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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 1-3507
---------------------------
ROHM AND HAAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 23-1028370
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 INDEPENDENCE MALL WEST, PHILADELPHIA, PA 19106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-592-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------- ------------------------
Common Stock of $2.50 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
----
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 28, 2002: $4,313,328,027
Common stock outstanding at February 28, 2002: 220,677,633 SHARES.
Documents incorporated by reference:
Part III - Definitive Proxy Statement to be filed with the Securities and
Exchange Commission, except the Report on Executive Compensation, Graph titled
"Cumulative Total Return to Shareholders" and Audit Committee Report included
therein.
PART I
ITEM 1. BUSINESS
ROHM AND HAAS COMPANY
- -------------------------------------------------------------------------------
Rohm and Haas Company (the Company), is a global specialty materials company
that reported 2001 net sales of approximately $5.7 billion. The Company is a
public corporation whose shares are traded on the New York Stock Exchange under
the "ROH" symbol and was incorporated in 1917 under the laws of the State of
Delaware. The Company's headquarters office is located at 100 Independence Mall
West, Philadelphia, Pennsylvania 19106-2399 (phone number (215) 592-3000;
internet address www.rohmhaas.com).
In 2001, the Company operated four global businesses:
PERFORMANCE POLYMERS (56 percent of 2001 sales): This segment includes the
sales and operating results for Coatings, Adhesives and Sealants,
Plastics Additives, Monomers and Surface Finishes.
CHEMICAL SPECIALTIES (14 percent of 2001 sales): This segment includes the
sales and operating results for Consumer and Industrial Specialties,
Inorganic and Specialty Solutions and Ion Exchange Resins.
ELECTRONIC MATERIALS (17 percent of 2001 sales): This segment includes the
sales and operating results for Shipley Ronal (including Printed
Wiring Board and Electronic and Industrial Finishes) and
Microelectronics (including Shipley Microelectronics and Rodel).
SALT (13 percent of 2001 sales): This segment includes the sales and
operating results for the most recognized consumer salt brands in
North America (Morton Salt and Windsor Salt), along with sales derived
from other end-use markets, including water conditioning, highway ice
control, food processing, chemical/industrial and agriculture.
Rohm and Haas is a geographically diverse company, with approximately 100
manufacturing and technical locations in 25 countries. In 2001, 53% of net sales
were made outside of the United States. The Company's technology can be found in
a wide range of end-use markets, including building and construction, electronic
and computing devices, food, food processing and packaging, architectural and
industrial coatings, water treatment, pharmaceutical, home cleaning and personal
care.
STRATEGY
Rohm and Haas brings technology and innovation to the market that enhances the
performance of the end-use consumer products made by its customers and by
leveraging its broad technology base on a global basis within markets where it
enjoys leading positions.
The Company is committed to:
o continually bring innovation to the marketplace; even through the
2000-2001 economic downturn, the Company maintained its level of
investment in research and development.
o continually improve the efficiency of its cost structure, and
reposition the Company geographically to enhance the ability of its
customers to serve their market needs.
o achieve, enhance and defend leading market positions; this means
holding the first or second position in each of the markets or market
segments in which the Company competes.
1
ROHM AND HAAS COMPANY - NET SALES BY BUSINESS (in millions)
PRO FORMA
---------
2001 (1) 2000 (1) 1999 (1,2)
-----------------------------------
Coatings.................................. $ 1,445 $ 1,494 $ 1,512
Adhesives and Sealants.................... 661 707 737
Plastics Additives........................ 398 441 490
Monomers.................................. 357 382 305
Surface Finishes.......................... 309 373 507
-----------------------------------
Performance Polymers................... $ 3,170 $ 3,397 $ 3,551
-----------------------------------
Consumer and Industrial Specialties....... $ 388 $ 406 $ 374
Inorganic and Specialty Solutions......... 203 236 248
Ion Exchange Resins....................... 214 224 211
-----------------------------------
Chemical Specialties................... $ 805 $ 866 $ 833
-----------------------------------
Shipley Ronal............................. $ 470 $ 699 $ 621
Microelectronics.......................... 472 511 246
-----------------------------------
Electronic Materials................... $ 942 $ 1,210 $ 867
-----------------------------------
Salt................................... $ 749 $ 876 $ 930
-----------------------------------
Total Net Sales........................... $ 5,666 $ 6,349 $ 6,181
===================================
(1) Restated to conform to current year presentation and exclude the
discontinued operations of the Agricultural Chemicals business.
(2) Pro forma results include Morton International, Inc. (Morton), a specialty
chemicals producer (acquired in June 1999) and LeaRonal, Inc. (LeaRonal), an
electronic materials business (acquired in January 1999) as if these
acquisitions had occurred on January 1, 1999. The results are restated to
conform to the current year presentation and exclude the discontinued operations
of the Agricultural Chemicals business. Pro forma information is not presented
for other acquisitions and divestitures occurring in 2001, 2000 and 1999 because
they were not material to the Company's results of operations or consolidated
financial position.
2
SUMMARY OF BUSINESS SEGMENTS
----------------------------------------------------------------------------------------------------------------------
BUSINESS 2001 SALES MARKETS PRODUCTS/ END USES
TECHNOLOGY
----------------------------------------------------------------------------------------------------------------------
PERFORMANCE $3,170 million
POLYMERS:
COATINGS $1,445 million Bldg. and Construction A range of House paints
Home Improvement intermediate Traffic paints
(do-it-yourself products and Metal coatings
and contractor additives for Coated papers
segments) paints and coatings, Printing inks
Packaging textiles, non-woven Non-woven fibers
Graphic Arts and leather applications Textile finishes
Apparel an array of versatile Insulation
Home/Office Goods emulsion polymers and Leather
Transportation other technologies
----------------------------------------------------------------------------------------------------------------------
ADHESIVES $ 661 million Packaging A full-range of Pressure-sensitive
AND SEALANTS Bldg and Construction adhesives and tapes and labels
Transportation laminate materials Packaging tapes
Home Improvement (acrylic, urethane, Car interiors
polyester/urethane Weather stripping
emulsion polymers) Engine mounts
Flexible packaging
Graphic arts
Caulks, cements
Roof coatings
Sealants
----------------------------------------------------------------------------------------------------------------------
PLASTICS $ 398 million Bldg. and Construction A wide range of PVC pipe
ADDITIVES Home/Office Goods additives that impart Plastic packaging
Transportation desired properties Vinyl siding
Recreation into the end plastic, Wall systems
Packaging or help machinery Vinyl windows
run more efficiently Fencing and decks
(acrylic-based Interior automotive parts
modifiers, tin based Appliances and
stabilizers, lubricants business machines
and additives)
----------------------------------------------------------------------------------------------------------------------
MONOMERS $ 357 million Bldg. and Construction Produces essential Adhesives
Personal Care starting materials Paints and coatings
Automotive for acrylic products Floor polishes
Packaging and specialty Hair sprays
monomers Super-absorbent
products
3
----------------------------------------------------------------------------------------------------------------------
BUSINESS 2001 SALES MARKETS PRODUCTS/ END USES
TECHNOLOGY
----------------------------------------------------------------------------------------------------------------------
SURFACE $ 309 million
FINISHES
AUTOMOTIVE $ 98 million Transportation Water, solvent and Cars
COATINGS urethane-based Trucks
exterior and interior
coatings for plastic
parts
POWDER $ 211 million Home/Office Goods Epoxy, polyester Cars, shelving,
COATINGS Recreation, Lawn and and acrylic powder tables and chairs,
Garden Coatings office furniture,
Transportation Lamineer, a low cabinetry and
Bldg. and Construction temperature curing machinery
Electronics and coating
Comms. Devices
----------------------------------------------------------------------------------------------------------------------
CHEMICAL $ 805 million
SPECIALTIES:
CONSUMER AND $ 388 million Household Products Antimicrobial, Laundry and
INDUSTRIAL Personal Care dispersant, and dishwasher
SPECIALTIES Industrial Processing a range of other detergents
Bldg. and Construction technologies Shampoos, lotions
conditioners and
hair sprays
----------------------------------------------------------------------------------------------------------------------
INORGANIC $ 203 million Industrial Processing Sulfur-based Corrosion
AND SPECIALTY Lubricants and Fuels intermediates inhibitors
SOLUTIONS and salt-forming Pharmaceutical
bases products
Sodium borohydride Papers and
and related recycled newsprint
technologies
----------------------------------------------------------------------------------------------------------------------
4
----------------------------------------------------------------------------------------------------------------------
BUSINESS 2001 SALES MARKETS PRODUCTS/ END USES
TECHNOLOGY
----------------------------------------------------------------------------------------------------------------------
ION $ 214 million Food and Food-related Anion and cation Soft drinks and
EXCHANGE Electronics and ion exchange resins juices
RESINS Comms. Devices and adsorbents Ultrapure water
Pharmaceutical Catalysis
Home/Office Goods Pharmaceuticals
Industrial Processing
----------------------------------------------------------------------------------------------------------------------
ELECTRONIC $ 942 million
MATERIALS:
SHIPLEY $ 470 million Electronics and Enabling technology Cellular phones
RONAL Comms. Devices for all aspects of the PCs
Transportation manufacture of Mainframe
Home/Office Goods printed wiring computers
Recreation boards; processes Automotive parts
critical to electronic Office equipment
components, advanced Electronic games
packaging and industrial Steel and metal
finishing markets finishing
MICRO- $ 472 million Electronics and Essential technology PCs
ELECTRONICS Comms. Devices for creating state- Cellular phone and
Home/Office Goods of-the-art integrated other comms.
Transportation circuits: devices
Recreation photoresists, Home appliances
anti-reflective Office equipment
coatings, Electronic games
chemical mechanical Cars, trucks, etc.
planarization (CMP)
----------------------------------------------------------------------------------------------------------------------
SALT $ 749 million Food and Food Salt in all forms Table salt
related produced through Cooking salt
Transportation vacuum pan Home water
Industrial Processing production, conditioning salt
Home/Office Goods solar evaporation, or Highway salt
mined rock salt Chemical processing salt
Salt blocks for feed
----------------------------------------------------------------------------------------------------------------------
5
In addition to the summary of business segments, additional information appears
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the information indicated below appears in the 2001
"Notes to Consolidated Financial Statements" and is incorporated herein by
reference:
Notes to
Consolidated
Financial Statements
--------------------
Industry segment information for years 1999-2001..... Footnote 9
Foreign operations for years 1999-2001............... Footnote 9
RAW MATERIALS
The Company uses a variety of commodity chemicals as raw materials in its
operations. In most cases, these raw materials are purchased from multiple
sources under long-term supply contracts, created to provide access to key raw
materials. For the Company's Performance Polymers and Chemical Specialties
segments, many of these materials are hydrocarbon derivatives such as propylene,
acetone and styrene.
COMPETITION AND SEASONALITY
The Company experiences vigorous competition in each of its segments and its
competitors include many large multinational chemical firms based in Europe,
Asia and the United States. In some cases, the Company competes against firms
which are producers of commodity chemicals which the Company must purchase as
the raw materials to make its products. The Company however, does not believe
this places it at any significant competitive disadvantage. The Company's
products compete with products offered by other manufacturers on the basis of
product quality and specifications, customer service and price. Most of the
Company's products are specialty chemicals which are sold to customers who
demand a high level of customer service and technical expertise from the Company
and its sales force. The Salt segment is most affected by weather-driven sales
of highway ice control salt in the Eastern United States and Eastern Canada. To
a much lesser extent, sales in the Coatings segment destined for the paint
market are affected by weather in various regions.
RESEARCH AND DEVELOPMENT
The Company maintains its principal research and development laboratories at
Spring House, Pennsylvania. Research and development expenses totaled $230
million, $224 million and $174 million in 2001, 2000 and 1999, respectively. The
Company believes that its many intellectual properties are of substantial value
in the manufacturing, marketing and application of its various products. Though
the Company is not dependent, to a material extent, upon any one trademark,
patent or license, certain of the Company's businesses may be so dependent.
ENVIRONMENTAL
A discussion of environmental related factors is incorporated herein by
reference to Footnote 25: "Contingent Liabilities, Guarantees and Commitments"
in the accompanying "Notes to Consolidated Financial Statements."
6
ITEM 2. PROPERTIES
The Company, its subsidiaries and affiliates presently operate more than 100
manufacturing facilities, mines and salt evaporation facilities in 25 countries.
The facilities and the segment for which they are productive are detailed below:
MANUFACTURING LOCATIONS
- ---------------------------------------------------------------------------------------------------------------------
Argentina: Zarate(1) United States:
- ---------------------------------------------------------------------------------------------------------------------
Australia: Geelong(1) Arizona: Glendale(4), Phoenix(3)
- ---------------------------------------------------------------------------------------------------------------------
Bahamas: Inagua(4) California: Hayward(1), La Mirada(1), Long
Beach(4), Newark(4), Sunnyvale(3)
- ---------------------------------------------------------------------------------------------------------------------
Brazil: Jacarei(1,2) Delaware: Newark(3)
- ---------------------------------------------------------------------------------------------------------------------
Canada: Iles-De-La-Madeleine(4); Lindbergh(4); Florida: Cape Canaveral(4)
Ojibway(4); Pugwash(4); Regina/Belle
Plaine(4); West Hill(1,2); Windsor(4)
- ---------------------------------------------------------------------------------------------------------------------
China: Beijing(1); Dongguan(3); Illinois: Chicago Heights(1),
Hong Kong(3); Elk Grove(1), Kankakee(1),
Shanghi(1); Songjiang(2) Lansing(1), Ringwood(1)
- ---------------------------------------------------------------------------------------------------------------------
Colombia: Barranquilla(1,2) Indiana: Warsaw(1)
- ---------------------------------------------------------------------------------------------------------------------
France: Chauny(2); Lauterbourg(1,2); Semoy(1); Kansas: Hutchinson(4)
Villers-Saint-Paul(2)
- ---------------------------------------------------------------------------------------------------------------------
Germany: Bremen(1); Marl(1); Strullendorf(1) Kentucky: Louisville(1)
- ---------------------------------------------------------------------------------------------------------------------
Indonesia: Cilegon(1,2) Louisiana: Weeks Island(4)
- ---------------------------------------------------------------------------------------------------------------------
Italy: Castronno(2,3); Garlasco(1); Massachusetts: Marlborough(3), North Andover(2,3)
Mozzanica(1); Mozzate(1); Parona(1);
Robecchetto(1);
Romano d'Ezzelino(1)
- ---------------------------------------------------------------------------------------------------------------------
Japan: Kodama(3); Kurosaki(3); Mie(3);
Nagoya(1); Nara(3); Ogaki(3);
Osaka(3); Sasagami(3); Soma(1);
Tokyo(2) Michigan: Manistee(2,4)
- ---------------------------------------------------------------------------------------------------------------------
Mexico: Apizaco(1,2); Toluca(1) Mississippi: Moss Point(3)
- ---------------------------------------------------------------------------------------------------------------------
Netherlands: Amersfoort(1,2); Delfijl(2) New Jersey: Perth Amboy(4)
- ---------------------------------------------------------------------------------------------------------------------
New Zealand: Auckland(1,2) New York: Freeport(2,3), Silver Springs(4)
- ---------------------------------------------------------------------------------------------------------------------
Philippines: Las Pinas(1,2) North Carolina: Charlotte(1)
- ---------------------------------------------------------------------------------------------------------------------
Singapore: Singapore(1,3) Ohio: Cincinnati(4), Painesville(4),
Rittman(4), West Alexandria(1)
- ---------------------------------------------------------------------------------------------------------------------
Pennsylvania: Bristol(1), Croydon(1),
South Africa: New Germany(1) Philadelphia(2), Reading(1)
- ---------------------------------------------------------------------------------------------------------------------
Spain: Tudela(1) South Carolina: Greenville(1), Spartanburg(3)
- ---------------------------------------------------------------------------------------------------------------------
Sweden: Landskrona(1) Tennessee: Knoxville(1)
- ---------------------------------------------------------------------------------------------------------------------
Switzerland: Buchs(2); Lucerne(3) Texas: Bayport(1), Deer Park(1,2),
Grand Saline(4)
- ---------------------------------------------------------------------------------------------------------------------
Taiwan: Chiayi Hsien(3); Ta Yuan(1,2); Taoyuan Utah: Grantsville(4)
Hsien(3)
- ---------------------------------------------------------------------------------------------------------------------
Thailand: Maptaphut(1,2) Virginia: Wytheville(1)
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom: Buxton(3); Coventry(3); Dewsbury(1,2);
Grangemouth(1); Jarrow(2);
Warrington(2,3)
- ---------------------------------------------------------------------------------------------------------------------
7
RESEARCH AND TECHNICAL FACILITIES:
- ---------------------------------------------------------------------------------------------------------------------
Research Spring House, Pennsylvania USA(1,2,3) United States:
Headquarters:
- ---------------------------------------------------------------------------------------------------------------------
Australia: Geelong(1) Arizona: Phoenix(3)
- ---------------------------------------------------------------------------------------------------------------------
China: Shanghai(1) California: Sunnyvale(3)
- ---------------------------------------------------------------------------------------------------------------------
France: Chauny(2); Lauterbourg(2); Delaware: Newark(3)
Semoy(1); Valbonne(1,2)
- ---------------------------------------------------------------------------------------------------------------------
Germany: Bremen(1); Strullendorf(1) Illinois: Chicago Heights(1),
Elk Grove(1), Kankakee(1),
Lansing(1), Ringwood(1),
Woodstock(1,4)
- ---------------------------------------------------------------------------------------------------------------------
Italy: Mozzate(1); Parona(1); Robecchetto(1); Louisiana: Weeks Island(4)
Romano d'Ezzelino(1)
- ---------------------------------------------------------------------------------------------------------------------
Japan: Kodama(3); Nara(3); Omiya(3); Massachusetts: Marlborough(3), North Andover(2,3),
Sasagami(3) Woburn(1)
- ---------------------------------------------------------------------------------------------------------------------
Netherlands: Amersfoort(1,2) Michigan: Rochester Hills(1)
- ---------------------------------------------------------------------------------------------------------------------
Singapore: Singapore(1,3) North Carolina: Charlotte(1)
- ---------------------------------------------------------------------------------------------------------------------
Switzerland: Buchs(2); Lucerne(3) Ohio: Cincinnati(2), West Alexandria(1)
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom: Coventry(3); Dewsbury(1,2) Pennsylvania: Bristol(1), Reading(1), Newtown(1)
- ---------------------------------------------------------------------------------------------------------------------
South Carolina: Greenville(1)
--------------------------------------------------------
Texas: Deer Park(1,2)
- ---------------------------------------------------------------------------------------------------------------------
(1) Performance Polymers
(2) Chemical Specialties
(3) Electronic Materials
(4) Salt, including mines and evaporation facilities
The Company's manufacturing operations ran well throughout 2001. The plants
recorded good operating efficiencies and cost control, especially considering
the decline in demand due to slower global economies. Safety was a key focus, as
well, and significant improvement was made during the year. The overall
corporate safety record improved from a rate of 2.3 injuries for every 200,000
hours worked in 2000, to 1.7 injuries on a comparable basis for 2001.
Sixty-three sites operated injury-free throughout the year.
As part of the Company's comprehensive 2001 repositioning efforts, Rohm and Haas
closed manufacturing facilities in Tustin and Orange, California; Moss Point,
Mississippi and Paterson, New Jersey. The Company announced plans to make
further reductions in manufacturing capacity in several businesses in 2002.
Continual improvements in design, operation, and process control have
significantly improved the efficiency of the Company's remaining manufacturing
capacity. The Company believes it has the ability to generate significant
additional production capacity using its existing manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS
A discussion of legal proceedings is incorporated herein by reference to
Footnote 25: "Contingent Liabilities, Guarantees and Commitments" in the
accompanying "Notes to Consolidated Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2001.
8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock of $2.50 par value is traded on the New York Stock
Exchange (Symbol: ROH). There were 9,234 registered common stockholders as of
December 31, 2001. On February 28, 2002, the last sale price of the Company's
common stock was $38.41. The following table sets forth, for the period
indicated, the high and low sales prices and cash dividends of the Company's
common stock.
- --------------------------------------------------------------------------------
PERIOD HIGH LOW CASH DIVIDENDS
- --------------------------------------------------------------------------------
2001
1st Quarter $ 38.7000 $ 29.7700 $ 0.20
2nd Quarter $ 37.2300 $ 30.0900 $ 0.20
3rd Quarter $ 36.7800 $ 24.9000 $ 0.20
4th Quarter $ 37.3000 $ 30.8000 $ 0.20
2000
1st Quarter $ 47.6250 $ 33.0000 $ 0.19
2nd Quarter $ 49.4375 $ 32.8750 $ 0.19
3rd Quarter $ 37.5000 $ 25.6875 $ 0.20
4th Quarter $ 37.3125 $ 24.3750 $ 0.20
- --------------------------------------------------------------------------------
9
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data of the Company for
the years ended December 31, 2001, 2000, 1999, 1998 and 1997 as derived from the
historical financial statements of the Company.
- -----------------------------------------------------------------------------------------------------------------------------
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Unaudited)
(Millions of dollars, except per-share amounts and
where noted) 2001(7,12) 2000(8,12) 1999(9,12) 1998(6,10) 1997(6,11)
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ---------------------
Net sales ................................................ $ 5,666 $ 6,349 $ 4,840 $ 3,215 $ 3,497
Gross profit ............................................. 1,658 2,007 1,701 1,217 1,228
Earnings from continuing operations before interest,
income taxes, extraordinary item and cumulative
effect of accounting change ........................... 118 729 533 661 588
Earnings (losses) from continuing operations before
income taxes, extraordinary item and cumulative
effect of accounting change ........................... (64) 488 375 627 549
Earnings (losses) from continuing operations before
extraordinary item and cumulative effect of
accounting change ..................................... (70) 296 193 407 371
Discontinued operations:
Income from discontinued line of business, net of
income taxes .......................................... 40 58 56 46 39
Gain on disposal of discontinued line of business,
net of income taxes ................................... 428 -- -- -- --
Extraordinary loss on early extinguishment of debt, net
of income taxes ....................................... (1) -- -- (13) --
Cumulative effect of accounting change, net of income
taxes ................................................. (2) -- -- -- --
Net earnings ............................................. 395 354 249 440 410
EBITDA (1) ............................................... 1,056 1,369 1,160 844 N/A
As a percent of sales:
Gross profit .......................................... 29.3% 31.6% 35.1% 37.9% 35.1%
Selling and administrative expense .................... 15.2% 14.7% 15.9% 16.1% 15.0%
Research and development expense ...................... 4.1% 3.5% 3.6% 4.8% 4.2%
Earnings (losses) from continuing operations before
extraordinary item and cumulative effect of
accounting change ..................................... (1.2)% 4.7% 4.0% 12.7% 10.6%
Return on capital employed (2) ........................... 9.6% 9.2% 11.3% 21.4% 18.4%
Return on common stockholders' equity (3) ................ 10.3% 10.0% 13.4% 25.3% 22.7%
Ten year compound growth rate:
Sales (includes sales from discontinued
operations) ........................................... 7.9% 9.3% 7.3% 3.9% 6.1%
Basic earnings per common share before
extraordinary item and cumulative effect of
accounting change ..................................... 8.2% 4.6% 3.8% 8.4% 8.6%
Cash dividends per common share ....................... 6.9% 6.6% 6.6% 7.5% 8.2%
NET CASH FLOW DATA
- ------------------
Net Cash provided by continuing operations ............... $ 630 $ 675 $ 719 $ 601 $ 721
Net Cash provided by discontinued operations ............. 69 101 97 81 70
Additions to land, building and equipment ................ 401 391 323 229 254
Depreciation from continuing operations .................. 406 446 360 268 271
Cash dividends ........................................... 171 167 141 125 121
Free cash flow (4) ....................................... 127 218 352 328 416
Share repurchases ........................................ 1 1 3 567 216
10
Acquisitions of businesses and affiliates net of cash
acquired .............................................. 144 390 3,394 21 80
Proceeds from the disposal of discontinued line of
business, net of cash acquired ........................ 834 -- -- -- --
PER COMMON SHARE DATA AND OTHER SHARE INFORMATION
- -------------------------------------------------
Earnings (losses) from continuing operations before
extraordinary items and cumulative effect of accounting
changes:
Basic ............................................... $ (0.31) $ 1.34 $ .99 $ 2.29 $ 1.96
Diluted ............................................. $ (0.31) $ 1.34 $ .98 $ 2.26 $ 1.93
Cash dividends per common share .......................... $ .80 $ .78 $ .74 $ .70 $ .63
Common stock price
High ................................................ $ 38.7000 $ 49.4375 $ 49.2500 $ 38.8750 $ 33.7500
Low ................................................. $ 24.9000 $ 24.3750 $ 28.1250 $ 26.0000 $ 23.5625
Year-end close ...................................... $ 34.6300 $ 36.3125 $ 40.6875 $ 30.1250 $ 31.9375
Number of shares repurchased, in thousands ............... 33 18 70 17,459 7,653
Average number of shares outstanding - basic, in
thousands ............................................. 220,249 219,535 192,586 175,591 185,808
Average number of shares outstanding - diluted, in
thousands ............................................. 220,249 220,500 195,700 179,700 192,400
AT YEAR-END
- -----------
Gross fixed assets ....................................... $ 6,618 $ 6,699 $ 6,349 $ 4,471 $ 4,492
Total assets ............................................. 10,350 11,252 11,256 3,648 3,900
Total debt ............................................... 2,898 3,774 4,053 581 606
Stockholders' equity ..................................... 3,815 3,653 3,475 1,561 1,797
Debt ratio (5) ........................................... 42% 49% 52% 25% 22%
Number of registered common stockholders ................. 9,234 9,226 9,462 4,451 4,352
Number of employees ...................................... 18,210 20,248 21,512 11,265 11,592
- -----------------------------------------------------------------------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation and amortization. EBITDA
excludes non-recurring items and is presented to assist security analysts
and others in evaluating the Company's performance and its ability to
generate cash. EBITDA should not be considered an alternative to cash flow
from operating activities as a measure of liquidity or as an alternative to
net income as an indicator of the Company's operating performance in
accordance with generally accepted accounting principles. The Company's
definition of EBITDA may not be consistent with that used by other
companies. The Company did not calculate this measure prior to 1998.
