ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand McCormick & Company, Incorporated, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto contained in Item 8 of this report. We use certain non-GAAP information that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data. On November 30, 2020, the Company effected a two-for-one stock split in the form of a stock dividend on all shares of the Company’s two classes of common stock. On November 30, one like share was issued to each share outstanding to shareholders of record as of November 20, 2020. All common stock and per share data has been retroactively adjusted to reflect the stock split.

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%.

Impact of Global COVID-19 Pandemic–During the year ended November 30, 2020, the effects of a new coronavirus (COVID-19) and related actions to attempt to control its spread significantly impacted not only our operating results but also the global economy.

The impact of the global COVID-19 pandemic on our consolidated operating results in early fiscal 2020 was limited, in all material respects, to our operations in China where the Chinese government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country. In March 2020, as COVID-19 spread outside of China, significantly impacting the rest of the world, the World Health Organization designated the outbreak as a global pandemic. The pandemic spread outside of China in the balance of fiscal year 2020 to impact operations in our Americas and Europe, Middle East and Africa (EMEA) regions in addition to elsewhere in our Asia/Pacific region. The effects of COVID-19 and related actions to attempt to control its spread significantly impacted not only our operating results but also the global economy.

In the U.S., many state and local governments, based on local conditions, either recommended or mandated actions to slow the transmission of COVID-19. These measures ranged from limitations on crowd size, together with closures of bars and dine-in restaurants, to mandatory orders for non-essential citizens to shelter in place. Governments in non-U.S. jurisdictions also implemented shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibited many employees from going to work. Borders between countries have been closed to contain the spread of COVID-19 contagion. The extent and nature of government actions varied during fiscal year 2020 and in early fiscal year 2021 based upon the then-current extent and severity of the COVID-19 pandemic within their respective countries and localities.

We identified three priorities while navigating through the period of volatility and uncertainty associated with various stages of the COVID-19 pandemic:

▪First, to ensure the health and safety of our employees and the quality and integrity of our products.

▪Second, to keep our brands and our customers' brands in supply and to maintain the financial strength of our business.

▪Third, to ensure McCormick emerges strong from this event. The pandemic will come to an end and we believe that we will come out a better company by driving our long-term strategies, responding to changing consumer behavior and capitalizing on opportunities from our relative strength.

We implemented numerous measures over the course of fiscal 2020 to ensure that these priorities were achieved, including: (i) for our manufacturing and distribution employees, who played a critical role in maintaining the supply of our products to our customers and consumers, we instituted pre-shift temperature checks, temporarily increased pay and benefits, and provided time to enable social distancing and even greater sanitation procedures during shift changes; (ii) for our other employees, we instituted work-from-home arrangements; (iii) we maintained close communication with customers and suppliers to enable us to react to changing demand; and (iv) throughout the organization, we empowered global, regional and local crisis response teams that enabled us to react quickly to the challenging environment.

Our sales increased by 4.7% for the year ended November 30, 2020 over the 2019 level. That increase was driven by an 10.0% increase in sales of our consumer segment, partially offset by a 3.5% decline in sales of our flavor solutions segment. Our operating results have and will continue to be impacted by COVID-19, including the related recovery and the shift in consumer demand resulting from the pandemic. We have partnered with our customers to monitor consumer demand changes and address the shift to at-home versus away-from-home consumption. We estimate that away-from-home consumption has historically represented approximately 20% of our consolidated sales. The effects of COVID-19 on consumer behavior have, on a net basis, favorably impacted the operating results of our consumer segment and unfavorably impacted the operating results of our flavor solutions segment during the year ended November 30, 2020. The impact of COVID-19 on our consumer segment during fiscal 2020 resulted in a significant increase in at-home consumption and related demand for our products. The unfavorable impact on our flavor solutions segment during the same periods was principally attributable to decreased demand from certain customers that were affected by government mandates related to COVID-19 in many of our markets. Those measures required closures of, or capacity limitations on, dine-in restaurants or restricted operations of those restaurants to carry-out or delivery only and also restricted operations of quick service restaurants to drive-through pick-up or delivery. The resulting negative demand impacts in our flavor solutions segment were partially offset by increased at-home consumption from certain customers in our flavor solutions segment that use our products to flavor their own brands for at-home consumption. The impact of COVID-19 on our consumer segment and flavor solutions segment moderated during our fourth quarter of fiscal 2020. During that quarter, our sales increased by 4.9% over the comparable period in 2019, driven by a 5.9% increase in sales of our consumer segment and a 3.1% increase in sales of our flavor solutions segment. The 5.9% fourth quarter growth in sales of our consumer segment was moderated by the lack of availability of certain of our consumer products in the U.S. following the sustained increase in demand earlier in 2020 that caused us to suspend or curtail production of some secondary products in the fourth quarter to protect the supply of our top selling holiday items.

Upon worsening COVID-19 infection levels in certain localities in late fiscal 2020 and in early fiscal 2021, local governmental authorities have either re-imposed some or all of earlier restrictions or imposed other restrictions, all in an effort to check the spread of COVID-19.

In early fiscal 2021, vaccines effective in combatting COVID-19 were approved by health agencies in certain countries/regions in which we operate (including the U.S., U.K., European Union, Canada and Mexico) and began to be administered. However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to front-line health care workers and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19. Full administration of the COVID-19 vaccines is unlikely to occur in most jurisdictions until mid- to late-2021. The pace and shape of the COVID-19 recovery described above as well as the impact and extent of potential resurgences is not presently known. These and other uncertainties with respect to COVID-19 could result in changes to our current expectations in addition to a number of adverse impacts to our business, including but not limited to additional disruption to the economy and consumers’ willingness and ability to spend, temporary or permanent closures by businesses that consume our products, such as restaurants, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable or, in the case of significant increased demand for our product, incapable of fulfilling that increased demand. As a result, it may be challenging to obtain and process raw materials to support our business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us. The potential effects of COVID-19 also could impact us in a number of other ways including, but not limited to, variations in the level of our

profitability, laws and regulations affecting our business, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, valuation of our pension assets and obligations, credit risks of our customers and counterparties, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets.

Sales growth: Over time, we expect to grow sales with similar contributions from: 1) our base business – driven by brand marketing support, category management, and differentiated customer engagement; 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 investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products.

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

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

Acquisitions – Acquisitions are expected to approximate one-third of our sales growth over time. Since the beginning of 2015, we have completed nine acquisitions, which are driving sales in both our consumer and flavor solutions segments. We focus on acquisition opportunities that meet the growing demand for flavor and health. Geographically, our focus is on acquisitions that build scale where we currently have presence in both developed and emerging markets. Our acquisitions have included bolt-on opportunities as well as the following recent acquisitions:

•On December 30, 2020, we acquired FONA International, LLC and certain of its affiliates (FONA), a privately owned company, for approximately $710 million, net of cash acquired, subject to certain customary purchase price adjustments. We financed this fiscal 2021 acquisition with cash and short-term borrowings. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets which expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform, strengthens our capabilities, and accelerates the strategic migration of our portfolio to more value-added and technically insulated products.

•On November 30, 2020, we acquired the parent company of Cholula Hot Sauce® (Cholula) from L Catterton for approximately $803 million, net of cash acquired, subject to certain customary purchase price adjustments. Cholula is a strong addition to McCormick’s global branded flavor portfolio, which broadens the Company’s offering in the high growth hot sauce category to consumers and foodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce in both our consumer and flavor solutions segments.

•On August 17, 2017, we acquired Reckitt Benckiser's Food Division (RB Foods) for approximately $4.2 billion. The acquired market-leading brands of RB Foods included 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 moved 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 FONA and Cholula acquisitions are expected to contribute more than one-third of our sales growth in 2021. The RB Foods acquisition contributed 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 notes to our consolidated 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, including 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 statements, we expect to incur special charges of approximately $60 million to $65 million associated with our GE initiative of which approximately $39.9 million have been recognized through November 30, 2020. As technology provides the backbone for this greater process alignment, information sharing and scalability, we are also making investments in our information systems.From late 2018 through early 2020, we 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. In the second quarter of fiscal 2020, we elected to pause activity related to our ERP for the balance of fiscal 2020 due, in part, to COVID-19 restrictions that restricted necessary travel by internal and external ERP team members and made it difficult for local McCormick personnel to actively participate in the ERP development, data cleansing, and testing prior to then scheduled pilots later in fiscal 2020. In addition, the pause of this activity enabled all McCormick employees to focus their activities on the three priorities previously described under the heading “Impact of COVID-19 Pandemic” for navigating through the period of volatility and uncertainty associated with various stages of the COVID-19 pandemic.

