UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-K
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ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2005
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Commission
file number 1-496
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______________________________________________
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HERCULES
INCORPORATED
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A
DELAWARE CORPORATION
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I.R.S.
EMPLOYER IDENTIFICATION NO. 51-0023450
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HERCULES
PLAZA
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1313
NORTH MARKET STREET
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WILMINGTON,
DELAWARE 19894-0001
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TELEPHONE:
302-594-5000
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www.herc.com
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Securities
registered pursuant to Section 12(b) of the Act
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(Each
class is registered on the New York Stock Exchange,
Inc.)
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Title
of each class
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Common
Stock ($25/48
Stated Value)
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8%
Convertible Subordinated Debentures due August 15, 2010
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. Yes X
No
____.
Indicate
by check mark if the registrant is not required to file reports
pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act.
Yes ____ No
X
.
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 (or for such shorter period that
the
Registrant was required to file such reports), 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 X
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. Large accelerated filer X
Accelerated
filer ____ Non-accelerated filer ______.
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes
No
X
.
The
aggregate market value of registrant's common stock, $25/48
stated value ("Common Stock") held by non-affiliates based on the
closing
price on the last business day of the Company's most recently completed
second fiscal quarter, or June 30, 2005, was approximately $1.5
billion.
As
of February 24, 2006, registrant had 112,885,816 shares of Common
Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement for its 2006 Annual
Meeting
of Shareholders (the "Proxy Statement"), when filed, will be incorporated
by reference in Part III of this report.
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PART
I
Forward-Looking
Statements
This
Annual Report on Form 10-K includes forward-looking statements, as defined
in
the Private Securities Litigation Reform Act of 1995, reflecting management's
current analysis and expectations, based on what management believes to be
reasonable assumptions. Forward-looking statements may involve known and
unknown
risks, uncertainties and other factors, which may cause the actual results
to
differ materially from those projected, stated or implied, depending on such
factors as: ability to generate cash, changes in tax rates or changes resulting
from ongoing reviews of tax liabilities, ability to raise capital, ability
to
refinance, ability to execute productivity improvements and reduce costs,
ability to execute and integrate acquisitions, ability to raise product prices,
ability to execute divestitures, ability to realign business portfolio and
segments, ability to achieve growth in earnings and cash flows, business
climate, business performance, changes in tax laws or regulations, economic
and
competitive uncertainties, higher manufacturing costs, reduced level of customer
orders, changes in strategies, risks in developing new products and
technologies, risks in developing new market opportunities, environmental
and
safety regulations and clean-up costs, foreign exchange rates and exchange
control regulations, foreign investment laws, the impact of changes in the
value
of pension fund assets and liabilities, changes in generally accepted accounting
principles, legislative changes, adverse legal and regulatory developments,
including increases in the number or financial exposures of claims, lawsuits,
settlements or judgments, the financial capacity of settling insurers, the
impact of increased accruals and reserves for such exposures, the outcome
of
litigation and appeals, and adverse changes in economic and political climates
around the world, including terrorist activities, international hostilities,
governmental instabilities and potential natural disasters. Accordingly,
there
can be no assurance that the Company will meet future results, performance
or
achievements expressed or implied by such forward-looking statements. As
appropriate, additional factors are contained in other reports filed by the
Company with the Securities and Exchange Commission. The words or phrases
"will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions identify forward-looking
statements. This paragraph is included to provide safe harbor for
forward-looking statements, which are not generally required to be publicly
revised as circumstances change, and which the Company does not intend to
update
except as may be required by law.
ITEM
1. BUSINESS
Hercules
Incorporated ("Hercules" or the "Company") is a Delaware corporation formed
in
1912. The Company is a leading manufacturer and marketer of specialty chemicals
and related services for a broad range of business, consumer and industrial
applications. The Company is focused on maximizing cash flows and delivering
shareholder value by concentrating on managed growth in its core businesses
as
well as continuous improvement in its operations. Hercules operates on a
global
scale, with significant operations in North America, Europe, Asia and Latin
America. Product sales occur in over 125 countries with significant revenue
streams generated on five continents.
The
Company's principal products are chemicals used by the paper industry to
increase paper and paperboard performance and enhance the manufacturing process;
water-soluble polymers; polypropylene fibers and polypropylene/polyethylene
bicomponent fibers; and specialty resins. These products impart such qualities
as durability, water-resistance and improved aesthetics for everyday consumer
goods ranging from paper and packaging to toothpaste and diapers. The primary
markets the Company serves include pulp and paper; paints and adhesives;
construction materials; food, pharmaceutical and personal care; and industrial
specialties, including oilfield, textiles and general industrial.
While
the Company's products comprise a relatively minor component of its end
customers' total product cost, they frequently possess characteristics important
to the functionality and aesthetics of the finished product or the efficient
operation of the manufacturing process. Examples of the Company's products
in
consumer end-uses include strength additives for tissue and toweling, sizing
agents for milk and juice cartons, fibers that comprise the inner and outer
linings of disposable diapers and feminine hygiene products, thickeners in
products such as toothpaste, shampoos and water-based paints, and water control
additives for building products such as tile cements, grouts, stuccos, plasters
and joint compounds. The Company also offers products and related services
that
improve and reduce the cost of the paper manufacturing processes, including
water management programs that are designed to protect and maintain equipment
and reduce operating costs.
Although
the performance and quality of its products and high quality service are
important to the Company's competitive strategy, other important factors
such as
lower manufacturing costs and improved reliability are becoming increasingly
important. The Company strives to continually improve its products and
manufacturing processes by investing in technology. The Company has committed
substantial resources to its research and development efforts, including
expenditures which totaled approximately $40.9 million in 2005. Such efforts
enable the Company to consistently bring products to market that improve
functional properties or that offer similar properties at a lower cost.
Functional properties have become increasingly important, as customers have
come
to rely more on the Company to provide new solutions to improve their product
offerings and processes. Additionally, the Company strives to make its products
more cost-competitive by effectively managing production costs and advancing
its
application development with customers.
The
Company's strategy is to focus on meeting customer’s needs and adding value to
their businesses; continuously improving to extend competitive advantages;
maximizing cash flows; reducing financial leverage and returning to an
investment grade credit rating; growing profitability and increasing return
on
invested capital; and mitigating and reducing legacy liabilities.
Pursuant
to this strategy, on September 30, 2005, Hercules announced the signing of
a
joint venture agreement between its Aqualon division and the leading producers
of methylcellulose (“MC”) in China. The Company’s joint venture with Luzhou
North Chemical Industries Co. Ltd. and Jiangsu Feixiang Chemical Industries,
Co.
Ltd., Hercules Tianpu Chemical Co., is anticipated to be completed during
the
first quarter of 2006 and has total existing capacity of 6,000 metric tons
and
an additional 12,000 metric ton facility currently under construction. In
addition, on January 13, 2006 the Company announced its acquisition of the
guar
and guar derivative manufacturing business of Benchmark Polymer Products,
L.P.,
a subsidiary of Benchmark Performance Group, Inc. (“Benchmark”). The Company
also acquired an equity position in Benchmark, thereby expanding its position
in
the oil and gas industry.
On
January 31, 2006 the Company signed an agreement to sell a 51% interest in
its
FiberVisions division to an affiliate of SPG Partners, LLC (“SPG”), a New
York-based private equity firm. Under the terms of the agreement, Hercules
will
receive cash of approximately $109 million upon the closing of the transaction.
The transaction, which is expected to close by the end of the first quarter
of
2006, reflects the Company’s strategy to invest in growth opportunities in its
Aqualon and Pulp and Paper divisions and reduce earnings
volatility.
Reportable
Segments
The
Company presently operates through two reportable segments and four divisions.
The Pulp and Paper division and the Aqualon division comprise the Performance
Products segment and the FiberVisions division and the Pinova division comprise
the Engineered Materials and Additives segment. The financial information
regarding these segments, which includes net sales and profit from operations
for each of the three years ended December 31, 2005, 2004 and 2003 and total
assets as of December 31, 2005, 2004 and 2003, is provided in Note 23 to
the Consolidated Financial Statements.
Performance
Products
Products
and services offered by the Pulp and Paper division are designed to enhance
customers' profitability by improving production yields and overall product
quality, and to better enable customers to meet their environmental objectives
and regulatory requirements.
Pulp
and Paper is one of the largest suppliers of functional, process and water
management chemicals for the pulp and paper industry. The division offers
a wide
and highly sophisticated range of technology and applications expertise with
in-mill capabilities which run from influent treatment through the pulp and
paper making process to paper finishing. The division is a broad-based global
supplier able to offer a complete portfolio of products to its pulp and paper
customers.
Products
offered by Aqualon are designed to manage the properties of aqueous
(water-based) systems. Most of the products are derived from renewable natural
raw materials and are sold as key ingredients to other manufacturers where
they
are used as small-quantity additives to provide functionality such as
thickening, water retention, film formation, emulsifying action and binding
power. Major end uses for Aqualon products include personal care products,
food
additives, pharmaceutical products, construction materials, paints, coatings
and
oil and gas recovery, where polymers are used to modify viscosity, gel strength
and/or fluid loss.
At
December 31, 2005, the principal products and primary markets of this
segment were:
Division
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Principal
Products
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Primary
Markets
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Pulp
and Paper
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Functional
performance chemicals:
Sizing
(improving printability), strength, tissue creping and coatings
additives.
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Large,
multinational manufacturers of pulp, tissues, paper towels, packaging,
beverage containers, newsprint, papers for magazines and books,
printing
and writing paper and other stationery items such as labels and
envelopes.
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Process
treatment chemicals:
Deposit,
contaminant, microbiological and foam control, clarification, retention,
drainage, felt conditioning, deinking, fiber recovery and water
closure.
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Water
treatment chemicals:
Utility
systems, cooling water and water clarification.
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Aqualon
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Water-soluble
polymers:
Hydroxyethylcellulose
(HEC), Carboxymethylcellulose (CMC), Methylcellulose (MC) and derivatives,
Hydroxypropylcellulose (HPC) and Guar and its derivatives.
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Manufacturers
of interior and exterior architectural paints, oilfield service
companies
for oil and gas drilling and recovery, paper mills, construction
material
manufacturers and makers of oral hygiene products, personal care
products,
food products and pharmaceuticals.
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Solvent-soluble
polymers:
Pentaerythritol
(PE) and Ethylcellulose (EC).
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Producers
of coating resins, printing inks and aviation fluids.
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Engineered
Materials and Additives
FiberVisions
is one of the largest manufacturers of polyolefin staple fibers used in
disposable products like diapers and wipes. FiberVisions produces monocomponent
polypropylene fibers and bicomponent fibers comprised of a polypropylene
core
and a polyethylene sheath. FiberVisions also produces polyolefin fiber and
yarn
for the industrial and textile markets used in concrete and asphalt, wipes,
upholstery and automotive fabrics, geotextile fabrics and filtration
products.
Pinova
consists of the rosin and terpenes specialty business. Pinova manufactures
wood
and gum rosin resins and is the world’s only producer of pale wood rosin
derivatives. Product applications and markets include food and beverage,
construction specialties, adhesives, and rubber and plastic
modifiers.
At
December 31, 2005, the principal products and primary markets of this
segment were:
Division
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Principal
Products
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Primary
Markets
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FiberVisions
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Staple
fibers:
For
hygiene products, wipes, geotextiles and filtration.
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Makers
of nonwoven and woven fabrics for applications including baby care,
feminine care, adult incontinence, wipes, geotextile, construction
and
upholstery.
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Filament
yarns:
For
upholstery and automotive fabrics.
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Pinova
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Rosin
resins:
For
food and beverage, construction and adhesives.
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Makers
of consumer and industrial products such as masking, packaging,
arts and
duct tape, construction materials, beverages, chewing gum, plastics
and
adhesives.
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Raw
Materials and Energy Supply
Raw
materials and supplies are purchased from a variety of industry sources,
including the agricultural, forestry, mining, petroleum and chemical
industries.
Important
raw materials for Pulp and Paper are cationic and anionic polyacrylamides
and
emulsions, biocides, amines, surfactants, rosin, adipic acid, epichlorohydrin,
fumaric acid, stearic acid, diethylenetriamine, phosphorous trichloride and
starch.
Raw
materials important to Aqualon are cellulose pulp (derived from wood and
cotton
linters) and guar splits, both renewable resources, ethylene oxide and caustic.
Other commodity and chemical inputs include acetaldehyde, fatty acids, methanol,
ethyl chloride, propylene oxide, chlorine, monochloroacetic acid, methyl
chloride and inorganic acids.
The
important raw materials for the Engineered Materials and Additives segment
are
polypropylene and polyethylene for the FiberVisions division and pine wood
stumps, limonene, gum rosin and crude sulfate turpentine for the Pinova
division.
FiberVisions
purchases polypropylene resins from a number of the major global producers.
FiberVisions has undertaken initiatives to expand and fully qualify alternative
suppliers, which allows for greater flexibility and reliability of supply.
Major
requirements for key raw materials and fuels are typically purchased pursuant
to
contracts. The Company is not dependent on any one supplier for a material
amount of its raw material or fuel requirements, but certain important raw
materials, such as cotton linters, are obtained from a sole-source or a few
major suppliers. Except for polypropylene, which represented approximately
13%
of Cost of sales in 2005, no single raw material accounts for more than 4%
of
total current year cost of goods sold.
While
temporary shortages of raw materials and fuels may occur occasionally, these
items are currently readily available. However, their continuing availability
and price are subject to domestic and world market and political conditions
as
well as to the direct or indirect effect of governmental action or regulations.
The impact of any future raw material and energy shortages on the Company's
business as a whole or in specific world areas cannot be accurately predicted.
Operations and products may, at times, be adversely affected by governmental
action, natural disasters, shortages or international or domestic events.
Competition
The
specialty chemicals industry is highly fragmented and its participants offer
a
broad array of product lines representing many different products designed
to
meet specific customer requirements. Individual product and portfolio offerings
compete on a global, regional and/or local level subject to the nature of
the
businesses and products, as well as the end-markets and customers served.
The
industry has become increasingly global as participants focus on establishing
and maintaining leadership positions in relatively narrow market niches.
Many of
the Company's product lines face competitive domestic and international
pressures, including industry consolidation, pricing pressures and competing
technologies. In Pulp and Paper, customers and competitors are consolidating
to
enhance market positions and product offerings on a worldwide basis. Aqualon
is
facing competitive threats from emerging Asian producers. To address this
threat, Aqualon continues to pursue a lower cost strategy, which includes
reducing costs in existing facilities and adding production capacity in the
growing, low-cost Asian region, as evidenced by the new Hercules Tianpu Chemical
Company joint venture. In addition, certain of the Company's businesses are
subject to intense competition from new technologies, such as FiberVisions
in
its hygiene products line. FiberVisions, as a fibers manufacturer for carded
non-woven hygienic applications, faces competition from spunbond (SB) and
spunbond/melt blown/spunbond (SMS) technologies. SB/SMS products may offer
strength-driven cost savings compared to the products of FiberVisions in
specific applications; however, FiberVisions believes that its carded products
provide improved softness, uniformity, stretch and liquid management properties
preferred in wipes and by certain segments of the disposable diaper market
and
other hygiene products markets. The threat of new producers in the
thermal-bonded hygienic product line is relatively low due to the fact that
the
production process involves significant investments in plant, equipment and
application know-how.
Patents
and Trademarks
Patents
covering a variety of products and processes have been issued to the Company
and
its subsidiaries. The Company is licensed under certain other patents held
by
other parties covering its products and processes. The Company's rights under
these patents and licenses constitute a valuable asset.
The
Company and its wholly-owned subsidiaries also have many global trademarks
covering their products. Some of the more significant trademarks include:
AquaCat™
clear
cationic solution, Aquapel® sizing agent, Hercon® sizing emulsions, Aqualon®
water-soluble polymers, Natrosol® hydroxyethylcellulose, Culminal®
methylcellulose, Klucel® hydroxypropylcellulose, Natrosol FPS® water-soluble
polymer suspension, Precis® sizing agent, Kymene® resin, Herculon® fiber,
Presstige® deposit control additives, Spectrum® microbiocides, Ultra-pHase®
sizing agent, Hercobond® dry strength resin, Chromaset® surface size, ProSoft®
tissue softeners and Zenix® contaminant control.
The
Company does not consider any individual patent, license or trademark to
be of
material importance to Hercules taken as a whole.
Research
and Development
The
Company is focused on product innovation as one of its key growth strategies.
Research and development efforts are directed toward the discovery and
development of new products and processes, the improvement and refinement
of
existing products and processes, the development of new applications for
existing products and cost improvement initiatives. Hercules spent $40.9
million
on research and development activities in 2005, as compared to $42.8 million
in
2004 and $38.7 million in 2003. The decrease in spending for research and
development activities in 2005 was primarily due to the strategic decision
to
close the Barneveld Research Laboratories and efficiencies gained in targeting
the research and development programs which deliver optimal
results.
Pulp
and Paper currently focuses its technology efforts on innovative high-value
product development, incremental improvements to existing products and services
and cost reduction programs to meet diverse customer needs worldwide. During
2005, as part of the consolidation and rationalization of its research and
development operations, the division announced the closing of its Jacksonville,
Florida facility and completed the closure of its Barneveld facility in The
Netherlands. This centralization of Pulp and Paper research and development
operations at its Research Center in Wilmington, Delaware is expected to
result
in improved efficiency and effectiveness. The state-of-the-art facilities
located in the U.S. include large and sophisticated research and development
laboratories with pilot paper making capabilities that simulate actual operating
conditions in a customer's facilities. This allows an accurate assessment
of the
potential impact of new products on plant performance. The division's scientists
conduct research and customer optimization studies focused on solving water
and
process treatment challenges by using sophisticated techniques and equipment
to
provide high level analytical testing and advanced technical service
worldwide.
The
Pulp and Paper division’s Customer Applications laboratories are being relocated
to have greater proximity to key customer activities and to take advantage
of
existing Company assets and infrastructure. The European customer applications
operations formerly located at Barneveld have been recently relocated to
the
Helsingborg Technical Center in Helsingborg, Sweden. This facility began
operations in January 2006. The Americas customer applications activities
will
be relocated from Jacksonville, Florida to the Wilmington Research Center
by the
end of 2006 as part of a $5.5 million capital project to build a facility
which
will house the aforementioned pilot paper making and paper testing activity.
Finally, a new customer applications facility is planned for the Asia Pacific
region with an anticipated 2007 start-up.
Aqualon
focuses its research and development efforts on market-oriented product
development, manufacturing process improvement and responsive technical service
to customers. New product development is focused on products which manage
the
physical properties of water based systems, such as latex paint, construction
mortars and personal care products, to meet customer demand for improved
performance and efficiency.
Aqualon
has application and development laboratories in Europe, Asia and the Americas
that provide technical service to customers. At these laboratories, teams
work
in a network to develop products, identify new applications and meet customer
requirements.
Research
and development efforts in FiberVisions are primarily focused on developing
new
and novel polyolefin fibers around four key platforms: high tenacity for
industrial applications; dyeable fibers for apparel and upholstery; wettability
for wipes; and shaped fibers for improved adhesion, wicking, coverage and
visual
appearance. A continued hygiene focus is to improve fiber strength while
enhancing hygiene product properties for loft, softness and stretch, thereby
creating a platform to better compete with SB/SMS products. The industrial
and
textile product units are investigating the use of specific fibers for new
applications in the upholstery, wipes, geotextiles and construction
applications.
FiberVisions
has research and development facilities in the U.S. designed to serve the
business needs of its customers. During 2005, FiberVisions closed the technical
facility at its Varde, Denmark manufacturing facility and consolidated it
to
Covington, Georgia. Pilot spinning and processing lines are used to examine
new
polymers and processing concepts such as monocomponent or bicomponent fibers
from single filament spinning to full-scale production facilities.
Pinova,
whose research facilities are located in the U.S., focuses its efforts on
market
driven product development and cost improvement techniques in its production
processes.
Environmental
Matters
The
Company is subject to numerous environmental laws and regulations. The Company
believes it is in compliance, in all material respects, with applicable federal,
state and local environmental laws and regulations. Expenditures relating
to
environmental cleanup costs have not materially affected, and are not expected
to materially affect, capital expenditures or competitive position. Additional
information regarding environmental matters is provided in Notes 11 and 12
to
the Consolidated Financial Statements and is incorporated herein by
reference.
Employees
As
of December 31, 2005, the Company had approximately 4,650 employees
worldwide. Approximately half of the worldwide employees were located in
the
United States, of which approximately 31% were represented by various local
or
national unions. As of December 31, 2004, the Company had approximately
4,950 employees worldwide.
International
Operations
Net
sales and Property, plant and equipment, net by geographic area for each
of the
three years ended December 31, 2005, 2004 and 2003 appear in Note 23 to the
Consolidated Financial Statements. Direct export sales from the United States
to
unaffiliated customers were $131.7 million, $118.7 million and $122.5 million
for 2005, 2004 and 2003, respectively. The Company's operations outside the
United States are subject to the usual risks and limitations related to
investments in foreign countries, such as fluctuations in currency values,
exchange control regulations, wage and price controls, employment regulations,
foreign investment laws, governmental instability (including expropriation
or
confiscation of assets) and other potentially detrimental domestic and foreign
governmental policies affecting U.S.-based companies doing business abroad,
including risks related to terrorism and international hostilities.
Available
Information
Hercules
files its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports with the Securities
and
Exchange Commission (SEC). Hercules provides access to its SEC filings via
a
hyperlink to the SEC's website on its corporate website, www.herc.com.
These
filings may also be read and copied at the SEC's Public Reference Room which
is
located at 100 F Street, N.E., Washington, DC 20549. Information about the
operation of the Public Reference Room can be obtained by calling the SEC
at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy
and information statements, and other information regarding issuers that
file
electronically with the SEC at www.sec.gov.
The
Company's Directors Code of Business Conduct and Ethics and its Business
Practices Policy, as well as the charters of the Corporate Governance,
Nominating and Ethics Committee, Audit Committee and Human Resources Committee,
are available on the Company's website at www.herc.com.
These
documents are also available in print to any shareholder who requests them
in
writing from Israel J. Floyd, Esq., Corporate Secretary, Hercules Incorporated,
Hercules Plaza, 1313 North Market Street, Wilmington, Delaware
19894-0001.
ITEM
1A. RISK
FACTORS
In
addition to the factors discussed elsewhere, the following, which have not
been
sequenced in any particular order, are important factors that could cause
actual
results or events to differ materially from those contained in any
forward-looking statements made by or on behalf of the Company.
Indebtedness
As
of December 31, 2005, the Company's total debt was approximately $1,109.3
million, of which 64% is fixed rate indebtedness. The Company's indebtedness
has
significant consequences. For example, it could: increase the Company's
vulnerability to economic downturns and competitive pressures; require the
Company to dedicate a substantial portion of its cash flow from operations
to
payments on its indebtedness, thereby reducing the availability of its cash
flow
to fund working capital, capital expenditures, research and development efforts
and other general corporate purposes; limit the Company's flexibility in
planning for, or reacting to, changes in its business and the industries
in
which it operates or in pursuing attractive business opportunities requiring
debt financing; place the Company at a disadvantage to its competitors that
have
less debt; and limit the Company's ability to borrow additional funds due
to
restrictive covenants.
The
Senior Credit Facility and the indentures governing the 11.125% senior notes
due
2007 and the 6.75% senior subordinated notes due 2029, which together account
for a large portion of the Company's debt, contain numerous restrictive
covenants, including, among other things, covenants that limit the Company's
ability to: borrow money and incur contingent liabilities; make dividend
or
other restricted payments; use assets as security in other transactions;
enter
into transactions with affiliates; enter into new lines of business; issue
and
sell stock of restricted subsidiaries; sell assets or merge with or into
other
companies and make capital expenditures. In addition, the Senior Credit Facility
requires the Company to meet financial ratios and tests, including maximum
leverage and interest coverage levels. These restrictions could limit the
Company's ability to plan for or react to market conditions or meet
extraordinary capital needs and could otherwise restrict corporate
activities.
The
Company's ability to comply with the covenants and other terms of the Senior
Credit Facility and the indentures governing the senior notes and to satisfy
these and other debt obligations will depend upon the Company's current and
future performance. The Company's performance is affected by general economic
conditions and by financial, competitive, political, business and other factors,
many of which are beyond the Company's control. The Company believes that
the
cash generated from its businesses will be sufficient to enable the Company
to
comply with the covenants and other terms of the Senior Credit Facility and
the
indentures governing the senior notes and to make debt payments as they become
due.
The
Company and its subsidiaries may incur additional indebtedness in the future.
As
of December 31, 2005, the Company had a $550 million Senior Credit Facility
with a syndicate of banks. Under the Senior Credit Facility, the Company
has a
$150 million revolving credit agreement, which permits certain additional
borrowings. In addition, the Company has the option to borrow an additional
$250
million in the form of a term note under the Senior Credit Facility. If new
indebtedness is added to the Company's current indebtedness levels, the risks
described above could increase.
Market
Risk
Fluctuations
in interest and foreign currency exchange rates affect the Company's financial
position and results of operations. The Company has used several strategies
to
actively hedge interest rate and foreign currency exposure and minimize the
effect of such fluctuations on reported earnings and cash flow (see "Foreign
Currency Translation" and "Derivative Instruments and Hedging" in the Summary
of
Significant Accounting Policies and Note 24 to the Consolidated Financial
Statements). Sensitivity of the Company's financial instruments to selected
changes in market rates and prices, which are reasonably possible over a
one-year period, are described below. The market values for interest rate
risk
are calculated by the Company utilizing a third-party software that employs
standard pricing models to determine the present value of the instruments
based
on the market conditions as of the valuation date.
The
Company's derivative and other financial instruments subject to interest
rate
risk consist substantially of debt instruments (see Note 24 to the Consolidated
Financial Statements). At December 31, 2005 and 2004, net market value of
these combined instruments was a liability of $1,092.4 million and $1,265.2
million, respectively. The sensitivity analysis assumes an instantaneous
100-basis point move in interest rates from their levels, with all other
variables held constant. A 100-basis point increase in interest rates at
December 31, 2005 and 2004 would result in a $59.1 million and a $69.8
million decrease, respectively, in the net market value of the liability.
A
100-basis point decrease in interest rates at December 31, 2005 and 2004
would result in a $63.9 million and a $73.7 million increase, respectively,
in
the net market value of the liability.
Our
financial instruments subject to foreign currency exchange risk consist of
foreign currency forwards and options and represent a net liability position
of
$0.2 million and a net asset position of $0.6 million at December 31, 2005
and 2004, respectively. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. A 10% strengthening of the
U.S.
dollar versus other currencies at December 31, 2005 and 2004 would result
in a $0.1 million decrease and a $0.6 million increase, respectively, in
the net
position, while a 10% weakening of the dollar versus all currencies would
result
in a $0.1 million and a $0.8 million decrease, respectively, in the net
position.
Foreign
exchange forward and option contracts have been used to hedge the Company's
firm
and anticipated foreign currency cash flows. Thus, there is either an asset
or
cash flow exposure related to all the financial instruments in the above
sensitivity analysis for which the impact of a movement in exchange rates
would
be in the opposite direction and substantially equal to the impact on the
instruments in the analysis. There are presently no material restrictions
on the
remittance of funds generated by the Company's operations outside the United
States; however, in certain regions, primarily Latin America and Asia Pacific,
there are general limitations on the repatriation of cash.
The
Company has not designated any derivative as a hedge instrument under Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and, accordingly, changes
in
the fair value of derivatives are recorded each period in earnings.
Commodity
Price Risk
The
Company acquires raw materials and energy from its vendors under a variety
of
short-and long-term contracts and supply agreements, depending upon various
economic and logistical factors. The purchase prices are generally related
to
prevailing market conditions and are linked, in some cases, to relevant market
indices. Changes in raw material and energy costs have historically had a
material impact on the Company’s profit and cash from operations and are
anticipated to continue to impact future periods similarly.
In
order to mitigate these risks, the Company employs a variety of strategic
sourcing techniques to minimize use of sole source suppliers, establish
contracts that limit the frequency or magnitude of price increases, have
alternate raw materials approved for use, selectively hedge certain strategic
commodities, identify alternate suppliers in lower cost regions of the world,
continually reassess its value chain, and aggressively counter suppliers’
attempts to increase costs.
New
Product Development
Product
innovation and new product development are integral to the Company’s strategy.
Research and development efforts are directed towards the discovery and
development of new products and processes, the improvement and refinement
of
existing products and processes, the development of new applications for
existing products and cost improvement initiatives. There can be no assurance
that product development efforts will be successful, that we will be able
to
cost-effectively manufacture these new products or that we will be able to
successfully market these products.
Environmental
In
the ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites,
past
spills, disposals and other releases of hazardous substances. Changes in
these
laws and regulations may have a material adverse effect on the Company's
financial position and results of operations. Any failure by the Company
to
adequately comply with such laws and regulations could subject the Company
to
significant future liabilities.
Environmental
remediation expenses are funded from internal sources of cash. Such expenses,
the most significant of which relate to non-operating or former sites, are
not
expected to have a significant effect on the Company's ongoing liquidity.
Environmental cleanup costs, including capital expenditures for ongoing
operating sites, are a normal, recurring part of operations and are not
significant in relation to total operating costs or cash flows (see Item
3,
Legal Proceedings and Notes 11 and 12 to the Consolidated Financial
Statements).
Litigation
Hercules
is a defendant in numerous lawsuits arising out of, or incidental to, the
conduct of its business. Such litigation typically falls within the following
broad categories: environmental (discussed above); antitrust; commercial;
intellectual property; labor and employment; personal injury; property damage;
product liability; and toxic tort. While it is not feasible to predict the
outcome of all pending matters, the ultimate resolution of one or more of
these
matters could have a material effect upon the Company’s financial position,
results of operations and/or cash flows (see Item 3, Legal Proceedings and
Notes
11 and 12 to the Consolidated Financial Statements).
Pension
The
assets and liabilities associated with the Company's defined benefit plans
are
subject to interest rate and market risk. A 100-basis point decrease or increase
in the discount rate has an unfavorable or favorable impact of approximately
$170 million on the U.S. defined benefit plan’s accumulated benefit obligation
(“ABO”) and an unfavorable or favorable impact on its projected benefit
obligation (“PBO”) of approximately $177 million. A 100-basis point decrease or
increase in the assumed rate of return has an unfavorable or favorable impact
of
approximately $12 million on the estimated expense for the U.S. pension and
postretirement plans in 2006 (see Note 8 to the Consolidated Financial
Statements).
ITEM
1B. UNRESOLVED STAFF
COMMENTS
None
ITEM
2. PROPERTIES
The
Company's corporate headquarters and major research center are located in
Wilmington, Delaware. The Company also owns a number of plants and facilities
worldwide in locations strategic to the sources of raw materials or to
customers. All of the Company's principal properties are owned by the Company,
except for its corporate headquarters office building in Wilmington, Delaware,
its European headquarters office building in Schaffhausen, Switzerland and
its
Asian headquarters in Shanghai, China, all of which are leased. The following
are the locations of the Company's worldwide plants:
Performance
Products
|
Pulp
and Paper
-
Beringen, Belgium; Burlington, Ontario, Canada; Busnago, Italy;
Chicopee,
Massachusetts, U.S.; Franklin, Virginia, U.S.; Hattiesburg, Mississippi,
U.S.; Helsingborg, Sweden; Kim Cheon, Korea; Macon, Georgia, U.S.;
Mexico
City, Mexico; Milwaukee, Wisconsin, U.S.; Nantou, Taiwan; Paulinia,
Brazil; Pendlebury, United Kingdom; Portland, Oregon, U.S.; Savannah,
Georgia, U.S.; Shanghai, China (60% joint venture interest); Sobernheim,
Germany; Tampere, Finland; Tarragona, Spain; Voreppe, France; and
Zwijndrecht, The Netherlands.
|
The
division also owns a manufacturing facility in Pilar, Argentina, that has
been
leased to a major U.S. company under a five-year lease. The Company purchases
its products for sale in Argentina from this plant under a five-year supply
and
distribution agreement which ends in 2009.
|
Aqualon
-
Alizay, France; Doel, Belgium; Hopewell, Virginia, U.S.; Jiangmen
City,
China; Kenedy, Texas, U.S.; Louisiana, Missouri, U.S.; Dalton,
Georgia,
U.S.; Parlin, New Jersey, U.S.; and Zwijndrecht, The
Netherlands.
|
The
Dalton, Georgia site was acquired in January 2006 as part of the aforementioned
Benchmark transaction.
Engineered
Materials and Additives
|
FiberVisions
-
Athens, Georgia, U.S.; Covington, Georgia, U.S.; Suzhou, China;
and Varde,
Denmark.
Pinova
-
Brunswick, Georgia, U.S.
|
The
Company's plants and facilities are maintained in compliance with current
laws
and regulations and are generally considered to be in good condition, with
adequate capacity for projected business operations. From time to time, the
Company discontinues operations at, or disposes of, facilities that have
for one
reason or another become unsuitable.
ITEM
3. LEGAL
PROCEEDINGS
Information
regarding legal proceedings is included in the Notes to Consolidated Financial
Statements (see Note 12) and is incorporated herein by reference.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter was submitted to a vote of security holders during the fourth quarter
of
2005 through the solicitations of proxies or otherwise.
PART
II
ITEM
5. MARKET
FOR HERCULES' COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The
Company's common stock is listed on the New York Stock Exchange (ticker symbol
HPC) and the Swiss Stock Exchange. It is also traded on the Philadelphia,
Midwest and Pacific Stock Exchanges.
The
approximate number of holders of record of the Company’s common stock ($25/48
stated value) as of February 24, 2006 was 14,976.
The
following table sets forth, for the periods indicated, the high and low closing
price per share of the Company's common stock, as reported on the New York
Stock
Exchange:
2005
|
|
High
|
|
Low
|
|
First
Quarter
|
|
$
|
15.24
|
|
$
|
13.86
|
|
Second
Quarter
|
|
$
|
14.82
|
|
$
|
13.00
|
|
Third
Quarter
|
|
$
|
14.69
|
|
$
|
12.05
|
|
Fourth
Quarter
|
|
$
|
12.25
|
|
$
|
10.20
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
13.18
|
|
$
|
10.81
|
|
Second
Quarter
|
|
$
|
12.19
|
|
$
|
9.99
|
|
Third
Quarter
|
|
$
|
14.25
|
|
$
|
11.21
|
|
Fourth
Quarter
|
|
$
|
15.09
|
|
$
|
13.97
|
|
On
December 30, 2005, the closing price of the common stock was
$11.30.
The
payment of quarterly dividends was suspended in the fourth quarter of 2000,
subject to reconsideration by the Board of Directors in its discretion, when
warranted under appropriate circumstances and subject to restrictions in
the
indentures governing the Company's 11.125% senior notes due 2007, the 6.75%
senior subordinated notes due 2029 and the Senior Credit
Facility.
ITEM
6. SELECTED
FINANCIAL DATA
A
summary of the selected financial data for Hercules for the years ended and
as
of the end of the years specified is set forth in the table below. As discussed
in greater detail in Note 21, during 2005 the Company changed its method
of
accounting for inventory from the LIFO method to the weighted-average method.
As
such, prior year information has been retrospectively adjusted. The BetzDearborn
Water Treatment Business has been treated as a discontinued operation as
of
February 12, 2002 pursuant to Statement of Financial Accounting Standards
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”).
|
|
(Dollars
in millions, except per share data)
|
|
Statements
of Operations Information:
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Net
sales
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
$
|
1,846.0
|
|
$
|
1,705.0
|
|
$
|
1,776.0
|
|
Profit
from operations
|
|
|
130.4
|
|
|
228.9
|
|
|
255.5
|
|
|
217.3
|
|
|
186.0
|
|
Net
(loss) income from continuing operations before discontinued
operations
and cumulative effect of changes in accounting principle
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
74.2
|
|
|
(48.8
|
)
|
|
(107.7
|
)
|
Net
income (loss) on discontinued operations, net of tax
|
|
|
-
|
|
|
-
|
|
|
4.5
|
|
|
(196.0
|
)
|
|
56.0
|
|
Net
(loss) income before cumulative effect of changes in
accounting
principle
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
78.7
|
|
|
(244.8
|
)
|
|
(51.7
|
)
|
Cumulative
effect of changes in accounting principle, net of tax (see
Note
21)
|
|
|
(2.5
|
)
|
|
-
|
|
|
(33.3
|
)
|
|
(368.0
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
$
|
(612.8
|
)
|
$
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share Data and Other Share Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.70
|
|
$
|
(0.46
|
)
|
$
|
(1.03
|
)
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
0.04
|
|
|
(1.85
|
)
|
|
0.54
|
|
Cumulative
effect of changes in accounting principle
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.31
|
)
|
|
(3.47
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
$
|
(5.78
|
)
|
$
|
(0.49
|
)
|
Diluted
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.69
|
|
$
|
(0.46
|
)
|
$
|
(1.03
|
)
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
0.04
|
|
|
(1.85
|
)
|
|
0.54
|
|
Cumulative
effect of changes in accounting principle
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.31
|
)
|
|
(3.47
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
$
|
(5.78
|
)
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,568.8
|
|
$
|
2,720.3
|
|
$
|
2,721.8
|
|
$
|
2,772.0
|
|
$
|
4,952.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$
|
1,109.0
|
|
$
|
1,240.1
|
|
$
|
1,347.7
|
|
$
|
883.0
|
|
$
|
2,210.0
|
|
Company-obligated
preferred securities of subsidiary trusts
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
624.0
|
|
|
624.0
|
|
Total
debt and preferred securities
|
|
$
|
1,109.0
|
|
$
|
1,240.1
|
|
$
|
1,347.7
|
|
$
|
1,507.0
|
|
$
|
2,834.0
|
|
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
following discussion should be read in connection with the information contained
in the Consolidated Financial Statements and Notes thereto. All references
to
individual Notes refer to Notes to the Consolidated Financial Statements.
Business
Overview
Business
Profile - Market and Geographic Concentration
Hercules
is a leading global manufacturer and marketer of specialty chemicals and
related
services for a broad range of business, consumer and industrial applications.
The Company's principal products are chemicals used by the paper industry
to
improve performance and enhance the manufacturing process; water-soluble
polymers; polypropylene and polyethylene fibers; and specialty resins. Key
markets for the Company's products as a percentage by end market net sales
in
the years ended December 31, 2005 and 2004 were:
|
|
2005
|
|
2004
|
|
Pulp
and
Paper
|
|
|
48
|
%
|
|
48
|
%
|
Regulated
(including food, pharmaceutical and personal care)
|
|
|
21
|
%
|
|
20
|
%
|
Industrial
Specialties (including oilfield, textiles and general
industrial)
|
|
|
12
|
%
|
|
13
|
%
|
Paints
and Adhesives
|
|
|
10
|
%
|
|
10
|
%
|
Construction
Materials
|
|
|
9
|
%
|
|
9
|
%
|
Consolidated
|
|
|
100
|
%
|
|
100
|
%
|
More
than
50% of the Company's revenues are generated outside of North America. Net
sales
by region expressed as a percentage of total net sales for the years ended
December 31, 2005 and 2004 were:
|
|
2005
|
|
2004
|
|
North
America
|
|
|
48
|
%
|
|
46
|
%
|
Europe
|
|
|
36
|
%
|
|
38
|
%
|
Asia
Pacific
|
|
|
11
|
%
|
|
11
|
%
|
Latin
America
|
|
|
5
|
%
|
|
5
|
%
|
Consolidated
|
|
|
100
|
%
|
|
100
|
%
|
Business
Segments
The
Company currently operates through two reportable segments and four divisions:
Performance Products (Pulp and Paper and Aqualon) and Engineered Materials
and
Additives (FiberVisions and Pinova). Net sales for the years ended
December 31, 2005 and 2004 as a percent of total net sales, by division,
were:
|
|
2005
|
|
2004
|
|
Pulp
and
Paper
|
|
|
47
|
%
|
|
47
|
%
|
Aqualon
|
|
|
34
|
%
|
|
34
|
%
|
FiberVisions
|
|
|
14
|
%
|
|
14
|
%
|
Pinova
|
|
|
5
|
%
|
|
5
|
%
|
Consolidated
|
|
|
100
|
%
|
|
100
|
%
|
Key
Developments
During
2005, Profit from operations and Net income declined from prior year levels
primarily as a result of: (1) the rapid escalation in raw material, utility
and
transportation costs driven by the escalation in oil and gas inputs, (2)
special
charges primarily associated with ongoing efforts to restructure the Company’s
global operations including manufacturing rationalization, marketing and
management realignment, research and development consolidation and corporate
support realignment, and (3) an impairment of goodwill attributable to the
Company’s commitment to dispose of a majority interest in the FiberVisions
division.
Despite
the challenges to the current operating environment and the costs of the
substantial restructuring efforts, Hercules increased its cash from operations
from prior year levels and continued to make progress towards its goal to
further de-lever its balance sheet. In addition, the Company recently announced
intentions to realign the business toward a greater market focus, resulting
in
the formation of two new business segments that will replace the Company’s
existing segments. The two segments will be the Aqualon Group and the Paper
Technologies and Ventures Group. The Aqualon Group will focus on coatings
and
construction, the regulated industries of food, pharmaceutical and personal
care, and energy and specialties solutions. The existing Pinova division
will be
primarily integrated into coatings and construction and regulated industries.
The Paper Technologies and Ventures Group will focus on the paper industry
and
manage a number of ventures that will initially include businesses focused
on
water management, pulp and biorefining, lubricants and adhesives. The Company
anticipates that these changes will be effective for the reporting period
ending
March 31, 2006.
Raw
Materials and Energy
The
challenging raw material environment that was experienced in 2004 continued
into
2005 and escalated beginning with the first quarter primarily as a result
of
increasing prices for petroleum-based products and the growing global demand
for
raw materials driven in part by substantial growth in China. These factors
continued to drive costs higher through the spring and summer months and
also
had a negative impact on ancillary costs such as freight and transportation.
Hurricanes Katrina and Rita and other regional storms further exacerbated
the
problem by disrupting the United States’ Gulf Coast natural gas and oil
exploration, development, refining and distribution infrastructure. As a
result,
a number of the Company’s key raw material suppliers declared force majeure
resulting in product allocation issues. Infrastructure damage, including
that to
Gulf coast rail bridges, continues to impact supply distribution. In many
cases,
the Company has incurred fuel and energy surcharges for freight and
transportation. Where necessary to maintain commitments to our customers,
the
Company has, in some cases, incurred incremental costs to secure raw materials
from alternative suppliers, some of which involved significant air freight
charges. Pricing for many key raw materials reached all-time highs during
the
year and particularly during the fourth quarter, resulting in increased raw
material costs to Hercules of approximately $76 million during 2005 as compared
to 2004. The escalation in energy prices also had an adverse impact on utility
costs.
Special
Charges and Restructurings
Consistent
with long range plans to reposition the Company’s operations in order to
capitalize on growth opportunities on both a regional as well as product
and
service offering basis, the Company executed a number of restructuring and
rationalization programs designed to improve organizational efficiency in
all
key phases of operations including research and development, regional and
functional management, global marketing, manufacturing, and corporate support
during 2005.
At
the
end of 2004, the Company announced the first phase of its program to realign
and
consolidate its significant research and development efforts into regional
centers for Europe and North America, respectively. In connection with that
program, the Company closed its research facility in Barneveld, The Netherlands
during the third quarter of 2005. The Company terminated approximately 50
employees at the Barneveld facility and relocated 8 employees to the Company’s
Helsingborg, Sweden site, which will now serve as the primary center for
Pulp
and Paper application activities in Europe. The Company recognized approximately
$3.0 million in severance charges and benefits that were accrued ratably
over
the service period from the announcement date in December of 2004 through
closure in September 2005 in accordance with SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities (“SFAS 146”). In addition to
severance costs, the Company recognized an additional $1.4 million of charges
for other exit costs incurred to close the Barneveld facility.
The
second phase of the research realignment and consolidation program began
during
the fourth quarter of 2005 with the announcement of the Company’s intention to
close its Jacksonville, Florida facility which houses certain research and
development capabilities specific to pulp and paper technology including
a pilot
paper making machine. Concurrent with that action and in connection with
a grant
received from the State of Delaware, the Company announced plans to
substantially expand and upgrade its research facility in Wilmington, Delaware.
The plan includes the transfer of certain employees and equipment from the
Jacksonville facility to the Wilmington facility. The Company plans to terminate
approximately 60 employees at the Jacksonville site and recognized a charge
of
$0.3 million during the fourth quarter of 2005. In accordance with SFAS 146,
the
Company will recognize approximately an additional $2.0 million during 2006
as
the activities are terminated and the site is prepared for closure. While
the
Wilmington site is undergoing expansion and will eventually increase its
headcount, certain functions were realigned resulting in the elimination
of
approximately 10 positions for which a charge of approximately $0.5 million
was
recognized in accordance with Statement of Financial Accounting Standards
No.
112, “Employers’ Accounting for Postemployment Benefits” (“SFAS
112”).
In
connection with these actions, the Company accelerated the depreciation of
its
facilities in Barneveld and Jacksonville through the periods prior to their
estimated closure resulting in charges of $1.8 million and $0.1 million,
respectively. Accelerated depreciation charges will continue into 2006 for
the
Jacksonville site during the period of operation prior to estimated closure.
The
Company also accelerated the depreciation of certain assets at the Wilmington,
Delaware facility for the period prior to their demolition or reconfiguration
resulting in charges of $0.5 million.
Throughout
2005, the Performance Products segment engaged in significant actions designed
to realign its global marketing infrastructure and de-layer management as
part
of both divisions’ strategic plans and to improve responsiveness to emerging
market trends and opportunities. Accordingly, the Company eliminated
approximately 80 positions worldwide and recognized charges for severance
and
related benefits of $14.5 million in accordance with SFAS 112. Of the total,
approximately $12.7 million was attributable to the Pulp and Paper division
and
the remaining $1.8 million was attributable to the Aqualon
division.
