0000063754-17-000057.txt : 20170928 0000063754-17-000057.hdr.sgml : 20170928 20170928172717 ACCESSION NUMBER: 0000063754-17-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 81 CONFORMED PERIOD OF REPORT: 20170831 FILED AS OF DATE: 20170928 DATE AS OF CHANGE: 20170928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCORMICK & CO INC CENTRAL INDEX KEY: 0000063754 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 520408290 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14920 FILM NUMBER: 171108463 BUSINESS ADDRESS: STREET 1: 18 LOVETON CIRCLE STREET 2: P O BOX 6000 CITY: SPARKS STATE: MD ZIP: 21152 BUSINESS PHONE: 4107717301 MAIL ADDRESS: STREET 1: 18 LOVETON CIRCLE STREET 2: P O BOX 6000 CITY: SPARKS STATE: MD ZIP: 21152 FORMER COMPANY: FORMER CONFORMED NAME: MCCORMICK & CO DATE OF NAME CHANGE: 19660620 10-Q 1 mkc-8312017xq3.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended August 31, 2017
Commission File Number 001-14920
 
 McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
 
MARYLAND
52-0408290
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
18 Loveton Circle, P. O. Box 6000,
Sparks, MD
21152-6000
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code    (410) 771-7301
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes   x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
 
Accelerated Filer
¨
Non-Accelerated Filer
¨
(Do not check if a smaller reporting company)
 
 
 
 
Smaller Reporting Company
¨
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Shares Outstanding
 
 
 
August 31, 2017
 
 
Common Stock
11,171,764

 
 
Common Stock Non-Voting
119,826,605

 



TABLE OF CONTENTS
 


2


PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(in millions except per share amounts)
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Net sales
$
1,185.2

 
$
1,091.0

 
$
3,343.2

 
$
3,184.5

Cost of goods sold
700.8

 
637.1

 
2,001.2

 
1,892.8

Gross profit
484.4

 
453.9

 
1,342.0

 
1,291.7

Selling, general and administrative expense
286.5

 
281.8

 
869.0

 
860.0

Transaction and integration expenses (related to RB Foods acquisition)
24.5

 

 
24.5

 

Special charges
4.7

 
4.3

 
13.0

 
9.8

Operating income
168.7

 
167.8

 
435.5

 
421.9

Interest expense
21.5

 
14.1

 
50.9

 
41.7

Other debt costs
15.4

 

 
15.4

 

Other income, net
1.2

 
0.2

 
2.5

 
2.0

Income from consolidated operations before income taxes
133.0

 
153.9

 
371.7

 
382.2

Income taxes
33.0

 
34.3

 
93.6

 
91.5

Net income from consolidated operations
100.0

 
119.6

 
278.1

 
290.7

Income from unconsolidated operations
8.2

 
8.1

 
23.6

 
24.2

Net income
$
108.2

 
$
127.7

 
$
301.7

 
$
314.9

Earnings per share – basic
$
0.86

 
$
1.01

 
$
2.40

 
$
2.48

Average shares outstanding – basic
126.3

 
126.4

 
125.5

 
126.8

Earnings per share – diluted
$
0.85

 
$
1.00

 
$
2.37

 
$
2.46

Average shares outstanding – diluted
127.8

 
127.9

 
127.2

 
128.2

Cash dividends paid per share
$
0.47

 
$
0.43

 
$
1.41

 
$
1.29

Cash dividends declared per share
$
0.47

 
$
0.43

 
$
0.94

 
$
0.86

See notes to condensed consolidated financial statements (unaudited).


3


McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
 
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Net income
$
108.2

 
$
127.7

 
$
301.7

 
$
314.9

Net income attributable to non-controlling interest
0.4

 
0.1

 
1.2

 
0.8

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized components of pension and postretirement plans (including curtailment gains of $76.7 for the nine months ended August 31, 2017)
27.1

 
8.3

 
114.7

 
17.8

Currency translation adjustments
99.9

 
(20.8
)
 
184.9

 
(7.8
)
Change in derivative financial instruments
(3.7
)
 
1.9

 
(13.2
)
 
0.3

Deferred taxes
(9.9
)
 
(1.9
)
 
(37.9
)
 
(4.4
)
Comprehensive income
$
222.0

 
$
115.3

 
$
551.4

 
$
321.6


See notes to condensed consolidated financial statements (unaudited).


4



McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
 
 
August 31,
2017
 
August 31,
2016
 
November 30,
2016
 
(unaudited)
 
(unaudited)
 
 
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
166.1

 
$
134.2

 
$
118.4

Trade accounts receivables, net
556.2

 
445.3

 
465.2

Inventories, net
 
 
 
 
 
Finished products
431.3

 
366.0

 
336.3

Raw materials and work-in-process
404.5

 
394.3

 
420.0

 
835.8

 
760.3

 
756.3

Prepaid expenses and other current assets
84.5

 
80.4

 
81.9

Total current assets
1,642.6

 
1,420.2

 
1,421.8

Property, plant and equipment
1,808.7

 
1,604.9

 
1,630.2

Less: accumulated depreciation
(1,043.3
)
 
(963.8
)
 
(960.8
)
Property, plant and equipment, net
765.4

 
641.1

 
669.4

Goodwill
4,503.3

 
1,813.3

 
1,771.4

Intangible assets, net
3,091.5

 
433.6

 
424.9

Investments and other assets
378.9

 
370.1

 
348.4

Total assets
$
10,381.7

 
$
4,678.3

 
$
4,635.9

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Short-term borrowings
$
349.2

 
$
559.3

 
$
390.3

Current portion of long-term debt
325.5

 
0.6

 
2.9

Trade accounts payable
516.9

 
361.0

 
450.8

Other accrued liabilities
542.6

 
419.5

 
578.7

Total current liabilities
1,734.2

 
1,340.4

 
1,422.7

Long-term debt
4,702.3

 
1,056.7

 
1,054.0

Deferred taxes
1,106.3

 
122.7

 
79.9

Other long-term liabilities
305.6

 
383.9

 
441.2

Total liabilities
7,848.4

 
2,903.7

 
2,997.8

Shareholders’ Equity
 
 
 
 
 
Common stock
411.8

 
406.6

 
409.7

Common stock non-voting
1,251.8

 
676.3

 
674.5

Retained earnings
1,123.9

 
1,074.7

 
1,056.8

Accumulated other comprehensive loss
(265.9
)
 
(400.2
)
 
(514.4
)
Non-controlling interests
11.7

 
17.2

 
11.5

Total shareholders’ equity
2,533.3

 
1,774.6

 
1,638.1

Total liabilities and shareholders’ equity
$
10,381.7

 
$
4,678.3

 
$
4,635.9

See notes to condensed consolidated financial statements (unaudited).


5



McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
(in millions)
 
 
Nine months ended August 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
301.7

 
$
314.9

Adjustments to reconcile net income to net cash flow provided by operating activities:
 
 
 
Depreciation and amortization
89.6

 
82.3

Stock-based compensation
18.4

 
19.8

Income from unconsolidated operations
(23.6
)
 
(24.2
)
Changes in operating assets and liabilities, net of effect of businesses acquired
(98.5
)
 
(93.4
)
Settlement of forward-starting interest rate swaps
(2.9
)
 

Dividends from unconsolidated affiliates
18.3

 
23.0

Net cash flow provided by operating activities
303.0

 
322.4

Investing activities
 
 
 
Acquisition of businesses (net of cash acquired)
(4,327.4
)
 
(116.2
)
Capital expenditures
(108.4
)
 
(87.9
)
Proceeds from corporate life insurance

 
1.4

Proceeds from sale of property, plant and equipment
0.7

 
0.9

Net cash flow used in investing activities
(4,435.1
)
 
(201.8
)
Financing activities
 
 
 
Short-term borrowings, net
(43.3
)
 
419.9

Long-term debt borrowings
3,977.6

 

Payment of debt issuance costs
(6.1
)
 

Long-term debt repayments
(3.9
)
 
(202.0
)
Proceeds from exercised stock options
26.5

 
35.9

Taxes withheld and paid on employee stock awards
(5.4
)
 
(3.5
)
Payment of contingent consideration
(19.7
)
 

Purchase of minority interest
(1.2
)
 

Issuance of common stock non-voting
554.9

 

Payment of costs related to issuance of common stock non-voting
(0.9
)
 

Common stock acquired by purchase
(135.8
)
 
(178.9
)
Dividends paid
(176.0
)
 
(163.6
)
Net cash flow provided by (used in) financing activities
4,166.7

 
(92.2
)
Effect of exchange rate changes on cash and cash equivalents
13.1

 
(6.8
)
Increase in cash and cash equivalents
47.7

 
21.6

Cash and cash equivalents at beginning of period
118.4

 
112.6

Cash and cash equivalents at end of period
$
166.1

 
$
134.2

See notes to condensed consolidated financial statements (unaudited).

