NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The financial statements include the accounts of our majority-owned or controlled subsidiaries and affiliates. Intercompany transactions have been eliminated. Investments in unconsolidated affiliates, over which we exercise significant influence, but not control, are accounted for by the equity method. Accordingly, our share of net income or loss of unconsolidated affiliates is included in net income.
Foreign Currency Translation
For majority-owned or controlled subsidiaries and affiliates, if located outside of the U.S., with functional currencies other than the U.S. dollar, asset and liability accounts are translated at the rates of exchange at the balance sheet date and the resultant translation adjustments are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Income and expense items are translated at average monthly rates of exchange. Gains and losses from foreign currency transactions of these majority-owned or controlled subsidiaries and affiliates
—
that is, transactions denominated in other than their functional currency
—
are included in net earnings.
Our unconsolidated affiliates located outside the U.S. generally use their local currencies as their functional currencies. The asset and liability accounts of those unconsolidated affiliates are translated at the rates of exchange at the balance sheet date, with the resultant translation adjustments included in accumulated other comprehensive income (loss) of those affiliates. Income and expense items of those affiliates are translated at average monthly rates of exchange. We record our ownership share of the net assets and accumulated other comprehensive income (loss) of our unconsolidated affiliates in our consolidated balance sheet on the lines entitled “Investments and other assets” and “Accumulated other comprehensive loss,” respectively. We record our ownership share of the net income of our unconsolidated affiliates in our consolidated income statement on the line entitled “Income from unconsolidated operations.”
Use of Estimates
Preparation of financial statements that follow accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual amounts could differ from these estimates.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard or average costs which approximate the first-in, first-out costing method.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost and depreciated over its estimated useful life using the straight-line method for financial reporting and both accelerated and straight-line methods for tax reporting. The estimated useful lives range from
20
to
50
years for buildings and
3
to
12
years for machinery, equipment and computer software. Assets leased under capital leases are depreciated over the shorter of the lease term or their useful lives unless it is reasonable certain that we will obtain ownership by the end of the lease term. Repairs and maintenance costs are expensed as incurred.
Computer Software
We capitalize costs of software developed or obtained for internal use. Capitalized software development costs include only (1) direct costs paid to others for materials and services to develop or buy the software, (2) payroll and payroll-related costs for employees who work directly on the software development project and (3) interest costs while developing the software. Capitalization of these costs stops when the project is substantially complete and ready for use. Software is amortized using the straight-line method over a range of
3
to
8
years, but not exceeding the expected life of the product. We capitalized
$13.2 million
,
$12.8 million
and
$21.8 million
of software development costs during 2018, 2017 and 2016, respectively.
Goodwill and Other Intangible Assets
We review the carrying value of goodwill and indefinite-lived intangible assets and conduct tests of impairment on an annual basis as described below. We also test goodwill for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount and test indefinite-lived
intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired. Separable intangible assets that have finite useful lives are amortized over those lives.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from these estimates.
Goodwill Impairment
Our reporting units used to assess potential goodwill impairment are the same as our business segments. We calculate fair value of a reporting unit by using a discounted cash flow model and then compare that to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the calculated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value.
Indefinite-lived Intangible Asset Impairment
Our indefinite-lived intangible assets consist of brand names and trademarks. We calculate fair value by using a relief-from-royalty method or discounted cash flow model and then compare that to the carrying amount of the indefinite-lived intangible asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment charge would be recorded to the extent the recorded indefinite-lived intangible asset exceeds the fair value.
Long-lived Asset Impairment
Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss would be calculated based on the excess of the asset’s carrying value over its estimated fair value.
Revenue Recognition
We recognize revenue when we have an agreement with the customer
—
upon either shipment or delivery, depending upon contractual terms
—
and when the sales price is fixed or determinable and collectability is reasonably assured. We reduce revenue for estimated product returns, allowances and price discounts based on historical experience and contractual terms.
Trade allowances, consisting primarily of customer pricing allowances and rebates, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Revenue is recorded net of trade allowances.
Trade accounts receivable are amounts billed and currently due from customers. We have an allowance for doubtful accounts to reduce our receivables to their net realizable value. We estimate the allowance for doubtful accounts based on the aging of our receivables and our history of collections.
Shipping and Handling
Shipping and handling costs on our products sold to customers are included in selling, general and administrative expense in the income statement. Shipping and handling expense was
$173.7 million
,
$111.0 million
and
$91.2 million
for
2018
,
2017
and
2016
, respectively.
Research and Development
Research and development costs are expensed as incurred and are included in selling, general and administrative expense in the income statement. Research and development expense was
$69.4 million
,
$66.1 million
and
$61.0 million
for
2018
,
2017
and
2016
, respectively.
Brand Marketing Support
Total brand marketing support costs, which are included in selling, general and administrative expense in the income statement, were
$324.8 million
,
$276.3 million
and
$252.2 million
for
2018
,
2017
and
2016
, respectively. Brand marketing support costs include advertising, promotions and customer trade funds used for cooperative advertising. Promotion costs include public relations, shopper marketing, social marketing activities, general consumer promotion activities and depreciation on assets used in these promotional activities. Advertising costs
include the development, production and communication of advertisements through television, digital, print and radio. Development and production costs are expensed in the period in which the advertisement is first run. All other costs of advertisement are expensed as incurred. Advertising expense was
$147.2 million
,
$117.8 million
and
$102.9 million
for
2018
,
2017
and
2016
, respectively.
Employee Benefit and Retirement Plans
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. During fiscal years 2018 and 2017 we made significant changes to our employee benefit and retirement plans as discussed in note 10.
We recognize the overfunded or underfunded status of our defined benefit pension plans as an asset or a liability in the balance sheet, with changes in the funded status recorded through other comprehensive income in the year in which those changes occur.
The expected return on plan assets is determined using the expected rate of return and a calculated value of plan assets referred to as the market-related value of plan assets. Differences between assumed and actual returns are amortized to the market-related value of assets on a straight-line basis over
five
years.
We use the corridor approach in the valuation of defined benefit pension and postretirement benefit plans. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. Those unrecognized gains and losses are amortized when the net gains and losses exceed
10%
of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining service period to retirement date of active plan participants.
Accounting Pronouncements Adopted in 2018
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02
Income Statement
—
Reporting Comprehensive Income (Topic 220)
—
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Pub.L. 115-97 "An
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018", (
referred to herein as the "U.S. Tax Act") enacted in December 2017. We early adopted this new accounting pronouncement effective December 1, 2017. The adoption resulted in a reclassification of
$20.9 million
from accumulated other comprehensive income to retained earnings in 2018.
In July 2015, the FASB issued ASU 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. We adopted ASU No. 2015-11 effective December 1, 2017. The adoption of this new accounting pronouncement did not have a material impact on our financial statements.
Recently Issued Accounting Pronouncements — Pending Adoption
Recently issued accounting pronouncements to be adopted in fiscal year 2019:
In May 2014, the FASB issued ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
, which supersedes previously existing revenue recognition guidance. Under this new guidance, companies will apply a principles-based five-step model to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration for which the company expects to be entitled to in exchange for those goods or services. The model encompasses the following steps: (1) determination of whether a contract - an agreement between two or more parties that creates legally enforceable rights and obligations - exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. The new revenue recognition guidance allows companies to account for shipping and handling activities that occur before and after the customer has obtained control of a product as fulfillment activities rather than as a promised service. We intend to apply this accounting policy election. In addition, the new revenue guidance requires that customer payments be accounted for as a reduction in the transaction price unless the payment to a customer is in exchange for a distinct good or service. The adoption of
this standard will not have an effect on the timing of our revenue recognition. This new standard will be effective beginning in fiscal year 2019 and may be applied using a full retrospective method or a modified retrospective transition method. We will adopt ASU No 2014-09 using the full retrospective method on December 1, 2018, the first day of our fiscal year 2019.
Upon adoption of the new ASU in fiscal 2019, we plan to make the following changes to our revenue recognition accounting policy and disclosure practices. We will classify shipping and handling expenses as a component of cost of goods sold rather than our current practice of recording these costs as a component of selling, general and administrative expense. Also, we will classify all payments to direct and indirect customers, including certain trade funds used for cooperative advertising and displays, as a reduction of revenue. Currently, certain of those payments are presented as brand marketing support costs and included as a component of selling, general and administrative expense. While there will be no effect on operating income, net income, or basic and diluted earnings per share upon our adoption of ASU No. 2014-09 in 2019, we currently estimate the following income statement reclassifications to our historical results as a result of that adoption: (i) a reduction in annual net sales by approximately
$100 million
to
$110 million
for each of the years ended November 30, 2018, 2017 and 2016; (ii) an increase in cost of goods sold by
$173.7 million
,
$111.0 million
, and
$91.2 million
in the years ended November 30, 2018, 2017 and 2016, respectively; and (iii) a decrease in selling, general and administrative expense by an amount ranging from
$273.7 million
to
$283.7 million
for the year ended November 30, 2018; from
$211.0 million
to
$221.0 million
for the year ended November 30, 2017; and from
$191.2 million
to
$201.2 million
for the year ended November 30, 2016.
In March 2017, the FASB issued ASU No. 2017-07
Compensation
—
Retirement Benefits (Topic 715)
—
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This guidance revises how employers that sponsor defined benefit pension and other postretirement plans present the net periodic benefit cost in their income statement and requires that the service cost component of net periodic benefit cost be presented in the same income statement line items as other employee compensation costs from services rendered during the period. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. The other components of the net periodic benefit cost must be presented separately from the line items that include the service cost and outside of any subtotal of operating income on the income statement. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019 and will be applied on a retrospective basis. Adoption of the new standard will solely impact classification within our Consolidated Statements of Income, with no change to net income or basic and diluted earnings per share. We expect the following annual income statement reclassifications upon our adoption of ASU No. 2017-07 on December 1, 2018, the beginning of our fiscal year 2019: (i) an increase (decrease) in cost of goods sold by
$2.7 million
,
$1.4 million
and
$(1.2) million
for the years ended November 30, 2018, 2017 and 2016, respectively; (ii) an increase (decrease) in selling, general and administrative expense by
$9.5 million
,
$1.2 million
and
$(7.2) million
for the years ended November 30, 2018, 2017 and 2016, respectively; (iii) an increase (decrease) in operating income by
$(12.2) million
,
$(2.6) million
, and
$8.4 million
for the years ended November 30, 2018, 2017, and 2016, respectively; and (iv) an increase (decrease) in income included in the income statement caption "Other income (expense), net" by
$12.2 million
,
$2.6 million
, and
$(8.4) million
for the years ended November 30, 2018, 2017 and 2016, respectively.
In August 2017, the FASB issued ASU No. 2017-12
Derivatives and Hedging (Topic 815)
—
Targeted Improvements to Accounting for Hedging Activities.
This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. Early adoption is permitted in any interim period or fiscal year before the effective date for all entities. We expect to adopt this guidance effective December 1, 2018. We currently do not expect this guidance to have a material impact on our financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. This new standard will be effective beginning in fiscal year 2019 and is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of December 1, 2018, the first day of our fiscal year 2019. We expect the cumulative-effect adjustment upon
adoption to be immaterial. The on-going effect of the adoption of the standard will depend on the nature and amount of future transactions.
In January 2017, the FASB issued ASU No. 2017-01
Business Combinations (Topic 805)
-
Clarifying the Definition of a Business.
This guidance changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in Accounting Standards Codification (ASC 606)
Revenue from Contracts with Customers.
The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. We currently cannot estimate the impact that adoption of this ASU will have on our financial statements and related disclosures as its application is dependent on the facts and circumstances of individual transactions.
In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532
Disclosure Update and Simplification
, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. In addition, the amendments provide that disclosure requirements related to the analysis of shareholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement, as well as the amount of dividends per share for each class of shares. This rule was effective on November 5, 2018; and the expanded interim disclosure requirements for changes in shareholders' equity will be effective for us for our quarterly reporting in the year ending November 30, 2019.
Recently issued accounting pronouncements to be adopted in fiscal years 2020 or 2021:
In January 2017, the FASB issued ASU No. 2017-04
Intangibles
—
Goodwill and Other Topics (Topic 350)
—
Simplifying the Test for Goodwill Impairment.
This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2021. Early adoption is permitted for all entities for annual and interim goodwill impairment testing dates after January 1, 2017. While we are still evaluating the timing of adoption, we currently do not expect this guidance to have a material impact on our financial statements.
In February 2016, the FASB issued ASU 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. Our leases principally relate to: (i) certain real estate, including that related to a number of administrative, distribution and manufacturing locations, and, beginning in May 2018, to our new headquarters building; (ii) certain machinery and equipment, including a corporate airplane and automobiles; and (iii) certain software. The new guidance in ASU No. 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all 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). In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842) Targeted Improvements
, which provides an additional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. We intend to adopt the requirements of the new standard via a cumulative-effect adjustment without restating prior periods. Based on our assessment to date, we expect that the adoption of ASU 2016-02 will not have a material effect on our results of operations but will result in an increase in lease-related assets and liabilities recognized in our Consolidated Balance Sheets. We are unable to quantify the amount of that increase at this time.
2. ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.
Acquisition of RB Foods
On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately
$4.21 billion
, net of acquired cash of
$24.3 million
. In December 2017, we paid
$4.2 million
associated with the final working capital adjustment. The acquisition was funded through our issuance of approximately
6.35 million
shares of common stock non-voting (see note 13) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6). The acquired market-leading brands of RB Foods include French’s
®
,
Frank’s RedHot
®
and Cattlemen’s
®
, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. Condiments category and provide significant international growth opportunities for our consumer and flavor solutions segments. At the time of the acquisition, annual sales of RB Foods were approximately
$570 million
. The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of RB Foods’ operations are included in our consolidated financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.
The purchase price of RB Foods was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management.
