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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
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)
(IRS Employer
Identification No.)
24 Schilling Road, Suite 1,
Hunt Valley,
Maryland
21031
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (410771-7301
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, No Par Value
MKC-V
New York Stock Exchange
Common Stock Non-Voting, No Par Value
MKC
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Not applicable.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes     No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes     No  
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 such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      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, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Check one:
Large Accelerated Filer
 
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  
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the Voting Common Stock held by non-affiliates at May 31, 2019: $1,458,501,404
The aggregate market value of the Non-Voting Common Stock held by non-affiliates at May 31, 2019: $19,200,282,923
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Number of Shares Outstanding
Date
Common Stock
9,314,335
December 31, 2019
Common Stock Non-Voting
123,599,379
December 31, 2019

DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of 10-K into Which Incorporated
Proxy Statement for
McCormick’s April 1, 2020
Annual Meeting of Stockholders
(the “2020 Proxy Statement”)
Part III

1



PART I.
As used herein, references to “McCormick,” “we,” “us” and “our” are to McCormick & Company, Incorporated and its consolidated subsidiaries or, as the context may require, McCormick & Company, Incorporated only.
ITEM 1. BUSINESS
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retailers, food manufacturers and foodservice businesses. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. Our major sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, India, Central America, Thailand and South Africa. McCormick & Company, Incorporated was formed in 1915 under Maryland law as the successor to a business established in 1889.

In August 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. 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 results of RB Foods’ operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.
Business Segments
We operate in two business segments, consumer and flavor solutions. Demand for flavor is growing globally, and across both segments we have the customer base and product breadth to participate in all types of eating occasions. Our products deliver flavor when cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer our customers and consumers a range of products to meet the increasing demand for certain product attributes such as organic, reduced sodium, gluten-free and non-GMO (genetically modified organisms) and that extend from premium to value-priced.

Consistent with market conditions in each segment, our consumer segment has a higher overall profit margin than our flavor solutions segment. In 2019, the consumer segment contributed approximately 61% of sales and 69% of operating income, and the flavor solutions segment contributed approximately 39% of sales and 31% of operating income.
Consumer Segment. From locations around the world, our brands reach consumers in approximately 150 countries and territories. Our leading brands in the Americas include McCormick®, French’s®, Frank’s RedHot®, Lawry’s® and Club House®, as well as brands such as Gourmet Garden® and OLD BAY®. We also market authentic regional and ethnic brands such as Zatarain’s®, Stubb's®, Thai Kitchen® and Simply Asia®. In the Europe, Middle East and Africa (EMEA) region, our major brands include the Ducros®, Schwartz®, Kamis® and Drogheria & Alimentari® brands of spices, herbs and seasonings and an extensive line of Vahiné® brand dessert items. In China, we market our products under the McCormick and DaQiao® brands. In Australia, we market our spices and seasonings under the McCormick brand, our dessert products under the Aeroplane® brand, and packaged chilled herbs under the Gourmet Garden brand. In India, we market our spices and rice products under the Kohinoor® brand. Elsewhere in the Asia/Pacific region, we market our products under the McCormick brand as well as other brands.
Our customers span a variety of retailers that include grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands.
Approximately half of our consumer segment sales are spices, herbs and seasonings. For these products, we are a category leader in our primary markets. There are numerous competitive brands of spices, herbs and seasonings in the U.S. and additional brands in international markets. Some are owned by large food manufacturers, while others are supplied by small privately-owned companies. In this competitive environment, we are leading with innovation and brand marketing, and applying our analytical tools to help customers optimize the profitability of their spice and seasoning sales while simultaneously working to increase our sales and profit.

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Flavor Solutions Segment. In our flavor solutions segment, we provide a wide range of products to multinational food manufacturers and foodservice customers. The foodservice customers are supplied with branded, packaged products both directly and indirectly through distributors. We supply food manufacturers and foodservice customers with customized flavor solutions, and many of these customer relationships have been active for decades. Our range of flavor solutions remains one of the broadest in the industry and includes seasoning blends, spices and herbs, condiments, coating systems and compound flavors. In addition to a broad range of flavor solutions, our long-standing customer relationships are evidence of our effectiveness in building customer intimacy. Our customers benefit from our expertise in many areas, including sensory testing, culinary research, food safety and flavor application.
Our flavor solutions segment has a number of competitors. Some tend to specialize in a particular range of products and have a limited geographic reach. Other competitors include larger publicly held flavor companies that are more global in nature, but which also tend to specialize in a narrower range of flavor solutions than McCormick.
Raw Materials
The most significant raw materials used in our business are dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour. Pepper and other spices and herbs are generally sourced from countries other than the United States. Other raw materials, like dairy products and onion, are primarily sourced locally, either within the United States or from our international locations. Because the raw materials are agricultural products, they are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, and other factors beyond our control.
We respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our Comprehensive Continuous Improvement ("CCI") program.
Customers
Our products are sold directly to customers and also through brokers, wholesalers and distributors. In the consumer segment, products are then sold to consumers under a number of brands through a variety of retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce. In the flavor solutions segment, products are used by food and beverage manufacturers as ingredients for their finished goods and by foodservice customers as ingredients for menu items to enhance the flavor of their foods. Customers for the flavor solutions segment include food manufacturers and the foodservice industry supplied both directly and indirectly through distributors.
We have a large number of customers for our products. Sales to one of our consumer segment customers, Wal-Mart Stores, Inc., accounted for approximately 11% of consolidated sales in 2019, 2018 and 2017. Sales to one of our flavor solutions segment customers, PepsiCo, Inc., accounted for approximately 10% in 2019 and 2018 and 11% of consolidated sales in 2017. In 2019, 2018 and 2017 the top three customers in our flavor solutions segment represented between 49% and 52% of our global flavor solutions sales.
The dollar amount of backlog orders for our business is not material to an understanding of our business, taken as a whole. No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
Trademarks, Licenses and Patents
We own a number of trademark registrations. Although in the aggregate these trademarks are material to our business, the loss of any one of those trademarks, with the exception of our “McCormick,” “French’s ,” “Frank’s RedHot,” “Lawry’s,” “Zatarain’s,” “Stubb's,” “Club House,” “Ducros,” “Schwartz,” “Vahiné,” "OLD BAY," "Simply Asia," "Thai Kitchen," "Kitchen Basics," “Kamis,” “Drogheria & Alimentari,” "DaQiao," “Kohinoor” and "Gourmet Garden" trademarks, would not have a material adverse effect on our business. The “Mc – McCormick” trademark is extensively used by us in connection with the sale of our food products in the U.S. and certain non-U.S. markets. The terms of the trademark registrations are as prescribed by law, and the registrations will be renewed for as long as we deem them to be useful.
We have entered into a number of license agreements authorizing the use of our trademarks by affiliated and non-affiliated entities. The loss of these license agreements would not have a material adverse effect on our business. The term of the license agreements is generally three to five years or until such time as either party terminates the agreement. Those agreements with specific terms are renewable upon agreement of the parties.
We also own various patents, none of which are individually material to our business.

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Seasonality
Due to seasonal factors inherent in our business, our sales, income and cash from operations generally are lower in the first two quarters of the fiscal year, increase in the third quarter and are significantly higher in the fourth quarter due to the holiday season. This seasonality reflects customer and consumer buying patterns, primarily in the consumer segment.
Working Capital
In order to meet increased demand for our consumer products during our fourth quarter, we usually build our inventories during the third quarter of the fiscal year. We generally finance working capital items (inventory and receivables) through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of our liquidity and capital resources, see note 6 of the accompanying financial statements and the “Liquidity and Financial Condition” section of “Management’s Discussion and Analysis.”
Competition
Each segment operates in markets around the world that are highly competitive. In this competitive environment, our growth strategies include customer intimacy and product innovation based on consumer insights. Additionally, in the consumer segment, we are building brand recognition and loyalty through advertising and promotions.

Governmental Regulation
We are subject to numerous laws and regulations around the world that apply to our global businesses. In the United States, the safety, production, transportation, distribution, advertising, labeling and sale of many of our products and their ingredients are subject to the Federal Food, Drug, and Cosmetic Act; the Food Safety Modernization Act; the Federal Trade Commission Act; state consumer protection laws; competition laws, anti-corruption laws, customs and trade laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal, state and local statutes and regulations. Outside the United States, our business is subject to numerous similar statutes, laws and regulatory requirements.
Environmental Regulations
The cost of compliance with federal, state and local provisions related to protection of the environment has had no material effect on our business. There were no material capital expenditures for environmental control facilities in fiscal year 2019, and there are no material expenditures planned for such purposes in fiscal year 2020.
Employees
We had approximately 12,400 full-time employees worldwide as of November 30, 2019. Our operations have not been affected significantly by work stoppages and, in the opinion of management, employee relations are good. We have approximately 300 employees covered by a collective bargaining contract in the United States. At our foreign subsidiaries, approximately 2,400 employees are covered by collective bargaining agreements or similar arrangements.

Information about our Executive Officers
In addition to the executive officers described in the 2020 Proxy Statement incorporated by reference in Part III, Item 10 of this Report, the following individuals are also executive officers of McCormick: Lisa B. Manzone and Nneka L. Rimmer.
Ms. Manzone is 55 years old and, during the last five years, has held the following positions with McCormick: June 2015 to present–Senior Vice President, Human Relations; January 2015 to June 2015–Vice President Global Human Relations; January 2013 to January 2015–Vice President Compensation and Benefits.
Ms. Rimmer is 48 years old and, during the last five years, has held the following positions with McCormick: February 2019 to present–Senior Vice President, Business Transformation; August 2017 to February 2019–Senior Vice President, Strategy and Global Enablement; April 2015 to August 2017–Senior Vice President, Corporate Strategy and Development. Before joining McCormick in April 2015, Ms. Rimmer was Partner and Managing Director with the Boston Consulting Group where she had 13 years of experience designing, executing and leveraging successful large-scale transformational initiatives, working with large global consumer goods corporations.
Foreign Operations
We are subject in varying degrees to certain risks typically associated with a global business, such as local economic and market conditions, exchange rate fluctuations, and restrictions on investments, royalties and dividends. In fiscal year 2019, approximately 40% of sales were from non-U.S. operations. For information on how

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we manage some of these risks, see the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis.”
Forward-Looking Information
Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, earnings, cost savings, special charges, acquisitions, brand marketing support, volume and product mix, and income tax expense are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan.” These statements may relate to: the expected results of operations of businesses acquired by the company, including the acquisition of RB Foods; the expected impact of raw material costs and pricing actions on the company's results of operations and gross margins; the expected impact of productivity improvements, including those associated with our Comprehensive Continuous Improvement (CCI) program and global enablement initiative; expected working capital improvements; expectations regarding growth potential in various geographies and markets, including the impact from customer, channel, category, and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected timing and costs of implementing our business transformation initiative, which includes the implementation of a global enterprise resource planning (ERP) system; the expected impact of accounting pronouncements; the expected impact of the U.S. Tax Act enacted in December 2017; the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of short- and long-term debt as well as quarterly dividends and the ability to issue additional debt or equity securities; and expectations regarding purchasing shares of McCormick's common stock under the existing repurchase authorizations.
These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: damage to the company's reputation or brand name; loss of brand relevance; increased private label use; product quality, labeling, or safety concerns; negative publicity about our products; actions by, and the financial condition of, competitors and customers; the longevity of mutually beneficial relationships with our large customers; business interruptions due to natural disasters or unexpected events; issues affecting the company's supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses, including the acquisition of RB Foods; global economic and financial conditions generally, including the pending exit of the U.K. from the European Union (Brexit), availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; the effects of increased level of debt service following the RB Foods acquisition as well as the effects that such increased debt service may have on the company's ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; the stability of credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; the company's inability to successfully implement our business transformation initiative; fundamental changes in tax laws; including interpretations and assumptions we have made, and guidance that may be issued, regarding the U.S. Tax Act enacted on December 22, 2017 and volatility in our effective tax rate; climate change; infringement of intellectual property rights, and those of customers; litigation, legal and administrative proceedings; the company's inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; and other risks described herein under Part I, Item 1A "Risk Factors."
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Available Information
Our principal corporate internet website address is: www.mccormickcorporation.com. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”). The SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding McCormick. Our website

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also includes our Corporate Governance Guidelines, Business Ethics Policy and charters of the Audit Committee, Compensation Committee, and Nominating/Corporate Governance Committee of our Board of Directors.

ITEM 1A. RISK FACTORS
The following are certain risk factors that could affect our business, financial condition and results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. Before you buy our Common Stock or Common Stock Non-Voting, you should know that making such an investment involves risks, including the risks described below. Additional risks and uncertainties that are not presently known to us or are currently deemed to be immaterial also may materially adversely affect our business, financial condition, or results of operations in the future. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our securities could decline, and you may lose part or all of your investment.
Damage to our reputation or brand name, loss of brand relevance, increase in use of private label or other competitive brands by customers or consumers, or product quality or safety concerns could negatively impact our business, financial condition or results of operations.

