ITEM 1. BUSINESS
General Development of Business
Loctite Corporation (the "Company") was organized as a Connecticut corporation in 1953 to manufacture and sell industrial adhesives and sealants. The Company reincorporated in Delaware in 1988. Its current line of such industrial products is sold in essentially all industrialized countries, in most cases through wholly owned subsidiaries.
The Company expanded its activities to encompass the manufacture and sale of adhesives, sealants, and related products through automotive aftermarket and consumer channels, primarily by the acquisition of Permatex Company, Inc. in 1972 and Woodhill Chemical Company in 1974. The domestic businesses of these two companies were consolidated in 1976, and in 1980 were merged into a single division to conduct business as Loctite Corporation, Automotive and Consumer Group.
During 1992, the Company moved ahead with its decision to consolidate the industrial and automotive aftermarket and consumer groups into the North American Region. The North American Region includes all of the Company's U.S., Canadian, Mexican, and Caribbean business activities, except for its electroluminescent lamp business. All of the Company's remaining operations are managed by its three other primary worldwide marketing regions.
Financial Information About Industry Segments
Loctite operates in one dominant segment: "adhesives, sealants, and related products". Applicable segment information is contained in Note 2 of the Notes to Consolidated Financial Statements.
Description of Business
The majority of the Company's adhesives, sealants, and related products are manufactured from raw materials at the Company's plants. Selected other products are purchased in bulk form and packaged for resale. A limited number of products are purchased in final packaged form. The principal materials and supplies used by the Company in the manufacture and packaging of products are generally commercially available from several sources in both the United States and Western Europe. While certain raw materials used by the Company, principally of petrochemical origin, have from time to time in the past been subject to supply shortages and price increases, the Company anticipates that adequate supplies of such raw materials will be available over the next several years.
The basic monomer resins used in the compounding of the Company's sealants and adhesives are manufactured in Sabana Grande, Puerto Rico; Dublin, Ireland; and Greater Sao Paulo, Brazil. The compounding of these products and the manufacturing of the Company's consumer and automotive aftermarket sealants and adhesives are done at Sabana Grande, Puerto Rico; Dublin, Ireland; Kansas City, Kansas; Warrensville Heights, Ohio; and at smaller facilities in several other countries.
The Company manufactures and sells a broad range of chemical sealants and adhesives having different chemical properties designed to suit a wide variety of applications. Special and standard equipment for the application of sealants and adhesives is also marketed by the Company, along with a variety of specialty chemical items which complement the sealants and adhesives line. The principal products are anaerobic sealants and adhesives and cyanoacrylate adhesives.
Anaerobics. Anaerobic sealants and adhesives remain liquid in the presence of air but cure in the absence of air. These liquids are used to replace or augment mechanical means for locking, sealing, retaining and structurally bonding machine elements, providing extra strength and reliability to these assemblies, and increasing resistance to loosening or damage caused by shock or vibration. Anaerobic sealants and adhesives can be used without solvent removal processes, and in many cases permit the relaxation of machining
tolerances. The net result is less complexity in manufacture and assembly operations for the user, frequently providing substantial overall cost savings.
Anaerobic sealants and adhesives have an indefinite shelf life and are produced with a wide variety of chemical and physical properties to meet the demands of their numerous industrial applications. They are used primarily on metal surfaces in equipment such as vehicles, household appliances, electronic equipment, and numerous other mechanical subassemblies.
Cyanoacrylates. Cyanoacrylate adhesives cure upon exposure to moisture, which is present in trace amounts on the surfaces to be bonded. They cure in times ranging from a few seconds to several minutes to form thin, transparent bonds. Because of the speed and strength of cyanoacrylate bonds, these materials require care in handling and use.
In general, cyanoacrylates have a shelf life in excess of one year and do not require extensive surface preparation prior to use. Cyanoacrylate adhesives may be used to bond metal, plastics, rubber, glass, ceramic, or wood, either together or in combination. Typical uses include the assembly of certain rubber and vinyl products, auto accessories, electronic components, and office equipment, especially where speed of cure is an important consideration.
Other Sealants, Adhesives and Related Products. The Company manufactures and sells other engineering adhesives, principally silicone sealants, as well as epoxies and modified acrylic adhesives; ultraviolet light and primer cured sealants and coatings used in a wide variety of industrial applications; a line of home and auto-care products for consumer use, including high viscosity, noncuring sealants which are used principally to coat conventional gaskets and rust converters; and other related specialty chemicals, principally lubricating, and cleaning compounds.
Other Products. The Company manufactures and sells various amounts of other products including metal-care products and cleaners for tile, porcelain, wood, metal, and fiberglass surfaces, hand cleaners, and electroluminescent lamps.
Marketing
The Company sells its products in essentially all industrialized countries of the world. Sales in North America and in Europe for the year ended December 31, 1994 accounted for approximately 42% and 37%, respectively, of consolidated net sales. Sales in the balance of the world accounted for approximately 21% of consolidated net sales.
The Company has three principal user markets for its products: the industrial market, the retail (consumer) market, and the automotive aftermarket. The Company reaches user markets through its four regional marketing organizations: North American; European; Latin American; and Asia/Pacific. Each marketing organization has the responsibility for developing marketing strategies and techniques for its area of operation within the framework of overall corporate marketing plans.
Throughout the world sales are made primarily through subsidiaries, most of which are wholly owned by the Company. Sales are made by these subsidiaries under the housemarks Loctite, Duro, and Permatex through a network of nonexclusive distributors, jobbers, and sales agents, some of which also sell adhesives and sealants made by others. In addition, sales are made through a direct sales force maintained by the Company. The Company provides close and continuing contact with its major end users, distributors, and sales agents to provide optimum technical assistance and support for the use of its products. The Company's retail(consumer) products are marketed primarily through the hardware, automotive, food, and building supply channels.
The Company's business, on a consolidated basis, has not been subject to significant seasonal trends. However, individual market channels do show some degree of seasonality, particularly with the increasing trend toward the practice of summer plant shutdowns.
The backlog of firm orders as of December 31, 1994 was $22.4 million versus $19.0 million as of December 31, 1993. The current backlog is expected to be substantially filled within the current fiscal year.
Government contracts and purchases do not contribute materially to the Company's consolidated net sales and net earnings.
No single customer of the Company accounted for 10 percent or more of consolidated net sales.
Research and Development
Research and development expenditures were $28.0 million for the year ended December 31, 1994, $26.7 million for the year ended December 31, 1993, and $26.2 million for the year ended December 31, 1992.
Competition
Competitive products, including anaerobic sealants and adhesives and cyanoacrylate adhesives, are being marketed in countries where the Company conducts business. The Company has patent protection on various aspects of its sealants and adhesives in the United States and, to a lesser extent, in a number of foreign countries. Nearly all competitive anaerobic sealants and adhesives are sold at lower prices than the Company's products and, in some instances, at substantially lower prices. Although the Company has selectively reduced prices to meet competition from time to time, it believes that attention to a superior quality of product, technical service and customer needs has generally enabled it to maintain its market position without significant price reductions.
