ITEM 1. BUSINESS ROHM AND HAAS COMPANY - -------------------------------------------------------------------------------
Rohm and Haas Company (the Company), is a global specialty materials company that reported 2001 net sales of approximately $5.7 billion. The Company is a public corporation whose shares are traded on the New York Stock Exchange under the "ROH" symbol and was incorporated in 1917 under the laws of the State of Delaware. The Company's headquarters office is located at 100 Independence Mall West, Philadelphia, Pennsylvania 19106-2399 (phone number (215) 592-3000; internet address www.rohmhaas.com).
In 2001, the Company operated four global businesses:
PERFORMANCE POLYMERS (56 percent of 2001 sales): This segment includes the sales and operating results for Coatings, Adhesives and Sealants, Plastics Additives, Monomers and Surface Finishes.
CHEMICAL SPECIALTIES (14 percent of 2001 sales): This segment includes the sales and operating results for Consumer and Industrial Specialties, Inorganic and Specialty Solutions and Ion Exchange Resins.
ELECTRONIC MATERIALS (17 percent of 2001 sales): This segment includes the sales and operating results for Shipley Ronal (including Printed Wiring Board and Electronic and Industrial Finishes) and Microelectronics (including Shipley Microelectronics and Rodel).
SALT (13 percent of 2001 sales): This segment includes the sales and operating results for the most recognized consumer salt brands in North America (Morton Salt and Windsor Salt), along with sales derived from other end-use markets, including water conditioning, highway ice control, food processing, chemical/industrial and agriculture.
Rohm and Haas is a geographically diverse company, with approximately 100 manufacturing and technical locations in 25 countries. In 2001, 53% of net sales were made outside of the United States. The Company's technology can be found in a wide range of end-use markets, including building and construction, electronic and computing devices, food, food processing and packaging, architectural and industrial coatings, water treatment, pharmaceutical, home cleaning and personal care.
STRATEGY Rohm and Haas brings technology and innovation to the market that enhances the performance of the end-use consumer products made by its customers and by leveraging its broad technology base on a global basis within markets where it enjoys leading positions.
The Company is committed to:
o continually bring innovation to the marketplace; even through the 2000-2001 economic downturn, the Company maintained its level of investment in research and development.
o continually improve the efficiency of its cost structure, and reposition the Company geographically to enhance the ability of its customers to serve their market needs.
o achieve, enhance and defend leading market positions; this means holding the first or second position in each of the markets or market segments in which the Company competes.
ROHM AND HAAS COMPANY - NET SALES BY BUSINESS (in millions)
PRO FORMA --------- 2001 (1) 2000 (1) 1999 (1,2) ----------------------------------- Coatings.................................. $ 1,445 $ 1,494 $ 1,512 Adhesives and Sealants.................... 661 707 737 Plastics Additives........................ 398 441 490 Monomers.................................. 357 382 305 Surface Finishes.......................... 309 373 507 ----------------------------------- Performance Polymers................... $ 3,170 $ 3,397 $ 3,551 -----------------------------------
Consumer and Industrial Specialties....... $ 388 $ 406 $ 374 Inorganic and Specialty Solutions......... 203 236 248 Ion Exchange Resins....................... 214 224 211 ----------------------------------- Chemical Specialties................... $ 805 $ 866 $ 833 -----------------------------------
Shipley Ronal............................. $ 470 $ 699 $ 621 Microelectronics.......................... 472 511 246 ----------------------------------- Electronic Materials................... $ 942 $ 1,210 $ 867 -----------------------------------
Salt................................... $ 749 $ 876 $ 930 -----------------------------------
Total Net Sales........................... $ 5,666 $ 6,349 $ 6,181 ===================================
(1) Restated to conform to current year presentation and exclude the discontinued operations of the Agricultural Chemicals business.
(2) Pro forma results include Morton International, Inc. (Morton), a specialty chemicals producer (acquired in June 1999) and LeaRonal, Inc. (LeaRonal), an electronic materials business (acquired in January 1999) as if these acquisitions had occurred on January 1, 1999. The results are restated to conform to the current year presentation and exclude the discontinued operations of the Agricultural Chemicals business. Pro forma information is not presented for other acquisitions and divestitures occurring in 2001, 2000 and 1999 because they were not material to the Company's results of operations or consolidated financial position.
In addition to the summary of business segments, additional information appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the information indicated below appears in the 2001 "Notes to Consolidated Financial Statements" and is incorporated herein by reference:
Notes to Consolidated Financial Statements --------------------
Industry segment information for years 1999-2001..... Footnote 9 Foreign operations for years 1999-2001............... Footnote 9
RAW MATERIALS The Company uses a variety of commodity chemicals as raw materials in its operations. In most cases, these raw materials are purchased from multiple sources under long-term supply contracts, created to provide access to key raw materials. For the Company's Performance Polymers and Chemical Specialties segments, many of these materials are hydrocarbon derivatives such as propylene, acetone and styrene.
COMPETITION AND SEASONALITY The Company experiences vigorous competition in each of its segments and its competitors include many large multinational chemical firms based in Europe, Asia and the United States. In some cases, the Company competes against firms which are producers of commodity chemicals which the Company must purchase as the raw materials to make its products. The Company however, does not believe this places it at any significant competitive disadvantage. The Company's products compete with products offered by other manufacturers on the basis of product quality and specifications, customer service and price. Most of the Company's products are specialty chemicals which are sold to customers who demand a high level of customer service and technical expertise from the Company and its sales force. The Salt segment is most affected by weather-driven sales of highway ice control salt in the Eastern United States and Eastern Canada. To a much lesser extent, sales in the Coatings segment destined for the paint market are affected by weather in various regions.
RESEARCH AND DEVELOPMENT The Company maintains its principal research and development laboratories at Spring House, Pennsylvania. Research and development expenses totaled $230 million, $224 million and $174 million in 2001, 2000 and 1999, respectively. The Company believes that its many intellectual properties are of substantial value in the manufacturing, marketing and application of its various products. Though the Company is not dependent, to a material extent, upon any one trademark, patent or license, certain of the Company's businesses may be so dependent.
ENVIRONMENTAL A discussion of environmental related factors is incorporated herein by reference to Footnote 25: "Contingent Liabilities, Guarantees and Commitments" in the accompanying "Notes to Consolidated Financial Statements."
(1) Performance Polymers (2) Chemical Specialties (3) Electronic Materials (4) Salt, including mines and evaporation facilities
The Company's manufacturing operations ran well throughout 2001. The plants recorded good operating efficiencies and cost control, especially considering the decline in demand due to slower global economies. Safety was a key focus, as well, and significant improvement was made during the year. The overall corporate safety record improved from a rate of 2.3 injuries for every 200,000 hours worked in 2000, to 1.7 injuries on a comparable basis for 2001. Sixty-three sites operated injury-free throughout the year.
As part of the Company's comprehensive 2001 repositioning efforts, Rohm and Haas closed manufacturing facilities in Tustin and Orange, California; Moss Point, Mississippi and Paterson, New Jersey. The Company announced plans to make further reductions in manufacturing capacity in several businesses in 2002. Continual improvements in design, operation, and process control have significantly improved the efficiency of the Company's remaining manufacturing capacity. The Company believes it has the ability to generate significant additional production capacity using its existing manufacturing operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A discussion of legal proceedings is incorporated herein by reference to Footnote 25: "Contingent Liabilities, Guarantees and Commitments" in the accompanying "Notes to Consolidated Financial Statements."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 2001.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock of $2.50 par value is traded on the New York Stock Exchange (Symbol: ROH). There were 9,234 registered common stockholders as of December 31, 2001. On February 28, 2002, the last sale price of the Company's common stock was $38.41. The following table sets forth, for the period indicated, the high and low sales prices and cash dividends of the Company's common stock.
- -------------------------------------------------------------------------------- PERIOD HIGH LOW CASH DIVIDENDS - -------------------------------------------------------------------------------- 1st Quarter $ 38.7000 $ 29.7700 $ 0.20 2nd Quarter $ 37.2300 $ 30.0900 $ 0.20 3rd Quarter $ 36.7800 $ 24.9000 $ 0.20 4th Quarter $ 37.3000 $ 30.8000 $ 0.20
1st Quarter $ 47.6250 $ 33.0000 $ 0.19 2nd Quarter $ 49.4375 $ 32.8750 $ 0.19 3rd Quarter $ 37.5000 $ 25.6875 $ 0.20 4th Quarter $ 37.3125 $ 24.3750 $ 0.20 - --------------------------------------------------------------------------------
PART II
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data of the Company for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 as derived from the historical financial statements of the Company.
(1) Earnings before interest, taxes, depreciation and amortization. EBITDA excludes non-recurring items and is presented to assist security analysts and others in evaluating the Company's performance and its ability to generate cash. EBITDA should not be considered an alternative to cash flow from operating activities as a measure of liquidity or as an alternative to net income as an indicator of the Company's operating performance in accordance with generally accepted accounting principles. The Company's definition of EBITDA may not be consistent with that used by other companies. The Company did not calculate this measure prior to 1998. (2) Net earnings plus after-tax amortization and interest expense divided by average total assets less cash and average non-interest bearing liabilities. Years 2000 and 1999 exclude the purchased in-process research and development (IPR&D) charges. Years 2001 and 1998 exclude extraordinary loss on early extinguishment of debt and year 2001 excludes the cumulative effect of accounting change. (3) Excluding ESOP adjustment and cumulative effect of accounting changes. Years 2000 and 1999 exclude IPR&D charges. (4) Cash provided by operating activities including discontinued operations less dividends and additions to land, building and equipment. (5) Total debt, net of cash (net debt), divided by the sum of net debt, minority interest, stockholders' equity and ESOP shares. (6) Reclassified to conform to current year presentation, primarily as a result of discontinued operations.
Notes 7-11 reflect all amounts net of income taxes (see table on page 15 for additional information related to 2001, 2000 and 1999 non-recurring items):
(7) Included in 2001 results are net non-recurring charges in continuing operations of $259 million, gain on disposal of line of business of $428 million and income from discontinued operations of $40 million, an extraordinary loss on early extinguishment of debt of $1 million and a $2 million charge for the cumulative effect of accounting change. (8) Included in 2000 results are net non-recurring charges in continuing operations of $28 million and income from discontinued operations of $58 million. (9) Included in 1999 results are net non-recurring charges in continuing operations of $161 million and income from discontinued operations of $56 million. Also included in 1999 are results from Morton, a specialty chemicals producer acquired in June 1999 and LeaRonal, an electronic materials business acquired in January 1999.
(10) Included in 1998 results is net non-recurring income of $45 million, consisting of a gain in continuing operations from the sale of the Company's interest in the AtoHaas and RohMax joint ventures, a loss from the early extinguishment of debt, the write-off of certain intangible assets in Europe and business realignment costs primarily in Asia. Also included is income from discontinued operations of $46 million. (11) Included in 1997 results is a net non-recurring gain in continuing operations of $16 million, the net result of remediation settlements with insurance carriers and discontinued operations income of $39 million. (12) See 2001, 2000 and 1999 results in "Management's Discussion and Analysis of Financial Condition and results of Operations" for additional information.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the consolidated financial statements and notes to financial statements for the years ended December 31, 2001, 2000 and 1999.
"Same business basis" as it relates to the comparison of sales between reporting periods includes only those businesses, segments or divisions that have been in place during the entire reportable period.
Earnings (losses) from continuing operations before extraordinary item and cumulative effect of accounting change are abbreviated as "Earnings (losses) from continuing operations" within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements."
SIGNIFICANT ITEMS AFFECTING 2001, 2000 AND 1999 RESULTS OF OPERATIONS In January 1999, the Company acquired LeaRonal, an electronic materials business and in June of 1999, Morton. Details of these transactions are discussed under "Liquidity, Capital Resources and Other Financial Data" below. The results of these significant acquisitions have been included in the consolidated financial statements since the dates of acquisition. Unaudited pro forma information is presented in the table on page 19.
The LeaRonal and Morton acquisitions, accounted for using the purchase method, significantly impacted the comparability of 2000 and 1999 results. Accordingly, 1999 pro forma sales and earnings excluding non-recurring items are provided in the results of operations discussions to facilitate comparisons. The pro forma results include Morton and LeaRonal as if these significant acquisitions had occurred on January 1, 1999. Pro forma adjustments were made primarily to reflect increased goodwill and intangible amortization and interest expense. Cost savings from integration efforts were not reflected. Though useful for comparison, pro forma results are not intended to reflect actual earnings had the acquisitions occurred on the dates indicated and are not a projection of future results or trends. Pro forma information is not presented for other acquisition and divestiture activities occurring in 2001, 2000 and 1999 because these were not material to the Company's results of operations or consolidated financial position.
NON-RECURRING ITEMS Non-recurring items represent gains or losses arising from events or transactions that are unusual in nature, occur infrequently or satisfy the definition of an extraordinary item in accordance with Accounting Principles Board (APB) 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Unless otherwise indicated, the impact of non-recurring items on operations within the context of the Management's Discussion and Analysis is stated net of tax.
SALE OF THE AGRICULTURAL CHEMICALS BUSINESS Following the sale of its Agricultural Chemicals business (Ag) in June 2001, the Company reported the operating results as discontinued operations in accordance with APB 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Agricultural Chemicals had been a separate major line of business in the Chemical Specialties segment. The operating results of Ag have been reported separately as discontinued operations in prior years.
CRITICAL ACCOUNTING POLICIES In response to the Securities and Exchange Commission's (SEC) Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company has identified the critical accounting
policies that are most important to the portrayal of the Company's financial condition and results of operations. The policies set forth below require management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
o LITIGATION AND ENVIRONMENTAL RESERVES The Company is involved in litigation in the ordinary course of business, including personal injury, property damage and environmental litigation. The Company also expends significant funds for environmental remediation of both company-owned and third-party locations. In accordance with Generally Accepted Accounting Principles (GAAP), specifically Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies" and Statement of Position 96-1, "Environmental Remediation Liabilities", the Company records a loss and establishes a reserve for litigation or remediation when it is probable that an asset has been impaired or a liability exists and the amount of the liability can be reasonably estimated. Reasonable estimates involve judgments made by management after considering a broad range of information including: notifications, demands, or settlements which have been received from a regulatory authority or private party, estimates performed by independent engineering companies and outside counsel, available facts, existing and proposed technology, the identification of other potentially responsible parties and their ability to contribute and prior experience. These judgments are reviewed quarterly as more information is received and the amounts reserved are updated as necessary. However, the reserves may materially differ from ultimate actual liabilities if the loss contingency is difficult to estimate or if management's judgments turn out to be inaccurate. If management believes no best estimate exists, the minimum loss is accrued in accordance with GAAP.
o RESTRUCTURING In June 2001, the Company recorded a $330 million restructuring and asset impairment charge in connection with its 2001 repositioning efforts, of which $82 million represented restructuring charges. The repositioning effort consisted of 112 separate initiatives affecting all business groups across the Company, and will take approximately twelve months to complete from date of commencement. The $82 million of restructuring included $71 million of severance termination benefits for 1,860 employees affected by plant closings or capacity reductions, as well as various personnel in corporate, administrative and shared service functions. Severance termination benefits were based on various factors including length of service, contract provisions and salary levels. Management estimated the restructuring charge based on these factors as well as projected final service dates.
Given the complexity of estimates and broad reaching scope of the 2001 repositioning effort, actual expenses could differ from management's estimates. If actual results are different from original estimates, the Company will record additional expense or reverse previously recorded expense through the "Provision for Restructuring and Asset Impairment" line in the Statement of Consolidated Earnings. As of December 31, 2001, the Company recognized a favorable change to the original estimate of $4 million, due in part to changes in estimates for severance expense and the recognition of settlement gains. Management will continue to make adjustments if necessary as actions under the plan are carried out.
o VALUATION OF LONG-LIVED ASSETS The Company's long-lived assets include property, plant, equipment, long-term investments, goodwill and other intangible assets. Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. In conjunction with the Company's 2001 repositioning efforts, $245 million in assets were deemed impaired and written-off based on estimated fair value assumptions. Fair values are estimated based upon forecasted cash flows discounted to present value. If actual cash flows or discount rate estimates change, the Company may have to record additional impairment charges not previously recognized.
The fair value of the long-term investments is dependant on the performance of the Company's investees, as well as volatility inherent in their external markets. In assessing potential impairment for these investments the Company will consider these factors as well as the forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized.
O PENSION AND OTHER EMPLOYEE BENEFITS Certain assumptions are used in the calculation of the actuarial valuation of the Company-sponsored defined benefit pension plans and post-retirement benefits. These assumptions include the weighted average discount rate, rates of increase in compensation levels, expected long-term rates of return on assets and increases or trends in health care costs. If actual results are less favorable than those projected by management, lower levels of pension credit or other additional expense may be required. See Notes 10 and 11 in the accompanying "Notes to Consolidated Financial Statements" for additional information regarding assumptions used by the Company.
o INVENTORY RESERVES The Company adjusts the value of its obsolete and unmarketable inventory to the estimated market value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
o GAIN ON SALE OF THE AGRICULTURAL CHEMICALS BUSINESS In June 2001, the Company completed the sale of its Agricultural Chemicals business to Dow AgroSciences LLC (DAS), a wholly-owned subsidiary of the Dow Chemical Company for approximately $1 billion, subject to a working capital adjustment. The working capital adjustment has not been finalized as of December 31, 2001. The Company has recorded a receivable from DAS for the amount of the working capital adjustment based upon management's best estimate of the ultimate adjustment. The Company's calculation of the working capital adjustment required estimates related to the valuation of certain assets, principally accounts receivable, inventory, and rebate liabilities transferred to DAS on June 1, 2001. If the final working capital adjustment differs from management's estimate as of December 31, 2001, the Company will be required to record an adjustment to the gain on disposal of discontinued line of business initially recorded in the second quarter of 2001.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
NET SALES Consolidated net sales in 2001 were $5,666 million, 11% below 2000 net sales of $6,349 million. The decrease from the prior-year was driven by persistently weak global demand across all businesses. 2001 net sales compared to the prior-year declined 22% for Electronic Materials, which has been buffeted by a precipitous industry-wide decline since April 2001, 7% for Performance Polymers on lower volumes and 7% for Chemical Specialties due to persistent sluggishness in the paper and industrial markets served by the businesses in this group. Salt sales, on a same business basis, remained flat as both periods benefited from strong demand for highway ice control products in the 2000 winter season. In the fourth quarter of 2000, the Company sold its European Salt business.