We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain our brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We continually make efforts to maintain and improve relationships with our customers and consumers and to increase awareness and relevance of our brands through effective marketing and other measures. From time to time, our customers evaluate their mix of product offerings, and consumers have the option to purchase private label or other competitive products instead of our branded products. If a significant portion of our branded business was switched to private label or competitive products, it could have a material negative impact on our consumer segment.
Our reputation for manufacturing high-quality products is widely recognized. In order to safeguard that reputation, we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our products. A serious breach of our quality assurance or quality control procedures, deterioration of our quality image, impairment of our customer or consumer relationships or failure to adequately protect the relevance of our brands may lead to litigation, customers purchasing from our competitors or consumers purchasing other brands or private label items that may or may not be manufactured by us, any of which could have a material negative impact on our business, financial condition or results of operations.
The food industry generally is subject to risks posed by food spoilage and contamination, product tampering, product recall, import alerts and consumer product liability claims. For instance, we may be required to recall certain of our products should they be mislabeled, contaminated or damaged, and certain of our raw materials could be blocked from entering the country if they were subject to government-imposed actions. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products could cause injury or illness, or that any of our products are mislabeled or fail to meet applicable legal requirements (even if the allegation is untrue). A product recall, import alert or an adverse result in any such litigation, or negative perceptions regarding food products and ingredients, could result in our having to pay fines or damages, incur additional costs or cause customers and consumers in our principal markets to lose confidence in the safety and quality of certain products or ingredients, any of which could have a negative effect on our business or financial results and, depending upon the significance of the affected product, that negative effect could be material to our business or financial results. Negative publicity about these concerns, whether or not valid, may discourage customers and consumers from buying our products or cause disruptions in production or distribution of our products and adversely affect our business, financial condition or results of operations.
The rising popularity of social networking and other consumer-oriented technologies has increased the speed and accessibility of information dissemination (whether or not accurate), and, as a result, negative, inaccurate, or misleading posts or comments on websites may generate adverse publicity that could damage our reputation or brands.

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Customer consolidation, and competitive, economic and other pressures facing our customers, may put pressure on our operating margins and profitability.
A number of our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years and consolidation could continue. Such consolidation could present a challenge to margin growth and profitability in that it has produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories; resisting price increases; demanding lower pricing, increased promotional programs and specifically tailored products; and shifting shelf space currently used for our products to private label and other competitive products. The economic and competitive landscape for our customers is constantly changing, such as the emergence of new sales channels like e-commerce, and our customers' responses to those changes could impact our business. Our flavor solutions segment may be impacted if the reputation or perception of the customers of our flavor solutions segment declines. These factors and others could have an adverse impact on our business, financial condition or results of operations.
The inability to maintain mutually beneficial relationships with large customers could adversely affect our business.
We have a number of major customers, including two large customers that, in the aggregate, constituted approximately 21% of our consolidated sales in 2019. The loss of either of these large customers or a material negative change in our relationship with these large customers or other major customers could have an adverse effect on our business.
Disruption of our supply chain and issues regarding procurement of raw materials may negatively impact us.
Our purchases of raw materials are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, governmental actions and other factors beyond our control. The most significant raw materials used by us in our business are dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour. While future price movements of raw material costs are uncertain, we seek to mitigate the market price risk in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our CCI program. We generally have not used derivatives to manage the volatility related to this risk. To the extent that we have used derivatives for this purpose, it has not been material to our business. Any actions we take in response to market price fluctuations may not effectively limit or eliminate our exposure to changes in raw material prices. Therefore, we cannot provide assurance that future raw material price fluctuations will not have a negative impact on our business, financial condition or operating results.
In addition, we may have very little opportunity to mitigate the risk of availability of certain raw materials due to the effect of weather on crop yield, government actions, political unrest in producing countries, action or inaction by suppliers in response to laws and regulations, changes in agricultural programs and other factors beyond our control. Therefore, we cannot provide assurance that future raw material availability will not have a negative impact on our business, financial condition or operating results.
Political, socio-economic and cultural conditions, as well as disruptions caused by terrorist activities or otherwise, could also create additional risks for regulatory compliance. Although we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our imported products, we cannot provide assurance that such events will not have a negative impact on our business, financial condition or operating results.
Our profitability may suffer as a result of competition in our markets.
The food industry is intensely competitive. Competition in our product categories is based on price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing and promotional activity, and the ability to identify and satisfy consumer preferences. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. Such pressures could reduce our ability to take appropriate remedial action to address commodity and other cost increases.
Laws and regulations could adversely affect our business.
Food products are extensively regulated in most of the countries in which we sell our products. We are subject to numerous laws and regulations relating to the growing, sourcing, manufacturing, storage, labeling, marketing, advertising and distribution of food products, as well as laws and regulations relating to financial reporting requirements, the environment, consumer protection, competition, anti-corruption, privacy, relations with distributors

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and retailers, foreign supplier verification, customs and trade laws, including the import and export of products and product ingredients, employment, and health and safety. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the attributes of food products and ingredients may increase compliance costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business, such as labeling disclosures pertaining to ingredients. For example, "Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986," in California exposes all food companies to the possibility of having to provide warnings on their products in that state. If we were required to add warning labels to any of our products or place warnings in locations where our products are sold in order to comply with Proposition 65, the sales of those products and other products of our company could suffer, not only in those locations but elsewhere.
In addition, there are various compliance obligations for companies that process personal data of certain individuals, including such obligations required by the European Union’s General Data Protection Regulation (“GDPR”), which came into effect in May 2018, and the California Consumer Privacy Act (“CCPA”), which came into effect in January 2020. These types of data privacy laws create a range of new compliance obligations for companies that process personal data of certain individuals, and increases financial penalties for non-compliance. For example, the CCPA imposes requirements on companies that do business in California and collect personal information from customers, including notice, consent and service provider requirements. The CCPA also provides for civil penalties for companies that fail to comply with these requirements, as well as a private right of action for data breaches. Regulations to implement portions of the CCPA have not been finalized and could significantly impact CCPA compliance measures. As a company that is subject to data privacy laws, we bear the costs of compliance with them, including the GDPR and CCPA, and are subject to the potential for fines and penalties in the event of a breach of these laws, which continue to evolve. These factors and others could have an adverse impact on our business, financial condition or results of operations.
Our operations may be impaired as a result of disasters, business interruptions or similar events.
We could have an interruption in our business, loss of inventory or data, or be rendered unable to accept and fulfill customer orders as a result of a natural disaster, catastrophic event, epidemic or computer system failure. Natural disasters could include an earthquake, fire, flood, tornado or severe storm. A catastrophic event could include a terrorist attack. An epidemic could affect our operations, major facilities or employees’ and consumers’ health. In addition, some of our inventory and production facilities are located in areas that are susceptible to harsh weather; a major storm, heavy snowfall or other similar event could prevent us from delivering products in a timely manner. Production of certain of our products is concentrated in a single manufacturing site.
We cannot provide assurance that our disaster recovery plan will address all of the issues we may encounter in the event of a disaster or other unanticipated issue, and our business interruption insurance may not adequately compensate us for losses that may occur from any of the foregoing. In the event that a natural disaster, terrorist attack or other catastrophic event were to destroy any part of our facilities or interrupt our operations for any extended period of time, or if harsh weather or health conditions prevent us from delivering products in a timely manner, our business, financial condition or operating results could be adversely affected.
We may not be able to successfully consummate and manage ongoing acquisition, joint venture and divestiture activities which could have an impact on our results.
From time to time, we may acquire other businesses and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses and raw material costs, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, and/or compliance risks.


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An impairment of the carrying value of goodwill or other indefinite-lived intangible assets could adversely affect our results.

As of November 30, 2019, we had approximately $4.5 billion of goodwill and approximately $2.6 billion of other indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are initially recorded at fair value and not amortized but are tested for impairment at least annually or more frequently if impairment indicators arise. We test goodwill at the reporting unit level by comparing the carrying value of the net assets of the reporting unit, including goodwill, to the unit's fair value. Similarly, we test indefinite-lived intangible assets by comparing the fair value of the assets to their carrying values. If the carrying values of the reporting unit or indefinite-lived intangible assets exceed their fair value, the goodwill or indefinite-lived intangible assets are considered impaired and reduced to their implied fair value or fair value, respectively. Factors that could result in an impairment include a change in revenue growth rates, operating margins, weighted average cost of capital, future economic and market conditions or assumed royalty rates. The impairment of our goodwill or indefinite-lived intangible assets may have a negative impact on our consolidated results of operations.

Because indefinite-lived intangible assets are recorded at fair value at the date of acquisition of the related business, indefinite-lived intangible assets associated with recent business acquisitions, particularly those acquired in recent low interest rate environments, such as RB Foods, are more susceptible to impairment in periods of rising interest rates than indefinite-lived intangible assets related to businesses acquired in periods of higher interest rates.

Our foreign and cross-border operations are subject to additional risks.
We operate our business and market our products internationally. In fiscal year 2019, approximately 40% of our sales were generated in foreign countries. Our foreign operations are subject to additional risks, including fluctuations in currency values, foreign currency exchange controls, discriminatory fiscal policies, compliance with U.S. and foreign laws, enforcement of remedies in foreign jurisdictions and other economic or political uncertainties. Several countries within the European Union continue to experience sovereign debt and credit issues which causes more volatility in the economic environment throughout the European Union and the United Kingdom ("U.K.") Additionally, international sales, together with finished goods and raw materials imported into the U.S., are subject to risks related to fundamental changes to tax laws as well as the imposition of tariffs, quotas, trade barriers and other similar restrictions. All of these risks could result in increased costs or decreased revenues, which could adversely affect our profitability.
Fluctuations in foreign currency markets may negatively impact us.
We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling, Australian dollar and Swiss franc. We routinely enter into foreign currency exchange contracts to facilitate managing certain of these foreign currency risks. However, these contracts may not effectively limit or eliminate our exposure to a decline in operating results due to foreign currency exchange changes. Therefore, we cannot provide assurance that future exchange rate fluctuations will not have a negative impact on our business, financial position or operating results.
The decision by British voters to exit the European Union may negatively impact our operations.
The U.K. is currently negotiating the terms of its exit from the European Union (“Brexit”). In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K., and a transition period to allow time for a future trade deal to be agreed.  After the U.K. Parliament failed to approve the Withdrawal Agreement in October 2019, European Union leaders granted the U.K. a three-month flexible Brexit extension, avoiding a no-deal exit on the previous deadline of October 31, 2019. On January 23, 2020, the Withdrawal Act, after clearing all stages in the U.K. Parliament, received royal assent from the Queen. Assuming approval by the European Parliament, the U.K. is expected to officially leave the European Union on January 31, 2020. Following its departure, the U.K. will enter a transition period until December 31, 2020 during which period of time the U.K.’s trading relationship with the European Union will remain largely the same while the two parties negotiate a free trade agreement as well as other aspects of the U.K.’s relationship with the European Union. The Withdrawal

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Agreement allows the U.K./European Union Joint Committee to extend the transition period by up to two years, meaning that the terms and eventual date of the U.K.’s withdrawal remain highly uncertain.
If the U.K. leaves the European Union with no agreement (“hard Brexit”), it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility.  In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Current volatility and tariffs and duties on trade may also occur under any trade agreement negotiated between the U.K. and the European Union, depending on the agreement's terms. Additionally, under a hard Brexit or a negotiated trade agreement, the movement of goods between the U.K. and the remaining member states of the European Union may be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure.  These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations.   A weaker British pound versus the U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period.  With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
Increases in interest rates or changes in our credit ratings may negatively impact us.
On November 30, 2019, we had total outstanding variable rate debt of approximately $882 million, including $601 million of short-term borrowings, at a weighted-average interest rate of approximately 2.6%. The interest rates under our term loans and revolving credit facilities can vary based on our credit ratings. Our policy is to manage our interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing cost and to achieve a desired mix of fixed and variable rate debt. We utilize derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that 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. Our use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. However, our use of these instruments may not effectively limit or eliminate our exposure to changes in interest rates. Therefore, we cannot provide assurance that future credit rating or interest rate changes will not have a material negative impact on our business, financial position or operating results.
Our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital.
Our credit ratings reflect each rating organization's opinion of our financial strength, operating performance and ability to meet our debt obligations. Our credit ratings were downgraded following our financing of the acquisition of RB Foods in August 2017, and any reduction in our credit ratings may limit our ability to borrow at interest rates consistent with the interest rates that were available to us prior to that acquisition and the related financing transactions. If our credit ratings are further downgraded or put on watch for a potential downgrade, we may not be able to sell additional debt securities or borrow money in the amounts, at the times or interest rates or upon the more favorable terms and conditions that might be available if our current credit ratings were maintained.
We have incurred additional indebtedness to finance the acquisition of RB Foods and may not be able to meet our debt service requirements.
After financing our acquisition of RB Foods, we have a significant amount of indebtedness outstanding. As of November 30, 2019, the indebtedness of McCormick and its subsidiaries is approximately $4.3 billion. This substantial level of indebtedness could have important consequences to our business, including, but not limited to:

increasing our debt service obligations, making it more difficult for us to satisfy our obligations;
limiting our ability to borrow additional funds and increasing the cost of any such borrowing;
increasing our exposure to negative fluctuations in interest rates;
subjecting us to financial and other restrictive covenants, the non-compliance with which could result in an event of default;
increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
placing us at a competitive disadvantage as compared to our competitors, to the extent that they are not as highly leveraged.

