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 September 30, 2008
OR
|
o TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 1-496
HERCULES
INCORPORATED
A
Delaware Corporation
I.R.S.
Employer Identification No. 51-0023450
Hercules
Plaza
1313
North Market Street
Wilmington,
Delaware 19894-0001
Telephone: 302-594-5000
www.herc.com
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: ý No: o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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
October 24, 2008, 112,645,074 shares of registrant’s common stock were
outstanding.
HERCULES
INCORPORATED
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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48
|
HERCULES
INCORPORATED
(Dollars
in millions, except per share)
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
605.8 |
|
|
$ |
544.2 |
|
|
$ |
1,776.7 |
|
|
$ |
1,595.5 |
|
Cost
of sales
|
|
|
421.3 |
|
|
|
358.0 |
|
|
|
1,215.8 |
|
|
|
1,040.2 |
|
Selling,
general and administrative expenses
|
|
|
93.5 |
|
|
|
84.1 |
|
|
|
286.7 |
|
|
|
252.3 |
|
Research
and development
|
|
|
10.9 |
|
|
|
11.0 |
|
|
|
33.4 |
|
|
|
32.4 |
|
Intangible
asset amortization (Note 4)
|
|
|
2.7 |
|
|
|
2.4 |
|
|
|
8.0 |
|
|
|
6.1 |
|
Other
operating expense, net (Note 12)
|
|
|
14.3 |
|
|
|
5.4 |
|
|
|
27.1 |
|
|
|
26.1 |
|
Profit
from operations
|
|
|
63.1 |
|
|
|
83.3 |
|
|
|
205.7 |
|
|
|
238.4 |
|
Interest
and debt expense
|
|
|
18.6 |
|
|
|
17.0 |
|
|
|
53.6 |
|
|
|
52.0 |
|
Vertac
response costs and litigation charges (Note
8)
|
|
|
(6.0 |
) |
|
|
1.0 |
|
|
|
(5.5 |
) |
|
|
20.0 |
|
|
|
|
6.1 |
|
|
|
3.9 |
|
|
|
21.4 |
|
|
|
22.9 |
|
Income
before income taxes, minority interests and equity income
|
|
|
44.4 |
|
|
|
61.4 |
|
|
|
136.2 |
|
|
|
143.5 |
|
Provision
(benefit) for income taxes (Note 14)
|
|
|
6.4 |
|
|
|
14.9 |
|
|
|
30.5 |
|
|
|
(26.1 |
) |
Income
before minority interests and equity income
|
|
|
38.0 |
|
|
|
46.5 |
|
|
|
105.7 |
|
|
|
169.6 |
|
Minority
interests in losses (earnings) of consolidated
subsidiaries
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
(0.7 |
) |
Equity
income of affiliated companies, net of tax
|
|
|
1.6 |
|
|
|
1.0 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Net
income from continuing operations before discontinued
operations
|
|
|
39.6 |
|
|
|
47.8 |
|
|
|
107.1 |
|
|
|
169.4 |
|
Net
income (loss) from discontinued operations, net of tax (Note 1)
|
|
|
(0.1 |
) |
|
|
1.0 |
|
|
|
25.8 |
|
|
|
1.0 |
|
Net
income
|
|
$ |
39.5 |
|
|
$ |
48.8 |
|
|
$ |
132.9 |
|
|
$ |
170.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.35 |
|
|
$ |
0.42 |
|
|
$ |
0.96 |
|
|
$ |
1.48 |
|
Discontinued
operations
|
|
|
— |
|
|
|
0.01 |
|
|
|
0.23 |
|
|
|
0.01 |
|
Net income
|
|
$ |
0.35 |
|
|
$ |
0.43 |
|
|
$ |
1.19 |
|
|
$ |
1.49 |
|
Weighted
average number of shares (millions)
|
|
|
111.4 |
|
|
|
114.4 |
|
|
|
111.6 |
|
|
|
114.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.35 |
|
|
$ |
0.41 |
|
|
$ |
0.96 |
|
|
$ |
1.47 |
|
Discontinued
operations
|
|
|
— |
|
|
|
0.01 |
|
|
|
0.23 |
|
|
|
0.01 |
|
Net income
|
|
$ |
0.35 |
|
|
$ |
0.42 |
|
|
$ |
1.19 |
|
|
$ |
1.48 |
|
Weighted
average number of shares (millions)
|
|
|
112.1 |
|
|
|
115.2 |
|
|
|
112.2 |
|
|
|
115.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
39.5 |
|
|
$ |
48.8 |
|
|
$ |
132.9 |
|
|
$ |
170.4 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
(54.1 |
) |
|
|
41.7 |
|
|
|
(7.1 |
) |
|
|
66.1 |
|
Pension
and postretirement benefit adjustments, net of tax
|
|
|
0.8 |
|
|
|
7.4 |
|
|
|
2.0 |
|
|
|
9.1 |
|
Revaluation
of net investment hedges, net of tax
|
|
|
28.3 |
|
|
|
(20.1 |
) |
|
|
(3.5 |
) |
|
|
(27.6 |
) |
|
|
|
(25.0 |
) |
|
|
29.0 |
|
|
|
(8.6 |
) |
|
|
47.6 |
|
Comprehensive
income
|
|
$ |
14.5 |
|
|
$ |
77.8 |
|
|
$ |
124.3 |
|
|
$ |
218.0 |
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
116.7 |
|
|
$ |
116.5 |
|
Accounts
receivable, net of allowance (2008 – $7.4; 2007 – $4.5)
|
|
|
421.5 |
|
|
|
366.8 |
|
|
|
|
243.1 |
|
|
|
224.0 |
|
Deferred
income taxes
|
|
|
26.7 |
|
|
|
41.0 |
|
Income
taxes receivable
|
|
|
24.7 |
|
|
|
20.2 |
|
Asbestos-related
assets (Note 8)
|
|
|
— |
|
|
|
4.0 |
|
Other
current assets
|
|
|
40.5 |
|
|
|
41.8 |
|
Total
current assets
|
|
|
873.2 |
|
|
|
814.3 |
|
Property,
plant, and equipment, net (Note 10)
|
|
|
687.2 |
|
|
|
660.0 |
|
Intangible
assets, net (Note 4)
|
|
|
155.1 |
|
|
|
161.2 |
|
|
|
|
531.5 |
|
|
|
527.9 |
|
Deferred
income taxes
|
|
|
360.2 |
|
|
|
370.8 |
|
Asbestos-related
assets (Note 8)
|
|
|
4.0 |
|
|
|
24.1 |
|
Deferred
charges and other assets
|
|
|
110.2 |
|
|
|
120.1 |
|
Total
assets
|
|
$ |
2,721.4 |
|
|
$ |
2,678.4 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
236.6 |
|
|
$ |
222.0 |
|
Asbestos-related
liabilities (Note 8)
|
|
|
28.0 |
|
|
|
28.0 |
|
Current
debt obligations (Note 5)
|
|
|
49.6 |
|
|
|
33.7 |
|
|
|
|
14.5 |
|
|
|
20.0 |
|
Accrued
expenses
|
|
|
190.7 |
|
|
|
207.7 |
|
Income
taxes payable
|
|
|
19.9 |
|
|
|
13.3 |
|
Deferred
income taxes
|
|
|
7.7 |
|
|
|
9.5 |
|
Total
current liabilities
|
|
|
547.0 |
|
|
|
534.2 |
|
|
|
|
760.8 |
|
|
|
762.3 |
|
Deferred
income taxes
|
|
|
72.7 |
|
|
|
74.3 |
|
Pension
obligations
|
|
|
160.7 |
|
|
|
158.7 |
|
Other
postretirement benefit obligations
|
|
|
116.3 |
|
|
|
123.1 |
|
Deferred
credits and other liabilities
|
|
|
258.8 |
|
|
|
298.7 |
|
Asbestos-related
liabilities (Note 8)
|
|
|
211.3 |
|
|
|
227.0 |
|
Total
liabilities
|
|
|
2,127.6 |
|
|
|
2,178.3 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
— |
|
|
|
— |
|
Minority
interests
|
|
|
21.2 |
|
|
|
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
|
|
|
425.7 |
|
|
|
438.3 |
|
Unearned
compensation
|
|
|
(13.4 |
) |
|
|
(29.8 |
) |
Accumulated
other comprehensive losses
|
|
|
(31.4 |
) |
|
|
(22.8 |
) |
Retained
earnings
|
|
|
1,726.1 |
|
|
|
1,610.1 |
|
|
|
|
2,190.3 |
|
|
|
2,079.1 |
|
Reacquired
stock, at cost (2008 – 47.4 million shares; 2007 – 46.0 million
shares)
|
|
|
(1,617.7 |
) |
|
|
(1,601.1 |
) |
Total
stockholders’ equity
|
|
|
572.6 |
|
|
|
478.0 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,721.4 |
|
|
$ |
2,678.4 |
|
See
accompanying notes to consolidated financial statements
HERCULES
INCORPORATED
(Dollars
in millions)
|
|
(Unaudited)
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
132.9 |
|
|
$ |
170.4 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
56.3 |
|
|
|
52.4 |
|
Amortization
|
|
|
19.6 |
|
|
|
29.6 |
|
Deferred
income tax provision
|
|
|
8.3 |
|
|
|
0.1 |
|
Gain
on disposal of assets and investments, net
|
|
|
(4.1 |
) |
|
|
(6.7 |
) |
Dilution
of investment and loss on sale of 51% interest in
FiberVisions
|
|
|
— |
|
|
|
2.5 |
|
Minority
interests in (losses) earnings of consolidated
subsidiaries
|
|
|
(0.8 |
) |
|
|
0.7 |
|
Stock-based
compensation
|
|
|
6.0 |
|
|
|
7.7 |
|
Other
non-cash charges and credits, net
|
|
|
5.8 |
|
|
|
(2.2 |
) |
Accruals
and deferrals of cash receipts and payments (net of acquisitions and
dispositions):
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(56.0 |
) |
|
|
(40.0 |
) |
Inventories
|
|
|
(16.4 |
) |
|
|
(6.1 |
) |
Asbestos-related
assets and liabilities, net
|
|
|
8.1 |
|
|
|
46.8 |
|
Other
current assets
|
|
|
0.8 |
|
|
|
(0.9 |
) |
Accounts
payable
|
|
|
13.1 |
|
|
|
(8.2 |
) |
Vertac
obligations
|
|
|
(5.5 |
) |
|
|
(103.7 |
) |
Accrued
expenses
|
|
|
0.2 |
|
|
|
23.4 |
|
Income
taxes receivable and payable, net
|
|
|
17.5 |
|
|
|
149.0 |
|
Pension
and other postretirement benefit obligations
|
|
|
(5.7 |
) |
|
|
(40.9 |
) |
Non-current
assets and liabilities
|
|
|
(44.9 |
) |
|
|
(26.4 |
) |
Net
cash provided by operating activities
|
|
|
135.2 |
|
|
|
247.5 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(74.3 |
) |
|
|
(77.8 |
) |
Acquisitions
and investments, net
|
|
|
(21.6 |
) |
|
|
(16.2 |
) |
Proceeds
from sale of 51% interest in FiberVisions, net
|
|
|
— |
|
|
|
(1.2 |
) |
Proceeds
of asset disposals, net of transaction costs
|
|
|
3.0 |
|
|
|
13.6 |
|
Other
|
|
|
(0.1 |
) |
|
|
— |
|
Net
cash used in investing activities
|
|
|
(93.0 |
) |
|
|
(81.6 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Long-term
debt proceeds
|
|
|
— |
|
|
|
3.9 |
|
Long-term
debt payments
|
|
|
(3.7 |
) |
|
|
(192.1 |
) |
Change
in short-term debt
|
|
|
11.7 |
|
|
|
8.0 |
|
Repurchase
of common stock
|
|
|
(38.1 |
) |
|
|
(22.8 |
) |
Dividends
paid
|
|
|
(16.5 |
) |
|
|
— |
|
Proceeds
from the exercise of stock options
|
|
|
2.4 |
|
|
|
6.1 |
|
Other,
net including income tax benefits attributable to stock-based
compensation
|
|
|
0.7 |
|
|
|
2.1 |
|
Net
cash used in financing activities
|
|
|
(43.5 |
) |
|
|
(194.8 |
) |
Effect
of exchange rate changes on cash
|
|
|
1.5 |
|
|
|
5.7 |
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
0.2 |
|
|
|
(23.2 |
) |
Cash
and cash equivalents – beginning of period
|
|
|
116.5 |
|
|
|
171.8 |
|
Cash
and cash equivalents – end of period
|
|
$ |
116.7 |
|
|
$ |
148.6 |
|
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 nine months ended September 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 and the Current Report on Form 8-K filed on July 30,
2008.
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 nine
month period ended September 30, 2008 includes 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 has concluded certain income tax issues with the
Internal Revenue Service (“IRS”) thereby eliminating the necessity for
maintaining the indemnity obligation. Miscellaneous adjustments for
other discontinued operations are also reflected for the three and nine month
periods ended September 30, 2008.
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 September 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
|
During
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 31.5 million Reais or $18.1 million has been paid
through the end of the third quarter of
2008, including 17.3 million Brazilian Reais or $10.8
million, which has been placed into escrow pending the resolution of
certain items. The pulp products business of Logos Quimica is being
integrated into the Ventures component of PTV and the remaining small portion of
Logos Quimica is being 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:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Customer
relationships
|
|
$ |
95.6 |
|
|
$ |
23.2 |
|
|
$ |
72.4 |
|
|
$ |
95.6 |
|
|
$ |
21.1 |
|
|
$ |
74.5 |
|
Trademarks
and tradenames
|
|
|
76.2 |
|
|
|
19.1 |
|
|
|
57.1 |
|
|
|
76.2 |
|
|
|
17.6 |
|
|
|
58.6 |
|
Other
intangible assets
|
|
|
52.7 |
|
|
|
27.1 |
|
|
|
25.6 |
|
|
|
51.0 |
|
|
|
22.9 |
|
|
|
28.1 |
|
|
|
$ |
224.5 |
|
|
$ |
69.4 |
|
|
$ |
155.1 |
|
|
$ |
222.8 |
|
|
$ |
61.6 |
|
|
$ |
161.2 |
|
Total
amortization expense for intangible assets was $2.7 million and $2.4 million for
the three months ended September 30, 2008 and 2007, respectively, and was $8.0
and $6.1 million for the nine months ended September 30, 2008 and 2007,
respectively. Amortization expense is estimated to be $10.3 million
for the year ending December 31, 2008.
