MCCORMICK & CO INC 10-Q

ITEM 1. FINANCIAL STATEMENTS McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) (in millions except per share amounts) Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Net sales $ 1,549.4 $ 1,430.3 $ 4,587.6 $ 4,043.4 Cost of goods sold 949.8 840.0 2,795.9 2,403.7 Gross profit 599.6 590.3 1,791.7 1,639.7 Selling, general and administrative expense 327.3 317.2 1,005.2 911.1 Transaction and integration expenses 1.3 — 27.0 — Special charges 5.8 0.1 20.6 4.0 Operating income 265.2 273.0 738.9 724.6 Interest expense 33.9 33.5 103.3 103.2 Other income, net 3.5 3.9 12.0 12.5 Income from consolidated operations before income taxes 234.8 243.4 647.6 633.9 Income tax expense 31.5 46.9 135.5 117.4 Net income from consolidated operations 203.3 196.5 512.1 516.5 Income from unconsolidated operations (including, for the nine months ended August 31, 2021, after-tax gain on sale of unconsolidated operation of $13.4) 9.1 9.6 45.8 30.2 Net income $ 212.4 $ 206.1 $ 557.9 $ 546.7 Earnings per share – basic $ 0.79 $ 0.77 $ 2.09 $ 2.05 Earnings per share – diluted $ 0.79 $ 0.76 $ 2.07 $ 2.03 Average shares outstanding – basic 267.4 266.7 267.2 266.3 Average shares outstanding – diluted 270.0 269.6 270.0 269.0 Cash dividends paid per share – voting and non-voting $ 0.34 $ 0.31 $ 1.02 $ 0.93 Cash dividends declared per share – voting and non-voting $ 0.34 $ 0.31 $ 0.68 $ 0.62 See notes to condensed consolidated financial statements (unaudited). 4 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) (in millions) Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Net income $ 212.4 $ 206.1 $ 557.9 $ 546.7 Net income attributable to non-controlling interest 0.7 1.6 3.5 3.1 Other comprehensive income (loss): Unrealized components of pension and postretirement plans 5.8 ( 2.1 ) 8.4 3.6 Currency translation adjustments ( 78.4 ) 146.7 21.5 65.8 Change in derivative financial instruments 2.5 ( 0.7 ) 3.1 0.2 Deferred taxes ( 2.8 ) 3.2 1.4 ( 1.6 ) Total other comprehensive income (loss) ( 72.9 ) 147.1 34.4 68.0 Comprehensive income $ 140.2 $ 354.8 $ 595.8 $ 617.8 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in millions) August 31, 2021 November 30, 2020 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 312.6 $ 423.6 Trade accounts receivable, net 541.0 528.5 Inventories, net Finished products 606.9 499.3 Raw materials and work-in-process 595.5 533.3 1,202.4 1,032.6 Prepaid expenses and other current assets 104.9 98.9 Total current assets 2,160.9 2,083.6 Property, plant and equipment, net 1,113.5 1,028.4 Goodwill 5,379.5 4,986.3 Intangible assets, net 3,478.3 3,239.4 Other long-term assets 752.2 752.0 Total assets $ 12,884.4 $ 12,089.7 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Short-term borrowings $ 767.4 $ 886.7 Current portion of long-term debt 768.5 263.9 Trade accounts payable 1,023.1 1,032.3 Other accrued liabilities 602.3 863.6 Total current liabilities 3,161.3 3,046.5 Long-term debt 3,985.0 3,753.8 Deferred taxes 752.6 727.2 Other long-term liabilities 582.4 622.2 Total liabilities 8,481.3 8,149.7 Shareholders’ Equity Common stock 523.0 484.0 Common stock non-voting 1,519.1 1,497.3 Retained earnings 2,780.0 2,415.6 Accumulated other comprehensive loss ( 435.6 ) ( 470.8 ) Total McCormick shareholders' equity 4,386.5 3,926.1 Non-controlling interests 16.6 13.9 Total shareholders’ equity 4,403.1 3,940.0 Total liabilities and shareholders’ equity $ 12,884.4 $ 12,089.7 See notes to condensed consolidated financial statements (unaudited). 6 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED) (in millions) Nine months ended August 31, 2021 2020 Operating activities Net income $ 557.9 $ 546.7 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation and amortization 139.1 123.9 Stock-based compensation 54.2 37.8 Fixed asset impairment charge 6.5 — Amortization of inventory fair value adjustments associated with acquisitions 6.3 — Income from unconsolidated operations ( 45.8 ) ( 30.2 ) Changes in operating assets and liabilities (net of businesses acquired) Trade accounts receivable 1.3 18.4 Inventories ( 156.5 ) ( 129.4 ) Trade accounts payable ( 16.7 ) 47.4 Other assets and liabilities ( 195.2 ) ( 11.3 ) Dividends from unconsolidated affiliates 21.8 23.4 Net cash flow provided by operating activities 372.9 626.7 Investing activities Acquisition of businesses (net of cash acquired) ( 706.4 ) — Proceeds from sale of unconsolidated operation 65.4 — Capital expenditures (including software) ( 189.9 ) ( 145.6 ) Other investing activities 0.3 2.3 Net cash flow used in investing activities ( 830.6 ) ( 143.3 ) Financing activities Short-term borrowings, net ( 118.9 ) ( 432.0 ) Long-term debt borrowings 1,001.5 506.4 Payment of debt issuance costs ( 1.9 ) ( 1.1 ) Long-term debt repayments ( 255.3 ) ( 256.0 ) Proceeds from exercised stock options 10.5 54.1 Taxes withheld and paid on employee stock awards ( 13.3 ) ( 10.7 ) Common stock acquired by purchase ( 3.2 ) ( 46.0 ) Dividends paid ( 272.4 ) ( 247.4 ) Net cash flow provided by (used in) financing activities 347.0 ( 432.7 ) Effect of exchange rate changes on cash and cash equivalents ( 0.3 ) 14.9 (Decrease) increase in cash and cash equivalents ( 111.0 ) 65.6 Cash and cash equivalents at beginning of period 423.6 155.4 Cash and cash equivalents at end of period $ 312.6 $ 221.0 See notes to condensed consolidated financial statements (unaudited). 7 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (in millions) (millions) Common Stock Shares Common Stock Non-Voting Shares Common Stock Amount Retained Earnings Accumulated Other Comprehensive (Loss) Income Non-controlling Interests Total Shareholders’ Equity Three months ended August 31, 2021 Balance, May 31, 2021 18.1 249.2 $ 2,027.1 $ 2,660.5 $ ( 362.3 ) $ 15.5 $ 4,340.8 Net income — 212.4 — — 212.4 Net income attributable to non-controlling interest — — — 0.7 0.7 Other comprehensive income (loss), net of tax — — ( 73.3 ) 0.4 ( 72.9 ) Dividends — ( 90.9 ) — — ( 90.9 ) Stock-based compensation 11.6 — — — 11.6 Shares purchased and retired ( 0.1 ) — ( 0.9 ) ( 2.0 ) — — ( 2.9 ) Shares issued 0.1 — 4.3 — — — 4.3 Equal exchange ( 0.1 ) 0.1 — — — — — Balance, August 31, 2021 18.0 249.3 $ 2,042.1 $ 2,780.0 $ ( 435.6 ) $ 16.6 $ 4,403.1 Nine months ended August 31, 2021 Balance, November 30, 2020 18.0 248.9 $ 1,981.3 $ 2,415.6 $ ( 470.8 ) $ 13.9 $ 3,940.0 Net income — 557.9 — — 557.9 Net income attributable to non-controlling interest — — — 3.5 3.5 Other comprehensive income (loss), net of tax — — 35.2 ( 0.8 ) 34.4 Dividends — ( 181.7 ) — — ( 181.7 ) Stock-based compensation 54.2 — — — 54.2 Shares purchased and retired ( 0.2 ) — ( 5.3 ) ( 11.8 ) — — ( 17.1 ) Shares issued 0.6 — 11.9 — — — 11.9 Equal exchange ( 0.4 ) 0.4 — — — — — Balance, August 31, 2021 18.0 249.3 $ 2,042.1 $ 2,780.0 $ ( 435.6 ) $ 16.6 $ 4,403.1 Three months ended August 31, 2020 Balance, May 31, 2020 18.6 247.9 $ 1,938.9 $ 2,288.7 $ ( 577.7 ) $ 12.4 $ 3,662.3 Net income — 206.1 — — 206.1 Net income attributable to non-controlling interest — — — 1.6 1.6 Other comprehensive loss, net of tax — — 147.8 ( 0.7 ) 147.1 Dividends — ( 82.6 ) — — ( 82.6 ) Stock-based compensation 10.7 — — — 10.7 Shares purchased and retired ( 0.4 ) — ( 7.4 ) ( 21.2 ) — — ( 28.6 ) Shares issued 0.7 — 29.4 — — — 29.4 Equal exchange ( 0.8 ) 0.8 — — — — — Balance, August 31, 2020 18.1 248.7 $ 1,971.6 $ 2,391.0 $ ( 429.9 ) $ 13.3 $ 3,946.0 8 Table of Contents Nine months ended August 31, 2020 Balance, November 30, 2019 18.6 247.2 $ 1,888.6 $ 2,055.8 $ ( 500.2 ) $ 12.5 $ 3,456.7 Net income — 546.7 — — 546.7 Net income attributable to non-controlling interest — — — 3.1 3.1 Other comprehensive loss, net of tax — — 70.3 ( 2.3 ) 68.0 Dividends — ( 165.0 ) — — ( 165.0 ) Stock-based compensation 37.8 — — — 37.8 Shares purchased and retired ( 0.5 ) ( 0.2 ) ( 12.6 ) ( 46.5 ) — — ( 59.1 ) Shares issued 1.7 — 57.8 — — — 57.8 Equal exchange ( 1.7 ) 1.7 — — — — — Balance, August 31, 2020 18.1 248.7 $ 1,971.6 $ 2,391.0 $ ( 429.9 ) $ 13.3 $ 3,946.0 See notes to condensed consolidated financial statements (unaudited). 9 Table of Contents McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ACCOUNTING POLICIES 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. In September 2020, our Board of Directors approved a 2-for-1 stock split in the form of a stock dividend on all shares of the Company's two classes of stock, Common stock and Common stock non-voting. Trading of the Company's common stock began on a split-adjusted basis on December 1, 2020. All common stock and per-share data prior to that date have been retroactively adjusted for the impact of the stock split. The results of consolidated operations for the nine-month period ended August 31, 2021 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 have been lower in the first half of the fiscal year and higher in the second half. The historical increase in Net sales, Net income and Cash flow from operations in the second half of the year has largely been 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, 2020. Recent Events Recent events impacting our business include COVID-19, the acquisitions of Cholula and FONA, the inflationary cost environment and supply chain disruption, each of which are further discussed in these notes to condensed consolidated financial statements. As more fully described below, we expect the largest factors impacting our fiscal 2021 performance to be the relative balance of at-home versus away-from-home consumption and the inflationary cost environment, both which remain uncertain. COVID-19: On March 11, 2020, the World Health Organization designated a new coronavirus (“COVID-19”) as a global pandemic. Governments around the world either recommended or mandated actions to slow the transmission of the virus that included shelter-in-place orders, quarantines, limitations on crowd size, closures of dine-in restaurants and bars, and significant restrictions on travel, as well as work restrictions that prohibited many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has significantly impacted not only our operating results but also the global economy. The extent and nature of government actions varied during the three and nine-months ended August 31, 2021 and 2020, based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. We are actively monitoring the impact of COVID-19 on all aspects of our business. The effects of COVID-19 on consumer behavior have impacted the relative balance of at-home versus away-from-home food demand. The impact of COVID-19, since the onset of the pandemic, has resulted in net sales growth as the increase in at-home consumption has more than offset declines in away-from-home demand. The impact of COVID-19 on our consumer segment since the beginning of the COVID-19 pandemic has resulted in a significant increase in at-home consumption and related demand for our products. The impact of COVID-19 on our flavor solutions segment has been two-fold, including both (i) an unfavorable impact attributable to decreased demand from certain customers that were affected by government measures related to COVID-19 mitigation in many of our markets that reduced away-from-home food demand; and (ii) a favorable impact attributable to increased at-home consumption from certain customers that use our products to flavor their own brands for at-home consumption. The COVID-19 mitigation measures impacting certain of 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. The extent of the at-home consumption and away-from-home demand has varied during the pandemic and has impacted our results, as compared to the prior year results, at different levels in any individual quarter. While we continue to see strong levels of consumer demand compared to the pre-pandemic levels, during the three months ended August 31, 2021 retail demand declined when compared to the comparable quarter of the prior year based on strong consumer demand at the beginning of the 10 Table of Contents pandemic. We continue to see recovery in away-from-home demand associated with the COVID-19 recovery. During the three months ended August 31, 2021 our flavor solutions sales and operating results improved as away-from-home consumption increased as compared to the comparable quarter in 2020, in part, due to the lifting of much more restrictive COVID-19 mitigation measures that were in place in the early stages of the pandemic. The impact of the 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. The pace and shape of the COVID-19 recovery as well as the impact and extent of COVID-19 variants or potential resurgences is not presently known. Inflationary Cost Environment and Supply Chain Disruption: During fiscal 2021, we have experienced inflationary cost increases in our commodities, packaging materials and transportation costs. We expect that these inflationary cost increases will be partially mitigated by pricing actions we expect to implement in the fourth quarter of fiscal 2021 and by our CCI-led cost savings. We are