MCCORMICK & CO INC 10-Q

ITEM 1. FINANCIAL STATEMENTS McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) (in millions except per share amounts) Three months ended February 28, 2023 2022 Net sales $ 1,565.5 $ 1,522.4 Cost of goods sold 1,002.6 962.0 Gross profit 562.9 560.4 Selling, general and administrative expense 336.1 333.3 Transaction and integration expenses — 0.7 Special charges 27.8 19.5 Operating income 199.0 206.9 Interest expense 50.6 33.1 Other income, net 11.1 6.2 Income from consolidated operations before income taxes 159.5 180.0 Income tax expense 34.4 34.4 Net income from consolidated operations 125.1 145.6 Income from unconsolidated operations 14.0 9.3 Net income $ 139.1 $ 154.9 Earnings per share – basic $ 0.52 $ 0.58 Earnings per share – diluted $ 0.52 $ 0.57 Average shares outstanding – basic 268.2 267.8 Average shares outstanding – diluted 269.8 270.5 Cash dividends paid per share – voting and non-voting $ 0.39 $ 0.37 See notes to condensed consolidated financial statements (unaudited). 4 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) (in millions) Three months ended February 28, 2023 2022 Net income $ 139.1 $ 154.9 Net income attributable to non-controlling interest 0.8 2.5 Other comprehensive income (loss): Unrealized components of pension and other postretirement plans ( 1.0 ) 2.2 Currency translation adjustments 47.0 3.7 Change in derivative financial instruments ( 5.4 ) 5.1 Tax benefit (expense) 1.0 ( 1.0 ) Total other comprehensive income 41.6 10.0 Comprehensive income $ 181.5 $ 167.4 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in millions) February 28, 2023 November 30, 2022 (unaudited) ASSETS Cash and cash equivalents $ 356.8 $ 334.0 Trade accounts receivable, net of allowances 571.0 573.7 Inventories, net Finished products 650.2 649.0 Raw materials and work-in-process 694.4 691.1 1,344.6 1,340.1 Prepaid expenses and other current assets 138.9 138.9 Total current assets 2,411.3 2,386.7 Property, plant and equipment, net 1,225.2 1,198.0 Goodwill 5,229.7 5,212.9 Intangible assets, net 3,381.7 3,387.9 Other long-term assets 957.5 939.4 Total assets $ 13,205.4 $ 13,124.9 LIABILITIES AND SHAREHOLDERS’ EQUITY Short-term borrowings $ 1,304.8 $ 1,236.7 Current portion of long-term debt 281.2 270.6 Trade accounts payable 1,124.3 1,171.0 Other accrued liabilities 610.7 754.1 Total current liabilities 3,321.0 3,432.4 Long-term debt 3,619.8 3,642.3 Deferred taxes 866.7 866.3 Other long-term liabilities 510.2 484.7 Total liabilities 8,317.7 8,425.7 Shareholders’ equity Common stock 574.5 568.6 Common stock non-voting 1,577.6 1,570.0 Retained earnings 3,155.1 3,022.5 Accumulated other comprehensive loss ( 437.1 ) ( 480.6 ) Total McCormick shareholders' equity 4,870.1 4,680.5 Non-controlling interests 17.6 18.7 Total shareholders’ equity 4,887.7 4,699.2 Total liabilities and shareholders’ equity $ 13,205.4 $ 13,124.9 See notes to condensed consolidated financial statements (unaudited). 6 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED) (in millions) Three months ended February 28, 2023 2022 Operating activities Net income $ 139.1 $ 154.9 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation and amortization 47.8 49.0 Stock-based compensation 11.8 11.1 Income from unconsolidated operations ( 14.0 ) ( 9.3 ) Changes in operating assets and liabilities Trade accounts receivable 9.7 33.2 Inventories ( 0.2 ) ( 49.9 ) Trade accounts payable ( 54.8 ) 5.2 Other assets and liabilities ( 49.9 ) ( 185.5 ) Dividends from unconsolidated affiliates 13.9 9.2 Net cash flow provided by operating activities 103.4 17.9 Investing activities Capital expenditures (including software) ( 61.5 ) ( 43.7 ) Net cash flow used in investing activities ( 61.5 ) ( 43.7 ) Financing activities Short-term borrowings, net 67.9 97.3 Long-term debt repayments ( 3.6 ) ( 3.5 ) Proceeds from exercised stock options 5.2 30.3 Taxes withheld and paid on employee stock awards ( 6.1 ) ( 12.0 ) Common stock acquired by purchase ( 3.5 ) ( 8.7 ) Dividends paid ( 104.6 ) ( 99.0 ) Net cash flow (used in) provided by financing activities ( 44.7 ) 4.4 Effect of exchange rate changes on cash and cash equivalents 25.6 8.1 Increase (decrease) in cash and cash equivalents 22.8 ( 13.3 ) Cash and cash equivalents at beginning of period 334.0 351.7 Cash and cash equivalents at end of period $ 356.8 $ 338.4 See notes to condensed consolidated financial statements (unaudited). 