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, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes |_| No X
As of May 13, 2003, there is 1 share of registrant's common stock
outstanding.
Noveon, Inc.
Index to Form 10-Q for the Quarter Ended March 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Income Statement--Three months
ended March 31, 2003 and 2002....................................3
Condensed Consolidated Balance Sheet--March 31, 2003 and
December 31, 2002................................................4
Condensed Consolidated Statement of Cash Flows--Three months
ended March 31, 2003 and 2002.....................................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................20
Item 3. Quantitative and Qualitative Disclosures of Market Risk..........31
Item 4. Controls and Procedures..........................................32
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................33
Noveon, Inc.
Condensed Consolidated Income Statement
(dollars in millions)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------------------
(unaudited)
Sales $ 282.3 $ 259.4
Cost of sales 200.5 177.0
------------------------
Gross profit 81.8 82.4
Selling and administrative expenses 50.4 49.1
Amortization expense 3.6 3.8
Restructuring and consolidation costs 2.0 0.1
------------------------
Operating income 25.8 29.4
Interest expense--net 18.0 19.3
Other (income) expense--net (0.1) 0.2
------------------------
Income before income taxes and cumulative
effect of accounting change 7.9 9.9
Income tax expense 2.1 1.4
------------------------
Income before cumulative effect
of accounting change 5.8 8.5
Cumulative effect of accounting change--
net of tax 0.5 -
------------------------
Net income $ 5.3 $ 8.5
========================
See notes to condensed consolidated financial statements.
Noveon, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions)
MARCH 31, DECEMBER 31,
2003 2002
---------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70.7 $ 79.5
Accounts and notes receivable, net of allowances
($9.2 and $9.0 at March 31, 2003 and
December 31, 2002, respectively) 159.4 135.7
Inventories 142.8 144.1
Prepaid expenses and other current assets 10.8 7.2
---------------------------
TOTAL CURRENT ASSETS 383.7 366.5
Property, plant and equipment--net 669.3 670.7
Goodwill 374.8 365.5
Identifiable intangible assets--net 180.1 182.1
Receivable from Parent 1.2 1.2
Other assets 42.3 43.1
---------------------------
TOTAL ASSETS $1,651.4 $1,629.1
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank debt $ 0.1 $ 0.4
Accounts payable 124.0 111.2
Accrued expenses 52.2 70.6
Income taxes payable 6.8 5.3
Current maturities of long-term debt 6.7 -
---------------------------
TOTAL CURRENT LIABILITIES 189.8 187.5
Long-term debt 859.1 847.1
Postretirement benefits other than pensions 5.7 5.8
Accrued pensions 35.6 34.9
Deferred income taxes 17.8 18.1
Accrued environmental 18.2 18.2
Other non-current liabilities 20.0 17.8
STOCKHOLDER'S EQUITY
Common stock - -
Paid in capital 498.0 498.0
Retained earnings (deficit) 3.4 (1.9)
Accumulated other comprehensive income 3.8 3.6
---------------------------
TOTAL STOCKHOLDER'S EQUITY 505.2 499.7
---------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,651.4 $1,629.1
===========================
See notes to condensed consolidated financial statements.
Noveon, Inc.
Condensed Consolidated Statement of Cash Flows
(dollars in millions)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 5.3 $ 8.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change--net of
tax 0.5 -
Depreciation and amortization 21.8 20.9
Deferred income taxes (0.1) -
Debt issuance cost amortization in interest
expense 1.4 1.4
Change in assets and liabilities, net of
effects of acquisitions of businesses (28.6) (28.0)
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 0.3 2.8
INVESTING ACTIVITIES
Purchases of property, plant and equipment (16.5) (4.9)
Payments made in connection with acquisitions,
net of cash acquired (10.7) -
---------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (27.2) (4.9)
FINANCING ACTIVITIES
(Decrease) increase in short-term debt (0.3) 0.1
Net proceeds from borrowings on revolving credit
facility 18.5 -
Payments on long-term borrowings - (7.2)
---------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 18.2 (7.1)
Effect of exchange rate changes on cash and cash
equivalents (0.1) (0.1)
---------------------------
Net (decrease) in cash and cash equivalents (8.8) (9.3)
Cash and cash equivalents at beginning of period 79.5 120.0
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70.7 $ 110.7
===========================
See notes to condensed consolidated financial statements.
Noveon, Inc.
Periods of Three Months Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (unaudited)
A. 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 months ended March 31,
2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
Earnings per share data are not presented because the common stock of
Noveon, Inc. (the "Company") is not publicly traded and the Company is a
wholly owned subsidiary of Noveon International, Inc. ("International" or
"Parent").
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
B. ACQUISITIONS
The Company's Specialty Materials segment purchased selected assets and
technology from a European extruder of electrostatic dissipative sheet in
February 2003 and made an investment in a company that produces TPU-based
cushion technology in March 2003. Also, in March 2003, the Company's
Performance Coatings segment purchased certain coatings technology and
manufacturing assets. The aggregate purchase price paid for these
acquisitions and investment was $10.7 million, which was allocated to the
assets acquired and resulted in goodwill of $9.3 million.
C. NEW ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires recording costs associated with exit or disposal activities at
their fair values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon management's commitment to
an exit plan, which is generally before an actual liability has been
incurred. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted
this Statement effective January 1, 2003. The effect of adoption had no
impact on the Company's consolidated financial condition or results of
operations.
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
D. INVENTORIES
The components of inventory consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
----------------------------
(IN MILLIONS)
Raw materials $ 32.5 $ 33.1
Work in process 3.1 3.6
Finished products 107.2 107.4
----------------------------
$ 142.8 $ 144.1
============================
At March 31, 2003 and December 31, 2002, LIFO inventory approximated
first-in, first-out (FIFO) cost.
E. ASSET RETIREMENT OBLIGATIONS
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 adopted this statement
effective January 1, 2003. Under the new standard, the Company recognizes
asset retirement obligations in the period in which they are incurred if a
reasonable estimate of a fair value can be determined. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
The cumulative effect of this change in accounting principle resulted in a
first quarter charge of $0.5 million (net of income taxes of $0.2 million).
