10-Q
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, 2015
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 ý 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 ý 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 | ý | 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 ý
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, 2015 | |
| Common Stock | 11,758,265 |
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| Common Stock Non-Voting | 116,288,620 |
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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 4 | | |
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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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net sales | $ | 1,059.9 |
| | $ | 1,042.8 |
| | $ | 3,094.4 |
| | $ | 3,069.6 |
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Cost of goods sold | 638.0 |
| | 622.7 |
| | 1,878.8 |
| | 1,845.5 |
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Gross profit | 421.9 |
| | 420.1 |
| | 1,215.6 |
| | 1,224.1 |
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Selling, general and administrative expense | 271.5 |
| | 260.5 |
| | 820.3 |
| | 818.2 |
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Special charges | 11.7 |
| | 2.3 |
| | 59.1 |
| | 2.3 |
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Operating income | 138.7 |
| | 157.3 |
| | 336.2 |
| | 403.6 |
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Interest expense | 13.6 |
| | 12.4 |
| | 39.5 |
| | 37.3 |
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Other income, net | 0.2 |
| | 0.3 |
| | 0.6 |
| | 0.8 |
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Income from consolidated operations before income taxes | 125.3 |
| | 145.2 |
| | 297.3 |
| | 367.1 |
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Income taxes | 37.4 |
| | 31.1 |
| | 71.9 |
| | 97.3 |
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Net income from consolidated operations | 87.9 |
| | 114.1 |
| | 225.4 |
| | 269.8 |
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Income from unconsolidated operations | 9.7 |
| | 8.8 |
| | 27.0 |
| | 20.1 |
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Net income | $ | 97.6 |
| | $ | 122.9 |
| | $ | 252.4 |
| | $ | 289.9 |
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Earnings per share – basic | $ | 0.76 |
| | $ | 0.95 |
| | $ | 1.97 |
| | $ | 2.22 |
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Average shares outstanding – basic | 128.0 |
| | 129.6 |
| | 128.1 |
| | 130.3 |
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Earnings per share – diluted | $ | 0.76 |
| | $ | 0.94 |
| | $ | 1.95 |
| | $ | 2.21 |
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Average shares outstanding – diluted | 129.2 |
| | 130.6 |
| | 129.2 |
| | 131.3 |
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Cash dividends paid per share | $ | 0.40 |
| | $ | 0.37 |
| | $ | 1.20 |
| | $ | 1.11 |
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Cash dividends declared per share | $ | 0.40 |
| | $ | 0.37 |
| | $ | 0.80 |
| | $ | 0.74 |
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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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income | $ | 97.6 |
| | $ | 122.9 |
| | $ | 252.4 |
| | $ | 289.9 |
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Net income attributable to non-controlling interest | (1.9 | ) | | 0.4 |
| | 0.5 |
| | 2.1 |
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Other comprehensive income (loss): | | | | | | | |
Unrealized components of pension plans | 7.3 |
| | 4.9 |
| | 23.1 |
| | 12.8 |
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Currency translation adjustments | (33.9 | ) | | (43.0 | ) | | (184.5 | ) | | (38.9 | ) |
Change in derivative financial instruments | (0.8 | ) | | 1.3 |
| | (0.3 | ) | | 1.3 |
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Deferred taxes | (1.5 | ) | | (1.6 | ) | | (5.9 | ) | | (4.5 | ) |
Comprehensive income | $ | 66.8 |
| | $ | 84.9 |
| | $ | 85.3 |
| | $ | 262.7 |
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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, 2015 | | August 31, 2014 | | November 30, 2014 |
| (unaudited) | | (unaudited) | | |
ASSETS | | | | | |
Current Assets | | | | | |
Cash and cash equivalents | $ | 108.4 |
| | $ | 93.8 |
| | $ | 77.3 |
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Trade accounts receivables, net | 422.9 |
| | 476.8 |
| | 493.6 |
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Inventories | | | | | |
Finished products | 333.3 |
| | 327.0 |
| | 303.2 |
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Raw materials and work-in-process | 393.9 |
| | 378.6 |
| | 410.6 |
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| 727.2 |
| | 705.6 |
| | 713.8 |
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Prepaid expenses and other current assets | 116.0 |
| | 132.6 |
| | 131.5 |
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Total current assets | 1,374.5 |
| | 1,408.8 |
| | 1,416.2 |
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Property, plant and equipment | 1,491.4 |
| | 1,460.7 |
| | 1,481.4 |
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Less: accumulated depreciation | (902.3 | ) | | (881.9 | ) | | (878.7 | ) |
Property, plant and equipment, net | 589.1 |
| | 578.8 |
| | 602.7 |
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Goodwill | 1,802.4 |
| | 1,769.1 |
| | 1,722.2 |
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Intangible assets, net | 376.1 |
| | 336.5 |
| | 330.8 |
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Investments and other assets | 348.6 |
| | 378.9 |
| | 342.4 |
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Total assets | $ | 4,490.7 |
| | $ | 4,472.1 |
| | $ | 4,414.3 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current Liabilities | | | | | |
Short-term borrowings | $ | 481.2 |
| | $ | 352.2 |
| | $ | 269.6 |
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Current portion of long-term debt | 203.6 |
| | 1.2 |
| | 1.2 |
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Trade accounts payable | 336.1 |
| | 338.8 |
| | 372.1 |
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Other accrued liabilities | 383.7 |
| | 385.4 |
| | 479.1 |
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Total current liabilities | 1,404.6 |
| | 1,077.6 |
| | 1,122.0 |
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Long-term debt | 807.2 |
| | 1,014.3 |
| | 1,014.1 |
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Other long-term liabilities | 516.7 |
| | 410.2 |
| | 468.8 |
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Total liabilities | 2,728.5 |
| | 2,502.1 |
| | 2,604.9 |
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Shareholders’ Equity | | | | | |
Common stock | 380.8 |
| | 363.3 |
| | 367.2 |
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Common stock non-voting | 653.0 |
| | 625.2 |
| | 628.4 |
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Retained earnings | 1,065.1 |
| | 993.6 |
| | 982.6 |
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Accumulated other comprehensive loss | (353.6 | ) | | (29.6 | ) | | (186.0 | ) |
Non-controlling interests | 16.9 |
| | 17.5 |
| | 17.2 |
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Total shareholders’ equity | 1,762.2 |
| | 1,970.0 |
| | 1,809.4 |
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Total liabilities and shareholders’ equity | $ | 4,490.7 |
| | $ | 4,472.1 |
| | $ | 4,414.3 |
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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, |
| 2015 | | 2014 |
Operating activities | | | |
Net income | $ | 252.4 |
| | $ | 289.9 |
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Adjustments to reconcile net income to net cash flow provided by operating activities: | | | |
Depreciation and amortization | 78.7 |
| | 78.1 |
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Stock-based compensation | 17.0 |
| | 15.1 |
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Brand name impairment included in special charges | 9.6 |
| | — |
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Income from unconsolidated operations | (27.0 | ) | | (20.1 | ) |
Changes in operating assets and liabilities | (31.8 | ) | | (99.8 | ) |
Dividends from unconsolidated affiliates | 17.7 |
| | 12.6 |
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Net cash flow provided by operating activities | 316.6 |
| | 275.8 |
