Edgar Filing: MCCORMICK & CO INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended May 31, 2016

Commission File Number 001-14920

McCORMICK & COMPANY, INCORPORATED

(Exact name of registrant as specified in its charter)



MARYLAND	52-0408290
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



18 Loveton Circle, P. O. Box 6000, Sparks, MD	21152-6000
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (410) 771-7301

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 filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨	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 x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



		Shares Outstanding
		May 31, 2016
	Common Stock	11,606,355
	Common Stock Non-Voting	115,044,381

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION			3

	ITEM 1	FINANCIAL STATEMENTS	3

	ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38

	ITEM 4	CONTROLS AND PROCEDURES	38

PART II - OTHER INFORMATION			40

	ITEM 1	LEGAL PROCEEDINGS	40

	ITEM 1a	RISK FACTORS	40

	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40

	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	40

	ITEM 4	MINE SAFETY DISCLOSURES	40

	ITEM 5	OTHER INFORMATION	42

	ITEM 6	EXHIBITS	42

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PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

(in millions except per share amounts)



	Three months ended May 31,				Six months ended May 31,
	2016		2015		2016		2015
Net sales	$	1,063.3	$	1,024.1	$	2,093.5	$	2,034.5
Cost of goods sold	630.5		620.1		1,255.7		1,240.8
Gross profit	432.8		404.0		837.8		793.7
Selling, general and administrative expense	303.9		281.2		578.2		548.8
Special charges	3.9		19.0		5.5		47.4
Operating income	125.0		103.8		254.1		197.5
Interest expense	13.7		13.0		27.6		25.9
Other income, net	0.7		0.6		1.8		0.4
Income from consolidated operations before income taxes	112.0		91.4		228.3		172.0
Income taxes	25.9		14.5		57.2		34.5
Net income from consolidated operations	86.1		76.9		171.1		137.5
Income from unconsolidated operations	7.7		7.4		16.1		17.3
Net income	$	93.8	$	84.3	$	187.2	$	154.8
Earnings per share – basic	$	0.74	$	0.66	$	1.47	$	1.21
Average shares outstanding – basic	126.9		127.9		127.0		128.1
Earnings per share – diluted	$	0.73	$	0.65	$	1.46	$	1.20
Average shares outstanding – diluted	128.3		129.0		128.3		129.2
Cash dividends paid per share	$	0.43	$	0.40	$	0.86	$	0.80
Cash dividends declared per share	$	0.43	$	0.40	$	0.43	$	0.40

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)



	Three months ended May 31,						Six months ended May 31,
	2016			2015			2016			2015
Net income	$	93.8		$	84.3		$	187.2		$	154.8
Net income attributable to non-controlling interest	—			1.2			0.7			2.4
Other comprehensive income (loss):
Unrealized components of pension plans	1.8			6.2			9.5			15.8
Currency translation adjustments	38.2			(13.4		)	13.0			(150.6		)
Change in derivative financial instruments	(3.2		)	(0.7		)	(1.6		)	0.5
Deferred taxes	(0.8		)	(1.9		)	(2.5		)	(4.4		)
Comprehensive income	$	129.8		$	75.7		$	206.3		$	18.5

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)



	May 31, 2016			May 31, 2015			November 30, 2015
	(unaudited)			(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	131.5		$	89.5		$	112.6
Trade accounts receivables, net	399.6			390.6			455.2
Inventories, net
Finished products	343.8			323.8			319.9
Raw materials and work-in-process	395.8			414.7			390.9
	739.6			738.5			710.8
Prepaid expenses and other current assets	131.5			140.3			127.9
Total current assets	1,402.2			1,358.9			1,406.5
Property, plant and equipment	1,589.8			1,486.2			1,531.3
Less: accumulated depreciation	(952.7		)	(896.1		)	(912.9		)
Property, plant and equipment, net	637.1			590.1			618.4
Goodwill	1,837.1			1,719.8			1,759.3
Intangible assets, net	410.2			364.6			372.1
Investments and other assets	357.7			345.0			351.5
Total assets	$	4,644.3		$	4,378.4		$	4,507.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings	$	513.1		$	416.7		$	139.5
Current portion of long-term debt	0.6			205.9			203.5
Trade accounts payable	366.2			337.8			411.9
Other accrued liabilities	390.8			378.4			485.3
Total current liabilities	1,270.7			1,338.8			1,240.2
Long-term debt	1,055.2			807.9			1,052.7
Other long-term liabilities	544.9			496.4			528.0
Total liabilities	2,870.8			2,643.1			2,820.9
Shareholders’ Equity
Common stock	402.1			378.0			384.5
Common stock non-voting	672.3			641.6			655.1
Retained earnings	1,069.8			1,020.4			1,036.7
Accumulated other comprehensive loss	(387.7		)	(324.7		)	(406.1		)
Non-controlling interests	17.0			20.0			16.7
Total shareholders’ equity	1,773.5			1,735.3			1,686.9
Total liabilities and shareholders’ equity	$	4,644.3		$	4,378.4		$	4,507.8

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

(in millions)



	Six months ended May 31,
	2016			2015
Operating activities
Net income	$	187.2		$	154.8
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation and amortization	53.0			52.5
Stock-based compensation	15.8			13.9
Income from unconsolidated operations	(16.1		)	(17.3		)
Changes in operating assets and liabilities	(43.7		)	(35.2		)
Dividends from unconsolidated affiliates	16.5			17.2
Net cash flow provided by operating activities	212.7			185.9
Investing activities
Acquisition of businesses (net of cash acquired)	(118.1		)	(111.5		)
Capital expenditures	(54.8		)	(42.7		)
Proceeds from sale of property, plant and equipment	1.5			0.1
Net cash flow used in investing activities	(171.4		)	(154.1		)
Financing activities
Short-term borrowings, net	373.8			148.2
Long-term debt repayments	(201.8		)	(0.3		)
Proceeds from exercised stock options	21.9			14.2
Common stock acquired by purchase	(100.8		)	(69.9		)
Dividends paid	(109.3		)	(102.5		)
Net cash flow used in financing activities	(16.2		)	(10.3		)
Effect of exchange rate changes on cash and cash equivalents	(6.2		)	(9.3		)
Increase in cash and cash equivalents	18.9			12.2
Cash and cash equivalents at beginning of period	112.6			77.3
Cash and cash equivalents at end of period	$	131.5		$	89.5

See notes to condensed consolidated financial statements (unaudited).

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McCORMICK & COMPANY, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented.

