MCCORMICK & CO INC 10-Q

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. 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, 2020, 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. 28 Table of Contents Business profile McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business. In fiscal year 2020, approximately 40% of our sales were outside of the U.S. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. We manage our business in two business segments, consumer and flavor solutions. R ecent Events Recent events impacting our business include COVID-19, the acquisitions of Cholula and FONA, the inflationary cost environment and disruption in our supply chain, each of which are further discussed below. 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, including escalating transportation costs, 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 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. For comparative purposes, the following provides a summary of growth in net sales as reported and on a constant currency basis for the third quarter of 2021 as compared to the third quarter of 2019: Three Months Ended August 31, 2021 as compared to Three Months Ended August 31, 2019 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment 16.1 % 2.3 % 13.8 % Flavor solutions segment 17.3 % 1.7 % 15.6 % Total net sales 16.6 % 2.0 % 14.6 % The percentage change in reported net sales and the percentage change on a constant currency basis were favorably impacted by the acquisitions of Cholula and FONA, which, in aggregate, contributed 2.9%, 7.8% and 4.8% to the consumer segment, flavor solutions segment and total net sales growth rates, respectively, in the preceding table, on both a reported and constant currency basis. 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 each 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 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 segment sales and operating results improved as away-from-home 29 Table of Contents consumption increased as compared to the corresponding quarter in 2020, in part, due to the lifting of much more restrictive COVID-19 mitigation measures that were in place during 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. 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. The availability of COVID-19 vaccines and their acceptance by individuals is difficult to predict, and vaccination levels vary across jurisdictions. 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. 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 restaurants, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable or, in the case of significant increased demand for our product, we may be unable to fulfill that increased demand. As a result, it may be challenging to obtain and process raw materials to support our business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes related to COVID-19 which could adversely impact our business, financial condition, or results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us. The potential effects of COVID-19 also could impact us in a number of other ways including, but not limited to, variations in the level of our profitability, laws and regulations affecting our business, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, valuation of our pension assets and obligations, credit risks of our customers and counterparties, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. 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 Comprehensive Continuous Improvement (CCI) program-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. Acquisitions: Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed nine acquisitions, which are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that build scale where we currently have presence in both developed and emerging markets. Information with respect to our recent acquisitions is provided below: • On December 30, 2020, we acquired FONA International, LLC and certain of its affiliates (FONA), a privately owned company, for approximately $708 million, net of cash acquired. 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. • On November 30, 2020, we acquired the parent company of Cholula Hot Sauce® (Cholula) from L Catterton for approximately $801 million, net of cash acquired. We financed this fiscal 2020 acquisition with cash and commercial paper. Cholula is a strong addition to McCormick’s global branded flavor portfolio, which broadens the Company’s offering 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 in both our consumer and flavor solutions segments. • In February 2021, we issued $500.0 million of 0.90% notes due February 15, 2026, with net cash proceeds received of $495.7 million. At the same time, we issued $500.0 million of 1.85% notes due February 15, 2031, with net cash proceeds received of $492.8 million. 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 30 Table of Contents FONA and Cholula, and for general corporate purposes. For further information regarding our issuance of these notes, see note 5 of the notes to the accompanying financial statements. 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 In 2021, we expect to grow net sales over the 2020 level by 12% to 13%, including an estimated 3% favorable impact from currency rates, or 9% to 10% on a constant currency basis. The 2021 sales growth forecast includes the estimated incremental impact of the Cholula and FONA acquisitions, which we expect to comprise 4.0% of the expected 12% to 13% sales growth, and higher volume and product mix driven by our brand marketing, new product, category management, and differentiated customer engagement growth plans. That sales growth forecast also includes the expected impact of pricing actions taken to partially offset an anticipated increase in costs. We expect to have organic sales growth in both our consumer and flavor solutions segments. We expect our 2021 gross profit margin to decline 160 to 180 basis points from our gross profit margin of 41.1% in 2020. The projected 2021 decline in gross profit margin is principally due to the net effect of (i) an anticipated mid-single-digit level of inflation in 2021 compared to 2020, (ii) anticipated unfavorable sales mix in 2021 between our consumer and flavor solutions segments as compared to 2020, (iii) 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, and (iv) an expected increase in COVID-19 related expenses of approximately $10 million in 2021 over the 2020 level. Excluding the $6.3 million of transaction and integration expenses related to our acquisitions of Cholula and FONA included in our projected range of gross profit margin anticipated in 2021, we expect our adjusted gross profit margin to be 150 to 170 basis points lower than our 2020 gross profit margin of 41.1%. In 2021, we expect an increase in operating income of 2% to 4%, 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 $25 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 $38 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 $26 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 6% to 8%, which includes an estimated 2% favorable impact from currency rates, or to increase by 4% to 6% 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 22.0% 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 nine months of 2021 of a deferred state tax discrete tax item directly related to our acquisition of FONA that increased tax expense by $10.4 million, we also estimate that our adjusted effective tax rate will approximate 21.0% 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 $2.80 to $2.85. 