Management's Discussion and Analysis
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| Gross profit | $ | 1,036.6 | $ | 1,007.9 | ||
| Gross profit margin | 40.0 | % | 39.9 | % | ||
In 2005, we exceeded our goal of lowering costs by $25 million, achieving savings of $33 million. Improved segment mix through a higher proportion of consumer versus industrial sales and pricing actions also improved gross profit margin. Significant cost increases in certain raw materials, packaging and fuel offset much of the gross profit margin increase.
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| SG&A | $ | 681.9 | $ | 677.7 | ||
| Percent of net sales | 26.3 | % | 26.8 | % | ||
Selling, general and administrative expenses were higher in 2005 than 2004 on a dollar basis but declined as a percentage of net sales. The dollar increase was primarily due to increased distribution expenses and higher sales promotion expenses. The increase in distribution expenses was primarily due to higher fuel costs. In our consumer business, we increased sales promotion expenses in order to launch several new products and to support our brand name. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to lower incentive compensation associated with our 2005 results. In addition, advertising was down slightly as we suspended some of our advertising for the Zatarain's brand following Hurricane Katrina.
The following is a summary of restructuring activities:
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| Pre-tax restructuring charges (credits) included in operating income |
$ | 11.2 | $ | (2.5 | ) | |
| Income tax effect | (3.7 | ) | 1.3 | |||
| Reduction (increase) in net income | 7.5 | (1.2 | ) | |||
| Reduction (increase) in earnings per share - diluted |
$ | .05 | $ | (.01 | ) | |
The 2004 pre-tax restructuring activities included a net gain of $8.7 million recorded in 2004 for funds received from a class action lawsuit that was settled in our favor. The charges in 2005 are primarily due to the implementation of the new restructuring plan, discussed later in MD&A and in note 4 of the financial statements.
Interest expense in 2005 increased $7.2 million. Average borrowings during the year increased slightly, however, higher interest rates on our variable rate debt during 2005 accounted for most of this increase.
Other income decreased to $0.4 million in 2005 compared to $2.1 million in 2004 due to lower interest income.
The effective tax rate was 32.7% in 2005 up from 30.3% in 2004. The increase in the effective tax rate was due to the final utilization of certain net operating loss carryforwards in 2004 which were no longer available in 2005 and the mix of earnings among the different tax jurisdictions in which we operate.
Income from unconsolidated operations increased 41% in 2005 compared to 2004. This increase is mainly attributable to higher income from our joint venture in Mexico where more effective marketing programs and promotions, new product launches, reduced expenses and lower soybean oil costs all contributed to the improved performance.
The following table outlines the major components of the change in diluted earnings per share from 2004 to 2005:
| 2004 Earnings per share - diluted | $ | 1.52 | |
| Increase (decrease) impact on EPS: Restructuring |
(.06 | ) | |
| Increased sales and operating income exclusive of restructuring |
.12 | ||
| Higher tax expense | (.05 | ) | |
| Effect of lower shares outstanding | .03 | ||
| 2005 Earnings per share - diluted | $ | 1.56 | |
Consumer Business
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| Net sales | $ | 1,478.3 | $ | 1,421.0 | ||
| Percent growth | 4.0 | % | ||||
| Operating income, excluding restructuring activities |
288.0 | 256.4 | ||||
| Operating income margin, excluding restructuring activities |
19.5 | % | 18.0 | % | ||
Sales from Silvo, acquired in November 2004, added 2.7% to sales and favorable foreign exchange rates added 0.9%. The additional increase of 0.4% was mainly driven by pricing actions taken in 2005. In the Americas, consumer business sales increased 2.2% with 2.4% of the sales increase from pricing actions and a favorable product mix, 0.5% from favorable foreign exchange rates and a volume decrease of 0.7%. During the fourth quarter, 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 negative impact of approximately 1% on the full year results. The remaining increase was driven by more effective marketing, new product introductions and pricing actions.