6


McCORMICK & COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
ACCOUNTING POLICIES

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented.
The results of consolidated operations for the three and nine month periods ended August 31, 2017 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations are lower in the first half of the fiscal year and increase in the second half. The typical increase in net sales, net income and cash flow from operations in the second half of the year is largely due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.
For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2016.
As of November 30, 2016, we adopted Accounting Standards Update (ASU) No. 2015-03 Simplifying the Presentation of Debt Issuance Costs, which eliminated the prior requirement to recognize debt issuance costs as an asset and instead requires classification as a direct reduction from the carrying amount of the debt liability, and ASU No. 2015-17 Balance Sheet Classification of Deferred Taxes (Topic 740), which, for entities with a classified balance sheet, eliminated the prior requirement to classify deferred tax assets and liabilities as current and non-current and instead requires the presentation of all deferred tax assets and liabilities as noncurrent. As a result, the accompanying condensed consolidated balance sheet as of August 31, 2016, has been restated to reflect the requirements of these newly adopted standards.
Accounting Pronouncement Adopted in 2017
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09 CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires, among its other provisions, that excess tax benefits (which represent the excess of actual tax benefits received at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) and tax deficiencies (which represent the amount by which actual tax benefits received at the date of vesting or settlement is lower than the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as an increase or decrease in income taxes when the awards vest or are settled. This is in comparison to the prior requirement that these excess tax benefits be recognized in additional paid-in capital and these tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. The new guidance also requires excess tax benefits to be classified, together with other income tax cash flows, as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. The new guidance is effective for the first quarter of our fiscal year ending November 30, 2018, with early adoption permitted.
We have elected to early adopt ASU No. 2016-09 effective December 1, 2016 on a prospective basis, where permitted by the new standard. As a result of this adoption:
We recognized discrete tax benefits of $0.8 million and $9.4 million in the income taxes line item of our consolidated income statement for the three and nine months ended August 31, 2017, respectively, related to excess tax benefits upon vesting or settlement in that period.
We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our cash flow statements for periods beginning after November 30, 2016, where these benefits are classified, together with other income tax cash flows, as an operating activity.
We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.

7


At this time, we have not changed our policy on statutory withholding requirements and will continue to allow an employee to withhold at the minimum statutory withholding requirements. Amounts paid by us to taxing authorities when directly withholding shares associated with employees’ income tax withholding obligations are classified as a financing activity in our cash flow statement for the nine months ended August 31, 2017. ASU No. 2016-09 requires that this cash flow presentation be made retrospectively and our cash flow statement for the nine months ended August 31, 2016 has been restated accordingly.
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended August 31, 2017.
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815)Targeted Improvements to Accounting for Hedging Activities. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. Early adoption is permitted in any interim period or fiscal year before the effective date for all entities. If the guidance is early adopted in an interim period, any adjustments would be reflected as of the beginning of the fiscal year that includes that interim period. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In March 2017, the FASB issued ASU No. 2017-07 Compensation-Retirement Benefits (Topic 715)Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance revises how employers that sponsor defined benefit pension and other postretirement plans present the net periodic benefit cost in their income statement and requires that the service cost component of net periodic benefit cost be presented in the same income statement line items as other employee compensation costs from services rendered during the period. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. The other components of the net periodic benefit cost must be presented separately from the line items that include the service cost and outside of any subtotal of operating income on the income statement. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted as of the beginning of an annual reporting period for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04 IntangiblesGoodwill and Other Topics (Topic 350)Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2021. Early adoption is permitted for all entities for annual and interim goodwill impairment testing dates after January 1, 2017. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805)Clarifying the Definition of a Business. This guidance changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in Accounting Standards Codification (ASC 606) Revenue from Contracts with Customers. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors. Our leases principally relate to: (i) certain real estate, including that related to a number of administrative, distribution and manufacturing locations; (ii) certain machinery and equipment, including a corporate airplane and automobiles; and (iii) certain software. In addition, in 2016, we entered into a 15-year lease for a headquarters building, which is expected to commence upon completion of building construction and fit-out, currently scheduled for the second half of 2018. The new guidance in ASU No. 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other

8


than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11 Simplifying the Measurement of Inventory (Topic 330). This guidance is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. It will be effective for the first quarter of our fiscal year ending November 30, 2018, and early adoption is permitted. We do not believe the impact from adoption of this new accounting pronouncement will have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606). This guidance is intended to improveand converge with international standardsthe financial reporting requirements for revenue from contracts with customers. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted for all entities, but not before the original effective date for public business entities (that is, annual reporting periods beginning after December 15, 2016 or our fiscal year ending November 30, 2018). We do not expect to early adopt this new accounting pronouncement. In preparation for our adoption of the new standard in our fiscal year ending November 30, 2019, we have obtained representative samples of contracts and other forms of agreements with our customers in the U.S. and international locations and are evaluating the provisions contained therein in light of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contractan agreement between two or more parties that creates legally enforceable rights and obligationsexists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other manufacturers of consumer products, such as slotting fees, co-operative advertising, rebates and other pricing allowances, merchandising funds and consumer coupons. We have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a prospective or retrospective basis in the first quarter of our fiscal year ending November 30, 2019.


9


 
2.
ACQUISITIONS

Acquisitions are part of our strategy to increase sales and profits.
Acquisition of RB Foods
On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately $4.21 billion, is net of acquired cash of $24.3 million, and included a preliminary working capital adjustment of $11.2 million, subject to certain post-closing adjustments. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 11) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 5). The acquired market-leading brands of RB Foods include French’s®, Frank’s RedHot® and Cattlemen’s®, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. Condiments category and provide significant international growth opportunities for our consumer and industrial segments. At the time of the acquisition, annual sales of RB Foods were approximately $570 million. The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of RB Foods’ operations are included in our consolidated financial statements as a component of our consumer and industrial segments from the date of acquisition.
The purchase price of RB Foods was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The allocation of the purchase price will be finalized within the allowable measurement period. The preliminary allocation, net of cash acquired, of the fair value of the RB Foods acquisition is summarized in the table below (in millions):
Trade accounts receivable
$
53.1

Inventories
65.9

Property, plant and equipment
33.1

Goodwill
2,553.9

Intangible assets
2,595.0

Other assets
5.7

Trade accounts payable
(65.7
)
Other accrued liabilities
(48.8
)
Deferred taxes
(966.6
)
Other long-term liabilities
(19.9
)
Total
$
4,205.7

The preliminary valuation of the acquired net assets of RB Foods includes $2,475.0 million allocated to indefinite lived brand assets and $120.0 million allocated to definite lived intangible assets with a weighted-average life of 15 years. As a result of the acquisition, we recognized a total of $2,553.9 million of goodwill. That goodwill, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumer and industrial customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The final allocation of goodwill to our reporting units, which are consumer and industrial segments, was not complete as of August 31, 2017, but will be finalized within the allowable measurement period. The results of RB Foods’ operations have been included in our consumer and industrial segments since its acquisition.
Total transaction and integration expenses related to the RB Foods acquisition are anticipated to approximate $100 million, of which approximately $60 million represent estimated transaction expenses and the remainder represent estimated integration expenses. These costs are anticipated to be incurred through fiscal 2018 and primarily consist of the amortization of the acquisition-date fair value adjustment of inventories in the amount of approximately $20 million that will be included in cost of goods sold; outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition, including the costs of $15.4 million related to the Bridge financing commitment that is included in other debt costs. Of the total anticipated transaction and integration expenses, we incurred $45.8 million in the three and nine months ended August 31, 2017