7 Table of Contents McCORMICK & COMPANY, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (in millions) (millions) Common Stock Shares Common Stock Non-Voting Shares Common Stock Amount Retained Earnings Accumulated Other Comprehensive (Loss) Income Non-controlling Interests Total Shareholders’ Equity Three months ended February 28, 2023 Balance, November 30, 2022 17.4 250.6 $ 2,138.6 $ 3,022.5 $ ( 480.6 ) $ 18.7 $ 4,699.2 Net income — 139.1 — — 139.1 Net income attributable to non-controlling interest — — — 0.8 0.8 Other comprehensive income (loss), net of tax — — 43.5 ( 1.9 ) 41.6 Stock-based compensation 11.8 — — — 11.8 Shares purchased and retired ( 0.1 ) — ( 4.8 ) ( 6.5 ) — — ( 11.3 ) Shares issued 0.3 — 6.5 — — — 6.5 Equal exchange ( 0.2 ) 0.2 — — — — — Balance, February 28, 2023 17.4 250.8 $ 2,152.1 $ 3,155.1 $ ( 437.1 ) $ 17.6 $ 4,887.7 Three months ended February 28, 2022 Balance, November 30, 2021 17.8 249.5 $ 2,055.1 $ 2,782.4 $ ( 426.5 ) $ 14.5 $ 4,425.5 Net income — 154.9 — — 154.9 Net income attributable to non-controlling interest — — — 2.5 2.5 Other comprehensive income (loss), net of tax — — 10.5 ( 0.5 ) 10.0 Stock-based compensation 11.1 — — — 11.1 Shares purchased and retired ( 0.2 ) — ( 6.5 ) ( 14.9 ) — — ( 21.4 ) Shares issued 0.9 — 31.6 — — — 31.6 Equal exchange ( 0.7 ) 0.7 — — — — — Balance, February 28, 2022 17.8 250.2 $ 2,091.3 $ 2,922.4 $ ( 416.0 ) $ 16.5 $ 4,614.2 See notes to condensed consolidated financial statements (unaudited). 8 Table of Contents McCORMICK & COMPANY, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented. The results of consolidated operations for the three-month period ended February 28, 2023 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations have been lower in the first half of the fiscal year and higher in the second half. The historical increase in net sales, net income and cash flow from operations in the second half of the year has largely been due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons. For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2022. Accounting Pronouncements Recently Adopted In 2022, we adopted the FASB issued ASU No. 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 which deferred the sunset date of Topic 848 which provides optional expedients for a limited time for accounting for transactions affected by the London Interbank Offered Rate (LIBOR) being discontinued. Arrangements that were entered into in 2022, including our 364-day revolving credit facility expiring in July 2023, fixed to variable interest rate swaps expiring in April 2030, and cross-currency interest rate swaps expiring in April 2030, do not use LIBOR as a reference rate. During the first quarter of 2023 we amended our interest rate swaps expiring in November 2025 and August 2027, and the cross currency and interest rate swaps expiring in August 2027 to no longer use LIBOR. Also, in March 2023 we amended our five-year revolving credit facility expiring in July 2026 to no longer use LIBOR. Our adoption of this standard commenced during 2022, in conjunction with the first phase-out of a LIBOR reference rate. There was no material impact to our consolidated financial statements, nor do we expect the adoption of this standard to have a material impact on our consolidated financial statements during the LIBOR transition period. Recently Issued Accounting Pronouncements — Pending Adoption In September 2022, the FASB issued ASU No. 2022-04: Liabilities - Supplier Finance Programs (Topic 450-50): Disclosure of Supplier Finance Program Obligations that requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a roll forward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The new standard’s requirements to disclose the key terms of the programs and information about obligations outstanding are effective for all interim and annual periods of our fiscal year ending November 30, 2024. The new standard’s requirement to disclose a roll forward of obligations outstanding will be effective for our fiscal year ending November 30, 2025. Early adoption is permitted. We are currently evaluating the impact that this new guidance will have on our consolidated financial statements. 