sale of our 26% interest in Eastern resulted in a gain of$13.4 33 -------------------------------------------------------------------------------- million, net of tax of$5.7 million . The gain is included in Income from unconsolidated operations in our consolidated income statement. •Income taxes associated with theU.S. Tax Act - We recorded a net income tax benefit of$1.5 million during the year endedNovember 30, 2019 associated with theU.S. Tax Act enacted inDecember 2017 related provision to return adjustment. Details with respect to the composition of transaction and integration expenses, special charges and income from the sale of unconsolidated operations recorded for the years and in the amounts set forth below are included in notes 2, 3 and 5, respectively, of notes to our consolidated financial statements. We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. 34 -------------------------------------------------------------------------------- A reconciliation of these non-GAAP financial measures to GAAP financial results is provided below: 2021 2020 2019 Gross profit$ 2,494.6 $
2,300.4
6.3 - -
Impact of special charges included in cost of goods sold(2)
4.7 - -
Adjusted gross profit $ 2,505.6 $ 2,300.4 $ 2,145.3
Adjusted gross profit margin (3) 39.7 % 41.1 % 40.1 %
Operating income $ 1,015.1 $
999.5
6.3 - -
Impact of other transaction and integration expenses (1) 29.0
12.4 -
Impact of special charges included in cost of goods sold(2)
4.7 - -
Impact of other special charges(2) 46.4 6.9 20.8
Adjusted operating income $ 1,101.5 $ 1,018.8 $ 978.5
% increase versus prior year 8.1 % 4.1 % 5.2 %
Adjusted operating income margin (3) 17.4 % 18.2 % 18.3 %
Income tax expense $ 192.7 $ 174.9 $ 157.4
Non-recurring benefit, net, of the U.S. Tax Act - - 1.5
Impact of transaction and integration expenses(1) (2.7) 1.9 -
Impact of special charges(2) 7.1 2.1 4.7
Adjusted income tax expense $ 197.1 $ 178.9 $ 163.6
Adjusted income tax rate(4) 20.1 % 19.9 % 19.5 %
Net income $ 755.3 $ 747.4 $ 702.7
Impact of transaction and integration expenses(1) 38.0 10.5 -
Impact of special charges(2) 44.0 4.8 16.1
Impact of after-tax gain on sale of unconsolidated operations
(13.4) - -
Non-recurring benefit, net, of the U.S. Tax Act - - (1.5)
Adjusted net income $ 823.9 $ 762.7 $ 717.3
% increase versus prior year 8.0 % 6.3 % 8.4 %
Earnings per share-diluted $ 2.80 $ 2.78 $ 2.62
Impact of transaction and integration expenses(1) 0.14 0.04 -
Impact of special charges(2) 0.16 0.01 0.06
Impact of after-tax gain on sale of unconsolidated operations
(0.05) - -
Adjusted earnings per share-diluted $ 3.05 $
2.83
(1) Transaction and integration expenses are more fully described in note 2 of notes to our
consolidated financial statements and include transaction and integration expenses
associated with our acquisitions of
expenses, integration expenses, including the effect of the fair value adjustment to
acquired inventories on Cost of goods sold and the impact of a discrete deferred state
income tax expense item, directly related to our
discrete tax item had an unfavorable impact of
for the year ended
(2) Special charges are more fully described in note 3 of notes to our consolidated financial
statements. Special charges for the year ended
which is reflected in Cost of goods sold and an
associated with the impairment of certain intangible assets.
(3) Adjusted gross profit margin is calculated as adjusted gross profit as a percent of net
sales for each period presented. Adjusted operating income margin is calculated as
adjusted operating income as a percent of net sales for each period presented.
(4) Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of
income from consolidated operations before income taxes, excluding transaction and
integration expenses and special charges, or
million for the years ended
Estimate for the year ending
November 30, 2022
Earnings per share - diluted $3.07 to $3.12
Impact of integration expenses 0.01
Impact of special charges 0.09
Adjusted earnings per share - diluted $3.17 to $3.22
35-------------------------------------------------------------------------------- Because we are a multi-national company, we are subject to variability of our reportedU.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed "on a constant currency basis," is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of theU.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results). Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current year results for entities reporting in currencies other than theU.S. dollar are translated intoU.S. dollars at the average exchange rates in effect during the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2021 on a constant currency basis, net sales and adjusted operating income for 2021 for entities reporting in currencies other than theU.S. dollar have been translated using the average foreign exchange rates in effect for 2020 and compared to the reported results for 2020; and (2) to present our growth in net sales and adjusted operating income for 2020 on a constant currency basis, net sales and operating income for 2020 for entities reporting in currencies other than theU.S. dollar have been translated using the average foreign exchange rates in effect for 2019 and compared to the reported results for 2019. For the
year ended
Percentage change Impact of foreign Percentage change on
as reported currency exchange constant currency basis
Net sales:
Consumer segment:
Americas 7.3 % 0.6 % 6.7 %
EMEA 5.8 % 4.9 % 0.9 %
Asia/Pacific 31.6 % 8.7 % 22.9 %
Total Consumer 9.5 % 2.2 % 7.3 %
Flavor Solutions segment:
Americas 16.6 % 1.2 % 15.4 %
EMEA 27.3 % 5.8 % 21.5 %
Asia/Pacific 16.9 % 7.5 % 9.4 %
Total Flavor Solutions 18.7 % 2.8 % 15.9 %
Total net sales 12.8 % 2.4 % 10.4 %
Adjusted operating income:
Consumer segment 3.1 % 1.8 % 1.3 %
Flavor Solutions segment 24.7 % 2.2 % 22.5 %
Total adjusted operating income 8.1 % 1.9 % 6.2 %
36
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For the
year ended
Percentage change Impact of foreign Percentage change on
as reported currency exchange constant currency basis
Net sales:
Consumer segment:
Americas 13.9 % (0.1) % 14.0 %
EMEA 14.5 % 0.2 % 14.3 %
Asia/Pacific (16.6) % (1.5) % (15.1) %
Total Consumer 10.0 % (0.3) % 10.3 %
