MCCORMICK & CO INC 10-K

ITEM 7. 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 contained in Item 8 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. The dollar and share information in the charts and tables in MD&A are in millions, except per share data. McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food and beverage industry–retailers, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and flavor solutions, as described in Item 1 of this report. 20 Our long-term annual growth objectives in constant currency are to increase sales 4% to 6%, increase adjusted operating income 7% to 9% and increase adjusted earnings per share 9% to 11%. Our actual results for a year can vary from our long-term growth objectives. Over time, we expect to grow sales with similar contributions from: 1) our base business – driven by brand marketing support, category management, and differentiated customer engagement; 2) new products; and 3) acquisitions. Base Business – We expect to drive sales growth by optimizing our brand marketing investment through improved speed, quality, and effectiveness. We measure the return on our brand marketing investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and help them discover new products. New Products – For our consumer segment, we believe that scalable and differentiated innovation continues to be one of the best ways to distinguish our brands from our competition, including private label. We are introducing products for every type of cooking occasion, from gourmet, premium items to convenient and value-priced flavors. For flavor solutions customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. We have a strong pipeline of flavor solutions products aligned with our customers’ new product launch plans, many of which include clean-label, organic, natural, and “better-for-you” innovation. With over 20 product innovation centers around the world, we are supporting the growth of our brands and those of our flavor solutions customers with products that appeal to local consumers. Acquisitions – Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2018, we have completed two acquisitions, including our December 20, 2020 acquisition of FONA International, LLC and certain of its affiliates (FONA) and our November 30, 2020 acquisition of the parent company of Cholula Hot Sauce ® (Cholula) from L Catterton. These acquisitions are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that build scale where we currently have presence in both developed and emerging markets. Executive Summary In 2023, we achieved net sales growth of 4.9% over the 2022 level due to the following factors: • Pricing actions, taken in response to the inflationary cost environment, contributed 8.5% to the increase in net sales. • Volume and product mix unfavorably impacted our net sales growth by 2.6%, exclusive of divestitures. Both our consumer and flavor solutions segments experienced unfavorable volume and product mix of 3.9% and 1.0%, respectively, including the impact of price elasticity. Our decisions to exit our consumer operations in Russia and certain low margin businesses contributed approximately 0.9% to the unfavorable impact of volume and product mix. • Divestitures negatively impacted our net sales increase by 0.4%. • Net sales growth was negatively impacted by fluctuations in currency rates that decreased sales growth by 0.6%. Excluding this impact, we grew sales by 5.5% over the prior year on a constant currency basis. Operating income was $963.0 million in 2023 and $863.6 million in 2022. We recorded $61.2 million and $51.6 million of special charges in 2023 and 2022, respectively, related to organization and streamlining actions. In 2022, we also recorded $2.2 million of transaction and integration expenses related to our acquisition of FONA that reduced operating income. In 2023, the effects of pricing actions taken in response to increased costs and cost savings from our GOE and CCI programs during 2022 were partially offset by increased employee incentive compensation and higher distribution costs. Excluding special charges and transaction and integration expenses related to our acquisition of FONA, adjusted operating income was $1,024.2 million in 2023, an increase of 11.6%, compared to $917.4 million in the year-ago period. In constant currency, adjusted operating income increased 12.0%. For further details and a reconciliation of non-GAAP to reported amounts, see the subsequent discussion under the heading "Non-GAAP Financial Measures". Diluted earnings per share was $2.52 in 2023 and 2022. In 2023, diluted earnings per share was driven primarily by the impact of higher operating income, an increase in interest expense, the unfavorable effects of a decrease in other income, and an increase in income from unconsolidated operations. Special charges and transaction and integration expenses lowered earnings per share by $0.18 and $0.15 in 2023 and 2022, respectively. A gain on our 21 sale of a business increased earnings per share by $0.14 in 2022. Excluding the effects of special charges, transaction and integration expenses, and the gain realized from the sale of a business, adjusted diluted earnings per share was $2.70 in 2023 and $2.53 in 2022, or an increase of 6.7%. Net cash provided by operating activities was $1,237.3 million, $651.5 million and $828.3 million in 2023, 2022, and 2021, respectively. In 2023, we continued to have a balanced use of cash for debt repayment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 38 years, and to fund capital expenditures and acquisitions. In 2023, the return of cash to our shareholders through dividends and share repurchases was $454.2 million. A detailed review of our fiscal 2023 performance compared to fiscal 2002 appears in the section titled “Results of Operations – 2023 Compared to 2022”. Recent Events During fiscal 2022 and fiscal 2023, we experienced inflationary cost increases in our commodities, packaging materials and transportation costs. While we continued to experience significant input cost inflation throughout fiscal 2023, our pricing actions, combined with cost savings from our Global Operating Effectiveness (GOE) program and our Comprehensive Continuous Improvement (CCI) program assisted in a 180-basis point recovery to gross margin. Additionally, in some instances, the pricing actions we take have been impacted by consumer behavior, or price elasticity, which unfavorably impacts our sales volume and mix. While we are seeing moderation in input cost inflation, we do expect inflationary pressures to persist into fiscal 2024. However, we anticipate GOE program and CCI program-led cost savings as well as previously implemented pricing actions to mitigate those inflationary pressures. We will also be lapping 2023 price increases and anticipate favorable net price realization in 2024. We are fueling our investment in growth with cost savings from our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization, as well as savings from the organization and streamlining actions described in note 3 of notes to our consolidated financial statements that includes our GOE program. Our CCI and GOE programs both delivered cost savings in 2023. Our CCI program funds brand marketing support, product innovation and other growth initiatives. We expect our CCI program, GOE program, and organization and streamlining actions to deliver additional savings in 2024. We are making investments to build the McCormick of the future, including in our Global Business Services (GBS) organization, to transform McCormick through globally aligned, innovative services to enable growth. As technology provides the backbone for this greater process alignment, information sharing and scalability, we are also making investments in our information systems. We continue to progress our global enterprise resource planning (ERP) replacement program which will enable us to accelerate the transformation of our ways of working and provide a scalable platform for growth. We will concentrate our global ERP focus on our operations in the U.S. over the next several years, or through 2027. We expect that our annual capital expenditures, including the capitalized software associated with our ERP program, over the next several years will continue to approximate 4% of our sales. We expect that our operating expenses associated with our global ERP program through 2027 will approximate $35 million to $50 million annually. 2024 Outlook In 2024, we expect net sales to range from a decline of 2% to 0% from our net sales in 2023 including a 1% unfavorable impact of foreign currency rates, or to range from a decline of 1% to an increase of 1% on a constant currency basis. We anticipate that the 2024 sales change will include a favorable impact from previously implemented pricing actions. We anticipate that our volume and product mix will be impacted by the divestiture of our Giotti canning business in the third quarter of last year, and the pruning of low margin businesses. We expect our 2024 gross profit margin to range from 50 basis points to 100 basis points higher than our gross profit margin of 37.6% in 2023. The projected 2024 increase in gross profit margin is principally due to the net effect of (i) the favorable impact of pricing actions, (ii) the favorable impacts of product mix, (iii) the favorable impact of anticipated Global Operating Effectiveness Program and CCI cost savings, and (iv) a low single-digit percentage impact of inflation in 2024 compared to 2023. In 2024, we expect an increase in operating income of 8% to 10%, which includes a 1% unfavorable impact from foreign currency rates, over the 2023 level. The projected 2024 change in operating income includes the effects of 22 the anticipated increase in our gross profit margin as well as SG&A cost savings from our CCI and GOE programs, which will be partially offset by our investments to drive volume growth, including brand marketing. We expect our brand marketing investments in 2024 to increase in the high-single digits over the 2023 level. We also expect approximately $15 million of special charges in 2024 that relate to previously announced organization and streamlining actions; in 2023, special charges were $61.2 million. Excluding special charges, we expect 2024’s adjusted operating income to increase by 3% to 5%, which includes a 1% unfavorable impact from foreign currency rates, or to increase by 4% to 6% on a constant currency basis. We estimate that our 2024 effective tax rate, including the net favorable impact of anticipated discrete tax items, will be 22% as compared to 21.8% in 2023. Excluding projected taxes associated with special charges, we estimate that our adjusted effective tax rate will be approximately 22% in 2024, or comparable to an adjusted effective tax rate of 22.0% in 2023. We also expect that our income from unconsolidated operations, including the performance of our largest joint venture, McCormick de Mexico, will increase by a mid-teens percentage rate over the 2023 level. Diluted earnings per share was $2.52 in 2023. Diluted earnings per share for 2024 is projected to range from $2.76 to $2.81. Excluding the per share impact of special charges of $61.2 million adjusted diluted earnings per share was $2.70 in 2023. Adjusted diluted earnings per share, excluding an estimated per share impact from special charges of $0.04, is projected to range from $2.80 to $2.85 in 2024, or an increase of 4% to 6% over adjusted diluted earnings per share of $2.70 in 2023. RESULTS OF OPERATIONS—2023 COMPARED TO 2022 2023 2022 Net sales $ 6,662.2 $ 6,350.5 Percent growth 4.9 % 0.5 % Components of percent growth in net sales – increase (decrease): Pricing actions 8.5 % 7.7 % Volume and product mix (2.6) % (4.5) % Acquisitions — % 0.2 % Divestiture (0.4) % (0.4) % Foreign exchange (0.6) % (2.5) % Sales for 2023 increased by 4.9% from 2022 and by 5.5% 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 8.5% compared to the prior year period. Unfavorable volume and product mix decreased sales by 2.6% with declines in both our consumer and flavor solutions segments. Our decisions to exit our consumer operations in Russia and discontinue certain low margin businesses contributed approximately 0.9% to the unfavorable impact of volume and product mix. The divestiture of our Kitchen Basics business and the Giotti canning business unfavorably impacted sales by 0.4% as compared to the prior year. Sales were impacted by unfavorable foreign currency rates that decreased sales by 0.6% in 2023 as compared to the prior year and are excluded from our measure of sales growth of 5.5% on a constant currency basis. 