Rationalization
of certain manufacturing assets occurred in conjunction with the Performance
Products restructuring activities. The Company closed its Pandaan, Indonesia
manufacturing facility concurrent with the realignment of its Pulp and Paper
division in the Asia Pacific region. In connection with the closing, the
Company
terminated approximately 50 employees and recognized severance and related
benefits charges of approximately $0.2 million in accordance with SFAS 146
and
approximately $0.4 million in SFAS 112 charges. Accelerated depreciation
charges
of $0.3 million were recognized during the period preceding the closure.
The
Company also announced its intention to close its Pendlebury manufacturing
facility in the United Kingdom during 2006 as part of the Pulp and Paper
division’s realignment in Europe. As a result of this action, the Company
recognized a SFAS 112 charge of $1.3 million related to the termination of
approximately 40 employees. Accelerated depreciation charges of $0.8 million
were recognized in 2005 and will continue to be recognized into 2006 during
the
period of continued operational use prior to estimated closure. Also during
2005, the Aqualon division terminated 7 employees in connection with a program
at its Parlin, New Jersey manufacturing facility, resulting in approximately
$0.3 million in charges incurred during the period in which certain
energy-related assets were removed from service in accordance with SFAS
146.
Both
the
Pinova and FiberVisions divisions executed plans to curtail certain production
activities and reduce headcount at their manufacturing facilities in North
America and Europe. In November, Pinova announced its intention to exit the
terpenes specialties business in early 2006 and recorded an impairment charge
of
$5.2 million for certain assets directly attributable to the production of
those
products at the Brunswick, Georgia manufacturing facility as well as a $0.5
million write-off of related inventories and spare parts. The Company accrued
SFAS 112 charges of approximately $3.4 million in connection with the
termination of approximately 70 employees at the Brunswick facility. In addition
to those amounts accrued for severance and termination benefits, the Company
recognized an additional $0.2 million as incurred in connection with termination
of a product distribution agreement as an exit cost in accordance with SFAS
146.
Finally, Pinova recorded a $0.5 million impairment charge at the Company’s
Hattiesburg, Mississippi manufacturing facility attributable to the termination
of production of certain rosins which serve as an intermediate to other finished
products.
Primarily
as a result of declining market demand for certain products, FiberVisions
idled
production on certain lines at its Covington, Georgia manufacturing facility
and
also closed the technical facility at its Varde, Denmark manufacturing facility
and consolidated it to Covington, resulting in a combined termination of
approximately 80 employees and the accrual of SFAS 112 severance and related
benefit charges of $3.4 million. In addition the Company recorded $1.5 million
of write-downs in the value of certain inventories and spare parts at the
Covington facility.
In
order
to support the various initiatives to realign and restructure the Company’s
operations on a global basis, the Company also initiated several corporate
actions including the establishment of a centralized European headquarters
facility in Schaffhaussen, Switzerland, and concurrently implemented a principal
company structure. This new structure provides a number of benefits to the
Company including (1) centralized business management in Switzerland, (2)
administrative cost savings by having key managers in one location, and (3)
a
projected reduction in cash income taxes of approximately $20 million annually.
During 2005, the Company accrued approximately $0.5 million in relocation
costs
related to this restructuring in accordance with SFAS 146. In addition, the
Company streamlined other support functions, resulting in headcount reductions
of approximately 40 employees in various functional departments, including
information technology and procurement. In connection with the reductions,
the
Company recorded approximately $4.8 million for severance and related benefits
in accordance with SFAS 112.
A
summary
of the actions executed in 2005 is provided as follows:
|
|
Severance
and Other Exit Costs
|
|
Asset
Impairments
|
|
Accelerated
Depreciation
|
|
Inventory
Write-Downs
|
|
Totals
|
|
Research
and development consolidation
|
|
$
|
5.2
|
|
$
|
-
|
|
$
|
2.4
|
|
$
|
-
|
|
$
|
7.6
|
|
Global
marketing and management realignment
|
|
|
14.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14.5
|
|
Performance
Products manufacturing rationalization
|
|
|
2.2
|
|
|
-
|
|
|
1.1
|
|
|
-
|
|
|
3.3
|
|
Pinova
manufacturing rationalization
|
|
|
3.6
|
|
|
5.7
|
|
|
-
|
|
|
0.5
|
|
|
9.8
|
|
FiberVisions
manufacturing rationalization
|
|
|
3.4
|
|
|
-
|
|
|
-
|
|
|
1.5
|
|
|
4.9
|
|
Corporate
support realignment
|
|
|
5.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.3
|
|
Total
charges by action
|
|
$
|
34.2
|
|
$
|
5.7
|
|
$
|
3.5
|
|
$
|
2.0
|
|
$
|
45.4
|
|
In
connection with its commitment to sell a majority interest in the FiberVisions
division (see Strategic
Highlights
below),
the Company was required to record a goodwill impairment charge of $52.9
million
based on an estimate of the fair value for the entire division as determined
by
the negotiated sales price.
In
addition to these special charges, an update of the independent study of
the
Company’s estimated reasonably possible exposure for asbestos-related
liabilities was completed in the fourth quarter of 2005. Despite a significant
reduction in both the number of new claims received and the amounts paid
to
resolve claims, the study required an upward revision of the range of the
Company’s estimated reasonably possible exposure for these matters. Accordingly,
the Company recorded a charge of $37.5 million to reestablish and increase
its
reserves to $270 million.
Strategic
Highlights
During
the latter half of 2005, certain actions were initiated that are intended
to
enhance and support the Company’s strategic direction in light of the business
realignment referenced above. At the end of September 2005, the Company
announced the signing of a joint venture agreement between Aqualon and the
leading producers of MC in China. The joint venture will include the existing
MC
assets of Luzhou North Chemical Industries Co. Ltd. and Jiangsu Feixiang
Chemical Industries, Co. Ltd. as well as cash and equipment contributions
by
Hercules. The joint venture, Hercules Tianpu Chemical Co. will include an
expansion of a facility currently underway in Zhangjiagang, China that is
expected to begin operations in the second half of 2006. Closing is anticipated
in the first quarter of 2006 with a capital contribution of approximately
$8
million, of which $4.4 million has been pre-funded. During December 2005,
Hercules satisfied a portion of its initial capital contribution by securing
the
financing for certain equipment related to the new facility. Under the joint
venture agreement, Aqualon will have global marketing rights for the output
of
the joint venture and will receive sales commissions as well as royalties
for
licensed technology.
In
January of 2006, the Company announced an agreement to purchase the guar
and
guar derivative manufacturing division of Benchmark Polymer Products, L.P.,
a
subsidiary of Benchmark Performance Group, Inc. (“Benchmark”). Under the terms
of the agreement, Aqualon acquired Benchmark’s Dalton, Georgia production
facility for $20 million plus a provisional earn-out and also purchased an
equity position in Benchmark. In addition, the Company signed a five year
exclusive agreement to supply Benchmark with guar products for polymer slurries
used in oil and gas fracturing applications. This acquisition is intended
to
expand Aqualon’s presence in the energy industry. As a result of the
acquisition, Aqualon is expected to increase capacity utilization of its
existing guar and guar derivatives manufacturing facility in Kenedy,
Texas.
On
January 31, 2006, the Company signed an agreement to sell a 51% interest
in its
FiberVisions division to an affiliate of SPG Partners, LLC (“SPG”), a New
York-based private equity firm. Under terms of the agreement, Hercules will
receive cash of approximately $109 million, comprised of an $82.0 million
distribution from FiberVisions and $27.0 of proceeds from the sale of the
initial interest, upon the closing of the transaction, which is expected
to
occur by the end of March 2006. The agreement anticipates and is conditioned
upon the issuance of long-term debt financing prior to the sale. In addition,
the agreement provides SPG with an option to purchase an additional 14% interest
in FiberVisions for $7.4 million within one year. Hercules will receive
additional payments should FiberVisions meet certain performance measures.
The
transaction is expected to close by the end of the first quarter of 2006
pending
the aforementioned debt financing and other required approvals. The proceeds
from the transaction are expected to be utilized to pay down high cost debt
and
further de-lever the balance sheet consistent with the Company’s financial
goals.
In
addition, it was announced on February 13, 2006 that FiberVisions and Chisso
Corporation will establish a Japanese joint venture, ES FiberVisions Co.,
Ltd.,
and anticipate sales activity effective April 1, 2006.
As
a
result of the proposed transaction, the Company has begun efforts to develop
plans for the reduction of corporate expenses that are currently allocated
to
FiberVisions. Those costs are approximately $15 million and include
approximately $5 million of non-cash pension and post-retirement costs. Through
a combination of decentralization, selective outsourcing and non-manufacturing
site consolidations, the Company is targeting a total of $20 million in cost
reductions to be achieved by the end of 2007.
The
Company's discussion and analysis of its financial condition and results
of
operations is based on its consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Hercules
to make estimates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets
and liabilities. Hercules evaluates its estimates on a regular basis, including
those related to bad debts, inventories, impairments of goodwill and long-lived
assets, income taxes, restructuring, contingencies, including litigation
and
environmental, and pension and other benefit obligations. Hercules bases
its
estimates on various factors including historical experience, consultation
and
advice from third party subject matter experts and various assumptions that
are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Management reviews significant
estimates and related disclosures with the Audit Committee of the Board of
Directors on a regular basis. Actual results may differ from these
estimates.
Hercules
believes that the following accounting estimates are critical due to the
significant subjectivity and judgment necessary to account for the matters
or
the susceptibility of such matters to change and the effect of the estimates
and
assumptions on its consolidated financial statements.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts. The
recorded amount reflects various factors, including accounts receivable aging,
customer-specific risk issues, country risk and historical write-off experience.
It includes, but is not limited to, a formula driven calculation applied
to the
aging of trade accounts receivable balances. When a specific accounts receivable
balance is deemed uncollectible, a charge is taken to this reserve. Recoveries
of balances previously written off are also reflected in this
reserve.
Goodwill
and Other Intangible Assets
The
Company performs an annual assessment of its goodwill and other intangible
assets for impairment. In addition, the Company consistently considers factors
including deterioration in future economic conditions, poor operating results
in
the reporting units, new or stronger competitors, or changes in technology
that
could indicate an inability to recover the carrying value of its goodwill
and
intangible assets, thereby requiring an impairment in the future. To assess
impairment, the Company compares its reporting unit's book value of net assets,
including goodwill, to its fair value. Fair value is estimated using a
combination of valuation approaches including the market value and income
approaches. In the event that the book value exceeds the fair value, the
Company
recognizes an impairment to the extent the book value of goodwill exceeds
the
implied fair value of goodwill for any reporting unit, calculated by determining
the fair value of the assets and liabilities for the reporting
unit.
Other
Long-Lived Assets
The
Company tests other long-lived assets, including property, plant and equipment
for impairment based on an assessment of factors including deterioration
in
future economic conditions, poor operating results in a business, the
determination that the long-lived asset is unsuitable for one reason or another,
new or stronger competitors, or changes in technology, that could indicate
an
inability to recover the carrying value of the asset, thereby requiring an
impairment in the future. If the Company determines that an impairment loss
has
occurred, the loss is recognized in the income statement.
Deferred
Tax Asset Valuation Allowance
The
Company records a valuation allowance to reduce its deferred tax assets to
an
amount that is more likely than not to be realized after consideration of
future
taxable income and reasonable tax planning strategies. In the event that
Hercules were to determine that it would not be able to realize all or part
of
its deferred tax assets for which a valuation allowance had not been
established, or is able to utilize capital and/or operating loss carryforwards
for which a valuation allowance has been established, an adjustment to the
deferred tax asset will be reflected in income in the period such determination
is made.
Restructuring,
Severance and Other Exit Costs
The
Company has and will continue to record charges for the estimated costs of
employee severance and other exit costs pursuant to the Company's strategy
to
continuously improve return on capital, streamline organizational structure,
improve work processes and consolidate manufacturing and non-manufacturing
facilities. In the event that it is determined that additional employees
must be
involuntarily terminated, or that additional manufacturing or non-manufacturing
facilities must be closed pursuant to work process redesign or other cost
reduction initiatives, supplemental reserves would be required, which would
result in an incremental charge against earnings.
Environmental
Matters and Asset Retirement Obligations
Hercules
establishes reserves for environmental matters and asset retirement obligations
when a legal obligation exists and the fair value of the liability can be
reasonably estimated. In addition, the Company recognizes a liability for
environmental-related litigation and other contingencies when it is probable
that a liability has been incurred and the amount of the liability is reasonably
estimable. At December 31, 2005, the Company had a combined amount of
$107.9 million accrued including $90.3 million for asset retirement obligations
and $17.6 million for environmental-related contingencies. The actual costs
will
depend upon numerous factors, including: the estimated useful life of the
Company’s manufacturing facilities and significant component assets, changes in
the nature or use of existing assets and facilities, the number of parties
found
responsible at each environmental site and their ability to pay, the actual
methods of remediation required or agreed to, outcomes of negotiations with
regulatory authorities, outcomes of litigation, changes in the timing of
required remedial activities, changes in environmental laws and regulations,
technological developments, the years of remedial activity required and changes
in the number or financial exposures of claims, lawsuits, settlements or
judgments, or in the ability to reduce such financial exposures by collecting
indemnity payments from insurers. If the obligations or contingencies are
resolved for amounts greater or less than has been accrued, Hercules' share
of
the obligation or contingency increases or decreases, or other assumptions
relevant to the development of the estimate were to change, Hercules would
recognize an additional expense or benefit in income in the period such
determination was made.
Asbestos-Related
Contingencies
Hercules
has established reserves for asbestos-related personal injury lawsuits and
claims based upon the results of a periodic actuarial study of its
asbestos-related liabilities by a recognized expert at a major national
university. This study is based on a number of assumptions including the
number
of future claims, the timing and amount of future payments, disease, venue,
and
the dynamic nature of asbestos litigation and other circumstances. At
December 31, 2005, the Company had a gross accrued liability of $270.0
million for present and future potential asbestos claims. The Company also
had
$120.7 million of asbestos-related receivables and restricted cash in several
trusts pertaining to the aforementioned lawsuits and claims at December 31,
2005.
Pension
and Other Postretirement Benefits
In
the United States, the Company provides defined benefit pension plan coverage
for eligible employees hired prior to January 1, 2005 and postretirement
welfare
benefit plan coverage to eligible employees hired prior to January 1, 2003.
Similar plans are provided outside the United States in accordance with local
practice. Pension and other postretirement benefit obligations and the related
expense (income) are determined based upon actuarial assumptions regarding
mortality, medical inflation rates, discount rates, long-term return on assets,
salary increases, Medicare availability and other factors. Changes in these
assumptions can result in changes to the recognized pension expense and recorded
liability. At December 31, 2005, the ABO of the Company's U.S. and certain
foreign defined benefit pension plans, on a consolidated basis, exceeded
their
funded basis. The Company is required to recognize an additional liability
equal
to the sum of such excess plus the prepaid pension asset balance, with a
corresponding after-tax charge to other comprehensive income in stockholders'
equity. For
the
year ended December 31, 2005 the Company increased its additional minimum
liability ("AML") to $417.6 million. The increase to the AML was primarily
a
result of changes to the mortality table and discount rate and was partially
offset by plan amendments effective January 1, 2005 which changed the basis
by
which U.S. and certain foreign plans provide benefits from the “final pay” to
the “career average pay”. At the present time, the U.S. defined benefit pension
plan is at a sufficient funding level as to not require ERISA mandated
contributions. The Company has determined, however, that it is in the best
interests of the Company and its pension plan participants to make voluntary
contributions to the plan. If the U.S. qualified pension plan performs in
accordance with actuarial assumptions, the Company presently anticipates
making
voluntary cash contributions averaging $40 million per year over the next
several years.
Results
of Operations
- Consolidated Review
Net
sales
for the years ended December 31, 2005, 2004 and 2003 were as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Net
sales
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
$
|
1,846.0
|
|
$
|
72.1
|
|
$
|
150.7
|
|
Net
sales
for 2005 increased 4% from 2004 primarily as a result of $59.4 million, or
3%,
in higher pricing and $31.0 million, or 2%, from higher rates of exchange
offset
by a $15.5 million, or 1%, decrease in volume. There was also a slight decrease
of $2.8 million attributable to a broad change in product mix. The core
divisions of Pulp and Paper and Aqualon experienced volume increases of 1%
and
3%, respectively. The overall decline in volume was primarily attributable
to
FiberVisions as a result of the continuing trend of product substitution
in
favor of spunbond technology for diaper coverstock. This decline in volume
has
not been fully offset by continued growth in the demand for applications
for
disposable wipes and geotextiles. Additional volume declines related to efforts
to shed unprofitable accounts for both FiberVisions and Pinova.
Net
sales
for 2004 increased 8% from 2003 attributable to $162.5 million, or 8%, higher
volume and $73.8 million, or 4%, higher rates of exchange offset by a $77.7
million, or 4%, unfavorable change in product mix. A relatively small decrease
of $7.9 million was attributable to pricing. Net sales volume was up for
all
divisions except FiberVisions where demand for staple fibers for diaper
coverstock is in decline due to the continued rise in customer preference
for
fibers produced with spunbond technology. Increased production of paper and
paperboard products in Europe and North America drove demand in Pulp and
Paper
as well as tissue and towel and process chemicals improvements. Aqualon
benefited from strong demand for pharmaceutical and personal care applications
as well as paint, oilfield and applications. However, despite higher volume,
2004 reflected an increase in lower-priced products primarily related to
the CMC
acquisition in Jiangmen.
The
tables below reflect Net sales per region and the percentage change from
the
respective prior year periods as well as the percentage change excluding
the
impact of rates of exchange (“ROE”):
|
|
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2005
|
|
2004
|
|
%Change
|
|
ROE
|
|
North
America
|
|
$
|
981.0
|
|
$
|
921.2
|
|
|
6
|
%
|
|
6
|
%
|
Europe
|
|
|
747.9
|
|
|
762.2
|
|
|
(2
|
)%
|
|
(4
|
)%
|
Asia
Pacific
|
|
|
233.9
|
|
|
214.5
|
|
|
9
|
%
|
|
7
|
%
|
Latin
America
|
|
|
106.0
|
|
|
98.8
|
|
|
7
|
%
|
|
(1
|
)%
|
All
regions
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
|
4
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2004
|
|
2003
|
|
%Change
|
|
ROE
|
|
North
America
|
|
$
|
921.2
|
|
$
|
884.8
|
|
|
4
|
%
|
|
4
|
%
|
Europe
|
|
|
762.2
|
|
|
692.9
|
|
|
10
|
%
|
|
1
|
%
|
Asia
Pacific
|
|
|
214.5
|
|
|
174.5
|
|
|
23
|
%
|
|
23
|
%
|
Latin
America
|
|
|
98.8
|
|
|
93.8
|
|
|
5
|
%
|
|
2
|
%
|
All
regions
|
|
$
|
1,996.7
|
|
$
|
1,846.0
|
|
|
8
|
%
|
|
2
|
%
|
During
2005, Net sales increased in North America by 6% as compared to 2004. European
markets were soft due to weakened demand, aggressive competition and industry
overcapacity in certain product lines, all of which have limited the ability
to
raise prices to recapture a portion of incrementally higher costs. Despite
slower growth in the established economies, emerging markets remained strong.
On
an annual basis, Asia Pacific including China was up 9%, Eastern Europe was
up
14% and Brazil, for the Pulp and Paper division in particular, was up 29%.
Within Asia Pacific, China continues to be a bright spot with sales up 23%
across all divisions.
During
2004, Net sales increased in all regions of the world, and particularly in
Europe where the Euro steadily increased throughout the year approximately
10%
on average against the U.S. dollar over 2003 levels. Excluding the beneficial
impact of ROEs, overall growth was relatively modest and reflected a shift
in
mix to lower priced products. However, growth in the Asia Pacific region
and
China, which benefited from Aqualon’s acquisition of the CMC business in
Jiangmen, had an overall beneficial impact. In addition, continued penetration
of emerging markets in Eastern Europe and Brazil provided steady
growth.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Cost
of sales
|
|
$
|
1,406.3
|
|
$
|
1,307.6
|
|
$
|
1,166.9
|
|
$
|
98.7
|
|
$
|
140.7
|
|
Cost
of
sales increased $98.7 million, or 8%, during 2005 as compared to 2004. As
a
percent of sales, cost of sales increased to 68% in 2005 as compared to 65%
in
2004, primarily reflecting the acceleration of raw material, freight and
energy
costs at rates more rapidly than that which has or could be recovered through
price increases and related surcharges. These costs included record highs
for
certain raw materials, including polypropylene. On an aggregated basis, raw
material costs increased approximately $76 million over 2004 levels. A
significant portion of this increase is attributable to the hurricanes in
the
United States’ Gulf Coast region which severely impacted petroleum and related
by-product refining capabilities and damaged the distribution infrastructure,
further constraining supply. Accordingly, a number of key suppliers declared
force majeure and placed the Company on an allocation basis for certain key
raw
materials and feedstock derivatives. In order to maintain production and
commitments to the Company’s customers, alternative supply sources were utilized
resulting in significantly higher cost and transportation charges.
In
addition to increased raw material prices, energy costs were also adversely
impacted by the storms as well as a general increase in global demand. Despite
these significant challenges, the Company was able to lower overall
manufacturing costs primarily due to restructuring efforts in the current
and
prior years.
Cost
of
sales increased $140.7 million, or 12%, during 2004 as compared to 2003.
As a
percent of sales, cost of sales increased to 65% as compared to 63% in 2003,
primarily as a result of decreasing sales prices in certain product lines
and
increasing raw material costs in most divisions, particularly FiberVisions
which
was impacted by the rising costs for polypropylene. In addition, increased
energy and natural gas/crude oil feedstock costs impacted many raw materials,
particularly those derived from Chlor-alkali, ethylene, benzene and propylene.
Strong demand from China for many basic materials and the strengthening global
economy also exerted upward pressure on the price of raw materials.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Selling,
general and administrative expenses
|
|
$
|
382.8
|
|
$
|
382.4
|
|
$
|
359.9
|
|
$
|
0.4
|
|
$
|
22.5
|
|
Despite
inflation, increased rates of exchange and rising employee benefits costs,
restructuring and cost rationalization efforts in the current and prior years
have allowed the Company to maintain 2005 selling, general and administrative
(“SG&A”) costs at levels comparable with 2004. In addition to lower
personnel-related costs, including travel and entertainment, SG&A costs in
2005 reflect lower professional and consulting fees due to a normalization
of
compliance efforts for Sarbanes-Oxley, and lower bad debt expense and insurance
costs. These decreases were somewhat offset by higher information technology
costs and higher legal defense costs primarily attributable to the ongoing
patent infringement litigation with Ciba Specialty Chemicals Corporation
(“Ciba”) (see Note 12 to the Consolidated Financial Statements). As a percent of
sales, SG&A costs were reduced to 18% in 2005 as compared to 19% during
2004.
SG&A
expenses increased $22.5 million or 6% during 2004 as compared to 2003 while
remaining relatively flat as a percent of sales at 19%. Of the total increase,
$12.8 million is attributable to higher rates of exchange during 2004. Other
increases include higher salaries and incentive compensation as well as
significantly higher costs for consulting and other outside services, part
of
which were attributable to first year compliance efforts associated with
Sarbanes-Oxley. Bad debt expense was also higher during 2004. These increases
were partially offset by lower postretirement benefits costs due to changes
in
the retiree medical plans, lower general legal fees, lower workers compensation
insurance and lower rental expense due to an increase in sub-lease income.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Research
and development
|
|
$
|
40.9
|
|
$
|
42.8
|
|
$
|
38.7
|
|
$
|
(1.9
|
)
|
$
|
4.1
|
|
Research
and development charges decreased $1.9 million or 4% primarily as a result
of
the ongoing consolidation efforts which reflect the closure of the Company’s
research facility in Barneveld, The Netherlands during 2005 as well as the
impact of ongoing cost containment efforts particularly with respect to
Corporate research. Research and development expenses remained relatively
stable
at 2% as a percentage of sales for both 2005 and 2004.
Research
and development charges increased $4.1 million or 11% during 2004 as compared
to
2003. The increase reflects higher spending with respect to various product
and
applications development programs across most of the divisions continuing
a
trend of bringing new products to market. As a percentage of sales, research
and
development was approximately 2% for both 2004 and 2003.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Intangible
asset amortization
|
|
$
|
8.0
|
|
$
|
8.1
|
|
$
|
8.0
|
|
$
|
(0.1
|
)
|
$
|
0.1
|
|
The
Company’s portfolio of intangible assets, including customer relationships,
trademarks and tradenames has remained unchanged from 2003 through 2005
resulting in a consistent charge for amortization expense. Primarily as a
result
of the proposed FiberVisions transaction, amortization is expected to decrease
to $6.7 million for 2006, $6.3 million for 2007, $5.9 million for 2008, $4.6
million for 2009 and $4.4 million for 2010 as various amortization terms
expire.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Impairment
of FiberVisions goodwill
|
|
$
|
52.9
|
|
$
|
-
|
|
$
|
-
|
|
$
|
52.9
|
|
$
|
-
|
|
In
connection with the announced plans to sell a majority interest in the
FiberVisions division, the Company was required to test the underlying goodwill
asset recorded in that division for recoverability. The test indicated that
the
carrying value of goodwill exceeded its fair value. Accordingly, the Company
recorded an impairment charge of $52.9 million effective as of December 31,
2005. The impairment charge was based on an estimate of the fair value for
the
entire division as determined by the negotiated sales price for the
aforementioned sale of a majority interest.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Other
operating expenses, net
|
|
$
|
47.5
|
|
$
|
26.9
|
|
$
|
17.0
|
|
$
|
20.6
|
|
$
|
9.9
|
|
During
2005, the Company executed a number of restructuring and rationalization
programs designed to improve organizational efficiency in all key phases
of
operations including research and development, regional and functional
management, global marketing, manufacturing and corporate support. In connection
with these programs, the Company recorded total charges of $45.4 million,
including; severance and other exit costs of $34.2 million that will result
in a
total headcount reduction of approximately 490 employees; asset impairments
of
$5.7 million; accelerated depreciation charges of $3.5 million; and inventory
and spare parts write-downs of $2.0 million. Other charges for 2005 include
$0.8
million for consulting charges related to legacy issues, $0.7 million related
to
legal settlements, $0.2 million of accretion expense attributable to asset
retirement obligations for active operating sites and $0.4 million for all
other
miscellaneous charges.
During
2004, the Company incurred approximately $9.5 million attributable to severance
and other exit costs that resulted from the termination of approximately
160
employees. In addition, asset impairment charges of $7.3 million were recorded
reflecting $3.6 million attributable to a raw material production line at
the
Hopewell, Virginia manufacturing facility, $2.9 million related to the closure
of the former Kalamazoo, Michigan manufacturing facility and $0.5 million
and
$0.3 million for certain lines at the Pendlebury, UK and Savannah, Georgia
manufacturing facilities, respectively. During 2004, the Company also incurred
$6.5 million of shutdown costs related to the former Nitrocellulose facility
at
Parlin, New Jersey as well as $1.6 million for a special executive pension
adjustment. Other charges for 2004 include approximately $1.0 million in
professional fees related to legacy issues, $0.4 million in fees related
to a
failed acquisition attempt, $0.3 million of accretion expense attributable
to
asset retirement obligations for active operating sites and $0.3 million
for all
other miscellaneous charges.
During
2003, the Company incurred approximately $5.3 million in severance and other
restructuring costs that resulted from the termination of approximately 170
employees. Other charges for 2003 include approximately $7.3 million in special
executive pension benefits, $3.6 million in proxy solicitation and related
fees,
$0.3 million of accretion expense attributable to asset retirement obligations
for active operating sites and $0.5 million for all other miscellaneous
charges.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Interest
and debt expense
|
|
$
|
89.4
|
|
$
|
108.7
|
|
$
|
130.8
|
|
$
|
(19.3
|
)
|
$
|
(22.1
|
)
|
Interest
and debt expense for 2005 decreased $19.3 million or 18% from 2004 primarily
as
a result of lower outstanding debt balances. This primarily resulted from
the
Company’s repurchase of $96.0 million (book value) of the 11.125% notes during
2005. The impact of debt repurchases more than offset the unfavorable effect
of
increasing variable rates on the Company’s Term B Loan. The Term B Loan carries
a LIBOR-based interest rate and allows the Company to reset into LIBOR rates
for
one, two, three or six month periods. The three-month LIBOR rate has increased
by approximately 340 basis points since January 2004 and approximately 200
basis
points since the beginning of 2005 and is continuing an upward trend. In
addition, bank fees were lower during 2005 and the Company had lower
amortization of deferred debt issuance costs primarily as a result of continuing
debt repurchases.
Interest
and debt expense for 2004 decreased $22.1 million or 17%, reflecting lower
outstanding debt balances, improved debt mix and reduced rates on the Company's
bank debt. The April 2004 refinancing of the Term B loan, combined with an
amendment to the credit agreement during the third quarter of 2004 resulted
in a
150 basis point rate reduction on the bank debt. In addition to the repurchase
of $149.8 million (book value) of its 11.125% senior notes during 2004, the
Company also repaid its 9.42% trust preferred securities in May 2004 with
the
proceeds of the April 2004 private placement of $250.0 million 6.75% senior
subordinated debt and a portion of the proceeds of the new Senior Credit
Facility. In addition, moderately higher bank fees were more than offset
by
lower amortization of deferred debt issuance costs primarily as a result
of
continuing debt repurchases.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Gain
on sale of CP Kelco ApS
|
|
$
|
-
|
|
$
|
(27.0
|
)
|
$
|
-
|
|
$
|
27.0
|
|
$
|
(27.0
|
)
|
During
2004, the Company sold its 28% minority ownership interest in CP Kelco ApS
to a
subsidiary of J.M. Huber Corporation for approximately $27.0 million. The
book
value of the investment was previously written down to zero during 2002,
thereby
resulting in a gain equivalent to the sales proceeds.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Other
expenses, net
|
|
$
|
86.3
|
|
$
|
116.7
|
|
$
|
28.9
|
|
$
|
(30.4
|
)
|
$
|
87.8
|
|
An
update
of the independent study of the Company’s estimated reasonably possible exposure
for asbestos-related liabilities was completed in the fourth quarter of 2005.
Despite a significant reduction in both the number of new claims received
and
the amounts paid to resolve claims, the study resulted in an upward revision
of
the range of the Company’s estimated reasonably possible exposure for these
matters. Accordingly, the Company recorded a charge of $37.5 million to
reestablish and increase its reserves to the appropriate level. In addition,
the
Company incurred $9.3 million for asbestos-related litigation costs which
was
partially offset by $1.6 million of accretion income from the asbestos-insurance
trusts and $0.6 million in other related insurance and legal recoveries.
During
2005, the Company incurred $22.4 million in environmental charges attributable
to non-operating sites or related activities associated with previously divested
businesses. Of the total, $15.0 million relates to the Vertac litigation
(see
Notes 11 and 12 to the Consolidated Financial Statements), $3.4 million is
attributable to revisions in the asset retirement obligations for two sites
as a
result of changes in the timing of projected net cash flows, $1.8 million
relates to accretion expense attributable to asset retirement obligations
and
$2.2 million for other environmental-related charges.
The
Company incurred charges of $18.9 million in 2005 for the settlement of several
cases relating to previously divested businesses, the most significant of
which
related to the former Composite Products division. In connection with its
efforts to pay down debt during 2005, the Company incurred premiums of $14.3
million on the open-market repurchase of its 11.125% notes as well as $1.8
million for the write-off of related unamortized debt issuance costs, partially
offset by a $1.9 million gain related to the repurchase of CRESTS Units.
These
items were partially offset by $10.9 million of gains on the disposition
of
properties sold during 2005. These gains are primarily attributable to the
disposition of properties in Langhorne, Pennsylvania and Burlington, New
Jersey
that were non-operating facilities associated with the previously divested
water
treatment and resins businesses, respectively. Approximately $4.4 million
of the
total gain relates to the transfer of an asset retirement obligation in
connection with the sale of the Burlington property. In addition, the Company
realized other miscellaneous income of $2.9 million, net of all other
miscellaneous expenses.
Other
expense, net, increased $87.8 million to $116.7 million in 2004 from $28.9
million for 2003. The increase was primarily attributable to the net $34.2
million adjustment related to the asbestos litigation, consisting of a $79.8
million increase in the asbestos reserves, a $48.6 million increase in the
insurance receivables and $3.0 million in fees incurred in reaching the
settlements with the insurance carriers. Excluding the settlement, continuing
asbestos-related litigation costs and related claims and recovery costs prior
to
the settlement incurred during 2004 increased by $2.6 million as compared
to
2003. Legal settlements of $19.2 million in 2004 exceeded 2003 levels of
$7.8
million primarily due to the settlement of the Thomas
& Thomas Rodmakers vs. Newport Adhesives and Composites
litigation (see Note 12 to the Consolidated Financial Statements) as well
as
other litigation related to previously divested businesses and
activities.
During
2004, the Company wrote off $14.1 million of debt issuance costs associated
with
its April 2004 debt refinancing, and paid premiums of $30.2 million and wrote
off $4.0 million of debt issuance costs associated with the Company's open
market repurchases of its 11.125% senior notes throughout 2004. These costs
were
partially offset by a $7.3 million gain related to the repurchase of CRESTS
Units. During 2003, the Company recognized gains on the repurchase of CRESTS
Units in the amount of $7.1 million, which were partially offset by other
debt
extinguishment costs of $4.8 million.
During
2004, the Company incurred $7.6 million in environmental charges attributable
to
non-operating sites or related activities associated with previously divested
businesses. Of the total, $1.6 million relates to accretion expense and $4.2
million is attributable to revisions in the asset retirement obligations
while
the remainder reflects $1.8 million for all other environmental-related charges
including demolition work at various former operating sites. This compares
to a
total of $5.0 million during 2003, which includes $1.6 million related to
accretion expense attributable to asset retirement obligations.
The
Company initially recorded an asset impairment charge of $2.0 million during
2003 attributable to the closure of the former Langhorne, Pennsylvania site
and
subsequently recorded an additional $1.9 million impairment charge during
2004
in connection with its reclassification as an asset held for sale.
All
other
miscellaneous expense and income items aggregated to net income of $1.8 million
during 2004 while a net expense of $4.4 million resulted during 2003. The
change
is primarily the result of higher foreign currency exchange income and lower
workers compensation settlements related to divested businesses experienced
during 2004 as compared to 2003.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
(Benefit)
provision for income taxes
|
|
$
|
(7.2
|
)
|
$
|
2.4
|
|
$
|
21.3
|
|
$
|
(9.6
|
)
|
$
|
(18.9
|
)
|
The
effective tax benefit rate for 2005 was 16%, and was impacted by a $10.0
million
reversal of federal income tax reserves due to favorable resolutions of prior
year tax issues and net interest income of $2.9 million resulting from the
refund of excess cash tax deposits. These favorable benefits were offset
by a
$7.1 million increase to state tax expense relating to the filing of amended
income tax returns to reflect IRS audit adjustments as well as a $7.6 million
charge related to previously undistributed foreign earnings triggered by
the
proposed transaction to sell a majority interest in FiberVisions to
SPG.
The
change in the valuation allowance on deferred tax assets reflects the
utilization of capital loss carryforwards, the utilization and expiration
of
state net operating loss carryforwards, and the impairment charge on the
carrying value of FiberVisions.
The
effective tax rate in 2004 of 8% reflected the benefit of the CP Kelco ApS
gain
and the reduction of the valuation allowance related to capital losses partially
offset by an increase in tax reserves.
The
effective tax rate for 2003 reflected the tax benefit from the donation of
intellectual property to qualified organizations and the utilization of prior
year capital losses.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Equity
loss of affiliated companies, net of tax
|
|
$
|
(0.5
|
)
|
$
|
-
|
|
$
|
(0.3
|
)
|
$
|
(0.5
|
)
|
$
|
0.3
|
|
The
Company maintains certain relatively insignificant equity investments. These
investments generated losses in 2005 of which the Company recognized its
proportionate share of approximately $0.5 million during 2005 and $0.3 million
during 2003. During 2004, equity method losses essentially offset
income.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Net
income from discontinued operations, net of tax
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4.5
|
|
$
|
-
|
|
$
|
(4.5
|
)
|
Net
income from discontinued operations in 2003 includes $4.5 million, net of
taxes,
attributable to the reversal of various reserves that were initially established
in 2002 in connection with the previously divested BetzDearborn water treatment
business.
|
|
2005
|
|
2004
|
|
2003
|
|
2005
Change
|
|
2004
Change
|
|
Cumulative
effect of changes in accounting principle, net of
tax
|
|
$
|
(2.5
|
)
|
$
|
-
|
|
$
|
(33.3
|
)
|
$
|
(2.5
|
)
|
$
|
33.3
|
|
Effective
December 31, 2005, the Company adopted the provisions of FASB Interpretation
No.
47, “Conditional Asset Retirement Obligations - an Interpretation of FASB
Statement No. 143” (“FIN 47”) and recognized a cumulative effect adjustment of
$2.5 million, net of tax (see Notes 11 and 21).
Effective
January 1, 2003, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS 143”) and recognized a $28.0 million cumulative effect adjustment, net of
tax. As a result of the adoption of FASB Interpretation No. 46 (revised December
2003), “Consolidation of Variable Interest Entities - an Interpretation of ARB
No. 51” (“FIN 46(R)”) effective December 31, 2003, the Company recognized a $5.3
million cumulative effect adjustment, net of income taxes in connection with
gains realized upon the repurchase of CRESTS Units.
Results
of Operations - Segment Review
The
tables below reflect Net sales and Profit from operations for the comparative
periods 2005 vs. 2004 and 2004 vs. 2003, respectively. Substantially all
reconciling items have been allocated to the segments.
|
|
2005
|
|
2004
|
|
Change
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Performance
Products
|
|
|
|
|
|
|
|
|
|
Pulp
and Paper
|
|
$
|
973.6
|
|
$
|
932.1
|
|
$
|
41.5
|
|
|
4
|
%
|
Aqualon
|
|
|
712.4
|
|
|
684.4
|
|
|
28.0
|
|
|
4
|
%
|
|
|
|
1,686.0
|
|
|
1,616.5
|
|
|
69.5
|
|
|
4
|
%
|
Engineered
Materials and Additives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FiberVisions
|
|
|
282.7
|
|
|
281.2
|
|
|
1.5
|
|
|
1
|
%
|
Pinova
|
|
|
100.1
|
|
|
99.0
|
|
|
1.1
|
|
|
1
|
%
|
|
|
|
382.8
|
|
|
380.2
|
|
|
2.6
|
|
|
1
|
%
|
Consolidated
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
$
|
72.1
|
|
|
4
|
%
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
and Paper
|
|
$
|
62.8
|
|
$
|
82.3
|
|
$
|
(19.5
|
)
|
|
(24
|
)%
|
Aqualon
|
|
|
157.2
|
|
|
166.3
|
|
|
(9.1
|
)
|
|
(5
|
)%
|
|
|
|
220.0
|
|
|
248.6
|
|
|
(28.6
|
)
|
|
(12
|
)%
|
Engineered
Materials and Additives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FiberVisions
|
|
|
(64.9
|
)
|
|
(4.1
|
)
|
|
(60.8
|
)
|
|
NM
|
|
Pinova
|
|
|
(13.0
|
)
|
|
(10.3
|
)
|
|
(2.7
|
)
|
|
(26
|
)%
|
|
|
|
(77.9
|
)
|
|
(14.4
|
)
|
|
(63.5
|
)
|
|
NM
|
|
Corporate
Items
|
|
|
(11.7
|
)
|
|
(5.3
|
)
|
|
(6.4
|
)
|
|
NM
|
|
Consolidated
|
|
$
|
130.4
|
|
$
|
228.9
|
|
$
|
(98.5
|
)
|
|
(43
|
)%
|
|
|
2004
|
|
2003
|
|
Change
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Performance
Products
|
|
|
|
|
|
|
|
|
|
Pulp
and Paper
|
|
$
|
932.1
|
|
$
|
880.2
|
|
$
|
51.9
|
|
|
6
|
%
|
Aqualon
|
|
|
684.4
|
|
|
603.3
|
|
|
81.1
|
|
|
13
|
%
|
|
|
|
1,616.5
|
|
|
1,483.5
|
|
|
133.0
|
|
|
9
|
%
|
Engineered
Materials and Additives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FiberVisions
|
|
|
281.2
|
|
|
277.6
|
|
|
3.6
|
|
|
1
|
%
|
Pinova
|
|
|
99.0
|
|
|
84.9
|
|
|
14.1
|
|
|
17
|
%
|
|
|
|
380.2
|
|
|
362.5
|
|
|
17.7
|
|
|
5
|
%
|
Consolidated
|
|
$
|
1,996.7
|
|
$
|
1,846.0
|
|
$
|
150.7
|
|
|
8
|
%
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
and Paper
|
|
$
|
82.3
|
|
$
|
103.4
|
|
$
|
(21.1
|
)
|
|
(20
|
)%
|
Aqualon
|
|
|
166.3
|
|
|
158.5
|
|
|
7.8
|
|
|
5
|
%
|
|
|
|
248.6
|
|
|
261.9
|
|
|
(13.3
|
)
|
|
(5
|
)%
|
Engineered
Materials and Additives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FiberVisions
|
|
|
(4.1
|
)
|
|
12.6
|
|
|
(16.7
|
)
|
|
NM
|
|
Pinova
|
|
|
(10.3
|
)
|
|
(3.5
|
)
|
|
(6.8
|
)
|
|
NM
|
|
|
|
|
(14.4
|
)
|
|
9.1
|
|
|
(23.5
|
)
|
|
NM
|
|
Corporate
Items
|
|
|
(5.3
|
)
|
|
(15.5
|
)
|
|
10.2
|
|
|
66
|
%
|
Consolidated
|
|
$
|
228.9
|
|
$
|
255.5
|
|
$
|
(26.6
|
)
|
|
(10
|
)%
|
NM
= not
meaningful
The
tables below reflect Net sales percentage changes for the years ended December
31, 2005 and 2004 as compared to the same periods in 2004 and 2003,
respectively.
2005
|
|
Net
Sales Percentage Increase (Decrease) from 2004 Due
To:
|
|
|
|
Volume
|
|
Product
Mix
|
|
Price
|
|
Rates
of Exchange
|
|
Total
|
|
Pulp
and Paper
|
|
|
1
|
%
|
|
(1
|
)%
|
|
1
|
%
|
|
3
|
%
|
|
4
|
%
|
Aqualon
|
|
|
3
|
%
|
|
-
|
|
|
-
|
|
|
1
|
%
|
|
4
|
%
|
Performance
Products
|
|
|
2
|
%
|
|
(1
|
)%
|
|
1
|
%
|
|
2
|
%
|
|
4
|
%
|
FiberVisions
|
|
|
(13
|
)%
|
|
-
|
|
|
13
|
%
|
|
1
|
%
|
|
1
|
%
|
Pinova
|
|
|
(12
|
)%
|
|
6
|
%
|
|
7
|
%
|
|
-
|
|
|
1
|
%
|
Engineered
Materials and Additives
|
|
|
(13
|
)%
|
|
2
|
%
|
|
11
|
%
|
|
1
|
%
|
|
1
|
%
|
Consolidated
|
|
|
(1
|
)%
|
|
-
|
|
|
3
|
%
|
|
2
|
%
|
|
4
|
%
|
2004
|
|
Net
Sales Percentage Increase (Decrease) from 2003 Due
To:
|
|
|
|
Volume
|
|
Product
Mix
|
|
Price
|
|
Rates
of Exchange
|
|
Total
|
|
Pulp
and Paper
|
|
|
5
|
%
|
|
(2
|
)%
|
|
(1
|
)%
|
|
4
|
%
|
|
6
|
%
|
Aqualon
|
|
|
18
|
%
|
|
(7
|
)%
|
|
(1
|
)%
|
|
4
|
%
|
|
14
|
%
|
Performance
Products
|
|
|
11
|
%
|
|
(5
|
)%
|
|
(1
|
)%
|
|
4
|
%
|
|
9
|
%
|
FiberVisions
|
|
|
(6
|
)%
|
|
(2
|
)%
|
|
5
|
%
|
|
4
|
%
|
|
1
|
%
|
Pinova
|
|
|
28
|
%
|
|
(7
|
)%
|
|
(5
|
)%
|
|
-
|
|
|
16
|
%
|
Engineered
Materials and Additives
|
|
|
2
|
%
|
|
(3
|
)%
|
|
3
|
%
|
|
3
|
%
|
|
5
|
%
|
Consolidated
|
|
|
8
|
%
|
|
(4
|
)%
|
|
-
|
|
|
4
|
%
|
|
8
|
%
|
Performance
Products Segment
Pulp
and Paper
Pulp
and
Paper’s sales increased $41.5 million, or 4%, to $973.6 million in 2005 as
compared to $932.1 million in 2004. The increase was attributable to 3% higher
average rates of exchange, 1% higher volume and 1% for the impact of higher
prices partially offset by a 1% change in the product sales mix. Despite
relatively flat conditions during 2005 in the Americas’ paper and paperboard
markets, overall sales increased 3% excluding rates of exchange, reflecting
price increases related to raw materials and energy cost recovery as well
as
contractual pricing increases and pricing for new technology and products.
European conditions proved somewhat challenging particularly in the established
western economies and were impacted by regional events including the countrywide
lockout by paper producers in Finland, which shut down production for nearly
two
months earlier in the year. Competitive conditions due to slow demand in
Europe
as well as capacity additions in all market sectors of Asia Pacific have
challenged the ability to increase prices for various products including
wet-strength and rosin-based products despite raw material cost increases.
Offsetting
these challenges, Pulp and Paper has experienced continuing success in expanding
its presence in emerging markets and growing its business from new product
and
technology launches. When compared to 2004, sales to customers in Brazil,
Eastern Europe and China increased 29%, 17% and 21%, respectively. During
2005,
revenues from new product launches were approximately $75 million or a 97%
increase as compared to 2004. Overall, Pulp and Paper derived approximately
25%
of its total revenues from products that are less than 5 years old.