We expect that, in total over the course of the ERP replacement program from late 2018 through 2023, we will invest from approximately $350 million to $400 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 technology platform in 2022. Of that projected, $350 million to $400 million, we expect capitalized software to account for approximately 50% and program expenses to account for approximately 50%. Of the approximately $175 million to $200 million of operating expenses included in our projected total spending related to our ERP replacement program, approximately $40 million have been recognized through November 30, 2020. Of the approximately $175 million to $200 million of capitalized software included in our projected total spending related to our ERP program, approximately $87 million has been recognized through November 30, 2020.

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 provided by operating activities reached $1,041.3 million in 2020, an increase of $94.5 million from the $946.8 million realized in 2019. In 2020, we continued to have a balanced use of cash for debt repayment, capital expenditures and the return of cash to shareholders through dividends and share repurchases. We are using our cash to fund shareholder dividends, with annual increases in each of the past 35 years, and to fund capital expenditures and acquisitions. In 2020, the return of cash to our shareholders through dividends and share repurchases was $377.4 million.

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

In 2020, we achieved further growth of our business with net sales rising 4.7% over the 2019 level due to the following factors:

•We grew volume and product mix, which added 3.7% of sales growth. This growth was driven by sharply higher demand within our consumer segment, as the continuation of measures imposed to mitigate the spread of COVID-19 and the related change in consumer behavior, resulted in a shift in consumer behavior toward at-home meal preparation that more than offset lower demand within our flavor solutions segment principally associated with our branded food service customers.

•Pricing actions contributed 1.6% of the increase in net sales.

•Net sales growth was negatively impacted by fluctuations in currency rates that decreased sales growth by 0.6%. Excluding this impact, we grew sales by 5.3% over the prior year on a constant currency basis.

Operating income was $999.5 million in 2020 and $957.7 million in 2019. We recorded $6.9 million and $20.8 million of special charges in 2020 and 2019, respectively, related to organization and streamlining actions. In 2020, we also recorded $12.4 million of transaction and integration expenses related to our acquisitions of Cholula and FONA that reduced operating income. In 2020, compared to the year-ago period, the favorable impact of higher sales and $113.0 million of cost savings from our CCI program, including organization and streamlining actions, more than offset the impact of increased conversion costs, COVID-19 related expenses, higher incentive compensation, and the unfavorable impact of foreign currency exchange rates. During 2020, COVID-19 related

expenses included certain actions taken in response to the pandemic, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees, measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity, and impact of lower production volumes of flavor solutions inventories. Excluding special charges together with, for 2020, transaction and integration expenses related to our acquisitions of Cholula and FONA, adjusted operating income was $1,018.8 million in 2020, an increase of 4.1%, compared to $978.5 million in the year-ago period. In constant currency, adjusted operating income rose 4.8%. For further details and a reconciliation of non-GAAP to reported amounts, see the subsequent discussion under the heading "Non-GAAP Financial Measures".

Diluted earnings per share was $2.78 in 2020 and $2.62 in 2019. The year-on-year increase in earnings per share was driven mainly by higher operating income and decreased interest expense. Those favorable impacts in 2020 were partially offset by the impact of a higher effective tax rate, a decrease in other income and the impact of higher shares outstanding. Special charges, and in 2020, transaction and integration expenses lowered earnings per share by $0.05 and $0.06 in 2020 and 2019, 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 $2.83 in 2020 and $2.68 in 2019, or an increase of 5.6%.

2021 Outlook

In 2021, we expect to grow net sales over the 2020 level by 7% to 9%, including an estimated 2% favorable impact from currency rates, or 5 to 7% on a constant currency basis. That anticipated 2021 sales growth includes the incremental impact of the Cholula and FONA acquisitions, which we expect to comprise 3.5% to 4.0% of the expected 7% to 9% sales growth, and higher volume and product mix driven by our category management, brand marketing, new product, and differentiated customer engagement growth plans. We expect to have organic sales growth in both our consumer and flavor solutions segments.

We expect our 2021 gross profit margin to range from a decline of 10 basis points to an increase of 15 basis points from our gross profit margin of 41.1% in 2020. The projected 2021 range of change in gross profit margin is principally due to (i) expected accretion from our acquisitions of Cholula and FONA, net of transaction and integration expenses of $6.9 million related to the amortization of the step-up of the acquired inventories of Cholula and FONA to fair value, (ii) anticipated unfavorable sales mix in 2021 between our consumer and flavor solutions segments as compared to 2020, (iii) an expected increase in COVID-19 expenses of approximately $10 million in 2021 over the 2020 level, and (iv) an anticipated low-single-digit level of inflation in 2021 compared to 2020. Excluding the $6.9 million of transaction and integration expenses related to our acquisitions of Cholula and FONA included in our projected range of gross profit margin anticipated in 2021, we expect our adjusted gross profit margin to range from comparable to 25 basis points higher than our 2020 gross profit margin of 41.1%.

In 2021, we expect an increase in operating income of 4% to 6%, which includes an estimated 2% favorable impact from currency rates, over the 2020 level. The projected range of change in operating income in 2021 reflects an expected increase of approximately $30 million in expense related to our global ERP replacement program over the fiscal 2020 level. Our CCI-led cost savings target in 2021 is approximately $110 million and approximates the $113 million of CCI-led cost savings realized in 2020. We anticipate transaction and integration expenses related to the Cholula and FONA acquisitions of approximately $50 million to negatively impact operating income in 2021, as compared to $12.4 million of transaction and integration expenses in 2020. We also expect approximately $8 million of special charges in 2021 that relate to previously announced organization and streamlining actions; in 2020, special charges were $6.9 million. Excluding special charges and transaction and integration expenses, we expect 2021’s adjusted operating income to increase by 8% to 10%, which includes an estimated 2% favorable impact from currency rates, or to increase by 6% to 8% on a constant currency basis over the 2020 level.

Our underlying effective tax rate is projected to be higher in 2021 than in 2020.We estimate our effective tax rate, including the net favorable impact of anticipated discrete tax items, to approximate 24% in 2021 as compared to 19.8% in 2020. Excluding projected taxes associated with special charges and transaction and integration expenses, including the unfavorable impact in 2021 of a discrete tax item related to our acquisition of FONA, we estimate that our adjusted effective tax rate will approximate 23% in fiscal 2021, as compared to an adjusted effective tax rate of 19.9% in 2020.

Diluted earnings per share was $2.78 in 2020. Diluted earnings per share for 2021 is projected to range from $2.71 to $2.76.Excluding the per share impact of special charges and transaction and integration expenses of $0.01 and $0.04, respectively, adjusted diluted earnings per share was $2.83 in 2020. Adjusted diluted earnings per share

(excluding an estimated per share impact from special charges of $0.02 and from transaction and integration expenses of $0.18, including the unfavorable impact of a discrete tax item of $0.04 related to our acquisition of FONA) is projected to range from $2.91 to $2.96 in 2021. We expect adjusted diluted earnings per share to grow by 3% to 5%, which includes a 2% favorable impact from currency rates, or to grow by 1% to 3% on a constant currency basis over adjusted diluted earnings per share of $2.83 in 2020.

RESULTS OF OPERATIONS—2020 COMPARED TO 2019

Percent growth 4.7 % 0.8 %

Components of percent growth in net sales–increase (decrease):

Volume and product mix 3.7 % 2.5 %

Pricing actions 1.6 % 0.2 %

Foreign exchange (0.6) % (1.9) %

Sales for 2020 increased by 4.7% from 2019 and by 5.3% on a constant currency basis. That 4.7% sales increase was driven by higher sales in our consumer segment, which increased by 10.0% over the 2019 level, partially offset by lower sales in our flavor solutions segment, which declined by 3.5% from the prior year level. On a consolidated basis, higher volume and favorable product mix increased sales by 3.7% while pricing actions added 1.6% to sales. That net volume increase and favorable mix was driven by higher demand within our consumer segment, as measures imposed to mitigate the spread of COVID-19 and the related change in consumer behavior, resulted in a shift in consumer behavior toward at-home meal preparation that more than offset lower demand within our flavor solutions segment principally associated with our restaurant and branded food service customers. Sales were also impacted by unfavorable foreign currency rates that decreased net sales 0.6% compared to 2019 and is excluded from our measure of sales growth of 5.3% on a constant currency basis.

