Exhibit 99.2
NOVEON INTERNATIONAL, INC.
Index for the Quarter Ended March 31, 2004
Financial Statements (Unaudited)
Condensed Consolidated Income Statement--Three months ended
March 31, 2004 and 2003.....................................................F-2
Condensed Consolidated Balance Sheet--March 31, 2004 and
December 31, 2003...........................................................F-3
Condensed Consolidated Statement of Cash Flows--Three months ended
March 31, 2004 and 2003.....................................................F-4
Notes to Condensed Consolidated Financial Statements........................F-5
F-1
NOVEON INTERNATIONAL, INC.
Condensed Consolidated Income Statement
(dollars in millions)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------------------------
(unaudited)
Sales $ 321.6 $ 282.3
Cost of sales 227.6 200.5
-------------------------------
Gross profit 94.0 81.8
Selling and administrative expenses 55.7 50.4
Amortization expense 3.8 3.6
Restructuring and severance costs 2.8 2.0
-------------------------------
Operating income 31.7 25.8
Interest expense 23.0 23.1
Interest(income) (0.4) (0.3)
Gain on sale of assets (0.7) -
Other expense (income)--net 0.1 (0.1)
-------------------------------
Income before income taxes and cumulative effect 9.7 3.1
of accounting change
Income tax expense 2.5 2.1
-------------------------------
Income before cumulative effect of accounting change 7.2 1.0
Cumulative effect of accounting change--net of tax - 0.5
-------------------------------
Net income $ 7.2 $ 0.5
===============================
Net income per basic share:
Income before cumulative effect of accounting change $ 2.01 $ 0.28
Cumulative effect of accounting change--net of tax - (0.14)
-------------------------------
Net income per basic share $ 2.01 $ 0.14
===============================
Net income per dilutive share:
Income before cumulative effect of accounting change $ 1.99 $ 0.28
Cumulative effect of accounting change--net of tax - (0.14)
-------------------------------
Net income per dilutive share $ 1.99 $ 0.14
===============================
See notes to condensed consolidated financial statements.
F-2
NOVEON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet
(dollars in millions)
MARCH 31, DECEMBER 31,
2004 2003
---------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 94.8 $ 116.8
Accounts and notes receivable, net of allowances ($7.7 and
$7.5 at March 31, 2004 and December 31, 2003, respectively) 180.9 149.8
Inventories 164.7 161.7
Deferred income taxes 9.5 9.5
Prepaid expenses and other current assets 12.2 7.9
---------------------------------------
TOTAL CURRENT ASSETS 462.1 445.7
Property, plant and equipment--net 671.7 682.9
Goodwill 422.9 416.0
Identifiable intangible assets--net 170.2 172.9
Other assets 39.2 40.1
---------------------------------------
TOTAL ASSETS $ 1,766.1 $ 1,757.6
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 134.2 $ 130.1
Accrued expenses 65.0 80.3
Income taxes payable 8.8 6.7
Current maturities of long-term debt 16.2 15.8
---------------------------------------
TOTAL CURRENT LIABILITIES 224.2 232.9
Long-term debt 1,030.5 1,014.5
Postretirement benefits other than pensions 5.8 5.7
Accrued pensions 32.5 31.0
Deferred income taxes 27.6 27.6
Accrued environmental 18.6 18.2
Other non-current liabilities 14.5 15.4
STOCKHOLDERS' EQUITY
Common stock - -
Paid in capital 361.0 361.0
Retained deficit (16.7) (23.9)
Accumulated other comprehensive income 69.3 76.4
Other (1.2) (1.2)
---------------------------------------
TOTAL STOCKHOLDERS' EQUITY 412.4 412.3
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,766.1 $ 1,757.6
=======================================
See notes to condensed consolidated financial statements.
F-3
NOVEON INTERNATIONAL, INC.
