NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented. We made an immaterial adjustment to the accompanying Condensed Consolidated Statement of Comprehensive Income that decreased both currency translation adjustments as well as comprehensive income by $3.1 million and $4.3 million for the three and nine months ended August 31, 2018, respectively, to conform to the presentation included in the Consolidated Statement of Comprehensive Income included in our Annual Report on Form 10-K for the year ended November 30, 2018.
The results of consolidated operations for the nine-month period ended August 31, 2019 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations are lower in the first half of the fiscal year and increase in the second half. The typical increase in net sales, net income and cash flow from operations in the second half of the year is largely due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.
For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2018.
Significant Accounting Policies
The following significant accounting policies were updated in 2019 to reflect changes upon our adoption of ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (the “Revenue Recognition ASU”), ASU No. 2017-07 Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “Pension ASU”), and ASU No. 2017-12 Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities.
Revenue Recognition
We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and foodservice businesses. We recognize sales as performance obligations are fulfilled when control passes to the customer. Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Any taxes collected on behalf of government authorities are excluded from net sales. We account for product shipping and handling as fulfillment activities with costs for these activities recorded within cost of goods sold. Amounts billed and due from our customers are classified as accounts receivable on the balance sheet and require payment on a short-term basis. Our allowance for doubtful accounts represents our estimate of probable non-payments and credit losses in our existing receivables, as determined based on a review of past due balances and other specific account data.
Performance Obligations
Our revenues primarily result from contracts or purchase orders with customers, which are generally short-term in nature. The Company assesses the goods and services promised in its customers’ contracts or purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices.
Significant Judgments
Sales are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Where applicable, future
reimbursements are estimated based on a combination of historical patterns and future expectations regarding these programs. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one-year or shorter duration. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized. The adjustments recognized during the three and nine months ended August 31, 2019 and 2018 resulting from updated estimates of revenue for prior year product sales were not significant. The unsettled portion remaining in accrued liabilities for these activities was $115.7 million, $125.9 million and $142.1 million at August 31, 2019, August 31, 2018 and November 30, 2018, respectively.
Other
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. Our business segments each sell to similar channels and customers. See note 11 for revenues reported by business segment, which is consistent with how we organize and manage our operations, and for revenues reported by geographic region.
Practical Expedients
As more fully described below, we adopted the Revenue Recognition ASU in the first quarter of 2019 using the full retrospective method, including applying the following policy elections and practical expedients upon that adoption:
|
|
•
|
Shipping and handling costs – The Company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service.
|
|
|
•
|
Measurement of transaction price – The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales, value added and other excise taxes.
|
|
|
•
|
Incremental cost of obtaining a contract – The Company elected to expense any incremental costs of obtaining a contract if the contract is for a period of one year or less.
|
Shipping and Handling
Shipping and handling costs on our products sold to customers related to activities that occur before the customer has obtained control of a good are included in cost of goods sold in the consolidated income statement.
Brand Marketing Support
Total brand marketing support costs are included in selling, general and administrative expense in the consolidated income statement. Brand marketing support costs include advertising and promotions but exclude trade funds paid to customers for such activities. All trade funds paid to customers are reflected in the consolidated income statement as a reduction of net sales. Promotion costs include public relations, shopper marketing, social marketing activities, general consumer promotion activities and depreciation of 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 advertising are expensed as incurred.
Derivative Instruments
We record all derivatives on the balance sheet at fair value. The fair value of derivative instruments is recorded in other current assets, other assets, other accrued liabilities or other liabilities. Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the consolidated income statement in other income (expense), net or interest expense. In the consolidated cash flow statement, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivative instruments, including instruments for which hedge accounting has been discontinued, are classified consistent with the nature of the instrument.
Cash flow hedges. Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in accumulated other comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) to the consolidated income statement on the same line item as the underlying transaction.
Fair value hedges. Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item.
Net investment hedges. Qualifying derivative and nonderivative financial instruments are accounted for as net investment hedges when the hedged item is a nonfunctional currency investment in a subsidiary. Gains and losses on these instruments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss).
Accounting Pronouncements Adopted in 2019
We elected to adopt the Revenue Recognition ASU on a full retrospective basis. We adopted the Pension ASU on a retrospective basis as required by the standard. These new accounting standards are summarized below.
In May 2014, the FASB issued the Revenue Recognition ASU, which supersedes previously existing revenue recognition guidance. Under this new guidance, companies 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; and we applied 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 did not have and is not expected to have an effect on the timing of our revenue recognition.
Upon adoption of the Revenue Recognition ASU in fiscal 2019, we made the following changes to our revenue recognition accounting policy and disclosure practices. We classify shipping and handling expenses as a component of cost of goods sold, rather than our prior practice of recording these costs as a component of selling, general and administrative expense. Also, we classify all payments to direct and indirect customers, including certain trade funds used for cooperative advertising and displays, as a reduction of revenue. Prior to our adoption of the Revenue Recognition ASU, we presented certain of those payments as brand marketing support costs and included these payments as a component of selling, general and administrative expense. There was no effect on operating income, net income, or basic and diluted earnings per share upon our adoption of the Revenue Recognition ASU in 2019.
In March 2017, the FASB issued the Pension ASU. 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 is 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 was adopted as of December 1, 2018 and has been applied on a retrospective basis. Adoption of the new standard solely impacts classification within our consolidated income statement, with no change to net income or basic and diluted earnings per share.
