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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-3507
___________________________
ROHM AND HAAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 23-1028370
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 INDEPENDENCE MALL WEST, PHILADELPHIA, PA 19106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-592-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------- ------------------------
Common Stock of $2.50 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K / /.
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 15, 1999: $3,887,542,127
Common stock outstanding at February 15, 1999: 167,642,725 SHARES.
Documents incorporated by reference:
Part III -- Definitive Proxy Statement to be filed with the Securities
and Exchange Commission, except the Report on Executive
Compensation and Graph titled "Cumulative Total Return
to Shareholders" included therein.
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PART I
ITEM 1. BUSINESS
Performance Polymers
Performance Polymers includes all six of Rohm and Haas's
acrylic-technology businesses, which accounted for 66% of the company's
sales in 1998. Following the company's divestiture of its stakes in
AtoHaas and RohMax early in 1998, the group emerged in this year's new
organization strengthened by a more fully integrated strategy
and operations. The result is a stronger focus on current and potential
customers of the company's specialty polymer-based products for a wide
range of end uses. The integration also streamlines Performance Polymers
management and improves its cost structure.
Overall, the Performance Polymers group performed quite well given the
highly uncertain economic environment that prevailed in Asia, Europe and
Latin America during 1998. Sales for the year totaled $2.4 billion, a
decrease of 10% following the sale of AtoHaas. Volume was flat. Earnings,
including several one-time items, increased 24%. Operating earnings
increased slightly.
In 1998, the six Performance Polymers businesses began to benefit from
a newly integrated supply chain. The creation of a single infrastructure
for the production and distribution of raw materials leverages the
combination of all six of Rohm and Haas's acrylics businesses to
significantly reduce costs and improve customer service. The Performance
Polymers supply-chain initiative produced more than $50 million in
permanent cost reductions during the year. In addition, Performance
Polymers' inventories at year-end were about 9% lower than at the end of
1997. Supply chain improvement yielded a platform for consistent
volume growth, while allowing Performance Polymers to defer construction of
significant new monomers capacity until at least 2002.
Coatings, the largest of the six Performance Polymers businesses,
delivered volume increases of more than twice the rate of GDP growth in
many markets around the world. Customers' continuing migration from
solvent-based coatings to Rohm and Haas's environmentally friendly
water-based systems contributed to this growth. Coatings' strong product
line drove increases in its share of many key markets, notably in Germany.
Important new products, including advancements in opaque polymers and
rheology modifiers, aided both market share gains and continued healthy
profitability. The business also benefited from geographic expansion into
Eastern Europe and South Africa. In 1999, Coatings looks forward to
continued gains in market share and geographic growth, as well as the
development of new technologies that will continue to broaden its range of
product offerings.
Specialty Polymers posted small declines in its volume and sales due to
global overcapacity in adhesives, paper chemicals and leather resulting in
part from Asia's economic turmoil. Its textiles and non-woven binding
unit, however, made healthy gains in profitability. The
business also made significant progress in the development of new,
lower cost-in-use products for both coated paper and paperboard and
pressure sensitive adhesives markets. These and other new products to be
introduced in 1999 will offer Rohm and Haas customers the means to improve
their competitive position. Specialty Polymers expects to return to its
accustomed rates of sales and volume growth in the second half of 1999,
driven by improved market conditions and the impact of its new product
introductions.
Plastics Additives faced a very competitive environment in 1998, as a
portion of its customer base faced weakened demand for polyvinyl chloride
packaging. Profitability was solid in most regions, driven by
continued growth in building and construction markets, while Asian results
failed to meet expectations due to the region's continuing macroeconomic
crises. Plastics Additives made a number of advancements in new products,
including the development of new and improved weatherable impact modifiers
sought by customers. Capacity additions were announced in many geographic
regions, as new technology yielded the prospect of greater volume at modest
cost. During the year, Plastics Additives received several supplier
achievement awards, including the respected Six Sigma Quality Award from
General Electric Co. in recognition of a new product that has delivered
significant process improvements, along with greatly reduced downtime and
rejects, to one of GE Plastics' customers.
Building Products posted strong growth thanks to continued market
penetration of its recently introduced products as well as renewed
alignment with its strategic customers. Latin America, North America and
Europe each contributed to the growth. The roof tile and siding business
expanded its customer base in North America, Latin America, Southeast Asia
and China. The strongest growth in the floor care business came in Latin
America and North America. The exterior finishings and installation
systems business increased its penetration of the European market, and
continued to benefit from its relationships with strategic customers in
North America. The caulks and sealants business, meanwhile, offset
significant competitive pressures with improved positions among its major
customers. In 1999, Building Products expects continued growth in excess
of GDP rates, driven by new product introductions and expanded geographic
presence.
Monomers: Most of Rohm and Haas's monomer production is used internally
in the manufacture of specialty products by the other Performance Polymers
businesses. During 1998, external sales by the Monomers business totaled
$337 million, up 26% from 1997. The divestiture of the company's stake in
AtoHaas resulted in new external sales to that business, which accounted
for most of the overall sales increase. Monomers also saw significant
growth in sales to producers of superabsorbent materials and other acrylic
polymers. The company foresees continued expansion of its monomers
production for both internal and external use in 1999.
Formulation Chemicals grew at double-digit rates in Asia and Latin
America, as its products continued to attract new customers around the
world. In order to keep pace with geographic growth, the business will
open a new polyacrylate production facility in Map Ta Phut, Thailand, in
early 1999. Asian and Latin American growth offset modest volume
declines in North America and Europe, where some consumers switched
from powder detergents. Formulation Chemicals commercially launched
Optidose(TM) polymers and test kits for the water treatment industry. The
business's alliance with International Specialty Products Inc., meanwhile,
continues to extend the reach of Rohm and Haas's acrylic technology into a
wide range of personal-care products, from hair sprays to skin lotions to
sunscreens. Formulation Chemicals expects future growth to come in part
from the sale of Duramax(TM) ceramic additives, a key new product line, as
well as from the worldwide expansion of our strategic customer's premium
laundry detergent brands, which drives the demand for multi-benefit
Acusol(R) polymers.
Together, Performance Polymers expects growth in 1999 from a number of
sources. New technology development will expand the product offerings of
each of the group's businesses. Geographic growth, meanwhile, will be
enhanced by the addition of significant emulsion facilities in KwaZulu,
South Africa, and Shanghai, China, as well as by the expansion of production
capacity at Tudela, Spain.
PERFORMANCE
POLYMERS 1998 SALES PRODUCTS/MARKETS COMPETITORS
- -------------------|-------------|------------------------------------|------------------------
COATINGS $843 million Binders and additives used in: o BASF
o Architectural coatings o Clariant
o Traffic paints o Union Carbide
o Maintenance coatings
- -------------------|-------------|------------------------------------|------------------------
SPECIALTY POLYMERS $469 million High-performance polymers used in: o Dow Chemical
o Adhesives o BASF
o High-quality paper o Rhodia
o Leather o Japan Synthetic Rubber
o Textiles and non-woven fiber
- -------------------|-------------|------------------------------------|------------------------
PLASTICS ADDITIVES $356 million High-performance polymers used in: o Kaneka
o Vinyl siding o Mitsubishi Rayon
o Window profiles o Elf Atochem
o Pipe
o Film
o Bottles
o Engineering plastics
- -------------------|-------------|------------------------------------|------------------------
BUILDING PRODUCTS $300 million High-performance polymers used in: o BASF
o Floor polishes o Union Carbide
o Roof coatings o Clariant
o Caulks and sealants
o Cement modifiers
o Roof tile and siding
o Elastomeric coatings
o Wood coatings
- -------------------|-------------|------------------------------------|------------------------
MONOMERS $337 million Feedstocks for the acrylic chain, o BASF
including: o ICI
o Acrylic acid and derivatives o Elf Atochem
o Methyl methacrylate and
derivatives
o Specialty monomers
- -------------------|-------------|------------------------------------|------------------------
FORMULATION $142 million High-performance polymers used in: o BASF
CHEMICALS o Detergents o National Starch (ICI)
o Water treatment o Rhodia
o Industrial cleaning
o Personal care
- -------------------|-------------|------------------------------------|------------------------
Electronic Materials
Technology was the key to Electronic Materials' resilient performance
amid the macroeconomic adversity that prevailed among its customers during
much of 1998. Rohm and Haas's businesses in this group adapted well to
short-term market fragility, even as they took a number of decisive steps
to improve their platforms for significant long-term growth.
Electronic Materials sales for the year totaled $398 million, $1
million less than in 1997; volume was also flat. Earnings for the group
were $45 million, down 13% from 1997.
The biggest single news item for Electronic Materials came at the end
of the year, when Rohm and Haas announced an agreement to acquire LeaRonal,
a New York-based specialty chemical company with sales of $242 million in
its 1998 fiscal year. Following the close of the acquisition in January
1999, Shipley Company began the process of combining LeaRonal with its
printed wiring board (PWB) business. The resulting division of Shipley,
named Shipley Ronal, unites two very strong and highly complementary
technologies for printed wiring boards, metal finishing and other specialty
applications. Shipley Ronal expects its full range of specialty chemical
products for the PWB industry to be a particularly strong driver of future
growth.
In January 1999, Electronic Materials also increased its ownership
stake in Rodel, Inc., to 48%. Rodel, a worldwide leader in
chemical-mechanical planarization, delivers specialty products
based on this key enabling technology to makers of semi-conductors
around the world. Rohm and Haas first bought part of Rodel in June 1997,
and has long admired that company's technologies and entrepreneurial
spirit.
The PWB and semiconductor industries that Shipley and Rodel serve
suffered from significant macroeconomic weakness in 1998. Asian economic
turmoil caused lower than expected activity in end-use markets.
Industry prices, meanwhile, generally decreased in each region of the
world. Electronics producers in many markets deferred capital spending
projects intended to increase capacity, in some cases by sizable margins.
Shipley Company's microelectronics business performed relatively well
in this environment, and was able to maintain good sales and earnings.
Throughout the year, the company strengthened its worldwide leadership
position in deep-UV and advanced I-line photoresists, the leading-edge
technologies used in semiconductor photolithography. Shipley also improved
its position in anti-reflective coatings, another important component of
semiconductor fabrication. Results were best in Europe and North America.
In Asia, Japan and Korea posed the most difficult operating environments,
while Taiwan delivered strong growth.
Shipley's PWB business faced one of its most difficult years around the
world. New technology development did not fully offset the overall
business situation in 1998, but is expected to contribute strongly to
improved results in 1999. The addition of LeaRonal's complementary
technologies and manufacturing capacity will drive future growth and
profitability. In particular, as printed wiring board designs become
increasingly complex, Shipley Ronal foresees its photoresists for PWB
imaging increasing their share of market.
Electronic Materials took a number of other steps to improve its
operations during the year. Shipley fully integrated the commercial and
manufacturing operations of Pratta, which was acquired in 1997.
LG-Shipley, a joint venture with South Korea's LG Chemical Group, was
implemented in the first half of 1998. Operational discipline and raw
material costs were a high priority in 1998 and will remain a focus for
continued improvements in 1999.
In late 1998, the worldwide electronics industry began to show initial
signs of recovery. Barring further economic shocks, Electronic Materials
expects its customers to return to their historical growth rates during the
course of 1999.
ELECTRONIC
MATERIALS 1998 SALES PRODUCTS/MARKETS COMPETITORS
- -------------------|-------------|------------------------------------|------------------------
ELECTRONIC $398 million o Specialty chemical processes o TOK
MATERIALS for printed wiring board o Arch Chemicals
manufacture o AZ/Clariant
o JSR
o Photoresists and ancillaries o Sumitomo
for semiconductor fabrication o MacDermid
o Atotech
o Slurries and pads for chemical-
mechanical planarization,
used by makers of semiconductors
(Rodel, Inc.: 48% owned,
effective January 15, 1999)
o Specialty chemicals for
connectors and semiconductor
packaging
o Plating technology for
surface-finishing industry
- -------------------|-------------|------------------------------------|------------------------
Chemical Specialties
Chemical Specialties encompasses those Rohm and Haas businesses that
independently serve the specialty chemical needs of their customers. The
group has a broad range of chemistries and other expertise at its disposal,
from gene-switching mechanisms useful in a range of biological
applications to chromatography chemistries for the pharmaceutical industry.
Chemical Specialties is also the segment of the Rohm and Haas portfolio in
which the company plans to develop independent new businesses, whether they
originate with the company's R&D efforts or through an acquisition of
technologies from an external source.
Overall, the Chemical Specialties group performed well during 1998.
Sales for the year totaled $875 million, a 1% decrease from the sales
posted in 1997 by the businesses that now comprise Chemical Specialties.
Volume was flat. Earnings for the group were $72 million, down 15%
from 1997.
The largest of the Chemical Specialties businesses, Agricultural
Chemicals, posted slightly higher sales over 1997; results were best in
North America and Latin America. Dithane fungicide and the Mimic(TM),
Confirm(R) and Intrepid(TM) molt accelerating compounds drove
gains in both sales and profitability. The business's biotechnology group
licensed its gene-switching technology to Invitrogen, a maker of materials
used in biotechnology research.
During the year, Agricultural Chemicals increased its focus on building
relationships with distributors around the world. The business increased
its ownership stake in AgLead, a key distributor in Japan, to 70%, and took
a minority interest in Isagro Italia, a firm that commercializes and
distributes crop protection products in Europe. Agricultural Chemicals
also signed a joint venture agreement for the production of Dithane in
China. In 1999, Agricultural Chemicals plans continued development of its
product distributor network in Latin America, Europe and Asia-Pacific. The
business also expects to benefit from its supply chain efforts around the
world, reducing inventories while improving customer service.
Ion Exchange Resins capped its multiyear turnaround efforts with a
good performance in 1998. Over the past few years, this business has
focused on rationalizing its product portfolio, improving its cost
structure and strengthening its operations. In 1998, this process had
yielded sufficient progress to allow Ion Exchange Resins to begin to
target new markets and new applications of its specialty resins.
With the exception of the European and Asia-Pacific Regions,
Ion Exchange Resins turned in healthy sales and earnings around the
world. The business's specialty focus drove performance of its products
for makers of chemical warfare decontamination kits, a highly
differentiated product with demanding performance standards. Electric
utilities, particularly those that operate nuclear-powered generators,
fueled growth of resins for industrial water purification, another
application with exacting specifications. The
business also posted particularly strong demand from producers of
specialty filters for drinking water. While cost-consciousness will remain
a priority, Ion Exchange Resins expects to continue its newly earned focus
on profitable growth in 1999.
Rohm and Haas's Biocides business experienced reasonably good demand
during 1998, yielding roughly flat sales for the year compared to 1997.
The business's improved cost structure helped produce the business's first
significant earnings gain in several years. Continued strength in Europe
and North America were somewhat offset by weakness in the paper and pulp
markets, in which manufacturers worldwide faced overcapacity and resulting
low-cost exports from Asia. Also during 1998, Biocides strengthened its
commitment to its markets with increased focus on developing newer, safer
processes that yield greater customer value. The SeaNine(R) biocide product,
which offers shipbuilders an environmentally friendly means of protecting
ship hulls from barnacle growth, benefited from broader awareness of the
environmental concerns caused by tin-based anti-barnacle formulations of
marine paints.
Primenes posted volume growth in 1998 in its fuel and plastics
additives segments. In the business's annual customer satisfaction survey,
respondents rated Primenes in the top quartile for product quality, order
processing, delivery, responsibility and the quality of the business's
partnerships. Primenes expects strong growth in 1999.
TosoHaas, a joint venture between Rohm and Haas and Tosoh Corp.,
realized good results driven by rapid growth in the pharmaceutical and
biotechnology industries. The business expects growing demand in 1999 from
established as well as newly developing areas requiring bioseparation
tools.
CHEMICAL
SPECIALTIES 1998 SALES PRODUCTS/MARKETS COMPETITORS
- -------------------|-------------|------------------------------------|------------------------
AGRICULTURAL $505 million o Herbicides o Atochem
CHEMICALS o Fungicides o DuPont
o Insecticides o Monsanto
o Zeneca
- -------------------|-------------|------------------------------------|------------------------
ION EXCHANGE $240 million High-performance resins used to o Dow Chemical
RESINS change characteristics of water o Bayer
and other fluids in: o Purolite
o Pharmaceuticals o Mitsubishi Kasei
o Biotechnology
o Electronics
o Food processing
- -------------------|-------------|------------------------------------|------------------------
BIOCIDES $130 million Isothiazolone biocides used to o Dow Chemical
control algae, fungi and bacteria o Union Carbide
in: o Zeneca
o Coatings o Great Lakes
o Water treatment
o Personal-care products
o Latex preservation
o Metalworking fluids
- -------------------|-------------|------------------------------------|------------------------
PRIMENES* Specialty intermediates and bases o BASF
used in: o Akzo
o Lubricants o Huntsman
o Dyes o Celanese
o Plastics
- -------------------|-------------|------------------------------------|------------------------
TOSOHAAS** Separations used in: o Amersham Pharmacia
o Pharmaceutical manufacturing Biotech
o Biomedical research o BioSepra
o Environmental testing
- -------------------|-------------|------------------------------------|------------------------
*sales included with Ion Exchange Resins
**sales are not consolidated
Segments and Foreign Operations
For discussion of segments and foreign operations for the years 1996-98
see Item 8, Note 6 "Segment Information" included herein.
Personnel
As of December 31, 1998, the company had approximately 11,300
employees.
Raw Materials
The company uses a variety of commodity chemicals as raw materials in
its operations. In most cases, these raw materials are purchased from
multiple sources under long-term contracts. Most of these materials are
hydrocarbon derivatives such as propylene, acetone and styrene.
Competition
The principal market segments in which the company competes are shown
above. The company experiences vigorous competition in each of these
segments. The company's competitors include many large multinational
chemical firms based in Europe, Japan and the United States. In some
cases, the company competes against firms which are producers of commodity
chemicals which the company must purchase as the raw materials to make its
products. The company, however, does not believe this places it at any
significant competitive disadvantage. The company's products compete with
products offered by other manufacturers on the basis of price, product
quality and specifications, and customer service. Most of the company's
products are specialty chemicals which are sold to customers who demand a
high level of customer service and technical expertise from the company and
its sales force.
Research and Development
The company maintains its principal research and development
laboratories at Spring House, Pennsylvania. Research and development
expenses, substantially all company sponsored, totaled $207 million,
$201 million and $187 million in 1998, 1997 and 1996, respectively.
