UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------------- -------------
NOVEON, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware File No. 333-61812 13-4143915
- -------------------------- ------------------------------- -----------------------
(State of incorporation) (Commission File Number) (IRS Employer
Identification No.)
9911 Brecksville Road
Cleveland Ohio 44141
-------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(216) 447-5000
----------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 [ ]
As of May 15, 2002, there is 1 share of registrant's Common Stock
outstanding.
Noveon, Inc.
Periods of Three Months Ended March 31, 2002 and
One Month Ended March 31, 2001
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Period of Two Months Ended February 28, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations--Two
months ended February 28, 2001, one month ended
March 31, 2001, and three months ended March 31,
2002....................................................2
Condensed Consolidated Balance Sheet--December 31, 2001
and March 31, 2002......................................3
Condensed Consolidated Statement of Cash Flows--Two
months ended February 28, 2001, one month ended
March 31, 2001, and three months ended March 31,
2002....................................................4
Notes to Condensed Consolidated Financial
Statements..............................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................21
Item 3. Quantitative and Qualitative Disclosures of Market
Risk......................................................32
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .........................33
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Condensed Consolidated Statement of Operations
(dollars in millions)
(unaudited)
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
----------------------------------------------------
TWO MONTHS ONE MONTH THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, MARCH 31, MARCH 31,
2001 2001 2002
----------------------------------------------------
Sales $ 187.0 $ 95.8 $ 259.4
Cost of sales 137.3 68.0 177.0
----------------------------------------------------
Gross profit 49.7 27.8 82.4
Selling and administrative expenses 35.2 15.7 49.1
Amortization expense 4.0 2.7 3.8
Consolidation costs - - 0.1
----------------------------------------------------
Operating income 10.5 9.4 29.4
Interest income (expense)--net 0.6 (9.7) (19.3)
Other (expense)--net (1.5) (0.7) (0.2)
----------------------------------------------------
Income (loss) before income taxes 9.6 (1.0) 9.9
Income tax (expense) benefit (4.0) 0.4 (1.4)
----------------------------------------------------
Net income (loss) $ 5.6 $ (0.6) $ 8.5
====================================================
See notes to condensed consolidated financial statements.
2
Noveon, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions)
DECEMBER 31, 2001 MARCH 31, 2002
---------------------------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 120.0 $ 110.7
Accounts and notes receivable, less allowances for doubtful
receivables ($8.7 and $8.2 at December 31, 2001
and March 31, 2002, respectively) 133.8 152.0
Inventories 140.2 135.7
Prepaid expenses and other current assets 4.5 9.2
---------------------------------------
TOTAL CURRENT ASSETS 398.5 407.6
Property, plant and equipment--net 672.5 655.1
Goodwill--net 346.9 351.4
Identifiable intangible assets--net 192.0 188.5
Other assets 51.9 48.3
---------------------------------------
TOTAL ASSETS $ 1,661.8 $ 1,650.9
=======================================
CURRENT LIABILITIES
Short-term bank debt $ 1.3 $ 1.4
Accounts payable 97.1 93.5
Accrued expenses 74.2 64.3
Income taxes payable 1.0 2.2
Current maturities of long-term debt 23.2 23.1
---------------------------------------
TOTAL CURRENT LIABILITIES 196.8 184.5
Long-term debt 876.2 868.7
Postretirement benefits other than pensions 5.3 5.5
Accrued pensions 32.8 34.2
Deferred income taxes 24.6 24.6
Accrued environmental 20.7 20.7
Other non-current liabilities 9.2 7.7
STOCKHOLDER'S EQUITY
Common stock - -
Paid in capital 527.0 527.0
Retained deficit (20.6) (12.1)
Accumulated other comprehensive loss (10.2) (9.9)
---------------------------------------
TOTAL STOCKHOLDER'S EQUITY 496.2 505.0
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,661.8 $ 1,650.9
=======================================
See notes to condensed consolidated financial statements.
3
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Condensed Consolidated Statement of Cash Flows
(dollars in millions)
(unaudited)
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
----------------------------------------------------
TWO MONTHS ONE MONTH THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, MARCH 31, MARCH 31,
2001 2001 2002
----------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 5.6 $ (0.6) $ 8.5
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 14.4 8.8 20.9
Deferred income taxes (5.2) (0.2) -
Debt issuance cost amortization in interest expense - 2.4 1.4
Change in assets and liabilities, net of effects of
acquisitions and
dispositions of businesses (46.4) 0.3 (28.0)
----------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (31.6) 10.7 2.8
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7.6) (2.3) (4.9)
Payments made in connection with acquisitions, net of cash
acquired - (1,186.8) -
----------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (7.6) (1,189.1) (4.9)
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (3.7) (23.9) 0.1
Payments on long-term borrowings - - (7.2)
Proceeds from issuance of long-term debt - 910.0 -
Proceeds from sale of receivables, net 0.5 - -
Debt issuance costs - (43.3) -
Equity contribution from Stockholder - 355.0 -
Transfers from Parent 40.7 - -
----------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 37.5 1,197.8 (7.1)
Effect of exchange rate changes on cash and cash equivalents - (0.1) (0.1)
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1.7) 19.3 (9.3)
Cash and cash equivalents at beginning of period 15.7 - 120.0
----------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14.0 $ 19.3 $ 110.7
====================================================
Non-Cash transactions
Equity contribution $ - $ 172.0 $ -
====================================================
See notes to condensed consolidated financial statements.
4
Noveon, Inc.
Period of three months ended March 31, 2002
and one month ended March 31, 2001
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Period of two months ended February 28, 2001
Notes to Condensed Consolidated Financial Statements (unaudited)
A. ACQUISITION
Noveon, Inc. (the "Company") commenced operations on March 1, 2001 through
the acquisition on February 28, 2001 of certain assets and common stock of
certain subsidiaries of BFGoodrich Performance Materials (the "Predecessor
Company"), an operating segment of The BFGoodrich Company ("Goodrich").
Under the terms of the Agreement for Sale and Purchase of Assets between
BFGoodrich and the Company (the "Agreement"), the final working capital
adjustment will be determined subsequent to March 31, 2002, which may
require a change to the original purchase price. Goodrich has computed a
$25.0 million working capital adjustment that is equal to the upward
adjustment limit under the terms of the Agreement. Under the terms of the
Agreement, the Company is disputing Goodrich's working capital adjustment.
The parties have not been able to settle their differences, and the
disputed matters will be forwarded to an independent third party for
resolution. The decision by the third party will be final and binding on
all parties. Any amounts finally determined to be due to Goodrich as a
working capital adjustment in the Agreement will be paid through borrowings
under the revolving credit facility or with cash. Any amounts received by
the Company as a result of a downward adjustment to the purchase price may
be used to reduce debt under the credit facilities unless these amounts are
invested in cash or net working capital. The adjustment to purchase price
for the working capital adjustment will be reflected in the financial
statements upon the resolution of the working capital dispute.
The following unaudited pro forma data summarize the results of operations
for the three months ended March 31, 2001 as if the Company had been
acquired as of the beginning of the period presented. The pro forma data
give effect to actual operating results prior to the acquisition.
