0000063754-21-000071.txt : 20210330 0000063754-21-000071.hdr.sgml : 20210330 20210330171459 ACCESSION NUMBER: 0000063754-21-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20210228 FILED AS OF DATE: 20210330 DATE AS OF CHANGE: 20210330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCORMICK & CO INC CENTRAL INDEX KEY: 0000063754 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 520408290 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14920 FILM NUMBER: 21787827 BUSINESS ADDRESS: STREET 1: 24 SCHILLING ROAD STREET 2: SUITE 1 CITY: HUNT VALLEY STATE: MD ZIP: 21031 BUSINESS PHONE: 4107717301 MAIL ADDRESS: STREET 1: 24 SCHILLING ROAD STREET 2: SUITE 1 CITY: HUNT VALLEY STATE: MD ZIP: 21031 FORMER COMPANY: FORMER CONFORMED NAME: MCCORMICK & CO DATE OF NAME CHANGE: 19660620 10-Q 1 mkc-20210228.htm 10-Q mkc-20210228
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2021
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)

Maryland52-0408290
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
24 Schilling Road, Suite 1,
Hunt Valley, MD21031
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code    (410) 771-7301

Securities registered pursuant to Section 12(b) of the Act:
 Trading
Title of each classSymbol(s)Name of each exchange on which registered
Common StockMKC-VNew York Stock Exchange
Common Stock Non-VotingMKCNew York Stock Exchange
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller 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  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 Shares Outstanding
February 28, 2021
Common Stock18,032,535 
Common Stock Non-Voting249,002,627 




TABLE OF CONTENTS
 

3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
(in millions except per share amounts)
 
Three months ended
 February 28, 2021February 29, 2020
Net sales$1,481.5 $1,212.0 
Cost of goods sold904.0 742.1 
Gross profit577.5 469.9 
Selling, general and administrative expense321.3 274.7 
Transaction and integration expenses18.8  
Special charges 1.1 1.0 
Operating income236.3 194.2 
Interest expense33.8 35.3 
Other income, net4.6 5.5 
Income from consolidated operations before income taxes207.1 164.4 
Income tax expense58.6 30.1 
Net income from consolidated operations148.5 134.3 
Income from unconsolidated operations13.3 10.4 
Net income$161.8 $144.7 
Earnings per share – basic$0.61 $0.54 
Earnings per share – diluted$0.60 $0.54 
Average shares outstanding – basic267.1 266.0 
Average shares outstanding – diluted269.9 268.7 
Cash dividends paid per share – voting and non-voting$0.34 $0.31 
See notes to condensed consolidated financial statements (unaudited).

4

McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
 
Three months ended
 February 28, 2021February 29, 2020
Net income$161.8 $144.7 
Net income attributable to non-controlling interest0.8 0.9 
Other comprehensive income (loss):
Unrealized components of pension and postretirement plans1.1 2.4 
Currency translation adjustments45.7 (20.0)
Change in derivative financial instruments(1.0)(0.7)
Deferred taxes3.0 (1.7)
Total other comprehensive income (loss)48.8 (20.0)
Comprehensive income$211.4 $125.6 
See notes to condensed consolidated financial statements (unaudited).

5


McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
 
February 28,
2021
November 30,
2020
 (unaudited) 
ASSETS
Current Assets
Cash and cash equivalents$256.1 $423.6 
Trade accounts receivable, net515.9 528.5 
Inventories, net
Finished products544.4 499.3 
Raw materials and work-in-process529.0 533.3 
1,073.4 1,032.6 
Prepaid expenses and other current assets109.3 98.9 
Total current assets1,954.7 2,083.6 
Property, plant and equipment, net1,070.8 1,028.4 
Goodwill5,397.0 4,986.3 
Intangible assets, net3,500.9 3,239.4 
Other long-term assets761.7 752.0 
Total assets$12,685.1 $12,089.7 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings$594.3 $886.7 
Current portion of long-term debt265.9 263.9 
Trade accounts payable967.4 1,032.3 
Other accrued liabilities596.1 863.6 
Total current liabilities2,423.7 3,046.5 
Long-term debt4,739.2 3,753.8 
Deferred taxes739.5 727.2 
Other long-term liabilities618.0 622.2 
Total liabilities8,520.4 8,149.7 
Shareholders’ Equity
Common stock495.4 484.0 
Common stock non-voting1,503.0 1,497.3 
Retained earnings2,573.6 2,415.6 
Accumulated other comprehensive loss(422.5)(470.8)
Total McCormick shareholders' equity4,149.5 3,926.1 
Non-controlling interests15.2 13.9 
Total shareholders’ equity4,164.7 3,940.0 
Total liabilities and shareholders’ equity$12,685.1 $12,089.7 
See notes to condensed consolidated financial statements (unaudited).

