McCORMICK & COMPANY 2007 ANNUAL REPORT
McCORMICK & COMPANY 2007 ANNUAL REPORT |
| MANAGEMENT’S DISCUSSION AND ANALYSIS |  |
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| In Europe, sales declined 0.8%, with unfavorable foreign
exchange rates reducing sales 1.5%. Lower
distribution in The Netherlands and our decision to close
our operations in Finland early in 2006 reduced sales. In
the U.K., sales of Schwartz branded herbs and spices
were strong, but were offset in part by weaker performance
in dry seasoning mixes and some non-core wet
products. In France, higher sales in 2006 were led by core
spice and seasoning products. Sales in the Asia/Pacific region increased 1.1%, including a decline of 0.5% due to unfavorable foreign exchange rates. The sales contribution from China was particularly strong in 2006, partially offset by a decline in Australia. The decrease in operating income and operating income margin, excluding restructuring charges was driven by stock-based compensation expense, increased incentive compensation expense and increased advertising expense in 2006, partially offset by strong sales performance and cost reduction efforts.  We began recording stock-based compensation expense in 2006. Total stock-based compensation expense recorded in the industrial business operating results was $8.1 million. Higher volumes related to new product introductions was
the primary driver of the sales increase while favorable
foreign exchange rates added 0.4%. As part of the global
industrial strategy, certain low margin business was eliminated
which reduced sales by approximately 1% in 2006.
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volume and a price increase
implemented earlier in 2006 for products sold to food
service distributors. In this region, customer and product
rationalization reduced sales approximately 1.0%. In Europe, sales increased 4.1%, which was negatively impacted by an unfavorable foreign exchange rate impact of 1.3%. Some of the same types of products as in the Americas drove the increase in Europe, including snack seasonings and products to flavor chicken sold through the food service channel. In this region, customer and product rationalization reduced sales approximately 1.0%. In the Asia/Pacific region, sales declined 2.4%, including a favorable foreign exchange rate effect which increased sales 1.3%. The main reason for this decline was the loss of certain low margin products in Australia, which began in the first quarter of 2006. In China, we continued to grow sales to both food service customers and food manufacturers. The higher operating income and operating income margin, excluding restructuring activities, was driven by higher sales and gross profit margin, partially offset by stock-based compensation and higher incentive compensation accruals due to the higher profit level. Cost savings from our restructuring plan and a focus on strategic customers lifted margins in 2006. Also, the industrial business was negatively impacted in 2005 by several factors including extreme volatility in the vanilla market.   We generate strong cash flow from operations which enables us to fund operating projects and investments that are designed to meet our growth objectives, make substantial share repurchases, increase our dividend and fund capital projects and restructuring costs. |
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McCormick & Company 2007 Annual Report 22 |
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