The results of consolidated operations for the three and six month periods ended May 31, 2016 are not necessarily indicative of the results to be expected for the full year. Historically, our net sales, net income and cash flow from operations are lower in the first half of the fiscal year and increase in the second half. The typical increase in net sales, net income and cash flow from operations in the second half of the year is largely due to the consumer business cycle in the U.S., where customers typically purchase more products in the fourth quarter due to the Thanksgiving and Christmas holiday seasons.

For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended November 30, 2015.

Recently Issued Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2018. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842). This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2020. Early adoption is permitted for all entities. We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.

In May 2014, the 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. The new standard will be effective for the first quarter of our fiscal year ending November 30, 2019. Early adoption is permitted for all entities, but not before the original effective date for public business entities (i.e., annual reporting periods beginning after December 15, 2016 or our fiscal year ending November 30, 2018). We have not yet determined the impact from adoption of this new accounting pronouncement on our financial statements.

For other recently issued accounting pronouncements that we have not yet adopted, see note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2015.

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2.	ACQUISITIONS

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

On April 19, 2016, we completed the purchase of 100% of the shares of Botanical Food Company, Pty Ltd, owner of the Gourmet Garden brand of packaged herbs (Gourmet Garden), a privately held company based in Australia. Gourmet Garden is a global market leader in chilled convenient packaged herbs. Gourmet Garden's closer-to-fresh products complement our existing branded herb portfolio with the addition of chilled convenient herbs located in the perimeter of the grocery store. We plan to drive sales of the Gourmet Garden brand by expanding global distribution and building awareness with increased brand investment. At the time of acquisition, annual sales of Gourmet Garden were approximately 70 million Australian dollars. The purchase price was $118.1 million, subject to certain closing adjustments, and was financed with a combination of cash and short-term borrowings. As of the acquisition date, a preliminary valuation of the acquired net assets of Gourmet Garden resulted in $20.4 million allocated to net tangible assets acquired, $20.3 million allocated to indefinite lived brand asset, $14.2 million allocated to definite lived intangible assets with a weighted-average life of 12.0 years and $63.2 million allocated to goodwill. Goodwill related to the Gourmet Garden acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumers for herbs, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The preliminary valuation, based on a comparison of acquisitions of similar consumer businesses, provided average percentages of purchase prices assigned to goodwill and other identifiable intangible assets, which we used to initially value the Gourmet Garden acquisition. We expect to finalize the determination of the fair value of the acquired net assets of Gourmet Garden in the first half of 2017. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has an industrial component, the industrial component is not currently material to its overall business. During the three and six months ended May 31, 2016, we recorded $2.4 million and $3.0 million, respectively, in transaction-related expenses associated with this acquisition. Due to the estimated impact of financing, acquisition and integration costs, we do not expect operating income contribution of Gourmet Garden to be significant to our overall results for 2016.

On August 20, 2015, we completed the purchase of 100% of the shares of One World Foods, Inc., owner of the Stubb's brand of barbeque products (Stubb's), a privately held company located in Austin, Texas. Stubb's is the leading premium barbeque sauce brand in the U.S. In addition to sauces, Stubb's products include marinades, rubs and skillet sauces. Its addition will expand the breadth of value-added products in our consumer segment. At the time of acquisition, annual sales of Stubb's were approximately $30 million. The purchase price for Stubb's was $99.4 million, subject to certain closing adjustments, and was financed with a combination of cash and short-term borrowings. As of the acquisition date, a preliminary valuation of the acquired net assets of Stubb's resulted in $5.4 million allocated to tangible assets acquired (less $12.4 million allocated to liabilities assumed), $13.3 million allocated to indefinite lived brand asset, $12.5 million allocated to definite lived intangible assets with a weighted-average life of 14.3 years and $80.6 million allocated to goodwill. Goodwill related to the Stubb's acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumers for unique and authentic barbeque and grilling flavors, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The preliminary valuation, based on a comparison of acquisitions of similar consumer businesses, provided average percentages of purchase prices assigned to goodwill and other identifiable intangible assets, which we used to initially value the Stubb's acquisition. We expect to finalize the determination of the fair value of the acquired net assets of Stubb's during the third quarter 2016. Stubb's has been included in our consumer segment since its acquisition.

On May 29, 2015, we completed the purchase of 100% of the shares of Drogheria & Alimentari (D&A), a privately held company based in Italy, and a leader of the spice and seasoning category in Italy that supplies both branded and private label products to consumers. The purchase price for D&A consisted of a cash payment of $49.0 million, net of cash acquired of $2.8 million, at the time of acquisition, subject to certain closing adjustments, and was financed with a combination of cash and short-term borrowings. In addition, the purchase agreement calls for a potential earn out payment in 2018 of up to €35 million, based upon the performance of the acquired business in 2017. This potential earn out payment had an acquisition-date fair value of $27.7 million (or approximately €25 million), based on estimates of projected performance in 2017, payable in fiscal 2018, and discounted using a probability-weighted approach. At the time of the acquisition, annual sales of D&A were approximately €50 million. As of May 31, 2016, we completed the final valuation of the D&A acquisition, which resulted in $3.2 million allocated to tangible net assets, $12.6 million allocated to indefinite lived brand assets, $19.8 million allocated to definite lived intangible assets with a weighted-average life of 13.8 years and $41.1 million allocated to goodwill. Goodwill related to the D&A acquisition, which is not deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our customer insights in demand

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from consumers for unique and authentic ethnic flavors and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The completion of the final valuation did not result in material changes to our consolidated income statement or consolidated balance sheet from our preliminary purchase price allocation. D&A has been included in our consumer segment since its acquisition.

On March 9, 2015, we acquired 100% of the shares of Brand Aromatics, a privately held company located in the U.S. Brand Aromatics is a supplier of natural savory flavors, marinades, and broth and stock concentrates to the packaged food industry. Its addition expands the breadth of value-added products in our industrial segment. The purchase price for Brand Aromatics was $62.4 million, net of post-closing adjustments and was financed with a combination of cash and short-term borrowings. At the time of acquisition, annual sales of Brand Aromatics were approximately $30 million. As of November 30, 2015, we completed the final valuation of the Brand Aromatics acquisition, which resulted in $5.2 million allocated to tangible net assets, $4.2 million allocated to a brand name indefinite lived intangible asset, $18.7 million allocated to definite lived intangible assets with a weighted average life of 11.9 years, and $34.3 million allocated to goodwill. Goodwill related to the Brand Aromatics acquisition, which will be deductible for tax purposes, primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging the customer intimacy and value-added flavor solutions we provide to our industrial customers to Brand Aromatics’ relationships with industrial customers of their stocks, marinades and other savory flavors, as well as from expected synergies from the combined operations and assembled workforces, and the future development initiatives of the assembled workforces. 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. Brand Aromatics has been included in our industrial segment since its acquisition.