2. SPECIAL CHARGES AND TRANSACTION AND INTEGRATION EXPENSES Special Charges In our consolidated income statement, we include a separate line item captioned "Special charges" in arriving at our consolidated operating income. Special charges consist of expenses, including related impairment charges, associated with certain actions undertaken to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman and Chief Executive Officer. Expenses associated with any approved action are classified as special charges upon recognition and monitored on an on-going basis 9 Table of Contents through completion. Certain ancillary expenses related to these actions approved by our Management Committee do not qualify for accrual upon approval but are included as special charges as incurred during the course of the actions. We continue to evaluate changes to our organizational structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness. The following is a summary of special charges recognized in the three months ended February 28, 2023 and 2022 (in millions): Three months ended February 28, 2023 2022 Employee severance and related benefits $ 24.8 $ 14.2 Other costs Cash 2.2 3.9 Non-Cash 0.8 1.4 Total special charges $ 27.8 $ 19.5 During the three months ended February 28, 2023, we recorded $ 27.8 million of special charges, consisting principally of $ 24.8 million associated with our Global Operating Effectiveness (GOE) program, as more fully described below, $ 0.9 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), as more fully described below, and streamlining actions of $ 1.3 million in the Americas region, and $ 0.8 million in the EMEA region. During the three months ended February 28, 2022, we recorded $ 19.5 million of special charges, consisting principally of $ 14.9 million associated with the transition of a manufacturing facility in EMEA, as more fully described below, streamlining actions of $ 2.1 million in the Americas region, and $ 1.5 million in the EMEA region. In 2022, our Management Committee approved the GOE program. The GOE program included a voluntary retirement plan, which included enhanced separation benefits to certain U.S. employees aged 55 years or older with at least ten years of service to the company. This voluntary retirement plan commenced in November 2022 and participants were required to submit their notifications by December 30, 2022. As of November 30, 2022, we had accrued special charges of $ 5.6 million, consisting of employee severance and related benefits. Upon all eligible employees submitting their notifications by the end of December 2022, we accrued an additional $ 19.7 million during the first quarter of 2023. All related payments will be made in fiscal year 2023 as all of the affected employees will leave the company in 2023. Other special charges recognized during the three months ended February 28, 2023, under our GOE program included $ 4.5 million in severance and related benefits costs and $ 0.6 million of third party expenses and other costs. In 2022, our Management Committee approved an initiative to consolidate our manufacturing operations in the United Kingdom into a net-zero carbon condiments manufacturing and distribution center facility with state-of-the-art technology. We expect to execute these changes to our supply chain operations and improve profitability, from a combination of lower headcount and non-headcount costs, by consolidating our operations into a scalable platform while expanding our capacity. We expect the cost of the initiative to approximate $ 40 million—to be recognized as special charges in our consolidated income statement during 2022 and 2023. Of that $ 40 million, we expect the costs to include employee severance and related benefits, non-cash accelerated depreciation, equipment