Approximately 15% of the company's employees were engaged in research and
development activities in 1998, 1997 and 1996.
Environmental Matters
Discussion of environmental matters is included herein under Item 7
(see "Liquidity, Capital Resources and Other Financial Data").
ITEM 2. PROPERTIES
The company, its subsidiaries and affiliates presently operate
38 manufacturing facilities in 20 countries. These facilities are
listed here:
Corporate Headquarters
- ----------------------
Rohm and Haas Company
100 Independence Mall West
Philadelphia, Pennsylvania USA
19106-2399
(215) 592-3000
(Delaware Corporation)
Manufacturing Locations
- -----------------------
Australia: Geelong
Brazil: Jacarei
Canada: West Hill
China: Beijing
Colombia: Barranquilla
England: Coventry; Jarrow
France: Chauny; Lauterbourg; Villers-Saint-Paul
Indonesia: Cilegon
Italy: Mozzanica
Japan: Nagoya; Sasagami; Soma
Mexico: Apizaco
New Zealand: Auckland
Philippines: Las Pinas
Scotland: Grangemouth
Singapore: Singapore
Spain: Tudela
Sweden: Landskrona
Taiwan: Min-Hsiung
Thailand: Map Ta Phut
United States:
California: Hayward; La Mirada
Delaware: Newark
Illinois: Chicago Heights; Kankakee
Kentucky: Louisville
Massachusetts: Marlborough
North Carolina: Charlotte
Pennsylvania: Bristol; Montgomeryville; Philadelphia
Tennessee: Knoxville
Texas: Bayport; Houston
Research Facilities
- -------------------
Corporate Research Headquarters
Spring House, Pennsylvania
Other Research and Technical Facilities
- ---------------------------------------
Brazil: Campinas
Canada: West Hill
France: Chauny; Valbonne
Japan: Washinomiya
United States:
Massachusetts: Marlborough
North Carolina: Charlotte
Pennsylvania: Bristol; Newtown
Texas: Houston; Waller County
Additional information about the company's facilities is included
herein under Item 7 (see "Liquidity, Capital Resources and Other Financial
Data") and throughout the above discussions of the company's businesses.
ITEM 3. LEGAL PROCEEDINGS
For discussion of legal proceedings see Item 8, Note 21, "Contingent
Liabilities, Guarantees and Commitments" included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The company's common stock of $2.50 par value is traded on the New York
Stock Exchange (Symbol: ROH). There were 4,451 registered common
stockholders as of December 31, 1998. The 1998 and 1997 quarterly
summaries of the high and low prices of the company's common stock and the
amounts of dividends paid on common stock are presented herein under Item 7
(see "Quarterly Results of Operations").
ITEM 6. SELECTED FINANCIAL DATA
The company's summary of selected financial data and related notes for
the years 1994 through 1998 are included herein under Item 8 (see
"Eleven-Year Summary of Selected Financial Data").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statements
Any statements made by the company in its filings with the Securities
and Exchange Commission or other communications (including press releases
and analyst meetings and calls) that are not statements of historical fact
are forward-looking statements. These statements include, without
limitation, those relating to anticipated product plans, litigation and
environmental matters, currency effects, profitability, and other
commitments or goals. Forward-looking statements are subject to a number
of risks and uncertainties that could cause actual results to differ
materially from the statements made. These risks and uncertainties
include, but are not limited to, the following:
1) Currencies. Approximately half of the company's revenues are from
outside the United States, a significant portion of which are denominated
in foreign currencies. Also, significant production facilities are located
outside the United States. The company's financial results therefore can
be affected by changes in foreign currency rates. Though the company uses
certain financial instruments to mitigate these effects, it does not hedge
its foreign currency exposure in a manner that would entirely eliminate the
effects of changes in foreign exchange rates on the company's earnings,
cash flows and fair values of assets and liabilities. Accordingly,
reported revenue, net income, cash flows and fair values have been and in
the future may be affected by changes in foreign exchange rates. In
addition, because of the extensive nature of the company's foreign business
activities, financial results could be adversely affected by changes in
worldwide economic conditions, changes in trade policies or tariffs,
changes in interest rates, and political unrest.
2) Competition and Demand. The company's products are sold in a
competitive, global economy. Competitors include many large multinational
chemical firms based in Europe, Japan and the United States. These
competitors often have resources that are greater than the company's. In
addition, financial results are subject to fluctuations in demand and the
seasonal activity of certain of the company's businesses. The company also
manufactures and sells its products to customers in industries and
countries that are experiencing periods of rapid change, most notably
countries in the Asia-Pacific region. Also, weather conditions have
historically had, and will likely continue to have in the future, a
significant impact on revenues and earnings in the company's Agricultural
Chemicals business. These factors can adversely affect demand for the
company's products and therefore may have a significant impact on financial
results.
3) Supply and Capacity. From time to time certain raw materials the
company requires become limited. It is likely this will occur again in the
future. Should such limitations arise, disruptions of the company's supply
chain may lead to higher prices and/or shortages. Also, from time to time,
the company is subject to increases in raw material prices and, from time
to time, experiences significant capacity limitations in its own
manufacturing operations. These limitations, disruptions in supply, price
increases and capacity constraints could adversely affect financial
results.
4) Technology. The company has invested significant resources in
intellectual properties such as patents, trademarks, copyrights, and trade
secrets. The company relies on the protection these intellectual property
rights provide since it depends on these intellectual resources for its
financial stability and its future growth. The development and successful
implementation of new, competing technologies in the market place could
significantly impact future financial results.
5) Joint Ventures and Acquisitions. The company has entered, and in
the future may enter, into arrangements with other companies to expand
product offerings and to enhance its own capabilities. It will likely also
continue to make strategic acquisitions and divestitures. The success of
acquisitions of new technologies, companies and products, or arrangements
with third parties, is not predictable and there can be no assurance that
the company will be successful in realizing its objectives, or that
realization may not take longer than anticipated, or that there will not be
unintended adverse consequences from these actions.
6) Environmental and Year 2000. Risks and uncertainties related to
environmental matters and year 2000 readiness are discussed herein under
this Item (see "Liquidity, Capital Resources and Other Financial Data").
RESULTS OF OPERATIONS
1998, 1997 AND 1996
In 1998, the board of directors declared a three-for-one split of the
company's common stock. Amounts per share, numbers of common shares and
capital accounts have been restated to give retroactive effect to the
stock split.
Earnings for 1998 were $440 million, an increase of 7% over last year's
earnings of $410 million. Diluted earnings per common share were $2.45
compared to $2.13 in 1997. Sales decreased 7% on a 1% volume increase.
The company sold its interest in the AtoHaas joint venture in 1998,
affecting the sales and volume comparison. In addition to the exclusion of
AtoHaas' sales from 1998, the remaining 50% of NorsoHaas was acquired and
operations in China were consolidated during the year. The unconsolidated
RohMax joint venture was also sold in 1998 but did not affect the sales and
volume comparisons. On a comparable-business basis, sales decreased 3%
while volume was flat. The sales decrease on flat volume is largely a
result of weaker currencies, primarily in Asia-Pacific, and lower selling
prices. Volume increased in Europe and in Latin America while economic
weakness hurt volume in the Asia-Pacific region. Volume in North America
was flat. On a comparable basis, Asia-Pacific region sales declined 19%
and volume decreased 12%. The company's earnings for the year were flat,
excluding non-recurring items. Diluted earnings per common share excluding
non-recurring items were $2.20 in 1998, up 7% versus 1997. The increase in
reported earnings per share reflects the impact of the company's stock
repurchase program and earnings from non-recurring items discussed below.
Earnings in 1997 were $410 million, 13% higher than the $363 million
reported in 1996. Diluted earnings per common share were $2.13, up 19%
from $1.79 the previous year. Despite 6% volume growth, sales of $3,999
million were essentially unchanged from 1996 due to weaker currencies in
Europe and Asia-Pacific and the absence of Petroleum Chemicals sales which
were part of the unconsolidated RohMax joint venture during 1997. All
business segments helped the volume increase, except Chemical Specialties,
in part due to lower volume in Agricultural Chemicals. All regions also
contributed, with the European and Latin American regions maintaining
strong volume momentum throughout the year. In addition to volume growth
within consolidated operations, earnings in affiliates benefited from
strong volume in RohMax and Rodel, as well as reduced losses in AtoHaas
Europe.
Included in 1998 results are a one-time net after-tax gain of $45 million,
or $.25 per share. This net gain affected all segments and regions except
Latin America, and was the net result of the sale of the company's interest
in the AtoHaas and RohMax joint ventures, an early extinguishment of debt,
the write-off of certain intangible assets in Europe and business
realignment costs primarily in Asia. Earnings in 1997 include a gain of
$16 million after tax, or $.09 per common share, the net result of
remediation settlements with insurance carriers during the fourth quarter.
Included in 1996 earnings was an after-tax gain of $.02 per common share
for the sale of land and retroactive tax credits, net of asset
writedowns and restructuring charges. The repurchase of 17.5 million,
7.7 million and 13.2 million common shares during 1998, 1997 and 1996,
respectively, contributed incrementally $.13 per share to 1998, $.12 to
1997 and $.06 to 1996.
These and other factors affecting earnings are discussed below. They are
summarized on a per-share basis below.
NET SALES BY BUSINESS SEGMENT AND CUSTOMER LOCATION
- --------------------------------------------------------------------------------------------------------------
PERFORMANCE CHEMICAL ELECTRONIC
POLYMERS SPECIALTIES MATERIALS TOTAL
- ---------------------------------------- ------------------- ------------------ ------------------------
(Millions
of dollars) 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------- ------------------- ------------------ ------------------------
North America $1,540 $1,722 $1,676 $316 $287 $289 $180 $178 $157 $2,036 $2,187 $2,122
Europe 590 591 620 262 278 305 93 90 81 945 959 1,006
Asia-Pacific 191 254 264 152 188 208 125 131 120 468 573 592
Latin America 126 145 134 145 135 128 0 0 0 271 280 262
---------------------- ------------------- ------------------ ------------------------
Total $2,447 $2,712 $2,694 $875 $888 $930 $398 $399 $358 $3,720 $3,999 $3,982
- --------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------
SUMMARY OF 1994-1998 RESULTS BY BUSINESS SEGMENT(1)
- -------------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------
NET SALES
Performance Polymers $2,447 $2,712 $2,694 $2,617 $2,420
Chemical Specialties 875 888 930 913 817
Electronic Materials 398 399 358 354 297
----------------------------------------------
Total $3,720 $3,999 $3,982 $3,884 $3,534
- -------------------------------------------------------------------------
NET EARNINGS
Performance Polymers $ 394 $ 317 $ 274 $ 244 $ 240
Chemical Specialties 72 85 112 89 74
Electronic Materials 45 52 39 43 19
Corporate(2) (71) (44) (62) (84) (69)
-----------------------------------------------
Total $ 440 $ 410 $ 363 $ 292 $ 264
- -------------------------------------------------------------------------
RONA
Performance Polymers 20.4% 14.5% 12.5% 11.2% 11.9%
Chemical Specialties 9.1 11.0 13.7 10.7 9.0
Electronic Materials 8.9 11.4 10.9 12.5 5.5
Corporate(2) (17.1) (9.2) (11.2) (15.6) (11.0)
---------------------------------------------
Total 12.7% 11.2% 9.9% 8.1% 7.6%
- -------------------------------------------------------------------------
(1) 1994-1997 amounts have been restated to reflect the 1998 change in
financial reporting structure.
(2) Corporate includes non-operating items such as interest income and
expense, corporate governance costs, corporate exploratory research and,
in 1998, loss on early extinguishment of debt. (See "Management
Discussion and Analysis.")
- -------------------------------------------------------------------------
SUMMARY OF 1994-1998 RESULTS BY CUSTOMER LOCATION
- -------------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------
NET SALES
North America $2,036 $2,187 $2,122 $2,074 $1,967
Europe 945 959 1,006 976 826
Asia-Pacific 468 573 592 597 514
Latin America 271 280 262 237 227
----------------------------------------------
Total $3,720 $3,999 $3,982 $3,884 $3,534
- -------------------------------------------------------------------------
NET EARNINGS
North America $ 365 $ 286 $ 235 $ 199 $ 198
Europe 97 77 96 102 75
Asia-Pacific 20 58 62 58 43
Latin America 29 33 32 17 17
Corporate(1) (71) (44) (62) (84) (69)
----------------------------------------------
Total $ 440 $ 410 $ 363 $ 292 $ 264
- -------------------------------------------------------------------------
RONA
North America 21.9% 16.5% 13.9% 12.2% 12.0%
Europe 12.4 9.0 11.2 11.9 9.7
Asia-Pacific 3.5 9.2 9.8 8.4 6.8
Latin America 14.2 15.9 15.9 8.7 9.8
Corporate(1) (17.1) (9.2) (11.2) (15.6) (11.0)
---------------------------------------------
Total 12.7% 11.2% 9.9% 8.1% 7.6%
- -------------------------------------------------------------------------
The four geographic regions reflect the company's major marketing
profit centers relative to customer location.
(1) Corporate includes non-operating items such as interest income and expense,
corporate governance costs, corporate exploratory research and, in 1998,
loss on early extinguishment of debt. (See "Management Discussion and
Analysis.")
SUMMARY BY BUSINESS SEGMENT
(Refer to table above)
The company's operations are organized by worldwide business groups. A
description of each business segment's operations is included in Item 1
"Business" of the 1998 Form 10-K.
CHANGE IN FINANCIAL REPORTING STRUCTURE In 1998, the company changed its
financial reporting structure and the related management structure to
better reflect its technical strengths and focus on key markets. Rohm and
Haas now reports by three business segments: Performance Polymers,
consisting of Polymers and Resins (which includes Coatings, Specialty
Polymers and Building Products), Monomers, Formulation Chemicals and
Plastics Additives businesses; Chemical Specialties, consisting of the
Agricultural Chemicals, Ion Exchange, Biocides and Primenes businesses; and
Electronic Materials, consisting of Shipley and Rodel, Inc. (Rodel), a
privately held affiliate and leader in precision polishing technology
serving the semiconductor, memory disk and glass polishing industries. The
1997 and 1996 presentation and analysis of sales and earnings has been
restated to reflect these changes. In the restatement, 1997 and 1996
results of AtoHaas and RohMax are reported under Performance Polymers.
RECENT DEVELOPMENTS On January 23, 1999, the company acquired all of the
outstanding shares of LeaRonal, Inc. (LeaRonal), a maker of specialty
chemicals for the electronics industry. The company added this business to
its Electronic Materials segment in 1999. On January 31, 1999, the company
and Morton International, Inc. (Morton) approved a merger agreement under
which the company will acquire Morton in a cash and stock transaction
valued at $4.9 billion, including the assumption of $268 million of debt.
The transaction adds international leadership positions in adhesives,
specialty coatings, electronic materials and salt. LeaRonal and Morton are
not included in the company's 1998 results. [See below discussion of
"Acquisitions and Divestitures" for more information on these
transactions.]
PERFORMANCE POLYMERS 1998 earnings, excluding non-recurring items, were
$320 million, up 1% from 1997. Sales were down 10% to $2,447 million from
$2,712 million in 1997, largely as a result of the absence of 1997 AtoHaas
sales of $305 million. Volume was flat and sales decreased 4% on a
comparable-business basis. The decrease in sales on flat volume was
primarily a result of unfavorable currencies in Europe and Asia-Pacific and
lower selling prices. Performance Polymers sales in the Asia-Pacific region
were down more than 26% from the prior year while volume decreased 11%.
Earnings increased slightly, excluding non-recurring items, largely as a
result of lower raw material prices and higher volume in North America
and Europe.
Performance Polymers reported 1997 earnings of $317 million, up 16% from
1996. Excluding the effect of the former Petroleum Chemicals business,
which was part of the
unconsolidated RohMax joint venture in 1997, sales were up 3% on an 8%
volume increase. Volume growth was evident in all regions and reflected
strong performances in the paper, adhesives and coatings markets. Monomers
and Formulation Chemicals also showed volume increases. Volume largely
drove the segment's earnings increase. The positive effects, however, were
held back by lower selling prices and weaker currencies, the dollar value
of which declined an average of 9% in Europe and 10% in Japan during the
year. Earnings in the Plastics business also contributed as a result of
improvement in AtoHaas Europe, where modest earnings were reported compared
with significant losses in 1996. Though Plastics' volume increased 4%,
sales decreased 2%, reflecting decreased selling prices and weaker
currencies in Europe. Continuing pricing pressure in most plastics sectors
also dampened Plastics' earnings recovery. In 1997 AtoHaas Europe was hurt
by a $4 million after-tax write-off of start-up expenses for a plant
in Italy.
CHEMICAL SPECIALTIES earnings in 1998 were $87 million, excluding non-
recurring items, up 2% from $85 million in 1997. Sales of $875 million
decreased 1% from 1997 sales of $888 million, in part due to weaker
currencies in Europe and Asia-Pacific and to lower selling prices. Volume
was flat for the segment despite strong mid-year demand in the Agricultural
Chemicals business, which was partially offset by decreased comparative
results for the Ion Exchange Resins business, particularly in Asia and
Eastern Europe. The earnings increase was driven by strength in the
Agricultural Chemicals and Biocides businesses particularly in North
America. Asia volume-driven earnings decreases in the Ion Exchange Resins
business offset most of these increases.
Chemical Specialties reported 1997 earnings of $85 million, down 24% from
1996 earnings of $112 million. Sales decreased 5% on a 2% volume decrease.
The earnings decrease was primarily due to 1997 results in the Agricultural
Chemicals business, where earnings were 33% lower than in 1996. Sales and
volume in this business decreased 2% from 1996, primarily because of
weather-related lower Dithane fungicide shipments in all regions except
Latin America. Sales of other Agricultural Chemical product lines showed
growth. It was this lower sales and volume and weaker currencies in Europe
and Japan that largely drove the earnings decrease for the Chemical
Specialties segment. Volume growth and operating improvements in the Ion
Exchange Resins business helped improve earnings but the comparison to 1996
was hurt by the absence of a $6 million after-tax gain from the sale of land
in Japan in that year. Another factor affecting the comparison to the
prior year was the discontinuation of the Biocides joint venture with Dead
Sea Bromine in 1997, which decreased both net sales and earnings.
