MCCORMICK & COMPANY, INCORPORATED OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand
McCormick & Company, Incorporated , our operations, and our present business
environment. MD&A is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes thereto,
included in Item 1 of this report. We use certain non-GAAP information - more
fully described below under the caption Non-GAAP Financial Measures - that we
believe is important for purposes of comparison to prior periods and development
of future projections and earnings growth prospects. This information is also
used by management to measure the profitability of our ongoing operations and
analyze our business performance and trends. Unless otherwise noted, the dollar
and share information in the charts and tables in MD&A are in millions, except
per share data.
Business profile
McCormick is a global leader in flavor. We manufacture, market and distribute
spices, seasoning mixes, condiments and other flavorful products to the entire
food industry - retailers, food manufacturers and the foodservice business. In
fiscal year 2021, approximately 40% of our sales were outside of the U.S. We
also are partners in a number of joint ventures that are involved in the
manufacture and sale of flavorful products, the most significant of which is
McCormick de Mexico . We manage our business in two business segments, consumer
and flavor solutions.
Recent Events
Recent events impacting our business include COVID-19, the inflationary cost
environment and disruption in our supply chain, and Russia's invasion of
Ukraine , each of which are further discussed below. As more fully described
below, we expect each of these factors will impact our fiscal 2022 performance.
We anticipate that fiscal 2022 will continue to be a dynamic macroeconomic
environment. While we expect the impacts of COVID-19 on our business to
moderate, other than the impacts of COVID-19 on our operations in China , there
still remains uncertainty around the pandemic, its effect on labor or other
macroeconomic factors, the severity and duration of the pandemic, the continued
availability and effectiveness of vaccines and actions taken by government
authorities, including restrictions, laws or regulations, and other third
parties in response to the pandemic. We expect elevated levels of cost inflation
to persist throughout 2022. We anticipate that these headwinds will be partially
mitigated by pricing actions in response to inflation, supply chain productivity
improvements and cost savings initiatives. Also, the invasion of Ukraine by
Russia and the sanctions imposed in response to this conflict have increased
global economic and political uncertainty. While the impact of these factors
remains uncertain, we will continue to evaluate the extent to which these
factors will impact our business, financial condition, or results of operations.
These and other uncertainties with respect to these recent events could result
in changes to our current expectations. The potential effects of these recent
events 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.
COVID-19: As a result of the COVID-19 pandemic, uncertainty with respect to its
economic effects has impacted not only our operating results but also the global
economy. The extent and nature of government actions varied during the quarters
ended May 31, 2022 and 2021 based upon the then-current extent and severity of
the COVID-19 pandemic within their respective countries and localities. In the
second quarter of 2022, sales in our Asia/Pacific region declined by $24.0
million from the corresponding quarter in 2021, driven by the decline in sales
of our China operations. The decline associated with China approximated $18
million and was driven by the effect of the restrictive measures put in place
related to COVID-19 resurgences in China .
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. While we continue
to see strong levels of at-home consumption compared to pre-pandemic levels, the
favorable impact of increased at-home meal preparation was less significant in
the three months ended May 31, 2022 as compared to the comparable period of
2021. This change in consumer behavior was due in part to a decrease in the
prevalence and scale of restrictive measures in place to reduce the spread of
COVID-19 in the 2022 period as compared to 2021. Conversely, we continue to see
improvements in away-from-home demand associated with the COVID-19 recovery.
During the three months ended May 31, 2022 , our flavor solutions segment sales
improved as away-from-home consumption increased as compared to the
corresponding quarter in 2021, in part, due to the continued easing of
restrictive COVID-19 mitigation measures outside of our Asia/Pacific region that
were in place during the second quarter of 2021.
Inflationary Cost Environment and Supply Chain Disruption - During fiscal 2021, we experienced inflationary cost increases in our commodities, packaging materials and transportation costs. These inflationary cost increases have continued in 2022, but
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we expect they will be partially mitigated by pricing actions implemented in the
fourth quarter of fiscal 2021 and first half of fiscal 2022, pricing actions
that we plan to implement in the second half of 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 to build capacity as well as increase our supply chain related
resources. We expect these pressures to continue throughout 2022.