6


McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
(in millions)
 
Three months ended
 February 28, 2021February 29, 2020
Operating activities
Net income$161.8 $144.7 
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation and amortization48.1 41.9 
Stock-based compensation14.2 6.4 
Amortization of inventory fair value adjustments associated with acquisitions6.3  
Income from unconsolidated operations(13.3)(10.4)
Changes in operating assets and liabilities(256.3)(148.9)
Dividends from unconsolidated affiliates7.0 11.1 
Net cash flow (used in) provided by operating activities(32.2)44.8 
Investing activities
Acquisition of businesses (net of cash acquired)(706.6) 
Capital expenditures (including software)(48.6)(38.5)
Other investing activities 0.2 
Net cash flow used in investing activities(755.2)(38.3)
Financing activities
Short-term borrowings, net(292.4)125.2 
Long-term debt borrowings 1,000.4  
Payment of debt issuance costs(1.1)— 
Long-term debt repayments(1.8)(20.5)
Proceeds from exercised stock options3.6 7.7 
Taxes withheld and paid on employee stock awards(5.1)(3.0)
Common stock acquired by purchase(0.1)(19.9)
Dividends paid(90.8)(82.4)
Net cash flow provided by financing activities612.7 7.1 
Effect of exchange rate changes on cash and cash equivalents7.2 1.8 
(Decrease) increase in cash and cash equivalents(167.5)15.4 
Cash and cash equivalents at beginning of period423.6 155.4 
Cash and cash equivalents at end of period$256.1 $170.8 
See notes to condensed consolidated financial statements (unaudited).
7



McCORMICK & COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(in millions)

(millions)Common Stock SharesCommon Stock
Non-Voting Shares
Common Stock AmountRetained EarningsAccumulated Other Comprehensive (Loss) IncomeNon-controlling InterestsTotal Shareholders’ Equity
Three months ended February 28, 2021
Balance, November 30, 202018.0 248.9 $1,981.3 $2,415.6 $(470.8)$13.9 $3,940.0 
Net income— 161.8 — — 161.8 
Net income attributable to non-controlling interest— — — 0.8 0.8 
Other comprehensive income, net of tax— — 48.3 0.5 48.8 
Stock-based compensation14.2 — — — 14.2 
Shares purchased and retired(0.1) (1.6)(3.8)— — (5.4)
Shares issued0.2  4.5 — — — 4.5 
Equal exchange(0.1)0.1 — — — — — 
Balance, February 28, 202118.0 249.0 $1,998.4 $2,573.6 $(422.5)$15.2 $4,164.7 
Three months ended February 29, 2020
Balance, November 30, 201918.6 247.2 $1,888.6 $2,055.8 $(500.2)$12.5 $3,456.7 
Net income— 144.7 — — 144.7 
Net income attributable to non-controlling interest— — — 0.9 0.9 
Other comprehensive loss, net of tax— — (19.3)(0.7)(20.0)
Stock-based compensation6.4 — — — 6.4 
Shares purchased and retired (0.2)(2.7)(20.6)— — (23.3)
Shares issued0.2  9.2 — — — 9.2 
Equal exchange(0.3)0.3 — — — — — 
Balance, February 29, 202018.5 247.3 $1,901.5 $2,179.9 $(519.5)$12.7 $3,574.6 
See notes to condensed consolidated financial statements (unaudited).