The adoption of the Revenue Recognition ASU and the Pension ASU, on a retrospective basis, impacted our previously reported results for the three and nine months ended August 31, 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Changes
|
|
Previously Reported
|
Revenue Recognition (1)
|
Pension
|
Recast (1)
|
For the three months ended August 31, 2018:
|
|
|
|
|
Net sales
|
$
|
1,345.3
|
|
$
|
(27.1
|
)
|
$
|
—
|
|
$
|
1,318.2
|
|
Cost of goods sold
|
750.4
|
|
44.7
|
|
0.6
|
|
795.7
|
|
Gross profit
|
594.9
|
|
(71.8
|
)
|
(0.6
|
)
|
522.5
|
|
Selling, general and administrative expense
|
353.0
|
|
(71.8
|
)
|
2.5
|
|
283.7
|
|
Operating income
|
233.0
|
|
—
|
|
(3.1
|
)
|
229.9
|
|
Other income, net
|
1.7
|
|
—
|
|
3.1
|
|
4.8
|
|
|
|
|
|
|
For the nine months ended August 31, 2018:
|
|
|
|
|
Net sales
|
$
|
3,909.7
|
|
$
|
(74.8
|
)
|
$
|
—
|
|
$
|
3,834.9
|
|
Cost of goods sold
|
2,219.6
|
|
125.2
|
|
1.8
|
|
2,346.6
|
|
Gross profit
|
1,690.1
|
|
(200.0
|
)
|
(1.8
|
)
|
1,488.3
|
|
Selling, general and administrative expense
|
1,045.7
|
|
(200.0
|
)
|
7.0
|
|
852.7
|
|
Operating income
|
608.4
|
|
—
|
|
(8.8
|
)
|
599.6
|
|
Other income, net
|
4.7
|
|
—
|
|
8.8
|
|
13.5
|
|
|
|
(1)
|
Amounts reflected in these columns for the nine months ended August 31, 2018 have been reclassified from the corresponding amounts included in the Form 8-K that we furnished on March 11, 2019. This reclassification is a revision of the recast of previously reported historical information associated with our retrospective adoption of the Revenue Recognition ASU and Pension ASU in the first quarter of 2019, as follows: (i) decreased cost of goods sold by $4.2 million, with a resultant increase in gross profit by $4.2 million; and (ii) increased selling, general and administrative expense by $4.2 million.
|
We adopted the following new accounting standards in the first nine months of 2019 on a prospective basis:
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 is effective for the first quarter of our fiscal year ending November 30, 2020, with early adoption permitted in any interim period or fiscal year before the effective date. We have elected to adopt this guidance effective December 1, 2018. There was no material impact to our financial statements upon adoption.
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 was 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. There was no cumulative-effect adjustment upon adoption. As more fully disclosed in note 8, during the nine months ended August 31, 2019, we recognized a discrete tax benefit of $16.2 million under the provisions of this standard. 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 the Revenue Recognition ASU. The new standard is effective for the first quarter of our fiscal year ending November 30, 2019. There was no material impact to our financial statements upon adoption.
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, and we have provided this disclosure beginning in the first quarter of 2019.
Recently Issued Accounting Pronouncements — Pending Adoption
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 No. 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. We are currently in the process of evaluating our existing lease portfolio, including accumulating all of the necessary information required to properly account for leases under the new standard. Additionally, we are implementing new software to assist in the accounting and are evaluating changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. Based on our assessment to date, we expect that the adoption of ASU No. 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which institutes a new model for recognizing credit losses on financial instruments that are not measured at fair value. The ASU is effective for the first quarter of our fiscal year ending November 30, 2021, and we anticipate that it will primarily impact our credit losses recognized for trade accounts receivable. While we are currently evaluating the effect that ASU No. 2016-13 will have on our consolidated financial statements, we do not expect this guidance to have a material impact.
In August 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. During the nine months ended August 31, 2018, we paid an additional $4.2 million associated with the final working capital adjustment.
During the three and nine months ended August 31, 2018, we incurred $5.6 million and $22.1 million, respectively, of transaction and integration expenses related to the RB Foods acquisition. Those costs consisted of outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition. The following are the transaction and integration expenses related to the RB Foods acquisition that we have recorded for the three and nine months ended August 31, 2018 (in millions):
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2018
|
Nine months ended August 31, 2018
|
Transaction expenses
|
$
|
0.1
|
|
$
|
0.3
|
|
Integration expenses
|
5.5
|
|
21.8
|
|
Total
|
$
|
5.6
|
|
$
|
22.1
|
|
In our consolidated income statement, we include a separate line item captioned “Special charges” in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.
The following is a summary of special charges recognized in the three and nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
|
Nine months ended August 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Employee severance and related benefits
|
$
|
1.1
|
|
|
$
|
0.6
|
|
|
$
|
5.1
|
|
|
$
|
1.7
|
|
Other costs
|
6.6
|
|
|
2.7
|
|
|
11.8
|
|
|
12.2
|
|
Total
|
$
|
7.7
|
|
|
$
|
3.3
|
|
|
$
|
16.9
|
|
|
$
|
13.9
|
|
We continue to evaluate changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness.
In 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 expected multi-year course—to range from approximately $55 million to $65 million. Of that $55 million to $65 million, we estimate that half will be attributable to
severance and related benefit payments and half will be attributable to cash payments associated with the 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 the three months ended August 31, 2019, we recorded $7.7 million of special charges, consisting primarily of (i) $6.0 million related to our GE initiative, including $5.5 million of third-party expenses, $0.3 million related to severance and related benefits, and $0.2 million related to other costs, and (ii) $1.3 million related to streamlining actions in our Europe, Middle East and Africa (EMEA) region.
