UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2020February 28, 2021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-14920
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
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Maryland | 52-0408290 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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24 Schilling Road, Suite 1, | | |
Hunt Valley, | MD | 21031 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (410) 771-7301
Securities registered pursuant to Section 12(b) of the Act:
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| | Trading | |
| Title of each class | Symbol(s) | Name of each exchange on which registered |
| Common Stock | MKC-V | New York Stock Exchange |
| Common Stock Non-Voting | MKC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitiondefinitions of “accelerated“large accelerated filer,” “large accelerated“accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | Shares Outstanding | |
| | August 31, 2020February 28, 2021 | |
| Common Stock | 9,063,59018,032,535 | | |
| Common Stock Non-Voting | 124,347,973249,002,627 | | |
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION | | | |
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| ITEM 1 | | |
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| ITEM 2 | | |
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| ITEM 3 | | |
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| ITEM 4 | | |
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| ITEM 1 | | |
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| ITEM 1a | | |
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| ITEM 2 | | |
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| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | |
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| ITEM 4 | | |
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| ITEM 5 | OTHER INFORMATION | |
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| ITEM 6 | | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(in millions except per share amounts)
| | | Three months ended August 31, | | | Nine months ended August 31, | | | Three months ended | |
| | 2020 | | 2019 | | 2020 | | 2019 | | February 28, 2021 | | February 29, 2020 | |
Net sales | Net sales | $ | 1,430.3 | | | $ | 1,329.2 | | | $ | 4,043.4 | | | $ | 3,862.6 | | Net sales | $ | 1,481.5 | | | $ | 1,212.0 | | |
Cost of goods sold | Cost of goods sold | 840.0 | | | 789.3 | | | 2,403.7 | | | 2,347.3 | | Cost of goods sold | 904.0 | | | 742.1 | | |
Gross profit | Gross profit | 590.3 | | | 539.9 | | | 1,639.7 | | | 1,515.3 | | Gross profit | 577.5 | | | 469.9 | | |
Selling, general and administrative expense | Selling, general and administrative expense | 317.2 | | | 278.7 | | | 911.1 | | | 839.9 | | Selling, general and administrative expense | 321.3 | | | 274.7 | | |
| Transaction and integration expenses | | Transaction and integration expenses | 18.8 | | | 0 | | |
Special charges | Special charges | 0.1 | | | 7.7 | | | 4.0 | | | 16.9 | | Special charges | 1.1 | | | 1.0 | | |
Operating income | Operating income | 273.0 | | | 253.5 | | | 724.6 | | | 658.5 | | Operating income | 236.3 | | | 194.2 | | |
Interest expense | Interest expense | 33.5 | | | 41.3 | | | 103.2 | | | 126.7 | | Interest expense | 33.8 | | | 35.3 | | |
| Other income, net | Other income, net | 3.9 | | | 6.9 | | | 12.5 | | | 19.3 | | Other income, net | 4.6 | | | 5.5 | | |
Income from consolidated operations before income taxes | Income from consolidated operations before income taxes | 243.4 | | | 219.1 | | | 633.9 | | | 551.1 | | Income from consolidated operations before income taxes | 207.1 | | | 164.4 | | |
Income tax expense | Income tax expense | 46.9 | | | 36.8 | | | 117.4 | | | 91.0 | | Income tax expense | 58.6 | | | 30.1 | | |
Net income from consolidated operations | Net income from consolidated operations | 196.5 | | | 182.3 | | | 516.5 | | | 460.1 | | Net income from consolidated operations | 148.5 | | | 134.3 | | |
Income from unconsolidated operations | Income from unconsolidated operations | 9.6 | | | 9.6 | | | 30.2 | | | 29.2 | | Income from unconsolidated operations | 13.3 | | | 10.4 | | |
Net income | Net income | $ | 206.1 | | | $ | 191.9 | | | $ | 546.7 | | | $ | 489.3 | | Net income | $ | 161.8 | | | $ | 144.7 | | |
Earnings per share – basic | Earnings per share – basic | $ | 1.55 | | | $ | 1.45 | | | $ | 4.11 | | | $ | 3.69 | | Earnings per share – basic | $ | 0.61 | | | $ | 0.54 | | |
Earnings per share – diluted | | Earnings per share – diluted | $ | 0.60 | | | $ | 0.54 | | |
Average shares outstanding – basic | Average shares outstanding – basic | 133.3 | | | 132.8 | | | 133.1 | | | 132.5 | | Average shares outstanding – basic | 267.1 | | | 266.0 | | |
Earnings per share – diluted | $ | 1.53 | | | $ | 1.43 | | | $ | 4.06 | | | $ | 3.65 | | |
Average shares outstanding – diluted | Average shares outstanding – diluted | 134.8 | | | 134.2 | | | 134.5 | | | 134.0 | | Average shares outstanding – diluted | 269.9 | | | 268.7 | | |
Cash dividends paid per share – voting and non-voting | Cash dividends paid per share – voting and non-voting | $ | 0.62 | | | $ | 0.57 | | | $ | 1.86 | | | $ | 1.71 | | Cash dividends paid per share – voting and non-voting | $ | 0.34 | | | $ | 0.31 | | |
Cash dividends declared per share – voting and non-voting | $ | 0.62 | | | $ | 0.57 | | | $ | 1.24 | | | $ | 1.14 | | |
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See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
| | | Three months ended August 31, | | | Nine months ended August 31, | | | Three months ended | |
| | 2020 | | 2019 | | 2020 | | 2019 | | February 28, 2021 | | February 29, 2020 | |
Net income | Net income | $ | 206.1 | | | $ | 191.9 | | | $ | 546.7 | | | $ | 489.3 | | Net income | $ | 161.8 | | | $ | 144.7 | | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | 1.6 | | | 0.3 | | | 3.1 | | | 1.5 | | Net income attributable to non-controlling interest | 0.8 | | | 0.9 | | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | | |
Unrealized components of pension and postretirement plans | Unrealized components of pension and postretirement plans | (2.1) | | | (0.7) | | | 3.6 | | | (2.8) | | Unrealized components of pension and postretirement plans | 1.1 | | | 2.4 | | |
Currency translation adjustments | Currency translation adjustments | 146.7 | | | (44.9) | | | 65.8 | | | (66.8) | | Currency translation adjustments | 45.7 | | | (20.0) | | |
Change in derivative financial instruments | Change in derivative financial instruments | (0.7) | | | (0.1) | | | 0.2 | | | (0.1) | | Change in derivative financial instruments | (1.0) | | | (0.7) | | |
Deferred taxes | Deferred taxes | 3.2 | | | 0 | | | (1.6) | | | 0.4 | | Deferred taxes | 3.0 | | | (1.7) | | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | 147.1 | | | (45.7) | | | 68.0 | | | (69.3) | | Total other comprehensive income (loss) | 48.8 | | | (20.0) | | |
Comprehensive income | Comprehensive income | $ | 354.8 | | | $ | 146.5 | | | $ | 617.8 | | | $ | 421.5 | | Comprehensive income | $ | 211.4 | | | $ | 125.6 | | |
See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
| | | August 31, 2020 | | August 31, 2019 | | November 30, 2019 | | February 28, 2021 | | | November 30, 2020 |
| | (unaudited) | | (unaudited) | | | | (unaudited) | | | |
ASSETS | ASSETS | | ASSETS | | | |
Current Assets | Current Assets | | Current Assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 221.0 | | | $ | 162.9 | | | $ | 155.4 | | Cash and cash equivalents | $ | 256.1 | | | | $ | 423.6 | |
Trade accounts receivable, net | Trade accounts receivable, net | 496.5 | | | 494.6 | | | 502.9 | | Trade accounts receivable, net | 515.9 | | | | 528.5 | |
Inventories, net | Inventories, net | | Inventories, net | | | |
Finished products | Finished products | 437.5 | | | 442.5 | | | 413.3 | | Finished products | 544.4 | | | | 499.3 | |
Raw materials and work-in-process | Raw materials and work-in-process | 504.6 | | | 404.4 | | | 387.9 | | Raw materials and work-in-process | 529.0 | | | | 533.3 | |
| | 942.1 | | | 846.9 | | | 801.2 | | | 1,073.4 | | | | 1,032.6 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 100.0 | | | 85.0 | | | 90.7 | | Prepaid expenses and other current assets | 109.3 | | | | 98.9 | |
Total current assets | Total current assets | 1,759.6 | | | 1,589.4 | | | 1,550.2 | | Total current assets | 1,954.7 | | | | 2,083.6 | |
Property, plant and equipment, net | Property, plant and equipment, net | 960.9 | | | 910.0 | | | 952.6 | | Property, plant and equipment, net | 1,070.8 | | | | 1,028.4 | |
Goodwill | Goodwill | 4,574.4 | | | 4,496.5 | | | 4,505.2 | | Goodwill | 5,397.0 | | | | 4,986.3 | |
Intangible assets, net | Intangible assets, net | 2,843.0 | | | 2,850.3 | | | 2,847.0 | | Intangible assets, net | 3,500.9 | | | | 3,239.4 | |
Other long-term assets | Other long-term assets | 722.8 | | | 519.8 | | | 507.1 | | Other long-term assets | 761.7 | | | | 752.0 | |
Total assets | Total assets | $ | 10,860.7 | | | $ | 10,366.0 | | | $ | 10,362.1 | | Total assets | $ | 12,685.1 | | | | $ | 12,089.7 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current Liabilities | Current Liabilities | | Current Liabilities | | | |
Short-term borrowings | Short-term borrowings | $ | 167.8 | | | $ | 683.6 | | | $ | 600.7 | | Short-term borrowings | $ | 594.3 | | | | $ | 886.7 | |
Current portion of long-term debt | Current portion of long-term debt | 263.7 | | | 119.3 | | | 97.7 | | Current portion of long-term debt | 265.9 | | | | 263.9 | |
Trade accounts payable | Trade accounts payable | 902.8 | | | 783.1 | | | 846.9 | | Trade accounts payable | 967.4 | | | | 1,032.3 | |
Other accrued liabilities | Other accrued liabilities | 619.2 | | | 444.4 | | | 609.1 | | Other accrued liabilities | 596.1 | | | | 863.6 | |
Total current liabilities | Total current liabilities | 1,953.5 | | | 2,030.4 | | | 2,154.4 | | Total current liabilities | 2,423.7 | | | | 3,046.5 | |
Long-term debt | Long-term debt | 3,737.5 | | | 3,843.1 | | | 3,625.8 | | Long-term debt | 4,739.2 | | | | 3,753.8 | |
Deferred taxes | Deferred taxes | 704.4 | | | 701.2 | | | 697.6 | | Deferred taxes | 739.5 | | | | 727.2 | |
Other long-term liabilities | Other long-term liabilities | 519.3 | | | 310.7 | | | 427.6 | | Other long-term liabilities | 618.0 | | | | 622.2 | |
Total liabilities | Total liabilities | 6,914.7 | | | 6,885.4 | | | 6,905.4 | | Total liabilities | 8,520.4 | | | | 8,149.7 | |
Shareholders’ Equity | Shareholders’ Equity | | Shareholders’ Equity | | | |
Common stock | Common stock | 480.5 | | | 441.3 | | | 447.6 | | Common stock | 495.4 | | | | 484.0 | |
Common stock non-voting | Common stock non-voting | 1,491.1 | | | 1,435.9 | | | 1,441.0 | | Common stock non-voting | 1,503.0 | | | | 1,497.3 | |
Retained earnings | Retained earnings | 2,391.0 | | | 2,019.8 | | | 2,055.8 | | Retained earnings | 2,573.6 | | | | 2,415.6 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (429.9) | | | (428.3) | | | (500.2) | | Accumulated other comprehensive loss | (422.5) | | | | (470.8) | |
Total McCormick shareholders' equity | Total McCormick shareholders' equity | 3,932.7 | | | 3,468.7 | | | 3,444.2 | | Total McCormick shareholders' equity | 4,149.5 | | | | 3,926.1 | |
Non-controlling interests | Non-controlling interests | 13.3 | | | 11.9 | | | 12.5 | | Non-controlling interests | 15.2 | | | | 13.9 | |
Total shareholders’ equity | Total shareholders’ equity | 3,946.0 | | | 3,480.6 | | | 3,456.7 | | Total shareholders’ equity | 4,164.7 | | | | 3,940.0 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 10,860.7 | | | $ | 10,366.0 | | | $ | 10,362.1 | | Total liabilities and shareholders’ equity | $ | 12,685.1 | | | | $ | 12,089.7 | |
See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
(in millions)
| | | Nine months ended August 31, | | | Three months ended |
| | 2020 | | 2019 | | February 28, 2021 | | February 29, 2020 |
Operating activities | Operating activities | | | | Operating activities | | | |
Net income | Net income | $ | 546.7 | | | $ | 489.3 | | Net income | $ | 161.8 | | | $ | 144.7 | |
Adjustments to reconcile net income to net cash flow provided by operating activities: | Adjustments to reconcile net income to net cash flow provided by operating activities: | | Adjustments to reconcile net income to net cash flow provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 123.9 | | | 118.0 | | Depreciation and amortization | 48.1 | | | 41.9 | |
Stock-based compensation | Stock-based compensation | 37.8 | | | 30.6 | | Stock-based compensation | 14.2 | | | 6.4 | |
| Amortization of inventory fair value adjustments associated with acquisitions | | Amortization of inventory fair value adjustments associated with acquisitions | 6.3 | | | 0 | |
Income from unconsolidated operations | Income from unconsolidated operations | (30.2) | | | (29.2) | | Income from unconsolidated operations | (13.3) | | | (10.4) | |
Changes in operating assets and liabilities | Changes in operating assets and liabilities | (74.9) | | | (139.8) | | Changes in operating assets and liabilities | (256.3) | | | (148.9) | |
| Dividends from unconsolidated affiliates | Dividends from unconsolidated affiliates | 23.4 | | | 25.7 | | Dividends from unconsolidated affiliates | 7.0 | | | 11.1 | |
Net cash flow provided by operating activities | 626.7 | | | 494.6 | | |
Net cash flow (used in) provided by operating activities | | Net cash flow (used in) provided by operating activities | (32.2) | | | 44.8 | |
Investing activities | Investing activities | | | | Investing activities | | | |
| Acquisition of businesses (net of cash acquired) | | Acquisition of businesses (net of cash acquired) | (706.6) | | | 0 | |
Capital expenditures (including software) | Capital expenditures (including software) | (145.6) | | | (107.1) | | Capital expenditures (including software) | (48.6) | | | (38.5) | |
| Other investing activities | Other investing activities | 2.3 | | | 2.6 | | Other investing activities | 0 | | | 0.2 | |
| Net cash flow used in investing activities | Net cash flow used in investing activities | (143.3) | | | (104.5) | | Net cash flow used in investing activities | (755.2) | | | (38.3) | |
Financing activities | Financing activities | | | | Financing activities | | | |
Short-term borrowings, net | Short-term borrowings, net | (432.0) | | | 124.4 | | Short-term borrowings, net | (292.4) | | | 125.2 | |
Long-term debt borrowings | Long-term debt borrowings | 506.4 | | | 0 | | Long-term debt borrowings | 1,000.4 | | | 0 | |
Payment of debt issuance costs | Payment of debt issuance costs | (1.1) | | | — | | Payment of debt issuance costs | (1.1) | | | — | |
Long-term debt repayments | Long-term debt repayments | (256.0) | | | (214.6) | | Long-term debt repayments | (1.8) | | | (20.5) | |
Proceeds from exercised stock options | Proceeds from exercised stock options | 54.1 | | | 84.6 | | Proceeds from exercised stock options | 3.6 | | | 7.7 | |
Taxes withheld and paid on employee stock awards | Taxes withheld and paid on employee stock awards | (10.7) | | | (10.3) | | Taxes withheld and paid on employee stock awards | (5.1) | | | (3.0) | |
| Common stock acquired by purchase | Common stock acquired by purchase | (46.0) | | | (76.9) | | Common stock acquired by purchase | (0.1) | | | (19.9) | |
Dividends paid | Dividends paid | (247.4) | | | (226.4) | | Dividends paid | (90.8) | | | (82.4) | |
Net cash flow used in financing activities | (432.7) | | | (319.2) | | |
Net cash flow provided by financing activities | | Net cash flow provided by financing activities | 612.7 | | | 7.1 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | 14.9 | | | (4.6) | | Effect of exchange rate changes on cash and cash equivalents | 7.2 | | | 1.8 | |
Increase in cash and cash equivalents | 65.6 | | | 66.3 | | |
(Decrease) increase in cash and cash equivalents | | (Decrease) increase in cash and cash equivalents | (167.5) | | | 15.4 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 155.4 | | | 96.6 | | Cash and cash equivalents at beginning of period | 423.6 | | | 155.4 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 221.0 | | | $ | 162.9 | | Cash and cash equivalents at end of period | $ | 256.1 | | | $ | 170.8 | |
See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(in millions)
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(millions) | Common Stock Shares | Common Stock Non-Voting Shares | Common Stock Amount | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non-controlling Interests | Total Shareholders’ Equity |
Three months ended August 31, 2020 | | | | | | | |
Balance, May 31, 2020 | 9.3 | | 123.9 | | $ | 1,938.9 | | $ | 2,288.7 | | $ | (577.7) | | $ | 12.4 | | $ | 3,662.3 | |
Net income | | | — | | 206.1 | | — | | — | | 206.1 | |
Net income attributable to non-controlling interest | | | — | | — | | — | | 1.6 | | 1.6 | |
Other comprehensive loss, net of tax | | | — | | — | | 147.8 | | (0.7) | | 147.1 | |
Dividends | | | — | | (82.6) | | — | | — | | (82.6) | |
Stock-based compensation | | | 10.7 | | — | | — | | — | | 10.7 | |
Shares purchased and retired | (0.1) | | 0 | | (7.4) | | (21.2) | | — | | — | | (28.6) | |
Shares issued | 0.3 | | 0 | | 29.4 | | — | | — | | — | | 29.4 | |
Equal exchange | (0.4) | | 0.4 | | — | | — | | — | | — | | — | |
Balance, August 31, 2020 | 9.1 | | 124.3 | | $ | 1,971.6 | | $ | 2,391.0 | | $ | (429.9) | | $ | 13.3 | | $ | 3,946.0 | |
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Nine months ended August 31, 2020 | | | | | | | |
Balance, November 30, 2019 | 9.3 | | 123.6 | | $ | 1,888.6 | | $ | 2,055.8 | | $ | (500.2) | | $ | 12.5 | | $ | 3,456.7 | |
Net income | | | — | | 546.7 | | — | | — | | 546.7 | |
Net income attributable to non-controlling interest | | | — | | — | | — | | 3.1 | | 3.1 | |
Other comprehensive loss, net of tax | | | — | | — | | 70.3 | | (2.3) | | 68.0 | |
Dividends | | | — | | (165.0) | | — | | — | | (165.0) | |
Stock-based compensation | | | 37.8 | | — | | — | | — | | 37.8 | |
Shares purchased and retired | (0.2) | | (0.1) | | (12.6) | | (46.5) | | — | | — | | (59.1) | |
Shares issued | 0.8 | | 0 | | 57.8 | | — | | — | | — | | 57.8 | |
Equal exchange | (0.8) | | 0.8 | | — | | — | | — | | — | | — | |
Balance, August 31, 2020 | 9.1 | | 124.3 | | $ | 1,971.6 | | $ | 2,391.0 | | $ | (429.9) | | $ | 13.3 | | $ | 3,946.0 | |
| | | | | | | |
Three months ended August 31, 2019 | | | | | | | |
Balance, May 31, 2019 | 9.5 | | 123.0 | | $ | 1,835.0 | | $ | 1,918.6 | | $ | (382.7) | | $ | 11.7 | | $ | 3,382.6 | |
Net income | | | — | | 191.9 | | — | | — | | 191.9 | |
Net income attributable to non-controlling interest | | | — | | — | | — | | 0.3 | | 0.3 | |
Other comprehensive loss, net of tax | | | — | | — | | (45.6) | | (0.1) | | (45.7) | |
Dividends | | | — | | (75.6) | | — | | — | | (75.6) | |
| | | | | | | |
Stock-based compensation | | | 7.8 | | — | | — | | — | | 7.8 | |
Shares purchased and retired | (0.1) | | 0 | | (3.2) | | (15.1) | | — | | — | | (18.3) | |
Shares issued | 0.5 | | 0 | | 37.6 | | — | | — | | — | | 37.6 | |
Equal exchange | (0.6) | | 0.6 | | — | | — | | — | | — | | — | |
Balance, August 31, 2019 | 9.3 | | 123.6 | | $ | 1,877.2 | | $ | 2,019.8 | | $ | (428.3) | | $ | 11.9 | | $ | 3,480.6 | |
| | Nine months ended August 31, 2019 | | |
Balance, November 30, 2018 | 9.6 | | 122.5 | | $ | 1,770.6 | | $ | 1,760.2 | | $ | (359.9) | | $ | 11.3 | | $ | 3,182.2 | | |
(millions) | | (millions) | Common Stock Shares | Common Stock Non-Voting Shares | Common Stock Amount | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Non-controlling Interests | Total Shareholders’ Equity |
| Three months ended February 28, 2021 | | Three months ended February 28, 2021 | |
Balance, November 30, 2020 | | Balance, November 30, 2020 | 18.0 | | 248.9 | | $ | 1,981.3 | | $ | 2,415.6 | | $ | (470.8) | | $ | 13.9 | | $ | 3,940.0 | |
Net income | Net income | | — | | 489.3 | | — | | — | | 489.3 | | Net income | | — | | 161.8 | | — | | — | | 161.8 | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | | — | | — | | — | | 1.5 | | 1.5 | | Net income attributable to non-controlling interest | | — | | — | | — | | 0.8 | | 0.8 | |
Other comprehensive loss, net of tax | | — | | — | | (68.4) | | (0.9) | | (69.3) | | |
Dividends | | — | | (151.1) | | — | | — | | (151.1) | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | — | | 48.3 | | 0.5 | | 48.8 | |
| Stock-based compensation | Stock-based compensation | | 30.6 | | — | | — | | — | | 30.6 | | Stock-based compensation | | 14.2 | | — | | — | | — | | 14.2 | |
Shares purchased and retired | Shares purchased and retired | (0.2) | | (0.4) | | (13.3) | | (78.6) | | — | | — | | (91.9) | | Shares purchased and retired | (0.1) | | 0 | | (1.6) | | (3.8) | | — | | — | | (5.4) | |
Shares issued | Shares issued | 1.4 | | 0 | | 89.3 | | — | | — | | — | | 89.3 | | Shares issued | 0.2 | | 0 | | 4.5 | | — | | — | | — | | 4.5 | |
Equal exchange | Equal exchange | (1.5) | | 1.5 | | — | | — | | — | | — | | — | | Equal exchange | (0.1) | | 0.1 | | — | | — | | — | | — | | — | |
Balance, August 31, 2019 | 9.3 | | 123.6 | | $ | 1,877.2 | | $ | 2,019.8 | | $ | (428.3) | | $ | 11.9 | | $ | 3,480.6 | | |
Balance, February 28, 2021 | | Balance, February 28, 2021 | 18.0 | | 249.0 | | $ | 1,998.4 | | $ | 2,573.6 | | $ | (422.5) | | $ | 15.2 | | $ | 4,164.7 | |
| | | Three months ended February 29, 2020 | | Three months ended February 29, 2020 | |
Balance, November 30, 2019 | | Balance, November 30, 2019 | 18.6 | | 247.2 | | $ | 1,888.6 | | $ | 2,055.8 | | $ | (500.2) | | $ | 12.5 | | $ | 3,456.7 | |
Net income | | Net income | | — | | 144.7 | | — | | — | | 144.7 | |
Net income attributable to non-controlling interest | | Net income attributable to non-controlling interest | | — | | — | | — | | 0.9 | | 0.9 | |
Other comprehensive loss, net of tax | | Other comprehensive loss, net of tax | | — | | — | | (19.3) | | (0.7) | | (20.0) | |
| Stock-based compensation | | Stock-based compensation | | 6.4 | | — | | — | | — | | 6.4 | |
Shares purchased and retired | | Shares purchased and retired | 0 | | (0.2) | | (2.7) | | (20.6) | | — | | — | | (23.3) | |
Shares issued | | Shares issued | 0.2 | | 0 | | 9.2 | | — | | — | | — | | 9.2 | |
Equal exchange | | Equal exchange | (0.3) | | 0.3 | | — | | — | | — | | — | | — | |
Balance, February 29, 2020 | | Balance, February 29, 2020 | 18.5 | | 247.3 | | $ | 1,901.5 | | $ | 2,179.9 | | $ | (519.5) | | $ | 12.7 | | $ | 3,574.6 | |
See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented. The consolidated balance sheet asIn September 2020, our Board of August 31, 2019 includesDirectors approved a reclassification2-for-1 stock split in the form of $59.8 milliona stock dividend on all shares of capitalized software from property, plantthe Company's two classes of stock, Common Stock and equipment, net, to other long-term assets to conform to our current presentation.Common Stock Non-Voting. Trading of the Company's common stock began on a split-adjusted basis on December 1, 2020. All common stock and per-share data have been retroactively adjusted for the impact of the stock split.
