form10q.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, 2008
OR
|
oTRANSITION 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, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ý Accelerated
filer o Non-accelerated
filer o Smaller
reporting company 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 25, 2008, 112,709,529 shares of registrant’s common stock were
outstanding.
HERCULES
INCORPORATED
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2008
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47
|
HERCULES
INCORPORATED
(Dollars
in millions, except per share)
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
612.6 |
|
|
$ |
549.0 |
|
|
$ |
1,170.9 |
|
|
$ |
1,051.3 |
|
Cost
of sales
|
|
|
420.1 |
|
|
|
358.8 |
|
|
|
794.5 |
|
|
|
682.2 |
|
Selling,
general and administrative expenses
|
|
|
98.6 |
|
|
|
84.8 |
|
|
|
193.2 |
|
|
|
168.2 |
|
Research
and development
|
|
|
11.4 |
|
|
|
11.0 |
|
|
|
22.5 |
|
|
|
21.4 |
|
Intangible
asset amortization (Note 4)
|
|
|
2.7 |
|
|
|
1.9 |
|
|
|
5.3 |
|
|
|
3.7 |
|
Other
operating expense, net (Note 12)
|
|
|
4.6 |
|
|
|
7.6 |
|
|
|
12.8 |
|
|
|
20.7 |
|
Profit
from operations
|
|
|
75.2 |
|
|
|
84.9 |
|
|
|
142.6 |
|
|
|
155.1 |
|
Interest
and debt expense
|
|
|
18.3 |
|
|
|
17.8 |
|
|
|
35.0 |
|
|
|
35.0 |
|
Vertac
response costs and litigation charges (Note
8)
|
|
|
0.3 |
|
|
|
17.5 |
|
|
|
0.5 |
|
|
|
19.0 |
|
|
|
|
8.4 |
|
|
|
15.7 |
|
|
|
15.3 |
|
|
|
19.0 |
|
Income
before income taxes, minority interests and equity loss
|
|
|
48.2 |
|
|
|
33.9 |
|
|
|
91.8 |
|
|
|
82.1 |
|
Provision
(benefit) for income taxes (Note 14)
|
|
|
12.6 |
|
|
|
(7.9 |
) |
|
|
24.1 |
|
|
|
(41.0 |
) |
Income
before minority interests and equity loss
|
|
|
35.6 |
|
|
|
41.8 |
|
|
|
67.7 |
|
|
|
123.1 |
|
Minority
interests in losses (earnings) of consolidated
subsidiaries
|
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
0.9 |
|
|
|
(1.0 |
) |
Equity
loss of affiliated companies, net of tax
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(1.1 |
) |
|
|
(0.5 |
) |
Net
income from continuing operations before discontinued
operations
|
|
|
35.1 |
|
|
|
41.3 |
|
|
|
67.5 |
|
|
|
121.6 |
|
Net
income from discontinued operations, net of tax (Note
1)
|
|
|
25.9 |
|
|
|
— |
|
|
|
25.9 |
|
|
|
— |
|
Net
income
|
|
$ |
61.0 |
|
|
$ |
41.3 |
|
|
$ |
93.4 |
|
|
$ |
121.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.32 |
|
|
$ |
0.36 |
|
|
$ |
0.61 |
|
|
$ |
1.06 |
|
Discontinued
operations
|
|
|
0.23 |
|
|
|
— |
|
|
|
0.23 |
|
|
|
— |
|
Net income
|
|
$ |
0.55 |
|
|
$ |
0.36 |
|
|
$ |
0.84 |
|
|
$ |
1.06 |
|
Weighted
average number of shares (millions)
|
|
|
111.4 |
|
|
|
114.6 |
|
|
|
111.6 |
|
|
|
114.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.31 |
|
|
$ |
0.36 |
|
|
$ |
0.60 |
|
|
$ |
1.06 |
|
Discontinued
operations
|
|
|
0.23 |
|
|
|
— |
|
|
|
0.23 |
|
|
|
— |
|
Net income
|
|
$ |
0.54 |
|
|
$ |
0.36 |
|
|
$ |
0.83 |
|
|
$ |
1.06 |
|
Weighted
average number of shares (millions)
|
|
|
112.1 |
|
|
|
115.3 |
|
|
|
112.2 |
|
|
|
115.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.05 |
|
|
|
— |
|
|
$ |
0.10 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
61.0 |
|
|
$ |
41.3 |
|
|
$ |
93.4 |
|
|
$ |
121.6 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
2.4 |
|
|
|
18.8 |
|
|
|
47.0 |
|
|
|
24.4 |
|
Pension
and postretirement benefit adjustments, net of tax
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
1.2 |
|
|
|
1.7 |
|
Revaluation
of net investment hedges, net of tax
|
|
|
1.5 |
|
|
|
(2.9 |
) |
|
|
(31.8 |
) |
|
|
(7.5 |
) |
|
|
|
4.7 |
|
|
|
17.5 |
|
|
|
16.4 |
|
|
|
18.6 |
|
Comprehensive
income
|
|
$ |
65.7 |
|
|
$ |
58.8 |
|
|
$ |
109.8 |
|
|
$ |
140.2 |
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
June
30,
2008
|
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
106.6 |
|
|
$ |
116.5 |
|
Accounts
receivable, net of allowance (2008 – $7.3; 2007 – $4.5)
|
|
|
435.8 |
|
|
|
366.8 |
|
|
|
|
244.6 |
|
|
|
224.0 |
|
Deferred
income taxes
|
|
|
34.1 |
|
|
|
41.0 |
|
Income
taxes receivable
|
|
|
24.6 |
|
|
|
20.2 |
|
Asbestos-related
assets (Note 8)
|
|
|
— |
|
|
|
4.0 |
|
Other
current assets
|
|
|
46.3 |
|
|
|
41.8 |
|
Total
current assets
|
|
|
892.0 |
|
|
|
814.3 |
|
Property,
plant, and equipment, net (Note 10)
|
|
|
698.9 |
|
|
|
660.0 |
|
Intangible
assets, net (Note 4)
|
|
|
157.7 |
|
|
|
161.2 |
|
|
|
|
551.9 |
|
|
|
527.9 |
|
Deferred
income taxes
|
|
|
370.5 |
|
|
|
370.8 |
|
Asbestos-related
assets (Note 8)
|
|
|
9.6 |
|
|
|
24.1 |
|
Deferred
charges and other assets
|
|
|
110.1 |
|
|
|
120.1 |
|
Total
assets
|
|
$ |
2,790.7 |
|
|
$ |
2,678.4 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
236.3 |
|
|
$ |
222.0 |
|
Asbestos-related
liabilities (Note 8)
|
|
|
28.0 |
|
|
|
28.0 |
|
Current
debt obligations (Note 5)
|
|
|
54.9 |
|
|
|
33.7 |
|
|
|
|
20.5 |
|
|
|
20.0 |
|
Accrued
expenses
|
|
|
200.5 |
|
|
|
207.7 |
|
Income
taxes payable
|
|
|
17.0 |
|
|
|
13.3 |
|
Deferred
income taxes
|
|
|
8.8 |
|
|
|
9.5 |
|
Total
current liabilities
|
|
|
566.0 |
|
|
|
534.2 |
|
|
|
|
761.8 |
|
|
|
762.3 |
|
Deferred
income taxes
|
|
|
78.7 |
|
|
|
74.3 |
|
Pension
obligations
|
|
|
163.0 |
|
|
|
158.7 |
|
Other
postretirement benefit obligations
|
|
|
118.4 |
|
|
|
123.1 |
|
Deferred
credits and other liabilities
|
|
|
306.1 |
|
|
|
298.7 |
|
Asbestos-related
liabilities (Note 8)
|
|
|
216.3 |
|
|
|
227.0 |
|
Total
liabilities
|
|
|
2,210.3 |
|
|
|
2,178.3 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
— |
|
|
|
— |
|
Minority
interests
|
|
|
21.1 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
Series preferred
stock
|
|
|
— |
|
|
|
— |
|
Common
stock, $25/48 par value (shares issued: 2008 and 2007 – 160.0
million)
|
|
|
83.3 |
|
|
|
83.3 |
|
Additional
paid-in capital
|
|
|
422.6 |
|
|
|
438.3 |
|
Unearned
compensation
|
|
|
(15.2 |
) |
|
|
(29.8 |
) |
Accumulated
other comprehensive losses
|
|
|
(6.4 |
) |
|
|
(22.8 |
) |
Retained
earnings
|
|
|
1,692.2 |
|
|
|
1,610.1 |
|
|
|
|
2,176.5 |
|
|
|
2,079.1 |
|
Reacquired
stock, at cost (2008 – 47.4 million shares; 2007 – 46.0 million
shares)
|
|
|
(1,617.2 |
) |
|
|
(1,601.1 |
) |
Total
stockholders’ equity
|
|
|
559.3 |
|
|
|
478.0 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,790.7 |
|
|
$ |
2,678.4 |
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
93.4 |
|
|
$ |
121.6 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
37.2 |
|
|
|
34.9 |
|
Amortization
|
|
|
15.9 |
|
|
|
19.1 |
|
Deferred
income tax provision
|
|
|
8.9 |
|
|
|
15.6 |
|
Gain
on disposal of assets and investments, net
|
|
|
(3.7 |
) |
|
|
(4.2 |
) |
Dilution
of investment and loss on sale of 51% interest in
FiberVisions
|
|
|
— |
|
|
|
(0.3 |
) |
Minority
interests in (losses) earnings of consolidated
subsidiaries
|
|
|
(0.9 |
) |
|
|
1.0 |
|
Stock-based
compensation
|
|
|
4.4 |
|
|
|
6.0 |
|
Other
non-cash charges and credits, net
|
|
|
4.8 |
|
|
|
(0.8 |
) |
Accruals
and deferrals of cash receipts and payments (net of acquisitions and
dispositions):
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(55.0 |
) |
|
|
(43.8 |
) |
Inventories
|
|
|
(11.4 |
) |
|
|
(9.9 |
) |
Asbestos-related
assets and liabilities, net
|
|
|
7.4 |
|
|
|
43.8 |
|
Other
current assets
|
|
|
(2.4 |
) |
|
|
(3.2 |
) |
Accounts
payable
|
|
|
3.9 |
|
|
|
(4.2 |
) |
Vertac
obligations
|
|
|
0.5 |
|
|
|
(104.8 |
) |
Accrued
expenses
|
|
|
(5.3 |
) |
|
|
7.5 |
|
Income
taxes receivable and payable, net
|
|
|
14.3 |
|
|
|
107.1 |
|
Pension
and other postretirement benefit obligations
|
|
|
(4.5 |
) |
|
|
(29.4 |
) |
Non-current
assets and liabilities
|
|
|
(39.6 |
) |
|
|
(15.5 |
) |
Net
cash provided by operating activities
|
|
|
67.9 |
|
|
|
140.5 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(45.4 |
) |
|
|
(53.8 |
) |
Acquisitions
and investments, net
|
|
|
(9.0 |
) |
|
|
(0.9 |
) |
Proceeds
from sale of 51% interest in FiberVisions, net
|
|
|
— |
|
|
|
(1.2 |
) |
Proceeds
of asset disposals, net of transaction costs
|
|
|
3.0 |
|
|
|
11.4 |
|
Other
|
|
|
— |
|
|
|
(0.1 |
) |
Net
cash used in investing activities
|
|
|
(51.4 |
) |
|
|
(44.6 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Long-term
debt proceeds
|
|
|
— |
|
|
|
3.3 |
|
Long-term
debt payments
|
|
|
(2.3 |
) |
|
|
(47.0 |
) |
Change
in short-term debt
|
|
|
16.4 |
|
|
|
5.8 |
|
Repurchase
of common stock
|
|
|
(37.3 |
) |
|
|
— |
|
Dividends
paid
|
|
|
(10.9 |
) |
|
|
— |
|
Proceeds
from the exercise of stock options
|
|
|
0.9 |
|
|
|
4.9 |
|
Other,
net including income tax benefits attributable to stock-based
compensation
|
|
|
0.8 |
|
|
|
2.1 |
|
Net
cash used in financing activities
|
|
|
(32.4 |
) |
|
|
(30.9 |
) |
Effect
of exchange rate changes on cash
|
|
|
6.0 |
|
|
|
1.1 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(9.9 |
) |
|
|
66.1 |
|
Cash
and cash equivalents – beginning of period
|
|
|
116.5 |
|
|
|
171.8 |
|
Cash
and cash equivalents – end of period
|
|
$ |
106.6 |
|
|
$ |
237.9 |
|
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, 2008 and 2007,
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 Report on Form 10-K for the year ended
December 31, 2007.
Effective
January 1, 2008, the Company elected to change its method of accounting for its
qualified defined-benefit pension plans in the United States (“U.S.”) and the
United Kingdom (“U.K.”). This change has been applied on a
retrospective basis to the comparable periods in 2007 that appear within the
financial statements and notes thereto. A more thorough discussion of the change
is provided in Note 6.
The three
and six month periods ended June 30, 2008 reflect income from discontinued
operations of $25.9 million, net of taxes. This amount relates to the
reversal of a $40 million indemnification obligation attributable to income tax
matters that the Company established in 1997 upon the sale of its investment in
a joint venture in the former Food and Functional products
segment. The buyer recently concluded certain income tax issues with
the Internal Revenue Service (“IRS”) thereby eliminating the necessity for
maintaining the indemnity obligation.
Certain
prior period amounts in the consolidated financial statements and notes have
been reclassified to conform to the current period presentation.
|
Recent
Accounting Pronouncements
|
Other
than those discussed below, there have been no accounting pronouncements issued
or changes thereto through June 30, 2008 that have significance or potential
significance to the Company.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative
Hedging Instruments and Hedging Activities – an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 is effective January 1, 2009 and requires
enhanced qualitative and quantitative disclosures with respect to derivatives
and hedging activities. Based on its current hedging activities, the
Company does not anticipate SFAS 161 will have a material impact on its
financial statements.
In
February 2008, the FASB deferred the effective date of Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”), until January 1, 2009 for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value on a recurring
basis. Fair value disclosures for financial assets and liabilities in
connection with the initial adoption of SFAS 157 effective January 1, 2008 are
provided in Note 17.
In
December 2007, the FASB issued Statements of Financial Accounting Standards No.
141 (revised 2007), “Business
Combinations” (“SFAS 141R”), and No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment to ARB No. 51” (“SFAS
160”). Both SFAS 141R and SFAS 160 are to be adopted effective
January 1, 2009. SFAS 141R requires the application of several new or
modified accounting concepts that, due to their complexity, could introduce a
degree of volatility in periods subsequent to a material business
combination. SFAS 141R requires that all assets and liabilities
acquired as a result of a business combination be recorded at their fair value,
with limited exceptions. SFAS 160 will primarily impact the
presentation of minority or noncontrolling interests within the Balance Sheet
and Statement of Operations as well as the accounting for transactions with
noncontrolling interest holders.
|
Acquisitions
and Investments
|
At the
end of the second quarter of 2008, the Company acquired Logos Quimica Ltda.
(“Logos Quimica”), a Brazil-based specialty chemical company. The
total transaction value is approximately 34 million Brazilian Reais or $21.3
million. A total of 11.9 million Reais or $7.5 million was paid at closing and
the remainder was paid shortly thereafter during the third quarter of
2008. Of the total transaction cost, 17.3 million Brazilian Reais or
$10.8 million has been placed into escrow pending the resolution of certain
items. The pulp products business of Logos Quimica will be integrated
into the Ventures component of PTV and the remaining small portion of Logos
Quimica will be integrated into the Aqualon segment to market products into the
coatings industry. The Company is currently in the process of
allocating the purchase price to the assets and liabilities acquired as a result
of the transaction.
|
Intangible
Assets and Goodwill
|
The
following table provides information regarding the Company’s intangible assets
with finite lives:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Customer
relationships
|
|
$ |
95.6 |
|
|
$ |
22.5 |
|
|
$ |
73.1 |
|
|
$ |
95.6 |
|
|
$ |
21.1 |
|
|
$ |
74.5 |
|
Trademarks
and tradenames
|
|
|
76.2 |
|
|
|
18.6 |
|
|
|
57.6 |
|
|
|
76.2 |
|
|
|
17.6 |
|
|
|
58.6 |
|
Other
intangible assets
|
|
|
52.7 |
|
|
|
25.7 |
|
|
|
27.0 |
|
|
|
51.0 |
|
|
|
22.9 |
|
|
|
28.1 |
|
|
|
$ |
224.5 |
|
|
$ |
66.8 |
|
|
$ |
157.7 |
|
|
$ |
222.8 |
|
|
$ |
61.6 |
|
|
$ |
161.2 |
|
Total
amortization expense for intangible assets was $2.7 million and $1.9 million for
the three months ended June 30, 2008 and 2007, respectively, and was $5.3 and
$3.7 million for the six months ended June 30, 2008 and 2007,
respectively. Amortization expense is estimated to be $10.2 million
for the year ending December 31, 2008.
