Valuation of Johnson Adhesives: A Simulation - bizvalblog · PDF file28.07.2012 · Business Valuation of Johnson Adhesives, Inc. ... (Global Adhesives ... Adhesives & Sealants Strategic

RUNNINGHEAD:ACG6935SemesterProject–Pearl&Pierce

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SEMESTERPROJECT:

BUSINESSVALUATIONOFJOHNSONADHESIVES,INC.

RACHELPEARLKYLEPIERCE

ACG6935

PROFESSORMICHAELCRAINSUMMER2012


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BizVals,Inc.11ApolloLandingDrive

Orlando,FloridaJuly28,2012

LawyersofMs.SusanJohnsonUnitedLawGroup,Inc.1492OceanBlueBoulevardBocaRaton,Florida

ToTheLawyersofMs.SusanJohnson:

Asrequested,wehavecompletedavaluationengagement,asdefinedintheStatementonStandardsforValuationServices(SSVS)bytheAmericanInstituteofCertifiedPublicAccountants(AICPA),ofthecommonstockofJohnsonAdhesives,Inc.(JAorthe“Company”)asofDecember31,2011.ThepurposeofthisvaluationissolelytoassistintheequitabledistributionofassetsforthematterofJohnsonv.Johnson.Allotherpartiesareforbiddenuseoftheinformationprovidedinthisvaluationengagement,forallotherpurposeswithoutourwrittenconsent.Theresultingestimateofvaluedeterminedbythisvaluationengagementwillbeconveyedasaconclusionofvalue.

Enclosed,isaconclusionofvalueandsummaryreport,titledSemesterProject:BusinessValuationofJohnsonAdhesives,Inc.,whichwillapplyrelevantdataandbusinessvaluationapproachesandmethodstodeterminethefairmarketvalueofMr.FrankJohnson’s55%ownershipinterestofJA,asofDecember31,2011.UsingdataprovidedtousbythelawyersofMs.SusanJohnsonaswellasinformationderivedfromvariouspubliclyavailablesources,thefollowingtopicswillbeanalyzedwithprofessionaljudgment,competenceandskepticism:

Economy, Industry, FinancialStatements,and ApproachestoValue.

OurfindingshavedeterminedtheestimatedvalueofMr.FrankJohnson’s55%ownershipinterestinJAtobe$16,500,000,whichequatesto$30,000.00pershare.ThisvaluationengagementwasconductedinaccordancewithSSVS,U.S.TreasuryRevenueRulings,aswellasothervariousgenerallyacceptedaccountingprinciplesandstandardsforbusinessvaluations.Inaddition,thisvaluationandreportistobeusedonlyasofthisvaluationdate,December31,2011,andisnotvalidforanyotherdate.Lastly,wepossessnoobligationtoupdatethisreportorourconclusionofvalueforanyinformationthatcomestoourattentionfollowingthisdate.


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Ifthereareanyquestionsorconcernspleasedonothesitatetocontactanyofourassociates.Thankyou.

Sincerely,

BizVals, Inc. BizVals,Inc.


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TABLEOFCONTENTS

Introduction................................................................................................................................................................6 OverviewofJohnsonAdhesives,Inc............................................................................................................6 AssignmentDescription....................................................................................................................................7 ScopeofWork........................................................................................................................................................8 SourcesofInformationUtilized.....................................................................................................................8 RevenueRuling59‐60........................................................................................................................................9 AssumptionsandLimitingConditions.....................................................................................................10

EconomicAnalysis................................................................................................................................................11 GlobalEconomy.................................................................................................................................................12 NationalEconomy.............................................................................................................................................12 IndustryEconomy............................................................................................................................................13 RisktotheCompany........................................................................................................................................14 SlowedDemand............................................................................................................................................14 CapacityUtilization.....................................................................................................................................15 RawMaterial&SupplyShortage...........................................................................................................15

Conclusion............................................................................................................................................................15

IndustryAnalysis...................................................................................................................................................16 ThreatofNewEntrants–Moderate(2Rating)...................................................................................17 BargainingPowerofBuyers–High(3Rating)....................................................................................17 BargainingPowerofSuppliers–High(3Rating)...............................................................................18 AvailabilityofSubstitutes–Low(1rating)...........................................................................................18 CompetitiveRivalry–High(3rating)......................................................................................................19 Conclusion............................................................................................................................................................19

FinancialStatementAnalysis...........................................................................................................................20 IncomeStatementAnalysis..........................................................................................................................21 Revenues..........................................................................................................................................................21 GrossProfit.....................................................................................................................................................22 OperatingExpenses.....................................................................................................................................22 Officers’Compensation..............................................................................................................................22 Pre‐TaxIncome.............................................................................................................................................23 NetIncome......................................................................................................................................................23

BalanceSheetAnalysis...................................................................................................................................23 CurrentAssets................................................................................................................................................24 TotalAssets.....................................................................................................................................................24 CurrentLiabilities........................................................................................................................................24 TotalLiabilities..............................................................................................................................................25 Stockholders’Equity...................................................................................................................................25

RatioAnalysis.....................................................................................................................................................25 LiquidityRatios.............................................................................................................................................25 ProfitabilityRatios.......................................................................................................................................26 LeverageRatios.............................................................................................................................................26


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ApproachestoValue............................................................................................................................................26 IncomeApproach..............................................................................................................................................27 MarketApproach...............................................................................................................................................27 AssetApproach..................................................................................................................................................27 SummaryoftheValuationApproachesandMethodsUsed...........................................................28

IncomeApproach..................................................................................................................................................28 CapitalizationofBenefitsMethod..............................................................................................................28 ConclusionofValue–IncomeApproach............................................................................................30

MarketApproach...................................................................................................................................................31 GuidelinePublicCompanyAnalysis..........................................................................................................31 SECEDGARSearch.......................................................................................................................................31 CrainValDatabaseSearch.........................................................................................................................31

ConclusionofValue–MarketApproach.................................................................................................32

DiscountforLackofMarketability................................................................................................................33

ReconciliationofValuationMethods............................................................................................................33

ReasonablenessTest............................................................................................................................................34

FinalConclusionofValue...................................................................................................................................34

Bibliography............................................................................................................................................................36

Appendix1–ValuationAnalysts’Representation..................................................................................39

Appendix2–SelectFinancialData................................................................................................................40

Appendix3–CalculationofValue..................................................................................................................50


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INTRODUCTION

OverviewofJohnsonAdhesives,Inc.

JohnsonAdhesives,Inc.(JAorthe“Company”)isaprivatelyownedmanufacturerofadhesivesandsealantsthatsellsmainlytohomeimprovementstorechainsandsmallerbusinesscustomersinNorthAmerica.Brothers,FrankandJohnJohnson,foundedtheCompanytwentyyearsagoin1987andsinceitsinception,JAhasstayedinthehandsoffamily.BothbrotherscontinuallyandactivelymanagetheCompany’soperationswithFrankJohnsonactingasmajorityshareholderpossessing55%ofJAcommonstock.Meanwhile,hisbrotherJohnowns35%ofthecommonstockandacousin,whoalsoworksforthecompany,ownstheremaining10%.Currently,JAhassixmanufacturinglocationsthroughouttheUnitedStatesandannualrevenuesofapproximately$50million.EightypercentofsalesaretocustomersintheU.S.whereastheremainingtwentypercentofsalesareexportedandsoldtocustomersinCanada,MexicoandtheCaribbeanIslands.

JAoperatesintheadhesiveandsealantsindustryandmanufacturesadhesiveandsealantproducts.TheStandardIndustrialClassificationSystemclassifiestheadhesivesandsealantsindustry(SIC#2891),asbusinessesprimarilyengagedin“manufacturingindustrialandhouseholdadhesives,glues,caulkingcompounds,sealants,andlinoleum,tile,andrubbercementsfromvegetable,animal,orsyntheticplasticsmaterials,purchasedorproducedinthesameestablishment”(IntegraReports,2011).Ontheotherhand,adhesiveandsealantproductsaretwotypesofcompoundsthathavecountlessusesandcomparablechemicalmake‐ups;yet,possessinherentlydifferentfunctions(GlobalAdhesives,2011).Unlikeadhesivesthatareusedtosecureabondbetweentwotypesofsimilarordissimilarmaterials,sealantproductsareusedtocreateaninescapablebarrierforgasorliquids(GlobalAdhesives,2011).

Classificationofadhesivesandsealantsarebyproducttype,basisoftechnologyemployedinproductionand/orend‐uses(GlobalAdhesives,2011).Producttypesinclude,butarenotlimitedto:vinyl,acrylic,rubber,polyurethane,blockcopolymers,epoxy,naturalproductsandsilicone.Technologiesemployedinproductioninclude,butisnotlimitedto:water‐borne,solvent‐borne,reactive,andhotmelt.Endusesinclude,butarenotlimitedto:packaging,residentialandcommercialconstruction,woodworking,assemblyandmanufacturingofconsumergoods,transportation,industrial,medical,footwearanddo‐it‐yourselfprojects(Pierce,2011).Figure1belowpresentsabreakdownofthestrategicmarketsectorsinwhichadhesiveandsealantproductsparticipate(Murad,2011).


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Figure1:Adhesives&SealantsStrategicMarketSectors

AssignmentDescription

BizVals,Inc.wascommissionedbythelawyersofMs.SusanJohnsontodeterminethefairmarketvalueofMr.FrankJohnson’s55%ownershipinterestinJAasofthevaluationdate,December31,2011.ThepurposeofthisreportistoaidtheequitabledistributionofMr.FrankJohnson’stotalnetworthforthemaritaldissolutionmatterofJohnsonv.Johnson.Mr.FrankJohnson’s55%equityinterestrepresents550sharesofcommonstockinJAandcontainselementsofcontrol.Thepremiseofvalueisgoingconcern.Allrelevantdataandmethodologieswereconsideredinthisappraisal,whichisdeemedtobecomplete.ThisreportmeetstherequirementssetforthintheStatementonStandardsforValuationServicesNo.1(SSVS)issuedbytheAmericanInstituteofCertifiedPublicAccountantswhichdefinesavaluationengagementas:

“Anengagementtoestimatevalueinwhichavaluationanalystdeterminesanestimateofthevalueofasubjectinterestbyperformingappropriateprocedures,asoutlinedintheAICPAStatementonStandardsforValuationServices,andisfreetoapplythevaluationapproachesandmethodsheorshe


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deemsappropriateinthecircumstances.Thevaluationanalystexpressestheresultsofthevaluationengagementasaconclusionofvalue,whichmaybeeitherasingleamountorarange.”

Theinformationoutlinedinthispaper,representsasummaryreportwhichisoutlinedbytheSSVS“toprovideanabridgedversionoftheinformationthatwouldbeprovidedinadetailedreport,andtherefore,neednotcontainthesamelevelofdetailasadetailedreport”.Lastly,thissummaryreportmeetstheminimumrequirementspresentedinparagraphs71‐72ofSSVS.

ScopeofWork

Thisreportcomprisesacompleteappraisal,andallrelevantdataandmethodologieshavebeenconsidered.Inperformingourwork,wewereprovidedwithinformationbythelawyersofMs.SusanJohnsonaswellasrelyinguponinformationderivedfromvariouspubliclyavailablesources.InsightontheCompanyanditsoperationalenvironmentwasattainedthroughacomprehensiveexaminationoftheindustry,economyandavailablefinancialstatementsofJA.Aftercarefulconsiderationofallrelevantdataandbusinessvaluationmethodsandapproachestoapply,itwasdeterminedthatboththeIncomeApproachandMarketApproachwerethemostappropriatemethodsinderivingaconclusionofvalue.Usingprofessionaljudgment,competenceandskepticism,wehavedeterminedourconclusionofvaluetorepresentourfindings,knowledgeofthemarketplaceandvaluationexpertise.StaffmembersofBizVals,Inc.,underthedirectsupervisionoftheleadappraiseronthisengagement,assistedinperformingresearch,datamodeling,andprovidingotherareasofgeneralassistance.

SourcesofInformationUtilized

Inconductingthisvaluationengagement,BizVals,Inc.wasprovidedwithand/orrelieduponseveralsourcesofinformationwhichinclude:

1. ReviewedfinancialstatementsfortheyearendingDecember31,2007,aspreparedbytheCompany;


3. ReviewedfinancialstatementsfortheyearendingDecember31,2009,aspreparedbytheCompany

4. ReviewedfinancialstatementsfortheyearendingDecember31,2010,aspreparedbytheCompany


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6. ValuationRUs,Inc.’svaluationreportforJAasofDecember31,2011;

7. DatafromStocks,Bonds,Bills,andInflation–2011Yearbook,ValuationEditionpublishedbyMorningstar/Ibbotson;and

8. Otheritemsreferencedthroughoutthisreport.

Inadditiontothewrittendocumentationprovidedtous,informationwasalsoattainedfrominterviewswithMs.SusanJohnsonandherlawyers,whichwerevitaltothisreport.Lastly,BizVals,Inc.didnotaudit,review,compileorattestundertheStatementsonStandardsforAttestationEngagements(SSAEs)tothefinancialinformationprovidedtousbythesubjectcompanyandassumesnoresponsibilityforthisinformation.