10



The deterioration of credit and capital markets may adversely affect our access to sources of funding.
We rely on our revolving credit facilities, or borrowings backed by these facilities, to fund a portion of our seasonal working capital needs and other general corporate purposes. If any of the banks in the syndicates backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of seasonal working capital requirements. We engage in regular communication with all of the banks participating in our revolving credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote.
In addition, global capital markets have experienced volatility in the past that has tightened access to capital markets and other sources of funding, and such volatility and tightened access could reoccur in the future. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time period. Our inability to obtain financing on acceptable terms or within an acceptable time period could have an adverse impact on our operations, financial condition and liquidity.
The uncertainty regarding the potential phase-out of LIBOR may negatively impact our operating results.
LIBOR, the interest rate benchmark used as a reference rate on our variable rate debt, including our revolving credit facility, interest rate swaps, and cross currency interest rate swaps is expected to be phased out after 2021, when private-sector banks are no longer required to report the information used to set the rate. Without this data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative of the market. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”). SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. Given the inherent differences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the Company’s cost of variable rate debt and certain derivative financial instruments. The Company will also need to consider new contracts and if they should reference an alternative benchmark rate or include suggested fallback language, as published by the Alternative Reference Rates Committee. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in an increase in the cost of our variable rate debt or derivative financial instruments which may be detrimental to our financial position or operating results.
We face risks associated with certain pension assets and obligations.
We hold investments in equity and debt securities in our qualified defined benefit pension plans and in a rabbi trust for our U.S. non-qualified pension plan. Deterioration in the value of plan assets resulting from a general financial downturn or otherwise, or an increase in the actuarial valuation of the plans' liability due to a low interest rate environment, could cause (or increase) an underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity.
Uncertain global economic conditions expose us to credit risks from customers and counterparties.
Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged. In addition, competition has increased with the growth in alternative channels through our customer base. These factors have caused some customers to be less profitable and increased our exposure to credit risk. Current credit markets are volatile, and some of our customers and counterparties are highly leveraged. A significant adverse change in the financial and/or credit position of a customer or counterparty could require us to assume greater credit risk relating to that customer or counterparty and could limit our ability to collect receivables. This could have an adverse impact on our financial condition and liquidity.
Our operations and reputation may be impaired if our information technology systems fail to perform adequately or if we are the subject of a data breach or cyber-attack.

11



Our information technology systems are critically important to operating our business. We rely on our information technology systems, some of which are or may be managed or hosted by or out-sourced to third party service providers, to manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. If we do not allocate and effectively manage the resources necessary to build, sustain, and protect appropriate information technology systems and infrastructure, or we do not effectively implement system upgrades or oversee third party service providers, our business or financial results could be negatively impacted. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction or reporting errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.
Furthermore, our information technology systems are subject to cyber-attacks or other security incidents, service disruptions, or other system or process failures. Such incidents could result in unauthorized access to information including customer, consumer or other company confidential data as well as disruptions to operations. We have experienced in the past, and expect to continue to experience, cybersecurity threats and incidents, although to date none has been material. To address the risks to our information technology systems and data, we maintain an information security program that includes updating technology, developing security policies and procedures, implementing and assessing the effectiveness of controls, conducting risk assessments of third party service providers and designing business processes to mitigate the risk of such breaches. There can be no assurance that these measures will prevent or limit the impact of a future incident. Moreover, the development and maintenance of these measures requires continuous monitoring as technologies change and efforts to overcome security measures evolve. If we are unable to prevent or adequately respond to and resolve an incident, it may have a material, negative impact on our operations or business reputation, and we may experience other adverse consequences such as loss of assets, remediation costs, litigation, regulatory investigations, and the failure by us to retain or attract customers following such an event. Additionally, we rely on services provided by third-party vendors for certain information technology processes and functions, which makes our operations vulnerable to a failure by any one of these vendors to perform adequately or maintain effective internal controls.

If we are not able to successfully implement our business transformation initiative or utilize information technology systems and networks effectively, our ability to conduct our business may be negatively impacted.

We continue to implement our multi-year business transformation initiative to execute significant change to our global processes, capabilities and operating model, including in our Global Enablement (GE) organization, in order to provide a scalable platform for future growth, while reducing costs. As technology provides the backbone for greater process alignment, information sharing and scalability, we are also making investments in our information systems, including the multi-year program to replace our enterprise resource planning (ERP) system currently underway, which includes the transformation of our financial processing systems to enterprise-wide systems solutions. These systems implementations are part of our ongoing business transformation initiative, and we plan to implement these systems throughout all parts of our businesses. If we do not allocate and effectively manage the resources necessary to build and sustain the proper information technology infrastructure, or if we fail to achieve the expected benefits from this initiative, it may impact our ability to process transactions accurately and efficiently and remain in step with the changing needs of our business, which could result in the loss of customers and revenue. In addition, failure to either deliver the applications on time, or anticipate the necessary readiness and training needs, could lead to business disruption and loss of customers and revenue. In connection with these implementations and resulting business process changes, we continue to enhance the design and documentation of business processes and controls, including our internal control over financial reporting processes, to maintain effective controls over our financial reporting.

We utilize cloud-based services and systems and networks managed by third-party vendors to process, transmit and store information and to conduct certain of our business activities and transactions with employees, customers, vendors and other third parties. Our utilization of these cloud-based services and systems will increase as we implement our business transformation initiatives. If any of these third-party service providers or vendors do not perform effectively, or if we fail to adequately monitor their performance (including compliance with service-level agreements or regulatory or legal requirements), we may not be able to achieve expected cost savings, we may have to incur additional costs to correct errors made by such service providers, our reputation could be harmed or we could be subject to litigation, claims, legal or regulatory proceedings, inquiries or investigations. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, incorrect or adverse effects on financial reporting, litigation or remediation costs, or damage to our reputation, which could have a

12



negative impact on employee morale. In addition, the management of multiple third-party service providers increases operational complexity and decreases our control.

The global nature of our business, changes in tax legislation and the resolution of tax uncertainties create volatility in our effective tax rate.

As a global business, our tax rate from period to period can be affected by many factors, including changes in tax
legislation, our global mix of earnings, the tax characteristics of our income, the timing and recognition of goodwill
impairments, acquisitions and dispositions, adjustments to our reserves related to uncertain tax positions, changes in valuation allowances and the portion of the income of foreign subsidiaries that we expect to remit to the U.S. and that will be taxable.

In addition, significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish accruals for certain tax contingencies when, despite the belief that our tax return positions are appropriately supported, the positions are uncertain. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. Our effective tax rate includes the impact of tax contingency accruals and changes to those accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to our effective tax rate in the year of resolution. Unfavorable resolution of any particular issue could increase the effective tax rate and may require the use of cash in the year of resolution.

Climate change may negatively affect our business, financial condition and results of operations.

Unseasonable or unusual weather or long-term climate changes may negatively impact the price or availability of spices, herbs and other raw materials. There is concern that greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity or practices, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products. In addition, such climate change may result in modifications to the eating preferences of the ultimate consumers of certain of our products, which may also unfavorably impact our sales and profitability.

Our intellectual property rights, and those of our customers, could be infringed, challenged or impaired, and reduce the value of our products and brands or our business with customers.

We possess intellectual property rights that are important to our business, and we are provided access by certain customers to particular intellectual property rights belonging to such customers. These intellectual property rights include ingredient formulas, trademarks, copyrights, patents, business processes and other trade secrets which are important to our business and relate to some of our products, our packaging, the processes for their production, and the design and operation of equipment used in our businesses. We protect our intellectual property rights, and those of certain customers, globally through a variety of means, including trademarks, copyrights, patents and trade secrets, third-party assignments and nondisclosure agreements, and monitoring of third-party misuses of intellectual property. If we fail to obtain or adequately protect our intellectual property (and the intellectual property of customers to which we have been given access), the value of our products and brands could be reduced and there could be an adverse impact on our business, financial condition and results of operations.

Litigation, legal or administrative proceedings could have an adverse impact on our business and financial condition or damage our reputation.

We are party to a variety of legal claims and proceedings in the ordinary course of business. Since litigation is inherently uncertain, there is no guarantee that we will be successful in defending ourselves against such claims or proceedings, or that management’s assessment of the materiality or immateriality of these matters, including any reserves taken in connection with such matters, will be consistent with the ultimate outcome of such claims or proceedings. In the event that management’s assessment of the materiality or immateriality of current claims and proceedings proves inaccurate, or litigation that is material arises in the future, there may be a material adverse effect on our financial condition. Any adverse publicity resulting from allegations made in litigation claims or legal or administrative proceedings (even if untrue) may also adversely affect our reputation. These factors and others could have an adverse impact on our business and financial condition or damage our reputation.


13



Streamlining actions to reduce fixed costs, simplify or improve processes, and improve our competitiveness may have a negative effect on employee relations.

We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance that we may transfer production from one manufacturing facility to another; transfer certain selling and administrative functions from one location to another; eliminate certain manufacturing, selling and administrative positions; and exit certain businesses or lines of business. These actions may result in a deterioration of employee relations at the impacted locations or elsewhere in McCormick.

If we are unable to fully realize the benefits from our CCI program, our financial results could be negatively affected.

Our future success depends in part on our ability to be an efficient producer in a highly competitive industry. Any failure by us to achieve our planned cost savings and efficiencies under our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization, or other similar programs, could have an adverse effect on our business, results of operations and financial position.
The declaration, payment and amount of dividends is made at the discretion of our board of directors and depends on a number of factors.
The declaration, payment and amount of any dividends is made pursuant to our dividend policy and is subject to final determination each quarter by our board of directors in its discretion based on a number of factors that it deems relevant, including our financial position, results of operations, available cash resources, cash requirements and alternative uses of cash that our board of directors may conclude would be in the best interest of the company and our shareholders. Our dividend payments are subject to solvency conditions established by the Maryland General Corporation Law. Accordingly, there can be no assurance that any future dividends will be equal or similar in amount to any dividends previously paid or that our board of directors will not decide to reduce, suspend or discontinue the payment of dividends at any time in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices and primary research facilities are leased and owned, respectively, and are located in suburban Baltimore, Maryland.
The following is a list of our principal manufacturing properties, all of which are owned except for the facilities in Commerce, California; Lakewood, New Jersey; Melbourne, Australia; Florence, Italy; and a portion of the facility in Littleborough, England, which are leased. The manufacturing facilities that we own in Guangzhou, Shanghai and Wuhan, China are each located on land subject to long-term leases:
United States:
Hunt Valley, Maryland–consumer and flavor solutions
(3 principal plants)
Gretna, Louisiana–consumer and flavor solutions
South Bend, Indiana–consumer and flavor solutions
Atlanta, Georgia–flavor solutions
Commerce, California–consumer
Irving, Texas–flavor solutions
Lakewood, New Jersey–flavor solutions
Springfield, Missouri–consumer and flavor solutions
Canada:
London, Ontario–consumer and flavor solutions
Mexico:
Cuautitlan de Romero Rubio–flavor solutions

14



United Kingdom:
Haddenham, England–consumer and flavor solutions
Littleborough, England–flavor solutions
France:
Carpentras–consumer and flavor solutions
Monteux–consumer and flavor solutions
Poland:
Stefanowo–consumer
Italy:
Florence–consumer and flavor solutions (3 principal plants)
China:
Guangzhou–consumer and flavor solutions
Shanghai–consumer and flavor solutions
Wuhan–consumer
Australia:
Melbourne–consumer and flavor solutions
Palmwoods–consumer (2 principal plants)
India:
New Delhi–consumer

Thailand:
Chonburi–consumer and flavor solutions

In addition to distribution facilities and warehouse space available at our manufacturing facilities, we lease regional distribution facilities as follows (i) in the U.S.: Belcamp and Aberdeen, Maryland; Salinas, California; Byhalia, Mississippi; Irving, Texas; and Springfield, Missouri; (ii) in Canada: Mississauga and London, Ontario; (iii) in Heywood, U.K. and (iv) in Gennevilliers, France. We also own distribution facilities in Belcamp, Maryland and Monteux, France. In addition, we own, lease or contract other properties used for manufacturing consumer and flavor solutions products and for sales, warehousing, distribution and administrative functions.
We believe our plants are well maintained and suitable for their intended use. We further believe that these plants generally have adequate capacity or the ability to expand, and can accommodate seasonal demands, changing product mixes and additional growth.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings in which we or any of our subsidiaries are a party or to which any of our or their property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.

PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock and Common Stock Non-Voting are listed and traded on the New York Stock Exchange ("NYSE"). Our Common Stock and Common Stock Non-Voting trade under the ticker symbols MKCV and MKC, respectively. We have disclosed in note 17 of the accompanying financial statements the information relating to the dividends declared and paid on our classes of common stock. The market price of our common stock at the close of business on December 31, 2019 was $171.07 per share for the Common Stock and $169.73 per share for the Common Stock Non-Voting.