Other liquid sealants and adhesives are available, many of which are produced by companies which are larger and have substantially greater financial resources than the Company. Alternatives to liquid sealants and adhesives, such as gaskets, lock washers, and self-locking nuts, are also available and compete with the Company's products.
Environmental Matters
Continuing compliance with existing federal, state, and local provisions dealing with protection of the environment is not expected to have a material effect upon the Company's capital expenditures, earnings, and competitive position. For further discussion on environmental matters, see Management's Discussion and Analysis of Financial Condition and Results of Operations.
Employees
At December 31, 1994, the Company had approximately 4,200 employees. The Company has had no significant strikes or work stoppages and considers employee relations to be satisfactory. Approximately 6% of the Company's employees are covered by collective bargaining agreements, specifically at the Company's plants in Kansas City, Kansas and Dublin, Ireland. There are no significant seasonal fluctuations in employment.
Patents
The Company owns a number of unexpired United States patents relating to anaerobic sealants and adhesives, and certain other sealants and adhesives, including cyanoacrylate adhesives, or on related products, uses, or manufacturing processes. These patents expire on various dates from 1995 to 2012. The Company also owns a substantial number of pending patent applications.
The Company also has obtained patents, and regularly files new patent applications, in foreign countries, particularly the industrialized countries of Western Europe, Australia, Canada, South Korea, and Japan. Because all applications have not been filed in all foreign countries and because of the varying degrees of protection afforded by foreign patent laws, the Company has somewhat less patent protection abroad than in the United States.
The Company has obtained protection for major trademarks in essentially all countries where the trademarks are of commercial importance and regularly files new trademark applications on a worldwide basis.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The information required is contained in Note 2 of the Notes to Consolidated Financial Statements.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns and leases properties located around the world. These properties are deemed adequate to meet the needs of the Company at present levels. The Company's properties are in good condition, well maintained, and modernized as required. Substantially all of the properties are in regular use with the exception of the Company's former North American Region Headquarters in Newington, Connecticut (141,000 square feet). Listed below are the approximate square footage numbers by region.
-- The North American properties total 1,110,000 square feet, of which 176,000 square feet are leased. Major locations include a warehouse in Solon, Ohio (180,000 square feet) for distribution of North American products; the Company's former Automotive and Consumer Group Headquarters in Warrensville Heights, Ohio (166,000 square feet), which includes manufacturing and administrative activities; and a manufacturing, warehousing, and administrative facility in Sabana Grande, Puerto Rico (113,000 square feet). In August of 1994, the consolidated North American sales, marketing, and administrative functions, as well as the research, development, and engineering functions moved into a new 200,000 square foot building on 57 acres in Rocky Hill, Connecticut.
-- The European properties total 656,000 square feet, of which 310,000 square feet are leased. The largest facility is in Dublin, Ireland (167,000 square feet) where manufacturing, warehousing, research, development, and engineering, and administrative activities take place. Other major facilities are in France (103,000 square feet), Italy (81,000 square feet), Germany (70,000 square feet), Sweden (65,000 square feet), and the U.K. (41,000 square feet), which include warehousing, marketing, and administrative functions.
-- The Latin American properties total 190,000 square feet, of which 38,000 square feet are leased. The largest facility is in Brazil (126,000 square feet), which is used for manufacturing, marketing, warehousing, and administrative functions.
-- The Asia/Pacific properties total 279,000 square feet, of which 104,000 square feet are leased. Major facilities are in Japan (77,000 square feet) and Australia (76,000 square feet) where manufacturing, marketing, warehousing, and administrative activities take place.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not a party to any pending legal proceedings in which an adverse decision, in the opinion of the Company, would have a material adverse effect upon the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York and Pacific Stock Exchanges. The number of stockholders of record of the Company's Common Stock as of the close of business on February 28, 1995, was 3,744. Information regarding quarterly market prices and dividends declared for the Company's Common Stock is shown below. Market prices are closing prices quoted on the New York Stock Exchange, the principal exchange market for the Company's Common Stock. The Company currently expects that comparable dividends will continue to be paid in the future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the operations of the Company.
TEN-YEAR FINANCIAL REVIEW
(dollars in millions, except per share amounts and as noted) SELECTED FINANCIAL DATA RESTATED TO A CALENDAR YEAR BASIS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993
For the year ended December 31, 1994, net sales were $703.6 million, an increase of $91.0 million or 15% over the prior year. The Company's management measures the results of the Company based on businesses and regions. Trade sales between regions are reflected as sales of the region servicing the customer. A summary of sales activity (in millions) is as follows:
Plastic Padding Holdings Limited was acquired in the first quarter of 1994.
Price changes contributed to the growth in sales for the Company. Average net prices changed as a result of changes in list price, changes in product mix, and changes in customers. Such factors are not quantifiable individually due to the diversity of markets, product formulations, and product packages.
Sales in North America increased by 8% in U.S. dollars and 9% in local currency when compared to 1993. Volume growth in the core products grew the Industrial business by $16.3 million and the Retail (Consumer) business by $5.4 million. The Automotive Aftermarket business had a sales increase of 2% in U.S. dollars and 3% in local currency. This growth was attributed to efforts in the third and fourth quarters when new products gained distribution and some niche distributors were added.
In Europe there was substantial sales growth in 1994, 19% in U.S. dollars and 18% in local currency. Approximately 39% of the $40.8 million sales growth was attributed to the acquisition of Plastic Padding Holdings Limited ("Plastic Padding"). Europe, excluding Plastic Padding sales, increased by 11% in both U.S. dollars and local currency compared to 1993 results. Favorable exchange rates in the third and fourth quarters offset the negative impact of the relatively strong dollar prevailing in the first two quarters of 1994. The five major countries (France, Italy, U.K., Germany, and Spain) reported local currency sales growth of between 7% and 16%.
Annual sales in the Asia/Pacific region increased by $12.6 million compared to the 1993 results. Volume growth of the core products was in double digits in this region. Japan and Australia had local currency growth of 3% and 8%, respectively, which translated to 12% and 17%, respectively, in U.S. dollars. Due to the strength of the U.S. dollar versus the Chinese Yuan, annual local currency sales growth of 46% in China became a decrease of 2% when translated into U.S. dollars. All other countries in this region registered double digit sales gains in both local currency and U.S. dollars.
The Latin American region had strong sales growth in 1994, 27% in U.S. dollars. One of the core consumer product lines in this region experienced a 38% volume increase over prior year sales. In Brazil, buyers reacted confidently to the government's implementation of a new financial plan and currency on the first of July. This can be seen in Brazil's sales growth of 60% in both the third and fourth quarters of 1994 when compared to prior year's results for the same periods. Colombia, Chile, and Argentina also achieved double digit sales growth in U.S. dollars for the year ended December 31, 1994.
Luminescent Systems sales grew 8% over 1993 results. This increase is the result of an increase in sales of aviation lighting and of electrical components for the automotive industry.
Overall, gross margin remained basically unchanged at 61% of sales during 1994, although there was some change in geographic mix.
