MCCORMICK & CO INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand McCormick & Company, Incorporated, our operations, and our present business environment from the perspective of management. MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes thereto, included in Item 1 of this report. We use certain non-GAAP information – more fully described below under the caption Non-GAAP Financial Measures – that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. Unless otherwise noted, the dollar and share information in the charts and tables in MD&A are in millions, except per share data. 19 Table of Contents Business profile McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business. In fiscal year 2023, approximately 39% of our sales were outside of the U.S. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. We manage our business in two business segments, consumer and flavor solutions. Executive Summary In the first quarter of 2024, we achieved net sales growth of 2.4% over the first quarter 2023 level, including impact from the following factors: • Pricing actions, principally implemented in the prior year, contributed 2.7% to the increase in net sales. • Volume and product mix unfavorably impacted our net sales growth by 1.0%, exclusive of divestitures. Our decisions to exit certain low margin businesses contributed approximately 0.6% to the unfavorable impact of volume and product mix. The consumer segment experienced unfavorable volume and product mix of 2.2% and the flavor solutions segment experienced favorable product and mix of 0.7%. • Divestitures negatively impacted our net sales increase by 0.2%. • Net sales growth was positively impacted by fluctuations in currency rates that increased sales growth by 0.9%. Excluding this impact, we grew sales by 1.5% over the prior year quarter on a constant currency basis. Operating income was $233.5 million in the first quarter of 2024 and $199.0 million in the comparable 2023 period. We recorded $4.2 million and $27.8 million of special charges in the first quarter of 2024 and 2023, respectively, related to organization and streamlining actions. In the first quarter of 2024, the effects of a 140 basis points improvement in our gross profit margin, primarily associated with the effects of favorable product mix, pricing actions that were implemented in the prior year and cost savings from our GOE and CCI programs, that were partially offset by commodity inflation. Also, in the first quarter of 2024, selling, general and administrative expenses as a percentage of sales increased 110 basis points, including a 90 basis points impact associated with the higher level of advertising and promotion expenses. Excluding special charges, adjusted operating income was $237.7 million in the first quarter of 2024, an increase of 4.8%, compared to $226.8 million in the year-ago period. In constant currency, adjusted operating income increased 4.3%. Diluted earnings per share was $0.62 and $0.52 in the first quarter of 2024 and 2023, respectively. The increase in diluted earnings per share for the first quarter of 2024 was driven primarily by the impact of higher operating income, including the effects of lower special charges, the unfavorable effects of an increase in the effective tax rate, and the favorable effects of an increase in income from unconsolidated operations. Special charges lowered earnings per share by $0.01 and $0.07 in the first quarter of 2024 and 2023, respectively. Excluding the effects of special charges, adjusted diluted earnings per share was $0.63 in the first quarter of 2024 and $0.59 in the first quarter of 2023, or an increase of 6.8%. A detailed review of our first quarter 2024 performance compared to the first quarter of fiscal 2023 appears in the section titled “Results of Operations – Company” and “Results of Operations – Segments”. For a reconciliation of non-GAAP to reported amounts, see the subsequent discussion under the heading "Non-GAAP Financial Measures". Recent Events Our industry continues to be impacted by commodity cost inflation, labor cost inflation, and other global macro-economic conditions. While we are seeing moderation in input cost inflation from that experienced in 2023, we 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. 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. 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 2 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 other organization and streamlining actions to deliver additional savings in 2024. 20 Table of Contents 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 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. 21 Table of Contents RESULTS OF OPERATIONS – COMPANY Three months ended February 29, 2024 February 28, 2023 Net sales $ 1,602.7 $ 1,565.5 Percent increase 2.4 % 2.8 % Components of percent change in net sales – increase (decrease): Pricing actions 2.7 % 10.6 % Volume and product mix (1.0) % (4.6) % Divestitures (0.2) % (0.7) % Foreign exchange 0.9 % (2.5) % Gross profit $ 599.3 $ 562.9 Gross profit margin 37.4 % 36.0 % Sales for the first quarter of 2024 increased by 2.4% from the prior year level and increased by 1.5% 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 increased sales by 2.7% as compared to the prior year period principally due to pricing actions implemented in the prior year. Unfavorable volume and product mix decreased sales by 1.0%, including the impact of price elasticity. Unfavorable volume and product mix in our consumer segment