Profit
from operations for Pulp and Paper decreased $19.5 million, or 24%, to $62.8
million in 2005 as compared to $82.3 million in 2004. The decrease in profit
from operations experienced during 2005 is largely attributable to the
significant increase in raw materials, energy and transportation costs that
continued from 2004 and was further exacerbated by the adverse weather
conditions as a result of the hurricanes in the United States’ Gulf Coast.
Despite corresponding pricing increases where applicable and where the
competitive environment allowed for such actions, Pulp and Paper was only
able
to recover approximately 57% of the cost increases for these categories.
The
rapid escalation of certain costs was not able to be recaptured through price
increases in the same frequency due to the term nature of certain
contracts.
Key
feedstock derivatives including adipic acid, caustic, epichlorohydrin, ethylene
and propylene-based derivatives all experienced record high costs during
the
latter part of 2005. In addition, supply was constrained due to a number
of
supplier force majeure actions resulting from the storms. Supply for certain
materials continues to be constrained due to infrastructure damage in the
Gulf
coast region that is in the process of repair. Alternative supplies and
logistics were obtained from other sources where possible, including overseas,
resulting in surcharges and higher transportation and air freight costs.
Costs
for raw materials, including gum and tall oil rosins have also been adversely
impacted by growing global demand particularly in China. On an aggregate
basis,
raw material costs have increased approximately $22 million or 5% over 2004
levels.
The
adverse impact of the storms has been estimated at approximately $5.3 million
including $3.7 million attributable to raw materials. The impact of the paper
producer action in Finland is estimated at approximately $1.3 million in
lost
profitability as Pulp and Paper was unable to recover all of the lost volume
in
the periods subsequent to the resolution.
In
addition to these issues, Pulp and Paper recorded $20.7 million of charges
related to the broad restructuring programs previously identified. Of the
total,
$4.9 million was attributable to the actions to consolidate the research
and
development functions into centralized locations, $3.1 million relates to
manufacturing rationalizations including accelerated depreciation and severance
charges associated with the closure of the Pandaan, Indonesia manufacturing
facility and the scheduled closure of the Pendlebury, UK manufacturing facility
and $12.7 million was primarily for severance charges associated with global
efforts to de-layer management and support and realign the marketing
organization. Pulp and Paper also experienced higher legal defense costs
during
2005 primarily as a result of the ongoing patent infringement litigation
with
Ciba. The reduction of SG&A costs, resulting from current and prior year
restructuring activities and work process improvements, partially offset
these
issues.
Pulp
and
Paper’s sales increased $51.9 million, or 6%, to $932.1 million during 2004 as
compared to $880.2 million during 2003. The increase was due to a 5% increase
in
volume coupled with 4% attributable to higher rates of exchange partially
offset
by a 2% decrease in sales mix and 1% lower pricing. The higher volume was
primarily a result of increased sales under our supply agreement with G.E.
Water
Technologies and the improving North American market for containerboard.
Europe
remained challenging as volume growth was offset by competitive price pressure
and unfavorable mix. Price erosion occurred in both functional and process
chemicals. Pricing in Pulp and Paper deteriorated from 2003 levels as a result
of competitive pressures. Pricing was down in North America and Europe, our
two
largest markets. The division initiated two price increases with a combined
increase of 11% to 19% on all process and functional products late in the
second
half of 2004.
Profit
from operations for Pulp and Paper decreased $21.1 million, or 20%, to $82.3
million in 2004 as compared to $103.4 million during 2003. Increased volume
and
favorable rates of exchange were more than offset by lower pricing, higher
energy, raw materials, and non-cash pension expense, as well as selling expenses
associated with new product growth. Raw material costs were higher in the
fourth
quarter than in previous quarters reflecting increases in adipic acid and
epichlorohydrin prices. Additionally, during 2004 severance charges of
approximately $7.7 million were incurred for headcount reductions in the
general
and administrative functions.
Aqualon
Aqualon’s
sales increased $28.0 million, or 4%, to $712.4 million during 2005 as compared
to $684.4 million during 2004. The increase was attributable to a 3% increase
in
volume as well as 1% attributable to higher rates of exchange. Overall volume
growth approximated global GDP despite unfavorable market conditions experienced
in the paint and coatings market, primarily attributable to slow economic
conditions in Europe. Price increases were implemented for all product lines
except MC primarily to recover increasing raw materials, energy and
transportation costs. Additional price increases were announced in the fourth
quarter in response to dramatic increases in the cost of certain raw materials.
These price increases are projected to have a favorable impact in 2006.
Excluding the impact from the MC product line, price increases provided $12.2
million in additional revenue during 2005. Compared with 2004, Aqualon
experienced strong growth in its products for both pharmaceutical and oilfield
applications consistent with global conditions in both of these industries.
The
global MC business continues to experience pricing pressure due to overcapacity
resulting from recent expansions. Aqualon’s recently announced MC joint venture
in China should help improve its long-term global market position in this
product family. During 2005, the U.S. International Trade Commission issued
a
favorable determination that Aqualon’s domestic CMC business had been materially
injured by imports of CMC being dumped by foreign producers in Finland, Mexico,
The Netherlands and Sweden. The resulting imposition of antidumping duties
on
the subject imports is expected to create a fairer competitive environment
in
the U.S. In addition, growth in oilfield products is expected during 2006
in
connection with the Benchmark acquisition.
Consistent
with the Company’s overall objectives for introducing and capitalizing upon new
opportunities through product innovation and technology, new product launches
during 2005 and continued expansion of sales of recently introduced products
provided approximately 15% of Aqualon’s total revenues.
Profit
from operations for Aqualon decreased $9.1 million, or 5%, to $157.2 million
during 2005 as compared to $166.3 million during 2004. Similar to Pulp and
Paper, Aqualon was adversely impacted by higher raw material, energy and
transportation costs. Key feedstock derivatives including ethylene oxide,
methanol, acetaldehyde and ethyl chloride and raw materials including guar
splits all experienced significant price spikes, and in certain circumstances
supplies were constrained. In addition, energy costs continued to exert pressure
on profitability and are anticipated to continue to do so during 2006,
particularly in Europe. Price increases were only able to recover approximately
19% of the cost increases for these issues during 2005 primarily as a result
of
the timing of certain cost spikes in relation to customer pricing changes.
The
aggregate impact of raw material cost increases over 2004 was approximately
$18
million or 10%.
In
addition to these issues, Aqualon recorded $2.0 million of charges related
to
the broad restructuring programs previously identified. Of the total, $0.2
million relates to severance charges associated with a reconfiguration of
the
powerhouse utility at the Parlin, New Jersey manufacturing facility while
the
remaining $1.8 million is attributable to severance charges associated with
a
global marketing realignment.
Aqualon’s
net sales increased $81.1 million, or 13%, to $684.4 million during 2004
as
compared to $603.3 million during 2003. The growth was driven by 18% higher
volume and a 4% benefit from higher rates of exchange, partially offset by
negative mix of 7% and 1% lower prices. Volume improvements were made in
many
markets including personal care, pharmaceutical, paint, oilfield, lubricants,
adhesives and coatings. Volumes also continued to benefit from the Jiangmen
acquisition completed in the fourth quarter of 2003 which accounted for
approximately 40% of the increase. The unfavorable product mix reflected
higher
sales of lower priced products, primarily related to CMC sales in China,
and an
unfavorable regional and industry mix. Price increases announced and implemented
in the fourth quarter resulted in pricing being flat in the aggregate for
the
quarter and down only 1% for the year. The continued competitive pricing
in one
product line due to temporary industry overcapacity was offset by price
increases in other product lines. The U.S. CMC business experienced pressure
due
to aggressive behavior of several foreign producers that are exporting into
the
U.S. market.
Profit
from operations for Aqualon increased $7.8 million, or 5%, to $166.3 million
during 2004 as compared to $158.5 million for 2003. Increased volume, favorable
rates of exchange, higher plant utilization rates and lower raw material
costs
in the aggregate were partially offset by higher non-cash pension, freight,
plant maintenance, utilities and increased SG&A costs. Raw material costs
were higher in the fourth quarter than the prior quarters, reflecting increases
in ethylene oxide, caustic and methanol. In addition, an asset impairment
charge
of $3.6 million at the Hopewell, Virginia manufacturing facility was incurred
in
the first quarter of 2004 as a result of the closure of a raw material
production line.
Engineered
Materials and Additives Segment
FiberVisions
FiberVisions’
sales increased $1.5 million, or less than 1%, to $282.7 million during 2005
as
compared to $281.2 million during 2004. The minimal increase was attributable
to
a 13% increase in prices and 1% related to higher rates of exchange offset
by a
13% decrease in volume. Price increases provided approximately $36.1 million
in
additional net sales compared to 2004 of which approximately 60% is attributable
to contractual provisions and agreements for a pass-through of the polymer-cost
component. During the latter part of 2005, FiberVisions took actions to change
the customer pricing mechanisms to allow pricing pass-through on a quicker
and
more fully recoverable basis as well as to implement energy surcharges. Volume
gains in the disposable wipes market and growth in the bi-component fiber
products including family and home care applications were 17% higher than
the
2004 levels. In addition, during 2005 FiberVisions expanded its business
in
emerging Chinese markets by approximately $3.7 million over 2004. However,
volume declines in the diaper coverstock markets of approximately 33% due
to the
continuing trend of product substitution related to spunbond technology more
than offset nominal growth in those other applications and market expansions.
In
addition, planned reductions in certain low margin or otherwise unprofitable
product markets further decreased net sales volume and capacity
utilization.
FiberVisions
increased its ratio of revenues provided by products less than 5 years old
from
29% in 2004 to 34% during 2005. The announced transaction to sell a majority
interest in FiberVisions to SPG should provide greater opportunity to further
advance progress in new products and technology, including applications with
polyester core bi-component fibers, which was successfully initiated at the
Company’s Athens, Georgia manufacturing facility during the fourth quarter of
2005.
Profit
from operations for FiberVisions decreased $60.8 million to a loss of $64.9
million during 2005 as compared to a loss of $4.1 million during 2004. Included
in the loss from operations is a goodwill impairment charge of $52.9 million
recorded in connection with the commitment to sell a majority interest in
the
division to SPG in 2006. Also included is $4.9 million of previously identified
restructuring charges. Of the total, $3.4 million is attributable to severance
charges related to the idling of certain production lines at the Covington,
Georgia manufacturing facility and $1.5 million related to the write-off
of
obsolete inventory and spare parts associated with discontinued products
as well
as the closure of the technical facility at the Varde, Denmark manufacturing
facility.
Despite
pricing initiatives as discussed above, and lower manufacturing as well as
SG&A costs, profitability declined due to lower fixed cost absorption from
lower volume and sharply higher energy and raw material costs. The aggregate
increase in raw material costs during 2005 as compared to 2004 was approximately
$33 million. The most significant portion of these increases is attributable
to
polypropylene and polyethylene resin costs. The exacerbating effect of the
hurricanes drove the cost of these materials to unprecedented levels. In
addition, certain suppliers declared force majeure thereby constraining supply
and requiring FiberVisions to incur additional costs in order to maintain
required production levels. The average price for polypropylene as published
by
CDI increased 20% or $0.11 per pound to $0.67 per pound during 2005. In Europe,
the price as reported by Platts increased by 166 Euro per metric ton or 19%
as
compared to 2004.
The
prices for these raw materials spiked with a 17% increase from September
to
October. Accordingly, the timing of the recovery of these rapid cost increases
had an adverse impact on 2005 profitability. Energy costs increased $2.3
million
over 2004 due to significantly higher gas and electricity costs at all global
manufacturing facilities.
FiberVisions’
net sales increased $3.6 million, or 1%, to $281.2 million during 2004 as
compared to $277.6 million during 2003. The nominal growth in sales resulted
from improved pricing of 5%, higher rates of exchange of 4%, partially offset
by
6% lower volume and a 2% unfavorable mix. Volume in the fourth quarter was
up
2%, reflecting gains in wipes and other applications markets, partially
offsetting the losses experienced in diaper coverstock applications versus
the
prior year.
FiberVisions
profit from operations decreased $16.7 million to a loss of $4.1 million
during
2004 as compared to a profit of $12.6 million during 2003. Improved pricing,
rates of exchange and lower management fees charged by our ES FiberVisions
joint
venture partner were more than offset by higher polymer costs and lower plant
utilization. Polypropylene costs increased 28% year over year. In addition,
the
division recognized legal costs of $0.4 million associated with the failed
acquisition attempt for Meraklon S.p.A.
Pinova
Pinova’s
sales increased $1.1 million, or 1%, to $100.1 million during 2005 as compared
to $99.0 million during 2004. The slight increase was attributable to higher
prices of 7% in addition to a shift in the product mix of 6% offset by a
12%
reduction in volume. Primarily due to the complexity and limited flexibility
associated with the manufacturing dynamics of certain products, Pinova was
engaged in efforts throughout the year to selectively and intentionally shed
non-profitable volume and relationships in order to target its sales towards
more profitable markets. Pinova’s decision to exit the unprofitable terpenes
specialties business altogether will not only improve the division’s cost
profile, but will further allow for the opportunity to concentrate on new
and
more profitable applications leading into 2006.
Pinova
has been allocated minimal funding for technology and new applications
development. However, Pinova has been able to maintain an average of
approximately 6% of its total revenues from recently introduced products
including a specialty product with significant applicability in the fragrance
industry. Innovation continued despite the relatively mature nature of this
business and its products. In connection with the pending business segment
realignment during 2006, the majority of Pinova will be consolidated into
the
Aqualon division.
Profit
from operations declined $2.7 million to a loss of $13.0 million during 2005
as
compared to a loss of $10.3 million during 2004. The decline reflects $9.8
million attributable to restructuring charges. Of the total, $5.7 million
is
attributable to an asset impairment and related write-off of spare parts
and
inventories as well as severance charges of $3.4 million associated with
the
decision to exit the terpenes specialties business at the Brunswick, Georgia
manufacturing facility. In addition, an asset impairment charge of $0.5 million
was recorded for the termination of the production of certain intermediate
products at the Hattiesburg, Mississippi manufacturing facility as well as
charge of $0.2 million associated with the termination of a distribution
agreement.
From
an
operations perspective, Pinova’s raw material costs for 2005 increased
approximately $3 million or 13% over 2004 levels. In addition, utilities
increased $2.5 million on an annual basis and the hurricanes resulted in
service
interruptions. These interruptions resulted in fixed cost absorption problems.
Overall, the adverse impact attributable to the hurricanes was approximately
$1.7 million. The force majeure declared by the Company’s hydrogen supplier in
the wake of the hurricanes prompted efforts to re-engineer its hydrogen process,
which will result in approximately $1 million in annual cost savings going
forward.
Pinova’s
net sales increased $14.1 million, or 17%, to $99.0 million during 2004 as
compared to $84.9 million during 2003. Sales benefited from significantly
higher
volume of 28%, partially offset by 5% lower pricing and unfavorable mix of
7%.
The increase in net sales volume was related to recapturing lost market share
in
the highly competitive chewing gum, adhesives and other industrial markets.
The
lower pricing and unfavorable product mix was related to these efforts to
regain
lost business and a strategic shift into lower priced industrial segments
aimed
at reducing inventory and increasing sales volume, thereby generating positive
cash flow.
Pinova’s
loss from operations increased $6.8 million to $10.3 million during 2004
as
compared to $3.5 million during 2003. Improved plant utilization rates
associated with higher volume were offset by lower pricing, higher raw
materials, energy and non-cash pension costs and lower tolling
fees.
Corporate
Items
Corporate
items include net operating charges and benefits that are not directly related
to the business segments. The most significant charges typically appear in
Other
operating expense, net, although portions are also reflected in Cost of sales
and SG&A expenses depending upon the specific nature of the items. The
following table reflects the components of Corporate items.
|
|
2005
|
|
2004
|
|
2003
|
|
Severance
and other exit costs
|
|
$
|
8.0
|
|
$
|
-
|
|
$
|
4.6
|
|
Legacy
issue professional fees
|
|
|
0.8
|
|
|
1.0
|
|
|
-
|
|
Reductions
in insurance claims reserves
|
|
|
-
|
|
|
(2.6
|
)
|
|
-
|
|
Nitrocellulose
facility shutdown costs
|
|
|
-
|
|
|
6.5
|
|
|
-
|
|
Proxy
solicitation costs
|
|
|
-
|
|
|
-
|
|
|
3.6
|
|
Special
executive pension adjustments
|
|
|
-
|
|
|
1.5
|
|
|
7.3
|
|
Other
miscellaneous
|
|
|
2.9
|
|
|
(1.1
|
)
|
|
-
|
|
Total
Corporate items
|
|
$
|
11.7
|
|
$
|
5.3
|
|
$
|
15.5
|
|
Corporate
items for 2005 include $8.0 million of charges related to the broad
restructuring programs previously identified. Of the total, $5.6 million
is
attributable to severance benefits, $0.5 million for relocation costs
attributable to the new European headquarters in Schaffhaussen, Switzerland,
$1.4 million for other exit costs incurred at the Barneveld research site,
and
$0.5 million for accelerated depreciation charges for certain assets at the
Wilmington, Delaware research facility in connection with the ongoing
revitalization program. Corporate charges for 2005 includes $0.8 million
for
professional fees incurred to resolve certain legacy business matters and
a net
$2.9 million for all other corporate charges.
Corporate
items for 2004 resulted in a net expense of $5.3 million and included charges
of
$6.5 million related to the shutdown of the former Nitrocellulose facility
and
$1.5 million for a special executive pension adjustment, $1.0 million for
professional fees incurred to resolve certain legacy business matters partially
offset by a $2.6 million reduction in insurance claims reserves and $1.1
million
of net gains in all other corporate items.
Corporate
items for 2003 include $4.6 million in restructuring charges related to work
process redesign efforts, a $7.3 million special executive pension adjustment
and $3.6 million in proxy solicitation costs.
Net
cash
provided by operating activities was $139.2 million for 2005 as compared
to
$120.5 million for 2004. Cash from operations during 2005 includes net income
tax payments of $18.4 million, interest and debt expense payments of $86.4
million, premiums paid on debt repurchases of $14.3 million, settlements
of
asset retirement obligations of $10.2 million and asbestos settlement payments
of $27.7 million. These payments were substantially lower than those during
2004
which included payments for income taxes, interest and debt expense, premiums
paid on debt repurchases, settlements of asset retirement obligations and
asbestos settlements of $40.7 million, $97.1 million, $30.2 million, $13.5
million and $41.0 million, respectively. Lower net income tax payments during
2005 reflect the refund of amounts previously on deposit with tax authorities.
Interest and debt expense payments are lower primarily as a result of the
Company’s repurchase of $96.0 million (book value) of its outstanding 11.125%
notes during 2005. Asset retirement obligation settlements are lower as a
result
of the timing of planned expenditures at certain sites. The lower asbestos
settlement payments reflect the dynamic nature of ongoing litigation and
settlement proceedings. Asbestos insurance recoveries of $51.2 million were
received during the 2005 period as compared to $50.0 million during 2004
which
included the establishment of the initial insurance trusts. These improvements
were partially offset by cash payments for legal settlements and defense
costs
during 2005 of $33.3 million primarily attributable to litigation associated
with the former Composite Products division as well as higher legal costs
attributable to the Ciba patent infringement litigation. In addition, severance
and other restructuring-related payments were $21.4 million for 2005 as compared
to $9.9 million for 2004, primarily as a result of the significant restructuring
actions taken during the current year. Accordingly, the Company has realized
and
will continue to realize cash savings from these actions. However, for the
full
year, cash from operations has been adversely impacted by operating results
which reflect the inability to pass through all of the significant and rapid
acceleration of the increase in raw material, energy and freight
costs.
Net
cash
used in investing activities was $57.7 million during 2005 as compared to
$49.1
million during 2004. Included in these totals are capital expenditures of
$67.5
million and $77.4 million, respectively, for 2005 and 2004. An investment
of
$4.4 million was made in Aqualon’s new MC joint venture in China in the form of
prepaid financing for equipment to be used by the new entity, Hercules Tianpu
Chemical Company, upon the start-up of operations during 2006. Proceeds of
$16.6
million, net of selling expenses, from the disposals of fixed assets have
been
reflected for 2005. Of this total, approximately $13.2 million is attributable
to the sale of properties in Langhorne, Pennsylvania and Burlington, New
Jersey
that were non operating facilities associated with the previously divested
water
treatment and resins businesses, respectively. The remaining $3.4 million
of
proceeds relates to the sales of other assets and properties associated with
businesses that have been exited, divested or otherwise curtailed as well
as
excess or fully depreciated equipment. As a result of the commitment to sell
a
majority interest in the FiberVisions division, the cash and cash equivalents
held by that division have been reclassified to FiberVisions assets held
for
sale on the Consolidated Balance Sheet as of December 31, 2005. Accordingly,
an
outflow of $2.6 million of cash balances has been reflected as an investing
activity in the Statement of Cash Flows during 2005. The comparable period
in
2004 includes proceeds of $27.0 million related to the Company’s sale of its
minority interest in CP Kelco ApS as well as $1.4 million attributable to
the
sale of other fixed assets.
Net
cash
used in financing activities was $127.0 million during 2005, as compared
to
$74.1 million during 2004. Total debt principal payments of $131.2 million
were
made during 2005, $96.0 million and $12.9 million of which was attributable
to
repurchases of the Company’s 11.125% senior notes and 17,000 CRESTS Units,
respectively, as well as $20.8 million of various term notes which matured
during 2005. During 2004, the Company refinanced its Senior Credit Facility
with
the issuance of a new Term B loan for $400.0 million. In addition, the Company
completed the issuance of $250.0 million of 6.75% senior subordinated notes.
These issuances were utilized to pay down the previous Term B loan as well
as
the 9.42% junior subordinated deferrable interest debentures. When combined
with
$150.0 million of payments attributable to repurchases of the Company’s 11.125%
senior notes as well as other payments including those on term notes, the
total
principal payments made during 2004 amounted to $729.5 million.
The
Company maintains ownership over a number of properties, including land and
buildings, associated with businesses that have been exited, divested or
otherwise curtailed. In addition, during the normal course of business, assets
associated with current operations, including such items as surplus land
and
excess or fully depreciated equipment and buildings among others, become
available for disposition. In order to maximize their value, the Company
is
actively engaged in an ongoing process of identifying alternative utilization
strategies including leasing and outright sales of the underlying assets
and
properties. When specific actions progress to the point that the plan of
sale
criteria included in the Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
have been met, impairments, to the extent they exist, are recognized and
the
underlying properties are reclassified as assets held for sale. Assets held
for
sale, excluding those related to the FibersVisions division, are included
in the
caption “Other current assets” on the Consolidated Balance Sheets. The carrying
value of total assets held for sale excluding FiberVisions was approximately
$0.2 million and $5.8 million as of December 31, 2005 and 2004, respectively.
The Company expects to market additional properties throughout 2006 and realize
cash proceeds upon their disposition.
In
connection with the FiberVisions transaction, the Company expects to realize
total cash proceeds of $109.0 million during 2006, comprised of an $82.0
million
distribution from FiberVisions and $27.0 million of proceeds from the sale
of
the initial 51% interest. The proceeds from this transaction are anticipated
to
be utilized to fund further repurchases of the Company’s 11.125% senior notes.
In addition, the Company has the potential to realize additional proceeds
in
connection with an earn-out provision provided certain performance targets
are
achieved. Additional proceeds from the earn-out, if any, are likely to be
received during 2007.
The
Company also anticipates the settlement of audits of various tax years that
are
currently under review by the Internal Revenue Service. Depending upon the
outcome of certain matters, the Company could potentially receive refunds
of
income taxes previously paid for those years during 2006.
During
February 2006, the Company entered into a series of floating rate cross currency
interest rate swap agreements. The Company has designated the agreements
as a
hedge of the foreign currency exposure associated with its net investment
in
certain foreign operations that utilize the Euro as their functional currency.
The combined notional amount of the agreements is for $475 million/€ 399 million
and requires the Company to receive three month LIBOR + 1.50% and pay three
month EURIBOR plus a margin ranging from 1.53% to 1.64% on a quarterly basis
for
a five year term. The agreement will be recorded at fair value in the
Consolidated Balance Sheet, with changes in value attributable to changes
in
foreign exchange rates recorded in Accumulated other comprehensive income.
Net
interest payments or receipts will be recorded as an adjustment to Interest
and
debt expense.
In
October 2004, the Board of Directors authorized the Company, from time to
time,
subject to market conditions and provisions of the Company's credit agreements
and indentures, to repurchase up to $200 million of its outstanding
indebtedness. During January and February of 2006, the Company repurchased
$11.0
million of its outstanding 11.125% senior notes. Subsequent to these
repurchases, the Board of Directors terminated the unused portion of the
existing debt repurchase authorization and authorized a new $150 million
debt
repurchase program effective February, 2006.
As
of
December 31, 2005, $50.5 million of the $150 million Revolving Facility
under the Company's Senior Credit Facility was available for use. The Company
had $99.5 million of outstanding letters of credit associated with the Revolving
Credit Facility and another $6 million of other outstanding letters of credit
at
December 31, 2005.
Financial
Condition
Total
debt at December 31, 2005 was $1,109.0 million which decreased $131.1 million
from $1,240.1 million at December 31, 2005 primarily as a result of the debt
payment and repurchases discussed above. Cash balances decreased to $77.3
million at December 31, 2005 from $126.5 at December 31, 2004.
Working
capital management represents a key performance measure for the Company.
Total
trade accounts receivable and inventories decreased by $21.3 million and
$6.7
million, respectively, while accounts payable increased $16.3 million from
December 31, 2004 to December 31, 2005 including the impact of the FiberVisions
division which has been classified as held for sale. Days sales outstanding
improved by one day to 60 days from 2004 and days sales in inventory improved
two days to 56 days from 2004. In addition, days payable outstanding improved
by
two days to 51 days from 2004. Overall, the Company’s cash cycle time improved
by a total of five days during 2005. The Company expects further, but more
modest improvements in the cash cycle time during 2006 as progress continues
with ongoing working capital initiatives.
Commitments
and Contractual Obligations
Capital
expenditures are expected to be between $67 and $71 million per year in both
2006 and 2007.
As
discussed in the Strategic
Highlights
section
above, the Company has begun efforts to develop plans to reduce corporate
expenses that are currently allocated to FiberVisions. The Company has targeted
a total of $20 million in annual cost reductions to be achieved by the end
of
2007. However, the Company anticipates incremental cash disbursements for
severance benefits and other exit costs as the plans are expected to be executed
primarily during the second half of 2006.
Also
referenced in the Strategic
Highlights
section
was the Company’s commitment to its MC joint venture in China as well as the
Benchmark acquisition. These activities are anticipated to result in
disbursement of approximately $4 million and $20 million, respectively during
2006. In addition, under an earn-out provision in the Benchmark agreement,
there
is the potential for a maximum disbursement to the seller in the amount of
$8.8
million if certain contractual provisions are met. Payments associated with
the
earn-out are anticipated to be made throughout the five-year term of the
related
supply agreement.
The
Company's contractual commitments as of December 31, 2005 are summarized
as
follows:
|
|
(Dollars
in millions)
|
|
|
|
Payments
Due by Period
(1)
|
|
|
|
|
|
Less
than
|
|
1
-
3
|
|
4
-
5
|
|
After
5
|
|
|
|
Total
|
|
1
year
|
|
years
|
|
years
|
|
years
|
|
Debt
obligations
|
|
$
|
1,109.0
|
|
$
|
16.7
|
|
$
|
138.8
|
|
$
|
384.6
|
|
$
|
568.9
|
|
Operating
lease obligations
|
|
|
118.6
|
|
|
19.6
|
|
|
34.3
|
|
|
35.6
|
|
|
29.1
|
|
Purchase
obligations
(2)
|
|
|
23.7
|
|
|
23.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long-term liabilities reflected on the
registrant's
balance sheet under GAAP
(3)
|
|
|
504.7
|
|
|
86.5
|
|
|
74.4
|
|
|
56.5
|
|
|
287.3
|
|
Total
contractual cash obligations
|
|
$
|
1,756.0
|
|
$
|
146.5
|
|
$
|
247.5
|
|
$
|
476.7
|
|
$
|
885.3
|
|
|
(1)
|
Does
not include the anticipated future interest payments to be made
under the
Company's current debt agreements; however, based upon current
indebtedness and interest rates at December 31, 2005, such interest
obligations are estimated to be approximately $84.5 million in
2006, $84.2
million in 2007, $69.4 million in 2008, $69.1 million in 2009,
$68.5
million in 2010 and $778.6 million thereafter. A one percent increase
or
decrease in the LIBOR rate would have an impact of approximately
plus or
minus $3.8 million on the Company’s interest payments in years 2006
through 2010.
|
|
(2)
|
Obligation
relates primarily to the FiberVisions division and as such will
transfer
to the joint venture upon the closing of the aforementioned transaction
with SPG, which is anticipated to occur prior to the end of the
first
quarter of 2006.
|
|
(3)
|
Includes
amounts pertaining to asbestos-related matters, asset retirement
obligations, post-employment and post-retirement obligations and
workers
compensation claims. Due to the dynamic nature of asbestos litigation,
it
is impractical to determine the anticipated payments in any given
year.
Therefore, the non-current asbestos-related liability of $233.6
million
has been reflected in the after five years
column.
|
At
December 31, 2005, the Company had commercial commitments totaling $105.5
million, in the form of letters of credit, which may require payments in
the
future. If required, these commitments would be funded from general corporate
funds.
The
Company projects cash flow from operations and available financial resources
will be sufficient to meet its investing and financing requirements in the
next
several years.
Indemnifications
In
connection with the sale of certain assets or businesses, the Company has
indemnified respective buyers against certain liabilities that may arise
in
connection with the sales transactions and business activities prior to the
ultimate closing of the sale. Additionally, the Company has provided
indemnifications pertaining to environmental, tax, employee and/or
product-related matters. If the indemnified party were to incur a liability
or
have a liability increase as a result of a successful claim, pursuant to
the
terms of the indemnification, the Company would be required to reimburse
the
buyer. These indemnifications are generally subject to threshold amounts,
specified claim periods and other restrictions and limitations. As of December
31, 2005, the Company has recorded indemnifications totaling $40 million
and has
$105.5 million of outstanding letters of credit. Although it is possible
that
future payments may exceed amounts accrued, due to the nature of indemnified
items, it is not possible to make a reasonable estimate of the maximum potential
loss or range of loss.
As
described in greater detail in Note 12 to the Consolidated Financial Statements,
the Company has entered into comprehensive settlement agreements with each
of
its insurance carriers which provided coverage for asbestos-related liabilities.
Under the terms of these agreements and in exchange for payments made and
to be
received from the insurance carriers, the Company has released and indemnified
the released insurers from any past, present and future claims asserted under
its cancelled policies.
Off-Balance
Sheet Arrangements
The
Company has no relationships with any unconsolidated, special-purpose entities
or other legal entities established for the purpose of facilitating off-balance
sheet financial arrangements.
Recent
Accounting Pronouncements
On
December 16, 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). On April 14,
2005,
the Securities and Exchange Commission issued an amendment to Rule 4-01 of
Regulation S-X that allows companies to implement SFAS 123R at the beginning
of
their next fiscal year, instead of the next reporting period that begins
after
June 15, 2005 as originally required. Accordingly, the Company will adopt
SFAS
123R effective January 1, 2006 using the “modified prospective” method in which
compensation cost is recognized beginning with the effective date based on
(a)
the requirements of SFAS 123R for all share-based payments granted after
the
effective date and (b) the requirements of SFAS 123 for all awards granted
to
employees prior to the effective date of SFAS 123R that remain unvested on
the
effective date. In addition, the Company expects to continue to utilize the
Black-Scholes option-pricing model, which is an acceptable option valuation
model in accordance with SFAS 123R, to estimate the value of stock options
granted to employees.
Beyond
those restricted stock and stock option awards previously granted, the Company
cannot predict with certainty the impact of SFAS 123R on its future consolidated
financial statements as the type and amount of such awards are determined
on an
annual basis and encompass a potentially wide range depending upon the
compensation decisions made by the Human Resources Committee of the Company’s
Board of Directors. SFAS 123R also requires the benefits of tax deductions
in
excess of compensation cost recognized in the financial statements to be
reported as a financing cash flow, rather than an operating cash flow as
currently required under Statement of Financial Accounting Standards No.
95,
“Statement of Cash Flows” (“SFAS 95”). This requirement, to the extent it
exists, will decrease net operating cash flows and increase net financing
cash
flows in periods subsequent to adoption. The Company cannot estimate what
those
amounts will be in the future because they depend on, among other things,
when
employees exercise stock options.
On
March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)
which expresses the view of the SEC Staff regarding the interaction of SFAS
123R
and certain SEC rules and regulations and provides the staff’s views regarding
the valuation of share-based payment arrangements. The Company believes that
the
views provided in SAB 107 are consistent with the approach taken in the
valuation and accounting associated with share-based compensation issued
in
prior periods as well as those issued during 2005.
Item
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For
discussion of quantitative and qualitative disclosures about market risk,
see
Item 1A, Risk Factors.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND
REQUIRED
SUPPLEMENTARY DATA
HERCULES
INCORPORATED
CONSOLIDATED
FINANCIAL
STATEMENTS
|
Page
|
Management's
Report on Internal Control Over Financial Reporting
|
34
|
Reports
of Independent Registered Public Accounting Firms
|
35
|
Consolidated
Statements of Operations and Comprehensive (Loss) Income for the
Years
Ended December 31, 2005, 2004 and
2003
|
38
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
39
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004
and 2003
|
40
|
Consolidated
Statements of Stockholders' (Deficit) Equity for the Years Ended
December 31, 2005, 2004 and 2003
|
42
|
Summary
of Significant Accounting Policies and Notes to Consolidated Financial
Statements
|
43
|
SUPPLEMENTARY
DATA
|
|
Valuation
and Qualifying Accounts
|
98
|
Management's
Report on Internal Control Over Financial Reporting
The
management of Hercules is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Act of 1934, as amended. Hercules’ internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Because
of the inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Hercules’
management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework.
Based
on this assessment, management has concluded that, as of December 31, 2005,
the
Company's internal control over financial reporting was effective based on
those
criteria.
Managements’
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005 has been audited by BDO Seidman, LLP, the
Company’s independent registered public accounting firm, as stated in their
report, which appears herein.
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We
have
audited the accompanying consolidated balance sheet of Hercules Incorporated
as
of December 31, 2005 and the related consolidated statements of operations
and
comprehensive (loss) income, stockholders’ (deficit) equity, and cash flows for
the year ended December 31, 2005 (which statements are incorporated herein
by
reference to the annual report to stockholders for the year ended December
31,
2005). We have also audited the financial statement schedule listed in the
accompanying index. These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and financial statement schedule. We believe that our audit provides
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 Hercules Incorporated
and
its subsidiaries at December 31, 2005 and the results of its operations and
its
cash flows for the year ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
As
discussed in Note 21 to the consolidated financial statements, in 2005 the
Company changed its method of inventory valuation from the last-in, first-out
method (LIFO) to the average - cost method for a portion of its domestic
inventories.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Hercules Incorporated’s
internal control over financial reporting as of December 31, 2005, based
on
criteria established in Internal Control - Integrated Framework issued by
the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our
report dated March 1, 2006 expressed an unqualified opinion
thereon.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
24, 2006
Report
of Independent Registered Public Accounting Firm
on
Internal Control over Financial Reporting
Board
of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Hercules Incorporated
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Hercules Incorporated’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Hercules Incorporated maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also in our
opinion, Hercules Incorporated maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
COSO criteria.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated balance sheet
of
Hercules Incorporated as of December 31, 2005, and the related consolidated
statements of operations and comprehensive (loss) income, changes in
stockholders (deficit) equity and cash flows for the year ended December
31,
2005 and our report dated March 1, 2006 expressed an unqualified
opinion.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
24, 2006
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors
of
Hercules Incorporated:
In
our opinion, the accompanying
consolidated
balance
sheet as of December 31, 2004 and the related consolidated statements of
income
and comprehensive income, of shareholders’ equity and of cash flows for years
ended December 31, 2004 and 2003 present fairly, in all material respects,
the
financial position of Hercules Incorporated and
its
subsidiaries at December
31, 2004, and the results
of
their
operations
and their
cash
flows for each of the two years in the period ended December
31, 2004 in
conformity with accounting principles generally accepted in the United States
of
America. 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 audits. We conducted our audits of these statements
in
accordance with the standards of the Public Company Accounting Oversight
Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
As
discussed in Note 12 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 143, “Accounting for
Asset Retirement Obligations” on January 1, 2003.
/s/
PricewaterhouseCoopers LLP
Philadelphia,
Pennsylvania
March
16,
2005, except as to the Change in Accounting described in Note 21, which is
as of
February 17, 2006
(Dollars
in millions, except per share)
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
$
|
1,846.0
|
|
Cost
of sales
|
|
|
1,406.3
|
|
|
1,307.6
|
|
|
1,166.9
|
|
Selling,
general and administrative expenses
|
|
|
382.8
|
|
|
382.4
|
|
|
359.9
|
|
Research
and development
|
|
|
40.9
|
|
|
42.8
|
|
|
38.7
|
|
Intangible
asset amortization (Note 4)
|
|
|
8.0
|
|
|
8.1
|
|
|
8.0
|
|
Impairment
of FiberVisions goodwill (Note 3)
|
|
|
52.9
|
|
|
-
|
|
|
-
|
|
Other
operating expense, net (Note 18)
|
|
|
47.5
|
|
|
26.9
|
|
|
17.0
|
|
Profit
from operations
|
|
|
130.4
|
|
|
228.9
|
|
|
255.5
|
|
Interest
and debt expense (Note 19)
|
|
|
89.4
|
|
|
108.7
|
|
|
130.8
|
|
Gain
on sale of CP Kelco ApS (Note 25)
|
|
|
-
|
|
|
(27.0
|
)
|
|
-
|
|
Other
expense, net (Note 20)
|
|
|
86.3
|
|
|
116.7
|
|
|
28.9
|
|
(Loss)
income before income taxes and equity (loss) income
|
|
|
(45.3
|
)
|
|
30.5
|
|
|
95.8
|
|
(Benefit)
provision for income taxes (Note 7)
|
|
|
(7.2
|
)
|
|
2.4
|
|
|
21.3
|
|
(Loss)
income before equity loss
|
|
|
(38.1
|
)
|
|
28.1
|
|
|
74.5
|
|
Equity
loss of affiliated companies, net of tax
|
|
|
(0.5
|
)
|
|
-
|
|
|
(0.3
|
)
|
Net
(loss) income from continuing operations before discontinued
|
|
|
|
|
|
|
|
|
|
|
operations
and cumulative effect of changes in accounting principle
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
74.2
|
|
Net
income from discontinued operations, net of tax
|
|
|
-
|
|
|
-
|
|
|
4.5
|
|
Net
(loss) income before cumulative effect of changes in accounting
principle
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
78.7
|
|
Cumulative
effect of changes in accounting principle, net of tax (Note
21)
|
|
|
(2.5
|
)
|
|
-
|
|
|
(33.3
|
)
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share (Note 22):
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.70
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
0.04
|
|
Cumulative
effect of changes in accounting principle
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.31
|
)
|
Net
(loss) income
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
Weighted
average number of shares (millions)
|
|
|
108.7
|
|
|
107.3
|
|
|
106.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.69
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
0.04
|
|
Cumulative
effect of changes in accounting principle
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.31
|
)
|
Net
(loss) income
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
Weighted
average number of shares (millions)
|
|
|
108.7
|
|
|
109.0
|
|
|
107.2
|
|
|
|
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
Foreign
currency translation
|
|
|
(72.1
|
)
|
|
71.1
|
|
|
123.4
|
|
(Increase)
decrease in additional minimum pension liability, net of tax,
due
to
|
|
|
|
|
|
|
|
|
|
|
Remeasurement
adjustments
|
|
|
(44.3
|
)
|
|
(28.2
|
)
|
|
14.9
|
|
Foreign
currency translations
|
|
|
5.5
|
|
|
(1.4
|
)
|
|
(2.2
|
)
|
Other,
net of tax
|
|
|
(0.3
|
)
|
|
-
|
|
|
-
|
|
Comprehensive
(loss) income
|
|
$
|
(152.3
|
)
|
$
|
69.6
|
|
$
|
181.5
|
|
The
accompanying accounting policies and notes are an integral part of
the
consolidated financial statements.
Hercules
Incorporated
Consolidated
Statements of Operations and Comprehensive (Loss)
Income
(Dollars
in millions)
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
77.3
|
|
$
|
126.5
|
|
Accounts
receivable, net (Note 1)
|
|
|
291.0
|
|
|
346.7
|
|
Inventories
(Note 2)
|
|
|
185.0
|
|
|
212.4
|
|
Deferred
income taxes (Note 7 )
|
|
|
39.3
|
|
|
36.7
|
|
Asbestos-related
assets (Note 12)
|
|
|
-
|
|
|
6.3
|
|
FiberVisions
assets held for sale (Note 3)
|
|
|
202.7
|
|
|
-
|
|
Other
current assets (Note 16)
|
|
|
48.1
|
|
|
53.8
|
|
Total
current assets
|
|
|
843.4
|
|
|
782.4
|
|
Property,
plant and equipment, net (Note 16)
|
|
|
535.4
|
|
|
695.4
|
|
Intangible
assets, net (Note 4)
|
|
|
142.8
|
|
|
162.3
|
|
Goodwill
(Note 4)
|
|
|
441.0
|
|
|
550.3
|
|
Deferred
income taxes (Note 7)
|
|
|
240.4
|
|
|
121.9
|
|
Asbestos-related
assets (Note 12)
|
|
|
120.7
|
|
|
162.5
|
|
Deferred
charges and other assets (Note 16)
|
|
|
245.1
|
|
|
245.5
|
|
Total
assets
|
|
$
|
2,568.8
|
|
$
|
2,720.3
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
173.4
|
|
$
|
187.0
|
|
FiberVisions
liabilities held for sale (Note 3)
|
|
|
66.6
|
|
|
-
|
|
Asbestos-related
liabilities (Note 12)
|
|
|
36.4
|
|
|
46.8
|
|
Current
debt obligations (Note 5)
|
|
|
16.7
|
|
|
29.8
|
|
Accrued
expenses (Note 16)
|
|
|
219.3
|
|
|
212.1
|
|
Total
current liabilities
|
|
|
512.4
|
|
|
475.7
|
|
Long-term
debt (Note 5)
|
|
|
1,092.3
|
|
|
1,210.3
|
|
Deferred
income taxes (Note 7)
|
|
|
75.8
|
|
|
77.2
|
|
Pension
liability (Note 8)
|
|
|
323.4
|
|
|
241.4
|
|
Other
postretirement benefits (Note 8)
|
|
|
65.5
|
|
|
80.5
|
|
Deferred
credits and other liabilities (Note 16)
|
|
|
290.5
|
|
|
309.9
|
|
Asbestos-related
liabilities (Note 12)
|
|
|
233.6
|
|
|
213.4
|
|
Total
liabilities
|
|
|
2,593.5
|
|
|
2,608.4
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
Stockholders'
(deficit) equity
|
|
|
|
|
|
|
|
Series
preferred stock (Note 13)
|
|
|
-
|
|
|
-
|
|
Common
stock, $25/48 stated value (Note 14)
|
|
|
83.3
|
|
|
83.3
|
|
(shares
issued: 2005 and 2004 - 159,984,444)
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
548.9
|
|
|
569.2
|
|
Unearned
compensation (Notes 9 and 10)
|
|
|
(65.7
|
)
|
|
(77.9
|
)
|
Accumulated
other comprehensive loss (Note 15)
|
|
|
(387.6
|
)
|
|
(276.4
|
)
|
Retained
earnings
|
|
|
1,495.4
|
|
|
1,536.5
|
|
|
|
|
1,674.3
|
|
|
1,834.7
|
|
Treasury
stock, at cost (shares: 2005 - 47,247,344 and 2004 -
47,842,836)
|
|
|
(1,699.0
|
)
|
|
(1,722.8
|
)
|
Total
stockholders' (deficit) equity
|
|
|
(24.7
|
)
|
|
111.9
|
|
Total
liabilities and stockholders' (deficit) equity
|
|
$
|
2,568.8
|
|
$
|
2,720.3
|
|
The
accompanying accounting policies and notes are an integral part of
the
consolidated financial statements.