The effect of the change on the three months ended March 31, 2003 was not
material to the results of operations. The pro forma effects as if the
Company had adopted SFAS No. 143 on January 1, 2002 are not material to the
results of operations.
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
F. FINANCING ARRANGEMENTS
The Company has interest rate swap agreements to limit its exposure to
interest rate fluctuations. In the first quarter of 2003, the Company
entered into an additional interest rate swap agreement with a notional
amount of $25.0 million. Under the terms of the agreement, the Company will
pay a fixed rate of interest of 2.92% through 2007.
G. INCOME TAXES
The Company's operations will be included in the consolidated income tax
returns filed by International. 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.
For the three months ended March 31, 2003 and even more so for the three
months ended March 31, 2002, the effective tax rate differed from the
federal statutory rate predominately due to decreases in the income tax
rate as a result of the reversal of tax valuation allowances previously
recorded for the Company's domestic operations. In addition, decreases in
the income tax rate resulted from certain income tax credits and the
effective tax rate differential on consolidated foreign subsidiaries. The
decreases in the income tax rate were partially offset by increases in tax
valuation allowance amounts associated with the Company's foreign
operations and other nondeductible items.
As of March 31, 2003, management has determined, based on the Company's new
capital structure and lack of prior earnings history based on this new
structure, that it is uncertain that future taxable income of the Company
will be sufficient enough to recognize certain of these net deferred tax
assets. As a result, under the provisions of SFAS No. 109, a valuation
allowance of $36.7 million at March 31, 2003 has been established. This
valuation allowance relates to net domestic deferred tax assets established
in purchase accounting, acquired foreign net deferred tax assets associated
with net operating losses and credits and deferred tax assets from domestic
and foreign tax net operating losses and credits arising subsequent to
March 1, 2001. The most significant portion of the valuation allowance is
associated with the deferred tax assets established in purchase accounting.
Any reversal of the valuation allowance that was established in purchase
accounting would reduce goodwill.
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
G. INCOME TAXES (CONTINUED)
In determining the adequacy of the $36.7 million valuation allowance,
management assessed the Company's profitability taking into account the
present and anticipated amounts of domestic and international earnings as
well as the anticipated taxable income as a result of the reversal of
future taxable temporary differences. The Company will maintain the tax
valuation allowances for the balance of deferred tax assets until
sufficient positive evidence (for example, cumulative positive earnings and
future taxable income) exists to support a reversal of the tax valuation
allowances.
H. SEGMENT INFORMATION
Consistent with the Company's focus on industries and end-use applications,
its operations are organized into three reportable business segments:
Consumer Specialties, Specialty Materials and Performance Coatings.
Segment operating income is total segment revenue reduced by operating
expenses identifiable within that business segment. Restructuring and
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.
The following tables summarize business segment information:
THREE MONTHS ENDED MARCH 31,
2003 % 2002 %
--------------------------------------
(DOLLARS IN MILLIONS)
Sales
Consumer Specialties $ 82.9 29.4% $ 66.9 25.8%
Specialty Materials 104.7 37.1% 98.1 37.8%
Performance Coatings 94.7 33.5% 94.4 36.4%
--------------------------------------
Total sales $282.3 100.0% $259.4 100.0%
======================================
Gross profit
Consumer Specialties $ 22.4 27.0% $ 20.0 29.9%
Specialty Materials 36.5 34.9% 36.1 36.8%
Performance Coatings 22.9 24.2% 26.3 27.9%
----------- ------------
Total gross profit $ 81.8 29.0% $ 82.4 31.8%
=========== ============
Operating income (loss)
Consumer Specialties $ 11.7 14.1% $ 10.6 15.8%
Specialty Materials 20.5 19.6% 21.3 21.7%
Performance Coatings 11.2 11.8% 15.1 16.0%
----------- ------------
Total segment operating
income 43.4 15.4% 47.0 18.1%
Corporate costs (15.6) (5.6)% (17.5) (6.8)%
Restructuring and
consolidation costs (2.0) (0.7)% (0.1) -
--------------------------------------
Total operating income $ 25.8 9.1% $ 29.4 11.3%
======================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
I. COMPREHENSIVE INCOME
Total comprehensive income consists of the following:
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------------------
(IN MILLIONS)
Net income $ 5.3 $ 8.5
Net change related to cash
flow hedges - 1.3
Cumulative translation adjustment 0.2 (1.0)
----------------------
Total comprehensive income $ 5.5 $ 8.8
======================
J. STOCK-BASED COMPENSATION
The Company's Parent has a stock option plan in which certain eligible
employees of the Company participate. The Company accounts for stock-based
employee compensation using the intrinsic value method in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price at or greater than the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation.
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------------------
(IN MILLIONS)
Net income as reported $ 5.3 $ 8.5
Deduct: total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax
effects (0.5) (0.4)
----------------------
Pro forma net income $ 4.8 $ 8.1
======================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. STOCK-BASED COMPENSATION (CONTINUED)
The effects of applying SFAS No. 123 may not be representative of the
effects on reportable net income in future years.
K. RESTRUCTURING AND CONSOLIDATION COSTS
In order to increase efficiency and productivity and to reduce costs, the
Company has reduced headcount at various administrative and manufacturing
facilities in 2003. All headcount reductions comprising the $1.7 million of
restructuring and consolidation costs were completed by March 31, 2003. The
restructuring accrual at March 31, 2003 is summarized below:
BALANCE BALANCE
JANUARY 1, MARCH 31,
(IN MILLIONS) 2003 PROVISION ACTIVITY 2003
-----------------------------------------------------------------------
Personnel-related
costs $ - $ 1.7 $ 0.3 $ 1.4
==================================================
During 2002, the Company consolidated its static control manufacturing
facilities into its Malaysia facility and closed the Twinsburg, Ohio leased
facility in order to improve productivity in the electronics
industry-related product lines. In conjunction with this consolidation, the
Company incurred personnel-related charges as well as closure costs related
to this leased facility. The restructuring accrual at March 31, 2003 is
summarized below:
BALANCE BALANCE
JANUARY 1, MARCH 31,
(IN MILLIONS) 2003 PROVISION ACTIVITY 2003
-----------------------------------------------------------------------
Facility closure
costs $ 0.2 $ - $ - $ 0.2
==================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
K. RESTRUCTURING AND CONSOLIDATION COSTS (CONTINUED)
In order to increase efficiency and productivity, reduce costs and support
the Company's global growth strategy, the Company has reduced headcount at
facilities throughout its global operations, restructured its colorants
business in Cincinnati, Ohio, and discontinued its flush pigments and
colorformers product lines in June 2001. Through these restructuring
efforts, the Company planned to eliminate approximately 440 positions.