ELECTRONIC MATERIALS earnings of $46 million in 1998, excluding non-
recurring items, decreased $6 million, or 12%, from the 1997 period. Sales
and volume were essentially flat. Shipley Company volume increased in all
regions, except Asia-Pacific, which offset the other regions. The effects
of solid growth in North America and the 1998 contribution of Rodel, a
33%-owned affiliate acquired in 1997, were mitigated by lower sales and
earnings in Asia-Pacific.
Nineteen ninety-seven earnings of $52 million in Electronic Materials
increased 33% compared with $39 million in 1996. This earnings increase
largely was a result of volume
in Shipley Company. The company's share of earnings from Rodel, Inc., a
1997 investment, also contributed. Sales increased 11% to $399 million
from $358 million reported in the 1996 period. Volume growth and earnings
were strong in Asia-Pacific and North America, driven largely by positive
results in the microelectronics and printed wiring board businesses.
Demand was strong for both Shipley and Rodel products throughout 1997.
CORPORATE expenses totaled $71 million in 1998, compared with $44 million
in 1997 and $62 million in 1996. After-tax charges of $13 million related
to extraordinary losses on the early extinguishment of debt were included
in 1998 results while 1997 reflects an after-tax gain of $16 million, the
result of remediation settlements with insurance carriers during the
fourth quarter. Interest expense of $34 million in 1998 was down 13% from
1997 interest expense because of 1998 debt retirements. The 1997 interest
expense was flat compared to 1996.
PHYSICAL VOLUME of shipments increased by 1% in 1998
and 6% in 1997:
- -----------------------------------------------------------------
Percent change
BUSINESS GROUP 1998 VS 1997 1997 vs 1996
- -----------------------------------------------------------------
Performance Polymers 1% 6%
Chemical Specialties 0 (2)
Electronic Materials 0 5
- -----------------------------------------------------------------
Worldwide 1% 6%
- -----------------------------------------------------------------
Percent change
CUSTOMER LOCATION 1998 VS 1997 1997 vs 1996
- -----------------------------------------------------------------
North America 0% 5%
Europe 10 8
Asia-Pacific (5) 5
Latin America 2 12
- -----------------------------------------------------------------
Worldwide 1% 6%
- -----------------------------------------------------------------
SUMMARY OF CONSOLIDATED RESULTS
An analysis of gross profit changes is summarized on a basic per-share
basis below.
NET SALES decreased 7% on a 1% volume increase. On a comparable business
basis, sales decreased 3% while volume was flat. In addition to the
divestiture of two businesses, resulting in the exclusion of AtoHaas' sales
from 1998, the remaining 50% of NorsoHaas was acquired and operations in
China were consolidated during the year. The sales decrease on higher
volume is largely a result of weaker currencies, primarily in Asia-Pacific,
and 2% lower selling prices. Volume was strong in Europe and Latin America
while the unfavorable business environment hurt volume in the Asia-Pacific
region. Volume in North America was flat. On a comparable business basis,
Asia-Pacific region sales declined 19% and volume decreased 12%. Sales of
$3,999 million in 1997 were essentially the same as in 1996, the net result
of 6% volume gains, 1% lower selling prices, 9% weaker currencies in
Europe, a 10% weaker Japanese yen and the absence of Petroleum Chemicals
sales, which were part of the unconsolidated RohMax joint venture in 1997.
Volume growth was strong in all regions, with all businesses contributing
except Agricultural Chemicals.
RAW MATERIAL PRICES declined throughout 1998 largely as a result of lower
prices in North America for acetone, methanol, propylene and other monomer
related raw materials, primarily benefiting the Performance Polymers
segment. Raw material prices were stable in 1997. They declined
throughout the first three quarters of 1996, until natural gas and oil
prices increased in the fourth quarter of that year. Prices for raw
materials, including methanol, propylene, acetone and butanol, were down
10%, net, in 1998 compared to decreases of 1% and 7% in 1997 and 1996,
respectively, excluding currency impacts.
GROSS PROFIT of $1,464 million increased 1% from 1997, largely as a result
of 10% lower raw material costs and efficient plant operations. Selling
prices were 2% lower. Currency fluctuations in Europe and Asia-Pacific
were unfavorable. Total gross profit increased to $1,455 million in 1997,
up 4% from 1996. The gross profit margin was 39%, 36% and 35% in 1998,
1997 and 1996, respectively. Gross profit in 1998 increased largely as a
result of lower raw material costs. The gross profit margin increased in
1997 because of higher volume but was negatively affected by 1% lower
selling prices and unfavorable currency impacts.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES for 1998 were
essentially unchanged compared to the 1997 period, reflecting the net
effect of higher research expense and lower selling and administrative
expense due to the absence of AtoHaas costs. SAR expenses in 1997 were up
3% over 1996 due to higher selling expenses, higher bonus expense,
insurance costs and the cost of new product introductions.
INTEREST EXPENSE of $34 million in 1998 decreased 13% from 1997 due to 1998
debt retirements. Interest expense in 1997 was flat compared to 1996.
SHARE OF AFFILIATE NET EARNINGS were $2 million in 1998, compared to
earnings of $11 million in 1997 and losses of $12 million in 1996.
Affiliate earnings decreased in 1998 due to the absence of the affiliate
earnings of RohMax. In 1997, share of affiliate net earnings were a result
of the RohMax joint venture, the contribution of Rodel and improved results
from AtoHaas Europe. During 1996, AtoHaas Europe experienced operating
losses because of weak market conditions characterized by lower volume,
falling selling prices and increasing raw material prices. The 1996 losses
of the AtoHaas Europe business also included $4 million of write-offs and
costs related to the restructuring of its operations.
OTHER INCOME, NET was $110 million, compared to $22 million in 1997 and $4
million in 1996. Income in 1998 reflects the net before-tax gain on second
quarter non-recurring items, including the divestiture of the AtoHaas and
RohMax businesses. The 1997 amount includes $26 million related to
remediation settlements with insurance carriers during the fourth quarter.
In 1996, other income included a gain of $10 million on the sale of land in
Japan and $6 million of royalty income, offset by $8 million of severance
and early retirement costs and $5 million of minority interest expense.
THE EFFECTIVE TAX RATES were 35% in 1998, 33% in 1997 and 32% in 1996. The
1998 increase was largely a result of the tax effect of 1998 non-recurring
items. The 1996 period included a $10 million retroactive tax credit on
sales outside the United States.
ANALYSIS OF CHANGE IN BASIC PER-COMMON-SHARE EARNINGS
CURRENT YEAR RELATIVE TO YEAR EARLIER
- -------------------------------------------------------------------------
$/Common Share
(after tax)
-----------------
1998 1997(1)
- -------------------------------------------------------------------------
GROSS PROFIT
Selling prices $(.22) $(.09)
Raw material prices .38 .03
Physical volume and product mix (.04) .19
Other manufacturing costs(2) .08 .32
Currency effect on gross profit (.17) (.25)
=================
Increase in gross profit .03 .20
- -------------------------------------------------------------------------
OTHER CAUSES
Gain on sale of facilities and investments, net .41 --
Selling, administrative and research expenses(3) (.01) (.07)
Share of affiliate earnings (.05) .12
Asset dispositions and write-downs (.07) --
Extraordinary loss on early extinguishment of debt (.07) --
Certain remediation settlements with
insurance carriers (.09) .09
Retroactive tax credit on sales outside of the U.S. -- (.05)
Reduction in outstanding shares of common stock .13 .12
Other .02 (.06)
=================
Increase from other causes .27 .15
- -------------------------------------------------------------------------
Increase in basic per-common-share earnings $ .30 $ .35
- -------------------------------------------------------------------------
(1) Restated to reflect the 1998 three-for-one stock split.
(2) Includes the favorable impact of higher production rates on unit
production costs.
(3) The amounts shown are on a U.S. dollar basis and include the impact of
currency movements as compared to the prior period.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
CASH FLOW Cash provided by operations for 1998 was $682 million compared to
$791 in 1997. The resulting free cash flow of $328 million in 1998 and
$416 million in 1997 was used to reduce debt, invest in joint ventures and
to fund the company's stock repurchase program. Free cash flow is cash
provided by operating activities less fixed asset spending and dividends.
FINANCING Total borrowings at year-end 1998 were $581 million, down $25
million from the prior year. At the end of 1998, the debt-to-equity ratio,
calculated without the reduction to stockholders' equity for the ESOP
transaction, was 34%, compared with 31% at the end of 1997 and 38% at the
end of 1996. In 1998 the company retired $130 million of high interest
long-term debt through a tender offer. These debt retirements resulted in
an after-tax extraordinary loss of $13 million, or $.07 per share.
ENVIRONMENTAL There is a risk of environmental damage 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
damage. These laws and regulations require the company to make significant
expenditures for remediation, capital improvements and the operation of
environmental protection equipment. 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) Superfund priority list.
The company is also involved in corrective actions at some of its
manufacturing facilities. The company considers a broad range of
information when determining the amount of its remediation accruals,
including available facts about the waste site, existing and proposed
remediation technology and the range of costs of applying those
technologies, prior experience, government proposals for this or similar
sites, the liability of other parties, the ability of other principally
responsible parties to pay costs apportioned to them and current laws and
regulations. These accruals are updated quarterly as additional technical
and legal information becomes available. Major sites for which reserves
have been provided are the non-company-owned Lipari, Woodland and Kramer
sites in New Jersey, and Whitmoyer in Pennsylvania and company-owned sites
in Bristol and Philadelphia, Pennsylvania, and in Houston, Texas. In
addition, the company has provided for future costs at approximately
80 other sites where it has been identified as potentially responsible for
cleanup costs and, in some cases, damages for alleged personal injury or
property damage.
The amount charged to earnings before tax for environmental remediation,
net of insurance recoveries, was $9 million in 1998. In 1997, remediation
related settlements with insurance carriers, a $20 million charge resulting
from an unfavorable arbitration
decision relating to the Woodlands sites, and other waste remediation
expenses resulted in a net gain of $13 million. The 1996 charge, net of
insurance recoveries, was $27 million.
The reserves for remediation were $131 million and $147 million at December
31, 1998 and 1997, respectively, and are recorded as "other liabilities"
(current and long-term). The company is in the midst of lawsuits over
insurance coverage for environmental liabilities. It is the company's
practice to reflect environmental insurance recoveries in results of
operations for the quarter in which the litigation is resolved through
settlement or other appropriate legal process. Resolutions typically
resolve coverage for both past and future environmental spending.
Insurance recoveries receivable, included in accounts receivable, net, were
$2 million at December 31, 1998 and $19 million at December 31, 1997.
The company settled with several of its insurance carriers in January 1999
for approximately $17 million. These settlements will be recognized
in income in 1999.
In addition to accrued environmental liabilities, the company has
reasonably possible loss contingencies related to environmental matters of
approximately $65 million at December 31, 1998 and 1997. Further, the
company has identified other sites, including its larger manufacturing
facilities in the United States, where additional future environmental
remediation may be required, but these loss contingencies are not
reasonably estimable 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 in any given
year because of the company's obligation to record the full projected cost
of a project when such costs are probable and reasonably estimable.
Capital spending for new environmental protection equipment was $17 million
in 1998. Spending for 1999 and 2000 is expected to be approximately $22
million and $15 million, respectively. Capital expenditures in this
category include projects whose primary purposes are pollution control and
safety, as well as environmental aspects of projects in other categories
below which are intended primarily to improve operations or increase plant
efficiency. The company expects future capital spending for environmental
protection equipment to be consistent with prior-year spending patterns.
Capital spending does not include the cost of environmental remediation of
waste disposal sites.
Cash expenditures for waste disposal site remediation were $26 million in
1998, $37 million in 1997 and $58 million in 1996. The expenditures for
remediation are charged against accrued remediation reserves. The cost of
operating and maintaining environmental facilities was $94 million, $95
million and $104 million in 1998, 1997 and 1996, respectively, and was
charged against current-year earnings.
DIVIDENDS Total common stock dividends paid in 1998 were $.70 per share,
compared to $.63 per share in 1997 and $.57 per share in 1996. The
company's common stock dividend payout is targeted at approximately 35% of
trend-line earnings. Common stock dividends have been paid each year since
1927. The common stock dividend payout has increased annually every year
since 1977. Total preferred dividends paid were $2.75 per share in 1998,
1997 and 1996.
ADDITIONS TO LAND, BUILDINGS AND EQUIPMENT Fixed asset additions in 1998
were $229 million, down $25 million from the prior year's spending of
$254 million. The decrease reflects the absence of significant projects
in process during 1997, such as the completion of capacity expansion
in Texas. Improved asset utilization also contributed to the lower
spending. Nineteen ninety-eight spending focused on emulsions capacity in
Europe, ion exchange resin and emulsions capacity in Asia-Pacific and
further investment in the Electronic Materials businesses. The company has
budgeted capital expenditures in 1999 of approximately $225 million.
Spending for environmental protection equipment, which is included in
several of the categories in the table shown below, was $17 million in
1998, $18 million in 1997 and $32 million in 1996.
Expenditures for the past three years, categorized by primary purpose of
project, were:
- ----------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------------------------------------------------------
Environmental, cost savings and infrastructure $133 $137 $167
Capacity additions and new products 60 87 134
Research facilities and equipment 27 18 18
Capitalized interest cost 9 12 15
- ----------------------------------------------------------------------
Total $229 $254 $334
ACQUISITIONS AND DIVESTITURES
On January 31, 1999, the company and Morton approved a merger agreement
under which the company will acquire Morton in a cash and stock transaction
valued at $4.9 billion, including the assumption of $268 million of debt.
The transaction creates a global specialty chemical company with combined
annual revenues of $6.5 billion and will provide the company with
international leadership positions in adhesives, specialty coatings,
electronic materials and salt. On February 5, 1999 the company commenced a
cash tender offer to purchase up to 80,916,766 shares of Morton common
stock for $37.125 per share, representing 67% of the outstanding Morton
shares on January 31, 1999. The tender offer is subject to certain
conditions including, among other things, the tender of at least a majority
of the outstanding shares of Morton on a fully diluted basis, the
expiration or
termination of the applicable waiting period under the Hart-Scott-Rodino
Act, and the receipt of European Union approval. The offer is scheduled to
expire on Friday, March 5, 1999, unless extended. The tender offer is not
conditioned upon obtaining financing. Following the successful completion
of the tender offer, the company intends to acquire the remaining Morton
shares in a second-step merger. In this step, subject to shareholder
approval, each share of Morton will be exchanged for between 1.0887 and
1.3306 of company shares based on the company's stock price for a period of
twenty days prior to closing, or, if fewer than 80,916,766 shares are
purchased in the tender, for a combination of cash and company stock.
On January 23, 1999 the company acquired all of the outstanding shares of
LeaRonal for approximately $460 million. LeaRonal develops and
manufactures specialty chemical processes used in the manufacture of
printed circuit boards, semiconductor packaging and electronic
connector plating, and also provides processes for metal-finishing
applications. LeaRonal reported $242 million in sales and $21 million in
net income for its fiscal year ended February 28, 1998.
The LeaRonal and Morton acquisitions will be financed through a combination
of commercial paper, bank loans and long-term debt and will be accounted
for using the purchase method. Their results are not included in the
company's 1998 results.
The company sold its interest in the AtoHaas and RohMax businesses in June
1998 for cash proceeds of $287 million, resulting in a net after-tax gain of
$76 million, or $.41 per share. Subsequent to the sale of the AtoHaas
joint venture, the buyer asserted a claim against the company in late 1998
related to the value of certain joint venture assets. Because the
investigation and assessment of this claim is not expected to be completed
until the latter part of the first quarter of 1999, the potential amount of
the claim and its impact on results of operations and financial position,
if any, cannot be reasonably estimated at this time.
During 1998 and 1997, the company purchased a 33% interest in Rodel and in
early 1999 purchased an additional 15% interest. The total cost for these
investments was approximately $149 million. Rodel is a privately held,
Delaware-based leader in precision polishing technology serving the
semiconductor, memory disk and glass polishing industries. The investment
is accounted for on the equity method with the company's share of
earnings reported as equity in affiliates. Also in 1998, the company
acquired the remaining 50% interest in NorsoHaas, which was an affiliate
in 1997.
STOCK REPURCHASES For the three years ended December 31, 1998, the company
repurchased more than 38 million shares, or approximately 19% of common
shares outstanding, at a cost of approximately $1 billion. During 1998,
the company repurchased 17,459,435 shares of its common stock at a total
cost of $567 million. Most of the shares were obtained in August 1998
through an accelerated stock repurchase program with a third party. Under
the terms of this purchase, the final cost to the company will reflect the
average share price paid by the third party in the market over an extended
trading period. Through December 31, 1998, the company had repurchased
two-thirds of the 12 million shares of common stock authorized under
the current buyback program and received board approval in October
1998 for another buyback program of an additional 9 million shares. The
company does not intend to buy back a significant number of shares in the near
future. The company purchased 7,653,453 shares in 1997 at a cost of $216
million. There were 167,587,287 and 182,626,947 common shares outstanding at
December 31, 1998 and 1997, respectively.
STOCK SPLIT AND RETIREMENTS In 1998, the board of directors declared a
three-for-one split of the company's common stock. The stock split was
effected in the form of a 200% common stock dividend. The par value of
the common stock remained unchanged at $2.50 per share. Also in 1998,
the company retired 39 million treasury shares. As a result of these
transactions, the company reclassified $296 million from retained earnings
to common stock. This amount represents the total par value of new shares
issued, net of retirements of treasury shares. Amounts per share, numbers
of common shares and capital accounts have been restated to give
retroactive effect to the stock split.
WORKING CAPITAL (the excess of current assets over current liabilities) was
$412 million at year-end 1998, down from $547 million in 1997. Accounts
receivable from customers decreased $30 million, while inventory decreased
$32 million and notes payable increased $75 million. Days sales outstanding
were 63 days, up from 61 days at the end of 1997. Days cost of sales in
ending inventory was 69 days, up from 66 days at the end of 1997. Details
about two major components of working capital at the end of 1998 and 1997
follow:
- ---------------------------------------------------------------
(Millions of dollars) 1998 1997
- ---------------------------------------------------------------
INVENTORIES
Year-end balance $ 427 $ 459
Annual turnover 5.3x 5.5x
CUSTOMER RECEIVABLES
Year-end balance $ 642 $ 672
Annual turnover 5.8x 5.9x
- ---------------------------------------------------------------
LAND, BUILDINGS AND EQUIPMENT, NET Investment in land,
buildings and equipment, net is summarized below.