Adjustments to interest expense, goodwill amortization and income taxes
related to the acquisition are reflected in the pro forma data. In
addition, the results of textile dyes, which were not part of the
acquisition, are excluded from the pro forma results. These pro forma
amounts (in millions) do not purport to be indicative of the results that
would have actually been attained if the acquisition had occurred as of the
beginning of the periods presented or that may be attained in the future.
Net sales $ 281.7
Operating income 15.7
Net loss (15.5)
5
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended
March 31, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The condensed consolidated statement of operations for the two months ended
February 28, 2001 reflects the results of the Predecessor Company prior to
the acquisition. The results for the Predecessor Company are not
necessarily comparable to those of the Company because of the exclusion of
certain businesses from the acquisition and changes in organizational
structure, recorded asset values, cost structure and capitalization of the
Company resulting from the acquisition.
Earnings per share data are not presented because the Company's common
stock is not publicly traded and the Company is a wholly-owned subsidiary
of Noveon Holdings, Inc. ("Holdings").
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
6
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
C. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," in July 2001. The Statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and supersedes Accounting Principles Board ("APB") Opinion No. 17,
"Intangible Assets." SFAS No. 142 applies to all goodwill and other
intangible assets recognized in an entity's statement of financial position
at that date, regardless of when those assets were initially recognized.
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized
over their useful lives. The Company adopted SFAS No. 142 in the Company's
first quarter of 2002. During the second quarter of 2002, the Company will
perform the first of the required impairment tests of goodwill as of
January 1, 2002. The Company has not yet determined what the effect of
these tests will be on the financial position and results of operations of
the Company.
After giving effect to the non-amortization provisions of SFAS No. 142, net
income for the two month period ended February 28, 2001 and the one month
period ended March 31, 2001 would have been $8.6 million and $0.3 million,
respectively.
Intangible assets that continue to be subject to amortization are comprised
of the following at March 31, 2002:
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
----------------------------------------------------
Technology $ 158.5 $ 12.2 $ 146.3
Trademarks 46.0 3.8 42.2
----------------------------------------------------
Total $ 204.5 $ 16.0 $ 188.5
====================================================
Amortization expense for the intangible assets subject to amortization was
$3.8 million for the three months ended March 31, 2002 and is estimated to
be approximately $14.0 million annually for the next five fiscal years.
7
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
C. NEW ACCOUNTING STANDARDS (CONTINUED)
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," that requires the fair value of the liability for
closure and removal costs associated with the resulting legal obligations
upon retirement or removal of any tangible long-lived assets be recognized
in the period in which it is incurred. The initial recognition of the
liability will be capitalized as part of the asset cost and depreciated
over its estimated useful life. The Company is required to adopt this
Statement January 1, 2003, the effect of which has not yet been determined.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The Statement retains the fundamental
provisions of SFAS No. 121 related to the recognition and measurement of
the impairment of long-lived assets to be "held and used," provides more
guidance on estimating cash flows when performing a recoverability test,
requires that a long-lived asset (group) to be disposed of other than by
sale (i.e., abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset
(group) as "held for sale." The Company adopted this Statement effective
January 1, 2002. The effect of adoption had no impact to the Company's
consolidated financial condition or results of operations.
D. INVENTORIES
The components of inventory consist of the following:
DECEMBER 31, MARCH 31,
2001 2002
--------------------------------------
(in millions)
Raw materials $ 30.2 $ 30.1
Work in process 2.5 2.7
Finished products 107.5 102.9
--------------------------------------
$ 140.2 $ 135.7
======================================
At December 31, 2001 and March 31, 2002, LIFO inventory approximated
replacement cost.
8
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
E. INCOME TAXES
The Company's operations will be included in the consolidated income tax
returns filed by Holdings. Income tax expense in the Company's consolidated
statement of operations is calculated on a separate tax return basis as if
the Company had operated as a stand-alone entity. The provision for income
taxes is calculated in accordance with SFAS No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred income taxes using the
liability method. Management has determined, based on the Company's capital
structure and lack of prior earnings history based on this structure, that
it is uncertain that future taxable income of the Company will be
sufficient enough to recognize certain of the net deferred tax assets. As a
result, a valuation allowance exists at March 31, 2002. Income tax expense
associated with income before income taxes has been significantly offset by
the reversal of certain valuation allowance amounts associated with the
utilization of net operating loss carryforwards for the three months ended
March 31, 2002.
F. SEGMENT INFORMATION
The Company's operations are classified into three reportable business
segments: Consumer Specialties, Polymer Solutions and Performance Coatings.
They serve various end-user applications such as personal care,
pharmaceuticals, printing, textiles, industrial, construction and
automotive. The Company's major products are Estane(R) (thermoplastic
polyurethane), TempRite(R) (high-heat-resistant plastics), synthetic
thickeners and emulsifiers polymer emulsions, resins and additives, and
textile thickeners, binders, emulsions and compounds.
9
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
F. SEGMENT INFORMATION (CONTINUED)
Segment operating income is total segment revenue reduced by operating
expenses identifiable within that business segment. Consolidation costs are
presented separately and corporate costs include general corporate
administrative expenses that are not specifically identifiable with just
one of the reportable business segments.
BFGOODRICH
PERFORMANCE MATERIALS NOVEON, INC.