10


and expect to incur $31.4 million in the fourth quarter of 2017 and $22.8 million in fiscal 2018. The following are the transaction and integration expenses that we have recorded for the three and nine months ended August 31, 2017 related to the RB Foods acquisition (in millions):
Transaction expenses included in cost of goods
$
5.9

Transaction expenses included in other debt costs
15.4

Other transaction expenses
22.3

Integration expenses
2.2

Total
$
45.8

For the three and nine months ended August 31, 2017, RB Foods added $22.5 million to our sales. For the three and nine months ended August 31, 2017, the impact of RB Foods on our consolidated income before taxes approximated the transaction and integration expenses previously noted.
The following unaudited pro forma information presents consolidated financial information as if RB Foods had been acquired at the beginning of fiscal 2016. Interest expense has been adjusted to reflect the debt issued to finance the acquisition as though that debt had been outstanding at December 1, 2015. The pro forma results reflect amortization expense of approximately $6.0 million for each period presented, relating to definite lived intangible assets recorded based upon preliminary third party valuations. The pro forma results for the nine months ended August 31, 2016 also include transaction and integration costs of $24.5 million, $20.0 million of amortization of the acquisition-date fair value adjustment of inventories, and $15.4 million associated with the Bridge financing commitment, all assuming that the acquisition had occurred as of December 1, 2015. The pro forma results for the nine months ended August 31, 2017 exclude the previously noted items to the extent they were incurred during the nine month period as they have been included, on a pro forma basis, in the results for the nine months ended August 31, 2016. The pro forma adjustments previously noted have been adjusted for the applicable income tax impact. Basic and diluted shares outstanding have been adjusted to reflect the issuance of 6.35 million shares of our common stock non-voting to partially finance the acquisition.
(in millions, except per share data)
Nine months ended August 31,
 
2017
 
2016
Net sales
$
3,718.1

 
$
3,572.5

Net income
351.0

 
284.8

Earnings per share – basic
$
2.67

 
$
2.14

Earnings per share – diluted
$
2.64

 
$
2.12

These unaudited pro forma consolidated results are not adjusted for changes in the business that will take place subsequent to our acquisition. including, but not limited to, additional transaction and integration costs that may be incurred. Accordingly, the above unaudited pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had been completed as of December 1, 2015, nor are they indicative of future consolidated results.
Other Acquisitions
On May 5, 2017, we purchased the remaining 15% ownership interest in our joint venture, Kohinoor Specialty Foods India Private Limited (Kohinoor) in India for a cash payment of $1.6 million, of which $1.2 million was paid in May and the balance is expected to be paid in the fourth quarter of 2018. In September 2011, when we originally entered this joint venture, we invested $113.0 million for an 85% interest in Kohinoor. In conjunction with our purchase of the 15% minority interest in the second quarter of 2017, we have eliminated the minority interest in Kohinoor and recorded an adjustment of $0.6 million in retained earnings of our stockholders' equity section of our consolidated balance sheet. The $1.2 million payment is reflected in the financing activities section of our consolidated cash flow statement for the nine months ended August 31, 2017.
On December 15, 2016, we purchased 100% of the shares of Enrico Giotti SpA (Giotti), a leading European flavor manufacturer located in Italy, for a cash payment of $124.0 million (net of cash acquired of $1.2 million), subject to certain post-closing adjustments. The acquisition was funded with cash and short-term borrowings. Giotti is well known in the industry for its innovative beverage, sweet, savory and dairy flavor applications. At the time of the acquisition, annual sales of Giotti were approximately €53 million. Our acquisition of Giotti in fiscal 2017 expands the breadth of value-added products for McCormick's industrial segment, including additional expertise in flavoring health and nutrition products. A preliminary valuation of the acquired net assets of Giotti resulted in $1.3 million allocated to net tangible assets acquired, $9.8 million

11


allocated to indefinite lived brand asset, $38.0 million allocated to definite lived intangible assets with a weighted-average life of 11.9 years and $74.9 million allocated to goodwill. Goodwill related to the Giotti acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging the customer intimacy and value-added flavor solutions we provide to our industrial customers to Giotti’s relationships with industrial customers of their flavors solutions and extracts, as well as from expected synergies from the combined operations and assembled workforces, and the future development initiatives of the assembled workforces. The preliminary valuation, based on a comparison of acquisitions of similar industrial businesses, provided average percentages of purchase prices assigned to goodwill and other identifiable intangible assets, which we used to initially value the Giotti acquisition. We expect to finalize the determination of the fair value of the acquired net assets of Giotti in the fourth quarter of 2017. Giotti has been included in our industrial segment since its acquisition. During the nine months ended August 31, 2017, we recorded $2.5 million in transaction-related expenses associated with this acquisition; those expenses are included in selling, general and administrative expense in our consolidated income statement.
Transaction-related expenses include third party expenses related to commercial and legal due diligence for unconsummated and completed acquisitions as well as third party expenses related to accounting, legal and financing activities with respect to completed acquisitions. Transaction-related expenses, excluding amounts related to the RB Foods acquisition that are separately classified in our consolidated income statement, are included in selling, general and administrative expense in our consolidated income statement and totaled $0.7 million and $2.8 million for the three and nine months ended August 31, 2017, respectively, and $4.9 million and $12.5 million for the three and nine months ended August 31, 2016, respectively.

On April 19, 2016, we completed the purchase of 100% of the shares of Botanical Food Company, Pty Ltd, owner of the Gourmet Garden brand of packaged herbs (Gourmet Garden), a privately held company based in Australia. Gourmet Garden is a global market leader in chilled convenient packaged herbs. Gourmet Garden's products complement our existing branded herb portfolio with the addition of chilled convenient herbs located in the perimeter of the grocery store. We plan to drive sales of the Gourmet Garden brand by expanding global distribution and building awareness with increased brand investment. At the time of acquisition, annual sales of Gourmet Garden were approximately 70 million Australian dollars. The purchase price was $116.2 million, net of cash acquired of $3.3 million and after closing adjustments, and was financed with a combination of cash and short-term borrowings. That purchase price reflects a $1.9 million favorable net working capital adjustment that was received in the third quarter of 2016. During the second quarter of 2017, we completed the final valuation of the Gourmet Garden acquisition which resulted in the following changes from the preliminary valuation to the acquired assets and liabilities: (i) the indefinite-lived brand asset increased by $7.3 million to $27.6 million; (ii) definite-lived intangible assets increased by $4.7 million to $18.9 million (with a weighted average life of 14.2 years); (iii) net tangible assets (net of liabilities assumed, including the deferred tax liabilities associated with identified intangible assets) acquired decreased by $4.4 million to $16.0 million; (iv) goodwill decreased by $7.6 million to $53.7 million. There was no material change to amortization expense as a result of these changes in the final valuation. Goodwill related to the Gourmet Garden acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumers for herbs, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has an industrial component, the industrial component was not material to its overall business in 2016. Beginning in 2017, the industrial component of Gourmet Garden is being reflected as a component of our industrial segment.

For the three and nine months ended August 31, 2017, Giotti added $20.5 million and $50.1 million, respectively, to our sales. For the nine months ended August 31, 2017, incremental sales of Gourmet Garden were $32.5 million, representing sales of the business in the first four months of 2017. Due to financing, acquisition and integration costs, the incremental operating income contributed by Giotti was not significant to our overall results for the three months ended August 31, 2017. Similarly, due to financing, acquisition and integration costs, the aggregate incremental operating income contributed by Giotti and Gourmet Garden was not significant to our overall results for the nine months ended August 31, 2017. Proforma financial information for these acquisitions has not been presented because the financial impact is not material. Proforma financial information for the acquisitions of Giotti and Gourmet Garden has not been presented because the incremental financial impact is not material.


3.  
SPECIAL CHARGES

In our consolidated income statement, we include a separate line item captioned “Special charges” in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of

12


any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.

