1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 1-3507
R O H M A N D H A A S C O M P A N Y
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(Exact name of registrant as specified in its charter)
DELAWARE 23-1028370
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 INDEPENDENCE MALL WEST, PHILADELPHIA, PENNSYLVANIA 19106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 592-3000
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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, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Common stock outstanding at October 31, 2000: 219,714,585 SHARES
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROHM AND HAAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
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(Millions of dollars, except per-share amounts) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
-------- ------- ------- -------
Net sales $ 1,677 $ 1,577 $ 5,170 $ 3,661
Cost of goods sold 1,119 1,027 3,436 2,280
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Gross profit 558 550 1,734 1,381
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Selling and administrative expense 259 261 795 608
Purchased in-process research
and development - - 13 105
Research and development expense 64 61 191 161
Interest expense 59 66 181 95
Amortization of goodwill and other
intangibles 40 33 120 40
Share of affiliate net earnings (losses) 4 5 15 (1)
Provision for restructuring - 30 13 30
Loss on disposition of joint ventures - - - (22)
Other income (expense), net (1) (6) 24 1
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Earnings before income taxes 139 98 460 320
Income taxes 55 40 176 161
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Net earnings $ 84 $ 58 $ 284 $ 159
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Net earnings applicable
to common shareholders $ 84 $ 58 $ 284 $ 157
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Earnings per common share
(in dollars):
- Basic $ .38 $ .27 $ 1.29 $ .85
- Diluted .38 .26 1.29 .84
Average common shares outstanding
(millions):
- Basic 219.7 217.3 219.4 184.7
- Diluted 219.8 221.1 220.7 188.3
Common dividends $ .20 $ .19 $ .58 $ .55
See Notes to Consolidated Financial Statements.
3
ROHM AND HAAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
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Nine Months Ended
September 30,
---------------------
2000 1999
---------------------
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 284 $ 159
Adjustments to reconcile net earnings to cash provided
by operating activities:
Depreciation 339 252
Purchased in-process research and development 13 105
Amortization of goodwill and intangibles 120 40
Changes in assets and liabilities, net of
acquisitions and divestitures:
Deferred income taxes (133) (41)
Accounts receivable (130) (9)
Inventories (55) (28)
Accounts payable and accrued liabilities 59 60
Income taxes payable 174 83
Other, net (170) (100)
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Net cash provided by operating activities 501 521
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses and affiliates,
net of cash acquired (360) (3,274)
Proceeds on sale of businesses, net of cash sold 295 -
Additions to land, buildings and equipment (226) (198)
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Net cash used for investing activities (291) (3,472)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 393 2,571
Repayments of long-term debt (195) -
Net change in short-term borrowings (276) 559
Payment of dividends (125) (100)
Purchases of treasury stock - (3)
Other, net - (9)
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Net cash (used for) provided by financing
activities (203) 3,018
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NET INCREASE IN CASH AND CASH EQUIVALENTS 7 67
Cash and cash equivalents at beginning of period 57 16
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Cash and cash equivalents at end of period $ 64 $ 83
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See Notes to Consolidated Financial Statements.
4
ROHM AND HAAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(Millions of dollars) (Unaudited)
September 30, December 31, September 30,
2000 1999 1999
---------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 64 $ 57 $ 83
Accounts receivable, net 1,504 1,370 1,271
Inventories (note C) 970 899 884
Prepaid expenses and other assets 217 171 189
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Total current assets 2,755 2,497 2,427
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Land, buildings and equipment, net 3,381 3,496 3,533
Goodwill and other intangible assets, net 4,668 4,482 4,534
Other assets 709 781 681
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$11,513 $11,256 $11,175
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 565 $ 931 $ 784
Accounts payable and accrued liabilities 1,477 1,407 1,247
Accrued income taxes payable 354 172 158
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Total current liabilities 2,396 2,510 2,189
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Long-term debt 3,367 3,122 3,242
Employee benefits 629 610 623
Other liabilities 1,428 1,520 1,550
Minority interest 23 19 26
Commitments and Contingencies (note B)
Stockholders' equity:
Common stock: shares issued - 242,078,367 605 605 605
Additional paid-in capital 1,950 1,942 1,939
Retained earnings 1,491 1,331 1,343
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4,046 3,878 3,887
Less: Treasury stock (note E) 216 224 226
Less: ESOP shares 121 125 127
Accumulated other comprehensive income (loss) (39) (54) 11
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 3,670 3,475 3,545
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$11,513 $11,256 $11,175
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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These interim financial statements are unaudited. In the opinion of
management, all adjustments, which are of a normal recurring nature, have
been made to present fairly the company's financial position, results of
operations and cash flows. Certain prior year amounts have been
reclassified to conform to current year presentation. These financial
statements should be read in conjunction with the financial statements,
accounting policies and the notes included in the company's annual report
for the year ended December 31, 1999, filed with the Securities and Exchange
Commission on March 27, 2000.
NOTE(A) ACQUISITIONS, DIVESTITURES AND RESTRUCTURING
On June 21, 1999, the company acquired Morton International (Morton) for
cash of $3 billion and the issuance of 45 million shares of common stock,
for a total transaction value of approximately $4.9 billion, including the
assumption of $272 million of debt. Morton is a manufacturer of specialty
chemicals and a producer of salt for a variety of markets. The cash portion
of the acquisition was financed primarily through a combination of
commercial paper and the later issuance of longer term instruments.