During the nine months ended August 31, 2019, we recorded $16.9 million of special charges, consisting primarily of (i) $12.2 million related to our GE initiative, including $8.9 million of third-party expenses, $2.0 million related to severance and related benefits, and $1.3 million related to other costs, (ii) $2.3 million of employee severance and related benefits associated with streamlining actions in the Americas and (iii) $1.9 million related to streamlining actions in EMEA.
During the three months ended August 31, 2018, we recorded $3.3 million of special charges, consisting primarily of: (i) $3.1 million related to our GE initiative, including $2.6 million related to third party expenses and $0.5 million related to employee severance and related benefits, and (ii) $0.1 million related to severance and related benefits and other costs directly associated with the relocation of our Chinese manufacturing facilities.
During the nine months ended August 31, 2018, we recorded $13.9 million of special charges, consisting primarily of: (i) $9.8 million related to our GE initiative, including $6.1 million of third party expenses, $3.0 million for a non-cash impairment charge, and $0.7 million related to severance and related benefits, (ii) a one-time payment in the aggregate amount of $2.2 million made to certain U.S. hourly employees associated with the enactment of the U.S Tax Act; (iii) $0.9 million related to severance and related benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; and (iv) $0.7 million related to severance and related benefits and other costs related to the transfer of certain manufacturing operations in our Asia Pacific region to a new facility then under construction in Thailand.
The remaining balance associated with our special charges of $4.0 million as of August 31, 2019 are included in accounts payable and other accrued liabilities in our consolidated balance sheet and are expected to be paid during the remainder of fiscal year 2019.
In addition to the amounts recognized in the first nine months of 2019, we expect to incur additional special charges during the remainder of 2019. We expect total special charges in 2019 of $20.0 million, consisting principally of: (i) approximately $15.0 million associated with our GE initiative comprised of third party expenses, severance and related benefits and other costs; (ii) $2.3 million of severance and related benefits associated with streamlining actions in the Americas, and (iii) $2.2 million related to streamlining actions in EMEA.
The following is a breakdown by business segments of special charges for the three and nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
|
Nine months ended August 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Consumer segment
|
$
|
4.6
|
|
|
$
|
2.2
|
|
|
$
|
11.0
|
|
|
$
|
8.6
|
|
Flavor solutions segment
|
3.1
|
|
|
1.1
|
|
|
5.9
|
|
|
5.3
|
|
Total special charges
|
$
|
7.7
|
|
|
$
|
3.3
|
|
|
$
|
16.9
|
|
|
$
|
13.9
|
|
4. FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS
During the nine months ended August 31, 2019 and 2018, we repaid $100.0 million and $180.0 million, respectively, of the three-year term loan due August 17, 2020. During the nine months ended August 31, 2019 and 2018, we repaid $106.3 million and $156.3 million, respectively, of the five-year term loan due August 17, 2022, which included required principal installments of $56.3 million in both periods. During the nine months ended August 31, 2018, we repaid the $250 million, 5.75% notes that matured on December 15, 2017.
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency, net investment 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 exchange risk. We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contracts and currency swaps to reduce fluctuations in long or short currency positions.
Forward contracts and options are generally less than 18 months duration. Currency swap agreements are established in conjunction with the term of underlying debt issues.
For foreign currency cash flow and fair value hedges, the assessment of effectiveness is generally based on changes in spot rates.
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. At August 31, 2019, the notional value of these contracts was $73.8 million. We also enter into fair value foreign currency exchange contracts to manage exposure to currency fluctuations in certain intercompany loans between subsidiaries. At August 31, 2019, the notional value of these contracts was $381.5 million. During the three months ended August 31, 2019 and 2018, we recognized (losses) gains of $(5.3) million and $0.5 million, respectively, on the change in fair value of these contracts and gains (losses) of $5.2 million and $(1.1) million, respectively, on the change in the currency component of the underlying loans. During the nine months ended August 31, 2019 and 2018, we recognized losses of $(2.6) million and $(2.1) million, respectively, on the change in fair value of these contracts and gains of $2.0 million and $1.1 million, respectively, on the change in the currency component of the underlying loans. Both the gains and the losses were recognized in our consolidated income statement as other income, net.
Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts that are considered net investment hedges. As of August 31, 2019, we had notional value of cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross currency interest rate swap contracts expire in August 2027.
Interest rate risk. We finance a portion of our operations with both fixed and variable rate debt instruments, principally commercial paper, notes and bank loans. We utilize interest rate swap agreements, including forward-starting swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and achieve a desired mix of variable and fixed rate debt. Fixed-to-variable interest rate swaps are designated and accounted for as fair value hedges and the assessment of effectiveness is based on changes in the fair value of the underlying debt.
As of August 31, 2019, we have outstanding interest rate swap contracts for a notional amount of $350 million. Those interest rate swap contracts include a $100 million notional value of interest rate swap contracts, where we receive interest at 3.25% and pay a variable rate of interest based on three-month LIBOR plus 1.22%, which expire in November 2025, and 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. We also have $250 million notional interest rate swap contracts where we receive interest at 3.40% and pay a variable rate of interest based on three-month LIBOR plus 0.685%, which expire in August 2027, and are designated as fair value
hedges of the changes in fair value of $250 million of the $750 million 3.40% term notes due 2027. Any realized gain or loss on either of these swaps was offset by a corresponding increase or decrease of the value of the hedged debt.
All derivatives are recognized at fair value in the balance sheet and recorded in either other current assets, or noncurrent other assets, other accrued liabilities or other long-term liabilities depending upon their nature and maturity.
