EX-13 6 dex13.txt PORTIONS OF THE ANNUAL REPORT FINANCIAL HIGHLIGHTS -------------------- Alberto-Culver Company and Subsidiaries --------------------------------------------------------------------------------
Year ended September 30, ------------------------ (In thousands, except per share data) 2001 2000 % Change ----------------------------------------------------------------------------------------------------------- Net sales $2,494,180 2,247,163 11.0% ----------------------------------------------------------------------------------------------------------- Earnings before provision for income taxes $ 167,236 154,281* 8.4% ----------------------------------------------------------------------------------------------------------- Net earnings $ 110,376 103,184* 7.0% ----------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ 1.96 1.85* 5.9% Diluted $ 1.91 1.83* 4.4% ----------------------------------------------------------------------------------------------------------- Cash dividends per share for Class A and Class B common stock $ .3225 .290 11.2% ----------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 56,176 55,790 0.7% Diluted 57,838 56,410 2.5% --------------------------------------------------------------------------------------------------------------
* Fiscal year 2000 includes a non-recurring gain from the sale of a trademark. The non-recurring gain increased earnings before provision for income taxes by $9.3 million, net earnings by $6.0 million and basic and diluted earnings per share by 11 cents. Consolidated Statements of Earnings Alberto-Culver Company and Subsidiaries
====================================================================================================================== Year ended September 30, ------------------------------------- (In thousands, except per share data) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Net sales $2,494,180 2,247,163 1,975,928 Cost of products sold 1,217,429 1,105,750 973,702 ---------------------------------------------------------------------------------------------------------------------- Gross profit 1,276,751 1,141,413 1,002,226 Advertising, promotion, selling and administrative 1,087,685 977,180 855,724 Non-recurring gain (note 9) -- (9,257) -- ---------------------------------------------------------------------------------------------------------------------- Operating earnings 189,066 173,490 146,502 Interest expense, net of interest income of $5,479 in 2001, $4,538 in 2000 and $2,130 in 1999 21,830 19,209 12,719 ---------------------------------------------------------------------------------------------------------------------- Earnings before provision for income taxes 167,236 154,281 133,783 Provision for income taxes 56,860 51,097 47,493 ---------------------------------------------------------------------------------------------------------------------- Net earnings $ 110,376 103,184 86,290 ====================================================================================================================== Net earnings per share: Basic $ 1.96 1.85 1.53 Diluted $ 1.91 1.83 1.51 ======================================================================================================================
See accompanying notes to consolidated financial statements. Consolidated Balance Sheets Alberto-Culver Company and Subsidiaries
============================================================================================================================== (In thousands, except share data) September 30, ----------------------- Assets 2001 2000 ============================================================================================================================== Current assets: Cash and cash equivalents $ 201,970 114,637 Short-term investments 869 314 Receivables, less allowance for doubtful accounts of $11,387 in 2001 and $10,135 in 2000 169,657 154,207 Inventories: Raw materials 41,521 45,197 Work-in-process 4,782 4,819 Finished goods 432,008 395,241 ----------------------------------------------------------------------------------------------------------------------------- Total inventories 478,311 445,257 Other current assets 26,142 26,122 ----------------------------------------------------------------------------------------------------------------------------- Total current assets 876,949 740,537 Property, plant and equipment: Land 13,593 13,640 Buildings and leasehold improvements 151,306 148,911 Machinery and equipment 306,958 288,877 ----------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 471,857 451,428 Accumulated depreciation 236,035 211,337 ----------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 235,822 240,091 Goodwill, net 264,339 263,847 Trade names, net 79,532 83,788 Other assets 59,859 57,335 ----------------------------------------------------------------------------------------------------------------------------- $1,516,501 1,385,598 ============================================================================================================================== Liabilities and Stockholders' Equity ============================================================================================================================== Current liabilities: Short-term borrowings $ 2,482 3,401 Current maturities of long-term debt 404 587 Accounts payable 191,410 183,770 Accrued expenses 165,525 135,115 Income taxes 30,482 17,916 ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 390,303 340,789 Long-term debt 321,183 340,948 Deferred income taxes 39,086 38,349 Other liabilities 29,920 33,252 Stockholders' equity: Common stock, par value $.22 per share: Class A authorized 75,000,000 shares; 30,612,798 shares issued at September 30, 2001 and 2000 6,735 6,735 Class B authorized 75,000,000 shares; 37,710,655 shares issued at September 30, 2001 and 2000 8,296 8,296 Additional paid-in capital 190,368 190,137 Retained earnings 779,792 687,631 Deferred compensation (4,826) (4,221) Accumulated other comprehensive income - foreign currency translation (61,284) (54,400) ----------------------------------------------------------------------------------------------------------------------------- 919,081 834,178 Less treasury stock, at cost (Class A common stock: 2001 -6,741,946 shares and 2000 - 7,630,930 shares; Class B common stock: 2001 and 2000 - 4,753,184 shares) (183,072) (201,918) ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 736,009 632,260 ----------------------------------------------------------------------------------------------------------------------------- $1,516,501 1,385,598 ==============================================================================================================================
See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Alberto-Culver Company and Subsidiaries
=================================================================================================================================== Year ended September 30, ------------------------------------ (In thousands) 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net earnings $110,376 103,184 86,290 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 37,315 36,575 32,336 Amortization of goodwill, trade names and other assets 14,090 13,063 9,838 Non-recurring gain -- (9,257) -- Deferred income taxes 738 73 2,082 Cash effects of changes in (exclusive of acquisitions): Receivables, net (14,582) (9,612) (15,868) Inventories (28,246) (5,056) (42,656) Other current assets 43 (3,236) (1,034) Accounts payable and accrued expenses 37,771 (3,085) 18,031 Income taxes 14,541 1,655 305 Other assets (6,713) (4,644) (5,383) Other liabilities (128) (530) (382) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 165,205 119,130 83,559 ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: Short-term investments (538) 1,538 (398) Capital expenditures (36,752) (37,527) (47,822) Payments for purchased businesses, net of acquired companies' cash (18,791) (144,832) (62,304) Proceeds from sale of trademark -- 10,000 -- Proceeds from disposals of assets 1,340 3,172 2,891 ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (54,741) (167,649) (107,633) ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities: Short-term borrowings (1,073) 464 1,156 Proceeds from issuance of long-term debt 42 308,508 65,276 Debt issuance costs -- (1,544) -- Repayments of long-term debt (20,512) (189,028) (11,988) Proceeds from sale of receivables -- 5,000 5,000 Proceeds from exercise of stock options 15,490 2,712 3,264 Cash dividends paid (18,215) (16,182) (14,394) Stock purchased for treasury (1,348) (3,460) (39,049) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (25,616) 106,470 9,265 ------------------------------------------------------------------------------------------------------------------------------------ Effect of foreign exchange rate changes on cash 2,485 755 (1,655) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 87,333 58,706 (16,464) Cash and cash equivalents at beginning of year 114,637 55,931 72,395 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $201,970 114,637 55,931 ==================================================================================================================================== Supplemental Cash Flow Information: Cash paid for: Interest $ 27,673 16,687 13,870 Income taxes $ 40,659 48,711 45,755 Non-cash investing and financing activities: Issuance of Class A common shares for acquisition $ -- 1,959 -- ====================================================================================================================================