Flavor Solutions segment:
Americas (3.5) % (1.0) % (2.5) %
EMEA (5.5) % (1.3) % (4.2) %
Asia/Pacific 0.4 % (1.2) % 1.6 %
Total Flavor Solutions (3.5) % (1.1) % (2.4) %
Total net sales 4.7 % (0.6) % 5.3 %
Adjusted operating income:
Consumer segment 15.5 % (0.2) % 15.7 %
Flavor Solutions segment (21.3) % (1.6) % (19.7) %
Total adjusted operating income 4.1 % (0.7) % 4.8 %
To present the percentage change in projected 2022 net sales, adjusted operating
income and adjusted earnings per share - diluted on a constant currency basis,
2022 projected local currency net sales, adjusted operating income, and adjusted
net income for entities reporting in currencies other than the U.S. dollar are
translated into U.S. dollars at currently prevailing exchange rates and are
compared to those 2022 local currency projected results, translated into U.S.
dollars at the average actual exchange rates in effect during the corresponding
months in fiscal year 2021 to determine what the 2022 consolidated U.S. dollar
net sales, adjusted operating income and adjusted earnings per share - diluted
would have been if the relevant currency exchange rates had not changed from
those of the comparable 2021 periods.
Projections for the Year Ending November 30, 2022
Percentage change in net sales 3% to 5%
Impact of unfavorable foreign currency exchange 1 %
Percentage change in net sales in constant currency 4% to 6%
Percentage change in adjusted operating income 7% to 9%
Impact of unfavorable foreign currency exchange 1 %
Percentage change in adjusted operating income in
constant currency 8% to 10%
Percentage change in adjusted earnings per share-
diluted 4% to 6%
Impact of unfavorable foreign currency exchange 1 %
Percentage change in adjusted earnings per share-
diluted in constant currency 5% to 7%
37--------------------------------------------------------------------------------
LIQUIDITY AND FINANCIAL CONDITION
2021 2020 2019
Net cash provided by operating activities$ 828.3 $ 1,041.3 $ 946.8 Net cash used in investing activities (908.6) (1,025.6)
(171.0)
Net cash provided by (used in) financing activities 22.0 220.9
(725.8)
The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use a combination of equity and short- and long-term debt. We use short-term debt, comprised primarily of commercial paper, principally to finance ongoing operations, including our requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts payable, accrued payroll, and other accrued liabilities). We are committed to maintaining investment grade credit ratings. Our cash flows from operations enable us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, fund or increase our quarterly dividends, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, our cash flow from operations has historically been the strongest during the fourth quarter of our fiscal year. Due to the timing of the interest payments on our debt, interest payments are higher in the first and third quarter of our fiscal year. We believe that our sources of liquidity, which include existing cash balances, cash flows from operations, existing credit facilities, our commercial paper program, and access to capital markets, will provide sufficient liquidity to meet our debt obligations, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. In addition, in the cash flow statement, the changes in operating assets and liabilities are presented excluding the effect of acquired operating assets and liabilities, as the cash flows associated with acquisition of businesses is presented as an investing activity. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. AtNovember 30, 2021 , the exchange rates for the Canadian dollar and Chinese renminbi were higher versus theU.S. dollar than atNovember 30, 2020 . AtNovember 30, 2021 , the exchange rates for the Euro, British pound sterling, Australian dollar, and Polish zloty were lower versus theU.S. dollar than atNovember 30, 2020 . Operating Cash Flow - Operating cash flow was$828.3 million in 2021,$1,041.3 million in 2020, and$946.8 million in 2019. Net income as well as our working capital management, as more fully described below, impacted operating cash flow. In 2021, the reduction in operating cash flow was the result of increased inventory levels to protect against supply disruption, employee incentive payments, and the payment of transaction and integration costs related to our recent acquisitions. In 2020, the increases to operating cash flow were the result of a significantly lower use of cash associated with other assets and liabilities, including the timing of certain employee incentive and customer related payments, which was partially offset by the use of cash associated with working capital, driven by the increased level of inventory to meet demand. In 2019, our working capital management favorably impacted operating cash flow. In 2019, those increases were partially offset by a use of cash associated with other assets and liabilities, totaling$81.5 million . Our working capital management - principally related to inventory, trade accounts receivable, and accounts payable - impacts our operating cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a significant use of cash in 2021 and 2020 and a moderate use of cash in 2019. The change in trade accounts receivable was a use of cash in 2021 but a source of cash in 2020 and 2019. The change in accounts payable was a significant source of cash in 2020 and 2019 and a more moderate source of cash in 2021. In addition to operating cash flow, we also use cash conversion cycle (CCC) to measure our working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows: 38 -------------------------------------------------------------------------------- Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory). The following table outlines our cash conversion cycle (in days) over the last three years: 2021 2020 2019 Cash Conversion Cycle 46 39 43 The increase in CCC in 2021 from 2020 was due primarily to an increase in our days in inventory as a result of efforts to protect against supply chain disruption and to meet increased demand. This was partially offset by an increase in our days payable outstanding. The decrease in CCC in 2020 from 2019 was due to an increase in our days payable outstanding