also experiencing additional pressure in our supply chain due to strained transportation capacity, as well as due to labor shortages and absenteeism associated with COVID-19, together with the impact of the continued elevated demand. Revenue Recognition The following supplements the description of our accounting policies with respect to revenue recognition contained in note 1 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2020: Our revenue arrangements generally include a single performance obligation relating to the fulfillment of a customer order, which in some cases are governed by a master sales agreement, for the purchase of our products. We recognize revenue at a point in time when control of the ordered products passes to the customer, which principally occurs either upon shipment or delivery to the customer or upon pick-up by the customer, depending upon terms included in the particular customer arrangement. Accounting Pronouncements Adopted in 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. This new standard was adopted effective December 1, 2020 and will be applied upon recognition of any future goodwill impairment charge. We do not expect this ASU to have a material impact on our financial statements. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which instituted a new model for recognizing credit losses on financial instruments that are not measured at fair value. This standard was adopted by the Company on December 1, 2020. As this ASU did not have a material impact on our consolidated financial statements upon adoption, a cumulative-effect adjustment to retained earnings was not necessary. Recently Issued Accounting Pronouncements — Pending Adoption In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The new guidance removes certain exceptions to the general principles for income taxes and also improves consistent application of accounting by clarifying or amending existing guidance. The new standard is effective for the first quarter of our fiscal year ending November 30, 2022, and interim periods within those years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting that provides optional expedients for a limited period of time for accounting for contracts, hedging relationship, and other transactions affected by the London Interbank Offered Rate (LIBOR) or other reference rates expected to be discontinued. These optional expedients can be applied from March 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements. 2. ACQUISITIONS AND DISPOSITIONS 11 Table of Contents Acquisitions are part of our strategy to increase sales and profits. Dispositions are made when deemed in our strategic interest. Acquisition of Cholula Hot Sauce On November 30, 2020, we completed the acquisition of the parent company of Cholula Hot Sauce ® (Cholula) from L Catterton. The purchase price was approximately $ 801.2 million, net of cash acquired. That purchase price is also net of $ 1.5 million received during the second quarter of 2021 associated with the final working capital adjustment. The acquisition was funded with cash and short-term borrowings. Cholula, a premium Mexican hot sauce brand, is a strong addition to McCormick’s global branded flavor portfolio, which we believe broadens our offerings in the high growth hot sauce category to consumers and foodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce. At the time of the acquisition, annual sales of Cholula were approximately $ 96 million. The results of Cholula’s operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition. The purchase price of Cholula was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as further described in note 2 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2020. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $ 4.9 million that was recognized in Cost of goods sold during the nine months ended August 31, 2021, as the related inventory was sold. During the nine months ended August 31, 2021, we completed the Cholula purchase price allocation which resulted in an increase in goodwill of $ 0.8 million. The final purchase price allocation for Cholula resulted in the following fair value allocations, net of cash acquired (in millions): Trade accounts receivable $ 15.0 Inventories 16.5 Goodwill 411.3 Intangible assets 401.0 Other assets 10.5 Trade accounts payable ( 7.0 ) Other accrued liabilities ( 8.1 ) Deferred taxes ( 35.1 ) Other long-term liabilities ( 2.9 ) Total $ 801.2 Acquisition of FONA International, LLC On December 30, 2020, we purchased FONA International, LLC and certain of its affiliates (FONA), a privately held company, for a purchase price of approximately $ 708.2 million, net of cash acquired. That purchase price includes the payment of $ 2.6 million during the second quarter 2021 associated with the final working capital adjustment. 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. The acquisition of FONA in fiscal 2021 expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform and strengthens our capabilities. The acquisition was funded with cash and commercial paper. At the time of the acquisition, annual sales of FONA were approximately $ 114 million. The results of FONA’s operations have been included in our financial statements as a component of our flavor solutions segments from the date of acquisition. The purchase price of FONA was preliminarily 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 in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The preliminary allocation, net of cash acquired, of the fair value of the FONA acquisition is summarized in the table below (in millions): 12 Table of Contents Trade accounts receivable $ 12.4 Inventories 10.3 Goodwill 389.4 Intangible assets 266.0 Property, plant and equipment 36.3 Other assets 5.5 Trade accounts payable ( 3.7 ) Other accrued liabilities ( 8.0 ) Total $ 708.2 We determined the preliminary fair value of intangible assets using the following methodologies. We valued the acquired brand names and trademarks and intellectual property using the relief from royalty method, an income approach. We valued the acquired customer relationships using the excess earnings method, an income approach. Some of the more significant assumptions inherent in developing the preliminary valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, operating profit margin, and working capital/contributory asset charges), royalty rates, the discount rate that appropriately reflects the risk 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 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. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $ 1.4 million that was recognized in Cost of goods sold during the nine months ended August 31, 2021, as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach. The preliminary valuation of the acquired net assets of FONA includes $ 49.0 million allocated to indefinite-lived brand assets, $ 173.0 million allocated to customer relationships with a weighted-average life of 15 years and $ 44.0 million allocated to intellectual property with a weighted-average life of 12 years. As a result of the acquisition, we recognized a total of $ 389.4 million of goodwill. That goodwill 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 customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Our aggregate income tax basis in the acquired intangible assets and goodwill approximates their aggregate book value at the acquisition date. The final allocation of the fair value of the acquired net assets of FONA, including the residual amount of goodwill, was not complete as of August 31, 2021, but will be finalized within the allowable measurement period. Transaction and Integration Expenses Associated with the Cholula and FONA Acquisitions We expect Transaction and integration expenses related to our acquisitions of Cholula and FONA to total approximately $ 30 million and $ 25 million, respectively. Of the total expected Transaction and integration expenses, transaction expenses of $ 12.4 million were incurred in 2020. We incurred an additional $ 1.3 million and $ 33.3 million of Transaction and integration costs related to Cholula and FONA during the three and nine months ended August 31, 2021, respectively. We anticipate incurring the remainder of those Transaction and integration expenses by May 31, 2022. The following are the Transaction and integration expenses recognized during the three and nine months ended August 31, 2021 relating to the Cholula and FONA acquisitions (in millions): Three months ended August 31, 2021 Nine months ended August 31, 2021 Transaction-related expenses included in cost of goods sold $ — $ 6.3 Other transaction expenses — 13.8 Integration expenses 1.3 13.2 Total transaction and integration expenses $ 1.3 $ 33.3 Sale of Unconsolidated Operation 13 Table of Contents On March 1, 2021, we sold our 26 % interest in Eastern Condiments Private Ltd (Eastern) for $ 65.4 million in cash, net of transaction expenses of $ 1.4 million. Eastern was accounted for as an equity method investment with our proportionate share of earnings, prior to the sale, reflected in Income from unconsolidated operations before income taxes in our consolidated income statement. The sale of Eastern resulted in a gain of $ 13.4 million, net of tax of $ 5.7 million. That gain is included in Income from unconsolidated operations before income taxes in our consolidated income statement. That gain also reflects a write-off of $ 1.4 million of foreign currency translation adjustment, a component of Accumulated other comprehensive loss. 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 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, 2021 and 2020 (in millions): Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Employee severance and related benefits $ 2.8 $ — $ 7.6 $ 2.2 Other costs 3.0 0.1 13.0 1.8 Total $ 5.8 $ 0.1 $ 20.6 $ 4.0 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. 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 $ 60 million to $ 65 million. Of that $ 60 million to $ 65 million, we estimate that approximately sixty percent will be attributable to cash payments associated with the related costs of GE implementation and transition, including outside consulting and other costs, and approximately forty percent will be attributable to severance and related benefit payments, all directly related to the initiative. We have spent a cumulative total of $ 41.1 million on this initiative through August 31, 2021. During the three months ended August 31, 2021, we recorded $ 5.8 million of Special charges, consisting principally of streamlining actions of $ 1.8 million in the Americas region, $ 1.7 million in the Europe, Middle East, and Africa (EMEA) region and $ 0.8 million in the Asia Pacific (APAC) region, and $ 0.7 million related to our GE initiative. During the nine months ended August 31, 2021, we recorded $ 20.6 million of Special charges, consisting principally of streamlining actions of $ 7.0 million in the Americas region, $ 3.0 million in the EMEA region and $ 0.8 million in the APAC region, and $ 0.7 million related to our GE initiative, together with a non-cash asset impairment charge of $ 6.5 million associated with an administrative site that will be exited in conjunction with our decision to employ a hybrid work environment. During the three months ended August 31, 2020, we recorded $ 0.1 million of Special charges, consisting primarily of streamlining actions in the EMEA region. 14 Table of Contents During the nine months ended August 31, 2020, we recorded $ 4.0 million of Special charges, consisting of $ 2.9 million of streamlining actions in the EMEA region and $ 1.1 million related to our GE initiative. As of August 31, 2021, reserves associated with Special charges, which are expected to be paid during the next six months, are included in Trade accounts payable and Other accrued liabilities in our consolidated balance sheet. The following is a breakdown by business segment of Special charges for the three and nine months ended August 31, 2021 and 2020 (in millions): Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Consumer segment $ 3.5 $ — $ 13.1 $ 3.1 Flavor solutions segment 2.3 0.1 7.5 0.9 Total special charges $ 5.8 $ 0.1 $ 20.6 $ 4.0 4. GOODWILL The changes in the carrying amount of goodwill by business segment for the nine months ended August 31, 2021 are as follows (in millions): Consumer Flavor Solutions Beginning of the year $ 3,711.2 $ 1,275.1 Increases in goodwill from acquisition — 389.4 Changes in preliminary purchase price allocation 0.5 0.3 Foreign currency fluctuations 0.3 2.7 Balance as of the end of period $ 3,712.0 $ 1,667.5 During the nine months ended August 31, 2021, a preliminary valuation of the net assets of FONA acquired in December 2020, resulted in the assignment of $ 389.4 million of goodwill to the flavor solutions segment. During the nine months ended August 31, 2021, we finalized the allocation of the purchase price of Cholula, which resulted in an increase in goodwill of $ 0.5 million to the consumer segment and $ 0.3 million to the flavor solutions segment. 5. FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS In February 2021, we issued $ 500.0 million of 0.90 % notes due February 15, 2026, with cash proceeds received of $ 495.7 million, net of discounts and underwriters' fees. Also, in February 2021, we issued $ 500.0 million of 1.85 % notes due February 15, 2031, with cash proceeds received of $ 492.8 million, net of discounts and underwriters' fees. Interest is payable semiannually on both of these notes in arrears in February and August of each year. The net proceeds from these issuances were used to pay down short-term borrowings, including a portion of the $ 1,443.0 million of commercial paper issued to finance our acquisitions of Cholula and FONA, and for general corporate purposes. During the three months ended August 31, 2021, we repaid our $ 250 million, 3.90 % notes that matured on July 8, 2021. In June 2021, we entered into a five -year $ 1.5 billion revolving credit facility, which will expire in June 2026. 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 %. The provisions of this new revolving credit facility restrict subsidiary indebtedness and require us to maintain a minimum interest coverage ratio. We do not expect that this covenant would limit our access to this revolving credit facility for the foreseeable future. This facility replaced the following prior revolving credit facilities: (i) a five -year $ 1.0 billion revolving credit facility that was due to expire in August 2022, and (ii) a 364 -day $ 1.0 billion revolving facility, which we entered into in the first quarter of 2021 and that was due to expire in December 2021. The terms of those revolving credit facilities are more fully described in note 6 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2020. 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 15 Table of Contents 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 contract and currency swaps to reduce fluctuations in the long or short currency positions. Forward contracts are generally less than 18 months duration. At August 31, 2021, we had foreign currency exchange contracts to purchase or sell $ 598.1 million of foreign currencies as compared to $ 383.8 million at November 30, 2020. 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. All foreign currency exchange contracts outstanding at August 31, 2021 have durations of less than 18 months, including $ 232.9 million of notional contracts that have durations of less than one month and are used to hedge short-term cash flow funding . 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 loss until the hedged item is recognized in Cost of goods sold, at which time the net amount deferred in Accumulated other comprehensive loss 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 both exposure to currency fluctuations in certain intercompany loans between subsidiaries as well as currency exposure to third-party non-functional currency assets or liabilities. At August 31, 2021, the notional value of these contracts was $ 391.7 million. Any gains or losses recorded based on both the change in fair value of these contracts and the change in the currency component of the underlying loans are recognized in our consolidated income statement as Other income, net. We also utilize cross currency interest rate swap contracts that are designated as net investment hedges. As of August 31, 2021, we had 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. Any gains or losses on net investment hedges are included in foreign currency translation adjustments in Accumulated other comprehensive loss. 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 to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt. As of August 31, 2021, 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. The fair value of these swap contracts is offset by a corresponding increase or decrease of the value of the hedged debt. All derivatives are recognized at fair value in our consolidated balance sheet and recorded in either Prepaid expenses and other current assets, Other long-term assets, Other accrued liabilities or Other long-term liabilities, depending upon their nature and maturity. Hedge ineffectiveness was not material. 16 Table of Contents The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions): As of August 31, 2021 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 long-term assets $ 350.0 $ 30.0 Other accrued liabilities $ — $ — Foreign exchange contracts Other current assets 444.0 6.2 Other accrued liabilities 154.1 1.6 Cross currency contracts Other current assets / Other long-term assets 261.9 2.8 Other long-term liabilities 266.8 17.2 Total $ 39.0 $ 18.8 As of November 30, 2020 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 long-term assets $ 350.0 $ 43.1 Other accrued liabilities $ — $ — Foreign exchange contracts Other current assets 27.5 1.4 Other accrued liabilities 356.3 8.2 Cross currency contracts Other current assets / Other long-term assets — — Other long-term liabilities 524.4 18.8 Total $ 44.5 $ 27.0 The following tables disclose the impact of derivative instruments on our Other comprehensive income (OCI), Accumulated other comprehensive loss (AOCI) and our consolidated income statement for the three- and nine-months ended August 31, 2021 and 2020 (in millions): Fair Value Hedges Derivative Income statement location Income (expense) Three months ended August 31, 2021 Three months ended August 31, 2020 Nine months ended August 31, 2021 Nine months ended August 31, 2020 Interest rate contracts Interest expense $ 2.1 $ 1.8 $ 6.1 $ 3.2 Three months ended August 31, Income statement location Gain (loss) recognized in income Income statement location Gain (loss) recognized in income Derivative 2021 2020 Hedged item 2021 2020 Foreign exchange contracts Other income, net $ 5.6 $ ( 7.6 ) Intercompany loans Other income, net $ ( 5.4 ) $ 7.3 Nine months ended August 31, Income statement location Gain (loss) recognized in income Income statement location Gain (loss) recognized in income Derivative 2021 2020 Hedged item 2021 2020 Foreign exchange contracts Other income, net $ ( 0.3 ) $ ( 4.1 ) Intercompany loans Other income, net $ 1.1 $ 3.1 The gains (losses) recognized on fair value hedges relating to currency exposure on third-party non-functional currency assets or liabilities were not material during the three- and nine-months ended August 31, 2021 and 2020. 