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Investing activities | | | |
Acquisition of businesses (net of cash acquired) | (210.9 | ) | | — |
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Capital expenditures | (70.0 | ) | | (78.0 | ) |
Proceeds from sale of property, plant and equipment | 0.3 |
| | 0.8 |
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Net cash flow used in investing activities | (280.6 | ) | | (77.2 | ) |
Financing activities | | | |
Short-term borrowings, net | 214.1 |
| | 139.7 |
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Long-term debt borrowings | 0.5 |
| | — |
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Long-term debt repayments | (1.4 | ) | | (1.4 | ) |
Proceeds from exercised stock options | 26.1 |
| | 19.2 |
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Common stock acquired by purchase | (72.3 | ) | | (178.4 | ) |
Dividends paid | (153.7 | ) | | (144.7 | ) |
Net cash flow provided by (used in) financing activities | 13.3 |
| | (165.6 | ) |
Effect of exchange rate changes on cash and cash equivalents | (18.2 | ) | | (2.2 | ) |
Increase in cash and cash equivalents | 31.1 |
| | 30.8 |
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Cash and cash equivalents at beginning of period | 77.3 |
| | 63.0 |
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Cash and cash equivalents at end of period | $ | 108.4 |
| | $ | 93.8 |
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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, 2015 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, 2014.
Accounting and Disclosure Changes
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-11 Simplifying the Measurement of Inventory (Topic 330). This guidance is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. It will be effective for the first quarter of our fiscal year ending November 30, 2018, and early adoption is permitted. 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. In August 2015, the FASB issued Accounting Standards Update No. 2015-14 Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date that provided for the adoption of the new standard for fiscal years beginning after December 15, 2017. As a result, 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, but not before the original effective date for public business entities (i.e., annual reporting periods beginning after December 15, 2016). We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
Acquisitions are part of our strategy to increase sales and profits.
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 business. The purchase price for Brand Aromatics was $62.5 million 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 August 31, 2015, a preliminary valuation of the acquired net assets of Brand Aromatics resulted in $5.1 million allocated to tangible net assets, $19.5 million allocated to other intangible assets and $37.9 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 expected synergies from the extension of our customer intimacy and value-added flavor solutions we provide to our industrial customers to stocks, marinades and other savory flavors, as well as from the combined operations and assembled workforces, and the future development initiatives of the assembled workforces. The preliminary valuation, based on a comparison of acquisitions of similar industrial businesses, provided average percentages of purchase prices assigned to goodwill and other identifiable intangible assets, which we used to initially value the Brand Aromatics acquisition. We expect to finalize the determination of the fair value of the acquired net assets of Brand Aromatics during the fourth quarter of 2015. Included in our industrial business segment since its acquisition, Brand Aromatics added $7.0 million and $11.8 million to sales in the three and nine months ended August 31, 2015, respectively. Due to financing, acquisition and integration costs, its operating income contribution was not significant to our overall results for those periods.
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, at the time of acquisition, subject to certain closing adjustments, 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, which we used to estimate the contingent consideration 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. As of August 31, 2015, a preliminary valuation of the acquired net assets of D&A resulted in $7.2 million allocated to tangible net assets, $24.3 million allocated to other intangible assets and $45.2 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 preliminary valuation, based on a comparison of acquisitions of similar consumer businesses, provided average percentages of purchase prices assigned to goodwill and other intangible assets which we used to initially value the D&A acquisition. We expect to finalize the determination of the fair value of the acquired net assets of D&A during early 2016. Included in our consumer business segment since its acquisition, D&A added $15.3 million to sales in the three and nine months ended August 31, 2015. Due to financing, acquisition and integration costs, its operating income contribution was not significant to our overall results for those periods.
On August 20, 2015, we completed the purchase of 100% of the shares of One World Foods, Inc., seller of Stubb's barbeque sauces ("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 business. At the time of acquisition, annual sales of Stubb's were approximately $30 million. The purchase price for Stubb's was $99.4 million, subject to certain closing adjustments, and was financed with a combination of cash and short-term borrowings. As of August 31, 2015, a preliminary valuation of the acquired net assets of Stubb's resulted in $5.4 million allocated to tangible assets acquired (less $12.4 million allocated to liabilities assumed), $25.8 million allocated to other intangible assets and $80.6 million allocated to goodwill. 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 customer insights in demand from customers 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. 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 Stubb's acquisition. We expect to finalize the determination of the fair value of the acquired
net assets of Stubb's during the first half of 2016. Included in our consumer business segment since its acquisition, Stubb's contribution to sales and operating income was not significant to our overall results this period.
During the three and nine months ended August 31, 2015, we recorded $0.8 million and $2.8 million, respectively, in transaction-related expenses associated with these acquisitions.
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 Chairman 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, 2015 and 2014 (in millions):
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| Three months ended August 31, | | Nine months ended August 31, |
| 2015 | | 2014 | | 2015 | | 2014 |
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 charge of $9.6 million for the three and nine months ended August 31, 2015) | 11.7 |
| | 2.3 |
| | 59.1 |
| | 2.3 |
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Total special charges | $ | 15.1 |
| | $ | 2.3 |
| | $ | 62.5 |
| | $ | 2.3 |
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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 light of the anticipated sales reduction associated with the business’s discontinuance of its bulk-packaged and broken basmati rice product lines, only partially offset by the launch of consumer-packaged herbs and spices, we determined that an impairment of the Kohinoor brand name had occurred. Using a relief from royalty method (and a discount rate reflective of the risk of the launch of consumer-packaged herbs and spices), we estimated a current fair value of the Kohinoor brand name that represented a reduction in its previous carrying value by approximately 53%, resulting in a non-cash impairment charge of $9.6 million in the third quarter of 2015. 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. In addition to the special charges outlined above and recorded in the three and nine months ended August 31, 2015, the future actions approved with respect to Kohinoor's plan to improve its profitability consist of costs associated with exiting certain contractual arrangements and other costs directly related to the plan. The estimated cost of such future actions, which will be reflected in special charges upon recognition over the next three to nine months, range from approximately $2 million to $4 million.