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 of $0.07 from special charges, $0.15 from transaction and integration expenses, including the unfavorable impact of a discrete tax item of $0.04 related to our acquisition of FONA, and $0.05 gain from the sale of an unconsolidated operation) 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, over adjusted diluted earnings per share of $2.83 in 2020. 31 Table of Contents RESULTS OF OPERATIONS – COMPANY Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Net sales $ 1,549.4 $ 1,430.3 $ 4,587.6 $ 4,043.4 Percent increase 8.3 % 7.6 % 13.5 % 4.7 % Components of percent growth in net sales – increase (decrease): Volume and product mix 0.7 % 6.8 % 6.0 % 4.1 % Pricing actions 0.1 % 1.8 % 0.2 % 1.7 % Acquisitions 4.5 % — % 4.3 % — % Foreign exchange 3.0 % (1.0) % 3.0 % (1.1) % Gross profit $ 599.6 $ 590.3 $ 1,791.7 $ 1,639.7 Gross profit margin 38.7 % 41.3 % 39.1 % 40.6 % Sales for the third quarter of 2021 increased by 8.3% from the prior year level and by 5.3% 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 0.7%. This increase was driven by increased sales of our flavor solutions segment across all regions, as demand was elevated as compared to the corresponding period in 2020 when away-from-home sales were negatively impacted by measures imposed to mitigate the spread of COVID-19. Pricing actions increased sales by 0.1%, while the incremental impact of the Cholula and FONA acquisitions added 4.5% to sales in the third quarter of 2021. Sales were also impacted by favorable foreign currency rates that increased net sales by 3.0% in the third quarter of 2021 compared to the year-ago quarter and is excluded from our measure of sales growth of 5.3% on a constant currency basis. Sales for the nine months ended August 31, 2021 increased by 13.5% from the prior year level and increased by 10.5% on a constant currency basis. Favorable volume and product mix increased sales by 6.0% with growth from both the consumer and flavor solutions segments. In addition, pricing actions added 0.2% and acquisitions added 4.3% to sales, both as compared to the prior year period. Sales were impacted by favorable foreign currency rates that increased sales by 3.0% as compared to the same period in 2020 and is excluded from our measure of sales growth of 10.5% on a constant currency basis. Gross profit for the third quarter of 2021 increased by $9.3 million, or 1.6%, over the comparable period in 2020. Our gross profit margin for the three months ended August 31, 2021 was 38.7%, a decrease of 260 basis points from the comparable period in 2020. The decrease in gross profit margin in the quarter ended August 31, 2021 was driven by increased commodity, packaging materials and transportation costs, and a less favorable mix in sales between our consumer and flavor solutions segments, which was partially offset by cost savings led by our Comprehensive Continuous Improvement ("CCI") program and the accretive impact of the Cholula and FONA acquisitions, as compared to the corresponding quarter in 2020. Gross profit for the nine months ended August 31, 2021 increased by $152.0 million, or 9.3% over the comparable period in 2020. Our gross profit margin for the nine months ended August 31, 2021 was 39.1%, a decrease of 150 basis points from the same period in 2020. The decrease in gross profit margin in the nine months ended August 31, 2021 was driven by increased commodity, packaging materials and transportation costs, higher conversion costs, which includes costs associated with COVID-19, and a less favorable mix in sales between our consumer and flavor solutions segments, which were partially offset by savings from our CCI program, improved product mix and the accretive impact of the Cholula and FONA acquisitions, each as compared to the prior year period. In addition, our gross profit for the nine months ended August 31, 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 for the nine months ended August 31, 2021 decreased by 140 basis points from 40.6% in the nine months ended August 31, 2020 to 39.2% in the corresponding period in 2021. Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Selling, general & administrative expense (SG&A) $ 327.3 $ 317.2 $ 1,005.2 $ 911.1 Percent of net sales 21.1 % 22.2 % 21.9 % 22.6 % SG&A increased by $10.1 million in the third quarter of 2021 compared to the 2020 level, driven by (i) SG&A associated with the acquired Cholula and FONA businesses; (ii) greater selling and distribution expenses associated with the higher sales 32 Table of Contents volume; and (iii) higher investments associated with the implementation of a global ERP platform that was paused in 2020 as a response to the inherent operational limitations caused by the onset of the COVID-19 pandemic. Those increases were partially offset by lower performance-based employee incentive expenses, as compared to the prior year period. SG&A as a percentage of net sales decreased by 110 basis points from the prior year level as the net impact of the previously mentioned factors were more than offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2021 period. SG&A increased by $94.1 million in the nine months ended August 31, 2021 compared to the 2020 level, primarily as a result of (i) SG&A associated with the Cholula and FONA acquisitions, (ii) increased brand marketing costs, and (iii) greater selling and distribution expenses associated with the higher sales volume, all as compared to the corresponding period in 2020. Those increases were partially offset by lower performance-based employee incentive expenses, as compared to the prior year period. SG&A as a percent of net sales for the nine months ended August 31, 2021 decreased by 70 basis points from the prior year level, driven by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2021 period, which was partially offset by the net impact of the aforementioned factors. Three months ended Nine months ended August 31, 2021 August 31, 2020 Aug 31, 2021 Aug 31, 2020 Total special charges $ 5.8 $ 0.1 $ 20.6 $ 4.0 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 Asia Pacific (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 related to streamlining actions in our EMEA region. During the nine months ended August 31, 2020, we recorded $4.0 million of special charges, consisting of $2.9 million related to streamlining actions in our EMEA region together with $1.1 million related to our GE initiative. Three months ended Nine months ended August 31, 2021 August 31, 2020 Aug 31, 2021 Aug 31, 2020 Transaction expenses included in cost of goods sold $ — $ — $ 6.3 $ — Other transaction and integration expenses 1.3 — 27.0 — Total transaction and integration expenses $ 1.3 $ — $ 33.3 $ — During the three months ended August 31, 2021, we recorded $1.3 million of integration expenses related to our acquisitions of Cholula and FONA. During the nine months ended August 31, 2021, we recorded $33.3 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 expenses primarily related to outside advisory, service and consulting costs, and (iii) $13.2 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 fourth quarter of fiscal 2021 by approximately $5 million. Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Interest expense $ 33.9 $ 33.5 $ 103.3 $ 103.2 Other income, net 3.5 3.9 12.0 12.5 Interest expense increased by $0.4 million and $0.1 million in the three and nine months ended August 31, 2021, respectively, both as compared to the prior year periods, as an increase in average total borrowings was largely offset by a decrease in 33 Table of Contents interest rates. Other income, net for the three and nine months ended August 31, 2021 decreased by $0.4 million and $0.5 million, both as compared to the prior year periods. Decreases in the quarter and year-to-date periods were driven by lower non-service cost income associated with our pension and postretirement benefit plans, which was partially offset by higher interest income, as compared to the corresponding periods in 2020. Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 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 Effective tax rate 13.4 % 19.3 % 20.9 % 18.5 % The provision for income taxes is based on the then-current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements of U.S. GAAP. Examples of such types of discrete items not related to ordinary income of the current fiscal year include, but are not limited to, excess tax benefits related to share-based compensation, changes in estimates of the outcome of tax matters related to prior years (including reversals of reserves upon the lapsing of statutes of limitations), provision-to-return adjustments, the settlement of tax audits, changes in enacted tax rates, changes in the assessment of deferred tax valuation allowances, acquisition related deferred tax adjustments and the tax effects of intra-entity asset transfers (other than inventory). Income tax expense for the three 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) $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. Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Income from unconsolidated operations $ 9.1 $ 9.6 $ 45.8 $ 30.2 34 Table of Contents Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, decreased by $0.5 million for the three months ended August 31, 2021, as compared to the year ago period. The decrease was driven by lower earnings of our largest joint venture, McCormick de Mexico. In the nine months ended August 31, 2021, income from unconsolidated operations increased by $15.6 million, as compared to the prior year period, driven by an after-tax gain of $13.4 million on the sale of our 26% interest in Eastern Condiments Private Ltd. (Eastern), an unconsolidated operation, during our second quarter of 2021, as more fully described in note 2 of the notes to the accompanying financial statements. The following table outlines the major components of the change in diluted earnings per share from 2020 to 2021: Three months ended August 31, Nine months ended August 31, 2020 Earnings per share – diluted $ 0.76 $ 2.03 Impact of change in operating income — 0.20 Increase in special charges, net of taxes (0.01) (0.04) Increase in transaction and integration expenses, including impact of net discrete tax item related to FONA acquisition — (0.14) Increase in income from unconsolidated operations, including, for the nine months ended August 31, 2021, an after-tax gain on sale of unconsolidated operation of $0.05 per diluted share — 0.06 Impact of change in effective income tax rate, excluding taxes on special charges and transaction and integration expenses 0.04 (0.03) Impact of higher shares outstanding — (0.01) 2021 Earnings per share – diluted $ 0.79 $ 2.07 RESULTS OF OPERATIONS — SEGMENTS We measure the performance of our business segments based on operating income, excluding special charges. 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. See note 12 of the notes to the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges and transaction and integration expenses, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income. CONSUMER SEGMENT Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Net sales $ 921.9 $ 910.9 $ 2,813.9 $ 2,573.0 Percent increase 1.2 % 14.7 % 9.4 % 11.7 % Segment operating income $ 187.8 $ 209.0 $ 554.5 $ 560.2 Segment operating income margin 20.4 % 22.9 % 19.7 % 21.8 % In the third quarter of 2021, sales of our consumer segment increased 1.2% as compared to the third quarter of 2020, which experienced a 14.7% increase in sales from the 2019 level as a result of government-mandated measures—imposed in 2020 to mitigate the spread of COVID-19—resulted in a shift in consumer behavior toward at-home meal preparation, and decreased by 1.2% on a constant currency basis. That 1.2% increase was driven by higher sales of our consumer business in our Asia/Pacific region, which was partially offset by lower sales in our EMEA region, both as compared to the prior year quarter. Unfavorable volume and product mix decreased consumer segment sales by 3.3% in the third quarter of 2021 as compared to the same period last year, as the exceptionally strong demand that existed in the early stages of the pandemic in the year ago period has eased but remains strong. Pricing actions decreased sales by 0.4% as compared to the prior year period, while the incremental 35 Table of Contents impact of the Cholula acquisition added 2.5% to sales. Sales in the third quarter of 2021 reflected a favorable impact from foreign currency rates that increased consumer segment sales by 2.4% compared to the year-ago quarter and is excluded from our measure of sales decline of 1.2% on a constant currency basis. In the Americas region, consumer sales increased 0.2% in the third quarter of 2021 as compared to the third quarter of 2020, which experienced a 17.2% increase in sales from the 2019 level as a result of exceptionally strong demand for our products in the early stages of the COVID-19 pandemic, and decreased by 0.6% on a constant currency basis. For the third quarter of 2021, unfavorable volume and product mix decreased sales by 3.2% as compared to the corresponding period in 2020, as the exceptionally strong demand that existed in the early stages of the pandemic in the year ago period has eased but remains strong. The incremental impact of the Cholula acquisition added 3.4% to sales in the quarter ended August 31, 2021 and pricing actions decreased sales by 0.8% as compared to the prior year period. The favorable impact of foreign currency rates increased sales by 0.8% in the quarter and is excluded from our measure of sales decline of 0.6% on a constant currency basis. In the EMEA region, consumer sales decreased 6.0% in the third quarter of 2021 as compared to the third quarter of 2020, which experienced a 23.0% increase in sales from the 2019 level driven by the COVID-19 impact on greater consumer at-home meal preparation, and decreased by 10.6% on a constant currency basis. Sales were impacted by unfavorable volume and product mix during the third quarter of 2021 that decreased sales by 11.0% from the prior year level. The decrease was driven by a shift in the relative balance of at-home and away-from-home eating, as consumption eased from the level of at-home eating seen in 2020. Pricing actions increased sales by 0.4% as compared to the 2020 period. During the third quarter of 2021, a favorable impact from foreign currency rates increased sales by 4.6% compared to the year-ago period and is excluded from our measure of sales decline of 10.6% on a constant currency basis. In the Asia/Pacific region, consumer sales increased 20.2% in the third quarter of 2021 as compared to the third quarter of 2020, which reflected an 8.7% decrease in sales from the 2019 level due mainly to COVID-19 disruption on foodservice sales in China, and increased by 10.6% on a constant currency basis. For the quarter ended August 31, 2021, favorable volume and product mix increased sales by 9.9%. The