ITEM 1. BUSINESS (Dollars in thousands, except per share amounts)
The Company is a formulator, manufacturer and retailer of a broad range of architectural and industrial coatings, available principally in the United States ("U.S.") and Canada. The Company has three reportable segments that include U.S. Manufacturing, U.S. Retail, and Canadian Manufacturing. The Company's business groups within these three segments are Trade Sales Coatings, Retail and Production Finishes Coatings. Both Trade Sales Coatings and Production Finishes Coatings are manufactured in the U.S. and Canada.
Trade Sales Coatings consist of a broad line of coatings that include water-thinnable and solvent-thinnable general purpose coatings (paints, stains and clear finishes) for use by the general public, painting contractors and industrial and commercial users, primarily for the decoration and preservation of the interiors and exteriors of residential, commercial, institutional and industrial buildings and allied structures.
Production Finishes Coatings are produced to conform to the specific requirements of manufacturers who utilize such coatings in the manufacturing process. The Production Finishes Coatings are primarily used in the manufacture of various types of flexible packages, beverage and food containers, tanks, roof decking, coils, furniture and shelving, window blinds and flatwood products. The Production Finishes Coatings, like Trade Sales Coatings, serve both decorative and preservative functions.
The Company owns and manages several multiple-outlet dealerships and stand-alone stores in various parts of the U.S. At December 31, 1999, there were 73 Company-owned stores positioned in the market as independent dealers that offer a broad array of products including Benjamin Moore brand and other competitor coatings, wallcoverings, window treatments and sundries. The Retail business serves two main markets: the Do-It-Yourself consumers and contractors.
Benjamin Moore substantially relies on independent dealers for distribution of its architectural products which provide the majority of the Company's revenue and profits. The network, which consists of over 3,700 retailers with over 4,700 storefronts in the U.S and Canada, forms the core of the Company's marketing strength and provides the high level of customer attention, service and color expertise critical to the maintenance and expansion of the Benjamin Moore brand. Reference is made to the information set forth in Note 15 to the Notes to Consolidated Financial Statements, Part II, Item 8 hereof, with respect to assets and operating results by reportable segment.
The Company believes that it is one of the leading manufacturers of coatings in the United States and Canada.
MARKETING AND DISTRIBUTION
It has always been the Company's policy to actively support the continued growth and prosperity of independently owned dealers and retail outlets, through which the Trade Sales Coatings are sold. In furtherance of that policy, the Company provides financing to such enterprises under circumstances where it is deemed to be in the best interests of the Company to do so (see Note 18 to the
Notes to Consolidated Financial Statements, Part II, Item 8 hereof). The Trade Sales Coatings are sold under such trademarks as Benjamin Moore(R), Benjamin Moore Paints(R), Moore's(R), Moorglo(R), Moorgard(R), Moorwood(R), Moorwhite(R), Moorlife(R), Impervo(R), Moorcraft(R), Impervex(R), Regal(R), Wall Satin(R), Satin Impervo(R), AquaGlo(R), AquaPearl(R), AquaVelvet(R), Regal Aquagrip(R), Regal First Coat(R), Pristine(R), A Stroke of Brilliance(R), Colorscapes(R), and Benwood(R).
In 1999, a new color system, the Benjamin Moore Color PreviewTM System was completed. The Color Preview StudioTM displays feature color selection tools that allow the paint buyer to preview their colors before they paint. The tools include 3-D Room With A ViewTM, the 8"x8" Color Tower, Trim ChipsTM, Color Combinations, Sheen Selection, Special Paint Finishes, Color Collections, Color Strip Chips and the Color PreviewTM Color Cards. The Color PreviewTM palette consists of 1,481 colors with each color being named, a first for the Company. By phasing in the new Color PreviewTM colorants and bases and phasing out the old material from the Moor-O-Matic(R) III system over a six-month period, the Company believes there will be minimum product obsolescence.
SALES
The Company is engaged in the formulation, manufacture and sale of coatings and related goods and services. Net sales in the U.S. Manufacturing Segment accounted for 77.1%, 79.8%, and 81.5% of total revenue for the three years ended December 31, 1999, 1998 and 1997, respectively. Net sales in the U.S. Retail Segment accounted for 11.9%, 7.6%, and 4.5% of total revenue for the three years ended December 31, 1999, 1998, and 1997, respectively. Net sales in the Canadian Manufacturing Segment accounted for 9.9%, 10.5%, and 11.4% of total revenue for the three years ended December 31, 1999, 1998, and 1997, respectively. The Company does not have any customer to which sales exceed 10% of total sales.
FOREIGN OPERATIONS
The Company operates in Canada and New Zealand. The Company's Canadian operations are carried on through Benjamin Moore & Co., Limited ("the Canadian Company"), which is an 85.2% owned subsidiary of the Company, and Technical Coatings Co. Limited, which is a wholly-owned subsidiary of the Canadian Company. The Company's New Zealand operations are carried on through Benjamin Moore & Co (NZ) Limited, which is a wholly-owned subsidiary of the Company, and Benjamin Moore Pacific Limited, which is a 67.3% owned subsidiary of Benjamin Moore & Co (NZ) Limited. In 1999, the Company sold its Australian subsidiary and currently has a signed letter of intent to sell its New Zealand operations. During 1999, net sales to external customers attributable to foreign companies in total (which are included in the Company's Consolidated Financial Statements) were approximately $85,589. Approximately 5.2% of the outstanding shares of the Canadian Company are owned by persons who are associated with the Company, including employees of such subsidiary.
RESEARCH AND DEVELOPMENT AND QUALITY CONTROL
The Company considers its research and development and quality control activities to be among the most advanced in the industry, and of significant importance in enabling it to achieve and maintain its position as one of the leading companies in the coatings industry.
The Company maintains several laboratory facilities for the development of new products and processes, the improvement of existing products and the special formulation of products to meet the specific requirements of its customers. The Central Laboratories, which is the principal such facility, is located in Flanders, New Jersey. Quality control activities are carried out in laboratories located at each manufacturing facility.
The Company also maintains outdoor testing facilities where its products, as well as those of its competitors, are evaluated for performance under varying weather conditions. The facility moved from Lebanon, New Jersey to Flanders, New Jersey in March 2000. Independent commercial facilities are also utilized for this purpose.
As of December 31, 1999, 90 chemists and technicians were employed by the Company in research and development and quality control activities. Research and development and quality control expenditures amounted to $13,251, $13,091 and $12,496 in 1999, 1998 and 1997, respectively. Quality control expenditures aggregated $3,474, $4,064 and $3,943, respectively, and are included herein because a substantial portion of such expenditures is related to development projects.
COMPETITION
The coatings industry is highly competitive and has historically been subject to intense price competition. It is estimated that there are approximately 800 coatings manufacturers in the United States, many of which are small companies which provide intense competition within regional and local markets, especially with respect to lower priced coatings and custom made specialty items which are required on a short-time delivery basis. Other manufacturers are large diversified corporations, the assets of which are substantially greater than those of the Company, which compete on a nationwide basis. The competition which the Company encounters in Canada and New Zealand is similar in nature to that which it encounters in the United States. The Company estimates that it is one of the largest manufacturers of Trade Sales Coatings in the United States and Canada. With respect to sales of Production Finishes Coatings, the Company's overall position in the industry is relatively small.
SEASONAL ASPECTS
Sales of Production Finishes Coatings have been relatively stable throughout the year. In addition, the Retail segment does not experience seasonality. However, due to the Retail acquisitions in the latter half of 1999, Retail sales were greater in the last six months of 1999 than the first six months.
Historically, sales of Trade Sales Coatings have been seasonal in nature, with the heaviest concentration of such sales occurring in the second and third quarters of the year. During 1999, the percentages of the U.S. Manufacturing Trade Sales Coatings which were made in the first, second, third and fourth quarters of the year were 22%, 27%, 28% and 23%, respectively. The percentages of Canadian Manufacturing Trade Sales Coatings which were made in the first, second, third and fourth quarters of 1999 were 23%, 30%, 27% and 20%, respectively. Production and inventory schedules are timed to coincide with the aforementioned variations.