- ---------------------------------------------------------------
(Millions of dollars) 1998 1997
- ---------------------------------------------------------------
Year-end balance $1,908 $2,008
Annual turnover 2.0x 2.0x
- ---------------------------------------------------------------
Annual turnover figures are calculated by dividing annual sales (for
customer receivables and land, buildings and equipment, net) or cost of
goods sold (for inventories) by the year-end balance. Days sales
outstanding was calculated by dividing ending customer receivables by daily
sales, and days cost of sales in ending inventory was calculated by
dividing ending inventory by daily cost of sales.
ASSET TURNOVER equals sales divided by year-end total assets. Asset
turnover has shown steady improvement, increasing from a low of .87 times
in 1992 to 1.0 in 1998 and 1997.
RETURN ON NET ASSETS (RONA) equals net earnings plus after-tax interest
expense, divided by year-end total assets. RONA was 12.7% in 1998, 11.2%
in 1997 and 9.9% in 1996. The 1998 amount rounds to 11.4% when calculated
without the effects of the year's non-recurring items. The 1997 amount
rounds to 10.8% when calculated without fourth quarter 1997 environmental
insurance recoveries.
RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) is obtained by dividing net
earnings less preferred stock dividends by average year-end common
stockholders' equity. Average year-end common stockholders' equity is
calculated without the reduction for the ESOP transaction. ROE was 25% in
1998, 23% in 1997 and 20% in 1996.
EURO Beginning in 1999 eleven of the fifteen member countries of the
European Union adopted the euro as their common currency after establishing
fixed conversion rates from their existing currencies. The company formed
a multifunctional steering team to evaluate the potential effect of the
euro in key impact areas such as information technology, treasury, supply
chain and accounting. The company's view is that the relevant systems and
processes related to these functions are generally capable of accommodating
a conversion to the euro; therefore, the company does not expect that the
conversion will have a material effect on its financial position or results
of operations.
YEAR 2000 During 1996 management initiated an enterprise-wide program to
prepare the company's computer systems and applications for the year 2000,
and, in 1997, began assessing supply chain and customer implications. All
of the company's centralized computer systems have been inventoried and
assessed to determine their year 2000 readiness. Remediation of all
systems was originally scheduled for completion by year end 1998.
Remediation of most computer applications supporting manufacturing is
complete while remediation of sales and marketing, order processing and
financial systems is expected to be completed by the end of April 1999.
The company is closely tracking the remediation of systems that are not yet
complete and will devote resources, as necessary, to bring them back on
schedule. Testing of all remediated systems is expected to be completed by
June 1999 as originally planned. Assessment and most remediation of key
process control and other plant floor systems at each facility is complete.
Some remaining remediation is scheduled for early 1999. In addition to
these internal systems and
processes, the company has placed a high priority on assessing the
status of its critical suppliers and business partners, such as warehouses,
toll manufacturers, distributors and transportation services.
The company expects all of its internal remediation and testing to be
completed by June 1999; however, despite its best efforts, business may be
interrupted with potentially material impact on its financial position or
results of operations if any of the following occur: external supply of raw
materials or utilities is delayed or unavailable for an extended period;
manufacturing systems fail; or, central corporate computer systems fail.
To limit the effects of these potential failures, the company has completed
corporate contingency planning guidelines and will prepare contingency
plans for potential disruptions of critical systems or processes. Examples
of contingency plans include a "freezing" of modifications to computer
systems, ensuring availability of additional information technology
personnel during the critical time period, backing-up systems at off-site
facilities, making alternate raw material supply arrangements, and
preparing for temporary shut-downs of certain plants and facilities. In
addition, the company has standard operating procedures in place for a safe
and orderly shut-down of systems and facilities should this be necessary.
A significant proportion of the costs associated with the year 2000 effort
represent the redeployment of existing information technology resources.
In addition, consulting and other expenses related to software application
and facilities enhancements necessary to prepare the systems for the year
2000 will be incurred. Approximately half of these costs, which are
expected to total $17 million, have been incurred and charged to expense
through December 31, 1998.
This discussion contains forward-looking statements based, in part, on
assumptions such as the following: that the manufacturers of the company's
computer systems and software have correctly represented the year 2000
status of their products; that the company's suppliers and customers will
meet their stated year 2000 and euro compliance obligations; and that the
company's own investigation, remediation, testing and systems
implementations are successful. The year 2000 and euro discussions and
other forward-looking statements made in this report are based on current
expectations and are subject to the risks and uncertainties discussed here
as well as those detailed in the "Cautionary Statements" section of the
1998 Form 10-K, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Actual results in the future may
differ from those projected.
RECENT ACCOUNTING STANDARDS In 1996, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position 96-1 (SOP 96-1),
"Environmental Remediation Liabilities," which became effective in 1997.
The statement provides authoritative guidance regarding the recognition,
measurement, display and disclosure of environmental remediation
liabilities. The company's adoption of this accounting guidance in 1997
did not have a material impact on the company's financial position or
results of operations.
In 1997, the company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings Per Share," which requires computation
and presentation of basic and dilutive earnings per share. Basic earnings
per share (EPS) is computed by dividing net income available for common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted. For the years presented, the company's basic earnings per
share are equal to earnings per share reported under the previous accounting
standards. Dilutive earnings per share is slightly lower than basic
earnings per share, primarily due to the impact of convertible preferred
stock.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes all changes in equity
during a period from all transactions other than those with shareholders,
including net income, foreign currency related items and unrealized
gain/loss on certain securities. The disclosures prescribed by this
standard were adopted in 1998 and are presented in the Statement of
Consolidated Stockholders' Equity.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" and, in 1998, SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
Both standards establish guidance for disclosure in annual financial
statements. The company's business segment reporting under SFAS No. 131
are consistent with the changes in its financial reporting structure
incorporated in the company's reporting since the first quarter of 1998.
As required, the company adopted the disclosures prescribed by both
statements in its 1998 year-end reporting.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for the
accounting and reporting of derivative and hedging transactions. The
statement amends a number of existing standards and is effective for fiscal
years beginning after June 15, 1999. The company expects to adopt this
standard as required in fiscal year 2000 and, because of continual
business-driven changes to its derivatives and hedging programs, has not
fully assessed its potential impact on its financial position or results
of operations.
Also in 1998, the AICPA issued SOP 98-1, "Accounting for Internally
Developed Software," with required adoption for most companies beginning in
1999. This SOP provides guidelines for the capitalization of certain
internal software development costs. The company adopted this standard in
1998, which resulted in an increase in 1998 before-tax earnings of
approximately $5 million.
QUARTERLY RESULTS OF OPERATIONS
Earnings increased 5% in the first quarter of 1998 to $109 million from
$104 million in the first quarter of 1997. Diluted earnings per common
share were $.58 compared to $.53 in the 1997 period. AtoHaas sales were
excluded from first quarter 1998 results of operations while NorsoHaas and
China results were consolidated. The sale of the interest in AtoHaas, the
purchase of the remaining 50% of NorsoHaas, already 50%-owned, and the
consolidation of China were effective January 1, 1998. On a comparable basis,
volume increased 2%, sales decreased 1% and earnings increased 11%. The
sales decrease on higher volume is primarily a result of weaker European
and Asia-Pacific currencies. Strong European volume and a good performance
in North America helped the company overcome poor business conditions in
the Asia-Pacific region, where volume and sales decreased 4% and 18%,
respectively. Earnings increased as a result of higher overall volume,
lower raw material costs and smooth plant operations. In addition to
higher earnings, the per share increase in the first, and all subsequent
quarters in 1998, reflects the impact of the company's common share
repurchase program.
Earnings increased 45% in the second quarter of 1998 to $170 million
from $117 million in the second quarter of 1997. Diluted earnings per
common share for the quarter were $.91 compared to $.61 in 1997. Included
in the 1998 results is a one-time gain of $48 million, or $.26 per share,
net of non-recurring items. This net gain affected all segments and
regions, except Latin America, and was the net result of the sale of the
company's interest in the AtoHaas and RohMax joint ventures, an early
extinguishment of debt, the write-off of certain intangible assets in
Europe and business realignment costs primarily in Asia. Volume decreased
2% for the quarter and sales decreased 9%. On a comparable-business
basis, volume was flat and sales decreased 4%. In addition to the
divestiture of two businesses, resulting in the exclusion of AtoHaas' sales
from 1998 results, the remaining 50% of NorsoHaas was acquired and
operations in China were consolidated in 1998. The sales decrease on flat
volume was primarily a result of weaker European and Asia-Pacific
currencies and slightly lower selling prices. Volume gains in Europe and
Latin America, on a comparable basis, were overcome by volume losses due to
poor business conditions in the Asia-Pacific region and flat volume in
North America. In the Asia-Pacific region sales declined 16% on a 10%
volume decrease. The company's earnings increased 4%, excluding
non-recurring items, primarily as a result of lower raw material costs and
efficient plant operations. Diluted earnings per common share excluding
non-recurring items was $.65 for the second quarter, up 7% versus 1997.
Earnings for the third quarter of 1998 decreased 5% to $86 million from $91
million in the third quarter of 1997. Diluted earnings per common share
for the quarter were $.48 unchanged from the 1997 quarter. Included in the
1998 results is an extraordinary after-tax charge of $3 million, or $.02
per share, related to an early extinguishment of debt. Volume increased 3%
for the quarter and sales decreased 7%. On a comparable-business basis,
volume increased 1% and sales decreased 3%, primarily as a result of lower
selling prices and currency impacts. [See above paragraph for changes
impacting the comparable-business basis results.] Volume gains in North
America and in Latin America, on a
comparable basis, carried the quarter to a 1% increase, despite volume
losses due to poor business conditions in the Asia-Pacific region and flat
volume in Europe. Asia-Pacific region sales declined 24% on a 14% volume
decrease. The company's earnings decreased 2%, excluding the extraordinary
item, as a result of lower selling prices, currency impacts and the absence
of affiliate earnings from businesses divested in 1998, some of which was
mitigated by lower raw material costs. Diluted earnings per common share
excluding the non-recurring extraordinary item were $.50 for the third
quarter, up 4% versus 1997.
Earnings in the fourth quarter of 1998 were $75 million, 23% lower than
last year's results. Diluted earnings per common share were $.44, compared
to $.52 in 1997. Fourth quarter 1997 earnings included a gain of $16
million after tax, or $.09 per common share, the result of remediation
settlements with insurance carriers. Volume for the quarter was up 1%
compared to the 1997 period. Sales decreased 7% to $884 million, due
largely to the absence of AtoHaas sales in the 1998 period. On a
comparable-business basis, volume decreased 1% while sales decreased almost
4%. The volume decline affected all businesses. The earnings impact of
lower raw material costs and smooth plant operations were offset by
slightly lower selling prices in the quarter and by the unfavorable
Asian business environment.
QUARTERLY STOCK PRICES
(dollars)
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
HIGH 24 15/16 23 11/16 22 1/4 27 1/2
LOW 21 5/16 20 9/16 18 5/16 21 13/16
CLOSE 22 3/16 20 15/16 21 13/16 27 3/16
1997
- ----
HIGH 31 5/8 30 7/16 33 3/4 32 1/8
LOW 24 3/4 23 9/16 29 3/8 26 7/16
CLOSE 24 15/16 30 32 31 15/16
1998
- ----
HIGH 35 1/16 38 11/16 35 5/8 38 7/8
LOW 26 15/16 32 7/16 26 26
CLOSE 34 7/16 34 5/8 27 13/16 30 1/8
1998 QUARTERLY RESULTS (Unaudited)
- ----------------------------------------------------------------------------------------
1st 2nd 3rd 4th YEAR
(Millions of dollars) Quarter Quarter Quarter Quarter 1998
- ----------------------------------------------------------------------------------------
Net sales $ 937 $ 990 $ 909 $ 884 $3,720
Gross profit 373 406 345 340 1,464
Earnings before extraordinary item 109 180 89 75 453
Net earnings 109 170 86 75 440
- ----------------------------------------------------------------------------------------
Earnings per common share before
extraordinary item, in dollars
-- Basic $ .59 $ .98 $ .51 $ .44 $ 2.55
-- Diluted .58 .96 .50 .44 2.52
Net earnings per common share, in dollars
-- Basic $ .59 $ .93 $ .49 $ .44 $ 2.47
-- Diluted .58 .91 .48 .44 2.45
Cash dividends per common share, in dollars $ .17 $ .17 $ .18 $ .18 $ .70
- ----------------------------------------------------------------------------------------
Percentage change from prior year
Net sales (5)% (9)% (7)% (7)% (7)%
Physical volume 3 (2) 3 1 1
- ----------------------------------------------------------------------------------------
Earnings before extraordinary item 5 % 54 % (2)% (23)% 10 %
- ----------------------------------------------------------------------------------------
Diluted net earnings per common share 9 % 49 % 0 % (15)% 15 %
- ----------------------------------------------------------------------------------------
1997 QUARTERLY RESULTS (Unaudited)
- ----------------------------------------------------------------------------------------
1st 2nd 3rd 4th Year
(Millions of dollars) Quarter Quarter Quarter Quarter 1997
- ----------------------------------------------------------------------------------------
Net sales $ 986 $1,089 $ 974 $ 950 $3,999
Gross profit 361 401 342 351 1,455
Net earnings 104 117 91 98 410
- ----------------------------------------------------------------------------------------
Net earnings per common share,* in dollars
-- Basic $ .54 $ .62 $ .48 $ .53 $ 2.17
-- Diluted .53 .61 .48 .52 2.13
Cash dividends per common share,* in dollars $ .15 $ .15 $ .16 $ .17 $ .63
- ----------------------------------------------------------------------------------------
Percentage change from prior year
Net sales (1)% 3 % 1 % (2)% 0 %
Physical volume 7 10 5 0 6
- ----------------------------------------------------------------------------------------
Net earnings 4 % 16 % 5 % 31 % 13 %
- ----------------------------------------------------------------------------------------
Diluted net earnings per common share 10 % 24 % 12 % 37 % 19 %
- ----------------------------------------------------------------------------------------
*Restated to reflect the 1998 three-for-one stock split.
1996 QUARTERLY RESULTS (Unaudited)
- ----------------------------------------------------------------------------------------
1st 2nd 3rd 4th Year
(Millions of dollars) Quarter Quarter Quarter Quarter 1996
- ----------------------------------------------------------------------------------------
Net sales $ 994 $1,054 $ 969 $ 965 $3,982
Gross profit 363 363 347 322 1,395
Net earnings 100 101 87 75 363
- ----------------------------------------------------------------------------------------
Net earnings per common share,* in dollars
-- Basic $ .49 $ .50 $ .44 $ .39 $ 1.82
-- Diluted .48 .49 .43 .38 1.79
Cash dividends per common share,* in dollars $ .14 $ .14 $ .14 $ .15 $ .57
- ----------------------------------------------------------------------------------------
Percentage change from prior year
Net sales 1 % 1 % 3 % 5 % 3 %
Physical volume (3) 5 8 14 6
- ----------------------------------------------------------------------------------------
Net earnings 27 % 16 % 47 % 12 % 24 %
- ----------------------------------------------------------------------------------------
Diluted net earnings per common share 26 % 17 % 54 % 19 % 28 %
- ----------------------------------------------------------------------------------------
*Restated to reflect the 1998 three-for-one stock split.
ITEM 7A. MARKET RISK DISCUSSION
The company is exposed to market risk from changes in foreign currency
exchange rates, interest rates and commodity prices since it denominates
its business transactions in a variety of foreign currencies, funds its
operations through long- and short-term borrowings, and purchases raw
materials at market prices. As a result, future earnings, cash flows and
fair values of assets and liabilities are subject to uncertainty. The
company's operating and financing plans include actions to reduce this
uncertainty including, but not limited to, the use of derivative
instruments.
The company has established policies governing its use of derivative
instruments and does not use derivative instruments for trading
purposes. The company only enters into derivative contracts based on
economic analysis of underlying exposures, anticipating that adverse
impacts on future earnings, cash flows and fair values due to fluctuations
in foreign currency exchange rates, interest rates and commodity prices
will be offset by the proceeds from and changes in fair value of the
derivative instruments. The company does not hedge its exposure to market
risk in a manner that completely eliminates the effects of changing market
conditions on earnings, cash flows and fair values.
In evaluating the effects of changes in foreign currency exchange rates,
interest rates and commodity prices on the company's business operations,
the risk management system uses sensitivity analysis as a primary
analytical technique. The analysis assumes simultaneous shifts in those
rates and quantifies the impact of such shifts on the company's earnings,
cash flows, and fair values of assets and liabilities during a one-year
period. The range of changes used for the purpose of this analysis
reflects the company's view of changes that are reasonably possible over a
one-year period. Fair values are the present value of projected future
cash flows based on market rates and prices chosen.
FOREIGN EXCHANGE RATE RISK Short-term exposures to changing foreign
currency exchange rates are primarily due to operating cash flows
denominated in foreign currencies. The company covers known and
anticipated operating exposures by using foreign currency exchange option,
forward and swap contracts. The company's most significant foreign
currency exposures relate to Western European countries (primarily Germany,
France, Italy, the United Kingdom, Sweden and Spain), as well as Brazil,
Mexico, Canada, Japan, and Australia. The company has evaluated the
effects of the introduction of the euro on its business operations and
has included the euro in its operating plans and foreign currency risk
management process to minimize any adverse impact.
The company conducted a sensitivity analysis on the fair value of its
foreign currency hedge portfolio assuming an instantaneous 10% change in
foreign currency exchange rates from their levels as of December 31, 1998,
with all other variables held constant. A 10% appreciation and
depreciation of the U.S. dollar against foreign currencies would result in
an increase of $15 million and a decrease of $5 million, respectively, in
the fair value of foreign currency exchange hedging contracts. The
sensitivity in fair value of the foreign
currency hedge portfolio represents changes in fair values estimated
based on market conditions as of December 31, 1998, without reflecting the
effects of underlying anticipated transactions. When those anticipated
transactions are realized, actual effects of changing foreign currency
exchange rates could have a material impact on earnings and cash flows in
future periods.
Long-term exposures to foreign currency exchange rate risk are managed
primarily through operational activities. The company manufactures its
products in a number of locations around the world; hence, has a cost base
in a variety of European, Asian and Latin American currencies. This
diverse base of local currency costs serves to partially counterbalance the
impact of changing foreign currency exchange rates on earnings, cash flows
and fair values of assets and liabilities.