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 preceding 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.
Of the $15.1 million of special charges recorded in our consolidated financial statements in the third quarter of 2015, $14.7 million related to our consumer business segment and $0.4 million related to our industrial business segment. Of the $62.5 million of special charges recorded in our consolidated financial statements for the nine months ended August 31, 2015, $49.6 million related to our consumer business segment and $12.9 million related to our industrial business segment. With the exception of $3.4 million of inventory reserves at August 31, 2015, all balances associated with our special charges are included in other accrued liabilities in our consolidated balance sheet.
For the three and nine months ended August 31, 2014, we recorded $2.3 million of special charges, principally related to employee severance, with $1.3 million related to our industrial business segment and $1.0 million related to our consumer business segment.
In late 2013, we announced a reorganization in parts of the Europe, Middle East and Africa (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. We expect to realize annual cost savings of approximately $10 million in 2015 related to this EMEA 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, 2015 (in millions):
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| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
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 |
|
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 in the first quarter of 2015, we accrued special charges of $24.5 million, consisting of employee severance and related costs that will be paid in cash. Substantially all of the affected employees will leave the company in 2015, and the majority exited by the second quarter.
The voluntary retirement plan is part of our ongoing North American effectiveness initiative that, upon completion, is expected to generate cost savings of approximately $10 million in 2015 and annual cost savings with a full year impact of approximately $25 million beginning in 2016. We currently estimate the total cost to implement the North American effectiveness initiative to approximate $28 million, including the cost of the voluntary early retirement plan and other actions necessary to achieve the cost savings previously described, consisting principally of severance and related benefits that will be paid in cash. 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, 2015 (in millions):
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| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
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 first quarter of 2015, we recorded a special charge of $3.9 million 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. The actions associated with this special charge are expected to be completed in 2015 and to generate annual cost savings of $3.0 million by 2016.
In the second 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. In total, including the amounts recorded during the nine months ended August 31, 2015, the company expects to record approximately $25 million of charges related to these actions, with approximately $24 million of cash expenses and approximately $1 million of non-cash fixed asset impairment expenses. Of the approximately $24 million of cash expenditures associated with these special charges, approximately $13 million are expected to be spent in 2015 and the balance spent in 2016. Related annual cost savings are projected to be approximately $16 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 undertaken in 2015 for the nine months ended August 31, 2015 (in millions):
|
| | | | | | | | | | | |
| Employee severance and related benefits | | Other related costs | | Total |
Special charges | $ | 21.5 |
| | $ | 2.2 |
| | $ | 23.7 |
|
Cash paid | (3.6 | ) | | (0.7 | ) | | (4.3 | ) |
Impairment of fixed assets recorded | — |
| | (1.1 | ) | | (1.1 | ) |
Impact of foreign exchange | — |
| | 0.2 |
| | 0.2 |
|
Balance as of August 31, 2015 | $ | 17.9 |
| | $ | 0.6 |
| | $ | 18.5 |
|
The changes in the carrying amount of goodwill by segment for the nine months ended August 31, 2015 and 2014 were as follows (in millions):
|
| | | | | | | | | | | | | | | | |
| | 2015 | | 2014 |
| | Consumer | | Industrial | | Consumer | | Industrial |
Beginning of year | | $ | 1,581.1 |
| | $ | 141.1 |
| | $ | 1,654.7 |
| | $ | 143.8 |
|
Changes in purchase price allocation | | — |
| | — |
| | (6.1 | ) | | — |
|
Goodwill acquired | | 125.8 |
| | 37.9 |
| | — |
| | — |
|
Foreign currency fluctuations | | (80.6 | ) | | (2.9 | ) | | (23.5 | ) | | 0.2 |
|
Balance as of August 31 | | $ | 1,626.3 |
| | $ | 176.1 |
| | $ | 1,625.1 |
| | $ | 144.0 |
|
| |
5. | FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS |
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.
In June 2015, we entered into a five-year $750 million revolving credit facility which will expire in June 2020. The pricing for this credit facility, on a fully drawn basis, is LIBOR plus 0.75%. This credit facility replaces our $600 million revolving credit facility that was due to expire in June 2016.
During the nine months ended August 31, 2015, we have entered into a total of $100 million of forward starting interest rate swap agreements to manage our interest rate risk associated with the anticipated issuance of at least $100 million of fixed rate notes by December 2015. We entered into $50 million of these swap agreements during our second quarter of 2015 and $50 million of these swap agreements during our third quarter of 2015. We intend to cash settle all of these agreements upon issuance of the fixed rate notes thereby effectively locking in the fixed interest rate in effect at the time the swap agreements were initiated. The weighted average fixed rate of these agreements is 2.25%. We have designated these forward starting interest rate swap agreements, which expire on December 18, 2015, as cash flow hedges. The gain or loss on these agreements is deferred in other comprehensive income and will be amortized over the life of the fixed rate notes as a component of interest expense.
As of August 31, 2015, the maximum time frame for our foreign exchange forward contracts is 15 months. The amount of foreign exchange forward contracts greater than 12 months is not material.
For all derivatives, the net amount of accumulated other comprehensive income expected to be reclassified in the next 12 months is $3.2 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 nature and maturity.
