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, 2023

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
	February 28, 2023
Common Stock	17,393,503
Common Stock Non-Voting	250,838,235

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	20
	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
	ITEM 4	CONTROLS AND PROCEDURES	34
PART II - OTHER INFORMATION			36
	ITEM 1	LEGAL PROCEEDINGS	36
	ITEM 1a	RISK FACTORS	36
	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	36
	ITEM 4	MINE SAFETY DISCLOSURES	37
	ITEM 5	OTHER INFORMATION	37
	ITEM 6	EXHIBITS	38

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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,
	2023		2022
Net sales	$	1,565.5	$	1,522.4
Cost of goods sold	1,002.6		962.0
Gross profit	562.9		560.4
Selling, general and administrative expense	336.1		333.3
Transaction and integration expenses	—		0.7
Special charges	27.8		19.5
Operating income	199.0		206.9
Interest expense	50.6		33.1
Other income, net	11.1		6.2
Income from consolidated operations before income taxes	159.5		180.0
Income tax expense	34.4		34.4
Net income from consolidated operations	125.1		145.6
Income from unconsolidated operations	14.0		9.3
Net income	$	139.1	$	154.9
Earnings per share – basic	$	0.52	$	0.58
Earnings per share – diluted	$	0.52	$	0.57
Average shares outstanding – basic	268.2		267.8
Average shares outstanding – diluted	269.8		270.5
Cash dividends paid per share – voting and non-voting	$	0.39	$	0.37

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)

 

	Three months ended February 28,
	2023		2022
Net income	$	139.1	$	154.9
Net income attributable to non-controlling interest	0.8		2.5
Other comprehensive income (loss):
Unrealized components of pension and other postretirement plans	(1.0)		2.2
Currency translation adjustments	47.0		3.7
Change in derivative financial instruments	(5.4)		5.1
Tax benefit (expense)	1.0		(1.0)
Total other comprehensive income	41.6		10.0
Comprehensive income	$	181.5	$	167.4

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

 

	February 28, 2023		November 30, 2022
	(unaudited)
ASSETS
Cash and cash equivalents	$	356.8	$	334.0
Trade accounts receivable, net of allowances	571.0		573.7
Inventories, net
Finished products	650.2		649.0
Raw materials and work-in-process	694.4		691.1
	1,344.6		1,340.1
Prepaid expenses and other current assets	138.9		138.9
Total current assets	2,411.3		2,386.7
Property, plant and equipment, net	1,225.2		1,198.0
Goodwill	5,229.7		5,212.9
Intangible assets, net	3,381.7		3,387.9
Other long-term assets	957.5		939.4
Total assets	$	13,205.4	$	13,124.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term borrowings	$	1,304.8	$	1,236.7
Current portion of long-term debt	281.2		270.6
Trade accounts payable	1,124.3		1,171.0
Other accrued liabilities	610.7		754.1
Total current liabilities	3,321.0		3,432.4
Long-term debt	3,619.8		3,642.3
Deferred taxes	866.7		866.3
Other long-term liabilities	510.2		484.7
Total liabilities	8,317.7		8,425.7
Shareholders’ equity
Common stock	574.5		568.6
Common stock non-voting	1,577.6		1,570.0
Retained earnings	3,155.1		3,022.5
Accumulated other comprehensive loss	(437.1)		(480.6)
Total McCormick shareholders' equity	4,870.1		4,680.5
Non-controlling interests	17.6		18.7
Total shareholders’ equity	4,887.7		4,699.2
Total liabilities and shareholders’ equity	$	13,205.4	$	13,124.9

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

(in millions)

 

	Three months ended February 28,
	2023		2022
Operating activities
Net income	$	139.1	$	154.9
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation and amortization	47.8		49.0
Stock-based compensation	11.8		11.1
Income from unconsolidated operations	(14.0)		(9.3)
Changes in operating assets and liabilities
Trade accounts receivable	9.7		33.2
Inventories	(0.2)		(49.9)
Trade accounts payable	(54.8)		5.2
Other assets and liabilities	(49.9)		(185.5)
Dividends from unconsolidated affiliates	13.9		9.2
Net cash flow provided by operating activities	103.4		17.9
Investing activities
Capital expenditures (including software)	(61.5)		(43.7)
Net cash flow used in investing activities	(61.5)		(43.7)
Financing activities
Short-term borrowings, net	67.9		97.3
Long-term debt repayments	(3.6)		(3.5)
Proceeds from exercised stock options	5.2		30.3
Taxes withheld and paid on employee stock awards	(6.1)		(12.0)
Common stock acquired by purchase	(3.5)		(8.7)
Dividends paid	(104.6)		(99.0)
Net cash flow (used in) provided by financing activities	(44.7)		4.4
Effect of exchange rate changes on cash and cash equivalents	25.6		8.1
Increase (decrease) in cash and cash equivalents	22.8		(13.3)
Cash and cash equivalents at beginning of period	334.0		351.7
Cash and cash equivalents at end of period	$	356.8	$	338.4

See notes to condensed consolidated financial statements (unaudited).

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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 February 28, 2023
Balance, November 30, 2022	17.4	250.6	$	2,138.6	$	3,022.5	$	(480.6)	$	18.7	$	4,699.2
Net income			—		139.1		—		—		139.1
Net income attributable to non-controlling interest			—		—		—		0.8		0.8
Other comprehensive income (loss), net of tax			—		—		43.5		(1.9)		41.6
Stock-based compensation			11.8		—		—		—		11.8
Shares purchased and retired	(0.1)	—	(4.8)		(6.5)		—		—		(11.3)
Shares issued	0.3	—	6.5		—		—		—		6.5
Equal exchange	(0.2)	0.2	—		—		—		—		—
Balance, February 28, 2023	17.4	250.8	$	2,152.1	$	3,155.1	$	(437.1)	$	17.6	$	4,887.7
Three months ended February 28, 2022
Balance, November 30, 2021	17.8	249.5	$	2,055.1	$	2,782.4	$	(426.5)	$	14.5	$	4,425.5
Net income			—		154.9		—		—		154.9
Net income attributable to non-controlling interest			—		—		—		2.5		2.5
Other comprehensive income (loss), net of tax			—		—		10.5		(0.5)		10.0
Stock-based compensation			11.1		—		—		—		11.1
Shares purchased and retired	(0.2)	—	(6.5)		(14.9)		—		—		(21.4)
Shares issued	0.9	—	31.6		—		—		—		31.6
Equal exchange	(0.7)	0.7	—		—		—		—		—
Balance, February 28, 2022	17.8	250.2	$	2,091.3	$	2,922.4	$	(416.0)	$	16.5	$	4,614.2

See notes to condensed consolidated financial statements (unaudited).