Gross profit margin 41.1 % 40.1 %

In 2020, our gross profit margin increased 100 basis points to 41.1% from 40.1% in 2019. This improvement was driven by the favorable impact of CCI-led cost savings, favorable pricing actions and the mix of consumer and flavor solutions sales, partially offset by unfavorable conversion costs and increased material costs. Higher conversion costs during 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees, measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity, and the impact of lower production volumes of flavor solutions inventories.

Selling, general & administrative expense $ 1,281.6 $ 1,166.8

Percent of net sales 22.9 % 21.8 %

Selling, general and administrative (SG&A) expense was $1,281.6 million in 2020 compared to $1,166.8 million in 2019, an increase of $114.8 million. That increase in SG&A expense was primarily a result of (i) higher performance-based employee incentive expense accruals, (ii) higher distribution expenses associated with the higher sales volume, (iii) increased brand marketing costs and (iv) a one-time fiscal 2019 expense reduction from the alignment of an employee benefit plan to our global standard that did not recur in 2020, all as compared to 2019. SG&A expense as a percent of net sales increased by 110 basis points from the prior year level, primarily as a result of the previously mentioned factors, partially offset by the impact of the leverage of fixed and semi-fixed expenses over a higher level of sales during the 2020 period.

Total special charges $ 6.9 $ 20.8

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

During 2020, we recorded $6.9 million of special charges, consisting of $5.3 million related to streamlining actions in our EMEA region and $1.6 million related to our GE initiative.

During 2019, we recorded $20.8 million of special charges, consisting 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.

Transaction and integration expenses $ 12.4 $ —

Transaction and integration expenses related to our acquisitions of Cholula andFONA of $11.2 million and $1.2 million, respectively, were incurred late in fiscal 2020. We expect to incur additional transaction and integration expenses related to these acquisitions in fiscal 2021.

Percent of net sales 17.8 % 17.9 %

Operating income increased by $41.8 million, or 4.4%, from $957.7 million in 2019 to $999.5 million in 2020. Operating income as a percent of net sales declined by 10 basis points in 2020, to 17.8% in 2020 from 17.9% in 2019 as a result of the factors previously described. Excluding the effect of special charges and transaction and integration expenses previously described, adjusted operating income was $1,018.8 million in 2020 as compared to $978.5 million in 2019, an increase of $40.3 million or 4.1% over the 2019 level. Adjusted operating income as a percent of net sales declined by 10 basis points in 2020, to 18.2% in 2020 from 18.3% in 2019.

Interest expense was $29.6 million lower for 2020 as compared to the prior year primarily due to a decline in average total borrowings and a lower interest rate environment. Other income, net for 2020 decreased by $9.1 million from the 2019 level due principally to lower non-service cost income associated with our pension and postretirement benefit plans that declined by $7.6 million in 2020 from the prior year level.

Income from consolidated operations before income taxes $ 881.5 $ 819.2

Effective tax rate 19.8 % 19.2 %

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

The effective tax rate was 19.8% in 2020 as compared to 19.2% in 2019. The effective tax rate of 19.2% in 2019 includes a non-recurring net tax benefit of $1.5 million associated with the U.S. Tax Act, as more fully described in note 13 of notes to our consolidated financial statements. Net discrete tax benefits were $43.4 million in 2020, which is a decrease of $0.3 million from $43.7 million in 2019, including the $1.5 million non-recurring benefit of the U.S. Tax Act in 2019. Discrete tax benefits in both the 2020 and 2019 periods include excess tax benefits associated with share-based payments to employees ($14.2 million and $22.4 million in 2020 and 2019, respectively), the tax benefits associated with intra-entity asset transfers that occurred ($9.9 million and $15.2 million in 2020 and 2019, respectively), the reversal of reserves for unrecognized tax benefits for the expiration of the statues of limitations and other discrete items. In 2020, discrete tax benefits included $11.9 million associated with the release of valuation allowances due to a change in judgment about realizability of deferred tax assets. See note 13 of notes to

our consolidated financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate.

Income from unconsolidated operations $ 40.8 $ 40.9

Income from unconsolidated operations, which is presented net of the elimination of earnings attributable to non-controlling interests, decreased $0.1 million in 2020 from the prior year. We own 50% of most of our unconsolidated joint ventures, including our largest joint venture, McCormick de Mexico, that comprised 75% and 72% of the income of our unconsolidated operations in 2020 and 2019, respectively.

We reported diluted earnings per share of $2.78 in 2020, compared to $2.62 in 2019. The table below outlines the major components of the change in diluted earnings per share from 2019 to 2020. The increase in adjusted operating income in the table below includes the impact from unfavorable currency exchange rates in 2020.

2019 Earnings per share—diluted $ 2.62

Increase in operating income 0.12

Decrease in special charges 0.05

Increase in transaction and integration expenses (0.04)

Decrease in interest expense 0.09

Decrease in other income (0.03)

Impact of income taxes (0.02)

Impact of higher shares (0.01)

2020 Earnings per share—diluted $ 2.78

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 acquisitions. See note 16 of notes to our consolidated financial statements for additional information on our segment measures as well as for a reconciliation by segment of operating income, excluding special charges and transaction and integration expenses related to our acquisitions. In the following discussion, we refer to our previously described measure of segment profit as "Segment operating income".

Consumer Segment

Percent growth 10.0 % 0.7 %

Components of percent growth in net sales–increase (decrease):

Volume and product mix 8.8 % 2.4 %

Pricing actions 1.5 % 0.1 %

Foreign exchange (0.3) % (1.8) %

Segment operating income margin 21.7 % 20.7 %

Sales of our consumer segment in 2020 grew by 10.0% as compared to 2019 and grew by 10.3% on a constant currency basis. This increase was driven by sharply higher sales of our consumer business in the Americas and in EMEA, with a partial offset from a sales decline in the Asia/Pacific region. Asia/Pacific region sales declines were driven by lower sales in China, which includes the impact of away-from-home products included in its consumer portfolio. Higher volume and product mix added 8.8% to sales as measures imposed to mitigate the spread of COVID-19 resulted in a shift in consumer behavior toward at-home meal preparation. Pricing actions added 1.5% to sales as compared to the prior year period. The unfavorable impact of foreign currency exchange rates decreased consumer segment sales by 0.3% compared to 2019 and is excluded from our measure of sales growth of 10.3% on a constant currency basis.

In the Americas, consumer sales rose 13.9% in 2020 as compared to 2019 and rose by 14.0% on a constant currency basis. Higher volume and product mix added 11.9% to sales driven by significant growth across the McCormick branded portfolio. In addition, pricing actions, taken in response to higher costs, increased sales by

2.1% as compared to the prior year period. The unfavorable impact of foreign currency exchange rates decreased sales by 0.1% compared to 2019 and is excluded from our measure of sales growth of 14.0% on a constant currency basis.

In the EMEA region, consumer sales increased 14.5% in 2020 as compared to 2019 and rose by 14.3% on a constant currency basis. Volume and product mix increased sales by 13.9%. The increase was broad based across the region with particular strength in branded spices and seasonings and homemade dessert products in France. The impact of pricing actions increased sales by 0.4%. The favorable impact of foreign currency exchange rates increased sales by 0.2% compared to 2019 and is excluded from our measure of sales growth of 14.3% on a constant currency basis.

In the Asia/Pacific region, consumer sales decreased 16.6% as compared to 2019 and decreased 15.1% on a constant currency basis. Lower volume and product mix reduced sales by 15.0%. The decrease was driven by products related to away-from-home consumption in China. Partially offsetting this decline was growth in cooking-at-home products, particularly in Australia. Pricing actions reduced sales by 0.1% as compared to 2019. The unfavorable impact from foreign currency exchange rates decreased sales by 1.5% compared to 2019 and is excluded from our measure of sales decline of 15.1% on a constant currency basis.

We grew segment operating income for our consumer segment by $104.6 million, or 15.5%, in 2020 as compared to 2019. The increase in segment operating income was driven by the impact of higher sales, as previously described, and CCI-led cost savings, partially offset by higher conversion costs, increased material costs, increased brand marketing costs and higher performance-based employee incentive expense accruals. Higher conversion costs during 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees as well as measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity. Segment operating margin for our consumer segment rose by 100 basis points in 2020 to 21.7%, driven by an increase in consumer gross profit margin that was partially offset by an increase in SG&A expense as a percentage of net sales as compared to the 2019 period. Segment operating margin in 2020 benefited from the leverage of fixed and semi-fixed expenses over a higher sales base than compared to the 2019 level. On a constant currency basis, segment operating income for our consumer segment rose by 15.7% in 2020 in comparison to the same period in 2019.