The
following table shows changes in the carrying amount of goodwill by operating
segment for the six months ended June 30, 2008:
|
|
Paper
Technologies and Ventures
|
|
|
Aqualon
Group
|
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$ |
471.6 |
|
|
$ |
56.3 |
|
|
$ |
527.9 |
|
Foreign
currency translation and other changes
|
|
|
23.0 |
|
|
|
1.0 |
|
|
|
24.0 |
|
Balance
at June 30, 2008
|
|
$ |
494.6 |
|
|
$ |
57.3 |
|
|
$ |
551.9 |
|
A summary
of debt by instrument is provided as follows:
|
|
June
30,
2008
|
|
|
December 31,
2007
|
|
Term
B Loan due 2010
|
|
$ |
259.0 |
|
|
$ |
261.0 |
|
6.6%
notes due 2027
|
|
|
15.9 |
|
|
|
15.9 |
|
6.75%
senior subordinated notes due 2029
|
|
|
250.0 |
|
|
|
250.0 |
|
8%
convertible subordinated debentures due 2010
|
|
|
2.2 |
|
|
|
2.3 |
|
6.5%
junior subordinated deferrable interest debentures due
2029
|
|
|
215.6 |
|
|
|
215.1 |
|
Term
loans of Hercules Tianpu at rates ranging from 4.33% to 8.22% through
2011(1)
|
|
|
49.8 |
|
|
|
42.4 |
|
Term
loans of Hercules Jiangmen at rates ranging from 6.24% to 8.22% through
2010
|
|
|
17.2 |
|
|
|
7.5 |
|
Other
|
|
|
7.0 |
|
|
|
1.8 |
|
|
|
|
816.7 |
|
|
|
796.0 |
|
Less:
Current debt obligations
|
|
|
54.9 |
|
|
|
33.7 |
|
Long-term
debt
|
|
$ |
761.8 |
|
|
$ |
762.3 |
|
(1)A total
of $23.6 million of these loans have been guaranteed by Hercules (see Note 8).
As of
June 30, 2008, the weighted-average interest rate on the Term B Loan, which
bears interest at LIBOR + 1.50%, was 4.0%.
As of
June 30, 2008, the Company’s Senior Credit Facility was comprised of a $150
million committed revolving credit facility which matures on April 8,
2009. As of June 30, 2008, the Company had $57.7 million of
outstanding letters of credit associated with the Revolving Credit Facility and
the remaining $92.3 million was available for use.
As of
June 30, 2008, the Company also had $33.1 million of foreign lines of credit
available and unused.
|
Pension
and Other Postretirement Benefits
|
Change
in Accounting Method for U.S. and U.K. Defined-Benefit Pension
Plans
Effective
January 1, 2008, the Company elected to change its method of accounting for its
qualified defined-benefit pension plans in the U.S. and U.K. The
change encompasses: (a) the basis for the determination of the “market-related
value” of plan assets from a smoothed value to the “fair value” and (b) a
reduction in the amortization period for gains and losses in excess of the
“corridor” from a period representing the average remaining service period of
active employees to a 1-year amortization period. The aforementioned
change in accounting method is preferable as it will provide a more meaningful
representation of the cost of the Company’s plans as well as its performance in
managing the associated economic risks, primarily the interest rate
risk. The Company does not intend to apply these changes to the
accounting for its defined benefit pension plans in other
jurisdictions. The effect of not applying the changes to the other
plans is not material as the qualified U.S. and U.K defined benefit plans
represent a substantial majority of the Company’s net pension
obligations.
The
change in accounting method has been applied to the financial statements of
prior periods on a retrospective basis. As reflected in the
presentation of this Form 10-Q, Retained earnings as of December 31, 2007 has
been reduced by $293.2 million with a corresponding increase to Accumulated
other comprehensive losses (“AOCL”) representing the cumulative effect of the
application of the change in accounting method to all prior periods. In
addition, the net periodic pension benefit cost for the six months ended June
30, 2007 has been adjusted to reflect the change in accounting
method.
While the
financial statements and notes reflect the change in method on a comparable
basis for accounting purposes, the underlying economic circumstances associated
with the U.S. and U.K. plans are substantially different for the periods
impacted by the change. The primary source of the differing economic
circumstances relates to the composition of the assets for these plans (see
Change in Investment
Strategy below).
The
following table illustrates the adjustments made to the relevant financial
statement line items for the 2007 periods.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
|
June
30, 2007
|
|
|
|
As
|
|
|
Effect
of
|
|
|
As
|
|
|
As
|
|
|
Effect
of
|
|
|
As
|
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
Selling,
general and administrative expenses
|
|
$ |
95.2 |
|
|
$ |
(10.4 |
) |
|
$ |
84.8 |
|
|
$ |
188.9 |
|
|
$ |
(20.7 |
) |
|
$ |
168.2 |
|
Profit
from operations
|
|
|
74.5 |
|
|
|
10.4 |
|
|
|
84.9 |
|
|
|
134.4 |
|
|
|
20.7 |
|
|
|
155.1 |
|
(Benefit)
provision for income taxes
|
|
|
(11.5 |
) |
|
|
3.6 |
|
|
|
(7.9 |
) |
|
|
(48.1 |
) |
|
|
7.1 |
|
|
|
(41.0 |
) |
Net
income from continuing operations
|
|
|
34.5 |
|
|
|
6.8 |
|
|
|
41.3 |
|
|
|
108.0 |
|
|
|
13.6 |
|
|
|
121.6 |
|
Net
income
|
|
|
34.5 |
|
|
|
6.8 |
|
|
|
41.3 |
|
|
|
108.0 |
|
|
|
13.6 |
|
|
|
121.6 |
|
Basic
earnings per share
|
|
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.36 |
|
|
$ |
0.95 |
|
|
$ |
0.11 |
|
|
$ |
1.06 |
|
Diluted
earnings per share
|
|
$ |
0.30 |
|
|
$ |
0.06 |
|
|
$ |
0.36 |
|
|
$ |
0.94 |
|
|
$ |
0.12 |
|
|
$ |
1.06 |
|
The
following table illustrates the effect of the change on the Company’s results of
operations and the relevant financial statement line items for the 2008
periods.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2008
|
|
|
|
Previous
|
|
|
Effect
of
|
|
|
Current
|
|
|
Previous
|
|
|
Effect
of
|
|
|
Current
|
|
|
|
Method
|
|
|
Change
|
|
|
Method
|
|
|
Method
|
|
|
Change
|
|
|
Method
|
|
Selling,
general and administrative expenses
|
|
$ |
109.5 |
|
|
$ |
(10.9 |
) |
|
$ |
98.6 |
|
|
$ |
215.1 |
|
|
$ |
(21.9 |
) |
|
$ |
193.2 |
|
Profit
from operations
|
|
|
64.3 |
|
|
|
10.9 |
|
|
|
75.2 |
|
|
|
120.7 |
|
|
|
21.9 |
|
|
|
142.6 |
|
Provision
for income taxes
|
|
|
8.8 |
|
|
|
3.8 |
|
|
|
12.6 |
|
|
|
16.5 |
|
|
|
7.6 |
|
|
|
24.1 |
|
Net
income from continuing operations
|
|
|
28.0 |
|
|
|
7.1 |
|
|
|
35.1 |
|
|
|
53.2 |
|
|
|
14.3 |
|
|
|
67.5 |
|
Net
income
|
|
|
53.9 |
|
|
|
7.1 |
|
|
|
61.0 |
|
|
|
79.1 |
|
|
|
14.3 |
|
|
|
93.4 |
|
Basic
earnings per share – continuing operations
|
|
$ |
0.26 |
|
|
$ |
0.06 |
|
|
$ |
0.32 |
|
|
$ |
0.48 |
|
|
$ |
0.13 |
|
|
$ |
0.61 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
0.25 |
|
|
$ |
0.06 |
|
|
$ |
0.31 |
|
|
$ |
0.47 |
|
|
$ |
0.13 |
|
|
$ |
0.60 |
|
Basic
earnings per share – net income
|
|
$ |
0.49 |
|
|
$ |
0.06 |
|
|
$ |
0.55 |
|
|
$ |
0.71 |
|
|
$ |
0.13 |
|
|
$ |
0.84 |
|
Diluted
earnings per share – net income
|
|
$ |
0.48 |
|
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
0.70 |
|
|
$ |
0.13 |
|
|
$ |
0.83 |
|
Change
in Investment Strategy
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 implemented a liability-driven
investing (“LDI”) 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 85% of the
plan’s assets have now been invested in interest rate-sensitive debt
instruments. This investment strategy is designed 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 U.K. pension plan during the first quarter of 2007. The
strategy for the U.S. qualified plan was effectuated through a 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 to 15% of total assets. The shift in assets under the LDI
strategy was completed during the fourth quarter of 2007.
Periodic
Disclosures of Benefit Cost
The
following tables set forth the consolidated net periodic pension and other
postretirement benefit costs as recognized for the three and six months ended
June 30, 2008 and 2007:
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
As
Adjusted
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3.9 |
|
|
$ |
4.3 |
|
|
$ |
7.9 |
|
|
$ |
8.8 |
|
Interest
cost
|
|
|
27.1 |
|
|
|
25.8 |
|
|
|
54.1 |
|
|
|
51.7 |
|
Expected
return on plan assets
|
|
|
(27.9 |
) |
|
|
(31.4 |
) |
|
|
(55.8 |
) |
|
|
(62.6 |
) |
Amortization
and deferrals
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(1.3 |
) |
|
|
(1.3 |
) |
Actuarial
losses recognized
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
2.0 |
|
|
|
2.7 |
|
|
|
$ |
3.5 |
|
|
$ |
(0.7 |
) |
|
$ |
6.9 |
|
|
$ |
(0.7 |
) |
Plan
Contributions
There
were no voluntary contributions to the Company’s pension plans during the three
and six months ended June 30, 2008. However, the Company expects to
provide voluntary funding of approximately $22 million for its U.S. qualified
plan and approximately $8 million in required and voluntary contributions for
all other international plans during 2008.
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
Interest
cost
|
|
|
2.0 |
|
|
|
1.9 |
|
|
|
3.9 |
|
|
|
4.1 |
|
Amortization
and deferrals
|
|
|
(1.8 |
) |
|
|
(2.0 |
) |
|
|
(3.5 |
) |
|
|
(3.9 |
) |
Actuarial
losses recognized
|
|
|
2.5 |
|
|
|
2.1 |
|
|
|
5.0 |
|
|
|
4.3 |
|
|
|
$ |
2.8 |
|
|
$ |
2.1 |
|
|
$ |
5.6 |
|
|
$ |
4.7 |
|
|
Asset
Retirement Obligations and Environmental
Contingencies
|
The
following table provides a reconciliation of the changes in the asset retirement
obligations (“AROs”) and environmental contingencies during the six months ended
June 30, 2008:
|
|
Active
Sites
|
|
|
Inactive
Sites
|
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$ |
10.8 |
|
|
$ |
67.5 |
|
|
$ |
78.3 |
|
Settlement
payments, net of cost recoveries
|
|
|
(0.5 |
) |
|
|
(2.6 |
) |
|
|
(3.1 |
) |
Changes
in estimated obligations and accretion
|
|
|
0.5 |
|
|
|
4.9 |
|
|
|
5.4 |
|
Foreign
currency translation and other changes
|
|
|
(1.3 |
) |
|
|
1.8 |
|
|
|
0.5 |
|
Balance
at June 30, 2008
|
|
$ |
9.5 |
|
|
$ |
71.6 |
|
|
$ |
81.1 |
|
(1)
Includes $3.6 million attributable to a revision of estimated remediation
costs for an inactive portion of the Company’s Brunswick, Georgia manufacturing
facility associated with a previously divested
business.
|
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 acquisition, disposition, and purchase or sale of Company
assets and businesses, the Company has indemnified other parties against certain
liabilities that may arise in connection with the relevant transactions and
business activities. The terms of these indemnifications typically pertain
to environmental, tax, employee and/or product related matters, as well as
matters concerning the ownership of relevant assets, the power and corporate
authority to enter into the transaction, the satisfaction of liabilities not
assumed by the buyer, and obtaining consents. 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
could be required to indemnify, defend, and/or hold the buyer harmless.
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, 2008, all of which are
attributable to business disposition transactions, was $1.5
million.
In
addition, and as noted in greater detail in the “Litigation” section and
“Asbestos” subsection of Note 12 to the Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007, 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 from such insurance
carriers, the Company has released and agreed to indemnify such insurers from
claims asserted under their cancelled policies. Finally, 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 $45.5 million of various outstanding obligations
under agreements with third parties related to consolidated subsidiaries and
affiliates as of June 30, 2008. The outstanding balance reflects
guarantees of debt for terms of varying length as well as a secured guarantee
related to a foreign-based pension plan with an indefinite
term. 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, results of operations and cash flows. Any failure by
the Company to adequately comply with such laws and regulations could subject
the Company to significant future liabilities. The Company has
established procedures for identifying environmental issues at its plant
sites. In addition to environmental audit programs, the Company has
environmental professionals who are familiar with environmental laws and
regulations and act as a resource for identifying environmental
issues.
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 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
following disclosure provides new and updated information regarding certain
matters. This information should be read in conjunction with the
disclosure appearing under the “Environmental” section heading set forth in Note
12 to the Consolidated Financial Statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”) and
Note 7 to the Consolidated Financial Statements included in the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (“2008 First
Quarter Form 10-Q”). As stated in the 2007 Form 10-K and the 2008
First Quarter Form 10-Q, while the Company is involved in numerous environmental
matters, only certain matters are described therein and herein because they are
currently viewed by management as potentially material to the Company’s
consolidated financial position, results of operations and cash
flows. There are no changes to the 2007 Form 10-K
and the 2008 First Quarter Form 10-Q disclosures except as noted
below:
United States of America v.
Vertac Chemical Corporation, et al., No. 4:80CV00109 (United States
District Court, Eastern District of Arkansas, Western Division). The
Company is continuing to review the additional response costs and interest
claimed by the United States and is engaged in settlement discussions with the
United States. As of June 30, 2008, the Company has accrued $20.5
million, including interest, representing the Company’s share of the 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.
Environmental
Compliance. In April 2005, the Company’s Franklin, Virginia
manufacturing facilities were subject to a multi-media environmental compliance
investigation by the EPA and the Virginia Department of Environmental Quality
(“VADEQ”), and in April 2007, the Company’s Hopewell, Virginia manufacturing
facilities were subject to a Clean Air Act compliance investigation by EPA and
the VADEQ. In April 2008, the results of both investigations were
provided to the Company. The results of both investigations uncovered
areas of potential noncompliance with various environmental
requirements. The Company is currently evaluating these
results. To the best of the Company’s knowledge, no other action has
yet been initiated by federal and/or Virginia state authorities. At
this time, the Company cannot reasonably estimate its potential liability, if
any, with respect to these matters and, accordingly, has not included these
matters 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 AROs (see Note 7), the Vertac site, and
other locations where the Company may have a liability, is approximately $101.6
million as of June 30, 2008.
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, including environmental litigation (see 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 in the 2007 Form 10-K, the 2008 First
Quarter Form 10Q, and this Form 10-Q 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, however the impact of such settlement or resolution would be
reflected in the financial statements included in the periodic report following
such settlement or resolution.
The
following disclosure provides new and updated information regarding certain
matters. This information should be read in conjunction with the
disclosures appearing under the “Litigation” section heading set forth in the
2007 Form 10-K and the 2008 First Quarter Form 10-Q. There are no
changes to those disclosures except as noted below:
Asbestos
As of
June 30, 2008, there were approximately 25,760 unresolved claims, of which
approximately 902 were premises claims and the rest were products claims.
There were also approximately 1,759 unpaid claims which have been settled or are
subject to the terms of a settlement agreement. Between January 1,
2008 and June 30, 2008, the Company received approximately 1,146 new
claims. During that same period, the Company spent a net amount of
$14.8 million to resolve and defend asbestos matters, including $10.7 million
directly related to settlement payments and $4.1 million for defense
costs.
As of
June 30, 2008, all of the cash recovered and all of the monies placed into trust
from the settlements with certain of the Company’s insurance carriers have been
used by the Company with respect to its asbestos-related liabilities or for
other corporate purposes, except for approximately $9.6 million remaining in
trust as of June 30, 2008. As previously described in the 2007 Form
10-K and the 2008 First Quarter Form 10-Q, the Company anticipates that the
monies remaining in trust will be exhausted during 2008, after which time the
Company will be required to fund defense costs and settlement payments for its
asbestos-related liabilities using cash from operations or other sources until
such time as the partial reimbursement obligations under the Future Coverage
Agreement, as defined in the 2007 Form 10-K, are triggered, which obligations
are not expected to be triggered unless and until defense costs and settlement
payments for qualifying asbestos products claims paid by the Company subsequent
to the October 13, 2004 effective date of that agreement aggregate to
approximately $330 million to $370 million. As of June 30, 2008,
defense costs and settlement payments for qualifying asbestos products claims of
approximately $117 million have been credited towards that range.