NET EARNINGS Net earnings as reported for the year 2001 were $395 million, a 12% increase from 2000 net earnings of $354 million. Earnings per share on a diluted basis were $1.79 in 2001, compared with $1.61 per share in 2000. The Company reported a loss from continuing operations for the year 2001 of $70 million or $0.31 per common share, compared to income from continuing operations of $296 million or $1.34 per common share in 2000. Net income excluding non-recurring items for the year 2001 was $189 million, or 42% less than 2000 earnings of $324 million. The year-over-year decline can be attributed to the impact of poor external economic conditions on all business segments, particularly Electronic Materials and Performance Polymers which accounted for $134 million, or 99%, of the total decline from 2000. The Company actively managed through the economic downturn to mitigate significantly reduced demand by announcing and implementing restructuring initiatives to bring capacity more in line with market demand. Expenditures continued to be made on research and development, enterprise resource planning (ERP) initiatives and small acquisitions in Adhesives and Sealants.
In June 2001, the Company completed the sale of Ag to Dow AgroSciences LLC (DAS), a wholly owned subsidiary of the Dow Chemical Company, for approximately $1 billion, subject to a working capital adjustment not yet finalized at December 31, 2001. The Company recorded a gain on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per share after-tax). Income from discontinued operations, prior to the June 2001 sale, was
$40 million or $0.18 per share after-tax as compared to income from discontinued operations in 2000 of $58 million or $0.27 per common share after-tax.
The impact of non-recurring items on earnings from continuing operations in 2001 was a charge of $259 million and consisted primarily of $226 million of restructuring and asset impairment charges; $18 million of costs associated with the repositioning efforts including plant shutdown and dismantlement costs; $10 million of asset valuation adjustments in the Electronic Materials segment; and $5 million of remediation-related charges, net of insurance settlements. The impact of non-recurring charges on earnings from continuing operations in 2000 was $28 million, and consisted of $14 million of purchased in-process research and development (IPR&D) and other one-time charges related to the Rodel acquisition and $14 million of costs associated with restructuring and integration efforts. Refer to the following table for a reconciliation of reported earnings to earnings excluding non-recurring items for all years presented.
GROSS PROFIT Gross profit for 2001 was $1,658 million, a 17% decline from $2,007 million in 2000 and the gross profit margin was 29%, down from 32% in 2000. The change in gross profit margin is primarily the result of lower manufacturing efficiency driven by reduced demand. The Company continues to respond by maintaining price increases and improving internal efficiencies.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES SAR expenses were $1,091 million for 2001, a 6% decrease from $1,157 million in 2000, reflecting savings from the Company's repositioning efforts as well as a decrease in employee related expenses. These cost reductions were offset by increased research and development costs reflecting the Company's continued focus on developing cutting edge technologies and ERP information system expenditures. SAR expenses were 19% of net sales for 2001, compared to 18% in 2000.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D) IPR&D in acquisitions accounted for by the purchase method, represents the value assigned to research and development projects of an acquired company where technological feasibility had not yet been established at the date of the acquisition, and which, if unsuccessful, have no alternative future use. Amounts assigned to IPR&D are charged to expense at the date of acquisition. Accordingly, the Company charged $13 million to expense in 2000 in connection with the Rodel acquisition. (See Note 4: "Purchased In-process Research and Development" in the accompanying "Notes to Consolidated Financial Statements").
INTEREST EXPENSE Interest expense for 2001 was $182 million, a 24% decline from $241 million in 2000, primarily due to lower debt levels and interest rates as compared to the prior-year period.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles for 2001 was $156 million, a 2% decline from $159 million in 2000.
SHARE OF AFFILIATE NET EARNINGS Share of affiliate net earnings in 2001 was $12 million, a 33% decline from earnings of $18 million in 2000, primarily due to the increased ownership in Rodel and the sale of affiliates related to the disposition of Ag (See Note 2: "Acquisitions and Dispositions of Assets" in the accompanying "Notes to Consolidated Financial Statements"). Prior to March 31, 2000 the investment in Rodel was accounted for under the equity method with the Company's share of earnings reported as equity in affiliates. Since the second quarter of 2000, Rodel's results of operations have been fully consolidated.
PROVISION FOR RESTRUCTURING Provision for restructuring of $320 million pre-tax or $226 million after-tax for the year ended December 31, 2001 is comprised primarily of asset impairment and restructuring charges relating to the Company's repositioning initiatives that commenced in June 2001. The Company recognized a $330 million one-time restructuring and asset impairment charge in the second quarter of 2001, to enable several of its businesses to respond to structural changes in the global marketplace. The largest component related to the partial closure of certain manufacturing and research facilities across all business groups and included exit costs related to the Liquid Polysulfide Sealants business in Performance Polymers and part of the dyes business in Chemical Specialties. Approximately 75% of the assets impaired were in the North American region. The one-time charge included severance benefits; the employees receiving severance benefits will include those affected by plant closings or capacity reductions, as well as various personnel in corporate, administrative and shared service functions. Approximately 1,860 positions will be affected by the restructuring efforts. Offsetting the original charge of $330 million recorded in June 2001, is a pre-tax gain of $4 million from the recognition of settlement gains and changes in estimates to restructuring liabilities established for the 2001 initiatives, as well as a pre-tax gain of $6 million from changes in estimates to restructuring liabilities established in 1999. It is the Company's policy to recognize settlement gains at the time an employee's pension liability is settled.
In the first half of 2000, a restructuring reserve of $13 million pre-tax was recorded in the Ion Exchange Resins business for the write-down of plant assets and severance costs for approximately 100 people. These charges were net of certain pension settlement and curtailment gains.
OTHER INCOME Other income for 2001 was $15 million, a 67% decline from $46 million in 2000. The decline is primarily due to lower foreign currency gains compared to the prior year. In addition, the Company incurred a $4 million casualty loss resulting from a fire at a joint venture manufacturing facility.
EFFECTIVE TAX RATE The loss from continuing operations of $70 million contains $6 million of income taxes, which computes to a 9% effective tax rate. This reflects the impact of a 29% tax rate on the $320 million loss provision for restructuring and asset impairment, which included non-deductible restructuring expenses. Excluding the impact of this provision, the effective tax rate on continuing operations was 39%, the same as 2000. The effective tax rate for 2000, excluding non-tax deductible IPR&D charges was 38%.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
NET SALES Net sales in 2000 were $6,349 million, a 3% increase from 1999 pro forma net sales of $6,181 million and a 31% increase from 1999 actual net sales of $4,840 million. The increase from pro forma 1999 net sales was driven largely by an acquisition-driven sales increase in the Electronic Materials segment and to a lesser extent the acquisition of 95% of Acima A.G. (Acima) in the Chemical Specialties segment. The effect of these acquisitions was partially offset by unfavorable currency impacts.
NET EARNINGS Net earnings on an as-reported basis for 2000 were $354 million, a 42% increase from 1999 net earnings of $249 million. Diluted earnings per common share were $1.61 in 2000 compared to $1.27 in 1999. Earnings from continuing operations for the year 2000 were $296 million or $1.34 per diluted common share, compared to $193 million or $0.98 per diluted common share in 1999. Net earnings excluding non-recurring items for the year 2000 were $324 million, a 2% decline from pro forma 1999 and an 8% decline from actual 1999 net earnings excluding non-recurring items. Earnings per share excluding non-recurring items on a diluted basis was $1.47 in 2000, compared with $1.81 per share in actual 1999.
The impact of the non-recurring charges on continuing operations in 2000 was $28 million, and consisted of $14 million of IPR&D and other one-time charges related to the Rodel acquisition, and $14 million of costs associated with the restructuring and integration efforts. Non-recurring items impacting continuing operations for 1999 include charges of $161 million, including a charge of $115 million for IPR&D and other one-time charges from the Morton acquisition, a charge of $23 million for restructuring costs resulting both from the integration of Morton and the Company's redesign of its selling and administrative infrastructure, $26 million related to asset write-downs, integration and other restructuring costs, a gain of $17 million from remediation related insurance recoveries, and a $14 million loss on disposition of the AtoHaas joint venture.
The operating results of Ag have been reported separately as discontinued operations in prior years. Income from discontinued operations in 2000 was $58 million or $0.27 per share as compared to income from discontinued operations in 1999 of $56 million or $0.29 per common share.
GROSS PROFIT Gross profit for the year 2000 was $2,007 million, an 18% increase from $1,701 million in 1999; however, the gross profit margin was 32% in 2000, down from 35% from 1999. The change in gross profit margin was primarily the result of increased hydrocarbon-based raw material prices in addition to higher energy costs in the form of higher natural gas prices and increased freight costs due to higher fuel prices. The impact of increased raw material prices was primarily in the Performance Polymers business segment. Overall raw material price increases were not offset by overall selling price increases. To a lesser extent, higher depreciation resulting from fair values being assigned to acquired assets also contributed to the change in gross profit margin.
SELLING, ADMINISTRATIVE AND RESEARCH (SAR) EXPENSES SAR expenses for 2000 decreased to 18% of net sales from 19% in 1999. In 1999, the Company began implementing a redesign of its selling and administrative infrastructure and instituted other cost saving measures associated with the integration of the Morton and LeaRonal acquisitions. The stated goal of these efforts was to reduce annual procurement, SAR and other expenses by $300 million. By year-end 2000, the run rate goal was achieved through cost reductions in support services, procurement and manufacturing.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D) IPR&D in acquisitions accounted for by the purchase method, represents the value assigned to research and development projects of an acquired company where technological feasibility had not yet been established at the date of the acquisition, and which, if unsuccessful, have no alternative future use. Amounts assigned to IPR&D were charged to expense at the date of acquisition. Accordingly, the Company charged $13 million and $105 million to expense in 2000 and 1999, respectively, related to the Rodel and Morton acquisitions (See Note 4: "Purchased In-process Research and Development" in the accompanying "Notes to Consolidated Financial Statements").
INTEREST EXPENSE Interest expense in 2000 was $241 million, a 53% increase from $158 million in 1999, due to higher debt levels resulting from acquisitions. In year 2000 a full year of interest at the higher debt levels is reflected versus six months in 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization in 2000 was $159 million, a 92% increase from $83 million in 1999. The increase was attributable to significant 1999 acquisitions and year 2000 reflects amortization for a full year versus six months in 1999 related to these acquisitions.
SHARE OF AFFILIATE NET EARNINGS Earnings of $18 million in 2000 increased from earnings of $6 million in 1999. The 2000 earnings resulted from a full year of affiliates acquired in mid-1999 and from earnings of certain affiliated businesses of Rodel. Since the second quarter of 2000, Rodel's results of operations have been fully consolidated. The 1999 earnings resulted largely from Rodel, which was an affiliate during that year.
OTHER INCOME Other income for 2000 was $46 million, a $32 million increase from $14 million in 1999. The increase is largely from foreign currency gains resulting from risk management activities. The 1999 period includes Morton integration costs offset by a gain related to a favorable settlement with insurance carriers over certain environmental remediation matters.
EFFECTIVE TAX RATE The effective tax rate for 2000 and 1999 was 39% and 49%, respectively. The effective tax rate for 1999 was 49%, largely as a result of the non-deductible write-off of IPR&D. Excluding the non-tax deductible IPR&D charges, the effective tax rate was 38% for both years. Rates also reflect the effect of certain non-tax deductible amortization charges resulting from the Company's acquisition activities.
SUMMARY BY BUSINESS SEGMENT The Company's operations are organized by worldwide business segments. Descriptions of the Company's business segments are located in Item 1. Business included in the beginning of this report.
(1) Reclassified to conform to current year presentation. (2) Pro forma results include Morton and LeaRonal as if these 1999 acquisitions had occurred on January 1, 1999. Pro forma net earnings exclude non-recurring items. (3) Corporate includes non-operating items such as interest income and expense, corporate governance costs, and corporate exploratory research. In 2000 and 1999, it included charges for purchased in-process research and development costs associated with the Rodel and Morton acquisitions. (See "Management's Discussion and Analysis")
PERFORMANCE POLYMERS 2001 VERSUS 2000 Performance Polymers sales for 2001 were $3,170 million, a 7% decline from $3,397 million in 2000. Sales and earnings decreases were felt in all businesses primarily due to poor external economic conditions and as a result of the continued slow down in the building and construction industry which are served largely by the Coatings, Adhesives and Sealants and Plastic Additives businesses. Automotive and Powder Coatings sales decreased primarily due to weak demand in the automotive and industrial markets, as compared to the prior-year. Earnings from continuing operations for 2001 were $85 million, a 70% decline from $282 million in 2000. Excluding non-recurring items, earnings were $229 million, an 18% decline from 2000 earnings of $278 million.
2000 VERSUS 1999 Performance Polymers sales for 2000 were $3,397 million, a decrease of 4% from $3,551 million pro forma 1999 sales and a 16% increase from actual sales of $2,939 million in 1999. Earnings from continuing operations for 2000 were $282 million, a 19% decline from $350 million in 1999. Excluding non-recurring items, earnings were $278 million in 2000, a 28% decrease from 1999 pro forma earnings of $388 million and a 21% decrease from $352 million in 1999. Sales and earnings in the year were impacted by an economic slowing in the U.S. building and construction markets in the second half of 2000. These markets are served largely by the Coatings, Adhesives and Sealants and Plastics Additives businesses. Similar slowing in the automotive markets served by Surface Finishes was also a factor. Sales were also affected by weaker European currencies. The 21% decrease in earnings, excluding non-recurring items, was a result of these demand factors and by sharply higher hydrocarbon base raw material costs and energy costs, particularly natural gas (see Gross Profit discussion under "Summary of Consolidated Results" below). The Monomer business continued to report strong growth in the year as a result of the acquired Stockhausen merchant monomer business in Europe. Among the Surface Finishes businesses, sales of Powder Coatings on a pro forma basis continued to improve, but were offset by weaker sales in Automotive Coatings driven by slowing in the U.S. automotive markets.
CHEMICAL SPECIALTIES 2001 VERSUS 2000 Chemical Specialties reported sales of $805 million, a 7% decline from $866 million in 2000. Inorganic and Specialty Solutions sales decreased by $33 million, representing 54% of the total year-over-year decline, as the business continues to suffer from persistently low demand for sodium borohydride related applications in the newsprint, pharmaceutical and electronic markets. Consumer and Industrial Specialties sales declined $18 million from 2000, representing 30% of the total decline as a result of decreased demand in industrial markets. Ion Exchange Resins sales declined due to a weakness in industrial water treatment and catalyst markets. Earnings from continuing operations for 2001 were $7 million, an 87% decline from $55 million in 2000. Earnings for 2001, excluding non-recurring items were $63 million, a 10% decline from $70 million in 2000 as lower demand produced higher manufacturing variances, which negatively impacted earnings.
2000 VERSUS 1999 Chemical Specialties sales for 2000 were $866 million, a 4% increase from pro forma 1999 sales of $833 million and a 22% increase from actual sales of $707 million in 1999. Sales increases were driven by Consumer and Industrial Specialties, helped by the acquired Acima biocides business, with a contribution from Ion Exchange Resins. Earnings from continuing operations for 2000 were $55 million, a 7% decline from $59 million in 1999. Net earnings, excluding non-recurring items, were $70 million in 2000, a 19% decline from pro forma 1999 earnings of $86 million and a 3% decline from actual earnings of $72 million in 1999.
ELECTRONIC MATERIALS 2001 VERSUS 2000 Electronic Materials sales were $942 million, a 22% decline from $1,210 million in 2000. The sales decline was driven by a significant decrease in demand across all businesses, with the exception of sophisticated technologies including deep UV photoresists, chemical mechanical planarization products and anti-reflective coatings. Earnings from continuing operations for 2001 were $1 million compared to $110 million in 2000, reflecting costs associated with the Company's repositioning efforts. Excluding non-recurring items, earnings were $27 million, a 76% decline from $112 million in 2000, because of significantly decreased demand impacting manufacturing efficiencies.
2000 VERSUS 1999 Electronic Materials sales for 2000 were $1,210 million, a 40% increase from pro forma 1999 sales of $867 million and a 60% increase from actual sales of $755 million in 1999. Earnings from continuing operations for 2000 were $110 million, a 72% increase from pro forma 1999 of $64 million and a 93% increase from $57 million in 1999. Excluding non-recurring items, earnings were $112 million in 2000, a 62% increase from $69 million in 1999. Increases in sales and earnings were evident in all regions and markets within the Electronic Materials segment due to continued demand for new technologies and contributions from Rodel, which was consolidated in 2000, and from Shipley Ronal, part of which was acquired in 1999. Results of operations for Rodel were consolidated during the second quarter of 2000, as a result of increasing the Company's ownership to approximately 90% from 48%.
SALT 2001 VERSUS 2000 Salt sales were $749 million for 2001, a 14% decline from $876 million in 2000. Sales, on a same business basis, remained unchanged from the prior period. Earnings from continuing operations for 2001 were $13 million, a 46% decline from $24 million in 2000. The Company sold its European salt business in the fourth quarter of 2000 (see Note 2: "Acquisitions and Dispositions of Assets" in the accompanying "Notes to Consolidated Financial Statements"). Excluding non-recurring items, earnings remained constant at $24 million in 2001 and 2000.
2000 VERSUS 1999 Salt sales in 2000 were $876 million, a 6% decline from pro forma 1999 sales of $930 million. Sales were comparatively lower in 2000 in part due to the absence of fourth quarter European Salt sales following the divestiture of that business. Earnings from continuing operations for 2000 were $24 million, a 31% decline from pro forma 1999 of $35 million and a $14 million increase from $10 million in 1999. Despite strong weather related results in the fourth quarter of 2000, the change in sales and earnings was largely attributable to the impact of a mild winter at the beginning of 2000 on sales of ice control salt in contrast with a more severe winter in early 1999. Excluding non-recurring items, earnings were $24 million in 2000, a $15 million increase from $9 million in 1999.
CORPORATE 2001 VERSUS 2000 Corporate loss from continuing operations in 2001 totaled $176 million compared to $175 million in 2000. The current period benefited from interest cost savings as a result of lower debt levels and interest rates compared to the prior-year. Offsetting the interest savings are additional provisions for environmental remediation (net of insurance recoveries) and increased employee related expenses. Excluding non-recurring items, corporate losses decreased 4% to $154 million compared to $160 million in 2000.