8


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

1.ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented. In September 2020, our Board of Directors approved a 2-for-1 stock split in the form of a stock dividend on all shares of the Company's two classes of stock, Common Stock and Common Stock Non-Voting. Trading of the Company's common stock began on a split-adjusted basis on December 1, 2020. All common stock and per-share data have been retroactively adjusted for the impact of the stock split.
The results of consolidated operations for the three-month period ended February 28, 2021 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations have been lower in the first half of the fiscal year and higher in the second half. The historical increase in net sales, net income and cash flow from operations in the second half of the year has largely been due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.
For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2020.
Impact of COVID-19
On March 11, 2020, the World Health Organization designated a new coronavirus (“COVID-19”) as a global pandemic. Governments around the world either recommended or mandated actions to slow the transmission of the virus that included shelter-in-place orders, quarantines, limitation on crowd size, closures of dine-in restaurants and bars, and significant restrictions on travel, as well as work restrictions that prohibited many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has significantly impacted not only our operating results but also the global economy. The extent and nature of government actions varied during the three months ended February 28, 2021 and February 29, 2020, based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities.

We are partnering with our customers to react to consumer demand changes associated with COVID-19. The effects of COVID-19 on consumer behavior have, on a net basis, favorably impacted the operating results of our consumer segment and unfavorably impacted the operating results of our flavor solutions segment in the three months ended February 28, 2021. The impact of COVID-19 on our consumer segment during that period resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same period was principally attributable to decreased demand from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures impacting our flavor solutions customers included the following: (i) with respect to dine-in restaurants, closures, limitations on dine-in capacity, or restrictions on the operations of those restaurants to carry-out or delivery only; and (ii) with respect to quick service restaurants, limitations on operations to drive-through pick-up or delivery. Those negative impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The impact of the global COVID-19 pandemic on our consolidated operating results during the three months ended February 29, 2020 was limited, in all material respects, to our operations in China where the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country.

As the COVID-19 pandemic progresses, we expect the largest factor impacting our fiscal 2021 performance will be the relative balance of at-home versus away-from-home food demand. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known.


9

Revenue Recognition

The following supplements the description of our accounting policies with respect to revenue recognition contained in note 1 of notes to consolidated financial statements included in our Form 10-K for the year ended November 30, 2020: Our revenue arrangements generally include a single performance obligation relating to the fulfillment of a customer order, which in some cases are governed by a master sales agreement, for the purchase of our products. We recognize revenue at a point in time when control of the ordered products passes to the customer, which principally occurs either upon shipment or delivery to the customer or upon pick-up by the customer, depending upon terms included in the particular customer arrangement.
Accounting Pronouncements Adopted in 2021

In January 2017, the FASB issued ASU No. 2017-04 IntangiblesGoodwill and Other Topics (Topic 350)Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. This new standard was adopted effective December 1, 2020 and will be applied upon recognition of any future goodwill impairment charge. We do not expect this ASU to have a material impact on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13 Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which instituted a new model for recognizing credit losses on financial instruments that are not measured at fair value. This standard was adopted by the Company on December 1, 2020. As this ASU did not have a material impact on our consolidated financial statements upon adoption, a cumulative-effect adjustment to retained earnings was not necessary.
Recently Issued Accounting Pronouncements — Pending Adoption
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The new guidance removes certain exceptions to the general principles for income taxes and also improves consistent application of accounting by clarifying or amending existing guidance. The new standard is effective for the first quarter of our fiscal year ending November 30, 2022, and interim periods within those years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting that provides optional expedients for a limited period of time for accounting for contracts, hedging relationship, and other transactions affected by the London Interbank Offered Rate (LIBOR) or other reference rates expected to be discontinued. These optional expedients can be applied from March 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

2.     ACQUISITIONS

Acquisitions are part of our strategy to increase sales and profits.
Acquisition of Cholula Hot Sauce
On November 30, 2020, we completed the acquisition of the parent company of Cholula Hot Sauce® (Cholula) from L Catterton. The purchase price was approximately $803.0 million, net of cash acquired, subject to certain customary purchase price adjustments. The acquisition was funded with cash and short-term borrowings. Cholula, a premium Mexican hot sauce brand, is a strong addition to McCormick’s global branded flavor portfolio, which we believe broadens our offerings in the high growth hot sauce category to consumers and foodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce. At the time of the acquisition, annual sales of Cholula were approximately $96 million. The results of Cholula’s operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.

The purchase price of Cholula was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as further described in note 2 of the financial statements in our 2020 Annual Report on Form 10-K for the year ended November 30, 2020. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $4.9 million that was recognized in cost of goods sold during the three months ended February 28, 2021, as the related inventory was sold. During the first quarter of 2021, we adjusted our preliminary purchase accounting associated with the acquired assets and liabilities which increased goodwill by $1.2 million.

