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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2002 COMMISSION FILE NUMBER 1-3507
R O H M A N D H A A S C O M P A N Y
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1028370
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 INDEPENDENCE MALL WEST, PHILADELPHIA, PENNSYLVANIA 19106
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 592-3000
--------------
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
--- ---
Common stock outstanding at October 31, 2002: 221,099,656 Shares
ROHM AND HAAS COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1. Statements of Consolidated Earnings for the three and nine months
ended September 30, 2002 and 2001.
2. Statements of Consolidated Cash Flows for the nine months ended
September 30, 2002 and 2001.
3. Consolidated Balance Sheets as of September 30, 2002 and December 31,
2001.
4. Notes to Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Management's discussion of market risk is incorporated herein by
reference to Item 7a of its Form 10-K for the year ended December 31,
2001, filed with the Securities and Exchange Commission on March 26,
2002.
ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROHM AND HAAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
(millions of dollars, except share and per-share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- -------------- ------------- -------------
Net sales $ 1,454 $ 1,346 $ 4,292 $ 4,326
Cost of goods sold 1,003 932 2,921 3,059
----------------------------------------------------------
Gross profit 451 414 1,371 1,267
Selling and administrative expense 220 208 645 638
Research and development expense 71 55 199 168
Interest expense 32 39 99 143
Amortization of goodwill and other intangibles (Note C) 17 40 51 118
Share of affiliate net earnings (5) (3) (10) (9)
Provision for restructuring and asset impairments (Note E) -- -- 16 330
Other (income) expense, net 3 (11) (4) 1
------------- -------------- ------------- -------------
Earnings (loss) from continuing operations before income taxes,
extraordinary item and cumulative effect of accounting change 113 86 375 (122)
Income tax expense (benefit) 36 33 121 (15)
------------- -------------- ------------- -------------
Earnings (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change $ 77 $ 53 $ 254 $ (107)
------------- -------------- ------------- -------------
Discontinued operations:
Income from discontinued line of business, net of income taxes -- -- -- 40
Gain (loss) on disposal of discontinued line of business,
net of income taxes (4) -- (7) 428
------------- -------------- ------------- -------------
Earnings before extraordinary item and cumulative effect of
accounting change $ 73 $ 53 $ 247 $ 361
Extraordinary loss on early extinguishment of debt, net of
income taxes -- -- (6) (1)
Cumulative effect of accounting change, net of income taxes -- -- (773) (2)
------------- -------------- ------------- -------------
Net earnings (loss) $ 73 $ 53 $ (532) $ 358
------------- -------------- ------------- -------------
Basic earnings (loss) per common share (in dollars):
Continuing operations $ 0.35 $ 0.24 $ 1.15 $ (0.48)
Income from discontinued line of business - -- -- 0.18
Gain (loss) on disposal of discontinued line of business (0.02) -- (0.03) 1.94
Extraordinary loss on early extinguishment of debt -- -- (0.03) (0.01)
Cumulative effect of accounting change -- -- (3.50) (0.01)
------------- -------------- ------------- -------------
$ 0.33 $ 0.24 $ (2.41) $ 1.62
------------- -------------- ------------- -------------
Diluted earnings (loss) per common share (in dollars):
Continuing operations $ 0.35 $ 0.24 $ 1.15 $ (0.48)
Income from discontinued line of business -- -- -- 0.18
Gain (loss) on disposal of discontinued line of business (0.02) -- (0.03) 1.94
Extraordinary loss on early extinguishment of debt -- -- (0.03) (0.01)
Cumulative effect of accounting change -- -- (3.49) (0.01)
------------- -------------- ------------- -------------
$ 0.33 $ 0.24 $ (2.40) $ 1.62
------------- -------------- ------------- -------------
Common dividends per share $ 0.21 $ 0.20 $ 0.61 $ 0.60
Weighted average common shares outstanding (in millions):
Basic 221.1 220.4 220.9 220.2
Diluted 222.1 221.3 221.9 220.2
See Notes to Consolidated Financial Statements.
2
ROHM AND HAAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
- ---------------------------------------------------------------------------------------------------------
(millions of dollars) Nine Months Ended
September 30,
----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (532) $ 358
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
(Gain) loss on disposal of discontinued line of business, net of income taxes 7 (428)
Provision for restructuring and asset impairments 16 330
Depreciation expense 292 308
Income from discontinued line of business, net of income taxes -- (40)
Amortization of goodwill and intangibles 51 118
Purchased in-process research and development 3 --
Extraordinary loss on early extinguishment of debt, net of income taxes 6 1
Cumulative effect of accounting change, net of income taxes 773 2
Changes in assets and liabilities, net of acquisitions and divestitures:
Deferred income taxes (57) (41)
Accounts receivable, net (23) 74
Inventories (19) 76
Prepaid expenses and other assets 24 (22)
Accounts payable and accrued liabilities (31) (414)
Accrued income taxes payable 54 (51)
Other, net 82 (17)
-------- --------
Net cash provided by continuing operations 646 254
-------- --------
Net cash provided by discontinued operations -- 44
-------- --------
Net cash provided by operating activities 646 298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from/cash used for disposal of discontinued line of business (20) 962
Acquisitions/divestitures of businesses and affiliates (85) (111)
Additions to land, buildings and equipment (261) (270)
Proceeds from/cash used for hedge of net investment in foreign subsidiaries (12) 7
-------- --------
Net cash (used in) provided by investing activities (378) 588
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares (1) --
Proceeds from issuance of long-term debt 153 --
Repayments of long-term debt (126) (147)
Net change in short-term borrowings 1 (612)
Payment of dividends (135) (132)
-------- --------
Net cash used in financing activities (108) (891)
-------- --------
Net increase (decrease) in cash and cash equivalents 160 (5)
Cash and cash equivalents at beginning of period 92 92
-------- --------
Cash and cash equivalents at end of period $ 252 $ 87
======== ========
See Notes to Consolidated Financial Statements
3
ROHM AND HAAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
(millions of dollars, except share amounts)
September 30, December 31,
2002 2001
---------- -----------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 252 $ 92
Receivables, net 1,248 1,220
Inventories (Note H) 753 712
Prepaid expenses and other assets 373 397
---------- -----------
Total current assets 2,626 2,421
---------- -----------
Land, buildings and equipment, net 2,901 2,916
Goodwill, net of amortization (Note C) 1,603 2,159
Other intangible assets, net of amortization (Note C) 1,944 2,257
Other assets 595 597
---------- -----------
Total assets $ 9,669 $ 10,350
========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 226 $ 178
Trade and other payables 466 520
Accrued liabilities 611 560
Accrued income taxes payable 294 340
---------- -----------
Total current liabilities 1,597 1,598
---------- -----------
Long-term debt 2,755 2,720
Employee benefits 600 613
Deferred income taxes 1,184 1,278
Other liabilities 272 282
Minority interest 19 18
Commitments and contingencies (Note F)
Stockholders' equity:
Common stock: shares issued - 242,078,367 605 605
Additional paid-in capital 1,969 1,961
Retained earnings 1,077 1,742
---------- -----------
3,651 4,308
Less: Treasury stock, at cost (Note J) 201 208
Less: ESOP shares 108 113
Accumulated other comprehensive (loss) (100) (146)
---------- -----------
Total stockholders' equity 3,242 3,841
---------- -----------
Total liabilities and stockholders' equity $ 9,669 $ 10,350
========== ===========
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Rohm and Haas
Company (the Company) have been prepared on a basis consistent with accounting
principles generally accepted in the United States of America and are in
accordance with the Securities and Exchange Commission (SEC) regulations for
interim financial reporting. In the opinion of management, the financial
statements reflect all adjustments, which are of a normal and recurring nature,
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Certain prior year amounts
have been reclassified to conform to current year presentation. These financial
statements should be read in conjunction with the financial statements,
accounting policies and the notes included in the Company's Annual Report filed
on Form 10-K with the SEC for the year ended December 31, 2001.
(A) NEW ACCOUNTING PRONOUNCEMENTS
o GOODWILL AND OTHER INTANGIBLE ASSETS
Refer to Footnote C for information related to Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."
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 the Company's financial statements.
o DEBT EXTINGUISHMENT, INTANGIBLE ASSETS OF MOTOR CARRIERS AND LEASE
ACCOUNTING
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement amends FASB Statement No. 13, "Accounting for
Leases," and other existing authoritative pronouncements in order to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions and also limits the classification
of debt extinguishments as extraordinary items. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002. The Company will adopt the
provisions of SFAS No. 145 during the first quarter of fiscal year 2003.
For the nine months ended September 30, 2002, the Company recorded
extraordinary losses on early extinguishment of debt of $6 million
after-tax. These losses will be reclassified to continuing operations in
fiscal 2003 after adopting SFAS No. 145, to maintain comparability for the
reported periods.
o COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses the
recognition, measurement and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance in Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." The statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. SFAS No. 146 is effective for disposal
activities initiated after December 31, 2002. The new guidance will impact
the timing of recognition and the initial measurement of the amount of
liabilities that the Company recognizes in connection with exit or disposal
activities initiated after the effective date. The Company does not expect
this statement to have a material impact on its financial statements.
5
(B) SEGMENT INFORMATION
Effective January 1, 2002, based on realignment of internal management
accountability, the Company changed its reportable business segments (hereafter
referred to as business segments) in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company operates
five business segments: Coatings, Adhesives and Sealants, Electronic Materials,
Performance Chemicals and Salt. The Coatings, Electronic Materials and
Performance Chemicals business segments aggregate operating segments. The
Coatings segment sells a range of intermediate products and additives for paint
and coatings, textiles, non-woven and leather applications for use in the
building and construction, home improvement, packaging, graphic arts, apparel
and transportation markets. The Adhesives and Sealants segment sells a
full-range of adhesives and laminate materials for use in the packaging,
building and construction, transportation and home improvement markets. The
Electronic Materials segment sells enabling technology for all aspects of the
manufacture of printed wiring boards, integrated circuits and integrated circuit
packaging for use in cellular phones, mainframe and personal computers, office
equipment, home appliances, electronic games and automotive parts. The
Performance Chemicals segment produces monomers that are essential starting
materials for acrylic products, a wide range of plastics additives, lubricants,
fuels, antimicrobial, resins and adsorbents. The Salt segment sells salt in all
forms including table, water conditioning, highway and chemical processing.
Results of operations from prior years have been reclassified to conform to
current year presentation.
The results for the year-ended December 31, 2001, as reported in the Company's
Annual Report filed on Form 10-K with the SEC, were presented in the previously
existing business segments. The following table provides a comparable view of
the business segments applicable to 2001 versus those presented in 2002.
