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On a consolidated basis, net sales of $3.339 billion
for the current fiscal year ended May 31, 2007 grew 11.0%,
or $330.4 million, over net sales of $3.008 billion during the
comparable period last year. The August 31, 2005 acquisition
of illbruck Sealant Systems ("illbruck"), plus nine other smaller
acquisitions, slightly offset by one small divestiture,
contributed 4.3%, or $129.9 million, to the growth over last
year. Organic sales contributed 6.7% to the growth in sales
from last year, or $200.5 million, and included 2.0% from
pricing initiatives and 1.3% from net favorable foreign
exchange rates year-over-year, primarily against the stronger
euro and Canadian dollar, offset slightly by certain weaker
Latin American and other currencies.
Industrial segment net sales, which comprised 62.9% of the
current year’s consolidated net sales, totaled $2.100 billion;
growing 15.9% from last year’s $1.812 billion. This segment’s
net sales growth resulted from the combination of the
acquisition of illbruck, plus six other smaller acquisitions, which
contributed 5.6%, plus organic sales, which added 10.3%,
including 2.7% from pricing and 1.7% from net favorable
foreign exchange differences. Within the segment, several
product lines provided notable organic growth over last year,
including corrosion control coatings, fiberglass reinforced
plastic grating composites and institutional roofing and
related services. Internationally, product lines in this segment
provided significant organic growth in Europe, Canada and
Latin America. There were strong organic sales improvements
throughout this segment, with much of this growth related to
ongoing industrial and commercial maintenance and
improvement activities primarily in North America, but also in
Europe, Latin America and other regions of the world, as well
as increased new construction in those sectors. We continue to
secure new business and grow market share among our
industrial segment operations.
Consumer segment net sales, which comprised 37.1% of the
current year’s consolidated net sales, increased 3.5% to
$1.238 billion from last year’s $1.197 billion. Organic sales
contributed 1.1% to the growth in sales, which included
pricing of 0.8% and 0.6% from net favorable foreign exchange
differences. Contributions to sales from acquisitions of three
product lines were slightly offset by a January 2006 divestiture,
for a net contribution of 2.4% to sales. The contribution from
organic sales in this segment has slowed over the past year,
principally as a result of fluctuating order patterns among
major retail customers in their efforts to manage their
inventories, as well as declines in existing homes turnover and,
to a lesser extent, new housing starts, which have affected
several lines of the business.
Consolidated gross profit margin of
40.8% of net sales this current fiscal year declined from 41.5%
a year ago. This margin decline of 0.7%, or 70 basis points
("bps"), is the result of several factors, a main one being
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continued higher costs of a number of our raw materials, such
as asphalts and various resins, net of higher pricing initiatives
(approximately 40 bps). Numerous price increases have been
initiated throughout both operating segments during the past
year to help compensate or recover these higher material
costs, a number of which are beginning to moderate. Several
recent acquisitions, particularly illbruck, also carry inherently
lower gross margin structures and further impacted gross
margin this quarter, by approximately 20 bps. In addition, a
comparatively lower-margin mix of sales, including increased
services sales, which also generate structurally lower gross
margin, further weighed on this margin.
Industrial segment gross profit margin for this year declined
to 42.1% of net sales from 43.0% last year. This 90 bps margin
decline in this segment essentially relates to the lower-margin
illbruck acquisition (approximately 20 bps); higher raw
material costs, net of higher pricing (approximately 40 bps);
and the continued growth in the lower-margin, mainly
service-driven mix of sales.
Consumer segment gross profit margin for this current fiscal
year declined to 38.4% of net sales from 39.2% last year, or
80 bps. Higher raw material costs, net of higher pricing
initiatives, amounted to approximately 30 bps, while the
change in delivery terms with a major customer during this
year’s second quarter impacted this segment’s margins by
approximately 40 bps. The remaining difference results from
the fluctuating order patterns among major retail customers in
their efforts to manage their inventories, as well as continued
declines in existing homes turnover and new housing starts,
which have impacted several product lines within this segment.
Consolidated SG&A expense levels for this year improved
by 100 bps to 30.6% of net sales compared with 31.6% a
year ago. Reflected in the improvement is the leverage from
the 5.4% organic sales growth, including higher pricing.
Additionally, the prior year included approximately
$10.2 million of one-time costs, which included the finalization
of the Dryvit national residential class action settlement
($5.0 million), the sale of a small subsidiary ($2.7 million),
hurricane-related costs ($1.0 million), and certain costs
incurred for a European pension plan ($1.5 million). The mix
of increased service sales over the prior year, which are
characterized by relatively lower SG&A support requirements,
also contributed to the improvement. Other factors having
a favorable impact on margins included tighter spending
controls across both segments and a change in delivery terms
with a major customer, which occurred during this year’s
second quarter and included an arrangement whereby this
customer provides for its own shipping.
Industrial segment SG&A improved by 90 bps to 30.9% of net
sales this current fiscal year from 31.8% a year ago, which
principally reflects the leverage of organic sales growth of
8.6% for this segment, including higher pricing. This segment’s
recent acquisitions also had a favorable impact on this year’s
results, impacting margins by approximately 10 bps.
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