exceeded the favorable volume and product mix in our flavor solutions segment. Our decisions to discontinue certain low margin businesses contributed approximately 0.6% to the unfavorable impact of volume and product mix. Also, the divestiture of our Giotti canning business unfavorably impacted sales by 0.2% as compared to the prior year period. Sales were also impacted by favorable foreign currency rates that increased net sales by 0.9% in the first quarter of 2024 compared to the year-ago quarter and is excluded from our measure of sales growth of 1.5% on a constant currency basis. Gross profit for the first quarter of 2024 increased by $36.4 million, or 6.5%, from the comparable period in 2023. Our gross profit margin for the three months ended February 29, 2024 was 37.4%, an increase of 140 basis points from the comparable period in 2023. The increase in gross profit margin in the quarter ended February 29, 2024 was driven by the favorable impact of our pricing actions, as previously described, favorable product and customer mix, and cost savings led by our CCI and GOE programs. These favorable impacts were partially offset by increased commodity costs as compared to the 2023 period. Three months ended February 29, 2024 February 28, 2023 Selling, general & administrative expense (SG&A) $ 361.6 $ 336.1 Percent of net sales 22.6 % 21.5 % SG&A increased by $25.5 million in the first quarter of 2024 as compared to the 2023 level, driven primarily by advertising and promotional spend, increased selling and market costs and a higher investment in research and development. These costs were partially offset by CCI-led and GOE cost savings, as compared to the 2023 period. SG&A as a percentage of net sales increased by 110 basis points from the prior year levels due primarily to a 90 basis point increase in advertising and promotional expenses as compared to the prior year period. Three months ended February 29, 2024 February 28, 2023 Total special charges $ 4.2 $ 27.8 During the three months ended February 29, 2024, we recorded $4.2 million of special charges. Those special charges principally consisted of $2.8 million associated with the GOE program and $1.4 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA). During the three months ended February 28, 2023, we recorded $27.8 million of special charges. Those special charges principally consisted of $24.8 million associated with the GOE program, including $19.7 million under our voluntary retirement program, $0.9 million associated with the transition of a manufacturing facility in EMEA, and streamlining actions of $1.3 million in the Americas region and $0.8 million in the EMEA region. 22 Table of Contents Details with respect to the composition of special charges are included in note 2 of the notes to the accompanying condensed consolidated financial statements. Three months ended February 29, 2024 February 28, 2023 Interest expense $ 50.3 $ 50.6 Other income, net 11.1 11.1 Interest expense decreased slightly in the three months ended February 29, 2024, as compared to the prior year period, driven by the effects of a reduction in average borrowing levels which were partially offset by higher short-term interest rates. Other income, net for the three months ended February 29, 2024 remained consistent, as compared to the prior year period. Three months ended February 29, 2024 February 28, 2023 Income from consolidated operations before income taxes $ 194.3 $ 159.5 Income tax expense 49.6 34.4 Effective tax rate 25.5 % 21.6 % The provision for income taxes is based on the estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements of U.S. GAAP. Examples of such types of discrete items not related to ordinary income include, but are not limited to, excess tax benefits or expense associated with stock-based compensation, changes in estimates of the outcome of tax matters related to prior years, including reversals of reserves upon the lapsing of statutes of limitations, provision-to-return adjustments, the settlement of tax audits, changes in enacted tax rates, and changes in the assessment of deferred tax valuation allowances. Income tax expense for the three months ended February 29, 2024 included $1.6 million of discrete tax expense consisting principally of $1.1 million of tax expense resulting from a state tax matter, and $0.5 million of tax expense associated with stock-based compensation. Income tax expense for the three months ended February 28, 2023 included $3.8 million of net discrete tax benefits consisting principally of $3.2 million of tax benefits associated with the adjustment of a valuation allowance due to changes in judgment about the realizability of the deferred tax asset, $0.8 million of tax benefits related to the revaluation of deferred taxes resulting from changes in tax rates, and $0.2 million of tax expense associated with stock-based compensation. Three months ended February 29, 2024 February 28, 2023 Income from unconsolidated operations $ 21.3 $ 14.0 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased by $7.3 million for the three months ended February 29, 2024, as compared to the year ago period. The increase was driven by higher earnings of our largest joint venture, McCormick de Mexico. The following table outlines the major components of the change in diluted earnings per share from 2023 to 2024: Three months ended February 28, 2023 and February 29, 2024 2023 Earnings per share – diluted $ 0.52 Impact of change in operating income 0.04 Decrease in special charges, net