Company Quick10K Filing
Quick10K
McCormick
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$123.64 132 $16,340
10-K 2018-11-30 Annual: 2018-11-30
10-K 2018-11-30 Annual: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-K 2017-11-30 Annual: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-K 2016-11-30 Annual: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-K 2015-11-30 Annual: 2015-11-30
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-11-29 Officers, Amend Bylaw, Exhibits
8-K 2018-09-27 Earnings, Exhibits
8-K 2018-06-28 Earnings, Exhibits
8-K 2018-04-03 Shareholder Vote
K Kellogg
CAG Conagra Brands
INGR Ingredion
NOMD Nomad Foods
SMPL Simplicity Bancorp
MED Medifast
TWNK Hostess Brands
DF Dean Foods
LWAY Lifeway Foods
FTFT Future Fintech Group
MKC 2018-11-30
Part I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV.
Item 15. Exhibits, Financial Statement Schedules
EX-21 mkc-11302018xex21.htm
EX-23 mkc-11302018xex23.htm
EX-31.1 mkc-11302018xex311.htm
EX-31.2 mkc-11302018xex312.htm
EX-32.1 mkc-11302018xex321.htm
EX-32.2 mkc-11302018xex322.htm

McCormick Earnings 2018-11-30

MKC 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 mkc-11302018x10kxq42018.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-14920
 
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
 
Maryland
52-0408290
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
24 Schilling Road, Suite 1, Hunt Valley, Maryland
21031
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (410) 771-7301
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, No Par Value
New York Stock Exchange
Common Stock Non-Voting, No Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Not applicable.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   ý  No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes   ¨  No  ý
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  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Check one:
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨


Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the Voting Common Stock held by non-affiliates at May 31, 2018: $1,000,702,694
The aggregate market value of the Non-Voting Common Stock held by non-affiliates at May 31, 2018: $12,249,033,270
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Number of Shares Outstanding
Date
Common Stock
9,545,617

December 31, 2018
Common Stock Non-Voting
122,602,644

December 31, 2018

DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of 10-K into Which Incorporated
Proxy Statement for
McCormick’s March 27, 2019
Annual Meeting of Stockholders
(the “2019 Proxy Statement”)
Part III





PART I.
As used herein, references to “McCormick,” “we,” “us” and “our” are to McCormick & Company, Incorporated and its consolidated subsidiaries or, as the context may require, McCormick & Company, Incorporated only.
ITEM 1. BUSINESS
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retailers, food manufacturers and foodservice businesses. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. Our major sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, India, Central America, Thailand and South Africa. McCormick & Company, Incorporated was formed in 1915 under Maryland law as the successor to a business established in 1889.
In August 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately $4.21 billion, net of acquired cash of $24.3 million. The acquired market-leading brands of RB Foods include French’s®, Frank’s RedHot® and Cattlemen’s®, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. Condiments category and provide significant international growth opportunities for our consumer and flavor solutions segments. At the time of the acquisition, annual sales of RB Foods were approximately $570 million. The results of RB Foods’ operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.
Business Segments
We operate in two business segments, consumer and flavor solutions. Demand for flavor is growing globally, and across both segments we have the customer base and product breadth to participate in all types of eating occasions. Our products deliver flavor when cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer our customers and consumers a range of products to meet the increasing demand for certain product attributes such as organic, reduced sodium, gluten-free and non-GMO (genetically modified organisms) and that extend from premium to value-priced.

Consistent with market conditions in each segment, our consumer segment has a higher overall profit margin than our flavor solutions segment. In 2018, the consumer segment contributed approximately 61% of sales and 69% of operating income, and the flavor solutions segment contributed approximately 39% of sales and 31% of operating income.
For a discussion of our recent acquisition activity, please refer to “Management’s Discussion and Analysis–Acquisitions” and note 2 of the accompanying financial statements.
Consumer Segment. From locations around the world, our brands reach consumers in approximately 150 countries and territories. Our leading brands in the Americas include McCormick®, French’s®, Frank’s RedHot®, Lawry’s® and Club House®, as well as brands such as Gourmet Garden® and OLD BAY®. We also market authentic regional and ethnic brands such as Zatarain’s®, Stubb's®, Thai Kitchen® and Simply Asia®. In the Europe, Middle East and Africa (EMEA) region, our major brands include the Ducros®, Schwartz®, Kamis® and Drogheria & Alimentari® brands of spices, herbs and seasonings and an extensive line of Vahiné® brand dessert items. In China, we market our products under the McCormick and DaQiao® brands. In Australia, we market our spices and seasonings under the McCormick brand, our dessert products under the Aeroplane® brand, and packaged chilled herbs under the Gourmet Garden brand. In India, we market our spices and rice products under the Kohinoor® brand. Elsewhere in the Asia/Pacific region, we market our products under the McCormick brand as well as other brands.
Our customers span a variety of retailers that include grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands.
Approximately half of our consumer segment sales are spices, herbs and seasonings. For these products, we are a category leader in our primary markets. There are numerous competitive brands of spices, herbs and seasonings in the U.S. and additional brands in international markets. Some are owned by large food manufacturers, while others are supplied by small privately-owned companies. In this competitive environment, we are leading with innovation





and brand marketing, and applying our analytical tools to help customers optimize the profitability of their spice and seasoning sales while simultaneously working to increase our sales and profit.
Flavor Solutions Segment. In our flavor solutions segment, we provide a wide range of products to multinational food manufacturers and foodservice customers. The foodservice customers are supplied with branded, packaged products both directly and indirectly through distributors. We supply food manufacturers and foodservice customers with customized flavor solutions, and many of these customer relationships have been active for decades. Our range of flavor solutions remains one of the broadest in the industry and includes seasoning blends, spices and herbs, condiments, coating systems and compound flavors. In addition to a broad range of flavor solutions, our long-standing customer relationships are evidence of our effectiveness in building customer intimacy. Our customers benefit from our expertise in many areas, including sensory testing, culinary research, food safety and flavor application.
Our flavor solutions segment has a number of competitors. Some tend to specialize in a particular range of products and have a limited geographic reach. Other competitors include larger publicly held flavor companies that are more global in nature, but which also tend to specialize in a narrower range of flavor solutions than McCormick.
Raw Materials
The most significant raw materials used in our business are dairy products, pepper, vanilla, garlic, capsicums (red peppers and paprika), onion, rice and wheat flour. Pepper and other spices and herbs are generally sourced from countries other than the United States. Other raw materials, like dairy products and onion, are primarily sourced locally, either within the United States or from our international locations. Because the raw materials are agricultural products, they are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, and other factors beyond our control.
We respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our Comprehensive Continuous Improvement ("CCI") program.
Customers
Our products are sold directly to customers and also through brokers, wholesalers and distributors. In the consumer segment, products are then sold to consumers under a number of brands through a variety of retail channels, including grocery, mass merchandise, warehouse clubs, discount and drug stores, and e-commerce. In the flavor solutions segment, products are used by food and beverage manufacturers as ingredients for their finished goods and by foodservice customers as ingredients for menu items to enhance the flavor of their foods. Customers for the flavor solutions segment include food manufacturers and the foodservice industry supplied both directly and indirectly through distributors.
We have a large number of customers for our products. Sales to one of our consumer segment customers, Wal-Mart Stores, Inc., accounted for approximately 11% of consolidated sales in 2018, 2017 and 2016. Sales to one of our flavor solutions segment customers, PepsiCo, Inc., accounted for approximately 10% of consolidated sales in 2018 and approximately 11% in both 2017 and 2016. In 2018, 2017 and 2016 the top three customers in our flavor solutions segment represented between 48% and 54% of our global flavor solutions sales.
The dollar amount of backlog orders for our business is not material to an understanding of our business, taken as a whole. No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
Trademarks, Licenses and Patents
We own a number of trademark registrations. Although in the aggregate these trademarks are material to our business, the loss of any one of those trademarks, with the exception of our “McCormick,” “French’s ,” “Frank’s RedHot,” “Lawry’s,” “Zatarain’s,” “Stubb's,” “Club House,” “Ducros,” “Schwartz,” “Vahiné,” "OLD BAY," "Simply Asia," "Thai Kitchen," "Kitchen Basics," “Kamis,” “Drogheria & Alimentari,” "DaQiao," “Kohinoor” and "Gourmet Garden" trademarks, would not have a material adverse effect on our business. The “Mc – McCormick” trademark is extensively used by us in connection with the sale of our food products in the U.S. and certain non-U.S. markets. The terms of the trademark registrations are as prescribed by law, and the registrations will be renewed for as long as we deem them to be useful.
We have entered into a number of license agreements authorizing the use of our trademarks by affiliated and non-affiliated entities. The loss of these license agreements would not have a material adverse effect on our business.





The term of the license agreements is generally three to five years or until such time as either party terminates the agreement. Those agreements with specific terms are renewable upon agreement of the parties.
We also own various patents, none of which are individually material to our business.
Seasonality
Due to seasonal factors inherent in our business, our sales, income and cash from operations generally are lower in the first two quarters of the fiscal year, increase in the third quarter and are significantly higher in the fourth quarter due to the holiday season. This seasonality reflects customer and consumer buying patterns, primarily in the consumer segment.
Working Capital
In order to meet increased demand for our consumer products during our fourth quarter, we usually build our inventories during the third quarter of the fiscal year. We generally finance working capital items (inventory and receivables) through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of our liquidity and capital resources, see note 6 of the accompanying financial statements and the “Liquidity and Financial Condition” section of “Management’s Discussion and Analysis.”
Competition
Each segment operates in markets around the world that are highly competitive. In this competitive environment, our growth strategies include customer intimacy and product innovation based on consumer insights. Additionally, in the consumer segment, we are building brand recognition and loyalty through advertising and promotions.

Governmental Regulation
We are subject to numerous laws and regulations around the world that apply to our global businesses. In the United States, the safety, production, transportation, distribution, advertising, labeling and sale of many of our products and their ingredients are subject to the Federal Food, Drug, and Cosmetic Act; the Food Safety Modernization Act; the Federal Trade Commission Act; state consumer protection laws; competition laws, anti-corruption laws, customs and trade laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal, state and local statutes and regulations. Outside the United States, our business is subject to numerous similar statutes, laws and regulatory requirements.
Environmental Regulations
The cost of compliance with federal, state and local provisions related to protection of the environment has had no material effect on our business. There were no material capital expenditures for environmental control facilities in fiscal year 2018, and there are no material expenditures planned for such purposes in fiscal year 2019.
Employees
We had approximately 11,600 full-time employees worldwide as of November 30, 2018. Our operations have not been affected significantly by work stoppages and, in the opinion of management, employee relations are good. We have approximately 300 employees covered by a collective bargaining contract in the United States. At our foreign subsidiaries, approximately 2,500 employees are covered by collective bargaining agreements or similar arrangements.
Foreign Operations
We are subject in varying degrees to certain risks typically associated with a global business, such as local economic and market conditions, exchange rate fluctuations, and restrictions on investments, royalties and dividends. In fiscal year 2018, approximately 40% of sales were from non-U.S. operations. For information on how we manage some of these risks, see the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis.”
Forward-Looking Information
Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, earnings, cost savings, acquisitions, brand marketing support, and income tax expense are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan.” These statements may relate to: the expected results of operations of businesses acquired by the company, including the acquisition of RB Foods; the expected impact of costs and pricing actions on the company's results of operations and gross margins; the expected impact of productivity improvements, including those associated with our CCI program and global enablement ("GE") initiative; expected working capital improvements; expectations regarding growth potential in various geographies and markets,





including the impact from customer, channel, category, and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected impact of Pub.L 115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the "U.S. Tax Act"); the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of short- and long-term debt as well as quarterly dividends and the ability to issue additional debt or equity securities; and expectations regarding purchasing shares of McCormick's common stock under the existing repurchase authorization.

These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: damage to the company's reputation or brand name; loss of brand relevance; increased private label use; product quality, labeling, or safety concerns; negative publicity about our products; business interruptions due to natural disasters or unexpected events; actions by, and the financial condition of, competitors and customers; the company's inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; the lack of successful acquisition and integration of new businesses, including the acquisition of RB Foods; issues affecting the company's supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials and freight; government regulation, and changes in legal and regulatory requirements and enforcement practices; global economic and financial conditions generally, including the availability of financing, and interest and inflation rates; the effects of increased level of debt service following the RB Foods acquisition as well as the effects that such increased debt service may have on the company's ability to react to certain economic and industry conditions and ability to borrow or the cost of any such additional borrowing; the interpretations and assumptions we have made, and guidance that may be issued, regarding the U.S. Tax Act; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pension obligations; foreign currency fluctuations; the stability of credit and capital markets; risks associated with the company's information technology systems, including the threat of data breaches and cyber-attacks; fundamental changes in tax laws; volatility in our effective tax rate; climate change; infringement of intellectual property rights, and those of customers; litigation, legal and administrative proceedings; and other risks described herein under Part I, Item 1A "Risk Factors."
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Available Information
Our principal corporate internet website address is: www.mccormickcorporation.com. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”). The SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding McCormick. Our website also includes our Corporate Governance Guidelines, Business Ethics Policy and charters of the Audit Committee, Compensation Committee, and Nominating/Corporate Governance Committee of our Board of Directors.

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





Damage to our reputation or brand name, loss of brand relevance, increase in use of private label or other competitive brands by customers or consumers, or product quality or safety concerns could negatively impact our business, financial condition or results of operations.

