MKC - 11.30.2014 - 10K - Q4 2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-14920
 
McCORMICK & COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
 
Maryland
52-0408290
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
18 Loveton Circle, Sparks, Maryland
21152
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (410) 771-7301
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, No Par Value
New York Stock Exchange
Common Stock Non-Voting, No Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Not applicable.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   ý  No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes   ¨  No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the Voting Common Stock held by non-affiliates at May 31, 2014: $859,593,668
The aggregate market value of the Non-Voting Common Stock held by non-affiliates at May 31, 2014: $8,504,657,615
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.





Class
Number of Shares Outstanding
Date
Common Stock
11,963,137

December 31, 2014
Common Stock Non-Voting
116,305,343

December 31, 2014
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of 10-K into Which Incorporated
Proxy Statement for
McCormick’s March 25, 2015
Annual Meeting of Stockholders
(the “2015 Proxy Statement”)
Part III





PART I.
As used herein, references to “McCormick,” “we,” “us” and “our” are to McCormick & Company, Incorporated and its consolidated subsidiaries or, as the context may require, McCormick & Company, Incorporated only.
ITEM 1. BUSINESS
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retail outlets, food manufacturers and foodservice businesses. Our major sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, Mexico, India, Singapore, Central America, Thailand and South Africa. McCormick & Company, Incorporated was formed in 1915 under Maryland law as the successor to a business established in 1889.
Business Segments
We operate in two business segments, consumer and industrial. Demand for flavor is growing globally, and across both segments we have the customer base and product breadth to participate in all types of eating occasions. Our products deliver flavor when cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer our customers and consumers a range of products from premium to value-priced.

Consistent with market conditions in each segment, our consumer business has a higher overall profit margin than our industrial business. Historically, the consumer business contributes approximately 60% of sales and 80% of operating income, and the industrial business contributes approximately 40% of sales and 20% of operating income.
For financial information about our business segments, please refer to “Management’s Discussion and Analysis–Results of Operations” and note 16 of the financial statements.
For a discussion of our recent acquisition activity, please refer to “Management’s Discussion and Analysis–Acquisitions” and note 2 of the financial statements.
Consumer Business. From locations around the world, our brands reach consumers in more than 135 countries and territories. Our leading brands in the Americas include McCormick®, Lawry’s® and Club House®. We also market authentic ethnic brands such as Zatarain’s®, Thai Kitchen® and Simply Asia®. In Europe, the Middle East and Africa (EMEA) our major brands include the Ducros®, Schwartz® and Kamis® brands of spices, herbs and seasonings and an extensive line of Vahiné® brand dessert items. In the Asia/Pacific region, we market products under the McCormick and DaQiao® brands in China. In Australia, we market our spices, herbs and seasonings under the McCormick brand and our dessert products under the Aeroplane® brand. In India, our majority-owned joint venture owns and trades under the Kohinoor® brand.
Our customers span a variety of retail outlets that include grocery, mass merchandise, warehouse clubs, discount and drug stores, served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands.
Approximately half of our consumer business is spices, herbs and seasonings. For these products, we are a category leader in our primary markets. There are a number of competitors in the spices, herbs and seasoning category, many with less than 3% share of sales.
More than 250 other brands of spices, herbs and seasonings are sold in the U.S. with additional brands in international markets. Some are owned by large food manufacturers, while others are supplied by small privately owned companies. In this competitive environment, we are leading with innovation and brand marketing, and applying our analytical tools to help customers optimize the profitability of their spice and seasoning category while simultaneously increasing our sales.
Industrial Business. In our industrial business, we provide a wide range of products to multinational food manufacturers and foodservice customers. The foodservice customers are supplied both directly and indirectly through distributors. Among food manufacturers and foodservice customers, many of our relationships have been active for decades. We focus our resources on our strategic partners that we believe offer the greatest prospects for growth. Our range of products remains one of the broadest in the industry and includes seasoning blends, spices and herbs, condiments, coating systems and compound flavors. In addition to a broad range of flavor solutions, we





strive to achieve customer intimacy. Our customers benefit from our expertise in many areas, including sensory testing, culinary research, food safety and flavor application.
Our industrial business has a number of competitors. Some tend to specialize in a particular range of products and have a limited geographic reach. Other competitors include larger publicly held flavor companies that are more global in nature, but which also tend to specialize in a more limited range of flavor solutions.
Raw Materials
The most significant raw materials used in our business are pepper, dairy products, rice, capsicums (red peppers and paprika), onion, garlic and wheat flour. Pepper and other spices and herbs are generally sourced from countries other than the United States. Other raw materials, like dairy products and onion, are primarily sourced from within the U.S. and locally, for many of our international locations. Because the raw materials are agricultural products, they are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, and other factors beyond our control.
We respond to this volatility in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our Comprehensive Continuous Improvement program.
Customers
Our products are sold directly to customers and also through brokers, wholesalers and distributors. In the consumer segment, products are then sold to consumers through a variety of retail outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores under a variety of brands. In the industrial segment, products are used by food and beverage manufacturers as ingredients for their finished goods and by foodservice customers as ingredients for menu items to enhance the flavor of their foods. Customers for the industrial segment include food manufacturers and the foodservice industry supplied both directly and indirectly through distributors.
We have a large number of customers for our products. Sales to one of our consumer business customers, Wal-Mart Stores, Inc., accounted for 11% of consolidated sales in 2014, 12% of consolidated sales in 2013 and 11% of consolidated sales in 2012. Sales to one of our industrial business customers, PepsiCo, Inc., accounted for 11% of consolidated sales in 2014, 2013 and 2012. In 2014, 2013 and 2012 the top three customers in our industrial business represented between 53% and 54% of our global industrial sales.
The dollar amount of backlog orders for our business is not material to an understanding of our business, taken as a whole. No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
Trademarks, Licenses and Patents
We own a number of trademark registrations. Although in the aggregate these trademarks are material to our business, the loss of any one of those trademarks, with the exception of our “McCormick,” “Lawry’s,” “Zatarain’s,” “Club House,” “Ducros,” “Schwartz,” “Vahiné,” “Kamis,” "DaQiao" and “Kohinoor” trademarks, would not have a material adverse effect on our business. The “Mc – McCormick” trademark is extensively used by us in connection with the sale of our food products in the U.S. and certain non-U.S. markets. The terms of the trademark registrations are as prescribed by law, and the registrations will be renewed for as long as we deem them to be useful.
We have entered into a number of license agreements authorizing the use of our trademarks by affiliated and non-affiliated entities. The loss of these license agreements would not have a material adverse effect on our business. The term of the license agreements is generally three to five years or until such time as either party terminates the agreement. Those agreements with specific terms are renewable upon agreement of the parties.
We also own various patents, none of which individually are material to our business.
Seasonality
Due to seasonal factors inherent in our business, our sales, income and cash from operations generally are lower in the first two quarters of the fiscal year, increase in the third quarter and are significantly higher in the fourth quarter due to the holiday season. This seasonality reflects customer and consumer buying patterns, primarily in the consumer segment.





Working Capital
In order to meet increased demand for our consumer products during our fourth quarter, we usually build our inventories during the third quarter of the fiscal year. We generally finance working capital items (inventory and receivables) through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of our liquidity and capital resources, see note 6 of the financial statements and the “Liquidity and Financial Condition” section of “Management’s Discussion and Analysis.”
Competition
Each segment operates in markets around the world that are highly competitive. In this competitive environment, our growth strategies include customer intimacy and product innovation based on consumer insights. Additionally, in the consumer segment we are building brand recognition and loyalty through increased advertising and promotions.
Research and Development
Many of our products are prepared from confidential formulas developed by our research laboratories and product development teams, and, in some cases, customer proprietary formulas. Expenditures for research and development were $62.0 million in 2014, $61.3 million in 2013, and $57.8 million in 2012. The amount spent on customer-sponsored research activities is not material.

Governmental Regulation
We are subject to numerous laws and regulations around the world that apply to our global businesses. In the United States, the safety, production, transportation, distribution, advertising, labeling and sale of many of our products and their ingredients are subject to the Federal Food, Drug, and Cosmetic Act, the Food Safety Modernization Act, the Federal Trade Commission Act, state consumer protection laws, competition laws, anti-corruption laws, customs and trade laws, federal, state and local workplace health and safety laws, various federal, state and local environmental protection laws, and various other federal, state and local statutes and regulations. Outside the United States, our business is subject to numerous similar statutes, laws and regulatory requirements.
Environmental Regulations
The cost of compliance with federal, state and local provisions related to protection of the environment has had no material effect on our business. There were no material capital expenditures for environmental control facilities in fiscal year 2014, and there are no material expenditures planned for such purposes in fiscal year 2015.
Employees
We had approximately 10,000 full-time employees worldwide as of November 30, 2014. Our operations have not been affected significantly by work stoppages and, in the opinion of management, employee relations are good. We have no collective bargaining contracts in the United States. At our foreign subsidiaries, approximately 1,300 employees are covered by collective bargaining agreements or similar arrangements.

Financial Information about Geographic Locations
For information on the net sales and long-lived assets of McCormick by geographic area, see note 16 of the financial statements.
Foreign Operations
We are subject in varying degrees to certain risks typically associated with a global business, such as local economic and market conditions, exchange rate fluctuations, restrictions on investments, royalties and dividends. Approximately 45% of sales in fiscal year 2014 were from non-U.S. operations. For information on how we manage some of these risks, see the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis.”
Forward-Looking Information
Certain statements contained in this report, including statements concerning expected performance such as those relating to net sales, earnings, cost savings, acquisitions and brand marketing support, are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements may be identified by the use of words such as “may,” “will,” “expect,” "should," "anticipate," "intend," “believe” and “plan.” These statements may relate to: the expected results of operations of businesses acquired by us, the expected impact of raw material costs and our pricing actions on our results of operations and gross margins, the expected productivity and working capital improvements, expected trends in net sales and earnings performance and other financial measures, the expectations of pension and postretirement plan contributions, the holding period and market risks associated with financial instruments, the impact of foreign exchange fluctuations, the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing, our ability to





issue additional debt or equity securities and our expectations regarding purchasing shares of our common stock under the existing authorizations.
These and other forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by factors such as: damage to our reputation or brand name; loss of brand relevance; increased use of private label or other competitive products; product quality, labeling, or safety concerns; negative publicity about our products; business interruptions due to natural disasters or unexpected events; actions by, and the financial condition of, competitors and customers; our ability to achieve expected and/or needed cost savings or margin improvements; negative employee relations; the successful acquisition and integration of new businesses; issues affecting our supply chain and raw materials, including fluctuations in the cost and availability of raw and packaging materials; government regulation, and changes in legal and regulatory requirements and enforcement practices; global economic and financial conditions generally, including the availability of financing, and interest and inflation rates; the investment return on retirement plan assets, and the costs associated with pension obligations; foreign currency fluctuations; the stability of credit and capital markets; risks associated with our information technology systems, the threat of data breaches and cyber attacks; volatility in our effective tax rate; climate change; infringement of our intellectual property rights, and those of customers; litigation, legal and administrative proceedings; and other risks described herein under Part I, Item 1A "Risk Factors."
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Available Information
Our principal corporate internet website address is: www.mccormickcorporation.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding McCormick. Our website also includes our Corporate Governance Guidelines, Business Ethics Policy and charters of the Audit Committee, Compensation Committee, and Nominating/Corporate Governance Committee of our Board of Directors.

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

We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain our brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We continually make efforts to maintain and improve relationships with our customers and consumers and to increase awareness and relevance of our brands through effective marketing and other measures. From time to time, our customers evaluate their mix of product offerings, and consumers have the option to purchase private label or other competitive products instead of our branded products. If a significant portion of our branded business





was switched to private label or competitive products, it could have a material negative impact on our consumer business.
Our reputation for manufacturing high-quality products is widely recognized. In order to safeguard that reputation, we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our products. A serious breach of our quality assurance or quality control procedures, deterioration of our quality image, impairment of our customer or consumer relationships or failure to adequately protect the relevance of our brands may lead to litigation, customers purchasing from our competitors or consumers purchasing other brands or private label items that may or may not be manufactured by us, any of which could have a material negative impact on our business, financial condition or results of operations.
The food industry generally is subject to risks posed by food spoilage and contamination, product tampering, product recall, import alerts and consumer product liability claims. For instance, we may be required to recall certain of our products should they be mislabeled, contaminated or damaged, and certain of our raw materials could be blocked from entering the country if they were subject to import alerts. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products could cause injury or illness, are mislabeled or fail to meet applicable legal requirements (even if the allegation is untrue). A product recall, import alert or an adverse result in any such litigation, or negative perceptions regarding food products and ingredients, could result in our having to pay fines or damages, incur additional costs or cause customers and consumers in our principal markets to lose confidence in the safety and quality of certain products or ingredients, any of which could have a negative effect on our business or financial results and, depending upon the significance of the affected product, that negative effect could be material to our business or financial results. Negative publicity about these concerns, whether or not valid, may discourage customers and consumers from buying our products or cause disruptions in production or distribution of our products and adversely affect our business, financial condition or results of operations.
The rising popularity of social networking and other consumer-oriented technologies has increased the speed and accessibility of information dissemination (whether or not accurate), and, as a result, negative, inaccurate, or misleading posts or comments on websites may generate adverse publicity that could damage our reputation or brands.
Customer consolidation, and competitive, economic and other pressures facing our customers, may put pressure on our operating margins and profitability.
A number of our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years and consolidation could continue. Such consolidation could present a challenge to margin growth and profitability in that it has produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories; resisting price increases; demanding lower pricing, increased promotional programs and specifically tailored products; and shifting shelf space currently used for our products to private label products. The economic and competitive landscape for our customers is constantly changing, and their response to those changes could impact our business. Our industrial business may be impacted if the reputation or perception of the customers of our industrial business declines. These factors and others could have an adverse impact on our business, financial condition or results of operations.
The inability to maintain mutually beneficial relationships with large customers could adversely affect our business.
We have a number of major customers, including two large customers that, in the aggregate, constituted approximately 22% of our consolidated sales in 2014. The loss of either of these large customers or a material negative change in our relationship with these large customers or other major customers could have an adverse effect on our business.
Disruption of our supply chain and issues regarding procurement of raw materials may negatively impact us.
Our purchases of raw materials are subject to fluctuations in market price and availability caused by weather, growing and harvesting conditions, market conditions, governmental actions and other factors beyond our control. The most significant raw materials used by us in our business are pepper, dairy products, rice, capsicums (red pepper and paprika), onion, garlic and wheat flour. While future price movements of raw material costs are uncertain, we seek to mitigate the market price risk in a number of ways, including strategic raw material purchases, purchases of raw material for future delivery, customer price adjustments and cost savings from our Comprehensive Continuous Improvement program. We generally have not used derivatives to manage the volatility related to this





