Document ba6eaKdOejpB04wZoBeNDdX03

Contents GL [i 38 3 Financial Highlights (In thousands, except per share amounts) Net sales Income before income taxes United States and foreign income taxes Net income Earnings per share: Net income Net income assuming full dilution Additions to property, plant and equipment Depreciation Cash dividend per share Years ended June 30,1974 $1,202,248 47,849 20,203 27,646 3.02 2.81 59,138 30,334 .425 1973 % Increase $ 980,281 31,285 12,986 18,299 23 53 56 51 2.00 1.91 39,966 27,210 .10 51 47 48 11 325 (All dollars in thousands) Working capital Property, plant and equipment, net Total assets Long-term debt Shareholders' equity Number of shareholders Common shares outstanding Number of employees At year end $ 231,967 207,237 646,683 152,906 266,068 47,800 9,156,000 29,600 $ 229,941 187,362 552,707 149,439 242,314 47,700 9,156,000 29,400 1 11 17 2 10 -- -- 1 SCM Corporation is a diversified manufacturing company Office products include SCM Copiers, typewriters, tele with 1974 sales of $1.2 billion. Our products are used in communications equipment for military and commercial many sectors of the consumer, industrial and office markets users, and business forms and stationery. in the United States and around the world. Our six major lines of business extend from Coatings Consumer products include Smith-Corona typewriters, and Resins, the largest, with sales of $312 million, to Glidden paints, Proctor-Silex appliances and Durkee Foods. Chemicals, sixth fargest, with sales of $116.7 million. Industrial products include chemical coatings, industrial and institutional foods, pigments and colors, metal powders, pulp and paper, organic chemicals, ceramic frits and industrial processing equipment. This report to shareholders and employees relates oper ating highlights for our major lines of business, and includes trends in sales, operating income and average assets for each of them over the last five years. i GLD38350 To trtc Shareholders Fiscal 1974 was a record year in protits, earnings per share and sales lor your company. Earnings not only continued the improvement that began in fiscal 1971, but gained momentum in 1974. Net income rose 51 per cent to $27.6 million, or $3.02per share, from $18.3 million, or $2.00per share in fiscal 1973. For thepast 14 con secutive quarters, sales and earnings have exceeded those of the same quarter of the previous year. We have been trying to build just such a record of consistent improvement in earnings, and our success is gratifying to all SCM management. The improvement in operating earnings was substantially tempered by the decision to value certain inventories on a LIFO (last-in,lirst-out) basis. This revised method of accounting for inventory is more conservative as to earn ings, which would have been$4.6 million, or 50 cents per share, higher under last year's methods. This amount was not added to earnings because it resulted from inflation in inventory value and not from operations. Sales last year increased23 per cent to $1,2 billion from $980 million in fiscal 1973. This was the first time that annual sales exceeded one billion dollars. The generally improved economic circumstances of the company enabled us to increase the quarterly cash dividend, from 10 cents to 12.5 cents per share in June, 1974. Our company-wide margin of profit rose from 1.9 per cent in 1973 to 2.3 per cent in 1974, reflecting operating improvement in almost all of our businesses. Operational Highlights: Four of our six major product areas had record profits in 1974: Paper, the largest con tributor to profits in 1974, Coatings and Resins, Typewriters and Appliances, and Chemicals. Foods' results were about even with last year while the loss in Business Equipment was much higher. Coatings and Resins, SCM's largest business, hadrecord sales and profits last year. This is the third consecutive record year tor this business, and it was brought about despite shortages of raw materials, particularly petro chemicals, and price controls. The latter, during much of the year, delayed price increases needed to compensate tor higher costs. Smith-Corona Typewriters again had record sales and profits last year. Smith-Corona is the world's leading maker of portable electric typewriters, and its strong brand image was consolidated during the year. Results for Proctor-Silex appliances were off from the prioryear because higher materials and manufacturing costs could not be passed through promptly. Allied Paper had a record year and had the largest increase in profits of any of our operations, more than triple its 1973 performance. This resulted from generally good conditions in the industry but especially from efficiency in papermaking and business forms operations. We also benefited from higher margins on pulp, and on the increasingly sophisticated fine paper grades on which we are now concentrating. >As a result, last year we sub stantially out-performed much-improved industry averages. Durkee Foods' overall operating performance improved last year, but it has yet to recover fully from its low point of two years ago. The second half of the fiscal year benefited from less chaotic raw material markets that severely penalized the first half. Sale of a West Coast pickle operation, closing an outmoded edible oils refinery and a long strike early in the year all held earnings down. Chemicals had record profits last year. Most of our chemical plants operated at capacity due to high worldwide levels of demand tor our products. The constantly growing technology used in our chemical products was also a factor in improved margins. Business Equipment was our only product group that had a loss last year. In fact, the operating loss for this business was substantially higher than in 1973. Last year we spent more for research and development in copiers, and we continued our policy of heavy depreciation on copiers. We also had expenses, some of which will continue in the current year, in connection with our antitrust suit against Xerox and for introduction of our new plain-paper copier. We did not attain minimum objectives in calculators and therefore decided to complete our withdrawal from the business. This decision added to the division operating loss,but losses from calculators have now been terminated. 2 0LD38351 (; a ti-is,ness Equipment Division is now concentrated > wholly in copiers, domestic and international. This is or twness where the profit result of improved r n ; ' ! rm-yet tobc realized, but it will come, international: 5>'< international sales have been , ; . >' :/i<* last fevsyears. For 1974, 18.1 : {';: -.ales were outside the U.S., compared to -'it m 1973 Despite the growth, however, this is .i ".ut'Vdy small percentage for a company our size. t vc multinationalism is a sound concept; the i`:t mai market provides us with some of our best ri :j s . Therefore, the percentage of overseas sales ' - to expand. 7h&Economy: In the letter to shareholders in last year's w report, i remarked that "the economic expansion -i-g-jn in 1971 continued and broadened on a world. - t'asis." One result of this was that many of the world's economies peaked simultaneously. The surge in id. coupled with delay in construction of new plants face of environmental restrictions, as wetI as price u uls, led to unprecedented shortages of a wide range -<nv materials used in industry. Petroleum-based raw itcrials, in particular, often became unavailable at any ce. The Government was forced to establish priorities in *? petroleum industry in response to the Arab oil boycott 'O' this added to the economic difficulties. While foreign economies were booming, U.S. economic policy went through a series of"phases " ending in our fourth quarter with the abolition of price and wage controls. Generally speaking, prior to April 30,1974, only price increases that could be proved justified by cost increases were permitted, regardless of the value placed upon oroducts by the marketplace, inevitably, many products v/ere withheld from the domestic market until price increases were approved. With the end of price controls, dislocations resulting from the experiment moderated. Exports, to which price controls did not apply and which were also aided by devaluation of the dollar, were at historic highs m fiscal 1974. Interest rates rose to record levels, and inflation was at its highest rate in more than 25 years. GLD38352 3 Despite specific economic problems, overall the economy was strong. The paper, chemicals and capital goods industries, for example, were very strong, and for us at least, the recession predicted by many economists did not materialize during fiscal 1974. For many industrial companies, a large part of earnings improvement in 1973 and early 1974 came from gains in inventory value. The LIFO approach to inventory valua tion minimized such "earnings" in our foods and paper businesses. Managing the Company: SCM's record of the past few years shows that we have brought under control a large and diverse company. We have not hesitated to prune away businesses that have either been loss operations or whose progress was too slow. The most recent example is our withdrawal from the calculator business. In the same vein, we have made management changes whenever we felt this action would improve the operation of a specific business. In the last year we outperformed many of the industries in which we participate. In doing so, we have demonstrated the ability to operate effectively in the kind of high inflation economy that will be with us for the forseeable future. A