Flavor Solutions Segment

Percent (decline) growth (3.5) % 1.1 %

Components of percent change in net sales–increase (decrease):

Volume and product mix (4.2) % 2.9 %

Pricing actions 1.8 % 0.3 %

Foreign exchange (1.1) % (2.1) %

Segment operating income margin 11.9 % 14.5 %

Sales of our flavor solutions segment decreased 3.5% in 2020 as compared to 2019 and decreased by 2.4% on a constant currency basis. Driving that decrease in sales was lower demand due to the impact of the COVID-19 disruption on our restaurant and branded food service customers, particularly in the Americas and EMEA regions. Unfavorable volume and product mix decreased segment sales by 4.2% as compared to 2019, while pricing actions, taken in response to increased costs, during the period increased sales by 1.8%. The unfavorable impact of foreign currency rates decreased flavor solutions segment sales by 1.1% as compared to 2019 and is excluded from our measure of sales decline of 2.4% on a constant currency basis.

In the Americas, flavor solutions sales decreased by 3.5% in 2020 as compared to the prior year level and decreased by 2.5% on a constant currency basis. Unfavorable volume and product mix decreased flavor solutions sales in the Americas by 4.4% during 2020, driven by lower sales to branded foodservice and quick service restaurant customers, but was partially offset by higher sales to packaged food companies. Pricing actions increased sales by 1.9% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 1.0% compared to 2019 and is excluded from our measure of sales decline of 2.5% on a constant currency basis.

In the EMEA region, flavor solutions sales in 2020 decreased by 5.5% from the prior year level and decreased by 4.2% on a constant currency basis. Unfavorable volume and product mix decreased segment sales by 7.0% as compared to 2019. The decline was primarily attributable to lower sales to branded foodservice and quick service restaurant customers, partially offset by higher demand from packaged food companies. Pricing actions increased sales by 2.8% in 2020 as compared the prior year level. An unfavorable impact from foreign currency rates decreased sales by 1.3% compared to 2019 and is excluded from our measure of sales decline of 4.2% on a constant currency basis.

In the Asia/Pacific region, flavor solutions sales increased 0.4% in 2020 from the prior year level and increased by 1.6% on a constant currency basis. Favorable volume and product mix increased sales by 2.2%, driven by higher sales to quick service restaurant customers. Pricing actions decreased sales by 0.6% as compared to the prior year period. An unfavorable impact from foreign currency rates decreased sales by 1.2% compared to 2019 and is excluded from our measure of sales growth of 1.6% on a constant currency basis.

Segment operating income for our flavor solutions segment decreased by $64.3 million, or 21.3%, in 2020 as compared to 2019. The decrease in segment operating income was driven by lower sales, increased conversion costs, the impact of lower production volumes, increased material costs and higher performance-based employee incentive expense accruals that were partially offset by CCI-led cost savings. Higher conversion costs during 2020 reflected certain matters associated with COVID-19, including the impact of temporary arrangements that increased salaries and benefits paid to our manufacturing employees as well as measures to enable manufacturing and distribution staff to maintain social distancing and permit enhanced cleaning between shifts that reduced productivity, and the impact of lower production volumes of flavor solutions inventories. Segment operating margin for our flavor solutions segment decreased by 260 basis points from the prior year level to 11.9% in 2020, driven by lower flavor solutions segment gross profit margin and an increase in SG&A expense as a percent of net sales. Segment operating margin in 2020 also declined due to the deleveraging impact of fixed and semi-fixed expenses over a lower sales base as compared to the 2019 period. On a constant currency basis, segment operating income for our flavor solutions segment declined by 19.7% in 2020, as compared to the same period in 2019.

RESULTS OF OPERATIONS—2019 COMPARED TO 2018

Percent growth 0.8 % 12.1 %

Components of percent growth in net sales–increase (decrease):

Volume and product mix 2.5 % 2.2 %

Pricing actions 0.2 % 0.5 %

Acquisitions — % 8.2 %

Foreign exchange (1.9) % 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 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 margin 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 $ 1,166.8 $ 1,163.4

Percent of net sales 21.8 % 22.0 %

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 alignment 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 percent of net sales was 21.8%, a 20-basis point improvement from 2018.

Total special charges $ 20.8 $ 16.3

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 (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 then newly constructed facility in Thailand.

Transaction and integration expenses $ — $ 22.5

Transaction and integration expenses related to the RB Foods acquisition 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.

Percent of net sales 17.9 % 16.8 %

Operating income increased by $66.6 million, or 7.5%, from $891.1 million 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 offsetting 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 approximately 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 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 $ 819.2 $ 741.3

Income tax (benefit) expense 157.4 (157.3)

Effective tax rate 19.2 % (21.2) %

As more fully described above and in note 13 of notes to our consolidated financial statements, the U.S. Tax Act was enacted in December 2017. The U.S. Tax Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% beginning on January 1, 2018 and creating a territorial tax system with a one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740, Income Taxes), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. We recorded a net benefit of $301.5 million associated with the U.S. Tax Act during 2018. This amount includes a $380.0 million benefit from the revaluation of our net U.S. deferred tax liabilities as of January 1, 2018, based on the new lower corporate income tax rate offset, in part, by an estimated net transition tax impact of $78.5 million. That net transition tax impact is comprised of the mandated one-time transition tax on previously deferred post-1986 foreign earnings of U.S. subsidiaries estimated at $75.3 million, together with additional foreign withholding taxes of $7.9 million associated with previously unremitted prior year earnings of certain foreign subsidiaries that were no longer considered indefinitely reinvested as of the effective date of the U.S. Tax Act and that were subsequently repatriated in 2018, less a $4.7 million reduction in our fiscal 2018 income taxes directly resulting from the transition tax. 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 associated 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 payments 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-recurring benefit of the U.S. Tax Act, and other discrete items. See note 13 of notes to our consolidated financial statements for a more detailed reconciliation of the U.S. federal tax rate with the effective tax rate.

Income from unconsolidated operations $ 40.9 $ 34.8

Income from unconsolidated operations 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 eliminating a lower level of earnings associated with our minority interests in 2019 as compared to 2018. We own 50% of most of our unconsolidated 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 $2.62 in 2019, compared to $3.50 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 $ 3.50

Increase in operating income 0.15

Increase in special charges (0.01)

Decrease in transaction and integration expenses 0.06

Decrease in interest expense 0.03

Increase in other income 0.01

Impact of income taxes 0.01

Increase in unconsolidated income 0.02

Impact of higher shares outstanding (0.02)

2019 Earnings per share—diluted $ 2.62

Results of Operations—Segments

Consumer Segment

Percent growth 0.7 % 11.9 %

Components of percent growth in net sales–increase (decrease):

Volume and product mix 2.4 % 1.7 %

Pricing actions 0.1 % 0.6 %

Acquisitions — % 8.2 %

Foreign exchange (1.8) % 1.4 %

Segment operating income margin 20.7 % 19.6 %

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% compared 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 currency 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 products 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 compared 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.

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.

Flavor Solutions Segment

Percent growth 1.1 % 12.4 %

Components of percent growth in net sales–increase (decrease):

Volume and product mix 2.9 % 3.1 %

Pricing actions 0.3 % 0.3 %

Acquisitions — % 8.2 %

Foreign exchange (2.1) % 0.8 %

Segment operating income margin 14.5 % 14.2 %

Sales of our flavor solutions segment increased 1.1% in 2019 as compared 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 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 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 expense. 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 expense as a percentage of net sales.

NON-GAAP FINANCIAL MEASURES

The following tables include financial measures of 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 prepared as a complement to our financial results prepared in accordance with United States generally accepted accounting principles. These financial measures exclude the impact, as applicable, of the following:

•Special charges – Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee. 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 non-recurring income tax benefit is excluded from our computation 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 Cholula, FONA and RB Foods acquisitions – We exclude certain costs associated with our acquisitions of Cholula and FONA in November and December 2020, respectively, and RB Foods in August 2017 and their subsequent integration into the Company. Such costs, which we refer to as “Transaction and integration expenses”, include transaction costs associated with each acquisition, as well as integration costs following the respective acquisition, including the impact of the acquisition date fair value adjustment for inventory, together with the impact of discrete tax items, if any, directly related to each acquisition.

