MCCORMICK & COMPANY, INCORPORATED 
Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understandMcCormick & Company, Incorporated , our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto contained in Item 8 of this report. We use certain non-GAAP information that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data. McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry-retailers, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and flavor solutions, as described in Item 1 of this report. Our long-term annual growth objectives in constant currency are to increase sales 4% to 6%, increase adjusted operating income 7% to 9% and increase adjusted earnings per share 9% to 11%. Sales growth: Over time, we expect to grow sales with similar contributions from: 1) our base business-driven by brand marketing support, customer intimacy, expanded distribution and category growth; 2) new products; and 3) acquisitions. Base business-We expect to drive sales growth by optimizing our brand marketing investment through improved speed, quality and effectiveness. We measure the return on our brand marketing investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products. New Products-For our consumer segment, we believe that scalable and differentiated innovation continues to be one of the best ways to distinguish our brands from our competition, including private label. We are introducing products for every type of cooking occasion, from gourmet, premium items to convenient and value-priced flavors. For flavor solutions customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. We have a solid pipeline of flavor solutions aligned with our customers' new product launch plans, many of which include "better-for-you" innovation. With over 20 product innovation centers around the world, we are supporting the growth of our brands and those of our flavor solutions customers with products that appeal to local consumers. Acquisitions-Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed seven 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. Our acquisitions have included bolt-on opportunities and theAugust 17, 2017 acquisition of Reckitt Benckiser's Food Division ("RB Foods ") from Reckitt Benckiser Group plc. for approximately$4.2 billion , net of acquired cash. The acquired market-leading brands ofRB Foods include French's®, Frank's RedHot® and Cattlemen's®, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractiveU.S. condiments category and provide significant international growth opportunities for our consumer and flavor solutions segments.
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Cost savings and business transformation: We are fueling our investment in
growth with cost savings from our CCI program, an ongoing initiative to improve
productivity and reduce costs throughout the organization, that also includes
savings from the organization and streamlining actions described in note 3 of
the accompanying financial statements. In addition to funding brand marketing
support, product innovation and other growth initiatives, our CCI program helps
offset higher costs and is contributing to higher operating income and earnings
per share.
We are making investments to build the McCormick of the future, including in our
Global Enablement (GE) organization to transform McCormick through globally
aligned, innovative services to enable growth. As more fully described in note 3
of notes to our consolidated financial statements, we expect to incur special
charges of approximately $60 million to $65 million associated with our GE
initiative of which approximately $38 million have been recognized through
November 30, 2019 . As technology provides the backbone for this greater process
alignment, information sharing and scalability, we are also making investments
in our information systems. In 2019, we have progressed in implementing our
global enterprise resource planning (ERP) replacement program which will enable
us to accelerate the transformation of our ways of working and provide a
scalable platform for growth. We expect that, in total over the course of the
ERP replacement program from late 2018 through 2022, we will invest from
approximately $300 million to $350 million , including expenses related to the
go-live activities in our operations, to enable the anticipated completion of
the global roll out of our new information technology platform in 2022. Of that
projected, $300 million to $350 million , we expect capitalized software to
account for approximately 40% and program expenses to account for approximately
60%. Of the approximately $180 million to $210 million of operating expenses
included in our projected total spending related to our ERP replacement program,
approximately $20 million have been recognized through November 30, 2019 .
The
Cash flow: We continue to generate strong cash flow. Net cash provided by operating activities reached$946.8 million in 2019, an increase of$125.6 million from the$821.2 million realized in 2018. In 2019, we continued to have a balanced use of cash for debt repayment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 34 years, and to fund capital expenditures, acquisitions and share repurchases. In 2019, the return of cash to our shareholders through dividends and share repurchases was$397.3 million .
On a long-term basis, we expect a combination of acquisitions and share repurchases to add about 2% to earnings per share growth.
In 2019, we achieved further growth of our business with net sales rising 0.8% over the 2018 level due to the following factors: • We grew volume and product mix, with increases in both our consumer and
flavor solutions segments. This added 2.5% of sales growth. The increases
were driven by new products as well as growth in the base business.
• Pricing actions contributed 0.2% of the increase in net sales.
• Net sales growth was negatively impacted by fluctuations in currency rates
that reduced sales growth by 1.9%. Excluding this impact, we grew sales
2.7% on a constant currency basis.
Operating income was $957.7 million in 2019 and $891.1 million in 2018. We
recorded $20.8 million and $16.3 million of special charges in 2019 and 2018,
respectively, related to organization and streamlining actions. In 2018, we also
recorded $22.5 million of transaction and integration expenses related to our
acquisition of RB Foods that reduced operating income. In 2019, compared to the
year-ago period, the favorable impact of higher sales, $118.9 million of cost
savings from our CCI program, including organization and streamlining actions,
and the impact of the previously mentioned 2018 integration costs more than
offset increased conversion costs, higher stock-based compensation expense, and
the unfavorable impact of foreign currency exchange rates. Excluding special
charges together with, for 2018, transaction and integration expenses related to
our acquisition of RB Foods , adjusted operating income was $978.5 million in
2019, an increase of 5.2%, compared to $929.9 million in the year-ago period. In
constant currency, adjusted operating income rose 6.7%. For further details and
a reconciliation of non-GAAP to reported amounts, see Non-GAAP Financial
Measures.
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Diluted earnings per share was $5.24 in 2019 and $7.00 in 2018. The year-on-year
decrease in earnings per share was driven mainly by the significant reduction in
the non-recurring benefit of the U.S. Tax Act and, to a much smaller extent, by
a higher amount of shares outstanding and by increased special charges in 2019
as compared to 2018. Those unfavorable impacts in 2019 were partially offset by
higher operating income as previously described, by the absence of transaction
and integration expenses, by lower interest expense and by higher income from
unconsolidated operations in 2019 as compared to 2018. Special charges lowered
earnings per share by $0.12 and $0.10 in 2019 and 2018, respectively.
Transaction and integration expenses lowered earnings per share by $0.13 in
2018. A non-recurring benefit from the U.S. Tax Act increased diluted earnings
per share by $0.01 and $2.26 in 2019 and 2018, respectively. Excluding the
effects of special charges, transaction and integration expenses, and the
non-recurring benefit of the U.S. Tax Act, adjusted diluted earnings per share
was $5.35 in 2019 and $4.97 in 2018, or an increase of 7.6%.
2020 Outlook
We are well-positioned for another year of underlying solid performance in 2020.
In 2020, we expect to grow net sales 2% to 4% over 2019's net sales of $5,347.4
million . That anticipated 2020 sales growth is primarily driven by new products,
brand marketing, expanded distribution and the impact of pricing actions, which,
in conjunction with cost savings, are expected to offset an anticipated
mid-single digit cost increase. That increase consists entirely of organic
growth as we do not currently anticipate an incremental sales impact from
acquisitions in 2020. We expect our 2020 gross profit margin to be 25 to 75
basis points higher in 2020 than in 2019, in part driven by our CCI-led cost
savings.
In 2020, we expect operating income, compared to 2019's operating income of
$957.7 million , to range from comparable to an increase of 2%; that range
includes an estimated 600 basis point unfavorable impact from expenses related
to the investment in our global ERP replacement. Our expectations for 2020
operating income reflect the impact of lower special charges, estimated at $8
million in 2020 compared to $20.8 million in 2019. Excluding special charges
(but including the estimated 600 basis point unfavorable impact from expenses
related to our global ERP investment), we expect 2020's adjusted operating
income, compared to 2019's adjusted operating income of $978.5 million , to range
from a decline of 1% to an increase of 1%. Our CCI-led cost savings target in
2020 is approximately $105 million . In 2020, we expect to support our sales
growth with a mid-single-digit increase in brand marketing.
Our underlying effective tax rate is projected to be higher in 2020 than in
2019. Absent the projected impact of discrete tax items, we estimate our
underlying tax rate to be approximately 24% in 2020. Including the projected
impact of estimated discrete tax items, including the favorable impact of a
discrete item that occurred in December 2019 , we estimate that our consolidated
effective tax rate will approximate 22% in fiscal 2020. Excluding 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 tax rate was approximately 19.5% in 2019. We expect our adjusted
effective tax rate in 2020 to approximate our effective tax rate under U.S. GAAP
of 22%.
Diluted earnings per share was $5.24 in 2019. Diluted earnings per share for
2020 are projected to range from $5.15 to $5.25 . Excluding the per share impact
of the non-recurring benefit from the U.S. Tax Act of $0.01 and special charges
of $0.12 in 2019, adjusted diluted earnings per share was $5.35 in 2019.
Adjusted diluted earnings per share (excluding an estimated $0.05 per share
impact from special charges) are projected to be $5.20 to $5.30 in 2020. Our
projected adjusted diluted earnings per share in 2020, which ranges from a
decline of 3% to a decline of 1% from adjusted diluted earnings per share of
$5.35 in 2019, includes an approximate 700 basis point impact from the expenses
associated with our ERP replacement program and a higher adjusted effective tax
rate in 2020.