See accompanying notes to consolidated financial statements. Consolidated Statements of Stockholders' Equity Alberto-Culver Company and Subsidiaries --------------------------------------------------------------------------------
Number of Shares Dollars ----------------------------------------- ------------------------------------------ Common Stock Issued Treasury Stock Common Stock Issued Additional -------------------------------------------------------------- Paid-in Retained (In thousands) Class A Class B Class A Class B Class A Class B Capital Earnings ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1998 30,613 37,711 (6,550) (4,563) $6,735 $8,296 $192,610 $528,733 ------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 86,290 Foreign currency translation ------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) 86,290 Cash dividends (14,394) Stock options exercised 244 (1,560) Stock issued pursuant to employee incentive plans 21 9 Restricted stock issued, net 37 4 Restricted stock amortization Stock purchased for treasury (1,597) (190) ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1999 30,613 37,711 (7,845) (4,753) 6,735 8,296 191,063 600,629 ------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 103,184 Foreign currency translation ------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) 103,184 Cash dividends (16,182) Stock options exercised 193 (1,048) Stock issued pursuant to employee incentive plans 15 (19) Stock issued for acquisition 75 343 Restricted stock issued, net 101 (202) Restricted stock amortization Stock purchased for treasury (170) ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2000 30,613 37,711 (7,631) (4,753) 6,735 8,296 190,137 687,631 ------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 110,376 Foreign currency translation ------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) 110,376 Cash dividends (18,215) Stock options exercised 850 (117) Stock issued pursuant to employee incentive plans 17 65 Restricted stock issued, net 67 283 Restricted stock amortization Stock purchased for treasury (45) ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2001 30,613 37,711 (6,742) (4,753) $6,735 $8,296 $190,368 $779,792 ------------------------------------------------------------------------------------------------------------------------- Dollars -------------------------------------------------------- Accumulated Other Total Deferred Comprehensive Treasury Stockholders' (In thousands) Compensation Income (Loss) Stock Equity ------------------------------------------------------------------------------------------------- Balance at September 30, 1998 $(2,841) $(28,131) $(174,252) $531,150 ------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 86,290 Foreign currency translation (3,029) (3,029) ------------------------------------------------------------------------------------------------- Total comprehensive income (loss) (3,029) 83,261 Cash dividends (14,394) Stock options exercised 5,296 3,736 Stock issued pursuant to employee incentive plans 454 463 Restricted stock issued, net (875) 808 (63) Restricted stock amortization 676 676 Stock purchased for treasury (39,049) (39,049) ------------------------------------------------------------------------------------------------- Balance at September 30, 1999 (3,040) (31,160) (206,743) 565,780 ------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 103,184 Foreign currency translation (23,240) (23,240) ------------------------------------------------------------------------------------------------- Total comprehensive income (loss) (23,240) 79,944 Cash dividends (16,182) Stock options exercised 4,169 3,121 Stock issued pursuant to employee incentive plans 317 298 Stock issued for acquisition 1,616 1,959 Restricted stock issued, net (2,104) 2,183 (123) Restricted stock amortization 923 923 Stock purchased for treasury (3,460) (3,460) ------------------------------------------------------------------------------------------------- Balance at September 30, 2000 (4,221) (54,400) (201,918) 632,260 ------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net earnings 110,376 Foreign currency translation (6,884) (6,884) ------------------------------------------------------------------------------------------------- Total comprehensive income (loss) (6,884) 103,492 Cash dividends (18,215) Stock options exercised 18,382 18,265 Stock issued pursuant to employee incentive plans 371 436 Restricted stock issued, net (1,819) 1,441 (95) Restricted stock amortization 1,214 1,214 Stock purchased for treasury (1,348) (1,348) ------------------------------------------------------------------------------------------------- Balance at September 30, 2001 $(4,826) $(61,284) $(183,072) $736,009 -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements ------------------------------------------ (1) Summary of Significant Policies ---------------------------------------- PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Alberto-Culver Company and its subsidiaries ("company"). All significant intercompany accounts and transactions have been eliminated. Certain amounts for prior periods have been reclassified to conform to the current year's presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Actual results may differ from these estimates. Management believes these estimates and assumptions are reasonable. Financial Instruments All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. These investments are stated at cost which approximates market value. Short-term investments are stated at cost which approximates market value at September 30, 2001 and 2000. The carrying amounts of accounts receivable, accounts payable and short-term borrowings approximate fair value due to the short maturities of these financial instruments. The fair value of long-term debt was approximately $336.1 million at September 30, 2001. Fair value estimates are calculated using the present value of the projected debt cash flows based on the current market interest rates of comparable debt instruments. Inventories Inventories are stated at the lower of cost (first-in, first out method) or market (net realizable value). Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is recorded primarily on the straight-line method over the estimated useful lives of the respective classes of assets. Buildings and building improvements are depreciated over periods of 20-40 years. Leasehold improvements are depreciated over the lives of the related leases. The depreciation of machinery and equipment is over periods of 5-15 years. Expenditures for maintenance and repairs are expensed as incurred. Goodwill and Trade Names The cost of goodwill and trade names is amortized on a straight-line basis over periods ranging from ten to forty years. Management periodically considers whether there has been a permanent impairment to the value of goodwill and trade names by evaluating various factors including current operating results, market and economic conditions and anticipated future results and cash flows. When these factors indicate that a specific intangible asset should be evaluated for impairment, the company compares the estimated future cash flows associated with the asset to the carrying value of the asset to determine if any impairment exists. Accumulated amortization at September 30, 2001 and 2000 was $57.8 million and $46.9 million, respectively. Foreign Currency Translation Foreign currency balance sheet accounts are translated at rates of exchange in effect at the balance sheet date. Results of operations are translated using the average exchange rates during the period. Revenue Recognition The company's consumer products segments and specialty distribution segment recognize revenue when title passes, which is at the time products are shipped to customers. The company's specialty distribution segment also recognizes revenue when a customer consummates a point-of-sale transaction in a store. Appropriate provisions for sales returns, cash discounts and bad debt are made at the time sales are recorded. Shipping and Handling Amounts invoiced to customers for shipping and handling are included in net sales with the related expense reported on the advertising, promotion, selling and administrative line of the consolidated statement of earnings. Costs of Products Sold The company's consumer products segments include direct material costs and direct and indirect expenses incurred to manufacture products in cost of products sold. The company's specialty distribution segment includes the direct cost of merchandise in the cost of products sold. Advertising, Promotion and Market Research Advertising, promotion and market research costs are expensed as incurred and amounted to $305.1 million, $286.4 million and $259.7 million in 2001, 2000 and 1999, respectively. Research and Development Research and development costs are expensed as incurred and amounted to $9.1 million in 2001, $8.3 million in 2000 and $8.7 million in 1999. Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. Weighted Average Shares Outstanding The following table provides information about basic and diluted weighted average shares outstanding:
