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For the year ended May 31, 2007, and to a greater extent for
the year ended May 31, 2006, the decreases in the effective tax
rate were partially offset by valuation allowances associated
with losses incurred by certain of our foreign businesses,
valuation allowances related to U.S. federal foreign tax credit
carryforwards and state and local income taxes.
As of May 31, 2007, we have determined, based on the
available evidence, that it is uncertain whether we will be able
to recognize certain deferred tax assets. Therefore, in
accordance with the provisions of SFAS No. 109, "Accounting
for Income Taxes," we have provided valuation allowances
against such deferred tax assets. The valuation allowances
relate to U.S. federal foreign tax credit carryforwards, certain
foreign net operating losses and net foreign deferred tax
assets recorded in purchase accounting. We intend to maintain
the valuation allowance recorded as of May 31, 2007 for
certain deferred tax assets until sufficient positive evidence
(for example, cumulative positive foreign earnings or
additional foreign source income) exists to support the
reversal of the tax valuation allowances. A portion of the
valuation allowance is associated with deferred tax assets
recorded in purchase accounting. Any reversal of the valuation
allowance that was recorded in purchase accounting would
reduce goodwill.
The effective income tax expense rate for the year ended
May 31, 2007 reflects the impact of a cash settlement with an
insurance carrier regarding asbestos-matters, which resulted in
income of $15.0 million. Excluding the asbestos-related
settlement income, the effective income tax expense rate for
this year would have been adjusted to a pro-forma annualized
effective income tax rate of 32.1%. The effective income tax
benefit rate for the year ended May 31, 2006 reflects the
impact of the $380.0 million asbestos charge. Excluding the
asbestos charge, the effective income tax rate for the prior
year would have been adjusted to a pro-forma effective
income tax expense rate of 34.7%.
Net income of $208.3 million for the year ended
May 31, 2007 compares to net loss of $76.2 million for fiscal
2006. The prior year net loss reflects the impact of an after-tax
asbestos reserve charge of $244.3 million, while the current
year reflects a one-time gain of $2.1 million relating to the
settlement of prior years’ tax liabilities, and income of
$9.7 million (after-tax) related to the impact of a cash
settlement received from one of the defendant insurers,
as discussed previously. Excluding the impact of the asbestosrelated
items, this year’s net income would have reflected an
improvement of $30.5 million, or 18.1%, to $198.6 million
from last year’s adjusted $168.1 million. Margin on sales of
6.0% this year compares to last year’s adjusted 5.6%, excluding
the asbestos items, with this 40 bps margin difference mostly
the result of the combination of higher organic unit sales
volume, the one-time costs a year ago, the movement in sales
mix and the influence of several favorable acquisitions.
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Diluted earnings per common share for this year improved by
352.3%, to $1.64 from a diluted loss per common share of
$0.65 a year ago. Excluding the asbestos-related items
previously discussed, diluted earnings per common share for
this year improved by 16.3%, to $1.57, compared with last
year’s adjusted $1.35.
Consolidated net sales for 2006 of $3.008 billion
improved 17.7%, or $452.6 million, over 2005 net sales of
$2.556 billion. Contributing to this improvement was primarily
growth in organic sales of approximately $272.1 million, or
10.7%, including 3.3% pricing, plus nine acquisitions, net of
one small divestiture, resulting in another 6.9% growth in
sales, or $176.9 million. Net favorable foreign exchange rates,
relating primarily to the Canadian and Latin American
currencies, partly offset by mainly the euro, provided the
remaining 0.1%, or $3.6 million, of the growth in sales
over 2005.
Industrial segment net sales for 2006 grew 25.7% to
$1.812 billion from $1.442 billion in 2005, comprising 60.2%
of consolidated net sales for 2006. This segment’s net sales
growth resulted primarily from organic sales growth of 13.1%,
including 3.2% pricing, plus 12.4% from the 2006 acquisition
of illbruck and six smaller acquisitions, with the remaining
0.1% from net favorable foreign exchange differences.
Within the segment, the most notable growth in organic
sales occurred among molded composite structures, corrosion
control coatings, construction sealants and admixtures,
roofing, powder coatings and exterior insulating finishes.
Much of this demand improvement relates to increased
industrial sector maintenance and improvement activity across
North America, but also in Europe, Latin America, Africa and
the Middle East, as well as increased commercial and industrial
construction. We continue to secure new business and grow
market share among our industrial segment operations.
Consumer segment net sales for the year grew 7.4% to
$1.197 billion from $1.114 billion in 2005, comprising 39.8% of
consolidated net sales for 2006. Growth in organic sales added
7.5% (3.4% from pricing) to the consumer segment sales total,
plus 0.1% from favorable foreign exchange differences, offset
by 0.2% from a small divestiture, net of two small acquisitions.
Beginning in February 2005, our retail merchandising services
arrangements were changed with certain customers, resulting
in a year-over-year reduction in net sales and gross profit, with
a related reduction in selling expenses; otherwise, organic sales
growth in 2006 would have been 8.4%, or 0.9% stronger.
There were notable organic sales increases in this segment
among caulks and sealants; primer-sealers; confectionary, sliced
fruit and pharmaceutical glazes; and small-project paints and
coatings. Retail demand by the consumer remained fairly
steady throughout the year, augmented by continuous product
development among our businesses.
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