The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2019
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance sheet
location
|
|
Notional
amount
|
|
Fair
value
|
|
Balance sheet
location
|
|
Notional
amount
|
|
Fair
value
|
Interest rate contracts
|
Other current
assets / Investments and other assets
|
|
$
|
350.0
|
|
|
$
|
28.2
|
|
|
Other accrued liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
Other current
assets
|
|
104.7
|
|
|
2.2
|
|
|
Other accrued
liabilities
|
|
350.6
|
|
|
4.6
|
|
Cross currency contracts
|
Investments and other assets
|
|
236.4
|
|
|
14.0
|
|
|
Other long-term liabilities
|
|
243.9
|
|
|
13.4
|
|
Total
|
|
|
|
|
$
|
44.4
|
|
|
|
|
|
|
$
|
18.0
|
|
|
|
|
As of August 31, 2018
|
Asset Derivatives
|
|
Liability 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
|
|
|
$
|
6.0
|
|
Foreign exchange contracts
|
Other current
assets
|
|
175.8
|
|
|
2.1
|
|
|
Other accrued
liabilities
|
|
254.6
|
|
|
5.7
|
|
Total
|
|
|
|
|
$
|
2.1
|
|
|
|
|
|
|
$
|
11.7
|
|
|
|
|
As of November 30, 2018
|
Asset Derivatives
|
|
Liability 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
|
|
The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our consolidated income statement for the three and nine-month periods ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Income statement
location
|
|
Income (expense)
|
|
|
|
|
Three months ended August 31, 2019
|
|
Three months ended August 31, 2018
|
|
Nine months ended August 31, 2019
|
|
Nine months ended August 31, 2018
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
Income statement location
|
Gain (loss) recognized in income
|
|
Income statement location
|
Gain (loss) recognized in income
|
Derivative
|
|
2019
|
2018
|
Hedged item
|
|
2019
|
2018
|
Foreign exchange contracts
|
Other income, net
|
$
|
(5.3
|
)
|
$
|
0.5
|
|
Intercompany loans
|
Other income, net
|
$
|
5.2
|
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended August 31,
|
Income statement location
|
Gain (loss) recognized in income
|
|
Income statement location
|
Gain (loss) recognized in income
|
Derivative
|
|
2019
|
2018
|
Hedged item
|
|
2019
|
2018
|
Foreign exchange contracts
|
Other income, net
|
$
|
(2.6
|
)
|
$
|
(2.1
|
)
|
Intercompany loans
|
Other income, net
|
$
|
2.0
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
Three months ended August 31,
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Gain or (loss)
recognized in OCI
|
|
Income
statement
location
|
|
Gain or (loss)
reclassified from
AOCI
|
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
Interest rate contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Foreign exchange contracts
|
|
(0.3
|
)
|
|
0.1
|
|
|
Cost of goods sold
|
|
0.5
|
|
|
(0.8
|
)
|
Total
|
|
$
|
(0.3
|
)
|
|
$
|
0.1
|
|
|
|
|
$
|
0.7
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended August 31,
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Gain or (Loss)
recognized in OCI
|
|
Income
statement
location
|
|
Gain or (Loss)
reclassified from
AOCI
|
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
Interest rate contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Foreign exchange contracts
|
|
0.3
|
|
|
0.9
|
|
|
Cost of goods
sold
|
|
0.9
|
|
|
(3.5
|
)
|
Total
|
|
$
|
0.3
|
|
|
$
|
0.9
|
|
|
|
|
$
|
1.3
|
|
|
$
|
(3.1
|
)
|
For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive income (loss) expected to be reclassified in the next 12 months is $1.5 million as an increase to earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges
|
|
|
Three months ended August 31,
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Gain or (loss)
recognized in OCI
|
|
Income
statement
location
|
|
Gain or (loss)
excluded from the assessment of hedge effectiveness
|
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
Cross currency contracts
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended August 31,
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Gain or (loss)
recognized in OCI
|
|
Income
statement
location
|
|
Gain or (loss)
excluded from the assessment of hedge effectiveness
|
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
Cross currency contracts
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
Interest
expense
|
|
$
|
3.8
|
|
|
$
|
—
|
|
For all net investment hedges, no amounts have been reclassified out of other comprehensive income (loss). The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.
|
|
5.
|
FAIR VALUE MEASUREMENTS
|
Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
At August 31, 2019, August 31, 2018 and November 30, 2018, we had no financial assets or liabilities that were subject to a level 3 fair value measurement. Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
162.9
|
|
|
$
|
162.9
|
|
|
$
|
—
|
|
Insurance contracts
|
|
117.2
|
|
|
—
|
|
|
117.2
|
|
Bonds and other long-term investments
|
|
4.3
|
|
|
4.3
|
|
|
—
|
|
Interest rate derivatives
|
|
28.2
|
|
|
—
|
|
|
28.2
|
|
Foreign currency derivatives
|
|
2.2
|
|
|
—
|
|
|
2.2
|
|
Cross currency contracts
|
|
14.0
|
|
|
—
|
|
|
14.0
|
|
Total
|
|
$
|
328.8
|
|
|
$
|
167.2
|
|
|
$
|
161.6
|
|
Liabilities
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
4.6
|
|
Cross currency contracts
|
|
13.4
|
|
|
—
|
|
|
13.4
|
|
Total
|
|
$
|
18.0
|
|
|
$
|
—
|
|
|
$
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
73.0
|
|
|
$
|
73.0
|
|
|
$
|
—
|
|
Insurance contracts
|
|
123.7
|
|
|
—
|
|
|
123.7
|
|
Bonds and other long-term investments
|
|
4.4
|
|
|
4.4
|
|
|
—
|
|
Foreign currency derivatives
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
Total
|
|
$
|
203.2
|
|
|
$
|
77.4
|
|
|
$
|
125.8
|
|
Liabilities
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
Interest rate derivatives
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
Total
|
|
$
|
11.7
|
|
|
$
|
—
|
|
|
$
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2018
|
|
|
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
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
Interest rate derivatives
|
|
6.4
|
|
|
—
|
|
|
6.4
|
|
Total
|
|
$
|
12.8
|
|
|
$
|
—
|
|
|
$
|
12.8
|
|
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar-type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on values for similar instruments using models with market-based inputs.
