McCormick & Company
Annual Report 2019

Plain-text annual report

FLAVORING A BETTER TOMORROW 2 1 0 9 A N N U A L R E P O R T McCormick is flavoring a better tomorrow McCormick is first and foremost a global flavor company with a passion for bringing new ideas to the world. In addition to enriching lives through flavor experiences, we believe that as we build the McCormick of the future we have a responsibility to do our part to ensure that our people, communities and planet thrive. CONTENTS 2 Letter to Shareholders 14 Purpose-led Performance 17 Form 10-K Table of Contents 11 Financial Highlights 16 Directors and Officers 19 Form 10-K 12 Our Broad Global Portfolio Investor Information on Inside Back Cover RED PEPPER This deep and bright red colored fiery spice is used to liven up everything from pasta sauces to vegetables. It is a favorite spice in many cuisines across the globe. Recipes using red pepper can be customized for every heat preference by adding as much or as little as desired. Fellow Shareholders, In 2019, we celebrated McCormick’s 130th anniversary and are proud of the many aspects of our business which are rooted in our heritage and are key to McCormick’s success. We are continually building upon that heritage with innovation and a commitment to purpose as we proceed on our transformational journey. Our employees and the culture we have sustained over the past 130 years have driven our accomplishments and are catalysts for innovation as we move forward. We are executing against strategies designed to build long-term share- holder value as is evidenced by our strong 2019 results. With an unrelenting focus on growth, performance and people, we are looking forward to tomorrow. Brendan Foley, Lisa Manzone, Lawrence Kurzius, Mike Smith, Malcolm Swift, Nneka Rimmer. Management Committee, left to right: Top-Tier Business Performance 20 We delivered top-tier business performance in 2019. We drove sales, adjusted operating income and adjusted 15 Operating income increased to $958 million com- 16% 15% pared to $891 million in 2018 driven by higher sales 20 15 10 5 0 20 15 10 5 0 2.5 2.0 1.5 1.0 0.5 0.0 earnings per share growth. We also delivered substan- and gross margin expansion, including Comprehensive 12% tial cost savings, expanded adjusted operating margin 10 Continuous Improvement (CCI) led cost savings. and generated strong cash flow. Additionally, decreases of $23 million in transaction 5 Net Sales rose 1%, including an unfavorable impact from currency. Sales growth was driven by new 0 products and growth in the base business from expanded distribution and brand marketing. Both our segments contributed to this increase with con- sumer and flavor solutions each contributing growth of 1%. In constant currency, sales rose 3%. Our con- 20 sumer segment and flavor solutions segment each achieved constant currency sales growth of 3%. 15 16% 15% and integration charges, related to the acquisition of our Frank’s® and French’s® brands, also contrib- uted to the increase versus 2018. Partially offsetting these benefits were increases of $5 million in special MKC S&P 500 Packaged Foods Index charges related to organizational and streamlining actions versus 2018. Excluding these costs, adjusted operating income increased 5% to $979 million 20% 19% compared to $930 million in 2018 including a 2% unfavorable impact from currency. 15% 15% 12% MKC S&P 500 Packaged Foods Index Total Annual Shareholder Return 20% 20 19% 15% 15 15% 10 5 0 10 5 0 52 Week Return vs. S&P 500 and S&P 500 Packaged Foods Index Dividends Declared (Per Share Data) 1-YR 5-YR 10-YR 20-YR $2.33 $2.13 $1.93 12% $1.76 $1.63 2.5 2.0 15% 16% 1.5 1.0 0.5 0.0 2015 2016 2017 2018 2019 McCormick has increased its dividend in each of the past 34 years. We have paid a dividend for 94 consecutive years. 2019 Annual Report 03 1-YR 5-YR 10-YR 20-YR Total annual shareholder return has been 15% or more for the past 1-, 5-, 10- and 20-year periods. As of 11/30/2019 20 15 $1.76 $1.63 $2.33 $2.13 $1.93 MKC S&P 500 Packaged Foods Index As of 11/30/2019 20% 19% 15% 15% 10 5 0 2.5 2.0 1.5 1.0 0.5 0.0 2015 2016 2017 2018 2019 1-YR 5-YR 10-YR 20-YR $2.33 $2.13 $1.93 $1.76 $1.63 2015 2016 2017 2018 2019  Our adjusted operating income margins expanded in an increase in adjusted earnings per share of 8%, 80 basis points, with expansion in both the consumer which includes an unfavorable impact of foreign and flavor solutions segments. This expansion was currency rates. primarily driven by our CCI program. In 2019 we generated strong cash flow from oper- Our CCI program achieved $119 million of cost savings. ations, reaching another new high of $947 million These savings generated fuel for growth, funding driven by higher operating income and working cap- investments in brand marketing and new products as ital improvements. A portion of this cash was used well as contributing to our adjusted operating margin to pay down $436 million of acquisition debt. At the expansion. In early 2016, we established a four-year, end of 2019, our Board of Directors authorized a 9% $400 million goal for our CCI program. With our 2019 increase in the quarterly dividend continuing our results, we have generated $463 million of cost sav- long history of returning cash to shareholders. We ings, exceeding our goal significantly. There continues are proud to be a dividend aristocrat having paid div- to be a long runway of savings initiatives beyond 2019. idends every year since 1925 with increases in the Our earnings per share decreased to $5.24 in 2019 past 34 consecutive years. compared to $7.00 in 2018. Special charges, partially The successful execution of our strategies has deliv- offset by an adjustment associated with the non- ered differentiated results. Our focus on growth, recurring impact of the U.S. Tax Act, lowered earnings performance and people is driving strong long-term per share by $0.11 in 2019. The net favorable non- results which generated double-digit shareholder recurring impact of the recent U.S. Tax Act, partially return in the past 1-, 5-, 10- and 20-year periods. Our offset by transaction and integration expenses as performance continues to give us confidence that the well as special charges increased earnings per share momentum of our business is sustainable and we will by $2.03 in 2018. Excluding these impacts, adjusted continue to build long-term shareholder value as we earnings per share grew to $5.35 in 2019 compared build the McCormick of the future. to $4.97 in 2018, driven primarily by higher adjusted operating income, lower interest expense and higher income from unconsolidated operations. This resulted Generation Z seeks bolder and spicier flavors and is fueling the next generation of flavor growth 04 McCormick & Company, Inc. Sustainably Positioned for Growth McCormick’s broad and advantaged global flavor port- New Product Innovation folio continues to position us to meet the demand for flavor around the world and grow our business. Our breadth and reach across segments, geographies, channels, customers and product offerings create a balanced portfolio to drive consistency in our perfor- mance in a volatile environment. It gives us significant flexibility to adapt to changing conditions, wherever they may arise, and continue to drive growth. This is a differentiator in our current environment where change is the only thing we can count on with certainty. Flavor continues to be an advantaged global category that has grown at a compounded annual growth rate of five percent over the last five years. The rising con- sumer demand for great taste and healthy eating is the foundation of our sales growth. Consumers have an increased interest in creating flavor experiences with bold, rich, authentic flavors while demanding convenience and focusing on fresh, natural and recognizable ingredients with greater transparency around the sourcing and quality of food. Generation Z, the largest consumer segment, even bigger than mil- lennials, is more experimental and health aware about food. They are just starting to enter the workforce and form households. They are carrying the rising demand for flavor into the future with even greater emphasis. McCormick’s products are well positioned to meet this consumer demand for flavor, convenience, health and sustainably-minded practices. The combination of our breadth and reach, our align- ment with consumer trends and our commitment to stay true to our core principles…a passion for flavor, the power of people, the taste you trust, driven to innovate and purpose-led performance…is one of our greatest competitive advantages and sustainably positions us for continued growth. As a global flavor leader, we have an important role in bringing people together to celebrate their eating and drinking occasions. People rely on McCormick for the best products and purest flavors. Our technical inno- vation centers work closely with consumers and our customers to develop new products that deliver on con- sumer demands and drive sales growth. Through our partnership with IBM®, our product developers are also using artificial intelligence, combining our consumer insights with technology, for flavor and product develop- ment across our business. McCormick’s product inno- vation, spanning both our consumer and flavor solutions segments, attracts global consumers to just about every store shelf, real or virtual, and into restaurants across the world to discover new tastes and packaging innovation while seeking healthier, flavorful options. Our flavor solutions technology platform is driving new product wins New products are integral to our sales growth. In 2019, 8% of our sales were generated by products launched in the last three years. In our flavor solutions segment, we had strong 2019 new product momentum as our cus- tomers continue to move their portfolios to on-trend flavors and healthier, more natural products while not 2019 Annual Report 05 compromising on taste. Our new product success is driven by several enablers, including our differentiated culinary foundation, customer collaboration and our technology platform. Our technologies include FlavorReal, our clean and natural platform which sets the benchmark for organic, non-GMO and better-for-you products and FlavorFull, which enables delivery of solutions for common challenges like reducing salt or sugar without sacrificing iconic flavor. Our technologies also include FlavorCell, our patented controlled release encapsulation technology that is designed to deliver flavor where, when and how you need it and FlavorSpice, which delivers flexible natural replacements for ground spices and herbs. We are creating natural flavor solutions for our customers that resonate with consumers who prefer familiar kitchen ingredients to those they don’t recognize. In our consumer segment, new product innovation differ- entiates our brands and strengthens our relevance with the consumer. Our 2019 product launches, inspired by the consumer’s pursuit of convenience, transparency and flavor exploration included the expansion of our Street Food line into the U.S. and Australia; a U.S. “One” product platform of one-dish recipe mixes; the addition of Frank’s Redhot® wings and Zatarain’s® entrée rice bowls to our U.S. frozen portfolio; co-branded Tasty® McCormick® seasoning blends in the Americas and EMEA; a Ducros® “Grown in France” range in France; a core packaging redesign and the relaunch of Frank’s and French’s with Mandarin labels in China; and authentic flavored Heat and Eat meals in India. Our 2019 launches drove strong growth across all regions and we are excited about our robust pipeline moving forward. Differentiated Brand Marketing In markets around the world, we are building our brand equity and have made significant increases in brand mar- keting. With these steady increases over the past several years, we have lifted our brand marketing as a percentage of sales to be among the highest versus our consumer industry peers, resulting in leading share growth in our cat- egories in key markets. We have not only increased our level of investment, we are also targeting these investments to optimize sales and profitability, getting more value out of each dollar we spend. Our Marketing Excellence organi- zation is driving greater speed, quality and effectiveness Consumer new product innovation is an integral part of our growth with a wide range of 2019 launches. across our marketing programs, particularly in the Digital Acceleration Americas. Our Marketing Excellence organization includes an in-house agency where we are scaling capabilities and processes and have increased our agility. We have faster social media response times and are getting more out of our media spend with inno- vative campaigns. Our initiatives are creating aware- ness and trial for new products and, importantly, are building consumer equity for our leading brands and driving growth across the portfolio. We are accelerating our digital platform even beyond brand marketing. Our investments in resources, content development, programs with retailers and products developed for e-commerce are driving excellent 2019 global growth with substantial opportunities still ahead of us. We have strong momentum in our partnership with Buzzfeed® Tasty®, gaining significant reach from our product integration into the videos and recipes used by the younger generations to create fabulous Our returns on brand marketing investments are also dishes with the bold and authentic flavors they desire. differentiated, exceeding the consumer product industry Additionally, our Flavor Maker App unlocks a world of norms by over two times. Digital marketing continues to exciting digital experiences where every swipe and achieve one of our highest returns on marketing invest- tap leads the flavor obsessed to new kitchen inspira- ment. Through digital marketing, we connect directly tion. Users can discover new recipes, sharpen kitchen with consumers to provide personalized recipes, build know-how with how-to cooking videos and tutorials, communities and bring together those with a common and save time by tracking all grocery needs in one interest to build flavor stories. Our digital leadership place with a convenient, on-the-go shopping list. was recognized again in 2019 by Gartner L2 Research, a business intelligence service, in their Digital IQ Index. McCormick was ranked #1 for Food and was the only food brand to earn the title of Genius, which represents the top distinction for Gartner L2 Research’s Digital IQ Index. This marked our 6th consecutive year in the top 5 ranking of over 100 food and beverage brands on the effectiveness of our website, digital, social media, e-commerce and mobile platforms. 44% GLOBAL E-COMMERCE GROWTH 2019 Kohinoor Super Value Basmati Rice, 5 kg Shop Now MCCORMICK OREGANO LEAVES WHERE TO BUY THE OFFICIAL SPICE OF #1 DIGITAL FOOD NETWORK 1.3 BILLION MKC 2019 GLOBAL IMPRESSIONS #1 DIGITAL RANKING ACROSS U.S. FOOD BRANDS +1 BILLION IMPRESSIONS EARNING +15X MEDIA VALUE National Mustard Day 2019 Annual Report 07 Investing in Business Transformation We are investing in business transformation to fuel replace our existing Enterprise Resource Planning our growth to win today as well as to remain agile, (ERP) systems with a single, global platform. Joining relevant and scalable to win tomorrow. With a stead- our new ERP platform with our globally aligned pro- fast focus on growth, performance and people, our cesses will not only drive efficiencies, but also elevate investments will continue to move us forward, build- operational excellence, enable faster decision making, ing both the McCormick of the future and long-term empower our digital ambitions and allow us to remain shareholder value. forward-focused on growth. Supply Chain Technology Growth Behaviors Our Technically Advantaged Supply Chain (TASC) At McCormick, innovation is everyone’s responsibility. program is continuing to make advances through the To further enable that responsibility, we are invest- application of state-of-the-art technologies which ing in development to ensure all employees have the will further differentiate McCormick. Our Purpose-led tools and skillsets to transform McCormick together Performance iconic raw material sustainable sourcing to achieve our growth objectives. In 2019, we began commitments are being achieved through our agricul- an experience—McCormick INNOVATE.ALL—built on tural science programs. Digital satellite imagery, drone four growth behaviors which allow all employees to be reconnaissance, controlled environment agriculture more agile, enable more rapid execution of projects and farmer engagement through use of digital devices and more effectively achieve innovation and growth. are at various stages of deployment. The benefits of these initiatives both create competitive advantage for our brands as well as support the resilience of the farming communities from which we source. In addition to our sourcing programs, we are applying analytical resources and digital technologies to reduce Constant reframing to rethink your work losses and improve productivity throughout our supply and question basic assumptions to see new chain. Our manufacturing and distribution locations opportunities. continue to increase their contribution to our global CCI objectives through the application of both our analyt- ics and supply chain digitalization efforts. Enterprise Resource Planning Our Global Enablement organization, a shared service team, is continuing to reinvent and transform our operating model through globally aligned and innova- tive services creating a scalable platform for growth. As technology provides the backbone for greater pro- cess alignment, information sharing and scalability, we are also making investments in our information systems. We have begun a multi-year program to 08 McCormick & Company, Inc. Moving faster when pursuing innovative concepts to experiment quickly and in a smaller scale. Dynamically allocating resources to ensure they are assigned to growth opportunities. Use the whole McCormick brain by access- ing experiences and opinions from many to strengthen the quality of ideas and decisions. These behaviors will continue to strengthen our ability to progress our Driven to Innovate Principle and accel- erate our business transformation journey toward the McCormick of the future. The Power of People We are incredibly proud of our culture which began with C.P. McCormick’s introduction of The Power of People. Our high-performance culture is rooted in our shared values and the respect for the contributions of every employee. Our multiple management philosophy of encouraging participation and inclusion continues to be a driving force in our differentiation, solving busi- ness challenges, creating growth opportunities and developing careers and business leaders. Our goal is to ensure McCormick remains a great place to work for the 12,400 employees around the world. We want to retain and attract the best talent and we know our culture is a key differentiator in today’s highly competitive talent market. We are strengthening our position to win the war for talent with not only our Our Singapore employees are volunteering in a not-for-profit community garden for underprivileged families. investments in development but also by continuing a difference beyond financial performance and want to modernize our workplaces. In 2019, we revamped to have the opportunity to contribute to that impact. our EMEA headquarters in the U.K., creating an updated, Since 1941, McCormick has held a Charity Day, where open space and technology enabled workplace. The employees work to donate to local charities annually new office environment provides additional oppor- and contributions are matched by McCormick, to raise tunities for employees to contribute and collaborate millions of dollars each year. This year our philanthropic more easily and will help us attract and retain talent. spirit was in full force with a special campaign to support Additionally, McCormick’s reputation for sustainability, hunger-relief efforts. Highlights of activities around the transparency and community support strongly res- world included packing holiday meals for the Maryland onates with our current and prospective employees. Food Bank at our global headquarters, serving break- Employees want to work for a company that is making fast at a hunger relief program in El Salvador, donating food to schools for underprivileged students in India and Thailand and many food drives across all our sites. We are proud to have met our goal and worldwide pro- vided 1.3 million meals to local communities. A newly renovated collaborative workspace in our EMEA headquarters. 2019 Annual Report 09 McCormick’s flavors come to life each day through the The collective power of our people is driving our dif- diversity of our people, ideas, brands and geographies. ferentiated performance. Our people are catalysts We are creating a global workforce as wide-ranging as for innovation, the talent to match our ambitions and the people who trust and love our products through our ensure McCormick is sustainably positioned for growth. goals related to ethnically diverse talent and women in leadership positions, as well as our leadership devel- opment programs and employee ambassador groups (EAG’s). We currently have over 1,100 employees participating in eight EAG’s, including our Women’s International Network, PRISM (LGBTQ), U.S. Veteran’s Group and several representing different cultures. Our success is the work of many and having a diverse and inclusive workplace results in growth, innovation and a highly engaged workforce. Our Focus Is Growth We are focused on growth, committed to people and driven by purpose. We are disciplined in concen- trating on the right opportunities, investing in our business and attracting and retaining the talent to meet our ambition. We have a solid foundation and in an environment that continues to be dynamic and Our people are the main reason McCormick is a great fast-paced, we are ensuring we remain agile, relevant place to work. On behalf of the executive team, I would and focused on long-term sustainable growth. With like to thank every employee for their dedicated efforts. our engaged employees driving our momentum and the effective execution of our strategies, we are well positioned. We are confident we will drive top-tier results, while significantly investing for the future and will continue our success in 2020 and beyond. Our overarching focus on growth is relentless as we drive McCormick forward, flavoring a better tomorrow and further building the value of your McCormick invest- ment. On behalf of the McCormick Board of Directors and the executive team, I would like to thank you for your continued support and confidence. Sincerely, Lawrence E. Kurzius Chairman, President and Chief Executive Officer 010 McCormick & Company, Inc.Financial Highlights For the year ended November 30 (millions except per share data) Net sales Gross profit Gross profit margin Operating income Operating income margin Net income Earnings per share—diluted Cash flow from operations Dividends paid Dividends paid per share 2019 $5,347.4 2,145.3 40.1% 957.7 17.9% 702.7 5.24 946.8 302.2 2.28 2018 % Change $5,302.8 2,093.3 39.5% 891.1 16.8% 933.4 7.00 821.2 273.4 2.08 0.8% 2.5% 7.5% (24.7%) (25.1%) 15.3% 10.5% 9.6% We are providing below certain Non-GAAP financial results excluding items affecting comparability. The details of these adjustments are provided in the Non-GAAP Financial Measures of the Management’s Discussion and Analysis. Adjusted operating income Adjusted operating income margin Adjusted net income Adjusted earnings per share—diluted Cash Flow from Operations (millions) $947 $815 $821 $815 $658 $590 $658 $590 2019 978.5 18.3% 717.3 5.35 2018 % Change 929.9 17.5% 662.0 4.97 5.2% 8.4% 7.6% CCI Led Cost Savings (millions) $117 $118 $119 $117 $118 $119 $109 $98 Net Debt to Adjusted $947 EBITDA Ratio For the year ended November 30, 2019 $109 $821 $98 3.4x REDUCED FROM 4.5x IN 2017 2015 2016 2017 2018 2015 2019 2016 2017 2018 2019 2015 2016 2017 2018 2015 2019 2016 2017 2018 2019 Since 2015, we have increased cash flow from operations by more than $350 million. We have repaid $1.25 billion of the $1.5 billion in term notes associated with the acquisition of our Frank’s and French’s brands. In the past five years, we have achieved over $550 million in cost savings. 11 2019 Annual ReportOur Broad Global Portfolio McCORMICK IS REACHING ACROSS THE GLOBE AND EVERY CHANNEL WITH COMPELLING OFFERINGS… FOR EVERY RETAIL AND CUSTOMER STRATEGY…WITH OUR BROAD RANGE OF CONSUMER FORMATS AND FLAVOR APPLICATIONS McCormick is a global leader in flavor and differ- entiated with a broad and advantaged portfolio. We operate in two segments—consumer and flavor solutions—in every region across the globe, with our joint ventures also adding to our global presence. We deliver flavor across all eating occasions as well as across all cuisines and trends. With our diverse flavor portfolio we are ideally positioned to fully meet the demand for flavor around the world. No matter where, what or when you eat or drink, you are likely enjoying something flavored by McCormick—we are mak- ing every meal and moment better. Global Net Sales by Product Category Consumer Segment Flavor Solutions Segment U.S. Spices & Seasonings International Spices & Seasonings Recipe Mixes Condiments & Sauces Regional Leaders Flavors Global Net Sales by Branded Foodservice Segment and Region Custom Condiments Ingredients & Coatings Global Net Sales by Product Category Global Net Sales by Segment and Region Consumer Segment Flavor Solutions Segment Americas Europe, Middle East and Africa Asia/Pacific Americas Europe, Middle East and Africa Asia/Pacific 12 BREADTH & REACH BALANCES PORTFOLIO FOR CONSISTENT PERFORMANCE McCormick & Company, Inc.Consumer Segment Our consumer segment provides flavor to consumers around the world with brands in approximately 150 countries and territories. Our iconic brands have leading share positions in many of our markets and are the taste consumers trust. We sell products at every price point ranging from our premium brands to private label and across every channel, from tradi- tional grocery to e-commerce. Our products are a fraction of the cost of a meal or snacking occasion, but drive the flavor experience. Since 2016 we grew... NET SALES 21.7% ADJUSTED OPERATING INCOME 36.2% [mm] 0 10 20 30 40 50 60 70 80 90 100 Użyte kolory/Used colors: Klient/Client Praca/Artwork Data/Date KAMIS LOGO KAMIS.ai 2016.01.05 Cyan Magenta Yellow Black Agencja Reklamowa Opus B, ul. Pijarska 9, 31-015 Kraków, Polska/Poland, www.opusb.pl - - - - Bertie Flavor Solutions Segment Our flavor solutions segment is a culinary-inspired flavor business with a deep understanding of the consumer flavor experience from real food and beverage, and leading technology that delivers consumer-preferred solutions for our customers, across a wide variety of applications. We offer one of the broadest ranges of flavor solutions among our competitors and develop those solutions for consumer food and beverage manufac- turers, the foodservice industry and restaurant customers. Since 2016 we grew... NET SALES 27.7% ADJUSTED OPERATING INCOME 78.8% Flavors designed for a wide range of customer applications Beverages Snacks Dairy Bakery/ Confectionary Savory 13 2019 Annual ReportPurpose-led Performance For 130 years, McCormick has had an unwavering responsibility to the long-term vitality and prosperity of our business and the world around us. Our commitment to delivering industry leading financial performance while doing what’s right for people, com- munities and the planet we share remains strong. We leverage the power of our people, innovative technologies and passion for quality products to deliver consistent results that meet the expectations of our stakeholders to create a healthier planet with healthier people. Our Purpose-led Performance is both part of our heritage and how we will flavor a better tomorrow. “ We were placed here to improve the society in which we live and that should be the goal of busi- ness and professional leaders today, tomorrow and forever.” — C.P. McCormick, 1949 People Communities SENIOR LEADERSHIP DIVERSITY Progress on Our 2025 Goals 2019 2019 49% Women globally Goal 50% 24% Ethnically Diverse Talent in the U.S. Goal 30% Since 2017 +69% MSI CITATIONS Supporting health and wellness by publishing the benefits of herbs and spices. 14 014 McCormick & Company, Inc. SMALLHOLDER FARM SUPPORT increased by more than 5x to nearly 16,000 farmers since 2017 through partnerships with organizations around the world. +$1.9M CONTRIBUTED TO HEALTHY EATING PROGRAMS SINCE 2016 Teaching individuals and families to reduce salt, fat and sugar intakes while boosting flavor through the use of herbs and spices. We have laid out a series of commitments and performance targets for 2025 which will drive progress against the United Nations Sustainable Development Goals. Read more about our Purpose-led Performance and our 2025 goals at www.mccormickcorporation.com/en/responsibility/purpose-led-performance Recognition 9 15 EXECUTIVE WOMEN For the fourth consecutive year, McCormick ranked No. 1 in the food products industry in their 2020 Global 100 Most Sustainable Corporations Index by Corporate Knights. Corporate Knights assesses all publicly traded companies with gross revenue in excess of $1 billion to create the annual list. In 2019, for the second consecutive year, McCormick was recognized on Barron’s 100 Most Sustainable Companies list. DiversityInc named McCormick to its Top 50 Companies for Diversity in 2019, our third year in a row on the Top 50 list showcasing our commitment to foster- ing a diverse and inclusive workplace. Planet Signed The New Plastics Economy Global Commitment led by 100% of plastic packaging that can be reused, recycled or repurposed by 2025. ON TRACK TO MEET 2025 GOAL WITH 84% achieved through 2019. NEW LEED CERTIFIED global headquar- ters and Thailand manufacturing facility. ON TRACK TO SUSTAINABLY SOURCE 100% of our iconic branded herbs & spices by 2025. 2019 Annual Report 01515 Board of Directors—Standing left to right: Maritza Montiel, Freeman Hrabowski, Anthony Vernon, Michael Conway, Margaret Preston, Gary Rodkin. Seated left to right: Jacques Tapiero, Lawrence Kurzius, Michael Mangan, Patricia Little. Not pictured due to recent appointment: Anne Bramman. Board of Directors Michael A. Conway 53 Executive Vice President and President, Canada Starbucks Corporation Seattle, Washington Director since 2015 Audit Committee Freeman A. Hrabowski, III 69 President University of Maryland Baltimore County Baltimore, Maryland Director since 1997 Nominating/Corporate Governance Committee* Lawrence E. Kurzius 61 Chairman, President and Chief Executive Officer McCormick & Company, Inc. Director since 2015 Patricia Little 59 Former Senior Vice President and Chief Financial Officer The Hershey Company Hershey, Pennsylvania Director since 2010 Nominating/Corporate Governance Committee 16 McCormick & Company, Inc. Michael D. Mangan 63 Former President Worldwide Power Tools & Accessories The Black & Decker Corporation Towson, Maryland Director since 2007** Compensation Committee Nominating/Corporate Governance Committee Maritza G. Montiel 68 Former Deputy Chief Executive Officer and Vice Chairman Deloitte LLP Washington, D.C. Director since 2015 Audit Committee* Margaret M.V. Preston 62 Former Managing Director, Private Wealth Management TD Bank New York, New York Director since 2003 Compensation Committee Gary M. Rodkin 67 Former Chief Executive Officer ConAgra Foods, Inc. Omaha, Nebraska Director since 2017 Nominating/Corporate Governance Committee Jacques Tapiero 61 Former Senior Vice President and President, Emerging Markets Eli Lilly and Company Indianapolis, Indiana Director since 2012 Compensation Committee W. Anthony Vernon 64 Former Chief Executive Officer Kraft Foods Group, Inc. Northfield, Illinois Director since 2017 Compensation Committee* Anne Bramman, 52 Chief Financial Officer Nordstrom, Inc. Seattle, Washington Appointed in January 2020 Audit Committee * Indicates Chair Position on the Committee ** Lead Director Executive Officers Lawrence E. Kurzius Chairman, President and Chief Executive Officer Michael R. Smith Executive Vice President and Chief Financial Officer Brendan M. Foley President Global Consumer, Americas and Asia Lisa B. Manzone Senior Vice President, Human Relations Nneka L. Rimmer Senior Vice President, Business Transformation Jeffery D. Schwartz Vice President, General Counsel and Secretary Malcolm Swift President Global Flavor Solutions, EMEA and Chief Administrative Officer Table of Contents to Form 10-K PART I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 PART II Item 5 Item 6 Item 7 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk Item 8 Item 9 Item 9A Item 9B PART III Item 10 Item 11 Item 12 Item 13 Financial Statements and Supplementary Data  Report of Management  Reports of Independent Registered Public Accounting Firm  Consolidated Income Statements  Consolidated Statements of Comprehensive Income  Consolidated Balance Sheets  Consolidated Cash Flow Statements  Consolidated Statements of Shareholders’ Equity  Notes to Consolidated Financial Statements Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Item 14 Principal Accountant Fees and Services PART IV Item 15 Exhibits, Financial Statement Schedules Page 21 24 31 31 31 31 32 33 34 51 52 52 53 56 56 57 58 59 60 83 83 84 84 84 84 84 84 85 2019 Annual Report 17 THIS PAGE LEFT INTENTIONALLY BLANK UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 2019 OR £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-14920 McCORMICK & COMPANY, INCORPORATED (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 24 Schilling Road, Suite 1, Hunt Valley, Maryland (Address of principal executive offices) 52-0408290 (IRS Employer Identification No.) 21031 (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 Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, No Par Value Common Stock Non-Voting, No Par Value MKC-V MKC New York Stock Exchange 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 S 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 S 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 S No £ 2019 Annual Report 19 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 S No £ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Check one: Large Accelerated Filer S Non-accelerated Filer £ (Do not check if a smaller reporting company) £ Accelerated Filer Smaller Reporting Company £ Emerging Growth Company £ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the Voting Common Stock held by non-affiliates at May 31, 2019: $1,458,501,404 The aggregate market value of the Non-Voting Common Stock held by non-affiliates at May 31, 2019: $19,200,282,923 Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Class Number of Shares Outstanding Date Common Stock Common Stock Non-Voting 9,314,335 123,599,379 December 31, 2019 December 31, 2019 DOCUMENTS INCORPORATED BY REFERENCE Document Part of 10-K into Which Incorporated Proxy Statement for McCormick’s April 1, 2020 Annual Meeting of Stockholders (the “2020 Proxy Statement”) Part III 20 McCormick & Company, Inc. 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 pur- chase 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 interna- tional 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 partici- pate 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 attri- butes 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 seg- ment has a higher overall profit margin than our flavor solutions seg- ment. In 2019, the consumer segment contributed approximately 61% of sales and 69% of operating income, and the flavor solutions segment contributed approximately 39% of sales and 31% of operating income. Consumer Segment. From locations around the world, our brands reach consumers in approximately 150 countries and territories. Our leading brands in the Americas include McCormick®, French’s®, Frank’s RedHot®, Lawry’s® and Club House®, as well as brands such as Gourmet Garden® and OLD BAY®. We also market authen- tic 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 season- ings 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 distrib- utors or wholesalers. In addition to marketing our branded prod- ucts 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 sea- soning 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 sen- sory 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. 2019 Annual Report 21 Raw Materials The most significant raw materials used in our business are dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour. Pepper and other spices and herbs are generally sourced from countries other than the United States. Other raw materials, like dairy products and onion, are primarily sourced locally, either within the United States or from our international loca- tions. 