The
following table shows changes in the carrying amount of goodwill by operating
segment for the nine months ended September 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
|
|
|
1.4 |
|
|
|
2.2 |
|
|
|
3.6 |
|
Balance
at September 30, 2008
|
|
$ |
473.0 |
|
|
$ |
58.5 |
|
|
$ |
531.5 |
|
A summary
of debt by instrument is provided as follows:
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
Term
B Loan due 2010
|
|
$ |
258.0 |
|
|
$ |
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
|
|
|
215.8 |
|
|
|
215.1 |
|
Term
loans of Hercules Tianpu at rates ranging from 6.09 % to 8.22% through
2011(1)
|
|
|
48.3 |
|
|
|
42.4 |
|
Term
loans of Hercules Jiangmen at rates ranging from 6.21% to 8.22% through
2010
|
|
|
15.7 |
|
|
|
7.5 |
|
Other
|
|
|
4.5 |
|
|
|
1.8 |
|
|
|
|
810.4 |
|
|
|
796.0 |
|
Less:
Current debt obligations
|
|
|
49.6 |
|
|
|
33.7 |
|
Long-term
debt
|
|
$ |
760.8 |
|
|
$ |
762.3 |
|
(1)A total
of $24.3 million of these loans have been guaranteed by Hercules (see Note 8).
As of
September 30, 2008, the weighted-average interest rate on the Term B Loan, which
bears interest at LIBOR + 1.50%, was 5.2%.
As of
September 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 September 30, 2008, the Company had $53.8 million of
outstanding letters of credit associated with the Revolving Credit Facility and
the remaining $96.2 million was available for use.
As of
September 30, 2008, the Company also had $22.5 million of foreign lines of
credit available and unused.
6. 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 one 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
three and nine months ended September 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
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
|
|
As
|
|
|
Effect
of
|
|
|
As
|
|
|
As
|
|
|
Effect
of
|
|
|
As
|
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
Selling,
general and administrative expenses
|
|
$ |
94.5 |
|
|
$ |
(10.4 |
) |
|
$ |
84.1 |
|
|
$ |
283.4 |
|
|
$ |
(31.1 |
) |
|
$ |
252.3 |
|
Profit
from operations
|
|
|
72.9 |
|
|
|
10.4 |
|
|
|
83.3 |
|
|
|
207.3 |
|
|
|
31.1 |
|
|
|
238.4 |
|
Provision
(benefit) for income taxes
|
|
|
10.9 |
|
|
|
4.0 |
|
|
|
14.9 |
|
|
|
(37.2 |
) |
|
|
11.1 |
|
|
|
(26.1 |
) |
Net
income from continuing operations
|
|
|
41.4 |
|
|
|
6.4 |
|
|
|
47.8 |
|
|
|
149.4 |
|
|
|
20.0 |
|
|
|
169.4 |
|
Net
income
|
|
|
42.4 |
|
|
|
6.4 |
|
|
|
48.8 |
|
|
|
150.4 |
|
|
|
20.0 |
|
|
|
170.4 |
|
Basic
earnings per share
|
|
$ |
0.37 |
|
|
$ |
0.06 |
|
|
$ |
0.43 |
|
|
$ |
1.31 |
|
|
$ |
0.18 |
|
|
$ |
1.49 |
|
Diluted
earnings per share
|
|
$ |
0.37 |
|
|
$ |
0.05 |
|
|
$ |
0.42 |
|
|
$ |
1.31 |
|
|
$ |
0.17 |
|
|
$ |
1.48 |
|
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2008
|
|
|
|
Previous
|
|
|
Effect
of
|
|
|
Current
|
|
|
Previous
|
|
|
Effect
of
|
|
|
Current
|
|
|
|
Method
|
|
|
Change
|
|
|
Method
|
|
|
Method
|
|
|
Change
|
|
|
Method
|
|
Selling,
general and administrative expenses
|
|
$ |
104.5 |
|
|
$ |
(11.0 |
) |
|
$ |
93.5 |
|
|
$ |
319.6 |
|
|
$ |
(32.9 |
) |
|
$ |
286.7 |
|
Profit
from operations
|
|
|
52.1 |
|
|
|
11.0 |
|
|
|
63.1 |
|
|
|
172.8 |
|
|
|
32.9 |
|
|
|
205.7 |
|
Provision
for income taxes
|
|
|
2.6 |
|
|
|
3.8 |
|
|
|
6.4 |
|
|
|
19.1 |
|
|
|
11.4 |
|
|
|
30.5 |
|
Net
income from continuing operations
|
|
|
32.4 |
|
|
|
7.2 |
|
|
|
39.6 |
|
|
|
85.6 |
|
|
|
21.5 |
|
|
|
107.1 |
|
Net
income
|
|
|
32.3 |
|
|
|
7.2 |
|
|
|
39.5 |
|
|
|
111.4 |
|
|
|
21.5 |
|
|
|
132.9 |
|
Basic
earnings per share – continuing operations
|
|
$ |
0.29 |
|
|
$ |
0.06 |
|
|
$ |
0.35 |
|
|
$ |
0.77 |
|
|
$ |
0.19 |
|
|
$ |
0.96 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
0.29 |
|
|
$ |
0.06 |
|
|
$ |
0.35 |
|
|
$ |
0.77 |
|
|
$ |
0.19 |
|
|
$ |
0.96 |
|
Basic
earnings per share – net income
|
|
$ |
0.29 |
|
|
$ |
0.06 |
|
|
$ |
0.35 |
|
|
$ |
1.00 |
|
|
$ |
0.19 |
|
|
$ |
1.19 |
|
Diluted
earnings per share – net income
|
|
$ |
0.29 |
|
|
$ |
0.06 |
|
|
$ |
0.35 |
|
|
$ |
1.00 |
|
|
$ |
0.19 |
|
|
$ |
1.19 |
|
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 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 nine months ended
September 30, 2008 and 2007:
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
As
Adjusted
|
|
|
|
|
|
As
Adjusted
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4.0 |
|
|
$ |
4.3 |
|
|
$ |
11.9 |
|
|
$ |
13.1 |
|
Interest
cost
|
|
|
26.9 |
|
|
|
25.6 |
|
|
|
81.0 |
|
|
|
77.3 |
|
Expected
return on plan assets
|
|
|
(27.9 |
) |
|
|
(30.7 |
) |
|
|
(83.7 |
) |
|
|
(93.3 |
) |
Amortization
and deferrals
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Actuarial
losses recognized
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
3.1 |
|
|
|
4.0 |
|
|
|
$ |
3.4 |
|
|
$ |
(0.2 |
) |
|
$ |
10.3 |
|
|
$ |
(0.9 |
) |
Plan
Contributions
There
were no voluntary contributions to the Company’s pension plans during the three
and nine months ended September 30, 2008. However, the Company
expects to provide voluntary funding up to $20 million for its U.S. qualified
plan and approximately $8 million in required and voluntary contributions for
all other international plans during the fourth quarter of 2008.
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
Interest
cost
|
|
|
1.9 |
|
|
|
2.0 |
|
|
|
5.8 |
|
|
|
6.1 |
|
Amortization
and deferrals
|
|
|
(1.8 |
) |
|
|
(1.9 |
) |
|
|
(5.3 |
) |
|
|
(5.8 |
) |
Actuarial
losses recognized
|
|
|
2.5 |
|
|
|
1.9 |
|
|
|
7.5 |
|
|
|
6.2 |
|
|
|
$ |
2.7 |
|
|
$ |
2.2 |
|
|
$ |
8.3 |
|
|
$ |
6.9 |
|
|
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 nine months
ended September 30, 2008:
|
|
Active
Sites
|
|
|
Inactive
Sites
|
|
|
Total(2)
|
|
Balance
at January 1, 2008
|
|
$ |
10.8 |
|
|
$ |
67.5 |
|
|
$ |
78.3 |
|
Settlement
payments, net of cost recoveries
|
|
|
(0.6 |
) |
|
|
(9.7 |
) |
|
|
(10.3 |
) |
Changes
in estimated obligations and accretion(1)
|
|
|
0.7 |
|
|
|
10.9 |
|
|
|
11.6 |
|
Foreign
currency translation and other changes
|
|
|
(1.3 |
) |
|
|
1.3 |
|
|
|
— |
|
Balance
at September 30, 2008
|
|
$ |
9.6 |
|
|
$ |
70.0 |
|
|
$ |
79.6 |
|
(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.
(2) Of the
total at September 30, 2008, $18.3 million is included in Accrued expenses and
$61.3 million is included in Deferred credits and other liabilities in the
Consolidated Balance Sheet.
|
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 September 30, 2008, all of which are
attributable to business disposition transactions, was $1.4
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 $43.3 million of various outstanding obligations
under agreements with third parties related to consolidated subsidiaries and
affiliates as of September 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 and Note 8 to the Consolidated Financial Statements included in the
Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008
and June 30, 2008, respectively (“2008 First and Second Quarter Form
10-Qs”). As stated in the 2007 Form 10-K and the 2008 First and
Second Quarter Form 10-Qs, 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
and Second Quarter Form 10-Qs 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 has reached a settlement agreement with the United States to resolve the
Government’s claim for additional response costs, including interest, for $14.5
million. This settlement is subject to public comment and Court
approval. The Company has adjusted its accrual to $14.5 million with
respect to this matter as of September 30, 2008.
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.
Naval Weapons Industrial
Reserve Plant. The Naval Weapons Industrial Reserve Plant in
McGregor, Texas (the “Site”), is a government-owned facility which was operated
by various contractors on behalf of the U.S. Department of the Navy (the “Navy”)
from 1942 to 1995. The Company operated the Site from 1978 to
1995. The U.S. Department of Justice, on behalf of the Navy, has
advised the Company and other former contractors that, pursuant to CERCLA, the
government has incurred costs of over $50 million with respect to certain
environmental liabilities which the government alleges are attributable, at
least in part, to the Company’s and the other former contractors’ past operation
of the Site. The Company and the other former contractors have
executed a tolling agreement with the government and are engaged in discussions
with the government concerning the Site. Based on the investigation
undertaken by the Company to date, the Company believes that there may be
substantial defenses to some or all of the government’s claims. At
this time, the Company cannot reasonably estimate its potential liability, if
any, with respect to the Site and, accordingly, has not included this Site in
the accrued liability for environmental matters reported below.
Range of
Exposure. The reasonably possible share of costs for
environmental matters involving current and former operating sites, including
those with identified AROs (see Note 7), the Vertac site, and
other locations where the Company may have a liability, is approximately $94.1
million as of September 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 and
Second Quarter Form 10Qs, 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 and Second Quarter Form
10-Qs. There are no changes to those disclosures except as noted
below:
Asbestos
As of
September 30, 2008, there were approximately 25,563 unresolved claims, of which
approximately 895 were premises claims and the rest were products claims.
There were also approximately 1,745 unpaid claims which have been settled or are
subject to the terms of a settlement agreement. Between January 1,
2008 and September 30, 2008, the Company received approximately 1,304 new
claims. During that same period, the Company spent a net amount of
$20.7 million to resolve and defend asbestos matters, including $15.7 million
directly related to settlement payments and $5.0 million for defense
costs.
As of
September 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 $4.0 million remaining in
trust as of September 30, 2008. As previously described in the 2007
Form 10-K and the 2008 First and Second Quarter Form 10-Qs, 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 September 30, 2008, defense costs and settlement
payments for qualifying asbestos products claims of approximately $123 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 nine months ended
September 30, 2008.
|
|
Balance
January 1, 2008
|
|
|
Interest
Income/
Accrual
adjustments, net
|
|
|
Insurance
Recovered/
Liabilities
Settled
|
|
|
Accretion/
Reclassify-
action
|
|
|
Balance
September
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 |
|
|
|
— |
|
|
|
(3.3 |
) |
|
|
— |
|
|
|
4.0 |
|
Noncurrent
asbestos-related assets
|
|
|
24.1 |
|
|
|
(0.4 |
) |
|
|
(19.7 |
) |
|
|
— |
|
|
|
4.0 |
|
Total
asbestos-related assets
|
|
$ |
28.1 |
|
|
$ |
(0.4 |
) |
|
$ |
(23.7 |
) |
|
$ |
— |
|
|
$ |
4.0 |
|
Asbestos-related
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
reserve for claims
|
|
$ |
28.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28.0 |
|
Noncurrent
reserve for claims
|
|
|
227.0 |
|
|
|
— |
|
|
|
(15.7 |
) |
|
|
— |
|
|
|
211.3 |
|
Total
asbestos-related liabilities
|
|
$ |
255.0 |
|
|
$ |
— |
|
|
$ |
(15.7 |
) |
|
$ |
— |
|
|
$ |
239.3 |
|
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 (Rib), 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). The Company has been advised that in late September 2008,
co-defendant BP Amoco Polymers, Inc. and related entities entered into a
settlement with Cytec.
Hercules Incorporated v.
Hexcel Corporation, Supreme Court of the State of New York,
County of New York, and 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 the Company’s claim for
indemnification based on the terms of the purchase and sale
agreement. The Company then sought review of the dismissal of its
indemnification claim by the New York Court of Appeals. However, on
September 2, 2008, the New York Court of Appeals denied the Company’s motion for
leave to appeal, bringing this litigation to an end.