Approximately 95% of the affected employees have left their positions as of
March 31, 2003. The restructuring accrual at March 31, 2003 is summarized
below:
BALANCE BALANCE
JANUARY 1, MARCH 31,
(IN MILLIONS) 2003 PROVISION ACTIVITY 2003
----------------------------------------------------------------------
Personnel-related
costs $ 2.1 $ - $ 0.8 $ 1.3
Facility closure
costs 0.6 - 0.2 0.4
Relocation and
restructuring
expense - 0.3 0.3 -
------------------------------------------------
$ 2.7 $ 0.3 $ 1.3 $ 1.7
================================================
L. CONTINGENCIES
The Company has numerous purchase commitments for materials, supplies and
energy incident to the ordinary course of business. The Company has
numerous sales commitments for product supply contracts incident to the
ordinary course of business.
General--There are pending or threatened claims, lawsuits and
administrative proceedings against the Company or its subsidiaries, 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.
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
L. CONTINGENCIES (CONTINUED)
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 regulated by 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.
The Company initiates corrective and/or preventive environmental projects
of its own to ensure environmental compliance and safe and lawful
activities at its current operations. The Company 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, results of operations, cash
flows or competitive position.
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 action election and
implementation, as well as negotiations with other PRPs and governmental
agencies.
Goodrich Corporation ("Goodrich") provided the Company with an indemnity
for various environmental liabilities. The Company estimates Goodrich's
share of such currently identified liabilities under the indemnity, which
extends to 2011, to be about $8.1 million. In addition to Goodrich's
indemnity, several other indemnities from third parties such as past owners
relate to specific environmental liabilities. Goodrich and other third
party indemnitors are currently indemnifying the Company for several
environmental remediation projects. Goodrich's share of all of these
liabilities may increase to the extent such third parties fail to honor
their indemnity obligations through 2011. The Company's March 31, 2003
balance sheet includes liabilities, measured on an undiscounted basis, of
$19.1 million to cover future environmental expenditures either payable by
the Company or indemnifiable by Goodrich. Accordingly, the current portion
of the environmental obligations of $0.9 million is recorded in accrued
expenses and $1.4 million is recorded in accounts receivable. Non-current
liabilities include $18.2 million and other non-current assets include $6.7
million, reflecting the recovery due from Goodrich.
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 additional costs, 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.
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
The Company as presented herein represents Noveon, Inc. 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, 2003
--------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $166.7 $ 47.5 $ 97.5 $ (29.4) $282.3
Cost of sales 112.2 44.8 72.9 (29.4) 200.5
--------------------------------------------------------------
Gross profit 54.5 2.7 24.6 - 81.8
Selling and
administrative
expenses 32.7 2.5 15.2 - 50.4
Amortization expense 0.1 2.3 1.2 - 3.6
Restructuring and
consolidation costs 1.6 - 0.4 - 2.0
--------------------------------------------------------------
Operating income (loss) 20.1 (2.1) 7.8 - 25.8
Interest expense--net 16.1 1.7 0.2 - 18.0
Other (income)
expense--net (0.2) (0.2) 0.3 - (0.1)
--------------------------------------------------------------
Income (loss) before
income taxes
and cumulative effect
of accounting change 4.2 (3.6) 7.3 - 7.9
Income tax expense
(benefit) - (0.2) 2.3 - 2.1
--------------------------------------------------------------
Income (loss) before
cumulative effect of
accounting change 4.2 (3.4) 5.0 - 5.8
Cumulative effect of
accounting change--net
of tax - - 0.5 - 0.5
--------------------------------------------------------------
Net income (loss) $ 4.2 $ (3.4) $ 4.5 $ - $ 5.3
==============================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
MARCH 31, 2003
--------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash
equivalents $ 9.2 $ 0.6 $ 60.9 $ - $ 70.7
Accounts and notes
receivable 71.3 25.8 62.3 - 159.4
Inventories 68.0 29.8 45.0 - 142.8
Prepaid expenses and
other
current assets 7.2 1.1 2.5 - 10.8
--------------------------------------------------------------
TOTAL CURRENT ASSETS 155.7 57.3 170.7 - 383.7
Property, plant and
equipment-net 395.6 101.1 172.6 - 669.3
Goodwill 250.0 0.5 124.3 - 374.8
Identifiable intangible
assets-net 3.5 119.9 56.7 - 180.1
Intercompany receivables 380.3 - 24.4 (404.7) -
Investment in
subsidiaries 436.7 48.9 - (485.6) -
Receivable from Parent 1.2 - - - 1.2
Other assets 34.1 7.7 0.5 - 42.3
--------------------------------------------------------------
TOTAL ASSETS $1,657.1 $ 335.4 $ 549.2 $ (890.3) $1,651.4
==============================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ - $ 0.1 $ - $ 0.1
Accounts payable 76.6 11.8 35.6 - 124.0
Accrued expenses 38.0 4.6 9.6 - 52.2
Income taxes payable - - 6.8 - 6.8
Current maturities of
debt 6.7 - - - 6.7
--------------------------------------------------------------
TOTAL CURRENT
LIABILITIES 121.3 16.4 52.1 - 189.8
Long-term debt 858.8 - 0.3 - 859.1
Postretirement benefits
other than pensions 4.4 1.3 - - 5.7
Accrued pensions 22.5 6.3 6.8 - 35.6
Deferred income taxes - - 17.8 17.8
Accrued environmental 1.2 17.0 - - 18.2
Intercompany payables 159.9 155.1 89.7 (404.7) -
Other non-current
