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 August 31, 2022

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)	(I.R.S. Employer Identification No.)

 

24 Schilling Road, Suite 1,
Hunt Valley,	MD	21031
(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 class	Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.01 per share	MKC.V	New York Stock Exchange
Common Stock Non-Voting, Par Value $0.01 per share	MKC	New 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 Filer	☐	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  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares Outstanding
	August 31, 2022
Common Stock	17,606,187
Common Stock Non-Voting	250,600,835

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION			4
	ITEM 1	FINANCIAL STATEMENTS	4
	ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
	ITEM 4	CONTROLS AND PROCEDURES	45
PART II - OTHER INFORMATION			46
	ITEM 1	LEGAL PROCEEDINGS	46
	ITEM 1a	RISK FACTORS	46
	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47
	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	47
	ITEM 4	MINE SAFETY DISCLOSURES	47
	ITEM 5	OTHER INFORMATION	47
	ITEM 6	EXHIBITS	48

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 August 31,				Nine months ended August 31,
	2022		2021		2022		2021
Net sales	$	1,595.6	$	1,549.4	$	4,654.8	$	4,587.6
Cost of goods sold	1,028.9		949.8		3,004.7		2,795.9
Gross profit	566.7		599.6		1,650.1		1,791.7
Selling, general and administrative expense	328.1		327.3		1,010.6		1,005.2
Transaction and integration expenses	—		1.3		2.2		27.0
Special charges	3.4		5.8		38.0		20.6
Operating income	235.2		265.2		599.3		738.9
Interest expense	37.9		33.9		104.7		103.3
Other income, net	77.4		3.5		89.9		12.0
Income from consolidated operations before income taxes	274.7		234.8		584.5		647.6
Income tax expense	59.3		31.5		115.4		135.5
Net income from consolidated operations	215.4		203.3		469.1		512.1
Income from unconsolidated operations	7.5		9.1		27.2		45.8
Net income	$	222.9	$	212.4	$	496.3	$	557.9
Earnings per share – basic	$	0.83	$	0.79	$	1.85	$	2.09
Earnings per share – diluted	$	0.82	$	0.79	$	1.83	$	2.07
Average shares outstanding – basic	268.3		267.4		268.1		267.2
Average shares outstanding – diluted	270.2		270.0		270.4		270.0
Cash dividends paid per share – voting and non-voting	$	0.37	$	0.34	$	1.11	$	1.02
Cash dividends declared per share – voting and non-voting	$	0.37	$	0.34	$	0.74	$	0.68

See notes to condensed consolidated financial statements (unaudited).

4

McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)

 

	Three months ended August 31,				Nine months ended August 31,
	2022		2021		2022		2021
Net income	$	222.9	$	212.4	$	496.3	$	557.9
Net income attributable to non-controlling interest	1.5		0.7		5.2		3.5
Other comprehensive income (loss):
Unrealized components of pension and other postretirement plans	4.5		5.8		10.5		8.4
Currency translation adjustments	(114.9)		(78.4)		(162.2)		21.5
Change in derivative financial instruments	(22.1)		2.5		4.7		3.1
Deferred taxes	(3.9)		(2.8)		(18.8)		1.4
Total other comprehensive income (loss)	(136.4)		(72.9)		(165.8)		34.4
Comprehensive income	$	88.0	$	140.2	$	335.7	$	595.8

See notes to condensed consolidated financial statements (unaudited).

5

McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

 

	August 31, 2022		November 30, 2021
	(unaudited)
ASSETS
Cash and cash equivalents	$	343.9	$	351.7
Trade accounts receivable, net of allowances	565.8		549.5
Inventories, net
Finished products	668.8		556.2
Raw materials and work-in-process	710.7		626.1
	1,379.5		1,182.3
Prepaid expenses and other current assets	123.6		112.3
Total current assets	2,412.8		2,195.8
Property, plant and equipment, net	1,139.1		1,140.3
Goodwill	5,209.7		5,335.8
Intangible assets, net	3,396.6		3,452.5
Other long-term assets	782.8		781.4
Total assets	$	12,941.0	$	12,905.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term borrowings	$	1,436.4	$	539.1
Current portion of long-term debt	20.6		770.3
Trade accounts payable	1,143.5		1,064.2
Other accrued liabilities	539.9		850.2
Total current liabilities	3,140.4		3,223.8
Long-term debt	3,904.8		3,973.3
Deferred taxes	816.3		792.3
Other long-term liabilities	472.8		490.9
Total liabilities	8,334.3		8,480.3
Shareholders’ equity
Common stock	564.3		530.0
Common stock non-voting	1,566.6		1,525.1
Retained earnings	3,048.4		2,782.4
Accumulated other comprehensive loss	(590.0)		(426.5)
Total McCormick shareholders' equity	4,589.3		4,411.0
Non-controlling interests	17.4		14.5
Total shareholders’ equity	4,606.7		4,425.5
Total liabilities and shareholders’ equity	$	12,941.0	$	12,905.8