For the second quarter of 2016, Gourmet Garden, Stubb's and D&A added $7.4 million, $9.4 million and $17.2 million, respectively, to our sales. Gourmet Garden, Stubb's and D&A added $7.4 million, $14.7 million and $31.8 million, respectively, to our sales in the six months ended May 31, 2016. Incremental sales of Brand Aromatics in the six months ended May 31, 2016 were $7.2 million, representing sales of the business in the first quarter of 2016. Due to financing, acquisition and integration costs, the aggregate incremental operating income contributed by Gourmet Garden, Stubb's, D&A and Brand Aromatics was not significant to our overall results for the three and six months ended May 31, 2016. Proforma financial information for these acquisitions has not been presented because the financial impact is not material.

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3.	SPECIAL CHARGES

We continue to evaluate changes to our organization structure to enable us to reduce fixed costs, simplify or improve processes, and improve our competitiveness.

In our consolidated income statement, we include a separate line item captioned “special charges” in arriving at our consolidated operating income. Special charges consist of expenses associated with certain actions undertaken by the Company to reduce fixed costs, simplify or improve processes, and improve our competitiveness and are of such significance in terms of both up-front costs and organizational/structural impact to require advance approval by our Management Committee, comprised of our senior management, including our President and Chief Executive Officer. Upon presentation of any such proposed action (generally including details with respect to estimated costs, which typically consist principally of employee severance and related benefits, together with ancillary costs associated with the action that may include a non-cash component or a component which relates to inventory adjustments that are included in cost of goods sold; impacted employees or operations; expected timing; and expected savings) to the Management Committee and the Committee’s advance approval, expenses associated with the approved action are classified as special charges upon recognition and monitored on an on-going basis through completion.

During the three months ended May 31, 2016, we recorded $3.9 million of special charges, consisting of $2.0 million related to additional organization and streamlining actions associated with our consumer business in our Europe, Middle East and Africa (EMEA) region, $1.5 million for additional organization and streamlining actions associated with our North America effectiveness initiative and $0.4 million for other exit costs related to the discontinuance of Kohinoor's non-profitable bulk-packaged and broken basmati rice product lines, all of which were initiated in 2015 and are described more fully below. During the six months ended May 31, 2016, we recorded $5.5 million of special charges, consisting of $3.1 million related to other exit costs associated with actions undertaken to enhance organization efficiency and streamline processes in our EMEA region, $1.7 million for employee severance and related costs associated with our North America effectiveness initiative and $0.7 million for other exit costs related to the discontinuance of Kohinoor's non-profitable bulk-packaged and broken basmati rice product lines.

During the three months ended May 31, 2015, we recorded $19.0 million of special charges, consisting of $1.9 million related to employee severance and related costs associated with our North American effectiveness initiative and $17.9 million consisting of severance and related costs and $1.1 million for non-cash fixed asset impairment associated with our EMEA reorganization initiated in 2015. During the six months ended May 31, 2015, we recorded $47.4 million of special charges, consisting of $26.4 million related to employee severance and related costs associated with our North American effectiveness initiative and $22.9 million consisting of severance and related costs associated with our EMEA reorganization initiated in 2015. During the three and six months ended May 31, 2015, we reversed $1.9 million of reserves previously accrued as part of the EMEA reorganization plan undertaken in 2013 and 2014, principally as a result of a decision by EMEA management that employee attrition, which occurred and was expected to continue, obviated the need for certain accrued employee severance and related benefits.

The following is a breakdown of special charges by business segments for the three and six months ended May 31, 2016 and 2015 (in millions):



	Three months ended May 31,				Six months ended May 31,
	2016		2015		2016		2015
Consumer segment	$	3.5	$	15.7	$	4.8	$	34.9
Industrial segment	0.4		3.3		0.7		12.5
Total special charges	$	3.9	$	19.0	$	5.5	$	47.4

All balances associated with our special charges are included in other accrued liabilities in our consolidated balance sheet.

In January 2015, we offered a voluntary retirement plan, which included enhanced separation benefits but did not include supplementary pension benefits, to certain U.S. employees aged 55 years or older with at least ten years of service to the Company. Upon our receipt of notification from participants that they accepted this plan, which closed early in 2015, we accrued special charges of $24.5 million during the first quarter of 2015 (and an additional $1.9 million in the second quarter of 2015), consisting primarily of employee severance and related costs that were largely paid in 2015 as substantially all of the affected employees left the company in 2015. The voluntary retirement plan is part of our North American effectiveness initiative.

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Our North American effectiveness initiative generated cost savings of approximately $15 million in 2015 and is expected to generate annual cost savings with a full year impact of approximately $27 million beginning in 2016. The following table outlines the major components of accrual balances and activity relating to the special charges associated with our North American effectiveness initiative for the six months ended May 31, 2016 and 2015 (in millions):



	Employee severance and related benefits			Other related costs			Total
Balance as of November 30, 2015	$	2.3		$	—		$	2.3
Special charges	1.6			0.1			1.7
Cash paid	(2.4		)	(0.1		)	(2.5		)
Balance as of May 31, 2016	$	1.5		$	—		$	1.5

Balance as of November 30, 2014	$	—		$	—		$	—
Special charges	25.4			1.0			26.4
Cash paid	(19.5		)	(0.7		)	(20.2		)
Balance as of May 31, 2015	$	5.9		$	0.3		$	6.2

In the three and six months ended May 31, 2015, we recorded special charges of $19.0 million and $22.9 million, respectively, to undertake actions, principally consisting of severance and related costs, to change our organization structure to further reduce selling, general and administrative expenses throughout EMEA. For the second half of 2015, additional projects were identified in the EMEA region to further enhance organization efficiency and streamline processes in this region to support its competitiveness and long-term growth. These initiatives center on actions intended to reduce fixed costs and improve business processes, as well as continue to drive simplification across the business and supply chain. These actions include the transfer of certain additional activities to the recently established McCormick Shared Services Center in Lodz, Poland. Further actions were approved in the second quarter of 2016. In total, we recorded $24.4 million of special charges for fiscal year 2015 associated with our EMEA reorganization plans undertaken during that year. In addition to the $2.0 million and $3.1 million of special charges recorded for the three and six months ended May 31, 2016, we expect to record additional special charges in 2016 of approximately $3.7 million, for future actions approved under these EMEA reorganization and streamlining initiatives, which will be settled in cash and reflected in special charges upon recognition in 2016. Related annual cost savings are projected to be approximately $4 million in 2016 and $22 million by the end of 2017.