(2) Net earnings plus after-tax amortization and interest expense divided by
average total assets less cash and average non-interest bearing
liabilities. Years 2000 and 1999 exclude the purchased in-process research
and development (IPR&D) charges. Years 2001 and 1998 exclude extraordinary
loss on early extinguishment of debt and year 2001 excludes the cumulative
effect of accounting change.
(3) Excluding ESOP adjustment and cumulative effect of accounting changes.
Years 2000 and 1999 exclude IPR&D charges.
(4) Cash provided by operating activities including discontinued operations
less dividends and additions to land, building and equipment.
(5) Total debt, net of cash (net debt), divided by the sum of net debt,
minority interest, stockholders' equity and ESOP shares.
(6) Reclassified to conform to current year presentation, primarily as a result
of discontinued operations.
Notes 7-11 reflect all amounts net of income taxes (see table on page 15 for
additional information related to 2001, 2000 and 1999 non-recurring items):
(7) Included in 2001 results are net non-recurring charges in continuing
operations of $259 million, gain on disposal of line of business of $428
million and income from discontinued operations of $40 million, an
extraordinary loss on early extinguishment of debt of $1 million and a $2
million charge for the cumulative effect of accounting change.
(8) Included in 2000 results are net non-recurring charges in continuing
operations of $28 million and income from discontinued operations of $58
million.
(9) Included in 1999 results are net non-recurring charges in continuing
operations of $161 million and income from discontinued operations of $56
million. Also included in 1999 are results from Morton, a specialty
chemicals producer acquired in June 1999 and LeaRonal, an electronic
materials business acquired in January 1999.
11
(10) Included in 1998 results is net non-recurring income of $45 million,
consisting of a gain in continuing operations from the sale of the
Company's interest in the AtoHaas and RohMax joint ventures, a loss from
the early extinguishment of debt, the write-off of certain intangible
assets in Europe and business realignment costs primarily in Asia. Also
included is income from discontinued operations of $46 million.
(11) Included in 1997 results is a net non-recurring gain in continuing
operations of $16 million, the net result of remediation settlements with
insurance carriers and discontinued operations income of $39 million.
(12) See 2001, 2000 and 1999 results in "Management's Discussion and Analysis of
Financial Condition and results of Operations" for additional information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary should be read in conjunction with the consolidated
financial statements and notes to financial statements for the years ended
December 31, 2001, 2000 and 1999.
"Same business basis" as it relates to the comparison of sales between reporting
periods includes only those businesses, segments or divisions that have been in
place during the entire reportable period.
Earnings (losses) from continuing operations before extraordinary item and
cumulative effect of accounting change are abbreviated as "Earnings (losses)
from continuing operations" within the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements."
SIGNIFICANT ITEMS AFFECTING 2001, 2000 AND 1999 RESULTS OF OPERATIONS
In January 1999, the Company acquired LeaRonal, an electronic materials business
and in June of 1999, Morton. Details of these transactions are discussed under
"Liquidity, Capital Resources and Other Financial Data" below. The results of
these significant acquisitions have been included in the consolidated financial
statements since the dates of acquisition. Unaudited pro forma information is
presented in the table on page 19.
The LeaRonal and Morton acquisitions, accounted for using the purchase method,
significantly impacted the comparability of 2000 and 1999 results. Accordingly,
1999 pro forma sales and earnings excluding non-recurring items are provided in
the results of operations discussions to facilitate comparisons. The pro forma
results include Morton and LeaRonal as if these significant acquisitions had
occurred on January 1, 1999. Pro forma adjustments were made primarily to
reflect increased goodwill and intangible amortization and interest expense.
Cost savings from integration efforts were not reflected. Though useful for
comparison, pro forma results are not intended to reflect actual earnings had
the acquisitions occurred on the dates indicated and are not a projection of
future results or trends. Pro forma information is not presented for other
acquisition and divestiture activities occurring in 2001, 2000 and 1999 because
these were not material to the Company's results of operations or consolidated
financial position.
NON-RECURRING ITEMS
Non-recurring items represent gains or losses arising from events or
transactions that are unusual in nature, occur infrequently or satisfy the
definition of an extraordinary item in accordance with Accounting Principles
Board (APB) 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Unless otherwise indicated, the impact of
non-recurring items on operations within the context of the Management's
Discussion and Analysis is stated net of tax.
SALE OF THE AGRICULTURAL CHEMICALS BUSINESS
Following the sale of its Agricultural Chemicals business (Ag) in June 2001, the
Company reported the operating results as discontinued operations in accordance
with APB 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Agricultural Chemicals had been a separate
major line of business in the Chemical Specialties segment. The operating
results of Ag have been reported separately as discontinued operations in prior
years.
CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies," the Company has identified the critical accounting
12
policies that are most important to the portrayal of the Company's financial
condition and results of operations. The policies set forth below require
management's most subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
o LITIGATION AND ENVIRONMENTAL RESERVES
The Company is involved in litigation in the ordinary course of
business, including personal injury, property damage and environmental
litigation. The Company also expends significant funds for
environmental remediation of both company-owned and third-party
locations. In accordance with Generally Accepted Accounting Principles
(GAAP), specifically Statement of Financial Accounting Standards
(SFAS) No. 5, "Accounting for Contingencies" and Statement of Position
96-1, "Environmental Remediation Liabilities", the Company records a
loss and establishes a reserve for litigation or remediation when it
is probable that an asset has been impaired or a liability exists and
the amount of the liability can be reasonably estimated. Reasonable
estimates involve judgments made by management after considering a
broad range of information including: notifications, demands, or
settlements which have been received from a regulatory authority or
private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other potentially responsible
parties and their ability to contribute and prior experience. These
judgments are reviewed quarterly as more information is received and
the amounts reserved are updated as necessary. However, the reserves
may materially differ from ultimate actual liabilities if the loss
contingency is difficult to estimate or if management's judgments turn
out to be inaccurate. If management believes no best estimate exists,
the minimum loss is accrued in accordance with GAAP.
o RESTRUCTURING
In June 2001, the Company recorded a $330 million restructuring and
asset impairment charge in connection with its 2001 repositioning
efforts, of which $82 million represented restructuring charges. The
repositioning effort consisted of 112 separate initiatives affecting
all business groups across the Company, and will take approximately
twelve months to complete from date of commencement. The $82 million
of restructuring included $71 million of severance termination
benefits for 1,860 employees affected by plant closings or capacity
reductions, as well as various personnel in corporate, administrative
and shared service functions. Severance termination benefits were
based on various factors including length of service, contract
provisions and salary levels. Management estimated the restructuring
charge based on these factors as well as projected final service
dates.
Given the complexity of estimates and broad reaching scope of the 2001
repositioning effort, actual expenses could differ from management's
estimates. If actual results are different from original estimates,
the Company will record additional expense or reverse previously
recorded expense through the "Provision for Restructuring and Asset
Impairment" line in the Statement of Consolidated Earnings. As of
December 31, 2001, the Company recognized a favorable change to the
original estimate of $4 million, due in part to changes in estimates
for severance expense and the recognition of settlement gains.
Management will continue to make adjustments if necessary as actions
under the plan are carried out.
o VALUATION OF LONG-LIVED ASSETS
The Company's long-lived assets include property, plant, equipment,
long-term investments, goodwill and other intangible assets.
Long-lived assets, other than investments, goodwill and
indefinite-lived intangible assets, are depreciated over their
estimated useful lives, and are reviewed for impairment whenever
changes in circumstances indicate the carrying value may not be
recoverable. In conjunction with the Company's 2001 repositioning
efforts, $245 million in assets were deemed impaired and written-off
based on estimated fair value assumptions. Fair values are estimated
based upon forecasted cash flows discounted to present value. If
actual cash flows or discount rate estimates change, the Company may
have to record additional impairment charges not previously
recognized.
The fair value of the long-term investments is dependant on the
performance of the Company's investees, as well as volatility inherent
in their external markets. In assessing potential impairment for these
investments the Company will consider these factors as well as the
forecasted financial performance of its investees. If these forecasts
are not met, the Company may have to record additional impairment
charges not previously recognized.
13
O PENSION AND OTHER EMPLOYEE BENEFITS
Certain assumptions are used in the calculation of the actuarial
valuation of the Company-sponsored defined benefit pension plans and
post-retirement benefits. These assumptions include the weighted
average discount rate, rates of increase in compensation levels,
expected long-term rates of return on assets and increases or trends
in health care costs. If actual results are less favorable than those
projected by management, lower levels of pension credit or other
additional expense may be required. See Notes 10 and 11 in the
accompanying "Notes to Consolidated Financial Statements" for
additional information regarding assumptions used by the Company.
o INVENTORY RESERVES
The Company adjusts the value of its obsolete and unmarketable
inventory to the estimated market value based upon assumptions of
future demand and market conditions. If actual market conditions are
less favorable than those projected by management, additional
inventory write-downs may be required.
o GAIN ON SALE OF THE AGRICULTURAL CHEMICALS BUSINESS
In June 2001, the Company completed the sale of its Agricultural
Chemicals business to Dow AgroSciences LLC (DAS), a wholly-owned
subsidiary of the Dow Chemical Company for approximately $1 billion,
subject to a working capital adjustment. The working capital
adjustment has not been finalized as of December 31, 2001. The Company
has recorded a receivable from DAS for the amount of the working
capital adjustment based upon management's best estimate of the
ultimate adjustment. The Company's calculation of the working capital
adjustment required estimates related to the valuation of certain
assets, principally accounts receivable, inventory, and rebate
liabilities transferred to DAS on June 1, 2001. If the final working
capital adjustment differs from management's estimate as of December
31, 2001, the Company will be required to record an adjustment to the
gain on disposal of discontinued line of business initially recorded
in the second quarter of 2001.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001, AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
NET SALES
Consolidated net sales in 2001 were $5,666 million, 11% below 2000 net sales of
$6,349 million. The decrease from the prior-year was driven by persistently weak
global demand across all businesses. 2001 net sales compared to the prior-year
declined 22% for Electronic Materials, which has been buffeted by a precipitous
industry-wide decline since April 2001, 7% for Performance Polymers on lower
volumes and 7% for Chemical Specialties due to persistent sluggishness in the
paper and industrial markets served by the businesses in this group. Salt sales,
on a same business basis, remained flat as both periods benefited from strong
demand for highway ice control products in the 2000 winter season. In the fourth
quarter of 2000, the Company sold its European Salt business.
NET EARNINGS
Net earnings as reported for the year 2001 were $395 million, a 12% increase
from 2000 net earnings of $354 million. Earnings per share on a diluted basis
were $1.79 in 2001, compared with $1.61 per share in 2000. The Company reported
a loss from continuing operations for the year 2001 of $70 million or $0.31 per
common share, compared to income from continuing operations of $296 million or
$1.34 per common share in 2000. Net income excluding non-recurring items for the
year 2001 was $189 million, or 42% less than 2000 earnings of $324 million. The
year-over-year decline can be attributed to the impact of poor external economic
conditions on all business segments, particularly Electronic Materials and
Performance Polymers which accounted for $134 million, or 99%, of the total
decline from 2000. The Company actively managed through the economic downturn to
mitigate significantly reduced demand by announcing and implementing
restructuring initiatives to bring capacity more in line with market demand.
Expenditures continued to be made on research and development, enterprise
resource planning (ERP) initiatives and small acquisitions in Adhesives and
Sealants.
In June 2001, the Company completed the sale of Ag to Dow AgroSciences LLC
(DAS), a wholly owned subsidiary of the Dow Chemical Company, for approximately
$1 billion, subject to a working capital adjustment not yet finalized at
December 31, 2001. The Company recorded a gain on the sale in the amount of $679
million pre-tax ($428 million or $1.94 per share after-tax). Income from
discontinued operations, prior to the June 2001 sale, was
14
$40 million or $0.18 per share after-tax as compared to income from discontinued
operations in 2000 of $58 million or $0.27 per common share after-tax.
The impact of non-recurring items on earnings from continuing operations in 2001
was a charge of $259 million and consisted primarily of $226 million of
restructuring and asset impairment charges; $18 million of costs associated with
the repositioning efforts including plant shutdown and dismantlement costs; $10
million of asset valuation adjustments in the Electronic Materials segment; and
$5 million of remediation-related charges, net of insurance settlements. The
impact of non-recurring charges on earnings from continuing operations in 2000
was $28 million, and consisted of $14 million of purchased in-process research
and development (IPR&D) and other one-time charges related to the Rodel
acquisition and $14 million of costs associated with restructuring and
integration efforts. Refer to the following table for a reconciliation of
reported earnings to earnings excluding non-recurring items for all years
presented.
- ----------------------------------------------------------------------------------------
TABLE OF NON-RECURRING ITEMS 2001 2000 1999
(in millions)
- ----------------------------------------------------------------------------------------
Net Earnings as-reported $ 395 $ 354 $ 249
NON-RECURRING GAINS (LOSSES):
IPR&D and other one-time charges related to
acquisitions - (14) (115)
Joint venture dispositions - - (14)
Remediation related charges, net of
insurance settlements (5) - 17
Provision for restructuring and asset
impairments (226) (8) (23)
Asset write-downs, integration and other
restructuring costs (28) (6) (26)
------------ ----------- -----------
Impact on continuing operations (259) (28) (161)
------------ ----------- -----------
Income from discontinued line of business 40 58 56
Gain on disposal of discontinued line of
business 428 - -
------------ ----------- -----------
Discontinued operations 468 58 56
------------ ----------- -----------
(1) - -
Extraordinary loss on early extinguishment
of debt
Cumulative effect of accounting change (2) - -
------------ ----------- -----------
TOTAL NON-RECURRING GAINS (LOSSES) 206 30 (105)
------------ ----------- -----------
Earnings excluding non-recurring items $ 189 $ 324 $ 354
============ =========== ===========
- ----------------------------------------------------------------------------------------
GROSS PROFIT
Gross profit for 2001 was $1,658 million, a 17% decline from $2,007 million in
2000 and the gross profit margin was 29%, down from 32% in 2000. The change in
gross profit margin is primarily the result of lower manufacturing efficiency
driven by reduced demand. The Company continues to respond by maintaining price
increases and improving internal efficiencies.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES
SAR expenses were $1,091 million for 2001, a 6% decrease from $1,157 million in
2000, reflecting savings from the Company's repositioning efforts as well as a
decrease in employee related expenses. These cost reductions were offset by
increased research and development costs reflecting the Company's continued
focus on developing cutting edge technologies and ERP information system
expenditures. SAR expenses were 19% of net sales for 2001, compared to 18% in
2000.
15
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D)
IPR&D in acquisitions accounted for by the purchase method, represents the value
assigned to research and development projects of an acquired company where
technological feasibility had not yet been established at the date of the
acquisition, and which, if unsuccessful, have no alternative future use. Amounts
assigned to IPR&D are charged to expense at the date of acquisition.
Accordingly, the Company charged $13 million to expense in 2000 in connection
with the Rodel acquisition. (See Note 4: "Purchased In-process Research and
Development" in the accompanying "Notes to Consolidated Financial Statements").
INTEREST EXPENSE
Interest expense for 2001 was $182 million, a 24% decline from $241 million in
2000, primarily due to lower debt levels and interest rates as compared to the
prior-year period.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles for 2001 was $156 million, a 2%
decline from $159 million in 2000.
SHARE OF AFFILIATE NET EARNINGS
Share of affiliate net earnings in 2001 was $12 million, a 33% decline from
earnings of $18 million in 2000, primarily due to the increased ownership in
Rodel and the sale of affiliates related to the disposition of Ag (See Note 2:
"Acquisitions and Dispositions of Assets" in the accompanying "Notes to
Consolidated Financial Statements"). Prior to March 31, 2000 the investment in
Rodel was accounted for under the equity method with the Company's share of
earnings reported as equity in affiliates. Since the second quarter of 2000,
Rodel's results of operations have been fully consolidated.
PROVISION FOR RESTRUCTURING Provision for restructuring of $320 million pre-tax
or $226 million after-tax for the year ended December 31, 2001 is comprised
primarily of asset impairment and restructuring charges relating to the
Company's repositioning initiatives that commenced in June 2001. The Company
recognized a $330 million one-time restructuring and asset impairment charge in
the second quarter of 2001, to enable several of its businesses to respond to
structural changes in the global marketplace. The largest component related to
the partial closure of certain manufacturing and research facilities across all
business groups and included exit costs related to the Liquid Polysulfide
Sealants business in Performance Polymers and part of the dyes business in
Chemical Specialties. Approximately 75% of the assets impaired were in the North
American region. The one-time charge included severance benefits; the employees
receiving severance benefits will include those affected by plant closings or
capacity reductions, as well as various personnel in corporate, administrative
and shared service functions. Approximately 1,860 positions will be affected by
the restructuring efforts. Offsetting the original charge of $330 million
recorded in June 2001, is a pre-tax gain of $4 million from the recognition of
settlement gains and changes in estimates to restructuring liabilities
established for the 2001 initiatives, as well as a pre-tax gain of $6 million
from changes in estimates to restructuring liabilities established in 1999. It
is the Company's policy to recognize settlement gains at the time an employee's
pension liability is settled.
In the first half of 2000, a restructuring reserve of $13 million pre-tax was
recorded in the Ion Exchange Resins business for the write-down of plant assets
and severance costs for approximately 100 people. These charges were net of
certain pension settlement and curtailment gains.
OTHER INCOME
Other income for 2001 was $15 million, a 67% decline from $46 million in 2000.
The decline is primarily due to lower foreign currency gains compared to the
prior year. In addition, the Company incurred a $4 million casualty loss
resulting from a fire at a joint venture manufacturing facility.
EFFECTIVE TAX RATE
The loss from continuing operations of $70 million contains $6 million of income
taxes, which computes to a 9% effective tax rate. This reflects the impact of a
29% tax rate on the $320 million loss provision for restructuring and asset
impairment, which included non-deductible restructuring expenses. Excluding the
impact of this provision, the effective tax rate on continuing operations was
39%, the same as 2000. The effective tax rate for 2000, excluding non-tax
deductible IPR&D charges was 38%.
16
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000, AS
COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales in 2000 were $6,349 million, a 3% increase from 1999 pro forma net
sales of $6,181 million and a 31% increase from 1999 actual net sales of $4,840
million. The increase from pro forma 1999 net sales was driven largely by an
acquisition-driven sales increase in the Electronic Materials segment and to a
lesser extent the acquisition of 95% of Acima A.G. (Acima) in the Chemical
Specialties segment. The effect of these acquisitions was partially offset by
unfavorable currency impacts.
NET EARNINGS
Net earnings on an as-reported basis for 2000 were $354 million, a 42% increase
from 1999 net earnings of $249 million. Diluted earnings per common share were
$1.61 in 2000 compared to $1.27 in 1999. Earnings from continuing operations for
the year 2000 were $296 million or $1.34 per diluted common share, compared to
$193 million or $0.98 per diluted common share in 1999. Net earnings excluding
non-recurring items for the year 2000 were $324 million, a 2% decline from pro
forma 1999 and an 8% decline from actual 1999 net earnings excluding
non-recurring items. Earnings per share excluding non-recurring items on a
diluted basis was $1.47 in 2000, compared with $1.81 per share in actual 1999.
The impact of the non-recurring charges on continuing operations in 2000 was $28
million, and consisted of $14 million of IPR&D and other one-time charges
related to the Rodel acquisition, and $14 million of costs associated with the
restructuring and integration efforts. Non-recurring items impacting continuing
operations for 1999 include charges of $161 million, including a charge of $115
million for IPR&D and other one-time charges from the Morton acquisition, a
charge of $23 million for restructuring costs resulting both from the
integration of Morton and the Company's redesign of its selling and
administrative infrastructure, $26 million related to asset write-downs,
integration and other restructuring costs, a gain of $17 million from
remediation related insurance recoveries, and a $14 million loss on disposition
of the AtoHaas joint venture.
The operating results of Ag have been reported separately as discontinued
operations in prior years. Income from discontinued operations in 2000 was $58
million or $0.27 per share as compared to income from discontinued operations in
1999 of $56 million or $0.29 per common share.
GROSS PROFIT
Gross profit for the year 2000 was $2,007 million, an 18% increase from $1,701
million in 1999; however, the gross profit margin was 32% in 2000, down from 35%
from 1999. The change in gross profit margin was primarily the result of
increased hydrocarbon-based raw material prices in addition to higher energy
costs in the form of higher natural gas prices and increased freight costs due
to higher fuel prices. The impact of increased raw material prices was primarily
in the Performance Polymers business segment. Overall raw material price
increases were not offset by overall selling price increases. To a lesser
extent, higher depreciation resulting from fair values being assigned to
acquired assets also contributed to the change in gross profit margin.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES
SAR expenses for 2000 decreased to 18% of net sales from 19% in 1999. In 1999,
the Company began implementing a redesign of its selling and administrative
infrastructure and instituted other cost saving measures associated with the
integration of the Morton and LeaRonal acquisitions. The stated goal of these
efforts was to reduce annual procurement, SAR and other expenses by $300
million. By year-end 2000, the run rate goal was achieved through cost
reductions in support services, procurement and manufacturing.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D)
IPR&D in acquisitions accounted for by the purchase method, represents the value
assigned to research and development projects of an acquired company where
technological feasibility had not yet been established at the date of the
acquisition, and which, if unsuccessful, have no alternative future use. Amounts
assigned to IPR&D were charged to expense at the date of acquisition.
Accordingly, the Company charged $13 million and $105 million to expense in 2000
and 1999, respectively, related to the Rodel and Morton acquisitions (See Note
4: "Purchased In-process Research and Development" in the accompanying "Notes to
Consolidated Financial Statements").
17
INTEREST EXPENSE
Interest expense in 2000 was $241 million, a 53% increase from $158 million in
1999, due to higher debt levels resulting from acquisitions. In year 2000 a full
year of interest at the higher debt levels is reflected versus six months in
1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization in 2000 was $159 million, a 92% increase from $83 million in 1999.
The increase was attributable to significant 1999 acquisitions and year 2000
reflects amortization for a full year versus six months in 1999 related to these
acquisitions.
SHARE OF AFFILIATE NET EARNINGS
Earnings of $18 million in 2000 increased from earnings of $6 million in 1999.
The 2000 earnings resulted from a full year of affiliates acquired in mid-1999
and from earnings of certain affiliated businesses of Rodel. Since the second
quarter of 2000, Rodel's results of operations have been fully consolidated. The
1999 earnings resulted largely from Rodel, which was an affiliate during that
year.
OTHER INCOME
Other income for 2000 was $46 million, a $32 million increase from $14 million
in 1999. The increase is largely from foreign currency gains resulting from risk
management activities. The 1999 period includes Morton integration costs offset
by a gain related to a favorable settlement with insurance carriers over certain
environmental remediation matters.