(In thousands) 2001 2000 1999 ----------------------------------------------------------------------------------------------- Basic weighted average shares outstanding 56,176 55,790 56,378 Assumed exercise of stock options 1,299 564 709 Assumed vesting of restricted stock 363 -- -- Other -- 56 75 ----------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding 57,838 56,410 57,162 ===============================================================================================
Stock options for 722,200 and 781,200 shares were excluded from the computation of diluted earnings per share in 2000 and 1999, respectively, as the options' exercise prices were greater than the average market price and, therefore, were anti-dilutive. No stock options were anti-dilutive in 2001. Stock-Based Compensation The company uses the intrinsic method of accounting for its stock-based compensation arrangements. New Accounting Standards In May, 2000, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition, measurement and income statement classification for various types of sales incentives including coupons, rebates and free products. The company is required to comply with EITF Issue No. 00-14 in the second quarter of fiscal year 2002. In April, 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF Issue No. 00-25 addresses the income statement classification for various types of consideration paid by a vendor to a retailer. The company is required to comply with EITF Issue No. 00-25 in the second quarter of fiscal year 2002. The company expects to implement EITF Issue Nos. 00-14 and 00-25 in the first quarter of fiscal year 2002 and estimates the effect will be a reduction of consolidated net sales of approximately 4%-5%, but will not change consolidated net earnings. In June, 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, requires companies to discontinue the amortization of goodwill and certain other intangible assets and requires an impairment test of existing goodwill and certain other intangible assets based on a fair value method. The company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 in the fourth quarter of fiscal year 2001 for new acquisitions and is required to comply no later than the first quarter of fiscal year 2003 as to previously acquired intangibles. The company expects to implement the requirements of SFAS No. 142 for previously acquired intangibles in the first quarter of fiscal year 2002. The company estimates discontinuation of the amortization of goodwill and certain other intangibles in accordance with SFAS No. 142 will result in an increase in consolidated net earnings of approximately 7%-8% and does not expect any impairment of goodwill or other intangible assets upon implementation. (2) Accrued Expenses -------------------- Accrued expenses consist of the following:
(In thousands) 2001 2000 -------------------------------------------------------------------------------------------------- Compensation and benefits $ 83,403 60,723 Advertising and promotions 35,125 35,750 Other 46,997 38,642 -------------------------------------------------------------------------------------------------- $165,525 135,115 ==================================================================================================
(3) Long-Term Debt and Other Financing Arrangements --------------------------------------------------- Long-term debt, exclusive of current maturities, consists of the following:
(In thousands) 2001 2000 ----------------------------------------------------------------------------------------------- 8.25% notes due November, 2005 200,000 200,000 6.375% debentures due June, 2028 120,000 120,000 Variable rate revolving Swedish krona credit agreement due April, 2003 -- 19,053 Other 1,183 1,895 ----------------------------------------------------------------------------------------------- $321,183 340,948 ===============================================================================================
Maturities of long-term debt for the next five fiscal years are as follows (in thousands): 2002 - $404; 2003 - $1,129; 2004 - $44; 2005 - $10; 2006 - $200,000; 2007 and later - $120,000. In June, 1998, the company issued $120 million of 6.375% debentures due June 15, 2028. The debentures are subject to repayment, in whole or in part, on June 15, 2008 at the option of the holders. In addition, the company has the option to redeem the debentures at any time, in whole or in part, at a price equal to 100% of the principal amount plus accrued interest and, if applicable, a make-whole premium. In April, 2000, the company issued $200 million of 8.25% senior notes due November 1, 2005. The company has the option to redeem the notes at any time, in whole or in part, at a price equal to 100% of the principal amount plus accrued interest and, if applicable, a make-whole premium. The company has a $250 million revolving credit facility which expires in September, 2002. The facility, which had no borrowings outstanding at September 30, 2001 or 2000, may be drawn in U.S. dollars or certain foreign currencies. The interest rate for the revolving credit facility is based on a fixed spread over LIBOR. The $250 million revolving credit facility imposes restrictions on such items as total debt, liens and interest expense. At September 30, 2001, the company was in compliance with these arrangements. The company has an agreement to sell, without recourse, up to $40 million of designated trade receivables on an ongoing basis. The agreement involves the sale of accounts receivable to a wholly-owned special purpose entity (SPE), which in turn sells an undivided interest in a revolving pool of eligible receivables to a financial institution. The SPE is a separate corporate entity with its own creditors that are entitled to be satisfied out of the SPE's assets prior to those assets becoming available to its parent. The agreement expires in one year and is renewable annually upon the mutual consent of all parties. At September 30, 2001 and 2000, the facility was fully utilized. Costs related to this arrangement are included in administrative expenses. (4) Stockholders' Equity ------------------------ The company has two classes of common stock, both of which are listed on the New York Stock Exchange. Except for voting, dividend and conversion rights, the Class A and Class B common stock are identical. Class A has one-tenth vote per share and Class B has one vote per share. No dividend may be paid on the Class B unless an equal or greater dividend is paid on the Class A, and dividends may be paid on the Class A in excess of dividends paid, or without paying dividends, on the Class B. All, and not less than all, of the Class A may at any time be converted into Class B on a share-for-share basis at the option of the company. The Class B is convertible into Class A on a share-for-share basis at the option of the holders. Cash dividends for Class B common stock in 2001, 2000 and 1999 were $10.6 million or $.3225 per share, $9.6 million or $.29 per share and $8.4 million or $.255 per share, respectively. Cash dividends for Class A common stock in 2001, 2000 and 1999 were $7.6 million or $.3225 per share, $6.6 million or $.29 per share and $6.0 million or $.255 per share, respectively. Class A common stock dividends per share have been equal to those of Class B common stock since the Class A shares were issued in April, 1986. During fiscal year 1998, the Board of Directors authorized the company to purchase up to 6.0 million shares of its Class A common stock. This authorization was increased to 9.0 million shares in fiscal year 1999. As of September 30, 2001, the company had purchased 7.3 million Class A common shares under this program at a total cost of $162.9 million. In addition, the Board of Directors in fiscal year 1999 authorized the purchase of 190,000 Class B common shares from a related party at a total cost of $5.0 million, which was equal to the fair market value of the shares on the date of purchase. The related party was a trust of which a Vice Chairman of the company was a trustee with sole voting power and whose assets are held for the benefit of a family member of the company's Chairman and Vice Chairmen. (5) Stock Option and Restricted Stock Plans ------------------------------------------- Pursuant to its stock option plans, the company is authorized to issue non-qualified options to employees and non-employee directors to purchase a limited number of shares of the company's Class A common stock at a price not less than the fair market value of the stock on the date of grant. Options under the plans expire ten years from the date of grant and are exercisable on a cumulative basis in four equal annual increments commencing one year after the date of grant. A total of 15.6 million shares have been authorized to be issued under the plans. SFAS No. 123, "Accounting for Stock-Based Compensation," requires either the adoption of a fair value based method of accounting for stock-based compensation or the continuance of the intrinsic value method with pro-forma disclosures as if the fair value method was adopted. The company has elected to continue measuring compensation expense for its stock-based plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, no compensation cost has been recognized in the consolidated statements of earnings. Had compensation expense for these plans been determined based upon the fair value of stock options on the dates of grant and recognized over the vesting period consistent with SFAS No. 123, the company's pro-forma net earnings and earnings per share for the years ended September 30, 2001, 2000 and 1999 would have been as follows (in thousands, except per share amounts):
