EXHIBIT 20
COPY OF QUARTERLY REPORT TO STOCKHOLDERS
ROHM AND HAAS COMPANY
FIRST QUARTER 1998
ID: COVER GRAPHIC
FINANCIAL HIGHLIGHTS (Millions of dollars, except earnings per share)
- ---------------------------------------------------------------------
First Quarter
------------------------------
Percent
1998 1997 Change
------------------------------
Net sales $ 937 $ 986 (5)
Net earnings 109 104 5
Net earnings per common share
- Basic $1.76 $1.62 9
- Diluted $1.73 $1.59 9
- ---------------------------------------------------------------------
SALES BY BUSINESS GROUP
Millions of dollars
- ---------------------------------------------------
PERFORMANCE POLYMERS $618
CHEMICAL SPECIALTIES $219 [PIE CHART]
ELECTRONIC MATERIALS $100
SALES BY CUSTOMER LOCATION
Millions of dollars
- ---------------------------------------------------
NORTH AMERICA $511
[PIE CHART] EUROPE $260
ASIA-PACIFIC $109
LATIN AMERICA $ 57
=======================
== CHAIRMAN'S LETTER ==
=======================
Rohm and Haas's strong first quarter performance is testimony to our
ability to overcome a variety of difficult external business conditions.
In the Asia-Pacific region, the economies and currencies weakened even
more than we had expected. In Europe, currencies were also a negative
factor. In Europe, Asia and Latin America, sales of our Agricultural
Chemicals were down somewhat.
Yet Rohm and Haas's solid fundamentals kept volume and our earnings per
share moving in the right direction.
Our gross profit margin for the first quarter of 1998 was 40%, the
highest ever. That's proof that we are making steady progress on two
fronts:
o We continue our emphasis on those regions and markets where we can add
the most value for customers and shareholders alike.
o We are doing a good job of keeping unnecessary costs out of our
operations. That commitment is just as important as our focus on the
right products and markets.
Our margins also reflect lower prices for raw materials, which are down
roughly 5%. Raw material costs should remain a favorable factor into
next year, though it's too soon to know how much, and for how long.
Perhaps the most uncertain variable in our company's outlook is the
continuing economic turmoil in the Asia-Pacific region. But enough good
things are happening elsewhere that we do not need a recovery in Asia to
turn in a solid performance for the year.
/s/ J. LAWRENCE WILSON
J. Lawrence Wilson
May 12, 1998
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== MANAGEMENT DISCUSSION AND ANALYSIS ==
========================================
FIRST QUARTER 1998 VERSUS
FIRST QUARTER 1997
Earnings increased 5% in the first quarter of 1998 to $109 million from
$104 million in the first quarter of 1997. Diluted earnings per common
share were $1.73 compared to $1.59 in the 1997 period. AtoHaas sales
were excluded from first quarter 1998 results of operations while
NorsoHaas and China results were consolidated. The sale of the interest
in AtoHaas, the purchase of the remaining 50% of NorsoHaas, already
50%-owned, and the consolidation of China were substantially completed
in April 1998, effective January 1, 1998. On a comparable basis, volume
increased 2%, sales decreased 1% and earnings increased 11%. The sales
decrease on higher volume is primarily a result of weaker European and
Asia-Pacific currencies. Strong European volume and a good performance
in North America helped the company overcome poor business conditions in
the Asia-Pacific region where volume and sales decreased 4% and 18%,
respectively. Earnings increased as a result of higher overall volume,
lower raw material costs and smooth plant operations. The increase in
earnings per share also reflects the impact of the company's stock
repurchase program.
In the first quarter of 1998, the company changed its financial
reporting structure. Rohm and Haas will now report by three business
segments to better reflect its technical strengths and focus on key
markets: Performance Polymers, consisting of the Polymers and Resins,
Monomers, Formulation Chemicals and Plastics Additives businesses;
Chemical Specialties, consisting of the Agricultural Chemicals, Ion
Exchange and Biocides businesses; and Electronic Materials, consisting
of Shipley and Rodel, Inc., an affiliate. The 1997 presentation of
sales and earnings has been restated to reflect these changes. In the
restatement, 1997 results of AtoHaas are reported under Performance
Polymers, while RohMax results are reported in the segment for both 1997
and 1998. The sale of RohMax is expected to be completed during the
second quarter of 1998.