2000 VERSUS 1999 Corporate loss from continuing operations in 2000 totaled $175 million, a 38% decline from $283 million in 1999. The years 2000 and 1999 included charges of $13 million for Rodel and $105 million for Morton, respectively, for IPR&D related to these acquisitions. Excluding non-recurring items, corporate losses increased 8% to $160 million compared to $148 million in 1999.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
Cash and cash equivalents remained unchanged at $92 million at December 31, 2001. Net cash in-flows during 2000 and 1999 resulted in net increases in cash and cash equivalents of $35 million and $41 million, respectively. Each of these years included acquisition, divestiture and financing activities having a significant effect on the Company's cash flows. (See Note 2: "Acquisitions and Dispositions of Assets" in the accompanying "Notes to Consolidated Financial Statements").
Free cash flows (which the Company defines as cash provided by operating activities less capital asset spending and dividends) for the year 2001 compared to 2000 and 1999 are presented below:
- -------------------------------------------------------------------------------- (Millions of dollars) 2001 2000 1999 - -------------------------------------------------------------------------------- Cash provided by operating activities $ 699 $ 776 $ 816 Capital additions (401) (391) (323) Dividends (171) (167) (141) ------------------------------------ Free cash flow $ 127 $ 218 $ 352 - --------------------------------------------------------------------------------
The Company's short-term, primary source of liquidity will be cash flow from operations, supplemented as necessary with commercial paper and or bank borrowings. At year end 2001, the Company maintains an unused credit facility with a syndicated group of banks of $900 million; $500 million of which is committed until 2004. The commitment of this facility is not contingent on the Company's credit rating. The Company does not believe there is a material risk to short-term liquidity. As of December 31, 2001, the Company had no letters of credit or material guarantees outstanding.
FINANCING Total borrowings at year-end 2001 were $2,898 million, only 7% of which is due prior to 2004. Total borrowings were $3,774 million at year end 2000. At the end of 2001, the debt ratio was 42% compared with 49% at the end of 2000.
In 2000, the Company issued 400 million Euros (or $376 million) of 6.0% notes due 2007.
On February 27, 2002, the Company issued 20 billion yen (or $149 million) of 3.5% notes, interest payable semiannually on March 29th and September 29th, beginning in March 2002. The maturity date is March 29, 2032, callable annually after March 2012. Proceeds from the issuance of the note will be used for general corporate purposes.
The Company contemplates some early retirement of debt via calls and repurchases as opportunities arise in order to gain the long-term benefits of reduced interest expense. As a result, some non-recurring losses will be recorded during 2002.
CONTRACTUAL OBLIGATIONS The following table provides the Company's contractual obligations and commitments for future payments:
TRADING ACTIVITIES The Company does not have any trading activity that involves non-exchange traded contracts accounted for at fair value.
UNCONSOLIDATED ENTITIES The Company has no controlling ownership in significant entities which are not consolidated. There are no significant contractual requirements to fund losses of unconsolidated entities. Material contingent liabilities, guarantees and commitments not included in the consolidated balance sheet are disclosed in the accompanying "Notes to Consolidated Financial Statements" under Note 25: "Contingent Liabilities, Guarantees and Commitments."
ENVIRONMENTAL There is a risk of environmental impact in chemical manufacturing operations. The Company's environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental impact.
The laws and regulations under which the Company operates require significant expenditures for capital improvements, the operation of environmental protection equipment and remediation. Future developments and even more stringent environmental regulations may require the Company to make additional unforeseen
environmental expenditures. The Company's major competitors are confronted by substantially similar environmental risks and regulations.
The Company is a party in various government enforcement and private actions associated with former waste disposal sites, many of which are on the U.S. Environmental Protection Agency's (EPA) National Priority List and has been named a potentially responsible party at approximately 140 inactive waste sites where remediation costs have been or may be incurred under the Federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. In some of these cases the Company may also be held responsible for alleged property damage. The Company has provided for future costs at certain of these sites. The Company is also involved in corrective actions at some of its manufacturing facilities.
The Company considers a broad range of information when determining the amount of its remediation accruals, including available facts about the waste site, existing and proposed remediation technology and the range of costs of applying those technologies, prior experience, government proposals for this or similar sites, the liability of other parties, the ability of other principally responsible parties to pay costs apportioned to them and current laws and regulations. These accruals are assessed quarterly and updated as additional technical and legal information becomes available. However, at certain sites, the Company is unable, due to a variety of factors, to assess and quantify the ultimate extent of its responsibility for study and remediation costs. Major sites for which reserves have been provided are the non-company-owned Lipari, Woodland and Kramer sites in New Jersey, Whitmoyer in Pennsylvania and company-owned sites in Bristol and Philadelphia, Pennsylvania and Houston, Texas. The Morton acquisition introduced two major sites: Moss Point, Mississippi and Wood-Ridge, New Jersey.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation ("Velsicol") have been held jointly and severally liable for the cost of remediation necessary to correct mercury-related environmental problems associated with a mercury processing plant on the site prior to its acquisition by Morton. At the date of acquisition, Morton had disclosed and accrued for certain ongoing studies, which are expected to be completed during 2002, with regulatory decisions expected by the end of 2002. In its allocation of the purchase price of Morton, the Company accrued for additional study costs at December 31, 1999 and additional remediation costs in 2000 based on the progress of the technical studies. A separate study of probable contamination in Berry's Creek, which runs near the plant site, and of the surrounding wetlands is on a timetable yet to be determined. Therefore, the estimated costs of this separate study and any resulting remediation requirements have not been considered in the allocation of the Morton purchase price. There is much uncertainty as to what will be required to address Berry's Creek but cleanup costs could be very high and the Company's share of these costs could be material. The Company's exposure will also depend upon the continued ability of Velsicol and its indemnitor, Fruit of the Loom, Inc., which has filed for protection under the bankruptcy laws, to contribute to the cost of remediation. In 2001, these parties have stopped paying their share of expenses. Ultimately, the Company's exposure will also depend on the results of attempts to obtain contributions from others believed to share responsibility. A cost recovery action against these responsible parties is pending in federal court. This action has been stayed pending future regulatory developments and the appeal of a summary judgment ruling in favor of one of the defendants. Settlements have been reached with some defendants for claims considered de minimis associated with the Wood-Ridge plant site.
During 1996, the EPA notified Morton of possible irregularities in water discharge monitoring reports filed by its Moss Point, Mississippi plant in early 1995. Morton investigated and identified other environmental issues at the plant. Though at the date of acquisition Morton had accrued for some remediation and legal costs, the Company revised these accruals as part of the allocation of the purchase price of Morton based on its discussions with the authorities and on the information available as of June 30, 2000. In 2000, the Company reached agreement with the EPA, the Department of Justice and the State of Mississippi, resolving these historical environmental issues. The agreement received court approval in early 2001. The final settlement includes payment of $20 million in civil penalties, which were paid in the first quarter of 2001, $2 million in criminal penalties, which were paid in the fourth quarter of 2000 and $16 million in various Supplemental Environmental Projects. The accruals established for this matter were sufficient to cover these and other related costs of the settlement. In December 2001, the Company closed the chemicals portion of the Moss Point facility.
The amount charged to earnings before-tax for environmental remediation was $28 million and $4 million for the years ended December 31, 2001 and 1999, respectively, and the amount charged in 2000 was immaterial. The reserves for remediation were $156 million and $185 million at December 31, 2001 and 2000, respectively, and are
recorded as "other liabilities" (current and long-term). The Company is pursuing lawsuits over insurance coverage for environmental liabilities. It is the Company's practice to reflect environmental insurance recoveries in results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal processes. Resolutions typically resolve coverage for both past and future environmental spending. The Company settled with several of its insurance carriers and recorded income before-tax of approximately $13 million, $1 million and $17 million for the years ended December 31, 2001, 2000 and 1999, respectively.
In addition to accrued environmental liabilities, the Company had reasonably possible loss contingencies related to environmental matters of approximately $73 million and $73 million at December 31, 2001 and 2000, respectively. Further, the Company has identified other sites, including its larger manufacturing facilities, where additional future environmental remediation may be required, but these loss contingencies cannot reasonably be estimated at this time. These matters involve significant unresolved issues, including the number of parties found liable at each site and their ability to pay, the outcome of negotiations with regulatory authorities, the alternative methods of remediation and the range of costs associated with those alternatives. The Company believes that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on the consolidated financial position or consolidated cash flows of the Company, but could have a material adverse effect on consolidated results of operations or cash flows in any given period.
Capital spending for new environmental protection equipment was $26 million in 2001 versus $27 million in 2000 and $30 million in 1999. Spending for 2002 and 2003 is expected to be $26 million and $21 million, respectively. Capital expenditures in this category include projects whose primary purposes are pollution control and safety, as well as environmental aspects of projects in other categories that are intended primarily to improve operations or increase plant efficiency. The Company expects future capital spending for environmental protection equipment to be consistent with prior-year spending patterns. Capital spending does not include the cost of environmental remediation of waste disposal sites.
Cash expenditures for waste disposal site remediation were $51 million in 2001, $33 million in 2000 and $27 million in 1999. The expenditures for remediation are charged against accrued remediation reserves. The cost of operating and maintaining environmental facilities was $129 million, $114 million and $107 million in 2001, 2000 and 1999 respectively, and was charged against current-year earnings.
OTHER LITIGATION There has been increased publicity about asbestos liabilities faced by manufacturing companies. As a result of the bankruptcy of most major asbestos producers, plaintiffs' attorneys are increasing their focus on peripheral defendants. The Company believes it has adequate reserves and insurance and does not believe its asbestos exposure is material.
There are pending lawsuits filed against Morton related to employee exposure to asbestos at a manufacturing facility in Weeks Island, Louisiana with additional lawsuits expected. The Company expects that most of these cases will be dismissed because they are barred under worker's compensation laws; however, cases involving asbestos-caused malignancies may not be barred under Louisiana law. Subsequent to the Morton acquisition, the Company commissioned medical studies to estimate possible future claims and recorded accruals based on the results. Morton has also been sued in connection with the former Friction Division of the former Thiokol Corporation which merged with Morton in 1982. Settlements to date total $350 thousand and many cases have closed with no payment. These cases are fully insured. In addition, like most manufacturing companies, Rohm and Haas has been sued, generally as one of many defendants, by non-employees who allege exposure to asbestos on the Company premises.
The Company and its subsidiaries are also parties to litigation arising out of the ordinary conduct of its business. Recognizing the amounts reserved for such items and the uncertainty of the ultimate outcomes, it is the Company's opinion that the resolution of all these pending lawsuits, investigations and claims will not have a material adverse effect, individually or in the aggregate, upon the results of operations, cash flows or the consolidated financial position of the Company.
DIVIDENDS Total common stock dividends paid in 2001 were $.80 per share, compared to $.78 per share in 2000. The Company's common stock dividend payout is targeted at approximately 35% of trend-line earnings. Common stock dividends have been paid each year since 1927, and the payout has increased annually since 1977.
ADDITIONS TO LAND, BUILDING AND EQUIPMENT Capital additions were $401 million in 2001 compared to $391 million in 2000. Fixed asset additions during 2001 included spending on the Company's upgrade and consolidation of its ERP infrastructure; spending on a human resource/payroll project; completion of the Rodel expansion and the de-bottlenecking of the USA Methyl Methacrylate (MMA) facility in Houston. Capital additions during 2000 included acrylics expansion in Texas; spending on emulsions plants in the United Kingdom and Argentina; facility expansion in Electronic Materials, particularly at the Rodel facilities and spending on the Company's ERP project.
Capital expenditures in 2002 are not expected to exceed depreciation expense. Spending for environmental protection equipment, which is included in several of the categories in the table shown below, was $26 million in 2001, $27 million in 2000 and $30 million in 1999.
Expenditures for the past three years, categorized by primary purpose of project, are presented below:
- -------------------------------------------------------------------------------- (Millions of dollars) 2001 2000 1999 - -------------------------------------------------------------------------------- Environmental, cost savings and infrastructure $ 265 $ 271 $ 191 Capacity additions and new products 107 78 98 Research facilities and equipment 12 28 22 Capitalized interest cost 17 14 12 ------------------------------ Total $ 401 $ 391 $ 323 - --------------------------------------------------------------------------------
ACQUISITIONS AND DIVESTITURES The Company completed the following significant acquisitions and divestitures in 2001:
In November 2001, the Company acquired the flexible packaging adhesives business of Technical Coatings Co., a subsidiary of Benjamin Moore & Company. The acquisition includes the development, production and distribution of a full line of cold seal adhesives marked under the COSEAL(R) trademark. The primary application of such adhesives is in flexible packaging, used mainly in the food and medical industries.
In September 2001, the Company acquired the Megum[trademark] rubber-to-metal bonding business from Chemetall GmbH (Chemetall) of Frankfurt Germany. The acquisition includes the corresponding activities of Chemetall subsidiaries in Italy and Brazil, and includes the acquired technology used for the production of vibration absorption modules, used primarily in the automotive industry.
In 2001, the Company increased its ownership in Rodel from 90% to 99% for an additional cost of approximately $80 million. Rodel was a privately-held, Delaware-based leader in precision polishing technology serving the semiconductor, memory disk and glass polishing industries. In the second quarter of 2000 the Company increased its ownership from 48% to approximately 90% for a cost of approximately $200 million. The financial statements reflect allocations of the purchase price amounts based on estimated fair values, and resulted in acquired goodwill of $110 million, which was amortized on a straight-line basis over 30 years, through December 31, 2001. Prior to March 31, 2000 the investment had been accounted for under the equity method with the Company's share of earnings reported as equity in affiliates. Since the second quarter of 2000, Rodel was accounted for using the purchase method with results of operations fully consolidated. Approximately $13 million of the purchase price was allocated to IPR&D related to chemical mechanical planarization and surface preparation technologies under development and was recognized as a charge in the second quarter of 2000.
On June 1, 2001, the Company completed the sale of its Agricultural Chemicals business (Ag) to Dow AgroSciences LLC (DAS), a wholly owned subsidiary of the Dow Chemical Company, for approximately $1 billion, subject to a working capital adjustment not yet finalized at December 31, 2001. The Company recorded a gain on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per share, after-tax). Under the terms of the agreement, the divestiture included fungicides, insecticides, herbicides, trademarks, and license to all agricultural uses of the Rohm and Haas biotechnology assets, as well as the agricultural business-related manufacturing sites located in Brazil, Colombia, France and Italy, the Company's share of the Nantong, China joint venture and the Company's assets in Muscatine, Iowa. The Company recorded the sale of Ag as discontinued operations in accordance with APB 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Agricultural Chemicals business had been a separate major line of business previously reported as part of the Chemical Specialties segment and represented the Company's entire line of agricultural chemical products.
The operating results of Ag have been reported separately as discontinued operations in the Statements of Consolidated Earnings for each year presented.
Net sales and income from discontinued operations are as follows:
Year ended December 31, - -------------------------------------------------------------------------------- (Millions of dollars) 2001 2000 1999 - -------------------------------------------------------------------------------- Net sales $ 230 $ 530 $ 534 Operating income 65 93 89 Income tax expense 25 35 33 Income from discontinued operations 40 58 56 - --------------------------------------------------------------------------------
The Company completed the following acquisition and joint venture activities in 2000:
In the first quarter of 2000, the Company entered into a joint venture with Stockhausen GmbH & Co. KG (Stockhausen) of Germany to form a global partnership (StoHaas) for the manufacture of reliable, low cost supply of acrylic acid in North America and Europe. Under the terms of the joint venture both partners purchase acrylic acid from StoHaas for use as raw materials. Since StoHaas is not controlled by the Company its operations are not consolidated; instead, the Company's investment in StoHaas is accounted and reported as an investment under the equity method. The earnings impact in 2001, the first year of operations, was minimal. The Company expects minimal earnings impact from operations of the joint venture in future years as well. In conjunction with the joint venture, the Company acquired Stockhausen's merchant monomer business in Europe.
Acquired 95% of Acima A.G. (Acima), a Swiss company specializing in biocidal formulations, polyurethane catalysts and other specialty chemicals and also acquired an 80% interest in Silicon Valley Chemical Laboratories, Inc. (SVC), a privately-held supplier of high technology products for the semiconductor industry. These transactions were accounted for using the purchase method.
In the second quarter of 2000, the Company acquired the photoresist business of Mitsubishi Chemical Corporation. Mitsubishi Chemical is a leading producer of G-line, I-line and deep UV photoresist chemistry used to make semiconductor chips. The transaction was accounted for using the purchase method.
In conjunction with the acquisitions of Acima, SVC and Mitsubishi photoresist, the Company recorded goodwill of $36 million which was amortized over a range of 20 to 40 years, through December 31, 2001.
The Company completed the following divestitures in 2000:
In the first quarter of 2000, the Company sold its Industrial Coatings business to BASF Corporation for approximately $169 million, net of working capital adjustments.
In the third quarter of 2000, the Company sold its Thermoplastic Polyurethane business to Huntsman Corporation for approximately $117 million, net of working capital adjustments.
In the fourth quarter of 2000, the Company sold its European Salt business, Salins-Europe, to a consortium, which includes management, led by Union d'Etudes et d'Investissements SA, a wholly-owned subsidiary of Credit Agricole, for approximately $270 million.
These three businesses were acquired by the Company in June 1999 as part of the acquisition of Morton and were recorded at fair value. Accordingly, no gain or loss was recorded on these transactions.
In the fourth quarter of 2000, the Company sold its 50% interest in TosoHaas to its joint venture partner, Tosoh Corporation.
Pro forma information is not presented, as the 2001 and 2000 acquisitions and divestitures were not material to the Company's results of continuing operations or consolidated financial position. The results of operations of acquired businesses are included in the Company's consolidated financial statements from the respective dates of acquisition.
CHANGE IN FUNCTIONAL CURRENCIES On December 31, 2000, the Company substantially completed the legal restructuring and business integration of its foreign operations, primarily in Europe, following the Morton and LeaRonal acquisitions in 1999. Based on these significant operational changes at January 1, 2001, the Company determined that the functional currency of a majority of the Company's foreign entities is their respective local currency. This change resulted in a one-time write-down of fixed assets and inventories of approximately $50 million in the first quarter of 2001 with a corresponding charge to other comprehensive income.
WORKING CAPITAL Accounts receivable from customers decreased $314 million and inventory decreased $255 million. Days sales was 67 days, down from 72 in 2000. Days cost of sales in ending inventory decreased to 65 days from 74 days.