EFFECTIVE TAX RATE
The effective tax rate for 2000 and 1999 was 39% and 49%, respectively. The
effective tax rate for 1999 was 49%, largely as a result of the non-deductible
write-off of IPR&D. Excluding the non-tax deductible IPR&D charges, the
effective tax rate was 38% for both years. Rates also reflect the effect of
certain non-tax deductible amortization charges resulting from the Company's
acquisition activities.
SUMMARY BY BUSINESS SEGMENT
The Company's operations are organized by worldwide business segments.
Descriptions of the Company's business segments are located in Item 1. Business
included in the beginning of this report.
18
NET SALES FROM CONTINUING OPERATIONS BY BUSINESS SEGMENT AND REGION
- ---------------------------------------------------------------------------------------------------------------
Performance Chemical Electronic
Polymers Specialties Materials Salt Total
- ---------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------------
North America
2001 $ 1,915 $ 340 $ 488 $ 749 $ 3,492
2000 2,083 399 584 750 3,816
1999 1,847 320 352 326 2,845
- ---------------------------------------------------------------------------------------------------------------
Europe
2001 $ 865 $ 268 $ 167 $ -- $ 1,300
2000 923 266 213 126 1,528
1999 780 211 168 113 1,272
- ---------------------------------------------------------------------------------------------------------------
Asia-Pacific
2001 $ 235 $ 146 $ 287 $ -- $ 668
2000 242 145 413 -- 800
1999 197 122 235 -- 554
- ---------------------------------------------------------------------------------------------------------------
Latin America
2001 $ 155 $ 51 $ -- $ -- $ 206
2000 149 56 -- -- 205
1999 115 54 -- -- 169
- ---------------------------------------------------------------------------------------------------------------
Total
2001 $ 3,170 $ 805 $ 942 $ 749 $ 5,666
2000 3,397 866 1,210 876 6,349
1999 2,939 707 755 439 4,840
- ---------------------------------------------------------------------------------------------------------------
SUMMARY OF 1999-2001 RESULTS BY BUSINESS SEGMENT
- ----------------------------------------------------------------------------------------------------------
Actual Pro Forma(2)
-------------------------------------------------
(Millions of dollars) 2001 2000(1) 1999(1) 1999(1)
- ----------------------------------------------------------------------------------------------------------
Net Sales
Performance Polymers $3,170 $3,397 $2,939 $3,551
Chemical Specialties 805 866 707 833
Electronic Materials 942 1,210 755 867
Salt 749 876 439 930
- ----------------------------------------------------------------------------------------------------------
Total $5,666 $6,349 $4,840 $6,181
- ----------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations Before
Extraordinary Item and Cumulative Effect of
Accounting Change
Performance Polymers $ 85 $ 282 $ 350 $ 388
Chemical Specialties 7 55 59 86
Electronic Materials 1 110 57 64
Salt 13 24 10 35
Corporate(3) (176) (175) (283) (241)
- ----------------------------------------------------------------------------------------------------------
Total $ (70) $ 296 $ 193 $ 332
- ----------------------------------------------------------------------------------------------------------
(1) Reclassified to conform to current year presentation.
(2) Pro forma results include Morton and LeaRonal as if these 1999 acquisitions
had occurred on January 1, 1999. Pro forma net earnings exclude
non-recurring items.
(3) Corporate includes non-operating items such as interest income and expense,
corporate governance costs, and corporate exploratory research. In 2000 and
1999, it included charges for purchased in-process research and development
costs associated with the Rodel and Morton acquisitions. (See "Management's
Discussion and Analysis")
19
PERFORMANCE POLYMERS
2001 VERSUS 2000
Performance Polymers sales for 2001 were $3,170 million, a 7% decline from
$3,397 million in 2000. Sales and earnings decreases were felt in all businesses
primarily due to poor external economic conditions and as a result of the
continued slow down in the building and construction industry which are served
largely by the Coatings, Adhesives and Sealants and Plastic Additives
businesses. Automotive and Powder Coatings sales decreased primarily due to weak
demand in the automotive and industrial markets, as compared to the prior-year.
Earnings from continuing operations for 2001 were $85 million, a 70% decline
from $282 million in 2000. Excluding non-recurring items, earnings were $229
million, an 18% decline from 2000 earnings of $278 million.
2000 VERSUS 1999
Performance Polymers sales for 2000 were $3,397 million, a decrease of 4% from
$3,551 million pro forma 1999 sales and a 16% increase from actual sales of
$2,939 million in 1999. Earnings from continuing operations for 2000 were $282
million, a 19% decline from $350 million in 1999. Excluding non-recurring items,
earnings were $278 million in 2000, a 28% decrease from 1999 pro forma earnings
of $388 million and a 21% decrease from $352 million in 1999. Sales and earnings
in the year were impacted by an economic slowing in the U.S. building and
construction markets in the second half of 2000. These markets are served
largely by the Coatings, Adhesives and Sealants and Plastics Additives
businesses. Similar slowing in the automotive markets served by Surface
Finishes was also a factor. Sales were also affected by weaker European
currencies. The 21% decrease in earnings, excluding non-recurring items, was a
result of these demand factors and by sharply higher hydrocarbon base raw
material costs and energy costs, particularly natural gas (see Gross Profit
discussion under "Summary of Consolidated Results" below). The Monomer business
continued to report strong growth in the year as a result of the acquired
Stockhausen merchant monomer business in Europe. Among the Surface Finishes
businesses, sales of Powder Coatings on a pro forma basis continued to improve,
but were offset by weaker sales in Automotive Coatings driven by slowing in the
U.S. automotive markets.
CHEMICAL SPECIALTIES
2001 VERSUS 2000
Chemical Specialties reported sales of $805 million, a 7% decline from $866
million in 2000. Inorganic and Specialty Solutions sales decreased by $33
million, representing 54% of the total year-over-year decline, as the business
continues to suffer from persistently low demand for sodium borohydride related
applications in the newsprint, pharmaceutical and electronic markets. Consumer
and Industrial Specialties sales declined $18 million from 2000, representing
30% of the total decline as a result of decreased demand in industrial markets.
Ion Exchange Resins sales declined due to a weakness in industrial water
treatment and catalyst markets. Earnings from continuing operations for 2001
were $7 million, an 87% decline from $55 million in 2000. Earnings for 2001,
excluding non-recurring items were $63 million, a 10% decline from $70 million
in 2000 as lower demand produced higher manufacturing variances, which
negatively impacted earnings.
2000 VERSUS 1999
Chemical Specialties sales for 2000 were $866 million, a 4% increase from pro
forma 1999 sales of $833 million and a 22% increase from actual sales of $707
million in 1999. Sales increases were driven by Consumer and Industrial
Specialties, helped by the acquired Acima biocides business, with a contribution
from Ion Exchange Resins. Earnings from continuing operations for 2000 were $55
million, a 7% decline from $59 million in 1999. Net earnings, excluding
non-recurring items, were $70 million in 2000, a 19% decline from pro forma 1999
earnings of $86 million and a 3% decline from actual earnings of $72 million in
1999.
ELECTRONIC MATERIALS
2001 VERSUS 2000
Electronic Materials sales were $942 million, a 22% decline from $1,210 million
in 2000. The sales decline was driven by a significant decrease in demand across
all businesses, with the exception of sophisticated technologies including deep
UV photoresists, chemical mechanical planarization products and anti-reflective
coatings. Earnings from continuing operations for 2001 were $1 million compared
to $110 million in 2000, reflecting costs associated with the Company's
repositioning efforts. Excluding non-recurring items, earnings were $27 million,
a 76% decline from $112 million in 2000, because of significantly decreased
demand impacting manufacturing efficiencies.
20
2000 VERSUS 1999
Electronic Materials sales for 2000 were $1,210 million, a 40% increase from pro
forma 1999 sales of $867 million and a 60% increase from actual sales of $755
million in 1999. Earnings from continuing operations for 2000 were $110 million,
a 72% increase from pro forma 1999 of $64 million and a 93% increase from $57
million in 1999. Excluding non-recurring items, earnings were $112 million in
2000, a 62% increase from $69 million in 1999. Increases in sales and earnings
were evident in all regions and markets within the Electronic Materials segment
due to continued demand for new technologies and contributions from Rodel, which
was consolidated in 2000, and from Shipley Ronal, part of which was acquired in
1999. Results of operations for Rodel were consolidated during the second
quarter of 2000, as a result of increasing the Company's ownership to
approximately 90% from 48%.
SALT
2001 VERSUS 2000
Salt sales were $749 million for 2001, a 14% decline from $876 million in 2000.
Sales, on a same business basis, remained unchanged from the prior period.
Earnings from continuing operations for 2001 were $13 million, a 46% decline
from $24 million in 2000. The Company sold its European salt business in the
fourth quarter of 2000 (see Note 2: "Acquisitions and Dispositions of Assets" in
the accompanying "Notes to Consolidated Financial Statements"). Excluding
non-recurring items, earnings remained constant at $24 million in 2001 and 2000.
2000 VERSUS 1999
Salt sales in 2000 were $876 million, a 6% decline from pro forma 1999 sales of
$930 million. Sales were comparatively lower in 2000 in part due to the absence
of fourth quarter European Salt sales following the divestiture of that
business. Earnings from continuing operations for 2000 were $24 million, a 31%
decline from pro forma 1999 of $35 million and a $14 million increase from $10
million in 1999. Despite strong weather related results in the fourth quarter of
2000, the change in sales and earnings was largely attributable to the impact of
a mild winter at the beginning of 2000 on sales of ice control salt in contrast
with a more severe winter in early 1999. Excluding non-recurring items, earnings
were $24 million in 2000, a $15 million increase from $9 million in 1999.
CORPORATE
2001 VERSUS 2000
Corporate loss from continuing operations in 2001 totaled $176 million compared
to $175 million in 2000. The current period benefited from interest cost savings
as a result of lower debt levels and interest rates compared to the prior-year.
Offsetting the interest savings are additional provisions for environmental
remediation (net of insurance recoveries) and increased employee related
expenses. Excluding non-recurring items, corporate losses decreased 4% to $154
million compared to $160 million in 2000.
2000 VERSUS 1999
Corporate loss from continuing operations in 2000 totaled $175 million, a 38%
decline from $283 million in 1999. The years 2000 and 1999 included charges of
$13 million for Rodel and $105 million for Morton, respectively, for IPR&D
related to these acquisitions. Excluding non-recurring items, corporate losses
increased 8% to $160 million compared to $148 million in 1999.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
Cash and cash equivalents remained unchanged at $92 million at December 31,
2001. Net cash in-flows during 2000 and 1999 resulted in net increases in cash
and cash equivalents of $35 million and $41 million, respectively. Each of these
years included acquisition, divestiture and financing activities having a
significant effect on the Company's cash flows. (See Note 2: "Acquisitions and
Dispositions of Assets" in the accompanying "Notes to Consolidated Financial
Statements").
Free cash flows (which the Company defines as cash provided by operating
activities less capital asset spending and dividends) for the year 2001 compared
to 2000 and 1999 are presented below:
- --------------------------------------------------------------------------------
(Millions of dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 699 $ 776 $ 816
Capital additions (401) (391) (323)
Dividends (171) (167) (141)
------------------------------------
Free cash flow $ 127 $ 218 $ 352
- --------------------------------------------------------------------------------
21
The Company's short-term, primary source of liquidity will be cash flow from
operations, supplemented as necessary with commercial paper and or bank
borrowings. At year end 2001, the Company maintains an unused credit facility
with a syndicated group of banks of $900 million; $500 million of which is
committed until 2004. The commitment of this facility is not contingent on the
Company's credit rating. The Company does not believe there is a material risk
to short-term liquidity. As of December 31, 2001, the Company had no letters of
credit or material guarantees outstanding.
FINANCING
Total borrowings at year-end 2001 were $2,898 million, only 7% of which is due
prior to 2004. Total borrowings were $3,774 million at year end 2000. At the end
of 2001, the debt ratio was 42% compared with 49% at the end of 2000.
In 2000, the Company issued 400 million Euros (or $376 million) of 6.0% notes
due 2007.
On February 27, 2002, the Company issued 20 billion yen (or $149 million) of
3.5% notes, interest payable semiannually on March 29th and September 29th,
beginning in March 2002. The maturity date is March 29, 2032, callable annually
after March 2012. Proceeds from the issuance of the note will be used for
general corporate purposes.
The Company contemplates some early retirement of debt via calls and repurchases
as opportunities arise in order to gain the long-term benefits of reduced
interest expense. As a result, some non-recurring losses will be recorded during
2002.
CONTRACTUAL OBLIGATIONS
The following table provides the Company's contractual obligations and
commitments for future payments:
- ------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) Payments due by period
- ------------------------------------------------------------------------------------------------------------------------
Less than
Contractual obligations Total 1 year 1-3 years 4-5 years Over 5 years
-----------------------------------------------------------------------------------
Total borrowings/capital
lease obligations $ 2,898 $ 178 $ 516 $ 375 $ 1,829
Operating leases 228 50 90 57 31
-----------------------------------------------------------------------------------
Total contractual cash
obligations $ 3,126 $ 228 $ 606 $ 432 $ 1,860
- ------------------------------------------------------------------------------------------------------------------------
TRADING ACTIVITIES
The Company does not have any trading activity that involves non-exchange traded
contracts accounted for at fair value.
UNCONSOLIDATED ENTITIES
The Company has no controlling ownership in significant entities which are not
consolidated. There are no significant contractual requirements to fund losses
of unconsolidated entities. Material contingent liabilities, guarantees and
commitments not included in the consolidated balance sheet are disclosed in the
accompanying "Notes to Consolidated Financial Statements" under Note 25:
"Contingent Liabilities, Guarantees and Commitments."
ENVIRONMENTAL
There is a risk of environmental impact in chemical manufacturing operations.
The Company's environmental policies and practices are designed to ensure
compliance with existing laws and regulations and to minimize the possibility of
significant environmental impact.
The laws and regulations under which the Company operates require significant
expenditures for capital improvements, the operation of environmental protection
equipment and remediation. Future developments and even more stringent
environmental regulations may require the Company to make additional unforeseen
22
environmental expenditures. The Company's major competitors are confronted by
substantially similar environmental risks and regulations.
The Company is a party in various government enforcement and private actions
associated with former waste disposal sites, many of which are on the U.S.
Environmental Protection Agency's (EPA) National Priority List and has been
named a potentially responsible party at approximately 140 inactive waste sites
where remediation costs have been or may be incurred under the Federal
Comprehensive Environmental Response, Compensation and Liability Act and similar
state statutes. In some of these cases the Company may also be held responsible
for alleged property damage. The Company has provided for future costs at
certain of these sites. The Company is also involved in corrective actions at
some of its manufacturing facilities.
The Company considers a broad range of information when determining the amount
of its remediation accruals, including available facts about the waste site,
existing and proposed remediation technology and the range of costs of applying
those technologies, prior experience, government proposals for this or similar
sites, the liability of other parties, the ability of other principally
responsible parties to pay costs apportioned to them and current laws and
regulations. These accruals are assessed quarterly and updated as additional
technical and legal information becomes available. However, at certain sites,
the Company is unable, due to a variety of factors, to assess and quantify the
ultimate extent of its responsibility for study and remediation costs. Major
sites for which reserves have been provided are the non-company-owned Lipari,
Woodland and Kramer sites in New Jersey, Whitmoyer in Pennsylvania and
company-owned sites in Bristol and Philadelphia, Pennsylvania and Houston,
Texas. The Morton acquisition introduced two major sites: Moss Point,
Mississippi and Wood-Ridge, New Jersey.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation ("Velsicol")
have been held jointly and severally liable for the cost of remediation
necessary to correct mercury-related environmental problems associated with a
mercury processing plant on the site prior to its acquisition by Morton. At the
date of acquisition, Morton had disclosed and accrued for certain ongoing
studies, which are expected to be completed during 2002, with regulatory
decisions expected by the end of 2002. In its allocation of the purchase price
of Morton, the Company accrued for additional study costs at December 31, 1999
and additional remediation costs in 2000 based on the progress of the technical
studies. A separate study of probable contamination in Berry's Creek, which runs
near the plant site, and of the surrounding wetlands is on a timetable yet to be
determined. Therefore, the estimated costs of this separate study and any
resulting remediation requirements have not been considered in the allocation of
the Morton purchase price. There is much uncertainty as to what will be required
to address Berry's Creek but cleanup costs could be very high and the Company's
share of these costs could be material. The Company's exposure will also depend
upon the continued ability of Velsicol and its indemnitor, Fruit of the Loom,
Inc., which has filed for protection under the bankruptcy laws, to contribute to
the cost of remediation. In 2001, these parties have stopped paying their share
of expenses. Ultimately, the Company's exposure will also depend on the results
of attempts to obtain contributions from others believed to share
responsibility. A cost recovery action against these responsible parties is
pending in federal court. This action has been stayed pending future regulatory
developments and the appeal of a summary judgment ruling in favor of one of the
defendants. Settlements have been reached with some defendants for claims
considered de minimis associated with the Wood-Ridge plant site.
During 1996, the EPA notified Morton of possible irregularities in water
discharge monitoring reports filed by its Moss Point, Mississippi plant in early
1995. Morton investigated and identified other environmental issues at the
plant. Though at the date of acquisition Morton had accrued for some remediation
and legal costs, the Company revised these accruals as part of the allocation of
the purchase price of Morton based on its discussions with the authorities and
on the information available as of June 30, 2000. In 2000, the Company reached
agreement with the EPA, the Department of Justice and the State of Mississippi,
resolving these historical environmental issues. The agreement received court
approval in early 2001. The final settlement includes payment of $20 million in
civil penalties, which were paid in the first quarter of 2001, $2 million in
criminal penalties, which were paid in the fourth quarter of 2000 and $16
million in various Supplemental Environmental Projects. The accruals established
for this matter were sufficient to cover these and other related costs of the
settlement. In December 2001, the Company closed the chemicals portion of the
Moss Point facility.
The amount charged to earnings before-tax for environmental remediation was $28
million and $4 million for the years ended December 31, 2001 and 1999,
respectively, and the amount charged in 2000 was immaterial. The reserves for
remediation were $156 million and $185 million at December 31, 2001 and 2000,
respectively, and are
23
recorded as "other liabilities" (current and long-term). The Company is pursuing
lawsuits over insurance coverage for environmental liabilities. It is the
Company's practice to reflect environmental insurance recoveries in results of
operations for the quarter in which the litigation is resolved through
settlement or other appropriate legal processes. Resolutions typically resolve
coverage for both past and future environmental spending. The Company settled
with several of its insurance carriers and recorded income before-tax of
approximately $13 million, $1 million and $17 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
In addition to accrued environmental liabilities, the Company had reasonably
possible loss contingencies related to environmental matters of approximately
$73 million and $73 million at December 31, 2001 and 2000, respectively.
Further, the Company has identified other sites, including its larger
manufacturing facilities, where additional future environmental remediation may
be required, but these loss contingencies cannot reasonably be estimated at this
time. These matters involve significant unresolved issues, including the number
of parties found liable at each site and their ability to pay, the outcome of
negotiations with regulatory authorities, the alternative methods of remediation
and the range of costs associated with those alternatives. The Company believes
that these matters, when ultimately resolved, which may be over an extended
period of time, will not have a material adverse effect on the consolidated
financial position or consolidated cash flows of the Company, but could have a
material adverse effect on consolidated results of operations or cash flows in
any given period.
Capital spending for new environmental protection equipment was $26 million in
2001 versus $27 million in 2000 and $30 million in 1999. Spending for 2002 and
2003 is expected to be $26 million and $21 million, respectively. Capital
expenditures in this category include projects whose primary purposes are
pollution control and safety, as well as environmental aspects of projects in
other categories that are intended primarily to improve operations or increase
plant efficiency. The Company expects future capital spending for environmental
protection equipment to be consistent with prior-year spending patterns. Capital
spending does not include the cost of environmental remediation of waste
disposal sites.
Cash expenditures for waste disposal site remediation were $51 million in 2001,
$33 million in 2000 and $27 million in 1999. The expenditures for remediation
are charged against accrued remediation reserves. The cost of operating and
maintaining environmental facilities was $129 million, $114 million and $107
million in 2001, 2000 and 1999 respectively, and was charged against
current-year earnings.
OTHER LITIGATION
There has been increased publicity about asbestos liabilities faced by
manufacturing companies. As a result of the bankruptcy of most major asbestos
producers, plaintiffs' attorneys are increasing their focus on peripheral
defendants. The Company believes it has adequate reserves and insurance and does
not believe its asbestos exposure is material.
There are pending lawsuits filed against Morton related to employee exposure to
asbestos at a manufacturing facility in Weeks Island, Louisiana with additional
lawsuits expected. The Company expects that most of these cases will be
dismissed because they are barred under worker's compensation laws; however,
cases involving asbestos-caused malignancies may not be barred under Louisiana
law. Subsequent to the Morton acquisition, the Company commissioned medical
studies to estimate possible future claims and recorded accruals based on the
results. Morton has also been sued in connection with the former Friction
Division of the former Thiokol Corporation which merged with Morton in 1982.
Settlements to date total $350 thousand and many cases have closed with no
payment. These cases are fully insured. In addition, like most manufacturing
companies, Rohm and Haas has been sued, generally as one of many defendants, by
non-employees who allege exposure to asbestos on the Company premises.
The Company and its subsidiaries are also parties to litigation arising out of
the ordinary conduct of its business. Recognizing the amounts reserved for such
items and the uncertainty of the ultimate outcomes, it is the Company's opinion
that the resolution of all these pending lawsuits, investigations and claims
will not have a material adverse effect, individually or in the aggregate, upon
the results of operations, cash flows or the consolidated financial position of
the Company.
DIVIDENDS
Total common stock dividends paid in 2001 were $.80 per share, compared to $.78
per share in 2000. The Company's common stock dividend payout is targeted at
approximately 35% of trend-line earnings. Common stock dividends have been paid
each year since 1927, and the payout has increased annually since 1977.
24
ADDITIONS TO LAND, BUILDING AND EQUIPMENT
Capital additions were $401 million in 2001 compared to $391 million in 2000.
Fixed asset additions during 2001 included spending on the Company's upgrade and
consolidation of its ERP infrastructure; spending on a human resource/payroll
project; completion of the Rodel expansion and the de-bottlenecking of the USA
Methyl Methacrylate (MMA) facility in Houston. Capital additions during 2000
included acrylics expansion in Texas; spending on emulsions plants in the United
Kingdom and Argentina; facility expansion in Electronic Materials, particularly
at the Rodel facilities and spending on the Company's ERP project.
Capital expenditures in 2002 are not expected to exceed depreciation expense.
Spending for environmental protection equipment, which is included in several of
the categories in the table shown below, was $26 million in 2001, $27 million in
2000 and $30 million in 1999.
Expenditures for the past three years, categorized by primary purpose of
project, are presented below:
- --------------------------------------------------------------------------------
(Millions of dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Environmental, cost savings and infrastructure $ 265 $ 271 $ 191
Capacity additions and new products 107 78 98
Research facilities and equipment 12 28 22
Capitalized interest cost 17 14 12
------------------------------
Total $ 401 $ 391 $ 323
- --------------------------------------------------------------------------------
ACQUISITIONS AND DIVESTITURES
The Company completed the following significant acquisitions and divestitures in
2001:
In November 2001, the Company acquired the flexible packaging adhesives business
of Technical Coatings Co., a subsidiary of Benjamin Moore & Company. The
acquisition includes the development, production and distribution of a full line
of cold seal adhesives marked under the COSEAL(R) trademark. The primary
application of such adhesives is in flexible packaging, used mainly in the food
and medical industries.
In September 2001, the Company acquired the Megum[trademark] rubber-to-metal
bonding business from Chemetall GmbH (Chemetall) of Frankfurt Germany. The
acquisition includes the corresponding activities of Chemetall subsidiaries in
Italy and Brazil, and includes the acquired technology used for the production
of vibration absorption modules, used primarily in the automotive industry.
In 2001, the Company increased its ownership in Rodel from 90% to 99% for an
additional cost of approximately $80 million. Rodel was a privately-held,
Delaware-based leader in precision polishing technology serving the
semiconductor, memory disk and glass polishing industries. In the second quarter
of 2000 the Company increased its ownership from 48% to approximately 90% for a
cost of approximately $200 million. The financial statements reflect allocations
of the purchase price amounts based on estimated fair values, and resulted in
acquired goodwill of $110 million, which was amortized on a straight-line basis
over 30 years, through December 31, 2001. Prior to March 31, 2000 the investment
had been accounted for under the equity method with the Company's share of
earnings reported as equity in affiliates. Since the second quarter of 2000,
Rodel was accounted for using the purchase method with results of operations
fully consolidated. Approximately $13 million of the purchase price was
allocated to IPR&D related to chemical mechanical planarization and surface
preparation technologies under development and was recognized as a charge in the
second quarter of 2000.