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 *
* Designates a reporting unit for SFAS No. 142 purposes
- ----------------------------------------------------------------------------------------------------------------
6
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Sales by Business Segment and Customer Location
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
BUSINESS SEGMENT 2002 2001 (1) 2002 2001 (1)
-------------------- -------------------
Coatings $ 489 $ 453 $ 1,422 $ 1,371
Adhesives and Sealants 146 159 446 486
Electronic Materials 262 208 738 735
Performance Chemicals 584 529 1,650 1,663
Salt 139 144 489 546
Elimination of Intersegment Sales (166) (147) (453) (475)
------- ------- ------- -------
Total $ 1,454 $ 1,346 $ 4,292 $ 4,326
======= ======= ======= =======
CUSTOMER LOCATION
North America $ 887 $ 828 $ 2,662 $ 2,681
Europe 333 305 965 985
Asia-Pacific 183 163 516 504
Latin America 51 50 149 156
------- ------- ------- -------
Total $ 1,454 $ 1,346 $ 4,292 $ 4,326
======= ======= ======= =======
Earnings (Loss) from Continuing Operations by Business Segment (5)
(in millions) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Pro Forma Pro Forma
BUSINESS SEGMENT 2002 2001(1) 2001(1,3) 2002(4) 2001(1) 2001(1,3)
-------------------------------- -------------------------------
Coatings $ 48 $ 48 $ 51 $ 166 $ 84 $ 93
Adhesives and Sealants 3 6 9 (2) (74) (67)
Electronic Materials 26 (3) 2 60 2 15
Performance Chemicals 42 37 40 120 33 41
Salt 4 (2) 3 29 2 19
Corporate (2) (46) (33) (31) (119) (154) (149)
-------------------------------- -------------------------------
Total $ 77 $ 53 $ 74 $ 254 $ (107) $ (48)
================================ ===============================
(1) Reclassified to conform to current year presentation.
(2) Corporate includes non-operating items such as interest income and expense
and corporate governance costs.
(3) Pro forma results exclude amortization of goodwill and indefinite-lived
intangibles.
(4) Results for the nine months ended September 30, 2002 include an impairment
charge for goodwill and indefinite-lived intangible assets in accordance
with SFAS No. 142 reported as a cumulative change in accounting principle
as of January 1, 2002. The after-tax charge of $773 million by segment is
as follows: Coatings - $42 million; Electronic Materials - $281 million;
Performance Chemicals - $230 million and Salt - $220 million.
(5) Before extraordinary item and cumulative effect of accounting change.
(C) GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with this statement, as of January 1, 2002,
the Company ceased amortization of goodwill and intangible assets deemed to have
indefinite lives, and reclassified certain intangible assets to goodwill, net of
deferred taxes. Under SFAS No. 142, goodwill and certain indefinite-lived
intangible assets are no longer amortized but instead are reviewed for
impairment at least annually and are written down only in periods in which it is
determined that their fair value is less than the book value.
As a result of the Company's impairment testing in connection with the adoption
of SFAS No. 142, a non-cash charge of $830 million ($773 million after-tax), was
reflected in the results for the nine months ended September 30, 2002, as if
this charge had been recorded on January 1, 2002. The annual impairment review
was completed as of May 31, 2002 with no additional impairments identified. The
charge from adoption was reported as a Cumulative Effect of Accounting Change in
the Statement of Consolidated Earnings. Of the impairment, $668 million
pertained to goodwill and $162 million ($105 million after-tax) related to
indefinite-lived intangibles assets within the Salt segment. The after-tax
charge is as follows: Coatings - $42 million; Electronic Materials - $281
million; Performance Chemicals - $230 million and Salt - $220 million. The
impairment charges are primarily the result of the economic downturn over the
past two years affecting growth assumptions in certain key markets. In addition,
customer consolidation in some areas has led to downward pressure on pricing and
volume.
7
GOODWILL
SFAS No. 142 requires the transitional impairment review for goodwill, as well
as an annual impairment review, to be performed on a reporting unit basis. The
Company has identified each of its reporting units as designated in Note B. When
evaluating goodwill for impairment, SFAS No. 142 requires the Company to first
compare a reporting unit's book value of net assets, including goodwill, to its
fair value. Fair value was estimated based upon discounted cash flow analyses.
To the extent that the book value exceeded fair value, the Company was required
to perform a second step to measure the amount of the impairment loss. In the
second step, the Company determined "implied goodwill" by determining the fair
value for the assets and liabilities of its reporting units. To the extent that
a reporting unit's book value of goodwill exceeded its implied fair value,
impairment existed and was recognized.
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 changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, by business segment, are as follows:
(in millions) Adhesives Electronic Performance
Coatings and Sealants Materials Chemicals Salt Total
-------- ------------ --------- --------- ----- -------
Balance as of January 1, 2002 $ 330 $ 458 $ 529 $ 393 $ 449 $ 2,159
Reclassification of workforce
intangible assets, net of
amortization 11 9 18 7 37 82
Impairment losses (42) -- (281) (230) (115) (668)
Currency gains 3 4 2 3 -- 12
Goodwill acquired during the year 2 -- -- -- -- 2
Increase in ownership of Rodel -- -- 18 -- -- 18
Other (1) -- 17 (17) (1) (2)
----- ----- ----- ----- ----- -------
Balance as of September 30, 2002 $ 303 $ 471 $ 303 $ 156 $ 370 $ 1,603
===== ===== ===== ===== ===== =======
OTHER INTANGIBLE ASSETS
Other intangible assets are presented in the Consolidated Balance Sheet, as
follows:
(in millions) September 30,
2002
-------------
Indefinite-lived intangible assets $ 360
Finite-lived intangible assets 1,584
-------------
Total $ 1,944
=============
Indefinite-lived Intangible Assets
- ----------------------------------
Indefinite-lived intangible assets, which are no longer subject to amortization,
were also reviewed by the Company in accordance with SFAS No. 142 in a one-step
process. Impairment was recognized if the carrying value of the asset exceeded
its fair value. The following table provides information regarding the Company's
indefinite-lived intangible assets, which all pertain to the Company's Salt
segment, as of September 30, 2002:
8
(in millions) Strategic
Tradename Location * Total
------------- -------------- ---------
Balance as of January 1, 2002 $ 408 $ 114 $ 522
Impairment loss (108) (54) (162)
------------- -------------- ---------
Balance as of September 30, 2002 $ 300 $ 60 $ 360
============= ============== =========
* Strategic location is a specific customer-related asset that recognizes the
intangible value of a customer's location to the Company's supply source.
Finite-lived Intangible Assets
- ------------------------------
Finite-lived intangible assets are long-lived assets, other than investments,
goodwill and indefinite-lived intangible assets. They are amortized over their
useful lives and are reviewed for impairment in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." At adoption,
the Company evaluated such finite-lived intangible assets and determined there
to be no change in circumstances that would indicate that the carrying value of
any given asset may not be recoverable. The following table provides information
regarding the Company's finite-lived intangible assets:
At September 30, 2002 At December 31, 2001
-------------------------------- -------------------------------
(in millions) Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
-------- ------------ ------- -------- ------------ -------
Customer list $ 1,038 $ (87) $ 951 $ 1,158 $ (83) $ 1,075
Tradename 212 (21) 191 649 (46) 603
Developed technology 444 (88) 356 451 (69) 382
Workforce -- -- -- 148 (24) 124
Patents, license agreements
and other 133 (47) 86 101 (28) 73
------- ------- ------- ------- ----- -------
Total $ 1,827 $ (243) $ 1,584 $ 2,507 $(250) $ 2,257
======= ======= ======= ======= ===== =======
Amortization expense for finite-lived intangible assets was $51 million for the
nine months ended September 30, 2002 compared to $118 million for the nine
months ended September 30, 2001 for all intangible assets. Estimated
amortization expense for 2002 and the five succeeding fiscal years will be
approximately $69 million per year.
A reconciliation of reported earnings (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change and reported net
earnings (loss), as adjusted to reflect the adoption of SFAS No. 142 is as
follows:
(in millions, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported earnings (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change $ 77 $ 53 $ 254 $(107)
Add back: Amortization of goodwill and indefinite-lived
intangibles -- 21 -- 59
----------------- ------------------
Adjusted earnings (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change $ 77 $ 74 $ 254 $ (48)
================= ===================
Reported net earnings (loss) $ 73 $ 53 $ (532) $ 358
Add back: Amortization of goodwill and indefinite-lived
intangibles -- 21 -- 59
----------------- ------------------
Adjusted net earnings (loss) $ 73 $ 74 $ (532) $ 417
================= ===================
Reported basic and diluted earnings (loss) per common share from
continuing operations before extraordinary item and cumulative
effect of accounting change $.35 $.24 $ 1.15 $(.48)
Add back: Amortization of goodwill and indefinite-lived
intangibles -- .09 -- .27
----------------- ------------------
Adjusted basic and diluted earnings (loss) per common share from
continuing operations before extraordinary item and cumulative
effect of accounting change $.35 $.33 $ 1.15 $(.21)
================= ===================
Reported basic earnings (loss) per common share $.33 $.24 $(2.41) $1.62
Add back: Amortization of goodwill and indefinite-lived
intangibles -- .09 -- .27
----------------- ------------------
Adjusted basic earnings (loss) per common share $.33 $.33 $(2.41) $1.89
================= ===================
Reported diluted earnings (loss) per common share $.33 $.24 $(2.40) $1.62
Add back: Amortization of goodwill and indefinite-lived
intangibles -- .09 -- .27
----------------- ------------------
Adjusted diluted earnings (loss) per common share $.33 $.33 $(2.40) $1.89
================= ===================
9
(D) ACQUISITIONS AND DIVESTITURES
The Company completed the following acquisitions in 2002:
In September 2002, the Company acquired certain assets and liabilities of Ferro
Corporation's European Powder Coatings business for approximately $60 million.
Ferro Corporation's Powder Coatings business produces materials used mostly by
manufacturers of metal products to finish products like window frames and
automotive wheels.
In September 2002, the Company increased its ownership in Rodel for an
additional cost of $19 million, retaining a 99% ownership. Rodel was a
privately-held, Delaware-based leader in precision polishing technology serving
the semiconductor, memory disk and glass polishing industries.
In September 2002, the Company acquired the technology, equipment, intellectual
property and remaining workforce of Haleos, Inc., a company that creates fiber
optic components for a number of end uses, including optoelectronics device
components.
The following acquisitions and divestitures were completed 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 marketed under the COSEAL[registered] 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 included the corresponding activities of Chemetall subsidiaries in
Italy and Brazil, and included the acquired technology used for the production
of vibration absorption modules, used primarily in the automotive industry.
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 purchase price
adjustment. The amount of the purchase price adjustment owed to the Company,
which the Company believes is approximately $12 million, was not resolved
between the parties as of September 30, 2002, but the parties are in discussions
which should resolve the issue in the near future. 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) in June 2001. The Company recognized an adjustment to reduce
the original gain on sale by $11 million pre-tax ($7 million or $0.03 per share,
after-tax) in the nine months ended September 30, 2002. 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
Accounting Principles Board (APB) Opinion No. 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." Ag
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 Chemical Specialties segment was previously
reported as a separate segment until January 1, 2002, when the Company changed
its business segments in accordance with SFAS No. 131 due to realignment of
management.