EMPLOYEES
As of December 31, 1999, the Company had approximately 2,745 employees. Approximately 30% of these employees were salaried personnel, approximately 10% were sales representatives, and approximately 60% were hourly employees. The Company considers its relations with its employees to be excellent.
RAW MATERIALS AND SUPPLIES
The Company purchases its raw material and supplies from a wide variety of sources, and does not consider its business to be dependent upon any one source of supply. However, the price and supply of some petrochemical intermediate products, which are important ingredients in the manufacture of coatings, are subject to world political and economic conditions. Certain raw materials are converted into synthetic resins which, when combined with pigments, are used in the production of both Trade Sales Coatings and Production Finishes Coatings.
PATENTS AND TRADEMARKS
The Company does not rely on patents in its business although it owns six patents and has two patents pending. The Company does, however, rely upon formulas developed by it, and upon its technical expertise and experience in meeting the requirements of its customers. The Company owns a large number of registered trademarks and trade names, several of which are referred to elsewhere herein, which it considers to be of significance in identifying the Company and its products.
BACKLOG
As is typical in the industry, backlog of orders is not significant in the business of the Company.
ENVIRONMENTAL AFFAIRS AND GOVERNMENTAL REGULATION
The operations of the Company, like those of other companies engaged in similar businesses, involve the use and disposal of substances regulated under extensive environmental protection laws. The Company believes that its operations are in compliance with applicable federal, state and local laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment. Such laws and regulations have not had any material adverse effect upon the Company's capital expenditures, earnings or competitive position.
The Company places emphasis on environmental responsibility. New and existing facilities constructed or modified in the normal course of business incorporate designs to eliminate, reduce, or mitigate the release of waste and contaminants into the environment.
The Company has entered into full or partial settlement agreements with governmental authorities or private parties with respect to seventeen sites under federal and state laws. Total settlement costs incurred by the Company have been approximately $3,260.
The Company is involved in thirty-one unsettled sites. In all cases the Company believes its share of liability for environmental clean up costs is less than 1% of such costs for each site. A total of approximately $4,042 has been accrued as an estimate of such potential costs. These cost estimates are carefully reviewed and revised where necessary each quarter during the year. Possible insurance recoveries are not considered in estimating liabilities.
Also, the Company is involved in remedial activities at two of its owned facilities as follows:
1. Soil and shallow ground water contamination has been detected at the Company's plant at Milford, Massachusetts. The affected soils have been excavated. Further studies are being undertaken to assess the full extent of the water contamination. However, preliminary results indicate that the problem is moderate and is being remediated with appropriate technologies. Expenditures to date have been approximately $1,250.
2. The Company has expended approximately $5,000 over the last ten years to assess and remediate contamination of soil and water at the Company's facility at Santa Clara, California, operated by its subsidiary, Technical Coatings Co. The Company has installed an underground trench along two sides of its property. This trench is capable of capturing the contamination and preventing its migration off the plant site. At full operating capacity, the treatment system installed as part of the remediation process treats the pumped water to acceptable cleanup levels. The treated water would be used in the paint manufacturing process as cooling water before being discharged into the municipal sewer system or reinjected to the ground for recirculation. At this time there is a trial shut-down program of the treatment system which was approved by the California regulatory agency responsible for such oversight. Current operating and maintenance costs of the treatment system are approximately $30 per year.
Accrued costs for estimated cleanup expenses for these two facilities are approximately $637.
Federal and state laws require that potentially responsible parties ("PRPs") fund remedial actions regardless of fault, legality of original disposal or ownership of a disposal site. In 1999, the Company spent approximately $433 on remedial cleanups and related studies compared with approximately $372 spent for such purposes in 1998 and $347 for such purposes in 1997. The Company has recovered approximately $2,338 since 1994 under its general liability policies and an environmental impairment insurance policy. The Company continues to negotiate further settlements.
It is difficult to estimate the ultimate level of future environmental expenditures due to a number of uncertainties, including uncertainties about the current status of the law and regulations, uncertainties surrounding remediation procedures, including the development of new technologies, the enactment of additional regulations, the identification of new sites for which the Company could be a PRP, the apportionment of responsibility among identified PRPs in addition to the Company and insurance recoveries of Company costs, as well as information relating to individual sites. Subject to the foregoing, Company management believes its estimates of its liability are reasonable and anticipates that capital expenditures and the cost of remedial actions to comply with the current laws governing environmental protection will not have a material adverse effect upon its consolidated financial statements.
ITEM 2.
ITEM 2. PROPERTIES
Set forth below is certain information with respect to the Company's current principal facilities:
Approximate Location Principal Use Square Feet Owned/Leased - -------- ------------- ----------- ------------
Newark, NJ Plant 267,600 Owned
Melrose Park, IL Plant 145,200 Owned
Jacksonville, FL Plant 130,200 Owned
Johnstown, NY Plant 144,000 Owned
Pell City, AL Plant 120,800 Owned
Toronto, ON Executive Offices- 118,800 Owned Subsidiary; Plant
Milford, MA Plant 110,500 Owned
Cleveland, OH Warehouse 106,000 Owned
Colonial Heights, VA Plant 92,800 Owned
Mesquite, TX Plant 87,300 Owned
Flanders, NJ Central Laboratories, 78,000 Owned Management Information Services
St. Louis, MO Warehouse 76,800 Owned
Denver, CO Warehouse 73,500 Owned
Montreal, PQ Plant 63,500 Owned
Commerce, CA Plant 59,000 Owned
Montvale, NJ Corporate Offices 57,000 Owned
Glendale Heights, IL Executive Offices- 57,000 Leased(1) Subsidiary; Warehouse
Long Island City, NY Executive Offices- 55,000 Leased(2) Subsidiary; Warehouse
Nutley, NJ Plant 50,000 Owned
Burlington, ON Plant 46,600 Owned
Aldergrove, BC Plant 39,400 Owned
Santa Clara, CA Plant 39,400 Owned
Auckland, NZ Executive Offices- 30,700 Owned Subsidiary; Plant
- ---------- (1) Lease expires December 2006, not including renewal options (2) Lease expires December 2002, not including renewal options
The Company owns 9.32 acres of land in Lebanon, New Jersey, which was used as a testing facility. The Company also leases warehouse facilities in North Kansas City, Missouri; Bloomington, Minnesota; Newark, California; Strongsville, Ohio; Pell City, Alabama; Auckland and Christchurch, New Zealand; and Concord, Edmonton, Saskatoon, Winnipeg, Dartmouth and St. Johns, Canada. Warehouse arrangements also exist in Portland, Oregon. In addition, the Company leases approximately 89 retail locations.
All of the facilities which are stated above as being owned by the Company are owned in fee, free and clear of any mortgages or other material encumbrances. The Company believes that its properties and equipment are well maintained and in good condition, and that the rentals paid by it for its leased properties are at competitive rates. The Company also believes that its facilities are adequate for its existing needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal actions in which substantial monetary damages are sought. Management believes that the outcome of all such legal actions, individually and in the aggregate, will not have a material effect on the Company's consolidated financial statements. Also, see "Environmental Affairs and Governmental Regulation" above.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during the fourth quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected each year by the directors of the Company, and are as follows:
Name Office Age - ---- ------ ---
Richard Roob Chairman of the Board of Directors and Chief Executive Officer 67
Yvan Dupuy President and Chief Operating Officer 48
Denis S. Abrams Vice President - Operations 51
Michael A. Bonner Vice President-Technology 50
Donald E. Devine II Vice President - Finance and Chief Financial Officer 41
James E. Henderson Treasurer 48
John T. Rafferty Secretary and General Counsel 67
Ellen Singer Vice President - Marketing 43
Charles C. Vail Senior Vice President 56
Bruce E. Zeh Vice President - Sales 48
- ---------- All of the executive officers of the Company, except for Ms. Singer, Messrs. Devine and Zeh and Dr. Abrams have, during a period in excess of the past five years, been actively engaged in the business and affairs of the Company in various senior management capacities.
