Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended August 31, 2016
Commission File Number 001-14920
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
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MARYLAND | 52-0408290 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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18 Loveton Circle, P. O. Box 6000, Sparks, MD | 21152-6000 |
(Address of principal executive offices) | (Zip Code) |
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Registrant’s telephone number, including area code (410) 771-7301 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | x | Accelerated Filer | ¨ |
Non-Accelerated Filer | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
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| | Shares Outstanding | |
| | August 31, 2016 | |
| Common Stock | 11,508,652 |
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| Common Stock Non-Voting | 114,563,850 |
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TABLE OF CONTENTS
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| ITEM 1 | | |
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| ITEM 2 | | |
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| ITEM 3 | | |
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| ITEM 4 | | |
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| ITEM 1 | | |
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| ITEM 1a | | |
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| ITEM 2 | | |
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| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | |
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| ITEM 4 | | |
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| ITEM 5 | OTHER INFORMATION | |
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| ITEM 6 | | |
PART I - FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(in millions except per share amounts)
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| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales | $ | 1,091.0 |
| | $ | 1,059.9 |
| | $ | 3,184.5 |
| | $ | 3,094.4 |
|
Cost of goods sold | 637.1 |
| | 638.0 |
| | 1,892.8 |
| | 1,878.8 |
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Gross profit | 453.9 |
| | 421.9 |
| | 1,291.7 |
| | 1,215.6 |
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Selling, general and administrative expense | 281.8 |
| | 271.5 |
| | 860.0 |
| | 820.3 |
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Special charges | 4.3 |
| | 11.7 |
| | 9.8 |
| | 59.1 |
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Operating income | 167.8 |
| | 138.7 |
| | 421.9 |
| | 336.2 |
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Interest expense | 14.1 |
| | 13.6 |
| | 41.7 |
| | 39.5 |
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Other income, net | 0.2 |
| | 0.2 |
| | 2.0 |
| | 0.6 |
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Income from consolidated operations before income taxes | 153.9 |
| | 125.3 |
| | 382.2 |
| | 297.3 |
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Income taxes | 34.3 |
| | 37.4 |
| | 91.5 |
| | 71.9 |
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Net income from consolidated operations | 119.6 |
| | 87.9 |
| | 290.7 |
| | 225.4 |
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Income from unconsolidated operations | 8.1 |
| | 9.7 |
| | 24.2 |
| | 27.0 |
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Net income | $ | 127.7 |
| | $ | 97.6 |
| | $ | 314.9 |
| | $ | 252.4 |
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Earnings per share – basic | $ | 1.01 |
| | $ | 0.76 |
| | $ | 2.48 |
| | $ | 1.97 |
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Average shares outstanding – basic | 126.4 |
| | 128.0 |
| | 126.8 |
| | 128.1 |
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Earnings per share – diluted | $ | 1.00 |
| | $ | 0.76 |
| | $ | 2.46 |
| | $ | 1.95 |
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Average shares outstanding – diluted | 127.9 |
| | 129.2 |
| | 128.2 |
| | 129.2 |
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Cash dividends paid per share | $ | 0.43 |
| | $ | 0.40 |
| | $ | 1.29 |
| | $ | 1.20 |
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Cash dividends declared per share | $ | 0.43 |
| | $ | 0.40 |
| | $ | 0.86 |
| | $ | 0.80 |
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See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
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| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income | $ | 127.7 |
| | $ | 97.6 |
| | $ | 314.9 |
| | $ | 252.4 |
|
Net income (loss) attributable to non-controlling interest | 0.1 |
| | (1.9 | ) | | 0.8 |
| | 0.5 |
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Other comprehensive income (loss): | | | | | | | |
Unrealized components of pension plans | 8.3 |
| | 7.3 |
| | 17.8 |
| | 23.1 |
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Currency translation adjustments | (20.8 | ) | | (33.9 | ) | | (7.8 | ) | | (184.5 | ) |
Change in derivative financial instruments | 1.9 |
| | (0.8 | ) | | 0.3 |
| | (0.3 | ) |
Deferred taxes | (1.9 | ) | | (1.5 | ) | | (4.4 | ) | | (5.9 | ) |
Comprehensive income | $ | 115.3 |
| | $ | 66.8 |
| | $ | 321.6 |
| | $ | 85.3 |
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See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
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| | | | | | | | | | | |
| August 31, 2016 | | August 31, 2015 | | November 30, 2015 |
| (unaudited) | | (unaudited) | | |
ASSETS | | | | | |
Current Assets | | | | | |
Cash and cash equivalents | $ | 134.2 |
| | $ | 108.4 |
| | $ | 112.6 |
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Trade accounts receivables, net | 445.3 |
| | 422.9 |
| | 455.2 |
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Inventories, net | | | | | |
Finished products | 366.0 |
| | 333.3 |
| | 319.9 |
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Raw materials and work-in-process | 394.3 |
| | 393.9 |
| | 390.9 |
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| 760.3 |
| | 727.2 |
| | 710.8 |
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Prepaid expenses and other current assets | 128.2 |
| | 116.0 |
| | 127.9 |
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Total current assets | 1,468.0 |
| | 1,374.5 |
| | 1,406.5 |
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Property, plant and equipment | 1,604.9 |
| | 1,491.4 |
| | 1,531.3 |
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Less: accumulated depreciation | (963.8 | ) | | (902.3 | ) | | (912.9 | ) |
Property, plant and equipment, net | 641.1 |
| | 589.1 |
| | 618.4 |
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Goodwill | 1,813.3 |
| | 1,802.4 |
| | 1,759.3 |
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Intangible assets, net | 433.6 |
| | 376.1 |
| | 372.1 |
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Investments and other assets | 360.5 |
| | 348.6 |
| | 351.5 |
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Total assets | $ | 4,716.5 |
| | $ | 4,490.7 |
| | $ | 4,507.8 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current Liabilities | | | | | |
Short-term borrowings | $ | 559.3 |
| | $ | 481.2 |
| | $ | 139.5 |
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Current portion of long-term debt | 0.6 |
| | 203.6 |
| | 203.5 |
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Trade accounts payable | 361.0 |
| | 336.1 |
| | 411.9 |
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Other accrued liabilities | 420.3 |
| | 383.7 |
| | 485.3 |
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Total current liabilities | 1,341.2 |
| | 1,404.6 |
| | 1,240.2 |
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Long-term debt | 1,057.9 |
| | 807.2 |
| | 1,052.7 |
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Other long-term liabilities | 542.8 |
| | 516.7 |
| | 528.0 |
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Total liabilities | 2,941.9 |
| | 2,728.5 |
| | 2,820.9 |
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Shareholders’ Equity | | | | | |
Common stock | 406.6 |
| | 380.8 |
| | 384.5 |
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Common stock non-voting | 676.3 |
| | 653.0 |
| | 655.1 |
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Retained earnings | 1,074.7 |
| | 1,065.1 |
| | 1,036.7 |
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Accumulated other comprehensive loss | (400.2 | ) | | (353.6 | ) | | (406.1 | ) |
Non-controlling interests | 17.2 |
| | 16.9 |
| | 16.7 |
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Total shareholders’ equity | 1,774.6 |
| | 1,762.2 |
| | 1,686.9 |
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Total liabilities and shareholders’ equity | $ | 4,716.5 |
| | $ | 4,490.7 |
| | $ | 4,507.8 |
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See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
(in millions)
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| | | | | | | |
| Nine months ended August 31, |
| 2016 | | 2015 |
Operating activities | | | |
Net income | $ | 314.9 |
| | $ | 252.4 |
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Adjustments to reconcile net income to net cash flow provided by operating activities: | | | |
Depreciation and amortization | 82.3 |
| | 78.7 |
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Stock-based compensation | 19.8 |
| | 17.0 |
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Brand name impairment included in special charges | — |
| | 9.6 |
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Income from unconsolidated operations | (24.2 | ) | | (27.0 | ) |
Changes in operating assets and liabilities | (93.4 | ) | | (31.8 | ) |
Dividends from unconsolidated affiliates | 23.0 |
| | 17.7 |
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Net cash flow provided by operating activities | 322.4 |
| | 316.6 |
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Investing activities | | | |
Acquisition of businesses (net of cash acquired) | (116.2 | ) | | (210.9 | ) |
Capital expenditures | (87.9 | ) | | (70.0 | ) |
Proceeds from sale of property, plant and equipment | 0.9 |
| | 0.3 |
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Other | 1.4 |
| | — |
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Net cash flow used in investing activities | (201.8 | ) | | (280.6 | ) |
Financing activities | | | |
Short-term borrowings, net | 419.9 |
| | 214.1 |
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Long-term debt borrowings | — |
| | 0.5 |
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Long-term debt repayments | (202.0 | ) | | (1.4 | ) |
Proceeds from exercised stock options | 32.4 |
| | 26.1 |
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Common stock acquired by purchase | (178.9 | ) | | (72.3 | ) |
Dividends paid | (163.6 | ) | | (153.7 | ) |
Net cash flow (used in) provided by financing activities | (92.2 | ) | | 13.3 |
|
Effect of exchange rate changes on cash and cash equivalents | (6.8 | ) | | (18.2 | ) |
Increase in cash and cash equivalents | 21.6 |
| | 31.1 |
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Cash and cash equivalents at beginning of period | 112.6 |
| | 77.3 |
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Cash and cash equivalents at end of period | $ | 134.2 |
| | $ | 108.4 |
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See notes to condensed consolidated financial statements (unaudited).
McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented.
The results of consolidated operations for the three and nine month periods ended August 31, 2016 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations are lower in the first half of the fiscal year and increase in the second half. The typical increase in net sales, net income and cash flow from operations in the second half of the year is largely due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.
For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2015.
Recently Issued Accounting Pronouncements
In September 2015, the FASB issued Accounting Standards Update No. 2015-16 Simplifying the Accounting for Measurement-Period Adjustments (Topic 805). This guidance eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. As described in note 2, we elected to adopt ASU No. 2015-16 during the quarter ended August 31, 2016 with the completion of our final valuation related to the purchase of 100% of the shares of One World Foods, Inc.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on the classifications within our cash flow statement.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2018. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606). This guidance is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted for all entities, but not before the original effective date for public business entities (i.e., annual reporting periods beginning after December 15, 2016 or our fiscal year ending November 30, 2018). We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
For other recently issued accounting pronouncements that we have not yet adopted, see note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2015.
Acquisitions are part of our strategy to increase sales and profits.
On April 19, 2016, we completed the purchase of 100% of the shares of Botanical Food Company, Pty Ltd, owner of the Gourmet Garden brand of packaged herbs (Gourmet Garden), a privately held company based in Australia. Gourmet Garden is a global market leader in chilled convenient packaged herbs. Gourmet Garden's closer-to-fresh products complement our existing branded herb portfolio with the addition of chilled convenient herbs located in the perimeter of the grocery store. We plan to drive sales of the Gourmet Garden brand by expanding global distribution and building awareness with increased brand investment. At the time of acquisition, annual sales of Gourmet Garden were approximately 70 million Australian dollars. The purchase price was $118.1 million, net of cash acquired of $3.3 million and subject to certain closing adjustments, and was financed with a combination of cash and short-term borrowings. During the third quarter of 2016, we received a refund of $1.9 million for a net working capital adjustment associated with this acquisition that reduced the overall purchase price to $116.2 million. As of August 31. 2016, a preliminary valuation of the acquired net assets of Gourmet Garden resulted in $20.4 million allocated to net tangible assets acquired, $20.3 million allocated to indefinite lived brand asset, $14.2 million allocated to definite lived intangible assets with a weighted-average life of 12.0 years and $61.3 million allocated to goodwill. Goodwill related to the Gourmet Garden acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumers for herbs, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The preliminary valuation, based on a comparison of acquisitions of similar consumer businesses, provided average percentages of purchase prices assigned to goodwill and other identifiable intangible assets, which we used to initially value the Gourmet Garden acquisition. We expect to finalize the determination of the fair value of the acquired net assets of Gourmet Garden in early 2017. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has an industrial component, the industrial component is not currently material to its overall business. During the three and nine months ended August 31, 2016, we recorded $0.6 million and $3.6 million, respectively, in transaction-related expenses associated with this acquisition. Due to the estimated impact of financing, acquisition and integration costs, we do not expect operating income contribution of Gourmet Garden to be significant to our overall results for 2016.
On August 20, 2015, we completed the purchase of 100% of the shares of One World Foods, Inc., owner of the Stubb's brand of barbeque products (Stubb's), a privately held company located in Austin, Texas. Stubb's is the leading premium barbeque sauce brand in the U.S. In addition to sauces, Stubb's products include marinades, rubs and skillet sauces. Its addition will expand the breadth of value-added products in our consumer segment. At the time of acquisition, annual sales of Stubb's were approximately $30 million. The purchase price for Stubb's was $99.4 million, net of cash acquired of $0.8 million, and was financed with a combination of cash and short-term borrowings. During the third quarter of 2016, we completed the final valuation of the Stubb's acquisition, which resulted in the following changes from the preliminary valuation to the acquired assets and liabilities: (i) the indefinite lived brand asset increased by $13.8 million to $27.1 million; (ii) definite lived intangible assets increased by $11.9 million to $24.4 million (with a weighted average life of 13.9 years); (iii) tangible assets acquired increased by $0.3 million to $5.7 million; (iv) liabilities assumed (including the deferred tax liabilities associated with identified intangible assets) increased by $7.0 million to $19.4 million; and (v) goodwill decreased by $19.0 million to $61.6 million. As a result of these changes in the final valuation, amortization expense of definite lived intangible assets increased by $0.9 million. Goodwill related to the Stubb's acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumers for unique and authentic barbeque and grilling flavors, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. With the completion of the final valuation of Stubb's, we have elected to adopt ASU No. 2015-16, which eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Stubb's has been included in our consumer segment since its acquisition.
On May 29, 2015, we completed the purchase of 100% of the shares of Drogheria & Alimentari (D&A), a privately held company based in Italy, and a leader of the spice and seasoning category in Italy that supplies both branded and private label products to consumers. The purchase price for D&A consisted of a cash payment of $49.0 million, net of cash acquired of $2.8 million, and was financed with a combination of cash and short-term borrowings. In addition, the purchase agreement calls for a potential earn out payment in 2018 of up to €35 million, based upon the performance of the acquired business in 2017. This potential earn out payment had an acquisition-date fair value of $27.7 million (or approximately €25 million), based on estimates of projected performance in 2017, payable in fiscal 2018, and discounted using a probability-weighted approach. At the time of the acquisition, annual sales of D&A were approximately €50 million. During the second quarter of 2016, we
completed the final valuation of the D&A acquisition, which resulted in $3.2 million allocated to tangible net assets, $12.6 million allocated to indefinite lived brand assets, $19.8 million allocated to definite lived intangible assets with a weighted-average life of 13.8 years and $41.1 million allocated to goodwill. Goodwill related to the D&A acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our customer insights in demand from consumers for unique and authentic ethnic flavors and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The completion of the final valuation did not result in material changes to our consolidated income statement or consolidated balance sheet from our preliminary purchase price allocation. D&A has been included in our consumer segment since its acquisition.
