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 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 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.