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, 2008.
|
|
Balance
January 1, 2008
|
|
|
Interest
Income/
Accrual
adjustments, net
|
|
|
Insurance
Recovered/
Liabilities
Settled
|
|
|
Accretion/
Reclassifi-
cation
|
|
|
Balance
June
30,
2008
|
|
Asbestos-related
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable – current
|
|
$ |
4.0 |
|
|
$ |
— |
|
|
$ |
(4.0 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
receivable – non-current
|
|
|
16.8 |
|
|
|
(0.4 |
) |
|
|
(16.4 |
) |
|
|
— |
|
|
|
— |
|
Restricted
cash in trust
|
|
|
7.3 |
|
|
|
— |
|
|
|
2.3 |
|
|
|
— |
|
|
|
9.6 |
|
Noncurrent
asbestos-related assets
|
|
|
24.1 |
|
|
|
(0.4 |
) |
|
|
(14.1 |
) |
|
|
— |
|
|
|
9.6 |
|
Total
asbestos-related assets
|
|
$ |
28.1 |
|
|
$ |
(0.4 |
) |
|
$ |
(18.1 |
) |
|
$ |
— |
|
|
$ |
9.6 |
|
Asbestos-related
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
reserve for claims
|
|
$ |
28.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28.0 |
|
Noncurrent
reserve for claims
|
|
|
227.0 |
|
|
|
— |
|
|
|
(10.7 |
) |
|
|
— |
|
|
|
216.3 |
|
Total
asbestos-related liabilities
|
|
$ |
255.0 |
|
|
$ |
— |
|
|
$ |
(10.7 |
) |
|
$ |
— |
|
|
$ |
244.3 |
|
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. By Order dated April 23, 2008, the action
filed by Cytec Engineered Materials, Inc. in federal court against the Company
(Cytec Engineered
Materials, Inc. v. B.P. Amoco Polymers, Inc., et al., Case No. SACV
07-528 FMC (RNBx), U.S. District Court, Central District of California, Western
Division), was dismissed with prejudice. Cytec has appealed that
ruling to the U.S. Court of Appeals for the 9th
Circuit. Defendants also sought to have Cytec’s state court action
dismissed based on Cytec’s pleadings, but the Court denied defendants’ motions,
allowing the state court action to proceed to discovery. (Cytec
Engineered Materials, Inc. v. B.P. Amoco Polymers, Inc., et
al., Case No. BC370895, California Superior Court, Los Angeles
County).
Hercules Incorporated v.
Hexcel Corporation, Supreme Court of the State of New York, County of New
York, Index No.04/604098. The Company reached agreement with Hexcel
to dismiss all claims remaining in the lawsuit (including Hexcel’s counterclaim
for indemnification), except for Hercules’ claim for indemnification based on
the terms of the purchase and sale agreement. Hercules has sought
review of the dismissal of its indemnification claim by the New York Court of
Appeals.
Agent Orange
Litigation. Plaintiffs petitioned the U.S. Court of Appeals
for the Second Circuit for rehearing en banc of that court’s
decisions dated February 22, 2008 (Joe Isaacson, et al. v. Dow
Chemical Company, et al., Docket No. 05-1820-cv, and additional docket
numbers; J. Michael
Twinam, et. al. v. Dow Chemical Company, et al., Docket No. 05-1760-cv,
and additional docket numbers; and 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)) dismissing their
claims. Those petitions were denied by Orders dated May 7,
2008. We have been advised that plaintiffs in these actions intend to
file Petitions for Writ of Certiorari with the U.S. Supreme Court.
Other
Litigation
In
February 2008, the Final Order and Judgment became final, resolving the cases
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. As a result,
with the exception of four opt-out plaintiffs (whose claims are not viewed by
the Company as material), all plaintiffs’ claims have been
dismissed. All that remains is distribution of proceeds and various
administrative matters.
In Acevedo, et al. v. Union
Pacific Railroad Company, et al., Cause No. C-4885-99-F, 332nd
Judicial District Court, Hidalgo County, Texas (2001), Guadalupe Garza v. Allied
Chemical Corp., et al., Cause No. C-4885-99-F(10), 332nd
Judicial District Court, Hidalgo County, Texas, and related lawsuits, the trial
date for plaintiff Guadalupe Garza, which had been set for October 20, 2008, has
been set aside. Plaintiffs are seeking a new trial date for that
plaintiff, but no date has yet been set by the Court. Discovery and
motion practice are continuing.
Amounts Accrued for
Non-Asbestos Litigation
During
the period January 1, 2008 through June 30, 2008, no significant 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 insignificant. The
June 30, 2008 Consolidated Balance Sheet reflects a current liability of $2.6
million for non-asbestos and non-environmental related litigation matters,
representing management’s best estimate of the probable and reasonably estimable
losses for such matters. A separate liability is provided for the
Vertac matter on the June 30, 2008 Consolidated Balance Sheet.
A
reconciliation of common stock share activity during the six months ended June
30, 2008 is provided as follows:
|
|
Common
Stock
|
|
|
Reacquired
Stock
|
|
Balances
at January 1, 2008
|
|
|
160,004,908 |
|
|
|
46,006,780 |
|
Conversion
of debentures
|
|
|
3,354 |
|
|
|
— |
|
Exercise
of stock options
|
|
|
— |
|
|
|
(76,166 |
) |
Issuance
of stock awards, net of forfeitures
|
|
|
— |
|
|
|
(356,164 |
) |
Shares
redeemed in lieu of taxes on share-based compensation
awards
|
|
|
— |
|
|
|
115,255 |
|
Contribution
of shares to defined contribution benefit plan
|
|
|
— |
|
|
|
(10,864 |
) |
Repurchases
of common stock
|
|
|
— |
|
|
|
1,674,200 |
|
Balances
at June 30, 2008
|
|
|
160,008,262 |
|
|
|
47,353,041 |
|
10. Supplemental
Financial Statement Disclosures
|
|
June
30, 2008
|
|
|
December 31,
2007
|
|
Inventories:
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
131.0 |
|
|
$ |
125.5 |
|
Raw
materials and work-in-process
|
|
|
88.5 |
|
|
|
74.9 |
|
Supplies
|
|
|
25.1 |
|
|
|
23.6 |
|
|
|
$ |
244.6 |
|
|
$ |
224.0 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
16.6 |
|
|
$ |
16.0 |
|
Buildings
and equipment
|
|
|
1,813.5 |
|
|
|
1,726.4 |
|
Construction
in progress
|
|
|
128.4 |
|
|
|
113.7 |
|
|
|
|
1,958.5 |
|
|
|
1,856.1 |
|
Accumulated
depreciation and amortization
|
|
|
(1,259.6 |
) |
|
|
(1,196.1 |
) |
|
|
$ |
698.9 |
|
|
$ |
660.0 |
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in Cost of sales and Selling, general and administrative (“SG&A”)
expenses
|
|
$ |
18.9 |
|
|
$ |
17.6 |
|
|
$ |
37.1 |
|
|
$ |
34.4 |
|
Accelerated
depreciation included in Other operating expense, net
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
$ |
18.9 |
|
|
$ |
17.8 |
|
|
$ |
37.2 |
|
|
$ |
34.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$ |
2.7 |
|
|
$ |
1.9 |
|
|
$ |
5.3 |
|
|
$ |
3.7 |
|
Capitalized
software (normal basis) included in SG&A expenses
|
|
|
1.9 |
|
|
|
3.9 |
|
|
|
5.7 |
|
|
|
7.7 |
|
Accelerated
amortization of capitalized software included in Other operating expense,
net
|
|
|
1.2 |
|
|
|
3.4 |
|
|
|
4.6 |
|
|
|
6.9 |
|
Deferred
financing costs included in Interest and debt expense
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
$ |
5.9 |
|
|
$ |
9.6 |
|
|
$ |
15.9 |
|
|
$ |
19.1 |
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
21.3 |
|
|
$ |
20.2 |
|
|
$ |
36.4 |
|
|
$ |
33.6 |
|
Income
taxes, net of refunds received
|
|
|
6.8 |
|
|
|
(178.7 |
) |
|
|
13.7 |
|
|
|
(171.6 |
) |
11. Restructuring
Programs
Restructuring
charges are reflected as a component of Other operating expenses in the
Consolidated Statements of Operations. The restructuring liabilities
provided below are reflected in Accrued expenses on the Consolidated Balance
Sheets. A summary of the charges by program for the six months ended
June 30, 2008 and an allocation to the reporting segments as well as a
reconciliation of liabilities attributable to the Company’s restructuring
programs is provided as follows:
|
|
Severance
and Other
Exit
Costs
|
|
|
Asset
Charges
|
|
|
Total
|
|
Business
and Corporate infrastructure projects
|
|
$ |
2.7 |
|
|
$ |
5.2 |
|
|
$ |
7.9 |
|
All
other restructuring programs
|
|
|
5.3 |
|
|
|
0.1 |
|
|
|
5.4 |
|
|
|
$ |
8.0 |
|
|
$ |
5.3 |
|
|
$ |
13.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
2.2 |
|
|
$ |
— |
|
|
$ |
2.2 |
|
Aqualon
Group
|
|
|
0.4 |
|
|
|
— |
|
|
|
0.4 |
|
Corporate
|
|
|
5.4 |
|
|
|
5.3 |
|
|
|
10.7 |
|
|
|
$ |
8.0 |
|
|
$ |
5.3 |
|
|
$ |
13.3 |
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
19.1 |
|
|
$ |
10.5 |
|
Accrued
charges for severance and other exit costs
|
|
|
7.6 |
|
|
|
14.3 |
|
Cash
payments
|
|
|
(11.5 |
) |
|
|
(7.6 |
) |
Other,
including foreign currency translation
|
|
|
1.3 |
|
|
|
0.3 |
|
Balance
at end of period
|
|
$ |
16.5 |
|
|
$ |
17.5 |
|
In
addition, the Company made cash payments of $0.4 million and $0.5 million during
the six months ended June 30, 2008 and 2007, respectively, for certain exit
costs that have been paid as incurred and are not included in the reconciliation
of accrued restructuring liabilities above.
The
charges recorded during the six months ended June 30, 2008 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 specific restructuring programs. In addition,
other exit costs, including transition services, employee relocation and site
closure expenses, among others, are charged as
incurred. Approximately $1 million of additional charges for all
current restructuring programs on a combined basis are expected to be accrued
through 2009 resulting in approximately $17 million of future cash payments
primarily in 2008 and 2009 with certain amounts continuing into
2010.
Asset
charges recorded during the six months ended June 30, 2008 primarily reflect
accelerated amortization charges attributable to capitalized software
development costs associated with the Company’s information technology platform,
as well as other impairment charges for assets taken out of service in
connection with the completion of certain corporate infrastructure projects. In
connection with the substantial completion of prior restructuring programs, the
Company is currently marketing its former facilities in Jacksonville, Florida
and Pandaan, Indonesia. These facilities, with a carrying value of
$7.7 million, are reflected as assets held for sale and are included in the
caption “Other current assets” on the Consolidated Balance Sheet as of June 30,
2008.
12. Other
Operating Expense, Net
Other
operating expense, net consists of the following:
|
|
Three
Months Ended
June
30
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Severance,
restructuring and other exit costs, net
|
|
$ |
4.9 |
|
|
$ |
6.2 |
|
|
$ |
8.0 |
|
|
$ |
14.8 |
|
Accelerated
depreciation and amortization
|
|
|
1.2 |
|
|
|
3.7 |
|
|
|
4.7 |
|
|
|
7.4 |
|
Asset
retirement and environmental charges (active sites)
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Asset
impairment
|
|
|
0.6 |
|
|
|
— |
|
|
|
0.6 |
|
|
|
— |
|
Legal
settlements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
Gains
on asset dispositions, net
|
|
|
(3.1 |
) |
|
|
(4.1 |
) |
|
|
(3.3 |
) |
|
|
(4.0 |
) |
Dismantlement
costs
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
1.7 |
|
Other
miscellaneous charges, net
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
$ |
4.6 |
|
|
$ |
7.6 |
|
|
$ |
12.8 |
|
|
$ |
20.7 |
|
Other
expense, net consists of the following:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Asbestos-related
costs, net
|
|
$ |
2.0 |
|
|
$ |
2.2 |
|
|
$ |
5.0 |
|
|
$ |
4.3 |
|
Investment
dilution and loss on sale of 51% interest in FiberVisions
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Asset
retirement and environmental charges (inactive sites)
(1)
|
|
|
6.3 |
|
|
|
1.4 |
|
|
|
8.9 |
|
|
|
2.9 |
|
Litigation
settlements and accruals
|
|
|
1.0 |
|
|
|
13.8 |
|
|
|
1.8 |
|
|
|
14.5 |
|
Gains
on asset dispositions, net
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.4 |
) |
Other,
net
|
|
|
(0.9 |
) |
|
|
(1.2 |
) |
|
|
(0.4 |
) |
|
|
(2.0 |
) |
|
|
$ |
8.4 |
|
|
$ |
15.7 |
|
|
$ |
15.3 |
|
|
$ |
19.0 |
|
Benefit/Provision
for Income Taxes
For the
three and six months ended June 30, 2008, the Company recognized pretax income
of $48.2 million and $91.8 million and tax expense of $12.6 million and $24.1
million, respectively. The full year effective tax rate for 2008 is
estimated to be 27%.
The
Company recognized pretax income of $33.9 million and $82.1 million and tax
benefits of $7.9 million and $41.0 million for the three and six months ended
June 30, 2007, respectively, primarily reflecting a $47.3 million benefit
relating to the final resolution of IRS audits for the years 1993 through
2003.
There
were no significant changes in the Company’s unrecognized tax benefits during
the three and six months ended June 30, 2008.
In April
2008, the Company settled with the IRS the audit of tax years 2004 and
2005. As a result, the Company recorded a tax benefit of $0.4 million
during the three months ended June 30, 2008 and received a related refund of
$4.3 million during July 2008.
The
following table provides the weighted-average number of common shares (in
millions) used as the denominator in computing basic and diluted earnings per
share:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
number of common shares outstanding – Basic
|
|
|
111.4 |
|
|
|
114.6 |
|
|
|
111.6 |
|
|
|
114.3 |
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Share-based compensation
plans
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.5 |
|
Weighted-average
number of common shares outstanding – Diluted
|
|
|
112.1 |
|
|
|
115.3 |
|
|
|
112.2 |
|
|
|
115.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following were antidilutive and therefore excluded from the computation of
diluted earnings per share:
|
|
Options to purchase common
stock
|
|
|
1.3 |
|
|
|
1.9 |
|
|
|
1.3 |
|
|
|
1.9 |
|
Warrants to purchase common
stock
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
|
7.9 |
|
|
|
8.5 |
|
|
|
7.9 |
|
|
|
8.5 |
|
16. Reporting
Segment Information
A summary
of reporting segment data is provided below:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
310.0 |
|
|
$ |
288.3 |
|
|
$ |
612.9 |
|
|
$ |
571.5 |
|
Aqualon
Group
|
|
|
302.6 |
|
|
|
260.7 |
|
|
|
558.0 |
|
|
|
479.8 |
|
|
|
$ |
612.6 |
|
|
$ |
549.0 |
|
|
$ |
1,170.9 |
|
|
$ |
1,051.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
23.9 |
|
|
$ |
31.8 |
|
|
$ |
53.6 |
|
|
$ |
65.4 |
|
Aqualon
Group
|
|
|
56.6 |
|
|
|
62.5 |
|
|
|
104.6 |
|
|
|
114.8 |
|
Corporate
items (3)
|
|
|
(5.3 |
) |
|
|
(9.4 |
) |
|
|
(15.6 |
) |
|
|
(25.1 |
) |
|
|
$ |
75.2 |
|
|
$ |
84.9 |
|
|
$ |
142.6 |
|
|
$ |
155.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
9.6 |
|
|
$ |
10.2 |
|
|
$ |
20.3 |
|
|
$ |
20.3 |
|
Aqualon
Group
|
|
|
12.7 |
|
|
|
12.0 |
|
|
|
25.4 |
|
|
|
23.2 |
|
Corporate
items (1)(4)
|
|
|
2.5 |
|
|
|
5.2 |
|
|
|
7.4 |
|
|
|
10.5 |
|
|
|
$ |
24.8 |
|
|
$ |
27.4 |
|
|
$ |
53.1 |
|
|
$ |
54.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
4.7 |
|
|
$ |
4.3 |
|
|
$ |
9.2 |
|
|
$ |
8.7 |
|
Aqualon
Group
|
|
|
6.6 |
|
|
|
6.5 |
|
|
|
13.0 |
|
|
|
12.4 |
|
Corporate
items
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
$ |
11.4 |
|
|
$ |
11.0 |
|
|
$ |
22.5 |
|
|
$ |
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
7.5 |
|
|
$ |
10.0 |
|
|
$ |
12.6 |
|
|
$ |
15.0 |
|
Aqualon
Group
|
|
|
13.0 |
|
|
|
16.7 |
|
|
|
26.9 |
|
|
|
35.1 |
|
Corporate
items
|
|
|
2.8 |
|
|
|
2.9 |
|
|
|
5.9 |
|
|
|
3.7 |
|
|
|
$ |
23.3 |
|
|
$ |
29.6 |
|
|
$ |
45.4 |
|
|
$ |
53.8 |
|
(1)Normal
depreciation incurred by Corporate is allocated to the business segments in the
determination of Profit from operations.
(2)Profit
from operations for the three and six months ended June 30, 2007 have been
adjusted for the change in accounting for pensions (see Note
6).
(3)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.
