Management's Discussion and Analysis
Results of Operations - 2006 compared to 2005
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Net sales | $ | 2,716.4 | $ | 2,592.0 | ||
| Percent growth | 4.8 | % | ||||
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.
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Gross profit | $ | 1,114.6 | $ | 1,036.6 | ||
| Gross profit margin | 41.0 | % | 40.0 | % | ||
The increase in margin is 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, and a more favorable product mix. Included in cost of goods sold are restructuring charges for production facilities that are 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.
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Selling, general & administrative expense (SG&A) |
$ | 772.6 | $ | 681.9 | ||
| Percent of net sales | 28.4 | % | 26.3 | % | ||
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 result of the adoption of Statement of Financial Accounting Standards (SFAS) 123(R) effective December 1, 2005 (see note 3 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 the consumer brands.
The following is a summary of restructuring activities:
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Pre-tax restructuring charges: Recorded in cost of goods sold |
$ | 11.7 | - | |||
| Other restructuring charges | 72.4 | $ | 11.2 | |||
| Reduction in operating income | 84.1 | 11.2 | ||||
| Income tax effect | (27.0 | ) | (3.7 | ) | ||
| Gain on sale of unconsolidated operations, net of tax |
(26.8 | ) | - | |||
| Reduction in net income | $ | 30.3 | $ | 7.5 | ||
| Reduction in earnings per share - diluted | $ | .22 | $ | .05 | ||
Pre-tax restructuring charges for both 2006 and 2005 include actions under our restructuring plans. These include charges to consolidate our global manufacturing, rationalize our distribution facilities, improve our go-tomarket strategy and eliminate administrative redundancies. The gain on the sale of unconsolidated operations in 2006 is primarily for the redemption of our ownership investment in Signature Brands LLC (Signature) and, to a lesser extent, the sale of our consumer joint venture in Japan. More details of the restructuring charges are discussed later in MD&A and in note 4 of the financial statements.
Interest expense in 2006 increased $5.5 million. Higher interest rates on our variable rate debt during 2006 accounted for most of this increase. Average borrowings during the year increased slightly.