relocation costs, decommissioning and other property related lease exit costs, all directly related to the initiative. During the three months ended February 28, 2023, we recorded $ 0.4 million in accelerated depreciation and $ 0.5 million in third party expenses and other costs. During the three months ended February 28, 2022, we recorded $ 12.5 million in severance and related benefits costs, $ 1.4 million in accelerated depreciation and $ 1.0 million in third party expenses and other costs. In total, $ 21.5 million of special charges related to this initiative were recognized in 2022. As of February 28, 2023, reserves associated with special charges of $ 33.0 million, are included in other accrued liabilities in our consolidated balance sheet. The following is a breakdown by business segment of special charges for the three months ended February 28, 2023 and 2022 (in millions): 10 Table of Contents Three months ended February 28, 2023 2022 Consumer segment $ 19.0 $ 3.6 Flavor solutions segment 8.8 15.9 Total special charges $ 27.8 $ 19.5 Integration Expenses Integration expenses recognized during the three months ended February 28, 2022 were $ 0.7 million relating to the acquisition of FONA International, LLC (FONA). 3. FINANCIAL INSTRUMENTS We use derivative financial instruments to enhance our ability to manage risk, including foreign currency, net investment and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument, and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines. Foreign currency exchange risk. We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. We assess 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. Forward contracts are generally less than 18 months duration. Currency swap agreements are established in conjunction with the terms of the underlying debt issues. At February 28, 2023, we had foreign currency exchange contracts to purchase or sell $ 509.6 million of foreign currencies as compared to $ 560.5 million at November 30, 2022. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material. All foreign currency exchange contracts outstanding at February 28, 2023 have durations of less than 18 months, including $ 146.8 million of notional contracts that have durations of less than one month and are used to hedge short-term cash flow funding. Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Hedges of foreign currency denominated assets and liabilities include foreign currency exchange contracts with a notional value of $ 362.5 million at February 28, 2023. These foreign currency exchange contracts manage both exposure to currency fluctuations in certain intercompany loans between subsidiaries as well as currency exposure to third-party non-functional currency assets or liabilities. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item. We also utilize cross currency interest rate swap contracts that are designated as net investment hedges. Any gains or losses on net investment hedges are included in foreign currency translation adjustments in accumulated other comprehensive loss. Interest rate risk. We finance a portion of our operations with both fixed and variable rate debt instruments, principally commercial paper, notes and bank loans. We utilize interest rate derivative contracts, including interest rate swap agreements, to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt. 11 Table of Contents The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions): Asset Derivatives Liability Derivatives Balance sheet location Notional amount Fair value Balance sheet location Notional amount Fair value As of February 28, 2023 Interest rate contracts Other current assets / Other long-term assets $ — $ — Other long-term liabilities $ 600.0 $ 54.3 Foreign exchange contracts Other current assets 309.2 6.4 Other accrued liabilities 200.4 2.3 Cross currency contracts Other current assets / Other long-term assets 457.2 43.0 Other long-term liabilities 467.4 14.9 Total $ 49.4 $ 71.5 As of November 30, 2022 Interest rate contracts Other current assets / Other long-term assets $ — $ — Other long-term liabilities $ 600.0 $ 42.4 Foreign exchange