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Independent valuations of the fair value of acquired assets and liabilities of Cholula, including identified intangible assets and goodwill, remain in process as of February 28, 2021, but will be finalized within the allowable measurement period.
Acquisition of FONA International, LLC
On December 30, 2020, we purchased FONA International, LLC and certain of its affiliates (FONA), a privately held company, for a purchase price of approximately $706.6 million, net of cash acquired, subject to certain customary purchase price adjustments. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets. The acquisition of FONA in fiscal 2021 expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform and strengthens our capabilities. The acquisition was funded with cash and commercial paper. At the time of the acquisition, annual sales of FONA were approximately $114 million. The results of FONA’s operations have been included in our financial statements as a component of our flavor solutions segments from the date of acquisition.
The purchase price of FONA was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The preliminary allocation, net of cash acquired, of the fair value of the FONA acquisition is summarized in the table below (in millions):
Trade accounts receivable$12.4 
Inventories10.3 
Goodwill389.6 
Intangible assets266.0 
Property, plant and equipment36.3 
Other assets5.5 
Trade accounts payable(3.6)
Other accrued liabilities (9.9)
Total$706.6 
We determined the preliminary fair value of intangible assets using the following methodologies. We valued the acquired brand names and trademarks and intellectual property using the relief from royalty method, an income approach. We valued the acquired customer relationships using the excess earnings method, an income approach. Some of the more significant assumptions inherent in developing the preliminary valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, operating profit margin, and working capital/contributory asset charges), royalty rates, the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.
We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $1.4 million that was recognized in cost of goods sold during the three months ended February 28, 2021, as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach.
The preliminary valuation of the acquired net assets of FONA includes $49.0 million allocated to indefinite-lived brand assets, $173.0 million allocated to customer relationships with a weighted-average life of 15 years and $44.0 million allocated to intellectual property with a weighted-average life of 12 years. As a result of the acquisition, we recognized a total of $389.6 million of goodwill. That goodwill primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Our aggregate income tax basis in the acquired intangible assets and goodwill approximates their aggregate book value at the acquisition date. The final allocation of the fair value of the acquired net assets of FONA, including the residual amount of goodwill, was not complete as of February 28, 2021, but will be finalized within the allowable measurement period.
Transaction and Integration Expenses Associated with the Cholula and FONA Acquisitions
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We expect transaction and integration expenses related to our acquisitions of Cholula and FONA to total approximately $35 million and $30 million, respectively. Of those total transaction and integration expenses, transaction expenses of $12.4 million were incurred in 2020. We incurred an additional $25.1 million of transaction and integration costs related to Cholula and FONA during the three months ended February 28, 2021. We anticipate incurring the remainder of those transaction and integration expenses in the balance of fiscal 2021.
The following are the transaction and integration expenses recognized during the three months ended February 28, 2021 relating to the Cholula and FONA acquisitions (in millions):
2021
Transaction-related expenses included in cost of goods sold$6.3 
Other transaction expenses13.8 
Integration expenses5.0 
Total transaction and integration expenses$25.1 

3.      SPECIAL CHARGES

In our consolidated income statement, we include a separate line item captioned “Special charges” in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.

The following is a summary of special charges recognized in the three months ended February 28, 2021 and February 29, 2020 (in millions):
 20212020
Employee severance and related benefits$0.3 $0.3 
Other costs0.8 0.7 
Total$1.1 $1.0 

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

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

We expect the cost of the GE initiativeto be recognized as “Special charges” in our consolidated income statement over its expected multi-year courseto range from approximately $60 million to $65 million. Of that $60 million to $65 million, we estimate that approximately sixty percent will be attributable to cash payments associated with the related costs of GE implementation and transition, including outside consulting and other costs, and approximately forty percent will be attributable to severance and related benefit payments, all directly related to the initiative. While no special charges were incurred relating to our GE initiative during the three months ended February 28, 2021, we have spent a cumulative total of $39.9 million on this initiative through that date.

12

During the three months ended February 28, 2021, we recorded $1.1 million of special charges consisting of $0.6 million of streamlining actions in EMEA and $0.5 million of streamlining actions in the Americas.

During the three months ended February 29, 2020, we recorded $1.0 million of special charges, all of which related to our GE initiative, including $0.5 million of third-party expenses, $0.3 million related to employee severance and related benefits, and $0.2 million related to other costs.