---------------------------------------------------------------------------------
TWO MONTHS ONE MONTH THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, MARCH 31, MARCH 31,
2001 % 2001 % 2002 %
---------------------------------------------------------------------------------
(dollars in millions)
Sales
Consumer Specialties $ 45.2 24.2% $ 25.1 26.2% $ 66.9 25.8%
Polymer Solutions 73.1 39.1% 36.9 38.5% 98.1 37.8%
Performance Coatings 68.7 36.7% 33.8 35.3% 94.4 36.4%
---------------------------------------------------------------------------------
Total sales $ 187.0 100.0% $ 95.8 100.0% $ 259.4 100.0%
=================================================================================
Gross profit
Consumer Specialties $ 10.5 23.2% $ 7.3 29.1% $ 20.0 29.9%
Polymer Solutions 25.6 35.0% 12.7 34.4% 36.1 36.8%
Performance Coatings 13.6 19.8% 7.8 23.1% 26.3 27.9%
---------------- ---------------- ------------------
Total gross profit $ 49.7 26.6% $ 27.8 29.0% $ 82.4 31.8%
================ ================ ==================
Operating income (loss)
Consumer Specialties $ 2.1 4.6% $ 4.1 16.3% $ 10.6 15.8%
Polymer Solutions 16.9 23.1% 8.7 23.6% 21.3 21.7%
Performance Coatings 3.2 4.7% 3.0 8.9% 15.1 16.0%
Corporate Costs (11.7) (6.3)% (6.4) (6.7)% (17.5) (6.7)%
Consolidation costs - - - - (0.1) -
---------------- ---------------- ------------------
Total operating income $ 10.5 5.6% $ 9.4 9.8% $ 29.4 11.3%
================ ================ ==================
DECEMBER 31, MARCH 31,
2001 % 2002 %
-------------------------------------------------------
(dollars in millions)
Assets
Consumer Specialties $ 542.4 32.6% $ 542.9 32.9%
Polymer Solutions 528.7 31.8% 525.7 31.8%
Performance Coatings 590.7 35.6% 582.3 35.3%
-------------------------------------------------------
Total assets $1,661.8 100.0% $ 1,650.9 100.0%
=======================================================
10
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
G. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) consists of the following:
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
--------------------------------------------------
TWO MONTHS ONE MONTH THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, MARCH 31, MARCH 31,
2001 2001 2002
--------------------------------------------------
(in millions)
Net income (loss) $ 5.6 $ (0.6) $ 8.5
Net change related to cash flow hedges - - 1.3
Cumulative translation adjustment 2.6 (2.6) (1.0)
--------------------------------------------------
Total comprehensive income (loss) $ 8.2 $ (3.2) $ 8.8
==================================================
H. RESTRUCTURING AND CONSOLIDATION COSTS
In conjunction with the Company's plan to restructure and streamline its
operations in order to increase efficiency and productivity, reduce costs
and support the Company's global growth strategy, the Company restructured
its colorants business in Cincinnati, Ohio and discontinued its flush
pigments and colorformers product lines in June 2001 and reduced headcount
at other facilities. Through these restructuring efforts, the Company will
be eliminating approximately 480 positions. Approximately 77% of the
affected employees have left their positions as of March 31, 2002. The
restructuring accrual included in the purchase price allocation is
summarized below:
BALANCE BALANCE
JANUARY 1, MARCH 31,
(IN MILLIONS) 2002 PROVISION ACTIVITY 2002
-----------------------------------------------------------------------------------------------------
Personnel related costs $ 6.0 $ - $ (1.1) $ 4.9
Facility closure costs 0.7 - (0.1) 0.6
-----------------------------------------------------------------------
$ 6.7 $ - $ (1.2) $ 5.5
=======================================================================
11
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
H. RESTRUCTURING AND CONSOLIDATION COSTS (CONTINUED)
Consolidation accruals relating to pre-acquisition restructuring plans at
March 31, 2002 consisted of:
BALANCE BALANCE
JANUARY 1, MARCH 31,
(IN MILLIONS) 2002 PROVISION ACTIVITY 2002
-----------------------------------------------------------------------------------------------------
Personnel related costs $ 0.2 $ - $ (0.2) $ -
Relocation and restructuring
expense - 0.1 (0.1) -
-----------------------------------------------------------------------
$ 0.2 $ 0.1 $ (0.3) $ -
=======================================================================
I. CONTINGENCIES
General--There are pending or threatened against the Company or its
subsidiaries various claims, lawsuits and administrative proceedings, all
arising from the ordinary course of business with respect to commercial,
product liability, and environmental matters, which seek remedies or
damages. The Company believes that any liability that may finally be
determined with respect to commercial and product liability claims should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows. From time to time, the
Company is also involved in legal proceedings as a plaintiff involving
contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
Environmental--The Company and its subsidiaries are generators of both
hazardous wastes and non-hazardous wastes, the treatment, storage,
transportation and disposal of which are subject to various laws and
governmental regulations. Although past operations were in substantial
compliance with the then-applicable regulations, the Company has been
designated as a potentially responsible party (PRP) by the U.S.
Environmental Protection Agency (EPA), or similar state agencies, in
connection with several sites.
12
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
I. CONTINGENCIES (CONTINUED)
The Company initiates corrective and/or preventive environmental projects
of its own to ensure safe and lawful activities at its current operations.
It also conducts a compliance and management systems audit program. The
Company believes that compliance with current laws and regulations will not
have a material adverse effect on its capital expenditures, earnings,
competitive position, or cash flows.
The Company's environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as
off-site disposal sites at which the Company has been identified as a PRP.
This process includes investigation and remedial selection and
implementation, as well as negotiations with other PRPs and governmental
agencies.
At March 31, 2002, the Company had recorded total liabilities of $23.7
million to cover future environmental expenditures. Goodrich has
indemnified the Company for environmental liabilities totaling $12.5
million. Accordingly, the current portion of the environmental obligation
of $3.0 million is recorded in accrued expenses and $3.2 million is
recorded in accounts receivable. Approximately $20.7 million is included in
non-current liabilities and $9.3 million is included in other non-current
assets, reflecting the recovery due from Goodrich. These amounts are
recorded on an undiscounted basis.
The Company believes that its reserves are adequate based on currently
available information. Management believes that it is reasonably possible
that additional costs may be incurred beyond the amounts accrued as a
result of new information. However, the amounts, if any, cannot be
estimated and management believes that they would not have a material
adverse effect on the Company's results of operations, financial position
or cash flows in a given period.
13
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
The Company as presented herein represents Noveon, Inc. (or the Predecessor
Company for periods prior to March 1, 2001) exclusive of its guarantor
subsidiaries and its non-guarantor subsidiaries.
The Company's domestic subsidiaries, all of which are directly or
indirectly wholly-owned, are the only guarantors of the 11% Senior
Subordinated Notes. The guarantees are full, unconditional and joint and
several. Separate financial statements of these guarantor subsidiaries are
not presented as management has determined that they would not be material
to investors.