Hercules
Incorporated
Consolidated
Balance Sheets
(Dollars
in millions)
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
Net
income from discontinued operations, net of tax
|
|
|
-
|
|
|
-
|
|
|
(4.5
|
)
|
Adjustments
to reconcile net (loss) income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
80.5
|
|
|
74.9
|
|
|
73.2
|
|
Amortization
|
|
|
25.4
|
|
|
26.3
|
|
|
27.4
|
|
Deferred
income tax provision
|
|
|
(54.9
|
)
|
|
(18.7
|
)
|
|
8.3
|
|
Gain
on disposals
|
|
|
(11.8
|
)
|
|
(28.0
|
)
|
|
(3.7
|
)
|
Impairment
charges
|
|
|
58.6
|
|
|
9.1
|
|
|
1.9
|
|
Write-off
of debt issuance costs
|
|
|
1.8
|
|
|
18.0
|
|
|
-
|
|
Other
non-cash charges and credits
|
|
|
6.3
|
|
|
1.7
|
|
|
9.4
|
|
Accruals
and deferrals of cash receipts and payments (net of acquisitions
and
dispositions):
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2.9
|
|
|
(7.6
|
)
|
|
6.8
|
|
Inventories
|
|
|
(3.3
|
)
|
|
4.0
|
|
|
(7.4
|
)
|
Asbestos-related
assets and liabilities, net
|
|
|
61.3
|
|
|
40.2
|
|
|
(27.6
|
)
|
Other
current assets
|
|
|
(10.7
|
)
|
|
20.7
|
|
|
1.8
|
|
Accounts
payable and accrued expenses
|
|
|
28.2
|
|
|
5.0
|
|
|
(36.7
|
)
|
Income
taxes payable
|
|
|
27.1
|
|
|
(25.4
|
)
|
|
(88.1
|
)
|
Pension
and postretirement benefits
|
|
|
(18.3
|
)
|
|
(23.1
|
)
|
|
(34.3
|
)
|
Non-current
assets and liabilities
|
|
|
(12.8
|
)
|
|
(4.7
|
)
|
|
50.9
|
|
Net
cash provided by operating activities from continuing
operations
|
|
|
139.2
|
|
|
120.5
|
|
|
22.8
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(67.5
|
)
|
|
(77.4
|
)
|
|
(48.0
|
)
|
Proceeds
of investment and fixed asset disposals
|
|
|
16.6
|
|
|
1.4
|
|
|
10.4
|
|
Proceeds
from sale of minority interest in CP Kelco ApS
|
|
|
-
|
|
|
27.0
|
|
|
-
|
|
Decrease
in restricted cash
|
|
|
-
|
|
|
-
|
|
|
125.0
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
-
|
|
|
(8.9
|
)
|
Investment
in CRESTS Units preferred securities
|
|
|
-
|
|
|
-
|
|
|
(27.4
|
)
|
Other,
net
|
|
|
(6.8
|
)
|
|
(0.1
|
)
|
|
(1.4
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(57.7
|
)
|
|
(49.1
|
)
|
|
49.7
|
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt proceeds
|
|
|
-
|
|
|
650.0
|
|
|
-
|
|
Long-term
debt payments
|
|
|
(131.2
|
)
|
|
(729.5
|
)
|
|
(165.2
|
)
|
Change
in short-term debt
|
|
|
1.9
|
|
|
1.6
|
|
|
(0.7
|
)
|
Payment
of debt issuance costs and underwriting fees
|
|
|
-
|
|
|
(7.8
|
)
|
|
-
|
|
Repurchase
of CRESTS Units warrants
|
|
|
-
|
|
|
-
|
|
|
(7.0
|
)
|
Treasury
stock issued
|
|
|
2.7
|
|
|
5.5
|
|
|
1.9
|
|
Other
|
|
|
(0.4
|
)
|
|
6.1
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(127.0
|
)
|
|
(74.1
|
)
|
|
(171.0
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(3.7
|
)
|
|
2.9
|
|
|
15.8
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(49.2
|
)
|
|
0.2
|
|
|
(82.7
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
126.5
|
|
|
126.3
|
|
|
209.0
|
|
Cash
and cash equivalents at end of year
|
|
$
|
77.3
|
|
$
|
126.5
|
|
$
|
126.3
|
|
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
Hercules
Incorporated
Consolidated
Statements of Cash Flows
(Dollars
in millions)
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
86.4
|
|
$
|
97.1
|
|
$
|
121.8
|
|
Income
taxes, net of refunds received
|
|
|
18.4
|
|
|
40.7
|
|
|
64.7
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of minority interest
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2.0
|
|
Incentive
and other employee benefit stock plan issuances
|
|
|
13.4
|
|
|
15.7
|
|
|
19.0
|
|
Elimination
of 6.5% junior subordinated deferrable interest debentures due
2029
|
|
|
-
|
|
|
(34.6
|
)
|
|
-
|
|
Elimination
of investment in Hercules Trust II upon its dissolution
|
|
|
-
|
|
|
27.4
|
|
|
-
|
|
The
accompanying accounting policies and notes are an integral part of
the
consolidated financial statements.
Hercules
Incorporated
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Compen-
|
|
Comprehen-
|
|
Retained
|
|
Reacquired
|
|
|
|
|
|
Stock
|
|
Capital
|
|
sation
|
|
sive
Loss
|
|
Earnings
|
|
Stock
|
|
Total
|
|
Balances
at January 1, 2003, as previously reported
|
|
$
|
83.3
|
|
$
|
665.0
|
|
$
|
(91.0
|
)
|
$
|
(454.0
|
)
|
$
|
1,449.8
|
|
$
|
(1,824.3
|
)
|
$
|
(171.2
|
)
|
(Common
shares: issued, 159,984,444; reacquired, 50,615,487)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
for the cumulative effect on prior years of retrospectively applying
the weighted-average method of accounting for valuing inventories
(Note 21)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13.2
|
|
|
-
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2003 as adjusted
|
|
$
|
83.3
|
|
$
|
665.0
|
|
$
|
(91.0
|
)
|
$
|
(454.0
|
)
|
$
|
1,463.0
|
|
$
|
(1,824.3
|
)
|
$
|
(158.0
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45.4
|
|
|
-
|
|
|
45.4
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
121.2
|
|
|
-
|
|
|
-
|
|
|
121.2
|
|
Release
of shares held by ESOP trust
|
|
|
-
|
|
|
(4.8
|
)
|
|
11.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.2
|
|
Debt
issuance costs on warrants issued with trust preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
-
|
|
|
(7.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7.0
|
)
|
Repurchase
of warrants
|
|
|
-
|
|
|
(7.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7.0
|
)
|
Decrease
in additional minimum pension liability, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14.9
|
|
|
-
|
|
|
-
|
|
|
14.9
|
|
Issuances
of treasury stock, net of forfeitures
|
|
|
-
|
|
|
(42.8
|
)
|
|
(10.2
|
)
|
|
-
|
|
|
-
|
|
|
58.7
|
|
|
5.7
|
|
Amortization
of unearned compensation
|
|
|
-
|
|
|
-
|
|
|
4.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2003
|
|
$
|
83.3
|
|
$
|
603.4
|
|
$
|
(86.2
|
)
|
$
|
(317.9
|
)
|
$
|
1,508.4
|
|
$
|
(1,765.6
|
)
|
$
|
25.4
|
|
(Common
shares: issued, 159,984,444; reacquired, 48,992,628)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28.1
|
|
|
-
|
|
|
28.1
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
69.7
|
|
|
-
|
|
|
-
|
|
|
69.7
|
|
Release
of shares held by ESOP trust
|
|
|
-
|
|
|
(5.0
|
)
|
|
13.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.3
|
|
Increase
in additional minimum pension liability, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(28.2
|
)
|
|
-
|
|
|
-
|
|
|
(28.2
|
)
|
Issuances
of treasury stock, net of forfeitures
|
|
|
-
|
|
|
(29.2
|
)
|
|
(8.0
|
)
|
|
-
|
|
|
-
|
|
|
42.8
|
|
|
5.6
|
|
Amortization
of unearned compensation
|
|
|
-
|
|
|
-
|
|
|
3.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
|
$
|
83.3
|
|
$
|
569.2
|
|
$
|
(77.9
|
)
|
$
|
(276.4
|
)
|
$
|
1,536.5
|
|
$
|
(1,722.8
|
)
|
$
|
111.9
|
|
(Common
shares: issued, 159,984,444; reacquired, 47,842,836)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(41.1
|
)
|
|
-
|
|
|
(41.1
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(66.6
|
)
|
|
-
|
|
|
-
|
|
|
(66.6
|
)
|
Release
of shares held by ESOP trust
|
|
|
-
|
|
|
(5.0
|
)
|
|
12.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.8
|
|
Repurchase
of warrants
|
|
|
-
|
|
|
(2.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2.0
|
)
|
Increase
in additional minimum pension liability, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(44.3
|
)
|
|
-
|
|
|
-
|
|
|
(44.3
|
)
|
Issuances
of treasury stock, net of forfeitures
|
|
|
-
|
|
|
(13.3
|
)
|
|
(8.5
|
)
|
|
-
|
|
|
-
|
|
|
23.8
|
|
|
2.0
|
|
Amortization
of unearned compensation
|
|
|
-
|
|
|
-
|
|
|
7.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.9
|
|
Other,
net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.3
|
)
|
|
-
|
|
|
-
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
$
|
83.3
|
|
$
|
548.9
|
|
$
|
(65.7
|
)
|
$
|
(387.6
|
)
|
$
|
1,495.4
|
|
$
|
(1,699.0
|
)
|
$
|
(24.7
|
)
|
(Common
shares: issued, 159,984,444; reacquired,47,247,344)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying accounting policies and notes are an integral part of
the
consolidated financial statements.
Hercules
Incorporated
Consolidated
Statements of Stockholders' (Deficit)
Equity
Hercules
Incorporated (“Hercules” or the “Company”) was incorporated in 1912 under the
laws of the State of Delaware and its shares are traded on the New York Stock
Exchange under the symbol “HPC.” The Company is a leading manufacturer and
marketer of specialty chemicals and related services for a broad range of
business, consumer and industrial applications and has approximately 4,650
worldwide employees. The Company has a broad customer base, with no single
customer representing greater than 3% of Net sales, and serves many different
markets, the largest of which include: tissue and paper towel manufacturing;
writing paper; interior and exterior paints; construction materials; and
non-woven and woven fabrics. To serve these markets the Company has global
manufacturing operations which provide products to customers in more than
125
countries.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of Hercules, all
majority-owned subsidiaries where control exists, any other subsidiaries
which
it controls and variable interest entities ("VIEs") in which Hercules is
the
primary beneficiary. All significant intercompany transactions and profits
have
been eliminated. Investments in affiliated companies, where Hercules has
a 20%
to 50% interest and where the entity is either not a VIE or Hercules is not
the
primary beneficiary, are accounted for using the equity method of accounting
and, accordingly, consolidated income includes Hercules' share of their income
or loss.
Use
of Estimates
Preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial
Statements and the accompanying Notes. Actual results could differ from these
estimates.
Revenue
Recognition
The
Company recognizes revenue when the earnings process is complete. This generally
occurs when products are shipped to the customer or services are performed
in
accordance with terms of the agreement, title and risk of loss have been
transferred, collectibility is probable and pricing is fixed or determinable.
Approximately 13%, 13% and 12% of the Company's revenues for the years ended
December 31, 2005, 2004 and 2003, respectively, are from consignment
inventory. For consignment inventory, title and risk of loss are transferred
when the earnings process is considered complete, which generally occurs
when
the Company's products have been consumed or used in the customer's production
process. Accruals are made for sales returns and other allowances based on
the
Company's experience. The corresponding shipping and handling costs are included
in Cost of sales.
Allowance
for Doubtful Accounts Receivable
The
allowance for doubtful accounts represents an estimate of uncollectible accounts
receivable. The recorded amount reflects various factors, including accounts
receivable aging, customer-specific risk issues, country risk and historical
write-off experience. It includes, but is not limited to, a formula driven
calculation applied to the aging of trade accounts receivable balances. When
a
specific accounts receivable balance is deemed uncollectible, a charge is
taken
to this reserve. Recoveries of balances previously written off are also
reflected in this reserve.
Research
and Development Expenditures
Research
and development expenditures are expensed as incurred.
Environmental
Expenditures
The
Company has ongoing expenditures for environmental related projects at current
and former operating facilities. Accruals for environmental remediation matters
are expensed when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. The Company capitalizes
environmental expenditures for projects that extend the life, increase the
capacity or improve the safety or efficiency of its facilities. In addition,
the
Company capitalizes asset retirement obligations relating to environmental
remediation liabilities that result from the normal operation of Company
facilities. The Company capitalized environmental related expenditures totaling
$3.6 million, $2.6 million and $1.9 million for the years ended December
31,
2005, 2004 and 2003, respectively.
Changes
in Accounting Principle
The
Company recognizes the effects of accounting changes, including changes in
accounting principle, in accordance with Statement of Financial Accounting
Standards No. 154, “Accounting Changes and Error Corrections - a replacement of
APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). When applicable, the
Consolidated Financial Statements
Hercules
Incorporated
Summary
of Significant Accounting Policies
include
the specific transition requirements associated with new accounting
pronouncements. As required by SFAS 154, voluntary changes in accounting
principles require retrospective application to the earliest fiscal period
presented. Note 21 provides a summary of the financial statement effects
and
required disclosures applicable to those accounting changes implemented during
the periods presented.
Cash
and Cash Equivalents
Cash
in excess of operating requirements is invested in short-term, income-producing
instruments. Cash equivalents include commercial paper and other securities
with
original maturities of 90 days or less at the time of purchase. Book value
approximates fair value because of the short maturity of those
instruments.
Inventories
Foreign
and domestic inventories are stated at the lower of cost or market and are
valued principally on the weighted-average-cost method. Elements of costs
in
inventories include raw materials, direct labor and manufacturing
overhead.
During
2005, the Company elected to change its method of accounting for certain
inventories located in the United States from the LIFO method to the
weighted-average method. Financial statements of prior years have been adjusted
to apply the weighted-average cost method retrospectively.
Assets
Held for Sale
When
specific actions to dispose of assets progress to the point that the plan
of
sale criteria included in Statement of Financial Accounting Standards No.
144,
“Accounting for the Impairment of Disposal of Long-Lived Assets” have been met,
impairments to the extent they exist, are recognized and the underlying assets
are reclassified as assets held for sale included in the caption Other current
assets or separately disclosed on the Consolidated Statements of Operations.
Gains and losses on sales of assets associated with active business operations
and sites are included in Other operating expense while those attributable
to
former businesses are included in Other expense, net.
Property,
Plant and Equipment and Depreciation
Property,
plant and equipment are stated at cost. The Company uses the straight line
method of depreciation. The estimated useful lives of depreciable assets
are as
follows: buildings - 30 years; plant machinery and equipment - 15 years;
other
machinery and equipment - 3 to 15 years.
Maintenance,
repairs and minor renewals are expensed as incurred; major renewals and
improvements that extend the lives or increase the capacity of plant assets
are
capitalized. Upon normal retirement or replacement, the net book value of
property (less proceeds of sale or salvage) is charged to income.
Goodwill
and Other Intangible Assets
Goodwill
is tested for impairment on an annual basis with any necessary adjustment
charged to expense. The Company has selected November 30 as the date for
performing the annual impairment test. The Company has identified its reporting
units as Pulp and Paper, Aqualon, FiberVisions and Pinova for purposes of
applying the impairment test. Intangible assets with finite lives are amortized
over their useful lives. Other intangible assets are amortized on a
straight-line basis over the estimated future periods to be benefited, generally
40 years for customer relationships, trademarks and tradenames and 5 to 15
years
for other intangible assets.
Investments
Investments
in affiliated companies in which the Company has a 20% to 50% interest and
where
the entity is not a variable interest entity for which Hercules is the primary
beneficiary are accounted for using the equity method of accounting.
Accordingly, these investments are included in Deferred charges and other
assets
on the Company's Consolidated Balance Sheets and the income or loss from
these
investments is included in Equity income (loss) of affiliated companies,
net of
tax in the Company's Consolidated Statements of Operations.
Investments
in affiliated companies in which the Company does not have a controlling
interest, or an ownership and voting interest so large as to exert significant
influence, are accounted for using the cost method of accounting. Accordingly,
these investments are also included in Deferred charges and other assets
on the
Company's Consolidated Balance Sheets.
Other
investments include non-current marketable securities whose value approximates
market value.
Hercules
Incorporated
Summary
of Significant Accounting Policies
Long-lived
Assets
The
Company reviews its long-lived assets, including other intangible assets,
for
impairment on an exception basis whenever events or changes in circumstances
indicate carrying amounts of the assets may not be recoverable through
undiscounted future cash flows. If an impairment loss has occurred based
on
expected future cash flows (undiscounted), the loss is recognized in the
Consolidated Statements of Operations. The amount of the impairment loss
is the
excess of the carrying amount of the impaired asset over its fair value.
The
fair value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.
Computer
Software Development Costs
The
Company follows the American Institute of Certified Public Accountants Statement
of Position 98-1, "Accounting for the Cost of Computer Software Developed
or
Obtained for Internal Use" ("SOP 98-1"). These assets are included in Deferred
charges and other assets in the Company's Consolidated Balance Sheets. Computer
software development costs are being amortized over a period of 5 to 10 years.
Deferred
Financing Costs
The
Company capitalizes costs associated with the issuance of debt (deferred
financing costs), including bank, legal, investment advisor and accounting
fees
and other expenses. Deferred financing costs are amortized over the term
of the
related financing transaction using the effective interest rate method and
are
included in Interest and debt expense in the Company’s Consolidated Statements
of Operations.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach for accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income tax represents income taxes paid or payable for the current year plus
the
change in deferred taxes during the year. Deferred taxes result from differences
between the financial and tax basis of the Company's assets and liabilities
and
are adjusted for changes in tax rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is
more
likely than not that a tax benefit will not be realized.
Asset
Retirement Obligations
The
Company records a liability at fair value for legal obligations associated
with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal operations of a long-lived asset.
To the
extent an obligation is conditional, an obligation is recognized if the fair
value of the liability can be reasonably estimated. The Company’s asset
retirement obligations principally relate to environmental remediation
liabilities associated with current and former operations that were incurred
during the course of normal operations.
For
the purposes of recognizing obligations requiring the dismantlement of
facilities, owned properties, which have no fixed cessation date, are assumed
to
be in operation through 2055, although it could be longer. The Company will
evaluate the status of facilities on a periodic basis and make any necessary
adjustments to the obligations as required. Dismantlement of facilities at
leased sites are assumed to occur upon lease termination unless it is likely
that the Company is able to and plans to extend the term.
Foreign
Currency Translation
The
financial statements of Hercules' non-U.S. entities are translated into U.S.
dollars in accordance with U.S. GAAP. Most of the Company’s foreign subsidiaries
use the local currency as their functional currency. The Company translates
assets and liabilities of those entities into U.S. dollars using the appropriate
period end rates of exchange. Net sales and expenses are translated using
the
average exchange rates for the reporting period. Translation gains and losses
are recorded in Accumulated other comprehensive loss.
Derivative
Instruments and Hedging
Derivative
instruments are recorded on the balance sheet at their fair values. The Company
has not designated any derivative as a hedge instrument and accordingly,
changes
in fair value of derivatives are recorded each period in earnings. Under
procedures and controls established by the Company's risk management policies,
the Company strategically enters into contractual arrangements (derivatives)
in
the ordinary course of business to reduce the exposure to foreign currency
rates
and interest rates.
Hercules
Incorporated
Summary
of Significant Accounting Policies
The
Company's risk management policies establish several approved derivative
instruments to be utilized in each risk management program and the level
of
exposure coverage based on the assessment of risk factors. Derivative
instruments utilized include forwards, swaps and options. The Company uses
forward exchange contracts and options, generally no greater than three months
in term, to reduce its net currency exposure. The objective of this program
is
to maintain an overall balanced position in foreign currencies so that exchange
gains and losses resulting from exchange rate changes are minimized. The
Company
has used interest rate swap agreements to manage interest costs and risks
associated with changing rates.
Counterparties
to the forward exchange, currency swap, options and interest swap contracts
are
major financial institutions. Credit loss from counterparty nonperformance
is
not anticipated.
Stock-based
Compensation
Effective
January 1, 2003, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS
148
amends SFAS 123 by providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requiring enhanced disclosure regarding stock-based
compensation. The Company has elected to apply the fair value recognition
provisions of SFAS 123 on a prospective basis to all employee awards granted,
modified or settled after January 1, 2003. Awards under the Company's
stock-based compensation plans vest over periods ranging from 1 to a maximum
of
10 years; however, vesting can be extended with the approval of the Board
of
Directors. Therefore, the cost related to stock-based employee compensation
included in the determination of net income in 2005, 2004 and 2003 is less
than
that which would have been recognized if the fair value based method had
been
applied to all awards since the original effective date of SFAS 123.
Restricted
stock awards under the Hercules Long-term Incentive Compensation Plan are
recorded at the quoted market price (fair value) of the Company's stock on
the
grant date (measurement date). Stock acquired through the Employee Stock
Purchase Plan and "above target" restricted stock awarded under the Hercules
Management Incentive Compensation Plan is discounted 15% from market price
as
permitted by IRS regulations and the provisions of the Company's incentive
compensation plans. The award and the discount, if any, are amortized into
expense over the vesting (restriction) period. Forfeitures are recorded as
incurred. The Employee Stock Purchase Plan was terminated effective
March 31, 2004.
Pursuant
to the disclosure requirements of SFAS 123, as amended by SFAS 148, the
following table presents the pro forma effect on net (loss) income and (loss)
earnings per share assuming the Company had applied the fair value recognition
provisions of SFAS 123 to all stock-based compensation on a retroactive
basis.
|
|
|
|
(Dollars
in millions, except per share)
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
(loss) income, as reported
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
Add:
Total stock-based compensation expense recognized in reported results,
net of tax
|
|
|
4.5
|
|
|
1.4
|
|
|
2.9
|
|
Deduct:
Total stock-based compensation expense determined under the
fair
value based method for all awards, net of tax*
|
|
|
5.1
|
|
|
2.8
|
|
|
9.6
|
|
Pro
forma net (loss) income
|
|
$
|
(41.7
|
)
|
$
|
26.7
|
|
$
|
38.7
|
|
(Loss)
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
Basic
- pro forma
|
|
$
|
(0.38
|
)
|
$
|
0.25
|
|
$
|
0.36
|
|
Diluted
- as reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
Diluted
- pro forma
|
|
$
|
(0.38
|
)
|
$
|
0.24
|
|
$
|
0.36
|
|
*
For information regarding the weighted-average assumptions used
in
estimating fair value for 2005, 2004 and 2003, see Note
10.
|
Hercules
Incorporated
Summary
of Significant Accounting Policies
Recent
Accounting Pronouncements
On
December 16, 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). On April 14,
2005,
the Securities and Exchange Commission issued an amendment to Rule 4-01 of
Regulation S-X that allows companies to implement SFAS 123R at the beginning
of
their next fiscal year, instead of the next reporting period that begins
after
June 15, 2005 as originally required. Accordingly, the Company will adopt
SFAS
123R effective January 1, 2006 using the “modified prospective” method in which
compensation cost is recognized beginning with the effective date based on
(a)
the requirements of SFAS 123R for all share-based payments granted after
the
effective date and (b) the requirements of SFAS 123 for all awards granted
to
employees prior to the effective date of SFAS 123R that remain unvested on
the
effective date. In addition, the Company expects to continue to utilize the
Black-Scholes option-pricing model, which is an acceptable option valuation
model in accordance with SFAS 123R, to estimate the value of stock options
granted to employees.
Beyond
those restricted stock and stock option awards previously granted, the Company
cannot predict with certainty the impact of SFAS 123R on its future consolidated
financial statements as the type and amount of such awards are determined
on an
annual basis and encompass a potentially wide range depending upon the
compensation decisions made by the Human Resources Committee of the Company’s
Board of Directors. SFAS 123R also requires the benefits of tax deductions
in
excess of compensation cost recognized in the financial statements to be
reported as a financing cash flow, rather than an operating cash flow as
currently required under Statement of Financial Accounting Standards No.
95,
“Statement of Cash Flows” (“SFAS 95”). This requirement, to the extent it
exists, will decrease net operating cash flows and increase net financing
cash
flows in periods subsequent to adoption. The Company cannot estimate what
those
amounts will be in the future because they depend on, among other things,
when
employees exercise stock options.
On
March
29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
expresses the view of the SEC Staff regarding the interaction of SFAS 123R
and
certain SEC rules and regulations and provides the staff’s views regarding the
valuation of share-based payment arrangements. The Company believes that
the
views provided in SAB 107 are consistent with the approach taken in the
valuation and accounting associated with share-based compensation issued
in
prior periods as well as those issued during 2005.
Reclassifications
Certain
amounts in the 2004 and 2003 consolidated financial statements and notes
have
been reclassified to conform to the 2005 presentation. See Note 21 which
includes a summary of adjustments provided as a result of the Company’s change
in its method of accounting for inventories from the LIFO method to the
weighted-average method.
Hercules
Incorporated
Summary
of Significant Accounting Policies
1. Accounts
Receivable
Changes
in the allowance for doubtful accounts for the years ended December 31, 2005,
2004 and 2003 are as follows:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Balance
at beginning of year
|
|
$
|
4.7
|
|
$
|
5.5
|
|
$
|
11.9
|
|
Charged
to costs and expenses
|
|
|
2.3
|
|
|
5.4
|
|
|
4.2
|
|
Deductions
|
|
|
(3.0
|
)
|
|
(6.2
|
)
|
|
(10.6
|
)
|
Balance
at end of year
|
|
$
|
4.0
|
|
$
|
4.7
|
|
$
|
5.5
|
|
2. Inventories
The
components of inventories as of December 31, 2005 and 2004 are as
follows:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Finished
products
|
|
$
|
99.0
|
|
$
|
103.5
|
|
Raw
materials and work-in-process
|
|
|
64.8
|
|
|
79.6
|
|
Supplies
|
|
|
21.2
|
|
|
29.3
|
|
|
|
$
|
185.0
|
|
$
|
212.4
|
|
3. Sale
of Interest in FiberVisions Division
On
January 31, 2006, the Company, WSP, Inc. (“WSP”), a wholly-owned subsidiary of
Hercules, SPG/FV Investor LLC (“SPG”), an affiliate of SPG Partners, LLC, a New
York-based private equity firm, and FiberVisions Delaware Corporation, formerly
FiberVisions, L.L.C. (“FiberVisions”), a subsidiary owned 51% by Hercules (the
“Hercules Interest”) and 49% by WSP, entered into a contribution agreement (the
“Agreement”) whereby the Company will sell the Hercules Interest to SPG.
Under
terms of the Agreement, Hercules will receive cash of approximately $109
million, comprised of a distribution from FiberVisions and $27.0 million
of
proceeds for the Hercules Interest, upon the closing of the transaction.
The
Agreement anticipates and is conditioned upon the issuance of long-term debt
and
simultaneous $82.0 million distribution by FiberVisions to Hercules and WSP,
prior to the sale of the Hercules Interest. In addition, the Agreement provides
SPG with an option to purchase an additional 14% interest in FiberVisions
from
WSP for $7.4 million. Under the Agreement, Hercules will receive additional
payments should FiberVisions meet certain performance measures. The transaction
is expected to close by the end of the first quarter of 2006 pending debt
financing and other required approvals.
In
connection with the commitment to sell a majority interest in the FiberVisions
division, the Company was required to test the underlying goodwill asset
recorded in that division for recoverability. The test indicated that the
carrying value of goodwill exceeded its fair value. Accordingly, the Company
recorded an impairment charge of approximately $52.9 million effective as
of
December 31, 2005. The impairment charge was based on an estimate of the
fair
value for the entire division as determined by the negotiated sales price
for
the aforementioned sale of a majority interest. As a result of the pending
transaction, the Company has reclassified those assets and liabilities
attributable to FiberVisions as held for sale consistent with the Agreement.
At
December 31, 2005 the amounts included on the Consolidated Balance Sheet
consist
of the following.
(Dollars
in millions)
|
|
Assets
|
|
|
|
Liabilities
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2.6
|
|
|
Accounts
payable
|
|
$
|
29.9
|
|
Accounts
receivable, net
|
|
|
34.4
|
|
|
Accrued
expenses
|
|
|
7.1
|
|
Inventories
|
|
|
20.7
|
|
|
Deferred
income taxes
|
|
|
29.2
|
|
Other
current assets
|
|
|
9.2
|
|
|
Deferred
credits and other liabilities
|
|
|
0.1
|
|
Property,
plant and equipment, net
|
|
|
92.1
|
|
|
Long-term
debt
|
|
|
0.3
|
|
Intangible
assets, net
|
|
|
11.1
|
|
|
|
|
|
|
|
Goodwill
|
|
|
32.0
|
|
|
|
|
|
|
|
Deferred
charges and other assets
|
|
|
0.6
|
|
|
|
|
|
|
|
Total
Fibervisions assets held for sale
|
|
$
|
202.7
|
|
|
Total
FiberVisions liabilities held for sale
|
|
$
|
66.6
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
4. Goodwill
and Other Intangible Assets
The
following table shows the activity and changes in the carrying amount of
goodwill for the years ended December 31, 2004 and 2005, by operating
segment:
|
|
(Dollars
in millions)
|
|
|
|
|
|
Engineered
|
|
|
|
|
|
Performance
|
|
Materials
&
|
|
|
|
|
|
Products
|
|
Additives
|
|
Total
|
|
Balance
at December 31, 2003
|
|
$
|
433.2
|
|
$
|
84.9
|
|
$
|
518.1
|
|
Additions
|
|
|
1.6
|
|
|
-
|
|
|
1.6
|
|
Foreign
currency translation
|
|
|
30.6
|
|
|
-
|
|
|
30.6
|
|
Balance
at December 31, 2004
|
|
$
|
465.4
|
|
$
|
84.9
|
|
$
|
550.3
|
|
FiberVisions
impairment
|
|
|
-
|
|
|
(52.9
|
)
|
|
(52.9
|
)
|
Reclassified
to FiberVisions assets held for sale
|
|
|
-
|
|
|
(32.0
|
)
|
|
(32.0
|
)
|
Foreign
currency translation
|
|
|
(24.4
|
)
|
|
-
|
|
|
(24.4
|
)
|
Balance
at December 31, 2005
|
|
$
|
441.0
|
|
$
|
-
|
|
$
|
441.0
|
|
The
following table provides information regarding the Company’s intangible assets
with finite lives:
|
|
Customer
|
|
Trademarks
&
|
|
Other
|
|
|
|
|
|
Relationships
|
|
Tradenames
|
|
Intangibles
|
|
Total
|
|
Gross
Carrying Amount
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
90.0
|
|
$
|
73.9
|
|
$
|
52.5
|
|
$
|
216.4
|
|
Balance,
December 31, 2005
|
|
|
90.0
|
|
|
73.9
|
|
|
24.8
|
|
|
188.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
13.9
|
|
$
|
11.5
|
|
$
|
28.7
|
|
$
|
54.1
|
|
Balance,
December 31, 2005
|
|
|
16.4
|
|
|
13.5
|
|
|
16.0
|
|
|
45.9
|
|
As
a result of the pending FiberVisions transaction (Note 3), the company has
reclassified $11.1 million of Other intangible assets, net to FiberVisions
assets held for sale as of December 31, 2005. Total amortization expense
for
other intangible assets for the years ended December 31, 2005, 2004 and
2003 was $8.0 million, $8.1 million and $8.0 million, respectively, which
was
included in Profit from operations. It is estimated that amortization expense
will be $6.7 million for 2006, $6.3 million for 2007, $5.9 million for 2008,
$4.6 million for 2009 and $4.4 million for 2010.
5. Debt
A
summary of debt follows:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Term
B loan due 2010 (a)
|
|
$
|
393.0
|
|
$
|
397.0
|
|
6.60%
notes due 2027 (b)
|
|
|
100.0
|
|
|
100.0
|
|
Term
notes at various rates from 5.00% to 7.16% due in varying amounts
through
2006 (c)
|
|
|
6.8
|
|
|
27.8
|
|
11.125%
senior notes due 2007 (d)
|
|
|
130.0
|
|
|
226.0
|
|
6.75%
senior subordinated notes due 2029 (e)
|
|
|
250.0
|
|
|
250.0
|
|
8%
convertible subordinated debentures due 2010 (f)
|
|
|
2.6
|
|
|
2.6
|
|
6.5%
junior subordinated deferrable interest debentures due 2029
(g)
|
|
|
217.0
|
|
|
229.0
|
|
Other
|
|
|
9.6
|
|
|
7.7
|
|
|
|
|
1,109.0
|
|
|
1,240.1
|
|
Less:
Current debt obligations
|
|
|
16.7
|
|
|
29.8
|
|
Long
term debt
|
|
$
|
1,092.3
|
|
$
|
1,210.3
|
|
|
(a)
|
The
term loan, a component of the Company’s Senior Credit Facility, matures on
October 8, 2010 and bears interest at LIBOR + 1.75%, with the Company
holding the option to reset interest rates for one, two, three
or six
month periods. The weighted average rate was 5.9% as of December
31, 2005.
The Senior Credit Facility is also comprised of a $150 million
committed
revolving credit facility (the “Revolving Facility”) and provides Hercules
the ability, subject to lender approval, to borrow an additional
$250
million in the form of an incremental term note. The Senior Credit
Facility is secured by liens on the
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Company's
assets (including real, personal and intellectual properties) and is guaranteed
by substantially all of the Company's current and future wholly owned domestic
subsidiaries (see Note 26).
As
of
December 31, 2005, the Company had $105.5 million of outstanding letters
of
credit of which $99.5 million were associated with the Revolving Facility.
The
remaining $50.5 million was available for use. During June, 2005, the interest
rate on the Revolving Facility was amended to LIBOR + 1.25% from LIBOR +
1.75%.
The
Company's Senior Credit Facility requires quarterly compliance with certain
financial covenants, including a debt/EBITDA ratio ("leverage ratio") and
an
interest coverage ratio, and established limitations on the permitted amount
of
capital expenditures.
(b) 30-year
debentures with a 10-year put option, exercisable by the bondholder at a
redemption price equal to the principal amount.
(c) Debt
assumed in conjunction with the acquisition of FiberVisions L.L.C.
(d) The
senior notes accrue interest at 11.125% per annum, payable semi-annually.
The
senior notes are guaranteed by each of Hercules' current and future wholly-owned
domestic restricted subsidiaries. The senior notes are not redeemable at
Hercules' option prior to maturity. The Company is not required to make
mandatory redemption or sinking fund payments with respect to the senior
notes.
If a change of control occurs, each holder of the notes will have the right
to
require Hercules to repurchase all or any part of that Holder’s notes pursuant
to a change of control offer on the terms set forth in the indenture. In
the
change of control offer, Hercules will offer a change of control payment
in cash
equal to 101% of the aggregate principal amount of the notes repurchased
plus
accrued and unpaid interest and liquidated damages, if any, on the notes
repurchased, to the date of purchase.
(e) The
Company completed a private placement of $250 million aggregate principal
amount
of 6.75% senior subordinated notes due 2029 during April 2004. The senior
subordinated notes are guaranteed by each of Hercules’ current and future
wholly-owned domestic restricted subsidiaries. On June 30, 2004, Hercules
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission pursuant to which the Company offered to exchange all of the $250
million aggregate principal amount of the 6.75% senior subordinated notes
due
2029 (the "old notes") for $250 million aggregate principal amount of 6.75%
senior subordinated notes due 2029 (the "new notes"). The form and terms
of the
new notes are the same as the form and terms of the old notes except that,
because the new notes are registered under the Securities Act, the new notes
do
not bear legends restricting their transfer and are not entitled to certain
registration rights under the registration rights agreement. The new notes
evidence the same debt as the old notes and are governed by the same indenture.
Hercules did not receive any proceeds from the exchange offer. All of the
old
notes have been exchanged for the new notes.
(f) The
convertible subordinated debentures are convertible into common stock at
$14.90
per share and are redeemable at the option of the Company at varying rates.
The
annual sinking fund requirement of $5 million, beginning in 1996, has been
satisfied through conversions of debentures.
(g) The
6.5% junior subordinated deferrable interest debentures due 2029 (the "6.5%
debentures") had an initial issue price of $741.46 and have a redemption
price
of $1,000. The 6.5% debentures were initially issued to Hercules Trust II
("Trust II"), a subsidiary trust established in 1999. Trust II had issued,
in an
underwritten public offering, 350,000 CRESTS Units, each consisting of a
6.5%
preferred security of Trust II and a warrant (exercisable through 2029) to
purchase 23.4192 shares of the Company's common stock. The preferred securities
and the warrants were separable and were initially valued at $741.46 and
$258.54, respectively. The Company and Trust II accreted the difference between
the initial valuation of the 6.5% debentures and the preferred securities
and
the redemption value of $1,000 over the term of the 6.5% debentures and the
preferred securities. In connection with the Company’s dissolution and
liquidation of Trust II in December 2004, Trust II distributed the 6.5%
debentures to the holders of the preferred securities and the preferred
securities were cancelled. The CRESTS Units now consist of the 6.5% debentures
and the warrants.
During
2004, the Board of Directors authorized the Company, from time to time, subject
to market conditions and the Company's credit agreements and indentures,
to
repurchase up to $200 million of its outstanding indebtedness on the open
market. Under this program the Company repurchased $96.0 million (book value)
of
its 11.125% senior notes for $110.3 million during the year ended December
31,
2005 and recognized a $14.3 million loss and a non-cash expense of $1.8 million
for the write-off of the related unamortized debt issuance costs in other
expense, net. During December 2005, the Company acquired 17,000 CRESTS Units
for
$12.9 million in an open market purchase. The market value of the preferred
securities and warrant components of the CRESTS Units repurchased were $12.9
and
$2.0 million, respectively. The accreted book value of the preferred securities
and the 6.5% debentures at the time of purchase was $14.8 million, resulting
in
the recognition of a $1.9 million gain. The $2.0 million associated with
the
warrants was recorded as a reduction in Additional paid-in capital. In February
2006, the Board of Directors terminated the unused portion of the existing
debt
repurchase authorization and authorized a new $150 million debt repurchase
program.
At
December 31, 2005, Hercules had available and unused foreign lines of credit
totaling $32.9 million.
Debt
maturities are $16.7 million in 2006, $134.4 million in 2007, $4.4 million
in
2008, $4.5 million in 2009, $380.1 million in 2010 and $569.2 million
thereafter.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
6. Consolidation
of Variable Interest Entities
The
financial statements for the years ended December 31, 2005 and 2004 reflect
the
consolidation of two joint venture Variable Interest Entities (“VIEs”), ES
FiberVisions Holdings A/S and ES FiberVisions L.P., that were previously
accounted for using the equity method of accounting. These entities, which
will
no longer be consolidated subsequent to the completion of the sale of 51%
of the
Company’s interest in the FiberVisions division, serve as strategic global
marketers of the Company's bicomponent fibers. As of December 31, 2005, the
fair value of the assets in these joint ventures was approximately $5.1 million
and the fair values of the associated liabilities and non-controlling interests
were approximately $5.1 million. There are no assets of the Company that
serve
as collateral for the VIEs and the creditors of the VIEs have no recourse
to the
general credit of the Company. The total investment in the joint ventures
is
less than $0.1 million, representing the maximum exposure to loss.
7. Income
Taxes
The
domestic and foreign components of (loss) income before income taxes and
equity
(loss) income from continuing operations are listed below:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Domestic
|
|
$
|
(56.8
|
)
|
$
|
(158.8
|
)
|
$
|
(68.4
|
)
|
Foreign
|
|
|
11.5
|
|
|
189.3
|
|
|
164.2
|
|
(Loss)
income before income taxes and equity loss
|
|
$
|
(45.3
|
)
|
$
|
30.5
|
|
$
|
95.8
|
|
The
components of the tax provision from continuing operations are as
follows:
Currently
payable
|
|
|
|
|
|
|
|
U.S.
federal
|
|
$
|
(2.1
|
)
|
$
|
(30.4
|
)
|
$
|
(28.1
|
)
|
Foreign
|
|
|
40.9
|
|
|
38.1
|
|
|
39.9
|
|
State
|
|
|
8.9
|
|
|
13.4
|
|
|
0.6
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(48.3
|
)
|
|
(21.5
|
)
|
|
11.5
|
|
Foreign
|
|
|
(6.6
|
)
|
|
2.8
|
|
|
(2.6
|
)
|
(Benefit)
provision for income taxes
|
|
$
|
(7.2
|
)
|
$
|
2.4
|
|
$
|
21.3
|
|
The
components of the net deferred tax assets (liabilities) as of December 31,
2005
and 2004 are as follows:
|
|
2005
|
|
2004
|
|
Depreciation
|
|
$
|
(81.4
|
)
|
$
|
(105.9
|
)
|
Pension
|
|
|
(8.2
|
)
|
|
(1.1
|
)
|
Inventory
|
|
|
(4.1
|
)
|
|
(0.7
|
)
|
Investments
|
|
|
(174.3
|
)
|
|
(161.4
|
)
|
Goodwill
|
|
|
(48.4
|
)
|
|
(52.6
|
)
|
Accrued
expenses
|
|
|
(3.1
|
)
|
|
(4.1
|
)
|
Other
|
|
|
(13.1
|
)
|
|
(29.8
|
)
|
Gross
deferred tax liabilities
|
|
$
|
(332.6
|
)
|
$
|
(355.6
|
)
|
|
|
|
|
|
|
|
|
Postretirement
benefits other than pensions
|
|
$
|
45.5
|
|
$
|
52.5
|
|
Pension
|
|
|
113.4
|
|
|
84.7
|
|
Goodwill
|
|
|
7.1
|
|
|
7.8
|
|
Accrued
expenses
|
|
|
216.1
|
|
|
192.1
|
|
Loss
carryforwards
|
|
|
349.2
|
|
|
366.1
|
|
Credit
carryforwards
|
|
|
126.9
|
|
|
97.1
|
|
Assets
held for sale
|
|
|
21.5
|
|
|
-
|
|
Other
|
|
|
24.6
|
|
|
21.0
|
|
Gross
deferred tax assets
|
|
|
904.3
|
|
|
821.3
|
|
Valuation
allowance
|
|
|
(380.7
|
)
|
|
(391.8
|
)
|
Net
deferred tax assets
|
|
$
|
191.0
|
|
$
|
73.9
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
provision for income taxes attributable to discontinued operations and
cumulative effect of changes in accounting principle is:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Provision
on income from discontinued operations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2.1
|
|
Cumulative
effect of changes in accounting principle
|
|
|
(1.4
|
)
|
|
-
|
|
|
(18.2
|
)
|
|
|
$
|
(1.4
|
)
|
$
|
-
|
|
$
|
(16.1
|
)
|
During
the years ended December 31, 2005, 2004 and 2003 the Company incurred charges
(benefits) related to the additional minimum liability of its defined benefit
plans. The impact of the adjustments is posted, net of tax, directly to
Accumulated other comprehensive loss (see Note 15). The tax impact of these
charges (benefits) was as follows:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Additional
minimum pension liability
|
|
$
|
24.8
|
|
$
|
14.5
|
|
$
|
(10.5
|
)
|
Other
|
|
|
0.2
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
25.0
|
|
$
|
14.5
|
|
$
|
(10.5
|
)
|
The
reconciliation of the U.S. statutory income tax rate to the effective rate
from
continuing operations is:
|
|
2005
|
|
2004
|
|
2003
|
|
U.S.
statutory income tax rate
|
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Gain
on sale of CP Kelco ApS
|
|
|
-
|
|
|
(31
|
)
|
|
-
|
|
Valuation
allowances
|
|
|
(51
|
)
|
|
(75
|
)
|
|
(3
|
)
|
Tax
rate differences on subsidiary earnings
|
|
|
(6
|
)
|
|
(44
|
)
|
|
(9
|
)
|
U.S.
tax on foreign dividends and undistributed earnings
|
|
|
21
|
|
|
23
|
|
|
8
|
|
State
taxes
|
|
|
(11
|
)
|
|
34
|
|
|
1
|
|
Reserves
|
|
|
16
|
|
|
70
|
|
|
-
|
|
Exempt
export income
|
|
|
4
|
|
|
(7
|
)
|
|
(2
|
)
|
Intellectual
property
|
|
|
-
|
|
|
-
|
|
|
(9
|
)
|
Tax
refunds
|
|
|
9
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(1
|
)
|
|
3
|
|
|
1
|
|
Effective
tax rate
|
|
|
16
|
%
|
|
8
|
%
|
|
22
|
%
|
Loss
carryforwards include both net operating loss carryforwards and capital loss
carryforwards. At December 31, 2005, the tax effect of such carryforwards
approximated $349.2 million. Of this amount, $254.0 million are domestic
capital
loss carryforwards that expire in 2007 for which full valuation allowances
have
been established. State net operating loss carryforwards approximate $78.7
million, with expiration dates ranging from 2006 to 2024, for which full
valuation allowances have been established. Foreign net operating loss
carryforwards approximate $16.4 million and are offset by valuation allowances
of $7.6 million. Some of these foreign net operating loss carryforwards expire
as early as 2006 and others have expiration dates that are indefinite in
nature.
The tax effect of the credit carryforwards approximated $126.9 million at
December 31, 2005, with expiration dates ranging from 2009 to 2025, for
which no valuation allowances have been established.
The
Company provides taxes on undistributed earnings of subsidiaries and affiliates
to the extent such earnings are planned to be remitted and not permanently
reinvested. The undistributed earnings of subsidiaries and affiliates on
which
no provision for foreign withholding or U.S. income taxes has been made amounted
to approximately $153.8 million and $294.2 million at December 31, 2005 and
2004, respectively. U.S. and foreign income taxes that would be payable if
such
earnings were distributed may be lower than the amount computed at the U.S.
statutory rate because of the availability of tax credits.