RevenueRuling59‐60

Thestandardofvalueusedinthisengagementisfairmarketvalue,whichassumesthatthepriceistransactedincashorcashequivalents.U.S.TreasuryRevenueRuling(Rev.Rul.)59‐60,whichisusedinbothtaxandnontaxvaluations,definesfairmarketvalueas:

“Thepriceatwhichthepropertywouldchangehandsbetweenawillingbuyerandawillingsellerwhentheformerisnotunderanycompulsiontobuyandthelatterisnotunderanycompulsiontosell,bothpartieshavingreasonableknowledgeofrelevantfacts.Courtdecisionsfrequentlystateinadditionthatthehypotheticalbuyerandsellerareassumedtobeable,aswellaswilling,totradeandtobewellinformedaboutthepropertyandconcerningthemarketforsuchproperty.”

Furthermore,themeasurementoffairmarketvalueisdependentoncircumstancesofeachvaluationandthatthereisnosetformulaforderivingaconclusionofvalue.Rev.Rul.59‐60statesthefollowing:

“Adeterminationoffairmarketvalue,beingaquestionoffact,willdependuponthecircumstancesineachcase.Noformulacanbedevisedthatwillgenerallybeapplicabletothemultitudeofdifferentvaluationissues[whicharise]…Often,anappraiserwillfindwidedifferencesofopinionstothefairmarketvalueofaparticularstock.Inresolvingsuchdifferences,heshouldmaintainareasonableattitudeinrecognitionofthefactthatvaluationisnotanexactscience.Asoundvaluationwillbebaseduponalltherelevantfacts,buttheelementsofcommonsense,informedjudgmentandreasonablenessmustenterintotheprocessweighingthosefactsanddeterminingtheiraggregatesignificance…Theappraisermustexercisehisjudgmentastothe


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degreeofriskattachingtothebusinessofthecorporation,whichissuedthestock,butthatjudgmentmustberelatedtoalloftheotherfactorsaffectingvalue.Valuationofsecuritiesisinessence,aprophecyastothefutureandmustbebasedonfactsavailableattherequireddateofappraisal”.

Althoughthereisnogeneralformulafordeterminingfairmarketvalue,itisimportantfortheanalysttoconsiderallrelevantdataandinformation.Rev.Rul.59‐60offersthefollowingguidelinesandfactorstoconsiderforbusinessvaluations,whichwillbeincorporatedintothisvaluationengagement:

a. Thenatureofthebusinessandthehistoryoftheenterprisefromitsinception.

b. Theeconomicoutlookingeneralandtheconditionandoutlookofthespecificindustryinparticular

c. Thebookvalueofthestockandfinancialconditionofthebusiness.

d. Theearningcapacityofthecompany.

e. Thedividendpayingcapacityofthecompany.

f. Whetherornottheenterprisehasgoodwillorotherintangiblevalue.

g. Salesofthestockandthesizeoftheblockofstockbeingvalued.

h. Themarketpriceofstocksofcorporationsengagedinthesameorsimilarlineofbusinesshavingtheirstocksactivelytradedinafreeandopenmarketeitheronanexchangeoroverthecounter.

Thisreportisbrokenintofourmainsections:

1. EconomicAnalysis;

2. IndustryAnalysis;

3. FinancialStatementAnalysis;and

4. ValuationMethods.

AssumptionsandLimitingConditions

Providedaretheprimaryassumptionsandlimitingconditionsrelevanttotheestimateofvalueprovidedinthisreport:

1. TheresultingestimateofvalueexpressedastheconclusionofvaluestatedwithinthisreportisonlyvalidforthesolepurposeofaidingintheequitabledistributioninthematterofJohnsonv.JohnsonasofthevaluationdateDecember31,2011.

2. ThefinancialstatementsandotherrelatedinformationprovidedtousbyJAoritsrepresentativeshavebeenacceptedwithoutsubstantiationofitscompletenessor


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correctness.BizVals,Inc.assumesnoresponsibilityforthefinancialinformationprovidedtousandexpressesnoauditopinionoranyotherformofassurance.

3. Allfacts,data,statisticsandpublicinformationwhichwereobtainedforuseinthisreportarebelievedtobeaccurateandtrue;however,BizVals,Inc.hasnotindependentlyverifiedsuchinformationandisnotliableforthesesources.

4. Theinformationsetforthinthisreportistrueandaccuratetothebestofourknowledge.Wehavenotknowinglywithheldoromittedanythingfromourreport,whichwouldaffectthevaluationofJA.

5. Ownershipofthisreportoritscopydoesnotgrantanyarighttopublishanypartofit.Nopartyisalloweduseofthisreportforanypurposewithoutourwrittenconsent.

6. TheconclusionofvalueforJAcommonstockisbasedonfairmarketvalueasdefinedbyRev.Rul.59‐60.Nonetheless,anactualsaleofJA’scommonsharesmayresultinahigherorlowervaluethanestimated.BizVals,Inc.assumesnoresponsibilityforwhatvaluesindividualbuyersandsellersmayarrivetointheeventofanactualtransaction.

7. Thisvaluationreportcontainsfinancialinformation,estimatesandopinionsthatrepresenttheviewsBizVals,Inc.;however,theseviewsdonotrepresentpredictionsorassurancethatacertainlevelofprofitorincomewillbeattainedorthatcertaineventswilloccur.

8. Incertaincircumstancesinthisreport,estimateswereusedwhendocumentationwasmissingand/orcouldnotbeprovided.WedonotbelievethiswillresultinamaterialchangeinourestimateofvalueforJA;however,somereadersofthisreportmaybelievedifferently.

9. Futureservicesregardingthematerialinthisreport,willnotberequiredofBizVals,Inc.unlessotherwisestatedpriorinwriting.

10. NochangesoftheinformationinthisreportwillbemadebyanyoneelsebutthoseatBizVals,Inc.Weassumenoliabilityforanyunauthorizedchanges.

ECONOMICANALYSIS

Theperformanceofmanybusinessesandindustriesaretiedtostateoftheeconomy.Priortotheeconomicglobalrecessionin2008,theadhesiveandsealantindustryexperiencedanextendedperiodofuninterruptedgrowth;howeveroncetheglobaldownturnemerged,demandandoutputwoulddecreasedramatically.By2010,aneconomicreboundwouldseemattainable,butaftervariousunexpectedandexpectedeventsin2011,recoveryremainsuncertain.ThefollowingsectionswilldiscusstheglobalandnationaleconomyanditseffectsontheadhesiveandsealantindustryaswellastherisksitimposesontheCompany.


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GlobalEconomy

Witheconomicrecoveryinsight,2011wasayearofdisappointmentsbroughtaboutbynumerousfactorsthatupsetandstalledgrowth,suchas:theearthquakeandtsunamithathiteasternJapan;theconflictintheMiddleEastandNorthAfricanoilproducingregions;thedelicatebankingandfinancialinstitutionsofEuropeancountries;theslowdownofprogressionintheU.S.handoverofpublictoprivatedemand;aswellasglobalmarketssufferingfrommajorsell‐offsofriskyinvestments(IMF,2011).Thesefactorshaveaffectedunemploymentandoutputlevels,aswellasconsumerspending.AccordingtotheupdateontheWorldEconomicOutlook2011:SlowingGrowth,RisingRisksdevelopedbytheInternationalMonetaryFund(IMF),thetotalworldoutputfrombothadvancedanddevelopingeconomieswas4%in2011.Thiswasa1.1%decreaseintotalworldoutputfrom2010,yetanoverallincreaseof3.3%from2009(2011).ThemaindrivingforcebehindthesenumberswasfromemerginganddevelopingeconomiesaswellasChina.Growthratesfordevelopedandmatureeconomiesin2011andwere2.1%.Thiswasadecreaseof.4%from2010andanoverallincreaseof5.6%from2009(IMF,2011).Emerginganddevelopingeconomiesontheotherhand,hadgrowthratesof4.6%in2011,whichwasa.3%increasefrom2010andanoverallincreasefrom2009of2.8%(IMF2011).

Growthandrecoveryhasbeenslowingdownin2011comparedtothejumpin2010anditseemsthatwitheverystepforward,theglobaleconomyistakingonestepback.VariousestimatesstatethatindustrialoutputindevelopednationswasloweredbyhalfapercentagepointinthemonthsthatfollowedtheunanticipatedearthquakeandtsunamithatdevastatedJapan(IMF,2011).Furthermore,sourcesindicatethatduetothedisorderandinterruptioninthesupplychain,thenumberofcarsmanufacturedworldwidedroppedby30%(IMF,2011).RegulatoryuncertaintyintheU.S.aswellastheabilityofmanyEuropeancountriestostabilizetheirsovereigndebtalsohaditseffectonconsumerspendingandoutputlevels.Theeuro‐crisis,whichfirstemergedinGreece,thenspreadtoPortugal,Ireland,Spain,ItalyandthenFranceimmobilizedcashflowswithinbanks,createdfallingbondyieldsandtightenedlendingpolicies,astranslatedinskepticismofthemarketplace(IMF,2011).Additionally,globalunemploymentandtheaveragepriceofoilperbarrelalsocontinuedtoincrease.Globalunemploymentreached9.1%in2011(CIA,2011),whereasaveragepriceofoilperbarrelwas$103.20(IMF,2011).

NationalEconomy

TheU.S.stillstrugglestoregainitspre‐2007growthinthefaceofbearmarketsandmanufacturingslowdowns.Inaddition,theburstofthehousingbubblein2008stillposesseriouschallengestohomeowners,ofwhichabout68%carriedmortgages(EconomicReportofthePresident,2011).Inadditiontothenation’shousingmarketstillremaining


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weak,unemploymentlevelsbytheendof2011werealmost9%(Riley,2011).Furthermore,U.S.outputlevelsaswellasGDPdecreasedconsiderablyin2011,despiteincreasingoverallfrom2009.Outputlevelswereonly1.6%in2011,comparedto3.1%in2010;however,thisanoverallincreaseof5.3%from2009.RealGDPfigureswere1.5%in2011comparedto3.0%in2010;anoverallincreaseof5%from2009(IMF,2011).Additionally,realtotaldomesticdemandwas1.3%in2011comparedto3.4in2010,anoverallincreaseof5.7%from2009(IMF,2011).For2011,thesefiguresmayexhibitslowgrowthandsignsofrecovery,howeverthenation’seconomystillhasalongroadahead.

IndustryEconomy

Bothglobalandnationaleconomyhashaditseffectontheadhesiveandsealantindustry.In2009,globalconsumptionofadhesivesandsealantswasonly16.6billionpounds(Kusumgar,2011).Theadhesivemarketwasworth$20.6billionandthesealantmarketwasworth$8.5billion(Walsh,2010).Atthistime,theAsian‐Pacificregionwasthelargestconsumerofadhesiveandsealantsachieving40%ofvolumeandapproximately34%ofthesalesdollars(Kusumgar,2011).Europeontheotherhandwasthesecond‐largestregionalconsumerwith30%ofvolumeandapproximately32%ofsales(Kusumgar,2011).NorthAmericafollowedinthirdwith24%ofvolumeandapproximately27%ofsalesdollars.

ThesefigurestranslatedintoavolumedecreasesforNorthAmericaof8%(Walsh,2010).“Adecreaseofconsumptionandindustrialproductioninadhesiveandsealantsby5%and3%,respectively(Kusumgar,2011).NorthAmericanconsumptionlevelsofadhesiveshaddecreasedsixbillionpoundsin2009,“adeclineof7%compoundannualgrowthratesinceitspeakin2007”whereasthe“sealantsindustrysimultaneouslybottomedatslightlybelowonebillionpounds,amorepronounceddeclineof16%compoundannualgrowthratesinceitspeakin2006”(Murad,2010).DemandinEuropealsodecreased8%,whereasdemandinChina,actuallyincreased6%inthefaceofweakenedexportdemandsformanufacturingoutputlevels(Kusumgar,2011).

By2010,globaladhesivesandsealantsmarketwasupabout3%fromtheyearbefore,valuedatapproximately$30‐31billion(Walsh,2010).However,thesefigureswerestillbelowits“pre‐crisispeak”(Walsh,2010).Demandisstillbehindthatofpre‐2007figures,duetoissuesthathavesloweddowntheindustry(Nick,2010).Theseissuesinclude:

1. Formulatorsandrawmaterialsuppliersstretchingexistinginventory;

2. Reduceddemandandsupplyworldwide;

3. Reductioninvalueofthedollar,butnomarketforexports;


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4. Severelyrestrictedcredit,makingitdifficulttoobtainloansforexpansionofdailyoperations;

5. Highunemployment,risingsocialcosts;

6. Reducedtaxrevenues,leadingtoreducedgovernmentservices;

7. Rapidincreasesintaxestocovershortfalls;anda

8. Severelydepressedbuildingmarket(Nick,2010).

Nonetheless,adhesivesandsealantshaveexperienced“growthinbothvolumeanddollarsalesduringthe[current]year”duetoinnovativenewtechnologiesandmarketpenetrationsintonewenduserapplicationareasandexpectscontinuedgrowth”(GlobalMarketfor,2011).“Mostmarketsareforecastedtogrow,withemphasisonend‐usecategoriesincludingpackaging,building,construction,andfootwear,whiletransportationwillhaveslowergrowth”(Pierce,2011).AdhesiveandSealantCouncil’sNorthAmericanMarketReportestimatesthatbytheendof2013,totalglobaladhesiveandsealantsaleswillreach$40.5billioninsaleswitha3.3%growthrate,whereastheNorthAmericanadhesiveandsealantsmarketwillcomprisesof$11.1billionwitha2.2%growthrate(Pierce,2011).

