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. 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 2021, 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. Recent Events Recent events impacting our business include the inflationary cost environment and disruption in our supply chain, COVID-19, and Russia’s invasion of Ukraine, each of which are further discussed below. As more fully described below, we expect each of these factors will impact our fiscal 2022 performance. We anticipate that the remainder of fiscal 2022 will continue to be a dynamic macroeconomic environment. We expect elevated levels of cost inflation to persist throughout 2022. We anticipate that these headwinds will be partially mitigated by pricing actions in response to inflation, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates. While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, the severity and duration of the pandemic, the continued availability and effectiveness of vaccines and actions taken by government authorities, including restrictions, laws or regulations, and other third parties in response to the pandemic. Also, the invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. While the impact of these factors remains uncertain, we continue to evaluate the extent to which they may impact our business, financial condition, or results of 26 Table of Contents operations. These and other uncertainties with respect to recent events could result in changes to our current expectations. The potential effects of these recent events 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 experienced inflationary cost increases in our commodities, packaging materials and transportation costs. These inflationary cost increases have continued in 2022, but we expect they will be partially mitigated by pricing actions implemented in the fourth quarter of fiscal 2021 and during fiscal 2022, and by our Comprehensive Continuous Improvement (CCI) program-led cost savings. During fiscal 2021, we also experienced 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. In response to these supply chain pressures, we have taken actions to build capacity as well as increase our supply chain related resources. We expect these pressures to continue throughout 2022. There has been, and we expect there could continue to be, a difference between the timing of when these pricing and other actions impact our results of operations and when the impact of cost inflation occurs. Additionally, the pricing actions we take have, in some instances, been impacted by price elasticity which unfavorably impacts our sales volume and mix. Our interest expense is impacted by the overall interest rate environment. The inflationary environment has also resulted in central b anks raising short-term interest rates. On August 31, 2022, we had total outstanding variable rate debt of approximately $1,495 million. Our policy is to manage our interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to achieve a desired mix of fixed and variable rate debt. As of August 31, 2022, we had total outstanding fixed to variable interest rate swaps of $600 million notional. COVID-19: As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy. The extent and nature of government actions varied during the quarters ended August 31, 2022 and 2021 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities. We continue to actively monitor 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 consumption and demand. While we continue to see strong levels of at-home consumption compared to pre-pandemic levels, the favorable impact of increased at-home meal preparation was less significant in the three months ended August 31, 2022 as compared to the comparable period of 2021. This change in consumer behavior was due in part to a decrease in the prevalence and scale of restrictive measures in place to reduce the spread of COVID-19 in the 2022 period as compared to 2021. Conversely, we continue to see improvements in away-from-home demand associated with the COVID-19 recovery. During the three months ended August 31, 2022, our flavor solutions segment sales improved as away-from-home consumption increased as compared to the corresponding quarter in 2021, in part, due to the continued easing of restrictive COVID-19 mitigation measures in many jurisdictions compared to those that were in place during the third quarter of 2021. Russia’s Invasion of Ukraine: The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. It is not possible to predict the broader or longer-term consequences of this conflict or the sanctions imposed to date, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, energy and fuel prices, currency exchange rates and financial markets. We announced on March 11, 2022, that we were suspending our business operations in Russia. In May 2022, we made the decision to the exit of our consumer business in Russia. Our operations in Ukraine were also temporarily paused in order to focus on the safety of our employees, but we have resumed, where appropriate, a reduced level of operating activities. While neither Russia nor Ukraine constitutes a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations. 2022 Outlook 27 Table of Contents In 2022, we expect to grow net sales in the range of comparable to the 2021 level to an increase of 2%, which includes an estimated 3% unfavorable impact from currency rates, or 3% to 5% 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). That anticipated 2022 sales growth includes the impact of pricing actions taken in 2021 and during fiscal 2022, to partially offset inflationary cost increases. We expect the impact of pricing to be a significant driver of our sales growth. We expect volume and product mix to be impacted by price elasticity, although at a lower level than we have experienced historically. We also anticipate that our volume and product mix will be negatively impacted by the sale of the Kitchen Basics business, the exit of a lower margin product line in late 2021, and the conflict in Ukraine, including the exit of our consumer business in Russia. We plan to drive continued growth through the strength of our brands as well as our brand marketing, category management, new products, and differentiated customer engagement. We expect our 2022 gross profit margin to range from a 280 to 330 basis point decline from our gross profit margin of 39.5% in 2021. The projected 2022 change in gross profit margin is principally due to the net effect of (i) a high-teen percentage impact of inflation in 2022 compared to 2021, (ii) the impact of pricing actions in response to increased commodity, packaging materials and transportation costs, (iii) anticipated unfavorable sales mix in 2022 between our consumer and flavor solutions segments as compared to 2021, (iv) the favorable impact of anticipated CCI cost savings, and (v) the absence of $11.0 million of