On June 1, 2001, the Company completed the sale of its Agricultural Chemicals
business (Ag) to Dow AgroSciences LLC (DAS), a wholly owned subsidiary of the
Dow Chemical Company, for approximately $1 billion, subject to a working capital
adjustment not yet finalized at December 31, 2001. The Company recorded a gain
on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per
share, after-tax). Under the terms of the agreement, the divestiture included
fungicides, insecticides, herbicides, trademarks, and license to all
agricultural uses of the Rohm and Haas biotechnology assets, as well as the
agricultural business-related manufacturing sites located in Brazil, Colombia,
France and Italy, the Company's share of the Nantong, China joint venture and
the Company's assets in Muscatine, Iowa. The Company recorded the sale of Ag as
discontinued operations in accordance with APB 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Agricultural Chemicals business had been a separate major line of business
previously reported as part of the Chemical Specialties segment and represented
the Company's entire line of agricultural chemical products.
25
The operating results of Ag have been reported separately as discontinued
operations in the Statements of Consolidated Earnings for each year presented.
Net sales and income from discontinued operations are as follows:
Year ended December 31,
- --------------------------------------------------------------------------------
(Millions of dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Net sales $ 230 $ 530 $ 534
Operating income 65 93 89
Income tax expense 25 35 33
Income from discontinued operations 40 58 56
- --------------------------------------------------------------------------------
The Company completed the following acquisition and joint venture activities in
2000:
In the first quarter of 2000, the Company entered into a joint venture with
Stockhausen GmbH & Co. KG (Stockhausen) of Germany to form a global partnership
(StoHaas) for the manufacture of reliable, low cost supply of acrylic acid in
North America and Europe. Under the terms of the joint venture both partners
purchase acrylic acid from StoHaas for use as raw materials. Since StoHaas is
not controlled by the Company its operations are not consolidated; instead, the
Company's investment in StoHaas is accounted and reported as an investment under
the equity method. The earnings impact in 2001, the first year of operations,
was minimal. The Company expects minimal earnings impact from operations of the
joint venture in future years as well. In conjunction with the joint venture,
the Company acquired Stockhausen's merchant monomer business in Europe.
Acquired 95% of Acima A.G. (Acima), a Swiss company specializing in biocidal
formulations, polyurethane catalysts and other specialty chemicals and also
acquired an 80% interest in Silicon Valley Chemical Laboratories, Inc. (SVC), a
privately-held supplier of high technology products for the semiconductor
industry. These transactions were accounted for using the purchase method.
In the second quarter of 2000, the Company acquired the photoresist business of
Mitsubishi Chemical Corporation. Mitsubishi Chemical is a leading producer of
G-line, I-line and deep UV photoresist chemistry used to make semiconductor
chips. The transaction was accounted for using the purchase method.
In conjunction with the acquisitions of Acima, SVC and Mitsubishi photoresist,
the Company recorded goodwill of $36 million which was amortized over a range of
20 to 40 years, through December 31, 2001.
The Company completed the following divestitures in 2000:
In the first quarter of 2000, the Company sold its Industrial Coatings business
to BASF Corporation for approximately $169 million, net of working capital
adjustments.
In the third quarter of 2000, the Company sold its Thermoplastic Polyurethane
business to Huntsman Corporation for approximately $117 million, net of working
capital adjustments.
In the fourth quarter of 2000, the Company sold its European Salt business,
Salins-Europe, to a consortium, which includes management, led by Union d'Etudes
et d'Investissements SA, a wholly-owned subsidiary of Credit Agricole, for
approximately $270 million.
These three businesses were acquired by the Company in June 1999 as part of the
acquisition of Morton and were recorded at fair value. Accordingly, no gain or
loss was recorded on these transactions.
In the fourth quarter of 2000, the Company sold its 50% interest in TosoHaas to
its joint venture partner, Tosoh Corporation.
26
Pro forma information is not presented, as the 2001 and 2000 acquisitions and
divestitures were not material to the Company's results of continuing operations
or consolidated financial position. The results of operations of acquired
businesses are included in the Company's consolidated financial statements from
the respective dates of acquisition.
CHANGE IN FUNCTIONAL CURRENCIES
On December 31, 2000, the Company substantially completed the legal
restructuring and business integration of its foreign operations, primarily in
Europe, following the Morton and LeaRonal acquisitions in 1999. Based on these
significant operational changes at January 1, 2001, the Company determined that
the functional currency of a majority of the Company's foreign entities is their
respective local currency. This change resulted in a one-time write-down of
fixed assets and inventories of approximately $50 million in the first quarter
of 2001 with a corresponding charge to other comprehensive income.
WORKING CAPITAL
Accounts receivable from customers decreased $314 million and inventory
decreased $255 million. Days sales was 67 days, down from 72 in 2000. Days cost
of sales in ending inventory decreased to 65 days from 74 days.
Details about two major components of working capital at the end of 2001 and
2000 are summarized below:
- ---------------------------------------------------------------------------
(Millions of dollars) 2001(1) 2000(2)
- ---------------------------------------------------------------------------
INVENTORIES
Year-end balance $ 712 $ 967
Annual turnover 5.6x 4.8x
- ---------------------------------------------------------------------------
CUSTOMER RECEIVABLES
Year-end balance $ 1,045 $ 1,359
Annual turnover 5.4x 5.1x
- ---------------------------------------------------------------------------
(1) 2001 reflects the divestiture of the Agricultural Chemicals business and
reflect the current rate.
(2) 2000 includes the discontinued operations and statement of position of the
Agricultural Chemicals business and reflect historical rate.
LAND, BUILDING AND EQUIPMENT, NET
Investments in land, buildings and equipment, net is summarized below:
- ---------------------------------------------------------------------------
(Millions of dollars) 2001(1) 2000(2)
- ---------------------------------------------------------------------------
Year-end balance $ 2,916 $ 3,294
Annual turnover 1.9x 2.1x
- ---------------------------------------------------------------------------
(1) 2001 reflects the divestiture of the Agricultural Chemicals business and
reflect the current rate.
(2) 2000 includes the discontinued operations and statement of position of the
Agricultural Chemicals business and reflect historical rate.
Annual turnover figures are calculated by dividing annual sales (for customer
receivables and land, buildings and equipment, net) or cost of goods sold (for
inventories) by the year-end balance. Days sales outstanding was calculated by
dividing ending customer receivables by daily sales, and days cost of sales in
ending inventory was calculated by dividing ending inventory by daily cost of
sales.
ASSET TURNOVER equals sales divided by year-end total assets. Asset turnover was
.6 in 2001, .6 in 2000 and .6 in 1999. The 1999 amount was calculated using pro
forma sales.
RETURN ON CAPITAL EMPLOYED (ROCE) equals net earnings plus after-tax
amortization and after-tax interest expense, divided by average total assets
less cash and average non-interest bearing liabilities. ROCE was 9.6% in 2001,
9.2% in 2000 and 11.3% in 1999, excluding IPR&D charges in 2000 and 1999. The
year 2001 excludes extraordinary loss on early extinguishment of debt and the
cumulative effect of accounting change.
RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) is obtained by dividing net earnings
less preferred stock dividends by average year-end common stockholders' equity.
Average year-end common stockholders' equity is calculated without the reduction
for the ESOP transaction. ROE was 10.3% in 2001, 10.0% in 2000 and 13.4% in
1999, excluding the IPR&D charge.
27
INFORMATION SYSTEMS
The Company began an investment in 2000 to upgrade and consolidate its
information systems infrastructure. The effort is underway and on schedule with
the Plastics Additives business in production. As it is implemented, this
infrastructure is expected to enable more efficient e-commerce connections among
the Company, its suppliers and customers. The Company has also engaged an
implementation consultant to help install the components of the new system as
quickly and efficiently as possible and has created an internal e-Transformation
group to coordinate these efforts so that the new electronic business tools and
support systems can be in place as rapidly as possible. Initial areas of
concentration include, finance, human resources, customer relationship
management, materials management, production scheduling, procurement,
maintenance, sales and distribution.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
o ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND OTHER HEDGING ACTIVITIES
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes a new
model for the accounting and reporting of derivative and hedging
transactions. Additionally, in July 2001 the Company adopted DIG Issue G20,
"Assessing and Measuring the Effectiveness of a Purchased Option Used in a
Cash Flow Hedge."
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value
hedges, changes in the fair value of the instrument will largely be offset
on the income statement by changes in the fair value of the hedged item.
For instruments designated as cash flow hedges, the effective portion of
the hedge is reported in other comprehensive income until it is assigned to
earnings in the same period in which the hedged item has an impact on
earnings. For instruments designated as a hedge of net investment in
foreign operating units not using the U.S. Dollar as its functional
currency, changes in the fair value of the instrument will be offset in
other comprehensive income to the extent that they are effective as
economic hedges. Changes in the fair value of derivative instruments,
including embedded derivatives, that are not designated as a hedge will be
recorded each period in current earnings along with any ineffective portion
of hedges.
Using market valuations for derivatives held as of December 31, 2000, the
Company recorded a $6 million after-tax cumulative income effect to
accumulated other comprehensive income, and a charge to net income of $2
million, to recognize at fair value all derivative instruments on January
1, 2001. Changes in the Company's derivative instrument portfolio or
changes in the market values of this portfolio could have a material effect
on accumulated other comprehensive income.
The Company has concluded that the adoption of SFAS No. 133 will not
materially change management's risk policies and practices nor will
compliance with the standard materially impact the reported results from
operations.
o BUSINESS COMBINATIONS
SFAS No. 141, "Business Combinations," which is effective for all business
combinations completed after June 30, 2001, mandates that all business
combinations be accounted for by only the purchase method (thereby
eliminating the option for pooling of interests); segregation of other
intangible assets from goodwill if they meet the contractual legal
criterion or the separability criterion; and expanded disclosure
requirements on the primary reasons for a business combination and the
allocation of the purchase price to the assets and liabilities assumed by
major balance sheet caption.
o GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets," is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142, which the
Company adopted on January 1, 2002, requires the Company to cease
amortization of goodwill and certain indefinite-lived intangible assets and
evaluate goodwill and intangible assets for impairment. In accordance with
the Statement, the Company reviewed its intangible assets in order to
identify intangible assets with indefinite lives which will no longer be
amortized and intangible assets which may be reclassified as goodwill and
thus no longer be amortized. In addition the Company is in the process of
assessing the remaining useful lives of intangible assets which will
continue to be subject to amortization. As of January 1, 2002, the Company
ceased amortization of goodwill and intangibles deemed to have indefinite
lives and reclassified certain intangibles in accordance with the
provisions of this statement.
28
The evaluation of the Company's goodwill is performed at the reporting unit
level and is a two-step process. When evaluating goodwill for impairment,
the Statement requires the Company to first compare a reporting unit's book
value to its fair value. To the extent that the book value exceeds fair
value, the Company is required to perform a second step wherein a reporting
unit's assets and liabilities are fair valued. To the extent that a
reporting unit's book value of goodwill exceeds its implied fair value of
goodwill, impairment exists and must be recognized. The implied fair value
of goodwill is calculated as the fair value of a reporting unit in excess
of the fair value of all non-goodwill assets in the reporting unit. Net
book values of the recorded assets and liabilities have been calculated for
each of the Company's reporting units. The Company is in the process of
valuing these reporting units based primarily upon the present value of
expected future cash flows.
In accordance with SFAS No. 142, the intangible assets which continue to be
subject to amortization are being reviewed for impairment by the Company
under SFAS No. 144 "Accounting for the impairment or Disposal of Long-Lived
Assets." Intangible assets which are no longer subject to amortization are
being reviewed by the Company in accordance with SFAS No. 142 in a one-step
process. Impairment is measured as the amount an intangible asset's
carrying value exceeds its fair value. The Company intends to complete its
evaluation of intangible assets in accordance with SFAS No. 142 no later
than June 30, 2002.
The Company's previous business combinations were accounted for using the
purchase method of accounting. As of December 31, 2001, the net carrying
amount of goodwill was $2,159 million. Goodwill amortization expense for
the year ended December 31, 2001 was $64 million. The Company intends to
complete its evaluation of goodwill in accordance with SFAS No. 142 no
later than June 30, 2002 and expects to recognize an impairment loss. The
Company continues to finalize its estimate of the impairment loss. Any
impairment loss will be recognized as a cumulative effect of a change in
accounting principle in the Company's consolidated statement of operations.
o ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which requires
recognition of the fair value of liabilities associated with the retirement
of long-lived assets when a legal obligation to incur such costs arises as
a result of the acquisition, construction, development and/or the normal
operation of a long-lived asset. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset and subsequently allocated to
expense over the asset's useful life. SFAS No. 143 is effective for fiscal
years beginning after December 15, 2002. Management is currently assessing
the impact of the new standard on its financial statements.
o IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002 the Company adopted SFAS No. 144. The Statement provides
new guidance on the recognition of impairment losses on long-lived assets
to be held and used or to be disposed of and also broadens the definition
of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. Management has
assessed the impact of the new standard and determined there to be no
material impact to the financial statements.
CAUTIONARY STATEMENTS
Any statements made by the Company in its filings with the Securities and
Exchange Commission or other communications (including press releases and
analyst meetings and calls) that are not statements of historical fact are
forward-looking statements. These statements include, without limitation, those
relating to anticipated product plans, litigation and environmental matters,
currency effects, profitability, and other commitments or goals. Forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from the statements made. These risks and
uncertainties include, but are not limited to, the following:
29
o CURRENCIES AND ECONOMIC CONDITIONS
Approximately half of the Company's revenues are from outside the United
States, a significant portion of which are denominated in foreign
currencies. Also, significant production facilities are located outside the
United States. The Company's financial results therefore can be affected by
changes in foreign currency rates. Though the Company uses certain
financial instruments to mitigate these effects, it does not hedge its
foreign currency exposure in a manner that would entirely eliminate the
effects of changes in foreign exchange rates on the Company's earnings,
cash flows and fair values of assets and liabilities. Accordingly, reported
revenue, net income, cash flows and fair values have been and in the future
may be affected by changes in foreign exchange rates. In addition, because
of the extensive nature of the Company's foreign business activities,
financial results could be adversely affected by changes in worldwide
economic conditions, changes in trade policies or tariffs, changes in
interest rates, and political unrest.
o COMPETITION AND DEMAND
The Company's products are sold in a competitive, global economy.
Competitors include many large multinational chemical firms based in
Europe, Asia and the United States. In addition, financial results are
subject to fluctuations in demand and the seasonal activity of certain of
the Company's businesses. The Company also manufactures and sells its
products to customers in industries and countries that are experiencing
periods of rapid change, most notably countries in Eastern Europe and in
the Asia-Pacific region. Also, weather conditions have historically had,
and will likely continue to have in the future, a significant impact on
revenues and earnings in the Company's Salt segment. These factors can
adversely affect demand for the Company's products and therefore may have a
significant impact on financial results.
o SUPPLY AND CAPACITY
From time to time certain raw materials the Company requires become
limited. It is likely this will occur again in the future. Should such
limitations arise, disruptions of the Company's supply chain may lead to
higher prices and/or shortages. Also, from time to time, the Company is
subject to increases in raw material prices and, from time to time,
experiences significant capacity limitations in its own manufacturing
operations. These limitations, disruptions in supply, price increases and
capacity constraints could adversely affect financial results.
o TECHNOLOGY
The Company has invested significant resources in intellectual properties
such as patents, trademarks, copyrights, and trade secrets. The Company
relies on the protection these intellectual property rights provide since
it depends on these intellectual resources for its financial stability and
its future growth. The development and successful implementation of new,
competing technologies in the market place could significantly impact
future financial results.
o JOINT VENTURES, ACQUISITIONS AND ALLIANCES
The Company has entered, and in the future may enter, into arrangements
with other companies to expand product offerings and to enhance its own
capabilities. It will likely also continue to make strategic acquisitions
and divestitures. The success of acquisitions of new technologies,
companies and products, or arrangements with third parties, is not
predictable and there can be no assurance that the Company will be
successful in realizing its objectives, or that realization may not take
longer than anticipated, or that there will not be unintended adverse
consequences from these actions.
o ENVIRONMENTAL
Risks and uncertainties related to environmental matters are discussed on
pages 22 through 24 of this Form 10-K.
ITEM 7A. MARKET RISK DISCUSSION
The Company is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices since it denominates its business
transactions in a variety of foreign currencies, finances its operations through
long- and short-term borrowings, and purchases raw materials at market prices.
As a result, future earnings, cash flows and fair values of assets and
liabilities are subject to uncertainty. The Company's operating and financing
plans include actions to reduce this uncertainty including, but not limited to,
the use of derivative instruments.
30
The Company has established policies governing its use of derivative
instruments. The Company does not use derivative instruments for trading or
speculative purposes, nor is it a party to any leveraged derivative instruments
or any instruments of which the values are not available from independent third
parties. The Company manages counter-party risk by entering derivative contracts
with major financial institutions of investment grade credit rating and by
limiting amount of exposure to each financial institution. The terms of certain
derivative instruments contain a credit clause where each party has a right to
settle at market if the other party is downgraded below investment grade. As of
December 31, 2001, the fair market value of all such contracts was $24 million,
all of which were held by investment grade financial institutions.
The Company enters into derivative contracts based on economic analysis of
underlying exposures, anticipating that adverse impacts on future earnings, cash
flows and fair values due to fluctuations in foreign currency exchange rates,
interest rates and commodity prices will be offset by the proceeds from and
changes in fair value of the derivative instruments. The Company does not hedge
its exposure to market risk in a manner that completely eliminates the effects
of changing market conditions on earnings, cash flows and fair values.
In evaluating the effects of changes in foreign currency exchange rates,
interest rates and commodity prices on the Company's business operations, the
risk management system uses sensitivity analysis. The analysis assumes
simultaneous shifts in those rates and quantifies the impact of such shifts on
the Company's earnings, cash flows, and fair values of assets and liabilities
during a one-year period. The range of changes used for the purpose of this
analysis reflects the Company's view of changes that are reasonably possible
over a one-year period. Fair values are the present value of projected future
cash flows based on market rates and prices chosen.
FOREIGN EXCHANGE RATE RISK
Short-term exposures to changing foreign exchange rates are primarily due to
operating cash flows denominated in foreign currencies and transactions
denominated in non-functional currencies. The Company covers known and
anticipated external transactions and operating exposures by using foreign
exchange option, forward and swap contracts. The Company's most significant
foreign currency exposures relate to Western European countries (primarily
Germany, France, Italy, Netherlands, the United Kingdom, Sweden, and
Switzerland), as well as Brazil, Mexico, Canada, Japan, Taiwan, China and
Australia. The Company conducted a sensitivity analysis on the fair value of its
foreign currency hedge portfolio assuming an instantaneous 10% change in foreign
currency exchange rates from their levels as of December 31, 2001, with all
other variables held constant. A 10% appreciation and depreciation of the U.S.
dollar against foreign currencies would reduce and increase by $79 million, the
fair value of foreign currency hedging contracts held at December 31, 2001. The
sensitivity in fair value of the foreign currency hedge portfolio represents
changes in fair values estimated based on market conditions as of December 31,
2001, without reflecting the effects of underlying anticipated transactions.
When those anticipated transactions are realized, actual effects of changing
foreign currency exchange rates could have a material impact on earnings and
cash flows in future periods.
Long-term exposures to foreign currency exchange rate risk are managed primarily
through operational activities. The Company manufactures its products in a
number of locations around the world; hence, has a cost base in a variety of
European, Asian and Latin American currencies. Additionally, the Company
finances in local currencies its operations outside the United States. Such
diverse base of local currency costs and financings serves to partially
counterbalance the impact of changing foreign currency exchange rates on
earnings, cash flows and fair values of assets and liabilities.
INTEREST RATE RISK
The Company is exposed to changes in interest rates primarily due to its
financing, investing and cash management activities, which include long- and
short-term debt to maintain liquidity and fund its business operations. The
Company's current strategic policy is to maintain from 20% to 40% of floating
rate debt. A 65 basis point increase in interest rates would reduce by $107
million, the fair value of liabilities under its floating and fixed rate
instruments, including short- and long-term debt and derivative contracts
outstanding as of December 31, 2001. A 65 basis point decrease in interest rates
will increase the fair value by $119 million. However, such changes in fair
values would not have a material impact on earnings per share or cash flows as
the majority of the Company's debt portfolio consisted of fixed rate
instruments. A 65 basis point movement is equivalent to approximately 10% of the
Company's weighted average rate on its worldwide debt.
31
COMMODITY PRICE RISK
The Company purchases certain raw materials such as natural gas, propylene,
acetone, butanol and styrene under short- and long-term supply contracts. The
purchase prices are generally determined based on prevailing market conditions.
Changing raw material prices have historically had material impacts on the
Company's earnings and cash flows, and will likely continue to have significant
impacts on earnings and cash flows in future periods. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
25% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at December 31, 2001 approximates
$9 million, which would not be material when compared with the Company's
earnings and financial position.
FORWARD-LOOKING STATEMENTS
This market risk discussion and the estimated amounts presented are
forward-looking statements that assume certain market conditions known at
December 31, 2001. Actual results in the future may differ materially from these
projected results due to changes in business climate, economic and competitive
uncertainties, future acquisitions activities and any unforeseen developments in
relevant financial markets, including Asia and Latin America. The methods used
above to assess risk should not be considered projections of expected future
events or results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
- ----------------------------------------------------------------------------------------------
Report of Independent Accountants F-2
Consolidated Financial Statements:
Statements of Consolidated Earnings for the years ended December 31, 2001, 2000 and 1999 F-3
Statements of Consolidated Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-5
Statements of Consolidated Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
2001 Quarterly Results
- --------------------------------------------------------------------------------------------------------------------
Year
(Millions of dollars) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2001
----------------------------------------------------------------------------------
Net sales ................... $ 1,572 $ 1,408 $ 1,346 $ 1,340 $ 5,666
Gross profit................. 452 401 414 391 1,658
Earnings (losses) from
continuing operations before
extraordinary item and
cumulative effect of accounting
change....................... 48 (208) 53 37 (70)
Net earnings................. 63 242 53 37 395
Basic and diluted earnings per
common share, in dollars:
Continuing operations..... $ .22 $ (.94) $ .24 $ .17 $ (.31)
Net earnings.............. .29 1.09 .24 .17 1.79
Cash dividends per common
share, in dollars............ $ .20 $ .20 $ .20 $ .20 $ .80
- --------------------------------------------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------------------------------------------
2000 Quarterly Results
- --------------------------------------------------------------------------------------------------------------------
Year
(Millions of dollars) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2000
----------------------------------------------------------------------------------
Net sales.................... $ 1,622 $ 1,628 $ 1,583 $ 1,516 $ 6,349
Gross profit................. 535 508 508 456 2,007
Earnings from continuing
operations before extraordinary
item and cumulative effect of
accounting change............ 101 58 77 60 296
Net earnings................. 123 77 84 70 354
Basic and diluted earnings per
common share, in dollars:
Continuing operations..... $ .46 $ .26 $ .35 $ .27 $ 1.34
Net earnings.............. .56 .35 .38 .32 1.61
Cash dividends per common
share, in dollars............ $ .19 $ .19 $ .20 $ .20 $ .78
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No reports on Form 8-K were filed during 2001 or 2000 relating to any
disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WILLIAM J. AVERY, Chairman and Director, Crown, Cork & Seal Company, Inc.;
Previously Chief Executive Officer, Crown, Cork & Seal Company, Inc. Mr. Avery,
61, has been a director since 1997. (Committees: 3, 4 (chair), 6)
JAMES R. CANTALUPO, President and Vice Chairman, Emeritus, McDonalds
Corporation, Mr. Cantalupo, 58, has been a director since 1999. (Committees: 1
(chair), 5, 6)
J. MICHAEL FITZPATRICK, President and Chief Operating Officer, Rohm and Haas
Company, Dr. Fitzpatrick, 55, has been a director since 1999. (Committees: 2,
3, 5)
EARL G. GRAVES, SR., Chairman and Chief Executive Officer, Earl G. Graves,
Ltd.; Retired Chairman and Chief Executive Officer, Pepsi-Cola of Washington
D.C., L.P. ; Publisher and Editor, Black Enterprise Magazine; Managing Director,
Black enterprise/Greenwich Street Corporate Growth Partners, L.P., Mr. Graves,
67, has been a director since 1984. (Committees: 2, 5 (chair), 6)
RAJ L. GUPTA, Chairman and Chief Executive Officer, Rohm and Haas Company, Mr.