The results of consolidated operations for the nine-monththree-month period ended August 31, 2020February 28, 2021 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations have been lower in the first half of the fiscal year and higher in the second half. The historical increase in net sales, net income and cash flow from operations in the second half of the year has largely been due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.
For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2019.2020.
Impact of COVID-19
On March 11, 2020, the World Health Organization designated a new coronavirus (“COVID-19”) as a global pandemic. Governments around the world either recommended or mandated ordersactions to slow the transmission of the virus that included shelter-in-place orders, quarantines, limitation 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 have varied during the ninethree months ended August 31,February 28, 2021 and February 29, 2020, based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.
We are partnering with our customers to react to consumer demand changes associated with COVID-19. The effects of COVID-19 on consumer behavior have, on a net basis, favorably impacted the operating results of our consumer segment and unfavorably impacted the operating results of our flavor solutions segment in the three months and nine months ended August 31, 2020.February 28, 2021. The impact of COVID-19 on our consumer segment during those periodsthat period resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same periodsperiod was principally attributable to decreased demand from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures impacting our flavor solutions customers included closures ofthe 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 as well as restrictions on the operations ofonly; and (ii) with respect to quick service restaurants, limitations on operations to drive-through pick-up or delivery. Those negative demand impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The impact of the global COVID-19 pandemic on our consolidated operating results during the three months ended February 29, 2020 was limited, in all material respects, to our operations in China where the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country.
Accounting Pronouncements Adopted in 2020
As the COVID-19 pandemic progresses, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home food demand. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known.
As more fully described
Revenue Recognition
The following supplements the description of our accounting policies with respect to revenue recognition contained in note 1 of notes to consolidated financial statements included in our Form 10-K for the year ended November 30, 2019, we were required2020: Our revenue arrangements generally include a single performance obligation relating to adopt the new accounting standardfulfillment of a customer order, which in some cases are governed by a master sales agreement, for leases, Accounting Standards Codification Topic 842 Leases (ASC 842), asthe purchase of December 1, 2019 and we electedour products. We recognize revenue at a point in time when control of the ordered products passes to do so using a modified retrospective transition method. That modified retrospective transition method allowed usthe customer, which principally occurs either upon shipment or delivery to initially apply the new standard atcustomer or upon pick-up by the adoption date and recognize a cumulative-effect adjustment to retained earningscustomer, depending upon terms included in the opening balance sheetparticular customer arrangement.
Accounting Pronouncements Adopted in the period of adoption without restating prior periods. ASC 842 revised prior practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors and requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets. Under ASC 842, the lease liability is equal to the present value of lease payments, and the ROU asset is based on the lease liability, subject to adjustments, such as for deferred rent and initial direct costs. For income statement purposes, ASC 842 retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to prior accounting by
lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to prior accounting by lessees for capital leases under ASC 840).2021
We elected the package of practical expedients permitted under the transition guidance, which, among other things, allows us to carry forward the historical lease classification. In addition, we made accounting policy elections to combine the lease and non-lease components for all asset categories other than real estate. We also made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less ("short-term leases").
Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $136.5 million and $140.0 million, respectively, with the difference due to prepaid and deferred rents that were reclassified to the ROU asset value. No cumulative-effect adjustment to opening retained earnings was required as of December 1, 2019. The standard did not materially affect our consolidated net income or cash flows for the three- and nine-month periods ended August 31, 2020. See note 4 for further details.
Recently Issued Accounting Pronouncements — Pending Adoption
In January 2017, the Financial Accounting Standards Board ("FASB")FASB issued ASU No. 2017-04 Intangibles—Goodwill and Other Topics (Topic 350)—Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. TheThis new standard was adopted effective December 1, 2020 and will be effective for the first quarterapplied upon recognition of our fiscal year ending November 30, 2021. Early adoption is permitted for all entities for annual and interimany future goodwill impairment testing dates after January 1, 2017.charge. We currently do not expect this guidanceASU to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which institutesinstituted a new model for recognizing credit losses on financial instruments that are not measured at fair value. This standard was adopted by the Company on December 1, 2020. As this ASU did not have a material impact on our consolidated financial statements upon adoption, a cumulative-effect adjustment to retained earnings was not necessary.
Recently Issued Accounting Pronouncements — Pending Adoption
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The ASUnew guidance removes certain exceptions to the general principles for income taxes and also improves consistent application of accounting by clarifying or amending existing guidance. The new standard is effective for the first quarter of our fiscal year ending November 30, 2021,2022, and we anticipateinterim periods within those years. We are currently evaluating the impact that itthe new guidance will primarily impact our credit losses recognized for trade accounts receivable. We currently do not expect this guidance to have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting that provides optional expedients for a limited period of time for accounting for contracts, hedging relationship, and other transactions affected by the London Interbank Offered Rate (LIBOR) or other reference rates expected to be discontinued. These optional expedients can be applied from March 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
2. ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.
Acquisition of Cholula Hot Sauce
On November 30, 2020, we completed the acquisition of the parent company of Cholula Hot Sauce® (Cholula) from L Catterton. The purchase price was approximately $803.0 million, net of cash acquired, subject to certain customary purchase price adjustments. 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 we believe broadens our offerings 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. At the time of the acquisition, annual sales of Cholula were approximately $96 million. 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.
The purchase price of Cholula was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as further described in note 2 of the financial statements in our 2020 Annual Report on Form 10-K for the year ended November 30, 2020. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $4.9 million that was recognized in cost of goods sold during the three months ended February 28, 2021, as the related inventory was sold. During the first quarter of 2021, we adjusted our preliminary purchase accounting associated with the acquired assets and liabilities which increased goodwill by $1.2 million.
Independent valuations of the fair value of acquired assets and liabilities of Cholula, including identified intangible assets and goodwill, remain in process as of February 28, 2021, but will be finalized within the allowable measurement period.
Acquisition of FONA International, LLC
On December 30, 2020, we purchased FONA International, LLC and certain of its affiliates (FONA), a privately held company, for a purchase price of approximately $706.6 million, net of cash acquired, subject to certain customary purchase price adjustments. 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. The acquisition of FONA in fiscal 2021 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 commercial paper. At the time of the acquisition, annual sales of FONA were approximately $114 million. The results of FONA’s operations have been included in our financial statements as a component of our flavor solutions segments from the date of acquisition.
The purchase price of FONA was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The preliminary allocation, net of cash acquired, of the fair value of the FONA acquisition is summarized in the table below (in millions):
| | | | | |
Trade accounts receivable | $ | 12.4 | |
Inventories | 10.3 | |
Goodwill | 389.6 | |
Intangible assets | 266.0 | |
Property, plant and equipment | 36.3 | |
Other assets | 5.5 | |
Trade accounts payable | (3.6) | |
Other accrued liabilities | (9.9) | |
| |
| |
Total | $ | 706.6 | |
We determined the preliminary fair value of intangible assets using the following methodologies. We valued the acquired brand names and trademarks and intellectual property using the relief from royalty method, an income approach. We valued the acquired customer relationships using the excess earnings method, an income approach. Some of the more significant assumptions inherent in developing the preliminary valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, operating profit margin, and working capital/contributory asset charges), royalty rates, the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.
We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $1.4 million that was recognized in cost of goods sold during the three months ended February 28, 2021, as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach.
The preliminary valuation of the acquired net assets of FONA includes $49.0 million allocated to indefinite-lived brand assets, $173.0 million allocated to customer relationships with a weighted-average life of 15 years and $44.0 million allocated to intellectual property with a weighted-average life of 12 years. As a result of the acquisition, we recognized a total of $389.6 million of goodwill. That goodwill primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Our aggregate income tax basis in the acquired intangible assets and goodwill approximates their aggregate book value at the acquisition date. The final allocation of the fair value of the acquired net assets of FONA, including the residual amount of goodwill, was not complete as of February 28, 2021, but will be finalized within the allowable measurement period.
Transaction and Integration Expenses Associated with the Cholula and FONA Acquisitions
We expect transaction and integration expenses related to our acquisitions of Cholula and FONA to total approximately $35 million and $30 million, respectively. Of those total transaction and integration expenses, transaction expenses of $12.4 million were incurred in 2020. We incurred an additional $25.1 million of transaction and integration costs related to Cholula and FONA during the three months ended February 28, 2021. We anticipate incurring the remainder of those transaction and integration expenses in the balance of fiscal 2021.
The following are the transaction and integration expenses recognized during the three months ended February 28, 2021 relating to the Cholula and FONA acquisitions (in millions):
| | | | | |
| 2021 |
Transaction-related expenses included in cost of goods sold | $ | 6.3 | |
Other transaction expenses | 13.8 | |
Integration expenses | 5.0 | |
Total transaction and integration expenses | $ | 25.1 | |
3. SPECIAL CHARGES
In our consolidated income statement, we include a separate line item captioned “Special charges” in arriving at our consolidated operating income. 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, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically 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 on-going basis through completion.
The following is a summary of special charges recognized in the three and nine months ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| | | Three months ended August 31, | | | Nine months ended August 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | |
Employee severance and related benefits | Employee severance and related benefits | $ | 0 | | | $ | 1.1 | | | $ | 2.2 | | | $ | 5.1 | | Employee severance and related benefits | $ | 0.3 | | | $ | 0.3 | | |
Other costs | Other costs | 0.1 | | | 6.6 | | | 1.8 | | | 11.8 | | Other costs | 0.8 | | | 0.7 | | |
Total | Total | $ | 0.1 | | | $ | 7.7 | | | $ | 4.0 | | | $ | 16.9 | | Total | $ | 1.1 | | | $ | 1.0 | | |
We continue to evaluate changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness.
In 2017, our Management Committee approved a multi-year initiative during which we expect to execute significant changes to our global processes, capabilities and operating model to provide a scalable platform for future growth. We expect this initiative
to enable us to accelerate our ability to work globally and cross-functionally by aligning and simplifying processes throughout McCormick, in part building upon our current shared services foundation and expanding the end-to-end processes presently under that foundation. We expect this initiative, which we refer to as Global Enablement ("GE"), to enable this scalable platform for future growth while reducing costs, enabling faster decision making, increasing agility and creating capacity within our organization.
We expect the cost of the GE initiative—to be recognized as “Special charges” in our consolidated income statement over its expected multi-year course—to range from approximately $60 million to $65 million. Of that $60 million to $65 million, we estimate that approximately sixty percent will be attributable to cash payments associated with the related costs of GE implementation and transition, including outside consulting and other costs, and approximately forty percent will be attributable to severance and related benefit payments, all directly related to the initiative. During the nine months ended August 31, 2020, we incurredWhile no special charges associated withwere incurred relating to our GE initiative of $1.1 million. Prior to this, through November 30, 2019,during the three months ended February 28, 2021, we have spent a cumulative total of $38.3$39.9 million on this initiative.initiative through that date.
During the three months ended February 28, 2021, we recorded $1.1 million of special charges consisting of $0.6 million of streamlining actions in EMEA and $0.5 million of streamlining actions in the Americas.
During the three months ended August 31,February 29, 2020, we recorded $0.1$1.0 million of special charges, consisting primarilyall of streamlining actions in our Europe, Middle East and Africa (EMEA) region.
During the nine months ended August 31, 2020, we recorded $4.0 million of special charges consisting of $2.9 million of streamlining actions in EMEA and $1.1 millionwhich related to our GE initiative, including $0.5 million of third-party expenses, $0.3 million related to severance and related benefits, and $0.3 million related to other costs.
During the three months ended August 31, 2019, we recorded $7.7 million of special charges, consisting primarily of (i) $6.0 million related to our GE initiative, including $5.5 million of third-party expenses, $0.3 million related to employee severance and related benefits, and $0.2 million related to other costs, and (ii) $1.3 million related to streamlining actions in our EMEA region.
During the nine months ended August 31, 2019, we recorded $16.9 million of special charges, consisting primarily of (i) $12.2 million related to our GE initiative, including $8.9 million of third-party expenses, $2.0 million related to employee severance and related benefits, and $1.3 million related to other costs, (ii) $2.3 million of employee severance and related benefits associated with streamlining actions in the Americas region, and (iii) $1.9 million related to streamlining actions in our EMEA region.costs.
As of August 31, 2020,February 28, 2021, reserves associated with special charges, which are expected to be paid during the remainder of fiscal year 2020,2021, are included in accounts payable and other accrued liabilities in our consolidated balance sheet.
The following is a breakdown by business segments of special charges for the three and nine months ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| | | Three months ended August 31, | | | Nine months ended August 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | |
Consumer segment | Consumer segment | $ | 0 | | | $ | 4.6 | | | $ | 3.1 | | | $ | 11.0 | | Consumer segment | $ | 0.8 | | | $ | 0.6 | | |
Flavor solutions segment | Flavor solutions segment | 0.1 | | | 3.1 | | | 0.9 | | | 5.9 | | Flavor solutions segment | 0.3 | | | 0.4 | | |
Total special charges | Total special charges | $ | 0.1 | | | $ | 7.7 | | | $ | 4.0 | | | $ | 16.9 | | Total special charges | $ | 1.1 | | | $ | 1.0 | | |
4. GOODWILL
The changes in the carrying amount of goodwill by business segment for the three months ended February 28, 2021 are as follows (in millions):
| | | | | | | | | | | | | | | |
| 2021 | | |
| Consumer | | Flavor Solutions | | | | |
Beginning of the year | $ | 3,711.2 | | | $ | 1,275.1 | | | | | |
| | | | | | | |
Increases in goodwill from acquisition | 0 | | | 389.6 | | | | | |
Changes in preliminary purchase price allocation | 0.8 | | | 0.4 | | | | | |
Foreign currency fluctuations | 15.6 | | | 4.3 | | | | | |
Balance as of the end of period | $ | 3,727.6 | | | $ | 1,669.4 | | | | | |
During the three months ended February 28, 2021, a preliminary valuation of the net assets of FONA acquired in December 2020, resulted in the assignment of $389.6 million of goodwill to the flavor solutions segment. During the three months ended February 28, 2021, we have made changes in the preliminary allocation of the purchase price of Cholula which resulted in an increase in goodwill of $0.8 million to the consumer segment and $0.4 million to the flavor solutions segment.
3.5. FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS
In April 2020,February 2021, we issued $500.0 million of 2.50%0.90% notes due AprilFebruary 15, 2030,2026, with cash proceeds received of $495.0$495.7 million, net of discounts and underwriters' fees. Also in February 2021, we issued $500.0 million of 1.85% notes due February 15, 2031, with cash proceeds received of $492.8 million, net of discounts and underwriters' fees. Interest is payable semiannually on both of these notes in arrears in AprilFebruary and OctoberAugust of each year. The net proceeds from this issuancethese issuances were used to pay down short-term borrowings, including a portion of the $1,443.0 million of commercial paper issued to finance our acquisitions of Cholula and FONA, and for general corporate purposes.
During the nine months ended August 31, 2020 and 2019, we repaid $250.0 million and $106.3 million, respectively, of the five-year term loan due August 17, 2022, which included $56.3 million of aggregate quarterly principal payments required in each nine-month period. During the nine months ended August 31, 2019, we also repaid $100.0 million of the three-year term loan due August 17, 2020.
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency, net investment 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, and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
Foreign currency exchange risk. We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps to reduce fluctuations in the long or short currency positions. Forward contracts are generally less than 18 months duration. Currency swap agreements are established in conjunction with the terms of the underlying debt issues.
At August 31, 2020,February 28, 2021, we had foreign currency exchange contracts to purchase or sell $363.4$558.9 million of foreign currencies as compared to $489.2$383.8 million at November 30, 2019.2020. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. All foreign currency exchange contracts outstanding at August 31, 2020February 28, 2021 have durations of less than 18 months, including $107.0$170.3 million of notional contracts that have durations of less than seven days and are used to hedge short-term cash flow funding.
Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.
We also enter into fair value foreign currency exchange contracts to manage both exposure to currency fluctuations in certain intercompany loans between subsidiaries as well as currency exposure to third-party non-functional currency assets or liabilities. At August 31, 2020,February 28, 2021, the notional value of these contracts was $291.0$423.0 million. Any gains or losses recorded based on both the change in fair value of these contracts and the change in the currency component of the underlying loans are recognized in our consolidated income statement as other income, net.
We also utilize cross currency interest rate swap contracts that are considereddesignated as net investment hedges. As of August 31, 2020,February 28, 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. Any gains or losses on net investment hedges are included in foreign currency translation adjustments in accumulated other comprehensive loss.
Interest rate risk. We finance a portion of our operations with both fixed and variable rate debt instruments, principally commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.
As of August 31, 2020,February 28, 2021, we have outstanding interest rate swap contracts for a notional amount of $350 million. Those interest rate swap contracts include a $100 million notional value of interest rate swap contracts, where we receive interest at 3.25% and pay a variable rate of interest based on three-month LIBOR plus 1.22%, which expire in November 2025, and are designated as fair value hedges of the changes in fair value of $100 million of the $250 million 3.25% medium-term notes due 2025. We also have $250 million notional interest rate swap contracts where we receive interest at 3.40% and pay a variable rate of interest based on three-month LIBOR plus 0.685%, which expire in August 2027, and are designated as fair value hedges of the changes in fair value of $250 million of the $750 million 3.40% term notes due 2027. Any realized gain or loss on these swap contracts was offset by a corresponding increase or decrease of the value of the hedged debt.
All derivatives are recognized at fair value in the balance sheet and recorded in either other current assets, other long-term assets, other accrued liabilities or other long-term liabilities, depending upon their nature and maturity. Hedge ineffectiveness was not material.