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. On or about October 6, 2008, Plaintiffs in these actions filed
Petitions for Writ of Certiorari with the U.S. Supreme Court seeking review of
the rulings of the trial court and the U.S. Court of Appeals for the Second
Circuit.
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
Georgenes Baton, 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, and 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 scheduled for June 15, 2009. Discovery and motion practice are
continuing.
Amounts Accrued for
Non-Asbestos Litigation
During
the period January 1, 2008 through September 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
September 30, 2008 Consolidated Balance Sheet reflects a current liability of
$2.4 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 September 30, 2008 Consolidated Balance Sheet.
A
reconciliation of common stock share activity during the nine months ended
September 30, 2008 is provided as follows:
|
|
Common
Stock
|
|
|
Reacquired
Stock
|
|
Balances
at January 1, 2008
|
|
|
160,004,908 |
|
|
|
46,006,780 |
|
Conversion
of debentures
|
|
|
6,239 |
|
|
|
— |
|
Exercise
of stock options
|
|
|
— |
|
|
|
(176,648 |
) |
Issuance
of stock awards, net of forfeitures
|
|
|
— |
|
|
|
(241,682 |
) |
Shares
redeemed in lieu of taxes on share-based compensation
awards
|
|
|
— |
|
|
|
115,748 |
|
Contribution
of shares to defined contribution benefit plan
|
|
|
— |
|
|
|
(10,864 |
) |
Repurchases
of common stock
|
|
|
— |
|
|
|
1,674,200 |
|
Balances
at September 30, 2008
|
|
|
160,011,147 |
|
|
|
47,367,534 |
|
10. Supplemental
Financial Statement Disclosures
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
Inventories:
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
126.4 |
|
|
$ |
125.5 |
|
Raw
materials and work-in-process
|
|
|
91.5 |
|
|
|
74.9 |
|
Supplies
|
|
|
25.2 |
|
|
|
23.6 |
|
|
|
$ |
243.1 |
|
|
$ |
224.0 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
16.3 |
|
|
$ |
16.0 |
|
Buildings
and equipment
|
|
|
1,784.0 |
|
|
|
1,726.4 |
|
Construction
in progress
|
|
|
127.8 |
|
|
|
113.7 |
|
|
|
|
1,928.1 |
|
|
|
1,856.1 |
|
Accumulated
depreciation and amortization
|
|
|
(1,240.9 |
) |
|
|
(1,196.1 |
) |
|
|
$ |
687.2 |
|
|
$ |
660.0 |
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in Cost of sales and Selling, general and administrative (“SG&A”)
expenses
|
|
$ |
19.0 |
|
|
$ |
17.4 |
|
|
$ |
56.1 |
|
|
$ |
51.8 |
|
Accelerated
depreciation included in Other operating expense, net
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
$ |
19.1 |
|
|
$ |
17.5 |
|
|
$ |
56.3 |
|
|
$ |
52.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$ |
2.7 |
|
|
$ |
2.4 |
|
|
$ |
8.0 |
|
|
$ |
6.1 |
|
Capitalized
software (normal basis) included in SG&A expenses
|
|
|
0.7 |
|
|
|
3.8 |
|
|
|
6.4 |
|
|
|
11.5 |
|
Accelerated amortization of capitalized software included in Other
operating expense, net
|
|
|
0.1 |
|
|
|
3.4 |
|
|
|
4.7 |
|
|
|
10.3 |
|
Deferred
financing costs included in Interest and debt expense
|
|
|
0.2 |
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
1.7 |
|
|
|
$ |
3.7 |
|
|
$ |
10.5 |
|
|
$ |
19.6 |
|
|
$ |
29.6 |
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
14.7 |
|
|
$ |
14.0 |
|
|
$ |
51.1 |
|
|
$ |
47.6 |
|
Income
taxes, net of refunds received
|
|
|
3.8 |
|
|
|
(17.7 |
) |
|
|
17.5 |
|
|
|
(189.3 |
) |
11. Restructuring
Programs
Restructuring
charges are reflected as a component of Other operating expense 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 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:
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Severance
and Other
Exit
Costs
|
|
|
Asset
Charges
|
|
|
Total
|
|
Business
and Corporate infrastructure projects
|
|
$ |
4.7 |
|
|
$ |
5.3 |
|
|
$ |
10.0 |
|
All
other restructuring programs
|
|
|
5.5 |
|
|
|
1.3 |
|
|
|
6.8 |
|
|
|
$ |
10.2 |
|
|
$ |
6.6 |
|
|
$ |
16.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
2.5 |
|
|
$ |
— |
|
|
$ |
2.5 |
|
Aqualon
Group
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Corporate
|
|
|
8.0 |
|
|
|
6.6 |
|
|
|
14.6 |
|
|
|
$ |
10.2 |
|
|
$ |
6.6 |
|
|
$ |
16.8 |
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
19.1 |
|
|
$ |
10.5 |
|
Accrued
charges for severance and other exit costs
|
|
|
9.7 |
|
|
|
21.2 |
|
Cash
payments
|
|
|
(15.8 |
) |
|
|
(12.3 |
) |
Other,
including foreign currency translation
|
|
|
0.5 |
|
|
|
1.2 |
|
Balance
at end of period
|
|
$ |
13.5
3.5 |
|
|
$ |
20.6 |
|
In
addition, the Company made cash payments of $0.5 million and $1.4 million during
the nine months ended September 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 nine months ended September 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 $14 million of future cash payments
primarily in 2008 and 2009 with certain amounts continuing into
2010.
Asset
charges recorded during the nine months ended September 30, 2008 primarily
reflect accelerated amortization charges attributable to capitalized software
development costs associated with the Company’s information technology platform,
as well as an impairment of the Company’s former research facility in
Jacksonville, Florida due to a decline in current property values. Primarily as
a result of the substantial completion of prior restructuring programs, the
Company is currently marketing its former facilities in Jacksonville, Florida,
Pandaan, Indonesia and its existing facility in Pilar,
Argentina. These facilities, with a carrying value of $7.6 million,
are reflected as assets held for sale and are included in the caption “Other
current assets” on the Consolidated Balance Sheet as of September 30,
2008.
12. Other
Operating Expense, Net
Other
operating expense, net consists of the following:
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Severance,
restructuring and other exit costs, net
|
|
$ |
2.2 |
|
|
$ |
7.8 |
|
|
$ |
10.2 |
|
|
$ |
22.6 |
|
Impairments,
accelerated depreciation and amortization(1)
|
|
|
1.3 |
|
|
|
3.5 |
|
|
|
6.6 |
|
|
|
10.9 |
|
Asset
retirement and environmental charges (active sites)
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
0.3 |
|
Legal
settlements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
Gains
on asset dispositions, net
|
|
|
(0.3 |
) |
|
|
(7.6 |
) |
|
|
(3.6 |
) |
|
|
(11.6 |
) |
Dismantlement
costs
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
1.5 |
|
|
|
2.6 |
|
Ashland
transaction costs
|
|
|
10.4 |
|
|
|
— |
|
|
|
10.4 |
|
|
|
— |
|
Other
miscellaneous charges, net
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
$ |
14.3 |
|
|
$ |
5.4 |
|
|
$ |
27.1 |
|
|
$ |
26.1 |
|
(1)
Includes $1.1 million for the impairment of the Jacksonville, Florida
property (see Note 11).
Other
expense, net consists of the following:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Asbestos-related
costs, net
|
|
$ |
2.3 |
|
|
$ |
2.3 |
|
|
$ |
7.3 |
|
|
$ |
6.6 |
|
Investment
dilution and loss on sale of 51% interest in FiberVisions
|
|
|
— |
|
|
|
2.8 |
|
|
|
— |
|
|
|
2.5 |
|
Asset
retirement and environmental charges (inactive sites)
(1)
|
|
|
2.6 |
|
|
|
1.6 |
|
|
|
11.5 |
|
|
|
4.5 |
|
Litigation
settlements and accruals
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
2.0 |
|
|
|
15.2 |
|
Gains
on asset dispositions, net
|
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
|
|
(2.9 |
) |
Other,
net
|
|
|
1.0 |
|
|
|
(1.0 |
) |
|
|
0.6 |
|
|
|
(3.0 |
) |
|
|
$ |
6.1 |
|
|
$ |
3.9 |
|
|
$ |
21.4 |
|
|
$ |
22.9 |
|
Provision/Benefit
for Income Taxes
For the
three and nine months ended September 30, 2008, the Company recognized pretax
income of $44.4 million and $136.2 million and tax expense of $6.4 million and
$30.5 million, respectively. The full year effective tax rate for
2008 is estimated to be 24%. During the three month period ending
September 30, 2008, the Company reached final settlement with the IRS for the
remaining items for the 1996 through 1998 and 1999 through 2001 audit cycles,
and recorded an additional tax benefit of $2.7 million plus related after-tax
interest of $1.1 million.
The
Company recognized pretax income of $61.4 million and $143.5 million and tax
expense (benefits) of $14.9 million and $(26.1) million for the three and nine
months ended September 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 nine months ended September 30, 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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
number of common shares outstanding – Basic
|
|
|
111.4 |
|
|
|
114.4 |
|
|
|
111.6 |
|
|
|
114.4 |
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Share-based compensation
plans
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.5 |
|
Weighted-average
number of common shares outstanding – Diluted
|
|
|
112.1 |
|
|
|
115.2 |
|
|
|
112.2 |
|
|
|
115.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following were antidilutive and therefore excluded from the computation of
diluted earnings per share:
|
|
Options to purchase common
stock
|
|
|
0.9 |
|
|
|
1.9 |
|
|
|
0.9 |
|
|
|
1.9 |
|
Warrants to purchase common
stock
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
|
7.5 |
|
|
|
8.5 |
|
|
|
7.5 |
|
|
|
8.5 |
|
16. Reporting
Segment Information
A summary
of reporting segment data is provided below:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
316.9 |
|
|
$ |
287.2 |
|
|
$ |
929.8 |
|
|
$ |
858.7 |
|
Aqualon
Group
|
|
|
288.9 |
|
|
|
257.0 |
|
|
|
846.9 |
|
|
|
736.8 |
|
|
|
$ |
605.8 |
|
|
$ |
544.2 |
|
|
$ |
1,776.7 |
|
|
$ |
1,595.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
23.0 |
|
|
$ |
40.2 |
|
|
$ |
76.6 |
|
|
$ |
105.6 |
|
Aqualon
Group
|
|
|
57.4 |
|
|
|
55.7 |
|
|
|
162.0 |
|
|
|
170.5 |
|
Corporate
items (3)
|
|
|
(17.3 |
) |
|
|
(12.6 |
) |
|
|
(32.9 |
) |
|
|
(37.7 |
) |
|
|
$ |
63.1 |
|
|
$ |
83.3 |
|
|
$ |
205.7 |
|
|
$ |
238.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
9.0 |
|
|
$ |
10.4 |
|
|
$ |
29.3 |
|
|
$ |
30.7 |
|
Aqualon
Group
|
|
|
12.0 |
|
|
|
12.0 |
|
|
|
37.4 |
|
|
|
35.2 |
|
Corporate
items (1)(4)
|
|
|
1.8 |
|
|
|
5.6 |
|
|
|
9.2 |
|
|
|
16.1 |
|
|
|
$ |
22.8 |
|
|
$ |
28.0 |
|
|
$ |
75.9 |
|
|
$ |
82.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
4.6 |
|
|
$ |
4.6 |
|
|
$ |
13.8 |
|
|
$ |
13.3 |
|
Aqualon
Group
|
|
|
6.2 |
|
|
|
6.3 |
|
|
|
19.2 |
|
|
|
18.7 |
|
Corporate
items
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
$ |
10.9 |
|
|
$ |
11.0 |
|
|
$ |
33.4 |
|
|
$ |
32.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
8.6 |
|
|
$ |
9.9 |
|
|
$ |
21.2 |
|
|
$ |
24.9 |
|
Aqualon
Group
|
|
|
18.7 |
|
|
|
11.8 |
|
|
|
45.6 |
|
|
|
46.9 |
|
Corporate
items
|
|
|
1.6 |
|
|
|
2.3 |
|
|
|
7.5 |
|
|
|
6.0 |
|
|
|
$ |
28.9 |
|
|
$ |
24.0 |
|
|
$ |
74.3 |
|
|
$ |
77.8 |
|
(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 nine months ended September 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
these derivatives 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:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Notional
|
|
|
Fair
Value
|
|
|
Notional
|
|
|
Fair
Value
|
|
Foreign
exchange contracts(1)
|
|
$ |
54.1 |
|
|
$ |
2.9 |
|
|
$ |
35.6 |
|
|
$ |
0.3 |
|
Cross
currency interest rate swaps(2)
|
|
|
(500.0 |
) |
|
|
(117.4 |
) |
|
|
(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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Foreign
exchange contracts, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
(losses) recognized in Other expense, net
|
|
$ |
(0.5 |
) |
|
$ |
(0.8 |
) |
|
$ |
0.6 |
|
|
$ |
(1.2 |
) |
Cross
currency interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
(losses) recognized in OCI (1)
|
|
|
43.5 |
|
|
|
(30.9 |
) |
|
|
(5.3 |
) |
|
|
(42.4 |
) |
(Losses)
gains recognized in Interest and debt expense
|
|
|
(4.6 |
) |
|
|
0.1 |
|
|
|
(11.9 |
) |
|
|
2.1 |
|
(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.
|
Pending Transaction with Ashland
|
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 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. Necessary regulatory approvals required for
the transaction to close have been received from both domestic and international
authorities. The special shareholder’s meeting to vote on the merger
is scheduled for November 5, 2008. Assuming the satisfaction of the
remaining conditions, the transaction is expected to close during November 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 originally filed the Agreement with the
Securities and Exchange Commission as an Exhibit to a Current Report on Form 8-K
on July 14, 2008. Additional information is provided in the
definitive proxy statement/prospectus filed by the Company with the SEC on
October 3, 2008 and mailed to investors and security holders on or about October
6, 2008 and in a registration statement on Form S-4 filed by Ashland with the
SEC on September 29, 2008. There can be no assurance that the merger
will be completed.