as a result of extending our payment terms to suppliers, as more fully described below, which was partially offset by an increase in our days in inventory due to maintaining higher levels of inventory. Prior to fiscal 2019, in response to evolving market practices, we began a program to negotiate extended payment terms with our suppliers. We also initiated a Supply Chain Finance program (SCF) with several global financial institutions (SCF Banks). Under the SCF, qualifying suppliers may elect to sell their receivables from us to anSCF Bank . These participating suppliers negotiate their receivables sales arrangements directly with the respectiveSCF Bank . While we are not party to those agreements, the SCF Banks allow the participating suppliers to utilize our creditworthiness in establishing credit spreads and associated costs. This generally provides the suppliers with more favorable terms than they would be able to secure on their own. We have no economic interest in a supplier's decision to sell a receivable. Once a qualifying supplier elects to participate in the SCF and reaches an agreement with aSCF Bank , the supplier elects which of our individual invoices they sell to the SCF bank. However, all of our payments to participating suppliers are paid to theSCF Bank on the invoice due date, regardless of whether the individual invoice is sold by the supplier to theSCF Bank .The SCF Bank pays the supplier on the invoice due date for any invoices that were not previously sold by the supplier to theSCF Bank . The terms of our payment obligation are not impacted by a supplier's participation in the SCF. Our payment terms with our suppliers for similar materials within individual markets are consistent between those suppliers that elect to participate in the SCF and those suppliers that do not participate. Accordingly, our average days outstanding are not significantly impacted by the portion of suppliers or related input costs that are included in the SCF. For our participating suppliers, we believe substantially all of their receivables with us are sold to the SCF Banks. Accordingly, we would expect that at each balance sheet date, a similar proportion of amounts originally due to suppliers would instead be payable to SCF Banks. All outstanding amounts related to suppliers participating in the SCF are recorded within the line entitled "Trade accounts payable" in our consolidated balance sheets, and the associated payments are included in operating activities within our consolidated statements of cash flows. As ofNovember 30, 2021 and 2020, the amount due to suppliers participating in the SCF and included in "Trade accounts payable" were approximately$274.3 million and$273.6 million , respectively. Future changes in our suppliers' financing policies or economic developments, such as changes in interest rates, general market liquidity or our creditworthiness relative to participating suppliers could impact those suppliers' participation in the SCF and/or our ability to negotiate extended payment terms with our suppliers. However, any such impacts are difficult to predict. Investing Cash Flow - Net cash used in investing activities was$908.6 million in 2021,$1,025.6 million in 2020, and$171.0 million in 2019. Our primary investing cash flows include the usage of cash associated with acquisition of businesses and capital expenditures. Cash usage related to our acquisition of businesses was$706.4 million in 2021 and$803.0 million in 2020. Capital expenditures, including expenditures for capitalized software, were$278.0 million in 2021,$225.3 million in 2020, and$173.7 million in 2019. We expect 2022 capital expenditures to approximate$320 million to support our planned growth, including the multi-year program to replace our ERP system and other initiatives. Our primary investing cash inflow in 2021 was the$65.4 million of proceeds received from the sale of an unconsolidated operation, as more fully discussed in note 5 of notes to our consolidated financial statements. Financing Cash Flow - Net cash associated with financing activities was a source of cash of$22.0 million in 2021 and$220.9 million in 2020. Net cash used in financing activities was$725.8 million in 2019. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below. 39 --------------------------------------------------------------------------------
The following table outlines our net borrowing activities:
2021 2020 2019
Net (decrease) increase in short-term borrowings $ (346.7) $ 286.5 $ 41.0
Proceeds from issuance of long-term debt, net of debt
issuance costs 999.6 525.9 -
Repayments of long-term debt (257.1)
(257.7) (447.7)
Net cash provided from (used in) borrowing activities
In 2021, we borrowed$1,001.5 million under long-term borrowing arrangements, including net proceeds of$495.7 million of 0.9% notes dueFebruary 2026 and net proceeds of$492.8 million of 1.85% notes dueFebruary 2031 . The net proceeds from these issuances were used to pay down short-term borrowings, including a portion of the$1,443.0 million of commercial paper issued to fund our acquisitions ofCholula and FONA, and for general corporate purposes. We also repaid$257.1 million of long-term debt, including the$250 million , 3.90% notes that matured inJuly 2021 . In 2020, we borrowed$527.0 million under long-term borrowing arrangements, including net proceeds of$495.0 million of 2.5% notes dueApril 2030 . We also repaid$257.7 million of long-term debt, including$250.0 million associated with our term loans due inAugust 2022 . In 2019, we repaid$447.7 million of long-term debt, including$436.3 million of our$1,500.0 million term loans issued inAugust 2017 . The following table outlines the activity in our share repurchase programs: 2021 2020 2019
Number of shares of common stock 0.1 0.5
$ 8.6 $ 47.3 $ 95.1 As ofNovember 30, 2021 ,$576 million remained of a$600 million share repurchase program that was authorized by our Board of Directors inNovember 2019 . The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. Our share repurchase activity in 2021, 2020, and 2019 has principally been executed in order to mitigate the effect of shares issued upon the exercise of stock options. During 2021, 2020 and 2019, we received proceeds of$13.5 million ,$56.6 million and$90.9 million , respectively, from exercised stock options. We repurchased$15.4 million ,$13.0 million and$12.7 million of common stock during 2021, 2020 and 2019, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans. Our dividend history over the past three years is as follows: 2021 2020 2019 Total dividends paid$ 363.3 $ 330.1 $ 302.2 Dividends paid per share 1.36 1.24 1.14