risk. To the extent that we have used derivatives for this purpose, it has not been material to our business. Any actions we take in response to market price fluctuations may not effectively limit or eliminate our exposure to changes in raw material prices. Therefore, we cannot provide assurance that future raw material price fluctuations will not have a negative impact on our business, financial condition or operating results.
In addition, we may have very little opportunity to mitigate the risk of availability of certain raw materials due to the effect of weather on crop yield, government actions, political unrest in producing countries, action or inaction by suppliers in response to laws and regulations, changes in agricultural programs and other factors beyond our control. Therefore, we cannot provide assurance that future raw material availability will not have a negative impact on our business, financial condition or operating results.
Political, socio-economic and cultural conditions, as well as disruptions caused by terrorist activities or otherwise, could also create additional risks for regulatory compliance. Although we have adopted rigorous quality assurance and quality control procedures which are designed to ensure the safety of our imported products, we cannot provide assurance that such events will not have a negative impact on our business, financial condition or operating results.
Our profitability may suffer as a result of competition in our markets.
The food industry is intensely competitive. Competition in our product categories is based on price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing and promotional activity, and the ability to identify and satisfy consumer preferences. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. Such pressures could reduce our ability to take appropriate remedial action to address commodity and other cost increases.
Laws and regulations could adversely affect our business.
Food products are extensively regulated in most of the countries in which we sell our products. We are subject to numerous laws and regulations relating to the growing, sourcing, manufacture, storage, labeling, marketing, advertising and distribution of food products, as well as laws and regulations relating to financial reporting requirements, the environment, competition, anti-corruption, privacy, relations with distributors and retailers, foreign supplier verification, the import and export of products and product ingredients, employment, health and safety, and trade practices. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the attributes of food products and ingredients may increase compliance costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business, such as labeling disclosures pertaining to ingredients. For example, "Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986," in California exposes all food companies to the possibility of having to provide warnings on their products in that state. If we were required to add warning labels to any of our products or place warnings in locations where our products are sold in order to comply with Proposition 65, the sales of those products and other products of our company could suffer, not only in those locations but elsewhere. These factors and others could have an adverse impact on our business, financial condition or results of operations.
Our operations may be impaired as a result of disasters, business interruptions or similar events.
We could have an interruption in our business, loss of inventory or data, or be rendered unable to accept and fulfill customer orders as a result of a natural disaster, catastrophic event, epidemic or computer system failure. Natural disasters could include an earthquake, fire, flood, tornado or severe storm. A catastrophic event could include a terrorist attack. An epidemic could affect our operations, major facilities or employees’ and consumers’ health. In addition, some of our inventory and production facilities are located in areas that are susceptible to harsh weather; a major storm, heavy snowfall or other similar event could prevent us from delivering products in a timely manner. Production of certain of our products is concentrated in a single manufacturing site.
We cannot provide assurance that our disaster recovery plan will address all of the issues we may encounter in the event of a disaster or other unanticipated issue, and our business interruption insurance may not adequately compensate us for losses that may occur from any of the foregoing. In the event that a natural disaster, terrorist attack or other catastrophic event were to destroy any part of our facilities or interrupt our operations for any extended period of time, or if harsh weather or health conditions prevent us from delivering products in a timely manner, our business, financial condition or operating results could be adversely affected.





We may not be able to successfully consummate and manage ongoing acquisition, joint venture and divestiture activities which could have an impact on our results.
From time to time, we may acquire other businesses and, based on an evaluation of our business portfolio, divest existing businesses. These acquisitions, joint ventures and divestitures may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses and raw material costs, assumption of unknown liabilities and indemnities, and potential disputes with the buyers or sellers. In addition, we may be required to incur asset impairment charges (including charges related to goodwill and other intangible assets) in connection with acquired businesses which may reduce our profitability. If we are unable to consummate such transactions, or successfully integrate and grow acquisitions and achieve contemplated revenue synergies and cost savings, our financial results could be adversely affected. Additionally, joint ventures inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks.
Our foreign operations are subject to additional risks.
We operate our business and market our products internationally. In fiscal year 2014, approximately 45% of our sales were generated in foreign countries. Our foreign operations are subject to additional risks, including fluctuations in currency values, foreign currency exchange controls, discriminatory fiscal policies, compliance with U.S. and foreign laws, enforcement of remedies in foreign jurisdictions and other economic or political uncertainties. Beginning in 2011, several countries within the European Union experienced sovereign debt and credit issues. This has caused more volatility in the economic environment throughout the European Union. Additionally, international sales are subject to risks related to imposition of tariffs, quotas, trade barriers and other similar restrictions. All of these risks could result in increased costs or decreased revenues, which could adversely affect our profitability.
Fluctuations in foreign currency markets may negatively impact us.
We are exposed to fluctuations in foreign currency in the following main areas: cash flows related to raw material purchases; the translation of foreign currency earnings to U.S. dollars; the value of foreign currency investments in subsidiaries and unconsolidated affiliates and cash flows related to repatriation of these investments. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee, Thai baht and Swiss franc, as well as the British pound sterling versus the Euro. We routinely enter into foreign currency exchange contracts to facilitate managing certain of these foreign currency risks. However, these contracts may not effectively limit or eliminate our exposure to a decline in operating results due to foreign currency exchange changes. Therefore, we cannot provide assurance that future exchange rate fluctuations will not have a negative impact on our business, financial position or operating results.
Increases in interest rates may negatively impact us.
We had total outstanding short-term borrowings of $270 million at an average interest rate of approximately 1.3% on November 30, 2014. Our policy is to manage our interest rate risk by entering into both fixed and variable rate debt arrangements. We also use interest rate swaps to minimize worldwide financing cost and to achieve a desired mix of fixed and variable rate debt. We utilize derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instruments. Our use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. However, our use of these instruments may not effectively limit or eliminate our exposure to changes in interest rates. Therefore, we cannot provide assurance that future interest rate changes will not have a material negative impact on our business, financial position or operating results.
The deterioration of credit and capital markets may adversely affect our access to sources of funding.
We rely on our revolving credit facilities, or borrowings backed by these facilities, to fund a portion of our seasonal working capital needs and other general corporate purposes. If any of the banks in the syndicates backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of seasonal working capital requirements. We engage in regular communication with all of the banks participating in our revolving credit facilities. During these communications none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote.





In addition, global capital markets have experienced volatility in the past that has tightened access to capital markets and other sources of funding, and such volatility and tightened access could reoccur in the future. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on acceptable terms or within an acceptable time period could have an adverse impact on our operations, financial condition and liquidity.
We face risks associated with certain pension assets and obligations.
We hold investments in equity and debt securities in our qualified defined benefit pension plans and in a rabbi trust for our U.S. non-qualified pension plan. Deterioration in the value of plan assets resulting from a general financial downturn or otherwise, or an increase in the actuarial valuation of the plans' liability due to a low interest rate environment, could cause (or increase) an underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity.
The global financial downturn exposes us to credit risks from customers and counterparties.
Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged. In addition, competition has increased with the growth in alternative channels through our customer base. These factors have caused some customers to be less profitable and increased our exposure to credit risk. Current credit markets are volatile, and some of our customers and counterparties are highly leveraged. A significant adverse change in the financial and/or credit position of a customer or counterparty could require us to assume greater credit risk relating to that customer or counterparty and could limit our ability to collect receivables. This could have an adverse impact on our financial condition and liquidity.
Our operations may be impaired if our information technology systems fail to perform adequately or if we are the subject of a data breach or cyber attack.

Our information technology systems are critically important to operating our business efficiently. We rely on our information technology systems to manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.

Furthermore, our information technology systems may be vulnerable to security breaches beyond our control. We invest in security technology to protect our data and business processes against risk of data security breaches and cyber attacks. While we believe these measures provide some protection against security breaches and mitigate cybersecurity risks, there can be no assurance that security breaches and cyber attacks will not occur. A breach or successful attack could have a negative impact on our operations or business reputation.

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

As a global business, our tax rate from period to period can be affected by many factors, including changes in tax
legislation, our global mix of earnings, the tax characteristics of our income, the timing and recognition of goodwill
impairments, acquisitions and dispositions, adjustments to our reserves related to uncertain tax positions, changes in valuation allowances and the portion of the income of foreign subsidiaries that we expect to remit to the U.S. and that will be taxable.

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






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

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

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

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

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

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

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

During 2014 and 2013, we evaluated changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness, and we expect to continue such actions in the future. As a result of such fixed cost reductions and process simplifications or improvements, we may, from time to time, transfer production from one manufacturing facility to another or eliminate certain manufacturing, selling and administrative positions. These actions may result in a deterioration of employee relations at the impacted locations or elsewhere in McCormick.

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

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


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.





ITEM 2. PROPERTIES
Our principal executive offices and primary research facilities are owned and are located in suburban Baltimore, Maryland.
The following is a list of our principal manufacturing properties, all of which are owned except for the facilities in Commerce, California and Melbourne, Australia, and a portion of the facility in Littleborough, England, which are leased:
United States:
Hunt Valley, Maryland–consumer and industrial
(3 principal plants)
Gretna, Louisiana–consumer and industrial
South Bend, Indiana–industrial and consumer
Atlanta, Georgia–industrial
Commerce, California–consumer
Irving, Texas–industrial
Canada:
London, Ontario–consumer and industrial
Mexico:
Cuautitlan de Romero Rubio–industrial
United Kingdom:
Haddenham, England–consumer and industrial
Littleborough, England–industrial
France:
Carpentras–consumer and industrial
Monteux–consumer and industrial
Poland:
Stefanowo–consumer
India:
New Dehli–consumer
Australia:
Melbourne–consumer and industrial
China:
Guangzhou–consumer and industrial
Shanghai–consumer and industrial
Wuhan–consumer
In addition to distribution facilities and warehouse space available at our manufacturing facilities, we lease regional distribution facilities in Belcamp, Maryland; Salinas, California; Irving, Texas; Mississauga and London, Ontario, Canada; and Genvilliers, France; and own distribution facilities in Monteux, France. We also own, lease or contract other properties used for manufacturing consumer and industrial products and for sales, warehousing, distribution and administrative functions.
We believe our plants are well maintained and suitable for their intended use. We further believe that these plants generally have adequate capacity or the ability to expand, and can accommodate seasonal demands, changing product mixes and additional growth.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings in which we or any of our subsidiaries are a party or to which any of our or their property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.






PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We have disclosed in note 18 of the financial statements the information relating to the market price and dividends paid on our classes of common stock. The market price of our common stock at the close of business on December 31, 2014 was $75.96 per share for the Common Stock and $74.30 per share for the Common Stock Non-Voting.
Our Common Stock and Common Stock Non-Voting are listed and traded on the New York Stock Exchange (“NYSE”). The approximate number of holders of our common stock based on record ownership as of December 31, 2014 was as follows:
Title of Class
Approximate    
Number    
of Record    
Holders     
Common Stock, no par value
2,000

Common Stock Non-Voting, no par value
9,900

The following table summarizes our purchases of Common Stock (CS) and Common Stock Non-Voting (CSNV) during the fourth quarter of 2014:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of Shares Purchased as Part of  Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be  Purchased Under the Plans or Programs
September 1, 2014 to
September 30, 2014
CS-0
CSNV-315,000
    -
$68.59
            -
   315,000
$160 million        
October 1, 2014 to
October 31, 2014
CS-17,677
CSNV-345,000
$66.40
$67.65
     17,677
345,000
$135 million        
November 1, 2014 to
November 30, 2014
CS-18,106
CSNV-257,376
$72.22
$72.00
     18,106       
   257,376    
$116 million        
Total
CS-35,783
CSNV-917,376
$69.34
$69.19
     35,783       
   917,376    
$116 million        
As of November 30, 2014, approximately $116 million remained of a $400 million share repurchase authorization approved by the Board of Directors in April 2013. There is no expiration date for our repurchase program. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time.
In certain circumstances, we issue shares of CS in exchange for shares of CSNV, or issue shares of CSNV in exchange for shares of CS, in either case pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Typically, these exchanges are made in connection with the administration of our employee benefit plans, executive compensation programs and dividend reinvestment/direct purchase plans. The number of shares issued in an exchange is generally equal to the number of shares received in the exchange, although the number may differ slightly to the extent necessary to comply with the requirements of the Employee Retirement Income Security Act of 1974. During fiscal 2014, we issued 801,705 shares of CSNV in exchange for shares of CS and issued 21,490 shares of CS in exchange for shares of CSNV.





ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL SUMMARY
(millions except per share and percentage data)
2014
2013
2012
2011
2010
For the Year
 
 
 
 
 
Net sales
$
4,243.2

$
4,123.4

$
4,014.2

$
3,697.6

$
3,336.8

Percent increase
2.9
%
2.7
%
8.6
%
10.8
%
4.5
%
Operating income
603.0

550.5

578.3

540.3

509.8

Income from unconsolidated operations
29.4

23.2

21.5

25.4

25.5

Net income
437.9

389.0

407.8

374.2

370.2

Per Common Share
 
 
 
 
 
Earnings per share–basic
$
3.37

$
2.94

$
3.07

$
2.82

$
2.79

Earnings per share–diluted
3.34

2.91

3.04

2.79

2.75

Common dividends declared
1.51

1.39

1.27

1.15

1.06

Closing price, non-voting shares–end of year
74.33

69.00

64.56

48.70

44.01

Book value per share
14.10

14.85

12.83

12.17

11.00

At Year-End
 
 
 
 
 
Total assets
$
4,414.3

$
4,449.7

$
4,165.4

$
4,087.8

$
3,419.7

Current debt
270.8

214.1

392.6

222.4

100.4

Long-term debt
1,014.1

1,019.0

779.2

1,029.7

779.9

Shareholders’ equity
1,809.4

1,947.7

1,700.2

1,618.5

1,462.7

Other Financial Measures
 
 
 
 
 
Percentage of net sales
 
 
 
 
 
Gross profit
40.8
%
40.4
%
40.3
%
41.2
%
42.5
%
Operating income
14.2
%
13.4
%
14.4
%
14.6
%
15.3
%
Capital expenditures
$
132.7

$
99.9

$
110.3

$
96.7

$
89.0

Depreciation and amortization
102.7

106.0

102.8

98.3

95.1

Common share repurchases
244.3

177.4

132.2

89.3

82.5

Average shares outstanding
 
 
 
 
 
Basic
129.9

132.1

132.7

132.7

132.9

Diluted
131.0

133.6

134.3

134.3

134.7

The historical financial summary includes the impact of certain items that affect the comparability of financial results year to year. In 2014 and 2013, we recorded special charges related to the completion of a reorganization in EMEA and streamlining actions in the U.S. and Australian businesses. Also in 2013, we recognized a loss on a voluntary pension settlement in the U.S. In 2010, we had the benefit of the reversal of a significant tax accrual for a closed tax year. This tax accrual was recorded in a prior period based on uncertainties about the tax aspects of transactions related to the reorganization of our European operations and divestment of certain of our joint ventures. The net impact of these items is reflected in the following table:
 
(millions except per share data)
2014
2013
2012
2011
2010
Operating income
$
(5.2
)
$
(40.3
)



Net income
(3.7
)
(29.2
)


$
13.9

Earnings per share–diluted
(0.03
)
(0.22
)


0.10








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 Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this report. We use certain non-GAAP information that we believe is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. This information is also used by management to measure the profitability of our ongoing operations and analyze our business performance and trends. The dollar and share information in the charts and tables in the MD&A are in millions, except per share data.
McCormick is a global leader in flavor. The company manufactures, markets and distributes spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retail outlets, food manufacturers and foodservice businesses. We manage our business in two operating segments, consumer and industrial, as described in Item 1 of this report.
Our long-term annual growth objectives are to increase sales 4% to 6%, increase operating income 7% to 9% and increase earnings per share 9% to 11%. Over time, we expect to grow sales with similar contributions from: 1) our base business–driven by brand marketing support, customer intimacy and category growth; 2) product innovation; and 3) acquisitions. We are fueling our investment in growth with cost savings from our Comprehensive Continuous Improvement (CCI) program, an ongoing initiative to improve productivity and reduce costs throughout the organization. In addition to funding brand marketing support, product innovation and other growth initiatives, our CCI program helps offset higher material costs and is contributing to higher operating income and earnings per share.
Our business generates strong cash flow, and we have a balanced use of cash. We are using our cash to fund shareholder dividends, with annual increases in each of the past 29 years, and to fund capital expenditures, acquisitions and share repurchases. Each year, we expect a combination of acquisitions and share repurchases to add about 2% to earnings per share growth.
In 2014, we grew net sales 3% with increases in both our consumer and industrial business. This rate of growth was below our long-term goal as a result of challenging conditions in certain parts of our business. In the U.S., our consumer business was impacted by smaller competitors that have gained retail distribution. We are addressing this competition through accelerated innovation, increased brand marketing and the sharing of our analytics with retail customers to help optimize their sales and profitability while simultaneously increasing our sales to those customers. In China, our industrial business was impacted by weak demand from quick service restaurants that related to a product quality issue from a protein supplier. We expect this situation to improve in 2015 as these quick service restaurants have addressed this issue and continue to invest in new restaurant locations in China. Operating income was $603.0 million in 2014. Excluding special charges and in 2013, a loss on a voluntary pension settlement, adjusted operating income rose to $608.2 million from $590.8 million in 2013. This was an increase of 3% and below our long-term objective due in part to a significant increase in brand marketing support and a less favorable mix of business. Diluted earnings per share was $3.34 in 2014. Excluding the effect of the aforementioned special charges and the 2013 loss on voluntary pension settlement, adjusted diluted earnings per share was $3.37 in 2014, an increase of approximately 8% over adjusted diluted earnings per share of $3.13 in 2013. This increase was mainly driven by higher adjusted operating income, higher income from unconsolidated operations and our share repurchases.
McCormick continues to generate strong cash flow. Net cash provided by operating activities reached $503.6 million in 2014, an increase from $465.2 million in 2013. We continued to have a balanced use of cash for capital expenditures, acquisitions and the return of cash to shareholders through dividends and share repurchases. In 2014, that return of cash to our shareholders was a record $436.7 million.







RESULTS OF OPERATIONS—2014 COMPARED TO 2013
 
2014
2013
Net sales
$
4,243.2

$
4,123.4

Percent growth
2.9
 %
2.7
 %
Components of percent growth in net sales - increase (decrease):
 
 
Volume and product mix
(0.2
)%
0.1
 %
Pricing actions
1.9
 %
1.5
 %
Acquisitions
1.8
 %
1.5
 %
Foreign exchange
(0.6
)%
(0.4
)%

Sales for the fiscal year 2014 rose 2.9% from 2013, with growth in both the consumer and industrial segments. Pricing actions, taken in response to increased raw material and packaging costs, added 1.9% to sales. The incremental impact of the Wuhan Asia Pacific Condiments (WAPC) acquisition, completed in mid-2013, accounted for a 1.8% increase to sales, while volume and product mix in the base business reduced sales 0.2%. The impact of foreign exchange rates was unfavorable in 2014, reducing sales by 0.6%.

In 2015, we expect to grow sales in local currency by 4% to 6% from 2014, to include the impact of higher volume and pricing. We expect this range to be significantly reduced as a result of unfavorable foreign currency exchange rates.
 
2014
2013
Gross profit
$
1,730.2

$
1,665.8

Gross profit margin
40.8
%
40.4
%
In 2014, gross profit increased 3.9% while gross profit margin rose 40 basis points over the 2013 level to 40.8%. We offset a low single-digit increase in raw material and packaging costs with our pricing actions and CCI cost savings. Our CCI program generated cost savings of $65 million in 2014, of which $54 million lowered cost of goods sold. In 2015, we expect a favorable impact from pricing actions and cost savings, largely offset by a mid-single digit increase in raw material and packaging costs.

2014
2013
Selling, general & administrative expense (SG&A)
$
1,122.0

$
1,075.0

Percent of net sales
26.5
%
26.1
%
Selling, general and administrative expenses were $1,122.0 million in 2014 compared to $1,075.0 million in 2013, an increase of $47.0 million or 40 basis points as a percentage of net sales. That 40 basis point increase was driven by an $18.8 million increase in our brand marketing support from the 2013 level to $226.6 million in 2014, with 40% of that increase related to digital marketing, which is one of our highest return investments in brand marketing support. In addition, compared to 2013, lower pension and other postretirement benefit expenses in 2014 were partially offset by increased employee incentive compensation expenses in 2014.

2014
2013
Special charges
$
5.2

$
25.0

Loss on voluntary pension settlement

15.3


We are evaluating changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness. Special charges of $5.2 million were recorded in 2014 to enable us to implement these changes. Of the $5.2 million of special charges recorded in 2014, which were principally related to employee severance, $2.1 million related to actions undertaken with respect to the EMEA reorganization announced in late 2013, $1.3 million related to the realignment of certain manufacturing activities in the U.S. industrial business, $1.1 million related to the elimination of certain administrative positions in the U.S. consumer and industrial businesses, and $0.7 million related to the elimination of certain administrative and manufacturing positions in the Australian consumer business.

In late 2013, we announced several reorganization activities in the EMEA region to further improve EMEA’s profitability and process standardization while supporting its competitiveness and long-term growth. At that time, we indicated our expectation that we would recognize approximately $27 million of cash and non-cash charges related to this plan, of which $25.0 million in special charges was recognized in 2013, with $15.9 million related to





employee severance, $6.4 million for asset write-downs and $2.7 million for other exit costs. Total cash expenditures to implement this EMEA reorganization plan were $10.7 million in 2014. We expect to complete the implementation of this plan in 2015, spending an additional $10 million in cash in that year. See note 3 of the financial statements for further information with respect to special charges recorded in 2014 and 2013.

In addition to the special charges outlined above, we recorded a loss on voluntary pension settlement of $15.3 million in 2013 for the settlement of a portion of our U.S. defined benefit obligation, which reduced the size of our pension obligation and should reduce potential pension volatility in the future. The settlement charge relates to a lump sum distribution elected by certain former U.S. employees in exchange for their deferred vested pension plan benefits. This lump sum payout program was completed in 2013. See note 10 of the financial statements for additional information.
 
2014
2013
Interest expense
$
49.7

$
53.3

Other income, net
1.1

2.2

Interest expense for 2014 was lower than the prior year, primarily due to the refinancing of long-term debt in the second half of 2013. In August 2013, we issued $250 million of 3.50% notes (at an effective interest rate of 3.30%), the net cash proceeds of which, plus cash on hand, were used to pay off $250 million of 5.25% notes (at an effective interest rate of 5.54%) that matured in September 2013.
 
2014
2013
Income from consolidated operations before income taxes
$
554.4

$
499.4

Income taxes
145.9

133.6

Effective tax rate
26.3
%
26.8
%
The effective tax rate declined 50 basis points to 26.3% in 2014 from 26.8% in 2013, primarily as a result of the following factors: Discrete tax benefits were $10.8 million in 2014 compared to $3.9 million in 2013. That increase in 2014 is primarily due to the reversal of previously established reserves for unrecognized tax benefits, net of additional taxes provided, upon the following tax settlements reached during 2014: (1) a settlement with respect to the French taxing authority’s audits of the 2007-2013 tax years; and (2) a settlement with respect to the Internal Revenue Service (IRS) examination of our U.S. federal income tax return for the 2007 and 2008 tax years. Discrete tax benefits in 2013 of $3.9 million resulted from the 2013 recognition of a 2012 U.S. research tax credit and reversal of valuation allowances for two subsidiaries originally established against net operating losses. During 2013, a new law was enacted that retroactively granted the research tax credit in 2012 and allowed for a research tax credit in 2013. No research tax credit was recognized in 2014 as the tax law which retroactively granted the research tax credit for 2014 was not enacted until after the company’s 2014 fiscal year end. See note 12 of the financial statements for a reconciliation of the U.S. federal tax rate with the effective tax rate.
In November 2012, we deposited $18.8 million with the IRS to stop any potential interest on proposed adjustments associated with the IRS examination of our U.S. federal income tax returns for the 2007 and 2008 tax years. In November 2014, $14.9 million of that deposit was refunded to us upon our settlement with the IRS.
We expect the effective tax rate in 2015 to range from 27% to 28%.
 
2014
2013
Income from unconsolidated operations
$
29.4

$
23.2

Income from unconsolidated operations rose $6.2 million in 2014 compared to 2013, which was a 26.7% increase. This increase is attributable to our largest joint venture, McCormick de Mexico, which benefited in 2014 from its transition to a more efficient manufacturing facility and from lower commodity costs.
In 2014, our 50% interest in the McCormick de Mexico joint venture represented 64% of the sales and 91% of the net income of our unconsolidated joint ventures. We own 50% of most of our other unconsolidated joint ventures.
We reported diluted earnings per share of $3.34 in 2014, compared to $2.91 in 2013. The following table outlines the major components of the change in diluted earnings per share from 2013 to 2014:






2013 Earnings per share—diluted
$
2.91

Impact of reduction in special charges and loss on voluntary pension settlement
0.19

Increase in adjusted operating income
0.09

Impact of lower shares outstanding
0.07

Increase in income from unconsolidated operations
0.04

Decrease in effective income tax rate
0.02

Lower interest expense
0.02

2014 Earnings per share—diluted
$
3.34


We measure segment performance based on operating income excluding special charges and, in 2013, the loss on voluntary pension settlement as these activities are managed separately from the business segments.