19. 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 September 30, 2008
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
165.8 |
|
|
$ |
143.0 |
|
|
$ |
348.3 |
|
|
$ |
(51.3 |
) |
|
$ |
605.8 |
|
Cost
of sales
|
|
|
124.6 |
|
|
|
104.6 |
|
|
|
243.4 |
|
|
|
(51.3 |
) |
|
|
421.3 |
|
Selling,
general and administrative expenses
|
|
|
24.0 |
|
|
|
25.0 |
|
|
|
44.5 |
|
|
|
— |
|
|
|
93.5 |
|
Research
and development
|
|
|
4.5 |
|
|
|
5.0 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
10.9 |
|
Intangible
asset amortization
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
1.1 |
|
|
|
(0.1 |
) |
|
|
2.7 |
|
Other
operating expense (income), net
|
|
|
13.1 |
|
|
|
1.6 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
14.3 |
|
Profit
(loss) from operations
|
|
|
(2.0 |
) |
|
|
6.7 |
|
|
|
58.3 |
|
|
|
0.1 |
|
|
|
63.1 |
|
Interest
and debt expense (income), net
|
|
|
32.5 |
|
|
|
(15.5 |
) |
|
|
1.6 |
|
|
|
— |
|
|
|
18.6 |
|
Vertac
response costs and litigation charges
|
|
|
(6.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6.0 |
) |
Other
expense, net
|
|
|
5.0 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
6.1 |
|
Income
(loss) before income taxes, minority interests and equity
income
|
|
|
(33.5 |
) |
|
|
21.7 |
|
|
|
56.3 |
|
|
|
(0.1 |
) |
|
|
44.4 |
|
Provision
(benefit) for income taxes
|
|
|
(14.5 |
) |
|
|
8.0 |
|
|
|
12.9 |
|
|
|
— |
|
|
|
6.4 |
|
Income
(loss) before minority interests and equity income
|
|
|
(19.0 |
) |
|
|
13.7 |
|
|
|
43.4 |
|
|
|
(0.1 |
) |
|
|
38.0 |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Equity
income of affiliated companies
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
|
Equity
income from consolidated subsidiaries
|
|
|
58.6 |
|
|
|
— |
|
|
|
— |
|
|
|
(58.6 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
39.6 |
|
|
|
15.3 |
|
|
|
43.4 |
|
|
|
(58.7 |
) |
|
|
39.6 |
|
Net
loss from discontinued operations, net of tax
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
Net
income
|
|
$ |
39.5 |
|
|
$ |
15.3 |
|
|
$ |
43.4 |
|
|
$ |
(58.7 |
) |
|
$ |
39.5 |
|
Condensed
Consolidating Statement of Operations
|
|
Nine
months Ended September 30, 2008
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
484.0 |
|
|
$ |
411.4 |
|
|
$ |
1,034.8 |
|
|
$ |
(153.5 |
) |
|
$ |
1,776.7 |
|
Cost
of sales
|
|
|
357.0 |
|
|
|
299.4 |
|
|
|
713.2 |
|
|
|
(153.8 |
) |
|
|
1,215.8 |
|
Selling,
general and administrative expenses
|
|
|
74.8 |
|
|
|
80.6 |
|
|
|
131.3 |
|
|
|
— |
|
|
|
286.7 |
|
Research
and development
|
|
|
13.6 |
|
|
|
15.3 |
|
|
|
4.5 |
|
|
|
— |
|
|
|
33.4 |
|
Intangible
asset amortization
|
|
|
4.8 |
|
|
|
0.5 |
|
|
|
3.2 |
|
|
|
(0.5 |
) |
|
|
8.0 |
|
Other
operating expense, net
|
|
|
20.0 |
|
|
|
1.1 |
|
|
|
6.0 |
|
|
|
— |
|
|
|
27.1 |
|
Profit
from operations
|
|
|
13.8 |
|
|
|
14.5 |
|
|
|
176.6 |
|
|
|
0.8 |
|
|
|
205.7 |
|
Interest
and debt expense (income), net
|
|
|
88.7 |
|
|
|
(38.8 |
) |
|
|
3.7 |
|
|
|
— |
|
|
|
53.6 |
|
Vertac
response costs and litigation charges
|
|
|
(5.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.5 |
) |
Other
expense (income), net
|
|
|
20.3 |
|
|
|
1.7 |
|
|
|
(1.2 |
) |
|
|
0.6 |
|
|
|
21.4 |
|
Income
(loss) before income taxes, minority interests and equity income
(loss)
|
|
|
(89.7 |
) |
|
|
51.6 |
|
|
|
174.1 |
|
|
|
0.2 |
|
|
|
136.2 |
|
Provision
(benefit) for income taxes
|
|
|
(24.5 |
) |
|
|
19.0 |
|
|
|
35.9 |
|
|
|
0.1 |
|
|
|
30.5 |
|
Income
(loss) before minority interests and equity income (loss)
|
|
|
(65.2 |
) |
|
|
32.6 |
|
|
|
138.2 |
|
|
|
0.1 |
|
|
|
105.7 |
|
Minority
interests in losses of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
|
— |
|
|
|
0.9 |
|
Equity
income (loss) of affiliated companies
|
|
|
— |
|
|
|
0.5 |
|
|
|
(0.9 |
) |
|
|
0.9 |
|
|
|
0.5 |
|
Equity
income from consolidated subsidiaries
|
|
|
172.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(172.3 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
107.1 |
|
|
|
33.1 |
|
|
|
138.2 |
|
|
|
(171.3 |
) |
|
|
107.1 |
|
Net
income from discontinued operations, net of tax
|
|
|
25.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25.8 |
|
Net
income
|
|
$ |
132.9 |
|
|
$ |
33.1 |
|
|
$ |
138.2 |
|
|
$ |
(171.3 |
) |
|
$ |
132.9 |
|
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
157.6 |
|
|
$ |
114.9 |
|
|
$ |
321.2 |
|
|
$ |
(49.5 |
) |
|
$ |
544.2 |
|
Cost
of sales
|
|
|
111.2 |
|
|
|
82.9 |
|
|
|
213.7 |
|
|
|
(49.8 |
) |
|
|
358.0 |
|
Selling,
general and administrative expenses
|
|
|
15.6 |
|
|
|
30.7 |
|
|
|
37.8 |
|
|
|
— |
|
|
|
84.1 |
|
Research
and development
|
|
|
4.5 |
|
|
|
5.0 |
|
|
|
1.5 |
|
|
|
— |
|
|
|
11.0 |
|
Intangible
asset amortization
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
2.4 |
|
Other
operating expense (income), net
|
|
|
(2.4 |
) |
|
|
4.3 |
|
|
|
3.5 |
|
|
|
— |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
27.1 |
|
|
|
(8.1 |
) |
|
|
63.9 |
|
|
|
0.4 |
|
|
|
83.3 |
|
Interest
and debt expense (income), net
|
|
|
46.5 |
|
|
|
(30.7 |
) |
|
|
1.2 |
|
|
|
— |
|
|
|
17.0 |
|
Vertac
response costs and litigation charges
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.0 |
|
Other
expense, net
|
|
|
0.2 |
|
|
|
3.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
3.9 |
|
Income
(loss) before income taxes, minority interests and equity income
(loss)
|
|
|
(20.6 |
) |
|
|
19.1 |
|
|
|
62.6 |
|
|
|
0.3 |
|
|
|
61.4 |
|
Provision
(benefit) for income taxes
|
|
|
1.9 |
|
|
|
8.4 |
|
|
|
4.5 |
|
|
|
0.1 |
|
|
|
14.9 |
|
Income
(loss) before minority interests and equity income (loss)
|
|
|
(22.5 |
) |
|
|
10.7 |
|
|
|
58.1 |
|
|
|
0.2 |
|
|
|
46.5 |
|
Minority
interests in losses of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
Equity
income (loss) of affiliated companies
|
|
|
— |
|
|
|
1.0 |
|
|
|
(0.3 |
) |
|
|
0.3 |
|
|
|
1.0 |
|
Equity
income from consolidated subsidiaries
|
|
|
70.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(70.3 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
47.8 |
|
|
|
11.7 |
|
|
|
58.1 |
|
|
|
(69.8 |
) |
|
|
47.8 |
|
Net
income from discontinued operations, net of tax
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.0 |
|
Net
income
|
|
$ |
48.8 |
|
|
$ |
11.7 |
|
|
$ |
58.1 |
|
|
$ |
(69.8 |
) |
|
$ |
48.8 |
|
Condensed
Consolidating Statement of Operations
|
|
Nine
months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
467.6 |
|
|
$ |
340.3 |
|
|
$ |
932.5 |
|
|
$ |
(144.9 |
) |
|
$ |
1,595.5 |
|
Cost
of sales
|
|
|
329.0 |
|
|
|
240.7 |
|
|
|
616.1 |
|
|
|
(145.6 |
) |
|
|
1,040.2 |
|
Selling,
general and administrative expenses
|
|
|
47.5 |
|
|
|
93.9 |
|
|
|
110.9 |
|
|
|
— |
|
|
|
252.3 |
|
Research
and development
|
|
|
13.6 |
|
|
|
14.7 |
|
|
|
4.1 |
|
|
|
— |
|
|
|
32.4 |
|
Intangible
asset amortization
|
|
|
4.6 |
|
|
|
0.5 |
|
|
|
1.1 |
|
|
|
(0.1 |
) |
|
|
6.1 |
|
Other
operating expense, net
|
|
|
19.5 |
|
|
|
5.2 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
26.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from operations
|
|
|
53.4 |
|
|
|
(14.7 |
) |
|
|
198.9 |
|
|
|
0.8 |
|
|
|
238.4 |
|
Interest
and debt expense (income), net
|
|
|
138.4 |
|
|
|
(90.0 |
) |
|
|
3.6 |
|
|
|
— |
|
|
|
52.0 |
|
Vertac
response costs and litigation charges
|
|
|
20.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20.0 |
|
Other
expense, net
|
|
|
17.4 |
|
|
|
5.3 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
22.9 |
|
Income
(loss) before income taxes, minority interests and equity
income
|
|
|
(122.4 |
) |
|
|
70.0 |
|
|
|
195.2 |
|
|
|
0.7 |
|
|
|
143.5 |
|
(Benefit)
provision for income taxes
|
|
|
(83.9 |
) |
|
|
26.3 |
|
|
|
31.2 |
|
|
|
0.3 |
|
|
|
(26.1 |
) |
Income
(loss) before minority interests and equity income
|
|
|
(38.5 |
) |
|
|
43.7 |
|
|
|
164.0 |
|
|
|
0.4 |
|
|
|
169.6 |
|
Minority
interests in earnings of consolidated subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
— |
|
|
|
(0.7 |
) |
Equity
income of affiliated companies
|
|
|
— |
|
|
|
0.5 |
|
|
|
0.7 |
|
|
|
(0.7 |
) |
|
|
0.5 |
|
Equity
income from consolidated subsidiaries
|
|
|
207.9 |
|
|
|
— |
|
|
|
— |
|
|
|
(207.9 |
) |
|
|
— |
|
Net
income from continuing operations before discontinued
operations
|
|
|
169.4 |
|
|
|
44.2 |
|
|
|
164.0 |
|
|
|
(208.2 |
) |
|
|
169.4 |
|
Net
income from discontinued operations, net of tax
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.0 |
|
Net
income
|
|
$ |
170.4 |
|
|
$ |
44.2 |
|
|
$ |
164.0 |
|
|
$ |
(208.2 |
) |
|
$ |
170.4 |
|
Condensed
Consolidating Balance Sheet
|
|
As
of September 30, 2008
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminations
and
|
|
|
|
|
Assets
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
29.3 |
|
|
$ |
1.6 |
|
|
$ |
85.8 |
|
|
$ |
— |
|
|
$ |
116.7 |
|
Accounts
receivable, net
|
|
|
72.4 |
|
|
|
69.8 |
|
|
|
279.3 |
|
|
|
— |
|
|
|
421.5 |
|
Intercompany
receivables (payables)
|
|
|
69.0 |
|
|
|
14.6 |
|
|
|
0.3 |
|
|
|
(83.9 |
) |
|
|
— |
|
Inventories
|
|
|
57.3 |
|
|
|
67.8 |
|
|
|
117.0 |
|
|
|
1.0 |
|
|
|
243.1 |
|
Deferred
income taxes
|
|
|
16.5 |
|
|
|
3.7 |
|
|
|
6.5 |
|
|
|
— |
|
|
|
26.7 |
|
Income
taxes receivable
|
|
|
63.8 |
|
|
|
— |
|
|
|
— |
|
|
|
(39.1 |
) |
|
|
24.7 |
|
Other
current assets
|
|
|
16.4 |
|
|
|
2.9 |
|
|
|
21.2 |
|
|
|
— |
|
|
|
40.5 |
|
Total
current assets
|
|
|
324.7 |
|
|
|
160.4 |
|
|
|
510.1 |
|
|
|
(122.0 |
) |
|
|
873.2 |
|
Property,
plant and equipment, net
|
|
|
131.9 |
|
|
|
160.9 |
|
|
|
394.4 |
|
|
|
— |
|
|
|
687.2 |
|
Investments
in subsidiaries and advances, net
|
|
|
1,895.8 |
|
|
|
79.0 |
|
|
|
— |
|
|
|
(1,974.8 |
) |
|
|
— |
|
Intangible
assets, net
|
|
|
129.3 |
|
|
|
1.7 |
|
|
|
24.1 |
|
|
|
— |
|
|
|
155.1 |
|
Goodwill
|
|
|
61.3 |
|
|
|
39.6 |
|
|
|
430.6 |
|
|
|
— |
|
|
|
531.5 |
|
Deferred
income taxes
|
|
|
354.1 |
|
|
|
— |
|
|
|
13.1 |
|
|
|
(7.0 |
) |
|
|
360.2 |
|
Asbestos-related
assets
|
|
|
4.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.0 |
|
Deferred
charges and other assets
|
|
|
55.5 |
|
|
|
25.0 |
|
|
|
29.7 |
|
|
|
— |
|
|
|
110.2 |
|
Total
assets
|
|
$ |
2,956.6 |
|
|
$ |
466.6 |
|
|
$ |
1,402.0 |
|
|
$ |
(2,103.8 |
) |
|
$ |
2,721.4 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
66.2 |
|
|
$ |
41.2 |
|
|
$ |
129.2 |
|
|
$ |
— |
|
|
$ |
236.6 |
|
Intercompany
payables
|
|
|
2.4 |
|
|
|
49.9 |
|
|
|
31.8 |
|
|
|
(84.1 |
) |
|
|
— |
|
Asbestos-related
liabilities
|
|
|
28.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28.0 |
|
Current
debt obligations
|
|
|
4.0 |
|
|
|
— |
|
|
|
45.6 |
|
|
|
— |
|
|
|
49.6 |
|
Vertac
obligations
|
|
|
14.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14.5 |
|
Accrued
expenses
|
|
|
105.9 |
|
|
|
22.1 |
|
|
|
62.5 |
|
|
|
0.2 |
|
|
|
190.7 |
|
Income
taxes payable
|
|
|
— |
|
|
|
51.4 |
|
|
|
7.6 |
|
|
|
(39.1 |
) |
|
|
19.9 |
|
Deferred income
