Hercules Incorporated Form 10-K For Period Ending 12/31/2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-K
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Mark
One
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x 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, 2006
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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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, 2006, was approximately $1.7
billion.
As
of February 23, 2007, the registrant had 116,417,693 shares of
Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement for its 2007 Annual
Meeting
of Shareholders (the "Proxy Statement"), when filed, will be
incorporated
by reference in Part III of this report.
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HERCULES
INCORPORATED
FORM
10-K
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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 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 increase prices, ability to execute
divestitures, ability to achieve growth in earnings and cash flows, business
climate, business performance, changes in tax laws or regulations and related
liabilities, changes in tax rates, 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, including
the inability to obtain judicial review of adverse litigation results, 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 are among those
which 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. See also Risk Factors included in Item 1A.
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 growing cash flow and earnings and
delivering shareholder value by concentrating on growth in its core businesses,
expanding in emerging markets, entering adjacent markets, continuous improvement
in its operations and continuing to strengthen its financial profile. Hercules
operates on a global scale, with significant operations in North America,
Europe, Asia and Latin America. Product sales occur in over 135 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; 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. 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 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, 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, which 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 flow; and investing in innovation, emerging market opportunities
and bolt-on acquisitions to grow profitability and increase return on invested
capital.
Reportable
Segments
The
Company currently operates through two reportable segments: Paper Technologies
and Ventures (“PTV”) and the Aqualon Group (“Aqualon”). A reporting segment is
also maintained for FiberVisions for historical reporting purposes reflecting
the Company’s consolidation of this business through March 31, 2006. The
financial information regarding these segments, which includes net sales, profit
from operations, total assets and other financial information for each of the
three years ended December 31, 2006, 2005 and 2004 is provided in Note 27 to the Consolidated Financial Statements. An analysis of
the segments’ results of operations for these periods is provided herein under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.
Paper
Technologies and Ventures
Products
and services offered by PTV are designed to enhance customers' profitability
by
improving manufacturing processes, enhancing productivity and improving overall
product quality as well as enabling customers to meet their environmental
objectives and regulatory requirements.
Paper
Technologies is one of the key global suppliers of functional and process
chemicals for the paper industry, offering a wide and highly sophisticated
range
of technology and applications expertise with in-mill capabilities ranging
from
influent treatment through the paper making process to paper finishing.
The
Ventures portion of the group consists of a portfolio of businesses each
targeting a family of vertical markets with a distinct set of products. Current
businesses within Ventures are pulp and biorefining, water treatment for the
pulp and paper industry, aviation and refrigeration compressor synthetic
lubricants, and building and converted products.
The
principal products and primary markets of this segment are as
follows:
Principal
Products
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Primary
Markets
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Paper
Technologies:Functional performance chemicals
Sizing
(internal and surface), strength, tissue creping and coatings
additives.
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Large,
multi-national manufacturers of tissue, paper towels, packaging,
beverage
containers, newsprint, corrugated medium, printing and writing paper
and
other stationery items such as labels and envelopes.
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Paper
Technologies: Process treatment chemicals
Contaminant,
microbiological and foam control, clarification, retention, drainage,
felt
conditioning, fiber recovery, and water closure.
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Ventures:
Pulping chemicals
Deposit
and scale control, foam control, deinking, and clarification.
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Large,
multi-national manufacturers of pulp to ultimately produce paper.
Locations are either stand alone or integrated with paper
making.
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Ventures:
Water treatment chemicals
Utility
systems, cooling water and water clarification.
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Large,
multi-national manufacturers of pulp and/or paper with water utility
operations including boilers, cooling water and influent/effluent
water
treatment.
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Ventures:
Lubricants
Ester-based
synthetic lubricants and pentaerythritol (PE).
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Producers
of aviation and refrigeration compressor fluids, automotive, and
general
industry.
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Ventures:
Building and Converted Products
Adhesives,
resin modifiers, coatings, hydrophobic and release chemistries,
crosslinkers and binders, and foam control.
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Producers
of building products, textiles, electronics, paints and inks, and
paper
industry converting operations.
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Aqualon
Group
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. Aqualon also 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.
The
principal products and primary markets of this segment are as follows:
Principal
Products
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Primary
Markets
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Water-soluble
polymers, ethylcellulose and rosin resins:
Hydroxyethylcellulose
(HEC), Carboxymethylcellulose (CMC), Methylcellulose (MC) and derivatives,
Hydroxypropylcellulose (HPC), Guar and its derivatives, ethylcellulose
(EC) and rosin resins.
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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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FiberVisions
The
Company sold 51% of its interest in FiberVisions on March 31, 2006. While
FiberVisions is no longer a core business of Hercules, the Company holds a
minority interest and continues to maintain a reporting segment for historical
reporting purposes for the periods during which FiberVisions’ results of
operations were consolidated. 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.
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 PTV include polyacrylamides, biocides, surfactants, rosin,
adipic acid, epichlorohydrin, stearic acid, diethylenetriamine, phosphorous
trichloride, methanol, and acetaldehyde.
Raw
materials important to Aqualon are cellulose pulp (derived from wood and cotton
linters), guar splits, gum rosin, limonene and pine wood stumps, which are
renewable resources. Other commodity and chemical inputs include ethylene oxide,
caustic, methanol, ethyl chloride, propylene oxide, monochloroacetic acid,
methyl chloride, and inorganic acids.
Major
requirements for key raw materials and fuels are typically purchased pursuant
to
contracts. Supply
and demand has caused the market to tighten for a number of key raw materials,
however, the Company does not anticipate any availability issues. The
Company is not dependent on any one supplier for a material amount of its raw
material or fuel requirements. However, certain important raw materials, such
as
certain cellulose types and biocides, are obtained from a sole-source or a
few
major suppliers. On a consolidated basis, no single raw material accounts for
more than 7% of total current year Cost of sales.
The
price
and availability of raw materials and fuels are subject to domestic and world
market and political conditions and can also be directly or indirectly impacted
by governmental action or regulations. The impact of any future raw material
or
energy shortages on the Company's business as a whole or in specific geographic
regions cannot be accurately predicted. Operations and products may, at times,
be adversely affected by governmental action, natural disasters, shortages
or
international or domestic events.
In order
to mitigate risks relating to raw materials and energy supply, the Company
employs a variety of strategic sourcing techniques including minimizing the
use
of sole source suppliers, entering into contracts that limit the frequency
or
magnitude of price increases, using approved alternative raw materials,
selectively hedging certain strategic commodities, identifying alternate
suppliers in lower cost regions of the world, continually reassessing its value
chain, and aggressively countering suppliers’ attempts to increase
costs.
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 outside of their home markets. Many of
the
Company's product lines face domestic and international competitive factors,
including industry consolidation, pricing pressures and competing technologies.
In Paper Technologies, 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,
one
element of Aqualon’s strategy includes reducing costs in existing facilities and
adding production capacity in the growing, low-cost Asian region. PTV and
Aqualon’s strategies are both focused on innovation - providing new products to
our customers to extend our competitive advantage.
Patents
and Trademarks
Patents
covering a variety of products and processes have been issued to the Company
and
its subsidiaries. The Company holds licenses for 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®
fluidized polymer suspension, Aquarius™ coating systems, ChemVisions™ curing
agent, Precis® sizing agent, Kymene® resin, 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 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. The Company spent $38.8 million on research and
development activities in 2006, as compared to $40.8 million in 2005 and $42.7
million in 2004. The amounts prior to 2006 include a full year of costs
attributable to FiberVisions.
PTV
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 2006, as part of
the
consolidation and rationalization of its research and development operations,
PTV completed the closure of its Jacksonville, Florida facility. The
centralization of research and development operations at the Company’s Research
Center in Wilmington, Delaware is expected to result in improved efficiency
and
effectiveness. This state-of-the-art facility includes 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 group’s scientists conduct research and customer optimization
studies focused on solving functional and process treatment challenges using
sophisticated techniques and equipment to provide high level analytical testing
and advanced technical service worldwide.
PTV
has
additional customer applications laboratories strategically located to have
greater proximity to key customer activities and to take advantage of existing
Company assets and infrastructure. Today, the European customer applications
operation is located in Helsingborg, Sweden and the Americas customer
applications center is located at the Wilmington Research Center in Wilmington,
Delaware. Re-located from Jacksonville, Florida during 2006, the Americas
facility houses the aforementioned pilot papermaking and paper testing
activities. Finally, a new customer applications facility is currently planned
for the Asia Pacific region and will be located in Shanghai, China 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. While the primary research and development site
is
the Research Center in Wilmington, Delaware, 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.
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 12 and 13 to the Consolidated Financial
Statements.
Employees
As
of
December 31, 2006, the Company had approximately 4,430 employees worldwide
including those of consolidated joint venture entities. Approximately half
of
the worldwide employees were located in the United States, of which
approximately 28% were represented by various local or national unions. As
of
December 31, 2005, the Company had approximately 4,650 employees worldwide.
In addition to restructuring actions, the decrease in 2006 is attributable
to
the disposition of a majority interest in FiberVisions.
International
Operations
Net
sales
and Property, plant and equipment, net by geographic area for each of the three
years ended December 31, 2006, 2005 and 2004 appear in Note
27 to the Consolidated Financial Statements. Direct export sales from the
United States to unaffiliated customers were $106.1 million, $131.7 million
and
$118.7 million for 2006, 2005 and 2004, 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 (www.sec.gov)
on its
corporate website, www.herc.com.
These
filings may also be read and copied at 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.
These
documents are also available in print, without charge, 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.
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.
The
Company is subject to litigation.
The
Company is a defendant in numerous lawsuits that arise out of, and are
incidental to, the current and past conduct of the Company’s business. These
suits concern issues such as product liability, asbestos, environmental matters,
contract disputes, labor-related matters, intellectual property, property damage
and personal injury matters. While it is not feasible to predict the outcome
of
all pending suits and claims, the ultimate resolution of these matters could
have a material effect upon the Company’s financial position, operating results
and cash flows. See Note 13 to the Consolidated Financial
Statements for a thorough discussion of the most significant legal
matters.
The
Company is subject to environmental liabilities.
The
Company is subject to numerous foreign, federal, state and local 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, or the interpretation thereof, could have a material effect on
the
Company’s financial position, results of operations and cash flows. Any failure
by the Company to adequately comply with such laws and regulations could subject
the Company to significant future liabilities, including fines and penalties.
The
Company has been identified as a potentially responsible party 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. Actual costs
to
resolve these matters will depend on 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; the discovery
of
new information not known at this time; and the years of remedial activity
required, which could range from zero to 30 years or longer. The ultimate
resolution of such matters could have a material effect upon the Company’s
financial position, operating results and cash flows. See Notes 12 and 13 to the Consolidated
Financial Statements for a thorough discussion of the most significant
environmental matters.
The
Company has significant leverage.
As
of
December 31, 2006, the Company's total debt was $995.5 million, of which
approximately 60% 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 $641.1 million 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.
See Note 8 to the Consolidated Financial Statements for a
thorough discussion of the Company’s indebtedness.
The
Company has unfunded liabilities with respect to certain pension and
postretirement benefit plans.
The
projected benefit obligation of the Company’s U.S. defined benefit pension plan
and postretirement benefit plan and certain foreign plans exceeds the fair
value
of plan assets. In addition, the assets and liabilities associated with the
Company’s defined benefit pension and postretirement benefit plans are subject
to interest rate and market risk. See Note 10 to the
Consolidated Financial Statements for a description and related financial
disclosures for the defined benefit pension and postretirement
plans.
The
Company is subject to extensive competition.
The
global specialty chemicals industry is highly competitive. Some of our
competitors have greater financial, technical, marketing and other resources,
which could provide them with a competitive advantage. Also, the Company’s
competitors have in the past caused, and could in the future cause, a reduction
in prices for some of the Company’s products as a result of intensified price
competition. Additionally, although the Company does not compete primarily
on
the basis of price, the Company’s customers are price sensitive. Accordingly, in
periods where we are not able to pass on increased production costs, including
those associated with the increasing prices of raw materials, gross margins
may
deteriorate.
The
Company is subject to technological change and innovation.
Many
of
the Company’s products could be affected by technological change and new product
introductions and enhancements. Accordingly, 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 such products or that
our competitors will not develop new products or technologies that compete
with
or reduce the market for our products or services.
The
Company is subject to supply constraints and price volatility with respect
to
raw material and energy.
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.
Some
of the Company’s customers are in cyclical industries.
Some
of
the Company’s customers are in industries and businesses that are cyclical in
nature and many are sensitive to changes in general economic conditions. The
demand for our products depends, in part, upon the general economic conditions
of the markets of our customers. Downward economic cycles in our customers’
industries may reduce sales of our products.
The
Company’s international operations are affected by global and regional
conditions.
The
Company’s international operations are subject to risks, such as currency
exchange controls, labor unrest, regional economic uncertainty, political
instability, restrictions on the transfer of funds into or out of a country,
export duties and quotas, domestic and foreign customs and tariffs and current
and changing regulatory environments. These events could have an adverse effect
on our international operations in the future by reducing the demand for our
products, increasing our costs or otherwise having an adverse affect on our
results of operations.
Foreign
exchange rate fluctuations impact the Company’s financial
performance.
Our
products are sold throughout the world and, as a result, currency fluctuations
impact our financial performance. Our revenues in foreign countries are largely
generated in foreign currencies, while costs incurred to generate those revenues
are only partly incurred in the same currencies. We sometimes enter into hedging
transactions to reduce the Company’s exposure to currency exchange risk, but
such transactions cannot eliminate all of the risks associated with currency
fluctuations. Because our financial statements are denominated in
U.S. dollars, changes in currency exchange rates between the
U.S. dollar and other currencies could have a material adverse effect on
our results of operations.
The
Company’s production facilities are subject to operating
hazards.
We
are
dependent on the continued operation of our production facilities. Such
production facilities are subject to hazards associated with the manufacture,
handling, storage and transportation of chemical materials and products,
including pipeline leaks and ruptures, explosions, fires, inclement weather
and
natural disasters, mechanical failure, unscheduled downtime, labor difficulties,
transportation interruptions, remediation complications, chemical spills,
discharges or releases of toxic or hazardous substances or gases, storage tank
leaks and other environmental risks. These hazards can cause personal injury
and
loss of life, severe damage to or destruction of property and equipment and
environmental damage and could have a material adverse effect on our results
of
operations.
None
The
Company's corporate headquarters and major research center are located in
Wilmington, Delaware. The Company also owns a number of plants and facilities
in
strategic locations worldwide. 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 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. Certain
of
these properties are subject to liens under the Company’s debt obligations (see
Note 8 to the Consolidated Financial Statements). The
following are the locations of the Company's worldwide plants:
Paper
Technologies and Ventures
|
Beringen,
Belgium; Burlington, Ontario, Canada; Busnago, Italy; Chicopee,
Massachusetts, U.S.; Franklin, Virginia, U.S.; Hattiesburg, Mississippi,
U.S.; Helsingborg, Sweden; Kim Cheon, Korea; Louisiana, Missouri,
U.S.;
Macon, Georgia, U.S.; Mexico City, Mexico; Milwaukee, Wisconsin,
U.S.;
Nantou, Taiwan; Paulinia, Brazil; Portland, Oregon, U.S.; Savannah,
Georgia, U.S.; Shanghai, China; 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
Group
|
Alizay,
France; Doel, Belgium; Dalton, Georgia, U.S.; Hopewell, Virginia,
U.S.;
Jiangmen City, China; Kenedy, Texas, U.S.; Luzhou, China (40% joint
venture interest); Nanjing, China (land acquired in 2006 for facility
construction in 2007); Parlin, New Jersey, U.S.; Suzhou, China (40%
joint
venture interest); Zwijndrecht, The Netherlands; and Brunswick, Georgia,
U.S.
|
Information
regarding legal proceedings is included in Note 13 to the
Consolidated Financial Statements and is incorporated herein by
reference.
No
matter
was submitted to a vote of security holders during the fourth quarter of 2006
through the solicitations of proxies or otherwise.
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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 23, 2007 was 14,300.
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:
2006
|
|
High
|
|
Low
|
|
First
Quarter
|
|
$
|
13.93
|
|
$
|
11.03
|
|
Second
Quarter
|
|
$
|
16.02
|
|
$
|
13.63
|
|
Third
Quarter
|
|
$
|
15.99
|
|
$
|
13.68
|
|
Fourth
Quarter
|
|
$
|
19.52
|
|
$
|
15.73
|
|
|
|
|
|
|
|
|
|
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
|
|
On
December 29, 2006, the closing price of the common stock was
$19.31.
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.
During
2006, the Company did not purchase any shares of its outstanding common
stock.
A
summary
of the selected financial data for Hercules as of December 31 and for the years
specified is set forth in the table below. Data for 2006 reflects the impact
of
the sale of a majority interest in FiberVisions. All periods presented reflect
the terpenes specialties and BetzDearborn water treatment businesses as
discontinued operations.
|
|
(Dollars
and shares in millions, except per share data)
|
|
Statements
of Operations Information:
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Net
sales
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
$
|
1,984.3
|
|
$
|
1,836.0
|
|
$
|
1,693.7
|
|
Cost
of sales
|
|
|
1,343.4
|
|
|
1,391.1
|
|
|
1,291.6
|
|
|
1,155.6
|
|
|
1,029.1
|
|
Gross
profit
|
|
$
|
691.9
|
|
$
|
663.9
|
|
$
|
692.7
|
|
$
|
680.4
|
|
$
|
664.6
|
|
Research
and development
|
|
$
|
38.8
|
|
$
|
40.8
|
|
$
|
42.7
|
|
$
|
38.7
|
|
$
|
42.0
|
|
Profit
from operations
|
|
$
|
248.6
|
|
$
|
140.3
|
|
$
|
232.9
|
|
$
|
257.1
|
|
$
|
219.9
|
|
Net
income (loss) from continuing operations before discontinued
operations
and cumulative effect of changes in accounting principle
|
|
$
|
190.8
|
|
$
|
(32.1
|
)
|
$
|
30.7
|
|
$
|
75.2
|
|
$
|
(47.1
|
)
|
Net
income (loss) on discontinued operations, net of tax
|
|
|
47.0
|
|
|
(6.5
|
)
|
|
(2.6
|
)
|
|
3.5
|
|
|
(197.7
|
)
|
Net
income (loss) before cumulative effect of changes in
accounting
principle
|
|
|
237.8
|
|
|
(38.6
|
)
|
|
28.1
|
|
|
78.7
|
|
|
(244.8
|
)
|
Cumulative
effect of changes in accounting principle, net of tax
|
|
|
0.9
|
|
|
(2.5
|
)
|
|
—
|
|
|
(33.3
|
)
|
|
(368.0
|
)
|
Net
income (loss)
|
|
$
|
238.7
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
$
|
45.4
|
|
$
|
(612.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data and Other Share Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.72
|
|
$
|
(0.30
|
)
|
$
|
0.28
|
|
$
|
0.71
|
|
$
|
(0.44
|
)
|
Discontinued
operations
|
|
|
0.42
|
|
|
(0.06
|
)
|
|
(0.02
|
)
|
|
0.03
|
|
|
(1.87
|
)
|
Cumulative
effect of changes in accounting principle
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
—
|
|
|
(0.31
|
)
|
|
(3.47
|
)
|
Net
income (loss)
|
|
$
|
2.15
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.43
|
|
$
|
(5.78
|
)
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.71
|
|
$
|
(0.30
|
)
|
$
|
0.28
|
|
$
|
0.70
|
|
$
|
(0.44
|
)
|
Discontinued
operations
|
|
|
0.42
|
|
|
(0.06
|
)
|
|
(0.02
|
)
|
|
0.03
|
|
|
(1.87
|
)
|
Cumulative
effect of changes in accounting principle
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
—
|
|
|
(0.31
|
)
|
|
(3.47
|
)
|
Net
income (loss)
|
|
$
|
2.14
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
$
|
0.42
|
|
$
|
(5.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
110.8
|
|
|
108.7
|
|
|
107.3
|
|
|
106.2
|
|
|
106.0
|
|
Diluted
|
|
|
111.3
|
|
|
110.4
|
|
|
109.0
|
|
|
107.2
|
|
|
106.2
|
|
Actual
number of common shares outstanding
|
|
|
116.0
|
|
|
112.7
|
|
|
112.1
|
|
|
111.0
|
|
|
109.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
326.6
|
|
$
|
289.7
|
|
$
|
344.9
|
|
$
|
319.7
|
|
$
|
393.9
|
|
Inventories
|
|
|
210.6
|
|
|
179.6
|
|
|
205.7
|
|
|
199.6
|
|
|
181.7
|
|
Less:
Accounts payable
|
|
|
(205.3
|
)
|
|
(172.9
|
)
|
|
(186.6
|
)
|
|
(161.6
|
)
|
|
(167.8
|
)
|
Operating
working capital, net
|
|
$
|
331.9
|
|
$
|
296.4
|
|
$
|
364.0
|
|
$
|
357.7
|
|
$
|
407.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,808.5
|
|
$
|
2,568.8
|
|
$
|
2,720.3
|
|
$
|
2,721.8
|
|
$
|
2,772.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$
|
995.5
|
|
$
|
1,109.0
|
|
$
|
1,240.1
|
|
$
|
1,347.8
|
|
$
|
883.0
|
|
Company-obligated
preferred securities of subsidiary trusts
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
624.0
|
|
Total
debt and preferred securities
|
|
$
|
995.5
|
|
$
|
1,109.0
|
|
$
|
1,240.1
|
|
$
|
1,347.8
|
|
$
|
1,507.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
172.9
|
|
$
|
139.2
|
|
$
|
120.5
|
|
$
|
22.8
|
|
$
|
(215.2
|
)
|
Capital
expenditures
|
|
$
|
93.6
|
|
$
|
67.5
|
|
$
|
77.4
|
|
$
|
48.0
|
|
$
|
43.4
|
|
Depreciation
|
|
$
|
70.7
|
|
$
|
80.5
|
|
$
|
74.9
|
|
$
|
73.2
|
|
$
|
70.7
|
|
Amortization
|
|
$
|
24.6
|
|
$
|
25.4
|
|
$
|
26.3
|
|
$
|
27.4
|
|
$
|
29.0
|
|
Employees
|
|
|
4,430
|
|
|
4,650
|
|
|
4,950
|
|
|
5,116
|
|
|
5,095
|
|
The
following discussion should be read in connection with the information contained
in the Consolidated Financial Statements and Notes thereto. All dollar amounts
in the tables that follow are presented in millions.
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; and specialty resins. 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
and general industrial.
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, 2006 and 2005 were:
|
|
2006
|
|
2005
|
|
North
America
|
|
|
49
|
%
|
|
47
|
%
|
Europe
|
|
|
34
|
%
|
|
37
|
%
|
Asia
Pacific
|
|
|
11
|
%
|
|
11
|
%
|
Latin
America
|
|
|
6
|
%
|
|
5
|
%
|
Consolidated
|
|
|
100
|
%
|
|
100
|
%
|
Business
Segments
The
Company currently operates through two active reportable segments: Paper
Technologies and Ventures (“PTV”) and the Aqualon Group (“Aqualon”). PTV
includes the following business units: Paper Technologies and the Ventures
businesses-Pulping chemicals, Water Treatment chemicals, Lubricants and Building
and Converted products. Aqualon includes the following business units: Coatings
and Construction, Regulated Industries, and Energy and Specialty Solutions.
A
reporting segment is also maintained for FiberVisions for historical reporting
purposes reflecting the Company’s consolidation of this business through March
31, 2006. The Company currently holds a 49% ownership interest in the
FiberVisions business. The results of operations for 2004, 2005 and the three
months ended March 31, 2006 reflect the Company’s 100% ownership of this
business.
Net
sales
for the years ended December 31, 2006 and 2005 as a percent of total net
sales, by segment, were:
|
|
2006
|
|
2005
|
|
Paper
Technologies and Ventures
|
|
|
53
|
%
|
|
50
|
%
|
Aqualon
Group
|
|
|
44
|
%
|
|
36
|
%
|
FiberVisions
|
|
|
3
|
%
|
|
14
|
%
|
Consolidated
|
|
|
100
|
%
|
|
100
|
%
|
Key
Developments
During
2006, there were a number of strategic business and corporate actions and
financial reporting developments that had an impact upon the Company’s results
of operations and financial position as well as the overall presentation of
financial information. The most significant of these key developments (not
in
any order of relevant significance) were as follows: (1) realignment of the
Company’s reporting segments, (2) strategic business acquisitions, investments
and alliances, (3) disposition of a majority interest in FiberVisions, (4)
business and corporate restructuring actions, including actions initiated in
prior years, (5) resolution of certain income tax matters, (6) substantial
retirement of higher-cost debt, (7) actions regarding the Vertac litigation,
(8)
the adoption of Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) and (9)
the adoption of Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”). A discussion of these developments
follows.
Business
Segment Realignment
Effective
January 1, 2006, the Company realigned its business and reporting segments
to
provide greater market focus. Previously, the Company operated through the
Performance Products (Pulp and Paper and Aqualon) and Engineered Materials
and
Additives (FiberVisions and Pinova) segments. The Company’s new reporting
structure includes three reporting segments: (1) Paper Technologies and Ventures
(2) the Aqualon Group, and (3) FiberVisions. The Company’s Pinova business has
been integrated into the Aqualon Group and the synthetic lubricants business
has
been transferred from Aqualon to PTV.
FiberVisions
will remain as a stand-alone segment for historical reporting purposes and
its
results of operations have been consolidated into the Company’s Statement of
Operations through March 31, 2006. As a result of the sale of the Company’s 51%
interest (see below and Note 3 to the Consolidated Financial
Statements), FiberVisions is reflected as an equity investment and the Company
has included its proportionate share of earnings and losses using the equity
method of accounting for periods beginning April 1, 2006.
In
addition, the Company’s terpenes specialties business, which was previously a
component of Pinova, has been classified as a discontinued operation effective
January 1, 2006. Sales and operating results for this business have been
disaggregated from the former Pinova business and are excluded accordingly
from
the results of operations for Aqualon for 2006, 2005 and 2004,
respectively.
Acquisitions,
Investments and Alliances
Aqualon
acquired the guar and guar derivative manufacturing division of Benchmark
Polymer Products, L.P., (“Benchmark”) a subsidiary of Benchmark Performance
Group, Inc. (“BPG”), including a production facility, related working capital
and intangible assets for a total of $20.9 million plus a provisional earn-out.
In addition, Aqualon signed a five year exclusive agreement to supply BPG with
guar products for polymer slurries used in oil and gas fracturing
applications.
The
formation was completed for Aqualon’s methylcellulose (“MC”) joint venture,
Hercules Tianpu Chemicals Company Limited (“Hercules Tianpu”), with $3.2 million
contributed by Aqualon in addition to the $4.4 million previously contributed
in
2005 in exchange for a 40% ownership interest. Hercules Tianpu combines
Aqualon’s advanced technology with the leading producers of MC in China
enhancing Aqualon’s global supplier position for MC products. Under the joint
venture agreement, Aqualon has global marketing rights for the output of the
joint venture. Hercules Tianpu is currently in the process of completing a
significant capacity expansion for MC production which is expected to be
operating during the first quarter 2007.
Hercules
acquired the remaining 40% ownership interest in the Shanghai Hercules Chemicals
Company, Ltd. joint venture for $3.3 million, including transaction costs.
By
completing this transaction, PTV will be able to operate with greater
flexibility in the region and expects to continue to implement its expansion
plans, including the development of a regional technical and research
center.
Additional
information regarding these acquisitions and investments is provided in Note 2 to the Consolidated Financial Statements.
During
the second quarter of 2006, the Company entered into an alliance agreement
with
MeadWestvaco whereby Hercules will serve as the sole distributor for certain
rosin-based sizing products currently produced by both parties and MeadWestvaco
will assume all manufacturing of the underlying products upon the completion
of
related expansion projects at its existing facilities.
Sale
of Interest in FiberVisions
On
March
31, 2006, the Company sold a 51% interest in FiberVisions for $27.0 million
excluding transaction costs and post-closing adjustments. As a result of certain
performance-based measures included in the transaction agreement, the Company
was required to make contributions in the amount of $4.5 million to FiberVisions
subsequent to the sale and, based on current projections, an additional
contribution of $1.2 million is expected to be required during 2007. In summary,
the Company recognized a loss of $13.3 million on the sale of the investment
during 2006. An impairment charge of $52.9 million attributable to FiberVisions’
goodwill asset was recorded during 2005 in connection with the initial
commitment to dispose of a portion of the business. Additional information
regarding the transaction is included in Note 3 to the
Consolidated Financial Statements.
Restructuring
Actions
As
the
Company has undergone substantial transformation in its business focus during
the past several years, there have been a number of distinct restructuring
actions taken to reposition its physical and human resources in support of
those
initiatives. In addition, the Company consistently reviews its underlying cost
structure from a competitive standpoint and has taken actions to increase the
efficiency and cost-effectiveness of its operations and support infrastructure.
These actions have collectively resulted in plans to close facilities and
dispose of assets; relocate and centralize administrative, research and other
business functions; reduce employee headcount and contract for the provision
of
certain support services with third-party providers. A number of actions
commenced in 2006 and prior years impacted 2006 as the underlying programs
were
designed to be implemented over a number of years. The following summarizes
those activities:
· |
Research
and development consolidation -The Company completed the consolidation
of
its research and development activities from its Jacksonville, Florida
facility to its Wilmington, Delaware research center (“WRC”). Costs
incurred during 2006 that were attributable to this program included
$2.6
million in severance and termination benefits, other exit costs of
$1.2
million and accelerated depreciation of $1.2 million. In 2005, the
Company
consolidated its Barneveld research activities into WRC and a European
regional center.
|
· |
PTV
manufacturing rationalization and alliance - The Company closed its
Pendlebury manufacturing facility in the United Kingdom. As a result,
charges incurred during 2006 with respect to this program included
$2.1
million of accelerated depreciation, $0.4 million in severance and
termination benefits and $0.8 million in other exit costs. PTV entered
into an alliance agreement whereby the manufacture of the underlying
products is being phased to MeadWestvaco. As a result certain production
lines at the Company’s manufacturing facilities in Savannah, Georgia,
Hattiesburg, Mississippi and Portland, Oregon will be closed. During
2006,
the Company incurred $0.5 million in severance and termination benefits,
$0.2 million of other exit costs and $0.6 million of accelerated
depreciation in connection with this program. Additional charges
are
expected to continue into 2007 during the manufacturing phase-out
period.
|
· |
Business
segment realignment - In connection with the realignment of its business
segments, the Company incurred $9.8 million of severance and termination
benefits and $0.4 million of other exit costs, primarily to further
de-layer management and streamline organizational
structures.
|
· |
Business
Infrastructure Projects - These projects were developed primarily
as a
result of efforts to reduce stranded corporate costs resulting from
the
FiberVisions transaction discussed above. The goal of the projects
is to
realign the Company’s support organization through both reorganization and
selected outsourcing and offshoring service arrangements such that
a
substantial proportion of the underlying costs become more variable
in
nature, providing the Company with greater flexibility to scale the
level
of support services required in response to changing business demands,
as
well as to access larger service organizations that can provide a
greater
depth and breadth of services. The Company realized approximately
$10
million in annual savings due to the reorganization in 2006 and
anticipates approximately $7 million in annual cost reductions to
be
achieved by the end of 2007 as a result of the outsourcing and offshoring
projects.
|
In
connection with the Business Infrastructure Projects, the Company plans to
eliminate a number of positions worldwide. Accordingly, the Company has
estimated it will provide approximately $14 million in severance and termination
benefits as well as completion bonuses contingent upon the successful transition
of job functions and responsibilities to the outsource and offshore service
providers. A total of $2.9 million of severance and termination benefits has
been incurred through December 31, 2006. While the majority of actions and
charges will take place during 2007 and 2008, certain actions and cash flows
will continue into 2009.
A
more
thorough discussion and complete summary of these restructuring programs is
provided in Note 19 to the Consolidated Financial Statements.
Resolution
of Income Tax Matters
During
the fourth quarter of 2006, the Company settled substantially all issues related
to Internal Revenue Service (“IRS”) audits for the years 1993 through 2003
resulting in the recognition of a $90.7 million tax benefit and the reversal
of
$48.7 million of tax reserves related to the divestiture of the former water
treatment business which was previously classified as a discontinued operation.
In addition, a tax benefit of $102.7 million was recorded for the expected
utilization of existing capital loss carryforwards.
Retirement
of High-Cost Debt
In
April
2006, the Company completed a Tender Offer for its 11.125% senior notes due
2007
(the “Notes”) whereby the Company repurchased $102.9 million (book value) of the
Notes for a total cash payment of $116.4 million including $4.5 million of
accrued interest. Prior to the Tender Offer transaction, the Company had
repurchased in the first quarter of 2006, $11.0 million (book value) of the
Notes. The retirement of substantially all of the Notes along with principal
payment on other debt issues, partially offset by debt issued by Hercules Tianpu
for its expansion, resulted in the Company decreasing its total debt outstanding
to a level below $1.0 billion at December 31, 2006.
Vertac
Litigation
In
July
2006, a panel of the U.S. Court of Appeals for the Eighth Circuit affirmed
the
Final Judgment of the District Court in connection with the lawsuit captioned
United
States of America v. Vertac Chemical Corporation, et al.
(the
“Vertac litigation”). The Company’s request for an en
banc
review
of the panel’s determination was denied in September, 2006. In December 2006,
the Company filed a petition for writ of certiorari, requesting review by the
U.S. Supreme Court. In connection with the affirmation of the Final Judgment
in
July 2006, the Company recorded an additional charge of $106.0
million over amounts previously accrued related to the Vertac litigation. As
of
December 31, 2006, the Company has an accrued liability of $123.5 million,
including interest. For a more thorough discussion of the Vertac litigation,
see
Note 13 to the Consolidated Financial
Statements.
Adoption
of SFAS 158
The
Company adopted SFAS 158 effective December 31, 2006 which requires the
recognition of the funded status of its defined benefit pension and other
postretirement benefit plans in the Consolidated Balance Sheet. The funded
status represents the difference between the fair value of the plans’ assets and
the projected benefit obligation for pension plans and accumulated
postretirement benefit obligation for other postretirement plans. As a result of
the adoption of SFAS 158, the Company increased its pension and postretirement
benefit obligations by $139.8 million, decreased prepaid benefits costs by
$48.9
million, recorded deferred tax assets of $62.2 million and recorded an after-tax
charge of $126.5 million to Accumulated other comprehensive losses included
in
Stockholders’ equity. For a more thorough discussion regarding the adoption of
SFAS 158, see Notes 10 and 24 to the
Consolidated Financial Statements.
Adoption
of SFAS 123R
Effective
January 1, 2006, the Company adopted SFAS 123R using the “modified prospective”
method in which compensation cost is recognized for all awards granted to
employees during 2006 as well as those awards granted prior to 2006 that remain
unvested on the effective date. Upon the adoption of SFAS 123R, the Company
recorded a $0.9 million benefit, net of income taxes, as a cumulative effect
of
a change in accounting principle to reflect the required change in accounting
policy for the recognition of forfeitures. See Notes 14 and
24 to the Consolidated Financial Statements
for additional
disclosures.
The
Company’s Summary of Significant Accounting Policies is provided in Item 8. 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 of America. 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 impairments of goodwill, intangible and other long-lived
assets, income taxes, contingencies, including those related to litigation,
environmental issues, asset retirement obligations and asbestos lawsuits and
claims, pension and other benefit obligations and stock-based compensation.
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.
Goodwill
and Other Intangible Assets
The
Company performs an annual assessment of its goodwill and 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 units’ book values 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.
Income
valuation methodologies are based on estimates of future cash flows discounted
using a credit-adjusted risk-free rate of return (“discount rate”) that
essentially represents the Company’s cost of capital. The estimate of future
cash flows inherently involves significant management judgment as it represents
a forecast of future events. In addition, the discount rate is also subject
to
change from year-to-year based on the relative balance of debt and equity,
actual rates of interest on outstanding debt and the Company’s stock price. Any
change in the discount rate could have a significant impact on the discounted
cash flows underlying the Company’s valuations.
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. In some cases, the underlying assessment is subjective
in nature and represents a significant degree of judgment.
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 had been established, an adjustment to the
deferred tax asset will be reflected in income in the period such determination
is made.
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 loss for
environmental-related litigation and other contingencies when it is probable
that a liability has been incurred and the amount of the loss is reasonably
estimable. 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
the discount rates used to determine the fair value of obligations, 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. Each factor
is considered sensitive to variation which could impact estimates of the timing
and amount of cash flows.
Asbestos-Related
Contingencies
Hercules
has established reserves for asbestos-related personal injury lawsuits and
claims based upon the results of an annual 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. While the
expert noted above has applied his methodology in determining the Company’s
reasonably possible range of exposures for these liabilities on a consistent
basis, other methods in practice exist which place a differing degree of
emphasis on the underlying variables used to measure asbestos-related
contingencies. Such other methods could yield significantly different ranges
of
reasonably possible exposures.
Pension
and Other Postretirement Benefits
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 and other postretirement benefits expense
and recorded liabilities.
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
$195 million on the U.S. defined benefit plan’s projected benefit obligation. A
100-basis point decrease or increase in the assumed rate of return has an
unfavorable or favorable impact of approximately $13 million on the estimated
expense for the U.S. pension and postretirement plans in 2007 (see Note 10
to the Consolidated Financial Statements).
Stock-Based
Compensation
The
Company uses the Black-Scholes option pricing model to determine the fair value
of stock options issued as compensation. The model determines a fair value
based
on a number of key variables including the grant date price of Hercules common
stock and the related exercise or strike price, estimated dividend yield,
estimated term of the option prior to exercise, risk free rate of interest
over
the estimated term and a measure of the volatility of Hercules common stock
over
the estimated term. Certain of these variables encompass a degree of
subjectivity whose variability could result in significantly different values
for the grant date fair value of stock option awards. In addition, the charge
for compensation cost associated with stock options as well as restricted stock
is based upon the number of awards that are expected to vest. This measure
implicitly includes an estimate for forfeitures based on employee turnover,
reductions in force and other factors specific to the award recipient
population. Accordingly, the Company has developed an estimate for forfeitures
based on recent historical experience rates that incorporate the different
forfeiture and exercise patterns of officers and all other
employees.
Net
sales
for the years ended December 31, 2006, 2005 and 2004 were as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Net
sales
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
$
|
1,984.3
|
|
$
|
(19.7
|
)
|
$
|
70.7
|
|
Net
sales
for 2006 decreased approximately 1% from 2005 primarily as a result of the
Company’s disposition of a majority interest in FiberVisions on March 31, 2006.
FiberVisions’ sales during 2006 were $69.2 million whereas 2005 included a full
year in the amount of $282.7 million. Excluding the impact of FiberVisions,
net
sales for 2006 increased as a result of $183.3 million, or 24%, higher volume,
$47.8 million, or 3%, attributable to higher pricing and $8.1 million due to
favorable rates of exchange partially offset by $45.4 million, or 2%, lower
product mix. The increase in volume was attributable to a combination of
Aqualon’s guar and guar derivatives sales to the energy industry and MC sales
resulting from the consolidation of Hercules Tianpu as well as organic growth
from PTV and Aqualon’s other business units. In addition, the guar and guar
derivatives and MC acquisitions have significantly changed the product mix
profile of Aqualon when compared to the prior year period resulting in a
lower-priced product mix. Pricing increases have been implemented throughout
a
number of product lines for both PTV and Aqualon in order to recover raw
material, energy and transportation cost increases; however, pricing pressure
continued in the MC construction markets. While the Euro continued to strengthen
versus the U.S. Dollar during the latter part of 2006, the average was
essentially flat compared to 2005.
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 $16.9 million, or 1%, decrease in volume. There was also a slight decrease
of $2.8 million attributable to a broad change in product mix. PTV 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. Additional volume declines related to efforts to shed unprofitable
accounts for both FiberVisions and Aqualon.
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
|
|
2006
|
|
2005
|
|
%
Change
|
|
ROE
|
|
North
America
|
|
$
|
1,003.2
|
|
$
|
967.9
|
|
|
4
|
%
|
|
3
|
%
|
Europe
|
|
|
696.0
|
|
|
747.7
|
|
|
(7
|
)%
|
|
(6
|
)%
|
Asia
Pacific
|
|
|
227.4
|
|
|
233.7
|
|
|
(3
|
)%
|
|
(3
|
)%
|
Latin
America
|
|
|
108.7
|
|
|
105.7
|
|
|
3
|
%
|
|
(1
|
)%
|
All
regions
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
|
(1
|
)%
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2005
|
|
2004
|
|
%
Change
|
|
ROE
|
|
North
America
|
|
$
|
967.9
|
|
$
|
909.6
|
|
|
6
|
%
|
|
6
|
%
|
Europe
|
|
|
747.7
|
|
|
761.8
|
|
|
(2
|
)%
|
|
(4
|
)%
|
Asia
Pacific
|
|
|
233.7
|
|
|
214.4
|
|
|
9
|
%
|
|
7
|
%
|
Latin
America
|
|
|
105.7
|
|
|
98.5
|
|
|
7
|
%
|
|
(1
|
)%
|
All
regions
|
|
$
|
2,055.0
|
|
$
|
1,984.3
|
|
|
4
|
%
|
|
2
|
%
|
Excluding
the impact of FiberVisions, sales increased in all regions on an aggregate
basis
as compared to 2005. Sales in the Americas were particularly strong for both
PTV
and Aqualon. Within Europe, Aqualon sales continued a strong recovery from
the
prior year, particularly in the coatings and construction markets, while PTV
continued to experience softness due to excess capacity and regional market
fragmentation, continuing the trend that began during 2005. Emerging markets
in
China and Eastern Europe continued to provide strong growth opportunities for
both PTV and Aqualon while both segments experienced more modest growth in
developing markets in the Latin American and Asia Pacific regions.
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 limited the ability to
raise
prices to recapture a portion of incrementally higher costs. Despite slower
growth in the established economies, emerging markets were strong. On an annual
basis, Asia Pacific, including China, was up 9%, Eastern Europe was
up
14% and Brazil, for PTV in particular, was up 29%. Within Asia Pacific, China
was especially strong with sales up 23% across all segments.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Cost
of sales
|
|
$
|
1,343.4
|
|
$
|
1,391.1
|
|
$
|
1,291.6
|
|
$
|
(47.7
|
)
|
$
|
99.5
|
|
Cost
of
sales decreased $47.7 million, or 3%, during 2006 as compared to 2005 primarily
reflecting the absence of FiberVisions’ costs subsequent to March 31, 2006. As a
percent of sales, cost of sales decreased to 66% in 2006 as compared to 68%
in
2005, also reflecting the absence of FiberVisions, which experienced
significantly rising costs for polypropylene in the prior year period. Absent
the effect of FiberVisions, overall costs for raw materials and utilities were
higher during 2006 as compared to 2005. Price increases and surcharges have
recovered a substantial portion, but not all of the related cost increases.
In
addition, improved fixed cost absorption, primarily attributable to Aqualon
as
production remained at capacity for a number of high demand products, as well
as
lower freight partially offset the higher costs. On an aggregate basis, raw
material and energy costs increased $55.7 million over 2005 levels. While the
rate of increase in costs has moderated, the overall trend of increasing costs
has continued from the second half of 2005, when spikes occurred primarily
due
to the Gulf Coast hurricanes and the related impact on the raw material
suppliers and logistics infrastructure.
Cost
of
sales increased $99.5 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 rapid than those which have or could be recovered through
price increases and related surcharges. These increases included record highs
for certain raw materials, including polypropylene. On an aggregate basis,
raw
material costs increased $76.0 million over 2004 levels. A significant portion
of this increase was 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. 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 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.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Selling,
general and administrative expenses
|
|
$
|
372.2
|
|
$
|
382.5
|
|
$
|
382.1
|
|
$
|
(10.3
|
)
|
$
|
0.4
|
|
Selling,
general and administrative expenses (“SG&A”) decreased 3% during 2006 as
compared to 2005 reflecting the lower wage and employee expense base
attributable to lower overall headcount from current and prior period
restructuring actions. In addition, 2006 SG&A reflected lower professional
fees, including audit and tax consulting fees as well as legal fees resulting
from the completion and settlement attributable to PTV’s patent infringement
litigation. The sale of FiberVisions also contributed to the decrease. These
decreases were partially offset by higher postretirement benefits costs, higher
incentive compensation charges attributable to improved performance and a higher
number of awards outstanding, higher bad debt charges, higher average rates
of
exchange and indirect costs attributable to supporting growth in the Asia
Pacific region including the new joint venture, Hercules Tianpu. As a percent
of
sales, SG&A costs were reduced to 18% in 2006 as compared to 19% during
2005. During the first quarter of 2007, the Company expects to accelerate the
amortization for certain 2004 restricted stock awards based on the anticipated
achievement of certain share-price benchmarks resulting in an incremental charge
of approximately $3 million.
Despite
inflation, increased rates of exchange and rising employee benefits costs,
restructuring and cost rationalization efforts during 2005 and prior years
allowed the Company to maintain 2005 SG&A costs at levels comparable with
2004. In addition to lower personnel-related costs, including travel and
entertainment, SG&A costs in 2005 reflected 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 PTV’s patent infringement litigation. As a percent of
sales, SG&A costs were essentially flat at 19% when comparing 2005 to
2004.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Research
and development
|
|
$
|
38.8
|
|
$
|
40.8
|
|
$
|
42.7
|
|
$
|
(2.0
|
)
|
$
|
(1.9
|
)
|
Research
and development charges decreased 5% and 4% during 2006 and 2005, respectively,
primarily as a result of the FiberVisions transaction and the aforementioned
consolidation efforts in 2006 as well as the impact of cost containment efforts
particularly with respect to Corporate research. Research and development
expenses remained relatively stable at 2% as a percentage of sales for all
three
periods.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Intangible
asset amortization
|
|
$
|
7.2
|
|
$
|
8.0
|
|
$
|
8.1
|
|
$
|
(0.8
|
)
|
$
|
(0.1
|
)
|
Intangible
asset amortization decreased during 2006 primarily as a result of the absence
of
amortization for FiberVisions’ intangible assets partially offset by increases
in amortization attributable to intangible assets recognized with the Benchmark
acquisition and consolidation of Hercules Tianpu. Amortization is expected
to be
$7.1 million for 2007, $6.8 million for 2008, $5.5 million for 2009, $5.3
million for 2010 and $4.4 million for 2011 as various amortization terms
expire.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Impairment
of FiberVisions goodwill
|
|
$
|
—
|
|
$
|
52.9
|
|
$
|
—
|
|
$
|
(52.9
|
)
|
$
|
52.9
|
|
In
connection with the initial commitment to sell a majority interest in
FiberVisions, the Company was required to test the underlying goodwill asset
recorded in that segment 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 sale of
a
majority interest.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Other
operating expense, net
|
|
$
|
25.1
|
|
$
|
39.4
|
|
$
|
26.9
|
|
$
|
(14.3
|
)
|
$
|
12.5
|
|
Other
operating expense, net for 2006 reflects $21.1 million in severance benefits
and
other exit costs resulting from the scheduled termination of approximately
300
employees, accelerated depreciation and amortization of $5.1 million as well
as
$3.2 million of asset impairment charges primarily attributable to the Company’s
continued execution on several restructuring and rationalization programs that
began during 2005 and new programs that were initiated during 2006 (see Note 19 to the Consolidated Financial Statements). The 2006
programs include the Business Infrastructure Projects, a substantial effort
to
de-layer and reposition management in connection with the segment realignment
as
well as PTV’s initiation of an alliance agreement for the manufacturing and
marketing of certain rosin-based sizing products. A number of these actions
result in severance and termination benefits being accrued over periods during
which the affected employees are required to provide continuing services. Also
included in 2006 is a charge related to the settlement of a product liability
claim for $1.3 million, net of recoveries from insurance, site dismantlement
costs of $1.6 million primarily attributable to the Wilmington Research Center
revitalization project, $0.8 million of environmental charges including asset
retirement obligation accretion and $1.5 million of other miscellaneous
operating costs. These costs were partially offset by gains of $6.2 million
primarily related to the disposition of excess land at operating facilities
in
Parlin, New Jersey, Tarragona, Spain and Alizay, France and a $3.3 million
legal
settlement, net of related costs, attributable to a favorable judgment in the
Company’s price fixing suit against certain raw materials suppliers.
During
2005, the Company executed a number of restructuring and rationalization
programs and recorded total charges of $37.3 million, including severance and
other exit costs of $31.8 million that resulted in headcount reduction of
approximately 490 employees; asset impairments of $0.5 million; accelerated
depreciation charges of $3.5 million; and inventory and spare parts write-downs
of $1.5 million. Other charges for 2005 include $0.7 million related to legal
settlements, $0.2 million of accretion expense attributable to asset retirement
obligations for active operating sites, losses on asset dispositions of $0.1
million and $1.1 million for all other miscellaneous charges.
During
2004, the Company incurred $9.6 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. 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 $1.0 million attributable to losses on the disposition of
operating assets, $0.4 million of accretion expense attributable to asset
retirement obligations and other remediation charges for active operating sites
and $0.5 million for all other miscellaneous charges.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Interest
and debt expense
|
|
$
|
71.2
|
|
$
|
89.4
|
|
$
|
108.7
|
|
$
|
(18.2
|
)
|
$
|
(19.3
|
)
|
Interest
and debt expense for 2006 decreased $18.2 million, or 20%, from 2005 as a result
of lower outstanding debt balances, primarily reflecting the Company’s
repurchase of $113.9 million of its 11.125% notes including a $102.9 million
repurchase in April 2006 associated with a tender offer. The resulting impact
was a combined reduction of $15.8 million in interest and amortization of
issuance costs. Also contributing to the reduction was an offset to interest
expense of $7.1 million attributed to the cross-currency interest rate swaps,
$1.0 million attributable to lower outstanding balances on the 6.5% junior
subordinated deferrable interest debentures, $0.8 million attributable to the
absence of FiberVisions debt and $0.3 million of lower credit facility fees.
These decreases were partially offset by increasing LIBOR-based interest rates
on the Company’s Term B loan resulting in $6.4 million higher interest expense
and $0.4 million related to borrowings utilized to finance Hercules Tianpu’s MC
capacity expansion project in China. The three-month LIBOR rate has increased
by
279 basis points since the beginning of 2005 and 82 basis points during
2006.
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 (principal) 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. 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.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Vertac
litigation charges
|
|
$
|
108.5
|
|
$
|
15.0
|
|
$
|
—
|
|
$
|
93.5
|
|
$
|
15.0
|
|
As
a
result of a ruling in the Vertac litigation, the Company recorded a $106.0
million incremental charge, including interest in the second quarter of 2006,
to
increase the accrual initially provided during 2005. Interest continues to
accrue on the judgment while the Company seeks review by the United States
Supreme Court (see Note 13 to the Consolidated Financial
Statements).
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Gain
on sale of CP Kelco ApS
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(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 $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.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Other
expense, net
|
|
$
|
65.7
|
|
$
|
71.3
|
|
$
|
116.7
|
|
$
|
(5.6
|
)
|
$
|
(45.4
|
)
|
During
2006, the Company incurred charges of $29.0 million with respect to its
asbestos-related liabilities including $20.0 million to reestablish the reserve
to the appropriate level as determined by the independent reserve study and
$9.9
million for asbestos-related legal expenses partially offset by $0.9 million
of
accretion income from the asbestos-insurance trusts (see Note 13
to the Consolidated Financial Statements). On March 31,
2006, the Company
sold a majority interest in FiberVisions for $27.0 million and realized a loss
of $13.3 million. The loss reflects transaction costs, income tax
indemnifications, the assumption of certain obligations and other post-closing
adjustments including $5.7 million of additional contributions attributable
to
post-closing performance (see Note 3 to the Consolidated
Financial Statements).
Other
expenses, net for 2006 also includes $11.4 million of premiums and debt issuance
cost write-offs primarily attributable to the repurchase of the 11.125% notes,
$9.2 million for legal expenses and settlements attributable to previously
divested businesses and $6.5 million of environmental-related expenses including
$0.6 million related to asset retirement obligation accretion and revisions
for
former operating sites, $3.9 million for exposures at sites for which former
businesses were identified as a potentially responsible party and $2.0 million
of continuing demolition and remediation at other former operating sites.
Partially offsetting these charges are certain cost recoveries related to
previously divested businesses, the realization of currency translation
adjustments attributable to the liquidation of certain inactive legal entities,
interest and other miscellaneous income. The combined amount of these offsetting
items was $2.3 million. The Company also realized a gain of $1.4 million on
the
sale of its former operating facility in Addison, Illinois.
During
2005, the Company recorded a charge of $37.5 million to reestablish and increase
its asbestos-related reserves based on the annual reserve study. 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. The Company also incurred $7.3 million in environmental charges
attributable to non-operating sites or related activities associated with
previously divested businesses. Of the total, $3.4 million was attributable
to
revisions in the asset retirement obligations for two sites as a result of
changes in the timing of projected net cash flows, $1.7 million related to
accretion expense attributable to asset retirement obligations and $2.2 million
was for other environmental-related charges. Other expenses, net for 2005 also
included charges of $18.9 million for the settlement of several cases relating
to previously divested businesses, the most significant of which related to
the
former Composite Products division as well as premiums of $14.3 million for
repurchases of the Company’s 11.125% notes and $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 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 related 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.
During
2004, the Company reached settlements with a number of its insurers regarding
asbestos-related claims. The effect of those settlements as well as the annual
adjustment to the asbestos reserves resulted in a net charge of $31.2 million.
Other asbestos-related charges reflected litigation costs and settlements of
$17.9 million partially offset by $0.3 million of accretion income from the
asbestos-insurance trusts established as a result of the settlements. Other
expenses, net for 2004 also included legal settlements of $19.2 million
primarily due to the settlement of certain litigation related to the former
Composite Products division as well as other litigation attributable to
previously divested businesses and activities, $14.1 million of debt issuance
costs associated with its April 2004 debt refinancing, premiums of $30.2 million
and $4.0 million of debt issuance costs write-offs associated with the
repurchase of 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
2004, the Company also incurred $7.6 million in environmental charges
attributable to non-operating sites or related activities associated with
previously divested businesses including $1.6 million of accretion expense,
$4.2
million attributable to revisions in asset retirement obligations and $0.9
million for all other environmental-related charges including demolition work
at
various former operating sites. The Company also recorded an asset impairment
charge of $1.9 million for the former Langhorne, Pennsylvania site in connection
with its reclassification as an asset held for sale. All other miscellaneous
expense and income items aggregated to net other income of $0.9
million.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
(Benefit)
provision for income taxes
|
|
$
|
(192.2
|
)
|
$
|
(3.8
|
)
|
$
|
3.8
|
|
$
|
(188.4
|
)
|
$
|
(7.6
|
)
|
The
effective tax benefit rate for 2006 was not meaningful when compared to income
before income taxes as it was primarily impacted by the resolution of
substantially all issues related to Federal tax audits for the years 1993
through 2003 and the utilization of capital loss carryforwards. The settlement
of IRS audits resulted in a reversal of $44.1 million of income tax reserves
as
well as $49.7 million of tax refunds and interest income. In addition, the
provision reflects a tax benefit of $102.7 million for the expected utilization
of existing capital loss carryforwards. The change in valuation allowance for
deferred tax assets reflects utilization of the aforementioned capital loss
carryforwards, the basis difference in the carrying value of the Company’s
investment in FiberVisions and the increase in state deferred tax
assets.
The
effective tax benefit rate for 2005 was 11%, 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
transaction to sell a majority interest in FiberVisions. 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 11% 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.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Minority
interests in earnings of consolidated
subsidiaries
|
|
$
|
(1.4
|
)
|
$
|
(1.0
|
)
|
$
|
(0.9
|
)
|
$
|
(0.4
|
)
|
$
|
(0.1
|
)
|
Minority
interests in earnings of consolidated subsidiaries during 2006 primarily reflect
the impact of the consolidation of Hercules Tianpu effective April 1, 2006
while
the prior year periods primarily reflect the impact of FiberVisions’ bicomponent
fibers marketing joint venture entities.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Equity
loss of affiliated companies, net of tax
|
|
$
|
(3.2
|
)
|
$
|
0.5
|
|
$
|
0.9
|
|
$
|
(3.7
|
)
|
$
|
(0.4
|
)
|
The
equity loss for 2006 primarily includes a loss of $3.4 million attributable
to
the Company’s 49% interest in FiberVisions reflecting continued raw material
pricing challenges, partially offset by income from certain other relatively
insignificant equity investments. These equity investments generated earnings
during 2005 and 2004.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Net
income (loss) from discontinued operations, net of
tax
|
|
$
|
47.0
|
|
$
|
(6.5
|
)
|
$
|
(2.6
|
)
|
$
|
53.5
|
|
$
|
(3.9
|
)
|
Net
income from discontinued operations for 2006 includes $48.7 million attributable
to the reversal of various income tax reserves with respect to the completion
and settlement of IRS audits for 2002 and 2003. These reserves were established
in connection with the Betz Dearborn water treatment business disposition which
was classified as a discontinued operation effective 2001. In addition,
discontinued operations reflect the results of operations from the Company’s
terpenes specialties business. Net sales included therein are $2.5 million,
$13.7 million and $12.4 million for 2006, 2005 and 2004, respectively. The
terpenes specialties business generated operating losses of $2.6 million, $9.9
million and $4.0 million for 2006, 2005 and 2004, respectively and includes
restructuring charges and other exit costs as well as asset impairment charges
of $1.6 million and $8.1 million for 2006 and 2005, respectively.
|
|
2006
|
|
2005
|
|
2004
|
|
2006
Change
|
|
2005
Change
|
|
Cumulative
effect of changes in accounting principle, net of
tax
|
|
$
|
0.9
|
|
$
|
(2.5
|
)
|
$
|
—
|
|
$
|
3.4
|
|
$
|
(2.5
|
)
|
As
a
result of the adoption of SFAS 123R effective January 1, 2006, the Company
recorded a $0.9 million benefit, net of income taxes, as a cumulative effect
of
a change in accounting principle (see Notes 14 and 24 to the Consolidated Financial Statements).
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 12 and 24 to the Consolidated Financial Statements).
The
tables below reflect Net sales and Profit from operations for the comparative
periods 2006 vs. 2005 and 2005 vs. 2004, respectively. Substantially all
reconciling items have been allocated to the segments.
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$
|
1,075.3
|
|
$
|
1,017.3
|
|
$
|
58.0
|
|
|
6
|
%
|
Aqualon
Group
|
|
|
890.8
|
|
|
755.0
|
|
|
135.8
|
|
|
18
|
%
|
FiberVisions
|
|
|
69.2
|
|
|
282.7
|
|
|
(213.5
|
)
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
$
|
(19.7
|
)
|
|
(1
|
)%
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$
|
80.8
|
|
$
|
61.4
|
|
$
|
19.4
|
|
|
32
|
%
|
Aqualon
Group
|
|
|
187.4
|
|
|
155.5
|
|
|
31.9
|
|
|
21
|
%
|
FiberVisions
|
|
|
0.5
|
|
|
(64.9
|
)
|
|
65.4
|
|
|
NM
|
|
Corporate
Items
|
|
|
(20.1
|
)
|
|
(11.7
|
)
|
|
(8.4
|
)
|
|
(72
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
248.6
|
|
$
|
140.3
|
|
$
|
108.3
|
|
|
77
|
%
|
|
|
2005
|
|
2004
|
|
Change
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$
|
1,017.3
|
|
$
|
978.5
|
|
$
|
38.8
|
|
|
4
|
%
|
Aqualon
Group
|
|
|
755.0
|
|
|
724.6
|
|
|
30.4
|
|
|
4
|
%
|
FiberVisions
|
|
|
282.7
|
|
|
281.2
|
|
|
1.5
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,055.0
|
|
$
|
1,984.3
|
|
$
|
70.7
|
|
|
4
|
%
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$
|
61.4
|
|
$
|
84.5
|
|
$
|
(23.1
|
)
|
|
(27
|
)%
|
Aqualon
Group
|
|
|
155.5
|
|
|
157.9
|
|
|
(2.4
|
)
|
|
(2
|
)%
|
FiberVisions
|
|
|
(64.9
|
)
|
|
(4.1
|
)
|
|
(60.8
|
)
|
|
NM
|
|
Corporate
Items
|
|
|
(11.7
|
)
|
|
(5.4
|
)
|
|
(6.3
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
140.3
|
|
$
|
232.9
|
|
$
|
(92.6
|
)
|
|
(40
|
)%
|
NM
= not
meaningful
The
tables below reflect Net sales percentage changes for the years ended December
31, 2006 and 2005 as compared to the same periods in 2005 and 2004,
respectively.
2006
|
|
Net
Sales Percentage Increase (Decrease) from 2005 Due
To:
|
|
|
|
Volume
|
|
Product
Mix
|
|
Price
|
|
Rates
of Exchange
|
|
Total
|
|
Paper
Technologies and Ventures
|
|
|
—
|
|
|
1
|
%
|
|
4
|
%
|
|
1
|
%
|
|
6
|
%
|
Aqualon
Group
|
|
|
24
|
%
|
|
(7
|
)%
|
|
1
|
%
|
|
—
|
|
|
18
|
%
|
FiberVisions
|
|
|
(76
|
)%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
(2
|
)%
|
|
(2
|
)%
|
|
3
|
%
|
|
—
|
|
|
(1
|
)%
|
2005
|
|
Net
Sales Percentage Increase (Decrease) from 2004 Due
To:
|
|
|
|
Volume
|
|
Product
Mix
|
|
Price
|
|
Rates
of Exchange
|
|
Total
|
|
Paper
Technologies and Ventures
|
|
|
1
|
%
|
|
(1
|
)%
|
|
1
|
%
|
|
3
|
%
|
|
4
|
%
|
Aqualon
Group
|
|
|
3
|
%
|
|
—
|
|
|
—
|
|
|
1
|
%
|
|
4
|
%
|
FiberVisions
|
|
|
(13
|
)%
|
|
—
|
|
|
13
|
%
|
|
1
|
%
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
(1
|
)%
|
|
—
|
|
|
3
|
%
|
|
2
|
%
|
|
4
|
%
|
Paper
Technologies and Ventures
The
following table reflects PTV’s sales revenues on a disaggregated
basis:
|
|
2006
|
|
2005
|
|
2004
|
|
Paper
Technologies
|
|
$
|
851.0
|
|
$
|
810.7
|
|
$
|
779.0
|
|
Ventures
|
|
|
224.3
|
|
|
206.6
|
|
|
199.5
|
|
|
|
$
|
1,075.3
|
|
$
|
1,017.3
|
|
$
|
978.5
|
|
2006
compared to 2005
PTV’s
sales increased $58.0 million, or 6%, to $1,075.3 million during 2006 as
compared to $1,017.3 million during 2005. The increase was attributable to
4%
higher average prices, 1% improved product mix and 1% higher rates of exchange.
The impact of volume was relatively flat. Overall, improved performance in
the
Americas offset the continued challenging economic conditions in the Western
European paper market. Volume growth was achieved in the Americas and in Asia
offsetting declines in Europe. Increased pricing was achieved in all regions
with higher increases in the Americas and Asia, as opposed to Europe where
price
increases were more modest. In addition, revenues in emerging markets including
Brazil, China, the Middle East and Africa exceeded prior year levels. In the
aggregate, price increases of $37.9 million exceeded raw material cost increases
of $36.0 million, resulting in a recovery of 105% during 2006.
Paper
Technologies sales increased 5% during 2006 as compared to 2005. The increase
reflects higher volumes, increased pricing and favorable rates of exchange
partially offset by an unfavorable product mix. Higher volumes are primarily
attributable to the marketing and manufacturing alliance for rosin size products
partially offset by the continuing impact of customer bankruptcies and mill
closures, particularly in Southern Europe. Price increases have been achieved
in
all regions of the world with the largest increase attributable to the Americas.
The unfavorable product mix reflects higher sales of lower-priced functional
products in both North America and emerging Asia markets.
Venture
sales increased 9% during 2006 as compared to 2005. The increase reflects
improved product mix as well as higher pricing and favorable rates of exchange
partially offset by lower volume. The improved mix reflects higher sales of
water management, lubricants and adhesive products.
PTV’s
success with new product launches and increasing selling prices to reflect
value
in both the process and functional products families represents a continuing
trend as the segment has commercialized an expanding portfolio of new products
and applications, including many that are environmentally friendly and are
therefore more highly valued in certain regions. Most of these products provide
substantially higher margins. On an aggregated basis, revenues from new product
introductions during 2006 increased approximately 76% over 2005. Overall,
approximately 25% of PTV’s total revenues were derived from products that are
less than five years old.
Profit
from operations increased $19.4 million, or 32%, to $80.8 million during 2006
as
compared to $61.4 million for 2005. The increase reflects higher volume and
improved selling prices, which contributed to the recovery of higher raw
material, transportation and energy costs. In addition, PTV incurred lower
SG&A expenses primarily as a result of the significant restructuring actions
taken during the current and prior year. Additionally, legal fees associated
with patent defense costs were substantially lower than the prior year period
as
the patent infringement suit was settled during 2006. The disposal of excess
land at the Tarragona, Spain facility resulted in a realized gain of $2.9
million thereby contributing to the decrease in other operating costs. These
decreases were partially offset by higher corporate support costs, primarily
related to incentive compensation, as well as bad debt accruals.
Primarily
as a result of the rapid escalation in costs experienced in the second half
of
2005 and continuing into 2006, overall costs for raw materials, transportation
and energy for 2006 increased $36.8 million over 2005 levels. In addition to
energy-related price pressure, supply for certain raw materials in certain
regions remains constrained. In particular, crude tall oil rosin prices remain
at high levels due to high demand and limited supply, particularly in Europe.
Increased demand for gum rosin in the Asia Pacific region, particularly due
to
domestic consumption in China and certain weather events, resulted in higher
costs during 2006. Additionally, pricing for adipic acid and epichlorohydrin
continues to be stable at relatively high levels and prices for methanol have
increased sharply due to outages and supplier force majeure
actions.
With
respect to restructuring actions, PTV recorded charges of $10.5 million during
2006 for severance benefits and other exit costs primarily attributable to
continuing efforts to de-layer management and streamline the sales and marketing
organization in connection with the segment realignment as well as the
manufacturing rationalization attributable to PTV’s rosin-sizing product
alliance transaction. These costs also include charges attributable to the
closing of the research facility in Jacksonville, Florida and its related
relocation to Wilmington, Delaware. PTV results reflect $3.1 million of
accelerated depreciation charges of which $2.1 million is attributable to the
closure of the Pendlebury, United Kingdom manufacturing facility during the
three months ended March 31, 2006. The remaining $1.0 million is related to
the
closing of the Jacksonville facility and the shut-down of certain production
lines at manufacturing facilities in connection with the aforementioned
alliance.
2005
compared to 2004
PTV’s
sales increased $38.8 million, or 4%, to $1,017.3 million in 2005 as compared
to
$978.5 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. 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 products. The Americas paper and paperboard markets experienced
relatively stable conditions during 2005. European conditions proved somewhat
challenging particularly in the established western economies and were impacted
by regional events including a countrywide lockout by paper producers in
Finland, which shut down production for nearly two months during 2005.
Competitive conditions due to slow demand in Europe as well as capacity
additions in all market sectors of Asia Pacific challenged the ability to
increase prices for various products including wet-strength and rosin-based
products despite raw material cost increases.
Offsetting
these challenges, PTV experienced 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, a 97% increase as compared to 2004.
Overall, PTV derived approximately 25% of its total revenues from products
that
are less than 5 years old during 2005.
On
a
disaggregated basis, Paper Technologies sales increased 4% during 2005 as
compared to 2004 while Venture sales increased 3% during the same period. Paper
Technologies sales reflect the aggregate trends for PTV including organic growth
across the broad product spectrum in emerging markets, with general stability
in
North America while Western Europe remained challenging. Venture sales increased
primarily as a result of an expansion of a water treatment chemical supply
agreement as well as growth in the sales of adhesives products, partially offset
by declines in lubricants products including pentaerythritol.
Profit
from operations for PTV decreased $23.1 million, or 27%, to $61.4 million in
2005 as compared to $84.5 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 hurricanes in the United States’ Gulf Coast.
Despite corresponding pricing increases where applicable and where the
competitive environment allowed for such actions, PTV was only able to recover
approximately 57% of the cost increases for these categories. The escalation
of
certain costs was not able to be recaptured through price increases as rapidly
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 hurricanes. Supply for certain
materials was constrained due to infrastructure damage in the Gulf coast region.
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 were also adversely impacted by growing global demand particularly in
China. On an aggregate basis, raw material costs increased approximately $22
million, or 5%, over 2004 levels.
The
adverse impact of the storms was estimated at approximately $5.3 million
including $3.7 million attributable to raw materials. The impact of the paper
producer action in Finland was estimated at approximately $1.3 million in lost
profitability as PTV was unable to recover all of the lost volume in the periods
subsequent to the resolution.
In
addition to these issues, PTV recorded $20.6 million of charges related to
several broad restructuring programs. Of the total, $4.9 million was
attributable to the actions to consolidate the research and development
functions into centralized locations, $3.0 million related 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. PTV
also
experienced higher legal defense costs during 2005 primarily as a result of
patent infringement litigation. The reduction of SG&A costs, resulting from
current and prior year restructuring activities and work process improvements,
partially offset these issues.
Aqualon
Group
The
following table reflects Aqualon’s sales revenues on a disaggregated basis:
|
|
2006
|
|
2005
|
|
2004
|
|
Coatings
and Construction
|
|
$
|
398.3
|
|
$
|
356.4
|
|
$
|
346.8
|
|
Regulated
|
|
|
188.2
|
|
|
174.1
|
|
|
157.7
|
|
Energy
and Specialties
|
|
|
304.3
|
|
|
224.5
|
|
|
220.1
|
|
|
|
$
|
890.8
|
|
$
|
755.0
|
|
$
|
724.6
|
|
2006
compared to 2005
Aqualon’s
sales increased $135.8 million, or 18%, to $890.8 million during 2006 as
compared to $755.0 million during 2005. The increase is attributable to 24%
higher volume and 1% higher average prices partially offset by 7% unfavorable
product mix. Approximately 42% of the total increase was attributable to
Aqualon’s acquisition of the guar and guar derivatives business from Benchmark
and the consolidation of Hercules Tianpu. Aqualon experienced increased sales
in
all of its business lines.
Coatings
and Construction sales increased 12% during 2006 as compared to 2005 primarily
due to higher volume and favorable rates of exchange, partially offset by
unfavorable product mix and lower pricing. Sales were strong in most regions,
including Europe, which recovered from the general softness experienced during
2005. Sales of Coatings products into the Middle East and Asia were especially
strong during the 2006 while North American growth was lower. Sales of
Construction products continue to be strong in Eastern European and other
emerging markets. Pricing for Coatings products was up slightly during 2006,
while pricing for Construction products was lower as a result of continued
pricing challenges in the MC construction products markets. However, trends
in
construction pricing began to turn positive heading into 2007.
Regulated
industry sales increased 8% during 2006 as compared to 2005 primarily due to
improved product mix, higher average prices, favorable rates of exchange and
slightly higher volume. The improved mix reflects a greater concentration of
higher-priced products sold into the food and pharmaceutical markets. Price
increases were achieved in food and pharmaceutical products, whereas personal
care was lower. Volume increased in many end-markets and regions, including
China, reflecting higher pharmaceutical and personal care product
sales.
Energy
and Specialties sales increased 36% during 2006 as compared to 2005. The
increase was due to higher volume and improved product mix, higher average
prices and favorable rates of exchange. The acquisition of the guar and guar
derivatives business accounted for over half of the total sales increase. Demand
in the natural gas and oil services sector continued to be strong and price
increases were achieved in oilfield and many specialty product
families.
Aqualon
continued to introduce new products into the market and expects this trend
to
continue and improve further in 2007. Key among those expected to have an impact
are products specifically designed for tinted paint products and guar-based
products including cationic guar for personal care and fast-hydrating,
high-viscosity guar for oilfield and other applications. Aqualon is currently
in
the process of introducing Aquarius ™ coating systems, a new family of dry,
fully-formulated film coatings with application in pharmaceutical and
nutritional supplement products. Sales from new products and applications,
less
than five years old, increased to 18% of total sales in 2006 from 15% in
2005.
Profit
from operations for Aqualon increased $31.9 million, or 21%, to $187.4 million
during 2006 as compared to $155.5 million during 2005. The increase is primarily
attributable to the higher volume and prices and the associated contribution
margin partially offset by higher raw material and energy costs. Raw material
and energy costs increased $17.2 million as compared to 2005, reflecting the
increase in costs during the latter half of 2005 that continued into 2006.
Of
the total, $14.5 million was attributable directly to raw materials.
Specifically, raw materials including ethylene oxide, guar splits, methyl
chloride, propylene oxide, caustic, gum rosin and limonene all experienced
significant increases from the prior year. The remainder is attributable to
energy costs of which the majority was related to higher energy prices in Europe
as a result of the expiration of a long-term fixed price contract. Pricing
increases have been able to capture approximately 69% of these costs. However,
downward pricing pressure continued in the MC construction product lines
throughout most of 2006. SG&A costs were higher compared to the prior year,
primarily reflecting increased sales and marketing, business management,
incentive compensation and technology costs incurred to support growth
initiatives as well as the impact of the consolidation of Hercules Tianpu.
Profit from operations during 2006 also reflects realized gains of $3.6 million
attributable to the sale of excess land at the Parlin, New Jersey and Alizay,
France facilities.
Aqualon
incurred $3.7 million of restructuring charges, including severance, during
2006
that were attributable to headcount reductions designed to further delayer
the
management and sales and marketing organizations consistent with the segment
realignment. In addition, contract termination costs of $0.4 million were
incurred in connection with restructuring global distribution
networks.
2005
compared to 2004
Aqualon’s
sales increased $30.4 million, or 4%, to $755.0 million during 2005 as compared
to $724.6 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 to recover increasing raw materials, energy and transportation costs.
Additional price increases were announced late in the year in response to
dramatic increases in the cost of certain raw materials. 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.
Coatings
and construction sales increased 3% during 2005 as compared to 2004 primarily
due to 4% higher volume. Construction volume increased 9% with increases
obtained in all regions of the world. Emerging markets in Asia and the Middle
East were particularly strong. Coatings volume decreased 2% during 2005 as
compared to 2004 reflecting lower demand in European markets and modest
increases in North America.
Regulated
industry sales increased 10% during 2005 as compared to 2004 primarily due
to
14% higher volume. Food product sales increased 20% resulting from significantly
higher volume attributable to the Jiangmen acquisition and strong growth in
China. The North American markets also experienced strong sales growth. Sales
of
personal care products increased 2% reflecting growth in emerging markets offset
by lower growth in Europe. Sales of products in pharmaceutical markets increased
14% with increased volume of 5%. All regions had increased sales with strong
growth in emerging markets of China and the Middle East.
Energy
and Specialties sales increased 2% during 2005 as compared to 2004. Sales into
energy markets increased 14% with higher volume of 7% and improved product
mix
and pricing. Sales in the Middle East were particularly strong. Specialty
product sales were comparable to 2004 primarily reflecting lower volume of
Pinova specialty products in North America.
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 $2.4 million, or 2%, to $155.5 million
during 2005 as compared to $157.9 million during 2004. Similar to PTV, 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, 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 items, Aqualon recorded $3.3 million of charges related to
a
broad range of restructuring programs. 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, $1.2 million relates to actions
at the Brunswick, Georgia facility and certain distribution contract termination
costs, while the remaining $1.8 million is attributable to severance charges
associated with a global marketing realignment. Asset impairment charges of
$0.5
million were recorded during 2005 with respect to the termination of production
of certain Pinova products at the Hattiesburg, Mississippi
facility.
FiberVisions
2006
compared to 2005
FiberVisions’
results of operations for the three months ended March 31, 2006 are included
in
the Company’s consolidated results of operations. During that period,
FiberVisions had sales of $69.2 million and Profit from operations of $0.5
million. The prior year’s sales and loss from operations were $282.7 million and
$64.9 million, respectively, which reflect a full year of operations. Effective
April 1, 2006, FiberVisions’ results of operations are reported within the
caption Equity (loss) income of affiliated companies, net of tax. During the
nine months ended December 31, 2006, the Company recognized $3.4 million of
equity losses attributable to its 49% equity interest.
2005
compared to 2004
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 $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 $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.
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 in 2006. Also included is $4.9 million of 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.
Corporate
Items
The
Company allocates substantially all of its corporate support costs to the
business segments. These costs include those related to cash management,
treasury, legal, accounting and audit, tax, safety, information technology
and
other corporate services. Allocations are based on either a direct cost
pass-through for items directly identified as related to segment activities;
a
percentage allocation for such services provided based on factors such as
headcount, sales, net assets or cost of sales; or a relative weighting of
geographic activity. Based on their unique nature, certain charges and credits
have not been allocated to the business segments and remain as stand-alone
corporate items. The most significant of these items typically appear in Other
operating expense, net, although portions are also reflected in Cost of sales
and SG&A, respectively, depending upon the specific nature of the items.
The
following table reflects the components of those unallocated Corporate
items.
|
|
2006
|
|
2005
|
|
2004
|
|
Severance,
restructuring and other exit costs
|
|
$
|
6.5
|
|
$
|
7.5
|
|
$
|
—
|
|
Asset
charges (impairments and accelerated depreciation)
|
|
|
5.2
|
|
|
0.5
|
|
|
—
|
|
Legal
settlements
|
|
|
(3.1
|
)
|
|
0.1
|
|
|
—
|
|
Special
executive pension adjustment
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
Gains
on asset dispositions
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
Nitrocellulose
facility shutdown costs
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
Dismantlement
costs
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
Stranded
corporate costs
|
|
|
7.9
|
|
|
—
|
|
|
—
|
|
Other
miscellaneous charges, net
|
|
|
2.1
|
|
|
3.9
|
|
|
(2.7
|
)
|
Total
Corporate items
|
|
$
|
20.1
|
|
$
|
11.7
|
|
$
|
5.4
|
|
Severance,
restructuring and other exit costs for 2006 reflect charges related to the
Research and Development consolidation and Business Infrastructure Projects
and
includes severance charges attributable to the termination of approximately
220
employees, a substantial portion of which are required to continue to provide
services through predetermined transition periods. Also included are relocation
fees, restructuring and other exit costs associated with these programs. Total
asset charges of $5.2 million include accelerated depreciation on certain assets
at the Wilmington, Delaware Research Center and accelerated depreciation and
impairment of certain capitalized software costs in connection with the planned
upgrade of the Company’s primary information technology platform. Legal
settlements primarily reflect a favorable judgment in the Company’s price fixing
suit against certain raw materials suppliers. Dismantlement costs are primarily
attributable to the revitalization project at the Wilmington Research facility.
As a result of the FiberVisions transaction,
Corporate items include $7.9 million of general administrative costs that would
have otherwise been allocated to the FiberVisions reporting segment. As
discussed previously, the Business Infrastructure Project reflects the ongoing
efforts to eliminate these costs in 2007 and future years.
Severance,
restructuring and other exit costs for 2005 reflect charges related to the
Corporate Realignment and Research and Development consolidation restructuring
programs and include severance charges attributable to the termination of 50
employees. Also included are relocation costs attributable to the European
headquarters in Schaffhausen, Switzerland and accelerated depreciation charges
related to the Wilmington research facility. Corporate items for 2005 also
include professional fees incurred to resolve certain legacy business matters,
miscellaneous legal settlements and gains on asset dispositions, among a number
of other miscellaneous charges.
Corporate
items for 2004 resulted in a net expense of $5.4 million and included charges
of
$6.5 million related to the shutdown of the former Nitrocellulose facility
at
Parlin, New Jersey and $1.6 million for a special executive pension adjustment,
as well as professional fees incurred to resolve certain legacy business matters
partially offset by a reduction in insurance claims reserves and other
miscellaneous charges.
Analysis
of Cash Flows
Operating
Activities
|
|
2006
|
|
2005
|
|
Net
income (loss), depreciation, amortization and all other non-cash
charges
and credits
|
|
$
|
194.3
|
|
$
|
64.8
|
|
Changes
in working capital, net
|
|
|
(13.4
|
)
|
|
27.2
|
|
All
other sources and uses of cash
|
|
|
(8.0
|
)
|
|
47.2
|
|
Net
cash provided by operating activities
|
|
$
|
172.9
|
|
$
|
139.2
|
|
Net
cash
provided by operating activities improved $33.7 million during 2006 to $172.9
million as compared to $139.2 million for 2005. The increase is reflective
of
improved operating performance, lower legal settlements related to litigation
associated with former or otherwise previously divested businesses, lower
interest payments and lower pension plan funding payments. Cash paid for legal
settlements decreased $29.6 million during 2006 primarily due to substantial
payments made during 2005, the largest of which were attributable to litigation
involving the former composites business, as well as a settlement received
during 2006 related to the Company’s price fixing suit against certain raw
materials suppliers. Due to the substantial series of prepayments of higher
cost
debt during 2006 and prior years, including a tender offer, as well as the
beneficial impact of the cross-currency interest rate swaps, interest payments
decreased $15.5 million during 2006. During 2006, the Company provided voluntary
funding of $37.5 million to its pension plans reflecting a decrease of $16.2
million from 2005.
Embedded
within the improved cash flow from operations are a number of specific items
that required higher cash outflows or resulted in lower net receipts during
2006. The most significant are as follows: (1) income tax payments, net of
refunds received, were $19.2 million higher in 2006 primarily as a result of
refunds received during 2005, (2) amounts received from the asbestos settlement
trusts in excess of settlement payments, were lower by $9.5 million during
2006
as a result of timing issues reflecting the dynamic nature of settlements,
(3)
payments for severance and termination benefits and other exit costs increased
$5.4 million during 2006 as a result of the timing of the implementation of
the
various restructuring plans, some of which were initiated during the latter
part
of 2005 with payments beginning or continuing into 2006, (4) settlements of
asset retirement obligations increased $10.1 million primarily as a result
of
the timing with respect to various remediation and work plans. Also, 2006
reflects a higher use of working capital in support of the expansion of the
businesses as well as a $7.9 million net use of cash in connection with the
operations of FiberVisions during the period prior to the disposition
transaction primarily resulting from higher net working capital
requirements.
Investing
Activities
|
|
2006
|
|
2005
|
|
Capital
expenditures
|
|
$
|
93.6
|
|
$
|
67.5
|
|
Acquisitions
and investments, net
|
|
|
29.4
|
|
|
4.4
|
|
Proceeds
from asset and investment dispositions and all other sources,
net
|
|
|
(28.9
|
)
|
|
(14.2
|
)
|
Net
cash used in investing activities
|
|
$
|
94.1
|
|
$
|
57.7
|
|
Net
cash
used in investing activities increased $36.4 million during 2006 to $94.1
million as compared to $57.7 million for 2005. Capital expenditures increased
by
$26.1 million primarily as a result of the significant MC expansion at Hercules
Tianpu’s facility and CMC expansions at the Company’s Jiangmen facility. During
2006, the Company acquired Benchmark’s guar and guar derivatives manufacturing
business for $20.2 million, including transaction costs. In a related
transaction, the Company provided a convertible loan of $2.5 million to BPG.
The
Company also completed its required initial capital contribution to the Hercules
Tianpu joint venture, as well as the acquisition of subscription rights for
an
additional 1% interest from one of the joint venture partners resulting in
total
payments of $6.0 million including transaction costs, net of $2.6 million in
cash realized upon consolidation of the joint venture. During 2005, an initial
investment
of $4.4 million was provided in the form of prepaid financing for certain
equipment required by Hercules Tianpu. During 2006, the Company also acquired
the remaining 40% ownership interest in Shanghai Hercules for $3.3 million
including transaction costs.
In
connection with the sale of the Company’s 51% interest in FiberVisions, a
portion of the cash realized was provided by $27.0 million in proceeds received
directly from SPG. The Company has since paid $9.2 million in transaction costs
and other post-closing adjustments including $4.5 million of performance
guarantee subsidies. In addition to these items, the Company received net
proceeds of $11.3 million during 2006 primarily related to excess land sales
at
certain of the Company’s existing manufacturing facilities as well as the sale
of the Company’s former manufacturing facility in Addison, Illinois. Similar
asset dispositions took place during 2005 for which $12.3 million was
attributable to the sale of properties at former operating sites in Langhorne,
Pennsylvania and Burlington, New Jersey.
Financing
Activities
|
|
2006
|
|
2005
|
|
Long-term
debt payments
|
|
$
|
(142.5
|
)
|
$
|
(131.2
|
)
|
Long-term
debt proceeds and changes in short-term debt
|
|
|
27.8
|
|
|
1.9
|
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
|
|
83.7
|
|
|
—
|
|
Proceeds
from the exercise of stock options and all other sources,
net
|
|
|
42.6
|
|
|
2.3
|
|
Net
cash provided by (used in) financing activities
|
|
$
|
11.6
|
|
$
|
(127.0
|
)
|
Net
cash
provided by financing activities during 2006 was $11.6 million as compared
to a
net use of $127.0 million during 2005. During 2006, the Company made total
debt
principal payments of $142.5 million, of which $113.9 million was attributable
to repurchases of the Company’s 11.125% senior notes, $18.0 million was paid on
the Term B loan, $6.8 million was paid for FiberVisions’ variable rate term
loans and $3.8 million for the Company’s 6.5% junior subordinated deferrable
debentures due 2029 (“6.5% debentures”) in connection with the open market
purchase of 5,000 CRESTS units, which consists of 6.5% debentures and warrants
to purchase the Company’s common stock . Total debt payments made during 2005
were $131.2 million, of which $96.0 million was attributable to repurchases
of
the 11.125% senior notes and $12.9 million was attributable to the repurchase
of
6.5% debentures in connection with the acquisition of 17,000 CRESTS units.
A
total
of $22.0 million of long-term debt was issued during 2006 which was primarily
attributable to Hercules Tianpu’s borrowings to finance the construction project
to significantly expand the MC manufacturing capacity. The credit facility
for
this project was arranged with the Bank of China and Hercules has provided
a
guarantee for 55% of the total borrowings. In addition, net short-term
borrowings of $5.8 million were made by Hercules’ subsidiaries under existing
credit facilities primarily in Europe and Asia. Prior to the disposition
transaction in 2006, FiberVisions issued $90.0 million of debt, net of $6.3
million of issuance costs. In connection with this transaction, FiberVisions
distributed $82.0 million to Hercules immediately prior to the transaction
closing. The FiberVisions debt is non-recourse to Hercules. The
distribution and proceeds from the FiberVisions transaction were the
primary sources of cash used to fund the repayment of 11.125% senior
notes.
Primarily
as a result of significant stock price appreciation during the fourth quarter
of
2006, a substantial number of stock options were exercised resulting in proceeds
of $37.0 million. In addition, cash provided by financing activities includes
$6.2 million attributable to the income tax benefit to be realized by the
Company for stock-based compensation as required by SFAS 123R. An identical
amount is included as an outflow in cash from operations. A total of $2.7
million in proceeds from the exercise of stock options was received during
2005.
Sources
of Liquidity
The
Company projects that cash flow from operations and other available financial
resources discussed below will be sufficient to meet its investing and financing
requirements and enable the Company to comply with the covenants and other
terms
of the Senior Credit Facility and the indentures governing the senior
notes.
As
of
December 31, 2006, 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 until April 8,
2007, an additional $250 million in the form of a term note under the Senior
Credit Facility. As of December 31, 2006, $44.3 million of the $150 million
Revolving Facility was available for use as the Company had $105.7 million
of
outstanding letters of credit associated with the Revolving Credit Facility.
In
addition, the Company had $29.3 million of foreign lines of credit available
and
unused.
Approximately
$41.3 million of funds remaining in one of the trusts established in 2004
related to the settlement with insurers with respect to asbestos claims reverted
to the Company effective January 4, 2007. These funds were included in
Asbestos-related assets on the Consolidated Balance Sheet as of December 31,
2006 and were restricted for the reimbursement of costs to resolve asbestos
claims through the earlier of January 3, 2007 or the passage of federal asbestos
reform legislation. Those funds are no longer restricted and are available
for
general corporate purposes at the Company’s discretion.
In
connection with the comprehensive settlement of tax years 1993 through 2003,
the
Company anticipates the receipt of refunds and interest in the range of $230
million during 2007 with approximately $12 million expected to be received
during the first quarter, $147 million during the second quarter and the
remainder during the third quarter.
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 “plan of sale”
criteria have been met, impairments, to the extent they exist, are recognized
and the underlying properties are reclassified as assets held for sale. During
2006, the Company realized proceeds of $11.3 million, net of transaction costs,
attributable to the disposition of such assets. Assets held for sale are
included in the caption “Other current assets” on the Consolidated Balance
Sheets. As of December 31, 2006, there were no assets or properties that met
the
“plan of sale” criteria. However, the Company is pursuing a number of
dispositions that it expects will meet the recognition criteria or settle during
the first half of 2007.
There
are
generally no material restrictions on the remittance of funds generated by
the
Company's operations outside the United States except in certain regions of
Asia
Pacific and Latin America.
Total
debt at December 31, 2006 was $995.5 million, which decreased $113.5 million
from $1,109.0 million at December 31, 2005 primarily as a result of the debt
payments and repurchases discussed above. Cash balances increased to $171.8
million at December 31, 2006 from $77.3 million at December 31, 2005.
Working
capital management represents a key performance measure for the Company. Total
trade accounts receivable, inventories and accounts payable increased at
year-end 2006 by $36.9 million, $31.0 million and $32.4 million, respectively,
over year-end 2005 levels primarily as a result of growth attributable to
acquisitions and investments. Despite these absolute increases in working
capital and excluding the impact of FiberVisions, days sales outstanding (“DSO”)
improved by two days to 60 days and days sales in inventory (“DSI”) improved by
four days to 57 days from year-end 2005. Days payable outstanding (“DPO”)
increased by one day to 53 days from year-end 2005 levels. Overall, the
Company’s cash cycle time, or DSO plus DSI less DPO, improved by a total of five
days to 64 days as of the end of 2006. The Company expects further, but more
modest, improvements in the cash cycle time during 2007 as progress continues
with ongoing working capital initiatives.
Capital
Expenditures and Other Investing Commitments
Capital
expenditures are projected to total approximately $117 million during 2007.
Of
the total, approximately 29% will be attributable to PTV, 60% for Aqualon and
11% for Corporate purposes. Significant project commitments for 2007 include
the
development of a technical center in Shanghai, China for PTV, the continued
expansion of Aqualon’s CMC capacity at the Jiangmen, China facility as well as
the construction of an Aqualon HEC plant in Nanjing, China and the initial
phase
of a comprehensive upgrade of the Company’s primary information technology
platform.
In
connection with the Benchmark transaction, Aqualon is committed to providing
an
earn-out payment of $1.4 million during 2007 based on Benchmark’s 2006
performance. A similar commitment is in place for the next four years in the
amount of $1.8 million annually contingent upon the achievement of certain
performance metrics. The Company is also committed to providing $1.2 million
to
FiberVisions during 2007 in the form of an additional contribution in the event
that certain financial benchmarks are not achieved. There are no further
commitments to FiberVisions beyond 2007.
Pension
Plan Funding
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 continue 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 of $40 million during 2007.
On
August
17, 2006, the Pension Protection Act of 2006 (the “Act”) was signed into law.
While there are a number of administrative implications to the U.S.-based
pension plan as well as the Company’s U.S.-based postretirement and defined
contribution plans, the existing funding strategy for the pension plan is
anticipated to meet or exceed the current requirements. Accordingly, the Act
is
not expected to have a material impact on the Company’s cash requirements for
pension plan funding.
As
discussed in more detail in Note 13 to the Consolidated Financial Statements,
the anticipated settlement of the class action suit 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,
(the
“Pension litigation”) is expected to result in an increase to the U.S. pension
plans’ projected benefit obligation of approximately $18.2 million. However, the
proposed settlement of the Pension litigation is not expected to have a material
impact on the Company’s anticipated pension funding requirements.
Funding
for Litigation, Environmental and Asset Retirement Obligations
As
referenced previously and as discussed in Note 13 to the Consolidated Financial
Statements, the Company is seeking review of the Vertac litigation by the U.S.
Supreme Court. The Company will continue to accrue interest on the recorded
obligation amount until such time as the Final Judgment is either reversed
or is
paid. If the Company is ultimately required to pay such amount to the United
States, an event which could occur in 2007 or thereafter, the payment of such
amount could have a material adverse effect upon the Company’s cash flows in
such annual, quarterly or other period. While this matter has been under appeal
and continuing through the current period, the Company has posted an appeal
bond
which is partially supported by letters of credit included in the amount of
letters of credit outstanding as disclosed above.
As
of
December 31, 2006, the Company has recorded $81.6 million for environmental
and
other asset retirement matters involving current and former operating sites,
including those with identified asset retirement obligations as well as other
locations where the Company may have a known liability, excluding the Vertac
site. The annual costs required for remediation and similar asset retirement
activities are generally funded from operations as well as proceeds from the
disposition of assets. While such obligations are bound by legal, statutory
or
contractual provisions, the Company has a certain degree of discretion with
respect to the timing and magnitude of cash expenditures within a given range
of
periods. However, unfavorable developments regarding legal, regulatory or
operating matters with respect to any existing sites as well as unknown
exposures could have a material adverse effect on cash requirements for any
annual, quarterly or other period.
Debt
Retirement
In
December 2006, 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.
The
6.6%
notes due 2027 may be put to the Company at the option of the bondholders at
a
redemption price equal to 100% of the principal amount or $100.0 million on
August 1, 2007 if the bond holders exercise this option. The Company intends
to
address this eventuality from available cash on hand.
Contractual
Obligations
The
Company's contractual obligations as of December 31, 2006 are summarized as
follows:
|
|
Payments
Due by Period
(1)
|
|
|
|
|
|
Less
than
|
|
1
-
3
|
|
3
-
5
|
|
After
5
|
|
|
|
Total
|
|
1
year
|
|
years
|
|
years
|
|
years
|
|
Debt
obligations
|
|
$
|
995.5
|
|
$
|
35.8
|
|
$
|
21.5
|
|
$
|
374.1
|
|
$
|
564.1
|
|
Operating
lease obligations
|
|
|
101.0
|
|
|
18.9
|
|
|
44.6
|
|
|
22.8
|
|
|
14.7
|
|
Purchase
obligations
(2)
|
|
|
3,794.2
|
|
|
683.6
|
|
|
1,475.6
|
|
|
1,624.0
|
|
|
11.0
|
|
Other
liabilities reflected on the
registrant's
balance sheet under GAAP
(3)
|
|
|
667.4
|
|
|
224.2
|
|
|
72.9
|
|
|
53.8
|
|
|
316.5
|
|
Total
contractual cash obligations
|
|
$
|
5,558.1
|
|
$
|
962.5
|
|
$
|
1,614.6
|
|
$
|
2,074.7
|
|
$
|
906.3
|
|
|
(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, 2006, such interest
obligations are estimated to be approximately $72.2 million in 2007,
$70.2
million in 2008, $69.9 million in 2009, $69.7 million in 2010, $41.8
million in 2011 and $730.1 million thereafter. A one percent increase
or
decrease in the LIBOR rate would have an impact of approximately
plus or
minus $3.7 million on the Company’s interest payments in years 2007
through 2011.
|
|
(2)
|
Obligations
relates primarily to raw material requirements and service
contracts.
|
|
(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.
|
Reference
is made to Note 13 to the Consolidated Financial Statements
for a thorough discussion of indemnifications.
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.
Reference
is made to the Summary of Significant Accounting Policies included in the
Consolidated Financial Statements for a discussion and analysis of recently
issued accounting pronouncements and their impact on the Company.
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 28 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
foreign exchange and interest rate risk are calculated by the Company utilizing
a third-party software package that employs standard pricing models to determine
the present value of the instruments based on the market conditions as of the
valuation date.
Foreign
Exchange Rate Risk
Our
financial instruments subject to foreign currency exchange risk consist of
foreign currency forwards and options and represent a net liability position
of
$0.1 million and $0.2 million at December 31, 2006 and 2005, 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, 2006 would result in a negligible change and a $0.1 million
increase for the year ended 2005 in the net position, while a 10% weakening
of
the dollar versus all currencies would result in a $0.5 million and a $0.1
million increase, respectively, in the net position.
The
Company also utilizes cross currency interest rate swaps to hedge the foreign
currency exposure associated with its net investment in certain foreign
operations. At December 31, 2006, the net market value of the swaps was a
liability of $53.2 million. A 10% strengthening of the Euro versus the U.S.
dollar at December 31, 2006 would result in a $55.3 million increase in the
liability, while a 10% weakening of the Euro versus the U.S. dollar would result
in a $55.3 million decrease in the liability. Changes in the underlying interest
rates would have an insignificant impact.
Interest
Rate Risk
The
Company's derivative and other financial instruments subject to interest rate
risk consist substantially of debt instruments (see Note 28
to the Consolidated Financial Statements). At December 31, 2006 and
2005, net market value of these combined instruments was a liability of $964.2
million and $1,092.4 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, 2006 and 2005 would result in a $60.5 million and a $59.1
million decrease, respectively, in the net market value of the liability. A
100-basis point decrease in interest rates at December 31, 2006 and 2005
would result in a $62.7 million and a $63.9 million increase, respectively,
in
the net market value of the liability.
Commodity
Price Risk
The
Company has in the past hedged a portion of its natural gas requirements up
to
one year into the future. During 2006, the Company recognized a loss of $1.2
million as a component of Cost of sales in connection with the hedging of a
portion of its domestic natural gas requirements. As of December 31, 2006,
there
were no natural gas hedges in place.
Derivative
Financial Instruments
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. With respect to commodity hedging, the Company
has
utilized derivative instruments including forward contracts.
Other
than cross currency interest swaps to hedge the foreign currency exposure,
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.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND
REQUIRED
SUPPLEMENTARY DATA
CONSOLIDATED
FINANCIAL
STATEMENTS
|
|
|
Page
|
|
|
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36
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37
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41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
Notes
to the Consolidated Financial Statements:
|
|
|
|
|
|
|
|
48
|
|
|
|
|
48
|
|
|
|
|
49
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|
50
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|
51
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51
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51
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52
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53
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55
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59
|
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59
|
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61
|
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71
|
|
|
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74
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74
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74
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75
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76
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80
|
|
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80
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80
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81
|
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81
|
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83
|
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83
|
|
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84
|
|
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86
|
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87
|
|
|
|
|
96
|
|
SUPPLEMENTARY
DATA
|
|
|
|
|
|
|
|
100
|
|
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 Exchange 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, 2006. 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, 2006,
the
Company's internal control over financial reporting was effective based on
those
criteria.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by BDO Seidman, LLP, the
Company’s independent registered public accounting firm, as stated in their
report, which appears herein.
/s/
Craig A. Rogerson /s/
Allen A. Spizzo
President
and Chief Executive Officer Vice
President and Chief Financial Officer
February
28, 2007
February
28, 2007
Board
of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We
have
audited the accompanying consolidated balance sheets of Hercules Incorporated
as
of December 31, 2006 and 2005 and the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity (deficit), and
cash flows for each of the two years in the period ended December 31, 2006.
Our
audits also included the financial statement schedule for the two years in
the
period ended December 31, 2006 as listed in Item 15(a). 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
audits.
We
conducted our audits 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 audits provide
a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hercules Incorporated and
its subsidiaries at December 31, 2006 and 2005 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2006, 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.
We
have
also audited the adjustments to the 2004 financial statements to retrospectively
apply the realignment of reporting segments as described in Note 1 and Note
27.
Also, we audited the adjustments to the 2004 financial statements to reclassify
the assets, liabilities and operating results of the terpenes specialties
business as a discontinued operation as described in Note 23. In our opinion,
such adjustments are appropriate and have been properly applied. We were not
engaged to audit, review, or apply any procedures to the 2004 financial
statements of the Company other than with respect to the adjustments and,
accordingly, we do not express an opinion or any other form of assurance of
the
2004 financial statements taken as a whole.
As
discussed in Note 24 to the consolidated financial statements, Hercules
Incorporated changed its method of accounting effective December 31, 2006 for
defined benefit pension and other postretirement plans as a result of adopting
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans”.
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, 2006, 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 February 27, 2007 expressed an unqualified opinion
thereon.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
27, 2007
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, 2006, 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, 2006, 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, 2006, 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 sheets
of
Hercules Incorporated as of December 31, 2006 and 2005, and the related
consolidated statements of operations and comprehensive income (loss), changes
in stockholders equity (deficit) and cash flows for each of the two years in
the
period ended December 31, 2006 and our report dated February 27, 2007 expressed
an unqualified opinion.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
27, 2007
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of Hercules Incorporated:
In
our
opinion, the consolidated statements of income and comprehensive income, of
shareholders’ equity and of cash flows for the period ended December 31, 2004,
before the effects of the adjustments to retrospectively reflect discontinued
operations and the change in the composition of reportable segments described
in
Notes 23 and 27, respectively, present fairly, in all material respects, the
results of operations and cash flows of Hercules Incorporated and its
subsidiaries for period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America (the 2004
financial statements before the effects of the adjustments discussed in Notes
23
and 27 are not presented herein). In addition, in our opinion, the financial
statement schedule, for the period ended December 31, 2004 presents fairly,
in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit, before the effects of the adjustments described above,
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 audit provides a reasonable basis for our
opinion.
We
were
not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively reflect discontinued operations and the change in the
composition of reportable segments described in Notes 23 and 27, respectively,
and accordingly, we do not express an opinion or any other form of assurance
about whether such adjustments are appropriate and have been properly applied.
The audit of these adjustments was performed by other auditors.
/s/
PricewaterhouseCoopers LLP
Philadelphia,
Pennsylvania
March
16,
2005
Hercules
Incorporated
(Dollars
in millions, except per share data)
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
$
|
1,984.3
|
|
Cost
of sales
|
|
|
1,343.4
|
|
|
1,391.1
|
|
|
1,291.6
|
|
Selling,
general and administrative expenses
|
|
|
372.2
|
|
|
382.5
|
|
|
382.1
|
|
Research
and development
|
|
|
38.8
|
|
|
40.8
|
|
|
42.7
|
|
Intangible
asset amortization (Note 7)
|
|
|
7.2
|
|
|
8.0
|
|
|
8.1
|
|
Impairment
of FiberVisions goodwill (Note 3)
|
|
|
—
|
|
|
52.9
|
|
|
—
|
|
Other
operating expense, net (Note 20)
|
|
|
25.1
|
|
|
39.4
|
|
|
26.9
|
|
Profit
from operations
|
|
|
248.6
|
|
|
140.3
|
|
|
232.9
|
|
Interest
and debt expense (Note 21)
|
|
|
71.2
|
|
|
89.4
|
|
|
108.7
|
|
Vertac
litigation charges (Note 13)
|
|
|
108.5
|
|
|
15.0
|
|
|
—
|
|
Gain
on sale of CP Kelco ApS (Note 3)
|
|
|
—
|
|
|
—
|
|
|
(27.0
|
)
|
Other
expense, net (Notes 3 and 22)
|
|
|
65.7
|
|
|
71.3
|
|
|
116.7
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
|
3.2
|
|
|
(35.4
|
)
|
|
34.5
|
|
(Benefit)
provision for income taxes (Note 9)
|
|
|
(192.2
|
)
|
|
(3.8
|
)
|
|
3.8
|
|
Income
(loss) before minority interests and equity loss (income)
|
|
|
195.4
|
|
|
(31.6
|
)
|
|
30.7
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
(1.4
|
)
|
|
(1.0
|
)
|
|
(0.9
|
)
|
Equity
(loss) income of affiliated companies, net of tax
|
|
|
(3.2
|
)
|
|
0.5
|
|
|
0.9
|
|
Net
income (loss) from continuing operations before discontinued
|
|
|
|
|
|
|
|
|
|
|
operations
and cumulative effect of changes in accounting principle
|
|
|
190.8
|
|
|
(32.1
|
)
|
|
30.7
|
|
Net
income (loss) from discontinued operations, net of tax (Note 23)
|
|
|
47.0
|
|
|
(6.5
|
)
|
|
(2.6
|
)
|
Net
income (loss) before cumulative effect of changes in accounting
principle
|
|
|
237.8
|
|
|
(38.6
|
)
|
|
28.1
|
|
Cumulative
effect of changes in accounting principle, net of tax (Note
24)
|
|
|
0.9
|
|
|
(2.5
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
238.7
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (Note 26):
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.72
|
|
$
|
(0.30
|
)
|
$
|
0.28
|
|
Discontinued
operations
|
|
|
0.42
|
|
|
(0.06
|
)
|
|
(0.02
|
)
|
Cumulative
effect of change in accounting principle
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
2.15
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Weighted
average number of shares (millions)
|
|
|
110.8
|
|
|
108.7
|
|
|
107.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.71
|
|
$
|
(0.30
|
)
|
$
|
0.28
|
|
Discontinued
operations
|
|
|
0.42
|
|
|
(0.06
|
)
|
|
(0.02
|
)
|
Cumulative
effect of change in accounting principle
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
2.14
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Weighted
average number of shares (millions)
|
|
|
111.3
|
|
|
108.7
|
|
|
109.0
|
|
|
|
|
Net
income (loss)
|
|
$
|
238.7
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
Foreign
currency translation
|
|
|
58.7
|
|
|
(72.1
|
)
|
|
71.1
|
|
Decrease
(increase) in additional minimum pension liability, net of tax,
due
to
|
|
|
|
|
|
|
|
|
|
|
Remeasurement
adjustments
|
|
|
85.0
|
|
|
(44.3
|
)
|
|
(28.2
|
)
|
Foreign
currency translation
|
|
|
(4.1
|
)
|
|
5.5
|
|
|
(1.4
|
)
|
Revaluation
of hedges, net of tax
|
|
|
(34.6
|
)
|
|
—
|
|
|
—
|
|
Other,
net of tax
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
—
|
|
Comprehensive
income (loss)
|
|
$
|
343.2
|
|
$
|
(152.3
|
)
|
$
|
69.6
|
|
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
Hercules
Incorporated
|
|
|
|
(Dollars
in millions)
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
171.8
|
|
$
|
77.3
|
|
Accounts
receivable, net (Note 5)
|
|
|
326.6
|
|
|
289.7
|
|
|
|
|
210.6
|
|
|
179.6
|
|
Deferred
income taxes (Note 9 )
|
|
|
70.2
|
|
|
39.3
|
|
FiberVisions
assets held for sale (Note 3)
|
|
|
—
|
|
|
202.7
|
|
Current
assets of discontinued operations (Note
23)
|
|
|
0.4
|
|
|
6.7
|
|
Income
taxes receivable (Note 9)
|
|
|
170.8
|
|
|
12.6
|
|
Other
current assets
|
|
|
34.1
|
|
|
35.5
|
|
Total
current assets
|
|
|
984.5
|
|
|
843.4
|
|
Property,
plant and equipment, net (Note 18)
|
|
|
600.4
|
|
|
535.4
|
|
Intangible
assets, net (Note 7)
|
|
|
143.1
|
|
|
142.8
|
|
|
|
|
481.5
|
|
|
441.0
|
|
Deferred
income taxes (Note 9)
|
|
|
374.6
|
|
|
240.4
|
|
|
|
|
87.5
|
|
|
120.7
|
|
Deferred
charges and other assets (Note 18)
|
|
|
136.9
|
|
|
245.1
|
|
Total
assets
|
|
$
|
2,808.5
|
|
$
|
2,568.8
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
205.3
|
|
$
|
172.9
|
|
FiberVisions
liabilities held for sale (Note 3)
|
|
|
—
|
|
|
66.6
|
|
Asbestos-related
liabilities (Note 13)
|
|
|
36.4
|
|
|
36.4
|
|
Current
debt obligations (Note 8)
|
|
|
35.8
|
|
|
16.7
|
|
Vertac
litigation liability (Note 13)
|
|
|
123.5
|
|
|
—
|
|
|
|
|
228.6
|
|
|
217.0
|
|
Current
liabilities of discontinued operations (Note
23)
|
|
|
—
|
|
|
2.8
|
|
Total
current liabilities
|
|
|
629.6
|
|
|
512.4
|
|
|
|
|
959.7
|
|
|
1,092.3
|
|
Deferred
income taxes (Note 9)
|
|
|
69.7
|
|
|
75.8
|
|
|
|
|
262.5
|
|
|
323.4
|
|
Other
postretirement benefit obligations (Note
10)
|
|
|
142.2
|
|
|
65.5
|
|
Deferred
credits and other liabilities (Note 18)
|
|
|
255.6
|
|
|
289.4
|
|
Asbestos-related
liabilities (Note 13)
|
|
|
233.6
|
|
|
233.6
|
|
Total
liabilities
|
|
|
2,552.9
|
|
|
2,592.4
|
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
12.7
|
|
|
1.1
|
|
Stockholders'
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Common
stock, $25/48 stated value (Note 16)
|
|
|
|
|
|
|
|
(shares
issued: 2006 - 159,997,929 and 2005 - 159,984,444)
|
|
|
83.3
|
|
|
83.3
|
|
Additional
paid-in capital
|
|
|
454.9
|
|
|
548.9
|
|
|
|
|
(42.1
|
)
|
|
(65.7
|
)
|
Accumulated
other comprehensive losses (Note 17)
|
|
|
(409.6
|
)
|
|
(387.6
|
)
|
Retained
earnings
|
|
|
1,734.1
|
|
|
1,495.4
|
|
|
|
|
1,820.6
|
|
|
1,674.3
|
|
Reacquired
stock, at cost (shares: 2006 - 43,969,769 and 2005 -
47,247,344)
|
|
|
(1,577.7
|
)
|
|
(1,699.0
|
)
|
Total
stockholders' equity (deficit)
|
|
|
242.9
|
|
|
(24.7
|
)
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
2,808.5
|
|
$
|
2,568.8
|
|
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
Hercules
Incorporated
(Dollars
in millions)
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
238.7
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
Adjustments
to reconcile net income (loss) to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
70.7
|
|
|
80.5
|
|
|
74.9
|
|
Amortization
|
|
|
24.6
|
|
|
25.4
|
|
|
26.3
|
|
Deferred
income tax provision
|
|
|
(157.8
|
)
|
|
(54.9
|
)
|
|
(18.7
|
)
|
Gain
on disposals
|
|
|
(9.0
|
)
|
|
(11.8
|
)
|
|
(28.0
|
)
|
Impairment
charges
|
|
|
3.2
|
|
|
58.6
|
|
|
9.1
|
|
Write-off
of debt issuance costs
|
|
|
1.5
|
|
|
1.8
|
|
|
18.0
|
|
Loss
on sale of 51% interest in FiberVisions
|
|
|
13.3
|
|
|
—
|
|
|
—
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
1.4
|
|
|
1.0
|
|
|
0.9
|
|
Other
non-cash charges and credits
|
|
|
7.7
|
|
|
5.3
|
|
|
0.8
|
|
Accruals
and deferrals of cash receipts and payments (net of acquisitions
and
dispositions):
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(17.5
|
)
|
|
2.9
|
|
|
(7.6
|
)
|
Inventories
|
|
|
(8.7
|
)
|
|
(3.3
|
)
|
|
4.0
|
|
Asbestos-related
assets and liabilities, net
|
|
|
37.1
|
|
|
61.3
|
|
|
40.2
|
|
Other
current assets
|
|
|
5.0
|
|
|
(10.7
|
)
|
|
20.7
|
|
Accounts
payable and accrued expenses
|
|
|
3.9
|
|
|
28.2
|
|
|
5.0
|
|
Vertac
litigation liability
|
|
|
123.5
|
|
|
—
|
|
|
—
|
|
Income
taxes payable
|
|
|
(125.1
|
)
|
|
27.1
|
|
|
(25.4
|
)
|
Pension
and postretirement benefits
|
|
|
(7.9
|
)
|
|
(18.3
|
)
|
|
(23.1
|
)
|
Non-current
assets and liabilities
|
|
|
(23.8
|
)
|
|
(12.8
|
)
|
|
(4.7
|
)
|
FiberVisions
net assets held for sale
|
|
|
(7.9
|
)
|
|
—
|
|
|
—
|
|
Net
cash provided by operating activities
|
|
|
172.9
|
|
|
139.2
|
|
|
120.5
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(93.6
|
)
|
|
(67.5
|
)
|
|
(77.4
|
)
|
Acquisitions
and investments, net of cash recognized upon consolidation
|
|
|
(29.4
|
)
|
|
(4.4
|
)
|
|
—
|
|
Proceeds
from sale of 51% interest in FiberVisions, net of transaction
costs
|
|
|
17.8
|
|
|
—
|
|
|
—
|
|
Proceeds
of fixed asset disposals
|
|
|
11.3
|
|
|
16.6
|
|
|
1.4
|
|
Proceeds
from sale of minority interest in CP Kelco ApS
|
|
|
—
|
|
|
—
|
|
|
27.0
|
|
Other,
net
|
|
|
(0.2
|
)
|
|
(2.4
|
)
|
|
(0.1
|
)
|
Net
cash used in investing activities
|
|
|
(94.1
|
)
|
|
(57.7
|
)
|
|
(49.1
|
)
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
|
|
83.7
|
|
|
—
|
|
|
—
|
|
Long-term
debt proceeds
|
|
|
22.0
|
|
|
—
|
|
|
650.0
|
|
Long-term
debt payments
|
|
|
(142.5
|
)
|
|
(131.2
|
)
|
|
(729.5
|
)
|
Change
in short-term debt
|
|
|
5.8
|
|
|
1.9
|
|
|
1.6
|
|
Proceeds
from the exercise of stock options
|
|
|
37.0
|
|
|
2.7
|
|
|
5.5
|
|
Payment
of debt issuance costs and underwriting fees
|
|
|
—
|
|
|
—
|
|
|
(7.8
|
)
|
Other,
net
|
|
|
5.6
|
|
|
(0.4
|
)
|
|
6.1
|
|
Net
cash provided by (used in) financing activities
|
|
|
11.6
|
|
|
(127.0
|
)
|
|
(74.1
|
)
|
Effect
of exchange rate changes on cash
|
|
|
4.1
|
|
|
(3.7
|
)
|
|
2.9
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
94.5
|
|
|
(49.2
|
)
|
|
0.2
|
|
Cash
and cash equivalents at beginning of year
|
|
|
77.3
|
|
|
126.5
|
|
|
126.3
|
|
Cash
and cash equivalents at end of year
|
|
$
|
171.8
|
|
$
|
77.3
|
|
$
|
126.5
|
|
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
Hercules
Incorporated
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Compen-
|
|
Comprehen-
|
|
Retained
|
|
Reacquired
|
|
|
|
|
|
Stock
|
|
Capital
|
|
sation
|
|
sive
Losses
|
|
Earnings
|
|
Stock
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2004
|
|
$
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238.7
|
|
|
—
|
|
|
238.7
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54.6
|
|
|
—
|
|
|
—
|
|
|
54.6
|
|
Release
of shares held by ESOP trust
|
|
|
—
|
|
|
(6.4
|
)
|
|
11.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.1
|
|
Repurchase
of warrants
|
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Decrease
in additional minimum pension liability, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85.0
|
|
|
—
|
|
|
—
|
|
|
85.0
|
|
Recognition
of funded status of pension and postretirement
benefit
plans, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(126.5
|
)
|
|
—
|
|
|
—
|
|
|
(126.5
|
)
|
Issuances
of treasury stock, net of forfeitures
|
|
|
—
|
|
|
(74.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
121.3
|
|
|
46.6
|
|
Reclassification
required by SFAS 123R
|
|
|
—
|
|
|
(12.1
|
)
|
|
12.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversion
of debentures
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Revaluation
of hedges, net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34.6
|
)
|
|
—
|
|
|
—
|
|
|
(34.6
|
)
|
Other,
net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$
|
83.3
|
|
$
|
454.9
|
|
$
|
(42.1
|
)
|
$
|
(409.6
|
)
|
$
|
1,734.1
|
|
$
|
(1,577.7
|
)
|
$
|
242.9
|
|
(Common
shares: issued, 159,997,929; reacquired,43,969,769)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
Hercules
Incorporated
(Dollars
in millions, except per share data)
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 4,430
employees worldwide. 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 energy
services. To serve these markets the Company has global manufacturing operations
which provide products to customers in more than 135 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. Accordingly, these investments are included in Deferred charges and
other assets on the Company’s Consolidated Balance Sheets.
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 14%, 13% and 13% of the Company's revenues for the years ended
December 31, 2006, 2005 and 2004, 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. Revenues exclude amounts for value-added, sales and similar taxes.
Accruals are made for sales returns and other allowances based on the Company's
experience. 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
$8.8 million, $3.6 million and $2.6 million for the years ended December 31,
2006, 2005 and 2004, respectively.
Changes
in Accounting Principle
Voluntary
changes in accounting principles require retrospective application to the
earliest fiscal period presented. However, the Consolidated Financial Statements
reflect the specific transition requirements associated with new accounting
pronouncements,
which may not require retrospective application. Note 24
provides a summary of the financial statement effects and
required
disclosures applicable to those accounting changes implemented during the
periods presented.
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
Cash
and Cash Equivalents
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.
Assets
Held for Sale
When
specific actions to dispose of assets progress to the point that “plan of sale”
criteria have been met, impairments, to the extent they exist, are recognized
in
the Consolidated Statements of Operations and the underlying assets are
reclassified as assets held for sale and included in the caption Other current
assets or separately disclosed. 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.
Intangible
Assets and Goodwill
Intangible
assets with finite lives 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 3 to 50 years for other intangible
assets. Goodwill is tested for impairment on an annual basis as of November
30
with any necessary adjustment charged to expense. The Company has identified
its
reporting units as Paper Technologies and Ventures and the Aqualon Group, for
purposes of applying the impairment test.
Long-lived
Assets
The
Company reviews its long-lived 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 undiscounted future cash flows,
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
Capitalized
computer software development costs are included in Deferred charges and other
assets in the Company's Consolidated Balance Sheets and amortized over a period
of 5 to 10 years.
Deferred
Financing Costs
The
Company capitalizes costs associated with the issuance of debt, 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.
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
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 for 50 years, although it could be longer. The Company evaluates
the
status of its facilities on a periodic basis and makes any necessary adjustments
to the obligations as required. Dismantlement of facilities at leased sites
is
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 losses.
Derivative
Instruments and Hedging
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, interest rates and commodity prices.
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. The Company has used forward contracts to hedge
commodity price risk. The Company uses cross-currency interest rate swaps to
hedge the foreign currency exposure associated with its net investment in
certain foreign operations. Derivative instruments are recorded on the balance
sheet at their fair values.
With
the
exception of the cross-currency interest rate swaps, the Company has not
designated any derivatives as a formal hedge instrument and accordingly, changes
in fair value are recorded each period in earnings as a component of Other
expense, net (foreign currency exposures) and Cost of sales (commodity price
exposures) consistent with the reporting of the items hedged. Changes in the
fair value of the cross-currency interest rate swaps are recorded in the foreign
currency translation adjustments component of Accumulated other comprehensive
losses. Net interest payments or receipts from the cross-currency interest
rate
swaps are recorded as adjustments to Interest and debt expense, net in the
Statement of Operations and are reflected in Net cash provided by operating
activities in the Statement of Cash Flows.
Counterparties
to all derivative contracts are major financial institutions. Credit loss from
counterparty nonperformance is not anticipated.
Stock-based
Compensation
Effective,
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) (see Note 14). The Company had previously adopted, effective January
1, 2003, 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 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 through the date of adoption for SFAS 123R.
Therefore, the cost related to stock-based employee compensation included in
the
determination of net income in 2005 and 2004 was 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.
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
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.
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Net
(loss) income, as reported
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
Add:
Total stock-based compensation expense recognized in reported results,
net of tax
|
|
|
4.5
|
|
|
1.4
|
|
Deduct:
Total stock-based compensation expense determined under the
fair
value based method for all awards, net of tax*
|
|
|
5.1
|
|
|
2.8
|
|
Pro
forma net (loss) income
|
|
$
|
(41.7
|
)
|
$
|
26.7
|
|
(Loss)
earnings per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Basic
- pro forma
|
|
$
|
(0.38
|
)
|
$
|
0.25
|
|
Diluted
- as reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Diluted
- pro forma
|
|
$
|
(0.38
|
)
|
$
|
0.24
|
|
*
For information regarding the weighted-average assumptions used in
estimating fair value for 2005 and 2004 see Note
14.
|
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken in a tax return. The Company is currently evaluating the impact
of FIN 48, which is to be adopted effective January 1, 2007, and does not
anticipate it to have a material impact on its consolidated financial condition
or results of operation.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements” (“SFAS 157”). While SFAS 157 formally defines
fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements, it does not require any new fair
value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is required to be adopted
effective January 1, 2008 and the Company does not presently anticipate any
significant impact on its consolidated financial position, results of operations
or cash flows.
Reclassifications
Certain
amounts in the 2005 and 2004 consolidated financial statements and notes have
been reclassified to conform to the 2006 presentation. In addition, see Note 1 regarding the Company’s realignment of its reporting
segments.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share
data)
Effective
January 1, 2006, the Company realigned its reporting segments. Previously,
the
Company operated through the Performance Products (Pulp and Paper and Aqualon)
and Engineered Materials and Additives (FiberVisions and Pinova) segments.
The
Company’s new reporting structure includes three segments: (1) Paper
Technologies and Ventures (“PTV”), (2) the Aqualon Group (“Aqualon”) and (3)
FiberVisions. The Company’s synthetic lubricants business has been transferred
from Aqualon to PTV. The Company’s Pinova business has been integrated into the
Aqualon Group. In addition, the Company’s terpenes specialties business, which
was previously a business unit of Pinova, has been classified as a discontinued
operation effective January 1, 2006. As discussed further in Note
23, the Consolidated Financial Statements have been reclassified to
accommodate the reporting of this business as a discontinued operation.
FiberVisions will remain as a stand-alone segment for historical reporting
purposes.
Through
the quarter ended March 31, 2006, FiberVisions' results of operations have
been
consolidated into the Company’s Statement of Operations. As a result of the sale
of the Company’s 51% interest (see Note 3), FiberVisions is
being treated as an equity investment and the Company includes its proportionate
share of earnings and losses using the equity method of accounting for periods
beginning April 1, 2006.
Prior
period segment information included in Note 27 has been
adjusted for retrospective application of the aforementioned changes
attributable to the segments.
During
2006, the Company completed three strategic business investments for a total
of
$29.4 million including transaction costs, net of cash acquired. These included
(1) the acquisition of the guar and guar derivative manufacturing division
of
Benchmark Polymer Products, L.P. (“Benchmark”), a subsidiary of Benchmark
Performance Group, Inc. (“BPG”), as well as a loan to BPG that is convertible
into an equity position in BPG, (2) an investment for a 40% ownership interest
in the joint venture, Hercules Tianpu Chemicals Company Limited (“Hercules
Tianpu”), a manufacturer of methylcellulose (“MC”) in China and (3) the
acquisition of the 40% ownership interest not previously held by Hercules in
the
joint venture, Shanghai Hercules Chemicals Company, Ltd. (“Shanghai Hercules”),
from its partner Shanghai Chlor-Alkali Chemical Co. Ltd.
Benchmark
In
January 2006, the Company acquired the net assets of Benchmark for a total
of
$20.2 million including transaction costs plus a provisional earn-out. In
addition, the Company signed a five year exclusive agreement to supply BPG
with
guar products for polymer slurries used in oil and gas fracturing applications.
Under the terms of the purchase agreement, the Company acquired Benchmark’s
Dalton, Georgia production facility, related working capital and an intangible
asset related to the supply agreement. The acquired intangible asset of $3.7
million has a five year life. The Company recorded goodwill in the amount of
$9.7 million which is deductible for tax purposes over a period of 15 years.
In
a related transaction, the Company loaned $2.5 million to BPG. The loan, which
is convertible into an equity position in BPG, is reflected on the Balance
Sheet
as a component of Deferred charges and other assets. The results of operations
of Benchmark have been included in the Consolidated Financial Statements since
the date of acquisition and have been integrated into the Aqualon business
segment.
Hercules
Tianpu
During
the first quarter of 2006, the formation was completed for the Hercules Tianpu
joint venture with the Company contributing a total of $3.2 million in
connection with its required subscription for a 40% ownership interest in
addition to $4.4 million previously contributed in 2005 during the preliminary
formation stage. Prior to formation, the Company paid $1.7 million for the
subscription rights attributable to a 1% ownership interest of one of the other
joint venture partners as well as $1.1 million for transaction costs. Under
the
joint venture agreement, the Company has global marketing rights for the output
of the joint venture and receives sales commissions as well as royalties for
licensed technology. Operations for Hercules Tianpu began during the latter
part
of the first quarter of 2006 during which time the investment was accounted
for
as an equity affiliate. Effective April 1, 2006, Hercules Tianpu was
consolidated into Hercules’ results of operations, cash flows and balance sheet
(see Note 4) and is included in the Aqualon business segment.
Included in the net assets recognized upon consolidation was $3.5 million of
intangible assets related to land use rights with a useful life of 50 years
as
well as $2.8 million of goodwill which is not deductible for tax
purposes.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Shanghai
Hercules
During
2006, the Company acquired the remaining 40% ownership interest in Shanghai
Hercules for $3.3 million, including transaction costs of $0.2 million. The
transaction resulted in an increase to Goodwill in the amount of $1.5 million,
which is not deductible for tax purposes. As a result of this transaction,
PTV
will be able to operate with greater flexibility in the region and will be
able
to execute its expansion plans, including the development of a regional
technical and research center. As a controlled, majority-owned subsidiary,
the
results of operations and net assets of Shanghai Hercules have been included
in
the Consolidated Financial Statements and those amounts attributable to
non-controlling shareholders have been reflected as minority interests in the
Statement of Operations and Balance Sheet, respectively. Effective upon
completion of the transaction, the Company has reflected its full ownership
of
Shanghai Hercules and has included 100% of its net income in the Results of
Operations.
The
following table summarizes the fair values of the assets, liabilities and
minority interests recognized as a result of the acquisitions and consolidation
during 2006:
Assets
|
|
|
|
Liabilities
and Minority Interests
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2.6
|
|
|
Accounts
payable
|
|
$
|
10.3
|
|
Accounts
receivable, net
|
|
|
3.9
|
|
|
Accrued
expenses
|
|
|
5.5
|
|
Inventories
|
|
|
10.1
|
|
|
Minority
interests
|
|
|
9.6
|
|
Other
current assets
|
|
|
0.1
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
21.2
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
7.2
|
|
|
|
|
|
|
|
Goodwill
|
|
|
14.0
|
|
|
|
|
|
|
|
Deferred
charges and other assets
|
|
|
2.7
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
61.8
|
|
|
Total liabilities and minority interests
|
|
$
|
25.4
|
|
FiberVisions
On
March
31 2006, the Company completed the sale (the “Transaction” or “FiberVisions
Transaction”) of a 51% interest in its FiberVisions division to an affiliate of
SPG Partners, LLC (“SPG”). In connection with the Transaction, FiberVisions
issued long-term debt in the amount of $90.0 million and simultaneously
completed a distribution of $82.0 million to the Company and its wholly-owned
subsidiary, WSP Inc. (“WSP”) in proportion to their respective ownership
interests. FiberVisions incurred $6.3 million of costs in connection with the
debt issuance. Immediately thereafter, the Company received $27.0 million from
SPG in exchange for its 51% interest. The contribution agreement (“Agreement”)
provided SPG with an option to purchase an additional 14% interest in
FiberVisions. However, the option subsequently expired unexercised on January
31, 2007 resulting in a benefit to income of $0.2 million in 2007.
The
Agreement also provided for a maximum of $5.7 million of additional
contributions to FiberVisions based on defined performance measures during
2006
and 2007. Based on FiberVisions’ actual performance subsequent to the
Transaction, the Company was required to provide $4.5 million of additional
contributions during 2006. Based on FiberVisions’ performance projections for
2007, which continue to be challenged by raw material costs, the Company accrued
its remaining commitment of $1.2 million. This amount is expected to be paid
during the first half of 2007.
As
a
result of the Transaction closing and certain post-closing adjustments,
including $5.7 million for the performance-based contributions, the Company
has
recognized a $13.3 million loss on the transaction during 2006 as a component
of
Other expense, net reflecting the disposition of a non-operating asset held
for
sale. The loss also reflects a number of adjustments to the Company’s investment
including the realization of the currency translation adjustment associated
with
the disposed portion of the Company’s investment, a curtailment benefit, net of
special termination benefits, associated with FiberVisions’ domestic employees
that will no longer accrue service benefits under the Company’s pension and
postretirement benefit plans, certain indemnifications for income taxes, pension
and severance obligations, the settlement of substantially all of FiberVisions
third party debt obligations prior to closing, a provision for the valuation
of
SPG’s option and other transaction costs. A total of $8.4 million of transaction
costs and post-closing adjustments was paid during 2006 and the Company has
reflected $1.3 million to be paid during 2007 as a component of Accrued
expenses. As noted above, $1.2 million relates to the 2007 additional
contribution and the remaining $0.1 is for other transaction costs.
The
results of operations and cash flows for FiberVisions for the three months
ended
March 31, 2006 are included in the Consolidated Statement of Operations and
Consolidated Statement of Cash Flows, respectively, as it was wholly-owned
by
the Company during that period. Effective April 1, 2006, the Company began
recording its equity in the earnings of FiberVisions
based on its 49% ownership interest. The Company’s share of FiberVisions’ net
loss for the nine months ended December 31, 2006 was $3.4 million. The Company’s
investment in FiberVisions, as represented by the 49% interest held by WSP,
is
included in Deferred charges and other assets for $22.5 million, which
represents its fair value based on the terms of the Transaction adjusted for
equity losses during the nine months ended December 31, 2006.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
connection with its initial commitment to sell a majority interest in
FiberVisions at the end of 2005, the Company was required to test FiberVisions’
underlying goodwill asset 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 and its impact was reflected in
Profit from operations as it represented an active and fully consolidated
business during 2005.
As
of
December 31, 2005, the Company reclassified those assets and liabilities
attributable to FiberVisions as held for sale consistent with the Agreement.
The
amounts included on the Consolidated Balance Sheet consist of the
following:
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
|
|
|
Long-term
debt
|
|
|
0.3
|
|
Property,
plant and equipment, net
|
|
|
92.1
|
|
|
Deferred
credits and other liabilities
|
|
|
0.1
|
|
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
|
|
CP
Kelco
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.
In accordance with the provisions of FASB Interpretation No. 46, “Consolidation
of Variable Interest Entities” (revised December 2003) (“FIN 46R”), the Company
has identified Hercules Tianpu as a variable interest entity (“VIE”) for which
the Company was the primary beneficiary. The financial statements of the Company
reflect the consolidation of Hercules Tianpu effective April 1, 2006. As of
December 31, 2006, the fair value of the assets in Hercules Tianpu was $52.3
million and the fair values of the associated liabilities and non-controlling
interest were $43.6 million. There are no assets of the Company that serve
as
collateral for Hercules Tianpu. However, the Company has provided guarantees
to
certain financial institutions that have provided credit to Hercules Tianpu.
With respect to the credit facility established primarily to finance Hercules
Tianpu’s capacity expansion and working capital needs, the Company has provided
a guarantee of 55% of the total borrowing. As of December 31, 2006, the total
amount outstanding under this facility was $28.1 million.
The
Company maintains a 40% ownership interest in Hercules Tianpu and Aqualon has
the global marketing rights for the joint venture’s output and receives sales
commissions as well as royalties for licensed technology. Hercules Tianpu’s
operations began during the latter part of the first quarter of 2006 as the
contribution of cash and manufacturing assets was completed. As of December
31,
2006, the Company’s total equity investment in Hercules Tianpu was $11.4
million.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Accounts
Receivable, net includes trade accounts and notes receivable and amounts due
from affiliates less an allowance for doubtful accounts. Changes in the
allowance for doubtful accounts for the years ended December 31, 2006, 2005
and
2004 are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Balance
at beginning of year
|
|
$
|
4.0
|
|
$
|
4.7
|
|
$
|
5.5
|
|
Charged
to costs and expenses
|
|
|
3.2
|
|
|
2.3
|
|
|
5.4
|
|
Deductions
|
|
|
(1.6
|
)
|
|
(3.0
|
)
|
|
(6.2
|
)
|
Balance
at end of year
|
|
$
|
5.6
|
|
$
|
4.0
|
|
$
|
4.7
|
|
The
components of inventories as of December 31, 2006 and 2005 are as
follows:
|
|
2006
|
|
2005
|
|
Finished
products
|
|
$
|
115.4
|
|
$
|
98.4
|
|
Raw
materials and work-in-process
|
|
|
73.3
|
|
|
60.5
|
|
Supplies
|
|
|
21.9
|
|
|
20.7
|
|
|
|
$
|
210.6
|
|
$
|
179.6
|
|
The
following table provides information regarding the Company’s intangible assets
with finite lives.
|
|
2006
|
|
2005
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Customer
relationships
|
|
$
|
90.0
|
|
$
|
18.6
|
|
$
|
71.4
|
|
$
|
90.0
|
|
$
|
16.4
|
|
$
|
73.6
|
|
Trademarks
and tradenames
|
|
|
73.9
|
|
|
15.6
|
|
|
58.3
|
|
|
73.9
|
|
|
13.5
|
|
|
60.4
|
|
Other
intangible assets
|
|
|
32.2
|
|
|
18.8
|
|
|
13.4
|
|
|
24.8
|
|
|
16.0
|
|
|
8.8
|
|
|
|
$
|
196.1
|
|
$
|
53.0
|
|
$
|
143.1
|
|
$
|
188.7
|
|
$
|
45.9
|
|
$
|
142.8
|
|
Total
amortization expense for other intangible assets for the years ended
December 31, 2006, 2005 and 2004 was $7.2 million, $8.0 million and $8.1
million, respectively, which was included in Profit from operations. It is
estimated that amortization expense will be $7.1 million for 2007, $6.8 million
for 2008, $5.5 million for 2009, $5.3 million for 2010 and $4.4 million for
2011.
The
following table shows the activity and changes in the carrying amount of
goodwill for the years ended December 31, 2006 and 2005, by operating
segment:
|
|
Paper
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
Aqualon
|
|
|
|
|
|
|
|
and
Ventures
|
|
Group
|
|
FiberVisions
|
|
Total
|
|
Balance
at December 31, 2004
|
|
$
|
425.7
|
|
$
|
39.7
|
|
$
|
84.9
|
|
$
|
550.3
|
|
Impairment
|
|
|
—
|
|
|
—
|
|
|
(52.9
|
)
|
|
(52.9
|
)
|
Reclassified
to FiberVisions assets held for sale
|
|
|
—
|
|
|
—
|
|
|
(32.0
|
)
|
|
(32.0
|
)
|
Foreign
currency translation
|
|
|
(23.1
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
(24.4
|
)
|
Balance
at December 31, 2005
|
|
$
|
402.6
|
|
$
|
38.4
|
|
$
|
—
|
|
$
|
441.0
|
|
Acquisitions
and investments
|
|
|
1.5
|
|
|
12.5
|
|
|
—
|
|
|
14.0
|
|
Foreign
currency translation
|
|
|
25.4
|
|
|
1.1
|
|
|
—
|
|
|
26.5
|
|
Balance
at December 31, 2006
|
|
$
|
429.5
|
|
$
|
52.0
|
|
$
|
—
|
|
$
|
481.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A
summary of debt follows:
|
|
2006
|
|
2005
|
|
Term
B loan due 2010 (a)
|
|
$
|
375.0
|
|
$
|
393.0
|
|
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
|
|
11.125%
senior notes due 2007 (d)
|
|
|
16.1
|
|
|
130.0
|
|
6.75%
senior subordinated notes due 2029 (e)
|
|
|
250.0
|
|
|
250.0
|
|
8%
convertible subordinated debentures due 2010 (f)
|
|
|
2.4
|
|
|
2.6
|
|
6.5%
junior subordinated deferrable interest debentures due 2029
(g)
|
|
|
214.1
|
|
|
217.0
|
|
Term
loans at rates ranging from 5.5575% to 5.814% due in varying amounts
through 2011(h)
|
|
|
28.1
|
|
|
—
|
|
Other
|
|
|
9.8
|
|
|
9.6
|
|
|
|
|
995.5
|
|
|
1,109.0
|
|
Less:
Current debt obligations
|
|
|
35.8
|
|
|
16.7
|
|
Long
term debt
|
|
$
|
959.7
|
|
$
|
1,092.3
|
|
|
(a)
|
The
term loan, a component of the Company’s Senior Credit Facility, matures on
October 8, 2010 and bears interest at LIBOR + 1.50%, with the Company
holding the option to reset interest rates for one, two, three or
six
month periods. The weighted average rate was 6.87% as of December
31,
2006. The Senior Credit Facility is also comprised of a $150 million
committed revolving credit facility (the “Revolving Facility”) which
matures on April 8, 2009 and provides Hercules the ability, subject
to
lender approval, to borrow until April 8, 2007 an additional $250
million
in the form of an incremental term note. The Senior Credit Facility
is
secured by liens on the 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 29).
|
As
of
December 31, 2006, the Company had $105.7 million of outstanding letters of
credit under the Revolving Facility. The remaining $44.3 million was available
for use.
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 August 1, 2007
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
in 1998
and retained by Hercules prior to the FiberVisions
Transaction.
|
|
(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 and matures on November
15,
2007.
|
|
(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.
|
|
(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.
|
|
(h)
|
Includes
loans issued by Hercules Tianpu secured by liens on Hercules Tinapu’s
fixed assets for which Hercules has provided a guarantee for 55%
of the
outstanding balances. The loans are denominated in renminbi and include
a
short-term loan payable due in 2007 for approximately $5.9 million
and a
long-term loan payable due in 2011 for approximately $22.2
million.
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During 2006, 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 $150 million of its outstanding indebtedness on the
open
market. Under this program the Company repurchased $113.9 million (book
value)
of its 11.125% senior notes. In addition, the Company acquired 5,000 CRESTS
Units for $4.2 million in open market purchases. The market value of the
6.5%
debentures and CRESTS Units repurchased were $3.3 million and $1.0 million,
respectively. The accreted book value of the 6.5% debentures at the time
of the
purchase was $3.8 million, resulting in the recognition of a $0.5 million
gain.
The $1.0 million associated with the warrants was recorded as a reduction
of
Additional paid-in capital. Also, $18.0 million attributable to the Term
B loan
was paid during 2006, of which, $14.0 million represents a prepayment.
In
December 2006, the Board of Directors approved a new authorization for
the
repurchase of up to $200 million of debt.
At
December 31, 2006, Hercules had available and unused foreign lines of credit
totaling $31.8 million and $29.3 million, respectively.
Debt
maturities are $35.8 million in 2007, $10.1 million in 2008, $11.4 million
in
2009, $372.8 million in 2010, $1.3 million in 2011 and $564.1 million
thereafter.
The
domestic and foreign components of income (loss) before income taxes, minority
interests and equity (loss) income from continuing operations are listed
below:
|
|
2006
|
|
2005
|
|
2004
|
|
Domestic
|
|
$
|
(164.3
|
)
|
$
|
(46.9
|
)
|
$
|
(154.8
|
)
|
Foreign
|
|
|
167.5
|
|
|
11.5
|
|
|
189.3
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
$
|
3.2
|
|
$
|
(35.4
|
)
|
$
|
34.5
|
|
The
components of the tax provision from continuing operations are as
follows:
Currently
payable
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
federal
|
|
$
|
(64.0
|
)
|
$
|
1.4
|
|
$
|
(29.0
|
)
|
Foreign
|
|
|
29.6
|
|
|
40.9
|
|
|
38.1
|
|
State
|
|
|
—
|
|
|
8.8
|
|
|
13.4
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(154.6
|
)
|
|
(48.3
|
)
|
|
(21.5
|
)
|
Foreign
|
|
|
(3.2
|
)
|
|
(6.6
|
)
|
|
2.8
|
|
(Benefit)
provision for income taxes
|
|
$
|
(192.2
|
)
|
$
|
(3.8
|
)
|
$
|
3.8
|
|
On
October 25, 2006, the Company reached an agreement with the IRS with respect
to
its audit of the 2002 and 2003 tax years. The effect of the agreement resulted
in the reversal of certain tax reserves in the amount of $48.7 million
established with respect to the sale of the Company’s former BetzDearborn Water
Treatment business which has been reported as a discontinued operation. The
provision for income taxes attributable to discontinued operations and
cumulative effect of changes in accounting principle is:
|
|
2006
|
|
2005
|
|
2004
|
|
Benefit
on loss from discontinued operations
|
|
$
|
(49.6
|
)
|
$
|
(3.4
|
)
|
$
|
(1.4
|
)
|
Cumulative
effect of changes in accounting principle
|
|
|
0.5
|
|
|
(1.4
|
)
|
|
—
|
|
|
|
$
|
(49.1
|
)
|
$
|
(4.8
|
)
|
$
|
(1.4
|
)
|
During
the years ended December 31, 2006, 2005 and 2004 the Company recorded items
related to the additional minimum liability of its defined benefit plans, the
impact of the adoption of Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”)
and hedging activities. The impact of the adjustments is posted, net of tax,
directly to Accumulated other comprehensive losses (see Note
17). The tax benefit (expense) of these items was as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Additional
minimum pension liability
|
|
$
|
(44.7
|
)
|
$
|
24.8
|
|
$
|
14.5
|
|
Impact
of the adoption of SFAS 158
|
|
|
62.2
|
|
|
—
|
|
|
—
|
|
Hedging
activities
|
|
|
18.6
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
0.3
|
|
|
0.2
|
|
|
—
|
|
|
|
$
|
36.4
|
|
$
|
25.0
|
|
$
|
14.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
components of the net deferred tax assets (liabilities) as of December 31,
are
as follows:
|
|
2006
|
|
2005
|
|
Depreciation
|
|
$
|
(82.8
|
)
|
$
|
(81.4
|
)
|
Pension
|
|
|
(1.3
|
)
|
|
(8.2
|
)
|
Inventory
|
|
|
(3.1
|
)
|
|
(4.1
|
)
|
Investments
|
|
|
(19.3
|
)
|
|
(174.3
|
)
|
Goodwill
|
|
|
(45.0
|
)
|
|
(48.4
|
)
|
Accrued
expenses
|
|
|
(2.9
|
)
|
|
(3.1
|
)
|
Other
|
|
|
(7.5
|
)
|
|
(13.1
|
)
|
Gross
deferred tax liabilities
|
|
$
|
(161.9
|
)
|
$
|
(332.6
|
)
|
|
|
|
|
|
|
|
|
Postretirement
benefits other than pensions
|
|
$
|
70.0
|
|
$
|
45.5
|
|
Pension
|
|
|
87.3
|
|
|
113.4
|
|
Goodwill
|
|
|
8.4
|
|
|
7.1
|
|
Accrued
expenses
|
|
|
242.1
|
|
|
216.1
|
|
Loss
carryforwards
|
|
|
230.1
|
|
|
349.2
|
|
Credit
carryforwards
|
|
|
131.4
|
|
|
126.9
|
|
Investments
|
|
|
77.5
|
|
|
21.5
|
|
Other
|
|
|
14.2
|
|
|
24.6
|
|
Gross
deferred tax assets
|
|
|
861.0
|
|
|
904.3
|
|
Valuation
allowance
|
|
|
(335.8
|
)
|
|
(380.7
|
)
|
Net
deferred tax assets
|
|
$
|
363.3
|
|
$
|
191.0
|
|
The
reconciliation of the U.S. statutory income tax rate to the effective rate
from
continuing operations is:
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
statutory income tax rate
|
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Gain
on sale of CP Kelco ApS
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
Valuation
allowances
|
|
|
(3,137
|
)
|
|
(66
|
)
|
|
(66
|
)
|
Tax
rate differences on subsidiary earnings
|
|
|
(325
|
)
|
|
(8
|
)
|
|
(39
|
)
|
U.S.
tax on foreign dividends and undistributed earnings
|
|
|
232
|
|
|
27
|
|
|
21
|
|
State
taxes
|
|
|
(1
|
)
|
|
(15
|
)
|
|
30
|
|
Reserves
|
|
|
(1,378
|
)
|
|
21
|
|
|
61
|
|
Exempt
export income
|
|
|
(36
|
)
|
|
5
|
|
|
(6
|
)
|
Tax
refunds
|
|
|
(1,396
|
)
|
|
12
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Effective
tax rate
|
|
|
(6,006
|
)%
|
|
11
|
%
|
|
11
|
%
|
Loss
carryforwards include both net operating loss carryforwards and capital loss
carryforwards. At December 31, 2006, the tax effect of such carryforwards
approximated $230.1 million. Of this amount, $130.2 million are domestic capital
loss carryforwards that expire in 2007 for which full valuation allowances
have
been established and $3.4 million are domestic net operating loss carryforwards
that expire in 2023 for which no valuation allowance has been established.
State
net operating loss carryforwards approximate $81.0 million, with expiration
dates ranging from 2007 to 2026, for which full valuation allowances have been
established. Foreign net operating loss carryforwards approximate $15.5 million
and are offset by valuation allowances of $8.5 million. Some of these foreign
net operating loss carryforwards expire as early as 2007 and others have
expiration dates that are indefinite in nature. Deferred tax assets of $77.5
million attributable to investments represents the basis difference in the
carrying value of the Company’s 49% investment in FiberVisions for which full
valuation allowances have been established. The tax effect of the credit
carryforwards approximated $131.4 million at December 31, 2006, with
expiration dates ranging from 2011 to 2026, 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 $82.5 million and $153.8 million at December 31, 2006 and
2005, 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company provides defined benefit pension plans and postretirement benefit plans
to most U.S. employees and some foreign employees. The
following table summarizes information about the Company’s pension and
postretirement benefit plans subsequent to the adoption SFAS 158. Certain of
the
disclosures required by SFAS 158 are not applicable (“N/A”) to the 2005
presentation.
|
|
Pension
Benefits
|
|
|
|
|
|
2006
|
|
2005
|
|
Other
Postretirement Benefits
|
|
Change
in benefit obligation:
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2006
|
|
2005
|
|
Benefit
obligation at January 1
|
|
$
|
1,536.8
|
|
$
|
340.6
|
|
$
|
1,413.5
|
|
$
|
325.7
|
|
$
|
154.5
|
|
$
|
181.0
|
|
Service
cost
|
|
|
11.4
|
|
|
6.0
|
|
|
12.7
|
|
|
5.4
|
|
|
0.5
|
|
|
0.8
|
|
Interest
cost
|
|
|
86.5
|
|
|
15.5
|
|
|
81.3
|
|
|
15.2
|
|
|
8.8
|
|
|
8.8
|
|
Plan
amendments
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
(32.4
|
)
|
Foreign
currency translation
|
|
|
—
|
|
|
35.3
|
|
|
—
|
|
|
(37.3
|
)
|
|
—
|
|
|
0.1
|
|
Actuarial
(gain) loss
|
|
|
(17.8
|
)
|
|
(17.8
|
)
|
|
136.1
|
|
|
49.2
|
|
|
14.7
|
|
|
19.8
|
|
Settlements/curtailments
|
|
|
(2.3
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special
termination benefits
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
Benefits
paid from plan assets
|
|
|
(109.0
|
)
|
|
(15.2
|
)
|
|
(101.9
|
)
|
|
(13.1
|
)
|
|
—
|
|
|
—
|
|
Benefits
paid from Company assets
|
|
|
(5.1
|
)
|
|
—
|
|
|
(4.9
|
)
|
|
—
|
|
|
(21.4
|
)
|
|
(23.6
|
)
|
Benefit
obligation at December 31
|
|
$
|
1,502.1
|
|
$
|
364.1
|
|
$
|
1,536.8
|
|
$
|
340.6
|
|
$
|
158.4
|
|
$
|
154.5
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
$
|
1,219.3
|
|
$
|
256.4
|
|
$
|
1,176.2
|
|
$
|
245.7
|
|
$
|
—
|
|
$
|
—
|
|
Actual
return on plan assets
|
|
|
165.7
|
|
|
17.1
|
|
|
105.0
|
|
|
20.9
|
|
|
—
|
|
|
—
|
|
Actuarial
(loss) gain
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
—
|
|
Company
contributions
|
|
|
30.0
|
|
|
7.5
|
|
|
40.0
|
|
|
13.7
|
|
|
—
|
|
|
—
|
|
Participant
contributions
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
Foreign
currency translation
|
|
|
—
|
|
|
27.5
|
|
|
—
|
|
|
(27.7
|
)
|
|
—
|
|
|
—
|
|
Benefits
paid from plan assets
|
|
|
(109.0
|
)
|
|
(13.8
|
)
|
|
(101.9
|
)
|
|
(11.8
|
)
|
|
—
|
|
|
—
|
|
Fair
value of plan assets at December 31
|
|
$
|
1,306.0
|
|
$
|
295.0
|
|
$
|
1,219.3
|
|
$
|
256.4
|
|
$
|
—
|
|
$
|
—
|
|
Funded
status of the plan
|
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
(317.5
|
)
|
$
|
(84.2
|
)
|
$
|
(158.4
|
)
|
$
|
(154.5
|
)
|
Unrecognized
actuarial loss
|
|
|
—
|
|
|
—
|
|
|
671.2
|
|
|
104.5
|
|
|
—
|
|
|
120.1
|
|
Unrecognized
prior service benefit
|
|
|
—
|
|
|
—
|
|
|
(22.0
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
(55.4
|
)
|
Accrued
expenses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
Unrecognized
net transition obligation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.8
|
|
Net
amount recognized
|
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
331.7
|
|
$
|
17.9
|
|
$
|
(158.4
|
)
|
$
|
(89.0
|
)
|
Components
of the above amounts:
|
Prepaid
benefit cost
|
|
$
|
—
|
|
$
|
2.2
|
|
$
|
369.5
|
|
$
|
53.3
|
|
$
|
—
|
|
$
|
—
|
|
Accrued
expenses
|
|
|
(4.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.2
|
)
|
|
(23.5
|
)
|
Accrued
benefit liability (noncurrent)
|
|
|
(191.2
|
)
|
|
(71.3
|
)
|
|
(37.8
|
)
|
|
(35.4
|
)
|
|
(142.2
|
)
|
|
(65.5
|
)
|
Additional
minimum liability
|
|
|
—
|
|
|
—
|
|
|
(588.6
|
)
|
|
(48.2
|
)
|
|
—
|
|
|
—
|
|
Intangible
asset
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
Accumulated
other comprehensive losses
|
|
|
—
|
|
|
—
|
|
|
588.6
|
|
|
47.8
|
|
|
—
|
|
|
—
|
|
Net
amount recognized
|
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
331.7
|
|
$
|
17.9
|
|
$
|
(158.4
|
)
|
$
|
(89.0
|
)
|
Amounts
included in Accumulated other comprehensive
losses:
|
Actuarial
(losses) gains
|
|
$
|
(545.8
|
)
|
$
|
(106.6
|
)
|
|
N/A
|
|
|
N/A
|
|
$
|
(126.4
|
)
|
|
N/A
|
|
Prior
service credits
|
|
|
18.2
|
|
|
17.2
|
|
|
N/A
|
|
|
N/A
|
|
|
43.0
|
|
|
N/A
|
|
Transition
obligations
|
|
|
—
|
|
|
(0.4
|
)
|
|
N/A
|
|
|
N/A
|
|
|
(0.7
|
)
|
|
N/A
|
|
Total
|
|
$
|
(527.6
|
)
|
$
|
(89.8
|
)
|
|
N/A
|
|
|
N/A
|
|
$
|
(84.1
|
)
|
|
N/A
|
|
Amortization
expected to be recognized during next fiscal
year:
|
Actuarial
losses
|
|
$
|
39.1
|
|
$
|
4.5
|
|
|
N/A
|
|
|
N/A
|
|
$
|
8.9
|
|
|
N/A
|
|
Prior
service credits
|
|
|
(1.7
|
)
|
|
(0.9
|
)
|
|
N/A
|
|
|
N/A
|
|
|
(7.8
|
)
|
|
N/A
|
|
Transition
obligations
|
|
|
—
|
|
|
0.1
|
|
|
N/A
|
|
|
N/A
|
|
|
0.1
|
|
|
N/A
|
|
Total
|
|
$
|
37.4
|
|
$
|
3.7
|
|
|
N/A
|
|
|
N/A
|
|
$
|
1.2
|
|
|
N/A
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Weighted-average
assumptions used to determine the benefit obligation at December
31, 2006
and 2005 were:
|
|
|
|
Pension
Benefits
|
|
|
|
|
|
2006
|
|
2005
|
|
Other
Postretirement Benefits
|
|
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2006
|
|
2005
|
|
Weighted-average
discount rate
|
|
|
5.90
|
%
|
|
4.71
|
%
|
|
5.70
|
%
|
|
4.35
|
%
|
|
5.79
|
%
|
|
5.59
|
%
|
Rate
of compensation increase
|
|
|
4.30
|
%
|
|
3.10
|
%
|
|
4.30
|
%
|
|
2.87
|
%
|
|
4.29
|
%
|
|
4.29
|
%
|
Net
periodic benefit costs are summarized below:
|
|
Pension
Benefits
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Other
Postretirement Benefits
|
|
Net
periodic benefit cost:
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2006
|
|
2005
|
|
2004
|
|
Service
cost
|
|
$
|
11.4
|
|
$
|
6.0
|
|
$
|
12.7
|
|
$
|
5.4
|
|
$
|
13.3
|
|
$
|
5.9
|
|
$
|
0.5
|
|
$
|
0.8
|
|
$
|
0.8
|
|
Interest
cost
|
|
|
86.5
|
|
|
15.5
|
|
|
81.3
|
|
|
15.2
|
|
|
82.3
|
|
|
15.4
|
|
|
8.8
|
|
|
8.8
|
|
|
10.3
|
|
Expected
return on plan assets
|
|
|
(100.4
|
)
|
|
(17.3
|
)
|
|
(95.4
|
)
|
|
(14.9
|
)
|
|
(96.5
|
)
|
|
(14.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
and deferrals
|
|
|
(1.8
|
)
|
|
(0.4
|
)
|
|
(1.9
|
)
|
|
0.2
|
|
|
1.3
|
|
|
0.6
|
|
|
(8.0
|
)
|
|
(7.3
|
)
|
|
(8.5
|
)
|
Participant
contributions
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements/curtailments
(1)
|
|
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(4.4
|
)
|
|
—
|
|
|
—
|
|
Special
benefits/terminations (1)
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
Amortization
of transition (asset) obligation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Actuarial
losses recognized
|
|
|
39.9
|
|
|
4.5
|
|
|
40.7
|
|
|
3.4
|
|
|
33.9
|
|
|
3.1
|
|
|
8.4
|
|
|
6.5
|
|
|
5.2
|
|
Benefit
cost
|
|
$
|
35.2
|
|
$
|
7.8
|
|
$
|
37.4
|
|
$
|
8.8
|
|
$
|
35.4
|
|
$
|
9.5
|
|
$
|
6.5
|
|
$
|
8.8
|
|
$
|
7.9
|
|
(1)
During 2006, the impact of these items was directly attributable to the
FiberVisions transaction and, accordingly, these items are reflected in the
loss
on the sale of a 51% interest in FiberVisions (see Notes 3 and 22)..
Weighted-average
assumptions used to determine net periodic benefit
cost:
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
U.S.
|
|
Int’l.
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted-average
discount rate
|
|
|
6.00
|
%
|
|
4.53
|
%
|
|
5.75
|
%
|
|
5.04
|
%
|
|
6.10
|
%
|
|
5.35
|
%
|
|
5.81
|
%
|
|
5.51
|
%
|
|
6.08
|
%
|
Expected
return on plan assets
|
|
|
8.50
|
%
|
|
6.36
|
%
|
|
8.50
|
%
|
|
6.49
|
%
|
|
8.75
|
%
|
|
6.64
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
4.30
|
%
|
|
2.99
|
%
|
|
4.50
|
%
|
|
2.79
|
%
|
|
4.50
|
%
|
|
2.86
|
%
|
|
4.29
|
%
|
|
4.49
|
%
|
|
4.49
|
%
|
Defined
Benefit Pension Plans
Assets
of
the Company’s defined benefit pension 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
81% of the total plan assets and PBO for all defined benefit plans sponsored
by
the Company as of December 31, 2006. The Company uses a measurement date of
December 31 for all material defined benefit pension and other
postretirement benefit plans.
During
2006, the Company made contributions to its defined benefit plans totaling
$37.5
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 during 2007. Additionally, the Company anticipates
making contributions of approximately $21.0 million to its international defined
benefit pension plans in 2007.
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. and
Canada. 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, 2006 for non-pension postretirement benefits. The assumed
participation rate in these plans for future eligible retirees was 50% 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 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The assumed health care cost trend rate as of December 31, 2006 was an initial
rate of 10% in 2007 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 $3.9 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 $4.3 million and the aggregate service and interest
cost components by $0.4 million.
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 to remaining participants from “final pay” to “modified
career average pay,” effective January 1, 2005. New employees are ineligible for
retiree life insurance or postretirement health care benefits.
The
asset
allocation for the U.S. Plan as of December 31, 2006 and 2005 and the target
allocation for 2007, by asset category, is as follows:
|
|
Target
Allocation
|
|
Percentage
of Plan Assets
at
December 31,
|
|
Asset
category:
|
|
2007
|
|
2006
|
|
2005
|
|
Equity
securities
|
|
|
61
|
%
|
|
71
|
%
|
|
66
|
%
|
Fixed
income
|
|
|
32
|
%
|
|
22
|
%
|
|
26
|
%
|
Other
|
|
|
7
|
%
|
|
7
|
%
|
|
8
|
%
|
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, 2006 or December 31, 2005.
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. 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 both 2006 and
2005. 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 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 2007 as well as the future benefit payments expected to be paid from plan
or
Company assets, are as follows:
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
|
Pension
Benefits
|
|
|
|
|
|
Qualified
Plan
|
|
Non-qualified
Plan
|
|
Total
|
|
Other
Postretirement Benefits
|
|
Expected
employer contributions for 2007
|
|
$
|
40
|
|
$
|
—
|
|
$
|
40
|
|
$
|
—
|
|
Expected
benefit payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
88
|
|
|
5
|
|
|
93
|
|
|
16
|
|
2008
|
|
|
87
|
|
|
5
|
|
|
92
|
|
|
16
|
|
2009
|
|
|
88
|
|
|
5
|
|
|
93
|
|
|
15
|
|
2010
|
|
|
88
|
|
|
5
|
|
|
93
|
|
|
14
|
|
2011
|
|
|
89
|
|
|
5
|
|
|
94
|
|
|
13
|
|
2012-2016
|
|
|
476
|
|
|
25
|
|
|
501
|
|
|
55
|
|
International
Pension Plans
The
International Plans are Company provided defined benefit and contribution plans
to eligible employees in Europe, Canada and Asia Pacific. The International
defined benefit 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, 2006.
The
asset
allocation for International Plans as of December 31, 2006 and 2005 and the
target allocation for 2007, by asset category, is as follows:
|
|
Target
Allocation
|
|
Percentage
of Plan Assets
at
December 31,
|
|
Asset
category:
|
|
2007
|
|
2006
|
|
2005
|
|
Equity
securities
|
|
|
58
|
%
|
|
58
|
%
|
|
61
|
%
|
Fixed
income
|
|
|
41
|
%
|
|
41
|
%
|
|
38
|
%
|
Other
|
|
|
1
|
%
|
|
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 6.75% for 2006 and 6.8%
for
2005, 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.
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.
The
target asset allocation for the U.K. Plan is 50% global equity securities and
50% fixed income investments (debt and debt-like securities, including preferred
securities). The expected long-term rate of return on plan assets was 5.2%
and 5.6% for 2006 and 2005, 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 2007 and the total benefit payments expected to
be
paid from the plan assets or Company assets through the year 2016, are
summarized in the table below:
|
|
Pension
Plan Benefits
|
|
Expected
employer contributions for 2007
|
|
$
|
21
|
|
Expected
benefit payments:
|
|
|
|
|
2007
|
|
|
15
|
|
2008
|
|
|
15
|
|
2009
|
|
|
16
|
|
2010
|
|
|
16
|
|
2011
|
|
|
18
|
|
2012-2016
|
|
|
97
|
|
The
Hercules Incorporated Savings and Investment Plan (“SIP Plan”) allows employees
to invest a portion of compensation in a defined contribution 401(k) plan.
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 $6.4 million, $7.3 million and $8.2 million
for the years ended December 31, 2006, 2005 and 2004, respectively, is recorded
in Additional paid-in capital. Total shares allocated to fund these plan
payments were 106,977 and 103,717 for the years ended December 31, 2006 and
2005, 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 $42.1 million and $53.6 million at December 31, 2006 and
2005, respectively. The unallocated shares have a cost basis of $31.625 per
share.
At
December 31, 2006 and 2005, the ESOP Trust had $28.3 million and $39.2 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.
|
|
2006
|
|
2005
|
|
Allocated
|
|
|
1,200,346
|
|
|
1,458,065
|
|
Unallocated
|
|
|
1,332,965
|
|
|
1,695,387
|
|
Total
shares held by ESOP Trust
|
|
|
2,533,311
|
|
|
3,153,452
|
|
The
Company's SIP related expense was $6.1 million, $4.0 million and $3.9 million
for the years ended December 31, 2006, 2005 and 2004, respectively.
The
Company has recorded asset retirement obligations (“ARO”) in order to recognize
legal obligations associated with the retirement of tangible long-lived assets
and for the remediation of environmental liabilities associated with current
and
former operations 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 number of AROs that are conditional in nature including those
triggered upon commitments by the Company to take certain actions, including
demolition, renovation and other retirement-related activities as contemplated
by FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement
Obligations - an interpretation of FASB Statement No. 143” (“FIN 47”). These
actions include the preparation of certain properties for sale or for
alternative uses as well as the requirement to dismantle the Company’s
manufacturing facilities in certain countries upon their ultimate retirement
or
land lease expiration dates. There are also conditional requirements for asset
component retirements in which the Company can reasonably estimate both the
amount of the required settlement as well as the range of settlement
dates.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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.
With
respect to environmental contamination, the Company operates within the
requirements of numerous regulations at the local, state and U.S. Federal and
foreign 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, 2006, the Company has accrued a total of $76.3 million with respect
to AROs. Of this amount, approximately $72.3 million is for environmental
remediation associated with current and former operating sites. An amount of
$21.0 million is included in Accrued expenses representing amounts to be settled
during 2007 and the remaining $55.3 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 expense, net for active operating sites and facilities and Other
expense, net for inactive sites associated with businesses that have been exited
or divested.
The
following table provides a reconciliation of changes in the AROs during the
period:
|
|
Active
Sites
|
|
Inactive
Sites
|
|
Total
|
|
Balance
at January 1, 2005
|
|
$
|
7.1
|
|
$
|
89.2
|
|
$
|
96.3
|
|
Impact
of the adoption of FIN 47
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
0.8
|
|
|
1.4
|
|
|
2.2
|
|
Settlement
payments
|
|
|
(4.3
|
)
|
|
(14.1
|
)
|
|
(18.4
|
)
|
Changes
in estimated obligations
|
|
|
3.2
|
|
|
(1.6
|
)
|
|
1.6
|
|
Foreign
currency translation
|
|
|
0.2
|
|
|
0.4
|
|
|
0.6
|
|
Balance
at December 31, 2006
|
|
$
|
10.1
|
|
$
|
66.2
|
|
$
|
76.3
|
|
While
not
reflected in the table above, the Company has recognized $5.3 million for
environmental contingencies whereby it is reasonably likely that the Company
has
incurred a liability for costs associated with environmental remediation or
for
the probable 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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/or other restrictions
and limitations. The carrying amount recorded for indemnifications as of
December 31, 2006 was $41.2 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.
Debt
and Other Obligations
The
Company has directly guaranteed up to $43.5 million of various obligations
under
agreements with third parties related to subsidiaries, VIEs and affiliates
of
which $30.4 million is outstanding. The outstanding balance reflects guarantees
of debt for terms of varying length as well as a guarantee related to a
foreign-based pension plan with an indefinite term. The Company has also
provided $2.9 million in collateral in the form of a mortgage security for
the
aforementioned pension plan. Existing guarantees for subsidiaries and affiliates
arose from liquidity needs in normal operations.
Intercompany
Guarantees
The
Company and its subsidiaries have authorized intercompany guarantees between
and
among themselves which aggregate $191.5 million, of which $179.6 million was
outstanding as of December 31, 2006. 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 $19.7 million, $20.6
million and $22.1 million in 2006, 2005 and 2004, respectively, is net of
sub-lease income of $5.1 million, $5.2 million and $5.4 million in 2006, 2005
and 2004, respectively.
At
December 31, 2006, minimum rental payments under non-cancelable leases
aggregated $133.4 million with offsetting subleases of $32.4 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 $18.9 million in 2007, $18.9 million in 2008,
$25.7 million in 2009, $11.8 million in 2010, $11.0 million in 2011 and $14.7
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.
The
Company 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.
The Company 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 of America v. Vertac Chemical Corporation, et al.,
No.
4:80CV00109 (United States District Court, Eastern District of Arkansas, Western
Division)
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 in litigation since 1980, and involves
liability for costs in connection with the investigation and remediation of
the
Vertac Chemical Corporation (“Vertac”) site in Jacksonville, Arkansas. The
Company 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, the Company 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 were involved
in the investigation and remediation of contamination at and around the site.
Pursuant to several orders issued under CERCLA, the Company actively
participated in many of those 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.
The
procedural history of this litigation is discussed in greater detail in reports
previously filed by the Company with the SEC. In summary, in 1999, the District
Court finalized a ruling holding the Company and Uniroyal jointly and severally
liable for approximately $100 million in costs incurred by the 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 the Company. Both
the
Company and Uniroyal appealed those rulings to the U.S. Court of Appeals for
the
Eighth Circuit (the “Court of Appeals”). In 2001, the Court of Appeals 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 the
Company for $119.3 million, of which amount Uniroyal has been held jointly
and
severally liable for $110.4 million, with the Company alone liable for the
difference. The Final Judgment also provided that both the Company 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 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
the
Company for 2.6% of the response costs incurred by the Company of approximately
$27.4 million, or $0.7 million. Both the Company and Uniroyal appealed the
Final
Judgment to the Court of Appeals, asserting that the District Court had
committed reversible error.
On
July
13, 2006, a panel of the Court of Appeals affirmed the Final Judgment of the
District Court. The Company requested that the panel’s determination be reviewed
en
banc,
but
that request was denied by Order dated September 19, 2006. On December 14,
2006,
the Company filed a Petition for a Writ of Certiorari with the United States
Supreme Court, requesting that the Supreme Court review this matter. No action
has yet been taken by the Supreme Court with respect to the Company’s Petition.
While the Company continues to believe that the Final Judgment should be
reversed, the Supreme Court agrees to review very few matters, and it is
therefore probable that the Company will not be successful in having the Supreme
Court agree to review the July 13, 2006 decision which affirmed the Final
Judgment. Accordingly, the Company has accrued its total net liability of $123.5
million, including interest but not including amounts for which Uniroyal has
been held liable, based on the Final Judgment, which is recorded as a current
liability at December 31, 2006. The Company will continue to accrue interest
on
this amount until such time as the Final Judgment is either reversed or is
paid.
If the Company is ultimately required to pay such amount to the United States,
an event which could occur in 2007 or thereafter, the payment of such amount
could have a material adverse effect upon the Company’s cash flows in such
annual, quarterly or other period.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Alleghany
Ballistics Laboratory
The
Alleghany Ballistics Laboratory (“ABL”) is a government-owned facility which was
operated by the Company from 1945 to 1995 under contract with the United States
Department of the Navy. The Navy and the Company have commenced discussions
with
respect to certain environmental liabilities which the Navy alleges are
attributable to the Company’s past operations at ABL. During the course of
discussions, the Navy has stated that, pursuant to CERCLA, it has spent and
anticipates spending in the future a total of approximately $76 million. 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 below.
Kim
Stan Landfill
The
Company 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. As a result of that investigation, the Company
believes that it has defenses that would substantially reduce its exposure.
The
Company and two other PRPs are in negotiations with the EPA in an attempt to
resolve this matter in an equitable manner. The Company believes it is probable
that this matter will ultimately be amicably resolved, and the amount the
Company reasonably estimates that it will pay is included in the accrued
liability for environmental matters reported below.
Clean
Air Act Notice of Violation
On
December 23, 2005, EPA Region III issued a Notice of Violation (“NOV”) 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, Pennsylvania. (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. The EPA
has not specifically made a demand for monetary penalties upon the Company
and
Eastman. The Company is continuing to investigate the allegations set forth
in
the NOV, as well as any indemnification obligations that it may owe to Eastman
pursuant to the terms of the purchase and sale agreement. At this time, however,
the Company cannot reasonably estimate its liability, if any, with respect
to
this matter and, accordingly, has not included this site in the accrued
liability for environmental matters reported below.
Range
of Exposure
The
reasonably possible share of costs for environmental matters involving current
and former operating sites, including those with identified asset retirement
obligations (see Note 12), the Vertac site and other locations where the Company
may have a liability, is approximately $205 million as of December 31, 2006.
This accrued liability is evaluated at least 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.
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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 (discussed above); 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, and may also seek punitive damages.
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, certain 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.
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, 2006, there were approximately 26,045 unresolved claims, of which
approximately 980 were premises claims and the rest were products claims.
There were also approximately 2,075 unpaid claims which have been settled or
are
subject to the terms of a settlement agreement. In addition, as of
December 31, 2006, there were approximately 528 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, 2006 and December 31, 2006, the Company received approximately 2,665
new claims. During that same period, the Company spent approximately $31.5
million to resolve and defend asbestos matters, including $23.1 million in
settlement payments and approximately $8.4 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.
As
discussed in greater detail in reports previously filed by the Company with
the
SEC, the Company entered into several settlements with its insurers in 2004.
The
first such settlement involved 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 placed $67.0 million into a trust (the “Equitas Trust”)
set up to reimburse the Company for a portion of the costs it incurred to defend
and resolve certain asbestos claims. 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 settlement
provided that if federal asbestos reform legislation was not enacted into law
on
or prior to January 3, 2007, any funds remaining in the Equitas Trust would
be available to the Company to pay asbestos-related liabilities or to use for
other corporate purposes. Federal asbestos reform legislation was not enacted
on
or prior to January 3, 2007. As a result, on January 4, 2007, the Company
received as a lump sum distribution approximately $41.3 million, an amount
representing a complete liquidation of the remaining balance of the Equitas
Trust, including accrued interest, and the Equitas Trust has been terminated.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 a total of approximately
$102.2 million into a trust (the “Second Trust”), with such amount to be paid
over a four-year period commencing in January 2005 and ending in 2008. 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 defend and resolve asbestos-related claims. Any funds
remaining in the Second Trust subsequent to December 31, 2008 may be used
by the Company to defend and resolve both asbestos-related claims and
non-asbestos related claims. As of December 31, 2006, approximately $66.1
million of the $102.2 million had been placed into the Second Trust, and
the
Second Trust had a balance of approximately $13.8 million. On or about January
31, 2007, an additional $16.4 million was placed into the Second 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.
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 (with credit for certain amounts spent prior 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 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 of December 31, 2006, defense
costs and settlement payments for qualifying asbestos products claims of
approximately $132.4 million have been credited towards the range of $330
million to $370 million noted above.
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. Upon exhaustion of the trust fund monies, 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 qualifying asbestos
product liability claims defense costs and settlement 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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 provide
coverage for a significant portion, but less than a majority, of the Company’s
monetary exposure going forward for its estimated asbestos-related liabilities.
Since the settlements noted above were entered into, the Company’s insurers have
paid over $207 million to the Company and to the Trusts referred to above.
Some
of those payments have been used to pay or reimburse the Company for
asbestos-related liabilities, and some of those payments have been used by
the
Company for other corporate purposes. Based on the Company’s current claims
experience, it is possible that before the end of 2007, the Company will be
responsible for payment of a portion of its asbestos-related liabilities without
the ability to seek reimbursement from the Second Trust, and that by mid-2008,
or earlier, it is likely that the Company will be responsible for payment of
all
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
the cost of defending and settling qualifying asbestos product liability claims
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, however, 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.
In
early
2003, the Company 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 2007, the study was
updated again and, as a result, the reasonably possible exposure for these
matters as of December 31, 2006 was revised to a range of $270 million to
$770 million, which is the same as the previously established range at the
lower
end, and slightly lower than the previously established range at the high
end. 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. 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. Moreover,
while
the
expert noted above has applied his methodology in determining the Company’s
reasonably possible range of exposures for these liabilities on a consistent
basis, other methods in practice exist which place a differing degree of
emphasis on the underlying variables used to measure asbestos-related
contingencies. Such other methods could yield significantly different ranges
of
reasonably possible exposures.
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 sufficient to trigger the obligations
under the Future Coverage Agreement, the Company presently believes that a
significant portion of the liability it may reasonably anticipate will be
reimbursed by monies to be received pursuant to the Future Coverage Agreement.
However, there can be no assurance that such liabilities will be
reimbursed.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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,
2006 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).
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, 2006.
|
|
Balance
January
1, 2006
|
|
Interest
Income/
Additional
Accruals
|
|
Insurance
Recovered/
Liabilities
Settled
|
|
Accretion/
Reclassifi-
cation
|
|
Balance
December
31, 2006
|
|
Asbestos-related
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable
|
|
$
|
65.2
|
|
$
|
—
|
|
$
|
(33.3
|
)
|
$
|
0.9
|
|
$
|
32.8
|
|
Restricted
cash in trust
|
|
|
55.5
|
|
|
3.0
|
|
|
(3.8
|
)
|
|
—
|
|
|
54.7
|
|
Asbestos-related
assets
|
|
$
|
120.7
|
|
$
|
3.0
|
|
$
|
(37.1
|
)
|
$
|
0.9
|
|
$
|
87.5
|
|
Asbestos-related
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related
liabilities, current
|
|
$
|
36.4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
36.4
|
|
Asbestos-related
liabilities, non-current
|
|
|
233.6
|
|
|
23.1
|
|
|
(23.1
|
)
|
|
—
|
|
|
233.6
|
|
Total
asbestos-related liabilities
|
|
$
|
270.0
|
|
$
|
23.1
|
|
$
|
(23.1
|
)
|
$
|
—
|
|
$
|
270.0
|
|
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.
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 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 have been reflected
in
the Company’s financial statements. At this time, all of the forgoing lawsuits
have been resolved, and all payments have been made, without any admission
of
liability. Each of the settlements was entered into by the Company in order
to
avoid the risks, uncertainties and costs inherent in litigation. In addition
to
the foregoing, two of the Company’s former customers have “opted-out” of the
Federal and California state class actions referred to above. The Company
believes it probable that the claims of these two former customers will
ultimately be amicably resolved, and the amount that the Company reasonably
estimates that it will pay is included in the accrued liability for non-asbestos
litigation reported below. Furthermore, by letter dated January 30, 2007, one
of
the defendants in the foregoing lawsuits asserted a claim against the Company
for damages as a result of the alleged anticompetitive activities alleged in
the
lawsuits described above, and requested that the Company enter into settlement
discussions. The Company intends to investigate this claim, but currently
believes it is without merit and legally defensible.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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 its Composite Products division to Hexcel in 1996. In
response, Hexcel Corporation has denied liability and has filed a counter-claim
also seeking indemnification. Both parties have filed motions for summary
judgment, but no ruling has yet been issued by the Court. No date for trial
has
been set.
Agent
Orange Litigation
Agent
Orange is a defoliant that was manufactured by several companies, including
the
Company, 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.
Currently,
the Company is a defendant 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.
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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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. It has been reported that
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 have
appealed. 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
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, the Company and several other
defendants entered into an agreement to settle these matters with the Company
agreeing to pay $1,412,000, an amount which has since been paid. On May 4,
2006,
the Court granted settlement class certification. This settlement, which was
agreed to by the Company without any admission of liability, is pending final
approval by the Court.
On
May 7, 2004, Ciba Specialty Chemicals Corporation (“Ciba”) filed a
Complaint against the Company 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 related to
the manufacture, use, sale and offer to sell of certain products of the
Company’s Paper Technologies and Ventures segment. Ciba sought to enjoin alleged
continued infringement, obtain a judgment that the defendants infringed the
patents, and obtain an award of damages and reasonable attorney’s fees.
The Company agreed to indemnify Cytec with respect to Ciba’s patent
infringement charges. On June 26, 2006, the Court issued a Memorandum
Opinion in which the Court granted the Company’s and Cytec’s motions for summary
judgment and denied Ciba’s motion for summary judgment. On July 27, 2006, the
Court entered Judgment in favor of the Company and Cytec and against Ciba.
On
August 25, 2006, Ciba filed a Notice of Appeal to the United States Court of
Appeals for the Federal Circuit. Settlement discussions with Ciba and Cytec
followed and a confidential settlement was reached in December 2006. Ciba
withdrew its appeal and, in January 2007, this matter was dismissed.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
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
sought the payment of benefits under the Pension Plan of Hercules Incorporated
(the “Plan”), and alleged 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 was alleged that the Company’s adoption in 2002 of a new interest rate
assumption used to determine the 51% cash payment constituted 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 constituted a breach
of
fiduciary duty. The Stepnowski
lawsuit
sought, among other things, the payment of additional benefits under ERISA
(as
well as costs and attorneys fees), and to compel the Company to use an interest
rate assumption that is more favorable to eligible retirees. 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 the Stepnowski
and
Webster
lawsuits
for discovery and trial. In March 2006, the Court certified the Webster
action
as a class action. By Order dated April 20, 2006, the Court entered partial
summary judgment in favor of plaintiffs, holding that while the interest
rate
change did not violate the anti-cutback provisions of ERISA, such change
did
violate provisions of the Plan, and ordered the Company to recalculate the
lump
sum pension benefit owed to class members by using the prior interest rate
assumption (the “PBGC” rate, which was the rate used prior to the change to the
new interest rate, as referenced above) to calculate benefits accrued through
December 31, 2001, and the new interest rate (the “30-Year Treasury Bond” rate)
for all benefits accrued after December 31, 2001. That Order also required
the
Company to make certain payments to Mr. Stepnowski and Mr. Webster, with
such
payments representing the additional lump sum benefit payable as a result
of the
adjusted lump sum calculation described in the preceding sentence, plus
interest. On October 4, 2006, the parties entered into a settlement in principle
to resolve both the Stepnowski
lawsuit
and Webster
class
action lawsuit. Preliminary approval of the settlement was granted by the
Court
on December 4, 2006. A hearing for final approval of the settlement is set
for
April 16, 2007.
The main
points of the settlement are: (1) each Class member’s lump sum will be computed
using the 30 Year Treasury Bond rate applied to all eligible service through
December 31, 2004 as the “floor,” plus 75% of the additional value gained, if
any, by using the PBGC rate for that portion of eligible service accrued
through
December 31, 2001 (the Plan’s actuaries have estimated that the “present value”
of the total settlement award is approximately $18.2 million, without
consideration of additional interest payments); (2) each Class member who
has
already received a lump sum will also receive 3% interest, compounded annually,
on his or her settlement award, from the date the original lump sum amount
was
paid until the settlement award has been paid; and (3) Defendants will pay
$0.3
million toward the fees and litigation costs of plaintiffs’ counsel. In
addition, plaintiffs and plaintiffs’ counsel have agreed to petition the Court
for an additional award which, if approved, will be credited against the
present
value of the aggregate settlement award and will reduce each Class member’s
settlement award by the same percentage. Of note, except for $0.3 million,
the
payments to be made as a result of this lawsuit will be made by the Company’s
pension plan.
Acevedo,
et al. v. Union Pacific Railroad Company, et al.,
Case
No. C-4885-99-F. 332nd
Judicial
District Court, Hidalgo County, Texas (2001), and related lawsuits, are mass
toxic tort lawsuits 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.
The
Company and others have been sued by approximately 520 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, and since that time, a portion
of these claims have been resolved. The Company has accrued its remaining
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, Robert
Corbin, et al. v. Canadianoxy Offshore Production Co., et al.,
Civil
Action No. 98-1097, Carl
Belaire, et al. v. Bridgestone Firestone Inc., et al.,
Civil
Action No. 2005-004369, Darrell
Comeaux, et al. v Bridgestone/Firestone, Inc.,
et
al.,
Civil
Action No. 2006-2242, and Howard
Dejean, et al. v. Bridgestone/Firestone, Inc., et al., Civil Action No.
2006-6276.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Amounts
Accrued for Non-Asbestos Litigation
During
the period January 1, 2006 through December 31, 2006, the Company incurred
charges totaling $12.2 million and paid $7.1 million in settlement payments
including defense costs with respect to the settlement of non-asbestos and
non-environmental litigation. The December 31, 2006 Consolidated Balance Sheet
reflects a current liability of $8.6 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.
A
separate liability is provided for the Vertac litigation. 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.
Effective
January 1, 2006 (the “effective date”), the Company adopted SFAS 123R as
interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted SFAS
123R 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. The
Company continues to use 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.
The
Company previously adopted SFAS 123 on a prospective basis for all employee
and
non-employee director awards granted, modified or settled after January 1,
2003.
Excluding stock options issued to non-employee directors which vest immediately
upon grant due to certain retirement-eligibility provisions, the Company did
not
issue any stock options to employees during 2003 and 2004. During 2005, the
Company granted nonqualified stock options to its Chief Executive Officer
(“CEO”). Those stock options have been accounted for in accordance with SFAS
123. Stock options issued to employees during years prior to 2003, which were
accounted for in accordance with APB 25, had fully vested by December 31, 2005.
Accordingly, there is no cost attributable to such options to be recorded
subsequent to 2005. During 2006, the Company issued nonqualified stock options
as well as restricted stock awards to the CEO and other management personnel.
These awards have been accounted for in accordance with SFAS 123R.
The
Company has in the past and continues to provide for the grant of stock options
and the award of restricted common stock and other market-based units to key
employees and non-employee directors under the following plans: (1) Hercules
Incorporated Long Term Incentive Compensation Plan (“LTICP”), (2) Management
Incentive Compensation Plan (“MICP”), and (3) Hercules Incorporated Omnibus
Equity Compensation Plan for Non-Employee Directors (“Omnibus Plan”)
(collectively, the “Plans”). As of December 31, 2006, 8,546,964 shares were
available for grant under the Plans as stock awards or stock option awards.
A
summary of the valuation and accounting for share-based awards granted under
the
Plans is described in further detail below.
The
compensation cost attributable to the Plans during 2006, 2005 and 2004 was
$6.6
million, $8.1 million and $3.2 million, respectively, and was recognized as
a
component of Selling, general and administrative expenses. During 2006, $0.4
million attributable to the acceleration of cost related to FiberVisions
employees was included as a component of the loss on disposition. The total
income tax benefit recognized in the Statement of Operations for share-based
compensation arrangements was $2.3 million, $2.8 million and $1.1 million for
2006, 2005 and 2004, respectively. In connection with the transition to SFAS
123R, the Company determined that it will account for the income tax effects
of
share-based compensation with a pool of windfall tax benefits (the “pool”) set
at zero upon the effective date. In addition, the Company recognized $6.2
million of tax benefits in Additional paid-in capital resulting from the
exercise of stock options and vesting of restricted stock during 2006.
Upon
the
adoption of SFAS 123R, the Company recorded a $0.9 million benefit, net of
income taxes, as a cumulative effect of a change in accounting principle to
reflect the required change in accounting policy for recognition of forfeitures
from occurrence-based to one whereby the recognition of cost is based upon
an
estimate of the total number of awards that are expected to vest over the
requisite service period for all awards. The adjustment was based on the
unvested portion of awards issued prior to 2006 that were outstanding upon
the
effective date.
The
Company issues shares from treasury stock upon the exercise of stock options
and
the grant of restricted stock awards. During 2006, the Company issued 3,559,294
shares of stock from treasury, of which 2,966,552 were attributable to the
exercise of stock options and 516,252 were attributable to the grant of
restricted stock awards. In addition, 121,993 shares were returned to treasury
stock as a result of forfeitures of restricted stock awards. Cash received
from
the exercise of stock options during 2006 was $37.0 million.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Stock
Options
Regular
stock options are granted under the Plans at the market price on the date of
grant or measurement date and are exercisable at various periods from one to
nine years after date of grant. Performance accelerated stock options (“PASOs”)
are also granted at the market price at 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 stock
options and PASOs expire ten years after the date of grant. These awards 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 Plans do not provide the award recipients the ability to require a cash
settlement except in the case of a standard cashless exercise
program.
The
fair
value of option awards granted during 2006, 2005 and 2004 is measured on the
date of grant using the Black-Scholes option pricing model and the
weighted-average assumptions in the following table:
|
|
2006
|
|
2005
|
|
2004
|
|
Expected
volatility
|
|
|
30.10
|
%
|
|
28.65
|
%
|
|
31.22
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected
life (in years)
|
|
|
6.0
|
|
|
6.0
|
|
|
6.0
|
|
Risk-free
interest rate
|
|
|
4.60
|
%
|
|
4.08
|
%
|
|
3.73
|
%
|
A
summary
of outstanding stock option activity under the Plans during 2004, 2005 and
2006
is presented as follows:
|
|
Regular
|
|
Performance
Accelerated
|
|
|
|
Number
of
Shares
|
|
Weighted-
average
Price
|
|
Number
of
Shares
|
|
Weighted-average
Price
|
|
Outstanding
at January 1, 2004
|
|
|
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
|
|
Outstanding
at 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
|
|
Outstanding
at December 31, 2005
|
|
|
8,382,012
|
|
$
|
21.31
|
|
|
1,342,115
|
|
$
|
43.49
|
|
Granted
|
|
|
503,430
|
|
|
12.52
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
(2,966,552
|
)
|
|
12.29
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
(1,241,595
|
)
|
|
32.12
|
|
|
(621,125
|
)
|
|
46.67
|
|
Outstanding
at December 31, 2006
|
|
|
4,677,295
|
|
$
|
23.22
|
|
|
720,990
|
|
$
|
40.75
|
|
The
weighted-average grant date fair value of options granted during 2006, 2005
and
2004 was $4.86, $5.13 and $5.38 per option, respectively. These options vest
over a period of three years with 40% vesting in each of the first two years
and
20% in the third year. Accordingly, the Company amortizes compensation cost
using the graded vesting method. The total intrinsic value of options exercised
was $17.1 million, $0.6 million and $1.0 million during 2006, 2005 and 2004,
respectively. As of December 31, 2006, there was $1.6 million of unrecognized
compensation cost related to stock options granted under the Plans. That cost
is
expected to be recognized over a remaining weighted-average period of 1.9 years.
The total fair value of option shares charged to compensation expense during
2006 was $1.6 million.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Following
is a summary of stock options outstanding and exercisable at December 31,
2006:
|
|
Outstanding
Options
|
|
Exercisable
Options
|
|
|
|
Number
Outstanding
|
|
Weighted-
average
Remaining
Contractual
Life
|
|
Weighted-
average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted-
average
Exercise
Price
|
|
Regular
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
$8.50
- $11.75
|
|
|
608,150
|
|
|
5.00
|
|
$
|
11.13
|
|
|
608,150
|
|
$
|
11.13
|
|
$11.76
- $15.00
|
|
|
1,359,464
|
|
|
7.12
|
|
$
|
12.46
|
|
|
772,746
|
|
$
|
12.28
|
|
$15.01
- $25.00
|
|
|
801,686
|
|
|
3.37
|
|
$
|
17.21
|
|
|
776,210
|
|
$
|
17.20
|
|
$25.00
- $33.75
|
|
|
404,200
|
|
|
1.69
|
|
$
|
25.70
|
|
|
404,200
|
|
$
|
25.70
|
|
$33.76
- $40.00
|
|
|
1,203,945
|
|
|
1.46
|
|
$
|
38.54
|
|
|
1,203,945
|
|
$
|
38.54
|
|
$40.01
- $55.00
|
|
|
299,850
|
|
|
1.32
|
|
$
|
47.79
|
|
|
299,850
|
|
$
|
47.79
|
|
|
|
|
4,677,295
|
|
|
|
|
|
|
|
|
4,065,101
|
|
|
|
|
Performance-Accelerated
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
$25.00
- $37.00
|
|
|
11,075
|
|
|
2.45
|
|
$
|
31.16
|
|
|
—
|
|
|
—
|
|
$37.01
- $45.00
|
|
|
511,405
|
|
|
1.75
|
|
$
|
38.19
|
|
|
150,850
|
|
$
|
39.50
|
|
$45.01
- $50.00
|
|
|
197,185
|
|
|
1.33
|
|
$
|
47.83
|
|
|
575
|
|
$
|
47.25
|
|
$50.01
- $61.00
|
|
|
1,325
|
|
|
0.65
|
|
$
|
52.21
|
|
|
—
|
|
|
—
|
|
|
|
|
720,990
|
|
|
|
|
|
|
|
|
151,425
|
|
|
|
|
The
intrinsic value of Regular stock options outstanding and exercisable as of
December 31, 2006 was $16.0 million and $12.0 million, respectively. The
Performance-Accelerated stock options did not have any intrinsic value as their
exercise prices exceeded the market value of Hercules’ stock.
Restricted
Stock Awards
Restricted
stock and other market based units are awarded with respect to certain programs
in connection with the Plans. During the restriction period, award holders
have
the rights of stockholders, including the right to vote and receive cash
dividends, if any, but cannot transfer ownership and nonvested shares are
subject to forfeiture. Restricted stock awards are recorded at the fair value
of
the Company’s stock on the grant date (measurement date). These awards 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.
A
summary
of restricted stock award activity under the Plans during 2006 is presented
as
follows:
|
|
Number
of
Shares
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Outstanding
at January 1, 2006
|
|
|
2,093,631
|
|
$
|
11.38
|
|
Granted
|
|
|
516,252
|
|
|
12.47
|
|
Vested
|
|
|
(430,482
|
)
|
|
9.17
|
|
Forfeited
|
|
|
(121,993
|
)
|
|
12.36
|
|
Outstanding
at December 31, 2006
|
|
|
2,057,408
|
|
$
|
12.05
|
|
The
restricted stock awards granted during 2006 vest based on relative stock
performance over a period of three to seven years from the date of grant.
Vesting can be accelerated to as early as three years from the date of grant
or
delayed to seven years based upon share price fluctuation with a market-based
benchmark. Currently, the 2006 awards are being amortized over a five year
period. Restricted stock awards granted in periods prior to 2006 include awards
which vest based on continuous service as well as those whose vesting can be
accelerated upon the achievement of a market-based benchmark. The total number
of restricted stock awards that are expected to vest is adjusted by estimated
forfeiture rates. As of December 31, 2006, there was $12.9 million of
unrecognized compensation cost related to restricted stock awards granted under
the Plans. That cost is expected to be recognized over a remaining
weighted-average period of 3.5 years. The total fair value of shares charged
to
compensation expense during 2006, 2005 and 2004 was $5.4 million, $6.9 million
and $3.1 million, respectively.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Amortization
of compensation cost for those awards issued prior to 2006 is based on
a normal
five-year vesting period. Consistent with prior periods, the Company will
continue to amortize the cost of these awards based on this policy unless
there
is an acceleration or deceleration event or change in estimated forfeitures,
upon which compensation cost will be adjusted accordingly.
There
are
2,000,000 shares of series preferred stock without par value authorized for
issuance, none of which have been issued.
Hercules
common stock has a stated value of $25/48, and 300,000,000 shares are authorized
for issuance. At December 31, 2006, a total of 20,708,528 shares were
reserved for issuance for the following purposes: 5,398,285 shares for the
exercise of awards under the Stock Option Plan; 8,546,964 shares for awards
under incentive compensation plans; 159,065 shares for conversion of debentures;
and 6,604,214 shares for exercise of the warrant component of the CRESTS
Units.
The
components of Accumulated other comprehensive losses are as
follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Pension
and postretirement benefit plan adjustments, net of tax (1)
|
|
$
|
(461.3
|
)
|
$
|
(415.7
|
)
|
$
|
(376.9
|
)
|
Foreign
currency translation adjustments, net of hedging activities and
taxes
|
|
|
52.5
|
|
|
28.4
|
|
|
100.5
|
|
Other,
net of tax
|
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
|
$
|
(409.6
|
)
|
$
|
(387.6
|
)
|
$
|
(276.4
|
)
|
(1)
Includes the impact of the adoption of SFAS 158 effective December 31, 2006
and
minimum pension liability adjustments prior to the adoption of SFAS
158.
The
tax
impact of charges to the above components of Accumulated other comprehensive
losses for the years ended December 31, 2006, 2005 and 2004 is summarized in
Note 9.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
|
2006
|
|
2005
|
|
Property,
plant and equipment:
|
|
|
|
|
|
Land
|
|
$
|
16.4
|
|
$
|
10.6
|
|
Buildings
and equipment
|
|
|
1,643.0
|
|
|
1,613.6
|
|
Construction
in progress
|
|
|
85.0
|
|
|
38.0
|
|
Total
|
|
|
1,744.4
|
|
|
1,662.2
|
|
Accumulated
depreciation
|
|
|
(1,144.0
|
)
|
|
(1,126.8
|
)
|
Property,
plant and equipment, net
|
|
$
|
600.4
|
|
$
|
535.4
|
|
|
|
2006
|
|
2005
|
|
Deferred
charges and other assets:
|
|
|
|
|
|
Tax
deposits
|
|
$
|
3.0
|
|
$
|
66.1
|
|
Capitalized
software, net
|
|
|
44.8
|
|
|
62.6
|
|
Prepaid
pension assets
|
|
|
2.2
|
|
|
42.8
|
|
Cash
surrender value of life insurance policies
|
|
|
22.3
|
|
|
21.4
|
|
Unamortized
debt issuance costs
|
|
|
7.7
|
|
|
10.3
|
|
Investment
securities available for sale
|
|
|
2.6
|
|
|
1.0
|
|
Equity
method investments
|
|
|
25.6
|
|
|
2.6
|
|
Other
|
|
|
28.7
|
|
|
38.3
|
|
|
|
$
|
136.9
|
|
$
|
245.1
|
|
|
|
2006
|
|
2005
|
|
Accrued
expenses:
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
53.0
|
|
$
|
37.0
|
|
Current
portion of postretirement benefits
|
|
|
16.2
|
|
|
23.5
|
|
Current
portion of asset retirement obligations
|
|
|
21.0
|
|
|
21.6
|
|
Severance
and other exit costs
|
|
|
10.5
|
|
|
16.6
|
|
Income
taxes payable
|
|
|
24.5
|
|
|
14.5
|
|
Interest
payable
|
|
|
14.6
|
|
|
12.9
|
|
Current
deferred income taxes
|
|
|
11.8
|
|
|
12.9
|
|
Sales
rebate accrual
|
|
|
10.9
|
|
|
9.3
|
|
Current
pension liability
|
|
|
4.9
|
|
|
6.2
|
|
Litigation
accrual
|
|
|
8.6
|
|
|
3.5
|
|
Current
portion of deferred rent
|
|
|
3.3
|
|
|
3.0
|
|
Other
taxes payable
|
|
|
2.8
|
|
|
2.3
|
|
Other
|
|
|
46.5
|
|
|
53.7
|
|
|
|
$
|
228.6
|
|
$
|
217.0
|
|
|
|
2006
|
|
2005
|
|
Deferred
credits and other liabilities:
|
|
|
|
|
|
Non-current
income tax liabilities
|
|
$
|
41.7
|
|
$
|
95.7
|
|
Asset
retirement obligations - noncurrent
|
|
|
55.3
|
|
|
68.7
|
|
Indemnifications
|
|
|
40.0
|
|
|
40.0
|
|
Deferred
rent
|
|
|
26.3
|
|
|
30.6
|
|
Environmental
contingencies
|
|
|
5.3
|
|
|
17.6
|
|
Fair
value of cross-currency interest rate swaps
|
|
|
53.2
|
|
|
—
|
|
Workers
compensation
|
|
|
13.9
|
|
|
14.6
|
|
Other
|
|
|
19.9
|
|
|
22.2
|
|
|
|
$
|
255.6
|
|
$
|
289.4
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
2006
A
summary
of charges incurred during 2006 in connection with restructuring programs as
well as an allocation to the reporting segments is provided as
follows:
|
|
Severance
|
|
Other
Exit Costs
|
|
Asset
Charges(1)
|
|
Total
|
|
Research
and development consolidation
|
|
|
|
|
|
|
|
|
|
Jacksonville,
FL
|
|
$
|
1.7
|
|
$
|
0.3
|
|
$
|
0.4
|
|
$
|
2.4
|
|
Wilmington,
DE
|
|
|
0.9
|
|
|
0.9
|
|
|
0.8
|
|
|
2.6
|
|
|
|
|
2.6
|
|
|
1.2
|
|
|
1.2
|
|
|
5.0
|
|
Manufacturing
rationalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pendlebury,
UK
|
|
|
0.4
|
|
|
0.8
|
|
|
2.1
|
|
|
3.3
|
|
Alliance-related
rationalization (2)
|
|
|
0.5
|
|
|
0.2
|
|
|
0.6
|
|
|
1.3
|
|
|
|
|
0.9
|
|
|
1.0
|
|
|
2.7
|
|
|
4.6
|
|
Business
segment realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
Aqualon
Group
|
|
|
3.7
|
|
|
0.4
|
|
|
—
|
|
|
4.1
|
|
|
|
|
9.8
|
|
|
0.4
|
|
|
—
|
|
|
10.2
|
|
Business
Infrastructure Projects
|
|
|
2.9
|
|
|
2.3
|
|
|
4.4
|
|
|
9.6
|
|
Total
restructuring and asset charges
|
|
$
|
16.2
|
|
$
|
4.9
|
|
$
|
8.3
|
|
$
|
29.4
|
|
Paper
Technologies and Ventures
|
|
$
|
8.7
|
|
$
|
1.8
|
|
$
|
3.1
|
|
$
|
13.6
|
|
Aqualon
Group
|
|
|
3.7
|
|
|
0.4
|
|
|
—
|
|
|
4.1
|
|
Corporate
|
|
|
3.8
|
|
|
2.7
|
|
|
5.2
|
|
|
11.7
|
|
Total
by reporting segment
|
|
$
|
16.2
|
|
$
|
4.9
|
|
$
|
8.3
|
|
$
|
29.4
|
|
(1)
Includes accelerated depreciation and amortization of $5.1 million, and an
impairment of capitalized software of $3.2 million.
(2)
Impacts Savannah, GA, Hattiesburg, MS and Portland, OR.
Research
and Development Consolidation
This
program, which was initiated during 2004 in connection with efforts to
centralize the Company’s research and development activities into regional
centers, reflects the transfer of activities from the Jacksonville, Florida
facility to the Wilmington, Delaware research center (“WRC”). The severance
charge of $2.6 million reflects the termination of 59 employees at the
Jacksonville and WRC sites, including those that were required to provide
services through predetermined transition periods. The Company expects to incur
additional charges of $0.1 million during 2007 as certain transition activities
continue.
In
connection with this program, the Company substantially expanded and upgraded
the WRC as well as its technical staff as this site will serve as the primary
research and development facility for the Company in the Americas. The expansion
and upgrade was partially funded by a grant received from the State of Delaware
in the amount of $2.3 million, of which $1.8 million has been allocated as
a
reduction of capital additions and $0.4 million has been allocated as a
reduction of relocation expenses. The remaining $0.1 million is expected to
be
allocated to capital additions in 2007. The Company incurred $1.2 million in
relocation and other exit costs attributable to the closure and transfer of
activities and employees from the Jacksonville facility. Asset charges
associated with the program include $0.4 million of accelerated depreciation
for
the Jacksonville facility through its date of closure and $0.8 million for
certain assets at the WRC prior to their demolition or reconfiguration in
connection with the upgrade and expansion project.
PTV
Manufacturing and Alliance-related Rationalization
This
program, which was initiated during 2005, resulted in the closure of the
Company’s manufacturing facility in Pendlebury, United Kingdom during 2006.
While the majority of the workforce at Pendlebury was terminated at the end
of
2005, the Company incurred a total of $0.4 million in severance charges in
connection with the termination of 7 additional employees that were retained
through the date of closure in 2006. Other exit costs of $0.8 million were
incurred in connection
with the closure and shut-down and transfer of certain component assets to
other
European PTV facilities. Accelerated depreciation charges of $2.1 million were
recorded during 2006 while the facility was still in operation.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During
2006, PTV signed an alliance agreement with MeadWestvaco whereby Hercules will
serve as the sole distributor for certain rosin-based sizing products currently
produced by both Hercules and MeadWestvaco. Under the agreement, Hercules
assumed MeadWestvaco’s sales accounts and services all orders. MeadWestvaco
acquired access to Hercules’ technology and is assuming production of the
products. The manufacturing transition will be phased in through 2007 and will
result in the shut-down of certain production lines at the Company’s Savannah,
Georgia, Hattiesburg, Mississippi and Portland, Oregon manufacturing facilities.
Accordingly, the Company has accelerated depreciation in the amount of $0.6
million for certain of these facilities, which will continue through the
transition period. During 2006, the Company incurred $0.5 million in severance
and termination benefits associated with 14 employees at these facilities.
The
Company anticipates $0.2 million in additional severance and termination
benefits to be incurred during 2007 as production is transitioned to
MeadWestvaco.
Business
Segment Realignment
In
connection with the Company’s realignment of its business segments, the Company
eliminated 52 positions, primarily representing sales and marketing and related
support functions, in an effort to further de-layer management and streamline
the organizational structures. This resulted in charges for severance and
termination benefits in the amount of $9.8 million during 2006. The Company
also
incurred $0.4 million in other exit costs, including contract terminations,
attributable to this program.
Business
Infrastructure Projects
The
most
significant program initiated during 2006 related to the Business Infrastructure
Projects. These projects were developed primarily as a result of efforts to
reduce stranded corporate costs resulting from the FiberVisions transaction.
The
reorganization component was essentially completed in 2006 yielding
approximately $10 million in annual savings. An additional objective of the
projects is to realign the Company’s support organization through selected
outsourcing and offshoring service arrangements such that a substantial
proportion of the underlying costs become more variable in nature. This should
allow the Company greater flexibility to scale the level of support services
required in response to changing business demands as well as provide access
to
larger service organizations that can provide a greater depth and breadth of
services. The Company anticipates an additional $7 million in annual cost
reductions to be achieved by the end of 2007 as a result of these
projects.
An
ancillary action to the project is the Company’s commitment to a significant
technical and functional upgrade of its primary information technology platform
(“IT upgrade”). As a result, the Company has begun the acceleration of
amortization of certain of its capitalized software development cost assets
as
their remaining useful lives have been reduced to coincide with the
implementation of the IT Upgrade. Total accelerated amortization to be recorded
through 2008 is expected to be approximately $19 million. In addition, $3.2
million of software development costs previously capitalized have been written
off as their utility has been nullified by the planned upgrade.
In
connection with the Business Infrastructure Projects and the IT upgrade, the
Company plans to eliminate approximately 220 positions worldwide resulting
in a
commitment to provide approximately $14 million in severance and termination
benefits as well as completion bonuses contingent upon the successful transition
of job functions and responsibilities to the outsource and offshore service
providers. The plans impact a number of business and corporate functional areas
and contemplate individual targets, milestones and scheduling. A total of $2.9
million of severance and termination benefits has been incurred through December
31, 2006 and the remainder will be incurred through individual dates of
completion, at which time cash payments will begin. While the majority of such
actions will take place during 2007 and 2008, certain actions and cash flows
will continue into 2009.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
2005
A
summary
of charges incurred during 2005 in connection with restructuring programs as
well as an allocation to the reporting segments is provided as
follows:
|
|
Severance
|
|
Other
Exit Costs
|
|
Asset
Charges(1)
|
|
Total
|
|
Research
and development consolidation
|
|
|
|
|
|
|
|
|
|
Barneveld,
The Netherlands
|
|
$
|
2.9
|
|
$
|
1.4
|
|
$
|
1.8
|
|
$
|
6.1
|
|
Jacksonville,
FL
|
|
|
0.4
|
|
|
—
|
|
|
0.1
|
|
|
0.5
|
|
Wilmington,
DE
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
1.0
|
|
|
|
|
3.8
|
|
|
1.4
|
|
|
2.4
|
|
|
7.6
|
|
Manufacturing
rationalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
1.9
|
|
|
—
|
|
|
1.1
|
|
|
3.0
|
|
Aqualon
Group
|
|
|
1.3
|
|
|
0.2
|
|
|
0.5
|
|
|
2.0
|
|
FiberVisions
|
|
|
3.4
|
|
|
—
|
|
|
1.5
|
|
|
4.9
|
|
|
|
|
6.6
|
|
|
0.2
|
|
|
3.1
|
|
|
9.9
|
|
Global
marketing and management realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
12.7
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
Aqualon
Group
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
|
|
14.5
|
|
|
—
|
|
|
—
|
|
|
14.5
|
|
Corporate
support realignment
|
|
|
4.8
|
|
|
0.5
|
|
|
—
|
|
|
5.3
|
|
Sub-total
for continuing operations
|
|
|
29.7
|
|
|
2.1
|
|
|
5.5
|
|
|
37.3
|
|
Terpenes
specialties exit
|
|
|
2.4
|
|
|
—
|
|
|
5.7
|
|
|
8.1
|
|
Total
restructuring and asset charges
|
|
$
|
32.1
|
|
$
|
2.1
|
|
$
|
11.2
|
|
$
|
45.4
|
|
Paper
Technologies and Ventures
|
|
$
|
17.5
|
|
$
|
0.1
|
|
$
|
3.0
|
|
$
|
20.6
|
|
Aqualon
Group
|
|
|
3.1
|
|
|
0.2
|
|
|
0.5
|
|
|
3.8
|
|
FiberVisions
|
|
|
3.4
|
|
|
—
|
|
|
1.5
|
|
|
4.9
|
|
Corporate
|
|
|
5.7
|
|
|
1.8
|
|
|
0.5
|
|
|
8.0
|
|
Discontinued
operations
|
|
|
2.4
|
|
|
—
|
|
|
5.7
|
|
|
8.1
|
|
Total
by reporting segment
|
|
$
|
32.1
|
|
$
|
2.1
|
|
$
|
11.2
|
|
$
|
45.4
|
|
(1)
Includes accelerated depreciation of $3.5 million, asset impairments of $5.7
million (Brunswick, GA and Hattiesburg, MS) and inventory write-downs of $2.0
million (Brunswick and Covington, GA).
Research
and Development Consolidation
At
the
end of 2004, the Company initiated the first phase of its program to realign
and
consolidate research and development activities 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 2005 and
terminated 50 employees and relocated remaining employees to the Company’s
Helsingborg, Sweden site, which now serves as the primary center for PTV
application activities in Europe. A total of $2.9 million in severance charges
and benefits, incurred ratably over the service period from the announcement
date through the closure, was recognized as well as an additional $1.4 million
of other exit costs related to the closure of the facility.
The
second phase of the program began during 2005 with the planned closure of the
Jacksonville facility and concurrent transfer to and expansion of the WRC as
discussed above. The Company began recognition of severance charges for the
affected employees from Jacksonville as they began their transition service
periods. In addition, certain functions at the WRC were realigned resulting
in
the termination of 10 employees and the recognition of $0.5 million of severance
charges. The Company also recorded accelerated depreciation charges for
Barneveld, Jacksonville and certain assets at the WRC in connection with phased
implementation of the plan.
Manufacturing
Rationalization
PTV
closed its Pandaan, Indonesia manufacturing facility concurrent with its
strategic realignment in the Asia Pacific region. In connection with the
closing, the Company terminated approximately 50 employees and recognized
severance charges of $0.6 million. PTV also announced its intention to close
its
Pendlebury, U.K. facility as part of its strategic realignment in Europe. As
a
result of this action, the Company recognized severance charges of $1.3 million
related to the termination of approximately 40 employees. In addition, PTV
accelerated the depreciation of its Pandaan and Pendlebury facilities while
they
remained in operation.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Aqualon
terminated 7 employees in connection with a program at its Parlin, New Jersey
manufacturing facility resulting in a charge of $0.3 million recognized during
the period in which certain energy-related assets were taken out of service.
Aqualon also accrued $1.0 million in connection with the termination of 18
employees at the Brunswick, Georgia manufacturing facility. Additionally,
Aqualon recorded an impairment charge at the 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.
Primarily
as a result of declining market demand for certain products, FiberVisions ceased
production on certain lines at its facilities in North America and reduced
headcount at its Varde, Denmark manufacturing facility resulting in the
termination of approximately 80 employees and severance charges of $3.4 million.
FiberVisions also recorded write-downs in the value of certain inventories
and
spare parts at the Covington, Georgia manufacturing facility.
Global
Marketing and Management Realignment
Throughout
2005, PTV and Aqualon engaged in significant actions designed to realign their
global marketing infrastructure and de-layer management in connection with
their
strategic plans. Accordingly, approximately 80 positions were eliminated
worldwide resulting in charges for severance and related benefits of $14.5
million.
Corporate
Support Realignment
In
order
to support the various initiatives to realign and restructure the Company’s
operations on a global basis, the Company initiated several corporate actions
including the establishment of a centralized European headquarters facility
in
Schaffhaussen, Switzerland. During 2005, the Company accrued $0.5 million in
relocation costs related to this move. 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 $4.8 million
of severance and related benefits.
Terpenes
Specialties Exit
Primarily
as a result of the Company’s decision to exit the Terpenes Specialties business
during 2005, a total of 52 employees at the Brunswick, Georgia manufacturing
facility were terminated resulting in severance charges of $2.4 million. In
addition, certain assets directly attributable to this business were impaired
resulting in a charge of $5.2 million and related spare parts inventories in
the
amount of $0.5 million were written-down.
2004
Restructuring
charges recorded during the year ended December 31, 2004 were primarily related
to employee severance and related benefits in connection with various regional
and functional restructuring and general headcount reduction programs. Severance
charges amounted to $9.6 million in 2004, including $0.3 million of charges
attributable to the initial actions at the Barneveld facility as discussed
above. The total is attributable as follows: $7.6 million to PTV, $0.3 million
to Aqualon, $1.4 to FiberVisions and $0.3 to Corporate.
The
year
ended December 31, 2004 also included asset impairment charges of $9.2 million.
Of the total, $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, U.K. and Savannah,
Georgia manufacturing facilities, respectively. These impairment charges are
reflected in Other operating expense, net. The remaining $1.9 million relates
to
a write-down to fair value of the Company’s former operating facility at
Langhorne, Pennsylvania prior to its classification as held for sale. This
amount is reflected in Other expense, net. The total is attributable to the
reporting segments as follows: $3.7 million to PTV, $3.6 million to Aqualon
and
$1.9 million to Corporate.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
All severance, other exit costs and asset charges for 2006, 2005 and 2004 are
included in the Statement of Operations as a component of Other operating
expenses except those related to the Terpenes Specialties exit incurred during
2005, which are included in the results of operations attributable to
discontinued operations and the aforementioned Langhorne impairment which is
included in Other expense, net.
A
reconciliation of activity, including cash payments, with respect to the
liabilities for these plans is as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Balance
at beginning of the year
|
|
$
|
16.6
|
|
$
|
5.8
|
|
$
|
6.0
|
|
Accrued
charges for severance and related benefits
|
|
|
16.2
|
|
|
32.1
|
|
|
9.6
|
|
Accrued
charges for other exit and restructuring costs
|
|
|
3.8
|
|
|
0.5
|
|
|
—
|
|
Cash
payments
|
|
|
(26.9
|
)
|
|
(21.4
|
)
|
|
(9.9
|
)
|
Other,
including foreign currency translation
|
|
|
0.8
|
|
|
(0.4
|
)
|
|
0.1
|
|
Balance
at end of the year
|
|
$
|
10.5
|
|
$
|
16.6
|
|
$
|
5.8
|
|
In
addition, the Company made cash payments of $1.5 million and $1.6 million during
2006 and 2005, respectively, for certain exit costs that have been charged
as
incurred and are not included in the reconciliation above.
Other
operating expense, net, consists of the following:
|
|
2006
|
|
2005
|
|
2004
|
|
Severance,
restructuring and other exit costs, net
|
|
$
|
21.1
|
|
$
|
31.8
|
|
$
|
9.6
|
|
Accelerated
depreciation and amortization
|
|
|
5.1
|
|
|
3.5
|
|
|
—
|
|
Asset
charges
|
|
|
3.2
|
|
|
2.0
|
|
|
7.3
|
|
Legal
settlements
|
|
|
(2.0
|
)
|
|
0.7
|
|
|
—
|
|
Environmental
charges
|
|
|
0.8
|
|
|
0.2
|
|
|
0.4
|
|
Special
executive pension adjustment
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
(Gains)
losses on asset dispositions, net
|
|
|
(6.2
|
)
|
|
0.1
|
|
|
1.0
|
|
Nitrocellulose
facility shutdown costs
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
Dismantlement
costs
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
Other
miscellaneous charges
|
|
|
1.5
|
|
|
1.1
|
|
|
0.5
|
|
|
|
$
|
25.1
|
|
$
|
39.4
|
|
$
|
26.9
|
|
Interest
and debt costs are summarized as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Incurred
|
|
$
|
71.5
|
|
$
|
89.8
|
|
$
|
109.8
|
|
Capitalized
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(1.1
|
)
|
Net
expensed
|
|
$
|
71.2
|
|
$
|
89.4
|
|
$
|
108.7
|
|
Other
expense, net, consists of the following:
|
|
2006
|
|
2005
|
|
2004
|
|
Asbestos-related
costs, net
|
|
$
|
29.0
|
|
$
|
44.6
|
|
$
|
48.8
|
|
Loss
on sale of 51% interest in FiberVisions (see Note
3)
|
|
|
13.3
|
|
|
—
|
|
|
—
|
|
Loss
on repurchases of debt
|
|
|
11.4
|
|
|
14.2
|
|
|
41.0
|
|
Environmental
charges
|
|
|
6.5
|
|
|
7.3
|
|
|
6.7
|
|
Litigation
settlements and accruals
|
|
|
9.2
|
|
|
19.0
|
|
|
19.2
|
|
Gains
on dispositions of assets, net
|
|
|
(1.4
|
)
|
|
(10.9
|
)
|
|
—
|
|
Asset
impairment charges
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
Other,
net
|
|
|
(2.3
|
)
|
|
(2.9
|
)
|
|
(0.9
|
)
|
|
|
$
|
65.7
|
|
$
|
71.3
|
|
$
|
116.7
|
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Terpenes
Specialties
In
December 2005, the Company announced its intention to exit the unprofitable
terpenes specialties business. The results of operations for the terpenes
specialties business are reported as a discontinued operation for 2006, 2005
and
2004, and accordingly, the consolidated financial statements have been
reclassified to separately report the assets, liabilities and operating results
of this business.
The
following are the summarized results of operations for the terpenes specialties
business:
|
|
2006
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
2.5
|
|
$
|
13.7
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
|
$
|
(2.6
|
)
|
$
|
(9.9
|
)
|
$
|
(4.0
|
)
|
Income
tax benefit on operations
|
|
|
0.9
|
|
|
3.4
|
|
|
1.4
|
|
Net
loss from discontinued operations, net of tax
|
|
$
|
(1.7
|
)
|
$
|
(6.5
|
)
|
$
|
(2.6
|
)
|
|
The
major
classes of assets and liabilities of the discontinued operation in the Balance
Sheet are as follows:
|
|
2006
|
|
2005
|
|
Accounts
receivable, net
|
|
$
|
0.2
|
|
$
|
1.3
|
|
Inventories
|
|
|
0.2
|
|
|
5.4
|
|
Current
assets of discontinued operations
|
|
$
|
0.4
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
—
|
|
$
|
0.5
|
|
Accrued
expenses
|
|
|
—
|
|
|
2.3
|
|
Current
liabilities of discontinued operation
|
|
$
|
—
|
|
$
|
2.8
|
|
BetzDearborn
Water Treatment Business
During
2006, the Company reversed certain tax reserves in the amount of $48.7 million
established with respect to the sale of the Company’s former BetzDearborn Water
Treatment business which has been reported as a discontinued operation (see
Note 9).
SFAS
123R
Effective
January 1, 2006, the Company adopted SFAS 123R using the “modified prospective”
method in which compensation cost is recognized for all awards granted to
employees during 2006 as well as those awards granted prior to 2006 that remain
unvested on the effective date. Upon the adoption of SFAS 123R, the Company
recorded a $0.9 million benefit, net of income taxes, as a cumulative effect
of
a change in accounting principle to reflect the required change in accounting
policy for the recognition of forfeitures.
SFAS
158
The
Company adopted SFAS 158 effective December 31, 2006 which required the
recognition of the funded status of its defined benefit pension and other
postretirement benefit plans in the Consolidated Balance Sheet. While the
adoption of SFAS 158 did not have an impact on the 2006 Statement of Operations,
the Company was required to increase its pension and postretirement benefit
obligations, provide for deferred tax assets and record an after-tax charge
to
Accumulated other comprehensive losses included in Stockholders’ equity.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table illustrates the adjustments made to the relevant items included
in the Company’s balance sheet on December 31, 2006.
|
|
Before
|
|
|
|
After
|
|
|
|
Application
of
|
|
|
|
Application
of
|
|
|
|
SFAS
158
|
|
Adjustments
|
|
SFAS
158
|
|
Deferred
income taxes
|
|
$
|
312.4
|
|
$
|
62.2
|
|
$
|
374.6
|
|
Deferred
charges and other assets
|
|
|
185.8
|
|
|
(48.9
|
)
|
|
136.9
|
|
Total
assets
|
|
|
2,795.2
|
|
|
13.3
|
|
|
2,808.5
|
|
Pension
obligations
|
|
|
206.8
|
|
|
55.7
|
|
|
262.5
|
|
Other
postretirement benefit obligations
|
|
|
58.1
|
|
|
84.1
|
|
|
142.2
|
|
Total
liabilities
|
|
|
2,413.1
|
|
|
139.8
|
|
|
2,552.9
|
|
Accumulated
other comprehensive losses
|
|
|
(283.1
|
)
|
|
(126.5
|
)
|
|
(409.6
|
)
|
Total
stockholders’ equity
|
|
|
369.4
|
|
|
(126.5
|
)
|
|
242.9
|
|
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. 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.
|
|
2005
|
|
2004
|
|
Net
(loss) income before cumulative effect of changes in accounting
principle:
|
|
|
|
|
|
As
reported
|
|
$
|
(38.6
|
)
|
$
|
28.1
|
|
Accretion
and depreciation
|
|
|
—
|
|
|
(0.1
|
)
|
Adjusted
net (loss) income before cumulative effect of changes in accounting
principle
|
|
$
|
(38.6
|
)
|
$
|
28.0
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) earnings per share before cumulative effect of
changes
in accounting principle:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
Adjusted
|
|
$
|
(0.36
|
)
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Net
(loss) income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(41.1
|
)
|
$
|
28.1
|
|
Accretion
and depreciation
|
|
|
—
|
|
|
(0.1
|
)
|
Adjusted
net income (loss)
|
|
$
|
(41.1
|
)
|
$
|
28.0
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
Adjusted
|
|
$
|
(0.38
|
)
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
Depreciation:
|
|
|
|
|
|
|
|
Included
in Cost of sales and Selling, general and administrative
expenses
|
|
$
|
66.8
|
|
$
|
76.6
|
|
$
|
74.5
|
|
Accelerated
depreciation included in Other operating expense, net
|
|
|
3.9
|
|
|
3.5
|
|
|
—
|
|
Included
in Net loss from discontinued operations
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
|
|
$
|
70.7
|
|
$
|
80.5
|
|
$
|
74.9
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$
|
7.2
|
|
$
|
8.0
|
|
$
|
8.1
|
|
Capitalized
software (normal basis)
|
|
|
15.2
|
|
|
15.3
|
|
|
15.0
|
|
Accelerated
amortization of capitalized software
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
Deferred
financing costs
|
|
|
1.1
|
|
|
2.1
|
|
|
3.2
|
|
|
|
$
|
24.6
|
|
$
|
25.4
|
|
$
|
26.3
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
70.9
|
|
$
|
86.4
|
|
$
|
97.1
|
|
Income
taxes, net of refunds received
|
|
|
37.6
|
|
|
18.4
|
|
|
40.7
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Increase
in Property, plant and equipment, net related to the consolidation
|
|
|
|
|
|
|
|
|
|
|
of
Hercules Tianpu
|
|
$
|
19.0
|
|
$
|
—
|
|
$
|
—
|
|
Increase
in Intangible assets, net related to the consolidation of Hercules
Tianpu
|
|
|
3.5
|
|
|
—
|
|
|
—
|
|
De-consolidation
of debt issued by FiberVisions
|
|
|
90.0
|
|
|
—
|
|
|
—
|
|
De-consolidation
of FiberVisions capitalized debt issuance costs
|
|
|
(6.3
|
)
|
|
—
|
|
|
—
|
|
Incentive
and other share-based compensation plan issuances
|
|
|
13.9
|
|
|
13.4
|
|
|
15.7
|
|
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
following table shows the weighted-average number of common shares (in millions)
used in computing basic and diluted earnings (loss) per share:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding - Basic
|
|
|
110.8
|
|
|
108.7
|
|
|
107.3
|
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Share-based
compensation plans
|
|
|
0.3
|
|
|
1.5
|
|
|
1.5
|
|
Weighted-average
number of common shares outstanding - Diluted
|
|
|
111.3
|
|
|
110.4
|
|
|
109.0
|
|
The
effect of convertible debentures and share-based compensation plans for 2005
was
anti-dilutive as a result of the loss incurred during that period. Accordingly,
108.7 million weighted-average shares were used to determine both basic and
diluted earnings per share. The related interest on the convertible subordinated
debentures has an immaterial impact on earnings per share
calculations.
The
following table shows the number of options and warrants (in millions) that
have
been excluded from the computation of diluted earnings per share as their
exercise price exceeded their current market value:
|
|
2006
|
|
2005
|
|
2004
|
|
Options
to purchase common stock
|
|
|
3.4
|
|
|
5.8
|
|
|
10.6
|
|
Warrants
to purchase common stock
|
|
|
6.6
|
|
|
6.7
|
|
|
7.1
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company operates through two active reporting segments, Paper Technologies
and
Ventures and the Aqualon Group. A reporting segment is maintained for historical
reporting purposes for FiberVisions, of which a majority interest was sold
during 2006 (see Notes 1 and 3).
Paper
Technologies and Ventures Group: Products
and services offered by PTV are designed to enhance customers' profitability
by
improving manufacturing processes, enhancing productivity and improving overall
product quality as well as enabling customers to meet their environmental
objectives and regulatory requirements.
PTV
is
one of the key global suppliers of functional and process chemicals for the
paper industry offering a wide and highly sophisticated range of technology
and
applications expertise with in-mill capabilities which run from influent
treatment through the paper making process to paper finishing.
The
Ventures portion of the group consists of a portfolio of businesses each
targeting a family of vertical markets with a distinct set of products. Current
businesses within Ventures are pulp and biorefining, water treatment for the
pulp and paper industry, aviation and refrigeration compressor synthetic
lubricants, and building and converted products.
Aqualon
Group:
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. Aqualon also 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.
FiberVisions:
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.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A
summary
of reporting segment data is provided as follows:
|
|
Paper
Technologies and Ventures
|
|
Aqualon
Group
|
|
FiberVisions
|
|
Corporate
|
|
Consolidated
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,075.3
|
|
$
|
890.8
|
|
$
|
69.2
|
|
$
|
—
|
|
$
|
2,035.3
|
|
|
|
|
Profit
(loss) from operations
|
|
|
80.8
|
|
|
187.4
|
|
|
0.5
|
|
|
(20.1
|
)
|
|
248.6
|
|
|
|
|
Depreciation
|
|
|
29.3
|
|
|
35.1
|
|
|
—
|
|
|
6.3
|
|
|
70.7
|
|
|
(1
|
)
|
Amortization
|
|
|
14.2
|
|
|
8.2
|
|
|
—
|
|
|
2.2
|
|
|
24.6
|
|
|
(2
|
)
|
Research
and development
|
|
|
19.1
|
|
|
18.6
|
|
|
0.4
|
|
|
0.7
|
|
|
38.8
|
|
|
|
|
Total
assets
|
|
|
976.1
|
|
|
756.5
|
|
|
—
|
|
|
1,075.9
|
|
|
2,808.5
|
|
|
(3
|
)
|
Capital
expenditures
|
|
|
25.1
|
|
|
59.1
|
|
|
—
|
|
|
9.4
|
|
|
93.6
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,017.3
|
|
$
|
755.0
|
|
$
|
282.7
|
|
$
|
—
|
|
$
|
2,055.0
|
|
|
|
|
Profit
(loss) from operations
|
|
|
61.4
|
|
|
155.5
|
|
|
(64.9
|
)
|
|
(11.7
|
)
|
|
140.3
|
|
|
|
|
Depreciation
|
|
|
29.6
|
|
|
33.0
|
|
|
10.9
|
|
|
7.0
|
|
|
80.5
|
|
|
(1
|
)
|
Amortization
|
|
|
14.3
|
|
|
7.5
|
|
|
1.5
|
|
|
2.1
|
|
|
25.4
|
|
|
(2
|
)
|
Research
and development
|
|
|
18.6
|
|
|
18.4
|
|
|
2.8
|
|
|
1.0
|
|
|
40.8
|
|
|
|
|
Total
assets
|
|
|
903.6
|
|
|
638.1
|
|
|
202.7
|
|
|
824.4
|
|
|
2,568.8
|
|
|
(3
|
)
|
Capital
expenditures
|
|
|
18.7
|
|
|
37.1
|
|
|
4.2
|
|
|
7.5
|
|
|
67.5
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
978.5
|
|
$
|
724.6
|
|
$
|
281.2
|
|
$
|
—
|
|
$
|
1,984.3
|
|
|
|
|
Profit
(loss) from operations
|
|
|
84.5
|
|
|
157.9
|
|
|
(4.1
|
)
|
|
(5.4
|
)
|
|
232.9
|
|
|
|
|
Depreciation
|
|
|
25.4
|
|
|
30.8
|
|
|
11.6
|
|
|
7.1
|
|
|
74.9
|
|
|
(1
|
)
|
Amortization
|
|
|
13.8
|
|
|
7.7
|
|
|
1.6
|
|
|
3.2
|
|
|
26.3
|
|
|
(2
|
)
|
Research
and development
|
|
|
19.4
|
|
|
18.0
|
|
|
2.9
|
|
|
2.4
|
|
|
42.7
|
|
|
|
|
Total
assets
|
|
|
1,029.2
|
|
|
676.2
|
|
|
286.0
|
|
|
728.9
|
|
|
2,720.3
|
|
|
(3
|
)
|
Capital
expenditures
|
|
|
26.6
|
|
|
41.3
|
|
|
4.0
|
|
|
5.5
|
|
|
77.4
|
|
|
|
|
|
(1)
|
Depreciation
for Corporate is allocated to the business segments in the determination
of Profit from operations.
|
|
(2)
|
Corporate
includes accelerated amortization of capitalized software and deferred
financing costs.
|
|
(3)
|
Corporate
assets include cash and cash equivalents, income taxes receivable,
deferred tax assets, asbestos-related assets, investments, assets
of
discontinued operations and certain other assets not directly attributable
to the business segments.
|
A
reconciliation of totals provided by reporting segment to the applicable line
captions included in the Consolidated Statement of Operations is provided as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Profit
from operations from the reporting segments
|
|
$
|
248.6
|
|
$
|
140.3
|
|
$
|
232.9
|
|
Interest
and debt expense
|
|
|
71.2
|
|
|
89.4
|
|
|
108.7
|
|
Vertac
litigation charges
|
|
|
108.5
|
|
|
15.0
|
|
|
—
|
|
Gain
on sale of CP Kelco ApS
|
|
|
—
|
|
|
—
|
|
|
(27.0
|
)
|
Other
expense, net
|
|
|
65.7
|
|
|
71.3
|
|
|
116.7
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
$
|
3.2
|
|
$
|
(35.4
|
)
|
$
|
34.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Geographic
Reporting
For
geographic reporting purposes, 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.
Geographic
Areas
|
|
United
States
|
|
Europe
|
|
Americas
|
|
Asia
Pacific
|
|
Total
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
897.2
|
|
$
|
696.0
|
|
$
|
214.7
|
|
$
|
227.4
|
|
$
|
2,035.3
|
|
Property,
plant and equipment, net
|
|
|
272.1
|
|
|
242.6
|
|
|
17.0
|
|
|
68.7
|
|
|
600.4
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
871.9
|
|
$
|
747.7
|
|
$
|
201.7
|
|
$
|
233.7
|
|
$
|
2,055.0
|
|
Property,
plant and equipment, net
|
|
|
262.1
|
|
|
233.8
|
|
|
15.7
|
|
|
23.8
|
|
|
535.4
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
824.1
|
|
$
|
761.8
|
|
$
|
184.0
|
|
$
|
214.4
|
|
$
|
1,984.3
|
|
Property,
plant and equipment, net
|
|
|
325.2
|
|
|
331.4
|
|
|
16.2
|
|
|
22.6
|
|
|
695.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair
value of cash and cash equivalents, accounts receivable, net and accounts
payable approximate their carrying values primarily due to their short-term
nature. The Company’s investment securities that are available for sale include
certain relatively insignificant debt and equity securities. Changes in the
fair
value of these securities are recognized in Accumulated other comprehensive
losses. Fair value measurements for these investments are generally based on
third party quotes or the present value of expected future cash flows. The
fair
values of the Company’s debt securities is determined based on the 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. The fair values of the Company’s derivative
instruments, including foreign exchange contracts and cross-currency interest
rate swaps, are based on exchange and interest rates in effect at
year-end.
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 involve 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. The Company had net outstanding
external forward-exchange contracts to sell foreign currencies aggregating
$14.6
million and $12.8 million at December 31, 2006 and 2005, respectively. Net
cross-currency trades entered into by non-U.S. dollar denominated entities
aggregated $14.5 million and $25.8 million at December 31, 2006 and 2005,
respectively. The foreign exchange contracts outstanding at December 31,
2006 matured on or before January 28, 2007. During 2006, $1.8 million was
recorded as a component of Other expense, net representing the net loss due
to
underlying foreign currency exposures net of the impact of foreign currency
contracts. The notional amounts of the contracts referenced above 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
Company also uses cross-currency interest rate swaps and during February and
March of 2006, entered into a series of floating rate cross-currency interest
rate swap agreements (the “Swaps”) and designated them as a hedge of the
Company’s foreign currency exposure associated with its net investment in
certain foreign operations that utilize the Euro as their functional currency.
The combined notional amounts of the Swaps is for $500.0 million/€ 420.2 million
and requires the Company to receive three month LIBOR + 1.50% and pay three
month EURIBOR plus an average margin at 1.59% on a quarterly basis for a five
year term. The Swaps have been recorded at fair value, with changes in value
attributable to changes in foreign exchange rates recorded in Accumulated other
comprehensive losses. During 2006, a credit of $7.1 million was recorded as
an
adjustment to Interest and debt expense representing the net amount received
from the Swaps in excess of amounts paid.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table presents the net carrying amounts and fair values of the
Company's financial instruments, including derivatives and excluding those
instruments of a short-term nature as referenced above, as well as the balance
sheet caption in which they are included at December 31, 2006 and
2005:
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Deferred
charges and other assets
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$
|
2.6
|
|
$
|
2.6
|
|
$
|
1.0
|
|
$
|
1.0
|
|
Foreign
exchange contracts, net
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
and long-term debt obligations
|
|
|
995.5
|
|
|
964.2
|
|
|
1,109.0
|
|
|
1,092.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
credits and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross
currency interest rate swaps
|
|
|
53.2
|
|
|
53.2
|
|
|
—
|
|
|
—
|
|
Fair
values of the above financial instruments are indicative of cash that would
have
been received or required had settlement been made at December 31, 2006 and
2005.
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 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, 2006, 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
|
Hercules
Flavor, Inc.
|
East
Bay Realty Services, Inc.
|
Hercules
Hydrocarbon Holdings, Inc.
|
Hercules
Euro Holdings, LLC
|
Hercules
Paper Holdings, Inc.
|
Hercules
Finance Company
|
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.
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 Financial
Statements.
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Operations
|
|
Year
Ended December 31, 2006
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
and
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
596.7
|
|
$
|
478.2
|
|
$
|
1,124.6
|
|
$
|
(164.2
|
)
|
$
|
2,035.3
|
|
Cost
of sales
|
|
|
417.5
|
|
|
345.7
|
|
|
744.6
|
|
|
(164.4
|
)
|
|
1,343.4
|
|
Selling,
general and administrative expenses
|
|
|
101.0
|
|
|
121.3
|
|
|
150.7
|
|
|
(0.8
|
)
|
|
372.2
|
|
Research
and development
|
|
|
19.7
|
|
|
16.9
|
|
|
2.2
|
|
|
—
|
|
|
38.8
|
|
Intangible
asset amortization
|
|
|
5.9
|
|
|
0.7
|
|
|
0.6
|
|
|
—
|
|
|
7.2
|
|
Other
operating expense, net
|
|
|
15.5
|
|
|
(1.8
|
)
|
|
11.4
|
|
|
—
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
37.1
|
|
|
(4.6
|
)
|
|
215.1
|
|
|
1.0
|
|
|
248.6
|
|
Interest
and debt expense (income), net
|
|
|
173.2
|
|
|
(103.7
|
)
|
|
1.7
|
|
|
—
|
|
|
71.2
|
|
Vertac
litigation charges
|
|
|
108.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
108.5
|
|
Other
expense, net
|
|
|
58.7
|
|
|
6.5
|
|
|
0.5
|
|
|
—
|
|
|
65.7
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
|
(303.3
|
)
|
|
92.6
|
|
|
212.9
|
|
|
1.0
|
|
|
3.2
|
|
(Benefit)
provision for income taxes
|
|
|
(230.3
|
)
|
|
(4.6
|
)
|
|
42.3
|
|
|
0.4
|
|
|
(192.2
|
)
|
Income
(loss) before minority interests and equity (loss) income
|
|
|
(73.0
|
)
|
|
97.2
|
|
|
170.6
|
|
|
0.6
|
|
|
195.4
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
(1.4
|
)
|
Equity
(loss) income of affiliated companies
|
|
|
—
|
|
|
(3.5
|
)
|
|
1.6
|
|
|
(1.3
|
)
|
|
(3.2
|
)
|
Equity
income (loss) from consolidated subsidiaries
|
|
|
263.8
|
|
|
0.5
|
|
|
(0.8
|
)
|
|
(263.5
|
)
|
|
—
|
|
Net
income from continuing operations before discontinued operations
and
cumulative effect of change in accounting principle
|
|
|
190.8
|
|
|
94.2
|
|
|
170.0
|
|
|
(264.2
|
)
|
|
190.8
|
|
Net
income from discontinued operations, net of tax
|
|
|
47.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47.0
|
|
Net
income before cumulative effect of change in accounting principle
|
|
|
237.8
|
|
|
94.2
|
|
|
170.0
|
|
|
(264.2
|
)
|
|
237.8
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Net
income (loss)
|
|
$
|
238.7
|
|
$
|
94.2
|
|
$
|
170.0
|
|
$
|
(264.2
|
)
|
$
|
238.7
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Operations
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
548.9
|
|
$
|
491.2
|
|
$
|
1,175.2
|
|
$
|
(160.3
|
)
|
$
|
2,055.0
|
|
Cost
of sales
|
|
|
386.2
|
|
|
382.7
|
|
|
794.7
|
|
|
(172.5
|
)
|
|
1,391.1
|
|
Selling,
general, and administrative expenses
|
|
|
103.7
|
|
|
130.0
|
|
|
148.8
|
|
|
—
|
|
|
382.5
|
|
Research
and development
|
|
|
19.2
|
|
|
18.4
|
|
|
3.2
|
|
|
—
|
|
|
40.8
|
|
Intangible
asset amortization
|
|
|
6.0
|
|
|
1.5
|
|
|
0.5
|
|
|
—
|
|
|
8.0
|
|
Impairment
of FiberVisions’ goodwill
|
|
|
-
|
|
|
52.9
|
|
|
—
|
|
|
—
|
|
|
52.9
|
|
Other
operating expenses, net
|
|
|
8.0
|
|
|
9.0
|
|
|
22.4
|
|
|
—
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
25.8
|
|
|
(103.3
|
)
|
|
205.6
|
|
|
12.2
|
|
|
140.3
|
|
Interest
and debt expense (income), net
|
|
|
173.1
|
|
|
(71.6
|
)
|
|
(12.1
|
)
|
|
—
|
|
|
89.4
|
|
Vertac
litigation charges
|
|
|
15.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.0
|
|
Other
expense (income), net
|
|
|
72.3
|
|
|
2.4
|
|
|
(3.4
|
)
|
|
—
|
|
|
71.3
|
|
(Loss)
income before income taxes, minority interests and equity income
(loss)
|
|
|
(234.6
|
)
|
|
(34.1
|
)
|
|
221.1
|
|
|
12.2
|
|
|
(35.4
|
)
|
(Benefit)
provision for income taxes
|
|
|
(100.3
|
)
|
|
20.0
|
|
|
72.2
|
|
|
4.3
|
|
|
(3.8
|
)
|
Income
(loss) before minority interests and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss)
|
|
|
(134.3
|
)
|
|
(54.1
|
)
|
|
148.9
|
|
|
7.9
|
|
|
(31.6
|
)
|
Minority
interests in earnings of consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
(1.0
|
)
|
Equity
income (loss) of affiliated companies
|
|
|
—
|
|
|
(1.1
|
)
|
|
1.5
|
|
|
0.1
|
|
|
0.5
|
|
Equity
income (loss) from consolidated subsidiaries
|
|
|
102.2
|
|
|
10.0
|
|
|
(3.2
|
)
|
|
(109.0
|
)
|
|
—
|
|
Net
(loss) income from continuing operations
before
discontinued operations and cumulative
effect
of change in accounting principle
|
|
|
(32.1
|
)
|
|
(45.2
|
)
|
|
146.2
|
|
|
(101.0
|
)
|
|
(32.1
|
)
|
Net
loss from discontinued operations, net of tax
|
|
|
(6.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.5
|
)
|
Net
(loss) income before cumulative effect of
changes
in accounting principle, net of tax
|
|
|
(38.6
|
)
|
|
(45.2
|
)
|
|
146.2
|
|
|
(101.0
|
)
|
|
(38.6
|
)
|
Cumulative
effect of change in accounting principle,
net of tax
|
|
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
Net
(loss) income
|
|
$
|
(41.1
|
)
|
$
|
(45.2
|
)
|
$
|
146.2
|
|
$
|
(101.0
|
)
|
$
|
(41.1
|
)
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Operations
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
sales
|
|
$
|
528.4
|
|
$
|
474.8
|
|
$
|
1,131.9
|
|
$
|
(150.8
|
)
|
$
|
1,984.3
|
|
Cost
of sales
|
|
|
358.8
|
|
|
352.5
|
|
|
731.1
|
|
|
(150.8
|
)
|
|
1,291.6
|
|
Selling,
general, and administrative expenses
|
|
|
100.8
|
|
|
126.0
|
|
|
155.3
|
|
|
—
|
|
|
382.1
|
|
Research
and development
|
|
|
19.7
|
|
|
17.4
|
|
|
5.6
|
|
|
—
|
|
|
42.7
|
|
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
|
|
|
38.2
|
|
|
(35.5
|
)
|
|
230.2
|
|
|
—
|
|
|
232.9
|
|
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, minority interest and equity income
(loss)
|
|
|
(396.0
|
)
|
|
20.3
|
|
|
410.2
|
|
|
—
|
|
|
34.5
|
|
Provision
(benefit) for income taxes
|
|
|
(86.8
|
)
|
|
38.1
|
|
|
52.5
|
|
|
—
|
|
|
3.8
|
|
Income
(loss) before minority interests and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
income ( loss)
|
|
|
(309.2
|
)
|
|
(17.8
|
)
|
|
357.7
|
|
|
—
|
|
|
30.7
|
|
Minority
interests in earnings of consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
Equity
income (loss) of affiliated companies
|
|
|
—
|
|
|
(0.7
|
)
|
|
1.8
|
|
|
(0.2
|
)
|
|
0.9
|
|
Equity
income (loss) from consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
339.9
|
|
|
6.0
|
|
|
(1.6
|
)
|
|
(344.3
|
)
|
|
—
|
|
Net
income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
discontinued operations
|
|
|
30.7
|
|
|
(12.5
|
)
|
|
357.0
|
|
|
(344.5
|
)
|
|
30.7
|
|
Net
loss from discontinued operations, net of tax
|
|
|
(2.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.6
|
)
|
Net
income (loss)
|
|
$
|
28.1
|
|
$
|
(12.5
|
)
|
$
|
357.0
|
|
$
|
(344.5
|
)
|
$
|
28.1
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Balance Sheet
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
Eliminations
and
|
|
|
|
Assets
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
89.7
|
|
$
|
0.5
|
|
$
|
81.6
|
|
$
|
—
|
|
$
|
171.8
|
|
Accounts
receivable, net
|
|
|
69.9
|
|
|
45.6
|
|
|
211.1
|
|
|
—
|
|
|
326.6
|
|
Intercompany
receivables
|
|
|
68.0
|
|
|
9.8
|
|
|
(6.4
|
)
|
|
(71.4
|
)
|
|
—
|
|
Inventories
|
|
|
56.2
|
|
|
68.9
|
|
|
87.0
|
|
|
(1.5
|
)
|
|
210.6
|
|
Deferred
income taxes
|
|
|
57.6
|
|
|
3.2
|
|
|
9.4
|
|
|
—
|
|
|
70.2
|
|
Current
assets of discontinued operations
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Income
taxes receivable
|
|
|
170.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
170.8
|
|
Other
current assets
|
|
|
12.3
|
|
|
2.4
|
|
|
19.4
|
|
|
—
|
|
|
34.1
|
|
Total
current assets
|
|
|
524.9
|
|
|
130.4
|
|
|
402.1
|
|
|
(72.9
|
)
|
|
984.5
|
|
Property,
plant and equipment, net
|
|
|
139.9
|
|
|
132.2
|
|
|
328.3
|
|
|
—
|
|
|
600.4
|
|
Investments
in subsidiaries and advances, net
|
|
|
2,569.7
|
|
|
85.2
|
|
|
44.9
|
|
|
(2,699.8
|
)
|
|
—
|
|
Intangible
assets, net
|
|
|
131.8
|
|
|
2.9
|
|
|
8.4
|
|
|
—
|
|
|
143.1
|
|
Goodwill
|
|
|
58.7
|
|
|
37.6
|
|
|
385.2
|
|
|
—
|
|
|
481.5
|
|
Deferred
income taxes
|
|
|
357.1
|
|
|
—
|
|
|
19.5
|
|
|
(2.0
|
)
|
|
374.6
|
|
Asbestos-related
assets
|
|
|
87.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
87.5
|
|
Deferred
charges and other assets
|
|
|
87.7
|
|
|
27.7
|
|
|
21.5
|
|
|
—
|
|
|
136.9
|
|
Total
assets
|
|
$
|
3,957.3
|
|
$
|
416.0
|
|
$
|
1,209.9
|
|
$
|
(2,774.7
|
)
|
$
|
2,808.5
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
63.2
|
|
$
|
35.0
|
|
$
|
107.1
|
|
$
|
—
|
|
$
|
205.3
|
|
Intercompany
payables
|
|
|
2.0
|
|
|
43.4
|
|
|
26.1
|
|
|
(71.5
|
)
|
|
—
|
|
Asbestos-related
liabilities
|
|
|
36.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36.4
|
|
Current
debt obligations
|
|
|
20.0
|
|
|
—
|
|
|
15.8
|
|
|
—
|
|
|
35.8
|
|
Vertac
litigation liability
|
|
|
123.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
123.5
|
|
Accrued
expenses
|
|
|
119.8
|
|
|
68.3
|
|
|
82.4
|
|
|
(41.9
|
)
|
|
228.6
|
|
Total
current liabilities
|
|
|
364.9
|
|
|
146.7
|
|
|
231.4
|
|
|
(113.4
|
)
|
|
629.6
|
|
Long-term
debt
|
|
|
937.5
|
|
|
—
|
|
|
22.2
|
|
|
—
|
|
|
959.7
|
|
Deferred
income taxes
|
|
|
—
|
|
|
2.0
|
|
|
69.7
|
|
|
(2.0
|
)
|
|
69.7
|
|
Pension
obligations
|
|
|
191.2
|
|
|
—
|
|
|
71.3
|
|
|
—
|
|
|
262.5
|
|
Other
postretirement benefit obligations
|
|
|
139.9
|
|
|
2.1
|
|
|
0.2
|
|
|
—
|
|
|
142.2
|
|
Deferred
credits and other liabilities
|
|
|
220.8
|
|
|
14.1
|
|
|
20.7
|
|
|
—
|
|
|
255.6
|
|
Asbestos-related
liabilities
|
|
|
233.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
233.6
|
|
Intercompany
notes payable (receivable)
|
|
|
1,626.5
|
|
|
(1,413.5
|
)
|
|
(255.0
|
)
|
|
42.0
|
|
|
—
|
|
Minority
interests
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
|
12.7
|
|
Total
stockholders' equity
|
|
|
242.9
|
|
|
1,664.6
|
|
|
1,036.7
|
|
|
(2,701.3
|
)
|
|
242.9
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,957.3
|
|
$
|
416.0
|
|
$
|
1,209.9
|
|
$
|
(2,774.7
|
)
|
$
|
2,808.5
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Balance Sheet
|
|
December
31, 2005
|
|
|
|
|
|
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
|
|
|
62.1
|
|
|
35.8
|
|
|
191.6
|
|
|
0.2
|
|
|
289.7
|
|
Intercompany
receivable
|
|
|
68.7
|
|
|
17.5
|
|
|
21.4
|
|
|
(107.6
|
)
|
|
—
|
|
Inventories
|
|
|
52.7
|
|
|
52.4
|
|
|
76.6
|
|
|
(2.1
|
)
|
|
179.6
|
|
Deferred
income taxes
|
|
|
24.0
|
|
|
2.9
|
|
|
12.4
|
|
|
—
|
|
|
39.3
|
|
FiberVisions
assets held for sale
|
|
|
—
|
|
|
138.8
|
|
|
63.9
|
|
|
—
|
|
|
202.7
|
|
Current
assets of discontinued operations
|
|
|
6.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
Income
taxes receivable
|
|
|
12.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12.6
|
|
Other
current assets
|
|
|
12.8
|
|
|
1.8
|
|
|
20.7
|
|
|
0.2
|
|
|
35.5
|
|
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
|
)
|
|
—
|
|
Intangible
assets, net
|
|
|
137.7
|
|
|
—
|
|
|
5.1
|
|
|
—
|
|
|
142.8
|
|
Goodwill
|
|
|
58.7
|
|
|
27.9
|
|
|
354.4
|
|
|
—
|
|
|
441.0
|
|
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
|
|
|
13.7
|
|
|
59.8
|
|
|
—
|
|
|
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
|
|
$
|
51.5
|
|
$
|
16.7
|
|
$
|
104.5
|
|
$
|
0.2
|
|
$
|
172.9
|
|
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
|
|
|
76.2
|
|
|
60.5
|
|
|
80.3
|
|
|
—
|
|
|
217.0
|
|
Current
liabilities of discontinued operations
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
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
obligations
|
|
|
251.7
|
|
|
—
|
|
|
71.7
|
|
|
—
|
|
|
323.4
|
|
Other
postretirement benefit obligation
|
|
|
63.1
|
|
|
2.1
|
|
|
0.3
|
|
|
—
|
|
|
65.5
|
|
Deferred
credits and other liabilities
|
|
|
254.2
|
|
|
18.8
|
|
|
16.4
|
|
|
—
|
|
|
289.4
|
|
Asbestos-related
liabilities
|
|
|
233.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
233.6
|
|
Intercompany
notes payable (receivable)
|
|
|
1,667.2
|
|
|
(1,208.7
|
)
|
|
(458.5
|
)
|
|
—
|
|
|
—
|
|
Minority
interests
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
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
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
and
Adjustments
|
|
Consolidated
|
|
Net
Cash Provided By (Used In) Operating Activities
|
|
$
|
166.7
|
|
$
|
(1.2
|
)
|
$
|
482.1
|
|
$
|
(474.7
|
)
|
$
|
172.9
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(21.3
|
)
|
|
(21.0
|
)
|
|
(51.3
|
)
|
|
—
|
|
|
(93.6
|
)
|
Acquisitions
and investments, net of
cash, recognized upon consolidation
|
|
|
—
|
|
|
(22.7
|
)
|
|
(6.7
|
)
|
|
—
|
|
|
(29.4
|
)
|
Proceeds
from sale of 51% interest
in FiberVisions, net
|
|
|
17.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17.8
|
|
Proceeds
of fixed asset disposals
|
|
|
1.1
|
|
|
5.9
|
|
|
4.3
|
|
|
—
|
|
|
11.3
|
|
Other,
net
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Net
cash used in investing activities
|
|
|
(2.6
|
)
|
|
(37.8
|
)
|
|
(53.7
|
)
|
|
—
|
|
|
(94.1
|
)
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt issued by FiberVisions, net
of issuance costs
|
|
|
83.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
83.7
|
|
Long-term
debt proceeds
|
|
|
—
|
|
|
—
|
|
|
22.0
|
|
|
—
|
|
|
22.0
|
|
Long-term
debt payments
|
|
|
(135.7
|
)
|
|
—
|
|
|
(6.8
|
)
|
|
—
|
|
|
(142.5
|
)
|
Change
in short-term debt
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
|
5.8
|
|
Change
in intercompany advances
|
|
|
(71.5
|
)
|
|
38.5
|
|
|
(388.7
|
)
|
|
421.7
|
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
37.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37.0
|
|
Dividends
paid
|
|
|
—
|
|
|
—
|
|
|
(53.0
|
)
|
|
53.0
|
|
|
—
|
|
Other,
net
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
Net
cash provided by (used in) financing activities
|
|
|
(80.9
|
)
|
|
38.5
|
|
|
(420.7
|
)
|
|
474.7
|
|
|
11.6
|
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
4.1
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
83.2
|
|
|
(0.5
|
)
|
|
11.8
|
|
|
—
|
|
|
94.5
|
|
Cash
and cash equivalents at beginning of year
|
|
|
6.5
|
|
|
1.0
|
|
|
69.8
|
|
|
—
|
|
|
77.3
|
|
Cash
and cash equivalents at end of year
|
|
$
|
89.7
|
|
$
|
0.5
|
|
$
|
81.6
|
|
$
|
—
|
|
$
|
171.8
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
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
|
)
|
Investments
|
|
|
—
|
|
|
—
|
|
|
(4.4
|
)
|
|
—
|
|
|
(4.4
|
)
|
Proceeds
of fixed asset disposals
|
|
|
13.3
|
|
|
—
|
|
|
3.3
|
|
|
—
|
|
|
16.6
|
|
Other,
net
|
|
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
—
|
|
|
(2.4
|
)
|
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
|
|
|
82.2
|
|
|
(2.3
|
)
|
|
159.2
|
|
|
(239.1
|
)
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
Dividends
paid
|
|
|
—
|
|
|
—
|
|
|
(43.2
|
)
|
|
43.2
|
|
|
—
|
|
Other,
net
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(28.3
|
)
|
|
(2.3
|
)
|
|
99.5
|
|
|
(195.9
|
)
|
|
(127.0
|
)
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
—
|
|
|
(3.7
|
)
|
|
—
|
|
|
(3.7
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(36.3
|
)
|
|
0.1
|
|
|
(13.0
|
)
|
|
—
|
|
|
(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
|
|
$
|
6.5
|
|
$
|
1.0
|
|
$
|
69.8
|
|
$
|
—
|
|
$
|
77.3
|
|
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Condensed
Consolidating Statement of Cash Flows
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
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 fixed asset disposals
|
|
|
0.8
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
1.4
|
|
Proceeds
from sale of minority interest 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
|
|
Change
in intercompany advances
|
|
|
(68.4
|
)
|
|
(25.2
|
)
|
|
(262.2
|
)
|
|
355.8
|
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
5.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
Payment
of debt issuance costs and underwriting
fees
|
|
|
(7.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7.8
|
)
|
Dividends
paid
|
|
|
—
|
|
|
—
|
|
|
(210.2
|
)
|
|
210.2
|
|
|
—
|
|
Other,
net
|
|
|
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
(Dollars
in millions, except per share data)
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Year
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
$
|
527.3
|
|
$
|
501.9
|
|
$
|
501.0
|
|
$
|
534.7
|
|
$
|
513.1
|
|
$
|
519.6
|
|
$
|
493.9
|
|
$
|
498.8
|
|
$
|
2,035.3
|
|
$
|
2,055.0
|
|
Cost
of sales
|
|
|
360.7
|
|
|
337.6
|
|
|
324.7
|
|
|
351.2
|
|
|
332.2
|
|
|
353.7
|
|
|
325.8
|
|
|
348.6
|
|
|
1,343.4
|
|
|
1,391.1
|
|
Selling,
general and administrative expenses
|
|
|
91.3
|
|
|
99.7
|
|
|
90.7
|
|
|
99.9
|
|
|
92.8
|
|
|
92.7
|
|
|
97.4
|
|
|
90.2
|
|
|
372.2
|
|
|
382.5
|
|
Research
and development
|
|
|
9.6
|
|
|
10.3
|
|
|
9.4
|
|
|
10.0
|
|
|
9.3
|
|
|
10.1
|
|
|
10.5
|
|
|
10.4
|
|
|
38.8
|
|
|
40.8
|
|
Intangible
asset amortization
|
|
|
1.6
|
|
|
2.0
|
|
|
2.0
|
|
|
2.0
|
|
|
1.8
|
|
|
2.0
|
|
|
1.8
|
|
|
2.0
|
|
|
7.2
|
|
|
8.0
|
|
Impairment
of FiberVisions goodwill
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52.9
|
|
|
—
|
|
|
52.9
|
|
Other
operating expense, net
|
|
|
7.2
|
|
|
9.7
|
|
|
8.6
|
|
|
10.4
|
|
|
4.6
|
|
|
11.1
|
|
|
4.7
|
|
|
8.2
|
|
|
25.1
|
|
|
39.4
|
|
Profit
(loss) from operations
|
|
|
56.9
|
|
|
42.6
|
|
|
65.6
|
|
|
61.2
|
|
|
72.4
|
|
|
50.0
|
|
|
53.7
|
|
|
(13.5
|
)
|
|
248.6
|
|
|
140.3
|
|
Interest
and debt expense
|
|
|
20.7
|
|
|
22.2
|
|
|
16.7
|
|
|
22.8
|
|
|
16.7
|
|
|
22.5
|
|
|
17.1
|
|
|
21.9
|
|
|
71.2
|
|
|
89.4
|
|
Vertac
litigation charges
|
|
|
—
|
|
|
14.8
|
|
|
106.0
|
|
|
0.1
|
|
|
1.0
|
|
|
0.1
|
|
|
1.5
|
|
|
—
|
|
|
108.5
|
|
|
15.0
|
|
Other
expense, net
|
|
|
10.6
|
|
|
6.4
|
|
|
21.1
|
|
|
25.6
|
|
|
4.6
|
|
|
0.1
|
|
|
29.4
|
|
|
39.2
|
|
|
65.7
|
|
|
71.3
|
|
Income
(loss) before income taxes, minority interests and equity
loss
|
|
|
25.6
|
|
|
(0.8
|
)
|
|
(78.2
|
)
|
|
12.7
|
|
|
50.1
|
|
|
27.3
|
|
|
5.7
|
|
|
(74.6
|
)
|
|
3.2
|
|
|
(35.4
|
)
|
(Benefit)
provision for income taxes
|
|
|
10.7
|
|
|
(6.5
|
)
|
|
(27.5
|
)
|
|
3.1
|
|
|
14.1
|
|
|
2.8
|
|
|
(189.5
|
)
|
|
(3.2
|
)
|
|
(192.2
|
)
|
|
(3.8
|
)
|
Income
(loss) before minority interests and equity loss
|
|
|
14.9
|
|
|
5.7
|
|
|
(50.7
|
)
|
|
9.6
|
|
|
36.0
|
|
|
24.5
|
|
|
195.2
|
|
|
(71.4
|
)
|
|
195.4
|
|
|
(31.6
|
)
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(1.4
|
)
|
|
(1.0
|
)
|
Equity
loss of affiliated companies, net of tax
|
|
|
(0.4
|
)
|
|
0.3
|
|
|
(0.6
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
0.2
|
|
|
(1.1
|
)
|
|
—
|
|
|
(3.2
|
)
|
|
0.5
|
|
Net
income (loss) from continuing operations before discontinued operations
and cumulative effect of changes in accounting principle
|
|
|
14.4
|
|
|
5.6
|
|
|
(51.6
|
)
|
|
9.4
|
|
|
34.5
|
|
|
24.4
|
|
|
193.5
|
|
|
(71.5
|
)
|
|
190.8
|
|
|
(32.1
|
)
|
Net
income (loss) from discontinued operations, net of tax
|
|
|
(0.6
|
)
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
48.6
|
|
|
(5.2
|
)
|
|
47.0
|
|
|
(6.5
|
)
|
Net
income (loss) before cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
changes
in accounting principle
|
|
|
13.8
|
|
|
4.9
|
|
|
(52.3
|
)
|
|
9.2
|
|
|
34.2
|
|
|
24.0
|
|
|
242.1
|
|
|
(76.7
|
)
|
|
237.8
|
|
|
(38.6
|
)
|
Cumulative
effect of changes in accounting principle
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
0.9
|
|
|
(2.5
|
)
|
Net
income (loss)
|
|
$
|
14.7
|
|
$
|
4.9
|
|
$
|
(52.3
|
)
|
$
|
9.2
|
|
$
|
34.2
|
|
$
|
24.0
|
|
$
|
242.1
|
|
$
|
(79.2
|
)
|
$
|
238.7
|
|
$
|
(41.1
|
)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.13
|
|
$
|
0.06
|
|
$
|
(0.46
|
)
|
$
|
0.09
|
|
$
|
0.31
|
|
$
|
0.22
|
|
$
|
1.72
|
|
$
|
(0.66
|
)
|
$
|
1.72
|
|
$
|
(0.30
|
)
|
Discontinued
operations
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
0.43
|
|
|
(0.05
|
)
|
|
0.42
|
|
|
(0.06
|
)
|
Cumulative
effect of changes in accounting
principle
|
|
|
0.01
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
0.01
|
|
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.13
|
|
$
|
0.05
|
|
$
|
(0.47
|
)
|
$
|
0.08
|
|
$
|
0.31
|
|
$
|
0.22
|
|
$
|
2.15
|
|
$
|
(0.73
|
)
|
$
|
2.15
|
|
$
|
(0.38
|
)
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.13
|
|
$
|
0.05
|
|
$
|
(0.46
|
)
|
$
|
0.08
|
|
$
|
0.31
|
|
$
|
0.22
|
|
$
|
1.71
|
|
$
|
(0.66
|
)
|
$
|
1.71
|
|
$
|
(0.30
|
)
|
Discontinued
operations
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.43
|
|
|
(0.05
|
)
|
|
0.42
|
|
|
(0.06
|
)
|
Cumulative
effect of changes in accounting
principle
|
|
|
0.01
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
0.01
|
|
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.13
|
|
$
|
0.04
|
|
$
|
(0.47
|
)
|
$
|
0.08
|
|
$
|
0.31
|
|
$
|
0.22
|
|
$
|
2.14
|
|
$
|
(0.73
|
)
|
$
|
2.14
|
|
$
|
(0.38
|
)
|
AND
FINANCIAL DISCLOSURE
Information
regarding the Company’s change in accountants during 2005 is incorporated herein
by reference to the Forms 8-K and 8-K/A filed on April 22, 2005 and May 12,
2005, respectively. There were no disagreements related to the change in
accountants.
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, 2006. 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 36 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
May
9, 2006 reporting that he was not aware of any violation by us of the NYSE’s
Corporate Governance listing standards.
None.
BOARD
OF DIRECTORS
The
name,
age and current position of each executive officer of Hercules as of February
28, 2007 is listed below. There are no family relationships among the executive
officers.
Name
|
|
Age
|
|
Current
Position
|
Craig
A. Rogerson
|
|
50
|
|
President,
Chief Executive Officer and Director
|
Fred
G. Aanonsen
|
|
59
|
|
Vice
President and Controller
|
Edward
V. Carrington
|
|
64
|
|
Vice
President, Human Resources
|
Richard
G. Dahlen
|
|
67
|
|
Chief
Legal Officer
|
Israel
J. Floyd
|
|
60
|
|
Corporate
Secretary and General Counsel
|
Vincenzo
M. Romano
|
|
53
|
|
Vice
President, Taxes
|
Stuart
C. Shears
|
|
56
|
|
Vice
President and Treasurer
|
Allen
A. Spizzo
|
|
49
|
|
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
Financial Executives International.
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.
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, 2006 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
|
|
|
5,398,285
|
|
|
(1)
(2
|
)
|
$
|
25.56
|
|
|
8,546,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
5,398,285
|
|
|
|
|
$
|
25.56
|
|
|
8,546,964
|
|
|
(1) Includes
2,234,710 options with exercise prices in excess of the weighted
average
price of $25.56.
|
(2) Includes
options to purchase 1,181,759 shares that were not vested at December
31,
2006.
|
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.
Information
regarding principal accountant fees and services will be included in the
Company's Proxy Statement and is incorporated herein by
reference.
(a) Documents
filed as part of this Report:
1. Consolidated
Financial Statements
|
Page
|
Management's
Report on Internal Control over Financial Reporting
|
36
|
Reports
of Independent Registered Public Accounting Firm
|
37
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
Years
Ended December 31, 2006, 2005 and 2004
|
40
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
41
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2005
and 2004
|
42
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2006, 2005 and 2004
|
43
|
Summary
of Significant Accounting Policies and Notes to Consolidated Financial
Statements
|
44
|
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
2006
|
|
|
|
|
|
|
|
|
|
|
|
Tax
valuation allowance
|
|
$
|
380.7
|
|
$
|
(100.4
|
)
|
$
|
55.5
|
|
$
|
—
|
|
$
|
335.8
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 February 28, 2007.
|
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 February 28, 2007.
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/
Thomas P. Gerrity
|
|
/s/
Jeffrey M. Lipton
|
Thomas
P. Gerrity
|
|
Jeffrey
M. Lipton
|
|
|
|
/s/
John C. Hunter, III
|
|
/s/
Joe B. Wyatt
|
John
C. Hunter, III
|
|
Joe
B. Wyatt
|
|
|
|
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
|
Omnibus
Equity Compensation Plan for Non-Employee Directors
|
|
Appendix
II, Proxy Statement dated June 20, 2003
|
10.20
|
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
|
10.21
|
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
|
10.22
|
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
|
10.23
|
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
|
10.24
|
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
|
10.25
|
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
|
10.26
|
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
|
10.27
|
Employment
Offer Letter - Paul C. Raymond III, dated December 28,
2004
|
|
Exhibit
10.34, Annual Report on Form 10-K, filed March 16, 2005
|
10.28
|
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
|
10.29
|
General
Terms of Employment between Hercules Incorporated and Certain Executive
Officers
|
|
Exhibit
10.36, Annual Report on Form 10-K, filed March 16, 2005
|
10.30
|
Employment
Offer Letter - John E. Panichella, dated December 15, 2005
|
|
Exhibit
10.1, Current Report on Form 8-K/A, dated December 15,
2005
|
10.31
|
Contribution
Agreement between Hercules Incorporated, WSP, Inc., SPG/FV Investor
LLC
and Fibervisions Delaware Corporation dated January 31,
2006
|
|
Exhibit
10.33, Annual Report on Form 10-K, filed March 3, 2006
|
10.32*
|
Agreement
between Hercules Incorporated and Genpact International dated January
16,
2007
|
|
|
10.33*
|
Agreement
between Hercules Incorporated and HCL America Inc. and HCL Technologies
Limited dated January 16, 2007
|
|
|
14
|
Directors
Code of Business Conduct and Ethics
|
|
Appendix
VII, Proxy Statement dated June 20, 2003
|
18.1
|
Letter
Regarding Change in Accounting Principle
|
|
Exhibit
18.1, Annual report on Form 10-K, filed March 3, 2006
|
21.1*
|
Principal
Consolidated Subsidiaries as of December 31, 2006
|
|
|
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
|
|
|
-105-