McCORMICK & COMPANY 2007 ANNUAL REPORT
McCORMICK & COMPANY 2007 ANNUAL REPORT |
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| MANAGEMENT’S DISCUSSION AND ANALYSIS |  |
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| Favorable foreign exchange rates added 2.8% to sales,
while actions to eliminate lower margin products
decreased sales approximately 2%.
Sales in the Americas rose 1.9% with favorable foreign exchange rates adding 0.5%. In this region, customer and product rationalization reduced sales approximately 2%. The remaining increase was primarily due to price increases. During 2007 new products and other volume gains with sales to food manufacturers were offset by weakness in the restaurant industry. In Europe, sales increased 20.1%, which included a favorable foreign exchange rate impact of 9.2%. In this region, customer and product rationalization reduced sales approximately 2%. The remaining increase of approximately 13% was mostly volume-related due to increases in snack seasonings and products sold to quick service restaurants. In the Asia/Pacific region, sales increased 25.8% with 8.0% from foreign exchange rates. Rapid expansion of industrial business, especially in China with quick service restaurant customers, contributed to sales in this region. Operating income excluding restructuring activities decreased in both dollar terms and in terms of margin. Higher material costs during the year more than offset the benefit of our 7.3% sales increase and the cost savings from our restructuring activities. At the end of 2007 and into early 2008, we took further pricing actions in response to higher costs. |
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| The increase in margin was attributable to initiatives to reduce costs, pricing actions taken early in 2006 in response to the higher costs of certain materials, employee benefits and energy, as well as a more favorable product mix. Included in cost of goods sold were restructuring charges for production facilities that were being closed. These charges reduced gross profit margin in 2006 by 0.5%. Also, gross profit margin in 2005 was negatively impacted by higher costs of vanilla. | |
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| The increase in SG&A was primarily due to increased
incentive compensation on higher earnings, as well as
stock-based compensation and higher advertising costs.
Stock-based compensation of $22.0 million, which
accounted for a 0.8 percentage point increase as a percentage
of net sales, was recorded in 2006 as a result of
the adoption of Statement of Financial Accounting
Standards (SFAS) 123(R) effective December 1, 2005 (see
note 9 of the financial statements). Advertising expense
increased by $12.7 million, adding another 0.5 percentage
point increase to SG&A as a percentage of net sales, as we
spent at a higher level to support our consumer brands. The following is a summary of restructuring activities: |
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| Key initiatives that drove sales in 2006 included higher volume driven by acquisitions, new products and effective marketing programs, as well as pricing actions taken early in the year. Sales from Simply Asia Foods, acquired in the third quarter of 2006, contributed 0.7% to the sales increase. Foreign exchange rates had an unfavorable effect on sales in the first half of 2006 and a favorable effect on reported sales in the second half of the year. On a full year basis, the sales effect of foreign exchange rates was slightly favorable. | |
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| Pre-tax restructuring charges for both 2006 and 2005 related to actions under our restructuring plans to consolidate our global manufacturing, rationalize our distribution | |
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McCormick & Company 2007 Annual Report 20 |
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