Gupta, 56, has been a director since 1999. (Committees: 3 (chair))
DAVID W. HAAS, Board Chairman and Director, William Penn Foundation, Mr. Haas,
46, has been a director since 1999. (Committees: 2, 6)
THOMAS W. HAAS, Director and Corporate Officer, William Penn Foundation; Pilot
and Flight Instructor, Mr. Haas, 46, has been a director since 1999.
(Committees: 4, 6)
JAMES A. HENDERSON, Retired Chairman and Chief Executive Officer and Director,
Cummins Engine Company, Inc. Mr. Henderson, 67, has been a director since 1989.
(Committees: 4, 6)
33
RICHARD L. KEYSER, Chairman of the Board and Chief Executive Officer, W.W.
Grainger, Inc., Mr. Keyser, 59, has been a director since 1999. (Committees: 4,
6)
JOHN H. MCARTHUR, Senior Advisor to the President, World Bank Group, Mr.
McArthur, 67, has been a director since 1977. (Committees: 2, 6)
JORGE P. MONTOYA, President, Global Food & Beverage, The Procter and Gamble
Company; President, Procter and Gamble Latin America, Mr. Montoya, 55, has been
a director since 1996. (Committees: 4, 6)
SANDRA O. MOOSE, Senior Vice President and Director, The Boston Consulting
Group, Inc., Dr. Moose, 60, has been a director since 1981. (Committees: 1, 3,
5, 6 (chair))
GILBERT S. OMENN, Executive Vice President for Medical Affairs, The University
of Michigan; CEO, The University of Michigan Health System, Professor of
Internal Medicine, Human Genetics, Public Health, The Cancer Center, The
University of Michigan, Dr. Omenn, 60, has been a director since 1987.
(Committees: 2 (chair), 6)
RONALDO H. SCHMITZ, Advisor to Deutsche Bank AG; Retired Member of the Executive
Board, Deutsche Bank AG, Dr. Schmitz, 63, has been a director since 1992.
(Committees: 1, 5, 6)
MARNA C. WHITTINGTON, President, Nicholas-Applegate Capital Management; Chief
Operating Officer, Allianz Dresdner Asset Management; Retired Chief Operating
Officer, Morgan Stanley Institutional Investment Management, Dr. Whittington,
54, has been a director since 1989. (Committees: 1, 3, 5, 6)
COMMITTEES:
1. Audit
2. Corporate Responsibility, Environment, Safety and Health
3. Executive
4. Executive Compensation
5. Finance
6. Nominating
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Items 10 and 11 of this Form 10-K report for the
fiscal year ended December 31, 2001, has been omitted, except for the
information presented below, since the Company will file with the Securities and
Exchange Commission a definitive Proxy Statement pursuant to regulation 14(a)
under the Securities Exchange Act of 1934.
EXECUTIVE OFFICERS
The Company's executive officers along with their present position, offices held
and activities during the past five years are presented below. All officers
normally are elected annually and serve at the pleasure of the Board of
Directors. The Company's non-employee directors and their business experience
during the past five years are listed in the Company's Proxy Statement.
ALAN E. BARTON, 46, vice president since 1999; director of the Coatings business
group since 2001; business unit director of Coatings from 1997 to 2001; Polymers
and Resins business manager and business director of industrial Coatings from
1996 to 1997.
BRADLEY J. BELL, 49, senior vice president and chief financial officer since
1999; vice president, chief financial officer and treasurer from 1997 to 1998;
previously vice president and treasurer of Whirlpool Corporation from 1987 to
1997.
PIERRE R. BRONDEAU, 44, vice president and director of the Electronic Materials
business group since 1999; president and chief executive officer of Shipley
Company, LLC since 1999; president and chief operating officer of
34
Shipley Company, LLC since 1998; vice president and chief operating officer of
Shipley Company, LLC from 1997 to 1998; director of research, sales and
marketing of Shipley Company, LLC from 1995 to 1997.
J. MICHAEL FITZPATRICK, 55, president, chief operating officer and director
since 1999; vice president since 1993; chief technology officer from 1996 to
1998.
JOSEPH J. FORISH, 49, vice president and director of human resources since 1999;
previously vice president of human resources for a unit of Bristol-Myers Squibb
Corporation from 1989 to 1999.
RAJ L. GUPTA, 56, chairman, chief executive officer and director since 1999;
vice chairman since 1999; vice president and regional director of Asia-Pacific
from 1993 to 1998.
ROBERT A. LONERGAN, 56, vice president and general counsel since 1999;
previously senior vice president, general counsel and secretary of PegasusGold,
Inc. from 1995 to 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership of certain beneficial owners and management is
incorporated in this Form 10-K by reference to the definitive Proxy Statement to
be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated in this Form 10-K by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The financial statements as set forth under Item 8 of this report on
Form 10-K are incorporated herein
2. Financial Statement Schedule
The following supplementary financial information is filed in
this Form 10-K :
PAGE
----
Financial Statement Schedule
II - Valuation and qualifying accounts for the years 2001,
2000 and 1999 ............................................ S-1
The schedules not included herein are omitted because they are not
applicable or the required information is presented in the financial
statements or related notes.
(b) Reports on 8-K
None
(c) Exhibit listing
Exhibit (3)(i), Restated Certificate of Incorporation and Bylaws*
Exhibit (12), Computation of Ratio of Earnings to Fixed Charges for
the Company and subsidiaries
Exhibit (21), Subsidiaries of the registrant
Exhibit (23), Consent of Independent Accountants
* Incorporated by reference
35
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
STOCK EXCHANGE LISTING
Rohm and Haas stock trades on the New York Stock Exchange (NYSE) under the
trading symbol ROH.
TRANSFER AGENT AND REGISTRAR
EquiServe L.P.
P.O. Box 8218
Boston, MA 02266-8218
ANNUAL MEETING OF SHAREHOLDERS
Rohm and Haas Company's Annual Meeting of Shareholders will be held on May 6,
2002 at Independence Visitors Center, One North Independence Mall West,
Philadelphia, PA 19106. Formal notice of the meeting, the proxy statement and
form of proxy will be mailed to current shareholders on April 2, 2002.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Two Commerce Square
2001 Market Street
Suite 1700
Philadelphia, PA USA 19103
(267) 330-3000
10-K FILING WITH THE SEC
You can obtain a copy of Rohm and Haas's annual report to the U.S. Securities
and Exchange Commission (SEC) through:
The SEC EDGAR database at: www.sec.gov
-----------
The Rohm and Haas website: www.rohmhaas.com
----------------
The Rohm and Haas Investors Line at: 1-800-ROH-0466
Or by writing to:
Rohm and Haas Company
Public Relations Department
100 Independence Mall West
Philadelphia, PA USA 19106-2399
- --------------------------------------------------------------------------------
36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Rohm and Haas Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
/s/ Bradley J. Bell
----------------------------------------------------
Bradley J. Bell
Senior Vice President and Chief Financial Officer
March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 26, 2002 by the following persons on behalf of
the registrant and in the capacities indicated.
- -------------------------------------------------------------------------------------------------------------
Signature and Title Signature and Title
- --------------------------------------------------------------------------------------------------------------
/s/ Raj L. Gupta /s/ James A. Henderson
- ----------------------------------------------------- ------------------------------------------------
Raj L. Gupta James A. Henderson
Director, Chairman of the Board and Director
Chief Executive Officer
/s/ Bradley J. Bell /s/ Richard L. Keyser
- ----------------------------------------------------- ------------------------------------------------
Bradley J. Bell Richard L. Keyser
Senior Vice President and Chief Financial Officer Director
/s/ William J. Avery /s/ John H. McArthur
- ----------------------------------------------------- ------------------------------------------------
William J. Avery John H. McArthur
Director Director
/s/ James R. Cantalupo /s/ Jorge P. Montoya
- ----------------------------------------------------- ------------------------------------------------
James R. Cantalupo Jorge P. Montoya
Director Director
/s/ J. Michael Fitzpatrick /s/ Sandra O. Moose
- ----------------------------------------------------- ------------------------------------------------
J. Michael Fitzpatrick Sandra O. Moose
Director Director
/s/ Earl G. Graves /s/ Gilbert S. Omenn
- ----------------------------------------------------- -------------------------------------------------
Earl G. Graves Gilbert S. Omenn
Director Director
/s/ David W. Haas /s/ Ronaldo H. Schmitz
- ----------------------------------------------------- ------------------------------------------------
David W. Haas Ronaldo H. Schmitz
Director Director
/s/ Thomas W. Haas /s/ Marna C. Whittington
- ----------------------------------------------------- ------------------------------------------------
Thomas W. Haas Marna C. Whittington
Director Director
37
INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
Report of Independent Accountants F-2
Consolidated Financial Statements:
Statements of Consolidated Earnings for the years ended
December 31, 2001, 2000 and 1999 F-3
Statements of Consolidated Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-5
Statements of Consolidated Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule II. Valuation and Qualifying Accounts Financial Statement Schedule S-1
F-1
REPORT ON FINANCIAL STATEMENTS
The financial statements of Rohm and Haas Company and subsidiaries were prepared
by the Company in accordance with generally accepted accounting principles. The
financial statements necessarily include some amounts that are based on the best
estimates and judgments of the Company. The financial information in this annual
report is consistent with that in the financial statements.
The Company maintains accounting systems and internal accounting controls
designed to provide reasonable assurance that assets are safeguarded,
transactions are executed in accordance with the Company's authorization and
transactions are properly recorded. The accounting systems and internal
accounting controls are supported by written policies and procedures, by the
selection and training of qualified personnel and by an internal audit program.
In addition, the Company's code of business conduct requires employees to
discharge their responsibilities in conformity with the law and with a high
standard of business conduct.
The Company's financial statements have been audited by PricewaterhouseCoopers
LLP, independent accountants, as stated in their report below. Their audit was
conducted in accordance with generally accepted auditing standards and included
a review of internal accounting controls to the extent considered necessary to
determine the audit procedures required to support their opinion.
The audit committee of the board of directors, composed entirely of non-employee
directors, recommends to the board of directors the selection of the Company's
independent accountants, approves their fees and considers the scope of their
audits, audit results, the adequacy of the Company's internal accounting control
systems and compliance with the Company's code of business conduct.
/s/ Raj L. Gupta
Raj L. Gupta
Chairman of the Board and Chief Executive Officer
/s/ Bradley J. Bell
Bradley J. Bell
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
The Board of Directors and Shareholders
of Rohm and Haas Company:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 present fairly, in all material respects, the financial
position of Rohm and Haas Company and its subsidiaries at December 31, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
index under Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 7, on January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities."
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 21, 2002
F-2
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED EARNINGS
Years ended December 31, 2001, 2000 and 1999
(Millions of dollars, except per-share amounts) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
CURRENT EARNINGS
-----------------------------------------------------------------------------------------------------------------
Net sales $ 5,666 $ 6,349 $ 4,840
Cost of goods sold 4,008 4,342 3,139
===================================
Gross profit 1,658 2,007 1,701
Selling and administrative expense 861 933 768
Research and development expense 230 224 174
Interest expense 182 241 158
Amortization of goodwill and other intangibles 156 159 83
Purchased in-process research and development -- 13 105
Provision for restructuring and asset impairment 320 13 36
Loss on disposition of joint ventures -- -- (22)
Share of affiliate net earnings 12 18 6
NOTE 6 Other income, net 15 46 14
===================================
Earnings (losses) from continuing operations before income taxes,
extraordinary item and cumulative effect of accounting change (64) 488 375
NOTE 8 Income taxes 6 192 182
===================================
EARNINGS (LOSSES) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (70) $ 296 $ 193
===================================
Discontinued operations:
Income from discontinued line of business, net of $25 million,
$35 million and $33 million of income taxes in 2001, 2000
and 1999, respectively 40 58 56
Gain on disposal of discontinued line of business, net
of $251 million of income taxes 428 -- --
===================================
EARNINGS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 398 $ 354 $ 249
NOTE 19 Extraordinary loss on early extinguishment of debt,
net of $1 million income taxes in 2001 (1) -- --
Cumulative effect of accounting change,
net of $1 million income taxes in 2001 (2) -- --
===================================
NET EARNINGS $ 395 $ 354 $ 249
===================================
NOTE 22 Less preferred stock dividends -- -- 2
===================================
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 395 $ 354 $ 247
===================================
Basic earnings (loss) per common share (in dollars):
Continuing operations $ (0.31) $ 1.34 $ 0.99
Income from discontinued line of business 0.18 0.27 0.29
Gain on disposal of discontinued line of business 1.94 -- --
Extraordinary loss on early extinguishment of debt (0.01) -- --
Cumulative effect of accounting change (0.01) -- --
===================================
$ 1.79 $ 1.61 $ 1.28
===================================
Diluted earnings (loss) per common share (in dollars):
Continuing operations $ (0.31) $ 1.34 $ 0.98
Income from discontinued line of business 0.18 0.27 0.29
Gain on disposal of discontinued line of business 1.94 -- --
Extraordinary loss on early extinguishment of debt (0.01) -- --
Cumulative effect of accounting change (0.01) -- --
===================================
$ 1.79 $ 1.61 $ 1.27
===================================
Weighted average common shares outstanding (in millions)
- Basic 220.2 219.5 192.6
- Diluted 220.2 220.5 195.7
-----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements (pages F-7 through F-35).
F-3
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------------------------------------
(Millions of dollars) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 395 $ 354 $ 249
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on disposal of discontinued line of business (679) -- --
Provision for restructuring and asset impairments 320 13 36
Discontinued operations (65) (93) (89)
Purchased in-process research and development -- 13 105
Depreciation 406 446 360
Amortization of goodwill and other intangibles 156 159 83
Loss, as adjusted, on sale of facilities and investments -- -- 22
Extraordinary loss on early extinguishment of debt, net of tax (1) -- --
Cumulative effect of accounting change, net of tax (2) -- --
Changes in assets and liabilities, net of acquisitions and divestitures:
Deferred income taxes (87) (37) (70)
Accounts receivable 122 (169) (104)
Inventories 141 (100) (41)
Accounts payable, accrued interest and other accrued liabilities (249) 78 128
Federal, foreign and other income taxes payable 213 82 25
Other, net (40) (71) 15
- --------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 630 675 719
- --------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations 69 101 97
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 699 776 816
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses and affiliates, net of cash acquired (144) (390) (3,394)
Proceeds from the disposal of discontinued line of business, net of cash sold 834 -- --
Proceeds from the sale of businesses, net of cash sold 5 433 --
Additions to land, buildings and equipment (401) (391) (323)
Proceeds from hedge of net investment in foreign subsidiaries 18 21 --
------------------------------
Net cash provided (used) by investing activities 312 (327) (3,717)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 447 2,564
Repayments of long-term debt (159) (204) (23)
Net change in short-term borrowings (680) (489) 608
Purchases/retirement of treasury shares (1) (1) (65)
Payment of dividends (171) (167) (141)
Other, net -- -- (1)
------------------------------
Net cash provided (used) by financing activities (1,011) (414) 2,942
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents -- 35 41
Cash and cash equivalents at the beginning of the year 92 57 16
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 92 $ 92 $ 57
=============================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized $ 194 $ 239 $ 72
Income taxes, net of refunds received 239 247 202
Detail of acquisitions of businesses and affiliates:
Fair value of assets acquired $ 144 $ 537 $ 6,312
Liabilities assumed -- (147) (1,216)
Common stock issued -- -- (1,702)
- --------------------------------------------------------------------------------------------------------------
Net cash paid for acquisitions $ 144 $ 390 $ 3,394
=============================================================================================================
See notes to consolidated financial statements (pages F-7 through F-35).
F-4
Rohm and Haas Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
--------------------------------------------------------------------------------------------------------
(Millions of dollars) 2001 2000
--------------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 92 $ 92
NOTE 12 Receivables, net 1,220 1,479
NOTE 13 Inventories 712 967
NOTE 14 Prepaid expenses and other assets 397 243
--------------------------------------------------------------------------------------------------------
Total current assets 2,421 2,781
--------------------------------------------------------------------------------------------------------
NOTE 15 Land, buildings and equipment, net 2,916 3,294
NOTE 3 Investments in and advances to unconsolidated subsidiaries and
affiliates 152 126
NOTE 16 Goodwill and other intangible assets, net of accumulated amortization 4,416 4,586
NOTE 17 Other assets 445 465
--------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,350 $ 11,252
--------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
NOTE 18 Notes payable $ 178 $ 556
Trade and other payables 520 662
NOTE 20 Accrued liabilities 586 731
Federal, foreign and other income taxes payable 340 237
--------------------------------------------------------------------------------------------------------
Total current liabilities 1,624 2,186
--------------------------------------------------------------------------------------------------------
NOTE 19 Long-term debt 2,720 3,218
NOTE 11 Employee benefits 613 619
NOTE 8 Deferred income taxes 1,278 1,287
NOTE 21 Other liabilities 282 266
Minority interest 18 23
NOTE 25 Commitments and contingencies
--------------------------------------------------------------------------------------------------------
NOTE 22 STOCKHOLDERS' EQUITY
Common stock; par value--$2.50; authorized--400,000,000 shares;
issued--2001 and 2000: 242,078,367 shares 605 605
Additional paid-in capital 1,961 1,956
Retained earnings 1,742 1,518
--------------------------------------------------------------------------------------------------------
4,308 4,079
Less: Treasury stock (2001--21,651,545 shares;
2000--22,141,494 shares) 208 214
Less: ESOP shares (2001--11,631,000; 2000--12,264,000) 113 119
Accumulated other comprehensive loss (172) (93)
--------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,815 3,653
--------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,350 $ 11,252
--------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements (pages F-7 through F-35).
F-5
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
- ----------------------------------------------------------------------------------------------------------------------------
(Millions of dollars, Additional
- --------------------------------------- Preferred Common Paid-in Retained Treasury
except per share amounts) Stock Stock Capital Earnings Stock ESOP
- ----------------------------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1999 $ 73 $ 492 $ 139 $ 1,284 $ 286 $ 132
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings 249
Cumulative translation adjustment
Minimum pension liability
Total comprehensive income
Common dividends ($.74 per share) (139)
Preferred dividends ($2.75 per share) (2)
Redemptions and conversion
of shares to common stock (73)
Common stock issued:
Acquisitions 113 1,740
Conversion of preferred stock (34)
Under bonus plan, net of
preferred conversions 63 (31)
From ESOP (7)
Treasury stock:
Purchases 3
Retirements (61)
- ----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ -- $ 605 $ 1,942 $ 1,331 $ 224 $ 125
============================================================================================================================
2000
Net earnings 354
Cumulative translation adjustment
Minimum pension liability
Total comprehensive income
Common dividends ($.78 per share) (167)
Common stock issued:
Under bonus plan 14 (10)
From ESOP (6)
- ----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ -- $ 605 $ 1,956 $ 1,518 $ 214 $ 119
============================================================================================================================
2001
Net earnings 395
Transition adjustment as of January 1, 2001 (*)
Current period changes in fair value (*)
Reclassification of earnings, net (*)
Cumulative translation adjustment
Minimum pension liability
Total comprehensive income
Common dividends ($.80 per share)
(171)
Common stock issued:
Under bonus plan 5 (6)
From ESOP (6)
- ----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $ -- $ 605 $ 1,961 $ 1,742 $ 208 $ 113
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Accumulated
(Millions of dollars, Other Total Total
- --------------------------------------- Comprehensive Stockholders' Comprehensive
except per share amounts) Income (Loss) Equity Income (Loss)
- ----------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------
Balance January 1, 1999 $ (9) $ 1,561
- ---------------------------------------------------------------------------
Net earnings $ 249
Cumulative translation adjustment (47) (47)
Minimum pension liability 2 2
-------------
Total comprehensive income $ 204
-------------
Common dividends ($.74 per share)
Preferred dividends ($2.75 per share)
Redemptions and conversion
of shares to common stock
Common stock issued:
Acquisitions
Conversion of preferred stock
Under bonus plan, net of
preferred conversions
From ESOP
Treasury stock:
Purchases
Retirements
- ---------------------------------------------------------------------------
Balance December 31, 1999 $ (54) $ 3,475
===========================================================================
2000
Net earnings $ 354
Cumulative translation adjustment (37) (37)
Minimum pension liability (2) (2)
-------------
Total comprehensive income $ 315
-------------
Common dividends ($.78 per share)
Common stock issued:
Under bonus plan
From ESOP
- ---------------------------------------------------------------------------
Balance December 31, 2000 $ (93) $ 3,653
===========================================================================
2001
Net earnings $ 395
Transition adjustment as of January 1, 2001 (*) (6) (6)
Current period changes in fair value (*) (27) (27)
Reclassification of earnings, net (*) 5 5
Cumulative translation adjustment (45) (45)
Minimum pension liability (6) (6)
-------------
Total comprehensive income $ 316
-------------
Common dividends ($.80 per share)
Common stock issued:
Under bonus plan
From ESOP
- ---------------------------------------------------------------------------
Balance December 31, 2001 $ (172) $ 3,815
- ---------------------------------------------------------------------------
See Notes to Consolidated Financial Statements for additional information.
* See Note 7 in the Notes to Consolidated Financial Statements for changes
within accumulated other comprehensive income, due to the use of derivative and
non-derivative instruments qualifying as hedges in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain reclassifications have been made to prior year
amounts to conform with current year presentation.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Rohm and Haas Company and its subsidiaries (the Company).
Investments in affiliates (20-50%-owned) are recorded at cost plus equity in
their undistributed earnings, less dividends. Intercompany accounts,
transactions and unrealized profits and losses on transactions within the
consolidated group and with significant affiliates are eliminated in
consolidation, as appropriate.
UNCONSOLIDATED ENTITIES
The Company has no controlling ownership in significant entities which are not
consolidated. There are no significant contractual requirements to fund losses
of unconsolidated entities. Material contingent liabilities, guarantees and
commitments not included in the consolidated balance sheet are disclosed in the
"Notes to Consolidated Financial Statements" under Note 25: "Contingent
Liabilities, Guarantees and Commitments."
TRANSLATION PROCEDURES Foreign currency accounts are translated into U.S.
dollars under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation." Through December 31, 2000, the
U.S. dollar was the functional currency for approximately half of international
operations. Following the Morton and LeaRonal acquisitions in 1999, the Company
completed legal entity restructuring and business integration of its foreign
operations, primarily in Europe. Based on these significant operational changes,
the Company determined that the functional currency of most of its foreign
entities is the respective local currency. Consequently, the Company changed the
functional currency for those international operations affected by the
restructuring and business integration. Based on exchange rates as of January 1,
2001, the Company recognized a one-time write-down of fixed assets and
inventories of approximately $50 million in the first quarter of 2001, which was
recorded with a corresponding charge to other comprehensive income.
Several foreign subsidiaries, primarily those in hyper-inflationary emerging
market economies, continue to use the U.S. dollar as their functional currency.
Foreign subsidiaries using their local currency as the functional currency
translate their assets and liabilities into U.S. dollars using exchange rates at
year-end. Revenue and expense accounts are translated using the average exchange
rates for the reporting period. Translation adjustments are recorded in
accumulated other comprehensive income or loss, a separate component of
shareholder's equity.
Under the provisions of SFAS No. 52, foreign entities that continue to use the
U.S. dollar as the functional currency translate: (1) land, buildings and
equipment along with related accumulated depreciation, inventories, goodwill and
intangibles along with related accumulated amortization, and minority interest
at historical rates of exchange; (2) all other assets and liabilities using
exchange rates at end of period, and (3) revenues, cost of goods sold, and
operating expenses other than depreciation, amortization of goodwill and
intangibles using the average rates of exchange for the reporting period.
Foreign exchange adjustments, including recognition of open foreign exchange
contracts, are charged or credited to income.
REVENUE RECOGNITION Revenues from product sales, net of applicable allowances,
are recognized upon shipment of product. Exceptions from this practice include
shipments of supplier-owned and managed
F-7
inventory ("SOMI") arrangements. Revenue is recognized under SOMI arrangements
when usage of finished goods is reported by the customer, generally on a weekly
or monthly basis. Payments received in advance of revenue recognition are
recorded as deferred revenue.