transaction and integration expenses and special charges reflected in cost of goods sold in 2021. We expect our 2022 adjusted gross profit margin to range from a 300 to 350 basis points decline from our 2021 adjusted gross profit margin of 39.7%, which excludes the impact of $11.0 million of transaction and integration expenses and special charges. In 2022, we expect operating income to decline 8% to 10%, which includes an estimated 2% unfavorable impact from currency rates, from the 2021 level. Our CCI-led cost savings target in 2022 is approximately $85 million. We anticipate integration expenses related to the FONA acquisition of approximately $2 million in 2022, as compared to $35.3 million of transaction and integration expenses in 2021. We also expect approximately $46 million of special charges in 2022 that relate to previously approved organization and streamlining actions; in 2021, special charges were $51.1 million. Excluding special charges and transaction and integration expenses, we expect 2022’s adjusted operating income to decline 11% to 13% from 2021, which includes an estimated 2% unfavorable impact from currency rates, or to decline by 9% to 11% on a constant currency basis from the 2021 level. In 2022, we expect the effects of the sale of the Kitchen Basics business and the termination of interest rate contracts that were entered into to manage our interest rate risk associated with our anticipated issuance of fixed rate debt to favorably impact other income, net by approximately $68 million. Our underlying effective tax rate is projected to be higher in 2022 than in 2021. We estimate that our 2022 effective tax rate, including the net favorable impact of anticipated discrete tax items, will approximate 22% as compared to 21.5% in 2021. Excluding projected taxes associated with special charges and transaction and integration expenses, we estimate that our adjusted effective tax rate will approximate 22% in 2022, as compared to an adjusted effective tax rate of 20.1% in 2021. Diluted earnings per share was $2.80 in 2021. Diluted earnings per share for 2022 is projected to range from $2.64 to $2.69. Excluding the per share impact of (i) special charges of $0.16; (ii) transaction and integration expenses, including the unfavorable impact of a discrete tax item of $0.04 related to our acquisition of FONA, of $0.14; and (iii) the gain realized upon our sale of an unconsolidated operation of $0.05, adjusted diluted earnings per share was $3.05 in 2021. Adjusted diluted earnings per share, excluding an estimated per share impact from (i) the gain on the sale of Kitchen Basics of $0.14, (ii) special charges of $0.12, (iii) integration expenses of $0.01 is projected to range from $2.63 to $2.68 in 2022. We expect 2022's adjusted diluted earnings per share range to include a 2% unfavorable impact from currency rates, from adjusted diluted earnings per share in 2021. 28 Table of Contents RESULTS OF OPERATIONS – COMPANY Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Net sales $ 1,595.6 $ 1,549.4 $ 4,654.8 $ 4,587.6 Percent increase 3.0 % 8.3 % 1.5 % 13.5 % Components of percent change in net sales – increase (decrease): Volume and product mix (3.1) % 0.7 % (3.6) % 6.0 % Pricing actions 9.7 % 0.1 % 7.1 % 0.2 % Acquisitions — % 4.5 % 0.2 % 4.3 % Divestiture (0.5) % — % (0.2) % — % Foreign exchange (3.1) % 3.0 % (2.0) % 3.0 % Gross profit $ 566.7 $ 599.6 $ 1,650.1 $ 1,791.7 Gross profit margin 35.5 % 38.7 % 35.4 % 39.1 % Sales for the third quarter of 2022 increased by 3.0% from the prior year level and increased by 6.1% 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). Unfavorable volume and product mix decreased sales by 3.1%, as growth in our flavor solutions segment was more than offset by unfavorable volume and product mix in our consumer segment. That decrease included a 0.8% impact, as compared to 2021, from the exit of our rice product line in India and exiting our consumer operations in Russia. Pricing actions, taken in response to the inflationary cost environment, increased sales by 9.7% compared to the prior year period. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.5% as compared to 2021. Sales were also impacted by unfavorable foreign currency rates that decreased net sales by 3.1% in the third quarter of 2022 compared to the year-ago quarter and is excluded from our measure of sales growth of 6.1% on a constant currency basis. Sales for the nine months ended August 31, 2022 increased by 1.5% from the prior year level and by 3.5% on a constant currency basis. Unfavorable volume and product mix decreased sales by 3.6% with growth in our flavor solutions segment being more than offset by a decline in our consumer segment. That decrease included a 0.7% impact, as compared to 2021, from the exit of our rice product line in India and exiting our consumer operations in Russia. In addition, pricing actions, taken in response to the inflationary cost environment, added 7.1% to sales, as compared to the prior year period. Acquisitions and a divestiture added and decreased sales by 0.2% and 0.2%, respectively, both as compared to the prior year period. Sales were impacted by unfavorable foreign currency rates that decreased sales by 2.0% in the nine months ended August 31, 2022 as compared to the year-ago period and is excluded from our measure of sales growth of 3.5% on a constant currency basis. Gross profit for the third quarter of 2022 decreased by $32.9 million, or 5.5%, from the comparable period in 2021. Our gross profit margin for the three months ended August 31, 2022 was 35.5%, a decrease of 320 basis points from the comparable period in 2021. The decrease in gross profit margin in the quarter ended August 31, 2022 was driven by the margin dilutive impact of pricing actions taken in response to the inflationary cost environment of 250 basis points, increased commodity, packaging materials and transportation costs and higher conversion costs, each as compared to the 2021 period. These unfavorable impacts were partially offset by cost savings led by our CCI program. Gross profit for the nine months ended August 31, 2022 decreased by $141.6 million, or 7.9%, from the comparable period in 2021. Our gross profit margin for the nine months ended August 31, 2022 was 35.4%, a decrease of 370 basis points from the same period in 2021 driven by the margin dilutive impact of pricing actions taken in response to the inflationary cost environment of 240 basis points, increased commodity, packaging materials and transportation costs, higher conversion costs and a less favorable product mix both within and between our segments, each as compared to the 2021 period. These unfavorable impacts were partially offset by cost savings led by our CCI program. 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 declined 380 basis points to 35.4% in 2022 from 39.2% in 2021. 