(4)Includes
accelerated depreciation and amortization that has not been allocated to the
business segments.
17. Risk
Management Activities, Including Derivatives, and Fair Value
Measurements
Risk Management
Activities
The
Company selectively
uses foreign currency forward contracts to offset the effects of foreign
currency exchange rate changes on reported earnings, cash flow and net asset
positions. The terms of these derivative contracts are generally for 3 months
or less. Changes in the fair value of these derivative contracts are recorded in earnings to
offset the impact of foreign currency transaction gains and losses attributable
to certain third party and intercompany financial assets and liabilities with
similar terms. The net gains and losses attributable to these
activities are included in Other expense, net.
The Company also uses
cross-currency interest rate swaps (the “Swaps”) and has formally designated
them as a hedge of the Company’s foreign currency exposure associated with its
net investment in certain foreign operations that utilize the Euro as their
functional currency. The Swaps require the Company to pay EURIBOR +
1.59% and receive LIBOR + 1.50%. The benchmark interest rates are
reset on a quarterly basis. The Swaps were entered into
during the first quarter of 2006 and have a term of five
years. Changes in the fair value of the Swaps representing the
effective portion of the hedge are recorded in Other comprehensive income
(“OCI”)
as an offset to
the foreign currency translation associated with the underlying net
investment. The ineffective portion of
the hedge, if any, is recorded as an adjustment to Interest and debt expense,
net. The net interest payments or receipts from the Swaps are also
recorded as an adjustment to Interest and debt expense, net.
The Company had the following
derivative financial instrument assets and (liabilities) outstanding as
of:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Notional
|
|
|
Fair
Value
|
|
|
Notional
|
|
|
Fair
Value
|
|
Foreign
exchange contracts(1)
|
|
$ |
54.9 |
|
|
$ |
0.7 |
|
|
$ |
35.6 |
|
|
$ |
0.3 |
|
Cross
currency interest rate swaps(2)
|
|
|
(500.0 |
) |
|
|
(160.9 |
) |
|
|
(500.0 |
) |
|
|
(112.1 |
) |
(1) These
derivative financial assets are reflected in Deferred charges and other assets
on the Consolidated Balance Sheet.
(2) These
derivative financial liabilities are reflected in Deferred credits and other
liabilities on the Consolidated Balance Sheet.
The Company recognized the
following gains and losses attributable to its derivative financial instruments
during the following periods:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Foreign
exchange contracts, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
(losses) recognized in Other expense, net
|
|
$ |
0.9 |
|
|
$ |
— |
|
|
$ |
1.1 |
|
|
$ |
(0.4 |
) |
Cross
currency interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
(losses) recognized in OCI (1)
|
|
|
2.4 |
|
|
|
(4.4 |
) |
|
|
(48.8 |
) |
|
|
(11.5 |
) |
(Losses)
gains recognized in Interest and debt expense
|
|
|
(4.7 |
) |
|
|
0.8 |
|
|
|
(7.3 |
) |
|
|
2.0 |
|
(1) These
gains and losses are fully offset by foreign currency translation gains that are
also recognized in OCI.
Fair
Value Measurements
The
Company recognizes its derivative financial instruments at their fair
values. The fair values are determined based on the application of
valuation techniques contemplated within SFAS 157, which specifies a hierarchy
of inputs to valuation techniques used to measure fair value. The
levels of the hierarchy are broadly defined as follows: Level 1 –
quoted prices for identical assets or liabilities, Level 2 – quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and model-based
valuations in which significant inputs are corroborated by observable market
data, and Level 3 – valuation techniques in which significant inputs are
unobservable. The fair values of the Company’s derivative financial
instruments disclosed above are primarily derived from quotes for
internationally-recognized foreign currency exchange rates. The
Company has determined such inputs to be a Level 2 measurement as defined
previously.
On July
11, 2008, the Company announced that it had entered into a definitive merger
agreement (the “Agreement”) with Ashland Inc. (“Ashland”) under which Ashland
would acquire all of the outstanding shares of the Company for $18.60 per share
in cash and 0.093 of a share of Ashland common stock for each share of the
Company’s common stock. The merger is conditioned upon, among other
things, the approval of the Company’s stockholders, the receipt of regulatory
approvals and other closing conditions. Assuming the satisfaction of
these conditions, the transaction is expected to close during the fourth quarter
of 2008.
Under the
terms of the Agreement, the Company would be required to pay Ashland a fee of
$77.5 million under certain circumstances including if the Company terminates
the merger agreement to accept a superior offer, and Ashland would be required
to pay the Company a fee in the same amount if the transaction is not completed
due to failure to obtain financing at the time the conditions to the merger have
been satisfied. In addition, the Agreement limits certain activities of the
Company that are considered as outside the ordinary course of
business. These activities include certain limitations on (1) the
declaration of common stock dividends inconsistent with the Company’s past
practice, (2) the issuance and repurchase of shares of common stock, (3) changes
to the Company’s charter and bylaws, (4) capital expenditures, (5) acquisitions
and investments, (6) the ability to incur additional indebtedness and (7) the
settlement of certain claims, among others. The Agreement also places
certain restrictions on Ashland during the period prior to the transaction
closing. The Company filed the Agreement with the Securities and
Exchange Commission as an Exhibit to a Current Report on Form 8-K on July 14,
2008. There can be no assurance that the merger will be
completed.
|
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 adjusted to conform to the current period
presentation.
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended June 30, 2008
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
159.1 |
|
|
$ |
139.2 |
|
|
$ |
368.4 |
|
|
$ |
(54.1 |
) |
|
$ |
612.6 |
|
Cost
of sales
|
|
|
116.9 |
|
|
|
102.4 |
|
|
|
255.2 |
|
|
|
(54.4 |
) |
|
|
420.1 |
|
Selling,
general and administrative expenses
|
|
|
26.4 |
|
|
|
26.4 |
|
|
|
45.8 |
|
|
|
— |
|
|
|
98.6 |
|
Research
and development
|
|
|
4.6 |
|
|
|
5.2 |
|
|
|
1.6 |
|
|
|
— |
|
|
|
11.4 |
|
Intangible
asset amortization
|
|
|
1.6 |
|
|
|
0.2 |
|
|
|
1.1 |
|
|
|
(0.2 |
) |
|
|
2.7 |
|
Other
operating expense, net
|
|
|
2.1 |
|
|
|
(1.4 |
) |
|
|
3.9 |
|
|
|
— |
|
|
|
4.6 |
|
Profit
from operations
|
|
|
7.5 |
|
|
|
6.4 |
|
|
|
60.8 |
|
|
|
0.5 |
|
|
|
75.2 |
|
Interest
and debt expense (income), net
|
|
|
25.8 |
|
|
|
(8.7 |
) |
|
|
1.2 |
|
|
|
— |
|
|
|
18.3 |
|
Vertac
response costs and litigation charges
|
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
Other
expense (income), net
|
|
|
8.7 |
|
|
|
0.6 |
|
|
|
(1.1 |
) |
|
|
0.2 |
|
|
|
8.4 |
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
|
|
(27.3 |
) |
|
|
14.5 |
|
|
|
60.7 |
|
|
|
0.3 |
|
|
|
48.2 |
|
Provision
(benefit) for income taxes
|
|
|
(5.3 |
) |
|
|
5.5 |
|
|
|
12.2 |
|
|
|
0.2 |
|
|
|
12.6 |
|
Income
(loss) before minority interests and equity (loss) income
|
|
|
(22.0 |
) |
|
|
9.0 |
|
|
|
48.5 |
|
|
|
0.1 |
|
|
|
35.6 |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Equity
(loss) income of affiliated companies
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
(0.2 |
) |
Equity
income from consolidated subsidiaries
|
|
|
57.1 |
|
|
|
— |
|
|
|
— |
|
|
|
(57.1 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
35.1 |
|
|
|
8.8 |
|
|
|
48.5 |
|
|
|
(57.3 |
) |
|
|
35.1 |
|
Net
income from discontinued operations, net of tax
|
|
|
25.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25.9 |
|
Net
income
|
|
$ |
61.0 |
|
|
$ |
8.8 |
|
|
$ |
48.5 |
|
|
$ |
(57.3 |
) |
|
$ |
61.0 |
|
Condensed
Consolidating Statement of Operations
|
|
Six
Months Ended June 30, 2008
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
318.2 |
|
|
$ |
268.4 |
|
|
$ |
686.5 |
|
|
$ |
(102.2 |
) |
|
$ |
1,170.9 |
|
Cost
of sales
|
|
|
232.4 |
|
|
|
194.8 |
|
|
|
469.8 |
|
|
|
(102.5 |
) |
|
|
794.5 |
|
Selling,
general and administrative expenses
|
|
|
50.8 |
|
|
|
55.6 |
|
|
|
86.8 |
|
|
|
— |
|
|
|
193.2 |
|
Research
and development
|
|
|
9.1 |
|
|
|
10.3 |
|
|
|
3.1 |
|
|
|
— |
|
|
|
22.5 |
|
Intangible
asset amortization
|
|
|
3.2 |
|
|
|
0.4 |
|
|
|
2.1 |
|
|
|
(0.4 |
) |
|
|
5.3 |
|
Other
operating expense (income), net
|
|
|
6.9 |
|
|
|
(0.5 |
) |
|
|
6.4 |
|
|
|
— |
|
|
|
12.8 |
|
Profit
from operations
|
|
|
15.8 |
|
|
|
7.8 |
|
|
|
118.3 |
|
|
|
0.7 |
|
|
|
142.6 |
|
Interest
and debt expense (income), net
|
|
|
56.2 |
|
|
|
(23.3 |
) |
|
|
2.1 |
|
|
|
— |
|
|
|
35.0 |
|
Vertac
response costs and litigation charges
|
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.5 |
|
Other
expense (income), net
|
|
|
15.3 |
|
|
|
1.2 |
|
|
|
(1.6 |
) |
|
|
0.4 |
|
|
|
15.3 |
|
Income
(loss) before income taxes, minority interests and equity
loss
|
|
|
(56.2 |
) |
|
|
29.9 |
|
|
|
117.8 |
|
|
|
0.3 |
|
|
|
91.8 |
|
Provision
(benefit) for income taxes
|
|
|
(10.0 |
) |
|
|
11.0 |
|
|
|
23.0 |
|
|
|
0.1 |
|
|
|
24.1 |
|
Income
(loss) before minority interests and equity loss
|
|
|
(46.2 |
) |
|
|
18.9 |
|
|
|
94.8 |
|
|
|
0.2 |
|
|
|
67.7 |
|
Minority
interests in losses of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
|
— |
|
|
|
0.9 |
|
Equity
loss of affiliated companies
|
|
|
— |
|
|
|
(1.1 |
) |
|
|
(0.9 |
) |
|
|
0.9 |
|
|
|
(1.1 |
) |
Equity
income from consolidated subsidiaries
|
|
|
113.7 |
|
|
|
— |
|
|
|
— |
|
|
|
(113.7 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
67.5 |
|
|
|
17.8 |
|
|
|
94.8 |
|
|
|
(112.6 |
) |
|
|
67.5 |
|
Net
income from discontinued operations, net of tax
|
|
|
25.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25.9 |
|
Net
income
|
|
$ |
93.4 |
|
|
$ |
17.8 |
|
|
$ |
94.8 |
|
|
$ |
(112.6 |
) |
|
$ |
93.4 |
|
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
|
|
|
15.7 |
|
|
|
31.0 |
|
|
|
38.1 |
|
|
|
— |
|
|
|
84.8 |
|
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
|
|
|
14.1 |
|
|
|
(2.7 |
) |
|
|
73.0 |
|
|
|
0.5 |
|
|
|
84.9 |
|
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
|
|
|
(65.3 |
) |
|
|
26.8 |
|
|
|
72.1 |
|
|
|
0.3 |
|
|
|
33.9 |
|
(Benefit)
provision for income taxes
|
|
|
(30.3 |
) |
|
|
9.1 |
|
|
|
13.2 |
|
|
|
0.1 |
|
|
|
(7.9 |
) |
Income
(loss) before minority interests and equity (loss) income
|
|
|
(35.0 |
) |
|
|
17.7 |
|
|
|
58.9 |
|
|
|
0.2 |
|
|
|
41.8 |
|
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 from consolidated subsidiaries
|
|
|
76.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(76.3 |
) |
|
|
— |
|
Net
income
|
|
$ |
41.3 |
|
|
$ |
17.5 |
|
|
$ |
59.2 |
|
|
$ |
(76.7 |
) |
|
$ |
41.3 |
|
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
|
|
|
31.9 |
|
|
|
63.2 |
|
|
|
73.1 |
|
|
|
— |
|
|
|
168.2 |
|
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
|
|
|
26.3 |
|
|
|
(6.6 |
) |
|
|
135.0 |
|
|
|
0.4 |
|
|
|
155.1 |
|
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
|
|
|
(101.8 |
) |
|
|
50.9 |
|
|
|
132.6 |
|
|
|
0.4 |
|
|
|
82.1 |
|
(Benefit)
provision for income taxes
|
|
|
(85.8 |
) |
|
|
17.9 |
|
|
|
26.7 |
|
|
|
0.2 |
|
|
|
(41.0 |
) |
Income
(loss) before minority interests and equity (loss) income
|
|
|
(16.0 |
) |
|
|
33.0 |
|
|
|
105.9 |
|
|
|
0.2 |
|
|
|
123.1 |
|
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 from consolidated subsidiaries
|
|
|
137.6 |
|
|
|
— |
|
|
|
— |
|
|
|
(137.6 |
) |
|
|
— |
|
Net
income
|
|
$ |
121.6 |
|
|
$ |
32.5 |
|
|
$ |
105.9 |
|
|
$ |
(138.4 |
) |
|
$ |
121.6 |
|
Condensed
Consolidating Balance Sheet
|
|
As
of June 30, 2008
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminations
and
|
|
|
|
|
Assets
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
11.0 |
|
|
$ |
1.5 |
|
|
$ |
94.1 |
|
|
$ |
— |
|
|
$ |
106.6 |
|
Accounts
receivable, net
|
|
|
71.8 |
|
|
|
65.9 |
|
|
|
298.1 |
|
|
|
— |
|
|
|
435.8 |
|
Intercompany
receivables (payables)
|
|
|
69.4 |
|
|
|
13.9 |
|
|
|
(1.7 |
) |
|
|
(81.6 |
) |
|
|
— |
|
Inventories
|
|
|
58.3 |
|
|
|
70.4 |
|
|
|
115.2 |
|
|
|
0.7 |
|
|
|
244.6 |
|
Deferred
income taxes
|
|
|
23.0 |
|
|
|
3.6 |
|
|
|
7.5 |
|
|
|
— |
|
|
|
34.1 |
|
Income
taxes receivable
|
|
|
89.2 |
|
|
|
— |
|
|
|
— |
|
|
|
(64.6 |
) |
|
|
24.6 |
|
Other
current assets
|
|
|
19.7 |
|
|
|
4.8 |
|
|
|
21.8 |
|
|
|
— |
|
|
|
46.3 |
|
Total
current assets
|
|
|
342.4 |
|
|
|
160.1 |
|
|
|
535.0 |
|
|
|
(145.5 |
) |
|
|
892.0 |
|
Property,
plant and equipment, net
|
|
|
131.1 |
|
|
|
158.1 |
|
|
|
409.7 |
|
|
|
— |
|
|
|
698.9 |
|
Investments
in subsidiaries and advances, net
|
|
|
1,773.6 |
|
|
|
80.2 |
|
|
|
— |
|
|
|
(1,853.8 |
) |
|
|
— |
|
Intangible
assets, net
|
|
|
131.0 |
|
|
|
1.8 |
|
|
|
24.9 |
|
|
|
— |
|
|
|
157.7 |
|
Goodwill
|
|
|
59.3 |
|
|
|
39.7 |
|
|
|
452.9 |
|
|
|
— |
|
|
|
551.9 |
|
Deferred
income taxes
|
|
|
364.3 |
|
|
|
— |
|
|
|
12.3 |
|
|
|
(6.1 |
) |
|
|
370.5 |
|
Asbestos-related
assets
|
|
|
9.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9.6 |
|
Deferred
charges and other assets
|
|
|
57.4 |
|
|
|
24.8 |
|
|
|
27.9 |
|
|
|
— |
|
|
|
110.1 |
|
Total
assets
|
|
$ |
2,868.7 |
|
|
$ |
464.7 |
|
|
$ |
1,462.7 |
|
|
$ |
(2,005.4 |
) |
|
$ |
2,790.7 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
61.1 |
|
|
$ |
43.5 |
|
|
$ |
131.7 |
|
|
$ |
— |
|
|
$ |
236.3 |
|
Intercompany
payables
|
|
|
2.1 |
|
|
|
48.3 |
|
|
|
31.2 |
|
|
|
(81.6 |
) |
|
|
— |
|
Asbestos-related
liabilities
|
|
|
28.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28.0 |
|
Current
debt obligations
|
|
|
4.0 |
|
|
|
— |
|
|
|
50.9 |
|
|
|
— |
|
|
|
54.9 |
|
Vertac
obligations
|
|
|
20.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20.5 |
|
Accrued
expenses
|
|
|
101.1 |
|
|
|
20.2 |
|
|
|
78.9 |
|
|
|
0.3 |
|
|
|
200.5 |
|
Income
taxes payable
|
|
|
— |
|
|
|
72.2 |
|
|
|
9.4 |
|
|
|
(64.6 |
) |
|
|
17.0 |
|
Deferred income
taxes
|
|
|
— |
|
|
|
— |
|
|
|
8.8 |
|
|
|
— |
|
|
|
8.8 |
|
Total
current liabilities
|
|
|
216.8 |
|
|
|
184.2 |
|
|
|
310.9 |
|
|
|
(145.9 |
) |
|
|
566.0 |
|
Long-term
debt
|
|
|
738.7 |
|
|
|
— |
|
|
|
23.1 |
|
|
|
— |
|
|
|
761.8 |
|
Deferred
income taxes
|
|
|
— |
|
|
|
6.3 |
|
|
|
78.5 |
|
|
|
(6.1 |
) |
|
|
78.7 |
|
Pension
obligations
|
|
|
109.6 |
|
|
|
— |
|
|
|
53.4 |
|
|
|
— |
|
|
|
163.0 |
|
Other
postretirement benefit obligations
|
|
|
115.2 |
|
|
|
— |
|
|
|
3.2 |
|
|
|
— |
|
|
|
118.4 |
|
Deferred
credits and other liabilities
|
|
|
271.0 |
|
|
|
15.8 |
|
|
|
19.3 |
|
|
|
— |
|
|
|
306.1 |
|
Asbestos-related
liabilities
|
|
|
216.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
216.3 |
|
Intercompany
notes payable (receivable)
|
|
|
641.8 |
|
|
|
(771.0 |
) |
|
|
129.2 |
|
|
|
— |
|
|
|
— |
|
Minority
interests
|
|
|
— |
|
|
|
— |
|
|
|
21.1 |
|
|
|
— |
|
|
|
21.1 |
|
Total
stockholders' equity
|
|
|
559.3 |
|
|
|
1,029.4 |
|
|
|
824.0 |
|
|
|
(1,853.4 |
) |
|
|
559.3 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,868.7 |
|
|
$ |
464.7 |
|
|
$ |
1,462.7 |
|
|
$ |
(2,005.4 |
) |
|
$ |
2,790.7 |
|
Condensed
Consolidating Statement of Cash Flows
|
|
Six
Months Ended June 30, 2008
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
43.5 |
|
|
$ |
63.8 |
|
|
$ |
74.3 |
|
|
$ |
(113.7 |
) |
|
$ |
67.9 |
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(10.8 |
) |
|
|
(10.1 |
) |
|
|
(24.5 |
) |
|
|
— |
|
|
|
(45.4 |
) |
Acquisitions and investments,
net
|
|
|
— |
|
|
|
(1.5 |
) |
|
|
(7.5 |
) |
|
|
— |
|
|
|
(9.0 |
) |
Proceeds
of asset disposals, net of transaction
|
|
|
2.9 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
3.0 |
|
Net cash used in investing
activities
|
|
|
(7.9 |
) |
|
|
(11.6 |
) |
|
|
(31.9 |
) |
|
|
— |
|
|
|
(51.4 |
) |
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
payments
|
|
|
(2.0 |
) |
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(2.3 |
) |
Change in short-term
debt
|
|
|
— |
|
|
|
— |
|
|
|
16.4 |
|
|
|
— |
|
|
|
16.4 |
|
Change
in intercompany advances