15



The approximate number of holders of our common stock based on record ownership as of December 31, 2019 was as follows:
Title of class
Approximate    
number    
of record    
holders     
Common Stock, no par value
2,000
Common Stock Non-Voting, no par value
9,400
The following table summarizes our purchases of Common Stock (CS) and Common Stock Non-Voting (CSNV) during the fourth quarter of 2019:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total number of
shares purchased
Average price
paid per share
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs
September 1, 2019 to
September 30, 2019
CS-0
CSNV-0
    -
-
            -
            -
$50 million        
October 1, 2019 to
October 31, 2019
CS-0
CSNV-72,000
    -
$161.96
            -
     72,000
$38 million        
November 1, 2019 to
November 30, 2019
CS-0
CSNV-40,500
    -
$160.22
            -
      40,500
$632 million (1)
Total
CS-0
CSNV-112,500
    -
$161.33
            -
    112,500    
$632 million        
(1)
Includes an additional $600 million of share repurchase authorization approved by our board of directors in November 2019.

As of November 30, 2019, approximately $32 million remained of a $600 million share repurchase authorization approved by the Board of Directors in March 2015. An additional $600 million share repurchase program was authorized by our Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors.
In certain circumstances, we issue shares of CS in exchange for shares of CSNV, or issue shares of CSNV in exchange for shares of CS, in either case pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Typically, these exchanges are made in connection with the administration of our employee benefit plans, executive compensation programs and dividend reinvestment/direct purchase plans. The number of shares issued in an exchange is generally equal to the number of shares received in the exchange, although the number may differ slightly to the extent necessary to comply with the requirements of the Employee Retirement Income Security Act of 1974. During fiscal 2019, we issued 1,563,804 shares of CSNV in exchange for shares of CS and issued 2,268 shares of CS in exchange for shares of CSNV.

16



ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL SUMMARY
(millions except per share and percentage data)
2019
2018
2017
2016
2015
For the Year
 
 
 
 
 
Net sales (1)
$
5,347.4

$
5,302.8

$
4,730.3

$
4,313.9

$
4,296.3

Operating income (1)
957.7

891.1

699.8

649.4

548.4

Income from unconsolidated operations
40.9

34.8

33.9

36.1

36.7

Net income
702.7

933.4

477.4

472.3

401.6

Per Common Share
 
 
 
 
 
Earnings per share–basic
$
5.30

$
7.10

$
3.77

$
3.73

$
3.14

Earnings per share–diluted
5.24

7.00

3.72

3.69

3.11

Common dividends declared
2.33

2.13

1.93

1.76

1.63

Closing price, non-voting shares–end of year
169.25

150.00

102.18

91.20

85.92

Book value per share
26.02

24.09

19.62

13.07

13.25

At Year-End
 
 
 
 
 
Total assets (2)
$
10,362.1

$
10,256.4

$
10,385.8

$
4,635.9

$
4,472.6

Current debt
698.4

643.5

583.2

393.2

343.0

Long-term debt (2)
3,625.8

4,052.9

4,443.9

1,054.0

1,051.4

Shareholders’ equity
3,456.7

3,182.2

2,570.9

1,638.1

1,686.9

Other Financial Measures
 
 
 
 
 
Percentage of net sales (1)
 
 
 
 
 
Gross profit (1)
40.1
%
39.5
%
37.9
%
38.1
%
40.4
%
Operating income (1)
17.9
%
16.8
%
14.8
%
15.1
%
12.8
%
Capital expenditures
$
173.7

$
169.1

$
182.4

$
153.8

$
128.4

Depreciation and amortization
158.8

150.7

125.2

108.7

105.9

Common share repurchases
95.1

62.3

137.8

242.7

145.8

Dividends paid
302.2

273.4

237.6

217.8

204.9

Average shares outstanding
 
 
 
 
 
Basic
132.6

131.5

126.8

126.6

128.0

Diluted
134.1

133.2

128.4

128.0

129.2

(1) 
Amounts set forth above for Net sales, Operating income, Percentage of net sales - Gross profit, and Percentage of net sales - Operating income for the fiscal years ended 2019-2016 have been recast to reflect the provisions of ASC 606, which we adopted in fiscal 2019 on a full retrospective basis. Amounts set forth above for Operating income, Percentage of net sales - Gross profit, and Percentage of net sales - Operating income for the fiscal years ended 2019-2016 have also been recast to reflect the provisions of ASU 2017-07 regarding the presentation of net periodic pension cost and net periodic postretirement cost. Amounts set forth for the same items in the fiscal year ended 2015 are presented in accordance with guidance in effect in that fiscal year.
(2) 
Total assets and Long-term debt for the fiscal year ended 2015 reflect the provisions of Accounting Standards Updates 2015-03, related to the presentation of debt issuance costs, and 2015-17, related to the classification of deferred tax assets and liabilities, both of which we adopted as of November 30, 2016.

The historical financial summary includes the impact of certain items that affect the comparability of financial results year to year. The net impact of these items is reflected in the following table:
 
(millions except per share data)
2019
2018
2017
2016
2015
Operating income (1)
$
(20.8
)
$
(38.8
)
$
(83.9
)
$
(16.0
)
$
(65.5
)
Net income (2)
(14.6
)
271.4

(69.3
)
(11.1
)
(47.9
)
Earnings per share–diluted
(0.11
)
2.03

(0.54
)
(0.09
)
(0.37
)
(1) 
In 2019, 2018, 2017, 2016 and 2015, we recorded special charges related to the completion of organization and streamlining actions, including, for 2016 and 2015, special charges related to the discontinuance of bulk-packaged and

17



broken basmati rice product lines for our business in India. In 2018 and 2017, we recorded transaction and integration expenses related to our acquisition of RB Foods.
(2) 
In 2019 and 2018, we recorded a non-recurring benefit from the U.S. Tax Act of $1.5 million and $301.5 million, respectively.


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand McCormick & Company, Incorporated, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto contained in Item 8 of this report. We use certain non-GAAP information that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data.
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retailers, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and flavor solutions, as described in Item 1 of this report.
Our long-term annual growth objectives in constant currency are to increase sales 4% to 6%, increase adjusted operating income 7% to 9% and increase adjusted earnings per share 9% to 11%.
Sales growth: Over time, we expect to grow sales with similar contributions from: 1) our base business–driven by brand marketing support, customer intimacy, expanded distribution and category growth; 2) new products; and 3) acquisitions.
Base business–We expect to drive sales growth by optimizing our brand marketing investment through improved speed, quality and effectiveness. We measure the return on our brand marketing investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products.

New Products–For our consumer segment, we believe that scalable and differentiated innovation continues to be one of the best ways to distinguish our brands from our competition, including private label. We are introducing products for every type of cooking occasion, from gourmet, premium items to convenient and value-priced flavors.

For flavor solutions customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. We have a solid pipeline of flavor solutions aligned with our customers’ new product launch plans, many of which include “better-for-you” innovation. With over 20 product innovation centers around the world, we are supporting the growth of our brands and those of our flavor solutions customers with products that appeal to local consumers.

Acquisitions–Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed seven acquisitions, which are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that build scale where we currently have presence in both developed and emerging markets. Our acquisitions have included bolt-on opportunities and the August 17, 2017 acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. for approximately $4.2 billion, net of acquired cash. 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.

The RB Foods acquisition resulted in acquisitions contributing more than one-third of our sales growth in 2018 and 2017.


18



Cost savings and business transformation: We are fueling our investment in growth with cost savings from our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization, that also includes savings from the organization and streamlining actions described in note 3 of the accompanying financial statements. In addition to funding brand marketing support, product innovation and other growth initiatives, our CCI program helps offset higher costs and is contributing to higher operating income and earnings per share.

We are making investments to build the McCormick of the future, including in our Global Enablement (GE) organization to transform McCormick through globally aligned, innovative services to enable growth. As more fully described in note 3 of notes to our consolidated financial statements, we expect to incur special charges of approximately $60 million to $65 million associated with our GE initiative of which approximately $38 million have been recognized through November 30, 2019. As technology provides the backbone for this greater process alignment, information sharing and scalability, we are also making investments in our information systems. In 2019, we have progressed in implementing our global enterprise resource planning (ERP) replacement program which will enable us to accelerate the transformation of our ways of working and provide a scalable platform for growth. We expect that, in total over the course of the ERP replacement program from late 2018 through 2022, we will invest from approximately $300 million to $350 million, including expenses related to the go-live activities in our operations, to enable the anticipated completion of the global roll out of our new information technology platform in 2022. Of that projected, $300 million to $350 million, we expect capitalized software to account for approximately 40% and program expenses to account for approximately 60%. Of the approximately $180 million to $210 million of operating expenses included in our projected total spending related to our ERP replacement program, approximately $20 million have been recognized through November 30, 2019.

The GE initiative is expected to generate annual savings, ranging from approximately $45 million to $55 million, once all actions are implemented, including those that are dependent on the replacement of our global ERP platform.

Cash flow: We continue to generate strong cash flow. Net cash provided by operating activities reached $946.8 million in 2019, an increase of $125.6 million from the $821.2 million realized in 2018. In 2019, we continued to have a balanced use of cash for debt repayment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 34 years, and to fund capital expenditures, acquisitions and share repurchases. In 2019, the return of cash to our shareholders through dividends and share repurchases was $397.3 million.

On a long-term basis, we expect a combination of acquisitions and share repurchases to add about 2% to earnings per share growth.

In 2019, we achieved further growth of our business with net sales rising 0.8% over the 2018 level due to the following factors:
We grew volume and product mix, with increases in both our consumer and flavor solutions segments. This added 2.5% of sales growth. The increases were driven by new products as well as growth in the base business.
Pricing actions contributed 0.2% of the increase in net sales.
Net sales growth was negatively impacted by fluctuations in currency rates that reduced sales growth by 1.9%. Excluding this impact, we grew sales 2.7% on a constant currency basis.

Operating income was $957.7 million in 2019 and $891.1 million in 2018. We recorded $20.8 million and $16.3 million of special charges in 2019 and 2018, respectively, related to organization and streamlining actions. In 2018, we also recorded $22.5 million of transaction and integration expenses related to our acquisition of RB Foods that reduced operating income. In 2019, compared to the year-ago period, the favorable impact of higher sales, $118.9 million of cost savings from our CCI program, including organization and streamlining actions, and the impact of the previously mentioned 2018 integration costs more than offset increased conversion costs, higher stock-based compensation expense, and the unfavorable impact of foreign currency exchange rates. Excluding special charges together with, for 2018, transaction and integration expenses related to our acquisition of RB Foods, adjusted operating income was $978.5 million in 2019, an increase of 5.2%, compared to $929.9 million in the year-ago period. In constant currency, adjusted operating income rose 6.7%. For further details and a reconciliation of non-GAAP to reported amounts, see Non-GAAP Financial Measures.

19




Diluted earnings per share was $5.24 in 2019 and $7.00 in 2018. The year-on-year decrease in earnings per share was driven mainly by the significant reduction in the non-recurring benefit of the U.S. Tax Act and, to a much smaller extent, by a higher amount of shares outstanding and by increased special charges in 2019 as compared to 2018. Those unfavorable impacts in 2019 were partially offset by higher operating income as previously described, by the absence of transaction and integration expenses, by lower interest expense and by higher income from unconsolidated operations in 2019 as compared to 2018. Special charges lowered earnings per share by $0.12 and $0.10 in 2019 and 2018, respectively. Transaction and integration expenses lowered earnings per share by $0.13 in 2018. A non-recurring benefit from the U.S. Tax Act increased diluted earnings per share by $0.01 and $2.26 in 2019 and 2018, respectively. Excluding the effects of special charges, transaction and integration expenses, and the non-recurring benefit of the U.S. Tax Act, adjusted diluted earnings per share was $5.35 in 2019 and $4.97 in 2018, or an increase of 7.6%.
2020 Outlook

We are well-positioned for another year of underlying solid performance in 2020. In 2020, we expect to grow net sales 2% to 4% over 2019’s net sales of $5,347.4 million. That anticipated 2020 sales growth is primarily driven by new products, brand marketing, expanded distribution and the impact of pricing actions, which, in conjunction with cost savings, are expected to offset an anticipated mid-single digit cost increase. That increase consists entirely of organic growth as we do not currently anticipate an incremental sales impact from acquisitions in 2020. We expect our 2020 gross profit margin to be 25 to 75 basis points higher in 2020 than in 2019, in part driven by our CCI-led cost savings.

In 2020, we expect operating income, compared to 2019’s operating income of $957.7 million, to range from comparable to an increase of 2%; that range includes an estimated 600 basis point unfavorable impact from expenses related to the investment in our global ERP replacement. Our expectations for 2020 operating income reflect the impact of lower special charges, estimated at $8 million in 2020 compared to $20.8 million in 2019. Excluding special charges (but including the estimated 600 basis point unfavorable impact from expenses related to our global ERP investment), we expect 2020’s adjusted operating income, compared to 2019’s adjusted operating income of $978.5 million, to range from a decline of 1% to an increase of 1%. Our CCI-led cost savings target in 2020 is approximately $105 million. In 2020, we expect to support our sales growth with a mid-single-digit increase in brand marketing.