•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 transition tax on previously unremitted earnings of non-U.S. subsidiaries. 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, 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 13, respectively, of notes to our consolidated 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:

Impact of transaction and integration expenses 12.4 — 22.5

% increase versus prior year 4.1 % 5.2 % 18.7 %

Adjusted operating income margin (1) 18.2 % 18.3 % 17.5 %

Non-recurring benefit, net, of the U.S. Tax Act (2) — 1.5 301.5

Impact of transaction and integration expenses 1.9 — 4.9

Impact of special charges 2.1 4.7 3.8

Impact of transaction and integration expenses 10.5 — 17.6

Non-recurring benefit, net, of the U.S. Tax Act (2) — (1.5) (301.5)

% increase versus prior year 6.3 % 8.4 % 21.1 %

Earnings per share—diluted $ 2.78 $ 2.62 $ 3.50

Impact of transaction and integration expenses 0.04 — 0.06

Non-recurring benefit, net, of the U.S. Tax Act (2) — — (1.13)

Adjusted earnings per share—diluted $ 2.83 $ 2.68 $ 2.48

Estimate for the year ending November 30, 2021

Earnings per share – diluted $2.71 to $2.76

Impact of transaction and integration expenses (1) 0.18

Impact of special charges 0.02

Adjusted earnings per share – diluted $2.91 to $2.96

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

Percentage changes in sales and adjusted operating income expressed on a constant currency basis are presented excluding the impact of foreign currency exchange. To present this information for historical periods, current year results for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the prior fiscal year, rather than at the actual average exchange rates in effect during the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current year and the prior fiscal year. The tables set forth below present our growth in net sales and adjusted operating income on a constant currency basis as follows: (1) to present our growth in net sales and adjusted operating income for 2020 on a constant currency basis, net sales and adjusted operating income for 2020 for entities reporting in currencies other than the U.S. dollar have been translated using the average foreign exchange rates in effect for 2019 and compared to the reported results for 2019; and (2) to present our growth in net sales and adjusted operating income for 2019 on a constant currency basis, net sales and 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.

For the year ended November 30, 2020

Net sales:

Consumer segment:

Flavor Solutions segment:

Americas (3.5) % (1.0) % (2.5) %

Asia/Pacific 0.4 % (1.2) % 1.6 %

Total Flavor Solutions (3.5) % (1.1) % (2.4) %

Total net sales 4.7 % (0.6) % 5.3 %

Adjusted operating income:

Flavor Solutions segment (21.3) % (1.6) % (19.7) %

Total adjusted operating income 4.1 % (0.7) % 4.8 %

For the year ended November 30, 2019

Net sales:

Consumer segment:

Asia/Pacific 0.8 % (4.9) % 5.7 %

Total Consumer 0.7 % (1.8) % 2.5 %

Flavor Solutions segment:

Asia/Pacific (3.4) % (4.0) % 0.6 %

Total Flavor Solutions 1.1 % (2.1) % 3.2 %

Total net sales 0.8 % (1.9) % 2.7 %

Adjusted operating income:

Consumer segment 6.1 % (1.2) % 7.3 %

Flavor Solutions segment 3.2 % (2.1) % 5.3 %

Total adjusted operating income 5.2 % (1.5) % 6.7 %

To present the percentage change in projected 2021 net sales, adjusted operating income and adjusted earnings per share — diluted on a constant currency basis, 2021 projected local currency net 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 2021 local currency projected results, translated into U.S. dollars at the average actual exchange rates in effect during the corresponding months in fiscal year 2020 to determine what the 2021 consolidated U.S. dollar net sales, adjusted operating income and adjusted earnings per share — diluted would have been if the relevant currency exchange rates had not changed from those of the comparable 2020 periods.

Projections for the Year Ending November 30, 2021

Percentage change in net sales 7% to 9%

Impact of favorable foreign currency exchange 2 %

Percentage change in net sales in constant currency 5% to 7%

Percentage change in adjusted operating income 8% to 10%

Impact of favorable foreign currency exchange 2 %

Percentage change in adjusted operating income in constant currency 6% to 8%

Percentage change in adjusted earnings per share— diluted 3% to 5%

Impact of favorable foreign currency exchange 2 %

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 amortization (Adjusted EBITDA). We define Adjusted EBITDA as net income plus expenses for interest, income taxes, depreciation and amortization, less interest income and as further adjusted for cash and non-cash acquisition-related 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 terms of our revolving credit facilities, which require us to maintain our leverage ratio below certain levels. Under those agreements, the applicable leverage ratio is reduced periodically. As of November 30, 2020, our capacity under the revolving credit facilities was not affected by these covenants. In early fiscal 2021 following our acquisition of FONA, the levels specified in our revolving credit facilities under which we are required to maintain our leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios. We do not expect that these covenants would limit our access to our revolving credit facilities for the foreseeable future; however, the leverage ratio could restrict our ability to utilize these facilities. We expect to comply with this financial covenant for the foreseeable future.

The following table reconciles our net income to Adjusted EBITDA for the years ended November 30:

Leverage ratio (Net debt/Adjusted EBITDA) (3) 3.6 3.4 4.0

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 $ 1,041.3 $ 946.8 $ 821.2

Net cash provided by (used in) financing activities 220.9 (725.8) (751.1)

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, our cash flow from operations has historically been the strongest during the fourth quarter.

In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. In addition, in the cash flow statement, the changes in operating assets and liabilities are presented excluding the effect of acquired operating assets and liabilities, as the cash flows associated with acquisition of businesses is presented as an investing activity. 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, 2020, the exchange rates for the Euro, British pound sterling, Canadian dollar, Australian dollar, Chinese renminbi and Polish zloty were higher versus the U.S. dollar than at November 30, 2019. During 2020, we have seen greater-than-normal fluctuations in foreign exchanges rates as a result of increased market volatility driven by the global COVID-19 pandemic.

Operating Cash Flow – Operating cash flow was $1,041.3 million in 2020, $946.8 million in 2019, and $821.2 million in 2018. The increases in cash flow from operations in both 2020 and 2019 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 impacted operating cash flow. In 2020, the increases to operating cash flow were the result of a significantly lower use of cash associated with other assets and liabilities, including the timing of certain employee incentive and customer related payments, which was partially offset by the use of cash associated with working capital, driven by the increased level of inventory to meet demand. In 2019 and 2018, our working capital management favorably impacted operating cash flow. In 2019, those increases 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 indebtedness related to our acquisition of RB Foods.

Our working capital management – principally related to inventory, trade accounts receivable, and accounts payable – impacts our operating cash flow. The change in inventory had a significant impact on the variability in cash flow from operations. It was a use of cash in 2020, 2019 and 2018. The change in trade accounts receivable was a source of cash in 2020, 2019 and 2018. 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 different than operating cash flow in that it uses average balances instead of specific point in time measures. CCC is a calculation of the number of days, on average, that it takes us to convert a cash outlay for resources, such as raw materials, to a cash inflow from collection of accounts receivable. Our goal is to lower our CCC over time. We calculate CCC as follows:

Days sales outstanding (average trade accounts receivable divided by average daily net sales) plus days in inventory (average inventory divided by average daily cost of goods sold) less days payable outstanding (average trade accounts payable divided by average daily cost of goods sold plus the average daily change in inventory).

The following table outlines our cash conversion cycle (in days) over the last three years:

The decreases in CCC in 2020 from 2019 and in 2019 from 2018 were due, in both instances, to an increase in our days payable outstanding as a result of extending our payment terms to suppliers, as more fully described below, 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 2020 as compared to 2019 and also in 2019 as compared to 2018.

Prior to fiscal 2018, in response to evolving market practices, we began a program to negotiate extended payment terms with our suppliers. We also initiated a Supply Chain Finance program (SCF) with several global financial institutions (SCF Banks). Under the SCF, qualifying suppliers may elect to sell their receivables from us to an SCF Bank. These participating suppliers negotiate their receivables sales arrangements directly with the respective SCF Bank. While we are not party to those agreements, the SCF Banks allow the participating suppliers to utilize our creditworthiness in establishing credit spreads and associated costs. This generally provides the suppliers with more favorable terms than they would be able to secure on their own. We have no economic interest in a supplier’s decision to sell a receivable. Once a qualifying supplier elects to participate in the SCF and reaches an agreement with a SCF Bank, the supplier elects which of our individual invoices they sell to the SCF bank. However, all of our payments to participating suppliers are paid to the SCF Bank on the invoice due date, regardless of whether the individual invoice is sold by the supplier to the SCF Bank. The SCF Bank pays the supplier on the invoice due date for any invoices that were not previously sold by the supplier to the SCF Bank.