major component of our long-term plan is to emphasize those of SCM's businesses with the best possibility of high margins, rapid growth and good market share. We have been and will continue to concentrate our resources in products or businesses that meet these criteria. In the 1960's SCM's growth was largely a result of acquisitions. So far in the 1970's our growth has been a reflection of the growth of existing businesses, with acquisitions playing a more supplemental role. In the decade ahead we wilt continue our primary emphasis on the internal generation of new products and new technology. The results of this strategy are already evident. Technology and new product development produced the Coronamatic cartridge typewriter, the Proctor-Silex "Super-Steam" iron, the first commercial dispersion-strengthened copper (GIidCop), vitamin intermediates in demand world-wide, the best and most widely used fine lightweight bibleand book publishing paper, and other new products. Almost all of our major product groups have introduced one or more new products in the past year. We spent a record $18 million on research, development and engineering last year, exceeding theprevious record $16 million spent in 1973. In last year's annual report I pointed out that one of our immediate tasks was to increase profits by increasing overall margins. Profit margins in 1974 increased to 2.3 per cent from 1.9 per cent in 1973 and 1.1 per cent in 1972. This is by way of a progress report; obviously, there is still room for considerable improvement. Our earnings and cash position enabled us to share our improvement with the stockholders by increasing the cash dividend. A company's major reason for being is to provide an adequate and improving long-term return to its stockholders. A cash dividend is one means of accom plishing this; the other is improvement in the market value of the shares. Not the company's results, but worldwide economic uncertainty have denied you this second benefit. Unfortunately, we can't assure you that this general situa tion will be resolved soon. What we can do is run the company with continuedand increasing effectiveness, and we intend to do this. At the close of fiscal 1974 most of our major lines of business were in good condition with operations generally at a more profitable level than a year ago. We have every reason to expect the improvement of the last three years to be continued into fiscal 1975. PaulH. Bicker President 4 GLD38353 Net Sales, Operating Income and Average Assets by Product Group (In millions) Net Sales Years ended June 30 Coatings and Resins Typewriters and Appliances Foods Business Equipment Chemicals Paper Products Other Eliminations Total Operating Income Coatings and Resins Typewriters and Appliances Foods Business Equipment Chemicals Paper Products Other Total Average Assets Coatings and Resins Typewriters and Appliances Foods Business Equipment Chemicals Paper Products Other Total 1974 $ 312.0 203.1 289.2 124.6 116.7 141.1 30.6 1,217.3 (15.1) $1,202.2 22.9 16.8 .4 (14.3) 10.8 24.5 .8 $ 61.9 174.2 109.4 110.5 57.9 81.4 52.7 13.6 $ 599.7 1973 $259.1 182.7 215.5 106.0 103.6 102.5 24.8 994.2 (13.9) $980.3 18.3 16.5 .2 (4.2) 5.5 7.8 (.2) $ 43.9 144.4 107.0 97.0 52.6 78.9 39.2 14.8 $533.9 1972 1971 $229.2 181.8 211.4 110.4 84.6 86.1 26.5 930.0 (12.2) $917.8 $207.8 169.0 205.0 112.3 76.1 86.1 29.1 885.4 (10.3) $875.1 17.2 12.1 (2.9) (3.3) 3.1 4.2 .4 $ 30.8 13.8 8.2 5.8 (3.9) 3.6 3.6 (2.2) ~ $ 28.9 121.6 104.8 100.3 74.8 73.0 36.2 18.3 $529.0 116.0 118.8 92.4 91.7 73.0 49.6 19.0 $560.5 1970 $198.5 172.2 183.8 113.5 77.0 88.5 30.8 864.3 (9.8) $854.5 9.1 7.9 8.6 (4.1) 6.4 3.2 (9.1) $ 22.0 109.7 123.0 76.0 94.7 68.6 53.8 25.4 $551.2 SCM's results are broken down into seven lines ot business. The table above shows the sales, operating income and average assets for each over five years. Paper contributed the largest percentage of total operating income, 40 per cent, up from 18 per cent last year. Coatings and Resins contributed37 per cent compared to 42 per cent in 1973. Typewriters and Appliances accounted for 27 per cent compared to 38 per cent in 1973. Chemicals accounted tor 17 per cent of operating income, up from 13 per cent in 1973. When totaled, contributions exceed 100 per cent because of the Business Equipment loss, a negative 23 per cent. Several major lines of business had increases in average assets. The increase for Coatings and Resins was due in part to the newpaint plant at Huron, Ohio. The increase for Paper reflects the investment in the new recovery boiler at our Jackson, Alabama, pulp and paper mill, and the increase for Foods was due primarily to the higher price for edible oils. Each of the major lines oi business is discussed in detail in a separate section of this annual report. 5 GLD38354 Cbbtings and Resins Glidden Coatings and Resins, SCM's largest business, had record sales and profits last year. Operating profit increased 25.1 per cent on a 20.5 per cent increase in sales. Operating profit margin was 7.3 per cent in 1974, 7.1 per cent in 1973. This group accounted for 37 percent of SCM's overall operating profit on 29per cent of the company's average assets during 1974. Comparable figures for 1973 were 41.7 per cent of the operating profit on 27 per cent of the average assets. Raw material shortages hurt ihe otherwise solid perform ance of our paint business in 1974. Shortages resulted in higher raw material prices, forced changes in product mix and limited the number of new customers we could serve. The Government's program of price controls, in effect tor the first ten months of our fiscal year, prevented prompt recovery ol most of the higher prices we had to pay for raw materials. The overriding importance of raw material shortages and price controls can be seen in the following statistic: The average price of 24 key raw materials used by Coatings and Resins in North America increased 32 per cent during the year, while our prices rose 17 per cent. It is important, however, to keep these difficulties in perspec tive. Our coatings and resins business was able, through good management, to produce record profits--for the third consecutive year. In marketing, industry demand was good in 1974. Profits were at a high level by both historic and industry standards, and margins improved. Our technology is strong. We are among the industry leaders in waterbased paints which will most easily meet stringent solvent vapor control regulations. Trade Safes to consumers, painters, painting contractors and the do-it-yourself home painter is one of two broad segments of the paint market. Chemical coatings is the Research and development activities at Glidden Coatings and Resins center around Im proving existing products and developing new ones. Tech nology, which has always played an important role in the industry, has taken on even greater sig nificance because of the grow ing amount of legislation based on safety and environmental requirements. Instruments such as the centrifuge, right, enable us to observe certain proper ties ol coatings. The test begins when a small sample of pafnt is placed in the centrifuge. Spin ning at very high speeds, ihe paint particles separate because of their varying densities. The size of particles affects how a paint goes on a surface and coalesces. (In millions) 1974 1973 1972 1971 1970 Net sales $312.0 $259.1 $229.2 $2078 $198.5 Operating income $ 22.9 $ 18.3 $ 17.2 $ 13.8 $ 9.1 Return on net sales 7.3% 7.1% 7.5% 8.6% 4.6% Average assets $174.2 $144.4 $121.6 $116.0 $109.7 Return on average assets 13.1% 12.7% 14.1% 11.9% 8.3% '6 s- * r** other. Glidden, the fourth largest company in the U.S. paint industry, is a major factor in both fields but somewhat larger in trade sales than in chemical coatings. Trade sales had a strong year and accounted for most of the sales and profit gain recorded by Coatings and Resins. Shortages were somewhat less of a problem in trade sales because this product line requires fewer of the raw materials in short supply last year. Coatings and Resins trade sales have some relationship to housing demand which has been sluggish. Trade sales capacity was modernized when our new Huron paint plant began operation during the year. The 162,000 square-foot plant brings to 15 the number of Glidden paint facilities serving the U.S. consumer market. The new plant went on stream smoothly. Chemical Coatings, the segment o1 the market which provides a wide variety of specialized coatings to industrial users, also had higher sales and profits last year, in spite of disruptions caused by shortages. These shortages restricted production to the degree that we were unable to serve some regular customers. Inventories were unbal anced because we had to buy raw materials when they were offered, and this was not always the time of our choosing. Sales increased in three chemical coatings markets that are important to us: coatings for containers, wood finishes and materials for electrocoatings, and wc improved our share of market in each. International sales and profits increased substantially last year due to a strong showing by our Latin American opera tions which more than offset generally poor results of the European operations. Operations in Canada also were strong again Iasi year. Glidden operates 14 paint plants in 10 countries which account tor 22.5 per cent o) total group sales. Leading the Latin American operations was Tinias Ypiranga, our Brazilian subsidiary acquired in 1973? which had a very strong year. This acquisition has worked out well. Our three European subsidiaries in Italy, Germany and France did not do as well Our German subsidiary, for example, suffered because of lower automobile production levels of our largest European customer. - x- ir GLO 3835?  : <`...<-\ paint tor the - : ;: -,rket at 1b Under the *. - scops, left, a --.o' wan pain! is nknifin! dispersion 'I,'!:t:on. two o! i: tc-isUcs that de pain! can be : ppr!o/m m a home. i eatings is the other : ton Coatings and ndast to trade sales, . < jtly call for an off- com. most customers caf coalings require - c product for a specific . / be a paint that dries dain finish or isresis. -iain environmental Vie market tor a! coatings is therefore . sugmonteci. One of the -v ke:s is for coatings that . ipptied to cans that hold .: or beverages. 1 he spray -mg machinejn pur research right, simulates largo: - production runs. A can ping is sprayed on tram live no hundred containers to no,-, the coating goes oh ir. cosVngs prevent foods from ming into contact wfihWc'' ~" eta! container, which would affect the taste o1 the product ****# GL 0383 58 GL 038 3 59 -A principal market tor portable typewriters in the U.S. is the 18to-24-year-old group. This seg ment of the population is ex pected to remain static over the next few years. Despite this, safes of electric portables, par ticularly models at the high end of the line, featuring the Coronamatic cartridge ribbons, are increasing. In response to this strong consumer demand, a targe part of Smith-Corona's production in the U.S. was switched last year to cartridge models from manual and non cartridge machines. Increased manufacture of cartridge models also required a major increase in the production of Coronamatic cartridges. Repeat sales of this item are going well, and we have decided to expand production. In the international market, lowcost manufacture is essential. A new typewriter aimed primarily at this market is the result of re search and development carried out over several years at the Smith-Corona laboratory. This new model has undergone strenuous testing and evaluation to insure that it meets the rigid quality standards that con sumers have come to expect from Smith-Corona. Various functions of the new typewriter are tested, left, using scientific equipment at the Smith-Corona laboratory in Cortland, New York. Typewriters and Appliances The Consumer Products Division, which consists of SmithCorona typewriters and Proctor-Silex appliances, again had record sales and profits for the year. Operating profits increased 1.8 per cent on an 11.2 per cent increase in sales. This group accounted for 27.1 per cent of SOM's overall operating profit on 18.3 per cent of the company's average assets during 1974. Comparable figures for 1973 were 37.6 per cent of the operating profit on 20 per cent of the average assets. Smith-Corona Typewriters had record sales and profits last year. Last year's record was achieved in spite of substantially higher costs for advertising, research and engineering, new product introduction and new plant start-up. We continue to invest for future generations of Smith-Corona portables. Ourposition in the portable typewriter market improved in 1974. Smith-Corona has consistently been the leader in developing new type writer products that grow at a faster rate than the overall market. We do well in portable type writers because of this and because of leadership in marketing and our elficient, high-volume manufacturing. We expect to create new capacity in 1975, and to raise production levels in 1976. Smith-Corona compact electric office typewriters, designed for medium office use, have found a special place in the large electric office typewriter market. The newest addition to this line, the Coronamatic 7000 cartridge ribbon typewriter, has been well received since its intro duction in January, 1973. Proctor-Silex Appliances had increased safes last year but was only marginally profitable. Sales continued strong on the "Super-Steam '' iron introduced in 1973, and we successfully introduced an improved toaster oven last year. (In millions) 1974 1973 1972 1971 1970 Net sales $203.1 $182.7 $181.8 $169.0 $172.2 Operating income $ 16.8 $ 16.5 $ 12.1 $ 8.2 $ 7.9 Return on net sales 8.3% 9.0% 6.7% 4.9% 4.6% Average assets $109.4 $107.0 $104.8 $118.8 $123.0 Return on average assets 15.4% 15.4% 11.5% 6.9% 6.4% 11 1 GLD3836C P/QCiO(-$l:ex ISMlt; iViffid's . largest maker oi toasters, in the U.S. it has (tie s-evortci largest s.'-'S'e miroris antfrsiH! in glass electric percolators '.-/inch account tor about toper cent of the total ciectnc coffee maker market m the U.S. Proctor-Sflex also leads m the 'electric ice cream freezer, clcctnc juicer and irormg fable markets Product cristr/bubon is organized so toa! Proctor Sue? appliances a re ava-fable a; vrrt irally e rery reiad po-rd o/sa'c Our appli ances me sold in more, than 90 ' 00 separate u -t'c's nciud- ,n:j r.e ghbo'hooci hardware ' ' s-'c'Cs, major discount houses, : department stores, mass rr<pr-' -; cha-'i-scrs. catalog showrooms and mad-order houses. \!cr. product development rs critical ro Proctor-Siiex's long- 7 range plans A'senesofnew 'products :$ currently under dai.erorcren: some or these writ be extensions 0/ existing items. \ as the 'Super-Steam" I'uhwas fiats orno volt be entirely new' P'Couch :na> otter trie con- s^r cr a ccnib<natiC>mo: lull '0'jl-..!VS. ihd-liy ii!:d YiSOd expei-t I-, 'rrroducc se\ eraisuch rue. u-c.ts during mscal /9?6. ' ' s u c consh.tr.'abed &rc. ,- tt'.r ,v. c-/panel the proauct nne i\ r, areas. A I'-'OCtor Siiex even, nght is tested lor . ; petlomKince at fr^du: Sue/.'s'f'hioo'oiphia' -jc. . ".vs - ' Blenders and juicers, two of our motor-driven appliances, had higher sales, while sales of glass coffee percolators declined slightly. Consumer spending for appliances was generally good, with purchases trending toward higher priced models offering more features, A new vice president-general manager was appointed during the year and a new position of vice president marketing was created and filled. Both positions are currently held by executives with extensive experience in the appliance industry. In the past, Proctor-Sitex has concentrated its efforts on a volume-oriented, fairly narrow product line selling in the middle price range. Volume is important to us and we want to maintain it, but we also hope to increase profit margins by concentrating further on higher priced products. international markets for typewriters are slightly larger and growing faster than in the U.S. Despite its leadership in the U.S. and Canada, Smith-Corona has only a modest, although growing, position in foreign markets'where tarilf barriers have tended to discriminate against US. type writers in favor of aomestic producers. Typewriter production in Canada was nearly doubted last year. Production of a new model typewriter designed in part for the international market will start in our recently completed plant in Singapore in the current year. Currency value fluctuations of the past year and the appeal of our new products have made our U.S. typewriters more competitive overseas. As a result, we are now supplying the European market with small quantities of our Coronamatic 7000's and 2200's. Presently we provide both U.S. and some foreign markets with less expensive models made in our fwo plants in the United Kingdom, increasingly, however, we will also supply the international markets with typewriters made in Singapore. At present, Proctor-Sitex is a small factor overseas. Its foreign markets, mostly in Western Europe, are supplied with products exported from our plants in the U.S. Proctor-Silex brand appliances are expected to appear for the first time in Japan in the current fiscal year. GID3836? The heart of Durkee Foods ` in dustrial business is the refining of edible oits into a wide range of products, including shorten ings, salad and margarine oils, hard butters, fractionated prod ucts and emulsifiers. These products are sold to food manu facturers who make margarine, salad oil, bread, biscuits and crackers, confectioneries, cake mixes, coffee whiteners, vege table dairy products, salad dressing and snacks. M/e use soybean, corn and cottonseed oils, as well as a variety oi lesser known oils, many ol which are imported. Some oils, such as those used tor salad oil and mar garine, undergo relatively simple refining. These oils ac count for the bulk, but a de creasing proportion, of Industrial Foods' volume and sell at modest markups. In the case of other oils, we use various methods to alter their basic characteristics so they suit the individual needs oi specific customers for shortenings, in gredient extenders and as bak ing catalysts. An industrial baker, tor example, may need an oil that reacts well to freez ing. These oils require more sophisticated processing and are sold in smaller volume but at considerably higher margins and have higher growth rates. At our research facility at Strongsville, outside Cleveland, we have developed a family of polyglycerol esters, which has led to products used in ice cream and whipped toppings. One use oi potyglycero! esters, for example, enables manu facturers to make low-fat ice cream that has the consistency of regular ice cream, but without the high tat content. Foods Durkee Foods, consisting of Industrial Foods, Food Service and Consumer Foods, had slightly improved operating performance last year with profits not yet satisfactory. This group accounted for 24.1 per cent of SCM's overall sales on 18.4 per cent of the company's average assets. Comparable figures for 1973 were 22.0 per