Details about two major components of working capital at the end of 2001 and 2000 are summarized below:
- --------------------------------------------------------------------------- (Millions of dollars) 2001(1) 2000(2) - --------------------------------------------------------------------------- INVENTORIES Year-end balance $ 712 $ 967 Annual turnover 5.6x 4.8x - ---------------------------------------------------------------------------
CUSTOMER RECEIVABLES Year-end balance $ 1,045 $ 1,359 Annual turnover 5.4x 5.1x - --------------------------------------------------------------------------- (1) 2001 reflects the divestiture of the Agricultural Chemicals business and reflect the current rate. (2) 2000 includes the discontinued operations and statement of position of the Agricultural Chemicals business and reflect historical rate.
LAND, BUILDING AND EQUIPMENT, NET Investments in land, buildings and equipment, net is summarized below: - --------------------------------------------------------------------------- (Millions of dollars) 2001(1) 2000(2) - --------------------------------------------------------------------------- Year-end balance $ 2,916 $ 3,294 Annual turnover 1.9x 2.1x - --------------------------------------------------------------------------- (1) 2001 reflects the divestiture of the Agricultural Chemicals business and reflect the current rate. (2) 2000 includes the discontinued operations and statement of position of the Agricultural Chemicals business and reflect historical rate.
Annual turnover figures are calculated by dividing annual sales (for customer receivables and land, buildings and equipment, net) or cost of goods sold (for inventories) by the year-end balance. Days sales outstanding was calculated by dividing ending customer receivables by daily sales, and days cost of sales in ending inventory was calculated by dividing ending inventory by daily cost of sales.
ASSET TURNOVER equals sales divided by year-end total assets. Asset turnover was .6 in 2001, .6 in 2000 and .6 in 1999. The 1999 amount was calculated using pro forma sales.
RETURN ON CAPITAL EMPLOYED (ROCE) equals net earnings plus after-tax amortization and after-tax interest expense, divided by average total assets less cash and average non-interest bearing liabilities. ROCE was 9.6% in 2001, 9.2% in 2000 and 11.3% in 1999, excluding IPR&D charges in 2000 and 1999. The year 2001 excludes extraordinary loss on early extinguishment of debt and the cumulative effect of accounting change.
RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) is obtained by dividing net earnings less preferred stock dividends by average year-end common stockholders' equity. Average year-end common stockholders' equity is calculated without the reduction for the ESOP transaction. ROE was 10.3% in 2001, 10.0% in 2000 and 13.4% in 1999, excluding the IPR&D charge.
INFORMATION SYSTEMS The Company began an investment in 2000 to upgrade and consolidate its information systems infrastructure. The effort is underway and on schedule with the Plastics Additives business in production. As it is implemented, this infrastructure is expected to enable more efficient e-commerce connections among the Company, its suppliers and customers. The Company has also engaged an implementation consultant to help install the components of the new system as quickly and efficiently as possible and has created an internal e-Transformation group to coordinate these efforts so that the new electronic business tools and support systems can be in place as rapidly as possible. Initial areas of concentration include, finance, human resources, customer relationship management, materials management, production scheduling, procurement, maintenance, sales and distribution.
NEW ACCOUNTING PRONOUNCEMENTS - -----------------------------
o ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND OTHER HEDGING ACTIVITIES On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes a new model for the accounting and reporting of derivative and hedging transactions. Additionally, in July 2001 the Company adopted DIG Issue G20, "Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge."
This standard requires that all derivative instruments be reported on the balance sheet at fair value. For instruments designated as fair value hedges, changes in the fair value of the instrument will largely be offset on the income statement by changes in the fair value of the hedged item. For instruments designated as cash flow hedges, the effective portion of the hedge is reported in other comprehensive income until it is assigned to earnings in the same period in which the hedged item has an impact on earnings. For instruments designated as a hedge of net investment in foreign operating units not using the U.S. Dollar as its functional currency, changes in the fair value of the instrument will be offset in other comprehensive income to the extent that they are effective as economic hedges. Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as a hedge will be recorded each period in current earnings along with any ineffective portion of hedges.
Using market valuations for derivatives held as of December 31, 2000, the Company recorded a $6 million after-tax cumulative income effect to accumulated other comprehensive income, and a charge to net income of $2 million, to recognize at fair value all derivative instruments on January 1, 2001. Changes in the Company's derivative instrument portfolio or changes in the market values of this portfolio could have a material effect on accumulated other comprehensive income.
The Company has concluded that the adoption of SFAS No. 133 will not materially change management's risk policies and practices nor will compliance with the standard materially impact the reported results from operations.
o BUSINESS COMBINATIONS SFAS No. 141, "Business Combinations," which is effective for all business combinations completed after June 30, 2001, mandates that all business combinations be accounted for by only the purchase method (thereby eliminating the option for pooling of interests); segregation of other intangible assets from goodwill if they meet the contractual legal criterion or the separability criterion; and expanded disclosure requirements on the primary reasons for a business combination and the allocation of the purchase price to the assets and liabilities assumed by major balance sheet caption.
o GOODWILL AND OTHER INTANGIBLE ASSETS SFAS No. 142, "Goodwill and Other Intangible Assets," is effective for fiscal years beginning after December 15, 2001. SFAS No. 142, which the Company adopted on January 1, 2002, requires the Company to cease amortization of goodwill and certain indefinite-lived intangible assets and evaluate goodwill and intangible assets for impairment. In accordance with the Statement, the Company reviewed its intangible assets in order to identify intangible assets with indefinite lives which will no longer be amortized and intangible assets which may be reclassified as goodwill and thus no longer be amortized. In addition the Company is in the process of assessing the remaining useful lives of intangible assets which will continue to be subject to amortization. As of January 1, 2002, the Company ceased amortization of goodwill and intangibles deemed to have indefinite lives and reclassified certain intangibles in accordance with the provisions of this statement.
The evaluation of the Company's goodwill is performed at the reporting unit level and is a two-step process. When evaluating goodwill for impairment, the Statement requires the Company to first compare a reporting unit's book value to its fair value. To the extent that the book value exceeds fair value, the Company is required to perform a second step wherein a reporting unit's assets and liabilities are fair valued. To the extent that a reporting unit's book value of goodwill exceeds its implied fair value of goodwill, impairment exists and must be recognized. The implied fair value of goodwill is calculated as the fair value of a reporting unit in excess of the fair value of all non-goodwill assets in the reporting unit. Net book values of the recorded assets and liabilities have been calculated for each of the Company's reporting units. The Company is in the process of valuing these reporting units based primarily upon the present value of expected future cash flows.
In accordance with SFAS No. 142, the intangible assets which continue to be subject to amortization are being reviewed for impairment by the Company under SFAS No. 144 "Accounting for the impairment or Disposal of Long-Lived Assets." Intangible assets which are no longer subject to amortization are being reviewed by the Company in accordance with SFAS No. 142 in a one-step process. Impairment is measured as the amount an intangible asset's carrying value exceeds its fair value. The Company intends to complete its evaluation of intangible assets in accordance with SFAS No. 142 no later than June 30, 2002.
The Company's previous business combinations were accounted for using the purchase method of accounting. As of December 31, 2001, the net carrying amount of goodwill was $2,159 million. Goodwill amortization expense for the year ended December 31, 2001 was $64 million. The Company intends to complete its evaluation of goodwill in accordance with SFAS No. 142 no later than June 30, 2002 and expects to recognize an impairment loss. The Company continues to finalize its estimate of the impairment loss. Any impairment loss will be recognized as a cumulative effect of a change in accounting principle in the Company's consolidated statement of operations.
o ASSET RETIREMENT OBLIGATIONS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. SFAS No. 143 is effective for fiscal years beginning after December 15, 2002. Management is currently assessing the impact of the new standard on its financial statements.
o IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On January 1, 2002 the Company adopted SFAS No. 144. The Statement provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. Management has assessed the impact of the new standard and determined there to be no material impact to the financial statements.
CAUTIONARY STATEMENTS
Any statements made by the Company in its filings with the Securities and Exchange Commission or other communications (including press releases and analyst meetings and calls) that are not statements of historical fact are forward-looking statements. These statements include, without limitation, those relating to anticipated product plans, litigation and environmental matters, currency effects, profitability, and other commitments or goals. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties include, but are not limited to, the following:
o CURRENCIES AND ECONOMIC CONDITIONS Approximately half of the Company's revenues are from outside the United States, a significant portion of which are denominated in foreign currencies. Also, significant production facilities are located outside the United States. The Company's financial results therefore can be affected by changes in foreign currency rates. Though the Company uses certain financial instruments to mitigate these effects, it does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the Company's earnings, cash flows and fair values of assets and liabilities. Accordingly, reported revenue, net income, cash flows and fair values have been and in the future may be affected by changes in foreign exchange rates. In addition, because of the extensive nature of the Company's foreign business activities, financial results could be adversely affected by changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest.
o COMPETITION AND DEMAND The Company's products are sold in a competitive, global economy. Competitors include many large multinational chemical firms based in Europe, Asia and the United States. In addition, financial results are subject to fluctuations in demand and the seasonal activity of certain of the Company's businesses. The Company also manufactures and sells its products to customers in industries and countries that are experiencing periods of rapid change, most notably countries in Eastern Europe and in the Asia-Pacific region. Also, weather conditions have historically had, and will likely continue to have in the future, a significant impact on revenues and earnings in the Company's Salt segment. These factors can adversely affect demand for the Company's products and therefore may have a significant impact on financial results.
o SUPPLY AND CAPACITY From time to time certain raw materials the Company requires become limited. It is likely this will occur again in the future. Should such limitations arise, disruptions of the Company's supply chain may lead to higher prices and/or shortages. Also, from time to time, the Company is subject to increases in raw material prices and, from time to time, experiences significant capacity limitations in its own manufacturing operations. These limitations, disruptions in supply, price increases and capacity constraints could adversely affect financial results.
o TECHNOLOGY The Company has invested significant resources in intellectual properties such as patents, trademarks, copyrights, and trade secrets. The Company relies on the protection these intellectual property rights provide since it depends on these intellectual resources for its financial stability and its future growth. The development and successful implementation of new, competing technologies in the market place could significantly impact future financial results.
o JOINT VENTURES, ACQUISITIONS AND ALLIANCES The Company has entered, and in the future may enter, into arrangements with other companies to expand product offerings and to enhance its own capabilities. It will likely also continue to make strategic acquisitions and divestitures. The success of acquisitions of new technologies, companies and products, or arrangements with third parties, is not predictable and there can be no assurance that the Company will be successful in realizing its objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions.
o ENVIRONMENTAL Risks and uncertainties related to environmental matters are discussed on pages 22 through 24 of this Form 10-K.
ITEM 7A.
ITEM 7A. MARKET RISK DISCUSSION
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices since it denominates its business transactions in a variety of foreign currencies, finances its operations through long- and short-term borrowings, and purchases raw materials at market prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. The Company's operating and financing plans include actions to reduce this uncertainty including, but not limited to, the use of derivative instruments.
The Company has established policies governing its use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes, nor is it a party to any leveraged derivative instruments or any instruments of which the values are not available from independent third parties. The Company manages counter-party risk by entering derivative contracts with major financial institutions of investment grade credit rating and by limiting amount of exposure to each financial institution. The terms of certain derivative instruments contain a credit clause where each party has a right to settle at market if the other party is downgraded below investment grade. As of December 31, 2001, the fair market value of all such contracts was $24 million, all of which were held by investment grade financial institutions.
The Company enters into derivative contracts based on economic analysis of underlying exposures, anticipating that adverse impacts on future earnings, cash flows and fair values due to fluctuations in foreign currency exchange rates, interest rates and commodity prices will be offset by the proceeds from and changes in fair value of the derivative instruments. The Company does not hedge its exposure to market risk in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values.
In evaluating the effects of changes in foreign currency exchange rates, interest rates and commodity prices on the Company's business operations, the risk management system uses sensitivity analysis. The analysis assumes simultaneous shifts in those rates and quantifies the impact of such shifts on the Company's earnings, cash flows, and fair values of assets and liabilities during a one-year period. The range of changes used for the purpose of this analysis reflects the Company's view of changes that are reasonably possible over a one-year period. Fair values are the present value of projected future cash flows based on market rates and prices chosen.
FOREIGN EXCHANGE RATE RISK Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. The Company covers known and anticipated external transactions and operating exposures by using foreign exchange option, forward and swap contracts. The Company's most significant foreign currency exposures relate to Western European countries (primarily Germany, France, Italy, Netherlands, the United Kingdom, Sweden, and Switzerland), as well as Brazil, Mexico, Canada, Japan, Taiwan, China and Australia. The Company conducted a sensitivity analysis on the fair value of its foreign currency hedge portfolio assuming an instantaneous 10% change in foreign currency exchange rates from their levels as of December 31, 2001, with all other variables held constant. A 10% appreciation and depreciation of the U.S. dollar against foreign currencies would reduce and increase by $79 million, the fair value of foreign currency hedging contracts held at December 31, 2001. The sensitivity in fair value of the foreign currency hedge portfolio represents changes in fair values estimated based on market conditions as of December 31, 2001, without reflecting the effects of underlying anticipated transactions. When those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on earnings and cash flows in future periods.
Long-term exposures to foreign currency exchange rate risk are managed primarily through operational activities. The Company manufactures its products in a number of locations around the world; hence, has a cost base in a variety of European, Asian and Latin American currencies. Additionally, the Company finances in local currencies its operations outside the United States. Such diverse base of local currency costs and financings serves to partially counterbalance the impact of changing foreign currency exchange rates on earnings, cash flows and fair values of assets and liabilities.
INTEREST RATE RISK The Company is exposed to changes in interest rates primarily due to its financing, investing and cash management activities, which include long- and short-term debt to maintain liquidity and fund its business operations. The Company's current strategic policy is to maintain from 20% to 40% of floating rate debt. A 65 basis point increase in interest rates would reduce by $107 million, the fair value of liabilities under its floating and fixed rate instruments, including short- and long-term debt and derivative contracts outstanding as of December 31, 2001. A 65 basis point decrease in interest rates will increase the fair value by $119 million. However, such changes in fair values would not have a material impact on earnings per share or cash flows as the majority of the Company's debt portfolio consisted of fixed rate instruments. A 65 basis point movement is equivalent to approximately 10% of the Company's weighted average rate on its worldwide debt.
COMMODITY PRICE RISK The Company purchases certain raw materials such as natural gas, propylene, acetone, butanol and styrene under short- and long-term supply contracts. The purchase prices are generally determined based on prevailing market conditions. Changing raw material prices have historically had material impacts on the Company's earnings and cash flows, and will likely continue to have significant impacts on earnings and cash flows in future periods. The Company uses commodity derivative instruments to modify some of the commodity price risks. Assuming a 25% change in the underlying commodity price, the potential change in the fair value of commodity derivative contracts held at December 31, 2001 approximates $9 million, which would not be material when compared with the Company's earnings and financial position.
FORWARD-LOOKING STATEMENTS This market risk discussion and the estimated amounts presented are forward-looking statements that assume certain market conditions known at December 31, 2001. Actual results in the future may differ materially from these projected results due to changes in business climate, economic and competitive uncertainties, future acquisitions activities and any unforeseen developments in relevant financial markets, including Asia and Latin America. The methods used above to assess risk should not be considered projections of expected future events or results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No reports on Form 8-K were filed during 2001 or 2000 relating to any disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WILLIAM J. AVERY, Chairman and Director, Crown, Cork & Seal Company, Inc.; Previously Chief Executive Officer, Crown, Cork & Seal Company, Inc. Mr. Avery, 61, has been a director since 1997. (Committees: 3, 4 (chair), 6)
JAMES R. CANTALUPO, President and Vice Chairman, Emeritus, McDonalds Corporation, Mr. Cantalupo, 58, has been a director since 1999. (Committees: 1 (chair), 5, 6)
J. MICHAEL FITZPATRICK, President and Chief Operating Officer, Rohm and Haas Company, Dr. Fitzpatrick, 55, has been a director since 1999. (Committees: 2, 3, 5)
EARL G. GRAVES, SR., Chairman and Chief Executive Officer, Earl G. Graves, Ltd.; Retired Chairman and Chief Executive Officer, Pepsi-Cola of Washington D.C., L.P. ; Publisher and Editor, Black Enterprise Magazine; Managing Director, Black enterprise/Greenwich Street Corporate Growth Partners, L.P., Mr. Graves, 67, has been a director since 1984. (Committees: 2, 5 (chair), 6)
RAJ L. GUPTA, Chairman and Chief Executive Officer, Rohm and Haas Company, Mr. Gupta, 56, has been a director since 1999. (Committees: 3 (chair))
DAVID W. HAAS, Board Chairman and Director, William Penn Foundation, Mr. Haas, 46, has been a director since 1999. (Committees: 2, 6)
THOMAS W. HAAS, Director and Corporate Officer, William Penn Foundation; Pilot and Flight Instructor, Mr. Haas, 46, has been a director since 1999. (Committees: 4, 6)
JAMES A. HENDERSON, Retired Chairman and Chief Executive Officer and Director, Cummins Engine Company, Inc. Mr. Henderson, 67, has been a director since 1989. (Committees: 4, 6)
RICHARD L. KEYSER, Chairman of the Board and Chief Executive Officer, W.W. Grainger, Inc., Mr. Keyser, 59, has been a director since 1999. (Committees: 4, 6)
JOHN H. MCARTHUR, Senior Advisor to the President, World Bank Group, Mr. McArthur, 67, has been a director since 1977. (Committees: 2, 6)
JORGE P. MONTOYA, President, Global Food & Beverage, The Procter and Gamble Company; President, Procter and Gamble Latin America, Mr. Montoya, 55, has been a director since 1996. (Committees: 4, 6)
SANDRA O. MOOSE, Senior Vice President and Director, The Boston Consulting Group, Inc., Dr. Moose, 60, has been a director since 1981. (Committees: 1, 3, 5, 6 (chair))
GILBERT S. OMENN, Executive Vice President for Medical Affairs, The University of Michigan; CEO, The University of Michigan Health System, Professor of Internal Medicine, Human Genetics, Public Health, The Cancer Center, The University of Michigan, Dr. Omenn, 60, has been a director since 1987. (Committees: 2 (chair), 6)
RONALDO H. SCHMITZ, Advisor to Deutsche Bank AG; Retired Member of the Executive Board, Deutsche Bank AG, Dr. Schmitz, 63, has been a director since 1992. (Committees: 1, 5, 6)
MARNA C. WHITTINGTON, President, Nicholas-Applegate Capital Management; Chief Operating Officer, Allianz Dresdner Asset Management; Retired Chief Operating Officer, Morgan Stanley Institutional Investment Management, Dr. Whittington, 54, has been a director since 1989. (Committees: 1, 3, 5, 6)
COMMITTEES:
1. Audit 2. Corporate Responsibility, Environment, Safety and Health 3. Executive 4. Executive Compensation 5. Finance 6. Nominating
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Items 10 and 11 of this Form 10-K report for the fiscal year ended December 31, 2001, has been omitted, except for the information presented below, since the Company will file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to regulation 14(a) under the Securities Exchange Act of 1934.