Accounted for by the purchase method, the financial statements reflect the
allocation of the purchase price based on fair values at the date of
acquisition. The final allocation as of June 30, 2000 resulted in acquired
goodwill of $1.7 billion, which is being amortized on a straight-line basis
over 40 years. Based on an independent appraisal, $105 million of the
purchase price was allocated to in-process research and development, which
was recorded as a charge in the second quarter of 1999. For additional
discussion regarding purchased in-process research and development, see Note
3 in the company's annual report for the year ended December 31, 1999. In
addition to goodwill and in-process research and development, the purchase
price was allocated to: customer lists and trade names ($1.6 billion), which
are being amortized over 40 years, developed technology and workforce ($434
million), which are being amortized over approximately 18 years, and fixed
assets ($724 million), which are being amortized over approximately 12
years. Also, during the first six months of 2000, adjustments totaling $220
million were made to the purchase price allocation for resolution or
adjustment of pre-acquisition contingencies and valuations.
In late January 1999, the company acquired all of the outstanding shares of
LeaRonal, Inc. (LeaRonal) for approximately $460 million. LeaRonal
develops and manufactures specialty chemicals used in the manufacture of
printed circuit boards, semiconductor packaging and for electronic connector
plating and also provides processes for metal-finishing applications. The
acquisition, financed primarily through commercial paper, was accounted for
using the purchase method. The financial statements reflect the allocation
of the purchase price based on fair values at the date of acquisition and
later analysis of certain acquired assets and liabilities. The final
allocation resulted in acquired goodwill of approximately $202 million,
which is being amortized on a straight-line basis over 40 years. In
addition to goodwill, the purchase price was allocated to: customer lists
and trade names ($129 million), which are being amortized over 40 years,
developed technology and workforce ($63 million), which are being amortized
over 13 years, and fixed assets ($9 million), which are being amortized over
approximately 20 years.
The results of both Morton and LeaRonal have been included in the
consolidated financial statements since the respective dates of acquisition.
In the second quarter of 1999, the company announced its intentions to enter
into a joint venture with Stockhausen GmbH & Co. KG (Stockhausen) of Germany
to form a global partnership for the manufacture of acrylic acid. The company
6
expects the transaction to close by the end of 2000. In conjunction with the
proposed joint venture, which will be completed in the first quarter of 2001,
the company acquired Stockhausen's merchant monomer business in Europe in the
first quarter of 2000.
The following acquisition and divestiture activities occurred or were
announced in 2000:
- - The company sold its Industrial Coatings business to BASF Corporation in
the first quarter of 2000 for approximately $175 million, subject to working
capital adjustments. The Industrial Coatings business was acquired by the
company in June 1999 as part of the acquisition of Morton and was recorded
at its fair value; accordingly, no gain or loss was recorded on this
transaction.
- - The company increased its ownership in Rodel from 48% to 90% for a cost
of approximately $200 million. Rodel is a privately-held, Delaware-based
leader in precision polishing technology serving the semiconductor, memory
disk and glass polishing industries. Through March 31, 2000, the
investment had been accounted for on the equity method with the company's
share of earnings reported as equity in affiliates. Beginning in the
second quarter of 2000, the transaction with Rodel, increasing the
company's ownership to approximately 90%, was accounted for using the
purchase method with results of operations combined during the second
quarter of 2000. The financial statements reflect the allocation of the
purchase price based on estimated fair values, and resulted in acquired
goodwill of $58 million, which is being amortized on a straight-line basis
over 30 years. Thirteen million dollars of the purchase price was allocated to
in-process research and development related to chemical mechanical
planarization and surface preparation technologies under development and
was recorded as a charge in the second quarter of 2000.
- - The company acquired 95% of Acima A.G.(Acima), a Swiss company
specializing in biocidal formulations, polyurethane catalysts and other
specialty chemicals. The company also acquired an 80% interest in Silicon
Valley Chemical Laboratories, Inc. (SVC), a privately-held supplier of high
technology products for the semiconductor industry. The combined cost for
these two transactions was approximately $93 million. These transactions
have been accounted for using the purchase method with results of operations
of SVC combined as of the date of acquisition and the results of operations
of Acima combined during the second quarter of 2000 due to the
unavailability of data as of March 31, 2000. The financial statements
reflect the allocation of the purchase prices based on estimated fair values
at the dates of acquisition, and resulted in acquired combined goodwill of
$32 million, which is being amortized on a straight-line basis over 40 years
for Acima and over 20 years for SVC.
- - The company acquired the photoresist business of Mitsubishi Chemical
Corporation in the second quarter of 2000. Mitsubishi Chemical is a leading
producer of G-line, I-line and deep UV photoresist chemistry used to make
semi-conductor chips. The transaction was accounted for using the purchase
method with results of operations combined as of the date of acquisition.
- - The company agreed to sell its Thermoplastic Polyurethane business to
Huntsman Corporation for $120 million, subject to adjustment, and its
European Salt business, Salins-Europe, to a consortium, which includes
management, led by Union d'Etudes et d'Investissements SA, a wholly-owned
subsidiary of Credit Agricole, for approximately $270 million. Both
businesses were acquired by the company in June 1999 as part of the
acquisition of Morton and were recorded at fair value; accordingly, no gain
or loss is expected to be recorded on these transactions. These
transactions closed in the third and fourth quarters of 2000, respectively.
7
- - The company agreed to sell its 50% interest in TosoHaas to its joint
venture partner, Tosoh Corporation. The transaction closed in the fourth
quarter of 2000.
In conjunction with the above acquisitions of Rodel, Acima and SVC, the
company also allocated $172 million to identifiable intangible assets, which
are being amortized over useful lives ranging from 5 to 30 years.