Our underlying effective tax rate is projected to be higher in 2020 than in 2019. Absent the projected impact of discrete tax items, we estimate our underlying tax rate to be approximately 24% in 2020. Including the projected impact of estimated discrete tax items, including the favorable impact of a discrete item that occurred in December 2019, we estimate that our consolidated effective tax rate will approximate 22% in fiscal 2020. Excluding the non-recurring benefit of $1.5 million associated with the U.S. Tax Act and taxes associated with special charges recognized in fiscal 2019, our adjusted effective tax rate was approximately 19.5% in 2019. We expect our adjusted effective tax rate in 2020 to approximate our effective tax rate under U.S. GAAP of 22%.

Diluted earnings per share was $5.24 in 2019. Diluted earnings per share for 2020 are projected to range from $5.15 to $5.25. Excluding the per share impact of the non-recurring benefit from the U.S. Tax Act of $0.01 and special charges of $0.12 in 2019, adjusted diluted earnings per share was $5.35 in 2019. Adjusted diluted earnings per share (excluding an estimated $0.05 per share impact from special charges) are projected to be $5.20 to $5.30 in 2020. Our projected adjusted diluted earnings per share in 2020, which ranges from a decline of 3% to a decline of 1% from adjusted diluted earnings per share of $5.35 in 2019, includes an approximate 700 basis point impact from the expenses associated with our ERP replacement program and a higher adjusted effective tax rate in 2020.

In 2020, we expect minimal impact of foreign currency, as compared to 2019 levels, on our projections of net sales, operating income and diluted earnings per share as well as adjusted operating income and adjusted diluted earnings per share.

20



RESULTS OF OPERATIONS—2019 COMPARED TO 2018
 
2019
2018
Net sales
$
5,347.4

$
5,302.8

Percent growth
0.8
 %
12.1
%
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
2.5
 %
2.2
%
Pricing actions
0.2
 %
0.5
%
Acquisitions
 %
8.2
%
Foreign exchange
(1.9
)%
1.2
%

Sales for 2019 increased by 0.8% from 2018 and by 2.7% on a constant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.5% to sales. This was driven by product innovation as well as growth in the base business. Pricing actions added 0.2% to sales. These factors were partially offset by an unfavorable impact from foreign currency exchange rates that reduced sales by 1.9% compared to 2018 and is excluded from our measure of sales growth of 2.7% on a constant currency basis.
 
2019
2018
Gross profit
$
2,145.3

$
2,093.3

Gross profit margin
40.1
%
39.5
%
In 2019, our gross profit margin increased 60 basis points to 40.1% from 39.5% in 2018, driven by the favorable impact of CCI-led cost savings, partially offset by unfavorable conversion costs.
 
2019
2018
Selling, general & administrative expense
$
1,166.8

$
1,163.4

Percent of net sales
21.8
%
22.0
%
Selling, general and administrative (SG&A) expense was $1,166.8 million in 2019 compared to $1,163.4 million in 2018, an increase of $3.4 million. That increase in SG&A expense was driven by increased stock-based compensation expense and higher distribution costs, partially offset by CCI-led cost savings. SG&A expense in 2019 also reflected the impact of two significant, but largely offsetting items: (i) expenses associated with our investment in a global ERP platform in support of our GE business transformation initiative that increased SG&A expense over the prior year level; and (ii) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard that decreased SG&A expense from the prior year level. As a result of the above factors over an increased net sales base, SG&A expense as a percentage of net sales was 21.8%, a 20-basis point improvement from 2018.
 
2019
2018
Total special charges
$
20.8

$
16.3


We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements.
During 2019, we recorded $20.8 million of special charges, consisting primarily of (i) $14.1 million of costs related to our multi-year GE business transformation initiative, including $10.6 million of third-party expenses, $2.1 million related to severance and related benefits, and $1.4 million related to other costs; (ii) $2.3 million of severance and related benefits associated with streamlining actions in the Americas; and (iii) $3.9 million related to streamlining actions in our EMEA region.

During 2018, we recorded $16.3 million of special charges, consisting primarily of: (i) $11.5 million related to our multi-year GE business transformation initiative, consisting of $7.5 million of third party expenses, $1.0 million of employee severance charges and a non-cash asset impairment charge of $3.0 million (which non-cash asset impairment charge was related to the write-off of certain software assets that are incompatible with our move to the new global ERP platform); (ii) a one-time payment, in the aggregate amount of $2.2 million, made to eligible U.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act; (iii) $1.0 million related to employee severance benefits and other costs directly

21



associated with the relocation of one of our Chinese manufacturing facilities; and (iv) $1.6 million related to employee severance benefits and other costs related to the transfer of certain manufacturing operations in our Asia/Pacific region to a newly constructed facility in Thailand.
 
2019
2018
Transaction and integration expenses
$

$
22.5


Transaction and integration expenses related to the RB Foods acquisition totaled $22.5 million for 2018. These costs primarily consisted of outside advisory, service and consulting costs; employee-related costs, and other costs related to the acquisition.
 
2019
2018
Operating income
$
957.7

$
891.1

Percent of net sales
17.9
%
16.8
%

Operating income increased by $66.6 million, or 7.5%, from $891.1 million in 2018 to $957.7 million in 2019. An absence of transaction and integration expenses in 2019, compared to $22.5 million related to our acquisition of RB Foods in 2018, more than offset a $4.5 million increase in special charges in 2019 from $16.3 million in 2018 to $20.8 million in 2019. Operating income as a percent of net sales rose by 110 basis points in 2019, from 16.8% in 2018 to 17.9% in 2019 as a result of the factors previously described. Our operating income as a percent of net sales in 2019 was impacted by two large, but substantially offsetting items: (i) expenses associated with our investment in a global ERP platform in support of our GE business transformation initiative that decreased operating income as a percent of sales by approximately 35 basis points in 2019; and (ii) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard that increased operating income as a percent of sales by approximately 40 basis points in 2019. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was $978.5 million in 2019 as compared to $929.9 million in 2018, an increase of $48.6 million or 5.2% over the 2018 level. Adjusted operating income as a percent of sales rose by 80 basis points in 2019, from 17.5% in 2018 to 18.3% in 2019.
 
2019
2018
Interest expense
$
165.2

$
174.6

Other income, net
26.7

24.8

Interest expense was $9.4 million lower for 2019 as compared to the prior year primarily due to a decline in average total borrowings. Other income, net for 2019 increased by $1.9 million from the 2018 level due principally to higher non-service cost income associated with our pension and postretirement benefit plans and higher interest income, which was partially offset by a gain on the sale of a building which was reflected in our 2018 results and did not recur in 2019.
 
2019
2018
Income from consolidated operations before income taxes
$
819.2

$
741.3

Income tax expense (benefit)
157.4

(157.3
)
Effective tax rate
19.2
%
(21.2
)%

The provision for income taxes is based on the then-current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements of U.S. GAAP. Examples of such types of discrete items not related to ordinary income of the current fiscal year include, but are not limited to, excess tax benefits associated with share-based payments to employees, changes in estimates of the outcome of tax matters related to prior years (including reversals of reserves upon the lapsing of statutes of limitations), provision-to-return adjustments, and the settlement of tax audits and, beginning in 2019, the tax effects of intra-entity asset transfers (other than inventory).

As more fully described in note 12 of the accompanying financial statements, the U.S. Tax Act was enacted in December 2017. The U.S. Tax Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% beginning on January 1, 2018 and creating a territorial tax system with a one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740, Income Taxes), the effects of changes in tax rates and laws on deferred tax

22



balances are recognized in the period in which the new legislation is enacted. We recorded a net benefit of $301.5 million associated with the U.S. Tax Act during 2018. This amount includes a $380.0 million benefit from the revaluation of our net U.S. deferred tax liabilities as of January 1, 2018, based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of $78.5 million. That net transition tax impact is comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries estimated at $75.3 million, together with additional foreign withholding taxes of $7.9 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatriated in 2018, less a $4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax. In addition, in 2019, we recorded a benefit of $1.5 million relating to an adjustment to a prior year tax accrual associated with the U.S. Tax Act.

The effective tax rate was an expense of 19.2% in 2019 as compared to a benefit of 21.2% in 2018. The effective tax rate benefit of 21.2% in 2018 includes the non-recurring net tax benefit of $301.5 million associated with the U.S. Tax Act, as more fully described above, that had a (40.7)% impact on 2018’s effective tax rate. Net discrete tax benefits were $43.7 million in 2019, which is an increase of $15.6 million from $28.1 million in 2018, excluding the non-recurring benefit of the U.S. Tax Act in 2018. For 2019, the effective tax rate was impacted by $15.2 million of tax benefits associated with an intra-entity asset transfer that occurred during 2019 under the provisions of ASU No. 2016-16, which we adopted on December 1, 2018. Discrete tax benefits in both periods include excess tax benefits associated with share-based payments to employees ($22.4 million and $21.7 million in 2019 and 2018, respectively), reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and settlements with taxing authorities in several jurisdictions, the previously described non-recurring benefit of the U.S. Tax Act, and other discrete items. See note 12 of the accompanying financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate.

 
2019
2018
Income from unconsolidated operations
$
40.9

$
34.8

Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased $6.1 million in 2019 from the prior year. This increase was primarily attributable to the impact of higher earnings from our largest joint venture, McCormick de Mexico, as well as the impact of eliminating a lower level of earnings associated with our minority interests in 2019 as compared to 2018. We own 50% of most of our unconsolidated joint ventures, including McCormick de Mexico that comprised 72% of the income of our unconsolidated operations in 2019.
We reported diluted earnings per share of $5.24 in 2019, compared to $7.00 in 2018. The table below outlines the major components of the change in diluted earnings per share from 2018 to 2019. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2019.
2018 Earnings per share—diluted
$
7.00

Increase in operating income
0.29

Impact of non-recurring tax benefit recognized as a result of the U.S. Tax Act
(2.25
)
Increase in special charges
(0.02
)
Decrease in transaction and integration expenses attributable to RB Foods acquisition
0.13

Decrease in interest expense
0.06

Increase in other income
0.01

Impact of income taxes
0.01

Increase in income from unconsolidated operations
0.04

Impact of higher shares
(0.03
)
2019 Earnings per share—diluted
$
5.24


Results of Operations—Segments
We measure the performance of our business segments based on operating income, excluding special charges and transaction and integration expenses related to our RB Foods acquisition. See note 15 of the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment

23



of operating income, excluding special charges as well as transaction and integration expenses related to our RB Foods acquisition, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income.
In 2019, the Company transferred management responsibility for certain export operations in both its consumer and flavor solutions segments between geographies within each respective segment, shifting from the Americas to the Asia/Pacific regions within each segment, with no change in segment sales or segment operating income for either the consumer or flavor solutions segment in total. The discussion that follows reflects the effect of that realignment of export operations for all periods presented.
Consumer Segment
 
 
2019
2018
Net sales
$
3,269.8

$
3,247.0

Percent growth
0.7
 %
11.9
%
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
2.4
 %
1.7
%
Pricing actions
0.1
 %
0.6
%
Acquisitions
 %
8.2
%
Foreign exchange
(1.8
)%
1.4
%
 
 
 
Segment operating income
$
676.3

$
637.1

Segment operating income margin
20.7
 %
19.6
%
Sales of our consumer segment in 2019 grew by 0.7% as compared to 2018 and grew by 2.5% on a constant currency basis. Higher volume and product mix added 2.4% to sales, and pricing actions added 0.1%. These factors offset an unfavorable impact from foreign currency exchange rates that reduced consumer segment sales by 1.8% compared to 2018 and is excluded from our measure of sales growth of 2.5% on a constant currency basis.
In the Americas, consumer sales rose 2.4% in 2019 as compared to 2018 and rose by 2.7% on a constant currency basis. Higher volume and product mix added 2.7% to sales, driven by new product sales as well as base business growth. The unfavorable impact of foreign currency exchange rates decreased sales by 0.3% compared to 2018 and is excluded from our measure of sales growth of 2.7% on a constant currency basis.
In the EMEA region, consumer sales decreased 5.5% in 2019 as compared to 2018 and decreased 0.2% on a constant currency basis. Volume and product mix increased sales by 1.0%, led by new products and promotions that were partially offset by declines in private label sales. The impact of pricing actions reduced sales by 1.2%. The unfavorable impact of foreign currency exchange rates decreased sales by 5.3% compared to 2018 and is excluded from our measure of sales decline of 0.2% on a constant currency basis.
In the Asia/Pacific region, consumer sales increased 0.8% as compared to 2018 and increased 5.7% on a constant currency basis. Higher volume and product mix added 2.9% to sales, led by strong sales in India and Southeast Asia. Pricing actions, primarily in China, added 2.8% to sales as compared to 2018. These factors offset an unfavorable impact from foreign currency exchange rates that decreased sales by 4.9% compared to 2018 and is excluded from our measure of sales growth of 5.7% on a constant currency basis.
We grew segment operating income for our consumer segment by $39.2 million, or 6.1%, in 2019 compared to 2018. The favorable impact of higher sales and CCI-led cost savings more than offset increased conversion costs. On a constant currency basis, segment operating income for our consumer segment rose 7.3%. Segment operating income margin for our consumer segment rose by 110 basis points to 20.7% in 2019 from 19.6% in 2018, driven by an improvement in gross margin.