Consumer Business

 
 
2014
2013
Net sales
$
2,625.5

$
2,538.0

Percent growth
3.4
 %
5.1
 %
Components of percent growth in net sales - increase (decrease):
 
 
Volume and product mix
(1.1
)%
1.0
 %
Pricing actions
2.0
 %
1.7
 %
Acquisitions
2.9
 %
2.5
 %
Foreign exchange
(0.4
)%
(0.1
)%
 
 
 
Operating income, excluding special charges and loss on voluntary pension settlement
$
474.3

$
472.3

Operating income margin, excluding special charges and loss on voluntary pension settlement
18.1
 %
18.6
 %

We grew sales in the consumer business 3.4% in 2014 from 2013. This growth rate included a 2.9% increase due to the mid-2013 acquisition of WAPC and a 2.0% increase due to higher price, offset in part by a 1.1% decline in volume and product mix and 0.4% decline from unfavorable foreign exchange rates in 2014 from 2013.
In the Americas, consumer business sales declined 0.7%. Although higher pricing added 1.6%, a decline in volume and product mix reduced sales 1.6% and unfavorable foreign exchange rates reduced sales 0.7%. In the latter part of 2013, our sales growth was hampered as smaller competitors gained category share. This competitive activity persisted in 2014. Throughout 2014, we had actions underway to regain momentum with this part of our business that included additional brand marketing support, accelerated innovation and working with our retail customers to optimize their spices and seasonings and their recipe mix categories while simultaneously increasing sales of our products to these customers. We are making progress and have gained category share in 2014 in recipe mixes, driven in part by new grilling products, gluten-free products and liquid skillet sauces. In 2014, our category share of spices and seasonings had a further decline, although we expect better results in 2015 as we continue with our actions to improve the performance of our consumer business in the Americas.
In EMEA, consumer business sales increased 3.3%, with 2.0% added by pricing and 1.5% added by favorable foreign currency exchange rates. Volume and product mix declined slightly, reducing sales by 0.2%. While we had success with new product introductions, increased brand marketing and distribution gains, economic conditions across the region remained challenging. Our innovation activity in 2014 included the roll-out of Flavour Shots in the U.K., dessert items in France and additional recipe mixes in Poland. In this region, higher brand marketing support was devoted to building awareness and trial of new products, as well as digital marketing.
In the Asia/Pacific region, sales rose 31.2%. Our mid-2013 acquisition of WAPC added 28.2% to net sales, pricing actions added 4.0%, and base business volume and product mix added 2.2%, while unfavorable foreign currency exchange rates lowered sales 3.2%. We achieved a double-digit increase in our base business volume and product mix in China. However, crop shortages of basmati rice led to another year of steep increases in cost and pricing of basmati rice in India during 2014, and a subsequent decline in our sales volume as consumers turned toward lower cost rice varieties.





Consumer business operating income, excluding special charges and, for 2013, loss on voluntary pension settlement, rose 0.4% to $474.3 million from $472.3 million in 2013. Higher sales and CCI cost savings contributed to this profit growth, but were largely offset by higher material costs and a $16.8 million increase in brand marketing support. Operating income margin, excluding the impact of special charges and the 2013 loss on voluntary pension settlement, was 18.1% in 2014 compared to 18.6% in 2013. This reduction was due, in part, to the higher brand marketing support and the mix of business across regions, as sales in international markets grew at a faster rate than in the U.S., where our profit margin is higher due to larger scale and less complexity.
Industrial Business
 
 
2014
2013
Net sales
$
1,617.7

$
1,585.4

Percent change - increase (decrease)
2.0
 %
(0.8
)%
Components of percent growth in net sales - increase (decrease):
 
 
Volume and product mix
0.9
 %
(1.2
)%
Pricing actions
1.8
 %
1.2
 %
Foreign exchange
(0.7
)%
(0.8
)%
 
 
 
Operating income, excluding special charges and loss on voluntary pension settlement
$
133.9

$
118.5

Operating income margin, excluding special charges and loss on voluntary pension settlement
8.3
 %
7.5
 %

We grew sales for the industrial business 2.0% in 2014. Pricing actions taken to offset the impact of higher material costs added 1.8% and volume and product mix added 0.9%. Unfavorable foreign exchange rates decreased sales 0.7%. The growth in volume and product mix was led by sales of snack seasonings in the Americas and sales to quick service restaurants in our EMEA region.
In the Americas, industrial business sales rose 0.4%. Pricing added 1.0% and volume and product mix added 0.3% to sales, offset in part by unfavorable foreign currency exchange rates that lowered sales 0.9%. Innovation and category growth drove increased sales of seasonings for snack products and we also grew sales of branded foodservice items in 2014. However, demand from quick service restaurants was weak in the U.S. in 2014. This weakness is likely to extend into the first part of 2015.
In EMEA, we grew industrial business sales 9.3%, with a 5.0% increase from pricing actions, a 3.2% increase in volume and product mix, and a 1.1% increase from favorable foreign exchange rates. Demand from quick service restaurants remained robust, and we met this demand with products that we supply from our facilities in the U.K., Turkey and South Africa.
In the Asia/Pacific region, industrial business sales declined by 0.5%. While pricing actions added 1.0% and higher volume and product mix added 0.9%, unfavorable foreign exchange rates reduced sales 2.4%. Sales to quick service restaurants in China were adversely impacted by consumer concerns regarding quality issues from a supplier of protein in 2014 and regarding avian flu in 2013. In 2015, we expect demand from these quick service restaurant customers to improve in China as they address these issues and continue to expand the number of restaurant locations.
Industrial business operating income, excluding special charges and, for 2013, loss on voluntary pension settlement, was $133.9 million compared to $118.5 million in 2013. Higher sales, the benefit of CCI cost savings and a more favorable mix of business, more than offset increased material costs and a $2.0 million increase in marketing support for branded foodservice items. Industrial business operating income margin, excluding the impact of special charges and the 2013 loss on voluntary pension settlement, was 8.3% in 2014 compared to 7.5% in 2013.







RESULTS OF OPERATIONS—2013 COMPARED TO 2012
 
2013
2012
Net sales
$
4,123.4

$
4,014.2

Percent growth
2.7
 %
8.6
 %
Components of percent growth in net sales - increase (decrease):
 
 
Volume and product mix
0.1
 %
1.4
 %
Pricing actions
1.5
 %
4.4
 %
Acquisitions
1.5
 %
4.3
 %
Foreign exchange
(0.4
)%
(1.5
)%
Sales for the fiscal year 2013 rose 2.7% from 2012, with growth in the consumer segment partially offset by a decline in the industrial segment. Pricing actions, taken in response to increased raw material and packaging costs, added 1.5% to sales. The incremental impact of the WAPC acquisition, completed in mid-2013, accounted for a 1.5% increase to sales, and increased volume and product mix in the base business added 0.1% to sales. The impact of foreign exchange rates was unfavorable in 2013, reducing sales by 0.4%.
 
2013
2012
Gross profit
$
1,665.8

$
1,617.8

Gross profit margin
40.4
%
40.3
%
In 2013, gross profit increased 3.0% while gross profit margin rose 10 basis points. We were able to offset the dollar impact of 3% inflation in raw material and packaging costs with our pricing actions and CCI cost savings. In 2013, CCI cost savings totaled $63 million, of which $48 million lowered cost of goods sold.
 
2013
2012
Selling, general & administrative expense (SG&A)
$
1,075.0

$
1,039.5

Percent of net sales
26.1
%
25.9
%
Selling, general and administrative expenses were $1,075.0 million in 2013 compared to $1,039.5 million in 2012, an increase of $35.5 million or 20 basis points as a percentage of net sales. Retirement benefit expense increased $20.0 million in 2013 largely as a result of a lower interest rate environment at the November 30, 2012 pension measurement date which negatively impacted 2013 expense. Of the increase in retirement benefit expense, approximately 60% impacted selling, general and administrative expenses. In addition, we increased our brand marketing support by $9.6 million to $207.8 million in 2013, with about half of the increase in digital marketing, which is one of our highest return investments in brand marketing support.
 
2013
Special charges
$
25.0

Loss on voluntary pension settlement
15.3


In 2013, we announced several reorganization activities in the EMEA region and our expectation that we would record approximately $27 million of cash and non-cash charges related to this plan. For 2013, we recorded $25.0 million of special charges, with $15.9 million related to employee severance, $6.4 million for asset write-downs and $2.7 million for other exit costs. We expect to complete the implementation of this plan in 2015. See note 3 of the financial statements for additional information.

In addition to the $25.0 million in special charges outlined above, we recorded a loss on voluntary pension settlement of $15.3 million in 2013 for the settlement of a portion of our U.S. defined benefit obligation, which reduced the size of our pension obligation and should reduce potential pension volatility in the future. The settlement charge relates to a lump sum distribution elected by certain former U.S. employees in exchange for their deferred vested pension plan benefits. This lump sum payout program was completed in 2013. See note 10 of the financial statements for additional information.
 
2013
2012
Interest expense
$
53.3

$
54.6

Other income, net
2.2

2.4






Interest expense for 2013 was lower than the prior year. Most of this decrease is due to the impact of lower average debt balances for 2013 compared to 2012, and was partially aided by slightly lower average interest rates in 2013. The higher average debt balances in 2012 were due to the acquisitions completed late in 2011.
 
2013
2012
Income from consolidated operations before income taxes
$
499.4

$
526.1

Income taxes
133.6

139.8

Effective tax rate
26.8
%
26.6
%
Discrete tax benefits in 2013 were $3.9 million compared to $2.0 million in 2012. The increase in 2013 was due to the 2013 recognition of a 2012 U.S. research tax credit and reversal of valuation allowances for two subsidiaries originally established against net operating losses. A new law was enacted in 2013 that retroactively granted the research tax credit in 2012.
Tax expense for 2012 benefited from U.S. foreign tax credits that reduced tax expense by $9.7 million due to the repatriation of $70 million of cash from foreign subsidiaries. While no such benefit or repatriation occurred in 2013, tax expense in 2013 as a percentage of pre-tax income approximated the 2012 level due primarily to certain favorable items in 2013, which included the utilization of non-U.S. operating losses, lower state and local income taxes, and the inclusion of the U.S. research tax credit for 2013, as well as the increase in discrete tax benefits described above.
In addition, see note 12 of the financial statements for a reconciliation of the U.S. federal statutory tax rate with the effective tax rate.
 
2013
2012
Income from unconsolidated operations
$
23.2

$
21.5

Income from unconsolidated operations increased $1.7 million in 2013 compared to 2012. Most of this increase was attributable to our largest joint venture, McCormick de Mexico, through strong sales growth, along with improved performance by our Eastern Condiments joint venture in India.
In 2013, our McCormick de Mexico joint venture represented 63% of the sales and 78% of the net income of our unconsolidated joint ventures.
We reported diluted earnings per share of $2.91 in 2013, compared to $3.04 in 2012. The following table outlines the major components of the change in diluted earnings per share from 2012 to 2013:
2012 Earnings per share—diluted
$
3.04

Impact of special charge and loss on voluntary pension settlement
(0.22
)
Increase in adjusted operating income
0.06

Impact of lower shares outstanding
0.02

Increase in income from unconsolidated operations
0.01

Increase in effective income tax rate
(0.01
)
Lower interest expense
0.01

2013 Earnings per share—diluted
$
2.91


We measure segment performance based on operating income excluding special charges and the loss on a voluntary pension settlement as these activities are managed separately from the business segments.





Consumer Business
 
 
2013
2012
Net sales
$
2,538.0

$
2,415.3

Percent growth
5.1
 %
9.8
 %
Components of percent growth in net sales - increase (decrease):
 
 
Volume and product mix
1.0
 %
0.3
 %
Pricing actions
1.7
 %
3.7
 %
Acquisitions
2.5
 %
7.2
 %
Foreign exchange
(0.1
)%
(1.4
)%
 
 
 
Operating income, excluding special charges and loss on voluntary pension settlement
$
472.3

$
456.1

Operating income margin, excluding special charges and loss on voluntary pension settlement
18.6
 %
18.9
 %
We grew sales in the consumer business 5.1% in 2013 from 2012, which included a 2.5% increase due to the mid-2013 acquisition of WAPC, a 1.7% increase due to higher price, and a 1.0% increase from higher volumes and improved product mix. The effect of foreign exchange rates in 2013 from 2012 was slightly unfavorable, reducing sales by 0.1%.
In the Americas, consumer business sales rose 2.4%, with volume and product mix adding 1.7%, higher pricing adding 0.9% and unfavorable foreign exchange rates lowering sales by 0.2%. Higher volume and product mix was the result of new product introductions and increased brand marketing. In 2013, our new product launches included grilling items, premium recipe mixes, authentic Hispanic rice mixes and new varieties of Lawry’s, Zatarain's and Simply Asia brand products in the U.S. In Canada, we had particular success with gluten-free gravy mixes, introduced new grilling items and imported products from our business in China and affiliate in the Philippines. Across the Americas region, a portion of our incremental brand marketing support was in support of our new products and seasonal events. We also increased our digital marketing activity, which offers a more personalized way to interact with consumers. While we made good progress with these growth initiatives which contributed to strong consumer demand for spices and seasonings throughout 2013, our U.S. sales slowed in the second half of the year. During this period, private label and smaller competitors gained category share. In 2014, we had actions underway to regain momentum with this part of our business that include a significant increase in brand marketing support, accelerated innovation and improved agility in the marketplace.
In EMEA, consumer business sales increased 3.3%, with pricing and favorable foreign currency exchange rates each adding 1.3%, and higher volume and product mix adding 0.7%. While we had success with new product introductions, increased brand marketing and distribution gains, economic conditions across the region remained challenging. Our innovation in 2013 included the development and introduction of recipe mixes in France and Poland, the launch of grilling items in a number of markets, and new varieties of Vahiné brand dessert items. As in the Americas, higher brand marketing support was devoted to building awareness and trial of new products and towards digital marketing.
In the Asia/Pacific region, sales rose 32.6%. The impact of our 2013 acquisition of WAPC added 30.6% to net sales, pricing added 10.0%, base business volume and product mix declined 4.7% and unfavorable foreign currency exchange rates lowered sales by 3.3%. We achieved a double-digit increase in our base business volume and product mix in China. However, crop shortages of basmati rice led to a steep increase in cost and pricing of basmati rice in India during 2013, and a subsequent decline in our sales volume as consumers turned toward lower cost rice varieties.
Consumer business operating income, excluding special charges and loss on voluntary pension settlement, rose to $472.3 million from $456.1 million in 2012, a 3.6% increase. The growth in operating income was the result of higher sales and CCI savings, offset, in part, by higher retirement benefit expense, a $6.9 million increase in brand marketing support, $4.3 million of transaction costs related to the acquisition of WAPC and higher material costs. Operating income margin, excluding the impact of special charges and loss on voluntary pension settlement, was 18.6% in 2013 compared to 18.9% in 2012. This reduction was due, in part, to the mix of business across regions, as sales in international markets grew at a faster rate than in the U.S., where our profit margin is higher due to larger scale and less complexity.





