The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand
McCormick & Company, Incorporated, our operations, and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto, included in Item 1 of this report. We use certain non-GAAP information - more fully described below under the caption Non-GAAP Financial Measures - that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. Unless otherwise noted, the dollar and share information in the charts and tables in MD&A are in millions, except per share data. On November 30, 2020, the Company effected a two-for-one stock split in the form of a stock dividend on all shares of the Company's two classes of common stock. On November 30, one like share was issued for each share outstanding to shareholders of record as of November 20, 2020. All common stock and per share data have been retroactively adjusted to reflect the stock split. Business profile McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry - retailers, food manufacturers and the foodservice business. In fiscal year 2020, approximately 40% of our sales were outside of the U.S.We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. We manage our business in two business segments, consumer and flavor solutions. Recent Events On March 11, 2020, the World Health Organizationdesignated a new coronavirus ("COVID-19") as a global pandemic. Governments around the world either recommended or mandated actions to slow the transmission of the virus that included shelter-in-place orders, quarantines, limitations on crowd size, closures of dine-in restaurants and bars, and significant restrictions on travel, as well as work restrictions that prohibited many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has significantly impacted not only our operating results but also the global economy. The extent and nature of government actions varied during the three and six-months ended May 31, 2021and 2020 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. As the COVID-19 pandemic continues, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home food demand. We are actively monitoring the impact of COVID-19 on all aspects of our business. The effects of COVID-19 on consumer behavior have impacted the relative balance of at-home versus away-from-home food demand and have added volatility to our sales over the course of the pandemic. For example, our consolidated sales for the second quarter of 2020 increased by 7.6% over the 2019 level. That 7.6% sales increase was driven by a surge in demand in sales of the consumer segment that rose by 26.0% over the second quarter of 2019, as government-mandated measures, imposed to mitigate the spread of COVID-19 in the second quarter of 2020 and the ensuing change in consumer behavior, resulted in shift in consumer behavior toward at-home meal preparation that more than offset sharply lower demand within the flavor solutions segment, principally associated with our quick service restaurant and branded food service customers. That sharply lower demand drove an 18.5% decline in sales of the flavor solutions segment during the second quarter of 2020 from the 2019 level as dine-in restaurants and bars were closed to limit the spread of COVID-19 early in the pandemic. The extent of the at-home consumption and away-from-home demand has varied during the pandemic and has impacted our results, as compared to the prior year results, at different levels in any individual quarter. For the quarter ended May 31, 2021, our consolidated sales increased by 11.1% over the comparable period in 2020, driven by sharply higher sales in the flavor solution segment, which increased by 39.5% over a weak 2020 quarter, partially offset by a 1.8% decrease in sales of the consumer segment from an extremely strong 2020 quarter. For comparative purposes, the following provides a summary of growth in net sales as reported and on a constant currency basis for the second quarter of 2021 as compared to the second quarter of 2019: 27
Three months ended
Impact of the percentage change from abroad on
as Reported Currency Exchange Constant Currency Basis Net sales: Consumer segment 23.7 % 1.9 % 21.8 % Flavor solutions segment 13.7 % 0.5 % 13.2 % Total net sales 19.6 % 1.3 % 18.3 % The percentage change in reported net sales and the percentage change on a constant currency basis were favorably impacted by the acquisitions of
Cholulaand FONA, which contributed 2.7%, 7.5% and 4.7% to the consumer segment, flavor solutions segment and total net sales growth rates, respectively, in the preceding table, on both a reported and constant currency basis. The impact of COVID-19 on our consumer segment since the beginning of the COVID 19 pandemic has resulted in a significant increase in at-home consumption and related demand for our products. While we continue to see strong levels of consumer demand compared to the pre-pandemic levels, during the three months ended May 31, 2021retail demand declined when compared to the comparable quarter of the prior year based on the surge in consumer demand at the beginning of the pandemic. The impact of COVID-19 on our flavor solutions segment has included both the unfavorable impact attributable to decreased demand from certain customers that were affected by government measures related to COVID-19 in many of our markets that reduced away-from-home food demand and the favorable impact of increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The measures impacting certain of our flavor solutions customers included the following: (i) with respect to dine-in restaurants, closures, limitations on dine-in capacity, or restrictions on the operations of those restaurants to carry-out or delivery only; and (ii) with respect to quick service restaurants, limitations on operations to drive-through pick-up or delivery. We continue to see recovery in away-from-home demand