On March 9, 2015, we acquired 100% of the shares of Brand Aromatics, a privately held company located in the U.S. Brand Aromatics is a supplier of natural savory flavors, marinades, and broth and stock concentrates to the packaged food industry. Its addition expands the breadth of value-added products in our industrial segment. The purchase price for Brand Aromatics was $62.4 million, net of post-closing adjustments and was financed with a combination of cash and short-term borrowings. At the time of acquisition, annual sales of Brand Aromatics were approximately $30 million. As of November 30, 2015, we completed the final valuation of the Brand Aromatics acquisition, which resulted in $5.2 million allocated to tangible net assets, $4.2 million allocated to a brand name indefinite lived intangible asset, $18.7 million allocated to definite lived intangible assets with a weighted average life of 11.9 years, and $34.3 million allocated to goodwill. Goodwill related to the Brand Aromatics acquisition, which will be deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging the customer intimacy and value-added flavor solutions we provide to our industrial customers to Brand Aromatics’ relationships with industrial customers of their stocks, marinades and other savory flavors, as well as from expected synergies from the combined operations and assembled workforces, and the future development initiatives of the assembled workforces. The completion of the final valuation did not result in material changes to our consolidated income statement or our consolidated balance sheet from our preliminary purchase price allocation. Brand Aromatics has been included in our industrial segment since its acquisition.
For the third quarter of 2016, Gourmet Garden and Stubb's added $14.1 million and $6.9 million, respectively, to our sales. Gourmet Garden and Stubb's added $21.5 million and $21.6 million, respectively, to our sales in the nine months ended August 31, 2016. For the nine months ended August 31, 2016, incremental sales of D&A and Brand Aromatics were $31.8 million and $7.2 million, respectively, representing sales of the business in the first six months of 2016 and in the first quarter of 2016, respectively. Due to financing, acquisition and integration costs, the aggregate incremental operating income contributed by Gourmet Garden, Stubb's, D&A and Brand Aromatics was not significant to our overall results for the three and nine months ended August 31, 2016. Proforma financial information for these acquisitions has not been presented because the financial impact is not material.
We continue to evaluate changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness.
In our consolidated income statement, we include a separate line item captioned “special charges” in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.
The following is a summary of special charges recognized in the three and nine months ended August 31, 2016 and 2015 (in millions):
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| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Special charges included in cost of goods sold | $ | — |
| | $ | 3.4 |
| | $ | — |
| | $ | 3.4 |
|
Other special charges in the income statement (including a non-cash brand impairment charges of $9.6 million for the three and nine months ended August 31, 2015) | 4.3 |
| | 11.7 |
| | 9.8 |
| | 59.1 |
|
Total special charges | $ | 4.3 |
| | $ | 15.1 |
| | $ | 9.8 |
| | $ | 62.5 |
|
During the three months ended August 31, 2016, we recorded $4.3 million of special charges, consisting of $1.8 million related to the planned exit from our current leased manufacturing facilities in Singapore and Thailand upon construction of a new manufacturing facility in Thailand, $1.7 million related to additional organization and streamlining actions associated with our Europe, Middle East and Africa (EMEA) region, and $0.8 million related to the discontinuance of non-profitable product lines of our Kohinoor business in India. The EMEA and Kohinoor actions taken in the third quarter of 2016 are components of actions that commenced in 2015 and are further described below.
During the third quarter of 2016, our Management Committee approved a plan to construct a new industrial manufacturing facility in Thailand for our Asia/Pacific region, with anticipated completion in 2018. Upon completion of construction, we will exit two leased manufacturing facilities in Singapore and Thailand. The $1.8 million of special charges recorded in the three and nine months ended August 31, 2016, principally relates to severance and other related costs associated with employees located at the existing leased facility in Singapore. We expect to record additional special charges related to this action of approximately $2.2 million over the next two years associated with other exit costs.
During the nine months ended August 31, 2016, we recorded $9.8 million of special charges, consisting of $4.8 million related to additional organization and streamlining actions associated with our EMEA region, $1.8 million associated with actions associated with our planned exit of two leased manufacturing facilities in Singapore and Thailand, $1.7 million for employee severance actions and related with our North American effectiveness initiative initiated in 2015 and further described below, and $1.5 million for other exist costs related to the discontinuance of non-profitable product lines of our Kohinoor business in India.
As approved by our Management Committee, we reached agreement with our joint venture partner in South Africa during the third quarter of 2016 to exit the joint venture. The transfer agreement, which is subject to customary closing conditions (including regulatory approval that was obtained in September 2016), is expected to close in October 2016. Any loss in connection with execution of the transfer agreement and exit from the joint venture, which is not expected to be material, will be reflected in special charges. Sales of this consolidated joint venture, a component of our industrial segment were $4.5 million and $12.0 million for the three and nine months ended August 31, 2016, respectively, and $6.7 million and $19.4 million for the three and nine months ended August 31, 2015, respectively.
During the three months ended August 31, 2015, we recorded a total of $15.1 million of special charges, including $3.4 million classified in cost of goods sold. Of that amount, $13.0 million relates to a program, instituted by our Kohinoor consumer business in India and approved by our Management Committee during the third quarter, to improve the profitability of that business. The plan principally relates to the discontinuance of its non-profitable bulk-packaged and broken basmati rice product lines and other ancillary activities, while concentrating the business’s focus on both its existing consumer-packaged basmati rice product lines and the launch of consumer-packaged herbs and spices under the Kohinoor brand name.
In the third quarter of 2015, we recorded a non-cash impairment charge of $9.6 million for our Kohinoor brand name due to the anticipated sales reduction associated with the business’s discontinuance of its bulk-packaged and broken basmati rice product lines. In addition, as a result of the Kohinoor product line discontinuance approved in the third quarter of 2015, we recognized a $3.4 million charge in cost of goods sold, which represents a provision for the excess of the carrying value of inventories of bulk and broken basmati rice at August 31, 2015, determined on a lower of cost or market basis, over the estimated net realizable value of such inventories upon discontinuance. Also during the third quarter of 2015, we recognized an additional $2.1 million of special charges, consisting of $1.3 million related to employee severance and related costs associated with our North American effectiveness initiative and $0.8 million principally related to other exit costs related to our EMEA reorganization initiated earlier in 2015.
For the nine months ended August 31, 2015, we recorded $62.5 million of special charges as indicated in the above table. In addition to the Kohinoor charges of $13.0 million described in the paragraph above, we have recorded special charges of $27.7 million related to employee severance and related costs, associated with our North American effectiveness initiative, and $23.7 million related to our EMEA reorganization initiated earlier in 2015. Partially offsetting these charges was a credit of $1.9 million for the 2015 reversal of reserves previously accrued as part of the EMEA reorganization plan undertaken in 2013 and 2014, principally as a result of a decision by EMEA management that employee attrition, which occurred and was expected to continue, obviated the need for certain accrued employee severance and related benefits.