|
|
|
(3.0 |
) |
|
|
(52.2 |
) |
|
|
(40.5 |
) |
|
|
95.7 |
|
|
|
— |
|
Repurchase
of common stock
|
|
|
(37.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37.3 |
) |
Dividends
paid
|
|
|
(10.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10.9 |
) |
Intercompany dividends
paid
|
|
|
— |
|
|
|
— |
|
|
|
(18.0 |
) |
|
|
18.0 |
|
|
|
— |
|
Proceeds from the exercise of
stock options
|
|
|
0.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
Other, net
|
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
Net
cash used in financing activities
|
|
|
(51.5 |
) |
|
|
(52.2 |
) |
|
|
(42.4 |
) |
|
|
113.7 |
|
|
|
(32.4 |
) |
Effect of exchange rate
changes on cash
|
|
|
— |
|
|
|
— |
|
|
|
6.0 |
|
|
|
— |
|
|
|
6.0 |
|
Net (decrease) increase in
cash and cash equivalents
|
|
|
(15.9 |
) |
|
|
— |
|
|
|
6.0 |
|
|
|
— |
|
|
|
(9.9 |
) |
Cash and cash equivalents -
beginning of period
|
|
|
26.9 |
|
|
|
1.5 |
|
|
|
88.1 |
|
|
|
— |
|
|
|
116.5 |
|
Cash and cash equivalents -
end of period
|
|
$ |
11.0 |
|
|
$ |
1.5 |
|
|
$ |
94.1 |
|
|
$ |
— |
|
|
$ |
106.6 |
|
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
Flows 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
Flows 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 |
|
Intercompany 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 |
|
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. The words or phrases "will likely result,"
"should," "are expected to," "will continue," "is anticipated," "expect,"
"estimate," "project" or similar expressions are among those which identify
forward-looking statements. 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: the possibility that the merger with Ashland Inc.
(“Ashland”) may not be completed, including as a result of failure to obtain the
approval of the Company’s stockholders, the possibility that financing may not
be available to Ashland on the terms committed, other risks that are
described in filings made by the Company with the Securities and Exchange
Commission in connection with the proposed transaction, the ability to generate
cash, changes resulting from ongoing reviews of tax liabilities, ability to
raise capital, ability to refinance, ability to execute productivity
improvements and reduce costs, ability to improve margins, the success of
outsourcing initiatives, ability to identify, execute and integrate
acquisitions, ability to execute divestitures, ability to complete transactions,
ability to increase prices, business climate, business performance, changes in
tax laws or regulations and related liabilities, changes in tax rates, economic
and competitive uncertainties, higher raw material, manufacturing, freight and
utility costs, ability to obtain raw materials, reduced level of customer
orders, changes in strategies, risks in developing new products and
technologies, risks in developing new market opportunities or expanding
capacity, environmental and safety regulations and clean-up costs, the impact of
adverse events relating to the operation of the Company's facilities and to the
transportation and storage of hazardous materials (including equipment
malfunction, explosions, fires, spills, and the effects of severe weather
conditions), foreign exchange rates, asset dispositions, the impact of changes
in the value of pension fund assets and liabilities, changes in generally
accepted accounting principles, adverse legal and regulatory developments,
including increases in the number or financial exposures of claims, lawsuits,
settlements or judgments, the financial capacity of settling insurers, the
impact of increased accruals and reserves for such exposures, the outcome of
litigation and appeals, and adverse changes in economic and political climates
around the world, including terrorist activities, international hostilities and
potential natural disasters. Accordingly, there can be no assurance
that the Company will meet future results, performance or achievement expressed
or implied by such forward-looking statements, reactivate stock repurchases or
continue the payment of dividends. As appropriate, additional factors
are contained in reports filed by the Company with the Securities and Exchange
Commission. 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.
In
connection with the proposed merger, Ashland and the Company will be filing
documents with the SEC, including the filing by Ashland of a registration
statement on Form S-4, and the filing by the Company of a related preliminary
and definitive proxy statement/prospectus. Investors and security
holders are urged to read the registration statement on Form S-4 and the related
preliminary and definitive proxy statement/prospectus when they become available
because they will contain important information about the proposed
transaction. Investors and security holders may obtain free copies of
these documents (when they are available) and other documents filed with the SEC
at the SEC’s web site at www.sec.gov and by contacting Ashland Investor
Relations at (859) 815-4454 or Hercules Investor Relations at (302)
594-7151. Investors and security holders may obtain free copies of
the documents filed with the SEC on Ashland’s Investor Relations website at
www.ashland.com/investors or the Company’s website at www.herc.com or the SEC’s
website at www.sec.gov.
The
Company and its directors and executive officers may be deemed participants in
the solicitation of proxies from the stockholders of the Company in connection
with the proposed transaction. Information regarding the special
interests of these directors and executive officers in the proposed transaction
will be included in the proxy statement/prospectus described
above. Additional information regarding the directors and executive
officers of the Company is also included in the Company’s proxy statement for
its 2008 Annual Meeting of Stockholders, which was filed with the SEC on March
19, 2008. These documents are available free of charge at the SEC’s
web site at www.sec.gov and from Investor Relations at Ashland and the Company
as described above.
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 “six-month period” refer to the second quarter of 2008 and the six months
ended June 30, 2008. 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
(the “Company”) 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, 2008 and 2007
were:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
North
America
|
|
|
44 |
% |
|
|
46 |
% |
|
|
46 |
% |
|
|
48 |
% |
Europe
|
|
|
38 |
% |
|
|
37 |
% |
|
|
37 |
% |
|
|
36 |
% |
Asia
Pacific
|
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
11 |
% |
Latin
America
|
|
|
6 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
|
5 |
% |
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 Ventures
business which includes 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 Specialties.
Net sales
for the three and six months ended June 30, 2008 and 2007 as a percent of total
net sales, by segment, were:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Paper
Technologies and Ventures
|
|
|
51 |
% |
|
|
53 |
% |
|
|
52 |
% |
|
|
54 |
% |
Aqualon
Group
|
|
|
49 |
% |
|
|
47 |
% |
|
|
48 |
% |
|
|
46 |
% |
Consolidated
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Key
Developments
The
following 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) the entry into a definitive merger
agreement with Ashland Inc., (2) change in method of accounting for qualified
U.S. and U.K. defined-benefit pension plans (3) the acquisition of Logos Quimica
Ltda. and (4) the adoption of Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS 157”). A discussion of these
developments follows.
Entry
into a Definitive Merger Agreement with Ashland Inc.
On July
11, 2008, the Company announced that it had entered into a definitive merger
agreement (the “Agreement”) with Ashland under which Ashland would acquire all
of the outstanding shares of the Company for $18.60 per share in cash and 0.093
of a share of Ashland common stock for each share of the Company’s common
stock. The merger is conditioned upon, among other things, the
approval of the Company’s stockholders, the receipt of regulatory approvals and
other customary closing conditions. Assuming the satisfaction of
these conditions, the transaction is expected to close during the fourth quarter
of 2008. Additional
information is provided in Note 18 to the Consolidated Financial Statements and
in the Current Report on Form 8-K filed by the Company with the Securities and
Exchange Commission on July 14, 2008.
Change
in Method of Accounting for U.S. and U.K. Defined Benefit Pension
Plans
Effective
January 1, 2008, the Company changed its method of accounting for its qualified
defined-benefit pension plans in the U.S. and U.K. with respect
to: (a) the basis for the determination of the “market-related value”
of plan assets from a smoothed value to the “fair value” and (b) a reduction in
the amortization period for gains and losses in excess of the “corridor” from a
period representing the average remaining service period of active employees to
immediate recognition in the subsequent year. The change has been
applied on a retrospective basis to all prior periods including those that ended
during 2007. The Consolidated Financial Statements and Notes thereto
as well as the disclosures included in the discussions of Results of Operations
that follow have been adjusted accordingly. Additional detail
regarding the change in accounting method is provided in Note
6 to the Consolidated Financial Statements.
Acquisition
of Logos Quimica Ltda.
At the
end of the second quarter of 2008, the Company acquired Logos Quimica Ltda.
(“Logos Quimica”), a Brazil-based specialty chemicals company. The
total transaction value is approximately 34 million Brazilian Reais or $21.3
million. A total of 11.9 million Reais or $7.5 million was paid at closing and
the remainder was paid shortly thereafter during the third quarter of
2008. The pulp products business of Logos Quimica will be integrated
into the Ventures component of PTV and the remaining small portion of Logos
Quimica will be integrated into the Aqualon segment to market products into the
coatings industry. Additional information is provided in Note 3 to the Consolidated Financial Statements.
Adoption
of SFAS 157
The
Company adopted SFAS 157 effective January 1, 2008. SFAS 157 provides for
expanded disclosures of assets and liabilities that are recognized or disclosed
at fair value on a recurring basis. The Company has identified its
derivative financial instruments used to facilitate its foreign currency
exchange rate risks associated with certain transactions as well as its
Euro-denominated net investment in certain subsidiaries as within the scope of
the initial application of SFAS 157. The expanded disclosures
required by SFAS 157 are provided in Note 17 to the
Consolidated Financial Statements.
Reference
is made to the Company’s Annual Report on Form 10-K for the year ended December
31, 2007 for a complete description of the Company’s critical accounting
estimates. However, the following development is discussed below with
respect to its applicability during the three and six months ended June 30, 2008
and future periods.
Pension
and Other Postretirement Benefits
In
connection with the recently implemented change in the plan investment
methodology to a liability-driven investment (“LDI”) strategy for the Company’s
U.S. and U.K. defined-benefit pension plans, the Company’s plan asset risk
profile has changed significantly. In particular, the LDI strategy is
designed to substantially neutralize the interest rate risk associated with
fluctuations in the discount rate that determines the fair value of the
projected benefit obligation as well as minimize the impact of asset value
volatility. Under this strategy, approximately 85% of the plan’s
assets have been invested in interest rate-sensitive debt
instruments. This investment strategy is designed to reduce ongoing
funding requirements for a fully-funded plan to a level that approximates that
plan’s annual service cost.
As a
result of the LDI strategy discussed above, a 100-basis point decrease or
increase in the discount rate would have an unfavorable or favorable impact of
$165 million on the projected benefit obligation of the qualified U.S.
defined-benefit pension plan, which is the Company’s most significant
plan. However, this change should be offset to a large extent by a
commensurate movement in the plan assets.
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, 2008 and
2007:
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Net
sales
|
|
$ |
612.6 |
|
|
$ |
549.0 |
|
|
$ |
63.6 |
|
|
$ |
1,170.9 |
|
|
$ |
1,051.3 |
|
|
$ |
119.6 |
|
Net sales
for the three months ended June 30, 2008 increased 12% from the prior year
period primarily as a result of higher volume of $16.8 million, or 3%, higher
pricing of $17.0 million, or 3%, and $36.9 million, or 7%, related to higher
rates of exchange (“ROE”). These increases were partially offset by
an unfavorable mix of $7.1 million, or 1%. The Company increased
sales in all of its business units reflecting overall volume growth,
particularly in higher-growth markets, and modest pricing growth to continue
efforts to recover higher raw material, transportation and utility
costs. In addition, the sales growth reflects continued development
and introduction of new products as well as increased utilization of expanded
production capacity, particularly in the Aqualon segment. The ROE
impact is primarily attributable to continued strengthening of the Euro versus
the U.S. Dollar (“USD”). The average Euro/USD exchange rate was
approximately 12% higher during the 2008 period. The unfavorable mix
is primarily attributable to both product and regional mix, primarily in the
Aqualon segment.
Net sales
for the six months ended June 30, 2008 increased 11% from the prior year period
primarily as a result of higher volume of $51.9 million, or 5%, higher pricing
of $22.5 million, or 2%, and $64.1 million, or 6%, related to higher
ROE. These increases were partially offset by an unfavorable mix of
$18.7 million, or 2%. The overall sales variances for the six month
period are generally consistent with those for the three month
period.
The table
below reflects Net sales per region and the percentage change from the prior
year period as well as the percentage change excluding the impact of
ROE:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
ROE
|
|
North
America
|
|
$ |
270.8 |
|
|
$ |
252.3 |
|
|
|
7 |
% |
|
|
6 |
% |
Europe
|
|
|
232.1 |
|
|
|
203.3 |
|
|
|
14 |
% |
|
|
(1 |
)% |
Asia
Pacific
|
|
|
74.2 |
|
|
|
63.8 |
|
|
|
16 |
% |
|
|
13 |
% |
Latin
America
|
|
|
35.5 |
|
|
|
29.6 |
|
|
|
20 |
% |
|
|
11 |
% |
All
regions
|
|
$ |
612.6 |
|
|
$ |
549.0 |
|
|
|
12 |
% |
|
|
5 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
ROE
|
|
North
America
|
|
$ |
534.5 |
|
|
$ |
500.0 |
|
|
|
7 |
% |
|
|
6 |
% |
Europe
|
|
|
432.6 |
|
|
|
378.2 |
|
|
|
14 |
% |
|
|
1 |
% |
Asia
Pacific
|
|
|
135.0 |
|
|
|
116.7 |
|
|
|
16 |
% |
|
|
14 |
% |
Latin
America
|
|
|
68.8 |
|
|
|
56.4 |
|
|
|
22 |
% |
|
|
13 |
% |
All
regions
|
|
$ |
1,170.9 |
|
|
$ |
1,051.3 |
|
|
|
11 |
% |
|
|
5 |
% |
On a
consolidated basis, Net sales increased in all regions of the world during the
three months ended June 30, 2008. Excluding the impact of foreign
currency fluctuations, Aqualon’s sales increased in all regions with the
exception of Latin America. However, PTV’s sales growth in the Latin American
region more than offset this decline. Excluding the impact of foreign currency
fluctuations, PTV’s sales increased in all regions except Europe, which
continues to reflect challenging market conditions.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Cost
of sales
|
|
$ |
420.1 |
|
|
$ |
358.8 |
|
|
$ |
61.3 |
|
|
$ |
794.5 |
|
|
$ |
682.2 |
|
|
$ |
112.3 |
|
As
a % of sales
|
|
|
69 |
% |
|
|
65 |
% |
|
|
|
|
|
|
68 |
% |
|
|
65 |
% |
|
|
|
|
Cost of
sales increased 17% and 16%, respectively, during the three and six months ended
June 30, 2008 from the prior year period. In addition to the impact
of higher volume and ROE, raw material, transportation and utility costs
increased by $25.9 million and $40.0 million during the 2008 three and six month
periods, respectively.
