Document JNkzwMBjVkOJa519w6gyKJ5JX

Hnancial Highlights (1 n thousands, except per-share figures) Years ended June 30 1972 Net sales Income before income taxes United States and foreign income taxes Income before extraordinary loss Extraordinary loss Net income (loss) Earnings per common and common equivalent share: Income before extraordinary loss Extraordinary loss Net income (loss) Additions to property, plant and equipment Depreciation $917,817 17,591 7,264 10,327 10,176 151 1.13 1.11 .02 25,228 23,769 At year end Working capital Property, plant and equipment--net Long-term debt Shareholders' equity Number of shareholders Number of employees $224,297 176,838 162,024 224,873 49,600 28.300 SCM Corporation is a diversi fied manufacturing company combining technical leader ship in many of its businesses with proven mass marketing ability in many others. Our 1972 sales of $918 million were divided among three broad segments of the economy: industrial, consumer, and office products. Industrial products (coatings, industrial and institutional foods, pigments and colors, metal powders, chemicals, pulp and paper and industrial process ing equipment) accounted for approximately 42 per cent of the total, or $388 million. Consumer products (paints, typewriters and appliances and foods) accounted for an addi tional 40 per cent of the total, or $368 million. Office products (copiers, calculators, business forms and telecommunications equipment) provided the balance of 18 per cent, or $162 million. 1971 $875,138 13,073 6,012 7,061 9,252 (2,191) .77 1.01 (24) 25,543 22,439 Twenty-one SCM business units serve customers in these three broad market areas. They range in size from Coat ings and Resins, the largest, to Walton Printing, the smallest self-contained business unit in terms of sales. For purposes of this report, we have grouped our21 selfcontained operating units into seven lines of business. The sales, operating income and average assets for these seven groups over the past five years are reported on page 5, and the year's results are reviewed in detail in the following pages. $230,712 184.122 176,422 224,696 53,400 28,600 This annual report to the almost 50,000 SCM share holders attempts to place the 1972 fiscal year in perspective of the recent past and to indicate the future direction of the company as fully as possible. 1 GLD38645 i I i t To mu Shareholders Net income, before extraor dinary charges, was much improved in fiscal 1972; in fact il was the best it has been in three years. In addition, we have resolved two of SCM's major problems by drastically realigning Marchant calcu lators ana by deciding to dispose of our Shetland floorcare business. These actions resulted in an extraordinary charge Income: Income after taxes, but before the extraordinary charge, increased 46percent to Si0 3 million, or $1.13 a share, from $7.1 million, or 77 cents a share in 1971. Extraordinary charges of $lG.2m;i'ion, or$1.11 a share, resulted in net income of $151.000. or two cents a share This compares with an extraordinary charge of $9.25 million, or SI.01 a share, in 1971. which resulted in a net loss in that year ot S2.2 million, or 24 cents per share. Net income benefited from the fact that certain investment tax credits were available to us in 1972 and notin 1971. Our tax provision was at the rate of 41 per cent last year compared to 46 per cent in 1971. Sales increased 4.9 per cent to S917.8 million from $875.1 million in 1971. Income from operations is discussed in the review of operations that follows this letter and the extraordinary charges are detailed in the financial review and financial statements. Operating Highlights: Coatings and Resins, consisting principally of Glidden paints for consumers and industrial customers, and Smith-Corona typewriters were our two leading moneymaking operations in 1972. Theyalso provided the bulk of the total increase in earnings over the preceding year. Our Industrial Foods group, which refines and sells vege table oils, lost money and was our major disappointment. Calculators and Shetland floorcare, the two businesses which accounted for all but a fraction of the extraordinary charge, also lost money in operations. To that extent, our overall operating earnings were held down. Most of our businesses did well and improved on their perform ances of 1971. SCM's cash position showed substantial improvement. At year-end we had certain small foreign borrowings but short term borrowings, which totaled $38 million as recently as 1970, have been practically elimi nated. Total debt, including short-term borrowings, was $177 million at the end of fiscal 1972, down from $212 million in fiscal 1971, and $242 million in fiscal 1970. For the first lime in many years, we were in a cash surplus position at June 30. We had $6.7 million in short term investments at year-end. Results for 1972 were achieved in a mixed economy. Most of our consumer prod ucts did well, reflecting the general pickup in consumer spending. Some industrial areas remained depressed, however, with improvements slow in coming. Under Phase li of the govern ment's Economic Stabilization Program, we operate under price and wage restrictions. These restrictions have not yet had an adverse effect on profits, and are not likely to have such an effect in the immediate future. Whether this lack of adverse effect will con tinue, of course, depends on future governmental policies. GLD38646 i ( i l Long-Range Plan: This annua! report, the first since I was appointed president and chief executive officer on January 1. offers the opportunity to give you more than just a detailed account of SCM's perform ance for 1972. It also allows me to relate that performance to our plans for the future. Over the past year or two, our principal concentration has been on improving profits by eliminating major weaknesses. Now we can turn our attention to building on our strengths. Our strengths, as I see them, are in specialized areas of chemical technology and in our ability to merchandise large quantities of consumer products effectively These strengths provide a common thread which, as this report hopes to make clear, weaves through all of SCM's operations. Decisions: Certain actions we have taken over the past several years to eliminate major weaknesses have re sulted in extraordinary charges against earnings, and I would like to review them. In 1970: we discontinued pro duction of rotary calculators, full-sized office typewriters, and commodity iron powders. in 1971. we disposed of certain paper operations, reorganized others, and sold a small elec tronics firm. Also in 1971, we relocated copier manufacture to a con solidated typewriter-copier manufacturing plant, and leased the former copier plant to a nother company. This year wo reorganized our Marchant calculator operation and decided to phase out our U.S. floorcare business. The cash dividend was suspended early in fiscal 1971, reflecting unsatisfactory earnings. Finally, in the past several years we have made major investments of time and money aimed at strengthening the operations and the manage ment oT those businesses whore we have a strong position. Results: As a direct result of these decisions: Glidden paints had record sates and earnings last year. Smith-Corona typewriters had record earnings last year. Major losses in calculators and floorcare have been eliminated. Metal powders have moved to a profit from a loss. The.two remaining paper mills in Kalamazoo, Michigan, are again profitable. a-i iKsmfarji.ivav GLD386A7 3 Our copier business is sub stantially improved. Employment has been re duced to 28,300 from the all time high figure of 33.500 reached in 1969. SCM in Transition: What all this reflects. I believe, is that SCM is in transition. As we begin to see the results of decisions of the recent past, it becomes clear that SCM has changed markedly. Our future looks promising because operations are better and we have been solving major problems that have been holding us back. But SCM has not yet emerged as the company that our plans envision. So our building prog'arn will continue until we have returned SCM to the growth and profitability levels we feel it can achieve. An important part of this build ing plan has been the extraor dinary charges. As most of you are aware, last year's charge was the third in as many years. No doubt because of this, many times during the past year I have been asked the same question by share holders and others interested in SCM: Will there be addi tional extraordinary charges? No one can read the future and categorically say that any 4 company will never again tiave to take an extraordinary charge. We think we have now dealt with the problems that could give rise to such charges: Our plan to improve profitability