Acquisitions | ACQUISITIONS Acquisitions are part of our strategy to increase sales and profits. Acquisition of RB Foods On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately $4.21 billion , is net of acquired cash of $24.3 million , and included a preliminary working capital adjustment of $11.2 million . In December 2017, we paid an additional $4.2 million associated with the final working capital adjustment. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 13) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6). The acquired market-leading brands of RB Foods include French’s ® , Frank’s RedHot ® and Cattlemen’s ® , which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. Condiments category and provide significant international growth opportunities for our consumer and industrial segments. At the time of the acquisition, annual sales of RB Foods were approximately $570 million . The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of RB Foods’ operations are included in our consolidated financial statements as a component of our consumer and industrial segments from the date of acquisition. The purchase price of RB Foods was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The allocation of the purchase price will be finalized within the allowable measurement period. The preliminary allocation, net of cash acquired, of the fair value of the RB Foods acquisition is summarized in the table below (in millions): Trade accounts receivable $ 36.9 Inventories 68.8 Property, plant and equipment 33.1 Goodwill 2,546.3 Intangible assets 2,595.0 Other assets 4.4 Trade accounts payable (65.5 ) Other accrued liabilities (35.4 ) Deferred taxes (954.8 ) Other long-term liabilities (23.1 ) Total $ 4,205.7 The preliminary fair value of intangible assets was determined using income methodologies. We valued trademarks using the relief from royalty method, an income approach. For customer relationships, we used the distributor method, a variation of the excess earnings method that uses distributor-based inputs for margins and contributory asset charges. Some of the more significant assumptions inherent in developing the preliminary valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $20.9 million that was recognized in cost of goods sold in 2017 as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach. The preliminary fair value of property, plant and equipment was determined using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors. Deferred income tax assets and liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items. The preliminary valuation of the acquired net assets of RB Foods includes $2,475.0 million allocated to indefinite-lived brand assets and $120.0 million allocated to definite-lived intangible assets with a weighted-average life of 15 years . As a result of the acquisition, we recognized a total of $2,546.3 million of goodwill. That goodwill, 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 consumer and industrial customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. The final allocation of the fair value of the RB Foods acquisition, including the allocation of goodwill to our reporting units, which are the consumer and industrial segments, was not complete as of November 30, 2017, but will be finalized within the allowable measurement period. The results of RB Foods’ operations have been included in our consumer and industrial segments since its acquisition. Total transaction and integration expenses related to the RB Foods acquisition are anticipated to approximate $100 million , of which approximately $60 million represent transaction expenses and the remainder represent estimated integration expenses. These costs are anticipated to be incurred through fiscal 2018 and primarily consist of the amortization of the acquisition-date fair value adjustment of inventories in the amount of $20.9 million that is included in cost of goods sold for 2017; outside advisory, service and consulting costs; employee-related costs; and other costs related to the acquisition, including the costs of $15.4 million related to the Bridge financing commitment that is included in other debt costs for 2017. Of the total anticipated transaction and integration expenses, we incurred $77.1 million in 2017 and expect to incur the balance in fiscal 2018. The following are the transaction and integration expenses that we have recorded in 2017 related to the RB Foods acquisition (in millions): Transaction expenses included in cost of goods sold $ 20.9 Transaction expenses included in other debt costs 15.4 Other transaction expenses 23.2 Integration expenses 17.6 Total $ 77.1 RB Foods added $190.1 million to our sales for 2017. The impact of RB Foods on our 2017 consolidated income before taxes, including the effect of the transaction and integration expenses previously noted, and financing costs was a loss of approximately $42 million . The following unaudited pro forma information presents consolidated financial information as if RB Foods had been acquired at the beginning of fiscal 2016. Interest expense has been adjusted to reflect the debt issued