The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions):
| | As of August 31, 2020 | Asset Derivatives | | | Liability Derivatives | | |
As of February 28, 2021 | | As of February 28, 2021 | Asset Derivatives | | Liability Derivatives |
| | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value |
Interest rate contracts | Interest rate contracts | Other current assets / Other long-term assets | | $ | 350.0 | | | $ | 45.6 | | | Other accrued liabilities | | $ | 0 | | | $ | 0 | | Interest rate contracts | Other current assets / Other long-term assets | | $ | 350.0 | | | $ | 31.2 | | | Other accrued liabilities | | $ | 0 | | | $ | 0 | |
Foreign exchange contracts | Foreign exchange contracts | Other current assets | | 156.5 | | | 18.1 | | | Other accrued liabilities | | 206.9 | | | 21.3 | | Foreign exchange contracts | Other current assets | | 110.8 | | | 2.7 | | | Other accrued liabilities | | 448.1 | | | 13.2 | |
Cross currency contracts | Cross currency contracts | Other current assets / Other long-term assets | | 0 | | | 0 | | | Other long-term liabilities | | 524.5 | | | 19.3 | | Cross currency contracts | Other current assets / Other long-term assets | | 267.9 | | | 0.2 | | | Other long-term liabilities | | 270.7 | | | 21.3 | |
Total | Total | | $ | 63.7 | | | $ | 40.6 | | Total | | | | | $ | 34.1 | | | | | $ | 34.5 | |
| As of August 31, 2019 | Asset Derivatives | | | Liability Derivatives | | |
As of November 30, 2020 | | As of November 30, 2020 | Asset Derivatives | | Liability Derivatives |
| | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value |
Interest rate contracts | Interest rate contracts | Other current assets / Other long-term assets | | $ | 350.0 | | | $ | 28.2 | | | Other accrued liabilities | | $ | 0 | | | $ | 0 | | Interest rate contracts | Other current assets / Other long-term assets | | $ | 350.0 | | | $ | 43.1 | | | Other accrued liabilities | | $ | 0 | | | $ | 0 | |
Foreign exchange contracts | Foreign exchange contracts | Other current assets | | 104.7 | | | 2.2 | | | Other accrued liabilities | | 350.6 | | | 4.6 | | Foreign exchange contracts | Other current assets | | 27.5 | | | 1.4 | | | Other accrued liabilities | | 356.3 | | | 8.2 | |
Cross currency contracts | Cross currency contracts | Other current assets / Other long-term assets | | 236.4 | | | 14.0 | | | Other long-term liabilities | | 243.9 | | | 13.4 | | Cross currency contracts | Other current assets / Other long-term assets | | 0 | | | 0 | | | Other long-term liabilities | | 524.4 | | | 18.8 | |
Total | Total | | $ | 44.4 | | | $ | 18.0 | | Total | | $ | 44.5 | | | $ | 27.0 | |
| As of November 30, 2019 | Asset Derivatives | | | Liability Derivatives | | |
| Balance sheet location | | Notional amount | | Fair value | | Balance sheet location | | Notional amount | | Fair value | |
Interest rate contracts | Other current assets / Other long-term assets | | $ | 350.0 | | | $ | 20.9 | | | Other accrued liabilities | | $ | 0 | | | $ | 0 | | |
Foreign exchange contracts | Other current assets | | 293.1 | | | 3.3 | | | Other accrued liabilities | | 196.1 | | | 3.6 | | |
Cross currency contracts | Other current assets / Other long-term assets | | 495.5 | | | 3.2 | | | Other long-term liabilities | | 0 | | | 0 | | |
Total | | $ | 27.4 | | | $ | 3.6 | | |
The following tables disclose the impact of derivative instruments on our other comprehensive income ("OCI"), accumulated other comprehensive income ("AOCI") and our consolidated income statement for the three- and nine-monththree-month periods ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| Fair Value Hedges | Fair Value Hedges | | Fair Value Hedges | | |
| Derivative | Derivative | | Income statement location | | Income (expense) | | Derivative | | Income statement location | | Income (expense) |
| | | | | Three months ended August 31, 2020 | | Three months ended August 31, 2019 | | Nine months ended August 31, 2020 | | Nine months ended August 31, 2019 | | | | | Three months ended February 28, 2021 | | Three months ended February 29, 2020 | | |
| Interest rate contracts | Interest rate contracts | | Interest expense | | $ | 1.8 | | | $ | 0 | | | $ | 3.2 | | | $ | (0.3) | | Interest rate contracts | | Interest expense | | $ | 2.0 | | | $ | 0.5 | | | |
| Three months ended August 31, | Income statement location | Gain (loss) recognized in income | | | Income statement location | Gain (loss) recognized in income | | |
Three months ended | | Three months ended | Income statement location | Gain (loss) recognized in income | | Income statement location | Gain (loss) recognized in income |
Derivative | Derivative | | 2020 | 2019 | Hedged item | | 2020 | 2019 | Derivative | | February 28, 2021 | February 29, 2020 | Hedged item | | February 28, 2021 | February 29, 2020 |
Foreign exchange contracts | Foreign exchange contracts | Other income, net | $ | (7.6) | | $ | (5.3) | | Intercompany loans | Other income, net | $ | 7.3 | | $ | 5.2 | | Foreign exchange contracts | Other income, net | $ | (2.1) | | $ | (2.2) | | Intercompany loans | Other income, net | $ | 2.4 | | $ | 2.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended August 31, | Income statement location | Gain (loss) recognized in income | | | Income statement location | Gain (loss) recognized in income | |
Derivative | | 2020 | 2019 | Hedged item | | 2020 | 2019 |
Foreign exchange contracts | Other income, net | $ | (4.1) | | $ | (2.6) | | Intercompany loans | Other income, net | $ | 3.1 | | $ | 2.0 | |
The gains (losses) recognized on fair value hedges relating to currency exposure on third-party non-functional currency assets or liabilities were not material during the three-three-months ended February 28, 2021 and nine-months ended August 31, 2020 and 2019.February 29, 2020.
| Cash Flow Hedges | Cash Flow Hedges | | | | Cash Flow Hedges | | |
Three months ended August 31, | | | | | |
Three months ended | | Three months ended | | | | |
Derivative | Derivative | | Gain (loss) recognized in OCI | | | Income statement location | | Gain (loss) reclassified from AOCI | | Derivative | | Gain (loss) recognized in OCI | | Income statement location | | Gain (loss) reclassified from AOCI |
| | | 2020 | | 2019 | | | | 2020 | | 2019 | | | February 28, 2021 | | February 29, 2020 | | | | February 28, 2021 | | February 29, 2020 |
Interest rate contracts | Interest rate contracts | | $ | 0 | | | $ | 0 | | | Interest expense | | $ | 0.2 | | | $ | 0.2 | | Interest rate contracts | | $ | 0.3 | | | $ | 0 | | | Interest expense | | $ | 0.1 | | | $ | 0.1 | |
Foreign exchange contracts | Foreign exchange contracts | | (0.6) | | | (0.3) | | | Cost of goods sold | | 1.1 | | | 0.5 | | Foreign exchange contracts | | (1.6) | | | 0.6 | | | Cost of goods sold | | 0.3 | | | 0.4 | |
Total | Total | | $ | (0.6) | | | $ | (0.3) | | | $ | 1.3 | | | $ | 0.7 | | Total | | $ | (1.3) | | | $ | 0.6 | | | | | $ | 0.4 | | | $ | 0.5 | |
| Nine months ended August 31, | | | | | |
Derivative | | Gain (loss) recognized in OCI | | | Income statement location | | Gain (loss) reclassified from AOCI | | |
| | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Interest rate contracts | | $ | 0 | | | $ | 0 | | | Interest expense | | $ | 0.4 | | | $ | 0.4 | | |
Foreign exchange contracts | | 2.3 | | | 0.3 | | | Cost of goods sold | | 1.2 | | | 0.9 | | |
Total | | $ | 2.3 | | | $ | 0.3 | | | $ | 1.6 | | | $ | 1.3 | | |
| |
For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive income (loss) expected to be reclassified in the next 12 months is $1.3$1.1 million as an increasea decrease to earnings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Investment Hedges | | | | | | | | | | |
Three months ended August 31, | | | | | | | | | | |
Derivative | | Gain (loss) recognized in OCI | | | | Income statement location | | Gain (loss) excluded from the assessment of hedge effectiveness | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 |
Cross currency contracts | | $ | (17.4) | | | $ | 3.0 | | | Interest expense | | $ | 0.3 | | | $ | 1.7 | |
| | | | | | | | | | |
Nine months ended August 31, | | | | | | | | | | |
Derivative | | Gain (loss) recognized in OCI | | | | Income statement location | | Gain (loss) excluded from the assessment of hedge effectiveness | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 |
Cross currency contracts | | $ | (20.7) | | | $ | 0.3 | | | Interest expense | | $ | 2.7 | | | $ | 3.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Investment Hedges | | |
Three months ended | | | | | | | | | | |
Derivative | | Gain (loss) recognized in OCI | | Income statement location | | Gain (loss) excluded from the assessment of hedge effectiveness |
| | February 28, 2021 | | February 29, 2020 | | | | February 28, 2021 | | February 29, 2020 |
Cross currency contracts | | $ | (2.0) | | | $ | 0.2 | | | Interest expense | | $ | 0.4 | | | $ | 1.3 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
For all net investment hedges, no amounts have been reclassified out of accumulated other comprehensive income (loss). The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.
4. LEASES
Our lease portfolio primarily consists of (i) certain real estate, including those related to a number of administrative, distribution and manufacturing locations; (ii) certain machinery and equipment, including forklifts; and (iii) automobiles, delivery trucks and other vehicles, including an airplane. When our real estate lease arrangements include lease and non-lease components (for example, common area maintenance), we account for each component separately, based on their relative standalone prices. For all other asset categories, we combine lease components and non-lease components into a single lease commitment. We determine if an agreement is a lease or contains a lease at inception. Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet.
ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.
As most of our leases do not provide an implicit borrowing rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments that are adjusted periodically based on a market rate or index. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.
The following table presents the components of our lease expense (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended August 31, 2020 | Nine months ended August 31, 2020 | |
Operating lease cost | | | | $ | 9.7 | | $ | 30.3 | | |
Finance lease cost: | | | | | | |
Amortization of ROU assets | | | | 2.2 | | 6.7 | | |
Interest on lease liabilities | | | | 1.1 | | 3.4 | | |
Net lease cost (1) | | | | $ | 13.0 | | $ | 40.4 | | |
| | | | | | |
(1) Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial. | | | | | | |
Supplemental balance sheet information related to leases as of August 31, 2020 were as follows (in millions):
| | | | | | | | | | | | | | |
Leases | | Classification | | |
Assets | | | | |
Operating lease ROU assets | | Other long-term assets | | $ | 121.3 | |
| | | | |
Finance lease ROU assets | | Property, plant and equipment, net | | 124.3 | |
| | | | |
Total leased assets | | | | $ | 245.6 | |
| | | | |
Liabilities | | | | |
Current | | | | |
Operating | | Other accrued liabilities | | $ | 33.6 | |
Finance | | Current portion of long-term debt | | 7.3 | |
Non-current | | | | |
Operating | | Other long-term liabilities | | 91.4 | |
Finance | | Long-term debt | | 127.3 | |
Total lease liabilities | | | | $ | 259.6 | |
Information regarding our lease terms and discount rates as of August 31, 2020 were as follows:
| | | | | | | | | | | |
| Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | 5.7 | | 2.1 | % |
Finance leases | 14.3 | | 3.3 | % |
The future maturity of our lease liabilities as of August 31, 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Operating leases | | Finance leases | | Total |
2020 (remainder of year) | $ | 9.6 | | | $ | 2.8 | | | $ | 12.4 | |
2021 | 33.9 | | | 11.4 | | | 45.3 | |
2022 | 25.5 | | | 11.4 | | | 36.9 | |
2023 | 18.1 | | | 11.4 | | | 29.5 | |
2024 | 11.3 | | | 11.5 | | | 22.8 | |
Thereafter | 34.1 | | | 125.9 | | | 160.0 | |
Total lease payments | 132.5 | | | 174.4 | | | 306.9 | |
Less: Imputed interest | 7.5 | | | 39.8 | | | 47.3 | |
Total lease liabilities | $ | 125.0 | | | $ | 134.6 | | | $ | 259.6 | |
Supplemental cash flow and other information related to leases for the nine months ended August 31, 2020 were as follows (in million):
| | | | | |
| |
Cash paid for amounts included in the measurements of lease liabilities: | |
Operating cash flows used for operating leases | $ | 30.4 | |
Operating cash flows used for finance leases | 3.4 | |
Financing cash flows used for finance leases | 5.1 | |
| |
ROU assets obtained in exchange for lease liabilities | |
Operating leases | $ | 8.7 | |
| |
5.6. FAIR VALUE MEASUREMENTS
Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
At August 31, 2020, August 31, 2019February 28, 2021 and November 30, 2019,2020, we had no financial assets or liabilities that were subject to a level 3 fair value measurement. Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | August 31, 2020 | | | | |
| | Fair Value | | Level 1 | | Level 2 | | |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 221.0 | | | $ | 221.0 | | | $ | 0 | | | |
Insurance contracts | | 120.8 | | | 0 | | | 120.8 | | | |
Bonds and other long-term investments | | 5.6 | | | 5.6 | | | 0 | | | |
Interest rate derivatives | | 45.6 | | | 0 | | | 45.6 | | | |
Foreign currency derivatives | | 18.1 | | | 0 | | | 18.1 | | | |
| | | | | | | | |
Total | | $ | 411.1 | | | $ | 226.6 | | | $ | 184.5 | | | |
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 21.3 | | | $ | 0 | | | $ | 21.3 | | | |
| | | | | | | | |
Cross currency contracts | | 19.3 | | | 0 | | | 19.3 | | | |
Total | | $ | 40.6 | | | $ | 0 | | | $ | 40.6 | | | |
| | | August 31, 2019 | | | February 28, 2021 |
| | | Fair Value | | Level 1 | | Level 2 | | | | Fair Value | | Level 1 | | Level 2 | |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 162.9 | | | $ | 162.9 | | | $ | 0 | | | Cash and cash equivalents | | $ | 256.1 | | | $ | 256.1 | | | $ | 0 | | |
Insurance contracts | Insurance contracts | | 117.2 | | | 0 | | | 117.2 | | | Insurance contracts | | 124.1 | | | 0 | | | 124.1 | | |
Bonds and other long-term investments | Bonds and other long-term investments | | 4.3 | | | 4.3 | | | 0 | | | Bonds and other long-term investments | | 6.2 | | | 6.2 | | | 0 | | |
Interest rate derivatives | Interest rate derivatives | | 28.2 | | | — | | | 28.2 | | | Interest rate derivatives | | 31.2 | | | 0 | | | 31.2 | | |
Foreign currency derivatives | Foreign currency derivatives | | 2.2 | | | 0 | | | 2.2 | | | Foreign currency derivatives | | 2.7 | | | 0 | | | 2.7 | | |
Cross currency contracts | Cross currency contracts | | 14.0 | | | — | | | 14.0 | | | Cross currency contracts | | 0.2 | | | — | | | 0.2 | | |
Total | Total | | $ | 328.8 | | | $ | 167.2 | | | $ | 161.6 | | | Total | | $ | 420.5 | | | $ | 262.3 | | | $ | 158.2 | | |
Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Foreign currency derivatives | Foreign currency derivatives | | $ | 4.6 | | | $ | 0 | | | $ | 4.6 | | | Foreign currency derivatives | | $ | 13.2 | | | $ | 0 | | | $ | 13.2 | | |
| Cross currency contracts | Cross currency contracts | | 13.4 | | | — | | | 13.4 | | | Cross currency contracts | | 21.3 | | | 0 | | | 21.3 | | |
Total | Total | | $ | 18.0 | | | $ | 0 | | | $ | 18.0 | | | Total | | $ | 34.5 | | | $ | 0 | | | $ | 34.5 | | |
| | | November 30, 2019 | | | November 30, 2020 |
| | | Fair Value | | Level 1 | | Level 2 | | | | Fair Value | | Level 1 | | Level 2 | |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 155.4 | | | $ | 155.4 | | | $ | 0 | | | Cash and cash equivalents | | $ | 423.6 | | | $ | 423.6 | | | $ | 0 | | |
Insurance contracts | Insurance contracts | | 121.7 | | | 0 | | | 121.7 | | | Insurance contracts | | 126.0 | | | 0 | | | 126.0 | | |
Bonds and other long-term investments | Bonds and other long-term investments | | 2.7 | | | 2.7 | | | 0 | | | Bonds and other long-term investments | | 3.9 | | | 3.9 | | | 0 | | |
Interest rate derivatives | Interest rate derivatives | | 20.9 | | | — | | | 20.9 | | | Interest rate derivatives | | 43.1 | | | — | | | 43.1 | | |
Foreign currency derivatives | Foreign currency derivatives | | 3.3 | | | 0 | | | 3.3 | | | Foreign currency derivatives | | 1.4 | | | 0 | | | 1.4 | | |
Cross currency contracts | | 3.2 | | | — | | | 3.2 | | | |
| Total | Total | | $ | 307.2 | | | $ | 158.1 | | | $ | 149.1 | | | Total | | $ | 598.0 | | | $ | 427.5 | | | $ | 170.5 | | |
Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Foreign currency derivatives | Foreign currency derivatives | | $ | 3.6 | | | $ | 0 | | | $ | 3.6 | | | Foreign currency derivatives | | $ | 8.2 | | | $ | 0 | | | $ | 8.2 | | |
| Cross currency contracts | | Cross currency contracts | | 18.8 | | | — | | | 18.8 | | |
Total | Total | | $ | 3.6 | | | $ | 0 | | | $ | 3.6 | | | Total | | $ | 27.0 | | | $ | 0 | | | $ | 27.0 | | |
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar-type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate derivatives, foreign currency derivatives, and cross currency contracts are based on values for similar instruments using models with market-based inputs.
The following table sets forth the carrying amounts and fair values of our long-term debt including the current portion thereof (in millions):
| | | August 31, 2020 | | August 31, 2019 | | November 30, 2019 | | February 28, 2021 | | November 30, 2020 |
Carrying amount | Carrying amount | $ | 4,001.2 | | | $ | 3,962.4 | | | $ | 3,723.5 | | Carrying amount | $ | 5,005.1 | | | $ | 4,017.7 | |
Fair value | Fair value | 4,339.3 | | | 4,153.7 | | | 3,859.0 | | Fair value | 5,274.7 | | | 4,357.1 | |
| Level 1 valuation techniques | Level 1 valuation techniques | $ | 4,162.9 | | | $ | 3,475.0 | | | $ | 3,437.5 | | Level 1 valuation techniques | $ | 5,068.8 | | | $ | 4,161.3 | |
Level 2 valuation techniques | Level 2 valuation techniques | 176.4 | | | 678.7 | | | 421.5 | | Level 2 valuation techniques | 205.9 | | | 195.8 | |
Total fair value | Total fair value | $ | 4,339.3 | | | $ | 4,153.7 | | | $ | 3,859.0 | | Total fair value | $ | 5,274.7 | | | $ | 4,357.1 | |
The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments.
6.7.EMPLOYEE BENEFIT AND RETIREMENT PLANS
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We also contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. DAs more fully described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2019, duringuring fiscal years 2018 and 2017, we made significant changes to our employee benefit and retirement plans that froze the accrual of future benefits under certain defined benefit pension plans in the U.S. and certain foreign locations. Although our defined benefit plans in the U.S., United Kingdom and Canada have been frozen, employees who are participants in the plans retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans.
The following table presents the components of our pension expense (income) of the defined benefit plans for the three months ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| | | United States | | | International | | | United States | | International |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Defined benefit plans | Defined benefit plans | | | | | | | | Defined benefit plans | | | | | | | |
Service cost | Service cost | $ | 0.8 | | | $ | 0.5 | | | $ | 0.2 | | | $ | 0.9 | | Service cost | $ | 0.9 | | | $ | 0.8 | | | $ | 0.3 | | | $ | 0.2 | |
Interest costs | Interest costs | 7.3 | | | 8.6 | | | 1.9 | | | 2.3 | | Interest costs | 6.5 | | | 7.3 | | | 1.7 | | | 1.9 | |
Expected return on plan assets | Expected return on plan assets | (10.2) | | | (10.6) | | | (3.7) | | | (4.0) | | Expected return on plan assets | (10.3) | | | (10.1) | | | (3.5) | | | (3.8) | |
Amortization of prior service costs | Amortization of prior service costs | 0.2 | | | 0.1 | | | 0.1 | | | 0 | | Amortization of prior service costs | 0.1 | | | 0.1 | | | 0 | | | 0 | |
Amortization of net actuarial losses | Amortization of net actuarial losses | 2.0 | | | 0.6 | | | 0.5 | | | 0.3 | | Amortization of net actuarial losses | 2.8 | | | 2.0 | | | 0.6 | | | 0.5 | |
Settlement loss | — | | | — | | | 0.7 | | | — | | |
| Total pension expense (income) | Total pension expense (income) | $ | 0.1 | | | $ | (0.8) | | | $ | (0.3) | | | $ | (0.5) | | Total pension expense (income) | $ | 0 | | | $ | 0.1 | | | $ | (0.9) | | | $ | (1.2) | |
The following table presents the components of our pension expense (income) of the defined benefit plans for the nine months ended August 31, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | | | International | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Defined benefit plans | | | | | | | |
Service cost | $ | 2.4 | | | $ | 1.5 | | | $ | 0.7 | | | $ | 2.7 | |
Interest costs | 22.0 | | | 25.8 | | | 5.6 | | | 7.1 | |
Expected return on plan assets | (30.5) | | | (31.8) | | | (11.2) | | | (12.3) | |
Amortization of prior service costs | 0.4 | | | 0.3 | | | 0.1 | | | 0.1 | |
Amortization of net actuarial losses | 5.9 | | | 1.8 | | | 1.5 | | | 0.9 | |
Settlement loss | — | | | — | | | 1.2 | | | — | |
Total pension expense (income) | $ | 0.2 | | | $ | (2.4) | | | $ | (2.1) | | | $ | (1.5) | |
During the ninethree months ended August 31,February 28, 2021 and February 29, 2020, and 2019, we contributed $9.3$2.3 million and $8.9$1.9 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 20192020 were $11.4$11.9 million.
The following table presents the components of our other postretirement benefits expense (income) for the three months ended February 28, 2021 and February 29, 2020 (in millions):
| | | Three months ended August 31, | | | Nine months ended August 31, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Other postretirement benefits | Other postretirement benefits | | | | | | | | | Other postretirement benefits | | | | | |
Service cost | Service cost | | $ | 0.5 | | | $ | 0.5 | | | $ | 1.4 | | | $ | 1.5 | | Service cost | | $ | 0.5 | | | $ | 0.5 | | |
Interest costs | Interest costs | | 0.5 | | | 0.7 | | | 1.5 | | | 2.0 | | Interest costs | | 0.4 | | | 0.5 | | |
Amortization of prior service credits | Amortization of prior service credits | | (1.2) | | | (2.2) | | | (3.5) | | | (6.5) | | Amortization of prior service credits | | (0.1) | | | (1.1) | | |
Amortization of net actuarial gains | Amortization of net actuarial gains | | 0 | | | (0.1) | | | (0.1) | | | (0.5) | | Amortization of net actuarial gains | | 0 | | | (0.1) | | |
| Total other postretirement benefits (income) | | $ | (0.2) | | | $ | (1.1) | | | $ | (0.7) | | | $ | (3.5) | | |
Total other postretirement benefits expense (income) | | Total other postretirement benefits expense (income) | | $ | 0.8 | | | $ | (0.2) | | |
All of the amounts in the tables above for pension expense and other postretirement benefits expense, other than service cost, were included in the income statement caption "Other income, net" within our consolidated income statements. The aggregate amount of pension and other postretirement benefits (income) expenses, excluding service cost components, were $(1.9)$(1.8) million and $(2.8) million for the three months ended February 28, 2021 and February 29, 2020, respectively.
and $(4.3) million for the three months ended August 31, 2020 and 2019, respectively and $(7.1) million and $(13.1) million for the nine months ended August 31, 2020 and 2019, respectively.
7.8. STOCK-BASED COMPENSATION
We have 34 types of stock-based compensation awards: restricted stock units ("RSUs"), stock options, and company stock awarded as part of our long-term performance plan ("LTPP"). and, beginning in the fourth quarter of 2020, price-vested stock options. The following table sets forth the stock-based compensation expense recorded in selling, general and administrative ("SG&A") expense for the three months ended February 28, 2021 and February 29, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended August 31, | | | | Nine months ended August 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Stock-based compensation expense | $ | 10.7 | | | $ | 7.8 | | | $ | 37.8 | | | $ | 30.6 | |
| | | | | | | | | | | | | | | |
| | | |
| 2021 | | 2020 | | | | |
Stock-based compensation expense | $ | 14.2 | | | $ | 6.4 | | | | | |
Our 20202021 annual grant of stock options and RSUs occurredis expected to occur in the second quarter, similar to the 20192020 annual grant. The weighted-average grant-date fair value of each stock option granted in 2020 was $26.53 and in 2019 was $27.51 as calculated under a lattice pricing model. Substantially all of the stock options and RSUs granted in 2020 vest ratably over a three-year period or, if earlier, upon the retirement eligibility date of the holder. The fair values of stock option grants in the stated periods were computed using the following range of assumptions for our various stock compensation plans:
| | | | | | | | | | | |
| 2020 | | 2019 |
Risk-free interest rates | 0.0 - 0.6% | | 2.2 - 2.5% |
Dividend yield | 1.8% | | 1.5% |
Expected volatility | 22.8% | | 17.4% |
Expected lives (in years) | 7.9 | | 7.5 |
The0The following is a summary of our stock option activity for the ninethree months ended August 31, 2020February 28, 2021 and 2019:February 29, 2020:
| | | 2020 | | | 2019 | | | 2021 | | 2020 |
(shares in millions) | (shares in millions) | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price | (shares in millions) | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price |
Outstanding at beginning of period | Outstanding at beginning of period | 2.6 | | | $ | 96.18 | | | 3.6 | | | $ | 82.60 | | Outstanding at beginning of period | 4.5 | | | $ | 53.56 | | | 5.2 | | | $ | 48.09 | |
Granted | 0.4 | | | 138.62 | | | 0.3 | | | 147.39 | | |
| Exercised | Exercised | (0.7) | | | 81.88 | | | (1.2) | | | 70.78 | | Exercised | (0.1) | | | 39.30 | | | (0.2) | | | 35.19 | |
Outstanding at end of the period | Outstanding at end of the period | 2.3 | | | $ | 106.88 | | | 2.7 | | | $ | 95.50 | | Outstanding at end of the period | 4.4 | | | $ | 53.62 | | | 5.0 | | | $ | 48.47 | |
Exercisable at end of the period | Exercisable at end of the period | 1.6 | | | $ | 95.33 | | | 2.0 | | | $ | 86.08 | | Exercisable at end of the period | 3.2 | | | $ | 47.95 | | | 3.6 | | | $ | 43.73 | |
As of August 31, 2020,February 28, 2021, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $225.5$135.2 million and for options currently exercisable was $180.2$115.0 million. The total intrinsic value of all options exercised during the ninethree months ended August 31,February 28, 2021 and February 29, 2020 and 2019 was $65.3$2.2 million and $102.8$8.6 million, respectively.