The following table outlines the major components of accrual balances and activity relating to the special charges associated with the EMEA reorganization plans described above for the six months ended May 31, 2016 and 2015 (in millions):



	Employee severance and related benefits			Other related costs			Total
Balance as of November 30, 2015	$	16.2		$	0.6		$	16.8
Special charges	1.3			1.8			3.1
Cash paid	(3.8		)	(1.9		)	(5.7		)
Impact of foreign exchange	0.6			—			0.6
Balance as of May 31, 2016	$	14.3		$	0.5		$	14.8

Balance as of November 30, 2014	$	—		$	—		$	—
Special charges	21.4			1.5			22.9
Cash paid	(1.9		)	—			(1.9		)
Impairment of fixed assets	—			(1.1		)	(1.1		)
Impact of foreign exchange	(0.1		)	—			(0.1		)
Balance as of May 31, 2015	$	19.4		$	0.4		$	19.8

In the second half of 2015, we recorded special charges related to initiatives to improve the profitability of our Kohinoor consumer business in India. This action principally related to the discontinuance of Kohinoor’s non-profitable bulk-package and broken basmati rice product lines and other ancillary activities to enable the business to focus on both its existing

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consumer-packaged basmati product lines and the launch of consumer-packaged seasonings under the Kohinoor brand name. In addition to the special charges recognized in the second half of 2015, which are more fully described in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended November 30, 2015, future actions approved with respect to Kohinoor’s plan to improve its profitability consisted of costs associated with exiting certain contractual arrangements and other costs directly related to the plan, of which $0.4 million and $0.7 million were recognized for the three and six months ended May 31, 2016, respectively. The estimated cost of future actions, which will be reflected in special charges upon recognition (expected later in 2016), range from approximately $0.7 million to $2.7 million.

In late 2013, we announced a reorganization in parts of the EMEA region to further improve EMEA’s profitability and process standardization while supporting its competitiveness and long-term growth. These actions included the closure of our 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 reduce selling, general and administrative activities throughout EMEA, including the centralization of shared service activity across the region into Poland. In fiscal years 2013 and 2014, we recorded a total of $27.1 million of cash and non-cash charges related to this reorganization.

The following table outlines the major components of accrual balances and activity relating to the special charges associated with the EMEA reorganization plan undertaken in 2013 and 2014 for the six months ended May 31, 2016 and 2015 (in millions):



	Employee severance and related benefits			Other related costs			Total
Balance as of November 30, 2015	$	2.3		$	—		$	2.3
Cash paid	(1.2		)	—			(1.2		)
Impact of foreign exchange	0.1			—			0.1
Balance as of May 31, 2016	$	1.2		$	—		$	1.2

Balance as of November 30, 2014	$	9.3		$	0.7		$	10.0
Cash paid	(2.4		)	(0.6		)	(3.0		)
Impact of foreign exchange	(1.6		)	(0.1		)	(1.7		)
Reversal into income (special charges)	(1.9		)	—			(1.9		)
Balance as of May 31, 2015	$	3.4		$	—		$	3.4

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4.	GOODWILL

The changes in the carrying amount of goodwill by segment for the six months ended May 31, 2016 and 2015 were as follows (in millions):



	2016						2015
	Consumer			Industrial			Consumer			Industrial
Beginning of year	$	1,587.7		$	171.6		$	1,581.1		$	141.1
Changes in preliminary purchase price allocation	(4.2		)	—			—			—
Increases in goodwill from acquisitions	63.2			—			45.2			37.9
Foreign currency fluctuations	20.3			(1.5		)	(83.5		)	(2.0		)
Balance as of end of May	$	1,667.0		$	170.1		$	1,542.8		$	177.0


5.	FINANCING ARRANGEMENTS AND 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 instruments. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.

As of May 31, 2016, the maximum time frame for our foreign exchange forward contracts is 16 months.

For all derivatives, the net amount of accumulated other comprehensive income expected to be reclassified in the next 12 months is $1.9 million as an increase to earnings.

All derivatives are recognized at fair value in the balance sheet and recorded in either current or noncurrent other assets or other accrued liabilities or other long-term liabilities depending upon their nature and maturity.

The following table discloses the fair values of derivative instruments on our balance sheet (in millions):

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As of May 31, 2016	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Notional Amount		Fair Value		Balance Sheet Location	Notional Amount		Fair Value
Interest rate contracts	Other current assets	$	100.0	$	3.0
Foreign exchange contracts	Other current assets	155.2		3.7		Other accrued liabilities	$	72.4	$	1.5
Total				$	6.7				$	1.5

As of May 31, 2015	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Notional Amount		Fair Value		Balance Sheet Location	Notional Amount		Fair Value
Interest rate contracts	Other current assets	$	150.0	$	5.9
Foreign exchange contracts	Other current assets	174.5		6.0		Other accrued liabilities	$	34.8	$	2.1
Total				$	11.9				$	2.1

As of November 30, 2015	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Notional Amount		Fair Value		Balance Sheet Location	Notional Amount		Fair Value
Interest rate contracts	Other current assets	$	100.0	$	2.5	Other accrued liabilities	$	100.0	$	0.6
Foreign exchange contracts	Other current assets	179.5		3.4		Other accrued liabilities	85.0		0.7
Total				$	5.9				$	1.3

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The following tables disclose the impact of derivative instruments on our other comprehensive income (OCI), accumulated other comprehensive income (AOCI) and our income statement for the three and six month periods ended May 31, 2016 and 2015 (in millions):



Fair Value Hedges
Derivative	Income statement location	Income (expense)
		Three months ended May 31, 2016		Three months ended May 31, 2015		Six months ended May 31, 2016		Six months ended May 31, 2015
Interest rate contracts	Interest expense	$	0.3	$	1.3	$	0.9	$	2.5



Cash Flow Hedges –
For the three months ended May 31,
Derivative	Gain or (Loss) recognized in OCI					Income statement location	Gain or (Loss) reclassified from AOCI
	2016			2015			2016			2015
Interest rate contracts	$	—		$	1.0	Interest expense	$	—		$	(0.1	)
Foreign exchange contracts	(2.2		)	0.1		Cost of goods sold	1.8			2.2
Total	$	(2.2	)	$	1.1		$	1.8		$	2.1

Cash Flow Hedges –
For the six months ended May 31,
Derivative	Gain or (Loss) recognized in OCI					Income statement location	Gain or (Loss) reclassified from AOCI
	2016			2015			2016			2015
Interest rate contracts	$	—		$	1.0	Interest expense	$	(0.1	)	$	(0.1	)
Foreign exchange contracts	(0.1		)	3.1		Cost of goods sold	3.1			3.3
Total	$	(0.1	)	$	4.1		$	3.0		$	3.2

The amount of gain or loss recognized in income on the ineffective portion of derivative instruments is not material. The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.