During 2018, we completed the final valuation of the RB Foods acquisition which resulted in the following fair value allocations, net of cash acquired, summarized in the table below (in millions):
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
36.9
|
|
|
Inventories
|
67.1
|
|
|
Property, plant and equipment
|
38.5
|
|
|
Goodwill
|
2,648.5
|
|
|
Intangible assets
|
2,430.0
|
|
|
Other assets
|
4.4
|
|
|
Trade accounts payable
|
(65.8
|
)
|
|
Other accrued liabilities
|
(35.0
|
)
|
|
Deferred taxes
|
(893.9
|
)
|
|
Other long-term liabilities
|
(20.8
|
)
|
|
Total
|
$
|
4,209.9
|
|
The impact of revising the fair value estimate of the RB Foods acquisition during 2018 decreased indefinite-lived brand names and trademarks by
$155.0 million
, decreased definite-lived intangible assets by
$10.0 million
, decreased deferred taxes by
$60.9 million
, increased other assets and liabilities, net, by
$1.9 million
and increased goodwill by
$102.2 million
. These revisions were primarily associated with finalizing the fair value estimate for the acquired intangible assets as well as the related deferred tax effects.
The valuation of the acquired net assets of RB Foods includes
$2,320.0 million
allocated to indefinite-lived brand assets and
$110.0 million
allocated to definite-lived intangible assets with a weighted-average life of
15 years
. We valued brand names and trademarks using the relief from royalty method, an income approach. For customer relationships, we used the distributor method, a variation of the excess earnings method that uses distributor-based inputs for margins and contributory asset charges. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the royalty rates, the discount rates that appropriately reflect the risks inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.
We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of
$20.9 million
that was recognized in cost of goods sold in 2017 as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach.
The fair value of property, plant and equipment was determined using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
Deferred income tax assets and liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases all computed using tax rates in effect as of the acquisition date.
We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items.
As a result of the acquisition, we recognized a total of
$2,648.5 million
of goodwill. That goodwill, 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 consumer and flavor solutions customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce.
Total transaction and integration expenses related to the RB Foods acquisition were
$99.6 million
, of which
$59.8 million
and
$39.8 million
represented transaction expenses and integration expenses, respectively. These costs primarily consist of the amortization of the acquisition-date fair value adjustment of inventories in the amount of
$20.9 million
that is included in cost of goods sold for 2017; outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition, including the costs of
$15.4 million
related to the bridge financing commitment that was included in other debt costs for 2017. The following are the transaction and integration expenses related to the RB Foods acquisition that we have recorded for the years ended November 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
Transaction expenses included in cost of goods sold
|
$
|
—
|
|
$
|
20.9
|
|
|
Transaction expenses included in other debt costs
|
—
|
|
15.4
|
|
|
Other transaction expenses
|
0.3
|
|
23.2
|
|
|
Integration expenses
|
22.2
|
|
17.6
|
|
|
Total
|
$
|
22.5
|
|
$
|
77.1
|
|
The incremental impact to our sales from RB Foods was
$190.1 million
for 2017. The impact of RB Foods on our 2017 consolidated income before taxes, including the effect of the transaction and integration expenses previously noted, and financing costs was a loss of approximately
$42 million
.
The following unaudited pro forma information presents consolidated financial information as if RB Foods had been acquired at the beginning of fiscal 2016. Interest expense has been adjusted to reflect the debt issued to finance the acquisition as though that debt had been outstanding at December 1, 2015. The pro forma results reflect amortization expense of approximately
$7.3 million
, relating to definite-lived intangible assets recorded based upon third-party valuations. The pro forma results for 2016 also include transaction and integration costs of
$40.8 million
,
$20.9 million
of amortization of the acquisition-date fair value adjustment of inventories, and
$15.4 million
associated with the bridge financing commitment, all assuming that the acquisition had occurred as of December 1, 2015. The pro forma results for 2017 exclude the previously noted items, as they have been included, on a pro forma basis, in the results for 2016. The pro forma adjustments previously noted have been adjusted for the applicable income tax impact. Basic and diluted shares outstanding have been adjusted to reflect the issuance of
6.35 million
shares of our common stock non-voting to partially finance the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
Year ended November 30,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
Net sales
|
$
|
5,209.0
|
|
|
$
|
4,969.3
|
|
|
Net income
|
548.7
|
|
|
465.5
|
|
|
Earnings per share – basic
|
$
|
4.19
|
|
|
$
|
3.50
|
|
|
Earnings per share – diluted
|
4.14
|
|
|
3.46
|
|
These unaudited pro forma consolidated results are not adjusted for changes in the business that will take place subsequent to our acquisition, including, but not limited to, additional transaction and integration costs that have or may be incurred. Accordingly, the above unaudited pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had been completed as of December 1, 2015, nor are they indicative of future consolidated results.
Other Acquisitions
On September 21, 2018, we purchased the remaining
10%
ownership interest in our Shanghai subsidiary for a cash payment of
$12.7 million
In conjunction with our purchase of this remaining 10% minority interest, we have eliminated the minority interest in Shanghai and recorded an adjustment of
$12.4 million
to retained earnings in our consolidated balance sheet. The
$12.7 million
payment is reflected in the financing activities section of our consolidated cash flow statement for 2018.
On May 5, 2017, we purchased the remaining
15%
ownership interest in our joint venture, Kohinoor Specialty Foods India Private Limited (Kohinoor) in India for a cash payment of
$1.5 million
, of which
$1.2 million
was paid in 2017 and the balance was paid in 2018. In September 2011, when we originally entered this joint venture, we invested
$113.0 million
for an 85% interest in Kohinoor. In conjunction with our purchase of the
15%
minority interest in 2017, we have eliminated the minority interest in Kohinoor and recorded an adjustment of
$0.6 million
to retained earnings in our consolidated balance sheet. The
$0.3 million
and
$1.2 million
payments are reflected in the financing activities section of our consolidated cash flow statement for 2018 and 2017, respectively.
On December 15, 2016, we purchased 100% of the shares of Enrico Giotti SpA (Giotti), a leading European flavor manufacturer located in Italy, for a purchase price of
$123.8 million
(net of cash acquired of
$1.2 million
). The acquisition was funded with cash and short-term borrowings. Giotti is well known in the industry for its innovative beverage, sweet, savory and dairy flavor applications. At the time of the acquisition, annual sales of Giotti were approximately
€53 million
. Our acquisition of Giotti in fiscal 2017 expands the breadth of value-added products for McCormick's flavor solutions segment, including additional expertise in flavoring health and nutrition products. Giotti has been included in our flavor solutions segment since its acquisition.
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 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
$116.2 million
, net of cash acquired of
$3.3 million
and was financed with a combination of cash and short-term borrowings. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has a flavor solutions component, the flavor solutions component was not material to its overall business in 2016. Beginning in 2017, the flavor solutions component of Gourmet Garden has been reflected as a component of our flavor solutions segment.
In 2017, Giotti added
$66.5 million
and Gourmet Garden added
$27.3 million
to our sales for the year and first four months of fiscal 2017, respectively. Due to financing, acquisition and integration costs, the aggregate incremental operating income contributed by Giotti and Gourmet Garden was not significant to our overall results for 2017. Pro forma financial information for our other acquisitions has not been presented because the financial impact is not material.
3. SPECIAL CHARGES
In our consolidated income statement, we include a separate line item captioned “special charges” in arriving at our consolidated operating income. Special charges consist of expenses, including related impairment charges, associated with certain actions undertaken to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component, such as an asset impairment, 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. Certain ancillary expenses related to these actions approved by our Management Committee do not qualify for accrual upon approval but are included as special charges as incurred during the course of the actions. In 2018, we also included in special charges, as approved by our Management Committee, expense associated with a one-time payment, made to eligible U.S. hourly employees, to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act and as more fully described in note 12.
The following is a summary of special charges recognized for the years ended November 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Special charges included in cost of goods sold
|
$
|
—
|
|
$
|
—
|
|
$
|
0.3
|
|
|
Other special charges in the income statement (1)
|
16.3
|
|
22.2
|
|
15.7
|
|
|
Total special charges
|
$
|
16.3
|
|
$
|
22.2
|
|
$
|
16.0
|
|
|
|
|
|
(1)
|
Included in special charges for 2018 and 2017 are non-cash fixed asset impairment charges of
$3.0 million
and
$0.5 million
, respectively. Included in special charges for 2016 is a non-cash goodwill impairment charge of
$2.6 million
recognized upon the exit of a consolidated joint venture.
|
The following is a summary of special charges by business segments for the years ended November 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Consumer segment
|
$
|
10.0
|
|
$
|
15.3
|
|
$
|
9.2
|
|
|
Flavor solutions segment
|
6.3
|
|
6.9
|
|
6.8
|
|
|
Total special charges
|
$
|
16.3
|
|
$
|
22.2
|
|
$
|
16.0
|
|
We continue to evaluate changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness.
During 2018, we recorded
$16.3 million
of special charges, consisting primarily of: (i)
$11.5 million
related to our global enablement initiative, as more fully described below; (ii) a one-time payment, in the aggregate amount of
$2.2 million
made to certain U.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act; (iii)
$1.0 million
related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; and (iv)
$1.6 million
related to employee severance benefits and other costs related to the transfer of certain manufacturing operations in our Asia/Pacific region to a new facility under construction in Thailand. Of the
$11.5 million
in special charges recognized in 2018 related to our GE initiative,
$7.5 million
related to third party expenses,
$3.0 million
represented a non-cash asset impairment charge, and
$1.0 million
related to employee severance benefits. That non-cash asset impairment charge was related to the write-off of certain software assets that are incompatible with our future move, approved in 2018, to a new global enterprise resource planning (ERP) platform to facilitate planned actions under our GE initiative to align and simplify our end-to-end processes to support our future growth.
Of the
$16.3 million
in special charges recorded during 2018, approximately
$12.3 million
were paid in cash and
$3.0 million
represented a non-cash asset impairment, with the remaining accrual expected to be paid in early 2019.
During 2017, we recorded
$22.2 million
of special charges, consisting primarily of (i)
$12.7 million
related to third party expenses incurred associated with our evaluation of changes relating to our global enablement initiative, which is described below; (ii)
$2.8 million
related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; (iii)
$2.5 million
for severance and other exit costs associated with our Europe, Middle East, and Africa (EMEA) region’s closure of its manufacturing plant in Portugal in mid-2017; and (iv)
$1.7 million
related to employee severance benefits and other costs associated with action related to the transfer of certain manufacturing operations in our Asia/Pacific region to a new facility under construction in Thailand.
During 2017, our Management Committee approved a multi-year initiative during which we expect to execute significant changes to our global processes, capabilities and operating model to provide a scalable platform for future growth. We expect this initiative to enable us to accelerate our ability to work globally and cross-functionally by aligning and simplifying processes throughout McCormick, in part building upon our current shared services foundation and expanding the end-to-end processes presently under that foundation. We expect this initiative, which we refer to as Global Enablement (GE), to enable this scalable platform for future growth while reducing costs, enabling faster decision making, increasing agility and creating capacity within our organization.
While we are continuing to fully develop the details of our GE operating model, we expect the cost of the GE initiative—to be recognized as “Special charges” in our consolidated income statement over its multi-year course—to range from approximately
$55 million
to
$65 million
. Of that
$55 million
to
$65 million
, we estimate that approximately half will be attributable to each employee severance and related benefit payments and cash payments associated with related costs of GE implementation and transition, including outside consulting and other costs directly related to the initiative. We incurred
$11.5 million
and
$12.7 million
of special charges associated with our GE initiative during 2018 and 2017, respectively. The GE initiative is expected to generate annual savings, ranging from approximately
$30 million
to
$40 million
, once all actions are implemented.
During 2016, we recorded
$16.0 million
of special charges, principally consisting of: (i)
$5.7 million
related to additional organization and streamlining actions associated with our EMEA region, which began in 2015; (ii)
$2.8 million
associated with the exit from our consolidated joint venture in South Africa, which is described below; (iii)
$1.9 million
for employee severance actions and other exit costs related to the discontinuance of non-profitable product lines of our Kohinoor business in India, which began in 2015; (iv)
$1.8 million
associated with actions in connection with our planned exit of
two
leased manufacturing facilities in Singapore and Thailand, which are described below; and (v)
$1.7 million
for employee severance actions and related costs associated with our North American effectiveness initiative, which began in 2015. The remainder principally related to other streamlining actions in 2016, as approved by our Management Committee, in our operations in North America, EMEA and Asia/Pacific.
In 2016, we exited our consolidated joint venture in South Africa and recognized special charges of
$2.8 million
, principally related to the write-off of
$2.6 million
of goodwill upon the receipt of regulatory approval to terminate the joint venture in the fourth quarter of 2016. As part of the negotiated agreement related to the exit, our former joint venture partner paid the joint venture
$5.1 million
for inventory and fixed assets and the joint venture paid
$0.9 million
to the former partner to settle their joint venture interest.
In 2016, our Management Committee approved a plan, to construct a new manufacturing facility in Thailand to replace two leased manufacturing facilities in Singapore and Thailand for our Asia/Pacific region. In 2018, we opened the new manufacturing facility in Thailand, exited the leased manufacturing facility in Singapore and expect to exit the leased Thai facility in 2019. We recorded
$1.8 million
of special charges in 2016 principally related to severance and other related costs associated with employees located at the former leased facility in Singapore.
As of November 30, 2018, reserves associated with special charges are included in other accrued liabilities in our consolidated balance sheet.
4. GOODWILL AND INTANGIBLE ASSETS
The following table displays intangible assets as of November 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
(millions)
|
Gross
carrying
amount
|
Accumulated
amortization
|
Gross
carrying
amount
|
Accumulated
amortization
|
|
Definite-lived intangible assets
|
$
|
311.3
|
|
$
|
84.9
|
|
$
|
329.1
|
|
$
|
66.5
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
Goodwill
|
4,527.9
|
|
—
|
|
4,490.1
|
|
—
|
|
|
Brand names and trademarks
|
2,646.9
|
|
—
|
|
2,808.5
|
|
—
|
|
|
|
7,174.8
|
|
—
|
|
7,298.6
|
|
—
|
|
|
Total goodwill and intangible assets
|
$
|
7,486.1
|
|
$
|
84.9
|
|
$
|
7,627.7
|
|
$
|
66.5
|
|
Intangible asset amortization expense was
$20.6 million
,
$16.3 million
and
$11.3 million
for
2018
,
2017
and
2016
, respectively. At
November 30, 2018
, definite-lived intangible assets had a weighted-average remaining life of approximately
11
years.
