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 from the perspective of management. 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. 23 Table of Contents Business profile McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business. In fiscal year 2022, approximately 38% 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 global economic conditions, inflationary cost environment, disruption in our supply chain, the COVID-19 pandemic, and the ongoing conflict between Russia and Ukraine, each of which are further discussed below. We expect each of these factors will impact our fiscal 2023 performance. We expect elevated levels of cost inflation to persist throughout 2023, although at lower levels than experienced in 2022. We anticipate in 2023 that these headwinds will be mitigated by pricing actions taken in response to inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates and, as a result, we expect that our interest expense will increase in 2023. While the impacts of COVID-19 on our business have largely moderated, there still remains uncertainty around the pandemic, including its effect on labor or other macroeconomic factors and spread of new COVID-19 variants and resurgences. Also, the ongoing conflict between Russia and Ukraine, 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 operations. These and other uncertainties 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 sales, profitability, cash flows, 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, laws and regulations affecting our business, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. Global Economic Conditions and Inflationary Cost Environment – During fiscal 2021 and 2022, we experienced inflationary cost increases in our commodities, packaging materials and transportation costs. We expect that these inflationary cost increases will continue but we anticipate they will be mitigated by our planned 2023 pricing actions, the effect of pricing actions executed in 2022, our organization and streamlining actions, including our Global Operating Effectiveness (GOE) program, and by our Comprehensive Continuous Improvement (CCI) program-led cost savings. There has been, and we expect there could continue to be, a difference between the timing of when the impact of cost inflation occurs and when these pricing and other actions impact our results of operations. Additionally, in some instances the pricing actions we take have been impacted by price elasticity which unfavorably impacts our sales volume and mix. Our interest expense is impacted by the overall global economic and interest rate environment. The inflationary environment has also resulted in central banks raising short-term interest rates. As of May 31, 2023, we had total outstanding variable rate debt of approximately $513 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 both May 31, 2023 and 2022, we had total outstanding fixed to variable interest rate swaps of $600 million notional. We expect that our interest expense will increase in 2023 as a result of the higher interest rate environment. Supply Chain Disruption – Over the past several years, as we have responded to demand volatility, COVID-19 and overall macroeconomic conditions, we have experienced pressures in our supply chain, including inefficiencies associated with demand volatility. These pressures are in addition to the inflationary cost environment previously noted and have included strained availability of raw materials and transportation capacity, expedited shipping costs, costs incurred in response to COVID-19, incremental warehouse costs to store increased inventory associated with maintaining additional safety stock, additional use of co-manufacturers, and labor shortages and absenteeism, in part, associated with COVID-19. The severity of those supply chain pressures varied over 2022, 2021 and 2020. In response to the general economic conditions, inflationary cost environment, and the supply chain pressures and related inefficiencies, we expect to eliminate approximately $125 million of costs during 2023 and 2024, including $100 million of supply chain costs and $25 million of costs across the remainder of the organization under our GOE program. The supply chain actions we are taking, and will continue to evaluate, include returning our manufacturing facilities to a more normal shift schedule, reducing headcount, and stabilizing turnover rates to reduce our labor costs; increasing our manufacturing capacity and automation to respond to the evaluated demand as well as reduce the use of co-manufacturers; and executing and evaluating initiatives to reduce the safety stock levels of our inventory that were put in place to protect against supply disruptions. The elimination of other costs across the organization will include a voluntary retirement program and other streamlining initiatives. 24 Table of Contents We expect our GOE program, and organization and streamlining actions to deliver savings of approximately $75 million in 2023. COVID-19 – COVID-19 has impacted our operating results. There still remains uncertainty around the COVID-19 pandemic. The ultimate impact depends on the length and severity of the pandemic, including new strains and variants of the virus; infection rates in the markets where we do business; the federal, state, and local government actions taken in response; vaccine effectiveness; and the macroeconomic environment. We will continue to evaluate the extent to which the COVID-19 pandemic impacts our business, consolidated results of operations and financial condition. The extent and nature of government actions, customer and end-consumer demand varied during 2022, 2021 and 2020. However, the impact of COVID-19 during the quarters ended May 31, 2023 and 2022, based upon the then-current extent and severity of the COVID-19 pandemic within the countries, localities and markets where we do business, were generally comparable with the exception of the impact on our results of operations in the Asia/Pacific region, specifically within China where we experienced a negative impact to consumer behavior in 2022, related to the impact of restrictive measures imposed associated with COVID-19 resurgences. We expect the impact of COVID-19 during 2023 to be mitigated from that experienced in 2022. Conflict Between Russia and Ukraine – The ongoing conflict between Russia and Ukraine, 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 exit 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 our operations in Russia nor Ukraine constitute 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. 