The following is a summary of special charges recognized in the three and nine months ended August 31, 2017 and August 31, 2016 (in millions):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Employee severance benefits and related costs
$
2.6

 
$
3.5

 
$
4.3

 
$
4.7

Other costs
2.1

 
0.8

 
8.7

 
5.1

Total
$
4.7

 
$
4.3

 
$
13.0

 
$
9.8


We continue to evaluate changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness.

During the three months ended August 31, 2017, our Management Committee approved a three-year initiative during which we expect to execute significant changes to our global processes, capabilities and operating model to provide a scalable platform for future growth. We expect this initiative to enable us to accelerate our ability to work globally and cross-functionally by aligning and simplifying processes throughout McCormick, in part building upon our current shared services foundation and expanding the end-to-end processes presently under that foundation. We expect this initiative, which we refer to as McCormick Global Enablement (MGE), to enable this scalable platform for future growth while reducing costs, enabling faster decision making, increasing agility and creating capacity within our organization.

While we are continuing to fully develop the details of our MGE operating model, we expect the cost of the MGE initiativeto be recognized as “Special charges” in our consolidated income statement over its expected three-year courseto range from approximately $55 million to $65 million. Of that $55 million to $65 million, we estimate that two-thirds will be attributable to employee severance and related benefit payments and one-third will be attributable to cash payments associated with related costs of MGE implementation and transition, including outside consulting and other costs directly related to the initiative. The MGE initiative is expected to generate annual savings, ranging from approximately $30 million to $40 million, once all actions are implemented.

During the three months ended August 31, 2017, we recorded $4.7 million of special charges, consisting primarily of $1.8 million related to third party expenses incurred associated with our evaluation of changes relating to our MGE initiative, $1.2 million related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities, $1.1 million related to employee severance benefits and other costs associated with action related to the transfer of certain manufacturing operations in our Asia Pacific region to a new facility under construction in Thailand and $0.4 million for severance and other exit costs associated with our Europe, Middle East and Africa (EMEA) region’s closure of its manufacturing plant in Portugal in mid-2017. During the nine months ended August 31, 2017, we recorded $13.0 million of special charges, consisting primarily of $7.3 million related to third party expenses incurred associated with our evaluation of changes relating to our MGE initiative, $2.3 million for severance and other exit costs associated with our EMEA region’s closure of its manufacturing plant in Portugal in mid-2017, $1.4 million related to employee severance benefits and other costs directly associated with the relocation of one of Chinese manufacturing facilities, $1.5 million related to employee severance benefits and other costs associated with actions related to the transfer of certain manufacturing operations to a new facility under construction in Thailand, and $0.6 million related to other exit costs associated with actions undertaken to enhance organization efficiency and streamline processes in our EMEA region (which is more fully described below). These charges were partially offset by a $0.3 million net credit recorded during the nine months ended August 31, 2017 related to our finalization of special charges associated with the 2015 discontinuance of Kohinoor's non-profitable bulk-packaged and broken basmati rice product lines.

Of the $13.0 million in special charges recorded during the nine months ended August 31, 2017, approximately $10.9 million were paid in cash and $0.5 million represented a non-cash asset impairment, with the remaining accrual expected to be substantially paid in 2017.


13


In addition to the amounts recognized in the first nine months of 2017, we expect to incur additional special charges during the fourth quarter of 2017 of $9.1 million, consisting of $7.1 million of additional third party expenses associated with our evaluation of changes related to our MGE initiative, $0.4 million related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities, $1.4 million related to ongoing EMEA reorganization plans, and $0.2 million of other costs associated with the planned exit of two leased manufacturing facilities in Singapore and Thailand.

During the three months ended August 31, 2016, we recorded $4.3 million of special charges, consisting of $1.8 million related to the planned exit from our current leased manufacturing facilities in Singapore and Thailand upon construction of a new manufacturing facility in Thailand, $1.7 million related to additional organization and streamlining actions associated with our EMEA region, and $0.8 million related to the discontinuance of non-profitable product lines of our Kohinoor business in India. The EMEA and Kohinoor actions taken in the third quarter of 2016 are components of actions that commenced in 2015 and are further described below. During the nine months ended August 31, 2016, we recorded $9.8 million of special charges, consisting of $4.8 million related to additional organization and streamlining actions associated with our EMEA region, $1.8 million associated with actions associated with our planned exit of two leased manufacturing facilities in Singapore and Thailand, $1.7 million for employee severance actions and related with our North American effectiveness initiative initiated in 2015, and $1.5 million for other exist costs related to the discontinuance of non-profitable product lines of our Kohinoor business in India. The EMEA, Kohinoor and North American effectiveness initiative were all a continuation of actions that were initiated in 2015. The charges related to our manufacturing facilities in Singapore and Thailand were approved by our Management Committee in the third quarter of 2016.

The following is a breakdown by business segments of special charges for the three and nine months ended August 31, 2017 and 2016 (in millions):

Three months ended August 31,

Nine months ended August 31,
 
2017

2016

2017

2016
Consumer segment
$
3.0


$
2.4


$
8.5


$
7.2

Industrial segment
1.7


1.9


4.5


2.6

Total special charges
$
4.7


$
4.3


$
13.0


$
9.8


All remaining balances associated with our special charges are included in accounts payable and other accrued liabilities in our consolidated balance sheet.

In 2015, we initiated projects to enhance organization efficiency and streamline processes in EMEA in order to support our competitiveness and long-term growth. These initiatives center on actions intended to reduce fixed costs and improve business processes, as well as continue to drive simplification across the business and supply chain. These actions include the transfer of certain additional activities to our shared services center in Poland. These projects were continued in 2016 and 2017.


14


The following table outlines the major components of accrual balances and activity relating to the special charges associated with the EMEA reorganization plans that were initiated in 2015 for the nine months ended August 31, 2017 and 2016 (in millions):
 
Employee severance and related benefits
 
Other related costs
 
Total
Balance as of November 30, 2016
$
10.5

 
$
0.5

 
$
11.0

Special charges

 
0.6

 
0.6

Cash paid
(3.4
)
 
(0.6
)
 
(4.0
)
Impact of foreign exchange
1.1

 
0.2

 
1.3

Balance as of August 31, 2017
$
8.2

 
$
0.7

 
$
8.9

 
 
 
 
 
 
Balance as of November 30, 2015
$
16.2

 
$
0.6

 
$
16.8

Special charges
1.2

 
3.6

 
4.8

Cash paid
(6.1
)
 
(2.7
)
 
(8.8
)
Impact of foreign exchange
0.4

 

 
0.4

Balance as of August 31, 2016
$
11.7

 
$
1.5

 
$
13.2





15


4.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table displays intangible assets at August 31, 2017, August 31, 2016 and November 30, 2016 (in millions):
 
August 31, 2017
 
August 31, 2016
 
November 30, 2016
 
Gross carrying amount
Accumulated Amortization

 
Gross carrying amount
Accumulated Amortization

 
Gross carrying amount
Accumulated Amortization
Finite-lived intangible assets
$
336.7

$
61.5

 
$
166.5

$
48.6

 
$
161.1

$
48.4

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
Goodwill
4,503.3


 
1,813.3


 
1,771.4


Brand names and trademarks
2,816.3


 
315.7


 
312.2


 
7,319.6


 
2,129.0


 
2,083.6


Total goodwill and intangible assets
$
7,656.3

$
61.5

 
$
2,295.5

$
48.6

 
$
2,244.7

$
48.4

Intangible asset amortization expense was $4.1 million and $11.1 million for the three and nine months ended August 31, 2017, respectively, and $4.1 million and $8.6 million for the three and nine months ended August 31, 2016, respectively. At August 31, 2017, finite-lived intangible assets had a weighted-average remaining life of approximately 12.7 years.
The changes in the carrying amount of goodwill by business segment for the nine months ended August 31, 2017 and 2016 were as follows (in millions):
 
 
2017
 
2016
  
 
Consumer
 
Industrial
 
Consumer
 
Industrial
Beginning of year
 
$
1,608.3

 
$
163.1

 
$
1,587.7

 
$
171.6

Changes in preliminary purchase price allocation
 
(7.7
)
 

 
(23.2
)
 

Increases in goodwill from acquisitions
 
1,702.6

 
926.2

 
61.3

 

Foreign currency fluctuations
 
96.4

 
14.4

 
20.1

 
(4.2
)
Balance as of end of August
 
$
3,399.6

 
$
1,103.7

 
$
1,645.9

 
$
167.4

A preliminary valuation of the acquired net assets of RB Foods in August 2017 (see note 2) resulted in the allocation of $1,702.6 million and $851.3 million of goodwill to the consumer segment and industrial segment, respectively. A preliminary valuation of the acquired net assets of Giotti in December 2016 (see note 2) resulted in the allocation of $74.9 million of goodwill to the industrial segment.