of taxes 0.06 Increase in income from unconsolidated operations 0.03 Impact of change in effective income tax rate, excluding taxes on special charges (0.03) 2024 Earnings per share – diluted $ 0.62 23 Table of Contents RESULTS OF OPERATIONS — SEGMENTS We measure the performance of our business segments based on operating income, excluding special charges for the periods presented. See note 10 of the notes to our accompanying condensed consolidated financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income. CONSUMER SEGMENT Three months ended February 29, 2024 February 28, 2023 Net sales $ 921.5 $ 909.5 Percent increase (decrease) 1.3 % (1.8) % Segment operating income $ 176.3 $ 173.4 Segment operating income margin 19.1 % 19.1 % In the first quarter of 2024, sales of our consumer segment increased by 1.3% as compared to the first quarter of 2023 and increased by 0.7% on a constant currency basis. The 1.3% increase was driven primarily by EMEA partially offset by lower sales in the APAC region, all as compared to the prior year quarter. Pricing actions favorably impacted sales by 2.9% as compared to the prior year period principally due to pricing actions implemented in the prior year. Unfavorable volume and product mix decreased consumer segment sales by 2.2% in the first quarter of 2024 as compared to the same period last year, including the impact of price elasticity. Our decision to discontinue certain low margin businesses also contributed 0.8% to the unfavorable impact of volume and product mix. Sales in the first quarter of 2024 reflected a favorable impact from foreign currency rates that increased consumer segment sales by 0.6% compared to the year-ago quarter and is excluded from our measure of sales growth of 0.7% on a constant currency basis. In the Americas region, consumer sales increased 0.1% in the first quarter of 2024 as compared to the same quarter of 2023 and increased by 0.1% on a constant currency basis. Pricing actions, principally implemented in the prior year, increased sales by 2.7% as compared to the prior year period. For the first quarter of 2024, unfavorable volume and product mix decreased sales by 2.6% as compared to the corresponding period in 2023. This reduction included a 1.1% impact of our decision to discontinue a low margin business. Foreign currency rates did not have a significant impact on sales in the quarter. Our sales growth on a constant currency basis was 0.1% for the quarter. In the EMEA region, consumer sales increased 13.3% in the first quarter of 2024 as compared to the same quarter of 2023 and increased by 8.2% on a constant currency basis. Pricing actions, principally implemented in the prior year, increased sales by 5.3% as compared to the 2023 period. Sales were favorably impacted by volume and product mix during the first quarter of 2024 and increased sales by 2.9% from the prior year level. During the first quarter of 2024, a favorable impact from foreign currency rates increased sales by 5.1% compared to the year-ago period and is excluded from our measure of sales growth of 8.2% on a constant currency basis. In the APAC region, consumer sales decreased 7.4% in the first quarter of 2024 as compared to the first quarter of 2023 and decreased by 5.4% on a constant currency basis. Pricing actions, principally implemented in the prior year, increased sales by 0.9% as compared to the prior year period. For the quarter ended February 29, 2024, unfavorable volume and product mix decreased sales by 6.3%, which included the effects of customer inventory reductions. During the first quarter of 2024, an 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 5.4% on a constant currency basis. Segment operating income for our consumer segment increased by $2.9 million, or 1.7%, in the first quarter of 2024 from the first quarter of 2023. The increase in segment operating income was driven by the effects of an increase in gross profit primarily due to favorable pricing actions and CCI-led and GOE cost savings more than offsetting increased commodity costs and SG&A expenses, that was primarily driven by higher advertising and promotion expenses, all as compared to the prior year period. Segment operating margin for our consumer segment in the first quarter of 2024 was 19.1% and was comparable to the first quarter of 2023 as an increase in gross margin was offset by an increase in SG&A as a percentage of sales, driven by an increase in advertising and promotion spend, all as compared to the prior year period. On a constant currency basis, segment operating income for our consumer segment increased by 1.4% in the first quarter of 2024 in comparison to the same period in 2023. 24 Table of Contents FLAVOR SOLUTIONS SEGMENT Three months ended February 29, 2024 February 28, 2023 Net sales $ 681.2 $ 656.0 Percent increase 3.8 % 10.0 % Segment operating income $ 61.4 $ 53.4 Segment operating income margin 9.0 % 8.1 % In the first quarter of 2024, sales of our flavor solutions segment increased by 3.8% as compared to the first quarter of 2023 and increased by 2.5% on a constant currency basis. Pricing actions across all regions increased sales by 2.4% in the first quarter of 2024 as compared to the prior year period principally due to pricing actions implemented in the prior year. Favorable volume and product mix increased segment sales by 0.7% as compared to the prior period as growth in the Americas and APAC regions were partially offset by lower volume and product mix in the EMEA region. Volume and product