RisktotheCompany

JA’smaincustomerbaseisintheNorthAmericanregionsofU.S.,Canada,MexicoandtheCaribbeanIslandsandtheimplicationsoftheeconomyshiftingtowardsChinesecompetitorsisanincreasedriskthatmustbetakenintoconsiderationofthisvaluation.WitheconomicrecoveryintheU.S.remaininguncertain,thenextthreesectionsofthisreport,willdiscussfactorsthatcouldalsoimposethreatstoJAprofits:

Sloweddemand,

Capacityutilization,and

Rawmaterialsandsupplies.

SlowedDemand

Consumerbehaviordictatesdemandandcurrentmarketconditionshavecausedconsumerstobehavemorecautiouslythaneverbefore.“Consumersaccountfor70%ofeconomicactivityintheU.S.”andwiththeriseinunemploymentrates,financialmarketconcerns,andtheeffectsofthesubprimeandrealestatecrisisstillloomingintheheartsofindividuals,demandhasstalledasconsumerconfidencedampens(Murad,2010).Furthermore,theFederalReserveestimatesthat“unemploymentwillnotmovelowerthan8.0%through2013”(Murad,2011).


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CapacityUtilization

Capacityutilizationcanbedefinedastherelationshipbetweenactualoutputandpotentialoutputwhencompanyassetsarefullyutilized.Whenthereisadeclineinmanufacturingoutputsthiscansignificantlyhurtanindustry.“Duringthedownturn,theFederalReserveestimatedcapacityutilizationdroppedtohistoricallylowlevelsof65%,causingstructuralchangestocapacitiesinmanyindustries.Currentcapacityutilization[oftheadhesiveandsealantindustry]isoperatingnear75%,yetthisisstillwellbelowthepre‐recessionlevelsof83‐85%”(Murad,2011).Additionally,withotherend‐userindustriessuchasautomotivemanufacturing,thatsignificantlyinfluenceadhesiveandsealantsatcapacityutilizationratesofapproximately50%,thisdisplaysdownbeatinthesupplychain(Murad,2010).

RawMaterial&SupplyShortage

Pricesofadhesiveandsealantrawmaterialinputshaverisendrasticallyaswellasfacedastringofsupplyoutages.Beginninginlate2009,tightsuppliesandspikesinrawmaterialpriceshaveincreasedcostsformanufacturerswithsomerawmaterialandsupplypricesskyrocketingupto90%in2010andothersincreasing5%eachquarterin2011(Extance,2011).Additionally,“withmostadhesiverawmaterialsnowrelativelyscarceandmanyrawmaterialelementsonallocation,it'ssupplythat'sdrivingpricesmorethanunderlyingfeedstockcost”(Extance,2011).Figure2onpage16depictsaflowchartofthecomplexsupplychainfeedstockthatisrequiredinordertocreatethecompoundsnecessaryformakingadhesiveandsealantsformanufacturersintheindustry(ChemQuest,2011).

Conclusion

JA’smaincustomerbaseisintheNorthAmericanregion.EightypercentoftheCompany’ssalesareconductedintheU.S.withtheremainingtwentypercentfromCanada,Mexico,andtheCaribbeanIslands.TheslowgrowthanddecreasesindemandandoutputlevelsintheNorthAmericaneconomyplustheshifttowardsChinesecompetitorsisasignificantriskfortheCompany.Additionally,increasedcostsofrawmaterialsandthetighteningofsuppliesmustalsobetakenintoconsiderationinthisvaluation


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Figure2:AdhesivesandSealantsIndustrySupplyChain

INDUSTRYANALYSIS

Thefollowingsectionswillassessindustryattractivenessandlong‐runprofitabilityoftheadhesiveandsealantmanufacturingindustrybyapplyingMichaelPorter’sFive‐ForcesModel.Thefollowingfiveforceswillbeexaminedinseparatesubsectionswitheachcompetitiveforceratednumericallyfromlow(1),moderate(2)tohigh(3)inordertoevaluatethecurrentstateoftheindustry:

Threatofnewentrants;

Bargainingpowerofbuyers;

Bargainingpowerofsuppliers;

Threatofsubstituteproductsorservices;and

Intensityofcompetitiverivalry.


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ThreatofNewEntrants–Moderate(2Rating)

Profitableindustrieswillalwaysattractnewcompetitorsthatareinterestedtakinginashareofprofits.Thistypeofcompetitionposesapotentialthreattoexistingcompaniesalreadyoperatingwithintheindustry.Currently,theeconomyisataslowdownandoperatingatdecreasedoutputandconsumptionlevels.NewentrantsintotheadhesiveandsealantindustrycansignificantlydetractfromJA’sprofits.Thisisbecausewhencompaniesenterintoamarketofexistingcompetitionwhereoutputisnotatoptimallevels,fewerprofitscanbecollected.Additionallyanothermajorbarriertoentryisincreasedinternationalenvironmentalandgovernmentalregulatoryrequirementswithinanindustry.

Regulatoryrequirementscanbecostlyandoccasionallyifbusinessesdonotabidebythem,itcanmeanfinesortheendofoperations.ForJA’sNorthAmericancompetitorsthisisalargebarriertoentryduetoincreasedregulationsintheU.S.tomeetemissionandcleanairrequirementssetbytheEnvironmentalProtectionAgency(EPA).In2009,theEPAcalledforlowVolatileOrganicCompounds(VOC)inadhesiveandsealantproductsinthethirteenNortheastandMid‐AtlanticstatesknownastheOTCorOzoneTransportCommission(VOCRegulations,2009).Thephase‐inperiodallowedcompaniestoadjusttotheserequirementsfrom2009through2011.Manufacturersandimportersthatdonotabidebytheseenvironmentalandgovernmentregulationsusuallycannotoperatewithintheindustryandthiscreatesabarriertoentry.

ForJA,thethreatofnewentrantsis“moderate”andwillberatedas2.0.Thisratingisbasedonthehighbarriertoentryexpectedfromincreasedregulationaswellastheadhesiveandsealantindustrycurrentlynotoperatingatfullcapacityutilizationandthenegativeeffectsnewcompetitionwouldhaveonprofitsiftheyweretoenterthemarketplace.

BargainingPowerofBuyers–High(3Rating)

Thebargainingpowerofbuyersinfluencesthecompetitivenessandprofitsofbusinesseswithinanindustry.Buyergroupsincludeestablishmentsintheautomotive,packaging,aircraft,electronics,durableconsumergoodsandmetalsectors;aswellasformaintenance,repair,andoverhaul,home,schoolandofficeapplicationsbycraftsmen,tradeprofessionalsandindividualconsumers.End‐usesinclude,butarenotlimitedto:packaging,residentialandcommercialconstruction,woodworking,assemblyandmanufacturingofconsumergoods,transportation,industrial,medical,footwearanddo‐it‐yourselfprojects(Pierce,2011).Thisprovidesahighconcentrationofbuyerstoahighconcentrationofsellers,whichinturnincreasesthebuyer’sbargainingpower.Consumerdemandsisalsoanimportantaspectofbuyerbargainingpowerandwithdecreased


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demand,thiscanincreasethestrengthofbuyersinthemarket.Additionally,manufacturersofadhesivesandsealantsalsohaveextensiveknowledgeontheformulationofcompoundsandabilitytodoso.Thisaspectofformulationknowledgecreatesacompetitiveadvantageforcompaniesintheadhesiveandsealantmanufacturingindustryandthusalsodrivesdownthepowerofbuyers.

ForJA,thebargainingpowerofbuyerswillberated“high”as3.0.Thereasonforthisratingisduetothelackofconsumerdemandatthemomentaswellastheloweringofprofitpotentialfromtotheimmenseconcentrationofbuyerstoalargenumberofsellerseventhoughsellerspossessextensiveadhesiveandsealantformulationknowledgeforcontributetocompetitiveadvantage.

BargainingPowerofSuppliers–High(3Rating)

Themajorityofcompaniesoperatingwithintheadhesiveandsealantindustrygenerallyavoidsolesourcesupplierarrangementsforrawmaterials.Thisisbecauseitleavesthemanufacturerstheabilitytoattainthebestsupplyarrangements.However,despitethenumerousamountsofsuppliers,theshortagesanddemandinrawmaterialsfromthesesuppliershasincreasedthecompetitionofbusinesseswithintheadhesiveandsealantindustry.Additionally,theserawmaterialcostsdriveupthecostsforthesupplierwhichinturnthemanufacturershavetotakeonthemselves;thus,drivingupthecostofadhesiveandsealantproducts.

ForJA,thebargainingpowerofsuppliersis“high”andwillberated3.0.ThisisduetotherelativelyscarceandmanyrawmaterialelementsthatdrivesuppricesandcostsfortheCompany.

AvailabilityofSubstitutes–Low(1rating)

Substituteproductsincludescrews,nailsandfastenersaswellassealingmethodssuchassoldering.Thoughtheavailabilityoftheseadhesiveandsealantalternativesareabundant,thebenefitsofadhesiveandsealantproductsareevenmoreplentiful.Forinstance,withtheemerging“green”sectorsandnationspushingforcleanerandmoresustainabletechnologies,thesesubstituteproductshavenotbeenhavingthesamecapabilitiesofthenewandinnovativeadhesivesandsealantsonthemarket.Inaddition,thetechnologyappliedbyanadhesiveandsealantcomparedtoasimplescrewornaildoesnothavethesametypesofbondingandadheringqualityofanadhesiveorsealant.Furthermore,theapplicationofuseintheconstructionmarkethasincreasedastheseconsumersarelookingformoresustainableusesforcreatingbondsandsealingtoovercomeproblemsofcorrosion,weight,instability,increasedstresscreatedbytravellingspeedsandweather.


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ForJA,thethreatofsubstituteproductsis“low”andwillberatedas2.0.Thereasonforthisratingisbecauseeventhoughthecostsofswitchingfromanadhesiveandsealanttofasteners,suchasnailsandscrewsareverylowthesealternativesareinferiortotheproductsprovidedbytheadhesiveandsealantindustry.

CompetitiveRivalry–High(3rating)

Onlyahandfulofcompaniesdominatetheadhesiveandsealantsmarketyetthemarketissaturatedwithmanysmallercompetitors.Thismakestheadhesiveandsealantindustryveryfragmentedandintense.Intheadhesiveandsealantindustry,thetoptenplayersholda48%shareinthemarket(Murad,2011).Also,accordingtoindustrydatasuppliedbyIntegraReport,theadhesiveandsealantindustrycompriseofapproximately250establishments(2011).Duetotheamountofcompetitorsandweakeneddemand,companiesarenotexperiencingtheprofitlevelsofpre‐2007levels.Highrawmaterialcostsandtheslowdownindemandhavecausedcompaniestoregresstooldcompetitivestrategiesofpricecuttingaswellasconsolidation,nichemarketingandglobalexpansion.Howevernewandinnovativeusesforthesealantandadhesivemarketgivecompaniescompetitiveadvantages.Forinstance,declininginfrastructuremayleadtoimprovementfortheadhesivesandsealantsindustry.Cheapermoresustainablebondingmethodshavebeensoughtoutdueits“greener”properties.

ForJA,competitiverivalryishighandwillberated3.0.Thisisduetonumerouscompetitors,slowgrowthintheindustryaswellasbrandloyaltyandlowswitchingbuyerswitchingcostsduetoprice‐cuttingstrategies.

Conclusion

UsingMichaelPorter’sFive‐ForcesModeltoassesstheadhesiveindustriesattractivenessandlong‐runprofitabilitythefollowingfiveforcesreceivedthefollowingratings:


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Table1:SummaryofPorterFiveForcesAnalysis

Competitive Forces in the Adhesive and Sealant Industry Risk Level

Threat of New Entrants Moderate; 2.0

Bargaining Power of Buyers High; 3.0

Bargaining power of Suppliers High; 3.0

Threat of Substitute Products Low; 1.0

Intensity of Competitive Rivalry High; 3.0

Overall Conclusion Moderate to High; 2.41

Withtheindustryriskat2.4,thisisamoderatelyhighlevel,whichcandetractfromJAprofitsfornumerousreasonsandmustbetakenintoconsiderationinthevaluationoftheCompany.

FINANCIALSTATEMENTANALYSIS

WehavesummarizedtheCompany’s2007–2011historicalfinancialstatementsinExhibit1(seepage40).Additionally,wehavecomputedselectCompanyfinancialratiosforthesameyears.TheseratiosareshowninExhibit2(seepage41).