As of February 28, 2021, reserves associated with special charges, which are expected to be paid during the remainder of fiscal year 2021, are included in accounts payable and other accrued liabilities in our consolidated balance sheet.

The following is a breakdown by business segments of special charges for the three months ended February 28, 2021 and February 29, 2020 (in millions):
 20212020
Consumer segment$0.8 $0.6 
Flavor solutions segment0.3 0.4 
Total special charges$1.1 $1.0 


4.    GOODWILL

The changes in the carrying amount of goodwill by business segment for the three months ended February 28, 2021 are as follows (in millions):

2021
 ConsumerFlavor Solutions
Beginning of the year$3,711.2 $1,275.1 
Increases in goodwill from acquisition 389.6 
Changes in preliminary purchase price allocation0.8 0.4 
Foreign currency fluctuations15.6 4.3 
Balance as of the end of period$3,727.6 $1,669.4 

During the three months ended February 28, 2021, a preliminary valuation of the net assets of FONA acquired in December 2020, resulted in the assignment of $389.6 million of goodwill to the flavor solutions segment. During the three months ended February 28, 2021, we have made changes in the preliminary allocation of the purchase price of Cholula which resulted in an increase in goodwill of $0.8 million to the consumer segment and $0.4 million to the flavor solutions segment.



5.    FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS
In February 2021, we issued $500.0 million of 0.90% notes due February 15, 2026, with cash proceeds received of $495.7 million, net of discounts and underwriters' fees. Also in February 2021, we issued $500.0 million of 1.85% notes due February 15, 2031, with cash proceeds received of $492.8 million, net of discounts and underwriters' fees. Interest is payable semiannually on both of these notes in arrears in February and August of each year. The net proceeds from these issuances were used to pay down short-term borrowings, including a portion of the $1,443.0 million of commercial paper issued to finance our acquisitions of Cholula and FONA, and for general corporate purposes.
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency, net investment and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument, and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.

13

Foreign currency exchange risk. We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps to reduce fluctuations in the long or short currency positions. Forward contracts are generally less than 18 months duration. Currency swap agreements are established in conjunction with the terms of the underlying debt issues.

At February 28, 2021, we had foreign currency exchange contracts to purchase or sell $558.9 million of foreign currencies as compared to $383.8 million at November 30, 2020. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. All foreign currency exchange contracts outstanding at February 28, 2021 have durations of less than 18 months, including $170.3 million of notional contracts that have durations of less than seven days and are used to hedge short-term cash flow funding.

Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.

We also enter into fair value foreign currency exchange contracts to manage both exposure to currency fluctuations in certain intercompany loans between subsidiaries as well as currency exposure to third-party non-functional currency assets or liabilities. At February 28, 2021, the notional value of these contracts was $423.0 million. Any gains or losses recorded based on both the change in fair value of these contracts and the change in the currency component of the underlying loans are recognized in our consolidated income statement as other income, net.

We also utilize cross currency interest rate swap contracts that are designated as net investment hedges. As of February 28, 2021, we had cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross currency interest rate swap contracts expire in August 2027. Any gains or losses on net investment hedges are included in foreign currency translation adjustments in accumulated other comprehensive loss.

Interest rate risk. We finance a portion of our operations with both fixed and variable rate debt instruments, principally commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.

As of February 28, 2021, we have outstanding interest rate swap contracts for a notional amount of $350 million. Those interest rate swap contracts include a $100 million notional value of interest rate swap contracts, where we receive interest at 3.25% and pay a variable rate of interest based on three-month LIBOR plus 1.22%, which expire in November 2025, and are designated as fair value hedges of the changes in fair value of $100 million of the $250 million 3.25% medium-term notes due 2025. We also have $250 million notional interest rate swap contracts where we receive interest at 3.40% and pay a variable rate of interest based on three-month LIBOR plus 0.685%, which expire in August 2027, and are designated as fair value hedges of the changes in fair value of $250 million of the $750 million 3.40% term notes due 2027. Any realized gain or loss on these swap contracts was offset by a corresponding increase or decrease of the value of the hedged debt.