Ms. Singer was elected Vice President - Marketing in February 1998 and had been the Director of Marketing of the Company since January 1997 and the Corporate Marketing Manager from 1995 until 1996. Prior thereto, she was Business Director of Nabisco Foods Group from 1987 until 1995.
Mr. Devine joined the Company in November 1998 as Vice President - Finance and Chief Financial Officer. Prior to his joining the Company, he was Vice President of Finance and Chief Financial Officer of the Dannon Company since 1992.
Mr. Zeh joined the Company in June 1998. Prior to his joining the Company, he was formerly employed by ICI Paints as Vice President and General Manager of ICI Paints Canada, Inc. from 1995 through 1998. Prior to that he was a Vice President at Devoe.
Dr. Abrams was elected Vice President - Operations in November 1999 and had been promoted to Director of Operations in September 1999. From 1997 through 1999, Dr. Abrams was Director of Manufacturing after having been named Director of Planning in March 1997 and, from 1995 to 1997, he was a consultant for Technical Coatings. He joined the Company in 1995 from Gilman Brothers Paint Co., which he owned.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTER
Despite the absence of an established public trading market for shares of the Company's common stock, limited trading of the Company's shares occurs on the over-the-counter bulletin board ("OTCBB"). This type of trading activity has been at prices that differ from the per share price of the Company's common stock as determined by the independent appraisal firm, Management Planning, Inc. ("MPI"). The Company uses the MPI price for purposes of the Company's Employees' Stock Ownership Plan ("ESOP"). It is possible that from time to time officers and directors of the Company may buy or sell shares of Company common stock on the OTCBB. A broker or financial advisor should be consulted for information concerning this market.
In the past, the Company has purchased shares of its common stock from shareholders in privately negotiated transactions. However, except with respect to shares distributed from its ESOP, the Company is under no obligation to purchase shares from its shareholders and there can be no assurance that such purchases will be continued. As of December 31, 1999, the Company had 1,831 shareholders.
The Board of Directors of Benjamin Moore & Co. on April 15, 1999 declared a stock split pursuant to which each outstanding share of Common Stock, par value $10.00 per share, of the Company held by a shareholder of the Company on the record date of July 1, 1999 and each such share held in the treasury of the Company on the record date of July 1, 1999 was divided into three shares of Common Stock. In connection with the stock split, and as permitted under New Jersey law, the Board of Directors of the Company also determined that the authorized Common Stock of the Company be increased from 40,000,000 shares to 120,000,000 shares and the par value of the Common Stock be decreased from $10.00 per share to $3.33 1/3 per share. All amounts presented below prior to July 1, 1999 have been adjusted to reflect the split.
The following table sets forth the high and low price for shares in each quarter during 1999 and 1998, as determined by MPI. The table also shows the dividends paid in each such quarter.
PRICE RANGE DIVIDENDS PAID 1999 1998 1999 1998 - ----------------------------------------------------------------- High Low High Low
1st quarter $29.22 $26.42 $27.89 $26.04 $.167 $.150 2nd quarter 30.36 26.70 28.24 27.37 .167 .150 3rd quarter 30.30 26.46 28.90 24.38 .167 .150 4th quarter 29.85 25.13 28.22 23.91 .170 .150 4th quarter-extra .170 .150 ------------- Total $.841 $.750 =============
The following table shows the high and low close price for shares in each quarter during 1999 and 1998 as determined by the OTCBB:
PRICE RANGE 1999 1998 - -------------------------------------------------- High Low High Low
1st quarter $32.00 $28.83 $33.67 $28.42 2nd quarter 32.33 30.17 33.83 29.67 3rd quarter 34.88 31.17 37.92 33.50 4th quarter 36.63 34.13 37.92 29.17
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)
Certain reclassifications have been made to the above selected financial data to conform to the method of presentation used in 1999. Prior year per share amounts have been restated to reflect the 3-for-1 stock split which occurred on July 1, 1999.
(1) See Note 12 to the Notes to Consolidated Financial Statements.
(2) Book value per outstanding share of common stock is computed based on shareholders' equity before deduction of employees' stock ownership and stock purchase plan notes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)
OPERATING RESULTS 1999 VS. 1998
Consolidated Net Sales increased 9.6% over 1998, to $779,517, due to increased United States ("U.S.") and Canadian Manufacturing and U.S. Retail Segment sales, partially offset by decreased Other Segment sales. Excluding the impact of acquisitions and divestitures, 1999 Net Sales increased 7.4% over 1998.
U.S. Manufacturing Segment Net Sales in 1999 increased 6.0% to $601,366. By business group within this segment, Trade Sales Coatings increased 6.3% and Production Finishes Coatings increased 3.7%. The increase in Trade Sales Coatings resulted from strong unit growth of 6.9% coupled with a price increase across all Do-It-Yourself ("DIY") product lines. The increase in Production Finishes Coatings was primarily attributed to unit volume growth of 3.6%.
U.S. Retail Segment Net Sales increased 70.3% due primarily to the effect of acquisitions during 1999. Excluding acquisitions, U.S. Retail Segment Net Sales increased 8.8% and comparable same store sales increased by approximately 5.8%. As of December 31, 1999, the Company operated 73 owned retail stores as compared to 30 at December 31, 1998. Comparable store sales increases were due primarily to increased paint sales combined with sales gains in each of the remaining major product lines (wallcoverings, window treatments and associated products).
Canadian Segment Net Sales during 1999 increased 4.2%. By business group within this segment, Trade Sales Coatings increased 4.2% and Production Finishes Coatings increased 4.4%. The increase in Trade Sales Coatings primarily resulted from a price increase across all DIY product lines, as unit volume growth was .3% as compared to 1998. The increase in Production Finishes Coatings net sales was attributable to the mix of products sold, as unit volume growth was 1.4% as compared to 1998. Excluding the effect of exchange rate fluctuations, 1999 Canadian Manufacturing Net Sales increased by 3.5% as compared to 1998.
Other Segment Net Sales decreased to $8,126 resulting from the Company's divestiture of its Australian operations in April of 1999. Included in 1999 Other Segment Net Sales is $5,447 from the Company's New Zealand subsidiary, which increased slightly as compared to 1998.
Consolidated Gross Margin increased from 42.1% in 1998 to 44.8% in 1999. The improved gross margin in 1999 resulted from continued manufacturing and purchasing efficiencies implemented by management, partially offset by the product mix shift towards contractor lines and the effect of additional retail operations included in 1999 results.
Consolidated Selling, General and Administrative expenses ("SG&A") of $219,640 increased by $22,661 as compared to 1998. SG&A as a percentage of sales was 28.2% in 1999 as compared to 27.7% in 1998. The increase in SG&A results from a higher SG&A ratio typically associated with retail operations, additional sales and marketing spending attributed to the Color PreviewTM System introduced in the U.S. as well as increased severance and other compensation costs.
The increase in Other Income, Net is primarily due to increased interest income on a higher average cash position during 1999 as compared to 1998.
Income Before Taxes, Minority Interest and Cumulative Effect of Change in Accounting Principle was $137,120, an increase of $29,937 compared to the previous year. The resulting effective income tax rate in 1999 was 42.3% as compared to 42.8% in 1998. As a result of the foregoing, the Company generated net income of $78,004 in 1999 as compared to $60,095 in 1998.
Basic and diluted net income per share for 1999 was $2.93, an increase of $.67 compared to 1998.
During the first quarter of 2000, the Board of Directors approved a restructuring of U.S. and Canadian operations and offered an early retirement program. This plan was designed to lower manufacturing costs and maximize efficient means of distribution. It is estimated that these actions will result in a first quarter pre-tax charge ranging from $36,000 to $43,000, primarily consisting of enhanced benefits associated with the early retirement program, severance, asset write-offs and decommissioning costs.