The following is a summary of our RSU activity for the ninethree months ended August 31, 2020February 28, 2021 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | |
(shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value |
Outstanding at beginning of period | 381 | | | $ | 115.89 | | | 423 | | | $ | 103.05 | |
Granted | 148 | | | 134.06 | | | 129 | | | 143.15 | |
Vested | (137) | | | 109.97 | | | (134) | | | 96.74 | |
Forfeited | (7) | | | 124.30 | | | (9) | | | 112.10 | |
Outstanding at end of period | 385 | | | $ | 124.82 | | | 409 | | | $ | 117.51 | |
February 29, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value |
Outstanding at beginning of period | 714 | | | $ | 61.74 | | | 762 | | | $ | 57.95 | |
Granted | 10 | | | 91.85 | | | 0 | | | 0 | |
Vested | (10) | | | 47.70 | | | (8) | | | 35.01 | |
Forfeited | (6) | | | 65.74 | | | (10) | | | 60.22 | |
Outstanding at end of period | 708 | | | $ | 62.34 | | | 744 | | | $ | 58.20 | |
The following is a summary of our Price-Vested Stock Options activity for the three months ended February 28, 2021:
| | | | | | | | | | | | | | | |
| | | |
(shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | | | |
Outstanding at beginning of period | 2,482 | | | $ | 9.40 | | | | | |
Granted | 15 | | | 9.66 | | | | | |
| | | | | | | |
Forfeited | (13) | | | 9.40 | | | | | |
Outstanding at end of period | 2,484 | | | $ | 9.40 | | | | | |
The following is a summary of our LTPP activity for the ninethree months ended August 31, 2020February 28, 2021 and 2019:February 29, 2020:
| | | 2020 | | | 2019 | | | 2021 | | 2020 |
(shares in thousands) | (shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value | (shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value |
Outstanding at beginning of period | Outstanding at beginning of period | 196 | | | $ | 115.96 | | | 218 | | | $ | 83.55 | | Outstanding at beginning of period | 382 | | | $ | 71.20 | | | 392 | | | $ | 57.98 | |
Granted | Granted | 65 | | | 172.28 | | | 102 | | | 150.51 | | Granted | 141 | | | 98.30 | | | 130 | | | 84.37 | |
Vested | Vested | (44) | | | 89.96 | | | (57) | | | 86.40 | | Vested | (121) | | | 50.95 | | | (88) | | | 44.98 | |
Forfeited | Forfeited | (3) | | | 127.46 | | | 0 | | | 0 | | Forfeited | (5) | | | 82.59 | | | (2) | | | 68.48 | |
Outstanding at end of period | Outstanding at end of period | 214 | | | $ | 138.26 | | | 263 | | | $ | 117.14 | | Outstanding at end of period | 397 | | | $ | 86.89 | | | 432 | | | $ | 68.52 | |
8.9. INCOME TAXES
Income taxes for the three months ended August 31, 2020February 28, 2021 included $13.2$5.3 million of net discrete tax benefitsexpense consisting principally of the following: (i) $7.3$11.4 million of excessdeferred state tax benefits associated with share-based compensation, (ii) $2.1 million of tax benefitsexpense directly related to the reversalour December 2020 acquisition of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $2.0 million for an adjustment to a prior year tax accrual based on the final return filed, and (iv) $1.1 million related to the revaluation of deferred taxes resulting from enacted legislation. Income taxes for the nine months ended August 31, 2020 included $40.1 million of discrete tax benefits consisting principally of the following: (i) $13.0 million of excess tax benefits associated with share-based compensation,FONA, (ii) $9.9 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter, (iii) $9.3$4.5 million of tax benefits associated with the release of a valuation allowance due to a change in judgment about realizability of deferred tax assets, (iv) $5.5and (iii) $1.2 million of tax benefits related tofrom the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expirationresolution of statutes of limitations in various jurisdictions, and (v) $2.0 million for an adjustment to a prior year tax accrual based on the final return filed.uncertainties.
Income taxes for the three months ended August 31, 2019February 29, 2020 included $15.5$10.4 million of net discrete tax benefits consisting principally of the following: (i) $8.3 million of excess tax benefits associated with share-based compensation, (ii) $2.4 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $2.5 million related to the revaluation of deferred tax liabilities resulting from enacted legislation and (iv) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act, described below. Income taxes for the nine months ended August 31, 2019 included $44.4 million of discrete tax benefits consisting principally of the following: (i) $21.2 million of excess tax benefits associated with share-based compensation, (ii) $16.2$9.9 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter, (iii) $2.6(ii) $1.8 million related to the reversal of unrecognizedexcess tax benefits and related interest associated with the expirationshare-based compensation, and (iii) $1.4 million of statutes of limitation in several jurisdictions, (iv) $2.1 millionexpense related to the revaluation of deferred tax liabilities resulting from enacted legislation and (v) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act, described below.
In December 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (this legislation was formerly called the “Tax Cuts and Jobs Act” and is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provided for significant changes in the U.S. Internal Revenue Code of 1986, as amended. During the three and nine months ended August 31, 2019, we recorded a net income tax benefit of $1.5 million associated with a provision-to-return adjustment related to the U.S Tax Act.certain non-U.S. jurisdictions.
Other than additions for current year tax positions and the reversal of unrecognized tax benefits and related interest noted above, there were no significant changes to unrecognized tax benefits during the ninethree months ended August 31, 2020.February 28, 2021.
As of August 31, 2020,February 28, 2021, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements.
9.10. CAPITAL STOCK AND EARNINGS PER SHARE AND STOCK ISSUANCE
The following table sets forth the reconciliation of average shares outstanding for the three months ended February 28, 2021 and February 29, 2020 (in millions):
| | | Three months ended | | | Nine months ended | | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | 2021 | | 2020 | |
Average shares outstanding – basic | Average shares outstanding – basic | 133.3 | | | 132.8 | | | 133.1 | | | 132.5 | | Average shares outstanding – basic | 267.1 | | | 266.0 | | |
Effect of dilutive securities: | Effect of dilutive securities: | | Effect of dilutive securities: | | |
Stock options/RSUs/LTPP | Stock options/RSUs/LTPP | 1.5 | | | 1.4 | | | 1.4 | | | 1.5 | | Stock options/RSUs/LTPP | 2.8 | | | 2.7 | | |
Average shares outstanding – diluted | Average shares outstanding – diluted | 134.8 | | | 134.2 | | | 134.5 | | | 134.0 | | Average shares outstanding – diluted | 269.9 | | | 268.7 | | |
The following table sets forth the stock options and RSUs for the three months ended February 28, 2021 and February 29, 2020 that were not considered in our earnings per share calculation since they were anti-dilutive (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | Nine months ended | | |
| August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 |
| | | | | | | |
Anti-dilutive securities | 0 | | | 0.2 | | | 0.1 | | | 0.1 | |
| | | | | | | | | | | | | | | |
| | | |
| 2021 | | 2020 | | | | |
| | | | | | | |
Anti-dilutive securities | 0 | | | 0.2 | | | | | |
The following table sets forth the common stock activity for the three months ended February 28, 2021 and February 29, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | Nine months ended | | |
| August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 |
Shares issued under stock options, RSUs, LTPP and employee stock purchase plans | 0.3 | | | 0.5 | | | 0.8 | | | 1.4 | |
Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, LTPP and employee stock purchase programs | 0.1 | | | 0.1 | | | 0.3 | | | 0.6 | |
| | | | | | | | | | | | | | | |
| | | |
| 2021 | | 2020 | | | | |
Shares issued under stock options, RSUs, LTPP and employee stock purchase plans | 0.2 | | | 0.2 | | | | | |
Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, LTPP and employee stock purchase programs | 0.1 | | | 0.2 | | | | | |
As of August 31, 2020, $586.0February 28, 2021, $584.6 million remained of the $600 million share repurchase program authorization approved by our Board of Directors in November 2019.
10.11. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax, where applicable (in millions):
| | | | | | | | | | | | | | | | | |
| August 31, 2020 | | August 31, 2019 | | November 30, 2019 |
Foreign currency translation adjustment (1) | $ | (198.5) | | | $ | (308.2) | | | $ | (266.5) | |
Unrealized gain (loss) on foreign currency exchange contracts | 0.3 | | | (0.8) | | | 0 | |
| | | | | |
Unamortized value of settled interest rate swaps | 0 | | | 0.4 | | | 0.3 | |
Pension and other postretirement costs | (231.7) | | | (119.7) | | | (234.0) | |
Accumulated other comprehensive loss | $ | (429.9) | | | $ | (428.3) | | | $ | (500.2) | |
| | | | | | | | | | | | | |
| February 28, 2021 | | | | November 30, 2020 |
Foreign currency translation adjustment (1) | $ | (124.9) | | | | | $ | (174.0) | |
Unrealized gain (loss) on foreign currency exchange contracts | (1.7) | | | | | (0.4) | |
| | | | | |
Unamortized value of settled interest rate swaps | 0 | | | | | (0.1) | |
Pension and other postretirement costs | (295.9) | | | | | (296.3) | |
Accumulated other comprehensive loss | $ | (422.5) | | | | | $ | (470.8) | |
(1)TheDuring the three months ended February 28, 2021, the foreign currency translation adjustment of accumulated other comprehensive loss decreased on a net basis by $68.0$49.1 million, during the nine months ended August 31, 2020, including the impact of a $20.7$2.0 million increase associated with net investment hedges. These net investment hedges asare more fully described in note 3.5.
The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the three months ended February 28, 2021 and February 29, 2020 (in millions):
| | | Three months ended | | | Nine months ended | | | Affected Line Items in the Condensed Consolidated Income Statement | | | | | | Affected Line Items in the Condensed Consolidated Income Statement |
Accumulated Other Comprehensive Income (Loss) Components | Accumulated Other Comprehensive Income (Loss) Components | | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | | Affected Line Items in the Condensed Consolidated Income Statement | 2021 | | 2020 | | Affected Line Items in the Condensed Consolidated Income Statement | |
(Gains)/losses on cash flow hedges: | (Gains)/losses on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate derivatives | Interest rate derivatives | | $ | (0.2) | | | $ | (0.2) | | | $ | (0.4) | | | $ | (0.4) | | | Interest expense | | Interest rate derivatives | | $ | (0.1) | | | $ | (0.1) | | | | Interest expense |
Foreign exchange contracts | Foreign exchange contracts | | (1.1) | | | (0.5) | | | (1.2) | | | (0.9) | | | Cost of goods sold | | Foreign exchange contracts | | (0.3) | | | (0.4) | | | | Cost of goods sold |
Total before tax | Total before tax | | (1.3) | | | (0.7) | | | (1.6) | | | (1.3) | | | Total before tax | | (0.4) | | | (0.5) | | | |
Tax effect | Tax effect | | 0.3 | | | 0.1 | | | 0.4 | | | 0.3 | | | Income taxes | | Tax effect | | 0.1 | | | 0.1 | | | | Income taxes |
Net, after tax | Net, after tax | | $ | (1.0) | | | $ | (0.6) | | | $ | (1.2) | | | $ | (1.0) | | | Net, after tax | | $ | (0.3) | | | $ | (0.4) | | | |
| Amortization of pension and postretirement benefit adjustments: | Amortization of pension and postretirement benefit adjustments: | | Amortization of pension and postretirement benefit adjustments: | | | |
Amortization of prior service costs (credit) (1) | Amortization of prior service costs (credit) (1) | | $ | (0.9) | | | $ | (2.1) | | | $ | (3.0) | | | $ | (6.1) | | | Other income, net | | Amortization of prior service costs (credit) (1) | | $ | 0 | | | $ | (1.0) | | | | Other income, net |
Amortization of net actuarial losses (1) | Amortization of net actuarial losses (1) | | 3.2 | | | 0.8 | | | 8.5 | | | 2.2 | | | Other income, net | | Amortization of net actuarial losses (1) | | 3.4 | | | 2.4 | | | | Other income, net |
Total before tax | Total before tax | | 2.3 | | | (1.3) | | | 5.5 | | | (3.9) | | | Total before tax | | 3.4 | | | 1.4 | | | |
Tax effect | Tax effect | | (0.6) | | | 0.3 | | | (1.3) | | | 0.9 | | | Income taxes | | Tax effect | | (0.8) | | | (0.3) | | | | Income taxes |
Net, after tax | Net, after tax | | $ | 1.7 | | | $ | (1.0) | | | $ | 4.2 | | | $ | (3.0) | | | Net, after tax | | $ | 2.6 | | | $ | 1.1 | | | |
(1) This accumulated other comprehensive income (loss) component, including settlement losses, is included in the computation of total pension expense and other postretirement benefits expense (refer to note 67 for additional details).
11.12. BUSINESS SEGMENTS
We operate in 2 business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, herbs, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce under the “McCormick” brand and a variety of brands around the world, including “French’s”, “Frank’s RedHot”, “OLD BAY”, “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Cholula”, “Schwartz”, “Club House”, “Kamis”, “Kohinoor”, “DaQiao”, “La Drogheria”, “Stubb's”, and “Gourmet Garden”. Our flavor solutions segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors, with the exception of our businesses in China and India, where foodservice sales are managed by and reported in our consumer segment.
In each of our segments, we produce and sell many individual products which are similar in composition and nature. With their primary attribute being flavor, we regard the products within each of our segments to be fairly homogenous. It is impracticable to segregate and identify sales and profits for each of these individual product lines.
We measure segment performance based on operating income excluding special charges, as this activity is managed separately from the business segments. We also exclude transaction and integration expenses related to our acquisitions of Cholula and FONA from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include the
amortization of the acquisition-date fair value adjustment of inventories that is included in Cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the businesses.
Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for internal reporting, evaluating performance or allocating capital. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.
| | | Consumer | | Flavor Solutions | | Total | | Consumer | | Flavor Solutions | | Total |
| | | | (in millions) | | | | | | (in millions) | | |
Three months ended August 31, 2020 | | |
Three months ended February 28, 2021 | | Three months ended February 28, 2021 | |
Net sales | | Net sales | $ | 946.8 | | | $ | 534.7 | | | $ | 1,481.5 | |
Operating income excluding special charges and transaction and integration expenses | | Operating income excluding special charges and transaction and integration expenses | 189.9 | | | 72.6 | | | 262.5 | |
Income from unconsolidated operations | | Income from unconsolidated operations | 10.8 | | | 2.5 | | | 13.3 | |
| Three months ended February 29, 2020 | | Three months ended February 29, 2020 | |
Net sales | Net sales | $ | 910.9 | | | $ | 519.4 | | | $ | 1,430.3 | | Net sales | $ | 699.5 | | | $ | 512.5 | | | $ | 1,212.0 | |
Operating income excluding special charges | Operating income excluding special charges | 209.0 | | | 64.1 | | | 273.1 | | Operating income excluding special charges | 119.6 | | | 75.6 | | | 195.2 | |
Income from unconsolidated operations | Income from unconsolidated operations | 8.5 | | | 1.1 | | | 9.6 | | Income from unconsolidated operations | 7.8 | | | 2.6 | | | 10.4 | |
| Three months ended August 31, 2019 | | |
Net sales | $ | 794.2 | | | $ | 535.0 | | | $ | 1,329.2 | | |
Operating income excluding special charges | 176.5 | | | 84.7 | | | 261.2 | | |
Income from unconsolidated operations | 7.3 | | | 2.3 | | | 9.6 | | |
| | | |
Nine months ended August 31, 2020 | | |
Net sales | $ | 2,573.0 | | | $ | 1,470.4 | | | $ | 4,043.4 | | |
Operating income excluding special charges | 560.2 | | | 168.4 | | | 728.6 | | |
Income from unconsolidated operations | 24.7 | | | 5.5 | | | 30.2 | | |
| Nine months ended August 31, 2019 | | |
Net sales | $ | 2,303.2 | | | $ | 1,559.4 | | | $ | 3,862.6 | | |
Operating income excluding special charges | 449.6 | | | 225.8 | | | 675.4 | | |
Income from unconsolidated operations | 22.7 | | | 6.5 | | | 29.2 | | |
|
A reconciliation of operating income excluding special charges and, for 2021, transaction and integration expenses, to operating income is as follows (in millions):
| | | Consumer | | Flavor Solutions | | Total | | Consumer | | Flavor Solutions | | Total |
Three months ended August 31, 2020 | | | | | | |
Operating income excluding special charges | $ | 209.0 | | | $ | 64.1 | | | $ | 273.1 | | |
Three months ended February 28, 2021 | | Three months ended February 28, 2021 | | | | | |
Operating income excluding special charges and transaction and integration expenses | | Operating income excluding special charges and transaction and integration expenses | $ | 189.9 | | | $ | 72.6 | | | $ | 262.5 | |
Less: Special charges | Less: Special charges | 0 | | | 0.1 | | | 0.1 | | Less: Special charges | 0.8 | | | 0.3 | | | 1.1 | |
| Less: Transaction-related expenses included in cost of goods sold | | Less: Transaction-related expenses included in cost of goods sold | 4.0 | | | 2.3 | | | 6.3 | |
Less: Other transaction and integration expenses | | Less: Other transaction and integration expenses | 4.2 | | | 14.6 | | | 18.8 | |
Operating income | Operating income | $ | 209.0 | | | $ | 64.0 | | | $ | 273.0 | | Operating income | $ | 180.9 | | | $ | 55.4 | | | $ | 236.3 | |
| Three months ended August 31, 2019 | | |
Three months ended February 29, 2020 | | Three months ended February 29, 2020 | |
Operating income excluding special charges | Operating income excluding special charges | $ | 176.5 | | | $ | 84.7 | | | $ | 261.2 | | Operating income excluding special charges | $ | 119.6 | | | $ | 75.6 | | | $ | 195.2 | |
| Less: Special charges | Less: Special charges | 4.6 | | | 3.1 | | | 7.7 | | Less: Special charges | 0.6 | | | 0.4 | | | 1.0 | |
Operating income | Operating income | $ | 171.9 | | | $ | 81.6 | | | $ | 253.5 | | Operating income | $ | 119.0 | | | $ | 75.2 | | | $ | 194.2 | |
| Nine months ended August 31, 2020 | | |
Operating income excluding special charges | $ | 560.2 | | | $ | 168.4 | | | $ | 728.6 | | |
Less: Special charges | 3.1 | | | 0.9 | | | 4.0 | | |
Operating income | $ | 557.1 | | | $ | 167.5 | | | $ | 724.6 | | |
| Nine months ended August 31, 2019 | | |
Operating income excluding special charges | $ | 449.6 | | | $ | 225.8 | | | $ | 675.4 | | |
Less: Special charges | 11.0 | | | 5.9 | | | 16.9 | | |
Operating income | $ | 438.6 | | | $ | 219.9 | | | $ | 658.5 | | |
| | |
The following table sets forth our net sales, by geographic area, for the three and nine months ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| Americas | EMEA | Asia/Pacific | | Total |
| | | | | |
Three months ended August 31, 2020 | $ | 1,010.5 | | $ | 262.7 | | $ | 157.1 | | | $ | 1,430.3 | |
Three months ended August 31, 2019 | 931.3 | | 234.5 | | 163.4 | | | 1,329.2 | |
| | | | | |
Nine months ended August 31, 2020 | 2,855.5 | | 756.7 | | 431.2 | | | 4,043.4 | |
Nine months ended August 31, 2019 | 2,634.4 | | 726.7 | | 501.5 | | | 3,862.6 | |
| | | | | | | | | | | | | | | | | |
| Americas | EMEA | Asia/Pacific | | Total |
| | | | | |
Three months ended February 28, 2021 | $ | 964.8 | | $ | 302.4 | | $ | 214.3 | | | $ | 1,481.5 | |
Three months ended February 29, 2020 | 819.6 | | 250.3 | | 142.1 | | | 1,212.0 | |
| | | | | |
| | | | | |
| | | | | |
12 SUBSEQUENT EVENT
On September 28, 2020, our Board of Directors approved a 2-for-1 stock split of the Company’s voting and non-voting shares of common stock. On November 30, 2020, one like share will be issued for each share outstanding to shareholders of record as of November 20, 2020. Trading of the Company’s common stock will begin on a split-adjusted basis on December 1, 2020. Common stock and per-share data in this Quarterly Report on Form 10-Q have not been adjusted for the impact of the split.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. On November 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. On November 30, one like share was issued for each share outstanding to shareholders of record as of November 20, 2020. All common stock and per share data have been retroactively adjusted to reflect the stock split.
Business profile
McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business. In fiscal year 2019,2020, approximately 40% of our sales were outside of the U.S. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. We manage our business in two business segments, consumer and flavor solutions.
Recent Events
During the three and nine months ended August 31,On March 11, 2020, the effects ofWorld Health Organization designated a new coronavirus (“COVID-19”) and relatedas a global pandemic. Governments around the world either recommended or mandated actions to attemptslow 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 control its spreadwork. 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 three months ended February 28, 2021 and February 29, 2020 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. As the COVID-19 pandemic continues, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home food demand.
We are partnering with our customers to react to consumer demand changes associated with COVID-19. The effects of COVID-19 on consumer behavior have, on a net basis, favorably impacted the operating results of our consumer segment and unfavorably impacted the operating results of our flavor solutions segment in the three months ended February 28, 2021. The impact of COVID-19 on our consumer segment during that period resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same period was principally attributable to decreased demand from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures impacting 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. Those negative impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The impact of the global COVID-19 pandemic on our consolidated operating results forduring the three months ended February 29, 2020 was limited, in all material respects, to our operations in China where the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country. InOur operations in China saw a sharp drop in sales during the first quarter ofthree months ended February 29, 2020, with sales in our Asia/Pacific region declineddeclining by $39.6$43 million from the corresponding quarter in 2019, driven by the decline in the first quarter of 2020 sales in our China operations, as compared to the corresponding period in 2019, that approximated $43 million. That $43 million decline was driven by government-mandated measures, imposed to mitigate the spread of COVID-19, including measures that caused us to institute work-at-home protocols for many of our employees and to close our manufacturing facilities in our China operations during a portion of the first quarter. Our plants in China have since resumed operations, with our plants in Shanghai and Guangzhou resuming operations in mid-February 2020 and our Wuhan plant in mid-March 2020.