See notes to condensed consolidated financial statements (unaudited).

6

McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

(in millions)

 

	Nine months ended August 31,
	2022		2021
Operating activities
Net income	$	496.3	$	557.9
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation and amortization	148.2		139.1
Stock-based compensation	49.1		54.2
Gain on the sale of intangible asset	(13.6)		—
Gain on the sale of a business	(49.6)		—
Asset impairment charge	10.0		6.5
Amortization of inventory fair value adjustments associated with acquisitions	—		6.3
Income from unconsolidated operations	(27.2)		(45.8)
Changes in operating assets and liabilities (net of businesses acquired and disposed)
Trade accounts receivable	(43.6)		1.3
Inventories	(238.5)		(156.5)
Trade accounts payable	100.8		(16.7)
Other assets and liabilities	(209.6)		(195.2)
Dividends from unconsolidated affiliates	27.8		21.8
Net cash flow provided by operating activities	250.1		372.9
Investing activities
Acquisition of businesses (net of cash acquired)	—		(706.4)
Proceeds from sale of business	95.2		—
Proceeds from sale of unconsolidated operation	—		65.4
Proceeds from sale of intangible asset	13.6		—
Capital expenditures (including software)	(166.8)		(189.9)
Other investing activities	2.5		0.3
Net cash flow used in investing activities	(55.5)		(830.6)
Financing activities
Short-term borrowings, net	898.1		(118.9)
Long-term debt borrowings	—		1,001.5
Payment of debt issuance costs	—		(1.9)
Long-term debt repayments	(768.7)		(255.3)
Proceeds from exercised stock options	39.9		10.5
Taxes withheld and paid on employee stock awards	(19.4)		(13.3)
Common stock acquired by purchase	(26.1)		(3.2)
Dividends paid	(297.5)		(272.4)
Net cash flow (used in) provided by financing activities	(173.7)		347.0
Effect of exchange rate changes on cash and cash equivalents	(28.7)		(0.3)
Decrease in cash and cash equivalents	(7.8)		(111.0)
Cash and cash equivalents at beginning of period	351.7		423.6
Cash and cash equivalents at end of period	$	343.9	$	312.6

See notes to condensed consolidated financial statements (unaudited).

7

McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

(in millions)

(millions)	Common Stock Shares	Common Stock Non-Voting Shares	Common Stock Amount		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Non-controlling Interests		Total Shareholders’ Equity
Three months ended August 31, 2022
Balance, May 31, 2022	17.8	250.5	$	2,119.2	$	2,933.6	$	(454.6)	$	16.9	$	4,615.1
Net income			—		222.9		—		—		222.9
Net income attributable to non-controlling interest			—		—		—		1.5		1.5
Other comprehensive loss, net of tax			—		—		(135.4)		(1.0)		(136.4)
Dividends			—		(99.2)		—		—		(99.2)
Stock-based compensation			12.2		—		—		—		12.2
Shares purchased and retired	(0.2)	—	(4.8)		(8.9)		—		—		(13.7)
Shares issued	0.1	—	4.3		—		—		—		4.3
Equal exchange	(0.1)	0.1	—		—		—		—		—
Balance, August 31, 2022	17.6	250.6	$	2,130.9	$	3,048.4	$	(590.0)	$	17.4	$	4,606.7
Nine months ended August 31, 2022
Balance, November 30, 2021	17.8	249.5	$	2,055.1	$	2,782.4	$	(426.5)	$	14.5	$	4,425.5
Net income			—		496.3		—		—		496.3
Net income attributable to non-controlling interest			—		—		—		5.2		5.2
Other comprehensive loss, net of tax			—		—		(163.5)		(2.3)		(165.8)
Dividends			—		(198.4)		—		—		(198.4)
Stock-based compensation			49.1		—		—		—		49.1
Shares purchased and retired	(0.5)	—	(14.9)		(31.9)		—		—		(46.8)
Shares issued	1.3	0.1	41.6		—		—		—		41.6
Equal exchange	(1.0)	1.0	—		—		—		—		—
Balance, August 31, 2022	17.6	250.6	$	2,130.9	$	3,048.4	$	(590.0)	$	17.4	$	4,606.7
Three months ended August 31, 2021
Balance, May 31, 2021	18.1	249.2	$	2,027.1	$	2,660.5	$	(362.3)	$	15.5	$	4,340.8
Net income			—		212.4		—		—		212.4
Net income attributable to non-controlling interest			—		—		—		0.7		0.7
Other comprehensive income (loss), net of tax			—		—		(73.3)		0.4		(72.9)
Dividends			—		(90.9)		—		—		(90.9)
Stock-based compensation			11.6		—		—		—		11.6
Shares purchased and retired	(0.1)	—	(0.9)		(2.0)		—		—		(2.9)
Shares issued	0.1	—	4.3		—		—		—		4.3
Equal exchange	(0.1)	0.1	—		—		—		—		—
Balance, August 31, 2021	18.0	249.3	$	2,042.1	$	2,780.0	$	(435.6)	$	16.6	$	4,403.1