16



5.
FINANCING ARRANGEMENTS

Our outstanding debt at each balance sheet date was as follows:
(millions)
August 31, 2017
August 31,
2016
November 30,
2016
Short-term borrowings
 
 
 
Commercial paper
$
314.0

$
528.1

$
356.9

Other
35.2

31.2

33.4

 
$
349.2

$
559.3

$
390.3

Weighted-average interest rate of short-term borrowings at end of period
2.0
%
0.7
%
1.4
%
 
 
 
 
Long-term debt
 
 
 
5.75% notes due 12/15/2017(1)
$
250.0

$
250.0

$
250.0

Term loan due 8/17/2020(3)
750.0



3.90% notes due 7/8/2021(2)
250.0

250.0

250.0

2.70% notes due 8/15/2022
750.0



Term loan due 8/17/2022(3)
750.0



3.50% notes due 8/19/2023(4)
250.0

250.0

250.0

3.15% notes due 8/15/2024
700.0



3.25% notes due 11/15/2025(5)
250.0

250.0

250.0

3.40% notes due 8/15/2027(6)
750.0



4.20% notes due 8/15/2047
300.0



7.63%–8.12% notes due 2024
55.0

55.0

55.0

Other
7.6

5.2

11.1

Unamortized discounts, premiums, debt issuance costs and fair value adjustments
(34.8
)
(2.9
)
(9.2
)
 
5,027.8

1,057.3

1,056.9

Less current portion
325.5

0.6

2.9

 
$
4,702.3

$
1,056.7

$
1,054.0


(1)
Interest rate swaps, settled upon the issuance of these notes in 2007, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 6.25%.
(2)
Interest rate swaps, settled upon the issuance of these notes in 2011, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 4.01%.
(3)
As more fully described below, the term loans are prepayable in whole or in-part. Also, the term loan due in 2022 requires quarterly principal payments of 2.5% of the initial principal amount.
(4)
Interest rate swaps, settled upon the issuance of these notes in 2013, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 3.30%.
(5)
Interest rate swaps, settled upon the issuance of these notes in 2015, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 3.45%. The fixed interest rate on $100 million of the 3.25% notes due in 2025 is effectively converted to a variable rate by interest rate swaps through 2025. Net interest payments are based on 3 month LIBOR plus 1.22% during the nine months ended August 31, 2017 (our effective rate as of August 31, 2017 was 2.53%).
(6)
Interest rate swaps, settled upon the issuance of these notes in 2017, effectively set the interest rate on the $750 million notes at a weighted-average fixed rate of 3.44%%.
Maturities of long-term debt during the fiscal years subsequent to November 30, 2017 are as follows (in millions):
2018
$
325.5

2019
75.2

2020
825.2

2021
325.2

Thereafter
3,492.5


In August 2017, we entered into a five-year $1.0 billion revolving credit facility, which will expire in August 2022. The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. This credit facility supports our commercial paper program and, after $314.0 million was used to support issued commercial paper, we have

17


$686.0 million of capacity at August 31, 2017. This facility replaces our prior facilities: (i) a five-year $750 million revolving credit facility that was due to expire in June 2020 and (ii) a 364-day $250 million revolving facility, which we entered into in the second quarter of 2017 and that was due to expire in March 2018. The pricing for the 364-day credit facility, on a fully drawn basis, was LIBOR plus 0.75%.

The consideration for our acquisition of RB Foods on August 17, 2017 totaled approximately $4.2 billion in cash (see note 2) and was funded with (a) borrowings under McCormick’s $1.5 billion Term Loan Agreement described below; (b) amounts received from the offering of $2.5 billion aggregate principal amount of McCormick’s senior unsecured notes described below; and (c) amounts received from the offering of McCormick’s common stock non-voting, which closed on August 11, 2017 (see note 11).

In connection with our entry into the agreement to acquire RB Foods, we entered into a commitment letter, dated July 18, 2017 (the “Commitment Letter”), under which certain banks agreed to provide a senior unsecured 364-day bridge loan facility (the “Bridge Facility”) of up to $4.2 billion in the aggregate. On August 7, 2017 we entered into a Senior Unsecured Bridge Credit Agreement with certain financial institutions under which those financial institutions agreed to provide a senior unsecured 364-day bridge loan facility (the “Bridge Facility”) for the purpose of providing the financing necessary to fund all or a portion of the consideration to be paid pursuant to the terms of the agreement related to the acquisition of RB Foods and related fees and expenses (the “Bridge Loan Commitment”). The Bridge Facility provided that the Bridge Loan Commitment would be reduced in equivalent amounts upon any incurrence by McCormick of, among other things, term loans and/or the issuance of equity or notes in a public offering or private placement prior to the consummation of the transaction, subject to certain exceptions set forth in the Bridge Facility. McCormick secured its permanent financing for the RB Foods acquisition, as described above, prior to the August 17, 2017 acquisition date. As a result, the Bridge Loan Commitment was reduced to zero without us ever drawing under the Bridge Facility. Other debt costs of $15.4 million for the three and nine months ended August 31, 2017 represents the Bridge Loan Commitment financing fees.

As previously noted, in connection with our acquisition of RB Foods, we entered into a Term Loan Agreement (“Term Loan”) in August 2017. The Term Loan provides for three-year and five-year senior unsecured term loans, each for $750 million. The three-year loan is payable at maturity. The five-year loan is payable in equal quarterly installments in an amount of 2.5% of the initial principal amount, with the remaining unpaid balance due at maturity. The three-year and five-year loans are each prepayable in whole or in-part. The three-year and five-year loans initially bear interest at LIBOR plus 1.125% and LIBOR plus 1.25%, respectively. The interest rate is based on our credit rating with the maximum interest rate of LIBOR plus 1.625% and LIBOR plus 1.75% for the three-year loan and five-year loan, respectively. The net proceeds received from the issuance of the Term Loan was $1,498.3 million.

The provisions of our outstanding $1.0 billion revolving credit facility and the Term Loan restrict subsidiary indebtedness and requires us to maintain certain minimum and maximum financial ratios for interest expense coverage and our leverage ratio. The applicable leverage ratio is reduced annually commencing on November 30, 2018. As of August 31, 2017, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility.

In August 2017, we issued an aggregate amount of $2.5 billion of senior unsecured notes. These notes are due as follows: $750.0 million due August 15, 2022, $700.0 million due August 15, 2024, $750.0 million due August 15, 2027 and $300.0 million due August 15, 2047 with stated fixed interest rates of 2.70%, 3.15%, 3.40% and 4.20%, respectively. Interest is payable semiannually in arrears in August and February of each year. The net proceeds received from the issuance of these notes were $2,479.3 million. The net proceeds from this issuance were used to partially fund our acquisition of RB Foods. In addition, we expect to use a portion of these proceeds, which in the interim were used to repay commercial paper borrowings, to repay our $250 million, 5.75% notes that will mature on December 15, 2017.
  
In July 2016, we entered into a 15-year lease for a headquarters building in Hunt Valley, Maryland. The lease, which is expected to commence upon completion of building construction and fit-out, currently scheduled for the second half of 2018, requires monthly lease payments of approximately $0.9 million beginning six months after lease commencement. The $0.9 million monthly lease payment is subject to adjustment after an initial 60-month period and thereafter on an annual basis as specified in the lease agreement. In addition, the initial $0.9 million monthly lease payment is subject to increase in the event of agreed-upon changes to specifications related to the headquarters building. We expect to commence recognition of rent expense in the second quarter of 2018 as we gain access to the building to prepare for our occupancy in the second half of the year. We expect to consolidate our Corporate staff and certain non-manufacturing U.S. employees, currently housed in four locations in the Hunt Valley, Maryland area, to the new headquarters building.