InordertoanalyzethefinancialstatementsofJohnsonAdhesivesusingafairmarketvaluestandard,wefounditnecessarytoadjustcertainaccountsintheincomestatementtobetterrepresentthestructureahypotheticalbuyerwouldanticipateformingafterpurchaseofacontrollinginterestinthecompany.WereclassifiedamountsfromOfficers’CompensationandOperatingExpenses.WeprovidedetailsofthesenormalizationadjustmentsinAppendix2,inExhibit3throughExhibit6.Webasedourfinancialanalysisonthesenormalizedfinancialstatements.

1Thisnumberwasbaseduponaveragingthetotalrisklevelofcompetitiveforcesintheadhesiveandsealantindustry


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Table2:JohnsonAdhesivesNormalizedIncomeStatements($million)

YearendedDec31 2007 2008 2009 2010 2011

Revenues $33.02 $37.94 $40.85 $48.59 $50.29CostofGoodsSold 22.63 25.25 28.45 33.95 34.80GrossProfit $10.39 $12.69 $12.40 $14.64 $15.49NormalizedOperatingExpenses 2.31 2.72 2.34 4.58 4.95NormalizedOfficers'Compensation 1.09 1.90 2.40 1.73 2.26OperatingEBITDA $6.99 $8.07 $7.66 $8.33 $8.28DepreciationandAmortization 0.07 0.05 0.10 0.22 0.31OperatingIncome(EBIT) $6.92 $8.02 $7.56 $8.11 $7.97Miscellaneous(Income) (0.12) (0.18) (0.19) (0.25) (0.30)InterestExpense 0.59 0.47 0.55 0.74 0.84Pre‐taxIncome $6.45 $7.73 $7.20 $7.62 $7.43Less:IncomeTaxes* 0.00 0.00 0.00 0.00 0.00NormalizedNetIncome $6.45 $7.73 $7.20 $7.62 $7.43

Overall,ourfinancialanalysisrevealsacompanywithdecreasingliquidityandaverageleveragewhencomparedtosimilarlysizedcompaniesinthesameindustry.However,JohnsonAdhesives’returnonequityishigherthantheindustryaverage,andothermeasuresofprofitabilityarehigh.

Wefurtherdiscussthefinancialstatementsandratiosbelow.

IncomeStatementAnalysis

WeanalyzetheJohnsonAdhesivesnormalizedincomestatementsbelow.

Revenues

JohnsonAdhesiveshadrevenuesof$50.29millionforthefiscalyearendedDecember31,2011.Thisrepresentedanincreaseof52%over2007revenuesof$33.02million,whichresultsinacompoundannualgrowthrate(CAGR)of11.1%overtheyearsreviewed.Year‐to‐yearrevenuegrowthvariedfromalowof3.5%in2011toahighof18.9%in2010.

Comparatively,theindustryyear‐to‐yeargrowthinrevenuesdeclinedovertheyearsreviewedfromahighof11.0%in2008to2.6%in2010.Industryrevenuesshrankby6.6%in2011.RevenuesacrosstheindustryhadCAGRof3.1%from2007to2011.

Despitethevolatilityofitsnetrevenues,JohnsonAdhesivesgeneratedahigherrateofgrowththansimilarlysizedcompaniesintheindustryineachyearandacrosstheentireperiodanalyzed.


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GrossProfit

Whilethetotaldollaramountofthecompany’sgrossmargingenerallyincreasedfromyear‐to‐year,thegrossprofitannualgrowthratevarieddramaticallyacrosstheyearsreviewed.Thehighestannualincreaseof22.1%occurredin2008,whilethenextyearsawa2.3%reductioningrossprofits.Overall,JohnsonAdhesives’CAGRforgrossprofitof10.5%wassmallerthanthatofthecompany’snetrevenues.

Theaveragechangeingrossmarginforsimilarlysizedcompaniesintheindustrymirroredthechangesinthosecompany’snetrevenues.Growthofgrossmarginslowedacrossallyearsandgrossprofitsshrankin2011.TheindustryhadaCAGRof3.1%.

RegardlessofJohnsonAdhesivesvolatilityinitsgrossprofit,itsCAGRwasoverthreetimeshigherthanthatofothersimilarlysizedcompaniesintheindustry.

OperatingExpenses

Inordertomeetthestandardoffairmarketvalue,weadjustedoperatingexpensestoremovecertainexpensesthatahypotheticalbuyerlikelywouldnotchooseincurintheoperationofthebusiness.Wealsoadjustedthisaccountin2009inordertoremoveaone‐timechargeforalegalsettlementthecompanypaidinthatyear.

Afterournormalizationadjustments,ouranalysisofJohnsonAdhesives’operatingexpensesrevealedlargeswingsinyear‐to‐yeargrowth.Annualoperatingexpensesnearlydoubledin2010afterfalling14.0%in2009.TheCompany’sCAGRforoperatingexpenseswas21.0%.

Overtheyearsreviewed,operatingexpensesforsimilarcompaniesintheindustryhadaCAGRof3.4%.Year‐to‐yearchangesinoperatingexpensesmirroredthechangesinrevenuesandgrossprofitsforthesecompanies,endingwithlowerexpensesin2011than2010.

OperatingexpenseswasanotherareawhereJohnsonAdhesivesshowedsteadilyincreasingspecificamountsbuthadlargeswingsintheyear‐to‐yearchanges.Theseexpensesgrewataratethatwasoversixtimesfasterthansimilarcompaniesintheindustry.

Officers’Compensation

Wejudgedthereportedlevelofficers’compensationtobeinexcessofwhatahypotheticalwillingbuyer,undertheInternalRevenueServiceRevenueRuling59‐60’sdefinitionoffairmarket,wouldofferascompensation.Wereviewedwageand


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compensationreportsfromtheUnitedStatesBureauofLaborStatistics(BLS).WefocusedonCEOlevelwagesforbusinesseswithNorthAmericanIndustryClassificationSystem(NAICS)code325500‐Paint,Coating,andAdhesiveManufacturingfortheyearsunderreview.

Tocalculateareasonablesalaryfortheofficers’positions,westartedwiththemeansalaryreportedintheBLSwagereportforagivenyearthenaddedonestandarddeviationofthe2007‐2011amountstomakethesalarycompetitivebutreasonablebybringingthesalaryabovethemeanfortheindustry.Thisamountwasroundedtothenearest$10,000.Weusedthehigherofeitherthisroundedamountortheamountthatweusedfortheprioryear’ssalary.Wedidthistopreventadeclineinsalaryovertheprioryearwhichwouldhaveoccurredin2010duetotheindustryaverageCEOsalarydroppinginthatyear’sBLSreport.UsingthesevaluesandinformationprovidedbySusanJohnson,wereclassifiedofficers’salariesinexcessofthecalculatedwagefortheyearbyreducingtheexpensechargedintheofficers’compensationaccount.WedemonstratethesecalculationsinExhibit3throughExhibit6onpages42‐44.

Pre‐TaxIncome

JohnsonAdhesivesincomebeforetaxesgrewatacompoundannualrateof3.6%overtheyearswereviewed.ThisgrowthrateissmallerthantheCompany’sgrowthinnetrevenues.Actualdollarvaluesfluctuatedfromyear‐to‐yearwithtwoyearsofincreasingpre‐taxincomeeachfollowedbyayearofsmallerincomebeforetaxes.TheCompany’s2011incomebeforetaxeswas$7.43million.

Thecompoundannualgrowthrateforincomebeforetaxeswasamodest3.1%fortheindustryovertheyearsanalyzed.Weagainfoundthatthetrendwasaslowinggrowthrateuntil2011,whentheindustry’spre‐taxincomeshrankincomparisonto2010.

JAshowedahigherCAGRforpre‐taxincomethandidtheindustryfortheperiodreviewed.However,theannualgrowthforJohnsonAdhesiveswasvolatilewithperiodsofgrowingincomebeforetaxesandyearsofshrinkingpre‐taxincome.

NetIncome

JohnsonAdhesiveswasorganizedasapass‐throughentity,specificallyanScorporation,duringtheyearsreviewed.Assuch,pre‐taxincomeandnetincomewereequalineachyear.

BalanceSheetAnalysis

WeanalyzetheJohnsonAdhesivesnormalizedbalancesheetsbelow.


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CurrentAssets

TheCompany’scurrentassetstotaled$11.69millionattheendoffiscalyear2011.Currentassetsgrewatacompoundannualrateof6.3%sincethe2007balancesheetdate.However,thegrowthwasunsteadywithalargepeakin2009,followedbyareductionandendingessentiallyflatin2011.Currentassetsasapercentageoftotalassetsdeclinedfrom55.3%to40.7%overtheyearsreviewed.

Incontrast,theindustrytrendincurrentassetswasslowinggrowththrough2010andareductioninendingcurrentassetsin2011.IndustryCAGRforcurrentassetswas2.3%overthistimeframe.Currentassetsasapercentageoftotalassetsremainedessentiallyunchangednear70%throughoutthetimeperiodexamined.

Whilesteadilyincreasinginvalue,JohnsonAdhesives’ratioofcurrenttototalassetsdeclinedfrom2007–2011whiletheindustryshowednosuchchangeinstructuringassets.Furthermore,JA’scurrenttototalassetsratiowassignificantlylowerthantheindustry’sratioineachyear.

TotalAssets

TotalassetsforJohnsonAdhesivesgrewatacompoundannualrateof14.7%overtheyearsreviewed.Muchofthisgrowthoccurredin2009withsignificantincreasesincurrent,fixed,andotherassets,andasecond,butsmaller,increasein2011.JAended2011withtotalassetsvaluedat$28.72million.

Theindustrysawslowergrowthinassetsacrossthesameperiod,withaCAGRof3.2%.Growthinindustrytotalassetsslowedacrosstheyearsweanalyzed,ending20117.2%lowerthanattheendof2010.

JohnsonAdhesivesexperiencedstrongergrowthintotalassetsthandiditsindustrypeers.Whiletheindustryexperiencedatimeofslowingandeventuallynegativegrowth,theCompany’sgrowthintotalassetswaspredominantlypositivewithoneyearofessentiallynochange.

CurrentLiabilities

JohnsonAdhesivesended2011with$11.50millionincurrentliabilities.Thisrepresenteda23.5%CAGRincurrentliabilitiessinceDecember31,2007.AswithotherJAaccountsweanalyzed,currentliabilitiesfluctuatedthroughouttheperiodreviewedinapatternofoneyearofreductionfollowedbyayearwithalargeincreaseincurrentliabilities.Currentliabilitiesasapercentageoftotalassetsrangedfromalowof23.9%toahighof40.1%duringthefiveyearsweexamined.Theratiofluctuatedeachyear.


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Overthesameperiod,theindustrysawaCAGRincurrentliabilitiesof5.8%.Again,thetrendwasoneofslowinggrowththrough2010andshrinkagein2011.Theindustryratioofcurrentliabilitiestototalassetsgrewslightlyeachyearfrom34.4%in2007to38.1%in2011.

TotalLiabilities

JohnsonAdhesives’totalliabilitiesgrewfrom$9.90milliononDecember31,2007to$17.33milliononDecember31,2011.ThisisaCAGRof15.0%acrosstheseyears;however,thechangeintotalliabilitieswasuneventhroughouttheperiod.Afteraslightdeclinein2008,liabilitiesjumpedby80%in2009.JAheldtotalliabilitiesbetweenone‐halftotwo‐thirdsoftotalassetsacrosstheperiod.

IndustryCAGRfortotalliabilitieswas5.3%acrossthefiveyearswereviewed.Thegrowthintotalliabilitiesshowedadownwardtrendbeforebecomingnegativein2011.Thevalueoftheindustry’stotalliabilitiesremainednear50%ofthevalueofitstotalassets.

Stockholders’Equity

JohnsonAdhesives’bookvalueofstockholders’equitygrewfrom$6.69millionin2007to$11.39millionin2011.Thisrepresents40%ofthevalueoftotalassetsineachyear.However,thevalueasapercentageoftotalassetsfluctuatedduringtheinterveningyearswithalowof33.7%andahighof49.5%.

Industryequityasapercentageofitstotalassetsdeclinedslightlyfrom51%in2007to47%in2011.

RatioAnalysis

WeconductedananalysisofvariousfinancialratiostoexaminethefinancialpositionofJohnsonAdhesives.Thevariousratiosareclassifiedanddescribedbelow.

LiquidityRatios

JohnsonAdhesives’workingcapitalhasfallensubstantiallysince2007witha2011balanceof$0.18million.Thecurrentratioreflectsthiswithadeclineto1.02fromahighof2.17in2008.

Thecurrentratiofortheindustryhasfallenoverthesametimeperiod,butnotasdramatically.The2011industrycurrentratiowas1.81,downfromahighof2.07in2007.

ThedecliningtrendinJohnsonAdhesives’currentratiocausesconcernsaboutadecreasingliquiditylevelforthecompany.Someofthisdeclinemaybearesultofan


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increaseinfixedassetsin2011whichcouldindicateasubstantialcashcapitalexpenditurethatmaynotbearecurringitem.Wewerenotprovidedspecificdetailstoinvestigatethisfurther.