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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 three-month period ended February 28, 2023 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, 2022.

Accounting Pronouncements Recently Adopted

In 2022, we adopted the FASB issued ASU No. 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 which deferred the sunset date of Topic 848 which provides optional expedients for a limited time for accounting for transactions affected by the London Interbank Offered Rate (LIBOR) being discontinued. Arrangements that were entered into in 2022, including our 364-day revolving credit facility expiring in July 2023, fixed to variable interest rate swaps expiring in April 2030, and cross-currency interest rate swaps expiring in April 2030, do not use LIBOR as a reference rate. During the first quarter of 2023 we amended our interest rate swaps expiring in November 2025 and August 2027, and the cross currency and interest rate swaps expiring in August 2027 to no longer use LIBOR. Also, in March 2023 we amended our five-year revolving credit facility expiring in July 2026 to no longer use LIBOR. Our adoption of this standard commenced during 2022, in conjunction with the first phase-out of a LIBOR reference rate. There was no material impact to our consolidated financial statements, 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 roll forward 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 roll forward 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

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. Expenses associated with any approved action are classified as special charges upon recognition and monitored on an on-going basis

9

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 reduce fixed costs, simplify or improve processes, and improve our competitiveness.

The following is a summary of special charges recognized in the three months ended February 28, 2023 and 2022

(in millions):

	Three months ended February 28,
	2023		2022
Employee severance and related benefits	$	24.8	$	14.2
Other costs
Cash	2.2		3.9
Non-Cash	0.8		1.4
Total special charges	$	27.8	$	19.5

During the three months ended February 28, 2023, we recorded $27.8 million of special charges, consisting principally of $24.8 million associated with our Global Operating Effectiveness (GOE) program, as more fully described below, $0.9 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), as more fully described below, and streamlining actions of $1.3 million in the Americas region, and $0.8 million in the EMEA region.

During the three months ended February 28, 2022, we recorded $19.5 million of special charges, consisting principally of $14.9 million associated with the transition of a manufacturing facility in EMEA, as more fully described below, streamlining actions of $2.1 million in the Americas region, and $1.5 million in the EMEA region.

In 2022, our Management Committee approved the GOE program. The GOE program included a voluntary retirement plan, which included enhanced separation benefits to certain U.S. employees aged 55 years or older with at least ten years of service to the company. This voluntary retirement plan commenced in November 2022 and participants were required to submit their notifications by December 30, 2022. As of November 30, 2022, we had accrued special charges of $5.6 million, consisting of employee severance and related benefits. Upon all eligible employees submitting their notifications by the end of December 2022, we accrued an additional $19.7 million during the first quarter of 2023. All related payments will be made in fiscal year 2023 as all of the affected employees will leave the company in 2023. Other special charges recognized during the three months ended February 28, 2023, under our GOE program included $4.5 million in severance and related benefits costs and $0.6 million of third party expenses and other costs.

In 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 $40 million—to be recognized as special charges in our consolidated income statement during 2022 and 2023. Of that $40 million, we expect the costs to include employee severance and related benefits, non-cash accelerated depreciation, equipment relocation costs, decommissioning and other property related lease exit costs, all directly related to the initiative. During the three months ended February 28, 2023, we recorded $0.4 million in accelerated depreciation and $0.5 million in third party expenses and other costs. During the three months ended February 28, 2022, we recorded $12.5 million in severance and related benefits costs, $1.4 million in accelerated depreciation and $1.0 million in third party expenses and other costs. In total, $21.5 million of special charges related to this initiative were recognized in 2022.

As of February 28, 2023, reserves associated with special charges of $33.0 million, are included in other accrued liabilities in our consolidated balance sheet.

The following is a breakdown by business segment of special charges for the three months ended February 28, 2023 and 2022 (in millions):

10

	Three months ended February 28,
	2023		2022
Consumer segment	$	19.0	$	3.6
Flavor solutions segment	8.8		15.9
Total special charges	$	27.8	$	19.5

Integration Expenses

Integration expenses recognized during the three months ended February 28, 2022 were $0.7 million relating to the acquisition of FONA International, LLC (FONA).

3.    FINANCIAL INSTRUMENTS

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.

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 February 28, 2023, we had foreign currency exchange contracts to purchase or sell $509.6 million of foreign currencies as compared to $560.5 million at November 30, 2022. 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. Hedge ineffectiveness was not material. All foreign currency exchange contracts outstanding at February 28, 2023 have durations of less than 18 months, including $146.8 million of notional contracts that have durations of less than one month 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. Hedges of foreign currency denominated assets and liabilities include foreign currency exchange contracts with a notional value of $362.5 million at February 28, 2023. 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. 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 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.

11

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 February 28, 2023
Interest rate contracts	Other current assets / Other long-term assets	$	—	$	—	Other long-term liabilities	$	600.0	$	54.3
Foreign exchange contracts	Other current assets	309.2		6.4		Other accrued liabilities	200.4		2.3
Cross currency contracts	Other current assets / Other long-term assets	457.2		43.0		Other long-term liabilities	467.4		14.9
Total				$	49.4				$	71.5
As of November 30, 2022
Interest rate contracts	Other current assets / Other long-term assets	$	—	$	—	Other long-term liabilities	$	600.0	$	42.4
Foreign exchange contracts	Other current assets	344.9		11.0		Other accrued liabilities	215.6		1.5
Cross currency contracts	Other current assets / Other long-term assets	680.0		44.5		Other long-term liabilities	226.1		8.3
Total				$	55.5				$	52.2

In conjunction with the phase-out of LIBOR, during the first quarter of 2023 we amended our previously existing cross currency swaps which expire in August 2027 such that, effective February 15, 2023, we now pay and receive at USD Secured Overnight Financing Rate (SOFR) plus 0.907% (previously three-month U.S. LIBOR plus 0.685%).

In conjunction with the phase-out of LIBOR, during the first quarter of 2023, we amended our $100 million interest rate swaps which expire in November 2025 and our $250 million interest rate swaps that expire in August 2027, such that, effective February 15, 2023 we now pay and receive at USD SOFR plus 1.487% (previously U.S. three-month LIBOR plus 1.22%) and USD SOFR plus 0.907% (previously U.S. three-month LIBOR plus 0.685%), respectively.

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-months ended February 28, 2023 and 2022 (in millions):

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Fair Value Hedges
Three months ended February 28,
Derivative	Income statement location	(Expense) income
		2023		2022
Interest rate contracts	Interest expense	$	(3.7)	$	2.2

	Income statement location	Gain (loss) recognized in income					Income statement location	Gain (loss) recognized in income
Derivative		2023		2022		Hedged item		2023		2022
Foreign exchange contracts	Other income, net	$	1.0	$	(0.4)	Intercompany loans	Other income, net	$	(0.1)	$	0.4

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, 2023 and 2022.