In 2020, we expect minimal impact of foreign currency, as compared to 2019
levels, on our projections of net sales, operating income and diluted earnings
per share as well as adjusted operating income and adjusted diluted earnings per
share.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS-2019 COMPARED TO 2018
2019 2018
Net sales $ 5,347.4 $ 5,302.8
Percent growth 0.8 % 12.1 %
Components of percent growth in net sales-increase
(decrease):
Volume and product mix 2.5 % 2.2 %
Pricing actions 0.2 % 0.5 %
Acquisitions - % 8.2 %
Foreign exchange (1.9 )% 1.2 %
Sales for 2019 increased by 0.8% from 2018 and by 2.7% on a constant currency
basis. Both the consumer and flavor solutions segments drove higher volume and
product mix that added 2.5% to sales. This was driven by product innovation as
well as growth in the base business. Pricing actions added 0.2% to sales. These
factors were partially offset by an unfavorable impact from foreign currency
exchange rates that reduced sales by 1.9% compared to 2018 and is excluded from
our measure of sales growth of 2.7% on a constant currency basis.
2019 2018
Gross profit $ 2,145.3 $ 2,093.3
Gross profit margin 40.1 % 39.5 %
In 2019, our gross profit margin increased 60 basis points to 40.1% from 39.5% in 2018, driven by the favorable impact of CCI-led cost savings, partially offset by unfavorable conversion costs.
2019 2018
Selling, general & administrative expense
21.8 % 22.0 %
Selling, general and administrative (SG&A) expense was $1,166.8 million in 2019
compared to $1,163.4 million in 2018, an increase of $3.4 million . That increase
in SG&A expense was driven by increased stock-based compensation expense and
higher distribution costs, partially offset by CCI-led cost savings. SG&A
expense in 2019 also reflected the impact of two significant, but largely
offsetting items: (i) expenses associated with our investment in a global ERP
platform in support of our GE business transformation initiative that increased
SG&A expense over the prior year level; and (ii) a one-time fiscal 2019 expense
reduction from the alignment of an employee benefit plan to our global standard
that decreased SG&A expense from the prior year level. As a result of the above
factors over an increased net sales base, SG&A expense as a percentage of net
sales was 21.8%, a 20-basis point improvement from 2018.
2019 2018
Total special charges
We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements. During 2019, we recorded$20.8 million of special charges, consisting primarily of (i)$14.1 million of costs related to our multi-yearGE business transformation initiative, including$10.6 million of third-party expenses,$2.1 million related to severance and related benefits, and$1.4 million related to other costs; (ii)$2.3 million of severance and related benefits associated with streamlining actions in theAmericas ; and (iii)$3.9 million related to streamlining actions in our EMEA region. During 2018, we recorded$16.3 million of special charges, consisting primarily of: (i)$11.5 million related to our multi-yearGE business transformation initiative, consisting of$7.5 million of third party expenses,$1.0 million of employee severance charges and a non-cash asset impairment charge of$3.0 million (which non-cash asset impairment charge was related to the write-off of certain software assets that are incompatible with our move to the new global ERP platform); (ii) a one-time payment, in the aggregate amount of$2.2 million , made to eligibleU.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of theU.S. Tax Act; (iii)$1.0 million related to employee severance benefits and other costs directly 21 -------------------------------------------------------------------------------- associated with the relocation of one of our Chinese manufacturing facilities; and (iv)$1.6 million related to employee severance benefits and other costs related to the transfer of certain manufacturing operations in ourAsia/Pacific region to a newly constructed facility inThailand . 2019 2018
Transaction and integration expenses $ -
Transaction and integration expenses related to theRB Foods acquisition totaled$22.5 million for 2018. These costs primarily consisted of outside advisory, service and consulting costs; employee-related costs, and other costs related to the acquisition. 2019 2018 Operating income$ 957.7 $ 891.1 Percent of net sales 17.9 % 16.8 % Operating income increased by$66.6 million , or 7.5%, from$891.1 million in 2018 to$957.7 million in 2019. An absence of transaction and integration expenses in 2019, compared to$22.5 million related to our acquisition ofRB Foods in 2018, more than offset a$4.5 million increase in special charges in 2019 from$16.3 million in 2018 to$20.8 million in 2019. Operating income as a percent of net sales rose by 110 basis points in 2019, from 16.8% in 2018 to 17.9% in 2019 as a result of the factors previously described. Our operating income as a percent of net sales in 2019 was impacted by two large, but substantially offsetting items: (i) expenses associated with our investment in a global ERP platform in support of ourGE business transformation initiative that decreased operating income as a percent of sales by approximately 35 basis points in 2019; and (ii) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard that increased operating income as a percent of sales by approximately 40 basis points in 2019. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was$978.5 million in 2019 as compared to$929.9 million in 2018, an increase of$48.6 million or 5.2% over the 2018 level. Adjusted operating income as a percent of sales rose by 80 basis points in 2019, from 17.5% in 2018 to 18.3% in 2019. 2019 2018 Interest expense$ 165.2 $ 174.6 Other income, net 26.7 24.8 Interest expense was$9.4 million lower for 2019 as compared to the prior year primarily due to a decline in average total borrowings. Other income, net for 2019 increased by$1.9 million from the 2018 level due principally to higher non-service cost income associated with our pension and postretirement benefit plans and higher interest income, which was partially offset by a gain on the sale of a building which was reflected in our 2018 results and did not recur in 2019. 2019 2018 Income from consolidated operations before income taxes$ 819.2 $ 741.3 Income tax expense (benefit) 157.4 (157.3 ) Effective tax rate 19.2 % (21.2 )% 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 ofU.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 associated with share-based payments to employees, changes in estimates of the outcome of tax matters related to prior years (including reversals of reserves upon the lapsing of statutes of limitations), provision-to-return adjustments, and the settlement of tax audits and, beginning in 2019, the tax effects of intra-entity asset transfers (other than inventory). As more fully described in note 12 of the accompanying financial statements, theU.S. Tax Act was enacted inDecember 2017 . TheU.S. Tax Act significantly changedU.S. corporate income tax laws by, among other things, reducing theU.S. corporate income tax rate to 21% beginning onJanuary 1, 2018 and creating a territorial tax system with a one-time transition tax on previously deferred post-1986 foreign earnings ofU.S. subsidiaries. Under GAAP (specifically, ASC Topic 740, Income Taxes), the effects of changes in tax rates and laws on deferred tax 22 -------------------------------------------------------------------------------- balances are recognized in the period in which the new legislation is enacted. We recorded a net benefit of$301.5 million associated with theU.S. Tax Act during 2018. This amount includes a$380.0 million benefit from the revaluation of our netU.S. deferred tax liabilities as ofJanuary 1, 2018 , based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of$78.5 million . That net transition tax impact is comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earnings ofU.S. subsidiaries estimated at$75.3 million , together with additional foreign withholding taxes of$7.9 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of theU.S. Tax Act and that were subsequently repatriated in 2018, less a$4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax. In addition, in 2019, we recorded a benefit of$1.5 million relating to an adjustment to a prior year tax accrual associated with theU.S. Tax Act. The effective tax rate was an expense of 19.2% in 2019 as compared to a benefit of 21.2% in 2018. The effective tax rate benefit of 21.2% in 2018 includes the non-recurring net tax benefit of$301.5 million associated with theU.S. Tax Act, as more fully described above, that had a (40.7)% impact on 2018's effective tax rate. Net discrete tax benefits were$43.7 million in 2019, which is an increase of$15.6 million from$28.1 million in 2018, excluding the non-recurring benefit of theU.S. Tax Act in 2018. For 2019, the effective tax rate was impacted by$15.2 million of tax benefits associated with an intra-entity asset transfer that occurred during 2019 under the provisions of ASU No. 2016-16, which we adopted onDecember 1, 2018 . Discrete tax benefits in both periods include excess tax benefits associated with share-based payments to employees ($22.4 million and$21.7 million in 2019 and 2018, respectively), reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and settlements with taxing authorities in several jurisdictions, the previously described non-recurring benefit of theU.S. Tax Act, and other discrete items. See note 12 of the accompanying financial statements for a more detailed reconciliation of theU.S. federal tax rate with the effective tax rate. 2019 2018
Income from unconsolidated operations
Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased$6.1 million in 2019 from the prior year. This increase was primarily attributable to the impact of higher earnings from our largest joint venture,McCormick de Mexico , as well as the impact of eliminating a lower level of earnings associated with our minority interests in 2019 as compared to 2018. We own 50% of most of our unconsolidated joint ventures, includingMcCormick de Mexico that comprised 72% of the income of our unconsolidated operations in 2019. We reported diluted earnings per share of$5.24 in 2019, compared to$7.00 in 2018. The table below outlines the major components of the change in diluted earnings per share from 2018 to 2019. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2019. 2018 Earnings per share-diluted $
7.00
Increase in operating income
0.29
Impact of non-recurring tax benefit recognized as a result of the
(2.25 )
Increase in special charges (0.02 )
Decrease in transaction and integration expenses attributable to RB
Foods acquisition 0.13
Decrease in interest expense 0.06
Increase in other income 0.01
Impact of income taxes 0.01
Increase in income from unconsolidated operations 0.04
Impact of higher shares (0.03 ) 2019 Earnings per share-diluted $
5.24