contracts Other current assets 344.9 11.0 Other accrued liabilities 215.6 1.5 Cross currency contracts Other current assets / Other long-term assets 680.0 44.5 Other long-term liabilities 226.1 8.3 Total $ 55.5 $ 52.2 In conjunction with the phase-out of LIBOR, during the first quarter of 2023 we amended our previously existing cross currency swaps which expire in August 2027 such that, effective February 15, 2023, we now pay and receive at USD Secured Overnight Financing Rate (SOFR) plus 0.907 % (previously three-month U.S. LIBOR plus 0.685 %). In conjunction with the phase-out of LIBOR, during the first quarter of 2023, we amended our $ 100 million interest rate swaps which expire in November 2025 and our $ 250 million interest rate swaps that expire in August 2027, such that, effective February 15, 2023 we now pay and receive at USD SOFR plus 1.487 % (previously U.S. three-month LIBOR plus 1.22 %) and USD SOFR plus 0.907 % (previously U.S. three-month LIBOR plus 0.685 %), respectively. The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive loss (AOCI) and our consolidated income statement for the three-months ended February 28, 2023 and 2022 (in millions): 12 Table of Contents Fair Value Hedges Three months ended February 28, Derivative Income statement location (Expense) income 2023 2022 Interest rate contracts Interest expense $ ( 3.7 ) $ 2.2 Income statement location Gain (loss) recognized in income Income statement location Gain (loss) recognized in income Derivative 2023 2022 Hedged item 2023 2022 Foreign exchange contracts Other income, net $ 1.0 $ ( 0.4 ) Intercompany loans Other income, net $ ( 0.1 ) $ 0.4 The gains (losses) recognized on fair value hedges relating to currency exposure on third-party non-functional currency assets or liabilities were not material during the three months ended February 28, 2023 and 2022. Cash Flow Hedges Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) reclassified from AOCI 2023 2022 2023 2022 Three months ended February 28, Interest rate contracts $ — $ — Interest expense $ 0.1 $ 0.1 Foreign exchange contracts ( 1.1 ) 2.9 Cost of goods sold 1.2 ( 0.2 ) Total $ ( 1.1 ) $ 2.9 $ 1.3 $ ( 0.1 ) For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive loss expected to be reclassified in the next 12 months is $ 1.1 million as an increase to earnings. Net Investment Hedges Derivative Gain (loss) recognized in OCI Income statement location Gain (loss) excluded from the assessment of hedge effectiveness 2023 2022 2023 2022 Three months ended February 28, Cross currency contracts $ ( 5.8 ) $ 0.7 Interest expense $ 3.3 $ 0.5 For all net investment hedges, no amounts have been reclassified out of accumulated other comprehensive loss. The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes. 13 Table of Contents 4. FAIR VALUE MEASUREMENTS Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. • Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. At February 28, 2023 and November 30, 2022, we had no financial assets or liabilities that were subject to a level 3 fair value measurement. Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions): February 28, 2023 Fair Value Level 1 Level 2 Assets Cash and cash equivalents $ 356.8 $ 356.8 $ — Insurance contracts 109.6 — 109.6 Bonds and other long-term investments 2.4 2.4 — Foreign currency derivatives 6.4 — 6.4 Cross currency contracts 43.0 — 43.0 Total $ 518.2 $ 359.2 $ 159.0 Liabilities Foreign currency derivatives $ 2.3 $ — $ 2.3 Interest rate derivatives 54.3 — 54.3 Cross currency contracts 14.9 — 14.9 Total $ 71.5 $ — $ 71.5 November 30, 2022 Fair Value Level 1 Level 2 Assets Cash and cash equivalents $ 334.0 $ 334.0 $ — Insurance contracts 110.0 — 110.0 Bonds and other long-term investments 5.1 5.1 — Foreign currency derivatives 11.0 — 11.0 Cross currency contracts 44.5 — 44.5 Total $ 504.6 $ 339.1 $ 165.5 Liabilities Foreign currency derivatives $ 1.5 $ — $ 1.5 Interest rate derivatives 42.4 — 42.4 Cross currency contracts 8.3 — 8.3 Total $ 52.2 $ — $ 52.2 At February 28, 2023 and November 30, 2022, the carrying amounts of interest rate derivatives, foreign currency derivatives, cross currency contracts, insurance contracts, and bond and other long-term investments were equal to their respective fair values. Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value. 14 Table of Contents Insurance contracts, bonds, and other long-term investments are comprised of fixed income and equity securities held for certain non-qualified U.S. employee benefit plans and are stated at fair value on the balance sheet. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate derivatives, foreign currency derivatives, and cross currency contracts are based on values for similar instruments using models with market-based inputs. The following table sets forth the carrying amounts and fair values of our long-term debt including the current portion thereof (in millions): February 28, 2023 November 30, 2022 Carrying amount $ 3,901.0 $ 3,912.9 Level 1 valuation techniques $ 3,402.4 $ 3,424.8 Level 2 valuation techniques 172.7 176.1 Total fair value $ 3,575.1 $ 3,600.9 The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments. 5. EMPLOYEE BENEFIT AND RETIREMENT PLANS We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We also contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. We previously froze the accrual of future benefits under certain defined benefit pension plans in the U.S. and certain foreign locations. Although our defined benefit plans in the U.S., United Kingdom and Canada have generally been frozen, employees who are participants in the plans retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans. The following table presents the components of our pension (income) and other postretirement benefits expense for the three months ended February 28, 2023 and 2022 (in millions): United States pension International pension Other postretirement benefits 2023 2022 2023 2022 2023 2022 Service cost $ 0.5 $ 0.9 $ 0.2 $ 0.2 $ 0.3 $ 0.4 Interest costs 9.0 6.6 2.5 1.8 0.6 0.4 Expected return on plan assets ( 10.6 ) ( 10.7 ) ( 3.7 ) ( 3.2 ) — — Amortization of prior service costs 0.1 0.1 — — ( 0.1 ) ( 0.1 ) Amortization of net actuarial losses (gains) 0.1 2.2 — 0.4 ( 0.5 ) — Total (income) expense $ ( 0.9 ) $ ( 0.9 ) $ ( 1.0 ) $ ( 0.8 ) $ 0.3 $ 0.7 During the three months ended February 28, 2023 and 2022, we contributed $ 1.9 million and $ 2.0 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2022 were $ 11.4 million. All of the amounts in the tables above for pension (income) and other postretirement benefits expense, other than service cost, were included in other income, net within our consolidated income statements. The net aggregate amount of pension and other postretirement benefits (income), excluding service cost components, was $( 2.6 ) million and $( 2.5 ) million for the three months ended February 28, 2023 and 2022, respectively. 6. STOCK-BASED COMPENSATION We have four types of stock-based compensation awards: restricted stock units ("RSUs"), stock options, company stock awarded as part of our long-term performance plan ("LTPP") and price-vested stock options. The following table sets forth the stock-based compensation expense recorded in selling, general and administrative ("SG&A") expense (in millions): 15 Table of Contents Three months ended February 28, 2023 2022 Stock-based compensation expense $ 11.8 $ 11.1 Our 2023 annual grant of stock options and RSUs is expected to occur in the second quarter, similar to the 2022 annual grant. The following is a summary of our stock option activity for the three months ended February 28, 2023 and 2022: 2023 2022 (shares in millions) Number of Shares Weighted- Average Exercise Price Number of Shares Weighted- Average Exercise Price Outstanding at beginning of period 4.8 $ 67.08 5.0 $ 59.71 Granted — — — — Exercised ( 0.1 ) 49.50 ( 0.6 ) 45.25 Outstanding at end of the period 4.7 $ 67.32 4.4 $ 61.72 Exercisable at end of the period 3.5 $ 58.79 3.0 $ 53.17 As of February 28, 2023, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $ 60.7 million and for options currently exercisable was $ 59.9 million. The total intrinsic value of all options exercised during the three months ended February 28, 2023 and 2022 was $ 2.1 million and $ 32.6 million, respectively. The following is a summary of our RSU activity for the three months ended February 28, 2023 and 2022: 2023 2022 (shares in thousands) Number of Shares Weighted- Average Grant-Date Fair Value Number of Shares Weighted- Average Grant-Date Fair Value Outstanding at beginning of period 480 $ 77.62 563 $ 69.52 Granted — — 6 92.47 Vested ( 26 ) 52.48 ( 24 ) 54.02 Forfeited ( 7 ) 88.35 ( 8 ) 78.51 Outstanding at end of period 447 $ 78.89 537 $ 70.31 16 Table of Contents The following is a summary of our price-vested stock options activity for the three months ended February 28, 2023 and 2022: 2023 2022 (shares in thousands) Number of Shares Weighted- Average Grant-Date Fair Value Number of Shares Weighted- Average Grant-Date Fair Value Outstanding at beginning of period 2,107 $ 9.40 2,193 $ 9.40 Granted — — — — Forfeited ( 39 ) 9.40 ( 27 ) 9.40 Outstanding at end of period 2,068 $ 9.40 2,166 $ 9.40 The following is a summary of our LTPP activity for the three months ended February 28, 2023 and 2022: 2023 2022 (shares in thousands) Number of Shares Weighted- Average Grant-Date Fair Value Number of Shares Weighted- Average Grant-Date Fair Value Outstanding at beginning of period 451 $ 106.32 497 $ 83.74 Granted 167 89.00 151 95.00 Vested ( 176 ) 86.14 ( 251 ) 75.26 Forfeited ( 11 ) 94.58 ( 2 ) 96.03 Outstanding at end of period 431 $ 93.64 395 $ 93.42 7. INCOME TAXES Income tax expense for the three months ended February 28, 2023 included $ 3.8 million of net discrete tax benefits consisting principally of the following: (i) $ 3.2 million of tax benefits associated with the adjustment of a valuation allowance due to changes in judgment about the realizability of the deferred tax asset, (ii) $ 0.8 million of tax benefits related to the revaluation of deferred taxes resulting from changes in tax rates, and (iii) $ 0.2 million of tax expense associated with stock-based compensation. Income tax expense for the three months ended February 28, 2022 included $ 10.3 million of net discrete tax benefits consisting principally of the following: (i) $ 7.6 million of excess tax benefits associated with stock-based compensation, and (ii) $ 2.5 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation. Other than additions for current year tax positions, there we re no significant changes to unrecognized tax benefits during the three months ended February 28, 2023. As of February 28, 2023, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements. 8. CAPITAL STOCK AND EARNINGS PER SHARE The following table sets forth the reconciliation of average shares outstanding (in millions): Three months ended February 28, 2023 2022 Average shares outstanding – basic 268.2 267.8 Effect of dilutive securities: Stock options/RSUs/LTPP 1.6 2.7 Average shares outstanding – diluted 269.8 270.5 17 Table of Contents The following table sets forth the stock options and RSUs that were not considered in our earnings per share calculation since they were anti-dilutive (in millions): Three months ended February 28, 2023 2022 Anti-dilutive securities 1.6 0.2 The following table sets forth common stock activity (in millions): Three months ended February 28, 2023 2022 Shares issued under stock options, RSUs, LTPP and employee stock purchase plans 0.3 0.9 Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, and LTPP 0.1 0.2 As of February 28, 2023, $ 532.4 million remained of the $ 600 million share repurchase program authorization approved by our Board of Directors in November 2019. 9. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table sets forth the components of accumulated other comprehensive loss, net of tax, where applicable (in millions): February 28, 2023 November 30, 2022 Foreign currency translation adjustment (1) $ ( 356.3 ) $ ( 405.3 ) Unrealized gain on foreign currency exchange contracts ( 0.4 ) 3.8 Unamortized value of settled interest rate swaps ( 0.8 ) ( 0.6 ) Pension and other postretirement costs ( 79.6 ) ( 78.5 ) Accumulated other comprehensive loss $ ( 437.1 ) $ ( 480.6 ) (1) During the three months ended February 28, 2023, the foreign currency translation adjustment of accumulated other comprehensive loss increased on a net basis by $ 49.0 million, inclusive of $ 5.8 million of unrealized losses associated with net investment hedges. These net investment hedges are more fully described in note 3. The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income (in millions): Three months ended Affected Line Items in the Condensed Consolidated Income Statement February 28, 2023 February 28, 2022 (Gains)/losses on cash flow hedges: Interest rate derivatives $ ( 0.1 ) $ ( 0.1 ) Interest expense Foreign exchange contracts ( 1.2 ) 0.2 Cost of goods sold Total before tax ( 1.3 ) 0.1 Tax effect 0.3 — Income tax expense Net, after tax $ ( 1.0 ) $ 0.1 Amortization of pension and postretirement benefit adjustments: Amortization of net actuarial losses (1) $ ( 0.4 ) $ 2.6 Other income, net Total before tax ( 0.4 ) 2.6 Tax effect 0.1 ( 0.6 ) Income tax expense Net, after tax $ ( 0.3 ) $ 2.0 18 Table of Contents (1) This accumulated other comprehensive income (loss) component is included in the computation of total pension (income) and other postretirement benefits expense (refer to note 5 for additional details). 10. BUSINESS SEGMENTS We operate in two business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, herbs, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce under the “McCormick” brand and a variety of brands around the world, including “French’s”, “Frank’s RedHot”, “OLD BAY”, “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Cholula”, “Schwartz”, “Club House”, “Kamis”, “DaQiao”, “La Drogheria”, “Stubb's”, and “Gourmet Garden”. Our flavor solutions segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors, with the exception of our business in China, where foodservice sales are managed by and reported in our consumer segment. In each of our segments, we produce and sell many individual products which are similar in composition and nature. With their primary attribute being flavor, the products within each of our segments are regarded as fairly homogenous. It is impracticable to segregate and identify sales and profits for each of these individual product lines. We measure segment performance based on operating income excluding special charges, as this activity is managed separately from the business segments. We also exclude transaction and integration expenses related to our acquisitions from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include the amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the businesses. Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for purposes of internal reporting, performance evaluation, or capital allocation. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material. Consumer Flavor Solutions Total (in millions) Three months ended February 28, 2023 Net sales $ 909.5 $ 656.0 $ 1,565.5 Operating income excluding special charges 173.4 53.4 226.8 Income from unconsolidated operations 13.8 0.2 14.0 Three months ended February 28, 2022 Net sales $ 926.1 $ 596.3 $ 1,522.4 Operating income excluding special charges and transaction and integration expenses 167.0 60.1 227.1 Income from unconsolidated operations 8.4 0.9 9.3 19 Table of Contents A reconciliation of operating income excluding special charges and transaction and integration expenses, to operating income is as follows (in millions): Consumer Flavor Solutions Total Three months ended February 28, 2023 Operating income excluding special charges $ 173.4 $ 53.4 $ 226.8 Less: Special charges 19.0 8.8 27.8 Operating income $ 154.4 $ 44.6 $ 199.0 Three months ended February 28, 2022 Operating income excluding special charges and transaction and integration expenses $ 167.0 $ 60.1 $ 227.1 Less: Special charges 3.6 15.9 19.5 Less: Transaction and integration expenses — 0.7 0.7 Operating income $ 163.4 $ 43.5 $ 206.9 The following table sets forth our net sales, by geographic area, for the three and three months ended February 28, 2023 and 2022 (in millions): Americas EMEA Asia/Pacific Total Three months ended February 28, 2023 $ 1,094.7 $ 283.9 $ 186.9 $ 1,565.5 Three months ended February 28, 2022 1,022.5 290.5 209.4 1,522.4