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 deliv- ery, 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 solu- tions segment, products are used by food and beverage manufactur- ers as ingredients for their finished goods and by foodservice customers as ingredients for menu items to enhance the flavor of their foods. Customers for the flavor solutions segment include food manufacturers and the foodservice industry supplied both directly and indirectly through distributors. We have a large number of customers for our products. Sales to one of our consumer segment customers, Wal-Mart Stores, Inc., accounted for approximately 11% of consolidated sales in 2019, 2018 and 2017. Sales to one of our flavor solutions segment customers, PepsiCo, Inc., accounted for approximately 10% in 2019 and 2018 and 11% of con- solidated sales in 2017. In 2019, 2018 and 2017 the top three custom- ers in our flavor solutions segment represented between 49% and 52% of our global flavor solutions sales. The dollar amount of backlog orders for our business is not material to an understanding of our business, taken as a whole. No material por- tion 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 aggre- gate 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” trade- marks, would not have a material adverse effect on our business. The “Mc – McCormick” trademark is extensively used by us in con- nection 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 22 McCormick & Company, Inc. 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 quar- ters of the fiscal year, increase in the third quarter and are signifi- cantly higher in the fourth quarter due to the holiday season. This seasonality reflects customer and consumer buying patterns, primar- ily 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 Finan- cial 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 fed- eral, 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 environ- mental control facilities in fiscal year 2019, and there are no material expenditures planned for such purposes in fiscal year 2020. Employees We had approximately 12,400 full-time employees worldwide as of November 30, 2019. Our operations have not been affected signifi- cantly by work stoppages and, in the opinion of management, employee relations are good. We have approximately 300 employees covered by a collective bargaining contract in the United States. At our foreign subsidiaries, approximately 2,400 employees are covered by collective bargaining agreements or similar arrangements. Information about our Executive Officers In addition to the executive officers described in the 2020 Proxy Statement incorporated by reference in Part III, Item 10 of this Report, the following individuals are also executive officers of McCormick: Lisa B. Manzone and Nneka L. Rimmer. Ms. Manzone is 55 years old and, during the last five years, has held the following positions with McCormick: June 2015 to present–Senior Vice President, Human Relations; January 2015 to June 2015–Vice President Global Human Relations; January 2013 to January 2015– Vice President Compensation and Benefits. Ms. Rimmer is 48 years old and, during the last five years, has held the following positions with McCormick: February 2019 to present–Senior Vice President, Business Transformation; August 2017 to February 2019–Senior Vice President, Strategy and Global Enablement; April 2015 to August 2017–Senior Vice President, Corporate Strategy and Development. Before joining McCormick in April 2015, Ms. Rimmer was Partner and Managing Director with the Boston Consulting Group where she had 13 years of experience designing, executing and lever- aging successful large-scale transformational initiatives, working with large global consumer goods corporations. Foreign Operations We are subject in varying degrees to certain risks typically associated with a global business, such as local economic and market conditions, exchange rate fluctuations, and restrictions on investments, royalties and dividends. In fiscal year 2019, approximately 40% of sales were from non-U.S. operations. For information on how 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 con- cerning expected performance such as those relating to net sales, earnings, cost savings, special charges, acquisitions, brand marketing support, volume and product mix, and income tax expense are “for- ward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements may be identified by the use of words such as “may,” “will,” “expect,” “should,” “antici- pate,” “intend,” “believe” and “plan.” These statements may relate to: the expected results of operations of businesses acquired by the com- pany, including the acquisition of RB Foods; the expected impact of raw material costs and pricing actions on the company’s results of operations and gross margins; the expected impact of productivity improvements, including those associated with our Comprehensive Continuous Improvement (CCI) program and global enablement initia- tive; expected working capital improvements; expectations regarding growth potential in various geographies and markets, including the impact from customer, channel, category, and e-commerce expansion; expected trends in net sales and earnings performance and other financial measures; the expected timing and costs of implementing our business transformation initiative, which includes the implementation of a global enterprise resource planning (ERP) system; the expected impact of accounting pronouncements; the expected impact of the U.S. Tax Act enacted in December 2017; the expectations of pension and postretirement plan contributions and anticipated charges associated with those plans; the holding period and market risks associated with financial instruments; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquid- ity, such as the availability of bank financing; the anticipated suffi- ciency 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 expec- tations regarding purchasing shares of McCormick’s common stock under the existing repurchase authorizations. These and other forward-looking statements are based on manage- ment’s current views and assumptions and involve risks and uncertain- ties that could significantly affect expected results. Results may be materially affected by factors such as: damage to the company’s repu- tation or brand name; loss of brand relevance; increased private label use; product quality, labeling, or safety concerns; negative publicity about our products; actions by, and the financial condition of, competi- tors and customers; the longevity of mutually beneficial relationships with our large customers; business interruptions due to natural disas- ters or unexpected events; issues affecting the company’s supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials; government regulation, and changes in legal and regulatory requirements and enforcement practices; the lack of successful acquisition and integration of new businesses, including the acquisition of RB Foods; global economic and financial conditions generally, including the pending exit of the U.K. from the European Union (Brexit), availability of financing, interest and inflation rates, and the imposition of tariffs, quotas, trade barriers and other similar restrictions; foreign currency fluctuations; the effects of increased level of debt service following the RB Foods acquisition as well as the effects that such increased debt service may have on the company’s ability to borrow or the cost of any such additional borrowing, our credit rating, and our ability to react to certain economic and industry conditions; assumptions we have made regarding the investment return on retirement plan assets, and the costs associated with pen- sion obligations; the stability of credit and capital markets; risks asso- ciated with the company’s information technology systems, including the threat of data breaches and cyber-attacks; the company’s inability to successfully implement our business transformation initiative; fun- damental changes in tax laws; including interpretations and assump- tions we have made, and guidance that may be issued, regarding the U.S. Tax Act enacted on December 22, 2017 and volatility in our effec- tive tax rate; climate change; infringement of intellectual property rights, and those of customers; litigation, legal and administrative pro- ceedings; the company’s inability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; and other risks described herein under Part I, Item 1A “Risk Factors.” Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Available Information Our principal corporate internet website address is: www.mccormick- corporation.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 rea- sonably 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 2019 Annual Report 23 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 neg- atively 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 rele- vance, 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, finan- cial 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 custom- ers that, in the aggregate, constituted approximately 21% of our consolidated sales in 2019. The loss of either of these large customers or a material negative change in our relationship with these large customers or other major customers could have an adverse effect on our business. 24 McCormick & Company, Inc. Disruption of our supply chain and issues regarding procure- ment of raw materials may negatively impact us. Our purchases of raw materials are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, governmental actions and other factors beyond our control. The most significant raw materials used by us in our business are dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, onion, rice and wheat flour. While future price movements of raw material costs are uncertain, we seek to mitigate the market price risk in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our CCI program. We generally have not used derivatives to manage the volatility related to this risk. To the extent that we have used derivatives for this purpose, it has not been material to our business. Any actions we take in response to market price fluctuations may not effectively limit or eliminate our exposure to changes in raw material prices. Therefore, we cannot provide assurance that future raw material price fluctuations will not have a negative impact on our business, financial condition or operating results. In addition, we may have very little opportunity to mitigate the risk of availability of certain raw materials due to the effect of weather on crop yield, government actions, political unrest in producing countries, action or inaction by suppliers in response to laws and regulations, changes in agricultural programs and other factors beyond our control. Therefore, we cannot provide assurance that future raw material availability will not have a negative impact on our business, financial condition or operating results. Political, socio-economic and cultural conditions, as well as disruptions caused by terrorist activities or otherwise, could also create additional risks for regulatory compliance. Although we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our imported products, we cannot provide assurance that such events will not have a negative impact on our business, financial condition or operating results. Our profitability may suffer as a result of competition in our markets. The food industry is intensely competitive. Competition in our product categories is based on price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing and promotional activity, and the ability to identify and satisfy consumer preferences. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. Such pressures could reduce our ability to take appropriate remedial action to address commodity and other cost increases. Laws and regulations could adversely affect our business. Food products are extensively regulated in most of the countries in which we sell our products. We are subject to numerous laws and regulations relating to the growing, sourcing, manufacturing, storage, labeling, marketing, advertising and distribution of food products, as well as laws and regulations relating to financial reporting requirements, the environment, consumer protection, competition, anti-corruption, privacy, relations with distributors and retailers, foreign supplier verification, customs and trade laws, including the import and export of products and product ingredients, employment, and health and safety. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the attributes of food products and ingredients may increase compliance costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business, such as labeling disclosures pertaining to ingredients. For example, “Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986,” in California exposes all food companies to the possibility of having to provide warnings on their products in that state. If we were required to add warning labels to any of our products or place warnings in locations where our products are sold in order to comply with Proposition 65, the sales of those products and other products of our company could suffer, not only in those locations but elsewhere. In addition, there are various compliance obligations for companies that process personal data of certain individuals, including such obligations required by the European Union’s General Data Protection Regulation (“GDPR”), which came into effect in May 2018, and the California Consumer Privacy Act (“CCPA”), which came into effect in January 2020. These types of data privacy laws create a range of new compliance obligations for companies that process personal data of certain individuals, and increases financial penalties for non-compliance. For example, the CCPA imposes requirements on companies that do business in California and collect personal information from customers, including notice, consent and service provider requirements. The CCPA also provides for civil penalties for companies that fail to comply with these requirements, as well as a private right of action for data breaches. Regulations to implement portions of the CCPA have not been finalized and could significantly impact CCPA compliance measures. As a company that is subject to data privacy laws, we bear the costs of compliance with them, including the GDPR and CCPA, and are subject to the potential for fines and penalties in the event of a breach of these laws, which continue to evolve. These factors and others could have an adverse impact on our business, financial condition or results of operations. Our operations may be impaired as a result of disasters, business interruptions or similar events. We could have an interruption in our business, loss of inventory or data, or be rendered unable to accept and fulfill customer orders as a result of a natural disaster, catastrophic event, epidemic or computer system failure. Natural disasters could include an earthquake, fire, flood, tornado or severe storm. A catastrophic event could include a terrorist attack. An epidemic could affect our operations, major facilities or employees’ and consumers’ health. In addition, some of our inventory and production facilities are located in areas that are susceptible to harsh weather; a major storm, heavy snowfall or other similar event could prevent us from delivering products in a timely manner. Production of certain of our products is concentrated in a single manufacturing site. 2019 Annual Report 25 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. An impairment of the carrying value of goodwill or other indefinite-lived intangible assets could adversely affect our results. As of November 30, 2019, we had approximately $4.5 billion of goodwill and approximately $2.6 billion of other indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are initially recorded at fair value and not amortized but are tested for impairment at least annually or more frequently if impairment indicators arise. We test goodwill at the reporting unit level by comparing the carrying value of the net assets of the reporting unit, including goodwill, to the unit’s fair value. Similarly, we test indefinite-lived intangible assets by comparing the fair value of the assets to their carrying values. If the carrying values of the reporting unit or indefinite-lived intangible assets exceed their fair value, the goodwill or indefinite-lived intangible assets are considered impaired and reduced to their implied fair value or fair value, respectively. Factors that could result in an impairment include a change in revenue growth rates, operating margins, weighted average cost of capital, future economic and market conditions or assumed royalty rates. The impairment of our goodwill or indefinite-lived intangible assets may have a negative impact on our consolidated results of operations. Because indefinite-lived intangible assets are recorded at fair value at the date of acquisition of the related business, indefinite-lived intangible assets associated with recent business acquisitions, 26 McCormick & Company, Inc. particularly those acquired in recent low interest rate environments, such as RB Foods, are more susceptible to impairment in periods of rising interest rates than indefinite-lived intangible assets related to businesses acquired in periods of higher interest rates. Our foreign and cross-border operations are subject to additional risks. We operate our business and market our products internationally. In fiscal year 2019, approximately 40% of our sales were generated in foreign countries. Our foreign operations are subject to additional risks, including fluctuations in currency values, foreign currency exchange controls, discriminatory fiscal policies, compliance with U.S. and foreign laws, enforcement of remedies in foreign jurisdictions and other economic or political uncertainties. Several countries within the European Union continue to experience sovereign debt and credit issues which causes more volatility in the economic environment throughout the European Union and the United Kingdom (“U.K.”) Additionally, international sales, together with finished goods and raw materials imported into the U.S., are subject to risks related to fundamental changes to tax laws as well as the imposition of tariffs, quotas, trade barriers and other similar restrictions. All of these risks could result in increased costs or decreased revenues, which could adversely affect our profitability. Fluctuations in foreign currency markets may negatively impact us. We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling, Australian dollar and Swiss franc. We routinely enter into foreign currency exchange contracts to facilitate managing certain of these foreign currency risks. However, these contracts may not effectively limit or eliminate our exposure to a decline in operating results due to foreign currency exchange changes. Therefore, we cannot provide assurance that future exchange rate fluctuations will not have a negative impact on our business, financial position or operating results. The decision by British voters to exit the European Union may negatively impact our operations. The U.K. is currently negotiating the terms of its exit from the European Union (“Brexit”). In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K., and a transition period to allow time for a future trade deal to be agreed. After the U.K. Parliament failed to approve the Withdrawal Agreement in October 2019, European Union leaders granted the U.K. a three-month flexible Brexit extension, avoiding a no-deal exit on the previous deadline of October 31, 2019. On January 23, 2020, the Withdrawal Act, after clearing all stages in the U.K. Parliament, received royal assent from the Queen. Assuming approval by the European Parliament, the U.K. is expected to officially leave the European Union on January 31, 2020. Following its departure, the U.K. will enter a transition period until December 31, 2020 during which period of time the U.K.’s trading relationship with the European Union will remain largely the same while the two parties negotiate a free trade agreement as well as other aspects of the U.K.’s relationship with the European Union. The Withdrawal Agreement allows the U.K./European Union Joint Committee to extend the transition period by up to two years, meaning that the terms and eventual date of the U.K.’s withdrawal remain highly uncertain. If the U.K. leaves the European Union with no agreement (“hard Brexit”), it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Current volatility and tariffs and duties on trade may also occur under any trade agreement negotiated between the U.K. and the European Union, depending on the agreement’s terms. Additionally, under a hard Brexit or a negotiated trade agreement, the movement of goods between the U.K. and the remaining member states of the European Union may be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations. A weaker British pound versus the U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations. 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 financ- ing 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 down- grade, we may not be able to sell additional debt securities or borrow money in the amounts, at the times or interest rates or upon the more favorable terms and conditions that might be available if our current credit ratings were maintained. We have incurred additional indebtedness to finance the acquisition of RB Foods and may not be able to meet our debt service requirements. After financing our acquisition of RB Foods, we have a significant amount of indebtedness outstanding. As of November 30, 2019, the indebtedness of McCormick and its subsidiaries is approximately $4.3 billion. This substantial level of indebtedness could have import- ant consequences to our business, including, but not limited to: • increasing our debt service obligations, making it more difficult for us to satisfy our obligations; • limiting our ability to borrow additional funds and increasing the cost of any such borrowing; • increasing our exposure to negative fluctuations in interest rates; • subjecting us to financial and other restrictive covenants, the non- compliance with which could result in an event of default; • increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and Increases in interest rates or changes in our credit ratings may negatively impact us. • placing us at a competitive disadvantage as compared to our com- petitors, to the extent that they are not as highly leveraged. On November 30, 2019 we had total outstanding variable rate debt of approximately $882 million, including $601 million of short-term bor- rowings, at a weighted-average interest rate of approximately 2.6%. The interest rates under our term loans and revolving credit facilities can vary based on our credit ratings. Our policy is to manage our inter- est rate risk by entering into both fixed and variable rate debt arrange- ments. 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 utili- zation of written guidelines. However, our use of these instruments may not effectively limit or eliminate our exposure to changes in inter- est 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. 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 com- mitments, 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 com- mitment is remote. 2019 Annual Report 27 In addition, global capital markets have experienced volatility in the past that has tightened access to capital markets and other sources of funding, and such volatility and tightened access could reoccur in the future. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time period. Our inability to obtain financing on acceptable terms or within an acceptable time period could have an adverse impact on our operations, financial condition and liquidity. The uncertainty regarding the potential phase-out of LIBOR may negatively impact our operating results. LIBOR, the interest rate benchmark used as a reference rate on our variable rate debt, including our revolving credit facility, interest rate swaps, and cross currency interest rate swaps is expected to be phased out after 2021, when private-sector banks are no longer required to report the information used to set the rate. Without this data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative of the market. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”). SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash over- night, collateralized by U.S. Treasury securities. Given the inherent dif- ferences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the Company’s cost of variable rate debt and certain deriv- ative financial instruments. The Company will also need to consider new contracts and if they should reference an alternative benchmark rate or include suggested fallback language, as published by the Alternative Reference Rates Committee. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in an increase in the cost of our variable rate debt or derivative financial instruments which may be detrimental to our financial position or operating results. We face risks associated with certain pension assets and obligations. We hold investments in equity and debt securities in our qualified defined benefit pension plans and in a rabbi trust for our U.S. non-qualified pension plan. Deterioration in the value of plan assets resulting from a general financial downturn or otherwise, or an increase in the actuarial valuation of the plans’ liability due to a low interest rate environment, could cause (or increase) an underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity. Uncertain global economic conditions expose us to credit risks from customers and counterparties. Consolidations in some of the industries in which our customers oper- ate 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 informa- tion 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 operat- ing 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, communi- cations, 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 tech- nology 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 dis- rupt our business and could result in transaction or reporting errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer. Furthermore, our information technology systems are subject to cyber-at- tacks 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 infor- mation security program that includes updating technology, developing security policies and procedures, implementing and assessing the effec- tiveness 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 tech- nologies 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 28 McCormick & Company, Inc. 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, changes in tax legislation and the resolution of tax uncertainties create volatility in our effective tax rate. If we are not able to successfully implement our business transformation initiative or utilize information technology systems and networks effectively, our ability to conduct our business may be negatively impacted. We continue to implement our multi-year business transformation initiative to execute significant change to our global processes, capabilities and operating model, including in our Global Enablement (GE) organization, in order to provide a scalable platform for future growth, while reducing costs. As technology provides the backbone for greater process alignment, information sharing and scalability, we are also making investments in our information systems, including the multi-year program to replace our enterprise resource planning (ERP) system currently underway, which includes the transformation of our financial processing systems to enterprise-wide systems solutions. These systems implementations are part of our ongoing business transformation initiative, and we plan to implement these systems throughout all parts of our businesses. If we do not allocate and effectively manage the resources necessary to build and sustain the proper information technology infrastructure, or if we fail to achieve the expected benefits from this initiative, it may impact our ability to process transactions accurately and efficiently and remain in step with the changing needs of our business, which could result in the loss of customers and revenue. In addition, failure to either deliver the applications on time, or anticipate the necessary readiness and train- ing needs, could lead to business disruption and loss of customers and revenue. In connection with these implementations and resulting business process changes, we continue to enhance the design and documentation of business processes and controls, including our internal control over financial reporting processes, to maintain effec- tive controls over our financial reporting. We utilize cloud-based services and systems and networks managed by third-party vendors to process, transmit and store information and to conduct certain of our business activities and transactions with employees, customers, vendors and other third parties. Our utilization of these cloud-based services and systems will increase as we implement our business transformation initiatives. If any of these third-party service providers or vendors do not perform effectively, or if we fail to adequate- ly monitor their performance (including compliance with service- level agreements or regulatory or legal requirements), we may not be able to achieve expected cost savings, we may have to incur additional costs to correct errors made by such service providers, our reputation could be harmed or we could be subject to litigation, claims, legal or regulatory proceedings, inquiries or investigations. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, incorrect or adverse effects on financial reporting, litigation or remediation costs, or damage to our reputation, which could have a negative impact on employee morale. In addition, the management of multiple third-party service providers increases operational complexity and decreases our control. 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 recogni- tion of goodwill impairments, acquisitions and dispositions, adjust- ments to our reserves related to uncertain tax positions, changes in valuation allowances and the portion of the income of foreign subsid- iaries that we expect to remit to the U.S. and that will be taxable. In addition, significant judgment is required in determining our effec- tive 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 uncer- tain. 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 manage- ment. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolu- tion of such matters could be recognized as a reduction to our effec- tive 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 atmo- sphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natu- ral 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 commodi- ties 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 unfa- vorably 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 partic- ular 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 2019 Annual Report 29 through a variety of means, including trademarks, copyrights, patents and trade secrets, third-party assignments and nondisclosure agree- ments, 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 ordi- nary 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 allega- tions made in litigation claims or legal or administrative proceedings (even if untrue) may also adversely affect our reputation. These fac- tors 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 organiza- tion 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 rela- tions at the impacted locations or elsewhere in McCormick. If we are unable to fully realize the benefits from our CCI program, our financial results could be negatively affected. Our future success depends in part on our ability to be an efficient producer in a highly competitive industry. Any failure by us to achieve our planned cost savings and efficiencies under our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization, or other similar programs, could have an adverse effect on our business, results of operations and financial position. The declaration, payment and amount of dividends is made at the discretion of our board of directors and depends on a number of factors. The declaration, payment and amount of any dividends is made pursu- ant 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 divi- dends at any time in the future. 30 McCormick & Company, Inc. ITEM 1B. UNRESOLVED STAFF COMMENTS China: 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: Guangzhou–consumer and flavor solutions Shanghai–consumer and flavor solutions Wuhan–consumer Australia: Melbourne–consumer and flavor solutions Palmwoods–consumer (2 principal plants) India: New Delhi–consumer Thailand: Chonburi–consumer and flavor solutions In addition to distribution facilities and warehouse space available at our manufacturing facilities, we lease regional distribution facilities as follows (i) in the U.S.: Belcamp and Aberdeen, Maryland; Salinas, California; Byhalia, Mississippi; Irving, Texas; and Springfield, Missouri; (ii) in Canada: Mississauga and London, Ontario; (iii) in Heywood, U.K. and (iv) in Gennevilliers, France. We also own distribu- tion 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. Cuautitlan de Romero Rubio–flavor solutions ITEM 3. LEGAL PROCEEDINGS 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) 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 prop- erty is the subject. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. 2019 Annual Report 31 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 com- mon stock at the close of business on December 31, 2019 was $171.07 per share for the Common Stock and $169.73 per share for the Common Stock Non-Voting. The approximate number of holders of our common stock based on record ownership as of December 31, 2019 was as follows: Title of class Common Stock, no par value Common Stock Non-Voting, no par value Approximate number of record holders 2,000 9,400 The following table summarizes our purchases of Common Stock (CS) and Common Stock Non-Voting (CSNV) during the fourth quarter of 2019: Period September 1, 2019 to September 30, 2019 October 1, 2019 to October 31, 2019 November 1, 2019 to November 30, 2019 Total ISSUER PURCHASES OF EQUITY SECURITIES Total number of shares purchased CS-0 CSNV-0 CS-0 CSNV-72,000 CS-0 CSNV-40,500 CS-0 CSNV-112,500 Average price paid per share — — — $161.96 — $160.22 — $161.33 Total number of shares purchased as part of publicly announced plans or programs — — — 72,000 — 40,500 — 112,500 Approximate dollar value of shares that may yet be purchased under the plans or programs $ 50 million $ 38 million $ 632 million(1) $ 632 million (1) Includes an additional $600 million of share repurchase authorization approved by our board of directors in November 2019. As of November 30, 2019, approximately $32 million remained of a $600 million share repurchase authorization approved by the Board of Directors in March 2015. An additional $600 million share repurchase program was authorized by our Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. In certain circumstances, we issue shares of CS in exchange for shares of CSNV, or issue shares of CSNV in exchange for shares of CS, in either case pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Typically, these exchanges are made in connection with the administration of our employee benefit plans, executive compensation programs and dividend rein- vestment/direct purchase plans. The number of shares issued in an exchange is generally equal to the number of shares received in the exchange, although the number may differ slightly to the extent necessary to comply with the requirements of the Employee Retirement Income Security Act of 1974. During fiscal 2019, we issued 1,563,804 shares of CSNV in exchange for shares of CS and issued 2,268 shares of CS in exchange for shares of CSNV. 32 McCormick & Company, Inc. ITEM 6. SELECTED FINANCIAL DATA HISTORICAL FINANCIAL SUMMARY (millions except per share and percentage data) 2019 2018 2017 2016 2015 For the Year Net sales (1) Operating income (1) Income from unconsolidated operations Net income Per Common Share Earnings per share–basic Earnings per share–diluted Common dividends declared Closing price, non-voting shares–end of year Book value per share At Year-End Total assets (2) Current debt Long-term debt (2) Shareholders’ equity Other Financial Measures Percentage of net sales (1) Gross profit (1) Operating income (1) Capital expenditures Depreciation and amortization Common share repurchases Dividends paid Average shares outstanding Basic Diluted $ 5,347.4 957.7 40.9 702.7 $ 5.30 5.24 2.33 169.25 26.02 $10,362.1 698.4 3,625.8 3,456.7 $ 5,302.8 891.1 34.8 933.4 $ 7.10 7.00 2.13 150.00 24.09 $10,256.4 643.5 4,052.9 3,182.2 $ 4,730.3 699.8 33.9 477.4 $ 3.77 3.72 1.93 102.18 19.62 $10,385.8 583.2 4,443.9 2,570.9 $4,313.9 649.4 36.1 472.3 $ 3.73 3.69 1.76 91.20 13.07 $4,635.9 393.2 1,054.0 1,638.1 $4,296.3 548.4 36.7 401.6 $ 3.14 3.11 1.63 85.92 13.25 $4,472.6 343.0 1,051.4 1,686.9 40.1% 17.9% 39.5% 16.8% 37.9% 14.8% 38.1% 15.1% 40.4% 12.8% $ 173.7 158.8 95.1 302.2 132.6 134.1 $ 169.1 150.7 62.3 273.4 131.5 133.2 $ 182.4 125.2 137.8 237.6 126.8 128.4 $ 153.8 108.7 242.7 217.8 126.6 128.0 $ 128.4 105.9 145.8 204.9 128.0 129.2 (1) Amounts set forth above for Net sales, Operating income, Percentage of net sales—Gross profit, and Percentage of net sales—Operating income for the fiscal years ended 2019– 2016 have been recast to reflect the provisions of ASC 606, which we adopted in fiscal 2019 on a full retrospective basis. Amounts set forth above for Operating income, Percentage of net sales—Gross profit, and Percentage of net sales—Operating income for the fiscal years ended 2019–2016 have also been recast to reflect the provisions of ASU 2017–07 regarding the presentation of net periodic pension cost and net periodic postretirement cost. Amounts set forth for the same items in the fiscal year ended 2015 are presented in accordance with guidance in effect in that fiscal year. (2) Total assets and Long-term debt for the fiscal year ended 2015 reflect the provisions of Accounting Standards Updates 2015–03, related to the presentation of debt issuance costs, and 2015-17, related to the classification of deferred tax assets and liabilities, both of which we adopted as of November 30, 2016. The historical financial summary includes the impact of certain items that affect the comparability of financial results year to year. The net impact of these items is reflected in the following table: (millions except per share data) Operating income (1) Net income (2) Earnings per share–diluted 2019 $ (20.8) (14.6) (0.11) 2018 $ (38.8) 271.4 2.03 2017 $ (83.9) (69.3) (0.54) 2016 $ (16.0) (11.1) (0.09) 2015 $ (65.5) (47.9) (0.37) (1) In 2019, 2018, 2017, 2016 and 2015, we recorded special charges related to the completion of organization and streamlining actions, including, for 2016 and 2015, special charges related to the discontinuance of bulk-packaged and broken basmati rice product lines for our business in India. In 2018 and 2017, we recorded transaction and integration expenses related to our acquisition of RB Foods. (2) In 2019 and 2018, we recorded a non-recurring benefit from the U.S. Tax Act of $1.5 million and $301.5 million, respectively. 