Results of Operations-Segments We measure the performance of our business segments based on operating income, excluding special charges and transaction and integration expenses related to ourRB Foods acquisition. See note 15 of the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment 23 -------------------------------------------------------------------------------- of operating income, excluding special charges as well as transaction and integration expenses related to ourRB Foods acquisition, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income. In 2019, the Company transferred management responsibility for certain export operations in both its consumer and flavor solutions segments between geographies within each respective segment, shifting from theAmericas to theAsia/Pacific regions within each segment, with no change in segment sales or segment operating income for either the consumer or flavor solutions segment in total. The discussion that follows reflects the effect of that realignment of export operations for all periods presented. Consumer Segment 2019 2018 Net sales$ 3,269.8 $ 3,247.0 Percent growth 0.7 % 11.9 % Components of percent growth in net sales-increase (decrease): Volume and product mix 2.4 % 1.7 % Pricing actions 0.1 % 0.6 % Acquisitions - % 8.2 % Foreign exchange (1.8 )% 1.4 % Segment operating income$ 676.3 $ 637.1 Segment operating income margin 20.7
% 19.6 %
Sales of our consumer segment in 2019 grew by 0.7% as compared to 2018 and grew by 2.5% on a constant currency basis. Higher volume and product mix added 2.4% to sales, and pricing actions added 0.1%. These factors offset an unfavorable impact from foreign currency exchange rates that reduced consumer segment sales by 1.8% compared to 2018 and is excluded from our measure of sales growth of 2.5% on a constant currency basis. In theAmericas , consumer sales rose 2.4% in 2019 as compared to 2018 and rose by 2.7% on a constant currency basis. Higher volume and product mix added 2.7% to sales, driven by new product sales as well as base business growth. The unfavorable impact of foreign currency exchange rates decreased sales by 0.3% compared to 2018 and is excluded from our measure of sales growth of 2.7% on a constant currency basis. In the EMEA region, consumer sales decreased 5.5% in 2019 as compared to 2018 and decreased 0.2% on a constant currency basis. Volume and product mix increased sales by 1.0%, led by new products and promotions that were partially offset by declines in private label sales. The impact of pricing actions reduced sales by 1.2%. The unfavorable impact of foreign currency exchange rates decreased sales by 5.3% compared to 2018 and is excluded from our measure of sales decline of 0.2% on a constant currency basis. In theAsia/Pacific region, consumer sales increased 0.8% as compared to 2018 and increased 5.7% on a constant currency basis. Higher volume and product mix added 2.9% to sales, led by strong sales inIndia andSoutheast Asia . Pricing actions, primarily inChina , added 2.8% to sales as compared to 2018. These factors offset an unfavorable impact from foreign currency exchange rates that decreased sales by 4.9% compared to 2018 and is excluded from our measure of sales growth of 5.7% on a constant currency basis. We grew segment operating income for our consumer segment by$39.2 million , or 6.1%, in 2019 compared to 2018. The favorable impact of higher sales and CCI-led cost savings more than offset increased conversion costs. On a constant currency basis, segment operating income for our consumer segment rose 7.3%. Segment operating income margin for our consumer segment rose by 110 basis points to 20.7% in 2019 from 19.6% in 2018, driven by an improvement in gross margin. 24 --------------------------------------------------------------------------------
Flavor Solutions Segment
2019 2018
Net sales $ 2,077.6 $ 2,055.8
Percent growth 1.1 % 12.4 %
Components of percent change in net sales-increase (decrease):
Volume and product mix 2.9 % 3.1 %
Pricing actions 0.3 % 0.3 %
Acquisitions - % 8.2 %
Foreign exchange (2.1 )% 0.8 %
Segment operating income $ 302.2 $ 292.8
Segment operating income margin 14.5 % 14.2 %
Sales of our flavor solutions segment increased 1.1% in 2019 as compared to 2018 and increased by 3.2% on a constant currency basis. Higher volume and product mix added 2.9% to sales and pricing actions added 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced flavor solutions segment sales by 2.1% compared to 2018 and is excluded from our measure of sales growth of 3.2% on a constant currency basis. In theAmericas , flavor solutions sales rose 2.2% in 2019 as compared to 2018 and rose 2.6% on a constant currency basis. Higher volume and product mix added 2.4% to sales and included growth in new products as well as in base business, led by sales to packaged food companies. Pricing actions added 0.2% to sales in 2019. These factors offset an unfavorable impact from foreign currency exchange rates that reduced sales by 0.4% in 2019 compared to 2018 and is excluded from our measure of sales growth of 2.6% on a constant currency basis. In the EMEA region, flavor solutions sales decreased 0.3% in 2019 as compared to 2018 and increased 6.7% on a constant currency basis. Higher volume and product mix added 5.4% to sales in 2019 with contributions from new products as well as base business growth. The increase was led by sales to quick service restaurants and packaged foods companies. Pricing actions added 1.3% to sales in 2019. These factors partially offset an unfavorable impact from foreign currency exchange rates that decreased sales by 7.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 6.7% on a constant currency basis. In theAsia/Pacific region, flavor solutions sales decreased 3.4% in 2019 as compared to 2018 and increased 0.6% on a constant currency basis. Higher volume and product mix added 0.9% to sales and included increased sales to quick service restaurants, partially offset by the exit of certain low margin business. Pricing actions reduced sales in 2019 by 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced sales by 4.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 0.6% on a constant currency basis. We grew segment operating income for our flavor solutions segment by$9.4 million , or 3.2%, in 2019 compared to 2018. The increase in segment operating income was driven by higher sales as well as lower SG&A costs. On a constant currency basis, segment operating income for our flavor solutions segment rose 5.3%. Segment operating income margin for our flavor solutions segment rose by 30 basis points to 14.5% in 2019 from 14.2% in 2018 and reflected the impact of lower SG&A costs as a percentage of net sales.
RESULTS OF OPERATIONS-2018 COMPARED TO 2017
2018 2017
Net sales $ 5,302.8 $ 4,730.3
Percent growth 12.1 % 9.7 %
Components of percent growth in net sales-increase
(decrease):
Volume and product mix 2.2 % 1.7 %
Pricing actions 0.5 % 2.1 %
Acquisitions 8.2 % 6.6 %
Foreign exchange 1.2 % (0.7 )%
25-------------------------------------------------------------------------------- Sales for 2018 increased by 12.1% from 2017 and by 10.9% on a constant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.2% to sales in 2019. This was driven by new products as well as growth in the base business. The incremental impact of pricing actions added 0.5% to sales in 2018, as compared to 2017. The incremental impact of theRB Foods acquisition added 8.2% to sales during 2018. A favorable impact from foreign currency exchange rates increased sales by 1.2% compared to 2017 and is excluded from our measure of sales growth of 10.9% on a constant currency basis. 2018 2017 Gross profit$ 2,093.3 $ 1,794.0 Gross profit margin 39.5 % 37.9 % In 2018, our gross profit margin rose 160 basis points to 39.5% from 37.9% in 2017. While this expansion in 2018 includes the accretive impact from our acquisition of theRB Foods business, together with the absence of related transaction and integration expenses of$20.9 million that depressed our 2017 gross profit margin by 50 basis points, our core business was also a driver of that expansion. In 2018, CCI-led cost savings and the shift in our core product portfolio to more value-added products continued to drive profit expansion across both of our segments, which was partially offset by an increase in freight costs during 2018 as compared to 2017. Excluding the effect of those transaction and integration expenses in 2017, adjusted gross profit margin rose 110 basis points from 38.4% in 2017 to 39.5% in 2018. 2018 2017
Selling, general & administrative expense
22.0 % 21.8 %
Selling, general and administrative ("SG&A") expense was $1,163.4 million in
2018 compared to $1,031.2 million in 2017, an increase of $132.2 million . That
increase in SG&A expense was driven by the incremental impact of the RB Foods
acquisition, together with increased brand marketing and higher distribution
costs, which was offset in part by CCI-led cost savings, including the benefits
from the organization and streamlining actions described in note 3 of the
accompanying financial statements. As a result, SG&A expense as a percentage of
net sales was 22.0%, a 20-basis point increase from 2017.
2018 2017
Total special charges $ 16.3 $ 22.2
During 2018, we recorded $16.3 million of special charges, consisting primarily
of: (i) $11.5 million related to our multi-year GE business transformation
initiative, consisting of $7.5 million of third party expenses, $1.0 million of
employee severance charges and a non-cash asset impairment charge of $3.0
million (that non-cash asset impairment charge was related to the write-off of
certain software assets that are incompatible with our move to the new global
ERP platform); (ii) a one-time payment, in the aggregate amount of $2.2 million ,
made to eligible U.S. hourly employees to distribute a portion of the
non-recurring net income tax benefit recognized in connection with the enactment
of the U.S. Tax Act; (iii) $1.0 million related to employee severance benefits
and other costs directly associated with the relocation of one of our Chinese
manufacturing facilities; and (iv) $1.6 million related to employee severance
benefits and other costs related to the transfer of certain manufacturing
operations in our Asia/Pacific region to a newly constructed facility in
Thailand .
During 2017, we recorded $22.2 million of special charges, consisting primarily
of $12.7 million related to third party expenses incurred as part of our
evaluation of changes relating to our GE transformation initiative, $2.8 million
related to employee severance benefits and other costs associated with the
relocation of one of our Chinese manufacturing facilities, $2.5 million for
severance and other exit costs associated with the closure of our manufacturing
plant in Portugal , and $1.7 million related to employee severance benefits and
other costs associated with actions related to the transfer of certain
manufacturing operations to a new facility then under construction in Thailand .