Pro forma information is not presented, as the above 2000 acquisitions were not
material to the Company's results of operations or consolidated
financial position. The results of operations of these businesses are
included in the company's consolidated financial statements from the
respective dates of acquisition, except as noted above.
Restructuring reserve activity for the nine months ended September 30, 2000
was as follows:
- ----------------------------------------------------------------------------------------------------
Millions of dollars
- ----------------------------------------------------------------------------------------------------
Increases to Decreases to
Reserve(1) Reserve
-------------------- ---------------------------------
Reserve at Charge Reclass Reserve at
Dec. 31, to Inc.(Dec.) Cash to Pension Other Sept. 30,
1999 Earnings Goodwill Payments Asset(2) Changes(3) 2000
- ------------------------------------------------------------------------------------------------------
Severance and
other employee
related
charges(1) $58 $ 6 $ 8 $ (3) $(53) $(3) $13
Asset impairments - 17 1 - - - 18
Pension related
gains - (10) - - - 10 -
Lease terminations
and other 15 - 37 (23) - (3) 26
- ------------------------------------------------------------------------------------------------------
$73 $ 13 $46 $(26) $(53) $ 4 $57
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(1) The "charge to earnings" includes a decrease to expense due to a
reclassification to "increase(decrease) in goodwill" resulting from a
change in company identification (from acquiring company to acquired
company) for a number of employees expected to be terminated.
(2) Severance of the acquired company will be paid from the pension plan.
Because this is no longer part of the reserve, but rather a reduction in the
company's Pension Asset, it is reclassified here for presentation purposes.
(3) Amounts in this column reflect the impact of the treatment of most
severance for U.S. employees which will generally be paid from the pension
plans and not from corporate cash, which results in pension-related gains
being recorded as increases to the pension asset.
(4) For additional information regarding the restructuring reserve, see Note
4 of the Notes to Consolidated Financial Statements in the company's annual
report for the fiscal year ended December 31, 1999.
NOTE(B) CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENTS
ENVIRONMENTAL
There is a risk of environmental damage in chemical manufacturing
8
operations. The company's environmental policies and practices are
designed to ensure compliance with existing laws and regulations and to
minimize the possibility of significant environmental damage. Following
the 1999 acquisitions of Morton and LeaRonal, the company began a process at
acquired facilities to ensure company-wide uniformity in such
policies and practices.
In Wood-Ridge, New Jersey, the company and Velsicol Chemical Corporation
("Velsicol") have been held jointly and severally liable for the cost of
remediation necessary to correct mercury-related environmental problems
associated with a mercury processing plant on the site prior to its
acquisition by Morton. At the date of acquisition Morton had disclosed and
accrued for certain ongoing studies, which were expected to be completed by
the end of 2000, with regulatory decisions expected in 2001. In its
allocation of the purchase price of Morton, the company accrued for
additional study costs at December 31, 1999 and additional remediation costs
in the first quarter of 2000 based on the progress of the technical studies.
A separate study of the contamination in Berry's Creek, which runs near the
plant site, and of the surrounding wetlands area is expected, but on a
timetable yet to be determined; therefore, the estimated costs of
remediation that may result from this separate study have not been
considered in the allocation of the Morton purchase price. The company's
ultimate exposure will also depend upon the continued ability of Velsicol
and its indemnitor, Fruit of the Loom, Inc., which has filed for protection
under the bankruptcy laws, to contribute to the cost of remediation and on
the results of attempts to obtain contributions from others believed to
share responsibility. A cost recovery action against these responsible
parties is pending in federal court. Settlements have been reached with
some defendants for claims considered de minimis associated with the
Wood-Ridge plant site. Where appropriate, the analysis to determine the
company's liability, if any, with respect to remedial costs at the above
sites reflects an assessment of the likelihood and extent of participation
of other potentially responsible parties.
During 1996, the EPA notified Morton of possible irregularities in water
discharge monitoring reports filed by the Moss Point, Mississippi plant in
early 1995. Morton investigated and identified other environmental issues
at the plant. Though at the date of acquisition Morton had accrued for some
remediation and legal costs, the company revised these accruals as part of
the allocation of the purchase price of Morton based on its discussions with
the authorities and on the information available as of June 30, 2000. On
October 26, 2000 the company announced that it reached agreement with the EPA,
the Department of Justice and the State of Mississippi, resolving these
historic environmental issues, subject to court approval. The settlement
includes payment of $20 million in civil penalties, $2 million in criminal
penalties and $16 million in various Supplemental Environmental Projects
(SEPs). The accruals established for this matter were sufficient to
cover these and other related costs of the settlement.
The amount charged to earnings before tax for environmental remediation was
$6 million and $10 million for the nine months ended September 30, 2000 and
1999, respectively. Remediation-related reserves were $190 million and $201
million at September 30, 2000 and December 31, 1999, respectively, and are
recorded as "other liabilities" (current and long-term). These reserves
include amounts resulting from the allocation of the purchase price of
Morton. The company is pursuing lawsuits over insurance coverage for
environmental liabilities. It is the company's practice to reflect
environmental insurance recoveries in results of operations for the quarter
in which the litigation is resolved through settlement or other appropriate
legal process. Resolutions typically resolve coverage for both past and
future environmental spending. The company settled with several of its
insurance carriers and recorded income before tax for approximately $1
9
million and $22 million for the nine months ended September 30, 2000 and 1999,
respectively.