is well started, and if it con tinues, such charges will, of course, be unnecessary. I hope that this letter enables you to gain a better under standing of what we are attempting to do: improve profits by eliminating major weaknesses and building on strengths, and how we are going about it. The ultimate test will, of course, be how well SCM performs in the coming years. I am optimistic that the prog ress made in 1972 will continue next year. Paul H. Elicker President The table on the opposite page shows the sales, operating income and average assets of each of our seven lines of business. The purpose of this display is to show the evolving shape of SCM as a business. Several trends are apparent. Average assets invested in business equipment, for example, have shown a decline, both actual and rela tive to total assets. While the sharp drop in 1972 reflects the calculator write-off, it also reflects the increased depre ciation for copiers placed under Copy Service programs. In chemicals, assets have increased substantially al though profits have declined. The chart shows a heavy investment that has yet to provide the return that we anticipate. A simitar trend is apparent in foods. Finally, operating income from coalings and resins and type writers and appliances reflect the fact that these are our strongest businesses. In the following pages each of the seven produetgroupings is reported on separately. The tables at the beginning of each section also include figures to show the return on sales and the return on average assets GLD38648 XA k Net Sates. Operating Income and Average Assets by Product Group (In millions) Years ended June 30 1972 Net Sales Coatings and Resins Tyoewriters and Appliances Foocs Business Equipment Chemicals Paper Products Other Products Total 229.2 174.4 211.4 117.8 74.0 86.1 24.9 917.8 Operating Income Coatings and Resins Typewriters ana Appliances Foods Business Equipment Cherncas Paoor Products Otte'" Products 17.2 11.8 (2.9) (3.0) 3.1 4.2 .4 Total 30.8 Average Assets Coatings ana Resins Tvpewrilers anAppliances Foods Business Equ.oment Chem cals Paper Products Other Products 121.6 100.8 100.3 78.8 73.0 36.2 18.3 Total 529.0 1971 207.8 161.1 205.0 120.1 67.5 86.1 27.5 875.1 13.8 7.9 5.8 (3.6) 3.6 3.6 (2.2) 28.9 116.0 114.9 92.4 95.6 73.0 49.6 19.0 560.5 1970 198.5 163.5 183.8 122.1 68.6 88.5 29.5 854.5 9.1 7.5 86 (3.7) 6.4 3.2 (9.1) 22.0 109.7 118.8 76.0 98.9 68.6 53.8 25.4 551.2 1969 175.8 158.0 169.6 126.9 67.5 77.5 32.3 807.6 13.7 14.2 8.3 4.1 9.4 1.9 (1.3) 50.3 95.2 106.3 67.5 98.1 67.1 47.7 25.2 497.1 1968 148.8 146.0 163.6 123.1 58.7 68.7 35.9 744.8 10.2 11.7 9.3 .1 5.9 2.2 2.3 41.7 83.9 100.7 62.7 95.7 51.1 43.3 23.3 460.7 _ GL0386A9 Glidden's Coatings and Resins group had increased sales and profits last year, reflecting the continued high level of housing starts, higher rates of consumer spending, and to some extent, a recovery in the industrial sector. The S2.8 billion U. S. coatings market is divided into $1.5 bil lion of consumer sales of a re stiveiy few products and SI. j billion oi industrial sales of a great number of products. Glidden is the fourth largest of the relatively few companies who share about 40 per cent of trie market: over 1.000 others divide the remainder. We are strong in both segments but somewhat stronger in con sumer. or "trade" sales, than in industrial sales. Consumer Coatings: Our position in consumer paint sales reflects the wide and growing recognition of Glidden "Spred" products, our principal line. Sales are supported by a comprehensive distribution network that includes more than 1,000 dealers' and 203 companyoperated retail stores. These dealers and stores are sup plied by 98 regional ware houses which, along with many store locations, also serve as regional distribution centers for painting con tractors. Glidden also operates 131 leased depart ments in stores located primarily in suburban shop ping centers. Leased depart ments. even more than our retail stores, stock a large number of items for resale, such as home decorating needs and hardware, to provide onestop shopping for the do-ityourself home decorator. Last year in our centralized research center near Cleve land, we developed an alkyd resin paint called "Spred Gel-Flo" which has the con sistency of gelatin in the can, yet brushes on smoothly and evenly to any desired thickness without dripping or running. Sales of "Spred Gej-Flo" are encouraging for a new product. Paint is expensive to ship long distances, and because oj this, Glidden's 16 paint plants in the U.S. and Canada are located near the markets they serve. For several years we have been adding capacity to ourpgint plants and modern izing our equioment. Con struction is underway on a $7.5 million plant ai Huron, Ohio, to produce paints for the midwest consumer market, industrial Coatings: Industrial coatings have generally more complex formulationsthan (In millions) Net sales Operating income Return on net sales Average assets 1972 1971 1970 1969 1968 $229.2 $207.8 SI 98.5 $175.8 $148.8 $ 17.2 $ 13.8 $ 9.1 $ 13.7 $ 10.2 7.5% 6.6% 4.6% 7.8% 6.9% $121.6 S116.0 $109.7 $ 95.2 $ 83.9 Coatings and rosins is a solid, consistent ana growing busi ness for us our Reading, Pennsylvania plant, one of Glidden's 16 pla nts in the U.S. and Canada, the mixing operation begins. This modern, high speed machine is being loaded pr>or to mixing a 3,00d ganon batch of paint. Return on average assets 14.1% 11.9% 8.3% 14.4% 12.2% GLD38650 CLD3855\ :\.-:s-;i.rnei putiltS. I Ills IS bCc.iuse they arc labored lor specific applications including the system by which they ate to be applied, the environment in which the coated product is to be used, and growing legal restrictions on materials used for some products. This being the case, technical service is the key to success with industrial cus tomers just as advertising and distribution are the keys to success in trade sales. Our technical service represen tatives, working with the cus tomer. use ourtechnology and experience to meet his needs. Because of the variety of industries served and the specialization demanded, industrial markets tend to be segmented. In tho U.S . in approximate order of size, industrial coatings are sold to ; mu.-motive, appi.ances. v.oo>i finishing, and metal pi 't nnei industries. We have special stiength in can coat ings (the clear coating applied to the inside ol cans to prevent food products from corning in contact with the metal con tainer). coil coatings (materials (or coating rolls of metal from which pre-painted parts can be stamped or formed without chipping or marring the finish), and electrocoating (a process of applying a positively charged coating material to a negatively charged object). Gtidden was a pioneer in electrocoating. Glidden s coatings and resins business is heavily dependent on innovative research. We arc, for example, de veloping industrial coatings that can be applied elec trically as dry powders. These coatings will eliminate pollution caused by the evaporation of solvents when parts are spray painted. We have also expanded our efforts in the development of liquid coatings that use water as the solvent, which will help reduce the pollution problem faced by users of industrial paints. International: Gfidden's Coat ings and Resins group also manufactures and sells industrial and consumer paints in Canada and several Latin American countries. We are a major producer for the Canadian market and we are the leading paint maker for the more modest markets in several Latin American coun tries. Overall sales and earnings of our Latin American affiliates are much smaller than our U.S. and Canadian businesses. In Europe, we make only indus trial finishes and generally in particular segments of the industrial market. We have a medium-sized operation in Italy and a somewhat larger one in Germany. Our plans are to expand into additional countries in Europe, building and expanding on our industrial coatings base. In the remainder of the world market, we participate primarily through technical licensing agreements; that is, selling our research and manufactur ing knowledge. In summary, coatings and resins is a solid, consistent, and growing business for us.. While the overall industry growth rate is moderate, in recent years we have consist ently increased our share of market. We have depth of management and a broadbased position in the industry. We anticipate continued good performance by this important part of SCM's business. Four one-gallon cans are simul taneously filled at our Reading, Pennsylvania paint plant. Sales ol Gtidden consumer paints are supported by a distribution network that includes dealers' stores, company-opeiated retail stores and leased depart ments like this one in a Big N store, in Rochester, New York, Jim Berry (left) our managerof the paint, hardware and auto department at Big N, restocks and reorders Glidden paints with Robert P. Winchell, zone supervisor for Glidden. \\ ' 'r-h i GLD38653 Typewriters and Appliances 1 (In millions) 1972 1971 1970 1969 1968 | Net sales $174.4 S161.1 $163.5 $158.0 SI 46.0 | Operating income S 11.5 S 7.9 $ 7.5 S 14.2 S 11.7 I Return on net sales 6.8% 4.9% 4.6% 9.0% 8.0% | Average assets SI 00.8 S114.9 $118.8 $106.3 $100.7 f Return on average assets 11.7% 6.9% 6.4% 13.3% 11.6% A continuing program aimed at manufacturing efficiency and automation at our Cortland, New York typewriter facilities has enabled Smith-Corona to stay competitive in the domes tic market even without tariff protection. This automated sub-assembly machine does six separate tasks, and turns out a finished assembly at almost one per second. 