2001 2000 1999 ---------------------------------------------------------------------------------------- Net earnings: As reported $110,376 103,184 86,290 Pro-forma $104,591 98,633 82,779 Basic earnings per share: As reported $ 1.96 1.85 1.53 Pro-forma $ 1.86 1.77 1.47 Diluted earnings per share: As reported $ 1.91 1.83 1.51 Pro-forma $ 1.81 1.75 1.45 ========================================================================================
The weighted average fair value of options at the date of grant in 2001, 2000 and 1999 was $7.49, $5.77 and $4.96 per option, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
2001 2000 1999 ---------------------------------------------------------------------------------------- Expected life 5 years 5 years 5 years Volatility 25.4% 24.8% 20.5% Risk-free interest rate 4.6%-5.9% 5.8%-6.5% 4.2%-5.2% Dividend yield 1.0%-1.2% 1.1%-1.4% 1.0%-1.2% ========================================================================================
Summarized information on the company's outstanding stock options at September 30, 2001 is as follows (options in thousands):
Options Outstanding Options Exercisable -------------------------------------------- ------------------------- Average Weighted Weighted Range of Number Remaining Average Number Average Exercise of Contractual Option of Option Prices Options Life Price Options Price --------------------------------------------------------------------------------------------------------- $9.75-$13.38 791 3.2 years $12.21 791 $12.21 $16.34-$23.19 2,542 7.2 years $20.40 1,576 $20.43 $24.94-$32.15 2,197 8.2 years $25.33 990 $25.69 =========================================================================================================
Stock option activity under the plans is summarized as follows (options in thousands):
Number Weighted of Average Options Option Price ---------------------------------------------------------------------------------------- Outstanding At September 30, 1998 3,055 $17.92 ------------------------------------------------------------ Granted 1,187 $21.41 Exercised (244) $13.37 Canceled (288) $22.16 --------------------------------------------------------- Outstanding at September 30, 1999 3,710 $19.01 ------------------------------------------------------------ Granted 1,590 $19.93 Exercised (193) $14.05 Canceled (153) $21.42 --------------------------------------------------------- Outstanding at September 30, 2000 4,954 $19.42 ------------------------------------------------------------ Granted 1,716 $24.98 Exercised (851) $18.22 Canceled (289) $22.29 --------------------------------------------------------- Outstanding at September 30, 2001 5,530 $21.18 ====================================================================================== Exercisable at September 30: 1999 1,985 $16.99 2000 2,912 $18.40 2001 3,357 $20.04 ======================================================================================
The company is also authorized to grant up to 1,000,000 shares of Class A common stock to employees under its restricted stock plan. The restricted shares vest on a cumulative basis in four equal annual installments commencing four years after the date of grant. The total value of restricted shares is recorded as deferred compensation at the time of grant based on the fair market value of the shares on the date of grant. The deferred compensation balance is amortized into expense over the seven year vesting period. During fiscal year 2001, employees were granted 80,000 restricted shares at a weighted average fair value of $24.94 per share on the date of grant. At September 30, 2001 there were 344,450 restricted shares outstanding, and the deferred compensation balance included as a separate component of stockholders' equity was $4.8 million. (6) Income Taxes ---------------- The provisions for income taxes consist of the following: (In thousands) 2001 2000 1999 ------------------------------------------------------------------------------ Current: Federal $45,989 35,739 30,965 Foreign 7,624 12,000 9,966 State 2,509 3,285 4,480 ---------------------------------------------------------------------------- 56,122 51,024 45,411 ============================================================================ Deferred: Federal 808 (874) 2,189 Foreign 134 1,327 (402) State (204) (380) 295 ---------------------------------------------------------------------------- 738 73 2,082 ---------------------------------------------------------------------------- $56,860 51,097 47,493 ============================================================================ The difference between the United States statutory federal income tax rate and the effective income tax rate is summarized below: 2001 2000 1999 ------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effect of foreign income tax rates (.5) (2.6) (2.5) State income taxes, net of federal tax benefit .9 1.2 2.3 Tax exempt interest income (.6) (.3) (.1) Other, net (.8) (.2) .8 ------------------------------------------------------------------------------- Effective tax rate 34.0% 33.1% 35.5% =============================================================================== Significant components of the company's deferred tax assets and liabilities at September 30, 2001 and 2000 are as follows: (In thousands) 2001 2000 ------------------------------------------------------------------------------- Deferred tax assets attributable to: Accrued expenses $15,052 17,195 Other 3,045 1,946 ------------------------------------------------------------------------------- Total deferred tax assets 18,097 19,141 ------------------------------------------------------------------------------- Deferred tax liabilities attributable to: Depreciation and amortization 41,802 39,761 Inventory adjustments 1,617 4,269 State income taxes 329 534 ------------------------------------------------------------------------------- Total deferred tax liabilities 43,748 44,564 ------------------------------------------------------------------------------- Net deferred tax liabilities $25,651 25,423 =============================================================================== Other current assets at September 30, 2001 and 2000 include $13.4 million and $12.9 million, respectively, of net deferred tax assets. Management believes that it is more likely than not that results of future operations will generate sufficient taxable income to realize the deferred tax assets. Accordingly, there is no valuation allowance recorded at September 30, 2001 and 2000. Domestic earnings before income taxes were $140.7 million, $124.4 million and $107.2 million in 2001, 2000 and 1999, respectively. Foreign operations had earnings before income taxes of $26.5 million, $29.9 million (including the non-recurring gain) and $26.6 million in 2001, 2000 and 1999, respectively. Undistributed earnings of the company's foreign operations amounting to $202.8 million are intended to remain permanently invested to finance future growth and expansion. Accordingly, no U.S. income taxes have been provided on those earnings at September 30, 2001. Should such earnings be distributed, the credits for foreign income taxes paid would substantially offset applicable U.S. income taxes. (7) Lease Commitments --------------------- The major portion of the company's leases are for Sally Beauty Company stores. Other leases cover certain manufacturing and warehousing properties, office facilities and data processing equipment. September 30, 2001, future minimum payments under non-cancelable leases are as follows: Operating Capital (In thousands) Leases Leases ----------------------------------------------------------------------------- 2002 $ 61,194 125 2003 50,682 70 2004 36,973 27 2005 24,752 9 2006 14,535 -- 2007 and later 13,700 -- --------------------------------------------------------------------------- Total minimum lease payments $201,836 231 =========================================================================== Total rental expense for operating leases amounted to $82.7 million in 2001, $74.9 million in 2000 and $69.8 million in 1999. Certain leases require the company to pay real estate taxes, insurance, maintenance and special assessments. (8) Business Segments and Geographic Area Information ----------------------------------------------------- The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. The company's consumer products business includes two segments, "Alberto-Culver North America" and "Alberto-Culver International," and includes developing, manufacturing, distributing and marketing branded consumer products worldwide. The Alberto-Culver North America segment also includes the manufacturing of custom label products for other companies. The "Specialty distribution - Sally" business segment consists of Sally Beauty Company, a distributor of professional beauty supplies through its Sally Beauty Supply stores and its Beauty Systems Group full-service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The company accounts for sales between segments as if the sales were to a third party, however, sales between segments are eliminated in consolidation. Notes Continued -------------------------------------------------------------------------------- (8) Business Segments and Geographic Area Information (continued) Segment data for the years ended September 30, 2001, 2000 and 1999 is as follows:
Business Segments Information (In thousands) 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Net sales: Consumer products: Alberto-Culver North America $ 616,909 551,595 466,014 Alberto-Culver International 445,778 437,861 430,952 ------------------------------------------------------------------------------------------------------------------------------------ Total consumer products 1,062,687 989,456 896,966 Specialty distribution - Sally 1,460,137 1,281,065 1,096,867 Eliminations (28,644) (23,358) (17,905) ------------------------------------------------------------------------------------------------------------------------------------ $2,494,180 2,247,163 1,975,928 ==================================================================================================================================== Earnings before provision for income taxes: Consumer products: Alberto-Culver North America $ 52,511 37,284 30,229 Alberto-Culver International 15,945 15,874 20,273 --------------------------------------------------------------------------------------------------------------------------------- Total consumer products 68,456 53,158 50,502 Specialty distribution - Sally 144,688 125,640 111,252 --------------------------------------------------------------------------------------------------------------------------------- Segment operating profit 213,144 178,798 161,754 Non-recurring gain (note 9) -- 9,257 -- Unallocated expenses, net* (24,078) (14,565) (15,252) Interest expense, net of interest income (21,830) (19,209) (12,719) --------------------------------------------------------------------------------------------------------------------------------- $ 167,236 154,281 133,783 ==================================================================================================================================== Identifiable assets: Consumer products: Alberto-Culver North America $ 324,495 316,656 256,334 Alberto-Culver International 361,144 374,206 382,345 --------------------------------------------------------------------------------------------------------------------------------- Total consumer products 685,639 690,862 638,679 Specialty distribution - Sally 655,825 589,955 497,570 Corporate** 175,037 104,781 45,245 --------------------------------------------------------------------------------------------------------------------------------- $1,516,501 1,385,598 1,181,494 ==================================================================================================================================== Depreciation and amortization expense: Consumer products: Alberto-Culver North America $ 14,849 14,587 12,358 Alberto-Culver International 12,197 12,471 10,713 --------------------------------------------------------------------------------------------------------------------------------- Total consumer products 27,046 27,058 23,071 Specialty distribution - Sally 22,132 20,527 17,931 Corporate 2,227 2,053 1,172 --------------------------------------------------------------------------------------------------------------------------------- $ 51,405 49,638 42,174 ==================================================================================================================================== Capital expenditures: Consumer products: Alberto-Culver North America $ 13,237 10,259 17,488 Alberto-Culver International 5,785 10,337 12,002 --------------------------------------------------------------------------------------------------------------------------------- Total consumer products 19,022 20,596 29,490 Specialty distribution - Sally 17,730 16,931 18,601 --------------------------------------------------------------------------------------------------------------------------------- $ 36,752 37,527 48,091 ====================================================================================================================================
* "Unallocated expenses, net" principally consists of general corporate expenses. ** Corporate identifiable assets are primarily cash, cash equivalents, short-term investments and equipment. Geographic data for the years ended September 30, 2001, 2000 and 1999 is as follows:
Geographic Area Information (In thousands) 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Net sales: United States $1,941,499 1,703,438 1,448,701 Foreign 571,041 565,970 549,688 Eliminations (18,360) (22,245) (22,461) --------------------------------------------------------------------------------------------------------------------------------- $2,494,180 2,247,163 1,975,928 ==================================================================================================================================== Segment Operating profit: United States $ 178,177 147,021 129,773 Foreign 34,967 31,777 31,981 --------------------------------------------------------------------------------------------------------------------------------- $ 213,144 178,798 161,754 ==================================================================================================================================== Identifiable assets: United States $ 935,874 871,727 708,524 Foreign 405,590 409,090 427,725 Corporate* 175,037 104,781 45,245 --------------------------------------------------------------------------------------------------------------------------------- $1,516,501 1,385,598 1,181,494 ====================================================================================================================================
* Corporate identifiable assets are primarily cash, cash equivalents, short-term investments and equipment. (9) Non-Recurring Gain ---------------------- In the first quarter of fiscal year 2000, the company sold a European trademark with a nominal carrying value for $10.0 million. The transaction resulted in a non-recurring pre-tax gain of $9.3 million and an increase in net earnings of $6.0 million. The non-recurring gain added 11 cents to the company's basic and diluted earnings per share in fiscal year 2000. (10) Quarterly Financial Data ----------------------------- Unaudited quarterly consolidated statement of earnings information for the years ended September 30, 2001 and 2000 is summarized below (in thousands, except per share amounts):
1/st/ 2/nd/ 3/rd/ 4/th/ Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------- 2001: Net sales $ 593,560 622,558 634,416 643,646 Gross profit $ 301,377 323,288 324,810 327,276 Net earnings $ 23,626 25,892 29,071 31,787 Earnings per share: Basic $ .42 .46 .52 .56 Diluted $ .41 .45 .50 .55 --------------------------------------------------------------------------------- 2000: Net sales $ 525,799 553,813 573,095 594,456 Gross profit $ 268,429 282,293 292,718 297,973 Net earnings $ 26,833* 22,757 25,466 28,128 Earnings per share: Basic $ .48* .41 .46 .50 Diluted $ .48* .40 .45 .50 ---------------------------------------------------------------------------------