24



Flavor Solutions Segment
 
 
2019
2018
Net sales
$
2,077.6

$
2,055.8

Percent growth
1.1
 %
12.4
%
Components of percent change in net salesincrease (decrease):
 
 
Volume and product mix
2.9
 %
3.1
%
Pricing actions
0.3
 %
0.3
%
Acquisitions
 %
8.2
%
Foreign exchange
(2.1
)%
0.8
%
 
 
 
Segment operating income
$
302.2

$
292.8

Segment operating income margin
14.5
 %
14.2
%
Sales of our flavor solutions segment increased 1.1% in 2019 as compared to 2018 and increased by 3.2% on a constant currency basis. Higher volume and product mix added 2.9% to sales and pricing actions added 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced flavor solutions segment sales by 2.1% compared to 2018 and is excluded from our measure of sales growth of 3.2% on a constant currency basis.
In the Americas, flavor solutions sales rose 2.2% in 2019 as compared to 2018 and rose 2.6% on a constant currency basis. Higher volume and product mix added 2.4% to sales and included growth in new products as well as in base business, led by sales to packaged food companies. Pricing actions added 0.2% to sales in 2019. These factors offset an unfavorable impact from foreign currency exchange rates that reduced sales by 0.4% in 2019 compared to 2018 and is excluded from our measure of sales growth of 2.6% on a constant currency basis.
In the EMEA region, flavor solutions sales decreased 0.3% in 2019 as compared to 2018 and increased 6.7% on a constant currency basis. Higher volume and product mix added 5.4% to sales in 2019 with contributions from new products as well as base business growth. The increase was led by sales to quick service restaurants and packaged foods companies. Pricing actions added 1.3% to sales in 2019. These factors partially offset an unfavorable impact from foreign currency exchange rates that decreased sales by 7.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 6.7% on a constant currency basis.
In the Asia/Pacific region, flavor solutions sales decreased 3.4% in 2019 as compared to 2018 and increased 0.6% on a constant currency basis. Higher volume and product mix added 0.9% to sales and included increased sales to quick service restaurants, partially offset by the exit of certain low margin business. Pricing actions reduced sales in 2019 by 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced sales by 4.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 0.6% on a constant currency basis.
We grew segment operating income for our flavor solutions segment by $9.4 million, or 3.2%, in 2019 compared to 2018. The increase in segment operating income was driven by higher sales as well as lower SG&A costs. On a constant currency basis, segment operating income for our flavor solutions segment rose 5.3%. Segment operating income margin for our flavor solutions segment rose by 30 basis points to 14.5% in 2019 from 14.2% in 2018 and reflected the impact of lower SG&A costs as a percentage of net sales.

RESULTS OF OPERATIONS—2018 COMPARED TO 2017
 
2018
2017
Net sales
$
5,302.8

$
4,730.3

Percent growth
12.1
%
9.7
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
2.2
%
1.7
 %
Pricing actions
0.5
%
2.1
 %
Acquisitions
8.2
%
6.6
 %
Foreign exchange
1.2
%
(0.7
)%


25



Sales for 2018 increased by 12.1% from 2017 and by 10.9% on a constant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.2% to sales in 2019. This was driven by new products as well as growth in the base business. The incremental impact of pricing actions added 0.5% to sales in 2018, as compared to 2017. The incremental impact of the RB Foods acquisition added 8.2% to sales during 2018. A favorable impact from foreign currency exchange rates increased sales by 1.2% compared to 2017 and is excluded from our measure of sales growth of 10.9% on a constant currency basis.

 
2018
2017
Gross profit
$
2,093.3

$
1,794.0

Gross profit margin
39.5
%
37.9
%
In 2018, our gross profit margin rose 160 basis points to 39.5% from 37.9% in 2017. While this expansion in 2018 includes the accretive impact from our acquisition of the RB Foods business, together with the absence of related transaction and integration expenses of $20.9 million that depressed our 2017 gross profit margin by 50 basis points, our core business was also a driver of that expansion. In 2018, CCI-led cost savings and the shift in our core product portfolio to more value-added products continued to drive profit expansion across both of our segments, which was partially offset by an increase in freight costs during 2018 as compared to 2017. Excluding the effect of those transaction and integration expenses in 2017, adjusted gross profit margin rose 110 basis points from 38.4% in 2017 to 39.5% in 2018.

2018
2017
Selling, general & administrative expense
$
1,163.4

$
1,031.2

Percent of net sales
22.0
%
21.8
%
Selling, general and administrative ("SG&A") expense was $1,163.4 million in 2018 compared to $1,031.2 million in 2017, an increase of $132.2 million. That increase in SG&A expense was driven by the incremental impact of the RB Foods acquisition, together with increased brand marketing and higher distribution costs, which was offset in part by CCI-led cost savings, including the benefits from the organization and streamlining actions described in note 3 of the accompanying financial statements. As a result, SG&A expense as a percentage of net sales was 22.0%, a 20-basis point increase from 2017.

2018
2017
Total special charges
$
16.3

$
22.2


During 2018, we recorded $16.3 million of special charges, consisting primarily of: (i) $11.5 million related to our multi-year GE business transformation initiative, consisting of $7.5 million of third party expenses, $1.0 million of employee severance charges and a non-cash asset impairment charge of $3.0 million (that non-cash asset impairment charge was related to the write-off of certain software assets that are incompatible with our move to the new global ERP platform); (ii) a one-time payment, in the aggregate amount of $2.2 million, made to eligible U.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act; (iii) $1.0 million related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; and (iv) $1.6 million related to employee severance benefits and other costs related to the transfer of certain manufacturing operations in our Asia/Pacific region to a newly constructed facility in Thailand.

During 2017, we recorded $22.2 million of special charges, consisting primarily of $12.7 million related to third party expenses incurred as part of our evaluation of changes relating to our GE transformation initiative, $2.8 million related to employee severance benefits and other costs associated with the relocation of one of our Chinese manufacturing facilities, $2.5 million for severance and other exit costs associated with the closure of our manufacturing plant in Portugal, and $1.7 million related to employee severance benefits and other costs associated with actions related to the transfer of certain manufacturing operations to a new facility then under construction in Thailand.


26



 
2018
2017
Transaction expenses included in cost of goods sold
$

$
20.9

Transaction expenses included in other debt costs

15.4

Other transaction and integration expenses
22.5

40.8

Total
$
22.5

$
77.1


Transaction and integration expenses related to our RB Foods acquisition totaled $22.5 million and $77.1 million in 2018 and 2017, respectively. In 2018, these costs primarily consisted of outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition. In 2017, these expenses consisted of amortization of the acquisition-date fair value adjustment of inventories of $20.9 million that was 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 related to the bridge financing commitment of $15.4 million that was included in other debt costs.

 
2018
2017
Operating income
$
891.1

$
699.8

Percent of net sales
16.8
%
14.8
%
Operating income increased by $191.3 million, or 27.3%, from $699.8 million in 2017 to $891.1 million in 2018. The change in operating income was impacted by (i) a $39.2 million decrease in transaction and integration expenses, from $61.7 million in 2017 to $22.5 million in 2018, related to our acquisition of RB Foods in 2018; and (ii) a $5.9 million decrease in special charges in 2018 as compared to 2017. Operating income as a percent of net sales rose by 200 basis points in 2018, from 14.8% in 2017 to 16.8% in 2018 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses, adjusted operating income was $929.9 million in 2018 as compared to $783.7 million in 2017, an increase of $146.2 million or 18.7% over the 2017 level. Adjusted operating income as a percent of sales rose by 90 basis points in 2018, from 16.6% in 2017 to 17.5% in 2018.

 
2018
2017
Interest expense
$
174.6

$
95.7

Other income, net
24.8

6.1

Interest expense for 2018 of $174.6 million was sharply higher than the prior year level, primarily due to higher average borrowings in 2018 related to our incurrence of $3.7 billion in debt in August 2017 to finance the acquisition of RB Foods (see note 6 of the accompanying financial statements). Other income, net, for 2018 of $24.8 million was significantly higher than the 2017 level principally due to i) a $9.6 million increase in income related to the non-service component of our pension and other post-retirement plans, ii) a gain of $6.3 million recognized on the sale in 2018 of a building vacated as part of our move to a new global headquarters in Maryland, iii) higher interest income, and iv) lower non-operating foreign currency transaction losses recognized in 2018 as compared to 2017.
 
2018
2017
Income from consolidated operations before income taxes
$
741.3

$
594.8

Income tax (benefit) expense
(157.3
)
151.3

Effective tax rate
(21.2
)%
25.4
%

As more fully described above and in note 12 of the accompanying financial statements, the U.S. Tax Act was enacted in December 2017. We recorded a net benefit of $301.5 million associated with the U.S. Tax Act during 2018. This amount included a $380.0 million benefit from the revaluation of our net U.S. deferred tax liabilities as of January 1, 2018, based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of $78.5 million. That net transition tax impact was comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries estimated at $75.3 million, together with additional foreign withholding taxes of $7.9 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatriated in 2018, less a $4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax.


27



The effective tax rate was a benefit of 21.2% in 2018 as compared to an effective tax rate expense of 25.4% in 2017. The effective tax rate benefit of 21.2% in 2018 includes the net tax benefit of $301.5 million associated with the U.S. Tax Act, as more fully described above, that had a (40.7)% impact on 2018’s effective tax rate. Our 2018 effective tax rate also reflects the effects of the lower U.S. federal corporate income tax rate under the U.S. Tax Act and higher other net discrete tax benefits. Net discrete tax benefits, excluding the effects of the U.S. Tax Act in 2018, increased by $3.9 million from $24.2 million in 2017 to $28.1 million in 2018. Discrete tax benefits in both periods include excess tax benefits associated with share-based payments to employees ($21.7 million and $10.7 million in 2018 and 2017, respectively), reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and settlements with taxing authorities in several jurisdictions, and other discrete items, including, in 2017, the establishment of valuation allowances on non-U.S. deferred tax assets due to a change in our assessment of the recoverability of those deferred taxes. See note 12 of the accompanying financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate.

 
2018
2017
Income from unconsolidated operations
$
34.8

$
33.9

Income from unconsolidated operations increased $0.9 million in 2018 from the prior year. This increase was mainly attributable to higher earnings from our largest joint venture, McCormick de Mexico, partially offset by the impact of a higher elimination of earnings associated with our minority interests in 2018 than in 2017. We own 50% of most of our unconsolidated joint ventures, including McCormick de Mexico, which comprised 76% of the income of our unconsolidated operations in 2018.
We reported diluted earnings per share of $7.00 in 2018, compared to $3.72 in 2017. The table below outlines the major components of the change in diluted earnings per share from 2017 to 2018. The increase in operating income in the table below includes the impact from favorable currency exchange rates in 2018.
2017 Earnings per share—diluted
$
3.72

Increase in operating income
0.84

Impact of non-recurring tax benefit recognized as a result of the U.S. Tax Act
2.26

Decrease in special charges
0.02

Decrease in transaction and integration expenses attributable to RB Foods acquisition
0.29

Increase in interest expense
(0.46
)
Other impact of income taxes
0.40

Increase in other income
0.11

Increase in unconsolidated income
0.01

Impact of higher shares outstanding
(0.19
)
2018 Earnings per share—diluted
$
7.00



Results of Operations—Segments

Consumer Segment
 
 
2018
2017
Net sales
$
3,247.0

$
2,901.6

Percent growth
11.9
%
8.0
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
1.7
%
0.2
 %
Pricing actions
0.6
%
2.3
 %
Acquisitions
8.2
%
5.6
 %
Foreign exchange
1.4
%
(0.1
)%
 
 
 