The changes in the carrying amount of goodwill by segment for the years ended November 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
(millions)
|
Consumer
|
Flavor Solutions
|
Consumer
|
Flavor Solutions
|
|
Beginning of year
|
$
|
3,385.4
|
|
$
|
1,104.7
|
|
$
|
1,608.3
|
|
$
|
163.1
|
|
|
Changes in preliminary purchase price allocation
|
68.1
|
|
34.1
|
|
(7.1
|
)
|
—
|
|
|
Increases in goodwill from acquisitions
|
—
|
|
—
|
|
1,697.5
|
|
929.3
|
|
|
Foreign currency fluctuations
|
(54.6
|
)
|
(9.8
|
)
|
86.7
|
|
12.3
|
|
|
End of year
|
$
|
3,398.9
|
|
$
|
1,129.0
|
|
$
|
3,385.4
|
|
$
|
1,104.7
|
|
Our valuation of the acquired net assets of RB Foods resulted in the allocation of
$1,765.6 million
and
$882.9 million
of goodwill to the consumer and flavor solutions segment, respectively. Our valuation of the acquired net assets of Giotti in 2017 resulted in the allocation of
$80.5 million
of goodwill to the flavor solutions segment.
5. INVESTMENTS IN AFFILIATES
Summarized annual and year-end information from the financial statements of unconsolidated affiliates representing
100%
of the businesses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Net sales
|
$
|
807.9
|
|
$
|
775.4
|
|
$
|
767.6
|
|
|
Gross profit
|
290.5
|
|
278.5
|
|
245.6
|
|
|
Net income
|
78.9
|
|
75.5
|
|
66.4
|
|
|
Current assets
|
$
|
342.1
|
|
$
|
315.4
|
|
$
|
315.6
|
|
|
Noncurrent assets
|
129.9
|
|
127.6
|
|
113.0
|
|
|
Current liabilities
|
172.1
|
|
146.9
|
|
146.2
|
|
|
Noncurrent liabilities
|
10.0
|
|
13.6
|
|
9.1
|
|
Our share of undistributed earnings of unconsolidated affiliates was
$142.1 million
at
November 30, 2018
. Royalty income from unconsolidated affiliates was
$18.5 million
,
$17.5 million
and
$16.1 million
for
2018
,
2017
and
2016
, respectively.
Our principal earnings from unconsolidated affiliates is from our
50%
interest in McCormick de Mexico, S.A. de C.V. Profit from this joint venture represented
76%
of income from unconsolidated operations in 2018,
74%
in 2017 and
83%
in 2016.
As of November 30, 2018, undistributed earnings of investments in unconsolidated affiliates for which we have not provided deferred income tax liabilities would not be material.
6. FINANCING ARRANGEMENTS
Our outstanding debt, including capital leases, was as follows at November 30:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
|
Short-term borrowings
|
|
|
|
Commercial paper
|
$
|
509.9
|
|
$
|
219.4
|
|
|
Other
|
50.1
|
|
38.2
|
|
|
|
$
|
560.0
|
|
$
|
257.6
|
|
|
Weighted-average interest rate of short-term borrowings at year-end
|
2.9
|
%
|
2.3
|
%
|
|
|
|
|
|
Long-term debt
|
|
|
|
5.75% notes due 12/15/2017
|
$
|
—
|
|
$
|
250.0
|
|
|
Term loan due 8/17/2020
(1)
|
130.0
|
|
500.0
|
|
|
3.90% notes due 7/8/2021
(2)
|
250.0
|
|
250.0
|
|
|
2.70% notes due 8/15/2022
|
750.0
|
|
750.0
|
|
|
Term loan due 8/17/2022
(1)
|
556.3
|
|
731.3
|
|
|
3.50% notes due 8/19/2023
(3)
|
250.0
|
|
250.0
|
|
|
3.15% notes due 8/15/2024
|
700.0
|
|
700.0
|
|
|
3.25% notes due 11/15/2025
(4)
|
250.0
|
|
250.0
|
|
|
3.40% notes due 8/15/2027
(5)
|
750.0
|
|
750.0
|
|
|
4.20% notes due 8/15/2047
|
300.0
|
|
300.0
|
|
|
7.63%–8.12% notes due 2024
|
55.0
|
|
55.0
|
|
|
Other, including capital leases
|
180.5
|
|
19.6
|
|
|
Unamortized discounts, premiums, debt issuance costs and fair value adjustments
|
(35.4
|
)
|
(36.4
|
)
|
|
|
4,136.4
|
|
4,769.5
|
|
|
Less current portion
|
83.5
|
|
325.6
|
|
|
|
$
|
4,052.9
|
|
$
|
4,443.9
|
|
|
|
|
|
(1)
|
The term loans are prepayable in whole or in part. Also, the term loan due in 2022 requires quarterly principal payments of
2.5%
of the initial principal amount.
|
|
|
|
|
(2)
|
Interest rate swaps, settled upon the issuance of these notes in 2011, effectively set the interest rate on the
$250 million
notes at a weighted-average fixed rate of
4.01%
.
|
|
|
|
|
(3)
|
Interest rate swaps, settled upon the issuance of these notes in 2013, effectively set the interest rate on the
$250 million
notes at a weighted-average fixed rate of
3.30%
.
|
|
|
|
|
(4)
|
Interest rate swaps, settled upon the issuance of these notes in 2015, effectively set the interest rate on the
$250 million
notes at a weighted-average fixed rate of
3.45%
.
The fixed interest rate on
$100 million
of the
3.25%
notes due in 2025 is effectively converted to a variable rate by interest rate swaps through 2025. Net interest payments are based on 3-month LIBOR plus
1.22%
during this period (our effective rate as of November 30, 2018 was
3.84%
).
|
|
|
|
|
(5)
|
Interest rate swaps, settled upon the issuance of these notes in 2017, effectively set the interest rate on the
$750 million
notes at a weighted-average fixed rate of
3.44%
.
|
Maturities of long-term debt, including capital leases, during the fiscal years subsequent to November 30, 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
2019
|
$
|
83.5
|
|
|
2020
|
219.9
|
|
|
2021
|
340.4
|
|
|
2022
|
1,101.7
|
|
|
2023
|
257.7
|
|
|
Thereafter
|
2,168.6
|
|
In connection with our acquisition of RB Foods, we entered into a Term Loan Agreement (“Term Loan”) in August 2017. The Term Loan provide for
three
-year and
five
-year senior unsecured term loans, each for
$750 million
. The net proceeds received from the issuance of the Term Loan was
$1,498.3 million
. The
three
-year loan is payable at maturity. The
five
-year loan is payable in equal quarterly installments in an amount of
2.5%
of the initial principal amount, with the remaining unpaid balance due at maturity. The
three
-year and
five
-year loans are each prepayable
in whole or in part. In 2018 and 2017, we repaid
$370.0 million
and
$250.0 million
, respectively, of the three-year loan. In 2018, we repaid
$175.0 million
of the five-year loan, which included required quarterly principal installments of
$75.0 million
. In 2017, we repaid
$18.8 million
of the five-year loan. The
three
-year and
five
-year loans currently bear interest at LIBOR plus
1.125%
and LIBOR plus
1.25%
, respectively. The interest rates are based on our credit rating with the maximum potential interest rates of LIBOR plus
1.625%
and LIBOR plus
1.75%
for the
three
-year loan and
five
-year loan, respectively.
The provisions of our outstanding
$1.0 billion
revolving credit facility and the Term Loan restrict subsidiary indebtedness and require us to maintain certain minimum and maximum financial ratios for interest expense coverage and our leverage ratio. The applicable leverage ratio is reduced annually. As of November 30, 2018, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility.
In August 2017, we issued an aggregate amount of
$2.5 billion
of senior unsecured notes. These notes are due as follows:
$750.0 million
due August 15, 2022,
$700.0 million
due August 15, 2024,
$750.0 million
due August 15, 2027 and
$300.0 million
due August 15, 2047 with stated fixed interest rates of
2.70%
,
3.15%
,
3.40%
and
4.20%
, respectively. Interest is payable semiannually in arrears in August and February of each year. The net proceeds received from the issuance of these notes were
$2,479.3 million
. The net proceeds from this issuance were used to partially fund our acquisition of RB Foods. In addition, we used a portion of these proceeds to repay our
$250 million
,
5.75%
notes that matured on December 15, 2017.
Other debt costs of
$15.4 million
for the year ended November 30, 2017 represents the financing fees related to a bridge loan commitment, obtained in connection with our acquisition of RB Foods, that expired undrawn.
We have available credit facilities with domestic and foreign banks for various purposes. Some of these lines are committed lines and others are uncommitted lines and could be withdrawn at various times. We have a
five
-year
$1.0 billion
revolving credit facility, which will expire in August 2022. The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus
1.25%
. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus
1.75%
. This credit facility supports our commercial paper program and, after
$509.9 million
was used to support issued commercial paper, we have
$490.1 million
of capacity at November 30, 2018. In addition, we have several uncommitted lines totaling
$237.3 million
, which have a total unused capacity at
November 30, 2018
of
$149.9 million
. These lines by their nature can be withdrawn based on the lenders’ discretion. Committed credit facilities require a fee, and commitment fees were
$1.3 million
and
$0.8 million
for 2018 and 2017, respectively.
In 2018, we consolidated our Corporate staff and certain non-manufacturing U.S. employees into our new headquarters building in Hunt Valley, Maryland. The 15-year lease for that building requires monthly lease payments of approximately
$0.9 million
beginning in April 2019. 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. Upon commencement of fit-out in the second quarter of 2018, we obtained access to the building, which resulted in the lease commencement date for accounting purposes. We have recognized this lease as a capital lease, with the leased asset of
$133.4 million
included in property, plant and equipment, net, and the lease obligation in the amount of
$138.6 million
included in long-term debt as of November 30, 2018. During 2018, we recognized amortization expense of
$5.2 million
related to the leased asset.
Rental expense under operating leases (primarily buildings and equipment) was
$58.5 million
in
2018
,
$46.5 million
in
2017
and
$41.6 million
in
2016
. Future annual fixed rental payments under operating leases for the years ended November 30 are as follows (in millions):
|
|
|
|
|
|
|
|
2019
|
$
|
42.9
|
|
|
2020
|
32.9
|
|
|
2021
|
24.3
|
|
|
2022
|
18.7
|
|
|
2023
|
12.6
|
|
|
Thereafter
|
22.4
|
|
At
November 30, 2018
, we had guarantees outstanding of
$0.6 million
with terms of one year or less. At both
November 30, 2018
and
2017
, we had outstanding letters of credit of
$7.3 million
. These letters of credit typically
act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The unused portion of our letter of credit facility was
$13.7 million
at
November 30, 2018
.
7. 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 instrument and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
Foreign Currency
We are potentially exposed to foreign currency fluctuations affecting net investments, transactions and earnings denominated in foreign currencies. We selectively hedge the potential effect of these foreign currency fluctuations by entering into foreign currency exchange contracts with highly-rated financial institutions. At November 30, 2018, we had foreign currency exchange contracts to purchase or sell
$494.9 million
of foreign currencies as compared to
$405.9 million
at November 30, 2017. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material.
Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.
We also enter into fair value foreign currency exchange contracts to manage exposure to currency fluctuations in certain intercompany loans between subsidiaries. The notional value of these contracts was
$402.0 million
and
$281.9 million
at November 30, 2018 and 2017, respectively. During fiscal years 2018, 2017 and 2016, we recognized a
$2.9 million
loss, a
$12.8 million
gain and a
$3.5 million
loss, respectively, on the change in fair value of these contracts, which was offset by a
$2.7 million
gain, a
$14.1 million
loss and a
$3.1 million
gain, respectively, on the change in the currency component of the underlying loans. All of the losses and the gains for both fiscal years were recognized in our consolidated income statement as other income, net.
At November 30, 2018, we had
$160.6 million
of notional contracts that have durations of less than
seven
days that are used to hedge short-term cash flow funding. At November 30, 2018, the remaining contracts have durations of one to
twelve
months.
Interest Rates
We finance a portion of our operations with both fixed and variable rate debt instruments, primarily commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.
We have outstanding interest rate swap contracts for a notional amount of
$100 million
to receive interest at
3.25%
and pay a variable rate of interest based on three-month LIBOR plus
1.22%
. These swaps, which expire in November 2025, are designated as fair value hedges of the changes in fair value of
$100 million
of the
$250 million
3.25%
medium-term notes due 2025 that we issued in November 2015. Any unrealized gain or loss on these swaps was offset by a corresponding increase or decrease in the value of the hedged debt. Hedge ineffectiveness was not material.