In addition to accrued environmental liabilities, the company has reasonably
possible loss contingencies related to environmental matters of
approximately $93 million and $110 million at September 30, 2000 and
December 31, 1999, respectively. Further, the company has identified other
sites, including its larger manufacturing facilities, where additional
future environmental remediation may be required, but these loss
contingencies cannot reasonably be estimated at this time. These matters
involve significant unresolved issues, including the number of parties found
liable at each site and their ability to pay, the outcome of negotiations
with regulatory authorities, the alternative methods of remediation and the
range of costs associated with those alternatives. The company believes
that these matters, when ultimately resolved, which may be over an extended
period of time, will not have a material adverse effect on the consolidated
financial position or consolidated cash flows of the company, but could have
a material adverse effect on consolidated results of operations or cash
flows in any given period.
LEGAL
There are pending lawsuits filed against Morton related to asbestos
exposure at a facility in Weeks Island, Louisiana with additional
lawsuits expected. The company expects that most of these cases will be
dismissed because they are barred under worker's compensation laws; but
cases involving asbestos-caused malignancies will not be barred under
Louisiana law. Subsequent to the acquisition, the company commissioned
medical studies to estimate possible future claims. Accruals were
recorded at June 30, 2000 as part of the allocation of the purchase price
of Morton based on the results of these studies.
The company and its subsidiaries are parties to other litigation arising
out of the ordinary conduct of its business. Where appropriate, the company
reserves for such items, including certain product liability claims as part
of the allocation of the purchase price of Morton. Recognizing the amounts
reserved and the uncertainty of the ultimate outcomes, it is the company's
opinion that the resolution of all pending lawsuits, investigations and
claims will not have a material adverse effect, individually or in the
aggregate, upon the results of operations or the consolidated financial
position of the company.
OTHER
In the ordinary course of business, the company has entered into certain
purchase commitments, has guaranteed certain loans (with recourse to the
issuer), and has made certain financial guarantees, primarily for the
benefit of its non-U.S. and unconsolidated subsidiaries and affiliates.
It is believed that these commitments and any liabilities which may
result from these guarantees will not have a material adverse effect
upon the consolidated financial position of the company.
(C) INVENTORIES
Inventories consisted of:
(millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
-------- -------- --------
Finished products and work in process $760 $707 $696
Raw materials and supplies 210 192 188
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Total inventories $970 $899 $884
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(D) COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
(millions of dollars)
Quarter Ended Nine Months Ended
Sept. 30, Sept. 30,
------------- -----------------
2000 1999 2000 1999
----- ----- ------ ------
Net earnings $84 $58 $284 $159
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment (1) 31 15 20
----- ----- ----- ------
Comprehensive income $83 $89 $299 $179
----- ----- ----- ------
(E) TREASURY SHARES
The number of common treasury shares were:
September 30, 2000 22,397,780
December 31, 1999 23,097,178
September 30, 1999 23,256,038
(F) EARNINGS PER SHARE
The differences in common shares outstanding used in the calculations of
basic and diluted earnings per common share for the quarter and the nine
month period ended September 30, 2000 and 1999 are primarily due to the
effect of stock options as shown in the reconciliation below:
Quarter Ended Nine Months Ended
-------------------------------- ------------------------------------
Per-Share Per-Share
Earnings Shares Amount Earnings Shares Amount
-------------------------------- ------------------------------------
(millions) (thousands) (millions) (thousands)
2000
- ----
Net earnings available to
common shareholders $ 84 219,658 $ 0.38 $ 284 219,443 $ 1.29
Dilutive effect of options - 171 - 1,251
------------------- ----------------------
Diluted earnings per share $ 84 219,829 $ 0.38 $ 284 220,694 $ 1.29
1999
- ----
Net earnings available to
common shareholders $ 58 217,319 $ 0.27 $ 157 184,683 $ 0.85
Effect of convertible
preferred stock - - 2 -
Effect of accelerated
stock repurchase program (1) - 1,683 - 1,683
Dilutive effect of options - 2,088 - 1,907
------------------- ----------------------
Diluted earnings per share $ 58 221,090 $ 0.26 $ 159 188,273 $ 0.84
- ---------------------
(1) The "Effect of accelerated stock repurchase program" in 1999 results from
the dilutive effect of an obligation to a third party associated with the
repurchase program. This obligation was outstanding for most of 1999.
(G) SEGMENT INFORMATION
For the company's segment information, see the "Net Sales by Business
Segment and Region" and "Net Earnings by Business Segment" tables within
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 11 and 12.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements for the year ended December 31, 1999 and Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the company's 1999 annual report on Form 10-K.
Within the following discussion, unless otherwise stated, "quarter" and "nine
month period" refer to the third quarter of 2000 and the nine months ended
September 30, 2000. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.
In January 1999, the company acquired LeaRonal, Inc. (LeaRonal), an
electronic materials business and, on June 21, 1999, the company acquired
Morton International, Inc. (Morton), a specialty chemicals producer (see
details of these transactions in the "Notes to Consolidated Financial
Statements" under "Note(A) Acquisitions and Divestitures" above). The
results of LeaRonal and Morton have been included in the consolidated
financial statements from the acquisition dates. In addition, unaudited pro
forma information is presented for comparison purposes.