18




6.    FINANCIAL INSTRUMENTS

We use derivative financial instruments to enhance our ability to manage risk, including foreign currency 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 instruments. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
From time to time, we enter into fair value foreign currency exchange contracts to manage exposure to currency fluctuations in certain intercompany loans between subsidiaries. At August 31, 2017, the notional value of these contracts was $117.0 million. During the three and nine months ended August 31, 2017, we recognized gains of $2.9 million and $5.2 million, respectively, on the change in fair value of these contracts, which was offset by losses of $3.1 million and $6.0 million, respectively, on the change in the currency component of the underlying loans. Both the gains and the losses were recognized in our consolidated income statement as other income, net.

During the nine months ended August 31, 2017, we entered into a total of $150 million of forward starting interest rate swap agreements to manage our interest rate risk associated with the anticipated issuance of at least $150 million of fixed rate notes by December 2017. The weighted average fixed rate of these agreements was 2.45% and was based upon the applicable U.S. LIBOR swap rate at the inception of each agreement. We cash settled these agreements upon issuance of the 3.40% fixed rate notes issued in August 2017 and made a one-time cash payment to the counterparties of $2.9 million. We designated these forward starting interest rate swap agreements as cash flow hedges. Amounts associated with these agreements, including the related mark-to-market prior to settlement were deferred in other comprehensive income. Upon settlement, the loss realized was recognized in other comprehensive and will be amortized over the life of the 3.40% fixed rate notes due August 15, 2027 as a component of interest expense. Ineffectiveness associated with these hedges was not material.
As of August 31, 2017, the maximum time frame for our foreign exchange forward contracts is 15 months.

All derivatives are recognized at fair value in the balance sheet and recorded in either current or noncurrent other assets or other accrued liabilities or other long-term liabilities depending upon their nature and maturity.
The following table discloses the fair values of derivative instruments on our balance sheet (in millions):
 
 
 
 
As of August 31, 2017
Asset Derivatives
 
Liability Derivatives
 
Balance sheet
location
 
Notional
amount
 
Fair
value
 
Balance sheet
location
 
Notional
amount
 
Fair
value
Interest rate contracts
Other current
assets
 
$
100.0

 
$
0.3

 
Other accrued liabilities
 
$

 
$

Foreign exchange contracts
Other current
assets
 
116.1

 
5.5

 
Other accrued
liabilities
 
358.9

 
9.1

Total
 
 
 
 
$
5.8

 
 
 
 
 
$
9.1

 
 
 
As of August 31, 2016
Asset Derivatives
 
Liability Derivatives
 
Balance sheet
location
 
Notional
amount
 
Fair
value
 
Balance sheet
location
 
Notional
amount
 
Fair
value
Interest rate contracts
Other current
assets
 
$
100.0

 
$
5.5

 
Other accrued liabilities
 
$

 
$

Foreign exchange contracts
Other current
assets
 
153.8

 
3.4

 
Other accrued
liabilities
 
236.4

 
2.3

Total
 
 
 
 
$
8.9

 
 
 
 
 
$
2.3

 
 
 
As of November 30, 2016
Asset Derivatives
 
Liability Derivatives
 
Balance sheet
location
 
Notional
amount
 
Fair
value
 
Balance sheet
location
 
Notional
amount
 
Fair
value
Interest rate contracts
Other current
assets
 
$

 
$

 
Other accrued liabilities
 
$
100.0

 
$
1.2

Foreign exchange contracts
Other current
assets
 
204.3

 
4.9

 
Other accrued
liabilities
 
244.9

 
5.4

Total
 
 
 
 
$
4.9

 
 
 
 
 
$
6.6



19


The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the three and nine month periods ended August 31, 2017 and 2016 (in millions):
 
Fair Value Hedges
 
 
 
 
 
 
 
 
 
 
Derivative
 
Income statement
location
 
Income (expense)
 
 
 
 
Three months ended August 31, 2017
 
Three months ended August 31, 2016
 
Nine months ended August 31, 2017
 
Nine months ended August 31, 2016
Interest rate contracts
 
Interest expense
 
$
0.2

 
$
0.4

 
$
0.7

 
$
1.3

Three months ended August 31,
Income statement location
Gain (loss) recognized in income

Income statement location
Gain (loss) recognized in income
Derivative

2017
2016
Hedged item

2017
2016
Foreign exchange contracts
Other income, net
$
2.9

$

Intercompany loans
Other income, net
$
(3.1
)
$

Nine months ended August 31,
Income statement location
Gain (loss) recognized in income
 
Income statement location
Gain (loss) recognized in income
Derivative
 
2017
2016
Hedged item
 
2017
2016
Foreign exchange contracts
Other income, net
$
5.2

$

Intercompany loans
Other income, net
$
(6.0
)
$


Cash Flow Hedges
 
 
Three months ended August 31,
 
 
 
 
 
 
 
 
 
 
Derivative
 
Gain or (loss)
recognized in OCI
 
Income
statement
location
 
Gain or (loss)
reclassified from
AOCI
 
 
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
$
0.3

 
$

 
Interest
expense
 
$
(0.1
)
 
$
(0.1
)
Foreign exchange contracts
 
(4.7
)
 
1.8

 
Cost of goods sold
 
0.3

 

Total
 
$
(4.4
)
 
$
1.8

 
 
 
$
0.2

 
$
(0.1
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended August 31,
 
 
 
 
 
 
 
 
 
 
Derivative
 
Gain or (Loss)
recognized in OCI
 
Income
statement
location
 
Gain or (Loss)
reclassified from
AOCI
 
 
2017
 
2016
 
 
 
2017
 
2016
Interest rate contracts
 
$
(2.9
)
 
$

 
Interest
expense
 
$
(0.2
)
 
$
(0.2
)
Foreign exchange contracts
 
(6.5
)
 
1.7

 
Cost of goods
sold
 
2.1

 
3.1

Total
 
$
(9.4
)
 
$
1.7

 
 
 
$
1.9

 
$
2.9

For all derivatives, the net amount of accumulated other comprehensive income expected to be reclassified in the next 12 months is $3.4 million as a decrease to earnings. The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.


20



7.
FAIR VALUE MEASUREMENTS

Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):
 
 
 
 
August 31, 2017
  
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
166.1

 
$
166.1

 
$

 
$

Insurance contracts
 
115.2

 

 
115.2

 

Bonds and other long-term investments
 
8.1

 
8.1

 

 

Interest rate derivatives
 
0.3

 

 
0.3

 

Foreign currency derivatives
 
5.5

 

 
5.5

 

Total
 
$
295.2

 
$
174.2

 
$
121.0

 
$

Liabilities
 
 
 
 
 
 
 
 
Foreign currency derivatives
 
$
9.1

 
$

 
$
9.1

 
$

Total
 
$
9.1

 
$

 
$
9.1

 
$


 
 
 
 
August 31, 2016
  
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
134.2

 
$
134.2

 
$

 
$

Insurance contracts
 
106.6

 

 
106.6

 

Bonds and other long-term investments
 
10.0

 
10.0

 

 

Interest rate derivatives
 
5.5

 

 
5.5

 

Foreign currency derivatives
 
3.4

 

 
3.4

 

Total
 
$
259.7

 
$
144.2

 
$
115.5

 
$

Liabilities
 
 
 
 
 
 
 
 
Foreign currency derivatives
 
$
2.3

 
$

 
$
2.3

 
$

Contingent consideration related to D&A acquisition
 
30.1

 

 

 
30.1

Total
 
$
32.4

 
$

 
$
2.3

 
$
30.1

 

21


 
 
 
 
November 30, 2016
  
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
118.4

 
$
118.4

 
$

 
$

Insurance contracts
 
106.0

 

 
106.0

 

Bonds and other long-term investments
 
10.2

 
10.2

 

 

Foreign currency derivatives
 
4.9

 

 
4.9

 

Total
 
$
239.5

 
$
128.6

 
$
110.9

 
$

Liabilities
 
 
 
 
 
 
 