The following tables disclose the derivative instruments on our balance sheet, all of which are all recorded at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
November 30, 2018:
|
|
|
|
|
|
|
|
(millions)
|
Asset Derivatives
|
Liability Derivatives
|
|
Derivatives
|
Balance sheet
location
|
Notional amount
|
Fair value
|
Balance sheet
location
|
Notional amount
|
Fair value
|
|
Interest rate contracts
|
Other current
assets
|
$
|
—
|
|
$
|
—
|
|
Other accrued liabilities
|
$
|
100.0
|
|
$
|
6.4
|
|
|
Foreign exchange contracts
|
Other current assets
|
199.5
|
|
4.4
|
|
Other accrued liabilities
|
295.4
|
|
6.4
|
|
|
Total
|
|
|
$
|
4.4
|
|
|
|
$
|
12.8
|
|
|
As of
November 30, 2017:
|
|
|
|
|
|
|
|
(millions)
|
Asset Derivatives
|
Liability Derivatives
|
|
Derivatives
|
Balance sheet
location
|
Notional amount
|
Fair value
|
Balance sheet
location
|
Notional amount
|
Fair value
|
|
Interest rate contracts
|
Other current
assets
|
$
|
—
|
|
$
|
—
|
|
Other accrued liabilities
|
$
|
100.0
|
|
$
|
2.5
|
|
|
Foreign exchange contracts
|
Other current assets
|
326.3
|
|
12.7
|
|
Other accrued liabilities
|
79.6
|
|
4.7
|
|
|
Total
|
|
|
$
|
12.7
|
|
|
|
$
|
7.2
|
|
The following tables disclose the impact of derivative instruments on other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the years ended
November 30, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges (millions)
|
|
|
Income statement
location
|
Income (expense)
|
|
Derivative
|
2018
|
2017
|
2016
|
|
Interest rate contracts
|
Interest expense
|
$
|
(0.1
|
)
|
$
|
0.9
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement location
|
Gain (loss) recognized in income
|
|
Income statement location
|
Gain (loss) recognized in income
|
|
Derivative
|
2018
|
2017
|
2016
|
Hedged Item
|
2018
|
2017
|
2016
|
|
Foreign exchange contracts
|
Other income, net
|
$
|
(2.9
|
)
|
$
|
12.8
|
|
$
|
(3.5
|
)
|
Intercompany loans
|
Other income, net
|
$
|
2.7
|
|
$
|
(14.1
|
)
|
$
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (millions)
|
|
|
Gain (loss)
recognized in OCI
|
Income statement location
|
Gain (loss)
reclassified from AOCI
|
|
Derivative
|
2018
|
2017
|
2016
|
2018
|
2017
|
2016
|
|
Interest rate contracts
|
$
|
—
|
|
$
|
(2.9
|
)
|
$
|
—
|
|
Interest expense
|
$
|
0.5
|
|
$
|
(0.4
|
)
|
$
|
(0.3
|
)
|
|
Foreign exchange contracts
|
2.6
|
|
(7.3
|
)
|
4.4
|
|
Cost of goods sold
|
(3.3
|
)
|
1.2
|
|
3.7
|
|
|
Total
|
$
|
2.6
|
|
$
|
(10.2
|
)
|
$
|
4.4
|
|
|
$
|
(2.8
|
)
|
$
|
0.8
|
|
$
|
3.4
|
|
The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The net amount of accumulated other comprehensive income expected to be reclassified into income related to these contracts in the next twelve months is a
$1.8 million
increase to earnings.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments as of November 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
(millions)
|
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
|
Long-term investments
|
$
|
120.8
|
|
$
|
120.8
|
|
$
|
127.0
|
|
$
|
127.0
|
|
|
Long-term debt (including current portion)
|
4,136.4
|
|
4,039.4
|
|
4,769.5
|
|
4,858.5
|
|
|
Derivatives related to:
|
|
|
|
|
|
Interest rates (liabilities)
|
6.4
|
|
6.4
|
|
2.5
|
|
2.5
|
|
|
Foreign currency (assets)
|
4.4
|
|
4.4
|
|
12.7
|
|
12.7
|
|
|
Foreign currency (liabilities)
|
6.4
|
|
6.4
|
|
4.7
|
|
4.7
|
|
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.
At November 30, 2018, the fair value of long-term debt includes
$3,172.7 million
and
$866.7 million
determined using Level 1 and Level 2 valuation techniques, respectively. At November 30, 2017, the fair value of long-term debt includes
$3,615.2 million
and
$1,243.3 million
determined using Level 1 and Level 2 valuation techniques, respectively. The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments.
Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value. Long-term investments are comprised of fixed income and equity securities held on behalf of employees in certain employee benefit plans and are stated at fair value on the balance sheet. The cost of these investments was
$73.7 million
and
$78.4 million
at
November 30, 2018
and
2017
, respectively.
Concentrations of Credit Risk
We are potentially exposed to concentrations of credit risk with trade accounts receivable and financial instruments. The customers of our consumer segment are predominantly food retailers and food wholesalers. Consolidations in these industries have created larger customers. In addition, competition has increased with the growth in alternative channels including mass merchandisers, dollar stores, warehouse clubs, discount chains and e-commerce. This has caused some customers to be less profitable and increased our exposure to credit risk. We generally have a large and diverse customer base which limits our concentration of credit risk. At November 30, 2018, we did not have amounts due from any single customer that exceed
10%
of consolidated trade accounts receivable. Current credit markets are highly volatile and some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties and generally do not require collateral. We believe that the allowance for doubtful accounts properly recognized trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.
8. 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 management’s own assumptions.
|
Our population of assets and liabilities subject to fair value measurements on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using fair
value hierarchy as of November 30, 2018
|
|
(millions)
|
Fair value
|
Level 1
|
Level 2
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
96.6
|
|
$
|
96.6
|
|
$
|
—
|
|
|
Insurance contracts
|
118.0
|
|
—
|
|
118.0
|
|
|
Bonds and other long-term investments
|
2.8
|
|
2.8
|
|
—
|
|
|
Foreign currency derivatives
|
4.4
|
|
—
|
|
4.4
|
|
|
Total
|
$
|
221.8
|
|
$
|
99.4
|
|
$
|
122.4
|
|
|
Liabilities:
|
|
|
|
|
Interest rate derivatives
|
$
|
6.4
|
|
$
|
—
|
|
$
|
6.4
|
|
|
Foreign currency derivatives
|
6.4
|
|
—
|
|
6.4
|
|
|
Total
|
$
|
12.8
|
|
$
|
—
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using fair
value hierarchy as of November 30, 2017
|
|
(millions)
|
Fair value
|
Level 1
|
Level 2
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
186.8
|
|
$
|
186.8
|
|
$
|
—
|
|
|
Insurance contracts
|
119.5
|
|
—
|
|
119.5
|
|
|
Bonds and other long-term investments
|
7.5
|
|
7.5
|
|
—
|
|
|
Foreign currency derivatives
|
12.7
|
|
—
|
|
12.7
|
|
|
Total
|
$
|
326.5
|
|
$
|
194.3
|
|
$
|
132.2
|
|
|
Liabilities:
|
|
|
|
|
Interest rate derivatives
|
$
|
2.5
|
|
$
|
—
|
|
$
|
2.5
|
|
|
Foreign currency derivatives
|
4.7
|
|
—
|
|
4.7
|
|
|
Total
|
$
|
7.2
|
|
$
|
—
|
|
$
|
7.2
|
|
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.
At November 30, 2018 and 2017, we had no financial assets or liabilities that were subject to a level 3 fair value measurement.
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the components of accumulated other comprehensive loss, net of tax where applicable, as of November 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
Accumulated other comprehensive loss, net of tax where applicable
|
|
|
|
Foreign currency translation adjustment
|
$
|
(241.6
|
)
|
$
|
(124.4
|
)
|
|
Unrealized loss on foreign currency exchange contracts
|
(1.1
|
)
|
(3.6
|
)
|
|
Unamortized value of settled interest rate swaps
|
0.6
|
|
0.8
|
|
|
Pension and other postretirement costs
|
(117.8
|
)
|
(152.3
|
)
|
|
|
$
|
(359.9
|
)
|
$
|
(279.5
|
)
|
In conjunction with the adoption of ASU No. 2018-02
Income Statement-Reporting Comprehensive Income (Topic 220)
—
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
we reclassified
$20.9 million
of other comprehensive income, primarily associated with pension and other
postretirement plans, from accumulated other comprehensive income to retained earnings effective December 1, 2017.
The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the years ended November 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
Affected line items in the consolidated income statement
|
|
Accumulated other comprehensive income (loss) components
|
|
2018
|
|
2017
|
|
2016
|
|
|
(Gains)/losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
(0.5
|
)
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
Interest expense
|
|
Foreign exchange contracts
|
|
3.3
|
|
|
(1.2
|
)
|
|
(3.7
|
)
|
|
Cost of goods sold
|
|
Total before taxes
|
|
2.8
|
|
|
(0.8
|
)
|
|
(3.4
|
)
|
|
|
|
|
Tax effect
|
|
(0.6
|
)
|
|
0.2
|
|
|
0.9
|
|
|
Income taxes
|
|
Net, after tax
|
|
$
|
2.2
|
|
|
$
|
(0.6
|
)
|
|
$
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and postretirement benefit adjustments:
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service (credits) costs
(1)
|
|
$
|
(8.5
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
0.3
|
|
|
SG&A expense/ Cost of goods sold
|
|
Amortization of net actuarial losses
(1)
|
|
12.6
|
|
|
9.7
|
|
|
16.7
|
|
|
SG&A expense/ Cost of goods sold
|
|
Total before taxes
|
|
4.1
|
|
|
8.1
|
|
|
17.0
|
|
|
|
|
|
Tax effect
|
|
(1.0
|
)
|
|
(2.8
|
)
|
|
(5.8
|
)
|
|
Income taxes
|
|
Net, after tax
|
|
$
|
3.1
|
|
|
$
|
5.3
|
|
|
$
|
11.2
|
|
|
|
|
(1)
This accumulated other comprehensive income (loss) component is included in the computation of total pension expense and total other postretirement expense (refer to note 10 for additional details).
10. EMPLOYEE BENEFIT AND RETIREMENT PLANS
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees.
During fiscal years 2018 and 2017, we made the following significant changes to our employee benefit and retirement plans:
2018
|
|
|
|
•
|
On December 1, 2017, our Management Committee approved the freezing of benefits under our pension plans in Canada. The effective date of this freeze is November 30, 2019. Although those plans will be frozen, employees who are participants in the plans will retain benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans.
|
2017
|
|
|
|
•
|
On December 1, 2016, our Management Committee approved the freezing of benefits under the McCormick U.K. Pension and Life Assurance Scheme (the U.K. plan). The effective date of this freeze was December 31, 2016. Although the U.K. plan has been frozen, employees who are participants in that plan retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan.
|
|
|
|
|
•
|
On January 3, 2017, our Management Committee approved the freezing of benefits under the McCormick Pension Plan, the defined benefit pension plan available to U.S. employees hired on or prior to December 31, 2011. The effective date of this freeze was November 30, 2018. Employees who are participants in that plan retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan.
|
|
|
|
|
•
|
On January 3, 2017, the Compensation Committee of our Board of Directors approved the freezing of benefits under the McCormick Supplemental Executive Retirement Plan (the “SERP”). The effective date of this freeze was January 31, 2017. Executives who are participants in the SERP as of the date of the freeze, including certain named executive officers, retained benefits accumulated up to that date, based on credited service and eligible earnings, in accordance with the SERP’s terms.
|
As a result of these changes, we remeasured pension assets and benefit obligations as of the dates of the approvals indicated above and (i) in fiscal year 2018, we reduced the Canadian plan benefit obligations by
$17.5 million
; and (ii) in fiscal year 2017, we reduced the U.S. and U.K. plan benefit obligations by
$69.9 million
and
$7.8 million
, respectively. These remeasurements resulted in non-cash, pre-tax net actuarial gains of
$17.5 million
and
$77.7 million
for fiscal years 2018 and 2017, respectively. These net actuarial gains consist principally of curtailment gains of
$18.0 million
and
$76.7 million
, which are included in our Consolidated Statement of Comprehensive Income for 2018 and 2017, respectively, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension plans. Deferred taxes associated with these actuarial gains, together with other unrealized components of pension plans recognized during 2018 and 2017, are also included in that statement as a component of Other comprehensive income (loss).
Included in accumulated other comprehensive loss at
November 30, 2018
was
$153.1 million
(
$117.8 million
net of tax) related to net unrecognized actuarial losses of
$160.5 million
and unrecognized prior service cost credits of
$7.4 million
that have not yet been recognized in net periodic pension or postretirement benefit cost. We expect to recognize
$5.1 million
(
$3.9 million
net of tax) in net periodic pension and postretirement benefit credits during 2019 related to the amortization of actuarial losses of
$2.8 million
and the amortization of prior service cost credits of
$(7.9) million
.
Defined Benefit Pension Plans
The significant assumptions used to determine benefit obligations are as follows as of November 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
International
|
|
|
2018
|
2017
|
2018
|
2017
|
|
Discount rate—funded plan
|
4.7
|
%
|
4.0
|
%
|
3.3
|
%
|
3.0
|
%
|
|
Discount rate—unfunded plan
|
4.6
|
%
|
3.9
|
%
|
—
|
|
—
|
|
|
Salary scale
|
—
|
|
3.8
|
%
|
3.0-3.5%
|
|
3.0-3.5%
|
|
The significant assumptions used to determine pension expense for the years ended November 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
International
|
|
|
2018
|
2017
|
2016
|
2018
|
2017
|
2016
|
|
Discount rate—funded plan
|
4.0
|
%
|
4.6
|
%
|
4.7
|
%
|
2.9
|
%
|
3.2
|
%
|
3.9
|
%
|
|
Discount rate—unfunded plan
|
3.9
|
%
|
4.5
|
%
|
4.7
|
%
|
—
|
|
—
|
|
—
|
|
|
Salary scale
|
3.8
|
%
|
3.8
|
%
|
3.8
|
%
|
3.5
|
%
|
3.4
|
%
|
3.5
|
%
|
|
Expected return on plan assets
|
7.3
|
%
|
7.3
|
%
|
7.5
|
%
|
5.6
|
%
|
5.5
|
%
|
6.0
|
%
|
Annually, we undertake a process, with the assistance of our external investment consultants, to evaluate the appropriate projected rates of return to use for our pension plans’ assumptions. We engage our investment consultants' research teams to develop capital market assumptions for each asset category in our plans to project investment returns into the future. The specific methods used to develop expected return assumptions vary by asset category. We adjust the outcomes for the fact that plan assets are invested with actively managed funds and subject to tactical asset reallocation.