liabilities 16.8 - 3.2 - 20.0
--------------------------------------------------------------
TOTAL LIABILITIES 1,184.9 196.1 169.9 (404.7) 1,146.2
STOCKHOLDER'S EQUITY
Capital stock - 145.7 339.9 (485.6) -
Paid in capital 498.0 - - - 498.0
Retained earnings
(deficit) (11.1) (6.4) 20.9 - 3.4
Accumulated other
comprehensive income
(loss) (14.7) - 18.5 - 3.8
--------------------------------------------------------------
TOTAL STOCKHOLDER'S
EQUITY 472.2 139.3 379.3 (485.6) 505.2
--------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $1,657.1 $ 335.4 $ 549.2 $ (890.3) $1,651.4
==============================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided
(used) by operating
activities $ (19.5) $ 5.5 $ 14.3 $ - $ 0.3
Investing activities:
Purchases of
property, plant
and equipment (7.1) (5.0) (4.4) - (16.5)
Payments made in
connection with
acquisitions, net
of cash acquired (10.4) - (0.3) - (10.7)
---------------------------------------------------------------
Net cash (used) by
investing activities (17.5) (5.0) (4.7) (27.2)
Financing activities:
Decrease in
short-term debt - - (0.3) - (0.3)
Net proceeds from
borrowings on
revolving credit
facility 18.5 - - - 18.5
---------------------------------------------------------------
Net cash provided
(used) by financing
activities 18.5 - (0.3) - 18.2
Effect of exchange rate
changes on cash and
cash equivalents - - (0.1) - (0.1)
---------------------------------------------------------------
Net (decrease) increase
in cash and cash
equivalents (18.5) 0.5 9.2 - (8.8)
Cash and cash
equivalents at
beginning of period 27.7 0.1 51.7 - 79.5
---------------------------------------------------------------
Cash and cash
equivalents
at end of period $ 9.2 $ 0.6 $ 60.9 $ - $ 70.7
===============================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
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
Restructuring and
consolidation costs - - 0.1 - 0.1
----------------------------------------------------------------
Operating income 22.2 1.0 6.2 - 29.4
Interest expense
(income)--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
================================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
DECEMBER 31, 2002
----------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- ------------------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 27.7 $ 0.1 $ 51.7 $ - $ 79.5
Accounts and notes receivable 58.4 20.0 57.3 - 135.7
Inventories 66.3 30.3 47.5 - 144.1
Prepaid expenses and other
current assets 4.0 0.9 2.3 - 7.2
----------------------------------------------------------------
TOTAL CURRENT ASSETS 156.4 51.3 158.8 366.5
Property, plant and
equipment--net 399.3 98.2 173.2 - 670.7
Goodwill 246.2 0.5 118.8 - 365.5
Identifiable intangible
assets--net 2.6 121.8 57.7 - 182.1
Intercompany receivables 358.6 0.7 23.8 (383.1) -
Investment in subsidiaries 430.8 48.9 - (479.7) -
Receivable from Parent 1.2 - - - 1.2
Other assets 35.0 7.6 0.5 - 43.1
----------------------------------------------------------------
TOTAL ASSETS $1,630.1 $ 329.0 $ 532.8 $ (862.8) $1,629.1
================================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ 0.1 $ 0.3 $ - $ 0.4
Accounts payable 62.5 11.8 36.9 - 111.2
Accrued expenses 57.5 5.0 8.1 - 70.6
Income taxes payable - - 5.3 - 5.3
----------------------------------------------------------------
TOTAL CURRENT LIABILITIES 120.0 16.9 50.6 - 187.5
Long-term debt 846.8 - 0.3 - 847.1
Postretirement benefits
other than pensions 4.5 1.3 - - 5.8
Accrued pensions 22.1 6.2 6.6 - 34.9
Deferred income taxes - - 18.1 - 18.1
Accrued environmental 1.4 16.8 - - 18.2
Intercompany payables 151.5 142.6 89.0 (383.1) -
Other non-current liabilities 15.8 - 2.0 - 17.8
----------------------------------------------------------------
TOTAL LIABILITIES 1,162.1 183.8 166.6 (383.1) 1,129.4
STOCKHOLDER'S EQUITY
Capital stock - 148.2 331.5 (479.7) -
Paid in capital 498.0 - - - 498.0
Retained (deficit) earnings (15.3) (3.0) 16.4 - (1.9)
Accumulated other
comprehensive income (loss) (14.7) - 18.3 - 3.6
----------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 468.0 145.2 366.2 (479.7) 499.7
----------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $1,630.1 $ 329.0 $ 532.8 $ (862.8) $1,629.1
================================================================
Noveon, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. 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)
----------------------------------------------------------------
Net cash (used)
provided by financing
activities (7.2) - 0.1 - (7.1)
Effect of exchange rate
changes
on cash and cash
equivalents - - (0.1) - (0.1)
----------------------------------------------------------------
(Decrease) increase 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
================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this report include
forward-looking statements, including those that relate to our future
plans, objectives, expectations and intentions. Statements that are
predictive in nature, that depend upon or refer to future events or
conditions or that include the words "expects," "anticipates," "intends,"
"plans," "believes," "estimates," "seeks," "thinks" and variations of these
words and similar expressions are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results and performance to be materially
different from any future results or performance expressed or implied by
these forward-looking statements. Although we believe that these statements
are based upon reasonable assumptions, our goals may not be achieved. These
forward-looking statements are made as of the date of this report, and,
except as required under the federal securities laws and the rules and
regulations of the Commission, we assume no obligation to update or revise
them or provide reasons why actual results may differ.