*The first quarter of fiscal year 2000 includes a non-recurring gain from the sale of a trademark. The non-recurring gain increased net earnings by $6.0 million and basic and diluted earnings per share by 11 cents. (11) Acquisitions ----------------- The company made acquisitions during fiscal years 2001, 2000 and 1999 which individually were insignificant to the consolidated financial statements. The total amount paid for the acquisitions in fiscal years 2001, 2000 and 1999 were $18.8 million, $144.8 million and $62.3 million, respectively. The acquisitions were accounted for using the purchase method, and accordingly, the results of operations of the acquired businesses have been included in the consolidated financial statements from the dates of acquisition. Total goodwill of $11.6 million, $101.9 million and $39.3 million was recorded in fiscal years 2001, 2000 and 1999, respectively, as a result of the acquisitions. Independent Auditors' Report ---------------------------- Alberto-Culver Company and Subsidiaries The Board of Directors and Stockholders Alberto-Culver Company: We have audited the accompanying consolidated balance sheets of Alberto-Culver Company and Subsidiaries as of September 30, 2001 and 2000 and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the years in the three-year period ended September 30, 2001. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alberto-Culver Company and Subsidiaries as of September 30, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP KPMG LLP Chicago, Illinois October 23, 2001 Management's Discussion and Analysis of Results of Operations and Financial --------------------------------------------------------------------------- Condition --------- Alberto-Culver Company and Subsidiaries --------------------------------------- Results of Operations Fiscal year 2001 marked the company's tenth consecutive year of record sales and record operating earnings. Net sales for the year ended September 30, 2001 were $2.49 billion, an increase of 11.0% over prior year sales of $2.25 billion. Net sales in 1999 were $1.98 billion. Record net earnings of $110.4 million in 2001 increased 13.6% from the prior year's net earnings of $97.2 million before the non-recurring gain described below. Excluding the fiscal year 2000 non-recurring gain, basic earnings per share of $1.96 in fiscal year 2001 were 22 cents or 12.6% higher than 2000. Diluted earnings per share before the non-recurring gain increased 11.0% to $1.91 in fiscal year 2001 from $1.72 in fiscal year 2000. As described in "note 9" to the consolidated financial statements, in fiscal year 2000, the company sold a European trademark with a nominal carrying value for $10.0 million. As a result, the company recognized a non-recurring pre-tax gain of $9.3 million and an increase in net earnings of $6.0 million. Accordingly, basic and diluted earnings per share increased 11 cents as a result of the gain. Fiscal year 2001 net earnings increased $7.2 million or 7.0% compared to fiscal year 2000 net earnings including the non-recurring gain. Sales of Alberto-Culver North America consumer products in fiscal year 2001 increased to $616.9 million from $551.6 million in 2000. The current year sales increase primarily resulted from the Pro-Line business acquired in March, 2000, the introduction of TRESemme Hydrology and higher sales for St. Ives Swiss Formula facial products and body washes, the Motions line of hair care products and the Alberto VO5 Herbals line of shampoos and conditioners. In fiscal year 2000, sales increased 18.4% compared to 1999 sales of $466.0 million primarily due to higher sales of the Alberto VO5 Herbals line of shampoos and conditioners, St. Ives Swiss Formula facial and body wash product lines, the Motions line of hair care products, TRESemme hair care products and higher sales for custom label filling operations, along with the inclusion of sales related to the Pro-Line acquisition. Alberto-Culver International consumer products sales increased 1.8% to $445.8 million in 2001 compared to $437.9 million in 2000. The fiscal year 2001 results were negatively impacted by the effect of foreign exchange rates. Had foreign exchange rates in fiscal year 2001 been the same as 2000, Alberto-Culver International sales would have increased 10.0%, primarily due to sales increases for the company's European and Latin American businesses. In fiscal year 2000, International sales increased 1.6% to $437.9 million from $431.0 million in fiscal year 1999. Sales of the "Specialty distribution - Sally" business segment increased to $1.46 billion in fiscal year 2001, compared to $1.28 billion and $1.10 billion in 2000 and 1999, respectively. The sales increases of 14.0% in 2001 and 16.8% in 2000 were attributable to the expansion of Sally's full service operations, higher sales for established Sally Beauty Company outlets and the addition of stores during the year. The number of Sally stores increased 21.5% during the last three fiscal years to a total of 2,428 at September 30, 2001 compared to 2,325 and 2,157 at the end of fiscal years 2000 and 1999, respectively. Cost of products sold as a percentage of sales was 48.8% in fiscal year 2001 compared to 49.2% in 2000 and 49.3% in 1999. The lower cost of products sold percentage in fiscal year 2001 compared to the prior year was primarily due to the introduction of higher margin new products and lower costs. Advertising, promotion, selling and administrative expenses increased 11.3% in fiscal year 2001 and 14.2% in 2000. The increases in fiscal years 2001 and 2000 primarily resulted from the higher selling and administration costs associated with the growth of the Sally Beauty Company business and higher expenditures for advertising, promotion and market research. Advertising, promotion and market research expenditures were $305.1 million, $286.4 million and $259.7 million in fiscal years 2001, 2000 and 1999, respectively. The higher expenses in fiscal year 2001 were mainly attributable to increased advertising and promotion expenditures for North America primarily related to the launch of TRESemme Hydrology and the acquisition of Pro-Line, and higher expenses for International primarily related to Advanced Alberto VO5, the introduction of a new product line in Mexico and the fiscal year 2000 acquisition of a skin care business in Poland. Management's Discussion and Analysis of Results of Operations and Financial --------------------------------------------------------------------------- Condition (Cont.) ----------------- Alberto-Culver Company and Subsidiaries Interest expense, net of interest income, was $21.8 million, $19.2 million and $12.7 million in fiscal years 2001, 2000 and 1999, respectively. Interest expense was $27.3 million in fiscal year 2001 versus $23.7 million in 2000 and $14.8 million in 1999. The increase in interest expense in fiscal year 2001 was primarily attributable to an additional $8.4 million of interest expense related to the $200 million of 8.25% senior notes issued in April, 2000. The higher interest expense was partially offset by lower interest expense related to the repayment of borrowings under the revolving credit facility, the payoff of the $20.0 million of notes payable which matured in September, 2000, and the repayment of borrowings under the Swedish Krona revolving credit facility. Interest income in fiscal year 2001 was $5.5 million, compared to $4.5 million in 2000 and $2.1 million in 1999. The increase in fiscal year 2001 was principally due to higher interest income resulting from investing the net proceeds of the senior notes for a full year and interest income earned on cash generated by operations during the year. The provision for income taxes as a percentage of earnings before income taxes was 34.0% in 2001, 33.1% in 2000 and 35.5% in 1999. The higher tax rate in fiscal year 2001 was primarily due to the mix of foreign taxable earnings. Other factors which influenced the effective tax rates for those years are described in "note 6" to the consolidated financial statements. Financial Condition Working capital at September 30, 2001 was $486.6 million, an increase of $86.9 million from the prior year's working capital of $399.7 million. The resulting current ratio was 2.25 to 1.00 at September 30, 2001 compared to 2.17 to 1.00 last year. The increase in working capital and the current ratio was primarily due to higher cash, cash equivalents and short-term investments principally resulting from cash generated from operating activities during the year. Accounts receivable increased 10.0% to $169.7 million from $154.2 million last year. The increase was principally due to increased sales. Inventories were $478.3 million at September 30, 2001, up 7.4% compared to $445.3 million last year. The increase primarily resulted from acquisitions and the growth of the Sally Beauty Company and North America businesses. Net property, plant and equipment decreased $4.3 million to $235.8 million at September 30, 2001. The decrease resulted primarily from depreciation during fiscal year 2001 and the effects of foreign exchange rates, substantially offset by expenditures for additional Sally stores, acquisitions, office facilities, machinery and equipment and information systems. Accounts payable of $191.4 million at September 30, 2001 increased $7.6 million compared to 2000, primarily due to the timing of inventory purchases and vendor payments, partially offset by the effects of foreign exchange rates. Long-term debt decreased $19.8 million to $321.2 million at September 30, 2001 principally due to the elimination of borrowings under the company's Swedish Krona revolving credit facility. Total stockholders' equity increased $103.7 million to $736.0 million at September 30, 2001. The increase was primarily due to net earnings for the fiscal year and proceeds from the exercise of employee stock options, partially offset by dividend payments and the weakening of certain foreign currencies against the U.S. dollar. Liquidity and Capital Resources The company's primary sources of cash over the past three years have been from funds provided by operating activities and the issuance of $200 million of 8.25% senior notes in April, 2000. Operating activities provided cash of $165.2 million, $119.1 million and $83.6 million in 2001, 2000 and 1999, respectively. The company has obtained long-term financing as needed to fund acquisitions and other growth opportunities. Funds