29 Table of Contents Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Selling, general & administrative expense (SG&A) $ 328.1 $ 327.3 $ 1,010.6 $ 1,005.2 Percent of net sales 20.5 % 21.1 % 21.7 % 21.9 % SG&A increased by $0.8 million in the third quarter of 2022 compared to the 2021 level, as unfavorable investment results associated with non-qualified retirement plan assets and increased distribution costs were mostly offset by lower performance-based employee incentive expenses, all as compared to the 2021 period. SG&A as a percentage of net sales decreased by 60 basis points from the prior year level, due to the unfavorable net impact of the previously mentioned factors being more than offset by a higher net sales base as compared to the prior year period. SG&A increased by $5.4 million in the nine months ended August 31, 2022 compared to the 2021 level, driven by unfavorable investment results associated with non-qualified retirement plan assets, higher investment associated with the implementation of our global enterprise resource planning (ERP) platform, increased distribution costs and SG&A associated with the acquired FONA business, partially offset by lower performance-based employee incentive expenses, all as compared to the 2021 period. SG&A as a percent of net sales for the nine months ended August 31, 2022 decreased by 20 basis points as compared to the prior year level, due primarily the net impact of the previously mentioned factors being more than offset by a higher net sales base as compared to the prior year period. Three months ended Nine months ended August 31, 2022 August 31, 2021 Aug 31, 2022 Aug 31, 2021 Total special charges $ 3.4 $ 5.8 $ 38.0 $ 20.6 During the three months ended August 31, 2022, we recorded $3.4 million of special charges. Those special charges principally consisted of $1.0 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), $0.8 million associated with the exit of our consumer business in Russia, and streamlining actions of $0.4 million in the Americas region, and $1.2 million in the EMEA region. During the nine months ended August 31, 2022, we recorded $38.0 million of net special charges. Those special charges consisted principally of $23.0 million associated with the exit of our consumer business in Russia, $18.4 million associated with the transition of a manufacturing facility in EMEA, and streamlining actions of $5.7 million in the Americas region and $5.5 million in the EMEA region. These charges were offset by a $13.6 million gain during the nine months ended August 31, 2022, on the sale of our Kohinoor brand, as we exited our Kohinoor rice product line in India in the fourth quarter of fiscal 2021, as well as a reversal of $2.2 million of estimated costs associated with the exit of our rice product line in India upon settlement of a supply agreement related to that product line. 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 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 was exited in conjunction with our decision to employ a hybrid work environment. Details with respect to the composition of special charges are included in note 2 of the notes to the accompanying financial statements. Three months ended Nine months ended August 31, 2022 August 31, 2021 Aug 31, 2022 Aug 31, 2021 Transaction expenses included in cost of goods sold $ — $ — $ — $ 6.3 Other transaction and integration expenses — 1.3 2.2 27.0 Total transaction and integration expenses $ — $ 1.3 $ 2.2 $ 33.3 During the nine months ended August 31, 2022, we recorded $2.2 million of integration expenses related to our acquisition of FONA. 30 Table of Contents 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. Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Interest expense $ 37.9 $ 33.9 $ 104.7 $ 103.3 Other income, net 77.4 3.5 89.9 12.0 Interest expense increased by $4.0 million and $1.4 million for the three and nine months ended August 31, 2022, respectively, as an increase in interest rates was partially offset by a decrease in average total borrowings, as compared to the prior year periods. Other income, net for the three and nine months ended August 31, 2022 increased by $73.9 million and $77.9 million, respectively. Other income, net for the three and nine months ended August 31, 2022 included a $49.6 million gain on the sale of our Kitchen Basics business and $18.7 million associated with the settlement of treasury lock arrangements, both of which are more fully described in the notes to the accompanying financial statements. The remaining increase was driven by an increase in interest income, as compared to the prior year periods. Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Income from consolidated operations before income taxes $ 274.7 $ 234.8 $ 584.5 $ 647.6 Income tax expense 59.3 31.5 115.4 135.5 Effective tax rate 21.6 % 13.4 % 19.7 % 20.9 % The provision for income taxes is based on the 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 associated with stock-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, the tax effects associated with a sale of a business and the tax effects of certain intra-entity asset transfers (other than inventory). Income tax expense for the three months ended August 31, 2022 included $3.8 million of net discrete tax expense consisting principally of the following: (i) $11.6 million of tax expense related to the sale of a business, (ii) $1.4 million of net tax benefits related to the revaluation of deferred taxes resulting from enacted legislation, (iii) $4.7 million of tax benefits from the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, and (iv) $1.3 million of tax benefits resulting from an adjustment to a prior year tax accrual based on the final return filed. Income tax expense for the nine months ended August 31, 2022 included $15.5 million of net discrete tax benefits consisting principally of the following: (i) $9.0 million of excess tax benefits associated with stock-based compensation, (ii) $4.1 million of net tax benefits associated with an adjustment of valuation allowances due to changes in judgment about the realizability of deferred tax assets, (iii) $3.9 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation, (iv) $2.3 million of tax benefits related to the sale of an asset associated with a previously exited line of business, (v) $6.2 million of tax benefits from the resolution of tax uncertainties, including the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expiration of statutes of limitations, (vi) $1.3 million of tax benefits resulting from an adjustment to a prior year tax accrual based on the final return filed, and (vii) $11.6 million of tax expense related to the sale of a business. 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 31 Table of Contents 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. Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Income from unconsolidated operations $ 7.5 $ 9.1 $ 27.2 $ 45.8 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, decreased by $1.6 million and $18.6 million for the three and nine months ended August 31, 2022, as compared to the year ago periods. The decrease for the three months ended August 31, 2022 was attributable to lower earnings from joint ventures and the impact of eliminating a higher level of earnings associated with our minority interests, both as compared to the 2021 period. The nine months ended August 31, 2021 include an after-tax gain of $13.4 million on the sale of an unconsolidated operation. The remaining decrease for the nine months ended August 31, 2022 was driven by lower earnings of our largest joint venture, McCormick de Mexico and the impact of eliminating a higher level of earnings associated with our minority interests, both as compared to the 2021 period. The following table outlines the major components of the change in diluted earnings per share from 2021 to 2022: Three months ended August 31, Nine months ended August 31, 2021 Earnings per share – diluted $ 0.79 $ 2.07 Impact of change in operating income (0.10) (0.46) Increase in special charges, net of taxes — (0.05) Decrease in transaction and integration expenses, including impact of net discrete tax item related to FONA acquisition — 0.13 Gain on the sale of a business, net of taxes 0.14 0.14 Increase in other income, excluding gain on the sale of a business 0.07 0.08 Decrease in income from unconsolidated operations (0.01) (0.07) Increase in interest expense (0.01) — Impact of change in effective income tax rate, excluding taxes on special charges, transaction and integration expenses and the sale of a business (0.06) (0.01) 2022 Earnings per share – diluted $ 0.82 $ 1.83 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 10 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. 32 Table of Contents CONSUMER SEGMENT Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Net sales $ 927.9 $ 921.9 $ 2,720.1 $ 2,813.9 Percent increase (decrease) 0.7 % 1.2 % (3.3) % 9.4 % Segment operating income $ 183.7 $ 187.8 $ 475.5 $ 554.5 Segment operating income margin 19.8 % 20.4 % 17.5 % 19.7 % In the third quarter of 2022, sales of our consumer segment increased 0.7% as compared to the third quarter of 2021 and increased by 3.4% on a constant currency basis. That 0.7% increase included higher sales of our consumer business in the Americas and Asia/Pacific regions, which were partially offset by lower sales in the EMEA region, all as compared to the prior year quarter. Unfavorable volume and product mix decreased consumer segment sales by 5.7% in the third quarter of 2022 as compared to the same period last year, including the effects of lower sales due to the exit of our rice product line in India and exiting our consumer operations in Russia, which collectively had a negative impact of 1.2%, and the impact of price elasticity, all as compared to the third quarter of 2021. Pricing actions, taken in response to increased costs, favorably impacted sales by 10.0% as compared to the prior year period. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.9% as compared to 2021. Sales in the third quarter of 2022 reflected an unfavorable impact from foreign currency rates that decreased consumer segment sales by 2.7% compared to the year-ago quarter and is excluded from our measure of sales growth of 3.4% on a constant currency basis. In the Americas region, consumer sales increased 2.8% in the third quarter of 2022 as compared to the same quarter of 2021 and increased by 3.1% on a constant currency basis. For the third quarter of 2022, unfavorable volume and product mix decreased sales by 7.5% as compared to the corresponding period in 2021. This reduction included the unfavorable impact of price elasticity. Pricing actions increased sales by 11.9% as compared to the prior year period. The sale of our Kitchen Basics business unfavorably impacted sales by 1.3% as compared to 2021. The unfavorable impact of foreign currency rates decreased sales by 0.3% in the quarter and is excluded from our measure of sales growth of 3.1% on a constant currency basis. In the EMEA region, consumer sales decreased 12.7% in the third quarter of 2022 as compared to the same quarter of 2021 and decreased by 0.6% on a constant currency basis. Sales were impacted by unfavorable volume and product mix during the third quarter of 2022 that decreased sales by 7.4% from the prior year level. The decrease was driven by the impact of our operations in Russia and Ukraine. Lower sales of our consumer business in France also contributed to the decrease as compared to the prior year period. Pricing actions, taken in response to the inflationary cost environment, increased sales by 6.8% as compared to the 2021 period. During the third quarter of 2022, an unfavorable impact from foreign currency rates decreased sales by 12.1% compared to the year-ago period and is excluded from our measure of sales decline of 0.6% on a constant currency basis. In the Asia/Pacific region, consumer sales increased 5.4% in the third quarter of 2022 as compared to the third quarter of 2021 and increased by 10.1% on a constant currency basis. For the quarter ended August 31, 2022, favorable volume and product mix increased sales by 6.9%. The increase was driven by a rebound of sales in China, as the loosening of restrictions associated with COVID-19 resurgences in China earlier in 2022 benefited sales during the quarter ended August 31, 2022. The impact of the exit of our rice product line in India partially offset the sales increase. Pricing actions, taken in response to the inflationary cost environment, increased sales by 3.2% as compared to the prior year period. During the third quarter of 2022, an unfavorable impact from foreign currency rates decreased sales by 4.7% compared to the year-ago period and is excluded from our measure of sales growth of 10.1% on a constant currency basis. For the nine months ended August 31, 2022, our consumer segment sales decreased 3.3% as compared to the nine months ended August 31, 2021 and decreased by 1.7% on a constant currency basis. That 3.3% sales decrease was driven by lower sales of our consumer business in the EMEA and Asia/Pacific regions during the nine months ended August 31, 2022, as compared to the prior year period. Lower volume and unfavorable product mix decreased sales by 8.3%. That decrease included a 1.0% impact, as compared to 2021, from the exit of our rice product line in India and our consumer operations in Russia. Pricing actions, taken in response to inflationary cost pressures, increased sales by 6.9% in the first nine months of 2022 as compared to the prior year level. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.3% as compared to 2021. An unfavorable impact from foreign currency rates decreased sales by 1.6% compared to the prior year and is excluded from our measure of sales decline of 1.7% on a constant currency basis. Segment operating income for our consumer segment decreased by $4.1 million, or 2.2%, in the third quarter of 2022 as compared to the third quarter of 2021. The decrease in segment operating income was driven by increased commodity, transportation and conversion costs, partially offset by CCI-led cost savings, pricing actions in response to increased costs and 33 Table of Contents lower performance-based employee incentive expenses, all as compared to the prior year period. Segment operating margin for our consumer segment decreased by 60 basis points from the third quarter of 2021 to 19.8% in the third quarter of 2022. That decrease was principally the result of a decrease in gross margin, including the margin dilutive impact of pricing actions and the impact of the inflationary cost environment, both as compared to 2021. Higher SG&A as a percentage of net sales, including increased brand marketing expense, also contributed to the decrease. On a constant currency basis, segment operating income for our consumer segment decreased by 1.2% in the third quarter of 2022 in comparison to the same period in 2021. Segment operating income for our consumer segment decreased by $79.0 million, or 14.2%, for the nine months ended August 31, 2022 as compared to the same period in 2021. The decrease in segment operating income was driven by lower sales and increased commodity, transportation and conversion costs, partially offset by pricing actions in response to increased costs, CCI-led cost savings and lower performance-based employee incentive expenses, all as compared to the prior year period. Segment operating margin for our consumer segment decreased by 220 basis points from the first nine months of 2021 to 17.5%, driven by a decrease in consumer gross profit margin, including the margin dilutive impact of pricing actions, the impact of the inflationary cost environment, and a less favorable product mix, which was partially offset by the impact of CCI-led cost savings, all as compared to the 2021 level. Higher SG&A as a percentage of net sales, including increased distribution costs, and the unfavorable impact of fixed and semi-fixed expenses over a lower sales base as compared to the 2021 level, also contributed to the decrease. On a constant currency basis, segment operating income for our consumer segment declined by 13.5% in the nine months ended August 31, 2022 in comparison to the same period in 2021. FLAVOR SOLUTIONS SEGMENT Three months ended Nine months ended August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Net sales $ 667.7 $ 627.5 $ 1,934.7 $ 1,773.7 Percent increase 6.4 % 20.8 % 9.1 % 20.6 % Segment operating income $ 54.9 $ 84.5 $ 164.0 $ 238.3 Segment operating income margin 8.2 % 13.5 % 8.5 % 13.4 % In the third quarter of 2022, sales of our flavor solutions segment increased by 6.4% as compared to the third quarter of 2021, and increased by 10.1% on a constant currency basis. Favorable volume and product mix increased segment sales by 0.8% in the third quarter of 2022 as compared to the same period in 2021, as growth in our EMEA and Asia/Pacific regions was partially offset by lower sales in our Americas region. Pricing actions, taken in response to increased costs, also increased sales by 9.3% in the third quarter of 2022. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 3.7% compared to the year-ago quarter and is excluded from our measure of sales growth of 10.1% on a constant currency basis. In the Americas region, flavor solutions sales increased by 9.2% in the third quarter of 2022 as compared to the third quarter of 2021 and increased by 9.6% on a constant currency basis. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 0.7% during the third quarter of 2022, as lower sales to quick service restaurants were partially offset by growth in sales to packaged food and beverage companies, both as compared to the year ago period. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 10.3% during the quarter ended August 31, 2022 as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 0.4% compared to the third quarter of 2021 and is excluded from our measure of sales growth of 9.6% on a constant currency basis. In the EMEA region, flavor solutions sales decreased by 1.3% in the third quarter of 2022 as compared to the third quarter of 2021 and increased by 11.2% on a constant currency basis. Favorable volume and product mix increased segment sales in the EMEA region by 3.7% as compared to the corresponding period in 2021. That increase included the unfavorable effect of a 0.9% decline associated with lower sales in Russia. The increase was driven by higher sales to quick service restaurants, branded foodservice and package food and beverage company customers. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 7.5% in the third quarter of 2022 as compared to the prior period level. An unfavorable impact from foreign currency rates decreased sales by 12.5% compared to the third quarter of 2021 and is excluded from our measure of sales growth of 11.2% on a constant currency basis. In the Asia/Pacific region, flavor solutions sales increased 4.8% in the third quarter of 2022 as compared to the third quarter of 2021 and increased by 11.1% on a constant currency basis. Favorable volume and product mix increased sales by 5.0% in the third quarter of 2022 driven by higher sales to our quick service restaurant customers, partially impacted by the timing of customers' promotional activities. Pricing actions, taken in response to the inflationary cost environment, favorably impacted 34 Table of Contents sales by 6.1% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 6.3% compared to the third quarter of 2021 and is excluded from our measure of sales growth of 11.1% on a constant currency basis. For the nine months ended August 31, 2022, our flavor solutions sales increased 9.1% as compared to the nine months ended August 31, 2021 and increased by 11.6% on a constant currency basis. Volume and product mix contributed 3.6% of the increase in addition to pricing actions which added 7.4% to sales for the first nine months of 2022, both in comparison to the prior year levels. The incremental impact of our acquisition of FONA added 0.6% to segment sales for the nine months ended August 31, 2022. An unfavorable impact from foreign currency rates decreased sales by 2.5% compared to the prior year and is excluded from our measure of sales growth of 11.6% on a constant currency basis. Segment operating income for our flavor solutions segment decreased by $29.6 million, or 35.0%, in the third quarter of 2022 as compared to the third quarter of 2021. The decrease in segment operating income was driven by increased commodity, transportation and conversion costs, as well as costs related to supply chain investments, which was partially offset by a higher level of sales, including pricing actions in response