The following is a breakdown of special charges by business segments for the three and nine months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Consumer segment | $ | 2.4 |
| | $ | 14.7 |
| | $ | 7.2 |
| | $ | 49.6 |
|
Industrial segment | 1.9 |
| | 0.4 |
| | 2.6 |
| | 12.9 |
|
Total special charges | $ | 4.3 |
| | $ | 15.1 |
| | $ | 9.8 |
| | $ | 62.5 |
|
All balances associated with our special charges are included in other accrued liabilities in our consolidated balance sheet.
In January 2015, we offered a voluntary retirement plan, which included enhanced separation benefits but did not include supplementary pension benefits, to certain U.S. employees aged 55 years or older with at least ten years of service to the Company. Upon our receipt of notification from participants that they accepted this plan, which closed early in 2015, we accrued special charges of $24.5 million during the first quarter of 2015 (and an additional $3.2 million in the second and third quarters of 2015), consisting primarily of employee severance and related costs that were largely paid in 2015 as substantially all of the affected employees left the company in 2015. The voluntary retirement plan is part of our North American effectiveness initiative.
Our North American effectiveness initiative generated cost savings of approximately $15 million in 2015 and is expected to generate annual cost savings with a full year impact of approximately $27 million beginning in 2016. The following table outlines the major components of accrual balances and activity relating to the special charges associated with our North American effectiveness initiative for the nine months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
Balance as of November 30, 2015 | $ | 2.3 |
| | $ | — |
| | $ | 2.3 |
|
Special charges | 1.6 |
| | 0.1 |
| | 1.7 |
|
Cash paid | (2.7 | ) | | (0.1 | ) | | (2.8 | ) |
Balance as of August 31, 2016 | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
|
| | | | | |
Balance as of November 30, 2014 | $ | — |
| | $ | — |
| | $ | — |
|
Special charges | 25.6 |
| | 2.1 |
| | 27.7 |
|
Cash paid | (22.8 | ) | | (1.5 | ) | | (24.3 | ) |
Balance as of August 31, 2015 | $ | 2.8 |
| | $ | 0.6 |
| | $ | 3.4 |
|
In the three and nine months ended August 31, 2015, we recorded special charges of $0.8 million and $23.7 million, respectively, to undertake actions, principally consisting of severance and related costs, to change our organization structure to further reduce selling, general and administrative expenses throughout EMEA. For the last quarter of 2015, additional projects were identified in the EMEA region to further enhance organization efficiency and streamline processes in this region to support its competitiveness and long-term growth. These initiatives center on actions intended to reduce fixed costs and improve business processes, as well as continue to drive simplification across the business and supply chain. These actions include the transfer of certain additional activities to the recently established McCormick Shared Services Center in Lodz, Poland. Further actions were approved in the second quarter of 2016. In total, we recorded $24.4 million of special charges for fiscal year 2015 associated with our EMEA reorganization plans undertaken during that year. In addition to the $1.7 million and $4.8 million of special charges recorded for the three and nine months ended August 31, 2016, we expect to record additional special charges in 2016 of approximately $1.0 million, for future actions approved under these EMEA reorganization and streamlining initiatives, which will be settled in cash and reflected in special charges upon recognition in 2016. Related annual cost savings are projected to be approximately $4 million in 2016 and $22 million by the end of 2017.
The following table outlines the major components of accrual balances and activity relating to the special charges associated with the EMEA reorganization plans described above for the nine months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
Balance as of November 30, 2015 | $ | 16.2 |
| | $ | 0.6 |
| | $ | 16.8 |
|
Special charges | 1.2 |
| | 3.6 |
| | 4.8 |
|
Cash paid | (6.1 | ) | | (2.7 | ) | | (8.8 | ) |
Impact of foreign exchange | 0.4 |
| | — |
| | 0.4 |
|
Balance as of August 31, 2016 | $ | 11.7 |
| | $ | 1.5 |
| | $ | 13.2 |
|
| | | | | |
Balance as of November 30, 2014 | $ | — |
| | $ | — |
| | $ | — |
|
Special charges | 21.5 |
| | 2.2 |
| | 23.7 |
|
Cash paid | (3.6 | ) | | (0.7 | ) | | (4.3 | ) |
Impairment of fixed assets | — |
| | (1.1 | ) | | (1.1 | ) |
Impact of foreign exchange | — |
| | 0.2 |
| | 0.2 |
|
Balance as of August 31, 2015 | $ | 17.9 |
| | $ | 0.6 |
| | $ | 18.5 |
|
In the second half of 2015, we recorded special charges related to initiatives to improve the profitability of our Kohinoor consumer business in India. This action principally related to the discontinuance of Kohinoor’s non-profitable bulk-package and broken basmati rice product lines and other ancillary activities to enable the business to focus on both its existing consumer-packaged basmati product lines and the launch of consumer-packaged seasonings under the Kohinoor brand name. In addition to the special charges recognized in the second half of 2015, which are more fully described in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2015, future actions approved with respect to Kohinoor’s plan to improve its profitability consisted of costs associated with exiting certain contractual arrangements and other costs directly related to the plan, of which $0.8 million and $1.5 million were recognized
for the three and nine months ended August 31, 2016, respectively. The estimated cost of future actions, which will be reflected in special charges upon recognition, range from approximately $0.5 million to $2.0 million.
In late 2013, we announced a reorganization in parts of the EMEA region to further improve EMEA’s profitability and process standardization while supporting its competitiveness and long-term growth. These actions included the closure of our sales and distribution operations in the Netherlands, with the transition to a third-party distributor model to continue to sell the Silvo brand, as well as actions intended to reduce selling, general and administrative activities throughout EMEA, including the centralization of shared service activity across the region into Poland. In fiscal years 2013 and 2014, we recorded a total of $27.1 million of cash and non-cash charges related to this reorganization.
The following table outlines the major components of accrual balances and activity relating to the special charges associated with the EMEA reorganization plan undertaken in 2013 and 2014 for the nine months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
Balance as of November 30, 2015 | $ | 2.3 |
| | $ | — |
| | $ | 2.3 |
|
Cash paid | (1.4 | ) | | — |
| | (1.4 | ) |
Impact of foreign exchange | 0.1 |
| | — |
| | 0.1 |
|
Balance as of August 31, 2016 | $ | 1.0 |
| | $ | — |
| | $ | 1.0 |
|
| | | | | |
Balance as of November 30, 2014 | $ | 9.3 |
| | $ | 0.7 |
| | $ | 10.0 |
|
Cash paid | (3.0 | ) | | (0.6 | ) | | (3.6 | ) |
Impact of foreign exchange | (1.5 | ) | | (0.1 | ) | | (1.6 | ) |
Reversal into income (special charges) | (1.9 | ) | | — |
| | (1.9 | ) |
Balance as of August 31, 2015 | $ | 2.9 |
| | $ | — |
| | $ | 2.9 |
|
The changes in the carrying amount of goodwill by segment for the nine months ended August 31, 2016 and 2015 were as follows (in millions):
|
| | | | | | | | | | | | | | | | |
| | 2016 | | 2015 |
| | Consumer | | Industrial | | Consumer | | Industrial |
Beginning of year | | $ | 1,587.7 |
| | $ | 171.6 |
| | $ | 1,581.1 |
| | $ | 141.1 |
|
Changes in preliminary purchase price allocation | | (23.2 | ) | | — |
| | — |
| | — |
|
Increases in goodwill from acquisitions | | 61.3 |
| | — |
| | 125.8 |
| | 37.9 |
|
Foreign currency fluctuations and other | | 20.1 |
| | (4.2 | ) | | (80.6 | ) | | (2.9 | ) |
Balance as of end of August | | $ | 1,645.9 |
| | $ | 167.4 |
| | $ | 1,626.3 |
| | $ | 176.1 |
|
| |
5. | FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS |
In July 2016, we entered into a 15-year lease for a headquarters building in Hunt Valley, Maryland. The lease, which is expected to commence upon completion of building construction and fit-out, currently scheduled for the second half of 2018, requires monthly lease payments of approximately $0.9 million beginning six months after lease commencement. The $0.9 million monthly lease payment is subject to adjustment after an initial 60-month period and thereafter on an annual basis as specified in the lease agreement. In addition, the initial $0.9 million monthly lease payment is subject to increase in the event of agreed-upon changes to specifications related to the headquarters building. We expect to consolidate our Corporate staff and certain non-manufacturing U.S. employees, currently housed in four locations in the Hunt Valley, Maryland area, to the new headquarters building.