The Company's foreign subsidiaries are not guarantors of the 11% Senior
Subordinated Notes. Condensed consolidating financial information for the
Company, the guarantor subsidiaries, and the non-guarantor, foreign
subsidiaries is as follows:
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- ---------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 163.4 $ 41.4 $ 78.8 $ (24.2) $ 259.4
Cost of sales 105.9 35.7 59.6 (24.2) 177.0
---------------------------------------------------------------------------------------
Gross profit 57.5 5.7 19.2 - 82.4
Selling and administrative
expenses 35.3 2.6 11.2 - 49.1
Amortization expense - 2.1 1.7 - 3.8
Consolidation costs - - 0.1 - 0.1
---------------------------------------------------------------------------------------
Operating income 22.2 1.0 6.2 - 29.4
Interest income (expense)--net
(19.1) 0.3 (0.5) - (19.3)
Other (expense)--net - - (0.2) - (0.2)
---------------------------------------------------------------------------------------
Income before income taxes 3.1 1.3 5.5 - 9.9
Income tax expense (0.1) (0.1) (1.2) - (1.4)
---------------------------------------------------------------------------------------
Net income $ 3.0 $ 1.2 $ 4.3 $ - $ 8.5
=======================================================================================
14
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
MARCH 31, 2002
---------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- ---------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 78.3 $ 0.2 $ 32.2 $ - $ 110.7
Accounts and notes receivable 72.8 23.4 55.8 - 152.0
Inventories 75.7 26.9 33.1 - 135.7
Prepaid expenses and other
current assets 5.6 1.2 2.4 - 9.2
---------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 232.4 51.7 123.5 - 407.6
Property, plant and 408.7 94.7 151.7 - 655.1
equipment-net
Goodwill, net 241.8 - 109.6 - 351.4
Identifiable intangible 1.5 126.3 60.7 - 188.5
assets-net
Intercompany receivables 460.1 0.3 68.2 (528.6) -
Investment in subsidiaries 280.2 328.9 - (609.1) -
Other assets 35.7 10.2 2.4 - 48.3
---------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,660.4 $ 612.1 $ 516.1 $ (1,137.7) $ 1,650.9
=======================================================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ - $ 1.4 $ - $ 1.4
Accounts payable 59.2 6.4 27.9 - 93.5
Accrued expenses 48.2 7.9 8.2 - 64.3
Income taxes payable - - 2.2 - 2.2
Current maturities of debt 23.1 - - - 23.1
---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 130.5 14.3 39.7 - 184.5
Long-term debt 868.7 - - - 868.7
Postretirement benefits
other than pensions 4.9 0.6 - - 5.5
Accrued pensions 23.9 6.8 3.5 - 34.2
Deferred income taxes - - 24.6 - 24.6
Accrued environmental 1.3 19.4 - - 20.7
Intercompany payables 90.6 340.0 98.0 (528.6) -
Other non-current liabilities 5.8 - 1.9 - 7.7
---------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,125.7 381.1 167.7 (528.6) 1,145.9
STOCKHOLDER'S EQUITY
Capital stock of subsidiaries - 237.6 371.5 (609.1) -
Paid in capital 527.0 - - - 527.0
Retained earnings (deficit) 7.7 (6.6) (13.2) - (12.1)
Accumulated other
comprehensive loss - - (9.9) - (9.9)
---------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 534.7 231.0 348.4 (609.1) 505.0
---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 1,660.4 $ 612.1 $ 516.1 $ (1,137.7) $ 1,650.9
=======================================================================================
15
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- --------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided (used) by
operating activities $ (5.9) $ 0.7 $ 8.0 $ - $ 2.8
Investing activities:
Purchases of property,
plant and equipment (3.2) (0.8) (0.9) - (4.9)
--------------------------------------------------------------------------------------
Net cash used by investing
activities (3.2) (0.8) (0.9) - (4.9)
Financing activities:
Increase in short-term debt - - 0.1 - 0.1
Payments on long-term
borrowings (7.2) - - - (7.2)
Intercompany transfers - - - - -
--------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (7.2) - 0.1 - (7.1)
Effect of exchange rate
changes on cash and cash
equivalents - - (0.1) - (0.1)
--------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (16.3) (0.1) 7.1 - (9.3)
Cash and cash equivalents
at beginning of period 94.6 0.3 25.1 - 120.0
--------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 78.3 $ 0.2 $ 32.2 $ - $ 110.7
======================================================================================
16
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
ONE MONTH ENDED MARCH 31, 2001
--------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- --------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 61.0 $ 14.8 $ 28.9 $ (8.9) $ 95.8
Cost of sales 42.1 14.1 20.7 (8.9) 68.0
--------------------------------------------------------------------------------------
Gross profit 18.9 0.7 8.2 - 27.8
Selling and administrative
expenses 11.1 0.8 3.8 - 15.7
Amortization expense 1.4 1.1 0.2 - 2.7
--------------------------------------------------------------------------------------
Operating income (loss) 6.4 (1.2) 4.2 - 9.4
Interest income (expense)-net (9.4) 0.2 (0.5) - (9.7)
Other (expense)--net (0.3) - (0.4) - (0.7)
--------------------------------------------------------------------------------------
Income (loss) before income
taxes (3.3) (1.0) 3.3 - (1.0)
Income tax (expense) benefit 1.5 (0.1) (1.0) - 0.4
--------------------------------------------------------------------------------------
Net income (loss) $ (1.8) $ (1.1) $ 2.3 $ - $ (0.6)
======================================================================================
TWO MONTHS ENDED FEBRUARY 28, 2001
--------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- --------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 120.2 $ 26.9 $ 56.7 $ (16.8) $ 187.0
Cost of sales 85.6 26.0 42.5 (16.8) 137.3
--------------------------------------------------------------------------------------
Gross profit 34.6 0.9 14.2 - 49.7
Selling and administrative
expenses 25.0 1.7 8.5 - 35.2
Amortization expense 1.2 2.4 0.4 - 4.0
--------------------------------------------------------------------------------------
Operating income (loss) 8.4 (3.2) 5.3 - 10.5
Interest income (expense)--net
0.3 0.7 (0.4) - 0.6
Other (expense)--net (1.0) - (0.5) - (1.5)
--------------------------------------------------------------------------------------
Income (loss) before income
taxes 7.7 (2.5) 4.4 - 9.6
Income tax (expense) benefit (3.0) 0.6 (1.6) - (4.0)
--------------------------------------------------------------------------------------
Net income (loss) $ 4.7 $ (1.9) $ 2.8 $ - $ 5.6
======================================================================================
17
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
ONE MONTH ENDED MARCH 31, 2001
--------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- --------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided by
operating activities $ 2.6 $ 0.6 $ 7.5 $ - $ 10.7
Investing activities:
Purchases of property,
plant and equipment (1.2) (0.4) (0.7) - (2.3)
Payments made in connection
with acquisitions; net of
cash acquired (1,186.8) - - - (1,186.8)
--------------------------------------------------------------------------------------
Net cash used by investing
activities (1,188.0) (0.4) (0.7) - (1,189.1)
Financing activities:
Decrease in short-term debt - - (23.9) - (23.9)
Proceeds from issuance of
long-term debt 910.0 - - - 910.0
Debt issuance costs (43.3) - - - (43.3)
Equity contribution from
stockholder 355.0 - - - 355.0
Intercompany transfers (24.8) - 24.8 - -
--------------------------------------------------------------------------------------
Net cash provided by
financing activities 1,196.9 - 0.9 - 1,197.8
Effect of exchange rate
changes on cash and cash
equivalents - - (0.1) - (0.1)
--------------------------------------------------------------------------------------
Increase in cash and cash
equivalents 11.5 0.2 7.6 - 19.3
Cash and cash equivalents
at beginning of period - - - - -
--------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 11.5 $ 0.2 $ 7.6 $ - $ 19.3
======================================================================================
18
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
TWO MONTHS ENDED FEBRUARY 28, 2001
--------------------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------- --------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash used by operating
activities $ (10.7) $ (10.6) $ (10.3) $ - $ (31.6)
Investing activities:
Purchases of property,
plant and equipment (5.2) (0.7) (1.7) - (7.6)
--------------------------------------------------------------------------------------
Net cash used by investing
activities (5.2) (0.7) (1.7) - (7.6)
Financing activities:
Decrease in short-term debt - - (3.7) - (3.7)
Proceeds from sale of
receivables, net - - 0.5 - 0.5
Transfers from Goodrich 15.9 11.2 13.6 - 40.7
--------------------------------------------------------------------------------------
Net cash provided by
financing activities 15.9 11.2 10.4 - 37.5
--------------------------------------------------------------------------------------
Decrease in cash
and cash equivalents - (0.1) (1.6) - (1.7)
Cash and cash equivalents
at beginning of period 0.1 0.2 15.4 - 15.7
--------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 0.1 $ 0.1 $ 13.8 $ - $ 14.0
======================================================================================
19
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
DECEMBER 31, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 94.6 $ 0.3 $ 25.1 $ - $ 120.0
Accounts and notes receivable 62.8 20.1 50.9 - 133.8
Inventories 74.5 30.7 35.0 - 140.2
Prepaid expenses and other -
current assets 1.5 0.8 2.2 4.5
-----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 233.4 51.9 113.2 - 398.5
Property, plant and equipment, 416.0 95.6 160.9 - 672.5
net
Goodwill--net 241.8 - 105.1 - 346.9
Identifiable intangible 1.5 128.4 62.1 - 192.0
assets--net
Intercompany receivables 443.7 - 63.5 (507.2) -
Investment in subsidiaries 252.6 328.9 - (581.5) -
Other assets 39.5 10.0 2.4 - 51.9
-----------------------------------------------------------------------------
TOTAL ASSETS $ 1,628.5 $ 614.8 $ 507.2 $(1,088.7) $ 1,661.8
=============================================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ - $ 1.3 $ - $ 1.3
Accounts payable 59.3 10.4 27.4 - 97.1
Accrued expenses 60.2 7.9 6.1 - 74.2
Income taxes payable - - 1.0 - 1.0
Current maturities of debt 23.2 - - - 23.2
-----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 142.7 18.3 35.8 - 196.8
Long-term debt 876.2 - - - 876.2
Postretirement benefits other
than pensions 4.6 0.7 - - 5.3
Accrued pensions 22.1 7.4 3.3 - 32.8
Deferred income taxes - - 24.6 - 24.6
Accrued environmental 1.3 19.4 - - 20.7
Intercompany payables 70.5 339.7 97.0 (507.2) -
Other non-current liabilities 7.4 - 1.8 - 9.2
-----------------------------------------------------------------------------
TOTAL LIABILITIES 1,124.8 385.5 162.5 (507.2) 1,165.6
STOCKHOLDER'S EQUITY
Capital stock of subsidiaries - 231.2 350.3 (581.5) -
Paid in capital 527.0 - - - 527.0
Retained earnings (deficit) (23.3) (1.9) 4.6 - (20.6)
Accumulated other comprehensive
loss - - (10.2) - (10.2)
-----------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 503.7 229.3 344.7 (581.5) 496.2
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 1,628.5 $ 614.8 $ 507.2 $(1,088.7) $ 1,661.8
=============================================================================
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a global producer and marketer of technologically advanced specialty
chemicals for a range of consumer and industrial applications. We maintain
a significant presence in many niche product categories where customers
value our long-standing ability to provide need-specific formulations and
solutions. These formulations can enhance the value of customers'
end-products by improving performance, lowering cost, providing easier
processing or making them more environmentally friendly. As a result,
customers use our products in many applications in place of more
traditional materials and chemical products. We consist of three reportable
segments: Consumer Specialties Segment, Polymer Solutions Segment, and
Performance Coatings Segment.
RESTRUCTURING MATTERS
In conjunction with our 2001 plan to restructure and streamline our
operations in order to increase efficiency and productivity, reduce costs
and support our global growth strategy, we restructured our colorants
business in Cincinnati, Ohio and discontinued our flush pigments and
colorformers product lines in June 2001 and reduced headcount at other
facilities. Through these restructuring efforts, we will be eliminating
approximately 480 positions. Approximately 77% of the affected employees
have left their positions as of March 31, 2002. At March 31, 2002,
approximately $5.5 million remains accrued for restructuring costs with
substantially all of the remaining costs anticipated to be paid in 2002 and
2003.
As a result of these restructuring efforts, we estimate annualized savings
of approximately $17.0 million attributable to reduced employee expenses
that were partially recognized beginning in the third quarter of 2001.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
The comparison of the three months ended March 31, 2002 to the three months
ended March 31, 2001 has been completed by combining the results of
operations for the two months ended February 28, 2001 of BFGoodrich
Performance Materials (the "Predecessor Company") prior to the acquisition,
with the results of operations of Noveon, Inc. for the one month ended
March 31, 2001. The results for the pre-acquisition period are not
necessarily comparative to the post-acquisition period because of the
changes in our organizational structure, recorded asset values, cost
structure and our capitalization resulting from the acquisition.
21
TOTAL COMPANY ANALYSIS
Sales--Sales decreased $23.4 million, or 8.3%, from $282.8 million in 2001
to $259.4 million in 2002. The decrease was primarily the result of volume
declines related to products sold to the textile, industrial and automotive
related industries, lower European demand, competitive pricing pressure,
and the weaker Euro. These decreases were partially offset by higher
volumes in our personal care product lines.
Cost of Sales--Cost of sales as a percentage of sales decreased from 72.6%
in 2001 to 68.2% in 2002. The decrease in cost of sales as a percentage of
sales in 2002 as compared to 2001 was attributable to decreases in raw
material and utility costs across all segments and lower manufacturing
costs.
Gross Profit--Gross profit increased $4.9 million, or 6.3%, from $77.5
million in 2001 to $82.4 million in 2002. As a percentage of sales, gross
profit increased from 27.4% in 2001 to 31.8% in 2002. The increase was
primarily associated with the decreases in raw material and utility costs
and lower manufacturing costs. The increases were partially offset by the
lower sales volumes, competitive pricing pressure, and the weaker Euro.
Selling and Administrative Expenses--Selling and administrative expenses
decreased $1.8 million, or 3.5%, from $50.9 million in 2001 to $49.1
million in 2002. Selling and administrative costs as a percentage of sales
increased from 18.0% in 2001 to 18.9% in 2002 due to reduced sales volumes.
The decrease in selling and administrative costs in 2002 was a result of
the reduction in costs attributable to the Company's restructuring efforts
and the reduced retiree medical costs resulting from the acquisition of the
Predecessor Company, which were offset by incremental investor management
fees of $0.7 million and incremental administrative costs reflective of a
stand-alone company.
Amortization Expense--Amortization expense decreased $2.9 million, or
43.3%, from $6.7 million in 2001 to $3.8 million in 2002. The decrease was
associated with the non-amortization provisions for goodwill as provided by
Statement of Financial Accounting Standards ("SFAS") No. 142 beginning in
2002.
Operating Income--Operating income increased by $9.5 million, or 47.7%,
from $19.9 million in 2001 to $29.4 million in 2002. The increase in
operating income was primarily attributable to decreases in raw material
and utility costs, lower manufacturing and selling and administrative
costs, and reduced amortization expense for goodwill. These favorable
impacts were partially offset by lower sales volumes, competitive pricing
pressure, and the weaker Euro.
Interest Income (Expense)-Net-- Interest expense was $9.1 million in 2001
and $19.3 million in 2002. The increase in expense was attributable to the
change in the debt structure associated with the acquisition at February
28, 2001, partially offset by reduced interest rates in 2002.
Other (Expense)-Net--Other expense-net was $2.2 million and $0.2 million in
2001 and 2002, respectively. The 2001 expense was primarily due to the
unfavorable operating performance of our investments accounted for under
the equity method.
22
Income Tax Expense--The income tax expense for 2002 was primarily
associated with our international operations. Management has determined,
based on our new capital structure and lack of prior earnings history based
on this new structure, that it is uncertain that our future taxable income
will be sufficient enough to recognize certain of these deferred tax
assets. As a result, a valuation allowance exists at March 31, 2002. Income
tax expense associated with income before income taxes has been
significantly offset by the reversal of certain valuation allowance amounts
associated with the utilization of net operating loss carryforwards for the
three months ended March 31, 2002. The effective tax rate was 41.9% in
2001.
Net Income (Loss)--Net income increased by $3.5 million from $5.0 million
in 2001 to $8.5 million in 2002. The increase in net income was primarily
attributable to decreases in raw material and utility costs, lower
manufacturing and selling and administrative costs, and reduced
amortization expense for goodwill. These favorable impacts were partially
offset by lower sales volumes, competitive pricing pressure, the weaker
Euro, and the incremental interest expense attributable to the change in
the debt structure associated with the acquisition at February 28, 2001.
Because of our highly leveraged capital structure, EBITDA is an important
performance measure used by us and our stakeholders. EBITDA is defined as
income from continuing operations before interest, taxes, depreciation and
amortization, other income and expense, management fees and consolidation
costs. We believe that EBITDA provides additional information for
determining our ability to meet future obligations and debt service
requirements. However, EBITDA is not indicative of operating income or cash
flow from operations as determined under generally accepted accounting
principles. EBITDA for the three month period ended March 31, 2002 and 2001
is calculated as follows (dollars in millions):
2001 2002
-----------------------------
Operating income $ 19.9 $ 29.4
Depreciation and amortization 23.2 20.9
Investor management fees 0.3 1.0
Consolidation costs - 0.1
Non-cash cost of sales impact of inventory
write-up from purchase accounting 0.7 -
-----------------------------
EBITDA $ 44.1 $ 51.4
=============================
GROUP ANALYSIS
Consumer Specialties Segment--Sales decreased $3.4 million, or 4.8%, from
$70.3 million in 2001 to $66.9 million in 2002. The decrease was primarily
attributable to the impact of lower phenol prices within the food and
beverage product lines, discontinued product lines at our colors business
in Cincinnati, lower pharmaceutical volumes, and the weaker Euro. These
decreases were partially offset by higher volume in our personal care
product lines.
23
Gross profit increased $2.2 million, or 12.4%, from $17.8 million in 2001
to $20.0 million in 2002. As a percentage of sales, gross profit increased
from 25.3% in 2001 to 29.9% in 2002. The increase was primarily associated
with decreases in raw material and utility costs, higher personal care
volumes and lower manufacturing costs. These favorable impacts were
partially offset by the impact of lower phenol prices within the food and
beverage product lines, discontinued product lines at our colors business
in Cincinnati, lower pharmaceutical volumes, and the weaker Euro.
Operating income increased $4.4 million, or 71.0%, from $6.2 million in
2001 to $10.6 million in 2002. The increase was primarily associated with
decreases in raw material and utility costs, higher personal care volumes,
lower manufacturing and selling and administrative costs, and reduced
amortization expense for goodwill. These favorable impacts were partially
offset by the impact of lower phenol prices within the food and beverage
product lines, discontinued product lines at our colors business in
Cincinnati, lower pharmaceutical volumes, and the weaker Euro.
Polymer Solutions Segment--Sales decreased by $11.9 million, or 10.8%, from
$110.0 million in 2001 to $98.1 million in 2002. The decrease was primarily
attributable to reduced volumes in products used in industrial and
automotive related applications within our polymer additives, Estane(R) and
Temprite(R) product lines, lower European demand, competitive pricing
pressure and the weaker Euro; partially offset by higher plumbing and fire
sprinkler related sales within the Temprite(R) product lines.
Gross profit decreased $2.2 million, or 5.7%, from $38.3 million in 2001 to
$36.1 million in 2002. As a percentage of sales, gross profit increased
from 34.8% in 2001 to 36.8% in 2002. The increase in gross margin
percentage was primarily attributable to decreases in raw material and
utility costs and lower manufacturing costs. These favorable impacts were
partially offset by lower volumes, competitive pricing pressure and the
weaker Euro.
Operating income for the segment decreased $4.3 million, or 16.8%, from
$25.6 million in 2001 to $21.3 million in 2002. The decrease was primarily
attributable to reduced sales volumes, competitive pricing pressure, and
increased selling and administrative costs. These unfavorable impacts were
partially offset by decreases in raw material and utility costs, higher
plumbing and fire sprinkler related sales within the Temprite(R) product
lines, and lower manufacturing costs as well as reduced amortization
expense for goodwill.
Performance Coatings Segment--Sales decreased $8.1 million, or 7.9%, from
$102.5 million in 2001 to $94.4 million in 2002. The decrease was primarily
attributable to a decline in demand in the textile and graphic arts related
industries, lower European demand, and the disposition of the textile dyes
product line prior to the acquisition. These unfavorable impacts were
partially offset by higher volumes in industrial coatings applications.
Gross profit increased $4.9 million, or 22.9%, from $21.4 million in 2001
to $26.3 million in 2002. As a percentage of sales, gross profit increased
from 20.9% in 2001 to 27.9% in 2002. The increase was primarily associated
with decreases in raw material and utility costs and lower manufacturing
costs. These favorable impacts were partially offset by reduced volumes.
24
Operating income for the segment increased $8.9 million, or 143.5%, from
$6.2 million in 2001 to $15.1 million in 2002. The increase was primarily
associated with the decrease in raw material and utility costs, lower
manufacturing and selling and administrative costs, and reduced
amortization expense for goodwill. These favorable impacts were partially
offset by reduced volumes.
Corporate--Corporate costs decreased $0.6 million from $18.1 million in
2001 to $17.5 million in 2002. This decrease was primarily the result of
our restructuring efforts and the reduced retiree medical costs resulting
from the acquisition of the Predecessor Company, and were partially offset
by incremental investor management fees of $0.7 million and the incremental
administrative costs reflective of a stand-alone company.
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND COMMITMENTS
Our credit facilities include (1) the Term Loan A facility in the original
amount of $125.0 million which matures in 2007, (2) the Term Loan B
facility in the original amount of $510.0 million which matures in 2008 and
(3) the revolving credit facility in the amount of $125.0 million which
matures in 2007. A portion of the revolving credit is available in various
foreign currencies. A portion of Term Loan A and Term Loan B are
denominated in Euros. The domestic revolving credit facility provides for a
letter of credit subfacility, usage under which will reduce the amount
available under the domestic revolving credit facility. Borrowings under
the revolving credit facility may be used for working capital and for
general corporate purposes.
Our $275.0 million senior subordinated notes mature on February 28, 2011
and interest will accrue at 11% per year. Interest payments on the notes
will occur on March 15 and September 15 of each year.
Principal and interest payments under the credit facilities and the notes
represent significant liquidity requirements for us. Borrowings under these
credit facilities bear interest at floating rates and require periodic
interest payments. Interest on the notes are payable semi-annually and
interest and principal on the credit facilities are payable periodically
but not less frequently than semi-annually. The credit facilities will be
repaid in periodic installments until the maturity of each of the term
loans. The credit facilities contain customary representations, covenants
related to net worth requirements, capital expenditures, interest coverage,
leverage and EBITDA levels and events of default.