NET SALES BY BUSINESS SEGMENT AND REGION
- ----------------------------------------------------------------------------
(millions of dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
--------------- --------------------------
Pro Forma
2000 1999 2000 1999 1999 (1)
--------------- --------------------------
BUSINESS SEGMENT
Performance Polymers $ 862 $ 899 $2,653 $2,082 $2,694
Chemical Specialties 333 305 1,071 898 1,024
Electronic Materials 322 210 868 501 613
Salt 160 163 578 180 625
------ ------ ------ ------ ------
Total $1,677 $1,577 $5,170 $3,661 $4,956
------ ------ ------ ------ ------
REGION
North America $ 967 $ 936 $3,025 $2,079 $2,966
Europe 380 399 1,250 933 1,313
Asia-Pacific 241 162 655 447 468
Latin America 89 80 240 202 209
------ ------ ------ ------ ------
Total $1,677 $1,577 $5,170 $3,661 $4,956
------ ------ ------ ------ ------
12
NET EARNINGS BY BUSINESS SEGMENT (1)
- ----------------------------------------------------------------
(millions of dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
2000 1999 2000 1999
-------------- -----------------
BUSINESS SEGMENT
Performance Polymers $ 66 $ 92 $ 237 $ 262
Chemical Specialties 27 21 97 90
Electronic Materials 29 12 77 31
Salt (2) - 10 (1)
Corporate (2) (36) (67) (137) (223)
------ ------ ------- -------
Total $ 84 $ 58 $ 284 $ 159
------ ------ ------- -------
NET EARNINGS BY BUSINESS SEGMENT, EXCLUDING NON-RECURRING ITEMS (1)
- -------------------------------------------------------------------
(millions of dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------- ------------------------
Pro Forma
2000 1999 2000 1999 1999 (3)
---------------- ------------------------
BUSINESS SEGMENT
Performance Polymers $ 66 $100 $233 $267 $303
Chemical Specialties 27 28 110 98 112
Electronic Materials 29 14 79 40 35
Salt (2) 1 9 1 27
Corporate (36) (54) (120) (97) (190)
------ ------ ------ ------ ------
Total $ 84 $ 89 $311 $309 $287
------ ------ ------ ------ ------
(1) Segment earnings reflect after-tax operating results, including
acquisition-related amortization of goodwill and other intangible assets
and provision for restructuring.
(2) Corporate includes non-operating items such as interest income and
expense, corporate governance costs, and corporate exploratory
research. In the nine months ended September 30, 2000 and 1999, it
includes a charge of $13 million for Rodel and $105 million for Morton
for purchased in-process research and development associated with these
acquisitions respectively.
(3) Pro forma results include adjustments for the Morton acquisition (June
1999) and the LeaRonal acquisition (January 1999) as if they had occurred
as of January 1, 1999.
13
RESULTS OF OPERATIONS
THIRD QUARTER 2000 VERSUS THIRD QUARTER 1999
Sales for the company were $1,677 million in the quarter, an increase of 6%
over sales of $1,577 million in the prior year period. Earnings for the
quarter were $84 million compared to $58 million in the prior year quarter.
Excluding non-recurring items, earnings for the 1999 period were $89 million.
Diluted earnings per common share was $.38 for the quarter.
Non-recurring items recorded during the third quarter of 1999 of $31 million
(after-tax) included $7 million of one-time charges related primarily to the
Morton acquisition, a $19 million provision for restructuring and $5 million
of integration costs.
Performance Polymers quarterly earnings, excluding non-recurring items,
decreased to $66 million from $100 million in the prior period. Sales were
$862 million in the quarter compared to $899 million in 1999. Earnings
declined due to higher raw material and natural gas-related energy costs, up
almost 70% from the prior year period. Sales for the quarter were impacted
by an economic slowing in the U.S. building, construction and automotive
markets despite an overall volume growth of 4% over the same period of the
prior year.
Despite an overall decline in sales for Performance Polymers, the Monomers
business within the business segment experienced significant growth as a
result of the acquired Stockhausen merchant monomer business. Excluding sales
related to the divested Thermoplastic Polyurethane business, sales for the
Adhesives and Sealants business remained flat for the period due to a slowdown
in the U.S. label market in addition to a weaker Euro and supply difficulties.
Demand for Plastics Additives products decreased significantly in North
America during the quarter, although demand remained strong in Latin America
and Asia. Sales to Powder coatings continued to improve, particularly in
Europe, but were offset by weaker sales in Automotive Coatings.
Chemical Specialties earnings increased to $27 million in the third quarter
of 2000 from $21 million in the 1999 period. 1999 third quarter earnings,
excluding non-recurring items, were $28 million. Sales increased 9% to $333
million in the quarter from $305 million primarily as a result of strong
sales in the Consumer and Industrial Specialties business and contributions
from the acquired Acima business. The increase in sales in the Ion Exchange
Resins business was the result of on-going turnaround efforts and improved
market conditions. In addition, sales were up for the Agricultural
Chemicals business despite unfavorable weather conditions primarily in the
Asia Pacific region and unfavorable sociopolitical factors in Latin America.
Electronic Materials earnings of $29 million increased significantly from
reported earnings of $12 million in the 1999 period. Excluding non-recurring
items, earnings were $14 million in the 1999 period. Sales increased
significantly to $322 million from $210 million in the 1999 period. Increases
in earnings and sales were evident in all regions and markets within the
Electronic Materials segment due to continued demand for new technologies.
Increases in sales and earnings were also impacted by contributions from Rodel
and Shipley Ronal, particularly in Asia. Results of operations for Rodel were
consolidated during the second quarter of 2000, following the transactions that
increased the company's ownership to approximately 90%.
Salt reported losses of $2 million in the quarter compared to prior period
pro forma earnings, excluding non-recurring items, of $1 million. Sales of
$160 million for the quarter were comparable to prior quarter sales of $163
million. The company sold its European salt business in the fourth quarter
of 2000 (see details of this transaction in the "Notes to Consolidated
Financial Statements" under "Note (A) Acquisitions and Divestitures").