Operating expenses as a percentage of sales remained unchanged at 45% in 1994. In total, expenses increased by 15% or $41.6 million, with Plastic Padding accounting for $5.8 million of the increase. Sales and marketing expenses increased 18% or $33.5 million, to support the increased sales volume and the 13% increase in the sales and marketing headcount. Administrative expenses increased 10% or $6.8 million. Research and development expenses increased 5% or $1.3 million in 1994.
Investment income was $2.1 million lower in 1994 than in 1993 primarily as a result of lower average interest rates and deposit levels in foreign locations.
Interest expense was $0.8 million higher in 1994 than in 1993 due primarily to higher average short-term debt levels in the U.S.
Net foreign exchange loss decreased by $3.8 million for the twelve month period over the comparable 1993 period due primarily to the new economic plan and currency introduced in Brazil during the second quarter of 1994. The plan had the effect in the third and fourth quarters of dramatically reducing the rate of inflation and was accompanied by an appreciating currency. Therefore, for 1994 the rates of inflation and devaluation were significantly lower than the rates prevailing in 1993.
Income taxes, as a percentage of earnings before taxes, were 25% for the year ended December 31, 1994. For further discussion of income taxes, see Notes to Consolidated Financial Statements, Note 4, Income Taxes.
YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992
For the year ended December 31, 1993, net sales were $612.6 million, an increase of $4.6 million or 1% over the prior year. A summary of sales activity (in millions) is as follows:
Price changes contributed to the growth in sales for the Company. Average net prices changed as a result of changes in list price, changes in product mix, and changes in customers. Such factors are not quantifiable individually due to the wide variety of markets, product formulations, and product packages.
North American sales increased by 7% in both local currency and U.S. dollars when compared to 1992. The North American Industrial business grew 10% on a local currency basis and 9% on a dollar basis as a result of a focus on the maintenance market, as well as a general upturn in industrial output in the U.S. economy. U.S. Automotive Aftermarket (AAM) sales were flat while the Retail (Consumer) business reported an 8% sales gain, for a combined growth of 4%. Volume increases contributed to the growth.
Poor economic conditions in Europe held sales growth in local currency to 2% over the prior year. This figure translated to a decline of 10% when converted to dollars because of the impact of the relatively stronger dollar compared to last year. There was a wide range of local currency sales growth reported within the region as each country is affected by different economic conditions. Of the five major countries in Europe (in terms of Loctite sales), France's local currency sales were flat with the prior year, Italy was up 11%, the U.K. was up 6%, Germany was down 9%, and Spain had local currency growth of 1%. With respect to products, volume decreases in major industrial products were offset by growth in other products and business mix.
Latin American sales growth in 1993 was 4%. Although Costa Rica, Colombia, and Chile experienced double digit percentage sales growth, Brazil's sales were down slightly. In Brazil, prices are changed monthly to keep up with the effects of inflation (see paragraph under Inflation and Changing Prices). Excluding the effects of inflation, Brazil reported a 5% decrease in sales versus 1992. Unstable economic conditions were a contributing factor.
Local currency sales in the Asia/Pacific region increased by 20% versus the prior year. This translated into a 27% increase when converted to dollars. All countries except Japan reported strong local currency growth. Although Japan's local currency sales decreased by 7% when compared to 1992, in dollars the growth was 6% due to the strength of the yen relative to the U.S. dollar. Included in this year's results are those of new subsidiaries operating in Malaysia, Singapore, China, and India which resulted in $7.9 million of additional sales.
Luminescent Systems sales decreased by 19% in local currency and 20% in U.S. dollars when compared to 1992. Sales continued to suffer in response to the decline in the defense and airline industries.
Gross margin decreased from 62% of sales in 1992 to 61% of sales in 1993. The decrease was caused by lower margins in Europe and North America as well as geographic mix.
As a percentage of sales, operating expenses were 45% in 1993 and 44% in 1992. In total, expenses increased $8.8 million or 3% over the prior year. Expenses in the Company's new subsidiaries operating in Malaysia, Singapore, India, China, Czech Republic, Slovakia, Hungary, Poland, Slovenia, and Norway accounted for $5.8 million of the increase. Included in administrative expenses is a $1.2 million charge related to the closing of a manufacturing facility of Loctite Luminescent Systems, a small subsidiary which has seen
its market shrink. The closing of this Rocky Hill, Connecticut facility will allow all manufacturing for this business to be concentrated in New Hampshire, adjacent to its management function. Additional monies were spent in the Asia/Pacific area to strengthen the Company's industrial and automotive aftermarket selling skills, and in Brazil, to upgrade manufacturing, technical, and selling skills to take advantage of an underpenetrated industrial market. North America reported expense increases of 8% primarily to support higher sales levels. In local currencies, European expenses increased by 6% versus the prior year, but when translated into dollars, current year expenses decreased by 7% when compared to the prior year.
Investment income was $0.9 million lower in 1993 than in 1992 primarily as a result of lower average interest rates on deposits in foreign locations translated into dollars at comparatively weaker average exchange rates.
Interest expense decreased by $0.2 million year-to-year as the effects of significant increases in average short-term debt levels in the U.S. were offset by benefits derived from the refinancing of maturing long-term debt, the capitalization of certain interest costs associated with the financing of construction-in-progress, and lower average short-term debt levels in Brazil.
Net foreign exchange losses decreased by $0.8 million for the 12 month period over the comparable 1992 period due primarily to favorable transaction related exchange results in Ireland.
Income taxes, as a percentage of earnings before taxes, were 25% for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had $33.3 million in cash and cash equivalents, a decrease of $11.3 million from the previous year's balance. The decrease was primarily due to capital expenditures, dividends paid, acquisitions mentioned below, repayments of short-term debt, and an increase in trade and other receivables, partially offset by net earnings. For complete details of the change in cash and cash equivalents see the financial statement titled "Consolidated Statement of Cash Flows".
The reduction of $16.9 million in time and certificates of deposit was used to fund working capital needs.
The Company has significant financial resources available for future growth. Time and certificates of deposit of $34.6 million, cash from operations, and existing unused credit lines at December 31, 1994 will provide additional financing flexibility.
The increase in accounts and notes receivable from $119.3 million at December 31, 1993, to $139.1 million at December 31, 1994 resulted from increased sales activity in the fourth quarter of 1994 compared to the fourth quarter of 1993. Foreign currency changes contributed $5.1 million of the increase.
The $11.2 million increase in inventory from December 31, 1993, to December 31, 1994 was primarily the result of North America's efforts to support higher sales levels. In addition, North America increased safety stock to maintain customer service while implementing new software for operations. Other contributing factors were the added inventory level from the acquisition of Plastic Padding and the impact of currency fluctuations to the U.S. dollar.
Deferred income tax benefits increased by $7.5 million from December 31, 1993, to December 31, 1994. For more details, see Notes to Consolidated Financial Statements, Note 4, Income Taxes.
While not a capital intensive business, the Company's practice is to ensure that sufficient operating capacity is available to meet its customers' needs. In the year ended December 31, 1994, capital expenditures were $57.3 million. In 1994, the Company completed the construction of its new 200,000 square foot facility on 57 acres of land in Rocky Hill, Connecticut accounting for approximately 29% of total capital expenditures for the year. From inception of the construction until the completion in the third quarter of 1994, a total of $6.8 million was spent on land and land improvements and $35.6 million was spent on the building. In 1994, expenditures for the building amounted to $16.8 million. Also contributing to the increase in net property, plant and equipment was a $5.8 million currency impact and $5.9 million of equipment purchased to support manufacturing.