INTEREST RATE RISK The company is exposed to changes in interest rates
primarily due to its financing, investing and cash management activities,
which include long- and short-term debt to maintain liquidity and fund its
business operations. The company's current strategic policy is to maintain
from 20% to 40% of floating rate debt, with a long-term average of 30%. An
80 basis point move in interest rates would affect the value of the
company's floating and fixed rate instruments, including short- and
long-term debt and derivative instruments, but would not have a material
impact on earnings per share or the company's financial position. Eighty
basis points approximate 10% of the company's weighted average rate on its
worldwide debt.
COMMODITY PRICE RISK The company purchases certain raw materials such as
natural gas, propylene, acetone, and butanol under short- and long-term
supply contracts. The purchase prices are generally determined based on
prevailing market conditions. Changing raw material prices have
historically had material impacts on the company's earnings and cash flows,
and will likely continue to have significant impacts on earnings and cash
flows in future periods. The company uses commodity derivative instruments
to modify some of the commodity price risks. Assuming a 10% change in the
underlying commodity price, the potential change in the fair value of
commodity derivative contracts held at December 31, 1998, would not be
material when compared with the company's earnings and financial position.
FORWARD-LOOKING STATEMENTS This market risk discussion and the estimated
amounts presented are forward-looking statements that assume certain market
conditions. This assessment does not include the potential effects on
interest rates or debt policy that may be adopted following the 1999
business acquisitions discussed above under "Acquisitions and
Divestitures." Actual results in the future may differ materially from
these projected results due to such acquisitions and any unforeseen
developments in relevant financial markets, including Asia and Latin
America. The methods used above to assess risk should not be considered
projections of expected future events or results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are included herein:
1) Summary of Significant Accounting Policies
2) Statements of Consolidated Earnings for years ended December 31, 1998,
1997 and 1996
3) Statements of Consolidated Cash Flows for years ended December 31, 1998,
1997 and 1996
4) Consolidated Balance Sheets as of December 31, 1998 and 1997
5) Statements of Consolidated Stockholders' Equity for years ended December
31, 1998, 1997 and 1996
6) Notes to Consolidated Financial Statements
7) Management's Report on Financial Statements
8) Report of Independent Accountants
9) Eleven-Year Summary of Selected Financial Data
Supplementary selected quarterly financial data is incorporated herein
under Item 7 (see "Quarterly Results of Operations").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of the company and its subsidiaries. Investments in
unconsolidated subsidiaries, which are involved mainly in selling
operations outside of the United States, are carried at cost and are
insignificant in total. Investments in affiliates (20-50%-owned) are
recorded at cost plus equity in their undistributed earnings, less
dividends. Intercompany accounts, transactions and unrealized profits and
losses on transactions within the consolidated group and with significant
affiliates are eliminated in consolidation, as appropriate.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
TRANSLATION PROCEDURES Foreign currency accounts are translated into
U.S. dollars under the provisions of SFAS No. 52, with the U.S. dollar as
the functional currency for the majority of international operations.
Under this standard: (1) land, buildings and equipment and related
depreciation, inventories, goodwill and intangibles and related
amortization and minority interest are translated at historical rates of
exchange; (2) all other assets and liabilities are translated at current
rates of exchange, and (3) monthly revenues, costs and expenses other than
depreciation, amortization of goodwill and intangibles and cost of goods
sold are translated at current rates of exchange. Translation gains and
losses of those operations that use local currencies as the functional
currency are included as a separate component of other comprehensive
income. Foreign exchange adjustments, including recognition of open
foreign exchange contracts that are not intended to hedge an identifiable
foreign currency commitment, are charged or credited to income based on
current exchange rates.
ENVIRONMENTAL ACCOUNTING Accruals for environmental remediation are
recorded when it is probable a liability has been incurred and costs are
reasonably estimable. The estimated liabilities are recorded at
undiscounted amounts. The cost of operating and maintaining environmental
control facilities are charged to expense. Expenditures which mitigate or
prevent contamination from future operations are capitalized and
depreciated under normal depreciation policies. It is the company's
practice to reflect environmental insurance recoveries in the results of
operations for the quarter in which litigation is resolved through
settlement or other appropriate legal process.
EARNINGS PER SHARE Basic earnings per share is calculated by dividing
net earnings applicable to common shareholders by the average number of
shares outstanding for the period. Diluted earnings per share is
calculated by adding the earnings impact of the conversion of preferred
stock to net earnings applicable to common shareholders and dividing this
amount by the average number of shares outstanding for the period adjusted
for the assumed preferred stock conversion, and for the dilutive effect of
an assumed exercise of all options outstanding at the end of the period.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, time
deposits and readily marketable securities with original maturities of
three months or less.
INVENTORIES Inventories are stated at the lower of cost or market.
Cost is primarily determined under the last-in, first-out (LIFO) method.
LAND, BUILDINGS AND EQUIPMENT AND RELATED DEPRECIATION Land, buildings
and equipment are carried at cost. Assets are depreciated over their
estimated useful lives on the straight-line and accelerated methods.
Maintenance and repairs are charged to earnings; replacements and
betterments are capitalized. The cost and related accumulated depreciation
of buildings and equipment are removed from the accounts upon retirement or
other disposition; any resulting gain or loss is reflected in earnings.
INTANGIBLE ASSETS The company amortizes identifiable intangible assets
such as patents and trademarks on the straight-line basis over their
estimated useful lives. Goodwill is amortized on the straight-line basis
over periods not greater than 40 years. Intangible assets are classified
in the accompanying consolidated balance sheets as "Other Assets, Net."
REVENUE RECOGNITION Revenues from product sales, net of applicable
allowances, are generally recognized upon shipment of product. Payments
received in advance of revenue recognition are recorded as deferred
revenue.
INCOME TAXES The company uses the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the estimated future consequences of
temporary differences between the financial statement carrying value of
assets and liabilities and their values as measured by tax laws.
STOCK COMPENSATION The company applies the intrinsic value method in
accordance with APB Opinion No. 25 and related Interpretations in
accounting for stock compensation plans. Under this method, no
compensation expense is recognized for fixed stock option plans.
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED EARNINGS
Years ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------
(Millions of dollars,
except per-share amounts) 1998 1997 1996
----------------------------------------------------------------------
CURRENT EARNINGS
----------------------------------------------------------------------
Net sales $3,720 $3,999 $3,982
Cost of goods sold 2,256 2,544 2,587
=======================
Gross profit 1,464 1,455 1,395
Selling and administrative expense 635 637 631
Research and development expense 207 201 187
Interest expense 34 39 39
Share of affiliate net earnings (losses) 2 11 (12)
NOTE 3 Other income, net (110) (22) (4)
=======================
Earnings before income taxes and
extraordinary item 700 611 530
NOTE 5 Income taxes 247 201 167
EARNINGS BEFORE EXTRAORDINARY ITEM $ 453 $ 410 $ 363
=======================
NOTE 15 Extraordinary loss on early extinguishment
of debt (net of income tax benefit of $6) 13 -- --
NET EARNINGS $ 440 $ 410 $ 363
=======================
NOTE 18 Less preferred stock dividends 6 7 7
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 434 $ 403 $ 356
=======================
EARNINGS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM:
-- BASIC $ 2.55 $ 2.17 $ 1.82
-- DILUTED 2.52 2.13 1.79
EARNINGS PER COMMON SHARE:
-- BASIC $ 2.47 $ 2.17 $ 1.82
-- DILUTED 2.45 2.13 1.79
----------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN MILLIONS)
-- BASIC 175.6 185.8 196.1
-- DILUTED 179.7 192.4 202.8
======================================================================
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
(Millions of dollars) 1998 1997* 1996*
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 440 $ 410 $ 363
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 276 279 262
Gain on sale of facilities and investments (76) (4) (10)
Extraordinary loss on early extinguishment of
debt, net of tax 13 -- --
Deferred income taxes 36 (11) 37
Accounts receivable (1) 88 (37)
Inventories 1 24 11
Accounts payable and accrued liabilities (15) -- (7)
Federal, foreign and other income taxes payable (85) 12 (1)
Other, net 93 (7) 88
-----------------------
Net cash provided by operating activities 682 791 706
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of facilities and
investments, net of cash sold 287 10 11
Additions to land, buildings and equipment (229) (254) (334)
Investments in joint ventures, affiliates
and subsidiaries, net of cash acquired (21) (80) (7)
-----------------------
Net cash provided (used) by investing activities 37 (324) (330)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchases of treasury shares (567) (216) (302)
Proceeds from issuance of long-term debt 44 16 2
Repayments of long-term debt (205) (44) (52)
Net change in short-term borrowings 108 (73) 68
Payment of dividends (125) (121) (116)
Other, net 2 -- (8)
-----------------------
Net cash used by financing activities (743) (438) (408)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (24) $ 29 $ (32)
===============================================================================
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
*Restated to conform to current year presentation.
Rohm and Haas Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
----------------------------------------------------------------------
(Millions of dollars) 1998 1997
----------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 16 $ 40
NOTE 9 Accounts receivable, net 711 755
NOTE 10 Inventories 427 459
NOTE 11 Prepaid expenses and other assets 133 143
---------------------
Total current assets 1,287 1,397
----------------------------------------------------------------------
NOTE 2 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
SUBSIDIARIES AND AFFILIATES 142 197
NOTE 12 LAND, BUILDINGS AND EQUIPMENT, NET 1,908 2,008
NOTE 13 OTHER ASSETS, NET 311 298
---------------------
$3,648 $3,900
----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------
CURRENT LIABILITIES
NOTE 14 Notes payable $ 172 $ 97
NOTE 16 Accounts payable and accrued liabilities 653 669
Federal, foreign and other income taxes payable 50 84
---------------------
Total current liabilities 875 850
----------------------------------------------------------------------
NOTE 15 LONG-TERM DEBT 409 509
NOTE 5 DEFERRED INCOME TAXES 168 126
NOTE 8 EMPLOYEE BENEFITS PAYABLE 432 410
NOTE 17 OTHER LIABILITIES 184 130
MINORITY INTEREST 19 78
NOTE 21 COMMITMENTS AND CONTINGENCIES
----------------------------------------------------------------------
NOTE 18 STOCKHOLDERS' EQUITY
$2.75 cumulative convertible preferred stock;
authorized -- 2,846,061 shares; issued -- 1998:
1,457,956 shares; 1997: 2,522,926 shares 73 126
Common stock; par value -- $2.50; authorized --
200,000,000 shares; issued -- 196,957,140 shares 492 590
Additional paid-in capital 139 135
Retained earnings 1,284 1,932
---------------------
1,988 2,783
Less: Treasury stock (1998 -- 29,369,853 shares;
1997 -- 53,330,193 shares) 286 820
Less: ESOP shares (1998 -- 13,545,000;
1997 -- 14,175,000) 132 138
Accumulated other comprehensive income (9) (28)
---------------------
Total stockholders' equity 1,561 1,797
----------------------------------------------------------------------
$3,648 $3,900
======================================================================
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
----------------------------------------------------------------------
NOTE 18 PREFERRED STOCK
----------------------------------------------------------------------
Balance, beginning of year $ 126 $ 131 $ 133
Redemptions and conversion of shares
to common stock (53) (5) (2)
-----------------------
Balance, end of year $ 73 $ 126 $ 131
-----------------------
COMMON STOCK
----------------------------------------------------------------------
Balance, beginning of year $ 590 $ 590 $ 590
Retirements of treasury stock (98) -- --
-----------------------
Balance, end of year $ 492 $ 590 $ 590
-----------------------
ADDITIONAL PAID-IN CAPITAL
----------------------------------------------------------------------
Balance, beginning of year $ 135 $ 143 $ 150
Shares issued to employees under bonus plan,
net of preferred conversions 4 (8) (7)
-----------------------
Balance, end of year $ 139 $ 135 $ 143
-----------------------
RETAINED EARNINGS
----------------------------------------------------------------------
Balance, beginning of year $1,932 $1,643 $1,396
Net earnings 440 410 363
Common stock dividends paid ($.70, $.63
and $.57 per share in 1998, 1997 and
1996, respectively), net of tax benefit
of $4 million in 1998, 1997 and 1996
related to the ESOP (119) (114) (109)
Retirements of treasury stock (963) -- --
Preferred stock dividends ($2.75 per share
in 1998, 1997 and 1996) (6) (7) (7)
-----------------------
Balance, end of year $1,284 $1,932 $1,643
-----------------------
NOTE 18 TREASURY STOCK, AT COST
----------------------------------------------------------------------
Balance, beginning of year $ 820 $ 629 $ 344
Shares issued to employees under bonus plan (17) (15) (16)
Purchases 567 216 302
Retirements (1,061) -- --
Shares issued for conversion of preferred
stock (23) (10) (1)
-----------------------
Balance, end of year $ 286 $ 820 $ 629
-----------------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF TAX
----------------------------------------------------------------------
Balance, beginning of year $ (28) $ (5) $ 7
Foreign currency translation adjustments 27 (26) (12)
Minimum pension liability adjustment (8) 3 --
-----------------------
Balance, end of year $ (9) $ (28) $ (5)
======================================================================
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
NOTE 1: ACQUISITIONS AND DISPOSITIONS OF ASSETS
On January 31, 1999, the company and Morton approved a merger agreement
under which the company will acquire Morton in a cash and stock transaction
valued at $4.9 billion, including the assumption of $268 million of debt.
On February 5, 1999, the company commenced a cash tender offer to purchase
up to 80,916,766 shares of Morton common stock for $37.125 per share,
representing 67% of the outstanding Morton shares on January 31, 1999. The
tender offer is subject to certain conditions including, among other
things, the tender of at least a majority of the outstanding shares of
Morton on a fully diluted basis, the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Act, and the receipt
of European Union approval. The offer is scheduled to expire on Friday,
March 5, 1999, unless extended. The tender offer is not conditioned upon
obtaining financing. Following the successful completion of the tender
offer, the company intends to acquire the remaining Morton shares in a
second-step merger. In this step, subject to shareholder approval, each
share of Morton will be exchanged for between 1.0887 and 1.3306 of company
shares based on the company's stock price for a period of twenty days prior
to closing, or, if fewer than 80,916,766 shares are purchased in the
tender, for a combination of cash and company stock.
On January 23, 1999, the company acquired all of the outstanding shares of
LeaRonal for approximately $460 million. LeaRonal develops and
manufactures specialty chemical processes used in the manufacture of
printed circuit boards, semiconductor packaging and electronic connector
plating and also provides processes for metal-finishing applications.
LeaRonal reported $242 million in sales and $21 million in net income for
their fiscal year ended February 28, 1998.
The LeaRonal and Morton acquisitions will be financed through a combination
of commercial paper, bank loans and long-term debt and will be accounted
for using the purchase method. Their results are not included in the
company's 1998 results.
The company sold its interest in the AtoHaas and RohMax businesses in June
1998 for cash proceeds of $287 million, resulting in a net after-tax gain of
$76 million, or $.41 per share. Subsequent to the sale of the AtoHaas
joint venture, the buyer asserted a claim against the company in late 1998
related to the value of certain joint venture assets. Because the
investigation and assessment of this claim is not expected to be completed
until the latter part of the first quarter of 1999, the potential amount of
the claim and its impact on results of operations and financial position,
if any, cannot be reasonably estimated at this time.
During 1998 and 1997, the company purchased a 33% interest in Rodel and in
early 1999 purchased an additional 15% interest. The total cost for these
investments was approximately $149 million. Rodel is a privately held,
Delaware-based leader in precision polishing technology serving the
semiconductor, memory disk and glass polishing industries. The investment
is accounted for on the equity method with the company's share of
earnings reported as equity in affiliates. Also in 1998, the company
acquired the remaining 50% interest in NorsoHaas, an affiliate during 1997.
NOTE 2: INVESTMENTS
The company's investments in its affiliates (20-50%-owned) totaled $118
million and $150 million at December 31, 1998, and 1997, respectively. The
decrease from 1997 relates primarily to the divestiture of the AtoHaas and
RohMax joint ventures offset by the company's additional 7% investment in
Rodel. Primarily as a result of the investment in Rodel the company's
total investments in affiliates exceed the equity in the underlying net
assets by approximately $64 million and $41 million at December 31, 1998
and 1997, respectively.
NOTE 3: OTHER INCOME, NET
- ------------------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------
Gain on sale of facilities and investments $(131) $ -- $ --
Interest income (13) (6) (7)
Royalty income, net (6) (9) (6)
Foreign exchange losses (gains), net 13 (3) (4)
Minority interest 2 5 5
Provision for write-down of assets
and restructuring charges net of
gains on asset dispositions 11 (2) (10)
Amortization of intangibles and purchased
option premiums 5 6 10
Voluntary early retirement incentives,
severance, litigation settlements and
certain waste disposal site cleanup costs 8 9 8
Environmental insurance recoveries -- (26) --
Other, net 1 4 --
=============================
Total $(110) $ (22) $ (4)
- ------------------------------------------------------------------------------
NOTE 4: FINANCIAL INSTRUMENTS
The company uses derivative financial instruments to reduce the impact of
changes in foreign exchange rates, interest rates and commodity raw
material prices on its earnings, cash flows and fair values of assets and
liabilities. The company enters into derivative financial contracts based
on analysis of specific and known economic exposures and by policy
prohibits holding or issuing derivative financial instruments for trading
purposes. Credit risk associated with non-performance by counterparties is
mitigated by using major financial institutions with high credit ratings.
The company also limits the amount of derivative contracts it enters into
with each counterparty.
The company uses primarily purchased foreign exchange option contracts to
hedge anticipated sales in foreign currencies by foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of
the option. Gains and losses on purchased option contracts are deferred and
recorded in the period in which the underlying sales transactions are
recognized, except for the contracts to hedge anticipated sales by
subsidiaries that use local currency as their functional currency. These
contracts, which amounted to approximately 5% and 32% of the total notional
amount outstanding at December 31, 1998 and 1997, respectively, are marked
to market at each balance sheet date.
The notional amounts of foreign exchange option contracts totaled $326 and
$118 million at December 31, 1998, and 1997, respectively. The table below
summarizes by currency the notional value of foreign exchange option
contracts in U.S. dollars:
(in Millions) 1998 1997
- ----------------------------------------------------------------
German mark $97 $40
Italian lira 49 23
British pound 38 --
Swedish krona 36 2
Canadian dollar 33 --
Australian dollar 31 10
Japanese yen 16 38
Spanish peseta 15 --
New Zealand dollar 11 5
- ----------------------------------------------------------------
The contracts outstanding at each balance sheet date have maturities of
less than eighteen months. At December 31, 1998 and 1997, net deferred
unrealized gains were $2 million and $4 million, respectively.