2019 Annual Report 33 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 opera- tions 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 devel- opment 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 contri- butions from: 1) our base business–driven by brand marketing support, customer intimacy, expanded distribution and category growth; 2) new products; and 3) acquisitions. Base business—We expect to drive sales growth by optimizing our brand marketing investment through improved speed, quality and effectiveness. We measure the return on our brand marketing invest- ment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital mar- keting, 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 custom- ers’ 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 com- pleted 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 34 McCormick & Company, Inc. have included bolt-on opportunities and the August 17, 2017 acquisi- tion 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 stra- tegic 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 and business transformation: We are fueling our investment in growth with cost savings from our CCI program, an ongoing initiative to improve productivity and reduce costs throughout the organization, that also includes savings from the organization and streamlining actions described in note 3 of the accompanying financial statements. In addition to funding brand marketing support, product innovation and other growth initiatives, our CCI program helps offset higher costs and is contributing to higher operating income and earnings per share. We are making investments to build the McCormick of the future, includ- ing in our Global Enablement (GE) organization to transform McCormick through globally aligned, innovative services to enable growth. As more fully described in note 3 of notes to our consolidated financial state- ments, we expect to incur special charges of approximately $60 million to $65 million associated with our GE initiative of which approximately $38 million have been recognized through November 30, 2019. As technology provides the backbone for this greater process alignment, information sharing and scalability, we are also making investments in our information systems. In 2019, we have progressed in implementing our global enterprise resource planning (ERP) replacement program which will enable us to accelerate the transformation of our ways of working and provide a scalable platform for growth. We expect that, in total over the course of the ERP replacement program from late 2018 through 2022, we will invest from approximately $300 million to $350 million, including expenses related to the go-live activities in our operations to enable the anticipated completion of the global roll out of our new information tech- nology platform in 2022. Of that projected $300 million to $350 million, we expect capitalized software to account for approximately 40% and program expenses to account for approximately 60%. Of the approxi- mately $180 million to $210 million of operating expenses included in our projected total spending related to our ERP replacement program, approx- imately $20 million have been recognized through November 30, 2019. The GE initiative is expected to generate annual savings, ranging from approximately $45 million to $55 million, once all actions are implemented, including those that are dependent on the replacement of our global ERP platform. Cash flow: We continue to generate strong cash flow. Net cash pro- vided by operating activities reached $946.8 million in 2019, an increase of $125.6 million from the $821.2 million realized in 2018. In 2019, we continued to have a balanced use of cash for debt repay- ment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 34 years, and to fund capital expenditures, acquisitions and share repurchases. In 2019, the return of cash to our shareholders through dividends and share repurchases was $397.3 million. On a long-term basis, we expect a combination of acquisitions and share repurchases to add about 2% to earnings per share growth. In 2019, we achieved further growth of our business with net sales rising 0.8% over the 2018 level due to the following factors: • We grew volume and product mix, with increases in both our con- sumer and flavor solutions segments. This added 2.5% of sales growth. The increases were driven by new products as well as growth in the base business. • Pricing actions contributed 0.2% of the increase in net sales. • Net sales growth was negatively impacted by fluctuations in cur- rency rates that reduced sales growth by 1.9%. Excluding this impact, we grew sales 2.7% on a constant currency basis. Operating income was $957.7 million in 2019 and $891.1 million in 2018. We recorded $20.8 million and $16.3 million of special charges in 2019 and 2018, respectively, related to organization and streamlining actions. In 2018, we also recorded $22.5 million of transaction and integration expenses related to our acquisition of RB Foods that reduced operating income. In 2019, compared to the year-ago period, the favorable impact of higher sales, $118.9 million of cost savings from our CCI program, including organization and streamlining actions, and the impact of the previously mentioned 2018 integration costs more than offset increased conversion costs, higher stock-based compensation expense, and the unfavorable impact of foreign currency exchange rates. Excluding special charges together with, for 2018, transaction and integration expenses related to our acquisition of RB Foods, adjusted operating income was $978.5 million in 2019, an increase of 5.2%, compared to $929.9 million in the year-ago period. In constant currency, adjusted operating income rose 6.7%. For further details and a reconciliation of non-GAAP to report- ed amounts, see Non-GAAP Financial Measures. Diluted earnings per share was $5.24 in 2019 and $7.00 in 2018. The year-on-year decrease in earnings per share was driven mainly by the significant reduction in the non-recurring benefit of the U.S. Tax Act and, to a much smaller extent, by a higher amount of shares outstanding and by increased special charges in 2019 as compared to 2018. Those unfavorable impacts in 2019 were partially offset by higher operating income as previously described, by the absence of transaction and integration expenses, by lower interest expense and by higher income from unconsolidated operations in 2019 as compared to 2018. Special charges lowered earnings per share by $0.12 and $0.10 in 2019 and 2018, respectively. Transaction and integration ex- penses lowered earnings per share by $0.13 in 2018. A non-recurring benefit from the U.S. Tax Act increased diluted earnings per share by $0.01 and $2.26 in 2019 and 2018, respectively. Excluding the effects of special charges, transaction and integration expenses, and the non-recurring benefit of the U.S. Tax Act, adjusted diluted earnings per share was $5.35 in 2019 and $4.97 in 2018, or an increase of 7.6%. 2020 Outlook We are well-positioned for another year of underlying solid performance in 2020. In 2020, we expect to grow net sales 2% to 4% over 2019’s net sales of $5,347.4 million. That anticipated 2020 sales growth is primarily driven by new products, brand marketing, expanded distribution and the impact of pricing actions, which, in conjunction with cost savings, are expected to offset an anticipated mid-single digit cost increase. That increase consists entirely of organic growth as we do not currently anticipate an incremental sales impact from acquisitions in 2020. We expect our 2020 gross profit margin to be 25 to 75 basis points higher in 2020 than in 2019, in part driven by our CCI-led cost savings. In 2020, we expect operating income, compared to 2019’s operating income of $957.7 million, to range from comparable to an increase of 2%; that range includes an estimated 600 basis point unfavorable impact from expenses related to the investment in our global ERP replacement. Our expectations for 2020 operating income reflect the impact of lower special charges, estimated at $8 million in 2020 compared to $20.8 million in 2019. Excluding special charges (but including the estimated 600 basis point unfavorable impact from expenses related to our global ERP investment), we expect 2020’s adjusted operating income, compared to 2019’s adjusted operating income of $978.5 million, to range from a decline of 1% to an increase of 1%. Our CCI-led cost savings target in 2020 is approximately $105 million. In 2020, we expect to support our sales growth with a mid-sin- gle-digit increase in brand marketing. Our underlying effective tax rate is projected to be higher in 2020 than in 2019. Absent the projected impact of discrete tax items, we estimate our underlying tax rate to be approximately 24% in 2020. Including the projected impact of estimated discrete tax items, includ- ing the favorable impact of a discrete item that occurred in December 2019, we estimate that our consolidated effective tax rate will approximate 22% in fiscal 2020. Excluding the non-recurring benefit of $1.5 million associated with the U.S. Tax Act and taxes associated with special charges recognized in fiscal 2019, our adjusted effective tax rate was approximately 19.5% in 2019. We expect our adjusted effective tax rate in 2020 to approximate our effective tax rate under U.S. GAAP of 22%. Diluted earnings per share was $5.24 in 2019. Diluted earnings per share for 2020 are projected to range from $5.15 to $5.25. Excluding the per share impact of the non-recurring benefit from the U.S. Tax Act of $0.01 and special charges of $0.12 in 2019, adjusted diluted earnings per share was $5.35 in 2019. Adjusted diluted earnings per share (excluding an estimated $0.05 per share impact from special charges) are projected to be $5.20 to $5.30 in 2020. Our projected adjusted diluted earnings per share in 2020, which ranges from a decline of 3% to a decline of 1% from adjusted diluted earnings per share of $5.35 in 2019, includes an approx- imate 700 basis point impact from the expenses associated with our ERP replacement program and a higher adjusted effective tax rate in 2020. In 2020, we expect minimal impact of foreign currency, as compared to 2019 levels, on our projections of net sales, operating income and diluted earnings per share as well as adjusted operating income and adjusted diluted earnings per share. RESULTS OF OPERATIONS—2019 COMPARED TO 2018 Net sales Percent growth Components of percent growth in net sales— increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange 2019 2018 $5,347.4 $5,302.8 0.8% 12.1% 2.5% 0.2% —% (1.9)% 2.2% 0.5% 8.2% 1.2% Sales for 2019 increased by 0.8% from 2018 and by 2.7% on a constant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.5% to sales. This was driven by product innovation as well as growth in the base business. Pricing actions added 0.2% to sales. These factors were partially offset 2019 Annual Report 35 by an unfavorable impact from foreign currency exchange rates that reduced sales by 1.9% compared to 2018 and is excluded from our measure of sales growth of 2.7% on a constant currency basis. Gross profit Gross profit margin 2019 2018 $2,145.3 $2,093.3 40.1% 39.5% In 2019, our gross profit margin increased 60 basis points to 40.1% from 39.5% in 2018, driven by the favorable impact of CCI-led cost savings, partially offset by unfavorable conversion costs. Selling, general & administrative expense Percent of net sales $1,166.8 $ 1,163.4 21.8% 22.0% 2019 2018 Selling, general and administrative (SG&A) expense was $1,166.8 million in 2019 compared to $1,163.4 million in 2018, an increase of $3.4 million. That increase in SG&A expense was driven by increased stock-based compensation expense and higher distribution costs, partially offset by CCI-led cost savings. SG&A expense in 2019 also reflected the impact of two significant, but largely offsetting items: (i) expenses associated with our investment in a global ERP platform in support of our GE business transformation initiative that increased SG&A expense over the prior year level; and (ii) a one-time fiscal 2019 expense reduction from the align- ment of an employee benefit plan to our global standard that decreased SG&A expense from the prior year level. As a result of the above factors over an increased net sales base, SG&A expense as a percentage of net sales was 21.8%, a 20-basis point improvement from 2018. Total special charges 2019 $20.8 2018 $16.3 We regularly evaluate whether to implement changes to our organiza- tion structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue to evaluate such actions in the future. From time to time, those changes are of such significance in terms of both up-front costs and organizational/ structural impact that we obtain advance approval from our Management Committee and classify expenses related to those changes as special charges in our financial statements. During 2019, we recorded $20.8 million of special charges, consist- ing primarily of (i) $14.1 million of costs related to our multi-year GE business transformation initiative, including $10.6 million of third-party expenses, $2.1 million related to severance and related benefits, and $1.4 million related to other costs; (ii) $2.3 million of severance and related benefits associated with streamlining actions in the Americas; and (iii) $3.9 million related to streamlining actions in our EMEA region. During 2018, we recorded $16.3 million of special charges, consisting primarily of: (i) $11.5 million related to our multi-year GE business transformation initiative, consisting of $7.5 million of third party expenses, $1.0 million of employee severance charges and a non-cash asset impairment charge of $3.0 million (which non-cash asset impair- ment charge was related to the write-off of certain software assets that are incompatible with our move to the new global ERP platform); (ii) a one-time payment, in the aggregate amount of $2.2 million, made to eligible U.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act; (iii) $1.0 million related to 36 McCormick & Company, Inc. 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. Transaction and integration expenses 2019 $ — 2018 $22.5 Transaction and integration expenses related to the RB Foods acquisi- tion totaled $22.5 million for 2018. These costs primarily consisted of outside advisory, service and consulting costs; employee-related costs, and other costs related to the acquisition. Operating income Percent of net sales 2019 2018 $ 957.7 $891.1 17.9% 16.8% Operating income increased by $66.6 million, or 7.5%, from $891.1 mil- lion in 2018 to $957.7 million in 2019. An absence of transaction and integration expenses in 2019, compared to $22.5 million related to our acquisition of RB Foods in 2018, more than offset a $4.5 million increase in special charges in 2019 from $16.3 million in 2018 to $20.8 million in 2019. Operating income as a percent of net sales rose by 110 basis points in 2019, from 16.8% in 2018 to 17.9% in 2019 as a result of the factors previously described. Our operating income as a percent of net sales in 2019 was impacted by two large, but substantially off- setting items: (i) expenses associated with our investment in a global ERP platform in support of our GE business transformation initiative that decreased operating income as a percent of sales by approxi- mately 35 basis points in 2019; and (ii) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard that increased operating income as a percent of sales by approximately 40 basis points in 2019. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was $978.5 million in 2019 as compared to $929.9 million in 2018, an increase of $48.6 million or 5.2% over the 2018 level. Adjusted operating income as a percent of sales rose by 80 basis points in 2019, from 17.5% in 2018 to 18.3% in 2019. Interest expense Other income, net 2019 $165.2 26.7 2018 $174.6 24.8 Interest expense was $9.4 million lower for 2019 as compared to the prior year primarily due to a decline in average total borrowings. Other income, net for 2019 increased by $1.9 million from the 2018 level due principally to higher non-service cost income associated with our pension and postretirement benefit plans and higher interest income, which was partially offset by a gain on the sale of a building which was reflected in our 2018 results and did not recur in 2019. Income from consolidated operations before income taxes Income tax expense (benefit) Effective tax rate 2019 2018 $ 819.2 157.4 19.2% $741.3 (157.3) (21.2)% The provision for income taxes is based on the then-current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the fiscal period. We record tax expense or tax benefits that do not relate to ordinary income in the current fiscal year discretely in the period in which such items occur pursuant to the requirements of U.S. GAAP. Examples of such types of discrete items not related to ordinary income of the current fiscal year include, but are not limited to, excess tax benefits associated with share-based payments to employees, changes in estimates of the outcome of tax matters related to prior years (including reversals of reserves upon the lapsing of stat- utes of limitations), provision-to-return adjustments, and the settlement of tax audits and, beginning in 2019, the tax effects of intra-entity asset transfers (other than inventory). As more fully described in note 12 of the accompanying financial state- ments, 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 asso- ciated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatriated in 2018, less a $4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax. In addition, in 2019, we recorded a benefit of $1.5 million relating to an adjustment to a prior year tax accrual associated with the U.S. Tax Act. The effective tax rate was an expense of 19.2% in 2019 as compared to a benefit of 21.2% in 2018. The effective tax rate benefit of 21.2% in 2018 includes the non-recurring net tax benefit of $301.5 million asso- ciated with the U.S. Tax Act, as more fully described above, that had a (40.7)% impact on 2018’s effective tax rate. Net discrete tax benefits were $43.7 million in 2019, which is an increase of $15.6 million from $28.1 million in 2018, excluding the non-recurring benefit of the U.S. Tax Act in 2018. For 2019, the effective tax rate was impacted by $15.2 million of tax benefits associated with an intra-entity asset transfer that occurred during 2019 under the provisions of ASU No. 2016-16, which we adopted on December 1, 2018. Discrete tax benefits in both periods include excess tax benefits associated with share-based pay- ments to employees ($22.4 million and $21.7 million in 2019 and 2018, respectively), reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and settlements with taxing authorities in several jurisdictions, the previously described non-recur- ring benefit of the U.S. Tax Act, and other discrete items. See note 12 of the accompanying financial statements for a more detailed reconcili- ation of the U.S. federal tax rate with the effective tax rate. Income from unconsolidated operations 2019 $40.9 2018 $34.8 Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, increased $6.1 million in 2019 from the prior year. This increase was primarily attributable to the impact of higher earnings from our largest joint venture, McCormick de Mexico, as well as the impact of eliminat- ing a lower level of earnings associated with our minority interests in 2019 as compared to 2018. We own 50% of most of our unconsolidat- ed joint ventures, including McCormick de Mexico that comprised 72% of the income of our unconsolidated operations in 2019. We reported diluted earnings per share of $5.24 in 2019, compared to $7.00 in 2018. The table below outlines the major components of the change in diluted earnings per share from 2018 to 2019. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2019. 2018 Earnings per share—diluted Increase in operating income Impact of non-recurring tax benefit recognized as a result of the U.S. Tax Act Increase in special charges Decrease in transaction and integration expenses attributable to RB Foods acquisition Decrease in interest expense Increase in other income Impact of income taxes Increase in income from unconsolidated operations Impact of higher shares 2019 Earnings per share—diluted $ 7.00 0.29 (2.25) (0.02) 0.13 0.06 0.01 0.01 0.04 (0.03) $ 5.24 Results of Operations—Segments We measure the performance of our business segments based on operating income, excluding special charges and transaction and integration expenses related to our RB Foods acquisition. See note 15 of the accompanying financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges as well as transaction and integration expenses related to our RB Foods acquisition, to consolidated operating income. In the following discussion, we refer to our previously described measure of segment profit as segment operating income. In 2019, the Company transferred management responsibility for certain export operations in both its consumer and flavor solutions seg- ments between geographies within each respective segment, shifting from the Americas to the Asia/Pacific regions within each segment, with no change in segment sales or segment operating income for either the consumer or flavor solutions segment in total. The dis- cussion that follows reflects the effect of that realignment of export operations for all periods presented. Consumer Segment Net sales Percent growth Components of percent growth in net sales– increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange Segment operating income Segment operating income margin 2019 2018 $3,269.8 $ 3,247.0 0.7% 11.9% 2.4% 0.1% —% (1.8)% 1.7% 0.6% 8.2% 1.4% $ 676.3 $ 637.1 20.7% 19.6% 2019 Annual Report 37 Sales of our consumer segment in 2019 grew by 0.7% as compared to 2018 and grew by 2.5% on a constant currency basis. Higher volume and product mix added 2.4% to sales, and pricing actions added 0.1%. These factors offset an unfavorable impact from foreign currency exchange rates that reduced consumer segment sales by 1.8% com- pared to 2018 and is excluded from our measure of sales growth of 2.5% on a constant currency basis. In the Americas, consumer sales rose 2.4% in 2019 as compared to 2018 and rose by 2.7% on a constant currency basis. Higher volume and product mix added 2.7% to sales, driven by new product sales as well as base business growth. The unfavorable impact of foreign cur- rency exchange rates decreased sales by 0.3% compared to 2018 and is excluded from our measure of sales growth of 2.7% on a constant currency basis. In the EMEA region, consumer sales decreased 5.5% in 2019 as compared to 2018 and decreased 0.2% on a constant currency basis. Volume and product mix increased sales by 1.0%, led by new prod- ucts and promotions that were partially offset by declines in private label sales. The impact of pricing actions reduced sales by 1.2%. The unfavorable impact of foreign currency exchange rates decreased sales by 5.3% compared to 2018 and is excluded from our measure of sales decline of 0.2% on a constant currency basis. In the Asia/Pacific region, consumer sales increased 0.8% as com- pared to 2018 and increased 5.7% on a constant currency basis. Higher volume and product mix added 2.9% to sales, led by strong sales in India and Southeast Asia. Pricing actions, primarily in China, added 2.8% to sales as compared to 2018. These factors offset an unfavorable impact from foreign currency exchange rates that decreased sales by 4.9% compared to 2018 and is excluded from our measure of sales growth of 5.7% on a constant currency basis. sales by 2.1% compared to 2018 and is excluded from our measure of sales growth of 3.2% on a constant currency basis. In the Americas, flavor solutions sales rose 2.2% in 2019 as compared to 2018 and rose 2.6% on a constant currency basis. Higher volume and product mix added 2.4% to sales and included growth in new products as well as in base business, led by sales to packaged food companies. Pricing actions added 0.2% to sales in 2019. These factors offset an unfavorable impact from foreign currency exchange rates that reduced sales by 0.4% in 2019 compared to 2018 and is excluded from our measure of sales growth of 2.6% on a constant currency basis. In the EMEA region, flavor solutions sales decreased 0.3% in 2019 as compared to 2018 and increased 6.7% on a constant currency basis. Higher volume and product mix added 5.4% to sales in 2019 with contributions from new products as well as base business growth. The increase was led by sales to quick service restaurants and packaged foods companies. Pricing actions added 1.3% to sales in 2019. These factors partially offset an unfavorable impact from foreign currency exchange rates that decreased sales by 7.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 6.7% on a constant currency basis. In the Asia/Pacific region, flavor solutions sales decreased 3.4% in 2019 as compared to 2018 and increased 0.6% on a constant currency basis. Higher volume and product mix added 0.9% to sales and included increased sales to quick service restaurants, partially offset by the exit of certain low margin business. Pricing actions reduced sales in 2019 by 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced sales by 4.0% in 2019 compared to 2018 and is excluded from our measure of sales growth of 0.6% on a constant currency basis. We grew segment operating income for our consumer segment by $39.2 million, or 6.1%, in 2019 compared to 2018. The favorable impact of higher sales and CCI-led cost savings more than offset increased conversion costs. On a constant currency basis, segment operating income for our consumer segment rose 7.3%. Segment operating income margin for our consumer segment rose by 110 basis points to 20.7% in 2019 from 19.6% in 2018, driven by an improvement in gross margin. We grew segment operating income for our flavor solutions segment by $9.4 million, or 3.2%, in 2019 compared to 2018. The increase in segment operating income was driven by higher sales as well as lower SG&A costs. On a constant currency basis, segment operating income for our flavor solutions segment rose 5.3%. Segment operating income margin for our flavor solutions segment rose by 30 basis points to 14.5% in 2019 from 14.2% in 2018 and reflected the impact of lower SG&A costs as a percentage of net sales. Flavor Solutions Segment RESULTS OF OPERATIONS—2018 COMPARED TO 2017 Net sales Percent growth Components of percent change in net sales– increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange Segment operating income Segment operating income margin 2019 2018 $2,077.6 $2,055.8 1.1% 12.4% 2.9% 0.3% —% (2.1)% 3.1% 0.3% 8.2% 0.8% $ 302.2 $ 292.8 14.5% 14.2% Sales of our flavor solutions segment increased 1.1% in 2019 as com- pared to 2018 and increased by 3.2% on a constant currency basis. Higher volume and product mix added 2.9% to sales and pricing actions added 0.3%. These factors partially offset an unfavorable impact from foreign currency exchange rates that reduced flavor solutions segment Net sales Percent growth Components of percent growth in net sales– increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange 2018 2017 $5,302.8 $4,730.3 12.1% 9.7% 2.2% 0.5% 8.2% 1.2% 1.7% 2.1% 6.6% (0.7)% Sales for 2018 increased by 12.1% from 2017 and by 10.9% on a con- stant currency basis. Both the consumer and flavor solutions segments drove higher volume and product mix that added 2.2% to sales in 2019. This was driven by new products as well as growth in the base business. The incremental impact of pricing actions added 0.5% to sales in 2018, as compared to 2017. The incremental impact of the RB Foods acquisition added 8.2% to sales during 2018. A favorable 38 McCormick & Company, Inc. impact from foreign currency exchange rates increased sales by 1.2% compared to 2017 and is excluded from our measure of sales growth of 10.9% on a constant currency basis. Gross profit Gross profit margin 2018 2017 $2,093.3 $1,794.0 39.5% 37.9% In 2018, our gross profit margin rose 160 basis points to 39.5% from 37.9% in 2017. While this expansion in 2018 includes the accretive impact from our acquisition of the RB Foods business, together with the absence of related transaction and integration expenses of $20.9 million that depressed our 2017 gross profit margin by 50 basis points, our core business was also a driver of that expansion. In 2018, CCI-led cost savings and the shift in our core product portfolio to more val- ue-added products continued to drive profit expansion across both of our segments, which was partially offset by an increase in freight costs during 2018 as compared to 2017. Excluding the effect of those transaction and integration expenses in 2017, adjusted gross profit margin rose 110 basis points from 38.4% in 2017 to 39.5% in 2018. Selling, general & administrative expense Percent of net sales $1,163.4 $1,031.2 22.0% 21.8% 2018 2017 Selling, general and administrative (“SG&A”) expense was $1,163.4 million in 2018 compared to $1,031.2 million in 2017, an increase of $132.2 million. That increase in SG&A expense was driven by the incremental impact of the RB Foods acquisition, together with increased brand marketing and higher distribution costs, which was offset in part by CCI-led cost savings, including the benefits from the organization and streamlining actions described in note 3 of the accom- panying financial statements. As a result, SG&A expense as a percent- age of net sales was 22.0%, a 20-basis point increase from 2017. Total special charges 2018 $16.3 2017 $22.2 During 2018, we recorded $16.3 million of special charges, consist- ing primarily of: (i) $11.5 million related to our multi-year GE busi- ness transformation initiative, consisting of $7.5 million of third party expenses, $1.0 million of employee severance charges and a non- cash asset impairment charge of $3.0 million (that non-cash asset impairment charge was related to the write-off of certain software assets that are incompatible with our move to the new global ERP platform); (ii) a one-time payment, in the aggregate amount of $2.2 million, made to eligible U.S. hourly employees to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act; (iii) $1.0 million related to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; and (iv) $1.6 million related to employee severance benefits and other costs related to the transfer of certain manufacturing operations in our Asia/Pacific region to a newly constructed facility in Thailand. During 2017, we recorded $22.2 million of special charges, consisting primarily of $12.7 million related to third party expenses incurred as part of our evaluation of changes relating to our GE transformation initiative, $2.8 million related to employee severance benefits and other costs associated with the relocation of one of our Chinese manufacturing facilities, $2.5 million for severance and other exit costs associated with the closure of our manufacturing plant in Portugal, and $1.7 million related to employee severance benefits and other costs associated with actions related to the transfer of certain manufactur- ing operations to a new facility then under construction in Thailand. Transaction expenses included in cost of goods sold Transaction expenses included in other debt costs Other transaction and integration expenses Total 2018 $ — — 22.5 $22.5 2017 $20.9 15.4 40.8 $77.1 Transaction and integration expenses related to our RB Foods acquisi- tion totaled $22.5 million and $77.1 million in 2018 and 2017, respec- tively. 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 amor- tization of the acquisition-date fair value adjustment of inventories of $20.9 million that was included in cost of goods sold; outside advi- sory, 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. Operating income Percent of net sales 2018 2017 $891.1 16.8% $699.8 14.8% Operating income increased by $191.3 million, or 27.3%, from $699.8 million in 2017 to $891.1 million in 2018. The change in operating income was impacted by (i) a $39.2 million decrease in transaction and integration expenses, from $61.7 million in 2017 to $22.5 million in 2018, related to our acquisition of RB Foods in 2018; and (ii) a $5.9 million decrease in special charges in 2018 as compared to 2017. Operating income as a percent of net sales rose by 200 basis points in 2018, from 14.8% in 2017 to 16.8% in 2018 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses, adjusted operating income was $929.9 million in 2018 as compared to $783.7 million in 2017, an increase of $146.2 million or 18.7% over the 2017 level. Adjusted operating income as a percent of sales rose by 90 basis points in 2018, from 16.6% in 2017 to 17.5% in 2018. Interest expense Other income, net 2018 $174.6 24.8 2017 $95.7 6.1 Interest expense for 2018 of $174.6 million was sharply higher than the prior year level, primarily due to higher average borrowings in 2018 related to our incurrence of $3.7 billion in debt in August 2017 to finance the acquisition of RB Foods (see note 6 of the accompanying financial statements). Other income, net, for 2018 of $24.8 million was significantly higher than the 2017 level principally due to i) a $9.6 million increase in income related to the non-service component of our pension and other post-retirement plans, ii) a gain of $6.3 million rec- ognized on the sale in 2018 of a building vacated as part of our move to a new global headquarters in Maryland, iii) higher interest income, and iv) lower non-operating foreign currency transaction losses recognized in 2018 as compared to 2017. 