Segment operating income
$
637.1

$
562.4

Segment operating income margin
19.6
%
19.4
 %

28



Sales of our consumer segment in 2018 grew by 11.9% as compared to 2017 and grew by 10.5% on a constant currency basis. Higher volume and product mix added 1.7% to sales, while the impact of 2018 pricing actions added 0.6%. The incremental impact of the RB Foods acquisition added 8.2% to sales. The favorable impact from foreign currency exchange rates increased consumer segment sales in 2018 by 1.4% compared to 2017 and is excluded from our measure of sales growth of 10.5% on a constant currency basis.
In the Americas, consumer sales rose 13.4% in 2018 as compared to 2017 and rose by 13.3% on a constant currency basis. Higher volume and product mix added 0.6% to sales, pricing actions added 1.0% to sales, and the incremental impact of acquisitions added 11.7% to sales. The favorable impact of foreign currency exchange rates increased sales in 2018 by 0.1% compared to 2017 and is excluded from our measure of sales growth of 13.3% on a constant currency basis.
In the EMEA region, consumer sales increased 6.9% in 2018 as compared to 2017 and rose 1.6% on a constant currency basis. Volume and product mix increased sales by 1.8%, led by growth in France and export sales to developing markets. This growth was partially offset by sales weakness in Poland driven by competitive conditions. The incremental impact of the RB Foods acquisition added 0.8% to sales, while the impact of pricing actions reduced sales by 1.0%. The favorable impact of foreign currency exchange rates increased sales in 2018 by 5.3% compared to 2017 and is excluded from our measure of sales increase of 1.6% on a constant currency basis.
In the Asia/Pacific region, consumer sales increased 11.5% in 2018 as compared to 2017 and increased 9.0% on a constant currency basis. Higher volume and product mix added 6.7% to sales. Growth was led by China through product innovation and increased distribution, partially offset by lower private label sales in Australia. Pricing actions added 1.2% to sales, and the incremental impact of acquisitions added 1.1% to sales. The favorable impact of foreign currency exchange rates increased sales by 2.5% in 2018 compared to 2017 and is excluded from our measure of sales growth of 9.0% on a constant currency basis.
We grew segment operating income for our consumer segment by $74.7 million, or 13.3%, in 2018 compared to 2017. The favorable impact of greater sales and higher CCI-led cost savings more than offset the unfavorable impact of higher costs and brand marketing expense. On a constant currency basis, segment operating income for our consumer segment rose 12.4%. Segment operating income margin for our consumer segment rose by 20 basis points to 19.6% in 2018 from 19.4% in 2017. The increase in segment operating income margin was driven by a higher gross profit margin and the leverage of fixed and semi-fixed elements of SG&A over the higher sales base in 2018 as compared to 2017. Those factors were partially offset by an increase in SG&A as a percentage of sales, driven by increased investment in brand marketing and higher distribution costs. The previously described gross profit margin improvement includes the incremental accretive impact attributable to the RB Foods acquisition as well as expansion in our core business, in part, from CCI-led cost savings and favorable product mix.
Flavor Solutions Segment
 
2018
2017
Net sales
$
2,055.8

$
1,828.7

Percent growth
12.4
%
12.4
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
3.1
%
3.8
 %
Pricing actions
0.3
%
2.0
 %
Acquisitions
8.2
%
8.2
 %
Foreign exchange
0.8
%
(1.6
)%
 
 
 
Segment operating income
$
292.8

$
221.3

Segment operating income margin
14.2
%
12.1
 %
Sales of our flavor solutions segment increased 12.4% in 2018 as compared to 2017 and increased by 11.6% on a constant currency basis. Higher volume and product mix added 3.1% to sales and pricing actions added 0.3%. Flavor solutions segment sales rose in 2018 due to the incremental impact of acquisitions, primarily the RB Foods acquisition, which added 8.2% to sales. The favorable impact from foreign currency exchange rates increased flavor solutions segment sales in 2018 by 0.8% compared to 2017 and is excluded from our measure of sales growth of 11.6% on a constant currency basis.
In the Americas, flavor solutions sales rose 15.1% in 2018 as compared to 2017 and rose 15.0% on a constant currency basis. Higher volume and product mix added 3.1% to sales led by increased sales to several large custom

29



flavor solutions customers partially offset by the impact from a global realignment of a major customer's sales to EMEA, together with the exit of certain lower margin business. Pricing actions added 0.2% to sales and the incremental impact of our RB Foods acquisition added 11.7% to sales. The favorable impact from foreign currency exchange rates increased sales by 0.1% in 2018 compared to 2017 and is excluded from our measure of sales growth of 15.0% on a constant currency basis.
In the EMEA region, flavor solutions sales increased 8.6% in 2018 as compared to 2017 and increased 6.3% on a constant currency basis. Higher volume and product mix added 4.1% to sales, driven by increased sales to quick service restaurants, broad based growth in Turkey, and the previously described global realignment of a major customer's sales from the Americas to EMEA. Pricing actions added 1.0% to sales in 2018 and the incremental impact of the Giotti and RB Foods acquisitions added 1.2% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 6.3% on a constant currency basis.
In the Asia/Pacific region, flavor solutions sales increased 3.9% in 2018 as compared to 2017 and increased 1.6% on a constant currency basis. Higher volume and product mix increased sales by 1.3%, while pricing actions reduced sales by 0.5% as compared to 2017. Increased sales in China, led by new products and limited time offers, were offset in part by sales declines in Australia, which were partially attributable to the exit of certain lower margin business. The incremental impact of the RB Foods acquisition added 0.8% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 1.6% on a constant currency basis.
We grew segment operating income for our flavor solutions segment by $71.5 million, or 32.3%, in 2018 compared to 2017. The increase in segment operating income was due to the incremental impact of the RB Foods acquisition, coupled with CCI-led cost savings. On a constant currency basis, segment operating income for our flavor solutions segment rose 32.3%. Segment operating income margin for our flavor solutions segment rose by 210 basis points to 14.2% in 2018 from 12.1% in 2017 and was driven by a higher gross profit margin offset, in part, by higher SG&A as a percentage of net sales, which reflects higher distribution costs.

NON-GAAP FINANCIAL MEASURES
The following tables include financial measures of adjusted gross profit, adjusted operating income, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following:
Special charges – Special charges consist of expenses 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. Upon presentation of any such proposed action (including details with respect to estimated costs, which generally 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 ongoing basis through completion. In 2018, we also included in special charges, as approved by our Management Committee, expense associated with a one-time payment, made to eligible U.S. hourly employees, to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act as that non-recurring income tax benefit is excluded from our computation of adjusted income taxes, adjusted net income and adjusted diluted earnings per share, each a non-GAAP measure.
Transaction and integration expenses associated with the RB Foods acquisition – We exclude certain costs associated with our acquisition of RB Foods in August 2017 and its subsequent integration into the Company. Such costs, which we refer to as “Transaction and integration costs”, include transaction costs associated with the acquisition, as well as integration costs following the acquisition. The size of this

30



acquisition and related costs, and therefore the impact on the comparability of our results, distinguishes it from our past, recent and smaller acquisitions, the costs of which have not been excluded from our non-GAAP financial measures.
Income taxes associated with the U.S. Tax Act – In connection with the enactment of the U.S. Tax Act in December 2017, we recorded a net non-recurring income tax benefit of $301.5 million during the year ended November 30, 2018, which included the estimated impact of the tax benefit from revaluation of net U.S. deferred tax liabilities based on the new lower corporate income tax rate and the tax expense associated with the one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries. We recorded an additional net income tax benefit of $1.5 million during the year ended November 30, 2019 associated with a U.S Tax Act related provision to return adjustment.
Details with respect to the composition of transaction and integration expenses (including other debt costs), special charges and non-recurring income tax benefits associated with the U.S. Tax Act recorded for the years and in the amounts set forth below are included in notes 2, 3 and 12, respectively, of the accompanying financial statements.
We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends.
These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting.
A reconciliation of these non-GAAP measures to GAAP financial results is provided below:

31



 
2019
2018
2017
Gross profit
$
2,145.3

$
2,093.3

$
1,794.0

Impact of transaction and integration expenses included in cost of goods sold (1)


20.9

Adjusted gross profit
$
2,145.3

$
2,093.3

$
1,814.9

Adjusted gross profit margin (2)
40.1
%
39.5
%
38.4
%
Operating income
$
957.7

$
891.1

$
699.8

Impact of transaction and integration expenses included in cost of goods sold (1)


20.9

Impact of other transaction and integration expenses (1)

22.5

40.8

Impact of special charges
20.8

16.3

22.2

Adjusted operating income
$
978.5

$
929.9

$
783.7

% increase versus prior year
5.2
%
18.7
%
17.8
%
Adjusted operating income margin (2)
18.3
%
17.5
%
16.6
%
Income tax expense (benefit)
$
157.4

$
(157.3
)
$
151.3

Non-recurring benefit, net, of the U.S. Tax Act (3)
1.5

301.5


Impact of transaction and integration expenses

4.9

23.6

Impact of special charges
4.7

3.8

6.4

Adjusted income tax expense
$
163.6

$
152.9

$
181.3

Adjusted income tax rate(4)
19.5
%
19.6
%
26.1
%
Net income
$
702.7

$
933.4

$
477.4

Impact of total transaction and integration expenses (1)

17.6

53.5

Impact of total special charges
16.1

12.5

15.8

Non-recurring benefit, net, of the U.S. Tax Act (3)
(1.5
)
(301.5
)

Adjusted net income
$
717.3

$
662.0

$
546.7

% increase versus prior year
8.4
%
21.1
%
13.1
%
Earnings per share—diluted
$
5.24

$
7.00

$
3.72

Impact of total transaction and integration expenses (1)

0.13

0.42

Impact of total special charges
0.12

0.10

0.12

Non-recurring benefit, net, of the U.S. Tax Act (3)
(0.01
)
(2.26
)

Adjusted earnings per share—diluted
$
5.35

$
4.97

$
4.26

% increase versus prior year
7.6
%
16.7
%
12.7
%

(1)
There were no transaction and integration expenses related to the acquisition of RB Foods during the year ended November 30, 2019. As more fully described in note 2 of the accompanying financial statements, transaction and integration expenses related to the acquisition of RB Foods are recorded in our consolidated income statement as follows for the years ended November 30, 2018 and 2017 (in millions, except per share amounts):
 
 
2018
2017
 
Transaction and integration expenses included in cost of goods sold
$

$
20.9

 
Reflected in transaction and integration expenses
22.5

40.8

 
Transaction and integration expenses included in operating income
22.5

61.7

 
Transaction and integration expenses included in other debt costs

15.4

 
Total pre-tax transaction and integration expenses
22.5

77.1

 
Less: Tax effect
(4.9
)
(23.6
)
 
Total after-tax transaction and integration expenses
$
17.6

$
53.5

 
 
 
 
 
 
(2)
Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented.
 
 
 
 
(3)
The non-recurring income tax benefit, net, associated with enactment of the U.S. Tax Act of $1.5 million and $301.5 million for the years ended November 30, 2019 and 2018, respectively, is more fully described in note 12 of the accompanying financial statements.
(4)
Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes, excluding transaction and integration expenses and special charges, or $840.0 million, $780.1 million, and $694.1 million for the years ended November 30, 2019, 2018, and 2017, respectively.



32



 
 
Estimate for the year ending November 30, 2020
 
 
 
Earnings per share – diluted
$5.15 to $5.25
Impact of special charges
0.05
Adjusted earnings per share – diluted
$5.20 to $5.30

Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past several years. The exclusion of the effects of foreign currency exchange, or what we refer to as amounts expressed “on a constant currency basis,” is a non-GAAP measure. We believe that this non-GAAP measure provides additional information that enables enhanced comparison to prior periods excluding the translation effects of changes in rates of foreign currency exchange and provides additional insight into the underlying performance of our operations located outside of the U.S. It should be noted that our presentation herein of amounts and percentage changes on a constant currency basis does not exclude the impact of foreign currency transaction gains and losses (that is, the impact of transactions denominated in other than the local currency of any of our subsidiaries in their local currency reported results).

Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current year results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2019 on a constant currency basis, net sales and adjusted operating income for 2019 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2018 and compared to the reported results for 2018; and (2) to present our growth in net sales and adjusted operating income for 2018 on a constant currency basis, net sales and operating income for 2018 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2017 and compared to the reported results for 2017.
 
 
For the year ended November 30, 2019
 
Percentage change as reported
Impact of foreign currency exchange
Percentage change on constant currency basis
Net sales:
 
 
 
Consumer segment:
 
 
 
Americas
2.4
 %
(0.3
)%
2.7
 %
EMEA
(5.5
)%
(5.3
)%
(0.2
)%
Asia/Pacific
0.8
 %
(4.9
)%
5.7
 %
Total Consumer
0.7
 %
(1.8
)%
2.5
 %
Flavor Solutions segment:
 
 
 
Americas
2.2
 %
(0.4
)%
2.6
 %
EMEA
(0.3
)%
(7.0
)%
6.7
 %
Asia/Pacific
(3.4
)%
(4.0
)%
0.6
 %
Total Flavor Solutions
1.1
 %
(2.1
)%
3.2
 %
Total net sales
0.8
 %
(1.9
)%
2.7
 %
 
 
 
 
Adjusted operating income:
 
 
 
Consumer segment
6.1
 %
(1.2
)%
7.3
 %
Flavor Solutions segment
3.2
 %
(2.1
)%
5.3
 %
Total adjusted operating income
5.2
 %
(1.5
)%
6.7
 %


33



 
For the year ended November 30, 2018
 
Percentage change as reported
Impact of foreign currency exchange
Percentage change on constant currency basis
Net sales:
 
 
 
Consumer segment:
 
 
 
Americas
13.4
%
0.1
%
13.3
%
EMEA
6.9
%
5.3
%
1.6
%
Asia/Pacific
11.5
%
2.5
%
9.0
%
Total Consumer
11.9
%
1.4
%
10.5
%
Flavor Solutions segment:
 
 
 
Americas
15.1
%
0.1
%
15.0
%
EMEA
8.6
%
2.3
%
6.3
%
Asia/Pacific
3.9
%
2.3
%
1.6
%
Total Flavor Solutions
12.4
%
0.8
%
11.6
%
Total net sales
12.1
%
1.2
%
10.9
%
 
 
 
 
Adjusted operating income:
 
 
 
Consumer segment
13.3
%
0.9
%
12.4
%
Flavor Solutions segment
32.3
%
%
32.3
%
Total adjusted operating income
18.7
%
0.7
%
18.0
%

To present the percentage change in projected 2020 sales, adjusted operating income and adjusted earnings per share on a constant currency basis, 2020 projected local currency sales, adjusted operating income, and adjusted net income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at currently prevailing exchange rates and are compared to those 2020 local currency projected results, translated into U.S. dollars  at the average actual exchange rates in effect during the corresponding months in fiscal year 2019 to determine what the 2020 consolidated U.S. dollar sales, adjusted operating income and adjusted earnings per share would have been if the relevant currency exchange rates had not changed from those of the comparable prior-year periods. In 2020, we expect minimal impact of foreign currency, as compared to 2019 levels, on our projections of net sales, operating income and diluted earnings per share as well as adjusted operating income and adjusted diluted earnings per share.