Important factors that may affect our expectations, estimates or
projections include:
o the effects of the substantial debt we have incurred in connection
with our acquisition of the Performance Materials Segment from
Goodrich and our ability to refinance or repay that debt;
o changes in customer requirements in markets or industries we serve;
o general economic and market conditions;
o competition within our industry;
o our access to capital markets and any restrictions placed on us by any
current or future financing arrangements;
o environmental and government regulations;
o the effect of risks of investing in and conducting operations in
foreign countries, including political, social, economic, currency
and regulatory factors;
o changes in the price and supply of major raw materials; and
o the effect of fluctuations in currency exchange rates on our
international operations.
OVERVIEW
We are a leading global producer and marketer of technologically advanced
specialty materials and chemicals used in a broad range of consumer and
industrial applications. We have a number of high growth, industry-leading
franchises marketed under some of the industry's most recognized brand
names including Carbopol(R), TempRite(R), Estane(R) and Hycar(R). These
global brands are complemented by a diverse portfolio of historically
stable, cash generating businesses. We have a significant presence in many
niche product categories, where customers value our long-standing ability
to provide need-specific formulations and solutions. Our products and
services enhance the value of customers' end-products by improving
performance, providing essential product attributes, lowering cost,
simplifying processing or making them more environmentally friendly.
Through our worldwide network of 27 strategically located manufacturing
facilities, we service more than 7,000 customers operating in over 25
industries. In 2002, we derived approximately 63% of our sales from the
United States, 18% of our sales from Europe and 19% of our sales from the
rest of the world.
Consistent with our focus on industries and end-use applications, we have
organized our business into three segments: Consumer Specialties, Specialty
Materials and Performance Coatings.
ACQUISITIONS
The Specialty Materials segment purchased selected assets and technology
from a European extruder of electrostatic dissipative sheet in February
2003 and made an investment in a company that produces TPU-based cushion
technology in March 2003. Also, in March 2003, the Performance Coatings
segment purchased certain coatings technology and manufacturing assets. The
aggregate purchase price paid for these acquisitions and investment was
$10.7 million, which was allocated to the assets acquired and resulted in
goodwill of $9.3 million.
RESTRUCTURING MATTERS
In order to increase efficiency and productivity and to reduce costs, the
Company has reduced headcount at various administrative and manufacturing
facilities in 2003. All headcount reductions comprising the $1.7 million of
restructuring and consolidation costs were completed by March 31, 2003. As
of March 31, 2003, approximately $1.4 million remains accrued for
restructuring costs with the remaining costs to be paid by 2004.
During 2002, we consolidated our static control manufacturing facilities
into our Malaysia facility and closed the Twinsburg, Ohio leased facility
in order to improve the productivity of our electronics industry-related
product lines. In conjunction with this consolidation, we incurred
personnel-related charges as well as closure costs, totaling $1.3 million,
related to this leased facility in 2002.
In 2001, we implemented a plan to restructure and streamline our operations
to increase efficiency and productivity, reduce costs and support our
global growth strategy. As part of this plan, we reduced headcount
throughout our global operations, restructured our colorants business in
Cincinnati, Ohio and discontinued our flush pigments and colorformers
product lines. Through these restructuring efforts, we planned to eliminate
approximately 440 positions. Approximately 95% of the affected employees
have left their positions as of March 31, 2003. As of March 31, 2003,
approximately $1.7 million remains accrued for restructuring costs with
most of the remaining costs anticipated to be paid in 2003.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2002
TOTAL COMPANY ANALYSIS
Sales. Sales increased $22.9 million, or 8.8%, from $259.4 million for the
three months ended March 31, 2002 to $282.3 million for the three months
ended March 31, 2003. The increase in sales was attributable to the
strength of the Euro, incremental sales of $8.1 million associated with
acquisitions and increased volumes. Improved volumes and the strength of
the Euro were principally responsible for sales increases of $5.9 million
within our personal care product lines, $4.3 million in Estane(R) TPU, $2.9
million in our pharmaceutical product lines, and $2.1 million in our
TempRite(R) CPVC product lines. Increased sales of $7.3 million within the
food and beverage product lines were due primarily to the impact of
acquisitions, increased volumes and favorable pricing. Sales within the
performance coatings segment were relatively flat as sales increases
attributable to the strength in the Euro and incremental sales associated
with acquisitions were offset by lower sales volumes in our paints and
coatings, engineered paper and textile finishing product lines.
Cost of Sales. Cost of sales as a percentage of sales increased from 68.2%
for the three months ended March 31, 2002 to 71.0% for the three months
ended March 31, 2003. The increase in cost of sales as a percentage of
sales was primarily attributable to an increase in raw material and utility
costs across all segments.
Gross Profit. Gross profit decreased $0.6 million, or 0.7%, from $82.4
million for the three months ended March 31, 2002 to $81.8 million for the
three months ended March 31, 2003. As a percentage of sales, gross profit
decreased from 31.8% for the three months ended March 31, 2002 to 29.0% for
the three months ended March 31, 2003. The decrease in gross profit and
gross profit as a percentage of sales was primarily associated with
increases in raw material and utility costs.
Selling and Administrative Expenses. Selling and administrative expenses
increased $1.3 million, or 2.6%, from $49.1 million for the three months
ended March 31, 2002 to $50.4 million for the three months ended March 31,
2003. The increase in selling and administrative expenses was primarily
related to the impact of the stronger Euro, the addition of sales and
marketing resources that contributed to increased sales and the addition of
research and development resources. The increase was partially offset by
reduced spending and headcount reductions. Selling and administrative
expenses as a percentage of sales declined from 18.9% for the three months
ended March 31, 2002 to 17.9% for the three months ended March 31, 2003.
Amortization Expense. Amortization expense totaled $3.8 million for the
three months ended March 31, 2002 and was comparable to $3.6 million for
the three months ended March 31, 2003.
Restructuring and Consolidation Costs. Restructuring and consolidation
costs increased $1.9 million from $0.1 million for the three months ended
March 31, 2002 to $2.0 million for the three months ended March 31, 2003.
These expenses relate to our effort to increase efficiency and productivity
and to reduce costs.