2023 Outlook In 2023, we expect to grow net sales over the 2022 level by 5% to 7%, which includes a minimal impact of foreign currency rates. We anticipate that the 2023 sales growth will be driven by pricing actions, including the completion of those executed in 2022 in conjunction with cost savings which are expected to offset inflationary pressures. We expect volume and product mix to be impacted by pricing elasticities, although, consistent with 2022, at a lower level than we have experienced historically. We anticipate that our volume and product mix will also be impacted by the combined impact of lapping last year’s COVID-related disruptions in China, the divestiture of our Kitchen Basics brand in the third quarter of last year, the exit of our consumer business in Russia during the second quarter of last year, and the pruning of low margin businesses. We expect our 2023 gross profit margin to range from 50 basis points to 100 basis points higher than our gross profit margin of 35.8% in 2022. The projected 2023 increase in gross profit margin is principally due to the net effect of (i) the favorable impact of pricing actions in response to increased commodity, packaging materials and transportation costs, (ii) the favorable impact of anticipated GOE program and CCI cost savings, and (iii) a low to mid-teen percentage impact of inflation in 2023 compared to 2022. As we recover the cost inflation of our pricing that has lagged in the past two years, we expect cost pressures to be more than offset by pricing actions and our expected cost savings in 2023. In 2023, we expect an increase in operating income of 11% to 13%, which includes a minimal impact from foreign currency rates, over the 2022 level. The projected 2023 change in operating income includes the effects of cost savings from our GOE program and lapping the COVID-19 restrictive measures in China during 2022, which we anticipate will be partially offset by increased employee incentive compensation and the impact of our Kitchen Basics divestiture. Our CCI-led cost savings target in 2023 is approximately $85 million. We expect that the absence of $2.2 million of integration expenses related to the FONA acquisition in 2022 to favorably impact operating income in 2023. We also expect approximately $55 million of special charges in 2023 that relate to previously announced organization and streamlining actions; in 2022, special charges were $51.6 million. Excluding special charges and transaction and integration expenses, we expect 2023’s adjusted operating income to increase by 10% to 12%, which includes a minimal impact from foreign currency rates. We estimate that our interest expense will range from $200 to $210 million in 2023, with the increase over 2022 being driven by the higher interest-rate environment which will impact our variable rate debt. In 2023, we will also lap the favorable effects associated with the termination of interest rate contracts. These contracts were entered into to manage the interest rate risk associated with our then anticipated issuance of fixed rate debt, which favorably impacted other income, net in 2022. Our underlying effective tax rate is projected to be higher in 2023 than in 2022. We estimate that our 2023 effective tax rate, including the net favorable impact of anticipated discrete tax items, will be 22% as compared to 20.7% in 2022. Excluding 25 Table of Contents projected taxes associated with special charges, we estimate that our adjusted effective tax rate will be approximately 22% in 2023, as compared to an adjusted effective tax rate of 20.9% in 2022. Diluted earnings per share was $2.52 in 2022. Diluted earnings per share for 2023 is projected to range from $2.44 to $2.49. Excluding the per share impact of (i) special charges of $51.6 million; (ii) integration expenses of $2.2 million; and (iii) the gain realized upon our sale of Kitchen Basics of $49.6 million, adjusted diluted earnings per share was $2.53 in 2022. Adjusted diluted earnings per share, excluding an estimated per share impact from special charges of $0.16, is projected to range from $2.60 to $2.65 in 2023. We expect adjusted diluted earnings per share to grow by 3% to 5% over adjusted diluted earnings per share of $2.53 in 2022, including a minimal impact from foreign currency rates. RESULTS OF OPERATIONS – COMPANY Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Net sales $ 1,659.2 $ 1,536.8 $ 3,224.7 $ 3,059.2 Percent increase (decrease) 8.0 % (1.3) % 5.4 % 0.7 % Components of percent change in net sales – increase (decrease): Pricing actions 10.8 % 6.8 % 10.7 % 5.8 % Volume and product mix (0.9) % (6.6) % (2.8) % (4.0) % Acquisitions — % — % — % 0.3 % Divestitures (0.4) % — % (0.5) % — % Foreign exchange (1.5) % (1.5) % (2.0) % (1.4) % Gross profit $ 615.5 $ 523.0 $ 1,178.4 $ 1,083.4 Gross profit margin 37.1 % 34.0 % 36.5 % 35.4 % Sales for the second quarter of 2023 increased by 8.0% from the prior year level and increased by 9.5% 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). Pricing actions, taken in response to the inflationary cost environment, increased sales by 10.8% compared to the prior year period. Unfavorable volume and product mix decreased sales by 0.9%, including the impact of price elasticity. Both our flavor solutions and consumer segments experienced unfavorable volume and product mix. The net impact of the recovery experienced from the restrictive measures that existed in the prior year related to COVID-19 resurgences in China and the exit of our consumer operation in Russia favorably impacted volume and product mix by approximately 1.4%. Also, our decision to discontinue certain low margin businesses also contributed approximately 1.1% to the unfavorable impact of volume and product mix. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.4% as compared to the prior year period. Sales were also impacted by unfavorable foreign currency rates that decreased net sales by 1.5% in the second quarter of 2023 compared to the year-ago quarter and is excluded from our measure of sales growth of 9.5% on a constant currency basis. Sales for the six months ended May 31, 2023 increased by 5.4% from the prior year level and increased by 7.4% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 10.7% compared to the prior year period. Unfavorable volume and product mix decreased sales by 2.8%, including the impact of price elasticity. Both our flavor solutions and consumer segments experienced unfavorable volume and product mix. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.5% as compared to the prior year period. Sales were impacted by unfavorable foreign currency rates that decreased sales by 2.0% in the six months ended May 31, 2023 as compared to the year-ago period and is excluded from our measure of sales growth of 7.4% on a constant currency basis. Gross profit for the second quarter of 2023 increased by $92.5 million, or 17.7%, from the comparable period in 2022. Our gross profit margin for the three months ended May 31, 2023 was 37.1%, an increase of 310 basis points from the comparable period in 2022. The increase in gross profit margin in the quarter ended May 31, 2023 was driven by the favorable impact of our pricing actions taken in response to increased costs, favorable product mix within our segments and cost savings led by our CCI and GOE programs. These favorable impacts were partially offset by increased commodity costs as compared to the 2022 period. Gross profit for the six months ended May 31, 2023 increased by $95.0 million, or 8.8%, from the comparable period in 2022. Our gross profit margin for the six months ended May 31, 2023 was 36.5%, an increase of 110 basis points from the same period in 2022 driven by the favorable impact of our pricing actions taken in response to increased costs, favorable product mix within our segments and cost savings led by our CCI and GOE programs. These favorable impacts were partially offset by increased commodity costs and higher conversion costs, each as compared to the 2022 period. 26 Table of Contents Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Selling, general & administrative expense (SG&A) $ 380.5 $ 349.2 $ 716.6 $ 682.5 Percent of net sales 22.9 % 22.7 % 22.2 % 22.3 % SG&A increased by $31.3 million in the second quarter of 2023 as compared to the 2022 level, as increased distribution costs, increased selling and marketing costs and higher performance-based employee incentive expense were partially offset by CCI-led and GOE cost savings and favorable investment results associated with non-qualified retirement plan assets, all as compared to the 2022 period. SG&A as a percentage of net sales increased by 20 basis points from the prior year levels due primarily to the net impact of the previously mentioned factors, all as compared to the prior year period. SG&A increased by $34.1 million in the six months ended May 31, 2023 compared to the 2022 level, as increased distribution costs, increased selling and marketing costs and higher performance-based employee incentive expense were partially offset by CCI-led and GOE cost savings and favorable investment results associated with non-qualified retirement plan assets, all as compared to the 2022 period. SG&A as a percent of net sales for the six months ended May 31, 2023 decreased 10 basis points from prior year as the higher net sales base more than offset, the net impact of the previously mentioned factors, all as compared to the prior year period. Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Total special charges $ 13.2 $ 15.1 $ 41.0 $ 34.6 During the three months ended May 31, 2023, we recorded $13.2 million of special charges. Those special charges principally consisted of $8.6 million associated with the GOE program, $1.3 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), and streamlining actions of $3.2 million in the Americas region. During the six months ended May 31, 2023, we recorded $41.0 million of special charges. Those special charges principally consisted of $33.4 million associated with the GOE program, $2.2 million associated with the transition of a manufacturing facility in EMEA, and streamlining actions of $4.5 million in the Americas region, and $0.9 million in the EMEA region. During the three months ended May 31, 2022, we recorded $15.1 million of special charges, consisting principally of $22.2 million associated with the exit of our consumer business in Russia, $2.5 million associated with the transition of a manufacturing facility in EMEA, and streamlining actions of $3.2 million in the Americas region, and $2.8 million in the EMEA region. These charges were offset by a $13.6 million gain, on the sale of Kohinoor brand 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 six months ended May 31, 2022, we recorded $34.6 million of net special charges. Those special charge consisted principally of $22.2 million associated with the exit of our consumer business in Russia, $17.4 million associated with the transition of a manufacturing facility in EMEA, as more fully described in note 2 of the notes to the accompanying financial statements, and streamlining actions of $5.3 million in the Americas region and $4.3 million in the EMEA region. These charges were offset by a $13.6 million gain, 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. 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 Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Total integration expenses $ — $ 1.5 $ — $ 2.2 During the three months and six months ended May 31, 2022, we recorded $1.5 million and $2.2 million, respectively, of integration expenses related to our acquisition of FONA. 27 Table of Contents Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Interest expense $ 52.2 $ 33.7 $ 102.8 $ 66.8 Other income, net 12.5 6.3 23.6 12.5 Interest expense increased by $18.5 million and $36.0 million in the three and six months ended May 31, 2023, as compared to the prior year periods, as the effects of the higher interest rate environment more than offset lower average borrowing levels. Other income, net for the three and six months ended May 31, 2023 increased by $6.2 million and $11.1 million, as compared to the prior year periods. That increase was primarily driven by higher interest income, also principally associated with the higher interest rate environment. Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Income from consolidated operations before income taxes $ 182.1 $ 129.8 $ 341.6 $ 309.8 Income tax expense 40.3 21.7 74.7 56.1 Effective tax rate 22.1 % 16.7 % 21.9 % 18.1 % 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 GAAP. Examples of such types of discrete items not related to ordinary income include, but are not limited to, excess tax benefits or expense 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, and the tax effects of certain intra-entity asset transfers (other than inventory). Income tax expense for the three months ended May 31, 2023 included $3.0 million of net discrete tax benefit consisting principally of (i) $1.2 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 in a non-U.S. jurisdiction, (ii) $1.2 million of tax benefits related to a tax settlement, and (iii) $0.6 million of excess tax benefits associated with stock-based compensation. Income tax expense for the six months ended May 31, 2023 included $6.8 million of net discrete tax benefit consisting principally of (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) $1.2 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 in a non-U.S. jurisdiction, (iii) $1.2 million of tax benefits related to a tax settlement, (iv) $0.8 million of tax benefits related to the revaluation of deferred taxes resulting from changes in tax rates, and (v) $0.4 million of excess tax benefits associated with stock-based compensation. Income tax expense for the three months ended May 31, 2022 included $9.0 million of net discrete tax benefits consisting principally of the following: (i) $1.1 million of excess tax benefits associated with stock-based compensation, (ii) $4.1 million of net tax benefits associated with the adjustment of valuation allowances due to changes in judgment about the realizability of deferred tax assets, (iii) $1.3 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 in a non-U.S. jurisdiction, and (iv) $2.3 million of tax benefits related to the sale of an asset associated with a previously exited line of business. Income tax expense for the six months ended May 31, 2022 included $19.3 million of net discrete tax benefits consisting principally of the following: (i) $8.7 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) $2.5 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, and (v) $1.5 million from the resolution of tax uncertainties in non-U.S. jurisdictions, including the reversal of certain reserves for unrecognized tax benefits and related interest associated with the expiration of statutes of limitations in certain non-US jurisdictions. 28 Table of Contents Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Income from unconsolidated operations $ 10.3 $ 10.4 $ 24.3 $ 19.7 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, declined slightly for the three months ended May 31, 2023 as compared to the prior year period. Income from unconsolidated operations increased by $4.6 million for the six months ended May 31, 2023, as compared to the year ago period. The increase was driven by higher earnings of our largest joint venture, McCormick de Mexico. The following table outlines the major components of the change in diluted earnings per share from 2022 to 2023: Three months ended May 31, Six months ended May 31, 2022 Earnings per share – diluted $ 0.44 $ 1.01 Impact of change in operating income 0.18 0.18 Increase in special charges, net of taxes — (0.03) Decrease in integration expenses, net of tax — 0.01 Increase in interest expense (0.06) (0.10) Increase in other income 0.02 0.03 Increase in income from unconsolidated operations — 0.02 Impact of change in effective income tax rate, excluding taxes on special charges and transaction and integration expenses (0.02) (0.04) 2023 Earnings per share – diluted $ 0.56 $ 1.08 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 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 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. CONSUMER SEGMENT Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Net sales $ 912.1 $ 866.1 $ 1,821.6 $ 1,792.2 Percent increase (decrease) 5.3 % (8.4) % 1.6 % (5.3) % Segment operating income $ 153.6 $ 124.8 $ 327.0 $ 291.8 Segment operating income margin 16.8 % 14.4 % 18.0 % 16.3 % In the second quarter of 2023, sales of our consumer segment increased by 5.3% as compared to the second quarter of 2022 and increased by 7.0% on a constant currency basis. That 5.3% increase included higher sales of our consumer business in all regions, as compared to the prior year quarter. Pricing actions, taken in response to increased costs, favorably impacted sales by 8.5% as compared to the prior year period. Unfavorable volume and product mix decreased consumer segment sales by 0.7% in the second quarter of 2023 as compared to the same period last year, including the impact of price elasticity. The net impact of the recovery experienced from the restrictive measures that existed in the prior year related to COVID-19 resurgences in China and the exit of our consumer operation in Russia favorably impacted volume and product mix by approximately 1.6%. Also, our decision to discontinue certain low margin businesses also contributed approximately 1.2% to the unfavorable impact of 29 Table of Contents volume and product mix. The divestiture of our Kitchen Basics business unfavorably impacted consumer sales by 0.8% as compared to 2022. Sales in the second quarter of 2023 reflected an unfavorable impact from foreign currency rates that decreased consumer segment sales by 1.7% compared to the year-ago quarter and is excluded from our measure of sales growth of 7.0% on a constant currency basis. In the Americas region, consumer sales increased 3.0% in the second quarter of 2023 as compared to the same quarter of 2022 and increased by 3.6% on a constant currency basis. Pricing actions, taken in response to inflationary cost environment, increased sales by 8.1% as compared to the prior year period. For the second quarter of 2023, unfavorable volume and product mix decreased sales by 3.5% as compared to the corresponding period in 2022. This reduction included an approximately 1.6% impact of our decision to discontinue a low margin business. The sale of our Kitchen Basics business unfavorably impacted sales by 1.0% as compared to 