In addition to the above non-GAAP financial measures, we use a leverage ratio which is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt obligations and is a meaningful metric to investors in evaluating financial leverage. We believe that our leverage ratio is a meaningful metric to investors in evaluating our financial leverage, although our method to calculate our leverage ratio may be different than the method used by other companies to calculate such a leverage ratio. We determine our leverage ratio as net debt (which we define as total debt, net of cash in excess of $75.0 million) to adjusted earnings before interest, tax, depreciation and amortization (Adjusted EBITDA). We define Adjusted EBITDA as net income plus expenses for interest, income taxes, depreciation and amortization, less interest income and as further adjusted for cash and non-cash acquisition-related expenses (which may include the effect of the fair value adjustment of acquired inventory on cost of goods sold), special charges, stock-based compensation expenses, and certain gains or losses (which may include third party fees and expenses and integration costs). Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determination of the leverage ratio is consistent with the terms of our $1.0 billion revolving credit facility and our term loans which require us to maintain our leverage ratio below certain levels. Under those agreements, the applicable leverage ratio is reduced annually. As of November 30, 2019, 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. We expect to comply with this financial covenant for the foreseeable future.


34



The following table reconciles our net income to Adjusted EBITDA for the years ended November 30:
 
2019
2018
2017
Net income
$
702.7

$
933.4

$
477.4

Depreciation and amortization
158.8

150.7

125.2

Interest expense
165.2

174.6

95.7

Income tax expense (benefit)
157.4

(157.3
)
151.3

EBITDA
1,184.1

1,101.4

849.6

Adjustments to EBITDA (1)
47.9

57.3

117.4

Adjusted EBITDA
$
1,232.0

$
1,158.7

$
967.0

 
 
 
 
Net debt (2)
$
4,243.8

$
4,674.8

$
4,915.3

 
 
 
 
Leverage ratio (Net debt/Adjusted EBITDA) (3)
3.4

4.0

5.1

 
(1)
Adjustments to EBITDA are determined under the leverage ratio covenant in our $1.0 billion revolving credit facility and term loan agreements and include special charges, stock-based compensation expense, interest income and, for the years ended November 30, 2018 and 2017, transaction and integration expenses (related to RB Foods acquisition), including other debt costs.
(2)
The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements define net debt as the sum of short-term borrowings, current portion of long-term debt, and long-term debt, less the amount of cash and cash equivalents that exceed $75.0 million.
(3)
The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements provide that Adjusted EBITDA also includes the pro forma impact of acquisitions. As of November 30, 2017, our leverage ratio under the terms of those agreements, including the pro forma impact of acquisitions was 4.5.

Our long-term target for our leverage ratio is 1.5 to 2.0. Our leverage ratio can be temporarily impacted by our acquisition activity.

LIQUIDITY AND FINANCIAL CONDITION
 
2019
2018
2017
Net cash provided by operating activities
$
946.8

$
821.2

$
815.3

Net cash used in investing activities
(171.0
)
(158.5
)
(4,508.3
)
Net cash (used in) provided by financing activities
(725.8
)
(751.1
)
3,756.0

We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, increase our dividend, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, we generate much of our cash flow in the fourth quarter of the fiscal year.
In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.
The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2019, the exchange rates for the Euro, Australian dollar, Polish zloty and Chinese renminbi were lower versus the U.S. dollar than at November 30, 2018. At November 30, 2019, the exchange rates for the British pound sterling and Canadian dollar were higher versus the U.S. dollar than at November 30, 2018.
Operating Cash Flow Operating cash flow was $946.8 million in 2019, $821.2 million in 2018, and $815.3 million in 2017. The increases in cash flow from operations in both 2019 and 2018 were primarily due to higher net income, exclusive of the 2018 impact of the non-cash non-recurring net income tax benefit of $309.4 million related to the U.S. Tax Act. In addition, as more fully described below, our working capital management favorably impacted operating cash flow in 2019, 2018 and 2017. In 2019, the increases to operating cash flow were partially offset by a use of cash associated with other assets and liabilities, totaling $81.5 million. In 2018, those increases were partially offset by a higher use of cash from other operating assets and liabilities partially related to the timing of our payment of transaction and integration expenses as well as of interest on indebtedness related to our acquisition of

35



RB Foods, as compared to the source of cash in 2017. Dividends received from unconsolidated affiliates, which were higher in 2019 compared to 2018 and higher in 2018 as compared to 2017, also impacted our cash flow from operations.
Our working capital management principally related to inventory, trade accounts receivable, and accounts payable impacts our operating cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a use of cash in 2019 and 2018 and a source of cash in 2017. The change in trade accounts receivable has varied in the last three years as well, as it was a source of cash in 2019 and 2018, and a use of cash in 2017. The change in accounts payable was a significant source of cash in all three years.
In addition to operating cash flow, we also use cash conversion cycle ("CCC") to measure our working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows:
Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory).
The following table outlines our cash conversion cycle (in days) over the last three years:
 
2019
2018
2017
Cash Conversion Cycle
43

55

76

The decreases in CCC in 2019 from 2018 and in 2018 from 2017 were due, in both instances, to an increase in our days payable outstanding as a result of extending our payment terms to suppliers and to a lesser extent, by a decrease in our days sales outstanding. Our CCC is also impacted by days in inventory which increased in 2019 as compared to 2018, and decreased in 2018 as compared to 2017.
Investing Cash Flow Net cash used in investing activities was $171.0 million in 2019, $158.5 million in 2018, and $4,508.3 million in 2017. Our primary investing cash flows include the usage of cash associated with acquisition of businesses and capital expenditures. Cash usage related to our acquisitions of businesses were $4.2 million in 2018, and $4,327.4 million in 2017. See note 2 of the accompanying financial statements for further details related to our acquisition of RB Foods. Capital expenditures, including expenditures for capitalized software, were $173.7 million in 2019, $169.1 million in 2018, and $182.4 million in 2017. We expect 2020 capital expenditures to approximate $265 million to support our planned growth, including the multi-year program to replace our ERP system and other initiatives.
Financing Cash Flow Net cash used in financing activities was $725.8 million in 2019 and $751.1 million in 2018. Net cash provided by financing activities was $3,756.0 million in 2017. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below.
In 2019 and 2018, our net borrowing activity used cash of $406.7 million and $466.5 million, respectively. In 2017, our net borrowing activity provided cash of $3,574.6 million.
In 2019, we increased our short-term borrowings, on a net basis, by $41.0 million. We also repaid $447.7 million of long-term debt, including $436.3 million of our $1,500.0 million term loans issued in August 2017. Of that $436.3 million, $361.3 million represent prepayments. Through November 30, 2019, we have repaid $1,250.0 million of the $1,500.0 million term loans issued in August 2017, including pre-payments of $1,081.3 million.
In 2018, we increased our short-term borrowings, on a net basis, by $305.5 million and borrowed $25.9 million under long-term borrowing arrangements. In 2018, we repaid $797.9 million of long-term debt, including the $250 million 5.75% notes that matured on December 15, 2017 and $545.0 million of our $1,500.0 million term loans issued in August 2017.
In 2017, we received $3,977.6 million of net proceeds on the issuance of $4,000.0 million of long-term debt, including $2,500.0 million of notes and $1,500.0 million of term loans (see note 6 of the accompanying financial statements for additional information with respect to this long-term debt). We also paid $7.7 million of costs associated with the issuance of debt and our $1.0 billion revolving credit facility. In 2017, we repaid $272.7 million

36



of long-term debt, including $268.8 million of our $1,500.0 million term loans issued in August 2017. In 2017, we repaid $134.6 million of short-term borrowings.
The following table outlines the activity in our share repurchase programs:
 
2019
2018
2017
Number of shares of common stock
0.7

0.5

1.4

Dollar amount
$
95.1

$
62.3

$
137.8

As of November 30, 2019, $32 million remained of a $600 million share repurchase program that was authorized by our Board of Directors in March 2015. An additional $600 million share repurchase program was authorized by our Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors.
During 2019, 2018 and 2017, we received proceeds of $90.9 million, $78.2 million and $29.5 million, respectively, from exercised stock options. We repurchased $12.7 million, $11.6 million and $5.8 million of common stock during 2019, 2018 and 2017, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans.
During 2017, we issued approximately 6.35 million shares of our Common Stock Non-Voting to fund our acquisition of RB Foods (see notes 2 and 13 of the accompanying financial statements), which included approximately 0.8 million 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.
Our dividend history over the past three years is as follows:
 
2019
2018
2017
Total dividends paid
$
302.2

$
273.4

$
237.6

Dividends paid per share
2.28

2.08

1.88

Percentage increase per share
9.6
%
10.6
%
9.3
%
In November 2019, the Board of Directors approved an 8.8% increase in the quarterly dividend from $0.57 to $0.62 per share.
The following table presents our leverage ratios for the years ended November 30, 2019, 2018 and 2017:
 
2019
2018
2017
Leverage ratio
3.4

4.0

5.1 (1)

(1) The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements, both outstanding at November 30, 2019, 2018, and 2017, provide that Adjusted EBITDA under that covenant also include the pro forma impact of acquisitions, as applicable. As of November 30, 2017, our leverage ratio under the terms of those agreements, including the pro forma impact of acquisitions, was 4.5.

Our leverage ratio was 3.4 as of November 30, 2019, as compared to the ratios of 4.0 and 5.1 as of November 30, 2018 and 2017, respectively. The decrease in our leverage ratio from 4.0 as of November 30, 2018 to 3.4 as of November 30, 2019 is due to both an increase in our adjusted EBITDA, which was driven by higher operating income in 2019 as compared to 2018, as well as our lower level of net debt at November 30, 2019.

The decrease in the ratio from 5.1 as of November 30, 2017 to 4.0 as of November 30, 2018 is principally due to an increase in our adjusted EBITDA, which was driven by higher operating income in 2018 as compared to 2017. In addition, the ratio was favorably impacted by our lower level of net debt at November 30, 2018.

Most of our cash is in our foreign subsidiaries. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of the U.S. Tax Act on December 22, 2017, the permanent repatriation of cash balances from certain of our subsidiaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. Currently, the repatriation of cash balances from certain of our subsidiaries could still have adverse tax consequences related to the effects of withholding and other taxes. At November 30, 2019, we temporarily used $262.8 million of cash from our foreign subsidiaries to pay down short-

37



term debt in the U.S. The average short-term borrowings outstanding for the years ended November 30, 2019 and 2018 were $848.6 million and $700.0 million, respectively. The total average debt outstanding for the years ended November 30, 2019 and 2018 was $4,753.8 million and $5,081.6 million, respectively.

See notes 6 and 7 of the accompanying financial statements for further details of these transactions.

Credit and Capital Markets – The following summarizes the more significant impacts of credit and capital markets on our business:

CREDIT FACILITIES – Cash flows from operating activities are our primary source of liquidity for funding growth, share repurchases, dividends and capital expenditures. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements.

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 facility replaced 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. We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities of $261.5 million as of November 30, 2019, that can be withdrawn based upon the lenders' discretion. We engage in regular communication with all banks participating in our credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. See note 6 of the accompanying financial statements for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to fund ongoing operations.
PENSION ASSETS AND OTHER INVESTMENTS – We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash contributions to pension plans, including unfunded plans, were $11.4 million in 2019, $13.5 million in 2018, and $18.7 million in 2017. It is expected that the 2020 total pension plan contributions will be approximately $12.0 million. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all of our qualified defined benefit pension plans, approximately 59% of assets are invested in equities, 31% in fixed income investments and 10% in other investments. Assets in the rabbi trust are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 60% in equities and 40% in fixed income investments. See note 10 of the accompanying financial statements, which provides details on our pension funding.
CUSTOMERS AND COUNTERPARTIES – See the subsequent section of this discussion under Market Risk Sensitivity–Credit Risk.
ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.
We did not have any acquisition activity in fiscal 2019.
In fiscal 2018 we purchased the remaining 10% minority ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million.
In fiscal 2017, we made the following acquisitions:
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 $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. Our acquisition of Giotti in fiscal 2017 expanded the breadth of value-added products for McCormick's flavor solutions segment, including additional expertise in flavoring health and nutrition products.
On August 17, 2017, we completed the acquisition of RB Foods. The purchase price was approximately $4.21 billion, net of acquired cash of $24.3