10 SCM'sCoi-sume: Products Division, consisting of the Smith-Corona and ProctorSilex groups, benotited from increased consumer spending, particularly in the second half of the fiscal year. What would have otherwise been a record year for the g roup as a whole was marred by disappointing results in fioorcare. Typewriters: The largest part of sales and an even greater portion of the profits in this group came from typewriters. Last year, Smith-Corona type writers had record profits on slightly lowersales. The youth market in the United States has long been the principal outlet for portable typewriters. However, sales to graduating high school stur dents ate not expected to grow as fast as they have been because for the next few years there will be only nominal increases in the number of seniors. Sales of electric portables, particularly fullfeatured models at the high end of the product line, are still expanding at very satisfactory levels. SmithCorona accounted for the largest share, about 730.000 units, of the total U. S. market Of nearly 2,000,000 units last year, even though most im ported competitive typewriters sell at lower prices. The reason is Smith-Corona's reputation for reliability and durability, which is well-known to consumers. At our Smith-Corona manufac turing facilities in the Cortland, New York area, a continuing program of product improve ment and automation has enabled us to stay competitive in the domestic market even without tariff protection. One way we have maintained our competitive edge is by being ' tv SL.D36&54 I a h.-actO! in introducing new tYpewriter leatures. a record wc intend to maintain in the future. Our distribution system, which we betieve is the broadest and most efficient in the industry, reaches mass merchandisers, direct mail and mail order oullets, and 12,000 dealers. Currently, we have a lesser position overseas where foreign tariff barriers tend to discriminate against U.S. typewriters. We supply this market with the least expen sive models in our line from two manufacturing plants in England. Outside the U. S., the portable typewriter market tends to be dominated by low-end, non electric portables, and lowcost manufacturing is essential to compete in these markets. Appliances: Sales of appli ances continued to be ad versely affected by the reces sion during the first part of fiscal 1972. However, consumer demand for household appli ances improved steadily, and for the year Proctor-Silex had a substantial increase in profits on a slight increase in sales. Proctor-Silex continues to be challenged by heavy competi tion from domestic and foreign manufacturers which makes it difficult to recover higher production costs fully. Toasters and i rons are our two principal electric houseware products, and we are especially strong in these markets. Sales of our toasters, sold under the Citation, Mary Proctor, Starflile, Proctor-Silex and "Litelong" brands, continued strong, while sales of irons, marketed under the same brand names, declined slightly. A new "Lifelong "toaster-oven was added to the line last year, and glass coffee percola tors had improved sales. A significant portion of the products manufactured by Proctor-Silex are marketed under brand names of other companies. Continued success at ProctorSilex depends in large measure on a steady stream of sue- ...... cessful new products being brought to market. We have been strengthening our research and development staff since last year and will be in a better position to attain this goal. Smith-Corona portable electric typewriters are the number one seller in the U.S. Our distribu tion system reaches mass mer chandisers, direct mail and mail order outlets and 12,000 dealers. One of these dealers is Alan's Office Equipment Inc., Clearwater, Florida, where W. Robert Powell (left) SmithCorona area manager, meets Alan R. Carlson, president of Alan's. As a result of care in manufacturing, Smith-Corona typewriters' reputation for reli ability and durability is well known to consumers. GLD38656 GLD38657 . ill1:-: i-',i' n.i i-: ill If: : k s . L.U::v..: vo patod I- -1 > :: r uss would I :r :;! itid.i: 1', A -i v VK> p'on'ffinWilS : mv :i .:t line it: -: r ln-.v price : : ! he -lOlll ' If: it h phor- .:ht -.Miiiii.m clo'irior i ;i--i ii.-ii-.-.H fj. hitjf or It:.:-; el tie business. i that < ir :pp i.mce 1'-.it*' in t ie U S. nrd I!;oal s-ronci -I w - iriif-rdemand . ! : i i)| l-S i el . -.v ii it, ) t.>.Il iron `:o-r- ::ut SiU-theni (Vies. North Utnohnn plant in :> retail store, f ,mi,tily chioine-piatod iron bod.os (left) are removed from die plating tanks: receive final temperature cheek bolore being packed. One of f'roclorSilex's great strengths is its distribution network. Our appliances are sold in nearly 10.000 outlets--slores like Brooklyn's Abraham & Straus, where Hay Lyons (right) dis trict area manager for ProclorSilox and William J. Noedng. A&S houseware buyer, examine a Proctor-Silex iron.- Foods (In millions) 1972 1971 1970 1969 1968 Net sales S211.5 S205.0 $183.8 $169.6 $163.6 Operating income S (2.9) $ 5.8 $ 8.6 $ 8.3 $ 9.3 Return on net sales - 2.8% 4.7% 4.9% 5.7% Average assets SI00.3 $ 92.4 $ 76.0 $ 67.5 $ 62.7 Return or average assets - 6.3% 11.3% 12.4% 14.8% Durkee s loocis business tost money last year because of several problems at our Industrial Foods and Food Service operations. This was the first time in nearly 20 years that these groups were not profitable. However, Durkee Consumer Foods, which repre sents over a quarter of our food volume, had record sales and profils in fiscal 1972. Consumer Foods: Durkee is one of three major processors and distributors of spices in the U.S., competing across-theboard with two other nationally advertised labels. Spices, especially pepper, together with sauce and gravy mixes and coconut, account for well over half the sales and a higher portion of the profits of this segment of Durkee Foods. Other consumer foods, sold under the Durkee, O & C, Dailey, B. M. Reeves and Gretchen Grant labels, include a wide range of specialty foods, such as pickles, olives and frozen hors d'oeuvres. The specialty food market is growing faster and tends to have higher margins than the genera) food market, and Durkee has been able to improve its market share in many product lines. Industrial Foods: Durkee Industrial Foods supplies a wide range of edible oils to the food industry generally, and specialized edible oil products to confectioners, bakers, and cake manufacturers. Our indus trial foods group purchases in the commodities market crude soybean, cottonseed and corn oil, and other lesser known oils, many of which are imported, and refines these oils for use in food manufacturing. In addition to the basic running technique, Durkee uses solvent fractionation and other advanced processes to provide ingredients chemically tailored to specific customer applica tions. Industrial Foods labored through a series of problems that resulted in its losing money last year. The refinery at Joliet, Illinois, opened in 1971, reached reasonable levels of production only during the fourth quarter of fiscal 1972. Unfortunately, this new capacity coincided with general excess capacity in ihe industry, a % period of flat growth in demand and severe fluctuations in the world oil market. Sharp declines in oil prices during fiscal 1972 made satisfactory inventorying and pricing ex tremely difficult and had an adverse effect on the Industrial Foods group. Durkee Consumer Foods |s one of the three major processors and distributors of spices in the U.S. Spices, especially pepper, sauces and gravy mixes and coconut account for over half the sales. Other Durkee foods include olives, frozen hors d'oeuvres and several kinds of pickles, which are being restocked by Robert Throckmorton, Durkee sales representative. Colored and flavored coconut (right) a potential future product, is one of many products that emerged from