cent of the safes on 18.2 per cent of the average assets. Industrial Foods, which accounts for more than half of Durkee sales, had a difficult year. Unprecedented world demand tor edible oils, the major product of this operation, pushed raw oil prices to record levels twice during 1974. Unfortunately, during the first part of the year. Government price control programs left raw agricultural products, such as crude soybean oil, free to rise with demand while prices of products made from them were frozen. This sometimes had the effect of forcing us to sell below cost, or not sell at all. At various times we followed both courses, incurring significant losses to protect the continuity of our business. On the plus side, sales of our more sophisticated products increased last year. Our entire output of solvent fractionated products was sold out, for example. In general, Durkee Industrial Foods'strength has increasingly been in the more technologically complex, higher margin products. Our Joliet refinery achieved an adequate volume for the first time around mid-year. This, plus the end to Government price control programs, caused the second half to be much improved over the first. During the year we adopted a more conservative valuation procedure for our inventories of edible oils. The UFO (last - in, first - out) approach to inventory valuation has the effect of eliminating what would have been a large addition to earnings in the form of inventory gains. (See Notes to Financial Statements, p. 38.) (In millions) 1974 1973 1972 1971 1970 Net sales $289.2 $215.5 $211.4 $205.0 $183.8 Operating income $ .4 $ .2 $ (2.9) $ 5.8 $ 8.6 Return on net sales .1% .1% - 2.8% 4.7% Average assets $110.5 $ 97.0 $100.3 $ 92.4 $ 76.0 Return on average assets .4% .2% - 6.3% "i 1.3% ' 15 ; : ; W-. V. V` ' ';A:.v ..... Our research efforts have made it possible for us to develop and sell products to the bread in dustry, a new market torus. The new product, right, is B12K, a liquid system that con tains shortening and condi tioners. Prior to B12K, these ingredients were in a plasticlike system that could not be poured. Because of its liquid state, B12K is easier to handle, since, it can be pumped and it is easier to measure. K'e are constantly seeking ways to improve our edible oils refin ing operations as well as de velop new ways to refine oils. This research is carried out, far right, with sthall-scale expert-' mental refining operations which allow technicians to use various chemicals under dilterenl condi tions to explore chemistry. IVe are the largest independent seller of high-technofogy oils in the industry. Our refineries are at Louisville. Kentucky, and Jotlet, Illinois. Fractionated products are made in Chicago.  * -' v alter the close of the year, we announced the re -Jnated closing of an outmoded retinery at Berkeley, i-' lamia. The cost of this action is reflected in the .-end figures. : 1975. Industrial foods should benefit from recently .tntiiished favorable operating trends. We look for con need strengths in domestic and worldwide markets for Kir products because of very high prices for such compet ig natural products as cocoa beans and dairy products. Pood Service, which accounts for about a quarter of t'.irkee sales, also had a difficult year. Thegroup's -ot tiems were almost entirely due to the same high raw '.! rerial prices experienced by Industrial Foods, its 'nary supplier. Food Service markets nationally a broad t o / food products through a network of 1,200 inde ndent food service distributors. Sales are to hotels, > :hools and other institutions and many fast food and .tv.ay-from-home food operations, f rozen doughs is one of the fastest growing markets served by Food Service, and we believe we are the industry leader. During the year we opened a plant at Thorofare, New Jersey, to manufacture frozen doughs. Startup costs l>ad an adverse effect on profits, but we expect this opera- on to make a contribution to earnings in fiscal 1975. Consumer Foods, also about 25 per cent of Durkee sales, mproved its performance even though the fiscal first quarter was affected by the aftermath of a strike at our Bethlehem, Pennsylvania, plant. Also affecting the group's profit were raw material prices, especially on imported items, which rose to exceptionally high levels during the year. As was true in many of our businesses, these higher costs were not immediately recoverable in higher prices. in our program of weeding out operations not contributing to profits or with limitedprospects, we sold our West Coast pickle business during the year. It had not been a profitable operation as part of SCM. Consumer Foods should be aided in 1975 by a better rela tionship between prices and raw material costs and the absence of two negatives: the strike and the West Coast pickle business. Business Equipment Business Equipment was the only major business group that operated at a toss last year, but its tosses were severe --three limes the 1973 level. This division accounted for 9.7 per cent of SCM's average assets last year compared to 9.9 per cent in 1973. Calculators could not be made profitable during 1974 and, accordingly, at the end of the third quarter we announced our decision to withdraw completely from the business. This decision entailed inventory write-downs, liquidation oi supply commitments and employee terminations. All of these costs were provided tor during the year. Our withdrawal from calculators means that the Business Equipment Division is going to concentrate its efforts on copiers, that segment of the business equipment market where we think we have the best chance for success. Copier Products offers a Copy Serviceprogram to cus tomers through 81 offices in the U S. and 80 offices in Western Europe, Latin America and Canada. Copy Service provides users with the copier, paper, supplies and service as a package on a cost-per-copy rental basis, it also operates significant wholesale business, selling equip ment and supplies outright to dealers. Copier Products' Josses last year were higher than 1973. Large increases in the cost of copier paper and the chemicals used in the copiers could not be passed along to users under Copy Service contracts, save in a few cases. Also contributing to the toss was a heavier schedule of new copies placements for which costs are absorbed immedi ately although revenues are accrued over time. Our Research and new product de velopment lor the Business Equipment Division Is carried out at Zurich, Switzerland, and Paio Alto, California. When the decision was made several years ago to develop a plainpaper copier, we elected to pro duce a machine that, when it came to market, would tech nologically be where copiers are going, not where they have been. Our research and devel opment efforts in the plainpaper copier field have been towards this end. Part of the research process has involved developing a technique for applying the photo-conductive material used In the copier. An aspect of this process Is shown at right. with customers and expensing all refurbishment costs also affected the Group's performance. Dusing 1974 we proceeded with our suit against Xerox Corporation. Eiled in Federal Court tn July, 1973, the suit (In miHions) 1974 1973 1972 1971 1970 Net safes S124.6 $106.0 $110.4 $112.3 $113.5 Operating income $(14.3) $(4.2) $ (3.3) $ (3.9) $ (4.1) Return ori net sa les -- - -- - Average assets $ 57.9 S 52.6 5 74.8 $ 91.7 $ 94.7 Return on average assets - .. - 18 GLD38 363 charges Xerox with unlawful monopolization of the plain paper copying business. This litigation has imposed added heavy costs on the Division, but we think we are right and intend to pursue this matter to a conclusion. international operations were subject to the same cost increases, and Copy Service growth has been hampered by the proliferation of competitive low-speed, plain paper copiers. Growth rates, current revenues and results lor this business are acceptable, however, and we expect to con tinue to be a major factor in the European copier market. Plain paper: Although the market for copiers requiring coated paper is expected to continue to grow, the future is clearly with plain paper copiers. Therefore, since 1972, we have been working with Minolta Camera Company to develop a plain paper copier. In April we announced that SCM would assume full responsibility for further develop ment of this medium-speed machine which we hope to have ready for market introduction in 1975 or 1976. Costs of this development and of other new business equipment products were up significantly last year, and this is also reflected in the division's loss. During the year we stopped the expense of development work on some new products whose prospects did not look promising. Last year we began marketing the SCM 6740, a high-speed plain paper copier made ior us by another company. The 6740 is the most versatile'plain paper copier available today. It can produce 67 copies per minute in 40 different sizes and exhibits superior quality, customer convenience and service capabilities. We have agreed to purchase up to $42 million of 6740's and$2.4 million of collators to be used with the copiers. The contract can be reduced by SCM at our option until December, 1974. Start-up costs associated with the 6740 had an adverse effect on protits last year. Part of these costs were tor train ing programs designed to acquaint our Service Group and salesmen with the new machine. Business Equipment s performance will improve with calculator losses at an end and as our new copiers begin to impact the market. We believe SCM is capable of significant and profitable participation in the copier field, especially in plain paper copying. While we do not expect profitable operations in the current year, we do anticipate cutting last year's loss substantially in 1975. 