The following table sets forth the carrying amounts and fair values of our long-term debt (including the current portion thereof) at August 31, 2019, August 31, 2018 and November 30, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
|
November 30, 2018
|
Carrying amount
|
$
|
3,962.4
|
|
|
$
|
4,345.3
|
|
|
$
|
4,136.4
|
|
Fair value
|
4,153.7
|
|
|
4,294.5
|
|
|
4,039.4
|
|
|
|
|
|
|
|
Level 1 valuation techniques
|
$
|
3,475.0
|
|
|
$
|
3,218.0
|
|
|
$
|
3,172.7
|
|
Level 2 valuation techniques
|
678.7
|
|
|
1,076.5
|
|
|
866.7
|
|
Total fair value
|
$
|
4,153.7
|
|
|
$
|
4,294.5
|
|
|
$
|
4,039.4
|
|
The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments.
|
|
6.
|
EMPLOYEE BENEFIT AND RETIREMENT PLANS
|
During the first quarter of 2018, 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.
As a result of this change, we remeasured pension assets and benefit obligations as of the date of the approval (December 1, 2017) and we reduced the Canadian plan benefit obligations by $17.5 million. This remeasurement resulted in non-cash, pre-tax net actuarial gains of $17.5 million for the nine months ended August 31, 2018. This net actuarial gain consists principally of a curtailment gain of $18.0 million and is included in our consolidated statement of comprehensive income for the nine months ended August 31, 2018, 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 the nine months ended August 31, 2018, is also included in that statement as a component of Other comprehensive income (loss).
The following table presents the components of our pension (income) expense of the defined benefit plans for the three months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
International
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Defined benefit plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
0.5
|
|
|
$
|
4.4
|
|
|
$
|
0.9
|
|
|
$
|
1.0
|
|
Interest costs
|
8.6
|
|
|
8.0
|
|
|
2.3
|
|
|
2.2
|
|
Expected return on plan assets
|
(10.6
|
)
|
|
(10.8
|
)
|
|
(4.0
|
)
|
|
(4.0
|
)
|
Amortization of prior service costs
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial losses
|
0.6
|
|
|
2.4
|
|
|
0.3
|
|
|
0.7
|
|
Total pension (income) expense
|
$
|
(0.8
|
)
|
|
$
|
4.0
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.1
|
)
|
The following table presents the components of our pension (income) expense of the defined benefit plans for the nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
International
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Defined benefit plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
1.5
|
|
|
$
|
13.1
|
|
|
$
|
2.7
|
|
|
$
|
3.2
|
|
Interest costs
|
25.8
|
|
|
23.8
|
|
|
7.1
|
|
|
6.9
|
|
Expected return on plan assets
|
(31.8
|
)
|
|
(32.4
|
)
|
|
(12.3
|
)
|
|
(12.4
|
)
|
Amortization of prior service costs
|
0.3
|
|
|
—
|
|
|
0.1
|
|
|
0.5
|
|
Amortization of net actuarial losses
|
1.8
|
|
|
7.4
|
|
|
0.9
|
|
|
2.1
|
|
Total pension (income) expense
|
$
|
(2.4
|
)
|
|
$
|
11.9
|
|
|
$
|
(1.5
|
)
|
|
$
|
0.3
|
|
During the nine months ended August 31, 2019 and 2018, we contributed $8.9 million and $12.0 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2018 were $13.5 million.
The following table presents the components of our other postretirement benefits (income) expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
|
Nine months ended August 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Other postretirement benefits
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
1.5
|
|
|
$
|
1.8
|
|
Interest costs
|
|
0.7
|
|
|
0.6
|
|
|
2.0
|
|
|
1.8
|
|
Amortization of prior service credits
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
(6.5
|
)
|
|
(6.5
|
)
|
Amortization of net actuarial gains
|
|
(0.1
|
)
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
Total other postretirement benefits (income) expense
|
|
$
|
(1.1
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(2.9
|
)
|
In conjunction with our adoption of the Pension ASU, all of the amounts in the tables above for pension expense and other postretirement benefits expense, other than service cost, were included in the income statement caption "Other income, net" within our consolidated income statements. The aggregate amount of pension and other postretirement benefits (income) expenses, excluding service cost components, were $(4.3) million and $(3.1) million for the three months ended August 31, 2019 and 2018, respectively, and $(13.1) million and $(8.8) million for the nine months ended August 31, 2019 and 2018, respectively.
|
|
7.