research efforts at our Strongsville laboratory. GLD38660 itt During the year, and at yearend. substantia] provisions were made to restate nvontory values to reflect the market price. After the close of the fiscal year there were signs that the world supply of edible oils had become more in balance with indicated demand. While commodity prices are hard to predict, this should result in more stable market conditions in 1973. Food Service: Durkee's Food Service business is in part an extension of our Industrial Foods operation. Refined oils, the main product of Industrial Foods, is also the principal product of Food Service. There are, however, important differ ences in the markets served by the two groups. Industrial Foods' principal customers are tone: manufacturers, while i ood Service mainly supplies cooking oils to away-from- liomo eating places. Food Service is also a supplier of frozen doughs to bakeries, proportioned seafood entrees, and frozen hors d'oeuvres to hotels and similar large institu tional customers. Durkee's line of preportioned meat and chicken entrees encountered severe competi tion as large meat packing companies entered the field. In 1972 we sold three small processing plants in Penn sylvania which had been losing money. The operating losses of these three plants, together with the high cost of oil, were the main reasons that the Food Service group lost money in 1972. Our Industrial Foods group supplies specialized edible oil products to confectioners, cake manufacturers and bakers like the Keebler Company. Keebler's vice president of manufacturing, E.O. Tungate, Jr., watches M.E. Hanson, Durkee national account exec utive check the quality of a Durkee ingredient by seeing how a Keebler cookie snaps. Much of our involvement in the food industry begins at our Strongsville, Ohio research laboratory (right) where, among other projects, we are exploring various aseptic (germ free) processing techniques. Aseptic processing, an advanced manufacturing technique for preparing food products under sterile conditions, allows a product to retain more of its texture, flavor and color than current packaging methods. r Business Equipment I I (In millions) 9 Net sales 1972 1971 1970 1969 1968 S117.8 $120.1 SI22.1 $126.9 $123.1 Operating income S (3.0) S (3.6)$ (3.7)$ 4.1 $ .1 Return on net sales - - 3.2% .1% 1 Average assets $ 78.8 S 95.6 S 98.9 $ 98.1 $ 95.7 Return on average assets - 4.2% .1% Our copier paper coating operation, in a modern plant at Phoenixville, Pennsylvania, is a complex process requiring a combination of expertise in chemical anc coating technol ogies so that just the right amount of zinc oxide is applied to the paper. We produce costed paper for our own copiers and for those of our competitors. 20 As shown in the accompanying table, this division again oper ated at a substantial loss. Some decrease in this loss occurred because ga i ns in our office copier business, which is profitable, more than offset poorer results from calculators. Of all the actions taken last year, none had a greater impact on SCM's overall per formance, nor held out the promise of greater improve ment in the future, than those that occurred in our Business Equipment division. The major action was the realignment of Marchant calculators which resulted in the bulk of the extraordinary charge of SI. 11 a share. Calculators: Marchant had been incurring losses at an accelerating rate mainly be cause of the radical changes that had been taking place in the calculator market. These losses continued and worsened through fiscal 1972. Our objective was to stop the major drain from calculators by June 30, and we believe we have succeeded. In recenl years low-cost im ported calculators have come to be sold through dealer out lets. Our calculator marketing effort has been reoriented toward sales through office equipment dealers instead of through company-owned branches, and we closed fully 160 Marchant branch offices. The extraordinary charges in cludes provision for disposing of high cost and superseded inventory, costs of closing the Oakland plant and adjusting the value ol the plant and equipment, and the costs of phasing out the retail dis tribution network. We are still in the calculator business. Calculators of our design are being manufactured for us by other companies for sale under the Marchant name. Over 210 dealers, 85 of whom were former Marchant branch managers, had been named by June 30. These dealers are supplied with a competitive line ot American-made calculators. Our profitable service organi zation continues without major change caused by the realign ment. Skilled personnel from more than 300 Marchant service locations across the U.S. continue to provide prompt service for customers with our machines and are increasingly called upon to service office machines sold by others. The demand for calculators is still growing at a rapid rate in both the U.S. and overseas, and as a result of our actions in 1972, we are in a position 1o participate more effectively in this still attractive market. Copier Products: Strong demand for copiers makes this a fast growing markel both domestically and overseas. In earlier years we marketed our copiers, which use a specially coated zinc oxide paper of our own manufacture, by individual sale of machines and paper. However customers have become accustomed to renting a copy-producing service rather than owning their own machine. Accord ingly, we now have available programs where service is provided on a per-copy charge We call this "Copy Service." We started concentrating on Copy Service overseas some years ago, and more recently in the U. S. Emphasis on Copy Service, GLD38664 the past copior marketing leant individual sales of machines and paper i being made at ieftj. Now we concen trate on programs where wo provide a copy-producing service on a per-copy charge. Customer representatives like an Molchan (right) constantly sit our copier customers to nsure proper service. Here lie customer is Charles I i. Carman {left) president, and Paul Walters, ofhee manager, Charles H. Carman Inc. under which most costs are charged off as incurred and revenues are stretched out, large'y explains why our foreign operations have been more profitable, and why profits from domestic operations improved substantially on a relatively modest increase in revenues for fiscal 1972. Our copier paper coating Operation continued to do well last year, producing paper for our machines and for those of competitors. We broadened our line of copier supplies shortly after the close of the fiscal year with the purchase of a plant and operation that makes the dry and liquid toners used in various copiers. SCM's Copier Products group now manufactures and sells a full line of supplies for our competitors' as well as for our own machines. We sell paper and loners through both retail and wholesale channels. Copiers using zinc oxide coated paper still have a role in the market, and their place ment can continue to be a profitable operation. However, because we feel that this process may have a limited life, during the year we stepped up. as a normal charge against operations, the already accel erated depreciation schedules on this equipment. At the same time, there is a growing de mand for plain paper copiers that operate at adequate speed, at reasonable cost and also combine relative simplic ity and high durability. ml Recognizing this trend, our copier development efforts are directed toward such a machine. In May we announced an agreement with Matsushita Electric Industrial Co., Ltd., whereby SCM was licensed to use Matsushita's new photo conductor material throughout the world with the exception of Japan. At presenl, we do not have for sale a machine that uses the Matsushita material, although prototypes are being developed in our research laboratories: A machine should be on the market in two to three years, depending on whether we design and manufacture it our selves or in cooperation with another manufacturer. GLO38667 23 Cnemtcais omxien Lnonncais operates in four different areas, each of which requires a sophisticated chemical technology. They are: Pigments and Color, Organic Chemicals, Ceramics and Metal Powders. Overall, this business had a disappointing year. By the end of fiscal 1972, Pigments and Color, the largest of the four operations, was at breakeven, but it lost money for the year. Organic Chemicals, seriously impaired by a strike at another company's facility which sup plies steam and feed stock for one of our plants, had lower profits. Ceramics and Metals, two smaller groups, both had record profits. Pigments and Color: Pigments and Color's principal product is titanium dioxide, a white crystalline substance sold to the paint, paper, plastic and