Our pension expense for the years ended November 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
International
|
|
(millions)
|
2018
|
2017
|
2016
|
2018
|
2017
|
2016
|
|
Service cost
|
$
|
17.0
|
|
$
|
14.8
|
|
$
|
21.5
|
|
$
|
4.3
|
|
$
|
6.2
|
|
$
|
7.1
|
|
|
Interest costs
|
31.6
|
|
31.7
|
|
33.3
|
|
9.2
|
|
10.4
|
|
11.3
|
|
|
Expected return on plan assets
|
(43.4
|
)
|
(41.4
|
)
|
(40.8
|
)
|
(16.6
|
)
|
(15.3
|
)
|
(16.2
|
)
|
|
Amortization of prior service costs
|
—
|
|
—
|
|
—
|
|
0.1
|
|
0.7
|
|
0.3
|
|
|
Amortization of net actuarial loss
|
9.9
|
|
5.8
|
|
12.6
|
|
2.8
|
|
4.1
|
|
4.1
|
|
|
Settlement/curtailment loss
|
—
|
|
—
|
|
—
|
|
0.5
|
|
0.6
|
|
—
|
|
|
|
$
|
15.1
|
|
$
|
10.9
|
|
$
|
26.6
|
|
$
|
0.3
|
|
$
|
6.7
|
|
$
|
6.6
|
|
A rollforward of the benefit obligation, fair value of plan assets and a reconciliation of the pension plans’ funded status as of November 30, the measurement date, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
International
|
|
(millions)
|
2018
|
2017
|
2018
|
2017
|
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
813.7
|
|
$
|
757.0
|
|
$
|
341.5
|
|
$
|
324.9
|
|
|
Service cost
|
17.0
|
|
14.8
|
|
4.3
|
|
6.2
|
|
|
Interest costs
|
31.6
|
|
31.7
|
|
9.2
|
|
10.4
|
|
|
Employee contributions
|
—
|
|
—
|
|
0.7
|
|
0.7
|
|
|
Plan amendments
|
5.2
|
|
—
|
|
3.4
|
|
0.3
|
|
|
Plan curtailments
|
—
|
|
(68.9
|
)
|
(17.5
|
)
|
(7.8
|
)
|
|
Plan settlements
|
—
|
|
—
|
|
—
|
|
(3.1
|
)
|
|
Actuarial (gain) loss
|
(76.2
|
)
|
65.6
|
|
(20.2
|
)
|
3.3
|
|
|
Benefits paid
|
(36.3
|
)
|
(35.2
|
)
|
(13.2
|
)
|
(15.3
|
)
|
|
Business combinations
|
(2.4
|
)
|
48.7
|
|
—
|
|
—
|
|
|
Expenses paid
|
—
|
|
—
|
|
(0.7
|
)
|
(0.4
|
)
|
|
Foreign currency impact
|
—
|
|
—
|
|
(14.6
|
)
|
22.3
|
|
|
Benefit obligation at end of year
|
$
|
752.6
|
|
$
|
813.7
|
|
$
|
292.9
|
|
$
|
341.5
|
|
|
Change in fair value of plan assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
654.2
|
|
$
|
558.9
|
|
$
|
331.3
|
|
$
|
289.1
|
|
|
Actual return on plan assets
|
13.6
|
|
90.9
|
|
(0.7
|
)
|
31.5
|
|
|
Employer contributions
|
8.9
|
|
11.4
|
|
4.6
|
|
7.3
|
|
|
Employee contributions
|
—
|
|
—
|
|
0.7
|
|
0.7
|
|
|
Plan settlements
|
—
|
|
—
|
|
—
|
|
(3.1
|
)
|
|
Benefits paid
|
(36.3
|
)
|
(35.2
|
)
|
(13.2
|
)
|
(15.3
|
)
|
|
Business combinations
|
—
|
|
28.2
|
|
—
|
|
—
|
|
|
Expenses paid
|
—
|
|
—
|
|
(0.7
|
)
|
(0.4
|
)
|
|
Foreign currency impact
|
—
|
|
—
|
|
(15.5
|
)
|
21.5
|
|
|
Fair value of plan assets at end of year
|
$
|
640.4
|
|
$
|
654.2
|
|
$
|
306.5
|
|
$
|
331.3
|
|
|
Funded status
|
$
|
(112.2
|
)
|
$
|
(159.5
|
)
|
$
|
13.6
|
|
$
|
(10.2
|
)
|
|
Pension plans in which accumulated benefit obligation exceeded plan assets
|
|
|
|
|
|
Projected benefit obligation
|
$
|
752.6
|
|
$
|
813.7
|
|
$
|
19.1
|
|
$
|
20.9
|
|
|
Accumulated benefit obligation
|
746.9
|
|
797.6
|
|
16.1
|
|
16.7
|
|
|
Fair value of plan assets
|
640.4
|
|
654.2
|
|
1.5
|
|
1.6
|
|
Included in the U.S. in the preceding table is a benefit obligation of
$94.9 million
and
$105.4 million
for
2018
and
2017
, respectively, related to the SERP. Those amounts also represent the accumulated benefit obligation related to the SERP. The assets related to this plan, which totaled
$82.8 million
and
$89.2 million
as of
November 30, 2018
and
2017
, respectively, are held in a rabbi trust and accordingly have not been included in the preceding table.
As part of our acquisition of RB Foods in August 2017, we assumed a defined benefit pension plan that covers eligible union employees of the Reckitt Benckiser food business (the "RB Foods Union Pension Plan"). The related plan assets and benefit obligation of the RB Foods Union Pension Plan are included in the U.S. in the preceding table. As noted in the preceding table, at the acquisition date, the funded status of that plan was
$(20.5) million
, representing a benefit obligation of
$48.7 million
less the fair value of plan assets of
$28.2 million
. At the date of acquisition, based upon a preliminary valuation, the accumulated benefit obligation was
$40.9 million
. During 2018, we finalized the purchase accounting valuation for this plan which improved the funded status of this plan by
$2.4 million
, to
$(18.1) million
at the date of acquisition. Plan assets consist of a mix of equities, fixed income funds and real estate funds. During 2018 and 2017, we made contributions of
$2.5 million
and
$5.0 million
, respectively, to the RB Foods Union Pension Plan.
Amounts recorded in the balance sheet for all defined benefit pension plans as of November 30 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
International
|
|
(millions)
|
2018
|
2017
|
2018
|
2017
|
|
Non-current pension asset
|
$
|
—
|
|
$
|
—
|
|
$
|
31.2
|
|
$
|
22.5
|
|
|
Accrued pension liability
|
112.2
|
|
159.5
|
|
17.6
|
|
32.7
|
|
|
Deferred income tax assets
|
32.7
|
|
69.4
|
|
8.8
|
|
14.2
|
|
|
Accumulated other comprehensive loss
|
97.7
|
|
112.1
|
|
40.1
|
|
57.4
|
|
The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation or service levels. The accumulated benefit obligation for the U.S. pension plans was
$746.9 million
and
$797.6 million
as of
November 30, 2018
and
2017
, respectively. The accumulated benefit obligation for the international pension plans was
$286.8 million
and
$317.2 million
as of
November 30, 2018
and
2017
, respectively.
The investment objectives of the defined benefit pension plans are to provide assets to meet the current and future obligations of the plans at a reasonable cost to us. The goal is to optimize the long-term return across the portfolio of investments at a moderate level of risk. Higher-returning assets include mutual, co-mingled and other funds comprised of equity securities, utilizing both active and passive investment styles. These more volatile assets are balanced with less volatile assets, primarily mutual, co-mingled and other funds comprised of fixed income securities. Professional investment firms are engaged to provide advice on the selection and monitoring of investment funds, and to provide advice on the allocation of plan assets across the various fund managers. This advice is based in part on the duration of each plan’s liability. The investment return performances are evaluated quarterly against specific benchmark indices and against a peer group of funds of the same asset classification.
The allocations of U.S. pension plan assets as of November 30, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
2018
|
|
Asset Category
|
2018
|
2017
|
Target
|
|
Equity securities
|
65.8
|
%
|
69.3
|
%
|
59.0
|
%
|
|
Fixed income securities
|
20.5
|
%
|
18.6
|
%
|
23.2
|
%
|
|
Other
|
13.7
|
%
|
12.1
|
%
|
17.8
|
%
|
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
The allocations of the international pension plans’ assets as of November 30, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
2018
|
|
Asset Category
|
2018
|
2017
|
Target
|
|
Equity securities
|
52.1
|
%
|
53.8
|
%
|
53.0
|
%
|
|
Fixed income securities
|
47.8
|
%
|
46.1
|
%
|
47.0
|
%
|
|
Other
|
0.1
|
%
|
0.1
|
%
|
—
|
%
|
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
The following tables set forth by level, within the fair value hierarchy as described in note 8, pension plan assets at their fair value as of November 30 for the United States and international plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2018
|
United States
|
|
(millions)
|
Total
fair
value
|
Level 1
|
Level 2
|
|
Cash and cash equivalents
|
$
|
16.0
|
|
$
|
16.0
|
|
$
|
—
|
|
|
Equity securities:
|
|
|
|
|
U.S. equity securities
(a)
|
283.2
|
|
149.6
|
|
133.6
|
|
|
International equity securities
(b)
|
132.7
|
|
126.1
|
|
6.6
|
|
|
Fixed income securities:
|
|
|
|
|
U.S. government/corporate bonds
(c)
|
46.2
|
|
44.1
|
|
2.1
|
|
|
High yield bonds
(d)
|
36.7
|
|
—
|
|
36.7
|
|
|
International/government/corporate bonds
(e)
|
27.4
|
|
27.4
|
|
—
|
|
|
Insurance contracts
(f)
|
1.1
|
|
—
|
|
1.1
|
|
|
Other types of investments:
|
|
|
|
|
Real estate
(g)
|
22.3
|
|
18.7
|
|
3.6
|
|
|
Natural resources
(h)
|
12.6
|
|
—
|
|
12.6
|
|
|
Total
|
$
|
578.2
|
|
$
|
381.9
|
|
$
|
196.3
|
|
|
Investments measured at net asset value
(i)
|
|
|
|
|
Hedge funds
(j)
|
36.7
|
|
|
|
|
Private equity funds
(k)
|
5.6
|
|
|
|
|
Private debt funds
(l)
|
19.9
|
|
|
|
|
Total investments
|
$
|
640.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2018
|
International
|
|
(millions)
|
Total
fair
value
|
Level 1
|
Level 2
|
|
Cash and cash equivalents
|
$
|
2.0
|
|
$
|
2.0
|
|
$
|
—
|
|
|
International equity securities
(b)
|
159.5
|
|
—
|
|
159.5
|
|
|
Fixed income securities:
|
|
|
|
|
U.S./government/ corporate bonds
(c)
|
125.2
|
|
—
|
|
125.2
|
|
|
Insurance contracts
(f)
|
19.8
|
|
—
|
|
19.8
|
|
|
Total investments
|
$
|
306.5
|
|
$
|
2.0
|
|
$
|
304.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2017
|
United States
|
|
(millions)
|
Total
fair
value
|
Level 1
|
Level 2
|
|
Cash and cash equivalents
|
$
|
6.4
|
|
$
|
6.4
|
|
$
|
—
|
|
|
Equity securities:
|
|
|
|
|
U.S. equity securities
(a)
|
305.1
|
|
144.2
|
|
160.9
|
|
|
International equity securities
(b)
|
144.8
|
|
144.8
|
|
—
|
|
|
Fixed income securities:
|
|
|
|
|
U.S./government/ corporate bonds
(c)
|
45.3
|
|
45.3
|
|
—
|
|
|
High yield bonds
(d)
|
35.6
|
|
—
|
|
35.6
|
|
|
International/government/ corporate bonds
(e)
|
27.1
|
|
27.1
|
|
—
|
|
|
Insurance contracts
(f)
|
1.1
|
|
—
|
|
1.1
|
|
|
Other types of investments:
|
|
|
|
|
Real estate
(g)
|
19.8
|
|
18.3
|
|
1.5
|
|
|
Natural resources
(h)
|
11.4
|
|
—
|
|
11.4
|
|
|
Total
|
$
|
596.6
|
|
$
|
386.1
|
|
$
|
210.5
|
|
|
Investments measured at net asset value
(i)
|
|
|
|
|
Hedge funds
(j)
|
41.5
|
|
|
|
|
Private equity funds
(k)
|
3.2
|
|
|
|
|
Private debt funds
(l)
|
12.9
|
|
|
|
|
Total investments
|
$
|
654.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2017
|
|
International
|
|
|
(millions)
|
Total
fair
value
|
Level 1
|
Level 2
|
|
Cash and cash equivalents
|
$
|
0.3
|
|
$
|
0.3
|
|
$
|
—
|
|
|
International equity securities
(b)
|
178.2
|
|
—
|
|
178.2
|
|
|
Fixed income securities:
|
|
|
|
|
U.S./government/ corporate bonds
(c)
|
131.6
|
|
—
|
|
131.6
|
|
|
Insurance contracts
(f)
|
21.2
|
|
—
|
|
21.2
|
|
|
Total investments
|
$
|
331.3
|
|
$
|
0.3
|
|
$
|
331.0
|
|
|
|
|
|
(a)
|
This category comprises equity funds and collective equity trust funds that most closely track the S&P index and other equity indices.
|
|
|
|
|
(b)
|
This category comprises international equity funds with varying benchmark indices.
|
|
|
|
|
(c)
|
This category comprises funds consisting of U.S. government and U.S. corporate bonds and other fixed income securities. An appropriate benchmark is the Barclays Capital Aggregate Bond Index.
|
|
|
|
|
(d)
|
This category comprises funds consisting of real estate related debt securities with an appropriate benchmark of the Barclays Investment Grade CMBS Index.
|
|
|
|
|
(e)
|
This category comprises funds consisting of international government/corporate bonds and other fixed income securities with varying benchmark indices.
|
|
|
|
|
(f)
|
This category comprises insurance contracts, the majority of which have a guaranteed investment return.
|
|
|
|
|
(g)
|
This category comprises funds investing in real estate investment trusts (REIT). An appropriate benchmark is the MSCI U.S. REIT Index.
|
|
|
|
|
(h)
|
This category comprises funds investing in natural resources. An appropriate benchmark is the Alerian master limited partnership (MLP) Index.
|
|
|
|
|
(i)
|
Certain investments that are valued using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. These are included to permit reconciliation of the fair value hierarchy to the aggregate pension plan assets.
|
|
|
|
|
(j)
|
This category comprises hedge funds investing in strategies represented in various HFRI Fund Indices. The net asset value is generally based on the valuation of the underlying investment. Limitations exist on the timing from notice by the plan of its intent to redeem and actual redemptions of these funds and generally range from a minimum of one month to several months.
|
|
|
|
|
(k)
|
This category comprises private equity, venture capital and limited partnerships. The net asset is based on valuation models of the underlying securities as determined by the general partner or general partner's designee. These valuation models include unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods of approximately 10 years.
|
|
|
|
|
(l)
|
This category comprises limited partnerships funds investing in senior loans, mezzanine and distressed debt. The net asset is based on valuation models of the underlying securities as determined by the general partner or general partner's designee. These valuation models include unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods of approximately 10 years.
|
For the plans’ hedge funds, private equity funds and private debt funds, we engage an independent advisor to compare the funds’ returns to other funds with similar strategies. Each fund is required to have an annual audit by
an independent accountant, which is provided to the independent advisor. This provides a basis of comparability relative to similar assets.