The annual capital expenditures for calendar years 1995, 1996, and 1997 are expected to be approximately $34 - $47 million per year. Projected capital expenditures are not firm commitments and are subject to final management approval depending on the needs of the individual businesses and the business environment at the time of the expenditure. Approximately 60% of the expected capital expenditures is intended to support increased product sales and product maintenance. Approximately 10% will be for new product developments and research and development. The remaining expenditures will be for building improvements, computer equipment, legal, health and safety, and office furniture. There are no planned projects that represent a material commitment for the Company.
The increase in goodwill from $80.1 million at December 31, 1993, to $94.7 million at December 31, 1994 was primarily due to the acquisition of Plastic Padding in the first quarter of 1994.
Short-term debt decreased by $8.8 million year-to-year as cash was received from the sale of two businesses (see discussion on Sale of VSI Businesses), and because of the repatriation of foreign profits to the U.S.
Long-term debt current decreased by $11.2 million during 1994 as scheduled promissory note payments were made in 1994.
The Company's current tax liability increased by $5.2 million during 1994, primarily due to higher year-end tax liabilities in various countries, primarily Brazil ($2.5 million) and France ($1.2 million). These liabilities will be paid during 1995.
Accrued other current liabilities increased from $12.9 million in 1993 to $21.1 million in 1994 due in part to a reclassification in the North American restructuring liabilities of $3.9 million from accrued other long-term liabilities. Currency had a $1.3 million effect on current liabilities and there was a capital accrual made for $1.3 million, as two major manufacturing projects were started in the last quarter of 1994.
In 1992, the Company recorded a pretax charge of $12.7 million for restructuring its North American operations. Amounts charged against the accrual were $3.3 million in 1994, $3.5 million in 1993, and $1.4 million in 1992. At December 31, 1994, there is $0.7 million remaining recorded as a long-term liability and $3.8 million remaining recorded as short-term liabilities.
Retirement and postretirement obligations increased from $9.8 million in 1993 to $13.2 million in 1994. For further details see Notes to Consolidated Financial Statements, Note 10, Pension Plans, and Note 11, Postretirement Health Care and Life Insurance Benefits.
Other long-term liabilities decreased by $8.7 million during 1994 in large part due to the reclassification of the North American restructuring liability to other short-term liabilities mentioned above. Also contributing to the decrease was a reclassification from long-term to short-term of liabilities associated with prior year acquisitions.
FOREIGN CURRENCY TRANSLATION
Since a substantial portion of the Company's business is transacted in foreign locations and currencies, the Company's financial statements are affected by fluctuations in foreign exchange rates. A stronger U.S. dollar decreases the translated results of foreign subsidiaries, while a weaker U.S. dollar increases the translated results. For the year ended December 31, 1994, the effect of currency changes had an immaterial effect on sales. For the year ended December 31, 1993, the effect of a comparatively stronger dollar decreased sales by approximately five percentage points when compared to the prior year.
The unrealized foreign currency translation adjustment included in stockholders' equity changed from a loss of $21.9 million at December 31, 1993 to a loss of $8.6 million at December 31, 1994 due to the impact of a comparatively weaker U.S. dollar on the Company's net asset position at December 31 in its foreign subsidiaries.
INFLATION AND CHANGING PRICES
The Company's Brazilian subsidiary was subject to a rate of inflation in excess of eight hundred percent in 1994, in excess of two thousand percent in 1993, and in excess of one thousand percent in 1992. If the Company excluded the effects of inflation from the Brazilian sales value, Brazilian sales would have been reduced by $4.5 million (1994), $8.1 million (1993), and $7.0 million (1992) from the net sales amounts reported for Latin America. Similarly, Brazilian earnings from operations would have been reduced by $4.0 million (1994), $7.1 million (1993), and $5.6 million (1992) from the earnings from operations amounts reported for Latin America.
ACQUISITIONS
During the first quarter of 1994, the Company acquired Plastic Padding Holdings Limited, a producer of automotive aftermarket chemical products with strong brand presence and established distribution networks in the U.K., Ireland, and Scandinavia.
In April 1994, the Company purchased the remaining 49% interest in its subsidiary in Thailand, which brought the Company's percent of voting stock owned to 100%.
In September 1994, the Company acquired certain assets and liabilities from its distributors in Finland and Turkey and began to operate wholly owned subsidiaries in these countries.
In November 1994, the Company acquired certain assets from its distributors in Denmark and merged this business with its Plastic Padding Denmark subsidiary (now called Loctite Denmark).
In December 1994, the Company acquired the remaining 49% interest in its Venezuelan subsidiary, which brought the Company's percent of voting stock owned to 100%.
The cost of these acquisitions was approximately $24.3 million which is not material to the Company for purposes of pro forma presentation.
During the first quarter of 1995 the Company acquired certain assets from its distributor in Sweden and merged this business with its Plastic Padding Sweden subsidiary (now called Loctite Sweden). The cost of this acquisition was not material to the Company.
SALE OF VSI BUSINESSES
The Company sold a small division, Canton Biomedical Division of Loctite VSI, Inc., and recorded a loss of $0.8 million in the first quarter of 1994. In December 1994 the Company sold the balance of the Loctite VSI, Inc. business for a gain of $1.9 million. Thus, a net pretax gain of $1.1 million was recognized on the two separate sales of Loctite VSI, Inc. businesses in 1994.
ACCOUNTING CHANGES -- POSTEMPLOYMENT BENEFITS
During the first quarter of 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). The statement requires employers to accrue the cost of benefits to former or inactive employees, their beneficiaries and covered dependents, after employment, but before retirement. In prior years, the Company expensed the costs of such benefits when paid. In 1994, postemployment benefit expense under SFAS No. 112 was $0.8 million.
ENVIRONMENTAL MATTERS
Continuing compliance with existing federal, state, and local provisions dealing with protection of the environment is not expected to have a material effect upon the Company's capital expenditures, earnings, and competitive position. As previously reported in its 1993 Annual Report on Form 10-K, the Company has been investigating a soil and groundwater contamination problem at its Newington, Connecticut facility which has probably resulted from the failure of an underground storage tank and/or prior waste handling practices by Company personnel, or by other prior or concurrent users of the site, and/or adjacent sites. The tank, which
formerly held chlorinated solvents, has been removed. Consultants hired by the Company have been working closely with officials of the Connecticut Department of Environmental Protection ("DEP") to identify the exact source(s) of the contamination and its/their parameters. The Company spent approximately $0.2 million in 1993 and approximately $0.5 million in 1994 in continuing subsurface investigation and is nearing the completion of the investigative phase of the work at this site. The Company expects to spend approximately $0.6 million in 1995 for capital equipment to be used to implement a site remediation plan developed by the Company's environmental consultants and approximately $0.3 million for additional professional consulting services related thereto, including additional investigative work, on-going operation and maintenance of equipment, and initial monitoring costs.