The terms of our payment obligation are not impacted by a supplier’s participation in the SCF. Our payment terms with our suppliers for similar materials within individual markets are consistent between those suppliers that elect to participate in the SCF and those suppliers that do not participate. Accordingly, our average days outstanding are not significantly impacted by the portion of suppliers or related input costs that are included in the SCF. For our participating suppliers, we believe substantially all of their receivables with us are sold to the SCF Banks. Accordingly, we would expect that at each balance sheet date, a similar proportion of amounts originally due to suppliers would instead be payable to SCF Banks. All outstanding amounts related to suppliers participating in the SCF are recorded within the line entitled "Trade accounts payable" in our consolidated balance sheets, and the associated payments are included in operating activities within our consolidated statements of cash flows. As of November 30, 2020 and 2019, the amount due to suppliers participating in the SCF and included in "Trade accounts payable" were approximately $273.6 million and $206.5 million, respectively.

Future changes in our suppliers’ financing policies or economic developments, such as changes in interest rates, general market liquidity or our creditworthiness relative to participating suppliers could impact those suppliers’ participation in the SCF and/or our ability to negotiate extended payment terms with our suppliers. However, any such impacts are difficult to predict.

Investing Cash Flow – Net cash used in investing activities was $1,025.6 million in 2020, $171.0 million in 2019, and $158.5 million in 2018. 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 $803.0 million in 2020 and $4.2 million in 2018. Capital expenditures, including expenditures for capitalized software, were $225.3 million in 2020, $173.7 million in 2019, and $169.1 million in 2018. We expect 2021 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 associated with financing activities was a source of cash of $220.9 million in 2020. Net cash used in financing activities was $725.8 million in 2019 and $751.1 million in 2018. The variability between years is principally a result of changes in our net borrowings, share repurchase activity and dividends, all as described below.

The following table outlines our net borrowing activities:

Net increase in short-term borrowings $ 286.5 $ 41.0 $ 305.5

In 2020, we borrowed $527.0 million under long-term borrowing arrangements, including net proceeds of $495.0 million of 2.5% notes due April 2030. We also repaid $257.7 million of long-term debt, including $250.0 million associated with our term loans due in August 2020.

In 2019, we repaid $447.7 million of long-term debt, including $436.3 million of our $1,500.0 million term loans issued in August 2017.

In 2018, we borrowed $25.9 million under long-term borrowing arrangements. In 2018, we repaid $797.9 million of long-term debt, including the $250 million 5.75% notes that matured on December 15, 2017 and $545.0 million of our $1,500.0 million term loans issued in August 2017.

Through November 30, 2020, we have repaid in full the $1,500.0 million term loans issued in connection with our acquisition of RB Foods in August 2017, with a total of $1,275.0 million of those term loans repaid in advance of their scheduled maturities, which were in August 2020 and August 2022.

The following table outlines the activity in our share repurchase programs:

Number of shares of common stock 0.5 1.3 1.1

As of November 30, 2020, $585 million remained of a $600 million share repurchase program that 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. As a result of the increased level of indebtedness related to the acquisition of RB Foods in August 2017, we curtailed our share repurchase activity since that time. Although we have curtailed our share repurchase activity, we repurchased shares in 2020, 2019 and 2018 to mitigate the effect of shares issued upon the exercise of stock options. As a result of the additional indebtedness associated with our acquisitions of Cholula and FONA, we expect to continue the curtailment of share repurchase activity in fiscal 2021 while also continuing to mitigate the effect of shares issued upon the exercise of stock options.

During 2020, 2019 and 2018, we received proceeds of $56.6 million, $90.9 million and $78.2 million, respectively, from exercised stock options. We repurchased $13.0 million, $12.7 million and $11.6 million of common stock during 2020, 2019 and 2018, respectively, in conjunction with employee tax withholding requirements associated with our stock compensation plans.

Our dividend history over the past three years is as follows:

Percentage increase per share 8.8 % 9.6 % 10.6 %

In November 2020, the Board of Directors approved an 9.7% increase in the quarterly dividend from $0.31 to $0.34 per share.

The following table presents our leverage ratios for the years ended November 30, 2020, 2019 and 2018:

(1)The leverage ratio covenant in our revolving credit facilities provides that Adjusted EBITDA under that covenant also include the pro forma impact of acquisitions, as applicable. As of November 30, 2020, our leverage ratio under the terms of those revolving credit facilities, including the pro forma impact of acquisitions, was 3.5.

Our leverage ratio was 3.6 as of November 30, 2020, as compared to the ratios of 3.4 and 4.0 as of November 30, 2019 and 2018, respectively. The increase in our leverage ratio from 3.4 as of November 30, 2019 to 3.6 as of November 30, 2020 is principally due to an increase in total debt associated with the funding of our acquisition of Cholula, which was partially offset by an increase in adjusted EBITDA.

The decrease in the ratio from 4.0 as of November 30, 2018 to 3.4 as of November 30, 2019 is principally due to an increase in our adjusted EBITDA, which was driven by higher operating income in 2019 as compared to 2018. In addition, the ratio was favorably impacted by our lower level of net debt at November 30, 2019 as compared to the prior year-end.

In early fiscal 2021 following our acquisition of FONA, the levels specified in our revolving credit facilities under which we are required to maintain our leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios. As amended, the maximum permitted leverage ratios under the terms of those revolving credit facilities, including the pro form impact of acquisitions, is 4.5 as of the measurement date at the end of each fiscal quarter in the year ending November 30, 2021. That maximum ratio drops to 4.25 on February 28, 2022, and drops to 3.75 for each fiscal quarter for the remaining term of the facility. At the same time in early fiscal 2021, a similar amendment was made to our synthetic lease agreement for a to-be-constructed distribution center, which contains covenants consistent with our revolving credit facilities.

Most of our cash is in our subsidiaries outside of the U.S. 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 non-U.S. subsidiaries could have had adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. As of November 30, 2020, we have $1.3 billion of earnings from our non-U.S. subsidiaries and joint ventures that are considered indefinitely reinvested. While federal income tax expense has been recognized as a result of the U.S. Tax Act, we have not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income taxes, or foreign exchange gains or losses. It is not practicable for us to determine the amount of unrecognized tax expense on these indefinitely reinvested foreign earnings.

At November 30, 2020, we temporarily used $100.0 million of cash from our non-U.S. subsidiaries to pay down short-term debt in the U.S. During the year, our short-term borrowings vary, but are lower at the end of a year or quarter. The average short-term borrowings outstanding for the years ended November 30, 2020 and 2019 were $518.1 million and $848.6 million, respectively. Those average short-term borrowings outstanding for the year ended November 30, 2020 included average commercial paper outstanding of $452.0 million. The total average debt outstanding for the years ended November 30, 2020 and 2019 was $4,327.4 million and $4,753.8 million, respectively.

See notes 6 and 8 of notes to our consolidated financial statements for further details of these transactions.

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

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

In August 2017, we entered into a five-year $1.0 billion revolving credit facility, which will expire in August 2022. The current pricing for the credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the credit facility is based on a credit rating grid that contains a fully drawn maximum pricing of the credit facility equal to LIBOR plus 1.75%. In December 2020, we entered into a 364-day $1.0 billion revolving credit facility, which will expire in December 2021. The current pricing for that 364-day credit facility, on a fully drawn basis, is LIBOR plus 1.25%. The pricing of the 364-day 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%. In early fiscal 2021, following our acquisition of FONA, the levels specified in our revolving credit facilities under which we are required to maintain our leverage ratios were amended by the participating banks to increase the permitted maximum leverage ratios. 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.

We generally use these revolving credit facilities 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 facilities. These facilities are 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. We engage in regular communication with all banks participating in our credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. In addition to our committed revolving credit facilities, we have uncommitted facilities of $316.6 million as of November 30, 2020 that can be withdrawn based upon the lenders' discretion. See note 6 of notes to our consolidated financial statements for more details on our financing arrangements.

We will continue to have cash requirements to support seasonal working capital needs and capital expenditures, to pay interest, to service debt, and to fund acquisitions. To meet those cash requirements, we intend to use our existing cash, cash equivalents and internally generated funds, to borrow under our existing credit facilities or under other short-term borrowing facilities, and depending on market conditions and upon the significance of the cost of a particular acquisition to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our cash requirements over the next twelve months. We recently funded the Cholula and FONA acquisitions with cash and short-term borrowings, principally under commercial paper. We will continue to monitor our liquidity and may seek to obtain additional long-term financing to further support our business.

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 $11.9 million in 2020, $11.4 million in 2019, and $13.5 million in 2018. It is expected that the 2021 total pension plan contributions will be approximately $10.0 million. Future increases or decreases in pension liabilities and required cash contributions are highly dependent on changes in interest rates and the actual return on plan assets. We base our investment of plan assets, in part, on the duration of each plan’s liabilities. Across all of our qualified defined benefit pension plans, approximately 59% of assets are invested in equities, 31% in fixed income investments and 10% in other investments. Assets associated with our nonqualified defined benefit pension plan are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of 60% in equities and 40% in fixed income investments. See note 11 of notes to our consolidated financial statements, which provides details on our pension funding.