 
Foreign currency derivatives
 
$
5.4

 
$

 
$
5.4

 
$

Interest rate derivatives
 
1.2

 

 
1.2

 

Contingent consideration related to D&A acquisition
 
28.9

 

 

 
28.9

Total
 
$
35.5

 
$

 
$
6.6

 
$
28.9

Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on values for similar instruments using models with market based inputs.
The following table sets forth the carrying amounts and fair values of our long-term debt (including the current portion thereof) at August 31, 2017, August 31, 2016 and November 30, 2016 (in millions):
 
August 31, 2017
 
August 31, 2016
 
November 30, 2016
Carrying amount
$
5,027.8

 
$
1,057.3

 
$
1,056.9

Fair value
5,154.7

 
1,155.3

 
1,118.3


The acquisition-date fair value of the liability for contingent consideration related to our acquisition of Drogheria & Alimentari (D&A) in May 2015 was approximately $27.7 million (€25.2 million). The fair value of the liability both at acquisition and as of each reporting period prior to our agreement to settle the obligation in the second quarter of 2017, was estimated using a discounted cash flow technique applied to the expected payout with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB's Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our probability assessments of expected future cash flows related to our acquisition of D&A during the calendar 2017 earn-out period, adjusted for expectations of the amounts and ultimate resolution of likely disputes to be raised by the seller and by us as provided in the purchase agreement, discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the purchase agreement. Changes in the fair value of the liability for contingent consideration, excluding the impact of foreign currency, have been recognized in income on a quarterly basis as of each reporting period prior to our agreement to settle the obligation in the second quarter of 2017. In the second quarter of 2017, we reached agreement with the sellers to settle the contingent consideration liability prior to its contractual term for approximately $29.3 million (€26.1 million), with $19.7 million (€17.6 million) paid in the third quarter of 2017. We previously prepaid €5.0 million at the date of acquisition. The balance of the liability is expected to be paid in the fourth quarter of 2017. Accordingly, during the nine months ended August 31, 2017, we recognized a $1.6 million gain on settlement in selling, general and administrative expense in our consolidated income statement.

22


The change in fair value of our Level 3 liabilities, which relates solely to the contingent consideration related to our acquisition of D&A prior to the agreed settlement in May 2017, for the nine months ended August 31, 2017 and 2016 is summarized as follows (in millions):
 
Beginning of year
 
Changes in fair value including accretion
 
Impact of foreign currency
 
Effect of agreed upon settlement
 
Balance as of end of period
Nine months ended August 31, 2017
$
28.9

 
$
0.3

 
$
1.7

 
$
(30.9
)
 
$

Nine months ended August 31, 2016
$
27.1

 
$
1.3

 
$
1.7

 
$

 
$
30.1



8.
EMPLOYEE BENEFIT AND RETIREMENT PLANS

During the first quarter of 2017, we made the following significant changes to our employee benefit and retirement plans:

On December 1, 2016, our Management Committee approved the freezing of benefits under the McCormick U.K. Pension and Life Assurance Scheme (the U.K. plan). The effective date of this freeze is December 31, 2016. Although the U.K. plan has been frozen, employees who are participants in that plan retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan.
On January 3, 2017, our Management Committee approved the freezing of benefits under the McCormick Pension Plan, the defined benefit pension plan available to U.S. employees hired on or prior to December 31, 2011. The effective date of this freeze is November 30, 2018. Although the U.S. Pension plan will be frozen, employees who are participants in that plan will retain benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan.
On January 3, 2017, the Compensation Committee of our Board of Directors approved the freezing of benefits under the McCormick Supplemental Executive Retirement Plan (the “SERP”). The effective date of this freeze is January 31, 2017. Although the SERP has been frozen, executives who are participants in the SERP as of the date of the freeze, including certain named executive officers, retained benefits accumulated up to that date, based on credited service and eligible earnings, in accordance with the SERP’s terms.

As a result of these changes, we remeasured pension assets and benefit obligations as of the dates of the approvals indicated above and reduced the U.S. and U.K. plan benefit obligations by $69.9 million and $7.8 million, respectively. These remeasurements resulted in non-cash, pre-tax net actuarial gains of $77.7 million, which principally consist of curtailment gains of $76.7 million, and are included in our Consolidated Statement of Comprehensive Income for the nine months ended August 31, 2017, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension plans. Deferred taxes associated with these actuarial gains, together with other unrealized components of pension plans recognized during the nine months ended August 31, 2017, are also included in that statement as a component of Other comprehensive income (loss).

During the third quarter of 2017, we made the following changes to our postretirement medical and life insurance benefits impacting certain U.S. employees:

On August 23, 2017, our Management Committee approved changes to our postretirement medical benefits plan for eligible U.S. employees and retirees (employees hired after December 31, 2008 are not eligible for the subsidy). These changes included consolidating benefits providers and simplifying and reducing our subsidy for postretirement medical benefits. The effective date of the change in our subsidy is January 1, 2018.
On August 23, 2017, our Management Committee approved the elimination of life insurance benefits under our other postretirement benefit plan to eligible U.S. active employee (that life insurance benefit was available to U.S. employees hired on or prior to December 31, 2008). The effective date of this plan amendment is January 1, 2018, unless an employee commits to their retirement date by December 31, 2017 and retires on or before December 31, 2018.

As a result of these changes, we remeasured the other postretirement benefit obligation as of August 23, 2017, resulting in a reduction of the other postretirement benefit obligation of $27.1 million. These remeasurements resulted in an aggregate non-cash, pre-tax net prior service cost credit of $27.1 million, which is included in our Consolidated Statement of Comprehensive

23


Income for the three and nine months ended August 31, 2017, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension and other postretirement plans. Deferred taxes associated with these aggregate prior service cost credits, together with other unrealized components of pension plans recognized during the nine months ended August 31, 2017, are also included in that statement as a component of Other comprehensive income (loss).

As part of the RB Foods acquisition in August 2017, we assumed a defined benefit pension plan that covers eligible union employees of the Reckitt Benckiser food business (the "RB Foods Union Pension Plan"). At the date of acquisition, based upon a preliminary valuation the funded status of the plan was $(19.9) million representing a benefit obligation of $48.1 million less the fair value of plan assets of $28.2 million. Plan assets consist of a mix of equities, fixed income funds and real estate funds. At the date of acquisition, based upon a preliminary valuation, the accumulated benefit obligation was $40.8 million. We expect to make a contribution to the RB Foods Union Pension Plan of approximately $5.0 million in the fourth quarter of 2017.

The following table presents the components of our pension expense of the defined benefit plans for the three months ended August 31, 2017 and 2016 (in millions):
 
United States
 
International
 
2017
 
2016
 
2017
 
2016
Defined benefit plans
 
 
 
 
 
 
 
Service cost
$
3.4

 
$
5.3

 
$
1.4

 
$
1.9

Interest costs
7.8

 
8.4

 
2.6

 
2.8

Expected return on plan assets
(10.3
)
 
(10.1
)
 
(3.8
)
 
(4.1
)
Amortization of net actuarial losses
1.3

 
3.1

 
1.0

 
1.1

Total pension expense
$
2.2

 
$
6.7

 
$
1.2

 
$
1.7


The following table presents the components of our pension expense of the defined benefit plans for the nine months ended August 31, 2017 and 2016 (in millions):
 
United States
 
International
 
2017
 
2016
 
2017
 
2016
Defined benefit plans
 
 
 
 
 
 
 
Service cost
$
10.7

 
$
16.1

 
$
4.2

 
$
5.4

Interest costs
23.5

 
25.0

 
7.6

 
8.6

Expected return on plan assets
(30.8
)
 
(30.4
)
 
(11.2
)
 
(12.4
)
Amortization of prior service costs

 

 
0.6

 
0.2

Amortization of net actuarial losses
4.5

 
9.4

 
3.0

 
3.2

Total pension expense
$
7.9

 
$
20.1

 
$
4.2

 
$
5.0


During the nine months ended August 31, 2017 and 2016, we contributed $10.9 million and $22.1 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2016 were $25.1 million.
The following table presents the components of our other postretirement benefits expense (in millions):