The pandemic spread outside of China during our second and third quarters of fiscal year 2020 to impact operations in our Americas and Europe, Middle East and Africa (“EMEA”) regions in addition to elsewhere in our Asia/Pacific region. In the U.S., many state and local governments, based on local conditions, either recommended or mandated actions to slow the transmission of COVID-19. These measures ranged from limitations on crowd size, together with closures of bars and dine-in restaurants, to mandatory orders for non-essential citizens to shelter in place. Governments in non-U.S. jurisdictions also implemented shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibited many employees from going to work. Borders between countries have been closed to contain the spread of COVID-19 contagion. The extent and nature of government actions have varied during the nine months ended August 31, 2020 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. Uncertainty with respect to the economic effects of the pandemic introduced significant volatility in the financial markets.
We identified three priorities while navigating through the period of volatility and uncertainty associated with various stages of the COVID-19 pandemic:
•First, to ensure the health and safety of our employees and the quality and integrity of our products.
•Second, to keep our brands and our customers' brands in supply and to maintain the financial strength of our business.
•Third, to ensure McCormick emerges strong from this event. The pandemic will come to an end and we believe that we will come out a better company by driving our long-term strategies, responding to changing consumer behavior and capitalizing on opportunities from our relative strength.
We implemented numerous measures to ensure that these priorities were achieved, including: (i) for our manufacturing and distribution employees, who played a critical role in maintaining the supply of our products to our customers and consumers, we instituted pre-shift temperature checks, increased pay and benefits, and provided time to enable social distancing and even greater sanitation procedures during shift changes; (ii) for our other employees, we instituted work-from-home arrangements; (iii) we maintained close communication with customers and suppliers to enable us to react to changing demand; and (iv) throughout the organization, we empowered global, regional and local crisis response teams that enabled us to react quickly to the challenging environment.
We elected to pause activities related to our global enterprise resource planning ("ERP") replacement program in the balance of fiscal 2020. Current travel restrictions and border closures imposed by governments to mitigate COVID-19 contagion would make it impossible to provide on-the-ground support at the times of pilot go-lives previously planned for fiscal 2020, and we do not have a clear line of sight as to when those restrictions will be lifted. For these reasons, we have chosen to refocus our employees on the three previously described priorities while navigating through this period of volatility and uncertainty.2019.
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 nine months ended August 31, 2020, our sales increased by 4.7% over the prior year level. That increase was driven by an 11.7% increase in sales of our consumer segment, partially offset by a 5.7% decline in sales of our flavor solutions segment. Our operating results haveU.S., U.K., European Union, Canada and will continueMexico) and began to be impactedadministered. However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to front-line health care workers and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19. We expect that administration of the COVID-19 includingvaccines to substantial numbers of the related recoverypopulation is unlikely to occur in the more significant jurisdictions in which we operate until mid- to late-2021 in the Americas and EMEA and until 2022 in the shift in consumer demand resulting from the pandemic. We have partnered with our customers to monitor consumer demand changes and address the shift to at-home versus away-from-home consumption. We estimate that away-from-home consumption has historically represented approximately 20% of our consolidated sales.Asia Pacific region. The effectsavailability of COVID-19 on consumer behavior have, onvaccines and their take-up by individuals is difficult to predict and, as a net basis, favorably impacted the operatingresult, actual vaccination results of our consumer segment and unfavorably impact the operating results of our flavor solutions segment in the three and nine months ended August 31, 2020. The impact of COVID-19 on our consumer segment during those periods resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same periods was principally attributableare likely to decreased demandvary from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures required closures of dine-in restaurants or restricted operations of those restaurants to carry-out or delivery only and also restricted operations of quick service restaurants to drive-through pick-up or delivery. Those negative demand impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption.
these expectations. The pace and shape of the COVID-19 recovery described above as well as the impact and extent of potential resurgences is not presently known. These and other uncertainties 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, incapableincapability of fulfilling that increased demand.As a result, it may be challenging to obtain and process raw materials to support our business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes 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.
2020 OutlookAcquisitions
Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed nine 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 recent acquisitions is provided below:
•On December 30, 2020, we acquired FONA International, LLC and certain of its affiliates (FONA), a privately owned company, for approximately $707 million, net of cash acquired, subject to certain customary purchase price adjustments. We project another yearfinanced this fiscal 2021 acquisition with cash and commercial paper. FONA is a leading manufacturer of strong financial performance in 2020.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 The operating environment continuesCatterton for approximately $803 million, net of cash acquired, subject to evolve and there remains a degree of uncertainty about the pace and shape of the COVID-19 recovery. The Company’s guidance considers its year-to-datecertain customary purchase price adjustments. We financed this fiscal 2020 performanceacquisition with cash and commercial paper. Cholula is a strong addition to McCormick’s global branded flavor portfolio, which broadens the expected shiftCompany’s offering in consumer demandthe high growth hot sauce category to at-home consumptionconsumers and from away-from-home consumption that has impactedfoodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce in both our consumer and flavor solutions segments.
•In February 2021, we issued $500.0 million of 0.90% notes due February 15, 2026, with net cash proceeds received of $495.7 million. At the same time, we issued $500.0 million of 1.85% notes due February 15, 2031, with net cash proceeds received of $492.8 million. 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 finance our acquisitions of FONA and Cholula, and for general corporate purposes. For further information regarding our issuance of these notes, see note 5 of the accompanying notes to consolidated financial statements.
As described below under the caption 2021 Outlook, the FONA and Cholula acquisitions are expected to contribute more than one-third of our sales growth in 2021.
2021 Outlook
In 2021, we expect to grow net sales over the 2020 level by 8% to 10%, including an estimated 2% favorable impact from currency rates, or 6% to 8% on a constant currency basis. That anticipated 2021 sales growth includes the incremental impact of the Cholula and FONA acquisitions, which we expect to comprise 3.5% to 4.0% of the expected 8% to 10% sales growth, and higher volume and product mix driven by our category management, brand marketing, new product, and differentiated customer engagement growth plans. We expect to have organic sales growth in both our consumer and flavor solutions segments.
We expect our 2021 gross profit margin to decline 10 basis points from our gross profit margin of 41.1% in 2020. The projected 2021 decline in gross profit margin is principally due to (i) expected accretion from our acquisitions of Cholula and FONA, net of transaction and integration expenses of $6.3 million related to the amortization of the step-up of the acquired inventories of Cholula and FONA to fair value, (ii) anticipated unfavorable sales mix in 2021 between our consumer and flavor solutions segments as compared to 2020, (iii) an expected increase in COVID-19 related expenses of approximately $10 million in 2021 over the 2020 level, and (iv) an anticipated low-single-digit level of inflation in 2021 compared to 2020. Excluding the $6.3 million of transaction and integration expenses related to our acquisitions of Cholula and FONA included in our projected range
In 2020,of gross profit margin anticipated in 2021, we expect to grow sales at the upper end of a 4% to 5% range, including an estimated 1% unfavorable impact from currency rates, or 5% to 6% on a constant currency basis. That anticipated 2020 sales growth is primarily driven by new products, brand marketing and expanded distribution as well as the impact of the consumer shift in demand as a result of COVID-19 and the consumer’s sustained preference for cooking at home.Sales growth is also expected to include the impact of pricing, which in conjunction with cost savings, is expected to offset an anticipated mid-single digit inflationary pressure.Our anticipated sales growth consists entirely of organic growth as we do not anticipate an incremental sales impact from acquisitions in 2020. We expect our adjusted gross profit margin to be 75comparable to 100 basis points higher inour 2020 than in 2019, in part driven by our CCI-led cost savings, which we expect to be $105 million in 2020, and favorable product mix, partially offset by COVID-19 related costs.gross profit margin of 41.1%.
In 2020,2021, we expect an increase in operating income of 6%5% to 7%, which includes an estimated 1% unfavorable2% favorable impact from currency rates. That increaserates, over the 2020 level. The projected range of change in operating income in 2021 reflects an expected increase of approximately $30 million in expense related to our global ERP replacement program over the fiscal 2020 level. Our CCI-led cost savings target in 2021 is approximately $110 million and approximates the $113 million of CCI-led cost savings realized in 2020. We anticipate transaction and integration expenses related to the Cholula and FONA acquisitions of approximately $50 million to negatively impact operating income in 2021, as compared to $12.4 million of lowertransaction and integration expenses in 2020. We also expect approximately $8 million of special charges estimated at $7.0 millionin 2021 that relate to previously announced organization and streamlining actions; in 2020, compared to $20.8 million in 2019.special charges were $6.9 million. Excluding special charges and transaction and integration expenses, we expect 2020’s2021’s adjusted operating income to increase 4%by 9% to 5%11%, which includes an estimated 1% unfavorable2% favorable impact from currency rates, or 5% to 6%increase by 7% to 9% on a constant currency basis. In addition tobasis over the factors noted in the preceding paragraph, we expect to support our 2020 sales growth with a mid-single digit increase in brand marketing investment as compared to the 2019 level.We also estimate increased incentive compensation as a result of our projected fiscal year 2020 operating performance.
Our underlying effective tax rate is projected to be higher in 20202021 than in 2019. Absent2020. We estimate our effective tax rate, including the net favorable impact of anticipated discrete tax items, we estimate our underlying tax rate to be approximatelyapproximate 24% in 2021 as compared to 25%19.8% in 2020. IncludingExcluding projected taxes associated with special charges and transaction and integration expenses, including the projectedunfavorable impact in the first quarter of 2021 of a deferred state tax discrete tax items, including the favorable impactitem directly related to our acquisition of discrete itemsFONA that occurred through August 31, 2020,increased tax expense by $11.4 million, we estimate that our consolidatedadjusted effective tax rate will approximate 20%23% in fiscal 2020.Including the non-recurring benefit of $1.5 million associated with the U.S. Tax Act and taxes associated with special charges recognized in fiscal 2019, our adjusted effective rate was approximately 19.5% in 2019.We expect our2021, as compared to an adjusted effective tax rate of 19.9% in 2020 to approximate our effective tax rate under U.S. GAAP of 20%.2020.
Diluted earnings per share was $5.24$2.78 in 2019.2020. Diluted earnings per share for 2020 are2021 is projected to range from $5.60$2.77 to $5.68.$2.82. Excluding the per share impact of special charges of $0.12 and the per share impact of the non-recurring benefit from the U.S. Tax Acttransaction and integration expenses of $0.01 in 2019,and $0.04, respectively, adjusted diluted earnings per share was $5.35$2.83 in 2019.2020. Adjusted diluted earnings per share excluding(excluding an estimated $0.04 per share impact from special charges areof $0.02 and from transaction and integration expenses of $0.18, including the unfavorable impact of a discrete tax item of $0.04 related to our acquisition of FONA) is projected to be $5.64range from $2.97 to $5.72$3.02 in 2020.2021. We expect adjusted diluted earnings per share in 2020 to grow by 5% to 7%, which includes a 1% unfavorable2% favorable impact from currency rates, or to grow 6%by 3% to 8% in5% on a constant currency basis over adjusted diluted earnings per share of $5.35$2.83 in 2019.2020.
RESULTS OF OPERATIONS – COMPANY
| | | Three months ended | | | Nine months ended | | | Three months ended | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | February 28, 2021 | | February 29, 2020 | |
Net sales | Net sales | $ | 1,430.3 | | | $ | 1,329.2 | | | $ | 4,043.4 | | | $ | 3,862.6 | | Net sales | $ | 1,481.5 | | | $ | 1,212.0 | | |
Percent increase | 7.6 | % | | 0.8 | % | | 4.7 | % | | 0.7 | % | |
Percent increase (decrease) | | Percent increase (decrease) | 22.2 | % | | (1.6) | % | |
Components of percent growth in net sales – increase (decrease): | Components of percent growth in net sales – increase (decrease): | | Components of percent growth in net sales – increase (decrease): | | |
Volume and product mix | Volume and product mix | 6.8 | % | | 2.1 | % | | 4.1 | % | | 2.7 | % | Volume and product mix | 15.2 | % | | (2.5) | % | |
Pricing actions | Pricing actions | 1.8 | % | | 0.1 | % | | 1.7 | % | | 0.3 | % | Pricing actions | 0.8 | % | | 1.1 | % | |
| Acquisitions | | Acquisitions | 4.0 | % | | — | % | |
Foreign exchange | Foreign exchange | (1.0) | % | | (1.4) | % | | (1.1) | % | | (2.3) | % | Foreign exchange | 2.2 | % | | (0.2) | % | |
Gross profit | Gross profit | $ | 590.3 | | | $ | 539.9 | | | $ | 1,639.7 | | | $ | 1,515.3 | | Gross profit | $ | 577.5 | | | $ | 469.9 | | |
Gross profit margin | Gross profit margin | 41.3 | % | | 40.6 | % | | 40.6 | % | | 39.2 | % | Gross profit margin | 39.0 | % | | 38.8 | % | |
Sales for the thirdfirst quarter of 20202021 increased by 7.6%22.2% from the prior year level and by 8.6%20.0% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). That 7.6% sales increase was driven by higher sales in our consumer segment, which increased by 14.7% over the 2019 level, partially offset by lower sales in our flavor solutions segment, which declined by 2.9% from the prior year level. On a consolidated basis, higherHigher volume and favorable product mix increased sales by 6.8% while pricing actions added 1.8% to sales. That net volume increase and favorable mix was15.2%, driven by sharply higher demand within ourin the consumer segment asacross all regions. In the Americas and EMEA regions, growth was driven by increased consumption due to a shift in consumer behavior toward at-home meal preparation related to the continuation of measures imposed to mitigate the spread of COVID-19. Sales growth in the Americas also benefited from trade replenishment with certain customers. Sales growth was also favorably impacted by the Asia/Pacific region due largely to the strong rebound of our business in China, which had been significantly impacted by the COVID-19 outbreak in the first quarter of fiscal 2020 and accounted for 560 basis points of consolidated sales growth during the quarter ended February 28, 2021. Pricing actions added 0.8% to sales, while the incremental impact of the Cholula and FONA acquisitions added 4.0% to sales. Sales were also impacted by favorable foreign
continuation of measures imposed to mitigate the spread of COVID-19 and the related change in consumer behavior, resulted in a shift in consumer behavior toward at-home meal preparation that more than offset lower demand within our flavor solutions segment principally associated with our branded food service customers. Sales were also impacted by unfavorable foreign currency rates that reducedincreased net sales 1.0%2.2% compared to the year-ago quarter and is excluded from our measure of sales growth of 8.6% on a constant currency basis.
Sales for the nine months ended August 31, 2020 increased by 4.7% from the prior year level and increased by 5.8% on a constant currency basis. Favorable volume and product mix increased sales by 4.1% while pricing actions added 1.7% to sales. Sales were impacted by unfavorable foreign currency rates that reduced sales by 1.1% as compared to the same period in 2019 and is excluded from our measure of sales growth of 5.8%20.0% on a constant currency basis.
Gross profit for the thirdfirst quarter of 20202021 increased by $50.4$107.6 million, or 9.3%22.9%, over the comparable period in 2019. Gross profit for the nine months ended August 31, 2020 increased by $124.4 million, or 8.2% over the comparable period in 2019.2020. Our gross profit marginsmargin for the three and nine months ended August 31, 2020 were 41.3% and 40.6%February 28, 2021 was 39.0%, respectively, an increase of 7020 basis points and 140 basis points, respectively, from the same periods in 2019.prior year period. This improvement was driven by the mix of consumer and flavor solutions sales in both the quarter and year-to-date periods. Also, as a percentage of sales, the gross margin impact of cost savings led by our Comprehensive Continuous Improvement ("CCI") program along with favorable product mix within and between our consumer and flavor solutions segments. These favorable pricing actionsimpacts were offset, in part, by higher costs associated with COVID-19, higher conversion costs and increased material costs, in botheach as compared to the quarter and year-to-date periods. Higher conversion costsprior year. The gross margin impact of COVID-19 during the three and nine months ended August 31, 2020February 28, 2021 reflected certain matters associated with COVID-19,incremental costs, including the impactincreased cost of production related to our temporary use of co-manufacturing arrangements that increased salaries and benefits paid to our manufacturing employees,certain product costs as well as costs associated with measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity,productivity. In addition, our gross profit for the three months ended February 28, 2021 was burdened by $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 in the impactfirst quarter of lower production volumes of flavor solutions inventories.fiscal 2021. Excluding those transaction and integration expenses, adjusted gross profit margin rose 60 basis points from 38.8% in 2020 to 39.4% in 2021.
| | | Three months ended | | | Nine months ended | | | Three months ended | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | February 28, 2021 | | February 29, 2020 | |
Selling, general & administrative expense (SG&A) | Selling, general & administrative expense (SG&A) | $ | 317.2 | | | $ | 278.7 | | | $ | 911.1 | | | $ | 839.9 | | Selling, general & administrative expense (SG&A) | $ | 321.3 | | | $ | 274.7 | | |
Percent of net sales | Percent of net sales | 22.2 | % | | 20.9 | % | | 22.6 | % | | 21.7 | % | Percent of net sales | 21.7 | % | | 22.7 | % | |
SG&A increased by $38.5$46.6 million in the thirdfirst quarter of 20202021 compared to the 20192020 level, driven by (i) higher performance-based employee incentive expense accruals,SG&A associated with the Cholula and FONA acquisitions, (ii) higherincreased brand marketing costs, (iii) greater selling and distribution expenses associated with the higher sales volume, and (iii) a one-time fiscal 2019(iv) increased performance-based employee incentive expense, reduction from the alignment of an employee benefit plan to our global standard did not recur in 2020, all as compared to the corresponding period in 2019.including stock based compensation. SG&A as a percent of net sales increaseddecreased by 130100 basis points from the prior year level, primarily as a result of the previously mentioned factors, partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2020 quarter.
SG&A increased by $71.2 million in the nine months ended August 31, 2020 compared to the 2019 level, primarily as a result of (i) higher performance-based employee incentive expense accruals, (ii) higher distribution expenses associated with the higher sales volume, (iii) higher expenses associated with efforts related to implementation of a global ERP platform, and (iv) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard did not recur in 2020, all as compared to the corresponding period in 2019. SG&A as a percent of net sales for the nine months ended August 31, 2020 increased by 90 basis points from the prior year level, primarily as a result of the previously mentioned factors,2021 quarter, partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2020 period.previously mentioned factors.
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| Three months ended | | | | Nine months ended | | |
| August 31, 2020 | | August 31, 2019 | | Aug 31, 2020 | | Aug 31, 2019 |
Total special charges | $ | 0.1 | | | $ | 7.7 | | | $ | 4.0 | | | $ | 16.9 | |
| | | | | | | | | | | | | | | |
| Three months ended | | |
| February 28, 2021 | | February 29, 2020 | | | | |
Total special charges | $ | 1.1 | | | $ | 1.0 | | | | | |
During the three months ended August 31, 2020,February 28, 2021, we recorded $0.1 million of special charges related to streamlining actions in our EMEA region. During the nine months ended August 31, 2020, we recorded $4.0$1.1 million of special charges consisting of $2.9$0.6 million and $0.5 million related to streamlining actions in our EMEA region together with $1.1 million related to our GE initiative.and the Americas, respectively.
During the three months ended August 31, 2019,February 29, 2020, we recorded $7.7$1.0 million of special charges consisting primarily of (i) $6.0 million related to our GE initiative, including $5.5 million of third-party expenses, $0.3 million of severance and related benefits, and $0.2 million of other related costs and (ii) $1.3 million related to streamlining actions in our EMEA region.initiative.
| | | | | | | | | | | | | | | |
| Three months ended | | |
| February 28, 2021 | | February 29, 2020 | | | | |
Transaction expenses included in cost of goods sold | $ | 6.3 | | | $ | — | | | | | |
Other transaction and integration expenses | 18.8 | | | — | | | | | |
Total transaction and integration expenses | $ | 25.1 | | | $ | — | | | | | |
During the ninethree months ended August 31, 2019,February 28, 2021, we recorded $16.9$25.1 million of special charges, consisting primarily of (i) $12.2 million coststransaction and integration expense related to our GE initiative, including $8.9acquisitions of Cholula and FONA. These costs consisted of (i) $6.3 million of third-party expenses, $2.0amortization 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 severanceoutside advisory, service and related benefits,consulting costs, and $1.3(iii) $5.0 million of integration expenses. We expect transaction and integration expenses related to other costs; (ii) $2.3 millionour acquisitions of severanceCholula and related benefits associated with streamlining actionsFONA to negatively impact operating income in the Americas; and (iii) $1.9remainder of fiscal 2021 by an additional $25 million.
| | | | | | | | | | | | | | | |
| Three months ended | | |
| February 28, 2021 | | February 29, 2020 | | | | |
Interest expense | $ | 33.8 | | | $ | 35.3 | | | | | |
Other income, net | 4.6 | | | 5.5 | | | | | |
Interest expense decreased by $1.5 million relatedin the first quarter of 2021, compared to streamlining actionsthe same period in our EMEA region.2020, as an increase in average total borrowings was more than offset by a decrease in interest rates. Other income, net for the three months ended February 28, 2021 decreased by $0.9 million from the 2020 levels due principally to lower non-service cost income associated
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | Nine months ended | | |
| August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 |
Interest expense | $ | 33.5 | | | $ | 41.3 | | | $ | 103.2 | | | $ | 126.7 | |
Other income, net | 3.9 | | | 6.9 | | | 12.5 | | | 19.3 | |
Interest expense decreased by $7.8 million in the third quarter of 2020, compared to the same period in 2019, due primarily to a decline in average total borrowings and the lower interest rate environment. Interest expense was $23.5 million lower for the nine months ended August 31, 2020 than the same period of the prior year. That decline was primarily due to a decrease in average borrowings, a lower interest rate environment and the favorable impact of the cross currency interest rate swap contracts entered into during February 2019. Other income, net for the three and nine months ended August 31, 2020 decreased by $3.0 million and $6.8 million, respectively, from the 2019 levels due principally to lower non-service cost income associated with our pension and postretirement benefit plans that declinedand lower interest income, which was partially offset by $2.4 million and $6.0 million fromfavorable net gains on non-operating foreign currency transactions, as compared to the prior year level in the three and nine months ended August 31, 2020, respectively.period.
| | | Three months ended | | | Nine months ended | | | Three months ended | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | February 28, 2021 | | February 29, 2020 | |
Income from consolidated operations before income taxes | Income from consolidated operations before income taxes | $ | 243.4 | | | $ | 219.1 | | | $ | 633.9 | | | $ | 551.1 | | Income from consolidated operations before income taxes | $ | 207.1 | | | $ | 164.4 | | |
Income tax expense | Income tax expense | 46.9 | | | 36.8 | | | 117.4 | | | 91.0 | | Income tax expense | 58.6 | | | 30.1 | | |
Effective tax rate | Effective tax rate | 19.3 | % | | 16.8 | % | | 18.5 | % | | 16.5 | % | Effective tax rate | 28.3 | % | | 18.3 | % | |
The provision for income taxes is based on the then-current 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 of U.S. GAAP. Examples of such types of discrete items not related to ordinary income of the current fiscal year include, but are not limited to, excess tax benefits related to share-based compensation, 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, acquisition related deferred tax adjustments and the tax effects of intra-entity asset transfers (other than inventory).