All derivatives are recognized at fair value in the balance sheet and recorded in either other current assets, other long-term assets, other accrued liabilities or other long-term liabilities, depending upon their nature and maturity. Hedge ineffectiveness was not material.
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The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions):
As of February 28, 2021Asset DerivativesLiability Derivatives
 Balance sheet
location
Notional
amount
Fair
value
Balance sheet
location
Notional
amount
Fair
value
Interest rate contractsOther current
assets / Other long-term assets
$350.0 $31.2 Other accrued liabilities$ $ 
Foreign exchange contractsOther current
assets
110.8 2.7 Other accrued
liabilities
448.1 13.2 
Cross currency contractsOther current assets / Other long-term assets267.9 0.2 Other long-term liabilities270.7 21.3 
Total$34.1 $34.5 
As of November 30, 2020Asset DerivativesLiability Derivatives
 Balance sheet
location
Notional
amount
Fair
value
Balance sheet
location
Notional
amount
Fair
value
Interest rate contractsOther current
assets / Other long-term assets
$350.0 $43.1 Other accrued liabilities$ $ 
Foreign exchange contractsOther current
assets
27.5 1.4 Other accrued
liabilities
356.3 8.2 
Cross currency contractsOther current
assets / Other long-term assets
  Other long-term liabilities524.4 18.8 
Total$44.5 $27.0 

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The following tables disclose the impact of derivative instruments on our other comprehensive income ("OCI"), accumulated other comprehensive income ("AOCI") and our consolidated income statement for the three-month periods ended February 28, 2021 and February 29, 2020 (in millions):
 
Fair Value Hedges
DerivativeIncome statement
location
Income (expense)
  Three months ended February 28, 2021Three months ended February 29, 2020
Interest rate contractsInterest expense$2.0 $0.5 

Three months endedIncome statement locationGain (loss) recognized in incomeIncome statement locationGain (loss) recognized in income
DerivativeFebruary 28, 2021February 29, 2020Hedged itemFebruary 28, 2021February 29, 2020
Foreign exchange contractsOther income, net$(2.1)$(2.2)Intercompany loansOther income, net$2.4 $2.0 

The gains (losses) recognized on fair value hedges relating to currency exposure on third-party non-functional currency assets or liabilities were not material during the three-months ended February 28, 2021 and February 29, 2020.

Cash Flow Hedges
Three months ended
DerivativeGain (loss)
recognized in OCI
Income
statement
location
Gain (loss)
reclassified from
AOCI
 February 28, 2021February 29, 2020 February 28, 2021February 29, 2020
Interest rate contracts$0.3 $ Interest
expense
$0.1 $0.1 
Foreign exchange contracts(1.6)0.6 Cost of goods sold0.3 0.4 
Total$(1.3)$0.6 $0.4 $0.5 

For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive income (loss) expected to be reclassified in the next 12 months is $1.1 million as a decrease to earnings.
Net Investment Hedges
Three months ended
DerivativeGain (loss)
recognized in OCI
Income
statement
location
Gain (loss)
excluded from the assessment of hedge effectiveness
 February 28, 2021February 29, 2020 February 28, 2021February 29, 2020
Cross currency contracts$(2.0)$0.2 Interest
expense
$0.4 $1.3 
For all net investment hedges, no amounts have been reclassified out of accumulated other comprehensive income (loss). The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.

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6.    FAIR VALUE MEASUREMENTS

Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
At February 28, 2021 and November 30, 2020, we had no financial assets or liabilities that were subject to a level 3 fair value measurement. Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):
February 28, 2021
  
Fair ValueLevel 1Level 2
Assets
Cash and cash equivalents$256.1 $256.1 $ 
Insurance contracts124.1  124.1 
Bonds and other long-term investments6.2 6.2  
Interest rate derivatives31.2  31.2 
Foreign currency derivatives2.7  2.7 
Cross currency contracts0.2 — 0.2 
Total$420.5 $262.3 $158.2 
Liabilities
Foreign currency derivatives$13.2 $ $13.2 
Cross currency contracts21.3  21.3 
Total$34.5 $ $34.5 
 
November 30, 2020
  
Fair ValueLevel 1Level 2
Assets
Cash and cash equivalents$423.6 $423.6 $ 
Insurance contracts126.0  126.0 
Bonds and other long-term investments3.9 3.9  
Interest rate derivatives43.1 — 43.1 
Foreign currency derivatives1.4  1.4 
Total$598.0 $427.5 $170.5 
Liabilities
Foreign currency derivatives$8.2 $ $8.2 
Cross currency contracts18.8 — 18.8 
Total$27.0 $ $27.0 
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar-type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate derivatives, foreign currency derivatives, and cross currency contracts are based on values for similar instruments using models with market-based inputs.
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The following table sets forth the carrying amounts and fair values of our long-term debt including the current portion thereof (in millions):
February 28, 2021November 30, 2020
Carrying amount$5,005.1 $4,017.7 
Fair value5,274.7 4,357.1 
Level 1 valuation techniques$5,068.8 $4,161.3 
Level 2 valuation techniques205.9 195.8 
Total fair value$5,274.7 $4,357.1 
The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments.