6.	FAIR VALUE MEASUREMENTS

Fair value can be measured using valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


•	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

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Our population of financial assets and liabilities subject to fair value measurements on a recurring basis are as follows (in millions):



			May 31, 2016
	Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	131.5	$	131.5	$	—	$	—
Insurance contracts	103.4		—		103.4		—
Bonds and other long-term investments	9.5		9.5		—		—
Interest rate derivatives	3.0		—		3.0		—
Foreign currency derivatives	3.7		—		3.7		—
Total	$	251.1	$	141.0	$	110.1	$	—
Liabilities
Foreign currency derivatives	$	1.5	$	—	$	1.5	$	—
Contingent consideration related to D&A acquisition	29.6		—		—		29.6
Total	$	31.1	$	—	$	1.5	$	29.6



			May 31, 2015
	Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	89.5	$	89.5	$	—	$	—
Insurance contracts	107.1		—		107.1		—
Bonds and other long-term investments	7.9		7.9		—		—
Interest rate derivatives	5.9		—		5.9		—
Foreign currency derivatives	6.0		—		6.0		—
Total	$	216.4	$	97.4	$	119.0	$	—
Liabilities
Foreign currency derivatives	$	2.1	$	—	$	2.1	$	—
Contingent consideration related to D&A acquisition	26.0		—		—		26.0
Total	$	28.1	$	—	$	2.1	$	26.0



			November 30, 2015
	Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	112.6	$	112.6	$	—	$	—
Insurance contracts	104.1		—		104.1		—
Bonds and other long-term investments	8.5		8.5		—		—
Interest rate derivatives	2.5		—		2.5		—
Foreign currency derivatives	3.4		—		3.4		—
Total	$	231.1	$	121.1	$	110.0	$	—
Liabilities
Foreign currency derivatives	$	0.7	$	—	$	0.7	$	—
Interest rate derivatives	0.6		—		0.6		—
Contingent consideration related to D&A acquisition	27.1		—		—		27.1
Total	$	28.4	$	—	$	1.3	$	27.1

Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair values of insurance contracts are based upon the underlying values of the securities in which they are invested and are from quoted market prices from various stock and bond exchanges for similar type assets. The fair values of bonds and other long-term investments are based on quoted market prices

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from various stock and bond exchanges. The fair values for interest rate and foreign currency derivatives are based on values for similar instruments using models with market based inputs.

The following table sets forth the carrying amount and fair values of our long-term debt (including the current portion thereof) at May 31, 2016, May 31, 2015 and November 30, 2015 (in millions):



	May 31, 2016		May 31, 2015		November 30, 2015
Carrying amount	$	1,055.8	$	1,013.8	$	1,256.2
Fair value	1,142.5		1,095.7		1,325.6

The acquisition-date fair value of the liability for contingent consideration related to our acquisition of D&A was approximately $27.7 million (see note 2). The fair value of the liability as of November 30, 2015 was $27.1 million and was included in other long-term liabilities in our consolidated balance sheet. The fair value of the liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB's Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our probability assessments of expected future cash flows related to our acquisition of D&A during the earn-out period, adjusted for expectations of the amounts and ultimate resolution of likely disputes to be raised by the seller and by us as provided in the purchase agreement, discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the purchase agreement. Changes in the fair value of the liability for contingent consideration, excluding the impact of foreign currency, will be recognized in income on a quarterly basis until settlement in fiscal 2018.

The change in fair value of our Level 3 liabilities for the six months ended May 31, 2016 is summarized as follows (in millions):



	Beginning of year		Settlements		Changes in fair value including accretion		Impact of foreign currency		Balance as of May 31, 2016
Contingent consideration related to D&A acquisition	$	27.1	$	—	$	1.0	$	1.5	$	29.6


7.	EMPLOYEE BENEFIT AND RETIREMENT PLANS

The following table presents the components of our pension expense of the defined benefit plans for the three months ended May 31, 2016 and 2015 (in millions):



	United States						International
	2016			2015			2016			2015
Defined benefit plans
Service cost	$	5.4		$	5.9		$	1.8		$	2.0
Interest costs	8.3			7.9			2.9			3.0
Expected return on plan assets	(10.2		)	(10.1		)	(4.2		)	(4.3		)
Amortization of prior service costs	—			—			0.1			0.1
Amortization of net actuarial losses	3.2			4.2			1.1			1.5
Total pension expense	$	6.7		$	7.9		$	1.7		$	2.3

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The following table presents the components of our pension expense of the defined benefit plans for the six months ended May 31, 2016 and 2015 (in millions):



	United States						International
	2016			2015			2016			2015
Defined benefit plans
Service cost	$	10.8		$	11.8		$	3.5		$	4.1
Interest costs	16.6			15.8			5.8			6.1
Expected return on plan assets	(20.3		)	(20.1		)	(8.3		)	(8.7		)
Amortization of prior service costs	—			—			0.2			0.2
Recognized net actuarial loss	6.3			8.4			2.1			3.0
Total pension expense	$	13.4		$	15.9		$	3.3		$	4.7

During the six months ended May 31, 2016 and 2015, we contributed $9.6 million and $9.8 million, respectively, to our pension plans. Total contributions to our pension plans in fiscal year 2015 were $15.7 million.