8

Nine months ended August 31, 2021
Balance, November 30, 2020	18.0	248.9	$	1,981.3	$	2,415.6	$	(470.8)	$	13.9	$	3,940.0
Net income			—		557.9		—		—		557.9
Net income attributable to non-controlling interest			—		—		—		3.5		3.5
Other comprehensive income (loss), net of tax			—		—		35.2		(0.8)		34.4
Dividends			—		(181.7)		—		—		(181.7)
Stock-based compensation			54.2		—		—		—		54.2
Shares purchased and retired	(0.2)	—	(5.3)		(11.8)		—		—		(17.1)
Shares issued	0.6	—	11.9		—		—		—		11.9
Equal exchange	(0.4)	0.4	—		—		—		—		—
Balance, August 31, 2021	18.0	249.3	$	2,042.1	$	2,780.0	$	(435.6)	$	16.6	$	4,403.1

See notes to condensed consolidated financial statements (unaudited).

9

McCORMICK & COMPANY, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented.

The results of consolidated operations for the nine-month period ended August 31, 2022 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, 2021.

Accounting Pronouncements Adopted in 2022

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying 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 was adopted effective December 1, 2021. There was no material impact to 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 relationships, 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. Arrangements that were entered into during the nine months ended August 31, 2022, including our new revolving credit facility expiring in July 2023 and cross-currency interest rate swaps expiring in April 2030, no longer use LIBOR as a reference rate. However, LIBOR continues to be the reference rate for our variable rate debt, including our revolving credit facility expiring in July 2026, interest rate swaps, and the cross-currency interest rate swaps expiring in August 2027. The phase out of LIBOR reference rates will occur at different dates and began on January 1, 2022. Our adoption of this new standard occurred during the three months ended February 28, 2022, in conjunction with the first phase-out of a LIBOR reference rate. There was no material impact to our consolidated financial statements during the nine months ended August 31, 2022, nor do we expect the adoption of this standard to have a material impact on our consolidated financial statements during the LIBOR transition period.

Recently Issued Accounting Pronouncements — Pending Adoption

In September 2022, the FASB issued ASU No. 2022-04: Liabilities - Supplier Finance Programs (Topic 450-50): Disclosure of Supplier Finance Program Obligations that requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The new standard’s requirements to disclose the key terms of the programs and information about obligations outstanding are effective for all interim and annual periods of our fiscal year ending November 30, 2024. The new standard’s requirement to disclose a rollforward of obligations outstanding will be effective for our fiscal year ending November 30, 2025. Early adoption is permitted. We are currently evaluating the impact that this new guidance will have on our consolidated financial statements.

2.      SPECIAL CHARGES AND TRANSACTION AND INTEGRATION EXPENSES

Special Charges

10

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, including related impairment charges, associated with certain actions undertaken 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 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, such as an asset impairment, 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. Certain ancillary expenses related to these actions approved by our Management Committee do not qualify for accrual upon approval but are included as special charges as incurred during the course of the actions.