The following table discloses the fair values of derivative instruments on our balance sheet (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | |
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 August 31, 2014 | 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 |
| | $ | 7.3 |
| | | |
|
| |
|
|
Foreign exchange contracts | Other current assets | | 105.9 |
| | 1.6 |
| | Other accrued liabilities | | $ | 104.6 |
| | $ | 0.8 |
|
Total | | | | | $ | 8.9 |
| | | | | | $ | 0.8 |
|
| | |
As of November 30, 2014 | 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 |
| | $ | 7.4 |
| | | | | | |
Foreign exchange contracts | Other current assets | | 106.3 |
| | 4.9 |
| | Other accrued liabilities | | $ | 156.4 |
| | $ | 1.4 |
|
Total | | | | | $ | 12.3 |
| | | | | | $ | 1.4 |
|
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, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | |
Fair Value Hedges - | | | | | | | | | | |
Derivative | | Income statement location | | Expense |
| | | | For the three months ended August 31, 2015 | | For the three months ended August 31, 2014 | | For the nine months ended August 31, 2015 | | For the nine months ended August 31, 2014 |
Interest rate contracts | | Interest expense | | $ | 1.2 |
| | $ | 1.3 |
| | $ | 3.7 |
| | $ | 3.8 |
|
|
| | | | | | | | | | | | | | | | | | |
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 |
| | 2015 | | 2014 | | | | 2015 | | 2014 |
Interest rate contracts | | $ | (0.2 | ) | | $ | — |
| | Interest expense | | $ | — |
| | $ | — |
|
Foreign exchange contracts | | 1.6 |
| | 1.1 |
| | Cost of goods sold | | 2.1 |
| | (0.3 | ) |
Total | | $ | 1.4 |
| | $ | 1.1 |
| | | | $ | 2.1 |
| | $ | (0.3 | ) |
| | | | | | | | | | |
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 |
| | 2015 | | 2014 | | | | 2015 | | 2014 |
Interest rate contracts | | $ | 0.8 |
| | $ | — |
| | Interest expense | | $ | (0.1 | ) | | $ | (0.1 | ) |
Foreign exchange contracts | | 4.7 |
| | 0.6 |
| | Cost of goods sold | | 5.4 |
| | (0.8 | ) |
Total | | $ | 5.5 |
| | $ | 0.6 |
| | | | $ | 5.3 |
| | $ | (0.9 | ) |
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, 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 acquisition | | 28.6 |
| | — |
| | — |
| | 28.6 |
|
Total | | $ | 30.0 |
| | $ | — |
| | $ | 1.4 |
| | $ | 28.6 |
|
|
| | | | | | | | | | | | | | | | |
| | | | August 31, 2014 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 93.8 |
| | $ | 93.8 |
| | $ | — |
| | $ | — |
|
Insurance contracts | | 103.3 |
| | — |
| | 103.3 |
| | — |
|
Bonds and other long-term investments | | 8.2 |
| | 8.2 |
| | — |
| | — |
|
Interest rate derivatives | | 7.3 |
| | — |
| | 7.3 |
| | — |
|
Foreign currency derivatives | | 1.6 |
| | — |
| | 1.6 |
| | — |
|
Total | | $ | 214.2 |
| | $ | 102.0 |
| | $ | 112.2 |
| | $ | — |
|
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 0.8 |
| | $ | — |
| | $ | 0.8 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | November 30, 2014 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 77.3 |
| | $ | 77.3 |
| | $ | — |
| | $ | — |
|
Insurance contracts | | 104.5 |
| | — |
| | 104.5 |
| | — |
|
Bonds and other long-term investments | | 8.5 |
| | 8.5 |
| | — |
| | — |
|
Interest rate derivatives | | 7.4 |
| | — |
| | 7.4 |
| | — |
|
Foreign currency derivatives | | 4.9 |
| | — |
| | 4.9 |
| | — |
|
Total | | $ | 202.6 |
| | $ | 85.8 |
| | $ | 116.8 |
| | $ | — |
|
Liabilities | | | | | | | | |
Foreign currency derivatives | | $ | 1.4 |
| | $ | — |
| | $ | 1.4 |
| | $ | — |
|
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 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) 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, 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, 2015 is summarized as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Beginning of year | | Acquisition-Date Fair Value | | Settlements | | Post Acquisition | | Impact of foreign currency | | Balance as of August 31, 2015 |
Contingent consideration related to acquisition | $ | — |
| | $ | 27.7 |
| | $ | — |
| | $ | 0.3 |
| | $ | 0.6 |
| | $ | 28.6 |
|
| |
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, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | |
| United States | | International |
| 2015 | | 2014 | | 2015 | | 2014 |
Defined benefit plans | | | | | | | |
Service cost | $ | 5.9 |
| | $ | 5.0 |
| | $ | 2.1 |
| | $ | 2.0 |
|
Interest costs | 7.9 |
| | 7.7 |
| | 3.0 |
| | 3.4 |
|
Expected return on plan assets | (10.0 | ) | | (9.7 | ) | | (4.3 | ) | | (4.7 | ) |
Amortization of prior service costs | — |
| | — |
| | — |
| | 0.1 |
|
Recognized net actuarial loss | 4.2 |
| | 3.0 |
| | 1.5 |
| | 1.2 |
|
Total pension expense | $ | 8.0 |
| | $ | 6.0 |
| | $ | 2.3 |
| | $ | 2.0 |
|
The following table presents the components of our pension expense of the defined benefit plans for the nine months ended August 31, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | |
| United States | | International |
| 2015 | | 2014 | | 2015 | | 2014 |
Defined benefit plans | | | | | | | |
Service cost | $ | 17.7 |
| | $ | 15.0 |
| | $ | 6.2 |
| | $ | 5.9 |
|
Interest costs | 23.7 |
| | 23.3 |
| | 9.1 |
| | 10.3 |
|
Expected return on plan assets | (30.1 | ) | | (29.1 | ) | | (13.0 | ) | | (14.1 | ) |
Amortization of prior service costs | — |
| | — |
| | 0.2 |
| | 0.3 |
|
Recognized net actuarial loss | 12.6 |
| | 8.9 |
| | 4.5 |
| | 3.5 |
|
Total pension expense | $ | 23.9 |
| | $ | 18.1 |
| | $ | 7.0 |
| | $ | 5.9 |
|
During the nine months ended August 31, 2015 and 2014, we contributed $12.6 million and $14.0 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2014 were $16.8 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, |
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
Other postretirement benefits |
|
|
|
|
|
|
|
|
Service cost |
| $ | 0.8 |
|
| $ | 1.0 |
|
| $ | 2.4 |
|
| $ | 2.8 |
|
Interest costs |
| 0.9 |
|
| 1.0 |
|
| 2.7 |
|
| 3.1 |
|
Total other postretirement expense |
| $ | 1.7 |
|
| $ | 2.0 |
|
| $ | 5.1 |
|
| $ | 5.9 |
|
| |
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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock-based compensation expense | $ | 3.1 |
| | $ | 3.0 |
| | $ | 17.0 |
| | $ | 15.1 |
|
Our 2015 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2014 annual grant. The weighted-average grant-date fair value of an option granted in 2015 was $12.52 and in 2014 was $9.48 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 range of assumptions for our various stock compensation plans:
|
| | | |
| 2015 | | 2014 |
Risk-free interest rates | 0.1 - 2.0% | | 0.1 - 2.7% |
Dividend yield | 2.1% | | 2.1% |
Expected volatility | 18.8% | | 15.6 - 20.1% |
Expected lives (in years) | 7.7 | | 5.8 |
The following is a summary of our stock option activity for the nine months ended August 31, 2015 and 2014:
|
| | | | | | | | | | | | | |
| 2015 | | 2014 |
(shares in millions) | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price |
Outstanding at beginning of period | 4.8 |
| | $ | 54.17 |
| | 4.6 |
| | $ | 47.73 |
|
Granted | 0.8 |
| | 76.32 |
| | 1.1 |
| | 71.12 |
|
Exercised | (0.6 | ) | | 42.77 |
| | (0.6 | ) | | 35.93 |
|
Outstanding at end of the period | 5.0 |
| | 58.96 |
| | 5.1 |
| | 54.02 |
|
Exercisable at end of the period | 3.3 |
| | $ | 51.95 |
| | 3.0 |
| | $ | 45.55 |
|
As of August 31, 2015, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $101.8 million and for options currently exercisable was $89.9 million. The total intrinsic value of all options exercised during the nine months ended August 31, 2015 and 2014 was $19.1 million and $20.9 million, respectively.