Cash Flow Hedges
Derivative	Gain (loss) recognized in OCI				Income statement location	Gain (loss) reclassified from AOCI
	2023		2022			2023		2022
Three months ended February 28,
Interest rate contracts	$	—	$	—	Interest expense	$	0.1	$	0.1
Foreign exchange contracts	(1.1)		2.9		Cost of goods sold	1.2		(0.2)
Total	$	(1.1)	$	2.9		$	1.3	$	(0.1)

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 $1.1 million as an increase to earnings.

Net Investment Hedges
Derivative	Gain (loss) recognized in OCI				Income statement location	Gain (loss) excluded from the assessment of hedge effectiveness
	2023		2022			2023		2022
Three months ended February 28,
Cross currency contracts	$	(5.8)	$	0.7	Interest expense	$	3.3	$	0.5

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 February 28, 2023 and November 30, 2022, 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, 2023
	Fair Value		Level 1		Level 2
Assets
Cash and cash equivalents	$	356.8	$	356.8	$	—
Insurance contracts	109.6		—		109.6
Bonds and other long-term investments	2.4		2.4		—
Foreign currency derivatives	6.4		—		6.4
Cross currency contracts	43.0		—		43.0
Total	$	518.2	$	359.2	$	159.0
Liabilities
Foreign currency derivatives	$	2.3	$	—	$	2.3
Interest rate derivatives	54.3		—		54.3
Cross currency contracts	14.9		—		14.9
Total	$	71.5	$	—	$	71.5

 

			November 30, 2022
	Fair Value		Level 1		Level 2
Assets
Cash and cash equivalents	$	334.0	$	334.0	$	—
Insurance contracts	110.0		—		110.0
Bonds and other long-term investments	5.1		5.1		—
Foreign currency derivatives	11.0		—		11.0
Cross currency contracts	44.5		—		44.5
Total	$	504.6	$	339.1	$	165.5
Liabilities
Foreign currency derivatives	$	1.5	$	—	$	1.5
Interest rate derivatives	42.4		—		42.4
Cross currency contracts	8.3		—		8.3
Total	$	52.2	$	—	$	52.2

At February 28, 2023 and November 30, 2022, the carrying amounts of interest rate derivatives, foreign currency derivatives, cross currency contracts, insurance contracts, and bond and other long-term investments were equal to their respective fair values. 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. Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value.

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Insurance contracts, bonds, and other long-term investments are comprised of fixed income and equity securities held for certain non-qualified U.S. employee benefit plans and are stated at fair value on the balance sheet. 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.

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, 2023		November 30, 2022
Carrying amount	$	3,901.0	$	3,912.9
Level 1 valuation techniques	$	3,402.4	$	3,424.8
Level 2 valuation techniques	172.7		176.1
Total fair value	$	3,575.1	$	3,600.9

The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments.

5.     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. We previously 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 generally 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 (income) and other postretirement benefits expense for the three months ended February 28, 2023 and 2022 (in millions):

	United States pension				International pension				Other postretirement benefits
	2023		2022		2023		2022		2023		2022
Service cost	$	0.5	$	0.9	$	0.2	$	0.2	$	0.3	$	0.4
Interest costs	9.0		6.6		2.5		1.8		0.6		0.4
Expected return on plan assets	(10.6)		(10.7)		(3.7)		(3.2)		—		—
Amortization of prior service costs	0.1		0.1		—		—		(0.1)		(0.1)
Amortization of net actuarial losses (gains)	0.1		2.2		—		0.4		(0.5)		—
Total (income) expense	$	(0.9)	$	(0.9)	$	(1.0)	$	(0.8)	$	0.3	$	0.7

During the three months ended February 28, 2023 and 2022, we contributed $1.9 million and $2.0 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2022 were $11.4 million.

All of the amounts in the tables above for pension (income) and other postretirement benefits expense, other than service cost, were included in other income, net within our consolidated income statements. The net aggregate amount of pension and other postretirement benefits (income), excluding service cost components, was $(2.6) million and $(2.5) million for the three months ended February 28, 2023 and 2022, respectively.

6.    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 price-vested stock options. The following table sets forth the stock-based compensation expense recorded in selling, general and administrative ("SG&A") expense (in millions):

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	Three months ended February 28,
	2023		2022
Stock-based compensation expense	$	11.8	$	11.1

Our 2023 annual grant of stock options and RSUs is expected to occur in the second quarter, similar to the 2022 annual grant.

The following is a summary of our stock option activity for the three months ended February 28, 2023 and 2022:

	2023			2022
(shares in millions)	Number of Shares	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
Outstanding at beginning of period	4.8	$	67.08	5.0	$	59.71
Granted	—	—		—	—
Exercised	(0.1)	49.50		(0.6)	45.25
Outstanding at end of the period	4.7	$	67.32	4.4	$	61.72
Exercisable at end of the period	3.5	$	58.79	3.0	$	53.17

As of February 28, 2023, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $60.7 million and for options currently exercisable was $59.9 million. The total intrinsic value of all options exercised during the three months ended February 28, 2023 and 2022 was $2.1 million and $32.6 million, respectively.

The following is a summary of our RSU activity for the three months ended February 28, 2023 and 2022:

	2023			2022
(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 period	480	$	77.62	563	$	69.52
Granted	—	—		6	92.47
Vested	(26)	52.48		(24)	54.02
Forfeited	(7)	88.35		(8)	78.51
Outstanding at end of period	447	$	78.89	537	$	70.31

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The following is a summary of our price-vested stock options activity for the three months ended February 28, 2023 and 2022:

	2023			2022
(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 period	2,107	$	9.40	2,193	$	9.40
Granted	—	—		—	—
Forfeited	(39)	9.40		(27)	9.40
Outstanding at end of period	2,068	$	9.40	2,166	$	9.40

The following is a summary of our LTPP activity for the three months ended February 28, 2023 and 2022:

	2023			2022
(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 period	451	$	106.32	497	$	83.74
Granted	167	89.00		151	95.00
Vested	(176)	86.14		(251)	75.26
Forfeited	(11)	94.58		(2)	96.03
Outstanding at end of period	431	$	93.64	395	$	93.42

7.    INCOME TAXES

Income tax expense for the three months ended February 28, 2023 included $3.8 million of net discrete tax benefits consisting principally of the following: (i) $3.2 million of tax benefits associated with the adjustment of a valuation allowance due to changes in judgment about the realizability of the deferred tax asset, (ii) $0.8 million of tax benefits related to the revaluation of deferred taxes resulting from changes in tax rates, and (iii) $0.2 million of tax expense associated with stock-based compensation.