17 Table of Contents Cash Flow Hedges Three months ended August 31, Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) reclassified from AOCI 2021 2020 2021 2020 Interest rate contracts $ — $ — Interest expense $ 0.2 $ 0.2 Foreign exchange contracts 1.5 ( 0.6 ) Cost of goods sold ( 0.3 ) 1.1 Total $ 1.5 $ ( 0.6 ) $ ( 0.1 ) $ 1.3 Nine months ended August 31, Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) reclassified from AOCI 2021 2020 2021 2020 Interest rate contracts $ 0.3 $ — Interest expense $ 0.4 $ 0.4 Foreign exchange contracts ( 0.9 ) 2.3 Cost of goods sold ( 0.6 ) 1.2 Total $ ( 0.6 ) $ 2.3 $ ( 0.2 ) $ 1.6 For all cash flow and settled interest rate fair value hedge derivatives, the net amount of Accumulated other comprehensive loss expected to be reclassified in the next 12 months is $ 0.7 million as an increase to earnings. Net Investment Hedges Three months ended August 31, Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) excluded from the assessment of hedge effectiveness 2021 2020 2021 2020 Cross currency contracts $ 8.4 $ ( 17.4 ) Interest expense $ 0.4 $ 0.3 Nine months ended August 31, Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) excluded from the assessment of hedge effectiveness 2021 2020 2021 2020 Cross currency contracts $ 4.9 $ ( 20.7 ) Interest expense $ 1.1 $ 2.7 For all net investment hedges, no amounts have been reclassified out of Accumulated other comprehensive loss. The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes. 18 Table of Contents 6. FAIR VALUE MEASUREMENTS Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. • Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. At August 31, 2021 and November 30, 2020, 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, 2021 Fair Value Level 1 Level 2 Assets Cash and cash equivalents $ 312.6 $ 312.6 $ — Insurance contracts 138.8 — 138.8 Bonds and other long-term investments 2.0 2.0 — Interest rate derivatives 30.0 — 30.0 Foreign currency derivatives 6.2 — 6.2 Cross currency contracts 2.8 — 2.8 Total $ 492.4 $ 314.6 $ 177.8 Liabilities Foreign currency derivatives $ 1.6 $ — $ 1.6 Cross currency contracts 17.2 — 17.2 Total $ 18.8 $ — $ 18.8 November 30, 2020 Fair Value Level 1 Level 2 Assets Cash and cash equivalents $ 423.6 $ 423.6 $ — Insurance contracts 126.0 — 126.0 Bonds and other long-term investments 3.9 3.9 — Interest rate derivatives 43.1 — 43.1 Foreign currency derivatives 1.4 — 1.4 Total $ 598.0 $ 427.5 $ 170.5 Liabilities Foreign currency derivatives $ 8.2 $ — $ 8.2 Cross currency contracts 18.8 — 18.8 Total $ 27.0 $ — $ 27.0 Because of their short-term nature, the amounts reported in our consolidated balance sheet for Cash and cash equivalents, Trade accounts receivable, 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 derivatives, foreign 19 Table of Contents currency derivatives, and cross currency contracts 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 (in millions): August 31, 2021 November 30, 2020 Carrying amount $ 4,753.5 $ 4,017.7 Fair value 5,009.5 4,357.1 Level 1 valuation techniques $ 4,807.4 $ 4,161.3 Level 2 valuation techniques 202.1 195.8 Total fair value $ 5,009.5 $ 4,357.1 The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments. 20 Table of Contents 7. 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 also 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. D uring fiscal years 2018 and 2017, we made significant changes to our employee benefit and retirement plans that froze the accrual of future benefits under certain defined benefit pension plans in the U.S. and certain foreign locations. Although our defined benefit plans in the U.S., United Kingdom and Canada have been frozen, employees who are participants in the plans retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans. The following table presents the components of our pension expense (income) of the defined benefit plans for the three months ended August 31, 2021 and 2020 (in millions): United States International 2021 2020 2021 2020 Defined benefit plans Service cost $ 0.9 $ 0.8 $ 0.3 $ 0.2 Interest costs 6.5 7.3 1.8 1.9 Expected return on plan assets ( 10.3 ) ( 10.2 ) ( 3.5 ) ( 3.7 ) Amortization of prior service costs 0.2 0.2 — 0.1 Amortization of net actuarial losses 2.7 2.0 0.6 0.5 Settlement loss — — 0.2 0.7 Total pension expense (income) $ — $ 0.1 $ ( 0.6 ) $ ( 0.3 ) The following table presents the components of our pension expense (income) of the defined benefit plans for the nine months ended August 31, 2021 and 2020 (in millions): United States International 2021 2020 2021 2020 Defined benefit plans Service cost $ 2.8 $ 2.4 $ 0.8 $ 0.7 Interest costs 19.5 22.0 5.3 5.6 Expected return on plan assets ( 30.9 ) ( 30.5 ) ( 10.5 ) ( 11.2 ) Amortization of prior service costs 0.4 0.4 0.1 0.1 Amortization of net actuarial losses 8.2 5.9 1.7 1.5 Settlement loss — — 0.6 1.2 Total pension expense (income) $ — $ 0.2 $ ( 2.0 ) $ ( 2.1 ) During the nine months ended August 31, 2021 and 2020, we contributed $ 7.5 million and $ 9.3 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2020 were $ 11.9 million. The following table presents the components of our other postretirement benefits expense (income) (in millions): Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Other postretirement benefits Service cost $ 0.5 $ 0.5 $ 1.5 $ 1.4 Interest costs 0.4 0.5 1.2 1.5 Amortization of prior service credits ( 0.1 ) ( 1.2 ) ( 0.3 ) ( 3.5 ) Amortization of net actuarial gains — — — ( 0.1 ) Total other postretirement benefits expense (income) $ 0.8 $ ( 0.2 ) $ 2.4 $ ( 0.7 ) All of the amounts in the tables above for pension expense and other postretirement benefits expense, other than service cost, were included in Other income, net within our consolidated income statements. The aggregate amount of pension and other 21 Table of Contents postretirement benefits (income) expenses, excluding service cost components, were $( 1.5 ) million and $( 1.9 ) million for the three months ended August 31, 2021 and 2020, respectively and $( 4.7 ) million and $( 7.1 ) million for the nine months ended August 31, 2021 and 2020, respectively. 8. STOCK-BASED COMPENSATION We have four types of stock-based compensation awards: restricted stock units ("RSUs"), stock options, company stock awarded as part of our long-term performance plan ("LTPP") and, beginning in the fourth quarter of 2020, price-vested stock options. 