During
the six month period in 2008, the Company incurred higher fixed manufacturing
costs, including the costs associated with plant repair and maintenance
shut-downs, primarily in the first quarter. These costs were partially offset by
higher fixed cost absorption attributable to Aqualon as production continued at
or near capacity for a number of products. In addition, higher
transportation costs incurred by Aqualon were substantially offset by lower
costs realized by PTV. Raw material, transportation and utility costs in the
aggregate are expected to exceed prior year levels by approximately $100 million
for the full year 2008 due to significant increases in feedstock costs as well
as global demand and supply dynamics. The Company expects that
announced and additional price increases will offset a majority of these
anticipated additional costs. Through the first half of 2008, PTV and
Aqualon have recovered approximately 62% and 52%, respectively, of these cost
increases through higher pricing. 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
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Selling,
general and administrative expenses
|
|
$ |
98.6 |
|
|
$ |
84.8 |
|
|
$ |
13.8 |
|
|
$ |
193.2 |
|
|
$ |
168.2 |
|
|
$ |
25.0 |
|
As
a % of sales
|
|
|
16 |
% |
|
|
15 |
% |
|
|
|
|
|
|
17 |
% |
|
|
16 |
% |
|
|
|
|
Selling,
general and administrative expenses (“SG&A”) increased 16% and 15% during
the three and six months ended June 30, 2008, respectively, over the prior year
periods. In addition to the impact of higher average ROE, the
increases reflect inflationary increases in personnel costs including those
associated with expanding marketing, technology and other functions primarily to
support growth of both Aqualon and PTV and their expanding presence in
higher-growth markets. The increases also reflect higher net periodic
pension cost attributable to lower estimated returns on plan assets during the
2008 periods. The higher pension expense is directly attributable to the
significant change in investment strategy to the plan assets for the qualified
U.S. and U.K. defined-benefit plans.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Research
and development
|
|
$ |
11.4 |
|
|
$ |
11.0 |
|
|
$ |
0.4 |
|
|
$ |
22.5 |
|
|
$ |
21.4 |
|
|
$ |
1.1 |
|
As
a % of sales
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
Research
and development charges for the three and six months ended June 30, 2008
increased 4% and 5%, respectively, over the prior year periods reflecting higher
spending in both PTV and Aqualon including higher employee staffing and related
costs supporting new product development and product line
enhancements.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Intangible
asset amortization
|
|
$ |
2.7 |
|
|
$ |
1.9 |
|
|
$ |
0.8 |
|
|
$ |
5.3 |
|
|
$ |
3.7 |
|
|
$ |
1.6 |
|
Intangible
asset amortization increased during the three and six months ended June 30,
2008, respectively, as compared to the prior year periods primarily as a result
of amortization associated with intangible assets recognized in connection with
the formation of the H2H technology joint venture and the specialty surfactants
acquisition during the second half of 2007. Amortization is expected
to be $10.2 million during 2008.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Other
operating expense, net
|
|
$ |
4.6 |
|
|
$ |
7.6 |
|
|
$ |
(3.0 |
) |
|
$ |
12.8 |
|
|
$ |
20.7 |
|
|
$ |
(7.9 |
) |
Other
operating expense, net for the three and six months ended June 30, 2008,
respectively, includes $4.9 million and $8.0 million of severance, restructuring
and other exit costs, as well as $1.8 million and $5.3 million of accelerated
depreciation and amortization and impairment charges attributable to the
Company’s continued execution on its restructuring programs, primarily the
Business Infrastructure Project and the ancillary information technology
platform upgrade project (see Note 11 to the Consolidated
Financial Statements). In addition, the Company incurred $1.0 million
and $2.8 million, respectively, in dismantlement, asset retirement and
environmental and other costs during the three and six month periods of
2008. These items were partially offset during the three month period
in 2008 by a $2.9 million gain on the sale of a parcel of surplus property at
the Parlin, New Jersey manufacturing site and the recurring recognition of $0.2
million of deferred gains attributable to the sale and leaseback of the
Company’s administrative facility in Rijswijk, The Netherlands in 2007. The six
month period in 2008 also reflects these items.
Other
operating expense, net for the three and six months ended June 30, 2007,
respectively, reflects $6.2 million and $14.8 million of severance benefits and
other exit costs, as well as $3.7 million and $7.4 million of accelerated
depreciation and amortization charges primarily attributable to the Business
Infrastructure Project and the ancillary information technology platform upgrade
project. In addition, the Company incurred $1.8 million and $2.8
million in dismantlement, asset retirement and environmental and other costs
during the three and six month periods in 2007, respectively. These
items were partially offset by a gain of $4.1 million attributable to the sale
of the Company’s former manufacturing facility in Pendlebury, United Kingdom
during the 2007 three month period and a combination of the gain and $0.2
million of legal recoveries related to a domestic product anti-dumping suit
against certain competitors during the 2007 six month period.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Interest
and debt expense
|
|
$ |
18.3 |
|
|
$ |
17.8 |
|
|
$ |
0.5 |
|
|
$ |
35.0 |
|
|
$ |
35.0 |
|
|
$ |
— |
|
Interest
and debt expense for the three months ended June 30, 2008 increased 3% from the
2007 period due to $5.5 million resulting from decreasing LIBOR-based rates
compared to increasing EURIBOR-based rates on the cross-currency interest rate
swaps as well as $0.4 million attributable to higher local borrowings related to
the financing of expansion projects in China. These items were partially offset
by lower interest expense of $5.4 million on the Company’s fixed and variable
rate debt primarily due to substantial debt repayments made during the second
half of 2007. Interest and debt expense was essentially unchanged for
the six month periods ended June 30, 2008 and 2007, respectively. However, the
current period also reflects higher charges related to the cross-currency
interest rate swaps offset by lower interest charges on outstanding debt due to
prior year principal repayments.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Vertac
response costs and litigation charges
|
|
$ |
0.3 |
|
|
$ |
17.5 |
|
|
$ |
(17.2 |
) |
|
$ |
0.5 |
|
|
$ |
19.0 |
|
|
$ |
(18.5 |
) |
Vertac-related
costs decreased during the three and six months ended June 30, 2008,
respectively, and reflect interest on the claimed obligation for additional
response costs incurred after June 1, 1998 at the Vertac site. The
2007 periods reflect the charge incurred to initially recognize the obligation
for the additional response costs. The outstanding balance of the accrued
obligation for response costs plus interest was $20.5 million as of June 30,
2008 and $18.7 million as of June 30, 2007.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Other
expense, net
|
|
$ |
8.4 |
|
|
$ |
15.7 |
|
|
$ |
(7.3 |
) |
|
$ |
15.3 |
|
|
$ |
19.0 |
|
|
$ |
(3.7 |
) |
Other
expense, net for the three and six months ended June 30, 2008, respectively,
reflects $2.0 million and $5.0 million in legal fees for asbestos-related
litigation costs, net of interest accretion from the asbestos insurance trusts,
$1.0 million and $1.8 million for legal expenses attributable to previously
divested businesses, $6.3 million and $8.9 million for asset retirement and
environmental-related charges for sites associated with former businesses and
other miscellaneous income, net of $0.9 million and $0.4 million. The
environmental charge includes $3.6 million attributable to a revision of
estimated remediation costs for an inactive portion of
the Company’s Brunswick, Georgia manufacturing facility associated with a
previously divested business.
Other
expense, net for the three and six months ended June 30, 2007, respectively,
reflects $2.2 million and $4.3 million in legal fees for asbestos-related
litigation costs, net of interest accretion from the asbestos insurance trust,
$13.8 million and $14.5 million for legal expenses attributable to previously
divested businesses, and $1.4 million and $2.9 million for asset retirement and
environmental-related charges for sites associated with former
businesses. Included in the legal expenses is $13.0 million
attributable to a settlement with the U.S. Navy in connection with environmental
issues at the Alleghany Ballistics Laboratory site. Partially offsetting these
charges is interest and other miscellaneous income of $1.7 million and $2.7
million.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Provision
(benefit) for income taxes
|
|
$ |
12.6 |
|
|
$ |
(7.9 |
) |
|
$ |
20.5 |
|
|
$ |
24.1 |
|
|
$ |
(41.0 |
) |
|
$ |
65.1 |
|
Effective
tax rate
|
|
|
26 |
% |
|
|
(23 |
%) |
|
|
|
|
|
|
26 |
% |
|
|
(50 |
%) |
|
|
|
|
For the
three and six months ended June 30, 2008, the Company recognized pretax income
of $48.2 million and $91.8 million and tax expense of $12.6 million and $24.1
million, respectively. The full year effective tax rate for 2008 is
estimated to be 27%.
The
Company recognized pretax income of $33.9 million and $82.1 million and tax
benefits of $7.9 million and $41.0 million for the three and six months ended
June 30, 2007, respectively, primarily reflecting a $47.3 million benefit
relating to the final resolution of IRS audits for the years 1993 through
2003.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Minority
interests in earnings of consolidated subsidiaries
|
|
$ |
(0.3 |
) |
|
$ |
(0.5 |
) |
|
$ |
0.2 |
|
|
$ |
0.9 |
|
|
$ |
(1.0 |
) |
|
$ |
1.9 |
|
The three
months ended June 30, 2008, reflect amounts attributable to the noncontrolling
partners’ interests in losses incurred by the H2H technology joint venture as
well as income realized by Hercules Tianpu. The 2008 six month period also
reflects losses incurred by H2H as well as a year-to-date loss incurred by
Hercules Tianpu primarily as a result of a shut-down for several weeks due to
the previously reported incident at the joint venture’s facility in China during
January 2008. Full scale production did not resume until the latter
part of March 2008. The three months ended June 30, 2007 reflect the
noncontrolling partners’ interests in the earnings of Hercules
Tianpu.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Equity
loss of affiliated companies, net of tax
|
|
$ |
(0.2 |
) |
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
(1.1 |
) |
|
$ |
(0.5 |
) |
|
$ |
(0.6 |
) |
Equity
losses during the 2008 and 2007 periods are primarily attributable to losses
incurred by FiberVisions, in which the Company currently maintains a 34.5%
ownership interest.
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Income
from discontinued operations, net of tax
|
|
$ |
25.9 |
|
|
$ |
— |
|
|
$ |
25.9 |
|
|
$ |
25.9 |
|
|
$ |
— |
|
|
$ |
25.9 |
|
The three
and six month periods ended June 30, 2008 reflect income from discontinued
operations of $25.9 million, net of taxes. This amount relates to the
reversal of a $40 million indemnification obligation attributable to income tax
matters that the Company established in 1997 upon the sale of its investment in
a joint venture in the former Food and Functional products
segment. The buyer recently concluded certain income tax issues with
the Internal Revenue Service (“IRS”) thereby eliminating the necessity for
maintaining the indemnity obligation.
Results of Operations – Segment Review
The
tables below reflect Net sales and Profit from operations for the three and six
months ended June 30, 2008 as compared to the three and six months ended June
30, 2007.
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies
|
|
$ |
233.8 |
|
|
$ |
227.6 |
|
|
$ |
6.2 |
|
|
|
3
|
% |
Ventures
|
|
|
76.2 |
|
|
|
60.7 |
|
|
|
15.5 |
|
|
|
26
|
% |
|
|
|
310.0 |
|
|
|
288.3 |
|
|
|
21.7 |
|
|
|
8
|
% |
Aqualon
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coatings
& Construction
|
|
|
153.8 |
|
|
|
129.9 |
|
|
|
23.9 |
|
|
|
18
|
% |
Regulated
|
|
|
74.2 |
|
|
|
63.8 |
|
|
|
10.4 |
|
|
|
16
|
% |
Energy
& Specialties
|
|
|
74.6 |
|
|
|
67.0 |
|
|
|
7.6 |
|
|
|
11
|
% |
|
|
|
302.6 |
|
|
|
260.7 |
|
|
|
41.9 |
|
|
|
16
|
% |
|
|
$ |
612.6 |
|
|
$ |
549.0 |
|
|
$ |
63.6 |
|
|
|
12
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
23.9 |
|
|
$ |
31.8 |
|
|
$ |
(7.9 |
) |
|
|
(25 |
)
% |
Aqualon
Group
|
|
|
56.6 |
|
|
|
62.5 |
|
|
|
(5.9 |
) |
|
|
(9 |
)
% |
Corporate
Items
|
|
|
(5.3 |
) |
|
|
(9.4 |
) |
|
|
4.1 |
|
|
|
44
|
% |
Consolidated
|
|
$ |
75.2 |
|
|
$ |
84.9 |
|
|
$ |
(9.7 |
) |
|
|
(11 |
)
% |
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies
|
|
$ |
460.5 |
|
|
$ |
448.9 |
|
|
$ |
11.6 |
|
|
|
3
|
% |
Ventures
|
|
|
152.4 |
|
|
|
122.6 |
|
|
|
29.8 |
|
|
|
24
|
% |
|
|
|
612.9 |
|
|
|
571.5 |
|
|
|
41.4 |
|
|
|
7
|
% |
Aqualon
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coatings
& Construction
|
|
|
273.0 |
|
|
|
230.2 |
|
|
|
42.8 |
|
|
|
19
|
% |
Regulated
|
|
|
143.0 |
|
|
|
124.0 |
|
|
|
19.0 |
|
|
|
15
|
% |
Energy
& Specialties
|
|
|
142.0 |
|
|
|
125.6 |
|
|
|
16.4 |
|
|
|
13
|
% |
|
|
|
558.0 |
|
|
|
479.8 |
|
|
|
78.2 |
|
|
|
16
|
% |
|
|
$ |
1,170.9 |
|
|
$ |
1,051.3 |
|
|
$ |
119.6 |
|
|
|
11
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
53.6 |
|
|
$ |
65.4 |
|
|
$ |
(11.8 |
) |
|
|
(18 |
)
% |
Aqualon
Group
|
|
|
104.6 |
|
|
|
114.8 |
|
|
|
(10.2 |
) |
|
|
(9 |
)
% |
Corporate
Items
|
|
|
(15.6 |
) |
|
|
(25.1 |
) |
|
|
9.5 |
|
|
|
38
|
% |
Consolidated
|
|
$ |
142.6 |
|
|
$ |
155.1 |
|
|
$ |
(12.5 |
) |
|
|
(8 |
)
% |
Paper
Technologies and Ventures
Three Months Ended June 30,
2008 compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Paper
Technologies
|
|
|
(6 |
)% |
|
|
— |
|
|
|
2 |
% |
|
|
7 |
% |
|
|
3 |
% |
Ventures
|
|
|
8 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
26 |
% |
|
|
|
(3 |
)% |
|
|
1 |
% |
|
|
3 |
% |
|
|
7 |
% |
|
|
8 |
% |
Six Months Ended June 30,
2008 compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Paper
Technologies
|
|
|
(3 |
)% |
|
|
(1 |
)% |
|
|
— |
|
|
|
7 |
% |
|
|
3 |
% |
Ventures
|
|
|
7 |
% |
|
|
5 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
24 |
% |
|
|
|
(1 |
)% |
|
|
— |
|
|
|
2 |
% |
|
|
6 |
% |
|
|
7 |
% |
PTV’s
overall sales reflect improvement resulting from continued expansion in fast
growing markets and continued success with new product introductions as well as
the beneficial impact of various currencies strengthening against the
USD. Higher sales in the Ventures businesses contributed over 70% of
the sales growth for both the three and six month periods in 2008, respectively,
over 2007 levels. Sales of products introduced during the past five
years represent approximately 24% of total sales. Overall, sales of
recently introduced products continue to support revenue growth in overcoming
lower sales in mature product lines.
Paper
Technologies Sales
Paper
Technologies’ sales increased 3% during the three months ended June 30, 2008
primarily due to 7% higher rates of exchange, 2% higher average pricing
partially offset by 6% lower volume. Volumes were lower in both North
America and Europe while Asia volume was flat. North America volume
was lower in the sizing functional product line. The decline in
Europe resulted primarily from shortfalls in strength product
lines. In addition there have been several production curtailments
and plant closures by certain large paper producers within
Europe. Sales in the fastest growing markets increased by 26% as
compared to the prior year, including strong growth in Brazil, Chile, Indonesia,
Russia and Mediterranean, Red Sea and Persian Gulf countries. Modest
price increases were achieved in the Americas and Europe, partially offset by
lower pricing in the Asia Pacific region. Significant price increases
were announced in the Americas region targeting all product lines.
