The external environment in fiscal year 2001 was the most difficult in recent memory. For the first time since the early 90's we experienced "head winds" in each of our major businesses that became more pronounced as the year progressed. Revenues for 2001 were $794 million, up 4% from $758 million in the prior year. Earnings were sharply lower. Earnings per share were $1.07 vs. $1.40 after one - time costs, and $1.33 vs. $1.70 before. Included in revenues in 2001 was $82 million resulting from acquisitions. On a comparable basis revenues were down 2%. Rest assured no one at MacDermid considers this satisfactory performance. This year represents a stumble, the second in a row. Our share price finished the year at $18.08, down 38%. Not a lot to feel proud of or, is there more to the story?
THE STORY: As the year progressed our markets weakened. Printed circuits suffered from unprecedented declines in demand as inventories of electronic devices began piling up in the supply chain. An important measure of demand, the book - to - bill ratio for printed circuits ended the year at .63, the lowest since the measure was introduced. A ratio of 1.0 would mean bookings and shipments were balanced. The slowing of the U.S. economy was evidenced in automotive production, which ended 15% lower, driving down the demand for our industrial products. Advertising and printing activity in graphic arts trended down as the year progressed. Yes, the external environment presented a difficult challenge.
REOCCURRING REVENUES: This year's difficult external environment provided the background for us to demonstrate the relative lack of volatility of earnings and especially cash flow in down cycles. A very important characteristic of your company is the percentage of reoccurring revenues. Reoccurring revenues are sales revenue of the company that don't require a new sales cycle. We refer to this as consumable revenues. Most of our products are consumed, or used in our customers' manufacturing processes. This means purchases of our products cannot be postponed or otherwise reduced in a cost savings initiative. Yes, the amount of our product used may be reduced if our customers produce less. For example, in the graphic arts business, our customers use a photopolymer printing plate for every page of a newspaper. A page cannot be printed without one. When fewer pages are printed, our volume is reduced as we experienced this year. Reoccurring revenues were 89% of total revenues this year. For many of our product lines there is a minimum usage of our products to operate a production line, regardless of whether the line is fully utilized or not. This is why we often experience smaller reductions in revenues than our end markets would indicate.
VARIABLE COST STRUCTURE. 64% of our total costs are manufacturing costs incurred to produce our chemical business products. 75% of manufacturing cost is raw materials. We purchase more than 1,000 raw materials. Historically, the economic cycles of different raw materials run counter to one another, offsetting an increase in one with a reduction in another. Raw materials are strictly variable in usage, i.e. the more products we sell the more we produce and visa versa. As a result, the portion of cost represented by raw materials remains a constant percent as volume moves up and down. There is a significant portion of our "SG&A" that is variable as well. This results from a highly leveraged compensation system. When earnings are down, bonuses, which represent as much as 20% of total compensation, are also down, offsetting a good amount of the impact.
BETTER CASH FLOWS IN DIFFICULT TIMES. Fiscal 2001 cash from operations were $59 million, about equal to the prior year. Owner earnings of $43.4 million were 15% higher than the previous year. We will increasingly refer to owner earnings. This is a measure of the cash available for investment generated by the business in the period. We define owner earnings as net income, plus non-cash items, plus or minus the change in working capital, less capital expenditures. Another way to look at owner earnings is the amount of cash that could be taken out of the business, or reinvested in it. MacDermid has always been cash flow oriented. This year with the difficult external environment, we made a greater effort than normal. Capital expenditures are much more discretionary at MacDermid than one might suspect. This year net capital expenditures were $8 million lower than the prior year. We estimate our maintenance capital expenditure at about $8 million. Any spending over that should produce a growth opportunity. Capital expenditures are subject to delays or cancellations if the economic situation warrants doing so. We did a much better job of utilizing cash globally, minimizing non-productive uses and balances. Our new heightened focus on cash will continue to benefit us in fiscal 2002.