Performance Polymers earnings were $83 million, up 6% compared to the
prior year. Sales were down 7% to $618 million from $668 million in
1997, largely as a result of the absence of AtoHaas. On a comparable
basis, excluding the effect of AtoHaas, NorsoHaas and China results
(consolidated in 1998), volume increased 2% and sales decreased 2%,
while earnings increased 14%. The sales decrease on higher volume is
primarily a result of unfavorable currencies in Europe and Asia-Pacific.
This affected the Polymers and Resins business in particular where,
despite higher volume, sales were flat. In Asia-Pacific, volume and
sales were down, reflecting generally unfavorable economic conditions in
the region. The earnings increase, despite weaker currencies in Europe
and Asia-Pacific, is a result of higher volume in Polymers and Resins in
North America, lower raw material prices and improved margins in
Plastics Additives.
Chemical Specialties earnings of $29 million for the first quarter of
1998 were up slightly versus the prior-year period. Volume decreased
2% and sales were down 4%. The volume and sales decreases are primarily
a result of lower volume and sales in the Agri-
2
cultural Chemicals business caused by lower demand for Dithane and the
impact of weaker currencies in Europe and Asia-Pacific. These factors
also affected earnings negatively. The Ion Exchange Resins business
improved earnings with strong volume increases in key markets, including
Europe. Biocides also contributed to earnings as a result of improved
plant operations versus the first quarter of 1997.
Electronic Materials earnings of $13 million were up 8% from the 1997
period. Sales increased 10% and volume increased 7%. The increase in
sales is the result of higher volume for Shipley Company in North
America and Europe. Asia-Pacific sales were flat, while earnings were
down slightly. This reflects the negative impact of the weakened
economies in that region. Earnings were driven largely by sales growth,
but also reflect the contribution of Rodel, Inc., an affiliate that was
26%-owned at quarter end. In early April 1998 the company purchased an
additional 5% interest in this affiliate.
Corporate expenses totaled $16 million in 1998, compared to $14 million
in last year's first quarter, in part due to higher exploratory research
expense.
On a comparable basis, sales decreased 1%. The first quarter gross
profit margin of 40% was up from 37% in the prior-year period,
benefiting from higher production volume, smooth plant operations and 5%
lower raw material costs. Selling prices were flat but currency
fluctuations were unfavorable.
Selling, administrative and research (SAR) expenses increased slightly
for the quarter versus the 1997 period and reflected the net effect of
higher research expense and lower selling and administrative expense due
to the absence of AtoHaas costs. Interest expense was flat, while
affiliate earnings were $2 million compared to 1997 earnings of $3
million. The prior year includes affiliate earnings of AtoHaas Europe.
The effective tax rate for the first quarter of 1998 was 34%, up
slightly from 33% for the first quarter of 1997.
LIQUIDITY, CAPITAL RESOURCES
AND OTHER FINANCIAL DATA
Cash provided by operating activities during the first quarter decreased
versus the prior year primarily as a result of seasonal increases of $72
million in receivables, net and $10 million in inventories from
historically low 1997 year-end balances. Though not affecting cash
flows, other current assets increased $83 million from year-end and
include the net assets of AtoHaas, which have been deconsolidated in
accordance with the agreement to sell this business that was initiated
in January and signed in April 1998 effective January 1, 1998.
Free cash flows for the first quarter of 1998 versus the prior-year
period were as follows:
Quarter Ended
March 31,
---------------
1998 1997
---------------
Cash provided by
operating activities $ 35 $108
Capital additions (34) (58)
Dividends (31) (29)
---------------
Free cash flow $(30) $ 21
---------------
3
Fixed asset additions during the first three months of 1998 totaled
$34 million, compared to $58 million in the prior year. The decrease
reflects the absence of significant projects that were active during the
first quarter of 1997, such as the completion of capacity expansion in
Texas. Spending for the full year is expected to be in the same range
as total 1997 spending, or approximately $250 million, and will include
spending on emulsions capacity in Europe and Asia-Pacific, an Ion
Exchange Resins plant in China, further investment in the Electronic
Materials businesses and new monomers projects in Texas.
On May 4, 1998, the board of directors declared a regular quarterly
dividend of $.50 per common share and $.6875 per preferred share,
payable June 1, 1998, to stockholders of record on May 15, 1998 and,
at the annual meeting of stockholders, a resolution was approved to
increase the number of authorized shares of common stock from 100
million shares to 200 million shares.
The debt-to-capital ratio, calculated without the reduction to
stockholders' equity for the ESOP transaction, was 24% at the end of the
quarter, compared with 23% at year-end 1997. (Debt-to-capital is total
debt divided by the sum of total debt, minority interest, shareholders'
equity and ESOP shares.) During the 1998 quarter, the company
repurchased 285,000 shares of common stock at a cost of $27 million.