ruboer industries as a whitener and opacifier. We are one of the medium-size pro ducers of this material in the U.S. Last year's annual report noted that heavy start-up costs at our new chloride plant at Baltimore, together with poor price conditions for all grades of titanium dioxide, resulted in an unsatisfactory year. We also pointed out that we were not optimistic about improve ment in the near future. This estimate proved generally correct during fiscal 1972. Pigments and Color had d substantial loss caused by poor pricing conditions. Prices showed some improvement at the end of the fiscal year. Despite these problems, we now believe there are reasons for optimism. The chloride plant, ah alternate process new to us last year, is now operat- (In millions) 1972 1971 1970 1969 1968 Net sales S74.0 $67.5 $68.6 $67.5 $58.7 Operating income S 3.1 $ 3.6 $ 6.4 $ 9.4 $ 5.9 Return on net sales 4.2% 5.3% 9.3% 14.0% 10.0% Average assets S73.0 S73.0 $68.6 $57.1 $51.1 rteturn on average assets 4.3% 4.9% 9.3% 16.6% 11.5% Paul Albert (left) of Glidden's Ceramics group, spends a good part of his time with custo1 mers. In this case, the custo mer is Al Hess, unit manager at General Electric's porcelain unit. We supply GE with por celain coatings for major home appliances. Our Ceramics group also produces thermo plastic pellets (right) used in printing materials that fuse to glass bottles. 1 i ] III. in-j cthmomiy. .me n; trkut : mm. uienucats penorm- ItCb. AMvJdvJ Ly V-iVJtl- conditionsh;wo unproved. ,:e last year was adversely tinned high rates of home About 140,000 tons of a mmeted by price erosion construction and appliance total U.S. annual capacity of in several areas, particularly in sales, this operation had approximately 000.000 tons has been tost as several com panies ciosed operations due itasic terpenessuch as pine Oil One of this group's two plants was forced fo close for record profits and sales tor the year, in an industry marked by relatively slow growth. to economic problems brought on by the recession and/or pollution problems. Organic Chemicals: Glidden's Organic Chemicals group processes crude sulphate turpentine into intermediates sold to manufacturers of vitamins, perfumes, line chemi cals, flavors, and fragrances. three months and was affected throughout the year because of a strike at a paper mill that supplied us with boiler steam and crude tall oil. We no longer rely on that plant for boiler steam and we have entered into a joint venture that will help assure us of adequate supplies of raw material. Metals: The Metals group continued the improvement begun in fiscal 1971, and had its most profitable year in a decade. This group is a leading producer of copper powders that are made into oil-less bear ings used in home appliances and automobiles. It is also a leader in stainless steel and This group is the world's Ceramics: Glidden's Ceramic other alloy powders used in largest in its area and is a group is a leading maker of automobiles and industrial major supplier of refined ceramic glazes used in bath equipment. Industry sales of pine oil used for disinfectants. room tiles and fixtures, specialty powdered metals are We are also a major processor industrial tiles, and porce growing at high rates, and we of crude tall oil, which we turn lain coatings for major home have the technology required into rosins, fatty acids, and to maintain our position as a distilled tall oil used in the leader in the field. paint and plastics business. Glidden's Organic Chemicals group is a major processor of refined pine oil used for disin fectants such as Pine-Solfa household cleaner made by American Cyanamid Company. Dave Duncan (right) Glidden sales manager, and Thomas Yannitle, purchasing agent for American Cyanamid, form the vital link between manufacturer and customer. Our Organic Chemicals group is also a world leader in syn thesizing flavors and fragrances from crude sulphate turpentine. A crucial part of this process involves the mass spectrom eter gas chromatograph used for atomic analysis of chemical compounds. This complex equipment breaks down a com pound and gives us information needed to synthesize it. Paper Products Despite unfavorable industry conditions, Allied showed moderate overall profit im provement in fiscal 1972. Our older Kalamazoo, Michigan paper mills and our business forms operations had substan tially improved results com pared to fiscal 1971. These more than offset declines at our Southern pulp and paper and converting operations. Kalamazoo Paper Group: The improved picture at Allied stems partly from major changes that look place in fiscal 1971. At that time, using the criterion of strengthening profitability by eliminating weaknesses, we closed one paper mill in Kalamazoo and a greeting card operation in Chicago, and reorganized the other Kalamazoo paper mills. However, 1972's profit improve ment resulted from far mote than the closing of unprofitable operations. The two remaining mills at Kalamazoo, which were losing money, are now profit able in part because they have been able to develop and sell new products. Allied has been and continues to be strong in paper tech nology and this has enabled us to bring out products such as high wet strength papers, electrostatic offset masters and cigarette tipping papers. Southern Pulp and Paper; Two important projects were begun in fiscal 1972 at Allied's Southern mill at Jackson, Alabama: modernization of the wood yard and design and construction of a new recovery boiler. A recovery boiler produces steam and recovers the chemicals used in cooking Business forms are made by the Allied/Egry group of Allied Paper at our plant in Denison, Texas. Heart of this operation is the paper convert ing machine press which can make continuous business forms containing from one to six copies, in addition, the machine, which can make two different forms s multaneousiy, prints, perforates, folds and collates the forms and as many pieces of carbon caper as required. (In millions) 1972 1971 1970 1969 1968 Net sales $86.1 $86.1 $88.5 $77.5 $68.7 Operating income $ 4.2 $ 3.6 $ 3.2 $ 1.9 $ 2.2 Return on net sales 4.9% 4.2% 3.6% 2.4% 3.2% Average assets $36.2 $49.6 $53.8 $47.7 $43.3 Return on average assets 11.7% 7.3% 5.9% 3.9% 5.1% Gt.C386?3 P'ocoss. The wood yard project, costing SI .5 million, should be finished during fiscal 1973, and the recovery boilor. expected to cost about S10 million, should be com pleted by the end of 1974. Wo expect that the recov ery boiler will be financed through the sale of industrial revenue bonds. Both programs will improve efficiency, and the recovery boiler will enable us to meet existing and contem plated state and federal pollution control laws. Through fiscal 1972 market prices for pulp continued at the recession levels of 1971. This caused Allied's market pulp sales to be substantially previous year. By the end of the fiscal year, however, pulp prices had begun to firm, and ns an indirect result we are beginning to see better prices for fine papers. Allied, a maker of fine papers, is in a good position to benefit from this. However, we will gain little directly from increased pulp prices because, while the new recovery boiler is being in stalled. our Jackson facility will operate at restricted levels. Business Forms: Business forms made by our Allied/Egry and Walton Printing operations are a part of Allied Paper. Histacount, which sells a mail order to doctors, lawyers and other professionals, is part of the Business Equipment Division. At about midyear, Allied/Egry's sales and profits began to increase with the easing of the recession in the business forms industry. Afso, a continuing program of equip ment modernization and up grading has increased operat ing efficiency. In the business forms industry we are relatively small and geographically specialized. Our product line is also special ized in that most of our products are computer-output' oriented. Business forms have been a growth market, and continuous computer forms is its fastest growing seclor. Business forms have been a growth market, and continuous computer forms is its fastest growing segment. A substantial part of our business forms operation is through dealers and directly to the government, but the major part of the busi ness is through a sizeable retail selling network staffed by' people like E.C. funster (left) an Allied/ Egry salesman. He is with Mike Carroll, manager of our Cleveland data center. I I ( ! ! (In millions) j Net sales j Operating income I [ Return on nel sales | Average assets | Return on average assets : 32 Other Products This group consists of tele communications and industrial processing equipment. The group as a whole became profitable in 1972 after three years of loss operations. Kfeinschmldt; SCM's Kleinschmidt division, a sup plierof telecommunications equipment lor the military, continued the improvement begun in fiscal 1971 when new management was placed in charge ol the operation. We experienced substantial losses in fiscal 1970. These were reduced to a loss of S2.9 million in fiscal 1971 and were further cut to a loss of $791,000 in fiscal 1972. All of these losses were related to a series of contracts to design and produce in the future a new generation high speed tele communications system, and the accompanying reduction in sales of the older models. 