8. Pension
and Other Postretirement Benefits
The
Company provides defined benefit pension plans and postretirement benefit
plans
to most U.S. employees and some foreign employees. Coverage is subject to
an
employee’s date of hire and other eligibility requirements. The
following table summarizes the changes in benefit obligations, plan assets,
the
funded status of the plans and the amounts recognized in the consolidated
financial statements for the Company's defined benefit pension and other
postretirement benefit plans.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
|
|
(Dollars
in millions)
|
|
|
|
Pension
Benefits
|
|
|
|
|
|
2005
|
|
2004
|
|
Other
Postretirement Benefits
|
|
Change
in benefit obligation:
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2005
|
|
2004
|
|
Benefit
obligation at January 1
|
|
$
|
1,413.5
|
|
$
|
325.7
|
|
$
|
1,421.3
|
|
$
|
282.2
|
|
$
|
181.0
|
|
$
|
206.1
|
|
Service
cost
|
|
|
12.7
|
|
|
5.4
|
|
|
13.3
|
|
|
5.9
|
|
|
0.8
|
|
|
0.8
|
|
Interest
cost
|
|
|
81.3
|
|
|
15.2
|
|
|
82.3
|
|
|
15.4
|
|
|
8.8
|
|
|
10.3
|
|
Plan
amendments
|
|
|
-
|
|
|
(4.5
|
)
|
|
(43.1
|
)
|
|
(1.7
|
)
|
|
(32.4
|
)
|
|
-
|
|
Participant
contributions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
Foreign
currency translation
|
|
|
-
|
|
|
(37.3
|
)
|
|
-
|
|
|
27.3
|
|
|
0.1
|
|
|
0.2
|
|
Actuarial
loss (gain)
|
|
|
136.1
|
|
|
49.2
|
|
|
42.7
|
|
|
10.2
|
|
|
19.8
|
|
|
(12.9
|
)
|
Settlements/curtailments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.6
|
)
|
|
-
|
|
|
-
|
|
Special
benefits
|
|
|
-
|
|
|
-
|
|
|
1.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Benefits
paid from plan assets
|
|
|
(101.9
|
)
|
|
(13.1
|
)
|
|
(98.8
|
)
|
|
(12.1
|
)
|
|
-
|
|
|
-
|
|
Benefits
paid from Company assets
|
|
|
(4.9
|
)
|
|
-
|
|
|
(5.3
|
)
|
|
(1.2
|
)
|
|
(23.6
|
)
|
|
(23.5
|
)
|
Benefit
obligation at December 31
|
|
$
|
1,536.8
|
|
$
|
340.6
|
|
$
|
1,413.5
|
|
$
|
325.7
|
|
$
|
154.5
|
|
$
|
181,0
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
$
|
1,176.2
|
|
$
|
245.7
|
|
$
|
1,115.1
|
|
$
|
217.9
|
|
$
|
-
|
|
$
|
-
|
|
Actual
return on plan assets
|
|
|
105.0
|
|
|
20.9
|
|
|
119.9
|
|
|
15.6
|
|
|
-
|
|
|
-
|
|
Actuarial
gain
|
|
|
-
|
|
|
14.7
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
Settlements/curtailments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.5
|
)
|
|
-
|
|
|
-
|
|
Company
contributions
|
|
|
40.0
|
|
|
13.7
|
|
|
40.0
|
|
|
3.2
|
|
|
-
|
|
|
-
|
|
Participant
contributions
|
|
|
-
|
|
|
0.9
|
|
|
-
|
|
|
1.0
|
|
|
-
|
|
|
-
|
|
Foreign
currency translation
|
|
|
-
|
|
|
(27.7
|
)
|
|
-
|
|
|
20.5
|
|
|
-
|
|
|
-
|
|
Benefits
paid from plan assets
|
|
|
(101.9
|
)
|
|
(11.8
|
)
|
|
(98.8
|
)
|
|
(12.1
|
)
|
|
-
|
|
|
-
|
|
Fair
value of plan assets at December 31
|
|
$
|
1,219.3
|
|
$
|
256.4
|
|
$
|
1,176.2
|
|
$
|
245.7
|
|
$
|
-
|
|
$
|
-
|
|
Funded
status of the plan
|
|
$
|
(317.5
|
)
|
$
|
(84.2
|
)
|
$
|
(237.3
|
)
|
$
|
(80.0
|
)
|
$
|
(154.5
|
)
|
$
|
(181.0
|
)
|
Unrecognized
actuarial loss
|
|
|
671.2
|
|
|
104.5
|
|
|
584.4
|
|
|
89.9
|
|
|
120.1
|
|
|
106.6
|
|
Unrecognized
prior service (benefit) cost
|
|
|
(22.0
|
)
|
|
(2.7
|
)
|
|
(23.0
|
)
|
|
2.4
|
|
|
(55.4
|
)
|
|
(30.5
|
)
|
Accrued
Expenses
|
|
|
-
|
|
|
(0.2
|
)
|
|
-
|
|
|
(0.2
|
)
|
|
-
|
|
|
-
|
|
Unrecognized
net transition obligation
|
|
|
-
|
|
|
0.5
|
|
|
-
|
|
|
0.8
|
|
|
0.8
|
|
|
0.9
|
|
Net
amount recognized
|
|
$
|
331.7
|
|
$
|
17.9
|
|
$
|
324.1
|
|
$
|
12.9
|
|
$
|
(89.0
|
)
|
$
|
(104.0
|
)
|
Components
of the above amounts:
|
Prepaid
benefit cost
|
|
$
|
369.5
|
|
$
|
53.3
|
|
$
|
361.9
|
|
$
|
51.6
|
|
$
|
-
|
|
$
|
-
|
|
Accrued
benefit liability
|
|
|
(37.8
|
)
|
|
(35.4
|
)
|
|
(37.8
|
)
|
|
(38.7
|
)
|
|
(89.0
|
)
|
|
(104.0
|
)
|
Additional
minimum liability
|
|
|
(588.6
|
)
|
|
(48.2
|
)
|
|
(506.2
|
)
|
|
(72.3
|
)
|
|
-
|
|
|
-
|
|
Intangible
asset
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
3.6
|
|
|
-
|
|
|
-
|
|
Accumulated
other comprehensive loss (pre-tax)
|
|
|
588.6
|
|
|
47.8
|
|
|
506.2
|
|
|
68.7
|
|
|
-
|
|
|
-
|
|
Net
amount recognized
|
|
$
|
331.7
|
|
$
|
17.9
|
|
$
|
324.1
|
|
$
|
12.9
|
|
$
|
(89.0
|
)
|
$
|
(104.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine the benefit obligation at December
31, 2005
and 2004 were:
|
|
|
Pension
Benefits
|
Other
Postretirement
|
|
|
2005
|
2004
|
Benefits
|
|
|
|
U.S.
|
|
|
Int’l.
|
|
|
U.S.
|
|
|
Int’l.
|
|
|
2005
|
|
|
2004
|
|
Weighted-average
discount rate
|
|
|
5.70
|
%
|
|
4.35
|
%
|
|
5.75
|
%
|
|
5.04
|
%
|
|
5.59
|
%
|
|
5.51
|
%
|
Rate
of compensation increase
|
|
|
4.30
|
%
|
|
2.87
|
%
|
|
4.50
|
%
|
|
2.79
|
%
|
|
4.29
|
%
|
|
4.49
|
%
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Net
periodic benefit costs are summarized below:
|
|
(Dollars
in millions)
|
|
|
|
Pension
Benefits
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Other
Postretirement Benefits
|
|
Net
periodic benefit cost:
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2005
|
|
2004
|
|
2003
|
|
Service
cost
|
|
$
|
12.7
|
|
$
|
5.4
|
|
$
|
13.3
|
|
$
|
5.9
|
|
$
|
12.1
|
|
$
|
5.9
|
|
$
|
0.8
|
|
$
|
0.8
|
|
$
|
0.6
|
|
Interest
cost
|
|
|
81.3
|
|
|
15.2
|
|
|
82.3
|
|
|
15.4
|
|
|
86.3
|
|
|
13.1
|
|
|
8.8
|
|
|
10.3
|
|
|
13.4
|
|
Expected
return on plan assets
|
|
|
(95.4
|
)
|
|
(14.9
|
)
|
|
(96.5
|
)
|
|
(14.6
|
)
|
|
(101.6
|
)
|
|
(12.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
and deferrals
|
|
|
(1.9
|
)
|
|
0.2
|
|
|
1.3
|
|
|
0.6
|
|
|
3.5
|
|
|
0.8
|
|
|
(7.3
|
)
|
|
(8.5
|
)
|
|
(7.7
|
)
|
Participant
contributions
|
|
|
-
|
|
|
(0.5
|
)
|
|
-
|
|
|
(0.7
|
)
|
|
-
|
|
|
(0.6
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Settlements/Curtailments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Special
benefits/terminations
|
|
|
-
|
|
|
-
|
|
|
1.1
|
|
|
-
|
|
|
4.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of transition (asset) obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
|
(0.1
|
)
|
|
6.5
|
|
|
0.1
|
|
|
0.1
|
|
Actuarial
losses recognized
|
|
|
40.7
|
|
|
3.4
|
|
|
33.9
|
|
|
3.1
|
|
|
19.9
|
|
|
1.3
|
|
|
-
|
|
|
5.2
|
|
|
6.7
|
|
Benefit
cost
|
|
$
|
37.4
|
|
$
|
8.8
|
|
$
|
35.4
|
|
$
|
9.5
|
|
$
|
24.9
|
|
$
|
8.3
|
|
$
|
8.8
|
|
$
|
7.9
|
|
$
|
13.1
|
|
Weighted-average
assumptions used to determine net periodic benefit
cost:
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2005
|
|
2004
|
|
2003
|
|
Weighted-average
discount rate
|
|
|
5.75
|
%
|
|
5.04
|
%
|
|
6.10
|
%
|
|
5.35
|
%
|
|
6.75
|
%
|
|
5.35
|
%
|
|
5.51
|
%
|
|
6.08
|
%
|
|
6.74
|
%
|
Expected
return on plan assets
|
|
|
8.50
|
%
|
|
6.49
|
%
|
|
8.75
|
%
|
|
6.64
|
%
|
|
8.75
|
%
|
|
6.70
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
4.50
|
%
|
|
2.79
|
%
|
|
4.50
|
%
|
|
2.86
|
%
|
|
4.50
|
%
|
|
2.93
|
%
|
|
4.49
|
%
|
|
4.49
|
%
|
|
4.50
|
%
|
Defined
Benefit Pension Plans
Assets
of
the Company’s defined benefit plans are primarily invested in U.S. and
international equity securities and U.S. and international fixed income
securities. Both the assets and the projected benefit obligations (“PBO”) of the
United States defined benefit pension plan (“U.S. Plan”) represent approximately
82% of the total plan assets and PBO for all defined benefit plans sponsored
by
the Company as of December 31, 2005. The Company uses a measurement date of
December 31 for all material defined benefit pension and other
postretirement benefit plans.
During
2005, the Company made contributions to its defined benefit plans totaling
$53.7
million, some of which were required by local funding requirements. The Company
presently anticipates making voluntary cash contributions to the U.S. Plan
of
approximately $40.0 million per year for the next five years. Additionally,
the
Company anticipates making contributions of approximately $5.4 million to
its
international defined benefit plans in 2006.
At
December 31, 2005 the accumulated benefit obligation ("ABO") of the defined
benefit pension plans on a consolidated basis was $1,800.3 million, of which
$1,476.3 million related to the U.S. Plan and the balance relates to the
other
defined benefit pension plans that reside in Europe, North America and Asia
Pacific (“International Plans”).
The
Company is required to recognize an additional minimum liability (“AML”) equal
to the sum of such excess plus the prepaid pension asset balance, with a
corresponding after-tax charge to Accumulated other comprehensive loss in
Stockholders' (deficit) equity. For the years ended December 31, 2005, 2004
and
2003 there were pre-tax charges (benefits) to AML of $69.1 million, $42.7
million and $(25.4) million, respectively. These impacts, net of tax, increased
(decreased) the Accumulated other comprehensive loss on the Consolidated
Balance
Sheets by $44.3 million, $28.2 million, and ($14.9) million for the three
years
ended December 31, 2005, 2004, and 2003, respectively. As of December 31,
2005, the
Consolidated Balance Sheet reflects a non-cash, after-tax charge to Accumulated
other comprehensive loss of $417.6 million (see Note 15).
Other
Postretirement Benefits
The
non-pension postretirement benefit plans include group life insurance coverage
and health care reimbursement for eligible employees/retirees in the U.S.,
Canada and The Netherlands. The benefit obligation of the U.S. other
postretirement benefit plan constitutes more than 98% of the Company's
consolidated benefit obligation at December 31, 2005 for non-pension
postretirement benefits. The assumed participation rate in these plans for
future eligible retirees was 60% for health care and 100% for life insurance.
The health care plans are contributory with participants' contributions adjusted
annually; the life insurance plans are non-contributory for most retirees.
The
postretirement health care plans include a limit on the Company's share of
costs
for recent and future retirees and the related accounting anticipates future
cost-sharing changes to the written plans that are consistent with the increase
in health care cost. Participant contributions
Hercules
Incorporated
Notes
to Consolidated Financial Statements
are
directly applied to claim payments and as such are not included as contributions
to plan assets. New employees are ineligible for retiree life insurance or
benefits supplemental to Medicare health care.
The
assumed health care cost trend rate as of December 31, 2005 was an initial
rate
of 10% in 2006 reducing to 5.0% in 2009 and thereafter. A
one-percentage point increase in the assumed health care cost trend rate
would
increase the postretirement benefit obligation by approximately $5.3 million
and
the aggregate service and interest cost components by $0.3 million, while
a
decrease of the same magnitude would decrease the postretirement benefit
obligations by approximately $5.7 million and the aggregate service and interest
cost components by $0.4 million.
The
PBO
exceeds plan assets for all of the Company's other postretirement benefit
plans.
Benefits paid from Company assets under the postretirement benefit plans
were
$23.6 million and $23.5 million for the years ended December 31, 2005 and
2004,
respectively.
U.
S. Pension and Postretirement Benefit Plans
The
Company provides both funded and unfunded non-contributory defined benefit
pension plans to substantially all of its U.S. employees. During 2004, some
terms of the U.S. Plan were amended, rendering new hires ineligible and changing
the calculation formula from “final pay” to “career average pay,” effective
January 1, 2005. New employees are ineligible for retiree life insurance
or
benefits supplemental to Medicare health care.
Effective
for 2006, Hercules changed its mortality assumption with the RP2000 mortality
table replacing the 1983GAM mortality table. This transition increased the
U.S.
Plan’s PBO and ABO as of December 31, 2005, by approximately $78 million and $74
million, respectively.
The
asset
allocation for the U.S. Plan as of December 31, 2005 and 2004 and the target
allocation for 2006, by asset category, is as follows:
|
|
Target
Allocation
|
|
Percentage
of Plan Assets
at
December 31,
|
|
Asset
category:
|
|
2006
|
|
2005
|
|
2004
|
|
Equity
securities
|
|
|
62
|
%
|
|
66
|
%
|
|
66
|
%
|
Fixed
income
|
|
|
28
|
%
|
|
26
|
%
|
|
27
|
%
|
Other
|
|
|
10
|
%
|
|
8
|
%
|
|
7
|
%
|
Totals
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Equity
securities are invested in both U.S. and non-U.S. (international) companies.
U.S. equity includes the common stock of large, medium, and small companies
that
are predominantly U.S. based. The plan did not own Hercules common stock
as of
December 31, 2005 or December 31, 2004.
Non-U.S.
equity represents equity securities issued by companies domiciled outside
the
U.S. Fixed income securities include U.S. and non-U.S. government obligations,
mortgage-backed securities, collateralized mortgage obligations and corporate
debt obligations. In 2004, Hercules increased its exposure to below investment
grade securities, allocating 2% of the total plan assets to a dedicated fixed
income manager for investing in such securities. All other fixed income
portfolio managers do not hold more than 12% of the fixed income securities
in
debt securities that are below investment grade. Other investments primarily
include market neutral, long, short, and event driven-type hedge funds.
Investment managers may employ limited use of derivatives, including futures
contracts, options on futures, and interest rate swaps in place of direct
investment in securities to gain efficient exposure to markets.
The
expected long-term rate of return on plan assets was 8.5% for 2005 and 8.75%
for
2004. The overall expected long-term rate of return on assets assumption
is a
function of the target asset allocation for plan assets, the long-term
equilibrium rate of return for the asset class, plus an incremental return
attributable to the active management of plan assets.
In
developing its investment strategy, the Company considered the following
factors
for its U.S. Plan: the nature and relative size of the liabilities, the
allocation of such liabilities between active and retired members, net cash
flows and funded position. The Company also considers the applicable investment
horizon, historical and expected capital market return, and the benefits
of
investment diversification.
The
Company manages plan assets with the primary objective of maximizing the
long-term investment return given available market opportunities and moderate
levels of risk consistent with the nature and purpose of the plan. Plan assets
are invested using a combination of active and passive investment strategies.
Active strategies employ multiple investment management firms. Managers within
each asset class cover a range of investment styles and approaches and are
combined in a way that controls market capitalization, style (growth, value,
and
core) and interest rate risk versus benchmark indices. Security selection
is the
primary means where value is added from active management. Risk is
Hercules
Incorporated
Notes
to Consolidated Financial Statements
controlled
through diversification among multiple asset classes, managers, styles, and
securities. Risk is further controlled both at the manager and asset class
level
by monitoring performance against assigned return and variability
targets.
Expected
cash flows for the U.S. Plan and the Company’s other postretirement benefit
plans, including the total anticipated contributions to be made by the Company
in 2006 as well as the future benefit payments expected to be paid from plan
or
Company assets, are as follows:
|
|
(Dollars
in millions)
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
|
Qualified
Plan
|
|
Non-qualified
Plan
|
|
Total
|
|
|
|
Expected
employer contributions for 2006
|
|
$
|
40
|
|
$
|
-
|
|
$
|
40
|
|
$
|
-
|
|
Expected
benefit payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
86
|
|
|
5
|
|
|
91
|
|
|
13
|
|
2007
|
|
|
85
|
|
|
5
|
|
|
90
|
|
|
13
|
|
2008
|
|
|
85
|
|
|
5
|
|
|
90
|
|
|
13
|
|
2009
|
|
|
86
|
|
|
5
|
|
|
91
|
|
|
12
|
|
2010
|
|
|
87
|
|
|
5
|
|
|
92
|
|
|
12
|
|
2011-2015
|
|
|
469
|
|
|
22
|
|
|
491
|
|
|
59
|
|
Benefits
expected to be paid in 2006 include $91 million in pension benefits and $13
million in postretirement benefits, of which $86 million is expected to be
paid
from plan assets.
International
Pension Plans
The
International Plans are Company provided defined benefit plans to eligible
employees residing in Europe, North America and Asia Pacific. The International
Plans provide benefits based on years of service and final average salary,
except for the defined benefit pension plans in The Netherlands (“The
Netherlands Plan”) and the United Kingdom (the “U.K. Plan”) which have both been
amended to provide benefits based on a career average pay basis effective
January 1, 2005.
The
asset
allocation for the International Plan as of December 31, 2005 and 2004 and
the
target allocation for 2006, by asset category, is as follows:
|
|
Target
Allocation
|
|
Percentage
of Plan Assets
at
December 31,
|
|
Asset
category:
|
|
2006
|
|
2005
|
|
2004
|
|
Equity
securities
|
|
|
58
|
%
|
|
61
|
%
|
|
59
|
%
|
Fixed
income
|
|
|
42
|
%
|
|
38
|
%
|
|
40
|
%
|
Other
|
|
|
-
|
|
|
1
|
%
|
|
1
|
%
|
Totals
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The
total assets held by The Netherlands Plan and the U.K. Plan account for
approximately 90% of the total assets held by International Plans.
The
Netherlands Plan's long-term target asset allocation is 58% global equity
securities which are actively managed and 42% fixed income investments (debt
and
debt-like securities, including preferred securities). The fixed income
securities are denominated in Euro and are issued and/or guaranteed by European
Monetary Union governments (mainly Belgium, Germany, France, Italy and The
Netherlands). The fixed income manager may invest on a tactical basis in
investment grade corporate bonds denominated in Euro. Investment managers
may
employ limited use of derivatives, including futures contracts, options on
futures, and interest rate swaps in place of direct investment in securities
to
gain efficient exposure to markets. Derivatives are not used to leverage
portfolios.
The
expected long-term rate of return on plan assets was 6.8% for both 2005 and
2004. The overall expected long-term rate of return on assets assumption
is a
function of the target asset allocation for plan assets, the long-term
equilibrium rate of return for the asset class, plus an incremental return
attributable to the active management of plan assets.
In
developing an investment strategy for The Netherlands Plan, the Company has
considered the following factors: the nature of the plan's liabilities, the
allocation of such liabilities between active members and retired members,
the
funded status of the plan, the net cash flow of the plan, the investment
horizon
of the plan, the size of the plan, historical and expected capital market
returns and the benefits of investment diversification.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
target asset allocation for the U.K. Plan is 30% U.K. equity securities,
20%
non-U.K. equity securities, 37.5% U.K. government bonds (gilts) and 12.5%
corporate bonds. The expected long-term rate of return on plan assets was
5.6% and 6% for 2005 and 2004, respectively. The overall expected long-term
rate
of return on assets assumption is a function of the target asset allocation
for
plan assets, the long-term equilibrium rate of return for the asset class,
plus
an incremental return attributable to the active management of plan assets.
The
Company considers the following factors in the development of its U.K. Plan
investment strategy: the nature and relative size of the liabilities, the
allocation of such liabilities between active and retired members, net cash
flows and funded positions, the applicable investment horizon, historical
and
expected capital market returns, and the benefits of investment diversification.
The
Company invests its U.K. Plan assets with a Manager of Managers, who invests
them with a broad selection of investment managers, each specializing in
a
different asset class or market. This approach provides a diversified portfolio
of managers in order to capitalize on the perceived strengths of each manager
within this structure. The Company delegates responsibility for the selection
and monitoring of the underlying investment managers to the Manager of Managers.
Expected
cash flows for the International Plans, reflecting the total anticipated
Company
contributions to be made in 2006 and the total benefit payments expected
to be
paid from the plan assets or Company assets through the year 2015, are
summarized in the table below:
|
|
(Dollars
in millions)
|
|
|
|
Pension
Plan Benefits
|
|
Expected
employer contributions for 2006
|
|
$
|
5
|
|
Expected
benefit payments:
|
|
|
|
|
2006
|
|
|
13
|
|
2007
|
|
|
13
|
|
2008
|
|
|
14
|
|
2009
|
|
|
15
|
|
2010
|
|
|
15
|
|
2011-2015
|
|
|
85
|
|
9. Savings
and Investment Plan
The
Hercules Incorporated Savings and Investment Plan (“SIP Plan”) allows employees
to invest 1% to 50% of eligible compensation, subject to certain limitations,
through payroll deductions. The Company's matching contributions, made in
the
form of Hercules' common stock contributed through an Employee Stock Ownership
Plan Trust (“ESOP Trust”) are equal to 50% of the first 6% of the employee's
contributed compensation and vest immediately. Shares used to fulfill the
Company's matching contribution are released at the fair market value of
those
shares in the period in which they are allocated. The pre-tax difference
between
cost and fair market value of these allocated shares, which was $7.3 million,
$8.2 million and $7.5 million for the years ended December 31, 2005, 2004
and
2003, respectively, is recorded in Additional paid-in capital. The Company
also
uses the shares in the ESOP Trust to fund a portion of the Hercules Incorporated
Profit Sharing Plan. Total shares allocated to fund these plan payments were
103,717 and 111,167 for the years ended December 31, 2005 and 2004,
respectively. The unallocated shares held by the trust are reflected in Unearned
compensation as a reduction in Stockholders' (deficit) equity on the balance
sheet of $53.6 million and $66.4 million at December 31, 2005 and 2004,
respectively. The unallocated shares have a cost basis of $31.625 per
share.
At
December 31, 2005 and 2004, the ESOP Trust had $39.2 million and $51.2 million
in long-term debt outstanding, respectively, under its loan agreement with
the
Company; the Company has an offsetting receivable in each year, which is
eliminated upon consolidation.
|
|
2005
|
|
2004
|
|
Allocated
|
|
|
1,458,065
|
|
|
1,464,530
|
|
Unallocated
|
|
|
1,695,387
|
|
|
2,099,176
|
|
Total
shares held by ESOP Trust
|
|
|
3,153,452
|
|
|
3,563,706
|
|
The
Company's SIP related expense was approximately $4.0 million, $3.9 million
and
$3.5 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
10. Long-term
Incentive Compensation Plans
The
Company's long-term incentive compensation plans provide for the grant of
stock
options and the award of common stock and other market-based units to certain
key employees and non-employee directors. Restricted stock and other
market-based units are awarded with respect to certain programs. During the
restriction period, award holders have the rights of stockholders, including
the
right to vote and receive cash dividends, but they cannot transfer ownership
and
nonvested shares are subject to forfeiture. During 2005, the Company granted
197,229 options to its President and Chief Executive Officer, with a fair
value
of $1.1 million. The Company did not grant any stock options covered by SFAS
123, as amended by SFAS 148, to employees in 2004. During 2005 and 2004,
the
Company granted 27,000 and 21,000 options, respectively, to its non-employee
directors and expensed $0.1 million in each year as the fair value of these
stock options. Restricted
stock awards under the Hercules Long-term Incentive Compensation Plan are
recorded at the quoted market price (fair value) of the Company's stock on
the
grant date (measurement date). The
number of awarded shares outstanding was 2,120,826 at December 31, 2005;
2,119,380 at December 31, 2004 and 1,299,214 at December 31,
2003.
At
December 31, 2005, under the Company's incentive compensation plans,
7,726,070 shares of common stock were available for grant as stock awards
or
stock option awards. Stock awards are limited to approximately 15% of the
total
authorizations. Regular stock options are granted at the market price on
the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted
at
the market price on the date of grant and are normally exercisable at nine
and
one-half years. Exercisability may be accelerated based upon the achievement
of
predetermined performance goals. Both regular and performance-accelerated
stock
options expire 10 years after the date of grant.
Restricted
shares, stock options and performance-accelerated stock options are forfeited
and revert to the Company in the event of employment termination, except
in the
case of death, disability, retirement, or other specified events.
The
Company recognized $6.9 million, $3.1 million and $4.3 million of expense
in
2005, 2004, and 2003, respectively, in connection with restricted stock
awards.
Below
is a summary of outstanding stock option grants under the incentive compensation
plans during 2003, 2004 and 2005:
|
|
Regular
|
|
Performance
Accelerated
|
|
|
|
Number
of Shares
|
|
Weighted-
average
Price
|
|
Number
of
Shares
|
|
Weighted-average
Price
|
|
December
31, 2002
|
|
|
13,207,
634
|
|
$
|
25.21
|
|
|
5,188,925
|
|
$
|
43.91
|
|
Granted
|
|
|
21,000
|
|
|
10.09
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(922,075
|
)
|
|
32.34
|
|
|
(409,225
|
)
|
|
46.77
|
|
December
31, 2003
|
|
|
12,306,559
|
|
$
|
24.47
|
|
|
4,779,700
|
|
$
|
43.66
|
|
Granted
|
|
|
21,000
|
|
|
14.25
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(402,855
|
)
|
|
11.48
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(886,820
|
)
|
|
33.19
|
|
|
(963,725
|
)
|
|
38.25
|
|
December
31, 2004
|
|
|
11,037,884
|
|
$
|
24.22
|
|
|
3,815,975
|
|
$
|
45.03
|
|
Granted
|
|
|
224,229
|
|
|
14.01
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(200,752
|
)
|
|
11.53
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(2,679,349
|
)
|
|
33.45
|
|
|
(2,473,860
|
)
|
|
45.87
|
|
December
31, 2005
|
|
|
8,382,012
|
|
$
|
21.31
|
|
|
1,342,115
|
|
$
|
43.49
|
|
The
fair value of regular stock options granted during 2005, 2004 and 2003 using
the
Black-Scholes option pricing model was $5.13, $5.38 and $4.67 respectively.
There were no performance-accelerated stock options granted during 2005,
2004
and 2003.
As
of December 31, 2005, 2004, and 2003, respectively, there were 8,162,583,
10,793,876, and 10,973,895 regular stock options exercisable at weighted-average
share prices of $21.59, $24.50, and $26.09, respectively.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
At
December 31, 2005, 2004 and 2003, respectively, there were no
performance-accelerated stock options exercisable. Following is a summary
of
stock options outstanding at December 31, 2005:
|
|
Outstanding
Options
|
|
Exercisable
Options
|
|
|
|
Number
Outstanding
at
12/31/2005
|
|
Weighted-
average
Remaining
Contractual
Life
|
|
Weighted-
average
Exercise
Price
|
|
Number
Exercisable
12/31/2005
|
|
Weighted-
average
Exercise
Price
|
|
Regular
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
$8.50
- $11.75
|
|
|
1,015,975
|
|
|
5.85
|
|
$
|
11.18
|
|
|
988,975
|
|
|
11.19
|
|
$11.76
- $15.00
|
|
|
3,198,047
|
|
|
6.14
|
|
$
|
11.24
|
|
|
2,979,818
|
|
|
11.97
|
|
$15.01
- $22.50
|
|
|
1,257,025
|
|
|
4.16
|
|
$
|
17.12
|
|
|
1,257,025
|
|
|
17.12
|
|
$22.51
- $33.75
|
|
|
891,700
|
|
|
2.70
|
|
$
|
26.01
|
|
|
891,700
|
|
|
26.01
|
|
$33.76
- $40.00
|
|
|
1,465,865
|
|
|
2.40
|
|
$
|
38.50
|
|
|
1,486,665
|
|
|
38.51
|
|
$40.01
- $60.00
|
|
|
553,400
|
|
|
1.77
|
|
$
|
49.30
|
|
|
558,400
|
|
|
49.31
|
|
|
|
|
8,382,012
|
|
|
|
|
|
|
|
|
8,162,583
|
|
|
|
|
Performance-Accelerated
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
$24.00
- $36.00
|
|
|
17,925
|
|
|
3.46
|
|
$
|
31.27
|
|
|
-
|
|
|
-
|
|
$36.01
- $45.00
|
|
|
685,030
|
|
|
2.66
|
|
$
|
38.25
|
|
|
-
|
|
|
-
|
|
$45.01
- $50.00
|
|
|
480,310
|
|
|
1.70
|
|
$
|
47.48
|
|
|
-
|
|
|
-
|
|
$50.01
- $61.00
|
|
|
158,850
|
|
|
0.12
|
|
$
|
55.36
|
|
|
-
|
|
|
-
|
|
|
|
|
1,342,115
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
The
Company's Employee Stock Purchase Plan was originally a qualified
non-compensatory plan, which allowed eligible employees to acquire shares
of
common stock through systematic payroll deductions. The plan was converted
to a
non-qualified employee stock purchase plan in 2001 and the shares were funded
from treasury stock. The plan consisted of three-month subscription periods,
beginning July 1 of each year. The purchase price was 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever was lower (the "look-back"). Purchases ranged from 2% to
15%
of an employee's base salary each pay period, subject to certain limitations.
Shares issued at December 31, 2001 under the qualified plan totaled
1,758,081. Pursuant to SFAS 123, the look-back constituted a stock option.
The
Company estimated and expensed the value of the option for the applicable
subscription period using the Black-Scholes option pricing model. The expense
attributable to the look-back provision was not significant. The 15% discount
on
the purchase price of the common stock was recognized as compensation expense
for the non-qualified Employee Stock Purchase Plan. The plan was terminated
effective April 1, 2004.
The
following weighted-average assumptions are used in determining the fair value
of
stock options and shares awarded under the Employee Stock Purchase Plan for
2005, 2004 and 2003:
|
|
Dividend
Yield
|
|
Risk-free
Interest
Rate
|
|
Expected
Life
|
|
Expected
Volatility
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Regular
Plan
|
|
|
0.00
|
%
|
|
4.08
|
%
|
|
6
yrs.
|
|
|
28.65
|
%
|
Employee
Stock Purchase Plan
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
Plan
|
|
|
0.00
|
%
|
|
3.73
|
%
|
|
6
yrs.
|
|
|
31.22
|
%
|
Employee
Stock Purchase Plan
|
|
|
0.00
|
%
|
|
1.00
|
%
|
|
3
mos.
|
|
|
32.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
Plan
|
|
|
0.00
|
%
|
|
3.54
|
%
|
|
6
yrs.
|
|
|
42.79
|
%
|
Employee
Stock Purchase Plan
|
|
|
0.00
|
%
|
|
1.00
|
%
|
|
3
mos.
|
|
|
35.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
pro forma effect on net (loss) income and (loss) earnings per share, assuming
the Company had applied the fair value recognition provisions of SFAS 123
to
stock-based employee compensation for all years reported, is presented in
the
Summary of Significant Accounting Policies.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
11. Asset
Retirement Obligations
In
accordance with Statement of Financial Accounting Standards No. 143, “Accounting
for Asset Retirement Obligations” (“SFAS 143”) and FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations - an interpretation
of
FASB Statement No. 143” (“FIN 47”), the Company has recorded asset retirement
obligations (“ARO”) in order to recognize legal obligations associated with the
retirement of tangible long-lived assets. The most significant of these are
primarily attributable to environmental remediation liabilities associated
with
current and former operations that were incurred during the course of normal
operations. Other AROs are attributable to requirements to dismantle facilities
and component assets upon their retirement as well as returning leased property
to its original condition upon the expiration of their underlying lease terms.
The
Company has a substantial number of AROs that are conditional in nature.
As
required by FIN 47, the Company identified certain conditional AROs upon
which
it was able to reasonably estimate their fair value and recognized approximately
$4.0 million as of December 31, 2005. Approximately $2.8 million was
attributable to AROs that were triggered upon commitments by the Company
to take
certain actions, including demolition, renovation and other retirement-related
activities. These actions include the centralization and consolidation of
the
Company’s U.S.-based research and development capabilities, the preparation of
certain properties for sale or for alternative uses and the announced closure
of
the Pendlebury, UK manufacturing facility. Approximately $0.2 million relates
to
the required dismantlement of the Company’s manufacturing facilities in certain
countries upon their ultimate retirement or land lease expiration dates.
Additionally, approximately $1.0 million is attributable to conditional
requirements for asset component retirements as well as circumstances in
which
the Company can reasonably estimate both the amount of the required settlement
as well as the range of settlement dates.
There
are a number of remaining conditional AROs whereby the Company does not have
sufficient information to estimate the fair value of the liabilities because
the
range of settlement dates has not been specified by others and/or cost estimates
are not available to apply an expected present value technique. Most significant
among these unrecognized conditional AROs are those attributable to the
abatement of asbestos at manufacturing facilities, and environmental
contamination. Asbestos is present in a substantial number of the Company’s
facilities. In general, regulations in the U.S. and other countries do not
require removal or abatement unless the condition is hazardous or if the
structure or component is disturbed through such activities as renovation
or
demolition. As of December 31, 2005, the Company has no plans or commitments,
other than those referenced above, to engage in such activities that would
otherwise disturb the asbestos present in its facilities.
With
respect to environmental contamination, the Company operates within the
requirements of numerous regulations at the local, state and national levels
regarding issues such as the handling and disposal of hazardous chemicals,
waste-water treatment and effluent and emissions limitations among others.
From
a practical standpoint, certain environmental contamination cannot be reasonably
determined until a facility or asset is retired or an event occurs that
otherwise requires the facility to be tested and monitored. In the absence
of
such requirements to test for environmental contamination prior to an asset
or
facility retirement, the Company has concluded that it cannot reasonably
estimate the cost associated with such environmental-related AROs. In addition,
the Company anticipates operating its manufacturing facilities indefinitely
into
the future thereby rendering the potential range of settlement dates as
indeterminate.
As
of December 31, 2005, the Company has accrued a total of $90.3 million with
respect to AROs. Approximately $21.6 million is included in Accrued expenses
representing amounts to be settled during 2006 and the remaining $68.7 million
is included in Deferred credits and other liabilities. The AROs have been
recognized on a discounted basis using a credit-adjusted risk free rate.
Accretion of the AROs is recorded in Other operating expenses for active,
operating sites and facilities and Other expense, net for inactive sites
associated with businesses that have been exited or divested.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
following table provides a reconciliation of changes in the AROs during the
period:
|
|
Active
Sites
|
|
Inactive
Sites
|
|
Total
|
|
Balance
at January 1, 2004
|
|
$
|
7.5
|
|
$
|
95.3
|
|
$
|
102.8
|
|
Liabilities
incurred
|
|
|
0.3
|
|
|
-
|
|
|
0.3
|
|
Accretion
|
|
|
0.3
|
|
|
1.6
|
|
|
1.9
|
|
Settlement
payments
|
|
|
(1.0
|
)
|
|
(12.5
|
)
|
|
(13.5
|
)
|
Changes
in estimated obligations
|
|
|
(0.2
|
)
|
|
4.2
|
|
|
4.0
|
|
Foreign
currency translation
|
|
|
0.2
|
|
|
0.6
|
|
|
0.8
|
|
Balance
at December 31, 2004
|
|
$
|
7.1
|
|
$
|
89.2
|
|
$
|
96.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
of FIN 47 adoption
|
|
|
4.0
|
|
|
-
|
|
|
4.0
|
|
Accretion
|
|
|
0.2
|
|
|
1.8
|
|
|
2.0
|
|
Settlement
payments
|
|
|
(1.2
|
)
|
|
(9.0
|
)
|
|
(10.2
|
)
|
Changes
in estimated obligations
|
|
|
0.3
|
|
|
3.2
|
|
|
3.5
|
|
Transfers
of obligations
|
|
|
-
|
|
|
(4.4
|
)
|
|
(4.4
|
)
|
Foreign
currency translation
|
|
|
(0.2
|
)
|
|
(0.7
|
)
|
|
(0.9
|
)
|
Balance
at December 31, 2005
|
|
$
|
10.2
|
|
$
|
80.1
|
|
$
|
90.3
|
|
While
not reflected in the table above, the Company has recognized approximately
$17.6
million of obligations for which it is reasonably likely that the Company
has
incurred a liability for costs associated with environmental remediation
or for
the settlement of related litigation. Liabilities included in this amount
are
attributable to sites that the Company formerly owned as well as sites that
the
Company did not have an ownership interest therein, but was associated with
activities at such sites, including landfills, waste sites and other similar
properties. The most significant among these is approximately $15.0 million
attributable to the Jacksonville, Arkansas site about which the Company has
been
litigating for several years (see Note 12).
12. Commitments
and Contingencies
Guarantees
In
accordance with FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), disclosures about each group of similar
guarantees are provided below:
Indemnifications
In
connection with the sale of the Company assets and businesses, the Company
has
indemnified respective buyers against certain liabilities that may arise
in
connection with the sales transactions and business activities prior to the
ultimate closing of the sale. These indemnifications typically pertain to
environmental, tax, employee and/or product related matters. If the indemnified
party were to incur a liability or have a liability increase as a result
of a
successful claim, pursuant to the terms of the indemnification, the Company
would be required to reimburse the buyer. These indemnifications are generally
subject to threshold amounts, specified claim periods and other restrictions
and
limitations. As of December 31, 2005, the Company has recorded indemnifications
totaling $40 million. Although it is reasonably possible that future payments
may exceed amounts accrued, due to the nature of indemnified items, it is
not
possible to make a reasonable estimate of the maximum potential loss or range
of
loss. Generally, there are no specific recourse provisions.
In
addition, the Company provides certain indemnifications in the ordinary course
of business such as product, patent and performance warranties in connection
with the manufacture, distribution and sale of its products and services.
Due to
the nature of these indemnities, it is not possible to make a reasonable
estimate of the maximum potential loss or range of loss.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Debt
Obligations
The
Company has directly guaranteed up to $44.2 million of various obligations
under
agreements with third parties related to subsidiaries and affiliates of which
$14.5 million is outstanding. The outstanding balance reflects guarantees
related to the debt of the following entities with maturities at various
dates
through 2006; $2.1 million for FiberVisions A/S, $2.8 million for Shanghai
Hercules Chemical, $2.8 million for Hercules Taiwan and $0.8 million for
Hercules Trading (Shanghai). The Company also guarantees $4.0 million related
to
a foreign-based pension plan with an indefinite term and $2.0 million related
to
debt obligations of previously disposed operations that expire in 2007. In
addition to the aforementioned $4.0 million guarantee, the Company has provided
approximately $2.5 million in collateral through a mortgage security related
to
the pension plan liability. Existing guarantees for subsidiaries and affiliates
arose from liquidity needs in normal operations.
Intercompany
Guarantees
The
Company and its subsidiaries have intercompany guarantees between and among
themselves which aggregate approximately $191.2 million of which $155.7 million
was outstanding as of December 31, 2005. These guarantees relate to intercompany
loans used to facilitate normal business operations and have been eliminated
from the Company's Consolidated Financial Statements.
Leases
Hercules
has operating leases (including office space, transportation and data processing
equipment) expiring at various dates. Lease expense of $20.6 million, $22.1
million and $24.6 million in 2005, 2004 and 2003, respectively, is net of
sub-lease income of $5.2 million, $5.4 million and $4.3 million in 2005,
2004
and 2003, respectively.
At
December 31, 2005, minimum rental payments under non-cancelable leases
aggregated $155.4 million with offsetting subleases of $36.8 million. A
significant portion of these payments relate to a long-term operating lease
for
corporate office facilities. The minimum payments over the next five years,
net
of minimum sublease receipts, are $19.6 million in 2006, $17.4 million in
2007,
$16.9 million in 2008, $23.6 million in 2009, $12.0 million in 2010 and $29.1
million thereafter.
Environmental
In
the
ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites,
past
spills, disposals and other releases of hazardous substances. Changes in
these laws and regulations may have a material adverse effect on the Company’s
financial position and results of operations. Any failure by the Company
to adequately comply with such laws and regulations could subject the Company
to
significant future liabilities.
Hercules has been identified as a potentially responsible party (“PRP”) by U.S.
federal and state authorities, or by private parties seeking contribution,
for
the cost of environmental investigation and/or cleanup at numerous sites.
Hercules becomes aware of sites in which it may be named a PRP in investigatory
and/or remedial activities through correspondence from the U.S. Environmental
Protection Agency (“EPA”) or other government agencies or from previously named
PRPs, who either request information or notify the Company of its potential
liability. The Company has established procedures for identifying
environmental issues at its plant sites. In addition to environmental
audit programs, the Company has environmental coordinators who are familiar
with
environmental laws and regulations and act as a resource for identifying
environmental issues.
The
range
of the reasonably possible share of costs for the investigation and cleanup
of
current and former operating sites including those with identified asset
retirement obligations and other locations where the Company may have a known
liability, is between $107.9 million and $214.5 million as of December 31,
2005.
In accordance with generally accepted accounting principles, the Company
has
accrued a liability of $107.9 million at December 31, 2005, representing
the low
end of the range, since no amount within the range is a better estimate than
any
other amount (see Note 11). This accrued liability is evaluated quarterly
based on currently available information, including the progress of remedial
investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of
costs
among other PRPs.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
actual costs for these matters will depend upon numerous factors, including
the
number of parties found responsible at each environmental site and their
ability
to pay; the actual methods of remediation required or agreed to; outcomes
of
negotiations with regulatory authorities; outcomes of litigation; changes
in
environmental laws and regulations; technological developments; and the years
of
remedial activity required, which could range from 0 to 30 or more years.
While it is not feasible to predict the outcome of all pending environmental
matters, the ultimate resolution of one or more of these environmental matters
could have a material adverse effect upon the Company’s financial position,
results of operations and/or cash flows for any annual, quarterly or other
period.
While
the
Company is involved in numerous environmental matters, the following matters
are
described below because they are currently viewed by management as potentially
material to the Company’s consolidated financial position, results of operations
and cash flows.
United
States, et al. v. Vertac Corporation, et al.,
USDC
No. LR-C-80-109 and LR-C-80-110 (E.D. Ark.)
This
case, a cost-recovery action based upon the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA” or the “Superfund statute”),
as well as other statutes, has been pending since 1980, and involves liability
for costs in connection with the investigation and remediation of the Vertac
Chemical Company (“Vertac”) site in Jacksonville, Arkansas. Hercules owned
and operated the site from December 1961 until 1971. The site was used for
the manufacture of certain herbicides and, at the order of the United States,
Agent Orange. In 1971, the site was leased to Vertac’s predecessor.
In 1976, Hercules sold the site to Vertac. The site was abandoned by Vertac
in
1987, and Vertac was subsequently placed into receivership. Both prior to
and following the abandonment of the site, the EPA and the Arkansas Department
of Pollution Control and Ecology (“ADPC&E”) were involved in the
investigation and remediation of contamination at and around the site.
Pursuant to several orders issued under CERCLA, Hercules actively participated
in many of these activities. The cleanup is essentially complete, except
for certain on-going maintenance and monitoring activities. This
litigation primarily concerns the responsibility and allocation of liability
for
the costs incurred in connection with the activities undertaken by the EPA
and
the ADPC&E.
The
procedural history of this litigation is discussed in greater detail in the
Company’s periodic reports previously filed with the SEC. In summary, in 1999,
the District Court finalized a ruling holding Hercules and Uniroyal jointly
and
severally liable for approximately $100 million in costs incurred by EPA,
as
well as costs to be incurred in the future. In 2000, the District Court
allocated 2.6% of such amounts to Uniroyal and 97.4% of such amounts to
Hercules. Both Hercules and Uniroyal appealed those rulings to the US Court
of
Appeals for the Eighth Circuit. In 2001, the Appeals Court reversed the District
Court’s rulings as to joint and several liability and allocation, and remanded
the case back to the District Court for several determinations, including
a
determination of whether the harms at the site giving rise to the EPA’s claims
were divisible. The trial on remand occurred in late 2001.
By
Memorandum Opinion and Order dated March 30, 2005, the District Court
largely affirmed its prior findings and prior judgment against the Company
and
Uniroyal and the prior allocation with respect to the Company and Uniroyal,
although the District Court did agree that the Company should not be liable
for
costs associated with a particular off-site landfill, and held that the judgment
should be reduced accordingly. By Order dated June 6, 2005, the District
Court entered a Final Judgment in favor of the United States and against
Hercules for $119.3 million of which Uniroyal is jointly and severally liable
for $110.4 million. The Final Judgment also provided that both Hercules and
Uniroyal are responsible for any additional response costs incurred or to
be
incurred by the United States after June 1, 1998, as well as post-judgment
interest running from the date of the Final Judgment. In addition, the District
Court re-affirmed its prior allocation holding which allocated 2.6% of the
$110.4 million in response costs for which Uniroyal is jointly and severally
liable, or $2.9 million, to Uniroyal. Finally, the Final Judgment found Uniroyal
liable to Hercules for 2.6% of the response costs incurred by Hercules of
approximately $27.4 million, or $0.7 million. The Company believes that the
District Court committed reversible error in reaching its conclusions and
has
appealed the District Court’s judgment to the United States Court of Appeals for
the Eighth Circuit. As a result of some of the findings set forth by the
District Court in its opinion, however, the Company determined that it has
a
probable and reasonably estimable liability of $14.8 million plus interest
and
established an accrual in that amount in March 2005. The Company will
continue to accrue interest on this amount until final disposition of the
judgment.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Alleghany
Ballistics Laboratory
The
Alleghany Ballistics Laboratory (“ABL”) is a government-owned facility which was
operated by Hercules from 1945 to 1995 under contract with the United States
Department of the Navy. The Navy has notified Hercules that it would like
to
negotiate with Hercules with respect to certain environmental liabilities
which,
the Navy alleges, are attributable to Hercules’ past operations at ABL. During
the course of discussions, the Navy has stated that, pursuant to CERCLA,
it has
spent a total of approximately $25.0 million and expects to spend an additional
$44.0 million over the next 10 years. The Company has conducted an investigation
of the Navy’s allegations, including the basis of the Navy’s claims, and
believes the contracts with the government pursuant to which the Company
operated ABL may provide the Company with a defense from some or all of the
amounts sought. The Company has exchanged information with the Navy and
discussions with the Navy are continuing. At this time, however, the Company
cannot reasonably estimate its liability, if any, with respect to ABL and,
accordingly, has not included this site in the range of its environmental
liabilities reported above.