to finance the acquisition as though that debt had been outstanding at December 1, 2015. The pro forma results reflect amortization expense of approximately $8.0 million for each period presented, relating to definite-lived intangible assets recorded based upon preliminary third party valuations. The pro forma results for 2016 also include transaction and integration costs of $40.8 million , $20.9 million of amortization of the acquisition-date fair value adjustment of inventories, and $15.4 million associated with the Bridge financing commitment, all assuming that the acquisition had occurred as of December 1, 2015. The pro forma results for 2017 exclude the previously noted items, as they have been included, on a pro forma basis, in the results for 2016. The pro forma adjustments previously noted have been adjusted for the applicable income tax impact. Basic and diluted shares outstanding have been adjusted to reflect the issuance of 6.35 million shares of our common stock non-voting to partially finance the acquisition. (in millions, except per share data) Year ended November 30, 2017 2016 (Unaudited) Net sales $ 5,209.0 $ 4,969.3 Net income 548.7 465.5 Earnings per share – basic $ 4.19 $ 3.50 Earnings per share – diluted 4.14 3.46 These unaudited pro forma consolidated results are not adjusted for changes in the business that will take place subsequent to our acquisition, including, but not limited to, additional transaction and integration costs that may be incurred. Accordingly, the above unaudited pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had been completed as of December 1, 2015, nor are they indicative of future consolidated results. Other Acquisitions On May 5, 2017, we purchased the remaining 15% ownership interest in our joint venture, Kohinoor Specialty Foods India Private Limited (Kohinoor) in India for a cash payment of $1.6 million , of which $1.2 million was paid in 2017 and the balance is expected to be paid in the fourth quarter of 2018. In September 2011, when we originally entered this joint venture, we invested $113.0 million for an 85% interest in Kohinoor. In conjunction with our purchase of the 15% minority interest in 2017, we have eliminated the minority interest in Kohinoor and recorded an adjustment of $0.6 million in retained earnings of our shareholders' equity section of our consolidated balance sheet. The $1.2 million payment is reflected in the financing activities section of our consolidated cash flow statement for 2017. On December 15, 2016, we purchased 100% of the shares of Enrico Giotti SpA (Giotti), a leading European flavor manufacturer located in Italy, for a purchase price of $123.8 million (net of cash acquired of $1.2 million ), including the effect of a $0.2 million favorable net working capital adjustment. The acquisition was funded with cash and short-term borrowings. Giotti is well known in the industry for its innovative beverage, sweet, savory and dairy flavor applications. At the time of the acquisition, annual sales of Giotti were approximately €53 million . Our acquisition of Giotti in fiscal 2017 expands the breadth of value-added products for McCormick's industrial segment, including additional expertise in flavoring health and nutrition products. During 2017, we completed the final valuation of the acquired net assets of Giotti that resulted in $7.0 million allocated to net tangible assets acquired, $4.8 million allocated to indefinite lived brand asset, $31.5 million allocated to definite-lived intangible assets with a weighted-average life of 11.9 years and $80.5 million allocated to goodwill. Goodwill related to the Giotti 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 the customer intimacy and value-added flavor solutions we provide to our industrial customers to Giotti’s relationships with industrial customers of their flavors solutions and extracts, as well as from expected synergies from the combined operations and assembled workforces, and the future development initiatives of the assembled workforces. Giotti has been included in our industrial segment since its acquisition. On September 1, 2016, we acquired a small niche business for $4.4 million . That business, Cajun Injector, whose annual sales were approximately $5 million at the time of acquisition, sells injectable marinades, along with seasonings and fry mixes that feature New Orleans flavors. Cajun Injector, which has been included in our consumer segment since its acquisition, complements our Zatarain’s brand. On April 19, 2016, we completed the purchase of 100% of the shares of Botanical Food Company, Pty Ltd, owner of the Gourmet Garden brand of packaged herbs (Gourmet Garden), a privately held company based in Australia. Gourmet Garden is a global market leader in chilled convenient packaged herbs. Gourmet Garden's products complement our existing branded herb portfolio with the addition of chilled convenient herbs located in the perimeter of the grocery store. We plan to drive sales of the Gourmet Garden brand by 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 $116.2 million , net of cash acquired of $3.3 million and