The quarter's gross profit margin was 33%, down from 35% in the prior
14
year period. The change in gross profit margin is primarily the result of
an increase in hydrocarbon-based raw material prices, which were more than
70% higher in the third quarter of 2000 compared to the same period of the
prior year. Higher energy costs, primarily due to natural gas prices and
increased freight charges driven by higher fuel prices, also contributed to
the change in gross profit margin. The company expects energy costs to
continue to increase through the fourth quarter of 2000 while raw material
costs are not expected to decrease significantly through this same period.
Selling, administrative and research expenses decreased to 19% of net sales
for the quarter from 20% in the 1999 period due to savings from acquisition
integration and on-going efforts to control internal costs to help offset the
impact of higher raw material and energy costs discussed above.
Interest expense decreased to $59 million in 2000 from $66 million in 1999 due
to a decrease in debt balances. Amortization of goodwill and other
intangibles increased during the quarter to $40 million from $33 million in
1999 period, attributable to the company's acquisition activity during 2000.
Corporate expenses totaled $36 million in the quarter, compared to $67 million
in the previous period. The 1999 period included higher interest expense as a
result of financing the 1999 acquisitions. In addition, the corporate segment
benefited from integration and internal cost savings during the quarter
as mentioned above.
The effective tax rate for the third quarter of 2000 and 1999 remained level
at 40% and 41%, respectively.
NINE MONTHS 2000 VERSUS NINE MONTHS 1999
Sales for the company were $5,170 million in the first nine months of 2000
compared to sales of $3,661 million and pro forma sales of $4,956 million in
the prior year period. Earnings for the nine months were $284 million
compared to $159 million in the prior period. Excluding non-recurring items,
earnings were $311 million compared to $309 million and $287 million, on a
pro forma basis, for the same periods. Diluted earnings per common share was
$1.29 for the 2000 period.
Non-recurring items for the nine month 2000 period of $27 million (after-tax)
included $14 million of purchased in-process research and development charges
and other one-time charges related to the Rodel acquisition and $13 million of
restructuring and integration costs. 1999 non-recurring items of $150 million
included $112 million of purchased in-process research and development and
other charges related to the Morton and LeaRonal acquisitions, a $19 million
provision for restructuring, $14 million of charges resulting from the
disposition of joint ventures, $13 million gain related to a favorable
settlement with insurance carriers over certain environmental remediation
matters, $10 million of integration and restructuring costs, and $8 million of
asset write-downs and other charges in the Electronic Materials business
segment.
Performance Polymers nine month earnings were $237 million compared to prior
period earnings of $262 million. Excluding non-recurring items, earnings were
$233 million compared to $267 million and $303 million, on a pro forma basis,
in the nine month period of 1999. Sales increased to $2,653 million from
$2,082 million in 1999 and were flat with 1999 pro forma sales of $2,694
million. Earnings declined due to continued higher raw material and natural
gas-related energy costs particularly in the third quarter. Sales in 2000
were impacted by an economic slowing in the U.S. building, construction
15
and automotive markets in addition to weaker European currencies. The Monomer
business continued to report strong growth in the nine month period of 2000 as
a result of the acquired Stockhausen merchant monomer business but was offset
by a decrease in demand for Plastics Additives products, particularly in
North America. Sales of Powder Coatings, on a pro forma basis, continued to
improve but were offset by weaker sales in Automotive Coatings.
Chemical Specialties earnings increased to $97 million for the nine month
period from earnings of $90 million for the 1999 period. Earnings,
excluding non-recurring items, were $110 million, increasing from prior
period earnings of $98 million and largely unchanged from 1999 pro forma
earnings of $112 million. Sales increased to $1,071 million from sales of
$898 million in the prior period and pro forma sales of $1,024 million.
Sales increases were driven by Consumer and Industrial Specialties with
contributions from Ion Exchange Resins and the acquired Acima business.
These increases were offset by a decline in Agricultural Chemicals sales due
to unfavorable weather conditions in several regions.
Electronic Materials earnings were $77 million versus $31 million in the prior
nine month period. Excluding non-recurring items, earnings were $79 million
and increased significantly from $40 million and pro forma amounts of $35
million in the 1999 period. Sales of $868 million increased considerably from
prior period sales of $501 million and pro forma 1999 sales of $613 million.
Increases in sales and earnings were evident in all regions and markets within
the Electronic Materials segment due to continued demand for new technologies
and contributions from Rodel and Shipley Ronal. Results of operations for
Rodel were consolidated during the second quarter of 2000, following the
transactions that increased the company's ownership to approximately 90%.
Salt earnings for the nine month period were $10 million compared to 1999
losses of $1 million. Excluding non-recurring items, earnings were $9 million
for the 2000 period compared to $1 million and $27 million, on a pro forma
basis, for the 1999 period. Sales decreased to $578 million in the period
from 1999 pro forma sales of $625 million. The change in sales and earnings
from the 1999 period to the 2000 period was largely attributable to the impact
of a mild winter at the beginning of the year on ice control salt sales in
contrast with a more severe winter in 1999.
Corporate expenses totaled $137 million in the nine months of 2000, compared
to $223 million in the same period of the prior year. The 2000 and 1999
periods included charges of $13 million for Rodel and $105 million for Morton,
respectively, for in-process research and development related to these
acquisitions.
Gross profit margin was 34%, down from 38% from the prior nine month period.
The change in gross profit margin is primarily the result of increased
hydrocarbon-based raw material prices in addition to higher energy costs in
the form of higher natural gas prices in the third quarter and increased
freight costs due to higher fuel prices. To a lesser extent, former Morton
businesses operating at lower margins than most legacy Rohm and Haas
businesses and higher depreciation resulting from fair values being assigned
to acquired assets also contributed to the change in gross profit margin. The
impact of increased raw material prices is primarily in the Performance
Polymers business segment. The extent to which these prices will continue to
rise is uncertain, but the company has assumed that costs will remain elevated
through the end of the year. The company is responding by actively pursuing
increases in selling prices.