As a result of this restructuring, the Company will have reduced its North American manufacturing facilities from sixteen to eight and reconfigured its distribution centers. The Company expects savings of approximately $13,000 pre-tax in 2001 and approximately $17,000 pre-tax annually thereafter (an approximate two percentage point improvement in gross profit margin on a consolidated basis).
OPERATING RESULTS 1998 VS. 1997
Consolidated Net Sales of $710,993 in 1998 increased by $44,699, or 6.7% over 1997. This resulted from increased sales in the U.S. Manufacturing and U.S. Retail Segments. Excluding the effect of purchasing a majority interest in a retail operation in July of 1997, Consolidated Net Sales increased 3.9% for the year versus 1997.
U.S. Manufacturing Segment Net Sales during 1998 increased 4.4% to $567,157. By business group within this segment, Trade Sales Coatings increased 3.8% and Production Finishes Coatings increased 11.5%. The increase in Trade Sales Coatings resulted from strong unit growth of 6.7%. The increase in Production Finishes Coatings was attributed to unit volume growth of 14.4%, primarily from an acquisition.
U.S. Retail Segment Net Sales increased by 82% primarily resulting from effects of the Company purchasing a majority interest in a retail operation in July of 1997. Excluding the acquired retail operation, U.S. Retail Segment Net Sales increased by 7.5% in 1998 over 1997. As of year-end 1998, the Company operated 30 owned retail stores.
Canadian Manufacturing Segment Net Sales during 1998 decreased 1.8% on unit volume growth of 6.3%. This difference between Canadian Net Sales and unit volume growth rates was primarily due to a decline in foreign currency exchange rates. Excluding the effect of such exchange rate fluctuations, 1998 Canadian Manufacturing Net Sales increased by 5.1% as compared to 1997.
Consolidated Gross Margin increased from 41.6% in 1997 to 42.1% for the year ended 1998. The improved gross margin in 1998 primarily resulted from manufacturing savings achieved from the 1997 restructuring. These improvements were partially offset by an increase in certain key raw material prices as well as the effect of additional retail operations included in 1998 results.
SG&A of $196,979 decreased by $2,229 as compared to 1997. SG&A as a percentage of sales was 27.7% in 1998 as compared to 29.9% in 1997. The decrease in SG&A results from efficiencies achieved from the 1997 restructuring, as well as the effects of certain one-time charges recorded in 1997. Included in the 1998 SG&A is approximately $5,600 of impairment write-downs relating to identifiable assets, intangibles and goodwill associated with the Company's investments in Benjamin Moore Pacific Limited ("Pacific") and White Knight Paints Pty Limited ("White Knight") . During the fourth quarter of 1998, the Company signed a memorandum of understanding to sell certain assets of White Knight in early 1999. The pending sale of such assets resulted in the Company recording certain impairment losses in the fourth quarter of 1998. Also, due to recurring losses at Pacific, the Company recorded additional write-downs associated with long-lived assets in 1998. Assessments made of Pacific's long-lived assets based on projections of undiscounted future cash flows from operations indicated that the carrying value of such assets was not recoverable.
The increase in Other Income, Net resulted from increased interest income on a higher average cash position during 1998 as compared to 1997. Also, interest expense declined in 1998 due to significantly reduced bank borrowings throughout 1998 as compared to 1997.
Income Before Taxes, Minority Interest and Cumulative Effect of Change in Accounting Principle was $107,183, an increase of $62,478 compared to the previous year. The increase is primarily attributable to the $33,388 restructuring charge recorded in 1997, efficiencies achieved in 1998 from the restructuring, the Company's concerted effort to reduce SG&A spending and strong sales volume growth. The resulting effective income tax rate in 1998 was 42.8% as compared to 45.9% in 1997.
As a result of the foregoing, the Company generated net income of $60,095 in 1998 as compared to $30,635 in 1997. Included in 1997's net income is the 1997 effect, and related cumulative effect, of the change from an accelerated depreciation method to the straight line method, as discussed in Note 19 to the consolidated financial statements.
Basic and diluted net income per share for 1998 was $2.26 (adjusted for the 1999 3-for-1 stock split), an increase of $1.12 compared to 1997.
FINANCIAL POSITION AND LIQUIDITY
Net cash flows provided by operating activities were $85,570 in 1999, which was $5,674 and $16,322 lower than in 1998 and 1997, respectively. Cash flows from operations continues to be the primary source of financing the Company's growth. As compared to 1998, the $4,788 increase in accounts and notes receivable resulted from strong 1999 fourth quarter net sales. Also during 1999, the Company made its first discretionary funding to the supplemental retirement plan.
Net cash flows used in investing activities were $84,164 in 1999, an increase of $74,362 compared to 1998 and $64,773 compared to 1997. During 1999, the Company significantly increased capital spending to $25,059 to improve manufacturing processes by increasing batch sizes and improving distribution. Also during 1999, the Company spent $35,020 on various retail acquisitions, which resulted in the purchase of 35 stores. The Company began investing available funds, $29,909 in 1999, in trading securities. Included in 1997's cash flows used in investing activities is the purchase of a majority interest in a retail operation in July of 1997.
Net cash flows used in financing activities of $28,510 represented an increase of $1,147 over 1998 and a decrease of $21,211 over 1997. Cash flows relating to financing activities were principally used for payment of dividends, repayments of borrowings and the purchase of treasury stock. The Company had expected the purchase of treasury stock to decline in 1999 since a greater number of shares appear to be traded on the over-the-counter bulletin board ("OTCBB"). See discussion below under "Stock Price and Dividend Data". During the three years ended December 31, 1999, the Company purchased 102,197, 405,975, 495,225 shares, respectively, of its common stock. In November and December 1999, the Company announced two dividends of $.19 and $.12 per share, respectively, to be paid in January 2000.
The Company repaid short-term borrowings of $5,868 in 1999 compared to proceeds of $655 in 1998 and repayments of $21,610 in 1997. There were no facility or line of credit borrowings by the U.S. and Canadian Manufacturing Segments at December 31, 1999. Working capital increased to $210,559 at December 31, 1999 and the current ratio decreased to 3.4:1 from 4.0:1 for the comparable period last year. Cash, cash equivalents, and short-term investments were $100,424 at December 31, 1999, as compared to $97,249 at December 31, 1998. The Company maintains excellent relations with its banks and other financial institutions that may serve as available resources for future growth opportunities, if the need arises.
YEAR 2000
The Company has completed its Year 2000 remediation efforts and, since January 1, 2000, has not experienced any significant problems internally or with suppliers and customers in connection with this event. Nevertheless, there still remain some future dates that could potentially cause computer systems problems.
The Company spent approximately $2,000 on its Year 2000 remediation efforts. No significant future costs are anticipated.
Because the Company has not, to date, experienced any significant problems in the Year 2000, it does not anticipate any major impact on its operations.
The foregoing discussion contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Any statement containing words, such as "believes", "anticipates", "should", "plans", "expects", "estimates" or similar words, is forward-looking; these statements involve risks and uncertainties and are based on current expectations and management's best estimates derived utilizing numerous assumptions of future events. Factors that could cause actual results to differ materially from those suggested by any such statement include, but are not limited to, general business conditions, strength of the retail economy and the growth within the coatings industry, unusual weather conditions and competition in the coatings industry.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates internationally, resulting in exposure to foreign exchange rate risk. This risk primarily relates to the consolidation of foreign subsidiary earnings, resulting in a foreign currency translation adjustment. This adjustment is included in the consolidated financial statements presented in Part II, Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its subsidiaries, together with notes thereto and the independent auditors' report, are set forth on pages 16 through 36. The additional financial information set forth in Part IV and included herein should be read in conjunction with the consolidated financial statements.