taxes
|
|
|
— |
|
|
|
— |
|
|
|
7.7 |
|
|
|
— |
|
|
|
7.7 |
|
Total
current liabilities
|
|
|
221.0 |
|
|
|
164.6 |
|
|
|
284.4 |
|
|
|
(123.0 |
) |
|
|
547.0 |
|
Long-term
debt
|
|
|
737.9 |
|
|
|
— |
|
|
|
22.9 |
|
|
|
— |
|
|
|
760.8 |
|
Deferred
income taxes
|
|
|
— |
|
|
|
7.0 |
|
|
|
72.7 |
|
|
|
(7.0 |
) |
|
|
72.7 |
|
Pension
obligations
|
|
|
110.7 |
|
|
|
— |
|
|
|
50.0 |
|
|
|
— |
|
|
|
160.7 |
|
Other
postretirement benefit obligations
|
|
|
112.9 |
|
|
|
— |
|
|
|
3.4 |
|
|
|
— |
|
|
|
116.3 |
|
Deferred
credits and other liabilities
|
|
|
224.8 |
|
|
|
16.0 |
|
|
|
18.0 |
|
|
|
— |
|
|
|
258.8 |
|
Asbestos-related
liabilities
|
|
|
211.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
211.3 |
|
Intercompany
notes payable (receivable)
|
|
|
765.4 |
|
|
|
(776.2 |
) |
|
|
10.8 |
|
|
|
— |
|
|
|
— |
|
Minority
interests
|
|
|
— |
|
|
|
— |
|
|
|
21.2 |
|
|
|
— |
|
|
|
21.2 |
|
Total
stockholders' equity
|
|
|
572.6 |
|
|
|
1,055.2 |
|
|
|
918.6 |
|
|
|
(1,973.8 |
) |
|
|
572.6 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,956.6 |
|
|
$ |
466.6 |
|
|
$ |
1,402.0 |
|
|
$ |
(2,103.8 |
) |
|
$ |
2,721.4 |
|
Condensed
Consolidating Statement of Cash Flows
|
|
Nine
months Ended September 30, 2008
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
123.5 |
|
|
$ |
64.2 |
|
|
$ |
135.5 |
|
|
$ |
(188.0 |
) |
|
$ |
135.2 |
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(16.7 |
) |
|
|
(16.8 |
) |
|
|
(40.8 |
) |
|
|
— |
|
|
|
(74.3 |
) |
Acquisitions and investments,
net
|
|
|
— |
|
|
|
(1.5 |
) |
|
|
(20.1 |
) |
|
|
— |
|
|
|
(21.6 |
) |
Proceeds
of asset disposals, net
|
|
|
2.9 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
3.0 |
|
Other,
net
|
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
(0.7 |
) |
|
|
— |
|
|
|
(0.1 |
) |
Net cash used in investing
activities
|
|
|
(13.9 |
) |
|
|
(17.6 |
) |
|
|
(61.5 |
) |
|
|
— |
|
|
|
(93.0 |
) |
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
payments
|
|
|
(3.0 |
) |
|
|
— |
|
|
|
(0.7 |
) |
|
|
— |
|
|
|
(3.7 |
) |
Change in short-term
debt
|
|
|
— |
|
|
|
— |
|
|
|
11.7 |
|
|
|
— |
|
|
|
11.7 |
|
Change
in intercompany advances
|
|
|
(52.7 |
) |
|
|
(46.5 |
) |
|
|
(37.2 |
) |
|
|
136.4 |
|
|
|
— |
|
Repurchase
of common stock
|
|
|
(38.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(38.1 |
) |
Dividends
paid
|
|
|
(16.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16.5 |
) |
Intercompany dividends
paid
|
|
|
— |
|
|
|
— |
|
|
|
(51.6 |
) |
|
|
51.6 |
|
|
|
— |
|
Proceeds from the exercise of
stock options
|
|
|
2.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.4 |
|
Other, net
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
Net
cash used in financing activities
|
|
|
(107.2 |
) |
|
|
(46.5 |
) |
|
|
(77.8 |
) |
|
|
188.0 |
|
|
|
(43.5 |
) |
Effect of
exchange rate changes on cash
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
— |
|
|
|
1.5 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2.4 |
|
|
|
0.1 |
|
|
|
(2.3 |
) |
|
|
— |
|
|
|
0.2 |
|
Cash and
cash equivalents - beginning of period
|
|
|
26.9 |
|
|
|
1.5 |
|
|
|
88.1 |
|
|
|
— |
|
|
|
116.5 |
|
Cash and
cash equivalents - end of period
|
|
$ |
29.3 |
|
|
$ |
1.6 |
|
|
$ |
85.8 |
|
|
$ |
— |
|
|
$ |
116.7 |
|
Condensed
Consolidating Statement of Cash Flows
|
|
Nine
months Ended September 30, 2007
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
and
Adjustments
|
|
|
Consolidated
|
|
Net
Cash Provided By Operating Activities
|
|
$ |
310.9 |
|
|
$ |
38.7 |
|
|
$ |
159.1 |
|
|
$ |
(261.2 |
) |
|
$ |
247.5 |
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(13.3 |
) |
|
|
(26.3 |
) |
|
|
(38.2 |
) |
|
|
— |
|
|
|
(77.8 |
) |
Acquisitions and investments,
net
|
|
|
— |
|
|
|
(16.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(16.2 |
) |
Proceeds from
sale of 51% interest inFiberVisions, net
|
|
|
(1.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.2 |
) |
Proceeds of asset disposals, net of transactioncosts
|
|
|
0.7 |
|
|
|
— |
|
|
|
12.9 |
|
|
|
— |
|
|
|
13.6 |
|
Net cash used in investing
activities
|
|
|
(13.8 |
) |
|
|
(42.5 |
) |
|
|
(25.3 |
) |
|
|
— |
|
|
|
(81.6 |
) |
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
proceeds
|
|
|
— |
|
|
|
— |
|
|
|
3.9 |
|
|
|
— |
|
|
|
3.9 |
|
Long-term debt
payments
|
|
|
(192.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(192.1 |
) |
Change in short-term
debt
|
|
|
— |
|
|
|
— |
|
|
|
8.0 |
|
|
|
— |
|
|
|
8.0 |
|
Change
in intercompany advances
|
|
|
(154.4 |
) |
|
|
4.5 |
|
|
|
(79.5 |
) |
|
|
229.4 |
|
|
|
— |
|
Repurchase
of common stock
|
|
|
(22.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22.8 |
) |
Proceeds from the exercise of
stock options
|
|
|
6.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.1 |
|
Dividends paid
|
|
|
— |
|
|
|
— |
|
|
|
(31.8 |
) |
|
|
31.8 |
|
|
|
— |
|
Other, net
|
|
|
2.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.1 |
|
Net cash (used in) provided by
financingactivities
|
|
|
(361.1 |
) |
|
|
4.5 |
|
|
|
(99.4 |
) |
|
|
261.2 |
|
|
|
(194.8 |
) |
Effect of
exchange rate changes on cash
|
|
|
— |
|
|
|
— |
|
|
|
5.7 |
|
|
|
— |
|
|
|
5.7 |
|
Net
(decrease) increase in cash and cashequivalents
|
|
|
(64.0 |
) |
|
|
0.7 |
|
|
|
40.1 |
|
|
|
— |
|
|
|
(23.2 |
) |
Cash and
cash equivalents - beginning of period
|
|
|
89.7 |
|
|
|
0.5 |
|
|
|
81.6 |
|
|
|
— |
|
|
|
171.8 |
|
Cash and
cash equivalents - end of period
|
|
$ |
25.7 |
|
|
$ |
1.2 |
|
|
$ |
121.7 |
|
|
$ |
— |
|
|
$ |
148.6 |
|
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 transaction 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; and other
risks that are described in filings made by Ashland and the Company with the
Securities and Exchange Commission (“SEC”) 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, 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 SEC. 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 transaction, Ashland and the Company have filed
documents with the SEC, including a registration statement on Form
S-4 filed by Ashland on September 29, 2008, and a related definitive proxy
statement/prospectus filed by the Company on October 3, 2008 and mailed to
investors and security holders on or about October 6, 2008. Investors
and security holders are urged to read the registration statement on Form S-4
and the related definitive proxy statement/prospectus about the proposed
transaction. Investors and security holders may obtain free copies of
these documents and other documents filed with the SEC by contacting Ashland
Investor Relations at (859) 815-4454 or Hercules Investor Relations at (302)
594-7151. Investors and security holders may also 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 are 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 has been
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 “nine-month period” refer to the third quarter of 2008 and the nine months
ended September 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 nine months ended September 30, 2008 and 2007
were:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
North
America
|
|
|
45 |
% |
|
|
47 |
% |
|
|
46 |
% |
|
|
47 |
% |
Europe
|
|
|
34 |
% |
|
|
35 |
% |
|
|
36 |
% |
|
|
36 |
% |
Asia
Pacific
|
|
|
13 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
Latin
America
|
|
|
8 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
Consolidated
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Business
Segments
The
Company operates through two 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 nine months ended September 30, 2008 and 2007 as a percent of
total net sales, by segment, were:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Paper
Technologies and Ventures
|
|
|
52 |
% |
|
|
53 |
% |
|
|
52 |
% |
|
|
54 |
% |
Aqualon
Group
|
|
|
48 |
% |
|
|
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., (4) settlement of the Vertac response cost matter and (5) the adoption of
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”). A discussion of these developments is provided as
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 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. Necessary regulatory approvals
required for the transaction to close have been received from both domestic and
international authorities. Assuming the satisfaction of the remaining
conditions, the transaction is expected to close during November of 2008. Additional
information is provided in Note 18 to the Consolidated
Financial Statements, the definitive proxy statement/prospectus filed by the
Company with the SEC on October 3, 2008 and in a registration statement on Form
S-4 filed by Ashland with the SEC.
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 31.5 million Reais or $18.1 million has been paid through
the end of the third quarter. The pulp products business of Logos
Quimica is being integrated into the Ventures component of PTV and the remaining
small portion of Logos Quimica is being integrated into the Aqualon segment to
market products into the coatings industry. Additional information is
provided in Note 3 to the Consolidated Financial
Statements.
Settlement
of Vertac Response Cost Matter.
The Company reached an agreement with
the U.S. Government with respect to response costs associated with the Vertac
site for $14.5 million (see Note 8 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 as well as a Current Report on Form 8-K filed on July 30, 2008 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 nine months ended September
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 nine months ended September 30, 2008 and
2007:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Net
sales
|
|
$ |
605.8 |
|
|
$ |
544.2 |
|
|
$ |
61.6 |
|
|
$ |
1,776.7 |
|
|
$ |
1,595.5 |
|
|
$ |
181.2 |
|
Net sales
for the three months ended September 30, 2008 increased 11% from the prior year
period primarily as a result of higher volume of $8.0 million, or 1%, higher
pricing of $26.4 million, or 5%, and $27.4 million, or 5%, related to higher
rates of exchange (“ROE”). These increases were partially offset by
an unfavorable mix of $0.2 million, or less than 1%. The Company
increased sales in all of its business units reflecting overall volume growth,
particularly in higher-growth markets, pricing growth to continue efforts to
recover higher raw material, transportation and utility costs and the
incremental impact of PTV’s recent acquisition in Latin America. 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 the stronger Euro versus the U.S. Dollar
(“USD”). The average Euro/USD exchange rate was approximately 13%
higher during the 2008 period. The unfavorable mix is primarily
attributable to both product and regional mix, primarily in the Paper
Technologies business within PTV and the Coatings business within
Aqualon.