Industrial Business
 
 
2013
2012
Net sales
$
1,585.4

$
1,598.9

Percent change - increase (decrease)
(0.8
)%
6.8
 %
Components of percent change in net sales - increase (decrease):
 
 
Volume and product mix
(1.2
)%
3.1
 %
Pricing actions
1.2
 %
5.3
 %
Foreign exchange
(0.8
)%
(1.6
)%
 
 
 
Operating income, excluding special charges and loss on voluntary pension settlement
$
118.5

$
122.2

Operating income margin, excluding special charges and loss on voluntary pension settlement
7.5
 %
7.6
 %
Sales for the industrial business declined 0.8% in 2013. Pricing actions taken to offset the impact of higher material costs added 1.2%, while volume and product mix lowered sales by 1.2% and unfavorable foreign exchange rates decreased sales 0.8%. The decline in volume and product mix was largely attributable to weak demand from quick service restaurants in the U.S. and China. In the U.S., sales to quick service restaurants were impacted by lower restaurant traffic and customer emphasis on menu items for which McCormick is not a leading supplier. In China, consumer concerns, including avian flu, led to reduced demand for poultry throughout most of 2013. As a leading supplier of coatings and seasonings for chicken, this adversely impacted our sales in 2013.
In the Americas, industrial business sales declined 1.7%. While pricing added 1.2% to sales and favorable foreign currency exchange rates added 0.1%, lower volume and product mix reduced sales 3.0%. Innovation and category growth drove increased sales of seasonings for snack products and sales of branded foodservice items were steady in 2013. However, as indicated, demand from quick service restaurants was weak in the U.S. in 2013.
In EMEA, industrial business sales rose 1.4%, with a 3.9% increase in volume and product mix as well as a 2.0% increase from pricing actions. These increases were partially offset by unfavorable foreign exchange rates that reduced sales by 4.5%. Demand from quick service restaurants remained robust, and we met this demand with products that we supply from our facilities in the U.K., Turkey and South Africa.
Industrial business sales in the Asia/Pacific region rose slightly, increasing by 0.2%. Higher volume and product mix added 0.6% and was largely offset by lower pricing of 0.1% and unfavorable foreign exchange rates of 0.3%. Product innovation in other parts of the region largely offset the weaker demand from quick service restaurants in China that was previously described. By the end of our fiscal year 2013, the situation in China had improved.
Industrial business operating income, excluding special charges and loss on voluntary pension settlement, was $118.5 million compared to $122.2 million in 2012. The benefit of CCI cost savings was more than offset by higher retirement benefit expense, increased material costs and a $2.7 million increase in marketing support for branded foodservice items. Industrial business operating income margin, excluding the impact of special charges and loss on voluntary pension settlement, was 7.5% in 2013 compared to 7.6% in 2012.

NON-GAAP FINANCIAL MEASURES
The tables below include financial measures of adjusted operating income, adjusted net income and adjusted diluted earnings per share, each excluding the impact of special charges in 2014 and 2013, and loss on voluntary pension settlement in 2013. There were no adjustments to 2012 financial results. 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. We believe this non-GAAP information 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.
Special charges of $5.2 million were recorded in 2014 to enable us to implement changes to our organization structure in order to reduce fixed costs, simplify or improve processes, and improve our competitiveness. Of the $5.2 million of special charges recorded in 2014, $2.1 million related to actions undertaken with respect to the EMEA reorganization announced in 2013, $1.3 million related to the realignment of manufacturing activities in the U.S. industrial business, and $1.1 million and $0.7 million related to the elimination of administrative and/or manufacturing positions in the consumer and industrial businesses in the U.S. and Australia, respectively.





In 2013, we recorded $25.0 million of special charges related to reorganization activities in the EMEA region and $15.3 million of loss on voluntary pension settlement related to our U.S. pension plan for a lump sum distribution to former employees in exchange for their deferred vested pension plan benefits.
We are treating these special charges and loss on voluntary pension settlement as adjustments to our operating income, net income and diluted earnings per share. We are providing non-GAAP results that exclude the impact of these special charges and loss on voluntary pension settlement as it allows for a better comparison of 2014 financial results to 2013 and 2012. See notes 3 and 10 of the financial statements for additional information on the special charges and the loss on voluntary pension settlement, respectively.
These non-GAAP 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. 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.
 
2014
2013
2012
Operating income
$
603.0

$
550.5

$
578.3

Impact of special charges and loss on voluntary pension settlement
5.2

40.3


Adjusted operating income
$
608.2

$
590.8

$
578.3

% increase versus prior year
2.9
%
2.2
%
7.0
%
Net income
$
437.9

$
389.0

$
407.8

Impact of special charges and loss on voluntary pension settlement
3.7

29.2


Adjusted net income
$
441.6

$
418.2

$
407.8

% increase versus prior year
5.6
%
2.6
%
9.0
%
 
Earnings per share—diluted
$
3.34

$
2.91

$
3.04

Impact of special charges and loss on voluntary pension settlement
0.03

0.22


Adjusted earnings per share—diluted
$
3.37

$
3.13

$
3.04

% increase versus prior year
7.7
%
3.0
%
9.0
%

In addition to the above non-GAAP measures, we use total debt to adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA) as a measure of leverage. We define adjusted EBITDA as net income plus expenses of interest, income taxes, depreciation and amortization, special charges and loss on voluntary pension settlement. Adjusted EBITDA and the ratio of total debt to adjusted EBITDA are both non-GAAP financial measures. This ratio measures our ability to repay outstanding debt obligations. Our target for total debt to adjusted EBITDA, excluding the temporary impact from acquisition activity, is 1.5 to 1.8. We believe that total debt to adjusted EBITDA is a meaningful metric to investors in evaluating our financial leverage and may be different than the method used by other companies to calculate total debt to adjusted EBITDA.

The following table reconciles our adjusted EBITDA to our net income:

 
2014
2013
2012
Net income
$
437.9

$
389.0

$
407.8

Special charges and loss on voluntary pension settlement
5.2

40.3


Depreciation and amortization
102.7

106.0

102.8

Interest expense
49.7

53.3

54.6

Income tax expense
145.9

133.6

139.8

Adjusted EBITDA
$
741.4

$
722.2

$
705.0

 
 
 
 
Total debt
$
1,284.9

$
1,233.1

$
1,171.8

 
 
 
 
Total debt/adjusted EBITDA
1.73

1.71

1.66

 







LIQUIDITY AND FINANCIAL CONDITION
 
2014
2013
2012
Net cash provided by operating activities
$
503.6

$
465.2

$
455.0

Net cash used in investing activities
(131.6
)
(239.7
)
(109.0
)
Net cash used in financing activities
(348.9
)
(245.9
)
(324.3
)
We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, increase our dividend, fund capital projects and make share repurchases when appropriate. In 2015, we expect to continue our share repurchase activity and fund all or a portion of possible future acquisitions with cash flow from operations.
In the cash flow statement, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates, as these do not reflect actual cash flows. Accordingly, the amounts in the cash flow statement do not agree with changes in the operating assets and liabilities that are presented in the balance sheet.
The reported values of our assets and liabilities held in our non-U.S. subsidiaries and affiliates can be significantly affected by fluctuations in foreign exchange rates between periods. At November 30, 2014, the exchange rate for the Euro, British pound sterling, Canadian dollar, Polish zloty and Australian dollar were lower versus the U.S. dollar than at November 30, 2013.
Operating Cash Flow Operating cash flow was $503.6 million in 2014, $465.2 million in 2013 and $455.0 million in 2012. The variability between years is due in part to changes in pension contributions, which were $16.8 million in 2014, $42.7 million in 2013 and $104.3 million in 2012. These contributions include payments to unfunded plans. We did not make any contribution to our major U.S. pension plan in 2014 as the plan was already funded within our company funding guidelines. The change in inventory also had an impact on the variability in cash flow from operations, as it was a use of cash in 2014 and 2013 and a modest source of cash in 2012. Higher adjusted net income, which excludes the impact of special charges in 2014 and 2013 and the loss on voluntary pension settlement in 2013, in 2014 compared to 2013 and in 2013 compared to 2012 was also a factor in the increased cash flow from operations in 2014 and in 2013, respectively.
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:
 
2014
2013
2012
Cash Conversion Cycle
91.4

84.8

82.1

The increase in CCC from 2013 to 2014 is mainly due to an increase in our days in inventory as a result of increased strategic raw material inventory. In the future we expect to reduce CCC by decreasing our days in inventory. The increase in CCC from 2012 to 2013 is due to an increase in our days sales outstanding and a decrease in our days payable outstanding. The increase in days sales outstanding was due in part to a greater customer response in 2013 to our U.S. holiday display program, which includes extended terms, than in 2012.
Investing Cash Flow Net cash used in investing activities was $131.6 million in 2014, $239.7 million in 2013 and $109.0 million in 2012. The variability between years is principally a result of cash usage related to our acquisitions of businesses and joint venture interests, which amounted to $142.3 million in 2013. We did not make any acquisitions in either 2014 or 2012. See note 2 of the financial statements for further details related to the 2013 acquisition. Capital expenditures were $132.7 million in 2014, $99.9 million in 2013 and $110.3 million in 2012. We expect 2015 capital expenditures to range between $130 million and $140 million.





Financing Cash Flow Net cash used in financing activities was $348.9 million in 2014, $245.9 million in 2013 and $324.3 million in 2012. The variability between years is principally a result of share repurchase and dividend activity, described below, and of changes in our net borrowing activity. In 2014 and 2013, our net borrowing activity provided cash of $56.1 million and $66.7 million, respectively. In 2013, we received net cash proceeds of $246.2 million from our issuance of $250 million of 3.50% notes due 2023. We used these net proceeds, together with cash on hand, to repay $250 million of maturing 5.25% notes and $1.4 million of other long-term debt, and we increased our net short-term borrowings by $71.9 million in 2013. In 2012, our net borrowing activity used cash of $80.5 million, due principally to a $76.6 million net reduction in short-term borrowings.
The following table outlines the activity in our share repurchase programs (in millions):
 
2014
2013
2012
Number of shares of common stock
3.6

2.7

2.4

Dollar amount
$
244.3

$
177.4

$
132.2

As of November 30, 2014, $116 million remained of a $400 million share repurchase program that was authorized by our Board of Directors in April 2013. During the fourth quarter of 2013, we completed a previous $400 million share repurchase program that had been authorized in June 2010.
The common stock issued in 2014, 2013 and 2012 relates to our stock compensation plans.
Our dividend history over the past three years is as follows:
 
2014
2013
2012
Total dividends paid
$
192.4

$
179.9

$
164.7

Dividends paid per share
1.48

1.36

1.24

Percentage increase per share
8.8
%
9.7
%
10.7
%
In November 2014, the Board of Directors approved an 8.1% increase in the quarterly dividend from $0.37 to $0.40 per share. During the past five years, dividends per share have risen at a compound annual rate of 9.0%.
 
2014
2013
2012
Total debt/adjusted EBITDA
1.73

1.71

1.66


For 2014, our total debt has increased slightly over the prior year to bring the ratio of total debt to adjusted EBITDA to 1.73. The increase was due to higher short-term borrowings to fund strategic purchases of inventory.
The changes in our total debt to adjusted EBITDA from 2012 to 2013 are mainly due to changes in our debt in conjunction with acquisition activity and the subsequent reduction of that debt. In 2011, we increased our debt levels to help fund our Kohinoor, Kamis and Kitchen Basics® acquisitions. During 2012, the debt associated with these acquisitions was reduced to bring our total debt to adjusted EBITDA within our target range of 1.5 to 1.8. For 2013, our EBITDA is lower due to the impact of the special charges and loss on voluntary pension settlement. Excluding the impact of special charges and loss on voluntary pension settlement, adjusted EBITDA for 2013 was $722.2 million and the ratio of total debt to adjusted EBITDA was 1.71.
Most of our cash is in our foreign subsidiaries. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The permanent repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations, capital projects and future acquisitions. At November 30, 2014, we temporarily used $201.4 million of cash from our foreign subsidiaries to pay down short-term debt in the U.S. The average short-term borrowings outstanding for the years ended November 30, 2014 and 2013 were $423.7 million and $390.7 million, respectively. The total average debt outstanding for the years ended November 30, 2014 and 2013 was $1,428.7 million and $1,395.7 million, respectively.
In November 2012 and in April and August 2013, we entered into a total of $175 million of forward-starting interest rate swap and Treasury rate lock agreements to manage our interest rate risk associated with the anticipated issuance of fixed rate notes in August 2013. We cash settled all of these agreements, which were designated as cash flow hedges, for a gain of $9.0 million simultaneous with the issuance of the notes at an all-in effective fixed rate of 3.30% on the full $250 million of debt. The gain on these agreements is deferred in accumulated other comprehensive income and will be amortized to reduce interest expense over the life of the notes. Hedge ineffectiveness of these agreements was not material.