INDEPENDENT AUDITORS' REPORT
BENJAMIN MOORE & CO.:
We have audited the accompanying consolidated balance sheets of Benjamin Moore & Co. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Benjamin Moore & Co. and Subsidiaries at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, in 1997 the Company changed its method of computing depreciation.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey February 17, 2000
BENJAMIN MOORE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
BENJAMIN MOORE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998 (Dollars in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
BENJAMIN MOORE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
BENJAMIN MOORE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
See Notes to Consolidated Financial Statements.
BENJAMIN MOORE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the operations of Benjamin Moore & Co. and all majority-owned subsidiaries ("the Company") except for Temporary Co-Ownerships as explained in Note 18. All balances and transactions between subsidiaries are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include commercial paper of $49,140 and a short-term investment fund of $7,836, in 1999, and commercial paper of $73,934 and a short-term investment fund of $10,011 in 1998, all with original maturities of less than three months. The carrying amount of these investments approximates fair value.
INVESTMENTS
The Company accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Investments are classified as trading or available-for-sale. Trading assets, consisting of marketable equity securities, are stated at fair value. Gains and losses from trading securities, both realized and unrealized, are included in Other Income, Net. Available-for-sale securities are shown net of unrealized gains and losses and are included in Other Assets. Dividend income has been recorded in Other Income, Net. Unrealized gains and losses from available-for-sale securities are included in Other Comprehensive Income.
INVENTORIES
Manufacturing segment inventories are valued at lower of cost or market, determined by the use of the last-in, first-out ("LIFO") method. U.S. Retail segment inventory is valued at the lower of cost or market, by use of the first-in, first-out ("FIFO") method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated using the straight-line method. The major classes of property along with their estimated useful lives are set forth below:
ESTIMATED ASSET USEFUL LIFE - ---------------------------------------------------------------------- Buildings 40 yrs. Machinery and equipment 3-10 yrs. Furniture and fixtures 5-10 yrs. Automobiles and trucks 3-6 yrs. Leasehold improvements Over Life of Lease
As discussed in Note 19, during 1997, the Company changed the method of computing depreciation on its fixed assets and modified certain of its assets' estimated useful lives.
INTANGIBLE ASSETS
Included in Other Assets, intangible assets resulting from acquisitions amounted to $39,521 and $14,854 at December 31, 1999 and 1998, respectively. These assets are being amortized over their estimated useful lives, which range from six to thirty-five years. During 1999, 1998 and 1997, amortization of such intangibles amounted to $4,300, $2,033 and $4,085, respectively. Included in the 1999, 1998 and 1997 amortization of intangibles, amounting to approximately $268, $1,433 and $3,700, respectively, are write-downs pertaining to impairment of intangibles and goodwill associated with the Company's investment in Benjamin Moore Pacific Limited ("Pacific"), White Knight Paints Pty Ltd. ("White Knight") and other small acquisitions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets over their remaining useful lives by projecting operating cash flows to be generated on an undiscounted basis. As of December 31, 1999, the Company believes that the existing balances of its long-lived assets are recoverable.
REVENUE RECOGNITION
The Manufacturing and Retail segments record revenues when products are shipped. Customer deposits received on Retail sales are recorded as a liability until such orders are filled.
PENSION EXPENSE
It is the Company's policy to fund all qualified pension costs based on calculations made by independent actuaries. Unrecognized net assets are being amortized over 16-2/3 years for the United States ("U.S.") plan and 15 years for the Canadian plan.
STOCK OPTIONS
The Company accounts for its stock options under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
ADVERTISING EXPENSES
The cost of advertising is expensed as incurred. Advertising expenses amounted to $48,272, $48,223 and $44,626 in 1999, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development and quality control expenditures amounted to $13,251, $13,091 and $12,496 in 1999, 1998 and 1997, respectively. Quality control expenditures aggregated $3,474, $4,064 and $3,943, respectively in 1999, 1998 and 1997 and are included herein because a substantial portion of such expenditures is related to development projects.
PROVISION FOR INCOME TAXES
The Company and its 80% or more owned subsidiaries file a consolidated tax return. The Company calculates income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 establishes financial accounting and reporting standards for the effect of income taxes that result from activities during the current and preceding years. SFAS No. 109 requires an asset and liability approach for financial reporting for income taxes. Tax credits are included as a reduction of income tax expense in the year the credits arise.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Substantially all of the Company's customers are either wholesalers or retailers of Benjamin Moore paint. Concentration of credit risk is limited due to the large number of customers comprising the Company's customer base as well as Company policies which include credit analysis of each customer and the Company's allowance for doubtful accounts. The Company had no significant concentration of credit risk as of December 31, 1999 or 1998.
FOREIGN CURRENCY TRANSLATION
All balance sheet accounts of foreign subsidiaries are translated to U.S. dollars at current exchange rates and income statement accounts are translated using the average exchange rates for the period. Adjustments for currency exchange rate fluctuations are excluded from net income and reflected as a separate component of Shareholders' Equity and Comprehensive Income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ESTIMATES
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the method of presentation used in 1999.
2. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31, 1999 1998 - --------------------------------------------------------------
Trade $100,686 $92,456 Other 2,561 1,702 ----------------------- Total 103,247 94,158 Less allowance for doubtful accounts 11,430 11,058 ----------------------- Net $ 91,817 $83,100 =======================
Trade notes receivable due after one year, net of reserves, amounted to $2,361 and $2,667 at December 31, 1999 and 1998, respectively, and are included in Other Assets in the accompanying Consolidated Balance Sheets. The carrying amount of notes receivable approximates fair value.
3. INVESTMENTS
At December 31, 1999, the Company had recorded equity securities classified as available-for-sale of $6,080 in Other Assets. The original cost of these securities was $6,152, resulting in an unrealized loss of $72, which is included in Other Comprehensive Income.
4. INVENTORIES
DECEMBER 31, 1999 1998 - --------------------------------------------------------------
Finished goods $57,535 $41,759 Raw materials 24,502 29,965 ----------------------- Total 82,037 71,724 Less reserve 3,652 2,693 ----------------------- Net $78,385 $69,031 =======================
If the FIFO method of inventory accounting, which approximates current cost, had been used in the U.S. and Canadian Manufacturing segments, inventory would have been $9,920 and $9,676 greater than reported at December 31, 1999 and 1998, respectively. Of the total inventory reported at December 31, 1999 and 1998, U.S. Retail segment inventory, net of reserves, of $18,459 and $9,065, respectively, were reported on the FIFO basis.
Work-in-process is not significant, due to the brief production cycle, and is included with raw materials.
During 1998, the reduction of inventory resulted in the liquidation of certain LIFO layers. The liquidation reduced net income by approximately $601 or $.02 (adjusted for the 1999 stock split) per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1999 1998 - --------------------------------------------------------------
Land $ 9,176 $ 8,468 Buildings 65,584 62,490 Machinery, equipment and leasehold improvements 137,359 112,906 ----------------------- Total 212,119 183,864 Less accumulated depreciation and amortization 107,131 97,213 ----------------------- Net $104,988 $ 86,651 =======================
6. EMPLOYEE BENEFITS
PENSION AND POSTRETIREMENT PLANS
The Company has retirement income plans covering substantially all U.S. and Canadian corporate and manufacturing employees as well as a plan for one of its Retail subsidiaries acquired in 1999. The majority of benefits are based upon years of service and the employee's highest average compensation during any thirty-six consecutive full calendar months of employment.
During 1999, the Company made its first discretionary funding of $6,000 to its previously unfunded supplemental retirement plan. This funding is reflected in Other Assets in the accompanying Consolidated Balance Sheet.
The Company also provides medical and life insurance benefits that cover U.S. and Canadian corporate and manufacturing employees of the Company. Substantially all employees are covered by a postretirement health care plan which is contributory for employees retiring on or after January 1, 1993, with retiree contributions adjusted annually; the life insurance plan is non-contributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase retiree contributions each year by the same percent increase experienced by the net incurred charges through 1998, after which all future cost increases will be passed on to the retirees. As of December 31, 1999, the Company has not established any specific funding policy for these plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1999, the Board of Directors approved cost-of-living adjustments for those individuals who retired prior to 1997 included in the U.S. pension plans; such effects are included in the 1999 year-end liabilities.