Condensed Consolidated Statement of Cash Flows
(dollars in millions)
THREE MONTHS ENDED
MARCH 31,
2004 2003
---------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 7.2 $ 0.5
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization 23.6 21.8
Deferred income taxes - (0.1)
Gain on sale of assets (0.7) -
Debt issuance cost amortization in interest expense 1.3 1.4
Cumulative effect of accounting change--net of tax - 0.5
Interest on seller note not paid in cash 5.5 4.8
Change in operating assets and liabilities, net of effects
of acquisitions of businesses (41.6) (28.6)
---------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (4.7) 0.3
INVESTING ACTIVITIES
Purchases of property, plant and equipment (11.8) (16.5)
Payments made in connection with acquisitions,
net of cash acquired (13.3) (10.7)
Proceeds from sale of assets 0.8 -
---------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (24.3) (27.2)
FINANCING ACTIVITIES
Net proceeds from borrowings on revolving
credit facility 13.3 18.5
Payments on long-term borrowings (4.8) -
Decrease in short-term debt - (0.3)
---------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8.5 18.2
Effect of exchange rate changes on cash and cash equivalents (1.5) (0.1)
---------------------------------------
Net decrease in cash and cash equivalents (22.0) (8.8)
Cash and cash equivalents at beginning of period 116.8 79.5
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94.8 $ 70.7
=======================================
See notes to condensed consolidated financial statements.
F-4
NOVEON INTERNATIONAL, INC.
Period of Three Months Ended March 31, 2004 and 2003
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, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
Noveon International, Inc. (the "Company") owns 100% of Noveon, Inc. (the
"Subsidiary").
The balance sheet at December 31, 2003 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
In January 2004, the Company purchased Scher Chemicals, Inc., a manufacturer of
emollient and surfactant specialty chemicals used in cosmetic and other personal
care formulations for the Consumer Specialties segment. Final determinations of
the fair value of certain assets and liabilities are in process. Accordingly,
the preliminary purchase price allocations are subject to revision. The
aggregate purchase price of $13.3 million paid for this acquisition was
allocated to the assets acquired and liabilities assumed and resulted in
goodwill of $11.2 million.
C. NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 clarifies the application of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements"
for certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. Interpretation No. 46 requires that variable
interest entities, as defined, be consolidated by the primary beneficiary, which
is defined as the entity that is expected to absorb the majority of the expected
losses, receive a majority of the expected residual returns, or both. The
Company adopted this statement in 2003. The effect of adoption had no impact on
the Company's consolidated financial position or results of operations.
F-5
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
C. NEW ACCOUNTING STANDARDS (CONTINUED)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this statement had no impact on
the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which were previously classified as
equity. SFAS No. 150 was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective on July 1, 2003. The
Company's adoption of this statement had no impact on its consolidated financial
statements.
D. EARNINGS PER SHARE
Basic earnings per common share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. The weighted-average number of common shares
outstanding for computing basic EPS was 3,606,133 and 3,600,115 for the three
months ended March 31, 2004 and 2003, respectively. Diluted EPS reflects the
potential dilution that could occur if stock options were exercised or converted
into common stock. The dilutive effect of the stock options increases the
weighted average number of common shares outstanding for the three months ended
March 31, 2004 and 2003 by 38,066 and 39,717, respectively.
The basic and diluted net income per common share for the three months ended
March 31, 2004 and 2003 is as follows:
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------------------------------------
Net income per basic share:
Income before cumulative effect of accounting change $ 2.01 $ 0.28
Cumulative effect of accounting change--net of tax - (0.14)
----------------------------------------
Net income per basic share $ 2.01 $ 0.14
========================================
Net income per dilutive share:
Income before cumulative effect of accounting change $ 1.99 $ 0.28
Cumulative effect of accounting change--net of tax - (0.14)
----------------------------------------
Net income per dilutive share $ 1.99 $ 0.14
========================================
F-6
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
E. INVENTORIES
The components of inventory consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
----------------------------------------
(IN MILLIONS)
Finished products $ 119.7 $ 120.8
Work in process 3.4 5.0
Raw materials 41.6 35.9
----------------------------------------
$ 164.7 $ 161.7
========================================
At March 31, 2004 and December 31, 2003, LIFO inventory approximated first-in,
first-out (FIFO) cost.
F. 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
charge of $0.5 million (net of income taxes of $0.2 million) in the first
quarter of 2003. The pro forma effects as if the Company had adopted SFAS No.
143 on January 1, 2003 are not material to the results of operations.