EARNINGS PER SHARE Basic earnings per share is calculated by dividing net
earnings applicable to common shareholders by the average number of shares
outstanding for the period. Diluted earnings per share is calculated by adding
the earnings impact of the conversion of preferred stock to net earnings
applicable to common shareholders and dividing this amount by the average number
of shares outstanding for the period adjusted for the assumed preferred stock
conversion, and for the dilutive effect of an assumed exercise of all "in the
money" options outstanding at the end of the period.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, time deposits
and readily marketable securities with original maturities of three months or
less.
INVENTORIES Inventories are stated at the lower of cost or market. Cost of
domestic inventory is primarily determined under the last-in, first-out (LIFO)
method.
LAND, BUILDINGS AND EQUIPMENT AND RELATED DEPRECIATION Land, buildings and
equipment are carried at cost. Assets are depreciated over their estimated
useful lives on the straight-line and accelerated methods. Maintenance and
repairs are charged to earnings; replacements and betterments are capitalized.
The cost and related accumulated depreciation of buildings and equipment are
removed from the accounts upon retirement or other disposition; any resulting
gain or loss is reflected in earnings.
INTANGIBLE ASSETS The Company amortizes identifiable intangible assets such as
patents and trademarks on the straight-line basis over their estimated useful
lives. Goodwill is amortized on the straight-line basis over periods not greater
than 40 years. The Company evaluates the recoverability of goodwill and other
intangible assets on an annual basis, or when events or circumstances indicate a
possible inability to recover carrying amounts. Such evaluation is based on
various analyses, including cash flow and profitability projections. These
analyses necessarily involve significant management judgment. See Note 26 for
additional information regarding new accounting pronouncements.
IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of its
long-lived assets based on current and anticipated future undiscounted cash
flows. In addition, the Company's policy for the recognition and measurement of
any impairment of such assets is to assess the current and anticipated cash
flows associated with the impaired asset. An impairment occurs when the cash
flows (excluding interest) do not exceed the carrying amount of the asset. The
amount of impairment loss is the difference between the carrying amount of the
asset and its estimated fair value. See Note 26 for additional information
regarding new accounting pronouncements.
INCOME TAXES The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future consequences of temporary differences
between the financial statement carrying value of assets and liabilities and
their values as measured by tax laws.
STOCK COMPENSATION The Company applies the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion No. 25 and related
Interpretations in accounting for stock compensation plans. Under this method,
no compensation expense is recognized for fixed stock option plans.
F-8
NOTE 2: ACQUISITIONS AND DISPOSITIONS OF ASSETS
THE COMPANY COMPLETED THE FOLLOWING ACQUISITIONS AND DIVESTITURES IN 2001:
In November 2001, the Company acquired the flexible packaging adhesives business
of Technical Coatings Co., a subsidiary of Benjamin Moore & Company. The
acquisition includes the development, production and distribution of a full line
of cold seal adhesives marked under the COSEAL(R) trademark. The primary
application of such adhesives is in flexible packaging, used mainly in the food
and medical industries.
In September 2001, the Company acquired the Megum[trademark] rubber-to-metal
bonding business from Chemetall GmbH (Chemetall) of Frankfurt Germany. The
acquisition includes the corresponding activities of Chemetall subsidiaries in
Italy and Brazil, and includes the acquired technology used for the production
of vibration absorption modules, used primarily in the automotive industry.
In 2001, the Company increased its ownership in Rodel from 90% to 99% for an
additional cost of approximately $80 million. Rodel was a privately-held,
Delaware-based leader in precision polishing technology serving the
semiconductor, memory disk and glass polishing industries. In the second quarter
of 2000 the Company increased its ownership from 48% to approximately 90% for a
cost of approximately $200 million. The financial statements reflect allocations
of the purchase price amounts based on estimated fair values, and resulted in
acquired goodwill of $110 million, which was amortized on a straight-line basis
over 30 years, through December 31, 2001. Prior to March 31, 2000 the investment
had been accounted for under the equity method with the Company's share of
earnings reported as equity in affiliates. Since the second quarter of 2000,
Rodel was accounted for using the purchase method with results of operations
fully consolidated. Approximately $13 million of the purchase price was
allocated to IPR&D related to chemical mechanical planarization and surface
preparation technologies under development and was recognized as a charge in the
second quarter of 2000.
On June 1, 2001, the Company completed the sale of its Agricultural Chemicals
business (Ag) to Dow AgroSciences LLC (DAS), a wholly owned subsidiary of the
Dow Chemical Company, for approximately $1 billion, subject to working capital
adjustments not yet finalized at December 31, 2001. The Company recorded a gain
on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per
share, after-tax.) Under the terms of the agreement, the divestiture included
fungicides, insecticides, herbicides, trademarks, and license to all
agricultural uses of the Rohm and Haas biotechnology assets, as well as the
agricultural business-related manufacturing sites located in Brazil, Colombia,
France and Italy, the Company's share of the Nantong, China joint venture and
the Company's assets in Muscatine, Iowa. The Company recorded the sale of Ag as
discontinued operations in accordance with APB 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
Agricultural Chemicals business had been a separate major line of business
previously reported as part of the Chemical Specialties segment and represented
the Company's entire line of agricultural chemical products.
The operating results of Ag have been reported separately as discontinued
operations in the Statements of Consolidated Earnings for each year presented.
Net sales and income from discontinued operations are as follows:
(in millions) Year ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Net sales $ 230 $ 530 $ 534
Operating income 65 93 89
Income tax expense 25 35 33
Income from discontinued operations 40 58 56
- --------------------------------------------------------------------------------
THE COMPANY COMPLETED THE FOLLOWING ACQUISITION AND JOINT VENTURE ACTIVITIES IN
2000:
F-9
In the first quarter of 2000, the Company entered into a joint venture with
Stockhausen GmbH & Co. KG (Stockhausen) of Germany to form a global partnership
(StoHaas) for the manufacture of reliable, low cost supply of acrylic acid in
North America and Europe. Under the terms of the joint venture both partners
purchase acrylic acid from StoHaas for use as raw materials. Since StoHaas is
not controlled by the Company its operations are not consolidated, instead, the
Company's investment in StoHaas is accounted and reported as an investment under
the equity method. The earnings impact in 2001, the first year of operations,
was minimal. The Company expects minimal earnings impact from operations of the
joint venture in future years as well. In conjunction with the joint venture,
the Company acquired Stockhausen's merchant monomer business in Europe.
Acquired 95% of Acima A.G. (Acima), a Swiss company specializing in biocidal
formulations, polyurethane catalysts and other specialty chemicals and also
acquired an 80% interest in Silicon Valley Chemical Laboratories, Inc. (SVC), a
privately-held supplier of high technology products for the semiconductor
industry. These transactions were accounted for using the purchase method.
In the second quarter of 2000, the Company acquired the photoresist business of
Mitsubishi Chemical Corporation. Mitsubishi Chemical is a leading producer of
G-line, I-line and deep UV photoresist chemistry used to make semiconductor
chips. The transaction was accounted for using the purchase method.
In conjunction with the acquisitions of Acima, SVC and Mitsubishi photoresist,
the Company recorded goodwill of $36 million which was amortized over a range of
20 to 40 years, through December 31, 2001.
THE COMPANY COMPLETED THE FOLLOWING DIVESTITURES IN 2000:
In the first quarter of 2000, the Company sold its Industrial Coatings business
to BASF Corporation for approximately $169 million, net of working capital
adjustments.
In the third quarter of 2000, the Company sold its Thermoplastic Polyurethane
business to Huntsman Corporation for approximately $117 million, net of working
capital adjustments.
In the fourth quarter of 2000, the Company sold its European Salt business,
Salins-Europe, to a consortium, which includes management, led by Union d'Etudes
et d'Investissements SA, a wholly-owned subsidiary of Credit Agricole, for
approximately $270 million.
These three businesses were acquired by the Company in June 1999 as part of the
acquisition of Morton and were recorded at fair value. Accordingly, no gain or
loss was recorded on these transactions.
In the fourth quarter of 2000, the Company sold its 50% interest in TosoHaas to
its joint venture partner, Tosoh Corporation.
Pro forma information is not presented, as the 2001 and 2000 acquisitions and
divestitures were not material to the Company's results of operations or
consolidated financial position. The results of operations of acquired
businesses are included in the Company's consolidated financial statements from
the respective dates of acquisition. The operating results of Ag have been
reported separately as discontinued operations in the Statements of Consolidated
Earnings for each year presented.
NOTE 3: INVESTMENTS
The Company's investments in its affiliates (20-50%-owned) totaled $109 million
at December 31, 2001 and 2000.
NOTE 4: PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In acquisitions accounted for by the purchase method, IPR&D represents the value
assigned to research and development projects of an acquired company where
technological feasibility had not yet been established at the date of the
acquisition, and which, if unsuccessful, have no alternative future use. Amounts
assigned
F-10
to IPR&D are charged to expense at the date of acquisition. Accordingly, the
Company has charged $13 million and $105 million to expense in 2000 and 1999,
respectively, related to the Rodel and Morton acquisition. The $13 million IPR&D
charge in 2000 resulted from the allocation of purchase price in the Rodel
acquisition to projects under development related to chemical mechanical
planarization (CMP) and surface preparation (SP) technologies which are expected
to be commercialized in 2002.
In 1999, eight IPR&D projects were identified based upon discussions with Morton
personnel, analyses of the acquisition agreements, and analyses of data provided
by Morton. The two most significant research and development projects were
passive materials and Lamineer coating which together represented more than 90%
of the overall in-process research and development value. The remaining value
was assigned to six other in-process projects.
The passive materials project is being developed by the Electronic Materials
product group, which principally manufactures dry film photoresists sold to
printed circuit board manufacturers. Passive materials is a new form of film
materials which has been in development since July 1996. The product
demonstrated technological feasibility in the laboratory and is currently in
evaluations with customers.
Lamineer coating is a new and innovative product for Morton's Powder Coatings
business which was successfully developed subsequent to the Morton Acquisition.
Lamineer is a new family of powder coatings used for a variety of wood
applications. The technology provides manufacturers with an alternative method
for applying coatings to wood at increased operating and manufacturing
efficiencies. Lamineer coating had been in development since early 1996. Through
June 1999, a material portion of the Lamineer technology, the base resins, was
completely developed. This portion of technology was identified as having an
alternative future use and, therefore, was not classified as IPR&D at the date
of the Morton acquisition. The curing technologies, however, were identified as
IPR&D. Related products are in the testing and trial stage of development. The
efforts required to complete the Lamineer coating project were focused on
developing the necessary curing technologies and meeting customer
specifications. During 2000, Lamineer products were commercially introduced and
marketed through the Company's Surface Finishes business.
The fair values of the in-process completed portion of these research and
development projects at the date of acquisition, were as follows:
- ----------------------------------------------------------------------------
(in millions) FAIR VALUE
- ----------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------
Passive Materials $ -- $ -- $ 50
Lamineer Coating -- -- 48
CMP and SP technologies -- 13 --
All Others -- -- 7
-----------------------------------
Total $ -- $ 13 $ 105
- ----------------------------------------------------------------------------
The valuation analyses of these projects were performed just prior to the date
of acquisition and were based on information available at that time. The
projects identified in the analysis were analyzed based primarily on an
evaluation of their status in the product development process, the expected
release dates, and the percentage completed.
The technique used in valuing each purchased research and development project
was the income approach, which included an analysis of the markets, cash flows,
and risks associated with achieving these cash flows. Significant appraisal
assumptions include: The period in which material net cash inflows from
significant projects were expected to commence; material anticipated changes
from historical pricing, margins and expense levels; and the risk adjusted
discount rate applied to the project's cash flows.
Net cash inflows that are attributable to the completed IPR&D began in 2001 and
are expected to last through 2015 for Lamineer coating. The forecast for both of
these in-process projects relied on sales estimates derived from targeted market
share, pricing estimates and expected product life cycles. Both passive
materials and Lamineer coating are expected to generate higher profit margins,
two to three times the margins of historical products in their respective
product groups. This is due to their new and
F-11
innovative characteristics, which allow pricing commensurate with their
performance. The discount rate used for the acquired in-process technologies was
estimated at 20% for passive materials and 25% for Lamineer coating based upon
Morton's weighted average cost of capital of 12%. The discount rate used for the
in-process technology was determined to be higher than Morton's weighted average
cost of capital because the technology had not yet reached technological
feasibility as of the date of valuation. In using a discount rate greater than
Morton's weighted average cost of capital, management has reflected the risk
premium associated with achieving the forecasted cash flows associated with
these projects, and because the in-process technology had not yet reached
technological feasibility as of the date of valuation.
The nature of the efforts required to develop the acquired in-process technology
into technologically feasible and commercially viable products principally
relate to the completion of all planning, designing and testing activities that
are necessary to establish a product or service that can be produced to meet its
design requirements, including functions, features and technical performance
requirements. The Company currently expects that the acquired in-process
technology will be successfully developed, but there can be no assurance that
the technological feasibility or commercial viability of these products will be
achieved.
NOTE 5: PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
In June 2001, the Company launched a repositioning initiative to enable several
of its businesses to respond to structural changes in the global marketplace. In
connection with its repositioning initiatives, the Company recognized a $330
million one-time restructuring and asset impairment charge in the second quarter
of 2001. The largest component of the charge relates to the partial closure of
certain manufacturing and research facilities across all business groups and
includes exit costs related to the Liquid Polysulfide Sealants business in
Performance Polymers and part of the dyes business in Chemical Specialties.
Approximately 75% of the asset write-downs were in the North American region.
Management estimates that less than 10% of the overall charge will require the
outlay of cash which is primarily limited to severance expense. Most severance
costs are paid from the respective pension plans and as a result,
pension-related gains are recorded as a reduction to the original restructuring
charge and an increase to the pension assets. Management expects to complete the
majority of its restructuring efforts by June 30, 2002.
The respective asset accounts were written down by $245 million. The write-down
of assets consisted of machinery and equipment of $105 million (book value prior
to write-down of $111 million), buildings of $76 million (book value prior to
write-down of $88 million), land of $13 million, investments of $6 million and
goodwill and other intangibles of $45 million. The remaining restructuring
reserves of $43 million are included in accrued liabilities on the Consolidated
Balance Sheet. Approximately $11 million of the $35 million severance and other
employee costs during the year ended December 31, 2001, was paid to employees
through the Company's payroll. The remaining balance was funded through the
Company's domestic pension plans as detailed in the following table:
(in millions)
- ----------------------------------------------------------------------------------------------------------
June 2001 Changes to Balance
2001 Repositioning accruals estimates Payments Dec. 31, 2001
- ----------------------------------------------------------------------------------------------------------
Severance and employee benefit costs $ 71 $ 1 $ (35) $ 37
Contract, lease termination and other 11 -- (5) 6
------------------------------------------------------------
$ 82 $ 1 $ (40) $ 43
------------------------------------------------------------
Offsetting the original charge of $330 million recorded in June 2001, is a
pre-tax charge of $1 million from changes in estimates of restructuring
liabilities and a pre-tax gain of $5 million primarily related to the
recognition of settlement gains recorded in the fourth quarter of 2001. It is
the Company's policy to recognize settlement gains at the time an employee's
pension liability is settled. The change to the restructuring liability was
required as a result of changes to original estimates.
F-12
The one-time charge includes severance benefits for 1,860 employees; the
employees receiving severance benefits include those affected by plant closings
or capacity reductions, as well as various personnel in corporate,
administrative and shared service functions. As of December 31, 2001, the number
of employees and sites affected by the 2001 repositioning efforts are as
follows:
- --------------------------------------------------------------------------------
Affected Positions Remaining to be
Positions eliminated eliminated
- --------------------------------------------------------------------------------
Number of employees 1,860 997 863
- --------------------------------------------------------------------------------
Sites closed at Sites remaining to
Sites affected December 31, 2001 be closed
- --------------------------------------------------------------------------------
Full shutdowns 9 4 5
Partial shutdowns 9 3 6
A provision for restructuring of $13 million before-tax was recorded in the
first half of 2000 in the Ion Exchange Resins Business for the write-down of
plant assets and severance costs for approximately 100 people. These charges
were net of certain pension settlement and curtailment gains. Also in 2000, an
additional $45 million related largely to lease terminations was recorded in the
allocation of the Morton purchase price. Actions under this plan are expected to
be completed by December 31, 2002.
A restructuring reserve was established in 1999 for costs related both to the
integration of Morton and the Company's redesign of its selling and
administrative infrastructure. A portion of these costs resulted in a pre-tax
charge of $60 million in 1999, largely for severance costs for approximately 700
employees of Rohm and Haas, the acquiring company. This charge was reduced by
$24 million in pension related gains recognized as severance was paid from the
Company's pension plan. An additional $68 million, largely severance related
reserve associated with staff reductions of approximately 500 employees of the
acquired company was recorded in the allocation of the Morton purchase price. In
December 2001, $6 million was reversed against the results of operations, and
$11 million was offset against the original purchase price as estimates changed.
A summary of the reserves for the year ended December 31, 2001 is as follows:
UTILIZATION
- ------------------------------------------------------------------------------------------------------------
RESERVE RESERVE
DECEMBER 31, CASH OTHER CHANGE IN DECEMBER 31,
(in millions) 2000 PAYMENTS CHARGES ESTIMATE 2001
- ------------------------------------------------------------------------------------------------------------
Severance/ other
employee costs $ 13 $ (3) $ -- $ (10) $ --
Contract and lease
terminations and
other 20 (6) (7) (7) --
----------------------------------------------------------------------------------
Total $ 33 $ (9) $ (7) $ (17) $ --
- ------------------------------------------------------------------------------------------------------------
NOTE 6: OTHER INCOME (EXPENSE), NET
- ------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Royalty income, net $ 13 $ 15 $ 9
Foreign exchange gains, net 10 26 4
Interest income 8 7 12
Voluntary early retirement incentives, severance,
litigation settlements and certain waste disposal
site cleanup costs -- (2) (9)
Environmental insurance recoveries -- -- 28
Integration costs (1) (8) (28)
Minority interest 2 5 (1)
Casualty loss in joint venture (4) -- --
Other, net (13) 3 (1)
--------------------------------------------------
Total $ 15 $ 46 $ 14
- ------------------------------------------------------------------------------------------------------------
F-13
NOTE 7: FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to reduce the impact of
changes in foreign exchange rates, interest rates and commodity raw material
prices on its earnings, cash flows and fair values of assets and liabilities.
The Company enters into derivative financial contracts based on analyses of
specific and known economic exposures. The Company does not use derivative
instruments for trading or speculative purposes, nor is it a party to any
leveraged derivative instruments or any instruments of which the values are not
available from independent third parties. The Company manages counterparty risk
associated with non-performance of counterparties by entering into derivative
contracts with major financial institutions of investment grade credit rating
and by limiting the amount of exposure with each financial institution.
In 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137 and No. 138. Additionally,
in July 2001 the Company adopted DIG Issue G-20, "Assessing and Measuring the
Effectiveness of a Purchased Option Used in a Cash Flow Hedge."Using market
valuations for derivatives held as of December 31, 2000, the Company, as of
January 1, 2001, recorded a $6 million after-tax cumulative income effect to
accumulated other comprehensive income and a charge to net income of $2 million,
to recognize at fair value all derivative instruments. With the adoption of SFAS
No. 133, changes in the Company's derivative instrument portfolio or changes in
the market values of this portfolio could have a material effect on accumulated
other comprehensive income. The adoption has not materially changed management's
risk policies and practices, nor has compliance with the standard materially
impacted the reported results of operations.
All derivative instruments are reported on the balance sheet at fair value. For
instruments designated as cash flow hedges, the effective portion of the hedge
is reported in other comprehensive income until it is reclassified to earnings
in the same period in which the hedged item has had an impact on earnings. For
instruments designated as fair value hedges, changes in fair value of the
instruments are offset in the Statements of Consolidated Earnings by changes in
the fair value of the hedged item. For instruments designated as hedges of net
investments in foreign operating units not using the U.S. dollar as their
functional currency, changes in fair value of the instruments are offset in
other comprehensive income to the extent that they are effective as economic
hedges. Changes in the fair value of derivative instruments, including embedded
derivatives that are not designated as a hedge, are recorded each period in
current earnings along with any ineffective portion of the hedges.
Current period changes, net of applicable income taxes, within accumulated other
comprehensive income, due to the use of derivative and non-derivative
instruments qualifying as hedges, are reconciled as follows:
(in millions) 2001
- --------------------------------------------------------------------------------
Accumulated derivatives gain at beginning of period $ 9
Transition adjustment as of January 1, 2001 6
Current period changes in fair value 27
Reclassification to earnings, net (5)
-------------
Accumulated derivatives gain at December 31, 2001 $ 37
- --------------------------------------------------------------------------------
The Company enters into foreign exchange option and forward contracts to reduce
the variability in the functional-currency-equivalent cash flows associated with
foreign currency denominated forecasted transactions. These foreign exchange
hedging contracts are designated as cash flow hedges. During the next twelve
months these contracts will cover all or a portion of the Company's exposure. As
such, their maturities are generally less than twelve months. The table below
summarizes by currency, the notional value of foreign currency cash flow hedging
contracts in U.S. dollars:
(in millions) 2001 2000
- ------------------------------------------------------------
Euro $ 132 $ 180
British pound -- 19
Australian dollar 9 18
Japanese yen 33 46
New Zealand dollar 3 5
- ------------------------------------------------------------
Total $ 177 $ 268
- ------------------------------------------------------------
F-14
Of the $37 million recorded within accumulated other comprehensive income at
December 31, 2001, $3 million, net of income taxes, represents the effective
portion of foreign currency cash flow hedges, which is expected to be
reclassified to earnings in 2002. The actual amounts that will be reclassified
to earnings in 2002 will vary from this amount as a result of changes in market
conditions. The amount reclassified in 2001 as income from accumulated other
comprehensive income was $12 million after income taxes. The ineffective portion
of changes in fair values of hedges amounted to $5 million after income taxes.
Both the effective and ineffective portions of cash flow hedges recorded in the
income statement were classified in other income, net. No amounts were
reclassified to earnings in 2001 in connection with forecasted transactions that
were no longer considered probable of occurring.
The Company also uses foreign exchange forward contracts and swap contracts to
reduce the exchange rate risk of recognized assets and liabilities denominated
in non-functional currencies, including intercompany loans. These contracts
generally require the exchange of one foreign currency for another at a fixed
rate at a future date. These contracts are designated as foreign currency fair
value hedges with maturities generally less than twelve months. The carrying
amounts of these contracts were adjusted to their market values at each balance
sheet date and the related gain or loss was recorded in other income and
expense. The following table sets forth the foreign currency fair value hedges
outstanding at December 31, 2001 and 2000 (in millions):
- --------------------------------------------------------------------------------
BUY CURRENCY SELL CURRENCY 2001 2000
- --------------------------------------------------------------------------------
Euro Japanese yen $ 73 $ 78
Euro Canadian dollar 58 --
U.S. dollar British pound 52 --
U.S. dollar Euro 60 10
Swiss franc U.S. dollar 31 26
U.S. dollar Japanese yen 24 --
Euro U.S. dollar 9 16
U.S. dollar Brazilian real 5 23
U.S. dollar Canadian dollar -- 82
Other 10 48
- --------------------------------------------------------------------------------
Total $ 322 $ 283
- --------------------------------------------------------------------------------
The Company uses cross-currency interest rate swaps, foreign exchange forward
and non-derivative instruments to hedge the foreign currency exposures of the
Company's net investments in foreign operating units. These transactions are
designated as hedges of net investment. The effective portion of changes in fair
values of hedges, recorded as income within accumulated other comprehensive
income, was $38 million after income taxes at December 31, 2001. The amount
excluded from the measurement of effectiveness on these net investment hedges
was $8 million before income taxes for 2001, which was recorded as a reduction
to interest expense. Prior to the adoption of SFAS No. 133, the Company used
cross currency interest rate swap contracts to hedge the foreign currency
exposures of the Company's net investment in foreign subsidiaries. While the
currency effects of these hedges were reflected in the foreign currency
translation adjustments within accumulated other comprehensive income, net
interest settlements reduced interest expense by $22 million before taxes in
2000. The following table sets forth open cross currency interest rate swap or
foreign exchange forward contracts at December 31, 2001 and 2000:
- ------------------------------------------------------
(in millions) 2001 2000
- ------------------------------------------------------
Euro $ 401 $ 203
Japanese yen 194 242
- ------------------------------------------------------
Total $ 595 $ 445
- ------------------------------------------------------
The Company uses interest swap agreements to optimize the worldwide financing
costs by maintaining a desired level of floating rate debt. In 2001, the Company
entered into interest swap agreements with a notional value of $950 million,
which converted the fixed rate components of the $450 million notes due July 15,
2004 and the $500 million due July 15, 2009 to a floating rate based on 3 month
LIBOR. Of these swap agreements, the $500 million notional value contracts
maturing in 2009 and $75 million maturing in 2004 contain a credit clause where
each counterparty has a right to settle at market price if the other party is
F-15
downgraded below investment grade. These interest swap agreements are designated
and accounted for as fair value hedges. The changes in fair values are marked to
market through income along with the offsetting changes in fair value of
underlying notes using the short cut method. The net credits reduced interest
expense by $13 million before income taxes in 2001. No interest swap agreements
were outstanding at December 31, 2000.