CUSTOMERS AND COUNTERPARTIES – See the subsequent section of this discussion under the heading "Market Risk Sensitivity–Credit Risk".

ACQUISITIONS

Acquisitions are part of our strategy to increase sales and profits.

In early fiscal 2021, we purchased FONA. The purchase price was approximately $710 million, net of cash acquired, subject to certain customary purchase price adjustments. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets. Our acquisition of FONA on December 30, 2020 expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform and strengthens our capabilities. The acquisition was funded with cash and short-term borrowings.

On November 30, 2020, we purchased Cholula for approximately $803 million, net of cash acquired, subject to certain customary purchase price adjustments. The acquisition was funded with cash and short-term borrowings. Cholula, a premium Mexican hot sauce brand, is a strong addition to McCormick’s global branded flavor portfolio, which broadens the Company’s offering in the high growth hot sauce category to consumers and foodservice operators and accelerates our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce. The results of Cholula’s operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.

We did not have any acquisitions 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.

See notes 2 and 19 of notes to our consolidated 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.

MARKET RISK SENSITIVITY

We utilize derivative financial instruments to enhance our ability to manage risk, including foreign exchange and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. The information presented below should be read in conjunction with notes 6 and 8 of notes to our consolidated financial statements.

Foreign Exchange Risk – We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the effects of foreign currency on loans between subsidiaries and unconsolidated affiliates and on cash flows related to repatriation of earnings of unconsolidated affiliates. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Swiss franc, Chinese renminbi, Indian rupee and Thai baht, as well as the Euro versus the British pound sterling and Australian dollar, and finally the Canadian dollar versus British pound sterling. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks.

During 2020, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in our subsidiaries with a functional currency of the British pound sterling, Euro, Polish zloty, Chinese yuan, Australian dollar, Canadian dollar and Mexican peso.

We also utilize 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 instruments are included in foreign currency translation adjustments in accumulated other comprehensive income (loss).

The following table summarizes the foreign currency exchange contracts held at November 30, 2020. All contracts are valued in U.S. dollars using year-end 2020 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, 2020

British pound sterling U.S. dollar $ 31.6 1.32 $ (0.4)

Canadian dollar U.S. dollar 96.4 0.76 (1.4)

U.S. dollar Australian dollar 14.0 0.68 1.2

Polish zloty U.S. dollar 6.9 3.79 (0.1)

Canadian dollar British pound sterling 30.0 1.74 (0.1)

British pound sterling Euro 36.4 0.90 (0.1)

We had a number of smaller contracts at November 30, 2020 with an aggregate notional value of $21.1 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 $0.1 million at November 30, 2020.

At November 30, 2019, 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 $489.2 million. The aggregate fair value of these contracts was a loss of $0.3 million at November 30, 2019.

We also utilized cross currency interest rate swap contracts that are considered net investment hedges. As of November 30, 2020, we had cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S. LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. We entered into these cross-currency interest rate swap contracts, which expire in August 2027, in early fiscal 2019. For more information, refer to note 8 of notes to our consolidated financial statements.

Interest Rate Risk – Our policy is to manage interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing costs and to achieve a desired mix of fixed and variable rate debt. The table that follows provides principal cash flows and related interest rates, excluding the effect of interest rate swaps and the amortization of any discounts or fees, by fiscal year of maturity at November 30, 2020. 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, 2020

Debt

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 subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. In 2020, our most significant raw materials were dairy products, pepper, vanilla, 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 generally have not used derivatives to manage the volatility related to this risk. To the extent that we have used derivatives for this purpose, it has not been material to our business.

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

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table reflects a summary of our contractual obligations and commercial commitments as of November 30, 2020:

CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR

Total Less than1 year 1–3 years 3–5 years More than5 years

Short-term borrowings $ 886.7 $ 886.7 $ — $ — $ —

Raw material purchase obligations(b) 505.5 505.5 — — —

(a)Interest payments include interest payments on short-term borrowings and long-term debt. See notes 6 and 7 of notes to our consolidated financial statements for additional information.

(b)Raw material purchase obligations outstanding as of year-end may not be indicative of outstanding obligations throughout the year due to our response to varying raw material cycles.

(c)Represents the minimum pension contributions for our U.S. and international pension plans, which are generally determined for the next fiscal year, and our expected benefit payments under our post-retirement medical plan.

(d)Other purchase obligations consist of information technology and other service agreements, advertising media commitments and utility contracts.

(e)Contractual obligations do not include any potential future tax settlements. See note 13 of notes to our consolidated financial statements for additional information.

Pension and postretirement funding can vary significantly each year due to changes in legislation, our significant assumptions and investment return on plan assets. As a result, we have not presented pension and postretirement funding in the table above.

COMMERCIAL COMMITMENTS EXPIRATION BY YEAR

Total Less than1 year 1–3 years 3–5 years More than5 years

Guarantees(a) $ 0.7 $ 0.7 $ — $ — $ —

Standby letters of credit 32.2 32.2 — — —

Total commercial commitments $ 32.9 $ 32.9 $ — $ — $ —

(a)Guarantees do not include any amounts associated with a residual value guarantee that we provide under a lease arrangement, which is more fully described in note 7 of notes to our consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of November 30, 2020 and 2019.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of notes to our consolidated financial statements for further details of these impacts.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing the financial statements, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. We believe, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to U.S. GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. In preparing the financial statements, we make routine estimates and judgments in determining the net realizable value of accounts receivable, inventory, fixed assets and prepaid allowances. Our most critical accounting estimates and assumptions are in the following areas:

Customer Contracts

In several of our major geographic markets, the consumer segment sells our products by entering into annual or multi-year customer 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 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.

Goodwill and Intangible Asset Valuation

We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.

Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.

Goodwill Impairment

Our reporting units are the same as our operating segments. We estimate the fair value of a reporting unit by using a discounted cash flow model. Our discounted cash flow model calculates fair value by present valuing future expected cash flows of our reporting units using our internal cost of capital as the discount rate. We then compare this fair value to the carrying amount of the reporting unit, including intangible assets and goodwill. If the carrying amount of the reporting unit exceeds the estimated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. As of November 30, 2020, we had $4,986.3 million of goodwill recorded in our balance sheet ($3,711.2 million in the consumer segment and $1,275.1 million in the flavor solutions segment).Included in those amounts are $410.5 million ($273.7 million in the consumer segment and $136.8 million in the flavor solutions segment) of goodwill related to our acquisition of Cholula that, as of November 30, 2020, was determined on a preliminary basis. The final valuation of the acquired net assets of Cholula, and the related goodwill balance by segment, will be completed in 2021.Our fiscal year 2020 impairment testing indicated that the estimated fair values of our reporting units were significantly in excess of their carrying values. Accordingly, we believe that only significant changes in the cash flow assumptions would result in an impairment of goodwill.

Indefinite-lived Intangible Asset Impairment

Our indefinite-lived intangible assets consist of brand names and trademarks. We estimate fair 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 be 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 trademarks, related royalty rates and appropriate discount rates, which are based, in part, upon current interest rates adjusted for our view of reasonable country- and brand-specific risks based upon the past and anticipated future performance of the related brand names and trademarks.

As of November 30, 2020, we had $3,030.0 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 $3,030.0 million of brand names assets and trademarks as of November 30, 2020: (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; (ii) $380.0 million relates to the Cholula brand names and trademarks, recognized as part of the preliminary purchase price allocation associated with the acquisition of Cholula in November 2020, and (iii) the remaining $330.0 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, 2020, except for: (i) the Cholula brand, whose preliminary fair value of $380.0 million was determined as of its November 30, 2020 acquisition date; and (ii) one additional brand with a carrying value of $7.4 million whose fair value modestly exceeds its carrying value as of year-end 2020.

The brand names and trademarks related to recent acquisitions, including our recent acquisitions of Cholula and, in early fiscal 2021, FONA, 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 valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized. In doing so, we have considered future taxable income and tax planning strategies in assessing the need for a valuation allowance. Both future taxable income and tax planning strategies include a number of estimates.