Income taxes for the three months ended August 31, 2020February 28, 2021 included $13.2$5.3 million of net discrete tax benefitsexpense consisting principally of the following: (i) $7.3$11.4 million of excessdeferred state tax benefits associated with share-based compensation, (ii) $2.1 million of tax benefitsexpense directly related to the reversalour December 2020 acquisition of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $2.0 million for an adjustment to a prior year tax accrual based on the final return filed, and (iv) $1.1 million related to the revaluation of deferred taxes resulting from enacted legislation. Income taxes for the nine months ended August 31, 2020 included $40.1 million of discrete tax benefits consisting principally of the following: (i) $13.0 million of excess tax benefits associated with share-based compensation,FONA, partially offset by (ii) $9.9 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter, (iii) $9.3$4.5 million of tax benefits associated with the release of a valuation allowance due to a change in judgment about realizability of deferred tax assets (iv) $5.5and (iii) $1.2 million of tax benefits related tofrom the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expirationresolution of statutes of limitations in various jurisdictions, and (v) $2.0 million for an adjustment to a prior year tax accrual based on the final return filed.uncertainties.
Income taxes for the three months ended August 31, 2019February 29, 2020 included $15.5$10.4 million of net discrete tax benefits consisting principally of the following: (i) $8.3$9.9 million of benefit associated with an intra-entity asset transfer that occurred during the quarter; (ii) $1.8 million of excess tax benefits associated with share-based compensation; (ii) $2.4and (iii) $1.4 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in several jurisdictions; (iii) $2.5 millionexpense related to the revaluation of deferred tax liabilities resulting from legislation enacted in acertain non-U.S. jurisdiction; and (iv) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act. Income taxes for the nine months ended August 31, 2019 included $44.4 million of discrete tax benefits consisting principally of the following: (i) $21.2 million of excess tax benefits associated with share-based compensation; (ii) $16.2 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter under the provisions of ASU No. 2016-16; (iii) $2.6 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in several jurisdictions; (iv) $2.1 million related to the revaluation of deferred tax liabilities resulting from legislation enacted in a non-U.S. jurisdiction; and (v) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act.jurisdictions.
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| Three months ended | | | | Nine months ended | | |
| August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 |
Income from unconsolidated operations | $ | 9.6 | | | $ | 9.6 | | | $ | 30.2 | | | $ | 29.2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| Three months ended | | |
| February 28, 2021 | | February 29, 2020 | | | | |
Income from unconsolidated operations | $ | 13.3 | | | $ | 10.4 | | | | | |
| | | | | | | |
| | | | | | | |
Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, for the three months ended August 31, 2020 was comparable to the three months ended August 31, 2019. Income from unconsolidated operationsFebruary 28, 2021 increased by $1.0$2.9 million for the nine months ended August 31, 2020, as compared to the year-agocorresponding period in fiscal 2020. The increase was attributable to higher earnings of our unconsolidated affiliates, primarily our largest joint venture, McCormick de Mexico, as compared to the prior year period.
The following table outlines the major components of the change in diluted earnings per share from 20192020 to 2020:2021:
| | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
2019 Earnings per share – diluted | $ | 1.43 | | | $ | 3.65 | |
Increase in operating income | 0.07 | | | 0.33 | |
Impact of net discrete tax benefit recognized as a result of the U.S. Tax Act | (0.01) | | | (0.01) | |
Decrease in special charges, net of taxes | 0.04 | | | 0.08 | |
| | | |
Decrease in interest expense | 0.05 | | | 0.14 | |
Decrease in other income | (0.01) | | | (0.04) | |
Increase in unconsolidated income | — | | | 0.01 | |
Impact of change in effective income tax rate, excluding taxes on special charges | (0.03) | | | (0.08) | |
Impact of higher shares outstanding | (0.01) | | | (0.02) | |
2020 Earnings per share – diluted | $ | 1.53 | | | $ | 4.06 | |
| | | | | | | |
| Three months ended February 28, | | |
2020 Earnings per share – diluted | $ | 0.54 | | | |
Increase in operating income | 0.20 | | | |
| | | |
Increase in transaction and integration expenses, including impact of net discrete tax item related to FONA acquisition | (0.12) | | | |
| | | |
| | | |
Increase in unconsolidated income | 0.01 | | | |
Decrease in interest expense | 0.01 | | | |
Impact of change in effective income tax rate, excluding taxes on special charges and transaction and integration expenses | (0.04) | | | |
| | | |
2021 Earnings per share – diluted | $ | 0.60 | | | |
RESULTS OF OPERATIONS — SEGMENTS
We measure the performance of our business segments based on operating income, excluding special charges. We also exclude transaction and integration expenses related to our acquisitions of Cholula and FONA from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration
expenses excluded from our segment performance measure include the amortization of the acquisition-date fair value adjustment of inventories that is included in Cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the businesses. See note 1112 of notes to the accompanying 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, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income.
CONSUMER SEGMENT
| | | Three months ended | | | Nine months ended | | | Three months ended | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | February 28, 2021 | | February 29, 2020 | |
(in millions) | (in millions) | | | | | | | | (in millions) | | | | |
Net sales | Net sales | $ | 910.9 | | | $ | 794.2 | | | $ | 2,573.0 | | | $ | 2,303.2 | | Net sales | $ | 946.8 | | | $ | 699.5 | | |
Percent increase (decrease) | Percent increase (decrease) | 14.7 | % | | 2.8 | % | | 11.7 | % | | 0.8 | % | Percent increase (decrease) | 35.4 | % | | (6.1) | % | |
Segment operating income | Segment operating income | $ | 209.0 | | | $ | 176.5 | | | $ | 560.2 | | | $ | 449.6 | | Segment operating income | $ | 189.9 | | | $ | 119.6 | | |
Segment operating income margin | Segment operating income margin | 22.9 | % | | 22.2 | % | | 21.8 | % | | 19.5 | % | Segment operating income margin | 20.1 | % | | 17.1 | % | |
In the thirdfirst quarter of 2020,2021, sales of our consumer segment increased 14.7%35.4% as compared to the thirdfirst quarter of 20192020 and increased by 15.1%32.2% on a constant currency basis. That 14.7% sales35.4% increase was driven by sharply higher sales of our consumer business inacross each of our three regions - the Americas, EMEA and Asia/Pacific. In the Americas and EMEA regions, growth was driven by increased consumption due to a shift in EMEA, with a partial offset from aconsumer behavior toward at-home meal preparation related to the continuation of measures imposed to mitigate the spread of COVID-19. The sales declineincrease in the Asia/Pacific region relatedwas driven by sharply higher sales of our consumer business in China, which includes the foodservice component, that contributed 820 basis points of the consumer segment’s sales increase of 35.4% in the first quarter of 2021 as our sales in China rebounded in comparison to sharply lower sales in the first quarter of away-from-home products included2020 when government-mandated measures to mitigate COVID-19 were first enacted. (Those sharply lower sales in itsChina in the first quarter of 2020, as compared to the prior year period, accounted for 530 basis points of the consumer portfolio.segment's sales decline of 6.1% during the three months ended February 29, 2020.) Favorable volume and product mix increased consumer segment sales by 13.6%28.6% in the thirdfirst quarter of 20202021 as compared to the same period last year as the continuation of measures imposed to mitigate the spread of COVID-19 and the related change in consumer behavior, resulted in a shift in consumer behavior toward at-home meal preparation. Pricing actions increased sales by 1.5%0.3% as compared to the prior year period.period, while the incremental impact of the Cholula acquisition in November 2020 added 3.3% to sales. Sales in the first quarter of 2021 reflected an unfavorablea favorable impact from foreign currency rates that decreasedincreased consumer segment sales by 0.4%3.2% compared to the year-ago quarter and is excluded from our measure of sales growth of 15.1%32.2% on a constant currency basis.
In the Americas, consumer sales increased 17.2%29.8% in the thirdfirst quarter of 20202021 as compared to the thirdfirst quarter of 20192020 and increased by 17.5%29.5% on a constant currency basis. For the thirdfirst quarter of 2020,2021, favorable volume and product mix increased sales by 15.2%,24.7% as compared to the corresponding period in 2019,2020. That growth was driven by significant growth across theincreased consumption due to a shift in consumer behavior toward at-home meal preparation, favorable trade replenishment and particular strength in McCormick branded portfolio. In addition, pricingspices and extracts. The incremental impact of the Cholula acquisition added 5.0% to sales in the quarter ended February 28, 2021. Pricing actions taken in response to increased costs, increaseddecreased sales by 2.3%0.2% as compared to the prior
year period. The unfavorablefavorable impact of foreign currency rates decreasedincreased sales by 0.3% in the quarter and is excluded from our measure of sales growth of 17.5%29.5% on a constant currency basis.
In the EMEA region, consumer sales increased 23.0%34.6% in the thirdfirst quarter of 20202021 as compared to the thirdfirst quarter of 20192020 and increased by 22.6%26.2% on a constant currency basis. Sales were impacted by favorable volume and product mix during the quarter that increased sales by 23.0%.25.3% over the prior year level. The increase was driven by increased consumption due to a shift in consumer behavior toward at-home meal preparation and was broad based across the region with particular strength in branded spices and seasonings as well as in homemade dessert products in France and branded dry recipe mixes.France. Pricing actions decreasedincreased sales by 0.4%.0.9% as compared to the 2020 period. During the thirdfirst quarter of 2020,2021, a favorable impact from foreign currency rates increased sales by 0.4%8.4% compared to the year-ago period and is excluded from our measure of sales growth of 22.6%26.2% on a constant currency basis.
In the Asia/Pacific region, consumer sales decreased 8.7%increased 64.7% in the thirdfirst quarter of 20202021 and declinedincreased by 6.2%55.0% on a constant currency basis. For the thirdfirst quarter of 2020, unfavorable2021, favorable volume and product mix decreasedincreased sales by 6.3%52.9%. The decrease was driven by products related to away-from-home consumption in China. Partially offsetting this decline was growth in cooking-at-home products, particularly in China and Australia. An unfavorable impact from foreign currency rates, which decreased sales by 2.5% compared to the third quarter of 2019, is excluded from our measure of sales decline of 6.2% on a constant currency basis.
For the nine months ended August 31, 2020, our consumer segment sales increased 11.7% as compared to the nine months ended August 31, 2019 and increased by 12.6% on a constant currency basis. That 11.7% sales increase was driven by sharply higher sales of our consumer segment in the Americas andChina business. This growth in EMEA during the nine months ended August 31, 2020, as government-mandated measures, imposed to mitigate the spread of COVID-19, resulted in a shift in consumer behavior toward at-home meal preparation, partially offset by a sharp decline in sales of our consumer segment in the Asia Pacific region driven by lower sales of products related to away-from-home consumption in China. Improved volume and product mix added 10.9% to sales and pricing actions added 1.7% to consumer segmentChina sales in the first nine monthsquarter ended February 28, 2021 represents a strong rebound from the significant unfavorable impact of government mandated closures in response to COVID-19 during the comparable period of 2020 both in comparison as previously discussed. Pricing actions increased sales by 2.1% as compared
to the prior year levels. An unfavorableperiod. A favorable impact from foreign currency rates, decreasedwhich increased sales by 0.9%9.7% compared to the prior year andfirst quarter of 2020, is excluded from our measure of sales growth of 12.6%55.0% on a constant currency basis.
Segment operating income for our consumer segment increased by $32.5$70.3 million, or 18.4%58.8%, in the thirdfirst quarter of 20202021 as compared to the thirdfirst quarter of 2019.2020. The increase in segment operating income was driven by the higher level of sales as previously described, and CCI-led cost savings, partially offset by incremental costs associated with COVID-19 and increased conversionbrand marketing costs, and higher performance-based employee incentive expense accruals. Higher conversion costsall as compared to the prior year period. The impact of COVID-19 on operating income during the three months ended August 31, 2020February 28, 2021 reflected certain matters associated with COVID-19, including the incremental impact of temporary arrangements to utilize co-manufacturing that increased salaries and benefits paidour cost to our manufacturing employeesproduce certain products and 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 increased by 70300 basis points from the thirdfirst quarter of 20192020 to 22.9%20.1% in the thirdfirst quarter of 2020.2021. That increase was principally the result of an increasethe previously mentioned factors in consumer gross margin,conjunction with the favorable leverage of fixed and semi-fixed expenses over a higher sales base, as compared to the thirdfirst quarter of 2019.2020. On a constant currency basis, segment operating income for our consumer segment increased by 18.7%54.2% in the thirdfirst quarter of 20202021 in comparison to the same period in 2019.2020.
We grew segment operating income for our consumer segment by $110.6 million, or 24.6%, in the nine months ended August 31, 2020 as compared to the same period in 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, as previously described, increased material costs and higher performance-based employee incentive expense accruals. Segment operating margin for our consumer segment rose by 230 basis points in the first nine months of 2020 to 21.8%, driven by an increase in consumer gross profit margin and a decrease in SG&A as a percentage of net sales as compared to the 2019 period. Segment operating margin for the nine months ended August 31, 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 25.3% in the nine months ended August 31, 2020 in comparison to the same period in 2019.
FLAVOR SOLUTIONS SEGMENT
| | | Three months ended | | | Nine months ended | | | Three months ended | |
| | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | February 28, 2021 | | February 29, 2020 | |
| | | | | |
Net sales | Net sales | $ | 519.4 | | | $ | 535.0 | | | $ | 1,470.4 | | | $ | 1,559.4 | | Net sales | $ | 534.7 | | | $ | 512.5 | | |
Percent (decrease) increase | (2.9) | % | | (2.0) | % | | (5.7) | % | | 0.7 | % | |
Percent increase | | Percent increase | 4.3 | % | | 5.3 | % | |
Segment operating income | Segment operating income | $ | 64.1 | | | $ | 84.7 | | | $ | 168.4 | | | $ | 225.8 | | Segment operating income | $ | 72.6 | | | $ | 75.6 | | |
Segment operating income margin | Segment operating income margin | 12.3 | % | | 15.8 | % | | 11.5 | % | | 14.5 | % | Segment operating income margin | 13.6 | % | | 14.8 | % | |
In the thirdfirst quarter of 2020,2021, sales of our flavor solutions segment decreasedincreased by 2.9%4.3% as compared to the thirdfirst quarter of 20192020 and decreasedincreased by 1.1%3.4% on a constant currency basis. DrivingThe increase was driven by the incremental impact of our Cholula and FONA acquisitions that 2.9% decreaseadded 4.9% to sales in the quarter ended February 28, 2021 as well as higher sales wasin the Asia/Pacific region, in part due to the government-mandated measures imposed to mitigate the spread of COVID-19 that unfavorably impacted the first quarter of 2020, which were offset in part by lower demand due to the impact of the COVID-19 disruption on our restaurant and branded food service customers particularly in the Americas and EMEA regions. This decline was partially offset by an increase in segment sales in the Asia/Pacific region. Unfavorable volume and product mix decreased segment sales by 3.2%3.0% as compared to the thirdfirst quarter of 2019,2020, while pricing actions during the period increased sales by 2.1%1.5%. The unfavorablefavorable impact of foreign currency rates decreasedincreased flavor solutions segment sales by 1.8%0.9% compared to the year-ago quarter and is excluded from our measure of sales declinegrowth of 1.1%3.4% on a constant currency basis.
In the Americas, flavor solutions sales decreasedincreased by 4.7%2.1% during the thirdfirst quarter of 20202021 as compared to the prior year level and decreasedincreased by 3.1%2.4% on a constant currency basis. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 5.3%6.3% during the thirdfirst quarter of 2020,2021, driven by lower sales to branded foodservice and quick service restaurant customers, but was partially offset by higher sales to packaged food companies. The incremental impact of the Cholula and FONA acquisitions increased sales by 7.1% during the first quarter of 2021. Pricing actions during the quarter ended August 31, 2020February 28, 2021 increased sales by 2.2%1.6% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 1.6%0.3% compared to the thirdfirst quarter of 20192020 and is excluded from our measure of sales declinegrowth of 3.1%2.4% on a constant currency basis.
In the EMEA region, flavor solutions sales in the thirdfirst quarter of 2020 decreased2021 increased by 1.0%1.4% from the prior year level butand increased by 1.2%0.1% on a constant currency basis. Unfavorable volume and product mix decreased segment sales by 2.1%2.8% as compared to the corresponding period in 2019.2020. The decline was primarily attributable to lower sales to branded foodservice and quick service restaurant customers in part due to COVID-19 mitigation efforts in various localities, partially offset by higher demand from packaged food companies. Pricing actions increased sales by 3.3%2.9% in the thirdfirst quarter of 20202021 as compared the prior period level. An unfavorableA favorable impact from foreign currency rates decreasedincreased sales by 2.2%1.3% compared to the thirdfirst quarter of 20192020 and is excluded from our measure of sales growth of 1.2%0.1% on a constant currency basis.
In the Asia/Pacific region, flavor solutions sales increased 4.9%25.8% in the thirdfirst quarter of 20202021 from the prior year level and increased by 7.0%17.6% on a constant currency basis. Favorable volume and product mix increased sales by 7.6%19.4%, driven by higher sales to quick service restaurant customers in China and Australia. That increase in China was due, in part, to the government-mandated measures imposed to mitigate the spread of COVID-19 that unfavorably impacted sales to our flavor solutions customers in China in the first quarter of 2020. Pricing actions decreased sales by 0.6%1.8% as compared to the prior year period. An unfavorableA favorable impact from foreign currency rates decreasedincreased sales by 2.1%8.2% compared to the thirdfirst quarter of 20192020 and is excluded from our measure of sales growth of 7.0%17.6% on a constant currency basis.
For the nine months ended August 31, 2020, our flavor solutions sales declined 5.7% compared to the nine months ended August 31, 2019 and decreased by 4.3% on a constant currency basis. Driving that 5.7% decrease in sales was lower demand during the second and third quarters due to the impact
Segment operating income for our flavor solutions segment decreased by $20.6$3.0 million, or 24.3%4.0%, in the thirdfirst quarter of 20202021 as compared to the thirdfirst quarter of 2019.2020. The decrease in segment operating income was driven by decreased sales, unfavorable product mix,increased material costs, higher conversion costs, increased material costs and higher performance-based employee incentive expense accruals, which were partially offset by favorable product mix and CCI-led cost savings. Higher conversion costs during the three and nine months ended August 31, 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees, measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity, and the impact of lower production volumes of flavor solutions inventories. Segment operating margin for our flavor solutions segment decreased by 350120 basis points from the prior year level to 12.3%13.6% in the thirdfirst quarter of 2020, due to a decrease in2021, as the accretive impact of the Cholula and FONA acquisitions on gross margin and increased SG&Amargins were more than offset by the aforementioned factors, all as a percentage of net sales. On a constant currency basis, segment operating income for our flavor solutions segment decreased by 21.6%4.2% in the thirdfirst quarter of 20202021 as compared to the same period in 2019.
Segment operating income for our flavor solutions segment decreased by $57.4 million, or 25.4%, in the nine months ended August 31, 2020 as compared to the same period of 2019. The decrease in segment operating income was driven by lower sales, increased conversion costs, including the matters previously described, 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. Segment operating margin for our flavor solutions segment decreased by 300 basis points from the prior year level to 11.5% in the first nine months of 2020, driven by lower segment gross margin and an increase in SG&A as a percentage of net sales. Segment operating margin for the nine months ended August 31, 2020 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 23.6% in the nine months ended August 31, 2020, in comparison to the same period in 2019.2020.
MARKET RISK SENSITIVITY
We are subject to market risk sensitivities, including those related to foreign exchange, interest rates, commodity risks and credit risks. The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets during 2020.2020 and has continued, to a lesser extent, in 2021.
Foreign Exchange Risk
We are potentially exposed to foreign currency risk affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps with highly-rated financial institutions to reduce fluctuations in the long or short currency positions. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. All derivatives are designated as hedges.
The following table sets forth the notional values and unrealized net gain (loss)loss of the portfolio of our forward foreign currency and cross currency swap contracts:
| | | August 31, 2020 | | August 31, 2019 | | November 30, 2019 | | February 28, 2021 | | November 30, 2020 |
Forward foreign currency: | Forward foreign currency: | | | | | | Forward foreign currency: | | | |
Notional value | Notional value | $ | 363.4 | | | $ | 455.3 | | | $ | 489.2 | | Notional value | $ | 558.9 | | | $ | 383.8 | |
Unrealized net loss | Unrealized net loss | (3.2) | | | (2.4) | | | (0.3) | | Unrealized net loss | (10.5) | | | (6.8) | |
Cross currency swaps: | Cross currency swaps: | | Cross currency swaps: | |
Notional value | Notional value | 524.5 | | | 480.3 | | | 495.5 | | Notional value | 538.6 | | | 524.4 | |
Unrealized net (loss) gain | (19.3) | | | 0.6 | | | 3.2 | | |
Unrealized net loss | | Unrealized net loss | (21.1) | | | (18.8) | |
The outstanding notional value is a result of our decisions on foreign currency exposure coverage, based on our foreign currency and foreign currency translation exposures.
Interest Rate Risk
We manage our interest rate exposure by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments, and all derivatives are designated as hedges.
The following table sets forth the notional values and fair values of our interest rate swap contracts:
| | | August 31, 2020 | | August 31, 2019 | | November 30, 2019 | | February 28, 2021 | | November 30, 2020 |
Notional value | Notional value | $ | 350.0 | | | $ | 350.0 | | | $ | 350.0 | | Notional value | $ | 350.0 | | | $ | 350.0 | |
Unrealized net gain | Unrealized net gain | 45.6 | | | 28.2 | | | 20.9 | | Unrealized net gain | 31.2 | | | 43.1 | |
The change in fair values of our interest rate swap contracts is due to changes in interest rates on the notional amounts outstanding as of each date as well as the remaining duration of our interest rate derivatives.
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. Our most significant raw materials are pepper, dairy products, garlic,pepper, vanilla, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour and rice.flour. 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. To the extent that we have used derivatives for this purpose, it has not been material to our business.