The following table presents the components of our other postretirement benefits expense (in millions):



	Three months ended May 31,				Six months ended May 31,
	2016		2015		2016		2015
Other postretirement benefits
Service cost	$	0.6	$	0.8	$	1.4	$	1.6
Interest costs	1.0		0.9		1.9		1.8
Amortization of losses	0.1		—		—		—
Total other postretirement expense	$	1.7	$	1.7	$	3.3	$	3.4

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8.	STOCK-BASED COMPENSATION

We have three types of stock-based compensation awards: restricted stock units (RSUs), stock options and company stock awarded as part of our long-term performance plan (LTPP). The following table sets forth the stock-based compensation expense recorded in selling, general and administrative (SG&A) expense (in millions):



	Three months ended May 31,				Six months ended May 31,
	2016		2015		2016		2015
Stock-based compensation expense	$	12.8	$	10.2	$	15.8	$	13.9

Our 2016 annual grant of stock options and RSUs occurred in the second quarter, similar to the 2015 annual grant. The weighted-average grant-date fair value of an option granted in 2016 was $17.50 and in 2015 was $12.52 as calculated under a lattice pricing model. Substantially all of the options granted vest ratably over a three-year period or upon retirement. The fair values of option grants in the stated periods were computed using the following assumptions for our various stock compensation plans:



	2016	2015
Risk-free interest rates	0.5 - 1.9%	0.1 - 2.0%
Dividend yield	1.7%	2.1%
Expected volatility	18.7%	18.8%
Expected lives (in years)	7.6	7.7

The following is a summary of our stock option activity for the six months ended May 31, 2016 and 2015:



	2016				2015
(shares in millions)	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at beginning of period	4.8		$	59.20	4.8		$	54.17
Granted	0.7		99.92		0.8		76.32
Exercised	(0.4	)	48.90		(0.4	)	42.46
Outstanding at end of the period	5.1		$	65.85	5.2		$	58.33
Exercisable at end of the period	3.5		$	56.60	3.4		$	50.97

As of May 31, 2016, the intrinsic value (the difference between the exercise price and the market price) for all options outstanding was $161.6 million and for options currently exercisable was $141.4 million. The total intrinsic value of all options exercised during the six months ended May 31, 2016 and 2015 was $18.0 million and $11.0 million, respectively.

The following is a summary of our RSU activity for the six months ended May 31, 2016 and 2015:



	2016				2015
(shares in thousands)	Number of Shares		Weighted- Average Grant-Date Fair Value		Number of Shares		Weighted- Average Grant-Date Fair Value
Outstanding at beginning of period	270		$	71.03	239		$	67.60
Granted	104		96.59		134		76.04
Vested	(94	)	72.21		(84	)	71.30
Forfeited	(6	)	78.64		(7	)	72.28
Outstanding at end of period	274		$	81.42	282		$	70.39

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The following is a summary of our LTPP activity for the six months ended May 31, 2016 and 2015:



	2016				2015
(shares in thousands)	Number of Shares		Weighted- Average Grant-Date Fair Value		Number of Shares		Weighted- Average Grant-Date Fair Value
Outstanding at beginning of period	192		$	70.94	231		$	61.94
Granted	108		86.40		96		74.02
Vested	(18	)	64.74		(65	)	48.78
Forfeited	(1	)	74.02		(14	)	70.92
Outstanding at end of period	281		$	77.28	248		$	69.55

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9.	INCOME TAXES

Income taxes for the three months ended May 31, 2016 included $6.9 million of discrete tax benefits primarily consisting of the following: (i) a reversal of a valuation allowance on an international deferred tax asset of $6.4 million due to a change in facts that favorably impacted our assessment of the likely recoverability of that deferred tax asset; and (ii) the reversal of unrecognized tax benefits and related interest of $0.2 million associated with the expiration of a statute of limitation in an international jurisdiction. Income taxes for the six months ended May 31, 2016 included $10.7 million of discrete tax benefits, consisting of the following: (i) the valuation allowance reversal in the amount of $6.4 million described above; (ii) recognition of the tax year 2015 research tax credit of $2.4 million related to new legislation enacted in our first quarter; (iii) the reversal of unrecognized tax benefits and related interest of $0.9 million associated with the expiration of statute of limitations in various jurisdictions; and (iv) a $1.0 million revaluation of a deferred tax liability related to legislation enacted in our first quarter reducing the statutory tax rate for a non-US jurisdiction. Other than the discrete tax benefits mentioned previously and additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three and six months ended May 31, 2016.

Income taxes for the three months ended May 31, 2015, included $13.4 million of discrete tax benefits, consisting principally of the following: (i) a reversal of a previously established valuation allowance on a foreign deferred tax asset in the amount of $8.6 million due to a change in facts that favorably impacted our assessment of the likely recoverability of that deferred tax asset; and (ii) the reversals of unrecognized tax benefits and related interest in the amount of $5.0 million associated with expirations of statutes of limitations in the U.S. and international jurisdictions. Income taxes for the six months ended May 31, 2015, included $17.2 million of discrete tax benefits, consisting of the amounts described above as well as an additional $3.8 million of discrete tax benefits of which $1.8 million related to the reversal of unrecognized tax benefits and interest associated with a statute of limitation expiration in an international jurisdiction and the remainder principally related to the recognition of a 2014 research tax credit. A new law was enacted in the first quarter 2015 that retroactively granted the credit for our 2014 tax year. Other than the reversals previously described and additions for current year tax positions, there were no significant changes to unrecognized tax benefits during the three months and six months ended May 31, 2015.

As of May 31, 2016, we believe that the reasonably possible total amount of unrecognized tax benefits that could decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlement would not be material to our consolidated financial statements.


10.	EARNINGS PER SHARE AND STOCK ISSUANCE

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



	Three months ended May 31,		Six months ended May 31,
	2016	2015	2016	2015
Average shares outstanding – basic	126.9	127.9	127.0	128.1
Effect of dilutive securities:
Stock options/RSUs/LTPP	1.4	1.1	1.3	1.1
Average shares outstanding – diluted	128.3	129.0	128.3	129.2

The following table sets forth the stock options and RSUs for the three and six months ended May 31, 2016 and 2015 which were not considered in our earnings per share calculation since they were anti-dilutive (in millions):



	Three months ended May 31,		Six months ended May 31,
	2016	2015	2016	2015
Anti-dilutive securities	0.5	0.9	0.3	0.6

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The following table sets forth the common stock activity for the three and six months ended May 31, 2016 and 2015 under the Company’s stock option and employee stock purchase plans and the repurchases of common stock under its stock repurchase program (in millions):



	Three months ended May 31,		Six months ended May 31,
	2016	2015	2016	2015
Shares issued under stock option, employee stock purchase plans and RSUs	0.4	0.1	0.5	0.4
Shares repurchased in connection with the stock repurchase program	0.5	0.1	1.1	0.9

As of May 31, 2016, $469 million remained of the $600 million share repurchase authorization that was authorized by the Board of Directors in March 2015.


