|
Consolidated gross profit margin of
41.6% of net sales in 2006 declined from 43.3% in 2005.
This margin decline of 170 bps, resulted from several factors,
including the higher costs of a number of our raw and
packaging materials, particularly petrochemical-based, net of
higher pricing initiatives (50 bps), coupled with the inherently
lower gross margin structures of several of our recent
acquisitions, particularly illbruck (60 bps). Numerous price
increases were initiated throughout the operating segments to
help compensate or recover these higher material costs, many
of which have recently begun to moderate. The additional
gross margin decline resulted from a comparatively lowermargin
mix of sales, including increased services sales, which
characteristically carry lower gross margins, plus the change in
merchandising services arrangements (20 bps).
Industrial segment gross profit margin for 2006 declined to
43.0% of net sales from 44.8% in 2005. This 180 bps margin
decline mainly related to the recent acquisitions, particularly
illbruck (110 bps) and a primarily service-driven lower-margin
mix of sales. The productivity gains from this segment’s 9.9%
organic unit sales growth, combined with pricing initiatives,
more than offset raw material cost increases in 2006.
Consumer segment gross profit margin for 2006 declined to
39.5% of net sales from 41.3% in 2005. The higher raw
material costs, net of pricing initiatives, impacted this
segment’s margin by approximately 100 bps, while the change
in merchandising services arrangements had a negative impact
of 50 bps. A partly service-driven lower-margin mix of sales
accounted for the difference.
Consolidated SG&A expense levels improved by 80 bps,
declining to 31.7% of net sales compared with 32.5% in 2005.
The 7.4% organic unit sales growth, higher pricing initiatives
during fiscal 2006 (90 bps), the favorable SG&A cost structure
of illbruck and other acquisitions (30 bps), and the change in
merchandising services arrangements (10 bps) primarily drove
this expense level improvement. This combination of favorable
factors more than offset higher employment-related costs,
including health care and other benefits, compensation and
incentives, as well as higher fuel-related distribution costs;
warranty claims; legal, audit and environmental, and other
growth-related expenditures and investments, in addition to
the $10.2 million of one-time costs incurred during the second
quarter of fiscal 2006, comprised primarily of additional costs
associated with the finalization of the Dryvit national
residential class action settlement ($5.0 million) and the loss on
sale of a small non-core subsidiary ($2.7 million), along with
uninsured hurricane-related losses and costs associated with a
European pension plan.
Industrial segment SG&A improved by 140 bps to 31.8% of net
sales in 2006 from 33.2% in 2005, reflecting principally the
leverage benefit from 9.9% organic unit sales growth, higher
pricing (80 bps), the favorable SG&A cost structure of illbruck
and other acquisitions (50 bps), and cost containment and
|
savings programs collectively more than offsetting higher
employment-related costs, fuel-related distribution costs, legal
costs, and other growth-related expenditures and investments.
Consumer segment SG&A improved by 190 bps to 26.2% of net
sales in 2006 compared with 28.1% in 2005, reflecting
principally higher pricing effect (90 bps), the leverage benefit
from 5.0% organic unit sales growth, this segment’s change in
merchandising servicing arrangements (40 bps), and cost
containment and savings programs more than offsetting
higher employment-related costs, warranty claims, certain
environmental costs and other growth-related expenditures
and investments.
Corporate/Other SG&A expenses increased during 2006 to
$63.4 million from $38.1 million during 2005, reflecting
primarily the $10.2 million of one-time costs incurred during
the second quarter of fiscal 2006, outlined previously, plus
$13.5 million toward increased employment-related costs,
including $7.9 million in higher health care costs for covered
U.S. and Canadian employees and $1.8 million for additional
grants made under the October 2004 Omnibus Equity
Incentive Plan.
License fee and joint venture income of approximately
$2.2 million and $0.6 million for the years ended May 31, 2006
and 2005, respectively, are reflected as reductions of
consolidated SG&A expenses.
We recorded total net periodic pension and postretirement
benefit cost of $19.7 million and $16.0 million for 2006
and 2005, respectively. This combined expense increase of
$3.7 million was essentially attributable to increased pension
service and interest cost approximating $3.6 million, in
combination with additional net actuarial losses incurred
of $1.0 million, partly offset by improvement against the
expected return on plan assets of $0.9 million. A change of
0.25% in the discount rate or expected rate of return on
plan assets assumptions would result in $1.2 million and of
$0.5 million higher pension expense, respectively. We expect
that pension expense will continue to fluctuate on a year-toyear
basis depending upon the investment performance of
plan assets, but such changes are not expected to be material
as a percentage of income before income taxes.
As described in Note I to the
Consolidated Financial Statements, we recorded asbestos
charges of $380.0 million and $78.0 million during 2006 and
2005, respectively. Please refer to our Consolidated Financial
Statements for further information.
Net interest expense was $6.0 million
higher in 2006 than in 2005. Interest rates averaged 5.19%
during in 2006, compared with 4.85% in 2005, accounting for
nearly $3.1 million in increased interest expense. This average
rate increase was largely related to the Federal Reserve Bank
rate increases during 2006, which directly affected the interest
rates on our variable-rate indebtedness. Additional borrowings
associated with acquisitions added approximately $6.6 million
|