Three months ended August 31,

Nine months ended August 31,
 

2017
 
2016

2017

2016
Other postretirement benefits








Service cost

$
0.6


$
0.6


$
2.0


$
2.0

Interest costs

0.9


1.0


2.7


2.9

Amortization of prior service costs

(0.3
)



(0.3
)


Amortization of (gains)/losses





(0.1
)


Total other postretirement expense

$
1.2


$
1.6


$
4.3


$
4.9



24


9.
STOCK-BASED COMPENSATION

We have three types of stock-based compensation awards: restricted stock units (RSUs), stock options and company stock awarded as part of our long-term performance plan (LTPP). The following table sets forth the stock-based compensation expense recorded in selling, general and administrative (SG&A) expense (in millions):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Stock-based compensation expense
$
4.0

 
$
4.0

 
$
18.4

 
$
19.8

Our 2017 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2016 annual grant. The weighted-average grant-date fair value of an option granted in 2017 was $17.61 and in 2016 was $17.50 as calculated under a lattice pricing model. Substantially all of the options granted vest ratably over a three-year period or upon retirement. The fair values of option grants in the stated periods were computed using the following range of assumptions for our various stock compensation plans:
 
2017
 
2016
Risk-free interest rates
0.9 - 2.4%
 
0.5 - 1.9%
Dividend yield
1.9%
 
1.7%
Expected volatility
18.7%
 
18.7%
Expected lives (in years)
7.6
 
7.6
The following is a summary of our stock option activity for the nine months ended August 31, 2017 and 2016:
 
2017
 
2016
(shares in millions)
Number
of
Shares
 
Weighted-
Average
Exercise
Price
 
Number
of
Shares
 
Weighted-
Average
Exercise
Price
Outstanding at beginning of period
4.9

 
$
66.00

 
4.8

 
$
59.20

Granted
0.6

 
98.07

 
0.7

 
99.92

Exercised
(0.6
)
 
49.50

 
(0.6
)
 
50.95

Outstanding at end of the period
4.9

 
$
71.59

 
4.9

 
$
66.07

Exercisable at end of the period
3.9

 
$
65.12

 
3.4

 
$
56.97

As of August 31, 2017, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $121.4 million and for options currently exercisable was $118.6 million. The total intrinsic value of all options exercised during the nine months ended August 31, 2017 and 2016 was $26.9 million and $25.0 million, respectively.
The following is a summary of our RSU activity for the nine months ended August 31, 2017 and 2016:
 
2017
 
2016
(shares in thousands)
Number
of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
 
Number
of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding at beginning of period
267

 
$
80.08

 
270

 
$
71.03

Granted
130

 
94.63

 
104

 
96.59

Vested
(118
)
 
80.62

 
(94
)
 
72.21

Forfeited
(12
)
 
90.65

 
(10
)
 
80.47

Outstanding at end of period
267

 
$
86.49

 
270

 
$
80.17


25


The following is a summary of our LTPP activity for the nine months ended August 31, 2017 and 2016:
 
2017
 
2016
(shares in thousands)
Number
of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
 
Number
of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding at beginning of period
201

 
$
78.10

 
192

 
$
70.94

Granted
78

 
89.96

 
108

 
86.40

Vested
(43
)
 
69.04

 
(18
)
 
64.74

Forfeited

 

 
(8
)
 
79.45

Outstanding at end of period
236

 
$
83.63

 
274

 
$
77.22



10.
INCOME TAXES

Income taxes for the three months ended August 31, 2017 included $6.6 million of discrete tax benefits consisting of the following: (i) $4.6 million related to the reversal of unrecognized tax benefits and related interest associated with the settlement of tax audits in various jurisdictions and the expiration of a statute of limitation in a non-US jurisdiction, (ii) $1.2 million for an adjustment to a prior year tax accrual based on the final return filed, and (iii) $0.8 million of excess tax benefits associated with share-based compensation.

Income taxes for the nine months ended August 31, 2017 included $17.3 million of discrete tax benefits consisting of the following: (i) $9.4 million related to excess tax benefits associated with share-based compensation, (ii) the reversal of unrecognized tax benefits and related interest of $6.8 million associated with the expiration of statute of limitations and settlement of tax audits in various jurisdictions, (iii) $1.2 million for an adjustment to a prior year tax accrual based on the final return filed, less (iv) a net detriment of $0.1 million resulting from the revaluation of deferred tax assets related to legislation enacted in our first quarter.

Other than the discrete tax benefits mentioned previously and additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three and nine months ended August 31, 2017.

Income taxes for the three months ended August 31, 2016 included $10.0 million of discrete tax benefits, consisting primarily of the reversal of unrecognized tax benefits and related interest associated with the expiration of statutes of limitations in the U.S. and an international jurisdiction. Income taxes for the nine months ended August 31, 2016 included $20.7 million of discrete tax benefits that primarily consisted of the following: (i) the reversal of unrecognized tax benefits and related interest of $11.3 million related to the expiration of statutes of limitations in the U.S. and in international jurisdictions; (ii) a reversal of a valuation allowance on an international deferred tax asset of $6.4 million due to a change in facts that favorably impacted our assessment of the likely recoverability of that deferred tax asset; (iii) recognition of the tax year 2015 research tax credit of $2.8 million as a result of new legislation enacted in our first quarter; and (iv) a $1.0 million revaluation of a deferred tax liability as a result of legislation enacted in our first quarter reducing the statutory tax rate for a non-U.S. jurisdiction.

As of August 31, 2017, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements.




11.
EARNINGS PER SHARE AND STOCK ISSUANCE

On August 11, 2017, we issued 6,353,591 shares of our common stock non-voting in connection with our acquisition of RB Foods (see note 2), which included 828,729 shares from the exercise of the underwriters' option to purchase additional shares. The net proceeds from this issuance, after the underwriting discount and related expenses, was $554.0 million.
The following table sets forth the reconciliation of average shares outstanding (in millions):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Average shares outstanding – basic
126.3

 
126.4

 
125.5

 
126.8

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options/RSUs/LTPP
1.5

 
1.5

 
1.7

 
1.4

Average shares outstanding – diluted
127.8

 
127.9

 
127.2

 
128.2


The following table sets forth the stock options and RSUs for the three and nine months ended August 31, 2017 and 2016 which were not considered in our earnings per share calculation since they were anti-dilutive (in millions):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Anti-dilutive securities
1.3

 
0.3

 
1.1

 
0.4


26


The following table sets forth the common stock activity for the three and nine months ended August 31, 2017 and 2016 (in millions):
 
Three months ended August 31,
 
Nine months ended August 31,
 
2017
 
2016
 
2017
 
2016
Shares issued, net of shares withheld for taxes, under stock option, RSUs, LTPP and employee stock purchase plans

 
0.1

 
0.6

 
0.6

Shares issued in connection with RB Foods acquisition
6.4

 

 
6.4

 

Shares repurchased under the stock repurchase program

 
0.8

 
1.4

 
1.9

As of August 31, 2017, $191.3 million remained of the $600 million share repurchase authorization that was authorized by the Board of Directors in March 2015.
 
 
12.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in millions):

 
August 31, 2017
 
August 31, 2016
 
November 30, 2016
Foreign currency translation adjustment
$
(114.5
)
 
$
(214.5
)
 
$
(299.4
)
Unrealized gain on foreign currency exchange contracts
(4.1
)
 
1.5

 
3.9

Unamortized value of settled interest rate swaps
1.0

 
2.3

 
2.4

Pension and other postretirement costs
(148.3
)
 
(189.5
)
 
(221.3
)
Accumulated other comprehensive loss
$
(265.9
)
 
$
(400.2
)
 
$
(514.4
)

The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the three and nine months ended August 31, 2017 and 2016 (in millions):


Three months ended August 31,

Nine months ended August 31,

Affected Line Items in the Condensed Consolidated Income Statement
Accumulated Other Comprehensive Income (Loss) Components

2017
 
2016
 
2017

2016

(Gains)/losses on cash flow hedges:











Interest rate derivatives

$
0.1


$
0.1


$
0.2


$
0.2


Interest expense
Foreign exchange contracts

(0.3
)



(2.1
)

(3.1
)

Cost of goods sold
Total before tax

(0.2
)

0.1