10
The operating results of Ag have been reported separately as discontinued
operations in the Statement of Consolidated Earnings for 2001. Net sales and
income from discontinued operations are as follows:
- -----------------------------------------------------------------------
(in millions) Nine Months
Ended
September 30,
2001
- -----------------------------------------------------------------------
Net sales $ 230
Operating income 65
Income tax expense 25
Income from discontinued operations 40
- -----------------------------------------------------------------------
(E) 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 restructuring and asset impairment charge in the second quarter of 2001.
The largest component of the charge related to the full and partial closure of
certain manufacturing and research facilities across all business groups and
included exit costs related to the Liquid Polysulfide Sealants business in
Adhesives and Sealants and part of the Dyes business in Performance Chemicals.
Approximately 75% of the asset write-downs were in the North American region.
Most severance costs are paid from the respective pension plans and as a result,
pension-related gains or losses are recorded as a reduction or increase to the
original restructuring charge and an increase or decrease to the pension assets
when payments are made. Management estimates that the majority of the efforts
have been completed, with the remaining initiatives to be finalized during the
remainder of 2002.
The remaining restructuring reserves of $26 million are included in Accrued
Liabilities on the Consolidated Balance Sheets and details are presented in the
table below. The severance and employee benefit payments were largely funded
through the Company's domestic pension plans.
(in millions) Balance Balance
December 31, Changes to September 30,
2001 Repositioning 2001 estimates Payments 2002
- --------------------------------------------------------------------------------
Severance and employee
benefit costs $ 37 $ 3 $ (19) $ 21
Contract and lease
termination and other
costs 6 3 (4) 5
---------------------------------------------------
$ 43 $ 6 $ (23) $ 26
---------------------------------------------------
11
As the Company completes each of its 112 initiatives, actual dollars spent for
severance, contract and lease termination and other costs are compared to the
corresponding liability established for each initiative at June 30, 2001. Any
resulting adjustment is recorded to Provision for Restructuring and Asset
Impairments in the Consolidated Statement of Earnings and the restructuring
liability in the Consolidated Balance Sheet is adjusted accordingly. In the
three and nine months ended September 30, 2002, $2 million and $6 million,
respectively, were recorded as additional expense to Provision for Restructuring
and Asset Impairment as changes in estimates. In addition, net gains of $2
million and $7 million, respectively, were recorded similarly in the three and
nine months ended September 30, 2002, offsetting the changes in estimates,
primarily related to the recognition of pension settlement gains. It is the
Company's policy to recognize settlement gains or losses at the time an
employee's pension liability is settled.
The 2001 restructuring charge of $330 million included severance benefits for
1,860 employees. 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 September 30,
2002, the Company made revisions to the total number of positions to be affected
by the original initiatives; the total number of positions was reduced by 273,
of which approximately 5% represents positions included for the partial closure
of the Amersfoort plant, located in the Netherlands. This initiative was delayed
and is now outside of the 2001 repositioning efforts. An additional
restructuring charge for the full closure of Amersfoort was recorded in June
2002. The remaining decrease in positions to be eliminated reflects
modifications to original plans and estimates determined in June 2001.
The number of employees and sites affected by the 2001 repositioning efforts are
as follows:
- --------------------------------------------------------------------------------
Affected Positions Remaining to
positions eliminated Adjustments be eliminated
- --------------------------------------------------------------------------------
Number of employees 1,860 1,384 (273) 203
- --------------------------------------------------------------------------------
Sites closed at Sites
Sites September 30, remaining to
affected 2002 Adjustments(*) be closed
- --------------------------------------------------------------------------------
Full shutdowns 9 8 (1) --
Partial shutdowns 9 8 -- 1
* In the second quarter of 2002, the Company made the decision to maintain a
portion of Elk Grove, Illinois, one of the plants originally slated for full
closure, due to excessive, unexpected costs associated with relocation of a
particular product line. Accordingly, in the table presented above, this change
is reflected as an adjustment from full shutdown to partial shutdown. Offsetting
the adjustment of Elk Grove as a partial shutdown is the removal of the
Amersfoort plant due to delayed timing which is now outside of the 2001
repositioning efforts and part of the 2002 efforts.
In June 2002, the Company recognized a restructuring and asset impairment charge
of $17 million pre-tax for the full closure of two European plants, Amersfoort
and Robecchetto. The $17 million charge is comprised of $12 million of machinery
and equipment (representing the book value prior to write-down), which will be
partially offset by $3 million of estimated proceeds, and $8 million of
severance benefits for 134 employees. The majority of the employees receiving
severance are located in the plants. There have been no payments or changes in
estimates made to the 2002 restructuring and asset impairment charge as of
September 30, 2002. Management expects the 2002 initiatives to be finalized
during 2003.
(F) 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.
12
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 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 potentially
responsible parties (PRPs) 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. Among the
sites for which the Company has accrued are both non-company owned Superfund
sites and company facilities.
The Whitmoyer site, located in Jackson Township, Lebanon County, Pennsylvania,
was the location of a veterinary pharmaceutical manufacturing facility. When
Rohm and Haas acquired the site in 1964, it discovered arsenic contamination and
the Company voluntarily undertook extensive remedial measures with the guidance
of the Pennsylvania Department of Health. In 1978, Rohm and Haas sold the site
to Beecham, Inc., which in turn sold the site to Stafford Laboratories in 1982.
GlaxoSmithKline is the successor entity to Beecham, Inc., and the only other
solvent known PRP for this site. Remediation on the site has been completed
except for ongoing groundwater remediation. The Company is in litigation with
GlaxoSmithKline over allocation of the remediation costs.
The Woodlands sites include two separate locations in the New Jersey Pinelands
near Chatsworth, New Jersey. The other known PRPs share remedial costs with Rohm
and Haas. The PRPs are performing a groundwater treatment program at the sites
that is expected to be completed in 3 to 4 years. Beyond that, the PRPs are
required to monitor a downgradient groundwater plume.
During the 1970s, manufacturing waste and that of numerous other known PRPs was
disposed of at the Kramer Landfill located in Mantua Township, New Jersey. Rohm
and Haas and other PRPs entered into a Consent Decree with the New Jersey
Department of Environmental Protection and the EPA in March 1998. All remedial
tasks have been completed except for groundwater remediation. The PRPs are
currently operating the groundwater treatment facility at the site. The
groundwater treatment program is expected to continue for an indeterminate time.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation (Velsicol)
have been held jointly and severally liable for the cost of remediation of
environmental problems associated with a mercury processing plant (Site)
subsequently acquired by Morton. As of the date of acquisition of Morton by the
Company, Morton had disclosed and accrued for certain ongoing studies related to
the Site. Additional data gathering has delayed completion of these studies
until 2003. In its allocation of the purchase price of Morton, the Company
accrued for additional study costs on December 31, 1999 and additional
remediation costs in 2000 based on the ongoing studies.
The Company's exposure at the Site will depend on the results of attempts to
obtain contributions from others believed to share responsibility. A cost
recovery action against certain 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 de minimis claims associated with the Site.
13
The Company's exposure will also depend upon the continued ability of Velsicol
and its indemnitor, Fruit of the Loom, Inc., which is operating under a Plan of
Reorganization under Chapter 11 of the Bankruptcy code, to contribute to
remediation costs. In 2001, these parties stopped paying their share of
expenses. In May 2002, the bankruptcy court approved a payment to the Company of
approximately $1 million. Also in 2002, the bankruptcy court approved a
government settlement entered into with Velsicol, Fruit of the Loom, and other
parties, which would create a fund to be used to respond to the Velsicol
liabilities at several sites, including Wood-Ridge.
The Company also agreed to fund up to $225,000 for the EPA to develop a workplan
for a separate study of contamination in Berry's Creek, which runs near the
Site, and of the surrounding wetlands. On October 11, 2002, the EPA requested
information relating to sources of contamination in Berry's Creek; the Company
understands this request was sent to over ninety potentially responsible
parties. The estimated costs of any resulting remediation of Berry's Creek were
not 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 to the results of its operations, cash flows and consolidated financial
position.
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 included 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 Company's Houston plant is an approximately 900 acre facility located in
Deer Park, Texas. The Texas Commission on Environmental Quality (TCEQ) issued a
Resource Conservation and Recovery Act (RCRA) Part B Permit and a Compliance
Plan calling for a RCRA Facility Investigation for certain Solid Waste
Management Units (SWMU's) and remediation of other units. Pursuant to the
Compliance Plan and subsequent investigations, the facility continues to operate
groundwater recovery systems at two units, has investigated and continues to
monitor one unit, will prepare a Corrective Measures Study for another unit, and
has submitted the Affected Property Assessment Report (APAR) concluding that no
further action is required for four units. Final approval of the APAR is pending
TCEQ's review.
The Company closed the former Morton plant at Paterson, New Jersey in December
2001, and is currently undertaking remediation of the site under New Jersey's
Industrial Site Recovery Act. Investigation of contamination of shallow soils
and groundwater is nearly complete, with further investigation of deeper
groundwater ongoing. Remediation systems for product and shallow groundwater
recovery are in place and awaiting authorization from New Jersey Authorities to
operate, and soil remediation measures are undergoing evaluation. An accrual was
recorded for known remediation activities in September 2000, and revised in
September 2002, to address information obtained during the ongoing site
investigation.
The amount charged to earnings pre-tax for environmental remediation was $25
million and $26 million for the nine months ended September 30, 2002 and 2001,
respectively. The reserves for remediation were $154 million and $150 million at
September 30, 2002 and December 31, 2001, respectively, and are recorded as
liabilities (current and long-term) in the Consolidated Balance Sheet. These
reserves include amounts resulting from the allocation of the purchase price of
Morton. The Company is pursuing lawsuits over insurance coverage for certain
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 pre-tax of approximately $33 million and $9 million for the nine
months ended September 30, 2002 and 2001, respectively.
14
In addition to accrued environmental liabilities, the Company had reasonably
possible loss contingencies related to environmental matters of approximately
$70 million and $73 million at September 30, 2002 and December 31, 2001,
respectively. The Company has reserved for the costs it believes are probable
and estimable and other costs which have not met the definition of probable have
been included in our discussion of reasonably possible loss contingencies.
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.
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, including the Company. 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 $383,000 and many cases have closed with no payment.
These cases are fully insured. In addition, like most manufacturing companies,
the Company has been sued, generally as one of many defendants, by non-employees
who allege exposure to asbestos on the Company premises. The Company does not
believe that it is reasonably possible that a material loss will be incurred in
excess of the amounts recorded for all pending cases.
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 and the consolidated financial position of
the Company.
(G) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As discussed in the Company's Annual Report filed on Form 10-K with the SEC, the
Company adopted, as of January 1, 2001, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which establishes a model for
the accounting and reporting of derivative hedging instruments. 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 (Loss) and a charge to Net Earnings (Loss) of $2
million after-tax, to recognize at fair value all derivative 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 for 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.