BACK TO THE FUTURE. As we said in last year's report, the strategic transformation of MacDermid is complete. Your company today is much more balanced in terms of business risk. The platform for growth is also more robust. There is no longer a strategic imperative to grow by acquisition. We find ourselves in a very similar position to the early 90's. Our businesses enjoy outstanding fundamentals. They generate significant cash and require only modest reinvestment. They are relatively recession resistant, and enjoy defendable competitive advantage. We have a lot to work with. In the early 90's we took a business with good dynamics and by exhibiting an intense focus on the basics, turned average performance into extraordinary results. Our starting point today is very similar. There are some 2,500 new Clan members who came from different cultures, good companies, albeit traditional. There is little traditional about MacDermid. A high performance expectation is fundamental to our culture. We act like owners. We take risks as entrepreneurs. We can afford to take risks because we spend your money like it was our own. Our performance standards are similar to what one would expect from a small business owner. To us it ALL matters. We know that people can change to embrace our philosophies. All of MacDermid changed in the early 90's. We also know it isn't easy. It takes inspired leadership, and a focus that can be scary in its intensity. Simply telling people about it doesn't change behavior. As we have begun this transformation we have had to change leadership. There can be no room for uninspired leaders if we are to be successful in this transformation. Make no mistake, this is a change that must occur. As your Chairman and CEO, I know I am the one who you must hold accountable. This is a transformation that must not fail. I take great comfort knowing that I am not alone. We have promoted progressive "young at heart" people who clearly "get it" and we will be supporting them closely. Recognizing the need for additional management capacity, especially at corporate, we are recruiting for a few key positions. There is large group of Clan members all around the world who need no special encouragement to embrace the MacDermid Philosophy. We will be building from that base. We also know there are key people from within the newly acquired organizations who are excited about this entrepreneurial opportunity.
BACK TO THE FUTURE IS ALREADY STARTED! Significant movement to focus on the basics has already started. Last year when we acquired PTI we thought we could operate Graphic Arts as a separate unit. We soon realized that graphic arts would not be able to meet our expectations without completely adopting the MacDermid operating philosophy. As a result, we announced the closure of their former headquarters, and a management reorganization as part of an overall $12 million cost reduction initiative that was complete by year-end. We saw an improvement in the fourth quarter and now fully expect Graphic Arts to meet our expectations. Our refocus on the basics of frugal entrepreneurship is in the early stages. We are seeing reductions in all discretionary areas, travel and entertainment, small purchases, facilities and much more. In Graphic Arts we have only recently begun sharing raw material costs between locations and we see a major opportunity to reduce these costs. During the year we sold a European fuel oil additive business and a small adhesive and sealant business. After the year-end we announced the write-off of our Via Tek investment in Chicago. This recognizes the end of one frustrating chapter in our investment in electronics manufacturing. We were unable to obtain the production levels and yields in Chicago that we were reaching in Spain. This will, however, eliminate more than $8 million in losses incurred in 2001.
MAKING THEM OWNERS. Employee ownership has been high at MacDermid since the employees bought the company from Archie MacDermid 42 years ago. We believe employee ownership is key to the success of the MacDermid philosophy. In an effort to jump-start this entrepreneurial transformation, we will be asking for your approval for two new stock option plans. First a worldwide, all employee plan intended to award options to all employees. The second is a new executive option plan. It is an indexed, performance plan, designed to ensure that our executives gain only if we meet performance targets and outperform the index. This plan is rare because it does not reward for average performance and it requires us to treat the cost as an expense in the income statement.
HAROLD LEEVER THE FOUNDER OF THE MODERN CLAN MACDERMID HAS PASSED ON. Harold implored us not to stand at his grave and weep, but to take inspiration from his life. Harold embodied the MacDermid philosophy like no one else. He was the tough taskmaster who knew that greatness never resulted from taking the easy road. He believed to the tips of his toes in innate human potential. His motives were pure. He just wanted people to be more successful than they themselves thought possible. And most of all Harold had fun. He reveled in the challenges we faced. He laughed in the face of adversity. He celebrated victory, did he ever celebrate victory! His life was MacDermid. We owe him a great debt as he created the special place called the Clan MacDermid. Now he has left it up to us. What do we do with this legacy? We can take the easy road and seek to fit in with the crowd. Or, we can continue the road less traveled, and take this as but the beginning. As you can see by reading the above, I have already decided. I know I can count on the Clan to respond, and appreciate the support of our shareholder partners. We will not fail.
Disclosure: I am long PAH.