ProfitabilityRatios

JohnsonAdhesivesgrossprofitmarginwassteadyacrossthefiveyearsanalyzed,remainingslightlyabove30%.Thegrossprofitmarginwas30.8%in2011.TheCompany’soperatingprofitmarginhastrendeddownwardslightlyfrom21%to16%whileitsnetprofitmarginhasdeclinedfrom19.5%in2007to14.8%in2011.Thereturnonassetsdeclinedfrom48%in2008to30%in2011.

Similarcompaniesintheindustryhaveshownstableprofitabilityratios.Thegrossprofitmarginfortheindustryhasremainedat28.5%,whileitsoperatingprofitmargindeclinedslightlyfrom3.5%to3.1%.However,theindustryhasshownaconsistentnetprofitmarginof1.4%acrossthefiveyearsweanalyzed.Thereturnonassetsfortheindustryheldstableat4%.

Despitedeclinesinitsoperatingandnetprofitmargins,JohnsonAdhesivesshowsconsistentlyhigherprofitabilityratiosthansimilarlysizedcompaniesintheindustry.

LeverageRatios

JohnsonAdhesives’currentliabilitiestoequityratiofluctuatedacrosstheyearswereviewedwithahighof1.04andalowof0.48.The2011ratiowas1.01,andthemeanvaluewas0.74.ThedebttoequityratiofortheCompanyvariedfromahighof1.97toalowof1.02.Thisratioended2011at1.52,slightlyabovethemeanof1.44over2007–2011.Finally,JA’sinterestcoveragedeclinedfromahighof17.07in2008to9.49in2011.

Industryleverageratiosremainedstablefrom2007–2011.For2011,itscurrentliabilitiestoequityratiowas0.81,itsdebttoequityratiowas1.12,itstimesinterestearnedwas2.47,anditsinterestcoveragewas2.47.

JohnsonAdhesivesleverageratiosindicatedacompanythathadcurrentandtotaldebtlevelsthatwereclosetoindustryaverageswhileitsinterestcoverageratiosweremuchhigherthansimilarcompaniesintheindustry.

APPROACHESTOVALUE

Thethreebasicapproachestovaluationthatmustbeconsideredare:

1. TheIncomeApproach,


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2. TheMarketApproach,and

3. TheAssetBasedApproach.

Withineachoftheseapproachesexistanumberofacceptablevaluationmethodsthatanappraisermayuse.Appraisalstandardssuggestthatthevaluationanalysttestasmanymethodsasmaybeapplicabletothefactsandcircumstancesoftheengagement.Theappraiserthenusesprofessionaljudgmentindetermininghowthesevaluesarereconciledtodeliverafinalestimateofvalue.

IncomeApproach

Theincomeapproachisorientedontheincomestreamsofthebusinessratherthanthebusinessassetsorthemarketforsimilarenterprises.Thisapproachassumesthataninvestorcouldinvestinasimilarpropertyasthatofthesubjectbusiness.

Usingtheincomeapproach,estimatesthevalueofabusinessasthepresentvalueofthefuturebenefitstreamsavailabletotheowners.Thisisdonebycapitalizingasingleperiodincomestreamordiscountingaseriesofprojectedfutureincomestreams.

Asprojectingfutureincomestreamsisaspeculativeprocess,generallyananalystwillusehistoricdatatoderiveastartingpointinmanyoftheincomeapproachmethods.Thisconceptispremisedontheconventionthathistoricaldatacanbeusedtoaccuratelypredictfutureinformation.

MarketApproach

Themarketapproachisconsideredafundamentalapproachtovaluationasfairmarketvalueisdeterminedbythemarket.Usingthemarketapproach,thevaluationanalystlocatesguidelinecompaniestradedonapublicstockexchange.Theguidelinecompaniesshouldbeinthesameorsimilarindustryastheappraisalsubject.Theappraiserassessesthepricingmultiplesoftheguidelinecompaniesandappliesthesemultiplestoappropriatefinancialinformationinthesubjectcompanytoderiveanestimateofvalue.

AssetApproach

Theassetapproachisbasedonvaluingthesubjectcompany’sassets.Assuch,itisnotamarket‐orientedapproach.Eachcomponentofabusinessisvaluedseparately,andtheindividualvaluesaresummedtoarriveatthetotalvalueofthecompany.Theappraiserderivesthevalueofanitembyestimatingthecostofduplicatingorreplacingtheindividualelementsofthebusinessproperty.


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SummaryoftheValuationApproachesandMethodsUsed

Inapproachingthisengagement,wereviewedthedata,bothhistoriccompanydataandprojectedeconomicdata,inourconsiderationofeachofthethreebasicapproachestovaluationdiscussedabove.Basedontheavailableinformation,wefeelthatthecapitalizationofbenefitsmethodisanappropriateincomeapproachtothevaluationofJohnsonAdhesives,andamarketapproachutilizingfourpricingmultiplesfromfivesimilarcompaniesisreasonableinthisengagement.Wedidnotfeelthatenoughinformationwasavailabletoaccuratelyapplytheassetapproach.Wedescribeouranalysisusingtheseselectedapproachesbelow.

INCOMEAPPROACH

CapitalizationofBenefitsMethod

Acapitalizationrateisarequiredrateofreturnonanincomegeneratingassetafterremovinganticipatedgrowth(Trugman,p.384).Thisrateismarketbasedandincorporatessystematicandunsystematicriskforthebenefitstreamgeneratedbytheasset.

Underthecapitalizationofbenefitsmethod,thevalueofacompanyisderivedbyapplyinganappropriatecapitalizationratetoabenefitstreamgeneratedbythecompany.Thiscapitalizationrateincorporatestherisktotheinvestoroftheparticularbenefitstream.Onceacapitalizationrateisdetermined,astraightforwardmathematicalformulaisappliedtothebenefitstream.Ifthebenefitstreamhasastabilizedgrowthrate,theformulausedisasfollows:

PV=PresentvalueE=Benefitstreamexpectedinnextperiodk=Discountrateg=Growthratefromtimet=0totimet=infinity

Acapitalizationrateisdefinedasadiscountratelessagrowthrate.Giventhisdefinition,thedenominatorintheabovepresentvalueequationequalsthecapitalizationratefortheselectedbenefitstream.Withthisinmind,wecanrearrangetheequationtothefollowing:


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Inordertodetermineanappropriatebenefitstreamtouseinourcalculations,weanalyzedJohnsonAdhesives’grossprofits,EBITDA,EBIT,andpre‐taxincomeasreportedinthehistoricalfinancialstatementsafterweappliednormalizingadjustments.TheresultsareprovidedinTable3below.

Table3:ComparisonofJohnsonAdhesives'BenefitStreams($millions)YearendedDec.31 Revenues GrossProfit EBITDA EBIT Pre‐tax

Income2007 33.02 10.39 6.99 6.92 6.452008 37.94 12.69 8.07 8.02 7.732009 40.85 12.40 7.66 7.56 7.202010 48.59 14.64 8.33 8.11 7.622011 50.29 15.49 8.28 7.97 7.43Mean 40.10 12.53 7.76 7.65 7.25

Std.Dev. 6.49 1.79 0.50 0.44 0.46COV 0.15 0.14 0.06 0.06 0.06

EBITandpre‐taxincomeappeartobethemoststableofthebenefitstreamsweanalyzed.Bothincomestreamshaveacoefficientofvarianceof0.06andastandarddeviationnear0.45.Thisindicatesalowlevelofvariationandamountsthataretightlyclusteredaroundthemeanofthefiveyearsofinformation.

Theriskassociatedwithabenefitstreamdecreasesasmoreinformationaboutthebenefitbecomesavailable.Aspre‐taxincomeincorporatesmoreinformationabouttheincomeoftheCompany,wehaveselectedpre‐taxincometouseforthevaluecalculation.

AnanalysisofJohnsonAdhesives’historicalincomestatementsshowsarepeatingpatternofanincreaseinoneyearfollowedbyadeclineinthenext.Thispatterntrendsupwardsatacompoundgrowthrateof3.6%overthiscycleandovertheentirefiveyears.Forthisreason,webelievethatanaverageofthe2010and2011pre‐taxincomeisanappropriatevaluetouseasourproxyforfuturebenefits.Thisvalueis$7,526,000.

Usingthefiveyearcompoundgrowthrateof3.6%,wenextcalculatetheexpectedcashflowfromthisbenefitstreambyincreasingthe2010–2011averagepre‐taxincomebythegrowthrate.Thiscalculationyieldsanexpectedpre‐taxincomefor2012of$7,797,941.

Nextwemustcalculatetheappropriatediscountratetoapplytotheselectedbenefitstream.Forthis,wehaveselectedthemodifiedcapitalassetpricingmodel(MCAPM)thatisbasedonthecapitalassetpricingmodel(CAPM)developedbyWilliamSharpe.TheCAPMestimatesadiscountrateforahighlydiversifiedportfoliousingfactorsbasedonstockpricesforpubliccompanies.Asmostcloselyheldbusinessesarenotbroadlydiversified,


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investorsinsuchabusinessareexposedtoanunsystematicriskthatisspecifictotheindividualcompany.TheformulafortheMCAPMaddsthisrisktothediscountratederivedbyCAPM.TheequationfortheMACPMisshownbelow.

ke=Expectedrateofreturn(discountrateforequity)Rf=Riskfreerateofreturnβ=Systematicrisk(marketrisk)Rm–Rf=Equityriskpremiumα=Companyspecificunsystematicrisk

TheriskfreerateofreturninthismodelisusuallytakenfromU.S.Treasuryissuesonthedateofvaluation.ThespecificTreasuryissuethatananalystselectsisbasedontheexpectedtimehorizonforthevaluationtarget.Inthecaseofavaluationofacloselyheldcompanythatwillcontinuetoberunasagoingconcern,mostvaluationanalystsusetherateofreturnona20‐yearTreasurybondonthedateofvaluation.Inthiscase,therateforsuchabondonDecember31,2011was2.67%asreportedintheFederalReserveH.15report.

Theβ(beta)inthisfunctionisameasureofsystematicriskinherentinadiversifiedportfolio.Itisusedtoaccountforhowasubsetofinvestmentswillchangeinvalueasthewiderportfolio(e.g.theentiremarket)changesinvalue.SinceBigCorecentlysubmittedanoffertopurchaseJohnsonAdhesives,wehaveusedthebetacalculatedforBigCoinourcalculation.

Theequityriskpremium(ERP)isameasureoftherateofreturninexcessoftheriskfreeratethatinvestorsrequireinordertoinvestinanythingotherthanariskfreeasset.TheERPisbasedonlong‐termhistoricaldataonratesofreturninamarket.SeveralsourcesprovideanERPforaparticularperiod.Inthiscase,weselectedthesupplysideERPof6.0%aspublishedintheIbbotsonSBBI2011ValuationYearbook.

Theα(alpha)intheequationrepresentsunsystematic,meaningcompanyspecific,riskinaninvestment.Thisrateisbasedonananalyst’sassessmentofmanyfactorsthataffecttheriskinherentinaspecificcompanyascomparedtoaguidelinecompany.Inthiscase,basedonourexperienceandjudgment,wehaveappliedacompanyspecificriskof20%.

ConclusionofValue–IncomeApproach

Applyingtheaboveinformation,wecalculateadiscountrateof35.63%.Removingtherateoflong‐termgrowthresultsinacapitalizationrateof32%whichweappliedtothe


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expected2012pre‐taxincome.Thisresultsinavalueof$24.4millionfor100%oftheJohnsonAdhesivesstock.

MARKETAPPROACH

GuidelinePublicCompanyAnalysis

SECEDGARSearch

FollowingRevenueruling59‐60,wereviewedthemarketpriceofstocksforactivelytradedcompaniesinthesameorsimilarindustryasJohnsonAdhesives.WesearchedtheEDGARdatabase(http://www.sec.gov/edgar/searchedgar/companysearch.html)maintainedbytheSecuritiesandExchangeCommissiontofindothercompaniesinthesameSICcodeasJA(SIC2891).Thissearchyieldedalistof15companies.

WenextreviewedthesecompaniesforsimilaritytoJohnsonAdhesivesbyreviewingeachcompany’s10‐KformfortheyearendedDecember31,2011tocomparethecompany’sbusinesslineandgeneralsizeofoperationstoJohnsonAdhesives.Thisnarrowedthelistofguidelinepubliccompaniestoasingleconsideration:H.B.FullerCompany,tradingasFULontheNewYorkStockExchange.

Wefurtherreviewedthiscompanyforappropriateness.Aswouldbeexpectedforapublicallytradedcompany,FULismuchlargerinitsoperationsthanJA.WhileJAhassalespredominantlyintheUnitedStateswithsomeextensionintotheothertwoNAFTAcountriesandtheCaribbeanIslands,FULhasglobaloperationsspanning40countriesinNorthAmerica,Europe,LatinAmerica,theAsiaPacificregion,India,theMiddleEast,andAfrica.IndustrialadhesivesdominatetheproductlineatFUL,whereasJApredominantlytargetsitsproductlinetoconsumerhomeimprovementretailoutlets.Wefeelthatrationalinvestorswouldnotpricethetwocompaniesinasimilarmannerbecauseofthesignificantdifferencesinsalesregions,products,andcustomers.Thesedifferencesresultindissimilarriskstoeachcompany’sbusiness.Therefore,FULisnotanappropriateguidelinecompanytouse.