1972 524.9 S .4 1.5% 518.3 2.0% 1971 $27.5 $(2.2) $19.0 - 1970 $29.5 5(9.1) $25.4 - 1969 1968 $32.3 S35.9 $<1.3) S 2.3 - 6.4% $25.2 S23.3 - 9.9% Kleinschmidt received an 5833,000 award from the government in June which represents the first part of a $9 million contract, expected to run over two years, to con tinue work on the new system. The contract is for advanced production engineering. This is the stage where we establish the production process that will be used to manufacture the teleprinters if we receive the final contract. The contract we received in June had no impact on results for fiscal 1972. As noted, Kleinschmidt continued to operate at a modest loss dur ing last year. We expectthat as we get further into the new program Kleinschmidt's per formance will improve. In addition, during the next two years, we will move forward in a program initiated last year to bolster our engineering, con tracts. and marketing depart ments and to develop other products that have primarily commercial application. Proctor & Schwartz: Proctor & Schwartz is a leader in the manufacture of industrial dryers used by the makers of cereal, tobacco, pet food and textiles. It also produces textile machinery, used to process fibers priorto weaving, and pollution control devices. Most of fhe company's prod ucts are adapted to fit a specific need of the customer. This business had a strong year in fiscal 1972 despite the continued sluggishness in the capital goods market in the U.S. Sales declined slightly but profits increased. Weak ness in the U.S. market was offset by another fine year at our operation in Scotland, where a substantial portion of sates were in high margin products. In last year's annual report we touched on the progress of our "TRAPS" (thermal regenera tive air purification system) equipment. This device elimi nates organic odors from industrial plants, particularly food processing facilities. Several "TRAPS" units have been installed in coffee, starch and textile processing plants and are functioning well in helping industry to efficiently and economically meet strict pollution control laws. It is difficult to fell, however, when we might expect an increase in orders for "TRAPS," because of buyers' reluctance to make large scale capital investments against a background of con stantly shifting and sporadical!) enforced pollution control regulations. GL038676 fD 0) W J. iV 1tsr& j tile i ;r. f ir H, 1 s w Managemeni unanges Vne board of directors elected Paul H. Eiicker president and chief executive oflicer effective January 1. Mr. Eticker,49, who had been SCM's executive vi ce president and chief opera ting officer since March 1970, succeeded Emerson E. Mead who resigned as chairman and president, effective January 1. Mr. Mead served as president for 12 years and chairman for four years He had been with SCM Sihce 1956. Shortly after being named president. Mr. Eticker announced a realignment of senior management duties. George E. Hall, 46, was named senior vice president--adminis tration with responsibilities for all corporate staff services with the exception of finance. Mr. Hall had been senior vice president and general counsel. Paul W. Neidhardt. 55, presi dent of the Glidden-Durkee division, was named a senior vice president ol SCM. He con tinues as president of the Glidden-Durkee division. Herbert H. Eg li, 42. was named vice president--finance and controller. He had been vice president and controller. James Balph, 42, was named vice president in charge of employee relations. He had been director of employee relations for Glidden-Durkee. Richard Sexton, 42, was . named vice president- general counsel of SCM. Mr. Sexton had been vice president --general counsel of SCM's Business Equipment division. Reporting to the president as division general managers are Mr. Neidhardt, as well as George F. Burns, president of the Consumer Products division; George S. Warner, president of the Business Equipment division; Ernest J. Klimczak, president of SCM's Allied Paper division; and Harry S. Gaples, president of the Kteinschmidt division. SCM's principal businesses, together with the names and addresses of the executives in charge of them, appear on page 34. GLD3867? 33 ... ' ...... . ; ' "' " .^V.. Consumer Products Division 29S Park Avenue New York. N.Y. 10017 George F. Burns, President --Sm th-Corona Group Paul J. Uebbing Vice President-General Manager -Appliance and Floor Care Group (Philadelphia, Pennsylvania) C. Peter Larmer Vice President-General Manager Business Equipment Division 299 Park Avenue New York, N.Y. 10017 George S. Warner, President -Copier Products Group John J. Reilly Vice President-General Manager -Marchant Group Matthew E, Meek Vice President-General Manager --International Group Francis 0. De Maio Vice President-General Manager -Histacount, Inc. (Melville, N.Y.) Joseph Gebbia, President Kleinschmidt Division Lake Cook Road Deerfield, Illinois 60015 Harry S. Gaples, President Glidden-Durkee Division 900 Union Commerce Building Cleveland, Ohio 44115 Paul W. Neidhardt, President -Coatings and Resins Group William D. Kinsell, Jr. Vice President Robert E. Dorfmeyer Vice President and Assistant to the President -Industrial Foods Group Adrian J. Lathe, Vice President -Food Service Group W. A. Hagen, Vice President --Metals Group W. E. Jones, Vice President --Organic Chemicals Group (Jacksonville, Florida) R. P. T. Young, Vice President John H. Lathe, Jr. Vice President and Assistant to the President --Consumer Foods Group William A. Miller,Vice President William L. Rodich (Baltimore, Maryland) Vice President -Pigments and Color Group (Baltimore, Maryland) L. C. Byrne, General Manager -Ceramics Group (Baltimore, Maryland) William A. Hubbard General Manager --Proctor & Schwartz (Philadelphia. Pennsylvania) P. K. Schwartz, President Allied Paper Division 1608 Lake Street Kalamazoo, Michigan 49003 Ernest J. Klimczak, President -Kalamazoo Paper Mill Group E. J. Gilman .Vice PresidentManufacturing -John Nisbet Vice President-Sales --Southern Mill Group (Jackson, Alabama) Ralph V. Zepp Vice PresidentResident Manager -Allied/Egry Group (Dayton, Ohio) G. W. Underwood, President -Walton Printing Group (Los Angeles, California) R. L. Walton, President -Office and School Supplies Group (Marion, Indiana) W. R. Gates, President 34 CLD38678 Financial Review ision 'igan 49003 v President or Mill Group 2 President- JaJes oup r:a) P i. President iroup fornia) r/dent :dent 75 Sales and Earnings: Net sales for 1972 were $917.8 million, up 4.9 per cent over last year's S875.1 million. Operating income was $30.8 million, up 6.4 percent, orS1.9 million, over last year's $28.9 million. Details of these changes by product group are explained in the review of operations. In total, operating income was 3.4 per cent of net sales in 1972 compared to 3.3 per cent in 1971. Interest expense was (In millions) Sales Quarter 1972 1971 First Second Third Fourth $223.0 $209.5 228.4 222.4 226.6 209.6 239.8 233.6 $917.8 $875.1 reduced $2.7 million or 16.5 per cent from 1971. Pretax income of $17.6 million before the extraordinary loss was up 34.6 per cent over last year, and income before the extra ordinary loss increased 46.3 per cent to $1.13 per share Quarterly sates, income and earnings per share before extraordinary charges, for the last two fiscal years are sum marized in the following table: Income 1972 1971 $ 2.0 3.3 1.4 3.6 $1.3 2.5 .7 2.6 Per Share 1972 1971 $ .22 .36 .15 .40 $.14 .27 .07 .29 Income Taxes: United States and foreign income taxes on income before extraordinary loss was $7.3 million, an effec tive rate of 41 per cent com pared to last year's 46 per cent rate. Without the investment credit of $700,000 in 1972 the effective tax rate would have been 45 per cent. In 1972 and in 1971 several items were charged against net income that are not yet deductible on our tax returns. These items representfuture tax benefits and will enhance cash flow in 1973 and 1974. and to a lesser extent later years. At June 30,1972 current assets included deferred tax benefits of about $13.3 million, including about $7.0 million which will, in effect, be realized in cash principally during fiscal 1974. $10.3 $7.1 $1.13 $.77 GL038679 35 ...11 t:-v. I i Extraordinary Charge: Last January we announced that further steps were being taken to realign our operations which would result in an extraordinary charge. The decision announced at that time to discontinue development and production of electronic calculators and to discontinue direct sales of calculators, together with our more recent decision to phase out of floorcare products resulted in an extraordinary charge of $10.2 million after income tax benefits of $12.3 million, or $1.11 per share. Th;s charge takes into account all the major business changes now contemplated that would involve an extraordinary charge. Working Capital: During 1972 working capital decreased S6.4 million, and followed a 1971 decrease of $3.3 million. As a result of generally im proved inventory turnover and the elimination of slow moving products, inventories de creased $32.3 million. This followed the $11.3 reduction in 1971. The cash realized from these inventory reduc tions was used to paydown loans and to finance growth of operations. Accounts receiv able increased only in propor tion to sales increases. The ratio of current assets to current liabilities improved from 2.97 in 1971 to 3.16 in 1972. Debt: As in 1971, no additional financing was required in 1972. Long-term debt declined $16.4 million to $162 million. Short term borrowings declined $18.0 million during the year resulting in a reduction In total borrowings of $34.4 million. In addition, at fiscal year end surplus short-term cash investments were $6.7 million. At June 30,1972 total debt, short-term and long-term, was 44.1 per cent of total debt plus equity compared to 48.6 per cent at June30,1971 and 51.7 per cent at June 30,1970. Capital Expenditures: Capital expenditures were $25.2 million in 1972 compared to $25.5 million in 1971. In addition, several projects were started in 1972 that will be completed in 1973 and 1974. As a result, 1973 capital spending will be higher. Depre ciation was $23.8 million in 1972 compared to $22,4 million in 1971. Dividends: No dividends were declared during the year and as of June 30,1972, no retained earnings were avail able for cash dividends. As provided in the most restrictive of our loan agreements, until earnings of the parent company and certain subsidiaries exceed about $6.6 million, no cash dividends may be paid. 36 GL038680 : :: ires: Capital S25.2 npared to n. In rojects were t will be and 1974. ipital gher. Depretiilion in 322.4 lends were year and no ere availnds. As t restrictive nts, until nt company ties exceed ocash id. >60 1908 19C9 1S70'1971 1972 lonrf-torn doa: loans pnyabff'and lorq-'orci dvhfpcr; ants due in one year Statement of Consolidated Income >oysands) .usands) Net sales Cost of sales Gross profit Selling, administrative and research expenses Operating income Other income, net Interest expense, net Income before income taxes and extraordinary loss United States and foreign income taxes Income before extraordinary loss Extraordinary loss Net income (loss) Earnings per share: Income before extraordinary loss Extraordinary loss Net income (loss) Years ended June 30 1972 $917,817 671,894 245,923 215,141 30,782 284 13,475 17,591 7,264 10,327 10,176 $ 151 $ 1.13 1.11 $ .02 1971 $875,138 638,002 237,136 208,201 28.935 284 16,146 13,073 6.012 7.061 9,252 $ (2,191) $ .77 1.01 $ (.24) Statement of Consolidated Retained Earnings Balance, beginning of year Net income (loss) for year Balance, end of year Years ended June 30 see accompanying notes to financial statements 1972 S 67,648 151 $ 67,799 1971 $ 69,839 (2,191) $ 67,648 GLD38682 Statement of Changes in Consolidated Financial Position iIn Ihousands) Sources: Applications: Changes in Wording Capital: Years ended June 30 Operations: Income before extraordinary loss Add expenses not requiring working capital: Depreciation Deferred pension expense Amortization of deferred charges Deferred income taxes--non current Total Extraordinary loss adjusted for deferred taxes and other charges not affecting working capital Working capital provided by operations Disposal of property, plant and equipment Sale of common stock Change in working capital Total Additions to property, plant and equipment Deduction of long-term debt Other changes in non-current items Total Current assets: Cash and marketable securities Accounts receivable--net Inventories Deferred income taxes and prepaid expenses Total Current liabilities: Loans and long-term debt payable within one year Accounts payable and accrued liabilities United States and foreign income taxes Deferred revenue on maintenance agreements Total Increase (Decrease) in working capital see accompanying notes to financial statements 1972 $10,327 23,769 1,475 279 4,170 40,020 (6,632) 33,388 3,022 26 6,415 $42,851 $25,228 16,398 1,225 $42,851 19 $ 7.0 22,4 4,5 2 3 34,7, (1.2 33,4 3,5 3.2 $40,3 S25.5 14,5 3 $40,3 $ (394) 6,059 (32,340) 7,290 (19,385) $5 (14,8 (11,5 2,6 (22,4 17,973 (8,348) 2,725 620 12,970 $(6,415) 16,5 5,6 (2,1 0 19,1 $(3,5 GLD38683 Consolidated Balance Sheet In thousands) Current assets: Cash Marketable securities (at cost which approximates market value) Accounts receivable Less allowance for doubtful accounts inventories: Raw materials and work in process Finished goods June 30 Deferred income taxes and prepaid expenses Total current assets Property, plant and equipment. Cost: Land and buildings Machinery and other equipment Less accumulated depreciation Other assets Total 1972 $ 10,499 6,665 138,469 4,154 134,315 66,063 94,523 160,586 16,265 328,330 100,808 268,292 369,100 192,262 176:838 9.981 $515,149 1971 $ 17,199 359 132,119 3,863 128,256 79,958 112,968 192,926 8,975 347,715 100,482 259,252 359,734 175,612 184,122 11,044 $542,881 see accompanying notes to financial statements GLD38684 .labilities anc Shareholders' Equity (In thousands) Current liabilities: Loans payable Accounts payable and accrued liabilities United States and foreign income taxes Deferred revenue on maintenance agreements Long-term debt payments due within one year Total current liabilities Pension and other liabilities Long-term debt Deferred income taxes Shareholders' equity: Common stock Additional paid-in capital Retained earnings Total June 30 1972 $ 3,401 79,878 1,862 7,048 11,844 104,033 10,762 162,024 13,457 45,753 111,321 67,799 224,873 $515,149 1971 $ 21,222 71,530 4,587 7,668 11,996 117,003 9,601 178,422 13,159 45,742 111,306 67,648 224,696 $542,881 see accompanying notes to financial statements 6L038685 Notes to Financial Statements Accounting Policies: The following is a summary of accounting policies followed oy SCM. These policies con form to generally accepted accounting principles and have seen consistently applied. Principles of Consolidation: The consolidated financial statements include the ac counts of all wholly owned and majority owned subsidiaries. 3CM adjusts its investments in minority owned companies of 20 per cent or more to recognize its appropriate share of the income of such companies. Excess of cost over net assets of businesses acquired is being amortized over a maximum of 40 years. Translation of Foreign Currencies: Assets and lia bilities {except net property, plant and equipment) are stated at rates of exchange prevailing at the end of the period. Net property, plant and equipment is translated at the rates in effect on the dates of acquisition of the related assets. Inventories: Inventories are stated at the lower of average cost or market. Property, Plant and Equipment: The Company provides depre ciation generally on a straightline basis at rates based on estimated useful lives. Product Development Costs: Costs associated with the development of new products and changes to existing prod ucts are charged to expense as incurred. Income Taxes: Income taxes are provided in the year trans actions enter into the deter mination of net income regardless of when such transactions are recognized for tax purposes. Investment tax credits are included as reductions of income tax expense in the year the credits become deductible. Retirement Plans: The Company has several retire ment plans which provide pensions for substantially all of its employees; contributions to pension funds are made when actuarial computations prescribe such funding. Maintenance and Repairs: Routine maintenance, repairs and renewals are charged against income as incurred. Expenditures which materially increase capacities, or extend useful lives are capitalized. Earnings Per Share: Earnings per share have been computed by dividing income by the average number of common and common equivalent shares outstanding. Fully diluted earnings per share have not been presented as there is no dilutive effect for 1972 and 1971. Retirement Plans: Pension expense for the United States and Canada, including