20 Work on developing a plainpaper copier, left, is proceeding satisfactorily at our Palo Alto Research, Development and Engineering Center. In August our copier engineering staff moved into a new building at Sunnyvale, California, where we expect to produce the new machine. The market for plainpaper copiers exceeds $2 billion and is expected to grow at about 15 per cent annually. In addition to the SCM 6740 and the plainpaper copier being developed, we are also upgrading the speed and quality of our copiers that use specially coated paper. Copier Products operates a plant at Phoenixville, Pennsyl vania, where paper is coated with zinc oxide tor use in SCM copiers, as well as in those made by other companies. Toner for use in copiers is produced at our Hazelton, Pennsylvania, plant. 0L038370 G.C3G3" . Glidden Organics produces basic turpentine-derived, or terpene, products, such as pine oil, camphene and fine chemi cals, including perfume and flavor ingredients, vitamin inter mediates and synthesized es sentia/ oils. We are the world's technological leaders in this terpene chemistry. Through synthesizing, we duplicate natural flavors such as lemon, spearmint and peppermint. A part of our business of grow ing importance is the manufac ture of intermediates used in the production of vitamins A and E, both of which are in continued heavy worldwide demand. There are only a limited number of methods of producing these products. One uses a turpentinederived process, and relative costs and the availability of raw materials appear to have now established this one as perhaps the best route. SCM is the leader in both sales and technology of terpene vitamin intermediates. Part of the expansion ot Glidden Organics involves construction of a facility to synthesize I- men thol, used in foods and cigarettes The technique that will be used to produce l-menthol was developed in our Jacksonville laboratories. Distillahon left is one step in the complex px> duction process Chemicals Glidden Chemicals had record sales and profits last yeat Operating profit increased 96.4per cent onal2.6 per cent increase in sales. Profits were 9.3 per cent ot sales in 1974 compared to 5.3per cent in 1973. This group accounted for 17.5per cent of SCM's overall operating protit on 13.6per cent of the company's average assets. Comparable figures for 1973 were 12.5 per cent ot operating profit on 14.8 per cent ot the average assets. Glidden Chemicals has tour parts: Pigments and Colors, Organic Chemicals, Ceramics and Metal Powders. Pigments and Colors' major product is titanium dioxide, a white pigment sold to the paint, plastic, paper and rubber industries and used as a whitenerand opacifier. In common with the rest of the industry, this operation did well last year, selling out its entire output of 75,000 tons. These good results were achieved despite a strike in the first quarter. Production costs were high, especially for fuel and labor. However, we and the industry are operating at full capacity, and af the end of the year prices improved sharply. Titanium dioxide is produced by either the sulfate method or the newer chloride process. Early this year we will increase our chloride capacity by 10,000 tons, and we Prices are now approaching levels permitting an adequate return. This year we expect to benefit from a full year of such conditions and from the incremental profits of the increased capacity. Organic Chemicals had record sales and profits last year. Located in Jacksonville and also across the Florida penin sula in Port St. Joe, Organic Chemicals is the country's largest refiner ot crude sulfate turpentine and one of the larger refiners of crude tat! oil. The Port St. Joe refinery, now a joint venture with St. Regis Paper Company, brought (In millions) 1974 1973 1972 1971 1970 Net sales $116.7 $103.6 $ 84.6 $ 76.1 $ 77.0 Operating income $ 10.8 $ 6.5 $ 3.1 $ 3.6 $ 6.4 Return on net sales 9.3% 5.3% 3.7% 4.7% 8.3% Average assets $ 81.4 $ 78.9 $ 73.0 $ 73.0 $ 68.6 Return on average assets 13.3% 7.0% 4.3% 4.9% 9.3% 23 GLD38372 on stream in 1973, the world's largest single tall oil refining unit. This operation had an excellent year, selling its entire output. Refined tall oil is used in making plastic resins, paint resins and soap. A substantial portion of the produc tion at both Jacksonville and Port St. Joe is exported. During the year we announced a major expansion of our Jacksonville operation. Part of the new facilities will go into production in fiscal 1975, the remainder in fiscal 1976. We expect our Organic Chemicals business to expand as major increases in the prices of natural flavors and fra grances and of petroleum-based alternate raw materials make synthesis from sulfate turpentine an economic afternative. More serious shortages of crude tall oil and crude sulfate turpentine, already in short supply world wide, would hamper further growth, but we expect to be able to continue to obtain enough to operate at close to rated capacity. Ceramics produces ceramic and porcelain frits used in the manufacture of household appliances, tiles, dinnerware and enamel-covered products. This operation had a modest decline in profits last year. The decline was due to higher cost of raw materials, chiefly imported chemicals, and to slowdowns in housing starts and sales of major appliances (two important markets for ceramic products). This business, however, still earns at a good rate. Metals also had a record year in 1974, aided in part by strong automotive sales in the first half and by additions to capacity begun some time ago. Despite a sharp decline in sales of automobiles in the second half and slowdowns in major household appliances, sales of copper, bronze and specialty alloy powders continued strong, enabling us to sell out our production last year. During the year we began construction that will double our capacity to make new alloy powders at our Johnstown, Pennsylvania, plant. This new capacity should be in production at the end of the first half of fiscal 1975. We are the leader in this field and anticipate no difficulty in selling the expanded output. SLD38373 GUdden Metais produces copper and bronze powder and a wide range of stainless steel and nonferrous metal and metal oxide powders. Products with complex shapes such as gears, bushings and cog wheels, for example, are formed by compressing metal powders in a mold and then finishing them at very high temperatures. Powder metal parts are generally lighter, stronger and more durable than machined parts. Alloy powders is another business area that has been selected as having good growth potential and where we have the prime technology and market position. GUdden Metals research produced the first com mercially available dispersioned strengthened copper, an alloy of copper and aluminum that combines the desirable quali ties of both metais. The first step in the production of "GlidCop", left, is the transfer of the preheated metal to an atomizing tank, where it is turned into powder. One ot the projects under study at our research laboratory at Baltimore is improvement in present methods of producing titanium dioxide, an important product of GUdden Chemicals. A laboratory fluid test-bed re actor, right, is being used to study the high-temperature chlorination ot titanium-bearing minerals. /4s a result or research and development which has been intensif-ed over recent years. Allied Paper has been able to gain the expertise needed to produce more specialty grade papers. These includelightweight papers used by the cigarette industry, spirit dupli cator master papers, electrofax base papers for both paper oftset plates and copier use and high quality lightweight papers for book publishing: Since the development and manufacture of papers for use in electrostatic processes require precise con trol over paper conductivity, we must have the sophisticated environmental conditioning and measurement equipment to get accurate results. The manager of our Kalamazoo coating laboratory, right, is making a conductivity measurement on an experimental paper sample. Paper Products Allied Paper had record sales and profits last year and the largest percentage increase in operating income of any of our six major businesses. Operating profit increased 214 per cent on a 37.7per cent increase in sales. Operating profit was 17.4 per cent of sales in 1974, and 7.6 per cent in 1973. The group accounted for 39.6 per cent of SCM's overall operating profit on 8.8 per cent of the company's assets. Figures tor 1973 were 17.8 per cent of the operating profit on 7.3 per cent of the average assets. Allied operates in four areas: puip, paper, business forms and office and school supplies; each had a record year. Pulp and paper were in worldwide short supply last year, and companies in the field generally operated at capacity throughout the year. The industry as a whole had its best year ever. We were helped by this strong demand, of course, but it explains only part of Allied's record results last year because we outperformed the averages of industry leaders. We had improved profit margins, more efficient opera tions, a high degree of operating integration and continued our emphasis on specialty papers. These require a high degree of technology to produce. They have commanded higher margins and face