We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain our brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We continually make efforts to maintain and improve relationships with our customers and consumers and to increase awareness and relevance of our brands through effective marketing and other measures. From time to time, our customers evaluate their mix of product offerings, and consumers have the option to purchase private label or other competitive products instead of our branded products. If a significant portion of our branded business was switched to private label or competitive products, it could have a material negative impact on our consumer segment.
Our reputation for manufacturing high-quality products is widely recognized. In order to safeguard that reputation, we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our products. A serious breach of our quality assurance or quality control procedures, deterioration of our quality image, impairment of our customer or consumer relationships or failure to adequately protect the relevance of our brands may lead to litigation, customers purchasing from our competitors or consumers purchasing other brands or private label items that may or may not be manufactured by us, any of which could have a material negative impact on our business, financial condition or results of operations.
The food industry generally is subject to risks posed by food spoilage and contamination, product tampering, product recall, import alerts and consumer product liability claims. For instance, we may be required to recall certain of our products should they be mislabeled, contaminated or damaged, and certain of our raw materials could be blocked from entering the country if they were subject to government-imposed actions. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products could cause injury or illness, or that any of our products are mislabeled or fail to meet applicable legal requirements (even if the allegation is untrue). A product recall, import alert or an adverse result in any such litigation, or negative perceptions regarding food products and ingredients, could result in our having to pay fines or damages, incur additional costs or cause customers and consumers in our principal markets to lose confidence in the safety and quality of certain products or ingredients, any of which could have a negative effect on our business or financial results and, depending upon the significance of the affected product, that negative effect could be material to our business or financial results. Negative publicity about these concerns, whether or not valid, may discourage customers and consumers from buying our products or cause disruptions in production or distribution of our products and adversely affect our business, financial condition or results of operations.
The rising popularity of social networking and other consumer-oriented technologies has increased the speed and accessibility of information dissemination (whether or not accurate), and, as a result, negative, inaccurate, or misleading posts or comments on websites may generate adverse publicity that could damage our reputation or brands.
Customer consolidation, and competitive, economic and other pressures facing our customers, may put pressure on our operating margins and profitability.
A number of our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years and consolidation could continue. Such consolidation could present a challenge to margin growth and profitability in that it has produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories; resisting price increases; demanding lower pricing, increased promotional programs and specifically tailored products; and shifting shelf space currently used for our products to private label and other competitive products. The economic and competitive landscape for our customers is constantly changing, such as the emergence of new sales channels like e-commerce, and our customers' responses to those changes could impact our business. Our flavor solutions segment may be impacted if the reputation or perception of the customers of our flavor solutions segment declines. These factors and others could have an adverse impact on our business, financial condition or results of operations.
The inability to maintain mutually beneficial relationships with large customers could adversely affect our business.
We have a number of major customers, including two large customers that, in the aggregate, constituted





approximately 21% of our consolidated sales in 2018. The loss of either of these large customers or a material negative change in our relationship with these large customers or other major customers could have an adverse effect on our business.
Disruption of our supply chain and issues regarding procurement of raw materials may negatively impact us.
Our purchases of raw materials are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, governmental actions and other factors beyond our control. The most significant raw materials used by us in our business are dairy products, pepper, vanilla, garlic, capsicums (red peppers and paprika), onion, rice and wheat flour. While future price movements of raw material costs are uncertain, we seek to mitigate the market price risk in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our CCI program. We generally have not used derivatives to manage the volatility related to this risk. To the extent that we have used derivatives for this purpose, it has not been material to our business. Any actions we take in response to market price fluctuations may not effectively limit or eliminate our exposure to changes in raw material prices. Therefore, we cannot provide assurance that future raw material price fluctuations will not have a negative impact on our business, financial condition or operating results.
In addition, we may have very little opportunity to mitigate the risk of availability of certain raw materials due to the effect of weather on crop yield, government actions, political unrest in producing countries, action or inaction by suppliers in response to laws and regulations, changes in agricultural programs and other factors beyond our control. Therefore, we cannot provide assurance that future raw material availability will not have a negative impact on our business, financial condition or operating results.
Political, socio-economic and cultural conditions, as well as disruptions caused by terrorist activities or otherwise, could also create additional risks for regulatory compliance. Although we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our imported products, we cannot provide assurance that such events will not have a negative impact on our business, financial condition or operating results.
Our profitability may suffer as a result of competition in our markets.
The food industry is intensely competitive. Competition in our product categories is based on price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing and promotional activity, and the ability to identify and satisfy consumer preferences. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. Such pressures could reduce our ability to take appropriate remedial action to address commodity and other cost increases.
Laws and regulations could adversely affect our business.
Food products are extensively regulated in most of the countries in which we sell our products. We are subject to numerous laws and regulations relating to the growing, sourcing, manufacturing, storage, labeling, marketing, advertising and distribution of food products, as well as laws and regulations relating to financial reporting requirements, the environment, consumer protection, competition, anti-corruption, privacy, relations with distributors and retailers, foreign supplier verification, customs and trade laws, including the import and export of products and product ingredients, employment, and health and safety. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the attributes of food products and ingredients may increase compliance costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business, such as labeling disclosures pertaining to ingredients. For example, "Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986," in California exposes all food companies to the possibility of having to provide warnings on their products in that state. If we were required to add warning labels to any of our products or place warnings in locations where our products are sold in order to comply with Proposition 65, the sales of those products and other products of our company could suffer, not only in those locations but elsewhere. In addition, the European Union’s General Data Protection Regulation (“GDPR”), which came into effect in May 2018, creates a range of new compliance obligations for companies that process personal data of European Union residents, and increases financial penalties for non-compliance. As a company that processes personal data of European Union residents, we bear the costs of compliance with the GDPR and are subject to the potential for fines and penalties in the event of a





breach of the GDPR. These factors and others could have an adverse impact on our business, financial condition or results of operations.
Our operations may be impaired as a result of disasters, business interruptions or similar events.
We could have an interruption in our business, loss of inventory or data, or be rendered unable to accept and fulfill customer orders as a result of a natural disaster, catastrophic event, epidemic or computer system failure. Natural disasters could include an earthquake, fire, flood, tornado or severe storm. A catastrophic event could include a terrorist attack. An epidemic could affect our operations, major facilities or employees’ and consumers’ health. In addition, some of our inventory and production facilities are located in areas that are susceptible to harsh weather; a major storm, heavy snowfall or other similar event could prevent us from delivering products in a timely manner. Production of certain of our products is concentrated in a single manufacturing site.
We cannot provide assurance that our disaster recovery plan will address all of the issues we may encounter in the event of a disaster or other unanticipated issue, and our business interruption insurance may not adequately compensate us for losses that may occur from any of the foregoing. In the event that a natural disaster, terrorist attack or other catastrophic event were to destroy any part of our facilities or interrupt our operations for any extended period of time, or if harsh weather or health conditions prevent us from delivering products in a timely manner, our business, financial condition or operating results could be adversely affected.
We may not be able to successfully consummate and manage ongoing acquisition, joint venture and divestiture activities which could have an impact on our results.
From time to time, we may acquire other businesses and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses and raw material costs, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, and/or compliance risks.

RB Foods may underperform relative to our expectations.

We may not be able to maintain the growth rate, levels of revenue, earnings or operating efficiency that we and RB Foods have achieved prior to the completion of that acquisition or might have achieved separately. The business and financial performance of RB Foods are subject to certain risks and uncertainties. The underperformance of RB Foods relative to our expectations could have a material adverse effect on our financial condition and results of operations.

We may fail to realize all of the anticipated benefits that we envisioned at the time of our acquisition of RB Foods or those benefits may take longer to realize than expected.

Our ability to realize the anticipated benefits of our acquisition of RB Foods will depend on many factors including, but not limited to the following:

difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition of RB Foods;
managing the potential impact of competing or duplicative products;
difficulties in managing the expanded operations of a significantly larger and more complex company; and
challenges in obtaining new customers.
The full anticipated benefits of its acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Each of these factors could cause reductions in our earnings per share, decrease or delay the expected accretive effect of the acquisition and negatively impact the price of shares of our common stock. As a result, it cannot be assured that the acquisition of RB Foods will result in the realization of the full anticipated benefits.






Our foreign and cross-border operations are subject to additional risks.
We operate our business and market our products internationally. In fiscal year 2018, approximately 40% of our sales were generated in foreign countries. Our foreign operations are subject to additional risks, including fluctuations in currency values, foreign currency exchange controls, discriminatory fiscal policies, compliance with U.S. and foreign laws, enforcement of remedies in foreign jurisdictions and other economic or political uncertainties. Several countries within the European Union continue to experience sovereign debt and credit issues which causes more volatility in the economic environment throughout the European Union and the United Kingdom ("U.K.") Additionally, international sales, together with finished goods and raw materials imported into the U.S., are subject to risks related to fundamental changes to tax laws as well as the imposition of tariffs, quotas, trade barriers and other similar restrictions. All of these risks could result in increased costs or decreased revenues, which could adversely affect our profitability.
Fluctuations in foreign currency markets may negatively impact us.
We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling, Australian dollar and Swiss franc. We routinely enter into foreign currency exchange contracts to facilitate managing certain of these foreign currency risks. However, these contracts may not effectively limit or eliminate our exposure to a decline in operating results due to foreign currency exchange changes. Therefore, we cannot provide assurance that future exchange rate fluctuations will not have a negative impact on our business, financial position or operating results.
The decision by British voters to exit the European Union may negatively impact our operations.
The U.K. is currently negotiating the terms of its exit from the European Union (“Brexit”) scheduled for March 29, 2019. In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K., and a transition period from March 29, 2019 through December 31, 2020 to allow time for a future trade deal to be agreed.  On January 15, 2019, the draft Withdrawal Agreement was rejected by the U.K. Parliament creating significant uncertainty about the terms (and timing) under which the U.K. will leave the European Union.
If the U.K. leaves the European Union with no agreement (“hard Brexit”), it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility.  In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure.  These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations.   A weaker British pound versus the U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period.  With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
Increases in interest rates or changes in our credit ratings may negatively impact us.





We had total outstanding short-term borrowings of $560 million at a weighted-average interest rate of approximately 2.9% on November 30, 2018. We also had total outstanding variable rate long-term debt, including current maturities, of approximately $1,284 million at a weighted-average interest rate of approximately 3.3% on November 30, 2018. Certain of our variable rate debt, including our revolving credit facility, currently uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate debt. The interest rates under our term loans and revolving credit facilities can vary based on our credit ratings. Our policy is to manage our interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing cost and to achieve a desired mix of fixed and variable rate debt. We utilize derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. Our use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. However, our use of these instruments may not effectively limit or eliminate our exposure to changes in interest rates. Therefore, we cannot provide assurance that future credit rating or interest rate changes will not have a material negative impact on our business, financial position or operating results.
Our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital.
Our credit ratings reflect each rating organization's opinion of our financial strength, operating performance and ability to meet our debt obligations. Our credit ratings were downgraded following our financing of the acquisition of RB Foods in August 2017, and any reduction in our credit ratings may limit our ability to borrow at interest rates consistent with the interest rates that were available to us prior to that acquisition and the related financing transactions. If our credit ratings are further downgraded or put on watch for a potential downgrade, we may not be able to sell additional debt securities or borrow money in the amounts, at the times or interest rates or upon the more favorable terms and conditions that might be available if our current credit ratings were maintained.
We have incurred additional indebtedness to finance the acquisition of RB Foods and may not be able to meet our debt service requirements.
After financing our acquisition of RB Foods, we have a significant amount of indebtedness outstanding. As of November 30, 2018, the indebtedness of McCormick and its subsidiaries is approximately $4.7 billion. This substantial level of indebtedness could have important consequences to our business, including, but not limited to:

reducing the benefits that we expect to receive from the acquisition of RB Foods;
increasing our debt service obligations, making it more difficult for us to satisfy our obligations;
limiting our ability to borrow additional funds and increasing the cost of any such borrowing;
increasing our exposure to negative fluctuations in interest rates;
subjecting us to financial and other restrictive covenants, the non-compliance with which could result in an event of default;
increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
placing us at a competitive disadvantage as compared to our competitors, to the extent that they are not as highly leveraged; and
restricting us from pursuing certain business opportunities, including other acquisitions.
The deterioration of credit and capital markets may adversely affect our access to sources of funding.
We rely on our revolving credit facilities, or borrowings backed by these facilities, to fund a portion of our seasonal working capital needs and other general corporate purposes. If any of the banks in the syndicates backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of seasonal working capital requirements. We engage in regular communication with all of the banks participating in our revolving credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote.
In addition, global capital markets have experienced volatility in the past that has tightened access to capital





markets and other sources of funding, and such volatility and tightened access could reoccur in the future. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time period. Our inability to obtain financing on acceptable terms or within an acceptable time period could have an adverse impact on our operations, financial condition and liquidity.
We face risks associated with certain pension assets and obligations.
We hold investments in equity and debt securities in our qualified defined benefit pension plans and in a rabbi trust for our U.S. non-qualified pension plan. Deterioration in the value of plan assets resulting from a general financial downturn or otherwise, or an increase in the actuarial valuation of the plans' liability due to a low interest rate environment, could cause (or increase) an underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity.
Uncertain global economic conditions expose us to credit risks from customers and counterparties.
Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged. In addition, competition has increased with the growth in alternative channels through our customer base. These factors have caused some customers to be less profitable and increased our exposure to credit risk. Current credit markets are volatile, and some of our customers and counterparties are highly leveraged. A significant adverse change in the financial and/or credit position of a customer or counterparty could require us to assume greater credit risk relating to that customer or counterparty and could limit our ability to collect receivables. This could have an adverse impact on our financial condition and liquidity.
Our operations and reputation may be impaired if our information technology systems fail to perform adequately or if we are the subject of a data breach or cyber-attack.
Our information technology systems are critically important to operating our business. We rely on our information technology systems, some of which are or may be managed or hosted by or out-sourced to third party service providers, to manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. If we do not allocate and effectively manage the resources necessary to build, sustain, and protect appropriate information technology systems and infrastructure, or we do not effectively implement system upgrades or oversee third party service providers, our business or financial results could be negatively impacted. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction or reporting errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.
Furthermore, our information technology systems may be vulnerable to cyber-attacks or other security incidents, service disruptions, or other system or process failures. Such incidents could result in unauthorized access to information including customer, consumer or other company confidential data as well as disruptions to operations. We have experienced in the past, and expect to continue to experience, cybersecurity threats and incidents although to date none has been material. To address the risks to our information technology systems and data, we maintain an information security program that includes updating technology, developing security policies and procedures, implementing and assessing the effectiveness of controls, conducting risk assessments of third party service providers and designing business processes to mitigate the risk of such breaches. There can be no assurance that these measures will prevent or limit the impact of a future incident. Moreover, the development and maintenance of these measures requires continuous monitoring as technologies change and efforts to overcome security measures evolve. If we are unable to prevent or adequately respond to and resolve an incident, it may have a material, negative impact on our operations or business reputation, and we may experience other adverse consequences such as loss of assets, remediation costs, litigation, regulatory investigations, and the failure by us to retain or attract customers following such an event. Additionally, we rely on services provided by third-party vendors for certain information technology processes and functions, which makes our operations vulnerable to a failure by any one of these vendors to perform adequately or maintain effective internal controls.

