Management's Discussion and Analysis

Special Charges

As the next step in our progress with margin improvement, we announced in September 2005 significant actions to improve the effectiveness of our supply chain and reduce costs. At that time, we also stated that a comprehensive review of our global industrial business was underway to identify improvements. These actions were included in a comprehensive restructuring plan which the Board approved in November 2005. As part of this plan, over the next three years, we will consolidate our global manufacturing, rationalize our distribution facilities, improve our go-to-market strategy and eliminate administrative redundancies. In addition, for the industrial business, we will reallocate resources to key customers and take pricing actions on lower volume products to meet new margin targets. A new business-wide forecasting process is being installed and the use of technology will be accelerated to monitor and manage the business. Through 2008, these actions are intended to reduce the number of industrial business customers and products in the U.S. by approximately 25%. Sales related to these customers and products represent approximately 2-5% of industrial business sales in the U.S. As these sales have minimal profit, this reduction will lead to higher margins. These reductions will also facilitate the consolidation of certain manufacturing.

We expect that the restructuring plan will reduce complexity and increase the organizational focus on growth opportunities in both the consumer and industrial businesses. In addition, we are projecting that $50 million of annual cost savings will be achieved by 2008. In 2006, we expect to realize at least $10 million of savings and estimate that another $30 million will be realized in 2007. We expect to drive margin improvement and increase earnings per share, as well as invest a portion of these savings in sales growth drivers such as brand advertising.

Total pre-tax charges under this restructuring plan are estimated to be $130-$150 million with approximately 75% in the consumer segment and 25% in the industrial segment. Of these charges, approximately 60% will consist of severance and other personnel costs, 15% will consist of asset write-offs and 25% will consist of other exit costs. In the fourth quarter of 2005, $10.7 million ($7.2 million after-tax) of charges were recorded of which $10.1 million related to our consumer business. These charges include certain severance costs associated with the closing of our manufacturing plant in Salinas, California, closing costs for a small plant in Belgium and costs associated with the reorganization of the sales and distribution networks in the U.S. and Europe. Following the $10.7 million charge recorded in 2005, we expect to record up to $85 million during the 2006 fiscal year. The remaining portion will occur fairly evenly between 2007 and 2008. For the total plan, the cash related portion of the charges will be approximately $85-$100 million, of which approximately $60 million will be spent in 2006.  We intend to fund this spending through internally generated funds. Much of the cash costs will be related to employee severance. The actions being taken are expected to reduce our global workforce by 800-1,000 over the three-year period. A significant number of the employees who will be impacted were notified by January 2006.

In 2001, we adopted a plan to streamline our operations which was completed in 2005. This plan included the consolidation of several distribution and manufacturing locations, the reduction of 392 administrative and manufacturing positions, and the reorganization of several joint ventures. The cost of the total plan was $30.9 million ($21.1 million aftertax). Total cash expenditures in connection with these costs approximated $16.2 million, which was funded through internally generated funds. The remaining $14.7 million of costs associated with the plan consisted of write-offs of assets. Annualized cash savings from the plan were approximately $8.0 million ($5.3 million after-tax). Savings under the plan are being used for spending on initiatives such as brand support and supply chain management. These savings are included within the cost of goods sold and selling, general and administrative expenses in the consolidated statement of income.

During the year ended November 30, 2005, we recorded special charges of $0.5 million ($0.3 million after-tax). The costs recorded in 2005 primarily are severance costs.

During the year ended November 30, 2004, we recorded special charges of $6.2 million ($4.3 million after-tax). The costs recorded in 2004 primarily include costs related to the consolidation of industrial manufacturing facilities in the U.K. and Canada, the reorganization of a consumer joint venture and additional severance costs. During 2004, total cash expenditures in connection with the 2001 restructuring plan were $4.7 million. Also included in special charges/(credits) is a net gain of $8.7 million ($5.5 million after-tax) related to funds received from a class action lawsuit that was settled in our favor in the second quarter of 2004. This matter dated back to 1999 when a number of class action lawsuits were filed against manufacturers and sellers of various flavor enhancers for their violation of antitrust laws. We, as a purchaser of such products, participated as a member of the plaintiff class. In the second quarter of 2004, we received $11.1 million as a settlement of this claim and as a result of the settlement, were required to settle claims against us for a portion of this gross amount. The net gain recorded was $8.7 million. This amount was recorded as a special credit and was not allocated to the business segments.

During the year ended November 30, 2003, we recorded special charges related to continuing operations of $5.5 million ($3.6 million after-tax). The costs recorded in 2003 included additional costs associated with the consolidation of production facilities in Canada, net of a gain on the sale of a manufacturing facility, severance and other costs related to the consolidation of industrial manufacturing in the U.K. and the realignment of our consumer sales operations in Australia. During 2003, total cash expenditures in connection with the plan were $4.7 million. During 2002 and 2001, we recorded total charges of $18.7 million ($12.9 million after-tax) from continuing operations associated with the 2001 restructuring plan.