less price competition than lowermargin commodity products which are sold in very com petitive markets. in recent years, Allied has become an industry leader in the manufacture of high quality lightweightpapers used to print bibles, encyclopedias and other reference and general interest books. We increased our volume in this market in 1974. Allied's distinctive approach to the marketplace has also played an important role in its success as a specialized paper company. Allied has emphasized working directly with bible and reference book publishers to develop (in millions) 1974 1973 1972 1971 1970 Net sales $141.1 $102.5 $ 86.1 $ 86.1 $ 88.5 Operating income $ 24.5 $ 7.8 S 4.2 $ 36 $ 3.2 Return on net sales 17.4% 7.6% 4.9% 4 2% 3.6% Average assets $ 52.7 $ 39.2 $ 36.2 6 49 6 $ 53.8 Return on average assets 46.5% 19.9% 11.7% 7.3% 5.9% 27 GLD3 8376 tt lightweight papers for specific requirement. This effort has resulted in a closer relationship with largo-volume custom ers and a unique opportunity to meet their growing needs. Pulp operations were strong at our mill atJackson, Alabama, even though production was at less than capacity during most of the year pending the installation of a new recovery boiler, a major and vital piece of equipment. The new boiler became operational with a smooth start-up at the end of fiscal 1974. It will enable us to meet applicable state and federal pollution control regulations while operating the mill at optimum levels, an important capability in these times of product shortage. The Jackson mill can produce close to 175,000 tons of pulp a year. More than half of the pulp is converted into paper at our mills in Jackson and Kalamazoo. A significant part ol the Jackson paper provides stock for our business forms; the balance is sold to otherpaper users. Office and School Supplies is the smallest part of our paper business. These cut-size, medium grade papers have been in high demand and are among those experi encing the most critical shortage conditions. Office supplies are sold under the "Gates'' label, and school supplies aresold under the "Penrite" label. Headquarters for this operation are at Marion, Indiana. Business Forms operations are made up oi the Allied/ Egry, Walton and Hisiacount groups. Allied/Egry is located in the east central part of the country, and its main strength is in Its ability to produce very large quantities of stock or custom forms at relatively low cost. During 1974 Allied! Egry continued to emphasize the sate ol forms through direct sales channels. We also opened a new 50,000 square-foot plant at Gainesville, Georgia, designed to serve directly the rapidly growing Southeast market. Other plants are at Petersburg, West Virginia; Leipsic, Ohio; and Denison, Texas. Walton Printing, located in Southern California, specializes in custom forms. It had another record year in 1974. Histacount sells specialized forms, stationery and related items by catalog to the medical and other professions. Histacount, located on Long Island, has been a growing and profitable operation, and 1974 was another good year. GLD383?? ' s 'he respons'b > tyo'the manu facturing group to ensure that oroperties ot newpaper grades are reproduced consistently in the manufacturing process. Qualityassurance is an impor tant part of this process. For ex ample. we must "balance" the equilibrium relative humidity ot a paper with that expected in a customer's press room to make sure the paper does not change sizd of cud during printing. Rolfs of paper are tested tor equilib rium relative humidity level, tell, prior to shipment. Another manutacturing process quality control involves microbiological analysis ot water trompaper machine systems. This test, above, keeps check on the bacteria content of the water to avoid formation of substances that could cause operating diihriiitios 29 GL036378 Other Other products include those of Proctor & Schwartz and Kleinschmidt and is the smallest part of SCM. Operating profits were $800,000 in 1974 compared to a toss of $200,000 in 1973. Sales improved by 23.4 per cent. These operations accounted for 1.3 per cent of SCM's overall operating profit on 2.2 per cent of the company's average assets in 1974. This compares with 2.8 per cent of the assets and a loss in 1973. Proctor & Schwartz manufactures and sells large indus trial drying machines used in the food, chemical and tobacco industries and machines used to process fibers prior to weaving. The company has plants at Lexington, North Carolina, and Philadelphia. International operations are handled by Proctor-Dalglish, which has a plant and headquarters in Glasgow, Scotland. Proctor & Schwartz had record sales and profits in 1974, a good year for the capital goods industry. The markets we serve, both in the U.S. and overseas .wereparticularly strong. In meeting its budget, Proctor-Dalglish surmounted problems in the United Kingdom, including the shortage of energy and the mandatory three-day work week. The capital goods industry is expected to remain strong, and Proctor & Schwartz's backlog of orders is good. Kleinschmidt designs and manufactures telecommuni cations equipment for the military and, increasingly, for commercial markets, at its plant in Deerfield, Illinois. Kleinschmidt was not profitable last year, but the loss, less than expected, was half the previous year's figure. Work continued through the year on the new generation high-speed military telecommunications system. In August, 1974, we were awaiting Defense Department budget clearance for the signing of a large contract to start production of these machines. The contract would be per formed over a four-year period. In addition to its military work, Kleinschmidt has been developing products with commercial applications. In 1974 Kleinschmidt introduced several new products designed for the commercial market. Initial sales have been encouraging. (In millions) 1974 1973 1972 1971 1970 Net sales $ 30.6 $ 24.8 $ 26.5 $ 29.1 $ 30.8 Operating income $ .8 $ (-2) $ A $ (2.2) $ (9.1) Return on net sales 2.6% -- 1.5% `:--- Average assets $ 13.6 $ 14.8 $ 18.3 $ 19.0 $ 25.4 Return on average assets 5.9% -- 2.0% -- -- 30 GLD38379 i i I Sales (in millions) 1,400 *1.700 m f1.000 w 800 600 400 f ~w~ i fI 200 .. A.. o 1971 197? Operating Income (in millions) 70 60 w.. i50 40 30 ..x 20 ii ti10 9 t 99 *9 0 1970 1971 1972 1973 1974 Earnings Per Share' (in dollars) 350 ' 3.00 250 " ... 2.00 .... . .... j 50 ...... . 1.00 ' _ 50 00 1970 1971 aoroinary ro." 15 1974 Capital Expenditures 0 Depreciation Shareholders' Equity& Total Borrowings On millions) 230 240 " "" % ## W\w s# # 9# w# t99#*# #W 9 99# 0 1970 1971 1972 1973 1974 QShareholders Equity & Total Borrowings 32 4k -AK- Return on Equity*(inpercentages) 10.5 9.0 7.5 6.0 4.5 fi93.0 .9 5. 5...1.5 i .0 1970 1971 1972 'After taxandbeforeextraordinaryitems 99 9 9 _l__ i 5__ #$ 1973 1974 GLD38381 Financial Review Sates and Earnings Net sales for 1974 were $1.2 billion, up 23 per cent over 1973's $980 million. Income from operations was $61.9 million, up 41 per cent over the prior year's $43.9 million and was 5.1 percent of sales in 1974 compared to 4.5 per cent in 1973. Operating income, as a return on assets employed, increased to 10.3per cent, the filth consecutive annual increase. Net income of $27.6 million, or $3.02 per share, was up 51 per cent from $18.3 million, or $2.00 per share, in 1973. In 1974 the LIFO (last-in, first-out) method of valuing inventories was adopted for the raw material content of all pulp, paper and edible oil inventories. Costs of raw material for these products had risen dramatically during fiscal 1974, and therefore this change in inventory method resulted in a reduction in net income of $4.6 million, or $.50 per share. Since part of these inventories had been valued on UFO and base stock methods in prior years, the effect of this change on net income is substantially less than it would have been had they previously all been valued on the FIFO (first-in, first-out) method. Quarterly sales, net income and net income per share for the last two fiscal years are summarized in the table below. Since it is impracticable to restate earnings for the effect of the LIFO change on prior periods, the full effect has been included in the fourth quarter of 1974. (In millions) Sales Net Income Per Share Quarter 1974 1973 1974 1973 1974 1973 First Second Third Fourth S 266.2 $227.7 291.2 241.2 308.6 246.7 336.2 264.7 $1,202.2 $980.3 $ 3.5 $ 3.3 7.9 5.8 7.6 3.5 8.6 5.7 $27.6 $18.3 $ .39 $ .36 .86 .63 .82 .38 .95 .63 $3.02 $2.00 Income Taxes U.S. and foreign income taxes were $20.2 million in 1974, compared to $13.0 million in 1973. The 1974 provision was reduced by $2.3 million of investment tax credit compared to $.8 million in 1973. The effective United States and foreign tax rate was 42.2 per cent in 1974, compared to 41.5 per cent in 1973. Withoutthe investment tax credit, this rate would have been 47.1 per cent in 1974 and 44.1 per cent in 1973. During 1974, the company settled with the Internal Revenue Service all issues for the years 1967 through 1969. These settlements had no effect on earnings. Federal income tax returns for the years 1970 and 1971 are currently being examined. In the opinion of management, adequate provision has been made tor all tax liabilities. Debt During fiscal 1974 long-term debt increased $5.1 million to $156.1 million as a result of capitalization of a $10 million long-term lease obligation and repayment of $4.9 million of debt Short-term borrowings increased $27.5 million during the year to $35.2 million. At