2019 Annual Report 39 Income from consolidated operations before income taxes Income tax (benefit) expense Effective tax rate 2018 2017 $ 741.3 (157.3) (21.2)% $594.8 151.3 25.4% As more fully described above and in note 12 of the accompanying financial statements, the U.S. Tax Act was enacted in December 2017. We recorded a net benefit of $301.5 million associated with the U.S. Tax Act during 2018. This amount included a $380.0 million benefit from the revaluation of our net U.S. deferred tax liabilities as of January 1, 2018, based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of $78.5 mil- lion. That net transition tax impact was comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earn- ings 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 subsidiar- ies that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatri- ated 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 employ- ees ($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. Income from unconsolidated operations 2018 $34.8 2017 $33.9 Income from unconsolidated operations increased $0.9 million in 2018 from the prior year. This increase was mainly attributable to higher earnings from our largest joint venture, McCormick de Mexico, partially offset by the impact of a higher elimination of earnings associated with our minority interests in 2018 than in 2017. We own 50% of most of our unconsolidated joint ventures, including McCormick de Mexico, which comprised 76% of the income of our unconsolidated operations in 2018. We reported diluted earnings per share of $7.00 in 2018, compared to $3.72 in 2017. The table below outlines the major components of the change in diluted earnings per share from 2017 to 2018. The increase in operating income in the table below includes the impact from favor- able currency exchange rates in 2018. 40 McCormick & Company, Inc. 2017 Earnings per share—diluted Increase in operating income Impact of non-recurring tax benefit recognized as a result of the U.S. Tax Act Decrease in special charges Decrease in transaction and integration expenses attributable to RB Foods acquisition Increase in interest expense Other impact of income taxes Increase in other income Increase in unconsolidated income Impact of higher shares outstanding 2018 Earnings per share—diluted $3.72 0.84 2.26 0.02 0.29 (0.46) 0.40 0.11 0.01 (0.19) $7.00 RESULTS OF OPERATIONS—SEGMENTS Consumer Segment Net sales Percent growth Components of percent growth in net sales— increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange Segment operating income Segment operating income margin 2018 2017 $3,247.0 $2,901.6 11.9% 8.0% 1.7% 0.6% 8.2% 1.4% 0.2% 2.3% 5.6% (0.1)% $ 637.1 $ 562.4 19.6% 19.4% Sales of our consumer segment in 2018 grew by 11.9% as compared to 2017 and grew by 10.5% on a constant currency basis. Higher volume and product mix added 1.7% to sales, while the impact of 2018 pricing actions added 0.6%. The incremental impact of the RB Foods acquisition added 8.2% to sales. The favorable impact from foreign currency exchange rates increased consumer segment sales in 2018 by 1.4% compared to 2017 and is excluded from our measure of sales growth of 10.5% on a constant currency basis. In the Americas, consumer sales rose 13.4% in 2018 as compared to 2017 and rose by 13.3% on a constant currency basis. Higher volume and product mix added 0.6% to sales, pricing actions added 1.0% to sales, and the incremental impact of acquisitions added 11.7% to sales. The favorable impact of foreign currency exchange rates in- creased sales in 2018 by 0.1% compared to 2017 and is excluded from our measure of sales growth of 13.3% on a constant currency basis. In the EMEA region, consumer sales increased 6.9% in 2018 as compared to 2017 and rose 1.6% on a constant currency basis. Volume and product mix increased sales by 1.8%, led by growth in France and export sales to developing markets. This growth was partially offset by sales weakness in Poland driven by competitive conditions. The incremental impact of the RB Foods acquisition added 0.8% to sales, while the impact of pricing actions reduced sales by 1.0%. The favorable impact of foreign currency exchange rates increased sales in 2018 by 5.3% compared to 2017 and is excluded from our measure of sales increase of 1.6% on a constant currency basis. In the Asia/Pacific region, consumer sales increased 11.5% in 2018 as compared to 2017 and increased 9.0% on a constant currency basis. Higher volume and product mix added 6.7% to sales. Growth was led by China through product innovation and increased distribution, partially offset by lower private label sales in Australia. Pricing actions added 1.2% to sales, and the incremental impact of acquisitions added 1.1% to sales. The favorable impact of foreign currency exchange rates in- creased sales by 2.5% in 2018 compared to 2017 and is excluded from our measure of sales growth of 9.0% on a constant currency basis. We grew segment operating income for our consumer segment by $74.7 million, or 13.3%, in 2018 compared to 2017. The favorable impact of greater sales and higher CCI-led cost savings more than offset the unfavorable impact of higher costs and brand marketing expense. On a constant currency basis, segment operating income for our consumer segment rose 12.4%. Segment operating income margin for our con- sumer segment rose by 20 basis points to 19.6% in 2018 from 19.4% in 2017. The increase in segment operating income margin was driven by a higher gross profit margin and the leverage of fixed and semi-fixed elements of SG&A over the higher sales base in 2018 as compared to 2017. Those factors were partially offset by an increase in SG&A as a percentage of sales, driven by increased investment in brand marketing and higher distribution costs. The previously described gross profit mar- gin 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 Net sales Percent growth Components of percent growth in net sales— increase (decrease): Volume and product mix Pricing actions Acquisitions Foreign exchange Segment operating income Segment operating income margin 2018 2017 $2,055.8 $ 1,828.7 12.4% 12.4% 3.1% 0.3% 8.2% 0.8% 3.8% 2.0% 8.2% (1.6)% $ 292.8 $ 221.3 14.2% 12.1% Sales of our flavor solutions segment increased 12.4% in 2018 as compared to 2017 and increased by 11.6% on a constant currency basis. Higher volume and product mix added 3.1% to sales and pricing actions added 0.3%. Flavor solutions segment sales rose in 2018 due to the incremental impact of acquisitions, primarily the RB Foods acquisition, which added 8.2% to sales. The favorable impact from for- eign currency exchange rates increased flavor solutions segment sales in 2018 by 0.8% compared to 2017 and is excluded from our measure of sales growth of 11.6% on a constant currency basis. In the Americas, flavor solutions sales rose 15.1% in 2018 as compared to 2017 and rose 15.0% on a constant currency basis. Higher volume and product mix added 3.1% to sales led by increased sales to several large custom flavor solutions customers partially offset by the impact from a global realignment of a major customer’s sales to EMEA, together with the exit of certain lower margin business. Pricing actions added 0.2% to sales and the incremental impact of our RB Foods acquisition added 11.7% to sales. The favorable impact from foreign currency exchange rates increased sales by 0.1% in 2018 compared to 2017 and is excluded from our measure of sales growth of 15.0% on a constant currency basis. In the EMEA region, flavor solutions sales increased 8.6% in 2018 as compared to 2017 and increased 6.3% on a constant currency basis. Higher volume and product mix added 4.1% to sales, driven by increased sales to quick service restaurants, broad based growth in Turkey, and the previously described global realignment of a major cus- tomer’s sales from the Americas to EMEA. Pricing actions added 1.0% to sales in 2018 and the incremental impact of the Giotti and RB Foods acquisitions added 1.2% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 6.3% on a constant currency basis. In the Asia/Pacific region, flavor solutions sales increased 3.9% in 2018 as compared to 2017 and increased 1.6% on a constant currency basis. Higher volume and product mix increased sales by 1.3%, while pricing actions reduced sales by 0.5% as compared to 2017. Increased sales in China, led by new products and limited time offers, were off- set in part by sales declines in Australia, which were partially attrib- utable to the exit of certain lower margin business. The incremental impact of the RB Foods acquisition added 0.8% to sales. The favorable impact from foreign currency exchange rates increased sales by 2.3% in 2018 compared to 2017 and is excluded from our measure of sales growth of 1.6% on a constant currency basis. We grew segment operating income for our flavor solutions segment by $71.5 million, or 32.3%, in 2018 compared to 2017. The increase in segment operating income was due to the incremental impact of the RB Foods acquisition, coupled with CCI-led cost savings. On a constant currency basis, segment operating income for our flavor solutions segment rose 32.3%. Segment operating income margin for our flavor solutions segment rose by 210 basis points to 14.2% in 2018 from 12.1% in 2017 and was driven by a higher gross profit margin offset, in part, by higher SG&A as a percentage of net sales, which reflects higher distribution costs. NON-GAAP FINANCIAL MEASURES The following tables include financial measures of adjusted gross profit, adjusted operating income, adjusted income tax expense, adjusted income tax rate, adjusted net income and adjusted diluted earnings per share. These represent non-GAAP financial measures which are pre- pared 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 competitive- ness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. Upon presentation of any such proposed action (including details with respect to estimated costs, which generally consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an ongoing basis through completion. In 2018, we also included in special charges, as approved by our Management Committee, expense associated with a one-time payment, made to eligible U.S. hourly employees, to distribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act as that 2019 Annual Report 41 non-recurring income tax benefit is excluded from our computa- tion of adjusted income taxes, adjusted net income and adjusted diluted earnings per share, each a non-GAAP measure. • Transaction and integration expenses associated with the RB Foods acquisition—We exclude certain costs associated with our acquisi- tion of RB Foods in August 2017 and its subsequent integration into the Company. Such costs, which we refer to as “Transaction and integration costs”, include transaction costs associated with the acquisition, as well as integration costs following the acquisition. The size of this acquisition and related costs, and therefore the impact on the comparability of our results, distinguishes it from our past, recent and smaller acquisitions, the costs of which have not been excluded from our non-GAAP financial measures. • Income taxes associated with the U.S. Tax Act—In connection with the enactment of the U.S. Tax Act in December 2017, we recorded a net non-recurring income tax benefit of $301.5 million during the year ended November 30, 2018, which included the estimated impact of the tax benefit from revaluation of net U.S. deferred tax liabilities based on the new lower corporate income tax rate and the tax expense associated with the one-time transi- tion tax on previously unremitted earnings of non-U.S. subsidiar- ies. We recorded an additional net income tax benefit of $1.5 million during the year ended November 30, 2019 associated with a U.S Tax Act related provision to return adjustment. Details with respect to the composition of transaction and integration expenses (including other debt costs), special charges and non-recurring income tax benefits associated with the U.S. Tax Act recorded for the years and in the amounts set forth below are included in notes 2, 3 and 12, respectively, of the accompanying financial statements. We believe that these non-GAAP financial measures are important. The exclusion of the items noted above provides additional information that enables enhanced comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. These non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. In addition, these non-GAAP financial measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting. A reconciliation of these non-GAAP measures to GAAP financial results is provided below: Gross profit Impact of transaction and integration expenses included in cost of goods sold (1) Adjusted gross profit Adjusted gross profit margin (2) Operating income Impact of transaction and integration expenses included in cost of goods sold (1) Impact of other transaction and integration expenses (1) Impact of special charges Adjusted operating income % increase versus prior year Adjusted operating income margin (2) Income tax expense (benefit) Non-recurring benefit, net, of the U.S. Tax Act (3) Impact of transaction and integration expenses Impact of special charges Adjusted income tax expense Adjusted income tax rate (4) Net income Impact of total transaction and integration expenses (1) Impact of total special charges Non-recurring benefit, net, of the U.S. Tax Act (3) Adjusted net income % increase versus prior year Earnings per share—diluted Impact of total transaction and integration expenses (1) Impact of total special charges Non-recurring benefit, net, of the U.S. Tax Act (3) Adjusted earnings per share—diluted % increase versus prior year 42 McCormick & Company, Inc. 2019 $2,145.3 — $2,145.3 2018 $2,093.3 — $2,093.3 2017 $ 1,794.0 20.9 $ 1,814.9 40.1% 39.5% 38.4% $ 957.7 — — 20.8 $ 978.5 5.2% 18.3% $ 157.4 1.5 — 4.7 $ 163.6 $ 891.1 — 22.5 16.3 $ 929.9 18.7% 17.5% $ (157.3) 301.5 4.9 3.8 $ 152.9 $ 699.8 20.9 40.8 22.2 $ 783.7 17.8% 16.6% $ 151.3 — 23.6 6.4 $ 181.3 19.5% 19.6% 26.1% $ 702.7 — 16.1 (1.5) $ 717.3 $ 933.4 17.6 12.5 (301.5) $ 662.0 $ 477.4 53.5 15.8 — $ 546.7 8.4% 21.1% 13.1% $ 5.24 — 0.12 (0.01) $ 5.35 $ 7.00 0.13 0.10 (2.26) $ 4.97 $ 3.72 0.42 0.12 — $ 4.26 7.6% 16.7% 12.7% (1) There were no transaction and integration expenses related to the acquisition of RB Foods during the year ended November 30, 2019. As more fully described in note 2 of the accom- panying 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): Transaction and integration expenses included in cost of goods sold Reflected in transaction and integration expenses Transaction and integration expenses included in operating income Transaction and integration expenses included in other debt costs Total pre-tax transaction and integration expenses Less: Tax effect Total after-tax transaction and integration expenses 2018 2017 $ — $ 20.9 40.8 22.5 22.5 — 22.5 (4.9) 61.7 15.4 77.1 (23.6) $ 17.6 $ 53.5 (2) Adjusted gross profit margin is calculated as adjusted gross profit as a percentage of net sales for each period presented. Adjusted operating income margin is calculated as adjusted operating income as a percentage of net sales for each period presented. (3) The non-recurring income tax benefit, net, associated with enactment of the U.S. Tax Act of $1.5 million and $301.5 million for the years ended November 30, 2019 and 2018, respec- tively, is more fully described in note 12 of the accompanying financial statements. (4) Adjusted income tax rate is calculated as adjusted income tax expense as a percentage of income from consolidated operations before income taxes, excluding transaction and inte- gration expenses and special charges, or $840.0 million, $780.1 million, and $694.1 million for the years ended November 30, 2019, 2018, and 2017, respectively. Estimate for the year ending November 30, 2020 Earnings per share—diluted Impact of special charges $ 5.15 to $ 5.25 0.05 Adjusted earnings per share—diluted $ 5.20 to $ 5.30 Because we are a multi-national company, we are subject to variability of our reported U.S. dollar results due to changes in foreign currency exchange rates. Those changes have been volatile over the past sev- eral 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 mea- sure 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 percent- age 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 for- eign currency exchange. To present this information for historical peri- ods, 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 cur- rency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2019 on a constant currency basis, net sales and adjusted operating income for 2019 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2018 and compared to the reported results for 2018; and (2) to present our growth in net sales and adjusted operating income for 2018 on a constant currency basis, net sales and operating income for 2018 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2017 and compared to the reported results for 2017. Net sales: Consumer segment: Americas EMEA Asia/Pacific Total Consumer Flavor Solutions segment: Americas EMEA Asia/Pacific Total Flavor Solutions Total net sales Adjusted operating income: Consumer segment Flavor Solutions segment Total adjusted operating income For the year ended November 30, 2019 Percentage change as reported Impact of foreign currency exchange Percentage change on constant currency basis 2.4% (5.5)% 0.8% 0.7% 2.2% (0.3)% (3.4)% 1.1% 0.8% 6.1% 3.2% 5.2% (0.3)% (5.3)% (4.9)% (1.8)% (0.4)% (7.0)% (4.0)% (2.1)% (1.9)% (1.2)% (2.1)% (1.5)% 2.7% (0.2)% 5.7% 2.5% 2.6% 6.7% 0.6% 3.2% 2.7% 7.3% 5.3% 6.7% 2019 Annual Report 43 For the year ended November 30, 2018 Percentage change as reported Impact of foreign currency exchange Percentage change on constant currency basis 13.4% 6.9% 11.5% 11.9% 15.1% 8.6% 3.9% 12.4% 12.1% 13.3% 32.3% 18.7% 0.1% 5.3% 2.5% 1.4% 0.1% 2.3% 2.3% 0.8% 1.2% 0.9% —% 0.7% 13.3% 1.6% 9.0% 10.5% 15.0% 6.3% 1.6% 11.6% 10.9% 12.4% 32.3% 18.0% terms of our $1.0 billion revolving credit facility and our term loans which require us to maintain our leverage ratio below certain levels. Under those agreements, the applicable leverage ratio is reduced annually. As of November 30, 2019, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility. We expect to comply with this financial covenant for the foresee- able future. The following table reconciles our net income to Adjusted EBITDA for the years ended November 30: Net income Depreciation and amortization Interest expense Income tax expense (benefit) EBITDA Adjustments to EBITDA(1) Adjusted EBITDA Net debt (2) Leverage ratio 2019 2018 2017 $ 702.7 158.8 165.2 157.4 1,184.1 47.9 $ 933.4 150.7 174.6 (157.3) 1,101.4 57.3 $ 477.4 125.2 95.7 151.3 849.6 117.4 $ 1,232.0 $ 1,158.7 $ 967.0 $ 4,243.8 $ 4,674.8 $ 4,915.3 (Net debt/Adjusted EBITDA) (3) 3.4 4.0 5.1 (1) Adjustments to EBITDA are determined under the leverage ratio covenant in our $1.0 billion revolving credit facility and term loan agreements and include special charges, stock-based compensation expense, interest income and, for the years ended November 30, 2018 and 2017, transaction and integration expenses (related to RB Foods acquisition), including other debt costs. (2) The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements define net debt as the sum of short-term borrowings, current por- tion of long-term debt, and long-term debt, less the amount of cash and cash equiv- alents that exceed $75.0 million. (3) The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements provide that Adjusted EBITDA also includes the pro forma impact of acquisitions. As of November 30, 2017, our leverage ratio under the terms of those agreements, including the pro forma impact of acquisitions was 4.5. Net sales: Consumer segment: Americas EMEA Asia/Pacific Total Consumer Flavor Solutions segment: Americas EMEA Asia/Pacific Total Flavor Solutions Total net sales Adjusted operating income: Consumer segment Flavor Solutions segment Total adjusted operating income To present the percentage change in projected 2020 sales, adjusted operating income and adjusted earnings per share on a constant cur- rency basis, 2020 projected local currency sales, adjusted operating income, and adjusted net income for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at currently prevailing exchange rates and are compared to those 2020 local cur- rency projected results, translated into U.S. dollars at the average actual exchange rates in effect during the corresponding months in fiscal year 2019 to determine what the 2020 consolidated U.S. dollar sales, adjusted operating income and adjusted earnings per share would have been if the relevant currency exchange rates had not changed from those of the comparable prior-year periods. In 2020, we expect minimal impact of foreign currency, as compared to 2019 lev- els, on our projections of net sales, operating income and diluted earnings per share as well as adjusted operating income and adjusted diluted earnings per share. In addition to the above non-GAAP financial measures, we use a leverage ratio which is determined using non-GAAP measures. A leverage ratio is a widely-used measure of ability to repay outstanding debt obligations and is a meaningful metric to investors in evaluating financial leverage. We believe that our leverage ratio is a meaningful metric to investors in evaluating our financial leverage, although our method to calculate our leverage ratio may be different than the method used by other companies to calculate such a leverage ratio. We determine our leverage ratio as net debt (which we define as total debt, net of cash in excess of $75.0 million) to adjusted earnings before interest, tax, depreciation and amor- tization (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 acqui- sition-related expenses (which may include the effect of the fair value adjustment of acquired inventory on cost of goods sold), special charges, stock-based compensation expenses, and certain gains or losses (which may include third party fees and expenses and integration costs). Adjusted EBITDA and our leverage ratio are both non-GAAP financial measures. Our determination of the leverage ratio is consistent with the 44 McCormick & Company, Inc. Our long-term target for our leverage ratio is 1.5 to 2.0. Our leverage ratio can be temporarily impacted by our acquisition activity. LIQUIDITY AND FINANCIAL CONDITION Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by 2019 2018 2017 $ 946.8 (171.0) $ 821.2 (158.5) $ 815.3 (4,508.3) financing activities (725.8) (751.1) 3,756.0 We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, service our debt, increase our dividend, fund capital projects and other investments, and make share repurchases when appropriate. Due to the cyclical nature of a portion of our business, we generate much of our cash flow in the fourth quarter of the fiscal year. In the cash flow statement, the changes in operating assets and liabili- ties are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet. The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2019, the exchange rates for the Euro, Australian dollar, Polish zloty and Chinese renminbi were lower versus the U.S. dollar than at November 30, 2018. At November 30, 2019, the exchange rates for the British pound sterling and Canadian dollar were higher versus the U.S. dollar than at November 30, 2018. Operating Cash Flow—Operating cash flow was $946.8 million in 2019, $821.2 million in 2018, and $815.3 million in 2017. The increases in cash flow from operations in both 2019 and 2018 were primarily due to higher net income, exclusive of the 2018 impact of the non-cash non-recurring net income tax benefit of $309.4 million related to the U.S. Tax Act. In addition, as more fully described below, our working capital management favorably impacted operating cash flow in 2019, 2018 and 2017. In 2019, the increases to operating cash flow were partially offset by a use of cash associated with other assets and liabilities, totaling $81.5 million. In 2018, those increases were partially offset by a higher use of cash from other operating assets and liabilities partially related to the timing of our payment of transaction and integration expenses as well as of interest on indebt- edness related to our acquisition of RB Foods, as compared to the source of cash in 2017. Dividends received from unconsolidated affili- ates, which were higher in 2019 compared to 2018 and higher in 2018 as compared to 2017, also impacted our cash flow from operations. Our working capital management—principally related to inventory, trade accounts receivable, and accounts payable—impacts our operat- ing cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a use of cash in 2019 and 2018 and a source of cash in 2017. The change in trade accounts receivable has varied in the last three years as well, as it was a source of cash in 2019 and 2018, and a use of cash in 2017. The change in accounts payable was a significant source of cash in all three years. In addition to operating cash flow, we also use cash conversion cycle (“CCC”) to measure our working capital management. This metric is differ- ent 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 receiv- able. 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 inven- tory 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: Cash Conversion Cycle 2019 43 2018 55 2017 76 The decreases in CCC in 2019 from 2018 and in 2018 from 2017 were due, in both instances, to an increase in our days payable outstanding as a result of extending our payment terms to suppliers and to a lesser extent, by a decrease in our days sales outstanding. Our CCC is also impacted by days in inventory which increased in 2019 as com- pared to 2018, and decreased in 2018 as compared to 2017. Investing Cash Flow—Net cash used in investing activities was $171.0 million in 2019, $158.5 million in 2018, and $4,508.3 million in 2017. Our primary investing cash flows include the usage of cash associated with acquisition of businesses and capital expenditures. Cash usage related to our acquisitions of businesses were $4.2 million in 2018, and $4,327.4 million in 2017. See note 2 of the accompanying financial statements for further details related to our acquisition of RB Foods. Capital expenditures, including expenditures for capitalized software, were $173.7 million in 2019, $169.1 million in 2018, and $182.4 million in 2017. We expect 2020 capital expenditures to approximate $265 million to support our planned growth, including the multi-year program to replace our ERP system and other initiatives. Financing Cash Flow—Net cash used in financing activities was $725.8 million in 2019 and $751.1 million in 2018. Net cash provided by financing activities was $3,756.0 million in 2017. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below. In 2019 and 2018, our net borrowing activity used cash of $406.7 mil- lion and $466.5 million, respectively. In 2017, our net borrowing activ- ity provided cash of $3,574.6 million. In 2019, we increased our short-term borrowings, on a net basis, by $41.0 million. We also repaid $447.7 million of long-term debt, includ- ing $436.3 million of our $1,500.0 million term loans issued in August 2017. Of that $436.3 million, $361.3 million represent prepayments. Through November 30, 2019, we have repaid $1,250.0 million of the $1,500.0 million term loans issued in August 2017, including pre- payments of $1,081.3 million. 2019 Annual Report 45 In 2018, we increased our short-term borrowings, on a net basis, by $305.5 million and borrowed $25.9 million under long-term borrow- ing 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 accompa- nying 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. The following table outlines the activity in our share repurchase programs: Number of shares of common stock Dollar amount 2019 0.7 $95.1 2018 0.5 $62.3 2017 1.4 $137.8 As of November 30, 2019, $32 million remained of a $600 million share repurchase program that was authorized by our Board of Directors in March 2015. An additional $600 million share repurchase program was authorized by our Board of Directors in November 2019. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. During 2019, 2018 and 2017, we received proceeds of $90.9 million, $78.2 million and $29.5 million, respectively, from exercised stock options. We repurchased $12.7 million, $11.6 million and $5.8 million of common stock during 2019, 2018 and 2017, respectively, in conjunc- tion with employee tax withholding requirements associated with our stock compensation plans. During 2017, we issued approximately 6.35 million shares of our Common Stock Non-Voting to fund our acquisition of RB Foods (see notes 2 and 13 of the accompanying financial statements), which included approxi- mately 0.8 million shares from the exercise of the underwriters’ option to purchase additional shares. The net proceeds from this issuance, after the underwriting discount and related expenses, was $554.0 million. Our dividend history over the past three years is as follows: Total dividends paid Dividends paid per share Percentage increase per share 2019 2018 2017 $302.2 2.28 9.6% $273.4 2.08 10.6% $237.6 1.88 9.3% In November 2019, the Board of Directors approved an 8.8% increase in the quarterly dividend from $0.57 to $0.62 per share. The following table presents our leverage ratios for the years ended November 30, 2019, 2018 and 2017: Leverage ratio 2019 3.4 2018 4.0 2017 5.1(1) (1) The leverage ratio covenant in our $1.0 billion revolving credit facility and the term loan agreements, both outstanding at November 30, 2019, 2018, and 2017, provide that Adjusted EBITDA under that covenant also include the pro forma impact of acquisitions, as applicable. As of November 30, 2017, our leverage ratio under the terms of those agreements, including the pro forma impact of acquisitions, was 4.5. Our leverage ratio was 3.4 as of November 30, 2019, as compared to the ratios of 4.0 and 5.1 as of November 30, 2018 and 2017, respec- tively. The decrease in our leverage ratio from 4.0 as of November 30, 2018 to 3.4 as of November 30, 2019 is due to both an increase in our adjusted EBITDA, which was driven by higher operating income in 2019 as compared to 2018, as well as our lower level of net debt at November 30, 2019. The decrease in the ratio from 5.1 as of November 30, 2017 to 4.0 as of November 30, 2018 is principally due to an increase in our adjusted EBITDA, which was driven by higher operating income in 2018 as compared to 2017. In addition, the ratio was favorably impacted by our lower level of net debt at November 30, 2018. Most of our cash is in our foreign subsidiaries. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. Prior to the enactment of the U.S. Tax Act on December 22, 2017, the permanent repatriation of cash balances from certain of our subsid- iaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisi- tions. Currently, the repatriation of cash balances from certain of our subsidiaries could still have adverse tax consequences related to the effects of withholding and other taxes. At November 30, 2019, we temporarily used $262.8 million of cash from our foreign subsidiaries to pay down short-term debt in the U.S. The average short-term bor- rowings outstanding for the years ended November 30, 2019 and 2018 were $848.6 million and $700.0 million, respectively. The total aver- age debt outstanding for the years ended November 30, 2019 and 2018 was $4,753.8 million and $5,081.6 million, respectively. See notes 6 and 7 of the accompanying financial statements for further details of these transactions. Credit and Capital Markets—The following summarizes the more sig- nificant 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. 46 McCormick & Company, Inc. 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 con- tains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. This facility replaced our prior facilities: (i) a five- year $750 million revolving credit facility that was due to expire in June 2020 and (ii) a 364-day $250 million revolving facility, which we entered into in the second quarter of 2017 and that was due to expire in March 2018. We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities of $261.5 million as of November 30, 2019, that can be withdrawn based upon the lenders’ discretion. We engage in regular communication with all banks partic- ipating 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 state- ments for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquid- ity under our credit facilities are sufficient to fund ongoing operations. PENSION ASSETS AND OTHER INVESTMENTS—We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash contributions to pension plans, including unfunded plans, were $11.4 million in 2019, $13.5 million in 2018, and $18.7 million in 2017. It is expected that the 2020 total pen- sion plan contributions will be approximately $12.0 million. Future increases or decreases in pension liabilities and required cash contri- butions are highly dependent on changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all of our qualified defined benefit pension plans, approximately 59% of assets are invested in equities, 31% in fixed income investments and 10% in other investments. Assets in the rabbi trust are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 60% in equities and 40% in fixed income invest- ments. See note 10 of the accompanying financial statements, which provides details on our pension funding. CUSTOMERS AND COUNTERPARTIES—See the subsequent section of this discussion under Market Risk Sensitivity–Credit Risk. ACQUISITIONS Acquisitions are part of our strategy to increase sales and profits. We did not have any acquisition activity in fiscal 2019. In fiscal 2018 we purchased the remaining 10% minority ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million. In fiscal 2017, we made the following acquisitions: • On December 15, 2016, we purchased 100% of the shares of Enrico Giotti SpA (Giotti), a leading European flavor manufac- turer 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 fla- voring 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 work- ing 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. 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. 2019 Annual Report 47 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among McCormick & Co., Inc., the S&P 500 Index and the S&P Packaged Foods & Meats Index $300 $250 $200 $150 $100 $50 $0 11/14 11/15 11/16 11/17 11/18 11/19 McCormick & Co., Inc S&P 500 S&P Packaged Foods & Meats *$100 invested on 11/30/14 in stock or index, including reinvestment of dividends. Fiscal year ending November 30. Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved. 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 informa- tion 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 sub- sidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary expo- sures 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 man- age certain of these foreign currency risks. During 2019, the foreign currency translation component in other com- prehensive 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, Australian dollar, Canadian dollar and Mexican peso. Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts, which are designated as net investment hedges, to manage the impact of exchange rate fluctuations on our net investments in subsidiaries with a functional currency of the British pound sterling and Euro. Gains and losses on these instru- ments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss). In 2018 and 2017, we did not hedge our net investments in subsidiaries or unconsoli- dated affiliates. 48 McCormick & Company, Inc. The following table summarizes the foreign currency exchange con- tracts held at November 30, 2019. All contracts are valued in U.S. dol- lars using year-end 2019 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, 2019 Currency sold Currency received British pound sterling Canadian dollar U.S. dollar Polish zloty Australian dollar Swiss franc Canadian dollar U.S. dollar U.S. dollar U.S. dollar U.S. dollar U.S. dollar U.S. dollar Australian dollar U.S. dollar Euro Euro British pound sterling Australian dollar British pound sterling Canadian dollar Euro Notional value $ 34.5 105.1 16.6 18.5 41.4 66.2 29.5 27.1 102.7 4.2 21.5 Average contractual exchange rate 1.27 0.76 0.70 3.90 1.64 1.13 1.65 0.68 1.29 0.77 1.10 Fair value $(0.8) 0.5 (0.4) 0.1 0.1 (1.9) 1.5 (0.1) 0.6 (0.1) — We had a number of smaller contracts at November 30, 2019 with an aggregate notional value of $21.8 million to purchase or sell other currencies, such as the Romanian leu, Russian ruble, and Singapore dollar. The aggregate fair value of these contracts was $0.2 million at November 30, 2019. At November 30, 2018, we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar, Polish zloty, Swiss franc and other currencies, with a notional value of $494.9 million. The aggregate fair value of these contracts was $(2.0) million at November 30, 2018. Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts that are considered net investment hedges. As of November 30, 2019, we had notional values of cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross-currency interest rate swap contracts expire in August 2027. For more information, refer to footnote 7. 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 amortiza- tion of any discounts or fees, by fiscal year of maturity at November 30, 2019. 