15
A reconciliation of current period changes, net of applicable income taxes,
within Accumulated Other Comprehensive (Loss), due to the use of derivative and
non-derivative instruments that have been designated and have qualified as
hedges, is as follows:
(in millions) Three Months Ended Nine Months
Ended Ended
--------------------------------
September 30, 2002
--------------------------------
Accumulated (loss) gain on derivatives at
beginning of period $(23) $ 37
Current period changes in fair value 5 (52)
Reclassification of income to earnings, net (1) (4)
--------------------------------
Accumulated (loss) on derivatives at
September 30, 2002 $(19) $(19)
================================
Comprehensive Income (Loss) for the three and nine month periods ended September
30, 2002 has been reconciled as detailed in Note I, and includes, as a
component, the results of the Company's hedging activities.
Additional disclosures required by SFAS No. 133, as amended, are provided in the
following paragraphs by respective hedging objective.
The Company utilizes 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 foreign currency cash flow hedges. Gains and
losses on these instruments are recorded as Accumulated Other Comprehensive
(Loss) until the underlying transactions are recorded into earnings. The amount
reclassified to earnings from Accumulated Other Comprehensive (Loss) was an
immaterial gain for the three months ended September 30, 2002 and a $4 million
gain after-tax for the nine months ended September 30, 2002. At September 30,
2002, an accumulated loss of $3 million after-tax was recorded within
Accumulated Other Comprehensive (Loss). The actual income or loss will be
reclassified from Accumulated Other Comprehensive (Loss) to earnings over the
next four quarters and will likely vary as a result of changing market
conditions.
The Company uses options, collars and swap agreements to reduce the effects of
changing raw material prices. These transactions are designated as cash flow
hedges. Gains and losses on these instruments are recorded as Accumulated Other
Comprehensive (Loss) until the underlying transactions are recorded into
earnings. The amount reclassified to earnings and recorded as Cost of Goods Sold
was a $1 million gain after-tax for the three months ended September 30, 2002
and an immaterial charge after-tax for the nine months ended September 30, 2002.
At September 30, 2002, a $2 million gain after-tax was included within
Accumulated Other Comprehensive (Loss), which is expected to be reclassified to
earnings over the next five quarters. The actual amounts to be reclassified to
earnings may differ as a result of changing market conditions.
The Company uses cross-currency interest rate swaps, foreign exchange forward
and collar contracts 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 investments. The effective
portion of changes in fair values of hedges, recorded within Accumulated Other
Comprehensive (Loss), amounted to a $18 million loss after-tax at September 30,
2002. The amount excluded from the measure of effectiveness on these net
investment hedges increased interest expense by $1 million pre-tax for the nine
month period ended September 30, 2002.
The Company uses interest rate swap agreements to optimize the worldwide
financing costs by maintaining a desired level of floating rate debt. At
September 30, 2002, the Company maintains interest rate swap agreements that
convert the fixed rate components of the $450 million and $500 million notes due
in July 15, 2004 and 2009, respectively, to a floating rate based on 3 month
LIBOR. These swap agreements are designated and accounted for as fair value
hedges. The changes in fair value of swaps are marked to market through income
along with the offsetting changes in fair value of underlying notes using the
short cut method. The difference between fixed and floating interest rates was
recorded as a reduction to interest expense, totaling $9 million and $27 million
for the three and nine month period ended September 30, 2002, respectively. At
September 30, 2002, the swap agreements carry an aggregate fair value of $101
million.
16
As of September 30, 2002, the Company maintained hedge positions that were
effective as hedges from an economic perspective but did not qualify for hedge
accounting under SFAS No. 133, as amended. Such hedges consisted primarily of
emerging market foreign currency option and forward contracts, and were
marked-to-market resulting in an immaterial impact on earnings for both the
three and nine month periods ended September 30, 2002.
(H) INVENTORIES
Inventories consist of the following:
(in millions) September 30, December 31,
2002 2001
---------------- ----------------
Finished products and work in-process $ 568 $ 550
Raw materials 130 119
Supplies 55 43
---------------- ----------------
Total $ 753 $ 712
================ ================
(I) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
------------------- ------------------
Net earnings (loss) $ 73 $ 53 $(532) $ 358
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (17) 86 98 (43)
Current period changes in fair value of derivative
and non-derivative instruments qualifying as hedges 5 (34) (52) (1)
Cumulative effect of accounting change -- -- -- 6
------------------- ------------------
Comprehensive income (loss) $ 61 $ 105 $(486) $ 320
=================== ==================
(J) TREASURY SHARES
The number of common treasury shares held by the Company were:
September 30, 2002 20,984,371
December 31, 2001 21,651,545
17
(K) EARNINGS PER SHARE
The difference in common shares outstanding used in the calculation of basic and
diluted earnings per common share are primarily due to the effect of stock
options as reflected in the reconciliation that follows:
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- -------------------------------------------
(in millions, except per-share Earnings Per- Earnings Per-
amounts) (Loss) Shares Share (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------- -------------------------------------------
2002
Earnings from continuing operations
before extraordinary item and
cumulative effect of accounting
change (Basic) $77 221.1 $.35 $ 254 220.9 $1.15
Dilutive effect of options (a) -- 1.0 -- 1.0
Earnings from continuing operations
before extraordinary item and
cumulative effect of accounting ------------------------- ----------------------------
change (Diluted) $77 222.1 $.35 $ 254 221.9 $1.15
2001
Earnings (loss) from continuing
operations before extraordinary item
and cumulative effect of
accounting change (Basic) $53 220.4 $.24 $(107) 220.2 $(.48)
Dilutive effect of options (a) -- 0.9 -- --
Earnings (loss) from continuing
operations before extraordinary item
and cumulative effect of ------------------------- ----------------------------
accounting change (Diluted) $53 221.3 $.24 $(107) 220.2 $(.48)
(a) For the three months ended September 30, 2002 and 2001, the Company had 0.9
million and 0.6 million, respectively, of anti-dilutive options; the
exercise price of these stock options was greater than the average market
price for the periods ended September 30, 2002 and 2001. For the nine
months ended September 30, 2002 and 2001, the Company had 0.9 million and
4.6 million, respectively, of anti-dilutive options.
(L) SUBSEQUENT EVENTS
On October 23, 2002, the Company announced the formation of a joint venture with
Chemicrea Inc., a current supplier to the Company of methylisothiazolinone, for
the manufacture and distribution of isothiazolinone biocides. Due to the
significant growth of the markets in the Asia/Pacific region, the Company felt
it was important to establish a manufacturing presence in the region for these
products. The agreement includes an investment in new plant assets for the
production of isothiazolinones in China and is expected to result in enhanced
global supply and service for customers.
The Company reached a $43 million pre-tax settlement in November 2002 with
certain insurance underwriters at Lloyd's, London. The settlement resolved
claims for environmental and other liabilities and payment is expected from the
underwriters in the fourth quarter of 2002.
On November 5, 2002, the Company announced the signing of a definitive agreement
for Kureha Chemical to sell their global plastic additives business to the
Company for approximately $66 million. Under the terms of the agreement, the
Company will acquire Kureha's commercial operations throughout the Asia-Pacific
region and other areas along with manufacturing facilities and laboratories in
Singapore, as well as technical service laboratories in Beijing. Additionally
the Company will gain full control of manufacturing sites in Singapore and
Grangemouth, Scotland, which were sites previously part of a joint venture.
ITEM 2. 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 Consolidated Financial Statements for the year
ended December 31, 2001 and Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) included in the Company's 2001 Annual
Report filed on Form 10-K with the Securities and Exchange Commission (SEC).
Within the following discussion, unless otherwise stated, "quarter" and "nine
month period," refers to the three and nine month periods ended September 30,
2002, respectively, and "prior period" refers to comparisons with the
corresponding period in the previous year, unless otherwise stated.
Earnings (loss) from continuing operations before extraordinary item and
cumulative effect of accounting change are abbreviated as "Earnings (loss) from
continuing operations" within the MD&A and "Notes to Consolidated Financial
Statements."
18
UNUSUAL ITEMS
Unusual items represent gains or losses arising from events or transaction that
in management's judgment are unusual in nature or amount, occur infrequently or
satisfy the definition of an extraordinary item in accordance with Accounting
Principles Board (APB) Opinion No. 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." Management believes
the exclusion of these items provides investors additional insight into the
ongoing operations of the business. Unless otherwise indicated, the impact of
unusual items on operations within the context of the MD&A is stated net of tax.
PRO FORMA RESULTS
Pro forma results are presented to reflect 2001 results of operations as if
Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets" had been adopted on January 1, 2001, which ceased the
amortization of goodwill and indefinite-lived intangibles effective January 1,
2002. Pro forma results exclude amortization of goodwill and indefinite-lived
intangibles from prior year results of operations to provide meaningful
comparisons to current year results.
GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the Company's impairment testing in connection with the adoption
of SFAS No. 142, a non-cash charge of $830 million ($773 million after-tax), was
reflected in the results for the nine months ended September 30, 2002, as if
this charge had been recorded on January 1, 2002. The after-tax charge of $773
million by segment is as follows: Coatings - $42 million; Electronic Materials -
$281 million; Performance Chemicals - $230 million and Salt - $220 million.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company has identified the
critical accounting 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 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 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. As of September 30, 2002, the majority of these efforts
were complete, with the remainder to be finalized before year-end 2002. 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. See Note E for additional
information, including revisions to the total number of positions to be
affected by the original initiatives and changes to original estimates.
19
Given the complexity of estimates and broad reaching scope of the 2001
repositioning effort, actual expenses could differ from management's
original estimates. If actual results are different from original
estimates, the Company will continue to record additional expense or
reverse previously recorded expense through the Provision for Restructuring
and Asset Impairments line in the Statement of Consolidated Earnings. As of
September 30, 2002, the Company recognized a $5 million favorable net
change to the original estimate, due in part to changes in estimates for
severance expense and the recognition of settlement gains. It is the
Company's policy to recognize settlement gains or losses at the time an
employee's pension liability is settled. Management will continue to make
adjustments if necessary as actions under the plan are implemented.
o VALUATION OF LONG-LIVED ASSETS
The Company's long-lived assets include land, buildings, equipment,
long-term investments, goodwill, indefinite-lived intangible assets 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 in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," whenever changes in circumstances indicate the carrying value may
not be recoverable. Goodwill and indefinite-lived intangible assets are
reviewed annually each May for impairment under the provisions of SFAS No.
142 "Goodwill and Other Intangible Assets." In conjunction with the
Company's 2001 repositioning efforts and the adoption of SFAS No. 142, $245
million and $830 million ($773 million after-tax), respectively, 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 (see Notes C and E).
The fair values of the Company's long-term investments are dependent on the
performance of the entities in which the Company invests, 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 investment entities.
If these forecasts are not met, the Company may have to record additional
impairment charges not previously recognized.
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 vary from those projected by management, adjustments to the pension
credit or additional expense may be required in future periods. See Notes
10 and 11 in the "Notes to Consolidated Financial Statements" of the
Company's Annual Report filed on Form 10-K with the SEC for additional
information regarding assumptions used by the Company.