Kim
Stan Landfill
Hercules
is one of a limited number of industrial companies that have been identified
by
the EPA as a PRP at the Kim Stan Landfill, near Covington, Virginia. The
EPA is
seeking to have the PRPs undertake the remediation of the site at a currently
estimated cost of $12.0 million (including EPA oversight charges). Based
on the
investigation conducted to date, the Company believes that parties not named
by
the EPA as PRPs may be responsible for the majority of the costs that have
been
and will be incurred at the site and intends to seek contribution from those
parties to the extent it is required to pay any monies in connection with
the
site. The Company is continuing to evaluate the EPA’s allegations and, pending
further investigation, is not able to determine its exposure, if any, with
respect to this site. EPA has invited the Company and two other PRPs
(collectively “the PRP Group”) to engage in negotiations to resolve EPA’s
claims.
Clean
Air Act Notice of Violation
On
December 23, 2005, EPA Region III issued a Notice of Violation to the Company
and to Eastman Company (Eastman) that alleges various violations of the Clean
Air Act, primarily focused on the Act’s requirements governing emissions of
volatile organic compounds, at a manufacturing facility located in West
Elizabeth, PA. (In
the
Matter of Eastman Company and Hercules Incorporated,
EPA
Region III, Docket No. CAA-III-06-011.) That facility was sold to Eastman
as
part of the Company's divestiture of its Resins business in May 2001. EPA
has
not specifically made a demand for monetary penalties upon the Company and
Eastman. The Company is in the process of investigating the allegations set
forth in the Notice of Violation.
Litigation
The
Company is involved in litigation arising out of or incidental to the conduct
of
its business. Such litigation typically falls within the following broad
categories: environmental (previously discussed); antitrust; commercial;
intellectual property; labor and employment; personal injury; property damage;
product liability; and toxic tort. These matters typically seek unspecified
or
large monetary damages or other relief. While it is not feasible to predict
the
outcome of all pending matters, the ultimate resolution of one or more of
these
matters could have a material adverse effect upon the Company’s financial
position, results of operations and/or cash flows for any annual, quarterly
or
other period. While the Company is involved in numerous matters, the following
matters are described below because they are currently viewed by management
as
potentially material. From time to time, management may determine (based
on
further analysis or additional information that becomes available through
discovery or otherwise) that other matters are or have become potentially
material to the Company. As appropriate, descriptions of such matters will
be
included in the periodic report following such determination. Occasionally,
management may not determine that a matter is material until it has been
settled
or otherwise resolved. In such a situation, that matter may not have been
described in the Company’s periodic reports prior to such settlement or
resolution, but the impact of such settlement or resolution would be reflected
in the financial statements included in the periodic report following such
settlement or resolution.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Asbestos
The
Company is a defendant in numerous asbestos-related personal injury lawsuits
and
claims which typically arise from alleged exposure to asbestos fibers from
resin
encapsulated pipe and tank products which were sold by one of the Company’s
former subsidiaries to a limited industrial market (“products claims”).
The Company is also a defendant in lawsuits alleging exposure to asbestos
at
facilities formerly or presently owned or operated by the Company (“premises
claims”). Claims are received and settled or otherwise resolved on an
on-going basis.
As
of
December 31, 2005, there were approximately 29,875 unresolved claims, of
which
approximately 995 were premises claims and the rest were products claims.
There were also approximately 1,775 unpaid claims which have been settled
or are
subject to the terms of a settlement agreement. In addition, as of
December 31, 2005, there were approximately 687 claims which have either
been
dismissed without payment or are in the process of being dismissed without
payment, but with plaintiffs retaining the right to re-file should they be
able
to establish exposure to an asbestos-containing product for which the Company
bears liability.
Between
January 1, 2005 and December 31, 2005, the Company received
approximately 4,408 new claims. During that same period, the Company spent
approximately $37.5 million on these matters, including approximately $27.7
million in settlement payments and approximately $9.8 million for defense
costs.
The
Company’s primary and first level excess insurance policies that provided
coverage for these asbestos-related matters exhausted their products limits
at
or before the end of July 2003. On November 27, 2002, the
Company initiated litigation against the solvent excess insurance carriers
that
provided insurance coverage for asbestos-related liabilities in a matter
captioned Hercules
Incorporated v. OneBeacon, et al.,
Civil
Action No. 02C-11-237 (SCD), Superior Court of Delaware, New Castle
County. Beginning in August 2004 and continuing through
October 2004, the Company entered into settlements with all of the insurers
named in that lawsuit. As a result, the lawsuit was dismissed in early
November 2004.
Effective
August 23, 2004, the Company entered into a comprehensive confidential
settlement agreement with respect to those insurance policies issued by certain
underwriters at Lloyd’s, London, and reinsured by Equitas Limited and related
entities (“Equitas”) (the “First Settlement Agreement”). As part of that
settlement, Equitas paid $30.0 million to the Company and placed
$67.0 million into a trust set up to reimburse the Company for a portion of
the costs incurred by the Company to defend and resolve certain asbestos
claims,
subject to certain monthly monetary limitations. In exchange, the Company
released the underwriters from past, present and future claims under those
policies, agreed to the cancellation of those policies, and agreed to indemnify
the underwriters from any claims asserted under those policies. In addition,
the
Company agreed that if federal asbestos reform legislation is enacted into
law
on or prior to January 3, 2007, the Company will be required to return any
funds remaining in the trust to Equitas should certain criteria be met. If
such legislation is not enacted by that date, any funds remaining in the
trust
will be available to the Company to pay asbestos-related liabilities or to
use
for other corporate purposes. The Company has and continues to reimburse
itself
from the trust for a portion of the monies spent to defend and resolve certain
asbestos claims. As of February 21, 2006, $51.2 million remains in the
trust.
In
addition, effective October 8, 2004, the Company entered into a
comprehensive confidential settlement agreement with respect to certain
insurance policies issued by various insurance companies operating in the
London
insurance market, and by one insurance company located in the United States
(the
“Second Settlement Agreement”). Under the terms of the Second Settlement
Agreement, the participating insurers agreed to place into trust over a four
year period commencing in January 2005 and ending in 2008 monies which will
ultimately total approximately $102.2 million. In exchange, the Company
released the insurers from past, present and future claims under those policies,
agreed to the cancellation of those policies, and agreed to indemnify the
insurers from any claims asserted under those policies. The trust funds have
been and are continuing to be used to reimburse the Company for costs it
incurs
to resolve asbestos claims. Any funds remaining in trust subsequent to
December 31, 2008 may be used by the Company to pay both asbestos-related
claims and non-asbestos related claims. As of February 21, 2006, $66.1
million of the $102.2 million has been placed into the trust, of which $34.6
million remains in the trust.
The
Company also reached settlement agreements with additional insurers whose
level
of participation in the Company’s insurance program is substantially lower than
the aggregate participation of the insurers referred to above (the “Other
Settlement Agreements”). Pursuant to the Other Settlement Agreements, the
Company has released or partially released its rights to coverage under
insurance policies issued by such insurers. The Company has received all
amounts due under the Other Settlement Agreements.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
In
addition, effective October 13, 2004, the Company reached a confidential
settlement agreement with the balance of its solvent excess insurers whereby
a
significant portion of the costs incurred by the Company with respect to
future
asbestos product liability claims will be reimbursed, subject to those claims
meeting certain qualifying criteria (the “Future Coverage Agreement”).
That agreement is not expected to result in reimbursement to the Company,
however, unless and until defense costs and settlement payments for qualifying
asbestos products claims paid by the Company subsequent to the effective
date of
the agreement aggregate to approximately $330 million to $370 million, with
the
foregoing approximation based on various assumptions, including that there
are
sufficient qualifying claims to require such payments, that for such qualifying
claims the time periods of each claimant’s alleged exposure to asbestos products
falls within the time periods covered by the participating insurers’ policies,
and that each of the participating insurers remain solvent and honor their
commitments under the terms of the Future Coverage Agreement. The Company
expects that such amounts, if required to be paid, would be paid by the Company
using monies from the above settlements and from other sources. If and
when such amounts are paid by the Company, the insurers’ obligations pursuant to
the terms of the Future Coverage Agreement would be triggered, and the
participating insurers would thereafter be required to pay their allocated
share
of defense costs and settlement payments for asbestos product liability claims
that qualify for reimbursement subject to the limits of their insurance
policies, which limits are believed to be sufficient to cover the insurers’
allocated shares of an amount that exceeds the high end of the reasonably
possible range of financial exposure described below. The Company will be
responsible for payment of the share of such costs and payments that are
not
reimbursed by the participating insurers pursuant to the terms of the Future
Coverage Agreement, as well as for such costs and payments for those claims
that
do not qualify for reimbursement under the terms of the Future Coverage
Agreement. Should asbestos reform legislation be passed, some or all of
the obligations under the Future Coverage Agreement will be suspended for
so
long as such legislation remains in effect.
As
a
result of the above settlements, the Company is expected to have available
to it
a combination of cash and trust fund monies which can be used to pay or
reimburse the Company for a significant portion of the defense costs and
settlement payments that may be incurred by the Company with respect to its
asbestos-related liabilities. If such liabilities exceed the total amount
of the cash and trust fund monies received by the Company as a result of
such
settlements, then the Company will be required to fund such liabilities itself
until such time as the insurers’ obligations under the Future Coverage Agreement
are triggered. If and when those obligations are triggered, the Company
and the insurers who are participants in the Future Coverage Agreement will
share such costs and payments at varying levels over time, with the Company
typically bearing a slightly larger share than such participating
insurers. Of note, as a result of the First Settlement Agreement, Second
Settlement Agreement and Other Settlement Agreements, substantially all of
the
Company’s insurance coverage applicable to asbestos products claims has been
cancelled (except for obligations under the Future Coverage Agreement), and
such
insurance coverage will no longer be available to cover any such claims.
In addition and as described above, as a result of the First Settlement
Agreement, Second Settlement Agreement and Other Settlement Agreements,
substantial amounts of insurance coverage that would have been available
to
cover insured claims other than asbestos products claims have been cancelled
and
will no longer be available to cover such claims.
Based
on
the current number of claims pending, the amounts the Company anticipates
paying
to resolve those claims which are not dismissed or otherwise resolved without
payment, and anticipated future claims, the Company believes that the total
monetary recovery under the settlements noted above will cover the majority
of
the Company’s monetary exposure for its current and estimated future
asbestos-related liabilities. The foregoing, however, assumes that all of
the monies received and to be received from the settlements described above
will
be utilized only for asbestos liabilities. In fact, due to timing
differences between the receipt of cash settlements and the payment of asbestos
claims by the Company, the Company has and will likely continue to use some
of
the proceeds received and to be received from the settlements described above
for other corporate purposes. As a result, from a cash flow perspective,
in any particular period of time, the Company may be required to fund some
or
all of its asbestos-related liabilities using cash flows from operations
or
sources other than the settlements described above. Further, as monies
received and to be received from the settlements described above are used
by the
Company, and as the balance remaining on amounts yet to be received from
the
settlements described above decline, it is likely that there will come a
time
when the Company will be responsible for payment of all or a majority of
such
liabilities until such time as the obligations under the Future Coverage
Agreement are triggered, at which point in time the Company is expected to
share
such liabilities with the participating insurers, with it being anticipated
that
the Company will typically bear a slightly larger share than the participating
insurers. In any period of time, including after obligations under the
Future Coverage Agreement are triggered, the amounts paid by the Company
in
connection with the defense and settlement of asbestos claims versus the
amounts
funded and to be funded by settlement monies and amounts anticipated to be
reimbursed by the Future Coverage Agreement are expected to vary
significantly.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Moreover,
as described in greater detail below, the Company’s projection of its current
and estimated future asbestos-related liabilities may change. As a result
of these and other factors, although the Company believes that the majority
of
its total monetary exposure will ultimately be covered by the total monetary
recovery under the settlements described above, there can be no assurance
such
will be the case.
In
October 2004, the Company first commissioned a study of its asbestos-related
liabilities by a recognized expert at a major national university, who is
a
member of the American Academy of Actuaries with broad experience in estimating
such liabilities. Since that time, such study has been updated several
times to take into account the then most current data concerning, among other
factors, the Company’s claims and payment experience. In January 2006, the study
was updated again and, as a result, the reasonably possible exposure for
these
matters as of December 31, 2005 was revised to a range of $270 million to
$790 million, an increase from the previously established range. Due to
inherent uncertainties in estimating the timing and amounts of future payments,
the foregoing range does not include the effects of inflation and has not
been
discounted for the time value of money. In addition, the range of
financial exposures set forth above does not include estimates for future
legal
costs. It is the Company’s policy to expense these legal costs as
incurred. As stated above, the Company presently believes that the
majority of this range of financial exposures will ultimately be funded by
the
settlements which it has made with the Company’s insurers. Cash payments
related to this exposure are expected to be made over an extended number
of
years and actual payments, when made, could be for amounts in excess of the
range due to potential future changes in estimates as well as the effects
of
inflation.
The
foregoing is based on the Company’s assumption that the number of future claims
filed per year and claim resolution payments will vary considerably from
year-to-year and by plaintiff, disease, venue and other circumstances, but
will,
when taken as a whole, remain relatively consistent with the Company’s
experience to date and will decline as the population of potential future
claimants expires due to non-asbestos-related causes. It is also based on
the results of the updated study and the status of the Company’s settlements
with its insurers, as described above. However, the Company recognizes
that the number of future claims filed per year and claim resolution payments
could greatly exceed those reflected by its past experience and contemplated
by
the study referenced above, that the Company’s belief of the range of its
reasonably possible financial exposure could change as the study referenced
above is periodically updated, and that its evaluation of the total payments
to
be received from its insurers may change depending upon numerous variables
including potential legislation and the risk that one or more insurance carriers
may refuse or be unable to meet their obligations to the Company.
Due
to
the dynamic nature of asbestos litigation, the Company’s estimates are
inherently uncertain, and these matters may present significantly greater
financial exposures than presently anticipated. In addition, the Company
intends to periodically update the asbestos study referenced above, and further
analysis combined with new data received in the future could result in a
material modification of the range of reasonably possible financial exposure
set
forth above. As a result of all of the foregoing, the Company’s liability
with respect to asbestos-related matters could vary significantly from present
estimates and may require a material change in the accrued liability for
these
matters within the next 12 months. If the Company’s liability does exceed
amounts recorded in the balance sheet, the Company presently believes that
the
majority of the liability it may reasonably anticipate will be paid or
reimbursed as a result of the settlements the Company has made with its
insurers, as described above. However, there can be no assurance that such
liabilities will be reimbursed.
The
findings of the updated study referenced above identified a range of the
Company’s reasonably possible financial exposure for these asbestos-related
matters. The Company adjusted its accrual for present and future potential
asbestos claims before anticipated insurance recoveries at December 31,
2005 to $270.0 million, reflecting the low end of the range noted above in
accordance with generally accepted accounting principles (since no amount
within
the range is a better estimate than any other amount).
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
following table presents the beginning and ending balances and balance sheet
activity for the Company’s asbestos-related accounts for the year ended December
31, 2005.
|
|
Balance
January 1, 2005
|
|
Interest
Income/
Additional
Accruals
|
|
Insurance
Recovered/
Liabilities
Settled
|
|
Accretion/
Reclassifi-
cation
|
|
Balance
December 31, 2005
|
|
Asbestos-related
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable
|
|
$
|
6.3
|
|
$
|
(0.3
|
)
|
$
|
(6.0
|
)
|
$
|
-
|
|
$
|
-
|
|
Asbestos-related
assets, current
|
|
|
6.3
|
|
|
(0.3
|
)
|
|
(6.0
|
)
|
|
-
|
|
|
-
|
|
Insurance
receivable
|
|
|
98.9
|
|
|
-
|
|
|
(35.3
|
)
|
|
1.6
|
|
|
65.2
|
|
Restricted
cash in trust (1)
|
|
|
63.6
|
|
|
1.8
|
|
|
(9.9
|
)
|
|
-
|
|
|
55.5
|
|
Asbestos-related
assets, non-current
|
|
|
162.5
|
|
|
1.8
|
|
|
(45.2
|
)
|
|
1.6
|
|
|
120.7
|
|
Total
asbestos-related assets
|
|
$
|
168.8
|
|
$
|
1.5
|
|
$
|
(51.2
|
)
|
$
|
1.6
|
|
$
|
120.7
|
|
Asbestos-related
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related
liabilities, current
|
|
$
|
46.8
|
|
$
|
-
|
|
$
|
(27.7
|
)
|
$
|
17.3
|
|
$
|
36.4
|
|
Asbestos-related
liabilities, non-current
|
|
|
213.4
|
|
|
37.5
|
|
|
-
|
|
|
(17.3
|
)
|
|
233.6
|
|
Total
asbestos-related liabilities
|
|
$
|
260.2
|
|
$
|
37.5
|
|
$
|
(27.7
|
)
|
$
|
-
|
|
$
|
270.0
|
|
(1) |
Amount
is reflected as a non-current asset as its availability for reimbursement
to the Company is restricted to asbestos claims and related defense
costs
reimbursable to the Company as discussed above in connection with
the
First Settlement Agreement.
|
The
Company, in conjunction with outside advisors, will continue to study its
asbestos-related matters, insurance recovery expectations and reserves on
an
ongoing basis, and make adjustments as appropriate.
Of
note,
in April, May and June 2005, respectively, Georgia, Texas and Florida
passed legislation aimed at reforming the way that civil asbestos litigation
is
handled in the courts of those states. In general, such legislation
establishes medical criteria which define whether a claimant has a physical
impairment allegedly caused by exposure to asbestos, and defers the claims
of
those claimants who have no or minimal physical impairment, while allowing
the
claims of claimants who have an alleged physical impairment to proceed. While
it
is too early to tell what impact these legislative enactments will have or
whether or to what extent these legislative enactments will survive any legal
challenges to their constitutionality or applicability, the Company is
optimistic that, over time, the net effect of these legislative enactments
will
be beneficial, although there can be no assurance that the effect of such
laws
will be beneficial. Of the state legislative reforms that have passed to
date,
the Texas legislation appears to have the most potential significance to
the
Company because of the number of claims historically filed and currently
pending
in Texas and the amount of money spent to date to defend and resolve claims
filed in Texas. The Texas legislation, which became effective on September
1,
2005, largely applies to claims pending as of or filed after December 1,
2005.
In addition to the medical criteria described above, the Texas legislation
also
prevents the “bundling” of groups of claims. While the Company is optimistic
that, over time, the net effect of the Texas legislation will be beneficial,
there can be no assurance that the legislation will have such effect. The
Company continues to closely follow the federal legislative developments
in the
United States Senate as efforts to develop a comprehensive national solution
to
the asbestos litigation problem proceed. Should the current proposed version
of
the Fairness
in Asbestos Injury Resolution Act
(also
referred to as the FAIR Act) become law, civil litigation of asbestos bodily
injury lawsuits in state and federal courts would end or abate and would
be
replaced by a national trust fund. While the Company believes that the current
version of the FAIR Act, if enacted into law, would be beneficial, there
can be
no assurance that the effect of such legislation would be beneficial, nor
can
there be any assurance that such proposed legislation will be enacted into
law.
Composite
Products Antitrust and Qui Tam Matters
Commencing
in 1999, the Company was one of several companies sued in a series of civil
antitrust and related lawsuits concerning the pricing and sale of carbon
fiber
and carbon prepreg products (together referred to as “carbon fiber products”).
These products were manufactured and sold by the Company’s former Composite
Products division, which division was sold to Hexcel Corporation in 1996.
These
lawsuits encompassed the following: (a) a federal class action brought on
behalf
of direct purchasers of carbon fiber products captioned Thomas &
Thomas Rodmakers v. Newport Adhesives and Composites,
Case
No. CV-99-07796-GHK (CTx) (U.S. District Court, Central District of
California; (b) a total of nine California state purported class actions
brought
on behalf of indirect purchasers of carbon fiber products, all consolidated
under the caption Carbon
Fiber Cases I, II, and III,
Judicial Council Coordination Proceeding Nos. 4212, 4216
Hercules
Incorporated
Notes
to Consolidated Financial Statements
and
4222,
Superior Court of California, County of San Francisco; (c) a Massachusetts
state
purported class action brought on behalf of indirect purchasers of carbon
fiber
products captioned Saul
M. Ostroff, et al. v. Newport Adhesives, et al.,
Civil
Action No. 02-2385, Superior Court of Middlesex County; and (d) a lawsuit
brought by Horizon Sports Technologies, a company that had “opted out” of the
federal class action lawsuit referred to above and captioned Horizon
Sports Technologies, Inc. v. Newport Adhesives and Composites, Inc.,
et al.,
Case
No. CV02-8126 FMC (RNEX), U.S. District Court, Central District of
California, Western Division. In addition, the Company and the other
defendants in the foregoing lawsuits were sued in a related “Qui Tam” action
captioned Randall
M. Beck, et al. v. Boeing Defense and Space Group, Inc., et
al.,
(Civil
Action No. 99 CV 1557 JM JAH), which lawsuit was originally filed under
seal in 1999 pursuant to the False Claims Act, 31 U.S.C. Section 729 et
seq. Throughout 2005, the Company entered into agreements to resolve each
of the
foregoing lawsuits, and the results of such settlements are reflected in
the
Company’s financial statements with such amounts not yet paid reflected in the
paragraph below entitled “Amounts Accrued for Non-Asbestos Litigation.” At this
time, all of the forgoing lawsuits have been resolved except for the
Massachusetts state purported class action, where a settlement in principle
has
been reached, and except as described in the following sentence. One of the
Company's customers
has “opted-out” of the Federal and California state class actions referred
to above, and the Company anticipates that this will result in an additional
claim by such customer. Each of the foregoing lawsuits have been resolved
by the
Company without any admission of liability and each of the settlements was
entered into by the Company in order to avoid the risks, uncertainties and
costs
inherent in litigation.
In
December 2004, the Company filed a lawsuit against Hexcel Corporation
(Hercules
Incorporated v. Hexcel Corporation,
Supreme
Court of the State of New York, County of New York, Index No. 04/604098)
seeking indemnification for the settlements described above. The lawsuit
against Hexcel is based on the terms of the purchase and sale agreement by
which
the Company sold to Hexcel its Composite Products division in 1996. In
response, Hexcel Corporation has denied liability and has filed a counter-claim
also seeking indemnification. That lawsuit is proceeding through
discovery.
Agent
Orange Litigation
Agent
Orange is a defoliant that was manufactured by several companies, including
Hercules, at the direction of the U.S. Government, and used by the U.S.
Government in military operations in both Korea and Vietnam from 1965 to
1970. In 1984, as part of a class action settlement, the Company and other
defendants settled the claims of persons who were in the U.S., New Zealand
and
Australian Armed Forces who alleged injury due to exposure to Agent
Orange. In
Re
“Agent Orange” Prod. Liab. Litig.,
597 F.
Supp. 740 (E.D.N.Y. 1984). Following that settlement, all claims for
alleged injuries due to exposure to Agent Orange by persons who had served
in
the Armed Forces of those countries were treated as covered by that class
action
settlement.
On
June 9, 2003, the United States Supreme Court affirmed the decision of the
United States Court of Appeals for the Second Circuit in a case captioned
Dow
Chemical Company, et al. v. Daniel Raymond Stephenson, et al.,
123 S.
Ct. 2161 (2003), where plaintiffs Stephenson and Isaacson (in a separate
but
consolidated case) alleged that they were injured from exposure to Agent
Orange
and that such injury did not manifest until after exhaustion of the settlement
fund created through the 1984 class action settlement. As a result of that
decision, the claims of persons who allege injuries due to exposure to Agent
Orange and whose injuries first manifest themselves after exhaustion of the
settlement fund created through the 1984 class action settlement may no longer
be barred by the 1984 class action settlement and such persons may now be
able
to pursue claims against the Company and the other former manufacturers of
Agent
Orange.
Since
1998, the Company has been sued in approximately twenty-eight lawsuits
(including two purported class actions) where plaintiffs allege that exposure
to
Agent Orange caused them to sustain various personal injuries. On
February 9, 2004, the U.S. District Court for the Eastern District of New
York issued a series of rulings granting several motions filed by defendants
in
the two cases that had been remanded to the U.S. District Court by the U.S.
Court of Appeals for the Second Circuit on remand from the U.S. Supreme Court
(In
re:
“Agent Orange” Product Liability Litigation: Joe Isaacson, et al v. Dow Chemical
Company, et al. and Daniel Raymond Stephenson, et al. v. Dow Chemical Company,
et al.
(MDL 381, CV 98-6383 (JBW), CV 99-3056 (JBW))). In relevant part, those
rulings held that plaintiffs’ claims against the defendant manufacturers of
Agent Orange that were brought in the state courts are properly removable
to
federal court under the “federal officer removal statute” and that such claims
are subject to dismissal by application of the “government contractor
defense.” The Court then dismissed plaintiffs’ claims, but stayed its
decision to allow plaintiffs to obtain additional discovery and to move for
reconsideration of the Court’s decision. A hearing on the motion for
reconsideration was held on February 28, 2005. By Orders dated
March 2, 2005, the Court denied reconsideration, lifted the stay of the
earlier decision, and dismissed plaintiffs’ claims in all of the lawsuits that
were before the Court at that time. Plaintiffs have appealed those
dismissals to the United States Court of Appeals for the Second
Circuit.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
In
addition, in January 2004, the Company was sued in a purported class action
filed in the United States District Court for the Eastern District of New
York
by The Vietnam Association for Victims of Agent Orange/Dioxin and several
individuals who claim to represent between two and four million Vietnamese
who
allege that Agent Orange used by the United States during the Vietnam War
caused
them or their families to sustain personal injuries. (The
Vietnam Association for Victims of Agent Orange/Dioxin, et al. v. The Dow
Chemical Company, et al.,
Civil
Action No. 04 CV 0400 (JBW)). That complaint alleges violations of
international law and war crimes, as well as violations of the common law
for
products liability, negligence and international torts. The defendants
moved to dismiss this case on several grounds, including failure to state
a
claim under the Alien Tort Claims Statute, lack of jurisdiction and
justiciability, the bar of the statute of limitations, failure to state claims
for violations of international law, and the “government contractor
defense.” A hearing on these motions was held on February 28,
2005. By order dated March 10, 2005, the Court dismissed this
lawsuit. Plaintiffs have appealed that dismissal to the United States
Court of Appeals for the Second Circuit.
In
addition, in 1999, approximately 17,200 Korean veterans of the Vietnam War
filed
suit in the 13th
Civil
Department of the District Court in Seoul, Korea, against The Dow Chemical
Company (“Dow”) and Monsanto Company (“Monsanto”) for their alleged injuries
from exposure to Agent Orange. These lawsuits were filed under various captions,
including Dong
Jin Kim and 9 others,
99
Gahap 84123, Il
Joo
La and 9 others,
99
Gahap 84147, and Dae
Jin Jang,
99
Gahap 84130. Following the commencement of those lawsuits, Dow and Monsanto
petitioned the court to issue Notices of Pendency to each of the non-defendant
manufacturers of Agent Orange, including the Company, in an attempt to bind
those companies to factual and legal findings which may be made in the Korean
courts if Dow and Monsanto are held liable to plaintiffs and sue those companies
for contribution. Thereafter, the Company was served with such notices through
diplomatic channels. In 2002, the District Court dismissed the plaintiffs'
claims, and the plaintiffs appealed. Based on news stories only (because
the
Company has not yet received a copy of the Court’s opinion), on January 26,
2006, the intermediate appellate court in Seoul reversed the District Court
and
awarded damages of $65.2 million plus pre- and post-judgment interest to
approximately 6,800 of the approximately 17,200 plaintiffs that filed these
lawsuits. The Company has been informed that Dow and Monsanto intend to appeal.
If Dow and Monsanto are not successful on appeal, it is possible that they
might
initiate an action seeking contribution from the non-defendant manufacturers
of
Agent Orange, including the Company. Further, if the intermediate appellate
court’s decision is ultimately upheld, it is possible that new lawsuits could be
brought in Korea against the Agent Orange manufacturers, including the Company,
by other Korean veterans of the Vietnam War.
The
Company believes that it has substantial meritorious defenses to all of the
Agent Orange-related claims described above and those that may yet be
brought. To that end, the Company denies any liability to plaintiffs, and
will vigorously defend all actions now pending or that may be brought in
the
future.
Other
Litigation
In
November 2002, an action for declaratory judgment was filed in the U.S.
District Court for the District of Delaware under the caption of Atofina
Chemicals, Inc. and Atofina v. Hercules Incorporated
(Civil
Action No. 02-1613). In this action, Atofina sought a declaratory
judgment that the Company cannot recover antitrust damages for purchases
of
monochloroacetic acid (“MCAA”) that the Company made outside of the United
States or for purchases from producers of MCAA not alleged to have participated
in any conspiracy to fix prices and allocate the market for MCAA. In
response, the Company filed a counter-claim, seeking damages from and injunctive
relief against Akzo Nobel Chemicals, Atofina Chemicals, Hoechst AG, Hoechst
Celanese, Clariant and others related to the fixing of prices of MCAA and
sodium
monochloracetate from approximately 1995 through 2000. In January 2006,
the Company reached a settlement in principle with the last of the parties
with
whom the Company had not previously settled. While the terms of those
settlements are confidential, each resulted in payments to the
Company.
The
Company is one of several defendants that had been sued by over 2,000
individuals in a series of lawsuits, including a purported class action lawsuit,
captioned Jerry
Oldham, et al. v. The State of Louisiana, et al.,
Civil
Action No. 55,160, John
Capone, et al. v. The State of Louisiana, et al.,
Civil
Action No. 56,048C, and Georgenner
Batton, et al. v. The State of Louisiana, et al.,
Civil
Action No. 55,285, all brought in the 18th
Judicial
District Court, Parish of Iberville, Louisiana. The purported class members
and
plaintiffs, who claimed to have worked or lived at or around the Georgia
Gulf
facility in Iberville Parish, Louisiana, alleged injury and fear of future
illness from the consumption of contaminated water and, specifically, elevated
levels of arsenic in that water. As to the Company, plaintiffs alleged
that the Company itself and as part of a joint venture operated a nearby
plant
and, as part of those operations, used a groundwater injection well to dispose
of various wastes, and that those wastes contaminated the potable water supply
at Georgia Gulf. In August 2005,
Hercules
Incorporated
Notes
to Consolidated Financial Statements
the
Company and several other defendants entered into an agreement in principle
to
settle these matters with the Company agreeing to pay $1,412,000. That
settlement, which will be structured as a class action settlement and which
was
agreed to by the Company without any admission of liability, is pending Court
approval.
On
May 7, 2004, Ciba Specialty Chemicals Corporation (“Ciba”) filed a
Complaint against Hercules Incorporated and Cytec Industries, Inc. (“Cytec”) in
the United States District Court for the District of Delaware alleging
infringement of two patents owned by Ciba (Ciba
Specialty Chemicals Corporation v. Hercules Incorporated and Cytec Industries,
Inc., C.A. No. 04-293 (KAJ)).
The two
patents in question are U.S. Patent 5,167,766 (issued on December 1, 1992)
entitled “Charged Organic Polymer Microbeads in Paper Making Process” and U.S.
Patent 5,171,808 (issued on December 15, 1992) entitled “Cross-linked
Anionic and Amphoteric Polymeric Microparticles.” The alleged conduct relates to
the manufacture, use, sale and offer to sell of certain products of the
Company’s Pulp and Paper division. Ciba seeks to enjoin alleged continued
infringement, obtain a judgment that the defendants have infringed the patents,
and obtain an award of damages and reasonable attorney’s fees. In June
2005, Hercules filed a motion for leave to file an Amended Answer and
Counterclaims alleging, in relevant part, that Ciba’s patents are invalid and
unenforceable, and seeking a declaratory judgment as to invalidity. In
October 2005, that motion was granted by the Court. The Company believes
that there are substantial meritorious defenses to this action, and has denied
liability to Ciba and will vigorously defend against this action. The Company
has agreed to indemnify Cytec with respect to the patent infringement
charges. Discovery has closed and various motions for summary judgment
have been filed by the parties but have not yet been ruled upon by the Court.
Trial has been scheduled to begin on August 14, 2006.
In
June
2004, a purported class action captioned Charles
Stepnowski v. Hercules Inc.; The Pension Plan of Hercules Inc.; The Hercules
Inc. Finance Committee; and Edward V. Carrington, Hercules’ Vice President Human
Resources,
Civil
Action No. 04-cv-2296, was filed in the United States District Court,
Eastern District of Pennsylvania. The Stepnowski
lawsuit
seeks the payment of benefits under the Pension Plan of Hercules Incorporated
(the “Plan”), and alleges violations of the Employee Retirement Income Security
Act, 29 U.S.C. §1001 et seq. (“ERISA”). Under the Plan, eligible retirees
of the Company may opt to receive a single cash payment of 51% of the present
value of their accrued benefit (with the remaining 49% payable as a monthly
annuity). In the Stepnowski
lawsuit,
it is alleged that the Company’s adoption of a new interest rate assumption used
to determine the 51% cash payment constitutes a breach of fiduciary duty
and a
violation of the anti-cutback requirements of ERISA, the Internal Revenue
Code
and the terms of the Plan, and that its communications to employees concerning
the new interest rate assumption constitute a breach of fiduciary duty. The
Stepnowski
lawsuit
seeks the payment of additional benefits under ERISA (as well as costs and
attorneys fees), seeks to compel the Company to use an interest rate assumption
that is more favorable to eligible retirees, and seeks to establish a class
comprised of all Plan participants who retired (or who will retire) on or
after
December 1, 2001. By Memorandum and Order dated May 26, 2005,
the Court denied without prejudice plaintiff’s motion for class certification
and dismissed plaintiff’s anti-cutback claim, but allowed plaintiff’s claim for
benefits and breach of fiduciary duty to proceed. In December 2005, a
virtually identical purported class action lawsuit was filed in the same
Court
in a matter captioned Samuel
J. Webster, et al. v. Hercules, Inc.; The Pension Plan of Hercules Inc.;
The
Hercules Inc. Finance Committee; and Edward V. Carrington, Hercules’ Vice
President Human Resources,
Civil
Action No. 05-6404. In January 2006, the Court consolidated both the
Stepnowski
and
Webster
lawsuits
for discovery and trial and set both cases for trial on March 27, 2006. The
Company denies all liability, and intends to vigorously defend this
action.
Acevedo,
et al. v. Union Pacific Railroad Company, et al.,
Case
No. C-4885-99-F. 332nd
Judicial
District Court, Hidalgo County, Texas (2001) is a mass toxic tort lawsuit
alleging pesticide exposure relating to operations at a former pesticide
formulation facility in Mission, Texas. There are currently approximately
1,700 plaintiffs and approximately 30 defendants, including the Company.
Plaintiffs include former workers at the pesticide formulation facility,
and
persons who currently reside, or in the past resided, near the facility.
All plaintiffs allege personal injuries and some plaintiffs also allege property
damage. The vast majority of the plaintiffs allege residential exposure to
a variety of pesticide and chemical products as a result of leaks, spills,
flooding, and airborne emissions from the pesticide formulation facility.
It is alleged that certain of the Company’s products were sold to or used by the
pesticide formulation facility prior to its ceasing operations in 1967. In
November 2004, Defendants filed a Petition for a Writ of Mandamus in the
Texas Supreme Court seeking to set aside an order consolidating the claims
of
certain plaintiffs for trial, and seeking to require the plaintiffs to provide
certain evidence of exposure and injury before being permitted to proceed
in
court. In response, the Texas Supreme Court issued a partial stay of the
underlying litigation. In November 2005, oral argument with respect to
Defendants’ Petition for Writ of Mandamus was held before the Texas Supreme
Court. No decision has yet been rendered with respect to that petition. The
Company denies any liability to plaintiffs and intends to vigorously defend
these matters.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
Company and others have been sued by approximately 250 former employees and
employees of third-party contractors who allege hearing loss as a result
of
their having worked at plants located in or about Lake Charles, Louisiana.
The Company formerly owned and operated a plant in Lake Charles. In
July 2005, the Company and other defendants reached a settlement in
principle with plaintiffs’ lawyers which provides for the resolution of these
claims over a period of approximately two years. The Company has accrued
its probable and reasonably estimable liability as a portion of the amount
described in the paragraph below entitled “Amounts Accrued for Non-Asbestos
Litigation.” The lawsuits at issue are all pending in the 14th
Judicial
District Court of Calcasieu Parish, Louisiana, and are captioned as
follows: James
Allee, et al. v. Canadianoxy Offshore Production Co., et al.,
Case
No. 2001-4085, James
Hollingsworth, et al. v. Hercules Inc.,
Civil
Action No. 2001-4064, Joseph
Kelley, et al. v. Canadianoxy Offshore Production Co., et al.,
Civil
Action No. 98-2802, and Robert
Corbin, et al. v. Canadianoxy Offshore Production Co., et al.,
Civil
Action No. 98-1097.
Amounts
Accrued for Non-Asbestos Litigation
During
the period January 1, 2005 through December 31, 2005, the Company incurred
charges totaling $16.5 million and paid $28.4 million in settlement payments
with respect to the settlement of non-asbestos and non-environmental litigation,
including matters described above. The December 31, 2005 Consolidated Balance
Sheet reflects a current liability of $3.5 million for non-asbestos and
non-environmental related litigation matters, representing management’s best
estimate of the probable and reasonably estimable losses for such matters.
While
it is not feasible to predict the outcome of all pending legal proceedings,
it
is reasonably possible that an exposure to loss exists in excess of the amounts
accrued for these and other matters, and the ultimate resolution of one or
more
of these matters could have a material adverse effect upon the Company’s
financial position, results of operations and/or cash flows for any annual,
quarterly or other period.
13. Series
Preferred Stock
There
are 2,000,000 shares of series preferred stock without par value authorized
for
issuance, none of which have been issued.
14. Common
Stock
Hercules
common stock has a stated value of $25/48, and 300,000,000 shares are authorized
for issuance. At December 31, 2005, a total of 24,344,057 shares were
reserved for issuance for the following purposes: 9,724,127 shares for the
exercise of awards under the Stock Option Plan; 7,726,070 shares for awards
under incentive compensation plans; 172,550 shares for conversion of debentures;
and 6,721,310 shares for exercise of the warrant component of the CRESTS
Units.
In
1991, the Board of Directors authorized the Company to repurchase up to
74,650,000 shares under its stock repurchase program. Total shares reacquired
pursuant to this program were 66,614,242, at an average price of $37.31 per
share. The program was suspended in 1999.
15. Accumulated
Other Comprehensive Loss
The
components of Accumulated other comprehensive loss are as follows:
|
|
(Dollars
in millions)
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Additional
minimum pension liability, net of tax
|
|
$
|
(417.6
|
)
|
$
|
(373.3
|
)
|
$
|
(345.1
|
)
|
Foreign
currency translation adjustment
|
|
|
30.3
|
|
|
96.9
|
|
|
27.2
|
|
Other,
net of tax
|
|
|
(0.3
|
)
|
|
-
|
|
|
-
|
|
|
|
$
|
(387.6
|
)
|
$
|
(276.4
|
)
|
$
|
(317.9
|
)
|
The
tax
impact of charges to the above components of Accumulated other comprehensive
loss for the years ended December 31, 2005, 2004 and 2003 is summarized in
Note
7.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
16. Additional
Balance Sheet Detail
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Property,
plant and equipment:
|
|
|
|
|
|
Land
|
|
$
|
10.6
|
|
$
|
19.6
|
|
Buildings
and equipment
|
|
|
1,613.6
|
|
|
1,998.9
|
|
Construction
in progress
|
|
|
38.0
|
|
|
70.8
|
|
Total
|
|
|
1,662.2
|
|
|
2,089.3
|
|
Accumulated
depreciation
|
|
|
(1,126.8
|
)
|
|
(1,393.9
|
)
|
Property,
plant and equipment, net
|
|
$
|
535.4
|
|
$
|
695.4
|
|
Depreciation
expense for the years ended December 31, 2005, 2004 and 2003 was $80.5 million,
$74.9 million and $73.2 million, respectively.
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Other
current assets:
|
|
|
|
|
|
Value-added
tax receivable
|
|
$
|
13.1
|
|
$
|
4.4
|
|
Federal
tax receivable
|
|
|
12.6
|
|
|
12.6
|
|
Supplier
rebates receivable
|
|
|
0.3
|
|
|
14.6
|
|
Assets
held for sale
|
|
|
0.2
|
|
|
5.8
|
|
Other
|
|
|
21.9
|
|
|
16.4
|
|
|
|
$
|
48.1
|
|
$
|
53.8
|
|
Assets
held for sale at December 31, 2005 includes surplus land at the Company’s
manufacturing sites located in Savannah, Georgia, Sobernheim, Germany and
Tarragona, Spain. Also included is surplus land at several of the Company’s
former operating sites in both domestic and foreign locations. The combined
carrying value of these properties is $0.2 million. Marketing efforts that
are
currently underway are expected to result in dispositions during 2006. Assets
held for sale at December 31, 2004 included the Company’s former sites in
Langhorne, Pennsylvania and Burlington, New Jersey. These properties were
subsequently sold in 2005 for $6.4 million and $6.8 million, respectively.
In
addition to the cash proceeds for the Burlington property, an asset retirement
obligation of $4.4 million attributable to the remediation of soil and
groundwater contamination was assumed by the buyer.
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Deferred
charges and other assets:
|
|
|
|
|
|
Tax
deposits
|
|
$
|
66.1
|
|
$
|
89.1
|
|
Capitalized
software, net
|
|
|
62.6
|
|
|
73.2
|
|
Prepaid
pension assets
|
|
|
42.4
|
|
|
7.0
|
|
Cash
surrender value of life insurance policies
|
|
|
21.4
|
|
|
19.4
|
|
Unamortized
debt issuance costs
|
|
|
10.3
|
|
|
14.2
|
|
Investments
|
|
|
9.8
|
|
|
6.0
|
|
Unrecognized
prior period service costs
|
|
|
0.4
|
|
|
3.6
|
|
Other
|
|
|
32.1
|
|
|
33.0
|
|
|
|
$
|
245.1
|
|
$
|
245.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Amortization
expense of capitalized software, including related development costs, was
$15.3
million, $15.0 million and $13.7 million for the years ended December 31,
2005,
2004 and 2003, respectively.
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Accrued
expenses:
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
37.0
|
|
$
|
45.0
|
|
Current
portion of postretirement benefits
|
|
|
23.5
|
|
|
23.5
|
|
Current
portion of asset retirement obligations
|
|
|
21.6
|
|
|
19.3
|
|
Severance
and other exit costs
|
|
|
16.6
|
|
|
5.8
|
|
Income
taxes payable
|
|
|
14.5
|
|
|
4.7
|
|
Interest
payable
|
|
|
12.9
|
|
|
12.8
|
|
Current
deferred income taxes
|
|
|
12.9
|
|
|
7.5
|
|
Sales
rebate accrual
|
|
|
9.3
|
|
|
11.1
|
|
Current
pension liability
|
|
|
6.2
|
|
|
7.1
|
|
Litigation
accrual
|
|
|
3.5
|
|
|
18.0
|
|
Current
portion of deferred rent
|
|
|
3.0
|
|
|
3.2
|
|
Other
taxes payable
|
|
|
2.3
|
|
|
1.7
|
|
Other
|
|
|
56.0
|
|
|
52.4
|
|
|
|
$
|
219.3
|
|
$
|
212.1
|
|
Deferred
credits and other liabilities:
|
|
|
|
|
|
Non-current
income tax liabilities
|
|
$
|
95.7
|
|
$
|
108.0
|
|
Asset
retirement obligations - non-current
|
|
|
68.7
|
|
|
77.0
|
|
Indemnifications
|
|
|
40.0
|
|
|
40.0
|
|
Deferred
rent
|
|
|
30.6
|
|
|
35.7
|
|
Environmental
accrual
|
|
|
17.6
|
|
|
2.8
|
|
Workers
compensation
|
|
|
14.6
|
|
|
21.9
|
|
Other
|
|
|
23.3
|
|
|
24.5
|
|
|
|
$
|
290.5
|
|
$
|
309.9
|
|
17. Restructuring
Programs
During
the year ended December 31, 2005, the Company executed a number of restructuring
and rationalization programs designed to improve organizational efficiency
in
all key phases of operations, including research and development, regional
and
functional management, global sales and marketing, manufacturing, and corporate
support. The actions were consistent with long-range plans to reposition
the
Company’s operations to capitalize on strategic market opportunities on both a
regional as well as a product and service offering basis.
At
the end of 2004, the Company announced the first phase of its program to
realign
and consolidate its significant research and development efforts into regional
centers in Europe and North America, respectively. In connection with that
program, the Company closed its research facility in Barneveld, The Netherlands
during the third quarter of 2005. The Company terminated approximately 50
employees at the Barneveld facility and relocated 8 employees to the Company’s
Helsingborg, Sweden site, which will now serve as the primary center for
Pulp
and Paper application activities in Europe. The Company recognized approximately
$3.0 million in severance charges and benefits, incurred ratably over the
service period from the announcement date through closure in September 2005
in
accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” (“SFAS 146”). The Company recognized an additional $1.4
million as incurred in connection with other exit costs related to the closure
of the Barneveld facility.
The
second phase of the research realignment and consolidation program began
during
the fourth quarter of 2005 with the announcement of the Company’s intention to
close its Jacksonville, Florida facility which houses certain research and
development capabilities specific to pulp and paper technology including
a small
scale pilot plant. Concurrent with that action and in connection with a grant
received from the State of Delaware, the Company announced plans to
substantially expand and upgrade its research facility in Wilmington, Delaware.
The plan includes the transfer of certain employees and equipment from the
Jacksonville facility to the Wilmington facility. The Company plans to terminate
approximately 60 employees at the Jacksonville site and recognized a charge
of
$0.3 million during the fourth quarter of 2005. In accordance with SFAS 146,
the
Company will recognize approximately $2.0 million of additional charges during
2006 as
Hercules
Incorporated
Notes
to Consolidated Financial Statements
the
activities are terminated and the site is prepared for closure. While the
Wilmington site is undergoing expansion and will eventually increase its
headcount, certain functions were realigned, resulting in the elimination
of
approximately 10 positions for which a charge of approximately $0.5 million
was
recognized in accordance with Statement of Financial Accounting Standards
No.
112, “Employers’ Accounting for Postemployment Benefits” (“SFAS
112”).
As
a result of these actions, the Company accelerated the depreciation of its
facilities in Barneveld and Jacksonville through the periods prior to their
estimated closure. The Company also accelerated the depreciation of certain
assets at the Wilmington facility for the period prior to their demolition
or
reconfiguration. As of December 31, 2005, the Jacksonville site is still
in
operation and will continue through a portion of 2006, during which accelerated
depreciation will continue.
Throughout
2005, the Performance Products segment engaged in significant actions designed
to realign its global marketing infrastructure and de-layer management as
part
of its strategic plans and to improve responsiveness to emerging market trends
and opportunities. Accordingly, the Company eliminated approximately 80
positions worldwide and recognized charges for severance and related benefits
of
$14.5 million in accordance with SFAS 112. Of the total, approximately $12.7
million was attributable to the Pulp and Paper division and the remaining
$1.8
million was attributable to the Aqualon division.
The
Performance Products restructuring activities also included the rationalization
of certain manufacturing assets. The Company closed its Pandaan, Indonesia
manufacturing facility concurrent with the strategic realignment of its Pulp
and
Paper division in the Asia Pacific region. In connection with the closing,
the
Company terminated approximately 50 employees and recognized severance and
related benefits charges of approximately $0.2 million and $0.4 million,
respectively, in accordance with SFAS 146 and SFAS 112. The Company also
announced its intention to close its Pendlebury manufacturing facility in
the
United Kingdom during 2006 as part of the Pulp and Paper strategic realignment
in Europe. As a result of this action, the Company recognized a SFAS 112
charge
of $1.3 million related to the termination of approximately 40 employees.
Also
during 2005, the Aqualon division terminated 7 employees in connection with
a
program at its Parlin, New Jersey manufacturing facility resulting in the
accrual of approximately $0.3 million of SFAS 146 charges which were recognized
during the period in which certain energy-related assets were taken out of
service. The Company accelerated the depreciation of its Pandaan and Pendlebury
manufacturing facilities during the periods of continued operational use
prior
to estimated closure. As of December 31, 2005, the Pendlebury site is still
in
operation and will continue as such into 2006. Accordingly, accelerated
depreciation charges are expected to continue until their estimated closure
dates during 2006.
Both
the Pinova and FiberVisions divisions executed plans to curtail certain
production activities and reduce headcount at their manufacturing facilities
in
North America and Europe. In November, Pinova announced its intention to
exit
the Terpenes Specialties business in early 2006. The Company accrued SFAS
112
charges of approximately $3.4 million in connection with the termination
of
approximately 70 employees at the Brunswick, Georgia manufacturing facility.
As
a result of this action, an impairment charge was recorded for certain assets
directly attributable to the production of those products at the Company’s
Brunswick, Georgia manufacturing facility. Additionally, Pinova recorded
an
impairment charge at the Company’s Hattiesburg, Mississippi manufacturing
facility attributable to the termination of production of certain rosins
which
serve as an intermediate to other finished products, as well as $0.2 million
charged as incurred in connection with the termination of a product distribution
agreement as an exit cost pursuant to SFAS 146.
Primarily
as a result of declining market demand for certain products, FiberVisions
ceased
production on certain lines at its facilities in North American and reduced
headcount at its Varde, Denmark manufacturing facility resulting in the
termination of approximately 80 employees and the accrual of SFAS 112 severance
and related benefit charges of $3.4 million.
The
Company also recorded write-downs in the value of certain inventories and
spare
parts for both the Terpenes Specialties business of Pinova as well as similar
items at FiberVisions’ Covington, Georgia manufacturing facility.
In
order to support the various initiatives to realign and restructure the
Company’s operations on a global basis, the Company also initiated several
corporate actions including the establishment of a centralized European
headquarters facility in Schaffhaussen, Switzerland. During 2005, the Company
accrued approximately $0.5 million in relocation costs related to this move
in
accordance with SFAS 146. In addition, the Company streamlined other support
functions resulting in headcount reductions of approximately 40 employees
in
various functional departments including Information Management and Procurement.
In connection with the reduction, the Company recorded approximately $4.8
million of severance and related benefits in accordance with SFAS
112.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
A
summary of the actions executed in 2005 for severance and other exit costs
as
well as asset-related charges, all of which have been recorded in Other
operating expenses, is provided as follows:
|
|
Charges
by Type
|
|
|
|
|
|
SFAS
112
|
|
SFAS
146
|
|
Total
|
|
Employee
severance, relocation and related benefits accrued:
|
|
|
|
|
|
|
|
Research
and development consolidation
|
|
$
|
0.5
|
|
$
|
3.3
|
|
$
|
3.8
|
|
Global
marketing and management realignment
|
|
|
14.5
|
|
|
-
|
|
|
14.5
|
|
Performance
products manufacturing rationalization
|
|
|
1.7
|
|
|
0.5
|
|
|
2.2
|
|
Pinova
manufacturing rationalization
|
|
|
3.4
|
|
|
-
|
|
|
3.4
|
|
FiberVisions
manufacturing rationalization
|
|
|
3.4
|
|
|
-
|
|
|
3.4
|
|
Corporate
support realignment
|
|
|
4.8
|
|
|
0.5
|
|
|
5.3
|
|
|
|
|
28.3
|
|
|
4.3
|
|
|
32.6
|
|
Other
exit costs charged as incurred:
|
|
|
|
|
|
|
|
|
|
|
Barneveld,
The Netherlands exit and site closure costs
|
|
|
-
|
|
|
1.4
|
|
|
1.4
|
|
Pinova
product distribution agreement termination
|
|
|
-
|
|
|
0.2
|
|
|
0.2
|
|
|
|
|
- |
|
|
1.6
|
|
|
1.6
|
|
Total
severance and other exit costs
|
|
$
|
28.3
|
|
$
|
5.9
|
|
$
|
34.2
|
|
|
|
Accelerated
Depreciation
|
|
Asset
Impairment
|
|
Inventory
Write-Down
|
|
Total
|
|
Research
& development consolidation
|
|
|
|
|
|
|
|
|
|
Barneveld,
The Netherlands
|
|
$
|
1.8
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1.8
|
|
Jacksonville,
FL
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Wilmington,
DE
|
|
|
0.5
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
|
|
2.4
|
|
|
-
|
|
|
-
|
|
|
2.4
|
|
Performance
Products manufacturing rationalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pandaan,
Indonesia
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
Pendlebury,
UK
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
0.8
|
|
|
|
|
1.1
|
|
|
-
|
|
|
-
|
|
|
1.1
|
|
Engineered
Materials and Additives manufacturing
rationalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brunswick,
GA
|
|
|
-
|
|
|
5.2
|
|
|
0.5
|
|
|
5.7
|
|
Hattiesburg,
MS
|
|
|
-
|
|
|
0.5
|
|
|
-
|
|
|
0.5
|
|
Covington,
VA
|
|
|
-
|
|
|
-
|
|
|
1.5
|
|
|
1.5
|
|
|
|
|
- |
|
|
5.7
|
|
|
2.0
|
|
|
7.7
|
|
Total
asset charges
|
|
$
|
3.5
|
|
$
|
5.7
|
|
$
|
2.0
|
|
$
|
11.2
|
|
Restructuring
charges recorded during the years ended December 31, 2004 and 2003,
respectively, are primarily related to employee severance and related benefits
in connection with various regional and functional restructuring and general
headcount reduction programs. Charges related to SFAS 112-type programs amounted
to approximately $9.0 million and $7.0 million in 2004 and 2003, respectively,
while 2004 also included $0.3 million of charges recorded in accordance with
SFAS 146 attributable to the initial actions at the Barneveld facility as
discussed above. All charges recorded have been included in the Statement
of
Operations as a component of Other operating expenses.
The
year ended December 31, 2004 included asset impairment charges of $9.2 million.
Of the total, approximately $3.6 million was attributable to a raw material
production line at the Hopewell, Virginia manufacturing facility, $2.9 million
related to the closure of the former Kalamazoo, Michigan manufacturing facility
and $0.5 million and $0.3 million for certain lines at the Pendlebury, UK
and
Savannah, Georgia manufacturing facilities, respectively. These charges,
attributable to the Performance products segment were recorded in Other
operating expenses. In addition, an impairment of approximately $1.9 million
was
recorded in Other expense, net attributable to the inactive Langhorne,
Pennsylvania site in connection with its reclassification as an asset held
for
sale.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
During
the year ended December 31, 2003, the Company recorded a $2.0 million asset
impairment charge in Other expense, net in connection with the closure of
the
Langhorne facility
Total
cash payments for severance benefits and other restructuring costs that have
been accrued during the year ended December 31, 2005 were approximately $21.4
million including $17. 2 million under SFAS 112 plans, $3.5 million under
SFAS
146 plans and $0.7 million related to continuing payment streams under plans
initiated in 1998 and 2001.
A
reconcilidation of
activity with respect to the liabilities for these plans is as
follows:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
Balance
at beginning of the year
|
|
$
|
5.8
|
|
$
|
6.0
|
|
Additional
severance and related costs recognized (SFAS 112)
|
|
|
28.3
|
|
|
9.3
|
|
Charges
for SFAS 146 terminations and relocations
|
|
|
4.3
|
|
|
0.3
|
|
Cash
payments
|
|
|
(21.4
|
)
|
|
(9.9
|
)
|
Other,
including foreign currency translation
|
|
|
(0.4
|
)
|
|
0.1
|
|
Balance
at end of the year
|
|
$
|
16.6
|
|
$
|
5.8
|
|
The
balance at December 31, 2005 is comprised of $14.4 million related to the
severance and related costs accounted for in accordance with SFAS 112,
$1.0
million associated with SFAS 146 related termination benefits and relocation
costs and approximately $1.2 million pertaining to continuing benefit streams
under the 1998 and 2001 restructuring plans.
18. Other
Operating Expense, Net
Other
operating expense, net, consists of the following:
|
|
(Dollars
in millions)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Severance,
restructuring and other exit costs, net
|
|
$
|
34.2
|
|
$
|
9.5
|
|
$
|
4.9
|
|
Nitrocellulose
facility shutdown costs
|
|
|
-
|
|
|
6.5
|
|
|
-
|
|
Asset
impairment charges
|
|
|
5.7
|
|
|
7.3
|
|
|
0.6
|
|
Accelerated
depreciation
|
|
|
3.5
|
|
|
-
|
|
|
-
|
|
Special
executive pension adjustment
|
|
|
-
|
|
|
1.6
|
|
|
7.3
|
|
Proxy
costs
|
|
|
-
|
|
|
-
|
|
|
3.6
|
|
Net
environmental expense
|
|
|
-
|
|
|
-
|
|
|
0.8
|
|
Other
miscellaneous charges
|
|
|
4.1
|
|
|
2.0
|
|
|
(0.2
|
)
|
|
|
$
|
47.5
|
|
$
|
26.9
|
|
$
|
17.0
|
|
19. Interest
and Debt Expense
Interest
and debt costs are summarized as follows:
|
|
(Dollars
in millions)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Incurred
|
|
$
|
89.8
|
|
$
|
109.8
|
|
$
|
131.2
|
|
Capitalized
|
|
|
(0.4
|
)
|
|
(1.1
|
)
|
|
(0.4
|
)
|
Net
expensed
|
|
$
|
89.4
|
|
$
|
108.7
|
|
$
|
130.8
|
|
Interest
and debt expense includes $2.1 million, $3.2 million and $5.7 million of
amortization of deferred financing costs for the years ended December 31,
2005,
2004 and 2003, respectively. Pursuant to the Company's adoption of SFAS 150
on
July 1, 2003, interest and debt costs on the preferred securities has been
recognized as interest and debt expense for each of the years presented (see
Note 5).
Hercules
Incorporated
Notes
to Consolidated Financial Statements
20. Other
Expense, Net
Other
expense, net, consists of the following:
|
|
(Dollars
in millions)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Asbestos-related
costs, net
|
|
$
|
44.6
|
|
$
|
48.8
|
|
$
|
12.0
|
|
Loss
(gain) on repurchase of debt
|
|
|
14.2
|
|
|
41.0
|
|
|
(2.3
|
)
|
Environmental
charges
|
|
|
22.4
|
|
|
7.6
|
|
|
5.0
|
|
Asset
impairment charges
|
|
|
-
|
|
|
1.9
|
|
|
2.0
|
|
Net
gains on dispositions
|
|
|
(10.9
|
)
|
|
-
|
|
|
-
|
|
Other
litigation settlements and accruals
|
|
|
18.9
|
|
|
19.2
|
|
|
7.8
|
|
Other,
net
|
|
|
(2.9
|
)
|
|
(1.8
|
)
|
|
4.4
|
|
|
|
$
|
86.3
|
|
$
|
116.7
|
|
$
|
28.9
|
|
|
Costs
summarized above, excluding loss (gain) on repurchase of debt, represent
charges, settlements and accruals associated with former operations of the
Company.
21. Changes
in Accounting Principle
FIN
47
Effective
December 31, 2005, the Company recorded a $2.5 million cumulative effect
adjustment, net of tax in accordance with the provisions of FIN 47. As discussed
further in Note 11, the cumulative effect adjustment includes the recognition
of
approximately $4.0 million in AROs and the capitalization of approximately
$0.2
million in related asset retirement costs offset by accumulated depreciation
on
those assets of $0.1 million. The following table reflects the pro forma
effect
of FIN 47 on net (loss) income and net (loss) earnings per share as if the
provisions had been in effect for the periods presented.
|
|
(Dollars
in millions)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
(loss) income before cumulative effect of changes in accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(38.6
|
)
|
$
|
28.1
|
|
$
|
78.7
|
|
Accretion
and depreciation
|
|
|
-
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Adjusted
net (loss) income before cumulative effect of changes in accounting
principle
|
|
$
|
(38.6
|
)
|
$
|
28.0
|
|
$
|
78.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share before cumulative effect of changes in
accounting principle:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.74
|
|
Adjusted
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share before cumulative effect of changes in
accounting principle:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.73
|
|
Adjusted
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
Accretion
and depreciation
|
|
|
-
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Adjusted
net income (loss)
|
|
$
|
(41.1
|
)
|
$
|
28.0
|
|
$
|
45.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
Adjusted
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
Adjusted
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Inventories
Effective
January 1, 2005, the Company elected to change its method of accounting for
inventories located in the United States and previously valued using the
LIFO
method to the weighted average method to better reflect the current value
of
inventory in the balance sheet and to provide a better matching of revenue
and
expense in the statement of operations. Comparative financial statements
of
prior years have been adjusted to apply the weighted average method
retrospectively. As a result of the accounting change, retained earnings
as of
January 1, 2003 was increased by $13.2 million from $1,449.8 million, as
originally reported, to $1,463.0 million.
The
following
tables reflect the changes to those financial statement line items of the
prior
year financial statements:
|
|
(Dollars
in millions)
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
|
|
As
Originally
Reported
|
|
Effect
of
Change
|
|
As
Adjusted
|
|
As
Originally
Reported
|
|
Effect
of
Change
|
|
As
Adjusted
|
|
Statement
of Operations Line Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
1,309.6
|
|
$
|
(2.0
|
)
|
$
|
1,307.6
|
|
$
|
1,167.6
|
|
$
|
(0.7
|
)
|
$
|
1,166.9
|
|
Profit
from operations
|
|
|
226.9
|
|
|
2.0
|
|
|
228.9
|
|
|
254.8
|
|
|
0.7
|
|
|
255.5
|
|
Provision
for income taxes
|
|
|
1.7
|
|
|
0.7
|
|
|
2.4
|
|
|
21.1
|
|
|
0.2
|
|
|
21.3
|
|
Net
income from continuing operations
|
|
|
26.8
|
|
|
1.3
|
|
|
28.1
|
|
|
74.0
|
|
|
0.5
|
|
|
74.5
|
|
Net
income
|
|
$
|
26.8
|
|
$
|
1.3
|
|
$
|
28.1
|
|
$
|
44.9
|
|
$
|
0.5
|
|
$
|
45.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.25
|
|
$
|
0.01
|
|
$
|
0.26
|
|
$
|
0.69
|
|
$
|
0.01
|
|
$
|
0.70
|
|
Net
income
|
|
$
|
0.25
|
|
$
|
0.01
|
|
$
|
0.26
|
|
$
|
0.42
|
|
$
|
0.01
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.25
|
|
$
|
0.01
|
|
$
|
0.26
|
|
$
|
0.69
|
|
$
|
-
|
|
$
|
0.69
|
|
Net
income
|
|
$
|
0.25
|
|
$
|
0.01
|
|
$
|
0.26
|
|
$
|
0.42
|
|
$
|
-
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows Line Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26.8
|
|
$
|
1.3
|
|
$
|
28.1
|
|
$
|
44.9
|
|
$
|
0.5
|
|
$
|
45.4
|
|
Deferred
income tax provision
|
|
|
(19.4
|
)
|
|
0.7
|
|
|
(18.7
|
)
|
|
7.5
|
|
|
0.2
|
|
|
7.7
|
|
Inventories
|
|
|
6.0
|
|
|
(2.0
|
)
|
|
4.0
|
|
|
(6.7
|
)
|
|
(0.7
|
)
|
|
(7.4
|
)
|
Net
cash provided by operating activities
|
|
$
|
120.5
|
|
$
|
-
|
|
$
|
120.5
|
|
$
|
22.8
|
|
$
|
-
|
|
$
|
22.8
|
|
|
|
|
|
|
As
of December 31, 2004
|
|
|
|
As
Originally
Reported
|
|
Effect
of
Change
|
|
As
Adjusted
|
|
Balance
Sheet Line Items:
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
189.4
|
|
$
|
23.0
|
|
$
|
212.4
|
|
Deferred
income taxes - current
|
|
|
44.8
|
|
|
(8.1
|
)
|
|
36.7
|
|
Total
assets (1)
|
|
$
|
2,710.2
|
|
$
|
10.1
|
|
$
|
2,720.3
|
|
Retained
earnings
|
|
|
1,521.5
|
|
|
15.0
|
|
|
1,536.5
|
|
Total
liabilities and stockholders’ equity (1)
|
|
$
|
2,710.2
|
|
$
|
10.1
|
|
$
|
2,720.3
|
|
|
(1)
Also
includes the reclassification of $4.9 million related to VAT receivables
and
payables.
SFAS
143
Effective
January 1, 2003, the Company recorded a $28.6 million cumulative effect
adjustment, net of tax in accordance with the provisions of SFAS 143 associated
with a change in the method of accounting for AROs. The cumulative effect
adjustment reflects the recognition of $27.4 million of AROs and an $18.3
million write-off of capitalized environmental remediation costs provided
in
accordance with the prior method of accounting offset by the capitalization
of
$2.0 million of asset retirement costs.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
FIN
46(R)
As
a result
of the adoption of FIN 46R effective December 31, 2003, the Company recognized
a
$4.7 million cumulative effect adjustment, net of tax in connection with
gains
realized upon the repurchase of CRESTS Units (see Note 5). The CRESTS were
initially issued by Trust II, which was a consolidated subsidiary prior to
the
adoption of FIN 46R. Deconsolidation of Trust II as a result of FIN 46R resulted
in the deferral of previously recognized gains on the repurchase of CRESTS
Units
until Trust II was liquidated. Trust II was subsequently dissolved and
liquidated in December 2004 resulting in the recognition of the previously
deferred gains in net income for 2004.
ESOP
Effective
December 31, 2003, the Company changed its method of accounting for the ESOP
from the method prescribed by Statement of Position No. 76-3, “Accounting
Practices for Certain Employee Stock Ownership Plans” to the method prescribed
by Statement of Position No. 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans” (“SOP 93-6”). Upon the adoption, the Company retroactively
applied the provisions of SOP 93-6 to all prior periods and adjusted the
beginning balance of retained earnings accordingly.
22. (Loss)
Earnings per Share
The
following table shows the amounts used in computing basic and diluted (loss)
earnings per share and the weighted-average number of shares of basic and
dilutive common stock:
|
|
(Dollars
in millions, except per share)
|
|
|
|
For
the years ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Loss
|
|
|
|
Earnings
|
|
Income
|
|
(loss)
|
|
|
|
Loss
|
|
per
share
|
|
Income
|
|
per
share
|
|
(loss)
|
|
per
share
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(38.6
|
)
|
$
|
(0.36
|
)
|
$
|
28.1
|
|
$
|
0.26
|
|
$
|
74.2
|
|
$
|
0.70
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.5
|
|
|
0.04
|
|
Cumulative
effect of changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
|
(2.5
|
)
|
|
(0.02
|
)
|
|
-
|
|
|
-
|
|
|
(33.3
|
)
|
|
(0.31
|
)
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
(0.38
|
)
|
$
|
28.1
|
|
$
|
0.26
|
|
$
|
45.4
|
|
$
|
0.43
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
basic shares (millions)
|
|
|
108.7
|
|
|
|
|
|
107.3
|
|
|
|
|
|
106.2
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(38.6
|
)
|
$
|
(0.36
|
)
|
$
|
28.1
|
|
$
|
0.26
|
|
$
|
74.2
|
|
$
|
0.69
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.5
|
|
|
0.04
|
|
Cumulative
effect of changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
|
(2.5
|
)
|
|
(0.02
|
)
|
|
-
|
|
|
-
|
|
|
(33.3
|
)
|
|
(0.31
|
)
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
(0.38
|
)
|
$
|
28.1
|
|
$
|
0.26
|
|
$
|
45.4
|
|
$
|
0.42
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
diluted shares (millions)
|
|
|
108.7
|
|
|
|
|
|
109.0
|
|
|
|
|
|
107.2
|
|
|
|
|
For
the years ended December 31, 2005, 2004 and 2003, respectively, the Company
had
convertible subordinated debentures, stock options and restricted stock that
were convertible into approximately 1.7 million, 1.7 million and 1.0 million
shares of common stock. Stock options, restricted stock and convertible
debentures in 2005 were anti-dilutive and are not included in the calculation
of
diluted earnings per share. The related interest on the convertible subordinated
debentures has an immaterial impact on (loss) earnings per share
calculations.
The
following table shows the number of options and warrants that have been excluded
from the computation of diluted earnings per share as their exercise price
exceeded their current market value:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Options
to purchase common stock (millions)
|
|
|
5.8
|
|
|
10.6
|
|
|
12.4
|
|
Warrants
to purchase common stock (millions)
|
|
|
6.7
|
|
|
7.1
|
|
|
7.1
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
23.
Operations by Industry
Segment and Geographic Area
The
financial information that follows regarding the Company's segments, which
includes Net sales, Profit from operations and Total assets, is presented
in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company has identified two reportable segments, Performance Products
and Engineered Materials and Additives.
Performance
Products (Pulp and Paper and Aqualon divisions): Products
and services offered by the Pulp and Paper division are designed to enhance
customers' profitability by improving production yields and overall product
quality, and to better enable customers to meet their environmental objectives
and regulatory requirements.
The
Company believes its Pulp and Paper division is one of the largest suppliers
of
functional, process and water management chemicals for the pulp and paper
industry. The division offers a wide and highly-sophisticated range of
technology and applications expertise with in-mill capabilities which run
from
influent treatment through the pulp and paper making process to paper finishing.
The division is a broad-based global supplier able to offer a complete portfolio
of products to its pulp and paper customers.
The
products in Aqualon are principally derived from natural resources and are
sold
as key raw materials to other manufacturers. Principal products and markets
include water-soluble polymers used as thickeners, emulsifiers and stabilizers
for water-based paints, oil and gas exploration, building materials and personal
care products.
Engineered
Materials and Additives (FiberVisions
and Pinova divisions):
Products
in this segment provide low-cost, technology driven solutions to meet customer
needs and market demands. Principal products and markets include polyolefin
staple fibers used in disposable diapers, wipes and other hygienic products;
industrial fiber products; rosin and hydrocarbon resins for adhesives; food
and
beverage; and construction specialties.
The
Company evaluates performance and makes decisions based primarily on cash
flow,
profit from operations and return on invested capital. Other assets and
liabilities, primarily goodwill and other intangibles, not specifically
allocated to business segments, are reflected as Corporate in the following
table.
Geographic
Reporting
For
geographic reporting, no single country, outside the United States, is material
for separate disclosure. However, because the Company has significant foreign
operations, Net sales and Property, plant and equipment, net are disclosed
by
geographic region.
Net
sales are reported on a "customer basis," meaning that they are included
in the
geographic area in which the customer is located. Property, plant and equipment,
net is included in the geographic areas in which the producing entities are
located.
Intersegment
sales are eliminated in consolidation.
Geographic
Areas
|
|
United
States
|
|
Europe
|
|
Americas
(a)
|
|
Asia
Pacific
|
|
Total
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
981.0
|
|
$
|
747.9
|
|
$
|
106.0
|
|
$
|
233.9
|
|
$
|
2,068.8
|
|
Property,
plant and equipment, net
|
|
|
262.1
|
|
|
233.8
|
|
|
15.7
|
|
|
23.8
|
|
|
535.4
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
921.2
|
|
$
|
762.2
|
|
$
|
98.8
|
|
$
|
214.5
|
|
$
|
1,996.7
|
|
Property,
plant and equipment, net
|
|
|
325.2
|
|
|
331.4
|
|
|
16.2
|
|
|
22.6
|
|
|
695.4
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
884.8
|
|
$
|
692.9
|
|
$
|
93.8
|
|
$
|
174.5
|
|
$
|
1,846.0
|
|
Property,
plant and equipment, net
|
|
|
345.3
|
|
|
302.6
|
|
|
12.2
|
|
|
17.3
|
|
|
677.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions)
|
|
Industry
Segments
|
|
Performance
Products
|
|
Engineered
Materials
and
Additives
|
|
Corporate
|
|
|
|
Consolidated
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,686.0
|
|
$
|
382.8
|
|
$
|
-
|
|
|
|
|
$
|
2,068.8
|
|
Profit
(loss) from operations
|
|
|
220.0
|
|
|
(77.9
|
)
|
|
(11.7
|
)
|
|
(b)
|
|
|
130.4
|
|
Interest
and debt expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.4
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.3
|
|
(Loss)
before income taxes and equity loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45.3
|
)
|
Total
assets
|
|
|
1,474.9
|
|
|
234.0
|
|
|
859.9
|
|
|
(c)
|
|
|
2,568.8
|
|
Capital
expenditures
|
|
|
53.5
|
|
|
6.5
|
|
|
7.5
|
|
|
|
|
|
67.5
|
|
Depreciation
and amortization
|
|
|
80.2
|
|
|
17.0
|
|
|
8.7
|
|
|
|
|
|
105.9
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,616.5
|
|
$
|
380.2
|
|
$
|
-
|
|
|
|
|
$
|
1,996.7
|
|
Profit
(loss) from operations
|
|
|
248.6
|
|
|
(14.4
|
)
|
|
(5.3
|
)
|
|
(b)
|
|
|
228.9
|
|
Interest
and debt expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.7
|
|
Gain
on sale of CP Kelco ApS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27.0
|
)
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.7
|
|
Income
before income taxes and equity loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.5
|
|
Total
assets
|
|
|
1,622.0
|
|
|
369.4
|
|
|
728.9
|
|
|
(c)
|
|
|
2,720.3
|
|
Capital
expenditures
|
|
|
63.7
|
|
|
8.2
|
|
|
5.5
|
|
|
|
|
|
77.4
|
|
Depreciation
and amortization
|
|
|
73.5
|
|
|
17.7
|
|
|
9.9
|
|
|
|
|
|
101.1
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,483.5
|
|
$
|
362.5
|
|
$
|
-
|
|
|
|
|
$
|
1,846.0
|
|
Profit
(loss) from operations
|
|
|
261.9
|
|
|
9.1
|
|
|
(15.5
|
)
|
|
(b)
|
|
|
255.5
|
|
Interest
and debt expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130.8
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.9
|
|
Income
before income taxes and equity loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.8
|
|
Total
assets
|
|
|
1,525.6
|
|
|
372.1
|
|
|
824.1
|
|
|
(c)
|
|
|
2,721.8
|
|
Capital
expenditures
|
|
|
39.3
|
|
|
4.9
|
|
|
3.8
|
|
|
|
|
|
48.0
|
|
Depreciation
and amortization
|
|
|
74.1
|
|
|
20.8
|
|
|
5.7
|
|
|
|
|
|
100.6
|
|
|
|
(a)
|
Excluding
operations in the United States of America.
|
(b) |
Includes
$7.1 million of severance and other exit costs in 2005, $6.5 million
in
facility shutdown costs in 2004, and $4.6 million, $7.3 million and
$3.6
million of severance, special pension adjustment and proxy costs,
respectively, in 2003.
|
(c) |
Includes
assets not specifically allocated to business segments, primarily
intangible assets and other long-term
assets.
|
24. Financial
Instruments and Risk Management, Including Derivatives
Notional
Amounts and Credit Exposure of Derivatives
The
notional amounts of the derivative contracts summarized below do not represent
the amounts exchanged by the parties involved and thus, are not a measure
of the
Company's exposure to various risks through its use of derivatives. The amounts
exchanged by the parties are calculated on the basis of the notional amounts,
underlyings such as interest rates and foreign currency rates of exchange
and
other terms of the derivative contracts.
Foreign
Exchange Risk Management
The
Company has selectively used foreign currency forward contracts and currency
swaps to offset the effects of foreign currency exchange rate changes on
reported earnings, cash flow and net asset positions. The primary exposures
are
denominated in the Euro, Swedish kroner, Danish kroner and British pound
sterling. Some of the contracts involved the exchange of two foreign currencies,
according to local needs in foreign subsidiaries. The term of the currency
derivatives is rarely more than three months. At December 31, 2005 and
2004, the Company had $-0- and $0.4 million, respectively, of outstanding
forward-exchange contracts to purchase foreign currencies. The Company had
outstanding forward-exchange contracts to sell foreign currencies aggregating
$12.8 million and $12.3 million at December 31, 2005 and 2004,
Hercules
Incorporated
Notes
to Consolidated Financial Statements
respectively.
Cross-currency trades entered into by non-U.S. dollar denominated entities
aggregated $329.8 million and $410.4 million at December 31, 2005 and 2004,
respectively. The foreign exchange contracts outstanding at December 31,
2005 mature on or before January 27, 2006.
Fair
Values
The
following table presents the net carrying amounts and fair values of the
Company's financial instruments at December 31, 2005 and 2004:
|
|
(Dollars
in millions)
|
|
|
|
2005
|
|
2004
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Investment
securities (available for sale)
|
|
$
|
1.0
|
|
$
|
1.0
|
|
$
|
1.5
|
|
$
|
1.5
|
|
Total
debt
|
|
|
(1,109.0
|
)
|
|
(1,092.1
|
)
|
|
(1,240.1
|
)
|
|
(1,265.2
|
)
|
Foreign
exchange contracts, net
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
0.6
|
|
|
0.6
|
|
Fair
values of the above financial instruments are indicative of cash that would
have
been required had settlement been made at December 31, 2005 and
2004.
Basis
of Valuation
· |
Investment
securities: Present value of expected future cash
flows.
|
· |
Long-term
debt: Present value of expected cash flows related to existing borrowings
discounted at rates currently available to the Company for long-term
borrowings with similar terms and remaining
maturities.
|
· |
Foreign
exchange contracts: Year-end exchange
rates.
|
25. Divestitures
On
February 12, 2004, a subsidiary of the Company completed the sale of its
minority ownership in CP Kelco ApS to a subsidiary of J. M. Huber Corporation
for $27.0 million. The book value of the Company's investment in CP Kelco
ApS
had been written down to zero in 2002 as the result of an after-tax impairment
charge of $19.0 million.
Net
(loss) income for the month ended January 31, 2004 and the year ended December
31, 2003 was $(2.2) million and $59.3 million, respectively. At the time
of
disposal, the CP Kelco ApS balance sheet was comprised of total assets and
total
liabilities of $932.1 million and $816.3 million, respectively.
26. Condensed
Consolidating Financial Information of Guarantor
Subsidiaries
The
11.125% senior notes due 2007 are guaranteed by substantially all of the
Company's current and future wholly-owned domestic restricted subsidiaries
(the
"guarantor subsidiaries"). The Senior Credit Facility entered into in April
2004
also provides for a guarantee by each guarantor subsidiary. The guarantees
by
each guarantor subsidiary are full and unconditional and joint and several.
The
indenture under which the Company's 6.60% notes due 2027 and 6.625% notes,
redeemed in 2003, were issued requires such notes to be guaranteed or secured
on
the same basis as any other subsequently issued debt that is guaranteed or
secured. As a result, at December 31, 2005, the following wholly-owned domestic
restricted subsidiaries fully and unconditionally and jointly and severally
guarantee the Senior Credit Facility, the 6.60% notes due 2027, the 11.125%
notes due 2007 and the 6.75% notes due 2029.
Aqualon
Company
|
FiberVisions
Products, Inc.
|
Athens
Holding Inc.
|
Hercules
Euro Holdings, LLC
|
Covington
Holdings, Inc.
|
Hercules
Finance Company
|
East
Bay Realty Services, Inc.
|
Hercules
Flavor, Inc.
|
FiberVisions
Incorporated
|
Hercules
Hydrocarbon Holdings, Inc.
|
FiberVisions,
L.L.C.
|
Hercules
Paper Holdings, Inc.
|
FiberVisions
L.P.
|
WSP,
Inc.
|
The
non-guarantor subsidiaries include all of the Company's foreign subsidiaries
and
certain domestic subsidiaries. The Company conducts much of its business
through
and derives much of its income from its subsidiaries. Therefore, the Company's
ability to make required payments with respect to its indebtedness and other
obligations depends on the financial results and condition of its subsidiaries
and its ability to receive funds from its subsidiaries. There are no
restrictions on the ability of any of the guarantor subsidiaries to transfer
funds to the Company; however, there may be such restrictions for certain
foreign non-guarantor subsidiaries.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
The
following condensed consolidating financial information for the Company presents
the financial information of Hercules, the guarantor subsidiaries and the
non-guarantor subsidiaries based on the Company's understanding of the
Securities and Exchange Commission's interpretation and application of Rule
3-10
under the Securities and Exchange Commission's Regulation S-X. The financial
information may not necessarily be indicative of results of operations or
financial position had the guarantor subsidiaries or non-guarantor subsidiaries
operated as independent entities.