The company also uses forward exchange contracts to reduce the exchange
rate risk of specific foreign currency transactions. These contracts
require the exchange of a foreign currency for U.S. dollars at a fixed rate
at a future date. The maturities are generally less than fifteen months.
The carrying amounts of these contracts are adjusted to their market value
at each balance sheet date and recorded in other income and expenses. At
December 31, 1998, the open foreign exchange forward contracts totaled $70
million in notional amounts, of which
$55 million is to hedge the intercompany loans denominated in German
marks of $14 million and Italian lira of $41 million. Fifteen million
dollars are to reduce operating exposures in Japanese yen. At December 31,
1997, one Japanese yen forward contract, which matured in February 1998, was
outstanding with a notional value of $5 million. Net unrealized losses at
December 31, 1998, were $1 million and gains at December 31, 1997, were
not material.
Currency swap agreements are used to manage short-term exposure positions
with various foreign currencies. Maturities generally do not exceed thirty
days. The carrying amounts of these swap agreements are adjusted to their
market value at each balance sheet date and recorded in other income and
expense. At December 31, 1998, the open swap agreements totaled $26
million in notional amounts, of which $20 million is to exchange the U.S.
dollar for British pounds while $6 million is to exchange the U.S. dollar
for German marks. The unrealized losses on the currency swap agreements
were not material at December 31, 1998.
At both December 31, 1998 and 1997, the company was party to a written
interest rate option contract with a notional amount of $25 million to
monetize the call provision on the company's 9.375% debentures due 2019.
The counterparty paid the company a premium of $5 million for the right to
receive 9.375% fixed rate payments beginning 1999 through 2002. In return,
the counterparty will pay the company variable interest payments based on
the six-month LIBOR. The written option has been marked to market at each
balance sheet date.
At December 31, 1997, the company held an interest rate floor expiring in
1999 to hedge $50 million of its fixed-rate debt. The floor rate under
this contract was 6%. The premium paid for the option was amortized to
interest expense over the life of the option. This contract was closed out
during 1998 at an immaterial gain.
The company uses commodity swap agreements for hedging purposes to reduce
the effects of changing raw material prices. Gains and losses on the swap
agreements are deferred until settlement and recorded as a component of
underlying inventory costs when settled. The notional value of commodity
swap agreements totaled $5 million and $9 million at December 31, 1998 and
1997, respectively. The company recorded immaterial net losses in 1998 and
net gains of $1 million in 1997.
The fair value of financial instruments was estimated based on the
following methods and assumptions:
Cash and cash equivalents, accounts receivable, accounts payable and
notes payable -- the carrying amount approximates fair value due to
the short maturity of these instruments.
Long-term debt -- the fair value is estimated based on quoted market
prices for the same or similar issues or the current rates offered to
the company or its subsidiaries for debt with the same or similar
remaining maturities and terms.
Interest rate option contracts -- the fair value is estimated based on
quoted market prices of the same or similar issues available.
Foreign currency option contracts -- the fair value is estimated based
on the amount the company would receive or pay to terminate the
contracts.
Foreign currency forward and swap agreements -- the carrying value
approximates fair value because these contracts are adjusted to their
market value at the balance sheet date.
Commodity swap agreements -- the fair value is estimated based on the
amount the company would receive or pay to terminate the contracts.
The carrying amounts and fair values of material financial instruments at
December 31, 1998 and 1997, are as follows:
- -------------------------------------------------------------------------
1998 1997
------------------ -------------------
CARRYING FAIR Carrying Fair
(Millions of dollars) AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------
Asset (Liability)
Long-term debt $(409) $(464) $(509) $(578)
Written interest rate options (10) (10) (8) (8)
Foreign currency options 4 7 5 8
Foreign exchange forward
contracts (1) (1) -- --
- -------------------------------------------------------------------------
NOTE 5: INCOME TAXES
Earnings before income taxes earned within or outside the United States are
shown below:
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997* 1996
- ----------------------------------------------------------------
United States
Parent and subsidiaries $559 $446 $371
Affiliates 1 7 --
Foreign
Subsidiaries 120 154 171
Affiliates 1 4 (12)
-----------------------
Earnings before income taxes $681 $611 $530
- ----------------------------------------------------------------
*Restated to conform to current year presentation.
Earnings before income taxes in 1998 include $19 million related to an
extraordinary loss on early extinguishment of debt.
The provision for income taxes is composed of:
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
- ----------------------------------------------------------------
Taxes on U.S. earnings
Federal
Current $142 $134 $ 56
Deferred 40 7 58
-----------------------
182 141 114
-----------------------
State and other
Current 8 6 2
-----------------------
Total taxes on U.S. earnings 190 147 116
- ----------------------------------------------------------------
Taxes on foreign earnings
Current 68 77 69
Deferred (17) (23) (18)
-----------------------
Total taxes on foreign earnings 51 54 51
-----------------------
Total income taxes $241 $201 $167
- ----------------------------------------------------------------
Income taxes in 1998 include a $6 million tax benefit resulting from an
extraordinary loss on early extinguishment of debt.
Cash payments of income taxes were $237 million, $181 million and $120
million in 1998, 1997 and 1996, respectively.
Deferred income taxes reflect temporary differences between the valuation
of assets and liabilities for financial and tax reporting. Details at
December 31, 1998 and 1997, were:
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997*
- ----------------------------------------------------------------
Deferred tax assets related to:
Compensation and benefit programs $213 $203
Accruals for waste disposal site remediation 47 54
Inventories 29 33
All other 52 66
Valuation allowance (3) (4)
===============
Total deferred tax assets $338 $352
===============
Deferred tax liabilities related to:
Tax depreciation in excess of book
depreciation $300 $312
Pension 80 69
All other 23 8
===============
Total deferred tax liabilities $403 $389
===============
Net deferred tax liability $ 65 $ 37
- ----------------------------------------------------------------
*Restated to conform to current year presentation.
Deferred taxes, which are classified into a net current and non-current
balance by tax jurisdiction, are presented in the balance sheet as follows:
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Prepaid expenses and other assets $ 94 $ 87
Other assets, net 10 3
Accounts payable and accrued liabilities 1 1
Non-current deferred income tax liabilities 168 126
===============
Net deferred tax liability $ 65 $ 37
- ----------------------------------------------------------------
The valuation allowance was reduced by $1 million in 1998 and 1997
due to usage of tax credit carryforwards and net operating loss
carryforwards.
The effective tax rate on pre-tax income differs from the U.S.
statutory tax rate due to the following:
- ----------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
U.S. tax credits (1.4) (1.5) (3.4)
Asset write-downs and dispositions .5 -- (.2)
Effect of non-taxable currency items .1 .5 (.5)
Gain on sale of facilities
and investments 1.5 -- --
Taxes on foreign earnings
and tax adjustments of
foreign subsidiaries (.6) (.6) .3
Other, net .2 (.5) .3
=======================
Effective tax rate 35.3% 32.9% 31.5%
- ----------------------------------------------------------------
The company has net operating loss carryforwards of $5 million to
offset future foreign taxable income through 2003.
Provision for U.S. income taxes, after applying statutory tax credits,
was made on the unremitted earnings of foreign subsidiaries and affiliates
which have not been reinvested abroad indefinitely. Total unremitted
earnings, after provision for applicable foreign income taxes, were
approximately $399 million at December 31, 1998. If the foreign
subsidiaries and affiliates earnings that have been reinvested abroad
indefinitely were remitted as dividends, the amount of additional U.S.
income taxes, after applying statutory tax adjustments, would be
approximately $25 million.
NOTE 6: SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," replacing
the industry segment approach with a management approach. SFAS No. 131
designates the internal management accountability structure as the source
of the company's reportable segments. The statement also requires
disclosures about products and services, geographic areas and major
customers. The adoption of this standard did not affect results of
operations or financial position but did affect the disclosure of segment
information as presented below.
The company's business segment reporting under SFAS No. 131 is consistent
with the changes in its financial reporting structure incorporated in the
company's reporting since the first quarter of 1998. These changes, and
concurrent changes to the management organization, were made to better
reflect the company's technical strengths and focus on key markets. There
are three business segments: Performance Polymers, consisting of the
Polymers and Resins (which includes Coatings, Specialty Polymers and
Building Products), Monomers, Formulation Chemicals and Plastics Additives
businesses; Chemical Specialties, consisting of the Agricultural Chemicals,
Ion Exchange, Biocides and Primenes businesses; and Electronic Materials,
consisting of Shipley and Rodel, Inc., an affiliate. Corporate includes
non-operating items such as interest income and expense, corporate
governance costs, corporate exploratory research and, in 1998, loss on
early extinguishment of debt.
The 1997 and 1996 presentations have been restated to reflect these
changes. In the restatement, 1997 and 1996 results of AtoHaas and RohMax
are reported under Performance Polymers.
PERFORMANCE CHEMICAL ELECTRONIC
1998 POLYMERS SPECIALTIES MATERIALS CORPORATE CONSOLIDATED
- ----------------------------------------------------------------------------------------
Sales to external customers $2,447 $ 875 $ 398 $ -- $3,720
Operating profit after tax(1) 394 72 45 (71) 440
Share of affiliate earnings 2 -- 4 (4) 2
Depreciation 188 51 17 20 276
Segment assets 1,927 783 511 427 3,648
Capital additions 150 38 29 12 229
PERFORMANCE CHEMICAL ELECTRONIC
1997 POLYMERS SPECIALTIES MATERIALS CORPORATE CONSOLIDATED
- ----------------------------------------------------------------------------------------
Sales to external customers $2,712 $ 888 $ 399 $ -- $3,999
Operating profit after tax(2) 317 85 52 (44) 410
Share of affiliate earnings 9 (1) 3 -- 11
Depreciation 200 51 16 12 279
Segment assets 2,182 779 457 482 3,900
Capital additions 171 35 33 15 254
PERFORMANCE CHEMICAL ELECTRONIC
1996 POLYMERS SPECIALTIES MATERIALS CORPORATE CONSOLIDATED
- ----------------------------------------------------------------------------------------
Sales to external customers $2,694 $ 930 $ 358 $ -- $3,982
Operating profit after tax 274 112 39 (62) 363
Share of affiliate losses (12) -- -- -- (12)
Depreciation 184 48 15 15 262
Segment assets 2,200 821 359 553 3,933
Capital additions 244 45 28 17 334
(1) Includes a one-time net gain of $45 million after-tax. This net gain
was the result of the sale of the company's interest in the AtoHaas and
RohMax joint ventures, an early extinguishment of debt, the write-off of
certain intangible assets in Europe and business realignment costs
primarily in Asia.
(2) Includes a gain of $16 million after tax, the net result of remediation
settlements with insurance carriers during the fourth quarter.
The tables below present sales and long-lived asset information by
geographic area as of and for the period ending December 31. Sales are
attributed to the United States and to all foreign countries combined based
on customer location and not on the geographic location from which goods
were shipped.
UNITED
1998 STATES FOREIGN CONSOLIDATED
- -------------------------------------------------------------------------
Sales to external customers $1,754 $1,966 $3,720
Long-lived assets 936 1,206 2,142
UNITED
1997 STATES FOREIGN CONSOLIDATED
- -------------------------------------------------------------------------
Sales to external customers $1,890 $2,109 $3,999
Long-lived assets 1,059 1,263 2,322
UNITED
1996 STATES FOREIGN CONSOLIDATED
- -------------------------------------------------------------------------
Sales to external customers $1,843 $2,139 $3,982
Long-lived assets 1,115 1,189 2,304
NOTE 7: PENSION PLANS
In 1997, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends a number of
previous statements and establishes guidance for disclosure in annual
financial statements. As required, the company adopted the disclosures
prescribed by this statement below.
The company has noncontributory pension plans that provide defined
benefits to domestic and non-U.S. employees meeting age and length of
service requirements. The following disclosures include amounts for both
the U.S. and significant foreign pension plans.
- -----------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
- -----------------------------------------------------------------------
COMPONENTS OF NET PERIODIC PENSION INCOME
Service cost $ (39) $ (39) $ (38)
Interest cost (64) (63) (60)
Expected return on plan assets 108 101 96
Amortization of net gain existing at
adoption of SFAS No. 87 9 10 11
Other amortization, net 5 1 (2)
========================
Net periodic pension income $ 19 $ 10 $ 7
- -----------------------------------------------------------------------
Pension income primarily reflects recognition of favorable investment
experience as stipulated by SFAS No. 87. The pension benefit payments in
all three years included payments related to voluntary early retirement
incentives and a severance benefit program.
The early retirement and severance benefit programs resulted in a pre-tax
gain of $3 million, $4 million and $2 million in 1998, 1997 and 1996,
respectively, as settlement gains from retirees electing lump-sum
distributions exceeded the cost of the special termination benefits.
Plan activity and status as of and for the years ended December 31 were
as follows:
- ----------------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------------
CHANGE IN PENSION OBLIGATION
Pension obligation at beginning of year $ 943 $ 907
Service cost, excluding expenses 34 35
Interest cost 64 63
Plan participants' contributions 1 1
Divestitures, curtailments and settlements (35) --
Special termination benefits 5 9
Actuarial loss 75 26
Foreign currency exchange rate changes (1) (4)
Benefits paid (87) (94)
===================
Pension obligation at end of year $ 999 $ 943
-------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $1,401 $1,306
Actual return on plan assets 198 210
Contributions 2 2
Transfer to fund retiree medical expenses (14) (13)
Trust expenses (5) (5)
Divestitures (32) --
Foreign currency exchange rate changes (1) (5)
Benefits paid (87) (94)
===================
Fair value of plan assets at end of year $1,462 $1,401
-------------------
Funded status $ 463 $ 458
Unrecognized actuarial gain (302) (305)
Unrecognized prior service cost 15 17
===================
Net amount recognized $ 176 $ 170
-------------------
Amounts recognized in the statement of
financial position consist of:
Prepaid pension cost $ 146 $ 128
Unrecognized transition asset 30 42
===================
Net amount recognized $ 176 $ 170
-------------------
- ----------------------------------------------------------------------
Net assets of the pension trusts, which primarily consist of common stocks
and debt securities, were measured at market value. Assumptions used are
as follows:
- --------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------
U.S. NON-U.S. U.S. Non-U.S.
PLANS PLANS Plans Plans
- --------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 6.5% 6.3% 7.0% 8.0%
Expected return on plan assets 8.5 7.9 8.5 9.0
Rate of compensation increase 4.0 4.3 5.0 6.2
- --------------------------------------------------------------------------
The company transferred excess pension plan assets of $14 million in 1998
and $13 million in 1997 to fund retiree medical expenses as allowed by U.S.
tax regulations.
The company has a noncontributory, unfunded pension plan that provides
supplemental defined benefits to U.S. employees whose benefits under the
qualified pension plan are limited by the Employee Retirement Security Act
of 1974 and the Internal Revenue Code. These employees must meet age and
length of service requirements. Pension cost determined in accordance with
plan provisions was $11 million in 1998, $6 million in 1997 and $7 million
in 1996. Pension benefit payments for this plan were $4 million in 1998
and 1997 and $5 million in 1996.
The company has a nonqualified trust, referred to as a "rabbi" trust, to
fund benefit payments under this pension plan. Rabbi trust assets are
subject to creditor claims under certain conditions and are not the
property of employees. Therefore, they are accounted for as corporate
assets and are classified as other non-current assets. Assets held in
trust at December 31, 1998 and 1997, totaled $30 million and $25 million,
respectively.
The status of this plan at year end was as follows:
- --------------------------------------------------------------
(Millions of dollars) 1998 1997
- --------------------------------------------------------------
CHANGE IN PENSION OBLIGATION
Pension obligation at beginning of year $ 61 $ 53
Service cost 1 1
Interest cost 6 4
Special termination benefit cost 4 --
Actuarial loss 23 7
Benefits paid (4) (4)
================
Pension obligation at end of year $ 91 $ 61
- --------------------------------------------------------------
Pension benefit obligations for this plan were determined from actuarial
valuations using an assumed discount rate of 6.5% and 7% at December 31,
1998 and 1997, respectively, and an assumed long-term rate of compensation
increase of 4% in 1998 and 5% in 1997.
In 1997, the company instituted a nonqualified savings plan for eligible
employees in the United States. The purpose of the plan is to provide
additional retirement savings benefits beyond the otherwise determined
savings benefits provided by the Rohm and Haas Company Employee Stock
Ownership and Savings Plan (the "Savings Plan"). Each participant's
contributions will be notionally invested in the same investment funds as
the participant has elected for investment in his or her Savings Plan
account. For most participants, the Company will contribute a notional
amount equal to 60% of the first 6% of the amount contributed by the
participant. The Company's matching contributions will be allocated to
deferred stock units. At the time of distribution, each deferred stock
unit will be distributed as one share of Rohm and Haas Company common
stock. Contributions to this plan were $2 million in 1998. There were no
contributions in 1997.
NOTE 8: EMPLOYEE BENEFITS
- ----------------------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------------------
Postretirement health care and life
insurance benefits $ 313 $ 323
Postemployment benefits 19 16
Unfunded supplemental pension plan (see Note 7) 74 50
Unfunded foreign pension liabilities 26 21
=====================
Total $ 432 $ 410
- ----------------------------------------------------------------------------
The company provides health care and life insurance benefits under numerous
plans for substantially all of its domestic retired employees, for which
the company is self-insured. In general, employees who have at least 15
years of service and are 60 years of age are eligible for continuing health
and life insurance coverage. Retirees contribute toward the cost of such
coverage.
The status of the plans at year end was as follows:
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 265 $ 303
Service cost 5 5
Interest cost 17 17
Divestitures, curtailments, settlements (8) --
Amendments -- (2)
Special termination benefits 1 2
Actuarial (loss) gain 7 (44)
Benefits paid (18) (16)
=================
Benefit obligation at end of year $ 269 $ 265
Unrecognized prior service cost 10 12
Unrecognized actuarial loss 53 62
=================
Total accrued postretirement benefit
obligation $ 332 $ 339
- ----------------------------------------------------------------
The accrued postretirement benefit obligation is recorded in "accrued
liabilities" (current) and "employee benefits" (non-current).