7.EMPLOYEE BENEFIT AND RETIREMENT PLANS

We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We also contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. During fiscal years 2018 and 2017, we made significant changes to our employee benefit and retirement plans that froze the accrual of future benefits under certain defined benefit pension plans in the U.S. and certain foreign locations. Although our defined benefit plans in the U.S., United Kingdom and Canada have been frozen, employees who are participants in the plans retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans.

The following table presents the components of our pension expense (income) of the defined benefit plans for the three months ended February 28, 2021 and February 29, 2020 (in millions):
 United StatesInternational
 2021202020212020
Defined benefit plans
Service cost$0.9 $0.8 $0.3 $0.2 
Interest costs6.5 7.3 1.7 1.9 
Expected return on plan assets(10.3)(10.1)(3.5)(3.8)
Amortization of prior service costs0.1 0.1   
Amortization of net actuarial losses2.8 2.0 0.6 0.5 
Total pension expense (income)$ $0.1 $(0.9)$(1.2)

 
During the three months ended February 28, 2021 and February 29, 2020, we contributed $2.3 million and $1.9 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2020 were $11.9 million.
The following table presents the components of our other postretirement benefits expense (income) for the three months ended February 28, 2021 and February 29, 2020 (in millions):
 20212020
Other postretirement benefits
Service cost$0.5 $0.5 
Interest costs0.4 0.5 
Amortization of prior service credits(0.1)(1.1)
Amortization of net actuarial gains (0.1)
Total other postretirement benefits expense (income)$0.8 $(0.2)

All of the amounts in the tables above for pension expense and other postretirement benefits expense, other than service cost, were included in the income statement caption "Other income, net" within our consolidated income statements. The aggregate amount of pension and other postretirement benefits (income) expenses, excluding service cost components, were $(1.8) million and $(2.8) million for the three months ended February 28, 2021 and February 29, 2020, respectively.

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8.    STOCK-BASED COMPENSATION
We have four types of stock-based compensation awards: restricted stock units ("RSUs"), stock options, company stock awarded as part of our long-term performance plan ("LTPP") and, beginning in the fourth quarter of 2020, price-vested stock options. The following table sets forth the stock-based compensation expense recorded in selling, general and administrative ("SG&A") expense for the three months ended February 28, 2021 and February 29, 2020 (in millions):
 20212020
Stock-based compensation expense$14.2 $6.4 
Our 2021 annual grant of stock options and RSUs is expected to occur in the second quarter, similar to the 2020 annual grant.
The following is a summary of our stock option activity for the three months ended February 28, 2021 and February 29, 2020:
 20212020
(shares in millions)Number
of
Shares
Weighted-
Average
Exercise
Price
Number
of
Shares
Weighted-
Average
Exercise
Price
Outstanding at beginning of period4.5 $53.56 5.2 $48.09 
Exercised(0.1)39.30 (0.2)35.19 
Outstanding at end of the period4.4 $53.62 5.0 $48.47 
Exercisable at end of the period3.2 $47.95 3.6 $43.73 
As of February 28, 2021, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $135.2 million and for options currently exercisable was $115.0 million. The total intrinsic value of all options exercised during the three months ended February 28, 2021 and February 29, 2020 was $2.2 million and $8.6 million, respectively.
The following is a summary of our RSU activity for the three months ended February 28, 2021 and February 29, 2020:
19