|
STOCK-BASED COMPENSATION
|
We have three types of stock-based compensation awards: restricted stock units (RSUs), stock options and company stock awarded as part of our long-term performance plan (LTPP). The following table sets forth the stock-based compensation expense recorded in selling, general and administrative (SG&A) expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
|
Nine months ended August 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock-based compensation expense
|
$
|
7.8
|
|
|
$
|
5.5
|
|
|
$
|
30.6
|
|
|
$
|
21.6
|
|
Our 2019 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2018 annual grant. The weighted-average grant-date fair value of each stock option granted in 2019 was $27.51 and in 2018 was $20.30 as calculated under a lattice pricing model. Substantially all of the stock options and RSUs granted in 2019 vest ratably over a three-year period or, if earlier, upon the retirement eligibility date of the holder. The fair values of stock option grants in the stated periods were computed using the following range of assumptions for our various stock compensation plans:
|
|
|
|
|
|
2019
|
|
2018
|
Risk-free interest rates
|
2.2 - 2.5%
|
|
1.7 - 2.9%
|
Dividend yield
|
1.5%
|
|
2.0%
|
Expected volatility
|
17.4%
|
|
18.4%
|
Expected lives (in years)
|
7.5
|
|
7.6
|
The following is a summary of our stock option activity for the nine months ended August 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
(shares in millions)
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at beginning of period
|
3.6
|
|
|
$
|
82.60
|
|
|
4.8
|
|
|
$
|
71.91
|
|
Granted
|
0.3
|
|
|
147.39
|
|
|
0.4
|
|
|
105.95
|
|
Exercised
|
(1.2
|
)
|
|
70.78
|
|
|
(0.9
|
)
|
|
51.82
|
|
Outstanding at end of the period
|
2.7
|
|
|
$
|
95.50
|
|
|
4.3
|
|
|
$
|
79.31
|
|
Exercisable at end of the period
|
2.0
|
|
|
$
|
86.08
|
|
|
3.4
|
|
|
$
|
73.52
|
|
As of August 31, 2019, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $181.2 million and for options currently exercisable was $153.5 million. The total intrinsic value of all options exercised during the nine months ended August 31, 2019 and 2018 was $102.8 million and $56.9 million, respectively.
The following is a summary of our RSU activity for the nine months ended August 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
(shares in thousands)
|
Number
of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Number
of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Outstanding at beginning of period
|
423
|
|
|
$
|
103.05
|
|
|
267
|
|
|
$
|
86.47
|
|
Granted
|
129
|
|
|
143.15
|
|
|
201
|
|
|
101.17
|
|
Vested
|
(134
|
)
|
|
96.74
|
|
|
(117
|
)
|
|
88.35
|
|
Forfeited
|
(9
|
)
|
|
112.10
|
|
|
(6
|
)
|
|
95.68
|
|
Outstanding at end of period
|
409
|
|
|
$
|
117.51
|
|
|
345
|
|
|
$
|
94.21
|
|
The following is a summary of our LTPP activity for the nine months ended August 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
(shares in thousands)
|
Number
of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Number
of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Outstanding at beginning of period
|
218
|
|
|
$
|
83.55
|
|
|
220
|
|
|
$
|
84.31
|
|
Granted
|
102
|
|
|
150.51
|
|
|
86
|
|
|
101.90
|
|
Vested
|
(57
|
)
|
|
86.40
|
|
|
(59
|
)
|
|
74.02
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
96.74
|
|
Outstanding at end of period
|
263
|
|
|
$
|
117.14
|
|
|
245
|
|
|
$
|
92.87
|
|
Income taxes for the three months ended August 31, 2019 included $15.5 million of discrete tax benefits consisting principally of the following: (i) $8.3 million of excess tax benefits associated with share-based compensation, (ii) $2.4 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in several jurisdictions, (iii) $2.5 million related to the revaluation of deferred tax liabilities resulting from enacted legislation and (iv) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act, described below. Income taxes for the nine months ended August 31, 2019 included $44.4 million of discrete tax benefits consisting principally of the following: (i) $21.2 million of excess tax benefits associated with share-based compensation, (ii) $16.2 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter under the provisions of ASU No. 2016-16, which was adopted on December 1, 2018, (iii) $2.6 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in several jurisdictions, (iv) $2.1 million related to the revaluation of deferred tax liabilities resulting from enacted legislation and (v) $2.3 million for an adjustment to a prior year tax accrual based on the final return filed, including $1.5 million associated with the U.S. Tax Act, described below.
Income taxes for the three months ended August 31, 2018 included $20.6 million of discrete tax benefits consisting of the following: (i) $10.3 million net benefit associated with the U.S. Tax Act, described below, (ii) $7.9 million of excess tax benefits associated with share-based compensation, (iii) $2.0 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in U.S. and non-U.S. jurisdictions, and (iv) $1.4 million for an adjustment to a prior year tax accrual based on the final return filed, less a net detriment of $1.0 million associated with other items. Income taxes for the nine months ended August 31, 2018 included $326.0 million of discrete tax benefits consisting of the following: (i) $308.2 million net benefit associated with the U.S. Tax Act, described below, (ii) $12.4 million of excess tax benefits associated with share-based compensation, (iii) $5.5 million related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitation in non-U.S. jurisdictions, and (iv) $1.4 million for an adjustment to a prior year tax accrual based on the final return filed, less a net detriment of $1.5 million, including $0.5 million related to the revaluation of deferred tax assets resulting from legislation enacted in a non-U.S. jurisdiction in our first quarter.
