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, net of acquired cash of $24.3 million. In December 2017, we paid $4.2 million associated with the final working capital adjustment. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 13) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6). 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 flavor solutions 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 flavor solutions segments from the date of acquisition.

The purchase price of RB Foods was 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 independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management.

During 2018, we completed the final valuation of the RB Foods acquisition which resulted in the following fair value allocations, net of cash acquired, summarized in the table below (in millions):



Trade accounts receivable	$	36.9
Inventories	67.1
Property, plant and equipment	38.5
Goodwill	2,648.5
Intangible assets	2,430.0
Other assets	4.4
Trade accounts payable	(65.8		)
Other accrued liabilities	(35.0		)
Deferred taxes	(893.9		)
Other long-term liabilities	(20.8		)
Total	$	4,209.9

The impact of revising the fair value estimate of the RB Foods acquisition during 2018 decreased indefinite-lived brand names and trademarks by $155.0 million, decreased definite-lived intangible assets by $10.0 million, decreased deferred taxes by $60.9 million, increased other assets and liabilities, net, by $1.9 million and increased goodwill by $102.2 million. These revisions were primarily associated with finalizing the fair value estimate for the acquired intangible assets as well as the related deferred tax effects.

The valuation of the acquired net assets of RB Foods includes $2,320.0 million allocated to indefinite-lived brand assets and $110.0 million allocated to definite-lived intangible assets with a weighted-average life of 15 years. We valued brand names and trademarks using the relief from royalty method, an income approach. For customer relationships, we used the distributor method, a variation of the excess earnings method that uses distributor-based inputs for margins and contributory asset charges. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the royalty rates, the discount rates that appropriately reflect the risks inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.

We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $20.9 million that was recognized in cost of goods sold in 2017 as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach.

The fair value of property, plant and equipment was determined using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.

Deferred income tax assets and liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases all computed using tax rates in effect as of the acquisition date.

We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items.

As a result of the acquisition, we recognized a total of $2,648.5 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 flavor solutions customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce.

Total transaction and integration expenses related to the RB Foods acquisition were $99.6 million, of which $59.8 million and $39.8 million represented transaction expenses and integration expenses, respectively. These costs primarily consist of the amortization of the acquisition-date fair value adjustment of inventories in the amount of $20.9 million that is included in cost of goods sold for 2017; 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 was included in other debt costs for 2017. The following are the transaction and integration expenses related to the RB Foods acquisition that we have recorded for the years ended November 30 (in millions):



	2018		2017
Transaction expenses included in cost of goods sold	$	—	$	20.9
Transaction expenses included in other debt costs	—		15.4
Other transaction expenses	0.3		23.2
Integration expenses	22.2		17.6
Total	$	22.5	$	77.1

The incremental impact to our sales from RB Foods was $190.1 million for 2017. The impact of RB Foods on our 2017 consolidated income before taxes, including the effect of the transaction and integration expenses previously noted, and financing costs was a loss of approximately $42 million.

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 $7.3 million, relating to definite-lived intangible assets recorded based upon third-party valuations. The pro forma results for 2016 also include transaction and integration costs of $40.8 million, $20.9 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 2017 exclude the previously noted items, as they have been included, on a pro forma basis, in the results for 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)	Year ended November 30,
	2017		2016
	(Unaudited)
Net sales	$	5,209.0	$	4,969.3
Net income	548.7		465.5
Earnings per share – basic	$	4.19	$	3.50
Earnings per share – diluted	4.14		3.46

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 have or 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 September 21, 2018, we purchased the remaining 10% ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million In conjunction with our purchase of this remaining 10% minority interest, we have eliminated the minority interest in Shanghai and recorded an adjustment of $12.4 million to retained earnings in our consolidated balance sheet. The $12.7 million payment is reflected in the financing activities section of our consolidated cash flow statement for 2018.

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 $1.5 million, of which $1.2 million was paid in 2017 and the balance was paid in 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 2017, we have eliminated the minority interest in Kohinoor and recorded an adjustment of $0.6 million to retained earnings in our consolidated balance sheet. The $0.3 million and $1.2 million payments are reflected in the financing activities section of our consolidated cash flow statement for 2018 and 2017, respectively.

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 purchase price of $123.8 million (net of cash acquired of $1.2 million). 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 flavor solutions segment, including additional expertise in flavoring health and nutrition products. Giotti has been included in our flavor solutions segment since its acquisition.

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 was financed with a combination of cash and short-term borrowings. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has a flavor solutions component, the flavor solutions component was not material to its overall business in 2016. Beginning in 2017, the flavor solutions component of Gourmet Garden has been reflected as a component of our flavor solutions segment.

In 2017, Giotti added $66.5 million and Gourmet Garden added $27.3 million to our sales for the year and first four months of fiscal 2017, respectively. 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 2017. Pro forma financial information for our other acquisitions has not been presented because the financial impact is not material.