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, particularly in light of the evolving financial impact of COVID-19. We believe that our allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of August 31, 2020,February 28, 2021, there have been no material changes in our contractual obligations and commercial commitments outside the ordinary course of business since November 30, 20192020 other than the following, both of which are more fully described in note 35 of the notes to condensed consolidatedthe accompanying financial statements included in Item 1: (i) in April 2020,February 2021, we issued $500$500.0 million of 2.5%0.90% notes due AprilFebruary 15, 2030;2026; and (ii) during the nine months ended August 31, 2020,also in February 2021, we fully repaid our five-year term loanissued $500.0 million of 1.85% notes due August 17, 2022.February 15, 2031.
NON-GAAP FINANCIAL MEASURES
The following table includes 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 with United 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 on-going basis through completion.
•Income taxesTransaction and integration expenses associated with the U.S. Tax ActCholula and FONA acquisitions – We recorded a net income tax benefit of $1.5 million during the year ended November 30, 2019exclude certain costs associated with a U.S Tax Actour acquisitions of Cholula and FONA in November and December 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 provision to return adjustment.each acquisition.
Details with respect to the composition of transaction and integration expenses and special charges set forth below are included in notenotes 2, 3 and 9 of notes to the accompanying financial statements and in the financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2019.2020.
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.
A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows:
| | | For the year ended November 30, 2019 | | For the three months ended | | | For the nine months ended | | | Estimated for the year ending November 30, 2020 | | For the year ended November 30, 2020 | | For the three months ended | | | Estimated for the year ending November 30, 2021 |
| | | | August 31, 2020 | | August 31, 2019 | | August 31, 2020 | | August 31, 2019 | | | Estimated for the year ending November 30, 2020 | | For the year ended November 30, 2020 | | | February 29, 2020 | | Estimated for the year ending November 30, 2021 | |
| | Gross profit | | Gross profit | $ | 2,300.4 | | | $ | 577.5 | | | $ | 469.9 | | | | |
Impact of transaction and integration expenses included in cost of goods sold (1) | | Impact of transaction and integration expenses included in cost of goods sold (1) | — | | | 6.3 | | | — | | | |
Adjusted gross profit | | Adjusted gross profit | $ | 2,300.4 | | | $ | 583.8 | | | $ | 469.9 | | | |
Adjusted gross profit margin (2) | | Adjusted gross profit margin (2) | 41.1 | % | | 39.4 | % | | 38.8 | % | | |
| Operating income | Operating income | $ | 957.7 | | | $ | 273.0 | | | $ | 253.5 | | | $ | 724.6 | | | $ | 658.5 | | | | Operating income | $ | 999.5 | | | $ | 236.3 | | | $ | 194.2 | | | |
| Impact of transaction and integration expenses included in cost of goods sold (1) | | Impact of transaction and integration expenses included in cost of goods sold (1) | — | | | 6.3 | | | — | | | |
Impact of other transaction and integration expenses (1) | | Impact of other transaction and integration expenses (1) | 12.4 | | | 18.8 | | | — | | | |
Impact of special charges | Impact of special charges | 20.8 | | | 0.1 | | | 7.7 | | | 4.0 | | | 16.9 | | | Impact of special charges | 6.9 | | | 1.1 | | | 1.0 | | | |
Adjusted operating income | Adjusted operating income | $ | 978.5 | | | $ | 273.1 | | | $ | 261.2 | | | $ | 728.6 | | | $ | 675.4 | | | Adjusted operating income | $ | 1,018.8 | | | $ | 262.5 | | | $ | 195.2 | | | |
Adjusted operating income margin (1) | 18.3 | % | | 19.1 | % | | 19.7 | % | | 18.0 | % | | 17.5 | % | | |
Adjusted operating income margin (3) | | Adjusted operating income margin (3) | 18.2 | % | | 17.7 | % | | 16.1 | % | | |
| | Income tax expense | Income tax expense | $ | 157.4 | | | $ | 46.9 | | | $ | 36.8 | | | $ | 117.4 | | | $ | 91.0 | | | Income tax expense | $ | 174.9 | | | $ | 58.6 | | | $ | 30.1 | | | |
Impact of transaction and integration expenses (1) | | Impact of transaction and integration expenses (1) | 1.9 | | | (5.9) | | | — | | | |
Impact of special charges | Impact of special charges | 4.7 | | | — | | | 1.6 | | | 1.2 | | | 3.8 | | | Impact of special charges | 2.1 | | | 0.3 | | | 0.3 | | | |
| Non-recurring benefit of the U.S. Tax Act | 1.5 | | | — | | | 1.5 | | | — | | | 1.5 | | | |
Adjusted income tax expense | Adjusted income tax expense | $ | 163.6 | | | $ | 46.9 | | | $ | 39.9 | | | $ | 118.6 | | | $ | 96.3 | | | Adjusted income tax expense | $ | 178.9 | | | $ | 53.0 | | | $ | 30.4 | | | |
Adjusted income tax rate (2) | 19.5 | % | | 19.3 | % | | 17.6 | % | | 18.6 | % | | 17.0 | % | | |
Adjusted income tax rate (4) | | Adjusted income tax rate (4) | 19.9 | % | | 22.7 | % | | 18.4 | % | | |
| Net income | Net income | $ | 702.7 | | | $ | 206.1 | | | $ | 191.9 | | | $ | 546.7 | | | $ | 489.3 | | | Net income | $ | 747.4 | | | $ | 161.8 | | | $ | 144.7 | | | |
| Impact of transaction and integration expenses (1) | | Impact of transaction and integration expenses (1) | 10.5 | | | 31.0 | | | — | | | |
Impact of special charges | Impact of special charges | 16.1 | | | 0.1 | | | 6.1 | | | 2.8 | | | 13.1 | | | Impact of special charges | 4.8 | | | 0.8 | | | 0.7 | | | |
Non-recurring benefit of the U.S. Tax Act | (1.5) | | | — | | | (1.5) | | | — | | | (1.5) | | | |
| Adjusted net income | Adjusted net income | $ | 717.3 | | | $ | 206.2 | | | $ | 196.5 | | | $ | 549.5 | | | $ | 500.9 | | | Adjusted net income | $ | 762.7 | | | $ | 193.6 | | | $ | 145.4 | | | |
| Earnings per share – diluted | Earnings per share – diluted | $ | 5.24 | | | $ | 1.53 | | | $ | 1.43 | | | $ | 4.06 | | | $ | 3.65 | | | $5.60 to $5.68 | Earnings per share – diluted | $ | 2.78 | | | $ | 0.60 | | | $ | 0.54 | | | | $2.77 to $2.82 |
| Impact of transaction and integration expenses (1) | | Impact of transaction and integration expenses (1) | 0.04 | | | 0.12 | | | — | | | | 0.18 | |
Impact of special charges | Impact of special charges | 0.12 | | | — | | | 0.04 | | | 0.02 | | | 0.10 | | | 0.04 | | Impact of special charges | 0.01 | | | — | | | — | | | | 0.02 | |
Non-recurring benefit of the U.S. Tax Act | (0.01) | | | — | | | (0.01) | | | — | | | (0.01) | | | — | | |
| Adjusted earnings per share – diluted | Adjusted earnings per share – diluted | $ | 5.35 | | | $ | 1.53 | | | $ | 1.46 | | | $ | 4.08 | | | $ | 3.74 | | | $5.64 to $5.72 | Adjusted earnings per share – diluted | $ | 2.83 | | | $ | 0.72 | | | $ | 0.54 | | | | $2.97 to $3.02 |
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(1) | Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. | | | | |
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(1) | Transaction and integration expenses include transaction and integration expenses associated with our acquisitions of Cholula and FONA. These expenses include transaction expenses, integration expenses, including the effect of the fair value adjustment of acquired inventory on cost of goods sold and the unfavorable impact of a discrete item related to deferred State income tax expense, directly related to our December 2020 acquisition of FONA, of $11.4 million or $0.04 per diluted share. |
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(2) | Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. |
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(3) | Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. |
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(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 $243.5 million and $637.9of $233.3 million for the three and nine months ended August 31, 2020, respectively; $226.8 million and $568.0February 28, 2021, $165.4 million for the three and nine months ended August 31, 2019, respectively;February 29, 2020, and $840.0$900.8 million for the year ended November 30, 2019.
2020. |
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Because we are a multi-national company, we are subject to variability of our reported U.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 the U.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 period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of 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 fiscal period and the corresponding period of the prior fiscal year.
Constant currency growth rates follow:
| | | | | | | | | | | |
| Three Months Ended August 31, 2020 | | |
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis |
Net sales: | | | |
Consumer segment: | | | |
Americas | 17.2 | % | (0.3) | % | 17.5 | % |
EMEA | 23.0 | % | 0.4 | % | 22.6 | % |
Asia/Pacific | (8.7) | % | (2.5) | % | (6.2) | % |
Total Consumer | 14.7 | % | (0.4) | % | 15.1 | % |
Flavor Solutions segment: | | | |
Americas | (4.7) | % | (1.6) | % | (3.1) | % |
EMEA | (1.0) | % | (2.2) | % | 1.2 | % |
Asia/Pacific | 4.9 | % | (2.1) | % | 7.0 | % |
Total Flavor Solutions | (2.9) | % | (1.8) | % | (1.1) | % |
Total net sales | 7.6 | % | (1.0) | % | 8.6 | % |
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Adjusted operating income: | | | |
Consumer segment | 18.4 | % | (0.3) | % | 18.7 | % |
Flavor Solutions segment | (24.3) | % | (2.7) | % | (21.6) | % |
Total adjusted operating income | 4.6 | % | (1.1) | % | 5.7 | % |
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| Nine Months Ended August 31, 2020 | | |
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis |
Net sales: | | | |
Consumer segment: | | | |
Americas | 17.8 | % | (0.2) | % | 18.0 | % |
EMEA | 14.3 | % | (1.8) | % | 16.1 | % |
Asia/Pacific | (19.4) | % | (2.9) | % | (16.5) | % |
Total Consumer | 11.7 | % | (0.9) | % | 12.6 | % |
Flavor Solutions segment: | | | |
Americas | (5.0) | % | (1.0) | % | (4.0) | % |
EMEA | (9.5) | % | (2.2) | % | (7.3) | % |
Asia/Pacific | (3.1) | % | (2.9) | % | (0.2) | % |
Total Flavor Solutions | (5.7) | % | (1.4) | % | (4.3) | % |
Total net sales | 4.7 | % | (1.1) | % | 5.8 | % |
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Adjusted operating income: | | | |
Consumer segment | 24.6 | % | (0.7) | % | 25.3 | % |
Flavor Solutions segment | (25.4) | % | (1.8) | % | (23.6) | % |
Total adjusted operating income | 7.9 | % | (1.1) | % | 9.0 | % |
Rates of constant currency growth (decline) follow:
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| Three Months Ended February 28, 2021 |
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis |
Net sales: | | | |
Consumer segment: | | | |
Americas | 29.8 | % | 0.3 | % | 29.5 | % |
EMEA | 34.6 | % | 8.4 | % | 26.2 | % |
Asia/Pacific | 64.7 | % | 9.7 | % | 55.0 | % |
Total Consumer | 35.4 | % | 3.2 | % | 32.2 | % |
Flavor Solutions segment: | | | |
Americas | 2.1 | % | (0.3) | % | 2.4 | % |
EMEA | 1.4 | % | 1.3 | % | 0.1 | % |
Asia/Pacific | 25.8 | % | 8.2 | % | 17.6 | % |
Total Flavor Solutions | 4.3 | % | 0.9 | % | 3.4 | % |
Total net sales | 22.2 | % | 2.2 | % | 20.0 | % |
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Adjusted operating income: | | | |
Consumer segment | 58.8 | % | 4.6 | % | 54.2 | % |
Flavor Solutions segment | (4.0) | % | 0.2 | % | (4.2) | % |
Total adjusted operating income | 34.5 | % | 2.9 | % | 31.6 | % |
To present “constant currency” information for the fiscal year 20202021 projection, projected sales and adjusted operating income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company’s budgeted exchange rates for 20202021 and are compared to the 20192020 results, translated into U.S. dollars using the same 20202021 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2019.2020. To estimate the percentage change in adjusted earnings per share on a constant currency basis, a similar calculation is performed to arrive at adjusted net income divided by historical shares outstanding for fiscal year 20192020 or projected shares outstanding for fiscal year 2020,2021, as appropriate.
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| Projections for the Year Ending November 30, 20202021 |
Percentage change in net sales | 4%8% to 5%10% |
Impact of unfavorablefavorable foreign currency exchange rates | 12 | % |
Percentage change in net sales in constant currency | 5%6% to 6%8% |
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Percentage change in adjusted operating income | 4%9% to 5%11% |
Impact of unfavorablefavorable foreign currency exchange rates | 12 | % |
Percentage change in adjusted operating income in constant currency | 5%7% to 6%9% |
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Percentage change in adjusted earnings per share — diluted | 5% to 7% |
Impact of unfavorablefavorable foreign currency exchange rates | 12 | % |
Percentage change in adjusted earnings per share — diluted in constant currency | 6%3% to 8%5% |
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In addition to the precedingabove non-GAAP financial measures, we use a leverage ratio thatwhich is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt obligations.obligations and is a meaningful metric to investors in evaluating financial leverage. We believe that our leverage ratio is a meaningful metric to investors in evaluating our financial leverage, andalthough our method to calculate our leverage ratio may be different than the method used by other companies to calculate such a leverage ratio. We determine our leverage ratio as net debt (which we define as total debt, net of cash in excess of $75.0 million) to adjusted earnings before interest, income taxes,tax, depreciation and amortization ("Adjusted EBITDA")(Adjusted EBITDA). We define Adjusted EBITDA as net income plus expenses for interest, income taxes, depreciation and amortization, less interest income and as further adjusted for cash and non-cash acquisition-related expenses (which may include the effect of the fair value adjustment of acquired inventory on cost of goods sold), special charges, stock-based compensation expense, andexpenses, certain gains or losses (which may include third party fees and expenses and transaction and integration costs)., and pro forma Adjusted EBITDA of businesses acquired during the trailing twelve-month period then ended. Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determinationdefinition of the leverage ratio, which is based in part on Adjusted EBITDA, is consistent with the terms of our $1.0 billion revolving credit facilityfacilities, which requiresrequire us to maintain our leverage ratio below certain levels. UnderWe have also entered into a non-cancellable synthetic lease for a to-be-constructed distribution facility that contains covenants that are consistent with our revolving credit facilities. For further information with respect to the previously described revolving credit facilities and synthetic lease agreement, refer to note 6 and note 7, respectively, of notes to consolidated financial statements included in our Annual Report on Form 10-K for the applicable leverage ratio is reduced annually onyear ended November 30th. 30, 2020.
As of August 31, 2020,February 28, 2021, our capacity under therevolving credit facilities consist of a five-year $1.0 billion revolving credit facility, is not affected by these covenants. We do not expect that these covenants would limitwhich will expire in August 2022, and a 364-day $1.0 billion revolving credit facility, which will expire in December 2021. In early fiscal 2021 following our access toacquisition of FONA, the levels specified in our revolving credit facilityfacilities under which we are required to maintain our leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios. As amended, the maximum permitted leverage ratio under the terms of those revolving credit facilities is 4.5 as of the measurement dates at the end of each fiscal quarter in the year ending November 30, 2021. That maximum ratio drops to 4.25 on February 28, 2022, and drops to 3.75 for each measurement date at the end of each fiscal quarter for the foreseeable future; however,remaining term of the five-year facility. At the same time in early fiscal 2021, a similar amendment was made to our non-cancelable synthetic lease agreement for a to-be-constructed distribution facility.
As of February 28, 2021, our leverage ratio could restrict our abilityas determined under these previously described facilities was 3.8 as compared to utilize this facility.the maximum permitted leverage ratio of 4.5 as of that date. We expect toanticipate that we will comply with this financial covenant for the foreseeable future.
In an unforeseen event of non-compliance with this financial covenant, we anticipate that we would undertake to renegotiate the covenant with the existing bank groups or obtain additional financing to repay the outstanding amounts under the previously described revolving credit facilities and synthetic lease, in either case the expected impact of which would be an increase in the cost of these borrowings.
The following table reconciles our net income to Adjusted EBITDA and provides the computation of the leverage ratio, determined in accordance with the respective financial covenant under our previously described revolving credit facilities and synthetic lease, for the trailing twelve-month periods ended August 31, 2020, August 31, 2019February 28, 2021 and November 30, 2019:2020:
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| February 28, 2021 | | November 30, 2020 |
Net income | $ | 764.5 | | | $ | 747.4 | |
Interest expense | 134.1 | | | 135.6 | |
Income tax expense | 203.4 | | | 174.9 | |
Depreciation and amortization | 171.2 | | | 165.0 | |
EBITDA | $ | 1,273.2 | | | $ | 1,222.9 | |
Adjustments to EBITDA (1) | 142.9 | | | 89.5 | |
Adjusted EBITDA | $ | 1,416.1 | | | $ | 1,312.4 | |
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Net debt (2) | $ | 5,418.3 | | | $ | 4,555.8 | |
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Leverage ratio (1) | 3.8 | | | 3.5 | |
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| August 31, 2020 | August 31, 2019 | November 30, 2019 |
Net income | $ | 760.1 | | $ | 703.3 | | $ | 702.7 | |
Depreciation and amortization | 164.7 | | 157.1 | | 158.8 | |
Interest expense | 141.7 | | 170.6 | | 165.2 | |
Income tax expense | 183.8 | | 146.8 | | 157.4 | |
EBITDA | $ | 1,250.3 | | $ | 1,177.8 | | $ | 1,184.1 | |
Adjustments to EBITDA (1) | 43.8 | | 44.8 | | 47.9 | |
Adjusted EBITDA | $ | 1,294.1 | | $ | 1,222.6 | | $ | 1,232.0 | |
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Net debt | $ | 4,023.0 | | $ | 4,558.1 | | $ | 4,243.8 | |
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Leverage ratio (1) | 3.1 | | 3.7 | | 3.4 | |
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(1) | Adjustments to EBITDA are determined under the leverage ratio covenant in our $1.0 billionpreviously described revolving credit facilityfacilities and includessynthetic lease agreement. Those Adjustments to EBITDA include special charges, share-basedstock-based compensation expense, interest income, transaction and interest income.integration expenses, and pro forma Adjusted EBITDA of businesses acquired by McCormick in the trailing twelve-month period. That pro forma Adjusted EBITDA of acquired businesses represents the pre-acquisition date Adjusted EBITDA of an acquired business for a period that, together with that acquired business’ Adjusted EBITDA subsequent to the acquisition included in McCormick’s consolidated results, comprises twelve months of Adjusted EBITDA of the acquired business for the trailing twelve-month period. Pro forma Adjusted EBITDA of acquired businesses included in Adjustments to EBITDA for the trailing twelve-month periods ended February 28, 2021 and November 30, 2020, were $51.9 million and $32.0 million, respectively.
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(2) | | The leverage ratio covenant in our previously described revolving credit facilities and synthetic lease agreement defines net debt as the sum of short-term borrowings, current portion of long-term debt, and long-term debt, less the amount of cash and cash equivalents that exceeds $75.0 million. |
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LIQUIDITY AND FINANCIAL CONDITION
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| Nine months ended | | |
| August 31, 2020 | | August 31, 2019 |
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Net cash provided by operating activities | $ | 626.7 | | | $ | 494.6 | |
Net cash used in investing activities | (143.3) | | | (104.5) | |
Net cash used in financing activities | (432.7) | | | (319.2) | |
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| Three months ended |
| February 28, 2021 | | February 29, 2020 |
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Net cash (used in) provided by operating activities | $ | (32.2) | | | $ | 44.8 | |
Net cash used in investing activities | (755.2) | | | (38.3) | |
Net cash provided by financing activities | 612.7 | | | 7.1 | |
In the statement of cash flows, the changes in operating assets and liabilities are presented excluding the translation 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 acquisitions of businesses is presented as an investing activity. Accordingly, the amounts in the statement of cash flows do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.
Due to the cyclical nature of a portion of our business, we generate much of our cash flow in 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.
Operating Cash Flow — Net cash (used in) provided by operating activities (“cash flow from operations”) is historically lowerlowest in the first quarter and second quarters and then has builthighest in the third and fourth quartersquarter of our fiscal year. For the ninethree months ended August 31, 2020,February 28, 2021 cash flow from operations of $626.7 million increased by $132.1decreased $77.0 million from the same period of 2019. The 2020 increase2020. This decrease was primarily driven by an increase of $57.4 million in net income in the nine months ended August 31, 2020 over the prior year level. In addition, a significantly lowerhigher use of cash associated with otheroperating assets and liabilities, including lower cash provided by working capital, the timinghigher amount of certain employee incentivebenefits accrued as of the prior year-end and customerpaid in the first quarter of the subsequent fiscal year, and the payment of transaction and integration costs associated with our recent acquisitions.
As more fully described in our Annual Report on Form 10-K for the year ended November 30, 2020, we participate in a Supply Chain Financing program (SCF) with several global financial institutions (SCF Banks). Under the SCF, qualifying suppliers may elect to sell their receivables from us to an SCF Bank, enabling participating suppliers to negotiate their receivables sales arrangements directly with the respective SCF Bank. We are not party to those agreements and have no economic interest in a supplier’s decision to sell a receivable.
All outstanding amounts related to suppliers participating in the SCF are recorded within the line entitled "Trade accounts payable" in our condensed consolidated balance sheets, and the associated payments was partially offset by the useare included in operating activities within our consolidated statements of cash associated with working capital, driven byflows. As of February 28, 2021 and November 30, 2020 the increased level of inventoryamount due to meet demand.suppliers participating in the SCF and included in "Trade accounts payable" was approximately $245.5 million and $273.6 million, respectively.
Investing Cash Flow — Cash used in investing activities increased by $38.8$716.9 million to $143.3$755.2 million for the ninethree months ended August 31, 2020,February 28, 2021, compared to $104.5$38.3 million for the corresponding period in 2019. 2020. Our primary investing cash flows
include the usage of cash associated with our acquisition of businesses and capital expenditures.Cash usage related to the acquisition of businesses was $706.6 million during the three months ended February 28, 2021 and related to our acquisition of FONA.During the first ninethree months of 2020,2021, capital expenditures increased by $38.5$10.1 million from the 20192020 level to $145.6$48.6 million. We expect 20202021 capital expenditures to approximate $225 million.$265 million to support our planned growth, including the multi-year program to replace our ERP system and other initiatives.
Financing Cash Flow — Financing activities usedprovided cash of $432.7$612.7 million for the first ninethree months of 2020,2021, as compared to a use of $319.2 million for the corresponding period in 2019.2020 when financing activities provided cash of $7.1 million. The primary drivers behind this change werevariability between years is principally a result of changes in our net borrowings, share repurchase activity, and dividends, all as follows.described below.