EXECUTIVE OFFICERS
The Company's executive officers along with their present position, offices held and activities during the past five years are presented below. All officers normally are elected annually and serve at the pleasure of the Board of Directors. The Company's non-employee directors and their business experience during the past five years are listed in the Company's Proxy Statement.
ALAN E. BARTON, 46, vice president since 1999; director of the Coatings business group since 2001; business unit director of Coatings from 1997 to 2001; Polymers and Resins business manager and business director of industrial Coatings from 1996 to 1997.
BRADLEY J. BELL, 49, senior vice president and chief financial officer since 1999; vice president, chief financial officer and treasurer from 1997 to 1998; previously vice president and treasurer of Whirlpool Corporation from 1987 to 1997.
PIERRE R. BRONDEAU, 44, vice president and director of the Electronic Materials business group since 1999; president and chief executive officer of Shipley Company, LLC since 1999; president and chief operating officer of
Shipley Company, LLC since 1998; vice president and chief operating officer of Shipley Company, LLC from 1997 to 1998; director of research, sales and marketing of Shipley Company, LLC from 1995 to 1997.
J. MICHAEL FITZPATRICK, 55, president, chief operating officer and director since 1999; vice president since 1993; chief technology officer from 1996 to 1998.
JOSEPH J. FORISH, 49, vice president and director of human resources since 1999; previously vice president of human resources for a unit of Bristol-Myers Squibb Corporation from 1989 to 1999.
RAJ L. GUPTA, 56, chairman, chief executive officer and director since 1999; vice chairman since 1999; vice president and regional director of Asia-Pacific from 1993 to 1998.
ROBERT A. LONERGAN, 56, vice president and general counsel since 1999; previously senior vice president, general counsel and secretary of PegasusGold, Inc. from 1995 to 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership of certain beneficial owners and management is incorporated in this Form 10-K by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated in this Form 10-K by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein
2. Financial Statement Schedule
The following supplementary financial information is filed in this Form 10-K :
PAGE ---- Financial Statement Schedule
II - Valuation and qualifying accounts for the years 2001, 2000 and 1999 ............................................ S-1
The schedules not included herein are omitted because they are not applicable or the required information is presented in the financial statements or related notes.
(b) Reports on 8-K None
(c) Exhibit listing
Exhibit (3)(i), Restated Certificate of Incorporation and Bylaws* Exhibit (12), Computation of Ratio of Earnings to Fixed Charges for the Company and subsidiaries Exhibit (21), Subsidiaries of the registrant Exhibit (23), Consent of Independent Accountants
* Incorporated by reference
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
STOCK EXCHANGE LISTING Rohm and Haas stock trades on the New York Stock Exchange (NYSE) under the trading symbol ROH.
TRANSFER AGENT AND REGISTRAR EquiServe L.P. P.O. Box 8218 Boston, MA 02266-8218
ANNUAL MEETING OF SHAREHOLDERS
Rohm and Haas Company's Annual Meeting of Shareholders will be held on May 6, 2002 at Independence Visitors Center, One North Independence Mall West, Philadelphia, PA 19106. Formal notice of the meeting, the proxy statement and form of proxy will be mailed to current shareholders on April 2, 2002.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP Two Commerce Square 2001 Market Street Suite 1700 Philadelphia, PA USA 19103 (267) 330-3000
10-K FILING WITH THE SEC
You can obtain a copy of Rohm and Haas's annual report to the U.S. Securities and Exchange Commission (SEC) through:
The SEC EDGAR database at: www.sec.gov ----------- The Rohm and Haas website: www.rohmhaas.com ---------------- The Rohm and Haas Investors Line at: 1-800-ROH-0466
Or by writing to:
Rohm and Haas Company Public Relations Department 100 Independence Mall West Philadelphia, PA USA 19106-2399 - --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Rohm and Haas Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Bradley J. Bell ---------------------------------------------------- Bradley J. Bell Senior Vice President and Chief Financial Officer March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 26, 2002 by the following persons on behalf of the registrant and in the capacities indicated.
INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
Report of Independent Accountants Consolidated Financial Statements: Statements of Consolidated Earnings for the years ended December 31, 2001, 2000 and 1999 Statements of Consolidated Cash Flows for the years ended December 31, 2001, 2000 and 1999 Consolidated Balance Sheets as of December 31, 2001 and 2000 Statements of Consolidated Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Schedule II. Valuation and Qualifying Accounts Financial Statement Schedule S-1
REPORT ON FINANCIAL STATEMENTS
The financial statements of Rohm and Haas Company and subsidiaries were prepared by the Company in accordance with generally accepted accounting principles. The financial statements necessarily include some amounts that are based on the best estimates and judgments of the Company. The financial information in this annual report is consistent with that in the financial statements.
The Company maintains accounting systems and internal accounting controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with the Company's authorization and transactions are properly recorded. The accounting systems and internal accounting controls are supported by written policies and procedures, by the selection and training of qualified personnel and by an internal audit program. In addition, the Company's code of business conduct requires employees to discharge their responsibilities in conformity with the law and with a high standard of business conduct.
The Company's financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report below. Their audit was conducted in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent considered necessary to determine the audit procedures required to support their opinion.
The audit committee of the board of directors, composed entirely of non-employee directors, recommends to the board of directors the selection of the Company's independent accountants, approves their fees and considers the scope of their audits, audit results, the adequacy of the Company's internal accounting control systems and compliance with the Company's code of business conduct.
/s/ Raj L. Gupta
Raj L. Gupta Chairman of the Board and Chief Executive Officer
/s/ Bradley J. Bell
Bradley J. Bell Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS - ---------------------------------
The Board of Directors and Shareholders of Rohm and Haas Company:
In our opinion, the consolidated financial statements listed in the index appearing under Item 8 present fairly, in all material respects, the financial position of Rohm and Haas Company and its subsidiaries at December 31, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 7, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 21, 2002
See notes to consolidated financial statements (pages through).
Rohm and Haas Company and Subsidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS Years ended December 31, 2001, 2000 and 1999
See notes to consolidated financial statements (pages through).
Rohm and Haas Company and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
See notes to consolidated financial statements (pages through).
Rohm and Haas Company and Subsidiaries STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999
See Notes to Consolidated Financial Statements for additional information. * See Note 7 in the Notes to Consolidated Financial Statements for changes within accumulated other comprehensive income, due to the use of derivative and non-derivative instruments qualifying as hedges in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform with current year presentation.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Rohm and Haas Company and its subsidiaries (the Company). Investments in affiliates (20-50%-owned) are recorded at cost plus equity in their undistributed earnings, less dividends. Intercompany accounts, transactions and unrealized profits and losses on transactions within the consolidated group and with significant affiliates are eliminated in consolidation, as appropriate.
UNCONSOLIDATED ENTITIES The Company has no controlling ownership in significant entities which are not consolidated. There are no significant contractual requirements to fund losses of unconsolidated entities. Material contingent liabilities, guarantees and commitments not included in the consolidated balance sheet are disclosed in the "Notes to Consolidated Financial Statements" under Note 25: "Contingent Liabilities, Guarantees and Commitments."
TRANSLATION PROCEDURES Foreign currency accounts are translated into U.S. dollars under the provisions of Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Through December 31, 2000, the U.S. dollar was the functional currency for approximately half of international operations. Following the Morton and LeaRonal acquisitions in 1999, the Company completed legal entity restructuring and business integration of its foreign operations, primarily in Europe. Based on these significant operational changes, the Company determined that the functional currency of most of its foreign entities is the respective local currency. Consequently, the Company changed the functional currency for those international operations affected by the restructuring and business integration. Based on exchange rates as of January 1, 2001, the Company recognized a one-time write-down of fixed assets and inventories of approximately $50 million in the first quarter of 2001, which was recorded with a corresponding charge to other comprehensive income.
Several foreign subsidiaries, primarily those in hyper-inflationary emerging market economies, continue to use the U.S. dollar as their functional currency.
Foreign subsidiaries using their local currency as the functional currency translate their assets and liabilities into U.S. dollars using exchange rates at year-end. Revenue and expense accounts are translated using the average exchange rates for the reporting period. Translation adjustments are recorded in accumulated other comprehensive income or loss, a separate component of shareholder's equity.
Under the provisions of SFAS No. 52, foreign entities that continue to use the U.S. dollar as the functional currency translate: (1) land, buildings and equipment along with related accumulated depreciation, inventories, goodwill and intangibles along with related accumulated amortization, and minority interest at historical rates of exchange; (2) all other assets and liabilities using exchange rates at end of period, and (3) revenues, cost of goods sold, and operating expenses other than depreciation, amortization of goodwill and intangibles using the average rates of exchange for the reporting period. Foreign exchange adjustments, including recognition of open foreign exchange contracts, are charged or credited to income.
REVENUE RECOGNITION Revenues from product sales, net of applicable allowances, are recognized upon shipment of product. Exceptions from this practice include shipments of supplier-owned and managed
inventory ("SOMI") arrangements. Revenue is recognized under SOMI arrangements when usage of finished goods is reported by the customer, generally on a weekly or monthly basis. Payments received in advance of revenue recognition are recorded as deferred revenue.
EARNINGS PER SHARE Basic earnings per share is calculated by dividing net earnings applicable to common shareholders by the average number of shares outstanding for the period. Diluted earnings per share is calculated by adding the earnings impact of the conversion of preferred stock to net earnings applicable to common shareholders and dividing this amount by the average number of shares outstanding for the period adjusted for the assumed preferred stock conversion, and for the dilutive effect of an assumed exercise of all "in the money" options outstanding at the end of the period.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, time deposits and readily marketable securities with original maturities of three months or less.
INVENTORIES Inventories are stated at the lower of cost or market. Cost of domestic inventory is primarily determined under the last-in, first-out (LIFO) method.
LAND, BUILDINGS AND EQUIPMENT AND RELATED DEPRECIATION Land, buildings and equipment are carried at cost. Assets are depreciated over their estimated useful lives on the straight-line and accelerated methods. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. The cost and related accumulated depreciation of buildings and equipment are removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in earnings.
INTANGIBLE ASSETS The Company amortizes identifiable intangible assets such as patents and trademarks on the straight-line basis over their estimated useful lives. Goodwill is amortized on the straight-line basis over periods not greater than 40 years. The Company evaluates the recoverability of goodwill and other intangible assets on an annual basis, or when events or circumstances indicate a possible inability to recover carrying amounts. Such evaluation is based on various analyses, including cash flow and profitability projections. These analyses necessarily involve significant management judgment. See Note 26 for additional information regarding new accounting pronouncements.
IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of its long-lived assets based on current and anticipated future undiscounted cash flows. In addition, the Company's policy for the recognition and measurement of any impairment of such assets is to assess the current and anticipated cash flows associated with the impaired asset. An impairment occurs when the cash flows (excluding interest) do not exceed the carrying amount of the asset. The amount of impairment loss is the difference between the carrying amount of the asset and its estimated fair value. See Note 26 for additional information regarding new accounting pronouncements.
INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future consequences of temporary differences between the financial statement carrying value of assets and liabilities and their values as measured by tax laws.
STOCK COMPENSATION The Company applies the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25 and related Interpretations in accounting for stock compensation plans. Under this method, no compensation expense is recognized for fixed stock option plans.
NOTE 2: ACQUISITIONS AND DISPOSITIONS OF ASSETS
THE COMPANY COMPLETED THE FOLLOWING ACQUISITIONS AND DIVESTITURES IN 2001:
In November 2001, the Company acquired the flexible packaging adhesives business of Technical Coatings Co., a subsidiary of Benjamin Moore & Company. The acquisition includes the development, production and distribution of a full line of cold seal adhesives marked under the COSEAL(R) trademark. The primary application of such adhesives is in flexible packaging, used mainly in the food and medical industries.
In September 2001, the Company acquired the Megum[trademark] rubber-to-metal bonding business from Chemetall GmbH (Chemetall) of Frankfurt Germany. The acquisition includes the corresponding activities of Chemetall subsidiaries in Italy and Brazil, and includes the acquired technology used for the production of vibration absorption modules, used primarily in the automotive industry.
In 2001, the Company increased its ownership in Rodel from 90% to 99% for an additional cost of approximately $80 million. Rodel was a privately-held, Delaware-based leader in precision polishing technology serving the semiconductor, memory disk and glass polishing industries. In the second quarter of 2000 the Company increased its ownership from 48% to approximately 90% for a cost of approximately $200 million. The financial statements reflect allocations of the purchase price amounts based on estimated fair values, and resulted in acquired goodwill of $110 million, which was amortized on a straight-line basis over 30 years, through December 31, 2001. Prior to March 31, 2000 the investment had been accounted for under the equity method with the Company's share of earnings reported as equity in affiliates. Since the second quarter of 2000, Rodel was accounted for using the purchase method with results of operations fully consolidated. Approximately $13 million of the purchase price was allocated to IPR&D related to chemical mechanical planarization and surface preparation technologies under development and was recognized as a charge in the second quarter of 2000.
On June 1, 2001, the Company completed the sale of its Agricultural Chemicals business (Ag) to Dow AgroSciences LLC (DAS), a wholly owned subsidiary of the Dow Chemical Company, for approximately $1 billion, subject to working capital adjustments not yet finalized at December 31, 2001. The Company recorded a gain on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per share, after-tax.) Under the terms of the agreement, the divestiture included fungicides, insecticides, herbicides, trademarks, and license to all agricultural uses of the Rohm and Haas biotechnology assets, as well as the agricultural business-related manufacturing sites located in Brazil, Colombia, France and Italy, the Company's share of the Nantong, China joint venture and the Company's assets in Muscatine, Iowa. The Company recorded the sale of Ag as discontinued operations in accordance with APB 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Agricultural Chemicals business had been a separate major line of business previously reported as part of the Chemical Specialties segment and represented the Company's entire line of agricultural chemical products.
The operating results of Ag have been reported separately as discontinued operations in the Statements of Consolidated Earnings for each year presented.
Net sales and income from discontinued operations are as follows:
(in millions) Year ended December 31, - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Net sales $ 230 $ 530 $ 534 Operating income 65 93 89 Income tax expense 25 35 33 Income from discontinued operations 40 58 56 - --------------------------------------------------------------------------------
THE COMPANY COMPLETED THE FOLLOWING ACQUISITION AND JOINT VENTURE ACTIVITIES IN 2000:
In the first quarter of 2000, the Company entered into a joint venture with Stockhausen GmbH & Co. KG (Stockhausen) of Germany to form a global partnership (StoHaas) for the manufacture of reliable, low cost supply of acrylic acid in North America and Europe. Under the terms of the joint venture both partners purchase acrylic acid from StoHaas for use as raw materials. Since StoHaas is not controlled by the Company its operations are not consolidated, instead, the Company's investment in StoHaas is accounted and reported as an investment under the equity method. The earnings impact in 2001, the first year of operations, was minimal. The Company expects minimal earnings impact from operations of the joint venture in future years as well. In conjunction with the joint venture, the Company acquired Stockhausen's merchant monomer business in Europe.
Acquired 95% of Acima A.G. (Acima), a Swiss company specializing in biocidal formulations, polyurethane catalysts and other specialty chemicals and also acquired an 80% interest in Silicon Valley Chemical Laboratories, Inc. (SVC), a privately-held supplier of high technology products for the semiconductor industry. These transactions were accounted for using the purchase method.
In the second quarter of 2000, the Company acquired the photoresist business of Mitsubishi Chemical Corporation. Mitsubishi Chemical is a leading producer of G-line, I-line and deep UV photoresist chemistry used to make semiconductor chips. The transaction was accounted for using the purchase method.
In conjunction with the acquisitions of Acima, SVC and Mitsubishi photoresist, the Company recorded goodwill of $36 million which was amortized over a range of 20 to 40 years, through December 31, 2001.
THE COMPANY COMPLETED THE FOLLOWING DIVESTITURES IN 2000:
In the first quarter of 2000, the Company sold its Industrial Coatings business to BASF Corporation for approximately $169 million, net of working capital adjustments.
In the third quarter of 2000, the Company sold its Thermoplastic Polyurethane business to Huntsman Corporation for approximately $117 million, net of working capital adjustments.
In the fourth quarter of 2000, the Company sold its European Salt business, Salins-Europe, to a consortium, which includes management, led by Union d'Etudes et d'Investissements SA, a wholly-owned subsidiary of Credit Agricole, for approximately $270 million.
These three businesses were acquired by the Company in June 1999 as part of the acquisition of Morton and were recorded at fair value. Accordingly, no gain or loss was recorded on these transactions.
In the fourth quarter of 2000, the Company sold its 50% interest in TosoHaas to its joint venture partner, Tosoh Corporation.
Pro forma information is not presented, as the 2001 and 2000 acquisitions and divestitures were not material to the Company's results of operations or consolidated financial position. The results of operations of acquired businesses are included in the Company's consolidated financial statements from the respective dates of acquisition. The operating results of Ag have been reported separately as discontinued operations in the Statements of Consolidated Earnings for each year presented.
NOTE 3: INVESTMENTS
The Company's investments in its affiliates (20-50%-owned) totaled $109 million at December 31, 2001 and 2000.
NOTE 4: PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In acquisitions accounted for by the purchase method, IPR&D represents the value assigned to research and development projects of an acquired company where technological feasibility had not yet been established at the date of the acquisition, and which, if unsuccessful, have no alternative future use. Amounts assigned
to IPR&D are charged to expense at the date of acquisition. Accordingly, the Company has charged $13 million and $105 million to expense in 2000 and 1999, respectively, related to the Rodel and Morton acquisition. The $13 million IPR&D charge in 2000 resulted from the allocation of purchase price in the Rodel acquisition to projects under development related to chemical mechanical planarization (CMP) and surface preparation (SP) technologies which are expected to be commercialized in 2002.