Income tax expense for the three months ended February 28, 2022 included $10.3 million of net discrete tax benefits consisting principally of the following: (i) $7.6 million of excess tax benefits associated with stock-based compensation, and (ii) $2.5 million of tax benefits related to the revaluation of deferred taxes resulting from enacted legislation.

Other than additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three months ended February 28, 2023.

As of February 28, 2023, 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.

8.    CAPITAL STOCK AND EARNINGS PER SHARE

The following table sets forth the reconciliation of average shares outstanding (in millions):

	Three months ended February 28,
	2023	2022
Average shares outstanding – basic	268.2	267.8
Effect of dilutive securities:
Stock options/RSUs/LTPP	1.6	2.7
Average shares outstanding – diluted	269.8	270.5

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The following table sets forth the stock options and RSUs that were not considered in our earnings per share calculation since they were anti-dilutive (in millions):

	Three months ended February 28,
	2023	2022
Anti-dilutive securities	1.6	0.2

The following table sets forth common stock activity (in millions):

	Three months ended February 28,
	2023	2022
Shares issued under stock options, RSUs, LTPP and employee stock purchase plans	0.3	0.9
Shares repurchased under the stock repurchase program and shares withheld for taxes under stock options, RSUs, and LTPP	0.1	0.2

As of February 28, 2023, $532.4 million remained of the $600 million share repurchase program authorization approved by our Board of Directors in November 2019.

9.    ACCUMULATED OTHER COMPREHENSIVE LOSS

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

	February 28, 2023		November 30, 2022
Foreign currency translation adjustment (1)	$	(356.3)	$	(405.3)
Unrealized gain on foreign currency exchange contracts	(0.4)		3.8
Unamortized value of settled interest rate swaps	(0.8)		(0.6)
Pension and other postretirement costs	(79.6)		(78.5)
Accumulated other comprehensive loss	$	(437.1)	$	(480.6)

(1)During the three months ended February 28, 2023, the foreign currency translation adjustment of accumulated other comprehensive loss increased on a net basis by $49.0 million, inclusive of $5.8 million of unrealized losses associated with net investment hedges. These net investment hedges are more fully described in note 3.

The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income (in millions):

	Three months ended				Affected Line Items in the Condensed Consolidated Income Statement
	February 28, 2023		February 28, 2022
(Gains)/losses on cash flow hedges:
Interest rate derivatives	$	(0.1)	$	(0.1)	Interest expense
Foreign exchange contracts	(1.2)		0.2		Cost of goods sold
Total before tax	(1.3)		0.1
Tax effect	0.3		—		Income tax expense
Net, after tax	$	(1.0)	$	0.1
Amortization of pension and postretirement benefit adjustments:
Amortization of net actuarial losses (1)	$	(0.4)	$	2.6	Other income, net
Total before tax	(0.4)		2.6
Tax effect	0.1		(0.6)		Income tax expense
Net, after tax	$	(0.3)	$	2.0

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(1)This accumulated other comprehensive income (loss) component is included in the computation of total pension (income) and other postretirement benefits expense (refer to note 5 for additional details).

10.    BUSINESS SEGMENTS

We operate in two business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, herbs, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce under the “McCormick” brand and a variety of brands around the world, including “French’s”, “Frank’s RedHot”, “OLD BAY”, “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Cholula”, “Schwartz”, “Club House”, “Kamis”, “DaQiao”, “La Drogheria”, “Stubb's”, and “Gourmet Garden”. Our flavor solutions segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors, with the exception of our business in China, where foodservice sales are managed by and reported in our consumer segment.

In each of our segments, we produce and sell many individual products which are similar in composition and nature. With their primary attribute being flavor, the products within each of our segments are regarded as fairly homogenous. It is impracticable to segregate and identify sales and profits for each of these individual product lines.

We measure segment performance based on operating income excluding special charges, as this activity is managed separately from the business segments. We also exclude transaction and integration expenses related to our acquisitions from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include the amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the businesses.

Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for purposes of internal reporting, performance evaluation, or capital allocation. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.

 

	Consumer		Flavor Solutions		Total
			(in millions)
Three months ended February 28, 2023
Net sales	$	909.5	$	656.0	$	1,565.5
Operating income excluding special charges	173.4		53.4		226.8
Income from unconsolidated operations	13.8		0.2		14.0
Three months ended February 28, 2022
Net sales	$	926.1	$	596.3	$	1,522.4
Operating income excluding special charges and transaction and integration expenses	167.0		60.1		227.1
Income from unconsolidated operations	8.4		0.9		9.3

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A reconciliation of operating income excluding special charges and transaction and integration expenses, to operating income is as follows (in millions):

	Consumer		Flavor Solutions		Total
Three months ended February 28, 2023
Operating income excluding special charges	$	173.4	$	53.4	$	226.8
Less: Special charges	19.0		8.8		27.8
Operating income	$	154.4	$	44.6	$	199.0
Three months ended February 28, 2022
Operating income excluding special charges and transaction and integration expenses	$	167.0	$	60.1	$	227.1
Less: Special charges	3.6		15.9		19.5
Less: Transaction and integration expenses	—		0.7		0.7
Operating income	$	163.4	$	43.5	$	206.9

The following table sets forth our net sales, by geographic area, for the three and three months ended February 28, 2023 and 2022 (in millions):

	Americas		EMEA		Asia/Pacific		Total
Three months ended February 28, 2023	$	1,094.7	$	283.9	$	186.9	$	1,565.5
Three months ended February 28, 2022	1,022.5		290.5		209.4		1,522.4

ITEM 2.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 from the perspective of management. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto, included in Item 1 of this report. We use certain non-GAAP information – more fully described below under the caption Non-GAAP Financial Measures – 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. Unless otherwise noted, the dollar and share information in the charts and tables in MD&A are in millions, except per share data.

Business profile

McCormick is a global leader in flavor. We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry – retailers, food manufacturers and the foodservice business. In fiscal year 2022, approximately 38% of our sales were outside of the U.S. 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. We manage our business in two business segments, consumer and flavor solutions.

Recent Events

Recent events impacting our business include global economic conditions, inflationary cost environment, disruption in our supply chain, the COVID-19 pandemic, and the ongoing conflict between Russia and Ukraine, each of which are further discussed below. We expect each of these factors will impact our fiscal 2023 performance. We expect elevated levels of cost inflation to persist throughout 2023, although at lower levels than experienced in 2022. We anticipate in 2023 that these headwinds will be partially mitigated by pricing actions taken in response to inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates and, as a result, we expect that our interest expense will increase in 2023. While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, its severity and duration, the continued availability and effectiveness of vaccines and actions taken by third parties or by government authorities in response, including restrictions, laws or regulations, or other responses. Also, the

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ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty.