The global nature of our business and the resolution of tax disputes create volatility in our effective tax rate.

As a global business, our tax rate from period to period can be affected by many factors, including changes in tax





legislation, our global mix of earnings, the tax characteristics of our income, the timing and recognition of goodwill
impairments, acquisitions and dispositions, adjustments to our reserves related to uncertain tax positions, changes in valuation allowances and the portion of the income of foreign subsidiaries that we expect to remit to the U.S. and that will be taxable.

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

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

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

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

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

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

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

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

We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance that we may transfer production from one manufacturing facility to another; transfer certain selling and administrative functions from one location to another;





eliminate certain manufacturing, selling and administrative positions; and exit certain businesses or lines of business. These actions may result in a deterioration of employee relations at the impacted locations or elsewhere in McCormick.

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

Our future success depends in part on our ability to be an efficient producer in a highly competitive industry. Any failure by us to achieve our planned cost savings and efficiencies under our CCI program, or other similar programs, could have an adverse effect on our business, results of operations and financial position.

The acquisition of RB Foods has significantly increased our goodwill and other intangible assets.

We have a significant amount of goodwill and other intangible assets on our consolidated financial statements that are subject to impairment based upon future adverse changes in our business or prospects. The impairment of any goodwill and other intangible assets may have a negative impact on our consolidated results of operations.

Curtailment of our share repurchase program may not enhance shareholder value.

We have curtailed the repurchases of our shares under our share repurchase program. Upon the acquisition of RB Foods, we announced our intention to reduce our leverage ratio by curtailing our share repurchase program, but there can be no assurance that curtailment of the program will result in the reduction of our leverage ratio. Our board of directors reserves the right to expand or terminate the share repurchase program at any time. Curtailment of the share repurchase program may not have the intended effects and may have a negative impact on our stock price.
The declaration, payment and amount of dividends is made at the discretion of our board of directors and depends on a number of factors.
The declaration, payment and amount of any dividends is made pursuant to our dividend policy and is subject to final determination each quarter by our board of directors in its discretion based on a number of factors that it deems relevant, including our financial position, results of operations, available cash resources, cash requirements and alternative uses of cash that our board of directors may conclude would be in the best interest of the company and our shareholders. Our dividend payments are subject to solvency conditions established by the Maryland General Corporation Law. Accordingly, there can be no assurance that any future dividends will be equal or similar in amount to any dividends previously paid or that our board of directors will not decide to reduce, suspend or discontinue the payment of dividends at any time in the future.

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





Irving, Texas–flavor solutions
Lakewood, New Jersey–flavor solutions
Springfield, Missouri–consumer and flavor solutions
Canada:
London, Ontario–consumer and flavor solutions
Mexico:
Cuautitlan de Romero Rubio–flavor solutions
United Kingdom:
Haddenham, England–consumer and flavor solutions
Littleborough, England–flavor solutions
France:
Carpentras–consumer and flavor solutions
Monteux–consumer and flavor solutions
Poland:
Stefanowo–consumer
Italy:
Florence–consumer and flavor solutions (3 principal plants)
China:
Guangzhou–consumer and flavor solutions
Shanghai–consumer and flavor solutions
Wuhan–consumer
Australia:
Melbourne–consumer and flavor solutions
Palmwoods–consumer (2 principal plants)
India:
New Delhi–consumer

El Salvador:
San Salvador–consumer

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

PART II.





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock and Common Stock Non-Voting are listed and traded on the New York Stock Exchange ("NYSE"). Our Common Stock and Common Stock Non-Voting trade under the ticker symbols MKCV and MKC, respectively. We have disclosed in note 17 of the accompanying financial statements the information relating to the dividends declared and paid on our classes of common stock. The market price of our common stock at the close of business on December 31, 2018 was $138.81 per share for the Common Stock and $139.24 per share for the Common Stock Non-Voting.
The approximate number of holders of our common stock based on record ownership as of December 31, 2018 was as follows:
Title of class
Approximate    
number    
of record    
holders     
Common Stock, no par value
2,000
Common Stock Non-Voting, no par value
9,500
The following table summarizes our purchases of Common Stock (CS) and Common Stock Non-Voting (CSNV) during the fourth quarter of 2018:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total number of
shares purchased
Average price
paid per share
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs
September 1, 2018 to
September 30, 2018
CS-0
CSNV-0
    -
-
            -
            -
$149 million        
October 1, 2018 to
October 31, 2018
CS-20,829
CSNV-75,000
$139.13
$138.36
     20,829
75,000
$137 million        
November 1, 2018 to
November 30, 2018
CS-23,870 (1)
CSNV-37,024
$148.44
$147.53
      23,870
37,024
$127 million        
Total
CS-44,699
CSNV-112,024
$144.10
$141.39
     44,699       
   112,024    
$127 million        
(1)
On November 14, 2018, we purchased 23,870 shares of our CS from our U.S. defined contribution retirement plan to manage shares, based upon participant activity, in the plan's company stock fund. The price paid per share of $148.44 represented the closing price of the CS on November 14, 2018.
As of November 30, 2018, approximately $127 million remained of a $600 million share repurchase authorization approved by the Board of Directors in March 2015. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. Due to our increased level of indebtedness because of the RB Foods acquisition in August 2017, we have curtailed our acquisition and share repurchase activity for a period in order to enable a return to our pre-acquisition credit profile. Although we have curtailed our share repurchase activity, we repurchased shares in 2018 to mitigate the effect of shares issued upon the exercise of stock options and expect to continue this practice in 2019.
In certain circumstances, we issue shares of CS in exchange for shares of CSNV, or issue shares of CSNV in exchange for shares of CS, in either case pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Typically, these exchanges are made in connection with the administration of our employee benefit plans, executive compensation programs and dividend reinvestment/direct purchase plans. The number of shares issued in an exchange is generally equal to the number of shares received in the exchange, although the number may differ slightly to the extent necessary to comply with the requirements of the Employee Retirement Income Security Act of 1974. During fiscal 2018, we issued 1,780,959 shares of CSNV in exchange for shares of CS and issued 3,449 shares of CS in exchange for shares of CSNV.





ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL SUMMARY
(millions except per share and percentage data)
2018
2017
2016
2015
2014
For the Year
 
 
 
 
 
Net sales
$
5,408.9

$
4,834.1

$
4,411.5

$
4,296.3

$
4,243.2

Percent increase
11.9
%
9.6
%
2.7
%
1.3
%
2.9
%
Operating income
903.3

702.4

641.0

548.4

603.0

Income from unconsolidated operations
34.8

33.9

36.1

36.7

29.4

Net income
933.4

477.4

472.3

401.6

437.9

Per Common Share
 
 
 
 
 
Earnings per share–basic
$
7.10

$
3.77

$
3.73

$
3.14

$
3.37

Earnings per share–diluted
7.00

3.72

3.69

3.11

3.34

Common dividends declared
2.13

1.93

1.76

1.63

1.51

Closing price, non-voting shares–end of year
150.00

102.18

91.20

85.92

74.33

Book value per share
24.09

19.62

13.07

13.25

14.10

At Year-End
 
 
 
 
 
Total assets (1)
$
10,256.4

$
10,385.8

$
4,635.9

$
4,472.6

$
4,382.3

Current debt
643.5

583.2

393.2

343.0

270.8

Long-term debt (1)
4,052.9

4,443.9

1,054.0

1,051.4

1,013.1

Shareholders’ equity
3,182.2

2,570.9

1,638.1

1,686.9

1,809.4

Other Financial Measures
 
 
 
 
 
Percentage of net sales
 
 
 
 
 
Gross profit
43.8
%
41.6
%
41.5
%
40.4
%
40.8
%
Operating income
16.7
%
14.5
%
14.5
%
12.8
%
14.2
%
Capital expenditures
$
169.1

$
182.4

$
153.8

$
128.4

$
132.7

Depreciation and amortization
150.7

125.2

108.7

105.9

102.7

Common share repurchases
62.3

137.8

242.7

145.8

244.3

Dividends paid
273.4

237.6

217.8

204.9

192.4

Average shares outstanding
 
 
 
 
 
Basic
131.5

126.8

126.6

128.0

129.9

Diluted
133.2

128.4

128.0

129.2

131.0

(1) 
Total assets and Long-term debt for fiscal year ended 2015 and 2014 reflect the provisions of Accounting Standards Updates 2015-03, related to the presentation of debt issuance costs, and 2015-17, related to the classification of deferred tax assets and liabilities, both of which we adopted as of November 30, 2016.
The historical financial summary includes the impact of certain items that affect the comparability of financial results year to year. In 2018, we recorded a non-recurring benefit from the U.S. Tax Act. In 2018 and 2017, we recorded transaction and integration expenses related to our acquisition of RB Foods. In 2018, 2017, 2016, 2015 and 2014, we recorded special charges related to the completion of organization and streamlining actions, including, for 2016 and 2015, special charges related to the discontinuance of bulk-packaged and broken basmati rice product lines for our business in India. The net impact of these items is reflected in the following table:
 
(millions except per share data)
2018
2017
2016
2015
2014
Operating income
$
(38.8
)
$
(83.9
)
$
(16.0
)
$
(65.5
)
$
(5.2
)
Net income
271.4

(69.3
)
(11.1
)
(47.9
)
(3.7
)
Earnings per share–diluted
2.03

(0.54
)
(0.09
)
(0.37
)
(0.03
)







ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand McCormick & Company, Incorporated, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto contained in Item 8 of this report. We use certain non-GAAP information that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data.
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retailers, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and flavor solutions, as described in Item 1 of this report.
Our long-term annual growth objectives in constant currency are to increase sales 4% to 6%, increase adjusted operating income 7% to 9% and increase adjusted earnings per share 9% to 11%.
Sales growth: Over time, we expect to grow sales with similar contributions from: 1) our base business–driven by brand marketing support, customer intimacy, expanded distribution and category growth; 2) new products; and 3) acquisitions.
Base business–In 2018, we increased our investment in brand marketing by 18% as compared to 2017. We measure the return on our brand marketing investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products.

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

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

Acquisitions–Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed seven acquisitions, which are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that build scale where we currently have presence in both developed and emerging markets. Our acquisitions have included bolt-on opportunities and the August 17, 2017 acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. for approximately $4.2 billion, net of acquired cash. The acquired market-leading brands of RB Foods include French’s®, Frank’s RedHot® and Cattlemen’s®, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and flavor solutions segments.

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

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






Cash flow: We continue to generate strong cash flow. Net cash provided by operating activities reached $821.2 million in 2018, an increase from $815.3 million in 2017. In 2018, we continued to have a balanced use of cash for debt repayment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 33 years, and to fund capital expenditures, acquisitions and share repurchases. In 2018, the return of cash to our shareholders through dividends and share repurchase was $335.7 million. Due to our increased level of indebtedness because of the RB Foods acquisition, we have curtailed our acquisition and share repurchase activity for a period in order to enable a return to our pre-acquisition credit profile. Although we have curtailed our share repurchase activity, we repurchased shares in 2018 to mitigate the effect of shares issued upon the exercise of stock options and expect to continue this practice in 2019.

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

In 2018, we achieved further growth of our business with net sales rising 11.9% over the 2017 level due to the following factors:
We grew volume and product mix, with increases in both our consumer and flavor solutions segments. This added 2.2% of sales growth. The increases were driven by new products as well as growth in the base business.
Pricing actions contributed 0.5% of the increase in net sales.
The incremental impact of the RB Foods acquisition contributed 8.0% of the increase in net sales.
Net sales growth was favorably impacted by fluctuations in currency rates that contributed 1.2% to sales growth. Excluding this impact, we grew sales 10.7% on a constant currency basis.

Operating income was $903.3 million in 2018 and $702.4 million in 2017. We recorded $16.3 million and $22.2 million of special charges in 2018 and 2017, respectively, related to organization and streamlining actions. In 2018 and 2017, we also recorded $22.5 million and $61.7 million of transaction and integration expenses, respectively, related to our acquisition of RB Foods that reduced operating income. In 2018, compared to the year-ago period, the favorable impact of higher sales, including the effects of the RB Foods acquisition, and $117.9 million of cost savings from our CCI program, including organization and streamlining actions, more than offset higher special charges, transaction and integration expenses, material costs and a $48.5 million increase in brand marketing. Excluding special charges together with transaction and integration expenses related to our acquisition of RB Foods, adjusted operating income was $942.1 million, an increase of 19.8%, compared to $786.3 million in the year-ago period. In constant currency, adjusted operating income rose 19.1%. For further details and a reconciliation of non-GAAP to reported amounts, see Non-GAAP Financial Measures.