Percentage increase per share 9.7 % 8.8 % 9.6 %
InNovember 2021 , the Board of Directors approved an 8.8% increase in the quarterly dividend from$0.34 to$0.37 per share. Most of our cash is in our subsidiaries outside of theU.S. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of theU.S. Tax Act onDecember 22, 2017 , the permanent repatriation of cash balances from certain of our non-U.S. subsidiaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. As ofNovember 30, 2021 , we have$1.3 billion of earnings from our non-U.S. subsidiaries and joint ventures that are considered indefinitely reinvested. While federal income tax expense has been recognized as a result of theU.S. Tax Act, we have not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income taxes, or foreign exchange gains or losses. It is not practicable for us to determine the amount of unrecognized tax expense on these indefinitely reinvested foreign earnings. AtNovember 30, 2021 , we temporarily used$334.8 million of cash from our non-U.S. subsidiaries to pay down short-term debt in theU.S. During the year, our short-term borrowings vary, but are lower at the end of a year or 40 -------------------------------------------------------------------------------- quarter. The average short-term borrowings outstanding for the years endedNovember 30, 2021 and 2020 were$1,029.9 million and$518.1 million , respectively. Those average short-term borrowings outstanding for the year endedNovember 30, 2021 included average commercial paper borrowings of$975.0 million . The total average debt outstanding for the years endedNovember 30, 2021 and 2020 was$5,574.5 million and$4,327.4 million , respectively. Credit and Capital Markets - The following summarizes the more significant impacts of credit and capital markets on our business: CREDIT FACILITIES - Cash flows from operating activities are our primary source of liquidity for funding growth, share repurchases, dividends and capital expenditures. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund working capital needs and other general corporate requirements. InJune 2021 , we entered into a five-year$1.5 billion revolving credit facility, which will expire inJune 2026 . The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. The provisions of this revolving credit facility restrict subsidiary indebtedness and require us to maintain a minimum interest coverage ratio. We do not expect that this covenant would limit our access to this revolving credit facility for the foreseeable future. This facility replaced the following prior revolving credit facilities: (i) a five-year$1.0 billion revolving credit facility that was due to expire inAugust 2022 , and (ii) a 364-day$1.0 billion revolving facility, which we entered into in the first quarter of 2021 that was due to expire inDecember 2021 . The terms of those revolving credit facilities are more fully described in note 6 of the notes to the consolidated financial statements. We generally use our revolving credit facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. This facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. We engage in regular communication with all banks participating in our credit facility. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. In addition to our committed revolving credit facility, we have uncommitted facilities of$308.4 million as ofNovember 30, 2021 that can be withdrawn based upon the lenders' discretion. See note 6 of notes to our consolidated financial statements for more details on our financing arrangements. We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. Our primary obligations include principal and interest payments on our outstanding short-term borrowings and long-term debt. In the next year, our most significant debt service obligation is the maturity of our$750.0 million , 2.70% notes due inAugust 2022 . Detail on these contractual obligations follows: MATERIAL CASH REQUIREMENTS The following table reflects a summary of our future material cash requirements as ofNovember 30, 2021 : Less than
1-3 3-5 More than
Total 1 year years years 5 years
Short-term borrowings $ 539.1 $ 539.1 $ - $ - $ -
Long-term debt, including finance leases 4,754.2 770.3 1,061.7 787.2 2,135.0
Interest payments(a) 838.8 126.3
204.3 192.6 315.6
Total contractual cash obligations
(a)Interest payments include interest payments on short-term borrowings and long-term debt. See notes 6 and 7 of notes to our consolidated financial statements for additional information.
41
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Our other cash requirements at year end include raw material purchases, lease
payments, income taxes, and pension and postretirement benefits. We acquire
various raw materials to satisfy our obligations to our customers, and these
outstanding purchase obligations can fluctuate throughout the year based on our
response to varying raw material cycles; however, these commitments generally do
not extend past one year. In addition, we also have a series of commercial
commitments, largely consisting of standby letters of credit. Our standby
letters of credit, leases, and pension and other post retirement obligations are
more fully described in notes 6, 7 and 11, respectively, of notes to our
consolidated financial statements.
These obligations impact our liquidity and capital resource needs. To meet those
cash requirements, we intend to use our existing cash, cash equivalents and
internally generated funds, to borrow under our existing credit facility or
under other short-term borrowing facilities, and depending on market conditions
and upon the significance of the cost of a particular debt maturity or
acquisition to our then-available sources of funds, to obtain additional short-
and long-term financing. We believe that cash provided from these sources will
be adequate to meet our future cash requirements.