increase was driven by sharply higher sales in the foodservice component of our China business in the quarter ended August 31, 2021, as compared to a 2020 period that was slowly recovering from the unfavorable impacts of COVID-19 on away-from-home consumption. Partially offsetting this increase were sales declines of cooking at-home products across the region from the elevated demand in the year-ago period. Pricing actions increased sales by 0.7% as compared to the prior year period. A favorable impact from foreign currency rates, which increased sales by 9.6% compared to the third quarter of 2020, is excluded from our measure of sales growth of 10.6% on a constant currency basis. For the nine months ended August 31, 2021, our consumer segment sales increased 9.4% as compared to the nine months ended August 31, 2020 and increased by 6.6% on a constant currency basis. That 9.4% sales increase was driven by higher sales of our consumer business in all regions during the nine months ended August 31, 2021 and is in comparison to a 11.7% increase in sales during the nine months ended August 31, 2020 as compared to the corresponding period in 2019. Improved volume and product mix added 4.2% to sales and pricing actions reduced sales by 0.2% in the first nine months of 2021, both in comparison to the prior year levels. The incremental impact of the Cholula acquisition added 2.6% to segment sales for the nine months ended August 31, 2021. A favorable impact from foreign currency rates increased sales by 2.8% compared to the prior year and is excluded from our measure of sales growth of 6.6% on a constant currency basis. Segment operating income for our consumer segment decreased by $21.2 million, or 10.1%, in the third quarter of 2021 as compared to the third quarter of 2020. The decrease in segment operating income was driven by the impact of increased commodity costs, including transportation costs, partially offset by the sales impact of the Cholula acquisition, lower incentive-based compensation accruals and CCI-led cost savings, all as compared to the prior year period. Segment operating margin for our consumer segment decreased by 250 basis points from the third quarter of 2020 to 20.4% in the third quarter of 2021. That decrease was principally the result of a decrease in gross margin, including the impact of the inflationary cost environment, that was partially offset by a decrease in SG&A as a percentage of net sales, as compared to the third quarter of 2020. On a constant currency basis, segment operating income for our consumer segment decreased by 11.6% in the third quarter of 2021 in comparison to the same period in 2020. Segment operating income for our consumer segment decreased by $5.7 million, or 1.0%, for the nine months ended August 31, 2021 as compared to the same period in 2020. The decrease in segment operating income was driven by the impact of increased commodities, packaging materials and transportation costs, increased conversion costs, which include incremental expenses related to COVID-19, and higher brand marketing investment, partially offset by higher sales, CCI-led cost savings and lower incentive-based compensation accruals, all as compared to the prior year period. The impact of COVID-19 on operating income during the nine months ended August 31, 2021 reflected actions, including the incremental impact of temporary arrangements to utilize co-manufacturing, that increased our cost to produce certain products and measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning that reduced productivity. Segment operating margin for our consumer segment decreased by 210 basis points in the first nine months of 2021 to 19.7%, driven by a decrease in segment gross profit margin, including the impact of the inflationary cost environment, which was partially offset by the 36 Table of Contents benefit from the leverage of fixed and semi-fixed expenses over a higher sales base as compared to the 2020 level. On a constant currency basis, segment operating income for our consumer segment declined by 3.4% in the nine months ended August 31, 2021 in comparison to the same period in 2020. FLAVOR SOLUTIONS SEGMENT Three months ended Nine months ended August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Net sales $ 627.5 $ 519.4 $ 1,773.7 $ 1,470.4 Percent increase (decrease) 20.8 % (2.9) % 20.6 % (5.7) % Segment operating income $ 84.5 $ 64.1 $ 238.3 $ 168.4 Segment operating income margin 13.5 % 12.3 % 13.4 % 11.5 % In the third quarter of 2021, sales of our flavor solutions segment increased by 20.8% as compared to the third quarter of 2020, which experienced a 2.9% decrease in sales from the 2019 level due to lower demand resulting from the broad-based impact of COVID-19 disruption on our quick service restaurant and branded food service customers in the early stages of the pandemic, and increased by 16.6% on a constant currency basis. The sales increase in the third quarter of 2021 included growth in all regions. The incremental impact of our Cholula and FONA acquisitions added 8.0% to sales in the quarter ended August 31, 2021. Favorable volume and product mix increased segment sales by 7.5% in the third quarter of 2021 as compared to the same period in 2020, as away-from-home consumption improved, in part, due to less restrictive COVID-19 measures that were in place in the third quarter of 2021 as compared to those in the early stages of the pandemic. Pricing actions during the third quarter of 2021 increased sales by 1.1%. The favorable impact of foreign currency rates increased flavor solutions segment sales by 4.2% compared to the year-ago quarter and is excluded from our measure of sales growth of 16.6% on a constant currency basis. In the Americas region, flavor solutions sales increased by 20.8% during the third quarter of 2021 as compared to the third quarter of 2020, which experienced a sales decline of 4.7% from the 2019 level driven by lower sales to quick service restaurant and branded food service customers as a result of COVID-19 restrictions imposed in the early stages of the pandemic, and increased by 18.6% on a constant currency basis. Favorable volume and product mix increased flavor solutions sales in the Americas by 5.4% during the third quarter of 2021, driven by growth in branded foodservice that benefited from an increase in away-from-home eating that resulted from the easing of measures taken in the early stages of the pandemic to address COVID-19, and growth with packaged food and beverage companies, each as compared to the year ago period. The incremental impact of the Cholula and FONA acquisitions increased sales by 11.8% during the third quarter of 2021. Pricing actions during the quarter ended August 31, 2021 increased sales by 1.4% as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 2.2% compared to the third quarter of 2020 and is excluded from our measure of sales growth of 18.6% on a constant currency basis. In the EMEA region, flavor solutions sales in the third quarter of 2021 increased by 28.1% as compared to the third quarter of 2020, which experienced a sales decline of 1.0% from the 2019 level primarily as a result of decreased sales to quick service restaurants and lower branded food service sales that were partially offset by higher demand from packaged food service companies in response to COVID-19 restrictions implemented in 2020, and increased by 19.4% on a constant currency basis. Favorable volume and product mix increased segment sales in the EMEA region by 18.5% as compared to the corresponding