The following is a summary of our RSU activity for the nine months ended August 31, 2015 and 2014:
|
| | | | | | | | | | | | | |
| 2015 | | 2014 |
(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 | 239 |
| | $ | 67.60 |
| | 161 |
| | $ | 60.86 |
|
Granted | 135 |
| | 76.06 |
| | 180 |
| | 71.15 |
|
Vested | (84 | ) | | 71.30 |
| | (93 | ) | | 62.57 |
|
Forfeited | (12 | ) | | 73.03 |
| | (5 | ) | | 69.05 |
|
Outstanding at end of period | 278 |
| | $ | 70.35 |
| | 243 |
| | $ | 67.66 |
|
The following is a summary of our LTPP activity for the nine months ended August 31, 2015 and 2014:
|
| | | | | | | | | | | | | |
| 2015 | | 2014 |
(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 | 231 |
| | $ | 61.94 |
| | 334 |
| | $ | 51.73 |
|
Granted | 96 |
| | 74.02 |
| | 105 |
| | 69.04 |
|
Vested | (65 | ) | | 48.78 |
| | (118 | ) | | 44.47 |
|
Forfeited | (14 | ) | | 70.92 |
| | (2 | ) | | 44.47 |
|
Outstanding at end of period | 248 |
| | $ | 69.55 |
| | 319 |
| | $ | 60.15 |
|
Income taxes for the three months ended August 31, 2015, included $1.1 million of discrete tax benefits, consisting principally of the following: (i) the reversal of unrecognized tax benefits and related interest of $0.7 million associated with the expiration of a statute of limitation in an international jurisdiction; and (ii) a $0.4 million benefit as a result of the adjustment of prior year tax accruals upon completion of the related tax return.
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.
Income tax expense for the three months ended August 31, 2014 included discrete tax benefits of $6.2 million. The principal components of those discrete tax benefits recognized in the third quarter of 2014 included the following: (i) the reversal of international tax expense in the amount of $3.7 million related to fiscal 2013, initially recorded in the first quarter of 2014 as a result of a retroactive change in French tax law enacted in the first quarter of 2014, but reversed in the third quarter of 2014 when final legislative guidance on that retroactive French tax law was issued that allowed us to conclude this additional tax would no longer be required; (ii) a $1.4 million benefit as a result of the adjustment of prior year tax accruals upon completion of the related tax returns; and (iii) the reversal of previously provided reserves for uncertain tax benefits and related interest in the amount of $0.8 million, principally as a result of statute of limitation expirations.
Income tax expense for the nine months ended August 31, 2014 included discrete tax benefits of $5.5 million. The principal components of those discrete tax benefits recognized in the first nine months of 2014 included the following: (i) a $5.8 million benefit related to the reversal of previously provided reserves for uncertain tax benefits and related interest recognized in connection with our settlement with respect to the French taxing authority’s audits of the 2007-2013 tax years in the first quarter of 2014; (ii) a $1.4 million benefit as a result of the adjustment of prior year tax accruals upon completion of the related tax returns; (iii) the reversal of previously provided reserves for uncertain tax benefits and related interest in the amount of $0.8 million, principally as a result of statute of limitation expirations; less (iv) international tax expense of $2.2 million related to prior year adjustments agreed as part of the previously described French tax settlement.
As of August 31, 2015, we believe that the reasonably possible total amount of unrecognized tax benefits that could change in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlement would not result in a change to unrecognized tax benefits that is material to our consolidated financial results.
| |
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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Average shares outstanding – basic | 128.0 |
| | 129.6 |
| | 128.1 |
| | 130.3 |
|
Effect of dilutive securities: | | | | | | | |
Stock options/RSUs/LTPP | 1.2 |
| | 1.0 |
| | 1.1 |
| | 1.0 |
|
Average shares outstanding – diluted | 129.2 |
| | 130.6 |
| | 129.2 |
| | 131.3 |
|
The following table sets forth the stock options and RSUs for the three and nine months ended August 31, 2015 and 2014 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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Anti-dilutive securities | 0.5 |
| | 1.9 |
| | 0.5 |
| | 1.5 |
|
The following table sets forth the common stock activity for the three and nine months ended August 31, 2015 and 2014 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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Shares issued under stock option, employee stock purchase plans and RSUs | 0.2 |
| | 0.1 |
| | 0.6 |
| | 0.7 |
|
Shares repurchased in connection with the stock repurchase program | — |
| | 0.7 |
| | 1.0 |
| | 2.6 |
|
As of August 31, 2015, $43 million remained of the $400 million share repurchase authorization that was authorized by the Board of Directors in April 2013 and all of an additional $600 million share repurchase authorization that was authorized by the Board of Directors in March 2015 remains available.