The weighted-average assumptions employed at December 31, 1999 and 1998 were:
* Assumed to decrease to 6% by 2009 and remain at that level thereafter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net pension and postretirement benefit costs include the following components:
As described in Note 17, the Company offered two voluntary early retirement programs during 1997 that provided employees electing to retire within the prescribed period with enhanced benefits. During 1997, the Company recorded net charges for enhanced pension and other postretirement benefits of $5,777 and $8,696, respectively.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One-Percentage- One-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components for 1999 $ 89 $ (65)
Effect on year-end 1999 postretirement benefit obligation 820 (636)
POSTEMPLOYMENT BENEFITS
The Company accrues for benefits provided to former or inactive employees after employment but before retirement. The liability related to these benefits at December 31, 1999 is approximately $1,848 and is recorded in Pension and Other Long-Term Benefits.
EMPLOYEES' STOCK OWNERSHIP PLAN
The Company maintains a qualified Employees' Stock Ownership Plan ("ESOP") covering substantially all of its U.S. employees, excluding retail employees. The Board of Directors of the Company is authorized to make contributions from time to time to the plan trust fund.
In 1989, the Company and its ESOP entered into a leveraged transaction whereby the Company borrowed $10,000 from a bank and loaned such funds to the ESOP. The ESOP used the loan proceeds to purchase, as restated to reflect the 1990 stock dividend and 1999 stock split, 719,377 shares of the Company's common stock; 262,770 shares from estates and 456,607 shares from the Company's treasury stock account. The bank loan bore interest at 7.85% and was payable in ten graduated annual installments through June 30, 1999 when the loan was repaid in full. The common stock purchased by the ESOP was held by the ESOP trustees as collateral for the loan from the Company to the ESOP in a restricted account. Each year the Company made contributions to the plan, which the plan's trustees used to repay the loan from the Company. The collateralized shares of common stock were released from restriction and allocated to participating employees annually, as of December 31, based upon the percentage of debt service paid during the year then ended to the projected total amount of debt service paid under the loan agreement. As of December 31, 1999, all collateralized shares have been allocated to participating employees and the ESOP was merged with the Benjamin Moore & Co. Deferred Savings and Investment Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contributions to the ESOP amounted to $1,450, $1,369 and $1,317 in 1999, 1998 and 1997, respectively. The fair value of the shares held by the ESOP was $34,132 and $32,943 at December 31, 1999 and 1998, respectively.
The Company's Canadian subsidiary maintains a similar plan which covers substantially all of the Canadian Company's employees. The Canadian subsidiary contributed approximately $272, $236 and $217 to the Canadian plan trust fund in 1999, 1998 and 1997, respectively.
STOCK OPTION AND STOCK INCENTIVE PLANS
During 1993, the Company adopted a Stock Option Plan ("1993 Plan"). The 1993 Plan provides for the granting of non-statutory stock options to officers and other employees of the Company. Options for the purchase of 1,200,000 shares of common stock, par value $3.33 1/3 per share (restated to reflect the 1999 stock split), could be granted. The options began vesting on the second anniversary of the grant date and vest over the succeeding two years. The options also become fully vested upon retirement or death. Expiration is ten years from date of grant, six months after retirement or ninety days after termination.
In 1998, a new Stock Incentive Plan ("1998 Plan") was adopted by the Company. Grants under the 1993 Plan were frozen. Options for the purchase of 1,200,000 shares of stock, par value of $3.33 1/3 per share (restated to reflect the 1999 stock split), may be granted. Vesting occurs over a four year period beginning one year after grant date. The options also become fully vested upon death. Expiration is ten years from date of grant, five years after retirement or three months after termination.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock option plans under APB 25. Accordingly, no compensation cost has been recognized for these plans. Had compensation cost for the plans been determined based on the fair value at the grant date consistent with SFAS No. 123, the Company's net income and income per share would have been as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------ Net income As reported $78,004 $60,095 $30,635 Pro forma 77,587 60,095 29,881
Net income per common share Basic As reported $ 2.93 $ 2.26 $ 1.14 Pro forma 2.92 2.26 1.12
Diluted As reported $ 2.93 $ 2.26 $ 1.14 Pro forma 2.91 2.26 1.12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of grant using the Binomial option-pricing model with the following weighted average assumptions:
Stock option activity for both the 1993 and 1998 plans were as follows (restated to reflect the 1999 stock split):
The following table summarizes information about stock options outstanding at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING PRICE NUMBER OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE - ----------------------------------------------------------------------------- $20.00 to 24.99 344,331 $24.42 3.9 Years 25.00 to 29.99 836,100 27.66 8.6
The following table summarizes information about stock options exercisable at December 31, 1999:
WEIGHTED AVERAGE PRICE NUMBER EXERCISABLE EXERCISE PRICE - ----------------------------------------------------------------------------- $20.00 to 24.99 326,331 $24.42 25.00 to 29.99 108,656 27.36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SHORT-TERM BORROWINGS
Information regarding the Company's arrangements with banks in the U.S. for short-term lines of credit is as follows:
DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------- Outstanding borrowings $ -- $ 5,576 Weighted average interest rate on outstanding borrowings -- 6.4% Unused portion of lines of credit $80,000 $78,075
There are no significant compensating cash balances or commitment fees that relate to the above arrangements. Due to the short maturity of these borrowings, the carrying amount approximates fair value.
8. OTHER LIABILITIES AND ACCRUED EXPENSES
DECEMBER 31, 1999 1998 - ---------------------------------------------------------------- Income taxes payable $14,786 $ 5,018 Restructuring reserve--current portion -- 1,002 Salaries, wages and commissions 13,372 6,970 Customer discounts and allowances 3,903 5,614 Other 10,734 9,456 -------------------- Total $42,795 $28,060 ==================== 9. ENVIRONMENTAL MATTERS
The Company operates in an industry subject to extensive environmental regulations and is subject to potential liability under various claims and legal actions which are pending or may be asserted in the future against the Company regarding environmental remediation matters. Estimates of the future costs to be incurred relating to such matters are necessary due to various uncertainties surrounding remediation procedures, including the development of new technologies, the enactment of additional regulations, the identification of new sites for which the Company could be a potentially responsible party ("PRP") and the apportionment of responsibility among identified PRPs in addition to the Company. The Company establishes reserves for environmental matters when remediation expenditures are probable and estimable. It is reasonably possible that the final resolution of some of these matters may require significant expenditures by the Company in excess of its existing reserves.
The Company has accrued approximately $4,042 for estimated potential cleanup costs based upon its monitoring of ongoing activities and its past experience with these matters.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. LONG-TERM OBLIGATIONS
Included in long-term obligations is long-term debt as follows:
DECEMBER 31, 1999 1998 - ---------------------------------------------------------------- Bank debt (interest ranging from 6%-11%) $ 782 $1,516 ESOP loan payable -- 1,400 Capital lease obligations 755 -- Other (interest ranging from 8%-13%) 228 259 ------------------ Total 1,765 3,175 Less current maturities 634 1,821 ------------------ Long-term debt $1,131 $1,354 ==================
Aggregate maturities of long-term obligations, including capital leases, are as follows: 2000 - $634; 2001 - $273; 2002 - $155; 2003 - $102; 2004 - $100; and $501 thereafter.
At December 31, 1999 and 1998, the Company was contingently liable for guarantees of indebtedness owed by third parties in the amount of $16,969 and $17,754, respectively, relating to financing arrangements between a bank and such third parties, to whom the Company sells merchandise. It is not practical to estimate the fair value of the guarantee. As of December 31, 1999, the Company has a reserve of $7,498 included in Long-Term Obligations for recourse provisions under these financing arrangements.
11. OPERATING LEASES
The Company leases data processing equipment, buildings, transportation equipment, autos and miscellaneous equipment under operating leases expiring at various dates.