associated with the COVID-19 recovery. During the three months ended May 31, 2021our flavor solutions segment sales and operating results improved as away-from-home consumption increased as compared to the comparable quarter in the prior year, in part, due to the lifting of much more restrictive COVID-19 measures that were in place at the beginning of the pandemic. The impact of the COVID-19 pandemic on our consolidated operating results during the three months ended February 29, 2020was limited, in all material respects, to our operations in Chinawhere the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country. Our operations in Chinasaw a sharp drop in sales during the three months ended February 29, 2020, with sales declining by $43 millionfrom the corresponding period in fiscal 2019. In early fiscal 2021, vaccines effective in combating COVID-19 were approved by health agencies in certain countries/regions in which we operate (including the U.S., U.K., European Union, Canada and Mexico) and began to be administered. The availability of COVID-19 vaccines and their take-up by individuals is difficult to predict, and vaccination levels are likely to vary across jurisdictions. The pace and shape of the COVID-19 recovery as well as the impact and extent of COVID-19 variants or potential resurgences is not presently known. These and other uncertainties with respect to COVID-19 could result in changes to our current expectations in addition to a number of adverse impacts to our business, including but not limited to additional disruption to the economy and consumers' willingness and ability to spend, temporary or permanent closures by businesses that consume our products, such as restaurants, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable or, in the case of significant increased demand for our product, incapability of fulfilling that increased demand. As a result, it may be challenging to obtain and process raw materials to support our business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes related to COVID-19 which could adversely impact our business, financial condition, or results of operations. Further, if our customers' businesses are similarly affected, they might delay or reduce purchases from us. The potential effects of COVID-19 also could impact us in a number of other ways including, but not limited to, variations in the level of our profitability, laws and regulations affecting our business, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, valuation of our pension assets and obligations, credit risks of our customers and counterparties, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets.
Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed nine acquisitions, which are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that 28
Large-scale table of contents where we are currently present in developed and emerging markets. Information on our recent acquisitions is provided below:
December 30, 2020, we acquired FONA International, LLCand certain of its affiliates (FONA), a privately owned company, for approximately $708 million, net of cash acquired. We financed this fiscal 2021 acquisition with cash and commercial paper. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets which expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform, strengthens our capabilities, and accelerates the strategic migration of our portfolio to more value-added and technically insulated products. •On November 30, 2020, we acquired the parent company of Cholula Hot Sauce® ( Cholula) from L Catterton for approximately $801 million, net of cash acquired. We financed this fiscal 2020 acquisition with cash and commercial paper. Cholulais a strong addition to McCormick's global branded flavor portfolio, which broadens the Company's offering in the high growth hot sauce category to consumers and foodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce in both our consumer and flavor solutions segments. •In February 2021, we issued $500.0 millionof 0.90% notes due February 15, 2026, with net cash proceeds received of $495.7 million. At the same time, we issued $500.0 millionof 1.85% notes due February 15, 2031, with net cash proceeds received of $492.8 million. The net proceeds from these issuances were used to pay down short-term borrowings, including a portion of the $1,443.0 millionof commercial paper issued to finance our acquisitions of FONA and Cholula, and for general corporate purposes. For further information regarding our issuance of these notes, see note 5 of the notes to the accompanying financial statements.
As described below under Outlook 2021, FONA and
Acquisitions are expected to contribute more than a third of our sales growth in 2021.
2021 Outlook In 2021, we expect to grow net sales over the 2020 level by 11% to 13%, including an estimated 3% favorable impact from currency rates, or 8% to 10% on a constant currency basis. That anticipated 2021 sales growth includes the incremental impact of the