PENSION ASSETS AND OTHER INVESTMENTS - We hold investments in equity and debt
securities in both our qualified defined benefit pension plans and through a
rabbi trust for our nonqualified defined benefit pension plan. Cash
contributions to pension plans, including unfunded plans, were $15.0 million in
2021, $11.9 million in 2020, and $11.4 million in 2019. It is expected that the
2022 total pension plan contributions will be approximately $15 million . Future
increases or decreases in pension liabilities and required cash contributions
are highly dependent upon changes in interest rates and the actual return on
plan assets. We base our investment of plan assets, in part, on the duration of
each plan's liabilities. Across all of our qualified defined benefit pension
plans, approximately 55% of assets are invested in equities, 34% in fixed income
investments and 11% in other investments. Assets associated with our
nonqualified defined benefit pension plan are primarily invested in
corporate-owned life insurance, the value of which approximates an investment
mix of 55% in equities and 45% in fixed income investments. See note 11 of notes
to our consolidated financial statements, which provides details on our pension
funding.
CUSTOMERS AND COUNTERPARTIES - See the subsequent section of this discussion
under the heading "Market Risk Sensitivity-Credit Risk".
ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.
In early fiscal 2021, we purchased FONA. The purchase price was approximately
$708 million , net of cash acquired. FONA is a leading manufacturer of clean and
natural flavors providing solutions for a diverse customer base across various
applications for the food, beverage and nutritional markets. Our acquisition of
FONA on December 30, 2020 expands the breadth of our flavor solutions segment
into attractive categories, as well as extends our technology platform and
strengthens our capabilities. The acquisition was funded with cash and
short-term borrowings. The results of FONA's operations have been included in
our financial statements as a component of our flavor solutions segment from the
date of acquisition.
On November 30, 2020 , we purchased Cholula for approximately $801 million , net
of cash acquired. The acquisition was funded with cash and short-term
borrowings. Cholula , a premium Mexican hot sauce brand, is a strong addition to
McCormick's global branded flavor portfolio, which broadens the Company's
offering in the high growth hot sauce category to consumers and foodservice
operators and accelerates our condiment growth opportunities with a
complementary authentic Mexican flavor hot sauce. The results of Cholula's
operations have been included in our financial statements as a component of our
consumer and flavor solutions segments from the date of acquisition.
We did not have any acquisitions in fiscal 2019.
See note 2 of notes to our consolidated financial statements for further details
regarding these acquisitions.
PERFORMANCE GRAPH - SHAREHOLDER RETURN
The following line graph compares the yearly change in McCormick's cumulative
total shareholder return (stock price appreciation plus reinvestment of
dividends) on McCormick's Non-Voting Common Stock with (1) the cumulative total
return of the Standard & Poor's 500 Stock Price Index, assuming reinvestment of
dividends, and (2) the cumulative total return of the Standard & Poor's Packaged
Foods & Meats Index , assuming reinvestment of dividends.
42
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MARKET RISK SENSITIVITY
We utilize derivative financial instruments to enhance our ability to manage
risk, including foreign exchange and interest rate exposures, which exist as
part of our ongoing business operations. We do not enter into contracts for
trading purposes, nor are we a party to any leveraged derivative instrument. The
use of derivative financial instruments is monitored through regular
communication with senior management and the utilization of written guidelines.
The information presented below should be read in conjunction with notes 6 and 8
of notes to our consolidated financial statements.
Foreign Exchange Risk - We are exposed to fluctuations in foreign currency in
the following main areas: cash flows related to raw material purchases; the
translation of foreign currency earnings to U.S. dollars; the effects of foreign
currency on loans between subsidiaries and unconsolidated affiliates and on cash
flows related to repatriation of earnings of unconsolidated affiliates. Primary
exposures include the U.S. dollar versus the Euro, British pound sterling,
Chinese renminbi, Canadian dollar, Australian dollar, Polish zloty, Singapore
dollar, Mexican peso, Swiss franc, and Thai baht, as well as the Euro versus the
British pound sterling and Australian dollar, and finally the Canadian dollar
versus British pound sterling. We routinely enter into foreign currency exchange
contracts to manage certain of these foreign currency risks.
During 2021, the foreign currency translation component in other comprehensive
income was principally related to the impact of exchange rate fluctuations on
our net investments in our subsidiaries with a functional currency of the
British pound sterling, Euro, Polish zloty, Chinese reminbi, Australian dollar,
Canadian dollar and Mexican peso.
43
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We also utilize cross currency interest rate swap contracts, which are
designated as net investment hedges, to manage the impact of exchange rate
fluctuations on our net investments in subsidiaries with a functional currency
of the British pound sterling and Euro. Gains and losses on these instruments
are included in foreign currency translation adjustments in accumulated other
comprehensive income (loss).
The following table summarizes the foreign currency exchange contracts held at
November 30, 2021 . All contracts are valued in U.S. dollars using year-end 2021
exchange rates and have been designated as hedges of foreign currency
transactional exposures, firm commitments or anticipated transactions.