In December 2017, President Trump signed into law H.R. 1, “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 was formerly called the “Tax Cuts and Jobs Act” and is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act provided 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 beginning December 1, 2018. The U.S. Tax Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017. The U.S. Tax Act creates a new requirement that certain income earned by foreign subsidiaries, known as GILTI, must be included in the gross income of the subsidiary's U.S. shareholder. This provision of the U.S. Tax Act was effective for us for our fiscal year beginning December 1, 2018. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat GILTI as a current period expense when incurred.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118) on December 23, 2017. SAB 118 provided a one-year measurement period from a registrant’s reporting period that includes the U.S. Tax Act’s enactment date to allow registrants sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740 Income Taxes. As more fully described in note 12 of notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2018, we recognized a $301.5 million income tax benefit, net, associated with the U.S. Tax Act during the year ended November 30, 2018. The net tax benefit related to the U.S. Tax Act was provisional and changed during the measurement period, which ended in the quarter ended November 30, 2018, as a result of, among other things, changes in interpretations and assumptions we made, guidance issued and other actions taken as a result of the U.S. Tax Act different from that previously assumed. During the third quarter of 2018, we recognized a tax benefit of $10.3 million as a change in the estimate to the $297.9 million provisional net benefit recognized in the first quarter of 2018 related to the U.S. Tax Act, as described below. We also recorded a net income tax benefit of $1.5 million in the three and nine months ended August 31, 2019 associated with a provision-to-return adjustment related to the U.S Tax Act.
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. As of August 31, 2018, we estimated that the revaluation of our U.S. deferred tax assets and liabilities to the 21% corporate tax rate reduced our net U.S. deferred income tax liability by $381.4 million and we reflected that amount as a reduction in our income tax expense for the nine months ended August 31, 2018. The U.S. Tax Act imposed a one-time transition tax on post-1986 earnings of non-U.S. affiliates that had 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. As of August 31, 2018, we estimated this transition tax to be $72.3 million. In addition to this transition tax, we incurred additional foreign withholding taxes of $5.2 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that are no longer considered indefinitely reinvested and were subsequently distributed as well as a $4.3 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax that we have recognized as a component of our income tax expense for the nine months ended August 31, 2018, for a net transition tax impact of $73.2 million.
Other than additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three and nine months ended August 31, 2019.
As of August 31, 2019, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements.
|
|
9.
|
EARNINGS PER SHARE AND STOCK ISSUANCE
|
The following table sets forth the reconciliation of average shares outstanding (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
August 31, 2019
|
|
August 31, 2018
|
|
August 31, 2019
|
|
August 31, 2018
|
Average shares outstanding – basic
|
132.8
|
|
|
131.6
|
|
|
132.5
|
|
|
131.4
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options/RSUs/LTPP
|
1.4
|
|
|
1.6
|
|
|
1.5
|
|
|
1.6
|
|
Average shares outstanding – diluted
|
134.2
|
|
|
133.2
|
|
|
134.0
|
|
|
133.0
|
|
The following table sets forth the stock options and RSUs for the three and nine months ended August 31, 2019 and 2018 that were not considered in our earnings per share calculation since they were anti-dilutive (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
August 31, 2019
|
|
August 31, 2018
|
|
August 31, 2019
|
|
August 31, 2018
|
Anti-dilutive securities
|
0.2
|
|
|
0.3
|
|
|
0.1
|
|
|
0.4
|
|
The following table sets forth the common stock activity for the three and nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
August 31, 2019
|
|
August 31, 2018
|
|
August 31, 2019
|
|
August 31, 2018
|
Shares issued, net of shares withheld for taxes, under stock options, RSUs, LTPP and employee stock purchase plans
|
0.5
|
|
|
0.5
|
|
|
1.3
|
|
|
1.0
|
|
Shares repurchased under the stock repurchase program
|
0.1
|
|
|
0.1
|
|
|
0.5
|
|
|
0.4
|
|
As of August 31, 2019, $50.1 million remained of the $600 million share repurchase authorization that was authorized by the Board of Directors in March 2015.
|
|
10.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The following table sets forth the components of accumulated other comprehensive income (loss), net of tax, where applicable (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
|
November 30, 2018
|
Foreign currency translation adjustment
|
$
|
(308.2
|
)
|
|
$
|
(197.3
|
)
|
|
$
|
(241.6
|
)
|
Unrealized loss on foreign currency exchange contracts
|
(0.8
|
)
|
|
(1.5
|
)
|
|
(1.1
|
)
|
Unamortized value of settled interest rate swaps
|
0.4
|
|
|
0.8
|
|
|
0.6
|
|
Pension and other postretirement costs
|
(119.7
|
)
|
|
(156.1
|
)
|
|
(117.8
|
)
|
Accumulated other comprehensive loss
|
$
|
(428.3
|
)
|
|
$
|
(354.1
|
)
|
|
$
|
(359.9
|
)
|
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 three and nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
Affected Line Items in the Condensed Consolidated Income Statement
|
Accumulated Other Comprehensive Income (Loss) Components
|
|
August 31, 2019
|
|
August 31, 2018
|
|
August 31, 2019
|
|
August 31, 2018
|
|
(Gains)/losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
|
(0.5
|
)
|
|
0.8
|
|
|
(0.9
|
)
|
|
3.5
|
|
|
Cost of goods sold
|
Total before tax
|
|
(0.7
|
)
|
|
0.6
|
|
|
(1.3
|
)
|
|
3.1
|
|
|
|
|
Tax effect
|
|
0.1
|
|
|
(0.1
|
)
|
|
0.3
|
|
|
(0.6
|
)
|
|
Income taxes
|
Net, after tax
|
|
$
|
(0.6
|
)
|
|
$
|
0.5
|
|
|
$
|
(1.0
|
)
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and postretirement benefit adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs (credit) (1)
|
|
$
|
(2.1
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(6.0
|
)
|
|
Other income, net
|
Amortization of net actuarial losses (1)
|
|
0.8
|
|
|
3.1
|
|
|
2.2
|
|
|
9.5
|
|
|
Other income, net
|
Total before tax
|
|
(1.3
|
)
|
|
0.9
|
|
|
(3.9
|
)
|
|
3.5
|
|
|
|
|
Tax effect
|
|
0.3
|
|
|
(0.2
|
)
|
|
0.9
|
|
|
(0.8
|
)
|
|
Income taxes
|
Net, after tax
|
|
$
|
(1.0
|
)
|
|
$
|
0.7
|
|
|
$
|
(3.0
|
)
|
|
$
|
2.7
|
|
|
|
|
(1) This accumulated other comprehensive income (loss) component is included in the computation of total pension expense and other postretirement benefits expense (refer to note 6 for additional details).