CrainValDatabaseSearch

Next,searchingtheCrainValdatabase,wefoundfivepubliccompanieswebelievedweresimilarenoughtoJohnsonAdhesivestouseasguidelinecompanies.Wecalculatedfourpricemultiplesforthesecompaniesasseeninthetablebelow.


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Table4:GuidelineCompanyMedianPriceMultiplesMarketValueofInvestedCapitaltosales 0.54MarketValueofInvestedCapitaltoEBITDA 5.80MarketValueofInvestedCapitaltoEBIT 7.26MarketValueofEquitytoPre‐TaxIncome 6.72

WeappliedtheseratiostotheequivalentbenefitstreamsintheJohnsonAdhesivesnormalizedincomestatementfor2011.WeplacedtheseindividualcalculationsinExhibit20(seepage51).Usingthesepricingmultiples,thevaluationrangeforJohnsonAdhesivesis$27.2million‐$57.9millionasshownbelowinTable5.

Table5:IndustryPricingRatiosAppliedtoJAIncomePricingMultiple IndustryRatio JAAmount Value(100%)MVICtosales 0.54 $50,290,000 $27,156,600MVICtoEBITDA 5.80 8,284,000 48,047,200MVICtoEBIT 7.26 7,974,000 57,891,240MVICtopre‐taxincome 6.72 7,434,000 49,956,480

Next,wereviewedtheequivalentnormalizedfinancialratiosforJohnsonAdhesivestoassessforinconsistenciesandextremevariation.WefoundthatJA’sMVICtoSalesratiowasthemostconsistentacrossthefourwithacoefficientofvariationof0.05andastandarddeviationof0.02.TheotherthreemultiplesvariedmorethanMVICtoSales,buteachofthethreehadsimilarcoefficientsofvariationandstandarddeviationstoeachother.Weusedthisinformationtoweightthepricingforeachofthefourratiosinordertodetermineasinglevaluationforthemarketapproach.WeassignedahigherweightingtotheMVICtoSalesratio,andlowerbutequalweightingtotheotherthreeratiosasseeninExhibit20(seepage51)andpartiallyreproducedinTable6below.

Table6:WeightedAverageEstimationofValuefor55%ofJohnsonAdhesivesStockPricingMultiple Value(100%) Weighting Value(55%)MVICtosales $27,156,600 30% $8,146,980MVICtoEBITDA 48,047,200 23% 11,211,013MVICtoEBIT 57,891,240 23% 13,507,956MVICtopre‐taxincome 49,956,480 23% 11,656,512Weightedaveragevalueofstock $44,522,461Discountforlackofmarketability(DLOM) 20%Valueof100%ofJohnsonAdhesivesstock $35,617,969

ConclusionofValue–MarketApproach

Fromthis,weconcludethatthevalueofJohnsonAdhesivesusingthemarketapproachis$44.5millionpriortoanydiscountforlackofmarketability(DLOM).After


33

applyingtheDLOM(discussedbelow),ourfinalvaluationof100%oftheJohnsonAdhesivesstockusingthemarketapproachis$36.6million.

DISCOUNTFORLACKOFMARKETABILITY

BigCosubmittedanoffertobuyJohnsonAdhesivesoneyearpriortothewritingofthisreport.WefeelthatthisdemonstratesthatJAislargeenoughtobeconsideredaninvestmentbyapubliccompanyorprivateequityfirmifitcouldbepurchasedinitsentirety.However,afractionalinterestinthecompanyislessmarketable.

“Adiscountforlackofmarketability(DLOM)isusedtocompensateforthedifficultyofsellingsharesofstockthatarenottradedonastockexchangecomparedwiththosethatcanbetradedpublicly”(Trugman,2008,p.412).JohnsonAdhesivesisacloselyheldcompanythatisnottradedonanyexchange.Themarketpriceforsharesinapubliclytradedcompanyarepremisedinpartontheliquidityoftheinvestment.Sharesinsuchacompanyareeasilydisposedofbytheinvestor;however,thatisnotthecasewithownershipinterestinacloselyheldbusiness.Assuch,theapplicationofaDLOMisappropriateinthevaluationoftheCompany.

TheInternalRevenueServiceinRevenueRuling77‐287recognizedtheeffectivenessofrestrictedstockstudiesindetermininganappropriateDLOM.TheaverageDLOMfromthesestudiesrangesfrom25%‐40%.

Wefeelthatthesizepremiumforcompaniesintheinthe10thdecileoftheMorningstar/Ibbotsonreportreflectameasureofthelackofmarketabilityofthesesmallercompaniesduetoalowerlevelofdemandforthestocks.Assuch,wefeelthatanythepricederivedintheincomemethodvaluationreflectsthisbuilt‐inDLOM.Assuch,wehaveappliedadiscountforlackofmarketabilityof20%onlytothevaluederivedfromthemarketapproach.

RECONCILIATIONOFVALUATIONMETHODS

TodetermineouroverallvaluationofthefractionalownershipoftheJohnsonAdhesivesstock,wefirstaveragedthevaluesderivedfromtheincomeandmarketapproaches.Thisresultedinavalueof$30.4millionfor100%ofthecompanystock.

Afterderivingavalueof100%ofthecompany’sstock,wethenreducedthisoverallcompanyvaluetothe55%ownershipbeingappraised.Ouranalysisrevealsafairmarketvalueof$16.8millionforMr.Johnson’ssharesonDecember31,2011.


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REASONABLENESSTEST

Recognizingthatvaluationisnotanexactscience,wetestedourfinalconclusionofvalueusingthejustificationforpurchasetest.Tosimplifythecalculations,wetestthereasonablenessofourvaluationof100%oftheJohnsonAdhesivesstockagainstthepre‐taxincomestreamadjustedtoreflecttheCAGRforthisbenefitstreamoverthe2007‐2011normalizedhistoricalincomestatements.

Forthistest,weassumedthewillingpurchaserwouldfinance2/3ofthepurchaseprice,withtheremainderbeingpaidinasequity.WehaveassumedthattheScorporationelectionisnotavailableafterthepurchase,andappliedataxrateof34%whichwasthepublishedrateforcorporationswithapre‐taxincomeof$335,000‐$10,000,000in2011.Wehaveassumedaborrowingrateof5.25%(theprimerateasofthevaluationdateplus2%)overafive‐yearterm.ThecalculationstoderivecashflowandreturnondownpaymentafterdebtservicearebelowinTable7(repeatedinExhibit22onp.52).

Table7:JustificationofPurchaseTestofReasonableness Year1 Year2 Year3 Year4 Year5

Annualpayment $4,727,353 $4,727,353 $4,727,353 $4,727,353 $4,727,353Interest 1,067,130 874,969 672,718 459,850 235,806Principal $3,660,222 $3,852,384 $4,054,634 $4,267,502 $4,491,546CashFlow: Pre‐taxincome $7,702,616 $7,980,939 $7,980,939 $8,791,872 $9,183,824Interestexpense 1,067,130 874,969 672,718 459,850 235,806Taxableincome $6,635,486 $7,105,970 $7,308,220 $8,332,022 $8,948,017Taxexpense 2,256,065 2,416,030 2,484,795 2,832,888 3,042,326Netincome $4,379,421 $4,689,940 $4,823,425 $5,499,135 $5,905,692

Principalpayment 3,660,222 3,852,384 4,054,634 4,267,502 4,491,546Cashflow $719,198 $837,556 $768,791 $1,231,632 $1,414,145Returnondownpayment 7.08% 8.24% 7.56% 12.12% 13.91%

ThecalculationsinTable7showthatawillingbuyercouldpayourappraisedpriceforthecompanyandsatisfytheresultingdebtobligation.

FINALCONCLUSIONOFVALUE

WehaveperformedavaluationengagementinaccordancewithandasdefinedintheStatementofStandardsforValuationServicesNo.1(SVSS)oftheAmericanInstituteofCertifiedPublicAccountants.Theengagementwastovalue550sharesofcommonstockofJohnsonAdhesives,Inc.asofDecember31,2011onacontrollingbasisatfairmarketvalue.Thevaluationwasperformedsolelytoassistinthedeterminationofvalueonlyformaritaldissolutionpurposes.Theresultingestimateofvalueshouldnotbeusedforanyotherpurposenorbyanyotherpartyforanypurpose.


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TheonlylimitationonourvaluationengagementwasaninabilitytointerviewJohnsonAssociatesmanagement.

Basedonouranalysisdescribedinthisreport,thefactsandcircumstancesasofthevaluationdate,ourestimateofthefairmarketvalueof550sharesofthecommonstockofJohnsonAdhesives,Inc.asofDecember31,2011,onacontrollingbasisis$16,500,000.Thisequatesto$30,000.00pershare.ThisconclusionissubjecttotheStatementofAssumptionsandLimitingConditionsfoundearlierinthisreportandtotheValuationAnalysts’RepresentationinAppendix1.Wehavenoobligationtoupdatethisreportorourconclusionofvalueforinformationthatcomestoourattentionafterthedateofthereport.


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BIBLIOGRAPHY

Coons,R.andWalsh,K.AdhesivesandSealants.ChemicalWeek,173.9(Apr.4,2011):p21.

D’Amico,E.andPhillips,K.AdhesivesandSealants,ToughEconomyUngluessomePlayers.ChemicalWeek,170.31(Oct6,2008):19,21‐22.

Dewan,Shaila.(2011,October).U.S.EconomyPicksUpPace,AvertingaStall.NewYorkTimes.Retrievedfromhttp://www.nytimes.com/2011/10/28/business/economy/us‐economy‐shows‐modest‐growth.html?pagewanted=all

EconomicReportofthePresident,(2011).AnnualReportoftheCouncilofEconomicAdvisors.Retrievedfromwebsite:http://www.gpo.gov/fdsys/pkg/ERP‐2011/pdf/ERP‐2011.pdf

EuropeanParliamentandoftheCouncil,EuropeanCommitteeforStandardization.(2011).CouncilRegulationno.1907/2006ofwithAmendments&Appeals(CONSLEG:2006R1907:20111210).Retrievedfromwebsite:http://eur‐lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2006R1907:20111210:EN:PDF

Extance,A.WillAdhesiveRawMaterialPricesEverComeBackDown?SpecialChem.(Apr1,2011).

GlobalAdhesives&SealantMarketbyType,Applications,Trends,&Forecasts(2011‐2016).(2011,December21).PRNewswire.

GlobalMarketforAdhesivestoReachUS$38BillionandSealantstoReachUS$6.5Billionby2017.In(2011).AdhesivesandSealants:AGlobalStrategicBusinessReport.Retrievedfromhttp://www.prweb.com/releases/adhesives/sealants/prweb8957272.htm

Kusumgar,M.(2011,January).Theglobalformulatedadhesivesmarket.AdhesivesMagazine,Retrievedfromhttp://www.adhesivesmag.com/articles/the‐global‐formulated‐adhesives‐market

Murad,D.(2010,February1).StrategicSolutions:2010OutlookfortheAdhesivesandSealantsIndustry.AdhesivesMagazine,17(2),13.Retrievedfromhttp://www.adhesivesmag.com/articles/strategic‐solutions‐2010‐outlook‐for‐the‐adhesives‐and‐sealants‐industry


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Murad,D.(November,12011).StrategicSolutions:2011IndustryOutlook.AdhesivesMagazine,Retrievedfromhttp://www.adhesivesmag.com/articles/90807‐strategic‐solutions‐‐2011‐industry‐outlook

ChemQuest,Inc.(Performer:Murad,D)(2011,January12).Webcast:AdhesiveandSealantsMarket‐WillDemandReboundin2011?.GersonLehrmanGroupResearch.[Videopodcast].Retrievedfromhttp://www.glgresearch.com/Council‐Events/Webcast‐‐Adhesives‐and‐Sealants‐Market‐‐‐Will‐Demand‐Rebound‐in‐2011‐‐(11‐00‐AM‐EST)‐9213967.html

Nick,D.(2010,November).IstheRecessionOver?.www.adhesivesmag.com,Retrievedfromhttp://www.adhesivesmag.com/articles/is‐the‐recession‐over

Pierce,L.M.(2011,June10).ASCReportDefinesAdhesive/SealantMarketSizeandGrowthExpectations.PackagingDigest,Retrievedfromhttp://www.packagingdigest.com/article/518484‐ASC_report_defines_adhesive_sealant_market_size_and_growth_expectations.php

Riley,G.(2011,December27).2011InReview‐theUSEconomy.tutr2u.Retrievedfromhttp://tutor2u.net/blog/index.php/economics/comments/2011‐in‐review‐the‐us‐economy

Schmitt,B.(2003,April9).Adhesives&Sealants;MarginsonaSlipperySlope.ChemicalWeek,21.