Operating Income. Operating income decreased by $3.6 million, or 12.2%,
from $29.4 million for the three months ended March 31, 2002 to $25.8
million for the three months ended March 31, 2003. The decrease in
operating income was primarily attributable to increases in raw material
costs, restructuring and consolidation costs and increased selling and
administrative expenses. The decrease was partially offset by increased
volumes within our personal care, TempRite(R) CPVC and Estane(R) TPU
product lines, lower manufacturing spending, the strength in the Euro and
the impact of acquisitions.
Interest Expense-Net. Interest expense was $19.3 million for the three
months ended March 31, 2002 and $18.0 million for the three months ended
March 31, 2003. The decrease in interest expense was attributable to lower
interest rates and lower average debt outstanding in 2003.
Other (Income) Expense-Net. Other expense was $0.2 million for the three
months ended March 31, 2002 and other income was $0.1 million for the three
months ended March 31, 2003.
Income Tax Expense. Income tax expense was $1.4 million for the three
months ended March 31, 2002 compared to $2.1 million for the three months
ended March 31, 2003. The income tax expense for the three months ended
March 31, 2002 and 2003 was primarily associated with our international
operations. The effective tax rate for the three months ended March 31,
2002 and 2003 was 14.1% and 26.6%, respectively.
For the three months ended March 31, 2003 and even more so for the three
months ended March 31, 2002, the effective tax rate differed from the
federal statutory rate predominately due to decreases in the income tax
rate as a result of the reversal of tax valuation allowances previously
recorded for our domestic operations. In addition, decreases in the income
tax rate resulted from certain income tax credits and the effective tax
rate differential on consolidated foreign subsidiaries. The decreases in
the income tax rate were partially offset by increases in tax valuation
allowance amounts associated with our foreign operations and other
nondeductible items.
The increase in the effective tax rate for the first quarter of 2003 as
compared to the first quarter of 2002 was principally related to a net
increase in valuation allowances recorded in 2003.
As of March 31, 2003, we have determined, based on our new capital
structure and lack of prior earnings history based on this new structure,
that it is uncertain that future taxable income of the Company will be
sufficient enough to recognize certain of these net deferred tax assets. In
accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, we intend to maintain the tax valuation
allowances recorded at March 31, 2003 for certain deferred tax assets until
sufficient positive evidence (for example, cumulative positive earnings and
future taxable income) exists to support the reversal of the tax valuation
allowances.
Cumulative Effect of Accounting Change-Net of Tax. The cumulative effect of
accounting change was $0.5 million for the three months ended March 31,
2003 and relates to the adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations" effective January 1, 2003.
Net Income. As a result of the factors discussed above, net income
decreased by $3.2 million from $8.5 million for the three months ended
March 31, 2002 to $5.3 million for the three months ended March 31, 2003.
SEGMENT ANALYSIS
Consumer Specialties. Sales increased $16.0 million, or 23.9%, from $66.9
million for the three months ended March 31, 2002 to $82.9 million for the
three months ended March 31, 2003. The increase is primarily attributable
to the impact of higher sales of $5.9 million in our personal care product
lines, principally due to higher Carbopol(R) acrylic thickener sales and
the successful launch of new products, and higher sales of $2.9 million
within our pharmaceutical product lines due primarily to a stronger Euro
and increased sales volumes. Additionally, the impact of acquisitions,
increased volumes and favorable pricing contributed to increased sales of
$7.3 million within our food and beverage product lines.
Gross profit increased $2.4 million, or 12.0%, from $20.0 million for the
three months ended March 31, 2002 to $22.4 million for the three months
ended March 31, 2003. The increase in gross profit was primarily associated
with higher personal care volumes and the strength in the Euro offset by
increased raw material and utility costs within our food and beverage
product lines. As a percentage of sales, gross profit decreased from 29.9%
for the three months ended March 31, 2002 to 27.0% for the three months
ended March 31, 2003. The decrease in gross profit as a percentage of sales
is due to increases in raw material and utility costs.
Operating income increased $1.1 million, or 10.4%, from $10.6 million for
the three months ended March 31, 2002 to $11.7 million for the three months
ended March 31, 2003. The increase was primarily associated with higher
personal care volumes and the strength in the Euro offset by increased raw
material and utility costs within our food and beverage product lines.
Specialty Materials. Sales increased by $6.6 million, or 6.7%, from $98.1
million for the three months ended March 31, 2002 to $104.7 million for the
three months ended March 31, 2003. The increase was primarily attributable
to $4.3 million in higher sales within our Estane(R) TPU product lines,
principally related to a stronger Euro and higher volumes, partially offset
by competitive pricing pressure, and $2.1 million of higher sales within
our TempRite(R) CPVC product lines, principally due to increased volumes.
Gross profit increased $0.4 million, or 1.1%, from $36.1 million for the
three months ended March 31, 2002 to $36.5 million for the three months
ended March 31, 2003. The increase in gross profit was primarily
attributable to higher volumes within our Estane(R) TPU and TempRite(R)
CPVC product lines, offset by increased raw material and utility costs and
competitive pricing pressure. As a percentage of sales, gross profit
decreased from 36.8% for the three months ended March 31, 2002 to 34.9% for
the three months ended March 31, 2003. The decrease in gross profit as a
percentage of sales is due to increases in raw material and utility costs.
Operating income for the segment decreased $0.8 million, or 3.8%, from
$21.3 million for the three months ended March 31, 2002 to $20.5 million
for the three months ended March 31, 2003. The decrease was primarily
attributable to higher raw material and utility costs, competitive pricing
pressure and increased selling and administrative expenses, primarily
related to the addition of sales and marketing resources, offset by
increased volumes within our Estane(R) TPU and TempRite(R) CPVC product
lines.
Performance Coatings. Sales increased $0.3 million, or 0.3%, from $94.4
million for the three months ended March 31, 2002 to $94.7 million for the
three months ended March 31, 2003. The increase was primarily attributable
to the strength in the Euro and the impact of acquisitions, offset by lower
sales volumes in our paints and coatings, engineered paper and textile
finishing product lines.