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 outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores 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”, “Vahine”, “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.
We measure segment performance based on operating income excluding special charges, as this activity is managed separately from the business segments, and transaction and integration expenses related to our acquisition of RB Foods, 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. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
Flavor Solutions
|
|
Total
|
|
|
|
(in millions)
|
|
|
Three months ended August 31, 2019
|
|
|
|
|
|
Net sales
|
$
|
794.2
|
|
|
$
|
535.0
|
|
|
$
|
1,329.2
|
|
Operating income excluding special charges
|
176.5
|
|
|
84.7
|
|
|
261.2
|
|
Income from unconsolidated operations
|
7.3
|
|
|
2.3
|
|
|
9.6
|
|
|
|
|
|
|
|
Three months ended August 31, 2018
|
|
|
|
|
|
Net sales
|
$
|
772.4
|
|
|
$
|
545.8
|
|
|
$
|
1,318.2
|
|
Operating income excluding special charges and transaction and integration expenses
|
152.0
|
|
|
86.8
|
|
|
238.8
|
|
Income from unconsolidated operations
|
7.7
|
|
|
0.7
|
|
|
8.4
|
|
|
|
|
|
|
|
Nine months ended August 31, 2019
|
|
|
|
|
|
Net sales
|
$
|
2,303.2
|
|
|
$
|
1,559.4
|
|
|
$
|
3,862.6
|
|
Operating income excluding special charges
|
449.6
|
|
|
225.8
|
|
|
675.4
|
|
Income from unconsolidated operations
|
22.7
|
|
|
6.5
|
|
|
29.2
|
|
|
|
|
|
|
|
Nine months ended August 31, 2018
|
|
|
|
|
|
Net sales
|
$
|
2,285.8
|
|
|
$
|
1,549.1
|
|
|
$
|
3,834.9
|
|
Operating income excluding special charges and transaction and integration expenses
|
411.6
|
|
|
224.0
|
|
|
635.6
|
|
Income from unconsolidated operations
|
20.8
|
|
|
3.1
|
|
|
23.9
|
|
A reconciliation of operating income excluding special charges and, for the three and nine months ended August 31, 2018, transaction and integration expenses, to operating income is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
Flavor Solutions
|
|
Total
|
Three months ended August 31, 2019
|
|
|
|
|
|
Operating income excluding special charges
|
$
|
176.5
|
|
|
$
|
84.7
|
|
|
$
|
261.2
|
|
Less: Special charges
|
4.6
|
|
|
3.1
|
|
|
7.7
|
|
Operating income
|
$
|
171.9
|
|
|
$
|
81.6
|
|
|
$
|
253.5
|
|
|
|
|
|
|
|
Three months ended August 31, 2018
|
|
|
|
|
|
Operating income excluding special charges and transaction and integration expenses
|
$
|
152.0
|
|
|
$
|
86.8
|
|
|
$
|
238.8
|
|
Less: Special charges
|
2.2
|
|
|
1.1
|
|
|
3.3
|
|
Less: Transaction and integration expenses
|
3.8
|
|
|
1.8
|
|
|
5.6
|
|
Operating income
|
$
|
146.0
|
|
|
$
|
83.9
|
|
|
$
|
229.9
|
|
|
|
|
|
|
|
Nine months ended August 31, 2019
|
|
|
|
|
|
Operating income excluding special charges
|
$
|
449.6
|
|
|
$
|
225.8
|
|
|
$
|
675.4
|
|
Less: Special charges
|
11.0
|
|
|
5.9
|
|
|
16.9
|
|
Operating income
|
$
|
438.6
|
|
|
$
|
219.9
|
|
|
$
|
658.5
|
|
|
|
|
|
|
|
Nine months ended August 31, 2018
|
Operating income excluding special charges and transaction and integration expenses
|
$
|
411.6
|
|
|
$
|
224.0
|
|
|
$
|
635.6
|
|
Less: Special charges
|
8.6
|
|
|
5.3
|
|
|
13.9
|
|
Less: Transaction and integration expenses
|
14.8
|
|
|
7.3
|
|
|
22.1
|
|
Operating income
|
$
|
388.2
|
|
|
$
|
211.4
|
|
|
$
|
599.6
|
|
The following table sets forth our net sales, by geographic area, for the three and nine months ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
EMEA
|
Asia/Pacific
|
|
Total
|
|
|
|
|
|
|
Three months ended August 31, 2019
|
$
|
931.3
|
|
$
|
234.5
|
|
$
|
163.4
|
|
|
$
|
1,329.2
|
|
Three months ended August 31, 2018
|
918.5
|
|
244.2
|
|
155.5
|
|
|
1,318.2
|
|
|
|
|
|
|
|
Nine months ended August 31, 2019
|
2,634.4
|
|
726.7
|
|
501.5
|
|
|
3,862.6
|
|
Nine months ended August 31, 2018
|
2,573.4
|
|
755.8
|
|
505.7
|
|
|
3,834.9
|
|