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Consumer revenues increased in Mexico by $944,000 and in Canada by $406,000,
reflecting continuing success in their respective mass retail markets. The
decrease in Industrial revenue was primarily due to the sale of the Graphite and
Lubricants division and, to a lesser degree, weakness in the industries served
by the Refractories division.
OPERATING PROFITS
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Operating profits decreased $3,787,000 (exclusive of the gain on the sale
of assets) from 1999. U.S. Consumer decreased $1,560,000 due principally to the
decrease in revenues and higher manufacturing inefficiencies. Foreign Consumer
decreased $1,660,000 primarily due to competitive pricing pressures and start-up
costs resulting from production moving from the U.S. to Mexico. The higher
manufacturing costs in the U.S. and Mexico substantially contributed to the
relative increase in total cost of goods sold in 2000 (64.6% of sales as
compared with 62.9% in 1999). Industrial operating profits decreased $340,000
<PAGE>
due to the sale of the Graphite and Lubricants division in 1999 and lower
Refractories income. General corporate expenses increased $230,000, primarily
due to higher restructuring and related personnel costs. Due to the lower
revenues, selling and administrative costs increased as a percentage of sales
(30.9% in 2000 compared to 29.5% in 1999). However, total selling and
administrative expenses decreased over $2 million in 2000, reflecting ongoing
cost reduction efforts and the sale of the Graphite and Lubricants division.
Operating profits in 1999 (exclusive of the gain on sale of assets of
$9,636,000 and provision for restructuring and related costs of $1,917,000)
decreased $1,346,000 from 1998. Industrial operating profits decreased
$2,163,000, primarily due to the sale of the Graphite and Lubricants division in
March, 1999 and lower Refractories division profits due to weakness in the
industries it serves. The reduction in Industrial gross profits substantially
contributed to the relative increase in total cost of goods sold in 1999 (62.9%
of sales as compared with 61.2% in 1998). As discussed above, U.S. Consumer
revenue decreased significantly, yet operating profits only decreased $206,000
due to lower selling and administrative expenses from cost reduction efforts.
Foreign operating profits increased $659,000 primarily due to higher revenues
and more favorable foreign currency effects. General corporate expenses were
also reduced by $364,000 reflecting cost reduction activities. The
aforementioned gain on sale of assets relates to the sale of the Graphite and
Lubricants division. The provision for restructuring and related costs under the
Company's cost reduction program principally represents anticipated impairment
losses due to plant closures and consolidation, as well as employee severance
costs. The aforementioned cost reduction efforts contributed to lower relative
selling and administrative costs (29.5% of sales in 1999 compared to 30.8% of
sales in 1998).
MINORITY INTEREST
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Minority interest represents 3% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A. de C.V., since September, 1999 and 20.2% prior
thereto ($23,938, $402,135, and $704,940 in fiscal 2000, 1999, and 1998,
respectively), equivalent to the extent of the investment of the minority
shareholders. As described in Note 8 to Consolidated Financial Statements, this
minority interest was created by an initial public offering in 1994.
EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 summarizing its views of applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's policy of revenue recognition is consistent with this bulletin.
In 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for the Company in fiscal
2001. This statement requires all derivative instruments to be recognized in the
balance sheet as either assets or liabilities at fair value. The Company
currently uses cash flow hedges to convert variable rate debt to fixed rate debt
and to occasionally hedge certain foreign currencies, but does not expect the
prescribed accounting for these instruments to materially affect its financial
position or results of operations when adopted.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's cash flows from operating activities improved dramatically
(by approximately $13.2 million) despite a net loss of $798,000 in fiscal 2000.
The Company's strict inventory control and reduction efforts in the U.S. led to
an increase in cash flows related to inventories of $3.1 million in 2000, as
compared with a decrease of $7.3 million in the prior year. In addition,
improved accounts payable management in the U.S. and Mexico and continued strong
U.S. accounts receivable collection practices more than offset the effects of
higher Mexico accounts receivable in 2000.
The Company's 2000 investing activities included approximately $1.4
million in net purchases of property and equipment as compared with $638,000 in
1999. This was an historically lower level of purchases in the prior year and
<PAGE>
2000 purchases include the acquisition of equipment for the start-up of the
Company's China operation. Management believes that capital expenditures levels
have been reduced over the past several years due to better capital budgeting
and control and the continued use of leasing as an alternative to acquiring
equipment. Generally, all major capital projects are discretionary in nature and
thus no material purchase commitments exist. Capital expenditures will continue
to be funded from operations and existing financing or new leasing arrangements.
Total cash provided from investing activities decreased dramatically due to the