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, 2021 2020 2021 2020 Stock-based compensation expense $ 11.6 $ 10.7 $ 54.2 $ 37.8 Our 2021 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2020 annual grant. The weighted-average grant-date fair value of each stock option granted in 2021 was $ 18.36 and in 2020 was $ 13.26 as calculated under a lattice pricing model. Substantially all of the stock options and RSUs granted in 2021 and 2020 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: 2021 2020 Risk-free interest rates 0.0 - 1.8% 0.0 - 0.6% Dividend yield 1.5 % 1.8 % Expected volatility 21.3 % 22.8 % Expected lives (in years) 7.9 7.9 The following is a summary of our stock option activity for the nine months ended August 31, 2021 and 2020: 2021 2020 (shares in millions) Number of Shares Weighted- Average Exercise Price Number of Shares Weighted- Average Exercise Price Outstanding at beginning of period 4.5 $ 53.56 5.2 $ 48.09 Granted 0.8 89.16 0.8 69.31 Exercised ( 0.2 ) 48.60 ( 1.4 ) 40.94 Outstanding at end of the period 5.1 $ 59.44 4.6 $ 53.44 Exercisable at end of the period 3.7 $ 51.19 3.2 $ 47.67 As of August 31, 2021, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $ 138.9 million and for options currently exercisable was $ 130.1 million. The total intrinsic value of all options exercised during the nine months ended August 31, 2021 and 2020 was $ 7.3 million and $ 65.3 million, respectively. The following is a summary of our RSU activity for the nine months ended August 31, 2021 and 2020: 2021 2020 (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 714 $ 61.74 762 $ 57.95 Granted 219 86.86 296 67.03 Vested ( 284 ) 62.31 ( 274 ) 54.99 Forfeited ( 28 ) 75.02 ( 14 ) 62.15 Outstanding at end of period 621 $ 69.75 770 $ 62.41 22 Table of Contents The following is a summary of our Price-Vested Stock Options activity for the nine months ended August 31, 2021: (shares in thousands) Number of Shares Weighted- Average Grant-Date Fair Value Outstanding at beginning of period 2,482 $ 9.40 Granted 15 9.66 Forfeited ( 245 ) 9.42 Outstanding at end of period 2,252 $ 9.40 The following is a summary of our LTPP activity for the nine months ended August 31, 2021 and 2020: 2021 2020 (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 382 $ 71.20 392 $ 57.98 Granted 141 98.30 130 86.14 Vested ( 124 ) 51.73 ( 88 ) 44.98 Forfeited ( 23 ) 89.44 ( 6 ) 63.73 Outstanding at end of period 376 $ 86.73 428 $ 69.13 23 Table of Contents 9. INCOME TAXES Income tax expense for the three months ended August 31, 2021 included $ 22.9 million of net discrete tax benefits consisting principally of the following: (i) $ 13.3 million of tax benefits due to the partial release of certain reserves for an unrecognized tax benefit and related interest in a non-U.S. jurisdiction based on a change in our assessment of the technical merits of that position associated with the availability of new information, (ii) $ 4.3 million of tax benefits from the resolution of other tax uncertainties, including the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $ 2.4 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation, (iv) $ 1.1 million of tax benefits resulting from an adjustment to a prior year tax accrual based on the final return filed, and (v) $ 1.0 million of tax benefits resulting from a refinement of deferred state taxes directly related to our December 2020 acquisition of FONA. Income tax expense for the nine months ended August 31, 2021 included $ 22.9 million of net discrete tax benefits consisting primarily of the following: (i) $ 13.3 million of tax benefits due to the partial release of certain reserves for an unrecognized tax benefit and related interest in a non-U.S. jurisdiction based on a change in our assessment of the technical merits of that position associated with the availability of new information, (ii) $ 9.2 million of tax benefits from the resolution of other tax uncertainties, including the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $ 10.4 million of deferred state tax expense directly related to our December 2020 acquisition of FONA, (iv) $ 4.5 million of tax benefits associated with the release of a valuation allowance due to a change in judgment about realizability of deferred tax assets, (v) $ 2.2 million of excess tax benefits associated with share-based compensation, (vi) $ 2.5 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation, and (vii) $ 1.1 million of tax benefits resulting from an adjustment to a prior year tax accrual based on the final return filed. Income taxes for the three months ended August 31, 2020 included $ 13.2 million of discrete tax benefits consisting principally of the following: (i) $ 7.3 million of excess tax benefits associated with share-based compensation, (ii) $ 2.1 million of tax benefits related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (iii) $ 2.0 million for an adjustment to a prior year tax accrual based on the final return filed, and (iv) $ 1.1 million related to the revaluation of deferred taxes resulting from enacted legislation. Income taxes for the nine months ended August 31, 2020 included $ 40.1 million of discrete tax benefits consisting principally of the following: (i) $ 13.0 million of excess tax benefits associated with share-based compensation, (ii) $ 9.9 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter, (iii) $ 9.3 million of tax benefits associated with the release of a valuation allowance due to a change in judgment about realizability of deferred tax assets, (iv) $ 5.5 million of tax benefits related to the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations in various jurisdictions, and (v) $ 2.0 million for an adjustment to a prior year tax accrual based on the final return filed. Other than additions for current year tax positions and the reversal of unrecognized tax benefits and related interest noted above, there were no significant changes to unrecognized tax benefits during the nine months ended August 31, 2021. As of August 31, 2021, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements. 