G. 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.
For the three months ended March 31, 2004 and, to a lesser extent, for the three
months ended March 31, 2003, the effective tax rate differed from the federal
statutory rate principally due to decreases in the income tax rate as a result
of certain income tax credits. In addition, for the three months ended March 31,
2004, decreases in the income tax rate resulted from the reversal of tax
F-7
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
G. INCOME TAXES (CONTINUED)
valuation allowances previously recorded for the Company's domestic operations.
The decreases in the effective tax rate from the federal statutory rate were
partially offset by higher tax valuation allowance amounts associated with
losses incurred by the Company's foreign businesses, the impact of foreign
operations, nondeductible interest expense and other nondeductible business
operating expenses. Furthermore, for the three months ended March 31, 2003, an
increase in the effective tax rate resulted from the recording of tax valuation
allowances associated with the Company's domestic operations.
As of March 31, 2004, management has determined that it is uncertain that future
taxable income of the Company will be sufficient to recognize certain of these
net deferred tax assets. As a result, under the provisions of SFAS No. 109, a
valuation allowance of $71.4 million has been recorded at March 31, 2004. 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. Any reversal of the valuation allowance that was established in purchase
accounting would reduce goodwill. For the three months ended March 31, 2004, a
reduction of the valuation allowance of $0.2 million has been allocated to
goodwill.
In determining the adequacy of the $71.4 million valuation allowance, management
assessed the Company's profitability taking into account cumulative 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 severance 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.
F-8
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
H. SEGMENT INFORMATION (CONTINUED)
The following tables summarize business segment information:
THREE MONTHS ENDED MARCH 31,
2004 % 2003 %
-------------------------------------------------------
(DOLLARS IN MILLIONS)
Sales
Consumer Specialties $ 95.4 29.7% $ 82.9 29.4%
Specialty Materials 126.2 39.2 104.7 37.1
Performance Coatings 100.0 31.1 94.7 33.5
-------------------------------------------------------
Total sales $ 321.6 100.0% $ 282.3 100.0%
=======================================================
Gross profit
Consumer Specialties $ 27.1 28.4% $ 22.4 27.0%
Specialty Materials 42.7 33.8 36.5 34.9
Performance Coatings 24.2 24.2 22.9 24.2
---------------- -----------------
Total gross profit $ 94.0 29.2% $ 81.8 29.0%
================ =================
Operating income
Consumer Specialties $ 14.2 14.9% $ 11.7 14.1%
Specialty Materials 23.7 18.8 20.5 19.6
Performance Coatings 11.9 11.9 11.2 11.8
---------------- -----------------
Total segment operating income $ 49.8 15.5% $ 43.4 15.4%
Corporate costs (15.3) (4.8) (15.6) (5.6)
Restructuring and severance costs (2.8) (0.9) (2.0) (0.7)
-------------------------------------------------------
Total operating income $ 31.7 9.8% $ 25.8 9.1%
=======================================================
I. COMPREHENSIVE INCOME
Total comprehensive income consists of the following:
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------------------------------
(IN MILLIONS)
Net income $ 7.2 $ 0.5
Net change related to cash flow hedges 0.6 -
Cumulative translation adjustment (7.7) 0.2
------------------------------------
Total comprehensive income $ 0.1 $ 0.7
====================================
F-9
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
J. STOCK-BASED COMPENSATION
The Company 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,
2004 2003
------------------------------------
(IN MILLIONS)
Net income as reported $ 7.2 $ 0.5
Deduct: total stock-based employee compensation
expense determined under the fair value based method for all
awards, net of related tax effects (0.7) (0.7)
------------------------------------
Pro forma net income (loss) $ 6.5 $ (0.2)
====================================
The effects of applying SFAS No. 123 may not be representative of the effects on
reportable net income in future years.