The DEP, in consultation with the U.S. Environmental Protection Agency, has recently determined that the remediation program is not subject to federal jurisdiction as a hazardous waste storage facility under the Resource Conservation and Recovery Act. Therefore, the remediation program will be implemented with the oversight of the DEP. Given this program, the Company believes that the aforementioned costs are reasonable and that after 1995 expenditures will be in the range of $0.1 million per year for an indefinite period to operate and maintain site remediation equipment. The Company does not presently anticipate any further expenditures in connection with site remediation beyond those mentioned above.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS:
The individual financial statements of Registrant's subsidiaries have been omitted since Registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than Registrant or its consolidated subsidiaries in amounts which together exceed five percent of total consolidated assets at December 31, 1994, excepting indebtedness incurred in the ordinary course of business which is not overdue and which matures within one year from the date of its creation.
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Loctite Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Loctite Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse L.L.P. [LOGO]
One Financial Plaza Hartford, Connecticut January 24, 1995
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Loctite Corporation and subsidiaries, and all other information presented in this Annual Report on Form 10-K, are the responsibility of the management of the Company. The financial statements have been prepared in accordance with generally accepted accounting principles.
Management is responsible for the integrity and objectivity of the financial statements, including estimates and judgments reflected in them. It fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. These controls include the selection and training of management and supervisory personnel; maintenance of an organizational structure providing for delegation of authority and establishment of responsibilities; communication of requirements for compliance with approved accounting, control and business practices throughout the organization; business planning and review; and a program of internal audit. However, an effective internal control system, no matter how well designed, has inherent limitations -- including the possibility of the circumvention or overriding of controls -- and, therefore, can provide only reasonable assurance with respect to financial statement preparation and such safeguarding of assets. Further, because of changes in conditions, internal control system effectiveness may vary over time. Management believes the internal accounting controls in use provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements.
The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls must be related to the benefits derived. The Company maintains an internal audit function which is responsible for evaluating the adequacy and application of financial and operating controls and for testing compliance with company policies and procedures.
The Audit and Finance Committee recommends the selection of the independent public accountants who are then appointed by the Board of Directors subject to confirmation by the stockholders.
The independent public accountants are engaged to perform an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their report appears in this Annual Report on Form 10-K.
The Audit and Finance Committee of the Board of Directors is comprised entirely of individuals who are not employees of the Company. This Committee meets periodically with management, the independent public accountants and the internal auditors to consider audit results.
David Freeman President and Chief Executive Officer
Robert L. Aller Senior Vice President and Chief Financial Officer
Richard C. Parker Vice President -- Controller
CONSOLIDATED STATEMENT OF EARNINGS
(amounts in thousands, except per share amounts)
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, DECEMBER 31, 1993, AND DECEMBER 31, 1992 (dollars in thousands, except share amounts)
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Loctite Corporation and all majority owned subsidiaries. Intercompany balances and transactions have been eliminated. The minority interest in earnings of consolidated subsidiaries that are not 100% owned is included in other expense on the consolidated statement of earnings and in other long-term liabilities on the consolidated balance sheet. Investments in which the Company owns 20% to 50% of the voting stock are accounted for under the equity method. Certain reclassifications have been made to 1993 and 1992 amounts to conform with the 1994 presentation.
Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash flows from forward foreign exchange contracts, interest rate swap agreements and other hedges of identifiable transactions or events are classified in the same category as the cash flows from the items being hedged.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market.
Marketable Securities and Long-Term Venture Capital Investments
Marketable securities are considered readily available for sale and are carried at fair value. Unrealized gains or losses relating to marketable securities are recorded in stockholders' equity. The Company has investments in seven venture capital limited partnerships, which invest in and assist growth oriented businesses. These investments are carried at cost. The carrying value of these investments is reviewed periodically for potential impairments. Provisions for permanent impairments are recorded as a reduction of earnings.
Property and Depreciation
Property, plant and equipment is recorded at cost. Ordinary maintenance and repairs are expensed; replacements and betterments are capitalized. The cost and related accumulated depreciation of disposed assets are removed from the accounts; any resulting gain or loss is reflected in earnings.
Plant and equipment is depreciated using both straight-line and accelerated methods. Estimated lives used to compute depreciation are: land improvements, 3 to 25 years; buildings and improvements, 3 to 40 years; and machinery and equipment, 3 to 10 years.
Interest costs for the construction of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. The Company capitalized net interest costs of $1.1 million in 1994, $0.6 million in 1993, and $0.4 million in 1992.
Business Acquisitions
Goodwill and other intangibles are being amortized on the straight-line method up to 40 years. The carrying value of goodwill and other intangibles is assessed annually.
Income Taxes
The Company accounts for its income tax expense, liabilities, and benefits in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," under which provision is made for deferred income taxes and future income tax benefits applicable to temporary differences between income tax and financial statement accounting.
Earnings Per Share
Earnings per share are computed by dividing net earnings by the average number of shares of common stock outstanding during the period. Stock options granted and shares to be issued under restricted stock plans would result in no material dilution of earnings.
Translation of Foreign Currencies
Foreign subsidiaries' assets and liabilities are translated at exchange rates prevailing on the balance sheet date; revenues and expenses are translated at average exchange rates prevailing during the period; and elements of stockholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in stockholders' equity. For the Company's subsidiaries operating in countries with very high inflation rates, the translation is the same except that inventories, cost of sales, property, plant and equipment, and depreciation are translated at historical rates. Resulting translation gains and losses for these subsidiaries are included in income.
Forward Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts in the normal course of business to hedge identifiable exposures related to foreign currency transactions. The gains and losses on these contracts are recognized in the same period in which gains and losses from the transaction being hedged are recognized. Additionally, forward foreign exchange contracts may be used to hedge firm foreign currency commitments. Gains and losses on these contracts are deferred and included in the measurement of the related foreign currency transaction.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements as a means of managing interest rate exposure associated with the Company's underlying borrowings. The interest differential to be paid or received under these swap agreements is recorded on an accrual basis as an adjustment to interest expense.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments:
Cash, Cash Equivalents, Time Deposits, and Certificates of Deposit -- The carrying amounts are a reasonable approximation of fair value due to the short-term maturity of these instruments.
Marketable Securities -- The fair value of marketable securities is based on quoted market prices.
Long-Term Venture Capital Investments -- It is not practicable to estimate the fair value of the Company's investments in limited partnerships, as there is no liquid market for these investments and, thus, no readily available source of market quotes.
Short-Term Debt -- The carrying amounts are a reasonable approximation of fair value due to the short-term maturity of these instruments.
Long-Term Debt -- The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Forward Foreign Exchange Contracts -- The fair value of forward foreign exchange contracts is estimated by obtaining quoted market prices.
Interest Rate Swap Agreements -- The fair value of interest rate swap agreements is estimated from quotes obtained from dealers. This value represents the estimated amount the Company would receive or pay to terminate the agreements.