26
--------------------------------------------------------------------------------
2018 2017
Transaction expenses included in cost of goods sold $ -
22.5 40.8
Total $ 22.5 $ 77.1
Transaction and integration expenses related to our RB Foods acquisition
totaled $22.5 million and $77.1 million in 2018 and 2017, respectively. In 2018,
these costs primarily consisted of outside advisory, service and consulting
costs; employee-related costs; and other costs related to the acquisition. In
2017, these expenses consisted of amortization of the acquisition-date fair
value adjustment of inventories of $20.9 million that was included in cost of
goods sold; outside advisory, service and consulting costs; employee-related
costs; and other costs related to the acquisition, including the costs related
to the bridge financing commitment of $15.4 million that was included in other
debt costs.
2018 2017
Operating income $ 891.1 $ 699.8
Percent of net sales 16.8 % 14.8 %
Operating income increased by $191.3 million , or 27.3%, from $699.8 million in
2017 to $891.1 million in 2018. The change in operating income was impacted by
(i) a $39.2 million decrease in transaction and integration expenses, from $61.7
million in 2017 to $22.5 million in 2018, related to our acquisition of RB Foods
in 2018; and (ii) a $5.9 million decrease in special charges in 2018 as compared
to 2017. Operating income as a percent of net sales rose by 200 basis points in
2018, from 14.8% in 2017 to 16.8% in 2018 as a result of the factors previously
described. Excluding the effect of special charges and transaction and
integration expenses, adjusted operating income was $929.9 million in 2018 as
compared to $783.7 million in 2017, an increase of $146.2 million or 18.7% over
the 2017 level. Adjusted operating income as a percent of sales rose by 90 basis
points in 2018, from 16.6% in 2017 to 17.5% in 2018.
2018 2017
Interest expense $ 174.6 $ 95.7
Other income, net 24.8 6.1
Interest expense for 2018 of $174.6 million was sharply higher than the prior
year level, primarily due to higher average borrowings in 2018 related to our
incurrence of $3.7 billion in debt in August 2017 to finance the acquisition of
RB Foods (see note 6 of the accompanying financial statements). Other income,
net, for 2018 of $24.8 million was significantly higher than the 2017 level
principally due to i) a $9.6 million increase in income related to the
non-service component of our pension and other post-retirement plans, ii) a gain
of $6.3 million recognized on the sale in 2018 of a building vacated as part of
our move to a new global headquarters in Maryland , iii) higher interest income,
and iv) lower non-operating foreign currency transaction losses recognized in
2018 as compared to 2017.
2018 2017
Income from consolidated operations before income taxes
(157.3 ) 151.3
Effective tax rate (21.2 )% 25.4 %
As more fully described above and in note 12 of the accompanying financial
statements, the U.S. Tax Act was enacted in December 2017 . We recorded a net
benefit of $301.5 million associated with the U.S. Tax Act during 2018. This
amount included a $380.0 million benefit from the revaluation of our net U.S.
deferred tax liabilities as of January 1, 2018 , based on the new lower corporate
income tax rate offset, in part, by an estimated net transition tax impact of
$78.5 million . That net transition tax impact was comprised of the mandated
one-time transition tax on previously deferred post-1986 foreign earnings of
U.S. subsidiaries estimated at $75.3 million , together with additional foreign
withholding taxes of $7.9 million associated with previously unremitted prior
year earnings of certain foreign subsidiaries that were no longer considered
indefinitely reinvested as of the effective date of the U.S. Tax Act and that
were subsequently repatriated in 2018, less a $4.7 million reduction in our
fiscal 2018 income taxes directly resulting from the transition tax.
27
--------------------------------------------------------------------------------
The effective tax rate was a benefit of 21.2% in 2018 as compared to an
effective tax rate expense of 25.4% in 2017. The effective tax rate benefit of
21.2% in 2018 includes the net tax benefit of $301.5 million associated with the
U.S. Tax Act, as more fully described above, that had a (40.7)% impact on 2018's
effective tax rate. Our 2018 effective tax rate also reflects the effects of the
lower U.S. federal corporate income tax rate under the U.S. Tax Act and higher
other net discrete tax benefits. Net discrete tax benefits, excluding the
effects of the U.S. Tax Act in 2018, increased by $3.9 million from $24.2
million in 2017 to $28.1 million in 2018. Discrete tax benefits in both periods
include excess tax benefits associated with share-based payments to employees
($21.7 million and $10.7 million in 2018 and 2017, respectively), reversal of
reserves for unrecognized tax benefits for the expiration of the statues of
limitations and settlements with taxing authorities in several jurisdictions,
and other discrete items, including, in 2017, the establishment of valuation
allowances on non-U.S. deferred tax assets due to a change in our assessment of
the recoverability of those deferred taxes. See note 12 of the accompanying
financial statements for a more detailed reconciliation of the U.S. federal tax
rate with the effective tax rate.
2018 2017
Income from unconsolidated operations
Income from unconsolidated operations increased$0.9 million in 2018 from the prior year. This increase was mainly attributable to higher earnings from our largest joint venture,McCormick de Mexico , partially offset by the impact of a higher elimination of earnings associated with our minority interests in 2018 than in 2017. We own 50% of most of our unconsolidated joint ventures, includingMcCormick de Mexico , which comprised 76% of the income of our unconsolidated operations in 2018. We reported diluted earnings per share of$7.00 in 2018, compared to$3.72 in 2017. The table below outlines the major components of the change in diluted earnings per share from 2017 to 2018. The increase in operating income in the table below includes the impact from favorable currency exchange rates in 2018. 2017 Earnings per share-diluted $
3.72
Increase in operating income
0.84
Impact of non-recurring tax benefit recognized as a result of the
2.26
Decrease in special charges
0.02
Decrease in transaction and integration expenses attributable toRB Foods acquisition 0.29 Increase in interest expense (0.46 ) Other impact of income taxes 0.40 Increase in other income 0.11 Increase in unconsolidated income
0.01
Impact of higher shares outstanding (0.19 ) 2018 Earnings per share-diluted$ 7.00
Results of Operations-Segments
Consumer Segment
2018 2017
Net sales $ 3,247.0 $ 2,901.6
Percent growth 11.9 % 8.0 %
Components of percent growth in net sales-increase (decrease):
Volume and product mix 1.7 % 0.2 %
Pricing actions 0.6 % 2.3 %
Acquisitions 8.2 % 5.6 %
Foreign exchange 1.4 % (0.1 )%
Segment operating income $ 637.1 $ 562.4
Segment operating income margin 19.6 % 19.4 %
28-------------------------------------------------------------------------------- Sales of our consumer segment in 2018 grew by 11.9% as compared to 2017 and grew by 10.5% on a constant currency basis. Higher volume and product mix added 1.7% to sales, while the impact of 2018 pricing actions added 0.6%. The incremental impact of theRB Foods acquisition added 8.2% to sales. The favorable impact from foreign currency exchange rates increased consumer segment sales in 2018 by 1.4% compared to 2017 and is excluded from our measure of sales growth of 10.5% on a constant currency basis. In theAmericas , consumer sales rose 13.4% in 2018 as compared to 2017 and rose by 13.3% on a constant currency basis. Higher volume and product mix added 0.6% to sales, pricing actions added 1.0% to sales, and the incremental impact of acquisitions added 11.7% to sales. The favorable impact of foreign currency exchange rates increased sales in 2018 by 0.1% compared to 2017 and is excluded from our measure of sales growth of 13.3% on a constant currency basis. In the EMEA region, consumer sales increased 6.9% in 2018 as compared to 2017 and rose 1.6% on a constant currency basis. Volume and product mix increased sales by 1.8%, led by growth inFrance and export sales to developing markets. This growth was partially offset by sales weakness inPoland driven by competitive conditions. The incremental impact of theRB Foods acquisition added 0.8% to sales, while the impact of pricing actions reduced sales by 1.0%. The favorable impact of foreign currency exchange rates increased sales in 2018 by 5.3% compared to 2017 and is excluded from our measure of sales increase of 1.6% on a constant currency basis. In theAsia/Pacific region, consumer sales increased 11.5% in 2018 as compared to 2017 and increased 9.0% on a constant currency basis. Higher volume and product mix added 6.7% to sales. Growth was led byChina through product innovation and increased distribution, partially offset by lower private label sales inAustralia . Pricing actions added 1.2% to sales, and the incremental impact of acquisitions added 1.1% to sales. The favorable impact of foreign currency exchange rates increased sales by 2.5% in 2018 compared to 2017 and is excluded from our measure of sales growth of 9.0% on a constant currency basis. We grew segment operating income for our consumer segment by$74.7 million , or 13.3%, in 2018 compared to 2017. The favorable impact of greater sales and higher CCI-led cost savings more than offset the unfavorable impact of higher costs and brand marketing expense. On a constant currency basis, segment operating income for our consumer segment rose 12.4%. Segment operating income margin for our consumer segment rose by 20 basis points to 19.6% in 2018 from 19.4% in 2017. The increase in segment operating income margin was driven by a higher gross profit margin and the leverage of fixed and semi-fixed elements of SG&A over the higher sales base in 2018 as compared to 2017. Those factors were partially offset by an increase in SG&A as a percentage of sales, driven by increased investment in brand marketing and higher distribution costs. The previously described gross profit margin improvement includes the incremental accretive impact attributable to theRB Foods acquisition as well as expansion in our core business, in part, from CCI-led cost savings and favorable product mix. Flavor Solutions Segment 2018 2017 Net sales$ 2,055.8 $ 1,828.7 Percent growth 12.4 % 12.4 % Components of percent growth in net sales-increase (decrease): Volume and product mix 3.1 % 3.8 % Pricing actions 0.3 % 2.0 % Acquisitions 8.2 % 8.2 % Foreign exchange 0.8 % (1.6 )% Segment operating income$ 292.8 $ 221.3 Segment operating income margin 14.2 %