FOREIGN CURRENCY EXCHANGE CONTRACTS AT NOVEMBER 30, 2021
Average
contractual
Notional exchange Fair
Currency sold Currency received value rate value
British pound sterling U.S. dollar $ 54.4 1.41 $ 3.3
Swiss franc U.S. dollar 72.0 1.13 2.1
Canadian dollar U.S. dollar 79.5 1.25 2.0
U.S. dollar Australian dollar 71.7 0.72 (0.6)
U.S. dollar Singapore dollar 51.2 1.37 0.1
U.S. dollar British pound sterling 52.4 1.33 (0.2)
U.S. dollar Euro 49.2 1.13 0.1
Australian dollar Euro 43.6 1.58 0.6
Canadian dollar British pound sterling 30.4 1.74 (0.7)
U.S. dollar Mexican peso 24.7 21.37 (0.8)
British pound sterling Euro 29.7 0.86 0.1
U.S. dollar Thai baht 8.8 32.77 (0.3)
We had a number of smaller contracts at November 30, 2021 with an aggregate
notional value of $16.0 million to purchase or sell other currencies, such as
the Romanian leu and Russian ruble. The aggregate fair value of these contracts
was a loss of $0.2 million at November 30, 2021 .
At November 30, 2020 , we had foreign currency exchange contracts for the Euro,
British pound sterling, Canadian dollar, Australian dollar, Polish zloty, Swiss
franc and other currencies, with a notional value of $383.8 million . The
aggregate fair value of these contracts was a loss of $6.8 million at November
30, 2020 .
We also utilized cross currency interest rate swap contracts that are considered
net investment hedges. As of November 30, 2021 , we had cross currency interest
rate swap contracts of (i) $250 million notional value to receive $250 million
at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP
LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1
million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at
three-month Euro EURIBOR plus 0.808%. These cross-currency interest rate swap
contracts expire in August 2027 . For more information, refer to note 8 of notes
to our consolidated financial statements.
Interest Rate Risk - Our policy is to manage interest rate risk by entering into
both fixed and variable rate debt arrangements. We are exposed to interest rate
volatility, with primary exposures related to movements in U.S. Treasury rates,
London Interbank Offered Rates (LIBOR), and commercial paper rates. LIBOR will
be subject to a transition, or phase out, that will commence on January 1, 2022
with the phase out expected to be completed by June 30, 2023 . While LIBOR is the
current interest rate benchmark used as a reference rate on our variable rate
debt, including our revolving credit facility, synthetic lease, interest rate
swaps, and cross currency interest rate swaps, we do not anticipate a
significant impact to our financial position from the planned phase out of
LIBOR, given our current mix of variable and fixed-rate debt.
We also use interest rate swaps to minimize financing costs and to achieve a
desired mix of fixed and variable rate debt. The table that follows provides
principal cash flows and related interest rates, excluding the effect of
interest rate swaps and the amortization of any discounts or fees, by fiscal
year of maturity at November 30, 2021 . For foreign currency-denominated debt,
the information is presented in U.S. dollar equivalents. Variable interest rates
are based on the weighted-average rates of the portfolio at the end of the year
presented.
44
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YEARS OF MATURITY AT
2022 2023 2024 2025 Thereafter Total Fair value
Debt
Fixed rate $ 756.8 $ 257.8 $ 763.2 $ 258.6 $ 2,644.2 $ 4,680.6 $ 4,848.0
Average interest rate 2.71 % 3.50 % 3.50 % 3.26 % 2.38 % -
Variable rate $ 552.6 $ 6.7 $ 34.0 $ 19.4 $ - $ 612.7 $ 612.7
Average interest rate 0.24 % 1.39 % 1.69 % 1.74 % - % -
The table above displays the debt, including finance leases, by the terms of the
original debt instrument without consideration of fair value, interest rate
swaps and any loan discounts or origination fees. Interest rate swaps have the
following effects:
•We issued $250 million of 3.50% notes due in 2023 in August 2013 . Forward
treasury lock agreements settled upon issuance of these notes effectively set
the interest rate on these notes at a weighted-average fixed rate of 3.30%.
•We issued $250 million of 3.25% notes due in 2025 in November 2015 . Forward
treasury lock agreements settled upon issuance of these notes effectively set
the interest rate on these notes at a weighted-average fixed rate of 3.45%. The
fixed interest rate on $100 million of the 3.25% notes due in December 2025 was
effectively converted to a variable rate by interest rate swaps through 2025.
Net interest payments are based on 3-month LIBOR plus 1.22%.
•We issued $750 million of 3.40% notes due August 15, 2027 and $300 million due
in August 2027 in August 2017 . Forward treasury lock agreements settled upon
issuance of these notes effectively set the interest rate on these $750 million
notes at a weighted-average fixed rate of 3.44%. The fixed interest rate on $250
million of the 3.40% notes due in 2027 was effectively converted to a variable
rate by interest rate swaps through 2027. Net interest payments are based on
3-month LIBOR plus 0.685%.
Commodity Risk - We purchase certain raw materials which are subject to price
volatility caused by weather, market conditions, growing and harvesting
conditions, governmental actions and other factors beyond our control. In 2021,
our most significant raw materials were dairy products, pepper, capsicums (red
peppers and paprika), onion, vanilla, garlic, and salt. While future movements
of raw material costs are uncertain, we respond to this volatility in a number
of ways, including strategic raw material purchases, purchases of raw material
for future delivery and customer price adjustments. We generally have not used
derivatives to manage the volatility related to this risk.