Russia's Invasion of Ukraine : The invasion of Ukraine by Russia and the
sanctions imposed in response to this conflict have increased global economic
and political uncertainty. It is not possible to predict the broader or
longer-term consequences of this conflict or the sanctions imposed to date,
which could include further sanctions, embargoes, regional instability,
geopolitical shifts and adverse effects on macroeconomic conditions, security
conditions, energy and fuel prices, currency exchange rates and financial
markets. We announced on March 11, 2022 , that we were suspending our business
operations in Russia . In May 2022 , we made the decision to the exit of our
consumer business in Russia . Our operations in Ukraine were also temporarily
paused in order to focus on the safety of our employees, but we have resumed,
where appropriate, a reduced level of operating activities. While neither Russia
nor Ukraine constitutes a material portion of our business, a significant
escalation or expansion of economic disruption or the conflict's current scope
could disrupt our supply chain, broaden inflationary costs, and have a material
adverse effect on our results of operations.
2022 Outlook
In 2022, we expect to grow net sales over the 2021 level by 3% to 5%, which includes an estimated 2% unfavorable impact from currency rates, or 5% to 7% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). That anticipated 2022 sales growth includes the impact of pricing actions taken in 2021, the first half of fiscal 2022, and those we plan to implement in the second half of fiscal 2022, to partially offset inflationary 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 price elasticity, although at a lower level than we have experienced historically. We also anticipate that our volume and product mix will be negatively impacted by the demand disruptions caused by COVID-related lockdowns inChina , the conflict inUkraine , including the exit of our consumer business inRussia , and the exit of a lower margin product line in late 2021. We plan to drive continued growth through the strength of our brands as well as our brand marketing, category management, new products, and differentiated customer engagement. We expect our 2022 gross profit margin to range from a 130 to 180 basis point decline 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 high-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 absence 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 to range from a 150 to 200 basis points decline from our 2021 adjusted gross profit margin of 39.7%, which excludes the impact of$11.0 million of transaction and integration expenses and special charges. In 2022, we expect an increase in operating income of 4% to 6%, which includes an estimated 2% 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 unfavorably impact operating income in 2022, as compared to$35.3 million of transaction and integration expenses in 2021. We also expect approximately$46 million of special charges in 2022 that relate to previously approved 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 range from comparable to an increase of 2%, which includes an estimated 2% unfavorable impact from currency rates, or to increase by 2% to 4% on a constant currency basis over the 2021 level. In 2022, we expect the effects of the termination of interest rate contracts that were entered into to manage our interest rate risk associated with our anticipated issuance of fixed rate debt to favorably impact other income, net by approximately$15 million . 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 approximate 22% 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 approximate 22% 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$2.89 to$2.94 . 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 25
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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$0.13 and from integration expenses of$0.01 , is projected to range from$3.03 to$3.08 in 2022. We expect adjusted diluted earnings per share to range from a decline of 1% to an increase of 1%, which includes a 2% unfavorable impact from currency rates, or to grow by 1% to 3% on a constant currency basis over adjusted diluted earnings per share of$3.05 in 2021.