The Company uses natural gas and propylene swap agreements for hedging purposes
to reduce the effects of changing raw material prices. These swap contracts are
designated and accounted for as cash flow hedges. Of the $37 million recorded
within accumulated other comprehensive income at December 31, 2001, a loss of $4
million, net of income taxes, represents the effective portion of cash flow
hedges, which is expected to be reclassified to earnings in 2002. The actual
amounts that will be reclassified to earnings in 2002 will differ from this
amount as a result of changes in market conditions. The amount reclassified in
2001 as a loss from accumulated other comprehensive income was $7 million after
income taxes, which was recorded as a component of underlying inventory costs.
No amounts were reclassified to earnings in 2001 in connection with forecasted
transactions that were no longer considered probable of occurring. Prior to the
adoption of SFAS No. 133, gains and losses on the swap agreements were deferred
until settlement and recorded as a component of underlying inventory costs when
settled, which amounted to an after-tax gain of $1 million in 2000. The notional
value of natural gas and propylene swap agreements totaled $41 million and $3
million at December 31, 2001 and 2000, respectively.
As of December 31, 2001, the Company maintains hedge positions of immaterial
amounts that are effective as hedges from an economic perspective but do not
qualify for hedge accounting under SFAS No. 133, as amended. Such hedges consist
primarily of emerging market foreign currency option and forward contracts, and
have been marked to market through income with an immaterial impact on earnings.
The fair value of financial instruments was estimated based on the following
methods and assumptions:
Cash and cash equivalents, accounts receivable, accounts payable and notes
payable -- the carrying amount approximates fair value due to the short
maturity of these instruments.
Short and long-term debt -- quoted market prices for the same or similar
issues or the current rates offered to the Company or its subsidiaries for
debt with the same or similar remaining maturities and terms.
Interest rate swap agreements -- quoted market prices of the same or
similar issues available.
Foreign currency option contracts -- the market prices the Company would
receive or pay to terminate the contracts.
Foreign currency forward and swap agreements -- the carrying value
approximates fair value because these contracts are adjusted to their
market value at the balance sheet date.
Natural gas and propylene swap agreements -- the fair value is estimated
based on the amount the Company would receive or pay to terminate the
contracts.
F-16
The carrying amounts and fair values of material financial instruments at
December 31, 2001 and 2000 are as follows:
- --------------------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------
(in millions) CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
Asset (Liability)
Short-term debt $ (178) $ (178) $ (549) $ (549)
Long-term debt (2,720) (2,921) (3,225) (3,279)
Interest rate swap agreements 39 39 -- --
Foreign currency options 5 8 7 10
Foreign exchange forward and swap contracts 16 16 2 2
Natural gas swap agreements (3) (3) -- 3
Propylene swap agreement (3) (3) -- --
- --------------------------------------------------------------------------------------------------------
NOTE 8: INCOME TAXES
Earnings before income taxes earned within or outside the United States from
continuing operations are shown below:
- ---------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
United States
Parent and Subsidiaries $(177) $ 187 $ 111
Affiliates -- 6 1
Foreign
Subsidiaries 101 283 258
Affiliates 12 12 5
-----------------------------------
Earnings before income taxes $ (64) $ 488 $ 375
- ---------------------------------------------------------------------------------------------
The provision for income taxes from continuing operations is composed of:
- ---------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Taxes on U.S. earnings
Federal
Current $ 32 $ 81 $ 82
Deferred (69) (2) 4
-----------------------------------
(37) 79 86
-----------------------------------
State and other
Current 3 6 5
-----------------------------------
Total taxes on U.S. earnings (34) 85 91
Taxes on foreign earnings
Current 48 120 114
Deferred (8) (13) (23)
-----------------------------------
Total taxes on foreign earnings 40 107 91
-----------------------------------
Total income taxes $ 6 $ 192 $ 182
- ---------------------------------------------------------------------------------------------
The provision for income taxes attributable to items other than continuing
operations is shown below:
- ---------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Income from discontinued operations $ 25 $ 35 $ 33
Gain on disposal of discontinued operations 251 -- --
Extraordinary loss on early extinguishment of debt (1) -- --
Cumulative effect of accounting change (1) -- --
- ---------------------------------------------------------------------------------------------
F-17
Deferred income taxes reflect temporary differences between the valuation of
assets and liabilities for financial and tax reporting. Details at December 31,
2001 and 2000 were:
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Deferred tax assets related to:
Compensation and benefit programs $ 267 $ 262
Accruals for waste disposal site remediation 44 67
Restructuring reserves 94 5
Inventories 17 21
All other 71 95
-------------------------
Total deferred tax assets 493 450
-------------------------
Deferred tax liabilities related to:
Intangible assets 831 854
Tax depreciation in excess of book depreciation 492 522
Pension 152 121
All other 65 89
-------------------------
Total deferred tax liabilities 1,540 1,586
-------------------------
Net deferred tax liability $ 1,047 $ 1,136
- -------------------------------------------------------------------------------
Deferred taxes, which are classified into a net current and non-current balance
by tax jurisdiction, are presented in the balance sheet as follows:
- --------------------------------------------------------------------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Prepaid expenses and other assets $ 231 $ 149
Other assets, net -- 3
Accrued liabilities -- 1
Non-current deferred income taxes 1,278 1,287
--------------------------
Net deferred tax liability $ 1,047 $ 1,136
- --------------------------------------------------------------------------------
The effective tax rate on pre-tax income differs from the U.S. statutory tax
rate due to the following:
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Statutory tax rate (35.0)% 35.0% 35.0%
U.S. tax credits (14.7) (2.6) (3.1)
Charge for IPR&D -- .9 9.8
Depletion (9.8) (1.1) (0.8)
Amortization of non-deductible goodwill 35.0 4.2 3.0
Non-deductible restructuring charge 33.0 -- --
Other, net 0.9 2.9 4.6
-------------------------------
Effective tax rate 9.4% 39.3% 48.5%
- --------------------------------------------------------------------------------
At December 31, 2001 and 2000, the Company provided deferred income taxes for
the assumed repatriation of all unremitted foreign earnings. Total unremitted
earnings, after provision for applicable foreign income taxes, were
approximately $565 million and $361 million at December 31, 2001, and 2000,
respectively. The Company had a foreign tax credit carry-forward at December 31,
2000 of $76 million that was fully utilized as of December 31, 2001.
NOTE 9: SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" designates the internal management accountability structure as the
source of the Company's reportable segments. The statement also requires
disclosures about products and services, geographic areas and major customers.
The Company's business segment reporting under SFAS No. 131 at December 31, 2001
was consistent with the changes in its financial reporting structure
incorporated in the Company's reporting since the first quarter of 1998 as
revised, subsequent to the Morton and LeaRonal acquisitions in 1999. Corporate
F-18
includes non-operating items such as interest income and expense, corporate
governance costs, corporate exploratory research and, in 2000 and 1999, $13
million and $105 million of purchased in-process research and development,
respectively.
The Company changed its business segment format effective January 1, 2002, in
accordance with SFAS No. 131, based on realignment of management. The Company
continues to report the December 31, 2001 results in the format of the then
existing business segments. Going forward, the segments of the Company will be
reported as follows:
BUSINESS SEGMENTS AT DECEMBER 31, 2001 BUSINESS SEGMENTS AS OF JANUARY 1, 2002
- ----------------------------------------------------------------------------------------------------
Performance Polymers Coatings
Coatings Architectural and Functional Coatings
Adhesives and Sealants Automotive Coatings
Plastic Additives Powder Coatings
Monomers
Surface Finishes Adhesives and Sealants
Automotive Coatings
Powder Coatings Electronic Materials
Printed Wiring Board
Electronic and Industrial Finishes
Chemical Specialties Microelectronics
Consumer and Industrial Specialties
Inorganic and Specialty Solutions Performance Chemicals
Ion Exchange Resins Monomers
Plastic Additives
Electronic Materials Inorganic and Specialty Solutions
Shipley Ronal Consumer and Industrial Specialties
Microelectronics Ion Exchange Resins
Salt Salt
- ----------------------------------------------------------------------------------------------------
The table below presents Sales by business segment, as restated to follow the
new business segments for 2001 and 2000. Segment eliminations are presented to
adjust for the gross up of intercompany sales between segments.
SALES
- -----------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------
Coatings $ 1,753 $ 1,870
Adhesives and Sealants 661 704
Electronic Materials 942 1,210
Performance Chemicals 2,150 2,310
Salt 749 876
Elimination of Intersegment Sales (589) (621)
- -----------------------------------------------------------------
Total Company $ 5,666 $ 6,349
- -----------------------------------------------------------------
The table below presents summarized financial information concerning the
Company's reportable segments as of and for the periods ended December 31 and
excludes the Agricultural Chemicals business which was disposed of in June 2001.
F-19
(in millions)
- -----------------------------------------------------------------------------------------------------------------------
Performance Chemical Electronic
2001 Polymers Specialties Materials Salt Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Sales to external customers $3,170 $ 805 $ 942 $ 749 $ -- $ 5,666
Earnings (losses) from
continuing operations before
extraordinary item and
cumulative effect of
accounting change 85 7 1 13 (176) (70)
Share of affiliate earnings 8 -- 4 -- -- 12
Depreciation 228 57 27 79 15 406
Segment assets 4,116 1,302 1,886 1,956 1,090 10,350
Capital additions 139 35 70 29 128 401
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Performance Chemical Electronic
2000 Polymers Specialties Materials Salt Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Sales to external customers $3,397 $ 866 $1,210 $ 876 $ -- $ 6,349
Earnings (losses) from
continuing operations before
extraordinary item and
cumulative effect of
accounting change 282 55 110 24 (175) 296
Share of affiliate earnings 10 -- 8 -- -- 18
Depreciation 249 64 31 85 17 446
Segment assets 4,474 1,951 1,919 2,052 856 11,252
Capital additions 180 33 67 38 73 391
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Performance Chemical Electronic
1999 Polymers Specialties Materials Salt Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Sales to external customers $2,939 $ 707 $ 755 $ 439 $ -- $ 4,840
Earnings (losses) from
continuing operations before
extraordinary item and
cumulative effect of
accounting change 350 59 57 10 (283) 193
Share of affiliate earnings 6 -- 2 -- (2) 6
Depreciation 215 53 23 25 44 360
Segment assets 4,413 2,012 1,520 2,708 603 11,256
Capital additions 195 65 22 33 8 323
- -----------------------------------------------------------------------------------------------------------------------
F-20
The tables below present sales and long-lived asset information by geographic
area as of and for the periods ending December 31, reflective of the disposal of
the Agricultural Chemicals business. Sales are attributed to the United States
and to all foreign countries combined based on customer location and not on the
geographic location from which goods were shipped.
- --------------------------------------------------------------------------------
2001 (in millions) United States Foreign Consolidated
- --------------------------------------------------------------------------------
Sales to external customers $ 2,661 $ 3,005 $ 5,666
Long-lived assets 4,824 2,660 7,484
- --------------------------------------------------------------------------------
2000 (in millions)
- --------------------------------------------------------------------------------
Sales to external customers $ 2,825 $ 3,524 $ 6,349
Long-lived assets 5,896 2,110 8,006
- --------------------------------------------------------------------------------
1999 (in millions)
- --------------------------------------------------------------------------------
Sales to external customers $ 2,337 $ 2,503 $ 4,840
Long-lived assets 5,138 3,122 8,260
- --------------------------------------------------------------------------------
NOTE 10: PENSION PLANS
The Company has noncontributory pension plans which provide defined benefits to
domestic and non-U.S. employees meeting age and length of service requirements.
The following disclosures include amounts for both the U.S. and significant
foreign pension plans.
- --------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Components of net periodic pension income
Service cost $ (54) $ (58) $ (52)
Interest cost (107) (103) (83)
Expected return on plan assets 192 191 148
Amortization of net gain existing at adoption of
SFAS No. 87 8 8 9
Other amortization, net 11 11 7
---------------------------
Net periodic pension income $ 50 $ 49 $ 29
- --------------------------------------------------------------------------------
Pension income primarily reflects recognition of favorable investment experience
as stipulated by SFAS No. 87. The pension benefit payments in all three years
included payments related to voluntary early retirement incentives and a
severance benefit program.
The early retirement and severance benefit programs resulted in a pre-tax gain
of $3 million, $7 million and $1 million in 2001, 2000 and 1999 respectively, as
settlement gains from retirees electing lump-sum distributions exceeded the cost
of the special termination benefits. Most of the 2000 gains, shown here net of
termination costs, were reported in the Provision for Restructuring (see Note
5). It is the Company's policy to recognize settlement gains at the time of
settlement. Special termination benefits are recognized when the termination is
probable and the amount of the benefit is calculable.
F-21
Plan activity and status as of and for the years ended December 31, were as
follows:
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
CHANGE IN PENSION OBLIGATION:
Pension obligation at beginning of year $ 1,524 $ 1,615
Service cost, excluding expenses 48 51
Interest cost 107 103
Plan participants' contributions 1 1
Divestitures, curtailments and settlements (64) (28)
Special termination benefits 30 17
Actuarial (gain) loss 61 (109)
Foreign currency exchange rate changes (4) (5)
Benefits paid (99) (121)
------------------------
Pension obligation at end of year $ 1,604 $ 1,524
- -----------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 2,189 $ 2,361
Actual return on plan assets (58) 10
Contributions 5 4
Transfer to fund retiree medical expenses (29) (26)
Trust expenses (7) (4)
Settlements (73) --
Divestitures -- (29)
Foreign currency exchange rate changes (4) (6)
Benefits paid (98) (121)
------------------------
Fair value of plan assets at end of year $ 1,925 $ 2,189
- -----------------------------------------------------------------------------
Funded status $ 321 $ 665
Unrecognized actuarial gain (15) (322)
Unrecognized prior service cost 30 13
------------------------
Net amount recognized $ 336 $ 356
- -----------------------------------------------------------------------------
Amounts recognized in the statement of financial
position consist of:
Prepaid pension cost $ 333 $ 345
Unrecognized transition asset 3 11
------------------------
Net amount recognized $ 336 $ 356
- -----------------------------------------------------------------------------
Net assets of the pension trusts, which primarily consist of common stocks and
debt securities, were measured at market value. Assumptions used are as follows:
- -----------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------
U.S. Non-U.S. U.S. Non-U.S.
Plans Plans Plans Plans
- -----------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31,
Discount rate 7.3% 6.2% 7.5% 6.4%
Expected return on plan assets 8.6 7.8 8.9 7.9
Rate of compensation increase 4.0 4.3 4.0 4.5
- -----------------------------------------------------------------------------------------
The Company transferred excess pension plan assets of $29 and $26 million
in 2001 and 2000 respectively,to fund retiree medical expenses as allowed by
U.S. tax regulations.
The Company has a noncontributory, unfunded pension plan which provides
supplemental defined benefits to U.S. employees whose benefits under the
qualified pension plan are limited by the Employee Retirement Security Act of
1974 and the Internal Revenue Code. These employees must meet age and length of
service requirements. Pension cost determined in accordance with plan provisions
was $17 million in 2001, $15 million in 2000 and $14 million in 1999. Pension
benefit payments for this plan were $12 million in 2001, $10 million in 2000 and
$11 million in 1999.
F-22
The Company has a nonqualified trust, referred to as a "rabbi" trust, to fund
benefit payments under this pension plan. Rabbi trust assets are subject to
creditor claims under certain conditions and are not the property of employees.
Therefore, they are accounted for as corporate assets and are classified as
other non-current assets. Assets held in trust at December 31, 2001 and 2000
totaled $56 million and $64 million, respectively.
The status of this plan at year end was as follows:
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
CHANGE IN PENSION OBLIGATION:
Pension obligation at beginning of year $ 132 $ 124
Service cost 2 2
Interest cost 10 9
Actuarial gains 13 7
Benefits paid (12) (10)
----------------------------
Pension obligation at end of year $ 145 $ 132
- -----------------------------------------------------------------------------
Pension benefit obligations for this plan were determined from actuarial
valuations using an assumed discount rate of 7.25% and 7.5% at December 31, 2001
and 2000, respectively, and an assumed long-term rate of compensation increase
of 4% and 5% in 2001 and 2000, respectively.
In 1997, the Company instituted a non-qualified savings plan for eligible
employees in the United States. The purpose of the plan is to provide additional
retirement savings benefits beyond the otherwise determined savings benefits
provided by the Rohm and Haas Company Employee Stock Ownership and Savings Plan
(the "Savings Plan"). Each participant's contributions will be notionally
invested in the same investment funds as the participant has elected for
investment in his or her Savings Plan account. For most participants, the
Company will contribute a notional amount equal to 60% of the first 6% of the
amount contributed by the participant. The Company's matching contributions will
be allocated to deferred stock units. At the time of distribution, each deferred
stock unit will be distributed as one share of Rohm and Haas company common
stock. Contributions to this plan were $2 million in each of 2001 and 2000.
NOTE 11: EMPLOYEE BENEFITS
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Postretirement health care and life insurance $ 441 $ 447
benefits
Unfunded supplemental pension plan (see Note 10) 123 84
Post-employment benefits 28 28
Unfunded foreign pension liabilities 18 24
Other 3 36
--------------------------
Total $ 613 $ 619
- -------------------------------------------------------------------------------
The Company provides health care and life insurance benefits under numerous
plans for substantially all of its domestic retired employees, for which the
Company is self-insured. In general, employees who have at least 15 years of
service and are 60 years of age are eligible for continuing health and life
insurance coverage. Retirees contribute toward the cost of such coverage.
F-23
The status of the plans at year end was as follows:
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 394 $ 429
Service cost 7 7
Interest cost 32 27
Contributions 2 --
Divestitures, curtailments and settlements -- (6)
Amendments 3 (1)
Special termination benefits -- 1
Actuarial (gain) loss 64 (25)
Benefits paid (40) (38)
--------------------------
Benefit obligation at end of year 462 394
Unrecognized prior service cost 7 8
Unrecognized actuarial loss 5 66
--------------------------
Total accrued postretirement benefit obligation $ 474 $ 468
- -------------------------------------------------------------------------------
The accrued postretirement benefit obligation is recorded in "accrued
liabilities" (current) and "employee benefits" (non-current).
Net periodic postretirement benefit cost includes the following components:
- --------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Components of net periodic postretirement cost
Service cost $ 7 $ 7 $ 7
Interest cost 32 27 23
Net amortization (2) (3) (3)
----------------------------
Net periodic postretirement cost $ 37 $ 31 $ 27
- --------------------------------------------------------------------------------
The calculation of the accumulated postretirement benefit obligation assumes 9%
and 5% annual rates of increase in the health care cost trend rate for 2001 and
2000, respectively. The Company's plan limits its cost for health care coverage
to an increase of 10% or less each year, subject ultimately to a maximum cost
equal to double the 1992 cost level. Increases in retiree health care costs in
excess of these limits will be assumed by retirees.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have approximately the following effects:
- -------------------------------------------------------------------------------------------
1-Percentage 1-Percentage
Point Increase Point Decrease
- -------------------------------------------------------------------------------------------
(in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 1 $ 1 $ (1) $ (1)
Effect on post retirement benefit obligation 11 12 (11) (13)
- -------------------------------------------------------------------------------------------
The weighted average discount rate used to estimate the accumulated
postretirement benefit obligation was 7.25% at December 31, 2001 and 7.50% at
December 31, 2000.
F-24
NOTE 12: ACCOUNTS RECEIVABLE, NET
- --------------------------------------------------------------------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Customers $ 1,045 $ 1,359
Unconsolidated subsidiaries and affiliates 52 38
Employees 5 10
Other 172 115
--------------------------
1,274 1,522
Less: allowance for losses 54 43
--------------------------
Total $ 1,220 $ 1,479
- --------------------------------------------------------------------------------
NOTE 13: INVENTORIES
- --------------------------------------------------------------------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Finished products and work in-process $ 550 $ 771
Raw materials 119 155
Supplies 43 41
--------------------------
Total $ 712 $ 967
- --------------------------------------------------------------------------------
Inventories amounting to $439 million and $600 million were valued using the
LIFO method at December 31, 2001 and 2000, respectively. The excess of current
cost over the stated amount for inventories valued under the LIFO method
approximated $38 million and $58 million at December 31, 2001 and 2000,
respectively. Liquidation of prior years' LIFO inventory layers did not
materially affect cost of goods sold in 2001, 2000 or 1999.
NOTE 14: PREPAID EXPENSES AND OTHER ASSETS
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Deferred tax benefits $ 231 $ 149
Prepaid expenses 98 83
Notes receivable from third parties 43 3
Other current assets 25 8
-------------------------
Total $ 397 $ 243
- -------------------------------------------------------------------------------
NOTE 15: LAND, BUILDING AND EQUIPMENT, NET
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Land $ 114 $ 140
Buildings and improvements 1,421 1,375
Machinery and equipment 4,493 4,703
Capitalized interest 272 255
Construction 318 226
-------------------------
6,618 6,699
Less: accumulated depreciation 3,702 3,405
-------------------------
Total $ 2,916 $ 3,294
- -------------------------------------------------------------------------------
The principal lives (in years) used in determining depreciation rates of various
assets are: buildings and improvements (10-50); machinery and equipment (5-20);
automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory
equipment and other assets (5-10).
Gross book values of assets depreciated by accelerated methods totaled $708
million and $854 million at December 31, 2001 and 2000, respectively. Assets
depreciated by the straight-line method totaled $5,478 million and $5,479
million at December 31, 2001 and 2000, respectively.
F-25
In 2001, 2000 and 1999 respectively, interest costs of $17 million, $14 million
and $12 million were capitalized and added to the gross book value of land,
buildings and equipment. Amortization of such capitalized costs included in
depreciation expense was $15 million in 2001, 2000 and 1999.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to
sell.
During 2001, the Company commenced a restructuring of its operations. Certain
buildings and equipment were considered impaired and were written down to their
net realizable value (see Note 5).
NOTE 16: GOODWILL AND OTHER INTANGIBLE ASSETS, NET
- -------------------------------------------------------------------------------
(in millions) LIFE (YEARS) 2001 2000
- -------------------------------------------------------------------------------
Goodwill 40 $ 2,339 $ 2,333
Customer lists 40 1,158 1,152
Tradename 40 649 649
Developed technology 13 to 18 451 451
Workforce 11 to 16.5 148 148
Patents, license agreements and
Other 101 127
-------------------------
4,846 4,860
Less: accumulated amortization 430 274
-------------------------
Total $ 4,416 $ 4,586
- -------------------------------------------------------------------------------
Amortization expense for goodwill and other intangibles was $156 million, $159
million and $83 million for 2001, 2000 and 1999, respectively. All intangibles
are amortized on a straight line basis.
NOTE 17: OTHER ASSETS
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
Prepaid pension cost (see Note 10) $ 333 $ 345
Rabbi trust assets (see Note 10) 56 64
Other non-current assets 56 56
-----------------------
Total $ 445 $ 465
- -----------------------------------------------------------------------------
NOTE 18: NOTES PAYABLE
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
Short-term borrowings $ 167 $ 545
Current portion of long-term debt 11 11
------------------------
Total $ 178 $ 556
- -----------------------------------------------------------------------------
Short-term borrowings include bank debt owed by foreign subsidiaries. The
weighted-average interest rate of short-term borrowings was 4.7% and 6.2% at
December 31, 2001 and 2000, respectively.
At December 31, 2001, the Company had revolving credit agreements totaling $901
million, of which $401 million will expire in 2002 and $500 million in 2004.
These agreements, which carry various interest rates and fees, are available to
support commercial paper borrowings. Several credit agreements permit foreign
subsidiaries to borrow local currencies. At December 31, 2001 and 2000, $141
million and $137 million, respectively, was outstanding under these agreements.