Minimum future obligations under leases as of December 31, 1999 are as follows:
YEAR ENDING DECEMBER 31, TOTAL - ----------------------------------------------------------- 2000 $11,857 2001 10,274 2002 8,184 2003 6,659 2004 6,028 Thereafter 7,929 ------- Total minimum lease payments $50,931 =======
Rent expense on operating leases was approximately $11,337, $10,375 and $9,857 for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SHAREHOLDERS' EQUITY
In 1978, the Board of Directors, with shareholder approval, adopted an Employees' Stock Purchase Plan ("ESPP"). Under the Plan, as restated to reflect stock dividends and splits, up to an aggregate of 4,800,000 shares of Common Stock held in treasury may be offered and sold from time to time to employees of the Company and its subsidiaries at the fair value price per share as determined by an independent appraisal firm at the date of offering. Since 1979, 2,214,495 (restated for the 1999 stock split) shares have been sold to employees under the Plan.
Notes receivable outstanding with respect to the above referenced Plan, as well as the 1993 Stock Option Plan and the ESOP note receivable, are reflected in the balance sheets as reductions in shareholders' equity. Notes received by the Company relative to the 1993 Plan bear interest at the then-current rates of interest. The notes received by the Company relative to the ESPP offerings since 1991 are non-interest bearing.
Treasury stock is reflected at acquisition value, determined by the use of the FIFO method. Sales and distributions of treasury shares are recorded at fair value price per share. Any excess of such fair value proceeds over the FIFO cost is reflected as additional paid-in capital.
The Board of Directors of Benjamin Moore & Co. on April 15, 1999 declared a stock split pursuant to which each outstanding share of Common Stock, par value $10.00 per share, of the Company held by a shareholder of the Company on the record date of July 1, 1999 and each such share held in the treasury of the Company on the record date of July 1, 1999 was divided into three shares of Common Stock. In connection with the stock split, and as permitted under New Jersey law, the Board of Directors of the Company also determined that the authorized Common Stock of the Company be increased from 40,000,000 shares to 120,000,000 shares and the par value of the Common Stock be decreased from $10.00 per share to $3.33 1/3 per share.
A reconciliation of the number of common shares outstanding is as follows (restated to reflect the 1999 stock split):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. EARNINGS PER SHARE
The components of the denominator for basic and diluted net income per common share are as follows (restated to reflect the 1999 stock split):
In 1997, the Company changed its method of computing depreciation (see Note 19). This change resulted in basic and diluted net income per common share before cumulative effect of change in accounting principle of $.90 and basic and diluted net income per common share of $.24 for the cumulative effect of change in accounting principle.
14. INCOME TAXES
The composition of the income tax provision is as follows:
1999 1998 1997 - ----------------------------------------------------------------------- Federal income taxes: Current $ 42,158 $ 34,971 $ 24,629 Deferred 417 (1,214) (11,684) ------------------------------------- Total federal 42,575 33,757 12,945 ------------------------------------- State and local income taxes Current 10,106 8,267 3,523 Deferred 151 193 -- ------------------------------------- Total state and local 10,257 8,460 3,523 Foreign income taxes 5,150 3,705 4,032 ------------------------------------- Total $ 57,982 $ 45,922 $ 20,500 =====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income taxes represent the tax effects of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are comprised of the following:
Net long-term deferred tax assets of $3,562 are reflected in Other Assets.
At December 31, 1999, the Company has a valuation allowance recorded against available foreign tax credits and certain other foreign related items. Management believes it is more likely than not that the benefits related to these items may not be realized.
The Company has available for utilization $656 of foreign tax credits. Such credits expire as follows: 2000 - $233; 2001 - $140; 2002 - $78; and 2003 - $205.
A reconciliation of the statutory federal tax rate and effective tax rate is as follows:
1999 1998 1997 - --------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effect of: State and local income taxes 4.9 5.1 5.1 Foreign income taxes 1.1 2.4 5.0 Valuation allowance 1.0 1.6 -- Other - net .3 (1.3) .8 ------------------------------ Effective tax rate 42.3% 42.8% 45.9% ==============================
The Company does not accrue federal income taxes on its equity in the undistributed earnings of its Canadian subsidiary, which amounted to $38,690, $36,175 and $33,619 at December 31, 1999, 1998 and 1997, respectively, because the Company intends to reinvest such earnings indefinitely.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SEGMENTS
The Company manufactures and sells coatings for use by the general public and industrial and commercial users in the U.S., Canada and New Zealand. In 1999, the Company sold its Australian subsidiary and currently has a signed letter of intent to sell its New Zealand subsidiary in early 2000. Transfers between geographic areas are eliminated in consolidation. The Company has three reportable segments - (1) U.S. Manufacturing, (2) U.S. Retail, and (3) Canadian Manufacturing. Business groups within these three segments are Trade Sales Coatings, Production Finishes Coatings, and Retail. Also included in the Company's Consolidated Financial Statements, but not considered a reportable segment, are the international businesses in Australia and New Zealand.
The accounting policies of the segments are the same as those described in Note 1. Segment data includes intersegment net sales. The Company evaluates the performance of its segments based upon net sales to external customers and net income (loss).
The Company does not have any customers to which sales exceed 10% of total sales.
As a result of retail acquisitions in 1999, U.S. Retail has become a reportable segment. The Company has reformatted prior year amounts for comparability.
Assets and operating results by reportable segment and geographic area are as follows:
Reconciling items primarily consist of (a) the elimination of sales and cost of sales between segments, and (b) the elimination of intersegment investments and advances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents net sales to external customers by business group:
1999 1998 1997 - ---------------------------------------------------------------------- Trade Sales Coatings $629,813 $601,583 $585,052 Production Finishes Coatings 57,142 55,054 51,375 Retail 92,562 54,356 29,867 ------------------------------------ Total $779,517 $710,993 $666,294 ====================================
16. OTHER INCOME, NET
The components of other (income), net are as follows:
17. RESTRUCTURING
During the third quarter of 1997, the Board of Directors approved and implemented a strategic restructuring program designed to improve operating efficiency and industry competitiveness. This plan resulted in the Company recording a pre-tax charge of $33,388 including employee separation costs of $29,683 and asset impairments and other charges of $3,705. The Company streamlined its operations by reducing its workforce, consolidating certain manufacturing facilities and disposing of excess equipment.
Over 90% of all separations were completed by December 31, 1997 with the remainder completed during 1998. Exclusive of pension and postretirement enhancements, the remaining restructuring liability as of December 31, 1999, relating primarily to dismantling and facility costs, is $500. During 1999, 1998 and 1997, cash payments charged against the reserve were $1,267, $9,019 and $4,400, respectively.
18. INVESTMENTS IN TEMPORARY CO-OWNERSHIPS
Investments in Temporary Co-Ownerships are carried at cost less a reserve for impairments. These investments in the capital stock of retail paint stores are through financing arrangements. All increases in equity from earnings accrue solely to the benefit of the independent co-owners. The Company sells its products to Temporary Co-Ownerships at the same prices and terms used in transactions with other customers. A reasonable estimate of fair value of the investments in Temporary Co-Ownerships could not be made without incurring excessive costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
19. CHANGE IN ACCOUNTING PRINCIPLE
In 1997, the Company changed the method of computing depreciation on its fixed assets from accelerated methods used in previous periods to the straight-line method. The change was made because the straight-line method better matches the depreciation costs of the assets to the revenue produced by them. This change also makes the Company's depreciation policy more comparable to the policies used within its industry. The retroactive application of the new method resulted in a cumulative effect adjustment of $6,331 (net of $4,234 in income taxes) which is included in net income for the year ended December 31, 1997.