also may be obtained prior to their actual need in order to take advantage of opportunities in the debt markets. In April, 2000, the company issued $200 million of 8.25% senior notes due November, 2005. In June, 1998, the company issued $120 million of 6.375% debentures due June, 2028. In September, 1997, the company obtained a five-year, $200 million revolving credit facility, which was increased to $250 million in fiscal year 2000. The facility, which had no borrowings outstanding at September 30, 2001 or 2000, may be drawn in U.S. dollars or in certain foreign currencies. Under debt covenants, the company has the ability to incur up to $780 million of additional borrowings. The primary uses of cash during the three-year period ending September 30, 2001 were $225.9 million for acquisitions, $221.5 million for repayments of long-term debt, $122.1 million for capital expenditures, $48.8 million for cash dividends and $43.9 million for purchases of treasury stock. Compared to 1998, cash dividends per share increased 40.2% over the three-year period ended September 30, 2001. Cash dividends paid on Class A and Class B common stock were $.3225 per share in 2001, $.290 per share in 2000 and $.255 per share in 1999. The company anticipates that cash flows from operations and available credit will be sufficient to fund operating requirements in future years. During fiscal year 2002, the company expects that cash will continue to be used for acquisitions, capital expenditures, new product development, market expansion and dividend payments. The company may also purchase shares of its common stock depending on market conditions. During fiscal years 1998 and 1999, the Board of Directors authorized the company to purchase up to 9.0 million shares of its Class A common stock. As of September 30, 2001, 1.7 million Class A shares remained available for purchase under the authorizations. No Class A shares have been purchased under this program since October, 1999. Inflation The company was not significantly affected by inflation during the past three years. Management continuously attempts to resist cost increases and counteract the effects of inflation through productivity improvements, cost reduction programs and price increases within the constraints of the highly competitive markets in which the company operates. Market Risk As a multinational corporation that manufactures and markets products in countries throughout the world, the company is subject to certain market risks including foreign currency, interest rates and government actions. The company considers a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative financial instruments. The company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. As of September 30, 2001, the company had no material derivative financial instruments outstanding. The company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The company's primary exposures are to changes in exchange rates for the U.S. dollar versus the Swedish krona, the British pound sterling, the Canadian dollar, the Euro, the Australian dollar, the Mexican peso and the Argentine peso. The company's various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases, intercompany transactions, etc.) are hedged with forward contracts to reduce the foreign currency risk. Gains and losses on these foreign currency hedges are included in the basis of the underlying hedged transactions. As of September 30, 2001, the company had no material outstanding foreign currency contracts. The company considers combinations of fixed rate and variable rate debt, along with varying maturities, in its management of interest rate risk. At September 30, 2001, the company had no variable rate long-term debt outstanding. Management's Discussion and Analysis of Results of Operations and Financial --------------------------------------------------------------------------- Condition (Cont.) ----------------- Alberto-Culver Company and Subsidiaries The company has periodically used interest rate swaps to manage interest rate risk on debt securities. These instruments allow the company to exchange variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials paid or received on these arrangements are recognized as adjustments to interest expense over the life of the agreement. At September 30, 2001, the company had no interest rate swaps outstanding. The company's quantitative information on market risk as of September 30, 2001 is as follows (in millions):
Debt ---------------------------------------------------------------------------- Expected Maturities Short-Term Fixed Rate Long-Term Fixed Rate Total ------------------------------------------------------------------------------------------------------------------- 2002 (3.3% average rate) $ 2.9 -- 2.9 2003 (8.9% average rate) -- 1.1 1.1 2004 (7.8% average rate) -- 0.1 0.1 2006 (8.3% average rate) -- 200.0 200.0 Thereafter (6.4% average rate) -- 120.0 120.0 ------------------------------------------------------------------------------------------------------------------ Total $ 2.9 321.2 324.1 ------------------------------------------------------------------------------------------------------------------ Fair Value $ 2.9 336.1 339.0 ------------------------------------------------------------------------------------------------------------------
The company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the company's policy of investing in securities with high credit ratings. The company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising the company's customer base. The company believes its allowance for doubtful accounts is sufficient to cover customer credit risks. New Accounting Standards In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, requiring companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. The accounting treatment of gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The company was required to comply with SFAS No. 133, as amended, in the first quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements. In December, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition". SAB No. 101 provides guidance in applying generally accepted accounting principles to revenue recognition. The company implemented SAB No. 101 in the first quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements. In September, 2000, the FASB's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF Issue No. 00-10 addresses the income statement classification of shipping and handling fees and costs. The company implemented EITF Issue No. 00-10 in the first quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements. In September, 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. The company implemented SFAS No. 140 in the third quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements. Management's Discussion and Analysis of Results of Operations and Financial --------------------------------------------------------------------------- Condition (Cont.) ----------------- Alberto-Culver Company and Subsidiaries In May, 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition, measurement and income statement classification of various types of sales incentives including coupons, rebates and free products. The company is required to comply with EITF Issue No. 00-14 in the second quarter of fiscal year 2002. In April, 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF Issue No. 00-25 addresses the income statement classification for various types of consideration paid by a vendor to a retailer. The company is required to comply with EITF Issue No. 00-25 in the second quarter of fiscal year 2002. The company expects to implement EITF Issue Nos. 00-14 and 00-25 in the first quarter of fiscal year 2002 and estimates the effect will be a reduction of consolidated net sales of approximately 5%-6%, but will not change consolidated net earnings. In June, 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, requires companies to discontinue the amortization of goodwill and certain other intangible assets and requires an impairment of existing goodwill and certain other intangible assets based on a fair value method. The company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 in the fourth quarter of fiscal year 2001 for new acquisitions and is required to comply no later than the first quarter of fiscal year 2003 as to previously acquired intangibles. The company expects to implement the requirements of SFAS No. 142 for previously acquired intangibles in the first quarter of fiscal year 2002. The company estimates discontinuation of the amortization of goodwill and certain other intangibles in accordance with SFAS No. 142 will increase consolidated net earnings by approximately 7%-8% and does not expect any impairment of goodwill or other intangible assets upon implementation. In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including the presentation of discontinued operations in the statement of earnings. The company is required to adopt the provisions of SFAS No.144 no later than the first quarter of fiscal year 2003 and does not expect its implementation to have a material effect on the consolidated financial statements.