See notes 6 and 7 of the financial statements for further details of these transactions.
Credit and Capital Markets Global credit and capital markets continued to improve in 2014. The following summarizes the more significant impacts of credit and capital markets on our business:
CREDIT FACILITIES – Cash flows from operating activities are our primary source of liquidity for funding growth, share repurchases, dividends and capital expenditures. We also rely on our revolving credit facility, or borrowings backed by this facility, to fund seasonal working capital needs and other general corporate requirements.
Our major revolving credit facility has a total committed capacity of $600 million, which expires in 2016. We generally use this facility to support our issuance of commercial paper. If the commercial paper market is not available or viable, we could borrow directly under our revolving credit facility. The facility is made available by a syndicate of banks, with various commitments per bank. If any of the banks in this syndicate are unable to perform on their commitments, our liquidity could be impacted, which could reduce our ability to grow through funding of seasonal working capital. In addition to our committed revolving credit facility, we have uncommitted credit facilities for $125.4 million as of November 30, 2014 that will expire in 2015. We engage in regular communication with all of the banks participating in our credit facilities. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. In addition, we periodically review our banking and financing relationships, considering the stability of the institutions and other aspects of the relationships. Based on these communications and our monitoring activities, we believe our banks will perform on their commitments. See also note 6 of the financial statements for more details on our financing arrangements. We believe that our internally generated funds and the existing sources of liquidity under our credit facilities are sufficient to fund ongoing operations.
PENSION ASSETS AND OTHER INVESTMENTS – We hold investments in equity and debt securities in both our qualified defined benefit pension plans and through a rabbi trust for our nonqualified defined benefit pension plan. Cash payments to pension plans, including unfunded plans, were $16.8 million in 2014, $42.7 million in 2013 and $104.3 million in 2012. Our cash contributions in 2012 included a $35 million contribution made late in the fiscal year to bring the pension plan's funding status within our company guidelines. It is expected that the 2015 total pension plan contributions will be approximately $16 million primarily for international plans. 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 66% of assets are invested in equities, 25% in fixed income investments and 9% in other investments. Assets in the rabbi trust are primarily invested in corporate-owned life insurance, the value of which approximates an investment mix of approximately 50% in equities and 50% in fixed income investments. See also note 10 of the financial statements, which provides details on our pension funding.
CUSTOMERS AND COUNTERPARTIES – See the subsequent section of this discussion under Market Risk Sensitivity–Credit Risk.
ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits. We have a particular interest in emerging markets.

In 2013, we purchased the assets of Wuhan Asia-Pacific Condiments Co. Ltd. (WAPC), a privately held company based in China, for $144.8 million, which included $142.3 million of cash paid, net of closing adjustments, and the assumption of $2.5 million of liabilities. The acquisition was financed with a combination of cash and debt. WAPC, included in our consumer business segment, manufactures and markets DaQiao and ChuShiLe® brand bouillon products, which have a leading position in the central region of China.
See note 2 of the financial statements for further details of this acquisition.
PERFORMANCE GRAPH—SHAREHOLDER RETURN
Below is a line graph comparing 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 7 of the 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 value of foreign currency investments in subsidiaries and unconsolidated affiliates and cash flows related to repatriation of these investments. Primary exposures include the U.S. dollar versus the Euro, British pound sterling, Canadian dollar, Polish zloty, Australian dollar, Mexican peso, Chinese renminbi, Indian rupee, Thai baht and Swiss franc, as well as the British pound sterling versus the Euro. We routinely enter into foreign currency exchange contracts to manage certain of these foreign currency risks.
During 2014, the foreign currency translation component in other comprehensive income was principally related to the impact of exchange rate fluctuations on our net investments in France, the U.K., Poland, Canada and Australia. We did not hedge our net investments in subsidiaries and unconsolidated affiliates.
The following table summarizes the foreign currency exchange contracts held at November 30, 2014. All contracts are valued in U.S. dollars using year-end 2014 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, 2014





Currency sold
Currency received
Notional
value
Average
contractual
exchange
rate
Fair  
value  
Euro
U.S. dollar
$
22.5

1.27

$
0.4

British pound sterling
U.S. dollar
11.7

1.68

0.9

Canadian dollar
U.S. dollar
35.8

0.93

2.1

Australian dollar
U.S. dollar
3.3

0.91

0.2

Polish zloty
U.S. dollar
9.5

3.19

0.5

U.S. dollar
Canadian dollar
59.5

0.89

(1.0
)
U.S. dollar
Euro
28.0

1.25

(0.1
)
U.S. dollar
British pound sterling
39.1

1.57

(0.2
)
U.S. dollar
Mexican peso
14.4

13.67

0.3

British pound sterling
Euro
26.2

0.80


We have a number of smaller contracts with an aggregate notional value of $12.7 million to purchase or sell other currencies, such as the Swiss franc and the Thai baht, as of November 30, 2014. The aggregate fair value of these contracts was $0.4 million at November 30, 2014.
Included in the table above are $127.1 million notional value of contracts that have durations of less than seven days that are used to hedge short-term cash flow funding. Remaining contracts have durations of one to 12 months.
At November 30, 2013, we had foreign currency exchange contracts for the Euro, British pound sterling, Canadian dollar, Australian dollar and Polish zloty with a notional value of $204.9 million, all of which matured in 2014. The aggregate fair value of these contracts was $(0.5) million at November 30, 2013.
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, 2014. 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.
YEAR OF MATURITY AT NOVEMBER 30, 2014
 
2015
2016
2017
2018
Thereafter
Total  
Fair value
Debt
 
 
 
 
 
 
 
Fixed rate
$
0.9

$
200.2

$
0.2

$
250.2

$
556.3

$
1,007.8

$
1,103.3

Average interest rate
6.90
%
5.21
%
11.94
%
5.76
%
4.14
%


Variable rate
$
269.9

$
0.4

$
0.5

$
0.5

$
4.0

$
275.3

$
275.3

Average interest rate
1.28
%
8.79
%
8.79
%
8.79
%
8.79
%


The table above displays the debt 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. The fixed interest rate on $100 million of the 5.20% notes due in December 2015 is effectively converted to a variable rate by interest rate swaps through 2015. Net interest payments are based on 3 month LIBOR minus 0.05% during this period. We issued $250 million of 5.75% notes due in December 2017 in December 2007. Forward treasury lock agreements of $150 million were settled upon the issuance of these notes and effectively fixed the interest rate on the full $250 million of notes at a weighted-average fixed rate of 6.25%. We issued $250 million of 3.90% notes due in 2021 in July 2011. Forward treasury lock agreements of $200 million were settled upon the issuance of these notes and effectively fixed the interest rate on the full $250 million of 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 of $175 million were settled upon the issuance of these notes and effectively fixed the interest rate on the full $250 million of notes at a weighted-average fixed rate of 3.30%.
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 2014, our most significant raw materials were pepper, dairy products, rice, capsicums (red peppers and paprika), onion, garlic 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 business 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 and discount chains. 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, 2014:
CONTRACTUAL CASH OBLIGATIONS DUE BY YEAR
 
 
 
 
 
 
 
Total
Less than
1 year   
1–3  
years
3–5  
years
More than
5 years
Short-term borrowings
$
269.6

$
269.6




Long-term debt
1,013.5

1.2

$
201.3

$
251.5

$
559.5

Operating leases
92.3

23.4

31.5

19.8

17.6

Interest payments
252.7

43.2

78.1

53.7

77.7

Raw material purchase obligations(a)
377.0

377.0




Other purchase obligations(b)
16.7

16.7




Total contractual cash obligations
$
2,021.8

$
731.1

$
310.9

$
325.0

$
654.8

(a)
Raw material purchase obligations outstanding as of year-end may not be indicative of outstanding obligations throughout the year due to our response to varying raw material cycles.
(b)
Other purchase obligations primarily consist of advertising media commitments and electricity contracts.
Pension and postretirement funding can vary significantly each year due to changes in legislation, our significant assumptions and investment return on plan assets. As a result, we have not presented pension and postretirement funding in the table above.
COMMERCIAL COMMITMENTS EXPIRATION BY YEAR
 
Total
Less than
1 year   
1–3  
years
3–5  
years
More than
5 years
Guarantees
$
0.6

$
0.6




Standby letters of credit
8.1

8.1




Total commercial commitments
$
8.7

$
8.7




OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of November 30, 2014 and 2013.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are issued periodically that affect our current and future operations. See note 1 of the 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 business sells our products by entering into annual or multi-year customer contracts. These contracts include provisions for items such as sales discounts, marketing allowances and performance incentives. These items are recognized based on certain estimated criteria such as





sales volume of indirect customers, customers reaching anticipated volume thresholds and marketing spending. We routinely review these criteria and make adjustments as facts and circumstances change.
Goodwill and Intangible Asset Valuation
We review the carrying value of goodwill and non-amortizable intangible assets and conduct tests of impairment on an annual basis as described below. We also test for impairment if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. We test indefinite-lived intangible assets for impairment if events or changes in circumstances indicate that the asset might be impaired.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.
Goodwill Impairment
Our reporting units are the same as our operating segments. We calculate 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 calculated fair value, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. As of November 30, 2014, we had $1,722.2 million of goodwill recorded in our balance sheet ($1,581.1 million in the consumer segment and $141.1 million in the industrial segment). Our testing indicates that the current fair values of our reporting units are significantly in excess of 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 calculate fair value by using a relief-from-royalty method or discounted cash flow model and then compare that to the carrying amount of the indefinite-lived intangible asset. As of November 30, 2014, we had $270.8 million of brand name assets and trademarks recorded in our balance sheet and none of the balances exceed their calculated fair values. At November 30, 2014, the percentage excess of calculated fair value over book value of our major brand names and trademarks ranges from a low of 8% to a high of over 70%. While we believe that it is reasonably possible that, in the event of an increase in discount rates and/or a decline in forecasted revenues, a non-cash impairment charge may be required, we do not believe that the amount of such an impairment charge would be significant. At November 30, 2014, a hypothetical 15% reduction in the calculated fair values of our major brand names and trademarks would result in an impairment charge for only one of our major brand names and trademarks and that impairment charge would be approximately $1.5 million. We intend to continue to support our brand names and trademarks.
Below is a table which outlines the book value of our major brand names and trademarks as of November 30, 2014:
Zatarain’s
$
106.4

Lawry’s
48.0

Kamis
37.5

DaQiao/ChuShiLe
28.4

Kohinoor
18.8

Simply Asia/Thai Kitchen
18.6

Other
13.1

Total
$
270.8

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 U.S. 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 2015 pension and postretirement benefit expense by approximately $17 million. A 1% increase or decrease in the expected return on plan assets would impact 2015 pension expense by approximately $8 million.

Assumptions as to mortality of the participants in our pension plan is a key estimate in measuring the expected payments a participant may receive over their lifetime and therefore the amount of expense we will recognize. During 2014, the Society of Actuaries released a series of updated mortality tables resulting from recent studies conducted by them measuring mortality rates for various groups of individuals. The updated mortality tables released in 2014 reflect improved trends in longevity and therefore have the effect of increasing the estimate of benefits to be received by plan participants.

In determining the most appropriate mortality assumptions for our U.S. defined benefit pension and other postretirement benefit plans at November 30, 2014, we considered the updated mortality tables issued by the Society of Actuaries, coupled with other mortality information available from the Social Security Administration and our consulting actuaries that we believe is more closely aligned with our industry and participant mix to develop assumptions that we believe are most representative of the various characteristics of our participant populations.

The use of these updated mortality assumptions increased the benefit obligation for our U.S. defined benefit pension and other postretirement benefit plans by approximately $18 million at November 30, 2014 and will have the effect of increasing related expense by approximately $2 million in 2015. We will continue to evaluate the appropriateness of mortality and other assumptions used in the measurement of our pension obligations. In addition, see the preceding sections of MD&A and note 10 of the financial statements for a discussion of these assumptions and the effects on the financial statements.
Stock-Based Compensation
We estimate the fair value of our stock-based compensation using fair value pricing models which require the use of significant assumptions for expected volatility of stock, dividend yield and risk-free interest rate. Our valuation methodology and significant assumptions used are disclosed in note 11 of the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is set forth in the “Market Risk Sensitivity” section of “Management’s Discussion and Analysis” and in note 7 of the 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 evaluation 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 (1992 framework). This evaluation 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 evaluation. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, we have concluded with reasonable assurance that our internal control over financial reporting was effective as of November 30, 2014.
Our internal control over financial reporting as of November 30, 2014 has been audited by Ernst & Young LLP.
Alan D. Wilson
 
Chairman &
Chief Executive Officer
Gordon M. Stetz, Jr.
 
Executive Vice President &
Chief Financial Officer
Christina M. McMullen
 
Vice President & Controller
Chief Accounting Officer





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Internal Control Over Financial Reporting
The Board of Directors and Shareholders of
McCormick & Company, Incorporated
We have audited McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). McCormick & Company, Incorporated’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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
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.
In our opinion, McCormick & Company, Incorporated maintained, in all material respects, effective internal control over financial reporting as of November 30, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of McCormick & Company, Incorporated as of November 30, 2014 and 2013, and the related consolidated income statements, statements of comprehensive income, statements of shareholders’ equity and cash flow statements for each of the three years in the period ended November 30, 2014 and our report dated January 29, 2015 expressed an unqualified opinion thereon.
Baltimore, Maryland
January 29, 2015





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Consolidated Financial Statements
The Board of Directors and Shareholders of
McCormick & Company, Incorporated
We have audited the accompanying consolidated balance sheets of McCormick & Company, Incorporated as of November 30, 2014 and 2013, and the related consolidated income statements, statements of comprehensive income, statements of shareholders’ equity and cash flow statements for each of the three years in the period ended November 30, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McCormick & Company, Incorporated at November 30, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McCormick & Company, Incorporated’s internal control over financial reporting as of November 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated January 29, 2015 expressed an unqualified opinion thereon.
Baltimore, Maryland
January 29, 2015





CONSOLIDATED INCOME STATEMENT
for the year ended November 30 (millions except per share data)
2014
2013
2012
Net sales
$
4,243.2

$
4,123.4

$
4,014.2

Cost of goods sold
2,513.0

2,457.6

2,396.4

Gross profit
1,730.2

1,665.8

1,617.8

Selling, general and administrative expense
1,122.0

1,075.0

1,039.5

Special charges
5.2

25.0


Loss on voluntary pension settlement

15.3


Operating income
603.0

550.5

578.3

Interest expense
49.7

53.3

54.6

Other income, net
1.1

2.2

2.4

Income from consolidated operations before income taxes
554.4

499.4

526.1

Income taxes
145.9

133.6

139.8

Net income from consolidated operations
408.5

365.8

386.3

Income from unconsolidated operations
29.4

23.2

21.5

Net income
$
437.9

$
389.0

$
407.8

Earnings per share–basic
$
3.37

$
2.94

$
3.07

Earnings per share–diluted
$
3.34

$
2.91

$
3.04

See Notes to Consolidated Financial Statements.