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency 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 instruments. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
As of August 31, 2016, the maximum time frame for our foreign exchange forward contracts is 15 months.
For all derivatives, the net amount of accumulated other comprehensive income expected to be reclassified in the next 12 months is $1.4 million as an increase to earnings.
All derivatives are recognized at fair value in the balance sheet and recorded in either current or noncurrent other assets or other accrued liabilities or other long-term liabilities depending upon their nature and maturity.
The following table discloses the fair values of derivative instruments on our balance sheet (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | |
As of August 31, 2016 | Asset Derivatives | | Liability Derivatives |
| Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
Interest rate contracts | Other current assets | | $ | 100.0 |
| | $ | 5.5 |
| | | | | | |
Foreign exchange contracts | Other current assets | | 153.8 |
| | 3.4 |
| | Other accrued liabilities | | $ | 236.4 |
| | $ | 2.3 |
|
Total | | | | | $ | 8.9 |
| | | | | | $ | 2.3 |
|
| | |
As of August 31, 2015 | Asset Derivatives | | Liability Derivatives |
| Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
Interest rate contracts | Other current assets | | $ | 150.0 |
| | $ | 3.5 |
| | Other accrued liabilities | | $ | 50.0 |
| | $ | 0.2 |
|
Foreign exchange contracts | Other current assets | | 143.7 |
| | 5.1 |
| | Other accrued liabilities | | 81.2 |
| | 1.2 |
|
Total | | | | | $ | 8.6 |
| | | | | | $ | 1.4 |
|
| | |
As of November 30, 2015 | Asset Derivatives | | Liability Derivatives |
| Balance Sheet Location | | Notional Amount | | Fair Value | | Balance Sheet Location | | Notional Amount | | Fair Value |
Interest rate contracts | Other current assets | | $ | 100.0 |
| | $ | 2.5 |
| | Other accrued liabilities | | $ | 100.0 |
| | $ | 0.6 |
|
Foreign exchange contracts | Other current assets | | 179.5 |
| | 3.4 |
| | Other accrued liabilities | | 85.0 |
| | 0.7 |
|
Total | | | | | $ | 5.9 |
| | | | | | $ | 1.3 |
|
The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the three and nine month periods ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | |
Fair Value Hedges | | | | | | | | | | |
Derivative | | Income statement location | | Income (expense) |
| | | | Three months ended August 31, 2016 | | Three months ended August 31, 2015 | | Nine months ended August 31, 2016 | | Nine months ended August 31, 2015 |
Interest rate contracts | | Interest expense | | $ | 0.4 |
| | $ | 1.2 |
| | $ | 1.3 |
| | $ | 3.7 |
|
|
| | | | | | | | | | | | | | | | | | |
Cash Flow Hedges – | | |
For the three months ended August 31, | | | | | | | | | | |
Derivative | | Gain or (Loss) recognized in OCI | | Income statement location | | Gain or (Loss) reclassified from AOCI |
| | 2016 | | 2015 | | | | 2016 | | 2015 |
Interest rate contracts | | $ | — |
| | $ | (0.2 | ) | | Interest expense | | $ | (0.1 | ) | | $ | — |
|
Foreign exchange contracts | | 1.8 |
| | 1.6 |
| | Cost of goods sold | | — |
| | 2.1 |
|
Total | | $ | 1.8 |
| | $ | 1.4 |
| | | | $ | (0.1 | ) | | $ | 2.1 |
|
| | | | | | | | | | |
Cash Flow Hedges – | | |
For the nine months ended August 31, | | | | | | | | | | |
Derivative | | Gain or (Loss) recognized in OCI | | Income statement location | | Gain or (Loss) reclassified from AOCI |
| | 2016 | | 2015 | | | | 2016 | | 2015 |
Interest rate contracts | | $ | — |
| | $ | 0.8 |
| | Interest expense | | $ | (0.2 | ) | | $ | (0.1 | ) |
Foreign exchange contracts | | 1.7 |
| | 4.7 |
| | Cost of goods sold | | 3.1 |
| | 5.4 |
|
Total | | $ | 1.7 |
| | $ | 5.5 |
| | | | $ | 2.9 |
| | $ | 5.3 |
|
The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.
| |
6. | FAIR VALUE MEASUREMENTS |
Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| |
• | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| |
• | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| |
• | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):
|
| | | | | | | | | | | | | | | | |
| | | | August 31, 2016 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 134.2 |
| | $ | 134.2 |
| | $ | — |
| | $ | — |
|
Insurance contracts | | 106.6 |
| | — |
| | 106.6 |
| | — |
|
Bonds and other long-term investments | | 10.0 |
| | 10.0 |
| | — |
| | — |
|
Interest rate derivatives | | 5.5 |
| | — |
| | 5.5 |
| | — |
|
Foreign currency derivatives | | 3.4 |
| | — |
| | 3.4 |
| | — |
|
Total | | $ | 259.7 |
| | $ | 144.2 |
| | $ | 115.5 |
| | $ | — |
|
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 2.3 |
| | $ | — |
| | $ | 2.3 |
| | $ | — |
|
Contingent consideration related to D&A acquisition |
| 30.1 |
|
| — |
|
| — |
|
| 30.1 |
|
Total | | $ | 32.4 |
| | $ | — |
| | $ | 2.3 |
| | $ | 30.1 |
|
|
| | | | | | | | | | | | | | | | |
| | | | August 31, 2015 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 108.4 |
| | $ | 108.4 |
| | $ | — |
| | $ | — |
|
Insurance contracts | | 102.0 |
| | — |
| | 102.0 |
| | — |
|
Bonds and other long-term investments | | 7.8 |
| | 7.8 |
| | — |
| | — |
|
Interest rate derivatives | | 3.5 |
| | — |
| | 3.5 |
| | — |
|
Foreign currency derivatives | | 5.1 |
| | — |
| | 5.1 |
| | — |
|
Total | | $ | 226.8 |
| | $ | 116.2 |
| | $ | 110.6 |
| | $ | — |
|
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 1.2 |
| | $ | — |
| | $ | 1.2 |
| | $ | — |
|
Interest rate derivatives | | 0.2 |
| | — |
| | 0.2 |
| | — |
|
Contingent consideration related to D&A acquisition | | 28.6 |
| | — |
| | — |
| | 28.6 |
|
Total | | $ | 30.0 |
| | $ | — |
| | $ | 1.4 |
| | $ | 28.6 |
|
|
| | | | | | | | | | | | | | | | |
| | | | November 30, 2015 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 112.6 |
| | $ | 112.6 |
| | $ | — |
| | $ | — |
|
Insurance contracts | | 104.1 |
| | — |
| | 104.1 |
| | — |
|
Bonds and other long-term investments | | 8.5 |
| | 8.5 |
| | — |
| | — |
|
Interest rate derivatives | | 2.5 |
| | — |
| | 2.5 |
| | — |
|
Foreign currency derivatives | | 3.4 |
| | — |
| | 3.4 |
| | — |
|
Total | | $ | 231.1 |
| | $ | 121.1 |
| | $ | 110.0 |
| | $ | — |
|
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 0.7 |
| | $ | — |
| | $ | 0.7 |
| | $ | — |
|
Interest rate derivatives | | 0.6 |
| | — |
| | 0.6 |
| | — |
|
Contingent consideration related to D&A acquisition | | 27.1 |
| | — |
| | — |
| | 27.1 |
|
Total | | $ | 28.4 |
| | $ | — |
| | $ | 1.3 |
| | $ | 27.1 |
|
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar type assets. The fair values of bonds and other long-term investments are based on quoted market prices
from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on values for similar instruments using models with market based inputs.