after closing adjustments, and was financed with a combination of cash and short-term borrowings. That purchase price reflects a $1.9 million favorable net working capital adjustment that was received in the third quarter of 2016. During 2017, we completed the final valuation of the Gourmet Garden acquisition which resulted in the following changes from the preliminary valuation to the acquired assets and liabilities: (i) the indefinite-lived brand asset increased by $7.3 million to $27.6 million ; (ii) definite-lived intangible assets increased by $4.7 million to $18.9 million (with a weighted-average life of 14.2 years ); (iii) net tangible assets (net of liabilities assumed, including the deferred tax liabilities associated with identified intangible assets) acquired decreased by $4.4 million to $16.0 million ; (iv) goodwill decreased by $7.6 million to $53.7 million . There was no material change to amortization expense as a result of these changes in the final valuation. 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. Gourmet Garden has been included in our consumer segment since its acquisition. While this business has an industrial component, the industrial component was not material to its overall business in 2016. Beginning in 2017, the industrial component of Gourmet Garden is being reflected as a component of our industrial segment. 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 a leading premium barbeque sauce brand in the U.S. In addition to sauces, Stubb's products include marinades, rubs and skillet sauces. Its addition expanded 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 , net of cash acquired of $0.8 million , and was financed with a combination of cash and short-term borrowings. During 2016, we completed the final valuation of the Stubb's acquisition, which resulted in the following changes from the preliminary valuation to the acquired assets and liabilities: (i) the indefinite-lived brand asset increased by $13.8 million to $27.1 million ; (ii) definite-lived intangible assets increased by $11.9 million to $24.4 million (with a weighted-average life of 13.9 years ); (iii) tangible assets acquired increased by $0.3 million to $5.7 million ; (iv) liabilities assumed (including the deferred tax liabilities associated with identified intangible assets) increased by $7.0 million to $19.4 million ; and (v) goodwill decreased by $19.0 million to $61.6 million . As a result of these changes in the final valuation, additional amortization expense for definite-lived intangible assets of $0.9 million was recorded for the year ended November 30, 2016. 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. 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. This acquisition complemented our strong brands and expanded our current spice and seasoning leadership in Europe with a sizable footprint in Italy. The purchase price for D&A consisted of a cash payment of $49.0 million , net of cash acquired of $2.8 million , and was financed with a combination of cash and short-term borrowings. In addition, the purchase agreement called 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 and discounted using a probability-weighted approach. During 2017, we reached agreement with the sellers to settle the contingent consideration liability prior to its contractual term for approximately $29.3 million ( €26.1 million ), with $19.7 million ( €17.6 million ) paid in 2017. We previously prepaid €5.0 million at the date of acquisition. The balance of the liability is expected to be paid early in 2018. Accordingly, during 2017, we recognized a $1.6 million gain on settlement in selling, general and administrative expense in our consolidated income statement. At the time of the acquisition, annual sales of D&A were approximately €50 million . 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 expanded 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 . Brand Aromatics has been included in our industrial segment since its acquisition. Transaction-related expenses include third party expenses related to commercial and legal due diligence for unconsummated and completed acquisitions as well as third party expenses related to accounting, legal and financing activities with respect to completed acquisitions. Transaction-related expenses associated with the above acquisitions, excluding amounts related to the RB Foods acquisition that are separately classified in our consolidated income statement, are included in selling, general and administrative expense in our consolidated income statement and totaled $2.9 million , $5.5 million and $3.6 million for 2017, 2016 and 2015, respectively. In 2017, Giotti added $66.5 million and Gourmet Garden added $27.3 million to our sales for the year and first four months of fiscal 2017, respectively. Due to financing, acquisition and integration costs, the aggregate incremental operating income contributed by Giotti and Gourmet Garden was not significant to our overall results for 2017. Pro forma financial information for our other acquisitions has not been presented because the financial impact is not material. |