2023 2022 Gross profit $ 2,502.5 $ 2,274.5 Gross profit margin 37.6 % 35.8 % In 2023, gross profit increased by $228.0 million, or 10.0%, from 2022. Our gross profit margin for 2023 was 37.6%, an increase of 180 basis points from 35.8% in 2022. The increase 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, higher conversion costs, and unfavorable segment mix, all as compared to the 2022 period. 2023 2022 Selling, general & administrative expense $ 1,478.3 $ 1,357.1 Percent of net sales 22.2 % 21.4 % 23 Selling, general and administrative (SG&A) expense increased by $121.2 million in 2023 as compared to 2022. That increase in SG&A expense was primarily a result of higher performance-based employee incentive expense, increased distribution costs, increased selling and marketing costs, and higher advertising and promotional spend which 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 2022. SG&A as a percent of net sales for 2023 increased by 80 basis points from the prior year level, as the net impact of the previously mentioned factors was partially offset by the impact of the higher sales base. 2023 2022 Total special charges $ 61.2 $ 51.6 We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements. During 2023, we recorded $61.2 million of special charges, consisting principally of (i) $42.8 million associated with the GOE program, (ii) $8.7 million associated with the transition of a manufacturing facility in EMEA, and (iii) streamlining actions of $8.8 million in the Americas region and $0.9 million in the EMEA region. During 2022, we recorded $51.6 million of special charges, consisting principally of (i) $23.3 million associated with the exit of our consumer business in Russia, (ii) $21.5 million associated with the transition of a manufacturing facility in EMEA, and (iii) streamlining actions of $8.0 million in the Americas region and $7.1 million in the EMEA region, and (iv) $5.6 million associated with a U.S. voluntary retirement program. As more fully described in note 3 of our notes of consolidated financial statements, these charges were partially offset by a $13.6 million gain on the sale of our Kohinoor brand that was associated with the rice product line in India that we exited in the fourth quarter of fiscal 2021, as well as a reversal of $2.2 million of estimated costs associated with that rice product line exit upon settlement of a supply agreement related to that product line. Details with respect to the composition of special charges are included in the accompanying notes to our financial statements contained in Item 8 of this report. 2023 2022 Total transaction and integration expenses $ — $ 2.2 During 2022, we recorded integration expenses of $2.2 million related to our acquisition of FONA. 2023 2022 Operating income $ 963.0 $ 863.6 Percent of net sales 14.5 % 13.6 % Operating income increased by $99.4 million, or 11.5%, from $863.6 million in 2022 to $963.0 million in 2023. Special charges and transaction and integration expenses increased by $7.4 million in 2023, as compared to 2022, and negatively impacted operating income. Operating income as a percentage of net sales increased by 90 basis points in 2023, to 14.5% in 2023 from 13.6% in 2022 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was $1,024.2 million in 2023 as compared to $917.4 million in 2022, an increase of $106.8 million or 11.6% from the 2022 level. Adjusted operating income as a percentage of net sales increased by 100 basis points in 2023, to 15.4% in 2023 from 14.4% in 2022. 2023 2022 Interest expense $ 208.2 $ 149.1 Other income, net 43.9 98.3 Interest expense was $59.1 million higher in 2023 as compared to the prior year as the effects of the higher interest rate environment more than offset lower average borrowing levels. Other income, net for 2022 included a $49.6 million gain on the sale of our Kitchen Basics business and $18.7 million associated with the settlement of treasury lock arrangements both of which are more fully described in the notes to the accompanying condensed 24 consolidated financial statements. These were partially offset by higher interest income in 2023, also principally associated with the higher interest rate environment. 2023 2022 Income from consolidated operations before income taxes $ 798.7 $ 812.8 Income tax expense 174.5 168.6 Effective tax rate 21.8 % 20.7 % The effective tax rate was 21.8% in 2023 as compared to 20.7% in 2022. The increase in our effective tax rate was principally attributable to the effects of the lower level of net discrete tax benefits in 2023 as compared to 2022. Net discrete tax benefits were $9.6 million in 2023, a decrease of $18.0 million from $27.6 million in 2022. Discrete tax benefits in both the 2023 and 2022 periods included excess tax benefits associated with stock-based compensation ($0.8 million and $9.1 million in 2023 and 2022, respectively), the reversal of reserves for unrecognized tax benefits ($5.6 million and $6.9 million in 2023 and 2022, respectively) due to, in 2023 the net reversal of reserves for unrecognized tax benefits and related interest in non-U.S. jurisdictions and tax benefits related to a tax settlement, and in both years due to the expiration of the statutes of limitations, the release of valuation allowances due to a change in judgment about realizability of deferred tax assets ($3.2 million and $4.6 million in 2023 and 2022, respectively), and other discrete items. In 2023, other discrete tax benefits included $0.9 million of tax benefits resulting from an adjustment to a prior year tax accrual, and related deferred taxes, based on the final returns filed and $1.8 million of tax expense related to certain unremitted prior year earnings. In 2022, other discrete tax benefits included $3.9 million related to the revaluation of deferred taxes resulting from enacted legislation and $2.3 million of tax benefits related to the sale of an asset associated with a previously exited line of business. See note 13 of notes to our consolidated financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate. 2023 2022 Income from unconsolidated operations $ 56.4 $ 37.8 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased by $18.6 million in 2023 from the prior year. The increase for 2023 as compared to 2022 was primarily driven by higher earnings of McCormick de Mexico. We own 50% of most of our unconsolidated joint ventures, including our largest joint venture, McCormick de Mexico, that comprised 95% and 84% of the income of our unconsolidated operations in 2023 and 2022, respectively. We reported diluted earnings per share of $2.52 in 2023 and 2022. The table below outlines the major components of the change in diluted earnings per share from 2022 to 2023. 2022 Earnings per share—diluted $ 2.52 Increase in operating income 0.31 Increase in special charges, net of taxes (0.04) Decrease in transaction and integration expenses, net of taxes 0.01 Impact from gain on the sale of a business, net of taxes (0.14) Decrease in other income, excluding gain on the sale of a business (0.01) Increase in interest expense (0.17) Increase in income from unconsolidated operations 0.07 Impact of change in effective income tax rate, excluding taxes on special charges, transaction and integration expenses, and the sale of a business (0.03) 2023 Earnings per share—diluted $ 2.52 Results of Operations—Segments We measure the performance of our business segments based on operating income, excluding special charges and transaction and integration expenses related to our acquisitions. See note 16 of notes to our consolidated 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 related to our acquisitions. In 25 the following discussion, we refer to our previously described measure of segment profit as "Segment operating income." Consumer Segment 2023 2022 Net sales $ 3,807.3 $ 3,757.9 Percent - increase (decline) 1.3 % (4.6) % Components of percent change in net sales - increase (decrease): Pricing actions 6.5 % 7.4 % Volume and product mix (3.9) % (9.3) % Divestiture (0.5) % (0.6) % Foreign exchange (0.8) % (2.1) % Segment operating income $ 735.5 $ 710.7 Segment operating income margin 19.3 % 18.9 % Sales of our consumer segment in 2023 increased by 1.3% as compared to 2022 and increased by 2.1% on a constant currency basis. Pricing actions taken in our consumer business in all regions increased sales by 6.5% in 2023 as compared to 2022. Lower volume and unfavorable product mix decreased sales by 3.9%, driven primarily by the impact of price elasticity. Volume and product mix includes the unfavorable impact of our decisions to exit our consumer business in Russia and discontinue certain low margin businesses of 1.3%. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.5% as compared to 2022. An unfavorable impact from foreign currency rates decreased sales by 0.8% compared to the prior year and is excluded from our measure of sales increase of 2.1% on a constant currency basis. In the Americas region, consumer sales increased 0.4% in 2023 as compared to 2022 and increased by 0.8% on a constant currency basis. Pricing actions, taken in response to inflationary cost environment, increased sales by 5.8% as compared to the prior year period. Unfavorable volume and product mix decreased sales by 4.3% as compared to the corresponding period in 2022, including the unfavorable impact of price elasticity and the effects of the inflationary environment impacting consumer spending. This reduction included an approximately 1.2% impact of our decision to discontinue a low margin business. The sale of our Kitchen Basics business unfavorably impacted sales by 0.7% as compared to 2022. The unfavorable impact of foreign currency rates decreased sales by 0.4% in the year and is excluded from our measure of sales increase of 0.8% on a constant currency basis. In the EMEA region, consumer sales increased 7.1% in 2023 as compared to 2022 and increased by 6.2% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 11.1% as compared to 2022. Sales were impacted by unfavorable volume and product mix that decreased sales by 4.9% from the prior year level, including a 2.0% impact associated with the exit of our consumer operations in Russia. The favorable impact of foreign currency exchange rates increased sales by 0.9% compared to 2022 and is excluded from our measure of sales increase of 6.2% on a constant currency basis. In the APAC region, consumer sales decreased 1.1% in 2023 as compared to 2022 and increased by 5.1% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 5.1% as compared to the prior year period. Volume and product mix were comparable to 2022. The unfavorable impact from foreign currency rates decreased sales by 6.2% compared to the year-ago period and is excluded from our measure of sales increase of 5.1% on a constant currency basis. Segment operating income for our consumer segment increased by $24.8 million, or 3.5%, in 2023 as compared to 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, favorable product mix within the segment, and CCI-led and GOE cost savings, which were partially offset by higher commodity costs and higher SG&A expenses, including higher performance-based employee incentive expenses, increased distribution costs, and increased advertising and promotional expenses, all as compared to the prior year. Segment operating margin for our consumer segment increased by 40 basis points in 2023 to 19.3%, driven by an increase in consumer gross profit 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, all as compared to the 2022 level. On a constant currency basis, segment operating income for our consumer segment increased by 4.4% in 2023, as compared to 2022. 26 Flavor Solutions Segment 2023 2022 Net sales $ 2,854.9 $ 2,592.6 Percent growth 10.1 % 8.9 % Components of percent growth in net sales – increase (decrease): Pricing actions 11.4 % 8.2 % Volume and product mix (1.0) % 3.5 % Acquisition — % 0.4 % Divestiture (0.1) % — % Foreign exchange (0.2) % (3.2) % Segment operating income $ 288.7 $ 206.7 Segment operating income margin 10.1 % 8.0 % Sales of our flavor solutions segment increased 10.1% in 2023 as compared to 2022 and increased by 10.3% on a constant currency basis. Pricing actions, taken in response to increased costs, across all regions increased sales by 11.4% in 2023 and was partially offset by 1.0% of unfavorable volume and product mix, both in comparison to the prior year levels. The divestiture of our Giotti canning business unfavorably impacted sales by 0.1% as compared to the prior year. An unfavorable impact from foreign currency rates decreased sales by 0.2% compared to the prior year and is excluded from our measure of sales growth of 10.3% on a constant currency basis. In the Americas region, flavor solutions sales increased by 10.7% during 2023 as compared to 2022 and increased by 9.6% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 9.8% during 2023, as compared to the prior year. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 0.2% during 2023, including the effects of growth in sales to packaged food and beverage and nutrition and healthcare companies, as compared to the prior year. A favorable impact from foreign currency rates increased sales by 1.1% compared to 2022 and is excluded from our measure of sales growth of 9.6% on a constant currency basis. In the EMEA region, flavor solutions sales in 2023 increased by 10.3% as compared to 2022 and increased by 12.2% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 18.8% in 2023 as compared to the prior period level. Unfavorable volume and product mix decreased segment sales by 5.9% in 2023 as compared to 2022, including the effects of the inflationary environment impacting consumer spending at quick service restaurants and packaged food and beverage companies and approximately 1.3% impact of our decision to discontinue a low margin business. The divestiture of our Giotti canning business unfavorably impacted sales by 0.7% as compared to the prior year. An unfavorable impact from foreign currency rates decreased sales by 1.9% compared to 2022 and is excluded from our measure of sales growth of 12.2% on a constant currency basis. In the APAC region, flavor solutions sales increased 5.6% in 2023 as compared to 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 7.0% as compared to the prior year period. Favorable volume and product mix increased sales by 4.0%, driven by higher sales to quick service restaurant customers, partially impacted by the timing of customers' promotional activities. An unfavorable impact from foreign currency rates decreased sales by 5.4% compared to 2022 and is excluded from our measure of sales growth of 11.0% on a constant currency basis. Segment operating income for our flavor solutions segment increased by $82.0 million, or 39.7%, in 2023 as compared to 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 in response to increased costs, favorable product mix within the segment, and CCI-led and GOE cost savings which more than offset increased commodity and conversion costs and the higher level of SG&A expenses, including higher performance-based employee incentive expense and increased distribution costs, all as compared to the prior year. Segment operating margin for our flavor solutions segment increased by 210 basis points in 2023 to 10.1%, driven by a higher segment gross margin, as previously described. On a constant currency basis, segment operating income for our flavor solutions segment increased by 38.5% in 2023, as compared to 2022. 27 RESULTS OF OPERATIONS—2022 COMPARED TO 2021 2022 2021 Net sales $ 6,350.5 $ 6,317.9 Percent growth 0.5 % 12.8 % Components of percent growth in net sales – increase (decrease): Volume and product mix (4.5) % 5.5 % Pricing actions 7.7 % 0.8 % Acquisitions 0.2 % 4.1 % Divestiture (0.4) % — % Foreign exchange (2.5) % 2.4 % Sales for 2022 increased by 0.5% from 2021 and by 3.0% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). Unfavorable volume and product mix decreased sales by 4.5% with growth in our flavor solutions segment being more than offset by a decline in our consumer segment. The impact of restrictive measures related to COVID-19 resurgences in China, the exit of our consumer operations in Russia, and the exit of our rice product line in India, contributed approximately 1.0% to that decline as compared to 2021. In addition, pricing actions, taken in response to the inflationary cost environment, added 7.7% to sales, as compared to the prior year. Acquisitions and a divestiture added to and decreased sales by 0.2% and 0.4%, respectively, both as compared to the prior year. Sales were impacted by unfavorable foreign currency rates that decreased sales by 2.5% in 2022 as compared to the prior year and are excluded from our measure of sales growth of 3.0% on a constant currency basis. 2022 2021 Gross profit $ 2,274.5 $ 2,494.6 Gross profit margin 35.8 % 39.5 % In 2022, gross profit decreased by $220.1 million, or 8.8%, from 2021. Our gross profit margin for 2022 was 35.8%, a decrease of 370 basis points from 39.5% in 2021. The decline was driven by the margin dilutive impact of pricing actions taken in response to the inflationary cost environment of approximately 240 basis points, increased commodity, packaging materials and transportation costs, higher conversion costs and a less favorable product mix both within and between our segments, each as compared to 2021. These unfavorable impacts were partially offset by cost savings led by our CCI program. In addition, our gross profit for 2021 was burdened by (i) $6.3 million of transaction expense, representing the amortization of the fair value adjustment to the acquired inventories of Cholula and FONA upon our sale of those acquired inventories in the first quarter of fiscal 2021 and (ii) a non-cash special charge of $4.7 million associated with the exit of a low margin business in our APAC region. Excluding those transaction and integration expenses and special charges, adjusted gross profit margin declined 390 basis points to 35.8% in 2022 from 39.7% in 2021. 2022 2021 Selling, general & administrative expense $ 1,357.1 $ 1,404.1 Percent of net sales 21.4 % 22.3 % Selling, general and administrative (SG&A) expense decreased by $47.0 million in 2022 as compared to 2021. That decrease in SG&A expense was primarily a result of lower performance-based employee incentive expenses and variable selling costs, both as compared to the prior year. This decrease was partially offset by (i) higher distribution costs; (ii) unfavorable investment results associated with non-qualified retirement plan assets; and (iii) higher investment associated with the implementation of our global enterprise resource planning (ERP) platform. SG&A as a percent of net sales for 2022 decreased by 90 basis points from the prior year level, due primarily to the net impact of the previously mentioned factors. 2022 2021 Special charges included in cost of goods sold $ — $ 4.7 Other special charges 51.6 46.4 Total special charges $ 51.6 $ 51.1 We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the 28 future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements. During 2022, we recorded $51.6 million of special charges, consisting principally of (i) $23.3 million associated with the exit of our consumer business in Russia, (ii) $21.5 million associated with the transition of a manufacturing facility in EMEA, and (iii) streamlining actions of $8.0 million in the Americas region and $7.1 million in the EMEA region, and (iv) $5.6 million associated with a U.S. voluntary retirement program. As more fully described in note 3 of our notes of consolidated financial statements, these charges were partially offset by a $13.6 million gain on the sale of our Kohinoor brand that was associated with the rice product line in India that we exited in the fourth quarter of fiscal 2021, as well as a reversal of $2.2 million of estimated costs associated with that rice product line exit upon settlement of a supply agreement related to that product line. During 2021, we recorded $51.1 million of special charges, consisting principally of (i) $19.5 million associated with our exit of our rice product line in India (ii) $6.2 million associated with the transition of a manufacturing facility in EMEA, (iii) streamlining actions of $10.3 million in the Americas region and $4.8 million in the EMEA region, and (iv) a non-cash asset impairment charge of $6.0 million associated with an administrative site that was sold in conjunction with our decision to employ a hybrid work environment. Details with respect to the composition of special charges are including the accompanying notes to our financial statements contained in Item 8 of this report. 2022 2021 Transaction expenses included in cost of goods sold $ — $ 6.3 Other transaction and integration expenses 2.2 29.0 Total transaction and integration expenses $ 2.2 $ 35.3 During 2022, we recorded $2.2 million of integration expenses related to our acquisition of FONA. During 2021, we recorded transaction and integration expenses of $35.3 million related to our acquisitions of Cholula and FONA. These costs consisted of (i) $6.3 million of amortization of the acquisition-date fair value adjustment of inventories that is included in Cost of goods sold, (ii) $13.8 million of other transaction expenses primarily related to outside advisory, service and consulting costs, and (iii) $15.2 million of integration expenses. 