June 30,1974 total debt, short-term and long-term, was 41.8 per cent of total debt plus equity compared to 39.6 per cent at June 30,1973. Capital Expenditures Total capital expenditures, including those for copier equipment for lease to customers, were $59 million in 1974 compared to $40 million in 1973. Property, plant and equipment expenditures were princi pally tor newproducts and capacity expansion for Smith-Corona typewriters and Glidden chemicals and a new recovery boiler for the Alliedpulp mill. There were also capacity expansions of a more continuing nature in each of our other lines of business. Expenditures for copier equipment were for increased placements of zinc oxide equipment and especially for our new 6740 plain paper copier. Depreciation in 1974 was $30.3 million compared to $27.2 million in 1973. In addition to normal increases we continued our policy of heavy depreciation of zinc oxide copier equipment. Dividends In June, one year after reinstating the cash dividend, the Board of Directors increased the quarterly dividend from 10 cents to 12.5 cents per share. Market Data Common stock price ranges and resulting price earnings ratios during the five years ending June 30, 1974 are as follows: Common Stock Price Price Earnings Ratio Calendar Year High Low High Low 1974 1973 13V4 8% 187& 8% 43 94 1972 22Va 141/2 25 13 1971 23% 13V4 30 17 1970 24% 11Va 35 16 33 CLD38382 Statement of Consolidated Income (In thousands, except per share amounts) Years ended June 30 Net sales Cost of sales Gross prolit Selling, administrative and research expenses Operating income Interest expense, net Other expense, net Income before income taxes United States and foreign income taxes Net income Earnings per share: Net income Net income assuming full dilution 1974 $1,202,248 876,106 326,142 264,270 61,872 13,021 1,002 47,849 20,203 $ 27,646 $ 3.02 $ 2.81 1973 $980,281 708,946 271,385 227,481 43,854 11,993 576 31,285 12,986 $ 18,299 $ 2.00 $ 1.91 Statement of Consolidated Retained Earnings (In thousands, except per share amounts) Years ended June 30 Balance, beginning of year Net income Cash dividends (per share-- $.425,1974; $.10,1973) Balance, end of year 1974 $ 85,183 27,646 (3,892) $ 108,937 1973 $ 67799 18,299 (915) $ 85,183 See accompanying notes to financial statements. 34 GLD38383 ftatemen tof Changes in Consolidated Financial Position in 'nousands) Sources: Years ended June 30 Operations: Net income Add expenses not requiring working capital: Depreciation Deferred pension expense Amortization of deferred charges Deferred income taxes--non-current 1974 $ 27,646 30,334 (60) 1,862 (575) Working capital provided by operations Long-term lease obligations Disposal of property, plant and equipment Sale of common stock 59,207 10,000 8,929 -- Total $ 78,136 Applications: Additions to property, plant and equipment Reduction of long-term debt Cash dividends Other changes in non-current items Increase in working capital $59,138 6,533 3,892 6,547 2,026 Total $ 78J36 Changes in Working Capital: Current assets: Cash and marketable securities Accounts receivable, net Inventories Deferred income taxes and prepaid expenses $ (2,751) 36,093 35,378 628 Total 69,348 Current liabilities: Loans payable Long- term debt payments due within one year A ccounts payable and accrued liabilities United States and foreign income taxes Deferred revenue (27,545) (1,673) (34,608) (3,205) (291) Total (67,322) Increase in working capital $ 2,026 ........ . 1973 $ 18,299 27,210 2,410 361 3,701 51,981 -- 2,232 57 $ 54,270 $ 39,966 12,585 915 (4,840) 5,644 $ 54,270 $ (7,773) 18,616 17,389 (2) 28,230 (4,297) 10,312 (21,185) (7,512) 96 (22,586) $ 5,644 See accompanying notes to financial statements. 35 GLD38384 Assets (In thousands) * * Consolidated Balance Sheet Current assets: June 30 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 Deferred income taxes and prepaid expenses Total current assets Property, plant and equipment, at cost: Land and buildings Machinery and other equipment Other assets Less accumulated depreciation - Total 1974 $ 6,387 253 194,944 5,920 189,024 110,735 102,618 213,353 16,891 425,908 122,937 310,775 433J12 226,475 207,237 13,538 $646,683 1973 $ 6,168 3,223 157,537 4,606 152,931 85,996 91,979 177,975 16,263 356,560 110,805 289,389 400,194 212,832 187,362 8,785 $552,707 ____________________________ See accompanying notes to financial statements. 36 6LD3838 5 Liabilities and Shareholders'Equity (In thousands) Current liabilities: Loans payable June 30 Accounts payable and accrued liabilities United States and loreign income taxes Deferred revenue Long-term debt payments due within one year Total current liabilities Long-term debt Deferred income taxes Other liabilities Shareholders' equity: Common stock Additional paid-in capital Retained earnings Total 1974 $ 35,243 135,671 12,579 7,243 3,205 193,941 152,906 16,583 17,185 186,674 45,782 111"349 108,937 266,068 $646,683 1973 $ 7,698 101,063 9,374 6,952 1,532 126,619 149,439 17,158 17,177 183,774 45,782 111,349 85,183 242,314 $552,707 See accompanying notes to financial statements. ___________________________ 37 GLD38386 Kotos io Financial Statements Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. Investments of 20 per cent or more in minority-owned affiliates are adjusted io recognize SCM's share of their income or losses. Differences between cost and net asset value of businesses acquired are amortized over a maximum of forty years. Translation of Foreign Currencies Assets and liabilities of foreign subsidiaries and affiliates are stated in United States dollars at rates of exchange prevailing at the end of the period, except net property, plant and equipment which is stated at rates prevailing at date of acquisition. Foreign operating results, except depreciation, are stated at average rates of exchange. Net unrealized gains re sulting from currency fluctuations are credited to a reserve which is available to absorb future foreign exchange losses. Inventories Inventories of pulp and paper, and edible oils are priced on the last-in, first-out (UFO) method. Other inventories are stated at the tower of average cost or market (see note on Inventories). Property, Plant and Equipment Depreciation is provided on a straight-line basis at rates based on estimated useful lives. At the time properties are retired or disposed of, the property and related accumulated depreciation accounts are relieved of the applicable amounts, and any profit or loss is included in operating income. Maintenance and Repairs Routine maintenance and repairs are charged against operations as incurred. Expenditures that materially increase capacities or extend useful lives are capitalized. Product Development Cost Costs associated with the development of new products and changes to existing products are charged to operations as incurred. Income Taxes Income taxes are provided in the year transactions affect net income regardless of when such transactions are recognized for tax purposes. The tax effect of timing differences is accounted for as deferred taxes. Provision is also made for income taxes on undis tributed earnings of foreign subsidiaries not considered to be permanently invested. Investment tax credits are included as reductions of income tax expense in the year such credits become deductible. Retirement Plans SCM has several retirement plans that provide pensions for substantially all of its employees. Contributions to pension tunds are made when actuarial computations prescribe such funding. Earnings Per Share: Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Net income per share assuming full dilution is computed based on the assumption that convertible debt obligations were converted and dilutive outstanding stock options were exercised as of the beginning of the fiscal year. Retirement Plans: Pension expense, including interest on unfunded prior service liabilities, was approximately $12,500,000 for the year ended June 30,1974 and $10,000,000 for the year ended June 30,1973. The increase in pension expense was due principally to plan amend ments which provided improved benefits to participants. At June 30,1974, unfunded prior service liabilities approxi mated $54,000,000. Trust fund assets, together with the liability accrued in the Consolidated Balance Sheet, were approximately equal to the actuarialiy computed value ol vested benefits. Inventories: During 1974, the Company changed its method of pricing certain ol its pulpand paper and all ol its edible oils inventories to the last-in, first-out (UFO) method. This change resulted in a decrease in 1974 after tax earnings of approximately $4.6 million or $.50 per share ($.44 per share assuming tull dilution). Previously, such inventories were valued at the lower of average cost or market, except that portion of the edible oils inventory which, effective in 1973, was valued at approximately the lowest price experienced during that year. The 1973 change resulted in a decrease in alter tax earnings of approximatefy $1.4 million or $.15 per share. These changes were adopted in recognition ol a volatile market in order to more directly associate the cost of safes with the related sales. The eitect of these changes in method on any one prior period is impracticable to determine since retroactive application requires assumptions thatmay furnish results different from what they would have been had the newly adopted principle been used in prior periods. Had all inventories currently on LIFO been valued on a FIFO basis, inventories would have been approximately $23,000,000 higher in 1974 and $5,000,000 higher in 1973. 