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March 30, 2021, 5:43 p.m. EDT

10-Q: MCCORMICK & CO INC

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(EDGAR Online via COMTEX) -- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand McCormick & Company, Incorporated, our operations, and our present business environment. Table of Contents MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto, included in Item 1 of this report. We use certain non-GAAP information - more fully described below under the caption Non-GAAP Financial Measures - that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. Unless otherwise noted, the dollar and share information in the charts and tables in MD&A are in millions, except per share data. On November 30, 2020, the Company effected a two-for-one stock split in the form of a stock dividend on all shares of the Company's two classes of common stock. On November 30, one like share was issued for each share outstanding to shareholders of record as of November 20, 2020. All common stock and per share data have been retroactively adjusted to reflect the stock split.

Business profile

Recent Events

We are partnering with our customers to react to consumer demand changes associated with COVID-19. The effects of COVID-19 on consumer behavior have, on a net basis, favorably impacted the operating results of our consumer segment and unfavorably impacted the operating results of our flavor solutions segment in the three months ended February 28, 2021. The impact of COVID-19 on our consumer segment during that period resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same period was principally attributable to decreased demand from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures impacting our flavor solutions customers included the following: (i) with respect to dine-in restaurants, closures, limitations on dine-in capacity, or restrictions on the operations of those restaurants to carry-out or delivery only; and (ii) with respect to quick service restaurants, limitations on operations to drive-through, pick-up or delivery. Those negative impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The impact of the global COVID-19 pandemic on our consolidated operating results during the three months ended February 29, 2020 was limited, in all material respects, to our operations in China where the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country. Our operations in China saw a sharp drop in sales during the three months ended February 29, 2020, with sales declining by $43 million from the corresponding period in fiscal 2019.

In early fiscal 2021, vaccines effective in combating COVID-19 were approved by health agencies in certain countries/regions in which we operate (including the U.S., U.K., European Union, Canada and Mexico) and began to be administered. However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to front-line health care workers and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19. We expect that administration of the COVID-19 vaccines to substantial numbers of the population is unlikely to occur in the more significant jurisdictions in which we operate until mid- to late-2021 in the Americas and EMEA and until 2022 in the Asia Pacific region. The availability of COVID-19 vaccines and their take-up by individuals is difficult to predict and, as a result, actual vaccination results are likely to vary from these expectations. The pace and shape of the COVID-19 recovery described above as well as the impact and extent of potential resurgences is not presently known. These and other uncertainties with respect to COVID-19 could result in changes to our current expectations in addition to a number of adverse impacts to our business, including but not limited to additional disruption to the economy and consumers' willingness and ability to spend, temporary or permanent closures by businesses that consume our products, such as Table of Contents

Acquisitions

On December 30, 2020, we acquired FONA International, LLC and certain of its affiliates (FONA), a privately owned company, for approximately $707 million, net of cash acquired, subject to certain customary purchase price adjustments. We financed this fiscal 2021 acquisition with cash and commercial paper. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets which expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform, strengthens our capabilities, and accelerates the strategic migration of our portfolio to more value-added and technically insulated products.

As described below under the caption 2021 Outlook, the FONA and Cholula acquisitions are expected to contribute more than one-third of our sales growth in 2021.

2021 Outlook

We expect our 2021 gross profit margin to decline 10 basis points from our gross profit margin of 41.1% in 2020. The projected 2021 decline in gross profit margin is principally due to (i) expected accretion from our acquisitions of Cholula and FONA, net of transaction and integration expenses of $6.3 million related to the amortization of the step-up of the acquired inventories of Cholula and FONA to fair value, (ii) anticipated unfavorable sales mix in 2021 between our consumer and flavor solutions segments as compared to 2020, (iii) an expected increase in COVID-19 related expenses of approximately $10 million in 2021 over the 2020 level, and (iv) an anticipated low-single-digit level of inflation in 2021 compared to 2020. Excluding the $6.3 million of transaction and integration expenses related to our acquisitions of Cholula and FONA included in our projected range

In 2021, we expect an increase in operating income of 5% to 7%, which includes an estimated 2% favorable impact from currency rates, over the 2020 level. The projected range of change in operating income in 2021 reflects an expected increase of approximately $30 million in expense related to our global ERP replacement program over the fiscal 2020 level. Our CCI-led cost savings target in 2021 is approximately $110 million and approximates the $113 million of CCI-led cost savings realized in 2020. We anticipate transaction and integration expenses related to the Cholula and FONA acquisitions of approximately $50 million to negatively impact operating income in 2021, as compared to $12.4 million of transaction and integration expenses in 2020. We also expect approximately $8 million of special charges in 2021 that relate to previously announced organization and streamlining actions; in 2020, special charges were $6.9 million. Excluding special charges and transaction and integration expenses, we expect 2021's adjusted operating income to increase by 9% to 11%, which includes an estimated 2% favorable impact from currency rates, or to increase by 7% to 9% on a constant currency basis over the 2020 level.

Our underlying effective tax rate is projected to be higher in 2021 than in 2020. We estimate our effective tax rate, including the net favorable impact of anticipated discrete tax items, to approximate 24% in 2021 as compared to 19.8% in 2020. Excluding projected taxes associated with special charges and transaction and integration expenses, including the unfavorable impact in the first quarter of 2021 of a deferred state tax discrete tax item directly related to our acquisition of FONA that increased tax expense by $11.4 million, we estimate that our adjusted effective tax rate will approximate 23% in fiscal 2021, as compared to an adjusted effective tax rate of 19.9% in 2020.

Diluted earnings per share was $2.78 in 2020. Diluted earnings per share for 2021 is projected to range from $2.77 to $2.82. Excluding the per share impact of special charges and transaction and integration expenses of $0.01 and $0.04, respectively, adjusted diluted earnings per share was $2.83 in 2020. Adjusted diluted earnings per share (excluding an estimated per share impact from special charges of $0.02 and from transaction and integration expenses of $0.18, including the unfavorable impact of a discrete tax item of $0.04 related to our acquisition of FONA) is projected to range from $2.97 to $3.02 in 2021. We expect adjusted diluted earnings per share to grow by 5% to 7%, which includes a 2% favorable impact from currency rates, or to grow by 3% to 5% on a constant currency basis over adjusted diluted earnings per share of $2.83 in 2020.







        RESULTS OF OPERATIONS - COMPANY
                                                                                           Three months ended
                                                                               February 28, 2021         February 29, 2020
        Net sales                                                             $        1,481.5          $        1,212.0
        Percent increase (decrease)                                                       22.2  %                   (1.6) %
        Components of percent growth in net sales - increase (decrease):
                Volume and product mix                                                    15.2  %                   (2.5) %
                Pricing actions                                                            0.8  %                    1.1  %
                Acquisitions                                                               4.0  %                      -  %
                Foreign exchange                                                           2.2  %                   (0.2) %
        Gross profit                                                          $          577.5          $          469.9
        Gross profit margin                                                               39.0  %                   38.8  %
        


Sales for the first quarter of 2021 increased by 22.2% from the prior year level and by 20.0% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). Higher volume and favorable product mix increased sales by 15.2%, driven by sharply higher demand in the consumer segment across all regions. In the Americas and EMEA regions, growth was driven by increased consumption due to a shift in consumer behavior toward at-home meal preparation related to the continuation of measures imposed to mitigate the spread of COVID-19. Sales growth in the Americas also benefited from trade replenishment with certain customers. Sales growth was also favorably impacted by the Asia/Pacific region due largely to the strong rebound of our business in China, which had been significantly impacted by the COVID-19 outbreak in the first quarter of fiscal 2020 and accounted for 560 basis points of consolidated sales growth during the quarter ended February 28, 2021. Pricing actions added 0.8% to sales, while the incremental impact of the Cholula and FONA acquisitions added 4.0% to sales. Sales were also impacted by favorable foreign Table of Contents

Gross profit for the first quarter of 2021 increased by $107.6 million, or 22.9%, over the comparable period in 2020. Our gross profit margin for the three months ended February 28, 2021 was 39.0%, an increase of 20 basis points from the prior year period. This improvement was driven by cost savings led by our Comprehensive Continuous Improvement ("CCI") program along with favorable product mix within and between our consumer and flavor solutions segments. These favorable impacts were offset, in part, by higher costs associated with COVID-19, higher conversion costs and increased material costs, each as compared to the prior year. The gross margin impact of COVID-19 during the three months ended February 28, 2021 reflected certain incremental costs, including the increased cost of production related to our temporary use of co-manufacturing arrangements that increased certain product costs as well as costs associated with measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity. In addition, our gross profit for the three months ended February 28, 2021 was burdened by $6.3 million of transaction expense, representing the amortization of the fair value adjustment to the acquired inventories of Cholula and FONA upon our sale of those acquired inventories in the first quarter of fiscal 2021. Excluding those transaction and integration expenses, adjusted gross profit margin rose 60 basis points from 38.8% in 2020 to 39.4% in 2021.







                                                                                      Three months ended
                                                                          February 28, 2021         February 29, 2020
        Selling, general & administrative expense (SG&A)                 $          321.3          $          274.7
        Percent of net sales                                                         21.7  %                   22.7  %
        


SG&A increased by $46.6 million in the first quarter of 2021 compared to the 2020 level, driven by (i) SG&A associated with the Cholula and FONA acquisitions, (ii) increased brand marketing costs, (iii) greater selling and distribution expenses associated with the higher sales volume, and (iv) increased performance-based employee incentive expense, including stock based compensation. SG&A as a percent of net sales decreased by 100 basis points from the prior year level, primarily as a result of the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2021 quarter, partially offset by the previously mentioned factors.

During the three months ended February 28, 2021, we recorded $1.1 million of special charges consisting of $0.6 million and $0.5 million related to streamlining actions in EMEA and the Americas, respectively.

During the three months ended February 29, 2020, we recorded $1.0 million of special charges related to our GE initiative.







                                                                                   Three months ended
                                                                     February 28, 2021          February 29, 2020
        Transaction expenses included in cost of goods sold          $           6.3          $                -
        Other transaction and integration expenses                              18.8                           -
        Total transaction and integration expenses                   $          25.1          $                -
        


During the three months ended February 28, 2021, we recorded $25.1 million of transaction and integration expense related to our acquisitions of Cholula and FONA. These costs consisted of (i) $6.3 million of amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, (ii) $13.8 million of other transaction costs primarily related to outside advisory, service and consulting costs, and (iii) $5.0 million of integration expenses. We expect transaction and integration expenses related to our acquisitions of Cholula and FONA to negatively impact operating income in the remainder of fiscal 2021 by an additional $25 million.







                                        Three months ended
                             February 28, 2021      February 29, 2020
        Interest expense    $      33.8            $             35.3
        Other income, net           4.6                           5.5
        


Interest expense decreased by $1.5 million in the first quarter of 2021, compared to the same period in 2020, as an increase in average total borrowings was more than offset by a decrease in interest rates. Other income, net for the three months ended February 28, 2021 decreased by $0.9 million from the 2020 levels due principally to lower non-service cost income associated Table of Contents

Mar 30, 2021

COMTEX_383653125/2041/2021-03-30T17:43:21

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