In 1999, eight IPR&D projects were identified based upon discussions with Morton personnel, analyses of the acquisition agreements, and analyses of data provided by Morton. The two most significant research and development projects were passive materials and Lamineer coating which together represented more than 90% of the overall in-process research and development value. The remaining value was assigned to six other in-process projects.
The passive materials project is being developed by the Electronic Materials product group, which principally manufactures dry film photoresists sold to printed circuit board manufacturers. Passive materials is a new form of film materials which has been in development since July 1996. The product demonstrated technological feasibility in the laboratory and is currently in evaluations with customers.
Lamineer coating is a new and innovative product for Morton's Powder Coatings business which was successfully developed subsequent to the Morton Acquisition. Lamineer is a new family of powder coatings used for a variety of wood applications. The technology provides manufacturers with an alternative method for applying coatings to wood at increased operating and manufacturing efficiencies. Lamineer coating had been in development since early 1996. Through June 1999, a material portion of the Lamineer technology, the base resins, was completely developed. This portion of technology was identified as having an alternative future use and, therefore, was not classified as IPR&D at the date of the Morton acquisition. The curing technologies, however, were identified as IPR&D. Related products are in the testing and trial stage of development. The efforts required to complete the Lamineer coating project were focused on developing the necessary curing technologies and meeting customer specifications. During 2000, Lamineer products were commercially introduced and marketed through the Company's Surface Finishes business.
The fair values of the in-process completed portion of these research and development projects at the date of acquisition, were as follows:
- ---------------------------------------------------------------------------- (in millions) FAIR VALUE - ---------------------------------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------- Passive Materials $ -- $ -- $ 50 Lamineer Coating -- -- 48 CMP and SP technologies -- 13 -- All Others -- -- 7 ----------------------------------- Total $ -- $ 13 $ 105 - ----------------------------------------------------------------------------
The valuation analyses of these projects were performed just prior to the date of acquisition and were based on information available at that time. The projects identified in the analysis were analyzed based primarily on an evaluation of their status in the product development process, the expected release dates, and the percentage completed.
The technique used in valuing each purchased research and development project was the income approach, which included an analysis of the markets, cash flows, and risks associated with achieving these cash flows. Significant appraisal assumptions include: The period in which material net cash inflows from significant projects were expected to commence; material anticipated changes from historical pricing, margins and expense levels; and the risk adjusted discount rate applied to the project's cash flows.
Net cash inflows that are attributable to the completed IPR&D began in 2001 and are expected to last through 2015 for Lamineer coating. The forecast for both of these in-process projects relied on sales estimates derived from targeted market share, pricing estimates and expected product life cycles. Both passive materials and Lamineer coating are expected to generate higher profit margins, two to three times the margins of historical products in their respective product groups. This is due to their new and
innovative characteristics, which allow pricing commensurate with their performance. The discount rate used for the acquired in-process technologies was estimated at 20% for passive materials and 25% for Lamineer coating based upon Morton's weighted average cost of capital of 12%. The discount rate used for the in-process technology was determined to be higher than Morton's weighted average cost of capital because the technology had not yet reached technological feasibility as of the date of valuation. In using a discount rate greater than Morton's weighted average cost of capital, management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects, and because the in-process technology had not yet reached technological feasibility as of the date of valuation.
The nature of the efforts required to develop the acquired in-process technology into technologically feasible and commercially viable products principally relate to the completion of all planning, designing and testing activities that are necessary to establish a product or service that can be produced to meet its design requirements, including functions, features and technical performance requirements. The Company currently expects that the acquired in-process technology will be successfully developed, but there can be no assurance that the technological feasibility or commercial viability of these products will be achieved.
NOTE 5: PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS
In June 2001, the Company launched a repositioning initiative to enable several of its businesses to respond to structural changes in the global marketplace. In connection with its repositioning initiatives, the Company recognized a $330 million one-time restructuring and asset impairment charge in the second quarter of 2001. The largest component of the charge relates to the partial closure of certain manufacturing and research facilities across all business groups and includes exit costs related to the Liquid Polysulfide Sealants business in Performance Polymers and part of the dyes business in Chemical Specialties. Approximately 75% of the asset write-downs were in the North American region.
Management estimates that less than 10% of the overall charge will require the outlay of cash which is primarily limited to severance expense. Most severance costs are paid from the respective pension plans and as a result, pension-related gains are recorded as a reduction to the original restructuring charge and an increase to the pension assets. Management expects to complete the majority of its restructuring efforts by June 30, 2002.
The respective asset accounts were written down by $245 million. The write-down of assets consisted of machinery and equipment of $105 million (book value prior to write-down of $111 million), buildings of $76 million (book value prior to write-down of $88 million), land of $13 million, investments of $6 million and goodwill and other intangibles of $45 million. The remaining restructuring reserves of $43 million are included in accrued liabilities on the Consolidated Balance Sheet. Approximately $11 million of the $35 million severance and other employee costs during the year ended December 31, 2001, was paid to employees through the Company's payroll. The remaining balance was funded through the Company's domestic pension plans as detailed in the following table:
Offsetting the original charge of $330 million recorded in June 2001, is a pre-tax charge of $1 million from changes in estimates of restructuring liabilities and a pre-tax gain of $5 million primarily related to the recognition of settlement gains recorded in the fourth quarter of 2001. It is the Company's policy to recognize settlement gains at the time an employee's pension liability is settled. The change to the restructuring liability was required as a result of changes to original estimates.
The one-time charge includes severance benefits for 1,860 employees; the employees receiving severance benefits include those affected by plant closings or capacity reductions, as well as various personnel in corporate, administrative and shared service functions. As of December 31, 2001, the number of employees and sites affected by the 2001 repositioning efforts are as follows:
- -------------------------------------------------------------------------------- Affected Positions Remaining to be Positions eliminated eliminated - -------------------------------------------------------------------------------- Number of employees 1,860 997 863
- -------------------------------------------------------------------------------- Sites closed at Sites remaining to Sites affected December 31, 2001 be closed - -------------------------------------------------------------------------------- Full shutdowns 9 4 5 Partial shutdowns 9 3 6
A provision for restructuring of $13 million before-tax was recorded in the first half of 2000 in the Ion Exchange Resins Business for the write-down of plant assets and severance costs for approximately 100 people. These charges were net of certain pension settlement and curtailment gains. Also in 2000, an additional $45 million related largely to lease terminations was recorded in the allocation of the Morton purchase price. Actions under this plan are expected to be completed by December 31, 2002.
A restructuring reserve was established in 1999 for costs related both to the integration of Morton and the Company's redesign of its selling and administrative infrastructure. A portion of these costs resulted in a pre-tax charge of $60 million in 1999, largely for severance costs for approximately 700 employees of Rohm and Haas, the acquiring company. This charge was reduced by $24 million in pension related gains recognized as severance was paid from the Company's pension plan. An additional $68 million, largely severance related reserve associated with staff reductions of approximately 500 employees of the acquired company was recorded in the allocation of the Morton purchase price. In December 2001, $6 million was reversed against the results of operations, and $11 million was offset against the original purchase price as estimates changed. A summary of the reserves for the year ended December 31, 2001 is as follows:
NOTE 7: FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to reduce the impact of changes in foreign exchange rates, interest rates and commodity raw material prices on its earnings, cash flows and fair values of assets and liabilities. The Company enters into derivative financial contracts based on analyses of specific and known economic exposures. The Company does not use derivative instruments for trading or speculative purposes, nor is it a party to any leveraged derivative instruments or any instruments of which the values are not available from independent third parties. The Company manages counterparty risk associated with non-performance of counterparties by entering into derivative contracts with major financial institutions of investment grade credit rating and by limiting the amount of exposure with each financial institution.
In 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138. Additionally, in July 2001 the Company adopted DIG Issue G-20, "Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge."Using market valuations for derivatives held as of December 31, 2000, the Company, as of January 1, 2001, recorded a $6 million after-tax cumulative income effect to accumulated other comprehensive income and a charge to net income of $2 million, to recognize at fair value all derivative instruments. With the adoption of SFAS No. 133, changes in the Company's derivative instrument portfolio or changes in the market values of this portfolio could have a material effect on accumulated other comprehensive income. The adoption has not materially changed management's risk policies and practices, nor has compliance with the standard materially impacted the reported results of operations.
All derivative instruments are reported on the balance sheet at fair value. For instruments designated as cash flow hedges, the effective portion of the hedge is reported in other comprehensive income until it is reclassified to earnings in the same period in which the hedged item has had an impact on earnings. For instruments designated as fair value hedges, changes in fair value of the instruments are offset in the Statements of Consolidated Earnings by changes in the fair value of the hedged item. For instruments designated as hedges of net investments in foreign operating units not using the U.S. dollar as their functional currency, changes in fair value of the instruments are offset in other comprehensive income to the extent that they are effective as economic hedges. Changes in the fair value of derivative instruments, including embedded derivatives that are not designated as a hedge, are recorded each period in current earnings along with any ineffective portion of the hedges.
Current period changes, net of applicable income taxes, within accumulated other comprehensive income, due to the use of derivative and non-derivative instruments qualifying as hedges, are reconciled as follows:
(in millions) 2001 - -------------------------------------------------------------------------------- Accumulated derivatives gain at beginning of period $ 9 Transition adjustment as of January 1, 2001 6 Current period changes in fair value 27 Reclassification to earnings, net (5) ------------- Accumulated derivatives gain at December 31, 2001 $ 37 - --------------------------------------------------------------------------------
The Company enters into foreign exchange option and forward contracts to reduce the variability in the functional-currency-equivalent cash flows associated with foreign currency denominated forecasted transactions. These foreign exchange hedging contracts are designated as cash flow hedges. During the next twelve months these contracts will cover all or a portion of the Company's exposure. As such, their maturities are generally less than twelve months. The table below summarizes by currency, the notional value of foreign currency cash flow hedging contracts in U.S. dollars:
(in millions) 2001 2000 - ------------------------------------------------------------ Euro $ 132 $ 180 British pound -- 19 Australian dollar 9 18 Japanese yen 33 46 New Zealand dollar 3 5 - ------------------------------------------------------------ Total $ 177 $ 268 - ------------------------------------------------------------
Of the $37 million recorded within accumulated other comprehensive income at December 31, 2001, $3 million, net of income taxes, represents the effective portion of foreign currency cash flow hedges, which is expected to be reclassified to earnings in 2002. The actual amounts that will be reclassified to earnings in 2002 will vary from this amount as a result of changes in market conditions. The amount reclassified in 2001 as income from accumulated other comprehensive income was $12 million after income taxes. The ineffective portion of changes in fair values of hedges amounted to $5 million after income taxes. Both the effective and ineffective portions of cash flow hedges recorded in the income statement were classified in other income, net. No amounts were reclassified to earnings in 2001 in connection with forecasted transactions that were no longer considered probable of occurring.
The Company also uses foreign exchange forward contracts and swap contracts to reduce the exchange rate risk of recognized assets and liabilities denominated in non-functional currencies, including intercompany loans. These contracts generally require the exchange of one foreign currency for another at a fixed rate at a future date. These contracts are designated as foreign currency fair value hedges with maturities generally less than twelve months. The carrying amounts of these contracts were adjusted to their market values at each balance sheet date and the related gain or loss was recorded in other income and expense. The following table sets forth the foreign currency fair value hedges outstanding at December 31, 2001 and 2000 (in millions):
- -------------------------------------------------------------------------------- BUY CURRENCY SELL CURRENCY 2001 2000 - -------------------------------------------------------------------------------- Euro Japanese yen $ 73 $ 78 Euro Canadian dollar 58 -- U.S. dollar British pound 52 -- U.S. dollar Euro 60 10 Swiss franc U.S. dollar 31 26 U.S. dollar Japanese yen 24 -- Euro U.S. dollar 9 16 U.S. dollar Brazilian real 5 23 U.S. dollar Canadian dollar -- 82 Other 10 48 - -------------------------------------------------------------------------------- Total $ 322 $ 283 - --------------------------------------------------------------------------------
The Company uses cross-currency interest rate swaps, foreign exchange forward and non-derivative instruments to hedge the foreign currency exposures of the Company's net investments in foreign operating units. These transactions are designated as hedges of net investment. The effective portion of changes in fair values of hedges, recorded as income within accumulated other comprehensive income, was $38 million after income taxes at December 31, 2001. The amount excluded from the measurement of effectiveness on these net investment hedges was $8 million before income taxes for 2001, which was recorded as a reduction to interest expense. Prior to the adoption of SFAS No. 133, the Company used cross currency interest rate swap contracts to hedge the foreign currency exposures of the Company's net investment in foreign subsidiaries. While the currency effects of these hedges were reflected in the foreign currency translation adjustments within accumulated other comprehensive income, net interest settlements reduced interest expense by $22 million before taxes in 2000. The following table sets forth open cross currency interest rate swap or foreign exchange forward contracts at December 31, 2001 and 2000:
- ------------------------------------------------------ (in millions) 2001 2000 - ------------------------------------------------------ Euro $ 401 $ 203 Japanese yen 194 242 - ------------------------------------------------------ Total $ 595 $ 445 - ------------------------------------------------------
The Company uses interest swap agreements to optimize the worldwide financing costs by maintaining a desired level of floating rate debt. In 2001, the Company entered into interest swap agreements with a notional value of $950 million, which converted the fixed rate components of the $450 million notes due July 15, 2004 and the $500 million due July 15, 2009 to a floating rate based on 3 month LIBOR. Of these swap agreements, the $500 million notional value contracts maturing in 2009 and $75 million maturing in 2004 contain a credit clause where each counterparty has a right to settle at market price if the other party is
downgraded below investment grade. These interest swap agreements are designated and accounted for as fair value hedges. The changes in fair values are marked to market through income along with the offsetting changes in fair value of underlying notes using the short cut method. The net credits reduced interest expense by $13 million before income taxes in 2001. No interest swap agreements were outstanding at December 31, 2000.
The Company uses natural gas and propylene swap agreements for hedging purposes to reduce the effects of changing raw material prices. These swap contracts are designated and accounted for as cash flow hedges. Of the $37 million recorded within accumulated other comprehensive income at December 31, 2001, a loss of $4 million, net of income taxes, represents the effective portion of cash flow hedges, which is expected to be reclassified to earnings in 2002. The actual amounts that will be reclassified to earnings in 2002 will differ from this amount as a result of changes in market conditions. The amount reclassified in 2001 as a loss from accumulated other comprehensive income was $7 million after income taxes, which was recorded as a component of underlying inventory costs. No amounts were reclassified to earnings in 2001 in connection with forecasted transactions that were no longer considered probable of occurring. Prior to the adoption of SFAS No. 133, gains and losses on the swap agreements were deferred until settlement and recorded as a component of underlying inventory costs when settled, which amounted to an after-tax gain of $1 million in 2000. The notional value of natural gas and propylene swap agreements totaled $41 million and $3 million at December 31, 2001 and 2000, respectively.
As of December 31, 2001, the Company maintains hedge positions of immaterial amounts that are effective as hedges from an economic perspective but do not qualify for hedge accounting under SFAS No. 133, as amended. Such hedges consist primarily of emerging market foreign currency option and forward contracts, and have been marked to market through income with an immaterial impact on earnings.
The fair value of financial instruments was estimated based on the following methods and assumptions:
Cash and cash equivalents, accounts receivable, accounts payable and notes payable -- the carrying amount approximates fair value due to the short maturity of these instruments.
Short and long-term debt -- quoted market prices for the same or similar issues or the current rates offered to the Company or its subsidiaries for debt with the same or similar remaining maturities and terms.
Interest rate swap agreements -- quoted market prices of the same or similar issues available.
Foreign currency option contracts -- the market prices the Company would receive or pay to terminate the contracts.
Foreign currency forward and swap agreements -- the carrying value approximates fair value because these contracts are adjusted to their market value at the balance sheet date.
Natural gas and propylene swap agreements -- the fair value is estimated based on the amount the Company would receive or pay to terminate the contracts.
The carrying amounts and fair values of material financial instruments at December 31, 2001 and 2000 are as follows:
NOTE 8: INCOME TAXES
Earnings before income taxes earned within or outside the United States from continuing operations are shown below:
The provision for income taxes from continuing operations is composed of:
The provision for income taxes attributable to items other than continuing operations is shown below:
Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting. Details at December 31, 2001 and 2000 were:
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------- Deferred tax assets related to: Compensation and benefit programs $ 267 $ 262 Accruals for waste disposal site remediation 44 67 Restructuring reserves 94 5 Inventories 17 21 All other 71 95 ------------------------- Total deferred tax assets 493 450 ------------------------- Deferred tax liabilities related to: Intangible assets 831 854 Tax depreciation in excess of book depreciation 492 522 Pension 152 121 All other 65 89 ------------------------- Total deferred tax liabilities 1,540 1,586 ------------------------- Net deferred tax liability $ 1,047 $ 1,136 - -------------------------------------------------------------------------------
Deferred taxes, which are classified into a net current and non-current balance by tax jurisdiction, are presented in the balance sheet as follows:
- -------------------------------------------------------------------------------- (in millions) 2001 2000 - -------------------------------------------------------------------------------- Prepaid expenses and other assets $ 231 $ 149 Other assets, net -- 3 Accrued liabilities -- 1 Non-current deferred income taxes 1,278 1,287 -------------------------- Net deferred tax liability $ 1,047 $ 1,136 - --------------------------------------------------------------------------------
The effective tax rate on pre-tax income differs from the U.S. statutory tax rate due to the following:
- -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Statutory tax rate (35.0)% 35.0% 35.0% U.S. tax credits (14.7) (2.6) (3.1) Charge for IPR&D -- .9 9.8 Depletion (9.8) (1.1) (0.8) Amortization of non-deductible goodwill 35.0 4.2 3.0 Non-deductible restructuring charge 33.0 -- -- Other, net 0.9 2.9 4.6 ------------------------------- Effective tax rate 9.4% 39.3% 48.5% - --------------------------------------------------------------------------------
At December 31, 2001 and 2000, the Company provided deferred income taxes for the assumed repatriation of all unremitted foreign earnings. Total unremitted earnings, after provision for applicable foreign income taxes, were approximately $565 million and $361 million at December 31, 2001, and 2000, respectively. The Company had a foreign tax credit carry-forward at December 31, 2000 of $76 million that was fully utilized as of December 31, 2001.