2022. The unfavorable impact of foreign currency rates decreased sales by 0.6% in the quarter and is excluded from our measure of sales growth of 3.6% on a constant currency basis. In the EMEA region, consumer sales increased 7.2% in the second quarter of 2023 as compared to the same quarter of 2022 and increased by 9.3% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 11.8% as compared to the 2022 period. Sales were impacted by unfavorable volume and product mix during the second quarter of 2023 that decreased sales by 2.5% from the prior year level, including a 2.3% impact associated with the exit of our consumer operations in Russia. During the second quarter of 2023, an unfavorable impact from foreign currency rates decreased sales by 2.1% compared to the year-ago period and is excluded from our measure of sales growth of 9.3% on a constant currency basis. In the Asia/Pacific region, consumer sales increased 18.7% in the second quarter of 2023 as compared to the second quarter of 2022 and increased by 27.4% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 6.0% as compared to the prior year period. For the quarter ended May 31, 2023, favorable volume and product mix increased sales by 21.4%, including a 20.0% favorable impact from the recovery experienced from the restrictive measures that existed in the prior year related to COVID-19 resurgences in China. During the second quarter of 2023, an unfavorable impact from foreign currency rates decreased sales by 8.7% compared to the year-ago period and is excluded from our measure of sales growth of 27.4% on a constant currency basis. For the six months ended May 31, 2023, sales of our consumer segment increased 1.6% as compared to the six months ended May 31, 2022 and increased by 3.8% on a constant currency basis. Pricing actions taken in all of our consumer business in all regions increased sales by 8.6% during the six months ended May 31, 2023 as compared to the prior year period. Lower volume and unfavorable product mix decreased sales by 3.9% as compared to the prior year period driven primarily by the impact of price elasticity. The sale of our Kitchen Basics business unfavorably impacted sales by 0.9% as compared to 2022. An unfavorable impact from foreign currency rates decreased sales by 2.2% compared to the prior year and is excluded from our measure of sales growth of 3.8% on a constant currency basis. Segment operating income for our consumer segment increased by $28.8 million, or 23.1%, in the second quarter of 2023 over the second quarter of 2022. The increase in segment operating income was driven by the effects of an increase in gross profit primarily due to the higher level of sales, favorable pricing actions, and CCI-led and GOE cost savings partially offset by higher SG&A expenses, including higher distribution costs and higher performance-based employee incentive expense, all as compared to the prior year period. Segment operating margin for our consumer segment increased by 240 basis points from the second quarter of 2022 to 16.8% in the second quarter of 2023. That increase was principally the result of an increase in gross margin, including the impacts of pricing actions and CCI-led and GOE cost savings which was partially offset by a higher level of SG&A as a percentage of sales, all as compared to 2022. On a constant currency basis, segment operating income for our consumer segment increased by 24.5% in the second quarter of 2023 in comparison to the same period in 2022. Segment operating income for our consumer segment increased by $35.2 million, or 12.1%, for the six months ended May 31, 2023 as compared to the same period in 2022. The increase in segment operating income was driven by the effects of an increase in gross profit primarily driven by the higher level of sales, favorable pricing actions in response to increased costs, and CCI-led and GOE cost savings which were partially offset by higher SG&A expenses, including higher distribution costs and higher performance-based employee incentive expense, all as compared to the prior year period. Segment operating margin for our consumer segment increased by 170 basis points from the first half of 2022 to 18.0%. The increase was the result of an increase in gross margin as previously discussed which was partially offset by a higher level of SG&A as a percentage of sales, principally due to the factors previously described, both as compared to 2022. On a constant currency basis, segment operating income for our consumer segment increased by 14.0% for the six months ended May 31, 2023 in comparison to the same period in 2022. 30 Table of Contents FLAVOR SOLUTIONS SEGMENT Three months ended Six months ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Net sales $ 747.1 $ 670.7 $ 1,403.1 $ 1,267.0 Percent increase 11.4 % 9.7 % 10.7 % 10.5 % Segment operating income $ 81.4 $ 49.0 $ 134.8 $ 109.1 Segment operating income margin 10.9 % 7.3 % 9.6 % 8.6 % In the second quarter of 2023, sales of our flavor solutions segment increased by 11.4% as compared to the second quarter of 2022 and increased by 12.7% on a constant currency basis. Pricing actions, taken in response to increased costs, across all regions increased sales by 13.8% in the second quarter of 2023 and was partially offset by 1.1% of unfavorable volume and product mix, both as compared to the prior year quarter. Volume and product mix includes the net impact of the recovery experienced from the restrictive measures that existed in the prior year related to COVID-19 resurgences in China and our decision to discontinue certain low margin businesses of 1% favorable and 1% unfavorable, respectively. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 1.3% compared to the year-ago quarter and is excluded from our measure of sales growth of 12.7% on a constant currency basis. In the Americas region, flavor solutions sales increased by 11.9% in the second quarter of 2023 as compared to the second quarter of 2022 and increased by 11.0% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 12.1% during the quarter ended May 31, 2023, as compared to the prior year period. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 1.1% during the second quarter of 2023, including the effects of growth in sales to packaged food and beverage companies, as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 0.9% compared to the second quarter of 2022 and is excluded from our measure of sales growth of 11.0% on a constant currency basis. In the EMEA region, flavor solutions sales increased by 8.8% in the second quarter of 2023 as compared to the second quarter of 2022 and increased by 14.6% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 21.8% in the second quarter of 2023 as compared to the prior period level. Unfavorable volume and product mix decreased segment sales in the EMEA region by 7.2% as compared to the corresponding period in 2022 including the effects of the inflationary environment impacting consumer spending at quick service restaurants and an approximately 2.1% impact of our decision to discontinue a low margin business. An unfavorable impact from foreign currency rates decreased sales by 5.8% compared to the second quarter of 2022 and is excluded from our measure of sales growth of 14.6% on a constant currency basis. In the Asia/Pacific region, flavor solutions sales increased 13.4% in the second quarter of 2023 as compared to the second quarter of 2022 and increased by 21.6% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 8.0% as compared to the prior year period. Favorable volume and product mix increased segment sales by 13.6% in the second quarter of 2023 which was principally driven by the favorable impact from the recovery experienced from the restrictive measures that existed in the prior year related to COVID-19 resurgences in China. An unfavorable impact from foreign currency rates decreased sales by 8.2% compared to the second quarter of 2022 and is excluded from our measure of sales growth of 21.6% on a constant currency basis. For the six months ended May 31, 2023, our flavor solutions sales increased 10.7% as compared to the six months ended May 31, 2022 and increased by 12.5% on a constant currency basis. Pricing actions, taken in response to increased costs, across all regions increased sales by 13.6% during the six months ended May 31, 2023 and was partially offset by 1.1% of unfavorable volume and product mix, both as compared to the prior year period. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 1.8% compared to the year-ago period and is excluded from our measure of sales growth of 12.5% on a constant currency basis. Segment operating income for our flavor solutions segment increased by $32.4 million, or 66.1%, in the second quarter of 2023 as compared to the second quarter of 2022. The increase in segment operating income was driven by the effects of an increase in gross profit primarily due to the higher level of sales, favorable pricing and CCI-led and GOE cost savings which more than offset by increased conversion costs and the higher level of SG&A expenses, including higher distribution costs and higher performance-based employee incentive expense, all as compared to the prior year period. Segment operating margin for our flavor solutions segment increased by 360 basis points from the prior year level to 10.9% in the second quarter of 2023. That increase was principally the result of an increase in gross margin as previously described. On a constant currency basis, 31 Table of Contents segment operating income for our flavor solutions segment decreased by 65.7% in the second quarter of 2023 as compared to the same period in 2022. Segment operating income for our flavor solutions segment increased by $25.7 million, or 23.6%, for the six months ended May 31, 2023, as compared to the same period of 2022. The increase in segment operating income was driven by the effects of an increase in gross profit primarily due to the higher level of sales, favorable pricing and CCI-led and GOE cost savings which more than offset increased conversion costs, including the impact of scrapped inventory, and the higher level of SG&A expenses, including higher distribution costs and higher performance-based employee incentive expense, all as compared to the prior year period. Segment operating margin for our flavor solutions segment increased by 100 basis points from the first half of 2022 to 9.6%. That increase was principally the result of an increase in gross margin as previously described as the higher level of SG&A expenses were lower as a percentage of net sales due to the leverage effect of the higher level of sales as compared to the 2022 level. On a constant currency basis, segment operating income for our flavor solutions segment increased by 23.7% in the six months ended May 31, 2023, in comparison to the same period in 2022. 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. 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: May 31, 2023 November 30, 2022 Forward foreign currency: Notional value $ 840.0 $ 560.5 Unrealized net gain (loss) (2.3) 9.5 Cross currency swaps: Notional value 937.4 906.1 Unrealized net gain 26.5 36.2 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: May 31, 2023 November 30, 2022 Notional value $ 600.0 $ 600.0 Unrealized net (loss) (44.3) (42.4) 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. 32 Table of Contents 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, onion, capsicums (red peppers and paprika), garlic, wheat products, vegetable oils, and vanilla. 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 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 significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. Expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion. • Transaction and integration expenses – We exclude certain costs associated with our acquisitions 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. • 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 17 in our Annual Report on Form 10-K for the year ended November 30, 2022, the pre-tax gain associated with the sale was $49.6 million and is included in Other income, net in our consolidated income statement for the year ended November 30, 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 gain on sale of Kitchen Basics for the year ended November 30, 2022 are included in notes 2 and 3 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2022. 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. 