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, 2019 Debt Fixed rate Average interest rate Variable rate Average interest rate 2020 2021 2022 2023 Thereafter Total Fair value $ 7.1 3.45% $691.3 2.55% $257.3 $ 757.5 $ 257.8 $2,165.9 3.89% 2.71% 3.50% 3.52% $ 3,445.6 — $ 83.8 $ 106.6 $ — 2.89% 2.91% $ — $ 881.7 — $3,578.0 — $ 881.7 — 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 the issuance of these notes in 2011, effectively set the interest rate on the $250 million 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%. The fixed interest rate on $250 million of the 3.40% notes due in 2027 was effectively converted to a variable rate by interest rate swaps through 2027. Net interest payments are based on 3-month LIBOR plus 0.685% during this period Commodity Risk—We purchase certain raw materials which are sub- ject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. In 2019, our most significant raw materials were dairy products, vanilla, pepper, capsicums (red peppers and paprika), garlic, 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 gen- erally 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 predomi- nantly 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 mer- chandisers, 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, 2019: CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR Short-term borrowings Long-term debt, including capital leases Operating leases Interest payments Raw material purchase obligations (a) Other purchase obligations (b) Total contractual cash obligations Less than 1 year 1–3 years 3–5 years More than 5 years Total $ 600.7 $ 600.7 $ — $ — $ — 3,726.6 162.2 859.9 97.7 41.8 118.5 1,205.3 61.5 212.7 1,020.9 26.6 154.6 1,402.7 32.3 374.1 492.4 492.4 — — — 160.4 76.1 35.2 18.4 30.7 $ 6,002.2 $1,427.2 $1,514.7 $1,220.5 $1,839.8 (a) Raw material purchase obligations outstanding as of year end may not be indica- tive of outstanding obligations throughout the year due to our response to vary- ing raw material cycles. (b) Other purchase obligations consist of information technology and other service 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. 2019 Annual Report 49 COMMERCIAL COMMITMENTS EXPIRATION BY YEAR Guarantees Standby letters of credit Total commercial commitments Less than 1 year 1–3 years 3–5 years More than 5 years $ 0.6 32.2 $— $— — — $— — Total $ 0.6 32.2 $32.8 $32.8 $— $— $— OFF-BALANCE SHEET ARRANGEMENTS We had no off-balance sheet arrangements as of November 30, 2019 and 2018. 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 circum- stances, 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 prepar- ing 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 esti- mates 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 arrangements. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding these programs. Key sales terms, such as pricing and quan- tities ordered, are established on a frequent basis such that most cus- tomer arrangements and related incentives have a one-year or shorter duration. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized. Goodwill and Intangible Asset Valuation We review the carrying value of goodwill and non-amortizable intan- gible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstanc- es 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. 50 McCormick & Company, Inc. 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. 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 esti- mate 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 ex- ceeds 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, 2019, we had $4,505.2 million of goodwill recorded in our balance sheet ($3,377.6 million in the consumer segment and $1,127.6 million in the flavor solutions segment). Our fiscal year 2019 testing indicated that the estimated fair values of our reporting units were significantly in excess of their carry- ing 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 values primarily through the use of the relief-from-royalty method and then compare those fair values to the related carrying amounts of the indefinite-lived intangible asset. In the event that the fair value of any of the brand names or trademarks are less than their related carrying amounts, a non-cash impairment loss would recognized in an amount equal to the difference. The estimation of fair values of our brand names and trademarks requires us to make significant assumptions, including expectations with respect to sales and profits of the respective brands and trade- marks, related royalty rates and appropriate discount rates, which are based, in part, upon current interest rates adjusted for our view of rea- sonable country- and brand-specific risks based upon the past and antic- ipated future performance of the related brand names and trademarks. As of November 30, 2019, we had $2,643.0 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. Of the $2,643.0 million of brand names assets and trademarks as of November 30, 2019: (i) $2,320.0 million relates to the French’s, Frank’s RedHot and Cattlemen’s brand names and trademarks, recognized as part of our acquisition of RB Foods in August 2017, that we group for purposes of our impairment analysis; and (ii) the remaining $323.0 million represents a number of other brand name assets and trademarks with individual carrying values ranging from $0.2 million to $106.4 million. The percentage excess of estimated fair value over respective book values for each of our brand names and trademarks, including the $2,320.0 million related to our French’s, Frank’s RedHot and Cattlemen’s brands, was 20% or more as of November 30, 2019, except for one brand with a carrying value of $27.1 million whose fair value modestly exceeds its carrying value at that date. The brand names and trademarks related to recent acquisitions may be more susceptible to future impairment as their carrying values represent recently determined fair values. A change in assumptions with respect to recently acquired businesses, including those affected by rising interest rates or a deterioration in expectations of future sales, profitability or royalty rates as well as future economic and market conditions, or higher income tax 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 valu- ation 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, inter- pretative 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 actuar- ial assumptions used in our pension and postretirement benefit report- ing 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 assump- tions 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 2020 pension and postretirement benefit expense by approxi- mately $1 million. A 1% increase or decrease in the expected return on plan assets would impact 2020 pension expense by approximately $9 million. We will continue to evaluate the appropriateness of the 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. 2019 Annual Report 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT We are responsible for the preparation and integrity of the consol- idated 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 condi- tions 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 re- port to the Audit Committee and accordingly have full and free access to the Audit Committee at any time. Control—Integrated Framework issued by the Committee of Sponsor- ing Organizations of the Treadway Commission (2013 framework). This assessment included review of the documentation of controls, eval- uation 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, 2019. Our internal control over financial reporting as of November 30, 2019 has been audited by Ernst & Young LLP. Lawrence E. Kurzius Chairman, President & Chief Executive Officer Michael R. Smith Executive Vice President & Chief Financial Officer We conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Christina M. McMullen Vice President & Controller Chief Accounting Officer 52 McCormick & Company, Inc. 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, 2019, 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, 2019, 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, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, cash flow statements and statements of shareholders’ equity for each of the three years in the period ended November 30, 2019, and the related notes and the financial statement schedule listed in the Index at item 15(2) and our report dated January 28, 2020 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 account- ing principles. A company’s internal control over financial report- ing 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 detec- tion 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. Baltimore, Maryland January 28, 2020 2019 Annual Report 53 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, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, cash flow statements and statements of shareholders’ equity for each of the three years in the period ended November 30, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2019, 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 Com- pany’s internal control over financial reporting as of November 30, 2019, 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 28, 2020 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s man- agement. 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 pro- cedures 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communi- cated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial state- ments, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 5 4 McCormick & Company, Inc. Valuation of Indefinite-lived Intangible Assets Description of the Matter At November 30, 2019, the Company’s indefinite-lived intangible assets consist of brand names and trademarks with an aggregate car- rying value of approximately $2.6 billion. As explained in Note 1 to the consolidated financial statements, these assets are assessed for impairment at least annually primarily using the relief-from-royalty methodology to determine their fair values. If the fair value of any of the brand names or trademarks is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference. Auditing the Company’s impairment assessments is complex due to the significant estimation required in determining the fair value of the brand names and trademarks. Significant management judgment is also involved in determining whether individual brand names and trademarks should be grouped for purposes of the fair value determination or must be evaluated individually. The Company’s methodologies for estimating the fair value of these assets involve significant assumptions and inputs, including projected financial information for net sales and operating profit by brand, royalty rates, and discount rates, all of which are sensitive to and affected by economic, industry, and company-specific qualitative factors. These significant assumptions and inputs are forward-looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the Company’s indefinite-lived intangible asset review process, including controls over management’s review of its asset groupings and the significant assumptions described above. We tested controls over the review of methodologies used, significant assumptions and inputs, and completeness and accuracy of the data used in the measurements. To test the estimated fair value of the Company’s indefinite-lived intangible assets, we performed audit procedures that included, among others, evaluating the asset groupings used by the Company to perform its impairment assessment, assessing the method- ologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analyses. We compared the significant assumptions to current industry, market and economic trends, to the Company’s historical results, to other guideline companies within the same industry, and to other relevant data. In addition, we evaluated management’s ability to estimate revenues by comparing the current year actual revenues for certain brand names or trademarks to the estimates made in the Compa- ny’s prior year impairment assessment. We also performed sensitivity analyses of the significant assumptions to evaluate the potential change in the fair values of the brand names and trademarks resulting from hypothetical changes in underlying assumptions. We used an internal valuation specialist to assist in our evaluation of the methodologies used and significant assumptions and inputs used to determine the fair value of certain brand names and trademarks. We have served as the Company’s auditor since 1982. Baltimore, Maryland January 28, 2020 2019 Annual Report 55 CONSOLIDATED INCOME STATEMENTS for the year ended November 30 (millions except per share data) Net sales Cost of goods sold Gross profit Selling, general and administrative expense Transaction and integration expenses (related to RB Foods acquisition) Special charges Operating income Interest expense Other debt costs Other income, net Income from consolidated operations before income taxes Income tax expense (benefit) Net income from consolidated operations Income from unconsolidated operations Net income Earnings per share—basic Earnings per share—diluted See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME for the year ended November 30 (millions) Net income Net income attributable to non-controlling interest 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) Currency translation adjustments Change in derivative financial instruments Deferred taxes Total other comprehensive income (loss) Comprehensive income See Notes to Consolidated Financial Statements. 2019 $5,347.4 3,202.1 2,145.3 1,166.8 — 20.8 957.7 165.2 — 26.7 819.2 157.4 661.8 40.9 $ 702.7 $ 5.30 $ 5.24 2019 $ 702.7 1.9 (149.8) (25.5) 1.1 33.2 (141.0) 2018 $5,302.8 3,209.5 2,093.3 1,163.4 22.5 16.3 891.1 174.6 — 24.8 741.3 (157.3) 898.6 34.8 $ 933.4 $ 7.10 $ 7.00 2018 $ 933.4 3.3 72.6 (119.8) 2.3 (17.2) (62.1) 2017 $4,730.3 2,936.3 1,794.0 1,031.2 40.8 22.2 699.8 95.7 15.4 6.1 594.8 151.3 443.5 33.9 $ 477.4 $ 3.77 $ 3.72 2017 $ 477.4 1.6 103.2 174.6 (12.5) (30.8) 234.5 $ 563.6 $ 874.6 $ 713.5 56 McCormick & Company, Inc. CONSOLIDATED BALANCE SHEETS at November 30 (millions) 2019 2018 Assets Cash and cash equivalents Trade accounts receivable, less allowances of $5.6 for 2019 and $6.4 for 2018 Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Goodwill Intangible assets, net Other long-term assets Total assets Liabilities Short-term borrowings Current portion of long-term debt Trade accounts payable Other accrued liabilities Total current liabilities Long-term debt Deferred taxes Other long-term liabilities Total liabilities Shareholders’ equity Common stock, no par value; authorized 320.0 shares; issued and outstanding: 2019–9.3 shares, 2018–9.6 shares Common stock non-voting, no par value; authorized 320.0 shares; issued and outstanding: 2019–123.6 shares, 2018–122.5 shares Retained earnings Accumulated other comprehensive loss Total McCormick shareholders’ equity Non-controlling interests Total shareholders’ equity Total liabilities and shareholders’ equity See Notes to Consolidated Financial Statements. $ 155.4 502.9 801.2 90.7 1,550.2 952.6 4,505.2 2,847.0 507.1 $ 96.6 518.1 786.3 78.9 1,479.9 941.5 4,527.9 2,873.3 433.8 $10,362.1 $10,256.4 $ 600.7 97.7 846.9 609.1 2,154.4 3,625.8 697.6 427.6 6,905.4 $ 560.0 83.5 710.0 648.2 2,001.7 4,052.9 706.5 313.1 7,074.2 447.6 400.2 1,441.0 2,055.8 (500.2) 3,444.2 12.5 3,456.7 1,370.4 1,760.2 (359.9) 3,170.9 11.3 3,182.2 $10,362.1 $10,256.4 2019 Annual Report 57 CONSOLIDATED CASH FLOW STATEMENTS for the year ended November 30 (millions) 2019 2018 2017 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Noncash nonrecurring income tax benefit (related to enactment of the U.S. Tax Act) Special charges and transaction and integration expenses Amortization of inventory fair value adjustment associated with acquisition of RB Foods (Gain) loss on sale of assets Deferred income tax expense Income from unconsolidated operations Settlement of forward-starting interest rate swaps Changes in operating assets and liabilities (net of effect of businesses acquired): Trade accounts receivable Inventories Trade accounts payable Other assets and liabilities Dividends received from unconsolidated affiliates Net cash provided by operating activities Investing activities Acquisitions of businesses (net of cash acquired) Capital expenditures (including expenditures for capitalized software) Other investing activities Net cash used in investing activities Financing activities Short-term borrowings, net Long-term debt borrowings Payment of debt issuance costs Long-term debt repayments Proceeds from exercised stock options Taxes withheld and paid on employee stock awards Payment of contingent consideration Purchase of minority interest Issuance of common stock non-voting (net of issuance costs of $0.9) Common stock acquired by purchase Dividends paid Net cash (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See Notes to Consolidated Financial Statements. $ 702.7 $ 933.4 $ 477.4 158.8 37.2 — — — (1.6) 20.9 (40.9) — 12.2 (20.9) 128.2 (81.5) 31.7 946.8 — (173.7) 2.7 (171.0) 41.0 — — (447.7) 90.9 (12.7) — — — (95.1) (302.2) (725.8) 8.8 58.8 96.6 150.7 25.6 (309.4) 3.0 — (5.4) 40.1 (34.8) — 19.8 (10.0) 72.8 (91.8) 27.2 821.2 (4.2) (169.1) 14.8 (158.5) 305.5 25.9 — (797.9) 78.2 (11.6) (2.5) (13.0) — (62.3) (273.4) (751.1) (1.8) (90.2) 186.8 125.2 23.9 — 19.1 20.9 1.3 24.1 (33.9) (2.9) (13.0) 44.6 98.2 6.8 23.6 815.3 (4,327.4) (182.4) 1.5 (4,508.3) (134.6) 3,989.6 (7.7) (272.7) 29.5 (5.8) (19.7) (1.2) 554.0 (137.8) (237.6) 3,756.0 5.4 68.4 118.4 $ 155.4 $ 96.6 $ 186.8 58 McCormick & Company, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (millions) Common Stock Shares Common Stock Non-Voting Shares Common Stock Amount Accumulated Other Comprehensive (Loss) Income Non-controlling Interests Total Shareholders’ Equity 11.4 Balance, November 30, 2016 Net income Net income attributable to non-controlling interest Other comprehensive income (loss), net of tax Dividends Buyout of minority interest Stock-based compensation Shares issued in connection with RB Foods acquisition — (0.4) Shares purchased and retired 0.7 Shares issued, including tax benefit of $8.1 (1.7) Equal exchange 113.9 6.4 (1.1) 0.1 1.7 10.0 121.0 Balance, November 30, 2017 Net income Net income attributable to non-controlling interest Other comprehensive loss, net of tax Dividends Adoption of ASU 2018-02 Buyout of minority interest Stock-based compensation Shares purchased and retired Shares issued Equal exchange Balance, November 30, 2018 Net income Net income attributable to non-controlling interest Other comprehensive loss, net of tax Dividends Stock-based compensation Shares purchased and retired Shares issued Equal exchange Balance, November 30, 2019 See Notes to Consolidated Financial Statements. Retained Earnings $1,056.8 477.4 — — (247.0) 0.6 — — (121.3) — — $1,166.5 933.4 — — (280.5) 20.9 (12.4) — (67.7) — — $1,084.2 — — — — — 23.9 554.0 (23.8) 34.6 — $1,672.9 — — — — — — 25.6 (16.8) 88.9 — $ (514.4) — — 234.9 — — — — — — — $ (279.5) — — (59.5) — (20.9) — — — — — $ (359.9) (0.4) 0.1 1.8 (0.3) 1.7 (1.8) 9.6 (0.2) 1.5 (1.6) 9.3 122.5 $1,770.6 $1,760.2 — 702.7 — — — — 37.2 (15.4) 96.2 — — — (309.3) — (97.8) — — — (140.3) — — — — — (0.6) 0.1 1.6 $ 11.5 — 1.6 (0.4) — (1.7) — — — — — $ 11.0 — 3.3 (2.6) — — (0.4) — — — — $ 11.3 — 1.9 (0.7) — — — — — $ 1,638.1 477.4 1.6 234.5 (247.0) (1.1) 23.9 554.0 (145.1) 34.6 — $ 2,570.9 933.4 3.3 (62.1) (280.5) — (12.8) 25.6 (84.5) 88.9 — $ 3,182.2 702.7 1.9 (141.0) (309.3) 37.2 (113.2) 96.2 — 123.6 $1,888.6 $2,055.8 $ (500.2) $ 12.5 $ 3,456.7 2019 Annual Report 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The financial statements include the accounts of our majority-owned or controlled subsidiaries and affiliates. Intercompany transactions have been eliminated. Investments in unconsolidated affiliates, over which we exercise significant influence, but not control, are accounted for by the equity method. Accordingly, our share of net income or loss of unconsolidated affiliates is included in net income. Foreign Currency Translation For majority-owned or controlled subsidiaries and affiliates, if located outside of the U.S., with functional currencies other than the U.S. dol- lar, asset and liability accounts are translated at the rates of exchange at the balance sheet date and the resultant translation adjustments are included in accumulated other comprehensive income (loss), a sep- arate component of shareholders’ equity. Income and expense items are translated at average monthly rates of exchange. Gains and losses from foreign currency transactions of these majority-owned or con- trolled subsidiaries and affiliates—that is, transactions denominated in other than their functional currency—are included in net earnings. Our unconsolidated affiliates located outside the U.S. generally use their local currencies as their functional currencies. The asset and liability accounts of those unconsolidated affiliates are translated at the rates of exchange at the balance sheet date, with the resultant translation adjustments included in accumulated other comprehensive income (loss) of those affiliates. Income and expense items of those affiliates are translated at average monthly rates of exchange. We record our ownership share of the net assets and accumulated other comprehensive income (loss) of our unconsolidated affiliates in our consolidated balance sheet on the lines entitled “Other long-term assets” and “Accumulated other comprehensive loss,” respectively. We record our ownership share of the net income of our unconsolidat- ed affiliates in our consolidated income statement on the line entitled “Income from unconsolidated operations.” Use of Estimates Preparation of financial statements that follow accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual amounts could differ from these estimates. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out costing method (FIFO), including the use of average costs which approximate FIFO. Property, Plant and Equipment Property, plant and equipment is stated at historical cost and depreciated over its estimated useful life using the straight-line method for financial reporting and both accelerated and straight-line methods for tax report- ing. The estimated useful lives range from 20 to 50 years for buildings and 3 to 12 years for machinery, equipment and other assets. Assets leased under capital leases are depreciated over the shorter of the lease term or their useful lives unless it is reasonably certain that we will obtain ownership by the end of the lease term. Repairs and maintenance costs are expensed as incurred. 60 McCormick & Company, Inc. Computer Software We capitalize costs of software developed or obtained for internal use. Capitalized software development costs include only (1) direct costs paid to others for materials and services to develop or buy the software, (2) payroll and payroll-related costs for employees who work directly on the software development project and (3) interest costs while developing the software. Capitalization of these costs stops when the project is substantially complete and ready for use. The net book value of capitalized software totaled $76.4 million and $43.6 million at November 30, 2019 and 2018, respectively. Such amounts are recorded within “Other long-term assets” in the consol- idated balance sheet. Software is amortized using the straight-line method over a range of 3 to 13 years, but not exceeding the expected life of the product. The net book value of capitalized software includes $44.9 million and $9.3 million at November 30, 2019 and 2018, respec- tively, which had not yet been placed into service and relates to our future implementation of a global enterprise resource planning (ERP) system. Goodwill and Other Intangible Assets We review the carrying value of goodwill and indefinite-lived intan- gible assets and conduct tests of impairment on an annual basis as described below. We also test goodwill 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 and test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired. Separable intangible assets that have finite useful lives are amortized over those lives. 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 unpredictable and inherently uncertain. Actual future results may differ from these estimates. Goodwill Impairment Our reporting units used to assess potential goodwill impairment are the same as our business segments. We calculate fair value of a report- ing unit by using a discounted cash flow model and then compare that to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the calculated 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. Indefinite-lived Intangible Asset Impairment Our indefinite-lived intangible assets consist of brand names and trademarks. We primarily determine fair value by using a relief-from-royalty method and then compare that to the carrying amount of the indefinite-lived intangible asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment charge would be recorded to the extent the recorded indefinite-lived intangible asset exceeds the fair value. Long-lived Asset Impairment Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss would be calculated based on the excess of the asset’s carrying value over its estimated fair value. Revenue Recognition We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry—retailers, food manufacturers and foodservice business- es. We recognize sales as performance obligations are fulfilled when control passes to the customer. Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade dis- counts, rebates and returns, are estimated at the time of sale. Any taxes collected on behalf of government authorities are excluded from net sales. We account for product shipping and handling as fulfillment activities with costs for these activities recorded within cost of goods sold. Amounts billed and due from our customers are classified as accounts receivable on the balance sheet and require payment on a short-term basis. Our allowance for doubtful accounts represents our estimate of probable non-payments and credit losses in our existing receivables, as determined based on a review of past due balances and other specific account data. The following table sets forth our net sales by the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) geographic regions: (millions) 2019 Net sales 2018 Net sales 2017 Net sales Americas EMEA APAC Total $3,711.3 $ 986.1 $650.0 $5,347.4 $3,627.5 $1,021.1 $654.2 $5,302.8 $3,179.6 $ 948.9 $601.8 $4,730.3 Performance Obligations Our revenues primarily result from contracts or purchase orders with customers, which generally are both short-term in nature and have a single performance obligation—the delivery of our products to cus- tomers. We assess the goods and services promised in our customers’ contracts or purchase orders and identify a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, we consider all the goods or services promised, whether explicitly stated or implied based on customary business practices. Significant Judgments Sales are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regard- ing these programs. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one-year or shorter duration. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized. The adjustments recognized during the year ended November 30, 2019 and 2018 resulting from updated estimates of revenue for prior year product sales were not significant. The unsettled portion remaining in accrued liabilities for these activities was $137.2 million and $142.1 million at November 30, 2019 and 2018, respectively. Practical Expedients We have elected the following policy elections and practical expedi- ents with respect to revenue recognition: • Shipping and handling costs—We elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service. • Measurement of transaction price—We elected to exclude from the measurement of transaction price all taxes assessed by a gov- ernmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer for sales, value added and other excise taxes. • Incremental cost of obtaining a contract—We elected to expense any incremental costs of obtaining a contract when the contract is for a period of one year or less. Shipping and Handling Shipping and handling costs on our products sold to customers related to activities that occur before the customer has obtained control of a good are included in cost of goods sold in the consolidated income statement. Brand Marketing Support Total brand marketing support costs, which are included in selling, general and administrative expense in the consolidated income statement, were $214.6 million, $218.7 million and $172.5 million for 2019, 2018 and 2017, respectively. Brand marketing support costs include advertising and promotions but exclude trade funds paid to customers for such activities. All trade funds paid to customers are reflected in the consolidated income statement as a reduction of net sales. Promotion costs include public relations, shopper marketing, social marketing activities, general consumer promotion activities and depreciation of assets used in these promotional activities. Advertis- ing costs include the development, production and communication of advertisements through television, digital, print and radio. Develop- ment and production costs are expensed in the period in which the advertisement is first run. All other costs of advertising are expensed as incurred. Advertising expense was $150.8 million, $147.2 million and $117.8 million for 2019, 2018 and 2017, respectively. Research and Development Research and development costs are expensed as incurred and are included in selling, general and administrative expense in the consol- idated income statement. Research and development expense was $67.3 million, $69.4 million and $66.1 million for 2019, 2018 and 2017, respectively. Derivative Instruments We record all derivatives on the balance sheet at fair value. The fair value of derivative instruments is recorded in other current assets, other long-term assets, other accrued liabilities or other long-term liabilities. Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the consolidated income statement in other income (expense), net or in interest 2019 Annual Report 61 Accounting Pronouncements Adopted in 2019 We adopted ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (the “Revenue Recognition ASU”), ASU No. 2017-07 Compen- sation—Retirement Benefits (Topic 715)—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “Pension ASU”), and ASU No. 2017-12 Derivatives and Hedg- ing (Topic 815)—Targeted Improvements to Accounting for Hedging Activities. We elected to adopt the Revenue Recognition ASU on a full retrospective basis. We adopted the Pension ASU on a retrospective basis as required by the standard. These new accounting standards are summarized below. In May 2014, the FASB issued the Revenue Recognition ASU, which supersedes previously existing revenue recognition guidance. Under this new guidance, companies apply a principles-based five-step model to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration for which the company expects to be entitled to in exchange for those goods or services. The model encompasses the following steps: (1) determi- nation of whether a contract—an agreement between two or more parties that creates legally enforceable rights and obligations—exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recogni- tion of revenue when (or as) the performance obligation is satisfied. The new revenue recognition guidance allows companies to account for shipping and handling activities that occur before and after the customer has obtained control of a product as fulfillment activities rather than as a promised service; and we applied this accounting policy election. In addition, the new revenue guidance requires that customer payments be accounted for as a reduction in the transaction price unless the payment to a customer is in exchange for a distinct good or service. The adoption of this standard did not have and is not expected to have an effect on the timing of our revenue recognition. There was no effect on operating income, net income, or basic and diluted earnings per share upon our adoption of the Revenue Recogni- tion ASU in 2019. In March 2017, the FASB issued the Pension ASU. This guidance revises how employers that sponsor defined benefit pension and other postretirement plans present the net periodic benefit cost in their income statement and requires that the service cost component of net periodic benefit cost be presented in the same income statement line items as other employee compensation costs from services rendered during the period. Of the components of net periodic benefit cost, only the service cost component is eligible for asset capitalization. The other components of the net periodic benefit cost must be presented separately from the line items that include the service cost and outside of any subtotal of operating income on the income statement. The new standard was adopted as of December 1, 2018 and has been applied on a retrospective basis. Adoption of the new standard solely impact- ed classification within our consolidated income statement, with no change to net income or basic and diluted earnings per share. The adoption of the Revenue Recognition ASU and the Pension ASU, on a retrospective basis, impacted our previously reported results for the years ended November 30, 2018 and 2017 as follows: expense. In the consolidated cash flow statement, settlements of cash flow and fair value hedges are classified as operating activities; settlements of all other derivative instruments, including instruments for which hedge accounting has been discontinued, are classified consistent with the nature of the instruments. Cash flow hedges. Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in accumulated other comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) to the consolidated income statement on the same line item as the underlying transaction. Fair value hedges. Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item. Net investment hedges. Qualifying derivative and nonderivative financial instruments are accounted for as net investment hedges when the hedged item is a nonfunctional currency investment in a subsidiary. Gains and losses on these instruments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss). Employee Benefit and Retirement Plans We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. During fiscal years 2018 and 2017 we made significant changes to our employee benefit and retirement plans as discussed in note 10. We recognize the overfunded or underfunded status of our defined benefit pension plans as an asset or a liability in the balance sheet, with changes in the funded status recorded through other comprehen- sive income in the year in which those changes occur. The expected return on plan assets is determined using the expected rate of return and a calculated value of plan assets referred to as the market-related value of plan assets. Differences between assumed and actual returns are amortized to the market-related value of assets on a straight-line basis over five years. We use the corridor approach in the valuation of defined benefit pension and postretirement benefit plans. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. Those unrecognized gains and losses are amortized when the net gains and losses exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining life expectancy of retired plan participants, for plans whose benefits have been frozen, or the average remaining service period to retirement date of active plan participants. 62 McCormick & Company, Inc. (in millions) For the year ended November 30, 2018: Net sales Cost of goods sold Gross profit Selling, general and admin- istrative expense Operating income Other income, net For the year ended November 30, 2017: Net sales Cost of goods sold Gross profit Selling, general and admin- istrative expense Operating income Other income, net Accounting Changes Previously Reported Revenue Recognition Pension Recast $5,408.9 3,037.3 2,371.6 1,429.5 903.3 12.6 $4,834.1 2,823.9 2,010.2 1,244.8 702.4 3.5 $(106.1) 169.5 $ — $5,302.8 3,209.5 2.7 (275.6) (2.7) 2,093.3 (275.6) — — 9.5 (12.2) 12.2 1,163.4 891.1 24.8 $(103.8) 111.0 $ — $4,730.3 2,936.3 1.4 (214.8) (1.4) 1,794.0 (214.8) — — 1.2 (2.6) 2.6 1,031.2 699.8 6.1 We adopted the following new accounting standards in 2019 on a prospective basis: In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedg- ing Activities. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for compo- nents excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain dis- closure requirements. The new standard is effective for the first quarter of our fiscal year ending November 30, 2020, with early adoption per- mitted in any interim period or fiscal year before the effective date. We have elected to adopt this guidance effective December 1, 2018. There was no material impact to our financial statements upon adoption. In October 2016, the FASB issued ASU No. 2016-16 Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inven- tory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. This new standard was effective beginning in fiscal year 2019 and was required to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the first day of fiscal year 2019. There was no cumulative-effect adjust- ment upon adoption. During the year ended November 30, 2019, we recognized a discrete tax benefit of $15.2 million under the provisions of this standard. The on-going effect of the adoption of the standard will depend on the nature and amount of future transactions. In January 2017, the FASB issued ASU No. 2017-01 Business Com- binations (Topic 805)—Clarifying the Definition of a Business. This guidance changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the Revenue Recognition ASU. The new standard was effective beginning in fiscal year 2019. There was no material impact to our financial statements upon adoption. In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Services Contract. The ASU aligns the require- ment for capitalization of implementation costs incurred in a cloud hosting arrangement with the requirements for capitalizing implemen- tation costs incurred to develop or obtain internal use software. The new standard is effective for the first quarter of our fiscal year ending November 30, 2021, with early adoption permitted in any interim period or fiscal year before the effective date. We have elected to adopt this guidance effective December 1, 2018. In conjunction with the adoption of this ASU, we classify capitalized software within other long-term assets and have reclassified prior periods for consistent presentation. Previously, we classified capitalized software within property, plant and equipment. In August 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532 Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. Recently Issued Accounting Pronouncements—Pending Adoption In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors. Our leases principally relate to: (i) certain real estate, including that related to a number of administra- tive, distribution and manufacturing locations; (ii) certain machinery and equipment, including forklifts; and (iii) certain automobiles, delivery and other vehicles, including an airplane. The new guidance in ASU No. 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). In July 2018, the FASB issued ASU No. 2018-11 Leases (Topic 842) Targeted Improvements which provides a modified retrospective transition method that allows entities to initially apply the new standard at the adoption date and recognize 2019 Annual Report 63 a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. We will adopt the standard using a modified retrospective approach as of December 1, 2019, the first day of our fiscal year 2020. We will elect the package of practical expedients permitted under the transition guidance, which among other things, allows us to retain the historical lease classification. In addition, we will elect to combine the lease and non-lease components for all asset categories other than real estate. We will also make an accounting policy election to exclude from balance sheet reporting those leases with initial terms of 12 months or less (short-term leases). We estimate that adoption of the standard will result in recognition of operating lease right-of-use assets and lease liabilities of approxi- mately $135 million and $140 million, respectively, with the difference largely due to deferred rent that will be reclassified to the right-of-use asset value. We do not expect adoption of the standard to materially affect our consolidated net income or cash flows. In January 2017, the FASB issued ASU No. 2017-04 Intangibles— Goodwill and Other Topics (Topic 350)—Simplifying the Test for Good- will Impairment. This guidance eliminates the requirement to calculate the implied fair value of goodwill of a reporting unit to measure a goodwill impairment charge. Instead, a company will record an impair- ment charge based on the excess of a reporting unit’s carrying amount over its fair value. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2021. Early adoption is permitted for all entities for annual and interim goodwill impairment testing dates after January 1, 2017. We currently do not expect this guidance to have a material impact on our financial statements. In June 2016, the FASB issued ASU No. 2016-13 Financial Instru- ments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which institutes a new model for recognizing credit losses on financial instruments that are not measured at fair value. The new standard is effective for the first quarter of our fiscal year ending November 30, 2021, and we anticipate that it will primar- ily impact our credit losses recognized for trade accounts receivable. While we are currently evaluating the effect that ASU No. 2016-13 will have on our consolidated financial statements, we do not expect this guidance to have a material impact. 2. ACQUISITIONS Acquisitions are part of our strategy to increase sales and profits. Acquisition of RB Foods On August 17, 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. 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) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6). 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 cate- gory and provide significant international growth opportunities for our consumer and flavor solutions segments. At the time of the acquisition, 64 McCormick & Company, Inc. annual sales of RB Foods were approximately $570 million. The trans- action was accounted for under the acquisition method of accounting and, accordingly, the results of RB Foods’ operations are included in our consolidated financial statements as a component of our consumer and flavor solutions segments from the date of acquisition. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $20.9 mil- lion that was recognized in cost of goods sold in 2017 as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach. Total transaction and integration expenses related to the RB Foods acquisition aggregated $99.6 million in 2018 and 2017, of which $59.8 million and $39.8 million represented transaction expenses and integration expenses, respectively. These costs primarily consist of the amortization of the acquisition-date fair value adjustment of inventories in the amount of $20.9 million that is included in cost of goods sold for 2017; outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition, including $15.4 million of costs related to the bridge financing com- mitment that was included in other debt costs for 2017. The following are the transaction and integration expenses related to the RB Foods acquisition that we have recorded for the years ended November 30 (in millions): Transaction expenses included in cost of goods sold Transaction expenses included in other debt costs Other transaction expenses Integration expenses Total 2018 $ — — 0.3 22.2 $22.5 2017 $20.9 15.4 23.2 17.6 $77.1 The incremental impact to our sales from RB Foods was $190.1 million for 2017. The impact of RB Foods on our 2017 consolidated income before taxes, including the effect of the transaction and integration expenses previously noted, and financing costs was a loss of approxi- mately $42 million. Other Acquisitions On September 21, 2018, we purchased the remaining 10% ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million In conjunction with our purchase of this remaining 10% minority interest, we have eliminated the minority interest in that subsidiary and recorded an adjustment of $12.4 million to retained earnings in our consolidated balance sheet. The $12.7 million payment is reflected in the financing activities section of our consolidated cash flow state- ment for 2018. On May 5, 2017, we purchased the remaining 15% ownership interest in our joint venture, Kohinoor Specialty Foods India Private Limited (Kohinoor), in India for a cash payment of $1.5 million, of which $1.2 million was paid in 2017 and the balance was paid in 2018. In September 2011, when we originally entered this joint venture, we invested $113.0 million for an 85% interest in Kohinoor. In conjunction with our purchase of the 15% minority interest in 2017, we have eliminated the minority interest in Kohinoor and recorded an adjustment of $0.6 million to retained earnings in our consolidated balance sheet. The $0.3 million and $1.2 million payments are reflected in the financing activities section of our consolidated cash flow statement for 2018 and 2017, respectively. 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 purchase price 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 bev- erage, sweet, savory and dairy flavor applications. At the time of the acquisition, annual sales of Giotti were approximately €53 million. Our acquisition of Giotti in fiscal 2017 expands the breadth of value-added products for McCormick’s flavor solutions segment, including addition- al expertise in flavoring health and nutrition products. Giotti has been included in our flavor solutions segment since its acquisition. 3. SPECIAL CHARGES In our consolidated income statement, we include a separate line item captioned “special charges” in arriving at our consolidated operat- ing income. Special charges consist of expenses, including related impairment charges, associated with certain actions undertaken to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our Chairman, President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component, such as an asset impairment, or a component which relates to inven- tory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion. Certain ancillary expenses related to these actions approved by our Management Committee do not qualify for accrual upon approval but are included as special charges as incurred during the course of the actions. In 2018, we also included in special charges, as approved by our Management Committee, expense associated with a one-time payment, made to eligible U.S. hourly employees, to dis- tribute a portion of the non-recurring net income tax benefit recognized in connection with the enactment of the U.S. Tax Act and as more fully described in note 12. The following is a summary of special charges recognized for the years ended November 30 (in millions): Employee severance and related benefits Other costs(1) Total special charges 2019 2018 2017 $ 6.2 14.6 $ 2.0 14.3 $ 8.3 13.9 $20.8 $16.3 $22.2 (1) Included in other costs for 2018 and 2017 are non-cash fixed asset impairment charges of $3.0 million and $0.5 million, respectively. The following is a summary of special charges by business segments for the years ended November 30 (in millions): Consumer segment Flavor solutions segment Total special charges 2019 2018 2017 $ 13.1 7.7 $ 10.0 6.3 $ 15.3 6.9 $ 20.8 $ 16.3 $ 22.2 We continue to evaluate changes to our organization structure to reduce fixed costs, simplify or improve processes, and improve our competitiveness. During 2019, we recorded $20.8 million of special charges, consisting primarily of (i) $14.1 million related to our GE initiative, including $10.6 million of third-party expenses, $2.1 million related to severance and related benefits, and $1.4 million related to other costs, (ii) $2.3 million of employee severance and related benefits associated with streamlining actions in the Americas and (iii) $3.9 million related to streamlining actions in our EMEA region. Of the $20.8 million in special charges recorded during 2019, approx- imately $16.8 million were paid in cash, with the remaining accrual expected to be paid in 2020. During 2018, we recorded $16.3 million of special charges, consist- ing primarily of: (i) $11.5 million related to our global enablement initiative, as more fully described below; (ii) a one-time payment, in the aggregate amount of $2.2 million made to certain 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 new facility then under construction in Thailand. Of the $11.5 million in special charges recognized in 2018 related to our GE initiative, $7.5 million related to third party expenses, $3.0 million represented a non-cash asset impairment charge, and $1.0 million related to employee sev- erance benefits. 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 2018, to a new global ERP platform to facilitate planned actions under our GE initiative to align and simplify our end-to-end processes to support our future growth. Of the $16.3 million in special charges recorded during 2018, approxi- mately $12.3 million were paid in cash and $3.0 million represented a non-cash asset impairment, with the remaining accrual paid in 2019. As of November 30, 2019, reserves associated with special charges are included in accounts payable and other accrued liabilities in our consolidated balance sheet. During 2017, we recorded $22.2 million of special charges, consisting primarily of (i) $12.7 million related to third party expenses incurred associated with our evaluation of changes relating to our global enablement initiative, which is described below; (ii) $2.8 million relat- ed to employee severance benefits and other costs directly associated with the relocation of one of our Chinese manufacturing facilities; (iii) $2.5 million for severance and other exit costs associated with our Europe, Middle East, and Africa (EMEA) region’s closure of its man- ufacturing plant in Portugal in mid-2017; and (iv) $1.7 million related to employee severance benefits and other costs associated with action related to the transfer of certain manufacturing operations in our Asia/ Pacific region to a new facility then under construction in Thailand. During 2017, our Management Committee approved a multi-year initiative during which we expect to execute significant changes to our global processes, capabilities and operating model to provide a 2019 Annual Report 65 scalable platform for future growth. We expect this initiative to enable us to accelerate our ability to work globally and cross-functionally by aligning and simplifying processes throughout McCormick, in part building upon our current shared services foundation and expanding the end-to-end processes presently under that foundation. We expect this initiative, which we refer to as Global Enablement (GE), to enable this scalable platform for future growth while reducing costs, enabling faster decision making, increasing agility and creating capacity within our organization. While we are continuing to fully develop the details of our GE operat- ing model, we expect the cost of the GE initiative—to be recognized as “Special charges” in our consolidated income statement over its multi-year course—to range from approximately $60 million to $65 million. Of that $60 million to $65 million, we estimate that approxi- mately sixty percent will be attributable to cash payments associated with related costs of GE implementation and transition, including outside consulting and other costs and approximately forty percent will be attributable to employee severance and related benefit payments both directly related to the initiative. We incurred $14.1 million, $11.5 million and $12.7 million of special charges associated with our GE initiative during 2019, 2018 and 2017, respectively. 4. GOODWILL AND INTANGIBLE ASSETS The following table displays intangible assets as of November 30: 2019 2018 Gross carrying amount Accumulated amortization Gross carrying amount Accumulated amortization (millions) Definite-lived intangible assets $ 308.3 $ 104.3 $ 311.3 $ 84.9 Indefinite-lived intangible assets: Goodwill Brand names and trademarks Total goodwill and intangible assets 4,505.2 2,643.0 7,148.2 — — — 4,527.9 2,646.9 7,174.8 — — — $ 7,456.5 $ 104.3 $ 7,486.1 $ 84.9 Intangible asset amortization expense was $20.3 million, $20.6 million and $16.3 million for 2019, 2018 and 2017, respectively. At November 30, 2019, definite-lived intangible assets had a weighted-average remaining life of approximately 10 years. The changes in the carrying amount of goodwill by segment for the years ended November 30 were as follows: 2019 2018 (millions) Consumer Flavor Solutions Consumer Flavor Solutions Beginning of year Changes in preliminary purchase price allocation Foreign currency fluctuations $ 3,398.9 $1,129.0 $3,385.4 $ 1,104.7 — — 68.1 (21.3) (1.4) (54.6) 34.1 (9.8) End of year $ 3,377.6 $1,127.6 $3,398.9 $1,129.0 66 McCormick & Company, Inc. In 2018, we finalized our valuation of the acquired net assets of RB Foods, resulting in the allocation of $1,765.6 million and $882.9 million of goodwill to the consumer and flavor solutions segment, respectively. 5. INVESTMENTS IN AFFILIATES Summarized annual and year-end information from the financial statements of unconsolidated affiliates representing 100% of the businesses follows: (millions) Net sales Gross profit Net income Current assets Noncurrent assets Current liabilities Noncurrent liabilities 2019 $863.0 316.2 90.5 $426.3 134.0 223.8 9.2 2018 2017 $ 807.9 290.5 78.9 $ 342.1 129.9 172.1 10.0 $ 775.4 278.5 75.5 $ 315.4 127.6 146.9 13.6 Our share of undistributed earnings of unconsolidated affiliates was $150.6 million at November 30, 2019. Royalty income from unconsol- idated affiliates was $19.0 million, $18.5 million and $17.5 million for 2019, 2018 and 2017, respectively. Our principal earnings from unconsolidated affiliates is from our 50% interest in McCormick de Mexico, S.A. de C.V. Profit from this joint venture represented 72% of income from unconsolidated operations in 2019, 76% in 2018 and 74% in 2017. As of November 30, 2019, undistributed earnings of investments in unconsolidated affiliates for which we have not provided deferred income tax liabilities would not be material. 6. FINANCING ARRANGEMENTS Our outstanding debt, including capital leases, was as follows at November 30: (millions) Short-term borrowings Commercial paper Other 2019 2018 $ 575.3 25.4 $ 600.7 $ 509.9 50.1 $ 560.0 Weighted-average interest rate of short-term borrowings at year-end 2.5% 2.9% Long-term debt Term loan due 8/17/2020(1) 3.90% notes due 7/8/2021(2) 2.70% notes due 8/15/2022 Term loan due 8/17/2022(1) 3.50% notes due 8/19/2023(3) 3.15% notes due 8/15/2024 3.25% notes due 11/15/2025(4) 3.40% notes due 8/15/2027(5) 4.20% notes due 8/15/2047 7.63%–8.12% notes due 2024 Other, including capital leases Unamortized discounts, premiums, debt $ — 250.0 750.0 250.0 250.0 700.0 250.0 750.0 300.0 55.0 171.6 $ 130.0 250.0 750.0 556.3 250.0 700.0 250.0 750.0 300.0 55.0 180.5 issuance costs and fair value adjustments(6) (3.1) (35.4) Less current portion 3,723.5 97.7 4,136.4 83.5 $3,625.8 $4,052.9 (1) The term loans are prepayable in whole or in part. Also, the term loan due in 2022 requires quarterly principal payments of 2.5% of the initial principal amount. (2) Interest rate swaps, settled upon the issuance of these notes in 2011, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 4.01%. (3) Interest rate swaps, settled upon the issuance of these notes in 2013, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 3.30%. (4) Interest rate swaps, settled upon the issuance of these notes in 2015, effectively set the interest rate on the $250 million notes at a weighted-average fixed rate of 3.45%. The fixed interest rate on $100 million of the 3.25% notes due in 2025 is 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 (our effective rate as of November 30, 2019 was 3.13%). (5) Interest rate swaps, settled upon the issuance of these notes in 2017, effectively set the interest rate on the $750 million notes at a weighted-average fixed rate of 3.44%. The fixed interest rate on $250 million of the 3.40% notes due in 2027 is effectively converted to a variable rate by interest rate swaps through 2027. Net interest payments are based on 3-month LIBOR plus 0.685% during this period (our effective rate as of November 30, 2019 was 2.59%). (6) Includes unamortized discounts, premiums and debt issuance costs of $(23.6) million and $(29.0) million as of November 30, 2019 and 2018, respectively. Includes fair value adjustment associated with interest rate swaps designated as fair value hedges of $20.5 million and $(6.4) million as of November 30, 2019 and 2018, respectively. Maturities of long-term debt, including capital leases, during the fiscal years subsequent to November 30, 2019 are as follows (in millions): 2020 2021 2022 2023 2024 Thereafter $ 97.7 341.1 864.2 257.8 763.1 1,402.7 In connection with our acquisition of RB Foods, we entered into a Term Loan Agreement (“Term Loan”) in August 2017. The Term Loan provide for three-year and five-year senior unsecured term loans, each for $750 million. The net proceeds received from the issuance of the Term Loan was $1,498.3 million. The three-year loan was payable at maturity. The five-year loan is payable in equal quarterly installments in an amount of 2.5% of the initial principal amount, with the remaining unpaid balance due at maturity. The three-year and five-year loans are each prepayable in whole or in part. In 2019 and 2018, we repaid the three-year loan in the amounts of $130.0 million and $370.0 million, respectively. Prior to payoff, the three-year loan bore interest at LIBOR plus 1.125%. In 2019 and 2018, we repaid $306.3 million and $175.0 million, respectively, of the five-year loan, which included required quarterly principal installments of $75.0 million in both years. The five- year loan currently bears interest at LIBOR plus 1.25%. The interest rates are based on our credit rating with the maximum potential interest rate of LIBOR plus 1.75% for the five-year loan. The provisions of our outstanding $1.0 billion revolving credit facility and the Term Loan restrict subsidiary indebtedness and require us to maintain certain minimum and maximum financial ratios for interest expense coverage and our leverage ratio. The applicable leverage ratio is reduced annually. As of November 30, 2019, our capacity under the revolving credit facility is not affected by these covenants. We do not expect that these covenants would limit our access to our revolving credit facility for the foreseeable future; however, the leverage ratio could restrict our ability to utilize this facility. In August 2017, we issued an aggregate amount of $2.5 billion of senior unsecured notes. These notes are due as follows: $750.0 million due August 15, 2022, $700.0 million due August 15, 2024, $750.0 million due August 15, 2027 and $300.0 million due August 15, 2047 with stated fixed interest rates of 2.70%, 3.15%, 3.40% and 4.20%, respectively. Interest is payable semiannually in arrears in August and February of each year. The net proceeds received from the issuance of these notes were $2,479.3 million and were used to partially fund our acquisition of RB Foods. In addition, we used a portion of these proceeds to repay our $250.0 million, 5.75% notes that matured on December 15, 2017. Other debt costs of $15.4 million for the year ended November 30, 2017 represent the financing fees related to a bridge loan commit- ment, obtained in connection with our acquisition of RB Foods, that expired undrawn. We have available credit facilities with domestic and foreign banks for various purposes. Some of these lines are committed lines and others are uncommitted lines and could be withdrawn at various times. We have 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 credit facility supports our commercial paper program and, after $575.3 million was used to support issued commercial paper, we have $424.7 million of capacity at November 30, 2019. In addition, we have several uncommitted lines totaling $261.5 million, which have a total unused capacity at November 30, 2019 of $205.1 million. These lines, by their nature, can be withdrawn based on the lenders’ discretion. Committed credit facilities require a fee, and commitment fees were $1.3 million for both 2019 and 2018. In 2018, we consolidated our Corporate staff and certain non- manufacturing U.S. employees into our new headquarters building in Hunt Valley, Maryland. The 15-year lease for that building requires monthly lease payments of approximately $0.9 million which began in April 2019. The $0.9 million monthly lease payment is subject to adjustment after an initial 60-month period and thereafter on an annu- al basis as specified in the lease agreement. Upon commencement of fit-out in the second quarter of 2018, we obtained access to the build- ing, which resulted in the lease commencement date for accounting purposes. We have recognized this lease as a capital lease, with the leased asset of $124.7 million and $133.4 million included in property, plant and equipment, net, as of November 30, 2019 and 2018, respec- tively. As of November 30, 2019, the total lease obligation was $137.7 million, of which $6.8 million was included in the current portion of long-term debt and $130.9 million was included in long-term debt. As of November 30, 2018, the entire lease liability of $138.6 million was included in long-term debt. During 2019 and 2018, respectively, we recognized amortization expense of $8.7 million and $5.2 million related to the leased asset. Rental expense under operating leases (primarily buildings and equipment) was $48.1 million in 2019, $58.5 million in 2018 and $46.5 million in 2017. Future annual fixed rental payments under operating leases for the years ended November 30 are as follows (in millions): 2020 2021 2022 2023 2024 Thereafter $41.8 35.7 25.8 16.0 10.6 32.3 2019 Annual Report 67 At November 30, 2019, we had guarantees outstanding of $0.6 million with terms of one year or less. As of November 30, 2019 and 2018, we had outstanding letters of credit of $32.2 million and $7.3 million, respectively. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The unused portion of our letter of credit facility was $13.8 million at November 30, 2019. 7. FINANCIAL INSTRUMENTS We use derivative financial instruments to enhance our ability to man- age risk, including foreign currency and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines. Foreign Currency We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Man- agement assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps with highly-rated financial institutions to reduce fluctuations in the long or short currency positions. Forward contracts are generally less than 18 months duration. Currency swap agree- ments are established in conjunction with the terms of the underlying debt issues. At November 30, 2019, we had foreign currency exchange contracts to purchase or sell $489.2 million of foreign currencies as compared to $494.9 million at November 30, 2018. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material. Contracts which are designated as hedges of anticipated purchas- es denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item. We also enter into fair value foreign currency exchange contracts to manage exposure to currency fluctuations in certain intercompany loans between subsidiaries. The notional value of these contracts was $357.5 million and $402.0 million at November 30, 2019 and 2018, respectively. During fiscal years 2019, 2018 and 2017, we recognized a $0.2 million gain, a $2.9 million loss and a $12.8 million gain, respec- tively, on the change in fair value of these contracts, which was offset by a $0.9 million loss, a $2.7 million gain and a $14.1 million loss, respectively, on the change in the currency component of the under- lying loans. All of the losses and the gains for both fiscal years were recognized in our consolidated income statement as other income, net. At November 30, 2019, we had $151.3 million of notional contracts that have durations of less than seven days that are used to hedge short-term cash flow funding. At November 30, 2019, the remaining contracts have durations of one to twelve months. Beginning in the first quarter of 2019, we also utilized cross currency interest rate swap contracts that are designated as net investment hedges. As of November 30, 2019, we had notional values of cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three- month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross-currency interest rate swap contracts expire in August 2027. Interest Rates We finance a portion of our operations with both fixed and variable rate debt instruments, primarily commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize world- wide financing costs and to achieve a desired mix of variable and fixed rate debt. As of November 30, 2019, we have outstanding interest rate swap contracts for a notional amount of $350.0 million. Those interest rate swap contracts include a $100 million notional value of interest rate swap contracts where we receive interest at 3.25% and pay a variable rate of interest based on three-month LIBOR plus 1.22%. These swaps, which expire in November 2025, are designated as fair value hedges of the changes in fair value of $100 million of the $250 million 3.25% medium-term notes due 2025 that we issued in November 2015. We also have $250 million notional interest rate swap contracts where we receive interest at 3.40% and pay a variable rate of interest based on three-month LIBOR plus 0.685%, which expire in August 2027, and are designated as fair value hedges of the changes in fair value of $250 million of the $750 million 3.40% term notes due 2027. Any unrealized gain or loss on these swaps was offset by a corre- sponding increase or decrease in the value of the hedged debt. Hedge ineffectiveness was not material. All derivatives are recognized at fair value in the balance sheet and recorded in either other current assets, or other long-term assets, other accrued liabilities or other long-term liabilities depending upon their nature and maturity. 68 McCormick & Company, Inc. The following tables disclose the notional amount and fair values of derivative instruments on our consolidated balance sheet: As of November 30, 2019: (millions) Asset Derivatives Liability Derivatives Derivatives Balance sheet location Notional amount Fair value Balance sheet location Notional amount Fair value Interest rate contracts Other current assets/ Other long-term assets Foreign exchange contracts Other current assets Cross currency contracts Other current assets/ Other long-term assets Total As of November 30, 2018: (millions) $ 350.0 293.1 495.5 $ 20.9 3.3 Other accrued liabilities Other accrued liabilities $ — 196.1 3.2 Other long-term liabilities — $ 27.4 $ — 3.6 — $ 3.6 Asset Derivatives Liability Derivatives Derivatives Balance sheet location Notional amount Fair value Balance sheet location Notional amount Fair value Interest rate contracts Foreign exchange contracts Other current assets Other current assets $ — 199.5 Total Other accrued liabilities Other accrued liabilities $100.0 295.4 $ — 4.4 $ 4.4 $ 6.4 6.4 $ 12.8 The following tables disclose the impact of derivative instruments on other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our consolidated income statement for the years ended November 30, 2019, 2018 and 2017: Fair value hedges (millions) Derivative Interest rate contracts Income statement location Interest expense Income (expense) 2019 $ — 2018 2017 $ (0.1) $ 0.9 Derivative Income statement location Foreign exchange contracts Other income, net 2019 $0.2 2018 $(2.9) Gain (loss) recognized in income 2017 Hedged Item Income statement location Gain (loss) recognized in income 2019 2018 2017 $12.8 Intercompany loans Other income, net $ (0.9) $ 2.7 $(14.1) Cash flow hedges (millions) Derivative Interest rate contracts Foreign exchange contracts Total Gain (loss) recognized in OCI 2019 $ — (0.2) $ (0.2) 2018 $ — 2.6 $2.6 2017 $ (2.9) (7.3) $(10.2) Income statement location Interest expense Cost of goods sold Gain (loss) reclassified from AOCI 2019 $ 0.5 1.6 $ 2.1 2018 $ 0.5 (3.3) $(2.8) 2017 $(0.4) 1.2 $ 0.8 The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The net amount of accumulated other comprehensive income expected to be reclassified into income related to these contracts in the next twelve months is a $0.2 million increase to earnings. Net investment hedges (millions) Derivative Cross currency contracts Gain (loss) recognized in OCI Income statement location Gain (loss) excluded from the assessment of hedge effectiveness 2019 $ 1.1 Interest expense 2019 $ 5.4 2019 Annual Report 69 For all net investment hedges, no amounts have been reclassified out of other comprehensive income (loss). The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes. Fair Value of Financial Instruments The carrying amount and fair value of financial instruments as of November 30 were as follows: (millions) Long-term investments Long-term debt (including current portion) Derivatives related to: Interest rates (assets) Interest rates (liabilities) Foreign currency (assets) Foreign currency (liabilities) Cross currency (assets) Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. At November 30, 2019, the fair value of long-term debt includes $3,437.5 million and $421.5 million determined using Level 1 and Level 2 valuation techniques, respectively. At November 30, 2018, the fair value of long-term debt includes $3,172.7 million and $866.7 million determined using Level 1 and Level 2 valuation techniques, respectively. The fair value for Level 2 long-term debt is determined by using quoted prices for similar debt instruments. Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value. Long-term investments are comprised of fixed income and equity securities held on behalf of employees in certain employee benefit plans and are stated at fair value on the balance sheet. Concentrations of Credit Risk We are potentially exposed to concentrations of credit risk with trade accounts receivable and financial instruments. 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. We generally have a large and diverse customer base which limits our concentration of credit risk. At November 30, 2019, 2019 2018 Carrying amount Fair value Carrying amount Fair value $ 124.4 3,723.5 $ 124.4 3,859.0 $ 120.8 4,136.4 $ 120.8 4,039.4 20.9 — 3.3 3.6 3.2 20.9 — 3.3 3.6 3.2 — 6.4 4.4 6.4 — — 6.4 4.4 6.4 — we did not have amounts due from any single customer that exceed 10% of consolidated trade accounts receivable. Current credit markets are highly volatile and some of our customers and counterparties are highly leveraged. We continue to closely monitor the credit worthiness of our customers and counterparties and generally do not require col- lateral. We believe that the allowance for doubtful accounts properly recognized trade receivables at realizable value. We consider nonper- formance credit risk for other financial instruments to be insignificant. 8. FAIR VALUE MEASUREMENTS Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. • Level 3: Unobservable inputs that reflect management’s own assumptions. 70 McCormick & Company, Inc. Our population of assets and liabilities subject to fair value measurements on a recurring basis are as follows: (millions) Assets: Cash and cash equivalents Insurance contracts Bonds and other long-term investments Interest rate derivatives Foreign currency derivatives Cross currency contracts Total Liabilities: Foreign currency derivatives Total (millions) Assets: Cash and cash equivalents Insurance contracts Bonds and other long-term investments Foreign currency derivatives Total Liabilities: Interest rate derivatives Foreign currency derivatives Total Fair value measurements using fair value hierarchy as of November 30, 2019 Fair value Level 1 Level 2 $ 155.4 121.7 2.7 20.9 3.3 3.2 $ 307.2 3.6 $ 3.6 $ 155.4 — 2.7 — — — $ 158.1 $ — 121.7 — 20.9 3.3 3.2 $ 149.1 — 3.6 $ — $ 3.6 Fair value measurements using fair value hierarchy as of November 30, 2018 Fair value Level 1 Level 2 $ 96.6 118.0 2.8 4.4 $ 221.8 $ 6.4 6.4 $ 12.8 $ 96.6 — 2.8 — $ 99.4 $ — — $ — $ — 118.0 — 4.4 $ 122.4 $ 6.4 6.4 $ 12.8 The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar type assets. The fair values of bonds and other long-term investments are based on quoted market prices from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on values for similar instruments using models with market- based inputs. At November 30, 2019 and 2018, we had no financial assets or liabili- ties that were subject to a level 3 fair value measurement. 9. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table sets forth the components of accumulated other comprehensive loss, net of tax where applicable, as of November 30 (in millions): Accumulated other comprehensive loss, net of tax where applicable Foreign currency translation adjustment (1) Unrealized loss on foreign currency exchange contracts Unamortized value of settled interest rate swaps Pension and other postretirement costs 2019 2018 $ (266.5) — 0.3 (234.0) $(241.6) (1.1) 0.6 (117.8) $ (500.2) $(359.9) (1) The foreign currency translation adjustment of accumulated other comprehensive loss increased by $(24.9) million during the year ended November 30, 2019. Of that increase, $0.9 million was associated with net investment hedges as more fully described in Note 7. In conjunction with the adoption of ASU No. 2018-02 Income Statement- Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, we reclassified $20.9 million of other comprehensive income, primarily associated with pension and other postretirement plans, from accu- mulated other comprehensive income to retained earnings effective December 1, 2017. 2019 Annual Report 7 1 The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the years ended November 30: (millions) Accumulated other comprehensive income (loss) components 2019 2018 2017 Affected line items in the consolidated income statement (Gains)/losses on cash flow hedges: Interest rate derivatives Foreign exchange contracts Total before taxes Tax effect Net, after tax Amortization of pension and postretirement benefit adjustments: Amortization of prior service (credits) costs (1) Amortization of net actuarial losses (1) Total before taxes Tax effect Net, after tax $ (0.5) (1.6) (2.1) 0.4 $ (0.5) 3.3 2.8 (0.6) $ 0.4 (1.2) (0.8) 0.2 $ (1.7) $ 2.2 $ (0.6) $ (8.0) 2.6 (5.4) 1.2 $ (8.5) 12.6 4.1 (1.0) $ (1.6) 9.7 8.1 (2.8) $ (4.2) $ 3.1 $ 5.3 Interest expense Cost of goods sold Income taxes Other income, net Other income, net Income taxes (1) This accumulated other comprehensive income (loss) component is included in the computation of total pension expense and total other postretirement expense (refer to note 10 for additional details). • On January 3, 2017, the Compensation Committee of our Board of Directors approved the freezing of benefits under the McCormick Supplemental Executive Retirement Plan (the “SERP”). The effec- tive date of this freeze was January 31, 2017. Executives who are participants in the SERP as of the date of the freeze, including cer- tain named executive officers, retained benefits accumulated up to that date, based on credited service and eligible earnings, in accordance with the SERP’s terms. As a result of these changes, we remeasured pension assets and benefit obligations as of the dates of the approvals indicated above and (i) in fiscal year 2018, we reduced the Canadian plan benefit obligations by $17.5 million; and (ii) in fiscal year 2017, we reduced the U.S. and U.K. plan benefit obligations by $69.9 million and $7.8 million, respectively. These remeasurements resulted in non-cash, pre-tax net actuarial gains of $17.5 million and $77.7 million for fiscal years 2018 and 2017, respectively. These net actuarial gains consist principally of curtailment gains of $18.0 million and $76.7 million, which are included in our consolidated statement of comprehensive income for 2018 and 2017, respectively, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension plans. Deferred taxes associated with these actuarial gains, together with other unrealized components of pension plans recognized during 2018 and 2017, are also included in that statement as a component of Other comprehensive income (loss). Included in accumulated other comprehensive loss at November 30, 2019 was $303.0 million ($234.0 million net of tax) related to net unrecognized actuarial losses that have not yet been recognized in net periodic pension or postretirement benefit cost. We expect to recog- nize $5.6 million ($4.1 million net of tax) in net periodic pension and postretirement benefit costs during 2020 related to the amortization of actuarial losses of $9.6 million and the amortization of prior service cost credits of $4.0 million. 10. EMPLOYEE BENEFIT AND RETIREMENT PLANS We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. We contribute to defined contribution plans in locations outside the U.S., including government-sponsored retirement plans. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees and retirees. During fiscal years 2018 and 2017, we made the following significant changes to our employee benefit and retirement plans: 2018 • On December 1, 2017, our Management Committee approved the freezing of benefits under our pension plans in Canada. The effec- tive date of this freeze was November 30, 2019. Although those plans have been frozen, employees who are participants in the plans retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plans. 2017 • On December 1, 2016, our Management Committee approved the freezing of benefits under the McCormick U.K. Pension and Life Assurance Scheme (the U.K. plan). The effective date of this freeze was December 31, 2016. Although the U.K. plan has been frozen, employees who are participants in that plan retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan. • On January 3, 2017, our Management Committee approved the freezing of benefits under the McCormick Pension Plan, the defined benefit pension plan available to U.S. employees hired on or prior to December 31, 2011. The effective date of this freeze was November 30, 2018. Employees who are participants in that plan retained benefits accumulated up to the date of the freeze, based on credited service and eligible earnings, in accordance with the terms of the plan. 72 McCormick & Company, Inc. Defined Benefit Pension Plans The significant assumptions used to determine benefit obligations are as follows as of November 30: Discount rate—funded plan Discount rate—unfunded plan Salary scale United States International 2019 3.4% 3.3% — 2018 4.7% 4.6% — 2019 2.2% — 2018 3.3% — 2.9% 3.0-3.5% The significant assumptions used to determine pension expense for the years ended November 30 are as follows: Discount rate—funded plan Discount rate—unfunded plan Salary scale Expected return on plan assets United States International 2019 2018 2017 2019 2018 2017 4.7% 4.6% — 7.0% 4.0% 3.9% 3.8% 7.3% 4.6% 4.5% 3.8% 7.3% 3.3% — 3.4% 5.5% 2.9% — 3.5% 5.6% 3.2% — 3.4% 5.5% Annually, we undertake a process, with the assistance of our external investment consultants, to evaluate the appropriate projected rates of return to use for our pension plans’ assumptions. We engage our investment consultants’ research teams to develop capital market assumptions for each asset category in our plans to project investment returns into the future. The specific methods used to develop expected return assumptions vary by asset category. We adjust the outcomes for the fact that plan assets are invested with actively managed funds and subject to tactical asset reallocation. Our pension expense for the years ended November 30 was as follows: (millions) Service cost Interest costs Expected return on plan assets Amortization of prior service costs Amortization of net actuarial loss Settlement/curtailment loss United States International 2019 2018 2017 2019 2018 2017 $ 2.1 34.4 (42.5) 0.5 2.3 — $ 17.0 31.6 (43.4) — 9.9 — $ 14.8 31.7 (41.4) — 5.8 — $ 3.6 9.5 (16.4) 0.2 1.2 — $ 4.3 9.2 (16.6) 0.1 2.8 0.5 $ 6.2 10.4 (15.3) 0.7 4.1 0.6 $ (3.2) $ 15.1 $ 10.9 $ (1.9) $ 0.3 $ 6.7 2019 Annual Report 73 A rollforward of the benefit obligation, fair value of plan assets and a reconciliation of the pension plans’ funded status as of November 30, the measurement date, follows: (millions) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest costs Employee contributions Plan amendments Plan curtailments Actuarial (gain) loss Benefits paid Business combinations Expenses paid Foreign currency impact Benefit obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Employee contributions Benefits paid Expenses paid Foreign currency impact Fair value of plan assets at end of year Funded status Pension plans in which accumulated benefit obligation exceeded plan assets Projected benefit obligation Accumulated benefit obligation Fair value of plan assets United States International 2019 2018 2019 2018 $ 752.6 2.1 34.4 — — — 134.6 (38.9) — — — $ 813.7 17.0 31.6 — 5.2 — (76.2) (36.3) (2.4) — — $ 292.9 3.6 9.5 0.8 (0.2) — 51.8 (14.7) — (0.3) 2.2 $ 341.5 4.3 9.2 0.7 3.4 (17.5) (20.2) (13.2) — (0.7) (14.6) $ 884.8 $ 752.6 $ 345.6 $ 292.9 $ 640.4 62.2 8.2 — (38.9) — — $ 654.2 13.6 8.9 — (36.3) — — $ 306.5 42.7 3.2 0.8 (14.7) (0.3) 2.7 $ 331.3 (0.7) 4.6 0.7 (13.2) (0.7) (15.5) $ 671.9 $ 640.4 $ 340.9 $ 306.5 $ (212.9) $ (112.2) $ (4.7) $ 13.6 $ 884.8 874.8 671.9 $ 752.6 746.9 640.4 $ 103.9 100.4 83.6 $ 19.1 16.1 1.5 Included in the U.S. in the preceding table is a benefit obligation of $105.4 million and $94.9 million for 2019 and 2018, respectively, related to the SERP. The assets related to this plan, which totaled $85.5 million and $82.8 million as of November 30, 2019 and 2018, respectively, are held in a rabbi trust and accordingly have not been included in the preceding table. As part of our acquisition of RB Foods in August 2017, we assumed a defined benefit pension plan that covers eligible union employees of the Reckitt Benckiser food business (the “RB Foods Union Pension Plan”). The related plan assets and benefit obligation of the RB Foods Union Pension Plan are included in the U.S. in the preceding table. At the acquisition date, the funded status of that plan was $(20.5) million, based upon a preliminary valua- tion. During 2018, we finalized the purchase accounting valuation for this plan which improved the funded status of this plan by $2.4 million, to $(18.1) million at the date of acquisition. During 2019 and 2018, we made contributions of $1.8 million and $2.5 million, respectively, to the RB Foods Union Pension Plan. Amounts recorded in the balance sheet for all defined benefit pension plans as of November 30 consist of the following: (millions) Non-current pension asset Accrued pension liability Deferred income tax assets Accumulated other comprehensive loss United States International 2019 $ — 212.9 58.5 183.9 2018 $ — 112.2 32.7 97.7 2019 $ 15.6 20.3 13.3 60.1 2018 $ 31.2 17.6 8.8 40.1 The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation or service levels. The accumulated benefit obligation for the U.S. pension plans was $874.8 million and $746.9 million as of November 30, 2019 and 2018, respectively. The accumulated benefit obligation for the international pension plans was $342.2 million and $286.8 million as of November 30, 2019 and 2018, respectively. The investment objectives of the defined benefit pension plans are to provide assets to meet the current and future obligations of the plans at a reasonable cost to us. The goal is to optimize the long-term return across the portfolio of investments at a moderate level of risk. 74 McCormick & Company, Inc. Higher-returning assets include mutual, co-mingled and other funds comprised of equity securities, utilizing both active and passive invest- ment styles. These more volatile assets are balanced with less volatile assets, primarily mutual, co-mingled and other funds comprised of fixed income securities. Professional investment firms are engaged to provide advice on the selection and monitoring of investment funds, and to provide advice on the allocation of plan assets across the various fund managers. This advice is based in part on the duration of each plan’s liability. The investment return performances are evaluated quarterly against specific benchmark indices and against a peer group of funds of the same asset classification. The allocations of U.S. pension plan assets as of November 30, by asset category, were as follows: Asset Category Equity securities Fixed income securities Other Total Actual 2019 2018 63.3% 21.5% 15.2% 65.8% 20.5% 13.7% 2019 Target 59.0% 23.2% 17.8% 100.0% 100.0% 100.0% The allocations of the international pension plans’ assets as of November 30, by asset category, were as follows: Asset Category Equity securities Fixed income securities Other Total Actual 2019 2018 50.4% 48.9% 0.7% 52.1% 47.8% 0.1% 2019 Target 53.0% 47.0% —% 100.0% 100.0% 100.0% The following tables set forth by level, within the fair value hierarchy as described in note 8, pension plan assets at their fair value as of November 30 for the United States and international plans: As of November 30, 2019 (millions) Cash and cash equivalents International equity securities(b) Fixed income securities: International/government/ corporate bonds(e) Insurance contracts(f) International Total fair value $ 2.5 171.6 Level 1 Level 2 $ 2.5 — $ — 171.6 144.7 22.1 — — 144.7 22.1 Total investments $ 340.9 $ 2.5 $ 338.4 As of November 30, 2018 (millions) Cash and cash equivalents Equity securities: U.S. equity securities(a) International equity securities(b) Fixed income securities: U.S./government/ corporate bonds(c) High yield bonds(d) International/government/ corporate bonds(e) Insurance contracts(f) Other types of investments: Real estate(g) Natural resources(h) United States Total fair value Level 1 Level 2 $ 16.0 $ 16.0 $ — 283.2 132.7 149.6 126.1 133.6 6.6 46.2 36.7 27.4 1.1 22.3 12.6 44.1 — 27.4 — 18.7 — 2.1 36.7 — 1.1 3.6 12.6 Total $578.2 $381.9 $196.3 Investments measured at net asset value(i) Hedge funds(j) Private equity funds(k) Private debt funds(l) Total investments 36.7 5.6 19.9 $640.4 United States Total fair value Level 1 Level 2 $ 15.3 $ 15.3 $ — As of November 30, 2018 (millions) As of November 30, 2019 (millions) Cash and cash equivalents Equity securities: U.S. equity securities(a) International equity securities(b) Fixed income securities: U.S. government/corporate bonds(c) High yield bonds(d) International/government/ corporate bonds(e) Insurance contracts(f) Other types of investments: Real estate(g) Natural resources(h) 276.5 145.5 148.5 134.2 128.0 11.3 51.2 40.1 26.8 1.1 25.9 12.0 49.1 — 26.8 — 22.0 — 2.1 40.1 — 1.1 3.9 12.0 Total $ 594.4 $ 395.9 $ 198.5 Investments measured at net asset value(i) Hedge funds(j) Private equity funds(k) Private debt funds(l) Total investments 49.3 3.2 25.0 $ 671.9 Cash and cash equivalents International equity securities(b) Fixed income securities: International/government/ corporate bonds(e) Insurance contracts(f) Total investments International Total fair value $ 2.0 159.5 Level 1 Level 2 $2.0 — $ — 159.5 125.2 19.8 — — 125.2 19.8 $306.5 $2.0 $304.5 (a) This category comprises equity funds and collective equity trust funds that most closely track the S&P index and other equity indices. (b) This category comprises international equity funds with varying benchmark indices. (c) This category comprises funds consisting of U.S. government and U.S. corporate bonds and other fixed income securities. An appropriate benchmark is the Barclays Capital Aggregate Bond Index. (d) This category comprises funds consisting of real estate related debt securities with an appropriate benchmark of the Barclays Investment Grade CMBS Index. (e) This category comprises funds consisting of international government/corporate bonds and other fixed income securities with varying benchmark indices. (f) This category comprises insurance contracts, the majority of which have a guaranteed investment return. (g) This category comprises funds investing in real estate investment trusts (REIT). An appropriate benchmark is the MSCI U.S. REIT Index. (h) This category comprises funds investing in natural resources. An appropriate bench- mark is the Alerian master limited partnership (MLP) Index. 2019 Annual Report 75 (i) Certain investments that are valued using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. These are included to permit reconciliation of the fair value hierarchy to the aggregate pension plan assets. (j) This category comprises hedge funds investing in strategies represented in various HFRI Fund Indices. The net asset value is generally based on the valuation of the under- lying investment. Limitations exist on the timing from notice by the plan of its intent to redeem and actual redemptions of these funds and generally range from a minimum of one month to several months. (k) This category comprises private equity, venture capital and limited partnerships. The net asset is based on valuation models of the underlying securities as determined by the general partner or general partner’s designee. These valuation models include unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods of approximately 10 years. (l) This category comprises limited partnerships funds investing in senior loans, mezzanine and distressed debt. The net asset is based on valuation models of the underlying securities as determined by the general partner or general partner’s designee. These valuation models include unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods of approximately 10 years. For the plans’ hedge funds, private equity funds and private debt funds, we engage an independent advisor to compare the funds’ returns to other funds with similar strategies. Each fund is required to have an annual audit by an independent accountant, which is provided to the independent advisor. This provides a basis of comparability relative to similar assets. Equity securities in the U.S. pension plans included McCormick stock with a fair value of $64.4 million (0.4 million shares and 9.6% of total U.S. pension plan assets) and $57.2 million (0.4 million shares and 8.9% of total U.S. pension plan assets) at November 30, 2019 and 2018, respectively. Dividends paid on these shares were $0.9 million and $0.8 million in 2019 and 2018, respectively. Pension benefit payments in our most significant plans are made from assets of the pension plans. It is anticipated that future benefit payments for the U.S. and International plans for the next 10 fiscal years will be as follows: (millions) 2020 2021 2022 2023 2024 2025-2029 United States International $ 41.4 41.6 43.1 44.8 46.7 243.8 $ 14.1 14.2 14.4 15.4 15.3 77.3 U.S. Defined Contribution Retirement Plans Effective December 1, 2018 for the U.S. defined contribution retirement plan, we match 100% of a participant’s contribution up to the first 3% of the participant’s salary, and 66.7% of the next 3% of the participant’s salary. In addition, we make contributions of 3% of the participant’s salary for all U.S. employees who are employed on December 31 of each year. Prior to December 1, 2018, for the U.S. defined contribution retirement plan, we matched 100% of a participant’s contribution up to the first 3% of the participant’s salary, and 50% of the next 2% of the participant’s salary. In addition, we made contributions of 3% of the participant’s salary for U.S. employees not covered by the defined ben- efit plan. Some of our smaller U.S. subsidiaries sponsor separate 401(k) retirement plans. We also sponsor a non-qualified defined contribution retirement plan. Our contributions charged to expense under all U.S. defined contribution retirement plans were $28.2 million, $15.5 million and $12.2 million in 2019, 2018 and 2017, respectively. At the participant’s election, 401(k) retirement plans held 1.6 million shares of McCormick stock, with a fair value of $266.1 million, at November 30, 2019. Dividends paid on the shares held in the 401(k) retirement plans in 2019 and 2018 were $3.9 million in each year. Postretirement Benefits Other Than Pensions We currently provide postretirement medical and life insurance benefits to certain U.S. employees who were covered under the active employees’ plan and retire after age 55 with at least five years of service. The subsidy provided under these plans is based primarily on age at date of retirement. These benefits are not pre-funded but paid as incurred. Employees hired after December 31, 2008 are not eligible for a company subsidy. They are eligible for coverage on an access- only basis. During 2017, we made the following changes to our postretirement medical and life insurance benefits impacting certain U.S. employees: • On August 23, 2017, our Management Committee approved changes to our postretirement medical benefits plan for eligible U.S. employees and retirees (employees hired after December 31, 2008 are not eligible for the subsidy). These changes included consolidating benefits providers and simplifying and reducing our subsidy for postretirement medical benefits. The effective date of the change in our subsidy was January 1, 2018. • On August 23, 2017, our Management Committee approved the elim- ination of life insurance benefits under our other postretirement ben- efit plan to eligible U.S. active employees (that life insurance benefit was available to U.S. employees hired on or prior to December 31, 2008). The effective date of this plan amendment was January 1, 2018, unless an employee committed to their retirement date by December 31, 2017 and retired on or before December 31, 2018. As a result of these changes, we remeasured the other postretirement benefit obligation as of August 23, 2017, resulting in a reduction of the other postretirement benefit obligation of $27.1 million. These remeasurements resulted in an aggregate non-cash, pre-tax net prior service cost credit of $27.1 million, which is included in our consoli- dated statement of comprehensive income for 2017, as a component of Other comprehensive income (loss) on the line entitled Unrealized components of pension and other postretirement plans. Deferred taxes associated with these aggregate prior service cost credits, together with other unrealized components of pension plans recognized during 2017, are also included in that statement as a component of Other comprehensive income (loss). Our other postretirement benefit (income) expense for the years ended November 30 follows: (millions) Service cost Interest costs Amortization of prior service credits Amortization of actuarial gains 2019 2018 2017 $ 1.8 2.7 (8.7) (0.9) $ 2.0 2.4 (8.6) (0.1) $ 2.6 3.3 (2.3) (0.2) Postretirement benefit (income) expense $ (5.1) $ (4.3) $ 3.4 76 McCormick & Company, Inc. Rollforwards of the benefit obligation, fair value of plan assets and a reconciliation of the plans’ funded status at November 30, the measurement date, follow: (millions) 2019 2018 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest costs Employee contributions Plan amendments Other plan assumptions Discount rate change Actuarial (gain) loss Benefits paid $ 62.9 1.8 2.7 0.3 (0.4) (1.0) 7.6 (2.5) (4.2) $ 70.9 2.0 2.4 0.4 — (0.1) (4.5) (3.0) (5.2) Benefit obligation at end of year $ 67.2 $ 62.9 Change in fair value of plan assets: Fair value of plan assets at beginning of year Employer contributions Employee contributions Benefits paid Fair value of plan assets at end of year Other postretirement benefit liability $ — $ — 4.8 0.4 (5.2) 3.9 0.3 (4.2) $ — $ — $ 67.2 $ 62.9 Estimated future benefit payments (net of employee contributions) for the next 10 fiscal years are as follows: (millions) 2020 2021 2022 2023 2024 2025-2029 Retiree medical Retiree life insurance $ 3.7 3.7 3.7 3.7 3.7 18.0 $1.4 1.4 1.4 1.4 1.4 6.5 Total $ 5.1 5.1 5.1 5.1 5.1 24.5 The assumed discount rate in determining the benefit obligation was 3.1% and 4.5% for 2019 and 2018, respectively. A summary of our RSU activity for the years ended November 30 follows: For 2019, the assumed annual rate of increase in the cost of covered health care benefits is 6.5% (7.3% last year). It is assumed to decrease gradually to 4.5% in the year 2030 (4.5% in 2028 last year) and remain at that level thereafter. A one percentage point increase or decrease in the assumed health care cost trend rate would have had an immaterial effect on the benefit obligation and the total of service and interest cost components for 2019. 11. STOCK-BASED COMPENSATION We have three types of stock-based compensation awards: restricted stock units (RSUs), stock options and company stock awarded as part of our long-term performance plan (LTPP). Total stock-based compensation expense for 2019, 2018 and 2017 was $37.2 million, $25.6 million and $23.9 million, respectively. Total unrecognized stock-based compensa- tion expense related to our RSUs and stock options at November 30, 2019 was $27.5 million and the weighted-average period over which this will be recognized is 1.4 years. Total unrecognized stock-based compensation expense related to our LTPP is variable in nature and is dependent on the company’s execution against established perfor- mance metrics under performance cycles related to this plan. As of November 30, 2019, we have 5.1 million shares remaining available for future issuance under our RSUs, stock option and LTPP award programs. For all awards, forfeiture rates are considered in the calculation of compensation expense. The following summarizes the key terms and the methods of valuation and expense recognition for each of our stock-based compensation awards. RSUs RSUs are valued at the market price of the underlying stock, discount- ed by foregone dividends, on the date of grant. Substantially all of the RSUs granted vest over a three-year term or, if earlier, upon the retire- ment eligibility date of the holder. Compensation expense is recorded in the consolidated income statement ratably over the shorter of the period until vested or the employee’s retirement eligibility date. (shares in thousands) Beginning of year Granted Vested Forfeited Outstanding—end of year 2019 2018 2017 Shares Weighted-average price Shares Weighted-average price Shares Weighted-average price 423 129 (159) (12) 381 $103.05 143.23 104.15 113.55 $ 115.89 267 278 (113) (9) 423 $ 86.47 112.72 88.15 96.53 $103.05 267 131 (118) (13) 267 $ 80.08 94.63 80.62 90.85 $ 86.47 Stock Options Stock options are granted with an exercise price equal to the market price of the stock on the date of grant. Substantially all of the options vest ratably over a three-year period or, if earlier, upon the retirement-eligibility dates of the holders and are exercisable over a 10-year period. Upon exercise of the option, shares are issued from our authorized and unissued shares. The fair value of the options is estimated with a lattice option pricing model which uses the assumptions in the following table. We believe the lattice model provides an appropriate estimate of fair value of our options as it allows for a range of possible outcomes over an option term and can be adjusted for changes in certain assumptions over time. Expected volatilities are based primarily on the historical performance of our stock. We also use historical data to estimate the timing and amount of option exercises and forfeitures within the 2019 Annual Report 7 7 valuation model. The expected term of the options is an output of the option pricing model and estimates the period of time that options are expected to remain unexercised. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compen- sation expense is calculated based on the fair value of the options on the date of grant. This compensation is recorded in the consolidated income statement ratably over the shorter of the period until vested or the employee’s retirement eligibility date. The per share weighted-average fair value for all options granted was $27.51, $20.30 and $17.61 in 2019, 2018 and 2017, respectively. These fair values were computed using the following range of assumptions for the years ended November 30: Risk-free interest rates Dividend yield Expected volatility Expected lives 2019 2018 2017 2.2–2.5% 1.5% 17.4% 7.5 years 1.7–2.9% 2.0% 18.4% 7.6 years 0.9–2.4% 1.9% 18.7% 7.6 years Under our stock option plans, we may issue shares on a net basis at the request of the option holder. This occurs by netting the option cost in shares from the shares exercised. A summary of our stock option activity for the years ended November 30 follows: (shares in millions) Beginning of year Granted Exercised Outstanding—end of year Exercisable—end of year 2019 2018 2017 Shares Weighted-average exercise price Shares Weighted-average exercise price Shares Weighted-average exercise price 3.6 0.3 (1.3) 2.6 1.9 $ 82.60 147.39 71.08 96.18 $ 86.61 4.8 0.4 (1.6) 3.6 2.8 $ 71.91 105.95 55.28 82.60 $ 76.54 4.9 0.6 (0.7) 4.8 3.8 $66.00 98.07 50.63 71.91 $65.34 As of November 30, 2019, the intrinsic value (the difference between the exercise price and the market price) for all options currently outstanding was $189.6 million and for options currently exercisable was $157.6 million. At November 30, 2019, the differences between options outstanding and options expected to vest and their related weighted-average exercise prices, aggregate intrinsic values and weighted-average remaining lives were not material. The total intrinsic value of all options exercised during the years ended November 30, 2019, 2018 and 2017 was $111.0 million, $108.0 million and $31.4 million, respectively. A summary of our stock options outstanding and exercisable at November 30, 2019 follows: (shares in millions) Range of exercise price $38.00–$79.00 $79.01–$103.00 $103.01–$149.00 Options outstanding Options exercisable Shares Weighted-average remaining life (yrs.) Weighted-average exercise price Shares Weighted-average remaining life (yrs.) Weighted-average exercise price 0.9 1.0 0.7 2.6 4.4 6.8 8.8 6.5 $ 71.40 99.04 125.75 $ 96.18 0.9 0.9 0.1 1.9 4.4 6.7 8.3 5.7 $ 71.40 99.22 106.65 $ 86.61 LTPP Our LTPP grants in 2018 and 2017 will deliver awards in a combination of cash and company stock. The stock compensation portion of the LTPP awards shares of company stock if certain company performance objectives are met at the end of a three-year period. LTPP awards granted in 2019 will be delivered entirely in company stock, with the target award calculated using a combination of a market-based total shareholder return and perfor- mance-based components. These awards are valued based on the fair value of the underlying stock on the date of grant. Compensation expense is recorded in the income statement ratably over the three-year period of the program based on the number of shares ultimately expected to be awarded using our estimate of the most likely outcome of achieving the performance objectives. A summary of the LTPP award activity for the years ended November 30 follows: 2019 2018 2017 Shares Weighted- average price Shares Weighted- average price Shares Weighted- average price 218 68 (57) (33) — 196 $ 83.55 150.51 86.40 89.96 — $ 115.96 220 86 (60) (26) (2) 218 $ 84.31 101.90 74.02 86.40 97.41 $ 83.55 201 78 (43) (16) — 220 $78.10 89.96 69.04 74.02 — $84.31 (shares in thousands) Beginning of year Granted Vested Performance adjustment Forfeited Outstanding—end of year 78 McCormick & Company, Inc. 12. INCOME TAXES The provision for income taxes for the years ended November 30 consists of the following: (millions) Income taxes Current Federal State International Deferred Federal State International Total income tax expense (benefit) 2019 2018 2017 $ 52.3 10.7 73.5 136.5 26.4 3.6 (9.1) 20.9 $ 157.4 $ 92.9 11.0 78.7 182.6 (340.3) 1.5 (1.1) (339.9) $(157.3) $ 67.1 6.2 53.9 127.2 23.8 0.9 (0.6) 24.1 $151.3 In December 2017, President Trump signed into law 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” (this legisla- tion is referred to herein as the “U.S. Tax Act”). The U.S. Tax Act pro- vides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the U.S. Tax Act were effec- tive during our fiscal year ended November 30, 2018 with all provi- sions of the U.S. Tax Act effective as of the beginning of our fiscal year beginning December 1, 2018. The U.S. Tax Act contains provi- sions with separate effective dates but is generally effective for tax- able years beginning after December 31, 2017. The U.S. Tax Act creates a new requirement that certain income earned by foreign sub- sidiaries, known as Global Intangible Low-Taxed Income (GILTI), must be included in the gross income of the subsidiary’s U.S. shareholder. This provision of the U.S. Tax Act was effective for us for our fiscal year beginning December 1, 2018. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary dif- ferences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat GILTI as a current period expense when incurred. Beginning on January 1, 2018, the U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% on our U.S. earnings from that date and beyond. The revaluation of our U.S. deferred tax assets and liabilities to the 21% corporate tax rate has reduced our net U.S. deferred income tax liability by $380.0 million and is reflected as a reduction in our income tax expense in our results for the year ended November 30, 2018. The U.S. Tax Act imposes a one-time transition tax on post-1986 earnings of non-U.S. affiliates that have not been repatriated for purposes of U.S. federal income tax, with those earnings taxed at rates of 15.5% for earnings reflected by cash and cash equivalent items and 8% for other assets. This transition tax, based on our fiscal 2018 tax return filed in fiscal 2019, was $76.0 million (we estimated the transition tax to be $75.3 million in fiscal 2018). The cash tax effects of the transition tax, reduced by the utilization of $21.1 million of current and carried forward excess foreign tax credits, as well as other items of $7.7 million, resulted in a net tax liability of $47.2 million, which can be remitted in installments over an eight-year period as we are doing. As of November 30, 2019, our remaining unpaid transition tax is $43.4 million. In addition to the estimated transition tax of $75.3 million recognized in 2018, we incurred additional foreign withholding taxes, net of a U.S. foreign tax credit, of $7.9 million and a $4.7 million reduction in our fiscal 2018 income taxes as a consequence of the transition tax, both of which we recognized as a component of our income tax expense for the year ended November 30, 2018, for a net transition tax impact recognized in 2018 of $78.5 million. In 2019, current federal income tax expense increased by $8.3 million from $44.0 million (exclusive of non-recurring U.S. Tax Act impacts of $48.9 million) in 2018 to $52.3 million in 2019. Deferred federal expense decreased by $2.6 million from $29.0 million (exclusive of non-recurring U.S. Tax Act impacts of $369.3 million) in 2018 to $26.4 million in 2019. The net change in current federal income tax expense principally stemmed from higher pretax income in the U.S. in 2019 compared to 2018. The components of income from consolidated operations before income taxes for the years ended November 30 follow: (millions) Pretax income United States International 2019 2018 2017 $ 569.0 250.2 $ 819.2 $492.2 249.1 $741.3 $382.1 212.7 $594.8 A reconciliation of the U.S. federal statutory rate with the effective tax rate for the years ended November 30 follows: Federal statutory tax rate State income taxes, net of federal benefits International tax at different effective rates U.S. tax on remitted and unremitted earnings Stock compensation expense U.S. manufacturing deduction Changes in prior year tax contingencies Non-recurring benefit of U.S. Tax Act Intra-entity asset transfer Other, net 2019 21.0% 2018 2017 22.2% 35.0% 1.6 1.6 0.5 (2.8) — (0.3) (0.2) (1.8) (0.4) 1.5 0.4 0.6 (2.9) (0.8) (0.8) (40.7) — (0.7) 0.8 (4.8) 0.4 (1.6) (1.8) (2.1) — — (0.5) Total 19.2% (21.2)% 25.4% Deferred tax assets and liabilities are comprised of the following as of November 30: (millions) Deferred tax assets Employee benefit liabilities Other accrued liabilities Inventory Tax loss and credit carryforwards Other Valuation allowance Deferred tax liabilities Depreciation Intangible assets Other 2019 2018 $ 103.3 32.3 7.5 46.8 48.1 (32.4) 205.6 82.6 770.5 5.5 858.6 $ 82.7 40.0 8.0 57.2 44.2 (32.9) 199.2 77.8 782.8 5.3 865.9 Net deferred tax liability $(653.0) $(666.7) At November 30, 2019, our non-U.S. subsidiaries have tax loss carry- forwards of $183.3 million. Of these carryforwards, $2.4 million expire in 2020, $6.1 million from 2021 through 2022, $59.3 million from 2023 through 2036 and $115.5 million may be carried forward indefinitely. 2019 Annual Report 79 We are under normal recurring tax audits in the U.S. and in several jurisdictions outside the U.S. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for uncertain tax positions are adequate to cover existing risks and exposures. 