11.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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



	May 31, 2016			May 31, 2015			November 30, 2015
Foreign currency translation adjustment	$	(193.7	)	$	(118.5	)	$	(206.6	)
Unrealized gain on foreign currency exchange contracts	0.4			2.5			1.5
Fair value of interest rate swaps (excluding settled interest rate swaps)	—			0.6			—
Unamortized value of settled interest rate swaps	1.9			2.8			2.1
Pension and other postretirement costs	(196.3		)	(212.1		)	(203.1		)
Accumulated other comprehensive loss	$	(387.7	)	$	(324.7	)	$	(406.1	)

The following table sets forth the amounts reclassified from accumulated other comprehensive income (loss) and into consolidated net income for the three and six months ended May 31, 2016 and 2015 (in millions):



	Three months ended May 31,						Six months ended May 31,						Affected Line Items in the Condensed Consolidated Income Statement
Accumulated Other Comprehensive Income (Loss) Components	2016			2015			2016			2015
(Gains)/losses on cash flow hedges:
Interest rate derivatives	$	—		$	0.1		$	0.1		$	0.1		Interest expense
Foreign exchange contracts	(1.8		)	(2.2		)	(3.1		)	(3.3		)	Cost of goods sold
Total before tax	(1.8		)	(2.1		)	(3.0		)	(3.2		)
Tax effect	0.4			0.3			0.7			0.6			Income taxes
Net, after tax	$	(1.4	)	$	(1.8	)	$	(2.3	)	$	(2.6	)

Amortization of pension and postretirement benefit adjustments:
Amortization of prior service costs (1)	$	0.1		$	0.1		$	0.2		$	0.2		SG&A expense/ Cost of goods sold
Amortization of net actuarial losses (1)	4.4			5.7			8.4			11.4			SG&A expense/ Cost of goods sold
Total before tax	4.5			5.8			8.6			11.6
Tax effect	(1.5		)	(2.0		)	(2.9		)	(4.0		)	Income taxes
Net, after tax	$	3.0		$	3.8		$	5.7		$	7.6

(1) This accumulated other comprehensive income component is included in the computation of total pension expense (refer to note 7 for additional details).

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12.	BUSINESS SEGMENTS

We operate in two business segments: consumer and industrial. The consumer and industrial segments manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products throughout the world. Our consumer segment sells to retail outlets, including grocery, mass merchandise, warehouse clubs, discount and drug stores under the “McCormick” brand and a variety of brands around the world, including “Lawry’s”, “Zatarain’s”, “Simply Asia”, “Thai Kitchen”, “Ducros”, “Vahine”, “Schwartz”, “Club House”, “Kamis”, “Kohinoor”, “DaQiao”, “Drogheria & Alimentari”, "Stubb's", and "Gourmet Garden". Our industrial segment sells to food manufacturers and the foodservice industry both directly and indirectly through distributors.

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

We measure segment performance based on operating income excluding special charges as this activity is managed separately from the business segments. Although the segments are managed separately due to their distinct distribution channels and marketing strategies, manufacturing and warehousing are often integrated to maximize cost efficiencies. We do not segregate jointly utilized assets by individual segment for internal reporting, evaluating performance or allocating capital. Because of manufacturing integration for certain products within the segments, products are not sold from one segment to another but rather inventory is transferred at cost. Intersegment sales are not material.



	Consumer		Industrial			Total
			(in millions)
Three months ended May 31, 2016
Net sales	$	641.8	$	421.5		$	1,063.3
Operating income excluding special charges	86.4		42.5			128.9
Income from unconsolidated operations	6.2		1.5			7.7

Three months ended May 31, 2015
Net sales	$	599.8	$	424.3		$	1,024.1
Operating income excluding special charges	80.8		42.0			122.8
Income from unconsolidated operations	7.6		(0.2		)	7.4


Six months ended May 31, 2016
Net sales	$	1,275.6	$	817.9		$	2,093.5
Operating income excluding special charges	180.7		78.9			259.6
Income from unconsolidated operations	13.8		2.3			16.1

Six months ended May 31, 2015
Net sales	$	1,220.1	$	814.4		$	2,034.5
Operating income excluding special charges	172.3		72.6			244.9
Income from unconsolidated operations	17.7		(0.4		)	17.3

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A reconciliation of operating income excluding special charges (which we use to measure segment profitability) to operating income is as follows (in millions):



	Consumer		Industrial		Total
Three months ended May 31, 2016
Operating income	$	82.9	$	42.1	$	125.0
Add: Special charges	3.5		0.4		3.9
Operating income excluding special charges	$	86.4	$	42.5	$	128.9

Three months ended May 31, 2015
Operating income	$	65.1	$	38.7	$	103.8
Add: Special charges	15.7		3.3		19.0
Operating income excluding special charges	$	80.8	$	42.0	$	122.8

Six months ended May 31, 2016
Operating income	$	175.9	$	78.2	$	254.1
Add: Special charges	4.8		0.7		5.5
Operating income excluding special charges	$	180.7	$	78.9	$	259.6

Six months ended May 31, 2015
Operating income	$	137.4	60.1		$	197.5
Add: Special charges	34.9		12.5		47.4
Operating income excluding special charges	$	172.3	72.6		244.9


13.	SUBSEQUENT EVENT

In June 2016, we reached agreement with our joint venture partner in South Africa to exit the joint venture. The transfer agreement, which is subject to regulatory approval and customary closing conditions, is expected to close on or about October 1, 2016. No material gain or loss is expected in connection with execution of the transfer agreement. Sales of this consolidated joint venture, a component of our industrial segment, were $3.9 million and $7.5 million for the three and six months ended May 31, 2016, respectively, and $7.0 million and $12.7 million for the three and six months ended May 31, 2015.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Business profile

We are a global leader in flavor, with the manufacturing, marketing and distribution of spices, seasoning mixes, condiments and other flavorful products to the entire food industry. 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. Annually, approximately 40% of our sales have been outside of the United States.

We operate in two business segments, consumer and industrial. Our consumer segment customers span a variety of retailers that include grocery mass merchandise, warehouse clubs, discount and drug stores, and e-commerce retailers served directly and indirectly through distributors or wholesalers. In addition to marketing our branded products to these customers, we are also a leading supplier of private label items, also known as store brands. In our industrial segment, 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.