NOTE 2 SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one dominant segment, "adhesives, sealants, and related products." Sales of this dominant segment account for approximately 90% of consolidated revenues, operating profit, and operating assets. The Company has no customer which accounts for 10% or more of net sales. Export sales in each of the geographic regions were below 10% in each of the years reported.
The Company's management measures results based on individual businesses and geographic regions. Trade sales and operating expenses between regions are reflected as those of the region servicing the customer.
North America includes the Company's operations in the United States, Puerto Rico, Canada, Mexico, and the Caribbean. Europe includes the Company's operations in Europe and Africa. Latin America includes the Company's operations in South and Central America. Asia/Pacific includes the Company's operations in Asia and the Pacific Rim. Luminescent Systems includes the Company's business in electroluminescent lamps.
Research, Development and Engineering (RD&E) encompasses the efforts of the major laboratories of the Company together with administrative support.
* North American expenses included $12.7 million in restructuring charges in the year ended December 31, 1992.
** Luminescent Systems expenses included $1.2 million in manufacturing consolidation charges in the year ended December 31, 1993.
Net sales represents sales to unaffiliated customers. Earnings from operations includes gross margin less selling, general, administrative, and research and development expenses. Investment income, interest expense,
foreign exchange gains and losses, intercompany expenses, miscellaneous non-operating expenses, and income taxes are not included in earnings from operations.
Identifiable assets do not include intercompany receivables and intercompany profit-in-inventory. Assets pertaining to RD&E are included in the assets of the business unit where the RD&E facilities are physically located. Accordingly, Rocky Hill, Newington, and Cleveland RD&E facilities are included with North American assets, Irish and German RD&E facilities are included with European assets, and the Japanese RD&E facility is included with Asia/Pacific assets. Goodwill is included in the business or region's identifiable assets. Corporate assets include cash, investments, property, prepaid assets, and investments in joint ventures as well as the cash and investments of certain holding companies whose records are maintained at Corporate Headquarters.
Since a substantial portion of the Company's business is transacted in foreign locations and currencies, the Company's financial statements are affected by fluctuations in foreign exchange rates. A stronger U.S. dollar decreases the translated results of foreign subsidiaries, while a weaker U.S. dollar increases the translated results.
Foreign subsidiaries' assets and liabilities are translated at exchange rates prevailing on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period, and elements of stockholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in stockholders' equity. For the Company's subsidiaries operating in countries with very high inflation rates (primarily in Latin America), the translation is the same except that inventories, cost of sales, property, plant and equipment, and depreciation are translated at historical rates. Resulting translation gains and losses for these subsidiaries are included in income.
The Company's Brazilian subsidiary was subject to a rate of inflation in excess of eight hundred percent in 1994, in excess of two thousand percent in 1993, and in excess of one thousand percent in 1992. If the Company excluded the effects of inflation from the Brazilian sales value, Brazilian sales would have been reduced by $4.5 million (1994), $8.1 million (1993), and $7.0 million (1992) from the net sales amounts reported above for Latin America. Similarly, Brazilian earnings from operations would have been reduced by $4.0 million (1994), $7.1 million (1993), and $5.6 million (1992) from the earnings from operations amounts reported for Latin America.
NOTE 3 SHORT-TERM DEBT
Short-term debt and bank lines of credit are summarized as follows:
* Average and period ending interest rates on consolidated short-term bank debt include the effects of local currency borrowings in highly inflationary environments, where interest rates obtained on borrowings reflect the underlying levels of local inflation. The exception to this is Brazil, where, because of the potential for significant distortion, the inflation components of interest expense have been reported in the translation component of foreign exchange loss. In 1994, this amount was not material as there were negligible outstanding local borrowings in Brazil. In 1993, however, this amount was $4.4 million. Substantially offsetting this 1993 amount were exchange gains arising from the translation of the short-term bank debt as the Brazilian currency devalued against the U.S. dollar, at a pace generally in line with the pace of local inflation.
Substantially all of the Company's bank lines of credit are of an uncommitted or informal nature. As such, the lines of credit may generally be cancelled at any time either by the Company or the banks. Borrowings under these lines are on such terms and conditions as may be mutually agreed upon.
There were no significant compensating balance requirements at December 31, 1994.
NOTE 4 INCOME TAXES
The Company accounts for its income tax expense, liabilities and benefits in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
The Company's consolidated effective tax rates have been less than the United States Federal statutory tax rates for the following reasons:
A significant portion of the Company's earnings is derived from operations located in Ireland and Puerto Rico. Substantially all of the earnings of the Company's manufacturing subsidiary in Ireland are subject to a 10% income tax. This reduced tax rate is provided under an industrial relief incentive provided by Irish tax law and is in effect through December 31, 2010.
Prior to 1994, no U.S. tax was paid on the earnings of the Company's subsidiary in Puerto Rico because of the availability of a tax credit equal to the subsidiary's U.S. tax. In 1994, U.S. tax law changes became effective which reduced this tax credit, but a significant credit was still generated, resulting in a tax benefit. Also, although the earnings of this subsidiary can be remitted as dividends without the imposition of U.S. regular income tax, such dividends are subject to the U.S. alternative minimum tax and to Puerto Rican withholding taxes equal to 7% of the remitted earnings. No "tollgate" withholding taxes have been provided on $32.7 million of cumulative undistributed earnings of the Puerto Rican subsidiary because these earnings are indefinitely reinvested in Puerto Rico.
The Company's subsidiary in Puerto Rico currently operates under a grant of partial tax exemption which extends to June 30, 2002. Under the terms of the grant, 90% of this subsidiary's manufacturing income is exempt from Puerto Rican corporate income tax.
At December 31, 1994, applicable U.S. income and foreign withholding taxes have not been provided on $212.4 million of accumulated earnings of foreign subsidiaries because it is the Company's intention to indefinitely reinvest these earnings overseas, or to repatriate these earnings only when it is tax effective to do so. It is not practicable to accurately estimate the amount of unrecognized deferred U.S. tax liability on these undistributed earnings.
The components of earnings before income taxes and the provision for income taxes are as follows:
* Includes pre-tax charge of $12,740 for restructuring North American operations.
Earnings before income taxes presented above is distributed geographically according to where the income is taxed. This differs from the earnings from operations presented in Note 2 in which items of income and expense are allocated to the region where revenues are generated.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. If it is more likely than not that a deferred tax asset, in whole or in part, will not be realized, a valuation allowance is established which reduces the asset to its realizable value.
The following is a summary of the tax effects of the significant temporary differences which comprise the Company's deferred tax assets and liabilities as of December 31, 1994 and December 31, 1993:
As of December 31, 1994, the Company has net operating loss (NOL) carryforwards and U.S. tax credit carryforwards which will expire, if unused, as follows:
(dollars in thousands)
The net operating losses shown above may generate future tax benefits of $5.4 million, none of which have been recognized in the Company's financial statements to date. The total potential benefit has been offset by a valuation allowance because of the uncertainty of ultimate realization.
During 1994, no changes occurred in the conclusions regarding the need for a valuation allowance in any tax jurisdiction.