The following table sets forth the carrying amount and fair values of our long-term debt (including the current portion thereof) at August 31, 2016, August 31, 2015 and November 30, 2015 (in millions):
|
| | | | | | | | | | | |
| August 31, 2016 | | August 31, 2015 | | November 30, 2015 |
Carrying amount | $ | 1,058.5 |
| | $ | 1,010.8 |
| | $ | 1,256.2 |
|
Fair value | 1,155.3 |
| | 1,081.9 |
| | 1,325.6 |
|
The acquisition-date fair value of the liability for contingent consideration related to our acquisition of D&A was approximately $27.7 million (see note 2). The fair value of the liability as of November 30, 2015 was $27.1 million and was included in other long-term liabilities in our consolidated balance sheet. The fair value of the liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB's Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our probability assessments of expected future cash flows related to our acquisition of D&A during the earn-out period, adjusted for expectations of the amounts and ultimate resolution of likely disputes to be raised by the seller and by us as provided in the purchase agreement, discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the purchase agreement. Changes in the fair value of the liability for contingent consideration, excluding the impact of foreign currency, will be recognized in income on a quarterly basis until settlement in fiscal 2018.
The change in fair value of our Level 3 liabilities for the nine months ended August 31, 2016 is summarized as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Beginning of year | | Settlements | | Changes in fair value including accretion | | Impact of foreign currency | | Balance as of August 31, 2016 |
Contingent consideration related to D&A acquisition | $ | 27.1 |
| | $ | — |
| | $ | 1.3 |
| | $ | 1.7 |
| | $ | 30.1 |
|
| |
7. | EMPLOYEE BENEFIT AND RETIREMENT PLANS |
The following table presents the components of our pension expense of the defined benefit plans for the three months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | |
| United States | | International |
| 2016 | | 2015 | | 2016 | | 2015 |
Defined benefit plans | | | | | | | |
Service cost | $ | 5.3 |
| | $ | 5.9 |
| | $ | 1.9 |
| | $ | 2.1 |
|
Interest costs | 8.4 |
| | 7.9 |
| | 2.8 |
| | 3.0 |
|
Expected return on plan assets | (10.1 | ) | | (10.0 | ) | | (4.1 | ) | | (4.3 | ) |
Amortization of net actuarial losses | 3.1 |
| | 4.2 |
| | 1.1 |
| | 1.5 |
|
Total pension expense | $ | 6.7 |
| | $ | 8.0 |
| | $ | 1.7 |
| | $ | 2.3 |
|
The following table presents the components of our pension expense of the defined benefit plans for the nine months ended August 31, 2016 and 2015 (in millions): |
| | | | | | | | | | | | | | | |
| United States | | International |
| 2016 | | 2015 | | 2016 | | 2015 |
Defined benefit plans | | | | | | | |
Service cost | $ | 16.1 |
| | $ | 17.7 |
| | $ | 5.4 |
| | $ | 6.2 |
|
Interest costs | 25.0 |
| | 23.7 |
| | 8.6 |
| | 9.1 |
|
Expected return on plan assets | (30.4 | ) | | (30.1 | ) | | (12.4 | ) | | (13.0 | ) |
Amortization of prior service costs | — |
| | — |
| | 0.2 |
| | 0.2 |
|
Amortization of net actuarial losses | 9.4 |
| | 12.6 |
| | 3.2 |
| | 4.5 |
|
Total pension expense | $ | 20.1 |
| | $ | 23.9 |
| | $ | 5.0 |
| | $ | 7.0 |
|
During the nine months ended August 31, 2016 and 2015, we contributed $22.1 million and $12.6 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2015 were $15.7 million.
The following table presents the components of our other postretirement benefits expense (in millions):
|
| | | | | | | | | | | | | | | | |
|
| Three months ended August 31, |
| Nine months ended August 31, |
|
| 2016 | | 2015 |
| 2016 |
| 2015 |
Other postretirement benefits |
|
|
|
|
|
|
|
|
Service cost |
| $ | 0.6 |
|
| $ | 0.8 |
|
| $ | 2.0 |
|
| $ | 2.4 |
|
Interest costs |
| 1.0 |
|
| 0.9 |
|
| 2.9 |
|
| 2.7 |
|
Total other postretirement expense |
| $ | 1.6 |
|
| $ | 1.7 |
|
| $ | 4.9 |
|
| $ | 5.1 |
|
| |
8. | STOCK-BASED COMPENSATION |
We have three types of stock-based compensation awards: restricted stock units (RSUs), stock options and company stock awarded as part of our long-term performance plan (LTPP). The following table sets forth the stock-based compensation expense recorded in selling, general and administrative (SG&A) expense (in millions):
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Stock-based compensation expense | $ | 4.0 |
| | $ | 3.1 |
| | $ | 19.8 |
| | $ | 17.0 |
|
Our 2016 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2015 annual grant. The weighted-average grant-date fair value of an option granted in 2016 was $17.50 and in 2015 was $12.52 as calculated under a lattice pricing model. Substantially all of the options granted vest ratably over a three-year period or upon retirement. The fair values of option grants in the stated periods were computed using the following assumptions for our various stock compensation plans:
|
| | | |
| 2016 | | 2015 |
Risk-free interest rates | 0.5 - 1.9% | | 0.1 - 2.0% |
Dividend yield | 1.7% | | 2.1% |
Expected volatility | 18.7% | | 18.8% |
Expected lives (in years) | 7.6 | | 7.7 |
The following is a summary of our stock option activity for the nine months ended August 31, 2016 and 2015:
|
| | | | | | | | | | | | | |
| 2016 | | 2015 |
(shares in millions) | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price |
Outstanding at beginning of period | 4.8 |
| | $ | 59.20 |
| | 4.8 |
| | $ | 54.17 |
|
Granted | 0.7 |
| | 99.92 |
| | 0.8 |
| | 76.32 |
|
Exercised | (0.6 | ) | | 50.95 |
| | (0.6 | ) | | 42.77 |
|
Outstanding at end of the period | 4.9 |
| | $ | 66.07 |
| | 5.0 |
| | $ | 58.96 |
|
Exercisable at end of the period | 3.4 |
| | $ | 56.97 |
| | 3.3 |
| | $ | 51.95 |
|
As of August 31, 2016, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $177.2 million and for options currently exercisable was $152.5 million. The total intrinsic value of all options exercised during the nine months ended August 31, 2016 and 2015 was $25.0 million and $19.1 million, respectively.