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

The following is a summary of special charges recognized in the three and nine months ended August 31, 2022 and 2021

(in millions):

	Three months ended August 31,				Nine months ended August 31,
	2022		2021		2022		2021
Employee severance and related benefits	$	1.9	$	2.8	$	23.6	$	7.6
Other costs
Cash	0.9		3.0		6.9		6.5
Non-Cash	0.6		—		21.1		6.5
Total special charges	3.4		5.8		51.6		20.6
Gain on sale of exited brand	—		—		(13.6)		—
Total	$	3.4	$	5.8	$	38.0	$	20.6

During the three months ended August 31, 2022, we recorded $3.4 million of special charges. Those special charges principally consisted of $1.0 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), as more fully described below, $0.8 million associated with the exit of our consumer business in Russia, as more fully described below, and streamlining actions of $0.4 million in the Americas region, and $1.2 million in the EMEA region.

During the nine months ended August 31, 2022, we recorded $38.0 million of net special charges. Those special charges consisted principally of $23.0 million associated with the exit of our consumer business in Russia, as more fully described below, $18.4 million associated with the transition of a manufacturing facility in EMEA, as more fully described below, and streamlining actions of $5.7 million in the Americas region, and $5.5 million in the EMEA region. These charges were offset by a $13.6 million gain, on the sale of our Kohinoor brand discussed below as well as a reversal of $2.2 million of estimated costs associated with the exit of our rice product line in India upon settlement of a supply agreement related to that product line.

In the second quarter of 2022, our Management Committee approved the exit of our consumer business in Russia. As a result, in the second quarter of 2022 we recognized $22.2 million of special charges. These special charges included a non-cash impairment charge of $10.0 million associated with the Kamis brand name to reduce its carrying value to its estimated fair value, $2.5 million of employee severance and $1.8 million of other related exit costs directly associated with the exit plan that we anticipated will be paid in the next twelve months, and a non-cash $7.9 million reclassification of the cumulative translation adjustment previously reflected in accumulated other comprehensive income (loss) to earnings associated with the exit of our business in Russia. During the three months ended August 31, 2022, we recorded an additional $0.8 million of employee severance charges.

In the first quarter of 2022, our Management Committee approved an initiative to consolidate our manufacturing operations in the United Kingdom into a net-zero carbon condiments manufacturing and distribution center facility with state-of-the-art technology. We expect to execute these changes to our supply chain operations and improve profitability, from a combination of lower headcount and non-headcount costs, by consolidating our operations into a scalable platform while expanding our capacity. We expect the cost of the initiative to approximate $30 million—to be recognized as special charges in our consolidated income statement through 2023. Of that $30 million, we expect the costs to include employee severance and related benefits, non-cash accelerated depreciation, decommissioning and other property related lease exit costs, all directly

11

related to the initiative. During the three months ended August 31, 2022, we recorded $0.6 million in accelerated depreciation and $0.4 million in third party expenses and other costs. During the nine months ended August 31, 2022, we recorded $12.5 million in severance and related benefits costs, $3.3 million in accelerated depreciation and $2.6 million in third party expenses and other costs.

We exited our Kohinoor rice product line in India in the fourth quarter of fiscal 2021. During the nine months ended August 31, 2022, we sold the Kohinoor brand name for $13.6 million, net of costs associated with the sale of $1.4 million, and reflected the gain of $13.6 million associated with this sale within special charges.

During the three months ended August 31, 2021, we recorded $5.8 million of special charges, consisting principally of streamlining actions of $1.8 million in the Americas region, $1.7 million in the EMEA region, $0.8 million in the Asia Pacific (APAC) region, and $0.7 million associated with our GE initiative as more fully described below.

During the nine months ended August 31, 2021, we recorded $20.6 million of special charges, consisting principally of streamlining actions of $7.0 million in the Americas region, $3.0 million in the EMEA region, $0.8 million in the APAC region, and $0.7 million associated with our GE initiative, together with a non-cash asset impairment charge of $6.5 million associated with an administrative site that will be exited in conjunction with our decision to employ a hybrid work environment.

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.

While we are continuing to fully develop the details of our GE operating model, we expect the cost of the GE initiative—to be recognized as special charges in our consolidated income statement over its expected multi-year course—to 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 the 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 this initiative. We have spent a cumulative total of $40.7 million on this initiative through August 31, 2022.

As of August 31, 2022, reserves associated with special charges, which are expected to be paid during the next twelve months, are included in trade accounts payable and other accrued liabilities in our consolidated balance sheet.