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 purchase
price adjustment. The amount of the purchase price adjustment owed to the
Company, which the Company believes is approximately $12 million, was not
resolved between the parties as of September 30, 2002, but the parties are
in discussions which should resolve the issue in the near future. The
Company recognized an adjustment to reduce the original gain on sale by $11
million pre-tax ($7 million or $0.03 per share, after-tax) in the nine
months ended September 30, 2002. Accordingly, the Company has adjusted the
receivable from DAS for the remaining amount of the purchase price
adjustment, which represents management's best estimate of the final
receivable. The Company's calculation of the purchase price 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 receivable differs from management's current
estimate, the Company will record an additional adjustment to the gain on
disposal of discontinued line of business.
20
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 Opinion No. 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." Ag had been a separate major
line of business in the Chemical Specialties segment. The Chemical Specialties
segment was previously reported as a separate segment until January 1, 2002,
when the Company changed its business segments in accordance with SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," due to
realignment of management. For 2001, the operating results of Ag are reported
separately as discontinued operations.
FORWARD-LOOKING INFORMATION
This document contains forward-looking information so that investors will have a
better understanding of the Company's future prospects and make informed
investment decisions. Forward-looking statements within the context of the
Private Securities Litigation Reform Act of 1995 include statements anticipating
future growth in sales, earnings, EBITDA and cash flows. Words such as
"anticipates," "estimates," "expects," "projects," "intends," "plans,"
"believes," and similar language to describe prospects for future operations or
financial condition identify such forward-looking statements. Forward-looking
statements are based on management's assessment of current trends and
circumstances, which may be susceptible to uncertainty, change or any other
unforeseen development. Results could differ materially depending on such
factors as change in business climate, economic and competitive uncertainties,
raw material and energy costs, foreign exchange rates, interest rates,
acquisitions or divestitures, risks in developing new products and technologies,
changes in business strategies, or the unanticipated costs of complying with
environmental and safety regulations. As appropriate, additional factors are
contained in the Company's 2001 Annual Report filed on Form 10-K with the SEC on
March 26, 2002. The Company is under no obligation to update or alter its
forward-looking statements, as a result of new changes, information, future
events or otherwise.
BUSINESS SEGMENTS AS OF JANUARY 1, 2002
Effective January 1, 2002, based on realignment of internal management
accountability, the Company changed its reportable business segments in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company operates five business segments: Coatings,
Adhesives and Sealants, Electronic Materials, Performance Chemicals and Salt.
The Coatings, Electronic Materials and Performance Chemicals business segments
aggregate operating segments. The Coatings segment sells a range of intermediate
products and additives for paint and coatings, textiles, non-woven and leather
applications for use in the building and construction, home improvement,
packaging, graphic arts, apparel and transportation markets. The Adhesives and
Sealants segment sells a full-range of adhesives and laminate materials for use
in the packaging, building and construction, transportation and home improvement
markets. The Electronic Materials segment sells enabling technology for all
aspects of the manufacture of printed wiring boards, integrated circuits and
integrated circuit for use in cellular phones, mainframe and personal computers,
office equipment, home appliances, electronic games and automotive parts. The
Performance Chemicals segment produces monomers that are essential starting
materials for acrylic products, a wide range of plastics additives, lubricants,
fuels, antimicrobial, resins and adsorbents. The Salt segment sells salt in all
forms including table, cooking, water conditioning, highway and chemical
processing. Results of operations from prior years have been reclassified to
conform to current year presentation.
The results for the year-ended December 31, 2001, as reported in the Company's
Annual Report filed on Form 10-K with the SEC, were presented in the previously
existing business segments. The following table provides a comparable view of
the business segments applicable to 2001 versus those presented in 2002.
21
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 *
* Designates a reporting unit for SFAS No. 142 purposes
- ----------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Sales by Business Segment and Customer Location
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 (1) 2002 2001 (1)
-------------------- --------------------
BUSINESS SEGMENT
Coatings $ 489 $ 453 $ 1,422 $ 1,371
Adhesives and Sealants 146 159 446 486
Electronic Materials 262 208 738 735
Performance Chemicals 584 529 1,650 1,663
Salt 139 144 489 546
Elimination of Intersegment Sales (166) (147) (453) (475)
------- ------- ------- -------
Total $ 1,454 $ 1,346 $ 4,292 $ 4,326
======= ======= ======= =======
CUSTOMER LOCATION
North America $ 887 $ 828 $ 2,662 $ 2,681
Europe 333 305 965 985
Asia-Pacific 183 163 516 504
Latin America 51 50 149 156
------- ------- ------- -------
Total $ 1,454 $ 1,346 $ 4,292 $ 4,326
======= ======= ======= =======
Earnings (Loss) from Continuing Operations by Business Segment (5)
(in millions) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Pro Forma Pro Forma
2002 2001(1) 2001(1,3) 2002(4) 2001(1) 2001(1,3)
--------------------------------- ---------------------------------
BUSINESS SEGMENT
Coatings $ 48 $ 48 $ 51 $ 166 $ 84 $ 93
Adhesives and Sealants 3 6 9 (2) (74) (67)
Electronic Materials 26 (3) 2 60 2 15
Performance Chemicals 42 37 40 120 33 41
Salt 4 (2) 3 29 2 19
Corporate (2) (46) (33) (31) (119) (154) (149)
-------------------------------- ---------------------------------
Total $ 77 $ 53 $ 74 $ 254 $(107) $ (48)
================================ =================================
22
Earnings from Continuing Operations by Business Segment Excluding Unusual
Items (5,6)
(in millions) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Pro Forma Pro Forma
2002 2001(1) 2001(1,3) 2002 2001(1) 2001(1,3)
--------------------------------- ---------------------------------
BUSINESS SEGMENT
Coatings $ 51 $ 48 $ 51 $ 171 $ 130 $ 139
Adhesives and Sealants 6 6 9 17 15 22
Electronic Materials 26 (2) 3 61 27 40
Performance Chemicals 45 39 42 133 90 98
Salt 4 (2) 3 29 13 30
Corporate (2) (42) (38) (36) (121) (128) (123)
-------------------------------- ---------------------------------
Total $ 90 $ 51 $ 72 $ 290 $ 147 $ 206
================================ =================================
(1) Reclassified to conform to current year presentation.
(2) Corporate includes non-operating items such as interest income and expense
and corporate governance costs.
(3) Pro forma results exclude amortization of goodwill and indefinite-lived
intangibles.
(4) Results for the nine months ended September 30, 2002 include an impairment
charge for goodwill and indefinite-lived intangible assets in accordance
with SFAS No. 142 reported as a cumulative change in accounting principle
as of January 1, 2002. The after-tax charge of $773 million by segment is
as follows: Coatings - $42 million; Electronic Materials - $281 million;
Performance Chemicals - $230 million and Salt - $220 million.
(5) Before extraordinary item and cumulative effect of accounting change.
(6) Table of Unusual Items follows:
(in millions) Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------- ------------------
2002 Unusual Items After- After-
- ------------------ Pre-Tax Tax Pre-Tax Tax
------------------------------------------
Net earnings (loss) as reported $ 107 $ 73 $(475) $(532)
Loss on disposal of discontinued line
of business 6 4 11 7
Extraordinary loss on early
extinguishment of debt -- -- 9 6
Cumulative effect of accounting
change -- -- 830 773
------------------------------------------
Earnings from continuing operations
before extraordinary item and
cumulative effect of accounting change 113 77 375 254
Remediation-related charges 19 12 19 12
Remediation-related insurance
settlements (16) (10) (32) (20)
Purchased in-process research and
development 3 2 3 2
Provision for restructuring and asset
impairments -- -- 16 10
Demolition, dismantlement and other
costs associated with restructuring 15 9 49 32
------------------------------------------
Impact of unusual items on continuing
operations 21 13 55 36
------------------------------------------
Earnings excluding unusual items $ 134 $ 90 $ 430 $ 290
==========================================
23
(in millions) Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
-------------------- ------------------
2001 Unusual Items After- After-
- ------------------ Pre-Tax Tax Pre-Tax Tax
------------------------------------------
Net earnings as reported $ 86 $ 53 $ 617 $ 358
Income from discontinued line of
business -- -- (65) (40)
Gain on disposal of discontinued line
of business -- -- (679) (428)
Extraordinary loss on early
extinguishment of debt -- -- 2 1
Cumulative effect of accounting
change -- -- 3 2
------------------------------------------
Earnings (loss) from continuing
operations before extraordinary item
and cumulative effect of accounting
change 86 53 (122) (107)
Remediation-related charges, net of
insurance settlements (5) (3) 9 5
Provision for restructuring and asset
impairments -- -- 330 233
Asset write-downs, integration and
other restructuring 2 1 28 16
------------------------------------------
Impact of unusual items on continuing
operations (3) (2) 367 254
------------------------------------------
Earnings excluding unusual items $ 83 $ 51 $ 245 $ 147
==========================================
THIRD QUARTER 2002 VERSUS THIRD QUARTER 2001 - CONSOLIDATED
NET SALES
Consolidated net sales for the third quarter of 2002 were $1,454 million, an 8%
increase of $108 million from prior period net sales of $1,346 million,
reflecting stronger sales in consumer markets, particularly automotive, housing
and home improvements. The growth from prior year was driven by volume increases
and favorable product mix. Favorable currency gains were offset by unfavorable
selling prices and the impact of exited businesses. Along segment lines,
Coatings, Electronic Materials and the consumer markets of Performance Chemicals
increased from the prior period. Net sales for Adhesives and Sealants decreased
8% to $146 million in the current period; however, after eliminating the effect
of the Liquid Polysulfide business exited at the end of 2001, net sales
increased by 6% on a comparable basis. Net sales for Salt were 3% lower in the
current period due to lower levels of early season ice control activity.
NET EARNINGS
Net earnings as reported for the third quarter of 2002 were $73 million, a 38%
increase from prior period net earnings of $53 million. Earnings per share on a
diluted basis were $0.33 in the third quarter of 2002 compared to $0.24 in the
prior period. Improved earnings can be primarily attributed to improved product
mix, increased volumes and the positive impact of ongoing cost controls.
Additional factors contributing to the increase from prior period include the
cessation of amortization of goodwill and indefinite-lived intangibles in 2002,
which contributed $21 million after-tax and reduced interest expense in the
amount of $5 million after-tax. Increased research and development spending of
$11 million after-tax as well as $9 million after-tax for demolition,
dismantlement and other costs associated with the 2001 restructuring initiatives
offset the year-over-year growth.
GROSS PROFIT
Gross profit for the third quarter of 2002 was $451 million, increased 9% or $37
million, from $414 million in the prior period. The gross profit margin for the
current quarter remained flat with the prior period at 31%. As compared to the
third quarter of 2001, favorable volume and product mix in key segments were
offset by unfavorable selling prices, the Methyl Methacrylate outage during the
current quarter and increased prices for key raw materials, especially propylene
and acetone, most significantly affecting Architectural and Functional Coatings
and Monomers. Additionally, non-qualified spending associated with the 2001
restructuring initiatives was higher and decreased gross profit as compared to
the prior period by $9 million after-tax.