Net sales
for the nine months ended September 30, 2008 also increased 11% from the prior
year period primarily as a result of higher volume of $59.9 million, or 4%,
higher pricing of $48.8 million, or 3%, and $91.9 million, or 5%, related to
higher ROE. These increases were partially offset by an unfavorable
mix of $19.4 million, or 1%. The overall sales variances for the nine
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 September 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
ROE
|
|
North
America
|
|
$ |
273.1 |
|
|
$ |
257.1 |
|
|
|
6 |
% |
|
|
5 |
% |
Europe
|
|
|
208.3 |
|
|
|
190.2 |
|
|
|
9 |
% |
|
|
(6 |
)% |
Asia
Pacific
|
|
|
78.2 |
|
|
|
63.2 |
|
|
|
24 |
% |
|
|
19 |
% |
Latin
America
|
|
|
46.2 |
|
|
|
33.7 |
|
|
|
37 |
% |
|
|
31 |
% |
All
regions
|
|
$ |
605.8 |
|
|
$ |
544.2 |
|
|
|
11 |
% |
|
|
4 |
% |
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
%
Change
Excluding
|
|
Regions
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
ROE
|
|
North
America
|
|
$ |
807.6 |
|
|
$ |
757.1 |
|
|
|
7 |
% |
|
|
6 |
% |
Europe
|
|
|
640.8 |
|
|
|
568.4 |
|
|
|
13 |
% |
|
|
(2 |
)% |
Asia
Pacific
|
|
|
213.3 |
|
|
|
179.9 |
|
|
|
19 |
% |
|
|
16 |
% |
Latin
America
|
|
|
115.0 |
|
|
|
90.1 |
|
|
|
28 |
% |
|
|
20 |
% |
All
regions
|
|
$ |
1,776.7 |
|
|
$ |
1,595.5 |
|
|
|
11 |
% |
|
|
5 |
% |
On a
consolidated basis, Net sales increased in all regions of the world during the
three and nine months ended September 30, 2008. Excluding the impact
of foreign currency fluctuations for both comparative periods, PTV’s sales
increased in all regions with the exception of Europe for both the three and
nine month periods while Aqualon experienced a decline in Europe during the
three month period. Declines in the European regions continue to
reflect challenging market conditions. However, PTV’s sales growth in
the Latin American region more than offset these declines.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Cost
of sales
|
|
$ |
421.3 |
|
|
$ |
358.0 |
|
|
$ |
63.3 |
|
|
$ |
1,215.8 |
|
|
$ |
1,040.2 |
|
|
$ |
175.6 |
|
As
a % of sales
|
|
|
70 |
% |
|
|
66 |
% |
|
|
|
|
|
|
68 |
% |
|
|
65 |
% |
|
|
|
|
Cost of
sales increased 18% and 17%, respectively, during the three and nine months
ended September 30, 2008 from the prior year periods. In addition to
the impact of higher volume and ROE, raw material, transportation and utility
costs increased by $34.7 million and $74.8 million during the 2008 three and
nine month periods, respectively.
During
the nine month period in 2008, the Company incurred higher fixed manufacturing
costs primarily reflecting those costs associated with plant repair and
maintenance shut-downs. In addition, the incremental costs associated
with restoring the Hercules Tianpu methylcellulose (“MC”) facility back to
normal operating capacity, subsequent to the incident in the first
quarter of 2008, are also reflected. 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
$110 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 third quarter of
2008, PTV and Aqualon have recovered approximately 63% and 67%, 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
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Selling,
general and administrative expenses
|
|
$ |
93.5 |
|
|
$ |
84.1 |
|
|
$ |
9.4 |
|
|
$ |
286.7 |
|
|
$ |
252.3 |
|
|
$ |
34.4 |
|
As
a % of sales
|
|
|
15 |
% |
|
|
16 |
% |
|
|
|
|
|
|
16 |
% |
|
|
16 |
% |
|
|
|
|
Selling,
general and administrative expenses (“SG&A”) increased 11% and 14% during
the three and nine months ended September 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 Logos Quimica acquisition, expanded 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 expected returns
on plan assets during the 2008 periods. The higher pension expense is
directly attributable to the significant change in investment strategy with
respect to the plan assets for the qualified U.S. and U.K. defined-benefit plans
(see Note 6 to the Consolidated Financial
Statements).
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Research
and development
|
|
$ |
10.9 |
|
|
$ |
11.0 |
|
|
$ |
(0.1 |
) |
|
$ |
33.4 |
|
|
$ |
32.4 |
|
|
$ |
1.0 |
|
As
a % of sales
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
Research
and development charges for the three and nine months ended September 30, 2008
decreased 1% and increased 3%, respectively, when compared to the prior year
periods. The variances reflect higher spending in both PTV and
Aqualon including higher ROE and employee staffing and related costs supporting
new product development and product line enhancements. The slight
decrease during the three month period reflects lower centralized research and
development spending as the organization has become more streamlined and
industry/segment-focused.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Intangible
asset amortization
|
|
$ |
2.7 |
|
|
$ |
2.4 |
|
|
$ |
0.3 |
|
|
$ |
8.0 |
|
|
$ |
6.1 |
|
|
$ |
1.9 |
|
Intangible
asset amortization increased during the three and nine months ended September
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 $10.3 million during
2008.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Other
operating expense, net
|
|
$ |
14.3 |
|
|
$ |
5.4 |
|
|
$ |
8.9 |
|
|
$ |
27.1 |
|
|
$ |
26.1 |
|
|
$ |
1.0 |
|
Other
operating expense, net for the three and nine months ended September 30, 2008,
respectively, includes $2.2 million and $10.2 million of severance,
restructuring and other exit costs, as well as $1.3 million and $6.6 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). These charges include a $1.1 million
impairment charge related to the Company’s former research facility in
Jacksonville, Florida that is currently held for sale. In connection
with the pending transaction with Ashland, the Company incurred $10.4 million of
transaction costs including legal and professional fees, during the three months
ended September 30, 2008. In addition, the Company incurred $0.7
million and $3.5 million, respectively, in dismantlement, asset retirement and
environmental and other costs during the three and nine month periods of
2008. These items were partially offset during the three month period
in 2008 by a $0.3 million gain on the sale of assets. These gains, as
well as the recurring recognition of deferred gains attributable to the sale and
leaseback of the Company’s administrative facility in Rijswijk, The Netherlands,
are also reflected during the nine month period in the amount of $0.7
million. Also reflected during the nine month period is a $2.9
million gain on the sale of a parcel of surplus property at the Parlin, New
Jersey manufacturing site.
Other
operating expense, net for the three and nine months ended September 30, 2007,
respectively, reflects $7.8 million and $22.6 million of severance,
restructuring and other exit costs, as well as $3.5 million and $10.9 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 $1.7
million and $4.4 million in dismantlement, asset retirement and environmental
and other costs during the three and nine month periods in 2007,
respectively. Partially offsetting these charges during the 2007
three month period were realized gains on asset dispositions including $7.4
million attributable to certain PTV intellectual property and $0.5 million
attributable to the sale of the Company’s former research facility in Barneveld,
The Netherlands, net of losses of $0.3 million attributable to other fixed
assets. The nine month period in 2007 reflects these items as well as
a gain of $4.1 million attributable to the sale of the Company’s former
manufacturing facility in Pendlebury, United Kingdom and $0.2 million of legal
recoveries related to a domestic product anti-dumping suit against certain
competitors.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Interest
and debt expense
|
|
$ |
18.6 |
|
|
$ |
17.0 |
|
|
$ |
1.6 |
|
|
$ |
53.6 |
|
|
$ |
52.0 |
|
|
$ |
1.6 |
|
Interest
and debt expense for the three and nine months ended September 30, 2008
increased 9% and 3% from the comparable 2007 periods, respectively, due to $4.7
million and $14.0 million expenses resulting from decreasing LIBOR-based rates
compared to increasing EURIBOR-based rates on the cross-currency interest rate
swaps as well as $0.5 million and $1.4 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
$4.2 million and $14.4 million during the three and nine month periods,
respectively, on the Company’s fixed and variable rate debt primarily due to
substantial debt repayments made during the second half of 2007. Also
reflected is the impact of lower capitalized interest, as certain large
construction projects have been completed, and higher credit facility fees and
related expenses during the 2008 periods.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Vertac
response costs and litigation charges
|
|
$ |
(6.0 |
) |
|
$ |
1.0 |
|
|
$ |
(7.0 |
) |
|
$ |
(5.5 |
) |
|
$ |
20.0 |
|
|
$ |
(25.5 |
) |
Vertac-related
costs decreased during the three and nine months ended September 30, 2008,
respectively, primarily reflecting the settlement with the U.S.
Government on the claim for additional response costs incurred after June 1,
1998 at the Vertac site (see Note 8 to the Consolidated
Financial Statements). 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 $14.5 million as of September 30, 2008 and $19.8 million
as of September 30, 2007.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Other
expense, net
|
|
$ |
6.1 |
|
|
$ |
3.9 |
|
|
$ |
2.2 |
|
|
$ |
21.4 |
|
|
$ |
22.9 |
|
|
$ |
(1.5 |
) |
Other
expense, net for the three and nine months ended September 30, 2008,
respectively, reflects $2.3 million and $7.3 million in legal fees for
asbestos-related litigation costs, net of interest accretion from the asbestos
insurance trusts, $0.2 million and $2.0 million for legal expenses attributable
to previously divested businesses, $2.6 million and $11.5 million for asset
retirement and environmental-related charges for sites associated with former
businesses and other miscellaneous expense of $1.0 million and $0.6
million. The environmental-related charge for the nine month period
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 nine months ended September 30, 2007,
respectively, reflects $2.3 million and $6.6 million in legal fees for
asbestos-related litigation costs, net of interest accretion from the asbestos
insurance trust, $0.7 million and $15.2 million for legal expenses attributable
to previously divested businesses, and $1.6 million and $4.5 million for asset
retirement and environmental-related charges for sites associated with former
businesses. Included in the legal expenses for the nine month period
is $13.0 million attributable to a settlement with the U.S. Navy in connection
with environmental issues at the Alleghany Ballistics Laboratory
site. The three and nine month periods reflect a loss of $2.8 million
attributable to a dilution of ownership in FiberVisions offset by $0.3 million
of credits related to the original disposition transaction in 2006 during the
2007 nine month period. The three month period also reflects gains on
the disposition of properties in New Jersey and California for a combined $2.5
million. The nine month period reflects these gains as well as $0.4
million attributable to the Company’s disposition of its equity interest in
Abieta Chemie GmbH. In addition, the Company realized interest
income, net of exchange losses and other miscellaneous charges of $1.0 million
and $3.0 million during the three and nine month periods.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Provision
(benefit) for income taxes
|
|
$ |
6.4 |
|
|
$ |
14.9 |
|
|
$ |
(8.5 |
) |
|
$ |
30.5 |
|
|
$ |
(26.1 |
) |
|
$ |
56.6 |
|
Effective
tax (benefit) rate
|
|
|
14 |
% |
|
|
24 |
% |
|
|
|
|
|
|
22 |
% |
|
|
(18 |
%) |
|
|
|
|
For the
three and nine months ended September 30, 2008, the Company recognized pretax
income of $44.4 million and $136.2 million and tax expense of $6.4 million and
$30.5 million, respectively. The full year effective tax rate for
2008 is estimated to be 24%. During the three month period in 2008,
the Company reached final settlement with the Internal Revenue Service (“IRS”)
for the remaining items for the 1996 through 1998 and 1999 through 2001 audit
cycles, and recorded an additional tax benefit of $2.7 million plus related
after-tax interest of $1.1 million.
The
Company recognized pretax income of $61.4 million and $143.5 million and tax
expense (benefits) of $14.9 million and $(26.1) million for the three and nine
months ended September 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
|
|
|
Nine
months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Minority
interests in loss (earnings) of consolidated subsidiaries
|
|
$ |
— |
|
|
$ |
0.3 |
|
|
$ |
(0.3 |
) |
|
$ |
0.9 |
|
|
$ |
(0.7 |
) |
|
$ |
1.6 |
|
The three
and nine months ended September 30, 2008, reflect amounts attributable to the
noncontrolling partners’ interests in losses incurred by the H2H technology
joint venture offset by those attributable to income realized by Hercules
Tianpu. The three months ended September 30, 2007 reflect the
noncontrolling partners’ interests in the losses of the H2H technology joint
venture in excess of those attributable to the earnings of Hercules Tianpu while
the nine month period in 2007 reflects the opposite conditions.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Equity
income of affiliated companies, net of tax
|
|
$ |
1.6 |
|
|
$ |
1.0 |
|
|
$ |
0.6 |
|
|
$ |
0.5 |
|
|
$ |
0.5 |
|
|
$ |
— |
|
Equity
income during the 2008 and 2007 periods is primarily attributable to earnings
from the Company’s investment in Pakistan Gum Industries (49%-owned by Hercules)
partially offset by losses incurred by FiberVisions, in which the Company
currently maintains a 34.5% ownership interest.
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Income
(loss) from discontinued operations, net of tax
|
|
$ |
(0.1 |
) |
|
$ |
1.0 |
|
|
$ |
(1.1 |
) |
|
$ |
25.8 |
|
|
$ |
1.0 |
|
|
$ |
24.8 |
|
The nine
month period ended September 30, 2008 reflects income from discontinued
operations of $25.9 million, net of taxes related 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 has
concluded certain income tax issues with the IRS thereby eliminating the
necessity for maintaining the indemnity obligation. Partially
offsetting this item is the true-up of certain state income tax reserves
initially established in connection with the disposition of the BetzDearborn
Water Treatment business, which was classified as a discontinued operation
effective in 2001.
Results of Operations – Segment Review
The
tables below reflect Net sales and Profit from operations for the three and nine
months ended September 30, 2008 as compared to the three and nine months ended
September 30, 2007.