 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended November 30 (millions)
2014
2013
2012
Net income
$
437.9

$
389.0

$
407.8

Net income attributable to non-controlling interest
2.5

1.3

1.9

Other comprehensive income (loss):
 
 
 
Unrealized components of pension and other postretirement plans
(89.0
)
235.6

(126.9
)
Currency translation adjustments
(134.1
)
(3.5
)
(15.5
)
Change in derivative financial instruments
5.7

11.8

(2.4
)
Deferred taxes
31.2

(87.1
)
43.0

Total other comprehensive income (loss)
(186.2
)
156.8

(101.8
)
 
 
 
 
Comprehensive income
$
254.2

$
547.1

$
307.9

See Notes to Consolidated Financial Statements.






CONSOLIDATED BALANCE SHEET
at November 30 (millions)
2014
2013
Assets
 
 
Cash and cash equivalents
$
77.3

$
63.0

Trade accounts receivable, less allowances of $4.0 for 2014 and $4.1 for 2013
493.6

495.5

Inventories
713.8

676.9

Prepaid expenses and other current assets
131.5

134.8

Total current assets
1,416.2

1,370.2

Property, plant and equipment, net
602.7

576.6

Goodwill
1,722.2

1,798.5

Intangible assets, net
330.8

333.4

Investments and other assets
342.4

371.0

Total assets
$
4,414.3

$
4,449.7

Liabilities
 
 
Short-term borrowings
$
269.6

$
211.6

Current portion of long-term debt
1.2

2.5

Trade accounts payable
372.1

387.3

Other accrued liabilities
479.1

461.7

Total current liabilities
1,122.0

1,063.1

Long-term debt
1,014.1

1,019.0

Other long-term liabilities
468.8

419.9

Total liabilities
2,604.9

2,502.0

Shareholders’ equity
 
 
Common stock, no par value; authorized 320.0 shares; issued and outstanding:
2014–12.0 shares, 2013–12.1 shares
367.2

352.8

Common stock non-voting, no par value; authorized 320.0 shares; issued and outstanding: 2014–116.4 shares, 2013–119.0 shares
628.4

609.6

Retained earnings
982.6

970.4

Accumulated other comprehensive loss
(186.0
)
(0.3
)
Non-controlling interests
17.2

15.2

Total shareholders’ equity
1,809.4

1,947.7

Total liabilities and shareholders’ equity
$
4,414.3

$
4,449.7

See Notes to Consolidated Financial Statements.





CONSOLIDATED CASH FLOW STATEMENT
for the year ended November 30 (millions)
2014
2013
2012
Operating activities
 
 
 
Net income
$
437.9

$
389.0

$
407.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
102.7

106.0

102.8

Stock-based compensation
18.2

18.7

20.2

Special charges
5.2

25.0


Loss on voluntary pension settlement

15.3


Loss on sale of assets
1.3

0.3

0.8

Deferred income taxes
6.1

(15.3
)
24.3

Income from unconsolidated operations
(29.4
)
(23.2
)
(21.5
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(16.4
)
(29.2
)
(38.8
)
Inventories
(54.4
)
(59.9
)
1.2

Trade accounts payable
(6.7
)
12.1

8.2

Other assets and liabilities
23.3

21.8

(65.6
)
Dividends received from unconsolidated affiliates
15.8

4.6

15.6

Net cash provided by operating activities
503.6

465.2

455.0

Investing activities
 
 
 
Acquisitions of businesses and joint venture interests

(142.3
)

Capital expenditures
(132.7
)
(99.9
)
(110.3
)
Proceeds from sale of property, plant and equipment
1.1

2.5

1.3

Net cash used in investing activities
(131.6
)
(239.7
)
(109.0
)
Financing activities
 
 
 
Short-term borrowings, net
57.7

71.9

(76.6
)
Long-term debt borrowings

246.2

0.8

Long-term debt repayments
(1.6
)
(251.4
)
(4.7
)
Proceeds from exercised stock options
31.7

44.7

53.1

Common stock acquired by purchase
(244.3
)
(177.4
)
(132.2
)
Dividends paid
(192.4
)
(179.9
)
(164.7
)
Net cash used in financing activities
(348.9
)
(245.9
)
(324.3
)
Effect of exchange rate changes on cash and cash equivalents
(8.8
)
4.4

3.4

Increase (decrease) in cash and cash equivalents
14.3

(16.0
)
25.1

Cash and cash equivalents at beginning of year
63.0

79.0

53.9

Cash and cash equivalents at end of year
$
77.3

$
63.0

$
79.0

See Notes to Consolidated Financial Statements.





CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(millions)
Common Stock Shares
Common Stock
Non-Voting Shares
Common Stock Amount
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Non-controlling Interests
Total Shareholders’ Equity
Balance, November 30, 2011
12.4

120.5

$
821.9

$
838.8

$
(59.0
)
$
16.8

$
1,618.5

 
 
 
 
 
 
 
 
Net income
 
 

407.8



407.8

Net income attributable to non-controlling interest
 
 



1.9

1.9

Other comprehensive loss, net of tax
 
 


(100.9
)
(0.9
)
(101.8
)
 
 
 
 
 
 
 
 
Dividends
 
 

(168.4
)


(168.4
)
Dividends attributable to non-controlling interest
 
 



(0.5
)
(0.5
)
Stock-based compensation
 
 
20.2




20.2

Shares purchased and retired
(0.6
)
(2.4
)
(25.5
)
(143.6
)


(169.1
)
Shares issued, including tax benefit of $13.3
2.0

0.6

91.6




91.6

Equal exchange
(1.4
)
1.4






Balance, November 30, 2012
12.4

120.1

$
908.2

$
934.6

$
(159.9
)
$
17.3

$
1,700.2

 
 
 
 
 
 
 
 
Net income
 
 

389.0



389.0

Net income attributable to non-controlling interest
 
 



1.3

1.3

Other comprehensive income (loss), net of tax
 
 


159.6

(2.8
)
156.8


 
 
 
 
 
 
 
Dividends
 
 

(183.3
)


(183.3
)
Dividends attributable to non-controlling interest
 
 



(0.6
)
(0.6
)
Stock-based compensation
 
 
18.7




18.7

Shares purchased and retired
(0.3
)
(2.5
)
(19.5
)
(169.9
)


(189.4
)
Shares issued, including tax benefit of $12.6
1.1

0.3

55.0




55.0

Equal exchange
(1.1
)
1.1











(millions)
Common Stock Shares
Common Stock
Non-Voting Shares
Common Stock Amount
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Non-controlling Interests
Total Shareholders’ Equity
Balance, November 30, 2013
12.1

119.0

$
962.4

$
970.4

$
(0.3
)
$
15.2

$
1,947.7

 
 
 
 
 
 
 
 
Net income
 
 

437.9



437.9

Net income attributable to non-controlling interest
 
 



2.5

2.5

Other comprehensive loss, net of tax
 
 


(185.7
)
(0.5
)
(186.2
)
 
 
 
 
 
 
 
 
Dividends
 
 

(195.2
)


(195.2
)
Stock-based compensation
 
 
18.2




18.2

Shares purchased and retired
(0.2
)
(3.5
)
(25.3
)
(230.5
)


(255.8
)
Shares issued, including tax benefit of $9.0
0.8

0.2

40.3




40.3

Equal exchange
(0.7
)
0.7






Balance, November 30, 2014
12.0

116.4

$
995.6

$
982.6

$
(186.0
)
$
17.2

$
1,809.4

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 the functional currency-are included in net earnings.

Our unconsolidated affiliates located outside the U.S. generally use their local currencies as their functional currencies. The asset and liability accounts of those unconsolidated affiliates, and our investment in the net assets of those unconsolidated affiliates, 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. Our income from these unconsolidated operations is translated at average monthly rates of exchange.
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 market. Cost is determined using standard or average costs which approximate the first-in, first-out costing method.
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 40 years for buildings and 3 to 12 years for machinery, equipment and computer software. Repairs and maintenance costs are expensed as incurred.
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. Software is amortized using the straight-line method over a range of 3 to 8 years, but not exceeding the expected life of the product. We capitalized $11.7 million of software development costs during the year ended November 30, 2014, $16.7 million during the year ended November 30, 2013 and $20.5 million during the year ended November 30, 2012.
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, then we would determine the implied fair value of the reporting unit’s goodwill. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value.
Indefinite-lived Intangible Asset Impairment
Our indefinite-lived intangible assets consist of brand names and trademarks. We calculate fair value by using a relief-from-royalty method or discounted cash flow model and then compare that to the carrying amount of the indefinite-lived intangible asset. 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 Fixed 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 is calculated based on estimated fair value.
Revenue Recognition
We recognize revenue when we have an agreement with the customer; upon either shipment or delivery, depending upon contractual terms; and when the sales price is fixed or determinable and collectability is reasonably assured. We reduce revenue for estimated product returns, allowances and price discounts based on historical experience and contractual terms.
Trade allowances, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Revenue is recorded net of trade allowances.
Trade accounts receivable are amounts billed and currently due from customers. We have an allowance for doubtful accounts to reduce our receivables to their net realizable value. We estimate the allowance for doubtful accounts based on the aging of our receivables and our history of collections.
Shipping and Handling
Shipping and handling costs on our products sold to customers are included in selling, general and administrative expense in the income statement. Shipping and handling expense was $100.3 million, $96.9 million and $94.8 million for 2014, 2013 and 2012, respectively.
Research and Development
Research and development costs are expensed as incurred and are included in selling, general and administrative expense in the income statement. Research and development expense was $62.0 million, $61.3 million and $57.8 million for 2014, 2013 and 2012, respectively.
Brand Marketing Support
Total brand marketing support costs, which are included in selling, general and administrative expense in the income statement, were $226.6 million, $207.8 million and $198.3 million for 2014, 2013 and 2012, respectively. Brand marketing support costs include advertising, promotions and customer trade funds used for cooperative advertising. Promotion costs include public relations, shopper marketing, social marketing activities, general consumer promotion activities and depreciation on 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 advertisement are expensed as incurred. Advertising expense was $100.4 million, $85.0 million and $86.2 million for 2014, 2013 and 2012, respectively.





Employee Benefit and Retirement Plans
We sponsor defined benefit pension plans in the U.S. and certain foreign locations. In addition, we sponsor defined contribution plans in the U.S. and contribute to government-sponsored retirement plans in locations outside the U.S. We also currently provide postretirement medical and life insurance benefits to certain U.S. employees. 
We recognize the overfunded or underfunded status of our defined benefit pension plans as an asset or a liability in the balance sheet, with changes in the funded status recorded through comprehensive income in the year in which those changes occur.
The expected return on plan assets is determined using the expected rate of return and a calculated value of plan assets referred to as the market-related value of plan assets. Differences between assumed and actual returns are amortized to the market-related value of assets on a straight-line basis over five years.
We use the corridor approach in the valuation of defined benefit pension plans. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. For defined benefit pension plans, these unrecognized gains and losses are amortized when the net gains and losses exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining service period to retirement date of active plan participants.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606). This guidance is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. It will be effective for our first quarter of 2018 and early adoption is not permitted. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is intended to provide disclosure on items reclassified out of accumulated other comprehensive income (loss) either in the notes or parenthetically on the face of the income statement. We adopted this new accounting pronouncement in 2014 and have included the necessary disclosures in note 9, Accumulated Other Comprehensive Loss. There was no impact on our financial statements from adoption, other than the additional disclosures.
2.  ACQUISITIONS
Acquisitions are part of our strategy to increase sales and profits.

On May 31, 2013, we completed the purchase of the assets of Wuhan Asia-Pacific Condiments Co. Ltd. (WAPC), a privately held company based in China, for $144.8 million, which included $142.3 million of cash paid, net of closing adjustments, and the assumption of $2.5 million of liabilities. The acquisition was financed with a combination of cash and debt. WAPC manufactures and markets DaQiao and ChuShiLe brand bouillon products, which have a leading position in the central region of China. WAPC is included in our consumer business segment from the date of acquisition. At the time of acquisition, annual sales of WAPC were approximately $122 million. During the second quarter of 2014, we completed the final valuation of the assets of WAPC which resulted in $26.9 million allocated to tangible net assets, $46.1 million allocated to other intangible assets and $71.8 million allocated to goodwill. The completion of the final valuation did not result in material changes to our consolidated income statement or our consolidated balance sheet from our preliminary purchase price allocation. Goodwill related to the WAPC acquisition is not deductible for tax purposes. During the years ended November 30, 2013 and 2012, we recorded $4.3 million and $1.7 million, respectively, in transaction-related expenses associated with the WAPC acquisition in selling, general and administrative expenses in our income statement.
Proforma financial information for the Wuhan acquisition has not been presented because the financial impact is not material.
3.  SPECIAL CHARGES

In the fourth quarter of 2013, we announced a reorganization in parts of the Europe, Middle East and Africa (EMEA) region to further improve EMEA’s profitability and process standardization while supporting its competitiveness and long-term growth. These actions include the closure of our current sales and distribution operations in The Netherlands, with the transition to a third-party distributor model to continue to sell the Silvo® brand, as well as




actions intended to streamline selling, general and administrative activities throughout EMEA, including the centralization of certain shared service activity across parts of the region into Poland.