Equity securities in the U.S. pension plans included McCormick stock with a fair value of
$57.2 million
(
0.4 million
shares and
8.9%
of total U.S. pension plan assets) and
$39.0 million
(
0.4 million
shares and
6.0%
of total U.S. pension plan assets) at
November 30, 2018
and
2017
, respectively. Dividends paid on these shares were
$0.8 million
and
$0.7 million
in
2018
and in
2017
, respectively.
Pension benefit payments in our most significant plans are made from assets of the pension plans. It is anticipated that future benefit payments for the U.S. and International plans for the next 10 fiscal years will be as follows:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
United States
|
International
|
|
2019
|
$
|
38.8
|
|
$
|
12.7
|
|
|
2020
|
38.9
|
|
12.4
|
|
|
2021
|
40.6
|
|
13.1
|
|
|
2022
|
43.4
|
|
13.1
|
|
|
2023
|
44.1
|
|
14.1
|
|
|
2024-2028
|
240.4
|
|
69.9
|
|
U.S. Defined Contribution Retirement Plans
For the U.S. defined contribution retirement plan, we match
100%
of a participant’s contribution up to the first
3%
of the participant’s salary, and
50%
of the next
2%
of the participant’s salary. In addition, we make contributions of
3%
of the participant's salary for U.S. employees not covered by the defined benefit plan. Some of our smaller U.S. subsidiaries sponsor separate 401(k) retirement plans. We also sponsor a non-qualified defined contribution retirement plan. Our contributions charged to expense under all U.S. defined contribution retirement plans were
$15.5 million
,
$12.2 million
and
$10.4 million
in
2018
,
2017
and
2016
, respectively.
At the participant’s election, 401(k) retirement plans held
1.8 million
shares of McCormick stock, with a fair value of
$266.4 million
, at
November 30, 2018
. Dividends paid on these shares in
2018
and 2017 were
$3.9 million
and
$3.8 million
, respectively.
Postretirement Benefits Other Than Pensions
We currently provide postretirement medical and life insurance benefits to certain U.S. employees who were covered under the active employees’ plan and retire after age
55
with at least
five
years of service. The subsidy provided under these plans is based primarily on age at date of retirement. These benefits are not pre-funded but paid as incurred. Employees hired after December 31, 2008 are not eligible for a company subsidy. They are eligible for coverage on an access-only basis.
During 2017, we made the following changes to our postretirement medical and life insurance benefits impacting certain U.S. employees:
|
|
|
|
•
|
On August 23, 2017, our Management Committee approved changes to our postretirement medical benefits plan for eligible U.S. employees and retirees (employees hired after December 31, 2008 are not eligible for the subsidy). These changes included consolidating benefits providers and simplifying and reducing our subsidy for postretirement medical benefits. The effective date of the change in our subsidy was January 1, 2018.
|
|
|
|
|
•
|
On August 23, 2017, our Management Committee approved the elimination of life insurance benefits under our other postretirement benefit plan to eligible U.S. active employees (that life insurance benefit was available to U.S. employees hired on or prior to December 31, 2008). The effective date of this plan amendment was January 1, 2018, unless an employee committed to their retirement date by December 31, 2017 and retired on or before December 31, 2018.
|
As a result of these changes, we remeasured the other postretirement benefit obligation as of August 23, 2017, resulting in a reduction of the other postretirement benefit obligation of
$27.1 million
. These remeasurements resulted in an aggregate non-cash, pre-tax net prior service cost credit of
$27.1 million
, which is included in our Consolidated Statement of Comprehensive Income for 2017, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension and other postretirement plans. Deferred taxes associated with these aggregate prior service cost credits, together with other unrealized components of pension plans recognized during 2017, are also included in that statement as a component of Other comprehensive income (loss).
Our other postretirement benefit expense for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Service cost
|
$
|
2.0
|
|
$
|
2.6
|
|
$
|
2.7
|
|
|
Interest costs
|
2.4
|
|
3.3
|
|
3.8
|
|
|
Amortization of prior service credits
|
(8.6
|
)
|
(2.3
|
)
|
—
|
|
|
Amortization of actuarial gains
|
(0.1
|
)
|
(0.2
|
)
|
—
|
|
|
Postretirement benefit expense
|
$
|
(4.3
|
)
|
$
|
3.4
|
|
$
|
6.5
|
|
Rollforwards of the benefit obligation, fair value of plan assets and a reconciliation of the plans’ funded status at November 30, the measurement date, follow:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
70.9
|
|
$
|
95.5
|
|
|
Service cost
|
2.0
|
|
2.6
|
|
|
Interest costs
|
2.4
|
|
3.3
|
|
|
Employee contributions
|
0.4
|
|
3.2
|
|
|
Plan amendments
|
—
|
|
(27.1
|
)
|
|
Demographic assumptions change
|
—
|
|
2.4
|
|
|
Other plan assumptions
|
(0.1
|
)
|
—
|
|
|
Discount rate change
|
(4.5
|
)
|
3.7
|
|
|
Actuarial (gain) loss
|
(3.0
|
)
|
(3.5
|
)
|
|
Benefits paid
|
(5.2
|
)
|
(9.2
|
)
|
|
Benefit obligation at end of year
|
$
|
62.9
|
|
$
|
70.9
|
|
|
Change in fair value of plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
—
|
|
$
|
—
|
|
|
Employer contributions
|
4.8
|
|
6.0
|
|
|
Employee contributions
|
0.4
|
|
3.2
|
|
|
Benefits paid
|
(5.2
|
)
|
(9.2
|
)
|
|
Fair value of plan assets at end of year
|
$
|
—
|
|
$
|
—
|
|
|
Other postretirement benefit liability
|
$
|
62.9
|
|
$
|
70.9
|
|
Estimated future benefit payments (net of employee contributions) for the next 10 fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
Retiree
medical
|
Retiree life
insurance
|
Total
|
|
2019
|
$
|
4.1
|
|
$
|
1.3
|
|
$
|
5.4
|
|
|
2020
|
4.1
|
|
1.3
|
|
5.4
|
|
|
2021
|
4.1
|
|
1.3
|
|
5.4
|
|
|
2022
|
4.1
|
|
1.3
|
|
5.4
|
|
|
2023
|
4.0
|
|
1.3
|
|
5.3
|
|
|
2024-2028
|
19.2
|
|
6.4
|
|
25.6
|
|
The assumed discount rate in determining the benefit obligation was
4.5%
and
3.6%
for
2018
and
2017
, respectively.
For 2018, the assumed annual rate of increase in the cost of covered health care benefits is
7.3%
(
8.0%
last year). It is assumed to decrease gradually to
4.5%
in the year
2028
(
4.5%
in
2027
last year) and remain at that level thereafter. A one percentage point increase or decrease in the assumed health care cost trend rate would have had an immaterial effect on the benefit obligation and the total of service and interest cost components for 2018.
11. 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). Total stock-based compensation expense for
2018
,
2017
and
2016
was
$25.6 million
,
$23.9 million
and
$25.6 million
, respectively. Total unrecognized stock-based compensation expense related to our RSUs and stock options at
November 30, 2018
was
$31.7 million
and the weighted-average period over which this will be recognized is
1.6 years
. Total unrecognized stock-based compensation expense related to our LTPP is variable in nature and is dependent on the company's execution against established performance metrics under performance cycles related to this plan. As of
November 30, 2018, we have
3.2 million
shares remaining available for future issuance under our RSUs, stock option and LTPP award programs.
For all awards, forfeiture rates are considered in the calculation of compensation expense.
The following summarizes the key terms and the methods of valuation and expense recognition for each of our stock-based compensation awards.
RSUs
RSUs are valued at the market price of the underlying stock, discounted by foregone dividends, on the date of grant. Substantially all of the RSUs granted vest over a
three
-year term or, if earlier, upon the retirement eligibility
date of the holder. Compensation expense is recorded in the income statement ratably over the shorter of the period until vested or the employee's retirement eligibility date.
A summary of our RSU activity for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
2018
|
2017
|
2016
|
|
|
Shares
|
Weighted-
average
price
|
Shares
|
Weighted-
average
price
|
Shares
|
Weighted-
average
price
|
|
Beginning of year
|
267
|
|
$
|
86.47
|
|
267
|
|
$
|
80.08
|
|
270
|
|
$
|
71.03
|
|
|
Granted
|
278
|
|
112.72
|
|
131
|
|
94.63
|
|
105
|
|
96.59
|
|
|
Vested
|
(113
|
)
|
88.15
|
|
(118
|
)
|
80.62
|
|
(94
|
)
|
72.21
|
|
|
Forfeited
|
(9
|
)
|
96.53
|
|
(13
|
)
|
90.85
|
|
(14
|
)
|
82.10
|
|
|
Outstanding—end of year
|
423
|
|
$
|
103.05
|
|
267
|
|
$
|
86.47
|
|
267
|
|
$
|
80.08
|
|
Stock Options
Stock options are granted with an exercise price equal to the market price of the stock on the date of grant. Substantially all of the options vest ratably over a
three
-year period or, if earlier, upon the retirement-eligibility dates of the holders and are exercisable over a
10
-year period. Upon exercise of the option, shares are issued from our authorized and unissued shares.
The fair value of the options is estimated with a lattice option pricing model which uses the assumptions in the following table. We believe the lattice model provides an appropriate estimate of fair value of our options as it allows for a range of possible outcomes over an option term and can be adjusted for changes in certain assumptions over time. Expected volatilities are based primarily on the historical performance of our stock. We also use historical data to estimate the timing and amount of option exercises and forfeitures within the valuation model. The expected term of the options is an output of the option pricing model and estimates the period of time that options are expected to remain unexercised. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense is calculated based on the fair value of the options on the date of grant. This compensation is recorded in the income statement ratably over the shorter of the period until vested or the employee's retirement eligibility date.
The per share weighted-average fair value for all options granted was
$20.30
,
$17.61
and
$17.50
in
2018
,
2017
and
2016
, respectively. These fair values were computed using the following range of assumptions for the years ended November 30:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Risk-free interest rates
|
1.7 - 2.9%
|
|
0.9 - 2.4%
|
|
0.5 - 1.9%
|
|
|
Dividend yield
|
2.0
|
%
|
1.9
|
%
|
1.7
|
%
|
|
Expected volatility
|
18.4%
|
|
18.7%
|
|
18.7%
|
|
|
Expected lives
|
7.6 years
|
|
7.6 years
|
|
7.6 years
|
|
Under our stock option plans, we may issue shares on a net basis at the request of the option holder. This occurs by netting the option cost in shares from the shares exercised.
A summary of our stock option activity for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in millions)
|
2018
|
2017
|
2016
|
|
|
Shares
|
Weighted-
average
exercise
price
|
Shares
|
Weighted-
average
exercise
price
|
Shares
|
Weighted-
average
exercise
price
|
|
Beginning of year
|
4.8
|
|
$
|
71.91
|
|
4.9
|
|
$
|
66.00
|
|
4.8
|
|
$
|
59.20
|
|
|
Granted
|
0.4
|
|
105.95
|
|
0.6
|
|
98.07
|
|
0.7
|
|
99.92
|
|
|
Exercised
|
(1.6
|
)
|
55.28
|
|
(0.7
|
)
|
50.63
|
|
(0.6
|
)
|
51.26
|
|
|
Outstanding—end of year
|
3.6
|
|
82.60
|
|
4.8
|
|
71.91
|
|
4.9
|
|
66.00
|
|
|
Exercisable—end of year
|
2.8
|
|
$
|
76.54
|
|
3.8
|
|
$
|
65.34
|
|
3.4
|
|
$
|
56.97
|
|
As of
November 30, 2018
, the intrinsic value (the difference between the exercise price and the market price) for all options currently outstanding was
$244.4 million
and for options currently exercisable was
$202.2 million
. At November 30, 2018, the differences between options outstanding and options expected to vest and their related weighted-average exercise prices, aggregate intrinsic values and weighted-average remaining lives were not material. The total intrinsic value of all options exercised during the years ended
November 30, 2018
,
2017
and
2016
was
$108.0 million
,
$31.4 million
and
$25.4 million
, respectively. A summary of our stock options outstanding and exercisable at
November 30, 2018
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in millions)
|
Options outstanding
|
Options exercisable
|
|
Range of
exercise price
|
Shares
|
Weighted-
average
remaining
life (yrs.)
|
Weighted-
average
exercise
price
|
Shares
|
Weighted-
average
remaining
life (yrs.)
|
Weighted-
average
exercise
price
|
|
$29.00 - $55.00
|
0.4
|
|
2.9
|
$
|
50.66
|
|
0.4
|
|
2.9
|
$
|
50.66
|
|
|
$55.01 - $81.00
|
1.6
|
|
5.4
|
73.18
|
|
1.6
|
|
5.4
|
73.18
|
|
|
$81.01 - $107.00
|
1.6
|
|
8.2
|
100.67
|
|
0.8
|
|
7.7
|
99.41
|
|
|
|
3.6
|
|
5.6
|
$
|
82.60
|
|
2.8
|
|
4.6
|
$
|
76.54
|
|
LTPP
Our LTPP delivers awards in a combination of cash and company stock. The stock compensation portion of the LTPP awards shares of company stock if certain company performance objectives are met at the end of a three-year period. These awards are valued at the market price of the underlying stock on the date of grant. Compensation expense is recorded in the income statement ratably over the
three
-year period of the program based on the number of shares ultimately expected to be awarded using our estimate of the most likely outcome of achieving the performance objectives.