In the first nine months of 2020,The following table outlines our net borrowing activitiesactivities:
| | | | | | | | | | | |
| Three months ended |
| February 28, 2021 | | February 29, 2020 |
| |
Net (decrease) increase in short-term borrowings | $ | (292.4) | | | $ | 125.2 | |
Proceeds from issuance of long-term debt, net of debt issuance costs | 999.3 | | | — | |
Repayments of long-term debt | (1.8) | | | (20.5) | |
Net cash provided from borrowing activities | $ | 705.1 | | | $ | 104.7 | |
During the three months ended February 28, 2021, we issued $500.0 million of 0.90% notes due February 15, 2026, with net cash proceeds received of $495.7 million. We also issued $500.0 million of 1.85% notes due February 15, 2031, with net cash proceeds received of $492.8 million. The net proceeds from these issuances were used cashto pay down short-term borrowings, including a portion of $182.7the $1,443.0 million as comparedof commercial paper issued to $90.2 million infund our acquisitions of Cholula and FONA, and for general corporate purposes.
During the first ninethree months of 2019. In the first nine months ofended February 29, 2020, we decreased our short-term borrowings, on a net basis, by $432.0 million as compared to an increase of $124.4 million during the comparable 2019 period. In the first nine months of 2020, we issued $500repaid $20.5 million of long-term debt with net proceeds fromprincipally comprised of the issuancerequired quarterly installment of $495.0 million. We also paid $1.1 million in costs associated with the debt issuance. In the first nine months of 2020, we also received $11.4 million of proceeds associated with the issuance of other long-term debt. During the nine months ended August 31, 2020 and 2019, we repaid $256.0 million and $214.6 million, respectively, of long-term debt. In the 2020 period, repayments consisted primarily of $250.0$18.8 million on our 5-year term loansloan due August 2022. Repayments during the nine months ended August 31, 2019, principally consisted of $206.3 million of repayments on term loans issued in August 2017. As of August 31, 2020, we have fully repaid $1.5 billion in term loans issued in connection with our acquisition of RB Foods in August 2017; the scheduled maturities of those term loans were $750 million due August 17, 2020 and $750 million due August 17, 2022.
We increased dividends paid to $247.4 million in the first nine months of 2020 from $226.4 million of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors.
During the nine months ended August 31, 2020, we received proceeds of $54.1 million from exercised stock options as compared to $84.6 million received in the corresponding 2019 period. We repurchased $10.7 million and $10.3 million of common stock during the nine months ended August 31, 2020 and 2019, respectively, in conjunction with employee tax withholding requirements.
The following table outlines the activity in our share repurchase program for the ninethree months ended August 31,February 28, 2021 and February 29, 2020 and 2019 (in millions):
| | | 2020 | | 2019 | | 2021 | | 2020 |
Number of shares of common stock repurchased | Number of shares of common stock repurchased | 0.26 | | | 0.54 | | Number of shares of common stock repurchased | — | | | 0.24 | |
Dollar amount | Dollar amount | $ | 46.0 | | | $ | 76.9 | | Dollar amount | $ | 0.1 | | | $ | 19.9 | |
As of August 31, 2020, $586.0February 28, 2021, $584.6 million remained of the $600 million share repurchase authorization approved by the Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors.
During the three months ended February 28, 2021, we received proceeds of $3.6 million from exercised stock options as compared to $7.7 million received in the corresponding 2020 period. We repurchased $5.1 million and $3.0 million of common stock during the three months ended February 28, 2021 and February 29, 2020, respectively, in conjunction with employee tax withholding requirements.
We increased dividends paid to $90.8 million in the first three months of 2021 from $82.4 million of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors.
The following table presents our leverage ratio for the trailing twelve-month periods ended August 31, 2020, August 31, 2019,February 28, 2021 and November 30, 2019:2020:
| | | | | | | | | | | | | | | | | |
| August 31, 2020 | | August 31, 2019 | | November 30, 2019 |
Leverage ratio | 3.1 | | | 3.7 | | | 3.4 | |
| | | | | | | | | | | |
| February 28, 2021 | | November 30, 2020 |
Leverage ratio | 3.8 | | | 3.5 | |
Our leverage ratio was 3.13.8 as of August 31, 2020February 28, 2021 as compared to the ratiosratio of 3.4 and 3.73.5 as of November 30, 2019 and August 31, 2019, respectively. The decrease in the ratio from 3.7 as of August 31, 2019 to 3.1 as of August 31, 20202020. That increase is due to an increase in our net debt balance, primarily associated with the acquisition of FONA, which was partially offset by the increase to our trailing twelve-month adjusted EBITDA and a lower net debt balance.
Adjusted EBITDA.
Most of our cash is denominated in foreign currencies.our subsidiaries outside of the U.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 the U.S. Tax Act onin December 22, 2017, the permanent repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and any possible future acquisitions. At August 31,February 28, 2021 and February 29, 2020, we temporarily used $184.6$221.2 million and $278.9 million, respectively, of cash from our foreign subsidiaries to pay down short-term debt in the U.S. At August 31, 2019, we temporarily used $253.5 million of cash from our foreignnon-U.S. subsidiaries to pay down short-term debt in the U.S. During a quarter, our short-term borrowings vary, but are lower at the end of a quarter. The average short-term borrowings outstanding for the ninethree months ended August 31,February 28, 2021 and February 29, 2020 and August 31, 2019 were $567.3$1,287.1 million and $839.0$911.1 million, respectively. Those average short-term borrowings outstanding for the ninethree months ended August 31, 2020February 28, 2021 included average commercial paper outstanding of $501.2$1,219.3 million. Total average debt outstanding for the ninethree months ended August 31,February 28, 2021 and February 29, 2020 and August 31, 2019 was $4,378.0$5,425.5 million and $4,792.0$4,465.6 million, respectively.
The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At August 31, 2020,February 28, 2021, the exchange rates for the Euro, British pound sterling, Canadian dollar, Australian dollar, Chinese renminbi and Polish zloty were higher than at both August 31, 2019February 29, 2020 and November 30, 2019. During 2020, we have seen greater-than-normal fluctuations in foreign exchanges rates as a result of increased market volatility driven by the global COVID-19 pandemic.
Credit and Capital Markets
Cash flows from operating activities are our primary source of liquidity for funding growth, dividends, capital expenditures and share repurchases. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements.
In August 2017, we entered into a five-year $1.0 billion revolving credit facility, which supports our commercial paper program and will expire in August 2022. The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. In December 2020, we entered into a 364-day $1.0 billion revolving credit facility, which will expire in December 2021. The current pricing for that 364-day credit facility, on a fully drawn basis, is LIBOR plus 1.25%. We generally use these facilities to support our issuance of commercial paper. The credit facility restrictsfacilities restrict subsidiary indebtedness and requiresrequire us to maintain certain minimum and maximum financial ratios for interest expense coverage and our leverage ratio. We generally use this facilityIn early fiscal 2021, following our acquisition of FONA, the levels specified in our revolving credit facilities under which we are required to supportmaintain our issuance of commercial paper.leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility.facilities. The facility isfacilities are made available by syndicates of banks, with various commitments per bank. If any of the banks in these syndicates are unable to perform on their commitments, our liquidity could be impacted.
We engage in regular communication with all banks participating in our revolving credit facility.facilities. 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, pricing we receive on services, and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote.
We hold investments in equity and debt securities in both our qualified defined benefit pension plans and a rabbi trust for our nonqualified defined benefit pension plan. We estimate total required contributions to our pension plans in 20202021 of approximately $12$10 million. In 2019,2020, we contributed $11.4$11.9 million to our pension plans. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets.
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. To meet these cash requirements, we intend to use our existing cash, cash equivalents, and internally generated funds, to borrow under our existing credit facilities or under other short-term borrowing facilities, depending on market conditions, to access capital markets, and, depending upon the significance of the cost of a particular 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 cash requirements over the next twelve months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of notes to the accompanying 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 are included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019.2020.
There have been no changes in our critical accounting estimates and assumptions included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019.2020.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, gross margin, earnings, cost savings, transaction and integration expenses, special charges, acquisitions, brand marketing support, volume and product mix, gross margins, earnings, cost savings, brand marketing support, special charges, acquisitions, income tax expense, and the impact of foreign currency rates are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan.” These statements may relate to: the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; disruptions or inefficiencies in the supply chain, including any impact of COVID-19; the expected results of operations of businesses acquired by the company, including the acquisitionacquisitions of RB Foods;Cholula and FONA; the expected impact of raw material costs and pricing actions on the company's results of operations and gross margins; the expected impact of productivity improvements, including those associated with our Comprehensive Continuous Improvement ("CCI")(CCI) program and global enablement initiative; expected working capital improvements; expectations regarding growth potential in various geographies and markets, including the impact from customer, channel, category, and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected timing and costs of implementing our business transformation initiative, which includes the implementation of a global enterprise resource planning (ERP) system; the expected impact of accounting pronouncements; the expected impact of the U.S. Tax Act enacted in December 2017; the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of short- and long-term debt as well as quarterly dividends and the ability to issue additional debt or equity securities; and expectations regarding purchasing shares of McCormick's common stock under the existing repurchase authorization.
These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: the company's ability to drive revenue growth; damage to the company's reputation or brand name; loss of brand relevance; increased private label use; product quality, labeling, or safety concerns; negative publicity about our products; actions by, and the financial condition of, competitors and customers; the longevity of mutually beneficial relationships with our large customers; the ability to identify, interpret and react to changes in consumer preferencespreference and demand; business interruptions due to natural disasters, unexpected events or public health crises,crisis, including COVID-19; issues affecting the company's supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses, including the acquisitionacquisitions of RB Foods;Cholula and FONA; global economic and financial conditions generally, including the on-going impact of the exit of the U.K.United Kingdom (U.K.) from the European Union, availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; the effects of increased level of debt service following the RB Foods acquisitionCholula and FONA acquisitions as well as the effects that such increased debt service may have on the company's ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; impairments of indefinite-lived intangible
assets; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; the stability of
credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; the company's inability to successfully implement our business transformation initiative; fundamental changes in tax laws,laws; including interpretations and assumptions we have made, and guidance that may be issued, regarding the U.S. Tax Act enacted on December 22, 2017 and volatility in our effective tax rate; climate change; infringement of intellectual property rights, and those of customers; litigation, legal and administrative proceedings; the company's inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; and other risks described in the company’s filings with the Securities and Exchange Commission.
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly, any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see “Market Risk Sensitivity” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations above and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended November 30, 2019.2020. Except as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations above, there have been no significant changes in our financial instrument portfolio or market risk exposures since our November 30, 20192020 fiscal year end.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: The company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the company’s disclosure controls and procedures were effective.
Changes in Internal Controls: No change occurred in our “internal control over financial reporting” as defined in Rule 13a-15(f) during our last fiscal quarter which was identified in connection with the evaluation required by Rule 13a-15a as materially affecting or reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
There are no material pending legal proceedings in which we or our subsidiaries is a party or in which any of our or their property is the subject.
ITEM 1.ARISK FACTORS
The following risk factor isThere have been no material changes in addition to our risk factors—included from those disclosed in Part 1,I, Item A1A to our Annual Report on Form 10-K for the fiscal year ended November 30, 2019 (“our 2019 Form 10-K”)—that could affect our business, financial condition and results of operations. These risk factors should be considered in connection with evaluating2020, except for the forward-looking statements included in this Quarterly Report on Form 10-Q because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. Before you buy our Common Stock or Common Stock Non-Voting, you should know that making such an investment involves risks, including the risks described in our 2019 Form 10-K and as included below. Additional risks and uncertainties that are not presently known to us or are currently deemed to be immaterial also may materially adversely affect our business, financial condition, or results of operations in the future. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our securities could decline, and you may lose part or all of your investment.following update:
Our operations may be adversely impacted as a result of pandemic outbreaks, including COVID-19.
In December 2019, COVID-19, a strain of novel coronavirus, or COVID-19, was first reported in Wuhan, China, resulting in thousands of confirmed cases of the disease in China. By January 2020, the Chinese government implemented a quarantine protocol for Wuhan and implemented other restrictions for other major Chinese cities, includingmandatory business closures, social distancing measures, and various travel restrictions. OnIn March 11, 2020, as COVID-19 spread outside of China, significantly impacting the rest of the world, the World Health Organization designated the outbreak as a global pandemic. The effects of COVID-19 and related actions to attempt to control its spread significantly impacted not only our operating results but also the global economy. COVID-19 has impacted and continues to impact our customers, our operations, consumers and the global economy as discussed below; however,below. However, given the evolving health, economic, social, and governmental environments, the breadth and duration of such impact remains uncertain.
The COVID-19 pandemic has affected, and may continuecontinues to affect, our operations, major facilities, and the health of our employees and consumers. The production of certain of our products in the U.S.our Americas, EMEA, and EuropeAsia/Pacific geographic regions are concentrated in a single manufacturing site inwithin each location.region. To mitigate the spread of COVID-19, many governments have implemented quarantines and significant restrictions on travel as well as work restrictions that prohibited many employees from going to work. As a result, we temporarily closed certain manufacturing and other facilities over the past several months.for limited periods in 2020. Our results have been and we expect will continue to be adversely impacted by these closures and other actions taken to contain or treat the impact of COVID-19, and the extent of such impact will depend upon future developments, which are highly uncertain and cannot be predicted. COVID-19 continues to interfere with general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our business, financial condition, or results of operations. Beginning late in the second quarter of 2020,In mid-2020, we saw some loosening of government-mandated COVID-19 restrictions in certain locales; however,locales in response to the extent thatimproved COVID-19 continuesinfection levels. However, upon worsening COVID-19 infection levels in certain localities in late fiscal 2020 and in early fiscal 2021, local governmental authorities have either re-imposed some or worsens, governments may maintainall of earlier restrictions or impose additional restrictions.imposed other restrictions, all in an effort to prevent the spread of COVID-19.
In early fiscal 2021, vaccines for combatting 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. However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to front-line health care workers and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19. We expect that administration of the COVID-19 vaccines to substantial numbers of the population is unlikely to occur in the more significant jurisdictions in which we operate until mid- to late-2021 in the Americas and EMEA and until 2022 in the Asia Pacific region. The resultavailability of COVID-19 vaccines and thosetheir take-up by individuals is difficult to predict and, as a result, actual vaccination results are likely to vary from these expectations. The impact of COVID-19, including the impact of restrictions imposed to combat its spread, could result in additional businesses being shut down, additional work restrictions and supply chains being interrupted, slowed, or rendered inoperable. As a result, it may be even more challenging to obtain and process raw materials to support our business needs, and more 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, as some of our customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of our business, financial condition or results of operations. The potential effects of COVID-19 also could impact many of the other risk factors described herein, but given the evolving health, economic, social and governmental environments, such potential impact remains uncertain. While we expect the impacts of COVID-19 to continue to have an effect on our
business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at this time.
The uncertainty regarding the potential effectsphase-out of COVID-19 also couldLIBOR may negatively impact our operating results.
LIBOR, the 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 is expected to be phased out beginning after December 31, 2021 when private-sector banks are no longer required to report the information used to set the rate. Without this data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative of the market. On March 5, 2021, the U.K. Financial Conduct Authority (FCA) published a statement confirming that all LIBOR settings will either cease to be provided or no longer be representative (i) immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings, and (ii) immediately after June 30, 2023, in the case of all remaining US dollar settings.The International Swaps and Derivative Association (ISDA) or Alternative Reference Rates Committee (ARRC) fallback spread adjustments were fixed as of the FCA announcement date and are expected to be implemented at the point each relevant reference rate ceases or becomes non-representative.
There continue to be many of our risk factors, included in Part 1, Item A of our 2019 Form 10-K,uncertainties regarding a transition from LIBOR, including but not limited to our profitability, lawsthe need to amend all contracts with LIBOR as the referenced rate and regulations affecting our business, fluctuationshow this will impact the Company’s cost of variable rate debt and certain derivative financial instruments. The Company will also need to consider new contracts and if they should reference an alternative benchmark rate or include suggested fallback language, as published by the ARRC. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in foreign currency markets,an increase in the availability of future borrowings, the costs of current and future borrowings, valuationcost of our pension assets and obligations, credit risks ofvariable rate debt or derivative financial instruments which may be detrimental to our customers and counterparties, our business transformation initiative and an impairment of the carrying value of goodwillfinancial position or other indefinite-lived intangible assets. However, given the evolving health, economic, social, and governmental environments, the potential impact that COVID-19 could have on our risk factors that are further described in our 2019 Form 10-K remain uncertain.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our purchases of our Common Stock (CS) and Common Stock Non-Voting (CSNV) during the thirdfirst quarter of 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
ISSUER PURCHASES OF EQUITY SECURITIES | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
June 1, 2020 to June 30, 2020 | CS – 0 | | $ | — | | | — | | | $611 million |
| CSNV – 0 | | $ | — | | | — | | | |
July 1, 2020 to July 31, 2020 | CS – 123,439 (1) | | $ | 189.18 | | | 123,439 | | | $588 million |
| CSNV – 0 | | $ | — | | | — | | | |
August 1, 2020 to August 31, 2020 | CS – 9,000 | | $ | 202.39 | | | 9,000 | | | $586 million |
| CSNV – 0 | | $ | — | | | — | | | |
Total | CS – 132,439 | | $ | 190.08 | | | 132,439 | | | $586 million |
| CSNV – 0 | | $ | — | | | — | | | |
(1)On July 1, 2020 and July 13, 2020, we purchased 9,613 shares and 7,826 shares, respectively, of our CS from our U.S. defined contribution retirement plan to manage shares, based upon participant activity, in the plan's company stock fund. The prices paid per share of $179.84 and $183.50 represented the closing price of the common shares on July 1, 2020 and July 13, 2020, respectively. On July 16, 2020, we purchased 106,000 shares of our CS from our domestic pension plan to facilitate the plan's rebalancing of its asset allocation. The price paid per share of $190.45 represented the closing price of the common shares on July 16, 2020. | | | | | | | | | | | | | | | | | | | | | | | |
ISSUER PURCHASES OF EQUITY SECURITIES |
Period | Total Number of Shares Purchased | | Average Price Paid per share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
December 1, 2020 to December 31, 2020 | CS – 0 | | $ | — | | | — | | | $585 million |
| CSNV – 0 | | $ | — | | | — | | |
January 1, 2021 to January 31, 2021 | CS – 0 | | $ | — | | | — | | | $585 million |
| CSNV – 0 | | $ | — | | | — | | |
February 1, 2021 to February 28, 2021 | CS – 550 | | $ | 90.27 | | | 550 | | | $585 million |
| CSNV – 0 | | $ | — | | | — | | |
Total | CS – 550 | | $ | 90.27 | | | 550 | | | $585 million |
| CSNV – 0 | | $ | — | | | — | | |
As of August 31, 2020, $586.0February 28, 2021, $584.6 million remained of the $600 million share repurchase authorization approved by the Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors.
In certain circumstances, we issue shares of CS in exchange for shares of CSNV, or issue shares of CSNV in exchange for shares of CS, in either case pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Typically, these exchanges are made in connection with the administration of our employee benefit plans, executive compensation programs and dividend reinvestment/direct purchase plans or at the request of holders of common stock. The number of shares issued in an exchange is generally equal to the number of shares received in the exchange,
although the number may differ slightly to the extent necessary to comply with the requirements of the Employee Retirement Income Security Act of 1974. During the thirdfirst quarter of 2020,2021, we issued 878,32886,965 shares of CSNV in exchange for shares of CS and issued 4,390333 shares of CS in exchange for shares of CSNV.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6.EXHIBITS
The following exhibits are attached or incorporated herein by reference:
| | | | | | | | | | | | | | |
| Exhibit Number | | | Description |
(3) | (i) | Articles of Incorporation and By-Laws | | |
| | Restatement of Charter of McCormick & Company, Incorporated dated April 16, 1990 | | Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration No. 33-39582 as filed with the Securities and Exchange Commission on March 25, 1991. |
| | Articles of Amendment to Charter of McCormick & Company, Incorporated dated April 1, 1992 | | Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration Statement No. 33-59842 as filed with the Securities and Exchange Commission on March 19, 1993. |
| | | | |
| (ii) | By-Laws | | |
| | | | |
(4) Instruments defining the rights of security holders, including indentures
(i)See Exhibit 3 (Restatement of Charter and By-Laws)
(10)Material Contracts
(ii)Deferred Compensation Plan, as restated on January 1, 2000, and amended on August 29, 2000, September 5, 2000 and May 16, 2003, in which directors, officers and certain other management employees participate, a copy of which Plan document and amendments was attached as Exhibit 10(viii) of McCormick’s Form 10-Q for the quarter ended August 31, 2003, File No. 1-14920, as filed with the Securities and Exchange Commission on October 14, 2003, and incorporated by reference herein.*(iii)Non-Qualified Retirement Savings Plan, with an effective date of February 1, 2017, in which directors, officers and certain other management employees participate, a copy of which Plan document was attached as Exhibit 10(v) of McCormick's Form 10-Q for the quarter ended February 28, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on March 28, 2017, and incorporated by reference herein.* (iv)The 2007 Omnibus Incentive Plan, in which directors, officers and certain other management employees participate, is set forth in Exhibit A of McCormick’s definitive Proxy Statement dated February 20, 2008, File No. 1-14920, as filed with the Securities and Exchange Commission on February 20, 2008, and incorporated by reference herein, as amended by Amendment No. 1 thereto, which Amendment is incorporated by reference from Exhibit 10(xi) of McCormick’s 10-K for the fiscal year ended November 30, 2008, File No. 1-14920, as filed with the Securities and Exchange Commission on January 28, 2009.*
(31) Rule 13a-14(a)/15d-14(a) Certifications Filed herewith
(32) Section 1350 Certifications Filed herewith
(101) The following financial information from the Quarterly Report on Form 10-Q of McCormick for the quarter ended August 31, 2020,February 28, 2021, filed electronically herewith, and formatted in Inline XBRL (Extensible Business Reporting Language):
(i) Condensed Consolidated Balance Sheet; (ii) Condensed Consolidated Income Statement; (iii) Condensed Consolidated Statement of Comprehensive Income; (iv) Condensed Consolidated Cash Flow Statement; (v) Condensed Consolidated Statement of Stockholders' Equity; and (vi) Notes to the Condensed Consolidated Financial Statements.
(104) Inline XBRL for the cover page from the Quarterly Report on Form 10-Q of McCormick for the quarter ended August 31, 2020,February 28, 2021, files electronically herewith, included in the Exhibit 101 inline XBRL Document Set.
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* | Management contract or compensatory plan or arrangement. |
McCormick hereby undertakes to furnish to the Securities and Exchange Commission, upon its request, copies of additional instruments of McCormick with respect to long-term debt that involve an amount of securities that do not exceed 10 percent of the total assets of McCormick and its subsidiaries on a consolidated basis, pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| McCORMICK & COMPANY, INCORPORATED | | |
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September 29, 2020March 30, 2021 | By: | | /s/ Michael R. Smith |
| Michael R. Smith | | |
| Executive Vice President & Chief Financial Officer | | |
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September 29, 2020March 30, 2021 | By: | | /s/ Christina M. McMullen |
| Christina M. McMullen | | |
| Vice President & Controller | | |