12.1 %
Sales of our flavor solutions segment increased 12.4% in 2018 as compared to 2017 and increased by 11.6% on a constant currency basis. Higher volume and product mix added 3.1% to sales and pricing actions added 0.3%. Flavor solutions segment sales rose in 2018 due to the incremental impact of acquisitions, primarily theRB Foods acquisition, which added 8.2% to sales. The favorable impact from foreign currency exchange rates increased flavor solutions segment sales in 2018 by 0.8% compared to 2017 and is excluded from our measure of sales growth of 11.6% on a constant currency basis. In theAmericas , flavor solutions sales rose 15.1% in 2018 as compared to 2017 and rose 15.0% on a constant currency basis. Higher volume and product mix added 3.1% to sales led by increased sales to several large custom 29 -------------------------------------------------------------------------------- flavor solutions customers partially offset by the impact from a global realignment of a major customer's sales to EMEA, together with the exit of certain lower margin business. Pricing actions added 0.2% to sales and the incremental impact of ourRB Foods acquisition added 11.7% to sales. The favorable impact from foreign currency exchange rates increased sales by 0.1% in 2018 compared to 2017 and is excluded from our measure of sales growth of 15.0% on a constant currency basis. In the EMEA region, flavor solutions sales increased 8.6% in 2018 as compared to 2017 and increased 6.3% on a constant currency basis. Higher volume and product mix added 4.1% to sales, driven by increased sales to quick service restaurants, broad based growth inTurkey , and the previously described global realignment of a major customer's sales from theAmericas to EMEA. Pricing actions added 1.0% to sales in 2018 and the incremental impact of theGiotti and RB Foods acquisitions added 1.2% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 6.3% on a constant currency basis. In theAsia/Pacific region, flavor solutions sales increased 3.9% in 2018 as compared to 2017 and increased 1.6% on a constant currency basis. Higher volume and product mix increased sales by 1.3%, while pricing actions reduced sales by 0.5% as compared to 2017. Increased sales inChina , led by new products and limited time offers, were offset in part by sales declines inAustralia , which were partially attributable to the exit of certain lower margin business. The incremental impact of theRB Foods acquisition added 0.8% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 1.6% on a constant currency basis. We grew segment operating income for our flavor solutions segment by$71.5 million , or 32.3%, in 2018 compared to 2017. The increase in segment operating income was due to the incremental impact of theRB Foods acquisition, coupled with CCI-led cost savings. On a constant currency basis, segment operating income for our flavor solutions segment rose 32.3%. Segment operating income margin for our flavor solutions segment rose by 210 basis points to 14.2% in 2018 from 12.1% in 2017 and was driven by a higher gross profit margin offset, in part, by higher SG&A as a percentage of net sales, which reflects higher distribution costs. NON-GAAP FINANCIAL MEASURES The following tables include financial measures of adjusted gross profit, adjusted operating income, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance withUnited States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following: • Special charges - Special charges consist of expenses associated with
certain actions undertaken by the Company to reduce fixed costs, simplify
or improve processes, and improve our competitiveness and are of such
significance in terms of both up-front costs and organizational/structural
impact to require advance approval by our Management Committee. Upon
presentation of any such proposed action (including details with respect
to estimated costs, which generally consist principally of employee
severance and related benefits, together with ancillary costs associated
with the action that may include a non-cash component or a component which
relates to inventory adjustments that are included in cost of goods sold;impacted employees or operations; expected timing; and expected savings)
to the Management Committee and the Committee's advance approval, expenses
associated with the approved action are classified as special charges upon
recognition and monitored on an ongoing basis through completion. In 2018,
we also included in special charges, as approved by our Management
Committee, expense associated with a one-time payment, made to eligible
income tax benefit recognized in connection with the enactment of the
Tax Act as that non-recurring income tax benefit is excluded from our
computation of adjusted income taxes, adjusted net income and adjusted
diluted earnings per share, each a non-GAAP measure.
• Transaction and integration expenses associated with the RB Foods acquisition - We exclude certain costs associated with our acquisition of
Such costs, which we refer to as "Transaction and integration costs",
include transaction costs associated with the acquisition, as well as
integration costs following the acquisition. The size of this
30-------------------------------------------------------------------------------- acquisition and related costs, and therefore the impact on the comparability of our results, distinguishes it from our past, recent and smaller acquisitions, the costs of which have not been excluded from our non-GAAP financial measures. • Income taxes associated with theU.S. Tax Act - In connection with the enactment of theU.S. Tax Act inDecember 2017 , we recorded a net non-recurring income tax benefit of$301.5 million during the year ended
from revaluation of net U.S. deferred tax liabilities based on the new
lower corporate income tax rate and the tax expense associated with the
one-time transition tax on previously unremitted earnings of non-
subsidiaries. We recorded an additional net income tax benefit of
million during the year ended
Act related provision to return adjustment.
Details with respect to the composition of transaction and integration expenses (including other debt costs), special charges and non-recurring income tax benefits associated with theU.S. Tax Act recorded for the years and in the amounts set forth below are included in notes 2, 3 and 12, respectively, of the accompanying financial statements. We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. A reconciliation of these non-GAAP measures to GAAP financial results is provided below: 31 --------------------------------------------------------------------------------
2019 2018 2017
Gross profit $ 2,145.3 $ 2,093.3 $ 1,794.0
Impact of transaction and integration expenses
included in cost of goods sold (1) - - 20.9
Adjusted gross profit$ 2,145.3 $ 2,093.3 $ 1,814.9 Adjusted gross profit margin (2) 40.1 % 39.5 % 38.4 % Operating income$ 957.7 $ 891.1 $ 699.8 Impact of transaction and integration expenses included in cost of goods sold (1) - -
20.9
Impact of other transaction and integration expenses (1) - 22.5 40.8 Impact of special charges 20.8 16.3 22.2 Adjusted operating income$ 978.5 $ 929.9 $ 783.7 % increase versus prior year 5.2 % 18.7 % 17.8 % Adjusted operating income margin (2) 18.3 % 17.5 % 16.6 % Income tax expense (benefit)$ 157.4 $ (157.3 ) $ 151.3 Non-recurring benefit, net, of theU.S. Tax Act (3) 1.5 301.5
-
Impact of transaction and integration expenses - 4.9 23.6 Impact of special charges 4.7 3.8 6.4 Adjusted income tax expense$ 163.6 $ 152.9 $ 181.3 Adjusted income tax rate(4) 19.5 % 19.6 % 26.1 % Net income$ 702.7 $ 933.4 $ 477.4 Impact of total transaction and integration expenses (1) - 17.6
53.5
Impact of total special charges 16.1 12.5
15.8
Non-recurring benefit, net, of theU.S. Tax Act (3) (1.5 ) (301.5 ) - Adjusted net income$ 717.3 $ 662.0 $ 546.7 % increase versus prior year 8.4 % 21.1 % 13.1 % Earnings per share-diluted$ 5.24 $ 7.00 $ 3.72 Impact of total transaction and integration expenses (1) - 0.13
0.42
Impact of total special charges 0.12 0.10
0.12
Non-recurring benefit, net, of theU.S. Tax Act (3) (0.01 ) (2.26 )
-
Adjusted earnings per share-diluted$ 5.35 $ 4.97 $ 4.26 % increase versus prior year 7.6 % 16.7 % 12.7 %
(1) There were no transaction and integration expenses related to the acquisition of
year ended
statements, transaction and integration expenses related to the acquisition of
in our consolidated income statement as follows for the years ended
millions, except per share amounts):
2018 2017
Transaction and integration expenses included in
cost of goods sold $ - $ 20.9
Reflected in transaction and integration expenses 22.5 40.8
Transaction and integration expenses included in
operating income 22.5 61.7
Transaction and integration expenses included in
other debt costs - 15.4
Total pre-tax transaction and integration
expenses 22.5 77.1
Less: Tax effect (4.9 ) (23.6 )
Total after-tax transaction and integration
expenses $ 17.6 $ 53.5
(2) Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for
each period presented. Adjusted operating income margin is calculated as adjusted operating income as
a percentage of net sales for each period presented.
(3) The non-recurring income tax benefit, net, associated with enactment of the
million and
described in note 12 of the accompanying financial statements. (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
30, 2019, 2018, and 2017, respectively.