 20212020
(shares in thousands)Number
of
Shares
Weighted-
Average
Grant-Date
Fair Value
Number
of
Shares
Weighted-
Average
Grant-Date
Fair Value
Outstanding at beginning of period714 $61.74 762 $57.95 
Granted10 91.85   
Vested(10)47.70 (8)35.01 
Forfeited(6)65.74 (10)60.22 
Outstanding at end of period708 $62.34 744 $58.20 
The following is a summary of our Price-Vested Stock Options activity for the three months ended February 28, 2021:
(shares in thousands)Number
of
Shares
Weighted-
Average
Grant-Date Fair Value
Outstanding at beginning of period2,482 $9.40 
Granted15 9.66 
Forfeited(13)9.40 
Outstanding at end of period2,484 $9.40 
The following is a summary of our LTPP activity for the three months ended February 28, 2021 and February 29, 2020:
 20212020
(shares in thousands)Number
of
Shares
Weighted-
Average
Grant-Date
Fair Value
Number
of
Shares
Weighted-
Average
Grant-Date
Fair Value
Outstanding at beginning of period382 $71.20 392 $57.98 
Granted141 98.30 130 84.37 
Vested(121)50.95 (88)44.98 
Forfeited(5)82.59 (2)68.48 
Outstanding at end of period397 $86.89 432 $68.52 

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9.    INCOME TAXES

Income taxes for the three months ended February 28, 2021 included $5.3 million of net discrete tax expense consisting principally of the following: (i) $11.4 million of deferred state tax expense directly related to our December 2020 acquisition of FONA, (ii) $4.5 million of tax benefits associated with the release of a valuation allowance due to a change in judgment about realizability of deferred tax assets, and (iii) $1.2 million of tax benefits from the reversal of certain reserves for unrecognized tax benefits associated with the resolution of tax uncertainties.

Income taxes for the three months ended February 29, 2020 included $10.4 million of net discrete tax benefits consisting principally of the following: (i) $9.9 million of tax benefits associated with an intra-entity asset transfer that occurred during the first quarter, (ii) $1.8 million of excess tax benefits associated with share-based compensation, and (iii) $1.4 million of expense related to the revaluation of deferred tax liabilities resulting from enacted legislation in certain non-U.S. jurisdictions.
Other than additions for current year tax positions and the reversal of unrecognized tax benefits noted above, there were no significant changes to unrecognized tax benefits during the three months ended February 28, 2021.

As of February 28, 2021, we believe the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to our consolidated financial statements.

10.    CAPITAL STOCK AND EARNINGS PER SHARE

The following table sets forth the reconciliation of average shares outstanding for the three months ended February 28, 2021 and February 29, 2020 (in millions):

 20212020
Average shares outstanding – basic267.1 266.0 
Effect of dilutive securities:
Stock options/RSUs/LTPP2.8 2.7 
Average shares outstanding – diluted269.9 268.7 

The following table sets forth the stock options and RSUs for the three months ended February 28, 2021 and February 29, 2020 that were not considered in our earnings per share calculation since they were anti-dilutive (in millions):
 20212020
Anti-dilutive securities 0.2 

The following table sets forth the common stock activity for the three months ended February 28, 2021 and February 29, 2020 (in millions):
 20212020
Shares issued under stock options, RSUs, LTPP and employee stock purchase plans 0.2 0.2 
Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, LTPP and employee stock purchase programs0.1 0.2 
As of February 28, 2021, $584.6 million remained of the $600 million share repurchase program authorization approved by our Board of Directors in November 2019.
 
11.    ACCUMULATED OTHER COMPREHENSIVE LOSS

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

21

February 28, 2021November 30, 2020
Foreign currency translation adjustment (1)
$(124.9)$(174.0)
Unrealized gain (loss) on foreign currency exchange contracts(1.7)(0.4)
Unamortized value of settled interest rate swaps (0.1)
Pension and other postretirement costs(295.9)(296.3)
Accumulated other comprehensive loss$(422.5)$(470.8)
(1)During the three months ended February 28, 2021, the foreign currency translation adjustment of accumulated other comprehensive loss decreased on a net basis by $49.1 million, including the impact of a $2.0 million increase associated with net investment hedges. These net investment hedges are more fully described in note 5.

The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the three months ended February 28, 2021 and February 29, 2020 (in millions):
Affected Line Items in the Condensed Consolidated Income Statement
Accumulated Other Comprehensive Income (Loss) Components20212020
(Gains)/losses on cash flow hedges:
Interest rate derivatives$(0.1)$(0.1)Interest expense
Foreign exchange contracts(0.3)(0.4)Cost of goods sold
Total before tax(0.4)(0.5)
Tax effect0.1 0.1