24
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES
SAR expenses were $291 million in the third quarter of 2002, an increase of $28
million or 11% from $263 million in the third quarter of 2001. Research and
development spending increased from the prior year driven by the continued
emphasis on investment in technology which accounted for the majority of the
total increase in research spending. In addition, the write-off of approximately
$3 million of in-process research and development associated with the
acquisition of the Ferro Corporation's European Powder Coatings business in the
third quarter of 2002 further increased research costs. The remaining increase
is attributable to higher selling and administrative costs, particularly due to
increased health care costs and normal wage increases.
INTEREST EXPENSE
Interest expense for the current quarter was $32 million, an 18% decline from
$39 million in the prior period, primarily due to lower effective interest
rates, lower debt levels and fluctuations of interest rate swap agreements.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangible assets for the current quarter was
$17 million, a 58% decrease from $40 million in the prior period. The decrease
is a direct result of the Company's adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002, which ceased the amortization of goodwill
and indefinite-lived intangibles. Excluding amortization of goodwill and other
intangibles in accordance with SFAS No. 142, amortization expense would have
been $19 million in 2001 on a pro forma basis.
SHARE OF AFFILIATE NET EARNINGS
Share of affiliate net earnings was $5 million in the third quarter of 2002, an
increase of 67% from $3 million in the third quarter of 2001.
OTHER (INCOME) EXPENSE, NET
The Company reported net other expense of $3 million for the current quarter
compared to net other income of $11 million in the prior period. The decrease of
other income is primarily due to the absence of foreign currency gains recorded
in the third quarter of 2001.
EFFECTIVE TAX RATE
The effective tax rate for earnings from continuing operations of $77 million
for the third quarter of 2002 was 32% compared to 38% in the prior period.
Results of operations in 2001 included non-deductible goodwill amortization
expense, which ceased in 2002 with the adoption of SFAS No. 142 as of January 1,
2002.
THIRD QUARTER 2002 VERSUS THIRD QUARTER 2001 -- BY BUSINESS SEGMENT
PRO FORMA RESULTS ARE PRESENTED BELOW TO EXCLUDE AMORTIZATION OF GOODWILL AND
INDEFINITE-LIVED INTANGIBLE ASSETS.
COATINGS
Net sales from Coatings were $489 million in the third quarter of 2002 an
increase of $36 million or 8% from $453 million in the prior period with
Architectural and Functional Coatings and Automotive Coatings reporting
increases from the prior period of 8% and 20%, respectively. Architectural and
Functional Coatings experienced growth from consumer paint sales for home
improvements, as well as higher demand for lightweight coated paper driven by
increased postal rates. Automotive Coatings experienced an increase in net sales
due to an increase in North American automotive production. Net earnings from
continuing operations remained flat at $48 million in the third quarter of 2002
and 2001. Excluding unusual items, net earnings were also flat at $51 million
for the current quarter of 2002 and on a pro forma basis. Earnings have been
negatively impacted in the current quarter by increasing raw material costs and
the write-off of purchased in-process research and development of $3 million, as
well as, the higher costs incurred due to the Methyl Methacrylate outage at the
Company's Deer Park, Texas plant.
ADHESIVES AND SEALANTS
Adhesives and Sealants net sales for the third quarter were $146 million a
decrease of 8% or $13 million from prior year net sales of $159 million.
Excluding the Liquid Polysulfide business exited at the end of 2001, on a
comparable basis net sales increased 6% from the prior period due to continuing
gain share in the transportation and packaging segments of the adhesives market.
Net earnings from continuing operations were $3 million in the third quarter of
2002, compared to $6 million from the prior period. Net earnings from continuing
operations excluding unusual items were $6 million for the current quarter
compared to $9 million on a pro forma basis. The difference was driven primarily
by the impact of the exited Liquid Polysulfide business.
25
ELECTRONIC MATERIALS
Electronic Materials net sales were $262 million for the current quarter,
compared to $208 million in the prior period, an increase of $54 million or 26%.
The increase is shared by all three reporting units in Electronic Materials and
is attributable to demand for new products and advanced technologies, such as
chemical mechanical planarization products, deep ultraviolet photoresists,
antireflective coatings and advanced finishing materials for chip packaging.
Earnings from continuing operations were $26 million in the third quarter,
compared to a net loss of $3 million from the prior period. Excluding unusual
items, net earnings were $26 million for the current quarter compared to $3
million on a pro forma basis. Earnings increased as a result of the increase in
volume and sales growth, pricing and improved internal cost control.
PERFORMANCE CHEMICALS
Performance Chemicals net sales were $584 million for the third quarter of 2002
an increase of $55 million or 10% from prior period net sales of $529 million.
The increase within Performance Chemicals is attributable to Monomers and
Plastic Additives. Net sales from Monomers increased 16% from the prior period
despite the Methyl Methacrylate outage. Strong demand and growth from new
products within Plastic Additives led to increased sales of 12% from the prior
period. Consumer and Industrial Specialties, Ion Exchange Resins and Inorganic
and Specialty Solutions net sales remained relatively flat as compared to the
prior period. Net earnings from continuing operations were $42 million for the
current period compared to $37 million in the prior period. Excluding unusual
items, net earnings were $45 million for the current quarter compared to $42
million on a pro forma basis. The earnings increase was driven primarily by
Monomers and Plastic Additives due to increased sales and a change in the
sourcing strategy of Inorganic and Specialty Solutions.
SALT
Salt net sales were $139 million for the current quarter, compared to $144
million, a decline of 3% from the prior period resulting from lower early season
ice control activity. Net earnings from continuing operations were $4 million
for the third quarter of 2002 an increase from a net loss of $2 million in the
prior period. Excluding unusual items, net earnings were $4 million for the
current quarter, a 33% increase on a pro forma basis. The earnings increase is
primarily due to better pricing and product mix in the non ice-control markets.
CORPORATE
Corporate reported a loss from continuing operations in the third quarter of
2002 of $46 million, compared to a loss of $33 million as reported and a loss of
$31 million on a pro forma basis in the third quarter of 2001. The increase is
primarily attributed to the foreign currency gains recorded in the prior period
and a reduction in pension credits of $9 million compared to the third quarter
of 2001, due to transition assets which were fully amortized as of December 31,
2001 and diminished economic returns from pension assets.
NINE MONTHS 2002 VERSUS NINE MONTHS 2001 -- CONSOLIDATED
NET SALES
Consolidated net sales for the first nine months of 2002 were $4,292 million, 1%
below prior period net sales of $4,326 million. The decrease from the prior
period was driven primarily by the loss of sales from exited businesses in 2001.
Adhesives and Sealants and Salt accounted for the majority of the total decline
in net sales. Adhesives and Sealants fell by $40 million, or 8%, to $446 million
from net sales of $486 million in the prior period. A decrease of $57 million in
net sales from the Salt business also contributed to the year-over-year decline
due to lower demand for highway ice control salt during a mild 2002 winter in
the United States and Canada and decreased demand across all non-ice products.
Performance Chemicals fell by $13 million, or 1%, to $1,650 million from net
sales of $1,663 million in the prior period. Net sales from Electronic Materials
increased to $738 million from net sales of $735 million while Coatings
increased by $51 million to $1,422 million from $1,371 million in the prior
period.
26
NET EARNINGS (LOSS)
Net loss as reported for the first nine months of 2002 was $532 million compared
to prior period earnings of $358 million. Loss per share on a diluted basis was
$2.40 in the current nine month period of 2002 compared to earnings per share of
$1.62 in the prior period. The net loss in 2002 is attributable to the $773
million after-tax charge for the Cumulative Effect of Accounting Change for the
adoption of SFAS No. 142, increased research and development spending of $21
million after-tax and $32 million after-tax for demolition, dismantlement and
other costs associated with the 2001 restructuring initiatives. Offsetting these
amounts include the cessation of amortization of goodwill and indefinite-lived
intangibles in 2002, which contributed $59 million after-tax and reduced
interest expense in the amount of $30 million after-tax. Prior period results
included a $233 million after-tax restructuring charge which was offset by a
$428 million after-tax gain for the Ag sale.
GROSS PROFIT
Gross profit for the nine months of 2002 was $1,371 million, an 8% increase from
$1,267 million in the prior period. The gross profit margin for the current
period was 32%, up from 29% in the prior period and can be attributed to
improved demand primarily driven by Coatings, Monomers and Plastic Additives,
higher margin product mix and benefits from ongoing cost control efforts, offset
by the Methyl Methacrylate outage during the third quarter of 2002.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES
SAR expenses were $844 million during the current nine month period, an increase
of 5% or $38 million, from $806 million in the prior period. Research and
development spending increased from the prior year driven by the continued
emphasis on investment in technology which accounted for the majority of the
total increase. The remaining increase is attributable to higher selling and
administration costs, particularly due to increased health care costs and normal
wage increases.
INTEREST EXPENSE
Interest expense for the current nine month period was $99 million, a 31%
decline from $143 million in the prior period, primarily due to lower effective
interest rates, lower debt levels and fluctuations of interest rate swap
agreements.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles for the current nine month period
was $51 million, a 57% decrease from $118 million in the prior period. The
decrease is a direct result of the Company's adoption of SFAS No. 142 "Goodwill
and Other Intangible Assets" on January 1, 2002, which ceased the amortization
of goodwill and indefinite-lived intangibles. Excluding amortization of goodwill
and other intangibles in accordance with SFAS No. 142, amortization expense
would have been $59 million in 2001 on a pro forma basis.
SHARE OF AFFILIATE NET EARNINGS
Share of affiliate net earnings increased 11% from $9 million in the prior
period to $10 million for the current year nine month period.
PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
The Company recognized a $17 million restructuring and asset impairment charge
in the second quarter of 2002 for the closure of two European plants, Robechetto
and Amersfoort. The expense of $17 million recognized in the second quarter is
offset by a gain of $1 million which was reported in the three month period
ended March 31, 2002 and relates to the Company's 2001 repositioning
initiatives. In connection with its repositioning initiatives, the Company
recognized a $330 million restructuring and asset impairment charge in the
second quarter of 2001. The Company also records ongoing change in estimates to
these original estimates as they are identified.
27
OTHER (INCOME) EXPENSE, NET
The Company reported net other income of $4 million for the first nine months of
2002 compared to net other expense of $1 million in the prior period. The
current period includes increased interest income, a favorable settlement in an
environmental bankruptcy matter, fewer currency gains and reduced miscellaneous
expenses. Royalty income remained flat as compared to the prior period.