Paper
Technologies’ sales increased 3% during the six months ended June 30, 2008
primarily due to 7% higher rates of exchange, 1% higher average pricing
partially offset by 3% lower volume and 2% unfavorable product
mix. Higher pricing was achieved in the Americas, while Europe
remained flat and Asia was lower as compared to the prior year. The
Company continues to experience competitive pressure in its mature product
lines, especially functional chemicals in Europe. Volume was lower in
the aggregate in all regions, however strong growth of 21% was achieved in
several fast growing markets as noted above. The unfavorable product
mix in the Americas and Europe exceeded the favorable impact in Asia, however,
the Company continues to pursue strategies for higher growth in its process
chemicals over its more mature functional chemical product lines, especially in
the Asian marketplace.
Ventures
Sales
Sales in
all Venture businesses increased during the three months ended June 30, 2008 as
compared to the prior year period. Strong growth was achieved in the
Lubricants, Building and Converted Products and Pulp businesses. The
Lubricants business has benefited from the utilization of recently expanded
capacity at its Louisiana, Missouri manufacturing facility and price increases
associated with the pass-through of increasing raw material
costs. Building and Converted Products continues to grow in
additional applications and customer acceptance. Pulp growth reflects
an improved product mix and higher selling prices.
Sales in
each of the Venture businesses increased during the six months ended June 30,
2008 as compared to the prior year period with increased pricing achieved in
most of these businesses, particularly Lubricants. Similar to the
quarterly results, strong growth was achieved in Ventures’ Lubricants, Building
and Converted Products and Pulp businesses.
PTV
2008 Profitability
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
2007
Profit from operations
|
|
|
|
|
$ |
31.8 |
|
|
|
|
|
$ |
65.4 |
|
Changes
due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
(2.1 |
) |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Regional
and product mix
|
|
|
(1.7 |
) |
|
|
|
|
|
|
(2.6 |
) |
|
|
|
|
Price
|
|
|
7.7 |
|
|
|
|
|
|
|
10.0 |
|
|
|
|
|
Raw
material, transportation and utility costs
|
|
|
(11.1 |
) |
|
|
|
|
|
|
(16.1 |
) |
|
|
|
|
All
other manufacturing costs
|
|
|
3.0 |
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
ROE
|
|
|
2.6 |
|
|
|
|
|
|
|
5.4 |
|
|
|
|
|
SG&A
and other expenses
|
|
|
1.1 |
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
Restructuring,
severance and other exit costs,
accelerated
depreciation and other charges
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
Impact
of change in accounting method for pensions
|
|
|
(5.6 |
) |
|
|
|
|
|
|
(11.2 |
) |
|
|
|
|
Net
change
|
|
|
|
|
|
|
(7.9 |
) |
|
|
|
|
|
|
(11.8 |
) |
2008
Profit from operations
|
|
|
|
|
|
$ |
23.9 |
|
|
|
|
|
|
$ |
53.6 |
|
Profit
from operations declined 25% and 18% during the three and six months ended June
30, 2008, respectively, as compared to the prior year
periods. Excluding the impact of the change in accounting method for
pension costs (see Note 6 to the Consolidated Financial
Statements), Profit from operations declined $2.3 million, or 7%, for the three
month period and $0.6 million, or 1%, for the six months period as compared to
the 2007 periods. The adjusted declines were primarily due to
significant increases in raw material and utility costs, lower volume and
unfavorable mix, primarily in the Paper Technologies markets, and higher
restructuring charges. These items were partially offset by favorable
ROE, improved selling prices, and lower support costs.
Higher
raw material costs of $10.3 million and $16.3 million for the three and six
month periods of 2008, respectively, broadly reflect higher prices for most
inputs, but most significantly for methanol, stearic acid, glyoxol, polymers and
cationic and anionic dry strength chemicals. While transportation
costs have increased during the three month period in 2008, primarily in Europe,
they remain lower by $1.2 million for the six month period primarily as a result
of a shift in the mix of products shipped with a higher solids content as well
as a trend towards customers arranging for their own product transportation
requirements. Restructuring charges were higher during the 2008
periods primarily as a result of actions taken in the European region to reduce
support costs in light of current market conditions.
PTV
Outlook
Paper
Technologies anticipates continuing its successful new product launch process
and improving its sales mix while strategically managing its price/volume
dynamics and maximizing productivity to better serve customers and increase
profitability. Additionally, the Company will continue to evaluate
its cost to service its customers and markets to optimize its structure to
better compete within the changing market dynamics of the regions in which it
conducts business.
The
Ventures businesses will continue to pursue potential acquisitions designed to
accelerate growth in selected regions and end-markets. The recent
acquisition of Logos Quimica Ltda. should better position the Company to
participate in the recent growth in the Latin American pulp
markets.
In
addition, the PTV business expects to continue its penetration of fast growing
markets in Latin America and Eastern and Central Europe. However, PTV
also faces significant raw material, transportation and utility cost
challenges. These conditions are expected to continue throughout 2008
resulting in cost increases of approximately $50 million over the year 2007,
however PTV remains committed to maximizing its recovery of these costs through
pricing while balancing its competitive position. In addition to the
trend of increasing costs for a number of raw materials, supply for certain key
raw materials has been and is expected to remain constrained in the near term,
creating the possible risk of raw material shortages and the possibility that
PTV may be unable to produce and/or meet customer demands for certain
products. Governmental restrictions and other conditions related to
the Summer Olympics have the potential to further exacerbate this condition with
respect to the availability of certain raw materials sourced within
China.
Aqualon
Group
Three Months Ended 2008
compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Coatings
& Construction
|
|
|
12 |
% |
|
|
(6 |
)% |
|
|
4 |
% |
|
|
8 |
% |
|
|
18 |
% |
Regulated
|
|
|
4 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
6 |
% |
|
|
16 |
% |
Energy
& Specialties
|
|
|
11 |
% |
|
|
(8 |
)% |
|
|
4 |
% |
|
|
4 |
% |
|
|
11 |
% |
|
|
|
10 |
% |
|
|
(4 |
)% |
|
|
3 |
% |
|
|
7 |
% |
|
|
16 |
% |
Six Months Ended 2008
compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Coatings
& Construction
|
|
|
14 |
% |
|
|
(6 |
)% |
|
|
3 |
% |
|
|
8 |
% |
|
|
19 |
% |
Regulated
|
|
|
4 |
% |
|
|
4 |
% |
|
|
2 |
% |
|
|
5 |
% |
|
|
15 |
% |
Energy
& Specialties
|
|
|
15 |
% |
|
|
(8 |
)% |
|
|
3 |
% |
|
|
3 |
% |
|
|
13 |
% |
|
|
|
11 |
% |
|
|
(4 |
)% |
|
|
3 |
% |
|
|
6 |
% |
|
|
16 |
% |
Sales
increased in all of Aqualon’s business units during the three months ended June
30, 2008 as compared to the 2007 period. In the aggregate, the sales
increase was driven by higher volume, including the impact of the specialty
surfactants acquisition during 2007, higher average selling prices, and
favorable ROE, primarily the Euro, while product and regional mix was
unfavorable.
Sales
increased in all of Aqualon’s business units during the six months ended June
30, 2008 as compared to the 2007 period. In the aggregate, the sales
increase was driven by higher volume including the impact of the specialty
surfactants acquisition, higher average selling prices, and favorable ROE,
primarily the Euro, partially offset by unfavorable product and regional
mix.
Coatings
and Construction Sales
Sales
into the Coatings markets increased 20% during the three months ended June 30,
2008 as compared to the 2007 period. The increase is due to 24%
higher volume including 9% attributable to the specialty surfactants business
acquisition during 2007. Sales of these products have expanded
outside of the traditional North American customer base capitalizing on
Aqualon’s global sales channel for Coatings. From a geographic
perspective, strong volume growth was achieved in the Asia Pacific region, the
Middle East, and Europe. These increases offset an 18% volume
decline, excluding the specialty surfactants acquisition, in North America
attributable to the continuing weakness in the U.S. housing
market. Modest price increases were achieved in most regions and
product families. Strong growth outside of North America resulted in
an unfavorable sales mix.
Sales
into construction markets increased 17% during the three months ended June 30,
2008 as compared to the 2007 period. Strong growth was achieved in
the Asia Pacific region, the Middle East, Africa and Eastern European markets
while other major regions, primarily North America, experienced
declines. Sales in the Asia Pacific region increased, reflecting
improved operability of the methylcellulose (“MC”) joint venture facility
subsequent to the restart during March. Price increases were achieved
in most regions and product families.
Sales
into the coatings and construction markets increased 20% and 18%, respectively,
for the six months ended June 30, 2008 as compared to the same period in
2007. Volume growth continued to be strong in China, the Middle East,
Africa and Europe, reflecting similar conditions noted throughout the
year.
Regulated
Industries Sales
Regulated
Industries’ sales increased 16% during the three months ended June 30, 2008 as
compared to the 2007 period. Sales growth was achieved in all of the
regulated industry groups as follows: pharmaceuticals increased 42%, personal
care increased 16% and food increased 10%. The sales growth was
attributable to all major regions of the world. Price increases were
achieved in most regions and product families. Sales of the
AquariusTM film
coating line for the pharmaceutical industry continue to grow since the product
launch in mid 2007.
Regulated
Industries’ sales increased 15% during the six months ended June 30, 2008 as
compared to the 2007 period. Sales growth was achieved in all of the
regulated industry groups as follows: pharmaceuticals increased 34%, personal
care increased 15% and food increased 8%. The sales growth was
attributable to all major regions of the world.
Energy
and Specialties Sales
Energy
and Specialties’ sales increased 11% during the three months ended June 30, 2008
as compared to the 2007 period. Energy sales increased 16% and
Specialties increased 3%. The sales growth was attributable to most
regions of the world and improved product pricing was achieved across all
product families. Product mix was unfavorable in both
businesses.
Energy
and Specialties’ sales increased 13% during the six months ended June 30, 2008
as compared to the 2007 period. Energy sales increased 16% and
Specialties increased 5%. The sales growth was attributable to most
regions of the world and improved product pricing was achieved across all
product families. Product mix was unfavorable in both
businesses.
Aqualon
2008 Profitability
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
2007
Profit from operations
|
|
|
|
|
$ |
62.5 |
|
|
|
|
|
$ |
114.8 |
|
Changes
due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
9.5 |
|
|
|
|
|
|
|
21.6 |
|
|
|
|
|
Regional
and product mix
|
|
|
(11.3 |
) |
|
|
|
|
|
|
(19.9 |
) |
|
|
|
|
Price
|
|
|
9.2 |
|
|
|
|
|
|
|
12.4 |
|
|
|
|
|
Raw
material, transportation and utility costs
|
|
|
(14.8 |
) |
|
|
|
|
|
|
(23.9 |
) |
|
|
|
|
All
other manufacturing costs
|
|
|
5.6 |
|
|
|
|
|
|
|
8.5 |
|
|
|
|
|
ROE
|
|
|
0.8 |
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
SG&A
and other expenses
|
|
|
0.3 |
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
Restructuring,
severance and other exit costs,
accelerated
depreciation and other charges
|
|
|
(0.4 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
Impact
of change in accounting method for pensions
|
|
|
(4.8 |
) |
|
|
|
|
|
|
(9.5 |
) |
|
|
|
|
Net
change
|
|
|
|
|
|
|
(5.9 |
) |
|
|
|
|
|
|
(10.2 |
) |
2008
Profit from operations
|
|
|
|
|
|
$ |
56.6 |
|
|
|
|
|
|
$ |
104.6 |
|
Profit
from operations declined 9% during both the three and six month periods ended
June 30, 2008 as compared to the prior year periods. Excluding the
impact of the change in accounting method for pension costs (see Note 6 to the Consolidated Financial Statements), Profit from
operations declined by 2% during the three month period in 2008 and was
essentially flat for the six month period as compared to the 2007
periods. The adjusted profitability was attributable to higher
volume, particularly with respect to hydroxyethylcellulose (“HEC”) products, and
the associated contribution margin, increased selling prices and favorable ROE
offset by higher raw material, transportation and utility costs, and unfavorable
product and regional mix.
Higher
raw material costs of $9.6 million and $16.0 million for the three and six month
periods, respectively, are primarily attributable to two of Aqualon’s most
significant inputs including cotton linters and ethylene oxide
(“EO”). Cotton linter prices are higher as a result of global demand,
primarily in China. Increasing utility costs as well as most
petroleum-based products and derivatives, including EO, reflect rising energy
demand and supply dynamics including refining capacity. Other key raw materials
that have increased in cost include monochloroacetic acid and methyl
chloride.
Aqualon
Outlook
Aqualon
expects sales volume to continue to grow and profitability to improve as
availability and utilization of its expanded capacity facilitates its ability to
meet growing demand Aqualon also continues to invest in growth
opportunities both in expanded capacity and potential acquisition opportunities
to facilitate growth. However, conditions are expected to remain
challenging in the North American coatings and construction markets in the
short-term and costs for raw materials, transportation and utilities are
expected to rise. These costs are expected to be approximately $50
million higher than those in the year 2007. Implementation of
announced price increases is expected to mostly offset these increased
costs.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Severance,
restructuring and other exit costs
|
|
$ |
2.8 |
|
|
$ |
6.0 |
|
|
$ |
5.4 |
|
|
$ |
13.7 |
|
Accelerated
depreciation and amortization
|
|
|
1.9 |
|
|
|
3.5 |
|
|
|
5.4 |
|
|
|
7.1 |
|
Asset
retirement and environmental charges
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Gains
on asset dispositions, net
|
|
|
(3.3 |
) |
|
|
(4.1 |
) |
|
|
(3.6 |
) |
|
|
(4.1 |
) |
Dismantlement
costs
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
1.0 |
|
|
|
1.5 |
|
Other
unallocated corporate costs
|
|
|
2.9 |
|
|
|
3.2 |
|
|
|
6.3 |
|
|
|
6.7 |
|
Other
miscellaneous expense (income), net
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
0.6 |
|
|
|
— |
|
|
|
$ |
5.3 |
|
|
$ |
9.4 |
|
|
$ |
15.6 |
|
|
$ |
25.1 |
|
Corporate
items for the three months ended June 30, 2007 include severance, restructuring
and other exit costs primarily attributable to the Business Infrastructure
Project. Corporate items also include accelerated depreciation and
amortization primarily attributable to the amortization of capitalized software
development costs associated with the aforementioned information technology
upgrade. Corporate items also include asset retirement and
environmental charges as well as dismantlement costs associated with inactive
portions of certain manufacturing facilities.
Liquidity and Capital Resources
Analysis
of Cash Flows
|
|
Six
Months Ended June 30,
|
|
Operating
Activities
|
|
2008
|
|
|
2007
|
|
Net
income, depreciation, amortization and all other non-cash charges and
credits, net
|
|
$ |
160.0 |
|
|
$ |
192.9 |
|
Changes
in working capital, net
|
|
|
(62.5 |
) |
|
|
(57.9 |
) |
Income
tax payments net of refunds
|
|
|
(13.7 |
) |
|
|
171.6 |
|
Interest
paid
|
|
|
(36.4 |
) |
|
|
(32.6 |
) |
Voluntary
pension plan contributions
|
|
|
— |
|
|
|
(27.1 |
) |
Other
postretirement benefits payments, net
|
|
|
(11.2 |
) |
|
|
(11.2 |
) |
Restructuring,
severance and other exit cost payments
|
|
|
(11.9 |
) |
|
|
(8.1 |
) |
ARO
and environmental contingency payments, net of recoveries
|
|
|
(3.1 |
) |
|
|
(5.4 |
) |
Asbestos
trust receipts, net of settlement payments
|
|
|
(0.4 |
) |
|
|
43.8 |
|
Settlement
of Vertac litigation judgment
|
|
|
— |
|
|
|
(124.5 |
) |
All
other accruals, deferrals and other cash receipts and (payments),
net
|
|
|
47.1 |
|
|
|
(1.0 |
) |
Net
cash provided by operating activities
|
|
$ |
67.9 |
|
|
$ |
140.5 |
|
Overall
cash from operations increased during the 2008 period after excluding the impact
of certain items that occurred during the 2007 period. These include
substantial tax refunds attributable to the settlement with the IRS for prior
year issues and cash receipts from the Asbestos settlement trust, partially
offset by the settlement of the Vertac litigation judgment and voluntary pension
contributions to the U.S. and U.K. defined benefit plans.
|
|
Six
Months Ended June 30,
|
|
Investing
Activities
|
|
2008
|
|
|
2007
|
|
Capital
expenditures
|
|
$ |
45.4 |
|
|
$ |
53.8 |
|
Acquisitions
and investments, net
|
|
|
9.0 |
|
|
|
0.9 |
|
Proceeds
from asset and investment dispositions and all other sources,
net
|
|
|
(3.0 |
) |
|
|
(10.1 |
) |
Net
cash used in investing activities
|
|
$ |
51.4 |
|
|
$ |
44.6 |
|
Capital
expenditures during both periods primarily reflect Aqualon’s capacity expansion
projects at its MC and carboxymethylcellulose (“CMC”) manufacturing facilities
in China. The 2008 period also reflects capacity expansion and
de-bottlenecking projects at Aqualon’s Doel, Belgium and Zwijndrecht, The
Netherlands facilities as well as the Company’s IT platform upgrade
project. The 2007 period reflects PTV’s synthetic lubricants
expansion at its Louisiana, Missouri manufacturing facility. The 2008
period reflects the initial payment of $7.5 million in connection with the
acquisition of Logos Quimica. Earn-out payments of $2.0 million and
$1.4 million to Benchmark Performance Group, Inc. (“BPG”) are reflected for the
2008 and 2007 periods, respectively, based on the annual performance of the guar
and guar derivatives business that was acquired by the Company from BPG during
2006. These payments were partially offset by $0.5 million of loan
repayments received from BPG during both periods.
|
|
Six
Months Ended June 30,
|
|
Financing
Activities
|
|
2008
|
|
|
2007
|
|
Long-term
debt payments
|
|
$ |
2.3 |
|
|
$ |
47.0 |
|
Long-term
debt proceeds and changes in short-term debt, net
|
|
|
(16.4 |
) |
|
|
(9.1 |
) |
Repurchase
of common stock
|
|
|
37.3 |
|
|
|
— |
|
Dividends
paid
|
|
|
10.9 |
|
|
|
— |
|
Proceeds
from the exercise of stock options and all other sources,
net
|
|
|
(1.7 |
) |
|
|
(7.0 |
) |
Net
cash used in financing activities
|
|
$ |
32.4 |
|
|
$ |
30.9 |
|
Long-term
debt payments for both periods primarily reflect payments on the Company’s Term
B loan due 2010 including $2 million during the 2008 period and $47 million
during the 2007 period. In addition, both periods reflect incremental
local borrowings, primarily in China, to finance the construction and expansion
projects in that region. During the 2008 period, the Company
repurchased 1.7 million common shares for $29.9 million in connection with its
authorized share repurchase program. A total of $0.8 million related
to the repurchase of shares in the second quarter settled in cash during the
third quarter. In addition, the Company paid $8.2 million during the 2008 period
for share repurchases initiated at the end of 2007. The 2008 period
also reflects the payment of the dividends declared during the fourth quarter of
2007 and first quarter of 2008. Proceeds from the exercise of stock
options were substantially lower during the 2008 period as there were fewer
exercisable options outstanding during 2008 that were in-the-money.