Our credit facilities contain a specific covenant requirement for minimum
EBITDA levels. The definition of EBITDA in the credit facilities
approximates our financial statement definition, as defined previously. We
currently satisfy the minimum EBITDA covenant for the twelve month period
ended March 31, 2002. For the twelve month period ended June 30, 2002 the
credit agreement requires a minimum EBITDA level of $185.0 million. We
expect to attain the minimum EBITDA level at June 30, 2002.
25
At March 31, 2002, we had a cash balance of $110.7 million and no
outstanding borrowings under our revolving credit facility. In addition, we
had $120.3 million available under the revolving credit facility of $125.0,
net of $4.7 million of outstanding letters of credit.
Under the terms of the Agreement for Sale and Purchase of Assets between
BFGoodrich and the Company (the "Agreement"), the final working capital
adjustment will be determined subsequent to March 31, 2002, which may
require a change to the purchase price. Goodrich has computed a $25.0
million working capital adjustment that is equal to the upward adjustment
limit. Under the terms of the Agreement, we are disputing Goodrich's
working capital adjustment. The parties have not been able to settle their
differences, and the disputed matters will be forwarded to an independent
third party for resolution. The decision by the third party will be final
and binding on all parties. Any amounts finally determined to be due to
Goodrich as a working capital adjustment in the Agreement will be paid
through borrowings under the revolving credit facility or with cash. Any
amounts received by us as a result of a downward adjustment to the purchase
price may be used to reduce debt under the credit facilities unless these
amounts are invested in cash or net working capital. The adjustment to
purchase price for the working capital adjustment will be reflected in the
financial statements upon the resolution of the working capital dispute.
Management believes that our cash on hand, anticipated funds from
operations, and the amounts available to us under our revolving credit
facilities will be sufficient to cover our working capital needs, capital
expenditures, debt service requirements, working capital adjustments which
may occur as a result of the Goodrich dispute and tax obligations. However,
our ability to fund working capital, capital expenditures, debt service
requirements and tax obligations will be dependent upon our future
financial performance and our ability to repay or refinance our debt
obligations which in turn will be subject to economic conditions and to
financial, business and other factors.
In conjunction with the acquisition, Noveon Holdings, Inc. ("Holdings")
made an equity contribution of $527.0 million to us comprised of $355.0
million in cash and $172.0 million from the seller note that Holdings
issued to a subsidiary of Goodrich in connection with the acquisition. The
seller note bears interest at an initial rate of 13% payable semi-annually
in cash or additional notes at the option of Holdings and increases to a
rate of 15% after 5 years. If the interest is paid in cash, the interest
rate remains at 13%. Holdings will be dependent on our cash flows to repay
the seller note upon maturity in 2011.
CASH FLOWS
Cash flows provided by operating activities increased $23.7 million from
$20.9 million used by operating activities in the first three months of
2001 to $2.8 million provided by operating activities in the first three
months of 2002. The increase was primarily related to decreases in working
capital period over period and improved operating results.
Investing activities used $4.9 million of cash in the three month period
ended March 31, 2002 for the purchases of property, plant and equipment.
Investing activities included the acquisition of the Performance Materials
business from Goodrich and purchases of property in the three month period
ended March 31, 2001, totaling $1,196.7 million.
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Financing activities used $7.1 million for the three month period ended
March 31, 2002 related to the principal payments on our Term Loans.
Financing activities provided $1,235.3 million of cash in the three month
period ended March 31, 2001, primarily related to the funding of our
acquisition.
CAPITAL EXPENDITURES
Management believes that our manufacturing facilities are generally in good
condition and we do not anticipate that major capital expenditures will be
needed to replace existing facilities in the near future. Accordingly, we
expect our capital expenditures to run at or below levels approximating
depreciation. Our capital expenditures for the three months ended March 31,
2002 were $4.9 million. These expenditures were used to maintain our
production sites, implement our business strategy regarding operations and
health and safety and for strategic capacity expansion in our key product
lines. These capital expenditures were paid for through internally
generated cash flow.
Our primary sources of liquidity are cash flows from operations and
borrowings under our credit facilities. Based on current and anticipated
financial performance, we expect that cash from operations and borrowings
under these credit facilities will be adequate to meet anticipated
requirements for capital expenditures, working capital and scheduled
interest and principal payments. However, our capital requirements will be
dependent upon our future financial performance and our ability to repay or
refinance our debt obligations which in turn will be subject to economic
conditions and to financial, business and other factors, many of which are
beyond our control.
CONTINGENCIES
We have numerous purchase commitments for materials, supplies and energy
incident to the ordinary course of business.
GENERAL
There are pending or threatened against us or our subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the
ordinary course of business with respect to commercial, product liability,
and environmental matters, which seek remedies or damages. We believe that
any liability that may finally be determined with respect to commercial and
product liability claims should not have a material adverse effect on our
consolidated financial position, results of operations or cash flows. From
time to time, we are also involved in legal proceedings as a plaintiff
involving contract, patent protection, environmental and other matters.
Gain contingencies, if any, are recognized when they are realized.
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ENVIRONMENTAL
We are generators of both hazardous and non-hazardous wastes, the
treatment, storage, transportation and disposal of which are subject to
various laws and governmental regulations. Although we believe past
operations were in substantial compliance with the then-applicable
regulations, the Company or the Predecessor Company has been designated as
a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency ("EPA"), or similar state agencies, in connection with
several sites.
We initiate corrective and/or preventive environmental projects of our own
to ensure safe and lawful activities at our current operations. We also
conduct a compliance and management systems audit program. We believe that
compliance with current laws and regulations will not have a material
adverse effect on our capital expenditures, results of operations or
competitive position.
Our environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as
off-site disposal sites at which we have been identified as a PRP. This
process includes investigation and remedial selection and implementation,
as well as negotiations with other PRPs and governmental agencies.
Goodrich has indemnified us for various environmental liabilities estimated
at $12.5 million. Our March 31, 2002 balance sheet includes liabilities of
$23.7 million to cover future environmental expenditures. Accordingly, the
current portion of the environmental obligation of $3.0 million is recorded
in accrued expenses and $3.2 million is recorded in accounts receivable.
Approximately $20.7 million is included in non-current liabilities and $9.3
million is included in other non-current assets, reflecting the recovery
due from Goodrich.
We believe that our reserves are adequate based on currently available
information. Management believes that it is reasonably possible that
additional costs may be incurred beyond the amounts accrued as a result of
new information. However, the amounts, if any, cannot be estimated and
management believes that they would not have a material adverse effect on
our results of operations, financial position or cash flows in a given
period.