period in 2020. The increase was driven by higher sales to quick service restaurants and branded foodservice customers combined with strong growth with packaged food companies. Pricing actions increased sales by 0.9% in the third quarter of 2021 as compared to the prior period level. A favorable impact from foreign currency rates increased sales by 8.7% compared to the third quarter of 2020 and is excluded from our measure of sales growth of 19.4% on a constant currency basis. In the Asia/Pacific region, flavor solutions sales increased 8.4% in the third quarter of 2021 as compared to the third quarter of 2020, which experienced a sales increase of 4.9% from the 2019 level driven by higher sales to quick service restaurant customers in China and Australia, and increased by 0.8% on a constant currency basis. Favorable volume and product mix increased sales by 1.6% in the third quarter of 2021. Pricing actions decreased sales by 0.8% as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 7.6% compared to the third quarter of 2020 and is excluded from our measure of sales growth of 0.8% on a constant currency basis. For the nine months ended August 31, 2021, our flavor solutions sales increased 20.6% as compared to the nine months ended August 31, 2020 and is in contrast to a 5.7% decline in segment sales during the nine months ended August 31, 2020 from the 2019 level and increased by 17.3% on a constant currency basis. Driving that increase in sales was higher demand during the 37 Table of Contents 2021 period due to the aforementioned improvement in away-from-home eating. Volume and product mix contributed 9.0% of the increase in addition to pricing actions which added 1.0% to sales for the first nine months of 2021, both in comparison to the prior year levels. The incremental impact of our acquisitions of Cholula and FONA added 7.3% to segment sales for the nine months ended August 31, 2021. A favorable impact from foreign currency rates increased sales by 3.3% compared to the prior year and is excluded from our measure of sales growth of 17.3% on a constant currency basis. Segment operating income for our flavor solutions segment increased by $20.4 million, or 31.8%, in the third quarter of 2021 as compared to the third quarter of 2020. The increase in segment operating income was driven by sharply higher sales, including the impact of acquisitions, favorable product mix, lower incentive-based compensation accruals and CCI-led cost savings, which were partially offset by increased commodities, packaging materials and transportation costs. Segment operating margin for our flavor solutions segment increased by 120 basis points from the prior year level to 13.5% in the third quarter of 2021, as the benefit from the leverage of fixed and semi-fixed expenses over a higher sales base as compared to the 2020 level, together with the accretive impact of the Cholula and FONA acquisitions on gross margins, were partially offset by higher commodities costs. On a constant currency basis, segment operating income for our flavor solutions segment increased by 26.6% in the third quarter of 2021 as compared to the same period in 2020. Segment operating income for our flavor solutions segment increased by $69.9 million, or 41.5%, for the nine months ended August 31, 2021 as compared to the same period of 2020. The increase in segment operating income was driven by higher sales, including the impact of acquisitions, CCI-led cost savings and favorable product mix, which was partially offset by increased commodities, packaging materials and transportation costs. Segment operating margin for our flavor solutions segment increased by 190 basis points in the first nine months of 2021 to 13.4% as the benefits from the leverage of fixed and semi-fixed expenses over a higher sales base as compared to the 2020 level, together with the accretive impact of the Cholula and FONA acquisitions on gross margins, were partially offset by the impact of the inflationary cost environment as compared to the first nine months of 2020. On a constant currency basis, segment operating income for our flavor solutions segment increased by 38.1% in the nine months ended August 31, 2021, in comparison to the same period in 2020. MARKET RISK SENSITIVITY We are subject to market risk sensitivities, including those related to foreign exchange, interest rates, commodity risks and credit risks. The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic introduced significant volatility in the financial markets during 2020 and has continued, to a lesser extent, in 2021. Foreign Exchange Risk We are potentially exposed to foreign currency risk 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 with highly-rated financial institutions to reduce fluctuations in the long or short currency positions. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. All derivatives are designated as hedges. The following table sets forth the notional values and unrealized net gain (loss) of the portfolio of our forward foreign currency and cross currency swap contracts: August 31, 2021 November 30, 2020 Forward foreign currency: Notional value $ 598.1 $ 383.8 Unrealized net gain (loss) 4.6 (6.8) Cross currency swaps: Notional value 528.7 524.4 Unrealized net loss (14.4) (18.8) The outstanding notional value is a result of our decisions on foreign currency exposure coverage, based on our foreign currency and foreign currency translation exposures. Interest Rate Risk We manage our interest rate exposure by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments, and all derivatives are designated as hedges. 38 Table of Contents The following table sets forth the notional values and fair values of our interest rate swap contracts: August 31, 2021 November 30, 2020 Notional value $ 350.0 $ 350.0 Unrealized net gain 30.0 43.1 The change in fair values of our interest rate swap contracts is due to changes in interest rates on the notional amounts outstanding as of each date as well as the remaining duration of our interest rate derivatives. Commodity Risk We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw materials are dairy products, pepper, vanilla, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour. While future movements of raw material costs are uncertain, we respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery and customer price adjustments. We generally have not used derivatives to manage the volatility related to this risk. To the extent that we have used derivatives for this purpose, it has not been material to our business. Credit Risk The customers of our consumer segment are predominantly food retailers and food wholesalers. Consolidations in these industries have created larger customers. In addition, competition has increased with the growth in alternative channels including mass merchandisers, dollar stores, warehouse clubs, discount chains and e-commerce. This has caused some customers to be less profitable and increased our exposure to credit risk. Some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties, particularly in light of the evolving financial impact of COVID-19. We believe that our allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS As of August 31, 2021, there have been no material changes in our contractual obligations and commercial commitments outside the ordinary course of business since November 30, 2020 other than the following, which are more fully described in note 5 of the notes to the accompanying financial statements included in Part I, Item 1 of this report: (i) in February 2021, we issued $500.0 million of 0.90% notes due February 15, 2026; (ii) in February 2021, we issued $500.0 million of 1.85% notes due February 15, 2031; and (iii) in June 2021, we entered into a $1.5 billion five-year revolving credit facility, which will expire in June 2026 and which replaced both our prior five-year $1.0 billion revolving credit facility that was due to expire in August 2022 and our 364-day revolving credit facility that was due to expire in December 2021. NON-GAAP FINANCIAL MEASURES The following table includes financial measures of adjusted gross profit, adjusted gross profit margin, adjusted operating income, adjusted operating income margin, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures, which are prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following: • Special charges – 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. 