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, 2008, 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, 2008, $92.3 million of the $150.0 million
Revolving Facility was available for use as the Company had $57.7 million of
outstanding letters of credit associated with the Revolving
Facility. In addition, the Company had $48.6 million of foreign lines
of credit available of which $33.1 million was unused and
available. The total amount of $15.6 million outstanding under these
facilities is attributable to operations in the Asia Pacific
region.
In
connection with the comprehensive settlement of tax years 1993 through 2003, the
Company anticipates the remaining federal and state income tax refunds and
interest of approximately $20 million will be received during the third or
fourth quarter of 2008.
With
respect to its asbestos litigation obligations, the Company has restricted cash
held in trust of $9.6 million available as of June 30, 2008 to fund
asbestos-related settlements and defense costs (see Note 8 to
the Consolidated Financial Statements). As detailed further in the
discussion of Commitments and Contractual Obligations that follows, this funding
source is expected to be exhausted during 2008. Upon occurrence of
this event, the Company will be required to fund its asbestos obligations from
its cash from operations and other available financial resources.
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, 2008 reflecting the Company’s former
research facility in Jacksonville, Florida and former manufacturing facility in
Pandaan, Indonesia. These properties are currently being marketed and
are expected to be disposed within the next twelve months for net sales prices
in excess of their carrying values.
Total
debt as of June 30, 2008 was $816.7 million, which increased $20.7 million from
$796.0 million as of December 31, 2007. Cash balances decreased to
$106.6 million as of June 30, 2008 from $116.5 million as of December 31,
2007.
When
compared to year-end 2007 levels, Days Sales Outstanding (“DSO”) remained at 61
days while Days Sales in Inventories (“DSI”) decreased by 3 days to 56
days. Days Payable Outstanding (“DPO”) decreased by 4 days to 49
days. As a result, the Company’s cash cycle time (DSO plus DSI less
DPO) increased by 1 day to 68 days when compared to year-end 2007
levels.
Commitments and Contractual Obligations
Capital
Expenditures and Other Investing Commitments
Capital
expenditures are projected to total approximately $130 million during
2008. Significant project commitments for 2008 include MC capacity
expansions at the Doel, Belgium facility and the construction of an HEC facility
in Nanjing, China as well as continued progress on the functional upgrade of the
Company’s information technology platform. In summary, approximately
$75 million of the projected total is attributable to expansion and productivity
projects while the remaining $50 million is attributable to maintenance capital
projects.
As a
result of the specialty surfactants acquisition in 2007, the Company is
obligated to pay up to $2.0 million during 2008 contingent upon the continuity
of sales revenues at certain predetermined levels. In connection with
the guar and guar derivatives acquisition in 2006, Aqualon made an earn-out
payment of $2.0 million during the first quarter of 2008 based on that business’
2007 performance. A similar obligation is in place through 2011 for
approximately $1 million to $2 million annually contingent upon the achievement
of certain performance metrics.
Pension
Plan Funding
There
were no voluntary contributions to the Company’s pension plans during the six
months ended June 30, 2008. The Company expects to provide voluntary
funding of approximately $22 million for its U.S. qualified plan and
approximately $8 million in required and voluntary contributions for all other
international plans during the second half of 2008.
Funding
for Litigation, Environmental and Asset Retirement Obligations
As of
June 30, 2008, the Company has recorded $81.1 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 (see Note
7 to the Consolidated Financial Statements). 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.
Excluding
any potential limitations imposed as a result of the pending transaction with
Ashland and excluding amounts for the Vertac matter, the Company anticipates
funding approximately $18 million towards these obligations during
2008. 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 former nitrocellulose
manufacturing operations. With regard to this portion of the site,
the Company is proceeding with plans to dispose of 400 acres of excess
land.
With
respect to the Vertac matter, the Company continues the process of reviewing and
discussing the claim received from the United States for reimbursement for
response costs plus interest received (see Note 8 to the
Consolidated Financial Statements). At this time, the Company is
unable to estimate the specific amount or timing of the final settlement payment
with respect to this matter. As of June 30, 2008, the Company has
accrued $20.5 million representing its share of the United States’ claim plus
cumulative interest.
Asbestos-Related
Litigation
During
2008, the Company anticipates the total cash requirements for asbestos-related
litigation matters to be approximately $37 million. Of the total,
approximately $28 million is projected for settlements and $9 million is
projected for defense costs. It is currently anticipated that all of
the funds remaining in the trust will be distributed to the Company during 2008,
thereby terminating the trust. As a result, from and after the time
that the trust is terminated, the Company will be required to fully fund its
asbestos settlements and related defense costs and legal fees from its cash from
operations and other available financial resources until such time, if any, that
the reimbursement obligations pursuant to the Future Coverage Agreement, as
defined in the 2007 Form 10-K, are triggered based on cumulative asbestos
products litigation-related expenditures. Depending upon the
magnitude of future settlement and defense costs, substantial reimbursement
pursuant to such agreement is not anticipated for at least several years, and
once such reimbursement begins, it is anticipated that the levels of
reimbursement will vary considerably over time. See Note 8 to the Consolidated Financial Statements and Note 12 to
the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007.
Debt
Retirement
In
December 2007, 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 $50 million of its outstanding
indebtedness. Scheduled debt maturities during 2008 are $33.5
million. The most significant of these maturities are attributable to
credit facilities associated with operations in the Asia Pacific region, which
the Company expects to extend at maturity.
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 $0.7 million at June 30, 2008. 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 USD versus other currencies at June 30, 2008 would result
in a $5.6 million decrease in the net position, while a 10% weakening of the
dollar versus all currencies would result in a $4.5 million increase 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, 2008, the net market value of the swaps was a
liability of $160.9 million. A 10% strengthening of the Euro versus
the USD at June 30, 2008 would result in a $66.1 million increase in the
liability, while a 10% weakening of the Euro versus the USD would result in a
$66.1 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, 2008, the
net market value of these combined instruments was a liability of $750.7
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, 2008 would result in a $60.0 million decrease in the net market
value of the liability. A 100-basis point decrease in interest rates
at June 30, 2008 would result in a $55.0 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 CRESTSSM units
issued in 1999 and the Company’s 8% convertible debentures due 2010 (see Note 5 to the Consolidated Financial
Statements). Actions taken by the holders of these financial
instruments could result in the issuance of additional shares of common stock
and thereby increase stockholders’ equity. The conversion prices are
$42.70 per share and $14.90 per share for the CRESTSSM units
and convertible debentures, respectively.
Commodity
Price Risk
As of and
for the three month period ended June 30, 2008, 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 Securities Exchange Act Rule 13a-15(e) or Rule 15d-15(e) as of
June 30, 2008. 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 current 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 changes in the Company’s internal controls over financial reporting
that occurred during the Company’s second fiscal quarter of 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II
– OTHER INFORMATION
The
information disclosed by the Company under the headings “Environmental” and
“Litigation” in Note 8 to the Consolidated Financial
Statements is incorporated herein by this reference.
Failure
to complete the merger with Ashland could materially and adversely affect the
Company.
The
merger is conditioned upon, among other things, the approval of the Company’s
stockholders, the receipt of regulatory approvals and other closing
conditions. There can be no assurance that these conditions will be
met or waived, that the necessary approvals will be obtained, or that the
Company will be able to successfully consummate the merger as currently
contemplated under the merger agreement or at all. If the merger is
not consummated, the Company will not realize the potential benefits of the
merger, including any synergies that could result from combining the Company
with Ashland and, under certain circumstances, the Company may have to pay a
termination fee to Ashland in the amount of $77.5 million.
Obtaining
required approvals and satisfying closing conditions may delay or prevent
completion of the merger.
Completion
of the merger is conditioned upon the receipt of certain governmental
authorizations, consents, orders and approvals, including the expiration or
termination of the applicable waiting period, and any extension of the waiting
period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, as well as the issuance by the European Commission of a decision under
the EC Merger Regulation declaring the merger compatible with the common
market. Although there is currently no contemplation that this will
occur, these consents, orders and approvals may impose conditions on, or require
divestitures relating to, the divisions, operations or assets of Ashland or the
Company. To the extent required, these conditions or divestitures may
jeopardize or delay completion of the merger or may reduce the anticipated
benefits of the merger. Further, no assurance can be given that the
required consents and approvals will be obtained or that the required conditions
to closing will be satisfied, and, if all required consents and approvals are
obtained and the conditions are satisfied, no assurance can be given as to the
terms, conditions and timing of the consents and approvals.
Ashland
may not be able to obtain the financing needed for the transaction.
Ashland
has received commitments from lenders to provide an aggregate of up to $2.7
billion in financing for the transaction. However, if the proceeds of
this committed financing are unavailable for any reason, Ashland would be
required to seek an alternate source of financing on terms and
conditions, taken as a whole, that are no less favorable to
Ashland, which may not be available.
The
Company will be required to expend significant resources in order to satisfy the
conditions to closing.
The
Company will incur significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the merger. In
addition, the attention of the Company’s management and employees may be
diverted from day-to-day operations.
The
pending merger may disrupt the Company’s normal business operations and the
merger agreement imposes certain restrictions on the activities of the Company
until the closing.
The
Company’s customers, suppliers or distributors may seek to modify or terminate
existing agreements, and prospective customers may delay entering into new
agreements or purchasing the Company’s products as a result of the announcement
of the merger. The Company’s ability to attract new employees and
retain its existing employees may be harmed by uncertainties associated with the
merger. In addition, the merger agreement limits certain activities
of the Company that are considered as other than in the ordinary course of
business, including the declaration of common stock dividends inconsistent with
the Company’s past practice, the issuance and repurchase of shares of common
stock, changes to the Company’s charter and bylaws, capital expenditures,
acquisitions and investments, the ability to incur additional indebtedness and
the settlement of certain claims, among others.
The
merger agreement restricts the Company’s ability to pursue alternatives to the
merger.
The
merger agreement precludes the Company from, directly or indirectly soliciting,
initiating, or knowingly encouraging the submission of any takeover proposal or
participating in any discussions or negotiations regarding, or furnishing to any
person any information in connection with, or otherwise cooperating in any way
that could reasonably lead to, any takeover proposal. In connection
with the termination of the merger agreement in certain circumstances involving
a competitive takeover proposal by a third party or a change in the Company’s
board of director’s recommendation of the merger to the Company’s stockholders,
the Company will be required to pay Ashland a termination fee of $77.5
million. These restrictions could discourage a potential third-party
acquirer from considering or proposing a transaction, or could reduce the price
that a potential third-party acquirer would be willing to pay, because of the
added cost of the termination fee.
* * * *
*
In
connection with the merger, Ashland and the Company will file a proxy
statement/prospectus with the Securities and Exchange
Commission. The proxy statement/prospectus will be sent to all
of the Company’s stockholders and will contain important information about the
Company, Ashland, the proposed merger, risks relating to the proposed merger and
the combined company, and related matters. The Company strongly
encourages its stockholders to read the proxy statement/prospectus when it
becomes available.
ITEM
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table provides a summary of the Company’s purchases of its common
stock during the six months ended June 30, 2008:
Period
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs (1)
|
|
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under Plans or Programs
(1)
|
|
Cumulative
through 2007
|
|
|
2,800,860 |
|
|
|
|
|
|
2,800,860 |
|
|
$ |
145,651,609 |
|
Cumulative
through First Quarter, 2008
|
|
|
1,323,100 |
|
|
$ |
17.63 |
|
|
|
1,323,100 |
|
|
$ |
122,319,595 |
|
April
1 – 30, 2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
122,319,595 |
|
May
1 – 31, 2008
|
|
|
142,700 |
|
|
$ |
19.22 |
|
|
|
142,700 |
|
|
$ |
119,576,385 |
|
June
1 – 30, 2008
|
|
|
208,400 |
|
|
$ |
18.15 |
|
|
|
208,400 |
|
|
$ |
115,794,239 |
|
Totals
for 2008
|
|
|
1,674,200 |
|
|
|
|
|
|
|
1,674,200 |
|
|
|
|
|
Cumulative
through 2008
|
|
|
4,475,060 |
|
|
|
|
|
|
|
4,475,060 |
|
|
$ |
115,794,239 |
|
(1) In July 2007, the Board of Directors
authorized the Company to repurchase up to $200 million of its common stock over
a two year period subject to market conditions and the provisions of the
Company’s Senior Credit Facility Agreement and indentures. The
authorization also encompasses dividends on the Company’s common
stock. The combination of share purchases and dividends is limited to
$100 million per calendar year. As a result of the pending merger
with Ashland, the Company has suspended its repurchase of
shares.
ITEM
4. Submission
of Matters to a Vote of Security Holders
The
Company held its Annual Meeting of Shareholders on April 17, 2008. A
summary of the final voting results follows. The number of votes cast
with respect to each matter is as indicated. A quorum of 100,864,797,
or 88.59% of the 113,854,449 outstanding voting shares as of the March 3, 2008
record date, was present in person or by proxy at the Annual
Meeting.
With the
exception of Mr. Cohen, who was elected to the Board in February 2008, directors
elected prior to the 2008 Annual Meeting were elected to serve for three-year
terms. Four (4) directors had terms that expired in 2008 (i.e. Allan H. Cohen,
Burton M. Joyce, Jeffrey M. Lipton and John K. Wulff). The following directors
were elected to serve for a one-year term and until their successors are elected
and qualified, or their earlier death, resignation or removal.
Director
Name
|
|
For
|
|
|
Withheld
Authority
|
|
|
Broker
Non-Votes
|
|
Allan
H. Cohen
|
|
|
98,357,009 |
|
|
|
2,507,788 |
|
|
|
— |
|
Burton
M. Joyce
|
|
|
98,340,981 |
|
|
|
2,523,816 |
|
|
|
— |
|
Jeffrey
M. Lipton
|
|
|
76,613,022 |
|
|
|
24,251,775 |
|
|
|
|
|
John
K. Wulff
|
|
|
76,017,214 |
|
|
|
24,847,583 |
|
|
|
— |
|
Directors
continuing in office after the meeting were: Anna Cheng Catalano, Thomas P.
Gerrity, John C. Hunter, III, Robert D. Kennedy, Craig A.
Rogerson and Joe B. Wyatt.
2.
|
Approval
of the provisions of the Amended and Restated Hercules Incorporated Annual
Management Incentive Compensation Plan, which received more than a
majority of the votes necessary for
approval.
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
85,341,193 |
|
|
|
6,682,247 |
|
|
|
893,029 |
|
|
|
— |
|
3.
|
Ratification
of BDO Seidman, LLP as Hercules’ Independent Registered Public Accountants
for 2008, which received more than a majority of the votes necessary for
ratification.
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
99,710,704 |
|
|
|
334,810 |
|
|
|
819,283 |
|
|
|
— |
|
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)
|
|
July
28, 2008
|
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated July 10, 2008 among Ashland Inc. Ashland Sub One,
Inc. and Hercules Incorporated (incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed on July 14,
2008).
|
|
|
|
18.1
|
|
Letter
Regarding Change in Accounting Principle (incorporated by reference to
Exhibit 18.1 to the Quarterly Report on Form 10-Q filed on April 28,
2008).
|
|
|
|
|
|
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
- 47-