to the inflationary cost environment, CCI-led cost savings and lower performance-based employee incentive expenses, all as compared to the prior year period. Segment operating margin for our flavor solutions segment decreased by 530 basis points from the prior year level to 8.2% in the third quarter of 2022. That decrease was principally the result of a decrease in gross margin, including the margin dilutive impact of pricing actions, the impact of the inflationary cost environment, and higher conversion costs, all as compared to the 2021 period. Lower SG&A as a percentage of net sales partially offset the decrease, as compared to the prior year. On a constant currency basis, segment operating income for our flavor solutions segment decreased by 33.7% in the third quarter of 2022 as compared to the same period in 2021. Segment operating income for our flavor solutions segment decreased by $74.3 million, or 31.2%, for the nine months ended August 31, 2022 as compared to the same period of 2021. The decrease in segment operating income was driven by increased commodity, transportation and conversion costs, as well as costs related to supply chain investments, which was partially offset by a higher level of sales, including pricing actions in response to the inflationary cost environment, and CCI-led cost savings, all as compared to the prior year period. Segment operating margin for our flavor solutions segment decreased by 490 basis points in the first nine months of 2022 to 8.5%, driven by a lower segment gross margin, including the margin dilutive impact of pricing actions, the impact of the inflationary cost environment, and higher conversion costs, including the costs related to our supply chain investments, partially offset by CCI-led cost savings and a decrease in SG&A as percentage of sales, all as compared to the first nine months of 2021. On a constant currency basis, segment operating income for our flavor solutions segment decreased by 28.4% in the nine months ended August 31, 2022, in comparison to the same period in 2021. MARKET RISK SENSITIVITY We utilize derivative financial instruments to enhance our ability to manage risk, including foreign exchange and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. Foreign Exchange Risk We are 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. 35 Table of Contents 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, 2022 November 30, 2021 Forward foreign currency: Notional value $ 539.5 $ 583.6 Unrealized net gain 12.6 5.5 Cross currency swaps: Notional value 882.8 508.5 Unrealized net gain (loss) 49.8 (3.6) 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 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. The following table sets forth the notional values and unrealized net gain (loss) of our interest rate swap contracts: August 31, 2022 November 30, 2021 Notional value $ 600.0 $ 350.0 Unrealized net (loss) gain (30.8) 23.1 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 derivative contracts. 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, capsicums (red peppers and paprika), onion, vanilla, garlic and salt. 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. 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. 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. 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 and income associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such 36 Table of Contents 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. Special charges for the nine months ended August 31, 2022 include a $13.6 million gain associated with the sale of the Kohinoor brand name. We exited our Kohinoor rice product line in India in the fourth quarter of fiscal 2021. • 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, 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 12 of the notes to the accompanying financial statements, the sale of our 26% interest in Eastern Condiments Private Ltd (Eastern) 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 for the nine months ended August 31, 2021 as well as the year ended November 30, 2021. • Gain on sale of Kitchen Basics – We exclude the gain realized upon our sale of the Kitchen Basics business in August 2022. As more fully described in note 11 of the notes to the accompanying financial statements, the pre-tax gain associated with the sale was $49.6 million for the three and nine months ended August 31, 2022. Details with respect to the composition of transaction and integration expenses and special charges set forth below are included in note 2 of the notes to the accompanying financial statements. Details with respect to the composition of transaction and integration expenses, special charges and income from the sale of unconsolidated operations for the year ended November 30, 2021 are included in notes 2, 3 and 5, respectively, of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2021. 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. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows: 37 Table of Contents For the year ended November 30, 2021 For the three months ended For the nine months ended Estimated for the year ending November 30, 2022 August 31, 2022 August 31, 2021 August 31, 2022 August 31, 2021 Gross profit $ 2,494.6 $ 566.7 $ 599.6 $ 1,650.1 $ 1,791.7 Impact of transaction and integration expenses included in cost of goods sold (1) 6.3 — — — 6.3 Impact of special charges included in cost of goods sold (2) 4.7 — — — — Adjusted gross profit $ 2,505.6 $ 566.7 $ 599.6 $ 1,650.1 $ 1,798.0 Adjusted gross profit margin (3) 39.7 % 35.5 % 38.7 % 35.4 % 39.2 % Operating income $ 1,015.1 $ 235.2 $ 265.2 $ 599.3 $ 738.9 Impact of transaction and integration expenses included in cost of goods sold (1) 6.3 — — — 6.3 Impact of other transaction and integration expenses (1) 29.0 — 1.3 2.2 27.0 Impact of special charges included in cost of goods sold (2) 4.7 — — — — Impact of other special charges (2) 46.4 3.4 5.8 38.0 20.6 Adjusted operating income $ 1,101.5 $ 238.6 $ 272.3 $ 639.5 $ 792.8 Adjusted operating income margin (4) 17.4 % 15.0 % 17.6 % 13.7 % 17.3 % Income tax expense $ 192.7 $ 59.3 $ 31.5 $ 115.4 $ 135.5 Impact of transaction and integration expenses (1) (2.7) — 1.2 0.6 (3.1) Impact of special charges 7.1 0.7 1.4 10.7 4.9 Impact of sale of Kitchen Basics — (11.6) — (11.6) — Adjusted income tax expense $ 197.1 $ 48.4 $ 34.1 $ 115.1 $ 137.3 Adjusted income tax rate (5) 20.1 % 21.2 % 14.1 % 20.0 % 19.6 % Net income $ 755.3 $ 222.9 $ 212.4 $ 496.3 $ 557.9 Impact of transaction and integration expenses (1) 38.0 — 0.1 1.6 36.4 Impact of special charges (2) 44.0 2.7 4.4 27.3 15.7 Impact of after-tax gain on sale of Kitchen Basics — (38.0) — (38.0) — Impact of after-tax gain on sale of unconsolidated operation (13.4) — — — (13.4) Adjusted net income $ 823.9 $ 187.6 $ 216.9 $ 487.2 $ 596.6 Earnings per share – diluted $ 2.80 $ 0.82 $ 0.79 $ 1.83 $ 