32--------------------------------------------------------------------------------
Estimate for the
year ending November
30, 2020
Earnings per share - diluted $5.15 to Impact of special charges
0.05
Adjusted earnings per share - diluted$5.20 to
Because we are a multi-national company, we are subject to variability of our reportedU.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed "on a constant currency basis," is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of theU.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results). Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current year results for entities reporting in currencies other than theU.S. dollar are translated intoU.S. dollars at the average exchange rates in effect during the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2019 on a constant currency basis, net sales and adjusted operating income for 2019 for entities reporting in currencies other than theU.S. dollar have been translated using the average foreign exchange rates in effect for 2018 and compared to the reported results for 2018; and (2) to present our growth in net sales and adjusted operating income for 2018 on a constant currency basis, net sales and operating income for 2018 for entities reporting in currencies other than theU.S. dollar have been translated using the average foreign exchange rates in effect for 2017 and compared to the reported results for 2017. For the year ended November 30, 2019 Impact of foreign Percentage change Percentage change currency on constant as reported exchange currency basis Net sales: Consumer segment: Americas 2.4 % (0.3 )% 2.7 % EMEA (5.5 )% (5.3 )% (0.2 )% Asia/Pacific 0.8 % (4.9 )% 5.7 % Total Consumer 0.7 % (1.8 )% 2.5 % Flavor Solutions segment: Americas 2.2 % (0.4 )% 2.6 % EMEA (0.3 )% (7.0 )% 6.7 % Asia/Pacific (3.4 )% (4.0 )% 0.6 % Total Flavor Solutions 1.1 % (2.1 )% 3.2 % Total net sales 0.8 % (1.9 )% 2.7 % Adjusted operating income: Consumer segment 6.1 % (1.2 )% 7.3 % Flavor Solutions segment 3.2 % (2.1 )% 5.3 % Total adjusted operating income 5.2 % (1.5 )% 6.7 % 33
--------------------------------------------------------------------------------
For the year ended November 30, 2018
Impact of
foreign Percentage change
Percentage change as currency on constant
reported exchange currency basis
Net sales:
Consumer segment:
Americas 13.4 % 0.1 % 13.3 %
EMEA 6.9 % 5.3 % 1.6 %
Asia/Pacific 11.5 % 2.5 % 9.0 %
Total Consumer 11.9 % 1.4 % 10.5 %
Flavor Solutions segment:
Americas 15.1 % 0.1 % 15.0 %
EMEA 8.6 % 2.3 % 6.3 %
Asia/Pacific 3.9 % 2.3 % 1.6 %
Total Flavor Solutions 12.4 % 0.8 % 11.6 %
Total net sales 12.1 % 1.2 % 10.9 %
Adjusted operating income:
Consumer segment 13.3 % 0.9 % 12.4 %
Flavor Solutions segment 32.3 % - % 32.3 %
Total adjusted operating income 18.7 % 0.7 % 18.0 %
To present the percentage change in projected 2020 sales, adjusted operating income and adjusted earnings per share on a constant currency basis, 2020 projected local currency sales, adjusted operating income, and adjusted net income for entities reporting in currencies other than theU.S. dollar are translated intoU.S. dollars at currently prevailing exchange rates and are compared to those 2020 local currency projected results, translated intoU.S. dollars at the average actual exchange rates in effect during the corresponding months in fiscal year 2019 to determine what the 2020 consolidatedU.S. dollar sales, adjusted operating income and adjusted earnings per share would have been if the relevant currency exchange rates had not changed from those of the comparable prior-year periods. In 2020, we expect minimal impact of foreign currency, as compared to 2019 levels, on our projections of net sales, operating income and diluted earnings per share as well as adjusted operating income and adjusted diluted earnings per share. In addition to the above non-GAAP financial measures, we use a leverage ratio which is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt 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, although 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, tax, depreciation and amortization (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 expenses, and certain gains or losses (which may include third party fees and expenses and integration costs). Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determination of the leverage ratio is consistent with the terms of our$1.0 billion revolving credit facility and our term loans which require us to maintain our leverage ratio below certain levels. Under those agreements, the applicable leverage ratio is reduced annually. As ofNovember 30, 2019 , our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility. We expect to comply with this financial covenant for the foreseeable future. 34
-------------------------------------------------------------------------------- The following table reconciles our net income to Adjusted EBITDA for the years endedNovember 30 : 2019 2018 2017 Net income$ 702.7 $ 933.4 $ 477.4 Depreciation and amortization 158.8 150.7
125.2
Interest expense 165.2 174.6
95.7
Income tax expense (benefit) 157.4 (157.3 ) 151.3 EBITDA 1,184.1 1,101.4 849.6 Adjustments to EBITDA (1) 47.9 57.3 117.4 Adjusted EBITDA$ 1,232.0 $ 1,158.7 $ 967.0 Net debt (2)$ 4,243.8 $ 4,674.8 $ 4,915.3
Leverage ratio (Net debt/Adjusted EBITDA) (3) 3.4 4.0 5.1
(1) Adjustments to EBITDA are determined under the leverage ratio covenant in our
special charges, stock-based compensation expense, interest income and, for
the years ended
expenses (related to
the term loan agreements define 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 exceed
the term loan agreements provide that Adjusted EBITDA also includes the pro
forma impact of acquisitions. As of
under the terms of those agreements, including the pro forma impact of
acquisitions was 4.5.
Our long-term target for our leverage ratio is 1.5 to 2.0. Our leverage ratio can be temporarily impacted by our acquisition activity.
LIQUIDITY AND FINANCIAL CONDITION
2019 2018 2017
Net cash provided by operating activities$ 946.8 $ 821.2 $
815.3
Net cash used in investing activities (171.0 ) (158.5 )
(4,508.3 ) Net cash (used in) provided by financing activities (725.8 ) (751.1 ) 3,756.0
We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, increase our dividend, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, we generate much of our cash flow in the fourth quarter of the fiscal year. In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. AtNovember 30, 2019 , the exchange rates for the Euro, Australian dollar, Polish zloty and Chinese renminbi were lower versus theU.S. dollar than atNovember 30, 2018 . AtNovember 30, 2019 , the exchange rates for the British pound sterling and Canadian dollar were higher versus theU.S. dollar than atNovember 30, 2018 . Operating Cash Flow - Operating cash flow was$946.8 million in 2019,$821.2 million in 2018, and$815.3 million in 2017. The increases in cash flow from operations in both 2019 and 2018 were primarily due to higher net income, exclusive of the 2018 impact of the non-cash non-recurring net income tax benefit of$309.4 million related to theU.S. Tax Act. In addition, as more fully described below, our working capital management favorably impacted operating cash flow in 2019, 2018 and 2017. In 2019, the increases to operating cash flow were partially offset by a use of cash associated with other assets and liabilities, totaling$81.5 million . In 2018, those increases were partially offset by a higher use of cash from other operating assets and liabilities partially related to the timing of our payment of transaction and integration expenses as well as of interest on indebtedness related to our acquisition of 35 --------------------------------------------------------------------------------RB Foods , as compared to the source of cash in 2017. Dividends received from unconsolidated affiliates, which were higher in 2019 compared to 2018 and higher in 2018 as compared to 2017, also impacted our cash flow from operations. Our working capital management - principally related to inventory, trade accounts receivable, and accounts payable - impacts our operating cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a use of cash in 2019 and 2018 and a source of cash in 2017. The change in trade accounts receivable has varied in the last three years as well, as it was a source of cash in 2019 and 2018, and a use of cash in 2017. The change in accounts payable was a significant source of cash in all three years. In addition to operating cash flow, we also use cash conversion cycle ("CCC") to measure our working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows: Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory). The following table outlines our cash conversion cycle (in days) over the last three years: 2019 2018 2017 Cash Conversion Cycle 43 55 76 The decreases in CCC in 2019 from 2018 and in 2018 from 2017 were due, in both instances, to an increase in our days payable outstanding as a result of extending our payment terms to suppliers and to a lesser extent, by a decrease in our days sales outstanding. Our CCC is also impacted by days in inventory which increased in 2019 as compared to 2018, and decreased in 2018 as compared to 2017. Investing Cash Flow - Net cash used in investing activities was$171.0 million in 2019,$158.5 million in 2018, and$4,508.3 million in 2017. Our primary investing cash flows include the usage of cash associated with acquisition of businesses and capital expenditures. Cash usage related to our acquisitions of businesses were$4.2 million in 2018, and$4,327.4 million in 2017. See note 2 of the accompanying financial statements for further details related to our acquisition ofRB Foods . Capital expenditures, including expenditures for capitalized software, were$173.7 million in 2019,$169.1 million in 2018, and$182.4 million in 2017. We expect 2020 capital expenditures to approximate$265 million to support our planned growth, including the multi-year program to replace our ERP system and other initiatives. Financing Cash Flow - Net cash used in financing activities was$725.8 million in 2019 and$751.1 million in 2018. Net cash provided by financing activities was$3,756.0 million in 2017. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below. In 2019 and 2018, our net borrowing activity used cash of$406.7 million and$466.5 million , respectively. In 2017, our net borrowing activity provided cash of$3,574.6 million . In 2019, we increased our short-term borrowings, on a net basis, by$41.0 million . We also repaid$447.7 million of long-term debt, including$436.3 million of our$1,500.0 million term loans issued inAugust 2017 . Of that$436.3 million ,$361.3 million represent prepayments. ThroughNovember 30, 2019 , we have repaid$1,250.0 million of the$1,500.0 million term loans issued inAugust 2017 , including pre-payments of$1,081.3 million . In 2018, we increased our short-term borrowings, on a net basis, by$305.5 million and borrowed$25.9 million under long-term borrowing arrangements. In 2018, we repaid$797.9 million of long-term debt, including the$250 million 5.75% notes that matured onDecember 15, 2017 and$545.0 million of our$1,500.0 million term loans issued inAugust 2017 . In 2017, we received$3,977.6 million of net proceeds on the issuance of$4,000.0 million of long-term debt, including$2,500.0 million of notes and$1,500.0 million of term loans (see note 6 of the accompanying financial statements for additional information with respect to this long-term debt). We also paid$7.7 million of costs associated with the issuance of debt and our$1.0 billion revolving credit facility. In 2017, we repaid$272.7 million 36 -------------------------------------------------------------------------------- of long-term debt, including$268.8 million of our$1,500.0 million term loans issued inAugust 2017 . In 2017, we repaid$134.6 million of short-term borrowings. The following table outlines the activity in our share repurchase programs: 2019 2018 2017