| |
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, 2015 | | August 31, 2014 | | November 30, 2014 |
Foreign currency translation adjustment | $ | (152.3 | ) | | $ | 126.8 |
| | $ | 32.1 |
|
Unrealized gain on foreign currency exchange contracts | 2.1 |
| | 0.3 |
| | 3.0 |
|
Fair value of interest rate swaps (excluding settled interest rate swaps) | 0.5 |
| | — |
| | — |
|
Unamortized value of settled interest rate swaps | 2.8 |
| | 2.4 |
| | 2.9 |
|
Pension and other postretirement costs | (206.7 | ) | | (159.1 | ) | | (224.0 | ) |
Accumulated other comprehensive loss | $ | (353.6 | ) | | $ | (29.6 | ) | | $ | (186.0 | ) |
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, 2015 and 2014 (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 |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
Gains (losses) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
| $ | — |
|
| $ | — |
|
| $ | (0.1 | ) |
| $ | (0.1 | ) |
| Interest expense |
Foreign exchange contracts |
| 2.1 |
|
| (0.3 | ) |
| 5.4 |
|
| (0.8 | ) |
| Cost of goods sold |
Total before tax |
| 2.1 |
|
| (0.3 | ) |
| 5.3 |
|
| (0.9 | ) |
|
|
|
Tax effect |
| (0.6 | ) |
| 0.1 |
|
| (1.2 | ) |
| 0.3 |
|
| Income taxes |
Net, after tax |
| $ | 1.5 |
|
| $ | (0.2 | ) |
| $ | 4.1 |
|
| $ | (0.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and postretirement benefit adjustments: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs (1) |
| $ | — |
|
| $ | 0.1 |
|
| $ | 0.2 |
|
| $ | 0.3 |
|
| SG&A expense/ Cost of goods sold |
Amortization of net actuarial losses (1) |
| 5.7 |
|
| 4.2 |
|
| 17.1 |
|
| 12.4 |
|
| SG&A expense/ Cost of goods sold |
Total before tax |
| 5.7 |
|
| 4.3 |
|
| 17.3 |
|
| 12.7 |
|
|
|
|
Tax effect |
| (1.9 | ) |
| (1.4 | ) |
| (5.9 | ) |
| (4.3 | ) |
| Income taxes |
Net, after tax |
| $ | 3.8 |
|
| $ | 2.9 |
|
| $ | 11.4 |
|
| $ | 8.4 |
|
|
|
|
(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” and "Stubb's". 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, 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 |
|
| | | | | |
Three months ended August 31, 2014 | | | | | |
Net sales | $ | 621.9 |
| | $ | 420.9 |
| | $ | 1,042.8 |
|
Operating income excluding special charges | 122.1 |
| | 37.5 |
| | 159.6 |
|
Income from unconsolidated operations | 8.1 |
| | 0.7 |
| | 8.8 |
|
| Consumer | | Industrial | | Total |
| | | (in millions) | | |
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 |
|
| | | | | |
Nine months ended August 31, 2014 | | | | | |
Net sales | $ | 1,852.2 |
| | $ | 1,217.4 |
| | $ | 3,069.6 |
|
Operating income excluding special charges | 302.3 |
| | 103.6 |
| | 405.9 |
|
Income from unconsolidated operations | 19.0 |
| | 1.1 |
| | 20.1 |
|
A reconciliation of operating income excluding special charges (which we use to measure segment profitability) to operating income is as follows:
|
| | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
(millions) | August 31, 2015 | August 31, 2014 | | August 31, 2015 | August 31, 2014 |
Operating income | $ | 138.7 |
| $ | 157.3 |
| | $ | 336.2 |
| $ | 403.6 |
|
Add: Special charges included in cost of goods sold | 3.4 |
| — |
| | 3.4 |
| — |
|
Add: Other special charges (including a non-cash impairment charge in 2015) | 11.7 |
| 2.3 |
| | 59.1 |
| 2.3 |
|
Operating income excluding special charges | $ | 153.8 |
| $ | 159.6 |
| | $ | 398.7 |
| $ | 405.9 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Our Business
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. Customers range from retail outlets and food manufacturers to food service businesses. 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. Consistent with market conditions in each segment, our consumer business has a higher overall profit margin than our industrial business. 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 consumers a range of products from premium to value-priced.
Our Growth Model and Outlook
Our growth model is straightforward – we are increasing sales and profits by investing in the business and funding these investments, in part, with cost savings from our Comprehensive Continuous Improvement (CCI) program. This simple model has been the driver of our success and is our plan for growth in the future.
Increasing Sales and Profits – 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%. 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. We are fueling our investment in growth mainly with cost savings from our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization. In addition to funding brand marketing support, product innovation and other growth initiatives, our CCI program helps offset higher material costs and is contributing to higher operating income and earnings per share.
In 2015, we expect the strength of the U.S. dollar and the resultant unfavorable effects of foreign currency exchange to have a negative impact, as compared to 2014, on our sales and earnings. In 2015, sales are projected to grow at the upper end of a 4% to 6% sales growth target on a constant currency basis, driven by building brand equity, a strong innovation pipeline, expanded distribution and acquisitions. For the full year 2015, an unfavorable foreign currency exchange is expected to have a 5% negative impact on sales. Diluted earnings per share was $3.34 in 2014. Excluding the earnings per share impact of special charges of $3.7 million ($5.2 million before tax) in 2014, adjusted diluted earnings per share was $3.37 in 2014. Adjusted diluted earnings per share (excluding an estimated $0.36 of special charges) are projected to be at the lower end of our $3.47 to $3.54 guidance range in 2015, an increase of 3% to 5%. On a constant currency basis, we expect adjusted diluted earnings per share in 2015 to grow at the lower end of our 7% to 9% guidance range over adjusted diluted earnings per share of $3.37 in 2014. We expect this growth rate to be mainly driven by increased adjusted operating income.
Our business generates strong cash flow, and we have a balanced use of cash. We are using our cash to fund shareholder dividends, with annual increases in each of the past 29 years, and to fund capital expenditures, acquisitions and share repurchases.
Investing in the Business – We are investing for growth through innovation, brand marketing support and acquisitions.
In recent years, 8% to 10% of sales came from new products launched in the past three years. For our consumer business, 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. In 2015, these include new varieties in the relaunch of our entire gourmet product line. That relaunch also includes new packaging and a flavor seal technology. Other innovation includes flavored sea salt grinders across North America, an Indian range of seasoning blends in the U.K. and further extensions of our Vahine dessert items in France. For industrial customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. In 2015, 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.
In 2014, we increased our investment in brand marketing by 9% over 2013 and more than 50% from five years earlier. Further increases in brand marketing support are planned in 2015. We measure the return on this investment and have identified digital marketing as one of 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 is expected to be approximately one third of total advertising in 2015, compared to 11% in 2010.
Through acquisitions, we are adding leading brands to extend our reach into new geographic regions where we currently have little or no distribution. We have a particular interest in emerging markets that offer high growth potential, such as China and India. Sales in emerging markets accounted for 17% of total company net sales in fiscal year 2014, up from 10% of net sales in 2011. In our developed markets, we are seeking consumer brands that have a defensible market position and meet a growing consumer trend for flavor.