interest on unfunded prior service liabilities, was approximately $6,200,000 for the year ended June 30,1972 and $4,800,000 for the year ended June 30, 1971. The pension fund assets, together with the liability accrued in the Consolidated Balance Sheet were in excess of the actuarially computed value of all pension benefits vested under the plans. See Accounting Policies forfurther information regarding pensions. Income Taxes: The 1972 provision for United States and foreign income taxes has been reduced by investment credits of $700,000. Capital Stock: The authorized capital stock of the Company consists of 500,000 shares of preferred stock, par value $50 each and 15,000,000 shares of common stock, par value $5 each. At June 30,1972, 9.150,640 shares of common stock were outstanding; 469,641 shares were reserved for issuance under the Company's stock option plans 891,946 shares were reserved for issuance upon conversion of the 5Yz % subordinated debentures duel 978-1988; and 322,234 shares were reserved for issuance upon conversion of the 5Vi % subordinated debentures due 1979-1989. During 1972 options to pur chase 64,230 shares were granted; options for 73,405 shares expired. Options for 2,210 shares were exercised contributing $11,000 and $15,000 to Common Stock ano Additional Paid-In Capital, respectively. Options exercisei during 1971 contributed $37,000 and $55,000 to Common Stock and Additional Paid-In Capital, respectively. At June 30.1972, options for 290,086 shares were out standing. Options are granted at fair market value. Commitments: At June 30. 1972. the Company's annual rental for real property under long-term leases was approxi mately $10,000,000. These leases have varying expiration dates through 2006. 6L038686 I Extraordinary Loss: (in thousands) years ended June 30 Realignment of Paper l-acilities Realignment of Calculator Operations Provision for Loss on Disposal of Floorcare Operations Other Total United States and Foreign income Taxes: Current Deferred Total Extraordinary Loss 1972 $- 13,035 9,656 (251) 22,440 3.052 9.212 12,264 $10,176 1971 $16,876 -- _ 1.025 17,901 3,134 5,515 8,649 S 9.252 Of the total deferred tax benefit in 1972. S5.340,000 was charged to current deferred income taxes and $3,872,000 to deferred income taxes; in 1971.3936,000 was charged to current deferred income taxes and S4.579.000 to deferred income taxes. Long-Term Debt: (in thousands) 5'/2% sinking fund debentures due 1973-1983 5%% sinking fund debentures due1973-1987 7'.'* % sinking fund debentures due1973-1988 9Vi % sinking fund debentures due 1975-1990 Bank term loans due t973-1974 interes! at prime rate plus a fraction Other loans--inte-est at rates from 5% to 8%% 5V?% convertible subordinated debentures due 1978-1988 5Vi % convertible subordinated debentures due 1979-1989 Total long-term debt S 16,179 17,540 19,000 35,000 6,000 11,821 41,484 15,000 $162,024 During the next five years approximate long-term debt maturities will be: 1973, Si 1,800,000; 1974, $8,100,000; 1975,$8,600,000; 1976, $6,300,000; 1977. $6,300,000. Under the most restrictive provisions of the loan agreements, no retained earnings are available for cash dividends until future earnings of the parent company and certain subsidiaries exceed approximately S6,600,000. i Auditors' Report Haskins & Sells Certified Public Accountants Two Broadway New York. New York 10004 To the Shareholders SCM Corporation: We have examined the con solidated balance sheet of SCM Corporation and sub sidiary companies at June 30, 1972 and the related state ments of consolidated income and retained earnings, and changes in consolidated financial position for the year then ended. Our examination was made in accordance with generaliy accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements present fairly the financial position of the com panies at June 30,1972 and the results of their operations and the changes in their financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. GLD3868? Haskins & Sells August 9,1972 43 Ten-Year Statistical Summary income ^er Common Share financial Pos tion Other Statistics Net sales Income before income taxes U.S. and foreign income taxes income before extraordinary items Extraordinary items, net of tax Net income (loss) Dividends Income reinvested Depreciation Income before extraordinary items Net income (loss) Cash dividends Stock dividends Book value Working capital Property, plant and equipment--net Total assets Additions to property, plant and equipment Income before extraordinary items: Return on average equity Return on net safes Current ratio Number of employees Number of shareholders Average common shares outstanding 1972 $917,817 17,591 7,264 10.327 (10,176) 151 -- 151 23,769 $ 1.13 .02 24.57 $224,297 176,838 515,149 $ 25,228 4.6% 1-1% 3.16 28,300 49,600 9,149,000 1971 $875,138 13,073 6.012 7,061 (9.252) (2.191) -- (2,191) 22,439 $ .77 (-24) 24.56 $230,712 184,122 542,881 $ 25.543 3.1% .8% 2.97 28,600 53,400 9,146,000 1970 $854,511 7,884 1.446 6,438 (4,542 1,896 5,421 (3,525 21,832 $ .71 .21 .60 2% 24.81 $233,976 197.112 578,107 $ 54,527 2.8% .8% 2.72 31,100 53,500 9,014,000 in thousands, except figures given on a per share basis 6LD36688 1969 $807,648 39,391 18,752 20,639 20,639 5,136 15,503 19,372 S 2.37 2.37 .60 2% 25.54 $231,785 168.310 524,232 S 40,764 9.5% 2.6% 3.08 33,500 50,000 fl 716.000 1968 $744,758 30,820 13,061 17,759 (4.700) 13,059 4.763 8,296 17,807 S 2.13 1.58 .60 3% 24.24 S221.718 148,152 470,009 S 32.188 9.2% 2.4% 3.50 33.200 47,500 8,616.000 1967 $705,160 43,626 18.550 25,076 25,076 8,479 16,294 15,384 S 2.90 2.90 .40 3% 22.24 $207,068 138,141 451,402 $ 36,116 12.8% 3.6% 3.10 33,100 45,600 8,158,000 1966 $644,787 40,408 18,956 21,452 1,207 22,659 7.666 14,474 12,835 $ 2.56 2.72 .30 2.5% 25.57 $165,245 108,680 382,329 $ 22.435 10.6% 3.3% 2.84 31,300 47,000 7,756,000 1965 $558,393 29,431 14,070 15,361 403 15,764 5,547 8,934 11,821 $ 1.96 2.02 5% 24.83 $143,484 107,727 331,223 $ 14,701 8.5% 2.8% 3.03 29,900 42,500 6,649,000 1964 $470,633 22,921 11,140 11,781 11,781 4,920 5,624 11,484 $ 1.47 1.47 3% 24.85 $138,389 104,028 319,261 $ 11,631 7.0% 2.5% 3.OB 25,900 37,500 6.458,000 1963 $453,126 20,066 9,188 10,878 10,878 4,663 5,335 12,042 $ 1.39 1.39 3% 23.95 $134,885 103,909 301,084 $ 6,876 6.8% 2.4% 3.51 24,900 37,200 6,443,000 ..................... - --...... ....... GLD38689 ..... .... ........................... --- 45 ' av,ivi oorpoiaie uaia Directors and Principal Occupation Richard C. Bond*. President, Board of Trustees, John Wanamaker Philadelphia John T. Booth, Executive Vice President, Blyth Eastman Dillon & Co. Incorporated George F. Burns. Vice President of SCM; President, Consumer Products Division Lewis H. Durland. Treasurer, Cornell University Paul H. Elicker*. ^resident and Chief Executive of SCM George E. Half*. Senior Vice President Administration of SCM George D Kennedy. Executive Vice President, International Minerals & Chemical Corporation Wallace W. Knox*. Senior Partner, Knox, Ricksen & Robbins Paul W. Neidhardt*, Senior Vice President of SCM; President, Glidcen-Durkee Division Crocker Nevin*. Chairman of the Board. Marine Midland Bank-New York Wiliam W. Quinn. Vice President. Aerospace Group. Martin Marietta Corporation George S. Warner. Vice President of SCM; President, Business Equipment Division Member of Executive Commitlee Directors Emeritus James M. Symes. Chairman of the Board-retired. Pennsylvania Railroad Company William I. Myers. Dean of the College of Agriculture--retired, Cornell University Corporate Officers Paul H. Elicker, President and Chief Executive George E. Hall. Senior Vice President-Administration Paul W. Neidhardt, Senior Vice President; President, Glidden-Durkee Division James Balph, Vice President-Employee Relations George F. Burns, Vice President; President, Consumer Products Division William V. Cawley, Vice President-Treasurer ' Herbert H. Egli, Vice President-Finance and Controller Richard Sexton, Vice President-General Counsel George S. Warner, Vice President; President, Business Equipment Division Transfer Agents Marine Midland Bank-New York, 140 Broadway, New York, New York 10015 Bank of America National Trust & Savings Association, 300 Montgomery Street, San Francisco, California 94104 Registrars Manufacturers Hanover Trust Company, 4 New York Plaza. New York, New York 10004 United California Bank, 95 Hawthorne Street, San Francisco, California 94104 Corporate Headquarters 299 Park Avenue, New York, New York 10017 Telephone: (212) 752-2700 Annual Meeting The Annual Meeting of shareholders will be held at 9:30 a.m. on October 26,1972 at the Ontario Science Centre, 770 Don Milts Road, Don Mills (Toronto), Ontario, Canada GL038690 1 030 SCM Corporation 299 Park Avenue New York, N Y. 10017 GLD38692 r