The following is a breakdown by business segment of special charges for the three and nine months ended August 31, 2022 and 2021 (in millions):

	Three months ended August 31,				Nine months ended August 31,
	2022		2021		2022		2021
Consumer segment	$	1.8	$	3.5	$	16.1	$	13.1
Flavor solutions segment	1.6		2.3		21.9		7.5
Total special charges	$	3.4	$	5.8	$	38.0	$	20.6

Transaction and Integration Expenses

The following are the transaction and integration expenses recognized during the three and nine months ended August 31, 2022 and 2021 relating to the acquisitions of Cholula Hot Sauce ("Cholula") and FONA International, LLC ("FONA") (in millions):

	Three months ended August 31,				Nine months ended August 31,
	2022		2021		2022		2021
Transaction-related expenses included in cost of goods sold	$	—	$	—	$	—	$	6.3
Other transaction expenses	—		—		—		13.8
Integration expenses	—		1.3		2.2		13.2
Total transaction and integration expenses	$	—	$	1.3	$	2.2	$	33.3

We expect integration expenses related to our acquisition of FONA to total approximately $2.2 million in fiscal 2022.

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3.    FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS

During the three months ended August 31, 2022, we entered into a 364-day $500 million revolving credit facility, which will expire in July 2023. The current pricing for the credit facility, on a fully drawn basis, is SOFR + 1.23%. 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 SOFR + 1.60%. The provisions of this revolving credit facility restrict subsidiary indebtedness and require us to maintain a minimum interest coverage ratio, consistent with our $1.5 billion five-year revolving credit facility. We do not expect that this covenant would limit our access to this revolving credit facility for the foreseeable future.

Also during the three months ended August 31, 2022, we repaid our $750 million, 2.70% notes due in August 2022.

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. For the three and nine months ended August 31, 2022 and 2021, hedge ineffectiveness was not material. 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.

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. We assess foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps with highly-rated financial institutions 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 August 31, 2022, we had foreign currency exchange contracts to purchase or sell $539.5 million of foreign currencies as compared to $583.6 million at November 30, 2021. 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. Hedges of foreign currency denominated assets and liabilities include foreign currency exchange contracts with a notional value of $381.1 million at August 31, 2022. These foreign currency exchange contracts 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. All foreign exchange contracts outstanding at August 31, 2022 have durations of less than 18 months, including $151.9 million of notional contracts that have durations of less than one month and are used to hedge short-term cash flow funding.

We also utilize cross currency interest rate swap contracts that are designated as net investment hedges. 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 derivative contracts, including interest rate swap agreements, to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.

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The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions):

	Asset Derivatives					Liability Derivatives
	Balance sheet location	Notional amount		Fair value		Balance sheet location	Notional amount		Fair value
As of August 31, 2022
Interest rate contracts	Other current assets / Other long-term assets	$	—	$	—	Other long-term liabilities	$	600.0	$	30.8
Foreign exchange contracts	Other current assets	316.3		14.9		Other accrued liabilities	223.2		2.3
Cross currency contracts	Other current assets / Other long-term assets	439.6		57.5		Other long-term liabilities	443.2		7.7
Total				$	72.4				$	40.8
As of November 30, 2021
Interest rate contracts	Other current assets / Other long-term assets	$	350.0	$	23.1	Other long-term liabilities	$	—	$	—
Foreign exchange contracts	Other current assets	380.8		8.3		Other accrued liabilities	202.8		2.8
Cross currency contracts	Other current assets / Other long-term assets	251.0		4.4		Other long-term liabilities	257.5		8.0
Total				$	35.8				$	10.8

In the first quarter of 2022, we entered into $250 million notional value interest rate swap contracts where we receive interest at 2.50% and pay a variable rate of interest based on USD SOFR plus 0.684%, which expire in April 2030, and are designated as fair value hedges of the changes in fair value of $250 million of the $500 million 2.50% term notes due in 2030. The fair value of these interest rate swap contracts is offset by a corresponding increase or decrease in the value of the hedged debt. Also during the first quarter of 2022, we entered into cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at USD SOFR plus 0.684% and pay £184.1 million at GBP SONIA plus 0.5740% and (ii) £184.1 million notional value to receive £184.1 million at GBP SONIA plus 0.574% and pay €219.2 million at Euro ESTR plus 0.667%, both of which expire in April 2030. In conjunction with the phase-out of LIBOR, during the first quarter of 2022 we amended our previously existing cross currency swaps which expire in August 2027 such that, effective February 15, 2022, we now pay and receive at GBP SONIA plus 0.859% (previously GBP LIBOR plus 0.740%).