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies
|
|
$ |
240.6 |
|
|
$ |
225.9 |
|
|
$ |
14.7 |
|
|
|
7
|
% |
Ventures
|
|
|
76.3 |
|
|
|
61.3 |
|
|
|
15.0 |
|
|
|
24
|
% |
|
|
|
316.9 |
|
|
|
287.2 |
|
|
|
29.7 |
|
|
|
10
|
% |
Aqualon
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coatings
& Construction
|
|
|
141.9 |
|
|
|
128.5 |
|
|
|
13.4 |
|
|
|
10
|
% |
Regulated
|
|
|
71.5 |
|
|
|
58.0 |
|
|
|
13.5 |
|
|
|
23
|
% |
Energy
& Specialties
|
|
|
75.5 |
|
|
|
70.5 |
|
|
|
5.0 |
|
|
|
7
|
% |
|
|
|
288.9 |
|
|
|
257.0 |
|
|
|
31.9 |
|
|
|
12
|
% |
|
|
$ |
605.8 |
|
|
$ |
544.2 |
|
|
$ |
61.6 |
|
|
|
11
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
23.0 |
|
|
$ |
40.2 |
|
|
$ |
(17.2 |
) |
|
|
(43 |
)
% |
Aqualon
Group
|
|
|
57.4 |
|
|
|
55.7 |
|
|
|
1.7 |
|
|
|
3
|
% |
Corporate
Items
|
|
|
(17.3 |
) |
|
|
(12.6 |
) |
|
|
(4.7 |
) |
|
|
(37 |
)
% |
Consolidated
|
|
$ |
63.1 |
|
|
$ |
83.3 |
|
|
$ |
(20.2 |
) |
|
|
(24 |
)
% |
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
Change
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies
|
|
$ |
701.2 |
|
|
$ |
674.7 |
|
|
$ |
26.5 |
|
|
|
4
|
% |
Ventures
|
|
|
228.6 |
|
|
|
184.0 |
|
|
|
44.6 |
|
|
|
24
|
% |
|
|
|
929.8 |
|
|
|
858.7 |
|
|
|
71.1 |
|
|
|
8
|
% |
Aqualon
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coatings
& Construction
|
|
|
414.8 |
|
|
|
358.7 |
|
|
|
56.1 |
|
|
|
16
|
% |
Regulated
|
|
|
214.6 |
|
|
|
182.1 |
|
|
|
32.5 |
|
|
|
18
|
% |
Energy
& Specialties
|
|
|
217.5 |
|
|
|
196.0 |
|
|
|
21.5 |
|
|
|
11
|
% |
|
|
|
846.9 |
|
|
|
736.8 |
|
|
|
110.1 |
|
|
|
15
|
% |
|
|
$ |
1,776.7 |
|
|
$ |
1,595.5 |
|
|
$ |
181.2 |
|
|
|
11
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper
Technologies and Ventures
|
|
$ |
76.6 |
|
|
$ |
105.6 |
|
|
$ |
(29.0 |
) |
|
|
(27 |
)
% |
Aqualon
Group
|
|
|
162.0 |
|
|
|
170.5 |
|
|
|
(8.5 |
) |
|
|
(5 |
)
% |
Corporate
Items
|
|
|
(32.9 |
) |
|
|
(37.7 |
) |
|
|
4.8 |
|
|
|
13
|
% |
Consolidated
|
|
$ |
205.7 |
|
|
$ |
238.4 |
|
|
$ |
(32.7 |
) |
|
|
(14 |
)
% |
Paper
Technologies and Ventures
Three Months Ended September
30, 2008 compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Paper
Technologies
|
|
|
1 |
% |
|
|
(3 |
)% |
|
|
3 |
% |
|
|
6 |
% |
|
|
7 |
% |
Ventures
|
|
|
5 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
24 |
% |
|
|
|
2 |
% |
|
|
(2 |
)% |
|
|
4 |
% |
|
|
6 |
% |
|
|
10 |
% |
Nine Months Ended September
30, 2008 compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Paper
Technologies
|
|
|
(2 |
)% |
|
|
(2 |
)% |
|
|
1 |
% |
|
|
7 |
% |
|
|
4 |
% |
Ventures
|
|
|
6 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
4 |
% |
|
|
24 |
% |
|
|
|
— |
|
|
|
(1 |
)% |
|
|
3 |
% |
|
|
6 |
% |
|
|
8 |
% |
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 50% and
60% of the sales growth for the three and nine month periods in 2008,
respectively, over 2007 levels. Sales of products introduced during
the past five years increased 36% over the prior year
period. 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 7% during the three months ended September 30,
2008 primarily due to 1% higher volume, 6% favorable ROE and 3% increased price
partially offset by 3% unfavorable mix. Volume was higher in both
Latin America and Asia, while North America was relatively flat and Europe was
lower as compared to the prior year period. The increase in both
Latin America and Asia was primarily due to growth in sales of functional
chemicals. Both North American and European volume reflected lower sales of
strength products. Price increases were achieved in all regions, with
the largest contribution in the Americas. The favorable ROE primarily
reflects the strength of the Euro against the USD. Sales in fast
growing markets increased by 37% as compared to the prior year, including strong
growth in Brazil, Chile, Indonesia, Russia and Mediterranean, Red Sea and
Persian Gulf countries.
Paper
Technologies’ sales increased 4% during the nine months ended September 30, 2008
primarily due to 7% higher ROE, 1% higher average pricing partially offset by 2%
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 was achieved in several fast growing markets as
noted for the three month period. 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
most Venture businesses increased during the three months ended September 30,
2008 as compared to the prior year period. Strong growth was achieved
in the Lubricants, Water Management and Pulping chemicals businesses with
increases over the prior year period of 86%, 17% and 15%,
respectively. The increase in Pulping chemicals sales was favorably
impacted by the acquisition of the Logos Quimica business which provided $2.3
million of sales during the quarter. Building and Converted products sales grew
modestly at 6% while Tolled products sales declined 11%. Pricing was favorable
in most Venture businesses and particularly strong in the Lubricants
business.
Sales in
each of the Venture businesses increased during the nine months ended September
30, 2008 as compared to the prior year period with increased pricing achieved in
most of these businesses, particularly Lubricants. The Logos Quimica
acquisition also favorably impacted the nine month period. 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 chemicals
growth reflects an improved product mix and higher selling prices.
PTV
2008 Profitability
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
2007
Profit from operations
|
|
|
|
|
$ |
40.2 |
|
|
|
|
|
$ |
105.6 |
|
Changes
due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
2.4 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
Regional
and product mix
|
|
|
(3.8 |
) |
|
|
|
|
|
|
(6.3 |
) |
|
|
|
|
Price
|
|
|
12.2 |
|
|
|
|
|
|
|
22.2 |
|
|
|
|
|
Raw
material, transportation and utility costs
|
|
|
(19.0 |
) |
|
|
|
|
|
|
(35.2 |
) |
|
|
|
|
All
other manufacturing costs
|
|
|
(2.8 |
) |
|
|
|
|
|
|
(2.9 |
) |
|
|
|
|
ROE
|
|
|
1.8 |
|
|
|
|
|
|
|
7.2 |
|
|
|
|
|
SG&A
and other expenses
|
|
|
4.4 |
|
|
|
|
|
|
|
9.8 |
|
|
|
|
|
Sale
of intellectual property
|
|
|
(7.4 |
) |
|
|
|
|
|
|
(7.4 |
) |
|
|
|
|
Restructuring,
severance and other exit costs, accelerated
depreciation and other charges
|
|
|
0.6 |
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
Impact
of change in accounting method for pensions
|
|
|
(5.6 |
) |
|
|
|
|
|
|
(16.8 |
) |
|
|
|
|
Net
change
|
|
|
|
|
|
|
(17.2 |
) |
|
|
|
|
|
|
(29.0 |
) |
2008
Profit from operations
|
|
|
|
|
|
$ |
23.0 |
|
|
|
|
|
|
$ |
76.6 |
|
Profit
from operations declined 43% and 27% during the three and nine months ended
September 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 $11.6 million, or 34%, for the three month period and $12.2
million, or 14%, for the nine month period as compared to the 2007
periods. The adjusted decline during the three month period was
primarily due to significant increases in raw material and utility costs and
unfavorable regional and product mix, primarily in the Paper Technologies
markets, and higher SG&A expenses, including those attributable to the Logos
Quimica acquisition. These items were partially offset by increased
selling prices, higher volume and associated contribution margins, favorable
ROE, and lower restructuring charges. The adjusted decline in
profitability during the nine month period reflects higher raw material and
utility costs, unfavorable regional and product mix and higher restructuring
charges partially offset by increased selling prices, higher volume and
associated contribution margins, favorable ROE and lower support
charges. The adjusted decline for both periods during 2008 was
impacted by the sale of certain intellectual property during the 2007 three and
nine month periods.
Higher
raw material costs of $18.7 million and $35.0 million for the three and nine
month periods of 2008, respectively, broadly reflect higher prices for most
inputs, but most significantly for methanol, stearic acid, gum rosins and
phosphorus trichloride. Transportation costs have decreased during
the three and nine month periods in 2008 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. The recovery of cost increases was down slightly on a
sequential basis to 64% for the three month period ended September 30, 2008 as
compared to 69% in the second quarter of 2008. For the 2008 nine
month period, the recovery of costs was approximately 63%.
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, PTV 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 anticipated growth in the Latin American pulp
markets.
In
addition, PTV 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 through the
remainder of 2008 resulting in cost increases in excess of $50 million over the
year 2007. PTV remains committed to maximizing its recovery of these
costs through pricing while balancing its competitive position.
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
|
|
|
2 |
% |
|
|
(3 |
)% |
|
|
5 |
% |
|
|
6 |
% |
|
|
10 |
% |
Regulated
|
|
|
11 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
4 |
% |
|
|
23 |
% |
Energy
& Specialties
|
|
|
(5 |
)% |
|
|
4 |
% |
|
|
5 |
% |
|
|
3 |
% |
|
|
7 |
% |
|
|
|
1 |
% |
|
|
1 |
% |
|
|
6 |
% |
|
|
4 |
% |
|
|
12 |
% |
Nine months Ended 2008
compared to 2007
|
|
Net
Sales Percentage Increase (Decrease) from 2007 Due To:
|
|
|
|
Volume
|
|
|
Mix
|
|
|
Price
|
|
|
Rates
of Exchange
|
|
|
Total
|
|
Coatings
& Construction
|
|
|
10 |
% |
|
|
(5 |
)% |
|
|
4 |
% |
|
|
7 |
% |
|
|
16 |
% |
Regulated
|
|
|
6 |
% |
|
|
4 |
% |
|
|
3 |
% |
|
|
5 |
% |
|
|
18 |
% |
Energy
& Specialties
|
|
|
8 |
% |
|
|
(4 |
)% |
|
|
4 |
% |
|
|
3 |
% |
|
|
11 |
% |
|
|
|
7 |
% |
|
|
(1 |
)% |
|
|
4 |
% |
|
|
5 |
% |
|
|
15 |
% |
Sales
increased in all of Aqualon’s business units during the three months ended
September 30, 2008 as compared to the 2007 period. In the aggregate,
the sales increase was driven by higher volume, higher average selling prices,
favorable ROE, primarily as a result of the Euro, and slightly favorable product
mix.
Sales
increased in all of Aqualon’s business units during the nine months ended
September 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 in 2007, higher average selling prices, and
favorable ROE, primarily as a result of the Euro, partially offset by
unfavorable product and regional mix.
Coatings
and Construction Sales
Sales
into the Coatings markets increased 14% during the three months ended September
30, 2008 as compared to the 2007 period. All major regions of the
world had increased sales, due in part to increased pricing. ROE remained
favorable in Europe and Asia while volume growth continued to be strong in Asia,
primarily China. Volume in North America also improved primarily due
to increased sales of specialty surfactants. Both Europe’s and Latin America’s
sales volume was essentially flat with the prior year period. Sales of specialty
surfactants have continued to improve when compared to the prior year for every
quarter since the acquisition was completed in July of 2007. In
addition, sales of specialty surfactants continue to grow outside of traditional
North American markets capitalizing on Aqualon’s global sales channel for
Coatings.
Sales
into Construction markets increased 7% during the three months ended September
30, 2008 as compared to the 2007 period. Strong growth was achieved
in the Middle East and Africa. Modest sales growth was achieved in
the Asia Pacific region and Europe, whereas sales in North and Latin America
declined primarily due to continued weakness in the housing
markets. Price increases were achieved in most regions and product
families.
Sales
into the Coatings and Construction markets increased 18% and 14%, respectively,
for the nine months ended September 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 23% during the three months ended September 30, 2008
as compared to the 2007 period. Sales growth was achieved in all of
the regulated industry groups as follows: pharmaceuticals increased 41%,
personal care increased 14% and food increased 23%. The sales growth
was attributable to all major regions of the world with the exception of Latin
America which was modestly lower. Price increases were achieved in
all regions and most product families. Sales of the AquariusTM film
coating line for the pharmaceutical industry have continued to grow since the
product launch in mid-2007.
Regulated
Industries’ sales increased 18% during the nine months ended September 30, 2008
as compared to the 2007 period. Sales growth was achieved in all of
the regulated industry groups as follows: pharmaceuticals increased
35%, personal care increased 15% and food increased 13%. The sales
growth was attributable to all major regions of the world.
Energy
and Specialties Sales
Energy
and Specialties’ sales increased 7% during the three months ended September 30,
2008 as compared to the 2007 period. Energy sales increased 16% and
Specialties increased 1%. The sales growth was attributable to most
regions of the world, with the exception of the Asia Pacific region which was
essentially flat. Improved product pricing was achieved across most product
families. Increased sales of higher-priced oilfield products improved
the product mix from the prior year period.
Energy
and Specialties’ sales increased 11% during the nine months ended September 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.