13. CAPITAL STOCK, EARNINGS PER SHARE AND STOCK ISSUANCE Holders of Common Stock have full voting rights except that (1) the voting rights of persons who are deemed to own beneficially 10% or more of the outstanding shares of Common Stock are limited to 10% of the votes entitled to be cast by all holders of shares of Common Stock regardless of how many shares in excess of 10% are held by such person; (2) we have the right to redeem any or all shares of stock owned by such person unless such person acquires more than 90% of the outstanding shares of each class of our common stock; and (3) at such time as such person controls more than 50% of the vote entitled to be cast by the holders of outstanding shares of Common Stock, automatically, on a share-for-share basis, all shares of Common Stock Non-Voting will convert into shares of Common Stock. Holders of Common Stock Non-Voting will vote as a separate class on all matters on which they are entitled to vote. Holders of Com- mon Stock Non-Voting are entitled to vote on reverse mergers and statutory share exchanges where our capital stock is converted into other securities or property, dissolution of the company and the sale of substantially all of our assets, as well as forward mergers and consolidation of the company. During 2017, we issued approximately 6.35 million shares of our com- mon stock non-voting in connection with our acquisition of RB Foods (see note 2), 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. The reconciliation of shares outstanding used in the calculation of basic and diluted earnings per share for the years ended November 30 follows: (millions) Average shares outstanding—basic Effect of dilutive securities: Stock options/RSUs/LTPP 2019 2018 2017 132.6 131.5 126.8 1.5 1.7 1.6 Average shares outstanding—diluted 134.1 133.2 128.4 The following table sets forth the stock options and RSUs for the years ended November 30 which were not considered in our earnings per share calculation since they were antidilutive: (millions) Antidilutive securities 2019 2018 2017 0.1 0.2 1.1 At November 30, 2019, our non-U.S. subsidiaries have capital loss car- ryforwards of $26.0 million. All of these carryforwards may be carried forward indefinitely. A valuation allowance has been provided to record deferred tax assets at their net realizable value based on a more likely than not criteria. The $0.5 million net decrease in the valuation allowance from November 30, 2018 to November 30, 2019 mainly relates to subsidiaries’ net operating losses, capital losses and other tax attributes which may not be realized in future periods. Historically, we have not provided deferred income taxes on the cumu- lative undistributed earnings of our international subsidiaries. During fiscal 2018, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested as of January 1, 2018; therefore, we recognized $7.9 million of income tax expense in fiscal 2018. Our intent is to continue to reinvest the remain- ing undistributed earnings of our international subsidiaries indefinitely. Therefore, in 2019 there were no incremental previously undistributed earnings that no longer met the requirements of indefinite reinvest- ment. While federal income tax expense has been recognized as a result of the U.S. Tax Act, we have not provided any additional de- ferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings. The following table summarizes the activity related to our gross unrec- ognized tax benefits for the years ended November 30: (millions) 2019 2018 2017 Balance at beginning of year Additions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Settlements Statute expirations Foreign currency translation Balance at November 30 $27.9 6.6 0.6 (0.3) — (2.5) (0.3) $32.0 $39.1 6.5 0.3 (6.9) — (9.1) (2.0) $27.9 $58.3 7.3 0.9 (8.4) (18.1) (2.1) 1.2 $39.1 As of November 30, 2019, if recognized, all of the $32.0 million of the unrecognized tax benefits would affect the effective rate. We record interest and penalties on income taxes in income tax expense. We recognized interest and penalty expense of $2.1 million, $0.1 million and $0.4 million in 2019, 2018 and 2017, respectively. As of November 30, 2019 and 2018, we had accrued $7.1 million and $5.1 million, respectively, of interest and penalties related to unrecognized tax benefits. Tax settlements or statute of limitation expirations could result in a change to our uncertain tax positions. We believe that the reasonably possible total amount of unrecognized tax benefits as of November 30, 2019 that could decrease in the next 12 months as a result of various statute expirations, audit closures and/or tax settlements would not be material. We file income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. The open years subject to tax audits vary depending on the tax jurisdictions. In the U.S federal jurisdiction, we are no longer subject to income tax audits by taxing authorities for years before 2016. In other major jurisdictions, we are no longer sub- ject to income tax audits by taxing authorities for years before 2012. 80 McCormick & Company, Inc. 14. COMMITMENTS AND CONTINGENCIES During the normal course of our business, we are occasionally involved with various claims and litigation. Reserves are established in connec- tion with such matters when a loss is probable and the amount of such loss can be reasonably estimated. At November 30, 2019 and 2018, no material reserves were recorded. The determination of probability and the estimation of the actual amount of any such loss are inherently un- predictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. However, we believe that the likelihood that any such excess might have a material adverse effect on our financial statements is remote. 15. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS Business Segments We operate in two business segments: consumer and flavor solutions. The consumer and flavor solutions segments manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail channels, including grocery, mass merchandise, warehouse clubs, dis- count and drug stores, and e-commerce under the “McCormick” brand and a variety of brands around the world, including “French’s,” “Frank’s RedHot,” “Lawry’s,” “Zatarain’s,” “Simply Asia,” “Thai Kitchen,” “Ducros,” “Vahiné,” “Schwartz,” “Club House,” “Kamis,” “Kohinoor,” “DaQiao,” “Drogheria & Alimentari,” “Stubb’s” and “Gourmet Garden.” Our flavor solutions segment sells to food manufacturers and the food- service industry both directly and indirectly through distributors. In each of our segments, we produce and sell many individual products which are similar in composition and nature. With their primary attribute being flavor, the products within each of our segments are regarded as fairly homogenous. It is impracticable to segregate and identify sales and profits for each of these individual product lines. Business Segment Results (millions) 2019 Net sales Operating income excluding special charges Income from unconsolidated operations Assets Capital expenditures Depreciation and amortization 2018 Net sales Operating income excluding special charges and transaction and integration expenses Income from unconsolidated operations Assets Capital expenditures Depreciation and amortization 2017 Net sales Operating income excluding special charges and transaction and integration expenses Income from unconsolidated operations Assets Capital expenditures Depreciation and amortization Historically, we have measured segment performance based on operating income excluding special charges as this activity is managed separately from the business segments. Beginning in 2017, we also excluded transaction and integration expenses related to our acquisition of RB Foods from our measure of segment performance as these expenses are similarly managed separately from the business segments. These transaction and integration expenses excluded from our segment performance measure include the amortization of the acquisition-date fair value adjustment of inventories that is included in cost of goods sold, costs directly associated with that acquisition and costs associated with integrating the RB Foods business. Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehous- ing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for purposes of internal reporting, performance evaluation, or capital allocation. In 2019, the Company transferred management responsibility for certain export operations in both its consumer and flavor solutions seg- ments between geographies within each respective segment, shifting from the Americas to the Asia/Pacific regions within each segment, with no change in segment sales or segment operating income for either the consumer or flavor solutions segment in total. We have a large number of customers for our products. Sales to one of our consumer segment customers, Wal-Mart Stores, Inc., accounted for approximately 11% of consolidated sales in 2019, 2018 and 2017. Sales to one of our flavor solutions segment customers, PepsiCo, Inc., accounted for approximately 10% of consolidated sales in both 2019 and 2018 and approximately 11% in 2017. Accounting policies for measuring segment operating income and as- sets are consistent with those described in note 1. Because of integrat- ed manufacturing for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Inter-segment sales are not material. Corporate assets include cash, deferred taxes, investments and certain fixed assets. Consumer Flavor Solutions Total segments Corporate & other Total $3,269.8 676.3 31.8 — — — $3,247.0 637.1 29.5 — — — $2,901.6 562.4 28.9 — — — $2,077.6 302.2 9.1 — — — $2,055.8 292.8 5.3 — — — $1,828.7 221.3 5.0 — — — $ 5,347.4 978.5 40.9 9,950.3 121.8 118.0 $ 5,302.8 929.9 34.8 10,015.8 126.3 115.0 $ 4,730.3 783.7 33.9 10,036.7 153.6 99.8 $ — — — 411.8 51.9 40.8 $ — — — 240.6 42.8 35.7 $ — — — 349.1 28.8 25.4 $ 5,347.4 978.5 40.9 10,362.1 173.7 158.8 $ 5,302.8 929.9 34.8 10,256.4 169.1 150.7 $ 4,730.3 783.7 33.9 10,385.8 182.4 125.2 2019 Annual Report 81 A reconciliation of operating income excluding special charges and, for 2018 and 2017, transaction and integration expenses, to operating income for 2019, 2018 and 2017 is as follows: (millions) 2019 Operating income excluding special charges Less: Special charges Operating income 2018 Operating income excluding special charges and transaction and integration expenses Less: Special charges Less: Transaction and integration expenses Operating income 2017 Operating income excluding special charges and transaction and integration expenses Less: Special charges Less: Transaction and integration expenses included in cost of goods sold Less: Other transaction and integration expenses Operating income Geographic Areas We have net sales and long-lived assets in the following geographic areas: (millions) 2019 Net sales Long-lived assets 2018 Net sales Long-lived assets 2017 Net sales Long-lived assets Consumer Flavor Solutions $676.3 13.1 $663.2 $637.1 10.0 15.0 $612.1 $562.4 15.3 13.6 27.1 $506.4 $302.2 7.7 $294.5 $292.8 6.3 7.5 $279.0 $221.3 6.9 7.3 13.7 $193.4 Total $978.5 20.8 $957.7 $929.9 16.3 22.5 $891.1 $783.7 22.2 20.9 40.8 $699.8 United States EMEA Other countries Total $3,226.3 6,397.0 $3,145.0 6,411.0 $2,748.7 6,329.1 $ 986.1 1,032.4 $1,021.1 1,057.1 $ 948.9 1,125.3 $1,135.0 875.4 $1,136.7 874.6 $1,032.7 881.2 $5,347.4 8,304.8 $5,302.8 8,342.7 $4,730.3 8,335.6 Long-lived assets include property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization. 16. SUPPLEMENTAL FINANCIAL STATEMENT DATA Supplemental consolidated information with respect to our income statement, balance sheet and cash flow follow: For the year ended November 30 (millions) 2019 2018 2017 Other income, net Pension and other postretirement benefit income Interest income Other $17.7 10.1 (1.1) $26.7 $12.2 7.1 5.5 $24.8 $2.6 5.7 (2.2) $6.1 At November 30 (millions) 2019 2018 Inventories Finished products Raw materials and work-in-process Prepaid expenses Other current assets 82 McCormick & Company, Inc. $413.3 387.9 $801.2 $ 36.0 54.7 $ 90.7 $406.1 380.2 $786.3 $ 27.2 51.7 $ 78.9 At November 30 (millions) 2019 2018 Property, plant and equipment Land and improvements Buildings (including capital lease) Machinery, equipment and other Construction-in-progress Accumulated depreciation Other long-term assets Investments in affiliates Long-term investments Software, net of accumulated amortization $275.0 for 2019 and $281.5 for 2018 Other Other accrued liabilities Payroll and employee benefits Sales allowances Other $ 67.5 658.5 1,007.8 85.8 (867.0) $ 62.6 626.2 947.5 105.1 (799.9) $ 952.6 $ 941.5 $ 186.0 124.4 $ 167.2 120.8 76.4 120.3 43.6 102.2 $ 507.1 $ 433.8 $ 184.9 137.2 287.0 $ 176.5 142.1 329.6 $ 609.1 $ 648.2 At November 30 (millions) Other long-term liabilities Pension Postretirement benefits Unrecognized tax benefits Other 2019 2018 $ 226.9 62.7 37.6 100.4 $ 123.1 58.5 31.0 100.5 $ 427.6 $ 313.1 For the year ended November 30 (millions) 2019 2018 2017 Depreciation Software amortization Interest paid Income taxes paid $ 113.6 13.7 169.8 137.2 $ 104.8 14.0 179.8 154.6 $ 85.2 14.5 72.1 155.6 Dividends paid per share were $2.28 in 2019, $2.08 in 2018 and $1.88 in 2017. Dividends declared per share were $2.33 in 2019, $2.13 in 2018, and $1.93 in 2017. 17. SELECTED QUARTERLY DATA (UNAUDITED) (millions except per share data) First Second Third Fourth 2019 Net sales Gross profit Operating income Net income Basic earnings per share Diluted earnings per share Dividends paid per share— Common Stock and Common Stock Non-Voting Dividends declared per share— Common Stock and Common Stock Non-Voting 2018 Net sales Gross profit Operating income Net income Basic earnings per share Diluted earnings per share Dividends paid per share— Common Stock and Common Stock Non-Voting Dividends declared per share— Common Stock and Common Stock Non-Voting $1,231.5 $1,301.9 $1,329.2 $1,484.8 630.0 299.2 213.4 1.60 1.59 539.9 253.5 191.9 1.45 1.43 466.9 196.9 148.0 1.12 1.11 508.5 208.1 149.4 1.13 1.12 0.57 0.57 0.57 0.57 — 0.57 0.57 1.19 $1,215.4 $1,301.3 $1,318.2 $1,467.9 605.0 291.5 214.0 1.62 1.60 522.5 229.9 173.5 1.32 1.30 505.4 188.6 123.3 0.94 0.93 460.4 181.1 422.6 3.22 3.18 0.52 0.52 0.52 0.52 — 0.52 0.52 1.09 Operating income for the first quarter of 2019 included $2.1 million of special charges, with an after-tax impact of $1.6 million and a per share impact of $0.01 for both basic and diluted earnings per share. Operating income for the second quarter of 2019 included $7.1 million of special charges, with an after-tax impact of $5.4 million and a per share impact of $0.04 for both basic and diluted earnings per share. Operating income for the third quarter of 2019 included $7.7 million of special charges, with an after-tax impact of $6.1 million and a per share impact of $0.04 for both basic and diluted earnings per share. Net income for the third quarter of 2019 included $1.5 million of non-recurring income tax expense related to enactment of the U.S. Tax Act, with a per share impact of $0.01 for both basic and diluted earnings per share. Operating income for the fourth quarter of 2019 included $3.9 million of special charges, with an after-tax impact of $3.0 million and a per share impact of $0.02 for both basic and diluted earnings per share. Operating income for the first quarter of 2018 included $2.2 million of special charges, with an after-tax impact of $1.6 million and a per share impact of $0.01 for both basic and diluted earnings per share. Operating income for the first quarter of 2018 included $8.7 million of transaction and integration expenses, with an after-tax impact of $6.9 million and a per share impact of $0.05 for both basic and diluted earn- ings per share. Net income for the first quarter of 2018 included $297.9 million of non-recurring income tax benefit related to enactment of the U.S. Tax Act, with a per share impact of $2.27 and $2.24 for basic and diluted earnings per share, respectively. Operating income for the sec- ond quarter of 2018 included $8.4 million of special charges, with an after-tax impact of $6.5 million and a per share impact of $0.05 for both basic and diluted earnings per share. Operating income for the second quarter of 2018 included $7.8 million of transaction and integration ex- penses, with an after-tax impact of $6.1 million and a per share impact of $0.05 and $0.04 for basic and diluted earnings per share, respective- ly. Operating income for the third quarter of 2018 included $3.3 million of special charges, with an after-tax impact of $2.5 million and a per share impact of $0.02 for both basic and diluted earnings per share. Operating income for the third quarter of 2018 included $5.6 million of transaction and integration expenses, with an after-tax impact of $4.3 million and a per share impact of $0.04 for both basic and diluted earnings per share. Net income for the third quarter of 2018 included $10.3 million of non-recurring income tax benefit related to enactment of the U.S. Tax Act, with a per share impact of $0.08 for both basic and diluted earnings per share. Operating income for the fourth quarter of 2018 included $2.4 million of special charges, with an after-tax impact of $1.9 million and a per share impact of $0.02 for both basic and dilut- ed earnings per share. Operating income for the fourth quarter of 2018 included $0.4 million of transaction and integration expenses, with an after-tax impact of $0.3 million. Net income for the fourth quarter of 2018 included $6.7 million of non-recurring income tax expense related to enactment of the U.S. Tax Act, with a per share impact of $0.05 for both basic and diluted earnings per share. See notes 2 and 3 for details with respect to the transaction and integra- tion expenses and actions undertaken in connection with these special charges, respectively. See note 12 for details regarding the non-recurring income tax benefits related to enactment of the U.S. Tax Act. Earnings per share are computed independently for each of the quar- ters presented. Therefore, the sum of the quarters may not be equal to the full year earnings per share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. 2019 Annual Report 83 Internal Control over Financial Reporting Management’s report on our internal control over financial reporting and the report of our Independent Registered Public Accounting Firm on internal control over financial reporting are included in our 2019 financial statements in Item 8 of this Report under the captions enti- tled “Report of Management” and “Report of Independent Registered Public Accounting Firm.” No change occurred in our “internal control over financial reporting” (as defined in Rule 13a-15(f)) during our last fiscal quarter which has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information responsive to this item is set forth in the sections titled “Corporate Governance,” “Election of Directors” and “Delinquent Section 16(a) Reports” in our 2020 Proxy Statement, incorporated by ref- erence herein, to be filed within 120 days after the end of our fiscal year. We have adopted a code of ethics that applies to all employees, including our principal executive officer, principal financial officer, principal accounting officer, and our Board of Directors. A copy of the code of ethics is available on our internet website at www.mccormick- corporation.com. We will satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any material amendment to our code of ethics, and any waiver from a provision of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, by posting such information on our website at the internet website address set forth above. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this item is incorporated herein by reference to the sections titled “Compensation of Directors,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Narrative to the Summary Compensation Table,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested in Last Fiscal Year,” “Retirement Benefits,” “Non-Qualified Deferred Compen- sation,” “Potential Payments Upon Termination or Change in Control,” “Compensation Committee Interlocks and Insider Participation” and “Equity Compensation Plan Information” in the 2020 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information responsive to this item is incorporated herein by reference to the sections titled “Principal Stockholders,” “Election of Direc- tors” and “Equity Compensation Plan Information” in the 2020 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information responsive to this item is incorporated herein by reference to the section entitled “Corporate Governance” in the 2020 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information responsive to this item is incorporated herein by reference to the section titled “Report of Audit Committee and Fees of Indepen- dent Registered Public Accounting Firm” in the 2020 Proxy Statement. 84 McCormick & Company, Inc. PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES II–Valuation and Qualifying Accounts List of documents filed as part of this Report. 1. Consolidated Financial Statements The Consolidated Financial Statements for McCormick & Company, Incorporated and related notes, together with the Report of Manage- ment, and the Reports of Ernst & Young LLP dated January 28, 2020, are included herein in Part II, Item 8. 2. Consolidated Financial Statement Schedule Supplemental Financial Schedule: Schedules other than that listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in the consolidated financial statements or notes thereto. 3. Exhibits required to be filed by Item 601 of Regulation S-K The information called for by this item is incorporated herein by refer- ence from the Exhibit Index included in this Report. 2019 Annual Report 85 EXHIBIT INDEX The Stock Purchase Agreement (Exhibit 2(i)) has been filed to provide investors and security holders with information regarding its terms. It is not intended to provide any other information about the Acquired Business, sellers or McCormick. The Agreement contains representations, warranties and covenants of the parties thereto made to and solely for the benefit of each other, and such representations, warranties and covenants may be subject to materiality and other qualifiers applicable to the contracting parties that differ from those that may be viewed as material to investors. The assertions embodied in those representations, warranties and covenants are qualified by information in confidential disclosure schedules that the sellers delivered in connection with the execution of the Agreement and were made only as of the date of the Agreement. Accordingly, investors and security holders should not rely on the representations, warranties and covenants as characterizations of the actual state of facts. Moreover, informa- tion concerning the subject matter of the representations, warranties and covenants may change after the date of the Agreement, which subsequent information may or may not be fully reflected in McCormick’s public disclosures. The following exhibits are attached or incorporated herein by reference: Exhibit Number Description (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession (i) Stock Purchase Agreement, dated July 18, 2017, by and among McCormick & Company, Incorporated, The R.T. French’s Food Group Limited, Reckitt Benckiser LLC, and Reckitt Benckiser Group plc, incorporated by reference from Exhibit 2.1 of McCormick’s Form 8-K dated July 18, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on July 19, 2017. Disclosure schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Agreement as filed identifies such schedules and exhibits, including the general nature of their contents. McCormick agrees to furnish a copy of any omitted attach- ment to the Securities and Exchange Commission on a confidential basis upon request. (3) (i) Articles of Incorporation and By-Laws Restatement of Charter of McCormick & Company, Incorporated dated April 16, 1990 Articles of Amendment to Charter of McCormick & Company, Incorporated dated April 1, 1992 Articles of Amendment to Charter of McCormick & Company, Incorporated dated March 27, 2003 (ii) By-Laws By-Laws of McCormick & Company, Incorporated Amended and Restated on November 26, 2019 Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration No. 33-39582 as filed with the Securities and Exchange Commission on March 25, 1991. Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration Statement No. 33-59842 as filed with the Securities and Exchange Commission on March 19, 1993. Incorporated by reference from Exhibit 4 of Registration Form S-8, Registration Statement No. 333-104084 as filed with the Securities and Exchange Commission on March 28, 2003. Incorporated by reference from Exhibit 99.1 of McCormick’s Form 8-K dated November 26 2019, File No. 1-14920, as filed with the Securities and Exchange Commission on November 26, 2019. (4) Instruments defining the rights of security holders, including indentures (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) See Exhibit 3 (Restatement of Charter and By-Laws) Summary of Certain Exchange Rights, incorporated by reference from Exhibit 4.1 of McCormick’s Form 10-Q for the quarter ended August 31, 2001, File No. 0-748, as filed with the Securities and Exchange Commission on October 12, 2001. Indenture dated July 8, 2011 between McCormick and U.S. Bank National Association, incorporated by reference from Exhibit 4.1 of McCormick’s Form 8-K dated July 5, 2011, File No. 1-14920, as filed with the Securities and Exchange Commission on July 8, 2011. Form of 3.90% notes due 2021, incorporated by reference from Exhibit 4.2 of McCormick’s Form 8-K dated July 5, 2011, File No. 1-14920, as filed with the Securities and Exchange Commission on July 8, 2011. Form of 2.70% notes due 2022, incorporated by reference from Exhibit 4.2 of McCormick’s Form 8-K dated August 7, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on August 11, 2017. Form of 3.50% notes due 2023, incorporated by reference from Exhibit 4.2 of McCormick’s Form 8-K dated August 14, 2013, File No. 1-14920, as filed with the Securities and Exchange Commission on August 19, 2013. Form of 3.15% notes due 2024, incorporated by reference from Exhibit 4.3 of McCormick’s Form 8-K dated August 7, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on August 11, 2017. Form of 3.25% notes due 2025, incorporated by reference from Exhibit 4.2 of McCormick’s Form 8-K dated November 3, 2015, File No. 1-14920, as filed with the Securities and Exchange Commission on November 6, 2015. 86 McCormick & Company, Inc. Exhibit Number Description (10) (ix) (x) (xi) (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) (x) (xi) (xii) (xiii) (xiv) Form of 3.40% notes due 2027, incorporated by reference from Exhibit 4.4 of McCormick’s Form 8-K dated August 7, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on August 11, 2017. Form of 4.20% notes due 2047, incorporated by reference from Exhibit 4.5 of McCormick’s Form 8-K dated August 7, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on August 11, 2017. Description of Securities of McCormick & Company, Incorporated Material contracts Filed herewith Directors’ Share Ownership Program, provided to members of McCormick’s Board of Directors who are not also employees of McCormick, is set forth on page 28 of McCormick’s definitive Proxy Statement dated February 17, 2004, File No. 1-14920, as filed with the Securities and Exchange Commission on February 17, 2004, and incorporated by reference herein.* Deferred Compensation Plan, as restated on January 1, 2000, and amended on August 29, 2000, September 5, 2000 and May 16, 2003, in which directors, officers and certain other management employees participate, a copy of which Plan document and amendments was attached as Exhibit 10(viii) of McCormick’s Form 10-Q for the quarter ended August 31, 2003, File No. 1-14920, as filed with the Securities and Exchange Commission on October 14, 2003, and incorporated by reference herein.* Non-Qualified Retirement Savings Plan, with an effective date of February 1, 2017, in which directors, officers and certain other management employees participate, a copy of which Plan document was attached as Exhibit 10(v) of McCormick’s Form 10-Q for the quarter ended February 28, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on March 28, 2017, and incorporated by reference herein.* The 2007 Omnibus Incentive Plan, in which directors, officers and certain other management employees participate, is set forth in Exhibit A of McCormick’s definitive Proxy Statement dated February 20, 2008, File No. 1-14920, as filed with the Securities and Ex- change Commission on February 20, 2008, and incorporated by reference herein, as amended by Amendment No. 1 thereto, which Amendment is incorporated by reference from Exhibit 10(xi) of McCormick’s 10-K for the fiscal year ended November 30, 2008, File No. 1-14920, as filed with the Securities and Exchange Commission on January 28, 2009.* The Amended and Restated 2013 Omnibus Incentive Plan, in which directors, officers and certain other management employees participate, is incorporated by reference from Exhibit A of McCormick’s definitive Proxy Statement dated February 14, 2019, File No. 1-14920, as filed with the Securities and Exchange Commission on February 14, 2019.* Form of Long-Term Performance Plan Agreement Form of Restricted Stock Units Agreement (viii) Form of Restricted Stock Units Agreement for Directors Form of Non-Qualified Stock Option Agreement Form of Non-Qualified Stock Option Agreement for Directors Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith Form of Indemnification Agreement, incorporated by reference from Exhibit 10(xv) of McCormick’s Form 10-Q for the quarter ended February 28, 2014, File No. 1-14920, as filed with the Securities and Exchange Commission on March 26, 2014. Employment Agreement between McCormick (UK) Limited and Malcolm Swift, incorporated by reference from Exhibit 10.1 of McCormick’s Form 8-K, File No. 1-14920, as filed with the Securities and Exchange Commission on January 29, 2015.* Severance Plan for Executives, incorporated by reference from Exhibit 10(xix) of McCormick’s Form 10-Q for the quarter ended February 28, 2015, File No. 1-14920, as filed with the Securities and Exchange Commission on March 31, 2015.* Term Loan Agreement, dated August 7, 2017, by among the Company, Bank of America, N.A., as administrative agent, and the lenders party thereto, incorporated by reference from Exhibit 10.1 of McCormick’s Form 8-K dated August 7, 2017, File No. 1-14920, as filed with the Securities and Exchange Commission on August 11, 2017. (21) (23) Subsidiaries of McCormick Consents of experts and counsel Filed herewith Filed herewith 2019 Annual Report 87 Exhibit Number Description (31) Rule 13a-14(a)/15d-14(a) Certifications Filed herewith (32) (101) (104) (i) (ii) (i) (ii) Certification of Lawrence E. Kurzius, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Michael R. Smith, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Section 1350 Certifications Filed herewith Certification of Lawrence E. Kurzius, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Michael R. Smith, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The following financial information from the Annual Report on Form 10-K of McCormick for the year ended November 30, 2019, filed electronically herewith, and formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Income Statements; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Cash Flow Statements; and (vi) Notes to Consolidated Financial Statements. Inline XBRL for the cover page of this Annual Report on Form 10-K of McCormick for the year ended November 30, 2019, filed electronically herewith, included in the Exhibit 101 Inline XBRL Document Set. * Management contract or compensatory plan or arrangement. McCormick hereby undertakes to furnish to the Securities and Exchange Commission, upon its request, copies of additional instruments of McCormick with respect to long-term debt that involve an amount of securities that do not exceed 10% of the total assets of McCormick and its subsidiaries on a consolidated basis, pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). 88 McCormick & Company, Inc. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, McCormick has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES McCORMICK & COMPANY, INCORPORATED By: /s/ Lawrence e. Kurzius Lawrence E. Kurzius Chairman, President & Chief Executive Officer January 28, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of McCormick and in the capacities and on the dates indicated. Principal Executive Officer: By: /s/ Lawrence e. Kurzius Lawrence E. Kurzius Principal Financial Officer: By: /s/ MichaeL r. sMith Michael R. Smith Principal Accounting Officer: Chairman, President & Chief Executive Officer January 28, 2020 Executive Vice President & Chief Financial Officer January 28, 2020 By: /s/ christina M. McMuLLen Christina M. McMullen Vice President & Controller Chief Accounting Officer January 28, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, being a majority of the Board of Directors of McCormick & Company, Incorporated, on the date indicated: THE BOARD OF DIRECTORS: Anne L. Bramman /s/ MichaeL a. conway Michael A. Conway /s/ FreeMan a. hrabowsKi, iii Freeman A. Hrabowski, III /s/ Lawrence e. Kurzius Lawrence E. Kurzius /s/ Patricia LittLe Patricia Little /s/ MichaeL D. Mangan Michael D. Mangan /s/ Maritza g. MontieL Maritza G. Montiel /s/ Margaret M.V. Preston Margaret M.V. Preston /s/ gary M. roDKin Gary M. Rodkin /s/ w. anthony Vernon W. Anthony Vernon /s/ Jacques taPiero Jacques Tapiero DATE: January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 January 28, 2020 2019 Annual Report 89 Supplemental Financial Schedule II Consolidated McCORMICK & COMPANY, INCORPORATED VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS) Column A Description Deducted from asset accounts: Year ended November 30, 2019: Allowance for doubtful receivables Valuation allowance on net deferred tax assets Deducted from asset accounts: Year ended November 30, 2018: Allowance for doubtful receivables Valuation allowance on net deferred tax assets Deducted from asset accounts: Year ended November 30, 2017: Allowance for doubtful receivables Valuation allowance on net deferred tax assets Column B Column C Additions Column D Column E Balance at beginning of period Charged to costs and expenses Charged to other accounts Deductions Balance at end of period $ 6.4 32.9 $39.3 $ 6.6 26.0 $32.6 $ 4.2 10.5 $14.7 $ 1.1 2.6 $ 3.7 $ 1.1 11.1 $ 12.2 $ 2.6 15.1 $17.7 $ (1.8) (0.5) $ (2.3) $(0.6) (2.2) $(2.8) $ 0.3 1.8 $ 2.1 $( 0.1) (2.6) $( 2.7) $ (0.7) (2.0) $ (2.7) $ (0.5) (1.4) $ (1.9) $ 5.6 32.4 $38.0 $ 6.4 32.9 $39.3 $ 6.6 26.0 $32.6 END OF ANNUAL REPORT ON FORM 10-K 90 McCormick & Company, Inc. Investor Information Global Headquarters McCormick & Company, Incorporated 24 Schilling Road Hunt Valley, MD 21031 U.S.A. (410) 771-7301 www.mccormickcorporation.com Stock Listing New York Stock Exchange Symbols: MKC, MKC.V Anticipated Dividend Dates—2020 Record Date 4/13/20 7/6/20 10/5/20 12/31/20 Payment Date 4/27/20 7/20/20 10/19/20 1/11/21 McCormick has paid dividends every year since 1925. Independent Registered Public Accounting Firm Ernst & Young LLP 621 East Pratt Street Baltimore, MD 21202 Investor Inquiries Our investor website, ir.mccormick.com, contains our annual reports, Securities & Exchange Commission (SEC) filings, press releases, webcasts, corporate governance principles and other information. To obtain without cost a copy of the annual report filed with the SEC on Form 10-K or for general questions about McCormick or the information in our reports, press releases and other filings, contact Investor Relations at the world headquarters address, investor website or telephone (800) 424-5855 or (410) 771-7537. Investor Services Plan (Dividend Reinvestment and Direct Purchase Plan) We offer an Investor Services Plan which provides share- holders of record the opportunity to automatically reinvest dividends, make optional cash purchases of stock, place stock certificates into safekeeping and sell shares. Indi- viduals who are not current shareholders may purchase their initial shares directly through the Plan. All transac- tions are subject to the limitations set forth in the Plan prospectus, which may be obtained by contacting our transfer agent. m o c . s r o n n o c - n a r r u c / . c n I , s r o n n o C & n a r r u C y b t u o y a L t r o p e R l a u n n A m o c . e t a r a l i h x / e t a r a l i h X y b n g i s e D t r o p e R l a u n n A Registered Shareholder Inquiries For questions on your account, statements, dividend pay- ments, reinvestment and direct deposit, and for address changes, lost certificates, stock transfers, ownership changes or other admin istrative matters, contact our transfer agent. Transfer Agent and Registrar EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120-4100 (877) 778-6784 or (651) 450-4064 shareowneronline.com Annual Meeting The annual meeting of shareholders will be held at 10 a.m., Wednesday, April 1, 2020, at Martin’s Valley Mansion, 594 Cranbrook Road, Hunt Valley, MD 21030. Electronic Delivery of Annual Report and Proxy Statement If you would like to receive next year’s annual report and proxy statement electronically, you may enroll on the website below: enroll.icsdelivery.com/mkc Trademarks Use of ® or ™ in this annual report indicates trademarks including those owned or used by McCormick & Company, Incorporated and its subsidiaries and affiliates. V ISI T OUR C OMPA N Y A ND C ONSUMER BR A ND S ON: McCormick has offset 20,000 lbs. of paper used for the production of this report by planting 241 trees in Madagascar. Please visit www.printreleaf.com to learn more. TX_1CB033F201AB McCormick & Company, Incorporated 24 Schilling Road, Hunt Valley, MD 21031 U.S.A. mccormickcorporation.com 

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