NOTE 9: SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" designates the internal management accountability structure as the source of the Company's reportable segments. The statement also requires disclosures about products and services, geographic areas and major customers. The Company's business segment reporting under SFAS No. 131 at December 31, 2001 was consistent with the changes in its financial reporting structure incorporated in the Company's reporting since the first quarter of 1998 as revised, subsequent to the Morton and LeaRonal acquisitions in 1999. Corporate
includes non-operating items such as interest income and expense, corporate governance costs, corporate exploratory research and, in 2000 and 1999, $13 million and $105 million of purchased in-process research and development, respectively.
The Company changed its business segment format effective January 1, 2002, in accordance with SFAS No. 131, based on realignment of management. The Company continues to report the December 31, 2001 results in the format of the then existing business segments. Going forward, the segments of the Company will be reported as follows:
The table below presents Sales by business segment, as restated to follow the new business segments for 2001 and 2000. Segment eliminations are presented to adjust for the gross up of intercompany sales between segments.
SALES - ----------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------- Coatings $ 1,753 $ 1,870 Adhesives and Sealants 661 704 Electronic Materials 942 1,210 Performance Chemicals 2,150 2,310 Salt 749 876 Elimination of Intersegment Sales (589) (621) - ----------------------------------------------------------------- Total Company $ 5,666 $ 6,349 - -----------------------------------------------------------------
The table below presents summarized financial information concerning the Company's reportable segments as of and for the periods ended December 31 and excludes the Agricultural Chemicals business which was disposed of in June 2001.
The tables below present sales and long-lived asset information by geographic area as of and for the periods ending December 31, reflective of the disposal of the Agricultural Chemicals business. Sales are attributed to the United States and to all foreign countries combined based on customer location and not on the geographic location from which goods were shipped.
- -------------------------------------------------------------------------------- 2001 (in millions) United States Foreign Consolidated - -------------------------------------------------------------------------------- Sales to external customers $ 2,661 $ 3,005 $ 5,666 Long-lived assets 4,824 2,660 7,484
- -------------------------------------------------------------------------------- 2000 (in millions) - -------------------------------------------------------------------------------- Sales to external customers $ 2,825 $ 3,524 $ 6,349 Long-lived assets 5,896 2,110 8,006
- -------------------------------------------------------------------------------- 1999 (in millions) - -------------------------------------------------------------------------------- Sales to external customers $ 2,337 $ 2,503 $ 4,840 Long-lived assets 5,138 3,122 8,260 - --------------------------------------------------------------------------------
NOTE 10: PENSION PLANS
The Company has noncontributory pension plans which provide defined benefits to domestic and non-U.S. employees meeting age and length of service requirements. The following disclosures include amounts for both the U.S. and significant foreign pension plans.
- -------------------------------------------------------------------------------- (in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Components of net periodic pension income Service cost $ (54) $ (58) $ (52) Interest cost (107) (103) (83) Expected return on plan assets 192 191 148 Amortization of net gain existing at adoption of SFAS No. 87 8 8 9 Other amortization, net 11 11 7 --------------------------- Net periodic pension income $ 50 $ 49 $ 29 - --------------------------------------------------------------------------------
Pension income primarily reflects recognition of favorable investment experience as stipulated by SFAS No. 87. The pension benefit payments in all three years included payments related to voluntary early retirement incentives and a severance benefit program.
The early retirement and severance benefit programs resulted in a pre-tax gain of $3 million, $7 million and $1 million in 2001, 2000 and 1999 respectively, as settlement gains from retirees electing lump-sum distributions exceeded the cost of the special termination benefits. Most of the 2000 gains, shown here net of termination costs, were reported in the Provision for Restructuring (see Note 5). It is the Company's policy to recognize settlement gains at the time of settlement. Special termination benefits are recognized when the termination is probable and the amount of the benefit is calculable.
Plan activity and status as of and for the years ended December 31, were as follows:
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- CHANGE IN PENSION OBLIGATION: Pension obligation at beginning of year $ 1,524 $ 1,615 Service cost, excluding expenses 48 51 Interest cost 107 103 Plan participants' contributions 1 1 Divestitures, curtailments and settlements (64) (28) Special termination benefits 30 17 Actuarial (gain) loss 61 (109) Foreign currency exchange rate changes (4) (5) Benefits paid (99) (121) ------------------------ Pension obligation at end of year $ 1,604 $ 1,524 - ----------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 2,189 $ 2,361 Actual return on plan assets (58) 10 Contributions 5 4 Transfer to fund retiree medical expenses (29) (26) Trust expenses (7) (4) Settlements (73) -- Divestitures -- (29) Foreign currency exchange rate changes (4) (6) Benefits paid (98) (121) ------------------------ Fair value of plan assets at end of year $ 1,925 $ 2,189 - ----------------------------------------------------------------------------- Funded status $ 321 $ 665 Unrecognized actuarial gain (15) (322) Unrecognized prior service cost 30 13 ------------------------ Net amount recognized $ 336 $ 356 - ----------------------------------------------------------------------------- Amounts recognized in the statement of financial position consist of: Prepaid pension cost $ 333 $ 345 Unrecognized transition asset 3 11 ------------------------ Net amount recognized $ 336 $ 356 - -----------------------------------------------------------------------------
Net assets of the pension trusts, which primarily consist of common stocks and debt securities, were measured at market value. Assumptions used are as follows:
The Company transferred excess pension plan assets of $29 and $26 million in 2001 and 2000 respectively,to fund retiree medical expenses as allowed by U.S. tax regulations.
The Company has a noncontributory, unfunded pension plan which provides supplemental defined benefits to U.S. employees whose benefits under the qualified pension plan are limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. These employees must meet age and length of service requirements. Pension cost determined in accordance with plan provisions was $17 million in 2001, $15 million in 2000 and $14 million in 1999. Pension benefit payments for this plan were $12 million in 2001, $10 million in 2000 and $11 million in 1999.
The Company has a nonqualified trust, referred to as a "rabbi" trust, to fund benefit payments under this pension plan. Rabbi trust assets are subject to creditor claims under certain conditions and are not the property of employees. Therefore, they are accounted for as corporate assets and are classified as other non-current assets. Assets held in trust at December 31, 2001 and 2000 totaled $56 million and $64 million, respectively.
The status of this plan at year end was as follows:
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- CHANGE IN PENSION OBLIGATION: Pension obligation at beginning of year $ 132 $ 124 Service cost 2 2 Interest cost 10 9 Actuarial gains 13 7 Benefits paid (12) (10) ---------------------------- Pension obligation at end of year $ 145 $ 132 - -----------------------------------------------------------------------------
Pension benefit obligations for this plan were determined from actuarial valuations using an assumed discount rate of 7.25% and 7.5% at December 31, 2001 and 2000, respectively, and an assumed long-term rate of compensation increase of 4% and 5% in 2001 and 2000, respectively.
In 1997, the Company instituted a non-qualified savings plan for eligible employees in the United States. The purpose of the plan is to provide additional retirement savings benefits beyond the otherwise determined savings benefits provided by the Rohm and Haas Company Employee Stock Ownership and Savings Plan (the "Savings Plan"). Each participant's contributions will be notionally invested in the same investment funds as the participant has elected for investment in his or her Savings Plan account. For most participants, the Company will contribute a notional amount equal to 60% of the first 6% of the amount contributed by the participant. The Company's matching contributions will be allocated to deferred stock units. At the time of distribution, each deferred stock unit will be distributed as one share of Rohm and Haas company common stock. Contributions to this plan were $2 million in each of 2001 and 2000.
NOTE 11: EMPLOYEE BENEFITS
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------- Postretirement health care and life insurance $ 441 $ 447 benefits Unfunded supplemental pension plan (see Note 10) 123 84 Post-employment benefits 28 28 Unfunded foreign pension liabilities 18 24 Other 3 36 -------------------------- Total $ 613 $ 619 - -------------------------------------------------------------------------------
The Company provides health care and life insurance benefits under numerous plans for substantially all of its domestic retired employees, for which the Company is self-insured. In general, employees who have at least 15 years of service and are 60 years of age are eligible for continuing health and life insurance coverage. Retirees contribute toward the cost of such coverage.
The status of the plans at year end was as follows:
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 394 $ 429 Service cost 7 7 Interest cost 32 27 Contributions 2 -- Divestitures, curtailments and settlements -- (6) Amendments 3 (1) Special termination benefits -- 1 Actuarial (gain) loss 64 (25) Benefits paid (40) (38) -------------------------- Benefit obligation at end of year 462 394 Unrecognized prior service cost 7 8 Unrecognized actuarial loss 5 66 -------------------------- Total accrued postretirement benefit obligation $ 474 $ 468 - -------------------------------------------------------------------------------
The accrued postretirement benefit obligation is recorded in "accrued liabilities" (current) and "employee benefits" (non-current).
Net periodic postretirement benefit cost includes the following components:
- -------------------------------------------------------------------------------- (in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Components of net periodic postretirement cost Service cost $ 7 $ 7 $ 7 Interest cost 32 27 23 Net amortization (2) (3) (3) ---------------------------- Net periodic postretirement cost $ 37 $ 31 $ 27 - --------------------------------------------------------------------------------
The calculation of the accumulated postretirement benefit obligation assumes 9% and 5% annual rates of increase in the health care cost trend rate for 2001 and 2000, respectively. The Company's plan limits its cost for health care coverage to an increase of 10% or less each year, subject ultimately to a maximum cost equal to double the 1992 cost level. Increases in retiree health care costs in excess of these limits will be assumed by retirees.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have approximately the following effects:
The weighted average discount rate used to estimate the accumulated postretirement benefit obligation was 7.25% at December 31, 2001 and 7.50% at December 31, 2000.
NOTE 12: ACCOUNTS RECEIVABLE, NET
- -------------------------------------------------------------------------------- (in millions) 2001 2000 - -------------------------------------------------------------------------------- Customers $ 1,045 $ 1,359 Unconsolidated subsidiaries and affiliates 52 38 Employees 5 10 Other 172 115 -------------------------- 1,274 1,522 Less: allowance for losses 54 43 -------------------------- Total $ 1,220 $ 1,479 - --------------------------------------------------------------------------------
NOTE 13: INVENTORIES
- -------------------------------------------------------------------------------- (in millions) 2001 2000 - -------------------------------------------------------------------------------- Finished products and work in-process $ 550 $ 771 Raw materials 119 155 Supplies 43 41 -------------------------- Total $ 712 $ 967 - --------------------------------------------------------------------------------
Inventories amounting to $439 million and $600 million were valued using the LIFO method at December 31, 2001 and 2000, respectively. The excess of current cost over the stated amount for inventories valued under the LIFO method approximated $38 million and $58 million at December 31, 2001 and 2000, respectively. Liquidation of prior years' LIFO inventory layers did not materially affect cost of goods sold in 2001, 2000 or 1999.
NOTE 14: PREPAID EXPENSES AND OTHER ASSETS
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------- Deferred tax benefits $ 231 $ 149 Prepaid expenses 98 83 Notes receivable from third parties 43 3 Other current assets 25 8 ------------------------- Total $ 397 $ 243 - -------------------------------------------------------------------------------
NOTE 15: LAND, BUILDING AND EQUIPMENT, NET
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------- Land $ 114 $ 140 Buildings and improvements 1,421 1,375 Machinery and equipment 4,493 4,703 Capitalized interest 272 255 Construction 318 226 ------------------------- 6,618 6,699 Less: accumulated depreciation 3,702 3,405 ------------------------- Total $ 2,916 $ 3,294 - -------------------------------------------------------------------------------
The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvements (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10).
Gross book values of assets depreciated by accelerated methods totaled $708 million and $854 million at December 31, 2001 and 2000, respectively. Assets depreciated by the straight-line method totaled $5,478 million and $5,479 million at December 31, 2001 and 2000, respectively.
In 2001, 2000 and 1999 respectively, interest costs of $17 million, $14 million and $12 million were capitalized and added to the gross book value of land, buildings and equipment. Amortization of such capitalized costs included in depreciation expense was $15 million in 2001, 2000 and 1999.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
During 2001, the Company commenced a restructuring of its operations. Certain buildings and equipment were considered impaired and were written down to their net realizable value (see Note 5).
NOTE 16: GOODWILL AND OTHER INTANGIBLE ASSETS, NET
- ------------------------------------------------------------------------------- (in millions) LIFE (YEARS) 2001 2000 - ------------------------------------------------------------------------------- Goodwill 40 $ 2,339 $ 2,333 Customer lists 40 1,158 1,152 Tradename 40 649 649 Developed technology 13 to 18 451 451 Workforce 11 to 16.5 148 148 Patents, license agreements and Other 101 127 ------------------------- 4,846 4,860 Less: accumulated amortization 430 274 ------------------------- Total $ 4,416 $ 4,586 - -------------------------------------------------------------------------------
Amortization expense for goodwill and other intangibles was $156 million, $159 million and $83 million for 2001, 2000 and 1999, respectively. All intangibles are amortized on a straight line basis.
NOTE 17: OTHER ASSETS
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- Prepaid pension cost (see Note 10) $ 333 $ 345 Rabbi trust assets (see Note 10) 56 64 Other non-current assets 56 56 ----------------------- Total $ 445 $ 465 - -----------------------------------------------------------------------------
NOTE 18: NOTES PAYABLE
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- Short-term borrowings $ 167 $ 545 Current portion of long-term debt 11 11 ------------------------ Total $ 178 $ 556 - -----------------------------------------------------------------------------
Short-term borrowings include bank debt owed by foreign subsidiaries. The weighted-average interest rate of short-term borrowings was 4.7% and 6.2% at December 31, 2001 and 2000, respectively.
At December 31, 2001, the Company had revolving credit agreements totaling $901 million, of which $401 million will expire in 2002 and $500 million in 2004. These agreements, which carry various interest rates and fees, are available to support commercial paper borrowings. Several credit agreements permit foreign subsidiaries to borrow local currencies. At December 31, 2001 and 2000, $141 million and $137 million, respectively, was outstanding under these agreements.
NOTE 19: LONG-TERM DEBT
- ------------------------------------------------------------------------------- (in millions) 2001 2000 - -------------------------------------------------------------------------------- 7.85% debentures due 2029 $ 957 $ 1,000 7.40% notes due 2009 500 500 6.95% notes due 2004 451 500 6.0% notes due 2007 (denominated in Euros) 356 376 9.25% debentures due 2020 169 170 9.80% notes due 2020 118 125 6.63% obligation due through 2012 43 45 9.50% notes due 2021 (callable 2002 at 104.75%) 38 38 1.55% notes due 2003 (denominated in yen) 22 33 Other 66 81 Long-term commercial paper borrowings -- 350 -------------------------- Total $ 2,720 $ 3,218 - --------------------------------------------------------------------------------
On February 27, 2002, the Company issued 20 billion yen (or $149 million) of 3.5% notes due 2032 with interest payable semi-annually every March 29th and September 29th, beginning March 2002. The maturity date is March 29, 2032, callable annually after March 2012. The proceeds from the issuance of the note will be used for general corporate purposes.
In 2000, the Company issued 400 million euros (or $376 million) of 6.0% notes due 2007 with interest payable annually, beginning March 9, 2001.
The Company's revolving credit and other loan agreements require that EBITDA, excluding non-recurring items, exceed 3.5 times consolidated interest expense on a rolling four-quarter basis. There are no restrictions on the payment of dividends.
In 2001, the Company retired $43 million of 7.85% debentures resulting in an after-tax extraordinary loss of $1 million and retired $49 million of 6.95% notes. In 2000, the Company retired $74 million of 9.25% debentures.
Total cash used for the payment of interest expense, net of amounts capitalized, was $194 million, $239 million and $72 million in 2001, 2000 and 1999, respectively.
Long-term debt maturing in the next five years is:
- ----------------------------------------------------------------- (in millions) - ----------------------------------------------------------------- 2002 $ 11 2005 $ 11 2003 $ 38 2006 $ 11 2004 $ 467 - -----------------------------------------------------------------
NOTE 20: ACCRUED LIABILITIES
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- Salaries and wages $ 99 $ 173 Interest 94 106 Sale incentive programs and other selling accruals 73 94 Taxes, other than income taxes 65 60 Employee benefits 46 45 Reserve for restructuring (see Note 5) 43 33 Insurance and legal 36 42 Reserve for environmental remediation (see Note 25) 20 40 Other 110 138 ----------------------- Total $ 586 $ 731 - -----------------------------------------------------------------------------
NOTE 21: OTHER LIABILITIES
- ----------------------------------------------------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------- Reserves for environmental remediation (Note 25) $ 136 $ 145 Deferred revenue on supply contracts 49 42 Other 97 79 ----------------------- Total $ 282 $ 266 - -----------------------------------------------------------------------------
NOTE 22: STOCKHOLDERS' EQUITY
Dividends paid on ESOP shares, used as a source of funds for meeting the ESOP financing obligation, were $13.8 million in 2001 and $13.2 million in 2000. These dividends were recorded net of the related U.S. tax benefits. The number of ESOP shares not allocated to plan members at December 31, 2001 and 2000 were 11.6 million and 12.3 million, respectively.
The Company recorded compensation expense of $6 million in 2001, 2000 and 1999, for ESOP shares allocated to plan members. The Company expects to record annual compensation expense at approximately this level over the next 19 years as the remaining $113 million of ESOP shares are allocated. The allocation of shares from the ESOP is expected to fund a substantial portion of the Company's future obligation to match employees savings plan contributions as the market price of Rohm and Haas stock appreciates.
The Company repurchased an insignificant number of shares in 2001, 2000 and 1999.
In 1999, the Company redeemed its $2.75 million cumulative convertible preferred stock under the terms of the issue.
