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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-K
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Mark
One
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x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
OR
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o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 1-496
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______________________________________________
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 HERCULES
INCORPORATED
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A
Delaware Corporation
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I.R.S.
Employer Identification No. 51-0023450
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Hercules
Plaza
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1313
North Market Street
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Wilmington,
Delaware 19894-0001
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Telephone: 302-594-5000
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www.herc.com
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Securities
registered pursuant to Section 12(b) of the Act
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(Each
class is registered on the New York Stock Exchange,
Inc.)
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Title
of each class
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Common
Stock ($25/48
Stated Value)
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8%
Convertible Subordinated Debentures due August 15, 2010
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes x
No
¨.
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Securities Exchange
Act. Yes ¨ No x.
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90
days. Yes x No ¨.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K x.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Large accelerated filer x Accelerated filer
¨ Non-accelerated
filer ¨ (Do not check if a
smaller reporting company) Smaller reporting company ¨ .
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No x
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The
aggregate market value of registrant's common stock, $25/48
stated value ("Common Stock") held by non-affiliates based on the closing
price on the last business day of the Company's most recently completed
second fiscal quarter, or June 29, 2007, was approximately $2.3
billion.
As
of February 27, 2008, the registrant had 113,490,756 shares of Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement for its 2008 Annual Meeting
of Shareholders (the "Proxy Statement"), when filed, will be incorporated
by reference in Part III of this report.
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HERCULES
INCORPORATED
FORM
10-K
FOR
THE YEAR ENDED DECEMBER 31, 2007
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PART I
Forward-Looking Statements
This
Annual Report on Form 10-K includes forward-looking statements, as defined in
the Private Securities Litigation Reform Act of 1995, reflecting management's
current analysis and expectations, based on what management believes to be
reasonable assumptions. The words or phrases “will likely result,”
“are expected to,” “will continue,” “is anticipated,” “expect,” “estimate,”
“project” or similar expressions are among those which identify forward-looking
statements. Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results to differ
materially from those projected, stated or implied, depending on such factors
as: ability to generate cash, changes resulting from ongoing reviews
of tax liabilities, ability to raise capital, ability to refinance, ability to
execute productivity improvements and reduce costs, the success of outsourcing
initiatives, ability to execute and integrate acquisitions, ability to execute
divestitures, ability to increase prices, business climate, ability to achieve
growth in earnings and cash flows, business performance, changes in tax laws or
regulations and related liabilities, changes in tax rates, economic and
competitive uncertainties, higher raw material and manufacturing costs, reduced
level of customer orders, changes in strategies, risks in developing new
products and technologies, risks in developing new market opportunities or
expanding capacity, environmental and safety regulations and clean-up costs, the
impact of adverse events relating to the operation of the Company’s facilities
and to the transportation and storage of hazardous materials (including
equipment malfunction, explosions, fires, spills and the effect of severe
weather conditions), foreign exchange rates, asset dispositions, the impact of
changes in the value of pension fund assets and liabilities, changes in
generally accepted accounting principles, adverse legal and regulatory
developments, including increases in the number or financial exposures of
claims, lawsuits, settlements or judgments, the financial capacity of settling
insurers, the impact of increased accruals and reserves for such exposures, the
outcome of litigation and appeals, and adverse changes in economic
and political climates around the world, including terrorist activities,
international hostilities and potential natural
disasters. Accordingly, there can be no assurance that the Company
will meet future results, performance or achievements projected, stated or
implied by such forward-looking statements, or continue the stock repurchase
program or the payment of dividends. As appropriate, additional
factors are contained in other reports filed by the Company with the Securities
and Exchange Commission. This paragraph is included to provide safe
harbor for forward-looking statements, which are not generally required to be
publicly revised as circumstances change, and which the Company does not intend
to update except as may be required by law. See also Risk Factors
included in Item 1A.
ITEM
1. BUSINESS
Hercules
Incorporated ("Hercules" or the "Company") is a Delaware corporation formed in
1912. The Company is a leading manufacturer and marketer of specialty
chemicals and related services for a broad range of business, consumer and
industrial applications. The Company is focused on growing cash flow
and earnings and delivering shareholder value by concentrating on growth in its
core businesses, investing in technology and innovation, expanding in
higher-growth markets, entering adjacent markets, continuous improvement in its
operations and continuing to strengthen its financial
profile. Hercules operates on a global scale, with significant
operations in North America, Europe, Asia and Latin America. Product
sales occur in over 135 countries with significant revenue streams generated on
five continents.
The
Company's principal products are functional and process chemicals used by the
paper industry to increase paper and paperboard performance and enhance the
manufacturing process; water-soluble polymers; and specialty
resins. These products impart such qualities as durability,
water-resistance and improved aesthetics for everyday consumer goods in a
variety of end-use applications. The primary markets the Company
serves include pulp and paper; paints and adhesives; construction materials;
food, pharmaceutical and personal care; and industrial specialties, including
oilfield and general industrial.
While the
Company's products comprise a relatively minor component of its end customers'
total product cost, they frequently possess characteristics important to the
functionality and aesthetics of the finished product or the efficient operation
of the manufacturing process. Examples of the Company's products in
consumer end-uses include strength additives for tissue and toweling, sizing
agents for milk and juice cartons, thickeners in products such as toothpaste,
shampoos and water-based paints, and water control additives for building
products such as tile cements, grouts, stuccos, plasters and joint
compounds. The Company also offers products and related services that
improve and reduce the cost of the paper manufacturing processes, including
water management programs that are designed to protect and maintain equipment
and reduce operating costs. Other product offerings include process
aids for oil well drilling and similar applications.
Although
the performance and quality of its products and high quality service are
important to the Company's competitive strategy, other important factors such as
lower manufacturing costs and improved reliability are becoming increasingly
important. The Company strives to continually improve its products
and manufacturing processes by investing in technology. The Company
has committed substantial resources to its research and development efforts,
which enable the Company to consistently bring products to market that improve
functional properties or that offer similar properties at a lower
cost. Functional properties have become increasingly important, as
customers have come to rely more on the Company to provide new solutions to
improve their product offerings and processes. Additionally, the
Company strives to make its products more cost-competitive by effectively
managing production costs and advancing its application development with
customers.
The
Company's strategy is to focus on meeting customer’s needs and adding value to
their businesses; continuously improving to extend competitive advantages;
maximizing cash flow; and investing in innovation, higher-growth market
opportunities and bolt-on acquisitions to grow profitability and increase return
on invested capital.
Reportable
Segments
The
Company currently operates through two reportable segments: Paper Technologies
and Ventures (“PTV”) and the Aqualon Group (“Aqualon”). A reporting
segment is also maintained for FiberVisions for historical reporting purposes
reflecting the Company’s consolidation of this business through March 31,
2006. The financial information regarding these segments, which
includes net sales, profit from operations, total assets and other financial
information for each of the three years ended December 31, 2007, 2006 and 2005
is provided in Note 23 to the Consolidated Financial
Statements. An analysis of the segments’ results of operations for
these periods is provided herein under “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”.
Paper
Technologies and Ventures
Products
and services offered by PTV are designed to enhance customers' profitability by
improving manufacturing processes, enhancing productivity and improving overall
product quality, as well as enabling customers to meet their environmental
objectives and regulatory requirements.
Paper
Technologies is one of the key global suppliers of functional and process
chemicals for the paper industry, offering a wide and highly sophisticated range
of technology and applications expertise with in-mill capabilities ranging from
wet-end chemicals and various treatments throughout the paper making process, to
and including paper finishing.
The
Ventures portion of the group consists of a portfolio of businesses each
targeting a family of vertical markets with a distinct set of
products. Current businesses within Ventures are: Pulping
chemicals, Water treatment chemicals, Lubricants, and Building and Converted
products.
The
principal products and primary markets of this segment are as
follows:
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Principal
Products
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Primary
Markets
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Paper
Technologies:Functional performance chemicals
Sizing
(internal and surface), strength, tissue creping and coatings
additives.
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Large,
multi-national manufacturers of tissue, paper towels, packaging, beverage
containers, newsprint, corrugated medium, printing and writing paper and
other stationery items such as labels and envelopes.
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Paper
Technologies: Process treatment chemicals
Contaminant,
microbiological and foam control, clarification, retention, drainage, felt
conditioning, fiber recovery, and water closure.
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Ventures:
Pulping chemicals
Deposit
and scale control, foam control, deinking, and
clarification.
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Large,
multi-national manufacturers of pulp to ultimately produce
paper. Locations are either stand alone or integrated with
paper making.
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Ventures:
Water treatment chemicals
Utility
systems, cooling water and water clarification.
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Large,
multi-national manufacturers of pulp and/or paper with water utility
operations including boilers, cooling water and influent/effluent water
treatment.
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Ventures:
Lubricants
Ester-based
synthetic lubricants and pentaerythritol (PE).
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Producers
of aviation and refrigeration compressor fluids, automotive, and general
industry.
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Ventures:
Building and Converted Products
Adhesives,
resin modifiers, coatings, hydrophobic and release chemistries,
crosslinkers and binders, and foam control.
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Producers
of building products, textiles, electronics, paints and inks, and paper
industry converting
operations.
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Aqualon
Group
Products
offered by Aqualon are primarily designed to manage the properties of aqueous
(water-based) systems. Most of the products are derived from
renewable natural raw materials and are sold as key ingredients to other
manufacturers where they are used as small-quantity additives to provide
functionality such as thickening, water retention, film formation, emulsifying
action and binding power. Major end uses for Aqualon products include
personal care products, food additives, pharmaceutical products, construction
materials, paints, coatings and oil and gas recovery, where polymers are used to
modify viscosity, gel strength and/or fluid loss. Aqualon also
manufactures wood and gum rosin resins and is the world’s only producer of pale
wood rosin derivatives. Product applications and markets include food
and beverage, construction specialties, adhesives, and rubber and plastic
modifiers.
The
principal products and primary markets of this segment are as
follows:
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Principal
Products
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Primary
Markets
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Water-soluble
polymers, ethylcellulose and rosin resins:
Hydroxyethylcellulose
(HEC) and derivatives, Carboxymethylcellulose (CMC), Methylcellulose (MC),
Hydroxypropylcellulose (HPC), Guar and derivatives, ethylcellulose (EC),
phosphate ester surfactants and rosin resins.
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Manufacturers
of interior and exterior architectural paints, oilfield service companies
for oil and gas drilling and recovery, paper mills, construction material
manufacturers and makers of oral hygiene products, personal care products,
food products and pharmaceuticals.
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FiberVisions
The
Company sold 51% of its interest in FiberVisions during 2006 and its ownership
was further diluted to 34.5% during 2007. While FiberVisions is no
longer a core business of Hercules, the Company holds a minority interest and
continues to maintain a reporting segment for historical reporting purposes for
the periods during which FiberVisions’ results of operations were
consolidated. FiberVisions is one of the largest manufacturers of
polyolefin staple fibers used in disposable products like diapers and
wipes. FiberVisions produces monocomponent polypropylene fibers and
bicomponent fibers comprised of a polypropylene core and a polyethylene
sheath. FiberVisions also produces polyolefin fiber and yarn for the
industrial and textile markets used in concrete and asphalt, wipes, upholstery
and automotive fabrics, geotextile fabrics and filtration products.
Raw
Materials and Energy Supply
Raw
materials and supplies are purchased from a variety of industry sources,
including the agricultural, forestry, mining, petroleum and chemical
industries.
Important
raw materials for PTV include polyacrylamides, biocides, surfactants, rosin,
adipic acid, epichlorohydrin, stearic acid, diethylenetriamine, phosphorous
trichloride, methanol, and acetaldehyde.
Raw
materials important to Aqualon are cellulose pulp (derived from wood and cotton
linters), guar splits, gum rosin, limonene and pine wood stumps, which are
renewable resources. Other commodity and chemical inputs include
ethylene oxide, caustic, methanol, ethyl chloride, propylene oxide,
monochloroacetic acid, methyl chloride, and inorganic acids.
Major
requirements for key raw materials and fuels are typically purchased pursuant to
contracts. Supply and demand has caused the market to tighten for a
number of key raw materials. However, the Company does not anticipate
any availability issues. The Company is not dependent on any one
supplier for a material amount of its raw material or fuel
requirements. However, certain important raw materials, such as
certain cellulose types and biocides, are obtained from a sole-source or a few
major suppliers. On a consolidated basis, no single raw material
accounts for more than 7% of total current year Cost of sales.
The price
and availability of raw materials and fuels are subject to domestic and world
market and political conditions, and can also be directly or indirectly impacted
by governmental action or regulations. The impact of any future raw
material or energy shortages on the Company's business as a whole or in specific
geographic regions cannot be accurately predicted. Operations and
products may, at times, be adversely affected by governmental action, natural
disasters, shortages or international or domestic events. In order to
mitigate risks relating to raw materials and energy supply, the Company employs
a variety of strategic sourcing techniques including minimizing the use of sole
source suppliers, entering into contracts that limit the frequency or magnitude
of price increases, using approved alternative raw materials, selectively
hedging certain strategic commodities, identifying alternate suppliers in lower
cost regions of the world, continually reassessing its value chain, and
aggressively countering suppliers’ attempts to increase costs.
Competition
The
specialty chemicals industry is highly fragmented and its participants offer a
broad array of product lines representing many different products designed to
meet specific customer requirements. Individual product and portfolio
offerings compete on a global, regional and/or local level subject to the nature
of the businesses and products, as well as the end-markets and customers
served. The industry has become increasingly global as participants
focus on establishing and maintaining leadership positions outside of their home
markets. Many of the Company's product lines face domestic and
international competitive factors, including industry consolidation, pricing
pressures and competing technologies. In Paper Technologies,
customers and competitors are consolidating to enhance market positions and
product offerings on a worldwide basis. Aqualon is facing competitive
threats from emerging Asian producers. To address this threat, one
element of Aqualon’s strategy includes reducing costs in existing facilities and
adding production capacity in the growing, low-cost Asian
region. PTV’s and Aqualon’s strategies are both focused on innovation
– providing new products to our customers to extend our competitive
advantage.
Patents
and Trademarks
Patents
covering a variety of products and processes have been issued to the Company and
its subsidiaries. The Company holds licenses for certain other
patents held by other parties covering its products and
processes. The Company's rights under these patents and licenses
constitute valuable assets.
The
Company and its wholly-owned subsidiaries also have many global trademarks
covering their products. Some of the more significant trademarks
include: AquaCat® clear cationic solution, Aquapel® sizing agent, Hercon® sizing
emulsions, Aqualon® water-soluble polymers, Natrosol® hydroxyethylcellulose,
Culminal® methylcellulose, Klucel® hydroxypropylcellulose, Natrosol FPS®
fluidized polymer suspension, Aquarius® coating systems, Dextrol® and Strodex®
surfactants, ChemVisions™ curing agent, Precis® sizing agent, Kymene® resin,
Presstige® deposit control additives, Spectrum® microbiocides, Ultra-pHase®
sizing agent, Hercobond® dry strength resin, Chromaset® surface size, ProSoft®
tissue softeners and Zenix® contaminant control.
The
Company does not consider any individual patent, license or trademark to be of
material importance to the Company when taken as a whole.
Research
and Development
The
Company is focused on product and process innovation as one of its key
strategies. Research and development efforts are directed toward the
discovery and development of new products and processes, the improvement and
refinement of existing products and processes, the development of new
applications for existing products, and cost improvement
initiatives. The Company incurred costs of $43.8 million on research
and development activities in 2007, as compared to $38.8 million in 2006 and
$40.8 million in 2005. The amounts incurred during 2006 and 2005
include $0.4 million and $2.8 million, respectively, attributable to
FiberVisions. As noted above, the Company now holds a minority
interest in FiberVisions.
PTV
focuses its technology efforts on innovative high-value product development,
incremental improvements to existing products and services, and cost reduction
programs to meet diverse customer needs worldwide. These efforts are
made via state-of-the-art facilities, including large and sophisticated research
and development laboratories with pilot paper making capabilities that simulate
actual operating conditions in a customer's facilities. This allows
an accurate assessment of the potential impact of new products on plant
performance. The group’s scientists conduct research and customer
optimization studies focused on solving functional and process treatment
challenges using sophisticated techniques and equipment to provide high level
analytical testing and advanced technical service worldwide.
During
2007, as part of its continuing efforts to have customer applications
laboratories strategically located to allow greater proximity to key customer
activities and to take advantage of existing Company assets and infrastructure,
PTV completed its new customer applications facility in Shanghai, China.
Existing customer applications laboratories for the European and Americas
regions are located in Helsingborg, Sweden and the
Wilmington Research Center in Wilmington, Delaware,
respectively.
Aqualon
focuses its research and development efforts on market-oriented product
development, manufacturing process improvement and responsive technical service
to customers. New product development is focused on products which
manage the physical properties of water based systems, such as latex paint,
construction mortars and personal care products, to meet customer demand for
improved performance and efficiency. While the primary research and
development site is the Research Center in Wilmington, Delaware, Aqualon has
application and development laboratories in Europe, Asia and the Americas that
provide technical service to customers. At these laboratories, teams
work in a network to develop products, identify new applications and meet
customer requirements.
Environmental
Matters
The
Company is subject to numerous environmental laws and
regulations. The Company believes it is in compliance, in all
material respects, with applicable federal, state and local environmental laws
and regulations. Expenditures relating to environmental cleanup costs
have not materially affected, and are not expected to materially affect, capital
expenditures or competitive position. Additional information
regarding environmental matters is provided in Notes 11 and
12 to the Consolidated Financial Statements.
Employees
As of
December 31, 2007, the Company had approximately 4,660 employees worldwide
including those of consolidated joint venture entities. Approximately
44% of the worldwide employees were located in the United States, of which
approximately 28% were represented by various local or national
unions. As of December 31, 2006, the Company had approximately
4,430 employees worldwide.
International
Operations
Net sales
and Property, plant and equipment, net by geographic area for each of the three
years ended December 31, 2007, 2006 and 2005 appear in Note
23 to the Consolidated Financial Statements. Direct export sales
from the United States to unaffiliated customers were $119.8 million, $106.1
million and $131.7 million for 2007, 2006 and 2005, respectively. The
amounts sold during 2006 and 2005 include $4.4 million and $37.5 million,
respectively, attributable to FiberVisions. The Company's operations
outside the United States are subject to risks and limitations typically related
to investments in foreign countries, such as fluctuations in currency values,
exchange control regulations, wage and price controls, employment regulations,
foreign investment laws, governmental instability (including expropriation or
confiscation of assets) and other potentially detrimental domestic and foreign
governmental policies affecting U.S.-based companies doing business abroad,
including risks related to terrorism and international hostilities.
Available
Information
Hercules
files its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports with the U.S. Securities
and Exchange Commission (“SEC”). Hercules provides access to its SEC
filings via a hyperlink to the SEC's website (www.sec.gov) on its
corporate website, www.herc.com. These
filings may also be read and copied at SEC’s Public Reference Room which is
located at 100 F Street, N.E., Washington, DC 20549. Information about the
operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov.
These
documents are also available in print, without charge, to any shareholder who
requests them in writing from Israel J. Floyd, Esq., Corporate Secretary,
Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington,
Delaware 19894-0001.
ITEM
1A. RISK
FACTORS
In
addition to the factors discussed elsewhere, the following, which have not been
sequenced in any particular order, are important factors that could cause actual
results or events to differ materially from those contained in any
forward-looking statements made by or on behalf of the Company.
The
Company is subject to litigation.
The
Company is a defendant in numerous lawsuits that arise out of, and are
incidental to, the current and past conduct of the Company’s
business. These suits concern issues such as environmental;
antitrust; commercial; intellectual property; labor and employment; personal
injury; property damage; product liability; and toxic tort. While it
is not feasible to predict the outcome of all pending suits and claims, the
ultimate resolution of these matters could have a material effect upon the
Company’s financial position, results of operations and cash
flows. See Note 12 to the Consolidated Financial
Statements for a thorough discussion of the most significant litigation
matters.
The
Company is subject to environmental liabilities.
The
Company is subject to numerous foreign, federal, state and local environmental
laws and regulations covering compliance matters or imposing liability for the
costs of, and damages resulting from, cleaning up sites, past spills, disposals
and other releases of hazardous substances. Changes in these laws and
regulations, or the interpretation thereof, could have a material effect on the
Company’s financial position, results of operations and cash
flows. Any failure by the Company to adequately comply with such laws
and regulations could subject the Company to significant future liabilities,
including fines and penalties.
The
Company has been identified as a potentially responsible party by U.S. federal
and state authorities, or by private parties seeking contribution, for the cost
of environmental investigation and/or cleanup at numerous
sites. Actual costs to resolve these matters will depend on numerous
factors, including the number of parties found responsible at each environmental
site and their ability to pay; the actual methods of remediation required or
agreed to; outcomes of negotiations with regulatory authorities; outcomes of
litigation; changes in environmental laws and regulations; technological
developments; the discovery of new information not known at this time; and the
remedial activity required, which could last for an extended number of
years. The ultimate resolution of such matters could have a material
effect upon the Company’s financial position, results of operations and cash
flows. See Notes 11 and 12 to
the Consolidated Financial Statements for a thorough discussion of the most
significant environmental matters.
The
Company is subject to extensive competition.
The
global specialty chemicals industry is highly competitive. Some of our
competitors have greater financial, technical, marketing and other resources,
which could provide them with a competitive advantage. Also, the
Company’s competitors have in the past caused, and could in the future cause, a
reduction in prices for some of the Company’s products as a result of
intensified price competition. Additionally, although the Company
does not compete primarily on the basis of price, the Company’s customers are
price sensitive. Accordingly, during periods in which the Company is
not able to pass on increased production costs, including those associated with
the increasing prices of raw materials, gross margins may
deteriorate.
The
Company is subject to technological change and innovation.
Many of
the Company’s products could be affected by technological change and new product
introductions and enhancements. Accordingly, product innovation and
new product development are integral to the Company’s
strategy. Research and development efforts are directed towards the
discovery and development of new products and processes, the improvement and
refinement of existing products and processes, the development of new
applications for existing products and cost improvement
initiatives. There can be no assurance that product development
efforts will be successful, that we will be able to cost-effectively manufacture
these new products or that we will be able to successfully market such products
or that our competitors will not develop new products or technologies that
compete with or reduce the market for our products or services.
The
Company is subject to supply constraints and price volatility with respect to
raw materials and energy.
The
Company acquires raw materials and energy from its vendors under a variety of
short and long-term contracts and supply agreements, depending upon various
economic and logistical factors. The purchase prices are generally
related to prevailing market conditions and are linked, in some cases, to
relevant market indices. Changes in raw material and energy costs
have historically had a material impact on the Company’s results from operations
and cash flows and are anticipated to continue to impact future periods
similarly.
The
Company may be impacted by changes in its customer’s markets.
Some
customers are in industries and businesses that are cyclical in
nature. Many customers are sensitive to changes in general
economic conditions. The demand for our products depends, in part,
upon the general economic conditions of the markets of our
customers. Downward economic cycles in our customers’ industries may
reduce sales of our products.
The
Company’s international operations are affected by global and regional
conditions.
The
Company’s international operations are subject to risks, such as currency
exchange controls, labor unrest, regional economic uncertainty, political
instability, restrictions on the transfer of funds into or out of a country,
import and export duties and quotas, domestic and foreign customs and tariffs
and current and changing regulatory environments. These events could
have an adverse effect on our international operations in the future by reducing
the demand for our products, increasing our costs or otherwise having an adverse
affect on the Company’s financial position, results of operations and cash
flows.
Foreign
exchange rate fluctuations impact the Company’s financial
performance.
Our
products are sold throughout the world and, as a result, currency fluctuations
impact our financial performance. Our revenues in foreign countries are largely
generated in foreign currencies, while costs incurred to generate those revenues
are only partly incurred in the same currencies. We sometimes enter
into hedging transactions to reduce the Company’s exposure to currency exchange
risk, but such transactions cannot eliminate all of the risks associated with
currency fluctuations. Because our financial statements are
denominated in U.S. dollars, changes in currency exchange rates between the
U.S. dollar and other currencies could have a material adverse effect on
the Company’s financial position, results of operations and cash
flows.
The
Company’s production facilities are subject to operating hazards.
We are
dependent on the continued operation of our production
facilities. Such production facilities are subject to hazards
associated with the manufacture, handling, storage and transportation of
chemical materials and products, including pipeline leaks and ruptures,
explosions, fires, inclement weather and natural disasters, mechanical failure,
unscheduled downtime, labor difficulties, transportation interruptions,
remediation complications, chemical spills, discharges or releases of toxic or
hazardous substances or gases, storage tank leaks and other environmental and
operational risks. These hazards can cause personal injury and loss
of life, severe damage to or destruction of property and equipment and
environmental damage and could have a material adverse effect on the Company’s
financial position, results of operations and cash flows.
The
Company has significant leverage.
As of
December 31, 2007, the Company's total debt was $796.0 million, of which
more than one-half is fixed rate indebtedness. The Company's
indebtedness has certain consequences. For example, it could:
increase the Company's vulnerability to economic downturns and competitive
pressures; require the Company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness, thereby reducing the
availability of its cash flow to fund working capital, capital expenditures,
research and development efforts and other general corporate purposes; limit the
Company's flexibility in planning for, or reacting to, changes in its business
and the industries in which it operates or in pursuing attractive business
opportunities requiring debt financing; place the Company at a disadvantage to
its competitors that have less debt; and limit the Company's ability to borrow
additional funds due to restrictive covenants.
The
Senior Credit Facility and the indentures governing the 6.75% senior notes
due 2029, which together account for $511.0 million of the Company's debt,
contain numerous restrictive covenants, including, among other things, covenants
that limit the Company's ability to: borrow money and incur contingent
liabilities; make dividend or other restricted payments; use assets as security
in other transactions; enter into transactions with affiliates; enter into new
lines of business; issue and sell stock of restricted subsidiaries; sell assets
or merge with or into other companies and make capital
expenditures. In addition, the Senior Credit Facility requires the
Company to meet financial ratios and tests, including maximum leverage and
interest coverage levels. These restrictions could limit the
Company's ability to plan for or react to market conditions or meet
extraordinary capital needs and could otherwise restrict corporate activities.
See Note 7 to the Consolidated Financial Statements for a
thorough discussion of the Company’s indebtedness.
The
Company has unfunded liabilities with respect to certain pension and
postretirement benefit plans.
The
projected benefit obligation of the Company’s U.S. defined benefit pension plan
and postretirement benefit plan and certain foreign plans exceeds the fair value
of plan assets. In addition, the assets and liabilities associated
with the Company’s defined benefit pension and postretirement benefit plans are
subject to interest rate and market risk. See Note
9 to the Consolidated Financial Statements for a description and related
financial disclosures for the defined benefit pension and postretirement
plans.
The
Company’s outsourcing and offshoring initiatives as well as its information
technology platform upgrade project have the potential to adversely impact
normal operations.
As
discussed more thoroughly in Note 16 to the Consolidated
Financial Statements, the Company is engaged in a comprehensive effort to
outsource and offshore a substantial number of corporate and business
functions. Additionally, the Company is in the midst of a multi-year
project to upgrade its information technology platform. While the
Company has engaged in extensive planning with respect to the transition and
implementation of these initiatives and projects, including the consideration of
contingencies, there are inherent risks with such activities. Such
risks include business interruption, deficiencies in internal controls,
excessive or unanticipated costs, information technology data corruption, loss
and/or malfunction, and failure to achieve projected cost savings among
others. These risks could have a material adverse effect on the
Company’s financial position, results of operations and cash flows.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
None
ITEM
2. PROPERTIES
The
Company's corporate headquarters and major research center are located in
Wilmington, Delaware. The Company also owns a number of plants and
facilities in strategic locations worldwide. All of the Company's
principal properties are owned by the Company, except for its corporate
headquarters office building in Wilmington, Delaware, its European headquarters
office building in Schaffhausen, Switzerland and its Asian headquarters in
Shanghai, China, all of which are leased. The Company's plants and
facilities are maintained in material compliance with current laws and
regulations and are generally considered to be in good condition, with adequate
capacity for projected business operations. Certain of these
properties are subject to liens under the Company’s debt obligations (see Note 7 to the Consolidated Financial Statements). The
following are the locations of the Company's worldwide plants:
Paper Technologies and
Ventures
|
|
Beringen,
Belgium; Burlington, Ontario, Canada; Busnago, Italy; Chicopee,
Massachusetts, U.S.; Franklin, Virginia, U.S.; Hattiesburg, Mississippi,
U.S.; Helsingborg, Sweden; Kim Cheon, Korea; Louisiana, Missouri, U.S.;
Macon, Georgia, U.S.; Mexico City, Mexico; Milwaukee, Wisconsin, U.S.;
Nantou, Taiwan; Paulinia, Brazil; Portland, Oregon, U.S.; Savannah,
Georgia, U.S.; Shanghai, China; Sobernheim, Germany; Tampere, Finland;
Tarragona, Spain; Voreppe, France; and Zwijndrecht, The
Netherlands.
|
The
Company also owns a manufacturing facility in Pilar, Argentina, that has been
leased to a major U.S. company under a five-year lease. The Company
purchases its products for sale in Argentina from this plant under a five-year
supply and distribution agreement which ends in 2009.
Aqualon
Group
|
|
Alizay,
France; Doel, Belgium; Dalton, Georgia, U.S.; Hopewell, Virginia, U.S.;
Jiangmen City, China; Kenedy, Texas, U.S.; Luzhou and Suzhou, China (40%
joint venture interest);Nanjing, China (land-use rights acquired in 2006
for facility construction beginning in 2007); Parlin, New Jersey, U.S.
Zwijndrecht, The Netherlands; and Brunswick, Georgia,
U.S.
|
ITEM
3. LEGAL
PROCEEDINGS
Information
regarding legal proceedings is included in Note 12 to the
Consolidated Financial Statements and is incorporated herein by
reference.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter
was submitted to a vote of security holders during the fourth quarter of 2007
through the solicitations of proxies or otherwise.
PART II
ITEM
5. MARKET
FOR HERCULES' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company's common stock is listed on the New York Stock Exchange (ticker symbol
HPC). It is also traded on the Philadelphia, Midwest and Pacific
Stock Exchanges.
The
approximate number of holders of record of the Company’s common stock ($25/48
stated value) as of February 27, 2008 was 13,050.
In 2000,
the Company suspended its practice of paying cash dividends to its
shareholders. Beginning in the third quarter of 2007, the Company’s
Board of Directors approved payment of cash dividends. The
declaration, payment and amount of future cash dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including financial condition, results of operations, cash flows from
operations and current and anticipated capital requirements. There
can be no assurance that future dividends will be declared and
paid. The following table sets forth, for the periods indicated, the
dividends declared per share and the high and low closing price per share of the
Company's common stock, as reported on the New York Stock Exchange:
|
2007
|
Dividend
|
High
|
Low
|
|||||||||
|
First
Quarter
|
— | $ | 21.04 | $ | 18.48 | |||||||
|
Second
Quarter
|
— | $ | 19.87 | $ | 17.67 | |||||||
|
Third
Quarter
|
$ | 0.05 | $ | 21.91 | $ | 19.01 | ||||||
|
Fourth
Quarter
|
$ | 0.05 | $ | 22.06 | $ | 17.49 | ||||||
|
2006
|
Dividend
|
High
|
Low
|
|||||||||
|
First
Quarter
|
— | $ | 13.93 | $ | 11.03 | |||||||
|
Second
Quarter
|
— | $ | 16.02 | $ | 13.63 | |||||||
|
Third
Quarter
|
— | $ | 15.99 | $ | 13.68 | |||||||
|
Fourth
Quarter
|
— | $ | 19.52 | $ | 15.73 | |||||||
On
December 31, 2007, the closing price of the common stock was
$19.35.
The
following table provides a summary of the Company’s purchases of its common
stock during the three months ended December 31, 2007:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under Plans or Programs
(1)
|
||||||||||||
|
October
1 – 31, 2007
|
— | — | — | $ | 177,235,535 | |||||||||||
|
November
1 – 30, 2007
|
331,900 | $ | 18.09 | 331,900 | $ | 171,231,941 | ||||||||||
|
December
1 – 31, 2007
|
1,316,560 | $ | 19.43 | 1,316,560 | $ | 145,651,609 | ||||||||||
|
Totals
|
1,648,460 | 1,648,460 | ||||||||||||||
(1) In July 2007, the Board of Directors
authorized the Company to repurchase up to $200 million of its common stock over
the next two years subject to market conditions and the provisions of the
Company’s Senior Credit Facility Agreement and indentures. The
authorization also encompasses dividends on the Company’s common
stock. The combination of share purchases and dividends is limited to
$100 million per calendar year under the terms of the Company’s Senior Credit
Facility Agreement.
ITEM 6. SELECTED
FINANCIAL DATA
A summary
of selected financial data for the Company as of December 31 and for the years
specified is set forth in the table below. Data for 2006 reflects the
impact of the sale of a majority interest in FiberVisions. All periods presented
reflect the former terpenes specialties and BetzDearborn water treatment
businesses as discontinued operations.
|
|
(Dollars
and shares in millions, except per share data)
|
|||||||||||||||||||
|
Statements
of Operations Information:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Net
sales
|
$ | 2,136.2 | $ | 2,035.3 | $ | 2,055.0 | $ | 1,984.3 | $ | 1,836.0 | ||||||||||
|
Cost
of sales
|
1,405.7 | 1,343.4 | 1,391.1 | 1,291.6 | 1,155.6 | |||||||||||||||
|
Gross
profit
|
$ | 730.5 | $ | 691.9 | $ | 663.9 | $ | 692.7 | $ | 680.4 | ||||||||||
|
Research
and development
|
$ | 43.8 | $ | 38.8 | $ | 40.8 | $ | 42.7 | $ | 38.7 | ||||||||||
|
Profit
from operations
|
$ | 264.2 | $ | 248.6 | $ | 140.3 | $ | 232.9 | $ | 257.1 | ||||||||||
|
Net
income (loss) from continuing operations before discontinued
operations
and cumulative effect of changes in accounting principle
|
$ | 170.9 | $ | 190.8 | $ | (32.1 | ) | $ | 30.7 | $ | 75.2 | |||||||||
|
Net
income (loss) from discontinued operations, net of tax
|
8.0 | 47.0 | (6.5 | ) | (2.6 | ) | 3.5 | |||||||||||||
|
Cumulative
effect of changes in accounting principle, net of tax
|
— | 0.9 | (2.5 | ) | — | (33.3 | ) | |||||||||||||
|
Net
income (loss)
|
$ | 178.9 | $ | 238.7 | $ | (41.1 | ) | $ | 28.1 | $ | 45.4 | |||||||||
|
Per
Share Data and Other Share Information:
|
||||||||||||||||||||
|
Basic
earnings (loss) per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.50 | $ | 1.72 | $ | (0.30 | ) | $ | 0.28 | $ | 0.71 | |||||||||
|
Discontinued
operations
|
0.07 | 0.42 | (0.06 | ) | (0.02 | ) | 0.03 | |||||||||||||
|
Cumulative
effect of changes in accounting principle
|
— | 0.01 | (0.02 | ) | — | (0.31 | ) | |||||||||||||
|
Net
income (loss)
|
$ | 1.57 | $ | 2.15 | $ | (0.38 | ) | $ | 0.26 | $ | 0.43 | |||||||||
|
Diluted
earnings (loss) per share
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.49 | $ | 1.71 | $ | (0.30 | ) | $ | 0.28 | $ | 0.70 | |||||||||
|
Discontinued
operations
|
0.07 | 0.42 | (0.06 | ) | (0.02 | ) | 0.03 | |||||||||||||
|
Cumulative
effect of changes in accounting principle
|
— | 0.01 | (0.02 | ) | — | (0.31 | ) | |||||||||||||
|
Net
income (loss)
|
$ | 1.56 | $ | 2.14 | $ | (0.38 | ) | $ | 0.26 | $ | 0.42 | |||||||||
|
Dividends
declared per share
|
$ | 0.10 | — | — | — | — | ||||||||||||||
|
Weighted-average
number of common shares outstanding
|
||||||||||||||||||||
|
Basic
|
114.3 | 110.8 | 108.7 | 107.3 | 106.2 | |||||||||||||||
|
Diluted
|
115.1 | 111.3 | 110.4 | 109.0 | 107.2 | |||||||||||||||
|
Actual
number of common shares outstanding
|
114.0 | 116.0 | 112.7 | 112.1 | 111.0 | |||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Accounts
receivable, net
|
$ | 366.8 | $ | 326.6 | $ | 289.7 | $ | 344.9 | $ | 319.7 | ||||||||||
|
Inventories
|
224.0 | 210.6 | 179.6 | 205.7 | 199.6 | |||||||||||||||
|
Less: Accounts
payable
|
(222.0 | ) | (205.3 | ) | (172.9 | ) | (186.6 | ) | (161.6 | ) | ||||||||||
|
Operating
working capital, net
|
$ | 368.8 | $ | 331.9 | $ | 296.4 | $ | 364.0 | $ | 357.7 | ||||||||||
|
Total
assets
|
$ | 2,678.4 | $ | 2,808.5 | $ | 2,568.8 | $ | 2,720.3 | $ | 2,721.8 | ||||||||||
|
Total
debt
|
$ | 796.0 | $ | 995.5 | $ | 1,109.0 | $ | 1,240.1 | $ | 1,347.8 | ||||||||||
|
Other
Financial and Statistical Data:
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 299.9 | $ | 172.9 | $ | 139.2 | $ | 120.5 | $ | 22.8 | ||||||||||
|
Capital
expenditures
|
$ | 118.3 | $ | 93.6 | $ | 67.5 | $ | 77.4 | $ | 48.0 | ||||||||||
|
Depreciation
|
$ | 70.3 | $ | 70.7 | $ | 80.5 | $ | 74.9 | $ | 73.2 | ||||||||||
|
Amortization
|
$ | 39.7 | $ | 24.6 | $ | 25.4 | $ | 26.3 | $ | 27.4 | ||||||||||
|
Employees
|
4,660 | 4,430 | 4,650 | 4,950 | 5,120 | |||||||||||||||
|
Manufacturing
facilities
|
32 | 32 | 35 | 35 | 37 | |||||||||||||||
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The
following discussion should be read in connection with all other information
contained herein, including without limitation the Consolidated Financial
Statements and Notes thereto. All dollar amounts in the tables that
follow are presented in millions.
Business Overview
Business
Profile – Market and Geographic Concentration
The
Company is a leading global manufacturer and marketer of specialty chemicals and
related services for a broad range of business, consumer and industrial
applications. The Company's principal products are chemicals used by
the paper industry to improve performance and enhance the manufacturing process;
water-soluble polymers; and specialty resins. The primary markets the
Company serves include pulp and paper; paints and adhesives; construction
materials; food, pharmaceutical and personal care; and industrial specialties,
including oilfield and general industrial.
More than
50% of the Company's revenues are generated outside of North
America. Net sales by region expressed as a percentage of total net
sales for the years ended December 31, 2007, 2006 and 2005 were:
|
2007
|
2006
|
2005
|
||||||||||
|
North
America
|
47 | % | 49 | % | 47 | % | ||||||
|
Europe
|
35 | % | 34 | % | 37 | % | ||||||
|
Asia
Pacific
|
12 | % | 11 | % | 11 | % | ||||||
|
Latin
America
|
6 | % | 6 | % | 5 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
Business
Segments
The
Company currently operates through two active reportable
segments: Paper Technologies and Ventures (“PTV”) and the Aqualon
Group (“Aqualon”). PTV includes the following business
units: The Paper Technologies business and the Ventures business
which includes Pulping chemicals, Water treatment chemicals, Lubricants and
Building and Converted products. Aqualon includes the following
business units: Coatings and Construction, Regulated Industries, and
Energy and Specialties. A reporting segment is also maintained for
FiberVisions for historical reporting purposes reflecting the Company’s
consolidation of this business through March 31, 2006. The Company
currently holds a 34.5% ownership interest in the FiberVisions
business. The results of operations for 2005 and the three months
ended March 31, 2006 reflect the Company’s 100% ownership of this
business.
Net sales
for the years ended December 31, 2007, 2006 and 2005 as a percent of total
net sales, by segment, were:
|
2007
|
2006
|
2005
|
||||||||||
|
Paper
Technologies and Ventures
|
54 | % | 53 | % | 50 | % | ||||||
|
Aqualon
Group
|
46 | % | 44 | % | 36 | % | ||||||
|
FiberVisions
|
— | 3 | % | 14 | % | |||||||
| 100 | % | 100 | % | 100 | % | |||||||
Key
Developments
During
2007, the following business and corporate actions and financial reporting
developments had an impact upon the Company’s results of operations and
financial position as well as the overall presentation of financial information:
(1) initiation of a share repurchase program and common stock dividend, (2)
business acquisitions and investments, (3) formal signing and initiation of
offshoring and outsourcing agreements as well as continued progress applicable
to the Business Infrastructure Project, (4) resolution and settlement of
significant legacy litigation and environmental matters, (5) formal agreement
with the Internal Revenue Service (“IRS”) regarding the resolution of certain
income tax matters and the receipt of a substantial portion of estimated tax
refunds, (6) implementation of a liability-driven investing strategy for the
Company’s U.S. and United Kingdom (“U.K.”) defined benefit pension plans and (7)
the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”). A discussion of these developments follows.
Share
Repurchase Program and Common Stock Dividend
During
2007, the Board of Directors authorized the repurchase of up to $200 million of
common stock and declared quarterly cash dividends of five cents per share
beginning in the third quarter of 2007. A total of 2.8 million shares
were repurchased for $54.3 million during 2007. These matters are
discussed in greater detail within the discussion of Liquidity
and Capital Resources and Commitments and Contractual
Obligations that follow.
Business
Acquisitions and Investments
During
2007, the Company completed two transactions: (1) the acquisition of the
specialty surfactants business of Dexter Chemicals, LLC (“Dexter”) for $10.6
million and (2) the formation of H2H Innovations, LLC (“H2H”), a technology
joint venture between Heartland Resource Technologies (“Heartland”) and
Hercules, which resulted in a cash investment of $5.0 million. The
Dexter business has been integrated into the Aqualon segment and manufactures
and markets products for the coatings industry. H2H has been
integrated into the Ventures component of PTV. Additional information
regarding these activities is provided in Note 1 to the
Consolidated Financial Statements and the discussion of Commitments and Contractual Obligations that
follows.
Business
Infrastructure Project
In
January 2007, the Company signed outsourcing/offshoring agreements with Genpact
International, HCL America Inc. and HCL Technologies Limited and proceeded with
plans to transition certain corporate and business support activities and
services in connection with the Company’s previously disclosed Business
Infrastructure Project. Activities associated with these agreements,
as well as those with other service providers initiated during 2006, are
operational and progressing in various phases of transition as contemplated in
the project plans. During these transitional periods, the Company is
incurring restructuring and severance charges, exit costs and other related
implementation charges as well as accelerated amortization. A total
of $33.3 million of such charges attributable to these specific activities has
been recorded during 2007. Additional detail is provided in Note 16 to the Consolidated Financial Statements.
Resolution
of Income Tax Matters and Receipt of Estimated Refunds
During
2007, the Company reached agreement with the IRS on all remaining income tax
matters for the years 1993 through 2003, resulting in the recording of an
additional benefit of $56.6 million, including interest, over and above the
amounts recorded during the fourth quarter of 2006. In addition, the
Company has received approximately $222 million of an estimated $241 million in
federal income tax refunds, including interest, during 2007. The
Company also expects to receive a total of approximately $4 million in state
income tax refunds of which approximately $3 million was received during
2007. The remaining estimated amounts are projected to be received
during the first half of 2008.
Resolution and Settlement of Legacy Litigation
and Environmental Matters
During
2007, the Company paid $124.5 million in connection with the lawsuit captioned
United States of
America v. Vertac Corp. et al. (Civil No. 4:80CV00109 GH, U.S. District
Court, Eastern District of Arkansas, Western Division) (the “Vertac
litigation”). Significant charges for this matter were recorded in
prior periods resulting in only the accrual of periodic interest and the impact
of the cash payment on the 2007 financial statements. However, the
Company received notification from the government in July 2007 with respect to
the government’s claim for reimbursement from the Company of additional response
costs related to the Vertac matter with the Company’s share totaling
approximately $18.7 million. Interest continues to accrue on this
amount and has resulted in a total accrual of $20.0 million as of December 31,
2007. Additional information regarding this matter is provided in Note 12 to the Consolidated Financial Statements.
In
addition, the Company reached a settlement with the United States Navy in
connection with environmental issues at the Alleghany Ballistics Laboratory site
(the “ABL matter”). The settlement resulted in the recording of a
charge and payment during 2007 of approximately $13 million.
Implementation
of New Pension Plan Investment Strategy
As
discussed in further detail in the Commitments and Contractual Obligations
section that follows, the Company implemented a liability-driven investing
strategy that is designed to generally align the characteristics of the
Company’s U.S. and U.K. defined benefit pension plans’ assets to those of the
underlying benefit obligations with the objective of mitigating the impact of
interest rate and asset value volatility. Voluntary contributions to
these plans during 2007 was driven in part by the implementation of this
strategy, as well as the impact of the settlement of litigation involving the
Company’s U.S. defined benefit pension plan.
Adoption
of FIN 48
The
Company adopted FIN 48 effective January 1, 2007 and recorded $1.9 million as an
adjustment to its beginning balance of retained earnings and a corresponding
decrease to its income tax reserves recorded in the balance sheet caption
Deferred credits and other liabilities in accordance with the required
transition provisions. The Company has identified $35.5 million of
unrecognized tax benefits as of December 31, 2007. Additional
information regarding the adoption of FIN 48 is provided in Note
8 to the Consolidated Financial Statements.
The
Company’s Summary of Significant Accounting Policies is
provided in Item 8. The Company's discussion and analysis of its
financial condition and results of operations is based on its Consolidated
Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires Hercules to make estimates
and assumptions that affect the amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. Hercules evaluates its estimates on a regular basis,
including those related to impairments of goodwill, intangible and other
long-lived assets, income taxes, contingencies, including those related to
litigation, environmental issues, asset retirement obligations, asbestos
lawsuits and claims, pension and other benefit obligations and stock-based
compensation. Hercules bases its estimates on various factors
including historical experience, consultation and advice from third party
subject matter experts, and various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Management reviews
significant estimates and related disclosures with the Audit Committee of the
Board of Directors on a regular basis. Actual results may differ from
these estimates and assumptions.
Hercules
believes that the following accounting estimates are critical due to the
significant subjectivity and judgment necessary to account for the matters or
the susceptibility of such matters to change and the effect of the estimates and
assumptions on its Consolidated Financial Statements.
Goodwill
and Other Intangible Assets
The
Company performs an annual assessment of its goodwill and intangible assets for
impairment. In addition, the Company consistently considers factors
including deterioration in future economic conditions, poor operating results in
the reporting units, new or stronger competitors, or changes in technology that
could indicate an inability to recover the carrying value of its goodwill and
intangible assets, thereby requiring an impairment in the future. To
assess impairment, the Company compares its reporting units’ book values of net
assets, including goodwill, to its fair value.
Fair
value is estimated using a combination of valuation approaches including the
market value and income approaches. Income valuation methodologies
are based on estimates of future cash flows discounted using a credit-adjusted
risk-free rate of return (“discount rate”) that essentially represents the
Company’s cost of capital. The key assumptions considered in the
development of estimates of future cash flows include (1) revenue growth
including price and volume, (2) cost of sales growth including raw materials
prices and labor and benefit costs, (3) indirect corporate overhead, working
capital and capital expenditures commensurate with the sales and cost growth
rates and (4) the discount rate. The estimate of future cash flows
inherently involves significant management judgment as it represents a forecast
of future events. In addition, the discount rate is also subject to
change from year-to-year based on the relative balance of the Company’s
outstanding debt and equity, actual rates of interest on outstanding debt and
the Company’s stock price. The following table summarizes the
approximate average impact of a change in the most significant of these
assumptions on the fair value of the Company’s net assets, while all other
assumptions are held constant:
|
Change
|
Average
Impact
|
||||
|
Discount
rate
|
+/- 0.5 | % |
+/-
$ 140 million
|
||
|
Revenue
growth
|
+/- 1.0 | % |
+/-
$ 340 million
|
||
|
Cost
of sales growth
|
+/- 1.0 | % |
+/-
$ 205 million
|
||
The
Company has identified its two active operating segments, PTV and Aqualon, as
its reporting units for the purposes of allocating goodwill and intangible
assets as well as the assessment for impairment. Goodwill and
intangible assets have been allocated to the reporting units as a result of
prior transactions in which these individual reporting units acquired net assets
or otherwise expanded their ownership interests in other related
businesses. The underlying assets related to such transactions,
including goodwill and intangible assets, have been and continue to be fully
integrated into the operations of the reporting units.
Other
Long-Lived Assets
The
Company tests other long-lived assets, including property, plant and equipment,
for impairment based on an assessment of factors including deterioration in
future economic conditions, poor operating results in a business, the
determination that the long-lived asset is unsuitable for one reason or another,
new or stronger competitors, or changes in technology, that could indicate an
inability to recover the carrying value of the asset, thereby requiring an
impairment in the future. In some cases, the underlying assessment is
subjective in nature and represents a significant degree of
judgment.
Deferred
Tax Asset Valuation Allowance
The
Company records a valuation allowance to reduce its deferred tax assets to an
amount that is more likely than not to be realized after consideration of future
taxable income and reasonable tax planning strategies. In the event
that Hercules were to determine that it would not be able to realize all or part
of its deferred tax assets for which a valuation allowance had not been
established, or is able to utilize capital and/or operating loss carryforwards
for which a valuation allowance had been established, an adjustment to the
deferred tax asset will be reflected in income in the period such determination
is made.
Asset
Retirement Obligations and Environmental Contingencies
The
Company establishes reserves for environmental matters and asset retirement
obligations when a legal obligation exists and the fair value of the liability
can be reasonably estimated. In addition, the Company recognizes a loss for
environmental-related litigation and other contingencies when it is probable
that a liability has been incurred and the amount of the loss is reasonably
estimable. The actual costs will depend upon numerous factors,
including: the estimated useful life of the Company’s manufacturing facilities
and significant component assets, changes in the nature or use of existing
assets and facilities, the number of parties found responsible at each
environmental site and their ability to pay, the actual methods of remediation
required or agreed to, outcomes of negotiations with regulatory authorities,
outcomes of litigation, changes in the timing of required remedial activities,
changes in the discount rates used to determine the fair value of obligations,
changes in environmental laws and regulations, technological developments, the
years of remedial activity required and changes in the number or financial
exposures of claims, lawsuits, settlements or judgments, or in the ability to
reduce such financial exposures by collecting indemnity payments from insurers
or others. Each factor is considered sensitive to variation which
could impact estimates of the timing and amount of cash flows.
Asbestos-Related
Contingencies
The
Company has established reserves for asbestos-related personal injury lawsuits
and claims based upon the results of an annual actuarial study of its
asbestos-related liabilities by a recognized expert at a major national
university. This study is based on a number of assumptions including
the anticipated number of future claims, the timing and amount of future
payments, disease, venue, and the dynamic nature of asbestos litigation and
other circumstances. While the expert noted above has applied his
methodology in determining the Company’s reasonably possible range of exposures
for these liabilities on a consistent basis, other methods in practice exist
which place a differing degree of emphasis on the underlying variables used to
measure asbestos-related contingencies. Such other methods could
yield significantly different ranges of reasonably possible
exposures.
Pension
and Other Postretirement Benefits
Pension
and other postretirement benefit obligations and the related benefits costs are
determined based upon actuarial assumptions regarding mortality, medical cost
inflation rates, discount rates, long-term return on assets, salary increases,
Medicare availability and other factors. Changes in these assumptions
can result in changes to the recognized pension and other postretirement
benefits expense and recorded liabilities.
The
assets and liabilities associated with the Company's defined benefit pension
plans are subject to interest rate and market risk. A 100-basis point
decrease or increase in the discount rate has an unfavorable or favorable impact
of approximately $165 million on the U.S. defined benefit pension plan’s
projected benefit obligation, which should be offset to a large extent by a
commensurate movement in plan assets ( see Note 9 to the Consolidated Financial
Statements).
Stock-Based
Compensation
For
financial reporting purposes, the Company uses the Black-Scholes option pricing
model to determine the fair value of stock options issued as compensation to key
employees and non-employee directors. The model determines a fair
value based on a number of key variables including the grant date price of
Hercules common stock and the related exercise or strike price, estimated
dividend yield, estimated term of the option prior to exercise, risk free rate
of interest over the estimated term and a measure of the volatility of Hercules
common stock over the estimated term. Certain of these variables
encompass a degree of subjectivity whose variability could result in
significantly different values for the grant date fair value of stock option
awards. In addition, the Company recognizes share-based compensation
cost based upon the number of awards that are expected to vest. This
measure implicitly includes an estimate for forfeitures based on employee
turnover, reductions in force and other factors specific to the award recipient
population. The Company has a policy to review its estimate of award
forfeitures on an annual basis or when specific facts and circumstances warrant
additional review. The review is primarily based on historical
experience and provides for estimated rates applicable to Company officers and
all other employees, respectively. Prior to 2007, the Company had
estimated different rates for these two employee groups. Based on its
most recent annual review, actual experience rates and other factors have
resulted in the convergence of the estimated forfeiture rates for the two
employee groups. However, future reviews will continue to assess the
groups independently. The change in estimated forfeiture rates will
result in total share-based compensation cost that is lower by less than $1
million than that which would have been recorded had the change in estimate not
occurred for 2007.
Results of Operations – Consolidated Review
A
comparative analysis, by line item, of the Statement of Operations is provided
as follows for the years ended December 31, 2007, 2006 and 2005:
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Net
sales
|
$ | 2,136.2 | $ | 2,035.3 | $ | 2,055.0 | $ | 100.9 | $ | (19.7 | ) | |||||||||
Net sales
for 2007 increased approximately 5% from 2006 primarily as a result of $46.7
million, or 2%, higher volume, $21.2 million, or 1%, attributable to higher
pricing and $72.4 million, or 4%, due to favorable rates of exchange (“ROE”)
partially offset by $39.4 million, or 2%, lower product
mix. Excluding the impact of the disposition of a majority interest
in FiberVisions, sales increased 9%. The increase in volume reflects
growth in substantially all of the Company’s business units as well as the
impact of the Dexter acquisition in the Aqualon segment. In addition, 2007
reflects the full year impact of the consolidation of the Hercules Tianpu
methylcellulose (“MC”) joint venture for Aqualon and operations under the
rosin-sizing product alliance with MeadWestvaco for PTV. These volume
increases were partially offset by the absence of $69.2 million of sales
attributable to FiberVisions that occurred during the quarter ended March 31,
2006 prior to the Company’s disposition of its majority ownership
interest. Pricing increases were implemented throughout a number of
product lines for both PTV and Aqualon in order to recover raw material, energy
and transportation cost increases. In addition, the sales growth
reflects continued development and introduction of new products. The
ROE impact is primarily attributable to continued strengthening of the Euro
versus the U.S. Dollar (“USD”). The average Euro/USD exchange rate
was approximately 9% higher during the 2007 period.
Net sales
for 2006 decreased approximately 1% from 2005 primarily as a result of the
Company’s disposition of a majority interest in FiberVisions on March 31,
2006. FiberVisions’ sales during 2006 were $69.2 million whereas 2005
included a full year in the amount of $282.7 million. Excluding the
impact of FiberVisions, net sales for 2006 increased as a result of $183.3
million, or 24%, higher volume, $47.8 million, or 3%, attributable to higher
pricing and $8.1 million due to favorable ROE partially offset by $45.4 million,
or 2%, lower product mix. The increase in volume was attributable to
a combination of Aqualon’s guar and guar derivatives sales to the energy
industry and MC sales resulting from the consolidation of Hercules Tianpu as
well as organic growth from PTV and Aqualon’s other business
units. In addition, the guar and guar derivatives and MC acquisitions
significantly changed the product mix profile of Aqualon when compared to 2005
resulting in a lower-priced product mix. Pricing increases were
implemented throughout a number of product lines for both PTV and Aqualon in
order to recover raw material, energy and transportation cost increases;
however, pricing pressure continued in the MC construction
markets. While the Euro strengthened versus the USD during the latter
part of 2006, the average was essentially flat compared to 2005.
The
tables below reflect Net sales per region and the percentage change from the
respective prior year periods as well as the percentage change excluding the
impact of ROE:
|
%
Change
Excluding
|
||||||||||||||||
|
Regions
|
2007
|
2006
|
%
Change
|
ROE
|
||||||||||||
|
North
America
|
$ | 1,002.9 | $ | 1,003.2 | — | — | ||||||||||
|
Europe
|
756.8 | 696.0 | 9 | % | 1 | % | ||||||||||
|
Asia
Pacific
|
249.3 | 227.4 | 10 | % | 7 | % | ||||||||||
|
Latin
America
|
127.2 | 108.7 | 17 | % | 12 | % | ||||||||||
|
All
regions
|
$ | 2,136.2 | $ | 2,035.3 | 5 | % | 1 | % | ||||||||
Excluding
the impact of FiberVisions as well as the impact of ROE, Net sales increased in
all global regions during 2007. The increases were attributable to
both PTV and Aqualon with the exception of PTV’s performance in the Asia Pacific
region where a 3% decline was realized primarily due to successful efforts to
improve product mix. During 2007, PTV experienced strong revenue
growth in the Americas including the higher-growth markets in Brazil and
Chile. In addition, both segments achieved growth in higher-growth
markets in Russia, other Eastern European countries and the Middle
East. African markets, which are generally served out of European
facilities, continued to provide growth for Aqualon while results were
relatively flat for PTV in this region. Aqualon achieved consistent
growth in the Asia Pacific region, primarily China, reflecting the segment’s
expanding presence in the country, and was able to more than offset the revenue
decline in the region attributable to PTV.
|
%
Change
Excluding
|
||||||||||||||||
|
Regions
|
2006
|
2005
|
%
Change
|
ROE
|
||||||||||||
|
North
America
|
$ | 1,003.2 | $ | 967.9 | 4 | % | 3 | % | ||||||||
|
Europe
|
696.0 | 747.7 | (7 | )% | (6 | )% | ||||||||||
|
Asia
Pacific
|
227.4 | 233.7 | (3 | )% | (3 | )% | ||||||||||
|
Latin
America
|
108.7 | 105.7 | 3 | % | (1 | )% | ||||||||||
|
All
regions
|
$ | 2,035.3 | $ | 2,055.0 | (1 | )% | (1 | )% | ||||||||
Excluding
the impact of FiberVisions, sales increased in all regions during 2006 on an
aggregate basis as compared to 2005. Sales in the Americas were
particularly strong for both PTV and Aqualon. Within Europe, Aqualon
sales continued a strong recovery from the prior year, particularly in the
coatings and construction markets, while PTV sales were flat due to excess
capacity and regional market fragmentation, continuing the trend that began
during 2005. Higher-growth markets in China and Eastern Europe
provided strong growth opportunities for both PTV and Aqualon while both
segments experienced more modest growth in developing markets in the Latin
American and Asia Pacific regions.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Cost
of sales
|
$ | 1,405.7 | $ | 1,343.4 | $ | 1,391.1 | $ | 62.3 | $ | (47.7 | ) | |||||||||
|
As
a % of sales
|
66 | % | 66 | % | 68 | % | ||||||||||||||
Cost of
sales increased 5% during 2007 as compared to 2006 commensurate with the higher
volume of sales. The increase also reflects higher raw material and
energy costs, start-up costs attributable to Aqualon’s capacity expansion in its
Chinese operations as well as costs for products purchased for resale to meet
customer demand during the start-up periods. These increases were
partially offset by lower transportation costs in PTV and the impact of higher
fixed cost absorption primarily attributable to Aqualon as production continued
at or near capacity for a number of high demand products. Raw material cost
increases over 2006 levels were $23.4 million. Price increases
recovered a substantial portion of these cost increases. However, the
terms of certain annual contracts limited the recovery during the latter part of
2007. Contract renewals implemented for 2008 as well as recently
announced price increases for certain products linked to those raw materials
that have greater price volatility are expected to provide for substantial cost
recovery throughout 2008. In addition to pricing and contract
initiatives, the Company continues to implement actions to mitigate raw material
cost increases including pursuing product substitutions, improving yields and
efficiencies and implementing energy conservation programs.
Cost of
sales decreased 3% during 2006 as compared to 2005 primarily reflecting the
absence of FiberVisions’ costs subsequent to March 31,
2006. Excluding the effect of FiberVisions, overall costs for raw
materials and energy were higher during 2006 as compared to
2005. Price increases and surcharges recovered a substantial portion,
but not all of the related cost increases. In addition, improved
fixed cost absorption, primarily attributable to Aqualon as production was at
capacity for a number of high demand products, as well as lower transportation
expenses partially offset the higher costs. On an aggregate basis,
raw material and energy costs increased $55.7 million over 2005
levels. While the rate of increase in costs moderated, the overall
trend of increasing costs continued from the second half of 2005, when spikes
occurred primarily due to the Gulf Coast hurricanes and the related impact on
the raw material suppliers and logistics infrastructure.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Selling,
general and administrative expenses
|
$ | 376.9 | $ | 372.2 | $ | 382.5 | $ | 4.7 | $ | (10.3 | ) | |||||||||
|
As
a % of sales
|
18 | % | 18 | % | 19 | % | ||||||||||||||
Selling,
general and administrative expenses (“SG&A”) increased 1% during 2007 as
compared to 2006 primarily reflecting higher ROE, which contributed $10.6
million to the overall increase. In addition, both PTV and Aqualon
incurred employee staffing-related costs associated with marketing, technology
and other functions to support growth and their expanding presence in certain
higher-growth markets. The increase also reflects approximately $3
million attributable to the accelerated vesting of certain 2004 restricted stock
awards based on the achievement of specific share price performance
benchmarks. These increases were substantially offset by lower
indirect support costs, primarily in PTV’s European operations. In
addition, there were decreases attributable to bad debts, incentive
compensation, litigation as well as the absence of FiberVisions during
2007.
SG&A
decreased 3% during 2006 as compared to 2005 reflecting the lower wage and
employee expense base attributable to lower overall headcount from a number of
restructuring actions. In addition, 2006 SG&A reflected lower
professional fees, including audit and tax consulting fees as well as legal fees
resulting from the completion and settlement attributable to PTV’s patent
infringement litigation. The sale of FiberVisions also contributed to
the decrease. These decreases were partially offset by higher
postretirement benefits costs, higher incentive compensation charges
attributable to improved performance and a higher number of awards outstanding,
higher bad debt charges, higher average ROE and indirect costs attributable to
supporting growth in the Asia Pacific region.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Research
and development
|
$ | 43.8 | $ | 38.8 | $ | 40.8 | $ | 5.0 | $ | (2.0 | ) | |||||||||
|
As
a % of sales
|
2 | % | 2 | % | 2 | % | ||||||||||||||
Research
and development charges increased 13% during 2007 as compared to 2006 reflecting
higher spending primarily in the Aqualon Group. This includes higher
employee staffing and related costs supporting new product development and
product line enhancements. The decrease during 2006 as compared to
2005 is primarily attributable to the FiberVisions transaction and PTV’s global
research and development consolidation program whereby PTV consolidated its
laboratories and technical development facilities into regional centers of
excellence.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Intangible
asset amortization
|
$ | 8.7 | $ | 7.2 | $ | 8.0 | $ | 1.5 | $ | (0.8 | ) | |||||||||
Intangible
asset amortization increased during 2007 primarily as a result of intangible
assets placed in service in connection with the Dexter acquisition and the
formation of H2H as well as the impact of a full year of amortization
attributable to Hercules Tianpu’s intangible assets as compared to
2006. Intangible asset amortization decreased during 2006 primarily
as a result of the absence of amortization for FiberVisions’ intangible assets
partially offset by increases in amortization attributable to intangible assets
recognized with the Benchmark acquisition and consolidation of Hercules
Tianpu. Amortization is expected to be $10.2 million for 2008, $8.9
million for 2009, $8.7 million for 2010, $7.9 million for 2011 and $6.6 million
for 2012 as various amortization terms expire.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Impairment
of FiberVisions goodwill
|
$ | — | $ | — | $ | 52.9 | $ | — | $ | (52.9 | ) | |||||||||
In
connection with the initial commitment to sell a majority interest in
FiberVisions at the end of 2005, the Company recorded an impairment charge of
$52.9 million.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Other
operating expense, net
|
$ | 36.9 | $ | 25.1 | $ | 39.4 | $ | 11.8 | $ | (14.3 | ) | |||||||||
During
2007, the Company incurred $28.4 million of severance, restructuring and other
exit costs, as well as $14.4 million of accelerated depreciation and
amortization charges attributable to the continued execution on several
restructuring and rationalization programs that were initiated during the
current and prior years (see Note 16 to the Consolidated
Financial Statements). The most significant active restructuring
program is the Business Infrastructure Project. The most significant
asset charge is attributable to accelerated amortization of certain capitalized
software development costs in connection with the ongoing information technology
platform upgrade. In addition, the Company incurred $8.1 million in
dismantlement, asset retirement and environmental and other
costs. These items were partially offset by gains on asset
dispositions of $12.4 million including $7.4 million related to certain PTV
intellectual property, $4.1 million attributable to the sale of the Company’s
former facility at Pendlebury, U.K., which was closed during 2006 in connection
with a manufacturing rationalization program, $0.5 million attributable to the
sale of the Company’s former research facility in Barneveld, The Netherlands and
$0.4 million related to other fixed asset and excess land
dispositions. Additionally, the Company realized $1.6 million of
legal recoveries related to a domestic product anti-dumping suit against certain
competitors.
Other
operating expense, net for 2006 reflects $21.1 million in severance benefits and
other exit costs resulting from the scheduled termination of approximately 300
employees, accelerated depreciation and amortization of $5.1 million as well as
$3.2 million of asset impairment charges primarily attributable to the Company’s
various restructuring and rationalization programs (see Note 16
to the Consolidated Financial Statements). The 2006 programs
include the Business Infrastructure Project, the segment realignment as well as
PTV’s initiation of an alliance agreement for the manufacturing and marketing of
certain rosin-based sizing products. Also included in 2006 is a
charge related to the settlement of a product liability claim for $1.3 million,
net of recoveries from insurance, site dismantlement costs of $1.6 million
primarily attributable to the Wilmington Research Center revitalization project,
$0.8 million of asset retirement and environmental charges and $1.5 million of
other miscellaneous operating costs. These costs were partially
offset by gains of $6.2 million primarily related to the disposition of excess
land at operating facilities in Parlin, New Jersey, Tarragona, Spain and Alizay,
France and a $3.3 million legal settlement, net of related costs, attributable
to a favorable judgment in the Company’s price fixing suit against certain raw
materials suppliers.
During
2005, the Company executed a number of restructuring and rationalization
programs and recorded total charges of $37.3 million, including severance and
other exit costs of $31.8 million that resulted in headcount reduction of
approximately 490 employees; asset impairments of $0.5 million (see Note 16 the Consolidated Financial Statements), accelerated
depreciation charges of $3.5 million; and inventory and spare parts write-downs
of $1.5 million. Other charges for 2005 include $0.7 million related
to legal settlements, $0.2 million of asset retirement and environmental charges
for active operating sites, losses on asset dispositions of $0.1 million and
$1.1 million for all other miscellaneous charges.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Interest
and debt expense
|
$ | 68.6 | $ | 71.2 | $ | 89.4 | $ | (2.6 | ) | $ | (18.2 | ) | ||||||||
Interest
and debt expense decreased 4% during 2007 primarily as a result of approximately
$214 million of U.S. debt repayments made during the year including those
attributable to the Term B variable rate loan, the 6.6% notes due 2027 and the
11.125% senior notes due 2007. Total interest expense reductions
attributable to these issues were approximately $9 million. Lower
interest expense on other debt issues, the absence of FiberVisions debt and
higher capitalized interest combined for an additional $1.7 million
reduction. These reductions were partially offset by a $6.4 million
lower benefit from cross-currency interest rate swaps attributable to the
weakening USD and decreasing LIBOR-based interest rates, as well as $1.7 million
attributable to higher local borrowings related to the financing of expansion
projects in China.
Interest
and debt expense for 2006 decreased 20% from 2005 as a result of lower
outstanding debt balances, primarily reflecting the Company’s repurchase of
$113.9 million of its 11.125% senior notes due 2007. The resulting
impact was a combined reduction of $15.8 million in interest and amortization of
issuance costs. Also contributing to the reduction was an offset to
interest expense of $7.1 million attributed to cross-currency interest rate
swaps, $1.0 million attributable to lower outstanding balances on the 6.5%
junior subordinated deferrable interest debentures, $0.8 million attributable to
the absence of FiberVisions debt and $0.3 million of lower credit facility
fees. These decreases were partially offset by increasing LIBOR-based
interest rates on the Company’s Term B loan resulting in $6.4 million higher
interest expense and $0.4 million related to borrowings utilized to finance
capacity expansion projects in China.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Vertac
response costs and litigation charges
|
$ | 20.3 | $ | 108.5 | $ | 15.0 | $ | (88.2 | ) | $ | 93.5 | |||||||||
Vertac-related
costs incurred during 2007 primarily reflect charges and accrued interest
attributable to a claim by the government for additional responses costs at the
Vertac site. The Company is continuing to pursue a settlement of this
matter (see Note 12 to the Consolidated Financial
Statements). In addition, charges incurred during 2007 include
interest accrued on the Vertac litigation judgment through the date of payment,
which occurred during the second quarter of 2007. As a result of a ruling during
2006 in the Vertac litigation, the Company recorded a $106.0 million charge and
continued the accrual of interest through the year. The 2006 charge
was incremental to an accrual initially provided during 2005.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Other
expense, net
|
$ | 24.0 | $ | 65.7 | $ | 71.3 | $ | (41.7 | ) | $ | (5.6 | ) | ||||||||
During
2007, the Company incurred net charges of $5.7 million attributable to legal
fees for asbestos-related litigation costs, net of interest accretion from the
asbestos insurance trusts and a downward adjustment to the asbestos litigation
reserve as determined by the independent reserve study (see Note
12 to the Consolidated Financial Statements). In addition, the
Company incurred charges of $16.1 million in settlements and legal expenses
attributable to previously divested businesses including approximately $13
million for the ABL matter, as well as $7.2 million for asset retirement and
environmental-related charges for sites associated with former
businesses. Also included is a charge for $2.8 million attributable
to an asset devaluation in connection with a dilution of the Company’s ownership
interest in FiberVisions during 2007, offset by $0.3 million related to the
reversal of accrued costs associated with the 2006 FiberVisions
transaction. Partially offsetting these charges are gains on asset
dispositions, interest and other miscellaneous income of $7.5
million. Gains on asset dispositions include $2.5 million for certain
real estate properties associated with previously divested businesses and $0.5
million attributable to the sale of the Company’s equity interest in Abieta
Chemie GmbH (“Abieta”).
During
2006, the Company incurred net charges of $29.0 million with respect to its
asbestos-related liabilities including an adjustment to reestablish the reserve
and legal expenses partially offset by accretion income from the
asbestos-insurance trusts. Also during 2006, the Company
sold a majority interest in FiberVisions for $27.0 million and realized a loss
of $13.3 million. Other expenses, net for 2006 also includes $11.4
million of premiums and debt issuance cost write-offs primarily attributable to
the repurchase of the 11.125% notes due 2007, $9.2 million for legal expenses
and settlements attributable to previously divested businesses and $6.5 million
of asset retirement and environmental-related expenses and revisions for former
operating sites, exposures at sites for which former businesses were identified
as a potentially responsible party and demolition and remediation at other
former operating sites. Partially offsetting these charges are
certain cost recoveries related to previously divested businesses, the
realization of currency translation adjustments attributable to the liquidation
of certain inactive legal entities, interest and other miscellaneous
income. The combined amount of these offsetting items was $2.3
million. The Company also realized a gain of $1.4 million on the sale
of its former operating facility in Addison, Illinois.
During 2005, the Company recorded net charges of $44.6 million to reestablish and increase its asbestos-related reserve and litigation costs partially offset by accretion income from the asbestos-insurance trusts and other related insurance and legal recoveries. The Company also incurred $7.3 million in asset retirement and environmental charges attributable to non-operating sites or related activities associated with previously divested businesses including amounts attributable to revisions in the asset retirement obligations. Other expenses, net for 2005 also included charges of $19.0 million for the settlement of several cases relating to previously divested businesses, the most significant of which related to the former Composite Products division as well as premiums of $14.3 million for repurchases of the Company’s 11.125% notes and $1.8 million for the write-off of related unamortized debt issuance costs, partially offset by a $1.9 million gain related to the repurchase of CRESTSSM units. These items were also offset by $10.9 million of gains on the disposition of the Langhorne, Pennsylvania and Burlington, New Jersey sites that were non-operating facilities associated with the previously divested water treatment and resins businesses, respectively. In addition, the Company realized other miscellaneous income of $2.9 million, net of all other miscellaneous expenses.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Benefit
for income taxes
|
$ | (20.3 | ) | $ | (192.2 | ) | $ | (3.8 | ) | $ | 171.9 | $ | (188.4 | ) | ||||||
|
Effective
tax benefit rate
|
13 | % |
Not
Meaningful
|
11 | % | |||||||||||||||
The
benefit for income taxes during 2007 was impacted primarily by a $56.6 million
benefit due to resolution with the IRS of all remaining income tax matters for
the years 1993 through 2003, and resulting interest income. The
Company also recognized a $4.9 million benefit related to income tax law changes
enacted in China, Germany, the U.K., Canada and Mexico. The change in
the valuation allowance on deferred tax assets reflects the utilization and
expiration of capital loss carryforwards and the increase in state net operating
loss carryforwards.
The
benefit for income taxes during 2006 was primarily impacted by the resolution of
substantially all issues related to Federal tax audits for the years 1993
through 2003 and the utilization of capital loss carryforwards. The
settlement of IRS audits resulted in a reversal of $44.1 million of income tax
reserves as well as $49.7 million of tax refunds and interest
income. In addition, the provision reflects a tax benefit of $102.7
million for the expected utilization of existing capital loss
carryforwards. The change in the valuation allowance for deferred tax
assets reflects utilization of the aforementioned capital loss carryforwards,
the basis difference in the carrying value of the Company’s investment in
FiberVisions and the increase in state deferred tax assets.
The
benefit for income taxes during 2005 was impacted by a $10.0 million reversal of
federal income tax reserves due to favorable resolutions of prior year tax
issues and net interest income of $2.9 million resulting from the refund of
excess cash tax deposits. These favorable benefits were offset by a
$7.1 million increase to state tax expense relating to the filing of amended
income tax returns to reflect IRS audit adjustments as well as a $7.6 million
charge related to previously undistributed foreign earnings triggered by the
transaction to sell a majority interest in FiberVisions. The change
in the valuation allowance on deferred tax assets reflects the utilization of
capital loss carryforwards, the utilization and expiration of state net
operating loss carryforwards, and the impairment charge on the carrying value of
FiberVisions.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
$ | (0.6 | ) | $ | (1.4 | ) | $ | (1.0 | ) | $ | 0.8 | $ | (0.4 | ) | ||||||
Minority
interests in earnings of consolidated subsidiaries during 2007 primarily reflect
the income attributable to the noncontrolling interests in Hercules Tianpu
partially offset by losses attributable to the noncontrolling interests in
H2H. Results during 2006 are substantially attributable to the
operations of Hercules Tianpu while 2005 reflects the impact of FiberVisions’
bicomponent fibers marketing joint venture entities.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Equity
(loss) income of affiliated companies, net of tax
|
$ | (0.1 | ) | $ | (3.2 | ) | $ | 0.5 | $ | 3.1 | $ | (3.7 | ) | |||||||
Equity
losses during 2007 primarily reflect losses attributable to FiberVisions,
partially offset by equity earnings attributable to the Company’s investment in
Pakistan Gum Industries (“PGI”) and earnings from Abieta prior to the Company’s
disposition of its interest therein. The equity loss for 2006 primarily reflects
losses attributable to FiberVisions subsequent to the disposition of the
Company’s majority ownership interest. Equity earnings during 2005
reflect income attributable to PGI and Abieta.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Net
income (loss) from discontinued operations, net of tax
|
$ | 8.0 | $ | 47.0 | $ | (6.5 | ) | $ | (39.0 | ) | $ | 53.5 | ||||||||
Net
income from discontinued operations for 2007 and 2006 includes $1.4 million and
$48.7 million, respectively, attributable to the reversal of various income tax
reserves with respect to the resolution and expiration of certain indemnity
matters as well as completion and settlement of IRS audits for 2002 and
2003. Also included in income for 2007 is $6.6 million resulting from
the reversal of estimated taxes payable for previously disposed legal entities.
These reserves were established in connection with the Betz Dearborn water
treatment business disposition which was classified as a discontinued operation
effective 2001. In addition, discontinued operations for the years
2006 and 2005 reflect the results of operations from the Company’s terpenes
specialties business. Net sales included therein are $2.5 million
and $13.7 million for 2006 and 2005, respectively. The
terpenes specialties business generated pre-tax operating losses of $2.6 million
and $9.9 million for 2006 and 2005, respectively, including restructuring
charges and other exit costs as well as asset impairment charges of $1.6 million
and $8.1 million for 2006 and 2005, respectively.
|
2007
|
2006
|
2005
|
2007
Change
|
2006
Change
|
||||||||||||||||
|
Cumulative
effect of changes in accounting principle, net of tax
|
$ | — | $ | 0.9 | $ | (2.5 | ) | $ | (0.9 | ) | $ | 3.4 | ||||||||
As a
result of the adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payments” effective January 1, 2006, the Company
recorded a $0.9 million benefit, net of income taxes, as a cumulative effect of
a change in accounting principle (see Note 20 to the
Consolidated Financial Statements). Effective December 31, 2005, the
Company adopted the provisions of FASB Interpretation No. 47, “Conditional Asset
Retirement Obligations – an Interpretation of FASB Statement No. 143” and
recognized a cumulative effect adjustment of $2.5 million, net of tax (see Note 20 to the Consolidated Financial
Statements).
Results of Operations – Segment Review
The
tables below reflect Net sales and Profit from operations for the comparative
periods 2007 as compared to 2006 and 2006 as compared to 2005,
respectively.
|
2007
|
2006
|
Change
|
%
Change
|
|||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
||||||||||||||||
|
Paper
Technologies
|
$ | 903.4 | $ | 845.7 | $ | 57.7 | 7 | % | ||||||||
|
Ventures
|
247.2 | 229.6 | 17.6 | 8 | % | |||||||||||
| 1,150.6 | 1,075.3 | 75.3 | 7 | % | ||||||||||||
|
Aqualon
Group
|
||||||||||||||||
|
Coatings
& Construction
|
476.0 | 420.2 | 55.8 | 13 | % | |||||||||||
|
Regulated
|
241.6 | 225.3 | 16.3 | 7 | % | |||||||||||
|
Energy
& Specialties
|
268.0 | 245.3 | 22.7 | 9 | % | |||||||||||
| 985.6 | 890.8 | 94.8 | 11 | % | ||||||||||||
|
FiberVisions
|
— | 69.2 | (69.2 | ) |
NM
|
|||||||||||
|
Consolidated
|
$ | 2,136.2 | $ | 2,035.3 | $ | 100.9 | 5 | % | ||||||||
|
Profit
from operations:
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
$ | 113.6 | $ | 80.8 | $ | 32.8 | 41 | % | ||||||||
|
Aqualon
Group
|
199.0 | 187.4 | 11.6 | 6 | % | |||||||||||
|
FiberVisions
|
— | 0.5 | (0.5 | ) |
NM
|
|||||||||||
|
Corporate
Items
|
(48.4 | ) | (20.1 | ) | (28.3 | ) |
NM
|
|||||||||
|
Consolidated
|
$ | 264.2 | $ | 248.6 | $ | 15.6 | 6 | % | ||||||||
|
2006
|
2005
|
Change
|
%
Change
|
|||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
||||||||||||||||
|
Paper
Technologies
|
$ | 845.7 | $ | 810.7 | $ | 35.0 | 4 | % | ||||||||
|
Ventures
|
229.6 | 206.6 | 23.0 | 11 | % | |||||||||||
| 1,075.3 | 1,017.3 | 58.0 | 6 | % | ||||||||||||
|
Aqualon
Group
|
||||||||||||||||
|
Coatings
& Construction
|
420.2 | 356.4 | 63.8 | 18 | % | |||||||||||
|
Regulated
|
225.3 | 174.1 | 51.2 | 29 | % | |||||||||||
|
Energy
& Specialties
|
245.3 | 224.5 | 20.8 | 9 | % | |||||||||||
| 890.8 | 755.0 | 135.8 | 18 | % | ||||||||||||
|
FiberVisions
|
69.2 | 282.7 | (213.5 | ) | (76 | )% | ||||||||||
|
Consolidated
|
$ | 2,035.3 | $ | 2,055.0 | $ | (19.7 | ) | (1 | )% | |||||||
|
Profit
from operations:
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
$ | 80.8 | $ | 61.4 | $ | 19.4 | 32 | % | ||||||||
|
Aqualon
Group
|
187.4 | 155.5 | 31.9 | 21 | % | |||||||||||
|
FiberVisions
|
0.5 | (64.9 | ) | 65.4 |
NM
|
|||||||||||
|
Corporate
Items
|
(20.1 | ) | (11.7 | ) | (8.4 | ) | (72 | )% | ||||||||
|
Consolidated
|
$ | 248.6 | $ | 140.3 | $ | 108.3 | 77 | % | ||||||||
NM = not
meaningful
Paper
Technologies and Ventures
2007 compared to
2006
|
Net
Sales Percentage Increase (Decrease) from 2006 Due To:
|
||||||||||||||||||||
|
Volume
|
Product
Mix
|
Price
|
Rates
of Exchange
|
Total
|
||||||||||||||||
|
Paper
Technologies
|
4 | % | (1 | )% | — | 4 | % | 7 | % | |||||||||||
|
Ventures
|
2 | % | — | 4 | % | 2 | % | 8 | % | |||||||||||
| 4 | % | (2 | )% | 1 | % | 4 | % | 7 | % | |||||||||||
PTV’s
overall sales growth reflects continued expansion in higher-growth markets as
well as progress with new product introductions which represent approximately
24% of total sales. In addition, PTV realized the beneficial impact
of various currencies, primarily the Euro, strengthening against the
USD. Pricing was favorable primarily in the Americas region partially
offset by lower pricing in both Europe and the Asia Pacific
region. As discussed further below, product mix was impacted by the
rosin-sizing product alliance which began in the second half of
2006.
Paper
Technologies Sales
Paper
Technologies’ volume growth was achieved in the Americas and in Europe, whereas
volume in Asia was lower. In the Asia Pacific region, declines in China, Taiwan
and Korea were partially offset by improvement in
Indonesia. Excluding the Asia Pacific region, strong growth continues
to be achieved in the higher-growth markets, particularly Brazil, Eastern
Europe, Russia, Africa and the Middle East. In the aggregate, sales in
higher-growth markets increased 20% as compared to 2006. Price
increases were achieved in North America primarily to recover raw material cost
increases, but were essentially offset by lower pricing in Europe and the
functional product portfolio in Asia. Product mix was impacted by the
rosin-sizing product alliance whereby PTV is the exclusive distributor for these
products produced by MeadWestvaco. The overall effect resulted in an
increase in volume for lower-margin products. The alliance activity
reached full operating scale during 2007 as compared to 2006 during which
activity did not begin until the second half of the year.
Ventures
Sales
Sales
growth was achieved in all of the Ventures businesses, particularly Water
Treatment and Building and Converted products. Pricing increased
across the entire Ventures portfolio with particular success in the Lubricants
business in response to market increases in the cost of
methanol. Product mix was adversely impacted by higher volume
associated with lower-priced adhesive products in the Building and Converted
products business as well as toll-produced Water treatment chemicals,
substantially offset by certain Pulp and Water treatment
products. The favorable impact of ROE is primarily attributable to
Venture products sold in Europe and Latin America.
PTV
2007 Profitability
|
Analysis
of Changes in Profitability
|
||||||||
|
2006
Profit from operations
|
$ | 80.8 | ||||||
|
Changes
due to:
|
||||||||
|
Volume
|
14.3 | |||||||
|
Product
mix
|
(4.2 | ) | ||||||
|
Price
|
11.2 | |||||||
|
Raw
material, transportation and energy costs
|
(8.5 | ) | ||||||
|
All
other manufacturing costs
|
(6.6 | ) | ||||||
|
Asset
dispositions
|
5.0 | |||||||
|
ROE
|
6.6 | |||||||
|
SG&A
and other expenses
|
5.9 | |||||||
|
Restructuring,
severance and other exit costs, accelerated depreciation and other
charges
|
9.1 | |||||||
|
Net
change
|
32.8 | |||||||
|
2007
Profit from operations
|
$ | 113.6 | ||||||
Profit
from operations during 2007 increased by 41% as compared to 2006 reflecting the
favorable impact of volume, price, ROE, lower SG&A and lower
restructuring-related charges partially offset by higher manufacturing-related
costs. The 2007 period also reflects $7.4 million related to a gain
on the sale of certain intellectual property as compared to a gain of $2.9
million related to the sale of excess land at the Tarragona, Spain facility
during the 2006 period. SG&A costs decreased primarily as a
result of lower support costs, and lower patent defense costs and bad debt
charges partially offset by increased personnel-related costs to
support strategic growth initiatives. The decrease in patent defense
costs reflects a settlement that was reached at the end of 2006.
Higher
raw material costs of $15.3 million reflect increases in the prices of tall oil
rosins, epichlorohydrin, and fatty and adipic acid partially offset by favorable
variances for Chinese gum rosin, methanol, acetaldehyde and sodium
hydroxide. These cost increases were partially offset by lower
transportation and energy costs for a combined decrease of $6.8
million. These decreases were primarily attributable to lower
transportation costs as a result of mix improvement, carriers billing certain
customers directly and lower negotiated rates for certain services with
Hercules’ preferred distribution network.
Severance, restructuring and other exit costs and accelerated depreciation during 2007 resulted in combined charges of $5.7 million as compared to $14.8 million during 2006. The decrease is primarily attributable to significant actions during the 2006 period with respect to defined restructuring programs for: (1) research and development consolidation, (2) rationalization of manufacturing capacity including the closure of PTV’s Pendlebury facility in the U.K., (3) the alliance with MeadWestvaco and (4) the business segment realignment. During 2007, PTV initiated plans to exit production activities at its Mexico City, Mexico manufacturing facility during 2008. As a part of this rationalization program, the Company will terminate the workforce at that facility upon the completion of various closure activities. Severance and termination benefits are being accrued over the period of continued service required of these individuals. In order to maintain its position in Mexico, the Company has appointed an exclusive distributor in Mexico and has contracted with that party to produce certain paper chemical products under a royalty-bearing license agreement. In addition, PTV initiated a restructuring action during 2007 at its Voreppe, France manufacturing facility in connection with continuing efforts to realign its European operating profile.
PTV
Outlook
PTV
expects to continue to sustain growth in certain higher-growth markets,
particularly in non-Western Europe and South America while addressing product
mix challenges in the Asia Pacific region. In addition, PTV continues
to focus its efforts on its successful new product launch strategy with an
emphasis on developing higher-value, higher-margin products to improve the
overall sales mix. During 2007, PTV invested in the H2H joint venture
to expand the development of adhesive products for wood laminates and composites
that comply with new formaldehyde emission standards.
2006 compared to
2005
|
Net
Sales Percentage Increase (Decrease) from 2005 Due To:
|
||||||||||||||||||||
|
Volume
|
Product
Mix
|
Price
|
Rates
of Exchange
|
Total
|
||||||||||||||||
|
Paper
Technologies
|
1 | % | — | 2 | % | 1 | % | 4 | % | |||||||||||
|
Ventures
|
(3 | )% | 9 | % | 4 | % | 1 | % | 11 | % | ||||||||||
| — | 1 | % | 4 | % | 1 | % | 6 | % | ||||||||||||
Overall,
improved performance in the Americas offset challenging economic conditions in
the Western European paper market. Volume growth was achieved in the
Americas and in the Asia Pacific region offsetting declines in
Europe. Increased pricing was achieved in all regions with higher
increases in the Americas and Asia, as opposed to Europe where price increases
were more modest. In addition, revenues in higher-growth markets
including Brazil, China, the Middle East and Africa exceeded prior year
levels.
Paper
Technologies Sales
Paper
Technologies’ volume increase is primarily attributable to the marketing and
manufacturing alliance for rosin size products partially offset by the impact of
customer bankruptcies and mill closures, particularly in Southern
Europe. Price increases were achieved in all regions of the world
with the largest increase attributable to the Americas. Product mix
was essentially flat as variances reflect higher sales of lower-priced
functional products in both North America and higher-growth Asia Pacific markets
substantially offset by higher priced process chemicals reflecting the success
of new product introductions.
Ventures
Sales
Ventures’
sales increase reflects improved product mix as well as higher pricing and
favorable ROE partially offset by lower volume. The improved mix
reflects higher sales of water management, lubricants and adhesive
products.
PTV
2006 Profitability
|
Analysis
of Changes in Profitability
|
||||||||
|
2005
Profit from operations
|
$ | 61.4 | ||||||
|
Changes
due to:
|
||||||||
|
Volume
|
(1.3 | ) | ||||||
|
Product
mix
|
3.3 | |||||||
|
Price
|
37.9 | |||||||
|
Raw
material, transportation and energy costs
|
(36.8 | ) | ||||||
|
All
other manufacturing costs
|
(1.1 | ) | ||||||
|
Asset
dispositions
|
2.6 | |||||||
|
ROE
|
1.8 | |||||||
|
SG&A
and other expenses
|
6.4 | |||||||
|
Restructuring,
severance and other exit costs, accelerated depreciation and other
charges
|
6.6 | |||||||
|
Net
change
|
19.4 | |||||||
|
2006
Profit from operations
|
$ | 80.8 | ||||||
Profit
from operations increased 32% during 2006 as compared to 2005. The
increase reflects improved selling prices, which contributed to the recovery of
higher raw material, transportation and energy costs, as well as favorable
product mix and ROE. The disposal of excess land at the Tarragona,
Spain facility resulted in a realized gain of $2.9 million. In
addition, PTV incurred lower SG&A expenses primarily as a result of the
significant restructuring actions taken during 2006 and
2005. Additionally, legal fees associated with patent defense costs
during 2006 were substantially lower than 2005 as the patent infringement suit
was settled at the end of 2006. These decreases were partially offset
by higher corporate support costs, primarily related to incentive compensation,
as well as higher bad debt accruals.
Primarily
as a result of the rapid escalation in costs experienced in the second half of
2005 and continuing into 2006, overall costs for raw material, transportation
and energy for 2006 increased over 2005 levels. In addition to
energy-related price pressure, supply for certain raw materials in certain
regions was constrained. In particular, crude tall oil rosin prices
were at high levels due to high demand and limited supply, particularly in
Europe. Increased demand for gum rosin in the Asia Pacific region,
particularly due to domestic consumption in China and certain weather events,
resulted in higher costs during 2006. Additionally, pricing for
adipic acid and epichlorohydrin was stable at relatively high levels and prices
for methanol increased sharply due to outages and supplier force majeure
actions.
With
respect to restructuring actions, PTV recorded charges of $10.5 million during
2006 for severance benefits and other exit costs primarily attributable to
efforts to de-layer management and streamline the sales and marketing
organization in connection with the segment realignment as well as the
manufacturing rationalization attributable to PTV’s rosin-sizing product
alliance transaction. These costs also include charges attributable
to the closing of the research facility in Jacksonville, Florida and its related
relocation to Wilmington, Delaware. PTV results reflect $3.1 million
of accelerated depreciation charges of which $2.1 million was attributable to
the closure of the Pendlebury, U.K. manufacturing facility during the first
quarter of 2006. The remaining $1.0 million was related to the
closing of the Jacksonville facility and the shut-down of certain production
lines at manufacturing facilities in connection with the aforementioned
alliance.
Aqualon
Group
2007 compared to
2006
|
Net
Sales Percentage Increase (Decrease) from 2006 Due To:
|
||||||||||||||||||||
|
Volume
|
Product
Mix
|
Price
|
Rates
of Exchange
|
Total
|
||||||||||||||||
|
Coatings
& Construction
|
11 | % | (4 | )% | 1 | % | 5 | % | 13 | % | ||||||||||
|
Regulated
|
(1 | )% | 4 | % | 2 | % | 2 | % | 7 | % | ||||||||||
|
Energy
& Specialties
|
13 | % | (7 | )% | 1 | % | 2 | % | 9 | % | ||||||||||
|
|
9 | % | (2 | )% | 1 | % | 3 | % | 11 | % | ||||||||||
All of
Aqualon’s business units had increased sales during 2007 as compared to
2006. Volume increases benefited broadly from additions to capacity
brought on-line during the year as well as the impact of acquisitions during
2007 and those initiated during 2006. Pricing increases were achieved
in all of Aqualon’s business units during the 2007 period. In
addition, Aqualon realized the beneficial impact of various currencies,
primarily the Euro, strengthening against the USD.
Coatings
and Construction Sales
Sales
into the Coatings markets increased 13% during 2007 reflecting substantial
growth in all major regions of the world with the exception of North
America. Sales increased in Europe by 18%, the Asia Pacific region by
24% and Latin America by 30%. North American sales increased slightly
compared to 2006. However, this reflects an overall decline primarily
attributable to challenges in the U.S. housing market that was substantially
mitigated by the impact of the Dexter acquisition. Absent the
accretive impact of the Dexter acquisition, sales in North America declined by
4%. Aqualon continues to have success with its synthetic thickener,
Aquaflow®, which offset a
portion
of the domestic decline in the hydroxyethylcellulose (“HEC”) Natrosol® product
lines. Aqualon is currently expanding its capacity in this
fast-growing product line. Aqualon continues to successfully drive
growth in part due to the pursuit of its adjacency strategy which includes
additional product platforms. Specifically, Aqualon continues to grow
the recently acquired surfactants product line for the coatings industry,
including markets outside of North America.
Sales
into the Construction markets were higher by 13% on a global basis during 2007
as compared to 2006, primarily as a result of higher volume. Strong
growth in the Asia Pacific region, Europe and Latin America offset declines in
North America. Asia Pacific sales growth of 48% reflects the improved
operability of Aqualon’s methylcellulose (“MC”) joint venture, Hercules Tianpu,
in China. The joint venture’s facility was operating at near capacity
in the latter part of the fourth quarter of 2007.
In mid
January 2008, the joint venture experienced a setback due to an incident at its
manufacturing facility. After a thorough investigation, Hercules
Tianpu expects to bring the operation back on line to meet customer orders and
return to full operational capability during the first quarter of
2008. It is expected that the overall financial impact on the Company
will be minimal.
Regulated
Industries Sales
Regulated
Industries’ sales increased primarily as a result of improved product mix
reflecting a higher proportion of sales into higher-priced pharmaceutical and
personal care markets. Despite growth achieved in Europe and China,
overall volume declined in the United States primarily due to a customer plant
consolidation and the adverse impact of associated order
patterns. Overall price increases were achieved in many of the
regulated end-markets. In addition, Aqualon initiated a
rationalization of certain regulated product lines due to raw material
availability and cost. Aqualon anticipates this business to return to
a more typical order pattern in the first quarter of 2008.
Energy
and Specialties Sales
Energy
and Specialties’ sales increased during 2007 reflecting increases in both
specialty and oilfield volume. Increases in specialty sales reflect
growth in most regions of the world. Oilfield sales growth was
achieved primarily in the United States partially offsetting declines in Europe
and the Middle East primarily due to formulation changes and order patterns
attributable to certain Middle East customers. Pricing and ROE in the
aggregate provided a component of the annual increase as well. The
unfavorable product mix is primarily attributable to a higher portion of guar
versus other oilfield product sales, including HEC, among others.
Aqualon
2007 Profitability
|
Analysis
of Changes in Profitability
|
||||||||
|
2006
Profit from operations
|
$ | 187.4 | ||||||
|
Changes
due to:
|
||||||||
|
Volume
|
27.4 | |||||||
|
Product
mix
|
(10.4 | ) | ||||||
|
Price
|
10.0 | |||||||
|
Raw
material, transportation and energy costs
|
(8.5 | ) | ||||||
|
All
other manufacturing costs
|
(0.9 | ) | ||||||
|
Asset
dispositions
|
(2.8 | ) | ||||||
|
ROE
|
3.7 | |||||||
|
SG&A
and other expenses
|
(7.3 | ) | ||||||
|
Restructuring,
severance and other exit costs and accelerated depreciation and other
charges
|
0.4 | |||||||
|
Net
change
|
11.6 | |||||||
|
2007
Profit from operations
|
$ | 199.0 | ||||||
Profit
from operations increased 6% during 2007 as compared to 2006
period. The increase reflects higher volume and the associated
contribution margin, increased selling prices and favorable ROE as discussed
above. Higher raw material costs are primarily attributable to price
increases for cotton linters and monochloroacetic acid partially offset by
favorable prices for caustic applicable to carboxymethylcellulose (“CMC”)
products and higher prices for methylchloride and caustic applicable to MC
products, primarily in China. In addition, Aqualon incurred increased
supply chain and start-up costs primarily associated with the expanded MC
capacity at the Hercules Tianpu facility in China. Also reflected are
higher start-up costs and third party purchases for resale associated with the
delayed start-up of an additional CMC production line in Jiangmen,
China. This line, which was originally scheduled to begin operation
in July 2007, commenced operations in the fourth quarter of 2007 and began
qualifying product with customers and regulatory agencies. It is anticipated to
be fully operational in the first quarter of 2008.
SG&A
costs were higher during 2007 reflecting increased sales, marketing, business
management, technology and other spending to support growth partially offset by
lower corporate allocations. In addition, both 2007 and 2006 reflect
gains on the sale of excess land at certain operating
facilities. Total gains during 2007 were $2.8 million lower than 2006
which contributed to the unfavorable variance during 2007.
Severance,
restructuring and other exit costs were lower during 2007 as compared to 2006,
primarily as a result of significant actions during the 2006 period impacting a
larger group of employees with respect to restructuring programs for the
realignment of the Company’s business segments. However, the 2007
period included the termination of a portion of the production personnel at the
Company’s Dalton, Georgia manufacturing facility related to the discontinuation
of guar production at that facility and the related transfer to the Kenedy,
Texas manufacturing facility. The production of guar derivatives will
continue at the Dalton site.
Aqualon
Outlook
Aqualon
expects global markets, particularly higher-growth markets in China and Eastern
Europe, to continue to provide healthy sales and operating profit growth
prospects. However, conditions are expected to remain challenging in
the North American coatings and construction markets consistent with
difficulties in the U.S. housing market. Volume growth and
profitability is anticipated to continue across all of Aqualon’s businesses as
availability and utilization of expanded capacity increases into
2008. Pricing increases, many of which have been implemented heading
into 2008 are expected to offset the rising cost environment with respect to raw
materials. Additional capacity for HEC is planned in connection with
the construction of a new facility in Nanjing, China. This facility
is expected to be operational in the fourth quarter of 2009. In
addition, new product development in connection with Aqualon’s adjacency
strategy is anticipated to provide an increasing proportion of sales growth in
future periods. The proportion of sales of products less than five
years old increased to 22% in 2007 as compared to 18% in 2006. There
have been several recent new product introductions including Aquaflow®,
fast-hydrating guar for the energy sector, the N-Hance® product line for
personal care and Culminal® products for tile cement.
2006 compared to
2005
|
Net
Sales Percentage Increase (Decrease) from 2005 Due To:
|
||||||||||||||||||||
|
Volume
|
Product
Mix
|
Price
|
Rates
of Exchange
|
Total
|
||||||||||||||||
|
Coatings
& Construction
|
26 | % | (5 | )% | (3 | )% | — | 18 | % | |||||||||||
|
Regulated
|
15 | % | 7 | % | 7 | % | — | 29 | % | |||||||||||
|
Energy
& Specialties
|
13 | % | (6 | )% | 2 | % | — | 9 | % | |||||||||||
|
|
24 | % | (7 | )% | 1 | % | — | 18 | % | |||||||||||
Aqualon’s
sales increased during 2006 primarily as a result of the acquisition of the guar
and guar derivatives business from Benchmark and the consolidation of Hercules
Tianpu. Despite the overall unfavorable impact on product mix,
Aqualon experienced increased sales in all of its business lines.
Coatings
and Construction Sales
Coatings
and Construction sales were strong in most regions, including Europe, which
recovered from the general decline experienced during 2005. Sales of
Coatings products into the Middle East and the Asia Pacific region were
especially strong during 2006 while North American growth was
lower. Sales of Construction products were also strong in Eastern
European and other higher-growth markets. Pricing for Coatings
products was up slightly during 2006, while pricing for Construction products
was lower as a result of pricing challenges in the MC construction products
markets.
Regulated
Industries Sales
Regulated
industry sales increased during 2006 as compared to 2005 reflecting an improved
mix attributable to a greater concentration of higher-priced products sold into
the food and pharmaceutical markets. Price increases were achieved in
food and pharmaceutical products, whereas personal care was
lower. Volume increased in many end-markets and regions, including
China, reflecting higher pharmaceutical and personal care product
sales.
Energy
and Specialties Sales
Energy
and Specialties sales increased during 2006 as compared to 2005 primarily due to
the acquisition of the guar and guar derivatives business which accounted for
over half of the total sales increase. Demand in the natural gas and
oil services sector was also strong and price increases were achieved in
oilfield and many specialty product families.
Aqualon
2006 Profitability
|
Analysis
of Changes in Profitability
|
||||||||
|
2005
Profit from operations
|
$ | 155.5 | ||||||
|
Changes
due to:
|
||||||||
|
Volume
|
70.4 | |||||||
|
Product
mix
|
(35.2 | ) | ||||||
|
Price
|
9.9 | |||||||
|
Raw
material, transportation and energy costs
|
(14.2 | ) | ||||||
|
All
other manufacturing costs
|
7.1 | |||||||
|
Asset
dispositions
|
3.3 | |||||||
|
ROE
|
— | |||||||
|
SG&A
and other expenses
|
(9.0 | ) | ||||||
|
Restructuring,
severance and other exit costs and accelerated depreciation and other
charges
|
(0.4 | ) | ||||||
|
Net
change
|
31.9 | |||||||
|
2006
Profit from operations
|
$ | 187.4 | ||||||
Profit
from operations for Aqualon increased 21% during 2006 as compared to
2005. The increase was primarily attributable to the higher volume
and prices and the associated contribution margin partially offset by higher raw
material and energy costs. Raw material and energy costs increased
reflecting the increase in costs during the latter half of 2005 that continued
into 2006. Specifically, raw materials including ethylene oxide, guar
splits, methyl chloride, propylene oxide, caustic, gum rosin and limonene all
experienced significant increases from the prior year. Lower
transportation costs more than offset higher energy costs, the majority of which
was related to Europe as a result of the expiration of a long-term fixed price
utility contract. Pricing increases captured approximately 70% of
these costs. However, downward pricing pressure continued in the MC
construction product lines throughout most of 2006.
SG&A
costs were higher compared to the prior year, primarily reflecting increased
sales and marketing, business management, incentive compensation and technology
costs incurred to support growth initiatives as well as the impact of the
consolidation of Hercules Tianpu. These costs were partially offset
by net realized gains of $3.2 million primarily attributable to the sale of
excess land at the Parlin, New Jersey and Alizay, France facilities as compared
to a net loss on asset dispositions of $0.1 million during 2005.
Aqualon
incurred $3.7 million of restructuring charges, including severance, during 2006
that were attributable to headcount reductions designed to delayer the
management and sales and marketing organizations consistent with the segment
realignment. In addition, contract termination costs of $0.4 million
were incurred in connection with restructuring global distribution
networks. These compared to similar restructuring-related charges of
$3.7 million during 2005.
FiberVisions
Effective
April 1, 2006, the Company recognizes its proportionate equity interest in the
earnings of FiberVisions within the caption Equity (loss) income of affiliated
companies, net of tax. During 2007 and 2006, the Company recognized
$1.5 million and $3.4 million of losses attributable to FiberVisions,
respectively. FiberVisions’ results of operations for the three
months ended March 31, 2006 are included in the Company’s consolidated results
of operations. During that period, FiberVisions had sales of $69.2
million and Profit from operations of $0.5 million. During 2005,
FiberVisions’ sales and loss from operations were $282.7 million and $64.9
million, respectively, which reflect a full year of majority
ownership.
Corporate
Items
The
Company allocates substantially all of its corporate support costs to the
business segments. These costs include those related to cash
management, treasury, legal, accounting and audit, tax, safety, information
technology and other corporate services. Allocations are based on
either a direct cost pass-through for items directly identified as related to
segment activities; a percentage allocation for such services provided based on
factors such as headcount, sales, net assets or cost of sales; or a relative
weighting of geographic activity.
Corporate
items include certain charges and credits that have not been allocated to the
business segments. The most significant of these items typically
appear in Other operating expense, net, although portions are also reflected in
Cost of sales and SG&A, respectively, depending upon the specific nature of
the items.
The
following table reflects the components of those unallocated Corporate
items.
|
2007
|
2006
|
2005
|
||||||||||
|
Severance,
restructuring and other exit costs
|
$ | 19.6 | $ | 6.5 | $ | 7.5 | ||||||
|
Asset
charges (impairments and accelerated
depreciation/amortization)
|
14.2 | 5.2 | 0.5 | |||||||||
|
Legal
settlements
|
— | (3.1 | ) | 0.1 | ||||||||
|
Gains
on asset dispositions
|
(4.7 | ) | — | (0.3 | ) | |||||||
|
Dismantlement
costs
|
3.1 | 1.5 | — | |||||||||
|
Unallocated
corporate costs
|
12.8 | 7.9 | — | |||||||||
|
Other
miscellaneous charges, net
|
3.4 | 2.1 | 3.9 | |||||||||
|
Total
Corporate items
|
$ | 48.4 | $ | 20.1 | $ | 11.7 | ||||||
Severance,
restructuring and other exit costs incurred during 2007 primarily reflect
amounts attributable to the Business Infrastructure Project which encompasses
outsourcing and offshoring service arrangements for various
functions. As these functions are transferred to external service
providers, the Company is incurring severance costs for employees required to
provide services during the transition periods as well as related exit costs and
other implementation charges. Ancillary to the Business
Infrastructure Project is the IT upgrade, which has resulted in $13.7 million of
accelerated amortization of capitalized software development costs during the
transition period. The accelerated amortization charges and
restructuring costs are expected to continue into 2008 and 2009,
respectively. Corporate items also includes unallocated corporate
costs, costs associated with the dismantlement of inactive portions of certain
manufacturing facilities and miscellaneous other operating expenses including
costs to prepare certain properties for disposition. These items were
partially offset by net gains on the disposition of assets including $4.6
million attributable to the sale of the Company’s former facilities at
Pendlebury, U.K. and Barneveld, The Netherlands, in connection with the
manufacturing rationalization and Research and Development consolidation
restructuring programs, respectively.
Severance,
restructuring and other exit costs for 2006 reflect charges related to the
Research and Development consolidation and Business Infrastructure Project and
include severance charges attributable to the termination of approximately 220
employees. Also included are relocation fees, restructuring and other
exit costs associated with these programs. Total asset charges of
$5.2 million include accelerated depreciation on certain assets at the
Wilmington, Delaware Research Center and accelerated depreciation and impairment
of certain capitalized software costs in connection with the planned IT
upgrade. Legal settlements in 2006 primarily reflect a favorable
judgment in the Company’s price fixing suit against certain raw materials
suppliers. Dismantlement costs are primarily attributable to the
revitalization project at the Wilmington Research facility. As a
result of the FiberVisions transaction, Corporate items include $7.9 million of
general administrative costs that would have otherwise been allocated to the
FiberVisions reporting segment.
Severance,
restructuring and other exit costs for 2005 reflect charges related to the
Corporate Realignment and Research and Development consolidation restructuring
programs and include severance charges attributable to the termination of 50
employees. Also included are relocation costs attributable to the
European headquarters in Schaffhausen, Switzerland and accelerated depreciation
charges related to the Wilmington research facility. Corporate items
for 2005 also include professional fees incurred to resolve certain legacy
business matters, miscellaneous legal settlements and gains on asset
dispositions, among a number of other miscellaneous items.
Analysis
of Cash Flows
|
Operating Activities
|
2007
|
2006
|
||||||
|
Net
income, depreciation, amortization and all other non-cash charges and
credits
|
$ | 312.6 | $ | 194.3 | ||||
|
Changes
in working capital, net
|
(19.1 | ) | (13.4 | ) | ||||
|
All
other sources and uses of cash
|
6.4 | (8.0 | ) | |||||
|
Net
cash provided by operating activities
|
$ | 299.9 | $ | 172.9 | ||||
Net cash
provided by operating activities increased $127.0 million during 2007 as
compared to 2006. The change primarily reflects the net impact during
2007 of the receipt of approximately $222 million of income tax refunds
associated with the settlement of issues with the IRS for the years 1993 through
2003 partially offset by the payment of a $124.5 million judgment in connection
with the Vertac litigation and a payment of approximately $13 million in
connection with the settlement of the ABL matter.
Aside
from the aforementioned significant cash flow events there were a number of
additional discrete cash flow changes that impacted the variance between
periods. The most significant among these is an increase of $35.6
million attributable to amounts received from the asbestos settlement trusts in
excess of settlement payments. This change includes the receipt of
$41.3 million related to the liquidation of one of the settlement trusts during
2007. Payments for severance and termination benefits were $7.2
million lower during 2007 compared to the prior year due to payments to a larger
group of employees impacted by actions that were initiated during 2005 and early
in
2006.
While there are currently a number of employees impacted by ongoing
restructuring programs including the Business Infrastructure Project, the timing
of payments of severance and termination benefits are dispersed over a greater
number of periods based on the longer transition periods unique to this
program. Payments for defense costs primarily associated with PTV’s
patent defense litigation were lower by $3.6 million during 2007 primarily as a
result of the completion and settlement of that action during the fourth quarter
of 2006. Settlements of asset retirement obligations and
environmental contingencies decreased by $7.7 million during 2007 primarily due
to the timing of various remediation and work plans. These decreases
in cash disbursements were partially offset by company contributions to its
defined benefit pension plans that were $46.8 million higher than
2006. Increased working capital usage over 2006 levels primarily
reflects higher accounts receivable and inventories attributable to growth in
the business.
|
Investing Activities
|
2007
|
2006
|
||||||
|
Capital
expenditures
|
$ | 118.3 | $ | 93.6 | ||||
|
Acquisitions
and investments, net
|
16.5 | 29.4 | ||||||
|
Proceeds
from asset and investment dispositions and all other sources,
net
|
(17.1 | ) | (28.9 | ) | ||||
|
Net
cash used in investing activities
|
$ | 117.7 | $ | 94.1 | ||||
Net cash
used in investing activities increased $23.6 million during 2007 as compared to
2006. Capital expenditures increased by $24.7 million primarily as a
result of Aqualon’s capacity expansion projects at both its MC and CMC
manufacturing facilities in China as well as PTV’s synthetic lubricants
expansion at its Louisiana, Missouri manufacturing facility. During
2007, the Company made cash payments of $10.6 million and $5.0 million in
connection with the acquisition of the Dexter specialty surfactants business and
the formation of the H2H technology venture, respectively. In addition, a $1.4
million earn-out payment was made to Benchmark Performance Group, Inc. (“BPG”)
during 2007 based on the 2006 performance of the guar and guar derivatives
business that was acquired by the Company from BPG at the beginning of 2006 (the
“Benchmark Acquisition”). This payment was partially offset by a $0.5
million payment received from BPG in connection with the Company’s $2.5 million
loan to BPG during 2006 as well. Acquisitions and investments during
2006 reflect the Benchmark Acquisition, a capital contribution made in
connection with the formation of the Hercules Tianpu joint venture and the
acquisition of the remaining 40% ownership interest in Shanghai
Hercules.
Investing
outflows during 2007 were partially offset by $14.1 million attributable to the
receipt of proceeds, net of transaction costs, from the disposition of various
properties including the Company’s facilities in Pendlebury, U.K., Barneveld and
Rijswijk, The Netherlands and certain real estate holdings in California and New
Jersey as well as other miscellaneous retired fixed assets. In
addition, total proceeds for 2007 includes $4.2 million, net of transaction
costs, attributable to the disposition of the Company’s minority interest
investment in Abieta.
In
connection with the sale of the Company’s 51% interest in FiberVisions during
2006, the Company received $27.0 million in proceeds, less transaction
costs. During 2007, the Company completed its final requirement to
provide an additional $1.2 million contribution to FiberVisions based on its
performance through the first quarter of 2007.
|
Financing Activities
|
2007
|
2006
|
||||||
|
Long-term
debt payments
|
$ | (216.8 | ) | $ | (142.5 | ) | ||
|
Long-term
debt proceeds and changes in short-term debt
|
13.2 | 27.8 | ||||||
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
— | 83.7 | ||||||
|
Repurchases
of common stock and dividends paid
|
(51.8 | ) | — | |||||
|
Proceeds
from the exercise of stock options and all other sources,
net
|
7.8 | 42.6 | ||||||
|
Net
cash (used in) provided by financing activities
|
$ | (247.6 | ) | $ | 11.6 | |||
During
2007, the Company made principal payments of: $114.0 million on its
Term B loan due 2010, $84.1 million in connection with bond holders’ exercise of
a put option with respect to the 6.6% notes due 2027, retired its 11.125% senior
notes due 2007 with a final payment of $16.1 million at maturity and $2.6
million on long-term borrowings in China. Debt principal payments
during 2006 include $113.9 million attributable to a tender offer and other
repurchases of the Company’s 11.125% senior notes due 2007, $18.0 million on its
Term B loan, $6.8 million for FiberVisions’ variable rate term loans and $3.8
million for the Company’s 6.5% junior subordinated deferrable debentures due
2029 (“6.5% debentures”) in connection with the open market purchase of 5,000
CRESTSSM units,
which consists of 6.5% debentures and warrants to purchase the Company’s common
stock.
A total
of $21.3 million and $22.0 million of short and long-term debt was issued during
2007 and 2006, respectively, reflecting local borrowings, primarily in China, to
finance the construction and expansion projects in that region. The
more significant of these borrowings relate specifically to Hercules
Tianpu. Hercules provides a guarantee for 55% of the total renminbi
and U.S. Dollar-equivalent borrowings under this credit facility. In
addition, net short-term borrowings of $9.4 million were received by Hercules’
subsidiaries under existing credit facilities primarily in Europe and
Asia. Prior to the disposition transaction in 2006, FiberVisions
issued $90.0 million of debt, net of $6.3 million of issuance
costs. The FiberVisions debt is non-recourse to
Hercules.
During
2007, the Company repurchased 2.8 million common shares in connection with its
authorized share repurchase program for a total of $54.3 million. Of
this total, $46.1 million settled in 2007 and the remaining $8.2 million settled
in cash in January 2008. Also during 2007, the Company reinstituted
its common stock dividend and paid $5.7 million in connection with the July 23,
2007 dividend declaration of $0.05 per share.
Proceeds
received from the exercise of stock options during 2007 were $6.5 million as
compared to $37.0 million during 2006. The decrease is attributable
to significant stock price appreciation during 2006 whereas the price range of
the stock was relatively stable during 2007. In addition, cash
provided by financing activities included $1.8 million and $6.2 million for 2007
and 2006, respectively, attributable to the income tax benefit to be realized by
the Company for stock-based compensation as required by SFAS
123R. Identical amounts are included as an outflow in cash from
operations.
Sources
of Liquidity
The
Company projects that cash flow from operations and other available financial
resources discussed below will be sufficient to meet its investing and financing
requirements and enable the Company to comply with the covenants and other terms
of the Senior Credit Facility and the indentures governing the senior
notes.
As of
December 31, 2007, the Company had a $550 million Senior Credit Facility with a
syndicate of banks. Under the Senior Credit Facility, the Company has
a $150 million revolving credit agreement, which permits certain additional
borrowings. As of December 31, 2007, $102.1 million of the $150.0
million Revolving Facility was available for use as the Company had $47.9
million of outstanding letters of credit associated with the Revolving
Facility. In addition, the Company had $35.1 million of foreign lines
of credit available of which $31.0 million was unused and
available. The total amount of $4.1 million outstanding under these
facilities is attributable to operations in the Asia Pacific
region.
During
2007, the Company amended its Senior Credit Facility Agreement (the “Agreement”)
to: (i) remove a $75 million limitation on asset sales; (ii) increase the annual
limitation on capital expenditures from $100 million to $150 million; (iii)
increase the limitation on additional indebtedness from $50 million to $150
million; and (iv) provide the Company the ability to pay dividends and/or
execute stock repurchases for up to $100 million per calendar year subject to
the satisfaction of certain financial leverage requirements as defined in the
Agreement. The amendment was designed to align the parameters of the
Agreement with the Company’s current financial profile and projected business
and financing plans.
In
connection with the comprehensive settlement of tax years 1993 through 2003, the
Company anticipated the receipt of federal and state income tax refunds and
interest of approximately $245 million in total. During 2007, the
Company received approximately $225 million of the aforementioned
total. The remainder is expected to be received during the first half
of 2008.
With
respect to its asbestos litigation obligations, the Company has total dedicated
assets of $28.1 million available as of December 31, 2007 to fund
asbestos-related settlements and defense costs. These assets include
receivables from insurers as well as restricted cash held in trust and cash to
be paid to the trust (see Note 12 to the Consolidated
Financial Statements). In January and February 2008, virtually all of
the monies to be paid to the Company and to the trust were paid. As
detailed further in the discussion of Commitments and Contractual
Obligations that follows, these funding sources are expected to be exhausted
during 2008. Upon occurrence of this event the Company will be
required to fund its asbestos obligations from its cash from operations and
other available financial resources.
The
Company maintains ownership over a number of properties, including land and
buildings, associated with businesses that have been exited, divested or
otherwise curtailed. In addition, during the normal course of
business, assets associated with current operations, including such items as
surplus land and excess or fully depreciated equipment and buildings among
others, become available for disposition. In order to maximize their
value, the Company is actively engaged in an ongoing process of identifying
alternative utilization strategies including leasing and outright sales of the
underlying assets and properties. When specific actions progress to
the point that “plan of sale” criteria have been met, impairments, to the extent
they exist, are recognized and the underlying properties are reclassified as
assets held for sale. Assets held for sale are included in the
caption “Other current assets” on the Consolidated Balance
Sheets. The carrying value of total assets held for sale was $7.7
million as of December 31, 2007, primarily reflecting the Company’s former
research facility in Jacksonville, Florida. This property is
currently being marketed and is expected to be disposed within the next twelve
months for a net sales price in excess of its carrying value.
There are
generally no material restrictions on the remittance of funds generated by the
Company's operations outside the United States except in certain regions of Asia
Pacific and Latin America.
Financial Condition
Total
debt as of December 31, 2007 was $796.0 million, which decreased $199.5 million
from $995.5 million as of December 31, 2006, primarily as a result of the debt
payments and repurchases discussed above. Cash balances decreased to
$116.5 million at December 31, 2007 from $171.8 million at December 31,
2006.
During
2007, the Company’s net working capital balances increased by $36.9 million
reflecting continued growth in both segments as well as higher
ROE. Of the total net increase, $40.2 million was attributable to
accounts receivable primarily reflecting growth in higher-growth markets and
$13.4 million related to higher inventories necessary to support the business
expansion. These were partially offset by an increase in accounts
payable of $16.7 million consistent with the business growth as well as
continuing efforts to reduce total cash cycle time. As of December
31, 2007, the Company’s cash cycle time increased by a total of 3 days from
year-end 2006 levels. Days sales outstanding (“DSO”) increased by one day to 61
days largely as a result of expanded growth in certain higher-growth markets
which generally encompass longer customer payment terms. Days sales
in inventory (“DSI”) increased by two days to 59 days reflecting changes in
inventory mix consistent with the increase in production capacity primarily
attributable to Aqualon partially offset by improved metrics for
PTV. Days payable outstanding (“DPO”) remained constant at 53
days. Despite challenging conditions, the Company expects to improve
its cash cycle time (DSO plus DSI less DPO) during 2008 as efforts continue with
respect to working capital initiatives.
Commitments and Contractual Obligations
Capital
Expenditures and Other Investing Commitments
Capital
expenditures are projected to total approximately $125 million during
2008. Of the total, approximately 27% will be attributable to PTV,
61% for Aqualon and 12% for Corporate purposes. Significant project
commitments for 2008 include the development of a multi-purpose facility in the
Asia Pacific region for PTV, MC capacity expansions at the Doel, Belgium
facility and Hercules Tianpu’s facilities in China, the construction of an HEC
facility in Nanjing, China as well as continued progress on the technical and
functional upgrades of the Company’s information technology
platform. In summary, approximately $75 million of the projected
total is attributable to expansion and productivity projects while the remaining
$50 million is allocated to maintenance capital projects.
As a
result of the Dexter transaction in 2007, the Company is committed to pay up to
$2.0 million within one year of the acquisition date contingent upon the
continuity of sales revenues at certain predetermined levels. Also,
the H2H joint venture arrangement provides an opportunity for the minority
shareholder, Heartland, to require Hercules to purchase all or some proportion
of its ownership interest at fair value for up to $15.0 million beginning in
July 2011. In addition and also beginning in July 2011, Heartland may
purchase an additional 2% ownership interest at fair value from Hercules
provided certain financial performance metrics are below levels defined in the
agreements. In connection with the Benchmark Acquisition, Aqualon is
required to make an earn-out payment of $2.0 million during 2008 based on
Benchmark’s 2007 performance. A similar commitment is in place
through 2011 for approximately $1 million to $2 million annually contingent upon
the achievement of certain performance metrics.
Pension
Plan Funding
In June
2007, the Finance Committee of the Board of Directors approved a change in the
pension asset investment strategy for the Company’s U.S. qualified
plan. Accordingly, the Company implemented a liability-driven
investing strategy that is designed to generally align the characteristics of
the plan’s assets to those of the underlying benefit obligations with the
objective of mitigating the impact of interest rate and asset value
volatility. Under this strategy, approximately 80% of the plan’s
assets have been invested in interest rate-sensitive debt
instruments. This investment strategy is expected to reduce ongoing
funding requirements for a fully-funded plan to a level that approximates that
plan’s annual service cost. A similar strategy was implemented for
the Company’s U.K. pension plan during the first quarter of 2007. The
strategy for the U.S. qualified plan has been effectuated through a shift to a
fixed-income portfolio with a duration to approximate that of the benefit
obligations while reducing the plan’s exposure to equity and other investment
securities to 20% of total assets.
This
strategy is expected to substantially reduce volatility of earnings and cash
flow and mitigate the risk of plan under funding due to asset or interest rate
changes. Conversely, this strategy limits the ability for the plans
to become over funded and will not compensate for actuarial changes including
mortality and future compensation changes as well as the incidence of lump-sum
payments. There can be no assurance that the Company’s plans will
achieve and/or maintain the current funded status.
During
2008, the Company expects to provide voluntary funding of approximately $22
million for the U.S. qualified plan and approximately $8 million on a combined
basis for all other international plans.
Funding
for Litigation, Environmental and Asset Retirement Obligations
As of
December 31, 2007, the Company has recorded $78.3 million for environmental and
other asset retirement matters involving current and former operating sites,
including those with identified asset retirement obligations as well as other
locations where the Company may have a known liability (see Note
11 to the Consolidated Financial Statements). The annual costs
required for remediation and similar asset retirement activities are generally
funded from operations as well as proceeds from the disposition of
assets. While such obligations are defined by legal, statutory or
contractual provisions, the Company has a certain degree of discretion with
respect to the timing and magnitude
of cash
expenditures within a given range of periods. However, unfavorable
developments regarding legal, regulatory or operating matters with respect to
any existing sites as well as unknown exposures could have a material adverse
effect on cash requirements for any annual, quarterly or other
period. In addition, the Company’s future commitment to certain
actions, including modifications to its existing facilities or preparing sites
for sale involving demolition and other related activities among others, could
trigger the recognition of additional obligations.
The
Company anticipates funding approximately $18 million towards these obligations
during 2008, excluding amounts for the Vertac matter. The most
significant of the total projected payments are attributable to the Company’s
operating facility and related property in Parlin, New
Jersey. Obligations at this site include those attributable to
existing Aqualon Natrosol® manufacturing operations as well as demolition and
environmental remediation activities attributable to that portion of the
facility that previously housed the Company’s former nitrocellulose
manufacturing operations. With regard to this portion of the site,
the Company is proceeding with plans to dispose of 400 acres in connection with
a brownfield redevelopment project. With respect to the Vertac
matter, the Company continues the process of reviewing the claim for
reimbursement for response costs received from the United States (see Note 12 to the Consolidated Financial
Statements). At this time, the Company is unable to estimate the
specific amount or timing of the final settlement payment with respect to this
matter. As of December 31, 2007, the Company has accrued $20.0
million representing its share of the United States’ claim plus cumulative
interest.
Asbestos-Related
Litigation
During
2008, the Company anticipates the total cash requirements for asbestos-related
litigation matters to be approximately $38 million. Of the total, approximately
$28 million is projected for settlements and $10 million is projected for
defense costs. It is currently anticipated that all of the funds
remaining in the trust will be distributed to the Company during 2008, thereby
terminating the trust. As a result, from and after the time that the
trust is terminated, the Company will be required to fully fund its asbestos
settlements and related defense costs and legal fees from its cash from
operations and other available financial resources until such time, if any, that
the reimbursement obligations pursuant to the Future Coverage Agreement are
triggered based on cumulative asbestos products litigation-related
expenditures. Depending upon the magnitude of future settlement and
defense costs, substantial reimbursement pursuant to such agreement is not
anticipated for at least several years, and once such reimbursement begins, it
is anticipated that the levels of reimbursement will vary considerably over
time. See Note 12 to the Consolidated Financial
Statements.
Debt
Retirement
In
December 2007, the Board of Directors authorized the Company, from time to time,
subject to market conditions and provisions of the Company's credit agreements
and indentures, to repurchase up to $50 million of its outstanding
indebtedness. Scheduled debt maturities during 2008 are $33.7
million.
Stock
Repurchase Program and Common Stock Dividend
During
2007, the Board of Directors of the Company authorized the repurchase of common
stock and payments of cash dividends for a combined amount of up to $200 million
during a two year period that will end in July of 2009. Stock
repurchases under this authorization may be made through open market and
privately negotiated transactions at times and in such amounts as management
deems appropriate. The timing and actual number of shares repurchased will
depend on a variety of factors including price, corporate and regulatory
requirements and other market conditions. The declaration of future
cash dividends will be subject to determination by the Board of Directors after
its review of the Company's performance, applicable debt covenants and other
commitments. Through February 27, 2008, the Company has acquired a
total of 3.5 million shares for $66.6 million and has paid quarterly cash
dividends for a total of $11.4 million. Accordingly, a total of $122.0 million
remains available for additional share repurchases and cash dividends through
the term of the authorization. At this time, the Company anticipates a total of
$75 million in stock repurchases for 2008 and the continuation of a quarterly
cash dividend for the remainder of 2008.
Contractual
Obligations
The
Company's contractual obligations as of December 31, 2007 are summarized as
follows:
|
Payments
Due by Period
(1)
|
||||||||||||||||||||
|
Less
than
|
1 -
3
|
3 -
5
|
More
than
|
|||||||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
||||||||||||||||
|
Debt
obligations
|
$ | 796.0 | $ | 33.7 | $ | 275.3 | $ | 6.1 | $ | 480.9 | ||||||||||
|
Operating
lease obligations
|
100.0 | 21.2 | 44.1 | 23.9 | 10.8 | |||||||||||||||
|
Purchase
obligations
(2)
|
4,242.6 | 739.7 | 1,634.6 | 1,868.3 | — | |||||||||||||||
|
Other
liabilities reflected on the registrant's
balance sheet under GAAP
(3)
|
630.2 | 106.4 | 129.3 | 121.0 | 273.5 | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 5,768.8 | $ | 901.0 | $ | 2,083.3 | $ | 2,019.3 | $ | 765.2 | ||||||||||
|
|
(1)
|
Does
not include the anticipated future interest payments to be made under the
Company's current debt agreements; however, based upon current
indebtedness and interest rates at December 31, 2007, such interest
obligations are estimated to be approximately $57.7 million in 2008, $56.4
million in 2009, $54.4 million in 2010, $36.5 million in 2011, $36.3
million in 2012 and $599.5 million thereafter. A one percent
increase or decrease in the LIBOR rate would have an impact of
approximately plus or minus $3.0 million on the Company’s interest
payments in years 2008 through
2010.
|
|
|
(2)
|
Obligations
relate primarily to raw material requirements and service
contracts.
|
|
(3)
|
Includes
amounts pertaining to asbestos-related matters, asset retirement
obligations, long-term unrecognized tax benefits (“UTBs”), postemployment
and postretirement obligations and workers compensation
claims. Due to the dynamic nature of asbestos litigation, it is
impractical to determine the anticipated payments in any given
year. Therefore, the non-current asbestos-related liability of
$227.0 million has been reflected in the “More than 5 years”
column. Due to the high degree of uncertainty regarding the
timing of potential future cash outflows associated with the Company’s
UTBs, the entire amount as provided in Note 8 to the
Consolidated Financial Statements is included in the “More than 5 years”
column.
|
Indemnifications
Reference
is made to Note 12 to the Consolidated Financial Statements
for a thorough discussion of indemnifications.
Off-Balance Sheet Arrangements
The
Company has no relationships with any unconsolidated, special-purpose entities
or other legal entities established for the purpose of facilitating off-balance
sheet financial arrangements.
Recent Accounting Pronouncements
Reference
is made to the Summary of Significant Accounting Policies
included in the Consolidated Financial Statements for a discussion and
analysis of recently issued accounting pronouncements and their impact on the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Fluctuations
in interest and foreign currency exchange rates affect the Company's financial
position, results of operations and cash flows. The Company has used
several strategies to actively hedge interest rate and foreign currency exposure
and minimize the effect of such fluctuations on reported earnings and cash flows
(see "Foreign Currency Translation" and "Derivative Instruments and Hedging" in
the Summary of Significant Accounting Policies and Note 24
to the Consolidated Financial Statements). Sensitivity of the
Company's financial instruments to selected changes in market rates and prices,
which are reasonably possible over a one-year period, are described
below. The market values for foreign exchange and interest rate risk
are calculated by the Company utilizing a third-party software package that
employs standard pricing models to determine the present value of the
instruments based on the market conditions as of the valuation
date.
Foreign
Exchange Rate Risk
Our
financial instruments subject to foreign currency exchange risk consist of
foreign currency forwards and options and represent a net asset position of $0.3
million and a net liability position of $0.1 million at December 31, 2007
and 2006, respectively. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. A 10% strengthening
of the U.S. dollar versus other currencies at December 31, 2007 would
result in a decrease of $2.6 million and a negligible change for the year ended
2006 in the net position, while a 10% weakening of the dollar versus all
currencies would result in a $1.8 million and a $0.5 million increase,
respectively, in the net position.
The
Company also utilizes cross currency interest rate swaps to hedge the foreign
currency exposure associated with its net investment in certain foreign
operations. At December 31, 2007, the net market value of the swaps
was a liability of $112.1 million. A 10% strengthening of the Euro
versus the U.S. dollar at December 31, 2007 would result in a $61.2 million
increase in the liability, while a 10% weakening of the Euro versus the U.S.
dollar would result in a $61.2 million decrease in the liability.
Interest
Rate Risk
The
Company's derivative and other financial instruments subject to interest rate
risk consist substantially of debt instruments (see Note 24
to the Consolidated Financial Statements). At December 31,
2007 and 2006, the net market value of these combined instruments was a
liability of $713.8 million and $964.2 million, respectively. The
sensitivity analysis assumes an instantaneous 100-basis point move in interest
rates from their levels, with all other variables held constant. A
100-basis point increase in interest rates at December 31, 2007 and 2006
would result in a $57.9 million and a $60.5 million decrease, respectively, in
the net market value of the liability. A 100-basis point decrease in
interest rates at December 31, 2007 and 2006 would result in a $49.6
million and a $62.7 million increase, respectively, in the net market value of
the liability.
Commodity
Price Risk
The
Company did not transact any hedging activities with respect to commodities or
any related raw material requirements for the year ended December 31,
2007.
Equity
Price Risk
The
Company’s financial instruments subject to equity price risk consist of the
warrants component of the CRESTSSM units
issued in 1999 and the Company’s 8% convertible debentures due 2010 (see Note 7 to the Consolidated Financial
Statements). Actions taken by the holders of these financial
instruments could result in the issuance of additional shares of common stock
and thereby increase stockholders’ equity. The conversion prices are
$42.70 per share and $14.90 per share for the CRESTSSM units
and convertible debentures, respectively.
Derivative
Financial Instruments
Foreign
exchange forward and option contracts have been used to hedge the Company's firm
and anticipated foreign currency cash flows. Thus, there is either an
asset or cash flow exposure related to all the financial instruments in the
above sensitivity analysis for which the impact of a movement in exchange rates
would be in the opposite direction and substantially equal to the impact on the
instruments in the analysis. With respect to commodity hedging, the
Company has, in the past, utilized derivative instruments including forward
contracts.
Other
than cross currency interest rate swaps to hedge the foreign currency exposure
associated with its net investment in certain foreign operations, the Company
has not designated any derivative as a hedge instrument under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and, accordingly, changes in the fair value of
derivatives are recorded each period in earnings.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The
financial statements and supplementary data required by this Item are provided
herein, beginning on page 45 of this report.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND
PROCEDURES
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Chief Executive Officer and the Company's Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-15 as of December 31, 2007. Based upon that evaluation, the
Company's President and Chief Executive Officer and the Company's Vice President
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in Company reports filed or submitted under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms.
There
have been no significant changes in the Company's internal controls over
financial reporting that occurred during the Company's fourth fiscal quarter,
that have materially affected, or are reasonably likely to materially affect the
registrant's internal control over financial reporting.
Management's
Report on Internal Control Over Financial Reporting is on page 46 of this Form
10-K.
The
certifications of the Company’s President and Chief Executive Officer and the
Company’s Vice President and Chief Financial Officer required by Section 302 of
the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2 to this
Annual Report on Form 10-K. Additionally, as required by Section
303A.12(a) of the New York Stock Exchange (“NYSE”) Listed Company Manual, the
Company’s President and Chief Executive Officer filed a certification with the
NYSE on May 8, 2007 reporting that he was not aware of any violation by us of
the NYSE’s Corporate Governance listing standards.
ITEM 9B. OTHER
INFORMATION
None.
PART III
|
|
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
|
BOARD
OF DIRECTORS
The name,
age and current position of each executive officer of Hercules as of February
28, 2007 is listed below. There are no family relationships among the
executive officers.
|
Name
|
|
Age
|
|
Current
Position
|
|
Craig
A. Rogerson
|
51
|
President,
Chief Executive Officer and Director
|
||
|
Fred
G. Aanonsen
|
60
|
Vice
President and Controller
|
||
|
Edward
V. Carrington
|
65
|
Vice
President, Human Resources
|
||
|
Richard
G. Dahlen
|
68
|
Chief
Legal Officer
|
||
|
Israel
J. Floyd
|
61
|
Corporate
Secretary and General Counsel
|
||
|
Vincenzo
M. Romano
|
54
|
Vice
President, Taxes
|
||
|
Stuart
C. Shears
|
57
|
Vice
President and Treasurer
|
||
|
Allen
A. Spizzo
|
50
|
Vice
President and Chief Financial
Officer
|
Craig A. Rogerson joined
Hercules in 1979 and has held his current position since December
2003. He previously served as Vice President and General Manager,
FiberVisions and Pinova from April 2002 to December 2003. He served
as Vice President and General Manager of BetzDearborn from August 2000 until
April 2002, and Vice President of Business Operations for BetzDearborn Division
from May through August 2000.
Fred G. Aanonsen joined
Hercules in July 2001. Prior to joining Hercules, he spent 25 years
at Union Carbide Corporation, where most recently he had been the Director of
Accounting and Financial Processing from 1998 until 2001 and Business Director
for the Finance SAP Design and Implementation Team from 1995 to
1998. Mr. Aanonsen is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants, the New York State
Society of Certified Public Accountants and Financial Executives
International.
Edward V. Carrington
originally joined Hercules when it acquired Radiant Color in 1969 and assumed
his current position in June 2001. Prior to that, he had served in a
consulting role since October 2000. From 1997 until 2000, he was Vice
President of Buttonwood Cottages, Inc., a vacation resort complex, and President
of Rentals in Paradise, Inc., a vacation home rental business. Mr.
Carrington is a trustee of Christiana Care.
Richard G. Dahlen originally
joined Hercules in 1996. Mr. Dahlen assumed his current position in
June 2001. Prior to that, he had served in a consulting role since
October 2000.
Israel J. Floyd joined
Hercules in 1973 and has held his current position since 2001. He had
been Vice President, Secretary and General Counsel since 1999.
Vincenzo M. Romano joined
Hercules in March
2003 as Director, Federal Tax and has held his current position since July
2004. He was self-employed as a tax consultant from September 2001
until March 2003. Prior to that, he was a Tax Director for
PricewaterhouseCoopers from January 1999 to August 2001.
Stuart C. Shears joined
Hercules in 1978 and has held his current position since 1999.
Allen A. Spizzo joined
Hercules in 1979 and has held his current position since March
2004. He had been Vice President, Corporate Affairs, Strategic
Planning and Corporate Development from July 2002 to March
2004. Prior to that, Mr. Spizzo had been Vice President, Investor
Relations and Strategic Planning since 2000.
The
Company has established a Code of Ethics for Senior Financial Executives, which
is attached to this Form 10-K as an exhibit. This is in addition to a
Directors’ Code of Business Conduct and Ethics, Business Practices Policy and
Corporate Governance Guidelines which are included in the Company’s corporate
governance section of its website at www.herc.com. The
Company will promptly post any future amendments to such documents on its
website.
ITEM
11. EXECUTIVE
COMPENSATION
|
|
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
regarding beneficial ownership of Hercules common stock by certain beneficial
owners and by directors and executive officers of Hercules will be included in
the Company's Proxy Statement and is incorporated herein by
reference.
Equity Compensation Plan
Information
The
following table provides information as of December 31, 2007 concerning the
number of shares of common stock to be issued upon the exercise of outstanding
options, warrants and rights issued under all of the Company's existing equity
compensation plans, including the Hercules Incorporated Long-Term Incentive
Compensation Plan, the Hercules Incorporated Non-Employee Director Stock
Accumulation Plan, and the Hercules Incorporated Omnibus Equity Compensation
Plan for Non-employee Directors. All of the Company's equity
compensation plans have been approved by the Company's
shareholders.
|
Plan
category
|
Number
of securities to
be
issued upon
exercise
of outstanding
options,
warrants
and
rights
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))
(c)
|
|||
|
Equity
compensation plans approved by security holders
|
4,133,074
|
(1)
(2)
|
$ 23.08
|
8,954,274
|
||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||
|
Total
|
4,133,074
|
$ 23.08
|
8,954,274
|
|||
|
(1) Includes 1,576,950 options with
exercise prices in excess of the weighted average price of
$23.08.
|
||||||
|
(2) Includes options to purchase
854,797 shares that were not vested at December 31,
2007.
|
||||||
|
|
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
regarding relationships or transactions between directors and officers and the
Company will be included in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
regarding principal accountant fees and services will be included in the
Company's Proxy Statement and is incorporated herein by
reference.
PART IV
(a) Documents
filed as part of this Report:
1. Consolidated
Financial Statements
|
|
Page
|
|
46
|
|
|
47
|
|
|
49
|
|
|
50
|
|
|
51
|
|
|
52
|
|
|
53
|
2. Financial
Statement Schedules:
All financial statement schedules have been omitted because they are not
applicable, not required or the information required is either presented in the
Notes to the Consolidated Financial Statements or has not changed materially
from that previously reported.
3. Exhibits:
A
complete listing of exhibits submitted with this Form 10-K as well as those
incorporated by reference to other filings is included in the Exhibit Index that
follows on page 41.
|
Number
|
Description
|
Incorporated
by Reference to
|
|
|
3.1
|
Restated
Certificate of Incorporation of Hercules, as revised and amended July 6,
1988
|
Exhibit
3-A, Annual Report on Form 10-K filed March 26, 1993
|
|
|
3.1.1
|
Certificate
of Amendment filed October 24, 1995, to the Restated Certificate of
Incorporation of Hercules
|
Exhibit
4.1a, Registration Statement on Form S-3, filed September 15,
1998
|
|
|
3.1.2*
|
Certificate
of Amendment, filed June 25, 2007, to the Restated Certificate of
Incorporation of Hercules
|
||
|
3.2
|
By-Laws
of Hercules, as amended and restated on June 21, 2007
|
Exhibit
3.1, Current Report on Form 8-K, filed June 26, 2007
|
|
|
4.1
|
Warrant
Agreement, dated July 27, 1999, between Hercules and The Chase Manhattan
Bank, as warrant agent
|
Exhibit
4.4, Current Report on Form 8-K, dated July 27, 1999
|
|
|
4.2
|
Form
of Series A Junior Subordinated Deferrable Interest
Debentures
|
Exhibit
4.5, Current Report on Form 8-K, dated July 27, 1999
|
|
|
4.3
|
Form
of CRESTSSM
Unit
|
Exhibit
4.7, Current Report on Form 8-K, dated July 27, 1999
|
|
|
4.4
|
Form
of Warrant
|
Exhibit
4.8, Current Report on Form 8-K, dated July 27, 1999
|
|
|
4.5
|
Rights
Agreement, dated as of August 24, 2000, between Hercules Incorporated and
Chase Mellon Shareholder Services, L.L.C.
|
Exhibit
4.1 to Hercules Registration of Certain Classes of Securities on Form 8-A
filed August 10, 2000
|
|
|
4.5.1
|
Amendment
No. 1 to the Hercules Incorporated Rights Agreement, dated as of June 5,
2003
|
Exhibit
4.2, Registration Statement on Form 8-A, filed June 5,
2003
|
|
|
4.5.2
|
Amendment
No. 2 to the Hercules Incorporated Rights Agreement, dated as of August
21, 2003
|
Exhibit
4.1, Current Report on Form 8-K, filed September 22,
2003
|
|
|
4.6
|
Indenture,
dated as of April 8, 2004, between Hercules Incorporated and each of the
Guarantors party thereto and Wells Fargo Bank, National
Association
|
Exhibit
4.1, Quarterly Report on Form 10-Q filed May 10, 2004
|
|
|
10.1
|
Hercules
Executive Survivor Benefit Plan
|
Exhibit
10-D, Annual Report on Form 10-K, filed March 27, 1981
|
|
|
10.2
|
Hercules
1993 Non-Employee Director Stock Accumulation and Deferred Compensation
Plan
|
Exhibit
4.1, Registration Statement on Form S-8, filed July 16,
1993
|
|
|
10.2.1
|
Amendment
2002-1 to Non-Employee Director Stock Accumulation Plan
|
Exhibit
II, Proxy Statement, dated May 15, 2002
|
|
|
10.3
|
Hercules
Employee Pension Restoration Plan
|
Exhibit
10-L, Annual Report on Form 10-K, filed March 26, 1993
|
|
|
10.4
|
Hercules
Amended and Restated Long Term Incentive Compensation Plan
|
Exhibit
10-K, Annual Report on Form 10-K, filed March 29, 2000
|
|
|
10.4.1
|
Amendment
2002-1 to Amended and Restated Long Term Incentive Compensation
Plan
|
Exhibit
I, Proxy Statement, dated May 15, 2002
|
|
|
10.5
|
Form
of Change-of-Control Employment Agreement between Hercules Incorporated
and Craig A. Rogerson, dated August 24, 2000
|
Exhibit
10-19, Registration Statement S-4, filed August 9, 2001
|
|
|
10.5.1
|
First
Amendment to the Employment Agreement between Hercules Incorporated and
Craig A. Rogerson, dated August 24, 2000
|
Exhibit
10.31, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.6
|
Form
of Change-of-Control Employment Agreement between Hercules
Incorporated and each of Richard G. Dahlen and Edward V.
Carrington
|
Exhibit
10-25, Registration Statement S-4, filed August 9, 2001
|
|
|
10.7
|
Change-of-Control
Employment Agreement, dated as of July 2, 2001, by and between Hercules
Incorporated and Fred G. Aanonsen
|
Exhibit
10-28, Registration Statement on Form S-4, filed August 9,
2001
|
|
|
10.8
|
Hercules
Incorporated Compensation Benefits Grantor Trust Agreement for Management
Employees
|
Exhibit
10-Ee, Annual Report on Form 10-K/A, filed May 1,
2003
|
|
10.9
|
Hercules
Incorporated Compensation Benefits Grantor Trust Agreement for
Non-Employee Directors
|
Exhibit
10-Ff, Annual Report on Form 10-K/A, filed May 1, 2003
|
|
|
10.10
|
Amended
and Restated Hercules Incorporated Management Incentive Compensation Plan,
dated February 21, 2003
|
Exhibit
10-Gg Annual Report on Form 10-K/A, filed May 1, 2003
|
|
|
10.11
|
Hercules
Deferred Compensation Plan, restated December 1995
|
Exhibit
10-B, Quarterly Report on Form 10-Q, filed May 15, 2003
|
|
|
10.12
|
Hercules
Executive Survivor Benefit Plan II dated January 1, 1987 - benefit
structure is only applicable to one executive officer
|
Exhibit
10-E, Quarterly Report on Form 10-Q, filed May 15, 2003
|
|
|
10.13
|
Omnibus
Equity Compensation Plan for Non-Employee Directors
|
Appendix
II, Proxy Statement dated June 20, 2003
|
|
|
10.14
|
Employment
Agreement between Hercules Incorporated and Israel J. Floyd, dated August
24, 2000
|
Exhibit
10.27, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.14.1
|
First
Amendment to the Employment Agreement between Hercules Incorporated and
Israel J. Floyd, dated August 24, 2000
|
Exhibit
10.28, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.15
|
Employment
Agreement between Hercules Incorporated and Allen A. Spizzo, dated August
24, 2000
|
Exhibit
10.29, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.15.1
|
First
Amendment to the Employment Agreement between Hercules Incorporated and
Allen A. Spizzo, dated August 24, 2000
|
Exhibit
10.30, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.16
|
Employment
Offer Letter – Paul C. Raymond III, dated December 28,
2004
|
Exhibit
10.34, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.17
|
Special
Pension Agreement between Hercules Incorporated and William H. Joyce,
approved August 21, 2003
|
Exhibit
10.35, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.18
|
General
Terms of Employment between Hercules Incorporated and Certain Executive
Officers
|
Exhibit
10.36, Annual Report on Form 10-K, filed March 16, 2005
|
|
|
10.19
|
Employment
Offer Letter – John E. Panichella, dated December 15, 2005
|
Exhibit
10.1, Current Report on Form 8-K/A, dated December 15,
2005
|
|
|
10.20
|
Amended
and Restated Credit Agreement, dated as of April 8, 2004, between Hercules
Incorporated and the Guarantors listed on Schedule A thereto and Credit
Suisse First Boston LLC, Wachovia Capital Markets, LLC, Scotia Capital
(USA) Inc. and Deutsche Bank Securities Inc.
|
Exhibit
10.1, Quarterly Report on Form 10-Q, filed May 10, 2004
|
|
|
10.20.1
|
First
Amendment to Amended and Restated Credit Agreement dated as of August 12,
2004, among Hercules Incorporated and the Guarantors listed on Schedule A
thereto and Credit Suisse First Boston LLC and Wachovia Bank, National
Association
|
Exhibit
10.1, Quarterly Report on Form 10-Q, filed November 15,
2004
|
|
|
10.20.2
|
Second
Amendment Amended and Restated Credit Agreement dated as of June 29, 2005,
among Hercules Incorporated and the Guarantors listed on Schedule A
thereto and Credit Suisse First Boston LLC and Wachovia Bank, National
Association
|
Exhibit
10.1, Quarterly Report on Form 10-Q, filed August 1,
2007
|
|
|
10.20.3
|
Third
Amendment Amended and Restated Credit Agreement dated as of March 2, 2006,
among Hercules Incorporated and the Guarantors listed on Schedule A
thereto and Credit Suisse First Boston LLC and Wachovia Bank, National
Association
|
Exhibit
10.1, Current Report on Form 8-K, dated March 2, 2006
|
|
|
10.20.4
|
Fourth
Amendment Amended and Restated Credit Agreement dated as of July 11, 2007,
among Hercules Incorporated and the Guarantors listed on Schedule A
thereto and Credit Suisse First Boston LLC and Wachovia Bank, National
Association
|
Exhibit
10.2, Quarterly Report on Form 10-Q, filed August 1,
2007
|
|
10.21
|
Contribution
Agreement between Hercules Incorporated, WSP, Inc., SPG/FV Investor LLC
and Fibervisions Delaware Corporation dated January 31,
2006
|
Exhibit
10.33, Annual Report on Form 10-K, filed March 3, 2006
|
|
|
10.22
|
Agreement
between Hercules Incorporated and Genpact International dated January 16,
2007
|
Exhibit
10.32, Annual Report on Form 10-K, filed February 28,
2007
|
|
|
10.23
|
Agreement
between Hercules Incorporated and HCL America Inc. and HCL Technologies
Limited dated January 16, 2007
|
Exhibit
10.33, Annual Report on Form 10-K, filed February 28,
2007
|
|
|
14.1*
|
Code
of Ethics for Senior Financial Executives
|
||
|
14.2
|
Directors
Code of Business Conduct and Ethics
|
Appendix
VII, Proxy Statement dated June 20, 2003
|
|
|
21.1*
|
Principal
Consolidated Subsidiaries as of December 31, 2006
|
||
|
23.1*
|
Consent
of BDO Seidman, LLP
|
||
|
31.1*
|
Certification
of President and Chief Executive Officer Pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
|
||
|
31.2*
|
Certification
of Vice President and Chief Financial Officer Pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
|
||
|
32.1*
|
Section
1350 Certification of President and Chief Executive
Officer
|
||
|
32.2*
|
Section
1350 Certification of Vice President and Chief Financial
Officer
|
||
|
*Filed
herewith
|
|||
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on February 28, 2008.
|
HERCULES
INCORPORATED
|
|
|
By:
|
/s/
Craig A. Rogerson
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on February 28, 2008.
|
Principal
Executive Officer and Director:
|
||||
|
|
President
and Chief Executive Officer
|
/s/
Craig A. Rogerson
|
||
|
Craig
A. Rogerson
|
||||
|
Principal
Financial Officer:
|
||||
|
Vice
President and Chief Financial Officer
|
/s/
Allen A. Spizzo
|
|||
|
Allen
A. Spizzo
|
||||
|
Principal
Accounting Officer:
|
||||
|
Vice
President and Controller
|
/s/
Fred G. Aanonsen
|
|||
|
Fred
G. Aanonsen
|
||||
|
Directors:
|
||||
|
/s/
John K. Wulff
|
/s/
Burton M. Joyce
|
|||
|
John
K. Wulff, Chairman of the Board
|
Burton
M. Joyce
|
|||
|
/s/
Anna Cheng Catalano
|
/s/
Robert D. Kennedy
|
|||
|
Anna
Cheng Catalano
|
Robert
D. Kennedy
|
|||
|
/s/
Jeffrey M. Lipton
|
||||
|
Allan
H. Cohen
|
Jeffrey
M. Lipton
|
|||
|
/s/
Thomas P. Gerrity
|
/s/
Joe B. Wyatt
|
|||
|
Thomas
P. Gerrity
|
Joe
B. Wyatt
|
|||
|
/s/
John C. Hunter, III
|
||||
|
John
C. Hunter, III
|
||||
HERCULES
INCORPORATED
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2007
|
CONSOLIDATED
FINANCIAL
STATEMENTS
|
Page
|
|
46
|
|
|
47
|
|
|
49
|
|
|
50
|
|
|
51
|
|
|
52
|
|
|
53
|
|
|
57
|
|
|
58
|
|
|
58
|
|
|
59
|
|
|
59
|
|
|
59
|
|
|
60
|
|
|
61
|
|
|
64
|
|
|
67
|
|
|
68
|
|
|
68
|
|
|
76
|
|
|
79
|
|
|
80
|
|
|
81
|
|
|
83
|
|
|
84
|
|
|
84
|
|
|
84
|
|
|
85
|
|
|
86
|
|
|
86
|
|
|
88
|
|
|
88
|
|
|
97
|
Management's Report on Internal Control Over Financial
Reporting
The
management of Hercules is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as
amended. Hercules’ internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Hercules’
management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Based on this assessment, management has concluded
that, as of December 31, 2007, the Company's internal control over financial
reporting was effective based on those criteria.
The
effectiveness of Hercules’ internal control over financial reporting, as of
December 31, 2007, has been audited by BDO Seidman, LLP, an independent
registered public accounting firm, as stated in their report which appears on
page 48.
/s/ Craig A.
Rogerson
President
and Chief Executive Officer
February
28, 2008
/s/ Allen A.
Spizzo
Vice
President and Chief Financial Officer
February
28, 2008
Report of Independent Registered Public Accounting
Firm
Board of
Directors and Stockholders
Hercules
Incorporated
Wilmington,
DE
We have
audited the accompanying consolidated balance sheets of Hercules Incorporated as
of December 31, 2007 and 2006 and the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements 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, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hercules Incorporated at
December 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 20 to the consolidated financial statements, Hercules
Incorporated changed its method of accounting effective December 31, 2006 for
defined benefit pension and other postretirement plans as a result of adopting
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans”. As discussed in Note 8 to the Consolidated
Financial Statements, effective January 1, 2007, the Company adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109.”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hercules Incorporated's internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated February 26, 2008 expressed an
unqualified opinion thereon.
/s/ BDO
Seidman, LLP
New York,
New York
February
26, 2008
Report
of Independent Registered Public Accounting Firm
on
Internal Control over Financial Reporting
Board of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We have
audited Hercules Incorporated’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Hercules Incorporated’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Hercules Incorporated maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hercules
Incorporated as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income (loss), stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2007
and our report dated February 26, 2008 expressed an unqualified
opinion.
/s/BDO
Seidman, LLP
New York,
New York
February
26, 2008
- 48
-
Hercules
Incorporated
Consolidated Statements of Operations and Comprehensive
Income (Loss)
(Dollars
in millions, except per share data)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| $ | 2,136.2 | $ | 2,035.3 | $ | 2,055.0 | |||||||
|
Cost
of sales
|
1,405.7 | 1,343.4 | 1,391.1 | |||||||||
|
Selling,
general and administrative expenses
|
376.9 | 372.2 | 382.5 | |||||||||
|
Research
and development
|
43.8 | 38.8 | 40.8 | |||||||||
|
Intangible
asset amortization (Note 6)
|
8.7 | 7.2 | 8.0 | |||||||||
|
Impairment
of FiberVisions goodwill (Note 2)
|
— | — | 52.9 | |||||||||
|
Other
operating expense, net (Note 17)
|
36.9 | 25.1 | 39.4 | |||||||||
|
Profit
from operations
|
264.2 | 248.6 | 140.3 | |||||||||
|
Interest
and debt expense (Note 7)
|
68.6 | 71.2 | 89.4 | |||||||||
|
Vertac
response costs and litigation charges (Note
12)
|
20.3 | 108.5 | 15.0 | |||||||||
| 24.0 | 65.7 | 71.3 | ||||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
151.3 | 3.2 | (35.4 | ) | ||||||||
|
Benefit
for income taxes (Note 8)
|
(20.3 | ) | (192.2 | ) | (3.8 | ) | ||||||
|
Income
(loss) before minority interests and equity (loss) income
|
171.6 | 195.4 | (31.6 | ) | ||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
(0.6 | ) | (1.4 | ) | (1.0 | ) | ||||||
|
Equity
(loss) income of affiliated companies, net of tax
|
(0.1 | ) | (3.2 | ) | 0.5 | |||||||
|
Net
income (loss) from continuing operations before discontinued operations and
cumulative effect of changes in accounting principle
|
170.9 | 190.8 | (32.1 | ) | ||||||||
|
Net
income (loss) from discontinued operations, net of tax (Note 19)
|
8.0 | 47.0 | (6.5 | ) | ||||||||
|
Net
income (loss) before cumulative effect of changes in accounting
principle
|
178.9 | 237.8 | (38.6 | ) | ||||||||
|
Cumulative
effect of changes in accounting principle, net of tax (Note 20)
|
— | 0.9 | (2.5 | ) | ||||||||
|
Net
income (loss)
|
$ | 178.9 | $ | 238.7 | $ | (41.1 | ) | |||||
|
Earnings
(loss) per share (Note 22):
|
||||||||||||
|
Basic
earnings (loss) per share
|
||||||||||||
|
Continuing
operations
|
$ | 1.50 | $ | 1.72 | $ | (0.30 | ) | |||||
|
Discontinued
operations
|
0.07 | 0.42 | (0.06 | ) | ||||||||
|
Cumulative effect of changes in
accounting principle
|
— | 0.01 | (0.02 | ) | ||||||||
|
Net income (loss)
|
$ | 1.57 | $ | 2.15 | $ | (0.38 | ) | |||||
|
Weighted average number of shares
(millions)
|
114.3 | 110.8 | 108.7 | |||||||||
|
Diluted
earnings (loss) per share
|
||||||||||||
|
Continuing
operations
|
$ | 1.49 | $ | 1.71 | $ | (0.30 | ) | |||||
|
Discontinued
operations
|
0.07 | 0.42 | (0.06 | ) | ||||||||
|
Cumulative effect of changes in
accounting principle
|
— | 0.01 | (0.02 | ) | ||||||||
|
Net income (loss)
|
$ | 1.56 | $ | 2.14 | $ | (0.38 | ) | |||||
|
Weighted average number of shares
(millions)
|
115.1 | 111.3 | 108.7 | |||||||||
|
Dividends
declared per share
|
$ | 0.10 | — | — | ||||||||
|
Net
income (loss)
|
$ | 178.9 | $ | 238.7 | $ | (41.1 | ) | |||||
|
Foreign
currency translation
|
80.8 | 54.6 | (66.6 | ) | ||||||||
|
Pension
and postretirement benefit adjustments, net of tax
|
51.1 | 85.0 | (44.3 | ) | ||||||||
|
Revaluation
of hedges, net of tax
|
(38.3 | ) | (34.6 | ) | — | |||||||
|
Other,
net of tax
|
— | (0.5 | ) | (0.3 | ) | |||||||
|
Comprehensive
income (loss)
|
$ | 272.5 | $ | 343.2 | $ | (152.3 | ) | |||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 49
-
Hercules
Incorporated
Consolidated Balance
Sheets
|
(Dollars
in millions)
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 116.5 | $ | 171.8 | ||||
|
Accounts
receivable, net (Note 4)
|
366.8 | 326.6 | ||||||
|
Inventories
(Note 5)
|
224.0 | 210.6 | ||||||
|
Deferred
income taxes (Note 8)
|
41.0 | 70.2 | ||||||
|
Current
assets of discontinued operations (Note
19)
|
— | 0.4 | ||||||
|
Income
taxes receivable (Note 8)
|
20.2 | 170.8 | ||||||
|
Asbestos-related
assets (Note 12)
|
4.0 | — | ||||||
|
Other
current assets
|
41.8 | 34.1 | ||||||
|
Total
current assets
|
814.3 | 984.5 | ||||||
|
Property,
plant and equipment, net (Note 15)
|
660.0 | 600.4 | ||||||
|
Intangible
assets, net (Note 6)
|
161.2 | 143.1 | ||||||
|
Goodwill
(Note 6)
|
527.9 | 481.5 | ||||||
|
Deferred
income taxes (Note 8)
|
370.8 | 374.6 | ||||||
|
Asbestos-related
assets (Note 12)
|
24.1 | 87.5 | ||||||
|
Deferred
charges and other assets (Note 15)
|
120.1 | 136.9 | ||||||
|
Total
assets
|
$ | 2,678.4 | $ | 2,808.5 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 222.0 | $ | 205.3 | ||||
|
Asbestos-related
liabilities (Note 12)
|
28.0 | 36.4 | ||||||
|
Current
debt obligations (Note 7)
|
33.7 | 35.8 | ||||||
|
Vertac
obligations (Note 12)
|
20.0 | 123.5 | ||||||
|
Accrued
expenses (Note 15)
|
207.7 | 192.3 | ||||||
|
Income
taxes payable (Note 8)
|
13.3 | 24.5 | ||||||
|
Deferred
income taxes (Note 8)
|
9.5 | 11.8 | ||||||
|
Total
current liabilities
|
534.2 | 629.6 | ||||||
|
Long-term
debt (Note 7)
|
762.3 | 959.7 | ||||||
|
Deferred
income taxes (Note 8)
|
74.3 | 69.7 | ||||||
|
Pension
obligations (Note 9)
|
158.7 | 262.5 | ||||||
|
Other
postretirement benefit obligations (Note
9)
|
123.1 | 142.2 | ||||||
|
Deferred
credits and other liabilities (Note
15)
|
298.7 | 255.6 | ||||||
|
Asbestos-related
liabilities (Note 12)
|
227.0 | 233.6 | ||||||
|
Total
liabilities
|
2,178.3 | 2,552.9 | ||||||
|
Commitments
and contingencies (Note 12)
|
— | — | ||||||
|
Minority
interests
|
22.1 | 12.7 | ||||||
|
Stockholders'
equity (Note 14)
|
||||||||
|
Series
preferred stock
|
— | — | ||||||
|
Common
stock, $25/48 stated value (shares: 2007 – 160,004,908 and 2006 –
159,997,929)
|
83.3 | 83.3 | ||||||
|
Additional
paid-in capital
|
438.3 | 454.9 | ||||||
|
Unearned
compensation (Note 10)
|
(29.8 | ) | (42.1 | ) | ||||
|
Accumulated
other comprehensive losses
|
(316.0 | ) | (409.6 | ) | ||||
|
Retained
earnings
|
1,903.3 | 1,734.1 | ||||||
| 2,079.1 | 1,820.6 | |||||||
|
Reacquired
stock, at cost (shares: 2007 – 46,006,780 and 2006 –
43,969,769)
|
(1,601.1 | ) | (1,577.7 | ) | ||||
|
Total
stockholders' equity
|
478.0 | 242.9 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 2,678.4 | $ | 2,808.5 | ||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 50
-
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income (loss)
|
$ | 178.9 | $ | 238.7 | $ | (41.1 | ) | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operations:
|
||||||||||||
|
Depreciation
|
70.3 | 70.7 | 80.5 | |||||||||
|
Amortization
|
39.7 | 24.6 | 25.4 | |||||||||
|
Deferred
income tax provision
|
19.1 | (157.8 | ) | (54.9 | ) | |||||||
|
Gain
on disposal of assets and investments, net
|
(8.5 | ) | (9.0 | ) | (11.8 | ) | ||||||
|
Impairment
charges
|
— | 3.2 | 58.6 | |||||||||
|
Dilution
of investment and loss on sale of 51% interest in
FiberVisions
|
2.5 | 13.3 | — | |||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
0.6 | 1.4 | 1.0 | |||||||||
|
Stock-based
compensation
|
9.4 | 7.0 | 8.1 | |||||||||
|
Other
non-cash charges and credits, net
|
0.6 | 2.2 | (1.0 | ) | ||||||||
|
Accruals
and deferrals of cash receipts and payments (net of acquisitions and
dispositions):
|
||||||||||||
|
Accounts
receivable, net
|
(21.6 | ) | (17.5 | ) | 2.9 | |||||||
|
Inventories
|
(2.1 | ) | (8.7 | ) | (3.3 | ) | ||||||
|
Asbestos-related
assets and liabilities, net
|
46.4 | 37.1 | 61.3 | |||||||||
|
Other
current assets
|
3.1 | 5.0 | (10.7 | ) | ||||||||
|
Accounts
payable
|
4.6 | 12.8 | 27.6 | |||||||||
|
Vertac
obligations
|
(103.5 | ) | 123.5 | — | ||||||||
|
Accrued
expenses
|
(0.3 | ) | (8.9 | ) | 0.6 | |||||||
|
Income
taxes receivable and payable
|
134.1 | (125.1 | ) | 27.1 | ||||||||
|
Pension
and postretirement benefit obligations
|
(55.7 | ) | (7.9 | ) | (18.3 | ) | ||||||
|
Non-current
assets and liabilities
|
(17.7 | ) | (23.8 | ) | (12.8 | ) | ||||||
|
FiberVisions
net assets held for sale
|
— | (7.9 | ) | — | ||||||||
|
Net cash provided by operating
activities
|
299.9 | 172.9 | 139.2 | |||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Capital
expenditures
|
(118.3 | ) | (93.6 | ) | (67.5 | ) | ||||||
|
Acquisitions
and investments, net of cash recognized upon consolidation
|
(16.5 | ) | (29.4 | ) | (4.4 | ) | ||||||
|
Proceeds
from sale of 51% interest in FiberVisions, net of transaction
costs
|
(1.2 | ) | 17.8 | — | ||||||||
|
Proceeds
of asset and investment disposals, net of transaction
costs
|
18.3 | 11.3 | 16.6 | |||||||||
|
Other,
net
|
— | (0.2 | ) | (2.4 | ) | |||||||
|
Net cash used in investing
activities
|
(117.7 | ) | (94.1 | ) | (57.7 | ) | ||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
— | 83.7 | — | |||||||||
|
Long-term
debt proceeds
|
3.8 | 22.0 | — | |||||||||
|
Long-term
debt payments
|
(216.8 | ) | (142.5 | ) | (131.2 | ) | ||||||
|
Change
in short-term debt
|
9.4 | 5.8 | 1.9 | |||||||||
|
Repurchase
of common stock
|
(46.1 | ) | — | — | ||||||||
|
Dividends
paid
|
(5.7 | ) | — | — | ||||||||
|
Proceeds
from the exercise of stock options
|
6.5 | 37.0 | 2.7 | |||||||||
|
Other,
net including income tax benefits attributable to stock-based
compensation
|
1.3 | 5.6 | (0.4 | ) | ||||||||
|
Net cash (used in) provided by
financing activities
|
(247.6 | ) | 11.6 | (127.0 | ) | |||||||
|
Effect
of exchange rate changes on cash
|
10.1 | 4.1 | (3.7 | ) | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(55.3 | ) | 94.5 | (49.2 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
171.8 | 77.3 | 126.5 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 116.5 | $ | 171.8 | $ | 77.3 | ||||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 51
-
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||
|
Common
|
Paid-in
|
Unearned
|
Comprehensive
|
Retained
|
Reacquired
|
|||||||||||||||||||||||
|
Stock
|
Capital
|
Compensation
|
Losses
|
Earnings
|
Stock
|
Total
|
||||||||||||||||||||||
|
Balances
at January 1, 2005
|
$ | 83.3 | $ | 569.2 | $ | (77.9 | ) | $ | (276.4 | ) | $ | 1,536.5 | $ | (1,722.8 | ) | $ | 111.9 | |||||||||||
|
(Common
shares: issued, 159,984,444; reacquired, 47,842,836)
|
||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | (41.1 | ) | — | (41.1 | ) | |||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | (66.6 | ) | — | — | (66.6 | ) | |||||||||||||||||||
|
Release
of shares held by ESOP trust
|
— | (5.0 | ) | 12.8 | — | — | — | 7.8 | ||||||||||||||||||||
|
Repurchase
of warrants
|
— | (2.0 | ) | — | — | — | — | (2.0 | ) | |||||||||||||||||||
|
Increase
in additional minimum pension liability, net of tax
|
— | — | — | (44.3 | ) | — | — | (44.3 | ) | |||||||||||||||||||
|
Issuances
of treasury stock, net of forfeitures and sales for taxes
|
— | (13.3 | ) | (8.5 | ) | — | — | 23.8 | 2.0 | |||||||||||||||||||
|
Amortization
of unearned compensation
|
— | — | 7.9 | — | — | — | 7.9 | |||||||||||||||||||||
|
Other,
net of tax
|
— | — | — | (0.3 | ) | — | — | (0.3 | ) | |||||||||||||||||||
|
Balances
at December 31, 2005
|
$ | 83.3 | $ | 548.9 | $ | (65.7 | ) | $ | (387.6 | ) | $ | 1,495.4 | $ | (1,699.0 | ) | $ | (24.7 | ) | ||||||||||
|
(Common
shares: issued, 159,984,444; reacquired, 47,247,344)
|
||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | 238.7 | — | 238.7 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | 54.6 | — | — | 54.6 | |||||||||||||||||||||
|
Release
of shares held by ESOP trust
|
— | (6.4 | ) | 11.5 | — | — | — | 5.1 | ||||||||||||||||||||
|
Repurchase
of warrants
|
— | (1.0 | ) | — | — | — | — | (1.0 | ) | |||||||||||||||||||
|
Decrease
in additional minimum pension liability, net of tax
|
— | — | — | 85.0 | — | — | 85.0 | |||||||||||||||||||||
|
Recognition
of funded status of pension and postretirement
benefit
plans, net of tax required by SFAS 158
|
— | — | — | (126.5 | ) | — | — | (126.5 | ) | |||||||||||||||||||
|
Issuances
of treasury stock, net of forfeitures and sales for taxes
|
— | (74.7 | ) | — | — | — | 121.3 | 46.6 | ||||||||||||||||||||
|
Reclassification
required by SFAS 123R
|
— | (12.1 | ) | 12.1 | — | — | — | — | ||||||||||||||||||||
|
Conversion
of debentures
|
— | 0.2 | — | — | — | — | 0.2 | |||||||||||||||||||||
|
Revaluation
of hedges, net of tax
|
— | — | — | (34.6 | ) | — | — | (34.6 | ) | |||||||||||||||||||
|
Other,
net of tax
|
— | — | — | (0.5 | ) | — | — | (0.5 | ) | |||||||||||||||||||
|
Balances
at December 31, 2006
|
$ | 83.3 | $ | 454.9 | $ | (42.1 | ) | $ | (409.6 | ) | $ | 1,734.1 | $ | (1,577.7 | ) | $ | 242.9 | |||||||||||
|
(Common
shares: issued, 159,997,929; reacquired, 43,969,769)
|
||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | 178.9 | — | 178.9 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | 80.8 | — | — | 80.8 | |||||||||||||||||||||
|
Dividends
declared
|
— | — | — | — | (11.6 | ) | — | (11.6 | ) | |||||||||||||||||||
|
Repurchase
of common stock
|
— | — | — | — | — | (54.3 | ) | (54.3 | ) | |||||||||||||||||||
|
Release
of shares held by ESOP trust
|
— | (4.5 | ) | 12.3 | — | — | — | 7.8 | ||||||||||||||||||||
|
Pension
and postretirement benefit adjustments, net of tax
|
— | — | — | 51.1 | — | — | 51.1 | |||||||||||||||||||||
|
Issuances
of treasury stock, net of forfeitures and sales for taxes
|
— | (12.2 | ) | — | — | — | 30.9 | 18.7 | ||||||||||||||||||||
|
Conversion
of debentures
|
— | 0.1 | — | — | — | — | 0.1 | |||||||||||||||||||||
|
Revaluation
of hedges, net of tax
|
— | — | — | (38.3 | ) | — | — | (38.3 | ) | |||||||||||||||||||
|
Cumulative
transition adjustment required by FIN 48
|
— | — | — | — | 1.9 | — | 1.9 | |||||||||||||||||||||
|
Balances
at December 31, 2007
|
$ | 83.3 | $ | 438.3 | $ | (29.8 | ) | $ | (316.0 | ) | $ | 1,903.3 | $ | (1,601.1 | ) | $ | 478.0 | |||||||||||
|
(Common
shares: issued, 160,004,908; reacquired, 46,006,780)
|
||||||||||||||||||||||||||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
- 52
-
Hercules
Incorporated
Summary of Significant Accounting Policies
(Dollars
in millions, except per share data)
Hercules
Incorporated (“Hercules” or the “Company”) was incorporated in 1912 under the
laws of the State of Delaware and its shares are traded on the New York Stock
Exchange under the symbol “HPC.” The Company is a leading
manufacturer and marketer of specialty chemicals and related services for a
broad range of business, consumer and industrial applications and has
approximately 4,660 employees worldwide. The Company has a broad
customer base, with no single customer representing greater than 3% of Net
sales, and serves many different markets, the largest of which
include: tissue and paper towel manufacturing; packaging products,
printing and writing paper; interior and exterior paints; construction materials
and energy services. To serve these markets, the Company has global
manufacturing operations which provide products to customers in more than 135
countries.
Principles of
Consolidation
The
Consolidated Financial Statements include the accounts of Hercules, its
subsidiaries where control exists and variable interest entities ("VIEs") in
which Hercules is the primary beneficiary. All significant
intercompany transactions and profits have been
eliminated. Investments in affiliated companies, where Hercules has a
20% to 50% interest and where the entity is neither a VIE nor is Hercules the
primary beneficiary, are accounted for using the equity method of accounting
and, accordingly, consolidated income includes Hercules' share of their income
or loss. These investments are included in Deferred charges and other
assets on the Company’s Consolidated Balance Sheets.
Use of
Estimates
Preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the Consolidated
Financial Statements and the accompanying Notes. Actual results could
differ from these estimates.
Revenue
Recognition
The
Company recognizes revenue when the earnings process is
complete. This generally occurs when products are shipped to the
customer in accordance with terms of the applicable sales agreement, title and
risk of loss have been transferred, collectibility is probable and pricing is
fixed or determinable. Approximately 15%, 14% and 13% of the
Company's revenues for the years ended December 31, 2007, 2006 and 2005,
respectively, are from consignment inventory. For consignment
inventory, title and risk of loss are transferred generally when the Company's
products have been consumed or used in the customer's production
process. Revenues exclude amounts for value-added, sales and similar
taxes. Accruals are made for sales returns and other allowances based
on the Company's experience. Shipping and handling fees billed to the
customer are included in revenues. Shipping and handling costs are
included in Cost of sales.
Research and Development
Expenditures
Research
and development expenditures are expensed as incurred.
Cash and Cash
Equivalents
Cash
equivalents include bank drafts and other securities with original maturities of
90 days or less at the time of purchase or receipt. Book value
approximates fair value because of the short maturity of those
instruments.
Allowance for Doubtful
Accounts Receivable
The
allowance for doubtful accounts represents an estimate of uncollectible accounts
receivable. The recorded amount reflects various factors, including
accounts receivable aging, customer-specific risk issues, country risk and
historical write-off experience. It includes, but is not limited to,
a formula driven calculation applied to the aging of trade accounts receivable
balances. When a specific accounts receivable balance is deemed
uncollectible, a charge is taken to this reserve. Recoveries of
balances previously written off are also reflected in this reserve.
Inventories
Inventories
are stated at the lower of cost or market and are valued principally on the
weighted-average-cost method. Elements of costs in inventories
include raw materials, direct labor and manufacturing overhead.
Assets Held for
Sale
When
specific actions to dispose of assets progress to the point that “plan of sale”
criteria have been met, impairments, to the extent they exist, are recognized in
the Consolidated Statements of Operations and the underlying assets are
reclassified as assets held for sale and included in the caption Other current
assets or separately disclosed. Gains and losses on sales of assets
associated with active business operations and sites are included in Other
operating expense, net while those attributable to former businesses and all
others are included in Other expense, net.
- 53
-
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
Property, Plant and
Equipment and Depreciation
Property,
plant and equipment are stated at cost. The Company uses the straight
line method of depreciation. The estimated useful lives of
depreciable assets are as follows: buildings – 30 years; plant machinery and
equipment – 15 years; other machinery and equipment – 3 to 15
years.
Maintenance,
repairs and minor renewals are expensed as incurred; major renewals and
improvements that extend the lives or increase the capacity of plant assets are
capitalized. Upon normal retirement or replacement, the net book
value of property (less proceeds of sale or salvage) is charged to the
Consolidated Statement of Operations.
Intangible Assets and
Goodwill
Intangible
assets with finite lives are amortized on a straight-line basis over their
estimated useful lives, generally 40 years for customer relationships,
trademarks and tradenames and 3 to 50 years for all other intangible
assets. Goodwill is tested for impairment on an annual basis as of
November 30 with any necessary adjustment charged to the Consolidated Statement
of Operations. For purposes of applying the impairment test, the
Company has identified its reporting units as Paper Technologies and Ventures
(“PTV”) and the Aqualon Group (“Aqualon”).
Long-lived
Assets
The
Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate carrying amounts of the
assets may not be recoverable through undiscounted future cash
flows. If an impairment loss has occurred based on expected
undiscounted future cash flows, a loss is recognized. The amount of
the impairment loss is the excess of the carrying amount of the impaired asset
over its fair value. The fair value represents expected future cash
flows from the use of the assets, determined using present value
techniques.
Computer Software
Development Costs
Capitalized
computer software development costs are included in Deferred charges and other
assets in the Company's Consolidated Balance Sheets and amortized over a period
of 3 to 10 years.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach for accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The
(benefit) provision for income tax represents income taxes paid (received) or
payable (receivable) for the current year plus the change in deferred taxes
during the year. Deferred taxes result from differences between the
financial and tax basis of the Company's assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are
enacted. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be
realized. The Company also reflects interest and penalties attributable to
income taxes, to the extent they arise, as a component of its income tax
provision or benefit as well as its outstanding income tax assets and
liabilities.
Litigation
The
Company provides for liabilities related to litigation when it is probable that
a liability has been incurred and the amount can be reasonably estimated.
Litigation costs, including attorneys fees and expenses, are charged to expense
when incurred.
Asset Retirement Obligations
and Environmental Contingencies
The
Company has recorded the fair value of asset retirement obligations (“AROs”) in
order to recognize legal obligations associated with the retirement of tangible
long-lived assets and for the remediation of environmental liabilities
associated with current and former operations incurred during the course of
normal operations as well as the return of leased property to its original
condition upon the expiration of their underlying lease terms. In
addition, the Company provides for AROs that are conditional in nature including
those triggered upon commitments by the Company to take certain actions,
including demolition, renovation and other retirement-related
activities. There are a number of remaining conditional AROs whereby
the Company does not have sufficient information to estimate the fair value of
the liabilities because the range of settlement dates has not been specified by
others and/or cost estimates are not available to apply an expected present
value technique. Most significant among these unrecognized
conditional AROs are those attributable to the abatement of asbestos at
manufacturing facilities. In general, regulations in the U.S. and
other countries do not require removal or abatement unless the condition is
hazardous or if the structure is disturbed through such activities as renovation
or demolition.
- 54
-
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
For the
purposes of recognizing obligations requiring the dismantlement of facilities,
owned properties, which have no fixed cessation date, are assumed to be in
operation for 50 years, although it could be longer. The Company
evaluates the status of its facilities on a periodic basis and makes any
necessary adjustments to the AROs as required. Dismantlement of
facilities at leased sites is assumed to occur upon lease termination unless it
is likely that the Company is able to and plans to extend the term.
With
respect to environmental contamination, the Company operates within the
requirements of numerous regulations at the local, state and U.S. Federal and
foreign levels regarding issues such as the handling and disposal of hazardous
chemicals, waste-water treatment and effluent and emissions limitations, among
others. From a practical standpoint, certain environmental
contamination cannot be reasonably determined until a facility or asset is
retired or an event occurs that otherwise requires the facility to be tested and
monitored.
The
Company capitalizes AROs that result from the normal operation of the Company’s
active facilities. Accretion of AROs attributable to active
facilities is recorded in Other operating expense, net. Initial AROs, subsequent
changes in estimates and accretion for inactive sites associated with businesses
that have been exited or divested are recorded in Other expense,
net.
The
Company also provides for environmental contingencies whereby it is reasonably
likely that the Company has incurred a liability for costs associated with
environmental remediation or for the probable settlement of related
litigation. Such contingent liabilities include those attributable to
sites that the Company formerly owned as well as sites that the Company did not
have an ownership interest therein, but was associated with activities at such
sites, including landfills, waste sites and other similar
properties.
Foreign Currency
Translation
The
financial statements of Hercules' non-U.S. entities are translated into U.S.
dollars. Most of the Company’s foreign subsidiaries use the local
currency as their functional currency. Net sales and expenses are
translated using the average exchange rates for the reporting
period. The Company translates assets and liabilities of those
entities into U.S. dollars using the appropriate period-end rates of
exchange. Translation gains and losses are recorded in Accumulated
other comprehensive losses (“AOCL”).
Derivative Instruments and
Hedging
Under
procedures and controls established by the Company's risk management policies,
the Company strategically enters into contractual arrangements (derivatives) in
the ordinary course of business to reduce the exposure to foreign currency
rates, interest rates and commodity prices.
The
Company's risk management policies establish several approved derivative
instruments to be utilized in each risk management program and the level of
exposure coverage based on the assessment of risk factors. Derivative
instruments utilized include forwards, swaps and options. The Company
uses forward exchange contracts and options, generally no greater than three
months in term, to reduce its net currency exposure. The objective of
this program is to maintain an overall balanced position in foreign currencies
so that exchange gains and losses resulting from exchange rate changes are
minimized. The Company has used interest rate swap agreements to
manage interest costs and risks associated with changing rates. The
Company has used forward contracts to hedge commodity price risk. The
Company uses cross-currency interest rate swaps to hedge the foreign currency
exposure associated with its net investment in certain foreign operations.
Derivative instruments are recorded on the balance sheet at their fair
values.
With the
exception of cross-currency interest rate swaps, the Company has not designated
any derivatives as a formal hedge instrument and accordingly, changes in fair
value are recorded each period in earnings as a component of Other expense, net
(foreign currency exposures) and Cost of sales (commodity price exposures)
consistent with the reporting of the items hedged. Changes in the
fair value of cross-currency interest rate swaps are recorded in the foreign
currency translation adjustments component of AOCL. Net interest
payments or receipts from cross-currency interest rate swaps are recorded as
adjustments to Interest and debt expense, net in the Statement of Operations and
are reflected in Net cash provided by operating activities in the Statement of
Cash Flows.
Counterparties
to all derivative contracts are major financial institutions. Credit
loss from counterparty nonperformance is not anticipated.
Stock-based
Compensation
For
financial reporting purposes, the Company uses the Black-Scholes option pricing
model to determine the fair value of stock options issued as compensation to key
employees and non-employee directors. The Company charges stock-based
compensation cost based on the number of awards expected to vest. This measure
provides for an estimate of forfeitures based on historical
experience.
- 55
-
Hercules
Incorporated
Summary
of Significant Accounting Policies
(Dollars
in millions, except per share data)
Effective,
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) (see Note 20). The Company had previously adopted,
effective January 1, 2003, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), The Company elected to
apply the fair value recognition provisions of SFAS 123 on a prospective basis
to all employee awards granted, modified or settled after January 1, 2003
through the date of adoption for SFAS 123R. Therefore, the cost
related to stock-based employee compensation included in the determination of
net income in 2005 was less than that which would have been recognized if the
fair value based method had been applied to all awards since the original
effective date of SFAS 123.
The
following table presents the pro forma effect on the net loss and loss per share
in 2005 assuming the Company applied the fair value recognition provisions of
SFAS 123 to all outstanding awards on a retroactive basis.
|
2005
|
||||
|
Net
loss, as reported
|
$ | (41.1 | ) | |
|
Add: Total
stock-based compensation expense recognized in reported results,
net of tax
|
4.5 | |||
|
Deduct:
Total stock-based compensation expense determined under the fair
value based method for all awards, net of tax
|
5.1 | |||
|
Pro
forma net loss
|
$ | (41.7 | ) | |
|
Basic
and Diluted loss per share - as reported and pro forma
|
$ | (0.38 | ) | |
Recent Accounting
Pronouncements
In
December 2007, the FASB issued Statements of Financial Accounting Standards No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements – an amendment to
ARB No. 51” (“SFAS 160”). Both SFAS 141R and SFAS 160 are to be
adopted effective January 1, 2009. SFAS 141R requires the application
of several new or modified accounting concepts that, due to their complexity,
could introduce a degree of volatility in periods subsequent to a material
business combination. SFAS 141R requires that all business
combinations result in assets and liabilities acquired being recorded at their
fair value, with limited exceptions. Other areas related to business
combinations that will require changes from current GAAP
include: contingent consideration, acquisition costs, contingencies,
restructuring costs, in process research and development and income taxes, among
others. SFAS 160 will primarily impact the presentation of minority
or noncontrolling interests within the Balance Sheet and Statement of Operations
as well as the accounting for transactions with noncontrolling interest
holders.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS
159 provides an option to report certain financial assets and liabilities at
fair value primarily to reduce the complexity and level of volatility in the
accounting for financial instruments resulting from measuring related financial
assets and liabilities differently under existing GAAP. SFAS 159 is effective
January 1, 2008. The Company does not anticipate SFAS 159 having a
material impact on its financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a
framework for measuring fair value under GAAP and will be applied to existing
accounting and disclosure requirements in GAAP that are based on fair value.
SFAS 157 does not require any new fair value measurements. SFAS 157
emphasizes a “market-based” as opposed to an “entity-specific” measurement
perspective, establishes a hierarchy of fair value measurement methods and
expands disclosure requirements about fair value measurements including methods
and assumptions and the impact on earnings. The Company has
identified its cross-currency interest rate swaps, certain foreign
exchange-related contracts, its “available for sale” investment securities and
its measurement processes for certain nonfinancial assets and liabilities
including the impairment of goodwill and other intangible assets and asset
retirement obligations as being impacted by SFAS 157. Originally,
SFAS 157 was to be effective January 1, 2008 and applied
prospectively. In February 2008, the FASB issued a Staff Position
that partially defers the effective date of SFAS 157 for one year for certain
nonfinancial assets and nonfinancial liabilities including those identified by
the Company as being impacted.
Reclassifications
Certain
amounts in the 2006 and 2005 Consolidated Financial Statements and Notes have
been reclassified to conform to the 2007 presentation.
- 56
-
Hercules
Incorporated
Notes to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
1.
|
Acquisitions and
Investments
|
2007
Activities
During
2007, the Company completed two transactions: (1) the acquisition of the
specialty surfactants business of Dexter Chemicals, LLC (“Dexter”) and (2) the
formation of H2H Innovations, LLC (“H2H”), a technology joint venture between
Heartland Resource Technologies (“Heartland”) and Hercules. The
Dexter transaction included the acquisition of certain inventories for $1.7
million and intangible and goodwill assets of $8.0 million and $1.1 million,
respectively, as well as the assumption of $0.2 million in sales rebate
obligations. A total of $10.6 million, including transaction costs of
$0.3 million, was paid during 2007. An additional amount of up to
$2.0 million is payable within one year of closing contingent upon the
continuity of sales revenues at certain predetermined levels. This
business has been integrated into the Aqualon segment and manufactures and
markets products for the coatings industry.
In
connection with the formation of the H2H joint venture, Hercules made a cash
investment of $5.0 million and contributed certain intangible assets and
royalty-free access to technology for a 51% ownership
interest. Heartland contributed similar assets for the remaining 49%
interest. As a result of the formation, the Company recognized $13.7
million of intangible assets. H2H has been integrated into the
Ventures component of the PTV segment.
In
connection with the 2006 acquisition of the guar and guar derivative
manufacturing division of Benchmark Polymer Products, L.P. (“Benchmark”), the
Company is required to make a $2.0 million earn-out payment during 2008 based on
the business’ 2007 performance. This contingent payment was accrued
as of December 31, 2007 and charged directly to goodwill.
The
following table summarizes the fair values of the assets, liabilities and
minority interests recognized as a result of the acquisition and investment
activity during 2007:
|
Assets
|
Liabilities
and Minority Interests
|
||||||||
|
Inventories
|
$ | 1.7 |
Accrued
expenses
|
$ | 2.2 | ||||
|
Intangible
assets, net
|
21.7 |
Minority
interests
|
8.7 | ||||||
|
Goodwill
|
3.1 | ||||||||
|
Total
assets
|
$ | 26.5 |
Total
liabilities and minority interests
|
$ | 10.9 | ||||
Also
during 2007, the Company made a $1.4 million earn-out payment that was
previously accrued and charged to goodwill at the end of 2006 based on the
Benchmark business’ 2006 performance. In addition, the Company
received a $0.5 million loan repayment from Benchmark Performance Group (“BPG”)
in connection with a loan transaction entered into during 2006 (see
below).
2006
Activities
During
2006, the Company completed three investment transactions for a total of $29.4
million including transaction costs, net of cash acquired. These
included: (1) the acquisition of the Benchmark business, a former subsidiary of
BPG, as well as a loan to BPG that is convertible into an equity position in
BPG, (2) an investment for a 40% ownership interest in the joint venture,
Hercules Tianpu Chemicals Company Limited (“Hercules Tianpu”), a manufacturer of
methylcellulose (“MC”) in China and (3) the acquisition of the 40% ownership
interest not previously held by Hercules in the joint venture, Shanghai Hercules
Chemicals Company, Ltd. (“Shanghai Hercules”), from its partner Shanghai
Chlor-Alkali Chemical Co. Ltd.
The
Company acquired the net assets of Benchmark for a total of $20.2 million
including transaction costs plus a provisional earn-out. In addition,
the Company signed a five year exclusive agreement to supply BPG with guar
products for polymer slurries used in oil and gas fracturing
applications. Under the terms of the purchase agreement, the Company
acquired Benchmark’s Dalton, Georgia production facility, related working
capital, an intangible asset of $3.7 million related to the supply agreement and
goodwill of $9.7 million. In a related transaction, the Company
loaned $2.5 million to BPG. The results of operations of Benchmark
have been included in the Consolidated Financial Statements since the date of
acquisition and have been integrated into the Aqualon segment.
The
formation of the Hercules Tianpu joint venture was completed with the Company
contributing a total of $3.2 million for a 40% ownership interest in addition to
$4.4 million previously contributed in 2005 during the preliminary formation
stage. Prior to formation, the Company paid a total of $2.8 million
attributable to subscription rights including transaction
costs. During 2006, Hercules Tianpu was consolidated into Hercules
(see Note 3) and has been integrated into the Aqualon
business segment. Included in the net assets recognized upon
consolidation was $3.5 million of intangible assets as well as $2.8 million of
goodwill.
- 57
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During
2006, the Company acquired the remaining 40% ownership interest in Shanghai
Hercules for $3.3 million. The transaction resulted in an increase to
Goodwill in the amount of $1.5 million. As a controlled,
majority-owned subsidiary, the results of operations and net assets of Shanghai
Hercules have been included in the Consolidated Financial Statements and those
amounts attributable to non-controlling shareholders have been reflected as
minority interests in the Statement of Operations and Balance Sheet,
respectively. Effective upon completion of the transaction, the
Company has reflected its full ownership of Shanghai Hercules and has included
100% of its net income in the Results of Operations.
The
following table summarizes the fair values of the assets, liabilities and
minority interests recognized as a result of the acquisition and investment
activity during 2006:
|
Assets
|
Liabilities
and Minority Interests
|
||||||||
|
Cash
and cash equivalents
|
$ | 2.6 |
Accounts
payable
|
$ | 10.3 | ||||
|
Accounts
receivable, net
|
3.9 |
Accrued
expenses
|
5.5 | ||||||
|
Inventories
|
10.1 |
Minority
interests
|
9.6 | ||||||
|
Other
current assets
|
0.1 | ||||||||
|
Property,
plant and equipment, net
|
21.2 | ||||||||
|
Intangible
assets, net
|
7.2 | ||||||||
|
Goodwill
|
14.0 | ||||||||
|
Deferred
charges and other assets
|
2.7 | ||||||||
|
Total
assets
|
$ | 61.8 |
Total
liabilities and minority interests
|
$ | 25.4 | ||||
|
2.
|
Divestitures
|
During
2006, the Company completed the sale (the “Transaction” or “FiberVisions
Transaction”) of a 51% interest in its FiberVisions division for $27.0
million. In connection with the Transaction, FiberVisions issued
long-term debt in the amount of $90.0 million and simultaneously completed a
distribution of $82.0 million to the Company. FiberVisions incurred
$6.3 million of costs in connection with the debt issuance.
The
Transaction contemplated additional contributions to FiberVisions based on
defined performance measures during 2006 and 2007. Based on
FiberVisions’ subsequent performance, the Company provided additional
contributions of $4.5 million and $1.2 million during 2006 and 2007,
respectively. As a result of the Transaction and post-closing
adjustments, including the performance-based contributions, the Company
recognized a $13.3 million loss during 2006. During 2007, the Company’s interest
in FiberVisions was diluted to 34.5% based on additional investments by the
majority owner. As a result of the dilution, the Company incurred a
net charge of $2.5 million. The 2006 loss and 2007 charge are
included as a component of Other expense, net.
FiberVisions
was fully consolidated in the Company’s financial statements through March 31,
2006. Effective April 1, 2006, the Company began recording its equity
in the earnings of FiberVisions based on its ownership interest. The
Company’s share of FiberVisions’ net losses for 2007 and 2006 was $1.5 million
and $3.4 million, respectively. The Company’s investment in
FiberVisions is included in Deferred charges and other assets for $18.1 million
as of December 31, 2007.
In
connection with its initial commitment to sell a majority interest in
FiberVisions at the end of 2005, the Company recorded an impairment charge of
$52.9 million. The impairment charge was based on an estimate of the
fair value for the entire division, as determined by the negotiated sales price
for the aforementioned sale of a majority interest, and was reflected in Profit
from operations as it represented an active and fully consolidated business
during 2005.
|
3.
|
Variable Interest
Entities
|
The
Company has identified Hercules Tianpu as a variable interest entity for which
the Company was the primary beneficiary. The financial statements
reflect the consolidation of Hercules Tianpu effective April 1,
2006. The Company maintains a 40% ownership interest in Hercules
Tianpu and Aqualon has the global marketing rights for the joint venture’s
output and receives sales commissions as well as royalties for licensed
technology. As of December 31, 2007, the Company’s total equity
investment in Hercules Tianpu was $13.1 million. As of December 31,
2007, the fair value of the assets of Hercules Tianpu was approximately $74
million and the fair values of the associated liabilities and non-controlling
interest were approximately $63 million. There are no assets of the
Company that serve as collateral for Hercules Tianpu. However, the
Company has provided guarantees to certain financial institutions that have
provided credit to Hercules Tianpu. As of December 31, 2007, the
total amount outstanding under these facilities was $42.4 million.
- 58
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
4. Accounts Receivable, Net
Accounts
Receivable, net includes trade accounts and notes receivable and amounts due
from affiliates less an allowance for doubtful accounts.
Changes
in the allowance for doubtful accounts for the years ended December 31, 2007,
2006 and 2005 are as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
at beginning of year
|
$ | 5.6 | $ | 4.0 | $ | 4.7 | ||||||
|
Charged
to costs and expenses
|
1.0 | 3.2 | 2.3 | |||||||||
|
Deductions
and other changes
|
(2.1 | ) | (1.6 | ) | (3.0 | ) | ||||||
|
Balance
at end of year
|
$ | 4.5 | $ | 5.6 | $ | 4.0 | ||||||
|
5.
|
Inventories
|
The
components of inventories as of December 31, 2007 and 2006 are as
follows:
|
2007
|
2006
|
|||||||
|
Finished
products
|
$ | 125.5 | $ | 115.4 | ||||
|
Raw
materials and work-in-process
|
74.9 | 73.3 | ||||||
|
Supplies
|
23.6 | 21.9 | ||||||
| $ | 224.0 | $ | 210.6 | |||||
|
6.
|
Intangible Assets and
Goodwill
|
The
following table provides information regarding the Company’s intangible assets
with finite lives.
|
2007
|
2006
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
|||||||||||||||||||
|
Customer
relationships
|
$ | 95.6 | $ | 21.1 | $ | 74.5 | $ | 90.0 | $ | 18.6 | $ | 71.4 | ||||||||||||
|
Trademarks
and tradenames
|
76.2 | 17.6 | 58.6 | 73.9 | 15.6 | 58.3 | ||||||||||||||||||
|
Other
intangible assets
|
51.0 | 22.9 | 28.1 | 32.2 | 18.8 | 13.4 | ||||||||||||||||||
| $ | 222.8 | $ | 61.6 | $ | 161.2 | $ | 196.1 | $ | 53.0 | $ | 143.1 | |||||||||||||
Total
amortization expense for intangible assets for the years ended December 31,
2007, 2006 and 2005 was $8.7 million, $7.2 million and $8.0 million,
respectively, which was included in Profit from operations. It is
estimated that amortization expense will be $10.2 million for 2008, $8.9 million
for 2009, $8.7 million for 2010, $7.9 million for 2011 and $6.6 million for
2012.
The
following table shows the activity and changes in the carrying amount of
goodwill for the years ended December 31, 2007 and 2006, by operating
segment:
|
Paper
|
||||||||||||
|
Technologies
|
Aqualon
|
|||||||||||
|
and
Ventures
|
Group
|
Total
|
||||||||||
|
Balance
at January 1, 2006
|
$ | 402.6 | $ | 38.4 | $ | 441.0 | ||||||
|
Acquisitions
and investments
|
1.5 | 12.5 | 14.0 | |||||||||
|
Foreign
currency translation and other
|
25.4 | 1.1 | 26.5 | |||||||||
|
Balance
at December 31, 2006
|
$ | 429.5 | $ | 52.0 | $ | 481.5 | ||||||
|
Acquisitions
and investments
|
— | 3.1 | 3.1 | |||||||||
|
Foreign
currency translation and other
|
42.1 | 1.2 | 43.3 | |||||||||
|
Balance
at December 31, 2007
|
$ | 471.6 | $ | 56.3 | $ | 527.9 | ||||||
- 59
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
7.
|
Debt
|
A
summary of debt follows:
|
2007
|
2006
|
|||||||
|
Term
B loan due 2010 (a)
|
$ | 261.0 | $ | 375.0 | ||||
|
6.60%
notes due 2027
|
15.9 | 100.0 | ||||||
|
11.125%
senior notes due 2007
|
— | 16.1 | ||||||
|
6.75%
senior notes due 2029 (b)
|
250.0 | 250.0 | ||||||
|
8%
convertible subordinated debentures due 2010 (c)
|
2.3 | 2.4 | ||||||
|
6.5%
junior subordinated deferrable interest debentures due 2029
(d)
|
215.1 | 214.1 | ||||||
|
Term
loans at rates ranging from 5.814% to 7.2978% due in varying amounts
through 2011(e)
|
49.9 | 28.1 | ||||||
|
Other
|
1.8 | 9.8 | ||||||
| 796.0 | 995.5 | |||||||
|
Less: Current
debt obligations
|
33.7 | 35.8 | ||||||
|
Long
term debt
|
$ | 762.3 | $ | 959.7 | ||||
|
|
(a)
|
The
term loan, a component of the Company’s Senior Credit Facility, matures on
October 8, 2010 and bears interest at LIBOR + 1.50%, with the Company
holding the option to reset interest rates for one, two, three or six
month periods. The weighted average rate was 6.71% as of
December 31, 2007. The Senior Credit Facility is also comprised
of a $150 million committed revolving credit facility (the “Revolving
Facility”) which matures on April 8, 2009. The Senior Credit
Facility is secured by liens on the Company's assets (including real,
personal and intellectual properties) and is guaranteed by substantially
all of the Company's current and future wholly-owned domestic subsidiaries
(see Note 25).
|
As
of December 31, 2007, the Company had $47.9 million of outstanding letters of
credit under the Revolving Facility. The remaining $102.1 million was
available for use.
The Company's Senior Credit Facility requires quarterly compliance with certain
financial covenants, including a leverage ratio and an interest coverage ratio,
and established limitations on the permitted amount of
capital
expenditures
and dividends.
|
|
(b)
|
The
senior notes are guaranteed by each of Hercules’ current and future
wholly-owned domestic restricted
subsidiaries.
|
|
|
(c)
|
The
convertible subordinated debentures are convertible into common stock at
$14.90 per share and are redeemable at the option of the Company at
varying rates.
|
|
|
(d)
|
The
6.5% junior subordinated deferrable interest debentures due 2029 (the
"6.5% debentures") had an initial issue price of $741.46 and have a
redemption price of $1,000. The 6.5% debentures were initially
issued to Hercules Trust II ("Trust II"), a subsidiary trust established
in 1999. Trust II had issued, in an underwritten public
offering, 350,000 CRESTSSM
Units, each consisting of a 6.5% preferred security of Trust II and a
warrant (exercisable through 2029) to purchase 23.4192 shares of the
Company's common stock for the equivalent of $42.70 per
share. The preferred securities and the warrants were separable
and were initially valued at $741.46 and $258.54,
respectively. The Company and Trust II accreted the difference
between the initial valuation of the 6.5% debentures and the preferred
securities and the redemption value of $1,000 over the term of the 6.5%
debentures and the preferred securities. In connection with the
Company’s dissolution and liquidation of Trust II in December 2004, Trust
II distributed the 6.5% debentures to the holders of the preferred
securities and the preferred securities were cancelled. The
CRESTSSM
Units now consist of the 6.5% debentures and the
warrants.
|
|
|
(e)
|
Includes
loans issued by Hercules Tianpu for which Hercules has provided a
guarantee for 55% of the outstanding balances. The loans are
denominated in renminbi and U.S. Dollar-equivalents and include a
short-term loan payable due in 2008 for approximately $17.2 million and a
long-term loan payable due in 2011 for approximately $25.2
million.
|
At
December 31, 2007, Hercules had available and unused foreign lines of credit
totaling $35.1 million and $31.0 million, respectively.
Debt
maturities are $33.7 million in 2008, $12.2 million in 2009, $263.1 million in
2010, $6.1 million in 2011 and $480.9 million thereafter.
Total
interest expense incurred for the years ended December 31, 2007, 2006 and 2005
was $69.7 million, $71.5 million and $89.8 million, respectively. The
total amounts capitalized for the aforementioned periods were $1.1 million, $0.3
million and $0.4 million, respectively.
- 60
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
8.
|
Income
Taxes
|
The
domestic and foreign components of income (loss) before income taxes, minority
interests and equity (loss) income from continuing operations are listed
below:
|
2007
|
2006
|
2005
|
||||||||||
|
Domestic
|
$ | (42.0 | ) | $ | (164.3 | ) | $ | (46.9 | ) | |||
|
Foreign
|
193.3 | 167.5 | 11.5 | |||||||||
| $ | 151.3 | $ | 3.2 | $ | (35.4 | ) | ||||||
The
components of the tax benefit from continuing operations are as
follows:
|
Current
|
2007
|
2006
|
2005
|
|||||||||
|
U.S.
federal
|
$ | (61.5 | ) | $ | (64.0 | ) | $ | 1.4 | ||||
|
Foreign
|
28.0 | 29.6 | 40.9 | |||||||||
|
State
|
(5.9 | ) | — | 8.8 | ||||||||
|
Deferred
|
||||||||||||
|
U.S.
federal and state
|
21.8 | (154.6 | ) | (48.3 | ) | |||||||
|
Foreign
|
(2.7 | ) | (3.2 | ) | (6.6 | ) | ||||||
| $ | (20.3 | ) | $ | (192.2 | ) | $ | (3.8 | ) | ||||
The
reconciliation of the U.S. statutory income tax rate to the effective rate from
continuing operations is:
|
2007
|
2006
|
2005
|
||||||||||
|
U.S.
statutory income tax rate
|
35 | % | 35 | % | 35 | % | ||||||
|
Valuation
allowances
|
(2 | ) | (3,137 | ) | (66 | ) | ||||||
|
Tax
rate differences on subsidiary earnings
|
(28 | ) | (325 | ) | (8 | ) | ||||||
|
U.S.
tax on foreign dividends and undistributed earnings
|
19 | 232 | 27 | |||||||||
|
State
taxes
|
1 | (1 | ) | (15 | ) | |||||||
|
Reserves
|
— | (1,378 | ) | 21 | ||||||||
|
Exempt
export income
|
— | (36 | ) | 5 | ||||||||
|
Tax
refunds
|
(39 | ) | (1,396 | ) | 12 | |||||||
|
Other
|
1 | — | — | |||||||||
| (13 | )% | (6,006 | )% | 11 | % | |||||||
The
provision for income taxes attributable to discontinued operations and
cumulative effect of changes in accounting principle is:
|
2007
|
2006
|
2005
|
||||||||||
|
Benefit
on loss from discontinued operations
|
$ | (8.0 | ) | $ | (49.6 | ) | $ | (3.4 | ) | |||
|
Cumulative
effect of changes in accounting principle
|
— | 0.5 | (1.4 | ) | ||||||||
| $ | (8.0 | ) | $ | (49.1 | ) | $ | (4.8 | ) | ||||
The tax
benefit (expense) of adjustments posted directly to AOCL (see Note 14) was as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Pension
and other postretirement benefits adjustments reflected in
AOCL
|
$ | (28.0 | ) | $ | — | $ | — | |||||
|
Impact
of the adoption of SFAS 158
|
— | 62.2 | — | |||||||||
|
Hedging
activities
|
20.6 | 18.6 | — | |||||||||
|
Additional
minimum pension liability
|
— | (44.7 | ) | 24.8 | ||||||||
|
Other
|
— | 0.3 | 0.2 | |||||||||
| $ | (7.4 | ) | $ | 36.4 | $ | 25.0 | ||||||
- 61
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
components of the net deferred tax assets (liabilities) as of December 31, are
as follows:
|
2007
|
2006
|
|||||||
|
Depreciation
|
$ | (79.8 | ) | $ | (82.8 | ) | ||
|
Pension
|
(15.1 | ) | (1.3 | ) | ||||
|
Inventory
|
(1.4 | ) | (3.1 | ) | ||||
|
Investments
|
(16.3 | ) | (19.3 | ) | ||||
|
Goodwill
|
(39.3 | ) | (45.0 | ) | ||||
|
Accrued
expenses
|
(2.7 | ) | (2.9 | ) | ||||
|
Other
|
(37.4 | ) | (7.5 | ) | ||||
|
Gross
deferred tax liabilities
|
$ | (192.0 | ) | $ | (161.9 | ) | ||
|
Postretirement
benefits other than pensions
|
$ | 80.5 | $ | 70.0 | ||||
|
Pension
|
48.2 | 87.3 | ||||||
|
Goodwill
|
5.7 | 8.4 | ||||||
|
Accrued
expenses
|
244.0 | 242.1 | ||||||
|
Loss
carryforwards
|
106.7 | 230.1 | ||||||
|
Credit
carryforwards
|
154.2 | 131.4 | ||||||
|
Investments(1)
|
78.1 | 77.5 | ||||||
|
Other
|
7.3 | 14.2 | ||||||
|
Gross
deferred tax assets
|
724.7 | 861.0 | ||||||
|
Valuation
allowance
|
(204.7 | ) | (335.8 | ) | ||||
|
Net
deferred tax assets
|
$ | 328.0 | $ | 363.3 | ||||
(1)
Represents the basis difference in the carrying value of the company’s
investment in FiberVisions for which a full valuation allowance has been
established.
A
reconciliation of activity for the Company’s deferred tax asset valuation
allowance is provided as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
at beginning of the year
|
$ | 335.8 | $ | 380.7 | $ | 391.8 | ||||||
|
Charged
to the (benefit) provision for income taxes
|
(3.8 | ) | (100.4 | ) | 23.1 | |||||||
|
Charged
to deferred tax assets
|
(127.3 | ) | 55.5 | (34.2 | ) | |||||||
|
Balance
at end of the year
|
$ | 204.7 | $ | 335.8 | $ | 380.7 | ||||||
The
expiration terms and amounts for which an allowance has been provided with
respect to the loss and credit carryforwards reflected in the gross deferred tax
assets above are comprised as follows:
|
Expiration
|
Gross
Amount
|
Allowance
|
||||||||||
|
Loss
carryforwards
|
||||||||||||
|
Federal
|
2023
|
$ | 3.4 | $ | — | |||||||
|
State
|
2008
– 2029
|
89.2 | 89.2 | |||||||||
|
Foreign
|
2008 – Indef.
|
14.1 | 7.1 | |||||||||
| $ | 106.7 | $ | 96.3 | |||||||||
|
Credit
carryforwards
|
||||||||||||
|
Foreign
tax
|
2011
– 2017
|
$ | 141.3 | $ | — | |||||||
|
Alternative
minimum tax
|
Indefinite
|
10.6 | — | |||||||||
|
Research
and development
|
2022
– 2027
|
2.3 | — | |||||||||
| $ | 154.2 | $ | — | |||||||||
The
Company provides taxes on undistributed earnings of subsidiaries and affiliates
to the extent such earnings are planned to be remitted and not permanently
reinvested. The undistributed earnings of subsidiaries and affiliates
on which no provision for foreign withholding or U.S. income taxes has been made
amounted to $103.6 million and $82.5 million at December 31, 2007 and 2006,
respectively. U.S. and foreign income taxes that would be payable if
such earnings were distributed may be lower than the amount computed at the U.S.
statutory rate because of the availability of tax credits.
- 62
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Resolution
of Income Tax Matters
During
2007, the Company reached agreement with the Internal Revenue Service (“IRS”) on
all remaining income tax matters for the years 1993 through 2003, resulting in
the recording of an additional benefit of $56.6 million, including interest,
over and above amounts recorded during the fourth quarter of 2006. In
addition, the Company has received approximately $222 million of an estimated
$241 million in federal income tax refunds, including interest, during
2007. The Company also expects to receive a total of approximately $4
million in state income tax refunds of which approximately $3 million was
received during 2007. The remaining estimated amounts are projected
to be received during the first half of 2008.
Adoption
of FIN 48
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”) effective January 1, 2007. The Company identified $40.4 million
of unrecognized tax benefits (“UTB”) as of January 1, 2007 and in accordance
with the transition provisions of FIN 48, recorded an increase to its beginning
balance of retained earnings in the amount of $1.9 million with a corresponding
decrease to certain state income tax reserves included in the caption Deferred
credits and other liabilities. A reconciliation of the activity in
the UTB accounts is as follows:
|
Balance
at January 1, 2007
|
$ | 40.4 | ||||||
|
Increases
related to prior year tax positions
|
0.3 | |||||||
|
Decreases
related to prior year tax positions
|
(3.6 | ) | ||||||
|
Increases
related to current year tax positions
|
0.4 | |||||||
|
Settlements
|
(0.9 | ) | ||||||
|
Lapse
of statute
|
(0.3 | ) | ||||||
|
Other,
net
|
(0.8 | ) | ||||||
|
Net
change
|
(4.9 | ) | ||||||
|
Balance
at December 31, 2007
|
$ | 35.5 | ||||||
Of the
total UTB as of December 31, 2007, $12.5 million would affect the effective tax
rate if recognized in future periods. The total amount of UTB could
increase or decrease within the next twelve months for a number of reasons
including the expiration of statute of limitations, audit settlements, tax
examination activities and the recognition and measurement considerations under
FIN 48. The Company does not believe that the total amount of UTB
will significantly increase or decrease over the next twelve
months.
The
Company has a long audit history with the IRS, and recently settled all issues
for the years 1993 through 2003. The tax years 2004 and 2005 are
currently under audit by the IRS. The Company also files tax returns
in every state which imposes corporate income tax and those jurisdictions remain
subject to examination in accordance with relevant state statutes. In
addition, the Company has significant international operations and approximately
50 legal entities have income tax filing requirements in accordance with local
country tax regulations. These returns remain subject to examination
in accordance with the local country statutes. The Company is
currently under audit in Germany for tax years 1999 through 2004.
The
Company has elected to retain its existing accounting policy with respect to the
treatment of interest and penalties attributable to income taxes in accordance
with FIN 48, and continues to reflect interest and penalties attributable to
income taxes, to the extent they arise, as a component of its income tax
provision or benefit as well as its outstanding income tax assets and
liabilities. The total amount of interest and penalties recognized in
the Consolidated Balance Sheet as of January 1, 2007 and December 31, 2007 was
$15.2 million and $16.1 million, respectively.
- 63
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
|
9. Pension and
Other Postretirement
Benefits
|
The
Company provides pension and postretirement benefits to most U.S. employees and
some foreign employees. The Company uses a measurement date of
December 31 for all of its defined benefit pension plans and other
postretirement benefit plans (“OPEB”). Summarized information about
the plans is provided as follows:
|
Defined
Benefit Pension Plans
|
||||||||||||||||||||||||
|
2007
|
2006
|
OPEB
|
||||||||||||||||||||||
|
Change
in benefit obligation:
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2007
|
2006
|
||||||||||||||||||
|
Benefit
obligation at January 1
|
$ | 1,502.1 | $ | 364.1 | $ | 1,536.8 | $ | 340.6 | $ | 158.4 | $ | 154.5 | ||||||||||||
|
Service
cost
|
11.2 | 6.0 | 11.4 | 6.0 | 0.6 | 0.5 | ||||||||||||||||||
|
Interest
cost
|
86.4 | 17.4 | 86.5 | 15.5 | 8.1 | 8.8 | ||||||||||||||||||
|
Plan
amendments
|
0.6 | 0.8 | — | 0.3 | — | — | ||||||||||||||||||
|
Foreign
currency translation
|
— | 30.8 | — | 35.3 | 0.5 | — | ||||||||||||||||||
|
Actuarial
(gain) loss
|
(21.4 | ) | (24.1 | ) | (17.8 | ) | (17.8 | ) | (11.9 | ) | 14.7 | |||||||||||||
|
Settlements/curtailments
|
— | — | (2.3 | ) | (0.6 | ) | — | — | ||||||||||||||||
|
Special
termination benefits
|
— | — | 1.6 | — | — | 1.3 | ||||||||||||||||||
|
Benefits
paid from plan assets
|
(113.4 | ) | (16.5 | ) | (109.0 | ) | (15.2 | ) | — | — | ||||||||||||||
|
Benefits
paid from Company assets
|
(6.4 | ) | — | (5.1 | ) | — | (17.6 | ) | (21.4 | ) | ||||||||||||||
|
Benefit
obligation at December 31
|
1,459.1 | 378.5 | 1,502.1 | 364.1 | 138.1 | 158.4 | ||||||||||||||||||
|
Change
in plan assets:
|
||||||||||||||||||||||||
|
Fair
value of plan assets at January 1
|
$ | 1,306.1 | $ | 295.0 | $ | 1,219.3 | $ | 256.4 | $ | — | $ | — | ||||||||||||
|
Actual
return on plan assets
|
92.2 | 8.8 | 165.7 | 16.6 | — | — | ||||||||||||||||||
|
Company
contributions
|
60.0 | 25.7 | 30.0 | 8.9 | — | — | ||||||||||||||||||
|
Participant
contributions
|
— | 0.8 | — | 0.8 | — | — | ||||||||||||||||||
|
Foreign
currency translation
|
— | 25.9 | — | 27.5 | — | — | ||||||||||||||||||
|
Benefits
paid from plan assets
|
(113.4 | ) | (16.5 | ) | (109.0 | ) | (15.2 | ) | — | — | ||||||||||||||
|
Fair
value of plan assets at December 31
|
1,344.9 | 339.7 | 1,306.0 | 295.0 | — | — | ||||||||||||||||||
|
Funded
status of the plan
|
$ | (114.2 | ) | $ | (38.8 | ) | $ | (196.1 | ) | $ | (69.1 | ) | $ | (138.1 | ) | $ | (158.4 | ) | ||||||
|
Components
of the above amounts:
|
||||||||||||||||||||||||
|
Prepaid
benefit cost
|
$ | — | $ | 10.7 | $ | — | $ | 2.2 | $ | — | $ | — | ||||||||||||
|
Accrued
expenses
|
(4.9 | ) | (0.1 | ) | (4.9 | ) | — | (15.0 | ) | (16.2 | ) | |||||||||||||
|
Accrued
benefit liability (noncurrent)
|
(109.3 | ) | (49.4 | ) | (191.2 | ) | (71.3 | ) | (123.1 | ) | (142.2 | ) | ||||||||||||
|
Net
amount recognized
|
$ | (114.2 | ) | $ | (38.8 | ) | $ | (196.1 | ) | $ | (69.1 | ) | $ | (138.1 | ) | $ | (158.4 | ) | ||||||
|
Amounts
included in AOCL:
|
||||||||||||||||||||||||
|
Actuarial
losses
|
$ | (494.9 | ) | $ | (96.2 | ) | $ | (545.8 | ) | $ | (106.6 | ) | $ | (106.4 | ) | $ | (126.4 | ) | ||||||
|
Prior
service credits
|
15.9 | 16.5 | 18.2 | 17.2 | 35.2 | 43.0 | ||||||||||||||||||
|
Transition
obligations
|
— | (0.3 | ) | — | (0.4 | ) | (0.6 | ) | (0.7 | ) | ||||||||||||||
|
Total
|
$ | (479.0 | ) | $ | (80.0 | ) | $ | (527.6 | ) | $ | (89.8 | ) | $ | (71.8 | ) | $ | (84.1 | ) | ||||||
|
Amortization
expected to be recognized
during
next fiscal year:
|
||||||||||||||||||||||||
|
Actuarial
losses
|
$ | 43.9 | $ | 4.0 | $ | 39.1 | $ | 4.5 | $ | 9.8 | $ | 8.9 | ||||||||||||
|
Prior
service credits
|
(1.7 | ) | (1.9 | ) | (1.7 | ) | (0.9 | ) | (7.0 | ) | (7.8 | ) | ||||||||||||
|
Transition
obligations
|
— | 0.1 | — | 0.1 | 0.2 | 0.1 | ||||||||||||||||||
|
Total
|
$ | 42.2 | $ | 2.2 | $ | 37.4 | $ | 3.7 | $ | 3.0 | $ | 1.2 | ||||||||||||
|
Weighted-average
assumptions used to
determine the benefit
obligation:
|
||||||||||||||||||||||||
|
Weighted-average
discount rate
|
6.16 | % | 5.31 | % | 5.90 | % | 4.71 | % | 5.88 | % | 5.79 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 3.19 | % | 4.30 | % | 3.10 | % | 4.00 | % | 4.29 | % | ||||||||||||
- 64
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Net
benefit costs are summarized below:
|
Defined
Benefit Pension Plans
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
OPEB
|
|||||||||||||||||||||||||||||||||
|
Net periodic benefit
cost:
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||
|
Service
cost
|
$ | 11.2 | $ | 6.1 | $ | 11.4 | $ | 6.0 | $ | 12.7 | $ | 5.4 | $ | 0.6 | $ | 0.5 | $ | 0.8 | ||||||||||||||||||
|
Interest
cost
|
86.4 | 17.4 | 86.5 | 15.5 | 81.3 | 15.2 | 8.1 | 8.8 | 8.8 | |||||||||||||||||||||||||||
|
Expected
return on plan assets
|
(101.0 | ) | (20.2 | ) | (100.4 | ) | (17.3 | ) | (95.4 | ) | (14.9 | ) | — | — | — | |||||||||||||||||||||
|
Amortization
and deferrals
|
(1.7 | ) | (1.0 | ) | (1.8 | ) | (0.5 | ) | (1.9 | ) | 0.2 | (7.8 | ) | (8.0 | ) | (7.3 | ) | |||||||||||||||||||
|
Participant
contributions
|
— | — | — | (0.5 | ) | — | (0.5 | ) | — | — | — | |||||||||||||||||||||||||
|
Settlements/curtailments
(1)
|
— | — | (2.0 | ) | — | — | — | — | (4.4 | ) | — | |||||||||||||||||||||||||
|
Special
benefits/terminations (1)
|
— | — | 1.6 | — | — | — | — | 1.2 | — | |||||||||||||||||||||||||||
|
Amortization
of transition (asset) obligation
|
— | 0.1 | — | 0.1 | — | 0.1 | 0.2 | 0.1 | 0.1 | |||||||||||||||||||||||||||
|
Actuarial
losses recognized
|
38.2 | 4.7 | 39.9 | 4.5 | 40.7 | 3.3 | 8.1 | 8.3 | 6.4 | |||||||||||||||||||||||||||
| 33.1 | 7.1 | $ | 35.2 | $ | 7.8 | $ | 37.4 | $ | 8.8 | 9.2 | $ | 6.5 | $ | 8.8 | ||||||||||||||||||||||
|
Other
changes recognized in Comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Current
year actuarial gains
|
(12.7 | ) | (12.7 | ) | (11.7 | ) | ||||||||||||||||||||||||||||||
|
Current
year prior service costs
|
0.6 | — | — | |||||||||||||||||||||||||||||||||
|
Amortization:
|
||||||||||||||||||||||||||||||||||||
|
Prior
service credits
|
1.7 | 1.0 | 7.8 | |||||||||||||||||||||||||||||||||
|
Transition
obligations
|
— | (0.1 | ) | (0.2 | ) | |||||||||||||||||||||||||||||||
|
Actuarial
losses
|
(38.2 | ) | (4.7 | ) | (8.1 | ) | ||||||||||||||||||||||||||||||
| (48.6 | ) | (16.5 | ) | (12.2 | ) | |||||||||||||||||||||||||||||||
|
Recognized
in periodic benefit cost and Comprehensive income
|
$ | 15.5 | $ | (9.4 | ) | $ | (3.0 | ) | ||||||||||||||||||||||||||||
(1) During 2006, the impact of these items
was directly attributable to the FiberVisions transaction and, accordingly,
these items are reflected in the loss on the sale of a 51% interest in
FiberVisions (see Notes 2 and 18)..
|
Weighted-average
assumptions used to determine net periodic benefit cost:
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||
|
Weighted-average
discount rate
|
5.90 | % | 4.71 | % | 6.00 | % | 4.53 | % | 5.75 | % | 5.04 | % | 5.79 | % | 5.81 | % | 5.51 | % | ||||||||||||||||||
|
Expected
return on plan assets
|
8.25 | % | 6.47 | % | 8.50 | % | 6.36 | % | 8.50 | % | 6.49 | % | N/A | N/A | N/A | |||||||||||||||||||||
|
Rate
of compensation increase
|
4.30 | % | 3.10 | % | 4.30 | % | 2.99 | % | 4.50 | % | 2.79 | % | 4.29 | % | 4.29 | % | 4.49 | % | ||||||||||||||||||
Description
of Plans
U.S.
Defined Benefit Pension Plans
The
Company provides both funded (qualified) and unfunded (non-qualified)
non-contributory defined benefit pension plans to substantially all of its U.S.
employees. During 2004, some terms of the U.S. qualified Plan (“U.S.
Plan”) were amended, rendering new hires ineligible and changing the calculation
formula to remaining participants from “final pay” to “modified career average
pay,” effective January 1, 2005.
International
Defined Benefit Pension Plans
The
Company provides defined benefit pension plans to eligible employees in parts of
Europe, the Americas and various countries in the Asia Pacific region (the
“International Plans”). The International Plans provide benefits
based on years of service and final average salary, except for the defined
benefit pension plans in The Netherlands (“The Netherlands Plan”) and the United
Kingdom (the “U.K. Plan”) which have both been amended to provide benefits based
on a modified career average pay basis effective January 1, 2006.
Other
Postretirement Benefit Plans
The
non-pension postretirement benefit plans include group life insurance coverage
and health care reimbursement for eligible employees/retirees in the U.S. and
Canada. The benefit obligation of the U.S. postretirement benefit
plan constitutes more than 97% of the Company's consolidated benefit obligation
at December 31, 2007 for non-pension postretirement
benefits. The assumed participation rate in these plans for future
eligible retirees was 50% for health care and 100% for life
insurance. The health care plans are contributory with participants'
contributions adjusted annually; the life insurance plans are non-contributory
for most retirees. The postretirement health care plans include a
limit on the Company's share of costs for recent and future retirees and the
related accounting anticipates future cost-sharing changes to the written plans
that are consistent with the increase in health care
cost. Participant contributions are either directly applied to claim
payments or as insurance premiums paid to the insurance companies guaranteeing
the benefits thereunder and thus are not included as contributions to plan
assets. U.S. employees hired after December 31, 2002 are ineligible
for retiree life insurance or postretirement health care
benefits.
- 65
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
assumed pre-65 health care cost trend rate as of December 31, 2007 was an
initial rate of 10% in 2008 reducing to 5.0% in 2012 and
thereafter. The assumed post-65 health care cost trend rate as
of December 31, 2007 was an initial rate of 12% in 2009 reducing to
5.0% in 2016 and thereafter. A one-percentage point increase in the
assumed health care cost trend rate would increase the postretirement benefit
obligation by approximately $2.3 million and the aggregate service and interest
cost components by $0.1 million, while a decrease of the same magnitude would
decrease the postretirement benefit obligations by approximately $2.3 million
and the aggregate service and interest cost components by $0.2
million.
Plan
Assets
In
developing an investment strategy for its defined benefit pension plans, the
Company has considered the following factors: the nature of the
plans’ liabilities, the allocation of such liabilities between active members
and retired members, the funded status of the plans, the net cash flows of the
plans, the investment horizon of the plans, the size of the plans, historical
and expected capital market returns and the benefits of investment
diversification.
U.S.
Defined Benefit Pension Plan
The asset
allocation for the U.S. Plan as of December 31, 2007 and 2006 and the target
allocation for 2008, by asset category, is as follows:
|
Target
Allocation
|
Percentage
of Plan Assets
at
December 31,
|
|||||||||||
|
Asset
category:
|
2008
|
2007
|
2006
|
|||||||||
|
Equity
securities
|
— | — | 66 | % | ||||||||
|
Fixed
income
|
80 | % | 78 | % | 26 | % | ||||||
|
Other
|
20 | % | 22 | % | 8 | % | ||||||
|
Totals
|
100 | % | 100 | % | 100 | % | ||||||
The
target asset allocation for the U.S. Plan is 80% long duration fixed income and
20% alternatives. Hercules strategic asset mix for the U.S.
Plan was transitioned in 2007 to decrease exposure to traditional equity market
risks, to utilize asset classes which tend to reduce surplus volatility, and to
utilize asset classes where active management has historically generated
favorable risk-adjusted returns. To the extent possible, this asset
mix is intended to substantially mitigate the impact of changes in interest
rates on surplus volatility.
Fixed
income securities include U.S. and non-U.S. government obligations and high
grade corporate debt obligations. Other investments primarily include
market neutral, long/short, and event driven-type hedge funds plus an allocation
to a global tactical allocation fund. Investment managers may employ
limited use of derivatives, including futures contracts, options on futures, and
interest rate swaps in place of direct investment in securities to gain
efficient exposure to markets. The expected long-term rate of return
on plan assets was 8.25% for 2007 and 8.50% for 2006.
International
Defined Benefit Pension Plans
The asset
allocation for the International Plans as of December 31, 2007 and 2006 and the
target allocation for 2008, by asset category, is as follows:
|
Target
Allocation
|
Percentage
of Plan Assets
at
December 31,
|
|||||||||||
|
Asset
category:
|
2008
|
2007
|
2006
|
|||||||||
|
Equity
securities
|
33 | % | 33 | % | 58 | % | ||||||
|
Fixed
income
|
51 | % | 51 | % | 41 | % | ||||||
|
Other
|
16 | % | 16 | % | 1 | % | ||||||
|
Totals
|
100 | % | 100 | % | 100 | % | ||||||
The total
assets held by The Netherlands Plan and the U.K. Plan account for approximately
90% of the total assets held by the International Plans.
- 66
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Netherlands Plan
The
Netherlands Plan's long-term target asset allocation is 40% global equity
securities, 50% fixed income, and 10% alternative investments. The
Plan’s strategic asset mix was transitioned in 2007 to reduce exposure to equity
market risks and to utilize long duration fixed income asset classes levered to
achieve a duration to match the plan’s liabilities. The fixed
income securities are denominated in Euro and are issued and/or guaranteed by
European Monetary Union governments (mainly Belgium, Germany, France, Italy and
The Netherlands). The fixed income manager may invest in investment
grade corporate bonds denominated in Euro. Investment managers may
employ limited use of derivatives, including futures contracts, options on
futures, and interest rate swaps in place of direct investment in securities to
gain efficient exposure to markets. Other investments primarily
include market neutral, long/short, and event driven-type hedge
funds.
The
expected long-term rate of return on plan assets was 6.75% for both 2007 and
2006, respectively. The Plan’s overall expected long-term rate of
return on assets assumption is a function of the target asset allocation for
plan assets, the long-term equilibrium rate of return for the asset class, plus
an incremental return attributable to the active management of plan
assets.
U.K.
Plan
The
target asset allocation for the U.K. Plan is 72% long duration fixed income and
28% of roughly equal proportions of property, hedge, and equity type
investments. The U.K.’s strategic asset mix was transitioned in 2007
to decrease exposure to traditional equity market risks, to utilize asset
classes which tend to reduce surplus volatility, and to utilize asset classes
where active management has historically generated favorable risk adjusted
returns. To the extent possible, this asset mix is intended to
substantially mitigate the impact of changes in interest rates on surplus
volatility.
Fixed
income securities include both U.K. and non-U.K. Government obligations and high
grade corporate debt obligations. Other investments include a market
neutral hedge fund, an international property fund and traditional international
and domestic equity. Investment managers may employ limited use of
derivatives, including futures contracts, options on futures, and interest rate
swaps in place of direct investment in securities to gain efficient exposure to
markets. The expected long-term rate of return on plan assets was
5.64% and 5.2% for 2007 and 2006, respectively.
Plan
Cash Flows
Plan
Contributions
During
2007, the Company made contributions to its defined benefit plans totaling $92.1
million, some of which were required by local funding
requirements. The Company presently anticipates making voluntary cash
contributions to the U.S. Plan of approximately $22 million during
2008. Additionally, the Company anticipates making contributions of
approximately $8 million to its international defined benefit pension plans in
2008.
Expected
Benefit Payments
Expected
cash flows for the Company’s future benefit payments expected to be paid from
plan or Company assets for its defined benefit pension plans and other
postretirement benefit plans, are as follows:
|
Pension
Benefits
|
||||||||||||||||||||
|
U.S.
Qualified
|
U.S.
Non-Qualified
|
Int’l.
|
Total
|
OPEB
|
||||||||||||||||
|
2008
|
$ | 89 | $ | 5 | $ | 17 | $ | 111 | $ | 15 | ||||||||||
|
2009
|
90 | 5 | 18 | 113 | 14 | |||||||||||||||
|
2010
|
90 | 5 | 18 | 113 | 14 | |||||||||||||||
|
2011
|
91 | 5 | 20 | 116 | 13 | |||||||||||||||
|
2012
|
92 | 5 | 20 | 117 | 13 | |||||||||||||||
|
2013
through 2017
|
487 | 21 | 109 | 617 | 54 | |||||||||||||||
|
|
10. Defined Contribution
Plans
|
The
Company sponsors defined contribution plans or the equivalent thereof in various
jurisdictions in which it operates. The most significant of these
plans is the Hercules Incorporated Savings and Investment Plan (the
“Plan”). The Plan is a tax qualified defined contribution 401(k) plan
which covers substantially all U.S. employees. Under the Plan, the
Company will contribute an amount equal to 50% of the first 6% of the employees’
qualified contributions. The Company’s contributions are made in the
form of Hercules common stock, which vests immediately, contributed through an
Employee Stock Ownership Plan Trust (“ESOP Trust”). The
Company-contributed common stock may be immediately transferred to other
available investment funds. The Company also makes voluntary
contributions to employees’ accounts under the Plan based on the Company’s
achievement of certain annual financial performance goals. Voluntary
contributions can be made in the form of shares from the ESOP Trust, shares from
Reacquired stock and cash at the Company’s discretion. Matching
contributions to the Plan and other voluntary contributions on a combined basis
were $10.7 million, $7.4 million and $5.5 million for 2007, 2006 and 2005,
respectively.
- 67
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A total
of 391,648, 362,422 and 403,789 shares were allocated by the ESOP Trust during
2007, 2006 and 2005, respectively. The difference between the cost
and fair market value of these allocated shares was $4.5 million, $6.4 million
and $5.0 million for the years 2007, 2006 and 2005, respectively, and was
reflected in Additional paid-in capital. Unallocated shares held by
the ESOP Trust are reflected as Unearned compensation within Stockholders’
equity and have a cost basis of $31.625 per share representing $29.8 million and
$42.1 million as of December 31, 2007, respectively. As of December
31, 2007 and 2006, the ESOP Trust had $18.2 million and $28.3 million,
respectively, payable to the Company under its loan agreement. The
Company has an offsetting receivable, which is eliminated in
consolidation.
Shares
held by the ESOP Trust as of December 31, were as follows:
|
2007
|
2006
|
|||||||
|
Allocated
|
1,155,021 | 1,200,346 | ||||||
|
Unallocated
|
942,239 | 1,332,965 | ||||||
| 2,097,260 | 2,533,311 | |||||||
|
11.
|
Asset Retirement Obligations and Environmental
Contingencies
|
The
following table provides a reconciliation of changes in the AROs and
environmental contingencies during the period:
|
Active
Sites
|
Inactive
Sites
|
Total
|
||||||||||
|
Balance
at January 1, 2006
|
$ | 10.2 | $ | 85.4 | $ | 95.6 | ||||||
|
Settlement
payments
|
(4.3 | ) | (15.9 | ) | (20.2 | ) | ||||||
|
Changes
in estimated obligations and accretion
|
4.0 | 1.6 | 5.6 | |||||||||
|
Foreign
currency translation
|
0.2 | 0.4 | 0.6 | |||||||||
|
Balance
at December 31, 2006
|
$ | 10.1 | $ | 71.5 | $ | 81.6 | ||||||
|
Settlement
payments
|
(1.7 | ) | (10.8 | ) | (12.5 | ) | ||||||
|
Changes
in estimated obligations and accretion
|
2.2 | 6.3 | 8.5 | |||||||||
|
Foreign
currency translation
|
0.2 | 0.5 | 0.7 | |||||||||
|
Balance
at December 31, 2007
|
$ | 10.8 | $ | 67.5 | $ | 78.3 | ||||||
As of
December 31, 2007, $18.3 million is included in Accrued expenses representing
amounts to be settled during 2008 and the remaining $60.0 million is included in
Deferred credits and other liabilities. A total of $5.3 million is
attributable to environmental remediation costs associated with current and
former operating sites. Excluded from the table above is $20.0 million and
$123.5 million, as of December 31, 2007 and 2006, respectively, attributable to
claims and cumulative interest related to the Vertac site as discussed further
in Note 12.
|
|
12. Commitments and
Contingencies
|
Guarantees
In
accordance with FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), disclosures about each group of similar
guarantees are provided below:
Indemnifications
In
connection with the acquisition, disposition, and purchase or sale of Company
assets and businesses, the Company has indemnified against certain liabilities
that may arise in connection with the relevant transactions and business
activities. The terms of these indemnifications typically pertain to
environmental, tax, employee and/or product related matters. If the
indemnified party were to incur a liability or have a liability increase as a
result of a successful claim, pursuant to the terms of the indemnification, the
Company would be required to protect, defend, and/or indemnify the
buyer. These indemnifications are generally subject to threshold
amounts, specified claim periods and/or other restrictions and
limitations. The carrying amount recorded for indemnifications as of
December 31, 2007, all of which are attributable to business disposition
transactions, was $41.2 million and is reflected as a component of Deferred
credits and other liabilities on the Consolidated Balance
Sheet. Although it is reasonably possible that future payments may
exceed amounts accrued, due to the nature of indemnified items, it is not
possible to make a reasonable estimate of the maximum potential loss or range of
loss. Generally, there are no specific recourse
provisions.
- 68
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
addition, in connection with these transactions, the Company has generally
provided indemnifications on general matters such as ownership of the relevant
assets, the power and corporate authority to enter into transactions, the
satisfaction of liabilities not assumed by the buyer and obtaining
consents. These indemnifications generally have indefinite
terms.
In
addition, the Company provides certain indemnifications in the ordinary course
of business such as product, patent and performance warranties in connection
with the manufacture, distribution and sale of its products and
services. Due to the nature of these indemnities, it is not possible
to make a reasonable estimate of the maximum potential loss or range of
loss.
Debt
and Other Obligations
The
Company has directly guaranteed up to $49.6 million of various obligations under
agreements with third parties related to subsidiaries, VIEs and affiliates of
which $32.0 million is outstanding. The outstanding balance reflects
guarantees of debt for terms of varying length as well as a guarantee related to
a foreign-based pension plan with an indefinite term. The Company has
also provided $3.1 million in collateral in the form of a mortgage security
for the aforementioned pension plan. Existing guarantees
for subsidiaries and affiliates arose from liquidity needs in normal
operations.
Leases
Hercules
has operating leases (including office space, transportation and data processing
equipment) expiring at various dates. Lease expense of $21.0 million,
$19.7 million and $20.6 million in 2007, 2006 and 2005, respectively, is net of
sub-lease income of $5.1 million, $5.1 million and $5.2 million in 2007, 2006
and 2005, respectively.
At
December 31, 2007, minimum rental payments under non-cancelable leases
aggregated $128.1 million with offsetting subleases of $28.1
million. A significant portion of these payments relate to a
long-term operating lease for corporate office facilities. The
minimum payments over the next five years, net of minimum sublease receipts, are
$21.2 million in 2008, $29.1 million in 2009, $15.0 million in 2010, $12.5
million in 2011, $11.4 million in 2012 and $10.8 million
thereafter.
Environmental
In the
ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in
these laws and regulations may have a material adverse effect on the Company’s
financial position, results of operations and cash flows. Any failure by
the Company to adequately comply with such laws and regulations could subject
the Company to significant future liabilities. The Company has
established procedures for identifying environmental issues at its plant
sites. In addition to environmental audit programs, the Company has
environmental coordinators who are familiar with environmental laws and
regulations and act as a resource for identifying environmental
issues.
The
Company has been identified as a potentially responsible party (“PRP”) by U.S.
federal and state authorities, or by private parties seeking contribution, for
the cost of environmental investigation and/or cleanup at numerous sites.
The Company becomes aware of sites in which it may be named a PRP through
correspondence from the U.S. Environmental Protection Agency (“EPA”) or other
government agencies or from previously named PRPs, who either request
information or notify the Company of its potential liability.
While the
Company is involved in numerous environmental matters, the following matters are
described below because they are currently viewed by management as potentially
material to the Company’s consolidated financial position, results of operations
and cash flows.
United States of America v.
Vertac Chemical Corporation, et al., No. 4:80CV00109 (United States
District Court, Eastern District of Arkansas, Western Division)
This
case, a cost-recovery action based upon the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA” or the “Superfund statute”),
as well as other statutes, has been in litigation since 1980, and involves
liability for costs incurred by the EPA in connection with the investigation and
remediation of the Vertac Chemical Corporation (“Vertac”) site in Jacksonville,
Arkansas, which was used for the manufacture of certain herbicides and, at the
order of the United States, Agent Orange.
- 69
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
procedural history of this litigation is discussed in greater detail in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and
in other reports subsequently filed by the Company with the U.S. Securities and
Exchange Commission (“SEC”). In summary, following extended
litigation and appeals, a final judgment against the Company was entered in 2005
by the U.S. District Court for the Eastern District of Arkansas, and
upheld in 2006 by the U.S. Court of Appeals for the 8th
Circuit. The appellate process ended in 2007 when the U.S. Supreme
Court denied the Company’s Petition for Certiorari. On May 18, 2007,
the Company paid to the United States a total of $124.5 million. As a
result, the judgment against the Company has been satisfied, except for such
amounts as may be owed to the United States for additional response costs
incurred since June 1, 1998.
On July
20, 2007, the Company received a claim from the United States seeking
reimbursement of approximately $19 million for response costs incurred since
June 1, 1998, including interest through various points in time preceding May
26, 2007, depending upon the specific cost item claimed. The Company
is reviewing these costs to determine whether they are properly
recoverable. Should the Company determine that certain costs may not
be properly recoverable, the Company will seek to have the United States’ claim
reduced accordingly. In the meantime, as of December 31, 2007, the
Company has accrued $20.0 million, including interest, representing the
Company’s share of the amount specified by the United States in its claim for
reimbursement. The Company will continue to accrue interest on this
amount until payment is made.
Alleghany Ballistics
Laboratory
The
Alleghany Ballistics Laboratory (“ABL”) is a government-owned facility which was
operated by the Company from 1945 to 1995 under contract with the United States
Department of the Navy (the “Navy”). The Navy advised the Company
that, pursuant to CERCLA, it anticipated spending a total of approximately $76
million with respect to certain environmental liabilities which the Navy alleged
were attributable to the Company’s past operations at ABL. Following
negotiations, the Company and the Navy agreed to resolve this matter pursuant to
a Consent Decree for a payment of approximately $13 million, which was approved
by the U.S. District Court for the Northern District of Virginia, and which was
paid in December 2007.
Clean Air Act Notice of
Violation
On
December 23, 2005, EPA Region III issued a Notice of Violation (“NOV”) to the
Company and to Eastman Chemical Company (“Eastman”) alleging various violations
of the Clean Air Act, primarily focused on the Act’s requirements governing
emissions of volatile organic compounds, at a manufacturing facility located in
West Elizabeth, Pennsylvania. (In the Matter of Eastman
Company and Hercules Incorporated, EPA Region III, Docket No.
CAA-III-06-011.) That facility was sold to Eastman as part of the
Company's divestiture of its Resins business in May 2001. The EPA has
not specifically made a demand for monetary penalties upon the Company and
Eastman. The Company is continuing to investigate the allegations set
forth in the NOV, as well as any indemnification obligations that it may owe to
Eastman pursuant to the terms of the purchase and sale agreement. At
this time, however, the Company cannot reasonably estimate its liability, if
any, with respect to this matter and, accordingly, has not included this matter
in the accrued liability for environmental matters reported below.
Range of
Exposure
The
reasonably possible share of costs for environmental matters involving current
and former operating sites, including those with identified AROs (see Note 11), the Vertac site, and other locations where the
Company may have a liability, is approximately $98 million as of December 31,
2007. These accrued liabilities are evaluated at least quarterly
based on currently available information, including the progress of remedial
investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. The actual costs for these matters will depend upon
numerous factors, including the number of parties found responsible at each
environmental site and their ability to pay; the actual methods of remediation
required or agreed to; outcomes of negotiations with regulatory authorities;
outcomes of litigation; changes in environmental laws and regulations;
technological developments; and the remedial activity required, which could last
for an extended number of years. While it is not feasible to predict the
outcome of all pending environmental matters, the ultimate resolution of one or
more of these environmental matters could have a material adverse effect upon
the Company’s financial position, results of operations and/or cash flows for
any annual, quarterly or other period.
- 70
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Litigation
The
Company is involved in litigation arising out of or incidental to the conduct of
its business. Such litigation typically falls within the following broad
categories: environmental, including environmental litigation (see above);
antitrust; commercial; intellectual property; labor and employment; personal
injury; property damage; product liability; and toxic tort. These
matters typically seek unspecified or large monetary damages or other relief,
and may also seek punitive damages. While it is not feasible to
predict the outcome of all pending matters, the ultimate resolution of one or
more of these matters could have a material adverse effect upon the Company’s
financial position, results of operations and/or cash flows for any annual,
quarterly or other period. While the Company is involved in numerous
matters, certain matters are described above and below because they are
currently viewed by management as potentially material. From time to
time, management may determine (based on further analysis or additional
information that becomes available through discovery or otherwise) that other
matters are or have become potentially material to the Company. As
appropriate, descriptions of such matters will be included in the periodic
report following such determination. Occasionally, management may not
determine that a matter is material until it has been settled or otherwise
resolved. In such a situation, that matter may not have been
described in the Company’s periodic reports prior to such settlement or
resolution, but the impact of such settlement or resolution would be reflected
in the financial statements included in the periodic report following such
settlement or resolution.
Asbestos
The
Company is a defendant in numerous asbestos-related personal injury lawsuits and
claims which typically arise from alleged exposure to asbestos fibers from resin
encapsulated pipe and tank products which were sold by one of the Company’s
former subsidiaries to a limited industrial market (“products claims”).
The Company is also a defendant in lawsuits alleging exposure to asbestos at
facilities formerly or presently owned or operated by the Company (“premises
claims”). Claims are received and settled or otherwise resolved on an
on-going basis.
As of
December 31, 2007, there were approximately 25,562 unresolved claims, of which
approximately 925 were premises claims and the rest were products claims.
There were also approximately 1,885 unpaid claims which have been settled or are
subject to the terms of a settlement agreement. Between January 1,
2007 and December 31, 2007, the Company received approximately 1,130 new
claims. During that same period, the Company spent $24.9 million to
resolve and defend asbestos matters, including $15.8 million directly related to
settlement payments and $9.1 million for defense costs.
As
discussed in greater detail in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006, and in other reports subsequently filed by the
Company with the SEC, in 2002, the Company commenced litigation against its
excess insurance carriers seeking coverage for the Company’s asbestos-related
liabilities. In 2004, that litigation was resolved through several
settlements, resulting in recoveries from some insurers (both cash payments and
monies placed into trust to be used to reimburse the Company for monies spent in
connection with these liabilities), and agreements with other insurers to cover
certain of these liabilities in the future (see
paragraph below). As of December 31, 2007, all of the cash
recovered and all of the monies placed into trust have been used by the Company
with respect to these liabilities or for other corporate purposes, except for
approximately $24 million remaining in trust and to be paid into trust during
the first quarter of 2008.
With
respect to the agreements reached to cover these liabilities in the future,
effective October 13, 2004, the Company reached a confidential settlement
agreement with its remaining solvent excess insurers whereby a significant
portion of the costs incurred by the Company with respect to future asbestos
product liability claims will be reimbursed, subject to those claims meeting
certain qualifying criteria (the “Future Coverage Agreement”). That
agreement is not expected to result in reimbursement to the Company, however,
unless and until defense costs and settlement payments for qualifying asbestos
products claims paid by the Company subsequent to the effective date of the
agreement aggregate to approximately $330 million to $370 million, with the
foregoing approximation based on various assumptions, including that there are
sufficient qualifying claims to require such payments, that for such qualifying
claims the time periods of each claimant’s alleged exposure to asbestos products
falls within the time periods specified in the Future Coverage Agreement, and
that each of the participating insurers remain solvent and honor their
commitments under the terms of the Future Coverage Agreement. The Company
expects that such amounts, if required to be paid, would be paid by the Company
using monies from the settlements described above and from other sources.
If and when such amounts are paid by the Company, the insurers’ obligations
pursuant to the terms of the Future Coverage Agreement would be triggered, and
the participating insurers would thereafter be required to pay their allocated
share of defense costs and settlement payments for asbestos product liability
claims that qualify for reimbursement subject to the limits of their liability
pursuant to the terms of the Future Coverage Agreement, which limits are
believed to be sufficient to cover the insurers’ allocated shares of an amount
that exceeds the high end of the reasonably possible range of financial exposure
described below. The Company will be responsible for the share of such
costs and payments that are not reimbursed by the participating insurers
pursuant to the terms of the Future Coverage Agreement, as well as for such
costs and payments for those claims that do not qualify for reimbursement under
the terms of the Future Coverage Agreement. Should asbestos reform
legislation be passed, some or all of the obligations under the Future Coverage
Agreement will be suspended for so long as such legislation remains in
effect. As of December 31, 2007, defense costs and settlement
payments for qualifying asbestos products claims of approximately $104 million
have been credited towards the range of $330 million to $370 million noted
above.
- 71
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
connection with the prior settlements involving payments of cash or the
placement of monies into trust, in general, the Company released the insurers
with which it settled from past, present and future claims under their policies,
agreed to the cancellation of those policies and agreed to indemnify those
insurers from any claims asserted under their policies. As a result,
substantial amounts of insurance coverage that would have been available to
cover both asbestos claims and other insured claims have been cancelled and will
no longer be available to cover such claims. In connection with the
Future Coverage Agreement, the Company released the participating insurers from
liability under their insurance policies only with respect to asbestos product
liability claims, with the sole liability of those insurers for asbestos product
liability claims being controlled by the Future Coverage Agreement, but with
their insurance policies remaining potentially available to respond to other
insured claims to the extent such policies are triggered, have available limits,
and provide coverage for such claims.
Upon
exhaustion of the monies in trust, which exhaustion is likely to occur during
2008, the Company will be required to fund its asbestos-related liabilities
until the insurers’ obligations under the Future Coverage Agreement are
triggered. If and when those obligations are triggered, the Company
and the insurers will share the costs of defending and settling qualifying
asbestos product liability claims, with the amounts paid by the Company versus
the amounts reimbursed pursuant to the Future Coverage Agreement expected to
vary significantly over time, and with the Company typically bearing a larger
share than such participating insurers.
In
January 2008, a study commissioned by the Company and prepared by a recognized
expert at a major national university, who is a member of the American Academy
of Actuaries with broad experience in estimating asbestos-related liabilities,
was updated to take into account the then most current data concerning, among
other factors, the Company’s claims and payment experience. As a
result, the Company has decreased the reasonably possible exposure for these
matters as of December 31, 2007 to a range of $255 million to $750 million
(as compared to the prior range of $270 million to $770 million). Due to
inherent uncertainties in estimating the timing and amounts of future payments,
this range does not include the effects of inflation and has not been discounted
for the time value of money. In addition, the range of financial exposures
set forth above does not include estimates for future legal costs. It
is the Company’s policy to expense these legal costs as incurred. Cash
payments related to this exposure are expected to be made over an extended
number of years and actual payments, when made, could be for amounts in excess
of the range due to potential future changes in estimates as well as the effects
of inflation.
The
foregoing is based on the Company’s assumption that the number of future claims
filed per year and claim resolution payments will vary considerably from
year-to-year and by plaintiff, disease, venue and other circumstances, but will,
when taken as a whole, remain relatively consistent with the Company’s
experience to date and will decline as the population of potential future
claimants expires due to non-asbestos-related causes. It is also based on
the results of the updated study and the status of the Company’s settlements
with its insurers, as described above. However, the Company recognizes
that the number of future claims filed per year and claim resolution payments
could greatly exceed those reflected by its past experience and contemplated by
the study referenced above, that the Company’s expectations regarding the range
of its reasonably possible financial exposure could change as the study
referenced above is periodically updated, and that its evaluation of the total
payments to be received from its insurers may change depending upon numerous
variables including potential legislation and the risk that one or more
insurance carriers may refuse or be unable to meet their obligations to the
Company. Moreover, while the expert noted above has applied his
methodology in determining the Company’s reasonably possible range of exposures
for these liabilities on a consistent basis, other methods in practice exist
which place a differing degree of emphasis on the underlying variables used to
measure asbestos-related contingencies. Such other methods could
yield significantly different ranges of reasonably possible
exposures.
Due to
the dynamic nature of asbestos litigation, the Company’s estimates are
inherently uncertain, and these matters may present significantly greater
financial exposures than presently anticipated. In addition, the Company
intends to continue to periodically update the asbestos study referenced above,
and further analysis combined with new data received in the future could result
in a material modification of the range of reasonably possible financial
exposure set forth above. As a result of all of the foregoing, the
Company’s liability with respect to asbestos-related matters could vary
significantly from present estimates and may require a material change in the
accrued liability for these matters within the next 12 months. If the
Company’s liability does exceed amounts sufficient to trigger the obligations
under the Future Coverage Agreement, the Company presently believes that a
significant portion of the liability it may reasonably anticipate from and after
the date that such obligations are triggered will be reimbursed by monies to be
received pursuant to the Future Coverage Agreement.
The
findings of the updated study referenced above identified a range of the
Company’s reasonably possible financial exposure for these asbestos-related
matters. The Company adjusted its accrual for present and future potential
asbestos claims before anticipated insurance recoveries at December 31,
2007 to $255.0 million, reflecting the low end of the range noted above in
accordance with GAAP (since no amount within the range is a better estimate than
any other amount).
- 72
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table presents the beginning and ending balances and balance sheet
activity for the Company’s asbestos-related accounts for the year ended December
31, 2007.
|
Balance
January 1, 2007
|
Interest
Income/
Accrual
adjustments, net
|
Insurance
Recovered/
Liabilities
Settled
|
Accretion/
Reclassifi-
cation
|
Balance
December 31, 2007
|
||||||||||||||||
|
Asbestos-related
assets:
|
||||||||||||||||||||
|
Insurance
receivable - current
|
$ | — | $ | 4.0 | $ | — | $ | — | $ | 4.0 | ||||||||||
|
Insurance
receivable – non-current
|
32.8 | — | (16.5 | ) | 0.5 | 16.8 | ||||||||||||||
|
Restricted
cash in trust
|
54.7 | 1.5 | (48.9 | ) | — | 7.3 | ||||||||||||||
|
Noncurrent
asbestos-related assets
|
87.5 | 1.5 | (65.4 | ) | 0.5 | 24.1 | ||||||||||||||
|
Total
asbestos-related assets
|
$ | 87.5 | $ | 5.5 | $ | (65.4 | ) | $ | 0.5 | $ | 28.1 | |||||||||
|
Asbestos-related
liabilities:
|
||||||||||||||||||||
|
Current
reserve for claims
|
$ | 36.4 | $ | — | $ | — | $ | (8.4 | ) | $ | 28.0 | |||||||||
|
Noncurrent
reserve for claims
|
233.6 | 0.8 | (15.8 | ) | 8.4 | 227.0 | ||||||||||||||
|
Total
asbestos-related liabilities
|
$ | 270.0 | $ | 0.8 | $ | (15.8 | ) | $ | — | $ | 255.0 | |||||||||
The
Company, in conjunction with outside advisors, will continue to study its
asbestos-related matters, insurance recovery expectations and reserves on an
ongoing basis, and make adjustments as appropriate.
Composite Products Antitrust
and Qui Tam Matters
Commencing
in 1999, the Company was one of several companies sued in a series of civil
antitrust and related lawsuits concerning the pricing and sale of carbon fiber
and carbon prepreg products. Those products were manufactured and
sold by the Company’s former Composite Products division, which division was
sold to Hexcel Corporation in 1996. As discussed in greater detail in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2006,
and in other reports subsequently filed by the Company with the SEC, all of
those lawsuits were resolved through settlements. It was also
previously reported that the Company had reached a settlement agreement in
principle with two former customers that had opted out of one of those
lawsuits. In December 2007, the Company finalized its settlement with
those two former customers and funded that settlement in full. As a
result, all of these lawsuits and claims have now been resolved through
settlement.
In May
2007, Cytec Engineered Materials, Inc. filed two lawsuits against the Company
and B.P. Amoco Polymers, Inc. (and allegedly related entities), one in federal
court (Cytec
Engineered Materials, Inc. v. B.P. Amoco Polymers, Inc., et al., Case No.
SACV 07-528 FMC (RNBx), U.S. District Court, Central District of California,
Western Division), and one in state court (Cytec
Engineered Materials, Inc. v. B.P. Amoco Polymers, Inc., et
al., Case No. BC370895, California Superior Court, Los Angeles
County). These lawsuits assert claims against the Company for damages
as a result of some of the anticompetitive activities alleged in the now
resolved lawsuits described in the above paragraph. The Company
currently believes that the lawsuits brought by Cytec are without merit and
intends to vigorously defend them.
In
December 2004, the Company filed a lawsuit against Hexcel Corporation
(“Hexcel”) (Hercules
Incorporated v. Hexcel Corporation, Supreme Court of the State of New
York, County of New York, Index No.04/604098) seeking indemnification for the
settlements described above. The lawsuit against Hexcel is based on the
terms of the purchase and sale agreement by which the Company sold its Composite
Products division to Hexcel in 1996. In response, Hexcel denied liability
and filed a counter-claim also seeking indemnification. Both parties
filed motions for summary judgment. In April 2007, the trial court
granted Hexcel’s motion for summary judgment and denied the Company’s motion for
summary judgment, ruling that the Company is not entitled to indemnification
from Hexcel. The Company has appealed those rulings to the Supreme
Court of New York, Appellate Division. By Decision and Order dated
February 7, 2008, the Appellate Division affirmed the trial court’s
rulings. The Company is evaluating its options.
Agent Orange
Litigation
Agent
Orange is a defoliant that was manufactured by several companies, including the
Company, at the direction of the U.S. Government, and used by the U.S.
Government in military operations in both Korea and Vietnam from 1965 to
1970. In 1984, as part of a class action settlement, the Company and other
defendants settled the claims of persons who were in the U.S., New Zealand and
Australian Armed Forces who alleged injury due to exposure to Agent
Orange. In Re
“Agent Orange” Prod. Liab. Litig., 597 F. Supp. 740 (E.D.N.Y.
1984). Following that settlement, all claims for alleged injuries
due to exposure to Agent Orange by persons who had served in the Armed Forces of
those countries were treated as covered by that class action
settlement.
- 73
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
On June
9, 2003, the U.S. Supreme Court affirmed the decision of the U.S. Court of
Appeals for the Second Circuit in a case captioned Dow Chemical Company, et al.
v. Daniel Raymond Stephenson, et al., 123 S. Ct. 2161 (2003), where
plaintiffs Stephenson and Isaacson (in separate but consolidated cases) alleged
that they were injured from exposure to Agent Orange and that such injury did
not manifest until after exhaustion of the settlement fund created through the
1984 class action settlement. As a result of that decision, the claims of
persons who allege injuries due to exposure to Agent Orange and whose injuries
first manifest themselves after exhaustion of the settlement fund created
through the 1984 class action settlement may no longer be barred by the 1984
class action settlement and such persons may now be able to pursue claims
against the Company and the other former manufacturers of Agent
Orange.
Currently,
the Company is a defendant in approximately thirty-one lawsuits (including two
purported class actions) where plaintiffs allege that exposure to Agent Orange
caused them to sustain various personal injuries. These alleged exposures
typically occurred while plaintiffs were engaged in activities on behalf of the
military, although one of the lawsuits alleges that civilians who resided near a
military base were exposed as a result of leakage from drums of Agent Orange
that were stored at the base. On February 9, 2004, the
U.S. District Court for the Eastern District of New York issued a
series of rulings granting several motions filed by defendants in the two cases
that had been remanded to the U.S. District Court by the U.S. Court of Appeals
for the Second Circuit on remand from the U.S. Supreme Court (In re: “Agent Orange”
Product Liability Litigation: Joe Isaacson, et al v. Dow Chemical Company, et
al. and Daniel Raymond Stephenson, et al. v. Dow Chemical Company, et
al. (MDL 381, CV 98-6383 (JBW), CV 99-3056 (JBW))). In
relevant part, those rulings held that plaintiffs’ claims against the defendant
manufacturers of Agent Orange that were brought in the state courts are properly
removable to federal court under the “federal officer removal statute” and that
such claims are subject to dismissal by application of the “government
contractor defense.” By Orders dated March 2, 2005, the District Court
dismissed plaintiffs’ claims in all of the lawsuits that were before it at that
time. Plaintiffs appealed those dismissals to the U.S. Court of Appeals
for the Second Circuit. By Opinions dated February 22, 2008, the
Court of Appeals affirmed the rulings of the District Court with respect to the
removal to federal court and the applicability of the “government contractor
defense” to those actions brought by persons alleging exposure to Agent Orange
while engaged in activities on behalf of the military, and affirmed the District
Court’s dismissals of those actions. (Joe Isaacson, et al. v. Dow
Chemical Company, et al., Docket No. 05-1820-cv, and additional docket numbers,
and J. Michael Twinam, et. al. v. Dow Chemical Company, et al., Docket No.
05-1760-cv, and additional docket numbers.) It is possible that
plaintiffs will seek re-hearing and/or re-hearing en banc by the Court of
Appeals and/or file a Petition for Writ of Certiorari in the United States
Supreme Court.
In
addition, in January 2004, the Company was sued in a purported class action
filed in the United States District Court for the Eastern District of New York
by The Vietnam Association for Victims of Agent Orange/Dioxin and several
individuals who claim to represent between two and four million Vietnamese who
allege that Agent Orange used by the United States during the Vietnam War caused
them or their families to sustain personal injuries. (The Vietnam Association for
Victims of Agent Orange/Dioxin, et al. v. The Dow Chemical Company, et
al., Civil Action No. 04 CV 0400 (JBW)). That complaint
alleges violations of international law and war crimes, as well as violations of
the common law for products liability, negligence and international torts.
The defendants moved to dismiss this case on several grounds, including failure
to state a claim under the Alien Tort Claims Statute, lack of jurisdiction and
justiciability, the bar of the statute of limitations, failure to state claims
for violations of international law, and the “government contractor
defense.” A hearing on these motions was held on February 28,
2005. By order dated March 10, 2005, the District Court dismissed
this lawsuit. Plaintiffs appealed that dismissal to the U.S. Court of
Appeals for the Second Circuit. By Opinion dated February 22, 2008,
the Court of Appeals affirmed the dismissal of this lawsuit by the District
Court. (Vietnamese Association for Victims of Agent Orange, et al. v.
Dow Chemical Company, et al., Docket No. 05-1953-cv.) It is possible
that plaintiffs will seek re-hearing and/or re-hearing en banc by the Court of
Appeals and/or file a Petition for Writ of Certiorari in the United States
Supreme Court.
In
addition, in 1999, approximately 17,200 Korean veterans of the Vietnam War filed
suit in the 13th Civil
Department of the District Court in Seoul, Korea, against The Dow Chemical
Company (“Dow”) and Monsanto Company (“Monsanto”) for their alleged injuries
from exposure to Agent Orange. These lawsuits were filed under
various captions, including Dong Jin Kim and 9
others, 99 Gahap 84123, Il Joo La and 9
others, 99 Gahap 84147, and Dae Jin Jang, 99
Gahap 84130. Following the commencement of those lawsuits, Dow and
Monsanto petitioned the court to issue Notices of Pendency to each of the
non-defendant manufacturers of Agent Orange, including the Company, in an
attempt to bind those companies to factual and legal findings which may be made
in the Korean courts if Dow and Monsanto are held liable to plaintiffs and sue
those companies for contribution. Thereafter, the Company was served
with such notices through diplomatic channels. In 2002, the District
Court dismissed the plaintiffs' claims, and the plaintiffs
appealed. It has been reported that on January 26, 2006, the
intermediate appellate court in Seoul reversed the District Court and awarded
damages of $65.2 million plus pre- and post-judgment interest to approximately
6,800 of the approximately 17,200 plaintiffs that filed these
lawsuits. The Company has been informed that Dow and Monsanto have
appealed. If Dow and Monsanto are not successful on appeal, it is
possible that they might initiate an action seeking contribution from the
non-defendant manufacturers of Agent Orange, including the
Company. Further, if the intermediate appellate court’s decision is
ultimately upheld, it is possible that new lawsuits could be brought in Korea
against the Agent Orange manufacturers, including the Company, by other Korean
veterans of the Vietnam War.
- 74
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company believes that it has substantial meritorious defenses to all of the
Agent Orange-related claims described above and those that may yet be
brought. To that end, the Company denies any liability to plaintiffs, and
will vigorously defend all actions now pending or that may be brought in the
future.
Other
Litigation
The
Company is one of several defendants that had been sued by over 2,000
individuals in a series of lawsuits, including a purported class action lawsuit,
captioned Jerry
Oldham, et al. v. The State of Louisiana, et al., Civil Action No.
55,160, John Capone,
et al. v. The State of Louisiana, et al., Civil Action No. 56,048C, and
Georgenner Batton, et
al. v. The State of Louisiana, et al., Civil Action No. 55,285, all
brought in the 18th
Judicial District Court, Parish of Iberville, Louisiana. The
plaintiffs, who claimed to have worked or lived at or around the Georgia Gulf
facility in Iberville Parish, Louisiana, alleged injury and fear of future
illness from the consumption of contaminated water and, specifically, elevated
levels of arsenic in that water. As to the Company, plaintiffs alleged
that the Company itself and as part of a joint venture operated a nearby plant
and, as part of those operations, used a groundwater injection well to dispose
of various wastes, and that those wastes contaminated the potable water supply
at Georgia Gulf. In August 2005, the Company and several other
defendants entered into an agreement to settle these matters with the Company
paying $1.4 million. On May 4, 2006, the Court granted settlement
class certification. Following notice and a fairness hearing, the
Court approved the settlement through entry of a Final Order and Judgment dated
August 16, 2007. The Final Order and Judgment will become final once
the dismissals of plaintiffs’ claims are filed. Thereafter, the
settlement funds can be distributed.
Acevedo, et al. v. Union
Pacific Railroad Company, et al., Cause No. C-4885-99-F, 332nd
Judicial District Court, Hidalgo County, Texas (2001), and related lawsuits, are
mass toxic tort lawsuits alleging pesticide exposure relating to operations at a
former pesticide formulation facility in Mission, Texas. There are
currently approximately 1,900 plaintiffs and approximately 30 defendants,
including the Company. Plaintiffs include former workers at the pesticide
formulation facility, and persons who currently reside, or in the past resided,
near the facility. All plaintiffs allege personal injuries and/or property
damage. The vast majority of the plaintiffs allege residential exposure to
a variety of pesticide and chemical products as a result of leaks, spills,
flooding, and airborne emissions from the pesticide formulation facility.
It is alleged that certain of the Company’s products were sold to or used by the
pesticide formulation facility prior to its ceasing operations in 1967. In
November 2004, Defendants filed a Petition for a Writ of Mandamus in the
Texas Supreme Court seeking to set aside an order consolidating the claims of
certain plaintiffs for trial, and seeking to require the plaintiffs to provide
certain evidence of exposure and injury before being permitted to proceed in
court. On June 15, 2007, the Texas Supreme Court issued an opinion
captioned In Re Allied
Chemical Corp., et al. (No. 04-1023), wherein the Texas Supreme Court
supported the defendants’ arguments and required the trial court to require
plaintiffs to provide evidence which specifically connects a defendant’s
products with a plaintiff’s alleged personal injury, and then to provide to
defendants a reasonable time to prepare for trial. While it is not
yet clear how that decision will impact this litigation, the Company believes
that the decision will assist it in defending plaintiffs’ personal injury
claims. On October 10, 2007, the trial court granted plaintiffs’
motion to sever the claims of one individual plaintiff so that such plaintiff’s
claims can be separately tried. (Guadalupe Garza v. Allied
Chemical Corp., et al., Cause No. C-4885-99-F(10), 332nd
Judicial District Court, Hidalgo County, Texas.) Discovery is in
progress and trial of the Garza matter has been
set for October 20, 2008. The Company continues to deny
any liability to plaintiffs and to vigorously defend these matters.
Amounts Accrued for
Non-Asbestos Litigation
During
the period January 1, 2007 through December 31, 2007 no significant accruals for
non-asbestos and non-environmental litigation were
established. During that same time period, settlement payments for
non-asbestos and non-environmental litigation were $6.0 million. The
December 31, 2007 Consolidated Balance Sheet reflects a current liability of
$2.7 million for non-asbestos and non-environmental related litigation matters,
representing management’s best estimate of the probable and reasonably estimable
losses for such matters. A separate liability is provided for the
Vertac litigation. While it is not feasible to predict the outcome of
all pending legal proceedings, it is reasonably possible that an exposure to
loss exists in excess of the amounts accrued for these and other matters, and
the ultimate resolution of one or more of these matters could have a material
adverse effect upon the Company’s financial position, results of operations
and/or cash flows for any annual, quarterly or other period.
- 75
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
REACH, Regulation (EC) No.
1907/2006
On June
1, 2007, the European Union's regulations concerning the Registration,
Evaluation, Authorization and Restriction of Chemicals (commonly referred to as
"REACH"), Regulation (EC) No. 1907/2006, became effective. This
regulation requires manufacturers and importers into the European Union of
certain chemicals to register those chemicals and to evaluate their potential
impacts on human health and the environment. Under REACH, the
continued importation into the EU, manufacture and/or use of certain chemicals
may be restricted, and manufacturers and importers of certain chemicals will be
required to undertake evaluations of those chemicals, including toxicological
and ecological evaluations. The requirements of REACH are expected to
be phased in over a period of years, and compliance with its requirements are
anticipated to require expenditures and resource commitments by the Company,
which could become material depending upon how various provisions of REACH are
interpreted and implemented. It is also possible that REACH could
affect raw material supply, customer demand for certain products, and the
Company's decision to continue to manufacture and sell certain
products.
13. Stock-Based Compensation
In
addition to cash compensation, the Company provides for the grant of stock
options and the award of restricted common stock and other market-based units to
key employees and non-employee directors under the following plans: (1) Hercules
Incorporated Long Term Incentive Compensation Plan (“LTICP”), (2) Management
Incentive Compensation Plan (“MICP”), and (3) Hercules Incorporated Omnibus
Equity Compensation Plan for Non-Employee Directors (“Omnibus Plan”)
(collectively, the “Plans”). As of December 31, 2007, 8,954,274
shares were available for grant under the Plans as stock awards or stock option
awards. A summary of the valuation for share-based awards granted
under the Plans as well as a summary of award activity is described in further
detail below.
Stock
Options
Regular
stock options are granted under the Plans at the market price on the date of
grant or measurement date and are exercisable at various periods from one to
nine years after date of grant. Performance accelerated stock options
(“PASOs”) are also granted at the market price at the date of grant and are
normally exercisable at nine and one-half years. Exercisability may
be accelerated based upon the achievement of predetermined performance
goals. Both regular stock options and PASOs expire ten years after
the date of grant. These awards are forfeited and revert to the
Company in the event of employment termination, except in the case of death,
disability, retirement or other specified events. The Plans do not
provide the award recipients the ability to request a cash settlement except in
the case of a standard cashless exercise program or sale for taxes.
The fair
value of option awards granted during 2007, 2006 and 2005 is measured on the
date of grant using the Black-Scholes option pricing model and the
weighted-average assumptions in the following table:
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
volatility
|
29.91 | % | 30.10 | % | 28.65 | % | ||||||
|
Expected
dividend yield
|
0.10 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected
life (in years)
|
6.0 | 6.0 | 6.0 | |||||||||
|
Risk-free
interest rate
|
4.63 | % | 4.60 | % | 4.08 | % | ||||||
- 76
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A summary
of stock option activity under the Plans during 2007, 2006 and 2005 is presented
as follows:
|
Regular
|
Performance
Accelerated
|
|||||||||||||||
|
Number
of
Shares
|
Weighted-
average
Price
|
Number
of
Shares
|
Weighted-
average
Price
|
|||||||||||||
|
Outstanding
at January 1, 2005
|
11,037,884 | $ | 24.22 | 3,815,975 | $ | 45.03 | ||||||||||
|
Granted
|
224,229 | 14.01 | — | — | ||||||||||||
|
Exercised
|
(200,752 | ) | 11.53 | — | — | |||||||||||
|
Forfeited
|
(2,679,349 | ) | 33.45 | (2,473,860 | ) | 45.87 | ||||||||||
|
Outstanding
at December 31, 2005
|
8,382,012 | $ | 21.31 | 1,342,115 | $ | 43.49 | ||||||||||
|
Granted
|
503,430 | 12.52 | — | — | ||||||||||||
|
Exercised
|
(2,966,552 | ) | 12.29 | — | — | |||||||||||
|
Forfeited
|
(1,241,595 | ) | 32.12 | (621,125 | ) | 46.67 | ||||||||||
|
Outstanding
at December 31, 2006
|
4,677,295 | $ | 23.22 | 720,990 | $ | 40.75 | ||||||||||
|
Granted
|
254,133 | 20.89 | — | — | ||||||||||||
|
Exercised
|
(463,034 | ) | 14.13 | — | — | |||||||||||
|
Forfeited
|
(820,520 | ) | 38.94 | (235,790 | ) | 40.03 | ||||||||||
|
Outstanding
at December 31, 2007
|
3,647,874 | $ | 20.68 | 485,200 | $ | 41.09 | ||||||||||
|
Exerciseable
at December 31, 2007
|
3,072,382 | $ | 21.52 | 201,795 | $ | 46.02 | ||||||||||
Following
is a summary of stock options outstanding and exercisable at December 31,
2007:
|
Outstanding
Options
|
Exercisable
Options
|
||||||||
|
Outstanding
|
Weighted-
average
Remaining
Contractual
Life
|
Weighted-
average
Exercise
Price
|
Exercisable
|
Weighted-
average
Exercise
Price
|
|||||
|
Regular
Stock Options
|
|||||||||
|
$8.50
- $11.75
|
496,650
|
4.07
|
$11.10
|
496,650
|
$11.10
|
||||
|
$11.76
- $15.00
|
1,210,790
|
6.27
|
$12.51
|
890,316
|
$12.51
|
||||
|
$15.01
- $25.00
|
618,551
|
2.74
|
$17.28
|
593,666
|
$17.20
|
||||
|
$25.00
- $33.75
|
597,158
|
3.94
|
$23.87
|
367,025
|
$25.65
|
||||
|
$33.76
- $40.00
|
473,525
|
1.47
|
$37.66
|
473,525
|
$37.66
|
||||
|
$40.01
- $48.00
|
251,200
|
0.35
|
$47.75
|
251,200
|
$47.75
|
||||
|
3,647,874
|
3,072,382
|
||||||||
|
Aggregate
intrinsic value
|
$ 77.3
|
$ 66.0
|
|||||||
|
Performance-Accelerated
Stock Options
|
|||||||||
|
$25.00
- $35.30
|
3,375
|
0.95
|
$27.53
|
925
|
$32.75
|
||||
|
$35.31
- $43.65
|
314,005
|
1.34
|
$37.65
|
33,050
|
$37.56
|
||||
|
$43.66
- $48.75
|
167,820
|
0.35
|
$47.81
|
167,820
|
$47.81
|
||||
|
485,200
|
201,795
|
||||||||
|
Aggregate
intrinsic value
|
—
|
—
|
|||||||
Restricted
Stock Awards
Restricted
stock and other market based units are awarded with respect to certain programs
in connection with the Plans. During the restriction period, award
holders have the rights of stockholders, including the right to vote and receive
cash dividends, if any, but cannot transfer ownership and nonvested shares are
subject to forfeiture. Restricted stock awards are recorded at the
fair value of the Company’s stock on the grant date (measurement
date). These awards are forfeited and revert to the Company in the
event of employment termination, except in the case of death, disability,
retirement or other specified events.
- 77
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A summary
of restricted stock award activity under the Plans during 2006 and 2007 is
presented as follows:
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
|||||||
|
Outstanding
at January 1, 2006
|
2,093,631 | $ | 11.38 | |||||
|
Granted
|
516,252 | 12.47 | ||||||
|
Vested
|
(430,482 | ) | 9.17 | |||||
|
Forfeited
|
(121,993 | ) | 12.36 | |||||
|
Outstanding
at December 31, 2006
|
2,057,408 | $ | 12.05 | |||||
|
Granted
|
387,183 | 20.84 | ||||||
|
Vested(1)
|
(609,591 | ) | 11.89 | |||||
|
Forfeited
|
(6,784 | ) | 18.63 | |||||
|
Outstanding
at December 31, 2007
|
1,828,216 | $ | 13.94 | |||||
(1)Includes
547,113 shares attributable to the accelerated vesting of certain 2004
restricted stock awards due to the achievement of specific share price
performance benchmarks upon the February 2007 anniversary date.
Restricted
stock awards granted during 2005 through 2007 vest based on relative stock
performance over a period of three to seven years from the date of
grant. Vesting can be accelerated to as early as three years from the
date of grant or delayed to seven years based upon share price fluctuation with
a market-based benchmark. Currently, these awards are being amortized
over a five year period. Restricted stock awards granted in periods
prior to 2005 include awards which vest based on continuous
service. The total number of restricted stock awards that are
expected to vest is adjusted by estimated forfeiture rates.
Supplemental
Stock-Based Compensation Disclosures
|
2007
|
2006
|
|||||||
|
Unrecognized
compensation cost:
|
||||||||
|
Stock options
|
$ | 1.7 | $ | 1.6 | ||||
|
Restricted
stock
|
$ | 13.0 | $ | 12.9 | ||||
|
Weighted-average
remaining periods for recognition (years):
|
||||||||
|
Stock options
|
1.5 | 1.9 | ||||||
|
Restricted
stock
|
3.4 | 3.5 | ||||||
|
Compensation
cost recognized:
|
||||||||
|
Stock options
|
$ | 1.9 | $ | 1.6 | ||||
|
Restricted stock (1)
|
$ | 7.5 | $ | 5.4 | ||||
|
Fair
value of options granted (per share)
|
$ | 8.16 | $ | 4.86 | ||||
|
Intrinsic
value of options exercised
|
$ | 2.7 | $ | 17.1 | ||||
|
Tax
benefits recognized in Additional paid-in capital:
|
||||||||
|
Stock options
|
$ | 2.4 | $ | 5.8 | ||||
|
Restricted stock
|
$ | 2.9 | $ | 0.4 | ||||
(1)Includes
approximately $3 million attributable to the accelerated vesting of certain 2004
restricted stock awards due to the achievement of specific share-price
performance benchmarks upon the February 2007 anniversary date
- 78
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
14.
|
Stockholders’ Equity
|
Series
Preferred Stock
There are
2,000,000 shares of series preferred stock without par value authorized for
issuance, none of which have been issued.
Common
Stock and Reacquired Stock
Hercules
common stock has a stated value of $25/48, and 300,000,000 shares are authorized
for issuance. As of December 31, 2007, a total of 19,843,648
shares were reserved for issuance for the following purposes: 4,133,074 shares
for the exercise of awards under the Stock Option Plan; 8,954,274 shares for
awards under incentive compensation plans; 152,086 shares for conversion of
debentures; and 6,604,214 shares for exercise of the warrant component of the
CRESTSSM
Units.
A
reconciliation of common stock share activity is provided as
follows:
|
Common
Stock
|
Reacquired
Stock
|
|||||||
|
Balances
at January 1, 2005
|
159,984,444 | 47,842,836 | ||||||
|
Exercise
of stock options
|
— | (200,752 | ) | |||||
|
Issuance
of stock awards, net of forfeitures
|
— | (461,658 | ) | |||||
|
Sales
for taxes
|
— | 66,918 | ||||||
|
Balances
at December 31, 2005
|
159,984,444 | 47,247,344 | ||||||
|
Conversion
of debentures
|
13,485 | — | ||||||
|
Exercise
of stock options
|
— | (2,966,552 | ) | |||||
|
Issuance
of stock awards, net of forfeitures
|
— | (441,178 | ) | |||||
|
Sales
for taxes
|
— | 130,155 | ||||||
|
Balances
at December 31, 2006
|
159,997,929 | 43,969,769 | ||||||
|
Conversion
of debentures
|
6,979 | — | ||||||
|
Exercise
of stock options
|
— | (463,034 | ) | |||||
|
Issuance
of stock awards, net of forfeitures
|
— | (386,239 | ) | |||||
|
Sales
for taxes
|
— | 224,282 | ||||||
|
Contribution
of shares to defined contribution benefit plan
|
— | (138,858 | ) | |||||
|
Repurchases
of common stock(1)
|
— | 2,800,860 | ||||||
|
Balances
at December 31, 2007
|
160,004,908 | 46,006,780 | ||||||
(1) A
total of 422,200 shares were repurchased at the end of December 2007 and settled
in cash during January 2008. Accordingly, a total of $8.2 million is
reflected in Accrued expenses on the Consolidated Balance Sheet as of December
31, 2007.
Accumulated
Other Comprehensive Losses
The
components of AOCL are as follows:
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Pension
and postretirement benefit plan adjustments, net of tax (1)
|
$ | (415.4 | ) | $ | (461.3 | ) | $ | (415.7 | ) | |||
|
Foreign
currency translation adjustments, net of hedging activities and
taxes
|
100.2 | 52.5 | 28.4 | |||||||||
|
Other,
net of tax
|
(0.8 | ) | (0.8 | ) | (0.3 | ) | ||||||
| $ | (316.0 | ) | $ | (409.6 | ) | $ | (387.6 | ) | ||||
(1)Includes
the impact of the adoption of SFAS 158 effective December 31, 2006 and minimum
pension liability adjustments prior to the adoption of SFAS 158.
The tax
impact of charges to the above components of AOCL for the years ended December
31, 2007, 2006 and 2005 is summarized in Note 8.
Retained
Earnings
The
Company declared cash dividends of $0.05 per share for the third and fourth
quarters of 2007. The dividend for the fourth quarter was paid on
January 18, 2008 and is reflected in Accrued expenses on the Consolidated
Balance Sheet as of December 31, 2007.
- 79
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
15. Additional Balance Sheet Detail
|
2007
|
2006
|
|||||||
|
Property,
plant and equipment:
|
||||||||
|
Land
|
$ | 16.0 | $ | 16.4 | ||||
|
Buildings and
equipment
|
1,726.4 | 1,643.0 | ||||||
|
Construction in
progress
|
113.7 | 85.0 | ||||||
|
Total
|
1,856.1 | 1,744.4 | ||||||
|
Accumulated
depreciation
|
(1,196.1 | ) | (1,144.0 | ) | ||||
| $ | 660.0 | $ | 600.4 | |||||
|
2007
|
2006
|
|||||||
|
Deferred
charges and other assets:
|
||||||||
|
Tax
deposits
|
$ | 3.0 | $ | 3.0 | ||||
|
Capitalized
software, net
|
20.1 | 44.8 | ||||||
|
Prepaid
pension assets
|
10.7 | 2.2 | ||||||
|
Cash
surrender value of life insurance policies
|
20.8 | 22.3 | ||||||
|
Unamortized
debt issuance costs
|
6.1 | 7.7 | ||||||
|
Investment
securities available for sale
|
6.6 | 2.6 | ||||||
|
Equity
method investments
|
20.6 | 27.4 | ||||||
|
Other
|
32.2 | 26.9 | ||||||
| $ | 120.1 | $ | 136.9 | |||||
|
2007
|
2006
|
|||||||
|
Accrued
expenses:
|
||||||||
|
Compensation
and benefits
|
$ | 49.6 | $ | 53.0 | ||||
|
Current
portion of postretirement benefits
|
15.0 | 16.2 | ||||||
|
Current
portion of asset retirement obligations
|
18.3 | 21.0 | ||||||
|
Severance
and other exit costs
|
19.1 | 10.5 | ||||||
|
Interest
payable
|
10.8 | 14.6 | ||||||
|
Stock
repurchase
|
8.2 | — | ||||||
|
Sales
rebate accrual
|
11.7 | 10.9 | ||||||
|
Dividend
payable
|
5.8 | — | ||||||
|
Current
pension obligation
|
5.0 | 4.9 | ||||||
|
Litigation
accrual
|
2.7 | 8.6 | ||||||
|
Current
portion of deferred rent
|
3.3 | 3.3 | ||||||
|
Other
taxes payable
|
3.3 | 2.8 | ||||||
|
Other
|
54.9 | 46.5 | ||||||
| $ | 207.7 | $ | 192.3 | |||||
|
2007
|
2006
|
|||||||
|
Deferred
credits and other liabilities:
|
||||||||
|
Non-current
income tax liabilities
|
$ | 34.6 | $ | 41.7 | ||||
|
Asset
retirement obligations – noncurrent
|
54.7 | 55.3 | ||||||
|
Indemnifications
|
41.2 | 41.2 | ||||||
|
Deferred
rent
|
21.8 | 26.3 | ||||||
|
Environmental
contingencies
|
5.3 | 5.3 | ||||||
|
Fair
value of cross-currency interest rate swaps
|
112.1 | 53.2 | ||||||
|
Workers
compensation
|
13.9 | 13.9 | ||||||
|
Other
|
15.1 | 18.7 | ||||||
| $ | 298.7 | $ | 255.6 | |||||
- 80
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
16.
|
Restructuring
Programs
|
A summary
of charges by program and an allocation to the reporting segments as well as a
reconciliation of liabilities attributable to the Company’s restructuring
programs is provided as follows:
|
Severance
|
Other
Exit Costs
|
Asset
Charges
|
Total
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Business
and Corporate infrastructure projects
|
$ | 13.2 | $ | 6.4 | $ | 13.7 | $ | 33.3 | ||||||||
|
Business
and segment realignment projects
|
4.6 | — | — | 4.6 | ||||||||||||
|
Manufacturing
rationalization projects
|
3.6 | 0.3 | 0.2 | 4.1 | ||||||||||||
|
Research
and development consolidation
|
(0.2 | ) | 0.5 | 0.5 | 0.8 | |||||||||||
| $ | 21.2 | $ | 7.2 | $ | 14.4 | $ | 42.8 | |||||||||
|
2006
|
||||||||||||||||
|
Business
and Corporate infrastructure projects
|
$ | 2.9 | $ | 2.3 | $ | 4.4 | $ | 9.6 | ||||||||
|
Business
and segment realignment projects
|
9.8 | 0.4 | — | 10.2 | ||||||||||||
|
Manufacturing
rationalization projects
|
0.9 | 1.0 | 2.7 | 4.6 | ||||||||||||
|
Research
and development consolidation
|
2.6 | 1.2 | 1.2 | 5.0 | ||||||||||||
| $ | 16.2 | $ | 4.9 | $ | 8.3 | $ | 29.4 | |||||||||
|
2005
|
||||||||||||||||
|
Business
and Corporate infrastructure projects
|
$ | 4.8 | $ | 0.5 | $ | — | $ | 5.3 | ||||||||
|
Business
and segment realignment projects
|
14.5 | — | — | 14.5 | ||||||||||||
|
Manufacturing
rationalization projects
|
6.6 | 0.2 | 3.1 | 9.9 | ||||||||||||
|
Research
and development consolidation
|
3.8 | 1.4 | 2.4 | 7.6 | ||||||||||||
|
Terpenes
specialties exit activities
|
2.4 | — | 5.7 | 8.1 | ||||||||||||
| $ | 32.1 | $ | 2.1 | $ | 11.2 | $ | 45.4 | |||||||||
|
2007
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
$ | 4.4 | $ | 0.7 | $ | 0.2 | $ | 5.3 | ||||||||
|
Aqualon
Group
|
3.7 | — | — | 3.7 | ||||||||||||
|
Corporate
|
13.1 | 6.5 | 14.2 | 33.8 | ||||||||||||
| $ | 21.2 | $ | 7.2 | $ | 14.4 | $ | 42.8 | |||||||||
|
2006
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
$ | 8.7 | $ | 1.8 | $ | 3.1 | $ | 13.6 | ||||||||
|
Aqualon
Group
|
3.7 | 0.4 | — | 4.1 | ||||||||||||
|
Corporate
|
3.8 | 2.7 | 5.2 | 11.7 | ||||||||||||
| $ | 16.2 | $ | 4.9 | $ | 8.3 | $ | 29.4 | |||||||||
|
2005
|
||||||||||||||||
|
Paper
Technologies and Ventures
|
$ | 17.5 | $ | 0.1 | $ | 3.0 | $ | 20.6 | ||||||||
|
Aqualon
Group
|
3.1 | 0.2 | 0.5 | 3.8 | ||||||||||||
|
FiberVisions
|
3.4 | — | 1.5 | 4.9 | ||||||||||||
|
Corporate
|
5.7 | 1.8 | 0.5 | 8.0 | ||||||||||||
|
Discontinued
operations
|
2.4 | — | 5.7 | 8.1 | ||||||||||||
| $ | 32.1 | $ | 2.1 | $ | 11.2 | $ | 45.4 | |||||||||
All
restructuring charges are reflected as a component of Other operating expenses
in the Consolidated Statements of Operations except those related to the
Terpenes Specialties exit incurred during 2005, which are included in the
results of discontinued operations. The restructuring liabilities
provided below are reflected in Accrued expenses on the Consolidated Balance
Sheets.
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
at beginning of the year
|
$ | 10.5 | $ | 16.6 | $ | 5.8 | ||||||
|
Accrued
charges for severance and related benefits
|
21.2 | 16.2 | 32.1 | |||||||||
|
Accrued
charges for other exit and restructuring costs
|
5.6 | 3.8 | 0.5 | |||||||||
|
Cash
payments
|
(19.2 | ) | (26.9 | ) | (21.4 | ) | ||||||
|
Other,
including foreign currency translation
|
1.0 | 0.8 | (0.4 | ) | ||||||||
|
Balance
at end of the year
|
$ | 19.1 | $ | 10.5 | $ | 16.6 | ||||||
In
addition, the Company made cash payments of $1.6 million, $1.1 million and $1.6
million during 2007, 2006 and 2005, respectively, for certain exit costs that
have been paid as incurred and are not included in the reconciliation of accrued
restructuring liabilities above.
- 81
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Business
and Corporate Infrastructure Projects
During
2006, the Company initiated a number of restructuring programs, collectively
referred to as the Business Infrastructure Project (“BIP”), primarily to reduce
stranded corporate costs resulting from the FiberVisions
transaction. An additional objective of the projects is to realign
the Company’s support organization through selected outsourcing and offshoring
service arrangements. Ancillary to the BIP is the Company’s
commitment to a significant technical and functional upgrade of its primary
information technology platform (“IT upgrade”).
In
connection with the BIP, over 200 positions worldwide have been or will be
eliminated resulting in a total commitment of approximately $30 million over the
term of the projects for exit costs and severance and termination benefits
including completion bonuses contingent upon the successful transition of job
functions and responsibilities to the outsource and offshore service
providers. The plans impact a number of business and corporate
functional areas and contemplate individual targets, milestones and
scheduling. Total remaining asset charges, including accelerated
depreciation attributable to the reduction in useful lives of existing software
development cost assets, is expected to be approximately $4.9 million and will
be recorded through the second quarter of 2008. A total of $16.1
million of severance and termination benefits has been incurred through December
31, 2007 and an additional $3.7 million is anticipated to be incurred through
individual dates of completion. While a substantial number of actions
have been completed during 2007, certain actions and cash flows will continue
through 2009.
During
2005, the Company initiated and completed several corporate actions resulting in
the streamlining of support functions as well as the establishment of its
centralized European headquarters in Schaffhausen, Switzerland. As a
result of these actions, the Company eliminated approximately 40 positions in
various functional departments and incurred severance costs and relocation costs
in connection with the transition to the new headquarters.
Business
and Segment Realignment Projects
During
2007 and 2006, the Company’s reporting segments initiated a number of actions to
streamline their management, sales and marketing and related support functions
in connection with the reporting segment realignment effective January 1,
2006. These actions resulted in charges for severance costs
attributable to approximately 60 employee terminations as well as contract
termination costs associated with certain distributor
relationships.
Throughout
2005, PTV and Aqualon engaged in significant actions designed to realign their
global marketing infrastructure and de-layer management in connection with their
regional and strategic business unit plans. Approximately 80
positions were eliminated on a global basis in connection with these
efforts.
Manufacturing
Rationalization Projects
During
2007, PTV initiated actions to curtail operations at its Mexico City, Mexico
manufacturing facility by early 2008. Accordingly, employees at that
site are accruing severance and termination benefits over the next several
months as they provide continuing services through the shut-down which is
expected in the first quarter of 2008. Related to this action was the
termination of certain sales and marketing employees in that region as the
Company has contracted with a local distributor to assume the servicing of
certain customer accounts. Approximately 40 positions will be
eliminated in connection with this action. PTV also initiated a restructuring
action at its Voreppe, France manufacturing facility in connection with
continuing efforts to realign its European operating profile. In
addition, the Aqualon Group has terminated certain production employees at its
Dalton, Georgia manufacturing facility in connection with the discontinuation of
a guar production line at that facility.
During
2006, PTV entered into an alliance with MeadWestvaco in which Hercules serves as
the distributor for certain rosin-based sizing products produced by Hercules and
MeadWestvaco. As a result of this arrangement, PTV shut down certain
production lines at its Savannah, Georgia, Hattiesburg, Mississippi and
Portland, Oregon manufacturing facilities. During 2007 and 2006,
severance and termination benefits for employees impacted by the shut-down were
recorded in addition to accelerated depreciation for these facilities through
the transition period, which ended in the fourth quarter of 2007, as the
manufacture of the Hercules products was transferred to
MeadWestvaco.
During
2005, PTV announced the closure of its manufacturing facilities in Pendlebury,
U.K. and Pandaan, Indonesia in connection with a global manufacturing
rationalization. The closure of these facilities resulted in the
elimination of positions and associated severance and termination benefits
costs. In addition, PTV provided for accelerated depreciation charges
for these facilities while they remained in operation prior to
closure. The severance costs and accelerated depreciation charges
began during 2005 and certain portions carried over to 2006. The
Pendlebury facility was subsequently sold in 2007.
- 82
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During
2005, Aqualon terminated certain employees and incurred severance costs and
asset impairment charges in connection with various programs at its Parlin, New
Jersey, Brunswick, Georgia and Hattiesburg, Mississippi manufacturing facilities
as well as the exit costs in connection with the termination of a product
distribution agreement.
Also
during 2005, FiberVisions ceased production on certain lines at its facilities
in North America and reduced headcount at its Varde, Denmark manufacturing
facility resulting in the termination of approximately 80 employees and a
provision for severance charges. Write-downs were also provided for
the value of certain inventories and spare parts at its Covington, Georgia
manufacturing facility.
Research
and Development Consolidation
This
program was initiated during 2004 in connection with efforts to centralize the
Company’s research and development activities into regional
centers. This included the closure of the Company’s facility in
Barneveld, The Netherlands and related transfer of activities to the
Helsingborg, Sweden site, which now serves as the primary center for PTV
application activities in Europe. This process was completed in 2005
and resulted in the termination of approximately 50 employees. The
Barneveld facility was subsequently sold in 2007. The Company also
closed its facility in Jacksonville, Florida and transferred research and
applications development activities from that facility to the Wilmington,
Delaware research center (“WRC”). In connection with this program,
the Company substantially expanded and upgraded the WRC as well as its technical
staff as this site now serves as the primary research and development facility
for the Company in the Americas. This process was substantially
completed in 2006. However, certain activities and facility
reconfiguration activities continued into 2007. In this domestic
phase of the project, the Company eliminated approximately 60
positions. From the fourth quarter of 2004 through 2007, the Company
incurred severance and termination benefits costs, relocation and other exits
costs and accelerated depreciation of certain facilities during the transition
periods prior to closure.
In
connection with the substantial completion of the Research and development
consolidation program, the Company is in the process of marketing its former
facility in Jacksonville, Florida. This facility, with a carrying
value of $7.7 million is reflected as an asset held for sale and is included in
the caption “Other current assets” on the Consolidated Balance Sheet as of
December 31, 2007.
Terpenes
Specialties Exit
Primarily
as a result of the Company’s decision to exit the Terpenes Specialties business
during 2005, approximately 50 employees at the Brunswick, Georgia manufacturing
facility were terminated. In addition, certain assets directly
attributable to this business were impaired and related supplies inventories
were written-down.
|
|
17. Other
Operating Expense, Net
|
Other
operating expense, net, consists of the following:
|
2007
|
2006
|
2005
|
||||||||||
|
Severance,
restructuring and other exit costs, net
|
$ | 28.4 | $ | 21.1 | $ | 31.8 | ||||||
|
Accelerated
depreciation and amortization
|
14.4 | 5.1 | 3.5 | |||||||||
|
Asset
impairments
|
— | 3.2 | 2.0 | |||||||||
|
Legal
settlements
|
(1.6 | ) | (2.0 | ) | 0.7 | |||||||
|
Asset
retirement and environmental charges
|
0.4 | 0.8 | 0.2 | |||||||||
|
(Gains)
losses on asset dispositions, net
|
(12.4 | ) | (6.2 | ) | 0.1 | |||||||
|
Dismantlement
costs
|
3.2 | 1.6 | — | |||||||||
|
Other
miscellaneous charges
|
4.5 | 1.5 | 1.1 | |||||||||
| $ | 36.9 | $ | 25.1 | $ | 39.4 | |||||||
- 83
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
18. Other Expense, Net
Other
expense, net, consists of the following:
|
2007
|
2006
|
2005
|
||||||||||
|
Asbestos-related
costs, net
|
$ | 5.7 | $ | 29.0 | $ | 44.6 | ||||||
|
Investment
dilution and loss on sale of 51% interest in FiberVisions
|
2.5 | 13.3 | — | |||||||||
|
Loss
on repurchases of debt
|
— | 11.4 | 14.2 | |||||||||
|
Asset
retirement and environmental charges
|
7.2 | 6.5 | 7.3 | |||||||||
|
Litigation
settlements and accruals
|
16.1 | 9.2 | 19.0 | |||||||||
|
Gains
on dispositions of assets, net
|
(3.0 | ) | (1.4 | ) | (10.9 | ) | ||||||
|
Other,
net
|
(4.5 | ) | (2.3 | ) | (2.9 | ) | ||||||
| $ | 24.0 | $ | 65.7 | $ | 71.3 | |||||||
|
19.
|
Discontinued
Operations
|
BetzDearborn
Water Treatment Business
During
2007 and 2006, the Company reversed certain tax reserves in the amounts of $8.0
million and $48.7 million, respectively, established with respect to the sale of
the Company’s former BetzDearborn Water Treatment business which has been
reported as a discontinued operation (see Note
8).
Terpenes
Specialties
In
December 2005, the Company announced its intention to exit the unprofitable
terpenes specialties business. The results of operations for the
terpenes specialties business are reported as a discontinued operation for 2006
and 2005.
The
following are the summarized results of operations for the terpenes specialties
business:
|
2006
|
2005
|
|||||||
|
Net
sales
|
$ | 2.5 | $ | 13.7 | ||||
|
Loss
from operations before income taxes
|
$ | (2.6 | ) | $ | (9.9 | ) | ||
|
Income
tax benefit on operations
|
0.9 | 3.4 | ||||||
|
Net
loss from discontinued operations, net of tax
|
$ | (1.7 | ) | $ | (6.5 | ) | ||
As of
December 31, 2006, the Balance Sheet reflected $0.2 million of accounts
receivable and $0.2 million of inventories attributable to the terpenes
specialties business.
|
20.
|
Changes in Accounting
Principle
|
SFAS
123R
Effective
January 1, 2006, the Company adopted SFAS 123R using the “modified prospective”
method in which compensation cost is recognized for all awards granted to
employees during 2006 as well as those awards granted prior to 2006 that remain
unvested on the effective date. Upon the adoption of SFAS 123R, the
Company recorded a $0.9 million benefit, net of income taxes, as a cumulative
effect of a change in accounting principle to reflect the required change in
accounting policy for the recognition of forfeitures.
SFAS
158
The
Company adopted SFAS 158 effective December 31, 2006 which required the
recognition of the funded status of its defined benefit pension and other
postretirement benefit plans in the Consolidated Balance Sheet. While
the adoption of SFAS 158 did not have an impact on the 2006 Statement of
Operations, the Company was required to increase its pension and postretirement
benefit obligations, provide for deferred tax assets and record an after-tax
charge to AOCL included in Stockholders’ equity.
- 84
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table illustrates the adjustments made to the relevant items included
in the Company’s balance sheet on December 31, 2006.
|
Before
|
After
|
|||||||||||
|
Application
of
|
Application
of
|
|||||||||||
|
SFAS
158
|
Adjustments
|
SFAS
158
|
||||||||||
|
Deferred
income taxes
|
$ | 312.4 | $ | 62.2 | $ | 374.6 | ||||||
|
Deferred
charges and other assets
|
185.8 | (48.9 | ) | 136.9 | ||||||||
|
Total
assets
|
2,795.2 | 13.3 | 2,808.5 | |||||||||
|
Pension
obligations
|
206.8 | 55.7 | 262.5 | |||||||||
|
Other
postretirement benefit obligations
|
58.1 | 84.1 | 142.2 | |||||||||
|
Total
liabilities
|
2,413.1 | 139.8 | 2,552.9 | |||||||||
|
Accumulated
other comprehensive losses
|
(283.1 | ) | (126.5 | ) | (409.6 | ) | ||||||
|
Total
stockholders’ equity
|
369.4 | (126.5 | ) | 242.9 | ||||||||
FIN
47
Effective
December 31, 2005, the Company recorded a $2.5 million cumulative effect
adjustment, net of tax in accordance with the provisions of FIN
47. The cumulative effect adjustment includes the recognition of
approximately $4.0 million in AROs and the capitalization of approximately $0.2
million in related asset retirement costs offset by accumulated depreciation on
those assets of $0.1 million.
|
21.
|
Supplemental Disclosure of Statements of Operations and Cash
Flows Data
|
|
2007
|
2006
|
2005
|
||||||||||
|
Depreciation:
|
||||||||||||
|
Included
in Cost of sales and Selling, general and administrative
expenses
|
$ | 69.6 | $ | 66.8 | $ | 76.6 | ||||||
|
Accelerated
depreciation included in Other operating expense, net
|
0.7 | 3.9 | 3.5 | |||||||||
|
Included
in Net loss from discontinued operations
|
— | — | 0.4 | |||||||||
| $ | 70.3 | $ | 70.7 | $ | 80.5 | |||||||
|
Amortization:
|
||||||||||||
|
Intangible
assets
|
$ | 8.7 | $ | 7.2 | $ | 8.0 | ||||||
|
Capitalized
software (normal basis)
|
15.4 | 15.2 | 15.3 | |||||||||
|
Accelerated
amortization of capitalized software
|
13.7 | 1.1 | — | |||||||||
|
Deferred
financing costs
|
1.9 | 1.1 | 2.1 | |||||||||
| $ | 39.7 | $ | 24.6 | $ | 25.4 | |||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
|
$ | 69.9 | $ | 70.9 | $ | 86.4 | ||||||
|
Income
taxes, net of refunds received
|
(183.9 | ) | 37.6 | 18.4 | ||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Increase
in Property, plant and equipment, net related to the consolidation of
Hercules Tianpu
|
$ | — | $ | 19.0 | $ | — | ||||||
|
Increase
in Intangible assets, net related to the:
|
||||||||||||
|
Consolidation
of Hercules Tianpu
|
— | 3.5 | — | |||||||||
|
Formation
of H2H
|
13.7 | — | — | |||||||||
|
De-consolidation
of debt issued by FiberVisions
|
— | 90.0 | — | |||||||||
|
De-consolidation
of FiberVisions capitalized debt issuance costs
|
— | (6.3 | ) | — | ||||||||
|
Incentive
and other share-based compensation plan issuances
|
11.8 | 13.9 | 13.4 | |||||||||
- 85
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
22.
|
Earnings (Loss) Per
Share
|
The
following table shows the weighted-average number of common shares (in millions)
used in computing basic and diluted earnings (loss) per
share:
|
2007
|
2006
|
2005
|
||||||||||
|
Weighted-average
number of common shares outstanding - Basic
|
114.3 | 110.8 | 108.7 | |||||||||
|
Dilutive
effect of:
|
||||||||||||
|
Convertible
debentures
|
0.2 | 0.2 | 0.2 | |||||||||
|
Share-based
compensation plans
|
0.6 | 0.3 | 1.5 | |||||||||
|
Weighted-average
number of common shares outstanding - Diluted
|
115.1 | 111.3 | 110.4 | |||||||||
The
effect of convertible debentures and share-based compensation plans for 2005 was
anti-dilutive as a result of the loss incurred during that
period. Accordingly, 108.7 million weighted-average shares were used
to determine both basic and diluted earnings per share. The related
interest on the convertible subordinated debentures has an immaterial impact on
earnings per share calculations.
The
following table shows the number of options and warrants (in millions) that have
been excluded from the computation of diluted earnings per share as their
exercise price exceeded their current market value:
|
2007
|
2006
|
2005
|
||||||||||
|
Options
to purchase common stock
|
1.8 | 3.4 | 5.8 | |||||||||
|
Warrants
to purchase common stock
|
6.6 | 6.6 | 6.7 | |||||||||
|
23.
|
Reporting Segment and Geographic
Data
|
The
Company operates through two active reporting segments, Paper Technologies and
Ventures and the Aqualon Group. A reporting segment is maintained for
historical reporting purposes for FiberVisions, of which a majority interest was
sold during 2006 (see Note 2).