While the impact of these factors remains uncertain, we continue to evaluate the extent to which they may impact our business, financial condition, or results of operations. These and other uncertainties could result in changes to our current expectations. The potential effects of these recent events also could impact us in a number of other ways including, but not limited to, variations in the level of our sales, profitability, cash flows, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, valuation of our pension assets and obligations, credit risks of our customers and counterparties, laws and regulations affecting our business, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets.

Global Economic Conditions and Inflationary Cost Environment – During fiscal 2021 and 2022, we experienced inflationary cost increases in our commodities, packaging materials and transportation costs. We expect that these inflationary cost increases will continue but we expect they will be partially mitigated by our planned 2023 pricing actions, our organization and streamlining actions, including our Global Operating Effectiveness (GOE) program, and by our Comprehensive Continuous Improvement (CCI) program-led cost savings. There has been, and we expect there could continue to be, a difference between the timing of when the impact of cost inflation occurs and when these pricing and other actions impact our results of operations. Additionally, in some instances the pricing actions we take have been impacted by price elasticity which unfavorably impacts our sales volume and mix.

Our interest expense is impacted by the overall global economic and interest rate environment. The inflationary environment has also resulted in central banks raising short-term interest rates. For the quarter ended February 28, 2023, we had total outstanding variable rate debt of approximately $1,361 million. 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 achieve a desired mix of fixed and variable rate debt. As of both February 28, 2023 and 2022, we had total outstanding fixed to variable interest rate swaps of $600 million notional. We expect that our interest expense will increase in 2023 as a result of the higher interest rate environment.

Supply Chain Disruption – Over the past several years, as we have responded to demand volatility, COVID-19 and overall macroeconomic conditions, we have experienced pressures in our supply chain, including inefficiencies associated with demand volatility. These pressures are in addition to the inflationary cost environment previously noted and have included strained availability of raw materials and transportation capacity, expedited shipping costs, costs incurred in response to COVID-19, incremental warehouse costs to store increased inventory associated with maintaining additional safety stock, additional use of co-manufacturers, and labor shortages and absenteeism, in part, associated with COVID-19. The severity of those supply chain pressures varied over 2022, 2021 and 2020.

In response to the general economic conditions, inflationary cost environment, and the supply chain pressures and related inefficiencies, we expect to eliminate approximately $125 million of costs during 2023 and 2024, including $100 million of supply chain costs and $25 million of costs across the remainder of the organization under our GOE program. The supply chain actions we are taking, and will continue to evaluate, include returning our manufacturing facilities to a more normal shift schedule, reducing headcount, and stabilizing turnover rates to reduce our labor costs; increasing our manufacturing capacity and automation to respond to the evaluated demand as well as reduce the use of co-manufacturers; and executing and evaluating initiatives to reduce the safety stock levels of our inventory that were put in place to protect against supply disruptions. The elimination of other costs across the organization will include a voluntary retirement program and other streamlining initiatives. We expect our GOE program, and organization and streamlining actions to deliver savings of approximately $75 million in 2023.

COVID-19 – The COVID-19 pandemic has impacted our operating results.

There still remains uncertainty around the COVID-19 pandemic. The ultimate impact depends on the length and severity of the pandemic, including new strains and variants of the virus; infection rates in the markets where we do business; the federal, state, and local government actions taken in response; vaccine effectiveness; and the macroeconomic environment. We will continue to evaluate the extent to which the COVID-19 pandemic impacts our business, consolidated results of operations and financial condition.

The extent and nature of government actions, customer and end-consumer demand varied during 2022, 2021 and 2020. However, the impact of COVID-19 during the quarters ended February 28, 2023 and 2022, based upon the then-current extent and severity of the COVID-19 pandemic within the countries, localities and markets where we do business, were generally comparable with the exception of the impact on our results of operations in the Asia/Pacific region, specifically within China where we experienced a negative impact to consumer behavior in 2022, as compared to 2021, related to the impact of restrictive measures imposed associated with COVID-19 resurgences. We expect the impact of COVID-19 to be mitigated from that experienced in 2022.

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Conflict Between Russia and Ukraine – The ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty. It is not possible to predict the broader or longer-term consequences of this conflict, or the sanctions imposed to date, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, energy and fuel prices, currency exchange rates and financial markets. We announced on March 11, 2022, that we were suspending our business operations in Russia. In May 2022, we made the decision to exit our consumer business in Russia. Our operations in Ukraine were also temporarily paused in order to focus on the safety of our employees, but we have resumed, where appropriate, a reduced level of operating activities. While neither our operations in Russia nor Ukraine constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations.

2023 Outlook

In 2023, we expect to grow net sales over the 2022 level by 5% to 7%, which includes a minimal impact of foreign currency rates. We anticipate that the 2023 sales growth will be driven by pricing actions, including the completion of those executed in 2022 combined with new pricing actions we are taking in 2023. We expect volume and product mix to be impacted by pricing elasticities, although, consistent with 2022, at a lower level than we have experienced historically. We anticipate that our volume and product mix will also be impacted by the combined impact of lapping last year’s COVID-related disruptions in China, the divestiture of our Kitchen Basics brand in the third quarter of last year, the exit of our consumer business in Russia during the second quarter of last year, and the pruning of low margin businesses.

We expect our 2023 gross profit margin to range from 25 basis points to 75 basis points higher than our gross profit margin of 35.8% in 2022. The projected 2023 increase in gross profit margin is principally due to the net effect of (i) the favorable impact of pricing actions in response to increased commodity, packaging materials and transportation costs, (ii) the favorable impact of anticipated GOE program and CCI cost savings, and (iii) a low to mid-teen percentage impact of inflation in 2023 compared to 2022. As we recover the cost inflation of our pricing that has lagged in the past two years, we expect cost pressures to be more than offset by pricing actions and our expected cost savings in 2023.

In 2023, we expect an increase in operating income of 10% to 12%, which includes a minimal impact from foreign currency rates, over the 2022 level. The projected 2023 change in operating income includes the effects of cost savings from our Global Operating Effectiveness Program and lapping the COVID-19 restrictive measures in China during 2022, which we anticipate will be partially offset by increased employee incentive compensation and the impact of our Kitchen Basics divestiture. Our CCI-led cost savings target in 2023 is approximately $85 million. We expect that the absence of $2.2 million of integration expenses related to the FONA acquisition in 2022 to favorably impact operating income in 2023. We also expect approximately $50 million of special charges in 2023 that relate to previously announced organization and streamlining actions; in 2022, special charges were $51.6 million. Excluding special charges and transaction and integration expenses, we expect 2023’s adjusted operating income to increase by 9% to 11%, which includes a minimal impact from foreign currency rates.