K. RESTRUCTURING AND SEVERANCE COSTS
In 2003, the Company announced the relocation of the Sancure(R) polyurethane
dispersions line, part of the Company's Performance Coatings segment, to its
Avon Lake, Ohio facility and the closing of the Leominster, Massachusetts
facility. Production is expected to be completely shifted to the Avon Lake site
by the end of 2004. In conjunction with the announced closing of the Leominster
facility, the Company performed an evaluation of the ongoing value of the
long-lived assets at that facility. The Company determined that the long-lived
assets were impaired and no longer recoverable. As a result, the long-lived
asset carrying value was written down to its estimated fair value of $1.4
million, which was determined by an independent appraisal, and an impairment
charge of $5.7 million was recorded. Additionally, in 2003, in order to increase
efficiency and productivity and to reduce costs, the Company reduced headcount
at various administrative and manufacturing facilities.
F-10
NOVEON INTERNATIONAL, INC.
AND
BF GOODRICH PERFORMANCE MATERIALS
(THE PREDECESSOR COMPANY AND A SEGMENT OF THE BF GOODRICH COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
K. RESTRUCTURING AND SEVERANCE COSTS (CONTINUED)
Through these restructuring efforts, the Company planned to eliminate
approximately 80 positions across all segments. Approximately 70% of the
affected employees have left their positions as of March 31, 2004. In
conjunction with these restructuring plans, the Company recorded severance costs
of $6.6 million pursuant to its existing severance plan. As of March 31, 2004,
$2.4 million remains accrued related to these restructurings with substantially
all of the remaining costs anticipated to be paid by the end of 2004.
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.
In June 2001, in order to increase efficiency and productivity, reduce costs and
support the Company's global growth strategy, the Company reduced headcount at
facilities throughout its global operations, restructured its colorants business
in Cincinnati, Ohio, and discontinued its flush pigments and colorformers
product lines. Through these restructuring efforts, the Company planned to
eliminate approximately 440 positions. All of the affected employees have left
their positions as of March 31, 2004 and the remaining personnel-related costs
are anticipated to be paid by 2007. In the first quarter of 2004, the Company
recorded $2.4 million of restructuring and severance costs in conjunction with
this restructuring plan, which consisted of expenses related to the buy-out of a
foreign pension plan associated with a closed facility as mandated by a change
in local employment laws. The restructuring accrual is summarized below:
BALANCE BALANCE
JANUARY 1, MARCH 31,
2004 PROVISION ACTIVITY 2004
--------------- --------------- --------------- ---------------
(IN MILLIONS)
PERSONNEL-RELATED COSTS
2003 Restructurings.......................... $ 2.7 $ 0.4 $ (0.7) $ 2.4
2001 Restructurings......................... 1.3 2.4 (0.2) 3.5
FACILITY CLOSURE COSTS
2002 Restructurings.......................... 0.1 - - 0.1
2001 Restructurings.......................... 0.3 - (0.1) 0.2
--------------- --------------- --------------- ---------------
$ 4.4 $ 2.8 $ (1.0) $ 6.2
=============== =============== =============== ================
F-11
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
L. PENSIONS AND POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for the three months ended March 31,
2004 and 2003 consists of the following:
UNITED STATES EUROPEAN UNITED STATES
PENSION BENEFITS PENSION BENEFITS OTHER BENEFITS
--------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
--------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(IN MILLIONS)
Components of net periodic benefit cost:
Service cost.............................. $ 1.0 $ 0.9 $ 0.5 $ 0.4 $ - $ -
Interest cost............................. 0.8 0.7 0.3 0.3 0.1 0.1
Expected return on plan assets............ (0.2) (0.2) (0.1) (0.2) - -
Amortization of prior service cost........ 0.1 - - - - -
---------------------- ---------------------- ----------------------
Total net periodic benefit cost.............. $ 1.7 $ 1.4 $ 0.7 $ 0.5 $ 0.1 $ 0.1
====================== ====================== ======================
Medicare Prescription Drug Act
In March 2004, the FASB issued Financial Staff Position ("FSP") No. 106-b
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act 2003." FSP 106-b addresses the
accounting and disclosure implications that are required as a result of the
Medicare Prescription Drug, Improvement and Modernization Act (the "Act"). The
Act introduced a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is a least actuarially equivalent to Medicare Part D.
Under FSP No. 106-b, a plan sponsor may elect to defer recognizing the effects
of the Act until authoritative guidance on the accounting for the federal
subsidy is issued. The Company has not adopted the provisions of the Act and,
accordingly, any measures of accumulated postretirement benefit obligation or
net periodic postretirement benefit cost in the financial statements or
accompanying notes do not reflect the Act. The adoption of this FSP could
require the Company to change previously reported information.