Diluted earnings per share was $7.00 in 2018 and $3.72 in 2017. The year-on-year increase in earnings per share was driven mainly by a lower effective tax rate, coupled with benefits of the U.S. Tax Act, along with higher operating income, as described above, which was offset by higher interest expense and higher shares outstanding. Special charges lowered earnings per share by $0.10 and $0.12 in 2018 and 2017, respectively. Transaction and integration expenses lowered earnings per share by $0.13 and $0.42 in 2018 and 2017, respectively. In 2018, a non-recurring benefit from the U.S. Tax Act increased diluted earnings per share by $2.26. Excluding the effects of special charges, transaction and integration expenses, and the non-recurring benefit of the U.S. Tax Act, adjusted diluted earnings per share was $4.97 in 2018 and $4.26 in 2017, or an increase of 16.7%.
2019 Outlook
In connection with our pending adoption of two new accounting standards relating to revenue recognition and income statement classification of pension expense, we will, at the beginning of fiscal 2019, recast our historical income statements for 2018, 2017 and 2016 to retrospectively reflect the adoption of those standards. As more fully described in note 2 of the accompanying financial statements, while there will be no impact to net income or basic or diluted earnings per share in those years (or in interim periods within those years), we currently estimate that the adoption of those new accounting standards will result in the following aggregate income statement reclassifications to our historical results: (i) a reduction in annual sales by approximately $100 million to $110 million for each of the years ended November 30, 2018, 2017 and 2016: (ii) an increase in cost of goods sold by $176.4 million, $112.4 million, and $90.0 million for the years ended November 30, 2018, 2017 and 2016, respectively. (iii) a decrease in





selling, general and administrative expense by an amount ranging from $264.2 million to $274.2 million for the year ended November 30, 2018, from $209.8 million to $219.8 million for the year ended November 30, 2017, and from $198.4 million to $208.4 million for the year ended November 30, 2016; (iv) an increase (decrease) in operating income by $(12.2) million, $(2.6) million and $8.4 million for the years ended November 30, 2018, 2017 and 2016; and (v) an increase (decrease) in non-operating income, net (or the line captioned "Other income (expense), net" in our consolidated income statements), by $12.2 million, $2.6 million, and $(8.4) million for the years ended November 30, 2018, 2017, and 2016. The adoption of these standards and related estimated reclassifications, which will be reflected retrospectively, are not anticipated to have a material impact on the growth rates for sales, adjusted operating income or adjusted earnings per share or other expectations provided with respect to our 2019 outlook included in the following paragraphs.
We project another year of strong financial performance in 2019. In 2019, we expect to grow sales 1% to 3%, including an estimated 2% unfavorable impact from currency rates, or 3% to 5% on a constant currency basis. That anticipated 2019 sales growth is primarily driven by higher volume and product mix, with some impact of pricing to offset anticipated cost increases, and consists entirely of organic growth as we do not anticipate an incremental sales impact from acquisitions in 2019. We expect our 2019 gross profit margin to be 25 to 75 basis points higher in 2019 than in 2018, in part driven by our CCI-led cost savings.
In 2019, we expect an increase in operating income of 10% to 12%, which includes an estimated 2% unfavorable impact from currency rates. That increase in operating income reflects the impact of lower special charges, estimated at $15 million in 2019 compared to $16.3 million in 2018, and the absence of $22.5 million of transaction and integration expenses incurred in 2018. Excluding special charges and, in 2018, transaction and integration expenses, we expect 2019’s adjusted operating income to increase 7% to 9%, which includes an estimated 2% unfavorable impact from currency rates, or 9% to 11% on a constant currency basis. Our CCI-led cost savings target in 2019 is approximately $110 million. In 2019, we expect to support our sales growth with a brand marketing investment comparable with the 2018 level, after consideration of the impact on both years of the adoption of the new accounting standards previously described.
Our underlying effective tax rate is projected to be higher in 2019 than in 2018 as the U.S. Tax Act was not fully effective for us, as a non-calendar year end company, in 2018. Absent the impact of discrete tax items, we estimate our underlying tax rate to be approximately 24% in 2019. Including the impact of a discrete tax item that occurred in December 2018, we estimate that our consolidated effective tax rate will approximate 22% in fiscal 2019. In 2018, we recognized a net non-recurring tax benefit of $301.5 million upon the enactment of the U.S. Tax Act. Excluding that benefit and taxes associated with special charges and transaction and integration expenses, our adjusted effective tax rate was approximately 19.6% in 2018. We expect our adjusted effective tax rate in 2018 to approximate our effective tax rate under U.S. GAAP of 22%.
Diluted earnings per share was $7.00 in 2018. Diluted earnings per share for 2019 are projected to range from $5.09 to $5.19. Excluding the per share impact of the non-recurring benefit from the U.S. Tax Act of $2.26, special charges of $0.10 and transaction and integration expenses of $0.13 in 2018, adjusted diluted earnings per share was $4.97 in 2018. Adjusted diluted earnings per share (excluding an estimated $0.08 per share impact from special charges) are projected to be $5.17 to $5.27 in 2019. We expect adjusted diluted earnings per share in 2019 to grow 4% to 6%, which includes a 2% unfavorable impact from currency rates, or to grow 6% to 8% in constant currency over adjusted diluted earnings per share of $4.97 in 2018. We expect this growth rate to be mainly driven by increased adjusted operating income which we expect to be partially offset by a higher adjusted effective tax rate in 2019.

RESULTS OF OPERATIONS—2018 COMPARED TO 2017
 
2018
2017
Net sales
$
5,408.9

$
4,834.1

Percent growth
11.9
%
9.6
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
2.2
%
1.7
 %
Pricing actions
0.5
%
2.1
 %
Acquisitions
8.0
%
6.5
 %
Foreign exchange
1.2
%
(0.7
)%






Sales for 2018 increased by 11.9% from 2017 and by 10.7% 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). Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.2% to sales. This was driven by new products as well as growth in the base business. The incremental impact of pricing actions added 0.5% to sales, as compared to 2017. The incremental impact of the RB Foods acquisition added 8.0% to sales during 2018. A favorable impact from foreign currency exchange rates increased sales by 1.2% compared to 2017 and is excluded from our measure of sales growth of 10.7% on a constant currency basis.

 
2018
2017
Gross profit
$
2,371.6

$
2,010.2

Gross profit margin
43.8
%
41.6
%
In 2018, our gross profit margin rose 220 basis points to 43.8% from 41.6% in 2017. While this expansion in 2018 includes the accretive impact from our acquisition of the RB Foods business, together with the absence of related transaction and integration expenses of $20.9 million that depressed our 2017 gross profit margin by 40 basis points, our core business was also a driver of that expansion. In 2018, CCI-led cost savings and the shift in our core product portfolio to more value-added products continued to drive profit expansion across both of our segments. Excluding the effect of those transaction and integration expenses in 2017, adjusted gross profit margin rose 180 basis points from 42.0% in 2017 to 43.8% in 2018.

2018
2017
Selling, general & administrative expense
$
1,429.5

$
1,244.8

Percent of net sales
26.4
%
25.8
%
Selling, general and administrative ("SG&A") expense was $1,429.5 million in 2018 compared to $1,244.8 million in 2017, an increase of $184.7 million. That increase in SG&A expense was driven by the incremental impact of the RB Foods acquisition, together with increased brand marketing and higher distribution costs, including freight, which was offset in part by CCI-led cost savings, including the benefits from the organization and streamlining actions described in note 3 of the accompanying financial statements. As a result, SG&A expense as a percentage of net sales was 26.4%, a 60-basis point increase from 2017.

2018
2017
Total special charges
$
16.3

$
22.2


We regularly evaluate whether to implement changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements. Special charges of $16.3 million were recorded in 2018 and $22.2 million in 2017 to enable us to implement these changes.

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

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





transfer of certain manufacturing operations to a new facility under construction in Thailand. See note 3 of the accompanying financial statements for more details on these charges and our basis for classifying amounts as special charges.

 
2018
2017
Transaction expenses included in cost of goods sold
$

$
20.9

Transaction expenses included in other debt costs

15.4

Other transaction and integration expenses
22.5

40.8

Total
$
22.5

$
77.1


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

 
2018
2017
Interest expense
$
174.6

$
95.7

Other income, net
12.6

3.5

Interest expense for 2018 of $174.6 million was sharply higher than the prior year level, primarily due to higher average borrowings in 2018 related to our incurrence of $3.7 billion in debt in August 2017 to finance the acquisition of RB Foods (see note 6 of the accompanying financial statements). Other income, net, for 2018 of $12.6 million was significantly higher than the 2017 level principally due to a gain of $6.3 million recognized on the sale in 2018 of a building vacated as part of our move to a new global headquarters in Maryland; higher interest income and lower non-operating foreign currency transaction losses recognized in 2018 as compared to 2017 also contributed to this increase.
 
2018
2017
Income from consolidated operations before income taxes
$
741.3

$
594.8

Income taxes (benefit)
(157.3
)
151.3

Effective tax rate
(21.2
)%
25.4
%

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

As more fully described in note 12 of the accompanying financial statements, the U.S. Tax Act was enacted in December 2017. The U.S. Tax Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% beginning on January 1, 2018 and creating a territorial tax system with a one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740, Income Taxes), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. We recorded a net benefit of $301.5 million associated with the U.S. Tax Act during 2018. This amount includes a $380.0 million benefit from the revaluation of our net U.S. deferred tax liabilities as of January 1, 2018, based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of $78.5 million. That net transition tax impact is comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries estimated at $75.3 million, together with additional foreign withholding taxes of $7.9 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatriated in 2018, less a $4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax.






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

 
2018
2017
Income from unconsolidated operations
$
34.8

$
33.9

Income from unconsolidated operations increased $0.9 million in 2018 from the prior year. This increase was mainly attributable to higher earnings from our largest joint venture, McCormick de Mexico, partially offset by the impact of a higher elimination of earnings associated with our minority interests in 2018 than in 2017. We own 50% of most of our unconsolidated joint ventures, including McCormick de Mexico, which represented 58% of the sales and 76% of the income of our unconsolidated operations in 2018.
We reported diluted earnings per share of $7.00 in 2018, compared to $3.72 in 2017. The table below outlines the major components of the change in diluted earnings per share from 2017 to 2018. The increase in operating income in the table below includes the impact from favorable currency exchange rates in 2018.
2017 Earnings per share—diluted
$
3.72

Increase in operating income
0.90

Impact of net discrete tax benefit recognized as a result of the U.S. Tax Act
2.26

Decrease in special charges
0.02

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

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

Increase in other income
0.05

Increase in unconsolidated income
0.01

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


We measure the performance of our business segments based on operating income, excluding special charges and transaction and integration expenses related to our RB Foods acquisition. See note 15 of the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges as well as transaction and integration expenses related to our RB Foods acquisition, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income.





Consumer Segment
 
 
2018
2017
Net sales
$
3,318.0

$
2,970.1

Percent growth
11.7
%
7.9
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
1.7
%
0.3
 %
Pricing actions
0.6
%
2.2
 %
Acquisitions
8.0
%
5.5
 %
Foreign exchange
1.4
%
(0.1
)%
 
 
 
Segment operating income
$
644.9

$
564.2

Segment operating income margin
19.4
%
19.0
 %
Sales of our consumer segment grew by 11.7% as compared to 2017 and grew by 10.3% on a constant currency basis. Higher volume and product mix added 1.7% to sales, while the impact of 2018 pricing actions added 0.6%. The incremental impact of the RB Foods acquisition added 8.0% to sales. The favorable impact from foreign currency exchange rates increased consumer segment sales by 1.4% compared to 2017 and is excluded from our measure of sales growth of 10.3% on a constant currency basis.
In the Americas, consumer sales rose 13.5% in 2018 as compared to 2017 and rose by 13.4% on a constant currency basis. Higher volume and product mix added 0.9% to sales, pricing actions added 1.0% to sales, and the incremental impact of acquisitions added 11.5% to sales. The favorable impact of foreign currency exchange rates increased sales by 0.1% compared to 2017 and is excluded from our measure of sales growth of 13.4% on a constant currency basis.
In the EMEA region, consumer sales increased 6.5% in 2018 as compared to 2017 and rose 1.1% on a constant currency basis. Volume and product mix increased sales by 1.3%, led by growth in France and export sales to developing markets. This growth was partially offset by sales weakness in Poland driven by competitive conditions. The incremental impact of the RB Foods acquisition added 0.8% to sales, while the impact of pricing actions reduced sales by 1.0%. The favorable impact of foreign currency exchange rates increased sales by 5.4% compared to 2017 and is excluded from our measure of sales increase of 1.1% on a constant currency basis.
In the Asia/Pacific region, consumer sales increased 10.2% as compared to 2017 and increased 7.7% on a constant currency basis. Higher volume and product mix added 6.4% to sales. Growth was led by China through product innovation and increased distribution, partially offset by lower private label sales in Australia. Pricing actions added 1.3% to sales. The favorable impact of foreign currency exchange rates increased sales by 2.5% compared to 2017 and is excluded from our measure of sales decline of 7.7% on a constant currency basis.
We grew segment operating income for our consumer segment by $80.7 million, or 14.3%, in 2018 compared to 2017. The favorable impact of greater sales and higher CCI-led cost savings more than offset the unfavorable impact of higher costs and brand marketing expense. On a constant currency basis, segment operating income for our consumer segment rose 13.4%. Segment operating income margin for our consumer segment rose by 40 basis points to 19.4% in 2018 from 19.0% in 2017. The increase in segment operating income margin was driven by a higher gross profit margin and the leverage of fixed and semi-fixed elements of SG&A over the higher sales base in 2018 as compared to 2017. Those factors were partially offset by an increase in SG&A as a percentage of sales, driven by increased investment in brand marketing and higher distribution costs, including freight. The previously described gross profit margin improvement includes the incremental accretive impact attributable to the RB Foods acquisition as well as expansion in our core business, in part, from CCI-led cost savings and favorable product mix.





Flavor Solutions Segment
 
2018
2017
Net sales
$
2,090.9

$
1,864.0

Percent growth
12.2
%
12.4
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
3.1
%
4.0
 %
Pricing actions
0.3
%
2.0
 %
Acquisitions
8.0
%
8.0
 %
Foreign exchange
0.8
%
(1.6
)%
 
 
 
Segment operating income
$
297.2

$
222.1

Segment operating income margin
14.2
%
11.9
 %
Sales of our flavor solutions segment increased 12.2% as compared to 2017 and increased by 11.4% on a constant currency basis. Higher volume and product mix added 3.1% to sales and pricing actions added 0.3%. Flavor solutions segment sales rose in 2018 due to the incremental impact of acquisitions, primarily the RB Foods acquisition, which added 8.0% to sales. The favorable impact from foreign currency exchange rates increased flavor solutions segment sales by 0.8% compared to 2017 and is excluded from our measure of sales growth of 11.4% on a constant currency basis.
In the Americas, flavor solutions sales rose 14.8% in 2018 as compared to 2017 and rose 14.7% on a constant currency basis. Higher volume and product mix added 3.0% to sales led by increased sales to several large custom flavor solutions customers partially offset by the impact from a global realignment of a major customer's sales to EMEA, together with the exit of certain lower margin business. Pricing actions added 0.3% to sales and the incremental impact of our RB Foods acquisition added 11.4% to sales. The favorable impact from foreign currency exchange rates increased sales by 0.1% compared to 2017 and is excluded from our measure of sales growth of 14.7% on a constant currency basis.
In the EMEA region, flavor solutions sales increased 8.6% in 2018 as compared to 2017 and increased 6.3% on a constant currency basis. Higher volume and product mix added 4.1% to sales, driven by increased sales to quick service restaurants, broad based growth in Turkey, and the previously described global realignment of a major customer's sales from the Americas to EMEA. Pricing actions added 1.0% to sales and the incremental impact of the Giotti and RB Foods acquisitions added 1.2% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% compared to 2017 and is excluded from our measure of sales growth of 6.3% on a constant currency basis.
In the Asia/Pacific region, flavor solutions sales increased 3.2% in 2018 as compared to 2017 and increased 0.9% on a constant currency basis. Higher volume and product mix added 1.4% to sales, while pricing actions reduced sales by 0.5% as compared to 2017. Sales growth was led by new products and limited time offers in China, partially offset by net sales declines in Australia, which were partially attributable to the exit of certain lower margin business. The favorable impact from foreign currency exchange rates increased sales by 2.3% compared to 2017 and is excluded from our measure of sales growth of 0.9% on a constant currency basis.
We grew segment operating income for our flavor solutions segment by $75.1 million, or 33.8%, in 2018 compared to 2017. The increase in segment operating income was due to the incremental impact of the RB Foods acquisition, coupled with CCI-led cost savings. On a constant currency basis, segment operating income for our flavor solutions segment rose 33.8%. Segment operating income margin for our flavor solutions segment rose by 230 basis points to 14.2% in 2018 from 11.9% in 2017 and was driven by a higher gross profit margin offset, in part, by higher SG&A as a percentage of net sales, which reflects higher distribution costs, including freight.