EFFECTIVE TAX RATE
The effective tax rate for earnings from continuing operations of $254 million
for the nine months ended September 30, 2002 was 32%. The loss from continuing
operations of $107 million for the nine months ended September 30, 2001 includes
a tax benefit of $15 million, which computes to a 12% effective tax rate. This
reflects the impact of a 29% tax rate on the $330 million loss provision for
restructuring and asset impairment in 2001, which included non-deductible
restructuring expenses. Results of operations in 2001 also included
non-deductible goodwill amortization expense, which ceased in 2002 with the
adoption of SFAS No. 142 as of January 1, 2002.
NINE MONTHS OF 2002 VERSUS NINE MONTHS OF 2001 -- BY BUSINESS SEGMENT
PRO FORMA RESULTS ARE PRESENTED BELOW TO EXCLUDE AMORTIZATION OF GOODWILL AND
INDEFINITE-LIVED INTANGIBLE ASSETS.
COATINGS
Net sales from Coatings were $1,422 million in the nine months of 2002 compared
to $1,371 million in the prior period. Net earnings from continuing operations
were $166 million for the current nine months, as compared to $84 million in the
prior period. The difference was driven by restructuring and asset impairment
charges recognized in the prior period in connection with the 2001 repositioning
efforts. Excluding unusual items, net earnings were $171 million for the current
nine months, a 23% increase from $139 million on a pro forma basis. Within
Coatings, consumer markets in Architectural and Functional Coatings continue to
drive increased earnings. In addition, segment-wide cost reduction efforts and
improved volume contributed to the positive performance. More specifically,
Architectural and Functional Coatings benefited from strong demand in the
consumer paint sales and the launch of new product lines, as well as higher
demand for lightweight coated paper driven by increased advertising and printing
of catalogue inserts. Automotive Coatings experienced an increase in net sales
resulting from an increase in North American automotive production.
ADHESIVES AND SEALANTS
Adhesives and Sealants net sales for the current nine month period were $446
million, a decline of 8% from prior period net sales of $486 million. The
decline in sales primarily relates to the Company exiting the Liquid Polysulfide
business at the end of 2001; on a comparable basis net sales increased 2% from
the prior period due to increased demand for flexible packaging, more
environmentally friendly adhesives and interior trim adhesives. Net loss from
continuing operations was $2 million in the nine months of 2002, compared to $74
million from the prior period due to restructuring and asset impairment charges
recognized in the prior period in connection with the 2001 repositioning
efforts. Net earnings from continuing operations excluding unusual items were
$17 million for the current nine months compared to $22 million on a pro forma
basis. The decrease in earnings is primarily due to the exited Liquid
Polysulfide business and the research and engineering costs associated with the
redesign of its manufacturing and laboratory footprint.
ELECTRONIC MATERIALS
Electronic Materials net sales were $738 million for the current nine months,
compared to $735 million from the same period in 2001. The change from prior
year is exacerbated by comparison to record-level net sales in the first quarter
of 2001, which were driven by significant growth for leading-edge products used
to make high-end semiconductor chips. Business demand fell precipitously
beginning in the second quarter of 2001, and then persisted at low levels for
the remainder of the year. However, Electronic Materials reported significantly
increased demand in the second quarter of 2002. Earnings from continuing
operations were $60 million in the current nine months compared to $2 million
from the prior year; the difference was driven by restructuring and asset
impairment charges recognized in the prior period in connection with the 2001
repositioning efforts. Excluding unusual items, net earnings were $61 million
for the current nine months, a 53% increase from $40 million on a pro forma
basis.
28
PERFORMANCE CHEMICALS
Performance Chemicals net sales for the first nine months of 2002 were $1,650
million, a decline of 1% from the prior period of $1,663 million. The decrease
was generated primarily in Monomers and Inorganic and Specialty Solutions offset
by increased sales for Plastics Additives. Net sales from Consumer and
Industrial Specialties and Ion Exchange Resins remained relatively flat as
compared to the prior period. Net earnings from continuing operations were $120
million for the current period compared to $33 million in the prior period. The
difference was driven by restructuring and asset impairment charges recognized
in the prior period in connection with the 2001 repositioning efforts. Excluding
unusual items, net earnings were $133 million for the current nine months, a 36%
increase from $98 million on a pro forma basis. The earnings increase was driven
primarily by Plastic Additives and Monomers.
SALT
Salt net sales for the current period were $489 million, a decline of 10% from
the prior period of $546 million. Milder winter weather was the primary cause
for the decline when compared to the prior period. Net earnings from continuing
operations were $29 million for the first nine months of 2002 compared to $2
million from the prior period due to charges incurred in the prior period in
connection with the 2001 repositioning efforts. Excluding unusual items, net
earnings were $29 million for the current nine months, a 3% decrease from $30
million on a pro forma basis. The earnings decrease is primarily due to
variances attributable to production inefficiencies resulting from high ice
control inventory carry-over as a result of the mild 2001-2002 winter. The
impact of the ice control sales shortfall was more than offset by improved
pricing for both the ice and non ice control categories.
CORPORATE
Corporate reported a loss from continuing operations in the first nine months of
2002 of $119 million, compared to a loss of $154 million as reported and a loss
of $149 million on a pro forma basis in the first nine months of 2001. The
decrease is primarily attributed to charges incurred in the prior period in
connection with the 2001 repositioning efforts. In addition, the decrease is due
to a reduction of $44 million in interest expense and $13 million of unusual
insurance recoveries, net of remediation-related charges compared to net
insurance recoveries of $9 million in the prior period. This decrease is
partially tempered by a reduction in pension credits of $25 million compared to
the third quarter of 2001, due to transition assets which were fully amortized
as of December 31, 2001 and diminished economic returns from pension assets.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
During the nine months ended September 30, 2002, cash increased by $160 million
primarily as a result of cash inflows from favorable operating activities.
Net cash provided by operating activities from continuing operations was $646
million for the nine months ended September 30, 2002, as compared to $254
million for the nine months ended September 30, 2001, a net increase in cash
generated from operating activities of $392 million. The primary difference in
the nine month period from prior year was due to increased earnings from
continuing operations of $183 million (pre-tax, excluding the provision for
restructuring and asset impairments.) Also driving the increase in cash from
operating activities is reduced cash outflows for working capital due in part to
cost-control efforts, offset by an increase in accounts receivable on higher
sales for the nine months ended September 30, 2002.
Net cash used in investing activities of $378 million for the nine months ended
September 30, 2002 was primarily for additions to land, buildings and equipment,
current year acquisitions and tax payments related to the sale of the
Agricultural Chemicals business. Net cash provided by investing activities of
$588 million in the nine months ended September 30, 2001 was due to $1 billion
in cash proceeds from the sale of the Agricultural Chemicals business in June
2001, offset by cash payments for additions to land, buildings and equipment and
$111 million paid for acquisition related activities.
Net cash used in financing activities was $108 million for the nine months ended
September 30, 2002 as compared to $891 million for the nine months ended
September 30, 2001. The primary use of cash in the nine months ended September
30, 2001 was the repayment of approximately $612 million of short-term
borrowings and $147 million of long-term debt. Comparatively, net cash used in
the nine months ended September 30, 2002 was driven by cash outlays for
long-term debt repurchases of $126 million and dividends of $135 million offset
by proceeds from the issuance of 20 billion Yen (approximately $149 million), 30
year 3.50% coupon notes via a private placement in 2002.
29
The Company evaluates operating performance based upon several factors including
free cash flow which it defines as cash provided by operating activities less
capital asset spending and dividends. Free cash flows for the nine months ended
September 30, 2002 and 2001 were as follows:
(in millions) Nine Months Ended
September 30,
-------------------------
2002 2001
---------- ----------
Cash provided by operating activities $ 646 $ 254
Capital asset spending (261) (270)
Dividends (135) (132)
Discontinued operations -- 44
--------- ----------
Free cash flows $ 250 $ (104)
========= ==========
Total borrowings were $2,981 million and $2,898 million at September 30, 2002
and December 31, 2001, respectively. During the first half of 2002, the Company
called and purchased debt in the principal amount of $114 million at an
after-tax loss of $6 million.
On February 27, 2002, the Company issued 20 billion Yen (approximately $149
million) of 30 year 3.5% coupon notes due 2032, with interest payable
semiannually on March 29th and September 29th. The maturity date is March 29,
2032, callable annually after March 2012. The proceeds from the issuance of the
note were used for general corporate purposes.
The Company currently anticipates capital expenditures in 2002 to be
approximately $380 million. Such capital expenditures will be used primarily for
the ongoing Enterprise Resource Planning (ERP) system implementation, ongoing
capital projects at existing plants and construction of the Mumbai, India plant.
The Company's short-term, primary source of liquidity will be existing cash
balances, cash flows from operations and if necessary, commercial paper and, or
bank borrowings. The Company maintains an unused credit facility with a
syndicated group of banks of $500 million, committed until 2004. The commitment
of this facility is not contingent upon the Company's credit rating. Management
believes that the Company's financial resources will adequately meet its
business requirements during the next twelve months, including planned
expenditures for the improvement or expansion of its manufacturing capacity,
working capital requirements and the dividend program.
On October 17, 2002, the Company's Board of Directors approved a quarterly
dividend on common shares of 21 cents per common share payable December 1, 2002
to stockholders of record on November 8, 2002.
On November 6, 2002, Standard and Poor's Ratings Services (Standard and Poor's)
announced that it lowered its ratings on the Company's long-term corporate
credit and senior unsecured debt to BBB+ from A-. At the same time, Standard
and Poor's affirmed its A-2 rating for the Company's short-term corporate
credit and commercial paper. Management does not expect this change to have a
material impact on the Company's annual results of operations or cash flows.
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.
30
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 potentially
responsible parties (PRPs) 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. Among the
sites for which the Company has accrued are both non-company owned Superfund
sites and company facilities.
The Whitmoyer site, located in Jackson Township, Lebanon County, Pennsylvania,
was the location of a veterinary pharmaceutical manufacturing facility. When
Rohm and Haas acquired the site in 1964, it discovered arsenic contamination and
the Company voluntarily undertook extensive remedial measures with the guidance
of the Pennsylvania Department of Health. In 1978, Rohm and Haas sold the site
to Beecham, Inc., which in turn sold the site to Stafford Laboratories in 1982.
GlaxoSmithKline is the successor entity to Beecham, Inc., and the only other
solvent known PRP for this site. Remediation on the site has been completed
except for ongoing groundwater remediation. The Company is in litigation with
GlaxoSmithKline over allocation of the remediation costs.
The Woodlands sites include two separate locations in the New Jersey Pinelands
near Chatsworth, New Jersey. The other known PRPs share remedial costs with Rohm
and Haas. The PRPs are performing a groundwater treatment program at the sites
that is expected to be completed in 3 to 4 years. Beyond that, the PRPs are
required to monitor a downgradient groundwater plume.