The following is a summary of our RSU activity for the nine months ended August 31, 2016 and 2015:
|
| | | | | | | | | | | | | |
| 2016 | | 2015 |
(shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value |
Outstanding at beginning of period | 270 |
| | $ | 71.03 |
| | 239 |
| | $ | 67.60 |
|
Granted | 104 |
| | 96.59 |
| | 135 |
| | 76.06 |
|
Vested | (94 | ) | | 72.21 |
| | (84 | ) | | 71.30 |
|
Forfeited | (10 | ) | | 80.47 |
| | (12 | ) | | 73.03 |
|
Outstanding at end of period | 270 |
| | $ | 80.17 |
| | 278 |
| | $ | 70.35 |
|
The following is a summary of our LTPP activity for the nine months ended August 31, 2016 and 2015:
|
| | | | | | | | | | | | | |
| 2016 | | 2015 |
(shares in thousands) | Number of Shares | | Weighted- Average Grant-Date Fair Value | | Number of Shares | | Weighted- Average Grant-Date Fair Value |
Outstanding at beginning of period | 192 |
| | $ | 70.94 |
| | 231 |
| | $ | 61.94 |
|
Granted | 108 |
| | 86.40 |
| | 96 |
| | 74.02 |
|
Vested | (18 | ) | | 64.74 |
| | (65 | ) | | 48.78 |
|
Forfeited | (8 | ) | | 79.45 |
| | (14 | ) | | 70.92 |
|
Outstanding at end of period | 274 |
| | $ | 77.22 |
| | 248 |
| | $ | 69.55 |
|
Income taxes for the three months ended August 31, 2016 included $10.0 million of discrete tax benefits, consisting primarily of the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations in the U.S. and an international jurisdiction. Income taxes for the nine months ended August 31, 2016 included $20.7 million of discrete tax benefits that primarily consisted of the following: (i) the reversal of unrecognized tax benefits and related interest of $11.3 million related to the expiration of statutes of limitations in the U.S. and in international jurisdictions; (ii) a reversal of a valuation allowance on an international deferred tax asset of $6.4 million due to a change in facts that favorably impacted our assessment of the likely recoverability of that deferred tax asset; (iii) recognition of the tax year 2015 research tax credit of $2.8 million as a result of new legislation enacted in our first quarter; and (iv) a $1.0 million revaluation of a deferred tax liability as result of legislation enacted in our first quarter reducing the statutory tax rate for a non-U.S. jurisdiction. Other than the discrete tax benefits mentioned previously and additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three and nine months ended August 31, 2016.
Income taxes for the three months ended August 31, 2015, included $1.1 million of discrete tax benefits, consisting primarily of the reversal of unrecognized tax benefits and related interest associated with the expiration of a statute of limitation in an international jurisdiction. Income taxes for the nine months ended August 31, 2015, included $18.3 million of discrete tax benefits, consisting of the amounts described above as well as an additional $17.2 million of discrete tax benefits consisting principally of the following: (i) a reversal of a previously established valuation allowance on a foreign deferred tax asset of $8.6 million due to a change in facts that favorably impacted our assessment of the likely recoverability of that deferred tax asset; (ii) the reversals of unrecognized tax benefits and related interest of $6.8 million associated with expirations of statutes of limitations in the U.S. and international jurisdictions; and (iii) the remainder principally related to recognition of a 2014 research tax credit. A new law was enacted in the first quarter 2015 that retroactively granted the credit for our 2014 tax year. Other than the reversals previously described and additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three months and nine months ended August 31, 2015.
As of August 31, 2016, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements.
| |
10. | EARNINGS PER SHARE AND STOCK ISSUANCE |
The following table sets forth the reconciliation of average shares outstanding (in millions):
|
| | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Average shares outstanding – basic | 126.4 |
| | 128.0 |
| | 126.8 |
| | 128.1 |
|
Effect of dilutive securities: | | | | | | | |
Stock options/RSUs/LTPP | 1.5 |
| | 1.2 |
| | 1.4 |
| | 1.1 |
|
Average shares outstanding – diluted | 127.9 |
| | 129.2 |
| | 128.2 |
| | 129.2 |
|
The following table sets forth the stock options and RSUs for the three and nine months ended August 31, 2016 and 2015 which were not considered in our earnings per share calculation since they were anti-dilutive (in millions):
|
| | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Anti-dilutive securities | 0.3 |
| | 0.5 |
| | 0.4 |
| | 0.5 |
|
The following table sets forth the common stock activity for the three and nine months ended August 31, 2016 and 2015 under the Company’s stock option and employee stock purchase plans and the repurchases of common stock under its stock repurchase program (in millions):
|
| | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Shares issued under stock option, employee stock purchase plans and RSUs | 0.1 |
| | 0.2 |
| | 0.6 |
| | 0.6 |
|
Shares repurchased in connection with the stock repurchase program | 0.8 |
| | — |
| | 1.9 |
| | 1.0 |
|
As of August 31, 2016, $391 million remained of the $600 million share repurchase authorization that was authorized by the Board of Directors in March 2015.
| |
11. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in millions):
|
| | | | | | | | | | | |
| August 31, 2016 | | August 31, 2015 | | November 30, 2015 |
Foreign currency translation adjustment | $ | (214.5 | ) | | $ | (152.3 | ) | | $ | (206.6 | ) |
Unrealized gain on foreign currency exchange contracts | 1.5 |
| | 2.1 |
| | 1.5 |
|
Fair value of interest rate swaps (excluding settled interest rate swaps) | — |
| | 0.5 |
| | — |
|
Unamortized value of settled interest rate swaps | 2.3 |
| | 2.8 |
| | 2.1 |
|
Pension and other postretirement costs | (189.5 | ) | | (206.7 | ) | | (203.1 | ) |
Accumulated other comprehensive loss | $ | (400.2 | ) | | $ | (353.6 | ) | | $ | (406.1 | ) |
The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the three and nine months ended August 31, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
|
| Three months ended August 31, |
| Nine months ended August 31, |
| Affected Line Items in the Condensed Consolidated Income Statement |
Accumulated Other Comprehensive Income (Loss) Components |
| 2016 | | 2015 |
| 2016 |
| 2015 |
|
(Gains)/losses on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
| $ | 0.1 |
|
| $ | — |
|
| $ | 0.2 |
|
| $ | 0.1 |
|
| Interest expense |
Foreign exchange contracts |
| — |
|
| (2.1 | ) |
| (3.1 | ) |
| (5.4 | ) |
| Cost of goods sold |
Total before tax |
| 0.1 |
|
| (2.1 | ) |
| (2.9 | ) |
| (5.3 | ) |
|
|
|
Tax effect |
| — |
|
| 0.6 |
|
| 0.7 |
|
| 1.2 |
|
| Income taxes |
Net, after tax |
| $ | 0.1 |
|
| $ | (1.5 | ) |
| $ | (2.2 | ) |
| $ | (4.1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and postretirement benefit adjustments: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs (1) |
| $ | — |
|
| $ | — |
|
| $ | 0.2 |
|
| $ | 0.2 |
|
| SG&A expense/ Cost of goods sold |
Amortization of net actuarial losses (1) |
| 4.2 |
|
| 5.7 |
|
| 12.6 |
|
| 17.1 |
|
| SG&A expense/ Cost of goods sold |
Total before tax |
| 4.2 |
|
| 5.7 |
|
| 12.8 |
|
| 17.3 |
|
|
|
|
Tax effect |
| (1.4 | ) |
| (1.9 | ) |
| (4.3 | ) |
| (5.9 | ) |
| Income taxes |
Net, after tax |
| $ | 2.8 |
|
| $ | 3.8 |
|
| $ | 8.5 |
|
| $ | 11.4 |
|
|
|
|
(1) This accumulated other comprehensive income component is included in the computation of total pension expense (refer to note 7 for additional details).