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. • Transaction and integration expenses associated with the Cholula and FONA acquisitions – We exclude certain costs associated with our acquisitions of Cholula and FONA in November and December 2020, respectively, and their subsequent integration into the Company. Such costs, which we refer to as Transaction and integration expenses, 39 Table of Contents include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventories, together with the impact of discrete tax items, if any, directly related to each acquisition. • Income from sale of unconsolidated operations — We exclude the gain realized upon our sale of an unconsolidated operation in March 2021. As more fully described in note 2 of the notes to the accompanying financial statements included in Part I, Item 1 of this report, the sale of our 26% interest in Eastern in resulted in a gain of $13.4 million, net of tax of $5.7 million. The gain is included in Income from unconsolidated operations in our consolidated income statement. Details with respect to the composition of transaction and integration expenses and special charges set forth below are included in notes 2, 3 and 9 of the notes to the accompanying financial statements and in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2020. We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the 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. These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. 40 Table of Contents A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows: For the year ended November 30, 2020 For the three months ended For the nine months ended Estimated for the year ending November 30, 2021 August 31, 2021 August 31, 2020 August 31, 2021 August 31, 2020 Gross profit $ 2,300.4 $ 599.6 $ 590.3 $ 1,791.7 $ 1,639.7 Impact of transaction and integration expenses included in cost of goods sold (1) — — — 6.3 — Adjusted gross profit $ 2,300.4 $ 599.6 $ 590.3 $ 1,798.0 $ 1,639.7 Adjusted gross profit margin (2) 41.1 % 38.7 % 41.3 % 39.2 % 40.6 % Operating income $ 999.5 $ 265.2 $ 273.0 $ 738.9 $ 724.6 Impact of transaction and integration expenses included in cost of goods sold (1) — — — 6.3 — Impact of other transaction and integration expenses (1) 12.4 1.3 — 27.0 — Impact of special charges 6.9 5.8 0.1 20.6 4.0 Adjusted operating income $ 1,018.8 $ 272.3 $ 273.1 $ 792.8 $ 728.6 Adjusted operating income margin (3) 18.2 % 17.6 % 19.1 % 17.3 % 18.0 % Income tax expense $ 174.9 $ 31.5 $ 46.9 $ 135.5 $ 117.4 Impact of transaction and integration expenses (1) 1.9 1.2 — (3.1) — Impact of special charges 2.1 1.4 — 4.9 1.2 Adjusted income tax expense $ 178.9 $ 34.1 $ 46.9 $ 137.3 $ 118.6 Adjusted income tax rate (4) 19.9 % 14.1 % 19.3 % 19.6 % 18.6 % Net income $ 747.4 $ 212.4 $ 206.1 $ 557.9 $ 546.7 Impact of transaction and integration expenses (1) 10.5 0.1 — 36.4 — Impact of special charges 4.8 4.4 0.1 15.7 2.8 Impact of after-tax gain on sale of unconsolidated operation — — — (13.4) — Adjusted net income $ 762.7 $ 216.9 $ 206.2 $ 596.6 $ 549.5 Earnings per share – diluted $ 2.78 $ 0.79 $ 0.76 $ 2.07 $ 2.03 $2.80 to $2.85 Impact of transaction and integration expenses (1) 0.04 — — 0.14 — 0.15 Impact of special charges 0.01 0.01 — 0.05 0.01 0.07 Impact of after-tax gain on sale of unconsolidated operation — — — (0.05) — (0.05) Adjusted earnings per share – diluted $ 2.83 $ 0.80 $ 0.76 $ 2.21 $ 2.04 $2.97 to $3.02 41 Table of Contents (1) Transaction and integration expenses include transaction and integration expenses associated with our acquisitions of Cholula and FONA. These expenses include transaction expenses, integration expenses, including the effect of the fair value adjustment to acquired inventories on Cost of goods sold and the impact of a discrete deferred state income tax expense item, directly related to our December 2020 acquisition of FONA. This discrete tax item had a favorable impact of $1.0 million for the three months ended August 31, 2021 and a net unfavorable impact of $10.4 million or $0.04 per diluted share for the nine months ended August 31, 2021. (2) Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. (3) Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. (4) Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes excluding transaction and integration expenses and special charges of $241.9 million and $701.5 million for the three and nine months ended August 31, 2021, respectively, $243.5 million and $637.9 million for the three and nine months ended August 31, 2020, respectively, and $900.8 million for the year ended November 30, 2020. Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed “on a constant currency basis”, is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results). Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of the comparative year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the comparative year. Rates of constant currency growth (decline) follow: Three Months Ended August 31, 2021 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 0.2 % 0.8 % (0.6) % EMEA (6.0) % 4.6 % (10.6) % Asia/Pacific 20.2 % 9.6 % 10.6 % Total Consumer 1.2 % 2.4 % (1.2) % Flavor Solutions segment: Americas 20.8 % 2.2 % 18.6 % EMEA 28.1 % 8.7 % 19.4 % Asia/Pacific 8.4 % 7.6 % 0.8 % Total Flavor Solutions 20.8 % 4.2 % 16.6 % Total net sales 8.3 % 3.0 % 5.3 % Adjusted operating income: Consumer segment (10.1) % 1.5 % (11.6) % Flavor Solutions segment 31.8 % 5.2 % 26.6 % Total adjusted operating income (0.3) % 2.4 % (2.7) % 42 Table of Contents Nine Months Ended August 31, 2021 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 5.1 % 0.7 % 4.4 % EMEA 10.0 % 6.9 % 3.1 % Asia/Pacific 36.8 % 9.9 % 26.9 % Total Consumer 9.4 % 2.8 % 6.6 % Flavor Solutions segment: Americas 17.7 % 1.3 % 16.4 % EMEA 30.7 % 7.1 % 23.6 % Asia/Pacific 22.0 % 9.4 % 12.6 % Total Flavor Solutions 20.6 % 3.3 % 17.3 % Total net sales 13.5 % 3.0 % 10.5 % Adjusted operating income: Consumer segment (1.0) % 2.4 % (3.4) % Flavor Solutions segment 41.5 % 3.4 % 38.1 % Total adjusted operating income 8.8 % 2.6 % 6.2 % In addition, the following provides a summary of growth in net sales as reported and on a constant currency basis for the third quarter of 2021 as compared to the third quarter of 2019: Three Months Ended August 31, 2021 as compared to Three Months Ended August 31, 2019 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment 16.1 % 2.3 % 13.8 % Flavor solutions segment 17.3 % 1.7 % 15.6 % Total net sales 16.6 % 2.0 % 14.6 % To present “constant currency” information for the fiscal year 2021 projection, projected sales and adjusted operating