RESULTS OF OPERATIONS—2017 COMPARED TO 2016
 
2017
2016
Net sales
$
4,834.1

$
4,411.5

Percent growth
9.6
 %
2.7
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
1.7
 %
1.7
 %
Pricing actions
2.1
 %
1.5
 %
Acquisitions
6.5
 %
2.3
 %
Foreign exchange
(0.7
)%
(2.8
)%

Sales for 2017 increased by 9.6% from 2016 and by 10.3% on a constant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 1.7% to sales. This was driven by product innovation, brand marketing and expanded distribution. Pricing actions, taken in response to increased material costs, added 2.1% to sales. The incremental impact of acquisitions completed in 2017 (both RB Foods and Giotti) and in 2016 (principally, Gourmet Garden) added 6.5% to sales. These factors offset an unfavorable impact from foreign currency exchange rates that reduced sales by 0.7% compared to 2016 and is excluded from our measure of sales growth of 10.3% on a constant currency basis.
 
2017
2016
Gross profit
$
2,010.2

$
1,831.7

Gross profit margin
41.6
%
41.5
%
In 2017, our gross profit margin rose 10 basis points to 41.6% from 41.5% in 2016, as the favorable impact of pricing actions, CCI-led cost savings and more favorable business mix more than offset unfavorable material cost inflation, including unfavorable foreign currency effects. In addition, our gross profit for 2017 was burdened by $20.9 million of transaction and integration expenses, representing the amortization of the fair value adjustment to the acquired inventories of RB Foods, that depressed our fiscal 2017 gross profit margin of 41.6% by 40 basis points. Excluding those transaction and integration expenses, adjusted gross profit margin rose 50 basis points from 41.5% in 2016 to 42.0% in 2017.
 
2017
2016
Selling, general & administrative expense
$
1,244.8

$
1,175.0

Percent of net sales
25.8
%
26.6
%
Selling, general and administrative expense was $1,244.8 million in 2017 compared to $1,175.0 million in 2016, an increase of $69.8 million. That increase in SG&A expense was driven by the impact of acquisitions, together with increased brand marketing and higher freight costs, partially offset by lower acquisition-related costs related to both completed and uncompleted acquisitions, all as compared to the 2016 levels. The lower acquisition-related costs in the 2017 period were primarily the result of costs associated with our investigation in 2016 of a large potential acquisition in the U.K. that we ultimately declined to pursue. In addition, acquisition-related costs attributable to RB Foods in 2017 are not included in SG&A expense but are instead included in transaction and integration expenses in our income statement (and are further discussed below). SG&A expense as a percentage of net sales was 25.8%, an 80-basis point improvement from 2016. Driving this reduction in SG&A expense as a percentage of net sales, in addition to the items described above, were lower employee benefit expense, including lower pension and other postretirement benefit expense, together with benefits from the organization and streamlining actions described in note 3 of the accompanying financial statements.
 
2017
2016
Special charges included in cost of goods sold
$

$
0.3

Other special charges in the income statement
22.2

15.7

Total
$
22.2

$
16.0

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





Of the $16.0 million of special charges recorded in 2016, $0.3 million were recorded in cost of goods sold. The 2016 special charges principally consist of $5.7 million related to our EMEA reorganization, which began in 2015, $2.8 million related to our exit from a consolidated joint venture in South Africa, $1.9 million for other exit costs related to the discontinuance of non-profitable product lines of our Kohinoor business in India initiated in 2015, $1.8 million associated with actions in connection with our planned exit of two leased manufacturing facilities in Singapore and Thailand, and $1.7 million for employee severance actions related to our North American effectiveness initiative begun in 2015.
 
2017
2016
Transaction expenses included in cost of goods sold
$
20.9

$

Transaction expenses included in other debt costs
15.4


Other transaction and integration expenses
40.8


Total
$
77.1

$


Total transaction and integration expenses related to the RB Foods acquisition of $77.1 million primarily consist of amortization of the acquisition-date fair value adjustment of inventories of $20.9 million that is included in cost of goods sold; outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition, including the costs related to the bridge financing commitment of $15.4 million that is included in other debt costs.
 
2017
2016
Interest expense
$
95.7

$
56.0

Other income, net
3.5

4.2

Interest expense for 2017 was sharply higher than the prior year, primarily due to higher average borrowings related to our incurrence of $3.7 billion in debt in August 2017 to finance our acquisition of RB Foods (see note 6 of the accompanying financial statements). Other income, net, for 2017 was $0.7 million lower than the 2016 level, primarily due to a gain on the 2016 sale of a non-operating asset.
 
2017
2016
Income from consolidated operations before income taxes
$
594.8

$
589.2

Income taxes
151.3

153.0

Effective tax rate
25.4
%
26.0
%
The effective tax rate decreased 60 basis points to 25.4% in 2017, from 26.0% in 2016, primarily because of an increase in net discrete tax benefits. Net discrete tax benefits increased by $3.1 million, from $21.1 million in 2016 to $24.2 million in 2017. In 2017, discrete items include $10.7 million of excess tax benefits associated with share-based payments to employees due to our adoption of ASU No. 2016-09 Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting on a prospective basis as of the beginning of our 2017 fiscal year. Both 2017 and 2016 included discrete tax benefits for the reversal of reserves for unrecognized tax benefits, net of additional taxes provided, for the expiration of statutes of limitation and, in 2017, settlements with taxing authorities in several tax jurisdictions. Discrete tax expense in 2017 included expense associated with the establishment of valuation allowances on non-U.S. deferred tax assets due to a change in our assessment of the recoverability of those deferred tax assets. Discrete tax items in 2016 included benefits associated with the reversal of valuation allowances on non-U.S. deferred tax assets due to a change in our assessment of the recoverability of those deferred tax assets.
 
2017
2016
Income from unconsolidated operations
$
33.9

$
36.1

Income from unconsolidated operations decreased $2.2 million in 2017 from the prior year. This decrease was mainly attributable to the impact of eliminating earnings associated with our minority interests in 2017 as compared to a loss in 2016 and to lower earnings from our largest joint venture, McCormick de Mexico, for which the unfavorable impact of foreign exchange rates more than offset the favorable impact, in local currency, of higher sales and net income. We own 50% of most of our unconsolidated joint ventures, including McCormick de Mexico which represented 57% of the sales and 74% of the income of our unconsolidated operations in 2017.
We reported diluted earnings per share of $3.72 in 2017, compared to $3.69 in 2016. The table below outlines the major components of the change in diluted earnings per share from 2016 to 2017. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2017.





2016 Earnings per share—diluted
$
3.69

Increase in operating income
0.75

Increase in special charges
(0.02
)
Transaction and integration expenses (including other debt costs) attributable to RB Foods acquisition
(0.42
)
Increase in interest expense
(0.23
)
Impact of income taxes
(0.02
)
Decrease in income from unconsolidated operations
(0.02
)
Impact of higher shares
(0.01
)
2017 Earnings per share—diluted
$
3.72


Consumer Segment
 
 
2017
2016
Net sales
$
2,970.1

$
2,753.2

Percent growth
7.9
 %
4.5
 %
Components of percent growth in net salesincrease (decrease):
 
 
Volume and product mix
0.3
 %
1.7
 %
Pricing actions
2.2
 %
1.2
 %
Acquisitions
5.5
 %
3.5
 %
Foreign exchange
(0.1
)%
(1.9
)%
 
 
 
Segment operating income
$
564.2

$
490.8

Segment operating income margin
19.0
 %
17.8
 %
Sales of our consumer segment grew by 7.9% as compared to 2016 and grew by 8.0% on a constant currency basis. Higher volume and product mix added 0.3% to sales, and pricing actions, taken in response to increased material costs, added 2.2%. The incremental impact of acquisitions – mainly, RB Foods and Gourmet Garden, completed in 2017 and 2016, respectively – added 5.5% to sales. These factors offset an unfavorable impact from foreign currency exchange rates that reduced consumer segment sales by 0.1% compared to 2016 and is excluded from our measure of sales growth of 8.0% on a constant currency basis.
In the Americas, consumer sales rose 11.2% in 2017 as compared to 2016 and rose by 11.1% on a constant currency basis. Higher volume and product mix added 0.5% to sales, pricing actions added 2.8% to sales, and the incremental impact of acquisitions – mainly, RB Foods and Gourmet Garden – added 7.8% to sales. The favorable impact of foreign currency exchange rates increased sales by 0.1% compared to 2016 and is excluded from our measure of sales growth of 11.1% on a constant currency basis.
In the EMEA region, consumer sales declined 1.6% in 2017 as compared to 2016 and declined 2.3% on a constant currency basis. Volume and product mix lowered sales by 3.3%, with weakness in Poland, the U.K. and France. The sales weakness in Poland was driven by competitive conditions, while weakness in the U.K. related to a difficult retail environment, including the effects of a reduction of Schwartz brand products by a large U.K. retailer. Pricing actions added 0.5% to sales and the incremental impact of the RB Foods and Gourmet Garden acquisitions added 0.5% to sales. The favorable impact of foreign currency exchange rates increased sales by 0.7% compared to 2016 and is excluded from our measure of sales decline of 2.3% on a constant currency basis.
In the Asia/Pacific region, consumer sales increased 6.4% as compared to 2016 and increased 8.9% on a constant currency basis. Higher volume and product mix added 5.1% to sales, with strong results in China that offset a volume and product mix decline in India in 2017, due in part to India's discontinuation of lower-margin product lines that occurred in 2016. Pricing actions added 1.7% to sales and the incremental impact of the Gourmet Garden acquisition added 2.1% to sales. These factors offset an unfavorable impact from foreign currency exchange rates that decreased sales by 2.5% compared to 2016 and is excluded from our measure of sales growth of 8.9% on a constant currency basis.
We grew segment operating income for our consumer segment by $73.4 million, or 15.0%, in 2017 compared to 2016. The favorable impact of greater sales and cost savings more than offset the unfavorable impact of higher material costs and an increase in brand marketing. On a constant currency basis, segment operating income for our consumer segment rose 14.9%. Segment operating income margin for our consumer segment rose by 120 basis points to 19.0% in 2017 from 17.8% in 2016.





Flavor Solutions Segment
 
 
2017
2016
Net sales
$
1,864.0

$
1,658.3

Percent growth (decline)
12.4
 %
(0.2
)%
Components of percent change in net salesincrease (decrease):
 
 
Volume and product mix
4.0
 %
1.5
 %
Pricing actions
2.0
 %
2.0
 %
Acquisitions
8.0
 %
0.4
 %
Foreign exchange
(1.6
)%
(4.1
)%
 
 
 
Segment operating income
$
222.1

$
166.2

Segment operating income margin
11.9
 %
10.0
 %
Sales of our flavor solutions segment increased 12.4% as compared to 2016 and increased by 14.0% on a constant currency basis. Higher volume and product mix added 4.0% to sales and pricing actions, taken in response to increased material costs, added 2.0%. The incremental impact on 2017 flavor solutions sales of the RB Foods and Giotti acquisitions completed in 2017 added 8.0% to sales. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced flavor solutions segment sales by 1.6% compared to 2016 and is excluded from our measure of sales growth of 14.0% on a constant currency basis.
In the Americas, flavor solutions sales rose 10.8% in 2017 as compared to 2016 and rose 11.2% on a constant currency basis. Higher volume and product mix added 3.4% to sales and included growth in sales of branded foodservice products in the U.S. and snack seasonings in the U.S. and Mexico. Pricing actions added 2.1% to sales and the incremental impact of the RB Foods and Gourmet Garden acquisitions added 5.7% to sales. These factors offset an unfavorable impact from foreign currency exchange rates that reduced sales by 0.4% compared to 2016 and is excluded from our measure of sales growth of 11.2% on a constant currency basis.
In the EMEA region, flavor solutions sales increased 20.5% in 2017 as compared to 2016 and increased 26.9% on a constant currency basis. Higher volume and product mix added 2.7% to sales and included growth in sales to leading quick service restaurants in this region. Pricing actions added 3.1% to sales and the incremental impact of the Giotti and, to a lesser extent, RB Foods acquisitions added 21.1% to sales. These factors partially offset an unfavorable impact from foreign currency exchange rates that decreased sales by 6.4% compared to 2016 and is excluded from our measure of sales growth of 26.9% on a constant currency basis.
In the Asia/Pacific region, flavor solutions sales increased 9.0% in 2017 as compared to 2016 and increased 10.1% on a constant currency basis. Higher volume and product mix added 9.6% to sales and included growth in sales to leading quick service restaurants supplied from our facilities in both China and Southeast Asia. Pricing actions added 0.1% to sales and the incremental impact of the Gourmet Garden acquisition added 0.4% to sales. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced sales by 1.1% compared to 2016 and is excluded from our measure of sales growth of 10.1% on a constant currency basis.
We grew segment operating income for our flavor solutions segment by $55.9 million, or 33.6%, in 2017 compared to 2016. The favorable impact of greater sales and cost savings more than offset the unfavorable impact of higher material costs. On a constant currency basis, segment operating income for our flavor solutions segment rose 37.1%. Segment operating income margin for our flavor solutions segment rose by 190 basis points to 11.9% in 2017 from 10.0% in 2016 and reflected the impact of our efforts to shift our business mix to more value-added products through innovation and acquisitions.