RESULTS OF OPERATIONS - COMPANY
Three months ended Six months ended
May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021
Net sales $ 1,536.8
(1.3) % 11.1 % 0.7 % 16.3 %
Components of percent change in net sales - increase (decrease):
Volume and product mix (6.6) % 3.3 % (4.0) % 8.9 %
Pricing actions 6.8 % (0.1) % 5.8 % 0.3 %
Acquisitions - % 4.4 % 0.3 % 4.2 %
Foreign exchange (1.5) % 3.5 % (1.4) % 2.9 %
Gross profit $ 523.0 $ 614.6 $ 1,083.4 $ 1,192.1
Gross profit margin 34.0 % 39.5 % 35.4 % 39.2 %
Sales for the second quarter of 2022 decreased by 1.3% from the prior year level
and increased by 0.2% on a constant currency basis (that is, excluding the
impact of foreign currency exchange as more fully described under the caption,
Non-GAAP Financial Measures). The impact of restrictive measures related to
COVID-19 resurgences in China , our operations in Russia and Ukraine , the exit of
our rice product line in India , and the effects of a trade replenishment that
occurred in the quarter ended May 31, 2021 , contributed approximately 4% to our
sales decline as compared to 2021. Unfavorable volume and product mix decreased
sales by 6.6%. That decrease was driven by our consumer segment, including the
previously noted effects of a trade replenishment that occurred in the quarter
ended May 31, 2021 , and lower sales in China , Russia , Ukraine and India , as
compared to the second quarter of 2021. The decrease in consumer segment sales
was partially offset by higher sales of our flavor solutions segment, as demand
was elevated as compared to the corresponding period in 2021. Pricing actions,
taken in response to the inflationary cost environment, increased sales by 6.8%
compared to the prior year period. Sales were also impacted by unfavorable
foreign currency rates that decreased net sales by 1.5% in the second quarter of
2022 compared to the year-ago quarter and is excluded from our measure of sales
growth of 0.2% on a constant currency basis.
Sales for the six months ended May 31, 2022 increased by 0.7% from the prior
year level and by 2.1% on a constant currency basis. The impact of restrictive
measures related to COVID-19 resurgences in China , our operations in Russia and
Ukraine , and the exit of our rice product line in India contributed 1.3% of our
sales decline as compared to 2021. Unfavorable volume and product mix decreased
sales by 4.0% with growth from flavor solutions segment sales being more than
offset by a decline in consumer segment sales. In addition, pricing actions,
taken in response to the inflationary cost environment, added 5.8% and
acquisitions added 0.3% to sales, both as compared to the prior year period.
Sales were impacted by unfavorable foreign currency rates that decreased sales
by 1.4% in the six months ended May 31, 2022 as compared to the year-ago period
and is excluded from our measure of sales growth of 2.1% on a constant currency
basis.
Gross profit for the second quarter of 2022 decreased by $91.6 million , or
14.9%, from the comparable period in 2021. Our gross profit margin for the three
months ended May 31, 2022 was 34.0%, a decrease of 550 basis points from the
comparable period in 2021. The decrease in gross profit margin in the quarter
ended May 31, 2022 was driven by the margin dilutive impact of pricing actions
taken in response to the inflationary cost environment of 250 basis points,
increased commodity, packaging materials and transportation costs, higher
conversion costs and a less favorable product mix both within and between our
segments, each as compared to the 2021 period. These unfavorable impacts were
partially offset by cost savings led by our Comprehensive Continuous Improvement
("CCI") program.
Gross profit for the six months ended May 31, 2022 decreased by $108.7 million ,
or 9.1%, from the comparable period in 2021. Our gross profit margin for the six
months ended May 31, 2022 was 35.4%, a decrease of 380 basis points from the
same period in 2021 driven by the margin dilutive impact of pricing actions
taken in response to the inflationary cost environment of 220 basis points,
increased commodity, packaging materials and transportation costs, higher
conversion costs and a less favorable product mix both within and between our
segments, each as compared to the 2021 period. These unfavorable impacts were
partially offset by cost savings led by our CCI program. In addition, our gross
profit for the six months ended May 31, 2021 was burdened by $6.3 million of
transaction expense, representing the amortization of the fair value adjustment
to the acquired
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inventories of Cholula and FONA upon our sale of those acquired inventories in
the first quarter of fiscal 2021. Excluding those transaction and integration
expenses, adjusted gross profit margin declined 400 basis points to 35.4% in
2022 from 39.4% in 2021.