Selling, administrative and research (SAR) expenses decreased to 19% of net
sales for the nine months ended September 30, 2000 from 20% on a pro forma
basis for the same period of 1999. In 1999, the company began implementing a
planned redesign of its selling and administrative infrastructure and
16
instituted other cost saving measures associated with the integration of the
Morton and LeaRonal acquisitions. The stated goal of these efforts was to
reduce annual procurement, SAR and other expenses by $300 million. Through
September 30, 2000, the $300 million run rate goal had been achieved through
cost reductions in support services, procurement and manufacturing.
Interest expense increased to $181 million in 2000 from $95 million in 1999
due to higher debt levels resulting from acquisitions. Amortization of
goodwill and other intangibles also increased significantly during the period
to $120 million from $40 million in the 1999 period, attributable to
acquisitions.
Other income was $24 million for the 2000 period compared to $1 million in
1999. The increase in the 2000 period was largely from foreign currency
gains. The 1999 period includes Morton integration costs offset by a gain
related to a favorable settlement with insurance carriers over certain
environmental remediation matters. The $22 million loss on disposition of
joint venture recorded in the 1999 period reflects the pre-tax settlement
related to the 1998 sale of AtoHaas.
The effective tax rate for the nine months ended September 30, 2000 and 1999
was 38% and 50%, respectively. The effective tax rate excluding the non-tax
deductible purchased in-process research and development charges was 37% and
38% for the respective nine month periods. The rates for both nine month
periods also reflect the effect of certain non-tax deductible amortization
charges resulting from the company's acquisition activities during those
periods.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
Net cash in-flows during the nine months ended September 30, 2000 and 1999
resulted in net increases in cash and cash equivalents of $7 million and $67
million, respectively. Both years included acquisition, divestiture and
financing activities having a significant effect on the company's cash flows.
Such activities are discussed at length in the "Notes to Consolidated
Financial Statements" under "Note(A) Acquisitions and Divestitures" above.
Free cash flows for the nine month period in 2000 versus 1999 were as follows
(in millions):
Nine Months Ended
September 30,
--------------------
2000 1999
------- -------
Cash provided by operating activities $ 501 $ 521
Capital additions (226) (198)
Dividends (125) (100)
------- -------
Free cash flow $ 150 $ 223
------- -------
Fixed asset additions during the nine months ended September 30, 2000 included
an Acrylic Acid plant expansion in Houston, a Dithane plant expansion in China
and an Emulsion plant expansion in Argentina in addition to on-going
investments related to general support of manufacturing facilities. Capital
spending for the full year of 2000 is expected to be approximately $400
million.
The debt ratio was 50% at the end of the quarter, compared with 52% at
year-end 1999. (The debt ratio is total debt, net of cash, divided by the
sum of net debt, minority interest, stockholders' equity and ESOP shares.)
The reduction in debt during 2000 was primarily accomplished by the use of
cash flows from operations and the net proceeds of divested businesses.
17
The company expects estimated working capital requirements and capital
expenditures will be largely funded by cash from operations and through the
company's credit facilities.
On October 19, 2000 the board of directors approved a quarterly dividend on
common shares of 20 cents per common share payable December 1, 2000 to
stockholders of record on November 3, 2000.
ENVIRONMENTAL
There is a risk of environmental damage in chemical manufacturing operations.
The company's environmental policies and practices are designed to ensure
compliance with existing laws and regulations and to minimize the possibility
of significant environmental damage. Following the 1999 acquisitions of
Morton and LeaRonal, the company began a process at acquired facilities to
ensure company-wide uniformity in such policies and practices.
In Wood-Ridge, New Jersey, the company and Velsicol Chemical Corporation
("Velsicol") have been held jointly and severally liable for the cost of
remediation necessary to correct mercury-related environmental problems
associated with a mercury processing plant on the site prior to its
acquisition by Morton. At the date of acquisition Morton had disclosed and
accrued for certain ongoing studies, which were expected to be completed by
the end of 2000, with regulatory decisions expected in 2001. In its
allocation of the purchase price of Morton, the company accrued for additional
study costs at December 31, 1999 and additional remediation costs in the first
quarter of 2000 based on the progress of the technical studies. A separate
study of the contamination in Berry's Creek, which runs near the plant site,
and of the surrounding wetlands area is expected, but on a timetable yet to be
determined; therefore, the estimated costs of remediation that may result from
this separate study have not been considered in the allocation of the Morton
purchase price. The company's ultimate exposure will also depend upon the
continued ability of Velsicol and its indemnitor, Fruit of the Loom, Inc.,
which has filed for protection under the bankruptcy laws, to contribute to the
cost of remediation and on the results of attempts to obtain contributions
from others believed to share responsibility. A cost recovery action against
these responsible parties is pending in federal court. Settlements have been
reached with some defendants for claims considered de minimis associated with
the Wood-Ridge plant site. Where appropriate, the analysis to determine the
company's liability, if any, with respect to remedial costs at the above sites
reflects an assessment of the likelihood and extent of participation of other
potentially responsible parties.