NON-GAAP FINANCIAL MEASURES
The following tables include financial measures of adjusted gross profit, adjusted gross profit margin, adjusted operating income, adjusted operating income margin, adjusted income from unconsolidated operations, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These financial measures also exclude, for 2018, the net non-recurring income tax benefit of $301.5 million related to the U.S. Tax Act as these items significantly impact comparability between years. These represent non-GAAP financial measures which are prepared as a complement to our financial results prepared in accordance with United States





generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following:
Special charges – Special charges consist of expenses associated with certain actions undertaken by the company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our Chairman, President and Chief Executive Officer; Executive Vice President and Chief Financial Officer; President, Global Flavor Solutions Segment and McCormick International; President, Global Consumer Segment and Americas; Senior Vice President, Human Relations; and Senior Vice President, Strategy and Global Enablement. Upon presentation of any such proposed action (including details with respect to estimated costs, which generally consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an ongoing basis through completion.
Transaction and integration expenses associated with the RB Foods acquisition – Beginning in 2017, we revised our non-GAAP measures to exclude certain costs associated with our acquisition of RB Foods in August of 2017 and its subsequent integration into the company. We made this change because of the significance of the RB Foods acquisition and, therefore, the impact on the comparability of our results of the costs associated with the acquisition and subsequent integration. Such costs, which we refer to as “transaction and integration expenses” include the impact of the acquisition-date fair value adjustment for inventory, transaction costs associated with the acquisition, integration costs following the acquisition, and the bridge financing costs. In our income statement, we include the impact of the fair value adjustment for inventory in cost of goods sold, the bridge financing cost in other debt costs, and present all other transaction and integration costs associated with the RB Foods acquisition in our income statement on the line, "Transaction and integration expenses (related to RB Foods acquisition)." The size of this acquisition and related costs distinguishes it from our past, recent and smaller acquisitions, the costs of which have not been excluded from our non-GAAP financial measures.
Income taxes associated with the U.S. Tax Act – In connection with the enactment of the U.S. Tax Act in December 2017, we recorded a net income tax benefit of $301.5 million during the year ended November 30, 2018, which includes the impact of the tax benefit from revaluation of net U.S. deferred tax liabilities based on the new lower corporate income tax rate and the tax expense associated with the one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries.
Details with respect to the composition of special charges, transaction and integration expenses (including other debt costs) and income taxes associated with the U.S. Tax Act recorded for the periods and in the amounts set forth below are included in notes 2, 3 and 12, respectively, of the accompanying financial statements.
We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends.
These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting.
A reconciliation of these non-GAAP measures to GAAP financial results is provided below (in millions, except per share data):





 
2018
2017
2016
Gross profit
$
2,371.6

$
2,010.2

$
1,831.7

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

20.9

0.3

Adjusted gross profit
$
2,371.6

$
2,031.1

$
1,832.0

Adjusted gross profit margin (2)
43.8
%
42.0
 %
41.5
 %
Operating income
$
903.3

$
702.4

$
641.0

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

20.9

0.3

Impact of other transaction and integration expenses (1)
22.5

40.8


Impact of other special charges
16.3

22.2

15.7

Adjusted operating income
$
942.1

$
786.3

$
657.0

% increase versus prior year
19.8
%
19.7
 %
7.0
 %
Adjusted operating income margin (2)
17.4
%
16.3
 %
14.9
 %
Income from unconsolidated operations
$
34.8

$
33.9

$
36.1

Impact of special charges attributable to non-controlling interests (3)


(1.9
)
Adjusted income from unconsolidated operations
$
34.8

$
33.9

$
34.2

% increase (decrease) versus prior year
2.7
%
(0.9
)%
(1.4
)%
Income tax (benefit) expense
$
(157.3
)
$
151.3

$
153.0

Non-recurring benefit, net, of the U.S. Tax Act (4)
301.5



Impact of transaction and integration expenses
4.9

23.6


Impact of special charges
3.8

6.4

2.7

Adjusted income tax expense
$
152.9

$
181.3

$
155.7

Adjusted income tax rate(5)
19.6
%
26.1
 %
25.7
 %
Net income
$
933.4

$
477.4

$
472.3

Impact of total transaction and integration expenses (1)
17.6

53.5


Impact of total special charges
12.5

15.8

13.0

Impact of special charges attributable to non-controlling interests (3)


(1.9
)
Non-recurring benefit, net, of the U.S. Tax Act (4)
(301.5
)


Adjusted net income
$
662.0

$
546.7

$
483.4

% increase versus prior year
21.1
%
13.1
 %
7.5
 %
Earnings per share—diluted
$
7.00

$
3.72

$
3.69

Impact of total transaction and integration expenses (1)
0.13

0.42


Impact of total special charges
0.10

0.12

0.10

Impact of special charges attributable to non-controlling interests (3)


(0.01
)
Non-recurring benefit, net, of the U.S. Tax Act (4)
(2.26
)


Adjusted earnings per share—diluted
$
4.97

$
4.26

$
3.78

% increase versus prior year
16.7
%
12.7
 %
8.6
 %






(1)
As more fully described in note 2 of the accompanying financial statements, transaction and integration expenses related to the acquisition of RB Foods are recorded in our consolidated income statement as follows for the years ended November 30, 2018 and 2017 (in millions, except per share amounts):
 
 
2018
2017
 
Transaction and integration expenses included in cost of goods sold
$

$
20.9

 
Reflected in transaction and integration expenses
22.5

40.8

 
Transaction and integration expenses included in operating income
22.5

61.7

 
Transaction and integration expenses included in other debt costs

15.4

 
Total pre-tax transaction and integration expenses
22.5

77.1

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

$
53.5

 
 
 
 
(2)
Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented.
 
 
 
 
(3)
Represents the portion of the total special charge of $2.8 million, net of tax of $0.9 million, associated with our exit of a consolidated joint venture in South Africa, attributable to our former joint venture partner.
(4)
The non-recurring income tax benefit, net, associated with enactment of the U.S. Tax Act of $301.5 million for the year ended November 30, 2018 is more fully described in note 12 of the accompanying financial statements.
(5)
Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes, excluding transaction and integration expenses and special charges, or $780.1 million, $694.1 million, and $605.2 million for the years ended November 30, 2018, 2017 and 2016, respectively.


 
 
Estimate for the year ending November 30, 2019
 
 
 
Earnings per share – diluted
$5.09 to $5.19
Impact of special charges
0.08
Adjusted earnings per share – diluted
$5.17 to $5.27

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

Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current year results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2018 on a constant currency basis, net sales and adjusted operating income for 2018 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2017 and compared to the reported results for 2017; and (2) to present our growth in net sales and adjusted operating income for 2017 on a constant currency basis, net sales and operating income for 2017 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2016 and compared to the reported results for 2016.
 





 
For the year ended November 30, 2018
 
Percentage change as reported
Impact of foreign currency exchange
Percentage change on constant currency basis
Net sales:
 
 
 
Consumer segment:
 
 
 
Americas
13.5
%
0.1
%
13.4
%
EMEA
6.5
%
5.4
%
1.1
%
Asia/Pacific
10.2
%
2.5
%
7.7
%
Total Consumer
11.7
%
1.4
%
10.3
%
Flavor Solutions segment:
 
 
 
Americas
14.8
%
0.1
%
14.7
%
EMEA
8.6
%
2.3
%
6.3
%
Asia/Pacific
3.2
%
2.3
%
0.9
%
Total Flavor Solutions
12.2
%
0.8
%
11.4
%
Total net sales
11.9
%
1.2
%
10.7
%
 
 
 
 
Adjusted operating income:
 
 
 
Consumer segment
14.3
%
0.9
%
13.4
%
Flavor Solutions segment
33.8
%
%
33.8
%
Total adjusted operating income
19.8
%
0.7
%
19.1
%

 
For the year ended November 30, 2017
 
Percentage change as reported
Impact of foreign currency exchange
Percentage change on constant currency basis
Net sales:
 
 
 
Consumer segment:
 
 
 
Americas
11.2
 %
0.1
 %
11.1
 %
EMEA
(1.6
)%
0.7
 %
(2.3
)%
Asia/Pacific
6.4
 %
(2.5
)%
8.9
 %
Total Consumer
7.9
 %
(0.1
)%
8.0
 %
Flavor Solutions segment:
 
 
 
Americas
10.8
 %
(0.4
)%
11.2
 %
EMEA
20.5
 %
(6.4
)%
26.9
 %
Asia/Pacific
9.0
 %
(1.1
)%
10.1
 %
Total Flavor Solutions
12.4
 %
(1.6
)%
14.0
 %
Total net sales
9.6
 %
(0.7
)%
10.3
 %
 
 
 
 
Adjusted operating income:
 
 
 
Consumer segment
15.0
 %
0.1
 %
14.9
 %
Flavor Solutions segment
33.6
 %
(3.5
)%
37.1
 %
Total adjusted operating income
19.7
 %
(0.8
)%
20.5
 %

To present the percentage change in projected 2019 sales, adjusted operating income and adjusted earnings per share on a constant currency basis, 2019 projected local currency sales, adjusted operating income, and adjusted net income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at currently prevailing exchange rates and are compared to those 2019 local currency projected results, translated into U.S. dollars  at the average actual exchange rates in effect during the corresponding months in fiscal year 2018 to determine what the 2019 consolidated U.S. dollar sales, adjusted operating income and adjusted earnings per share would have been if the relevant currency exchange rates had not changed from those of the comparable prior-year periods.





 
 
Estimate for the year ending November 30, 2019
 
 
 
Percentage change in net sales
1% to 3%
Impact of unfavorable foreign currency exchange rates
2%
Percentage change in net sales on a constant currency basis
3% to 5%

 
 
Estimate for the year ending November 30, 2019
 
 
 
Percentage change in adjusted operating income
7% to 9%
Impact of unfavorable foreign currency exchange rates
2%
Percentage change in adjusted operating income on a constant currency basis
9% to 11%

 
 
Estimate for the year ending November 30, 2019
 
 
 
Percentage change in adjusted earnings per share
4% to 6%
Impact of unfavorable foreign currency exchange rates
2%
Percentage change in adjusted earnings per share on a constant currency basis
6% to 8%


In addition to the above non-GAAP financial measures, we use a leverage ratio which is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt obligations and is a meaningful metric to investors in evaluating financial leverage. We believe that our leverage ratio is a meaningful metric to investors in evaluating our financial leverage and may be different than the method used by other companies to calculate such a leverage ratio. We determine our leverage ratio as net debt (which we define as total debt, net of cash in excess of $75.0 million) to adjusted earnings before interest, tax, depreciation and amortization (Adjusted EBITDA). We define Adjusted EBITDA as net income plus expenses for interest, income taxes, depreciation and amortization, less interest income and as further adjusted for cash and non-cash acquisition-related transaction and integration expenses (which may include the effect of the fair value adjustment of acquired inventory on cost of goods sold), special charges and stock-based compensation expenses. Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determination of the leverage ratio is consistent with the terms of our $1.0 billion revolving credit facility and our term loans which require us to maintain our leverage ratio below certain levels. Under those agreements, the applicable leverage ratio is reduced annually. As of November 30, 2018, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility. We expect to comply with this financial covenant for the foreseeable future.

The following table reconciles our net income to Adjusted EBITDA for the years ended November 30, 2018, 2017 and 2016:
 
2018
2017
2016
Net income
$
933.4

$
477.4

$
472.3

Depreciation and amortization
150.7

125.2

108.7

Interest expense
174.6

95.7

56.0

Income tax expense (benefit)
(157.3
)
151.3

153.0

EBITDA
1,101.4

849.6

790.0

Adjustments to EBITDA (1)
57.3

117.4

36.1

Adjusted EBITDA
$
1,158.7

$
967.0

$
826.1

 
 
 
 
Net debt (2)
$
4,674.8

$
4,915.3

$
1,403.8

 
 
 
 
Leverage ratio (Net debt/Adjusted EBITDA) (3)
4.0

5.1

1.7

 





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

Our long-term target for our leverage ratio is 1.5 to 1.8. Our leverage ratio can be temporarily impacted by our acquisition activity.

LIQUIDITY AND FINANCIAL CONDITION
 
2018
2017
2016
Net cash provided by operating activities
$
821.2

$
815.3

$
658.1

Net cash used in investing activities
(158.5
)
(4,508.3
)
(267.1
)
Net cash provided by (used in) financing activities
(751.1
)
3,756.0

(371.5
)
We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, increase our dividend, fund capital projects and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, we generate much of our cash flow in the fourth quarter of the fiscal year.
In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.
The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2018, the exchange rates for the Euro, the British pound sterling, Canadian dollar, Australian dollar, Polish zloty and Chinese renminbi were lower versus the U.S. dollar than at November 30, 2017.
Operating Cash Flow Operating cash flow was $821.2 million in 2018, $815.3 million in 2017 and $658.1 million in 2016. The increase in cash flow from operations in 2018 compared to 2017 was primarily due to higher net income, exclusive of the non-cash non-recurring net income tax benefit of $309.4 million related to the U.S. Tax Act. As more fully described below, our working capital management favorably impacted operating cash flow in both 2018 and 2017. In 2018, those increases were partially offset by a higher use of cash from other operating assets and liabilities partially related to the timing of our payment of transaction and integration expenses as well as of interest on indebtedness related to our acquisition of RB Foods, as compared to the source of cash in 2017. The improvement in cash flow from operations in 2017 compared to 2016 was primarily attributable to improvements in cash flow generated from inventories and accounts payable and the favorable timing of our payment of transaction and integration expenses as well as of interest on indebtedness related to our acquisition of RB Foods, which was partially offset by the timing of employee benefit payments.
Our working capital management principally related to inventory, trade accounts receivable, and accounts payable impacts our operating cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a use of cash in 2018, a significant source of cash in 2017 and a significant use of cash in 2016. The change in trade accounts receivable has varied in the last three years, as it was a source of cash in 2018 and a use of cash in 2017 and 2016. The change in accounts payable was a significant source of cash in all three years, but more so in 2017 compared to 2018 and 2016. Dividends received from unconsolidated affiliates, which were higher in 2018 as compared to 2017 and lower in 2017 as compared to 2016, also impacted our cash flow from operations.
In addition to operating cash flow, we also use cash conversion cycle ("CCC") to measure our working capital management. This metric is different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash





outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows:
Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory).
The following table outlines our cash conversion cycle (in days) over the last three years:
 
2018
2017
2016
Cash Conversion Cycle
55.5

76.6

88.5

The decreases in CCC in 2018 from 2017 and in 2017 from 2016 were due, in both instances, to an increase in our days payable outstanding as a result of extending our payment terms to suppliers and, to a lesser extent, a decrease in our days in inventory.
Investing Cash Flow Net cash used in investing activities was $158.5 million in 2018, $4,508.3 million in 2017 and $267.1 million in 2016. The variability between years is principally a result of cash usage related to our acquisitions of businesses, which amounted to $4.2 million in 2018, $4,327.4 million in 2017 and $120.6 million in 2016. See note 2 of the accompanying financial statements for further details related to these acquisitions. Capital expenditures were $169.1 million in 2018, $182.4 million in 2017 and $153.8 million in 2016. We expect 2019 capital expenditures to approximate $210 million to support our planned growth and other initiatives.
Financing Cash Flow Net cash used in financing activities was $751.1 million in 2018, as compared to cash provided of $3,756.0 million in 2017 and cash used of $371.5 million in 2016. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below.
In 2018, our net borrowing activity used cash of $466.5 million. In 2017 and 2016, our net borrowing activity provided cash of $3,574.6 million and $55.7 million, respectively.
In 2018, we increased our short-term borrowings, on a net basis, by $305.5 million and borrowed $25.9 million under long-term borrowing arrangements. In 2018, we repaid $797.9 million of long-term debt, including the $250 million 5.75% notes that matured on December 15, 2017 and $545.0 million of our $1,500.0 million term loans issued in August 2017.
In 2017, we received $3,977.6 million of net proceeds on the issuance of $4,000.0 million of long-term debt, including $2,500.0 million of notes and $1,500.0 million of term loans (see note 6 of the accompanying financial statements for additional information with respect to this long-term debt). We also paid $7.7 million of costs associated with the issuance of debt and our $1.0 billion revolving credit facility. In 2017, we repaid $272.7 million of long-term debt, including $268.8 million of our $1,500.0 million term loans issued in August 2017. In 2017, we repaid $134.6 million of short-term borrowings.