Gross profit decreased $3.4 million, or 12.9%, from $26.3 million for the
three months ended March 31, 2002 to $22.9 million for the three months
ended March 31, 2003. The decrease in gross profit was primarily
attributable to higher raw material and utility costs and lower sales
volumes in our engineered paper, paints and coatings and textile finishing
product lines, offset by the impact of acquisitions and the strength in the
Euro. As a percentage of sales, gross profit decreased from 27.9% for the
three months ended March 31, 2002 to 24.2% for the three months ended March
31, 2003. The decrease in gross profit as a percentage of sales is due to
increases in raw material and utility costs.
Operating income decreased $3.9 million, or 25.8%, from $15.1 million for
the three months ended March 31, 2002 to $11.2 million for the three months
ended March 31, 2003. The decrease was primarily attributable to increased
raw material and utility costs and lower sales volumes in our engineered
paper, paints and coatings and textile finishing product lines, offset by
the impact of acquisitions and the strength in the Euro.
Corporate. Corporate costs decreased $1.9 million, or 10.9%, from $17.5
million for the three months ended March 31, 2002 to $15.6 million for the
three months ended March 31, 2003. This decrease was primarily the result
of reduced spending and headcount reductions.
RAW MATERIAL COST TRENDS
Raw material prices have been increasing and some forecasts anticipate that
these costs will continue to remain at levels in excess of 2002. Raw
material cost increases could have an unfavorable impact on our financial
results. We benefited from reduced costs for raw materials for the three
months ended March 31, 2002 compared to the comparable period in 2003.
STRENGTH IN THE EURO
We have benefited from the strength in the Euro for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. Changes
in the Euro can have a significant impact on our financial results.
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND COMMITMENTS
Our credit facilities include (1) a Term Loan A facility in the original
amount of $125.0 million that matures in 2007, (2) a Term Loan B facility
in the original amount of $510.0 million that matures in 2008 and (3) a
revolving credit facility in the amount of $125.0 million that matures in
2007. A portion of the revolving credit facility 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. We and each of our direct and indirect material
domestic subsidiaries guarantee our obligations under the credit
facilities.
As of March 31, 2003, we had a cash balance of $70.7 million. We had $101.4
million available under the $125.0 million revolving credit facility, net
of $18.5 million of borrowings and $5.1 million of outstanding letters of
credit. As of March 31, 2003, the balance of Term Loan A was $73.0 million,
and the balance of Term Loan B was $499.0 million.
Our $275.0 million senior subordinated notes mature on February 28, 2011
and interest accrues at 11% per year. Interest payments on the notes occur
on March 15 and September 15 of each year.
Principal and interest payments under the credit facilities and the senior
subordinated notes represent significant liquidity requirements for us.
Borrowings under the credit facilities bear interest at floating rates and
require periodic interest payments. Interest on the senior subordinated
notes is payable semi-annually and interest and principal on the credit
facilities is payable periodically but not less frequently than quarterly.
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. As of March 31, 2003, we were in compliance with all of the
covenants of our credit facilities.
We believe 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 and tax obligations for the foreseeable future.
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, many of which are beyond our
control.
CASH FLOWS
Cash flows provided by operating activities decreased $2.5 million from
$2.8 million in the three months ended March 31, 2002 to $0.3 million in
the three months ended March 31, 2003. The decrease was primarily related
to a reduction in operating results and increased working capital related
to sales growth period over period.
Investing activities included payments made in connection with acquisitions
of $10.7 million and $16.5 of purchases of property, plant and equipment in
the three months ended March 31, 2003. Investing activities used $4.9
million for purchases of property, plant and equipment in the three months
ended March 31, 2002.
Financing activities provided $18.2 million for the three months ended
March 31, 2003, primarily related to borrowings on our revolving credit
facility. Financing activities used $7.1 million for the three months ended
March 31, 2002, primarily related to the principal payments on our Term
Loans.
CAPITAL EXPENDITURES
We believe 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. Our capital
expenditures for the three months ended March 31, 2003 were $16.5 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 using cash on hand and proceeds from our
revolving credit facility. We expect capital expenditures for the years
2003 and 2004 to be between $50.0 million and $60.0 million annually.
CONTINGENCIES
We have numerous purchase commitments for materials, supplies and energy
incident to the ordinary course of business. We have numerous sales
commitments to supply product incident to the ordinary course of business.
GENERAL
There are pending or threatened claims, lawsuits and administrative
proceedings against us or our subsidiaries, 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.
ENVIRONMENTAL
We are generators of both hazardous and non-hazardous wastes, the
treatment, storage, transportation and disposal of which are regulated by
various laws and governmental regulations. Although we believe past
operations were in substantial compliance with the then-applicable
regulations, either we or the Performance Materials Segment of Goodrich
have been designated as potentially responsible parties by the U.S.
Environmental Protection Agency, or similar state agencies, in connection
with several disposal sites. These laws and regulations, including the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state laws, generally impose liability for costs to
investigate and remediate contamination without regard to fault and under
certain circumstances liability may be joint and several resulting in one
responsible party being held responsible for the entire obligation.
Liability may also include damages to natural resources.
We initiate corrective and/or preventive environmental projects to ensure
environmental compliance and 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 our existing operating sites. This process includes
investigation and remedial selection and implementation, as well as
negotiations with other potentially responsible parties and governmental
agencies.
Goodrich provided us with an indemnity for various environmental
liabilities. We estimate Goodrich's share of such currently identified
liabilities under the indemnity, which extends to 2011, to be about $8.1
million. In addition to Goodrich's indemnity, several other indemnities
from third parties such as past owners relate to specific environmental
liabilities. Goodrich and other third party indemnitors are currently
indemnifying us for several environmental remediation projects. Goodrich's
share of all these liabilities may increase to the extent such third
parties fail to honor their indemnity obligations through 2011. Our March
31, 2003 balance sheet includes liabilities, measured on an undiscounted
basis, of $19.1 million to cover future environmental expenditures either
payable by us or indemnifiable by Goodrich. Accordingly, the current
portion of the environmental obligation of $0.9 million is recorded in
accrued expenses and $1.4 million is recorded in accounts receivable.