F-26
NOTE 19: LONG-TERM DEBT
- -------------------------------------------------------------------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
7.85% debentures due 2029 $ 957 $ 1,000
7.40% notes due 2009 500 500
6.95% notes due 2004 451 500
6.0% notes due 2007 (denominated in Euros) 356 376
9.25% debentures due 2020 169 170
9.80% notes due 2020 118 125
6.63% obligation due through 2012 43 45
9.50% notes due 2021 (callable 2002 at 104.75%) 38 38
1.55% notes due 2003 (denominated in yen) 22 33
Other 66 81
Long-term commercial paper borrowings -- 350
--------------------------
Total $ 2,720 $ 3,218
- --------------------------------------------------------------------------------
On February 27, 2002, the Company issued 20 billion yen (or $149 million) of
3.5% notes due 2032 with interest payable semi-annually every March 29th and
September 29th, beginning March 2002. The maturity date is March 29, 2032,
callable annually after March 2012. The proceeds from the issuance of the note
will be used for general corporate purposes.
In 2000, the Company issued 400 million euros (or $376 million) of 6.0% notes
due 2007 with interest payable annually, beginning March 9, 2001.
The Company's revolving credit and other loan agreements require that EBITDA,
excluding non-recurring items, exceed 3.5 times consolidated interest expense on
a rolling four-quarter basis. There are no restrictions on the payment of
dividends.
In 2001, the Company retired $43 million of 7.85% debentures resulting in an
after-tax extraordinary loss of $1 million and retired $49 million of 6.95%
notes. In 2000, the Company retired $74 million of 9.25% debentures.
Total cash used for the payment of interest expense, net of amounts capitalized,
was $194 million, $239 million and $72 million in 2001, 2000 and 1999,
respectively.
Long-term debt maturing in the next five years is:
- -----------------------------------------------------------------
(in millions)
- -----------------------------------------------------------------
2002 $ 11 2005 $ 11
2003 $ 38 2006 $ 11
2004 $ 467
- -----------------------------------------------------------------
F-27
NOTE 20: ACCRUED LIABILITIES
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
Salaries and wages $ 99 $ 173
Interest 94 106
Sale incentive programs and other selling accruals 73 94
Taxes, other than income taxes 65 60
Employee benefits 46 45
Reserve for restructuring (see Note 5) 43 33
Insurance and legal 36 42
Reserve for environmental
remediation (see Note 25) 20 40
Other 110 138
-----------------------
Total $ 586 $ 731
- -----------------------------------------------------------------------------
NOTE 21: OTHER LIABILITIES
- -----------------------------------------------------------------------------
(in millions) 2001 2000
- -----------------------------------------------------------------------------
Reserves for environmental remediation (Note 25) $ 136 $ 145
Deferred revenue on supply contracts 49 42
Other 97 79
-----------------------
Total $ 282 $ 266
- -----------------------------------------------------------------------------
NOTE 22: STOCKHOLDERS' EQUITY
Dividends paid on ESOP shares, used as a source of funds for meeting the ESOP
financing obligation, were $13.8 million in 2001 and $13.2 million in 2000.
These dividends were recorded net of the related U.S. tax benefits. The number
of ESOP shares not allocated to plan members at December 31, 2001 and 2000 were
11.6 million and 12.3 million, respectively.
The Company recorded compensation expense of $6 million in 2001, 2000 and 1999,
for ESOP shares allocated to plan members. The Company expects to record annual
compensation expense at approximately this level over the next 19 years as the
remaining $113 million of ESOP shares are allocated. The allocation of shares
from the ESOP is expected to fund a substantial portion of the Company's future
obligation to match employees savings plan contributions as the market price of
Rohm and Haas stock appreciates.
The Company repurchased an insignificant number of shares in 2001, 2000 and
1999.
In 1999, the Company redeemed its $2.75 million cumulative convertible preferred
stock under the terms of the issue.
F-28
The reconciliation from basic to diluted earnings per share is as follows:
- --------------------------------------------------------------------------------
Earnings Shares Per-Share
(In millions, except per share amounts) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
2001
Net earnings available to common
shareholders $ 395 220.2 $ 1.79
Dilutive effect of options(a) -- --
---------------------------
Diluted earnings per share $ 395 220.2 $ 1.79
- ----------------------------------------- -------------------------------------
2000
Net earnings available to common
shareholders $ 354 219.5 $ 1.61
Dilutive effect of options(a) -- 1
---------------------------
Diluted earnings per share $ 354 220.5 $ 1.61
- ----------------------------------------- -------------------------------------
1999
Net earnings available to common
shareholders $ 247 192.6 $ 1.28
Effect of convertible preferred stock 2 --
Effect of accelerated stock repurchase
program -- 1.3
Dilutive effect of options(a) -- 1.8
---------------------------
Diluted earnings per share $ 249 195.7 $ 1.27
- ----------------------------------------- --------------------------------------
(a) For the year ended December 31, 2001,Company had .6 million, anti-dilutive
stock options; the exercise price of the stock options was greater than the
average market price for the year ended December 31, 2001. There were no
anti-dilutive stock options for the years ended December 31, 2000 and 1999.
SHAREHOLDERS' RIGHTS PLAN
In 2000 the Company adopted a shareholders' rights plan under-which the Board of
Directors declared a dividend of one preferred stock purchase right ("right")
for each outstanding share of the Company's common stock held of record as of
the close of business on November 3, 2000. The rights initially are deemed to be
attached to the common shares and detach and become exercisable only if (with
certain exceptions and limitations) a person or group has obtained or attempts
to obtain beneficial ownership of 15% or more of the outstanding shares of the
Company's common stock or is otherwise determined to be an "acquiring person" by
the Board of Directors. Each right, if and when it becomes exercisable,
initially will entitle holders of the rights to purchase one one-thousandth
(subject to adjustment) of a share of Series A Junior Participating Preferred
Stock for $150 per one one-thousandth of a Preferred Share, subject to
adjustment. Each holder of a right (other than the acquiring person) is entitled
to receive a number of shares of the Company's common stock with a market value
equal to two times the exercise price, or $300. The rights expire, unless
earlier exercised or redeemed, on December 31, 2010.
NOTE 23: STOCK COMPENSATION PLANS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company continues to apply the provisions of APB Opinion No. 25. Accordingly, no
compensation expense has been recognized for the fixed stock option plans. For
restricted stock awards, compensation expense equal to the fair value of the
stock on the date of the grant is recognized over the five-year vesting period.
Total compensation expense for restricted stock was $3 million, $2 million and
$1 million in 2001, 2000 and 1999, respectively. Had compensation expense for
the Company's fixed stock option plans been determined in accordance with SFAS
No. 123, the Company's net earnings would have been reduced to $375 million in
2001, $345 million in 2000, and $146 million in 1999. Basic earnings per common
share would have been reduced to $1.70, $1.57, and $.75 in 2001, 2000 and 1999,
respectively. Diluted earnings per common share would have been reduced to
$1.70, $1.57, and $.75 in 2001, 2000 and 1999, respectively.
1999 STOCK PLAN
Under this plan, as amended in 2001, the Company may grant as options or
restricted stock up to 19 million shares of common stock with no more than 3
million of these shares granted to any employee as options over a five-year
period. No more than 50% of shares in this plan can be issued as restricted
stock. Awards under this plan may be granted only to employees of the Company.
Options granted under this plan in 2001 and 2000 were granted at the fair market
value on the date of grant and generally vest over three years expiring within
10 years of the grant date. Shares of restricted stock issued in 2001 totaled
98,069 at a weighted average grant-date fair value of $36.26 per share.
F-29
NON-EMPLOYEE DIRECTORS' STOCK PLAN OF 1997
Under the 1997 Non-Employee Directors Stock Plan, directors receive half of
their annual retainer in deferred stock. Each share of deferred stock represents
the right to receive one share of company common stock upon leaving the board.
Directors may also elect to defer all or part of their cash compensation into
deferred stock. Annual compensation expense is recorded equal to the number of
deferred stock shares awarded multiplied by the market value of the Company's
common stock on the date of award. Additionally, directors receive dividend
equivalents on each share of deferred stock, payable in deferred stock, equal to
the dividend paid on a share of common stock.
RESTRICTED STOCK PLAN OF 1992
Under this plan, executives were paid some or all of their bonuses in shares of
restricted stock instead of cash. Most shares vest after five years. The plan
covers an aggregate 450,000 shares of common stock. In 1999, 73,105 shares of
restricted stock were granted at weighted-average grant-date fair values of $31
per share.
FIXED STOCK OPTION PLANS
The Company has granted stock options to key employees under its Stock Option
Plans of 1984 and 1992. Options granted pursuant to the plans are priced at the
fair market value of the common stock on the date of the grant. Options vest
after one year and most expire 10 years from the date of grant. No further
grants can be made under either plan.
The status of the Company's stock options as of December 31 is presented below:
- ------------------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
- ------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 5,696 $ 28.56 5,419 $25.26 2,417 $23.58
Granted 2,910 33.19 1,061 40.64 6,545 22.26
Canceled (117) 35.44 (51) 34.65 (709) 18.26
Exercised (454) 20.37 (733) 20.39 (2,834) 18.65
---------- ---------- ----------
Outstanding at end
of year 8,035 30.60 5,696 28.56 5,419 25.26
----------- ---------- ----------
Options exercisable 4,612 27.75 4,655 25.86 4,993 25.14
at year end
Weighted-average
fair value of
options granted
during the year $ 10.74 $ 12.62 $ 24.38
- ------------------------------------------------------------------------------------------------------
F-30
The Black-Scholes option pricing model was used to estimate the fair value for
each grant made under the Rohm and Haas plan during the year. The following are
the weighted-average assumptions used for all shares granted in the years
indicated:
- --------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------
Dividend yield 2.42% 1.89%
Volatility 33.82 28.85
Risk-free interest rate 4.95 6.59
Time to exercise 6 years 6 years
- --------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
- ------------------------------------------------------ -------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Range Number Average Average Number Average
Of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (000s) Life Price (000s) Price
- --------------------------------------------------------------------------------------------------
$11 to 16 97 7.4 years $13.67 97 $13.67
$18 to 25 1,663 6.0 $21.69 1,663 $21.69
$26 to 35 4,775 8.0 $31.28 2,232 $29.46
$36 to 45 1,500 8.2 $39.40 620 $40.06
--------------- ---------------
8,035 4,612
--------------- ---------------
- --------------------------------------------------------------------------------------------------
NOTE 24: LEASES
The Company leases certain properties and equipment used in its operations,
primarily under operating leases. Most lease agreements require minimum lease
payments plus a contingent rental based on equipment usage and escalation
factors. Total net rental expense incurred under operating leases amounted to
$73 million in 2001, $80 million in 2000 and $79 million in 1999.
Total future minimum lease payments under the terms of non-cancelable operating
leases are as follows:
(in millions)
2002 $ 50 2005 $ 18
2003 43 2006 16
2004 29 Thereafter 72
NOTE 25: CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS
ENVIRONMENTAL
There is a risk of environmental impact in chemical manufacturing operations.
The Company's environmental policies and practices are designed to ensure
compliance with existing laws and regulations and to minimize the possibility of
significant environmental impact.
The laws and regulations under which the Company operates require significant
expenditures for capital improvements, the operation of environmental protection
equipment and remediation. Future developments and even more stringent
environmental regulations may require the Company to make additional unforeseen
environmental expenditures. The Company's major competitors are confronted by
substantially similar environmental risks and regulations.
The Company is a party in various government enforcement and private actions
associated with former waste disposal sites, many of which are on the U.S.
Environmental Protection Agency's (EPA) National Priority List and has been
named a potentially responsible party at approximately 140 inactive waste sites
where remediation costs have been or may be incurred under the Federal
Comprehensive Environmental Response, Compensation and Liability Act and similar
state statutes. In some of these cases the Company
F-31
may also be held responsible for alleged property damage. The Company has
provided for future costs at certain of these sites. The Company is also
involved in corrective actions at some of its manufacturing facilities.
The Company considers a broad range of information when determining the amount
of its remediation accruals, including available facts about the waste site,
existing and proposed remediation technology and the range of costs of applying
those technologies, prior experience, government proposals for this or similar
sites, the liability of other parties, the ability of other principally
responsible parties to pay costs apportioned to them and current laws and
regulations. These accruals are assessed quarterly and updated as additional
technical and legal information becomes available. However, at certain sites,
the Company is unable, due to a variety of factors, to assess and quantify the
ultimate extent of its responsibility for study and remediation costs. Major
sites for which reserves have been provided are the non-company-owned Lipari,
Woodland and Kramer sites in New Jersey, Whitmoyer in Pennsylvania and
company-owned sites in Bristol and Philadelphia, Pennsylvania and Houston,
Texas. The Morton acquisition introduced two major sites: Moss Point,
Mississippi and Wood-Ridge, New Jersey.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation ("Velsicol")
have been held jointly and severally liable for the cost of remediation
necessary to correct mercury-related environmental problems associated with a
mercury processing plant on the site prior to its acquisition by Morton. At the
date of acquisition, Morton had disclosed and accrued for certain ongoing
studies, which are expected to be completed during 2002, with regulatory
decisions expected by the end of 2002. In its allocation of the purchase price
of Morton, the Company accrued for additional study costs at December 31, 1999
and additional remediation costs in 2000 based on the progress of the technical
studies. A separate study of probable contamination in Berry's Creek, which runs
near the plant site, and of the surrounding wetlands is on a timetable yet to be
determined. Therefore, the estimated costs of this separate study and any
resulting remediation requirements have not been considered in the allocation of
the Morton purchase price. There is much uncertainty as to what will be required
to address Berry's Creek but cleanup costs could be very high and the Company's
share of these costs could be material. The Company's exposure will also depend
upon the continued ability of Velsicol and its indemnitor, Fruit of the Loom,
Inc., which has filed for protection under the bankruptcy laws, to contribute to
the cost of remediation. In 2001, these parties have stopped paying their share
of expenses. Ultimately, the Company's exposure will also depend on the results
of attempts to obtain contributions from others believed to share
responsibility. A cost recovery action against these responsible parties is
pending in federal court. This action has been stayed pending future regulatory
developments and the appeal of a summary judgment ruling in favor of one of the
defendants. Settlements have been reached with some defendants for claims
considered de minimis associated with the Wood-Ridge plant site.
During 1996, the EPA notified Morton of possible irregularities in water
discharge monitoring reports filed by its Moss Point, Mississippi plant in early
1995. Morton investigated and identified other environmental issues at the
plant. Though at the date of acquisition Morton had accrued for some remediation
and legal costs, the Company revised these accruals as part of the allocation of
the purchase price of Morton based on its discussions with the authorities and
on the information available as of June 30, 2000. In 2000, the Company reached
agreement with the EPA, the Department of Justice and the State of Mississippi,
resolving these historical environmental issues. The agreement received court
approval in early 2001. The final settlement includes payment of $20 million in
civil penalties, which were paid in the first quarter of 2001, $2 million in
criminal penalties, which were paid in the fourth quarter of 2000 and $16
million in various Supplemental Environmental Projects. The accruals established
for this matter were sufficient to cover these and other related costs of the
settlement. In December 2001, the Company closed the chemicals portion of the
Moss Point facility.
The amount charged to earnings before-tax for environmental remediation was $28
million and $4 million for the years ended December 31, 2001 and 1999,
respectively, and the amount for 2000 was immaterial. The reserves for
remediation were $156 million and $185 million at December 31, 2001 and 2000,
respectively, and are recorded as "other liabilities" (current and long-term).
These reserves include amounts resulting from the allocation of the purchase
price of Morton. The Company is pursuing lawsuits over insurance coverage for
environmental liabilities. It is the Company's practice to reflect environmental
insurance recoveries in results of operations for the quarter in which the
litigation is resolved through settlement or other appropriate legal processes.
Resolutions typically resolve coverage for both past and future environmental
spending. The Company settled with several of its insurance carriers and
recorded income before-tax of approximately $13 million, $1 million and $17
million for the years ended December 31, 2001, 2000 and 1999, respectively.
F-32
In addition to accrued environmental liabilities, the Company had reasonably
possible loss contingencies related to environmental matters of approximately
$73 million and $73 million at December 31, 2001 and 2000, respectively.
Further, the Company has identified other sites, including its larger
manufacturing facilities, where additional future environmental remediation may
be required, but these loss contingencies cannot reasonably be estimated at this
time. These matters involve significant unresolved issues, including the number
of parties found liable at each site and their ability to pay, the outcome of
negotiations with regulatory authorities, the alternative methods of remediation
and the range of costs associated with those alternatives. The Company believes
that these matters, when ultimately resolved, which may be over an extended
period of time, will not have a material adverse effect on the consolidated
financial position or consolidated cash flows of the Company, but could have a
material adverse effect on consolidated results of operations or cash flows in
any given period.
Capital spending for new environmental protection equipment was $26 million in
2001 versus $27 million in 2000 and $30 million on 1999. Spending for 2002 and
2003 is expected to be $26 million and $21 million, respectively. Capital
expenditures in this category include projects whose primary purposes are
pollution control and safety, as well as environmental aspects of projects in
other categories that are intended primarily to improve operations or increase
plant efficiency. The Company expects future capital spending for environmental
protection equipment to be consistent with prior-year spending patterns. Capital
spending does not include the cost of environmental remediation of waste
disposal sites.
Cash expenditures for waste disposal site remediation were $51 million in 2001,
$33 million in 2000 and $27 million in 1999. The expenditures for remediation
are charged against accrued remediation reserves. The cost of operating and
maintaining environmental facilities was $129 million, $114 million and $107
million in 2001, 2000 and 1999 respectively, and was charged against
current-year earnings.
OTHER LITIGATION
There has been increased publicity about asbestos liabilities faced by
manufacturing companies. As a result of the bankruptcy of most major asbestos
producers, plaintiffs' attorneys are increasing their focus on peripheral
defendants. The Company believes it has adequate reserves and insurance and does
not believe its asbestos exposure is material.
There are pending lawsuits filed against Morton related to employee exposure to
asbestos at a manufacturing facility in Weeks Island, Louisiana with additional
lawsuits expected. The Company expects that most of these cases will be
dismissed because they are barred under worker's compensation laws; however,
cases involving asbestos-caused malignancies may not be barred under Louisiana
law. Subsequent to the Morton acquisition, the Company commissioned medical
studies to estimate possible future claims and recorded accruals based on the
results. Morton has also been sued in connection with the former Friction
Division of the former Thiokol Corporation which merged with Morton in 1982.
Settlements to date total $350 thousand and many cases have closed with no
payment. These cases are fully insured. In addition, like most manufacturing
companies, Rohm and Haas has been sued, generally as one of many defendants, by
non-employees who allege exposure to asbestos on the Company premises.
The Company and its subsidiaries are also parties to litigation arising out of
the ordinary conduct of its business. Recognizing the amounts reserved for such
items and the uncertainty of the ultimate outcomes, it is the Company's opinion
that the resolution of all these pending lawsuits, investigations and claims
will not have a material adverse effect, individually or in the aggregate, upon
the results of operations and the consolidated financial position of the
Company.
F-33
NOTE 26: NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND OTHER HEDGING ACTIVITIES
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for the
accounting and reporting of derivative and hedging transactions. Additionally,
in July 2001 the Company adopted DIG Issue G20, "Assessing and Measuring the
Effectiveness of a Purchased Option Used in a Cash Flow Hedge."
This standard requires that all derivative instruments be reported on the
balance sheet at fair value. For instruments designated as fair value hedges,
changes in the fair value of the instrument will largely be offset on the income
statement by changes in the fair value of the hedged item. For instruments
designated as cash flow hedges, the effective portion of the hedge is reported
in other comprehensive income until it is assigned to earnings in the same
period in which the hedged item has an impact on earnings. For instruments
designated as a hedge of net investment in foreign operating units not using the
U.S. Dollar as its functional currency, changes in the fair value of the
instrument will be offset in other comprehensive income to the extent that they
are effective as economic hedges. Changes in the fair value of derivative
instruments, including embedded derivatives, that are not designated as a hedge
will be recorded each period in current earnings along with any ineffective
portion of hedges.
Using market valuations for derivatives held as of December 31, 2000, the
Company recorded a $6 million after-tax cumulative income effect to accumulated
other comprehensive income, and a charge to net income of $2 million, to
recognize at fair value all derivative instruments on January 1, 2001. Changes
in the Company's derivative instrument portfolio or changes in the market values
of this portfolio could have a material effect on accumulated other
comprehensive income.
The Company has concluded that the adoption of SFAS No. 133 will not materially
change management's risk policies and practices nor will compliance with the
standard materially impact the reported results from operations.
BUSINESS COMBINATIONS
SFAS No. 141, "Business Combinations," which is effective for all business
combinations completed after June 30, 2001, mandates that all business
combinations be accounted for by only the purchase method (thereby eliminating
the option for pooling of interests); segregation of other intangible assets
from goodwill if they meet the contractual legal criterion or the separability
criterion; and expanded disclosure requirements on the primary reasons for a
business combination and the allocation of the purchase price to the assets and
liabilities assumed by major balance sheet caption.
GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets," is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142, which the Company adopted
on January 1, 2002, requires the Company to cease amortization of goodwill and
certain indefinite-lived intangible assets and evaluate goodwill and intangible
assets for impairment. In accordance with the Statement, the Company reviewed
its intangible assets in order to identify intangible assets with indefinite
lives which will no longer be amortized and intangible assets which may be
reclassified as goodwill and thus no longer be amortized. In addition the
Company is in the process of assessing the remaining useful lives of intangible
assets which will continue to be subject to amortization. As of January 1, 2002,
the Company ceased amortization of goodwill and intangibles deemed to have
indefinite lives and reclassed certain intangibles in accordance with the
provisions of this statement.
The evaluation of the Company's goodwill is performed at the reporting unit
level and is a two-step process. When evaluating goodwill for impairment, the
Statement requires the Company to first compare a reporting unit's book value to
its fair value. To the extent that the book value exceeds fair value, the
Company is required to perform a second step wherein a reporting unit's assets
and liabilities are fair valued. To the extent that a reporting unit's book
value of goodwill exceeds its implied fair value of goodwill, impairment exists
and must be recognized. The implied fair value of goodwill is calculated as the
fair value of a reporting unit in excess of the fair value of all non-goodwill
assets in the reporting unit. Net book values of the recorded assets and
liabilities have been calculated for each of the Company's reporting units. The
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Company is in the process of valuing these reporting units based primarily upon
the present value of expected future cash flows.
In accordance with SFAS No. 142, the intangible assets which continue to be
subject to amortization are being reviewed for impairment by the Company under
SFAS No. 144. Intangible assets which are no longer subject to amortization are
being reviewed by the Company in accordance with SFAS No. 142 in a one-step
process. Impairment is measured as the amount an intangible asset's carrying
value exceeds its fair value. The Company intends to complete its evaluation of
intangible assets in accordance with SFAS No. 142 no later than June 30, 2002.
The Company's previous business combinations were accounted for using the
purchase method of accounting. As of December 31, 2001, the net carrying amount
of goodwill was $2,159 million. Goodwill amortization expense for the year ended
December 31, 2001 was $64 million. The Company intends to complete its
evaluation of goodwill in accordance with SFAS No. 142 no later than June 30,
2002 and expects to recognize an impairment loss. The Company continues to
finalize its estimate of the impairment loss. Any impairment loss will be
recognized as a cumulative effect of a change in accounting principle in the
Company's consolidated statement of operations.
ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations", which requires recognition
of the fair value of liabilities associated with the retirement of long-lived
assets when a legal obligation to incur such costs arises as a result of the
acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's useful
life. SFAS No.143 is effective for fiscal years beginning after December 15,
2002. Management is currently assessing the impact of the new standard on its
financial statements.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002 the Company adopted SFAS No. 144 "Accounting for the
impairment or Disposal of Long-Lived Assets." The Statement provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. Management has assessed the impact
of the new standard and determined there to be no material impact to the
financial statements.
NOTE 27: SUBSEQUENT EVENTS
As of March 21, 2002, the Company repurchased approximately $76 million of the
7.85% debentures due on July 15, 2029. On February 27, 2002, the Company
exercised the call option on the 9.50% notes due 2021. All of the outstanding
notes have been called for redemption on April 1, 2002 at a redemption price
equal to 104.75% of the principal amount together with interest accrued to the
date of redemption. The repurchases and redemption will result in an after-tax
charge of approximately $6 million in 2002.
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SCHEDULE II
ROHM AND HAAS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------ ------ ------
(millions of dollars)
Deducted from Accounts Receivable -
Allowances for losses:
Balance at beginning of year................ $ 43 $ 37 $ 12
Additions charged to earnings............... 25 14 6
Acquisitions/(Divestitures)................. 1 2 22
Charge-offs, net of recoveries (15) (10) (3)
------ ------ ------
Balance at end of year...................... $ 54 $ 43 $ 37
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