In 2016, net proceeds from short-term borrowings of $251.7 million were used to pay off $200 million of 5.20% notes that matured in December 2015 and for general corporate purposes.
The following table outlines the activity in our share repurchase programs:
 
2018
2017
2016
Number of shares of common stock
0.5

1.4

2.6

Dollar amount
$
62.3

$
137.8

$
242.7

As of November 30, 2018, $127 million remained of a $600 million share repurchase program that was authorized by our Board of Directors in March 2015. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. Due to our increased level of indebtedness related to our acquisition of RB Foods in August 2017, we have curtailed our acquisition and share repurchase activity for a period in order to enable a return to our pre-acquisition credit profile. Although we have curtailed our share repurchase activity, we repurchased shares in 2018 to mitigate the effect of shares issued upon the exercise of stock options and expect to continue this practice in 2019.





During 2017, we issued approximately 6.35 million shares of our Common Stock Non-Voting to fund our acquisition of RB Foods (see notes 2 and 13 of the accompanying financial statements), which included approximately 0.8 million shares from the exercise of the underwriters' option to purchase additional shares. The net proceeds from this issuance, after the underwriting discount and related expenses, was $554.0 million. In addition, we also issued $29.5 million of common stock related to our stock compensation plans in 2017. All of the common stock issued in 2018 and 2016 related to our stock compensation plans, including the effects of the related excess tax benefits.
Our dividend history over the past three years is as follows:
 
2018
2017
2016
Total dividends paid
$
273.4

$
237.6

$
217.8

Dividends paid per share
2.08

1.88

1.72

Percentage increase per share
10.6
%
9.3
%
7.5
%
In November 2018, the Board of Directors approved a 9.6% increase in the quarterly dividend from $0.52 to $0.57 per share.
The following table presents our leverage ratios for the trailing twelve-month periods ended November 30, 2018, 2017 and 2016:
 
2018
2017
2016
Leverage ratio
4.0

5.1 (1)
1.7


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

Our leverage ratio was 4.0 as of November 30, 2018, as compared to the ratios of 5.1 and 1.7 as of November 30, 2017 and 2016, respectively. The decrease in the ratio from 5.1 as of November 30, 2017 to 4.0 as of November 30, 2018 is principally due to an increase in our adjusted EBITDA, which was driven by the previously described improvement in operating income as compared to 2017. In addition, the ratio was favorably impacted by our lower level of net debt at November 30, 2018.

The increase in the ratio from 1.7 as of November 30, 2016 to 5.1 as of November 30, 2017 is principally due to an increase in total debt associated with the funding, net of cash flow from operations for 2017, of our acquisitions of RB Foods and Giotti, repurchases of common stock and payment of dividends.

Most of our cash is in our foreign subsidiaries. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of the U.S. Tax Act on December 22, 2017, the permanent repatriation of cash balances from certain of our subsidiaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. Currently, the repatriation of cash balances from certain of our subsidiaries could still have adverse tax consequences related to the effects of withholding and other taxes. At November 30, 2018, we temporarily used $181.2 million of cash from our foreign subsidiaries to pay down short-term debt in the U.S. The average short-term borrowings outstanding for the years ended November 30, 2018 and 2017 were $700.0 million and $630.6 million, respectively. The total average debt outstanding for the years ended November 30, 2018 and 2017 was $5,081.6 million and $2,996.6 million, respectively.

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

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

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






In August 2017, we entered into a five-year $1.0 billion revolving credit facility, which will expire in August 2022. The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. This facility replaces our prior facilities: (i) a five-year $750 million revolving credit facility that was due to expire in June 2020 and (ii) a 364-day $250 million revolving facility, which we entered into in the second quarter of 2017 and that was due to expire in March 2018. We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities for $237.3 million as of November 30, 2018, that can be withdrawn based upon the lenders' discretion. We engage in regular communication with all banks participating in our credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. See note 6 of the accompanying financial statements for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to fund ongoing operations.
PENSION ASSETS AND OTHER INVESTMENTS – We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash contributions to pension plans, including unfunded plans, were $13.5 million in 2018, $18.7 million in 2017 and $25.1 million in 2016. It is expected that the 2019 total pension plan contributions will be approximately $12.0 million. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all of our qualified defined benefit pension plans, approximately 61% of assets are invested in equities, 29% in fixed income investments and 10% in other investments. Assets in the rabbi trust are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 60% in equities and 40% in fixed income investments. See note 10 of the accompanying financial statements, which provides details on our pension funding.
CUSTOMERS AND COUNTERPARTIES – See the subsequent section of this discussion under Market Risk Sensitivity–Credit Risk.
ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.
In fiscal 2018 we purchased the remaining 10% minority ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million.
In fiscal 2017, we made the following acquisitions:
On December 15, 2016, we purchased 100% of the shares of Enrico Giotti SpA (Giotti), a leading European flavor manufacturer located in Italy, for a cash payment of $123.8 million, net of cash acquired of $1.2 million. The acquisition was funded with cash and short-term borrowings. Giotti is well known in the industry for its innovative beverage, sweet, savory and dairy flavor applications. Our acquisition of Giotti in fiscal 2017 expanded the breadth of value-added products for McCormick's flavor solutions segment, including additional expertise in flavoring health and nutrition products.
On August 17, 2017, we completed the acquisition of RB Foods. The purchase price was approximately $4.21 billion, net of acquired cash of $24.3 million, and included a preliminary working capital adjustment of $11.2 million. In December 2017, we paid $4.2 million associated with the final working capital adjustment. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 13 of the accompanying financial statements) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6 of the accompanying financial statements). The acquired market-leading brands of RB Foods include French’s, Frank’s RedHot and Cattlemen’s, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and flavor solutions segments. The





operations of RB Foods have been included as a component of our consumer and flavor solutions segments from the date of acquisition.

In fiscal 2016, we made the following acquisitions:
On April 19, 2016, we completed the purchase of 100% of the shares of Botanical Food Company, Pty Ltd, owner of the Gourmet Garden brand of packaged herbs ("Gourmet Garden"), a privately held company based in Australia. Gourmet Garden is a global market leader in chilled convenient packaged herbs. Gourmet Garden's products complement our existing branded herb portfolio with the addition of chilled convenient herbs located in the perimeter of the grocery store. We plan to drive sales of the Gourmet Garden brand by continuing to expand global distribution and to build awareness with increased brand investment. The purchase price was $116.2 million, net of cash acquired of $3.3 million, and was financed with a combination of cash and short-term borrowings. Gourmet Garden has been included in our consumer segment since its acquisition. The flavor solutions component of this business, which was not material in 2016, has been included in our flavor solutions segment since 2017.

See note 2 of the accompanying financial statements for further details regarding these acquisitions.
PERFORMANCE GRAPH—SHAREHOLDER RETURN
The following line graph compares the yearly change in McCormick’s cumulative total shareholder return (stock price appreciation plus reinvestment of dividends) on McCormick’s Non-Voting Common Stock with (1) the cumulative total return of the Standard & Poor’s 500 Stock Price Index, assuming reinvestment of dividends, and (2) the cumulative total return of the Standard & Poor’s Packaged Foods & Meats Index, assuming reinvestment of dividends.
a2018stockgraph.jpg






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. The information presented below should be read in conjunction with notes 6 and 7 of the accompanying financial statements.
Foreign Exchange Risk We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling, Australian dollar and Swiss franc. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks.
During 2018, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in our subsidiaries with a functional currency of the British pound sterling, Euro, Polish zloty, Chinese yuan, Canadian dollar and Mexican peso. We did not hedge our net investments in subsidiaries and unconsolidated affiliates during 2018.
The following table summarizes the foreign currency exchange contracts held at November 30, 2018. All contracts are valued in U.S. dollars using year-end 2018 exchange rates and have been designated as hedges of foreign currency transactional exposures, firm commitments or anticipated transactions.

FOREIGN CURRENCY EXCHANGE CONTRACTS AT NOVEMBER 30, 2018
Currency sold
Currency received
Notional
value
Average
contractual
exchange
rate
Fair  
value  
British pound sterling
U.S. dollar
$
22.1

1.33

$
0.7

Canadian dollar
U.S. dollar
126.8

0.77

3.2

Australian dollar
U.S. dollar
18.2

0.73


Polish zloty
U.S. dollar
10.8

3.67

0.3

Australian dollar
Euro
44.7

1.63

(1.8
)
Swiss franc
Euro
66.2

1.19

(3.7
)
Canadian dollar
British pound sterling
29.5

1.71

0.1

U.S. dollar
British pound sterling
121.0

1.28

(0.5
)
U.S. dollar
Euro
39.6

1.13

(0.1
)
We had a number of smaller contracts at November 30, 2018 with an aggregate notional value of $16.0 million to purchase or sell other currencies, such as the Swiss franc, the Romanian leu and Russian ruble. The aggregate fair value of these contracts was $(0.2) million at November 30, 2018.
At November 30, 2017, we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar, Polish zloty, Swiss franc and others, with a notional value of $405.9 million, all of which matured in 2018. The aggregate fair value of these contracts was $8.0 million at November 30, 2017.
Interest Rate Risk Our policy is to manage interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. The table that follows provides principal cash flows and related interest rates, excluding the effect of interest rate swaps and the amortization of any discounts or fees, by fiscal year of maturity at November 30, 2018. For foreign currency-denominated debt, the information is presented in U.S. dollar equivalents. Variable interest rates are based on the weighted-average rates of the portfolio at the end of the year presented.





YEARS OF MATURITY AT NOVEMBER 30, 2018
 
2019
2020
2021
2022
Thereafter
Total  
Fair value
Debt
 
 
 
 
 
 
 
Fixed rate
$
0.4

$
6.8

$
257.3

$
757.5

$
2,426.3

$
3,448.3

$
3,315.9

Average interest rate
7.65
%
3.45
%
3.89
%
2.71
%
3.88
%


Variable rate
$
643.1

$
213.1

$
83.1

$
344.2

$

$
1,283.5

$
1,283.5

Average interest rate
2.99
%
3.45
%
3.47
%
3.58
%
%


The table above displays the debt, including capital leases, by the terms of the original debt instrument without consideration of fair value, interest rate swaps and any loan discounts or origination fees. Interest rate swaps have the following effects:
We issued $250 million of 3.90% notes due in 2021 in July 2011. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these notes at a weighted-average fixed rate of 4.01%.
We issued $250 million of 3.50% notes due in 2023 in August 2013. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these notes at a weighted-average fixed rate of 3.30%.
We issued $250 million of 3.25% notes due in 2025 in November 2015. Forward treasury lock agreements settled upon issuance of these notes effectively set the interest rate on these notes at a weighted-average fixed rate of 3.45%. The fixed interest rate on $100 million of the 3.25% notes due in December 2025 was effectively converted to a variable rate by interest rate swaps through 2025. Net interest payments are based on 3-month LIBOR plus 1.22% during this period.
We issued an aggregate amount of $2.5 billion of senior unsecured notes in August 2017. These notes are due as follows: $750 million due August 15, 2022, $700 million due August 15, 2024, $750 million due August 15, 2027 and $300 million due August 15, 2047 with stated fixed interest rates of 2.70%, 3.15%, 3.40% and 4.20%, respectively. Forward treasury lock agreements settled upon issuance of the $750 million notes due August 15, 2027 effectively set the interest rate on these $750 million notes at a weighted-average fixed rate of 3.44%.
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. In 2018, our most significant raw materials were dairy products, pepper, vanilla, garlic, capsicums (red peppers and paprika), onion, rice and wheat flour. While future 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. To the extent that we have used derivatives for this purpose, it has not been material to our business.
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 feel that the allowance for doubtful accounts properly recognizes trade receivables at realizable value. We consider nonperformance credit risk for other financial instruments to be insignificant.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual obligations and commercial commitments as of November 30, 2018:
CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR
 
 
 
 
 
 
 
Total
Less than
1 year   
1–3  
years
3–5  
years
More than
5 years
Short-term borrowings
$
560.0

$
560.0

$

$

$

Long-term debt, including capital leases
4,171.8

83.5

560.3

1,359.4

2,168.6

Operating leases
153.8

42.9

57.1

31.4

22.4

Interest payments
1,010.0

139.1

236.7

184.5

449.7

Raw material purchase obligations(a)
575.5

531.5

44.0



Other purchase obligations(b)
41.1

26.4

6.6

8.1


Total contractual cash obligations
$
6,512.2

$
1,383.4

$
904.7

$
1,583.4

$
2,640.7






(a)
Raw material purchase obligations outstanding as of year end may not be indicative of outstanding obligations throughout the year due to our response to varying raw material cycles.
(b)
Other purchase obligations consist of services agreements, advertising media commitments and utility contracts.

