Management's Discussion and Analysis
Other income increased to $7.1 million in 2006 compared to $0.4 million in 2005 due mostly to higher interest income.
The effective tax rate was 29.0% in 2006 down from 32.7% in 2005. This decrease is due to both the mix of earnings among the different tax jurisdictions in which we do business and several discrete tax benefits. The discrete items were the favorable resolution of an international tax audit for $3.5 million, a $1.0 million reduction of accruals recorded for state tax audits and a $0.6 million additional tax benefit related to the closure of our operation in Finland. In 2007, we expect the rate to be closer to the 2005 rate.
We participated in two separate joint ventures with the same joint venture partner, Hero A.G. We owned 50% of Signature and 51% of Dessert Products International, S.A.S. (DPI). Signature is a cake decorating business in the U.S. and DPI markets the Vahine® brand of dessert aids in France and other European countries.
In the second quarter of 2006 we received the remaining 49% share of DPI in redemption of our 50% ownership investment in Signature. Since this transaction happened early in the year, it resulted in a decrease in our income from unconsolidated operations but also decreased the negative impact of our minority interest reported in the income statement. Excluding these effects, the increase in unconsolidated income is mainly from our joint venture in Mexico where stronger mayonnaise sales and moderate soybean oil prices contributed to the improved performance of this joint venture.
The following table outlines the major components of the changes in diluted earnings per share from 2005 to 2006:
| 2005 Earnings per share - diluted | $ | 1.56 | |
| Increase (decrease) impact on EPS: Restructuring |
(.17 | ) | |
| Stock-based compensation expense | (.11 | ) | |
| Increased sales and operating income exclusive of restructuring and stock-based compensation |
.10 | ||
| Lower tax rate | .06 | ||
| Effect of lower shares outstanding | .04 | ||
| Other | .02 | ||
| 2006 Earnings per share - diluted | $ | 1.50 |
Results of Operations - Segments
In 2006, we changed the way we internally manage and report our business segment results. The management and reporting of sales and income related to warehouse club customers was moved to the consumer business from the industrial business. Also, to better represent the profitability of our two segments, we began to allocate 100% of our SG&A to our business segments. In addition, since restructuring activities are managed separately from the business segments, the segments are being measured on operating income excluding net charges from restructuring activities. In line with these changes, prior year segment results have been restated to be comparable with the current presentation.
Consumer Business
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Net sales | $ | 1,556.4 | $ | 1,478.3 | ||
| Percent growth | 5.3 | % | ||||
| Operating income, excluding restructuring activities |
278.0 | 288.0 | ||||
| Operating income margin, excluding restructuring activities |
17.9 | % | 19.5 | % | ||
We began recording stock-based compensation expense in 2006. Total stock-based compensation expense recorded in the consumer business operating results was $13.9 million.
Higher volume, pricing actions and a favorable product mix added 5.3%, while foreign exchange rates had no effect on sales. This included sales from Simply Asia Foods, acquired in June 2006, which added 1.3% to sales. In the Americas, consumer business sales increased 8.1%, with 1.9% of the sales increase attributable to the Simply Asia Foods acquisition and 0.6% from favorable foreign exchange. The majority of the increase was driven by higher volume from new product introductions and more effective marketing, as well as pricing actions in the U.S. taken early in 2006. In 2006, we grew sales of Hispanic products, Grill Mates®, lower sodium items, slow cooker seasonings and more, with new varieties and marketing support. Print advertisements helped drive sales of gourmet products and gravy items. A new program, across our entire line of products, encouraged consumers to replace out-of-date spices and herbs. During the fourth quarter of 2005, demand for our McCormick® and Zatarain's® consumer products in the Gulf region of the U.S. was lower due to the effects of Hurricane Katrina. This had a positive impact when 2006 is compared to 2005.