33 Table of Contents A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows: For the year ended November 30, 2022 For the three months ended For the six months ended Estimated for the year ending November 30, 2023 May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Operating income $ 863.6 $ 221.8 $ 157.2 $ 420.8 $ 364.1 Impact of transaction and integration expenses 2.2 — 1.5 — 2.2 Impact of special charges (1) 51.6 13.2 15.1 41.0 34.6 Adjusted operating income $ 917.4 $ 235.0 $ 173.8 $ 461.8 $ 400.9 Adjusted operating income margin (2) 14.4 % 14.2 % 11.3 % 14.3 % 13.1 % Income tax expense $ 168.6 $ 40.3 $ 21.7 $ 74.7 $ 56.1 Impact of transaction and integration expenses 0.6 — 0.4 — 0.6 Impact of special charges 13.3 3.2 5.1 9.7 10.0 Impact of sale of Kitchen Basics (11.6) — — — — Adjusted income tax expense $ 170.9 $ 43.5 $ 27.2 $ 84.4 $ 66.7 Adjusted income tax rate (3) 20.9 % 22.3 % 18.6 % 22.1 % 19.2 % Net income $ 682.0 $ 152.1 $ 118.5 $ 291.2 $ 273.4 Impact of transaction and integration expenses 1.6 — 1.1 — 1.6 Impact of special charges (1) 38.3 10.0 10.0 31.3 24.6 Impact of after-tax gain on sale of Kitchen Basics (38.0) — — — — Adjusted net income $ 683.9 $ 162.1 $ 129.6 $ 322.5 $ 299.6 Earnings per share – diluted $ 2.52 $ 0.56 $ 0.44 $ 1.08 $ 1.01 $2.44 to $2.49 Impact of transaction and integration expenses 0.01 — — — 0.01 — Impact of special charges (1) 0.14 0.04 0.04 0.12 0.09 0.16 Impact of after-tax gain on sale of Kitchen Basics (0.14) — — — — — Adjusted earnings per share – diluted $ 2.53 $ 0.60 $ 0.48 $ 1.20 $ 1.11 $2.60 to $2.65 (1) 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, 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 year ended November 30, 2022 include a $13.6 million gain associated with the sale of the Kohinoor brand name. (2) Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. (3) Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes excluding transaction and integration expenses and special charges of $195.3 million and $382.6 million for the three and six months ended May 31, 2023, respectively, $146.4 million and $346.6 million for the three and six months ended May 31, 2022. 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, special charges and gain on the sale of Kitchen Basics of $817.0 million for the year ended November 30, 2022. 34 Table of Contents Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed “on a constant currency basis”, is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results). Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of the comparative year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the comparative year. Rates of constant currency growth (decline) follow: Three months ended May 31, 2023 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 3.0 % (0.6) % 3.6 % EMEA 7.2 % (2.1) % 9.3 % Asia/Pacific 18.7 % (8.7) % 27.4 % Total Consumer segment 5.3 % (1.7) % 7.0 % Flavor Solutions segment: Americas 11.9 % 0.9 % 11.0 % EMEA 8.8 % (5.8) % 14.6 % Asia/Pacific 13.4 % (8.2) % 21.6 % Total Flavor Solutions segment 11.4 % (1.3) % 12.7 % Total net sales 8.0 % (1.5) % 9.5 % Adjusted operating income: Consumer segment 23.1 % (1.4) % 24.5 % Flavor Solutions segment 66.1 % 0.4 % 65.7 % Total adjusted operating income 35.2 % (0.9) % 36.1 % 35 Table of Contents Six months ended May 31, 2023 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 3.1 % (0.5) % 3.6 % EMEA (1.4) % (4.6) % 3.2 % Asia/Pacific (2.4) % (7.6) % 5.2 % Total Consumer segment 1.6 % (2.2) % 3.8 % Flavor Solutions segment: Americas 12.3 % 0.7 % 11.6 % EMEA 7.9 % (7.7) % 15.6 % Asia/Pacific 5.8 % (7.2) % 13.0 % Total Flavor Solutions segment 10.7 % (1.8) % 12.5 % Total net sales 5.4 % (2.0) % 7.4 % Adjusted operating income: Consumer segment 12.1 % (1.9) % 14.0 % Flavor Solutions segment 23.6 % (0.1) % 23.7 % Total adjusted operating income 15.2 % (1.4) % 16.6 % To present constant currency information for the fiscal year 2023 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 2023 and are compared to the 2022 results, translated into U.S. dollars using the same 2023 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2022. To estimate the percentage change in adjusted earnings per share on a constant currency basis, a similar calculation is performed to arrive at adjusted net income divided by historical shares outstanding for fiscal year 2022 or projected shares outstanding for fiscal year 2023, as appropriate. LIQUIDITY AND FINANCIAL CONDITION Six months ended May 31, 2023 May 31, 2022 Net cash provided by operating activities $ 394.2 $ 154.4 Net cash used in investing activities (116.1) (89.2) Net cash (used in) provided by financing activities (518.1) (81.7) 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. 36 Table of Contents 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. 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 $394.2 million for the six months ended May 31, 2023, increased $239.8 million from the same period of 2022. This increase was primarily driven by higher net income, an improvement in cash provided by working capital, including the lower level of inventory and the lower amount of certain employee benefits accrued as of the prior year-end and paid in the subsequent fiscal year. As more fully described in our Annual Report on Form 10-K for the year ended November 30, 2022, 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 May 31, 2023 and November 30, 2022, the amounts due to suppliers participating in the SCF and included in trade accounts payable were approximately $327.4 million and $347.0 million, respectively. Investing Cash Flow — Cash used in investing activities of $116.1 million for the six months ended May 31, 2023 increased by $26.9 million as compared to $89.2 million for the corresponding period in 2022. Capital expenditures increased from the 2022 level of $101.6 million to $118.6 million. We expect 2023 capital expenditures to approximate $260 million to support our planned growth and other initiatives. Investing cash flow for the six months ended May 31, 2022 includes $12.1 million net cash proceeds received on the sale of the Kohinoor brand name. Financing Cash Flow — Financing activities used cash of $518.1 million for the first six months of 2023, as compared to the corresponding period in 2022 when financing activities used cash of $81.7 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: Six months ended May 31, 2023 May 31, 2022 Net