Pension and postretirement funding can vary significantly each year due to changes in legislation, our significant assumptions and investment return on plan assets. As a result, we have not presented pension and postretirement funding in the table above.
COMMERCIAL COMMITMENTS EXPIRATION BY YEAR
 
Total
Less than
1 year   
1–3  
years
3–5  
years
More than
5 years
Guarantees
$
0.6

$
0.6

$

$

$

Standby letters of credit
7.3

7.3




Total commercial commitments
$
7.9

$
7.9

$

$

$

OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of November 30, 2018 and 2017.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of the accompanying financial statements for further details of these impacts.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. In preparing the financial statements, we make routine estimates and judgments in determining the net realizable value of accounts receivable, inventory, fixed assets and prepaid allowances. Our most critical accounting estimates and assumptions are in the following areas:
Customer Contracts
In several of our major geographic markets, the consumer segment sells our products by entering into annual or multi-year customer contracts. These contracts include provisions for items such as sales discounts, marketing allowances and performance incentives. These items are recognized based on certain estimated criteria, such as sales volume of indirect customers, customers reaching anticipated volume thresholds and marketing spending. We routinely review these criteria and make adjustments as facts and circumstances change.
Goodwill and Intangible Asset Valuation
We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.





Goodwill Impairment
Our reporting units are the same as our operating segments. We estimate the fair value of a reporting unit by using a discounted cash flow model. Our discounted cash flow model calculates fair value by present valuing future expected cash flows of our reporting units using our internal cost of capital as the discount rate. We then compare this fair value to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the estimated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. As of November 30, 2018, we had $4,527.9 million of goodwill recorded in our balance sheet ($3,398.9 million in the consumer segment and $1,129.0 million in the flavor solutions segment). Our fiscal year 2018 testing indicated that the estimated fair values of our reporting units were significantly in excess of their carrying values. Accordingly, we believe that only significant changes in the cash flow assumptions would result in an impairment of goodwill.
Indefinite-lived Intangible Asset Impairment
Our indefinite-lived intangible assets consist of brand names and trademarks. We estimate fair value by using a relief-from-royalty method or discounted cash flow model and then compare that to the carrying amount of the indefinite-lived intangible asset.

As of November 30, 2018, we had $2,646.9 million of brand name assets and trademarks recorded in our balance sheet, and none of the balances exceeded their estimated fair values at that date. Excluding the brand names associated with the 2017 RB Foods acquisition, and those brand names discussed below, the percentage excess of estimated fair value over book values for our major brand names and trademarks was 25% or more as of November 30, 2018.

The following table outlines the book value of our major brand names and trademarks as of November 30, 2018:
RB Foods (French's, Frank's RedHot, and Cattlemen's)
$
2,320.0

Zatarain's
106.4

Lawry’s
48.0

Kamis
33.2

Stubb's
27.1

DaQiao/ChuShiLe
25.1

Gourmet Garden
26.3

Simply Asia/Thai Kitchen
18.5

Drogheria & Alimentari
12.9

Kohinoor
8.0

Giotti
5.2

Brand Aromatics
4.2

Other
12.0

Total
$
2,646.9


The percentage excess of estimated fair value over book value for the Kamis and Stubb's brand names as of November 30, 2018, was approximately 19% and 11%, respectively. A change in assumptions with respect to future performance of either the Kamis or Stubb's businesses could result in impairment losses in the future.

The brand names and trademarks related to recent acquisitions (in particular, our most recent – and most significant – acquisition, RB Foods) may be more susceptible to future impairment as their carrying values represent recently determined fair values. A change in assumptions with respect to future performance of these recently acquired businesses, or a change in other assumptions, including those effected by rising interest rates, could result in non-cash impairment losses in the future.
Income Taxes
We estimate income taxes and file tax returns in each of the taxing jurisdictions in which we operate and are required to file a tax return. At the end of each year, an estimate for income taxes is recorded in the financial statements. Tax returns are generally filed in the third or fourth quarter of the subsequent year. A reconciliation of the estimate to the final tax return is done at that time which will result in changes to the original estimate. We believe that our tax return positions are appropriately supported, but tax authorities may challenge certain positions. We evaluate our uncertain tax positions in accordance with the GAAP guidance for uncertainty in income taxes. We believe that our reserve for uncertain tax positions, including related interest, is adequate. The amounts ultimately





paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income and cash flows. We have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized. In doing so, we have considered future taxable income and tax planning strategies in assessing the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates. In addition, interpretative guidance continues to be issued in connection with the U.S. Tax Act enacted in December 2017. While we have considered available guidance, there is no assurance that future guidance may not cause us to revise amounts currently recorded.
Pension and Postretirement Benefits
Pension and other postretirement plans’ costs require the use of assumptions for discount rates, investment returns, projected salary increases, mortality rates and health care cost trend rates. The actuarial assumptions used in our pension and postretirement benefit reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension and postretirement benefit obligations. While we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results. A 1% increase or decrease in the actuarial assumption for the discount rate would impact 2019 pension and postretirement benefit expense by approximately $2 million. A 1% increase or decrease in the expected return on plan assets would impact 2019 pension expense by approximately $9 million.

We will continue to evaluate the appropriateness of mortality and other assumptions used in the measurement of our pension and other postretirement benefit obligations. In addition, see note 10 of the accompanying financial statements for a discussion of these assumptions and the effects on the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is set forth in the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis” and in note 7 of the accompanying financial statements.





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on our estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.
We are also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.
Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Business Ethics Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets periodically with members of management, the internal auditors and the independent registered public accounting firm to review and discuss internal control over financial reporting and accounting and financial reporting matters. The independent registered public accounting firm and internal auditors report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time.
We conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this assessment. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our assessment, we have concluded with reasonable assurance that our internal control over financial reporting was effective as of November 30, 2018.
Our internal control over financial reporting as of November 30, 2018 has been audited by Ernst & Young LLP.
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Lawrence E. Kurzius
 
Chairman, President &
Chief Executive Officer
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Michael R. Smith
 
Executive Vice President &
Chief Financial Officer

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Christina M. McMullen
 
Vice President & Controller
Chief Accounting Officer





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of McCormick & Company, Incorporated

Opinion on Internal Control over Financial Reporting

We have audited McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, McCormick & Company, Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of November 30, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of November 30, 2018 and 2017, the related consolidated income statements, statements of comprehensive income, statements of cash flows and statements of shareholders’ equity for each of the three years in the period ended November 30, 2018, and the related notes and the financial statement schedule listed in the Index at item 15(2) and our report dated January 24, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Baltimore, Maryland





January 24, 2019





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of McCormick & Company, Incorporated

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of McCormick & Company, Incorporated (the Company) as of November 30, 2018 and 2017, the related consolidated income statements, statements of comprehensive income, statements of cash flows and statements of shareholders’ equity for each of the three years in the period ended November 30, 2018, and the related notes and the financial statement schedule listed in the Index at item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at November 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of November 30, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 24, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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We have served as the Company’s auditor since 1982.
Baltimore, Maryland
January 24, 2019





CONSOLIDATED INCOME STATEMENTS
for the year ended November 30 (millions except per share data)
2018
2017
2016
Net sales
$
5,408.9

$
4,834.1

$
4,411.5

Cost of goods sold
3,037.3

2,823.9

2,579.8

Gross profit
2,371.6

2,010.2

1,831.7

Selling, general and administrative expense
1,429.5

1,244.8

1,175.0

Transaction and integration expenses (related to RB Foods acquisition)
22.5

40.8


Special charges
16.3

22.2

15.7

Operating income
903.3

702.4

641.0

Interest expense
174.6

95.7

56.0

Other debt costs

15.4


Other income, net
12.6

3.5

4.2

Income from consolidated operations before income taxes
741.3

594.8

589.2

Income tax (benefit) expense
(157.3
)
151.3

153.0

Net income from consolidated operations
898.6

443.5

436.2

Income from unconsolidated operations
34.8

33.9

36.1

Net income
$
933.4

$
477.4

$
472.3

Earnings per share–basic
$
7.10

$
3.77

$
3.73

Earnings per share–diluted
$
7.00

$
3.72

$
3.69

See Notes to Consolidated Financial Statements.






 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the year ended November 30 (millions)
2018
2017
2016
Net income
$
933.4

$
477.4

$
472.3

Net income (loss) attributable to non-controlling interest
3.3

1.6

(1.3
)
Other comprehensive income (loss):
 
 
 
Unrealized components of pension and other postretirement plans (including curtailment gains of $18.0 and $76.7 for 2018 and 2017, respectively)
72.6

103.2

(28.5
)
Currency translation adjustments
(119.8
)
174.6

(94.6
)
Change in derivative financial instruments
2.3

(12.5
)
4.1

Deferred taxes
(17.2
)
(30.8
)
8.9

Total other comprehensive income (loss)
(62.1
)
234.5

(110.1
)
 
 
 
 
Comprehensive income
$
874.6

$
713.5

$
360.9

See Notes to Consolidated Financial Statements.






CONSOLIDATED BALANCE SHEETS
at November 30 (millions)
2018
2017
Assets
 
 
Cash and cash equivalents
$
96.6

$
186.8

Trade accounts receivable, less allowances of $6.4 for 2018 and $6.6 for 2017
518.1

555.1

Inventories
786.3

793.3

Prepaid expenses and other current assets
78.9

81.8

Total current assets
1,479.9

1,617.0

Property, plant and equipment, net
985.1

809.1

Goodwill
4,527.9

4,490.1

Intangible assets, net
2,873.3

3,071.1

Investments and other assets
390.2

398.5

Total assets
$
10,256.4

$
10,385.8

Liabilities
 
 
Short-term borrowings
$
560.0

$
257.6

Current portion of long-term debt
83.5

325.6

Trade accounts payable
710.0

639.9

Other accrued liabilities
648.2

724.2

Total current liabilities
2,001.7

1,947.3

Long-term debt
4,052.9

4,443.9

Deferred taxes
706.5

1,094.5

Other long-term liabilities
313.1

329.2

Total liabilities
7,074.2

7,814.9

Shareholders’ equity
 
 
Common stock, no par value; authorized 320.0 shares; issued and outstanding:
2018–9.6 shares, 2017–10.0 shares
400.2

378.2

Common stock non-voting, no par value; authorized 320.0 shares; issued and outstanding: 2018–122.5 shares, 2017–121.0 shares
1,370.4

1,294.7

Retained earnings
1,760.2

1,166.5

Accumulated other comprehensive loss
(359.9
)
(279.5
)
Non-controlling interests
11.3

11.0

Total shareholders’ equity
3,182.2

2,570.9

Total liabilities and shareholders’ equity
$
10,256.4

$
10,385.8

See Notes to Consolidated Financial Statements.





CONSOLIDATED CASH FLOW STATEMENTS
for the year ended November 30 (millions)
2018
2017
2016
Operating activities
 
 
 
Net income
$
933.4

$
477.4

$
472.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
150.7

125.2

108.7

Stock-based compensation
25.6

23.9

25.6

Noncash income tax benefit (related to enactment of the U.S. Tax Act)
(309.4
)


Special charges and transaction and integration expenses
3.0

19.1

7.2

Amortization of inventory fair value adjustment associated with acquisition of RB Foods

20.9


(Gain) loss on sale of assets
(5.4
)
1.3

1.5

Deferred income tax expense (benefit)
40.1

24.1

(40.0
)
Income from unconsolidated operations
(34.8
)
(33.9
)
(36.1
)
Settlement of forward-starting interest rate swaps

(2.9
)

Changes in operating assets and liabilities (net of effect of businesses acquired):
 
 
 
Trade accounts receivable
19.8

(13.0
)
(21.0
)
Inventories
(10.0
)
44.6

(39.0
)
Trade accounts payable
72.8

98.2

47.0

Other assets and liabilities
(91.8
)
6.8

94.5

Dividends received from unconsolidated affiliates
27.2

23.6

37.4

Net cash provided by operating activities
821.2

815.3

658.1

Investing activities
 
 
 
Acquisitions of businesses (net of cash acquired)
(4.2
)
(4,327.4
)
(120.6
)
Proceeds from exit of consolidated joint venture (net of cash paid of $0.9)


4.2

Capital expenditures
(169.1
)
(182.4
)
(153.8
)
Proceeds from sale of property, plant and equipment
12.3

1.1

1.7

Proceeds from insurance
2.5

0.4

1.4

Net cash used in investing activities
(158.5
)
(4,508.3
)
(267.1
)
Financing activities
 
 
 
Short-term borrowings, net
305.5

(134.6
)
251.7

Long-term debt borrowings
25.9

3,989.6

6.0

Payment of debt issuance costs

(7.7
)

Long-term debt repayments
(797.9
)
(272.7
)
(202.0
)
Proceeds from exercised stock options
78.2

29.5

36.8

Taxes withheld and paid on employee stock awards
(11.6
)
(5.8
)
(3.5
)
Payment of contingent consideration
(2.5
)
(19.7
)

Purchase of minority interest
(13.0
)
(1.2
)

Issuance of common stock non-voting (net of issuance costs of $0.9)

554.0


Common stock acquired by purchase
(62.3
)
(137.8
)
(242.7
)
Dividends paid
(273.4
)
(237.6
)
(217.8
)
Net cash provided by (used in) financing activities
(751.1
)
3,756.0

(371.5
)
Effect of exchange rate changes on cash and cash equivalents
(1.8
)
5.4

(13.7
)
(Decrease) increase in cash and cash equivalents
(90.2
)
68.4

5.8

Cash and cash equivalents at beginning of year
186.8

118.4

112.6

Cash and cash equivalents at end of year
$
96.6

$
186.8

$
118.4

See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(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
Balance, November 30, 2015
11.7

115.6

$
1,039.6

$
1,036.7

$
(406.1
)
$
16.7

$
1,686.9

Net income
 
 

472.3



472.3

Net loss attributable to non-controlling interest
 
 



(1.3
)
(1.3
)
Other comprehensive income (loss), net of tax
 
 


(108.3
)
(1.8
)
(110.1
)
Dividends
 
 

(222.0
)


(222.0
)
Dividends attributable to non-controlling interest
 
 



(0.6
)
(0.6
)
Exit from consolidated joint venture
 
 



(1.5
)
(1.5
)