Non-current liabilities include $18.2 million and other non-current assets
include $6.7 million, reflecting the recovery due from Goodrich.
We believe that our reserves are adequate based on currently available
information. We believe that it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new
information, newly discovered conditions or a change in the law. However,
the additional costs, if any, cannot be currently estimated.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("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 adopted this
statement on January 1, 2003. We recorded a liability for the expected
present value of future asset retirement obligations costs of $1.1 million,
increased net property, plant and equipment by $0.4 million and recognized
a charge of $0.5 million, net of tax, related to the cumulative effect of
this change in accounting principle.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted this Statement
effective January 1, 2003. The effect of adoption had no impact on the
Company's consolidated financial position or results of operations.
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 at the time of shipment or consumption by the customer for
inventory on consignment. We require that persuasive evidence of a revenue
arrangement exists, delivery of product has occurred or services have been
rendered, the price to the customer is fixed and determinable and
collectibility is reasonably assured before revenue is realized and earned.
Rebates, customer claims, allowances, returns and discounts are reflected
as reductions from gross sales in determining net sales. In 2002, the total
of rebates, customer claims, returns and allowances and discounts amounted
to 3.5% of gross sales. Rebates are accrued based on contractual
relationships with customers as shipments are made. Customer claims,
returns and allowances and discounts are accrued based on our history of
claims and sales returns and allowances. Allowances for doubtful accounts
are maintained for estimated losses resulting from the inability of
customers to make required payments.
INVENTORIES
Inventories are stated at the lower of cost or market. The elements of
inventory cost include raw materials and labor and manufacturing overhead
costs attributed to the production process. Most domestic inventories are
valued by the last-in, first-out, or LIFO, cost method. Inventories not
valued by the LIFO method are valued principally by the average cost
method. We provide for allowances for excess and obsolete inventory based
on the age and quality of our products.
DERIVATIVE AND HEDGING ACTIVITIES
As required by our credit agreement, 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.
In the first quarter of 2003, we entered into an additional interest rate
swap agreement to limit our exposure to interest rate fluctuations on $25.0
million of the outstanding principal of Term Loan B. These agreements
require us to pay a fixed rate of interest while receiving a variable rate.
The net payments or receipts under these agreements are recognized as an
adjustment to interest expense in the Company's results of operations. As
of March 31, 2003, the fair value of these swap arrangements included in
other non-current liabilities totaled approximately $14.7 million. The
offsetting impact of this hedge transaction is included in accumulated
other comprehensive income.
We enter into currency forward exchange contracts, totaling $11.9 million
as of March 31, 2003, 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 was not
material to our results of operations, cash flow or financial position.
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 accumulated other comprehensive income. During the three months
ended March 31, 2003, we recognized $0.2 million of net losses 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. We provide valuation allowances
against the deferred tax assets if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized.
In determining the adequacy of the valuation allowance, which totaled $36.7
million as of March 31, 2003, management assesses our profitability by
taking into account the present and anticipated amounts of domestic and
international earnings, as well as the anticipated taxable income as a
result of the reversal of future taxable temporary differences.
Although we generated sufficient income through March 31, 2003 to realize
certain deferred tax assets, we intend to maintain the recorded valuation
allowances until sufficient positive evidence (for example, continuing
cumulative positive earnings and future taxable income) exists to support a
reversal of the tax valuation allowances.
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, primarily 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 transactional risk of foreign currency
fluctuations. The fair value of these contracts at March 31, 2003 was not
material to our results of operations, cash flow or financial position.
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 accumulated other comprehensive income.
INTEREST RATE RISK
As required by our credit agreement, 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. In the
first quarter of 2003, we entered into an additional interest rate swap
agreement to limit our exposure to interest rate fluctuations on $25.0
million of the outstanding principal of Term Loan B. Our interest rate swap
agreements as of March 31, 2003 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 change in the fair
value of the interest rate swap agreements was not material to
stockholder's equity for the three months ended March 31, 2003.
At March 31, 2003, we carried $865.9 million of outstanding debt on our
balance sheet, with $385.9 million of that total, net of $205.0 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, 2003, interest expense would
increase or decrease by $0.6 million. In addition, if interest rates
hypothetically increased or decreased by 10% on March 31, 2003, 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
$15.8 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of our disclosure controls and procedures within 90 days
before the filing date of this quarterly report. Based on that evaluation,
our management, including the CEO and CFO, concluded that our disclosure
controls and procedures were effective. Our Disclosure Committee, which is
comprised of members of operational and functional management, reports
directly to the CEO and CFO regarding the committee's formal evaluation of
disclosure controls and procedures.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective
actions were required or undertaken.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
---------- -----------------------------
10.1 Noveon, Inc. Management Incentive Plan.*
99.1 Section 906 Certificates.
*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 602(b)(2) of Regulation S-K.
(B) REPORTS ON FORM 8-K
February 28, 2003 - The Registrant filed a Current Report on Form
8-K, which was reported under Item 5, Other Events and Item 7,
Financial Statements and Exhibits, with respect to a press release
containing its financial results for the fourth quarter of 2002.
No other reports on Form 8-K were filed during the first quarter of
2003.
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 13, 2003 By: /s/ Steven J. Demetriou
------------ ------------------------
Steven J. Demetriou
President and Chief Executive Officer
By: /s/ Michael D. Friday
------------------------
Michael D. Friday
Executive Vice President and
Chief Financial Officer
Form 10-Q Certifications
I, Steven J. Demetriou, the Chief Executive Officer of Noveon, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Noveon, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Steven J. Demetriou
------------ ------------------------
Steven J. Demetriou
President and Chief Executive Officer
I, Michael D. Friday, the Chief Financial Officer of Noveon, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Noveon, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Michael D. Friday
------------ ----------------------
Michael D. Friday
Executive Vice President and
Chief Financial Officer