2022 2021 Operating income $ 863.6 $ 1,015.1 Percent of net sales 13.6 % 16.1 % Operating income decreased by $151.5 million, or 14.9%, from $1,015.1 million in 2021 to $863.6 million in 2022. Special charges and transaction and integration expenses decreased by $32.6 million in 2022, as compared to 2021, and positively impacted operating income. Operating income as a percentage of net sales declined by 250 basis points in 2022, to 13.6% in 2022 from 16.1% in 2021 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was $917.4 million in 2022 as compared to $1,101.5 million in 2021, a decrease of $184.1 million or 16.7% from the 2021 level. Adjusted operating income as a percentage of net sales declined by 300 basis points in 2022, to 14.4% in 2022 from 17.4% in 2021. 2022 2021 Interest expense $ 149.1 $ 136.6 Other income, net 98.3 17.3 Interest expense was $12.5 million higher in 2022 as compared to the prior year as an increase in interest rates during the latter part of 2022 was partially offset by a decrease in average total borrowings. Other income, net for 2022 increased by $81.0 million, including the impact of a $49.6 million gain on the sale of our Kitchen Basics business and $18.7 million associated with the settlement of treasury lock arrangements, both of which are more fully described in the notes to the accompanying financial statements. The remaining increase was principally driven by an increase in interest income, as compared to the prior year. 29 2022 2021 Income from consolidated operations before income taxes $ 812.8 $ 895.8 Income tax expense 168.6 192.7 Effective tax rate 20.7 % 21.5 % The effective tax rate was 20.7% in 2022 as compared to 21.5% in 2021. The decrease in our effective tax rate was principally attributable to the effects of the lower level of income before income taxes and the higher level of net discrete tax benefits in 2022 as compared to 2021. Net discrete tax benefits were $27.6 million in 2022, an increase of $1.0 million from $26.6 million in 2021. Discrete tax benefits in both the 2022 and 2021 periods included excess tax benefits associated with stock-based compensation ($9.1 million and $4.3 million in 2022 and 2021, respectively), the reversal of reserves for unrecognized tax benefits ($6.9 million and $22.5 million in 2022 and 2021, respectively) due to, in 2021, the partial release of certain reserves for an unrecognized tax benefit and related interest in a non-U.S. jurisdiction based on a change in our assessment of the technical merits of that position associated with the availability of new information, and in both years due to the expiration of the statutes of limitations, the release of valuation allowances due to a change in judgment about realizability of deferred tax assets ($4.6 million and $4.4 million in 2022 and 2021, respectively), tax benefits related to the revaluation of deferred taxes resulting from enacted legislation ($3.9 million and $4.0 million in 2022 and 2021, respectively), and other discrete items. In 2022, other discrete tax items included $2.3 million of tax benefits related to the sale of an asset associated with a previously exited line of business. In 2021, other discrete tax items included $10.4 million of deferred state tax expense directly related to our December 2020 acquisition of FONA. See note 13 of notes to our consolidated financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate. 2022 2021 Income from unconsolidated operations $ 37.8 $ 52.2 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, decreased $14.4 million in 2022 from the prior year. We own 50% of most of our unconsolidated joint ventures, including our largest joint venture, McCormick de Mexico, that comprised 84% and 62% of the income of our unconsolidated operations in 2022 and 2021, respectively. The decrease for 2022 as compared to 2021 was primarily driven by the after-tax gain of $13.4 million on the sale of an unconsolidated operation that occurred in 2021. We reported diluted earnings per share of $2.52 in 2022, compared to $2.80 in 2021. The table below outlines the major components of the change in diluted earnings per share from 2021 to 2022. The decrease in operating income in the table below includes the impact from unfavorable currency exchange rates in 2022. 2021 Earnings per share—diluted $ 2.80 Decrease in operating income (0.54) Decrease in special charges, net of taxes 0.02 Decrease in transaction and integration expenses, including impact of net discrete tax item related to FONA acquisition 0.13 Gain on the sale of a business, net of taxes 0.14 Increase in other income, excluding gain on the sale of a business 0.09 Decrease in income from unconsolidated operations, including the after-tax gain on sale of unconsolidated operation of $0.05 per diluted share in 2021 (0.05) Impact of change in effective income tax rate, excluding taxes on special charges, transaction and integration expenses, and the sale of a business (0.03) Increase in interest expense (0.04) 2022 Earnings per share—diluted $ 2.52 Results of Operations—Segments 30 Consumer Segment 2022 2021 Net sales $ 3,757.9 $ 3,937.5 Percent - (decline) increase (4.6) % 9.5 % Components of percent change in net sales – (decrease) increase: Volume and product mix (9.3) % 4.3 % Pricing actions 7.4 % 0.6 % Acquisition — % 2.4 % Divestiture (0.6) % — % Foreign exchange (2.1) % 2.2 % Segment operating income $ 710.7 $ 804.9 Segment operating income margin 18.9 % 20.4 % Sales of our consumer segment in 2022 decreased by 4.6% as compared to 2021 and decreased by 2.5% on a constant currency basis. The sales decrease was driven by lower sales of our consumer business in the Americas, EMEA and APAC regions. Lower volume and unfavorable product mix decreased sales by 9.3%. The impact of restrictive measures related to COVID-19 resurgences in China, the exit of our consumer operations in Russia, and the exit of our rice product line in India, contributed approximately 1.5% to that decline as compared to 2021. Pricing actions, taken in response to inflationary cost pressures, increased sales by 7.4% in 2022 as compared to the prior year level. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.6% as compared to 2021. An unfavorable impact from foreign currency rates decreased sales by 2.1% compared to the prior year and is excluded from our measure of sales decline of 2.5% on a constant currency basis. In the Americas region, consumer sales decreased 1.1% in 2022 as compared to 2021 and decreased by 0.9% on a constant currency basis. Unfavorable volume and product mix decreased sales by 8.6% as compared to the corresponding period in 2021, including the unfavorable impact of price elasticity. Pricing actions, taken in response to higher costs, increased sales by 8.6% as compared to the prior year. The sale of our Kitchen Basics business unfavorably impacted sales by 0.9% as compared to 2021. The unfavorable impact of foreign currency rates decreased sales by 0.2% in the year and is excluded from our measure of sales decline of 0.9% on a constant currency basis. In the EMEA region, consumer sales decreased 14.7% in 2022 as compared to 2021 and decreased by 5.1% on a constant currency basis. Unfavorable volume and product mix decreased sales by 10.5% as compared to the corresponding period of 2021. The decrease was driven by lower sales of our consumer business in France as compared to the prior year. The exit of our consumer operations in Russia also contributed approximately 2.1% to the region's decline in volume and mix. Pricing actions, taken in response to the inflationary cost environment, increased sales by 5.4% as compared to the 2021 period. The unfavorable impact of foreign currency exchange rates decreased sales by 9.6% compared to 2021 and is excluded from our measure of sales decline of 5.1% on a constant currency basis. In the APAC region, consumer sales decreased 10.1% in 2022 as compared to 2021 and decreased by 8.1% on a constant currency basis. Lower volume and unfavorable product mix decreased sales by 11.5% as compared to the corresponding period in 2021. The impact of restrictive measures related to COVID-19 resurgences in China and the exit of our rice product line in India, contributed approximately 9.5% to that decline as compared to 2021. Pricing actions, taken in response to the inflationary cost environment, increased sales by 3.4% as compared to the prior year. The unfavorable impact from foreign currency rates decreased sales by 2.0% compared to the year-ago period and is excluded from our measure of sales decline of 8.1% on a constant currency basis. Segment operating income for our consumer segment decreased by $94.2 million, or 11.7%, in 2022 as compared to 2021. The decrease in segment operating income was driven by lower sales and increased commodity, transportation and conversion costs, partially offset by pricing actions in response to increased costs, CCI-led cost savings and lower performance-based employee incentive expenses, all as compared to the prior year. Segment operating margin for our consumer segment decreased by 150 basis points in 2022 to 18.9%, driven by a decrease in consumer gross profit margin, including the margin dilutive impact of pricing actions, the impact of the inflationary cost environment, and higher conversion costs, which was partially offset by the impact of CCI-led cost savings, all as compared to the 2021 level. On a constant currency basis, segment operating income for our consumer segment decreased by 10.9% in 2022, as compared to 2021. 31 Flavor Solutions Segment 2022 2021 Net sales $ 2,592.6 $ 2,380.4 Percent growth 8.9 % 18.7 % Components of percent change in net sales – increase (decrease): Volume and product mix 3.5 % 7.2 % Pricing actions 8.2 % 1.4 % Acquisitions 0.4 % 7.3 % Foreign exchange (3.2) % 2.8 % Segment operating income $ 206.7 $ 296.6 Segment operating income margin 8.0 % 12.5 % Sales of our flavor solutions segment increased 8.9% in 2022 as compared to 2021 and increased by 12.1% on a constant currency basis. Volume and product mix contributed 3.5% of the increase in addition to pricing actions which added 8.2% to sales for 2022, both in comparison to the prior year levels. The incremental impact of our acquisition of FONA added 0.4% to segment sales for 2022. An unfavorable impact from foreign currency rates decreased sales by 3.2% compared to the prior year and is excluded from our measure of sales growth of 12.1% on a constant currency basis. In the Americas region, flavor solutions sales increased by 11.4% during 2022 as compared to 2021 and increased by 11.7% on a constant currency basis. Favorable volume and product mix increased flavor solutions sales in the Americas by 2.2% during 2022, as growth in sales to packaged food and beverage companies was partially offset by lower sales to quick service restaurants, both as compared to the year ago period. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 8.9% during 2022 as compared to the prior year. The incremental impact of our acquisition of FONA added 0.6% to segment sales for 2022. An unfavorable impact from foreign currency rates decreased sales by 0.3% compared to 2021 and is excluded from our measure of sales growth of 11.7% on a constant currency basis. In the EMEA region, flavor solutions sales in 2022 increased by 5.5% as compared to 2021 and increased by 17.2% on a constant currency basis. Favorable volume and product mix increased segment sales by 9.5% in 2022 as compared to 2021. The increase was driven by higher sales to quick service restaurants, branded foodservice and package food and beverage company customers. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 7.7% in 2022 as compared to the prior period level. An unfavorable impact from foreign currency rates decreased sales by 11.7% compared to 2021 and is excluded from our measure of sales growth of 17.2% on a constant currency basis. In the APAC region, flavor solutions sales decreased 0.2% in 2022 as compared to 2021 and increased by 5.2% on a constant currency basis. Favorable volume and product mix increased sales by 0.3%, driven by higher sales to quick service restaurant customers, partially impacted by the timing of customers' promotional activities. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 4.9% as compared to the prior year. An unfavorable impact from foreign currency rates decreased sales by 5.4% compared to 2021 and is excluded from our measure of sales growth of 5.2% on a constant currency basis. Segment operating income for our flavor solutions segment decreased by $89.9 million, or 30.3%, in 2022 as compared to 2021. The decrease in segment operating income was driven by increased commodity, transportation and conversion costs, as well as costs related to supply chain investments, which were partially offset by a higher level of sales, including pricing actions in response to the inflationary cost environment, and CCI-led cost savings, all as compared to the prior year. Segment operating margin for our flavor solutions segment decreased by 450 basis points in 2022 to 8.0% driven by a lower segment gross margin, including the margin dilutive impact of pricing actions, the impact of the inflationary cost environment, and higher conversion costs, including the costs related to our supply chain investments, partially offset by CCI-led cost savings and a decrease in SG&A as percentage of sales associated with the favorable impact of fixed and semi-fixed expenses over a higher sales base, all as compared to the 2021 level. On a constant currency basis, segment operating income for our flavor solutions segment decreased by 27.9% in 2022, as compared to 2021. 32 NON-GAAP FINANCIAL MEASURES The following tables include financial measures of adjusted gross profit, adjusted gross profit margin, adjusted operating income, adjusted operating income margin, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following: • Special charges – Special charges consist of expenses and income associated with certain actions undertaken by us to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component, such as an asset impairment, or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an ongoing basis through completion. Special charges for the year ended November 30, 2022 include a $13.6 million gain associated with the sale of the Kohinoor brand name. We exited our Kohinoor rice product line in India in the fourth quarter of fiscal year 2021. Special charges are more fully described in note 3 of notes to our accompanying consolidated financial statements. • Transaction and integration expenses associated with the Cholula and FONA acquisitions – We exclude certain costs associated with our acquisitions of Cholula and FONA in November and December 2020, respectively, and their subsequent integration into the Company. Such costs, which we refer to as “Transaction and integration expenses,” include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventories, together with the impact of discrete tax items, if any, directly related to each acquisition. • Income from sale of unconsolidated operations – We exclude the gain realized upon our sale of an unconsolidated operation in March 2021. As more fully described in note 5 of the notes to the accompanying financial statements, the sale of our 26% interest in Eastern Condiments resulted in a gain of $13.4 million, net of tax of $5.7 million. The gain is included in Income from unconsolidated operations in our consolidated income statement for the year ended November 30, 2021. • Gain on sale of Kitchen Basics – We exclude the gain realized upon our sale of the Kitchen Basics business in August 2022. As more fully described in note 17 of the notes to the accompanying financial statements, 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, special charges, income from the sale of unconsolidated operations, and gain on sale of Kitchen Basics for the years and in the amounts set forth below are included in notes 2, 3, and 5, of notes to our consolidated financial statements. 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 A reconciliation of these non-GAAP financial measures to GAAP financial results is provided below: 2023 2022 2021 Gross profit $ 2,502.5 $ 2,274.5 $ 2,494.6 Impact of transaction and integration expenses included in cost of goods sold (1) — — 6.3 Impact of special charges included in cost of goods sold (2) — — 4.7 Adjusted gross profit $ 2,502.5 $ 2,274.5 $ 2,505.6 Gross profit margin (3) 37.6 % 35.8 % 39.5 % Impact of transaction and integration expenses and special charges (3) — % — % 0.2 % Adjusted gross profit margin (3) 37.6 % 35.8 % 39.7 % Operating income $ 963.0 $ 863.6 $ 1,015.1 Impact of transaction and integration expenses included in cost of goods sold (1) — — 6.3 Impact of other transaction and integration expenses (1) — 2.2 29.0 Impact of special charges included in cost of goods sold (2) — — 4.7 Impact of other special charges (2) 61.2 51.6 46.4 Adjusted operating income $ 1,024.2 $ 917.4 $ 1,101.5 % (decrease) increase versus prior year 11.6 % (16.7) % 8.1 % Operating income margin (3) 14.5 % 13.6 % 16.1 % Impact of transaction and integration expenses and special charges (3) 0.9 % 0.8 % 1.3 % Adjusted operating income margin (3) 15.4 % 14.4 % 17.4 % Income tax expense $ 174.5 $ 168.6 $ 192.7 Impact of transaction and integration expenses (1) — 0.6 (2.7) Impact of special charges (2) 14.5 13.3 7.1 Impact of sale of Kitchen Basics — (11.6) — Adjusted income tax expense $ 189.0 $ 170.9 $ 197.1 Income tax rate (4) 21.8 % 20.7 % 21.5 % Impact of transaction and integration expenses, special charges, and sale of Kitchen Basics (4) 0.2 % 0.2 % (1.4) % Adjusted income tax rate (4) 22.0 % 20.9 % 20.1 % Net income $ 680.6 $ 682.0 $ 755.3 Impact of transaction and integration expenses (1) — 1.6 38.0 Impact of special charges (2) 46.7 38.3 44.0 Impact of after-tax gain on sale of Kitchen Basics — (38.0) — Impact of after-tax gain on sale of unconsolidated operations — — (13.4) Adjusted net income $ 727.3 $ 683.9 $ 823.9 % (decrease) increase versus prior year 6.3 % (17.0) % 8.0 % Earnings per share—diluted $ 2.52 $ 2.52 $ 2.80 Impact of transaction and integration expenses (1) — 0.01 0.14 Impact of special charges (2) 0.18 0.14 0.16 Impact of after-tax gain on sale of Kitchen Basics — (0.14) — Impact of after-tax gain on sale of unconsolidated operations — — (0.05) Adjusted earnings per share—diluted $ 2.70 $ 2.53 $ 3.05 34 (1) Transaction and integration expenses are more fully described in note 2 of notes to our consolidated financial statements and include transaction and integration expenses associated with our acquisitions of Cholula and FONA. These expenses include the effect of the fair value adjustment to acquired inventories on cost of goods sold and the impact of a discrete deferred state income tax expense item, directly related to our December 2020 acquisition of FONA. The discrete tax item had an unfavorable impact of $10.4 million or $0.04 per diluted share for the year ended November 30, 2021. (2) Special charges are more fully described in note 3 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. Special charges for the year ended November 30, 2021 include $4.7 million which is reflected in Cost of goods sold and an $11.2 million non-cash impairment charge associated with the impairment of certain intangible assets. (3) Gross profit margin, impact of transaction and integration expenses and special charges, and adjusted gross profit margin are calculated as gross profit, impact of transaction and integration expenses and special charges, and adjusted gross profit as a percentage of net sales for each period presented. Similarly, operating income margin, impact of transaction and integration expenses and special charges, and adjusted operating income margin are calculated as operating income, impact of transaction and integration expenses and special charges, and adjusted operating income as a percentage of net sales for each period presented. (4) Income tax rate is calculated as income tax expense as a percentage of income from consolidated operations before income taxes. 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 or $859.9 million, $817.0 million, and $982.2 million for the years ended November 30, 2023, 2022 and 2021, respectively. Estimate for the year ending November 30, 2024 Earnings per share – diluted $2.76 to $2.81 Impact of special charges 0.04 Adjusted earnings per share – diluted $2.80 to $2.85 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 year 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 prior fiscal 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 year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2023 on a constant currency basis, net sales and adjusted operating income for 2023 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2022 and compared to the reported results for 2022; and (2) to present our growth in net sales and adjusted operating income for 2022 on a constant currency basis, net sales and operating income for 2022 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2021 and compared to the reported results for 2021. 35 For the year ended November 30, 2023 Percentage change as reported Impact of foreign currency exchange Percentage change on constant currency basis Net sales: Consumer segment: Americas 0.4 % (0.4) % 0.8 % EMEA 7.1 % 0.9 % 6.2 % APAC (1.1) % (6.2) % 5.1 % Total Consumer 1.3 % (0.8) % 2.1 % Flavor Solutions segment: Americas 10.7 % 1.1 % 9.6 % EMEA 10.3 % (1.9) % 12.2 % APAC 5.6 % (5.4) % 11.0 % Total Flavor Solutions 10.1 % (0.2) % 10.3 % Total net sales 4.9 % (0.6) % 5.5 % Adjusted operating income: Consumer segment 3.5 % (0.9) % 4.4 % Flavor Solutions segment 39.7 % 1.2 % 38.5 % Total adjusted operating income 11.6 % (0.4) % 12.0 % For the year ended November 30, 2022 Percentage change as reported Impact of foreign currency exchange Percentage change on constant currency basis Net sales: Consumer segment: Americas (1.1) % (0.2) % (0.9) % EMEA (14.7) % (9.6) % (5.1) % APAC (10.1) % (2.0) % (8.1) % Total Consumer (4.6) % (2.1) % (2.5) % Flavor Solutions segment: Americas 11.4 % (0.3) % 11.7 % EMEA 5.5 % (11.7) % 17.2 % APAC (0.2) % (5.4) % 5.2 % Total Flavor Solutions 8.9 % (3.2) % 12.1 % Total net sales 0.5 % (2.5) % 3.0 % Adjusted operating income: Consumer segment (11.7) % (0.8) % (10.9) % Flavor Solutions segment (30.3) % (2.4) % (27.9) % Total adjusted operating income (16.7) % (1.2) % (15.5) % To present the percentage change in projected 2024 net sales, adjusted operating income and adjusted earnings per share — diluted on a constant currency basis, 2024 projected local currency net sales, adjusted operating income, and adjusted net income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at currently prevailing exchange rates and are compared to those 2024 local currency projected results, translated into U.S. dollars at the average actual exchange rates in effect during the corresponding months in fiscal year 2023 to determine what the 2024 consolidated U.S. dollar net sales, adjusted operating income and adjusted earnings per share — diluted would have been if the relevant currency exchange rates had not changed from those of the comparable 2023 periods. 36 Projections for the Year Ending November 30, 2024 Percentage change in net sales (2)% to 0% Impact of unfavorable foreign currency exchange 1 % Percentage change in net sales in constant currency (1)% to 1% Percentage change in adjusted operating income 3% to 5% Impact of unfavorable foreign currency exchange 1 % Percentage change in adjusted operating income in constant currency 4% to 6% LIQUIDITY AND FINANCIAL CONDITION 2023 2022 2021 Net cash provided by operating activities $ 1,237.3 $ 651.5 $ 828.3 Net cash used in investing activities (260.5) (146.4) (908.6) Net cash (used in) provided by financing activities (1,184.2) (487.2) 22.0 The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use a combination of equity and short- and long-term debt. We use short-term debt, comprised primarily of commercial paper, principally to finance ongoing operations, including our requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts payable, accrued payroll, and other accrued liabilities). We are committed to maintaining investment grade credit ratings. Our cash flows from operations enable us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, fund or increase our quarterly dividends, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, our cash flow from operations has historically been the strongest during the fourth quarter of our fiscal year. Due to the timing of the interest payments on our debt, interest payments are higher in the first and third quarter of our fiscal year. We believe that our sources of liquidity, which include existing cash balances, cash flows from operations, existing credit facilities, our commercial paper program, and access to capital markets, will provide sufficient liquidity to meet our debt obligations, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. In the cash flow statement, the changes in operating assets and liabilities are presented excluding the translation effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. In addition, in the cash flow statement, the changes in operating assets and liabilities are presented excluding the effect of acquired or disposed operating assets and liabilities, as the cash flows associated with acquisition or dispositions of businesses is presented as an investing activity. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2023, the exchange rates for the Euro, British pound sterling, Mexican peso, and Polish zloty were higher than the U.S. dollar than at November 30, 2022. At November 30, 2023, the exchange rates for the Canadian dollar, Chinese renminbi, and Australian dollar were lower than the U.S. dollar than at November 30, 2022. 37 Operating Cash Flow – Operating cash flow was $1,237.3 million in 2023, $651.5 million in 2022, and $828.3 million in 2021. Net income as well as our working capital management, as more fully described below, impacted operating cash flow. In 2023, the increase was primarily driven by an improvement in cash provided by working capital, which was driven by the lower inventory levels and the lower amount of employee incentive payments associated with the prior year as well as an increase in dividends received from unconsolidated affiliates. This was partially offset by an increased use of cash associated with accounts payable which partially resulted from our lower level of inventory. In 2022, the decrease in operating cash flow was primarily driven by lower net income, including the effect of net income associated with the gain on sale of our Kitchen Basics business and an intangible asset that are reflected as investing cash flows as well as the higher amount of employee incentive payments associated with the prior year. In 2021, the reduction in operating cash flow was the result of increased inventory levels to protect against supply disruption, employee incentive payments, and the payment of transaction and integration costs related to our acquisitions. Our working capital management – principally related to inventory, trade accounts receivable, and accounts payable – impacts our operating cash flow. The change in inventory was a significant source of cash from operations in 2023 and a significant use of cash from operations in 2022 and 2021. The change in trade accounts receivable was a moderate source of cash in 2023 and a use of cash in 2022 and 2021. The change in accounts payable was a use of cash in 2023, a significant source of cash in 2022, and a more moderate source of cash in 2021. In addition to operating cash flow, we also use cash conversion cycle (CCC) to measure our working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows: Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory). The following table outlines our cash conversion cycle (in days) over the last three years: 2023 2022 2021 Cash Conversion Cycle 40 51 46 The decrease in CCC in 2023 from 2022 was due primarily to a reduction in our days in inventory as a result of reducing our inventory based on demand planning and elimination of excess safety stock utilized to remedy service issues associated with the COVID-19 pandemic. The increase in CCC in 2022 from 2021 was due primarily to an increase in our days in inventory as a result of cost inflation, strategic purchases to avoid shipping challenges, and lower than forecasted sales. During both periods, the increase in days in inventory was partially offset by an increase in our days payable outstanding. As more fully described in note 1 of notes to our consolidated financial statements, 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 November 30, 2023 and 2022, the amounts due to suppliers participating in the SCF and included in trade accounts payable were approximately $300.5 million and $347.0 million, respectively. The terms of our payment obligations are not impacted by a supplier's participation in the SCF. Our payment terms with our suppliers for similar materials within individual markets are consistent between those suppliers that elect to participate in the SCF and those suppliers that do not participate. Accordingly, our average days outstanding are not significantly impacted by the portion of the suppliers that are included in the SCF. Future changes in our suppliers’ financing policies or economic developments, such as changes in interest rates, general market liquidity or our creditworthiness relative to participating suppliers could impact those suppliers’ participation in the SCF and/or our ability to negotiate extended payment terms with our suppliers. However, any such impacts are difficult to predict. 38 Investing Cash Flow – Net cash used in investing activities was $260.5 million in 2023, $146.4 million in 2022, and $908.6 million in 2021. Our primary investing cash flows include the usage of cash associated with acquisition of businesses and capital expenditures as well as cash provided by sale of businesses, unconsolidated operations, or other assets. Cash usage related to our acquisition of businesses was $706.4 million in 2021. Capital expenditures, including expenditures for capitalized software, were $263.9 million in 2023, $262.0 million in 2022, and $278.0 million in 2021. We expect 2024 capital expenditures to approximate $290 million. In 2022, we received $95.2 million net cash proceeds from the sale of our Kitchen Basics business and $13.6 million net cash proceeds received on the sale of the Kohinoor brand name which are more fully discussed in notes 2 and 3, respectively, of notes to our consolidated financial statements. Our primary investing cash inflow in 2021 was the $65.4 million of proceeds received from the sale of an unconsolidated operation, as more fully discussed in note 5 of notes to our consolidated financial statements. Financing Cash Flow – Net cash associated with financing activities was a use of cash of $1,184.2 million and $487.2 million in 2023 and 2022, respectively, and a source of cash of $22.0 million in 2021. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below. The following table outlines our net borrowing activities: 2023 2022 2021 Net increase (decrease) in short-term borrowings $ (964.6) $ 698.3 $ (346.7) Proceeds from issuance of long-term debt, net of debt issuance costs 495.3 — 999.6 Repayments of long-term debt (268.1) (772.0) (257.1) Net cash (used in) provided from net borrowing activities $ (737.4) $ (73.7) $ 395.8 In 2023, we repaid $268.1 million of long-term debt, including $250.0 million, 3.50% notes that matured September 1, 2023. We also issued $500.0 million of 4.95% notes due 2033, with net cash proceeds received of $496.4 million. In 2022, we repaid $772.0 million of long-term debt, including the $750 million, 2.70% notes that matured on August 15, 2022. In 2021, we borrowed $1,001.5 million under long-term borrowing arrangements, including net proceeds of $495.7 million of 0.9% notes due February 2026 and net proceeds of $492.8 million of 1.85% notes due February 2031. The net proceeds from these issuances were used to pay down short-term borrowings, including a portion of the $1,443.0 million of commercial paper issued to fund our acquisitions of Cholula and FONA, and for general corporate purposes. We also repaid $257.1 million of long-term debt, including the $250 million, 3.90% notes that matured in July 2021. The following table outlines the activity in our share repurchase programs: 2023 2022 2021 Number of shares of common stock 0.5 0.4 0.1 Dollar amount $ 35.7 $ 38.8 $ 8.6 As of November 30, 2023, $501 million remained of a $600 million share repurchase program that was authorized by our 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. Our share repurchase activity in 2023, 2022, and 2021 has principally been executed in order to mitigate the effect of shares issued upon the exercise of stock options. During 2023, 2022 and 2021, we received proceeds of $16.6 million, $41.4 million and $13.5 million, respectively, from exercised stock options. We repurchased $10.8 million, $19.4 million and $15.4 million of common stock during 2023, 2022 and 2021, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans. 39 Our dividend history over the past three years is as follows: 2023 2022 2021 Total dividends paid $ 418.5 $ 396.7 $ 363.3 Dividends paid per share 1.56 1.48 1.36 Percentage increase per share 5.4 % 8.8 % 9.7 % In November 2023, the Board of Directors approved a 7.7% increase in the quarterly dividend from $0.39 to $0.42 per share. 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 future acquisitions. As of November 30, 2023, we have $1.5 billion of earnings from our non-U.S. subsidiaries and joint ventures that are considered indefinitely reinvested. We have not provided any deferred taxes with respect to items such as foreign withholding taxes, other income taxes, or foreign exchange gains or losses. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings. At November 30, 2023, we temporarily used $531.4 million of cash from our non-U.S. subsidiaries to pay down short-term debt in the U.S. During the year, our short-term borrowings vary, but are lower at the end of a year or quarter. The average short-term borrowings outstanding for the years ended November 30, 2023 and 2022 were $1,121.9 million and $1,117.0 million, respectively. Those average short-term borrowings outstanding for the year ended November 30, 2023 included average commercial paper borrowings of $1,098.4 million. The total average debt outstanding for the years ended November 30, 2023 and 2022 was $5,197.8 million and $5,422.0 million, respectively. Credit and Capital Markets – The following summarizes the more significant impacts of credit and capital markets on our business: CREDIT FACILITIES – Cash flows from operating activities are our primary source of liquidity for funding growth, share repurchases, dividends and capital expenditures. We also rely on our revolving credit facilities, or borrowings backed by these facilities, to fund working capital needs and other general corporate requirements. 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 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%. 40 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. The terms of those revolving credit facilities are more fully described in note 6 of the notes to the consolidated financial statements. 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 these syndicates are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. We engage in regular communication with all banks participating in our credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. In addition to our committed revolving credit facilities, we have uncommitted facilities of $284.8 million as of November 30, 2023 that can be withdrawn based upon the lenders' discretion. See note 6 of notes to our consolidated financial statements for more details on our financing arrangements. 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 $700.0 million, 3.15% notes due in August 2024. Detail on these contractual obligations follows: MATERIAL CASH REQUIREMENTS The following table reflects a summary of our future material cash requirements as of November 30, 2023: Total Less than 1 year 1–3 years 3–5 years More than 5 years Short-term borrowings $ 272.2 $ 272.2 $ — $ — $ — Long-term debt, including finance leases 4,214.1 799.3 779.1 770.1 1,865.6 Interest payments (a) 854.5 130.3 187.8 143.7 392.7 Total contractual cash obligations $ 5,340.8 $ 1,201.8 $ 966.9 $ 913.8 $ 2,258.3 (a) Interest payments include expected interest payments on long-term debt. Our short-term borrowings, principally consisting of commercial paper, have short-term maturities. See note 6 of notes to our consolidated financial statements for additional information. Our other cash requirements at year end include raw material purchases, lease payments, income taxes, and pension and postretirement benefits. We acquire various raw materials to satisfy our obligations to our customers, and these outstanding purchase obligations can fluctuate throughout the year based on our response to varying raw material cycles; however, these commitments generally do not extend past one year. In addition, we also have a series of commercial commitments, largely consisting of standby letters of credit. Our standby letters of credit, leases, and pension and other post-retirement obligations are more fully described in notes 6, 7 and 11, respectively, of notes to our consolidated financial statements. These obligations impact our liquidity and capital resource needs. To meet those cash requirements, we intend to use our existing cash, cash equivalents and internally generated funds, to borrow under our existing credit facilities or under other short-term borrowing facilities, and depending on market conditions and upon the significance of the cost of a particular debt maturity or acquisition to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our future cash requirements. 41 PENSION ASSETS AND OTHER INVESTMENTS – We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash contributions to pension plans, including unfunded plans, were $9.2 million in 2023, $11.4 million in 2022, and $15.0 million in 2021. It is expected that the 2024 total pension plan contributions will be approximately $12 million. Future increases or decreases in pension liabilities and required cash contributions are highly dependent upon changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all of our qualified defined benefit pension plans, approximately 27% of assets are invested in equities, 62% in fixed income investments and 11% in other investments. Assets associated with our nonqualified defined benefit pension plan are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 63% in equities and 37% in fixed income investments. See note 11 of notes to our consolidated financial statements, which provides details on our pension funding. CUSTOMERS AND COUNTERPARTIES – See the subsequent section of this discussion under the heading "Market Risk Sensitivity–Credit Risk." PERFORMANCE GRAPH — SHAREHOLDER RETURN The following line graph compares the yearly change in McCormick’s cumulative total shareholder return (stock price appreciation plus reinvestment of dividends) on McCormick’s Non-Voting Common Stock with (1) the cumulative total return of the Standard & Poor’s 500 Stock Price Index, assuming reinvestment of dividends, and (2) the cumulative total return of the Standard & Poor’s Packaged Foods & Meats Index, assuming reinvestment of dividends. 42 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. The information presented below should be read in conjunction with notes 6 and 8 of notes to our consolidated financial statements. Foreign Exchange Risk – We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Chinese renminbi, Canadian dollar, Australian dollar, Polish zloty, Singapore dollar, Swiss franc, and Mexican peso, as well as the Euro versus the British pound sterling, Australian dollar, and Polish zloty, and finally the Canadian dollar versus British pound sterling. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks. During 2023, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in our subsidiaries with a functional currency of the British pound sterling, Euro, Polish zloty, Chinese renminbi, Australian dollar, Singapore dollar, and Mexican peso. We also utilize cross currency interest rate swap contracts, which are designated as net investment hedges, to manage the impact of exchange rate fluctuations on our net investments in subsidiaries with a functional currency of the British pound sterling and Euro. Gains and losses on these instruments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss). The following table summarizes the foreign currency exchange contracts held at November 30, 2023. All contracts are valued in U.S. dollars using year-end 2023 exchange rates and have been designated as hedges of foreign currency transactional exposures, firm commitments or anticipated transactions. FOREIGN CURRENCY EXCHANGE CONTRACTS AT NOVEMBER 30, 2023 Currency sold Currency received Notional value Average contractual exchange rate Fair value British pound sterling U.S. dollar $ 221.6 1.26 $ (0.5) Swiss franc U.S. dollar 75.7 0.87 (1.2) Canadian dollar U.S. dollar 63.5 1.33 1.1 Euro U.S. dollar 37.6 1.10 0.1 Polish zloty U.S. dollar 5.7 4.15 (0.2) U.S. dollar Australian dollar 65.0 0.66 (0.2) Chinese renminbi U.S. dollar 245.4 6.75 (11.5) U.S. dollar Singapore dollar 34.4 1.33 (0.2) U.S. dollar British pound sterling 40.4 1.27 (0.2) U.S. dollar Euro 59.9 1.10 (0.5) Australian dollar Euro 21.9 1.68 (0.4) Polish zloty Euro 11.1 4.54 (0.3) Canadian dollar British pound sterling 28.7 1.70 0.1 British pound sterling Euro 45.4 0.87 (0.2) U.S. dollar Peso 10.5 17.88 — U.S. dollar Thai baht 9.6 34.79 — We had a number of smaller contracts at November 30, 2023 with an aggregate notional value of $24.0 million to purchase or sell other currencies. The aggregate fair value of these contracts was $0.6 million at November 30, 2023. At November 30, 2022, we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar, Polish zloty, Swiss franc and other currencies, with a notional value of $560.5 million. The aggregate fair value of these contracts was a gain of $9.5 million at November 30, 2022. We also utilized cross currency interest rate swap contracts that are considered net investment hedges. 43 As of November 30, 2023 and 2022, we had cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at USD Secured Overnight Financing Rate (SOFR) plus 0.907% and pay £194.1 million at three-month GBP SONIA plus 0.859% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP SONIA plus 0.859% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross-currency interest rate swap contracts expire in August 2027. In conjunction with the phase out of the London Interbank Offered Rate (LIBOR), in 2023 we amended the terms of this cross currency swap such that, effective February 15, 2023, we now pay and receive at USD SOFR plus 0.907% (previously three-month U.S. LIBOR plus 0.685%). As of November 30, 2023 and 2022, we also had cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at USD SOFR plus 0.684% and pay £184.1 million at GBP SONIA plus 0.574% and (ii) £184.1 million notional value to receive £184.1 million at GBP SONIA plus 0.574% and pay €219.2 million at Euro ESTR plus 0.667%. These contracts expire in April 2030. Interest Rate Risk – Our policy is to manage interest rate risk by entering into both fixed and variable rate debt arrangements. We are exposed to interest rate volatility, with primary exposures related to movements in U.S. Treasury rates, Secured Overnight Financing Rate (SOFR), and commercial paper rates. Certain of our variable rate debt arrangements previously used LIBOR. The phase out of LIBOR reference rates occurred at different dates and began on January 1, 2022. As more fully disclosed in notes 1 and 8 of notes to our consolidated financial statements, during 2023 and 2022, we amended existing arrangements and entered into new arrangements that no longer use LIBOR as a reference rate. There was no material impact to our consolidated financial statements as a result of the LIBOR phase-out. We also use interest rate swaps to minimize financing costs and to achieve a desired mix of fixed and variable rate debt. The table that follows provides principal cash flows and related interest rates, excluding the effect of interest rate swaps and the amortization of any discounts or fees, by fiscal year of maturity at November 30, 2023. For foreign currency-denominated debt, the information is presented in U.S. dollar equivalents. Variable interest rates are based on the weighted-average rates of the portfolio at the end of the year presented. YEARS OF MATURITY AT NOVEMBER 30, 2023 2024 2025 2026 2027 Thereafter Total Fair value Debt Fixed rate $ 762.6 $ 258.8 $ 509.3 $ 759.7 $ 1,876.0 $ 4,166.4 $ 3,793.3 Average interest rate 3.50 % 3.26 % 0.95 % 3.40 % 3.32 % Variable rate $ 308.9 $ 11.0 $ — $ — $ — $ 319.9 $ 319.9 Average interest rate 5.16 % 2.06 % — % — — The table above displays the debt, including finance leases, by the terms of the original debt instrument without consideration of fair value, interest rate swaps and any loan discounts or origination fees. Interest rate swaps have the following effects: • We issued $250 million of 3.25% notes due in 2025 in November 2015. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these notes at a weighted-average fixed rate of 3.45%. Separately, the fixed interest rate on $100 million of the 3.25% notes due in December 2025 was effectively converted to a variable rate by interest rate swaps through the notes maturity in 2025. In 2023, we amended our $100 million interest rate swaps 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%). The effective variable rate was 6.94% as of November 30, 2023. • We issued $750 million of 3.40% notes due August 15, 2027 in August 2017. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these $750 million notes at a weighted-average fixed rate of 3.44%. Separately, the fixed interest rate on $250 million of the 3.40% notes due in August 2027 was effectively converted to a variable rate by interest rate swaps through the notes maturity in 2027. In 2023, we amended our $250 million interest rate swaps such that, effective February 15, 2023, we now pay and receive at USD SOFR plus 0.907% (previously U.S. three-month LIBOR plus 0.685%). The effective variable rate was 6.32% as of November 30, 2023. • We issued $500 million of 2.50% notes due April 15, 2030. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these $500 million notes at a weighted-average fixed rate of 2.62%. Separately, the fixed interest rate on $250 million of the 2.50% notes due in April 2030 was effectively converted to a variable rate by interest rate swaps through the notes maturity in 2030. Net interest payments are based on USD SOFR plus 0.684% with an effective variable rate of 6.13% as of November 30, 2023. • We issued $500 million of 4.95% notes due April 15, 2033. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these $500 million notes at a weighted-average fixed rate of 5.00%. 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. In 2023, our most significant raw materials were dairy products, pepper, onion, garlic, capsicums (red peppers and 44 paprika), tomato products, salts, and wheat products. 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 feel that the allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of notes to our consolidated financial statements for further details of these impacts. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS In preparing the financial statements, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. In preparing the financial statements, we make routine estimates and judgments in determining the net realizable value of accounts receivable, inventory, fixed assets and prepaid allowances. Our most critical accounting estimates and assumptions, which are those that have or are reasonably likely to have a material impact on our financial condition or results of operations, are in the following areas: Customer Contracts In several of our major geographic markets, the consumer segment sells our products by entering into annual or multi-year customer arrangements. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Where applicable, future reimbursements are estimated based on current expectations regarding what was earned through these programs as of the balance sheet date. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one-year or shorter duration. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized. Certain of our customer arrangements are annual arrangements such that the degree of estimates that affects revenue reduces as a year progresses. We do not believe that there will be significant changes to our estimates of customer consideration when any uncertainties are resolved with customers. Goodwill Impairment Our reporting units are the same as our operating segments. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, as more fully described in note 1 to our consolidated financial statements. We estimate the fair value of a reporting unit by using a discounted cash flow model. Our discounted cash flow model calculates fair value by present valuing future expected cash flows of our reporting units using a market-based discount rate. We then compare this fair value to the carrying amount of the reporting unit, including intangible assets and goodwill. An impairment charge would be recognized to the extent that the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit. The quantitative goodwill impairment test requires an entity to compare the fair value of each reporting unit with its carrying amount. As of November 30, 2023, we had $5,260.1 million of goodwill recorded in our balance sheet ($3,609.6 million in the consumer segment and $1,650.5 million in the flavor solutions segment). Our fiscal year 2023 impairment testing indicated that the estimated fair values of our reporting units were significantly in excess of their carrying values. Accordingly, we believe that only significant changes in the cash flow assumptions would result in an impairment of goodwill. However, variances between the actual performance of the businesses and the assumptions that were used in developing the estimates of fair value could result in impairment charges in future periods. 45 Indefinite-lived Intangible Asset Impairment Our indefinite-lived intangible assets consist of brand names and trademarks. We estimate fair values through the use of the relief-from-royalty method and then compare those fair values to the related carrying amounts of the indefinite-lived intangible asset. In the event that the fair value of any of the brand names or trademarks are less than their related carrying amounts, a non-cash impairment loss would be recognized in an amount equal to the difference. The estimation of fair values of our brand names and trademarks requires us to make significant assumptions, including expectations with respect to sales and profits of the respective brands and trademarks, related royalty rates, income tax rates and appropriate discount rates, which are based, in part, upon current interest rates adjusted for our view of reasonable country- and brand - specific risks based upon the past and anticipated future performance of the related brand names and trademarks . The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with our operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses. As of November 30, 2023, we had $3,045.6 million of brand names assets and trademarks recognized in our consolidated balance sheet, and none of the balances exceeded their estimated fair values at that date. Of the $3,045.6 million of brand names assets and trademarks as of November 30, 2023: (i) $2,320.0 million relates to the French’s, Frank’s RedHot and Cattlemen’s brand names and trademarks, recognized as part of our acquisition of RB Foods in August 2017, that we group for purposes of our impairment analysis; (ii) $380.0 million relates to the Cholula brand names and trademarks associated with the acquisition of Cholula in November 2020, (iii) $49.0 million relates to the FONA brand names and trademarks associated with the acquisition of FONA in December 2020 and (iv) the remaining $296.6 million represents a number of other brand name assets and trademarks with individual carrying values ranging from $0.2 million to $106.4 million. Except for four brand names assets and trademarks with a carrying value of approximately $446 million, including our recent acquisitions of Cholula and FONA, the percentage excess of estimated fair value over respective book values for each of our brand names and trademarks, was 20% or more as of our fourth quarter annual impairment assessment. The brand names and trademarks related to recent acquisitions, including our recent acquisitions of Cholula and FONA, may be more susceptible to future impairment as their carrying values represent recently determined fair values. A change in assumptions with respect to recently acquired businesses, including those affected by rising interest rates or a deterioration in expectations of future sales, profitability or royalty rates as well as future economic and market conditions, or higher income tax rates, could result in non-cash impairment losses in the future. Income Taxes We estimate income taxes and file tax returns in each of the taxing jurisdictions in which we operate and are required to file a tax return. At the end of each year, an estimate for income taxes is recorded in the financial statements. Tax returns are generally filed in the third or fourth quarter of the subsequent year. A reconciliation of the estimate to the final tax return is done at that time, which will result in changes to the original estimate. We believe that our tax return positions are appropriately supported, but tax authorities can challenge certain of our tax positions. We evaluate our uncertain tax positions in accordance with the GAAP guidance for uncertainty in income taxes. We recognize a tax benefit when it is more likely than not the position will be sustained upon examination, based on its technical merits. The tax position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter of such change. We believe that our reserve for uncertain tax positions, including related interest and penalties, is adequate. As of November 30, 2023, the Company had $27.7 million of unrecognized tax benefits, including interest and penalties, recorded in Other long-term liabilities. The amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income and cash flows. We have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized. In doing so, we have considered future taxable income and tax planning strategies in assessing the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates, as more fully described in note 1 of notes to our consolidated financial statements. 46 Pension Benefits Pension plans’ costs require the use of assumptions for discount rates, investment returns, projected salary increases, and mortality rates. The actuarial assumptions used in our pension benefit reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension benefit obligations. While we believe that the assumptions used are appropriate, changes in various assumptions and differences between the actual returns on plan assets and the expected returns on plan assets and changes to projected future rates of return on plan assets will affect the amount of pension expense or income ultimately recognized. A 1% increase or decrease in the actuarial assumption for the discount rate would impact 2024 pension benefit expense by approximately $1.1 million. A 1% increase or decrease in the expected return on plan assets would impact 2024 pension expense by approximately $9.7 million. We will continue to evaluate the appropriateness of the assumptions used in the measurement of our pension benefit obligations. In addition, see note 11 of notes to our consolidated financial statements for a discussion of these assumptions and the effects on the financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is set forth in the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in note 8 of our notes to consolidated financial statements. 47