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The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive loss (AOCI) and our consolidated income statement for the three- and nine-months ended August 31, 2022 and 2021 (in millions):

 

Fair Value Hedges
Derivative	Income statement location	Income (expense)
		Three months ended August 31, 2022		Three months ended August 31, 2021		Nine months ended August 31, 2022		Nine months ended August 31, 2021
Interest rate contracts	Interest expense	$	0.6	$	2.1	$	5.4	$	6.1

	Income statement location	Gain (loss) recognized in income					Income statement location	Gain (loss) recognized in income
Derivative		2022		2021		Hedged item		2022		2021
Three months ended August 31,
Foreign exchange contracts	Other income, net	$	3.6	$	5.6	Intercompany loans	Other income, net	$	(3.2)	$	(5.4)

Nine months ended August 31,
Foreign exchange contracts	Other income, net	$	6.9	$	(0.3)	Intercompany loans	Other income, net	$	(6.1)	$	1.1

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 and nine months ended August 31, 2022 and 2021.

Cash Flow Hedges
Derivative	Gain (loss) recognized in OCI				Income statement location	Gain (loss) reclassified from AOCI
	2022		2021			2022		2021
Three months ended August 31,
Interest rate contracts	$	1.8	$	—	Interest expense/ Other income, net	$	18.8	$	0.2
Foreign exchange contracts	2.8		1.5		Cost of goods sold	0.7		(0.3)
Total	$	4.6	$	1.5		$	19.5	$	(0.1)
Nine months ended August 31,
Interest rate contracts	$	18.7	$	0.3	Interest expense/ Other income, net	$	19.1	$	0.4
Foreign exchange contracts	5.2		(0.9)		Cost of goods sold	0.7		(0.6)
Total	$	23.9	$	(0.6)		$	19.8	$	(0.2)

During the three months ended May 31, 2022, we entered into treasury lock arrangements with a notional amount totaling $200 million in order to manage our interest rate risk associated with the anticipated issuance of at least $200 million of fixed rate debt by August 2022. These treasury locks had a maturity date of August 12, 2022 and an average fixed rate of 1.89%. We designated these treasury lock arrangements as cash flow hedges with any unrealized gain, prior to settlement, recognized in accumulated other comprehensive income. During the three months ended August 31, 2022, we settled the $200 million notional treasury locks upon determining we would not issue fixed rate debt but rather enter into the previously described $500 million 364-day revolving credit facility. The proceeds received upon settlement of these treasury lock arrangements were $18.7 million and were recognized in Other income, net in our Condensed consolidated income statements for the three and nine months ended August 31, 2022.

For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive loss expected to be reclassified in the next 12 months is $3.6 million as an increase to earnings.

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Net Investment Hedges
Derivative	Gain (loss) recognized in OCI				Income statement location	Gain (loss) excluded from the assessment of hedge effectiveness
	2022		2021			2022		2021
Three months ended August 31,
Cross currency contracts	$	29.7	$	8.4	Interest expense	$	2.4	$	0.4
Nine months ended August 31,
Cross currency contracts	$	51.8	$	4.9	Interest expense	$	4.1	$	1.1

For all net investment hedges, no amounts have been reclassified out of accumulated other comprehensive 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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4.    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 August 31, 2022 and November 30, 2021, 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):

			August 31, 2022
	Fair Value		Level 1		Level 2
Assets
Cash and cash equivalents	$	343.9	$	343.9	$	—
Insurance contracts	109.1		—		109.1
Bonds and other long-term investments	6.8		6.8		—
Foreign currency derivatives	14.9		—		14.9
Cross currency contracts	57.5		—		57.5
Total	$	532.2	$	350.7	$	181.5
Liabilities
Foreign currency derivatives	$	2.3	$	—	$	2.3
Interest rate derivatives	30.8		—		30.8
Cross currency contracts	7.7		—		7.7
Total	$	40.8	$	—	$	40.8

 

			November 30, 2021
	Fair Value		Level 1		Level 2
Assets
Cash and cash equivalents	$	351.7	$	351.7	$	—
Insurance contracts