The reconciliation from basic to diluted earnings per share is as follows:
- -------------------------------------------------------------------------------- Earnings Shares Per-Share (In millions, except per share amounts) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- Net earnings available to common shareholders $ 395 220.2 $ 1.79 Dilutive effect of options(a) -- -- --------------------------- Diluted earnings per share $ 395 220.2 $ 1.79 - ----------------------------------------- ------------------------------------- Net earnings available to common shareholders $ 354 219.5 $ 1.61 Dilutive effect of options(a) -- 1 --------------------------- Diluted earnings per share $ 354 220.5 $ 1.61 - ----------------------------------------- ------------------------------------- Net earnings available to common shareholders $ 247 192.6 $ 1.28 Effect of convertible preferred stock 2 -- Effect of accelerated stock repurchase program -- 1.3 Dilutive effect of options(a) -- 1.8 --------------------------- Diluted earnings per share $ 249 195.7 $ 1.27 - ----------------------------------------- --------------------------------------
(a) For the year ended December 31, 2001,Company had .6 million, anti-dilutive stock options; the exercise price of the stock options was greater than the average market price for the year ended December 31, 2001. There were no anti-dilutive stock options for the years ended December 31, 2000 and 1999.
SHAREHOLDERS' RIGHTS PLAN
In 2000 the Company adopted a shareholders' rights plan under-which the Board of Directors declared a dividend of one preferred stock purchase right ("right") for each outstanding share of the Company's common stock held of record as of the close of business on November 3, 2000. The rights initially are deemed to be attached to the common shares and detach and become exercisable only if (with certain exceptions and limitations) a person or group has obtained or attempts to obtain beneficial ownership of 15% or more of the outstanding shares of the Company's common stock or is otherwise determined to be an "acquiring person" by the Board of Directors. Each right, if and when it becomes exercisable, initially will entitle holders of the rights to purchase one one-thousandth (subject to adjustment) of a share of Series A Junior Participating Preferred Stock for $150 per one one-thousandth of a Preferred Share, subject to adjustment. Each holder of a right (other than the acquiring person) is entitled to receive a number of shares of the Company's common stock with a market value equal to two times the exercise price, or $300. The rights expire, unless earlier exercised or redeemed, on December 31, 2010.
NOTE 23: STOCK COMPENSATION PLANS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company continues to apply the provisions of APB Opinion No. 25. Accordingly, no compensation expense has been recognized for the fixed stock option plans. For restricted stock awards, compensation expense equal to the fair value of the stock on the date of the grant is recognized over the five-year vesting period. Total compensation expense for restricted stock was $3 million, $2 million and $1 million in 2001, 2000 and 1999, respectively. Had compensation expense for the Company's fixed stock option plans been determined in accordance with SFAS No. 123, the Company's net earnings would have been reduced to $375 million in 2001, $345 million in 2000, and $146 million in 1999. Basic earnings per common share would have been reduced to $1.70, $1.57, and $.75 in 2001, 2000 and 1999, respectively. Diluted earnings per common share would have been reduced to $1.70, $1.57, and $.75 in 2001, 2000 and 1999, respectively.
1999 STOCK PLAN Under this plan, as amended in 2001, the Company may grant as options or restricted stock up to 19 million shares of common stock with no more than 3 million of these shares granted to any employee as options over a five-year period. No more than 50% of shares in this plan can be issued as restricted stock. Awards under this plan may be granted only to employees of the Company. Options granted under this plan in 2001 and 2000 were granted at the fair market value on the date of grant and generally vest over three years expiring within 10 years of the grant date. Shares of restricted stock issued in 2001 totaled 98,069 at a weighted average grant-date fair value of $36.26 per share.
NON-EMPLOYEE DIRECTORS' STOCK PLAN OF 1997 Under the 1997 Non-Employee Directors Stock Plan, directors receive half of their annual retainer in deferred stock. Each share of deferred stock represents the right to receive one share of company common stock upon leaving the board. Directors may also elect to defer all or part of their cash compensation into deferred stock. Annual compensation expense is recorded equal to the number of deferred stock shares awarded multiplied by the market value of the Company's common stock on the date of award. Additionally, directors receive dividend equivalents on each share of deferred stock, payable in deferred stock, equal to the dividend paid on a share of common stock.
RESTRICTED STOCK PLAN OF 1992 Under this plan, executives were paid some or all of their bonuses in shares of restricted stock instead of cash. Most shares vest after five years. The plan covers an aggregate 450,000 shares of common stock. In 1999, 73,105 shares of restricted stock were granted at weighted-average grant-date fair values of $31 per share.
FIXED STOCK OPTION PLANS The Company has granted stock options to key employees under its Stock Option Plans of 1984 and 1992. Options granted pursuant to the plans are priced at the fair market value of the common stock on the date of the grant. Options vest after one year and most expire 10 years from the date of grant. No further grants can be made under either plan.
The status of the Company's stock options as of December 31 is presented below:
The Black-Scholes option pricing model was used to estimate the fair value for each grant made under the Rohm and Haas plan during the year. The following are the weighted-average assumptions used for all shares granted in the years indicated:
- -------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------- Dividend yield 2.42% 1.89% Volatility 33.82 28.85 Risk-free interest rate 4.95 6.59 Time to exercise 6 years 6 years - --------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
NOTE 24: LEASES
The Company leases certain properties and equipment used in its operations, primarily under operating leases. Most lease agreements require minimum lease payments plus a contingent rental based on equipment usage and escalation factors. Total net rental expense incurred under operating leases amounted to $73 million in 2001, $80 million in 2000 and $79 million in 1999.
Total future minimum lease payments under the terms of non-cancelable operating leases are as follows:
(in millions) 2002 $ 50 2005 $ 18 2003 43 2006 16 2004 29 Thereafter 72
NOTE 25: CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS
ENVIRONMENTAL There is a risk of environmental impact in chemical manufacturing operations. The Company's environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental impact.
The laws and regulations under which the Company operates require significant expenditures for capital improvements, the operation of environmental protection equipment and remediation. Future developments and even more stringent environmental regulations may require the Company to make additional unforeseen environmental expenditures. The Company's major competitors are confronted by substantially similar environmental risks and regulations.
The Company is a party in various government enforcement and private actions associated with former waste disposal sites, many of which are on the U.S. Environmental Protection Agency's (EPA) National Priority List and has been named a potentially responsible party at approximately 140 inactive waste sites where remediation costs have been or may be incurred under the Federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. In some of these cases the Company
may also be held responsible for alleged property damage. The Company has provided for future costs at certain of these sites. The Company is also involved in corrective actions at some of its manufacturing facilities.
The Company considers a broad range of information when determining the amount of its remediation accruals, including available facts about the waste site, existing and proposed remediation technology and the range of costs of applying those technologies, prior experience, government proposals for this or similar sites, the liability of other parties, the ability of other principally responsible parties to pay costs apportioned to them and current laws and regulations. These accruals are assessed quarterly and updated as additional technical and legal information becomes available. However, at certain sites, the Company is unable, due to a variety of factors, to assess and quantify the ultimate extent of its responsibility for study and remediation costs. Major sites for which reserves have been provided are the non-company-owned Lipari, Woodland and Kramer sites in New Jersey, Whitmoyer in Pennsylvania and company-owned sites in Bristol and Philadelphia, Pennsylvania and Houston, Texas. The Morton acquisition introduced two major sites: Moss Point, Mississippi and Wood-Ridge, New Jersey.
In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation ("Velsicol") have been held jointly and severally liable for the cost of remediation necessary to correct mercury-related environmental problems associated with a mercury processing plant on the site prior to its acquisition by Morton. At the date of acquisition, Morton had disclosed and accrued for certain ongoing studies, which are expected to be completed during 2002, with regulatory decisions expected by the end of 2002. In its allocation of the purchase price of Morton, the Company accrued for additional study costs at December 31, 1999 and additional remediation costs in 2000 based on the progress of the technical studies. A separate study of probable contamination in Berry's Creek, which runs near the plant site, and of the surrounding wetlands is on a timetable yet to be determined. Therefore, the estimated costs of this separate study and any resulting remediation requirements have not been considered in the allocation of the Morton purchase price. There is much uncertainty as to what will be required to address Berry's Creek but cleanup costs could be very high and the Company's share of these costs could be material. The Company's exposure will also depend upon the continued ability of Velsicol and its indemnitor, Fruit of the Loom, Inc., which has filed for protection under the bankruptcy laws, to contribute to the cost of remediation. In 2001, these parties have stopped paying their share of expenses. Ultimately, the Company's exposure will also depend on the results of attempts to obtain contributions from others believed to share responsibility. A cost recovery action against these responsible parties is pending in federal court. This action has been stayed pending future regulatory developments and the appeal of a summary judgment ruling in favor of one of the defendants. Settlements have been reached with some defendants for claims considered de minimis associated with the Wood-Ridge plant site.
During 1996, the EPA notified Morton of possible irregularities in water discharge monitoring reports filed by its Moss Point, Mississippi plant in early 1995. Morton investigated and identified other environmental issues at the plant. Though at the date of acquisition Morton had accrued for some remediation and legal costs, the Company revised these accruals as part of the allocation of the purchase price of Morton based on its discussions with the authorities and on the information available as of June 30, 2000. In 2000, the Company reached agreement with the EPA, the Department of Justice and the State of Mississippi, resolving these historical environmental issues. The agreement received court approval in early 2001. The final settlement includes payment of $20 million in civil penalties, which were paid in the first quarter of 2001, $2 million in criminal penalties, which were paid in the fourth quarter of 2000 and $16 million in various Supplemental Environmental Projects. The accruals established for this matter were sufficient to cover these and other related costs of the settlement. In December 2001, the Company closed the chemicals portion of the Moss Point facility.
The amount charged to earnings before-tax for environmental remediation was $28 million and $4 million for the years ended December 31, 2001 and 1999, respectively, and the amount for 2000 was immaterial. The reserves for remediation were $156 million and $185 million at December 31, 2001 and 2000, respectively, and are recorded as "other liabilities" (current and long-term). These reserves include amounts resulting from the allocation of the purchase price of Morton. The Company is pursuing lawsuits over insurance coverage for environmental liabilities. It is the Company's practice to reflect environmental insurance recoveries in results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal processes. Resolutions typically resolve coverage for both past and future environmental spending. The Company settled with several of its insurance carriers and recorded income before-tax of approximately $13 million, $1 million and $17 million for the years ended December 31, 2001, 2000 and 1999, respectively.
In addition to accrued environmental liabilities, the Company had reasonably possible loss contingencies related to environmental matters of approximately $73 million and $73 million at December 31, 2001 and 2000, respectively. Further, the Company has identified other sites, including its larger manufacturing facilities, where additional future environmental remediation may be required, but these loss contingencies cannot reasonably be estimated at this time. These matters involve significant unresolved issues, including the number of parties found liable at each site and their ability to pay, the outcome of negotiations with regulatory authorities, the alternative methods of remediation and the range of costs associated with those alternatives. The Company believes that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on the consolidated financial position or consolidated cash flows of the Company, but could have a material adverse effect on consolidated results of operations or cash flows in any given period.
Capital spending for new environmental protection equipment was $26 million in 2001 versus $27 million in 2000 and $30 million on 1999. Spending for 2002 and 2003 is expected to be $26 million and $21 million, respectively. Capital expenditures in this category include projects whose primary purposes are pollution control and safety, as well as environmental aspects of projects in other categories that are intended primarily to improve operations or increase plant efficiency. The Company expects future capital spending for environmental protection equipment to be consistent with prior-year spending patterns. Capital spending does not include the cost of environmental remediation of waste disposal sites.
Cash expenditures for waste disposal site remediation were $51 million in 2001, $33 million in 2000 and $27 million in 1999. The expenditures for remediation are charged against accrued remediation reserves. The cost of operating and maintaining environmental facilities was $129 million, $114 million and $107 million in 2001, 2000 and 1999 respectively, and was charged against current-year earnings.
OTHER LITIGATION There has been increased publicity about asbestos liabilities faced by manufacturing companies. As a result of the bankruptcy of most major asbestos producers, plaintiffs' attorneys are increasing their focus on peripheral defendants. The Company believes it has adequate reserves and insurance and does not believe its asbestos exposure is material.
There are pending lawsuits filed against Morton related to employee exposure to asbestos at a manufacturing facility in Weeks Island, Louisiana with additional lawsuits expected. The Company expects that most of these cases will be dismissed because they are barred under worker's compensation laws; however, cases involving asbestos-caused malignancies may not be barred under Louisiana law. Subsequent to the Morton acquisition, the Company commissioned medical studies to estimate possible future claims and recorded accruals based on the results. Morton has also been sued in connection with the former Friction Division of the former Thiokol Corporation which merged with Morton in 1982. Settlements to date total $350 thousand and many cases have closed with no payment. These cases are fully insured. In addition, like most manufacturing companies, Rohm and Haas has been sued, generally as one of many defendants, by non-employees who allege exposure to asbestos on the Company premises.
The Company and its subsidiaries are also parties to litigation arising out of the ordinary conduct of its business. Recognizing the amounts reserved for such items and the uncertainty of the ultimate outcomes, it is the Company's opinion that the resolution of all these pending lawsuits, investigations and claims will not have a material adverse effect, individually or in the aggregate, upon the results of operations and the consolidated financial position of the Company.
NOTE 26: NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND OTHER HEDGING ACTIVITIES On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes a new model for the accounting and reporting of derivative and hedging transactions. Additionally, in July 2001 the Company adopted DIG Issue G20, "Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge."
This standard requires that all derivative instruments be reported on the balance sheet at fair value. For instruments designated as fair value hedges, changes in the fair value of the instrument will largely be offset on the income statement by changes in the fair value of the hedged item. For instruments designated as cash flow hedges, the effective portion of the hedge is reported in other comprehensive income until it is assigned to earnings in the same period in which the hedged item has an impact on earnings. For instruments designated as a hedge of net investment in foreign operating units not using the U.S. Dollar as its functional currency, changes in the fair value of the instrument will be offset in other comprehensive income to the extent that they are effective as economic hedges. Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as a hedge will be recorded each period in current earnings along with any ineffective portion of hedges.
Using market valuations for derivatives held as of December 31, 2000, the Company recorded a $6 million after-tax cumulative income effect to accumulated other comprehensive income, and a charge to net income of $2 million, to recognize at fair value all derivative instruments on January 1, 2001. Changes in the Company's derivative instrument portfolio or changes in the market values of this portfolio could have a material effect on accumulated other comprehensive income.
The Company has concluded that the adoption of SFAS No. 133 will not materially change management's risk policies and practices nor will compliance with the standard materially impact the reported results from operations.
BUSINESS COMBINATIONS SFAS No. 141, "Business Combinations," which is effective for all business combinations completed after June 30, 2001, mandates that all business combinations be accounted for by only the purchase method (thereby eliminating the option for pooling of interests); segregation of other intangible assets from goodwill if they meet the contractual legal criterion or the separability criterion; and expanded disclosure requirements on the primary reasons for a business combination and the allocation of the purchase price to the assets and liabilities assumed by major balance sheet caption.
GOODWILL AND OTHER INTANGIBLE ASSETS SFAS No. 142, "Goodwill and Other Intangible Assets," is effective for fiscal years beginning after December 15, 2001. SFAS No. 142, which the Company adopted on January 1, 2002, requires the Company to cease amortization of goodwill and certain indefinite-lived intangible assets and evaluate goodwill and intangible assets for impairment. In accordance with the Statement, the Company reviewed its intangible assets in order to identify intangible assets with indefinite lives which will no longer be amortized and intangible assets which may be reclassified as goodwill and thus no longer be amortized. In addition the Company is in the process of assessing the remaining useful lives of intangible assets which will continue to be subject to amortization. As of January 1, 2002, the Company ceased amortization of goodwill and intangibles deemed to have indefinite lives and reclassed certain intangibles in accordance with the provisions of this statement.
The evaluation of the Company's goodwill is performed at the reporting unit level and is a two-step process. When evaluating goodwill for impairment, the Statement requires the Company to first compare a reporting unit's book value to its fair value. To the extent that the book value exceeds fair value, the Company is required to perform a second step wherein a reporting unit's assets and liabilities are fair valued. To the extent that a reporting unit's book value of goodwill exceeds its implied fair value of goodwill, impairment exists and must be recognized. The implied fair value of goodwill is calculated as the fair value of a reporting unit in excess of the fair value of all non-goodwill assets in the reporting unit. Net book values of the recorded assets and liabilities have been calculated for each of the Company's reporting units. The
Company is in the process of valuing these reporting units based primarily upon the present value of expected future cash flows.
In accordance with SFAS No. 142, the intangible assets which continue to be subject to amortization are being reviewed for impairment by the Company under SFAS No. 144. Intangible assets which are no longer subject to amortization are being reviewed by the Company in accordance with SFAS No. 142 in a one-step process. Impairment is measured as the amount an intangible asset's carrying value exceeds its fair value. The Company intends to complete its evaluation of intangible assets in accordance with SFAS No. 142 no later than June 30, 2002.
The Company's previous business combinations were accounted for using the purchase method of accounting. As of December 31, 2001, the net carrying amount of goodwill was $2,159 million. Goodwill amortization expense for the year ended December 31, 2001 was $64 million. The Company intends to complete its evaluation of goodwill in accordance with SFAS No. 142 no later than June 30, 2002 and expects to recognize an impairment loss. The Company continues to finalize its estimate of the impairment loss. Any impairment loss will be recognized as a cumulative effect of a change in accounting principle in the Company's consolidated statement of operations.
ASSET RETIREMENT OBLIGATIONS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. SFAS No.143 is effective for fiscal years beginning after December 15, 2002. Management is currently assessing the impact of the new standard on its financial statements.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On January 1, 2002 the Company adopted SFAS No. 144 "Accounting for the impairment or Disposal of Long-Lived Assets." The Statement provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. Management has assessed the impact of the new standard and determined there to be no material impact to the financial statements.
NOTE 27: SUBSEQUENT EVENTS
As of March 21, 2002, the Company repurchased approximately $76 million of the 7.85% debentures due on July 15, 2029. On February 27, 2002, the Company exercised the call option on the 9.50% notes due 2021. All of the outstanding notes have been called for redemption on April 1, 2002 at a redemption price equal to 104.75% of the principal amount together with interest accrued to the date of redemption. The repurchases and redemption will result in an after-tax charge of approximately $6 million in 2002.
SCHEDULE II
ROHM AND HAAS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------ ------ ------ (millions of dollars)
Deducted from Accounts Receivable - Allowances for losses: Balance at beginning of year................ $ 43 $ 37 $ 12 Additions charged to earnings............... 25 14 6 Acquisitions/(Divestitures)................. 1 2 22 Charge-offs, net of recoveries (15) (10) (3) ------ ------ ------ Balance at end of year...................... $ 54 $ 43 $ 37 ====== ====== ======
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