NOTE 5 FINANCIAL INSTRUMENTS
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to reduce the risks associated with changes in interest rates and foreign exchange rates as more fully discussed below.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into a series of interest rate swap agreements which have effectively fixed the interest rates on a portion of its domestic floating rate short-term bank debt. These agreements serve the purposes of reducing the volatility of reported results due to fluctuating short-term U.S. interest rates and of effectively providing long-term financing at costs favorable to alternative forms of fixed rate borrowings.
Under these agreements, the Company will pay the counterparties interest at a fixed rate and receive in return interest at a variable rate based on the London Interbank Offered Rate (LIBOR). At December 31, 1994, the Company had contracts in place which served to fix the interest rate on $40.0 million of underlying short-term bank debt: $20.0 million to July 1996; $10.0 million to October 2000; and $10.0 million to October 2003. The weighted average fixed rate payable by the Company on these contracts is approximately 5 1/2%.
The Company's current intention is to maintain these contracts as long as the underlying domestic short-term bank debt remains outstanding. Since it is the Company's policy not to speculate, terminating (or reversing) contracts would be entered into to the extent that aggregate domestic short-term bank debt falls below the aggregate amount of contracts outstanding.
Given the rise in U.S. interest rates in 1994, the estimated fair market value of these agreements was approximately $3.2 million at December 31, 1994. This unrecognized benefit represented the estimated amount that the Company would have receive if the agreements had been terminated.
The $40.0 million notional amount of the contracts is not a measure of the Company's counterparty credit risk. The amounts ultimately exchanged are determined by reference to the notional amounts and the specific terms contained in the agreements. The counterparties to the Company's interest rate swap agreements consist of a number of major international financial institutions. The Company monitors its position with, and the credit quality of, these institutions and does not anticipate any losses as a result of counterparty non- performance.
FORWARD FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts primarily to hedge intercompany receivables and intercompany lending activity. These contracts are not used for speculative purposes and do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts effectively offset gains and losses on the transactions being hedged. At December 31, 1994 these contracts totalled $66.4 million and the fair value of the contracts approximated carrying value. Additionally, forward foreign exchange contracts may be used to hedge firm foreign currency commitments. At December 31, 1994 contracts for this purpose totalled approximately $5.5 million. Deferred gains and losses were insignificant. In general, the maturities of the Company's forward foreign exchange contracts coincide with the underlying exposure positions they are intended to hedge, usually less than six months.
The counterparties to the Company's forward foreign exchange contracts consist of a number of major international financial institutions. The Company monitors its position with, and the credit quality of, these financial institutions and does not anticipate any losses as a result of counterparty non-performance.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash investments and trade accounts and notes receivable. Accounts receivable were $125.5 million and $105.4 million at December 31, 1994 and 1993, respectively. Notes receivable were $19.4 million and $18.6 million at December 31, 1994 and 1993, respectively.
The Company's cash investments are with major international financial institutions, with limitations established as to the maximum amount of cash that may be invested with any one financial institution. Concentrations of credit risk with respect to trade accounts and notes receivable are limited due to the large number of customers comprising the Company's customer base and their dispersion across different businesses and geographic areas.
As of December 31, 1994, the Company had no significant concentrations of credit risk.
NOTE 6 COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into long-term lease agreements for real property and equipment. The following information reflects rental commitments under noncancellable operating leases in effect at December 31, 1994:
Rental expense was $10.8 million in 1994, $11.0 million in 1993, and $8.8 million in 1992.
NOTE 7 LONG-TERM DEBT
Long-term debt at December 31, 1994 consisted of secured domestic ($1.4 million) and foreign ($1.8 million) industrial development loans related to facilities financing. The unsecured domestic promissory notes outstanding at December 31, 1993 ($11.0 million) were retired in July and August of 1994.
Under the terms of the secured domestic loan, the Company must, among other things, maintain a specified level of net worth and limit debt as a function of equity. At December 31, 1994, there was no material difference between the fair value of long-term debt and the carrying value.
Long-term debt at December 31, 1994 matures during the following years:
NOTE 8 EMPLOYEE STOCK PLANS
STOCK OPTION PLANS
Under the Company's stock option plans, options have been granted for periods of ten years at prices equal to the market price on the date of grant. Options are exercisable cumulatively at the rate of 20% per year with 20% exercisable at the end of the first year and 20% at the beginning of each succeeding year. Through December 31, 1994, 1,000,000 shares were reserved for the program. Information regarding transactions under these plans is as follows:
RESTRICTED STOCK PLAN
Under the Company's Restricted Stock Plan, awards are issued without any payment of cash consideration by the participant. The restricted shares become available to the employee at the rate of 50% on the third anniversary of the grant and the remaining 50% on the sixth anniversary of the grant. Expense associated with these shares is amortized over the life of the grant. Compensation expense was $1.2 million for 1994, $1.2 million for 1993 and $1.6 million for 1992. Through December 31, 1994, 500,000 shares were reserved for the program. Information regarding transactions under this plan is as follows:
THRIFT INVESTMENT PLAN
Under the Company's Thrift Investment Plan, eligible employees may save, by payroll deductions, a portion of their salaries. Up to 25% of the amount saved may be invested in the Company's Common Stock. In addition, the Company matches, in the Company's Common Stock, one half of the first 6% saved by the employee. The cost of the Company match was $1.4 million in 1994, $1.4 million in 1993, and $1.2 million in 1992. The average market price of the stock on a monthly basis is used in determining employee purchases and the Company's matching contribution. Vesting of Company contributions takes place after five years of service or after two years of participation in the Plan, whichever is more favorable to the employee. Shares issued under the Plan were 44,203 in 1994, 53,965 in 1993, and 43,813 in 1992. The average issue price was $42.12, $42.48, and $44.32, respectively.
SALES FORCE AWARD PLAN
On August 16, 1994, the Board of Directors approved the North American Group Field Sales Force Stock Award Plan. Under the Plan, awards are issued without any payment of cash consideration by the participant. This Plan is designed to recognize sales and profitability achievement above projected Annual Business Plan growth levels by providing limited awards of the Company's Common Stock. Continuation of the Plan will be reviewed annually by the Board of Directors.
NOTE 9 SHAREHOLDER RIGHTS PLAN
On April 14, 1994, the Board of Directors adopted a Shareholder Rights Plan (the "Plan"). This Plan will protect shareholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all shareholders.
Under the Plan, each outstanding share of the Company's Common Stock has associated with it a Right to purchase, upon the occurrence of certain events, one share of the Company's Common Stock at a price of $175 per share, subject to adjustment. The Rights will become exercisable only if a person or group (other than certain grandfathered shareholders) acquires stock representing 10 percent or more of the power to vote generally in the election of directors (an "Acquiring Person") or 10 days (or such later date as the Company's Board of Directors may determine) following the commencement by a person or group of a tender or exchange offer (other than a permitted offer) which would result in such person or group becoming an Acquiring Person. Generally, under the Plan, Henkel Corporation and its affiliates may own up to 35% of the outstanding shares of the Company's Common Stock without triggering the Plan.