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NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 142,
"Goodwill and Other Intangible Assets," in July 2001. The Statement
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets." SFAS No. 142 applies to all goodwill
and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were
initially recognized. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue
to be amortized over their useful lives. We adopted SFAS No. 142 in our
first quarter of 2002 reporting. After giving effect to the
non-amortization provisions of SFAS No. 142, net income for the two month
period ended February 28, 2001 and the one month period ended March 31,
2001 would have been $8.6 million and $0.3 million, respectively. During
the second quarter of 2002, we will perform the first of the required
impairment tests of goodwill as of January 1, 2002. We have not yet
determined what the effect of these tests will be on our financial position
and results of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," that requires the fair value of the liability for
closure and removal costs associated with the resulting legal obligations
upon retirement or removal of any tangible long-lived assets be recognized
in the period in which it is incurred. The initial recognition of the
liability will be capitalized as part of the asset cost and depreciated
over its estimated useful life. We are required to adopt this Statement
January 1, 2003, the effect of which has not yet been determined.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The Statement retains the fundamental
provisions of SFAS No. 121 related to the recognition and measurement of
the impairment of long-lived assets to be "held and used," provides more
guidance on estimating cash flows when performing a recoverability test,
requires that a long-lived asset (group) to be disposed of other than by
sales (i.e. abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset
(group) as "held for sale." We adopted this Statement effective January 1,
2002. The effect of adoption had no impact to our consolidated financial
condition or results of operations.
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CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to product returns, bad
debts, inventories, investments, intangible assets, income taxes,
restructuring, pensions and other postretirement benefits, and
contingencies and litigation. We base our estimates on historical
experience and on various other 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. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
significant judgments and estimates used in the preparation of our
consolidated financial statements.
REVENUE AND INCOME RECOGNITION
Revenue from the sale of products is recognized at the point of passage of
title, which is generally at the time of shipment.
INVENTORIES
Inventories are stated at the lower of cost or market. Most domestic
inventories are valued by the last-in, first-out (LIFO) cost method.
Inventories not valued by the LIFO method are valued principally by the
average cost method.
DERIVATIVE AND HEDGING ACTIVITIES
We have entered into interest rate swap agreements to limit our exposure to
interest rate fluctuations on $180.0 million of the outstanding principal
of our Term Loans through 2005. These agreements require us to pay a fixed
rate of interest while receiving a variable rate. At March 31, 2002, the
fair value of these swap arrangements included in other non-current
liabilities totaled approximately $4.5 million. The offsetting impact of
this hedge transaction is included in accumulated other comprehensive loss.
We enter into currency forward exchange contracts, totaling $9.0 million at
March 31, 2002, to hedge certain firm commitments denominated in foreign
currencies. The purpose of our foreign currency hedging activities is to
protect us from risk that the eventual dollar cash flows from the sale of
products to international customers will be adversely affected by changes
in the exchange rates. The fair value of these contracts at December 31,
2001 was not material to our results of operations, financial position, or
cash flows.
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We have foreign denominated floating rate debt to protect the value of our
investments in our foreign subsidiaries in Europe. Realized and unrealized
gains and losses from these hedges are not included in the income
statement, but are shown in the cumulative translation adjustment account
included in other comprehensive loss. During the three months ended March
31, 2002, we recognized $0.4 million of net gains included in the
cumulative translation adjustment, related to the foreign denominated
floating rate debt.
DEFERRED INCOME TAXES
The provision for income taxes is calculated in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred income taxes using the liability method. Deferred income taxes
reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Management provides valuation
allowances against the deferred tax assets for amounts for which it is
uncertain that future taxable income will be sufficient enough to recognize
certain of these deferred tax assets.
FORWARD-LOOKING INFORMATION
Certain statements in this section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect
our future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The terms "expect," "anticipate," "intend,"
"project," "may," "will," "believes," "plans," "estimates," and similar
words or expressions are intended to identify forward-looking statements.
These statements speak only as of the date of this report. The statements
are based on current expectations, are inherently uncertain, are subject to
risks, and should be viewed with caution. Actual results and experience may
differ materially from the forward-looking statements as a result of many
factors, including changes in economic conditions in the markets served by
us, increasing competition, fluctuations in raw materials and energy
prices, and other unanticipated events and conditions. It is not possible
to foresee or identify all such factors. We make no commitment to update
any forward-looking statement or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any
forward-looking statement. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a
prediction of actual results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
MARKET RISK
We are exposed to various market risk factors such as fluctuating interest
rates and changes in foreign currency rates. These risk factors can impact
results of operations, cash flows and financial position. We manage these
risks through regular operating and financing activities and periodically
use derivative financial instruments such as foreign exchange forward
contracts. These derivative instruments are placed with major financial
institutions and are not for speculative or trading purposes.
FOREIGN CURRENCY RISK
We limit our foreign currency risk by operational means, mostly by locating
our manufacturing operations in those locations where we have significant
exposures to major currencies. We have entered into forward contracts to
partially offset the risk of foreign currency fluctuations. The value of
these contracts at March 31, 2002 was not material to our results of
operations, financial position or cash flows.
We sell to customers in foreign markets through foreign operations and
through export sales from plants in the U.S. These transactions are often
denominated in currencies other than the U.S. dollar. The primary currency
exposure is the Euro.
We have foreign denominated floating rate debt to protect the value of our
investments in our foreign subsidiaries in Europe. Realized and unrealized
gains and losses from these hedges are not included in the income
statement, but are shown in the cumulative translation adjustment account
included in other comprehensive loss.
INTEREST RATE RISK
In order to hedge a portion of our interest rate risk, we are a party to
interest rate swap agreements with notional amounts of $180.0 million and
for which we pay a fixed rate of interest and receive a LIBOR-based
floating rate. Our interest rate swap agreements at March 31, 2002 did
qualify for hedge accounting under SFAS No. 133 and as such the changes in
the fair value of the interest rate swap agreements are recognized as a
component of equity. The amount of the changes in fair value of the
interest rate swap agreements was $1.3 million for the three months ended
March 31, 2002.
At March 31, 2002, we carried $893.2 million of outstanding debt on our
balance sheet, with $438.2 million of that total, net of $180.0 million of
debt that is hedged, held at variable interest rates. Holding all other
variables constant, if interest rates hypothetically increased or decreased
by 10%, for the three months ended March 31, 2002, interest expense would
increase or decrease by $0.7 million. In addition, if interest rates
hypothetically increased or decreased by 10% on March 31, 2002, with all
other variables held constant, the fair market value of our $275.0 million,
11% senior subordinated notes would decrease or increase by approximately
$17.0 million.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
---------------------------------------------------------------------
10.11 Noveon, Inc. 2002 Management Incentive Plan.*+
* Filed herewith.
+ We agree to furnish supplementary to the commission a
copy of any omitted schedule to such agreement upon the
request of the commission in accordance with Item
601(b)(2) of Regulation S-K.
(b) Reports on Form 8-K
On January 11, 2002, Noveon, Inc. issued a press release announcing the
purchase of the intellectual property and certain other assets related to
cross-linked polyethylene compounds from AT Plastics, Inc.
On March 5, 2002, Noveon, Inc. issued a press release relating to its
financial results for the fourth quarter and full year of 2001.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVEON, INC.
Dated: May 15, 2002 By: /s/ Christopher R. Clegg
-----------------------
Christopher R. Clegg
Senior Vice President,
General Counsel and Secretary
By: /s/ Michael D. Friday
----------------------
Michael D. Friday
Sr. Vice President and
Chief Financial Officer
34