mix includes a 0.4% unfavorable impact from the prior year associated with our decision to discontinue certain low margin businesses. The divestiture of our Giotti canning business unfavorably impacted sales by 0.6% as compared to the prior year period. The favorable impact of foreign currency rates increased flavor solutions segment sales by 1.3% compared to the year-ago quarter and is excluded from our measure of sales growth of 2.5% on a constant currency basis. In the Americas region, flavor solutions sales increased by 4.7% in the first quarter of 2024 as compared to the first quarter of 2023 and increased by 3.4% on a constant currency basis. Pricing actions, principally due to those implemented in the prior year, favorably impacted sales by 1.9% during the quarter ended February 29, 2024, as compared to the prior year period. Favorable volume and product mix increased flavor solutions sales in the Americas by 1.5% during the first quarter of 2024, including the effects of growth in sales to packaged food and nutrition and healthcare companies, as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 1.3% compared to the first quarter of 2023 and is excluded from our measure of sales growth of 3.4% on a constant currency basis. In the EMEA region, flavor solutions sales increased by 1.8% in the first quarter of 2024 as compared to the first quarter of 2023 and declined by 1.4% on a constant currency basis. Pricing actions, principally due to those implemented in the prior year, favorably impacted sales by 4.0% in the first quarter of 2024 as compared to the prior period level. Unfavorable volume and product mix decreased segment sales in the EMEA region by 2.5% as compared to the corresponding period in 2023 including the effects of consumer spending at quick service restaurants and packaged food and beverage companies and a 1.8% impact of our decision to discontinue a low margin business. The divestiture of our Giotti canning business unfavorably impacted sales by 2.9% as compared to the prior year period. A favorable impact from foreign currency rates increased sales by 3.2% compared to the first quarter of 2023 and is excluded from our measure of sales decline of 1.4% on a constant currency basis. In the APAC region, flavor solutions sales increased 1.5% in the first quarter of 2024 as compared to the first quarter of 2023 and increased by 4.5% on a constant currency basis. Pricing actions, principally due to those implemented in the prior year, favorably impacted sales by 3.5% as compared to the prior year period. Favorable volume and product mix increased segment sales by 1.0% in the first quarter of 2024. An unfavorable impact from foreign currency rates decreased sales by 3.0% compared to the first quarter of 2023 and is excluded from our measure of sales growth of 4.5% on a constant currency basis. Segment operating income for our flavor solutions segment increased by $8.0 million, or 15.0%, in the first quarter of 2024 as compared to the first quarter of 2023. 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 driven by favorable pricing, product and customer mix, and CCI-led and GOE cost savings which more than offset increased commodity and conversion costs and the higher level of SG&A expenses. Segment operating margin for our flavor solutions segment increased by 90 basis points from the prior year level to 9.0% in the first quarter of 2024. That increase was principally the result of an increase in gross margin, as previously described, which was partially offset by a higher level of SG&A as a percentage of sales, all as compared to 2023. On a constant currency basis, segment operating income for our flavor solutions segment increased by 13.7% in the first quarter of 2024 as compared to the same period in 2023. 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. 25 Table of Contents Foreign Exchange Risk We are exposed to foreign currency risk affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps with highly-rated financial institutions to reduce fluctuations in the long or short currency positions. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. All derivatives are designated as hedges. The following table sets forth the notional values and unrealized net gain (loss) of the portfolio of our forward foreign currency and cross currency swap contracts: February 29, 2024 November 30, 2023 Forward foreign currency: Notional value $ 953.7 $ 1,000.4 Unrealized net gain (loss) (15.5) (13.5) Cross currency swaps: Notional value 953.5 958.5 Unrealized net gain 23.0 17.1 The outstanding notional value is a result of our decisions on foreign currency exposure coverage, based on our foreign currency and foreign currency translation exposures. Interest Rate Risk We manage our interest rate exposure by entering into both fixed and variable rate debt arrangements. We use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments, and all derivatives are designated as hedges. The following table sets forth the notional values and unrealized net gain (loss) of our interest rate swap contracts: February 29, 2024 November 30, 2023 Notional value $ 600.0 $ 600.0 Unrealized net (loss) (51.9) (52.8) The change in fair values of our interest rate swap contracts is due to changes in interest rates on the notional amounts outstanding as of each date as well as the remaining duration of our interest rate derivative contracts. Commodity Risk We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw materials are dairy products, pepper, onion, garlic, capsicums (red peppers and 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 believe that our allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant. 26 Table of Contents NON-GAAP FINANCIAL MEASURES The following table includes financial measures of adjusted operating income, adjusted operating income margin, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures, which are prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact of special charges and the associated income tax effects, as applicable. Special charges consist of expenses and income, as applicable, 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. Expenses associated with the approved actions are classified as special charges upon recognition and monitored on an on-going basis through completion. Details with respect to the composition of special charges set forth below are included in note 2 of the notes to our accompanying condensed consolidated financial statements. Details with respect to the composition of special charges for the year ended November 30, 2023 are included in note 3 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2023. 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, U.S. 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. 27 Table of Contents A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows: For the year ended November 30, 2023 For the three months ended Estimated for the year ending November 30, 2024 February 29, 2024 February 28, 2023 Operating income $ 963.0 $ 233.5 $ 199.0 Impact of special charges 61.2 4.2 27.8 Adjusted operating income $ 1,024.2 $ 237.7 $ 226.8 Operating income margin (1) 14.5 % 14.6 % 12.7 % Impact of special charges 0.9 % 0.2 % 1.8 % Adjusted operating income margin (1) 15.4 % 14.8 % 14.5 % Income tax expense $ 174.5 $ 49.6 $ 34.4 Impact of special charges 14.5 1.1 6.5 Adjusted income tax expense $ 189.0 $ 50.7 $ 40.9 Income tax rate (2) 21.8 % 25.5 % 21.6 % Impact of special charges 0.2 % — % 0.2 % Adjusted income tax rate (2) 22.0 % 25.5 % 21.8 % Net income $ 680.6 $ 166.0 $ 139.1 Impact of special charges 46.7 3.1 21.3 Adjusted net income $ 727.3 $ 169.1 $ 160.4 Earnings per share – diluted $ 2.52 $ 0.62 $ 0.52 $2.76 to $2.81 Impact of special charges 0.18 0.01 0.07 0.04 Adjusted earnings per share – diluted $ 2.70 $ 0.63 $ 0.59 $2.80 to $2.85 (1) Operating income margin, impact of special charges, and adjusted operating income margin are calculated as operating income, impact of special charges, and adjusted operating income as a percentage of net sales for each period presented. (2) 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 special charges of $198.5 million and $187.3 million for the three months ended February 29, 2024, and February 28, 2023 respectively. Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes excluding special charges of $859.9 million for the year ended November 30, 2023. Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed “on a constant currency basis”, is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results). Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current period results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the corresponding period of the comparative year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the 28 Table of Contents change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the comparative year. Rates of constant currency growth (decline) follow: Three months ended February 29, 2024 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Net sales: Consumer segment: Americas 0.1 % — % 0.1 % EMEA 13.3 % 5.1 % 8.2 % APAC (7.4) % (2.0) % (5.4) % Total Consumer segment 1.3 % 0.6 % 0.7 % Flavor Solutions segment: Americas 4.7 % 1.3 % 3.4 % EMEA 1.8 % 3.2 % (1.4) % APAC 1.5 % (3.0) % 4.5 % Total Flavor Solutions segment 3.8 % 1.3 % 2.5 % Total net sales 2.4 % 0.9 % 1.5 % Adjusted operating income: Consumer segment 1.7 % 0.3 % 1.4 % Flavor Solutions segment 15.0 % 1.3 % 13.7 % Total adjusted operating income 4.8 % 0.5 % 4.3 % To present constant currency information for the fiscal year 2024 projection, projected sales and adjusted operating income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company’s budgeted exchange rates for 2024 and are compared to the 2023 results, translated into U.S. dollars using the same 2024 budgeted exchange rates, rather than at the average actual exchange rates in effect during fiscal year 2023. 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 Three months ended February 29, 2024 February 28, 2023 Net cash provided by operating activities $ 138.4 $ 103.4 Net cash used in investing activities (61.8) (61.5) Net cash used in financing activities (67.7) (44.7) The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use a combination of equity and short- and long-term debt. We use short-term debt, comprised 29 Table of Contents 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 long-term debt, interest payments are higher in the first and third quarter of our fiscal year. We believe that our sources of liquidity, which include existing cash balances, cash flows from operations, existing credit facilities, our commercial paper program, and access to capital markets, will provide sufficient liquidity to meet our debt obligations, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. In the condensed consolidated cash flow statement, the changes in operating assets and liabilities are presented excluding the translation effects of changes in foreign currency exchange rates