Trugman,G.R.(2008).Understandingbusinessvaluation:Apracticalguidetovaluingsmalltomediumsizedbusinesses.(3rded.).NewYork,NY:AmericanInstituteofCertifiedPublicAccountants,Inc.

VOCRegulationsforAdhesivesandSealants.In(2009).CommonQuestionsandAnswersRetrievedfromhttp://www.greensafecertified.com/PDFs/VOC_Q_&_A[1].pdf

Walsh,K.(2010,October).Adhesivesandsealants.ChemicalWeek,172(24),29‐31.Retrievedfromhttp://search.proquest.com.ezproxy.fau.edu/docview/760104001/abstract?accountid=10902

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U.S.EconomyonFirmerGround?(2011).EconomicWeekInReview,VangaurdGroup,Inc.https://personal.vanguard.com/us/insights/article/economic‐week‐review‐12022011


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APPENDIX1–VALUATIONANALYSTS’REPRESENTATION

Werepresentthat,tothebestofourknowledgeandbelief:1. Thestatementsoffactcontainedinthisreportaretrueandcorrect.

2. Thereportedanalyses,opinions,andconclusionsofvaluearelimitedonlybythereportedassumptionsandlimitingconditions,andareourpersonal,impartial,independent,unbiased,objectiveprofessionalanalyses,opinionsandconclusions.

3. Wehavenopresentorprospective/contemplatedfinancialorotherinterestinthebusinessorpropertythatisthesubjectofthisreport,andwehavenopersonalfinancialorotherinterestorbiaseswithrespecttothepropertyorthepartiesinvolved.

4. Ourengagementinthisassignmentwasnotcontingentupondevelopingorreportingpredeterminedresults.

5. Ourcompensationforcompletingthisassignmentisfee‐basedandisnotcontingentuponthedevelopmentorreportingofapredeterminedvalueordirectioninvaluethatfavorsthecauseoftheclient,theoutcomeofthevaluation,theamountofthevalueopinion,theattainmentofastipulatedresult,ortheoccurrenceofasubsequenteventdirectlyrelatedtotheintendeduseofthisappraisal.

6. Theeconomicandindustrydataincludedinthevaluationreporthavebeenobtainedfromvariousprintedorelectronicreferencesourcesthatthevaluationanalystsbelievestobereliable.Thevaluationanalystshavenotperformedanycorroboratingprocedurestosubstantiatethatdata.

7. Ouranalyses,opinions,conclusions,andthissummaryreportweredevelopedinconformitywiththeAmericanInstituteofCertifiedPublicAccountantsStatementonStandardsofValuationServicesNo.1.

8. Thepartiesforwhichtheinformationanduseofthevaluationreportisrestrictedareidentified;thevaluationreportisnotintendedtobeandshouldnotbeusedbyanyoneotherthansuchparties.

9. Thevaluationanalystshavenoobligationtoupdatethereportortheopinionofvalueforinformationthatcomestoourattentionafterthedateofthereport.

10. ThisreportandanalysiswerepreparedunderthedirectionofMariaGutierrez,CPA,ABV,CFFwithsignificantprofessionalassistancefromKylePierceandRachelPearl.


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APPENDIX2–SELECTFINANCIALDATA

Exhibit1:JohnsonAdhesives,Inc.SummaryofFinancialStatementsBalanceSheets ($million)

Dec31 2007 2008 2009 2010 2011

ASSETSCurrentAssets $9.17 $9.43 $12.37 $11.56 $11.69FixedAssets‐Net 6.79 7.65 9.37 10.36 13.87OtherAssets 0.62 1.12 3.25 3.00 3.17

TotalAssets $16.58 $18.20 $24.98 $24.92 $28.72

LIABILITIESANDEQUITYCurrentLiabilities $4.94 $4.34 $8.78 $6.41 $11.50Long‐termLiabilities 4.96 4.85 7.78 7.26 5.83TotalLiabilities 9.90 9.19 16.56 13.67 17.33

Equity 6.69 9.01 8.42 11.25 11.39TotalLiabilitiesandEquity $16.58 $18.20 $24.98 $24.92 $28.72

IncomeStatements ($million)YearendedDec31 2007 2008 2009 2010 2011

Revenues $33.02 $37.94 $40.85 $48.59 $50.29CostofGoodsSold 22.63 25.25 28.45 33.95 34.80GrossProfit 10.39 12.69 12.39 14.64 15.49OperatingExpenses 3.31 3.72 4.34 5.58 5.95Officers'Compensation 2.23 3.03 3.53 2.86 3.38OperatingEBITDA 4.86 5.94 4.52 6.20 6.15DepreciationandAmortization 0.07 0.05 0.10 0.22 0.31OperatingIncome(EBIT) 4.79 5.89 4.42 5.99 5.84Miscellaneous(Income) (0.12) (0.18) (0.19) (0.25) (0.30)InterestExpense 0.59 0.47 0.55 0.74 0.84Pre‐taxIncome 4.31 5.60 4.06 5.49 5.29Less:IncomeTaxes 0.00 0.00 0.00 0.00 0.00NetIncome $4.31 $5.60 $4.06 $5.49 $5.29Source:

JohnsonAssociatesFinancialStatements


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Exhibit2:JohnsonAdhesives,Inc.NormalizedSelectFinancialRatios2007 2008 2009 2010 2011 CAGR

WorkingCapital($millions) $4.23 $5.09 $3.59 $5.15 $0.18 (54.3%)CurrentRatio 1.86 2.17 1.41 1.80 1.02 (14.0%)CurrentLiabilitiestoEquity 0.74 0.48 1.04 0.57 1.01 8.1%DebttoEquity 1.48 1.02 1.97 1.22 1.52 0.7%EBITtoTotalAssets 0.42 0.44 0.30 0.33 0.28 (9.7%)TimesInterestEarned 11.73 17.07 13.74 10.96 9.49 (5.2%)ReturnonEquity(pre‐tax) 96.5% 85.8% 85.5% 67.7% 65.3% (9.3%)GrossProfitMargin 31.5% 33.4% 30.4% 30.1% 30.8% (0.5%)OperatingProfitMargin 21.0% 21.1% 18.5% 16.7% 15.9% (6.7%)NetProfitMargin 19.5% 20.4% 17.6% 15.7% 14.8% (6.7%)ReturnonAssets ‐ 47.9% 35.5% 32.7% 30.5% (14.0%)TotalAssetTurnover ‐ 2.18 1.89 1.95 1.88 (4.9%)InterestCoverage 11.73 17.07 13.74 10.96 9.49 (5.2%)InvestedCapital($millions) $11.64 $13.86 $16.20 $18.50 $17.22 10.3%LongTermDebttoInvestedCapital 0.43 0.35 0.48 0.39 0.34 (5.6%)MVICtoSales* 0.35 0.37 0.40 0.38 0.34 (0.7%)MVICtoEBITDA* 1.67 1.72 2.12 2.22 2.08 5.7%MVICtoEBIT* 1.68 1.73 2.14 2.28 2.16 6.4%MVICtoPre‐TaxIncome* 1.80 1.79 2.25 2.43 2.32 6.4%

*InterestratedataonJohnsonAdhesives'long‐termdebtwasunavailable,assumedtobeatmarketrate

Source:

NormalizationofJohnsonAssociatesFinancialStatements(seeExhibit7andExhibit8)


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Exhibit3:CalculationofReasonableOfficers’Salaries 2007 2008 2009 2010 2011BLSWageEstimateforCEOinNAICS

325500 $176,610 $181,200 $183,310 $181,730 $185,460Wageplusonestandarddeviationof

2007‐2011average 179,539 184,129 186,239 184,659 188,389Roundedtonearest$10,000 180,000 184,000 186,000 185,000 188,000Largerofroundedamountorprior

yearroundedamount $180,000 $184,000 $186,000 $186,000 $188,000

Sources:BureauofLaborStatisticsNationalIndustry‐SpecificOccupationalEmploymentandWage

Estimates,2007–2010forNAICS325500‐Paint,Coating,andAdhesiveManufacturing

Exhibit4:NormalizingAdjustmentforExcessiveCompensation(@million)

YearendedDec31 2007 2008 2009 2010 2011Reportedowners'salaryfor

Company(1position)* $750,000 $750,000 $750,000$

750,000$

750,000LargerofroundedBLSCEOwage

orprioryearroundedwage** 180,000 184,000 186,000 186,000 188,000Normalizingadjustmentfor

excessivecompensation $570,000 $566,000 $564,000$

564,000$

562,000Normalizingadjustment,rounded 570,000 566,000 564,000 564,000 562,000Normalizingadjustment,rounded

x2positions $1,140,000 $1,132,000 $1,128,000 $1,128,000 $1,124,000

Sources:UnauditedJohnsonAdhesivesFinancialStatements*InformationprovidedbySusanJohnson**FromExhibit3

Exhibit5:NormalizedOfficers'Compensation($million)

YearendedDec31 2007 2008 2009 2010 2011ReportedOfficers'Compensation $2.230 $3.030 $3.530 $2.860 $3.380Less:AdjustmentforExcessive

Compensation* 1.140 1.132 1.128 1.128 1.124NormalizedOfficers'Compensation* $1.090 $1.898 $2.402 $1.732 $2.256

*FromExhibit4


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Exhibit6:CalculationofJohnsonAdhesivesNormalizedOperatingExpenses($million)

YearendedDec3 2007 2008 2009 2010 2011NormalizedOperatingExpenses:ReportedOperatingExpenses $3.31 $3.72 $4.34 $5.58 $5.95Less:UnusualExpense:LawsuitSettlement* 0.00 0.00 1.00 0.00 0.00Less:PersonalExpensesChargedtoBusiness* 0.50 0.50 0.50 0.50 0.50Less:PersonalUseofCompanyJet* 0.50 0.50 0.50 0.50 0.50NormalizedOperatingExpenses $2.31 $2.72 $2.34 $4.58 $4.95

Sources:UnauditedJohnsonAdhesivesFinancialStatements*InformationprovidedbySusanJohnson

Exhibit7:JohnsonAdhesivesNormalizedBalanceSheets ($million)

Dec31 2007 2008 2009 2010 2011

ASSETSCurrentAssets $9.17 $9.43 $12.37 $11.56 $11.69FixedAssets–Net 6.79 7.65 9.37 10.36 13.87OtherAssets 0.62 1.12 3.25 3.00 3.17

TotalAssets $16.58 $18.20 $24.98 $24.92 $28.72

LIABILITIESANDEQUITYCurrentLiabilities $4.94 $4.34 $8.78 $6.41 $11.50Long‐termLiabilities 4.96 4.85 7.78 7.26 5.83TotalLiabilities $9.90 $9.19 $16.56 $13.67 $17.33

Equity 6.69 9.01 8.42 11.25 11.39TotalLiabilitiesandEquity $16.58 $18.20 $24.98 $24.92 $28.72


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Exhibit8:JohnsonAdhesivesNormalizedIncomeStatements($million)

YearendedDec31 2007 2008 2009 2010 2011

Revenues $33.02 $37.94 $40.85 $48.59 $50.29CostofGoodsSold 22.63 25.25 28.45 33.95 34.80GrossProfit $10.39 $12.69 $12.40 $14.64 $15.49NormalizedOperatingExpenses 2.31 2.72 2.34 4.58 4.95NormalizedOfficers'Compensation 1.09 1.90 2.40 1.73 2.26OperatingEBITDA $6.99 $8.07 $7.66 $8.33 $8.28DepreciationandAmortization 0.07 0.05 0.10 0.22 0.31OperatingIncome(EBIT) $6.92 $8.02 $7.56 $8.11 $7.97Miscellaneous(Income) (0.12) (0.18) (0.19) (0.25) (0.30)InterestExpense 0.59 0.47 0.55 0.74 0.84Pre‐taxIncome $6.45 $7.73 $7.20 $7.62 $7.43Less:IncomeTaxes* 0.00 0.00 0.00 0.00 0.00NormalizedNetIncome $6.45 $7.73 $7.20 $7.62 $7.43

Exhibit9:JohnsonAdhesivesNormalizedBalanceSheetHorizontalAnalysis %of2007Amount

Dec31 2007 2008 2009 2010 2011

ASSETSCurrentAssets 100.0% 102.9% 134.9% 126.1% 127.5%FixedAssets–Net 100.0% 112.6% 137.9% 152.5% 204.2%OtherAssets 100.0% 180.8% 524.2% 484.5% 511.3%

TotalAssets 100.0% 109.7% 150.7% 150.3% 173.2%

LIABILITIESANDEQUITYCurrentLiabilities 100.0% 87.9% 177.7% 129.8% 232.9%Long‐termLiabilities 100.0% 97.8% 157.1% 146.4% 117.6%TotalLiabilities 100.0% 92.8% 167.4% 138.2% 175.2%

Equity 100.0% 134.8% 126.0% 168.2% 170.4%TotalLiabilitiesandEquity 100.0% 109.7% 150.7% 150.3% 173.2%