During 1996, the EPA notified Morton of possible irregularities in water
discharge monitoring reports filed by the Moss Point, Mississippi plant in
early 1995. Morton investigated and identified other environmental issues at
the plant. Though at the date of acquisition Morton had accrued for some
remediation and legal costs, the company revised these accruals as part of the
allocation of the purchase price of Morton based on its discussions with the
authorities and on the information available as of June 30, 2000. On October
26, 2000 the company announced that it reached agreement with the EPA, the
Department of Justice and the State of Mississippi, resolving these historic
environmental issues, subject to court approval. The settlement includes
payment of $20 million in civil penalties, $2 million in criminal penalties
and $16 million in various Supplemental Environmental Projects (SEPs). The
accruals established for this matter were sufficient to cover these and
other related costs of the settlement.
The amount charged to earnings before tax for environmental remediation was $6
million and $10 million for the nine months ended September 30, 2000 and 1999,
respectively. Remediation-related reserves were $190 million and $201 million
at September 30, 2000 and December 31, 1999, respectively, and are recorded as
"other liabilities" (current and long-term). These reserves
18
include amounts resulting from the allocation of the purchase price of
Morton. The company is pursuing lawsuits over insurance coverage for
environmental liabilities. It is the company's practice to reflect
environmental insurance recoveries in results of operations for the quarter
in which the litigation is resolved through settlement or other appropriate
legal process. Resolutions typically resolve coverage for both past and
future environmental spending. The company settled with several of its
insurance carriers and recorded income before tax for approximately $1
million and $22 million for the nine months ended September 30, 2000 and 1999,
respectively.
In addition to accrued environmental liabilities, the company has reasonably
possible loss contingencies related to environmental matters of approximately
$93 million and $110 million at September 30, 2000 and December 31, 1999,
respectively. Further, the company has identified other sites, including its
larger manufacturing facilities, where additional future environmental
remediation may be required, but these loss contingencies cannot reasonably be
estimated at this time. These matters involve significant unresolved issues,
including the number of parties found liable at each site and their ability to
pay, the outcome of negotiations with regulatory authorities, the alternative
methods of remediation and the range of costs associated with those
alternatives. The company believes that these matters, when ultimately
resolved, which may be over an extended period of time, will not have a
material adverse effect on the consolidated financial position or consolidated
cash flows of the company, but could have a material adverse effect on
consolidated results of operations or cash flows in any given period.
LEGAL
There are pending lawsuits filed against Morton related to asbestos exposure
at a facility in Weeks Island, Louisiana with additional lawsuits expected.
The company expects that most of these cases will be dismissed because they
are barred under worker's compensation laws; but cases involving
asbestos-caused malignancies will not be barred under Louisiana law.
Subsequent to the acquisition, the company commissioned medical studies to
estimate possible future claims. Accruals were recorded at June 30, 2000 as
part of the allocation of the purchase price of Morton based on the results of
these studies.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, which addresses principles of revenue
recognition. In October of 2000, the Emerging Issues Task Force (EITF) of
the FASB reached consensus on EITF 00-10 "Accounting for Shipping and
Handling Fees and Costs" and EITF 00-14 "Accounting for Certain Sales
Incentives." Effective for the fourth quarter of 2000, this new accounting
guidance relates primarily to the classification of certain costs in the
company's statement of consolidated earnings. The company is currently
evaluating the impact that SAB No. 101 and EITFs 00-10 and 00-14 will have
on its financial statements and revenue recognition policies and procedures,
if any.
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes a new model for the accounting and reporting of derivative and
hedging transactions. The statement amends a number of existing standards
and, as amended by SFAS No. 138, is scheduled to be effective for fiscal
years beginning after June 15, 2000. The company will adopt this standard
as of January 1, 2001, as required, and has established a task force which
is evaluating the potential impact of foreign currency, interest rate,
commodity and any embedded derivatives on its financial position or
results of operations. Because of continual business-driven changes to its
derivatives and hedging programs, its impact has not been fully assessed.
On March 31, 2000 the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation" -- an interpretation
of APB Opinion No. 25 (FIN 44) which generally applies prospectively to new
awards,
19
exchanges of awards in a business combination, modifications to outstanding
awards, and changes in grantee status that occur on or after July 1, 2000,
except for the provision related to repricings and the definition of an
employee which apply to awards issued after December 15, 1998. To the extent
that events covered by FIN 44 occur after the applicable date but prior to
July 1, 2000, the effect of applying FIN 44 shall be recognized on a
prospective basis. Accordingly, no adjustment shall be made upon initial
application of FIN 44 to financial statements for periods prior to July 1,
2000.
This report includes forward-looking statements, reflecting management's
current expectations, based on reasonable assumptions. Results could differ
materially depending on such factors as changes in business climate, economic
and competitive uncertainties, the company's ability to integrate Morton and
LeaRonal in addition to other future acquisitions, changes in strategies,
risks in developing new products and technologies, interest rates,
environmental and safety regulations and clean-up costs and foreign exchange
rates. As appropriate, additional factors are contained in the company's 1999
Form 10-K report filed with the Securities and Exchange Commission on March
27, 2000.
20
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Management's discussion of market risk is incorporated herein
by reference to Item 7a of the Form 10-K for the year ended
December 31, 1999, filed with the Securities and Exchange
Commission on March 27, 2000.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS (See pages 7 through 9)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit (27) Financial Data Schedule
(b) Reports filed on Form 8-K during the quarter ended
September 30, 2000:
None.
21
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.
DATE: November 8, 2000 ROHM AND HAAS COMPANY
--------------- (Registrant)
BRADLEY J. BELL
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
22
EXHIBIT INDEX
(Pursuant to Part 232.102(d) of Regulation S-T)
Exhibit
No. Description
- -------- ------------------------------------------------------------
(27) Financial Data Schedule