A summary of the LTPP award activity for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
2018
|
2017
|
2016
|
|
|
Shares
|
Weighted-
average
price
|
Shares
|
Weighted-
average
price
|
Shares
|
Weighted-
average
price
|
|
Beginning of year
|
220
|
|
$
|
84.31
|
|
201
|
|
$
|
78.10
|
|
192
|
|
$
|
70.94
|
|
|
Granted
|
86
|
|
101.90
|
|
78
|
|
89.96
|
|
108
|
|
86.40
|
|
|
Vested
|
(60
|
)
|
74.02
|
|
(43
|
)
|
69.04
|
|
(18
|
)
|
64.74
|
|
|
Performance adjustment
|
(26
|
)
|
86.40
|
|
(16
|
)
|
74.02
|
|
(41
|
)
|
69.04
|
|
|
Forfeited
|
(2
|
)
|
97.41
|
|
—
|
|
—
|
|
(40
|
)
|
81.78
|
|
|
Outstanding—end of year
|
218
|
|
$
|
83.55
|
|
220
|
|
$
|
84.31
|
|
201
|
|
$
|
78.10
|
|
12. INCOME TAXES
The provision for income taxes for the years ended November 30 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Income taxes
|
|
|
|
|
Current
|
|
|
|
|
Federal
|
$
|
92.9
|
|
$
|
67.1
|
|
$
|
127.7
|
|
|
State
|
11.0
|
|
6.2
|
|
15.1
|
|
|
International
|
78.7
|
|
53.9
|
|
50.2
|
|
|
|
182.6
|
|
127.2
|
|
193.0
|
|
|
Deferred
|
|
|
|
|
Federal
|
(340.3
|
)
|
23.8
|
|
(29.6
|
)
|
|
State
|
1.5
|
|
0.9
|
|
(2.4
|
)
|
|
International
|
(1.1
|
)
|
(0.6
|
)
|
(8.0
|
)
|
|
|
(339.9
|
)
|
24.1
|
|
(40.0
|
)
|
|
Total income tax (benefit) expense
|
$
|
(157.3
|
)
|
$
|
151.3
|
|
$
|
153.0
|
|
In December 2017, President Trump signed into law Pub.L. 115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (this legislation is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the U.S. Tax Act were effective during our fiscal year ended November 30, 2018 with all provisions of the U.S. Tax Act effective as of the beginning of our fiscal year ending November 30, 2019. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the U.S. Tax Act lowered the U.S. corporate income tax rate from
35%
to
21%
on our U.S. earnings from that date and beyond. The revaluation of our U.S. deferred tax assets and liabilities to the
21%
corporate tax rate has reduced our net U.S. deferred income tax liability by
$380.0 million
and is reflected as a reduction in our income tax expense in our results for the year ended November 30, 2018. The U.S. Tax Act imposes a one-time transition tax on post-1986 earnings of non-U.S. affiliates that have not been repatriated for purposes of U.S. federal income tax, with those earnings taxed at rates of
15.5%
for earnings reflected by cash and cash equivalent items and 8% for other assets. We estimate this transition tax to be
$75.3 million
. In addition to this transition tax, we have incurred additional foreign withholding taxes, net of a U.S. foreign tax credit, of
$7.9 million
associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested at January 1, 2018, and were subsequently distributed during fiscal 2018, as well as a
$4.7 million
reduction in our fiscal 2018 income taxes as a consequence of the transition tax, both of which we have recognized as a component of our income tax expense for the year ended November 30, 2018 for a net transition tax impact of
$78.5 million
. The cash tax effects of the transition tax, reduced by the utilization of
$12.0 million
of foreign tax credits carried forward from the prior year as well as other items, of
$49.1 million
can be remitted in installments over an eight-year period and we intend to do so.
The components of income from consolidated operations before income taxes for the years ended November 30 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Pretax income
|
|
|
|
|
United States
|
$
|
492.2
|
|
$
|
382.1
|
|
$
|
383.3
|
|
|
International
|
249.1
|
|
212.7
|
|
205.9
|
|
|
|
$
|
741.3
|
|
$
|
594.8
|
|
$
|
589.2
|
|
A reconciliation of the U.S. federal statutory rate with the effective tax rate for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Federal statutory tax rate
|
22.2
|
%
|
35.0
|
%
|
35.0
|
%
|
|
State income taxes, net of federal benefits
|
1.5
|
|
0.8
|
|
1.4
|
|
|
International tax at different effective rates
|
0.4
|
|
(4.8
|
)
|
(6.7
|
)
|
|
U.S. tax on remitted and unremitted earnings
|
0.6
|
|
0.4
|
|
0.4
|
|
|
Stock compensation expense
|
(2.9
|
)
|
(1.6
|
)
|
—
|
|
|
U.S. manufacturing deduction
|
(0.8
|
)
|
(1.8
|
)
|
(2.2
|
)
|
|
Changes in prior year tax contingencies
|
(0.8
|
)
|
(2.1
|
)
|
(1.8
|
)
|
|
U.S. Tax Act
|
(40.7
|
)
|
—
|
|
—
|
|
|
Other, net
|
(0.7
|
)
|
(0.5
|
)
|
(0.1
|
)
|
|
Total
|
(21.2
|
)%
|
25.4
|
%
|
26.0
|
%
|
Deferred tax assets and liabilities are comprised of the following as of November 30:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
|
Deferred tax assets
|
|
|
|
Employee benefit liabilities
|
$
|
82.7
|
|
$
|
146.8
|
|
|
Other accrued liabilities
|
40.0
|
|
51.7
|
|
|
Inventory
|
8.0
|
|
12.4
|
|
|
Tax loss and credit carryforwards
|
57.2
|
|
50.2
|
|
|
Other
|
44.2
|
|
18.7
|
|
|
Valuation allowance
|
(32.9
|
)
|
(26.0
|
)
|
|
|
199.2
|
|
253.8
|
|
|
Deferred tax liabilities
|
|
|
|
Depreciation
|
77.8
|
|
52.3
|
|
|
Intangible assets
|
782.8
|
|
1,246.0
|
|
|
Other
|
5.3
|
|
6.1
|
|
|
|
865.9
|
|
1,304.4
|
|
|
Net deferred tax liability
|
$
|
(666.7
|
)
|
$
|
(1,050.6
|
)
|
At
November 30, 2018
, our non-U.S. subsidiaries have tax loss carryforwards of
$195.9 million
. Of these carryforwards,
$2.5 million
expire in 2019,
$6.4 million
from 2020 through 2021,
$54.1 million
from 2022 through 2035 and
$132.9 million
may be carried forward indefinitely.
At November 30, 2018, our non-U.S. subsidiaries have capital loss carryforwards of
$28.2 million
. All of these carryforwards may be carried forward indefinitely.
A valuation allowance has been provided to record deferred tax assets at their net realizable value based on a more likely than not criteria. The
$6.9 million
net increase in the valuation allowance from November 30, 2017 to November 30, 2018 was mainly due to subsidiaries' net operating and capital losses which may not be realized in future periods.
Historically, we have not provided deferred income taxes on the cumulative undistributed earnings of our international subsidiaries. During fiscal 2018, we determined that previously undistributed earnings of certain international subsidiaries no longer met the requirements of indefinite reinvestment and therefore recognized
$7.9 million
of income tax expense in fiscal 2018. Our intent is to continue to reinvest the remaining undistributed earnings of our international subsidiaries indefinitely. While federal income tax expense has been recognized as a result of the U.S. Tax Act, we have not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings.
The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended November 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Balance at beginning of year
|
$
|
39.1
|
|
$
|
58.3
|
|
$
|
56.5
|
|
|
Additions for current year tax positions
|
6.5
|
|
7.3
|
|
10.3
|
|
|
Additions for prior year tax positions
|
0.3
|
|
0.9
|
|
2.4
|
|
|
Reductions for prior year tax positions
|
(6.9
|
)
|
(8.4
|
)
|
—
|
|
|
Settlements
|
—
|
|
(18.1
|
)
|
—
|
|
|
Statute expirations
|
(9.1
|
)
|
(2.1
|
)
|
(10.0
|
)
|
|
Foreign currency translation
|
(2.0
|
)
|
1.2
|
|
(0.9
|
)
|
|
Balance at November 30
|
$
|
27.9
|
|
$
|
39.1
|
|
$
|
58.3
|
|
As of November 30, 2018, if recognized
$27.5 million
of the unrecognized tax benefits of
$27.9 million
would affect the effective rate.
We record interest and penalties on income taxes in income tax expense. We recognized interest and penalty expense of
$0.1 million
,
$0.4 million
and
$1.2 million
in 2018, 2017 and 2016, respectively. As of
November 30, 2018
and
2017
, we had accrued
$5.1 million
and
$5.3 million
, respectively, of interest and penalties related to unrecognized tax benefits.
Tax settlements or statute of limitation expirations could result in a change to our uncertain tax positions. We believe that the reasonably possible total amount of unrecognized tax benefits as of November 30, 2018 that could decrease in the next 12 months as a result of various statute expirations, audit closures and/or tax settlements would not be material.
We file income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. The open years subject to tax audits vary depending on the tax jurisdictions. In the U.S federal jurisdiction, we are no longer subject to income tax audits by taxing authorities for years before 2015. In other major jurisdictions, we are no longer subject to income tax audits by taxing authorities for years before 2011.
We are under normal recurring tax audits in the U.S. and in several jurisdictions outside the U.S. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for uncertain tax positions are adequate to cover existing risks and exposures.
13. CAPITAL STOCK, EARNINGS PER SHARE AND STOCK ISSUANCE
Holders of Common Stock have full voting rights except that (1) the voting rights of persons who are deemed to own beneficially 10% or more of the outstanding shares of Common Stock are limited to
10%
of the votes entitled to be cast by all holders of shares of Common Stock regardless of how many shares in excess of 10% are held by such person; (2) we have the right to redeem any or all shares of stock owned by such person unless such person acquires more than
90%
of the outstanding shares of each class of our common stock; and (3) at such time as such person controls more than
50%
of the vote entitled to be cast by the holders of outstanding shares of Common Stock, automatically, on a share-for-share basis, all shares of Common Stock Non-Voting will convert into shares of Common Stock.
Holders of Common Stock Non-Voting will vote as a separate class on all matters on which they are entitled to vote. Holders of Common Stock Non-Voting are entitled to vote on reverse mergers and statutory share exchanges where our capital stock is converted into other securities or property, dissolution of the company and the sale of substantially all of our assets, as well as forward mergers and consolidation of the company.
During 2017, we issued approximately
6.35 million
shares of our common stock non-voting in connection with our acquisition of RB Foods (see note 2), which included approximately
0.8 million
shares from the exercise of the underwriters' option to purchase additional shares. The net proceeds from this issuance, after the underwriting discount and related expenses, was
$554.0 million
.
The reconciliation of shares outstanding used in the calculation of basic and diluted earnings per share for the years ended November 30 follows:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Average shares outstanding—basic
|
131.5
|
|
126.8
|
|
126.6
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options/RSUs/LTPP
|
1.7
|
|
1.6
|
|
1.4
|
|
|
Average shares outstanding—diluted
|
133.2
|
|
128.4
|
|
128.0
|
|
The following table sets forth the stock options and RSUs for the years ended November 30 which were not considered in our earnings per share calculation since they were antidilutive:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Antidilutive securities
|
0.2
|
|
1.1
|
|
0.5
|
|
14. COMMITMENTS AND CONTINGENCIES
During the normal course of our business, we are occasionally involved with various claims and litigation. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. At
November 30, 2018
and
2017
, no material reserves were recorded. The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. However, we believe that the likelihood that any such excess might have a material adverse effect on our financial statements is remote.
15. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
Business Segments
We operate in two business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce under the “McCormick” brand and a variety of brands around the world, including “French's,” “Frank's RedHot,” “Lawry’s,” “Zatarain’s,” “Simply Asia,” “Thai Kitchen,” “Ducros,” “Vahiné,” “Schwartz,” “Club House,” “Kamis,” “Kohinoor,” "DaQiao," "Drogheria & Alimentari," "Stubb's" and "Gourmet Garden." Our flavor solutions 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 each of these individual product lines.
Historically we have measured segment performance based on operating income excluding special charges as this activity is managed separately from the business segments. Beginning in 2017, we also exclude transaction and integration expenses related to our acquisition of RB Foods from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include the amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the RB Foods business. 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.
We have a large number of customers for our products. Sales to one of our consumer segment customers, Wal-Mart Stores, Inc., accounted for approximately
11%
of consolidated sales in
2018
,
2017
and
2016
. Sales to one of
our flavor solutions segment customers, PepsiCo, Inc., accounted for approximately 10% of consolidated sales in 2018 and approximately 11% in both
2017
and
2016
.
Accounting policies for measuring segment operating income and assets are consistent with those described in note 1. Because of integrated manufacturing for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Inter-segment sales are not material. Corporate assets include cash, deferred taxes, investments and certain fixed assets.