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Exhibit10:JohnsonAdhesivesNormalizedIncomeStatementHorizontalAnalysis %of2007Amount

YearendedDec31 2007 2008 2009 2010 2011

Revenues 100.0% 114.9% 123.7% 147.2% 152.3%CostofGoodsSold 100.0% 111.6% 125.7% 150.0% 153.8%GrossProfit 100.0% 122.1% 119.3% 140.9% 149.1%OperatingExpenses 100.0% 117.7% 101.3% 198.3% 214.3%Officers'Compensation 100.0% 174.1% 220.4% 158.9% 207.0%OperatingEBITDA 100.0% 115.5% 109.6% 119.1% 118.5%DepreciationandAmortization 100.0% 71.4% 142.9% 314.3% 442.9%OperatingIncome(EBIT) 100.0% 115.9% 109.2% 117.2% 115.2%Miscellaneous(Income) 100.0% 150.0% 158.3% 208.3% 250.0%InterestExpense 100.0% 79.7% 93.2% 125.4% 142.4%Pre‐taxIncome 100.0% 119.9% 111.6% 118.1% 115.3%Less:IncomeTaxes ‐ ‐ ‐ ‐ ‐NetIncome 100.0% 119.9% 111.6% 118.1% 115.3%

Exhibit11:JohnsonAdhesivesNormalizedBalanceSheetVerticalAnalysis %ofYear'sTotalAssets

Dec31 2007 2008 2009 2010 2011


TotalAssets 100.0% 100.0% 100.0% 100.0% 100.0%




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Exhibit12:JohnsonAdhesivesNormalizedIncomeStatementsVerticalAnalysis %ofYear'sTotalRevenues

YearendedDec31 2007 2008 2009 2010 2011

Revenues 100.0% 100.0% 100.0% 100.0% 100.0%CostofGoodsSold 68.5% 66.6% 69.6% 69.9% 69.2%GrossProfit 31.5% 33.4% 30.4% 30.1% 30.8%OperatingExpenses 7.0% 7.2% 5.7% 9.4% 9.8%Officers'Compensation 3.3% 5.0% 5.9% 3.6% 4.5%OperatingEBITDA 21.2% 21.3% 18.7% 17.1% 16.5%DepreciationandAmortization 0.2% 0.1% 0.2% 0.5% 0.6%OperatingIncome(EBIT) 21.0% 21.1% 18.5% 16.7% 15.9%Miscellaneous(Income) (0.4%) (0.5%) (0.5%) (0.5%) (0.6%)InterestExpense 1.8% 1.2% 1.3% 1.5% 1.7%Pre‐taxIncome 19.5% 20.4% 17.6% 15.7% 14.8%Less:IncomeTaxes 0.0% 0.0% 0.0% 0.0% 0.0%NetIncome 19.5% 20.4% 17.6% 15.7% 14.8%

Exhibit13:JohnsonAdhesivesNormalizedBalanceSheetGrowthYeartoYearGrowth CAGR

Dec31 2008 2009 2010 2011 Mean SD COV 07‐11

ASSETS CurrentAssets 2.9% 31.1% (6.5%) 1.1% 7.1% 0.14 2.00 6.3%FixedAssets‐Net 12.6% 22.5% 10.6% 33.9% 19.9% 0.09 0.47 19.5%OtherAssets 80.8% 190.0% (7.6%) 5.5% 67.2% 0.79 1.17 50.4%TotalAssets 9.7% 37.3% (0.3%) 15.3% 15.5% 0.14 0.89 14.7%

LIABILITIESANDEQUITYCurrentLiabilities (12.1%) 102.1% (26.9%) 79.3% 35.6% 0.56 1.57 23.5%Long‐termLiabilities (2.2%) 60.7% (6.8%) (19.7%) 8.0% 0.31 3.88 4.1%TotalLiabilities (7.2%) 80.3% (17.5%) 26.8% 20.6% 0.38 1.85 15.0%Equity 34.8% (6.5%) 33.6% 1.3% 15.8% 0.19 1.18 14.2%TotalLiabilitiesandEquity 9.7% 37.3% (0.3%) 15.3% 15.5% 0.14 0.89 14.7%


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Exhibit14:JohnsonAdhesivesNormalizedIncomeStatementGrowth YeartoYearGrowth CAGR

YearendedDec31 2008 2009 2010 2011 Mean SD COV 07‐11

Revenues 14.9% 7.7% 18.9% 3.5% 11.3% 0.06 0.54 11.1%CostofGoodsSold 11.6% 12.7% 19.3% 2.5% 11.5% 0.06 0.52 11.4%GrossProfit 22.1% (2.3%) 18.1% 5.8% 10.9% 0.10 0.89 10.5%OperatingExpenses 17.7% (14.0%) 95.7% 8.1% 26.9% 0.41 1.54 21.0%Officers'Compensation 74.1% 26.6% (27.9%) 30.3% 25.8% 0.36 1.40 19.9%OperatingEBITDA 15.5% (5.1%) 8.7% (0.5%) 4.6% 0.08 1.72 4.3%DepreciationandAmortization (28.6%) 100.0% 120.0% 40.9% 58.1% 0.58 1.00 45.1%OperatingIncome(EBIT) 15.9% (5.8%) 7.3% (1.7%) 3.9% 0.08 2.13 3.6%Miscellaneous(Income) 50.0% 5.6% 31.6% 20.0% 26.8% 0.16 0.61 25.7%InterestExpense (20.3%) 17.0% 34.5% 13.5% 11.2% 0.20 1.78 9.2%Pre‐taxIncome 19.9% (6.9%) 5.8% (2.4%) 4.1% 0.10 2.49 3.6%Less:IncomeTaxes ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐NetIncome 19.9% (6.9%) 5.8% (2.4%) 4.1% 0.10 2.49 3.6%

Exhibit15:SelectSIC2891CompaniesBalanceSheetHorizontalAnalysisIndustryAverage

BalanceSheets %of2007AmountDec31 2007 2008 2009 2010 2011


TotalAssets 100.0% 109.5% 118.4% 122.2% 113.4%




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Exhibit16:SelectSIC2891CompaniesIncomeStatementHorizontalAnalysisIndustryAverage

%of2007AmountYearendedDec31 2007 2008 2009 2010 2011

Revenues 100.0% 111.0% 118.0% 121.1% 113.1%CostofGoodsSold 100.0% 111.1% 118.1% 121.2% 113.2%GrossProfit 100.0% 111.0% 117.9% 120.9% 112.8%OperatingExpenses 100.0% 111.3% 118.7% 122.2% 114.5%Officers'Compensation 100.0% 110.2% 116.2% 118.3% 109.6%OperatingEBITDA 100.0% 110.1% 115.7% 117.3% 108.4%DepreciationandAmortization 100.0% 112.2% 120.4% 124.7% 117.6%OperatingIncome(EBIT) 100.0% 108.8% 112.9% 113.0% 103.0%Miscellaneous(Income) 100.0% 111.5% 118.5% 125.5% 117.2%InterestExpense 100.0% 107.2% 110.6% 109.2% 98.1%Pre‐taxIncome 100.0% 110.2% 115.1% 117.0% 107.9%Less:IncomeTaxes 100.0% 110.0% 114.9% 116.9% 107.8%NetIncome 100.0% 110.2% 115.2% 117.1% 107.9%

Exhibit17::SelectSIC2891CompaniesBalanceSheetVerticalAnalysisBalanceSheets %ofYear'sTotalAssets

Dec31 2007 2008 2009 2010 2011


TotalAssets 100.0% 100.0% 100.0% 100.0% 100.0%




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Exhibit18::SelectSIC2891CompaniesIncomeStatementVerticalAnalysisIncomeStatements %ofYear'sTotalRevenues

YearendedDec31 2007 2008 2009 2010 2011

Revenues 100.0% 100.0% 100.0% 100.0% 100.0%CostofGoodsSold 71.5% 71.5% 71.5% 71.5% 71.5%GrossProfit 28.5% 28.5% 28.5% 28.5% 28.5%OperatingExpenses 20.5% 20.5% 20.6% 20.7% 20.7%Officers'Compensation 2.6% 2.6% 2.6% 2.5% 2.5%OperatingEBITDA 5.5% 5.4% 5.4% 5.3% 5.2%DepreciationandAmortization 2.0% 2.0% 2.1% 2.1% 2.1%OperatingIncome(EBIT) 3.5% 3.4% 3.3% 3.2% 3.1%Miscellaneous(Income) (0.3%) (0.3%) (0.3%) (0.3%) (0.3%)InterestExpense 1.4% 1.4% 1.3% 1.3% 1.2%Pre‐taxIncome 2.3% 2.3% 2.3% 2.3% 2.2%Less:IncomeTaxes 0.9% 0.9% 0.9% 0.9% 0.8%NetIncome 1.4% 1.4% 1.4% 1.4% 1.4%


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APPENDIX3–CALCULATIONOFVALUE

Exhibit19:IncomeApproachtoValueEstimation

Calculationof2012ExpectedPre‐taxIncomeNormalizedpre‐taxincome,2010 $7,618,000Normalizedpre‐taxincome,2011 7,434,000Average(mean) $7,526,000Compoundgrowthrate(2007‐2011) 3.6%Expectedbenefitstream,2012 $7,797,941

CalculationofJohnsonAdhesivesDiscountRateRiskfreerate 2.67%Equityriskpremium(ERP) 6.00%Beta(BigCo) 1.10BetaxERP 6.60%

Riskfreerate+(BetaxERP) 9.27%Companyspecificriskpremium(alpha) 20.0%Sizepremium 6.36%Companydiscountrate 35.63%Less:Long‐termgrowthrate 3.61%Companycapitalizationrate 32.02%Capitalizationrate,rounded 32%

Valuationof100%ofJohnsonAdhesivesStockExpectedpre‐taxincomebenefitstream,2012 $7,797,941Capitalizationrate,rounded 32%Valueof100%ofcompanystock* $24,368,564

*Value=Benefit/Capitalizationrate


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Exhibit20:MarketApproachtoValueEstimationNormalizedAmount

RelativeWeighting*

ContributiontoValue

UsingpubliccompaniesIndustryMVICtosalesmultiple 0.54Company'ssalesfor2011 $50,290,000Valueof100%ofcompanystock $27,156,600 x 30% = $8,146,980

UsingpubliccompaniesIndustryMVICtoEBITDAmultiple 5.80Company'snormalizedEBITDAfor2011 $8,284,000Valueof100%ofcompanystock $48,047,200 x 23% = $11,211,013

UsingpubliccompaniesIndustryMVICtoEBITmultiple 7.26Company'snormalizedEBITfor2011 $7,974,000Valueof100%ofcompanystock $57,891,240 x 23% = $13,507,956

UsingpubliccompaniesIndustryMVICtopre‐taxincomemultiple 6.72Company'snormalizedpre‐taxincomefor2011 $7,434,000Valueof100%ofcompanystock $49,956,480 x 23% = $11,656,512

Weightedaveragevalueofstock $44,522,461Discountforlackofmarketability 20%Valueof100%ofJAstock $35,617,969

*Amountsmaynottotalto100%duetorounding.

Exhibit21:ReconciliationofValueEstimationsValueof100%ofstockIncomeApproach $24,368,564MarketApproach 35,617,969Averagevalueof100%ofstock $29,993,267

ValueofMr.Johnson'sshareofstockValueof100%ofstock $29,993,267Percentofstocktovalue 55%ValueofFrank'sshareofstock $16,496,297RoundedvalueofMr.Johnson'sstock $16,500,000


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Exhibit22:JustificationofPurchaseTestofReasonablenessValueof100%ofstock $29,993,267%ofvaluefinanced 66.7%Amountfinanced $19,995,511Downpaymentamount $9,997,756Borrowingrate 5.25%Loanterm(years) 5Annualpayment $4,650,422Corporatetaxrate 34%

Year1 Year2 Year3 Year4 Year5Annualpayment $4,727,353 $4,727,353 $4,727,353 $4,727,353 $4,727,353Interest 1,067,130 874,969 672,718 459,850 235,806Principal $3,660,222 $3,852,384 $4,054,634 $4,267,502 $4,491,546 CashFlow:Pre‐taxincome $7,702,616 $7,980,939 $7,980,939 $8,791,872 $9,183,824Interestexpense 1,067,130 874,969 672,718 459,850 235,806Taxableincome $6,635,486 $7,105,970 $7,308,220 $8,332,022 $8,948,017Taxexpense 2,256,065 2,416,030 $2,484,795 $2,832,888 $3,042,326

Netincome $4,379,421 $4,689,940 $4,823,425 $5,499,135 $5,905,692Principalpayment 3,660,222 3,852,384 $4,054,634 $4,267,502 $4,491,546

Cashflow $719,198 $837,556 $768,791

$1,231,632 $1,414,145Returnondownpayment 7.08% 8.24% 7.56% 12.12% 13.91%

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Valuation of Johnson Adhesives: A Simulation - bizvalblog · PDF file28.07.2012 · Business Valuation of Johnson Adhesives, Inc. ... (Global Adhesives ... Adhesives & Sealants Strategic