We estimate that our interest expense will range from $200 to $210 million in 2023, with the increase over 2022 being driven by the higher interest-rate environment which will impact our variable rate debt. In 2023, we will also lap the favorable effects associated with the termination of interest rate contracts. These contracts were entered into to manage the interest rate risk associated with our then anticipated issuance of fixed rate debt, which favorably impacted other income, net in 2022.

Our underlying effective tax rate is projected to be higher in 2023 than in 2022. We estimate that our 2023 effective tax rate, including the net favorable impact of anticipated discrete tax items, will be 22% as compared to 20.7% in 2022. Excluding projected taxes associated with special charges, we estimate that our adjusted effective tax rate will be approximately 22% in 2023, as compared to an adjusted effective tax rate of 20.9% in 2022.

Diluted earnings per share was $2.52 in 2022. Diluted earnings per share for 2023 is projected to range from $2.42 to $2.47. Excluding the per share impact of (i) special charges of $51.6 million; (ii) integration expenses of $2.2 million; and (iii) the gain realized upon our sale of Kitchen Basics of $49.6 million, adjusted diluted earnings per share was $2.53 in 2022. Adjusted diluted earnings per share, excluding an estimated per share impact from special charges of $0.14, is projected to range from $2.56 to $2.61 in 2023. We expect adjusted diluted earnings per share to grow by 1% to 3% over adjusted diluted earnings per share of $2.53 in 2022, including a minimal impact from foreign currency rates.

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RESULTS OF OPERATIONS – COMPANY

	Three months ended
	February 28, 2023			February 28, 2022
Net sales	$	1,565.5		$	1,522.4
Percent increase	2.8		%	2.8		%
Components of percent change in net sales – increase (decrease):
Pricing actions	10.6		%	4.8		%
Volume and product mix	(4.6)		%	(1.5)		%
Acquisitions	—		%	0.7		%
Divestiture	(0.7)		%	—		%
Foreign exchange	(2.5)		%	(1.2)		%
Gross profit	$	562.9		$	560.4
Gross profit margin	36.0		%	36.8		%

Sales for the first quarter of 2023 increased by 2.8% from the prior year level and increased by 5.3% on a constant currency basis (that is, excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). Pricing actions, taken in response to the inflationary cost environment, increased sales by 10.6% compared to the prior year period. Unfavorable volume and product mix decreased sales by 4.6%, including the impact of price elasticity. The impact of COVID-19 resurgences in China and the exit of our consumer operations in Russia contributed approximately 1.1% to that decline. Both our flavor solutions and consumer segments experienced unfavorable volume and product mix. The divestiture of our Kitchen Basics business unfavorably impacted sales by 0.7% as compared to the prior year period. Sales were also impacted by unfavorable foreign currency rates that decreased net sales by 2.5% in the first quarter of 2023 compared to the year-ago quarter and is excluded from our measure of sales growth of 5.3% on a constant currency basis.

Gross profit for the first quarter of 2023 increased by $2.5 million, or 0.4%, from the comparable period in 2022. Our gross profit margin for the three months ended February 28, 2023 was 36.0%, a decrease of 80 basis points from the comparable period in 2022. The decrease in gross profit margin in the quarter ended February 28, 2023 was driven by the margin dilutive impact of pricing actions taken in response to the inflationary cost environment, and higher conversion costs, each as compared to the 2022 period. These unfavorable impacts were partially offset by the favorable impact of pricing actions in response to increased costs and cost savings led by our CCI and GOE programs.

	Three months ended
	February 28, 2023			February 28, 2022
Selling, general & administrative expense (SG&A)	$	336.1		$	333.3
Percent of net sales	21.5		%	21.9		%

SG&A increased by $2.8 million in the first quarter of 2023 as compared to the 2022 level, as increased distribution costs and higher performance-based employee incentive expense were partially offset by favorable investment results associated with non-qualified retirement plan assets and CCI-led and GOE cost savings, all as compared to the 2022 period. SG&A as a percentage of net sales decreased by 40 basis points from the prior year level as the higher net sales base more than offset the unfavorable net impact of the previously mentioned factors, all as compared to the prior year period.

	Three months ended
	February 28, 2023		February 28, 2022
Total special charges	$	27.8	$	19.5

During the three months ended February 28, 2023, we recorded $27.8 million of special charges. Those special charges principally consisted of $24.8 million associated with the GOE program, including $19.7 million under our voluntary retirement program, $0.9 million associated with the transition of a manufacturing facility in Europe, Middle East, and Africa (EMEA), and streamlining actions of $1.3 million in the Americas region, and $0.8 million in the EMEA region. During the three months ended February 28, 2022, we recorded $19.5 million of special charges, consisting principally of $14.9 million associated with the transition of a manufacturing facility in EMEA, streamlining actions of $2.1 million in the Americas region, and $1.5 million in the EMEA region. Details with respect to the composition of special charges are included in note 2 of the notes to the accompanying financial statements.

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	Three months ended
	February 28, 2023		February 28, 2022
Total integration expenses	$	—	$	0.7

During the three months ended February 28, 2022, we recorded $0.7 million of integration expenses related to our acquisition of FONA.

	Three months ended
	February 28, 2023		February 28, 2022
Interest expense	$	50.6	$	33.1
Other income, net	11.1		6.2

Interest expense increased by $17.5 million in the three months ended February 28, 2023, as compared to the prior year period, as the effects of the higher interest rate environment more than offset lower average borrowing levels. Other income, net for the three months ended February 28, 2023 increased by $4.9 million, as compared to the prior year period, which was primarily driven by higher interest income, also principally associated with the higher interest rate environment.

	Three months ended
	February 28, 2023			February 28, 2022
Income from consolidated operations before income taxes	$	159.5		$	180.0
Income tax expense	34.4			34.4
Effective tax rate	21.6		%	19.1		%

The provision for income taxes is based on the 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 include, but are not limited to, excess tax benefits or expense associated with stock-based compensation, 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, the settlement of tax audits, changes in enacted tax rates, changes in the assessment of deferred tax valuation allowances, and the tax effects of certain intra-entity asset transfers (other than inventory).

Income tax expense for the three months ended February 28, 2023 included $3.8 million of net discrete tax benefit consisting principally of $3.2 million of tax benefits associated with the adjustment of a valuation allowance due to changes in judgment about the realizability of the deferred tax asset, $0.8 million of tax benefits related to the revaluation of deferred taxes resulting from changes in tax rates, and $0.2 million of tax expense associated with stock-based compensation.

Income tax expense for the three months ended February 28, 2022 included $10.3 million of net discrete tax benefits consisting primarily of $7.6 million of excess tax benefits associated with stock-based compensation and $2.5 million of tax benefits related to the revaluation of deferred taxes resulting from legislation enacted during the period.