Business Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
Consumer
|
Flavor Solutions
|
Total
segments
|
Corporate
& other
|
Total
|
|
2018
|
|
|
|
|
|
|
Net sales
|
$
|
3,318.0
|
|
$
|
2,090.9
|
|
$
|
5,408.9
|
|
$
|
—
|
|
$
|
5,408.9
|
|
|
Operating income excluding special charges and transaction and integration expenses
|
644.9
|
|
297.2
|
|
942.1
|
|
—
|
|
942.1
|
|
|
Income from unconsolidated operations
|
29.5
|
|
5.3
|
|
34.8
|
|
—
|
|
34.8
|
|
|
Assets
|
—
|
|
—
|
|
10,015.8
|
|
240.6
|
|
10,256.4
|
|
|
Capital expenditures
|
—
|
|
—
|
|
126.3
|
|
42.8
|
|
169.1
|
|
|
Depreciation and amortization
|
—
|
|
—
|
|
115.0
|
|
35.7
|
|
150.7
|
|
|
2017
|
|
|
|
|
|
|
Net sales
|
$
|
2,970.1
|
|
$
|
1,864.0
|
|
$
|
4,834.1
|
|
$
|
—
|
|
$
|
4,834.1
|
|
|
Operating income excluding special charges and transaction and integration expenses
|
564.2
|
|
222.1
|
|
786.3
|
|
—
|
|
786.3
|
|
|
Income from unconsolidated operations
|
28.9
|
|
5.0
|
|
33.9
|
|
—
|
|
33.9
|
|
|
Assets
|
—
|
|
—
|
|
10,036.7
|
|
349.1
|
|
10,385.8
|
|
|
Capital expenditures
|
—
|
|
—
|
|
153.6
|
|
28.8
|
|
182.4
|
|
|
Depreciation and amortization
|
—
|
|
—
|
|
99.8
|
|
25.4
|
|
125.2
|
|
|
2016
|
|
|
|
|
|
|
Net sales
|
$
|
2,753.2
|
|
$
|
1,658.3
|
|
$
|
4,411.5
|
|
$
|
—
|
|
$
|
4,411.5
|
|
|
Operating income excluding special charges
|
490.8
|
|
166.2
|
|
657.0
|
|
—
|
|
657.0
|
|
|
Income from unconsolidated operations
|
30.7
|
|
5.4
|
|
36.1
|
|
—
|
|
36.1
|
|
|
Assets
|
—
|
|
—
|
|
4,387.8
|
|
248.1
|
|
4,635.9
|
|
|
Capital expenditures
|
—
|
|
—
|
|
120.1
|
|
33.7
|
|
153.8
|
|
|
Depreciation and amortization
|
—
|
|
—
|
|
71.7
|
|
37.0
|
|
108.7
|
|
A reconciliation of operating income excluding special charges, and for 2018 and 2017, transaction and integration expenses, to operating income for 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
Consumer
|
|
Flavor Solutions
|
|
Total
|
|
2018
|
|
|
|
|
|
|
Operating income excluding special charges and transaction and integration expenses
|
$
|
644.9
|
|
|
$
|
297.2
|
|
|
$
|
942.1
|
|
|
Less: Special charges
|
10.0
|
|
|
6.3
|
|
|
16.3
|
|
|
Less: Transaction and integration expenses
|
15.0
|
|
|
7.5
|
|
|
22.5
|
|
|
Operating income
|
$
|
619.9
|
|
|
$
|
283.4
|
|
|
$
|
903.3
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Operating income excluding special charges and transaction and integration expenses
|
$
|
564.2
|
|
|
$
|
222.1
|
|
|
$
|
786.3
|
|
|
Less: Special charges
|
15.3
|
|
|
6.9
|
|
|
22.2
|
|
|
Less: Transaction and integration expenses included in cost of goods sold
|
13.6
|
|
|
7.3
|
|
|
20.9
|
|
|
Less: Other transaction and integration expenses
|
27.1
|
|
|
13.7
|
|
|
40.8
|
|
|
Operating income
|
$
|
508.2
|
|
|
$
|
194.2
|
|
|
$
|
702.4
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Operating income excluding special charges
|
$
|
490.8
|
|
|
$
|
166.2
|
|
|
$
|
657.0
|
|
|
Less: Special charges included in cost of goods sold
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Less: Other special charges
|
8.9
|
|
|
6.8
|
|
|
15.7
|
|
|
Operating income
|
$
|
481.6
|
|
|
$
|
159.4
|
|
|
$
|
641.0
|
|
Geographic Areas
We have net sales and long-lived assets in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
United
States
|
EMEA
|
Other
countries
|
Total
|
|
2018
|
|
|
|
|
|
Net sales
|
$
|
3,266.9
|
|
$
|
1,021.1
|
|
$
|
1,120.9
|
|
$
|
5,408.9
|
|
|
Long-lived assets
|
6,449.7
|
|
1,060.0
|
|
876.6
|
|
8,386.3
|
|
|
2017
|
|
|
|
|
|
Net sales
|
$
|
2,859.6
|
|
$
|
951.6
|
|
$
|
1,022.9
|
|
$
|
4,834.1
|
|
|
Long-lived assets
|
6,357.9
|
|
1,129.1
|
|
883.3
|
|
8,370.3
|
|
|
2016
|
|
|
|
|
|
Net sales
|
$
|
2,565.3
|
|
$
|
896.0
|
|
$
|
950.2
|
|
$
|
4,411.5
|
|
|
Long-lived assets
|
1,499.9
|
|
846.5
|
|
519.3
|
|
2,865.7
|
|
Long-lived assets include property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization.
16. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Supplemental income statement, balance sheet and cash flow information follow:
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
|
Inventories
|
|
|
|
Finished products
|
$
|
406.1
|
|
$
|
398.1
|
|
|
Raw materials and work-in-process
|
380.2
|
|
395.2
|
|
|
|
$
|
786.3
|
|
$
|
793.3
|
|
|
Prepaid expenses
|
$
|
27.2
|
|
$
|
32.4
|
|
|
Other current assets
|
51.7
|
|
49.4
|
|
|
|
$
|
78.9
|
|
$
|
81.8
|
|
|
Property, plant and equipment
|
|
|
|
Land and improvements
|
$
|
62.6
|
|
$
|
63.2
|
|
|
Buildings (including capital lease)
|
626.2
|
|
488.3
|
|
|
Machinery and equipment
|
926.5
|
|
882.0
|
|
|
Software
|
336.9
|
|
332.5
|
|
|
Construction-in-progress
|
114.3
|
|
99.9
|
|
|
Accumulated depreciation
|
(1,081.4
|
)
|
(1,056.8
|
)
|
|
|
$
|
985.1
|
|
$
|
809.1
|
|
|
Investments and other assets
|
|
|
|
Investments in affiliates
|
$
|
167.2
|
|
$
|
163.6
|
|
|
Long-term investments
|
120.8
|
|
127.0
|
|
|
Other assets
|
102.2
|
|
107.9
|
|
|
|
$
|
390.2
|
|
$
|
398.5
|
|
|
Other accrued liabilities
|
|
|
|
Payroll and employee benefits
|
$
|
176.5
|
|
$
|
181.3
|
|
|
Sales allowances
|
142.1
|
|
146.6
|
|
|
Other
|
329.6
|
|
396.3
|
|
|
|
$
|
648.2
|
|
$
|
724.2
|
|
|
Other long-term liabilities
|
|
|
|
Pension
|
$
|
123.1
|
|
$
|
169.5
|
|
|
Postretirement benefits
|
58.5
|
|
65.8
|
|
|
Unrecognized tax benefits
|
31.0
|
|
28.9
|
|
|
Other
|
100.5
|
|
65.0
|
|
|
|
$
|
313.1
|
|
$
|
329.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
2018
|
2017
|
2016
|
|
Depreciation
|
$
|
104.8
|
|
$
|
85.2
|
|
$
|
71.2
|
|
|
Software amortization
|
14.0
|
|
14.5
|
|
17.1
|
|
|
Interest paid
|
179.8
|
|
72.1
|
|
57.5
|
|
|
Income taxes paid
|
154.6
|
|
155.6
|
|
151.0
|
|
Dividends paid per share were
$2.08
in
2018
,
$1.88
in
2017
and
$1.72
in
2016
. Dividends declared per share were
$2.13
in 2018, and
$1.93
in 2017, and
$1.76
in 2016.
17. SELECTED QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions except per share data)
|
First
|
Second
|
Third
|
Fourth
|
|
2018
|
|
|
|
|
|
Net sales
|
$
|
1,237.1
|
|
$
|
1,327.3
|
|
$
|
1,345.3
|
|
$
|
1,499.2
|
|
|
Gross profit
|
520.0
|
|
575.2
|
|
594.9
|
|
681.5
|
|
|
Operating income
|
183.7
|
|
191.7
|
|
233.0
|
|
294.9
|
|
|
Net income
|
422.6
|
|
123.3
|
|
173.5
|
|
214.0
|
|
|
Basic earnings per share
|
3.22
|
|
0.94
|
|
1.32
|
|
1.62
|
|
|
Diluted earnings per share
|
3.18
|
|
0.93
|
|
1.30
|
|
1.60
|
|
|
Dividends paid per share—
|
|
|
|
|
|
Common Stock and Common Stock Non-Voting
|
0.52
|
|
0.52
|
|
0.52
|
|
0.52
|
|
|
Dividends declared per share—
|
|
|
|
|
|
Common Stock and Common Stock Non-Voting
|
—
|
|
0.52
|
|
0.52
|
|
1.09
|
|
|
2017
|
|
|
|
|
|
Net sales
|
$
|
1,043.7
|
|
$
|
1,114.3
|
|
$
|
1,185.2
|
|
$
|
1,490.9
|
|
|
Gross profit
|
413.0
|
|
444.6
|
|
484.4
|
|
668.2
|
|
|
Operating income
|
134.2
|
|
132.6
|
|
168.7
|
|
266.9
|
|
|
Net income
|
93.5
|
|
100.0
|
|
108.2
|
|
175.7
|
|
|
Basic earnings per share
|
0.75
|
|
0.80
|
|
0.86
|
|
1.34
|
|
|
Diluted earnings per share
|
0.74
|
|
0.79
|
|
0.85
|
|
1.32
|
|
|
Dividends paid per share—
|
|
|
|
|
|
Common Stock and Common Stock Non-Voting
|
0.47
|
|
0.47
|
|
0.47
|
|
0.47
|
|
|
Dividends declared per share—
|
|
|
|
|
|
Common Stock and Common Stock Non-Voting
|
—
|
|
0.47
|
|
0.47
|
|
0.99
|
|
Operating income for the first quarter of 2018 included
$2.2 million
of special charges, with an after-tax impact of
$1.6 million
and a per share impact of
$0.01
for both basic and diluted earnings per share. Operating income for the first quarter of 2018 included
$8.7 million
of transaction and integration expenses, with an after-tax impact of
$6.9 million
and a per share impact of
$0.05
for both basic and diluted earnings per share. Net income for the first quarter of 2018 included
$297.9 million
of non-recurring income tax benefit related to enactment of the U.S. Tax Act, with a per share impact of
$2.27
and
$2.24
for basic and diluted earnings per share, respectively. Operating income for the second quarter of 2018 included
$8.4 million
of special charges, with an after-tax impact of
$6.5 million
and a per share impact of
$0.05
for both basic and diluted earnings per share. Operating income for the second quarter of 2018 included
$7.8 million
of transaction and integration expenses, with an after-tax impact of
$6.1 million
and a per share impact of
$0.05
and
$0.04
for basic and diluted earnings per share, respectively. Operating income for the third quarter of 2018 included
$3.3 million
of special charges, with an after-tax impact of
$2.5 million
and a per share impact of
$0.02
for both basic and diluted earnings per share. Operating income for the third quarter of 2018 included
$5.6 million
of transaction and integration expenses, with an after-tax impact of
$4.3 million
and a per share impact of
$0.04
for both basic and diluted earnings per share. Net income for the third quarter of 2018 included
$10.3 million
of non-recurring income tax benefit related to enactment of the U.S. Tax Act, with a per share impact of
$0.08
for both basic and diluted earnings per share. Operating income for the fourth quarter of 2018 included
$2.4 million
of special charges, with an after-tax impact of
$1.9 million
and a per share impact of
$0.02
for both basic and diluted earnings per share. Operating income for the fourth quarter of 2018 included
$0.4 million
of transaction and integration expenses, with an after-tax impact of
$0.3 million
. Net income for the fourth quarter of 2018 included
$6.7 million
of non-recurring income tax expense related to enactment of the U.S. Tax Act, with a per share impact of
$0.05
for both basic and diluted earnings per share.
Operating income for the first quarter of 2017 included
$3.6 million
of special charges, with an after-tax impact of
$2.5 million
and a per share impact of
$0.02
for both basic and diluted earnings per share. Operating income for the second quarter of 2017 included
$4.7 million
of special charges, with an after-tax impact of
$3.4 million
and a per share impact of
$0.03
for both basic and diluted earnings per share. Operating income for the third quarter of 2017 included
$4.7 million
of special charges, with an after-tax impact of
$3.2 million
and a per share impact of
$0.03
for both basic and diluted earnings per share. Operating income for the third quarter of 2017 included
$30.4 million
of transaction and integration expenses, including
$5.9 million
reflected in gross profit. Net income for the third quarter of 2017 also included a pre-tax charge of
$15.4 million
reflected in other debt costs. For the third quarter of 2017, the after-tax impact of transaction and integration expenses and other debt costs was
$31.1 million
and a per share impact of
$0.25
and
$0.24
for basic and diluted earnings per share, respectively. Operating income for the fourth
quarter of 2017 included
$9.2 million
of special charges, with an after-tax impact of
$6.7 million
and a per share impact of
$0.05
for both basic and diluted earnings per share. Operating income for the fourth quarter of 2017 included
$31.3 million
of transaction and integration expenses, including
$15.0 million
reflected in gross profit, with an after-tax impact of
$22.4 million
and a per share impact of
$0.17
for both basic and diluted earnings per share.
See notes 2 and 3 for details with respect to the transaction and integration expenses and actions undertaken in connection with these special charges, respectively. See note 12 for details regarding the non-recurring income tax benefits.
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarters may not be equal to the full year earnings per share.