Cost Savings – CCI is our ongoing initiative to improve productivity and reduce costs throughout the company. With CCI, each business unit develops cost reduction opportunities and sets specific goals. Our projects fall into the areas of cost optimization, cost avoidance and productivity that includes streamlining processes. However, the only amounts we report are actual cost reductions where costs have decreased from the prior year. CCI cost savings totaled $65 million in fiscal year 2014, of which $54 million lowered cost of goods sold. In 2015, CCI cost savings are expected to reach at least $75 million, with a large portion impacting our cost of goods sold. Another $20 million of cost savings are expected mainly from streamlining actions underway in North America and reorganization activities in our Europe, Middle East and Africa (EMEA) region. Material cost inflation is expected to be in the mid single-digit range in 2015, compared to approximately 2% in 2014. We anticipate the 2015 impact of material cost inflation will be largely offset by our cost savings and pricing actions.
RESULTS OF OPERATIONS – COMPANY
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Net sales | $ | 1,059.9 |
| | $ | 1,042.8 |
| | $ | 3,094.4 |
| | $ | 3,069.6 |
|
Percent increase | 1.6 | % | | 2.6 | % | | 0.8 | % | | 3.9 | % |
Gross profit | $ | 421.9 |
| | $ | 420.1 |
| | $ | 1,215.6 |
| | $ | 1,224.1 |
|
Gross profit margin | 39.8 | % | | 40.3 | % | | 39.3 | % | | 39.9 | % |
Sales for the third quarter of 2015 increased by 1.6% from the prior year level and included a 5.7% unfavorable impact from foreign currency exchange rates. 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), our sales increased 7.3% over the prior year level as higher volume and product mix, driven by both our consumer and industrial businesses, increased net sales by 4.0%, pricing actions added 1.1%, and acquisitions added 2.2%.
Sales for the nine months ended August 31, 2015, increased by 0.8% over the 2014 level and included a 5.1% unfavorable impact from foreign currency exchange rates. On a constant currency basis, our sales increased 5.9% over the prior year level as higher volume and product mix, driven by both our consumer and industrial businesses, increased net sales by 3.8%, pricing actions added 1.2%, and acquisitions added 0.9%.
Gross profit for the third quarter of 2015 increased by $1.8 million, or 0.4%, over the comparable period in 2014, while our gross profit margin was 50 basis points lower than the year ago quarter at 39.8%. Gross profit for the nine months ended August 31, 2015 decreased by $8.5 million, or 0.7%, from the comparable period in 2014, while our gross profit margin was 60 basis points lower from the first nine months of 2014 at 39.3%. These decreases in gross profit margin for both the quarter and year-to-date period were primarily due to sharply lower gross profit in our Kohinoor business, as well the impact on our other operations of higher material costs, mitigated by CCI cost savings and pricing actions. During the three and nine month ended August 31, 2015, we recorded $3.4 million of special charges related to inventory writedowns directly associated with the decision to discontinue the bulk-packaged and broken rice product lines of our Kohinoor business in India. While included in cost of goods sold in our income statement, these costs are being treated as special charges (see note 3 to our financial statements). In addition to the $3.4 million of special charges, the Kohinoor business also recognized lower gross profit, as compared to the 2014 levels, of $2.3 million and $5.7 million for the three and nine months ended August 31, 2015. On a combined basis, the reduction in Kohinoor’s gross profit by $5.8 million for the three months ended August 31, 2015, as compared to the corresponding period in 2014, accounted for 54 basis points of our overall 50 basis point reduction in gross profit margin. On a combined basis, the reduction in Kohinoor’s gross profit by $9.2 million for the nine months ended August 31, 2015, as compared to the corresponding period in 2014, accounted for 30 basis points of our overall 60 basis point reduction in gross profit percentage.
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Selling, general & administrative expense (SG&A) | $ | 271.5 |
| | $ | 260.5 |
| | $ | 820.3 |
| | $ | 818.2 |
|
Percent of net sales | 25.6 | % | | 25.0 | % | | 26.5 | % | | 26.7 | % |
SG&A as a percentage of net sales increased by 60 basis points for the three months ended August 31, 2015 as compared to the third quarter of 2014. Driving this increase in SG&A as a percentage of sales was higher benefits expense and brand marketing, partially offset by lower distribution and selling costs. For the nine months ended August 31, 2015 compared to the corresponding period in 2014, lower distribution and selling costs as a percentage of sales were partly offset by higher employee benefits expense and brand marketing support, causing a decrease of 20 basis points in SG&A as a percentage of net sales. Brand marketing support for the three and nine months ended August 31, 2015, increased by $2.4 million and $4.7 million, respectively, over the same periods in 2014. In connection with our acquisitions of Brand Aromatics, Drogheria & Alimentari and Stubb's, we incurred $0.8 million and $2.8 million of transaction costs for the three and nine months ended August 31, 2015, respectively, which were included in SG&A.
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Special charges included in cost of goods sold | $ | 3.4 |
| | $ | — |
| | $ | 3.4 |
| | $ | — |
|
Other special charges | 11.7 |
| | 2.3 |
| | 59.1 |
| | 2.3 |
|
Total special charges | $ | 15.1 |
| | $ | 2.3 |
| | $ | 62.5 |
| | $ | 2.3 |
|
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 related to our Kohinoor consumer business in India, $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, including $3.4 million classified in cost of goods sold. In addition to the Kohinoor charges of $13.0 million recorded in the third quarter, 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. See note 3 of the financial statements for more details on these charges and our basis for classifying amounts as special charges.
For the three and nine months ended August 31, 2014, we recorded $2.3 million of special charges, principally related to employee severance, with $1.3 million related to our industrial business segment and $1.0 million related to our consumer business segment.
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Interest expense | $ | 13.6 |
| | $ | 12.4 |
| | $ | 39.5 |
| | $ | 37.3 |
|
Other income, net | 0.2 |
| | 0.3 |
| | 0.6 |
| | 0.8 |
|
Interest expense was higher in the three and nine months ended August 31, 2015 compared to the same periods of the prior year due to higher average borrowings.
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Income from consolidated operations before income taxes | $ | 125.3 |
| | $ | 145.2 |
| | $ | 297.3 |
| | $ | 367.1 |
|
Income taxes | 37.4 |
| | 31.1 |
| | 71.9 |
| | 97.3 |
|
Effective tax rate | 29.8 | % | | 21.4 | % | | 24.2 | % | | 26.5 | % |
The provision for income taxes is based on the then-current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements of U.S. GAAP. Examples of such types of discrete items not related to ordinary income of the current fiscal year include, but are not limited to, changes in estimates of the outcome of tax matters related to prior years (including reversals of reserves upon the lapsing of statutes of limitations), provision-to-return adjustments, and the settlement of tax audits.