	Three months ended
	February 28, 2023		February 28, 2022
Income from unconsolidated operations	$	14.0	$	9.3

Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased by $4.7 million for the three months ended February 28, 2023, as compared to the year ago period. The increase was driven by higher earnings of our largest joint venture, McCormick de Mexico.

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The following table outlines the major components of the change in diluted earnings per share from 2022 to 2023:

	Three months ended February 28,
2022 Earnings per share – diluted	$	0.57
Increase in special charges, net of taxes	(0.01)
Increase in interest expense	(0.05)
Increase in other income	0.01
Increase in income from unconsolidated operations	0.02
Impact of change in effective income tax rate, excluding taxes on special charges	(0.02)
2023 Earnings per share – diluted	$	0.52

RESULTS OF OPERATIONS — SEGMENTS

We measure the performance of our business segments based on operating income, excluding special charges. We also exclude transaction and integration expenses related to our acquisitions from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include costs directly associated with that acquisition and costs associated with integrating the businesses. See note 10 of the notes to the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges and transaction and integration expenses, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income.

CONSUMER SEGMENT

	Three months ended
	February 28, 2023			February 28, 2022
Net sales	$	909.5		$	926.1
Percent decrease	(1.8)		%	(2.2)		%
Segment operating income	$	173.4		$	167.0
Segment operating income margin	19.1		%	18.0		%

In the first quarter of 2023, sales of our consumer segment decreased by 1.8% as compared to the first quarter of 2022 and increased by 0.8% on a constant currency basis. That 1.8% decrease included higher sales of our consumer business in the Americas regions, which was more than offset by lower sales in the EMEA and Asia/Pacific regions, all as compared to the prior year quarter. Pricing actions, taken in response to increased costs, favorably impacted sales by 8.7% as compared to the prior year period. Unfavorable volume and product mix decreased consumer segment sales by 6.8% in the first quarter of 2023 as compared to the same period last year, including the impact of price elasticity as well as the negative impact of 1.9% due to the impact of COVID-19 resurgences in China and the exit of our consumer operations in Russia, all as compared to the first quarter of 2022. The divestiture of our Kitchen Basics business unfavorably impacted sales by 1.1% as compared to 2022. Sales in the first quarter of 2023 reflected an unfavorable impact from foreign currency rates that decreased consumer segment sales by 2.6% compared to the year-ago quarter and is excluded from our measure of sales growth of 0.8% on a constant currency basis.

In the Americas region, consumer sales increased 3.3% in the first quarter of 2023 as compared to the same quarter of 2022 and increased by 3.8% on a constant currency basis. Pricing actions, taken in response to inflationary cost environment, increased sales by 10.0% as compared to the prior year period. For the first quarter of 2023, unfavorable volume and product mix decreased sales by 4.5% as compared to the corresponding period in 2022. This reduction included the unfavorable impact of price elasticity. The sale of our Kitchen Basics business unfavorably impacted sales by 1.7% as compared to 2022. The unfavorable impact of foreign currency rates decreased sales by 0.5% in the quarter and is excluded from our measure of sales growth of 3.8% on a constant currency basis.

In the EMEA region, consumer sales decreased 8.8% in the first quarter of 2023 as compared to the same quarter of 2022 and decreased by 2.1% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 7.3% as compared to the 2022 period. Sales were impacted by unfavorable volume and product mix during the first quarter of 2023 that decreased sales by 9.4% from the prior year level, including a 3.9% impact associated with the exit

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of our consumer operations in Russia. Lower sales of our consumer business in France also contributed to the decrease as compared to the prior year period. During the first quarter of 2023, an unfavorable impact from foreign currency rates decreased sales by 6.7% compared to the year-ago period and is excluded from our measure of sales decline of 2.1% on a constant currency basis.

In the Asia/Pacific region, consumer sales decreased 15.1% in the first quarter of 2023 as compared to the first quarter of 2022 and decreased by 8.1% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, increased sales by 4.7% as compared to the prior year period. For the quarter ended February 28, 2023, unfavorable volume and product mix decreased sales by 12.8%, including a 7.7% impact of COVID-19 resurgences in China and a 2.9% impact associated with the exit of our rice product line in India. During the first quarter of 2023, an unfavorable impact from foreign currency rates decreased sales by 7.0% compared to the year-ago period and is excluded from our measure of sales growth of 8.1% on a constant currency basis.

Segment operating income for our consumer segment increased by $6.4 million, or 3.8%, in the first quarter of 2023 over the first quarter of 2022. The increase in segment operating income was driven by the effects of an increase in gross profit more than offsetting the lower level of sales, as previously described, and lower SG&A expenses, all as compared to the prior year period. Segment operating margin for our consumer segment increased by 110 basis points from the first quarter of 2022 to 19.1% in the first quarter of 2023. That increase was principally the result of an increase in gross margin, including the impacts of pricing actions and CCI-led and GOE cost savings, as compared to 2022. On a constant currency basis, segment operating income for our consumer segment increased by 6.1% in the first quarter of 2023 in comparison to the same period in 2022.

FLAVOR SOLUTIONS SEGMENT

	Three months ended
	February 28, 2023			February 28, 2022
Net sales	$	656.0		$	596.3
Percent increase	10.0		%	11.5		%
Segment operating income	$	53.4		$	60.1
Segment operating income margin	8.1		%	10.1		%

In the first quarter of 2023, sales of our flavor solutions segment increased by 10.0% as compared to the first quarter of 2022, and increased by 12.3% on a constant currency basis. Pricing actions, taken in response to increased costs, across all regions increased sales by 13.5% in the first quarter of 2023 and was partially offset by 1.2% of unfavorable volume and product mix, both as compared to the prior year quarter. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 2.3% compared to the year-ago quarter and is excluded from our measure of sales growth of 12.3% on a constant currency basis.

In the Americas region, flavor solutions sales increased by 12.7% in the first quarter of 2023 as compared to the first quarter of 2022 and increased by 12.2% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 12.9% during the quarter ended February 28, 2023 as compared to the prior year period. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 0.7% during the first quarter of 2023, including the effects of growth in sales to packaged food and beverage companies, as compared to the year ago period. A favorable impact from foreign currency rates increased sales by 0.5% compared to the first quarter of 2022 and is excluded from our measure of sales growth of 12.2% on a constant currency basis.

In the EMEA region, flavor solutions sales increased by 6.8% in the first quarter of 2023 as compared to the first quarter of 2022 and increased by 16.8% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 19.4% in the first quarter of 2023 as compared to the prior period level. Unfavorable volume and product mix decreased segment sales in the EMEA region by 2.6% as compared to the corresponding period in 2022. An unfavorable impact from foreign currency rates decreased sales by 10.0% compared to the first quarter of 2022 and is excluded from our measure of sales growth of 16.8% on a constant currency basis.