Aqualon
2008 Profitability
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
2007
Profit from operations
|
|
|
|
|
$ |
55.7 |
|
|
|
|
|
$ |
170.5 |
|
Changes
due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
0.8 |
|
|
|
|
|
|
|
22.3 |
|
|
|
|
|
Regional
and product mix
|
|
|
0.8 |
|
|
|
|
|
|
|
(19.1 |
) |
|
|
|
|
Price
|
|
|
14.2 |
|
|
|
|
|
|
|
26.6 |
|
|
|
|
|
Raw
material, transportation and utility costs
|
|
|
(15.7 |
) |
|
|
|
|
|
|
(39.6 |
) |
|
|
|
|
All
other manufacturing costs
|
|
|
1.8 |
|
|
|
|
|
|
|
7.5 |
|
|
|
|
|
ROE
|
|
|
(0.5 |
) |
|
|
|
|
|
|
0.7 |
|
|
|
|
|
SG&A
and other expenses
|
|
|
2.8 |
|
|
|
|
|
|
|
5.1 |
|
|
|
|
|
Restructuring,
severance and other exit costs, accelerated
depreciation and other charges
|
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
Impact
of change in accounting method for pensions
|
|
|
(4.8 |
) |
|
|
|
|
|
|
(14.3 |
) |
|
|
|
|
Net
change
|
|
|
|
|
|
|
1.7 |
|
|
|
|
|
|
|
(8.5 |
) |
2008
Profit from operations
|
|
|
|
|
|
$ |
57.4 |
|
|
|
|
|
|
$ |
162.0 |
|
Profit
from operations improved 3% during the three month period ended September 30,
2008 and declined 5% during the nine month period ended September 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 improved by 13% and 4% during the
three and nine month periods in 2008. The adjusted profitability
during the three month period was attributable to higher volume and the
associated contribution margin, improved product mix, increased selling prices,
lower corporate allocated costs and lower restructuring charges offset by higher
raw material, transportation and utility costs as well as slightly unfavorable
ROE due to regional supply chain dynamics. The adjusted profitability
for the nine month period is attributable to higher volume and the associated
contribution margin, increased selling prices, favorable ROE and lower corporate
allocations and restructuring charges. These were offset by higher
raw material, transportation and utility costs and an unfavorable product and
regional mix.
Higher
raw material costs of $9.7 million and $25.7 million for the three and nine
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 the cost of
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. Transportation and utility costs increased $6.0
million and $13.9 million for the three and nine month periods, respectively,
primarily reflecting higher energy-related costs. The recovery of
these costs increases through pricing continues to improve as 90% and 67% of
costs increases were recovered during the three and nine month periods,
respectively.
Aqualon
Outlook
Aqualon
expects growth in sales volume and profitability to moderate as utilization of
capacity expansions offsets slower global macro economic
conditions. 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 in excess of $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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Severance,
restructuring and other exit costs
|
|
$ |
2.6 |
|
|
$ |
4.8 |
|
|
$ |
8.0 |
|
|
$ |
18.5 |
|
Accelerated
depreciation and amortization
|
|
|
1.2 |
|
|
|
3.6 |
|
|
|
6.6 |
|
|
|
10.7 |
|
Asset
retirement and environmental charges
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
0.3 |
|
Gains
(losses) on asset dispositions, net
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(3.9 |
) |
|
|
(4.0 |
) |
Dismantlement
costs
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
1.3 |
|
|
|
2.4 |
|
Ashland
transaction costs
|
|
|
10.4 |
|
|
|
— |
|
|
|
10.4 |
|
|
|
— |
|
Other
unallocated corporate costs
|
|
|
2.8 |
|
|
|
3.3 |
|
|
|
9.1 |
|
|
|
10.0 |
|
Other
miscellaneous expense (income), net
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
0.7 |
|
|
|
(0.2 |
) |
|
|
$ |
17.3 |
|
|
$ |
12.6 |
|
|
$ |
32.9 |
|
|
$ |
37.7 |
|
Severance, restructuring and other exit
costs for the three and nine months ended September 30, 2008, primarily reflect
amounts attributable to the Business Infrastructure Project which encompasses
outsourcing and offshoring service arrangements for various
functions. As these functions are transferred to external service
providers, the Company incurs severance costs for employees required to provide
services during the transition periods as well as related exit costs and other
implementation charges. The restructuring costs are expected to
continue into 2009. Ancillary to the Business Infrastructure Project
is an upgrade of the Company’s information technology platform, which has
resulted in accelerated amortization of capitalized software development costs
during the 2008 period. The three and nine month periods reflect a
$1.1 million impairment charge attributable to the Company’s former research
facility in Jacksonville, Florida which is currently being marketed as an asset
held for sale. Corporate items also include asset retirement and
environmental charges as well as dismantlement costs associated with inactive
portions of certain manufacturing facilities. In connection with the
pending transaction with Ashland, the Company incurred $10.4 million of
transaction costs including legal and professional fees, during the three months
ended September 30, 2008. All other unallocated and miscellaneous
expenses were partially offset by a gain on the sale of a parcel of surplus
property at the Parlin, New Jersey manufacturing facility as well as the
recognition of deferred gains attributable to sale and leaseback of the
Company’s administrative facility in Rijswijk, The Netherlands.
Corporate
items for the three and nine months ended September 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
|
|
Nine
Months Ended September 30,
|
|
Operating
Activities
|
|
2008
|
|
|
2007
|
|
Net
income, depreciation, amortization and other accruals and deferrals,
net
|
|
$ |
303.2 |
|
|
$ |
317.7 |
|
Changes
in working capital, net
|
|
|
(59.3 |
) |
|
|
(54.3 |
) |
|
|
|
243.9 |
|
|
|
263.4 |
|
Other
significant cash inflows (outflows):
|
|
|
|
|
|
|
|
|
Income
tax payments net of refunds
|
|
|
(17.5 |
) |
|
|
189.3 |
|
Interest
paid
|
|
|
(51.1 |
) |
|
|
(47.6 |
) |
Voluntary
pension plan contributions
|
|
|
— |
|
|
|
(37.1 |
) |
Other
postretirement benefits payments, net
|
|
|
(17.5 |
) |
|
|
(18.0 |
) |
Restructuring,
severance and other exit cost payments
|
|
|
(16.3 |
) |
|
|
(13.7 |
) |
ARO
and environmental contingency payments, net of recoveries
|
|
|
(10.3 |
) |
|
|
(8.9 |
) |
Asbestos
trust receipts, net of settlement payments
|
|
|
4.1 |
|
|
|
46.7 |
|
Settlement
of Vertac litigation judgment
|
|
|
— |
|
|
|
(124.5 |
) |
All
other, net
|
|
|
(0.1 |
) |
|
|
(2.1 |
) |
Net
cash provided by operating activities
|
|
$ |
135.2 |
|
|
$ |
247.5 |
|
Overall
cash from operations decreased slightly 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.
|
|
Nine
Months Ended September 30,
|
|
Investing
Activities
|
|
2008
|
|
|
2007
|
|
Capital
expenditures
|
|
$ |
74.3 |
|
|
$ |
77.8 |
|
Acquisitions
and investments, net
|
|
|
21.6 |
|
|
|
16.2 |
|
Proceeds
from asset and investment dispositions and all other sources,
net
|
|
|
(2.9 |
) |
|
|
(12.4 |
) |
Net
cash used in investing activities
|
|
$ |
93.0 |
|
|
$ |
81.6 |
|
Capital
expenditures during both periods primarily reflect Aqualon’s capacity expansion
projects at its MC and carboxymethylcellulose 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, initial construction of a hydroxyethylcellulose (“HEC”)
manufacturing facility in Nanjing, China, 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 payments of $18.1 million in connection with the acquisition of
Logos Quimica and a $2.0 million payment in settlement of a contingent
consideration obligation associated with the 2007 acquisition of the Dexter
specialty surfactants business. The prior year period includes $10.3
million for the Dexter acquisition as well as $5.0 million for the formation of
the Company’s H2H technology venture. Earn-out payments of $2.0
million and $1.4 million to Benchmark Performance Group, Inc. (“BPG”) are also
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.
These
outflows were partially offset by the receipt of proceeds, net of transaction
costs, from the disposition of various properties including a land parcel at the
Company’s Parlin, New Jersey facility during 2008 and the Company’s former
facilities in Pendlebury, United Kingdom, Barneveld, The Netherlands and certain
real estate holdings in California and New Jersey during 2007. Also
included in the 2007 proceeds is $4.1 million, net of transaction costs,
attributable to the disposition of the Company’s minority interest investment in
Abieta Chemie GmbH.
|
|
Nine
Months Ended September 30,
|
|
Financing
Activities
|
|
2008
|
|
|
2007
|
|
Long-term
debt payments
|
|
$ |
3.7 |
|
|
$ |
192.1 |
|
Long-term
debt proceeds and changes in short-term debt, net
|
|
|
(11.7 |
) |
|
|
(11.9 |
) |
Repurchase
of common stock
|
|
|
38.1 |
|
|
|
22.8 |
|
Dividends
paid
|
|
|
16.5 |
|
|
|
— |
|
Proceeds
from the exercise of stock options and all other sources,
net
|
|
|
(3.1 |
) |
|
|
(8.2 |
) |
Net
cash used in financing activities
|
|
$ |
43.5 |
|
|
$ |
194.8 |
|
Long-term
debt payments for both periods primarily reflect payments on the Company’s Term
B loan due 2010 including $3 million during the 2008 period and $108 million
during the 2007 period. The 2007 period also reflects the payment of
$84.1 million in connection with bond holders’ exercise of a put option with
respect to the 6.6% notes due 2027. In addition, both periods reflect
incremental local borrowings, primarily in China, to finance the construction
and expansion projects in that region, partially offset by the repayment of
certain debt instruments assumed in connection with the Logos Quimica
acquisition. During the 2008 period, the Company repurchased 1.7
million common shares for $29.9 million in connection with its authorized share
repurchase program. 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 two quarters 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
September 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 September 30, 2008, $96.2 million of the $150.0
million Revolving Facility was available for use as the Company had $53.8
million of outstanding letters of credit associated with the Revolving
Facility. In addition, the Company had $38.8 million of foreign lines
of credit available of which $22.5 million was unused and
available. The total amount of $16.3 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, and
the final adjustments associated with the 1996 through 2001 audit cycles. the
Company anticipates the remaining expected federal and state income tax refunds
and interest of approximately $24 million will be received during the fourth
quarter of 2008.
With
respect to its asbestos litigation obligations, the Company has restricted cash
held in trust of $4.0 million available as of September 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 $7.6 million as of September 30, 2008 reflecting the Company’s
former research facility in Jacksonville, Florida, the former manufacturing
facility in Pandaan, Indonesia and the existing facility in Pilar, Argentina
which is currently being leased to a tolling manufacturer. 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 September 30, 2008 was $810.4 million, which increased $14.4 million
from $796.0 million as of December 31, 2007. Cash balances increased
slightly to $116.7 million as of September 30, 2008 from $116.5 million as of
December 31, 2007.
When
compared to year-end 2007 levels, Days Sales Outstanding (“DSO”) increased by 2
days to 63 days while Days Sales in Inventories (“DSI”) decreased by 3 days to
56 days. Days Payable Outstanding (“DPO”) decreased by 2 days to 51
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. In summary, approximately $75 million of the
projected total is attributable to expansion and productivity projects while the
remaining $55 million is attributable to maintenance and other corporate capital
projects.
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 nine
months ended September 30, 2008. The Company expects to provide
voluntary funding of up to $20 million for its U.S. qualified plan and
approximately $8 million in required and voluntary contributions for all other
international plans during the fourth quarter of 2008.
Funding
for Litigation, Environmental and Asset Retirement Obligations
As of
September 30, 2008, the Company has recorded $79.6 million for environmental and
other asset retirement matters involving current and former operating sites,
including those with identified asset retirement obligations as well as other
locations where the Company may have a known liability (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, excluding recoveries, 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 has reached a settlement agreement in
principle with the United States which should resolve the Government’s pending
claim for approximately $14.5 million. (see Note 8 to the
Consolidated Financial Statements). At this time, the Company is
unable to estimate the specific timing of the final settlement payment with
respect to this matter. This settlement agreement is subject to
public comment and Court approval. As of September 30, 2008, the
Company has accrued $14.5 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 $35 million. Of the total,
approximately $26 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 $2.9 million at September 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
September 30, 2008 would result in a $5.2 million decrease in the net position,
while a 10% weakening of the dollar versus other currencies would result in a
$4.4 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 September 30, 2008, the net market value of the swaps
was a liability of $117.4 million. A 10% strengthening of the Euro
versus the USD at September 30, 2008 would result in a $61.7 million increase in
the liability, while a 10% weakening of the Euro versus the USD would result in
a $61.7 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 September 30,
2008, the net market value of these combined instruments was a liability of
$682.2 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 September 30, 2008 would result in a $54.3 million decrease in the net
market value of the liability. A 100-basis point decrease in interest
rates at September 30, 2008 would result in a $40.6 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 September 30, 2008, the Company did not
transact in any material 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 September 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 third 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.
Completion
of the merger is conditioned upon, among other things, the approval of the
Company’s stockholders and other closing matters. There can be no
assurance that these conditions will be completed or met or waived, or that the
Company will be able to successfully complete the merger as currently
contemplated under the merger agreement or at all. If the merger is
not completed, 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.
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.
The
Company may be adversely affected by current and future economic conditions and
credit market dislocations.
Current
and future economic conditions could adversely affect the Company’s business,
earnings and cash flow. These conditions have led to a lack of
consumer and business confidence and may decrease business activity, which could
limit the Company’s ability to increase sales and prices and improve margins and
could increase borrowing costs, add to pension funding requirements or otherwise
negatively impact cash flow.
* * * *
*
In
connection with the merger, Ashland filed a registration statement on Form S-4
on September 29, 2008 and the Company filed a proxy statement/prospectus on
October 3, 2008 with the Securities and Exchange Commission. The
proxy statement/prospectus was mailed to all of the Company’s stockholders on or
about October 6, 2008 and contains 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 registration statement on Form S-4 and
the proxy statement/prospectus.
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 nine months ended September 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 |
|
First
Quarter, 2008
|
|
|
1,323,100 |
|
|
$ |
17.63 |
|
|
|
1,323,100 |
|
|
$ |
122,319,595 |
|
Second
Quarter, 2008
|
|
|
351,100 |
|
|
$ |
18.59 |
|
|
|
351,100 |
|
|
$ |
115,794,239 |
|
Third
Quarter, 2008
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
$ |
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.
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)
|
|
October
27, 2008
|
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated as of 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
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