2.07 $2.64 to $2.69 Impact of transaction and integration expenses (1) 0.14 — — 0.01 0.14 0.01 Impact of special charges (2) 0.16 0.01 0.01 0.10 0.05 0.12 Impact of after-tax gain on sale of Kitchen Basics — (0.14) — (0.14) — (0.14) Impact of after-tax gain on sale of unconsolidated operation (0.05) — — — (0.05) — Adjusted earnings per share – diluted $ 3.05 $ 0.69 $ 0.80 $ 1.80 $ 2.21 $2.63 to $2.68 38 Table of Contents (1) Transaction and integration expenses include transaction and integration expenses associated with our acquisitions of Cholula and FONA. These expenses include 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. The discrete tax item had a favorable impact of $1.0 million for the three months ended August 31, 2021, a net unfavorable impact of $10.4 million or $0.04 per diluted share for the nine months ended August 31, 2021, and a net unfavorable impact of $10.4 million or $0.04 per diluted share for the year ended November 30, 2021. (2) Special charges are more fully described in note 2 of notes to our accompanying consolidated financial statements. Special charges for the year ended November 30, 2021 include $4.7 million which is reflected in Cost of goods sold and an $11.2 million non-cash impairment charge associated with the impairment of certain intangible assets. Special charges for the nine months ended August 31, 2022 include a $10.0 million non-cash intangible asset impairment charge associated with our exit of our business operations in Russia. We exited our Kohinoor rice product line in India in the fourth quarter of fiscal 2021. Special charges for the nine months ended August 31, 2022 include a $13.6 million gain associated with the sale of the Kohinoor brand name. (3) Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. (4) Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. (5) 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, and for 2022, the gain on a sale of a business, of $228.5 million and $575.1 million for the three and nine months ended August 31, 2022, respectively, $241.9 million and $701.5 million for the three and nine months ended August 31, 2021, respectively, and $982.2 million for the year ended November 30, 2021. 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. 39 Table of Contents Rates of constant currency growth (decline) follow: Three months ended August 31, 2022 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 2.8 % (0.3) % 3.1 % EMEA (12.7) % (12.1) % (0.6) % Asia/Pacific 5.4 % (4.7) % 10.1 % Total Consumer 0.7 % (2.7) % 3.4 % Flavor Solutions segment: Americas 9.2 % (0.4) % 9.6 % EMEA (1.3) % (12.5) % 11.2 % Asia/Pacific 4.8 % (6.3) % 11.1 % Total Flavor Solutions 6.4 % (3.7) % 10.1 % Total net sales 3.0 % (3.1) % 6.1 % Adjusted operating income: Consumer segment (2.2) % (1.0) % (1.2) % Flavor Solutions segment (35.0) % (1.3) % (33.7) % Total adjusted operating income (12.4) % (1.1) % (11.3) % Nine months ended August 31, 2022 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 0.2 % (0.1) % 0.3 % EMEA (15.1) % (7.7) % (7.4) % Asia/Pacific (5.1) % (0.8) % (4.3) % Total Consumer (3.3) % (1.6) % (1.7) % Flavor Solutions segment: Americas 10.9 % (0.2) % 11.1 % EMEA 8.1 % (9.6) % 17.7 % Asia/Pacific (0.2) % (3.5) % 3.3 % Total Flavor Solutions 9.1 % (2.5) % 11.6 % Total net sales 1.5 % (2.0) % 3.5 % Adjusted operating income: Consumer segment (14.2) % (0.7) % (13.5) % Flavor Solutions segment (31.2) % (2.8) % (28.4) % Total adjusted operating income (19.3) % (1.3) % (18.0) % To present “constant currency” information for the fiscal year 2022 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 2022 and are compared to the 2021 results, translated into U.S. dollars using the same 2022 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2021. 40 Table of Contents Projections for the Year Ending November 30, 2022 Percentage change in net sales 0% to 2% Impact of unfavorable foreign currency exchange 3 % Percentage change in net sales in constant currency 3% to 5% Percentage change in adjusted operating income (11)% to (13)% Impact of unfavorable foreign currency exchange 2 % Percentage change in adjusted operating income in constant currency (9)% to (11)% LIQUIDITY AND FINANCIAL CONDITION Nine months ended August 31, 2022 August 31, 2021 Net cash provided by operating activities $ 250.1 $ 372.9 Net cash used in investing activities (55.5) (830.6) Net cash (used in) provided by financing activities (173.7) 347.0 The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use a combination of equity and short- and long-term debt. We use short-term debt, comprised primarily of commercial paper, principally to finance ongoing operations, including our requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts payable, accrued payroll, and other accrued liabilities). We are committed to maintaining investment grade credit ratings. Our cash flows from operations enable us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, fund or increase our quarterly dividends, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, our cash flow from operations has historically been the strongest during 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. We believe that our sources of liquidity, which include existing cash balances, cash flows from operations, existing credit facilities, our commercial paper program, and access to capital markets, will provide sufficient liquidity to meet our debt obligations, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. 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 or disposed operating assets and liabilities, as the cash flow associated with acquisitions or dispositions 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. Operating Cash Flow — Net cash provided by operating activities of $250.1 million for the nine months ended August 31, 2022, decreased $122.8 million from the same period of 2021. This decrease was primarily driven by lower net income, including the effect of net income associated with the gain on sale of our Kitchen Basics business and an intangible asset that are reflected as investing cash flows. As more fully described in our Annual Report on Form 10-K for the year ended November 30, 2021, 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, 2022 and November 30, 2021, the amounts due to suppliers 41 Table of Contents participating in the SCF and included in trade accounts payable were approximately $360.4 million and $274.3 million, respectively. Investing Cash Flow — Cash used in investing activities of $55.5 million for the nine months ended August 31, 2022 decreased by $775.1 million as compared to $830.6 million for the corresponding period in 2021. Our primary investing cash flows include the usage of cash associated with our acquisition of businesses and capital expenditures and cash provided by sale of businesses, unconsolidated operations or other assets. 