Paper Technologies and
Ventures: Products and services offered by PTV are designed to
enhance customers' profitability by improving manufacturing processes, enhancing
productivity and improving overall product quality as well as enabling customers
to meet their environmental objectives and regulatory
requirements. PTV is one of the key global suppliers of functional
and process chemicals for the paper industry offering a wide and highly
sophisticated range of technology and applications expertise with in-mill
capabilities ranging from wet-end chemicals and various treatments throughout
the paper making process, to and including paper finishing. The
Ventures portion of the group consists of a portfolio of businesses each
targeting a family of vertical markets with a distinct set of
products. Current businesses within Ventures are Pulping chemicals,
Water treatment chemicals, Lubricants and Building and Converted
products.
Aqualon
Group: Products offered by Aqualon are designed to manage the
properties of aqueous (water-based) systems. Most of the products are
derived from renewable natural raw materials and are sold as key ingredients to
other manufacturers where they are used as small-quantity additives to provide
functionality such as thickening, water retention, film formation, emulsifying
action and binding power as well as process aids. Major end uses for
Aqualon products include personal care products, food additives, pharmaceutical
products, construction materials, paints, coatings and oil and gas recovery,
where polymers are used to modify viscosity, gel strength and/or fluid
loss. Aqualon also manufactures wood and gum rosin resins and is the
world’s only producer of pale wood rosin derivatives. Product
applications and markets include food and beverage, construction specialties,
adhesives, and rubber and plastic modifiers.
- 86
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Reporting
Segment Data
|
Paper
Technologies and Ventures
|
Aqualon
Group
|
FiberVisions
|
Corporate
|
Consolidated
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,150.6 | $ | 985.6 | $ | — | $ | — | $ | 2,136.2 | ||||||||||
|
Profit
(loss) from operations
|
113.6 | 199.0 | — | (48.4 | ) | 264.2 | ||||||||||||||
|
Depreciation
|
26.0 | 38.9 | — | 5.4 | 70.3 | (1) | ||||||||||||||
|
Amortization
|
15.4 | 8.7 | — | 15.6 | 39.7 | (2) | ||||||||||||||
|
Research
and development
|
18.2 | 24.9 | — | 0.7 | 43.8 | |||||||||||||||
|
Total
assets
|
1,049.1 | 862.3 | — | 767.0 | 2,678.4 | (3) | ||||||||||||||
|
Capital
expenditures
|
34.1 | 69.9 | — | 14.3 | 118.3 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,075.3 | $ | 890.8 | $ | 69.2 | $ | — | $ | 2,035.3 | ||||||||||
|
Profit
(loss) from operations
|
80.8 | 187.4 | 0.5 | (20.1 | ) | 248.6 | ||||||||||||||
|
Depreciation
|
29.3 | 35.1 | — | 6.3 | 70.7 | (1) | ||||||||||||||
|
Amortization
|
14.2 | 8.2 | — | 2.2 | 24.6 | (2) | ||||||||||||||
|
Research
and development
|
19.1 | 18.6 | 0.4 | 0.7 | 38.8 | |||||||||||||||
|
Total
assets
|
976.1 | 756.5 | — | 1,075.9 | 2,808.5 | (3) | ||||||||||||||
|
Capital
expenditures
|
25.1 | 59.1 | — | 9.4 | 93.6 | |||||||||||||||
|
2005
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,017.3 | $ | 755.0 | $ | 282.7 | $ | — | $ | 2,055.0 | ||||||||||
|
Profit
(loss) from operations
|
61.4 | 155.5 | (64.9 | ) | (11.7 | ) | 140.3 | |||||||||||||
|
Depreciation
|
29.6 | 33.0 | 10.9 | 7.0 | 80.5 | (1) | ||||||||||||||
|
Amortization
|
14.3 | 7.5 | 1.5 | 2.1 | 25.4 | (2) | ||||||||||||||
|
Research
and development
|
18.6 | 18.4 | 2.8 | 1.0 | 40.8 | |||||||||||||||
|
Total
assets
|
903.6 | 638.1 | 202.7 | 824.4 | 2,568.8 | (3) | ||||||||||||||
|
Capital
expenditures
|
18.7 | 37.1 | 4.2 | 7.5 | 67.5 | |||||||||||||||
|
|
(1)
|
Depreciation
for Corporate is allocated to the business segments in the determination
of Profit from operations.
|
|
|
(2)
|
Corporate
amortization includes accelerated amortization of capitalized software and
deferred financing costs.
|
|
|
(3)
|
Corporate
assets include cash and cash equivalents, income taxes receivable,
deferred tax assets, asbestos-related assets, investments, assets of
discontinued operations and certain other assets not directly attributable
to the business segments.
|
Geographic
Reporting Data
For
geographic reporting purposes, no single country, outside the United States, is
material for separate disclosure. However, because the Company has
significant foreign operations, Net sales and Property, plant and equipment, net
are disclosed by geographic region.
Net sales
are reported on a "customer basis," meaning that they are included in the
geographic area in which the customer is located. Property, plant and
equipment, net is included in the geographic areas in which the producing
entities are located.
|
Geographic
Areas
|
United
States
|
Europe
|
Americas
|
Asia
Pacific
|
Total
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
Sales
|
$ | 894.2 | $ | 756.8 | $ | 235.9 | $ | 249.3 | $ | 2,136.2 | ||||||||||
|
Property,
plant and equipment, net
|
287.1 | 255.5 | 20.2 | 97.2 | 660.0 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
Net
Sales
|
$ | 897.2 | $ | 696.0 | $ | 214.7 | $ | 227.4 | $ | 2,035.3 | ||||||||||
|
Property,
plant and equipment, net
|
272.1 | 242.6 | 17.0 | 68.7 | 600.4 | |||||||||||||||
|
2005
|
||||||||||||||||||||
|
Net
Sales
|
$ | 871.9 | $ | 747.7 | $ | 201.7 | $ | 233.7 | $ | 2,055.0 | ||||||||||
|
Property,
plant and equipment, net
|
262.1 | 233.8 | 15.7 | 23.8 | 535.4 | |||||||||||||||
- 87
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
24. Financial Instruments and Risk Management, Including
Derivatives
The fair
value of cash and cash equivalents, accounts receivable, net and accounts
payable approximate their carrying values primarily due to their short-term
nature. The Company’s investment securities that are available for
sale include certain relatively insignificant debt and equity
securities. Changes in the fair value of these securities are
recognized in AOCL. Fair value measurements for these investments are
generally based on third party quotes or the present value of expected future
cash flows. The fair values of the Company’s debt securities are
determined based on the present value of expected cash flows related to existing
borrowings discounted at rates currently available to the Company for long-term
borrowings with similar terms and remaining maturities. The fair
values of the Company’s derivative instruments, including foreign exchange
contracts and cross-currency interest rate swaps, are based on exchange and
interest rates in effect at year-end.
The
Company has selectively used foreign currency forward contracts and currency
swaps to offset the effects of foreign currency exchange rate changes on
reported earnings, cash flow and net asset positions. The primary
exposures are denominated in the Euro, Swedish kroner, Danish kroner and British
pound sterling. Some of the contracts involve the exchange of two
foreign currencies, according to local needs in foreign
subsidiaries. The terms of the currency derivatives are rarely more
than three months. The Company had net outstanding external
forward-exchange contracts to sell foreign currencies aggregating $3.9 million
and $14.6 million at December 31, 2007 and 2006, respectively. Net
cross-currency trades entered into by non-U.S. dollar denominated entities
aggregated $31.7 million and $14.5 million at December 31, 2007 and 2006,
respectively. The foreign exchange contracts outstanding at
December 31, 2007 matured on or before January 22, 2008. During
2007 and 2006, the Company recorded $0.8 million and $1.8 million, respectively,
as components of Other expense, net representing the net loss due to underlying
foreign currency exposures net of the impact of foreign currency
contracts. The notional amounts of the contracts referenced above do
not represent the amounts exchanged by the parties involved and thus, are not a
measure of the Company's exposure to various risks through its use of
derivatives.
The
Company uses cross-currency interest rate swaps (the “Swaps”) and has designated
them as a hedge of the Company’s foreign currency exposure associated with its
net investment in certain foreign operations that utilize the Euro as their
functional currency. The combined notional amounts of the Swaps is
$500.0 million/€ 420.2 million and requires the Company to receive three month
LIBOR + 1.50% and pay three month EURIBOR plus an average margin at 1.59% on a
quarterly basis for a five year term. The Swaps have been recorded at
fair value, with changes in value attributable to changes in foreign exchange
rates recorded in AOCL. During 2007 and 2006, credits of $0.7 million
and $7.1 million, respectively, were recorded as adjustments to Interest and
debt expense representing the net amount received from the Swaps in excess of
amounts paid.
The
following table presents the net carrying amounts and fair values of the
Company's financial instruments, including derivatives and excluding those
instruments of a short-term nature as referenced above, as well as the balance
sheet caption in which they are included at December 31, 2007 and
2006:
|
2007
|
2006
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Value
|
Value
|
Value
|
Value
|
|||||||||||||
|
Deferred
charges and other assets
|
||||||||||||||||
|
Investment
securities available for sale
|
$ | 6.6 | $ | 6.6 | $ | 2.6 | $ | 2.6 | ||||||||
|
Foreign
exchange contracts, net
|
0.3 | 0.3 | (0.1 | ) | (0.1 | ) | ||||||||||
|
Current
and long-term debt obligations
|
796.0 | 713.8 | 995.5 | 964.2 | ||||||||||||
|
Deferred
credits and other liabilities
|
||||||||||||||||
|
Cross
currency interest rate swaps
|
112.1 | 112.1 | 53.2 | 53.2 | ||||||||||||
Fair
values of the above financial instruments are indicative of cash that would have
been received or required had settlement been made at December 31, 2007 and
2006.
|
|
25. Condensed Consolidating Financial Information of Guarantor
Subsidiaries
|
The
Company’s Senior Credit Facility is guaranteed by substantially all of the
Company's current and future wholly-owned domestic restricted subsidiaries (the
"guarantor subsidiaries"). The guarantees by each guarantor
subsidiary are full and unconditional and joint and several. The
indenture under which the Company's 6.60% notes due 2027 were issued requires
such notes to be guaranteed or secured on the same basis as any other
subsequently issued debt that is guaranteed
- 88
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
or
secured. As a result, at December 31, 2007, the following
wholly-owned domestic restricted subsidiaries fully and unconditionally and
jointly and severally guarantee the Senior Credit Facility, the 6.60% notes due
2027, and the 6.75% notes due 2029:
|
Aqualon
Company
|
Hercules
Hydrocarbon Holdings, Inc.
|
|
East
Bay Realty Services, Inc.
|
Hercules
Paper Holdings, Inc.
|
|
Hercules
Euro Holdings, LLC
|
WSP,
Inc.
|
The
non-guarantor subsidiaries include all of the Company's foreign subsidiaries and
certain domestic subsidiaries. The Company conducts much of its
business through and derives much of its income from its
subsidiaries. Therefore, the Company's ability to make required
payments with respect to its indebtedness and other obligations depends on the
financial results and condition of its subsidiaries and its ability to receive
funds from its subsidiaries. There are no restrictions on the ability
of any of the guarantor subsidiaries to transfer funds to the Company; however,
there may be such restrictions for certain foreign non-guarantor
subsidiaries.
The
following condensed consolidating financial information for the Company presents
the financial information of Hercules, the guarantor subsidiaries and the
non-guarantor subsidiaries based on the Company's understanding of the
Securities and Exchange Commission's interpretation and application of Rule 3-10
under the Securities and Exchange Commission's Regulation S-X. The
financial information may not necessarily be indicative of results of operations
or financial position had the guarantor subsidiaries or non-guarantor
subsidiaries operated as independent entities.
In this
presentation, Hercules consists of parent company
operations. Guarantor subsidiaries and non-guarantor subsidiaries of
Hercules are reported on an equity basis. Additionally, prior year
information has been reclassified to conform to the presentation in the
Consolidated Financial Statements.
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 623.7 | $ | 450.0 | $ | 1,253.0 | $ | (190.5 | ) | $ | 2,136.2 | |||||||||
|
Cost
of sales
|
443.5 | 321.2 | 832.5 | (191.5 | ) | 1,405.7 | ||||||||||||||
|
Selling,
general and administrative expenses
|
111.1 | 112.8 | 153.0 | — | 376.9 | |||||||||||||||
|
Research
and development
|
18.5 | 19.6 | 5.7 | — | 43.8 | |||||||||||||||
|
Intangible
asset amortization
|
6.1 | 0.7 | 2.2 | (0.3 | ) | 8.7 | ||||||||||||||
|
Other
operating expense, net
|
24.6 | 5.1 | 7.2 | — | 36.9 | |||||||||||||||
|
Profit
(loss) from operations
|
19.9 | (9.4 | ) | 252.4 | 1.3 | 264.2 | ||||||||||||||
|
Interest
and debt expense (income), net
|
182.1 | (117.8 | ) | 4.3 | — | 68.6 | ||||||||||||||
|
Vertac
response costs and litigation charges
|
20.3 | — | — | — | 20.3 | |||||||||||||||
|
Other
expense, net
|
20.7 | 4.8 | (1.9 | ) | 0.4 | 24.0 | ||||||||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
(203.2 | ) | 103.6 | 250.0 | 0.9 | 151.3 | ||||||||||||||
|
(Benefit)
provision for income taxes
|
(106.8 | ) | 41.0 | 45.1 | 0.4 | (20.3 | ) | |||||||||||||
|
Income
(loss) before minority interests and equity (loss) income
|
(96.4 | ) | 62.6 | 204.9 | 0.5 | 171.6 | ||||||||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
— | — | (0.6 | ) | — | (0.6 | ) | |||||||||||||
|
Equity
(loss) income of affiliated companies
|
— | (0.1 | ) | 0.6 | (0.6 | ) | (0.1 | ) | ||||||||||||
|
Equity
income from consolidated subsidiaries
|
267.3 | — | — | (267.3 | ) | — | ||||||||||||||
|
Net
income from continuing operations before discontinued
operations
|
170.9 | 62.5 | 204.9 | (267.4 | ) | 170.9 | ||||||||||||||
|
Net
income from discontinued operations, net of tax
|
8.0 | — | (0.5 | ) | 0.5 | 8.0 | ||||||||||||||
|
Net
income
|
$ | 178.9 | $ | 62.5 | $ | 204.4 | $ | (266.9 | ) | $ | 178.9 | |||||||||
- 89
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 596.7 | $ | 478.2 | $ | 1,124.6 | $ | (164.2 | ) | $ | 2,035.3 | |||||||||
|
Cost
of sales
|
417.5 | 345.7 | 744.6 | (164.4 | ) | 1,343.4 | ||||||||||||||
|
Selling,
general and administrative expenses
|
101.0 | 121.3 | 150.7 | (0.8 | ) | 372.2 | ||||||||||||||
|
Research
and development
|
19.7 | 16.9 | 2.2 | — | 38.8 | |||||||||||||||
|
Intangible
asset amortization
|
5.9 | 0.7 | 0.6 | — | 7.2 | |||||||||||||||
|
Other
operating expense, net
|
15.5 | (1.8 | ) | 11.4 | — | 25.1 | ||||||||||||||
|
Profit
(loss) from operations
|
37.1 | (4.6 | ) | 215.1 | 1.0 | 248.6 | ||||||||||||||
|
Interest
and debt expense (income), net
|
173.2 | (103.7 | ) | 1.7 | — | 71.2 | ||||||||||||||
|
Vertac
response costs and litigation charges
|
108.5 | — | — | — | 108.5 | |||||||||||||||
|
Other
expense, net
|
58.7 | 6.5 | 0.5 | — | 65.7 | |||||||||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
(303.3 | ) | 92.6 | 212.9 | 1.0 | 3.2 | ||||||||||||||
|
(Benefit)
provision for income taxes
|
(230.3 | ) | (4.6 | ) | 42.3 | 0.4 | (192.2 | ) | ||||||||||||
|
Income
(loss) before minority interests and equity (loss) income
|
(73.0 | ) | 97.2 | 170.6 | 0.6 | 195.4 | ||||||||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
— | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||
|
Equity
(loss) income of affiliated companies
|
— | (3.5 | ) | 1.6 | (1.3 | ) | (3.2 | ) | ||||||||||||
|
Equity
income (loss) from consolidated subsidiaries
|
263.8 | 0.5 | (0.8 | ) | (263.5 | ) | — | |||||||||||||
|
Net
income from continuing operations before discontinued operations and
cumulative effect of changes in accounting principle
|
190.8 | 94.2 | 170.0 | (264.2 | ) | 190.8 | ||||||||||||||
|
Net
income from discontinued operations, net of tax
|
47.0 | — | — | — | 47.0 | |||||||||||||||
|
Net
income before cumulative effect of changes in accounting
principle
|
237.8 | 94.2 | 170.0 | (264.2 | ) | 237.8 | ||||||||||||||
|
Cumulative
effect of changes in accounting principle, net of tax
|
0.9 | — | — | — | 0.9 | |||||||||||||||
|
Net
income
|
$ | 238.7 | $ | 94.2 | $ | 170.0 | $ | (264.2 | ) | $ | 238.7 | |||||||||
- 90
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
||||||||||||||||||
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 548.9 | $ | 491.2 | $ | 1,175.2 | $ | (160.3 | ) | $ | 2,055.0 | |||||||||
|
Cost
of sales
|
386.2 | 382.7 | 794.7 | (172.5 | ) | 1,391.1 | ||||||||||||||
|
Selling,
general, and administrative expenses
|
103.7 | 130.0 | 148.8 | — | 382.5 | |||||||||||||||
|
Research
and development
|
19.2 | 18.4 | 3.2 | — | 40.8 | |||||||||||||||
|
Intangible
asset amortization
|
6.0 | 1.5 | 0.5 | — | 8.0 | |||||||||||||||
|
Impairment
of FiberVisions’ goodwill
|
— | 52.9 | — | — | 52.9 | |||||||||||||||
|
Other
operating expense, net
|
8.0 | 9.0 | 22.4 | — | 39.4 | |||||||||||||||
|
Profit
(loss) from operations
|
25.8 | (103.3 | ) | 205.6 | 12.2 | 140.3 | ||||||||||||||
|
Interest
and debt expense (income), net
|
173.1 | (71.6 | ) | (12.1 | ) | — | 89.4 | |||||||||||||
|
Vertac
response costs and litigation charges
|
15.0 | — | — | — | 15.0 | |||||||||||||||
|
Other
expense (income), net
|
72.3 | 2.4 | (3.4 | ) | — | 71.3 | ||||||||||||||
|
(Loss)
income before income taxes, minority interests and equity income
(loss)
|
(234.6 | ) | (34.1 | ) | 221.1 | 12.2 | (35.4 | ) | ||||||||||||
|
(Benefit)
provision for income taxes
|
(100.3 | ) | 20.0 | 72.2 | 4.3 | (3.8 | ) | |||||||||||||
|
(Loss)
income before minority interests and equity income
(loss)
|
(134.3 | ) | (54.1 | ) | 148.9 | 7.9 | (31.6 | ) | ||||||||||||
|
Minority
interests in earnings of
consolidated subsidiaries
|
— | — | (1.0 | ) | — | (1.0 | ) | |||||||||||||
|
Equity
income (loss) of affiliated companies
|
— | (1.1 | ) | 1.5 | 0.1 | 0.5 | ||||||||||||||
|
Equity
income (loss) from consolidated subsidiaries
|
102.2 | 10.0 | (3.2 | ) | (109.0 | ) | — | |||||||||||||
|
Net
(loss) income from continuing operations
before
discontinued operations and cumulative
effect
of change in accounting principle
|
(32.1 | ) | (45.2 | ) | 146.2 | (101.0 | ) | (32.1 | ) | |||||||||||
|
Net
loss from discontinued operations, net of tax
|
(6.5 | ) | — | — | — | (6.5 | ) | |||||||||||||
|
Net
(loss) income before cumulative effect of
changes
in accounting principle, net of tax
|
(38.6 | ) | (45.2 | ) | 146.2 | (101.0 | ) | (38.6 | ) | |||||||||||
|
Cumulative
effect of change in accounting
principle,
net of tax
|
(2.5 | ) | — | — | — | (2.5 | ) | |||||||||||||
|
Net
(loss) income
|
$ | (41.1 | ) | $ | (45.2 | ) | $ | 146.2 | $ | (101.0 | ) | $ | (41.1 | ) | ||||||
- 91
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Balance Sheet
|
||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
||||||||||||||||||
|
Assets
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
|||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 26.9 | $ | 1.5 | $ | 88.1 | $ | — | $ | 116.5 | ||||||||||
|
Accounts
receivable, net
|
65.8 | 48.7 | 252.3 | — | 366.8 | |||||||||||||||
|
Intercompany
receivables
|
70.8 | 11.0 | (3.6 | ) | (78.2 | ) | — | |||||||||||||
|
Inventories
|
55.3 | 67.6 | 101.7 | (0.6 | ) | 224.0 | ||||||||||||||
|
Deferred
income taxes
|
29.4 | 4.0 | 7.6 | — | 41.0 | |||||||||||||||
|
Income
taxes receivable
|
54.7 | — | — | (34.5 | ) | 20.2 | ||||||||||||||
|
Asbestos-related
assets
|
4.0 | — | — | — | 4.0 | |||||||||||||||
|
Other
current assets
|
20.1 | 2.0 | 19.7 | — | 41.8 | |||||||||||||||
|
Total
current assets
|
327.0 | 134.8 | 465.8 | (113.3 | ) | 814.3 | ||||||||||||||
|
Property,
plant and equipment, net
|
132.0 | 155.1 | 372.9 | — | 660.0 | |||||||||||||||
|
Investments
in subsidiaries and advances, net
|
1,853.6 | 81.4 | — | (1,935.0 | ) | — | ||||||||||||||
|
Intangible
assets, net
|
134.2 | 2.2 | 24.8 | — | 161.2 | |||||||||||||||
|
Goodwill
|
59.3 | 39.7 | 428.9 | — | 527.9 | |||||||||||||||
|
Deferred
income taxes
|
363.0 | — | 14.1 | (6.3 | ) | 370.8 | ||||||||||||||
|
Asbestos-related
assets
|
24.1 | — | — | — | 24.1 | |||||||||||||||
|
Deferred
charges and other assets
|
69.4 | 25.7 | 25.0 | — | 120.1 | |||||||||||||||
|
Total
assets
|
$ | 2,962.6 | $ | 438.9 | $ | 1,331.5 | $ | (2,054.6 | ) | $ | 2,678.4 | |||||||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 65.0 | $ | 31.8 | $ | 125.2 | $ | — | $ | 222.0 | ||||||||||
|
Intercompany
payables
|
1.8 | 47.0 | 29.1 | (77.9 | ) | — | ||||||||||||||
|
Asbestos-related
liabilities
|
28.0 | — | — | — | 28.0 | |||||||||||||||
|
Current
debt obligations
|
4.0 | — | 29.7 | — | 33.7 | |||||||||||||||
|
Vertac
obligations
|
20.0 | — | — | — | 20.0 | |||||||||||||||
|
Accrued
expenses
|
117.0 | 24.1 | 66.9 | (0.3 | ) | 207.7 | ||||||||||||||
|
Income
taxes payable
|
— | 36.7 | 11.1 | (34.5 | ) | 13.3 | ||||||||||||||
|
Deferred
income taxes
|
— | — | 9.5 | — | 9.5 | |||||||||||||||
|
Total
current liabilities
|
235.8 | 139.6 | 271.5 | (112.7 | ) | 534.2 | ||||||||||||||
|
Long-term
debt
|
740.2 | — | 22.1 | — | 762.3 | |||||||||||||||
|
Deferred
income taxes
|
— | 6.3 | 74.3 | (6.3 | ) | 74.3 | ||||||||||||||
|
Pension
obligations
|
109.3 | — | 49.4 | — | 158.7 | |||||||||||||||
|
Other
postretirement benefit obligations
|
119.6 | — | 3.5 | — | 123.1 | |||||||||||||||
|
Deferred
credits and other liabilities
|
268.5 | 12.5 | 17.7 | — | 298.7 | |||||||||||||||
|
Asbestos-related
liabilities
|
227.0 | — | — | — | 227.0 | |||||||||||||||
|
Intercompany
notes payable (receivable)
|
784.2 | (721.8 | ) | (62.4 | ) | — | — | |||||||||||||
|
Minority
interests
|
— | — | 22.1 | — | 22.1 | |||||||||||||||
|
Total
stockholders' equity
|
478.0 | 1,002.3 | 933.3 | (1,935.6 | ) | 478.0 | ||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 2,962.6 | $ | 438.9 | $ | 1,331.5 | $ | (2,054.6 | ) | $ | 2,678.4 | |||||||||
- 92
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Balance Sheet
|
||||||||||||||||||||
|
As
of December 31, 2006
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
||||||||||||||||||
|
Assets
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
|||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 89.7 | $ | 0.5 | $ | 81.6 | $ | — | $ | 171.8 | ||||||||||
|
Accounts
receivable, net
|
69.9 | 45.6 | 211.1 | — | 326.6 | |||||||||||||||
|
Intercompany
receivables
|
68.0 | 9.8 | (6.4 | ) | (71.4 | ) | — | |||||||||||||
|
Inventories
|
56.2 | 68.9 | 87.0 | (1.5 | ) | 210.6 | ||||||||||||||
|
Deferred
income taxes
|
57.6 | 3.2 | 9.4 | — | 70.2 | |||||||||||||||
|
Current
assets of discontinued operations
|
0.4 | — | — | — | 0.4 | |||||||||||||||
|
Income
taxes receivable
|
212.8 | — | — | (42.0 | ) | 170.8 | ||||||||||||||
|
Other
current assets
|
12.3 | 2.4 | 19.4 | — | 34.1 | |||||||||||||||
|
Total
current assets
|
566.9 | 130.4 | 402.1 | (114.9 | ) | 984.5 | ||||||||||||||
|
Property,
plant and equipment, net
|
139.9 | 132.2 | 328.3 | — | 600.4 | |||||||||||||||
|
Investments
in subsidiaries and advances, net
|
2,569.7 | 85.2 | 44.9 | (2,699.8 | ) | — | ||||||||||||||
|
Intangible
assets, net
|
131.8 | 2.9 | 8.4 | — | 143.1 | |||||||||||||||
|
Goodwill
|
58.7 | 37.6 | 385.2 | — | 481.5 | |||||||||||||||
|
Deferred
income taxes
|
357.1 | — | 19.5 | (2.0 | ) | 374.6 | ||||||||||||||
|
Asbestos-related
assets
|
87.5 | — | — | — | 87.5 | |||||||||||||||
|
Deferred
charges and other assets
|
87.7 | 27.7 | 21.5 | — | 136.9 | |||||||||||||||
|
Total
assets
|
$ | 3,999.3 | $ | 416.0 | $ | 1,209.9 | $ | (2,816.7 | ) | $ | 2,808.5 | |||||||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 63.2 | $ | 35.0 | $ | 107.1 | $ | — | $ | 205.3 | ||||||||||
|
Intercompany
payables
|
2.0 | 43.4 | 26.1 | (71.5 | ) | — | ||||||||||||||
|
Asbestos-related
liabilities
|
36.4 | — | — | — | 36.4 | |||||||||||||||
|
Current
debt obligations
|
20.0 | — | 15.8 | — | 35.8 | |||||||||||||||
|
Vertac
obligations
|
123.5 | — | — | — | 123.5 | |||||||||||||||
|
Accrued
expenses
|
119.8 | 16.6 | 55.8 | 0.1 | 192.3 | |||||||||||||||
|
Income
taxes payable
|
— | 51.7 | 14.8 | (42.0 | ) | 24.5 | ||||||||||||||
|
Deferred
income taxes
|
— | — | 11.8 | — | 11.8 | |||||||||||||||
|
Total
current liabilities
|
364.9 | 146.7 | 231.4 | (113.4 | ) | 629.6 | ||||||||||||||
|
Long-term
debt
|
937.5 | — | 22.2 | — | 959.7 | |||||||||||||||
|
Deferred
income taxes
|
— | 2.0 | 69.7 | (2.0 | ) | 69.7 | ||||||||||||||
|
Pension
obligations
|
191.2 | — | 71.3 | — | 262.5 | |||||||||||||||
|
Other
postretirement benefit obligations
|
139.9 | 2.1 | 0.2 | — | 142.2 | |||||||||||||||
|
Deferred
credits and other liabilities
|
220.8 | 14.1 | 20.7 | — | 255.6 | |||||||||||||||
|
Asbestos-related
liabilities
|
233.6 | — | — | — | 233.6 | |||||||||||||||
|
Intercompany
notes payable (receivable)
|
1,668.5 | (1,413.5 | ) | (255.0 | ) | — | — | |||||||||||||
|
Minority
interests
|
— | — | 12.7 | — | 12.7 | |||||||||||||||
|
Total
stockholders' equity
|
242.9 | 1,664.6 | 1,036.7 | (2,701.3 | ) | 242.9 | ||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 3,999.3 | $ | 416.0 | $ | 1,209.9 | $ | (2,816.7 | ) | $ | 2,808.5 | |||||||||
- 93
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
Cash Provided By Operating Activities
|
$ | 290.1 | $ | 90.0 | $ | 212.7 | $ | (292.9 | ) | $ | 299.9 | |||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(23.7 | ) | (34.9 | ) | (59.7 | ) | — | (118.3 | ) | |||||||||||
|
Acquisitions
and investments, net
|
— | (16.5 | ) | — | — | (16.5 | ) | |||||||||||||
|
Proceeds
from sale of 51% interest in FiberVisions,
net
of transaction costs
|
(1.2 | ) | — | — | — | (1.2 | ) | |||||||||||||
|
Proceeds
of asset disposals, net of transaction costs
|
2.8 | — | 15.5 | — | 18.3 | |||||||||||||||
|
Net
cash used in investing activities
|
(22.1 | ) | (51.4 | ) | (44.2 | ) | — | (117.7 | ) | |||||||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||||||||||
|
Long-term
debt proceeds
|
— | — | 3.8 | — | 3.8 | |||||||||||||||
|
Long-term
debt payments
|
(214.2 | ) | — | (2.6 | ) | — | (216.8 | ) | ||||||||||||
|
Change
in short-term debt
|
— | — | 9.4 | — | 9.4 | |||||||||||||||
|
Change
in intercompany advances
|
(72.6 | ) | (37.6 | ) | (132.5 | ) | 242.7 | — | ||||||||||||
|
Repurchase
of common stock
|
(46.1 | ) | — | — | — | (46.1 | ) | |||||||||||||
|
Dividends
paid
|
(5.7 | ) | — | — | — | (5.7 | ) | |||||||||||||
|
Intercompany
dividends paid
|
— | — | (50.2 | ) | 50.2 | — | ||||||||||||||
|
Proceeds
from the exercise of stock options
|
6.5 | — | — | — | 6.5 | |||||||||||||||
|
Other,
net
|
1.3 | — | — | — | 1.3 | |||||||||||||||
|
Net
cash used in financing activities
|
(330.8 | ) | (37.6 | ) | (172.1 | ) | 292.9 | (247.6 | ) | |||||||||||
|
Effect
of exchange rate changes on cash
|
— | — | 10.1 | — | 10.1 | |||||||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(62.8 | ) | 1.0 | 6.5 | — | (55.3 | ) | |||||||||||||
|
Cash
and cash equivalents at beginning of year
|
89.7 | 0.5 | 81.6 | — | 171.8 | |||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 26.9 | $ | 1.5 | $ | 88.1 | $ | — | $ | 116.5 | ||||||||||
- 94
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
Cash Provided By (Used In) Operating Activities
|
$ | 166.7 | $ | (1.2 | ) | $ | 482.1 | $ | (474.7 | ) | $ | 172.9 | ||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(21.3 | ) | (21.0 | ) | (51.3 | ) | — | (93.6 | ) | |||||||||||
|
Acquisitions
and investments, net
of
cash, recognized upon consolidation
|
— | (22.7 | ) | (6.7 | ) | — | (29.4 | ) | ||||||||||||
|
Proceeds
from sale of 51% interest in FiberVisions, net
|
17.8 | — | — | — | 17.8 | |||||||||||||||
|
Proceeds
of asset disposals, net of transaction costs
|
1.1 | 5.9 | 4.3 | — | 11.3 | |||||||||||||||
|
Other,
net
|
(0.2 | ) | — | — | — | (0.2 | ) | |||||||||||||
|
Net
cash used in investing activities
|
(2.6 | ) | (37.8 | ) | (53.7 | ) | — | (94.1 | ) | |||||||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||||||||||
|
Long-term
debt issued by FiberVisions net
of issuance costs
|
83.7 | — | — | — | 83.7 | |||||||||||||||
|
Long-term
debt proceeds
|
— | — | 22.0 | — | 22.0 | |||||||||||||||
|
Long-term
debt payments
|
(135.7 | ) | — | (6.8 | ) | — | (142.5 | ) | ||||||||||||
|
Change
in short-term debt
|
— | — | 5.8 | — | 5.8 | |||||||||||||||
|
Change
in intercompany advances
|
(71.5 | ) | 38.5 | (388.7 | ) | 421.7 | — | |||||||||||||
|
Intercompany
dividends paid
|
— | — | (53.0 | ) | 53.0 | — | ||||||||||||||
|
Proceeds
from the exercise of stock options
|
37.0 | — | — | — | 37.0 | |||||||||||||||
|
Other,
net
|
5.6 | — | — | — | 5.6 | |||||||||||||||
|
Net
cash provided by (used in) financing activities
|
(80.9 | ) | 38.5 | (420.7 | ) | 474.7 | 11.6 | |||||||||||||
|
Effect
of exchange rate changes on cash
|
— | — | 4.1 | — | 4.1 | |||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
83.2 | (0.5 | ) | 11.8 | — | 94.5 | ||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
6.5 | 1.0 | 69.8 | — | 77.3 | |||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 89.7 | $ | 0.5 | $ | 81.6 | $ | — | $ | 171.8 | ||||||||||
- 95
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||||||
|
Unconsolidated
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||||||
|
Net
Cash Provided By (Used In) Operating Activities
|
$ | (4.6 | ) | $ | 29.1 | $ | (81.2 | ) | $ | 195.9 | $ | 139.2 | ||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||||||||||
|
Capital
expenditures
|
(16.7 | ) | (26.7 | ) | (24.1 | ) | — | (67.5 | ) | |||||||||||
|
Acquisitions
and investments, net
|
— | — | (4.4 | ) | — | (4.4 | ) | |||||||||||||
|
Proceeds
of asset disposals net of transaction costs
|
13.3 | — | 3.3 | — | 16.6 | |||||||||||||||
|
Other,
net
|
— | — | (2.4 | ) | — | (2.4 | ) | |||||||||||||
|
Net
cash used in investing activities
|
(3.4 | ) | (26.7 | ) | (27.6 | ) | — | (57.7 | ) | |||||||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||||||||||
|
Long-term
debt payments
|
(112.8 | ) | — | (18.4 | ) | — | (131.2 | ) | ||||||||||||
|
Change
in short-term debt
|
— | — | 1.9 | — | 1.9 | |||||||||||||||
|
Change
in intercompany advances
|
82.2 | (2.3 | ) | 159.2 | (239.1 | ) | — | |||||||||||||
|
Intercompany
dividends paid
|
— | — | (43.2 | ) | 43.2 | — | ||||||||||||||
|
Proceeds
from the exercise of stock options
|
2.7 | — | — | — | 2.7 | |||||||||||||||
|
Other,
net
|
(0.4 | ) | — | — | — | (0.4 | ) | |||||||||||||
|
Net
cash (used in) provided by financing activities
|
(28.3 | ) | (2.3 | ) | 99.5 | (195.9 | ) | (127.0 | ) | |||||||||||
|
Effect
of exchange rate changes on cash
|
— | — | (3.7 | ) | — | (3.7 | ) | |||||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(36.3 | ) | 0.1 | (13.0 | ) | — | (49.2 | ) | ||||||||||||
|
Cash
and cash equivalents at beginning of year
|
42.8 | 0.9 | 82.8 | — | 126.5 | |||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 6.5 | $ | 1.0 | $ | 69.8 | $ | — | $ | 77.3 | ||||||||||
- 96
-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
26. Summary of Quarterly Results (Unaudited)
|
||||||||||||||||||||||||||||||||||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Year
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
| $ | 502.3 | $ | 527.3 | $ | 549.0 | $ | 501.0 | $ | 544.2 | $ | 513.1 | $ | 540.7 | $ | 493.9 | $ | 2,136.2 | $ | 2,035.3 | |||||||||||||||||||||
|
Cost
of sales
|
323.4 | 360.7 | 358.8 | 324.7 | 358.0 | 332.2 | 365.5 | 325.8 | 1,405.7 | 1,343.4 | ||||||||||||||||||||||||||||||
|
Selling,
general and administrative expenses
|
93.7 | 91.3 | 95.2 | 90.7 | 94.5 | 92.8 | 93.5 | 97.4 | 376.9 | 372.2 | ||||||||||||||||||||||||||||||
|
Research
and development
|
10.4 | 9.6 | 11.0 | 9.4 | 11.0 | 9.3 | 11.4 | 10.5 | 43.8 | 38.8 | ||||||||||||||||||||||||||||||
|
Intangible
asset amortization
|
1.8 | 1.6 | 1.9 | 2.0 | 2.4 | 1.8 | 2.6 | 1.8 | 8.7 | 7.2 | ||||||||||||||||||||||||||||||
|
Other
operating expense, net
|
13.1 | 7.2 | 7.6 | 8.6 | 5.4 | 4.6 | 10.8 | 4.7 | 36.9 | 25.1 | ||||||||||||||||||||||||||||||
|
Profit
from operations
|
59.9 | 56.9 | 74.5 | 65.6 | 72.9 | 72.4 | 56.9 | 53.7 | 264.2 | 248.6 | ||||||||||||||||||||||||||||||
|
Interest
and debt expense
|
17.2 | 20.7 | 17.8 | 16.7 | 17.0 | 16.7 | 16.6 | 17.1 | 68.6 | 71.2 | ||||||||||||||||||||||||||||||
|
Vertac
response costs and litigation charges
|
1.5 | — | 17.5 | 106.0 | 1.0 | 1.0 | 0.3 | 1.5 | 20.3 | 108.5 | ||||||||||||||||||||||||||||||
|
Other
expense, net
|
3.3 | 10.6 | 15.7 | 21.1 | 3.9 | 4.6 | 1.1 | 29.4 | 24.0 | 65.7 | ||||||||||||||||||||||||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
37.9 | 25.6 | 23.5 | (78.2 | ) | 51.0 | 50.1 | 38.9 | 5.7 | 151.3 | 3.2 | |||||||||||||||||||||||||||||
|
(Benefit)
provision for income taxes
|
(36.6 | ) | 10.7 | (11.5 | ) | (27.5 | ) | 10.9 | 14.1 | 16.9 | (189.5 | ) | (20.3 | ) | (192.2 | ) | ||||||||||||||||||||||||
|
Income
(loss) before minority interests and equity (loss) income
|
74.5 | 14.9 | 35.0 | (50.7 | ) | 40.1 | 36.0 | 22.0 | 195.2 | 171.6 | 195.4 | |||||||||||||||||||||||||||||
|
Minority
interests in (earnings) loss of consolidated subsidiaries
|
(0.5 | ) | (0.1 | ) | (0.5 | ) | (0.3 | ) | 0.3 | (0.4 | ) | 0.1 | (0.6 | ) | (0.6 | ) | (1.4 | ) | ||||||||||||||||||||||
|
Equity
(loss) income of affiliated companies, net of tax
|
(0.5 | ) | (0.4 | ) | — | (0.6 | ) | 1.0 | (1.1 | ) | (0.6 | ) | (1.1 | ) | (0.1 | ) | (3.2 | ) | ||||||||||||||||||||||
|
Net
income (loss) from continuing operations before discontinued operations
and cumulative effect of changes in accounting principle
|
73.5 | 14.4 | 34.5 | (51.6 | ) | 41.4 | 34.5 | 21.5 | 193.5 | 170.9 | 190.8 | |||||||||||||||||||||||||||||
|
Net
income (loss) from discontinued operations, net of tax
|
— | (0.6 | ) | — | (0.7 | ) | 1.0 | (0.3 | ) | 7.0 | 48.6 | 8.0 | 47.0 | |||||||||||||||||||||||||||
|
Net
income (loss) before cumulative effect of changes in
|
||||||||||||||||||||||||||||||||||||||||
|
accounting
principle
|
73.5 | 13.8 | 34.5 | (52.3 | ) | 42.4 | 34.2 | 28.5 | 242.1 | 178.9 | 237.8 | |||||||||||||||||||||||||||||
|
Cumulative
effect of changes in accounting principle
|
— | 0.9 | — | — | — | — | — | — | — | 0.9 | ||||||||||||||||||||||||||||||
|
Net
income (loss)
|
$ | 73.5 | $ | 14.7 | $ | 34.5 | $ | (52.3 | ) | $ | 42.4 | $ | 34.2 | $ | 28.5 | $ | 242.1 | $ | 178.9 | $ | 238.7 | |||||||||||||||||||
|
Basic
earnings (loss) per share:
|
||||||||||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | 0.64 | $ | 0.13 | $ | 0.30 | $ | (0.46 | ) | $ | 0.36 | $ | 0.31 | $ | 0.19 | $ | 1.72 | $ | 1.50 | $ | 1.72 | |||||||||||||||||||
|
Discontinued
operations
|
— | (0.01 | ) | — | (0.01 | ) | 0.01 | — | 0.06 | 0.43 | 0.07 | 0.42 | ||||||||||||||||||||||||||||
|
Cumulative
effect of changes in accounting principle
|
— | 0.01 | — | — | — | — | — | — | — | 0.01 | ||||||||||||||||||||||||||||||
|
Net
income (loss)
|
$ | 0.64 | $ | 0.13 | $ | 0.30 | $ | (0.47 | ) | $ | 0.37 | $ | 0.31 | $ | 0.25 | $ | 2.15 | $ | 1.57 | $ | 2.15 | |||||||||||||||||||
|
Diluted
earnings (loss) per share:
|
||||||||||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | 0.64 | $ | 0.13 | $ | 0.30 | $ | (0.46 | ) | $ | 0.36 | $ | 0.31 | $ | 0.19 | $ | 1.71 | $ | 1.49 | $ | 1.71 | |||||||||||||||||||
|
Discontinued
operations
|
— | (0.01 | ) | — | (0.01 | ) | 0.01 | — | 0.06 | 0.43 | 0.07 | 0.42 | ||||||||||||||||||||||||||||
|
Cumulative
effect of changes in accounting principle
|
— | 0.01 | — | — | — | — | — | — | — | 0.01 | ||||||||||||||||||||||||||||||
|
Net
income (loss)
|
$ | 0.64 | $ | 0.13 | $ | 0.30 | $ | (0.47 | ) | $ | 0.37 | $ | 0.31 | $ | 0.25 | $ | 2.14 | $ | 1.56 | $ | 2.14 | |||||||||||||||||||
|
Dividends
declared per share
|
— | — | — | — | $ | 0.05 | — | $ | 0.05 | — | $ | 0.10 | — | |||||||||||||||||||||||||||
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