In 2014, we recorded $2.1 million of charges associated with this previously announced EMEA reorganization, with $1.1 million related to employee severance and $1.0 million for other exit costs. For 2013, we recorded $25.0 million of charges related to this reorganization. For both years, these charges have been included on a separate line in the consolidated income statement. Of the $25.0 million of special charges recognized in 2013, $15.9 million related to employee severance, $6.4 million to asset write-downs, and $2.7 million to other exit costs.
These reorganization actions in the EMEA region are expected to generate annual cost savings of approximately $10 million when completed in 2015. Total cash expenditures for the EMEA reorganization were $10.7 million in 2014 and are expected to be approximately $10 million in 2015. Of the $2.1 million of special charges recognized with respect to this reorganization in 2014, all have been recorded in the consumer business segment. Of the $25.0 million of special charges recognized in 2013, $22.2 million were recorded in the consumer business segment and $2.8 million were recorded in the industrial business segment.
The $6.4 million asset write-down included in the $25.0 million special charge for 2013 relates to an impairment charge for the reduction in the value of our Silvo brand name in The Netherlands. Our decision to transition to a third-party distributor model to continue to sell the Silvo brand led us to conclude an impairment indicator to the Silvo brand was present. We calculated the fair value of the Silvo brand using the relief-from-royalty method and determined that it was lower than its carrying value. Consequently, we recorded a non-cash impairment charge of $6.4 million as part of the $22.2 million in special charges included in our consumer business segment during the fourth quarter of 2013. The carrying value of the Silvo brand name as of November 30, 2014 is not significant.
The following table outlines the major components of accrual balances relating to the special charges associated with this EMEA reorganization as of November 30, 2013 and November 30, 2014 (in millions):
 
Employee severance
 
Other exit costs
 
Total
Balance as of November 30, 2013
$
15.9

 
$
2.7

 
$
18.6

Special charges
1.1

 
1.0

 
2.1

Amounts utilized
(7.7
)
 
(3.0
)
 
(10.7
)
Balance as of November 30, 2014
$
9.3

 
$
0.7

 
$
10.0

In 2014, we continued to evaluate changes to our organizational structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness. In addition to the $2.1 million of special charges recognized in 2014 related to the previously announced EMEA reorganization, we also undertook reorganization actions in the U.S. and Australian businesses in 2014 and recognized an additional $3.1 million of special charges, consisting of the following: (1) During the third quarter of 2014, we recorded special charges in the amount of $1.3 million, principally related to employee severance, to realign certain manufacturing operations in the U.S. industrial business. Cash expenditures in 2014 associated with this action totaled $0.4 million. We expect that this action will be completed by 2015 and, upon completion, generate annual savings of approximately $2.3 million. (2) During the fourth quarter of 2014, we recorded special charges in the Australian business in the amount of $0.7 million, all related to the consumer segment business, consisting of employee severance and related expenses, to streamline costs through the elimination of certain manufacturing and administrative positions. Cash expenditures in 2014 associated with this reorganization totaled $0.2 million. We expect that this reorganization will be completed in 2015 and, upon completion, generate annual savings of approximately $0.8 million. (3) During the fourth quarter of 2014, we recorded special charges of $1.1 million, consisting of employee severance and related expenses, to eliminate certain administrative positions in the U.S. business. Of the $1.1 million in special charges, $0.9 million and $0.2 million related to the consumer business segment and industrial business segment, respectively. Cash expenditures in 2014 associated with this action totaled $0.2 million. We expect that this action will be completed in 2015 and, upon completion, generate annual savings of approximately $1.2 million.




4.  GOODWILL AND INTANGIBLE ASSETS
The following table displays intangible assets as of November 30, 2014 and 2013:
  
2014
2013
(millions)
Gross
carrying
amount
Accumulated
amortization
Gross
carrying
amount
Accumulated
amortization
Finite-lived intangible assets
$
94.7

$
34.7

$
93.9

$
30.2

Indefinite-lived intangible assets:
 
 
 
 
Goodwill
1,722.2

 
1,798.5

 
Brand names and trademarks
270.8

 
269.7

 
 
1,993.0

 

2,068.2

 

Total goodwill and intangible assets
$
2,087.7

$
34.7

$
2,162.1

$
30.2

Intangible asset amortization expense was $5.6 million, $5.2 million and $4.3 million for 2014, 2013 and 2012, respectively. At November 30, 2014, finite-lived intangible assets had a weighted-average remaining life of approximately 13 years.
The changes in the carrying amount of goodwill by segment for the years ended November 30, 2014 and 2013 were as follows:
  
2014
2013
(millions)
Consumer

Industrial
Consumer

Industrial
Beginning of year
$
1,654.7

$
143.8

$
1,551.0

$
144.3

Changes in purchase price allocation
(6.1
)



Goodwill acquired


77.9


Foreign currency fluctuations and other
(67.5
)
(2.7
)
25.8

(0.5
)
End of year
$
1,581.1

$
141.1

$
1,654.7

$
143.8

5.  INVESTMENTS IN AFFILIATES
Summarized annual and year-end information from the financial statements of unconsolidated affiliates representing 100% of the businesses follows:
(millions)
2014
2013
2012
Net sales
$
766.6

$
761.4

$
727.1

Gross profit
275.7

256.9

229.2

Net income
67.5

53.8

47.1

Current assets
$
320.1

$
288.9

$
274.4

Noncurrent assets
123.6

128.4

104.2

Current liabilities
137.2

141.0

129.9

Noncurrent liabilities
6.3

7.2

20.5

Our share of undistributed earnings of unconsolidated affiliates was $96.7 million at November 30, 2014. Royalty income from unconsolidated affiliates was $18.7 million, $18.4 million and $17.1 million for 2014, 2013 and 2012, respectively.
Our principal earnings from unconsolidated affiliates is from our 50% interest in McCormick de Mexico, S.A. de C.V. Profit from this joint venture represented 91% of income from unconsolidated operations in 2014, 78% in 2013 and 82% in 2012.





6.  FINANCING ARRANGEMENTS
Our outstanding debt was as follows at November 30:
(millions)
2014
2013
Short-term borrowings
 
 
Commercial paper
$
239.4

$
200.3

Other
30.2

11.3

 
$
269.6

$
211.6

Weighted-average interest rate of short-term borrowings at year-end
1.3
%
0.7
%
 
 
 
Long-term debt
 
 
5.20% notes due 12/15/2015(1)
$
200.0

$
200.0

5.75% notes due 12/15/2017(2)
250.0

250.0

3.90% notes due 7/8/2021(3)
250.0

250.0

3.50% notes due 8/19/2023(4)
250.0

250.0

7.63%–8.12% notes due 2024
55.0

55.0

Other
8.5

10.8

Unamortized discounts and fair value adjustments
1.8

5.7

 
1,015.3

1,021.5

Less current portion
1.2

2.5

 
$
1,014.1

$
1,019.0


(1)
The fixed interest rate on $100 million of the 5.20% notes due in 2015 is effectively converted to a variable rate by interest rate swaps through 2015. Net interest payments are based on 3 month LIBOR minus 0.05% during this period (our effective rate as of November 30, 2014 was 0.19%).
(2)
Interest rate swaps, settled upon the issuance of these notes in 2007, effectively fixed the interest rate on the $250 million notes at a weighted-average fixed rate of 6.25%.
(3)
Interest rate swaps, settled upon the issuance of these notes in 2011, effectively fixed the interest rate on the $250 million notes at a weighted-average fixed rate of 4.01%.
(4)
Interest rate swaps, settled upon the issuance of these notes in 2013, effectively fixed the interest rate on the $250 million notes at a weighted-average fixed rate of 3.30%.
Maturities of long-term debt during the fiscal years subsequent to November 30, 2014 are as follows (in millions):
2016
$
200.6

2017
0.7

2018
250.7

2019
0.8

Thereafter
559.5

In August 2013, we issued $250 million of 3.50% notes due 2023, with net cash proceeds received of $246.2 million. Interest is payable semiannually in arrears in March and September of each year. Of these notes, $175 million were subject to interest rate hedges as further disclosed in note 7. The net proceeds from this offering, plus cash on hand, were used to pay off $250 million of 5.25% notes that matured in September 2013.
We have available credit facilities with domestic and foreign banks for various purposes. Some of these lines are committed lines and others are uncommitted lines and could be withdrawn at various times. In June 2011, we entered into a five-year $600 million revolving credit facility, which will expire in June 2016. The pricing for this credit facility, on a fully drawn basis, is LIBOR plus 0.875%. This credit facility supports our commercial paper program and we have $360.6 million of capacity at November 30, 2014, after $239.4 million was used to support issued commercial paper. In addition, we have several uncommitted lines which have a total unused capacity at November 30, 2014 of $125.4 million. These lines by their nature can be withdrawn based on the lenders’ discretion. Committed credit facilities require a fee, and annual commitment fees were $0.5 million for 2014 and 2013.





Rental expense under operating leases (primarily buildings and equipment) was $40.3 million in 2014, $37.6 million in 2013 and $32.7 million in 2012. Future annual fixed rental payments for the years ending November 30 are as follows (in millions):
2015
$
23.4

2016
17.6

2017
13.9

2018
11.3

2019
8.5

Thereafter
17.6

At November 30, 2014, we had guarantees outstanding of $0.6 million with terms of one year or less. At November 30, 2014 and 2013, we had outstanding letters of credit of $8.1 million and $61.9 million, respectively. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The unused portion of our letter of credit facility was $12.9 million at November 30, 2014.
7.  FINANCIAL INSTRUMENTS
We use derivative financial instruments to enhance our ability to manage risk, including foreign currency and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.
Foreign Currency
We are potentially exposed to foreign currency fluctuations affecting net investments, transactions and earnings denominated in foreign currencies. We selectively hedge the potential effect of these foreign currency fluctuations by entering into foreign currency exchange contracts with highly-rated financial institutions.
Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts which are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.
At November 30, 2014, we had foreign currency exchange contracts to purchase or sell $262.7 million of foreign currencies versus $204.9 million at November 30, 2013. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material. At November 30, 2014, we had $127.1 million of notional contracts that have durations of less than seven days that are used to hedge short-term cash flow funding. The remaining contracts have durations of one to twelve months.
Interest Rates
We finance a portion of our operations with both fixed and variable rate debt instruments, primarily commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.
In November 2012 and in April and August 2013, we entered into a total of $175 million of forward-starting interest rate swap and Treasury rate lock agreements to manage our interest rate risk associated with the anticipated issuance of fixed rate notes in August 2013. We cash settled all of these agreements, which were designated as cash flow hedges, for a gain of $9.0 million simultaneous with the issuance of the notes at an all-in effective fixed rate of 3.30% on the full $250 million of debt. The gain on these agreements is deferred in accumulated other comprehensive income and will be amortized to reduce interest expense over the life of the notes. Hedge ineffectiveness of these agreements was not material.





In March 2006, we entered into interest rate swap contracts for a total notional amount of $100 million to receive interest at 5.20% and pay a variable rate of interest based on three-month LIBOR minus 0.05%. We designated these swaps, which expire in December 2015, as fair value hedges of the changes in fair value of $100 million of the $200 million 5.20% medium-term notes due 2015 that we issued in December 2005. Any unrealized gain or loss on these swaps will be offset by a corresponding increase or decrease in the value of the hedged debt. No hedge ineffectiveness is recognized as the interest rate swaps qualify for the “shortcut” treatment as defined under U.S. Generally Accepted Accounting Principles.
 
The following tables disclose the derivative instruments on our balance sheet as of November 30, 2014 and 2013, which are all recorded at fair value:
As of
November 30, 2014:
 
 
 
 
 
 
(millions)
Asset Derivatives
Liability Derivatives
Derivatives
Balance sheet
location
Notional amount
Fair value
Balance sheet
location
Notional amount
Fair value
Interest rate contracts
Other current 
assets
$
100.0

$
7.4

Other accrued liabilities


Foreign exchange contracts
Other current assets
106.3

4.9

Other accrued liabilities
$
156.4

$
1.4

Total
 
 
$
12.3

 
 
$
1.4

As of
November 30, 2013:
 
 
 
 
 
 
(millions)
Asset Derivatives
Liability Derivatives
Derivatives
Balance sheet
location
Notional amount
Fair value
Balance sheet
location
Notional amount
Fair value
Interest rate contracts
Other current 
assets
$
100.0

$
12.2

Other accrued liabilities


Foreign exchange contracts
Other current assets
79.2

1.1

Other accrued liabilities
$
125.7

$
1.6

Total
 
 
$
13.3

 
 
$
1.6

The following tables disclose the impact of derivative instruments on other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the years ended November 30, 2014, 2013 and 2012:
Fair value hedges (millions)
 
Income statement
location
Income (expense)
Derivative
2014
2013
2012
Interest rate contracts
Interest expense
$
5.0

$
5.0

$
4.7

 
Cash flow hedges (millions)
 
Gain (loss)
recognized in OCI
Income statement location      
Gain (loss)
  reclassified from AOCI   
Derivative
2014
2013
2012
2014
2013
2012
Interest rate contracts

$
9.2

$
(0.1
)
Interest expense      
$
(0.2
)
$
(1.3
)
$
(1.4
)
Foreign exchange contracts
$
4.2

1.0

(2.4
)
Cost of goods sold      
(1.1
)
0.3

0.6

Total
$
4.2

$
10.2

$
(2.5
)
 
$
(1.3
)
$
(1.0
)
$
(0.8
)
The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The net amount of other comprehensive income expected to be reclassified into income related to these contracts in the next twelve months is a $4.3 million increase to earnings.





Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments at November 30, 2014 and 2013 were as follows:
  
2014
2013
(millions)
Carrying
amount
Fair
value
Carrying
amount
Fair
value
Long-term investments
$
113.0

$
113.0

$
103.4

$
103.4

Long-term debt
1,015.3

1,109.0

1,021.5

1,102.4

Derivatives related to:
 
 
 
 
Interest rates (assets)
7.4

7.4

12.2

12.2

Foreign currency (assets)
4.9

4.9

1.1

1.1

Foreign currency (liabilities)
1.4

1.4

1.6

1.6

Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivabl