form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
Mark
One
|
ý QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For the quarterly period ended June 30, 2007
|
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 1-496
HERCULES
INCORPORATED
A
Delaware Corporation
I.R.S.
Employer Identification No. 51-0023450
Hercules
Plaza
1313
North Market Street
Wilmington,
Delaware 19894-0001
Telephone: 302-594-5000
www.herc.com
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: ý No: o
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 ý Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes: o No: ý
As
of
July 31, 2007 116,698,797 shares of registrant’s common stock were
outstanding.
HERCULES
INCORPORATED
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2007
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52
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52
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53
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54
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55
|
HERCULES
INCORPORATED
(Dollars
in millions, except per share)
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
549.0
|
|
|
$ |
501.0
|
|
|
$ |
1,051.3
|
|
|
$ |
1,028.3
|
|
Cost
of sales
|
|
|
358.8
|
|
|
|
324.7
|
|
|
|
682.2
|
|
|
|
685.4
|
|
Selling,
general and administrative expenses
|
|
|
95.2
|
|
|
|
90.7
|
|
|
|
188.9
|
|
|
|
182.0
|
|
Research
and development
|
|
|
11.0
|
|
|
|
9.4
|
|
|
|
21.4
|
|
|
|
19.0
|
|
Intangible
asset amortization (Note 3)
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
3.7
|
|
|
|
3.6
|
|
Other
operating expense, net (Note 11)
|
|
|
7.6
|
|
|
|
8.6
|
|
|
|
20.7
|
|
|
|
15.8
|
|
Profit
from operations
|
|
|
74.5
|
|
|
|
65.6
|
|
|
|
134.4
|
|
|
|
122.5
|
|
Interest
and debt expense
|
|
|
17.8
|
|
|
|
16.7
|
|
|
|
35.0
|
|
|
|
37.4
|
|
Vertac
response costs and litigation charges (Note
7)
|
|
|
17.5
|
|
|
|
106.0
|
|
|
|
19.0
|
|
|
|
106.0
|
|
|
|
|
15.7
|
|
|
|
21.1
|
|
|
|
19.0
|
|
|
|
31.7
|
|
Income
(loss) before income taxes, minority interests and equity
loss
|
|
|
23.5
|
|
|
|
(78.2 |
) |
|
|
61.4
|
|
|
|
(52.6 |
) |
(Benefit)
provision for income taxes (Note 13)
|
|
|
(11.5 |
) |
|
|
(27.5 |
) |
|
|
(48.1 |
) |
|
|
(16.8 |
) |
Income
(loss) before minority interests and equity loss
|
|
|
35.0
|
|
|
|
(50.7 |
) |
|
|
109.5
|
|
|
|
(35.8 |
) |
Minority
interests in earnings of consolidated subsidiaries
|
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
(1.0 |
) |
|
|
(0.4 |
) |
Equity
loss of affiliated companies, net of tax
|
|
|
—
|
|
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
(1.0 |
) |
Net
income (loss) from continuing operations before discontinued operations
and cumulative effect of change in accounting principle
|
|
|
34.5
|
|
|
|
(51.6 |
) |
|
|
108.0
|
|
|
|
(37.2 |
) |
Net
loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(0.7 |
) |
|
|
—
|
|
|
|
(1.3 |
) |
Net
income (loss) before cumulative effect of change in accounting
principle
|
|
|
34.5
|
|
|
|
(52.3 |
) |
|
|
108.0
|
|
|
|
(38.5 |
) |
Cumulative
effect of change in accounting principle, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
Net
income (loss)
|
|
$ |
34.5
|
|
|
$ |
(52.3 |
) |
|
$ |
108.0
|
|
|
$ |
(37.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (Note 14):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.30
|
|
|
$ |
(0.46 |
) |
|
$ |
0.95
|
|
|
$ |
(0.34 |
) |
Discontinued
operations
|
|
|
—
|
|
|
|
(0.01 |
) |
|
|
—
|
|
|
|
(0.01 |
) |
Cumulative
effect of change in
accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
Net
income (loss)
|
|
$ |
0.30
|
|
|
$ |
(0.47 |
) |
|
$ |
0.95
|
|
|
$ |
(0.34 |
) |
Weighted
average number of shares
(millions)
|
|
|
114.6
|
|
|
|
110.8
|
|
|
|
114.3
|
|
|
|
110.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.30
|
|
|
$ |
(0.46 |
) |
|
$ |
0.94
|
|
|
$ |
(0.34 |
) |
Discontinued
operations
|
|
|
—
|
|
|
|
(0.01 |
) |
|
|
—
|
|
|
|
(0.01 |
) |
Cumulative
effect of change in
accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
Net
income (loss)
|
|
$ |
0.30
|
|
|
$ |
(0.47 |
) |
|
$ |
0.94
|
|
|
$ |
(0.34 |
) |
Weighted
average number of shares
(millions)
|
|
|
115.3
|
|
|
|
110.8
|
|
|
|
115.0
|
|
|
|
110.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
34.5
|
|
|
$ |
(52.3 |
) |
|
$ |
108.0
|
|
|
$ |
(37.6 |
) |
Foreign
currency translation
|
|
|
19.8
|
|
|
|
30.5
|
|
|
|
25.9
|
|
|
|
37.9
|
|
Pension
and postretirement benefit adjustments, net of tax
|
|
|
7.4
|
|
|
|
(1.5 |
) |
|
|
13.8
|
|
|
|
62.9
|
|
Revaluation
of hedges, net of tax
|
|
|
(2.9 |
) |
|
|
(22.4 |
) |
|
|
(7.5 |
) |
|
|
(27.6 |
) |
Comprehensive
income (loss)
|
|
$ |
58.8
|
|
|
$ |
(45.7 |
) |
|
$ |
140.2
|
|
|
$ |
35.6
|
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
|
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
237.9
|
|
|
$ |
171.8
|
|
Accounts
receivable, net (Note 9)
|
|
|
376.7
|
|
|
|
326.6
|
|
|
|
|
223.2
|
|
|
|
210.6
|
|
Deferred
income taxes
|
|
|
37.5
|
|
|
|
70.2
|
|
Current
assets of discontinued operations
|
|
|
—
|
|
|
|
0.4
|
|
Income
taxes receivable
|
|
|
49.2
|
|
|
|
170.8
|
|
Other
current assets
|
|
|
44.7
|
|
|
|
34.1
|
|
Total
current assets
|
|
|
969.2
|
|
|
|
984.5
|
|
Property,
plant, and equipment, net (Note 9)
|
|
|
613.0
|
|
|
|
600.4
|
|
Intangible
assets, net (Note 3)
|
|
|
142.9
|
|
|
|
143.1
|
|
|
|
|
496.1
|
|
|
|
481.5
|
|
Deferred
income taxes
|
|
|
389.6
|
|
|
|
374.6
|
|
Asbestos-related
assets (Note 7)
|
|
|
37.6
|
|
|
|
87.5
|
|
Deferred
charges and other assets
|
|
|
125.5
|
|
|
|
136.9
|
|
Total
assets
|
|
$ |
2,773.9
|
|
|
$ |
2,808.5
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
204.2
|
|
|
$ |
205.3
|
|
Asbestos-related
liabilities (Note 7)
|
|
|
30.0
|
|
|
|
36.4
|
|
Current
debt obligations (Note 4)
|
|
|
126.1
|
|
|
|
35.8
|
|
|
|
|
18.7
|
|
|
|
123.5
|
|
Accrued
expenses
|
|
|
207.3
|
|
|
|
216.8
|
|
Deferred
income taxes
|
|
|
11.6
|
|
|
|
11.8
|
|
Total
current liabilities
|
|
|
597.9
|
|
|
|
629.6
|
|
|
|
|
833.0
|
|
|
|
959.7
|
|
Deferred
income taxes
|
|
|
73.4
|
|
|
|
69.7
|
|
Pension
obligations
|
|
|
228.4
|
|
|
|
262.5
|
|
Other
postretirement benefit obligations
|
|
|
138.8
|
|
|
|
142.2
|
|
Deferred
credits and other liabilities
|
|
|
252.7
|
|
|
|
255.6
|
|
Asbestos-related
liabilities (Note 7)
|
|
|
232.5
|
|
|
|
233.6
|
|
Total
liabilities
|
|
|
2,356.7
|
|
|
|
2,552.9
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
—
|
|
|
|
—
|
|
Minority
interests
|
|
|
13.7
|
|
|
|
12.7
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Series preferred
stock
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $25/48 par value (shares issued: 2007 and 2006 - 160.0
million)
|
|
|
83.3
|
|
|
|
83.3
|
|
Additional
paid-in capital
|
|
|
438.0
|
|
|
|
454.9
|
|
Unearned
compensation
|
|
|
(32.7 |
) |
|
|
(42.1 |
) |
Accumulated
other comprehensive losses
|
|
|
(377.4 |
) |
|
|
(409.6 |
) |
Retained
earnings
|
|
|
1,844.0
|
|
|
|
1,734.1
|
|
|
|
|
1,955.2
|
|
|
|
1,820.6
|
|
Reacquired
stock, at cost (2007 – 43.3 million shares; 2006 – 44.0 million
shares)
|
|
|
(1,551.7 |
) |
|
|
(1,577.7 |
) |
Total
stockholders’ equity
|
|
|
403.5
|
|
|
|
242.9
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,773.9
|
|
|
$ |
2,808.5
|
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
108.0
|
|
|
$ |
(37.6 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
34.9
|
|
|
|
36.9
|
|
Amortization
|
|
|
19.1
|
|
|
|
11.7
|
|
Deferred
income tax provision
|
|
|
15.6
|
|
|
|
(32.8 |
) |
Write-off
of debt issuance costs
|
|
|
—
|
|
|
|
1.5
|
|
Loss
on sale of 51% interest in FiberVisions
|
|
|
(0.3 |
) |
|
|
10.6
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
1.0
|
|
|
|
0.4
|
|
Stock-based
compensation
|
|
|
6.0
|
|
|
|
2.9
|
|
Other
non-cash charges and credits, net
|
|
|
(5.0 |
) |
|
|
0.2
|
|
Accruals
and deferrals of cash receipts and payments (net of acquisitions
and
dispositions):
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(43.8 |
) |
|
|
(30.3 |
) |
Inventories
|
|
|
(9.9 |
) |
|
|
(1.0 |
) |
Asbestos-related
assets and liabilities, net
|
|
|
43.8
|
|
|
|
6.5
|
|
Other
current assets
|
|
|
(3.2 |
) |
|
|
3.4
|
|
Accounts
payable
|
|
|
(4.2 |
) |
|
|
2.2
|
|
Vertac
litigation liability
|
|
|
(104.8 |
) |
|
|
106.0
|
|
Accrued
expenses
|
|
|
7.5
|
|
|
|
0.2
|
|
Income
taxes receivable and payable
|
|
|
107.1
|
|
|
|
(5.2 |
) |
Pension
and postretirement benefit obligations
|
|
|
(15.8 |
) |
|
|
12.7
|
|
Non-current
assets and liabilities
|
|
|
(15.5 |
) |
|
|
(16.4 |
) |
FiberVisions
net assets held for sale
|
|
|
—
|
|
|
|
(7.9 |
) |
Net
cash provided by operating activities
|
|
|
140.5
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(53.8 |
) |
|
|
(22.9 |
) |
Acquisitions
and investments, net of cash recognized upon consolidation
|
|
|
(0.9 |
) |
|
|
(26.1 |
) |
Proceeds
from sale of 51% interest in FiberVisions, net of transaction
costs
|
|
|
(1.2 |
) |
|
|
25.1
|
|
Proceeds
of asset disposals, net of transaction costs
|
|
|
11.4
|
|
|
|
0.3
|
|
Other,
net
|
|
|
(0.1 |
) |
|
|
(1.0 |
) |
Net
cash used in investing activities
|
|
|
(44.6 |
) |
|
|
(24.6 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
|
|
—
|
|
|
|
83.7
|
|
Long-term
debt proceeds
|
|
|
3.3
|
|
|
|
—
|
|
Long-term
debt payments
|
|
|
(47.0 |
) |
|
|
(122.7 |
) |
Change
in short-term debt
|
|
|
5.8
|
|
|
|
(0.8 |
) |
Proceeds
from the exercise of stock options
|
|
|
4.9
|
|
|
|
3.5
|
|
Other,
net including income tax benefits attributable to stock-based
compensation
|
|
|
2.1
|
|
|
|
0.4
|
|
Net
cash used in financing activities
|
|
|
(30.9 |
) |
|
|
(35.9 |
) |
Effect
of exchange rate changes on cash
|
|
|
1.1
|
|
|
|
1.1
|
|
Net
increase in cash and cash equivalents
|
|
|
66.1
|
|
|
|
4.6
|
|
Cash
and cash equivalents – beginning of period
|
|
|
171.8
|
|
|
|
77.3
|
|
Cash
and cash equivalents – end of period
|
|
$ |
237.9
|
|
|
$ |
81.9
|
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
and shares in millions, except per share amounts)
(Unaudited)
The
interim consolidated financial statements and the notes to the consolidated
financial statements of Hercules Incorporated (“Hercules” or the “Company”) are
unaudited as of and for the three and six months ended June 30, 2007 and 2006,
but in the opinion of management include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of Hercules’
financial position and results of operations for the interim
periods. The consolidated financial statements include the accounts
of variable interest entities for which Hercules is the primary
beneficiary. These consolidated financial statements should be read
in conjunction with the accounting policies, financial statements and notes
included in Hercules’ Annual Reports on Form 10-K and Form 10-K/A for the
year ended December 31, 2006.
The
results of operations and cash flows of FiberVisions have been consolidated
into
the Company’s Statements of Operations and Cash Flows through March 31, 2006,
preceding the sale of the Company’s 51% interest. Effective April 1,
2006, FiberVisions has been reported as an equity investment and the Company
includes its proportionate share of earnings and losses using the equity method
of accounting.
Certain
prior period amounts in the consolidated financial statements and notes have
been reclassified to conform to the current period presentation.
2.
|
Recent
Accounting
Pronouncements
|
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a
framework for measuring fair value under accounting principles generally
accepted in the United States (“GAAP”) and will be applied to
existing accounting and disclosure requirements in GAAP that are based on fair
value. SFAS 157 does not require any new fair value measurements. SFAS 157
emphasizes a “market-based” as opposed to an “entity-specific” measurement
perspective, establishes a hierarchy of fair value measurement methods and
expands disclosure requirements about fair value measurements including methods
and assumptions and the impact on earnings. The Company has
identified its cross-currency interest rate swaps, certain foreign
exchange-related contracts, its “available for sale” investment securities and
its measurement processes for asset retirement obligations and the
impairment of goodwill and intangible assets as being impacted by SFAS
157. The Company continues to evaluate the overall impact of SFAS
157, which is to be adopted effective January 1, 2008 and applied
prospectively.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS
159 provides an option to report certain financial assets and liabilities at
fair value primarily to reduce the complexity and level of volatility in the
accounting for financial instruments resulting from measuring related financial
assets and liabilities differently under existing GAAP. SFAS 159 is effective
January 1, 2008. At this time, the Company does not anticipate SFAS
159 having a material impact on its financial statements.
3.
|
Intangible
Assets and
Goodwill
|
The
following table provides information regarding the Company’s intangible assets
with finite lives:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Customer
relationships
|
|
$ |
90.6
|
|
|
$ |
19.8
|
|
|
$ |
70.8
|
|
|
$ |
90.0
|
|
|
$ |
18.6
|
|
|
$ |
71.4
|
|
Trademarks
and tradenames
|
|
|
73.9
|
|
|
|
16.6
|
|
|
|
57.3
|
|
|
|
73.9
|
|
|
|
15.6
|
|
|
|
58.3
|
|
Other
intangible assets
|
|
|
35.1
|
|
|
|
20.3
|
|
|
|
14.8
|
|
|
|
32.2
|
|
|
|
18.8
|
|
|
|
13.4
|
|
|
|
$ |
199.6
|
|
|
$ |
56.7
|
|
|
$ |
142.9
|
|
|
$ |
196.1
|
|
|
$ |
53.0
|
|
|
$ |
143.1
|
|
Total
amortization expense for Other intangible assets was $1.9 million and $2.0
million for the three months ended June 30, 2007 and 2006, respectively and
was
$3.7 million and $3.6 million for the six months ended June 30, 2007 and 2006,
respectively. Estimated amortization expense is $7.3 million for the
year ended December 31, 2007.
The
following table shows changes in the carrying amount of goodwill by operating
segment for the six months ended June 30, 2007:
|
|
Paper
Technology and Ventures
|
|
|
Aqualon
Group
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$ |
429.5
|
|
|
$ |
52.0
|
|
|
$ |
481.5
|
|
Foreign
currency translation
|
|
|
14.3
|
|
|
|
0.3
|
|
|
|
14.6
|
|
Balance
at June 30, 2007
|
|
$ |
443.8
|
|
|
$ |
52.3
|
|
|
$ |
496.1
|
|
A
summary
of debt by instrument is provided as follows:
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
Term
B Loan due 2010
|
|
$ |
328.0
|
|
|
$ |
375.0
|
|
6.6%
notes due 2027
|
|
|
100.0
|
|
|
|
100.0
|
|
11.125%
senior notes due 2007
|
|
|
16.1
|
|
|
|
16.1
|
|
6.75%
senior subordinated notes due 2029
|
|
|
250.0
|
|
|
|
250.0
|
|
8%
convertible subordinated debentures due 2010
|
|
|
2.3
|
|
|
|
2.4
|
|
6.5%
junior subordinated deferrable interest debentures due
2029
|
|
|
214.6
|
|
|
|
214.1
|
|
Term
loans at rates ranging from 5.5575% to 6.1101% due in varying amounts
thru
2011
|
|
|
35.0
|
|
|
|
28.1
|
|
Other
|
|
|
13.1
|
|
|
|
9.8
|
|
|
|
|
959.1
|
|
|
|
995.5
|
|
Less:
Current debt obligations
|
|
|
126.1
|
|
|
|
35.8
|
|
Long-term
debt
|
|
$ |
833.0
|
|
|
$ |
959.7
|
|
As
of
June 30, 2007 the weighted-average interest rate on the Term B Loan, which
bears
interest at LIBOR + 1.50%, was 6.85%.
In
accordance with provisions of the indenture under which they were issued, $84.1
million of the 6.6% notes due 2027 were put to the Company in June 2007 for
payment on August 1, 2007.
As
of
June 30, 2007, $98.2 million of the $150.0 million Revolving Facility under
the
Company’s Senior Credit Facility was available for use. The Company
had $51.8 million of outstanding letters of credit associated with the Revolving
Credit Facility at June 30, 2007. As of June 30, 2007, the Company
had $33.1 million of foreign lines of credit available and unused.
5.
|
Pension
and Other Postretirement
Benefits
|
The
following tables set forth the consolidated net periodic pension and other
postretirement benefit costs that are attributable to the Company’s global
pension and postretirement benefit plans as recognized for the three and six
months ended June 30, 2007 and 2006:
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4.3
|
|
|
$ |
4.1
|
|
|
$ |
8.8
|
|
|
$ |
8.8
|
|
Interest
cost
|
|
|
25.8
|
|
|
|
25.0
|
|
|
|
51.7
|
|
|
|
49.9
|
|
Expected
return on plan assets
|
|
|
(30.4 |
) |
|
|
(28.0 |
) |
|
|
(60.7 |
) |
|
|
(56.4 |
) |
Amortization
and deferrals
|
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
(1.3 |
) |
|
|
(1.0 |
) |
Actuarial
losses recognized
|
|
|
10.6
|
|
|
|
10.5
|
|
|
|
21.5
|
|
|
|
22.5
|
|
|
|
$ |
9.7
|
|
|
$ |
11.1
|
|
|
$ |
20.0
|
|
|
$ |
23.8
|
|
Subject
to market conditions, the total contributions expected to be made to the
Company’s pension plans during 2007 are approximately $37 million, including $20
million in voluntary contributions attributable to the U.S. defined benefit
pension plan and $17 million attributable to the Company’s pension plan in the
United Kingdom. Actual contributions of $27.1
million made during the six months ended June 30, 2007 included $10.0 million
to
the U.S. defined benefit pension and $17.1 million attributable to the pension
plan in the United Kingdom.
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.1
|
|
|
$ |
0.1
|
|
|
$ |
0.2
|
|
|
$ |
0.3
|
|
Interest
cost
|
|
|
1.9
|
|
|
|
2.2
|
|
|
|
4.1
|
|
|
|
4.3
|
|
Amortization
and deferrals
|
|
|
(2.0 |
) |
|
|
(1.9 |
) |
|
|
(3.9 |
) |
|
|
(4.0 |
) |
Actuarial
losses recognized
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
4.3
|
|
|
|
3.6
|
|
|
|
$ |
2.1
|
|
|
$ |
2.3
|
|
|
$ |
4.7
|
|
|
$ |
4.2
|
|
6.
|
Asset
Retirement
Obligations
|
The
following table provides a reconciliation of the changes in the asset retirement
obligations (“AROs”) during the period:
|
|
Active
Sites
|
|
|
Inactive
Sites
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$ |
9.9
|
|
|
$ |
66.4
|
|
|
$ |
76.3
|
|
Accretion
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
1.2
|
|
Settlement
payments
|
|
|
(1.0 |
) |
|
|
(4.4 |
) |
|
|
(5.4 |
) |
Foreign
currency translation
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Other
|
|
|
(0.7 |
) |
|
|
0.4
|
|
|
|
(0.3 |
) |
Balance
at June 30, 2007
|
|
$ |
8.4
|
|
|
$ |
63.6
|
|
|
$ |
72.0
|
|
While
not
reflected in the table above, the Company has recognized $36.9 million for
environmental contingencies whereby it is probable that the Company has incurred
a liability for costs associated with environmental remediation or for the
settlement of related litigation. Included in this amount is
approximately $13 million attributable to a settlement in principle with respect
to the Alleghany Ballistics Laboratory site and $18.7 million attributable
to a
claim for response costs at the Vertac site as discussed further in
Note 7. 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 in, but was associated with including landfills,
waste sites and other similar properties.
7.
|
Commitments
and
Contingencies
|
Guarantees
In
accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”), disclosure about each group of guarantees is
provided below:
Indemnifications
In
connection with the sale of Company assets and businesses, the Company has
indemnified respective buyers against certain liabilities that may arise in
connection with the sale transactions and business activities prior to the
ultimate closing of the sale. The terms of 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 protect, defend, and/or
indemnify 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 June
30, 2007 was $41.3 million.
In
addition, in connection with these transactions, the Company has generally
provided indemnifications on general corporate matters such as ownership of
the
relevant assets, the power and corporate authority to enter into transactions
and the satisfaction of liabilities not assumed by the buyer. These
indemnifications generally have indefinite terms.
As
noted
in greater detail in the Litigation section of this note, the Company has
entered into comprehensive settlement agreements with substantially all of
its
insurance carriers that provided coverage for asbestos-related product
liabilities. Under the terms of those agreements and in exchange for
payments received and to be received from such insurance carriers, the Company
has released and agreed to indemnify such insurers from claims asserted under
their cancelled policies.
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
Obligations
The
Company has directly guaranteed $43.4 million of various obligations under
agreements with third parties related to consolidated subsidiaries and
affiliates of which $33.3 million was outstanding at June 30, 2007. 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.
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.
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 concerned 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 the
Company’s report on Form 10-K for the year ended December 31, 2006, and in other
reports previously filed by the Company with the United States Securities and
Exchange Commission (“SEC”). In summary, in 2005, the United States
District Court for the Eastern District of Arkansas entered a Final Judgment
in
favor of the United States and against the Company for $119.3 million, of which
amount Uniroyal Chemical Ltd. (hereinafter “Uniroyal,” and now known as Chemtura
Canada Co./CIE) was 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 were 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. The Final Judgment was upheld in 2006
by the United States Court of Appeals for the 8th Circuit,
and the
appellate process ended in 2007 when the United States Supreme Court denied
the
Company’s and Uniroyal’s Petitions for Certiorari. On May 18, 2007,
the Company paid to the United States a total of $124.5 million, and on May
17,
2007, the Company received payment from Uniroyal in the amount of $0.8
million. As a result, the judgment against the Company and Uniroyal
has been satisfied, except for such amounts as may be owed to the United States
for additional response costs incurred by the United States since June 1,
1998.
On
July
20, 2007, the Company received from the United States its claim for
reimbursement for response costs incurred since June 1, 1998, with such claim
against the Company and Uniroyal totaling $19.2 million including interest
through various points in time preceding May 26, 2007, depending upon the
specific cost item claimed. The Company is in the process of
reviewing such costs to determine whether all such costs qualify for recovery
pursuant to CERCLA. Should the Company determine that certain costs
may not be recoverable pursuant to CERCLA, the Company will seek to have the
United States’ claim reduced accordingly. In the meantime, as of June
30, 2007, the Company has accrued $18.7 million, representing its proportionate
share of the entire amount specified by the United States in its claim for
reimbursement. The Company will continue to accrue interest on this
amount until payment is made.
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. In May 2007, the Company and the Navy
engaged in mediation, resulting in an agreement in principle to resolve the
Navy’s claims for $13.0 million. While such settlement is subject to
negotiation of mutually satisfactory settlement documents and various approvals,
the Company believes it probable that such settlement will be consummated and,
as of June 30, 2007, the Company has included the foregoing amount as part
of
the accrued liability for environmental matters 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 6), the Vertac and ABL sites and other
locations where the Company may have a liability, is approximately $109 million
as of June 30, 2007. 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.
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
June 30, 2007, there were approximately 26,000 unresolved claims, of which
approximately 950 were premises claims and the rest were products claims.
There were also approximately 1,850 unpaid claims which have been settled or
are
subject to the terms of a settlement agreement. In addition, as of June
30, 2007, there were approximately 15 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, 2007 and June 30, 2007, the Company received approximately 633 new
claims. During that same period, the Company settled
approximately $13.5 million to resolve and defend asbestos matters, including
$7.5 million directly related to settlement payments
and approximately $6.0 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.
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 June 30,
2007, approximately $85.1 million of the $102.2 million had been placed into
the
Second Trust, and the Second Trust had a balance of approximately $20.9
million.
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 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 June 30, 2007,
defense costs and settlement payments for qualifying asbestos products claims
of
approximately $93 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.
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.
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 six months ended
June 30, 2007.
|
|
Balance
December 31, 2006
|
|
|
Interest
Income/
Additional
Accruals
|
|
|
Insurance
Recovered/
Liabilities
Settled
|
|
|
Accretion/
Reclassifi-
cation
|
|
|
Balance
June
30, 2007
|
|
Asbestos-related
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable
|
|
$ |
32.8
|
|
|
$ |
—
|
|
|
$ |
(16.5 |
) |
|
$ |
0.3
|
|
|
$ |
16.6
|
|
Restricted
cash in trust
|
|
|
54.7
|
|
|
|
1.1
|
|
|
|
(34.8 |
) |
|
|
—
|
|
|
|
21.0
|
|
Asbestos-related
assets
|
|
$ |
87.5
|
|
|
$ |
1.1
|
|
|
$ |
(51.3 |
) |
|
$ |
0.3
|
|
|
$ |
37.6
|
|
Asbestos-related
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related
liabilities, current
|
|
$ |
36.4
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
(6.4 |
) |
|
$ |
30.0
|
|
Asbestos-related
liabilities, non-current
|
|
|
233.6
|
|
|
|
—
|
|
|
|
(7.5 |
) |
|
$ |
6.4
|
|
|
|
232.5
|
|
Total
asbestos-related liabilities
|
|
$ |
270.0
|
|
|
$ |
—
|
|
|
$ |
(7.5 |
) |
|
$ |
—
|
|
|
$ |
262.5
|
|
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. In April 2007, the Company
reached a confidential settlement agreement in principle with these two former
customers. The amount of that settlement is included in the accrued
liability for non-asbestos litigation reported below.
As
previously noted, 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 claimed in the lawsuits described
above. In May 2007, that entity, Cytec Engineered Materials, Inc.
filed two lawsuits against the Company and B.P. Amoco Polymers, Inc. (and
allegedly related entities), one such lawsuit in federal court (Cytec
Engineered Materials, Inc. v. B.P. Amoco Polymers, Inc., et al.,
Case No. SACV 07-528 FMC (RNBx), United States District Court, Central District
of California, Western Division), and one such lawsuit in state court (Cytec
Engineered Materials, Inc. v. B.P. Amoco Polymers, Inc., et al.,
Case No. BC370895, California Superior Court, Los Angeles
County). The Company currently believes that these lawsuits are
without merit and legally defensible, and the Company intends to vigorously
defend them.
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 filed motions for summary
judgment. In late April 2007, the Court granted Hexcel’s motion for
summary judgment and denied the Company’s motion for summary
judgment. The Company will seek to have those rulings reversed and,
on June 6, 2007, filed a Notice of Appeal with the Supreme Court of New York,
Appellate Division.
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. Oral argument before the Court of Appeals took place on June
18, 2007. No ruling has yet been issued.
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. Oral argument
before the Court of Appeals took place on June 18, 2007. No ruling
has yet been issued.
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 $1.4 million, 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.
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 was held on May 10, 2007, at which time
the
settlement was approved by the Court. 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 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) Plaintiffs’ counsel were granted fees
and costs totaling $1.5 million, and the two named plaintiffs were granted
incentive awards of $25,000 each, for a total of $1.55 million. Of
that amount, in June 2007, $0.3 million was paid by the Company, and the
balance
was paid by the pension plan. The amounts paid by the pension plan
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.
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 1,900 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/or 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. On June 15, 2007, the Texas Supreme Court issued an
opinion captioned In Re Allied Chemical Corp., et al. (No. 04-1023),
wherein the Texas Supreme Court supported the defendants’ arguments and required
the trial court to require plaintiffs to provide evidence which specifically
connects a defendant’s products with a plaintiff’s alleged personal injury, and
then to provide to defendants a reasonable time to prepare for
trial. While it is not yet clear how that decision will impact this
litigation, the Company believes that the decision will assist it in defending
plaintiffs’ personal injury claims. The Company continues to deny any
liability to plaintiffs and intends to vigorously defend these
matters.
The
Company and others have been sued by approximately 550 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, Howard Dejean, et al. v. Bridgestone/Firestone, Inc., et al.,
Civil Action No. 2006-6276, and Lloyd Guillory, et al v. Bridgestone/Firestone,
et al., Civil Action No. 2007-002582.
Amounts
Accrued for Non-Asbestos Litigation
During
the period January 1, 2007 through June 30, 2007 no new accruals for
non-asbestos and non-environmental litigation were
established. During that same time period, settlement payments for
non-asbestos and non-environmental litigation were $2.0 million. The
June 30, 2007 Consolidated Balance Sheet reflects a current liability of $6.3
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.
REACH,
Regulation (EC) No. 1907/2006
On
June
1, 2007, the European Union's regulations concerning the Registration,
Evaluation, Authorization and Restriction of Chemicals (commonly referred
to as
"REACH"), Regulation (EC) No. 1907/2006, became effective. This
regulation requires manufacturers and importers into the European Union of
certain chemicals to register those chemicals and to evaluate their potential
impacts on human health and the environment. Under REACH, the
continued importation into the EU, manufacture and/or use of certain chemicals
may be restricted, and manufacturers and importers of certain chemicals will
be
required to undertake evaluations of those chemicals, including toxicological
and ecological evaluations. The requirements of REACH are expected to
be phased in over a period of years, and compliance with its requirements
are
anticipated to require expenditures and resource commitments by the Company,
which could become material depending upon how various provisions of REACH
are
interpreted and implemented. It is also possible that REACH could
affect raw material supply, customer demand for certain products, and the
Company's decision to continue to manufacture and sell certain
products.
8. Stock-Based
Compensation
In
addition to cash compensation, the Company provides 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”). A summary of the valuation for
share-based awards granted under the plans as well as a summary of award
activity is described in further detail below.
Stock
Options
The
fair
value of stock option awards granted is estimated on the date of grant using
the
Black-Scholes option pricing model and the weighted-average assumptions in
the
following table:
|
|
2007
|
|
|
2006
|
|
Expected
volatility
|
|
|
30.00 |
% |
|
|
30.10 |
% |
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected
life (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
Risk-free
interest rate
|
|
|
4.68 |
% |
|
|
4.60 |
% |
A
summary
of stock option activity under the Plans as of June 30, 2007 and changes during
the six months then ended is presented as follows:
|
|
Regular
|
|
|
Performance
Accelerated
|
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Price
|
|
|
Number
of
Shares
|
|
|
Weighted-Average
Price
|
|
Outstanding
at December 31, 2006
|
|
|
4,677,295
|
|
|
$ |
23.22
|
|
|
|
720,990
|
|
|
$ |
40.75
|
|
Granted
|
|
|
230,133
|
|
|
|
21.04
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(343,822 |
) |
|
|
14.39
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(772,120 |
) |
|
|
38.86
|
|
|
|
(208,500 |
) |
|
|
40.20
|
|
Outstanding
at June 30, 2007
|
|
|
3,791,486
|
|
|
$ |
20.71
|
|
|
|
512,490
|
|
|
$ |
40.97
|
|
Exercisable
at June 30, 2007
|
|
|
3,212,954
|
|
|
$ |
21.53
|
|
|
|
27,290
|
|
|
$ |
38.75
|
|
Restricted
Stock Awards
A
summary
of restricted stock award activity under the Plans as of June 30, 2007 and
changes during the six months then ended is presented as follows:
|
|
Number
of
Shares
|
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Outstanding
at December 31, 2006
|
|
|
2,057,408
|
|
|
$ |
12.05
|
|
Granted
|
|
|
367,677
|
|
|
|
20.90
|
|
Vested(1)
|
|
|
(597,524 |
) |
|
|
11.88
|
|
Forfeited
|
|
|
(5,312 |
) |
|
|
19.49
|
|
Outstanding
at June 30, 2007
|
|
|
1,822,249
|
|
|
$ |
13.87
|
|
(1)Includes
547,113
shares attributable to the accelerated vesting of certain 2004 restricted stock
awards due to the achievement of specific share price performance benchmarks
upon the February 2007 anniversary date.
The
following supplemental disclosures are provided with respect to the Company’s
stock option and restricted stock award plans:
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
Unrecognized
compensation cost:
|
|
|
|
|
|
|
Stock
options
|
|
$ |
2.6
|
|
|
$ |
1.6
|
|
Restricted
stock
|
|
$ |
14.7
|
|
|
$ |
12.9
|
|
Weighted-average
remaining periods for recognition (years):
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1.9
|
|
|
|
1.9
|
|
Restricted
stock
|
|
|
3.8
|
|
|
|
3.5
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Compensation
cost recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
0.5
|
|
|
$ |
0.7
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
Restricted
stock (1)
|
|
$ |
1.2
|
|
|
$ |
1.0
|
|
|
$ |
5.0
|
|
|
$ |
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of options granted (per share)
|
|
$ |
—
|
|
|
$ |
5.40
|
|
|
$ |
8.26
|
|
|
$ |
4.60
|
|
Intrinsic
value of options exercised
|
|
$ |
0.4
|
|
|
$ |
1.1
|
|
|
$ |
1.8
|
|
|
$ |
1.1
|
|
Tax
benefits recognized in Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
0.1
|
|
|
$ |
0.3
|
|
|
$ |
0.6
|
|
|
$ |
0.3
|
|
Restricted
stock
|
|
$ |
0.1
|
|
|
$ |
0.1
|
|
|
$ |
1.8
|
|
|
$ |
0.3
|
|
(1)The
six months
ended June 30, 2007 includes approximately $3 million attributable to the
accelerated vesting of certain 2004 restricted stock awards due to the
achievement of specific share-price performance benchmarks upon the February
2007 anniversary date.
9. Supplemental
Financial Statement Disclosures
|
|
June
30,
2007
|
|
|
December 31,
2006
|
|
Accounts
receivable, gross
|
|
$ |
381.4
|
|
|
$ |
332.2
|
|
Allowance
for doubtful accounts
|
|
|
(4.7 |
) |
|
|
(5.6 |
) |
Accounts
receivable, net
|
|
$ |
376.7
|
|
|
$ |
326.6
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$ |
123.0
|
|
|
$ |
115.4
|
|
Raw materials and work-in-process
|
|
|
77.7
|
|
|
|
73.3
|
|
Supplies
|
|
|
22.5
|
|
|
|
21.9
|
|
|
|
$ |
223.2
|
|
|
$ |
210.6
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
16.4
|
|
|
$ |
16.4
|
|
Buildings and equipment
|
|
|
1,636.2
|
|
|
|
1,643.0
|
|
Construction in progress
|
|
|
106.3
|
|
|
|
85.0
|
|
|
|
|
1,758.9
|
|
|
|
1,744.4
|
|
Accumulated depreciation and amortization
|
|
|
(1,145.9 |
) |
|
|
(1,144.0 |
) |
Property,
plant and equipment, net
|
|
$ |
613.0
|
|
|
$ |
600.4
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Cost of sales and Selling, general and administrative
(“SG&A”) expenses
|
|
$ |
17.6
|
|
|
$ |
16.9
|
|
|
$ |
34.4
|
|
|
$ |
33.0
|
|
Accelerated depreciation included in Other operating expense,
net
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
0.5
|
|
|
|
3.9
|
|
|
|
$ |
17.8
|
|
|
$ |
17.8
|
|
|
$ |
34.9
|
|
|
$ |
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$ |
1.9
|
|
|
$ |
2.0
|
|
|
$ |
3.7
|
|
|
$ |
3.6
|
|
Capitalized
software (normal basis) included in SG&A expenses
|
|
|
3.9
|
|
|
|
3.7
|
|
|
|
7.7
|
|
|
|
7.4
|
|
Accelerated amortization of capitalized software included in Other
operating expense, net
|
|
|
3.4
|
|
|
|
—
|
|
|
|
6.9
|
|
|
|
—
|
|
Deferred
financing costs included in Interest and debt expense
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
$ |
9.6
|
|
|
$ |
5.9
|
|
|
$ |
19.1
|
|
|
$ |
11.7
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
20.2
|
|
|
$ |
30.8
|
|
|
$ |
33.6
|
|
|
$ |
45.8
|
|
Income
taxes, net of refunds received
|
|
|
(178.7 |
) |
|
|
11.0
|
|
|
|
(171.6 |
) |
|
|
19.3
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
8.9
|
|
|
|
11.8
|
|
10. Restructuring
Programs
A
summary
of the charges included in Other operating expense, net incurred during 2007
in
connection with restructuring programs as well as an allocation to the reporting
segments is provided as follows:
|
|
Severance
|
|
|
Other
Exit
Costs
|
|
|
Asset
Charges
|
|
|
Total
|
|
Research
and development consolidation
|
|
$ |
0.5
|
|
|
$ |
0.1
|
|
|
$ |
0.3
|
|
|
$ |
0.9
|
|
Manufacturing
and Alliance-related rationalization
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.8
|
|
Business
segment realignment
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
Business
Infrastructure Project
|
|
|
9.7
|
|
|
|
3.5
|
|
|
|
6.9
|
|
|
|
20.1
|
|
Total
by restructuring program
|
|
$ |
11.0
|
|
|
$ |
3.8
|
|
|
$ |
7.4
|
|
|
$ |
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
1.0
|
|
Aqualon
Group
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
Corporate
|
|
|
10.2
|
|
|
|
3.5
|
|
|
|
7.1
|
|
|
|
20.8
|
|
Total
by reporting segment
|
|
$ |
11.0
|
|
|
$ |
3.8
|
|
|
$ |
7.4
|
|
|
$ |
22.2
|
|
The
restructuring programs listed in the table above were all initiated in 2006
or
prior years. The charges recorded during the six months ended June
30, 2007 primarily reflect severance and termination benefits which are being
accrued over periods during which affected employees are required to provide
continuing services in connection with the related program. In
addition, other exit costs, including transition services, employee relocation
and site closure expenses, among others are charged as incurred. A
minimal number of employees were added to the severance plans associated with
these programs during the six months ended June 30,
2007. Approximately $8 million of additional charges are expected to
be accrued through 2009 resulting in approximately $25 million of future cash
payments primarily in 2007 and 2008 with certain amounts continuing into
2010.
Asset
charges recorded during the six months ended June 30, 2007 include accelerated
depreciation for certain assets at the Company’s Wilmington, Delaware research
facility in connection with construction programs attributable to the Research
and development consolidation program and certain production assets at various
domestic PTV manufacturing facilities in connection with the planned transfer
of
production activities in accordance with the rosin-based sizing product alliance
with MeadWestvaco. Also included is $6.9 million of accelerated
amortization charges attributable to capitalized software development costs
associated with the Company’s information technology platform, which is in the
process of undergoing a substantial technical upgrade that is expected to
continue through the second quarter of 2008. Accordingly, charges
resulting in additional accelerated amortization of approximately $12 million
will continue to be recorded through the second quarter of 2008.
A
reconciliation of activity with respect to the accrued liabilities for the
plans
described above is as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period
|
|
$ |
10.5
|
|
|
$ |
16.6
|
|
Accrued
charges for severance and related benefits
|
|
|
11.0
|
|
|
|
10.9
|
|
Accrued
charges for other exit and restructuring costs
|
|
|
3.3
|
|
|
|
0.8
|
|
Cash
payments
|
|
|
(7.6 |
) |
|
|
(13.4 |
) |
Other,
including foreign currency translation
|
|
|
0.3
|
|
|
|
0.4
|
|
Balance
at end of period
|
|
$ |
17.5
|
|
|
$ |
15.3
|
|
In
addition, the Company made cash payments of $0.5 million and $1.2 million during
the six months ended June 30, 2007 and 2006, respectively, for certain exit
costs that have been paid as incurred and are not included in the reconciliation
of accrued restructuring liabilities above.
In
connection with the substantial completion of the Research and development
consolidation program, the Company is in the process of marketing its former
facility in Jacksonville, Florida. This facility, with a carrying
value of $7.7 million, is reflected as an asset held for sale and is included
in
the caption “Other current assets” on the Consolidated Balance Sheet as of June
30, 2007.
11.
|
Other
Operating Expense,
Net
|
Other
operating expense, net consists of the following:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Severance,
restructuring and other exit costs, net
|
|
$ |
6.2
|
|
|
$ |
5.6
|
|
|
$ |
14.8
|
|
|
$ |
12.9
|
|
Accelerated
depreciation and amortization
|
|
|
3.7
|
|
|
|
0.9
|
|
|
|
7.4
|
|
|
|
3.9
|
|
Legal
settlements
|
|
|
—
|
|
|
|
1.5
|
|
|
|
(0.2 |
) |
|
|
(2.1 |
) |
Environmental
charges
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
(Gains)
losses on asset dispositions, net
|
|
|
(4.1 |
) |
|
|
—
|
|
|
|
(4.0 |
) |
|
|
(0.1 |
) |
Dismantlement
costs
|
|
|
1.0
|
|
|
|
0.4
|
|
|
|
1.7
|
|
|
|
0.6
|
|
Other
miscellaneous charges, net
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
$ |
7.6
|
|
|
$ |
8.6
|
|
|
$ |
20.7
|
|
|
$ |
15.8
|
|
Other
expense, net consists of the following:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Asbestos-related
costs, net
|
|
$ |
2.2
|
|
|
$ |
2.3
|
|
|
$ |
4.3
|
|
|
$ |
4.5
|
|
Loss
on sale of 51% interest in FiberVisions
|
|
|
(0.1 |
) |
|
|
5.5
|
|
|
|
(0.3 |
) |
|
|
10.6
|
|
Loss
on repurchase of debt
|
|
|
—
|
|
|
|
10.5
|
|
|
|
—
|
|
|
|
11.9
|
|
Environmental
charges
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
2.9
|
|
|
|
2.1
|
|
Litigation
settlements and accruals
|
|
|
13.8
|
|
|
|
1.4
|
|
|
|
14.5
|
|
|
|
2.1
|
|
Gains
on asset dispositions, net
|
|
|
(0.4 |
) |
|
|
—
|
|
|
|
(0.4 |
) |
|
|
—
|
|
Other,
net
|
|
|
(1.2 |
) |
|
|
0.6
|
|
|
|
(2.0 |
) |
|
|
0.5
|
|
|
|
$ |
15.7
|
|
|
$ |
21.1
|
|
|
$ |
19.0
|
|
|
$ |
31.7
|
|
Benefit/Provision
for Income Taxes
For
the
three months ended June 30, 2007, the Company recognized pretax income of $23.5
million and a tax benefit of $11.5 million while the six months ended June
30,
2007 reflects pre-tax income of $61.4 million and a tax benefit of $48.1
million. The most significant discrete items during the 2007 three
month period were an incremental benefit adjustment of $12.8 million related
to
the IRS audits for the years 1993 through 2003 (the “IRS final audit
resolution”) and a $1.9 million benefit for expected state tax refunds. The tax
benefit for the 2007 six month period includes the following discrete items:
(i)
a $60.1 million benefit related to the IRS final audit resolution and resulting
interest income; (ii) a $1.9 million benefit for expected state income tax
refunds resulting from the settlement of years 1993 through 2003; (iii) a net
$0.5 million benefit for other changes in international and state income tax
reserves; and (iv) a $0.2 million charge related to income tax law changes
enacted in China. The full year effective tax rate for 2007 is
estimated to be (15)%.
The
Company recognized a pretax loss of $78.2 million and a tax benefit of $27.5
million for the three months ended June 30, 2006 and a pretax loss of $52.6
million and a tax benefit of $16.8 million for the six months ended June 30,
2006. The 2006 six month effective tax rate of 32% reflects charges
attributable to the valuation allowance for the loss on the sale of
FiberVisions, a provision related to undistributed foreign earnings triggered
by
the sale, and a benefit related to the Vertac litigation charge (see Note 7).
Resolution
of Income Tax Matters
During
the first quarter of 2007, the Company reached agreement with the IRS on all
remaining income tax matters for the years 1993 through 2003. During the second
quarter of 2007, the Company was able to increase its expected refund of
interest through the application of various income tax deposits and overpayments
to the final tax liabilities for the years 1993 through 2003. As a result,
an
additional benefit of $60.1 million, including interest, was recorded over
and
above those amounts recorded during the fourth quarter of 2006. The Company
expects to receive a total of approximately $242 million, including interest,
during 2007 as a result of the settlement with the IRS. In addition,
the Company expects to receive
approximately $3 million in state income tax refunds as a result of the
resolution of tax years 1993 through 2003. Through the six months ended June
30,
2007, the Company has received $198.5 million related to the federal and state
income tax matters. The remainder is expected to be received during the second
half of 2007 and is reflected on the Consolidated Balance Sheet as of June
30,
2007 within Current assets.
Adoption
of FIN 48
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”) effective January 1, 2007. In accordance with the transition
provisions of FIN 48, the Company recorded an increase to its beginning balance
of retained earnings in the amount of $1.9 million with a corresponding decrease
to certain state income tax reserves included in the caption Deferred credits
and other liabilities.
The
Company has identified $40.4 million of unrecognized tax benefits (“UTB”) as of
January 1, 2007. Of this amount, $14.6 million would affect the
effective tax rate if recognized in future periods. The total amount
of UTB could increase or decrease within the next twelve months for a number
of
reasons including the expiration of statute of limitations, audit settlements,
tax examination activities and the recognition and measurement considerations
under FIN 48. The Company does not believe that the total amount of
UTB will significantly increase or decrease over the next twelve
months.
The
Company has a long audit history with the Internal Revenue Service (“IRS”), and
recently settled all issues for the years 1993 through 2003. The tax
years 2004 and 2005 are currently under audit by the IRS. The Company
also files tax returns in every state which imposes corporate income tax and
those jurisdictions remain subject to examination in accordance with relevant
state statutes. In addition, the Company has significant international
operations and approximately 45 legal entities have income tax filing
requirements in accordance with local country tax regulations. These
returns remain subject to examination in accordance with the local country
statutes. The Company is currently under audit in Germany for tax
years 1999 through 2004.
In
addition to the impact on the Company’s balance sheet, the Company has elected
to retain its existing accounting policy with respect to the treatment of
interest and penalties attributable to income taxes in accordance with FIN
48,
and continues to reflect interest and penalties attributable to income taxes,
to
the extent they arise, as a component of its income tax provision or benefit
as
well as its outstanding income tax assets and liabilities. The total
amount of interest and penalties recognized in the Consolidated Balance Sheet
as
of January 1, 2007 was $15.2 million.
The
following table provides the weighted-average number of common shares (in
millions) used in computing basic and diluted earnings (loss) per
share:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
number of common shares outstanding – Basic
|
|
|
114.6
|
|
|
|
110.8
|
|
|
|
114.3
|
|
|
|
110.5
|
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Share-based
compensation
plans
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.4
|
|
Weighted-average
number of common shares outstanding - Diluted
|
|
|
115.3
|
|
|
|
111.6
|
|
|
|
115.0
|
|
|
|
111.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
excluded from computation of diluted earnings per share (exercise
price
exceeds market value):
|
|
Options
to purchase common stock
|
|
|
1.9
|
|
|
|
4.9
|
|
|
|
1.9
|
|
|
|
5.2
|
|
Warrants
to purchase common stock
|
|
|
6.6
|
|
|
|
6.7
|
|
|
|
6.6
|
|
|
|
6.7
|
|
|
|
|
8.5
|
|
|
|
11.6
|
|
|
|
8.5
|
|
|
|
11.9
|
|
As
a result of the losses
incurred during the three and six months ended June 30, 2006, 110.8 million
and
110.5 million shares are used for the purposes of computing both basic and
diluted earnings per share, respectively, as the utilization of the
calculated amounts for diluted shares of 111.6 million and 111.1 million,
respectively, would be anti-dilutive.
A
summary
of reporting segment data is provided below:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technology and Ventures
|
|
$ |
288.3
|
|
|
$ |
266.4
|
|
|
$ |
571.5
|
|
|
$ |
520.6
|
|
Aqualon
Group
|
|
|
260.7
|
|
|
|
234.6
|
|
|
|
479.8
|
|
|
|
438.5
|
|
FiberVisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69.2
|
|
|
|
$ |
549.0
|
|
|
$ |
501.0
|
|
|
$ |
1,051.3
|
|
|
$ |
1,028.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technology and Ventures
|
|
$ |
26.2
|
|
|
$ |
16.6
|
|
|
$ |
54.2
|
|
|
$ |
31.2
|
|
Aqualon
Group
|
|
|
57.7
|
|
|
|
54.7
|
|
|
|
105.3
|
|
|
|
94.2
|
|
FiberVisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.5
|
|
Corporate
items (2)
|
|
|
(9.4 |
) |
|
|
(5.7 |
) |
|
|
(25.1 |
) |
|
|
(3.4 |
) |
|
|
$ |
74.5
|
|
|
$ |
65.6
|
|
|
$ |
134.4
|
|
|
$ |
122.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technology and Ventures
|
|
$ |
10.2
|
|
|
$ |
10.8
|
|
|
$ |
20.3
|
|
|
$ |
23.5
|
|
Aqualon
Group
|
|
|
12.0
|
|
|
|
11.1
|
|
|
|
23.2
|
|
|
|
21.1
|
|
Corporate
items
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
10.5
|
|
|
|
4.0
|
|
|
|
$ |
27.4
|
|
|
$ |
23.7
|
|
|
$ |
54.0
|
|
|
$ |
48.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technology and Ventures
|
|
$ |
4.3
|
|
|
$ |
4.6
|
|
|
$ |
8.7
|
|
|
$ |
9.0
|
|
Aqualon
Group
|
|
|
6.5
|
|
|
|
4.6
|
|
|
|
12.4
|
|
|
|
9.3
|
|
FiberVisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
Corporate
items
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
$ |
11.0
|
|
|
$ |
9.4
|
|
|
$ |
21.4
|
|
|
$ |
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technology and Ventures
|
|
$ |
10.0
|
|
|
$ |
3.7
|
|
|
$ |
15.0
|
|
|
$ |
6.5
|
|
Aqualon
Group
|
|
|
16.7
|
|
|
|
8.1
|
|
|
|
35.1
|
|
|
|
12.3
|
|
Corporate
items
|
|
|
2.9
|
|
|
|
3.0
|
|
|
|
3.7
|
|
|
|
4.1
|
|
|
|
$ |
29.6
|
|
|
$ |
14.8
|
|
|
$ |
53.8
|
|
|
$ |
22.9
|
|
(1)Normal
depreciation incurred by Corporate is allocated to the business segments in
the
determination of Profit from operations.
(2)Corporate
items
include severance, restructuring and other exit costs, accelerated depreciation
and amortization, primarily related to the Business Infrastructure Project,
and
certain other items that have not been allocated to the business
segments.
16. Financial
Instruments and Risk Management, Including
Derivatives
The
Company selectively uses
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. During the six months ended June 30, 2007 the
Company recorded $0.4 million 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. An insignificant amount was
reflected during the three months ended June 30, 2007. The three and six months
ended June 30, 2006 included $1.0 million and $1.5 million, respectively, of
net
losses attributable to foreign currency exposures. The Company also uses
cross-currency interest rate swaps to hedge the Company’s foreign currency
exposure associated with its net investment in certain foreign operations that
utilize the Euro as their functional currency. The notional amount of
the swaps is $500/€420.2 million and requires payment of EURIBOR + 1.59% and
receipt of LIBOR + 1.50%. During the three and six months ended June
30, 2007, the Company recorded $0.8 million and $2.0 million, respectively,
as a
reduction to Interest and debt expense representing the net amount received
from
the swaps in excess of amounts paid. The prior year periods ended June 30,
2006
included $2.2 million and $3.0 million, respectively, of net reductions to
Interest and debt expense attributable to the swaps.
The
following table presents
the net carrying amounts and fair values of the Company’s financial instruments
and derivatives as well as the balance sheet caption in which they are
included:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Deferred
charges and other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$ |
2.6
|
|
|
$ |
2.6
|
|
|
$ |
2.6
|
|
|
$ |
2.6
|
|
Foreign
exchange contracts, net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Current
and long-term debt obligations
|
|
|
959.1
|
|
|
|
909.1
|
|
|
|
995.5
|
|
|
|
964.2
|
|
Deferred
credits and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross
currency interest rate swaps
|
|
|
64.7
|
|
|
|
64.7
|
|
|
|
53.2
|
|
|
|
53.2
|
|
17. Financial
Information of 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 the parent company’s
operations. Guarantor subsidiaries and non-guarantor subsidiaries of
Hercules are reported on an equity basis. Additionally, prior year
information has been restated to conform to the current period
presentation.
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended June 30, 2007
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
155.4
|
|
|
$ |
116.5
|
|
|
$ |
326.1
|
|
|
$ |
(49.0 |
) |
|
$ |
549.0
|
|
Cost
of sales
|
|
|
109.6
|
|
|
|
82.0
|
|
|
|
216.7
|
|
|
|
(49.5 |
) |
|
|
358.8
|
|
Selling,
general and administrative expenses
|
|
|
25.8
|
|
|
|
31.0
|
|
|
|
38.4
|
|
|
|
—
|
|
|
|
95.2
|
|
Research
and development
|
|
|
4.5
|
|
|
|
5.2
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
11.0
|
|
Intangible
asset amortization
|
|
|
1.5
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
1.9
|
|
Other
operating expense (income), net
|
|
|
10.0
|
|
|
|
0.8
|
|
|
|
(3.2 |
) |
|
|
—
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
4.0
|
|
|
|
(2.7 |
) |
|
|
72.7
|
|
|
|
0.5
|
|
|
|
74.5
|
|
Interest
and debt expense (income), net
|
|
|
46.7
|
|
|
|
(30.3 |
) |
|
|
1.4
|
|
|
|
—
|
|
|
|
17.8
|
|
Vertac
response costs and litigation charges
|
|
|
17.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17.5
|
|
Other
expense (income), net
|
|
|
15.2
|
|
|
|
0.8
|
|
|
|
(0.5 |
) |
|
|
0.2
|
|
|
|
15.7
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
|
(75.4 |
) |
|
|
26.8
|
|
|
|
71.8
|
|
|
|
0.3
|
|
|
|
23.5
|
|
(Benefit)
provision for income taxes
|
|
|
(33.8 |
) |
|
|
9.1
|
|
|
|
13.1
|
|
|
|
0.1
|
|
|
|
(11.5 |
) |
Income
(loss) before minority interests and equity (loss) income
|
|
|
(41.6 |
) |
|
|
17.7
|
|
|
|
58.7
|
|
|
|
0.2
|
|
|
|
35.0
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.5 |
) |
|
|
—
|
|
|
|
(0.5 |
) |
Equity
(loss) income of affiliated companies
|
|
|
—
|
|
|
|
(0.2 |
) |
|
|
0.8
|
|
|
|
(0.6 |
) |
|
|
—
|
|
Equity
income (loss) from consolidated subsidiaries
|
|
|
76.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(76.1 |
) |
|
|
—
|
|
Net
income
|
|
$ |
34.5
|
|
|
$ |
17.5
|
|
|
$ |
59.0
|
|
|
$ |
(76.5 |
) |
|
$ |
34.5
|
|
Condensed
Consolidating Statement of Operations
|
|
Six
Months Ended June 30, 2007
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
310.0
|
|
|
$ |
225.4
|
|
|
$ |
611.3
|
|
|
$ |
(95.4 |
) |
|
$ |
1,051.3
|
|
Cost
of sales
|
|
|
217.8
|
|
|
|
157.8
|
|
|
|
402.4
|
|
|
|
(95.8 |
) |
|
|
682.2
|
|
Selling,
general and administrative expenses
|
|
|
52.1
|
|
|
|
63.2
|
|
|
|
73.6
|
|
|
|
—
|
|
|
|
188.9
|
|
Research
and development
|
|
|
9.1
|
|
|
|
9.7
|
|
|
|
2.6
|
|
|
|
—
|
|
|
|
21.4
|
|
Intangible
asset amortization
|
|
|
3.0
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
3.7
|
|
Other
operating expense (income), net
|
|
|
21.9
|
|
|
|
0.9
|
|
|
|
(2.1 |
) |
|
|
—
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
6.1
|
|
|
|
(6.6 |
) |
|
|
134.5
|
|
|
|
0.4
|
|
|
|
134.4
|
|
Interest
and debt expense (income), net
|
|
|
91.9
|
|
|
|
(59.3 |
) |
|
|
2.4
|
|
|
|
—
|
|
|
|
35.0
|
|
Vertac
response costs and litigation charges
|
|
|
19.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19.0
|
|
Other
expense, net
|
|
|
17.2
|
|
|
|
1.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19.0
|
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
|
(122.0 |
) |
|
|
50.9
|
|
|
|
132.1
|
|
|
|
0.4
|
|
|
|
61.4
|
|
(Benefit)
provision for income taxes
|
|
|
(92.7 |
) |
|
|
17.9
|
|
|
|
26.5
|
|
|
|
0.2
|
|
|
|
(48.1 |
) |
Income
(loss) before minority interests and equity (loss) income
|
|
|
(29.3 |
) |
|
|
33.0
|
|
|
|
105.6
|
|
|
|
0.2
|
|
|
|
109.5
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.0 |
) |
|
|
—
|
|
|
|
(1.0 |
) |
Equity
(loss) income of affiliated companies
|
|
|
—
|
|
|
|
(0.5 |
) |
|
|
1.0
|
|
|
|
(1.0 |
) |
|
|
(0.5 |
) |
Equity
income (loss) from consolidated subsidiaries
|
|
|
137.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(137.3 |
) |
|
|
—
|
|
Net
income
|
|
$ |
108.0
|
|
|
$ |
32.5
|
|
|
$ |
105.6
|
|
|
$ |
(138.1 |
) |
|
$ |
108.0
|
|
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended June 30, 2006
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
148.1
|
|
|
$ |
114.3
|
|
|
$ |
281.5
|
|
|
$ |
(42.9 |
) |
|
$ |
501.0
|
|
Cost
of sales
|
|
|
104.0
|
|
|
|
80.4
|
|
|
|
183.7
|
|
|
|
(43.4 |
) |
|
|
324.7
|
|
Selling,
general and administrative expenses
|
|
|
27.2
|
|
|
|
26.0
|
|
|
|
37.5
|
|
|
|
—
|
|
|
|
90.7
|
|
Research
and development
|
|
|
4.7
|
|
|
|
4.1
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
9.4
|
|
Intangible
asset amortization
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
2.0
|
|
Other
operating expense (income), net
|
|
|
5.9
|
|
|
|
(1.0 |
) |
|
|
3.7
|
|
|
|
—
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
4.8
|
|
|
|
4.4
|
|
|
|
55.9
|
|
|
|
0.5
|
|
|
|
65.6
|
|
Interest
and debt expense (income), net
|
|
|
41.3
|
|
|
|
(24.8 |
) |
|
|
0.2
|
|
|
|
—
|
|
|
|
16.7
|
|
Vertac
response costs and litigation charges
|
|
|
106.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
106.0
|
|
Other
expense, net
|
|
|
18.8
|
|
|
|
2.1
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
21.1
|
|
(Loss)
income before income taxes, minority interests and equity (loss)
income
|
|
|
(161.3 |
) |
|
|
27.1
|
|
|
|
55.5
|
|
|
|
0.5
|
|
|
|
(78.2 |
) |
(Benefit) provision
for income taxes
|
|
|
(52.1 |
) |
|
|
9.6
|
|
|
|
14.7
|
|
|
|
0.3
|
|
|
|
(27.5 |
) |
(Loss)
income before minority interests and equity (loss) income
|
|
|
(109.2 |
) |
|
|
17.5
|
|
|
|
40.8
|
|
|
|
0.2
|
|
|
|
(50.7 |
) |
Minority
interests in earnings of consolidated subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.3 |
) |
|
|
—
|
|
|
|
(0.3 |
) |
Equity
(loss) income of affiliated companies
|
|
|
—
|
|
|
|
(1.0 |
) |
|
|
0.7
|
|
|
|
(0.3 |
) |
|
|
(0.6 |
) |
Equity
income (loss) from consolidated subsidiaries
|
|
|
57.6
|
|
|
|
(2.5 |
) |
|
|
2.5
|
|
|
|
(57.6 |
) |
|
|
—
|
|
Net
(loss) income from continuing operations before discontinued operations
and cumulative effect of change in accounting principle
|
|
|
(51.6 |
) |
|
|
14.0
|
|
|
|
43.7
|
|
|
|
(57.7 |
) |
|
|
(51.6 |
) |
Net
loss from discontinued operations, net of tax
|
|
|
(0.7 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.7 |
) |
Net
(loss) income before cumulative effect of change in accounting
principle
|
|
|
(52.3 |
) |
|
|
14.0
|
|
|
|
43.7
|
|
|
|
(57.7 |
) |
|
|
(52.3 |
) |
Cumulative
effect of change in accounting principle, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
(loss) income
|
|
$ |
(52.3 |
) |
|
$ |
14.0
|
|
|
$ |
43.7
|
|
|
$ |
(57.7 |
) |
|
$ |
(52.3 |
) |
Condensed
Consolidating Statement of Operations
|
|
Six
Months Ended June 30, 2006
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
288.5
|
|
|
$ |
254.1
|
|
|
$ |
567.6
|
|
|
$ |
(81.9 |
) |
|
$ |
1,028.3
|
|
Cost
of sales
|
|
|
201.6
|
|
|
|
185.7
|
|
|
|
380.6
|
|
|
|
(82.5 |
) |
|
|
685.4
|
|
Selling,
general and administrative expenses
|
|
|
50.6
|
|
|
|
58.3
|
|
|
|
73.1
|
|
|
|
—
|
|
|
|
182.0
|
|
Research
and development
|
|
|
9.3
|
|
|
|
8.6
|
|
|
|
1.1
|
|
|
|
—
|
|
|
|
19.0
|
|
Intangible
asset amortization
|
|
|
3.0
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
3.6
|
|
Other
operating expense, net
|
|
|
4.6
|
|
|
|
1.7
|
|
|
|
9.5
|
|
|
|
—
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
19.4
|
|
|
|
(0.6 |
) |
|
|
103.1
|
|
|
|
0.6
|
|
|
|
122.5
|
|
Interest
and debt expense (income), net
|
|
|
84.7
|
|
|
|
(47.8 |
) |
|
|
0.5
|
|
|
|
—
|
|
|
|
37.4
|
|
Vertac
response costs and litigation charges
|
|
|
106.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
106.0
|
|
Other
expense, net
|
|
|
27.7
|
|
|
|
3.6
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
31.7
|
|
(Loss)
income before income taxes, minority interests and equity (loss)
income
|
|
|
(199.0 |
) |
|
|
43.6
|
|
|
|
102.2
|
|
|
|
0.6
|
|
|
|
(52.6 |
) |
(Benefit)
provision for income taxes
|
|
|
(53.8 |
) |
|
|
15.6
|
|
|
|
21.1
|
|
|
|
0.3
|
|
|
|
(16.8 |
) |
(Loss)
income before minority interests and equity (loss) income
|
|
|
(145.2 |
) |
|
|
28.0
|
|
|
|
81.1
|
|
|
|
0.3
|
|
|
|
(35.8 |
) |
Minority
interests in earnings of consolidated subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.4 |
) |
|
|
—
|
|
|
|
(0.4 |
) |
Equity
(loss) income of affiliated companies
|
|
|
—
|
|
|
|
(1.1 |
) |
|
|
0.4
|
|
|
|
(0.3 |
) |
|
|
(1.0 |
) |
Equity
income (loss) from consolidated subsidiaries
|
|
|
108.0
|
|
|
|
0.5
|
|
|
|
(0.8 |
) |
|
|
(107.7 |
) |
|
|
—
|
|
Net
(loss) income from continuing operations before discontinued operations
and cumulative effect of change in accounting principle
|
|
|
(37.2 |
) |
|
|
27.4
|
|
|
|
80.3
|
|
|
|
(107.7 |
) |
|
|
(37.2 |
) |
Net
loss from discontinued operations, net of tax
|
|
|
(1.3 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.3 |
) |
Net
(loss) income before cumulative effect of change in accounting
principle
|
|
|
(38.5 |
) |
|
|
27.4
|
|
|
|
80.3
|
|
|
|
(107.7 |
) |
|
|
(38.5 |
) |
Cumulative
effect of change in accounting principle, net of tax
|
|
|
0.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
Net
(loss) income
|
|
$ |
(37.6 |
) |
|
$ |
27.4
|
|
|
$ |
80.3
|
|
|
$ |
(107.7 |
) |
|
$ |
(37.6 |
) |
Condensed
Consolidating Balance Sheet
|
|
As
of June 30, 2007
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminations
and
|
|
|
|
|
Assets
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
124.3
|
|
|
$ |
1.2
|
|
|
$ |
112.4
|
|
|
$ |
—
|
|
|
$ |
237.9
|
|
Accounts
receivable, net
|
|
|
66.9
|
|
|
|
47.0
|
|
|
|
260.5
|
|
|
|
2.3
|
|
|
|
376.7
|
|
Intercompany
receivables (payables)
|
|
|
66.1
|
|
|
|
12.7
|
|
|
|
(3.0 |
) |
|
|
(75.8 |
) |
|
|
—
|
|
Inventories
|
|
|
57.9
|
|
|
|
71.8
|
|
|
|
94.5
|
|
|
|
(1.0 |
) |
|
|
223.2
|
|
Deferred
income taxes
|
|
|
26.4
|
|
|
|
2.9
|
|
|
|
8.2
|
|
|
|
—
|
|
|
|
37.5
|
|
Income
taxes receivable
|
|
|
49.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49.2
|
|
Other
current assets
|
|
|
21.0
|
|
|
|
2.8
|
|
|
|
20.9
|
|
|
|
—
|
|
|
|
44.7
|
|
Total
current assets
|
|
|
411.8
|
|
|
|
138.4
|
|
|
|
493.5
|
|
|
|
(74.5 |
) |
|
|
969.2
|
|
Property,
plant and equipment, net
|
|
|
130.4
|
|
|
|
144.6
|
|
|
|
338.0
|
|
|
|
—
|
|
|
|
613.0
|
|
Investments
in subsidiaries and advances, net
|
|
|
2,678.2
|
|
|
|
84.8
|
|
|
|
—
|
|
|
|
(2,763.0 |
) |
|
|
—
|
|
Intangible
assets, net
|
|
|
129.3
|
|
|
|
2.6
|
|
|
|
11.0
|
|
|
|
—
|
|
|
|
142.9
|
|
Goodwill
|
|
|
58.8
|
|
|
|
37.6
|
|
|
|
399.7
|
|
|
|
—
|
|
|
|
496.1
|
|
Deferred
income taxes
|
|
|
373.9
|
|
|
|
—
|
|
|
|
18.5
|
|
|
|
(2.8 |
) |
|
|
389.6
|
|
Asbestos-related
assets
|
|
|
37.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37.6
|
|
Deferred
charges and other assets
|
|
|
75.1
|
|
|
|
29.1
|
|
|
|
21.1
|
|
|
|
0.2
|
|
|
|
125.5
|
|
Total
assets
|
|
$ |
3,895.1
|
|
|
$ |
437.1
|
|
|
$ |
1,281.8
|
|
|
$ |
(2,840.1 |
) |
|
$ |
2,773.9
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
54.9
|
|
|
$ |
35.5
|
|
|
$ |
113.8
|
|
|
$ |
—
|
|
|
$ |
204.2
|
|
Intercompany
payables
|
|
|
2.1
|
|
|
|
46.9
|
|
|
|
24.6
|
|
|
|
(73.6 |
) |
|
|
—
|
|
Asbestos-related
liabilities
|
|
|
30.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30.0
|
|
Current
debt obligations
|
|
|
104.2
|
|
|
|
—
|
|
|
|
21.9
|
|
|
|
—
|
|
|
|
126.1
|
|
Vertac
litigation liability
|
|
|
18.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18.7
|
|
Accrued
expenses
|
|
|
50.8
|
|
|
|
98.0
|
|
|
|
58.5
|
|
|
|
—
|
|
|
|
207.3
|
|
Deferred
income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
11.6
|
|
|
|
—
|
|
|
|
11.6
|
|
Total
current liabilities
|
|
|
260.7
|
|
|
|
180.4
|
|
|
|
230.4
|
|
|
|
(73.6 |
) |
|
|
597.9
|
|
Long-term
debt
|
|
|
806.7
|
|
|
|
—
|
|
|
|
26.3
|
|
|
|
—
|
|
|
|
833.0
|
|
Deferred
income taxes
|
|
|
—
|
|
|
|
3.1
|
|
|
|
73.1
|
|
|
|
(2.8 |
) |
|
|
73.4
|
|
Pension
obligations
|
|
|
172.5
|
|
|
|
—
|
|
|
|
55.9
|
|
|
|
—
|
|
|
|
228.4
|
|
Other
postretirement benefit obligations
|
|
|
135.6
|
|
|
|
—
|
|
|
|
3.2
|
|
|
|
—
|
|
|
|
138.8
|
|
Deferred
credits and other liabilities
|
|
|
220.1
|
|
|
|
15.2
|
|
|
|
17.4
|
|
|
|
—
|
|
|
|
252.7
|
|
Asbestos-related
liabilities
|
|
|
232.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
232.5
|
|
Intercompany
notes payable (receivable)
|
|
|
1,663.5
|
|
|
|
(1,484.9 |
) |
|
|
(178.8 |
) |
|
|
0.2
|
|
|
|
—
|
|
Minority
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
13.7
|
|
|
|
—
|
|
|
|
13.7
|
|
Total
stockholders' equity
|
|
|
403.5
|
|
|
|
1,723.3
|
|
|
|
1,040.6
|
|
|
|
(2,763.9 |
) |
|
|
403.5
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,895.1
|
|
|
$ |
437.1
|
|
|
$ |
1,281.8
|
|
|
$ |
(2,840.1 |
) |
|
$ |
2,773.9
|
|
Condensed
Consolidating Statement of Cash Flows
|
|
Six
Months Ended June 30, 2007
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
Net
Cash Provided By Operating Activities
|
|
$ |
164.0
|
|
|
$ |
74.6
|
|
|
$ |
65.9
|
|
|
$ |
(164.0 |
) |
|
$ |
140.5
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(9.1 |
) |
|
|
(18.8 |
) |
|
|
(25.9 |
) |
|
|
—
|
|
|
|
(53.8 |
) |
Acquisitions
and investments, net
|
|
|
—
|
|
|
|
(0.9 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
(0.9 |
) |
Proceeds
from sale of 51% interest in FiberVisions, net of
transaction costs
|
|
|
(1.2 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.2 |
) |
Proceeds
of asset disposals, net of transaction costs
|
|
|
—
|
|
|
|
—
|
|
|
|
11.4
|
|
|
|
—
|
|
|
|
11.4
|
|
Other,
net
|
|
|
(0.1 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1 |
) |
Net
cash used in investing activities
|
|
|
(10.4 |
) |
|
|
(19.7 |
) |
|
|
(14.5 |
) |
|
|
—
|
|
|
|
(44.6 |
) |
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt proceeds
|
|
|
—
|
|
|
|
—
|
|
|
|
3.3
|
|
|
|
—
|
|
|
|
3.3
|
|
Long-term
debt payments
|
|
|
(47.0 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(47.0 |
) |
Change
in short-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
5.8
|
|
|
|
—
|
|
|
|
5.8
|
|
Change
in intercompany advances
|
|
|
(79.0 |
) |
|
|
(54.2 |
) |
|
|
(26.4 |
) |
|
|
159.6
|
|
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
4.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.9
|
|
Dividends
paid
|
|
|
—
|
|
|
|
—
|
|
|
|
(4.4 |
) |
|
|
4.4
|
|
|
|
—
|
|
Other,
net
|
|
|
2.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.1
|
|
Net
cash used in financing activities
|
|
|
(119.0 |
) |
|
|
(54.2 |
) |
|
|
(21.7 |
) |
|
|
164.0
|
|
|
|
(30.9 |
) |
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1.1
|
|
|
|
—
|
|
|
|
1.1
|
|
Net
increase in cash and cash equivalents
|
|
|
34.6
|
|
|
|
0.7
|
|
|
|
30.8
|
|
|
|
—
|
|
|
|
66.1
|
|
Cash
and cash equivalents - beginning of period
|
|
|
89.7
|
|
|
|
0.5
|
|
|
|
81.6
|
|
|
|
—
|
|
|
|
171.8
|
|
Cash
and cash equivalents - end of period
|
|
$ |
124.3
|
|
|
$ |
1.2
|
|
|
$ |
112.4
|
|
|
$ |
—
|
|
|
$ |
237.9
|
|
Condensed
Consolidating Statement of Cash Flows
|
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
Net
Cash Provided By (Used In) Operating
Activities
|
|
$ |
(64.4 |
) |
|
$ |
71.7
|
|
|
$ |
365.8
|
|
|
$ |
(309.1 |
) |
|
$ |
64.0
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(5.9 |
) |
|
|
(8.6 |
) |
|
|
(8.4 |
) |
|
|
—
|
|
|
|
(22.9 |
) |
Acquisitions
and investments, net
|
|
|
—
|
|
|
|
(22.7 |
) |
|
|
(3.4 |
) |
|
|
—
|
|
|
|
(26.1 |
) |
Proceeds
from sale of 51%
interest
in FiberVisions, net
|
|
|
25.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25.1
|
|
Proceeds
of asset disposals, net of transaction costs
|
|
|
—
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
0.3
|
|
Other,
net
|
|
|
(0.2 |
) |
|
|
—
|
|
|
|
(0.8 |
) |
|
|
—
|
|
|
|
(1.0 |
) |
Net
cash (used in) provided by investing activities
|
|
|
19.0
|
|
|
|
(31.2 |
) |
|
|
(12.4 |
) |
|
|
—
|
|
|
|
(24.6 |
) |
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt issued by FiberVisions, net
of issuance costs
|
|
|
83.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83.7
|
|
Long-term
debt payments
|
|
|
(115.9 |
) |
|
|
—
|
|
|
|
(6.8 |
) |
|
|
—
|
|
|
|
(122.7 |
) |
Change
in short-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.8 |
) |
|
|
—
|
|
|
|
(0.8 |
) |
Change
in intercompany advances
|
|
|
77.8
|
|
|
|
(41.0 |
). |
|
|
(246.6 |
) |
|
|
209.8
|
|
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
3.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.5
|
|
Dividends
paid
|
|
|
—
|
|
|
|
—
|
|
|
|
(99.3 |
) |
|
|
99.3
|
|
|
|
—
|
|
Other,
net
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
Net
cash (used in) provided by financing activities
|
|
|
49.5
|
|
|
|
(41.0 |
) |
|
|
(353.5 |
) |
|
|
309.1
|
|
|
|
(35.9 |
) |
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1.1
|
|
|
|
—
|
|
|
|
1.1
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4.1
|
|
|
|
(0.5 |
) |
|
|
1.0
|
|
|
|
—
|
|
|
|
4.6
|
|
Cash
and cash equivalents - beginning of period
|
|
|
6.5
|
|
|
|
1.0
|
|
|
|
69.8
|
|
|
|
—
|
|
|
|
77.3
|
|
Cash
and cash equivalents - end of period
|
|
$ |
10.6
|
|
|
$ |
0.5
|
|
|
$ |
70.8
|
|
|
$ |
—
|
|
|
$ |
81.9
|
|
This
Quarterly Report on Form 10-Q includes forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, reflecting
management’s current analysis and expectations, based on what management
believes to be reasonable assumptions. Forward-looking statements may
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results to differ materially from those projected, stated
or
implied, depending on such factors as: ability to generate cash,
changes in tax laws, regulations and/or rates or changes resulting from ongoing
reviews of tax liabilities, ability to raise capital, ability to refinance,
ability to execute productivity improvements and reduce costs, the success
of
outsourcing initiatives, ability to execute and integrate acquisitions, ability
to raise product prices, ability to execute divestitures, ability to realign
business portfolio and segments, ability to achieve growth in earnings and
cash
flows, business climate, business performance, economic and competitive
uncertainties, higher manufacturing costs, reduced level of customer orders,
changes in strategies, risk in developing new products and technologies, risk
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, ability to complete changes in pension asset allocations and reduce
pension funding requirements, 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 ability to obtain judicial review of
adverse litigation results, and adverse changes in economic and political
climates around the world, including terrorist activities, international
hostilities, governmental instabilities and potential natural
disasters. Accordingly, there can be no assurance that the Company
will meet future results, performance or achievements, expressed or implied
by
such forward-looking statements, or continue the share repurchase program or
the
payment of dividends. 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.
ITEM
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion should be read in connection with the information contained
in the Consolidated Financial Statements and Notes thereto. All
references to individual Notes refer to Notes to the Consolidated Financial
Statements. Within the following discussion, unless otherwise stated “quarter”
and “three-month period” refer to the second quarter of 2007 and the three
months ended June 30, 2007. All comparisons are with the
corresponding period in the previous year, unless otherwise stated. All dollar
amount references and tables are in millions.
Business
Profile – Market and Geographic Concentration
Hercules
is a global solutions provider of specialty chemicals, services and applied
chemistry expertise primarily for water-based products and water-borne systems.
The Company serves a number of markets including pulp and paper, the
regulated industries of food, pharmaceuticals and personal care, paints and
adhesives, construction materials and energy.
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 three and six months ended June 30, 2007 and 2006
were:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
North
America
|
|
|
46 |
% |
|
|
48 |
% |
|
|
48 |
% |
|
|
49 |
% |
Europe
|
|
|
37 |
% |
|
|
35 |
% |
|
|
36 |
% |
|
|
34 |
% |
Asia
Pacific
|
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
11 |
% |
Latin
America
|
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
6 |
% |
Consolidated
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Business
Segments
The
Company 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 Venture 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 with a book value of approximately $22
million. The consolidated results of operations for the six months
ended June 30, 2006 reflect the Company’s 100% ownership of this business
through March 31, 2006.
Net
sales
for the three and six months ended June 30, 2007 and 2006 as a percent of total
net sales, by segment, were:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Paper
Technologies and Ventures
|
|
|
53 |
% |
|
|
53 |
% |
|
|
54 |
% |
|
|
51 |
% |
Aqualon
Group
|
|
|
47 |
% |
|
|
47 |
% |
|
|
46 |
% |
|
|
43 |
% |
FiberVisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6 |
% |
Consolidated
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Key
Developments
The
following strategic business and corporate actions and financial reporting
developments had an impact on the Company’s results of operations and financial
position as well as the overall presentation of financial
information: (1) formal signing and initiation of offshoring and
outsourcing agreements as well as continued progress applicable to the Business
Infrastructure Project, (2) formal agreement with the Internal Revenue Service
(“IRS”) regarding the resolution of certain income tax matters and the receipt
of a substantial portion of estimated tax refunds, (3) resolution and settlement
of significant legacy litigation and environmental matters and (4) the adoption
of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”). A discussion of
these developments follows.
Business
Infrastructure Project
On
January 16, 2007, the Company signed outsourcing agreements with Genpact
International, HCL America Inc. and HCL Technologies Limited and proceeded
with
plans to transition certain corporate and business support activities and
services in connection with the Company’s previously disclosed Business
Infrastructure Project. Activities associated with these agreements, as well
as
those with other service providers initiated during 2006, are operational and
progressing in various phases of transition as contemplated in the project
plans. During these transitional periods, the Company is incurring restructuring
and severance charges, exit costs and other related implementation charges
as
well as accelerated amortization. A total of $20.1 million of such charges
have
been recorded through the six months ended June 30, 2007. Additional detail
is
provided in Note 10 to the Consolidated Financial
Statements.
Resolution
of Income Tax Matters and Receipt of Estimated Refunds
During
2007, the Company reached agreement with the IRS on all remaining income tax
matters for the years 1993 through 2003 resulting in the recording of
an additional benefit of $60.1 million, including interest, over and above
those
amounts recorded during the fourth quarter of 2006. In addition, the Company
has
received approximately $198 million of an estimated $242 million in federal
income tax refunds, including interest, during the first half of 2007. These
matters are discussed in greater detail in Note 13 to the
Consolidated Financial Statements and within the discussion of Liquidity and
Capital Resources that follows.
Resolution
and Settlement of Legacy Litigation and Environmental Matters
During
May 2007, the Company paid $124.5 million in connection with the lawsuit
captioned United States of America v. Vertac Corp. et al. (Civil No.
4:80CV00109 GH, U.S. District Court, Eastern District of Arkansas, Western
Division) (the “Vertac litigation”). Significant charges for this matter were
recorded in prior periods resulting in only the accrual of periodic interest
and
the eventual cash impact of the payment impacting the 2007 financial statements.
However, the Company received notification from the government in July 2007
with
respect to
the
recovery of additional response costs at the Vertac site with the Company’s
proportionate share totaling $18.7 million. The Company recorded a charge for
the full amount for the three and six months ended June 30, 2007. Additional
information regarding this matter is provided in Note 7 to
the Consolidated Financial Statements.
In
addition, the Company reached a settlement in principle with the United States
Navy in connection with environmental issues at the Alleghany Ballistics
Laboratory site (the “ABL matter”). The settlement in principle resulted in the
recording of a charge during the second quarter of 2007 for approximately $13
million, which is expected be paid during the third quarter of
2007.
Adoption
of FIN 48
The
Company adopted FIN 48 effective January 1, 2007 and recorded $1.9 million
as an
adjustment to its beginning balance of retained earnings and a corresponding
decrease to its income tax reserves recorded in the balance sheet caption
Deferred credits and other liabilities in accordance with the required
transition provisions. The Company has identified $40.4 million of
unrecognized tax benefits as of January 1, 2007. Additional
information regarding the adoption of FIN 48 is provided in Note
13 to the Consolidated Financial Statements.
Reference
is made to the Company’s Annual Report on Form 10-K and Form 10-K/A for the year
ended December 31, 2006 for a complete description of the Company’s critical
accounting estimates. However, the following developments are
discussed below with respect to their applicability during the three and six
months ended June 30, 2007 and future periods.
Pension
and Other Postretirement Benefits
In
accordance with Statement of Financial Accounting Standards No. 158, “Employers
Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”
(“SFAS 158”), prior service costs and credits, actuarial gains and losses and
transition obligations attributable to the Company’s pension and other
postretirement benefit plans have been recorded in Accumulated other
comprehensive losses (“AOCL”) within Stockholders’ equity effective with the
adoption of SFAS 158. These amounts are to be amortized from AOCL as
a component of net periodic benefit expense. In addition, any gains and losses
and prior service costs or credits that arise subsequent to the adoption of
SFAS
158 are required to be recognized as a component of Other comprehensive income
and ultimately reflected in AOCL similar to amounts recognized upon the adoption
of SFAS 158. These amounts are also subject to subsequent
amortization as a component of net periodic benefit expense. With
respect to the amortization of those amounts from AOCL that are denominated
in
currencies other than the U.S. dollar, the Company has applied a “current rate”
approach whereby the amounts are translated at the current exchange rate in
effect for the period in which the reclassification from AOCL to net income
occurs.
Stock-Based
Compensation
In
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment”, the Company recognizes share-based compensation
cost based on the number of awards expected to vest. This accounting
methodology implicitly requires a process to estimate forfeitures of awards.
The
Company has a policy to review its estimate of award forfeitures on an annual
basis or when specific facts and circumstances warrant additional
review. The review is primarily based on historical experience and
provides for estimated rates applicable to Company officers and all other
employees, respectively. Prior to 2007, the Company had estimated
different rates for these two employee groups. Based on its most
recent annual review, actual experience rates and other factors have resulted
in
the convergence of the estimated forfeiture rates for the two employee
groups. However, future reviews will continue to assess the groups
independently. The change in estimated forfeiture rates will result
in total share-based compensation cost that is lower by less than $1 million
than that which would have been recorded had the change in estimate not occurred
for 2007.
Income
Taxes
As
discussed in greater detail in Note 13 to the Consolidated
Financial Statements, the Company adopted the provisions of FIN 48 effective
January 1, 2007. In connection with the adoption of FIN 48, the
Company retained its prior practice of accounting for interest and penalties
related to tax positions as a component of income tax expense and related income
tax assets and liabilities.
Results
of Operations – Consolidated
Review
A
comparative analysis, by line item, of the Statement of Operations is provided
as follows for the three and six months ended June 30, 2007 and
2006:
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Net
sales
|
|
$ |
549.0
|
|
|
$ |
501.0
|
|
|
$ |
48.0
|
|
|
$ |
1,051.3
|
|
|
$ |
1,028.3
|
|
|
$ |
23.0
|
|
Net
sales
for the three months ended June 30, 2007 increased 10% from the prior year
period primarily as a result of higher volume of $37.5 million, or 7%, higher
pricing of $7.3 million, or 1%, and $15.4 million, or 3%, related to higher
rates of exchange. These increases were partially offset by an
unfavorable product mix of $12.2 million, or 1%. The Company
increased sales in all of its business units reflecting overall volume growth,
particularly in emerging markets, and pricing growth to continue efforts to
recover higher raw material, transportation and energy costs. In
addition, the sales growth reflects continued development and introduction
of
new products as well as the utilization of expanded production capacity,
particularly in the Aqualon segment. The rate of exchange impact is primarily
attributable to continued strengthening of the Euro versus the U.S. Dollar
(“USD”). Accordingly, the average Euro/USD exchange rate was
approximately 8% higher during the 2007 period.
Net
sales
for the six months ended June 30, 2007 increased 2% from the prior year period
despite the absence of $69.2 million of FiberVisions sales which
continued in the prior year period through March 31, 2006. Excluding the impact
of FiberVisions, Net sales increased approximately 10%, or $92.2 million, as
compared to the prior year period. The increase is attributable to
higher volume of $65.6 million, or 7%, higher pricing of $15.9 million, or
1%,
and $29.8 million, or 3%, related to higher rates of exchange. These
increases were partially offset by an unfavorable product mix of $19.1 million,
or 1%. The trends for the six month period are generally similar to
that of the three month period with higher volume reflecting continued organic
business growth and the higher rate of exchange impact highlighting a
continuously weakening U.S. Dollar.
The
table
below reflects Net sales per region and the percentage change from the prior
year periods as well as the percentage change excluding the impact of rates
of
exchange (“ROE”):
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2007
|
|
|
2006
|
|
|
%Change
|
|
|
ROE
|
|
North
America
|
|
$ |
252.3
|
|
|
$ |
242.6
|
|
|
|
4 |
% |
|
|
4 |
% |
Europe
|
|
|
203.3
|
|
|
|
176.0
|
|
|
|
16 |
% |
|
|
8 |
% |
Asia
Pacific
|
|
|
63.8
|
|
|
|
57.3
|
|
|
|
11 |
% |
|
|
10 |
% |
Latin
America
|
|
|
29.6
|
|
|
|
25.1
|
|
|
|
18 |
% |
|
|
14 |
% |
All
regions
|
|
$ |
549.0
|
|
|
$ |
501.0
|
|
|
|
10 |
% |
|
|
7 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2007
|
|
|
2006
|
|
|
%Change
|
|
|
ROE
|
|
North
America
|
|
$ |
500.0
|
|
|
$ |
505.4
|
|
|
|
(1 |
)% |
|
|
(1 |
)% |
Europe
|
|
|
378.2
|
|
|
|
353.1
|
|
|
|
7 |
% |
|
|
(1 |
)% |
Asia
Pacific
|
|
|
116.7
|
|
|
|
114.7
|
|
|
|
2 |
% |
|
|
1 |
% |
Latin
America
|
|
|
56.4
|
|
|
|
55.1
|
|
|
|
2 |
% |
|
|
—
|
|
All
regions
|
|
$ |
1,051.3
|
|
|
$ |
1,028.3
|
|
|
|
2 |
% |
|
|
(1 |
)% |
Excluding
the impact of ROE, Net sales increased for both of the Company’s business
segments in all regions of the world during the three months ended June 30,
2007. North American markets were particularly strong for PTV,
while higher European sales reflected continued growth by both PTV and Aqualon.
The growth in Europe reflects Aqualon’s penetration in the developing Eastern
European markets while PTV continues to experience a favorable recovery in
its
European markets as customer and competitor dynamics have stabilized somewhat
from the prior year. Growth in the Asia Pacific region is attributable to
Aqualon’s expanding presence in the region, particularly in China.
Excluding
the impact of FiberVisions as well as the impact of ROE, Net sales increased
in
all global regions for the six months ended June 30, 2007. The
increases were attributable to both PTV and Aqualon with the exception of PTV’s
performance in the Asia Pacific region, particularly China, where a 6% decline
was realized due to efforts to improve product mix. In the 2007 six month
period, PTV experienced strong revenue growth in the Americas including the
emerging markets in Brazil and Chile. Similar to the three month period, both
segments achieved growth in European markets including emerging markets in
Russia and other Eastern European countries. In addition, African markets,
which
are generally served out of European facilities, continued to provide growth.
Also similar to the three month period, Aqualon achieved consistent
growth in the Asia Pacific region, primarily China, reflecting the segment’s
expanding presence in the country, and was able to more than offset the revenue
decline in the region attributable to PTV.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Cost
of sales
|
|
$ |
358.8
|
|
|
$ |
324.7
|
|
|
$ |
34.1
|
|
|
$ |
682.2
|
|
|
$ |
685.4
|
|
|
$ |
(3.2 |
) |
As
a % of sales
|
|
|
65 |
% |
|
|
65 |
% |
|
|
|
|
|
|
65 |
% |
|
|
67 |
% |
|
|
|
|
Cost
of
sales increased $34.1 million, or 11%, during the three months ended June 30,
2007 as compared to the comparable period during 2006. Higher raw material
costs
of $5.3 million and other fixed costs and energy were partially offset by lower
transportation and pension costs.
Cost
of
sales decreased $3.2 million during the six months ended June 30, 2007 from
the
comparable prior year period. The decline is partially attributable to the
absence of FiberVisions cost of sales in the current year period. The most
significant of FiberVisions’ costs were attributable to polypropylene raw
materials. Excluding the impact of FiberVisions, higher raw material costs
of
$12.0 million, as well as increased fixed manufacturing costs were partially
offset by overall lower transportation, pension and energy costs as well as
higher fixed cost absorption attributable to Aqualon as production continued
at
or near capacity for a number of high demand products. Raw material cost
increases over the prior year level are expected to be approximately $27 million
for the full year 2007. Pricing increases implemented during 2006 and
the first half of 2007 are anticipated to provide for substantial recovery
of
these cost increases. However, the contractual terms of certain annual contracts
will limit the ability to recover raw material cost increases. In addition
to
pricing, the Company continues to implement actions to mitigate raw material
cost increases including pursuing product substitutions, improving yields and
efficiencies and implementing energy conservation programs.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Selling,
general and administrative
expenses
|
|
$ |
95.2
|
|
|
$ |
90.7
|
|
|
$ |
4.5
|
|
|
$ |
188.9
|
|
|
$ |
182.0
|
|
|
$ |
6.9
|
|
As
a % of sales
|
|
|
17 |
% |
|
|
18 |
% |
|
|
|
|
|
|
18 |
% |
|
|
18 |
% |
|
|
|
|
Selling,
general and administrative expenses (“SG&A”) increased approximately 5% and
4% during the three and six months ended June 30, 2007, respectively, over
the
comparable prior year periods. The increases for both comparable periods reflect
inflation, higher average rates of exchange, and employee staffing-related
costs
associated with expanding marketing, technology and other functions primarily
to
support both Aqualon’s and PTV’s growth and their expanding presence in
China. The increase during the six month period also reflects higher
incentive compensation charges of approximately $3 million attributable to
the
accelerated vesting of certain 2004 restricted stock awards based on the
achievement of specific share price performance benchmarks partially offset
by
the absence of FiberVisions during the current year period as well as lower
legal expenses attributable to the completion and settlement of PTV’s patent
infringement litigation during the latter part of 2006.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Research
and development
|
|
$ |
11.0
|
|
|
$ |
9.4
|
|
|
$ |
1.6
|
|
|
$ |
21.4
|
|
|
$ |
19.0
|
|
|
$ |
2.4
|
|
As
a % of sales
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
Research
and development charges for the three and six months ended June 30, 2007
increased 17% and 13%, respectively, over the comparable prior year periods
reflecting higher spending primarily in the Aqualon Group. The six month period
increase is partially offset by the absence of FiberVisions charges during
the
current year period.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Intangible
asset amortization
|
|
$ |
1.9
|
|
|
$ |
2.0
|
|
|
$ |
(0.1 |
) |
|
$ |
3.7
|
|
|
$ |
3.6
|
|
|
$ |
0.1
|
|
Intangible
asset amortization decreased by an insignificant amount during the three months
ended June 30, 2007 as compared to the prior year period due to an acceleration
of certain charges during the prior year period. The increase during
the six months ended June 30, 2007 as compared to the prior year period is
primarily attributable to amortization associated with intangible assets
recognized in connection with the consolidation of Hercules Tianpu, which was
not completed until the beginning of the second quarter of
2006. Amortization is expected to be $7.3 million for
2007.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Other
operating expense, net
|
|
$ |
7.6
|
|
|
$ |
8.6
|
|
|
$ |
(1.0 |
) |
|
$ |
20.7
|
|
|
$ |
15.8
|
|
|
$ |
4.9
|
|
Other
operating expense, net for the three and six months ended June 30, 2007 includes
$6.2 million and $14.8 million of severance, restructuring and other exit costs,
as well as $3.7 million and $7.4 million of accelerated depreciation and
amortization charges, respectively, attributable to the Company’s continued
execution on several restructuring and rationalization programs that were
initiated during 2006 and in prior periods (see Note 10 to
the Consolidated Financial Statements). The most significant
restructuring program is the Business Infrastructure Project, which results
in
severance and termination benefits being accrued over periods during which
the
affected employees are required to provide continuing services. The
most significant asset charge is attributable to accelerated amortization of
certain capitalized software development costs in connection with a planned
information technology platform upgrade. In addition, the Company incurred
$1.8
million and $2.7 million in dismantlement, environmental and other costs during
the 2007 three and six months periods, respectively. These items were partially
offset by a gain of $4.1 million attributable to the sale of the Company’s
facility at Pendlebury, United Kingdom, which was taken off-line during 2006
in
connection with a manufacturing rationalization program. Additionally, the
2007
six month period reflects $0.2 million of legal recoveries related to a domestic
product anti-dumping suit against certain competitors.
Other
operating expense, net for the three and six months ended June 30, 2006 includes
$5.6 million and $12.9 million of severance, restructuring and other exit costs,
as well as $0.9 million and $3.9 million of accelerated depreciation and
amortization charges, respectively. These charges are primarily attributable
to
the MeadWestvaco Manufacturing and Alliance-related rationalization, Research
and development consolidation and Business segment realignment programs. In
addition, the Company incurred $0.6 million and $1.2 million in dismantlement,
environmental and other costs during the 2006 three and six months periods,
respectively. The 2006 three month period includes legal settlements of $1.5
million, net of insurance recoveries, while the 2006 six month period includes
a
legal settlement recovery of $3.3 million, net of related costs, attributable
to
a favorable judgment in the Company’s price fixing suit against certain raw
materials suppliers.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Interest
and debt expense
|
|
$ |
17.8
|
|
|
$ |
16.7
|
|
|
$ |
1.1
|
|
|
$ |
35.0
|
|
|
$ |
37.4
|
|
|
$ |
(2.4 |
) |
Interest
and debt expense for the quarter ended June 30, 2007 increased 7% from 2006
primarily as a result of a $1.4 million lower benefit from the cross-currency
interest rate swaps as well as $0.5 million attributable to higher local
borrowings related to the financing of expansion projects in China. These
increases were partially offset by the impact of lower outstanding U.S.
dollar-denominated debt balances.
Interest
and debt expense for the six month period ended June 30, 2007 decreased 6%
primarily due to lower outstanding debt balances resulting from the Company’s
repurchase of the majority of its 11.125% notes and other U.S.
dollar-denominated issues during prior periods. The resulting impact
of the repurchases was a combined reduction of $3.6 million in interest expense
and amortization of issuance costs. Also contributing to the
reduction was $0.2 million of lower interest expense attributable to the absence
of FiberVisions debt and $0.2 million of higher capitalized interest
amounts resulting from higher capital expansion projects during the current
year
period. These decreases were partially offset by a $1.0
million lower offsetting impact of the cross-currency interest rate swaps and
$0.6 million attributable to higher local borrowings in China similar to the
quarterly period.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Vertac
response costs and litigation charges
|
|
$ |
17.5
|
|
|
$ |
106.0
|
|
|
$ |
(88.5 |
) |
|
$ |
19.0
|
|
|
$ |
106.0
|
|
|
$ |
(87.0 |
) |
The
three
and six months ended June 30, 2007 reflect an incremental charge of $17.5
million to accrue for the full proportionate share of the United States’ claimed
recoverable response costs incurred after June 1, 1998 at the Vertac site.
The
Company will accrue interest on these costs until the matter is settled. On
May
18, 2007, the Company paid $124.5 million to the United States in connection
with the Vertac litigation judgment. The most significant portion of the total
amount was accrued during the second quarter of 2006 subsequent to the
affirmation of the Final Judgment. The accrual of interest on the
judgment continued through the payment date.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Other
expense, net
|
|
$ |
15.7
|
|
|
$ |
21.1
|
|
|
$ |
(5.4 |
) |
|
$ |
19.0
|
|
|
$ |
31.7
|
|
|
$ |
(12.7 |
) |
Other
expense, net reflects $2.2 million and $4.3 million in legal fees for
asbestos-related litigation costs, net of interest accretion from the asbestos
insurance trusts, $13.8 million and $14.5 million for legal expenses
attributable to previously divested businesses including approximately $13
million for the ABL matter, $1.4 million and $2.9 million for
environmental-related charges including asset retirement obligation accretion
for the three and six months periods ended June 30, 2007,
respectively. Partially offsetting these charges are gains on asset
dispositions, interest and other miscellaneous income of $1.6 million and $2.4
million and a benefit of $0.1 million and $0.3 million attributable to the
reversal of an accrual for transaction costs and the expiration of an option
for
the majority owner of FiberVisions to acquire an additional 14% equity interest
from the Company for the three and six months ended June 30, 2007, respectively.
Gains on asset dispositions includes $0.4 million attributable to the sale
of
the Company’s equity interest in Abieta Chemie GmbH.
Other
expense, net reflects losses of $5.5 million and $10.6 million on the sale
of
the Company’s majority interest in FiberVisions for the three and six months
ended June 30, 2006, respectively. The Company incurred a total of
$10.5 million and $11.9 million including premiums and debt issuance cost
write-offs in connection with the repurchase of the majority of its 11.125%
senior notes for the 2006 three and six months periods,
respectively. Also included are $2.3 million and $4.5 million in
legal fees for asbestos-related litigation costs, net of interest accretion
from
the asbestos insurance trusts, $1.4 million and $2.1 million for legal expenses
attributable to previously divested businesses and $1.4 million and $2.6 million
for environmental-related and other miscellaneous charges including asset
retirement obligation accretion for the 2006 three and six months periods,
respectively.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
(Benefit)
provision for income taxes
|
|
$ |
(11.5 |
) |
|
$ |
(27.5 |
) |
|
$ |
16.0
|
|
|
$ |
(48.1 |
) |
|
$ |
(16.8 |
) |
|
$ |
(31.3 |
) |
Effective
tax rate
|
|
|
(49 |
%) |
|
|
(35 |
%) |
|
|
|
|
|
|
(78 |
%) |
|
|
32 |
% |
|
|
|
|
For
the
three months ended June 30, 2007, the Company recognized pretax income of $23.5
million while the six months ended June 30, 2007 reflects pre-tax income of
$61.4 million. The most significant discrete tax benefit items during
the 2007 three month period were an incremental benefit adjustment of $12.8
million related to the IRS audits for the years 1993 through 2003 (the “IRS
final audit resolution”) and a $1.9 million benefit for expected state tax
refunds. The tax benefit for the 2007 six month period includes the following
discrete items: (i) a $60.1 million benefit related to the IRS final audit
resolution and resulting interest income; (ii) a $1.9 million benefit for
expected state income tax refunds resulting from the settlement of years 1993
through 2003; (iii) a net $0.5 million benefit for other changes in
international and state income tax reserves; and (iv) a $0.2 million charge
related to income tax law changes enacted in China. The full year
effective tax rate for 2007 is estimated to be (15%).
The
Company recognized a pretax loss of $78.2 million for the three months ended
June 30, 2006 and a pretax loss of $52.6 million for the six months ended June
30, 2006. The 2006 six month effective tax rate of 32% reflects
charges attributable to the valuation allowance for the loss on the sale of
FiberVisions, a provision related to undistributed foreign earnings triggered
by
the sale, and a benefit related to the Vertac litigation charge.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Minority
interests in earnings of consolidated
subsidiaries
|
|
$ |
(0.5 |
) |
|
$ |
(0.3 |
) |
|
$ |
(0.2 |
) |
|
$ |
(1.0 |
) |
|
$ |
(0.4 |
) |
|
$ |
(0.6 |
) |
Minority
interests in earnings of consolidated subsidiaries reflects earnings
attributable to the Company’s joint venture partners’ interests in Hercules
Tianpu during the three and six months ended June 30, 2007 and FiberVisions
bicomponent fibers marketing entities during the three months ended June 30,
2006, respectively.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Equity
loss of affiliated companies, net of tax
|
|
$ |
—
|
|
|
$ |
(0.6 |
) |
|
$ |
0.6
|
|
|
$ |
(0.5 |
) |
|
$ |
(1.0 |
) |
|
$ |
0.5
|
|
Equity
losses attributable to FiberVisions, for which the Company maintains a 49%
ownership interest, of $0.1 million during the three months ended June 30,
2007
were essentially offset by equity income attributable to Abieta Chemie GmbH
prior to the Company’s disposition of its interest therein during the quarter.
Equity losses during the six month periods ended June 30, 2007 and 2006,
respectively, are primarily attributable to losses incurred by
FiberVisions.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Net
loss from discontinued operations, net of tax
|
|
$ |
—
|
|
|
$ |
(0.7 |
) |
|
$ |
0.7
|
|
|
$ |
—
|
|
|
$ |
(1.3 |
) |
|
$ |
1.3
|
|
Net
loss
from discontinued operations during the three and six months ended June 30,
2006
reflects the results of operations from the Company’s terpenes specialties
business. Net sales were $0.6 million and $2.3 million during these
periods and the loss from discontinued operations includes $1.0 million and
$1.1
million of restructuring and other exit costs, inventory write-downs and
dismantlement costs attributable to the termination of operations.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Cumulative
effect of change in accounting principle, net of
tax
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
0.9
|
|
|
$ |
(0.9 |
) |
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 attributable to the required change in
accounting policy for the recognition of forfeitures for awards that were
outstanding upon the date of adoption.
The
tables below reflect Net sales and Profit from operations for the three and
six
months ended June 30, 2007 and 2006. Substantially all reconciling
items have been allocated to the segments.
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
288.3
|
|
|
$ |
266.4
|
|
|
$ |
21.9
|
|
|
|
8 |
% |
Aqualon
Group
|
|
|
260.7
|
|
|
|
234.6
|
|
|
|
26.1
|
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
549.0
|
|
|
$ |
501.0
|
|
|
$ |
48.0
|
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
26.2
|
|
|
$ |
16.6
|
|
|
$ |
9.6
|
|
|
|
57 |
% |
Aqualon
Group
|
|
|
57.7
|
|
|
|
54.7
|
|
|
|
3.0
|
|
|
|
5 |
% |
Corporate
Items
|
|
|
(9.4 |
) |
|
|
(5.7 |
) |
|
|
(3.7 |
) |
|
|
(65 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
74.5
|
|
|
$ |
65.6
|
|
|
$ |
8.9
|
|
|
|
14 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
571.5
|
|
|
$ |
520.6
|
|
|
$ |
50.9
|
|
|
|
10 |
% |
Aqualon
Group
|
|
|
479.8
|
|
|
|
438.5
|
|
|
|
41.3
|
|
|
|
9 |
% |
FiberVisions
|
|
|
—
|
|
|
|
69.2
|
|
|
|
(69.2 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
1,051.3
|
|
|
$ |
1,028.3
|
|
|
$ |
23.0
|
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
54.2
|
|
|
$ |
31.2
|
|
|
$ |
23.0
|
|
|
|
74 |
% |
Aqualon
Group
|
|
|
105.3
|
|
|
|
94.2
|
|
|
|
11.1
|
|
|
|
12 |
% |
FiberVisions
|
|
|
—
|
|
|
|
0.5
|
|
|
|
(0.5 |
) |
|
|
(100 |
)% |
Corporate
Items
|
|
|
(25.1 |
) |
|
|
(3.4 |
) |
|
|
(21.7 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
134.4
|
|
|
$ |
122.5
|
|
|
$ |
11.9
|
|
|
|
10 |
% |
NM
= not
meaningful
The
tables below reflects Net sales percentage changes for the three and six months
ended June 30, 2007 as compared to the same periods in 2006.
Three
Months Ended June 30, 2007
|
|
Net
Sales Percentage Increase (Decrease) from Prior Year Due
To:
|
|
|
|
Volume
|
|
|
Product
Mix
|
|
|
Price
|
|
|
Rates
of
Exchange
|
|
|
Total
|
|
Paper
Technologies and Ventures
|
|
|
8 |
% |
|
|
(5 |
)% |
|
|
2 |
% |
|
|
3 |
% |
|
|
8 |
% |
Aqualon
Group
|
|
|
7 |
% |
|
|
—
|
|
|
|
1 |
% |
|
|
3 |
% |
|
|
11 |
% |
Consolidated
|
|
|
7 |
% |
|
|
(1 |
)% |
|
|
1 |
% |
|
|
3 |
% |
|
|
10 |
% |
Six
Months Ended June 30, 2007
|
|
Net
Sales Percentage Increase (Decrease) from Prior Year Due
To:
|
|
|
|
Volume
|
|
|
Product
Mix
|
|
|
Price
|
|
|
Rates
of
Exchange
|
|
|
Total
|
|
Paper
Technologies and Ventures
|
|
|
7 |
% |
|
|
(2 |
)% |
|
|
2 |
% |
|
|
3 |
% |
|
|
10 |
% |
Aqualon
Group
|
|
|
5 |
% |
|
|
(1 |
)% |
|
|
2 |
% |
|
|
3 |
% |
|
|
9 |
% |
FiberVisions
|
|
|
(100 |
)% |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(100 |
)% |
Consolidated
|
|
|
—
|
|
|
|
(3 |
)% |
|
|
2 |
% |
|
|
3 |
% |
|
|
2 |
% |
Paper
Technologies and Ventures
The
following table reflects PTV’s sales revenues by business unit for the three and
six months ended June 30, 2007 and 2006, respectively:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Paper
Technologies
|
|
$ |
227.6
|
|
|
$ |
208.6
|
|
|
$ |
448.9
|
|
|
$ |
406.7
|
|
Ventures
|
|
|
60.7
|
|
|
|
57.8
|
|
|
|
122.6
|
|
|
|
113.9
|
|
|
|
$ |
288.3
|
|
|
$ |
266.4
|
|
|
$ |
571.5
|
|
|
$ |
520.6
|
|
PTV’s
sales increased 8% during the three months ended June 30, 2007 primarily due
to
8% higher volume, 2% higher average prices and 3% higher rates of exchange
partially offset by 5% unfavorable product mix. The increase reflects
growth in emerging markets as represented by sales increases of 18% in Eastern
Europe, 25% in the Middle East, 25% in Africa, and 20% in South America,
primarily Brazil, as compared to the prior year period. In addition, PTV
continues to achieve progress with new product introductions which increased
33%
in the 2007 three month period as compared to the prior year period. Similar
trends were experienced by PTV during the six months ended June 30, 2007 as
sales increased 10% primarily due to 7% higher volume, 2% higher average prices
and 3% higher rates of exchange partially offset by 2% unfavorable product
mix.
Paper
Technologies Sales
Paper
Technologies’ sales increased 9% during the three months ended June 30, 2007
primarily due to 10% higher volume, 1% higher average pricing and 3% due to
higher rates of exchange, primarily the Euro, partially offset by 5% unfavorable
product mix. Volume increases were achieved in all major regions of
the world. North American volume increases are primarily due to the
Company’s marketing and manufacturing alliance with MeadWestvaco for rosin-based
size products. Product mix is expected to improve once manufacturing
operations by MeadWestvaco commence in the third quarter of 2007. Excluding
the
impact of the alliance, volume increased approximately 3% over the prior year
period. Price increases were achieved primarily in North America with
modestly lower pricing in the Asia Pacific region. PTV continued to experience
strong growth in the emerging markets, including Brazil, Chile, Eastern Europe
and Indonesia, which were higher by 22% during the 2007 three month period
as
compared to the prior year period. Sales in the emerging market of China were
flat in the 2007 three month period as compared to 2006.
Paper
Technologies’ sales increased 11% during the six months ended June 30, 2007
primarily due to 9% higher volume, 1% higher average pricing and 4% due to
higher rates of exchange, partially offset by 3% unfavorable product mix. Trends
for the six month period largely reflect those of the three month period with
the exception of the Asia Pacific region which still remains weaker compared
to
2006 primarily as a result of mix improvements taken in China during the first
quarter of 2007.
Ventures
Sales
Ventures’
sales increased 5% during the three months ended June 30, 2007 primarily due
to
4% higher average prices and 2% favorable rates of exchange partially offset
by
1% unfavorable product mix. Sales increased in all ventures
businesses with the exception of lubricants. Significant growth was achieved
in
building and converted products and pricing was favorable across all venture
businesses.
Ventures’
sales increased 8% during the six months ended June 30, 2007 primarily due
to 4%
higher average prices, 2% favorable rates of exchange and 2% higher volume.
Trends for the six month period were similar to those of the three month period
with the exception of volume which reflects year-to-date growth in both the
building and converted products and lubricants ventures.
PTV
Profitability
Profit
from operations increased $9.6 million, or 57%, to $26.2 million for the three
months ended June 30, 2007 as compared to $16.6 million for the 2006 period
while the six month period increased $23.0 million, or 74%, to $54.2 million
as
compared to $31.2 million during the comparable 2006 period. The
increase for both periods reflects higher volume, improved selling prices,
favorable rates of exchange, lower freight costs and lower SG&A costs,
partially offset by unfavorable mix, higher raw material costs and higher
tolling costs. SG&A costs were lower during the 2007 periods
primarily due to lower patent defense costs. However, the 2007 six
month period includes higher incentive compensation costs attributable to the
accelerated
vesting of 2004 restricted stock awards during the first quarter of 2007.
Severance, restructuring and other exit costs and accelerated depreciation
taken
during the 2007 three and six months periods resulted in combined charges of
$0.5 million and $1.0 million, respectively, as compared to $3.6 million and
$10.0 million during the 2006 three and six month periods,
respectively. The decrease is primarily attributable to significant
actions during the 2006 periods with respect to restructuring programs for
research and development consolidation, the rationalization of manufacturing
capacity resulting in the closure of PTV’s Pendlebury facility in the United
Kingdom, the alliance with MeadWestvaco and the realignment of the Company’s
business segments.
PTV
Outlook
PTV
expects to continue to sustain growth in the emerging markets, particularly
in
Eastern Europe and South America while addressing competitive challenges in
the
Chinese markets. In addition, PTV continues to focus its efforts on its
successful new product launch strategy with an emphasis on developing
higher-value, higher-margin products to improve the overall sales mix. With
respect to new technology development, PTV recently announced a technology
joint
venture, H2H Innovations LLC, with Heartland Resource Technologies. Hercules
owns a 51% interest in the joint venture which was formed to accelerate the
development of soy-based adhesive technologies for wood laminates and composites
that comply with new formaldehyde emission standards. Additionally, the
lubricants business expects to complete construction of its synthetic
lubricant manufacturing expansion with production beginning in the third quarter
of 2007. PTV also expects to complete the construction of its new technical
center in Shanghai with operations scheduled to begin at this facility during
the fourth quarter of 2007.
Aqualon
Group
The
following table reflects Aqualon’s sales revenues by business unit for the three
and six months ended June 30, 2007 and 2006, respectively:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Coatings
and Construction
|
|
$ |
129.5
|
|
|
$ |
118.9
|
|
|
$ |
230.2
|
|
|
$ |
211.2
|
|
Regulated
Industries
|
|
|
63.3
|
|
|
|
56.3
|
|
|
|
123.4
|
|
|
|
112.6
|
|
Energy
and Specialties
|
|
|
67.9
|
|
|
|
59.4
|
|
|
|
126.2
|
|
|
|
114.7
|
|
|
|
$ |
260.7
|
|
|
$ |
234.6
|
|
|
$ |
479.8
|
|
|
$ |
438.5
|
|
Aqualon’s
sales increased 11% during the three months ended June 30, 2007 primarily due
to
7% higher volume, 1% higher average prices and 3% favorable rates of
exchange. Sales were up 16% in China, 19% in all other Asia Pacific
markets, 33% in Eastern Europe, 18% in Africa and 58% in South America as
compared to the prior year period. In addition, pricing increases were achieved
in all of Aqualon’s business units during the 2007 three month period as
compared to the prior year period. Similar trends were experienced by Aqualon
during the six months ended June 30, 2007 as sales increased 9% primarily due
to
5% higher volume, 2% higher average prices and 3% higher rates of exchange
partially offset by 1% unfavorable product mix.
Coatings
and Construction Sales
Coatings
and Construction sales increased 9% during the 2007 three month period as
compared to the 2006 period due to 5% higher volume, 1% higher average prices
and 4% favorable rates of exchange partially offset by 1% unfavorable product
mix. Sales into the Coatings markets were higher by 6% during the
2007 period. Strong volume growth in Asia, Eastern Europe, Africa and
South America offset modestly softer North American Coatings and Construction
market conditions. Construction market sales increased 11% as
compared to the prior year period. Strong growth was achieved in Asia, along
with modest growth in Europe, particularly Eastern Europe, and Latin
America. Pricing improvements were achieved in most of the coating
and construction product families in all regions of the world. During
the 2007 three month period, Aqualon’s expansion of production capacity of
methylcellulose (“MC”), through the Hercules Tianpu joint venture, resulted in
additional supply chain costs. These costs were attributable to supplemental
sourcing from Aqualon’s Doel, Belgium manufacturing facility to offset temporary
supply shortfalls as well as incremental start up costs. The estimate of these
excess and incremental costs was approximately $3 million. Revenue trends and
variances were essentially similar for the six month period ended June 30,
2007
as compared to the prior year.
Regulated
Industries Sales
Regulated
Industries’ sales increased 12% during the 2007 three month period as compared
to the 2006 period due to 4% higher volume, 3% improved product mix, 3% higher
average prices and 2% favorable rates of exchange. Sales increased in
the pharmaceutical, personal care and food markets by 6%, 18% and 11%,
respectively. Asian and European markets were especially strong
during the 2007 period. On a year-to-date basis, Regulated Industries’ sales
increased 10% over the 2006 six month period reflecting a favorable product
mix
of 5%, 3% higher average prices and 2% favorable rates of exchange.
Energy
and Specialties Sales
Energy
and Specialties’ sales increased 14% during the 2007 three month period. The
increase was due to 13% higher volume, 1% higher average prices and 1% favorable
rates of exchange, partially offset by 1% unfavorable product
mix. The natural gas and oil services sector demand continues to be
strong and price increases were achieved across most product families. Energy
market volume was strong in North America and Eastern Europe, partially offset
by declines in the Middle East and Western Europe during the 2007 three month
period for an overall increase in volume of 9% over the prior year period.
Specialties sales were higher by 15% during the 2007 three month period
reflecting significant growth in Asia, Europe, the Middle East and Latin America
partially offset by modest declines in North American markets when compared
to
the prior year period. During the six month period ended June 30, 2007, Energy
and Specialties’ sales increased 11% reflecting 16% higher volume, 1% higher
average prices and 2% favorable rates of exchange, partially offset by 8%
unfavorable product mix.
Aqualon
Profitability
Profit
from operations increased $3.0 million, or 5%, to $57.7 million during the
three
months ended June 30, 2007 as compared to $54.7 million for the 2006 period
while the six month period increased $11.1 million, or 12%, to $105.3 million
compared to $94.2 million during the comparable 2006 period. The
increase for both periods reflects higher volume and the associated contribution
margin, increased selling prices and favorable rates of exchange, partially
offset by higher raw material and supply chain costs. In addition, the 2007
three month period reflects start up costs at the new MC production facility
in
China. SG&A costs were higher during the 2007 three month period reflecting
increased sales, marketing, business management, technology and other spending
to support growth. The 2007 six month period also includes higher incentive
compensation costs attributable to the accelerated vesting of 2004 restricted
stock awards. Severance, restructuring and other exit costs were lower during
the 2007 periods as compared to the 2006 periods primarily as a result of
significant actions during the 2006 period impacting a larger group of employees
with respect to restructuring programs for the realignment of the Company’s
business segments. The 2007 periods had minimal activity in Europe
associated with this program.
Aqualon
Outlook
Aqualon
expects global markets, particularly emerging markets in China and Eastern
Europe, to continue to provide healthy sales and operating profit growth
prospects. Also, modest improvement is anticipated in North American coatings
and construction markets during the second half of 2007. Volume growth is
anticipated to continue across all of its businesses as the utilization of
recently expanded capacity increases during the remainder of 2007 and into
2008.
A new carboxymethylcellulose (“CMC”) production facility in Jiangmen, China is
expected to start up in the third quarter of 2007. Additional capacity for
hydroxyethylcellulose (“HEC”) is planned in connection with the construction of
a new facility in Nanjing, China. In addition, new product development in
connection with Aqualon’s adjacency strategy is anticipated to provide an
increasing proportion of sales growth in future periods.
FiberVisions
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. Effective April 1, 2006, the Company’s proportionate 49%
share of FiberVisions’ results of operations are reported within the caption
Equity (loss) income of affiliated companies, net of tax. During the
three and six months ended June 30, 2007, the Company recognized $0.2 million
and $0.5 million, respectively, of equity losses attributable to its interest
in
FiberVisions while the prior year three and six month periods reflect equity
losses of $1.0 million.
Corporate
Items
Corporate
items include certain charges and credits that have not been allocated to the
business segments. 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.
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Severance,
restructuring and other exit costs
|
|
$ |
6.0
|
|
|
$ |
1.7
|
|
|
$ |
13.7
|
|
|
$ |
2.6
|
|
Accelerated
depreciation and amortization
|
|
|
3.5
|
|
|
|
0.3
|
|
|
|
7.1
|
|
|
|
0.6
|
|
Gains
on asset dispositions, net
|
|
|
(4.1 |
) |
|
|
—
|
|
|
|
(4.1 |
) |
|
|
—
|
|
Legal
settlements, net
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
(3.3 |
) |
Dismantlement
costs
|
|
|
0.9
|
|
|
|
0.3
|
|
|
|
1.5
|
|
|
|
0.5
|
|
Unallocated
corporate costs
|
|
|
3.2
|
|
|
|
2.2
|
|
|
|
6.7
|
|
|
|
2.2
|
|
Other
miscellaneous expense (income), net
|
|
|
(0.1 |
) |
|
|
0.9
|
|
|
|
0.2
|
|
|
|
0.8
|
|
Total
Corporate items – expense (income)
|
|
$ |
9.4
|
|
|
$ |
5.7
|
|
|
$ |
25.1
|
|
|
$ |
3.4
|
|
Severance,
restructuring and other exit
costs of $6.0 million and $13.7 million for the three and six months ended
June
30, 2007, respectively, primarily reflect amounts attributable to the Business
Infrastructure Project which encompasses outsourcing and offshoring service
arrangements for various functions. As these functions are
transferred to external service providers, the Company is incurring severance
costs for employees required to provide services during the transition periods
as well as related exit costs and other implementation
charges. Ancillary to the Business Infrastructure Project is a
planned upgrade of the Company’s information technology platform, which has
resulted in $3.4 million and $6.9 million of accelerated amortization of
capitalized software development costs during the transition period for the
three and six months periods, respectively. The restructuring costs
and accelerated amortization charges are expected to continue into 2009 and
2008, respectively. Corporate items also includes $3.2 million and $6.7 million
of corporate costs previously allocated to the FiberVisions segment, $0.9
million and $1.5 million of costs associated with the dismantlement of inactive
portions of certain manufacturing facilities and $0.1 million of miscellaneous
income and $0.2 million of miscellaneous other operating expenses including
costs to prepare certain properties for disposition for the 2007 three and
six
months periods, respectively. These items were partially offset by a gain of
$4.1 million attributable to the sale of the Company’s facility at Pendlebury,
United Kingdom, which was taken off-line during 2006 in connection with a supply
chain rationalization program.
Corporate
items for the three and six months ended June 30, 2006 includes severance,
restructuring and other exit costs of $1.7 million and $2.6 million,
respectively primarily attributable to the Business Infrastructure Project.
Corporate items also includes $0.3 million and $0.6 million of accelerated
depreciation attributable to certain assets at the Company’s Wilmington,
Delaware research facility, $0.3 million and $0.5 million of dismantlement
costs
at various manufacturing facilities, and $0.9 million and $0.8 million of
miscellaneous other operating expenses including costs to prepare certain
properties for disposition for the 2006 three and six months periods,
respectively. The 2006 three and six months periods include $2.2 million of
corporate costs previously allocated to the FiberVisions segment. These items
were partially offset during the 2006 six month period by a $3.3 million
settlement, net of related costs, attributable to a favorable judgment in the
Company’s price fixing suit against certain raw materials
suppliers.
Analysis
of Cash Flows
|
|
Six
Months Ended June 30,
|
|
Operating
Activities
|
|
2007
|
|
|
2006
|
|
Net
income (loss), depreciation, amortization and all other non-cash
items
|
|
$ |
179.3
|
|
|
$ |
(6.2 |
) |
Changes
in working capital, net
|
|
|
(57.9 |
) |
|
|
(29.1 |
) |
All
other sources and (uses) of cash
|
|
|
19.1
|
|
|
|
99.3
|
|
Net
cash provided by operating activities
|
|
$ |
140.5
|
|
|
$ |
64.0
|
|
Net
cash
provided by operating activities increased $76.5 million to $140.5 million
for
the six months ended June 30, 2007 as compared to $64.0 million for the
comparable period in 2006. The change broadly reflects the net impact
during 2007 of the receipt of approximately $195 million of income tax refunds
associated with the settlement of issues with the IRS for the years 1993 through
2003 offset by the payment of the Vertac litigation judgment for $124.5
million.
Aside
from these significant cash flow events there were a number of additional
discrete cash flow changes that impacted the variance between
periods. The most significant among these is an increase of $37.3
million attributable to amounts received from the asbestos settlement trusts
in
excess of settlement payments. This change includes the receipt of
$41.3 million related to the liquidation of one of the settlement trusts on
January 4, 2007. Payments for severance and termination benefits were
$6.0 million lower during the 2007 period as the prior year period included
payments to a larger group of employees impacted by actions that were initiated
during 2005 and early in 2006. While there are currently a number of
employees impacted by ongoing restructuring programs including the Business
Infrastructure Project, the actual payment of severance and termination benefits
will not occur until later in 2007 and into future periods based on the longer
transition periods unique to this program. Interest payments were
lower by $12.2 million during the 2007 period reflecting lower outstanding
debt
balances and the timing of payments. Partially offsetting these cash flow
increases during the 2007 period were voluntary contributions to the Company’s
pension plans in the United States and the United Kingdom for a combined $27.1
million while the prior year period did not reflect significant contributions
to
any of the Company’s domestic or international pension plans until later in
2006.
The
2007
working capital use reflects growth in accounts receivable attributable to
increased sales. In addition, the overall increase reflects higher inventories
including those attributable to the impact of Aqualon’s strategic purchases of
certain key raw materials including guar and China-sourced gum rosins during
the
2007 period as well as increased production levels to meet increasing demand
in
many product lines.
|
|
Six
Months Ended June 30,
|
|
Investing
Activities
|
|
2007
|
|
|
2006
|
|
Capital
expenditures
|
|
$ |
53.8
|
|
|
$ |
22.9
|
|
Acquisitions
and investments, net
|
|
|
0.9
|
|
|
|
26.1
|
|
Proceeds
from asset and investment dispositions and all other sources,
net
|
|
|
(10.1 |
) |
|
|
(24.4 |
) |
Net
cash used in investing activities
|
|
$ |
44.6
|
|
|
$ |
24.6
|
|
Net
cash
used in investing activities increased $20.0 million to $44.6 million for the
six months ended June 30, 2007 as compared to $24.6 million for the comparable
period in 2006. Included in these totals are capital expenditures of
$53.8 million and $22.9 million, respectively, for the 2007 and 2006
periods. The increase in capital expenditures is primarily related to
Aqualon’s capacity expansion projects at both its MC and CMC manufacturing
facilities in China as well as PTV’s synthetic lubricants expansion at its
Louisiana, Missouri manufacturing facility. Additional investing
outflows during the 2007 period include $1.4 million for an earn-out payment
to
Benchmark Performance Group, Inc. (“BPG”) based on the 2006 performance of the
guar and guar derivatives business that was acquired by the Company from
BPG at the beginning of 2006 (the “Benchmark Acquisition”). This
payment was partially offset by a $0.5 million payment received from BPG in
connection with the Company’s $2.5 million loan to BPG during 2006 as
well. The prior year period reflects the Benchmark Acquisition as
well as a capital contribution made in connection with the formation of the
Hercules Tianpu joint venture. Investing outflows for the 2007 period
were partially offset by $11.4 million attributable to the receipt of proceeds,
net of transaction costs, from the disposition of the Company’s facilities in
Pendlebury, United Kingdom and Barneveld, The Netherlands, an equity-method
investment in Germany as well as other miscellaneous retired fixed
assets.
In
connection with the sale of the Company’s 51% interest in FiberVisions during
the first quarter of 2006, the Company received $27.0 million in proceeds,
less
transaction costs. During the 2007 period, the Company completed its
final requirement to provide an additional $1.2 million contribution to
FiberVisions based on its performance through the first quarter of 2007 in
accordance with the sales transaction agreement.
|
|
Six
Months Ended June 30,
|
|
Financing
Activities
|
|
2007
|
|
|
2006
|
|
Long-term
debt payments
|
|
$ |
47.0
|
|
|
$ |
122.7
|
|
Long-term
debt proceeds and changes in short-term debt, net
|
|
|
(9.1 |
) |
|
|
0.8
|
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
|
|
—
|
|
|
|
(83.7 |
) |
Proceeds
from the exercise of stock options and all other sources,
net
|
|
|
(7.0 |
) |
|
|
(3.9 |
) |
Net
cash used by financing activities
|
|
$ |
30.9
|
|
|
$ |
35.9
|
|
Net
cash
used in financing activities decreased $5.0 million to $30.9 million for the
six
months ended June 30, 2007 as compared to $35.9 million for the comparable
period in 2006. During the 2007 period, the Company paid $47 million
on its Term B loan due 2010 while the 2006 period reflects payments of $113.9
million attributable to a Tender Offer and other repurchases of the Company’s
11.125% senior notes. The 2006 period includes the issuance of $90.0
million of debt, net of $6.3 million of issuance costs, by FiberVisions prior
to
the sale transaction. The FiberVisions’ debt is non-recourse to
Hercules. Higher average stock prices during the 2007 period, as
compared to the prior year period, resulted in an increase of $1.4 million
in
proceeds from the exercise of stock options during the 2007 period.
Sources
of Liquidity
The
Company projects that cash flows 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 indenture governing its senior
notes.
As
of
June 30, 2007, 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. As of June 30, 2007, $98.2 million of the $150.0 million
Revolving Facility was available for use as the Company had $51.8 million of
outstanding letters of credit associated with the Revolving
Facility. In addition, the Company had $38.0 million of foreign lines
of credit available of which $33.1 million was unused and available. The total
amount of $4.9 million outstanding under these facilities was entirely
attributable to operations in China.
On
July
11, 2007, the Company amended its Senior Credit Facility Agreement (the
“Agreement”). The amendment: (i) removes a $75 million limitation on asset
sales; (ii) increases the annual limitation on capital expenditures from $100
million to $150 million; (iii) increases the limitation on additional
indebtedness from $50 million to $150 million; and (iv) provides the Company
the
ability to pay dividends and/or execute stock repurchases for up to $100 million
per calendar year subject to the satisfaction of certain financial leverage
requirements as defined in the Agreement. The amendment was designed to align
the parameters of the Agreement with the Company’s current financial profile and
projected business plans.
In
connection with the comprehensive settlement of tax years 1993 through 2003,
the
Company anticipates the receipt of federal and state income tax refunds and
interest of approximately $245 million in total during 2007. During
the six months ended June 30, 2007, the Company received $198.5 million of
the
aforementioned total. An additional $23.2 million was received during
July 2007 and the remainder is expected to be received during the second half
of
2007.
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. Assets held for sale are included in the
caption “Other current assets” on the Consolidated Balance
Sheets. The carrying value of total assets held for sale was $7.7
million as of June 30, 2007, primarily reflecting the Company’s former research
facility in Jacksonville, Florida. This property is currently being marketed
and
is expected to be disposed within the next twelve months for a net sales price
in excess of its carrying amount.
Total
debt at June 30, 2007 was $959.1 million, which decreased $36.4 million from
$995.5 million at December 31, 2006 primarily as a result of the Term B loan
payments discussed above. Cash balances increased to $237.9 million
at June 30, 2007 from $171.8 million at December 31, 2006.
As
of
June 30, 2007, the Company’s cash cycle time increased by a total of 4 days to
70 days from year-end 2006 levels. Days Sales Outstanding (“DSO”)
remained at 60 days, similar to the year-end 2006 levels. Days Sales
in Inventories (“DSI”) increased by 1 day to 59 days, primarily reflecting
increases in Aqualon’s inventory partially offset by improved metrics in
PTV. Days Payable Outstanding (“DPO”) decreased by 3 days to 49
days. The Company expects to improve its cash cycle time during the
remainder of the year as efforts continue with respect to working capital
initiatives, primarily with respect to inventories and vendor accounts
payable.
Commitments
and Contractual
Obligations
Capital
Expenditures and Other Investing Commitments
Capital
expenditures are projected to total approximately $117 million during
2007. Of this total, approximately 28% will be attributable to PTV,
58% to Aqualon and 14% for Corporate purposes. Approximately $70
million is targeted for global expansion and new product capability projects
at
various manufacturing facilities. Significant projects for Aqualon include
those
related to MC and CMC capacity expansions as well as the construction of an
HEC
facility, all within China. PTV’s most significant projects include synthetic
lubricants and polyols and dry strength product capacity expansions and
production process improvements at various domestic facilities, Kymene
production enhancements at certain European-based facilities as well as its
new
technical center in Shanghai, China. Major Corporate-related projects are
attributable to a technical upgrade of the Company’s information technology
platform as well as continued enhancement of the Wilmington, Delaware research
facility.
In
connection with the Benchmark Acquisition, Aqualon made an earn-out payment
of
$1.4 million during the first quarter of 2007 based on 2006
performance. Similar performance-based commitments are in place
through 2010.
Pension
Plan Funding
The
Company is projecting total voluntary pension plan contributions to approximate
$37 million during 2007 including $20 million attributable to the U.S.-based
plan and $17 million to its international plans. During April 2007,
the Company made a $10 million voluntary contribution to its U.S. qualified
plan
and expects to make additional contributions of $10 million during the second
half of 2007, subject to market conditions. Approximately $17 million was
contributed to the United Kingdom pension plan during the first quarter of
2007
resulting in that plan being fully funded.
In
June
2007, the Finance Committee of the Board of Directors approved a change in
the
pension asset investment strategy for the Company’s U.S. qualified plan.
Accordingly, the Company is in the process of adopting a liability-driven
investing strategy that is designed to generally align the characteristics
of
the plan’s assets to those of the underlying benefit obligations with the
objective of mitigating the impact of interest rate and asset value volatility.
Under this strategy, approximately 80% of the plan’s assets will be invested in
interest rate-sensitive debt instruments. This investment strategy is expected
to reduce ongoing funding requirements for a fully-funded plan to a level that
approximates that plan’s annual service cost. A similar strategy was
implemented for the Company’s United Kingdom pension plan during the first
quarter of 2007 in connection with the aforementioned funding. The strategy
for
the U.S. qualified plan is to be effectuated through a phased shift to a
fixed-income portfolio with a duration to approximate that of the benefit
obligations while reducing the plan’s exposure to equity and other investment
securities. This shift has begun and it is anticipated that the change in asset
allocation will be completed during the fourth quarter of 2007, provided market
conditions permit.
This
strategy is expected to substantially reduce volatility of earnings and cash
flow and mitigate the risk of plan under funding due to asset or interest rate
changes. Conversely, this strategy limits the ability for the plans to become
over funded and will not compensate for actuarial changes including mortality
and future compensation changes as well as the incidence of lump-sum payments.
There can be no assurance that the Company’s plans will achieve and/or maintain
fully-funded status.
In
connection with this strategy, the Company intends to change its method of
accounting for its U.S qualified and United Kingdom pension plans to a
market-based methodology whereby the net periodic benefit expense will reflect
the actual return on plan assets as opposed to the expected return. Accordingly,
gains and losses outside of a corridor range will no longer be deferred and
amortized as a component of net periodic benefit expense. Upon adoption on
January 1, 2008, the change will be retrospectively applied to all prior periods
presented in the Company’s Securities Exchange Act filings.
Funding
for Litigation, Environmental and Asset Retirement Obligations
As
of
June 30, 2007, the Company has recorded $108.9 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. 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 defined 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. In addition, the Company’s
future commitment to certain actions, including modifications to its existing
facilities or preparing sites for sale involving demolition and other related
activities among others, could trigger the recognition of additional
obligations.
The
Company has paid $6.4 million towards these obligations during the six months
ended June 30, 2007 and anticipates a total of approximately $50 million in
payments for the full year. Included in this total is approximately
$13 million attributable to an agreement in principle to settle the ABL matter
as well as approximately $19 million attributable to a claim for additional
response costs at the Vertac site as discussed further in Note
7 to the Consolidated Financial Statements. Excluding the ABL settlement
and
the Vertac response costs matter, the most significant of the total projected
payments are attributable to the Company’s operating facility and related
property in Parlin, New Jersey. Obligations at this site include
those attributable to existing Aqualon Natrosol manufacturing operations as
well
as demolition and environmental remediation activities attributable to that
portion of the facility that previously housed the Company’s nitrocellulose
manufacturing operations. With regard to this portion of the site,
the Company is proceeding with plans to dispose of 400 acres in connection
with
a brownfield redevelopment project.
Asbestos-Related
Litigation
In
January 2007, the Company received $41.3 million of funds from the termination,
and complete distribution to the Company, of the proceeds from one of the trusts
established in 2004 related to the settlements with certain
insurers. During 2007, the Company projects reimbursements from the
remaining trust that was established in connection with such settlements to
approximate $25 million, which amount will be used to reimburse the Company
for
a substantial portion of the estimated costs associated with asbestos claims
for
the year. The combined cash impact of the complete distribution of
proceeds from, and liquidation of, the first trust, and projected reimbursements
from the remaining trust, will likely result in a positive net cash inflow
related to asbestos litigation matters through 2007. The entirety of
the funds currently in the remaining trust and certain amounts to be paid to
that trust in January 2008 are currently anticipated to be completely
distributed to the Company during 2008, resulting in the anticipated termination
of the remaining trust. As a result, from and after the time that the remaining
trust is terminated, the Company will be required to fund its asbestos
settlements and related defense costs and legal fees from its cash from
operations and other available financial resources until its excess insurance
policies are triggered based on cumulative asbestos products litigation-related
expenditures. Depending upon the magnitude of future settlement and
defense costs, substantial coverage under such excess policies is not
anticipated to be triggered for at least several years.
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. As discussed above, the Company repaid $47 million,
including amounts over and above required maturities, on its Term B loan during
the six months ended June 30, 2007. In addition, the Company made an additional
repayment of $30 million on the Term B loan during July, 2007 and anticipates
an
additional $23 million to be repaid during the remainder of 2007.
During
June 2007, bond holders representing a principal amount of $84.1 million of
the
total $100.0 million outstanding 6.6% notes due 2027 exercised their option
to
put 100% of the principal amount of their notes to the Company. This will
require a cash payment of $84.1 million on August 1, 2007. In addition, the
remaining $16.1 million of the 11.125% senior notes are scheduled to mature
in
November 2007. The Company intends to fund these obligations from
available cash on hand.
Share
Repurchase Program and Common Stock Dividend
Recent
Accounting Pronouncements
Reference
is made to Note 2 to 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. Sensitivity of the Company's financial instruments to selected
changes in market rates and prices, which are reasonably possible over a
one-year period, are described below. The market values for interest
rate risk are calculated by the Company utilizing a third-party software 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
The
Company’s financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards and options and represent a net asset
position of less than $0.1 million at June 30, 2007. The following
sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from period-end levels, with all other variables held
constant. A 10% strengthening of the U.S. Dollar versus other
currencies at June 30, 2007 would result in a $1.4 million increase in the
net
position, while a 10% weakening of the dollar versus all currencies would result
in a $1.9 million decrease 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 June 30, 2007, the net market value of the swaps was a
liability of $64.7 million. A 10% strengthening of the Euro versus
the U.S. dollar at June 30, 2007 would result in a $56.5 million increase in
the
liability, while a 10% weakening of the Euro versus the U.S. dollar would result
in a $56.5 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. At June 30, 2007, the
net market value of these combined instruments was a liability of $909.1
million. The sensitivity analysis assumes an instantaneous 100-basis
point move in interest rates from their period end levels, with all other
variables held constant. A 100-basis point increase in interest rates
at June 30, 2007 would result in a $71.5 million decrease in the net market
value of the liability. A 100-basis point decrease in interest rates
at June 30, 2007 would result in a $66.7 million increase in the net market
value of the liability.
Equity
Price Risk
The
Company’s financial instruments subject to equity price risk consist of the
warrants component of the CRESTS units issued in 1999 and the Company’s 8%
convertible subordinated debentures due 2010 and represent a net liability
position of $71.8 million. The sensitivity analysis assumes an
instantaneous 10% change in valuation with all other variables held
constant. A 10% increase in market value at June 30, 2007 would
increase the net liability by $10.7 million while a 10% decrease would reduce
the net liability by $10.4 million.
Commodity
Price Risk
As
of and
for the six month period ended June 30, 2007, the Company did not transact
in
any hedging activities with respect to commodities or any related raw materials
requirements.
Derivative
Financial Instruments
As
noted
above, the Company utilizes foreign exchange forward and option contracts 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.
Other
than cross-currency interest rate 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” and, accordingly, changes in the fair value
of derivatives are recorded each period in earnings.
ITEM
4. Controls
and Procedures
The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s President and
Chief Executive Officer and the Company’s Vice President and Chief Financial
Officer of the effectiveness of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15 as of June 30, 2007. 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 are
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 first fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
The
information disclosed by the Company under the headings “Environmental” and
“Litigation” in Note 7 to the Consolidated Financial
Statements is incorporated herein by this reference.
ITEM
4. Submission of Matters to a Vote of Security
Holders
The
Company held its Annual Meeting of Shareholders on April 19, 2007. A summary
of
the final voting results follows. The number of votes cast with respect to
each
matter is as indicated. A quorum of 104,383,944, or 89.77% of the 116,282,499
outstanding voting shares as of the March 5, 2007 record date, was present
in
person or by proxy at the Annual Meeting.
Three
of
the nine Directors had terms expiring in 2007 all of whom stood for reelection
this year. John C. Hunter, III, Robert D. Kennedy and Craig A. Rogerson were
reelected to the Hercules Board of Directors. Directors were elected to serve
for three-year terms and until their successors are elected and qualified,
or
their earlier death, resignation or removal.
Director
Name
|
|
For
|
|
|
Withheld
Authority
|
|
|
Broker
Non-Votes
|
|
John
C. Hunter, III
|
|
|
101,460,053
|
|
|
|
2,923,891
|
|
|
|
—
|
|
Robert
D. Kennedy
|
|
|
101,804,933
|
|
|
|
2,579,011
|
|
|
|
—
|
|
Craig
A. Rogerson
|
|
|
101,887,915
|
|
|
|
2,496,029
|
|
|
|
—
|
|
Directors
continuing in office after the meeting were: Anna Cheng Catalano, Thomas P.
Gerrity, John C. Hunter, III, Burton M. Joyce, Robert D. Kennedy, Jeffrey M.
Lipton, Craig A. Rogerson, John K. Wulff and Joe B. Wyatt.
2.
|
Ratification
of BDO Seidman, LLP as Hercules’ Independent Registered Public Accountants
for 2007, which received more than a majority of the votes necessary
for
ratification.
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker Non-Votes
|
|
|
103,369,049
|
|
|
|
185,024
|
|
|
|
829,871
|
|
|
|
—
|
|
3.
|
Amendments
to Hercules’ Amended and Restated Certificate of Incorporation and
Hercules’ Revised and Amended By-Laws, which received more than a majority
of the votes necessary for
approval.
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker Non-Votes
|
|
|
102,005,834
|
|
|
|
1,454,483
|
|
|
|
923,627
|
|
|
|
—
|
|
Please
see the exhibits listed on the Exhibits Index.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
HERCULES
INCORPORATED
|
|
|
|
|
|
By:
|
/s/
Allen A. Spizzo
|
|
|
Allen
A. Spizzo
|
|
Vice
President and Chief Financial Officer
|
|
(Principal
Financial Officer and Duly
|
|
Authorized
Signatory)
|
|
August
1, 2007
|
Number
|
|
Description
|
|
|
|
|
|
Second
Amendment to Amended and Restated Credit Agreement dated as of June
29,
2005, among Hercules Incorporated and the Guarantors listed on Schedule
A
thereto and Credit Suisse First Boston LLC and Wachovia Bank National
Association
|
|
|
|
|
|
Fourth
Amendment to Amended and Restated Credit Agreement dated as of July
11,
2007, among Hercules Incorporated and the Guarantors listed on Schedule
A
thereto and Credit Suisse First Boston LLC and Wachovia Bank National
Association
|
|
|
|
|
|
Certification
of President and Chief Executive Officer Pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
|
|
|
|
|
|
Certification
of Vice President and Chief Financial Officer Pursuant to Exchange
Act
Rule 13a-14(a)/15d-14(a)
|
|
|
|
|
|
Section 1350
Certification of President and Chief Executive Officer
|
|
|
|
|
|
Section 1350
Certification of Vice President and Chief Financial
Officer
|
__________________
*
Filed
herewith
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55
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