Net periodic postretirement benefit cost includes the following components:
- ------------------------------------------------------------------------
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC POSTRETIREMENT COSTS
Service cost $ 5 $ 5 $ 5
Interest cost 17 17 20
Net amortization (4) (4) (1)
=====================
Net periodic postretirement cost $ 18 $ 18 $ 24
- ------------------------------------------------------------------------
The calculation of the accumulated postretirement benefit obligation
assumes 5% and 6% annual rates of increase in the health care cost trend
rate for 1998 and 1997, respectively. The company's plan limits its cost
for health care coverage to an increase of 10% or less each year, subject
ultimately to a maximum cost equal to double the 1992 cost level.
Increases in retiree health care costs in excess of these limits will be
assumed by retirees. The change in the annual rates of increase reflects
lower expected health care inflation, improved health care utilization and
lower per capita cost experience.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have approximately the
following effects:
- ------------------------------------------------------------------------
1-Percentage 1-Percentage
Point Increase Point Decrease
- ------------------------------------------------------------------------
(Millions of dollars) 1998 1997 1998 1997
- ------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 1 $ 1 $ (1) $ (1)
Effect on postretirement benefit
obligation 9 7 (11) (9)
- ------------------------------------------------------------------------
The weighted average discount rate used to estimate the accumulated
postretirement benefit obligation was 6.5% at December 31, 1998, and 7%
at December 31, 1997.
NOTE 9: ACCOUNTS RECEIVABLE, NET
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Customers $642 $672
Unconsolidated subsidiaries and affiliates 21 43
Employees 6 5
Insurance recoveries for environmental
remediation (see Note 21) 2 19
Other 52 31
==================
723 770
Less allowance for losses 12 15
==================
Total $711 $755
- ----------------------------------------------------------------
NOTE 10: INVENTORIES
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Finished products and work in process $330 $352
Raw materials 48 49
Supplies 49 58
==================
Total $427 $459
- ----------------------------------------------------------------
Inventories amounting to $391 million and $430 million were valued using
the LIFO method at December 31, 1998 and 1997, respectively. The excess of
current cost over the stated amount for inventories valued under the LIFO
method approximated $77 million and $127 million at December 31, 1998 and
1997, respectively. Liquidation of prior years' LIFO inventory layers
in 1998, 1997 and 1996 did not materially affect cost of goods sold in
either year.
NOTE 11: PREPAID EXPENSES AND OTHER ASSETS
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Prepaid expenses $ 29 $ 36
Deferred tax benefits (see Note 5) 94 87
Notes receivable -- 4
Other current assets 10 16
==================
Total $133 $143
- ----------------------------------------------------------------
NOTE 12: LAND, BUILDINGS AND EQUIPMENT, NET
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Land $ 44 $ 50
Buildings and improvements 813 817
Machinery and equipment 3,276 3,307
Capitalized interest cost 229 220
Construction 109 98
====================
4,471 4,492
Less accumulated depreciation 2,563 2,484
====================
Total $1,908 $2,008
- ----------------------------------------------------------------
The principal lives (in years) used in determining depreciation rates of
various assets are: buildings and improvements (10-50); machinery and
equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and
fixtures, laboratory equipment and other assets (5-10).
Gross book values of assets depreciated by accelerated methods totaled
$1,011 million and $1,115 million at December 31, 1998 and 1997,
respectively. Assets depreciated by the straight-line method totaled
$3,307 million and $3,230 million at December 31, 1998 and 1997,
respectively.
In 1998, 1997 and 1996 respectively, interest costs of $9 million, $12
million and $15 million were capitalized and added to the gross book value
of land, buildings and equipment. Amortization of such capitalized costs
included in depreciation expense was $15 million in 1998 and $14 million in
1997 and 1996.
NOTE 13: OTHER ASSETS, NET
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Prepaid pension costs (see Note 7) $146 $128
Goodwill 92 110
Patents, trademarks and technology rights 55 54
Rabbi trust assets (see Note 7) 30 25
Deferred tax benefits (see Note 5) 10 3
Other noncurrent assets 33 26
==================
366 346
Less accumulated amortization
of intangible assets 55 48
==================
Total $311 $298
- ----------------------------------------------------------------
NOTE 14: NOTES PAYABLE
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Short-term borrowings $167 $ 49
Current portion of long-term debt 5 48
=================
Total $172 $ 97
- ----------------------------------------------------------------
Short-term borrowings include commercial paper and bank debt owed by
foreign subsidiaries. The weighted-average interest rate of short-term
borrowings was 6.5% and 7.8% at December 31, 1998 and 1997, respectively.
At December 31, 1998, the company has revolving credit agreements totaling
$400 million, of which $150 million expire in 1999, $20 million in 2002
and $230 million in 2003. These agreements, which carry various interest
rates and fees, are available to support commercial paper borrowings.
Several permit foreign subsidiaries to borrow local currencies. At
December 31, 1998, $74 million was outstanding under these agreements.
NOTE 15: LONG-TERM DEBT
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
9.80% notes due 2020 $135 $150
9.875% notes due 2000 100 100
9.375% debentures due 2019
(callable 1999 at 104.7%) 22 100
9.50% notes due 2021
(callable 2002 at 104.8%) 38 75
6.63% obligation due through 2012
(callable 2000 at 104.4%) 46 48
1.55% notes due 2003 (yen denominated) 44 --
Other 24 36
==================
Total $409 $509
- ----------------------------------------------------------------
The various loan agreements contain certain restrictions with respect to
tangible net worth and maintenance of working capital. There are no
restrictions on the payment of dividends.
In 1998 the company retired $130 million of high interest long-term debt
through a tender offer. These debt retirements resulted in an after-tax
extraordinary loss of $13 million, or $.07 per share.
Total cash used for the payment of interest expense, net of amounts
capitalized, was $36 million, $40 million and $39 million in 1998, 1997 and
1996, respectively.
Long-term debt maturing in the next five years is:
- ----------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------
1999 $ 5 2002 $ 12
2000 107 2003 64
2001 12
- ----------------------------------------------------------------
NOTE 16: ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Trade payables $235 $252
Salaries and wages 139 117
Taxes, other than income taxes 29 38
Interest 10 13
Employee benefits 25 23
Reserves for environmental
remediation (see Note 21) 45 47
Sales incentive programs 55 41
Other 115 138
==================
Total $653 $669
- ----------------------------------------------------------------
NOTE 17: OTHER LIABILITIES
- ----------------------------------------------------------------
(Millions of dollars) 1998 1997
- ----------------------------------------------------------------
Reserves for environmental
remediation (see Note 21) $ 86 $100
Deferred revenue on supply contracts 56 --
Other 42 30
==================
Total $184 $130
- ----------------------------------------------------------------
NOTE 18: STOCKHOLDERS' EQUITY
In 1998, the board of directors declared a three-for-one split of the
company's common stock. The stock split was effected in the form of a
200% common stock dividend. The par value of the common stock remained
unchanged at $2.50 per share. Also in 1998, the company retired 39 million
treasury shares. As a result of these transactions, the company
reclassified $296 million from retained earnings to common stock. This
amount represents the total par value of new shares issued, net of
retirements of treasury shares. Amounts per share, numbers of common
shares and capital accounts have been restated to give retroactive effect
to the stock split.
The company has the authorization to issue up to 25 million shares of
preferred stock. The outstanding preferred stock was issued in connection
with the acquisition of Shipley Company in 1992. This preferred stock pays
an annual cumulative dividend of $2.75 per share. It has antidilution
protection against stock splits, stock dividends and certain issuances of
additional securities and extraordinary dividends. This preferred stock is
convertible at any time at the holder's option into Rohm and Haas common
stock at the rate of 2.34 shares of common stock for each share of
preferred stock. Holders of the preferred stock are entitled to one vote
per share. The company has the option to redeem the preferred stock on or
after June 12, 1999, at a fixed redemption price of $50.62, payable in Rohm
and Haas common stock. The redemption price reduces each year to a final
price of $50 on or after June 12, 2002.
Dividends paid on ESOP shares, used as a source of funds for meeting the
ESOP financing obligation, were $12 million in 1998 and $11 million in
1997. These dividends were recorded net of the related U.S. tax benefits.
The number of ESOP shares not allocated to plan members at December 31,
1998 and 1997 were 13.5 million and 14.2 million, respectively.
The company recorded compensation expense of $6 million in 1998, 1997 and
1996 for ESOP shares allocated to plan members. The company expects to
record annual compensation expense at approximately this level over the
next 22 years as the remaining $132 million of ESOP shares are allocated.
The allocation of shares from the ESOP is expected to fund a substantial
portion of the company's future obligation to match employees savings plan
contributions as the market price of Rohm and Haas stock appreciates.
Purchases of treasury stock in 1998 totaled 17,459,435 shares, compared
with 7,653,453 and 13,292,913 shares in 1997 and 1996, respectively.
Most of the shares were obtained in August 1998 through an accelerated stock
repurchase program with a third party. Under the terms of this purchase,
the final cost to the company will reflect the average share price paid by
the third party in the market over an extended trading period. Through
December 31, 1998, the company had repurchased two-thirds of the 12 million
shares of common stock authorized under the current buyback program, and
received board approval in October 1998 for another buyback of an
additional 9 million shares.
NOTE 18: STOCKHOLDERS' EQUITY (CONTINUED)
The reconciliation from basic to diluted earnings per share is as follows:
- ------------------------------------------------------------------
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------
1998
- ----
Net earnings available to
common shareholders $434 175,591 $2.47
Effect of convertible
preferred stock 6 3,417
Dilutive effect of options -- 693
===================
Diluted earnings per share $440 179,701 $2.45
1997
- ----
Net earnings available to
common shareholders $403 185,808 $2.17
Effect of convertible
preferred stock 7 5,913
Dilutive effect of options -- 717
===================
Diluted earnings per share $410 192,438 $2.13
1996
- ----
Net earnings available to
common shareholders $356 196,122 $1.82
Effect of convertible
preferred stock 7 6,168
Dilutive effect of options -- 525
===================
Diluted earnings per share $363 202,815 $1.79
- ------------------------------------------------------------------
NOTE 19: STOCK COMPENSATION PLANS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the company continues to apply the provisions of APB Opinion No. 25.
Accordingly, no compensation expense has been recognized for the fixed
stock option plans. For restricted stock awards, compensation expense
equal to the fair value of the stock on the date of the grant is recognized
over the five-year vesting period. Total compensation expense for
restricted stock was $3 million in 1998 and $1 million in 1997 and 1996.
Had compensation expense for the company's fixed stock option plans been
determined in accordance with SFAS No. 123, the company's net earnings
would have been reduced to $437 million in 1998, $407 million in 1997 and
$361 million in 1996. Diluted earnings per common share would have been
reduced to $2.43, $2.12 and $1.78 in 1998, 1997 and 1996, respectively.
NON-EMPLOYEE DIRECTORS' STOCK PLAN OF 1997
Under the 1997 Non-Employee Directors Stock Plan, directors receive half of
their annual retainer in deferred stock. Each share of deferred stock
represents the right to receive one share of company common stock upon
leaving the board. Directors may also elect to defer all or part of their
cash compensation into deferred stock. Annual compensation expense is
recorded equal to the number of deferred stock shares awarded multiplied by
the market value of the company's common stock on the date of award.
Additionally, directors receive dividend equivalents on each share of
deferred stock, payable in deferred stock, equal to the dividend paid on a
share of common stock.
RESTRICTED STOCK PLAN OF 1992
Under this plan, executives were paid some or all of their bonuses in
shares of restricted stock instead of cash. Most shares vest after 5
years. The plan covers an aggregate 450,000 shares of common stock.
Shares of restricted stock issued in 1998 totaled 74,106 at a
weighted-average grant date fair value of $34 per share. In 1997, 93,714
shares of restricted stock were granted at a weighted-average grant-date
fair value of $28 per share. As of January 1, 1999, restricted stock
grants will be made, subject to shareholder approval, under the 1999
Stock Plan.
FIXED STOCK OPTION PLANS
The company has granted stock options to key employees under its Stock
Option Plans of 1984 and 1992. Options granted pursuant to the plans are
priced at the fair market value of the common stock on the date of the
grant. Options vest after one year and most expire 10 years from the date
of grant. The Stock Option Plan of 1992, as amended in 1994, limits the
number of options that can be granted to any one individual within a
five-year period to 300,000 shares. These plans have been superseded by
the 1999 Stock Plan, subject to shareholder approval. Under the 1999 Stock
Plan, the company may grant options for up to eight million shares of common
stock, subject to shareholder approval.
The status of the company's stock options as of December 31 is presented
below:
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
---------------------------------------------------------
Outstanding at
beginning
of year 2,394 $20.63 2,283 $17.49 2,331 $15.84
Granted 471 31.51 600 27.42 603 21.43
Canceled (10) 31.49 -- -- (6) 21.48
Exercised (438) 15.80 (489) 14.31 (645) 12.76
=== === ===
Outstanding at
end of year 2,417 23.58 2,394 20.63 2,283 17.49
Options exercisable
at year-end 1,956 21.71 1,809 18.44 1,686 16.10
Weighted-average
fair value of
options granted
during the year $ 8.40 $ 7.26 $ 5.56
- ------------------------------------------------------------------------------
The Black-Scholes option pricing model was used to estimate the fair
value for each grant made during the year. The following are the
weighted-average assumptions used for all shares granted in the years
indicated:
- ----------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------
Dividend yield 2.52% 2.59%
Volatility 25.07 20.74
Risk-free interest rate 5.52 6.46
Time to exercise 6 years 7 years
- ----------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
- ------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Range Weighted- Weighted- Weighted-
of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices (000s) Life Price (000s) Price
- -------------------------------------------------- --------------------------
$11 to $15 155 2.7 years $13.63 155 $13.63
18 to 22 1,226 6.1 20.04 1,226 20.04
25 to 35 1,036 8.5 29.24 575 27.43
===== =====
2,417 1,956
- ------------------------------------------------------------------------------
NOTE 20: LEASES
The company leases certain properties and equipment used in its operations,
primarily under operating leases. Total net rental expense incurred under
operating leases amounted to $57 million in 1998, $62 million in 1997 and
$63 million in 1996.
Total future minimum lease payments under the terms of non-cancellable
operating leases are as follows:
- ----------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------
1999 $31 2003 $12
2000 22 Thereafter 57
2001 18
2002 14
- ----------------------------------------------------------------
NOTE 21: CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS
There is a risk of environmental damage 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 damage. These laws
and regulations require the company to make significant expenditures for
remediation, capital improvements and the operation of environmental
protection equipment. 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) Superfund priority list.
The company is also involved in corrective actions at some of its
manufacturing facilities. The company considers a broad range of
information when determining the amount of its remediation accruals,
including available facts about the waste site, existing and proposed
remediation technology and the range of costs of applying those
technologies, prior experience, government proposals for this or similar
sites, the liability of other parties, the ability of other principally
responsible parties to pay costs apportioned to them and current laws and
regulations. These accruals are updated quarterly as additional technical
and legal information becomes available. Major sites for which reserves
have been provided are the non-company-owned Lipari, Woodland and Kramer
sites in New Jersey, and Whitmoyer in Pennsylvania, and company-owned sites
in Bristol and Philadelphia, Pennsylvania, and in Houston, Texas. In
addition, the company has provided for future costs at approximately 80
other sites where it has been identified as potentially responsible for
cleanup costs and, in some cases, damages for alleged personal injury or
property damage.
The amount charged to earnings before tax for environmental remediation,
net of insurance recoveries, was $9 million in 1998. In 1997, remediation
related settlements with insurance carriers, a $20 million charge resulting
from an unfavorable arbitration decision relating to the Woodlands sites,
and other waste remediation expenses resulted in a net gain of $13 million.
The 1996 charge, net of insurance recoveries, was $27 million.
The reserves for remediation were $131 million and $147 million at December
31, 1998 and 1997, respectively, and are recorded as "other liabilities"
(current and long-term). The company is in the midst of lawsuits over
insurance coverage for environmental liabilities. It is the company's
practice to reflect environmental insurance recoveries in results of
operations for the quarter in which the litigation is resolved through
settlement or other appropriate legal process. Resolutions typically
resolve coverage
for both past and future environmental spending. Insurance recoveries
receivable, included in accounts receivable, net, were $2 million at
December 31, 1998 and $19 million at December 31, 1997. The company
settled with several of its insurance carriers in January 1999 for
approximately $17 million. These settlements will be recognized in income
in 1999.
In addition to accrued environmental liabilities, the company has
reasonably possible loss contingencies related to environmental matters of
approximately $65 million at December 31, 1998 and 1997. Further, the
company has identified other sites, including its larger manufacturing
facilities in the United States, where additional future environmental
remediation may be required, but these loss contingencies are not
reasonably estimable 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 in any given
year because of the company's obligation to record the full projected cost
of a project when such costs are probable and reasonably estimable.
Capital spending for new environmental protection equipment was $17 million
in 1998. Spending for 1999 and 2000 is expected to be approximately $22
million and $15 million, respectively. Capital expenditures in this
category include projects whose primary purposes are pollution control and
safety, as well as environmental aspects of projects that are intended
primarily to improve operations or increase plant efficiency. The company
expects future capital spending for environmental protection equipment to
be consistent with prior-year spending patterns. Capital spending does not
include the cost of environmental remediation of waste disposal sites.
Cash expenditures for waste disposal site remediation were $26 million in
1998, $37 million in 1997 and $58 million in 1996. The expenditures for
remediation are charged against accrued remediation reserves. The cost of
operating and maintaining environmental facilities was $94 million, $95
million and $104 million in 1998, 1997 and 1996, respectively, and was
charged against current-year earnings.
Subsequent to the sale of the AtoHaas joint venture, the buyer asserted
a claim against the company in late 1998 related to the value of certain
joint venture assets. Because the investigation and assessment of this
claim is not expected to be completed until the latter part of the first
quarter of 1999, the potential amount of the claim and its impact on
results of operations and financial position, if any, cannot be reasonably
estimated at this time.
In addition, the company and its subsidiaries are parties to litigation
arising out of the ordinary conduct of its business. The company is also a
subject of an investigation by U.S. Customs into the labeling of some
products imported into the U.S. from some of the company's non-U.S.
locations. Recognizing the amounts reserved for such items and the
uncertainty of the ultimate outcomes, it is the company's opinion that the
resolution of these pending lawsuits, investigations and claims will not
have a material adverse effect, individually or in the aggregate, upon
the results of operations and the consolidated financial position of
the company.