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, whether it is cooking at home, dining out, purchasing a quick service meal or enjoying a snack. We offer customers and consumers a range of products that meet the increasing demand for certain product attributes such as organic, gluten-free and non-GMO (genetically modified organisms) and that extend from premium to value-priced.

Long-term growth objectives

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%, all in constant currency.

Sales growth - 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.

In 2015, we increased our investment in brand marketing by 6% over 2014 and 44% from 2010. We measure the return on this investment and have identified digital marketing as one of our highest return investments in brand marketing support. Through digital marketing, we are connecting with consumers in a personalized way to deliver recipes, provide cooking advice and discover new products. Digital marketing reached 38% of advertising spend in 2015, compared to 11% in 2010.

For our consumer segment, innovation continues to be one of the best ways to distinguish our brands from our competition, including private label. We are introducing products for every type of cooking occasion, from gourmet, premium items to convenient and value-priced flavors. Recent innovation includes new varieties in the relaunch of our entire gourmet product line. That relaunch also included new packaging and a flavor seal technology. Other innovation includes herb grinders and slow cooker sauces across North America, premium pepper grinders and grilling products across Europe, and a Thai chili sauce in China. For industrial customers, we are developing seasonings for snacks and other food products, as well as flavors for new menu items. We have a solid pipeline of new flavor solutions aligned with our customers’ new product launch plans. With more than 20 technical innovation centers and product development facilities around the world, we are supporting the growth of our brands and those of our industrial customers with products that appeal to local consumers. In addition, much of our innovation is designed to meet the increasing consumer demand for healthy eating. We founded the McCormick Science Institute in 2007 to fund the advancement of scientific knowledge of the potential health benefits of culinary spices and herbs. This institute is also committed to educating consumers, nutritionists and dietitians about these potential health benefits.

Acquisitions are contributing approximately one-third of our sales growth. Since 2007, we have completed 12 acquisitions and joint ventures, including three acquisitions added in 2015 and the addition of Gourmet Garden in 2016. Flavor is central to our pipeline of acquisition opportunities. This pipeline includes both consumer and industrial businesses that meet the growing demand for flavor and health. In addition to bolt-on opportunities, we are seeking larger acquisitions. Geographically, our focus is on acquisitions that build scale where we currently have presence in developed and emerging markets.

Cost savings - 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, as well as savings from organization and streamlining actions. 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. Examples of CCI cost savings include vendor consolidation, high-speed equipment and automation, process reliability, system technology and sustainability. Since inception in 2009, CCI cost savings have totaled nearly $450 million and

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in 2015, together with organization and streamlining actions, we reached a record $98 million in cost savings. In 2016, we set a four-year goal to deliver $400 million of cost savings by November 30, 2019.

Cash flow - Our business generates strong cash flow and in 2015, net cash provided by operating activities reached $590.0 million, an increase from $503.6 million in 2014. We have a balanced use of cash for capital expenditures, acquisitions and the return of cash to shareholders through dividends and share repurchases. In 2015, that return of cash to shareholders was $350.7 million, and our Board declared the 30^th consecutive annual increase in our quarterly dividend.

2016 outlook

In 2016, we expect the strength of the U.S. dollar and the resultant unfavorable effects of foreign currency exchange to have a negative impact, as compared to 2015, on our sales and earnings. In 2016, sales are projected to grow 1% to 3%, or 4% to 6% on a constant currency basis.

Led by CCI, we expect to reach cost savings of $100 million to $110 million in 2016, with a large portion impacting our cost of goods sold. Material cost inflation is expected to be in the low single-digit range and we expect to offset this impact with our cost savings and pricing actions. We also plan to increase brand marketing by approximately $20 million in 2016.

Diluted earnings per share was $3.11 in 2015. Earnings per share for 2016 are projected to range from $3.63 to $3.70. Excluding the earnings per share impact of special charges of $0.37 in 2015, adjusted diluted earnings per share was $3.48 in 2015. Adjusted diluted earnings per share (excluding an estimated $0.05 impact from special charges expected to be recorded in 2016) are projected to be $3.68 to $3.75 in 2016. On a constant currency basis, we expect adjusted diluted earnings per share in 2015 to grow 9% to 11% over adjusted diluted earnings per share of $3.48 in 2015. We expect this growth rate to be mainly driven by increased adjusted operating income.

RESULTS OF OPERATIONS – COMPANY



	Three months ended May 31,						Six months ended May 31,
(in millions)	2016			2015			2016			2015
Net sales	$	1,063.3		$	1,024.1		$	2,093.5		$	2,034.5
Percent increase/(decrease)	3.8		%	(0.9		)%	2.9		%	0.4		%
Gross profit	$	432.8		$	404.0		$	837.8		$	793.7
Gross profit margin	40.7		%	39.4		%	40.0		%	39.0		%

Sales for the second quarter of 2016 increased by 3.8% from the prior year level and by 6.0% on a constant currency basis (that is excluding the impact of foreign currency exchange as more fully described under the caption, Non-GAAP Financial Measures). Sales in the second quarter of 2016 increased in both our consumer and industrial segments as higher volume and product mix increased sales by 1.1%, pricing actions added 1.6%, and acquisitions added 3.3%. These factors offset an unfavorable impact from foreign currency rates that reduced sales by 2.2% compared to the year ago quarter and is excluded from our measure of sales growth of 6.0% on a constant currency basis.

Sales for the six months ended May 31, 2016 increased by 2.9% over the 2015 level and by 6.3% on a constant currency basis. For the six months ended May 31, 2016, sales increased over the prior year level as higher volume and product mix, driven by both our consumer and industrial segments, increased net sales by 2%, pricing actions added 1.3% and acquisitions added 3.0%. These factors offset an unfavorable impact from foreign currency rates that reduced sales by 3.4% in the six months ended May 31, 2016, compared to the year ago period and is excluded from our measure of sales growth of 6.3% on a constant currency basis.

Gross profit for the second quarter of 2016 increased by $28.8 million, or 7.1%, over the comparable period in 2015, and our gross profit margin increased 130 basis points from the year ago quarter to 40.7%. Gross profit for the six months ended May 31, 2016 increased by $44.1 million, or 5.6% over the comparable period in 2015, and our gross profit margin increased 100 basis points from the year ago quarter to 40.0%. These margin increases for both the quarter and year-to-date period were primarily due to cost savings from CCI and organization and streamlining actions, favorable business mix and pricing actions taken to offset higher material costs.

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	Three months ended May 31,		Six months ended May 31,
(in millions)	2016	2015	2016