income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company’s budgeted exchange rates for 2021 and are compared to the 2020 results, translated into U.S. dollars using the same 2021 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2020. To estimate the percentage change in adjusted earnings per share on a constant currency basis, a similar calculation is performed to arrive at adjusted net income divided by historical shares outstanding for fiscal year 2020 or projected shares outstanding for fiscal year 2021, as appropriate. Projections for the Year Ending November 30, 2021 Percentage change in net sales 12% to 13% Impact of favorable foreign currency exchange 3 % Percentage change in net sales in constant currency 9% to 10% Percentage change in adjusted operating income 6% to 8% Impact of favorable foreign currency exchange 2 % Percentage change in adjusted operating income in constant currency 4% to 6% Percentage change in adjusted earnings per share — diluted 5% to 7% Impact of favorable foreign currency exchange 2 % Percentage change in adjusted earnings per share in constant currency — diluted 3% to 5% 43 Table of Contents LIQUIDITY AND FINANCIAL CONDITION Nine months ended August 31, 2021 August 31, 2020 Net cash provided by operating activities $ 372.9 $ 626.7 Net cash used in investing activities (830.6) (143.3) Net cash provided by (used in) financing activities 347.0 (432.7) In the condensed consolidated cash flow statement, the changes in operating assets and liabilities are presented excluding the translation effects of changes in foreign currency exchange rates as these do not reflect actual cash flows. In addition, in the cash flow statement, the changes in operating assets and liabilities are presented excluding the effect of acquired operating assets and liabilities, as the cash flow associated with acquisitions of businesses is presented as an investing activity. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. Due to the cyclical nature of a portion of our business, we generate much of our cash flow in the fourth quarter of our fiscal year. Due to the timing of the interest payments on our debt, interest payments are higher in the first and third quarter of our fiscal year. Operating Cash Flow — Net cash provided by operating activities (“cash flow from operations”) is historically lowest in the first quarter and highest in the fourth quarter of our fiscal year. For the nine months ended August 31, 2021 cash flow from operations of $372.9 million decreased $253.8 million from the same period of 2020. This decrease was primarily driven by a higher use of cash associated with operating assets and liabilities, including the impact of higher cash used by working capital, the higher amount of certain employee benefits accrued as of the prior year-end and paid in the first quarter of the subsequent fiscal year, and the payment of transaction and integration costs associated with our recent acquisitions, each as compared to the prior year. As more fully described in our Annual Report on Form 10-K for the year ended November 30, 2020, we participate in a Supply Chain Financing program (SCF) with several global financial institutions (SCF Banks). Under the SCF, qualifying suppliers may elect to sell their receivables from us to an SCF Bank, enabling participating suppliers to negotiate their receivables sales arrangements directly with the respective SCF Bank. We are not party to those agreements and have no economic interest in a supplier’s decision to sell a receivable. All outstanding amounts related to suppliers participating in the SCF are recorded within the line entitled Trade accounts payable in our condensed consolidated balance sheets, and the associated payments are included in operating activities within our consolidated statements of cash flows. As of August 31, 2021 and November 30, 2020, the amount due to suppliers participating in the SCF and included in Trade accounts payable was approximately $291.1 million and $273.6 million, respectively. Investing Cash Flow — Cash used in investing activities of $830.6 million for the nine months ended August 31, 2021 increased by $687.3 million as compared to $143.3 million for the corresponding period in 2020. Our primary investing cash flows include the usage of cash associated with our acquisition of businesses and capital expenditures. Our primary investing cash inflow in the nine months ended August 31, 2021 was the $65.4 million of proceeds received from the sale of an unconsolidated operation, as more fully discussed in note 2 of the notes to the accompanying financial statements. Cash usage related to the acquisition of businesses was $706.4 million during the nine months ended August 31, 2021, principally related to our acquisition of FONA. During the first nine months of 2021, capital expenditures increased by $44.3 million from the 2020 level to $189.9 million. We expect 2021 capital expenditures to approximate $275 million to support our planned growth, including the multi-year program to replace our global enterprise resource planning (ERP) system and other initiatives. Financing Cash Flow — Financing activities provided cash of $347.0 million for the first nine months of 2021, as compared to the corresponding period in 2020 when financing activities used cash of $432.7 million. The variability between years is principally a result of changes in our net borrowings, share repurchase activity, and dividends, all as described below. 44 Table of Contents The following table outlines our net borrowing activities: Nine months ended August 31, 2021 August 31, 2020 Net decrease in short-term borrowings $ (118.9) $ (432.0) Proceeds from issuance of long-term debt, net of debt issuance costs 999.6 505.3 Repayments of long-term debt (255.3) (256.0) Net cash provided from (used in) borrowing activities $ 625.4 $ (182.7) During the nine months ended August 31, 2021, we issued $500.0 million of 0.90% notes due February 15, 2026, with net cash proceeds received of $495.7 million. We also issued $500.0 million of 1.85% notes due February 15, 2031, with net cash proceeds received of $492.8 million. 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 fund our acquisitions of Cholula and FONA, and for general corporate purposes. During the three months ended August 31, 2021, we repaid the $250 million, 3.90% notes that matured on July 8, 2021. In the first nine months of 2020, we issued $500 million of long-term debt with net proceeds from the issuance of $495.0 million. We also repaid $256.0 million of long-term debt which consisted primarily of $250.0 million on our term loans due August 2022. The following table outlines the activity in our share repurchase program for the nine months ended August 31, 2021 and 2020 (in millions): 2021 2020 Number of shares of common stock repurchased 0.04 0.52 Dollar amount $ 3.2 $ 46.0 As of August 31, 2021, $581.4 million remained of the $600 million share repurchase authorization approved by the Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. During the nine months ended August 31, 2021, we received proceeds of $10.5 million from exercised stock options as compared to $54.1 million received in the corresponding 2020 period. We repurchased $13.3 million and $10.7 million of common stock during the nine months ended August 31, 2021 and August 31, 2020, respectively, in conjunction with employee tax withholding requirements. We increased dividends paid to $272.4 million in the first nine months of 2021 from $247.4 million of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors. Most of our cash is in our subsidiaries outside of the U.S. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of the U.S. Tax Act in December 2017, the permanent repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and any possible future acquisitions. At August 31, 2021 and August 31, 2020, we temporarily used $329.3 million and $184.6 million, respectively, of cash from our non-U.S. subsidiaries to pay down short-term debt in the U.S. During a quarter, our short-term borrowings vary, but are lower at the end of a quarter. The average short-term borrowings outstanding for the nine months ended August 31, 2021 and August 31, 2020 were $1,023.7 million and $567.3 million, respectively. Those average short-term borrowings outstanding for the nine months ended August 31, 2021 included average commercial paper outstanding of $963.8 million. Total average debt outstanding for the nine months ended August 31, 2021 and August 31, 2020 was $5,564.8 million and $4,378.0 million, respectively. The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At August 31, 2021, the exchange rates for the British pound sterling, Canadian dollar, and Chinese renminbi were higher than at November 30, 2020. At August 31, 2021, the exchange rates for Euro, Polish zloty, and Australian dollar were lower than at November 30, 2020. Credit and Capital Markets 45 Table of Contents Cash flows from operating activities are our primary source of liquidity for funding growth, dividends, capital expenditures and share repurchases. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements. 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 engage in regular communication with all banks participating in our revolving credit facility. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services, and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote. We hold investments in equity and debt securities in both our qualified defined benefit pension plans and a rabbi trust for our nonqualified defined benefit pension plan. We estimate total required contributions to our pension plans in 2021 of approximately $15 million. In 2020, we contributed $11.9 million to our pension plans. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. To meet these cash requirements, we intend to use our existing cash, cash equivalents, and internally generated funds, to borrow under our existing credit facilities or under other short-term borrowing facilities, and, depending upon the significance of the cost of a particular acquisition to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our cash requirements over the next twelve months. 46 Table of Contents RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of notes to the accompanying financial statements for further details of these impacts. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS In preparing the financial statements, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. In preparing the financial statements, we make routine estimates and judgments in determining the net realizable value of accounts receivable, inventory, fixed assets and prepaid allowances. Our most critical accounting estimates and assumptions are included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020. There have been no changes in our critical accounting estimates and assumptions included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020. FORWARD-LOOKING INFORMATION Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, gross margin, earnings, cost savings, transaction and integration expenses, special charges, acquisitions, brand marketing support, volume and product mix, income tax expense, and the impact of foreign currency rates are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan.” These statements may relate to: the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; disruptions or inefficiencies in the supply chain, including any impact of COVID-19; the expected results of operations of businesses acquired by the company, including the acquisitions of Cholula and FONA; the expected impact of the inflationary cost environment, including commodity, packaging materials and transportation costs on our business; the expected impact of pricing actions on the company's results of operations and gross margins; the expected impact of factors affecting our supply chain, including transportation capacity, labor shortages, and absenteeism; the expected impact of productivity improvements, including those associated with our Comprehensive Continuous Improvement (CCI) program and global enablement initiative; expected working capital improvements; expectations regarding growth potential in various geographies and markets, including the impact from customer, channel, category, and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected timing and costs of implementing our business transformation initiative, which includes the implementation of a global enterprise resource planning (ERP) system; the expected impact of accounting pronouncements; the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of short- and long-term debt as well as quarterly dividends and the ability to issue additional debt or equity securities; and expectations regarding purchasing shares of McCormick's common stock under the existing repurchase authorization. These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: the company's ability to drive revenue growth; the company's ability to increase pricing to offset, or partially offset, inflationary pressures on the cost of our products; damage to the company's reputation or brand name; loss of brand relevance; increased private label use; product quality, labeling, or safety concerns; negative publicity about our products; actions by, and the financial condition of, competitors and customers; the longevity of mutually beneficial relationships with our large customers; the ability to identify, interpret and react to changes in consumer preference and demand; business interruptions due to natural disasters, unexpected events or public health crisis, including COVID-19; issues affecting the company's supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses, including the acquisitions of Cholula and FONA; global economic and financial conditions generally, including the on-going impact of the exit of the United Kingdom (U.K.) from the European Union, availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency 47 Table of Contents fluctuations; the effects of increased level of debt service following the Cholula and FONA acquisitions as well as the effects that such increased debt service may have on the company's ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; risks associated with the phase-out of LIBOR; impairments of indefinite-lived intangible assets; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; the stability of credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; the company's inability to successfully implement our business transformation initiative; fundamental changes in tax laws; including interpretations and assumptions we have made, and guidance that may be issued, volatility in our effective tax rate; climate change; infringement of intellectual property rights, and those of customers; litigation, legal and administrative proceedings; the company's inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; and other risks described in the company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly, any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.