Three months ended Six months ended
May 31, 2022 356.6$ 682.5 $ 677.9 Percent of net sales 22.7 % 22.9 % 22.3 % 22.3 % SG&A decreased by$7.4 million in the second quarter of 2022 compared to the 2021 level, driven by lower performance-based employee incentive expenses, partially offset by less favorable investment results associated with non-qualified retirement plan assets, higher investment associated with the implementation of our global enterprise resource planning (ERP) platform and increased distribution costs, all as compared to the 2021 period. SG&A as a percentage of net sales decreased by 20 basis points from the prior year level, due primarily to the net impact of the previously mentioned factors. SG&A increased by$4.6 million in the six months endedMay 31, 2022 compared to the 2021 level, driven by less favorable investment results associated with non-qualified retirement plan assets, higher investment associated with the implementation of our global ERP platform, increased distribution costs and SG&A associated with the acquired FONA business, partially offset by lower performance-based employee incentive expenses, all as compared to the 2021 period. SG&A as a percent of net sales for the six months endedMay 31, 2022 was comparable to the prior year level, due primarily the offsetting impacts of the previously mentioned factors. Three months ended Six months ended May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021 Total special charges$ 15.1 $ 13.7 $ 34.6 $ 14.8 During the three months endedMay 31, 2022 , we recorded$15.1 million of net special charges. Those special charges principally consisted of$22.2 million associated with the exit of our consumer business inRussia , as more fully described in note 2 of the notes to the accompanying financial statements,$2.5 million associated with the transition of a manufacturing facility inEurope ,Middle East , andAfrica (EMEA), streamlining actions of$3.2 million in theAmericas region, and$2.8 million in the EMEA region. These charges were offset by a$13.6 million gain, on the sale of our Kohinoor brand as well as a reversal of$-2.2 million of estimated costs associated with the exit of our rice product line inIndia upon settlement of a supply agreement related to that product line. During the six months endedMay 31, 2022 , we recorded$34.6 million of net special charges. Those special charge consisted principally of$22.2 million associated with the exit of our consumer business inRussia , as more fully described in note 2 of the notes to the accompanying financial statements,$17.4 million associated with the transition of a manufacturing facility in EMEA, as more fully described in note 2 of the notes to the accompanying financial statements, streamlining actions of$5.3 million in theAmericas region, and$4.3 million in the EMEA region. These charges were offset by a$13.6 million gain, on the sale of our Kohinoor brand, as we exited our Kohinoor rice product line inIndia in the fourth quarter of fiscal 2021, as well as a reversal of$-2.2 million of estimated costs associated with the exit of our rice product line inIndia upon settlement of a supply agreement related to that product line. During the three months endedMay 31, 2021 , we recorded$13.7 million of special charges consisting principally of a non-cash asset impairment charge of$6.5 million associated with an administrative site that will be exited in conjunction with our decision to employ a hybrid work environment and$4.7 million of streamlining actions in theAmericas region. During the six months endedMay 31, 2021 , we recorded$14.8 million of special charges consisting principally of the previously described non-cash asset impairment charge of$6.5 million ,$5.2 million of streamlining actions in theAmericas region, and$1.3 million of streamlining actions in the EMEA region.
Details with respect to the composition of special charges are included in note 2 of the notes to the accompanying financial statements.
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Three months ended Six months ended
May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021
Transaction expenses included in cost of
goods sold $ - $ - $ - $ 6.3
Other transaction and integration expenses 1.5 6.9 2.2 25.7
Total transaction and integration expenses
$ 32.0 During the three months endedMay 31, 2022 , we recorded$1.5 million of integration expenses related to our acquisition of FONA, as compared to$6.9 million of integration expenses in the 2021 period related to our acquisitions ofCholula and FONA. During the six months endedMay 31, 2022 , we recorded$2.2 million of integration expenses related to our acquisition of FONA. During the six months endedMay 31, 2021 , we recorded$32.0 million of transaction and integration expenses related to our acquisitions ofCholula 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 costs primarily related to outside advisory, service and consulting costs, and (iii)$11.9 million of integration expenses. Three months ended Six months ended May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021 Interest expense$ 33.7 $ 35.6 $ 66.8 $ 69.4 Other income, net 6.3 3.9 12.5 8.5 Interest expense decreased by$1.9 million and$2.6 million for the three and six months endedMay 31, 2022 , respectively, driven by a decrease in average total borrowings, as compared to the prior year periods. Other income, net for the three and six months endedMay 31, 2022 increased by$2.4 million and$4.0 million , respectively, driven by higher non-service cost income associated with our pension and postretirement benefit plans and an increase in interest income, each as compared to the prior year period.
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