Upon exercise, each Right (other than Rights held by the Acquiring Person) will entitle the holder to purchase, at the Right's then-current exercise price, Common Stock of the Company having a market value of twice such exercise price. If the Company is acquired in a merger or similar transaction, the Rights may be exercised to purchase common stock of the surviving company having a market value of two times the exercise price. The Rights may be redeemed by the Company at a price of one cent per Right at any time prior to the Rights becoming exercisable or prior to their expiration in April 2004.
NOTE 10 PENSION PLANS
The Company maintains a non-contributory defined benefit plan for all eligible employees in the United States. Plan assets are invested primarily in fixed income contracts and equity securities.
The Company maintains a nonqualified retirement plan to supplement benefits for designated employees whose pension plan benefits are limited by the provisions of the Internal Revenue Code. The Company also has a pension plan for outside directors and a Supplemental Retirement Agreement with its Chairman and former Chief Executive Officer. Amounts related to these plans are included in the disclosures below.
Certain of the Company's international subsidiaries provide retirement benefits to eligible employees under defined benefit plans. The benefits are based on salary and length of service. Plan assets for these plans are invested primarily in equity and fixed income securities.
It is the Company's policy to make contributions to these plans sufficient to meet the minimum funding requirements of applicable laws and regulations.
The Company accounts for the cost of its defined benefit plans in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS No. 87). In accordance with the provisions of SFAS No. 87, the Company has recorded an additional minimum liability at the end of each year representing the excess of the accumulated benefit obligations over the fair value of plan assets and accrued pension liabilities. The liabilities have been offset by intangible assets to the extent possible. Because the asset recognized may not exceed the amount of unrecognized prior service cost, the balance of the liability at the end of the period is reported as a separate reduction of stockholders' equity, net of tax benefits.
Amounts are summarized as follows:
UNITED STATES PLANS
Net U.S. periodic pension cost is summarized as follows:
The following table sets forth the U.S. defined benefit plans' funded status and amounts recognized in the Company's consolidated balance sheet:
The projected benefit obligation for the U.S. plans was determined using the following assumptions:
INTERNATIONAL PLANS
Net international periodic pension cost is summarized as follows:
The following table sets forth the international defined benefit plans' funded status and amounts recognized in the Company's consolidated balance sheet:
The projected benefit obligation for the international plans was determined using the following assumptions:
The Company's Puerto Rican subsidiary and certain of its international subsidiaries provide retirement benefits to eligible employees under defined contribution plans. Contributions are determined under various formulas. Certain other international subsidiaries have pension and severance benefits that are not covered under formal pension plans, including those accruing to employees under foreign government regulations. Expenses are determined in accordance with local law. Pension expense for these subsidiaries amounted to $2.2 million in the year ended December 31, 1994, $1.6 million in the year ended December 31, 1993, and $2.5 million in the year ended December 31, 1992.
NOTE 11 POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides postretirement health care and life insurance benefits for all eligible employees in the United States and Puerto Rico. The benefit plan is contributory based upon years of service and age at retirement. Health care benefits are also extended to spouses of eligible employees and are fully paid by retiree contributions.
The Company accounts for the cost of its postretirement health care and life insurance benefits in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS No. 106). The statement requires that annual postretirement benefit costs be accrued during an employee's years of active service. In 1992, prior to the adoption of SFAS No. 106, the Company expensed the cost of such benefits when paid. In accordance with SFAS No. 106, the transition obligation, representing the unfunded and unrecognized accumulated past service benefit obligation for all plan participants, may be recognized as an expense in the year of adoption or may be amortized on a straight-line basis over a period of up to twenty years. The Company has adopted SFAS No. 106 by electing to amortize the transition obligation of $13.3 million over twenty years.
Postretirement benefit cost was $2.4 million in 1994, $2.6 million in 1993, and $0.1 million in 1992. Costs recorded in 1992 were on a pay-as-you-go basis. The Company continues to fund medical and life insurance benefit costs on a pay-as-you-go basis.
Net periodic postretirement benefit cost is summarized as follows:
* The liabilities related to the VSI division sold in December 1994 were reversed and recorded as a reduction of expense.
The following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheet:
The accumulated postretirement obligation was determined using the following assumptions:
NOTE 12 POSTEMPLOYMENT BENEFITS
During the first quarter of 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). The statement requires employers to accrue the cost of benefits to former or inactive employees, their beneficiaries and covered dependents, after employment, but before retirement. In prior years, the Company expensed the costs of such benefits when paid. In 1994, postemployment benefit expense under SFAS No. 112 was $0.8 million.
NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between Registrant and its independent accountants on accounting and financial disclosure during the year ended December 31, 1994.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Executive Officers of the Registrant*
* All officers are elected by the Board of Directors and serve an indefinite term at the discretion of the Board.
The information contained in the Company's 1995 Proxy Statement on pages 2-4, under the heading "ELECTION OF DIRECTORS -- Nominees for Election as Directors" and on page 19 under the heading "ELECTION OF DIRECTORS -- Executive Compensation and Other Information -- Section 16 Reports" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's 1995 Proxy Statement under the heading "ELECTION OF DIRECTORS -- Board of Directors, Committee Meetings and Director Compensation" on pages 6-8, "ELECTION OF DIRECTORS -- Executive Compensation and Other Information -- Summary Compensation Table" and " -- Options" on pages 9-11 and "ELECTION OF DIRECTORS -- Executive Compensation and Other Information -- Pension Benefits" and " -- Executive and Consulting Agreements" on pages 17-18, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's 1995 Proxy Statement, on pages 5 and 19, under the headings "ELECTION OF DIRECTORS -- Stock Ownership of Management" and "ELECTION OF DIRECTORS -- Ownership of the Company's Securities" is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's 1995 Proxy Statement, on pages 19-20, under the heading "ELECTION OF DIRECTORS -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Registrant during the fourth quarter ended December 31, 1994.
(c) Exhibits
*Management contracts or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Report.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
LOCTITE CORPORATION
By /s/ DAVID FREEMAN ------------------------------------- DAVID FREEMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: February 21, 1995
POWER OF ATTORNEY
EACH OF THE UNDERSIGNED HEREBY APPOINTS EUGENE F. MILLER AND WILLIAM V. GRICKIS, JR., AND EACH OF THEM SEVERALLY, HIS TRUE AND LAWFUL ATTORNEYS TO EXECUTE ON BEHALF OF THE UNDERSIGNED ANY AND ALL AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION. EACH SUCH ATTORNEY WILL HAVE THE POWER TO ACT HEREUNDER WITH OR WITHOUT THE OTHERS. EACH OF THE UNDERSIGNED HEREBY RATIFIES AND CONFIRMS ALL THAT SUCH ATTORNEYS, OR ANY OF THEM, 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.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Post-Effective Amendments to the Registration Statements on Form S-8 (Nos. 2-74537, 2-65775, 2-57724, 2-49684, 33-34061, 33-35125, 33-32379, 33-57063, and 33-57067) of Loctite Corporation of our report dated January 24, 1995 appearing on page 16 of Loctite Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. We also consent to the reference to us under the heading "Experts" in such Prospectuses.
PRICE WATERHOUSE LLP
One Financial Plaza Hartford, Connecticut March 14, 1995
SCHEDULE VIII
LOCTITE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR DOUBTFUL ACCOUNTS