Selected Financial Data Alberto-Culver Company and Subsidiaries ============================================================================================================================= Year ended September 30, ----------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 2001 2000 1999 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------------------------------------------------------- Operating Results: Net sales $2,494,180 2,247,163 1,975,928 1,834,711 1,775,258 1,590,409 1,358,219 1,216,119 Cost of products sold 1,217,429 1,105,750 973,702 902,095 880,416 805,080 682,589 602,749 Interest expense 27,309 23,747 14,849 12,170 11,826 15,905 9,946 8,630 Earnings before income taxes 167,236 154,281(1) 133,783 132,378 136,121(2) 100,014 84,242 71,078 Provision for income taxes 56,860 51,097(1) 47,493 49,311 50,704(2) 37,270 31,591 27,010 Net earnings 110,376 103,184(1) 86,290 83,067 85,417(2) 62,744 52,651 44,068 Net earnings per share (3): Basic 1.96 1.85(1) 1.53 1.46 1.53(2) 1.13 0.95 0.79 Diluted 1.91 1.83(1) 1.51 1.37 1.41(2) 1.06 0.94 0.79 ----------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (3): Basic 56,176 55,790 56,378 56,845 55,967 55,571 55,430 56,063 Diluted 57,838 56,410 57,162 62,420 63,377 62,776 57,053 56,083 Shares outstanding at year end (3): Class A 23,871 22,982 22,768 24,063 22,610 22,097 21,926 21,826 Class B 32,957 32,957 32,957 33,148 33,533 33,533 33,533 33,534 ----------------------------------------------------------------------------------------------------------------------------- Financial Condition: Current ratio 2.25 to 1 2.17 to 1 1.92 to 1 1.89 to 1 1.86 to 1 1.79 to 1 2.28 to 1 1.86 to 1 Working capital $ 486,646 399,748 309,153 277,940 269,007 226,123 301,706 185,747 Cash, cash equivalents and short- term investments 202,839 114,951 57,816 73,305 87,600 71,557 146,985 50,362 Property, plant and equipment, net 235,822 240,091 238,753 223,476 190,998 175,920 157,791 132,881 Total assets 1,516,501 1,385,598 1,181,494 1,065,343 998,056 908,412 814,757 610,208 Long-term debt 321,183 340,948 225,173 171,760 149,441 161,548 183,094 42,976 Stockholders' equity 736,009 632,260 565,780 531,150 495,001 424,242 370,574 326,970 Cash dividends 18,215 16,182 14,394 13,220 10,909 9,724 8,590 7,708 Cash dividends per share (3)(4) 0.3225 0.290 0.255 0.230 0.195 0.175 0.155 0.1375 ============================================================================================================================= ============================================================================================== Year ended September 30, ---------------------------------------------------------------------------------------------- (In thousands, except per share data) 1993 1992 1991 ---------------------------------------------------------------------------------------------- Operating Results: Net sales 1,147,990 1,091,286 873,719 Cost of products sold 564,260 534,979 424,566 Interest expense 9,661 11,665 6,822 Earnings before income taxes 65,129 61,356 47,928 Provision for income taxes 23,857 22,740 17,812 Net earnings 41,272 38,616 30,116 Net earnings per share (3): Basic 0.72 0.68 0.53 Diluted 0.72 0.68 0.53 --------------------------------------------------------------------------------------------- Weighted average shares outstanding (3): Basic 57,361 56,726 56,606 Diluted 57,434 56,726 56,606 Shares outstanding at year end (3): Class A 23,126 23,491 22,875 Class B 33,604 33,604 33,604 ---------------------------------------------------------------------------------------------- Financial Condition: Current ratio 2.05 to 1 1.88 to 1 2.11 to 1 Working capital 205,050 193,080 212,268 Cash, cash equivalents and short- term investments 73,947 80,158 84,595 Property, plant and equipment, net 124,449 121,703 114,910 Total assets 593,046 610,400 574,413 Long-term debt 80,184 84,549 97,820 Stockholders' equity 298,857 286,222 249,431 Cash dividends 7,893 6,665 6,093 Cash dividends per share (3)(4) 0.1375(4) 0.1175 0.1075 ==============================================================================================
(1) Fiscal year 2000 includes a non-recurring gain from the sale of a trademark (note 9). The non-recurring gain increased earnings before income taxes by $9.3 million, net earnings by $6.0 million and basic and diluted earnings per share by $0.11. (2) Fiscal year 1997 includes a non-recurring gain from an insurance settlement for the loss of the company's corporate airplane. The non-recurring gain increased earnings before income taxes by $15.6 million, net earnings by $9.8 million and basic and diluted earnings per share by $0.18 and $0.16, respectively. (3) Net earnings per share, shares outstanding and cash dividends per share have been restated to reflect the 100% stock dividend on the company's Class A and Class B outstanding shares in February, 1997. (4) Cash dividends per share on Class A common stock and Class B common stock have been equal since the Class A shares were issued in April, 1986. Cash dividends paid in fiscal 1993 included a one-time extraordinary dividend of one cent per share in recognition of the company surpassing one billion dollars in sales for the fiscal year ended September 30, 1992. Market Price of Common Stock and Cash Dividends Per Share Alberto-Culver Company and Subsidiaries =============================================================================== The high and low sales prices of both classes of the company's common stock on the New York Stock Exchange and cash dividends per share in each quarter of fiscal years 2001 and 2000 are as follows:
Cash Market Price Range Dividends 2001 2000 Per Share ------------------------ ----------------------- ------------ High Low High Low 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Class A (NYSE Symbol ACVA): First Quarter $36.50 24.00 23.63 19.44 $ .0750 .065 Second Quarter $36.00 30.63 23.50 18.25 .0825 .075 Third Quarter $37.40 30.90 26.63 21.38 .0825 .075 Fourth Quarter $39.50 31.70 26.50 23.50 .0825 .075 --------------------------------------------------------------------------------------------------------------------- $ .3225 .290 -------------------------------------------------------------------------------------------------------------------------- Class B (NYSE Symbol ACV): First Quarter $43.50 28.44 27.63 22.31 $ .0750 .065 Second Quarter $42.75 36.88 27.13 19.38 .0825 .075 Third Quarter $44.45 37.15 31.81 23.19 .0825 .075 Fourth Quarter $46.26 37.35 31.50 27.38 .0825 .075 --------------------------------------------------------------------------------------------------------------------- $ .3225 .290 --------------------------------------------------------------------------------------------------------------------------
Stockholders of record, which excludes a large number of stockholders with shares held in "street name", totaled 898 for Class A shares and 898 for Class B shares as of November 16, 2001. The following trademarks and servicemarks owned by Alberto-Culver Company and its subsidiaries appear in this report: ALBERTO, ALBERTO VO5, BEAUTY SYSTEMS GROUP, BSG, CEDERROTH INTERNATIONAL, COMB-THRU, CONSORT, HYDRATEIN, HYDROLOGY, JUST FOR ME, MEND & DEFEND, MOTIONS, MRS. DASH, PRO-LINE, SALLY, SHEER HAIRDRESSING, SOFT & BEAUTIFUL, SORAYA, ST. IVES, ST. IVES SWISS FORMULA, STRAIGHT HAIR, TCB, TRESemme, VICTORY BEAUTY SYSTEMS and VO5. The following are trademarks and servicemarks of other companies which appear in this report: CLAIROL (Clairol, Inc.), GRAHAM WEBB (Graham Webb International Limited Partnership), L'OREAL (L'Oreal S.A.), MATRIX (Matrix Essentials, Inc.) PAUL MITCHELL (John Paul Mitchell Systems), NEXXUS (Nexxus Products Company), REDKEN (Redken Laboratories, Inc.), REVLON (Revlon Consumer Products Corporation), SEBASTIAN (Sebastian International, Inc.), TIGI (Mascolo Brothers Limited) and WELLA (The Wella Corporation).