Pension and Postretirement Benefits

Pension and other postretirement plans’ costs require the use of assumptions for discount rates, investment returns, projected salary increases, mortality rates and health care cost trend rates. The actuarial assumptions used in our pension and postretirement benefit reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension and postretirement benefit obligations. While we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results. A 1% increase or decrease in the actuarial assumption for the discount rate would impact 2021 pension and postretirement benefit expense by approximately $1 million. A 1% increase or decrease in the expected return on plan assets would impact 2021 pension expense by approximately $10 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 11 of notes to our consolidated 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 of Financial Condition and Results of Operations” and in note 8 of our notes to consolidated financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on our estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.

We are also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.

Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Business Ethics Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets periodically with members of management, the internal auditors and the independent registered public accounting firm to review and discuss internal control over financial reporting and accounting and financial reporting matters. The independent registered public accounting firm and internal auditors report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time.

We conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this assessment. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our assessment, we have concluded with reasonable assurance that our internal control over financial reporting was effective as of November 30, 2020.

Our internal control over financial reporting as of November 30, 2020 has been audited by Ernst & Young LLP.

Lawrence E. Kurzius

Chairman, President &Chief Executive Officer

Michael R. Smith

Executive Vice President &Chief Financial Officer

Christina M. McMullen

Vice President & ControllerChief Accounting Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on Internal Control over Financial Reporting

We have audited McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes and the financial statement schedule listed in the Index at item 15(2) and our report dated January 28, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

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

Baltimore, Maryland

January 28, 2021

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, 2020 and 2019, 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, 2020, and the related notes and 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of November 30, 2020, 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, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Indefinite-lived Intangible Assets

Valuation of Acquired Intangible Assets

We have served as the Company’s auditor since 1982.

Baltimore, Maryland

January 28, 2021

CONSOLIDATED INCOME STATEMENTS

for the year ended November 30 (millions except per share data) 2020 2019 2018

Transaction and integration expenses 12.4 — 22.5

Income from consolidated operations before income taxes 881.5 819.2 741.3

Income from unconsolidated operations 40.8 40.9 34.8

Earnings per share–diluted $ 2.78 $ 2.62 $ 3.50

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income attributable to non-controlling interest 4.3 1.9 3.3

Other comprehensive income (loss):

Currency translation adjustments 89.7 (25.5) (119.8)

Change in derivative financial instruments (0.9) 1.1 2.3

Total other comprehensive income (loss) 26.5 (141.0) (62.1)

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Assets

Cash and cash equivalents $ 423.6 $ 155.4

Prepaid expenses and other current assets 98.9 90.7

Property, plant and equipment, net 1,028.4 952.6

Liabilities

Current portion of long-term debt 263.9 97.7

Shareholders’ equity

Accumulated other comprehensive loss (470.8) (500.2)

Total McCormick shareholders’ equity 3,926.1 3,444.2

Non-controlling interests 13.9 12.5

Total liabilities and shareholders’ equity $ 12,089.7 $ 10,362.1

See Notes to Consolidated Financial Statements.

CONSOLIDATED CASH FLOW STATEMENTS

Operating activities

Non-cash special charges — — 3.0

Loss (gain) on sale of assets 3.0 (1.6) (5.4)

Deferred income tax (benefit) expense (11.2) 20.9 40.1

Income from unconsolidated operations (40.8) (40.9) (34.8)

Dividends received from unconsolidated affiliates 29.3 31.7 27.2

Investing activities

Acquisitions of businesses (net of cash acquired) (803.0) — (4.2)

Other investing activities 2.7 2.7 14.8

Financing activities

Long-term debt borrowings 527.0 — 25.9

Payment of debt issuance costs (1.1) — —

Proceeds from exercised stock options 56.6 90.9 78.2

Taxes withheld and paid on employee stock awards (13.0) (12.7) (11.6)

Payment of contingent consideration — — (2.5)

Purchase of minority interest — — (13.0)

Common stock acquired by purchase (47.3) (95.1) (62.3)

Net cash provided by (used in) financing activities 220.9 (725.8) (751.1)

Effect of exchange rate changes on cash and cash equivalents 31.6 8.8 (1.8)

Increase (decrease) in cash and cash equivalents 268.2 58.8 (90.2)

Cash and cash equivalents at beginning of year 155.4 96.6 186.8

Cash and cash equivalents at end of year $ 423.6 $ 155.4 $ 96.6

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Net income attributable to non-controlling interest — — — 3.3 3.3

Other comprehensive income (loss), net of tax — — (59.5) (2.6) (62.1)

Buyout of minority interest — (12.4) — (0.4) (12.8)

Stock-based compensation 25.6 — — — 25.6

Equal exchange (3.7) 3.7 — — — — —

Net income attributable to non-controlling interest — — — 1.9 1.9

Other comprehensive loss, net of tax — — (140.3) (0.7) (141.0)

Stock-based compensation 37.2 — — — 37.2

Equal exchange (3.1) 3.1 — — — — —

Net income attributable to non-controlling interest — — — 4.3 4.3

Other comprehensive income (loss), net of tax — — 29.4 (2.9) 26.5

Stock-based compensation 46.0 — — — 46.0

Equal exchange (1.9) 1.9 — — — — —

See Notes to Consolidated Financial Statements.

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. dollar, 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 separate 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 controlled subsidiaries and affiliates — that is, transactions denominated in other than their functional currency — other than intercompany transactions designated as long-term investments, 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 unconsolidated 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 reporting. 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.

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 $116.0 million and $76.4 million at November 30, 2020 and 2019, respectively. Such amounts are recorded within "Other long-term assets" in the consolidated 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 $86.7 million and $44.9 million at November

30, 2020 and 2019, respectively, 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 intangible 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 reporting 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, 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 acquired 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 businesses. 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 discounts, 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) Americas EMEA APAC Total

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 customers. 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 regarding 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, 2020, 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 $183.3 million and $137.2 million at November 30, 2020 and 2019, respectively.

Practical Expedients

We have elected the following policy elections and practical expedients 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 governmental 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 our consolidated income statement in the line entitled "Selling, general and administrative expense", were $230.3 million, $214.6 million and $218.7 million for 2020, 2019 and 2018, 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. Advertising costs include the development, production and communication of advertisements through television, digital, print and radio. Development 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 $174.8 million, $150.8 million and $147.2 million for 2020, 2019 and 2018, respectively.

Research and Development

Research and development costs are expensed as incurred and are included in our consolidated income statement in the line entitled "Selling, general and administrative expense". Research and development expense was $68.6 million, $67.3 million and $69.4 million for 2020, 2019 and 2018, respectively.

Income Taxes

Income taxes are recognized in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur.

As more fully described in note 13, the U.S. Tax Act created a new requirement that certain income earned by foreign subsidiaries, referred to 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 beginning on December 1, 2018. Accounting principles generally accepted in the U.S. provide for an accounting policy election of either recognizing deferred taxes for temporary differences 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.

In accordance with ASC 740, Income Taxes, we recognize a tax position in our financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Stock-Based Compensation

Stock-based compensation expense is recognized in accordance with ASC 718, Compensation – Stock Compensation. We recognize stock-based compensation expense associated with options and restricted stock units (RSUs), which contain provisions that such awards fully vest upon an employee’s retirement, ratably over the shorter of the vesting period or the employees’ retirement eligibility date. Accordingly, we recognize stock-based compensation associated with options and RSUs subject to immediate retirement eligible vesting provisions on the date of grant.

Compensation expense associated with our long-term performance plan (LTPP) 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. We estimate forfeitures at the time of grant based on historical experience and revises this estimate in subsequent periods if actual forfeitures differ.

We recognize stock-based compensation expense associated with price-vested stock options ratably over the vesting period as such options do not contain provisions that fully vest these awards upon an employee’s retirement.

Stock Split

On September 28, 2020, our Board of Directors approved a 2-for-1 stock split in the form of a stock dividend on all shares of the Company’s two classes of common stock, Common Stock and Common Stock Non-Voting. On November 30, 2020, one like share was issued for each share outstanding to shareholders of record as of November 20, 2020. Trading of the Company’s common stock began on a split-adjusted basis on December 1, 2020. All common stock and per-share data have been retroactively adjusted for the impact of the stock split.

Derivative Instruments

We record all derivatives on our balance sheet at fair value. The fair value of derivative instruments is recorded in our consolidated balance sheet on the lines entitled “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 our consolidated income statement in the lines entitled "Other income (expense), net" or "Interest expense". In our 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 our consolidated balance sheet on the line entitled “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)" in our consolidated balance sheet to our consolidated income statement on the same line items as the underlying transactions.

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.

MKC US Equity

MKC · 10-K · period ended 2020-11-30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MKC US Equity☆

MKC · 10-K · period ended 2020-11-30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MKC US Equity