Income tax expense for the three and nine months ended August 31, 2015 included net discrete tax benefits of $1.1 million and $18.3 million, respectively. Income tax expense for the three and nine months ended August 31, 2014 included net discrete tax benefits of $6.2 million and $5.5 million, respectively. See note 9 for a further description of these discrete items.
In addition to the discrete tax items described above, our effective tax rate of 21.4% for the three months ended August 31, 2014, benefited from the cumulative catch up adjustment necessary to reflect the reduction of our estimated annual effective tax rate for the nine months ended August 31, 2014, from that estimated for the first six months of 2014. That adjustment included the reversal of the higher taxes provided on our applicable 2014 pre-tax earnings during the first six months of 2014, initially recorded in response to the change in French tax law, but reversed in the third quarter of 2014 when final legislative guidance on that retroactive French tax law was issued that allowed us to conclude this additional tax would no longer be required. Our effective tax rate, including the net discrete tax benefits identified above, was 26.5%, which represented a reduction from the corresponding rate of 29.8% recognized for the first half of 2014.
Our effective tax rate of 29.8% for the three months ended August 31, 2015, exceeded the 21.4% effective tax rate for the corresponding 2014 quarter due to lower discrete tax benefits noted above in the 2015 quarter, the previously described cumulative catch up adjustment in the third quarter of 2014 resulting from the change in French tax law and final legislative guidance, higher non-deductible losses in 2015 in our Kohinoor majority-owned subsidiary (including special charges) compared to the prior year level, and from other changes in our expected mix of business across tax jurisdictions.
Our effective tax rate of 24.2% for the nine months ended August 31, 2015, was lower than the 26.5% effective tax rate for the corresponding period in 2014, for the following reasons: (i) higher non-deductible losses in 2015 in our Kohinoor majority-owned subsidiary (including special charges) compared to the 2014 level; (ii) other changes in our expected mix of business across tax jurisdictions; partially offset by (iii) higher discrete tax benefits noted above in the 2015 period.
Absent additional discrete items in the fourth quarter of 2015, we expect our annual effective tax rate for 2015 to be approximately 26%.
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
(in millions) | 2015 | | 2014 | | 2015 | | 2014 |
Income from unconsolidated operations | $ | 9.7 |
| | $ | 8.8 |
| | $ | 27.0 |
| | $ | 20.1 |
|
Income from unconsolidated operations for the three and nine months ended August 31, 2015 was $0.9 million and $6.9 million higher, respectively, compared to the corresponding periods in 2014. For both the three and nine months ended August 31, 2015 as compared to the 2014 periods, income from unconsolidated operations, which is presented net of earnings attributable to non-controlling interests, included a $1.9 million benefit due to the allocation of Kohinoor's total special charge to its 15%
minority stakeholder. Excluding this $1.9 million benefit, the remainder of these fluctuations were attributable to our joint venture in Mexico. For the third quarter of 2015, as compared to the corresponding period in 2014, income from our Mexican joint venture was negatively impacted by an unfavorable exchange rate. Higher sales and an increase in gross margin percentage from our Mexican joint venture more than offset an unfavorable exchange rate for the nine months ended August 31, 2015 as compared to the corresponding period in 2014. The increased gross margin percentage was due largely to lower commodity costs.
The following table outlines the major components of the change in diluted earnings per share from 2014 to 2015:
|
| | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
2014 Earnings per share – diluted | $ | 0.94 |
| | $ | 2.21 |
|
Impact of total special charges | (0.11 | ) | | (0.36 | ) |
Impact of special charges attributable to non-controlling interests | 0.02 |
| | 0.01 |
|
Impact of operating income | (0.03 | ) | | (0.04 | ) |
Impact of effective tax rate | (0.06 | ) | | 0.06 |
|
Impact of unconsolidated income | — |
| | 0.04 |
|
Impact of higher interest expense | (0.01 | ) | | (0.01 | ) |
Impact of lower shares outstanding | 0.01 |
| | 0.04 |
|
2015 Earnings per share – diluted | $ | 0.76 |
| | $ | 1.95 |
|
RESULTS OF OPERATIONS - SEGMENTS
CONSUMER BUSINESS
|
| | | | | | | | | | | | | | | |
| Three months ended August 31, | | Nine months ended August 31, |
| 2015 | | 2014 | | 2015 | | 2014 |
(in millions) | | | | | | | |
Net sales | $ | 630.5 |
| | $ | 621.9 |
| | $ | 1,850.6 |
| | $ | 1,852.2 |
|
Percent increase/(decrease) | 1.4 | % | | 1.5 | % | | (0.1 | )% | | 4.5 | % |
Operating income, excluding special charges | 114.6 |
| | 122.1 |
| | 286.9 |
| | 302.3 |
|
Operating income margin, excluding special charges | 18.2 | % | | 19.6 | % | | 15.5 | % | | 16.3 | % |
In the third quarter of 2015, sales of our global consumer business increased by 1.4%, which included a 5.5% unfavorable impact from foreign currency rates, as compared to the third quarter of 2014. On a constant currency basis, global consumer sales increased by 6.9% in the third quarter of 2015, due to higher volume and product mix of 4.2% and pricing actions that added 0.1% to sales. Our acquisitions of Drogheria & Alimentari (D&A) and Stubb's, during the second and third quarters, respectively, increased sales by 2.6% during the third quarter of 2015.
In the Americas, consumer sales rose 1.7% in the third quarter of 2015 as compared to the third quarter of 2014. That increase included a 1.6% unfavorable impact from foreign currency rates. On a constant currency basis, Americas consumer sales increased by 3.3%, which included a 2.4% increase attributable to higher volume and product mix, due to strength in items such as recipe mixes, Grill Mates, Kitchen Basics and Zatarain's products, and a 0.7% increase in pricing. Product innovation and brand marketing support, particularly in digital, are driving these results. The acquisition of Stubb's, which closed in August 2015, added 0.2% to sales for the quarter.
In the EMEA region, consumer sales decreased 0.7% in the third quarter of 2015 as compared to the prior year, but that decrease included an unfavorable impact of 18.2% from foreign exchange rates. On a constant currency basis, consumer sales rose 17.5% as a result of higher volumes and product mix that increased sales by 5.3% and 1.1% from higher pricing. The acquisition of D&A, which closed at the end of the second quarter 2015, added 11.1% to sales for the third quarter. Our core business growth in our EMEA region was broad-based, with increases in each of our top markets driven by our higher brand mark