In the ordinary course of business, the company has entered into certain
purchase commitments, has guaranteed certain loans (with recourse to the
issuer), and has made certain financial guarantees, primarily for the
benefit of its non-U.S. and unconsolidated subsidiaries and affiliates.
It is believed that these commitments and any liabilities that may result
from these guarantees will not have a material adverse effect upon the
consolidated financial position of the company.
At December 31, 1998, construction commitments totaled approximately
$23 million.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Rohm and Haas Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material
respects, the financial position of Rohm and Haas Company and its
subsidiaries at December 3l, 1998, and the results of their operations and
their cash flows for the year, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 22, 1999
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
of Rohm and Haas Company:
We have audited the consolidated balance sheet of Rohm and Haas Company
and subsidiaries as of December 31, 1997 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of
the years in the two-year period ended December 31, 1997. In connection
with our audits of the consolidated financial statements, we also have
audited the related financial statement schedule as listed in item 14(a)(2)
for each of the years in the two-year period ended December 31, 1997.
These consolidated financial statements and financial statement schedule
are the responsibility of management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Rohm and Haas Company and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also in our opinion, the
related financial statement schedule for each of the two years in the
two-year period ended December 31, 1997, when considered in relation to
the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 23, 1998
#---------------------------------------------------------------------------#
| PLEASE NOTE: TO MEET EDGAR REQUIREMENTS AND TO ALLOW FOR ADEQUATE COLUMN |
| SPACING THE "ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA" |
| IS SPLIT INTO TWO TABLES. THE STUB COLUMN IS REPEATED |
| FOR READABILITY. |
| A) TABLE 1 COVERS THE YEARS 1998 THROUGH 1993. |
| B) TABLE 2 COVERS THE YEARS 1992 THROUGH 1988. |
#---------------------------------------------------------------------------#
Rohm and Haas Company and Subsidiaries
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Unaudited) (ID: TABLE 1 OF 2)
- ------------------------------------------------------------------------------------------------------
(Millions of dollars,
except per-share amounts) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------
Volume of shipments in
millions of units 5,054 4,997 4,725 4,473 4,549 4,214
Net sales $ 3,720 $ 3,999 $ 3,982 $ 3,884 $ 3,534 $ 3,269
Gross profit 1,464 1,455 1,395 1,333 1,267 1,095
Earnings before interest
and taxes 734 650 569 480 453 235
Earnings before
income taxes 700 611 530 441 407 194
EARNINGS BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES $ 453 $ 410 $ 363 $ 292 $ 264 $ 126
NET EARNINGS (LOSS) $ 440 $ 410 $ 363 $ 292 $ 264 $ 107
As a percent of sales
Gross profit 39.4% 36.4% 35.0% 34.3% 35.9% 33.5%
Selling and administrative
expense 17.1 16.0 15.8 15.9 16.7 18.0
Research and development
expense 5.6 5.0 4.7 5.0 5.7 6.3
Earnings before extraordinary
items and cumulative
effects 12.2 10.3 9.1 7.5 7.5 3.9
Return on net assets (1) 12.7% 11.2% 9.9% 8.1% 7.6% 4.3%
Return on common
stockholders' equity (2) 25.3% 22.7% 20.1% 16.6% 16.5% 8.1%
Ten-year compound growth rate
Sales 3.9% 6.1% 6.8% 6.6% 5.6% 5.7%
Basic earnings per common
share before extraordinary
items and cumulative
effect of accounting
changes 8.3 8.6 10.5 7.7 5.4 (0.9)
Cash dividends per
common share 7.5 8.2 8.2 8.3 9.1 10.5
Wages and salaries $ 643 $ 630 $ 627 $ 625 $ 632 $ 616
CASH FLOW DATA
- ------------------------------------------------------------------------------------------------------
Cash provided by operating
activities $ 682 $ 791 $ 706 $ 513 $ 524 $ 358
Additions to fixed assets 229 254 334 417 339 382
Depreciation 276 279 262 242 231 226
Cash dividends 125 121 116 109 102 97
Free cash flow (3) 328 416 256 (13) 83 (121)
Share repurchases 567 216 302 29 7 --
Investments in joint
ventures, affiliates
and subsidiaries 21 80 7 -- -- --
PER COMMON SHARE DATA AND
OTHER SHARE INFORMATION(4)
- ------------------------------------------------------------------------------------------------------
Net earnings before
extraordinary items and
cumulative effect of
accounting changes:
Basic $ 2.55 $ 2.17 $ 1.82 $ 1.41 $ 1.26 $ .58
Diluted 2.52 2.13 1.79 1.40 1.26 .58
Cash dividends per
common share $ .70 $ .63 $ .57 $ .52 $ .48 $ .45
Common stock price
High $ 38-7/8 $ 33-3/4 $27-1/2 $21-5/8 $22-13/16 $20-11/16
Low 26 23-9/16 18-5/16 16-1/2 17-3/4 15-3/4
Year-end close 30-1/8 31-15/16 27-3/16 21-7/16 19-1/16 19-13/16
Number of shares repurchased
in thousands 17,459 7,653 13,293 1,545 369 21
Average number of shares
outstanding - basic,
in thousands 175,591 185,808 196,122 202,566 203,121 202,857
AT YEAR END
- ------------------------------------------------------------------------------------------------------
Working capital $ 412 $ 547 $ 570 $ 593 $ 508 $ 499
Gross fixed assets 4,471 4,492 4,327 4,158 3,969 3,696
Total assets 3,648 3,900 3,933 3,916 3,861 3,524
Total debt 581 606 707 696 786 773
Stockholders' equity 1,561 1,797 1,728 1,781 1,620 1,441
Debt-to-equity ratio (5) 34.3% 31.3% 37.5% 36.0% 44.3% 48.2%
Number of registered
common stockholders 4,451 4,352 4,492 4,721 4,907 5,120
Number of employees 11,265 11,592 11,633 11,670 12,211 12,985
- ------------------------------------------------------------------------------------------------------
(1) Net earnings plus after-tax interest expense, divided by year-end total
assets.
(2) Excluding ESOP adjustment and cumulative effect of accounting changes.
(3) Cash provided by operating activities less fixed asset spending and
dividends.
(4) 1998 to 1997 earnings per share and share information has been restated
to reflect the 1998 three-for-one stock split.
(5) Excluding ESOP adjustment.
See accompanying notes below.
See 1998, 1997 and 1996 results in Management Discussion and Analysis above.
Rohm and Haas Company and Subsidiaries
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Unaudited) (ID: TABLE 2 OF 2)
- ----------------------------------------------------------------------------------------
(Millions of dollars,
except per-share amounts) 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ----------------------------------------------------------------------------------------
Volume of shipments in
millions of units 3,750 3,267 3,336 3,259 3,143
Net sales $ 3,063 $ 2,763 $ 2,824 $ 2,661 $ 2,535
Gross profit 1,049 902 930 841 889
Earnings before interest
and taxes 314 288 350 290 378
Earnings before
income taxes 261 240 313 251 346
EARNINGS BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES $ 174 $ 163 $ 207 $ 176 $ 230
NET EARNINGS (LOSS) $ (5) $ 163 $ 207 $ 176 $ 230
As a percent of sales
Gross profit 34.2% 32.6% 32.9% 31.6% 35.1%
Selling and administrative
expense 17.9 17.0 16.1 15.1 15.0
Research and development
expense 6.5 6.6 6.3 6.6 6.2
Earnings before extraordinary
items and cumulative
effects 5.7 5.9 7.3 6.6 9.1
Return on net assets (1) 6.1% 6.8% 8.6% 8.3% 11.2%
Return on common
stockholders' equity (2) 11.4% 11.2% 15.2% 14.0% 20.4%
Ten-year compound growth rate
Sales 5.3% 3.9% 5.1% 5.3% 7.3%
Basic earnings per common
share before extraordinary
items and cumulative
effect of accounting
changes 8.6 7.4 9.9 7.1 17.0
Cash dividends per
common share 10.5 11.2 13.0 14.9 16.1
Wages and salaries $ 589 $ 540 $ 520 $ 481 $ 457
CASH FLOW DATA
- ----------------------------------------------------------------------------------------
Cash provided by operating
activities $ 401 $ 357 $ 336 $ 309 $ 314
Additions to fixed assets 283 265 412 385 338
Depreciation 203 183 159 150 128
Cash dividends 88 80 79 77 67
Free cash flow (3) 30 12 (155) (153) (91)
Share repurchases 1 1 213 -- 10
Investments in joint
ventures, affiliates
and subsidiaries 172 41 12 2 --
PER COMMON SHARE DATA AND
OTHER SHARE INFORMATION(4)
- ----------------------------------------------------------------------------------------
Net earnings before
extraordinary items and
cumulative effect of
accounting changes:
Basic $ .84 $ .82 $ 1.03 $ .88 $ 1.15
Diluted .84 .82 1.03 .88 1.15
Cash dividends per
common share $ .43 $ .41 $ .41 $ .39 $ .34
Common stock price
High $19-7/8 $16-3/16 $ 12-5/16 $12-1/2 $12-1/2
Low 14-1/4 10-15/16 8-1/16 10-5/16 9-5/16
Year-end close 17-13/16 14-1/2 11-5/8 11-9/16 11-1/2
Number of shares repurchased
in thousands 54 48 19,428 24 930
Average number of shares
outstanding - basic,
in thousands 199,188 192,309 198,654 199,779 199,683
AT YEAR END
- ----------------------------------------------------------------------------------------
Working capital $ 533 $ 606 $ 424 $ 434 $ 485
Gross fixed assets 3,470 3,015 2,770 2,396 2,062
Total assets 3,517 2,897 2,702 2,455 2,242
Total debt 800 753 679 531 454
Stockholders' equity 1,428 1,235 1,137 1,311 1,207
Debt-to-equity ratio (5) 50.1% 50.0% 48.0% 40.5% 37.6%
Number of registered
common stockholders 5,653 5,796 6,088 5,816 5,695
Number of employees 13,619 12,872 12,920 13,040 12,444
- ----------------------------------------------------------------------------------------
(1) Net earnings plus after-tax interest expense, divided by year-end total
assets.
(2) Excluding ESOP adjustment and cumulative effect of accounting changes.
(3) Cash provided by operating activities less fixed asset spending and
dividends.
(4) 1998 to 1997 earnings per share and share information has been restated
to reflect the 1998 three-for-one stock split.
(5) Excluding ESOP adjustment.
See accompanying notes below.
See 1998, 1997 and 1996 results in Management Discussion and Analysis above.
NOTES
A. Included in 1998 results is a one-time net gain of $45 million, or
25 cents per common share. This net gain affected all segments and regions,
except Latin America, and was the net result of the sale of the company's
interest in the AtoHaas and RohMax joint ventures, an early extinguishment
of debt, the write-off of certain intangible assets in Europe and business
realignment costs primarily in Asia.
B. The 1997 earnings include a gain of $16 million after tax, or 9 cents
per common share, the result of remediation settlements with insurance
carriers during the fourth quarter.
C. The 1996 earnings included a net gain of 2 cents per common share from
non-recurring items. This is the net effect of a 5 cent per common share
gain related to retroactive tax credits on sales outside of the United
States and a charge of 3 cents per common share for charges for
restructuring operations in Japan, a plant writedown in the United States,
a gain from a land sale in Japan, and restructuring costs associated with
the AtoHaas joint venture in Europe.
D. Results in 1995 were reduced by a charge of 8 cents per common share
for additional potential liability related to the cleanup of the Whitmoyer
waste site in Myerstown, Pennsylvania.
E. Earnings in 1993 included charges of 16 cents per common share for
remediation of property near the Lipari landfill, 8 cents per common share
for cancelling construction of a plastics manufacturing facility in England
and 9 cents per common share for the writedown of the imidized plastics
production line in Kentucky. Results also included a gain of 5 cents per
common share for the sale of Supelco, Inc.
F. Effective January 1, 1993, the company adopted a new accounting standard
for postemployment benefits. The cumulative effect of the change as of the
adoption date was a charge of 9 cents per common share. The impact on
1993 earnings was not material.
G. Results in 1992 included a 19 cents per common share charge for the
estimated costs of downsizing a manufacturing site in Philadelphia.
H. Effective January 1, 1992, the company adopted new accounting standards
for postretirement benefits and income taxes. The cumulative effect of
these accounting changes as of the adoption date was a charge of 90 cents
per common share. The impact on 1992 results was an after-tax charge of
4 cents per common share.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No reports on Form 8-K were filed during 1998 or 1997 relating to any
disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AND
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Items 10 and 11 of this Form 10-K report
for the fiscal year ended December 31, 1998, has been omitted, except for
the information presented below, because the company will file with the
Securities and Exchange Commission a definitive Proxy Statement pursuant to
regulation 14(a) under the Securities Exchange Act of 1934.
Executive Officers
The company's executive officers along with their present position,
offices held and activities during the past five years are presented below.
All officers normally are elected annually and serve at the pleasure of the
Board of Directors. The company's non-employee directors and their
business experience during the past five years are listed in the company's
Proxy Statement.
Bradley J. Bell, 46, senior vice president and chief financial officer
since 1999; vice president, chief financial officer and treasurer from 1997
to 1998; previously vice president and treasurer of Whirlpool Corporation
from 1987 to 1997.
Patrick R. Colau, 53, senior vice president and direct of the
Performance Polymers business group since 1999; vice president 1995 through
1998; director of polymers and resins from 1996 through 1998; previously
chief operating officer from 1994 to 1995 and chief executive officer from
1992 to 1994 of Shipley Company.
Nance K. Dicciani, 51, senior vice president, director of chemical
specialties business group and director of the European region since 1999;
vice president 1993 through 1998; director for monomers and chairman of
RohMax from 1996 to 1998; director for petroleum chemicals from 1991 to
1996.
J. Michael Fitzpatrick, 52, director since 1999; president and chief
operating officer since 1999; vice president since 1993; chief technology
officer from 1996 through 1998;
previously director of research from 1993 to 1995 and general manager
of Rohm and Haas (UK) Limited and European regional business director for
polymers and resins from 1990 to 1993.
Marisa L. Guerin, 46, vice president and director of human resources
since 1994.
Rajiv L. Gupta, 52, director since 1999; vice chairman since 1999; vice
president and regional director of Asia-Pacific from 1993 through 1998;
previously director of plastics additives from 1989 to 1993.
Charles M. Tatum, 51, senior vice president and chief technology
officer since 1999; vice president 1990 through 1998; director of plastics
additives from 1994 through 1998; previously director of research from 1989
to 1994.
Robert P. Vogel, 54, vice president since 1994; general counsel
responsible for legal, tax and regulatory matters since 1994.
J. Lawrence Wilson, 62, director since 1977; chairman and chief
executive officer since 1988; director of The Vanguard Group of Investment
Companies, Cummins Engine Company, Inc. and Mead Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership of certain beneficial owners and management is
incorporated in this Form 10-K by reference to the definitive Proxy Statement
to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated in this Form 10-K
by reference to the definitive Proxy Statement to be filed with the
Securities and Exchange Commission.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
Statements of Consolidated Earnings for years ended December 31,
1998, 1997 and 1996
Statements of Consolidated Cash Flows for years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Statements of Consolidated Stockholders' Equity for years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Management's Report on Financial Statements
Independent Accountants' Reports
2. Financial Statement Schedules
The following supplementary financial information is filed in this
Form 10-K and should be read in conjunction with the financial statements
included herein under Item 8:
Schedule submitted:
II - Valuation and qualifying accounts for the years 1998, 1997
and 1996
The schedules not included herein are omitted because they are not
applicable or the required information is presented in the financial
statements or related notes.
3. Exhibits
Exhibit (3)(ii), Bylaws as amended and restated December 7, 1998
Exhibit (10), Material Contracts
(a) Agreement between Rohm and Haas and
Mr. John P. Mulroney
(b) 1999 Rohm and Haas Stock Plan (subject to
Shareholder approval)
Exhibit (12), Computation of Ratio of Earnings to Fixed Charges
for the company and subsidiaries
Exhibit (21), Subsidiaries of the registrant
Exhibit (23), Consent of independent accountants
(a) Consent of PricewaterhouseCoopers LLP
(b) Consent of KPMG LLP
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Rohm and Haas Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
/s/ Bradley J. Bell
---------------------------------
Bradley J. Bell
Senior Vice President and
Chief Financial Officer
February 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 23, 1998 by the following persons on behalf of
the registrant and in the capacities indicated.
- ------------------------------------------------------------------------------
Signature and Title Signature and Title
- ------------------------------------------------------------------------------
/s/ J. Lawrence Wilson /s/ John H. McArthur
- ----------------------------------- -----------------------------------
J. Lawrence Wilson John H. McArthur
Director, Chairman of the Board and Director
Chief Executive Officer
/s/ Bradley J. Bell /s/ Jorge P. Montoya
- ----------------------------------- -----------------------------------
Bradley J. Bell Jorge P. Montoya
Senior Vice President and Director
Chief Financial Officer
/s/ William J. Avery /s/ Sandra O. Moose
- ----------------------------------- -----------------------------------
William J. Avery Sandra O. Moose
Director Director
/s/ Daniel B. Burke /s/ Gilbert S. Omenn
- ----------------------------------- -----------------------------------
Daniel B. Burke Gilbert S. Omenn
Director Director
/s/ J. Michael Fitzpatrick /s/ Ronaldo H. Schmitz
- ----------------------------------- -----------------------------------
J. Michael Fitzpatrick Ronaldo H. Schmitz
Director Director
/s/ Earl G. Graves /s/ Alan Schriesheim
- ----------------------------------- -----------------------------------
Earl G. Graves Alan Schriesheim
Director Director
/s/ Rajiv L. Gupta /s/ Marna C. Whittington
- ----------------------------------- -----------------------------------
Rajiv L. Gupta Marna C. Whittington
Director Director
/s/ James A. Henderson
- -----------------------------------
James A. Henderson
Director
SCHEDULE II
ROHM AND HAAS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(millions of dollars)
Deducted from Accounts Receivable --
Allowances for losses:
Balance at beginning of year..... $15 $14 $12
Additions charged to earnings.... 3 3 4
Charge-offs, net of recoveries... (6) (2) (2)
--- --- ---
Balance at end of year........... $12 $15 $14
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