10. CAPITAL STOCK AND EARNINGS PER SHARE On April 5, 2021, following approval by the Company’s shareholders on March 31, 2021, amendments to the Company’s Charter became effective that increased the number of authorized shares of each class of common stock from 320,000,000 to 640,000,000 and established the par value of each class of common stock at $ 0.01 per share. The par value and additional paid in capital associated with each class of common stock is recorded in Common stock and Common stock non-voting in our consolidated balance sheet. The following table sets forth the reconciliation of average shares outstanding (in millions): 24 Table of Contents Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Average shares outstanding – basic 267.4 266.7 267.2 266.3 Effect of dilutive securities: Stock options/RSUs/LTPP 2.6 2.9 2.8 2.7 Average shares outstanding – diluted 270.0 269.6 270.0 269.0 The following table sets forth the stock options and RSUs that were not considered in our earnings per share calculation since they were anti-dilutive (in millions): Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Anti-dilutive securities 0.8 — 0.6 0.2 The following table sets forth the common stock activity (in millions): Three months ended August 31, Nine months ended August 31, 2021 2020 2021 2020 Shares issued under stock options, RSUs, LTPP and employee stock purchase plans 0.1 0.7 0.6 1.7 Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, LTPP and employee stock purchase plans 0.1 0.4 0.2 0.7 As of August 31, 2021, $ 581.4 million remained of the $ 600 million share repurchase program authorization approved by our Board of Directors in November 2019. 11. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table sets forth the components of accumulated other comprehensive loss, net of tax, where applicable (in millions): August 31, 2021 November 30, 2020 Foreign currency translation adjustment (1) $ ( 147.0 ) $ ( 174.0 ) Unrealized gain (loss) on foreign currency exchange contracts 1.9 ( 0.4 ) Unamortized value of settled interest rate swaps ( 0.2 ) ( 0.1 ) Pension and other postretirement costs ( 290.3 ) ( 296.3 ) Accumulated other comprehensive loss $ ( 435.6 ) $ ( 470.8 ) (1) During the nine months ended August 31, 2021, the foreign currency translation adjustment of Accumulated other comprehensive loss decreased on a net basis by $ 27.0 million, including the impact of a $ 4.9 million decrease associated with net investment hedges. These net investment hedges are more fully described in note 5. 25 Table of Contents The following table sets forth the amounts reclassified from Accumulated other comprehensive income (loss) and into consolidated net income (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, 2021 August 31, 2020 August 31, 2021 August 31, 2020 (Gains)/losses on cash flow hedges: Interest rate derivatives $ ( 0.2 ) $ ( 0.2 ) $ ( 0.4 ) $ ( 0.4 ) Interest expense Foreign exchange contracts 0.3 ( 1.1 ) 0.6 ( 1.2 ) Cost of goods sold Total before tax 0.1 ( 1.3 ) 0.2 ( 1.6 ) Tax effect — 0.3 — 0.4 Income tax expense Net, after tax $ 0.1 $ ( 1.0 ) $ 0.2 $ ( 1.2 ) Amortization of pension and postretirement benefit adjustments: Amortization of prior service costs (credit) (1) $ 0.1 $ ( 0.9 ) $ 0.2 $ ( 3.0 ) Other income, net Amortization of net actuarial losses (1) 3.5 3.2 10.5 8.5 Other income, net Total before tax 3.6 2.3 10.7 5.5 Tax effect ( 0.8 ) ( 0.6 ) ( 2.5 ) ( 1.3 ) Income tax expense Net, after tax $ 2.8 $ 1.7 $ 8.2 $ 4.2 (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 7 for additional details). Amortization of net actuarial losses includes settlement losses. 12. BUSINESS SEGMENTS We operate in two business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, herbs, 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”, “OLD BAY”, “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Cholula”, “Schwartz”, “Club House”, “Kamis”, “Kohinoor”, “DaQiao”, “La Drogheria”, “Stubb's”, and “Gourmet Garden”. Our flavor solutions segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors, with the exception of our businesses in China and India, where foodservice sales are managed by and reported in our consumer segment. 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. We also exclude transaction and integration expenses related to our acquisitions of Cholula and FONA 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 businesses. 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. 26 Table of Contents Consumer Flavor Solutions Total (in millions) Three months ended August 31, 2021 Net sales $ 921.9 $ 627.5 $ 1,549.4 Operating income excluding special charges and transaction and integration expenses 187.8 84.5 272.3 Income from unconsolidated operations 6.7 2.4 9.1 Three months ended August 31, 2020 Net sales $ 910.9 $ 519.4 $ 1,430.3 Operating income excluding special charges 209.0 64.1 273.1 Income from unconsolidated operations 8.5 1.1 9.6 Nine months ended August 31, 2021 Net sales $ 2,813.9 $ 1,773.7 $ 4,587.6 Operating income excluding special charges and transaction and integration expenses 554.5 238.3 792.8 Income from unconsolidated operations 39.7 6.1 45.8 Nine months ended August 31, 2020 Net sales $ 2,573.0 $ 1,470.4 $ 4,043.4 Operating income excluding special charges 560.2 168.4 728.6 Income from unconsolidated operations 24.7 5.5 30.2 27 Table of Contents A reconciliation of operating income excluding special charges and, for 2021, transaction and integration expenses, to operating income is as follows (in millions): Consumer Flavor Solutions Total Three months ended August 31, 2021 Operating income excluding special charges and transaction and integration expenses $ 187.8 $ 84.5 $ 272.3 Less: Special charges 3.5 2.3 5.8 Less: Other transaction and integration expenses 0.2 1.1 1.3 Operating income $ 184.1 $ 81.1 $ 265.2 Three months ended August 31, 2020 Operating income excluding special charges $ 209.0 $ 64.1 $ 273.1 Less: Special charges — 0.1 0.1 Operating income $ 209.0 $ 64.0 $ 273.0 Nine months ended August 31, 2021 Operating income excluding special charges and transaction and integration expenses $ 554.5 $ 238.3 $ 792.8 Less: Special charges 13.1 7.5 20.6 Less: Transaction-related expenses included in cost of goods sold 4.0 2.3 6.3 Less: Other transaction and integration expenses 7.5 19.5 27.0 Operating income $ 529.9 $ 209.0 $ 738.9 Nine months ended August 31, 2020 Operating income excluding special charges $ 560.2 $ 168.4 $ 728.6 Less: Special charges 3.1 0.9 4.0 Operating income $ 557.1 $ 167.5 $ 724.6 The following table sets forth our net sales, by geographic area, for the three and nine months ended August 31, 2021 and 2020 (in millions): Americas EMEA Asia/Pacific Total Three months ended August 31, 2021 $ 1,084.5 $ 283.4 $ 181.5 $ 1,549.4 Three months ended August 31, 2020 1,010.5 262.7 157.1 1,430.3 Nine months ended August 31, 2021 3,130.7 890.7 566.2 4,587.6 Nine months ended August 31, 2020 2,855.5 756.7 431.2 4,043.4