In
this presentation, Hercules consists of parent company operations. Guarantor
subsidiaries and non-guarantor subsidiaries of Hercules are reported on an
equity basis. Additionally, prior year information has been reclassified
to
conform to the presentation in the Consolidated Balance Sheets.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Operations
|
|
Year
Ended December 31, 2005
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
562.7
|
|
$
|
491.2
|
|
$
|
1,175.2
|
|
$
|
(160.3
|
)
|
$
|
2,068.8
|
|
Cost
of sales
|
|
|
401.4
|
|
|
382.7
|
|
|
794.7
|
|
|
(172.5
|
)
|
|
1,406.3
|
|
Selling,
general, and administrative expenses
|
|
|
104.0
|
|
|
130.0
|
|
|
148.8
|
|
|
-
|
|
|
382.8
|
|
Research
and development
|
|
|
19.3
|
|
|
18.4
|
|
|
3.2
|
|
|
-
|
|
|
40.9
|
|
Intangible
asset amortization
|
|
|
6.0
|
|
|
1.5
|
|
|
0.5
|
|
|
-
|
|
|
8.0
|
|
Impairment
of Fibervisions goodwill
|
|
|
-
|
|
|
52.9
|
|
|
-
|
|
|
-
|
|
|
52.9
|
|
Other
operating expenses, net
|
|
|
16.1
|
|
|
9.0
|
|
|
22.4
|
|
|
-
|
|
|
47.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
15.9
|
|
|
(103.3
|
)
|
|
205.6
|
|
|
12.2
|
|
|
130.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and debt expense (income), net
|
|
|
173.1
|
|
|
(71.6
|
)
|
|
(12.1
|
)
|
|
-
|
|
|
89.4
|
|
Other
expense (income), net
|
|
|
87.3
|
|
|
2.4
|
|
|
(3.4
|
)
|
|
-
|
|
|
86.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes and
equity
(loss) income
|
|
|
(244.5
|
)
|
|
(34.1
|
)
|
|
221.1
|
|
|
12.2
|
|
|
(45.3
|
)
|
(Benefit)
provision for income taxes
|
|
|
(103.7
|
)
|
|
20.0
|
|
|
72.2
|
|
|
4.3
|
|
|
(7.2
|
)
|
Equity
(loss) income of affiliated companies
|
|
|
-
|
|
|
(1.1
|
)
|
|
0.5
|
|
|
0.1
|
|
|
(0.5
|
)
|
Equity
income (loss) from consolidated subsidiaries
|
|
|
102.2
|
|
|
10.0
|
|
|
(3.2
|
)
|
|
(109.0
|
)
|
|
-
|
|
Net
(loss) income from continuing operations
|
|
|
(38.6
|
)
|
|
(45.2
|
)
|
|
146.2
|
|
|
(101.0
|
)
|
|
(38.6
|
)
|
Cumulative
effect of changes in accounting principles
|
|
|
(2.5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2.5
|
)
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
(45.2
|
)
|
$
|
146.2
|
|
$
|
(101.0
|
)
|
$
|
(41.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Operations
|
|
Year
Ended December 31, 2004
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
540.8
|
|
$
|
474.8
|
|
$
|
1,131.9
|
|
$
|
(150.8
|
)
|
$
|
1,996.7
|
|
Cost
of sales
|
|
|
374.8
|
|
|
352.5
|
|
|
731.1
|
|
|
(150.8
|
)
|
|
1,307.6
|
|
Selling,
general, and administrative expenses
|
|
|
101.1
|
|
|
126.0
|
|
|
155.3
|
|
|
-
|
|
|
382.4
|
|
Research
and development
|
|
|
19.8
|
|
|
17.4
|
|
|
5.6
|
|
|
-
|
|
|
42.8
|
|
Goodwill
and intangible asset amortization
|
|
|
6.1
|
|
|
1.5
|
|
|
0.5
|
|
|
-
|
|
|
8.1
|
|
Other
operating expenses, net
|
|
|
4.8
|
|
|
12.9
|
|
|
9.2
|
|
|
-
|
|
|
26.9
|
|
Profit
(loss) from operations
|
|
|
34.2
|
|
|
(35.5
|
)
|
|
230.2
|
|
|
-
|
|
|
228.9
|
|
Interest
and debt expense (income), net
|
|
|
177.6
|
|
|
(59.7
|
)
|
|
(9.2
|
)
|
|
-
|
|
|
108.7
|
|
Gain
on sale of CP Kelco ApS
|
|
|
-
|
|
|
-
|
|
|
(27.0
|
)
|
|
-
|
|
|
(27.0
|
)
|
Other
expense (income), net
|
|
|
256.6
|
|
|
3.9
|
|
|
(143.8
|
)
|
|
-
|
|
|
116.7
|
|
Income
(loss) before income taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
income (loss)
|
|
|
(400.0
|
)
|
|
20.3
|
|
|
410.2
|
|
|
-
|
|
|
30.5
|
|
Provision
(benefit) for income taxes
|
|
|
(88.2
|
)
|
|
38.1
|
|
|
52.5
|
|
|
-
|
|
|
2.4
|
|
Equity
income (loss) of affiliated companies
|
|
|
-
|
|
|
(0.7
|
)
|
|
0.9
|
|
|
(0.2
|
)
|
|
-
|
|
Equity
income (loss) from consolidated subsidiaries
|
|
|
339.9
|
|
|
6.0
|
|
|
(1.6
|
)
|
|
(344.3
|
)
|
|
-
|
|
Net
income (loss) from continuing operations
|
|
|
28.1
|
|
|
(12.5
|
)
|
|
357.0
|
|
|
(344.5
|
)
|
|
28.1
|
|
Cumulative
effect of changes in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle,
net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
28.1
|
|
$
|
(12.5
|
)
|
$
|
357.0
|
|
$
|
(344.5
|
)
|
$
|
28.1
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of
Operations
|
|
Year
Ended December 31, 2003
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
509.2
|
|
$
|
445.1
|
|
$
|
1,023.5
|
|
$
|
(131.8
|
)
|
$
|
1,846.0
|
|
Cost
of sales
|
|
|
331.7
|
|
|
320.0
|
|
|
643.2
|
|
|
(128.0
|
)
|
|
1,166.9
|
|
Selling,
general, and administrative expenses
|
|
|
83.7
|
|
|
84.6
|
|
|
191.6
|
|
|
-
|
|
|
359.9
|
|
Research
and development
|
|
|
17.0
|
|
|
16.8
|
|
|
4.9
|
|
|
-
|
|
|
38.7
|
|
Goodwill
and intangible asset amortization
|
|
|
6.3
|
|
|
1.7
|
|
|
-
|
|
|
-
|
|
|
8.0
|
|
Other
operating expenses, net
|
|
|
9.2
|
|
|
3.9
|
|
|
3.9
|
|
|
-
|
|
|
17.0
|
|
Profit
from operations
|
|
|
61.3
|
|
|
18.1
|
|
|
179.9
|
|
|
(3.8
|
)
|
|
255.5
|
|
Interest
and debt expense (income), net
|
|
|
174.2
|
|
|
(58.8
|
)
|
|
15.4
|
|
|
-
|
|
|
130.8
|
|
Other
expense, net
|
|
|
23.1
|
|
|
4.8
|
|
|
1.0
|
|
|
-
|
|
|
28.9
|
|
Income
(loss) before income taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
(loss) income
|
|
|
(136.0
|
)
|
|
72.1
|
|
|
163.5
|
|
|
(3.8
|
)
|
|
95.8
|
|
Provision
(benefit) for income taxes
|
|
|
(52.3
|
)
|
|
29.2
|
|
|
45.7
|
|
|
(1.3
|
)
|
|
21.3
|
|
Equity
(loss) income of affiliated companies
|
|
|
-
|
|
|
(0.7
|
)
|
|
0.7
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Equity
income from consolidated subsidiaries
|
|
|
157.9
|
|
|
15.0
|
|
|
1.6
|
|
|
(174.5
|
)
|
|
-
|
|
Net
income from continuing operations
|
|
|
74.2
|
|
|
57.2
|
|
|
120.1
|
|
|
(177.3
|
)
|
|
74.2
|
|
Net
income on discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
4.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.5
|
|
Net
income before cumulative effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
changes in accounting principle
|
|
|
78.7
|
|
|
57.2
|
|
|
120.1
|
|
|
(177.3
|
)
|
|
78.7
|
|
Cumulative
effect of changes in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle,
net of tax
|
|
|
(33.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(33.3
|
)
|
Net
income
|
|
$
|
45.4
|
|
$
|
57.2
|
|
$
|
120.1
|
|
$
|
(177.3
|
)
|
$
|
45.4
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Balance Sheet
|
|
December
31, 2005
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
Assets
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9.1
|
|
$
|
1.0
|
|
$
|
67.2
|
|
$
|
-
|
|
$
|
77.3
|
|
Accounts
receivable, net
|
|
|
63.4
|
|
|
35.8
|
|
|
191.6
|
|
|
0.2
|
|
|
291.0
|
|
Intercompany
receivable
|
|
|
68.7
|
|
|
17.5
|
|
|
21.4
|
|
|
(107.6
|
)
|
|
-
|
|
Inventories
|
|
|
58.1
|
|
|
52.4
|
|
|
76.6
|
|
|
(2.1
|
)
|
|
185.0
|
|
Deferred
income taxes
|
|
|
24.0
|
|
|
2.9
|
|
|
12.4
|
|
|
-
|
|
|
39.3
|
|
FiberVisions
assets held for sale
|
|
|
-
|
|
|
138.8
|
|
|
63.9
|
|
|
-
|
|
|
202.7
|
|
Other
current assets
|
|
|
25.4
|
|
|
1.8
|
|
|
20.7
|
|
|
0.2
|
|
|
48.1
|
|
Total
current assets
|
|
|
248.7
|
|
|
250.2
|
|
|
453.8
|
|
|
(109.3
|
)
|
|
843.4
|
|
Property,
plant and equipment, net
|
|
|
145.6
|
|
|
107.2
|
|
|
282.6
|
|
|
-
|
|
|
535.4
|
|
Investments
in subsidiaries and advances, net
|
|
|
2,461.4
|
|
|
88.3
|
|
|
44.9
|
|
|
(2,594.6
|
)
|
|
-
|
|
Goodwill
and other intangible assets, net
|
|
|
196.4
|
|
|
27.8
|
|
|
359.6
|
|
|
-
|
|
|
583.8
|
|
Deferred
income taxes
|
|
|
361.7
|
|
|
-
|
|
|
18.3
|
|
|
(139.6
|
)
|
|
240.4
|
|
Asbestos-related
assets
|
|
|
120.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
120.7
|
|
Deferred
charges and other assets
|
|
|
171.6
|
|
|
13.8
|
|
|
59.7
|
|
|
-
|
|
|
245.1
|
|
Total
assets
|
|
$
|
3,706.1
|
|
$
|
487.3
|
|
$
|
1,218.9
|
|
$
|
(2,843.5
|
)
|
$
|
2,568.8
|
|
Liabilities
and Stockholders' (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
52.0
|
|
$
|
16.7
|
|
$
|
104.5
|
|
$
|
0.2
|
|
$
|
173.4
|
|
FiberVisions
liabilities held for sale
|
|
|
-
|
|
|
51.2
|
|
|
15.4
|
|
|
-
|
|
|
66.6
|
|
Asbestos-related
liabilities
|
|
|
36.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36.4
|
|
Intercompany
payable
|
|
|
1.5
|
|
|
60.7
|
|
|
42.0
|
|
|
(104.2
|
)
|
|
-
|
|
Current
debt obligations
|
|
|
4.0
|
|
|
-
|
|
|
12.7
|
|
|
-
|
|
|
16.7
|
|
Accrued
expenses
|
|
|
78.5
|
|
|
60.5
|
|
|
80.3
|
|
|
-
|
|
|
219.3
|
|
Total
current liabilities
|
|
|
172.4
|
|
|
189.1
|
|
|
254.9
|
|
|
(104.0
|
)
|
|
512.4
|
|
Long-term
debt
|
|
|
1,088.6
|
|
|
-
|
|
|
3.7
|
|
|
-
|
|
|
1,092.3
|
|
Deferred
income taxes
|
|
|
-
|
|
|
142.6
|
|
|
72.2
|
|
|
(139.0
|
)
|
|
75.8
|
|
Pension
liability
|
|
|
251.7
|
|
|
-
|
|
|
71.7
|
|
|
-
|
|
|
323.4
|
|
Other
postretirement benefits
|
|
|
63.1
|
|
|
2.1
|
|
|
0.3
|
|
|
-
|
|
|
65.5
|
|
Deferred
credits and other liabilities
|
|
|
254.2
|
|
|
18.8
|
|
|
17.5
|
|
|
-
|
|
|
290.5
|
|
Asbestos-related
liabilities
|
|
|
233.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
233.6
|
|
Intercompany
notes payable (receivable)
|
|
|
1,667.2
|
|
|
(1,208.7
|
)
|
|
(458.5
|
)
|
|
-
|
|
|
-
|
|
Total
stockholders' (deficit) equity
|
|
|
(24.7
|
)
|
|
1,343.4
|
|
|
1,257.1
|
|
|
(2,600.5
|
)
|
|
(24.7
|
)
|
Total
liabilities and stockholders' (deficit) equity
|
|
$
|
3,706.1
|
|
$
|
487.3
|
|
$
|
1,218.9
|
|
$
|
(2,843.5
|
)
|
$
|
2,568.8
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Balance Sheet
|
|
December
31, 2004
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
Assets
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
42.8
|
|
$
|
0.9
|
|
$
|
82.8
|
|
$
|
-
|
|
$
|
126.5
|
|
Accounts
receivable, net
|
|
|
64.8
|
|
|
55.6
|
|
|
225.6
|
|
|
0.7
|
|
|
346.7
|
|
Intercompany
receivable
|
|
|
74.4
|
|
|
25.2
|
|
|
29.9
|
|
|
(129.5
|
)
|
|
-
|
|
Inventories
|
|
|
59.0
|
|
|
63.2
|
|
|
105.0
|
|
|
(14.8
|
)
|
|
212.4
|
|
Deferred
income taxes
|
|
|
18.3
|
|
|
16.3
|
|
|
2.1
|
|
|
-
|
|
|
36.7
|
|
Asbestos-related
assets
|
|
|
6.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.3
|
|
Other
current assets
|
|
|
23.4
|
|
|
10.1
|
|
|
20.3
|
|
|
-
|
|
|
53.8
|
|
Total
current assets
|
|
|
289.0
|
|
|
171.3
|
|
|
465.7
|
|
|
(143.6
|
)
|
|
782.4
|
|
Property,
plant and equipment, net
|
|
|
162.7
|
|
|
152.7
|
|
|
380.0
|
|
|
-
|
|
|
695.4
|
|
Investments
in subsidiaries and advances, net
|
|
|
2,279.4
|
|
|
88.0
|
|
|
48.8
|
|
|
(2,416.2
|
)
|
|
-
|
|
Goodwill
and other intangible assets, net
|
|
|
195.9
|
|
|
88.2
|
|
|
428.5
|
|
|
-
|
|
|
712.6
|
|
Deferred
income taxes
|
|
|
266.3
|
|
|
(159.1
|
)
|
|
14.7
|
|
|
-
|
|
|
121.9
|
|
Asbestos-related
assets
|
|
|
162.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162.5
|
|
Deferred
charges and other assets
|
|
|
206.2
|
|
|
5.6
|
|
|
33.7
|
|
|
-
|
|
|
245.5
|
|
Total
assets
|
|
$
|
3,562.0
|
|
$
|
346.7
|
|
$
|
1,371.4
|
|
$
|
(2,559.8
|
)
|
$
|
2,720.3
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
43.1
|
|
$
|
24.4
|
|
$
|
120.2
|
|
$
|
(0.7
|
)
|
$
|
187.0
|
|
Asbestos-related
liabilities
|
|
|
46.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
46.8
|
|
Intercompany
payable
|
|
|
7.7
|
|
|
76.4
|
|
|
45.4
|
|
|
(129.5
|
)
|
|
-
|
|
Current
debt obligations
|
|
|
4.0
|
|
|
-
|
|
|
25.8
|
|
|
-
|
|
|
29.8
|
|
Accrued
expenses
|
|
|
81.9
|
|
|
73.4
|
|
|
56.8
|
|
|
-
|
|
|
212.1
|
|
Total
current liabilities
|
|
|
183.5
|
|
|
174.2
|
|
|
248.2
|
|
|
(130.2
|
)
|
|
475.7
|
|
Long-term
debt
|
|
|
1,200.6
|
|
|
0.2
|
|
|
9.5
|
|
|
-
|
|
|
1,210.3
|
|
Deferred
income taxes
|
|
|
-
|
|
|
-
|
|
|
77.2
|
|
|
-
|
|
|
77.2
|
|
Pension
liability
|
|
|
176.8
|
|
|
0.6
|
|
|
64.0
|
|
|
-
|
|
|
241.4
|
|
Other
postretirement benefits
|
|
|
78.3
|
|
|
2.2
|
|
|
-
|
|
|
-
|
|
|
80.5
|
|
Deferred
credits and other liabilities
|
|
|
247.2
|
|
|
40.4
|
|
|
22.3
|
|
|
-
|
|
|
309.9
|
|
Asbestos-related
liabilities
|
|
|
213.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
213.4
|
|
Intercompany
notes payable (receivable)
|
|
|
1,350.3
|
|
|
(1,181.9
|
)
|
|
(168.4
|
)
|
|
-
|
|
|
-
|
|
Total
stockholders' equity
|
|
|
111.9
|
|
|
1,311.0
|
|
|
1,118.6
|
|
|
(2,429.6
|
)
|
|
111.9
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,562.0
|
|
$
|
346.7
|
|
$
|
1,371.4
|
|
$
|
(2,559.8
|
)
|
$
|
2,720.3
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2005
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
and
Adjustments
|
|
Consolidated
|
|
Net
Cash Provided By (Used In) Operating Activities
|
|
$
|
(4.6
|
)
|
$
|
29.1
|
|
$
|
(81.2
|
)
|
$
|
195.9
|
|
$
|
139.2
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(16.7
|
)
|
|
(26.7
|
)
|
|
(24.1
|
)
|
|
-
|
|
|
(67.5
|
)
|
Proceeds
of investment and fixed asset
disposals
|
|
|
13.3
|
|
|
-
|
|
|
3.3
|
|
|
-
|
|
|
16.6
|
|
Other,
net
|
|
|
-
|
|
|
-
|
|
|
(6.8
|
)
|
|
-
|
|
|
(6.8
|
)
|
Net
cash used in investing activities
|
|
|
(3.4
|
)
|
|
(26.7
|
)
|
|
(27.6
|
)
|
|
-
|
|
|
(57.7
|
)
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt payments
|
|
|
(112.8
|
)
|
|
-
|
|
|
(18.4
|
)
|
|
-
|
|
|
(131.2
|
)
|
Change
in short-term debt
|
|
|
-
|
|
|
-
|
|
|
1.9
|
|
|
-
|
|
|
1.9
|
|
Change
in intercompany advances
|
|
|
84.8
|
|
|
(2.3
|
)
|
|
156.6
|
|
|
(239.1
|
)
|
|
-
|
|
Treasury
stock issued
|
|
|
2.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2.7
|
|
Dividends
paid
|
|
|
-
|
|
|
-
|
|
|
(43.2
|
)
|
|
43.2
|
|
|
-
|
|
Other
|
|
|
(0.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.4
|
)
|
Net
cash used in financing activities
|
|
|
(25.7
|
)
|
|
(2.3
|
)
|
|
96.9
|
|
|
(195.9
|
)
|
|
(127.0
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
-
|
|
|
(3.7
|
)
|
|
-
|
|
|
(3.7
|
)
|
Net
(decrease) increase in cash and cash
equivalents
|
|
|
(33.7
|
)
|
|
0.1
|
|
|
(15.6
|
)
|
|
-
|
|
|
(49.2
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
42.8
|
|
|
0.9
|
|
|
82.8
|
|
|
-
|
|
|
126.5
|
|
Cash
and cash equivalents at end of year
|
|
$
|
9.1
|
|
$
|
1.0
|
|
$
|
67.2
|
|
$
|
-
|
|
$
|
77.3
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2004
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
and
Adjustments
|
|
Consolidated
|
|
Net
Cash Provided By Operating Activities
|
|
$
|
155.4
|
|
$
|
40.9
|
|
$
|
490.0
|
|
$
|
(565.8
|
)
|
$
|
120.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(22.5
|
)
|
|
(15.4
|
)
|
|
(39.4
|
)
|
|
(0.1
|
)
|
|
(77.4
|
)
|
Proceeds
of investment and fixed asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
disposals
|
|
|
0.8
|
|
|
-
|
|
|
0.6
|
|
|
-
|
|
|
1.4
|
|
Proceeds
from sale of minority interests in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CP
Kelco ApS
|
|
|
27.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
27.0
|
|
Other,
net
|
|
|
0.8
|
|
|
(1.5
|
)
|
|
0.7
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Net
cash (used in) provided by investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
6.1
|
|
|
(16.9
|
)
|
|
(38.1
|
)
|
|
(0.2
|
)
|
|
(49.1
|
)
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt proceeds
|
|
|
650.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
650.0
|
|
Long-term
debt payments
|
|
|
(713.2
|
)
|
|
-
|
|
|
(16.3
|
)
|
|
-
|
|
|
(729.5
|
)
|
Change
in short-term debt
|
|
|
-
|
|
|
-
|
|
|
1.6
|
|
|
-
|
|
|
1.6
|
|
Payment
of debt issuance costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underwriting
fees
|
|
|
(7.8
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7.8
|
)
|
Change
in intercompany advances
|
|
|
(68.4
|
)
|
|
(25.2
|
)
|
|
(262.2
|
)
|
|
355.8
|
|
|
-
|
|
Treasury
stock issued
|
|
|
5.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.5
|
|
Dividends
paid
|
|
|
-
|
|
|
-
|
|
|
(210.2
|
)
|
|
210.2
|
|
|
-
|
|
Other
|
|
|
6.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.1
|
|
Net
cash used in financing activities
|
|
|
(127.8
|
)
|
|
(25.2
|
)
|
|
(487.1
|
)
|
|
566.0
|
|
|
(74.1
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
-
|
|
|
2.9
|
|
|
-
|
|
|
2.9
|
|
Net
increase (decrease) in cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
|
33.7
|
|
|
(1.2
|
)
|
|
(32.3
|
)
|
|
-
|
|
|
0.2
|
|
Cash
and cash equivalents at beginning of year
|
|
|
9.1
|
|
|
2.1
|
|
|
115.1
|
|
|
-
|
|
|
126.3
|
|
Cash
and cash equivalents at end of year
|
|
$
|
42.8
|
|
$
|
0.9
|
|
$
|
82.8
|
|
$
|
-
|
|
$
|
126.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2003
|
|
|
|
(Dollars
in millions)
|
|
Unconsolidated
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
and
Adjustments
|
|
Consolidated
|
|
Net
Cash Provided By Operating Activities
|
|
$
|
11.8
|
|
$
|
53.3
|
|
$
|
130.3
|
|
$
|
(172.6
|
)
|
$
|
22.8
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(13.5
|
)
|
|
(12.9
|
)
|
|
(21.6
|
)
|
|
-
|
|
|
(48.0
|
)
|
Proceeds
of investment and fixed asset
disposals
|
|
|
4.3
|
|
|
0.7
|
|
|
5.4
|
|
|
-
|
|
|
10.4
|
|
Decrease
in restricted cash
|
|
|
125.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
125.0
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
-
|
|
|
(8.9
|
)
|
|
-
|
|
|
(8.9
|
)
|
Investment
in CRESTS Units preferred securities
|
|
|
(27.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27.4
|
)
|
Other,
net
|
|
|
(0.7
|
)
|
|
0.9
|
|
|
(1.6
|
)
|
|
-
|
|
|
(1.4
|
)
|
Net
cash provided by (used in) investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
87.7
|
|
|
(11.3
|
)
|
|
(26.7
|
)
|
|
-
|
|
|
49.7
|
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt repayments
|
|
|
(151.2
|
)
|
|
-
|
|
|
(14.0
|
)
|
|
-
|
|
|
(165.2
|
)
|
Change
in short-term debt
|
|
|
-
|
|
|
-
|
|
|
(0.7
|
)
|
|
-
|
|
|
(0.7
|
)
|
Change
in intercompany, non-current
|
|
|
(65.1
|
)
|
|
(46.9
|
)
|
|
(105.4
|
)
|
|
217.4
|
|
|
-
|
|
Repurchase
of CRESTS Units warrants
|
|
|
(7.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7.0
|
)
|
Treasury
stock issued
|
|
|
1.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.9
|
|
Dividends
paid
|
|
|
-
|
|
|
-
|
|
|
44.8
|
|
|
(44.8
|
)
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(221.4
|
)
|
|
(46.9
|
)
|
|
(75.3
|
)
|
|
172.6
|
|
|
(171.0
|
)
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
-
|
|
|
15.8
|
|
|
-
|
|
|
15.8
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(121.9
|
)
|
|
(4.9
|
)
|
|
44.1
|
|
|
-
|
|
|
(82.7
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
131.0
|
|
|
7.0
|
|
|
71.0
|
|
|
-
|
|
|
209.0
|
|
Cash
and cash equivalents at end of year
|
|
$
|
9.1
|
|
$
|
2.1
|
|
$
|
115.1
|
|
$
|
-
|
|
$
|
126.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
27.
Summary of Quarterly Results (Unaudited)
|
|
(Dollars
in millions except per share amounts)
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Year
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
$
|
505.1
|
|
$
|
474.9
|
|
$
|
538.6
|
|
$
|
510.5
|
|
$
|
522.9
|
|
$
|
500.5
|
|
$
|
502.2
|
|
$
|
510.8
|
|
$
|
2,068.8
|
|
$
|
1,996.7
|
|
Cost
of sales
|
|
|
341.5
|
|
|
305.1
|
|
|
355.3
|
|
|
325.5
|
|
|
357.5
|
|
|
327.0
|
|
|
352.0
|
|
|
350.0
|
|
|
1,406.3
|
|
|
1,307.6
|
|
Selling,
general and administrative expenses
|
|
|
99.8
|
|
|
97.9
|
|
|
99.9
|
|
|
97.9
|
|
|
92.8
|
|
|
94.7
|
|
|
90.3
|
|
|
91.9
|
|
|
382.8
|
|
|
382.4
|
|
Research
and development
|
|
|
10.4
|
|
|
10.5
|
|
|
10.0
|
|
|
11.7
|
|
|
10.1
|
|
|
10.4
|
|
|
10.4
|
|
|
10.2
|
|
|
40.9
|
|
|
42.8
|
|
Goodwill
and intangible asset amortization
|
|
|
2.0
|
|
|
1.9
|
|
|
2.0
|
|
|
2.1
|
|
|
2.0
|
|
|
2.0
|
|
|
2.0
|
|
|
2.1
|
|
|
8.0
|
|
|
8.1
|
|
Impairment
if FiberVisions goodwill
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52.9
|
|
|
-
|
|
|
52.9
|
|
|
-
|
|
Other
operating expense, net
|
|
|
10.0
|
|
|
12.9
|
|
|
10.4
|
|
|
8.7
|
|
|
11.1
|
|
|
1.4
|
|
|
16.0
|
|
|
3.9
|
|
|
47.5
|
|
|
26.9
|
|
Profit
(loss) from operations
|
|
|
41.4
|
|
|
46.6
|
|
|
61.0
|
|
|
64.6
|
|
|
49.4
|
|
|
65.0
|
|
|
(21.4
|
)
|
|
52.7
|
|
|
130.4
|
|
|
228.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and debt expense
|
|
|
22.2
|
|
|
30.4
|
|
|
22.8
|
|
|
29.4
|
|
|
22.5
|
|
|
25.1
|
|
|
21.9
|
|
|
23.8
|
|
|
89.4
|
|
|
108.7
|
|
Gain
on sale of CP Kelco ApS
|
|
|
-
|
|
|
(26.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1.0
|
)
|
|
-
|
|
|
(27.0
|
)
|
Other
expense, net
|
|
|
21.1
|
|
|
17.4
|
|
|
25.8
|
|
|
26.4
|
|
|
0.2
|
|
|
49.8
|
|
|
39.2
|
|
|
23.1
|
|
|
86.3
|
|
|
116.7
|
|
(Loss)
income before income taxes
|
|
|
(1.9
|
)
|
|
24.8
|
|
|
12.4
|
|
|
8.8
|
|
|
26.7
|
|
|
(9.9
|
)
|
|
(82.5
|
)
|
|
6.8
|
|
|
(45.3
|
)
|
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit)
provision for income taxes
|
|
|
(6.9
|
)
|
|
(1.7
|
)
|
|
3.0
|
|
|
4.8
|
|
|
2.6
|
|
|
41.2
|
|
|
(5.9
|
)
|
|
(41.9
|
)
|
|
(7.2
|
)
|
|
2.4
|
|
(Loss)
income before equity income (loss)
|
|
|
5.0
|
|
|
26.5
|
|
|
9.4
|
|
|
4.0
|
|
|
24.1
|
|
|
(51.1
|
)
|
|
(76.6
|
)
|
|
48.7
|
|
|
(38.1
|
)
|
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
(loss) of affiliated companies, net of tax
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
0.1
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
0.3
|
|
|
(0.5
|
)
|
|
-
|
|
Net
(loss) income before cumulative effect of changes in accounting
principle
|
|
|
4.9
|
|
|
26.3
|
|
|
9.2
|
|
|
4.1
|
|
|
24.0
|
|
|
(51.3
|
)
|
|
(76.7
|
)
|
|
49.0
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of changes in accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2.5
|
)
|
|
-
|
|
|
(2.5
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
4.9
|
|
$
|
26.3
|
|
$
|
9.2
|
|
$
|
4.1
|
|
$
|
24.0
|
|
$
|
(51.3
|
)
|
$
|
(79.2
|
)
|
$
|
49.0
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
(Loss)
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.05
|
|
$
|
0.25
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.22
|
|
$
|
(0.47
|
)
|
$
|
(0.71
|
)
|
$
|
0.45
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
Cumulative
effect of changes in accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
0.05
|
|
$
|
0.25
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.22
|
|
$
|
(0.47
|
)
|
$
|
(0.73
|
)
|
$
|
0.45
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Diluted
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.04
|
|
$
|
0.24
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.22
|
|
$
|
(0.47
|
)
|
$
|
(0.71
|
)
|
$
|
0.45
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
Cumulative
effect of changes in accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
Net
(loss) income
|
|
$
|
0.04
|
|
$
|
0.24
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.22
|
|
$
|
(0.47
|
)
|
$
|
(0.73
|
)
|
$
|
0.45
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
On
April
18, 2005, the Audit Committee of the Board of Directors (“Audit Committee”) of
Hercules dismissed PricewaterhouseCoopers LLP (“PwC”) as the Company’s
independent registered public accounting firm effective upon completion of
services related to the review of the Company’s financial statements for the
first quarter ended March 31, 2005.
PwC’s
reports on the Company’s financial statements for the past two fiscal years did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principle. During
the
two most recent fiscal years and through April 18, 2005, there have been
no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PwC, would have caused
PwC
to make reference to the subject matter of the disagreement in connection
with
its reports on the financial statements for such years.
During
the two most recent fiscal years and through April 18, 2005, there have been
no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except
that:
•
The
Company included a disclosure, in “Item 4. Controls and Procedures”, of its Form
10-Q for the quarter ended September 30, 2004 as filed on November 15, 2004
and
as amended in a Form 10-Q/A filed on January 7, 2005, that the Company’s
disclosure controls and procedures were not effective as of September 30,
2004
solely as a result of a material weakness in internal control over financial
reporting relating to the calculation of available foreign tax credits and
over
the tax settlement process. In connection with a restatement of previously
issued financial statements, the Company made improvements to its disclosure
controls and procedures that effectively remediated the underlying material
weakness such that the Company’s President and Chief Executive Officer and the
Company’s Vice President and Chief Financial Officer believed that the Company’s
disclosure controls and procedures implemented over the tax process, including
the collection and analysis of information used to calculate foreign tax
credits
and the tax settlement process, were effective. Accordingly, the material
weakness in the tax process was remediated permitting management to conclude
that, as of December 31, 2004, the Company’s internal control over financial
reporting was effective. As reflected in their Report of Independent Registered
Public Accounting Firm dated as of March 16, 2005 included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2004, PwC stated
that
in its opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting, that the Company maintained effective
internal control over financial reporting as of December 31, 2004 based on
criteria established in Internal
Control - Integrated Framework
issued
by COSO, is fairly stated, in all material respects, based on those criteria.
Furthermore, in PwC’s opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO.
•
The
Company included a disclosure in “Item 9A. Controls and Procedures”, of its Form
10-K for the year ended December 31, 2003, as filed on March 15, 2004 and
as
amended in a Form 10-K/A filed on March 25, 2004, with respect to the accounting
for a special pension benefit granted in the quarter ended September 30,
2003.
In connection with a restatement of previously issued financial statements,
the
Company made improvements to its disclosure controls and procedures that
effectively remediated the underlying material weakness such that the Company’s
President and Chief Executive Officer and the Company’s Vice President and
Controller (Principal Accounting Officer) concluded that the Company’s
disclosure controls and procedures were effective as of December 31,
2003.
•
In
the
second quarter of 2003, the Company implemented the provisions of Statement
of
Financial Accounting Standards No. 148 (“SFAS No. 148”) “Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
No.
123.” The Company adopted SFAS No. 148 on a prospective basis. During the
year-end audit procedures of the Company’s stock compensation plans, it was
noted that the Company continued to account for its employee stock purchase
plan
under APB 25, “Accounting for Stock Issued to Employees” resulting in an
immaterial ($130,000) understatement of its compensation expense during the
first three quarters of 2003. The error was corrected in the fourth quarter
of
2003.
Hercules
provided PwC with a copy of the above statements as documented for issuance
in
the Company’s April 18, 2005 Form 8-K. The Company received a response letter,
dated as of April 22, 2005 and filed with the aforementioned Form 8-K as
Exhibit
16.1, regarding PwC’s concurrence with the statements.
On
April 18, 2005, the Audit Committee unanimously voted to engage BDO Seidman,
LLP
(“BDO”) as its independent registered public accounting firm to audit the
Company’s financial statements and internal control over financial reporting for
the year ending December 31, 2005.
Hercules
has not consulted with BDO during the two most recent fiscal years and through
April 18, 2005 regarding either the application of accounting principles
to a
specific transaction, either completed or proposed, or the type of audit
opinion
that might be rendered on the financial statements of the Company as well
as any
matters or reportable events described in Items 304(a)(2)(i) or (ii) of
Regulation S-K.
ITEM
9A. CONTROLS AND
PROCEDURES
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President
and
Chief Executive Officer and the Company's Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15 as of December 31, 2005. Based upon
that evaluation, the Company's President and Chief Executive Officer and
the
Company's Vice President and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. Disclosure controls
and procedures are
controls
and procedures that are designed to ensure that information required to be
disclosed in
Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission's rules and forms.
There
have been no significant changes in the Company's internal controls over
financial reporting that occurred during the Company's fourth fiscal quarter,
that have materially affected, or are reasonably likely to materially affect
the
registrant's internal control over financial reporting.
Management's
Report on Internal Control Over Financial Reporting is on page 30 of this
Form
10-K.
The
certifications of the Company’s President and Chief Executive Officer and the
Company’s Vice President and Chief Financial Officer required by Section 302 of
the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2 to this
Annual Report on Form 10-K. Additionally, as required by Section 303A.12(a)
of
the New York Stock Exchange (“NYSE”) Listed Company Manual, the Company’s
President and Chief Executive Officer filed a certification with the NYSE
on
June 22, 2005 reporting that he was not aware of any violation by us of the
NYSE’s Corporate Governance listing standards.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD
OF DIRECTORS
The
name,
age and current position of each executive officer of Hercules as of February
28, 2006 is listed below. There are no family relationships among the executive
officers.
Name
|
|
Age
|
|
Current
Position
|
Craig
A. Rogerson
|
|
49
|
|
President,
Chief Executive Officer and Director
|
Fred
G. Aanonsen
|
|
58
|
|
Vice
President and Controller
|
Edward
V. Carrington
|
|
63
|
|
Vice
President, Human Resources
|
Richard
G. Dahlen
|
|
66
|
|
Chief
Legal Officer
|
Israel
J. Floyd
|
|
59
|
|
Corporate
Secretary and General Counsel
|
Vincenzo
M. Romano
|
|
52
|
|
Vice
President, Taxes
|
Stuart
C. Shears
|
|
55
|
|
Vice
President and Treasurer
|
Allen
A. Spizzo
|
|
48
|
|
Vice
President and Chief Financial
Officer
|
Craig
A. Rogerson
joined
Hercules in 1979 and has held his current position since December 2003. He
had
been Vice President and General Manager, FiberVisions and Pinova since April
2002. Prior to that, he had been Vice President and General Manager of
BetzDearborn since August 2000 and Vice President of Business Operations
for
BetzDearborn Division since May 2000.
Fred
G. Aanonsen
joined
Hercules in July 2001. Prior to joining Hercules, he spent 25 years at Union
Carbide Corporation, where most recently he had been the Director of Accounting
and Financial Processing since 1998 and Business Director for the Finance
SAP
Design and Implementation Team from 1995 to 1998. Mr. Aanonsen is a Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants, the New York State Society of Certified Public Accountants and
the
Financial Executives Institute.
Edward
V. Carrington
originally joined Hercules when it acquired Radiant Color in 1969 and assumed
his current position in June 2001. Prior to that, he had served in a consulting
role since October 2000. From 1997 until 2000, he was Vice President of
Buttonwood Cottages, Inc., a vacation resort complex, and President of Rentals
in Paradise, Inc., a vacation home rental business. Mr. Carrington is a trustee
of Christiana Care.
Richard
G. Dahlen
originally joined Hercules in 1996. Mr. Dahlen assumed his current position
in
June 2001. Prior to that, he had served in a consulting role since October
2000.
Israel
J. Floyd
joined
Hercules in 1973 and has held his current position since 2001. He had been
Vice
President, Secretary and General Counsel since 1999.
Vincenzo
M. Romano joined
Hercules in March
2003 as Director, Federal Tax and has held his current position since July
2004.
He was self-employed as a tax consultant from September 2001 until March
2003.
Prior to that, he was a Tax Director for PricewaterhouseCoopers from January
1999 to August 2001.
Stuart
C. Shears
joined
Hercules in 1978 and has held his current position since 1999.
Allen
A. Spizzo
joined
Hercules in 1979 and has held his current position since March 2004. He had
been
Vice President, Corporate Affairs, Strategic Planning and Corporate Development
from July 2002 to March 2004. Prior to that, Mr. Spizzo had been Vice President,
Investor Relations and Strategic Planning since 2000.
ITEM
11. EXECUTIVE
COMPENSATION
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information
regarding beneficial ownership of Hercules common stock by certain beneficial
owners and by directors and executive officers of Hercules will be included
in
the Company's Proxy Statement and is incorporated herein by
reference.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2005 concerning the
number of shares of common stock to be issued upon the exercise of outstanding
options, warrants and rights issued under all of the Company's existing equity
compensation plans, including the Hercules Incorporated Long-Term Incentive
Compensation Plan, the Hercules Incorporated Non-Employee Director Stock
Accumulation Plan, and the Hercules Incorporated Omnibus Equity Compensation
Plan for Non-employee Directors; the weighted-average exercise price of such
options, warrants and rights and the number of securities remaining available
for future issuance under such plans. All of the Company's equity compensation
plans have been approved by the Company's shareholders.
Plan
category
|
|
Number
of securities to
be
issued upon
exercise
of outstanding
options,
warrants
and
rights
|
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))
|
|
|
|
(a)
|
|
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
9,724,127
|
|
|
(1)
(2)
|
|
$
|
24.08
|
|
|
7,726,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders (3)
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
9,724,127
|
|
|
|
|
$
|
24.08
|
|
|
7,726,070
|
|
|
(1)
Includes 4,253,080 options with exercise prices in excess of the
weighted
average price of $24.08.
|
(2)
Includes options to purchase 1,561,544 shares that were not vested
at
December 31, 2005.
|
(3)
There are no equity compensation plans that have not been approved
by the
Company's shareholders.
|
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information
regarding relationships or transactions between directors and officers and
the
Company will be included in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
regarding principal accountant fees and services will be included in the
Company's Proxy Statement and is incorporated herein by
reference.
PART
IV
(a) Documents
filed as part of this Report:
1. Consolidated
Financial Statements
|
Page
|
Management's
Report on Internal Control over Financial Reporting
|
34
|
Report
of Independent Registered Public Accounting Firm
|
35
|
Consolidated
Statements of Operations and Comprehensive (Loss) Income for the
Years
Ended December 31, 2005, 2004 and
2003
|
38
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
39
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004
and 2003
|
40
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2005, 2004 and 2003
|
42
|
Summary
of Significant Accounting Policies and Notes to Consolidated Financial
Statements
|
43
|
2. Financial
Statement Schedules:
(Dollars
in millions)
|
|
|
|
Balance
at
|
|
Charged
to
|
|
Charged
to
|
|
|
|
Balance
at
|
|
|
|
beginning
|
|
costs
and
|
|
other
|
|
|
|
end
|
|
Description
|
|
of
period
|
|
expenses
|
|
accounts
|
|
Deductions
|
|
of
period
|
|
Year
2005
|
|
|
|
|
|
|
|
|
|
|
|
Tax
valuation allowance
|
|
$
|
391.8
|
|
$
|
23.1
|
|
$
|
(34.2
|
)
|
$
|
-
|
|
$
|
380.7
|
|
Year
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
valuation allowance
|
|
$
|
399.8
|
|
$
|
(22.9
|
)
|
$
|
14.9
|
|
$
|
-
|
|
$
|
391.8
|
|
Year
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
valuation allowance
|
|
$
|
373.0
|
|
$
|
(2.9
|
)
|
$
|
29.7
|
|
$
|
-
|
|
$
|
399.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other schedules are omitted
because they are not applicable, not required or the information required
is
either presented in the Notes to the Consolidated Financial Statements or
has
not changed materially from that previously reported.
3. Exhibits:
A
complete listing of exhibits is included in the Exhibit Index that precedes
the
exhibits filed with this Report.
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized on March 1, 2006.
|
HERCULES
INCORPORATED
|
By:
|
/s/
Craig A. Rogerson
|
|
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 1, 2006.
Principal
Executive Officer and Director:
|
|
|
President
and Chief Executive Officer
|
/s/
Craig A. Rogerson
|
|
|
Craig
A. Rogerson
|
Principal
Financial Officer:
|
|
|
Vice
President and Chief Financial Officer
|
/s/
Allen A. Spizzo
|
|
|
Allen
A. Spizzo
|
Principal
Accounting Officer:
|
|
|
Vice
President and Controller
|
/s/
Fred G. Aanonsen
|
|
|
Fred
G. Aanonsen
|
|
|
Directors:
|
|
/s/
John K. Wulff
|
|
/s/
Burton M. Joyce
|
John
K. Wulff, Chairman of the Board
|
|
Burton
M. Joyce
|
|
|
|
/s/
Anna Cheng Catalano
|
|
/s/
Robert D. Kennedy
|
Anna
Cheng Catalano
|
|
Robert
D. Kennedy
|
|
|
|
/s/
Patrick Duff
|
|
/s/
Jeffrey M. Lipton
|
Patrick
Duff
|
|
Jeffrey
M. Lipton
|
|
|
|
/s/
Thomas P. Gerrity
|
|
/s/
Joe B. Wyatt
|
Thomas
P. Gerrity
|
|
Joe
B. Wyatt
|
/s/
John C. Hunter, III
|
|
|
John
C. Hunter, III
|
|
|
Number
|
Description
|
|
Incorporated
by Reference to
|
2.1
|
Agreement
and Plan of Merger among Hercules, Water Acquisition Company and
BetzDearborn Inc., dated July 30, 1998
|
|
Exhibit
2.1, BetzDearborn Inc. Current Report on Form 8-K, filed July 30,
1998
|
3.1
|
Restated
Certificate of Incorporation of Hercules, as revised and amended
July 6,
1988
|
|
Exhibit
3-A, Annual Report on Form 10-K filed March 26, 1993
|
3.2
|
Certificate
of Amendment dated October 24, 1995, to Hercules' Restated Certificate
of
Incorporation as revised and amended July 5, 1998
|
|
Exhibit
4.1a, Registration Statement on Form S-3, filed September 15, 1998
|
3.3
|
By-Laws
of Hercules, as revised and amended as of July 15,
2003
|
|
Exhibit
3.1, Quarterly Report on Form 10-Q filed August 7, 2003
|
4.1
|
Officers'
Certificate, dated as of July 27, 1999,
pursuant to the Junior Subordinated Debentures Indenture between
Hercules
and Chase, dated as of November 12, 1998
|
|
Exhibit
4.1, Current Report on Form 8-K, dated July 27, 1999
|
4.2
|
Unit
Agreement, dated July 27, 1999,
among Hercules, Hercules Trust II and The Chase Manhattan Bank,
as unit
agent
|
|
Exhibit
4.3, Current Report on Form 8-K, dated July 27, 1999
|
4.3
|
Warrant
Agreement, dated July 27, 1999,
between Hercules and The Chase Manhattan Bank, as warrant
agent
|
|
Exhibit
4.4, Current Report on Form 8-K, dated July 27, 1999
|
4.4
|
Form
of Series A Junior Subordinated Deferrable Interest
Debentures
|
|
Exhibit
4.5, Current Report on Form 8-K, dated July 27, 1999
|
4.5
|
Form
of CRESTS Unit
|
|
Exhibit
4.7, Current Report on Form 8-K, dated July 27, 1999
|
4.6
|
Form
of Warrant
|
|
Exhibit
4.8, Current Report on Form 8-K, dated July 27, 1999
|
4.7
|
Rights
Agreement, dated as of August 24, 2000, between Hercules Incorporated
and
Chase Mellon Shareholder Services, L.L.C.
|
|
Exhibit
4.1 to Hercules Registration of Certain Classes of Securities on
Form 8-A
filed August 10, 2000
|
4.8
|
Indenture,
dated as of November 14, 2000, between Hercules Incorporated, as
issuer
and Wells Fargo Bank Minnesota, N.A., as trustee (including the
form of
11.125% senior notes due 2007 included as Exhibit A
thereto).
|
|
Exhibit
4-A, Quarterly Report on Form 10-Q, filed November 14,
2000
|
4.9
|
Registration
Rights Agreement, dated as of November 14, 2000, among Hercules
Incorporated and all of its domestic subsidiaries and Donaldson,
Lufkin
& Jenrette Securities Corporation and Credit Suisse First Boston
Corporation, as the initial purchasers.
|
|
Exhibit
4-B Quarterly Report on Form 10-Q, filed November 14,
2000
|
4.10
|
Amendment
No. 1 to the Hercules Incorporated Rights Agreement, dated as of
June 5,
2003
|
|
Exhibit
4.2, Registration Statement on Form 8-A, filed June 5,
2003
|
4.11
|
Amendment
No. 2 to the Hercules Incorporated Rights Agreement, dated as of
August
21, 2003
|
|
Exhibit
4.1, Current Report on Form 8-K, filed September 22,
2003
|
4.12
|
Indenture,
dated as of April 8, 2004, between Hercules Incorporated and each
of the
Guarantors party thereto and Wells Fargo Bank, National
Association
|
|
Exhibit
4.1, Quarterly Report on Form 10-Q filed May 10,
2004
|
4.13
|
Registration
Rights Agreement, dated April 8, 2004, between Hercules Incorporated
and
the Guarantors listed on Schedule A thereto and Credit Suisse First
Boston
LLC, Wachovia Capital Markets, LLC, Scotia Capital (USA) Inc. and
Deutsche
Bank Securities Inc.
|
|
Exhibit
4.2, Quarterly Report on Form 10-Q, filed May 10, 2004
|
10.1
|
Hercules
Executive Survivor Benefit Plan
|
|
Exhibit
10-D, Annual Report on Form 10-K, filed March 27, 1981
|
10.2
|
Hercules
1993 Non-Employee Director Stock Accumulation and Deferred Compensation
Plan
|
|
Exhibit
4.1, Registration Statement on Form S-8, filed July 16,
1993
|
10.3
|
Hercules
Employee Pension Restoration Plan
|
|
Exhibit
10-L, Annual Report on Form 10-K, filed March 26, 1993
|
10.4
|
Hercules
Amended and Restated Long Term Incentive Compensation Plan
|
|
Exhibit
10-K, Annual Report on Form 10-K, filed March 29, 2000
|
10.5
|
CRESTS
Units Underwriting Agreement, dated July 21, 1999,
among Hercules, Hercules Trust II and the Underwriters named
therein
|
|
Exhibit
1.1, Current Report on Form 8-K, dated July 27, 1999
|
10.6
|
Common
Stock Underwriting Agreement, dated July 21, 1999,
among Hercules and the Underwriters named therein
|
|
Exhibit
1.2, Current Report on Form 8-K, dated July 27, 1999
|
10.7
|
Form
of Change-of-Control Employment Agreements entered into as of August
24,
2000 by Hercules Incorporated and each of Robert C. Flexon and
Craig A.
Rogerson
|
|
Exhibit
10-19, Registration Statement S-4, filed August 9, 2001
|
10.8
|
Form
of Change-of-Control Employment Agreements entered into as of June
15,
2001 by Hercules Incorporated and Richard G. Dahlen
|
|
Exhibit
10-25, Registration Statement S-4, filed August 9, 2001
|
10.9
|
Change-of-Control
Employment Agreement, dated as of July 2, 2001, by and between
Hercules
Incorporated and Fred G. Aanonsen
|
|
Exhibit
10-28, Registration Statement on Form S-4, filed August 9,
2001
|
10.10
|
Stock
and Asset Purchase Agreement, dated as of February 12, 2002, by
and among
Hercules Incorporated, General Electric Company and Falcon Acquisition
Corp.
|
|
Exhibit
10.1, Current Report on Form 8-K,
dated
February 12, 2002
|
10.11
|
Amendment
2002-1 to Amended and Restated Long Term Incentive Compensation
Plan
|
|
Exhibit
I, Proxy Statement, dated May 15, 2002
|
10.12
|
Amendment
2002-1 to Non-Employee Director Stock Accumulation Plan
|
|
Exhibit
II, Proxy Statement, dated May 15, 2002
|
10.13
|
Hercules
Incorporated Compensation Benefits Grantor Trust Agreement for
Management
Employees
|
|
Exhibit
10-Ee, Annual Report on Form 10-K/A, filed May 1, 2003
|
10.14
|
Hercules
Incorporated Compensation Benefits Grantor Trust Agreement for
Non-Employee Directors
|
|
Exhibit
10-Ff, Annual Report on Form 10-K/A, filed May 1, 2003
|
10.15
|
Amended
and Restated Hercules Incorporated Management Incentive Compensation
Plan,
dated February 21, 2003
|
|
Exhibit
10-Gg Annual Report on Form 10-K/A, filed May 1, 2003
|
10.16
|
Hercules
Deferred Compensation Plan, restated December 1995
|
|
Exhibit
10-B, Quarterly Report on Form 10-Q, filed May 15,
2003
|
10.17
|
Employment
Offer Letter - Fred G. Aanonsen, dated June 27, 2001
|
|
Exhibit
10-C, Quarterly Report on Form 10-Q, filed May 15, 2003
|
10.18
|
Hercules
Executive Survivor Benefit Plan II dated January 1, 1987 - benefit
structure is only applicable to one executive officer
|
|
Exhibit
10-E, Quarterly Report on Form 10-Q, filed May 15, 2003
|
10.19
|
First
Amendment to Credit Agreement, dated December 17, 2003, among
Hercules Incorporated, certain subsidiaries of Hercules several
banks and
other financial institutions identified in the agreement and Credit
Suisse
First Boston, as administrative agent
|
|
Exhibit
10-Mm, Annual Report on Form 10-K, filed March 15, 2004
|
10.20
|
Omnibus
Equity Compensation Plan for Non-Employee Directors
|
|
Appendix
II, Proxy Statement dated June 20, 2003
|
10.21
|
Amended
and Restated Credit Agreement, dated as of April 8, 2004, between
Hercules
Incorporated and the Guarantors listed on Schedule A thereto and
Credit
Suisse First Boston LLC, Wachovia Capital Markets, LLC, Scotia
Capital
(USA) Inc. and Deutsche Bank Securities Inc.
|
|
Exhibit
10.1, Quarterly Report on Form 10-Q, filed May 10, 2004
|
10.22
|
First
Amendment to Amended and Restated Credit Agreement dated as of
August 12,
2004, among Hercules Incorporated and the Guarantors listed on
Schedule A
thereto and Credit Suisse First Boston LLC and Wachovia Bank, National
Association
|
|
Exhibit
10.1, Quarterly Report on Form 10-Q, filed November 15,
2004
|
10.23
|
Employment
Agreement between Hercules Incorporated and Israel J. Floyd, dated
August
24, 2000
|
|
Exhibit
10.27, Annual Report on Form 10-K, filed March 16, 2005
|
10.24
|
First
Amendment to the Employment Agreement between Hercules Incorporated
and
Israel J. Floyd, dated August 24, 2000
|
|
Exhibit
10.28, Annual Report on Form 10-K, filed March 16, 2005
|
10.25
|
Employment
Agreement between Hercules Incorporated and Allen A. Spizzo, dated
August
24, 2000
|
|
Exhibit
10.29, Annual Report on Form 10-K, filed March 16, 2005
|
10.26
|
First
Amendment to the Employment Agreement between Hercules Incorporated
and
Allen A. Spizzo, dated August 24, 2000
|
|
Exhibit
10.30, Annual Report on Form 10-K, filed March 16, 2005
|
10.27
|
First
Amendment to the Employment Agreement between Hercules Incorporated
and
Craig A. Rogerson, dated August 24, 2000
|
|
Exhibit
10.31, Annual Report on Form 10-K, filed March 16, 2005
|
10.28
|
Pension
Service Credit Agreement between Hercules Incorporated Compensation
Committee of the Hercules Board of Directors and John Televantos,
dated
September 1, 2004
|
|
Exhibit
10.33, Annual Report on From 10-K, filed March 16, 2005
|
10.29
|
Employment
Offer Letter - Paul C. Raymond III, dated December 28,
2004
|
|
Exhibit
10.34, Annual Report on Form 10-K, filed March 16, 2005
|
10.30
|
Special
Pension Agreement between Hercules Incorporated and William H.
Joyce,
approved August 21, 2003
|
|
Exhibit
10.35, Annual Report on Form 10-K, filed March 16, 2005
|
10.31
|
General
Terms of Employment between Hercules Incorporated and Certain Executive
Officers
|
|
Exhibit
10.36, Annual Report on Form 10-K, filed March 16,
2005
|
10.32
|
Employment
Offer Letter - John E. Panichella, dated December 15, 2005
|
|
Exhibit
10.1, Current Report on Form 8-K/A, dated December 15,
2005
|
10.33
*
|
Contribution
Agreement between Hercules Incorporated, WSP, Inc., SPG/FV Investor
LLC
and Fibervisions Delaware Corporation dated January 31,
2006
|
|
|
14
|
Directors
Code of Business Conduct and Ethics
|
|
Appendix
VII, Proxy Statement dated June 20, 2003
|
18
|
Letter
Regarding Change in Accounting Principle
|
|
Exhibit
18, Annual Report on Form 10-K, filed March 15, 2004
|
18.1*
|
Letter
Regarding Change in Accounting Principle
|
|
|
21.1*
|
Subsidiaries
of Registrant
|
|
|
23.1*
|
Consent
of BDO Seidman, LLP
|
|
|
23.2*
|
Consent
of PricewaterhouseCooper, LLP
|
|
|
31.1*
|
Certification
of President and Chief Executive Officer Pursuant to Exchange Act
Rule
13a-14(a)/15d-14(a)
|
|
31.2*
|
Certification
of Vice President and Chief Financial Officer Pursuant to Exchange
Act
Rule 13a-14(a)/15d-14(a)
|
|
32.1*
|
Section
1350 Certification of President and Chief Executive
Officer
|
|
|
32.2*
|
Section
1350 Certification of Vice President and Chief Financial
Officer
|
|
|
*Filed
herewith
|
|
|