38 GLD38387 income Taxes;; in inou^nds) Years ended June 30 1974 United States and foreign income taxes consists of: Current United States Foreign Investment credit Total Current $20,292 3,292 (2,300) 21,284 Deterred United States Foreign Total Deferred Total income Tax Expense (1,237) 156 (1.081) $20,203 Reconciliation of effective tax rate: Statutory tax rate Investment credit Difference between U.S. & foreign tax rates Other, net 48.0% (4.8) .3 (1.3) Compensating Balances: Compensating balances, related 1973 to certain credit line loans, are generally based on 10% of the unused credit lines and 20% of borrowings. The average compensating balance requirement during fiscal 1974 was approximately $3,000,000, all of which was satisfied by float. $ 7,752 2,424 (800) Interest rates on bank loans are at prime, and maturities range from 60 to 180 days. The average interest rate at June 30,1974, for short-term borrowings, withoutgiving 9,376 effect to compensating balances, is 12.21%. Theuseof credit lines is allocated among several banks and the 3,380 unused portion at June 30,1974 is $17,250,000. 230 3,610 $12,986 The June 30,1974 balance represented the maximum amount of bank borrowings at any month end during the year. The average short-term borrowings outstanding during the fiscal year was $17,600,000, and the applicable average interest rate was 11.06%, calculated by dividing total interest by the average amount outstanding. 48.0% Long-Term Debi: (in thousands) (2.6) June 30 1974 1973 (2.9) 5Ve % sinking fund (1.0) debentures due 1979-1983 $ 11,891 $ 13,255 Effective Tax Rate 42.2% 41.5% 5% % sinking fund Deferred taxes result from: Business realignment cost $ (491) Inventory valuations 1,460 debentures due 1976-1987 $ 5,472 7V4 % sinking fund (1,760) debentures due 1976-1988 Excess of tax over book 9Y4% sinking fund depreciation 99 561 debentures due 1975-1990 Pension 405 (562) Other, net (2,554) (101) Other loans--interest at rates from 5% to 8% % Total Deferred Taxes $(1,081) $ 3,610 5 Vs % convertible subordinated State income taxes, included in selling, administrative debentures due 1978-1988 and research expenses, were $1,300,000 for the year ended June 30,1974 and $900,000 tor the year ended 5V4 % convertible subordinated June 30,1973. debentures due 1979-1989 At June 30,1974, provision for income taxes has not been Lease obligations (6% made on $29,600,000 of undistributed earnings of foreign Environmental Improvement subsidiaries since these earnings are considered to be Revenue Bonds, due 1984-1993) permanently invested. Tota! Long- Term Debt 15,149 16,283 33,250 9,849 41,484 15,000 10,000 $152,906 16,174 17,508 35,000 11,018 41,484 15,000 $149,439 39 CLD38388 During the next five years, approximate long-term debt maturities will be: 1975-$3,200,000, 1976-$3,400,000, 1977-36,400,000, 1978-39,200,000, 1979-39,500,000. Under the most restrictive provisions of the indentures and no options were exercised. Options exercised during 1973 contributed $29,000to Common Stock and $28,000 to Additional Paid-in Capital. At June 30,1974, options for 385,508 shares were outstanding. related to long-term debt. Retained Earnings of 327,800,000 was available at June 30,1974 for declara tion of cash dividends. Foreign Exchange: Other liabilities include a reserve lor future foreign exchange losses of $1,078,000 and $883,000 at June 30,1974 and 1973, respectively. Foreign exchange gains and losses included in the determination of net income were not material. Leases: The Company's annual rental expense, reduced by related income of $1,445,000 and $799,000, amounted to $20,184,000 and $18,802,000 ($7,163,000 and $6,351,000 related to financing leases) for the years ended June 30,1974 and 1973, respectively. Future minimum rental commitments at June 30,1974 under all non-cancellable leases reduced by related sublease income of $6,917,000 are as follows: Capital Stock: The authorized stock of the Company consists of500,000 shares of preferred stock, par value $50 each and 15,000,000 shares of common stock, par value $5 each. At June 30, 1974 and 1973,9,156,000 shares of common stock were outstanding; 458,000 shares were reserved for issuance under the Company's stock option plans; 892,000 shares were reserved for issuance upon conversion of the 5V.h % subordinated debentures due 1978-1988; and 322,000 shares were reserved for issuance upon conversion of the 5'A% subordinated debentures due 1979-1989. (fn thousands) Year 1975 1976 1977 1978 Financing Leases Real Personal Property Property $2,400 2,200 2,000 1,400 $3,000 2,400 1,900 1,700 NonFinancing Leases $ 6,700 6,000 5,500 5,300 Under SCM's stock option plans, shares of common stock have been made available to certain employees at the fair market value at the date the options were granted, except that certain options ("tandem options") have been granted at the lower of the market price on the date of the tandem grant or the exercise price of the basic option to which they are related. Tandem options are"non-qualitied'' options exercisable at the same time as, or after the expiration of the basic "qualified" options. 1979 1980-1984 1985-1989 1990-1994 Remainder 1,600 6,500 4,900 2,100 4,300 1,600 5,700 3,800 600 2,900 4,700 14,500 8,300 7,800 35,000 Minimum rental commitments under non-financing leases are primarily related to realproperty. During 1974 options to purchase 19,000 shares of common If all non-capitalized financing leases were capitalized, the stock were granted; options for 18,667 shares expired; effect on net income would be immaterial. 40 GLD38389 Auditors' Opinion Haskins & Sells Certified Public Accountants Two Broadway New York, New York 10004 To the Shareholders SCM Corporation: We have examined the consolidated balance sheet of SCM Corporation and subsidiary companies as of June 30,1974 and 1973 and the related statements of income, retained earnings, and changes in financial position lor the years then ended. Our examination was made in accord ance with generally 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 consolidated financial statements present fairly the financial position of the companies at June30,1974and 1973 and the results of their operations and the changes in their financial position-for the years then ended, in conformity with generally accepted account ing principles applied on a consistent basis, except for the change in 1974, with which we concur, in the method of pricing certain inventories as described in the Inventories note to the financial statements. Haskins & Sells August 15,1974 41 GLD38390 income Per Common Share Financial Position Other Statistics Ten-Year Statistical Summary 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 sales Current ratio Number of employees Number of shareholders Average common shares outstanding 1974 1973 $1,202,248 47,849 20,203 27,646 -- 27,646 3,892 23,754 30,334 $980,281 31,285 12,986 18,299 -- 18,299 915 17,384 2?,210 $ 3.02 $ 2.00 3.02 2.00 .425 -- .10 -- 29.06 26.47 $ 231,967 207,237 646,683 $229,941 187,362 to5* 52,707 $ 59,138 ' 10.9% 2.3% 2.20 29,600 47,800 9,156,000 $ 39,966 7.8% 1.9% 2.82 29,400 47,700 9,154,000 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 All dollars in thousands, except figures given on a per share basis. 42 GLD38391 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 1969 $807,648 39,391 18,752 20,639 -- 20,639 5,136 15,503 19,372 $ 2.37 2.37 .60 2% 25.54 $231,785 168,310 524,232 $ 40,764 9.5% 2.6% 3.08 33,500 50,000 8,716,000 1968 $744,758 30,820 13,061 17,759 (4,700) 13,059 4,763 8,296 17,807 $ 2.13 1.58 .60 3% 24.24 $221,718 148,152 470,009 $ 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 $ 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 43 6LD38392 Operating Businesses Consumer Products Division 299 Park Avenue, New York, New York 10017 George F. Burns, President Smith-Corona Group PaulJ. Uebbing, Vice President-General Manager Proctor-SHex Group (Philadelphia, Pennsylvania) Harry Hill, Vice President-General Manager Business Equipment Division 299 Park Avenue, New York, New York 10017 George S. Warner, President Copier Products Group JohnJ. Reilly, Vice President-General Manager International Group Francis D. DeMaio, Vice President-General Manager Histacount, Inc. (Melville, New York) Joseph Gebbia, President Kieinschmidt 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, Vice President Ceramics Group (Baltimore, Maryland) William A. Hubbard, Vice President Proctor & Schwartz (Philadelphia, Pennsylvania) J. R. Johnson, Vice President Allied Paper Division 1608 Lake Street, Kalamazoo, Michigan 49003 Ernest J. Klimczak, President Kalamazoo Paper Mill Group E. J. Gilman, Vice President-Manufacturing; John Nisbet, Vice President-Sales Southern Milt Group (Jackson, Alkbama) Ralph V. Zepp, Vice President-Resident 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 C LP38393 Corppr?te Data Directors and Principal Occupation Richard C. Bond*, President, Board of Trustees, John Wanamaker, Philadelphia, Inc. .~ JohrtjT.- Booths.Executive Vice President. Blvth Dillon& Co , Incorporated \ George F. Burns, Vice President of SCM, President, Co^Surner Products Division ' Lewis fi.Durland, Chairman, First National Bank ; p George F. Burns, Vice President; President, Consumer Products Division William V. Cawley, Vice President and Treasurer p *--*--* *>**- --*--- --' - - ; "-Li `ix'.'ku- '>> 0LD38394 * MBS SCM Corporation 299 Park Avenue New York, New York 10017 Design: Harrison Associates Photography: Wolf von dem Bussche CLD38395