M. CONTINGENCIES
The Company and its subsidiaries have numerous purchase commitments for
materials, supplies and energy in the ordinary course of business. The Company
and its subsidiaries have numerous sales commitments for product supply
contracts in the ordinary course of business.
F-12
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
M. CONTINGENCIES (CONTINUED)
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.
ENVIRONMENTAL. The Company and its subsidiaries 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 the
Company believes past operations were in substantial compliance with the
then-applicable regulations, either the Company or the Performance Materials
Segment of Goodrich have been designated as a potentially responsible party
("PRP") by the U.S. Environmental Protection Agency ("EPA"), 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.
The Company initiates corrective and/or preventive environmental projects 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'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 selection and implementation, as well
as negotiations with other PRPs and governmental agencies. Our estimates of
environmental liabilities are based on the results of this process.
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.
F-13
NOVEON INTERNATIONAL, INC.
AND
BF GOODRICH PERFORMANCE MATERIALS
(THE PREDECESSOR COMPANY AND A SEGMENT OF THE BF GOODRICH COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
M. CONTINGENCIES (CONTINUED)
The Company's March 31, 2004 balance sheet includes liabilities, measured on an
undiscounted basis, of $19.4 million to cover future environmental expenditures
either payable by the Company or indemnifiable by Goodrich. Accordingly, the
current portion of the environmental obligations of $0.8 million is recorded in
accrued expenses and $1.4 million of the recovery due from Goodrich is recorded
in accounts receivable. Non-current liabilities include $18.6 million and other
non-current assets include $6.7 million reflecting the recovery due from
Goodrich.
The Company believes that its environmental accruals are adequate based on
currently available information. The Company believes 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.
Additionally, as the indemnification from Goodrich extends through 2011, changes
in assumptions regarding when costs will be incurred may result in additional
expenses to the Company. However, the additional costs, if any, cannot currently
be estimated.
N. PARENT COMPANY FINANCIAL STATEMENTS
Substantially all of the net assets of Noveon, Inc. are restricted from
transfer, subject to certain restricted payment provisions, to the Company. As a
result, the Company has presented the following condensed financial statements
of Noveon International, Inc., the parent company, at March 31, 2004 and
December 31, 2003 and the three months ended March 31, 2004 and 2003 as follows:
THREE MONTHS ENDED
MARCH 31,
2004 2003
--------------------------------
(IN MILLIONS)
INCOME STATEMENT DATA
Interest expense--net $ 5.5 $ 4.8
--------------------------------
Income (loss) before income taxes (5.5) (4.8)
Income tax benefit (0.4) -
--------------------------------
Income before equity earnings (loss) of subsidiary (5.1) (4.8)
Earnings of subsidiary 12.3 5.3
--------------------------------
Net income $ 7.2 $ 0.5
================================
F-14
NOVEON INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
N. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, DECEMBER 31,
2004 2003
--------------------------------
(IN MILLIONS)
BALANCE SHEET DATA
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.2 $ 1.2
--------------------------------
TOTAL CURRENT ASSETS 1.2 1.2
Investment in subsidiary 590.2 585.0
Other assets 2.2 3.8
--------------------------------
TOTAL ASSETS $ 593.6 $ 590.0
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 1.9 $ 9.2
--------------------------------
TOTAL CURRENT LIABILITIES 1.9 9.2
Long-term debt 176.7 165.9
Payable to subsidiary 2.6 2.6
TOTAL STOCKHOLDERS' EQUITY 412.4 412.3
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 593.6 $ 590.0
================================
O. SUBSEQUENT EVENT
In April 2004, The Lubrizol Corporation ("Lubrizol") signed a definitive
agreement to purchase the Company in a transaction valued at approximately $1.84
billion, which will include a cash payment for equity and the assumption of the
Company's debt. The acquisition, which has been approved by the board of
directors of both companies, is subject to regulatory approval and is expected
to close by June 30, 2004. Following the close of the transaction, the Company
will be merged into a wholly owned subsidiary of Lubrizol.
F-15