During the 1970s, manufacturing waste and that of numerous other known PRPs was
disposed of at the Kramer Landfill located in Mantua Township, New Jersey. Rohm
and Haas and other PRPs entered into a Consent Decree with the New Jersey
Department of Environmental Protection and the EPA in March 1998. All remedial
tasks have been completed except for groundwater remediation. The PRPs are
currently operating the groundwater treatment facility at the site. The
groundwater treatment program is expected to continue for an indeterminate time.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation (Velsicol)
have been held jointly and severally liable for the cost of remediation of
environmental problems associated with a mercury processing plant (Site)
subsequently acquired by Morton. As of the date of acquisition of Morton by the
Company, Morton had disclosed and accrued for certain ongoing studies related to
the Site. Additional data gathering has delayed completion of these studies
until 2003. In its allocation of the purchase price of Morton, the Company
accrued for additional study costs on December 31, 1999 and additional
remediation costs in 2000 based on the ongoing studies.
The Company's exposure at the Site will depend on the results of attempts to
obtain contributions from others believed to share responsibility. A cost
recovery action against certain 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 de minimis claims associated with the Site.
The Company's exposure will also depend upon the continued ability of Velsicol
and its indemnitor, Fruit of the Loom, Inc., which is operating under a Plan of
Reorganization under Chapter 11 of the Bankruptcy code, to contribute to
remediation costs. In 2001, these parties stopped paying their share of
expenses. In May 2002, the bankruptcy court approved a payment to the Company of
approximately $1 million. Also in 2002, the bankruptcy court approved a
government settlement entered into with Velsicol, Fruit of the Loom, and other
parties, which would create a fund to be used to respond to the Velsicol
liabilities at several sites, including Wood-Ridge.
31
The Company also agreed to fund up to $225,000 for the EPA to develop a workplan
for a separate study of contamination in Berry's Creek, which runs near the
Site, and of the surrounding wetlands. On October 11, 2002, the EPA requested
information relating to sources of contamination in Berry's Creek; the Company
understands this request was sent to over ninety potentially responsible
parties. The estimated costs of any resulting remediation of Berry's Creek were
not 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 to the results of its operations, cash flows and consolidated financial
position.
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 included 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 Company's Houston plant is an approximately 900 acre facility located in
Deer Park, Texas. The Texas Commission on Environmental Quality (TCEQ) issued a
Resource Conservation and Recovery Act (RCRA) Part B Permit and a Compliance
Plan calling for a RCRA Facility Investigation for certain Solid Waste
Management Units (SWMU's) and remediation of other units. Pursuant to the
Compliance Plan and subsequent investigations, the facility continues to operate
groundwater recovery systems at two units, has investigated and continues to
monitor one unit, will prepare a Corrective Measures Study for another unit, and
has submitted the Affected Property Assessment Report (APAR) concluding that no
further action is required for four units. Final approval of the APAR is pending
TCEQ's review.
The Company closed the former Morton plant at Paterson, New Jersey in December
2001, and is currently undertaking remediation of the site under New Jersey's
Industrial Site Recovery Act. Investigation of contamination of shallow soils
and groundwater is nearly complete, with further investigation of deeper
groundwater ongoing. Remediation systems for product and shallow groundwater
recovery are in place and awaiting authorization from New Jersey Authorities to
operate, and soil remediation measures are undergoing evaluation. An accrual was
recorded for known remediation activities in September 2000, and revised in
September 2002, to address information obtained during the ongoing site
investigation.
The amount charged to earnings pre-tax for environmental remediation was $25
million and $26 million for the nine months ended September 30, 2002 and 2001,
respectively. The reserves for remediation were $154 million and $150 million at
September 30, 2002 and December 31, 2001, respectively, and are recorded as
liabilities (current and long-term) in the Consolidated Balance Sheet. These
reserves include amounts resulting from the allocation of the purchase price of
Morton. The Company is pursuing lawsuits over insurance coverage for certain
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 pre-tax of approximately $33 million and $9 million for the nine
months ended September 30, 2002 and 2001, respectively.
In addition to accrued environmental liabilities, the Company had reasonably
possible loss contingencies related to environmental matters of approximately
$70 million and $73 million at September 30, 2002 and December 31, 2001,
respectively. The Company has reserved for the costs it believes are probable
and estimable and other costs which have not met the definition of probable have
been included in our discussion of reasonably possible loss contingencies.
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.
32
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, including the Company. 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 $383,000 and many cases have closed with no payment.
These cases are fully insured. In addition, like most manufacturing companies,
the Company has been sued, generally as one of many defendants, by non-employees
who allege exposure to asbestos on the Company premises. The Company does not
believe that it is reasonably possible that a material loss will be incurred in
excess of the amounts recorded for all pending cases.
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 and the consolidated financial position of
the Company.
NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with this statement, as of January 1, 2002,
the Company ceased amortization of goodwill and intangible assets deemed to have
indefinite lives, and reclassified certain intangible assets to goodwill. Under
SFAS No. 142, goodwill and certain indefinite-lived intangible assets are no
longer amortized but instead are reviewed for impairment at least annually and
are written down only in periods in which it is determined that the fair value
is less than the book value.
As a result of the Company's impairment testing in connection with the adoption
of SFAS No. 142, a non-cash charge of $830 million ($773 million after-tax), was
reflected in the results for the nine months ended September 30, 2002, as if
this charge had been recorded on January 1, 2002. The annual impairment review
was completed as of May 31, 2002 with no additional impairments identified. The
charge from adoption was reported as a Cumulative Effect of Accounting Change in
the Statement of Consolidated Earnings. Of the impairment, $668 million
pertained to goodwill and $162 million ($105 million after-tax) related to
indefinite-lived intangibles assets within the Salt segment. The after-tax
charge is as follows: Coatings - $42 million; Electronic Materials - $281
million; Performance Chemicals - $230 million and Salt - $220 million. The
impairment charges are primarily the result of the economic downturn over the
past two years affecting growth assumptions in certain key markets. In addition,
customer consolidation in some areas has led to downward pressure on pricing and
volume.
33
SFAS No. 142 requires the transitional impairment review for goodwill, as well
as an annual impairment review, to be performed on a reporting unit basis. The
Company has identified each of its reporting units to be those identified in the
previously disclosed tables presented in the MD&A. When evaluating goodwill for
impairment, SFAS No. 142 requires the Company to first compare a reporting
unit's book value of net assets, including goodwill, to its fair value. Fair
value was estimated based upon discounted cash flow analyses. To the extent that
the book value exceeded fair value, the Company was required to perform a second
step to measure the amount of the impairment loss. In the second step, the
Company determined "implied goodwill" by determining the fair value for the
assets and liabilities of its reporting units. To the extent that a reporting
unit's book value of goodwill exceeded its implied fair value, impairment
existed and was recognized.
Long-lived assets, other than investments, goodwill and indefinite-lived
intangible assets are depreciated over their useful lives and are reviewed for
impairment in accordance with SFAS No. 144. The Company evaluated its
finite-lived intangible assets and determined there to be no change in
circumstances that would indicate that the carrying value of any given asset may
not be recoverable.
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 the
Company's 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." This 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.
DEBT EXTINGUISHMENT, INTANGIBLE ASSETS OF MOTOR CARRIERS AND LEASE ACCOUNTING
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement amends FASB Statement No. 13, "Accounting for Leases," and other
existing authoritative pronouncements in order to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions and also limits the classification of debt extinguishments as
extraordinary items. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company will adopt the provisions of SFAS No. 145 during the
first quarter of fiscal year 2003. For the nine months ended September 30, 2002,
the Company recorded extraordinary losses on early extinguishment of debt of $6
million after-tax. These losses will be reclassified to continuing operations in
fiscal 2003 after adopting SFAS No. 145, to maintain comparability for the
reported periods.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The
statement requires recording costs associated with exit or disposal activities
at their fair values when a liability has been incurred. SFAS No. 146 is
effective for disposal activities initiated after December 31, 2002. The new
guidance will impact the timing of recognition and the initial measurement of
the amount of liabilities that the Company recognizes in connection with exit or
disposal activities initiated after the effective date. The Company does not
expect this statement to have a material impact on its financial statements.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Management's discussion of market risk is incorporated herein by
reference to Item 7a of the Form 10-K for the year ended December 31,
2001, filed with the Securities and Exchange Commission on March 26,
2002.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures for
financial reporting to ensure that information required to be disclosed in the
Company's reports submitted under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC. These controls and procedures also ensure
that information required to be disclosed in such reports is accumulated and
communicated to management to allow timely decisions regarding required
disclosures.
Within 90 days prior to the date of this report, our Chairman of the Board and
Chief Executive Officer and our Senior Vice President and Chief Financial
Officer, together with management, conducted an evaluation of the effectiveness
of the Company's disclosure controls and procedures pursuant to Rule 13a-14 (c)
and 15d-14 (c) of the Exchange Act. Based on that evaluation, our Chairman of
the Board and Chief Executive Officer and our Senior Vice President and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
b) Changes in Internal Controls
There have been no significant changes in our internal controls since September
2002, the date of our last evaluation. As previously disclosed, the Company is
in the process of implementing an Enterprise Resource Planning (ERP) system
globally. The implementation is phased and planned to be complete in 2004. The
Company is taking the necessary steps to monitor and maintain the appropriate
internal controls during this period of change.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information related to Legal Proceedings, see Notes to Consolidated
Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(99.1) Certification Pursuant to 18 U.S.C. Section 1350 As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports filed on Form 8-K during the quarter ended
September 30, 2002:
None.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 2002 ROHM AND HAAS COMPANY
(Registrant)
BRADLEY J. BELL
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
36
SECTION 302 CERTIFICATION
-------------------------
I, Raj L. Gupta, Chairman and Chief Executive Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rohm and Haas Company
("Rohm and Haas");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Rohm
and Haas as of, and for, the periods presented in this quarterly report;
4. Rohm and Haas' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Rohm and Haas and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Rohm and Haas, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Rohm and Haas' disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. Rohm and Haas' other certifying officer and I have disclosed, based on our
most recent evaluation, to Rohm and Haas' auditors and the audit committee of
Rohm and Haas' board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Rohm and Haas' ability to record, process,
summarize and report financial data and have identified for Rohm and Haas'
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Rohm and Haas' internal controls; and
6. Rohm and Haas' other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Raj L. Gupta
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Raj L. Gupta
Chairman and Chief Executive Officer
37
SECTION 302 CERTIFICATION
-------------------------
I, Bradley J. Bell, Senior Vice President and Chief Financial Officer certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Rohm and Haas Company
("Rohm and Haas");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Rohm
and Haas as of, and for, the periods presented in this quarterly report;
4. Rohm and Haas' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Rohm and Haas and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Rohm and Haas, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Rohm and Haas' disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. Rohm and Haas' other certifying officer and I have disclosed, based on our
most recent evaluation, to Rohm and Haas' auditors and the audit committee of
Rohm and Haas' board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Rohm and Haas' ability to record, process,
summarize and report financial data and have identified for Rohm and Haas'
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Rohm and Haas' internal controls; and
6. Rohm and Haas' other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Bradley J. Bell
----------------------------------
Bradley J. Bell
Senior Vice President and Chief Financial Officer
38