Cholulaand FONA acquisitions, which we expect to comprise 3.5% to 4.0% of the expected 11% to 13% sales growth, and higher volume and product mix driven by our brand marketing, new product, category management, and differentiated customer engagement growth plans. That sales growth is also expected to include the impact of pricing actions taken to partially offset an anticipated increase in costs. We expect to have organic sales growth in both our consumer and flavor solutions segments. We expect our 2021 gross profit margin to decline 110 to 90 basis points from our gross profit margin of 41.1% in 2020. The projected 2021 decline in gross profit margin is principally due to (i) expected accretion from our acquisitions of Cholulaand FONA, net of transaction and integration expenses of $6.3 millionrelated to the amortization of the step-up of the acquired inventories of Cholulaand FONA to fair value, (ii) anticipated unfavorable sales mix in 2021 between our consumer and flavor solutions segments as compared to 2020, (iii) an expected increase in COVID-19 related expenses of approximately $10 millionin 2021 over the 2020 level, and (iv) an anticipated mid-single-digit level of inflation in 2021 compared to 2020. Excluding the $6.3 millionof transaction and integration expenses related to our acquisitions of Cholulaand FONA included in our projected range of gross profit margin anticipated in 2021, we expect our adjusted gross profit margin to be 100 to 80 basis points lower than our 2020 gross profit margin of 41.1%. In 2021, we expect an increase in operating income of 6% to 8%, which includes an estimated 2% favorable impact from currency rates, over the 2020 level. The projected range of change in operating income in 2021 reflects an expected increase of approximately $30 millionin expense related to our global ERP replacement program over the fiscal 2020 level. Our CCI-led cost savings target in 2021 is approximately $110 millionand approximates the $113 millionof CCI-led cost savings realized in 2020. We anticipate transaction and integration expenses related to the Cholulaand FONA acquisitions of approximately $42 millionto negatively impact operating income in 2021, as compared to $12.4 millionof transaction and integration expenses in 2020. We also expect approximately $21 millionof special charges in 2021 that relate to previously announced organization and streamlining actions; in 2020, special charges were $6.9 million. Excluding special charges and transaction and integration expenses, we expect 2021's adjusted operating income to increase by 10% to 12%, which includes an estimated 2% favorable impact from currency rates, or to increase by 8% to 10% on a constant currency basis over the 2020 level. Our underlying effective tax rate is projected to be higher in 2021 than in 2020. We estimate our effective tax rate, including the net favorable impact of anticipated discrete tax items, to approximate 23% in 2021 as compared to 19.8% in 2020. Excluding 29 -------------------------------------------------------------------------------- Table of Contents projected taxes associated with special charges and transaction and integration expenses, including the unfavorable impact in the first quarter of 2021 of a deferred state tax discrete tax item directly related to our acquisition of FONA that increased tax expense by $11.4 million, we also estimate that our adjusted effective tax rate will approximate 23% in fiscal 2021, as compared to an adjusted effective tax rate of 19.9% in 2020. Diluted earnings per share was $2.78in 2020. Diluted earnings per share for 2021 is projected to range from $2.83to $2.88. Excluding the per share impact of special charges and transaction and integration expenses of $0.01and $0.04, respectively, adjusted diluted earnings per share was $2.83in 2020. Adjusted diluted earnings per share (excluding an estimated per share impact from special charges of $0.06, $0.16from transaction and integration expenses, including the unfavorable impact of a discrete tax item of $0.04related to our acquisition of FONA, and $0.05gain from the sale of an unconsolidated operation) is projected to range from $3.00to $3.05in 2021. We expect adjusted diluted earnings per share to grow by 6% to 8%, which includes a 2% favorable impact from currency rates, over adjusted diluted earnings per share of $2.83in 2020.
OPERATING RESULTS – COMPANY
Three months ended Six months ended May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 Net sales
$ 1,556.7 $ 1,401.1 $ 3,038.2 $ 2,613.1Percent increase 11.1 % 7.6 % 16.3 % 3.1 %
Components of percentage growth in net sales – increase (decrease):
Volume and product mix 3.3 % 7.4 % 8.9 % 2.6 % Pricing actions (0.1) % 2.2 % 0.3 % 1.7 % Acquisitions 4.4 % - % 4.2 % - % Foreign exchange 3.5 % (2.0) % 2.9 % (1.2) % Gross profit
$ 614.6 $ 579.5 $ 1,192.1 $ 1,049.4Gross profit margin 39.5 % 41.4 % 39.2 % 40.2 % Sales for the second quarter of 2021 increased by 11.1% from the prior year level and by 7.6% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). Higher volume and favorable product mix increased sales by 3.3%. This increase was driven by sharply higher demand in the flavor solutions segment across all regions, as compared to the corresponding period in 2020 when away-from-home sales were sharply reduced by measures imposed to mitigate the spread of COVID-19. The flavor solutions segment sales increase in the second quarter of 2021 was partially offset by lower sales in the consumer segment, due to lapping exceptionally high demand for our products in the second quarter of 2020 when a surge in demand for our products resulted from more consumers cooking at home at the onset of the COVID-19 pandemic. Pricing actions reduced sales by 0.1%, while the incremental impact of the Cholulaand FONA acquisitions added 4.4% to sales in the second quarter of 2021. Sales were also impacted by favorable foreign currency rates that increased net sales by 3.5% in the second quarter of 2021 compared to the year-ago quarter and is excluded from our measure of sales growth of 7.6% on a constant currency basis. Sales for the six months ended May 31, 2021increased by 16.3% from the prior year level and increased by 13.4% on a constant currency basis. Favorable volume and product mix increased sales by 8.9% with growth from both the consumer and flavor solutions segments. In addition, pricing actions added 0.3% and acquisitions added 4.2% to sales, both as compared to the prior year period. Sales were impacted by favorable foreign currency rates that increased sales by 2.9% as compared to the same period in 2020 and is excluded from our measure of sales growth of 13.4% on a constant currency basis. Gross profit