as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. Operating Cash Flow — Net cash provided by operating activities of $138.4 million for the three months ended February 29, 2024, increased $35.0 million from the same period of 2023. This increase was primarily driven by an increase in net income, as well as the improvement in cash provided by accounts payable. This was partially offset by the higher amount of certain employee benefits accrued as of the prior year-end and paid in the subsequent fiscal year. Investing Cash Flow — Cash used in investing activities of $61.8 million for the three months ended February 29, 2024 increased by $0.3 million as compared to $61.5 million for the corresponding period in 2023. Capital expenditures increased from the 2023 level of $61.5 million to $62.0 million. We expect 2024 capital expenditures to approximate $290 million. Financing Cash Flow — Financing activities used cash of $67.7 million for the first three months of 2024 and increased $23.0 million as compared to $44.7 million for the corresponding period in 2023. The increase is a result of changes in our net borrowings, share issuance activity associated with the exercise of stock options, share repurchase activity, and dividends, all as described below. The following table outlines our net borrowing activities: Three months ended February 29, 2024 February 28, 2023 Net increase in short-term borrowings $ 57.3 $ 67.9 Repayments of long-term debt (14.1) (3.6) Net cash provided by borrowing activities $ 43.2 $ 64.3 The following table outlines the activity in our share repurchase program for the three months ended February 29, 2024 and February 28, 2023: 2024 2023 Number of shares of common stock repurchased (in thousands) 4 44 Dollar amount (in millions) $ 0.3 $ 3.5 As of February 29, 2024, $501 million remained of the $600 million share repurchase program that was authorized by the Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. During the three months ended February 29, 2024, we received proceeds of $4.4 million from exercised stock options as compared to $5.2 million received in the corresponding 2023 period. We repurchased $4.9 million and $6.1 million of common stock during the three months ended February 29, 2024 and February 28, 2023, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans. 30 Table of Contents We increased dividends paid to $112.7 million, or a per share quarterly dividend of $0.42, in the first three months of 2024 from $104.6 million, or a per share quarterly dividend of $0.39, of dividends paid in the same period last year. The timing and amount of any future dividends is determined by our Board of Directors. Most of our cash is in our subsidiaries outside of the U.S. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and any possible future acquisitions. At February 29, 2024 and February 28, 2023, we temporarily used $539.3 million and $150.1 million, respectively, of cash from our non-U.S. subsidiaries to pay down short-term debt in the U.S. During a quarter, our short-term borrowings vary, but are typically lower at the end of a quarter. The average short-term borrowings outstanding for the three months ended February 29, 2024 and February 28, 2023 were $828.9 million and $1,460.0 million, respectively. Total average debt outstanding for the three months ended February 29, 2024 and February 28, 2023 was $4,883.9 million and $5,265.0 million, respectively. The reported values of our assets and liabilities are significantly affected by fluctuations in foreign exchange rates between periods. At February 29, 2024, the exchange rate for the Mexican peso was higher than the U.S. dollar at November 30, 2023. At February 29, 2024, the exchange rate for the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Polish zloty, South African rand, and Australian dollar were lower than the U.S. dollar at November 30, 2023. Credit and Capital Markets Cash flows from operating activities are our primary source of liquidity for funding growth, dividends, capital expenditures and share repurchases. We also rely on our revolving credit facilities, or borrowings backed by these facilities, to fund working capital needs and other general corporate requirements. 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%. 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. We generally use our revolving credit facilities to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facilities. These facilities are made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of our working capital. We periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. In addition, we engage in regular communication with all banks participating in our credit facility. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. Material Cash Requirements We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. Our primary obligations include principal and interest payments on our outstanding short-term borrowings and long-term debt. In the next year, our most significant debt service obligation is the maturity of our $700.0 million, 3.15% notes due in August 2024. Also in June 2024, our $500 million, 364-day revolving credit facility matures. Our other cash requirements include raw material purchases, lease payments, income taxes, anticipated quarterly dividends, and pension and postretirement benefits, as well as other contractual obligations. These obligations impact our liquidity and capital resource needs. To meet those cash requirements, we intend to use our existing cash, cash equivalents and internally generated funds, to borrow under our existing credit facilities or under other short- 31 Table of Contents term borrowing facilities and depending on market conditions and upon the significance of the cost of a particular debt maturity to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our future cash requirements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of notes to the accompanying condensed 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 are included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2023. There have been no changes in our critical accounting estimates and assumptions included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2023. FORWARD-LOOKING INFORMATION Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, gross margin, earnings, cost savings, special charges, acquisitions, brand marketing support, volume and product mix, income tax expense, and the impact of foreign currency rates are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan” and similar expressions. These statements may relate to: general economic and industry conditions, including consumer spending rates, interest rates, and availability of capital; expectations regarding sales growth potential in various geographies and markets, including the impact from brand marketing support, product innovation, and customer, channel, category, heat platform and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected impact of pricing actions on the Company's results of operations and gross margins; the impact of price elasticity on our sales volume and mix; the expected impact of the inflationary cost environment on our business; the expected impact of factors affecting our supply chain, including the availability and prices of commodities and other supply chain resources including raw materials, packaging, labor energy, and transportation; the expected impact of productivity improvements, and cost savings, including those associated with our CCI and GOE programs and Global Business Services operating model initiative; the ability to identify, attract, hire, retain and develop qualified personnel and develop the next generation of leaders; the impact of the ongoing conflicts between Russia and Ukraine, Israel and Hamas, and in the Red Sea, including the potential for broader economic disruption; expected working capital improvements; the expected timing and costs of implementing our business transformation initiative, which includes the implementation of a global enterprise resource planning (ERP) system; the expected impact of accounting pronouncements; the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of short- and long-term debt, working capital needs, planned capital expenditures, quarterly dividends and our ability to obtain additional short- and long-term financing or issue additional debt securities; and expectations regarding purchasing shares of McCormick's common stock under the existing repurchase authorization. These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: the company's ability to drive revenue growth; the company's ability to increase pricing to offset, or partially offset, inflationary pressures on the cost of our products; damage to the company's reputation or brand name; loss of brand relevance; increased private label use; the company's ability to drive productivity improvements, including those related to our CCI program and streamlining actions, including our GOE program; product quality, labeling, or safety concerns; negative publicity about our products; actions by, and the financial condition of, competitors and customers; the longevity of mutually beneficial relationships with our large customers; the ability to identify, interpret and react to changes in consumer preference and demand; business interruptions due to natural disasters, unexpected events or public health crises; issues affecting the company's supply chain and procurement of raw materials, including fluctuations in the cost and availability of raw and packaging materials; labor shortage, turnover and labor cost increases; the impact of the ongoing conflicts between Russia and 32 Table of Contents Ukraine, Israel and Hamas, and in the Red Sea, including the potential for broader economic disruption; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses; global economic and financial conditions generally, availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; the effects of our amount of outstanding indebtedness and related level of debt service as well as the effects that such debt service may have on the company's ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; impairments of indefinite-lived intangible assets; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; the stability of credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; the company's inability to successfully implement our business transformation initiative; fundamental changes in tax laws; including interpretations and assumptions we have made, and guidance that may be issued, and volatility in our effective tax rate; climate change; Environmental, Social and Governance (ESG) matters; infringement of intellectual property rights, and those of customers; litigation, legal and administrative proceedings; the company's inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; and other risks described in the company's filings with the Securities and Exchange Commission. Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.