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. Investing cash flow for the nine months ended August 31, 2022 includes $95.2 million net cash proceeds received from the sale of our Kitchen Basics business and $13.6 million net cash proceeds received on the sale of the Kohinoor brand name. During the first nine months of 2022, capital expenditures decreased by $23.1 million from the 2021 level to $166.8 million. We expect 2022 capital expenditures to approximate $300 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 used cash of $173.7 million for the first nine months of 2022, as compared to the corresponding period in 2021 when financing activities provided cash of $347.0 million. The variability between years is a result of changes in our net borrowings, share issuance activity associated with the exercise of stock options, share repurchase activity, and dividends, all as described below. The following table outlines our net borrowing activities: Nine months ended August 31, 2022 August 31, 2021 Net increase (decrease) in short-term borrowings $ 898.1 $ (118.9) Proceeds from issuance of long-term debt, net of debt issuance costs — 999.6 Repayments of long-term debt (768.7) (255.3) Net cash provided by borrowing activities $ 129.4 $ 625.4 During the nine months ended August 31, 2022, we repaid the $750 million, 2.70% notes that matured on August 15, 2022. 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 nine months ended August 31, 2021, we repaid the $250 million, 3.90% notes that matured on July 8, 2021. The following table outlines the activity in our share repurchase program for the nine months ended August 31, 2022 and 2021 (in millions): 2022 2021 Number of shares of common stock repurchased 0.29 0.04 Dollar amount $ 26.1 $ 3.2 As of August 31, 2022, $549.9 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, 2022, we received proceeds of $39.9 million from exercised stock options as compared to $10.5 million received in the corresponding 2021 period. We repurchased $19.4 million and $13.3 million of common stock during the nine months ended August 31, 2022 and 2021, respectively, in conjunction with employee tax withholding requirements. We increased dividends paid to $297.5 million, or a per share quarterly dividend of $0.37, in the first nine months of 2022 from $272.4 million, or a per share quarterly dividend of $0.34, of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors. 42 Table of Contents 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, 2022 and 2021, we temporarily used $157.3 million and $329.3 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, 2022 and 2021 were $968.1 million and $1,023.7 million, respectively. Those average short-term borrowings outstanding for the nine months ended August 31, 2022 included average commercial paper outstanding of $930.2 million. Total average debt outstanding for the nine months ended August 31, 2022 and 2021 was $5,439.8 million and $5,564.8 million, respectively. The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At August 31, 2022, the exchange rates for the British pound sterling, Euro, Chinese renminbi, Canadian dollar, Australian dollar and Polish zloty were lower than the U.S. dollar at November 30, 2021. Credit and Capital Markets 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 facilities, or borrowings backed by these facilities, to fund working capital needs and other general corporate requirements. During the three months ended August 31, 2022, we entered into a 364-day $500 million revolving credit facility, which will expire in July 2023. The current pricing for the credit facility, on a fully drawn basis, is SOFR + 1.23%. 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 SOFR + 1.60%. The provisions of this revolving credit facility restrict subsidiary indebtedness and require us to maintain a minimum interest coverage ratio, consistent with our current five-year revolving credit facility. We do not expect that this covenant would limit our access to this revolving credit facility for the foreseeable future. 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 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. We generally use our revolving credit facilities to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facilities. These facilities are made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of our working capital. We engage in regular communication with all banks participating in our 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 and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. Material Cash Requirements 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. As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. Our primary obligations include principal and interest payments on our outstanding short-term borrowings and long-term debt. In the next year, our $500 million, 364-day revolving credit facility matures in July 2023. Our other cash requirements include raw material purchases, lease payments, income taxes, and pension and postretirement benefits. These obligations impact our liquidity and capital resource needs. To meet those 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 on market conditions and upon the significance of the cost of a particular debt maturity or 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 future cash requirements. 43 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, 2021. 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, 2021. 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 impact of price elasticity on our sales volume and mix; 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; the impact of the Russia-Ukraine conflict, including the potential for broader economic disruption; 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, working capital needs, planned capital expenditures, as well as quarterly dividends and the ability to obtain additional short- and long-term financing or issue additional debt 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; the company's ability to drive productivity improvements, including those related to our CCI program; 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 crises, including COVID-19; issues affecting the company's supply chain and procurement of raw materials, including fluctuations in the cost and availability of raw and packaging materials; labor shortage, turnover and labor cost increases; the impact of the Russia-Ukraine conflict, including the potential for broader economic disruption; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses; global economic and financial conditions generally, availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; 44 Table of Contents 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, and volatility in our effective tax rate; climate change; Environmental, Social and Governance (ESG) matters; 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.