In the Asia/Pacific region, flavor solutions sales decreased 1.1% in the first quarter of 2023 as compared to the first quarter of 2022 and increased by 5.1% on a constant currency basis. Pricing actions, taken in response to the inflationary cost environment, favorably impacted sales by 6.2% as compared to the prior year period. Unfavorable volume and product mix decreased segment sales by 1.1% in the first quarter of 2023 which included the impact of increased COVID-19 resurgences in China. An unfavorable impact from foreign currency rates decreased sales by 6.2% compared to the first quarter of 2022 and is excluded from our measure of sales growth of 5.1% on a constant currency basis.

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Segment operating income for our flavor solutions segment decreased by $6.7 million, or 11.1%, in the first quarter of 2023 as compared to the first quarter of 2022. The decrease in segment operating income was driven by the effect of higher sales, as previously described, which was more than offset by a reduction in gross profit margin, as the favorable effects of pricing action and CCI-led and GOE cost savings were more than offset by increased conversion costs, including the impacts of scrapped inventory as well as costs related to supply chain investments, and a higher level of SG&A expenses, all as compared to the prior year period. Segment operating margin for our flavor solutions segment decreased by 200 basis points from the prior year level to 8.1% in the first quarter of 2023. That decrease was principally the result of a decrease in gross margin as previously described. On a constant currency basis, segment operating income for our flavor solutions segment decreased by 10.7% in the first quarter of 2023 as compared to the same period in 2022.

MARKET RISK SENSITIVITY

We utilize derivative financial instruments to enhance our ability to manage risk, including foreign exchange 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. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines.

Foreign Exchange Risk

We are exposed to foreign currency risk 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 with highly-rated financial institutions to reduce fluctuations in the long or short currency positions. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. All derivatives are designated as hedges.

The following table sets forth the notional values and unrealized net gain (loss) of the portfolio of our forward foreign currency and cross currency swap contracts:

	February 28, 2023		November 30, 2022
Forward foreign currency:
Notional value	$	509.6	$	560.5
Unrealized net gain	4.1		9.5
Cross currency swaps:
Notional value	924.6		906.1
Unrealized net gain	28.1		36.2

The outstanding notional value is a result of our decisions on foreign currency exposure coverage, based on our foreign currency and foreign currency translation exposures.

Interest Rate Risk

We manage our interest rate exposure by entering into both fixed and variable rate debt arrangements. We use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments, and all derivatives are designated as hedges.

The following table sets forth the notional values and unrealized net gain (loss) of our interest rate swap contracts:

	February 28, 2023		November 30, 2022
Notional value	$	600.0	$	600.0
Unrealized net (loss)	(54.3)		(42.4)

The change in fair values of our interest rate swap contracts is due to changes in interest rates on the notional amounts outstanding as of each date as well as the remaining duration of our interest rate derivative contracts.

Commodity Risk

We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw materials are dairy products, pepper, onion, capsicums (red peppers and paprika), garlic, wheat products, vegetable oils, and vanilla. While future

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movements of raw material costs are uncertain, we respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery and customer price adjustments. We generally have not used derivatives to manage the volatility related to this risk.

Credit Risk

The customers of our consumer segment are predominantly food retailers and food wholesalers. Consolidations in these industries have created larger customers. In addition, competition has increased with the growth in alternative channels including mass merchandisers, dollar stores, warehouse clubs, discount chains and e-commerce. This has caused some customers to be less profitable and increased our exposure to credit risk. Some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties. We believe that our allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.

NON-GAAP FINANCIAL MEASURES

The following table includes financial measures of adjusted operating income, adjusted operating income margin, 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 and income 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. Expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.

•Transaction and integration expenses – We exclude certain costs associated with our acquisitions and their subsequent integration into the Company. Such costs, which we refer to as Transaction and integration expenses, include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventories, together with the impact of discrete tax items, if any, directly related to each acquisition.

•Gain on sale of Kitchen Basics – We exclude the gain realized upon our sale of the Kitchen Basics business in August 2022. As more fully described in note 17 in our Annual Report on Form 10-K for the year ended November 30, 2022, the pre-tax gain associated with the sale was $49.6 million and is included in Other income, net in our consolidated income statement for the year ended November 30, 2022.

Details with respect to the composition of transaction and integration expenses and special charges set forth below are included in note 2 of the notes to the accompanying financial statements. Details with respect to the composition of transaction and integration expenses, special charges and gain on sale of Kitchen Basics for the year ended November 30, 2022 are included in notes 2 and 3 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2022.

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.

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A reconciliation of these non-GAAP financial measures to the related GAAP financial measures follows:

	For the year ended November 30, 2022			For the three months ended						Estimated for the year ending November 30, 2023
				February 28, 2023			February 28, 2022
Operating income	$	863.6		$	199.0		$	206.9
Impact of transaction and integration expenses	2.2			—			0.7
Impact of special charges (1)	51.6			27.8			19.5
Adjusted operating income	$	917.4		$	226.8		$	227.1
Adjusted operating income margin (2)	14.4		%	14.5		%	14.9		%
Income tax expense	$	168.6		$	34.4		$	34.4
Impact of transaction and integration expenses	0.6			—			0.2
Impact of special charges	13.3			6.5			4.9
Impact of sale of Kitchen Basics	(11.6)			—			—
Adjusted income tax expense	$	170.9		$	40.9		$	39.5
Adjusted income tax rate (3)	20.9		%	21.8		%	19.7		%
Net income	$	682.0		$	139.1		$	154.9
Impact of transaction and integration expenses	1.6			—			0.5
Impact of special charges (1)	38.3			21.3			14.6
Impact of after-tax gain on sale of Kitchen Basics	(38.0)			—			—
Adjusted net income	$	683.9		$	160.4		$	170.0
Earnings per share – diluted	$	2.52		$	0.52		$	0.57		$2.42 to $2.47
Impact of transaction and integration expenses	0.01			—			—			—
Impact of special charges (1)	0.14			0.07			0.06			0.14
Impact of after-tax gain on sale of Kitchen Basics	(0.14)			—			—			—
Adjusted earnings per share – diluted	$	2.53		$	0.59		$	0.63		$2.56 to $2.61

(1) Special charges are more fully described in note 2 of notes to our accompanying consolidated financial statements. Special charges for the year ended November 30, 2022 include a $10.0 million non-cash intangible asset impairment charge associated with our exit of our business operations in Russia. We exited our Kohinoor rice product line in India in the fourth quarter of fiscal 2021. Special charges for the year ended November 30, 2022 include a $13.6 million gain associated with the sale of the Kohinoor brand name.