Credit Risk - The customers of our consumer segment are predominantly food
retailers and food wholesalers. Consolidations in these industries have created
larger customers. In addition, competition has increased with the growth in
alternative channels including mass merchandisers, dollar stores, warehouse
clubs, discount chains and e-commerce. This has caused some customers to be less
profitable and increased our exposure to credit risk. Some of our customers and
counterparties are highly leveraged. We continue to closely monitor the credit
worthiness of our customers and counterparties. We feel that the allowance for
doubtful accounts properly recognizes trade receivables at realizable value. We
consider nonperformance credit risk for other financial instruments to be
insignificant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are issued periodically that affect our current
and future operations. See note 1 of notes to our consolidated financial
statements for further details of these impacts.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements, we are required to make estimates and
assumptions that have an impact on the assets, liabilities, revenue and expenses
reported. These estimates can also affect supplemental information disclosed by
us, including information about contingencies, risk and financial condition. We
believe, given current facts and circumstances, our estimates and assumptions
are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in
the nature of an estimate or assumption is the fact that actual results may
differ from estimates, and estimates may vary as new facts and circumstances
arise. In preparing the financial statements, we make routine estimates and
judgments in determining the net realizable value of accounts receivable,
inventory, fixed assets and prepaid allowances. Our most critical accounting
estimates and assumptions, which are those that have or are reasonably likely to
have a material impact on our financial condition or results of operations, are
in the following areas:
Customer Contracts
In several of our major geographic markets, the consumer segment sells our
products by entering into annual or multi-year customer arrangements. Known or
expected pricing or revenue adjustments, such as trade discounts, rebates or
returns, are estimated at the time of sale. Where applicable, future
reimbursements are estimated based on a combination of historical patterns and
future expectations regarding these programs. Key sales terms, such as pricing
and quantities ordered, are established on a frequent basis such that most
customer arrangements and related incentives have a one-year or shorter
duration. Estimates that affect revenue, such as trade incentives and product
returns, are monitored and adjusted each period until the incentives or product
returns are realized. Certain
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of our customer arrangements are annual arrangements such that the degree of
estimates that affects revenue reduces as a year progresses. We do not believe
that there will be significant changes to our estimates of customer
consideration when any uncertainties are resolved with customers.
Business Combinations, Goodwill and Intangible Asset Valuation
We use the acquisition method in accounting for acquired businesses. Under the
acquisition method, our financial statements reflect the operations of an
acquired business starting from the closing of the acquisition. The assets
acquired and liabilities assumed are recorded at their respective estimated fair
values at the date of the acquisition. Any excess of the purchase price over the
estimated fair values of the identifiable net assets acquired is recorded as
goodwill. Significant judgment is often required in estimating the fair value of
assets acquired, particularly intangible assets. We generally obtain the
assistance of a third-party valuation specialist in estimating fair values of
tangible and intangible assets. The fair value estimates are based on available
historical information and on expectations and assumptions about the future,
considering the perspective of marketplace participants. While management
believes those expectations and assumptions are reasonable, they are inherently
uncertain. Unanticipated market or macroeconomic events and circumstances may
occur, which could affect the accuracy or validity of the estimates and
assumptions.
Determining the useful lives of intangible assets also requires judgment.
Certain brand intangibles are expected to have indefinite lives based on their
history and our plans to continue to support and build the acquired brands,
while other acquired intangible assets (e.g., customer relationships) are
expected to have determinable useful lives. Our estimates of the useful lives of
definite-lived intangible assets are primarily based upon historical experience,
the competitive and macroeconomic environment, and our operating plans. The
costs of definite-lived intangibles are amortized to expense over their
estimated life. We review the carrying value of goodwill and non-amortizable
intangible assets and conduct tests of impairment on an annual basis as
described below. We also test for impairment if events or circumstances indicate
it is more likely than not that the fair value of a reporting unit is below its
carrying amount. We test indefinite-lived intangible assets for impairment if
events or changes in circumstances indicate that the asset might be impaired.
Determining the fair value of a reporting unit or an indefinite-lived purchased
intangible asset is judgmental in nature and involves the use of significant
estimates and assumptions, as more fully described in note 1 of notes to our
consolidated financial statements. While we believe those estimates and
assumptions are reasonable, they are inherently uncertain. Unanticipated market
or macroeconomic events and circumstances may occur, which could affect the
accuracy or validity of the estimates and assumptions.
Goodwill Impairment
Our reporting units are the same as our operating segments. Determining the fair
value of a reporting unit is judgmental in nature and involves the use of
significant estimates and assumptions, as more fully described in note 1 to our
consolidated financial statements. We estimate the fair value of a reporting
unit by using a discounted cash flow model. Our discounted cash flow model
calculates fair value by present valuing future expected cash flows of our
reporting units using a market-based discount rate. We then compare this fair
value to the carrying amount of the reporting unit, including intangible assets
and goodwill. An impairment charge would be recognized to the extent that the
carrying amount of the reporting unit exceeds the estimated fair value of the
reporting unit. The quantitative goodwill impairment test requires an entity to
compare the fair value of each reporting unit with its carrying amount. As of
November 30, 2021 , we had $5,335.8 million of goodwill recorded in our balance
sheet ($3,674.7 million in the consumer segment and $1,661.1 million in the
flavor solutions segment). Our fiscal year 2021 impairment testing indicated
that the estimated fair values of our reporting units were significantly in
excess of their carrying values. Accordingly, we believe that only significant
changes in the cash flow assumptions would result in an impairment of goodwill.