Number of shares of common stock 0.7 0.5
$ 95.1 $ 62.3 $ 137.8 As ofNovember 30, 2019 ,$32 million remained of a$600 million share repurchase program that was authorized by our Board of Directors inMarch 2015 . An additional$600 million share repurchase program was authorized by our Board of Directors inNovember 2019 . The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. During 2019, 2018 and 2017, we received proceeds of$90.9 million ,$78.2 million and$29.5 million , respectively, from exercised stock options. We repurchased$12.7 million ,$11.6 million and$5.8 million of common stock during 2019, 2018 and 2017, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans. During 2017, we issued approximately 6.35 million shares of our Common Stock Non-Voting to fund our acquisition ofRB Foods (see notes 2 and 13 of the accompanying financial statements), which included approximately 0.8 million shares from the exercise of the underwriters' option to purchase additional shares. The net proceeds from this issuance, after the underwriting discount and related expenses, was$554.0 million . Our dividend history over the past three years is as follows: 2019 2018 2017
Total dividends paid
InNovember 2019 , the Board of Directors approved an 8.8% increase in the quarterly dividend from$0.57 to$0.62 per share. The following table presents our leverage ratios for the years endedNovember 30, 2019 , 2018 and 2017: 2019 2018 2017 Leverage ratio 3.4 4.0 5.1 (1) (1) The leverage ratio covenant in our$1.0 billion revolving credit facility and the term loan agreements, both outstanding atNovember 30, 2019 , 2018, and 2017, provide that Adjusted EBITDA under that covenant also include the pro forma impact of acquisitions, as applicable. As ofNovember 30, 2017 , our leverage ratio under the terms of those agreements, including the pro forma impact of acquisitions, was 4.5. Our leverage ratio was 3.4 as ofNovember 30, 2019 , as compared to the ratios of 4.0 and 5.1 as ofNovember 30, 2018 and 2017, respectively. The decrease in our leverage ratio from 4.0 as ofNovember 30, 2018 to 3.4 as ofNovember 30, 2019 is due to both an increase in our adjusted EBITDA, which was driven by higher operating income in 2019 as compared to 2018, as well as our lower level of net debt atNovember 30, 2019 . The decrease in the ratio from 5.1 as ofNovember 30, 2017 to 4.0 as ofNovember 30, 2018 is principally due to an increase in our adjusted EBITDA, which was driven by higher operating income in 2018 as compared to 2017. In addition, the ratio was favorably impacted by our lower level of net debt atNovember 30, 2018 . Most of our cash is in our foreign subsidiaries. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of theU.S. Tax Act onDecember 22, 2017 , the permanent repatriation of cash balances from certain of our subsidiaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. Currently, the repatriation of cash balances from certain of our subsidiaries could still have adverse tax consequences related to the effects of withholding and other taxes. AtNovember 30, 2019 , we temporarily used$262.8 million of cash from our foreign subsidiaries to pay down short- 37 --------------------------------------------------------------------------------
term debt in the
See notes 6 and 7 of the accompanying financial statements for further details of these transactions.
Credit and Capital Markets - The following summarizes the more significant impacts of credit and capital markets on our business:
CREDIT FACILITIES - Cash flows from operating activities are our primary source of liquidity for funding growth, share repurchases, dividends and capital expenditures. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements.
InAugust 2017 , we entered into a five-year$1.0 billion revolving credit facility, which will expire inAugust 2022 . The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. This facility replaced our prior facilities: (i) a five-year$750 million revolving credit facility that was due to expire inJune 2020 and (ii) a 364-day$250 million revolving facility, which we entered into in the second quarter of 2017 and that was due to expire inMarch 2018 . We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities of$261.5 million as ofNovember 30, 2019 , that can be withdrawn based upon the lenders' discretion. We engage in regular communication with all banks participating in our credit 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 and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. See note 6 of the accompanying financial statements for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to fund ongoing operations. PENSION ASSETS AND OTHER INVESTMENTS - We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash contributions to pension plans, including unfunded plans, were$11.4 million in 2019,$13.5 million in 2018, and$18.7 million in 2017. It is expected that the 2020 total pension plan contributions will be approximately$12.0 million . 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 base our investment of plan assets, in part, on the duration of each plan's liabilities. Across all of our qualified defined benefit pension plans, approximately 59% of assets are invested in equities, 31% in fixed income investments and 10% in other investments. Assets in the rabbi trust are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 60% in equities and 40% in fixed income investments. See note 10 of the accompanying financial statements, which provides details on our pension funding. CUSTOMERS AND COUNTERPARTIES - See the subsequent section of this discussion under Market Risk Sensitivity-Credit Risk. ACQUISITIONS Acquisitions are part of our strategy to increase sales and profits. We did not have any acquisition activity in fiscal 2019. In fiscal 2018 we purchased the remaining 10% minority ownership interest in ourShanghai subsidiary for a cash payment of$12.7 million . In fiscal 2017, we made the following acquisitions: • OnDecember 15, 2016 , we purchased 100% of the shares ofEnrico Giotti SpA
(Giotti), a leading European flavor manufacturer located in
cash payment of
acquisition was funded with cash and short-term borrowings. Giotti is well
known in the industry for its innovative beverage, sweet, savory and dairy
flavor applications. Our acquisition of Giotti in fiscal 2017 expanded the
breadth of value-added products for McCormick's flavor solutions segment,
including additional expertise in flavoring health and nutrition products.
• On
price was approximately $4.21 billion , net of acquired cash of $24.3
million , and included a preliminary working capital adjustment of $11.2
million . In December 2017 , we paid $4.2 million associated with the final
working capital adjustment. The acquisition was funded through ourissuance of approximately 6.35 million shares of common stock non-voting
(see note 13 of the accompanying financial statements) and through new
borrowings comprised of senior unsecured notes and pre-payable term loans
(see note 6 of the accompanying financial statements). The acquired
market-leading brands of
Cattlemen's, which are a natural strategic fit with our robust global
branded flavor portfolio. We believe that these additions move us to a
leading position in the attractive
significant international growth opportunities for our consumer and flavor
solutions segments. The operations of
component of our consumer and flavor solutions segments from the date of
acquisition.
See note 2 of the accompanying financial statements for further details regarding these acquisitions. PERFORMANCE GRAPH-SHAREHOLDER RETURN The following line graph compares the yearly change in McCormick's cumulative total shareholder return (stock price appreciation plus reinvestment of dividends) on McCormick's Non-Voting Common Stock with (1) the cumulative total return of theStandard & Poor's 500 Stock Price Index, assuming reinvestment of dividends, and (2) the cumulative total return of theStandard & Poor's Packaged Foods & Meats Index , assuming reinvestment of dividends. 38 -------------------------------------------------------------------------------- [[Image Removed: mkc2019.jpg]] MARKET RISK SENSITIVITY We utilize derivative financial instruments to enhance our ability to manage risk, including foreign exchange and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. The information presented below should be read in conjunction with notes 6 and 7 of the accompanying financial statements. Foreign Exchange Risk - We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings toU.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include theU.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling, Australian dollar and Swiss franc. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks. During 2019, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in our subsidiaries with a functional currency of the British pound sterling, Euro, Polish zloty, Chinese yuan, Australian dollar, Canadian dollar and Mexican peso. Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts, which are designated as net investment hedges, to manage the impact of exchange rate fluctuations on our net investments in subsidiaries with a functional currency of the British pound sterling and Euro. Gains and losses on these instruments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss). In 2018 and 2017, we did not hedge our net investments in subsidiaries or unconsolidated affiliates. 39 -------------------------------------------------------------------------------- The following table summarizes the foreign currency exchange contracts held atNovember 30, 2019 . All contracts are valued inU.S. dollars using year-end 2019 exchange rates and have been designated as hedges of foreign currency transactional exposures, firm commitments or anticipated transactions. FOREIGN CURRENCY EXCHANGE CONTRACTS ATNOVEMBER 30, 2019 Average contractual Notional exchange Fair
Currency sold Currency received value rate value
British pound sterling
$ 34.5 1.27$ (0.8 ) Canadian dollar U.S. dollar 105.1 0.760.5 U.S. dollar Australian dollar 16.6 0.70(0.4 ) Polish zloty U.S. dollar 18.5 3.900.1 Australian dollar Euro 41.4 1.640.1 Swiss franc Euro 66.2 1.13(1.9 ) Canadian dollar Britishpound sterling 29.5 1.651.5 U.S. dollar Australian dollar 27.1 0.68(0.1 ) U.S. dollar Britishpound sterling 102.7 1.290.6 U.S. dollar Canadian dollar 4.2 0.77(0.1 ) U.S. dollar Euro 21.5 1.10 - We had a number of smaller contracts atNovember 30, 2019 with an aggregate notional value of$21.8 million to purchase or sell other currencies, such as the Romanian leu, Russian ruble, andSingapore dollar. The aggregate fair value of these contracts was$0.2 million atNovember 30, 2019 . AtNovember 30, 2018 , we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar, Polish zloty, Swiss franc and other currencies, with a notional value of$494.9 million . The aggregate fair value of these contracts was$(2.0) million atNovember 30, 2018 . Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts that are considered net investment hedges. As ofNovember 30, 2019 , we had notional values of cross currency interest rate swap contracts of (i)$250 million notional value to receive$250 million at three-monthU.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 inAugust 2027 . For more information, refer to footnote 7. Interest Rate Risk - Our policy is to manage interest rate risk 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. The table that follows provides principal cash flows and related interest rates, excluding the effect of interest rate swaps and the amortization of any discounts or fees, by fiscal year of maturity atNovember 30, 2019 . For foreign currency-denominated debt, the information is presented inU.S. dollar equivalents. Variable interest rates are based on the weighted-average rates of the portfolio at the end of the year presented.