We operate in two business segments: consumer and industrial. The consumer and industrial segments manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores under the “McCormick” brand and a variety of brands around the world, including “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Schwartz”, “Club House”, “Kamis”, “Kohinoor”, “DaQiao”, “Drogheria & Alimentari”, "Stubb's", and "Gourmet Garden". Our industrial segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors.
In each of our segments, we produce and sell many individual products which are similar in composition and nature. With their primary attribute being flavor, we regard the products within each of our segments to be fairly homogenous. It is impracticable to segregate and identify sales and profits for individual product lines.
We measure segment performance based on operating income excluding special charges as this activity is managed separately from the business segments. Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for internal reporting, evaluating performance or allocating capital. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.
|
| | | | | | | | | | | |
| Consumer | | Industrial | | Total |
| | | (in millions) | | |
Three months ended August 31, 2016 | | | | | |
Net sales | $ | 662.0 |
| | $ | 429.0 |
| | $ | 1,091.0 |
|
Operating income excluding special charges | 127.3 |
| | 44.8 |
| | 172.1 |
|
Income from unconsolidated operations | 6.8 |
| | 1.3 |
| | 8.1 |
|
| | | | | |
Three months ended August 31, 2015 | | | | | |
Net sales | $ | 630.5 |
| | $ | 429.4 |
| | $ | 1,059.9 |
|
Operating income excluding special charges | 114.6 |
| | 39.2 |
| | 153.8 |
|
Income from unconsolidated operations | 9.2 |
| | 0.5 |
| | 9.7 |
|
| | | | | |
| | | | | |
Nine months ended August 31, 2016 | | | | | |
Net sales | $ | 1,937.6 |
| | $ | 1,246.9 |
| | $ | 3,184.5 |
|
Operating income excluding special charges | 308.0 |
| | 123.7 |
| | 431.7 |
|
Income from unconsolidated operations | 20.6 |
| | 3.6 |
| | 24.2 |
|
| | | | | |
Nine months ended August 31, 2015 | | | | | |
Net sales | $ | 1,850.6 |
| | $ | 1,243.8 |
| | $ | 3,094.4 |
|
Operating income excluding special charges | 286.9 |
| | 111.8 |
| | 398.7 |
|
Income from unconsolidated operations | 26.9 |
| | 0.1 |
| | 27.0 |
|
A reconciliation of operating income excluding special charges (which we use to measure segment profitability) to operating income is as follows (in millions):
|
| | | | | | | | | | | |
| Consumer | | Industrial | | Total |
Three months ended August 31, 2016 | | | | | |
Operating income | $ | 124.9 |
| | $ | 42.9 |
| | $ | 167.8 |
|
Add: Special charges | 2.4 |
| | 1.9 |
| | 4.3 |
|
Operating income excluding special charges | $ | 127.3 |
| | $ | 44.8 |
| | $ | 172.1 |
|
| | | | | |
Three months ended August 31, 2015 | | | | | |
Operating income | $ | 99.9 |
| | $ | 38.8 |
| | $ | 138.7 |
|
Add: Special charges in cost of goods sold | 3.4 |
| | — |
| | 3.4 |
|
Add: Other special charges (including a non-cash impairment charge in 2015) | 11.3 |
| | 0.4 |
| | 11.7 |
|
Operating income excluding special charges | $ | 114.6 |
| | $ | 39.2 |
| | $ | 153.8 |
|
| | | | | |
Nine months ended August 31, 2016 | | | | | |
Operating income | $ | 300.8 |
| | $ | 121.1 |
| | $ | 421.9 |
|
Add: Special charges | 7.2 |
| | 2.6 |
| | 9.8 |
|
Operating income excluding special charges | $ | 308.0 |
| | $ | 123.7 |
| | $ | 431.7 |
|
| | | | | |
Nine months ended August 31, 2015 |
Operating income | $ | 237.3 |
| | 98.9 |
| | $ | 336.2 |
|
Add: Special charges in cost of goods sold | 3.4 |
| | — |
| | 3.4 |
|
Add: Other special charges (including a non-cash impairment charge in 2015) | 46.2 |
| | 12.9 |
| | 59.1 |
|
Operating income excluding special charges | $ | 286.9 |
| | 111.8 |
| | 398.7 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Business profile
We are a global leader in flavor, with the manufacturing, marketing and distribution of spices, seasoning mixes, condiments and other flavorful products to the entire food industry. Our major sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, Mexico, India, Singapore, Central America, Thailand and South Africa. Annually, approximately 40% of our sales have been outside of the United States.
We operate in two business segments, consumer and industrial. Our consumer segment customers span a variety of retailers that include grocery mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands. In our industrial segment, we provide a wide range of products to multinational food manufacturers and foodservice customers. The foodservice customers are supplied both directly and indirectly through distributors.
Demand for flavor is growing globally, and across both segments, we have the customer base and product breadth to participate in all types of eating occasions, whether it is cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer customers and consumers a range of products that meet the increasing demand for certain product attributes such as organic, gluten-free and non-GMO (genetically modified organisms) and that extend from premium to value-priced.
Long-term growth objectives
Our long-term annual growth objectives are to increase sales 4% to 6%, increase operating income 7% to 9% and increase earnings per share 9% to 11%, all in constant currency.
Sales growth - Over time, we expect to grow sales with similar contributions from: 1) our base business-driven by brand marketing support, customer intimacy and category growth; 2) product innovation; and 3) acquisitions.
In 2015, we increased our investment in brand marketing by 6% over 2014 and 44% from 2010. We measure the return on this 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. Digital marketing reached 38% of advertising spend in 2015, compared to 11% in 2010.
For our consumer segment, 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. Recent innovation includes the launch of herb grinders in North America and Europe, and liquid pouch products such as single use Grill Mate marinades in the U.S. and Thai chili sauce in China. In the U.S., we are expanding our organic offerings within our gourmet spices and seasonings line, and introducing new McCormick brand organic recipe mixes and organic Kitchen Basics stocks and bone broth. Other consumer segment innovation includes World Cuisine recipe mixes and Vahine brand dessert items in Europe, Aeroplane brand dessert items in Australia and new cooking sauces in Central America. For industrial 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 new flavor solutions aligned with our customers’ new product launch plans. With more than 20 technical innovation centers and product development facilities around the world, we are supporting the growth of our brands and those of our industrial customers with products that appeal to local consumers. In addition, much of our innovation is designed to meet the increasing consumer demand for healthy eating. We founded the McCormick Science Institute in 2007 to fund the advancement of scientific knowledge of the potential health benefits of culinary spices and herbs. This institute is also committed to educating consumers, nutritionists and dietitians about these potential health benefits.
Acquisitions are contributing approximately one-third of our sales growth. Since 2007, we have completed 12 acquisitions and joint ventures, including three acquisitions added in 2015 and the addition of Gourmet Garden in 2016. Flavor is central to our pipeline of acquisit