However, variances between the actual performance of the businesses and the
assumptions that were used in developing the estimates of fair value could
result in impairment charges in future periods.
Indefinite-lived Intangible Asset Impairment
Our indefinite-lived intangible assets consist of brand names and trademarks. We
estimate fair values through the use of the relief-from-royalty method and then
compare those fair values to the related carrying amounts of the
indefinite-lived intangible asset. In the event that the fair value of any of
the brand names or trademarks are less than their related carrying amounts, a
non-cash impairment loss would be recognized in an amount equal to the
difference.
The estimation of fair values of our brand names and trademarks requires us to
make significant assumptions, including expectations with respect to sales and
profits of the respective brands and trademarks, related royalty rates, income
tax rates and appropriate discount rates, which are based, in part, upon current
interest rates
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adjusted for our view of reasonable country- and brand-specific risks based upon
the past and anticipated future performance of the related brand names and
trademarks. The assumptions used to assess impairment consider historical
trends, macroeconomic conditions, and projections consistent with our operating
strategy. Changes in these estimates can have a significant impact on the
assessment of fair value which could result in material impairment losses.
As of November 30, 2021 , we had $3,067.4 million of brand name assets and
trademarks recorded in our balance sheet, and none of the balances exceeded
their estimated fair values at that date. Of the $3,067.4 million of brand names
assets and trademarks as of November 30, 2021 : (i) $2,320.0 million relates to
the French's, Frank's RedHot and Cattlemen's brand names and trademarks,
recognized as part of our acquisition of RB Foods in August 2017 , that we group
for purposes of our impairment analysis; (ii) $380.0 million relates to the
Cholula brand names and trademarks associated with the acquisition of Cholula in
November 2020 , (iii) $49.0 million relates to the FONA brand names and
trademarks associated with the acquisition of FONA in December 2020 and (iv) the
remaining $318.4 million represents a number of other brand name assets and
trademarks with individual carrying values ranging from $0.2 million to $106.4
million . Except for our recent acquisitions of Cholula and FONA, the percentage
excess of estimated fair value over respective book values for each of our brand
names and trademarks, including the $2,320.0 million related to our French's,
Frank's RedHot and Cattlemen's brands, was 20% or more as of November 30, 2021 .
The brand names and trademarks related to recent acquisitions, including our
recent acquisitions of Cholula and FONA, may be more susceptible to future
impairment as their carrying values represent recently determined fair values. A
change in assumptions with respect to recently acquired businesses, including
those affected by rising interest rates or a deterioration in expectations of
future sales, profitability or royalty rates as well as future economic and
market conditions, or higher income tax rates, could result in non-cash
impairment losses in the future.
Income Taxes
We estimate income taxes and file tax returns in each of the taxing
jurisdictions in which we operate and are required to file a tax return. At the
end of each year, an estimate for income taxes is recorded in the financial
statements. Tax returns are generally filed in the third or fourth quarter of
the subsequent year. A reconciliation of the estimate to the final tax return is
done at that time, which will result in changes to the original estimate. We
believe that our tax return positions are appropriately supported, but tax
authorities can challenge certain of our tax positions. We evaluate our
uncertain tax positions in accordance with the GAAP guidance for uncertainty in
income taxes. We recognize a tax benefit when it is more likely than not the
position will be sustained upon examination, based on its technical merits. The
tax position is then measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. A change in
judgment related to the expected ultimate resolution of uncertain tax positions
will be recognized in earnings in the quarter of such change. We believe that
our reserve for uncertain tax positions, including related interest and
penalties, is adequate. As of November 30, 2021 , the Company had $31.0 million
of unrecognized tax benefits, including interest and penalties, recorded in
Other long-term liabilities. The amounts ultimately paid upon resolution of
audits could be materially different from the amounts previously included in our
income tax expense and, therefore, could have a material impact on our tax
provision, net income and cash flows. We have recorded valuation allowances to
reduce our deferred tax assets to the amount that is more likely than not to be
realized. In doing so, we have considered future taxable income and tax planning
strategies in assessing the need for a valuation allowance. Both future taxable
income and tax planning strategies include a number of estimates, as more fully
described in note 1 of notes to our consolidated financial statements.
Pension Benefits
Pension plans' costs require the use of assumptions for discount rates,
investment returns, projected salary increases, and mortality rates. The
actuarial assumptions used in our pension benefit reporting are reviewed
annually and compared with external benchmarks to ensure that they appropriately
account for our future pension benefit obligations. While we believe that the
assumptions used are appropriate, changes in various assumptions and differences
between the actual returns on plan assets and the expected returns on plan
assets and changes to projected future rates of return on plan assets will
affect the amount of pension expense or income ultimately recognized. A 1%
increase or decrease in the actuarial assumption for the discount rate would
impact 2022 pension benefit expense by approximately $1 million . A 1% increase
or decrease in the expected return on plan assets would impact 2022 pension
expense by approximately $10 million .
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--------------------------------------------------------------------------------We will continue to evaluate the appropriateness of the assumptions used in the measurement of our pension benefit obligations. In addition, see note 11 of notes to our consolidated financial statements for a discussion of these assumptions and the effects on the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is set forth in the "Market Risk Sensitivity" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in note 8 of our notes to consolidated financial statements.
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