20. SUBSEQUENT EVENT
During the first quarter of 2000, the Board of Directors approved a restructuring of U.S. and Canadian operations and offered a voluntary early retirement program. This plan was designed to lower manufacturing costs and maximize efficient means of distribution. It is estimated that these actions will result in a first quarter pre-tax charge ranging from $36,000 to $43,000, primarily consisting of enhanced benefits associated with the voluntary early retirement program, severance, asset write-offs and decommissioning costs. As a result of this restructuring, the Company will have reduced its North American manufacturing facilities from sixteen to eight and reconfigured its distribution centers.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the captions (i) "ELECTION OF DIRECTORS" at pages 4 and 5 and "Section 16(a) Beneficial Ownership Reporting Compliance" at page 18 of the Company's Proxy Statement dated March 27, 2000, for use in connection with its 2000 Annual Meeting of Shareholders, which information is hereby incorporated by reference, and (ii) "EXECUTIVE OFFICERS OF THE REGISTRANT" at page 9 of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "DIRECTOR COMPENSATION", "EXECUTIVE COMPENSATION" and "SEVERANCE ARRANGEMENTS" at pages 8 - - 12 and 16 of the Company's Proxy Statement dated March 27, 2000, for use in connection with its 2000 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Reference is made to the information set forth under the caption "PRINCIPAL SHAREHOLDERS" at pages 2 and 3 of the Company's Proxy Statement dated March 27, 2000, for use in connection with its 2000 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
(b) Security Ownership of Management
Reference is made to the information set forth under the caption "ELECTION OF DIRECTORS - Ownership of Securities by Directors and Named Executive Officers" at pages 6 and 7 of the Company's Proxy Statement dated March 27, 2000, for use in connection with its 2000 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
(c) Changes in Control
To the knowledge of the Company, there are no arrangements the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" at page 12 of the Company's Proxy Statement dated March 27, 2000, for use in connection with its 2000 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) List of Financial Statements Included Under Item 8 of this Report
Independent Auditors' Report 16
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 17
Consolidated Balance Sheets, December 31, 1999 and 1998 18
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 20
Notes to Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997 21 - 36
(2) Financial Statement Supplemental Schedule
II Consolidated Valuation and Qualifying Accounts For the Years Ended December 31, 1999, 1998 and 1997 43
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the information required thereby is shown in the financial statements or notes thereto.
The individual financial statements of the Company have been omitted because the Company is primarily an operating Company and all subsidiaries are included in the consolidated financial statements being filed. In addition, in the aggregate, such subsidiaries do not have minority equity interests and/or indebtedness to any person other than the Company or its consolidated subsidiaries in amounts which together exceed 5 percent of the total assets of the Company at December 31, 1999 and 1998.
(b) Reports on Form 8-K
Reported on Form 8-K filed December 21, 1999, the Executive and Finance Committee of the Board of Directors of Benjamin Moore & Co. on December 20, 1999 declared a special dividend on its common stock of $0.12 per share payable January 31, 2000 to shareholders of record on December 31, 1999.
(c) List of Exhibits
(3) Restated Certificate of Incorporation and Bylaws of the Company.
(i) Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3(a) of the Company's Registration Statement under the Securities Act of 1933, as amended, on Form S-1 - Registration No. 2-62626).
Reference is made to the information set forth under the caption "Amendment of the Restated Certificate of Incorporation" at pages 10 and 11 of the Company's Proxy Statement dated March 22, 1985, for use in connection with its 1985 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Limitation of Liability of Directors and Officers to the Maximum Extent Permitted by New Jersey Law" at pages 10, 11, 12 and 13 of the Company's Proxy Statement dated March 28, 1988, for use in connection with its 1988 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Amendment of the Restated Certificate of Incorporation" at pages 11 and 12 of the Company's Proxy Statement dated March 21, 1989, for use in connection with its 1989 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Amendment of the Certificate of Incorporation" at pages 15, 16 and 17 of the Company's Proxy Statement dated March 28, 1994, for use in connection with its 1994 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth (a) under the caption "Amendment to the Restated Certificate of Incorporation and to the ByLaws to Grant the Board the Right to Amend the ByLaws" at pages 19 and 20 and (b) under the caption "Amendment to the Restated Certificate of Incorporation toEliminate Preemptive Rights" at pages 21 and 22 of theCompany's Proxy Statement dated March 18, 1999, for use in connection with its 1999 Annual Meeting of Shareholders, whichinformation is hereby incorporated by reference.
(ii) Bylaws of the Company (incorporated herein by reference to Exhibit 3(b) of the Company's Registration Statement under the Securities Act of 1933, as amended, on Form S-1 - Registration No. 2-62626).
Reference is made to the information set forth under the caption "Indemnification of Directors, Officers and Employees" at pages 13 and 14 of the Company's Proxy Statement dated
March 28, 1988, for use in connection with its 1988 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Approval of Amendments of the Company Bylaws" at pages 17 through 21 of the Company's Proxy Statement dated March 28, 1994, for use in connection with its 1994 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Amendment to the Restated Certificate of Incorporation and to the ByLaws to Grant the Board the Right to Amend the ByLaws" at pages 19 and 20 of the Company's Proxy Statement dated March 18, 1999, for use in connection with its 1999 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
(10) Material Contracts
(iii)(A) Employees' Stock Purchase Plan of the Company (incorporated herein by reference to Exhibit 4(a) of the Company's Registration Statement under the Securities Act of 1933, as amended, on Form S-8 - Registration No. 33-2694).
Reference is made to the information set forth under the caption "Amendment of Employees' Stock Purchase Plan" at pages 11 and 12 of the Company's Proxy Statement dated March 25, 1991, for use in connection with its 1991 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Approval of the Stock Option Plan" at pages 13, 14 and 15 of the Company's Proxy Statement dated March 22, 1993, for use in connection with its 1993 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Supplemental Executive Retirement Plan" and "Severance Arrangements" at pages 10, 11 and 15 of the Company's Proxy Statement dated March 21, 1997, for use in connection with its 1997 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
Reference is made to the information set forth under the caption "Approval of the 1998 Stock Incentive Plan" at pages 16 - 21 of the Company's Proxy Statement dated March 23, 1998, for use in connection with its 1998 Annual Meeting of Shareholders, which information is hereby incorporated by reference.
(21) Subsidiaries of the Company Page 44
(23) Independent Auditors' Consent Page 45
(27) Financial Data Schedule Page 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Montvale, New Jersey, on the 24th day of March, 2000.
BENJAMIN MOORE & CO.
By /s/ Yvan Dupuy ------------------------------ Yvan Dupuy President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Yvan Dupuy and Richard Roob, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Richard Roob Chairman of the Board of Directors March 24, 2000 - --------------------------- and Chief Executive Officer; Richard Roob (Principal Executive Officer) and Director
/s/ Yvan Dupuy President and Chief Operating March 24, 2000 - --------------------------- Officer; Director Yvan Dupuy
/s/ Donald E. Devine II Vice President-Finance March 24, 2000 - --------------------------- and Chief Financial Officer Donald E. Devine II
/s/ Benjamin M. Belcher Jr. Director March 24, 2000 - --------------------------- Benjamin M. Belcher, Jr.
/s/ W. C. Belcher Director March 24, 2000 - --------------------------- Ward C. Belcher
/s/ Charles H.Bergmann, Jr. Director March 24, 2000 - --------------------------- Charles H. Bergmann, Jr.
/s/ Frederick J. Costello Director March 24, 2000 - --------------------------- Frederick J. Costello
/s/ G. Moore Director March 24, 2000 - --------------------------- Gerald W. Moore
Director March 24, 2000 - --------------------------- John C. Moore, Jr.
/s/ Robert H. Mundheim Director March 24, 2000 - --------------------------- Robert H. Mundheim
/s/ Charles C. Vail Director March 24, 2000 - --------------------------- Charles C. Vail
/s/ Sara B. Wardell Director March 24, 2000 - --------------------------- Sara B. Wardell
/s/ M.C. Workman Director March 24, 2000 - --------------------------- Maurice C. Workman
SCHEDULE II
BENJAMIN MOORE & CO. and SUBSIDIARIES CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) Accounts and Notes Receivable Written Off - Net of Recoveries (2) Foreign exchange gain or (loss) (3) Purchase Accounting