for the second quarter of 2021 increased by $35.1 million, or 6.1%, over the comparable period in 2020. Gross profit for the six months ended May 31, 2021increased by $142.7 million, or 13.6% over the comparable period in 2020. Our gross profit margins for the three and six months ended May 31, 2021were 39.5% and 39.2%, respectively, a decrease of 190 basis points and 100 basis points, respectively, from the same periods in 2020. The decrease in gross profit margin in the quarter ended May 31, 2021was driven by a less favorable mix in sales between our consumer and flavor solutions segments and increased material costs, which were partially offset by cost savings led by our Comprehensive Continuous Improvement ("CCI") program, all as compared to the corresponding quarter in 2020. The decrease in gross profit margin in the six months ended May 31, 2021was driven by increased material costs, higher costs associated with COVID-19 and a less favorable mix in sales between our consumer and flavor solutions segments, partially offset by savings from our CCI program, each as compared to the prior year. In addition, our gross profit for the six months ended May 31, 2021was burdened by $6.3 millionof 30 -------------------------------------------------------------------------------- Table of Contents transaction expense, representing the amortization of the fair value adjustment to the acquired inventories of Cholulaand FONA upon our sale of those acquired inventories in the first quarter of fiscal 2021. Excluding those transaction and integration expenses, adjusted gross profit margin for the six months ended May 31, 2021decreased by 80 basis points from 40.2% in the six months ended May 31, 2020to 39.4% in the corresponding period in 2021. Three months ended Six months ended May 31, 2021
Selling, general and administrative expenses (SG&A)
$ 677.9 $ 593.9Percent of net sales 22.9 % 22.8 % 22.3 % 22.8 % SG&A increased by $37.4 millionin the second quarter of 2021 compared to the 2020 level, driven by (i) SG&A associated with the acquired Cholulaand FONA businesses, (ii) increased brand marketing costs, and (iii) greater selling and distribution expenses associated with the higher sales volume. Those increases were partially offset by lower performance-based employee incentive expenses, as compared to the prior year period. SG&A as a percent of net sales increased by 10 basis points from the prior year level as increased brand marketing investment was partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2021 period. SG&A increased by $84.0 millionin the six months ended May 31, 2021compared to the 2020 level, primarily as a result of (i) SG&A associated with the Cholulaand FONA acquisitions, (ii) increased brand marketing costs, and (iii) greater selling and distribution expenses associated with the higher sales volume, all as compared to the corresponding period in 2020. SG&A as a percent of net sales for the six months ended May 31, 2021decreased by 50 basis points from the prior year level, driven by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2021 period. Three months ended Six months ended May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 Total special charges $ 13.7$ 2.9 $ 14.8$ 3.9
During the three months ended
During the six months ended
May 31, 2021, we recorded $14.8 millionof special charges consisting principally of the previously described non-cash asset impairment charge of $6.5 million, $5.2 millionof streamlining actions in the Americasregion, and $1.3 millionof streamlining actions in the EMEA region. During the three months ended May 31, 2020, we recorded $2.9 millionof special charges consisting primarily of $2.8 millionof streamlining actions in the EMEA region, including $1.9 millionrelated to severance and related benefits, $0.6 millionof third-party expenses, and $0.3 millionrelated to other costs. During the six months ended May 31, 2020, we recorded $3.9 millionof special charges consisting of $2.8 millionof streamlining actions in the EMEA region and $1.1 millionrelated to our Global Enablement initiative. Three months ended Six months ended May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 Transaction expenses included in cost of goods sold $ - $ - $ 6.3$ - Other transaction and integration expenses 6.9 - 25.7 -
Total transaction and integration fees
During the three months ended
During the six months ended
May 31, 2021, we recorded $32.0 millionof transaction and integration expense related to our acquisitions of Cholulaand FONA. These costs consisted of (i) $6.3 millionof amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, (ii) $13.8 millionof other transaction costs primarily related to outside advisory, service and consulting costs, and (iii) $11.9 millionof integration expenses. We expect transaction and integration expenses related to our acquisitions of Cholulaand FONA to negatively impact operating income in the second half of fiscal 2021 by approximately $10 million. 31
Table of Contents Three months ended Six months ended May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 Interest expense
$ 35.6 $ 34.4 $ 69.4 $ 69.7Other income, net 3.9 3.1 8.5 8.6 Interest expense increased by $1.2 millionin the second quarter of 2021, compared to the same period in 2020, as an increase in average total borrowings was partially offset by a decrease in interest rates. Interest expense decreased by $0.3 millionin the six months ended May 31, 2021, compared to the same period in 2020, as an increase in average total borrowings was more than offset by a decrease in interest rates. Other income, net for the three months ended May 31, 2021increased by $0.8 million, while other income, net for the six months ended May 31, 2021decreased by $0.1 million, both as compared to the prior year period.
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