increase (decrease) in short-term borrowings $ (776.8) $ 128.0 Proceeds of issuance of long-term debt, net of debt issuance costs 495.3 $ — Repayments of long-term debt (9.1) (15.3) Net cash (used in) provided by borrowing activities $ (290.6) $ 112.7 During the six months ended May 31, 2023, we issued $500.0 million of 4.95% notes due 2033, with net cash proceeds received of $496.4 million. The following table outlines the activity in our share repurchase program for the six months ended May 31, 2023 and 2022 (in millions): 2023 2022 Number of shares of common stock repurchased 0.23 0.13 Dollar amount $ 18.6 $ 12.9 As of May 31, 2023, $518.6 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 six months ended May 31, 2023, we received proceeds of $11.1 million from exercised stock options as compared to $36.1 million received in the corresponding 2022 period. We repurchased $10.8 million and $19.4 million of common stock during the six months ended May 31, 2023 and 2022, respectively, in conjunction with employee tax withholding requirements. 37 Table of Contents We increased dividends paid to $209.2 million, or a per share quarterly dividend of $0.39, in the first six months of 2023 from $198.2 million, or a per share quarterly dividend of $0.37, of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors. Most of our cash is in our subsidiaries outside of the U.S. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and any possible future acquisitions. At May 31, 2023 and 2022, we temporarily used $372.7 million and $158.1 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 typically lower at the end of a quarter. The average short-term borrowings outstanding for the three months ended May 31, 2023 and 2022 were $1,315.9 million and $890.7 million, respectively. Total average debt outstanding for the three months ended May 31, 2023 and 2022 was $5,287.5 million and $5,445.7 million, respectively. The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At May 31, 2023, the exchange rates for the British pound sterling, Euro, and Polish zloty were higher than the U.S. dollar at November 30, 2022. At May 31, 2023, the exchange rate for the Canadian dollar, Chinese renminbi, and Australian dollar were lower than the U.S. dollar at November 30, 2022. 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. In April 2023, we issued $500 million aggregate principal amount of 4.95% unsecured senior notes due 2033. Interest is payable semiannually in April and October of each year. The net proceeds received from the issuance of this note of $496.4 million was used to repay a portion of the Company's outstanding commercial paper borrowings. Our committed revolving credit facilities include a five-year $1.5 billion revolving credit facility, which will expire in June 2026 and a 364-day $500 million revolving credit facility, which was entered into in June 2023 and will expire in June 2024. The 364-day $500 million revolving credit facility that was entered into in July 2022 and was scheduled to expire in July 2023 was cancelled in conjunction with our entry into the June 2023 $500 million 364-day revolving credit facility. The current pricing for the five-year credit facility, on a fully drawn basis, is Term SOFR plus 1.25%. The pricing of that credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to Term SOFR plus 1.75%. The current pricing for the 364-day credit facility, on a fully drawn basis, is Term SOFR plus 1.23%. The pricing of that credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to Term SOFR plus 1.60%. The provisions of each 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 either revolving credit facilities for the foreseeable future. 38 Table of Contents 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 periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. In addition, 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. 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 most significant debt service obligation is the maturity of our $250.0 million, 3.50% notes due in September 2023. Our other cash requirements include raw material purchases, lease payments, income taxes, anticipated quarterly dividends, and pension and postretirement benefits, as well as other contractual obligations. 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 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. 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 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, 2022. 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, 2022. 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, 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” and similar expressions. 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; 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, streamlining actions, including our GOE program and global enablement initiative; the impact of the ongoing conflict between Russia and Ukraine, 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, 39 Table of Contents 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, and quarterly dividends; our 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 success of our brand marketing, new products, category management and customer engagement plans; 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 and streamlining actions, including our GOE 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 ongoing conflict between Russia and Ukraine, 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, including stability of financial institutions, availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; the effects of increased level of debt service following the Cholula and FONA acquisitions as well as the effects that such increased debt service may have on the company's ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; risks associated with the phase-out of LIBOR; impairments of indefinite-lived intangible assets; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; the stability of credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; the company's inability to successfully implement our business transformation initiative; fundamental changes in tax laws; including interpretations and assumptions we have made, and guidance that may be issued, 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.