YEARS OF MATURITY AT
2020 2021 2022 2023 Thereafter Total Fair value
Debt
Fixed rate $ 7.1 $ 257.3 $ 757.5 $ 257.8 $ 2,165.9 $ 3,445.6 $ 3,578.0
Average interest rate 3.45 % 3.89 % 2.71 % 3.50 % 3.52 % - -
Variable rate
- -
The table above displays the debt, including capital leases, by the terms of the
original debt instrument without consideration of fair value, interest rate
swaps and any loan discounts or origination fees. Interest rate swaps have the
following effects:
• We issued $250 million of 3.90% notes due in 2021 in July 2011 . Forward
treasury lock agreements, settled upon the issuance of these notes in
2011, effectively set the interest rate on the $250 million notes at a
weighted-average fixed rate of 4.01%.
• We issued
treasury lock agreements settled upon issuance of these notes effectively
set the interest rate on these notes at a weighted-average fixed rate of
3.30%.
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• We issued$250 million of 3.25% notes due in 2025 inNovember 2015 . Forward treasury lock agreements settled upon issuance of these notes
effectively set the interest rate on these notes at a weighted-average
fixed rate of 3.45%. The fixed interest rate on
notes due in
interest rate swaps through 2025. Net interest payments are based on
3-month LIBOR plus 1.22% during this period.
• We issued an aggregate amount of
2022,
and
2.70%, 3.15%, 3.40% and 4.20%, respectively. Forward treasury lock
agreements settled upon issuance of the
2027 effectively set the interest rate on these $750 million notes at a
weighted-average fixed rate of 3.44%. The fixed interest rate on $250
million of the 3.40% notes due in 2027 was effectively converted to avariable rate by interest rate swaps through 2027. Net interest payments
are based on 3-month LIBOR plus 0.685% during this period
Commodity Risk - We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. In 2019, our most significant raw materials were dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, onion, rice and wheat 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. We feel that the allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table reflects a summary of our contractual obligations and commercial commitments as ofNovember 30, 2019 : CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR Less than 1-3 3-5 More than Total 1 year years years 5 years Short-term borrowings$ 600.7 $ 600.7 $ - $ - $ - Long-term debt, including capital leases 3,726.6 97.7 1,205.3 1,020.9 1,402.7 Operating leases 162.2 41.8 61.5 26.6 32.3 Interest payments 859.9 118.5 212.7 154.6 374.1 Raw material purchase obligations(a) 492.4 492.4 - - - Other purchase obligations(b) 160.4 76.1 35.2 18.4 30.7 Total contractual cash obligations$ 6,002.2 $ 1,427.2 $ 1,514.7
(a) Raw material purchase obligations outstanding as of year end may not be
indicative of outstanding obligations throughout the year due to our response
to varying raw material cycles.
(b) Other purchase obligations consist of information technology and other
service agreements, advertising media commitments and utility contracts.
Pension and postretirement funding can vary significantly each year due to
changes in legislation, our significant assumptions and investment return on
plan assets. As a result, we have not presented pension and postretirement
funding in the table above.
COMMERCIAL COMMITMENTS EXPIRATION BY YEAR
41
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Less than 1-3 3-5 More than
Total 1 year years years 5 years
Guarantees $ 0.6 $ 0.6 $ - $ - $ -
Standby letters of credit 32.2 32.2 - - -
Total commercial commitments
-
OFF-BALANCE SHEET ARRANGEMENTS We had no off-balance sheet arrangements as ofNovember 30, 2019 and 2018. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of 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 toU.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 in the following areas: Customer Contracts In several of our major geographic markets, the consumer segment sells our products by entering into annual or multi-year customer arrangements. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding these programs. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one-year or shorter duration. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized.Goodwill and Intangible Asset Valuation We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired. Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates. Goodwill Impairment Our reporting units are the same as our operating segments. We estimate the fair value of a reporting unit by using a discounted cash flow model. Our discounted cash flow model calculates fair value by present valuing future expected cash flows of our reporting units using our internal cost of capital as the discount rate. We then compare this fair value to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the estimated fair value, then we would determine the implied fair value of the reporting unit's goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. As ofNovember 30, 2019 , we had$4,505.2 million of goodwill recorded in our balance sheet ($3,377.6 million in the consumer segment and$1,127.6 million in the flavor solutions segment). Our fiscal year 2019 testing indicated that the estimated fair values of our reporting units were significantly in excess of their carrying values. Accordingly, we believe that only significant changes in the cash flow assumptions would result in an impairment of goodwill. Indefinite-lived Intangible Asset Impairment Our indefinite-lived intangible assets consist of brand names and trademarks. We estimate fair values primarily through the use of the relief-from-royalty method and then compare those fair values to the related carrying 42 -------------------------------------------------------------------------------- amounts of the indefinite-lived intangible asset. In the event that the fair value of any of the brand names or trademarks are less than their related carrying amounts, a non-cash impairment loss would recognized in an amount equal to the difference. The estimation of fair values of our brand names and trademarks requires us to make significant assumptions, including expectations with respect to sales and profits of the respective brands and trademarks, related royalty rates and appropriate discount rates, which are based, in part, upon current interest rates adjusted for our view of reasonable country- and brand-specific risks based upon the past and anticipated future performance of the related brand names and trademarks. As ofNovember 30, 2019 , we had$2,643.0 million of brand name assets and trademarks recorded in our balance sheet, and none of the balances exceeded their estimated fair values at that date. Of the$2,643.0 million of brand names assets and trademarks as ofNovember 30, 2019 : (i)$2,320.0 million relates to the French's, Frank's RedHot and Cattlemen's brand names and trademarks, recognized as part of our acquisition ofRB Foods inAugust 2017 , that we group for purposes of our impairment analysis; and (ii) the remaining$323.0 million represents a number of other brand name assets and trademarks with individual carrying values ranging from$0.2 million to$106.4 million . The percentage excess of estimated fair value over respective book values for each of our brand names and trademarks, including the$2,320.0 million related to our French's, Frank's RedHot and Cattlemen's brands, was 20% or more as ofNovember 30, 2019 , except for one brand with a carrying value of$27.1 million whose fair value modestly exceeds its carrying value at that date. The brand names and trademarks related to recent acquisitions may be more susceptible to future impairment as their carrying values represent recently determined fair values. A change in assumptions with respect to recently acquired businesses, including those affected by rising interest rates or a deterioration in expectations of future sales, profitability or royalty rates as well as future economic and market conditions, or higher income tax rates, could result in non-cash impairment losses in the future. Income Taxes We estimate income taxes and file tax returns in each of the taxing jurisdictions in which we operate and are required to file a tax return. At the end of each year, an estimate for income taxes is recorded in the financial statements. Tax returns are generally filed in the third or fourth quarter of the subsequent year. A reconciliation of the estimate to the final tax return is done at that time which will result in changes to the original estimate. We believe that our tax return positions are appropriately supported, but tax authorities may challenge certain positions. We evaluate our uncertain tax positions in accordance with the GAAP guidance for uncertainty in income taxes. We believe that our reserve for uncertain tax positions, including related interest, is adequate. The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income and cash flows. We have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized. In doing so, we have considered future taxable income and tax planning strategies in assessing the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates. In addition, interpretative guidance continues to be issued in connection with theU.S. Tax Act enacted inDecember 2017 . While we have considered available guidance, there is no assurance that future guidance may not cause us to revise amounts currently recorded. Pension and Postretirement Benefits Pension and other postretirement plans' costs require the use of assumptions for discount rates, investment returns, projected salary increases, mortality rates and health care cost trend rates. The actuarial assumptions used in our pension and postretirement benefit reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension and postretirement benefit obligations. While we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results. A 1% increase or decrease in the actuarial assumption for the discount rate would impact 2020 pension and postretirement benefit expense by approximately$1 million . A 1% increase or decrease in the expected return on plan assets would impact 2020 pension expense by approximately$9 million . We will continue to evaluate the appropriateness of the assumptions used in the measurement of our pension and other postretirement benefit obligations. In addition, see note 10 of the accompanying financial statements for a discussion of these assumptions and the effects on the financial statements. 43 --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is set forth in the "Market Risk Sensitivity" section of "Management's Discussion and Analysis" and in note 7 of the accompanying financial statements.
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