During the quarter, expense before tax of $5 million was recorded for
environmental remediation, compared to $2 million for the first quarter
of 1997. In the prior-year period, there were charges of $27 million
resulting largely from an unfavorable arbitration decision related to
the Woodland, New Jersey sites. These charges were offset by a
$25 million increase in insurance recoveries receivable resulting from
agreements reached during that quarter with certain insurance carriers.
The 1998 charge includes the aggregation of smaller environmental
accruals.
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
comprehensive income and its components. The company adopted this
standard in the first quarter of 1998. As permitted under the standard,
the company will present the components of comprehensive income in its
Statement of Consolidated Stockholders' Equity. Because this Statement
is not part of the company's required interim reporting, comprehensive
income is disclosed in a note to the financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" and SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." Both
standards establish guidance for disclosure in annual financial
statements. The company expects its business segment reporting under
SFAS No. 131 will be consistent with the changes in its financial
reporting structure incorporated in this quarter's report. The company
will adopt the disclosures prescribed by both statements in its 1998
annual report as required.
4
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== ROHM AND HAAS COMPANY AND SUBSIDIARIES ==
============================================
SALES BY BUSINESS GROUP AND CUSTOMER LOCATION (Millions of dollars)
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FIRST QUARTER 1998 AND 1997
- ------------------------------------------------------------------------------
Performance Chemical Electronic
Polymers Specialties Materials Total
----------- ----------- ---------- -----------
1998 1997* 1998 1997* 1998 1997* 1998 1997*
----------- ----------- ---------- -----------
North America $387 $424 $ 78 $ 71 $ 46 $40 $511 $535
Europe 157 154 79 84 24 21 260 259
Asia-Pacific 46 57 33 46 30 30 109 133
Latin America 28 33 29 26 -- -- 57 59
----------- ----------- ---------- -----------
Total $618 $668 $219 $227 $100 $91 $937 $986
----------- ----------- ---------- -----------
*Restated to reflect the 1998 change in financial reporting structure.
PHYSICAL VOLUME CHANGE
CURRENT QUARTER RELATIVE TO YEAR-EARLIER QUARTER
- -----------------------------------------------------------------------
Percent CUSTOMER Percent
BUSINESS GROUP Change LOCATION Change
- -----------------------------------------------------------------------
Performance Polymers 3 North America --
Chemical Specialties (2) Europe 17
Electronic Materials 7 Asia-Pacific (4)
Latin America (6)
- -----------------------------------------------------------------------
Worldwide 3 Worldwide 3
- -----------------------------------------------------------------------
5
NET EARNINGS BY BUSINESS GROUP AND CUSTOMER LOCATION
- -----------------------------------------------------------
Quarter Ended
March 31,
---------------------------
1998 1997*
---------------------------
BUSINESS GROUP (Millions of dollars)
---------------------------
Performance Polymers $ 83 $ 78
Chemical Specialties 29 28
Electronic Materials 13 12
Corporate (16) (14)
- -----------------------------------------------------------
Total $109 $104
- -----------------------------------------------------------
CUSTOMER LOCATION
North America $ 83 $ 67
Europe 31 30
Asia-Pacific 6 15
Latin America 5 6
Corporate (16) (14)
- -----------------------------------------------------------
Total $109 $104
- -----------------------------------------------------------
Corporate includes non-operating items such as interest income and
expense, corporate governance costs and corporate exploratory research.
*Restated to reflect the 1998 change in financial reporting structure.
ANALYSIS OF CHANGE IN BASIC PER-SHARE EARNINGS
CURRENT PERIOD RELATIVE TO YEAR-EARLIER PERIOD
- ------------------------------------------------------------
$/Share
GROSS PROFIT (after-tax)
-------------
Selling prices $ .01
Physical volume and product mix .07
Raw material costs .14
Other manufacturing costs .13
Currency effect on gross profit (.22)
- ------------------------------------------------------------
Increase in gross profit .13
- ------------------------------------------------------------
OTHER CAUSES
Selling, administrative and research expenses* (.03)
Share of affiliate earnings (.02)
Reduction in outstanding shares of common stock .06
- ------------------------------------------------------------
Increase from other causes .01
- ------------------------------------------------------------
Increase in basic per-share earnings $ .14
- ------------------------------------------------------------
*Amounts shown are on a U.S. dollar basis and include the impact of
currency movements compared to the prior-year period.
6
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED EARNINGS (Subject to Year-end Audit)
- --------------------------------------------------------------------
Quarter Ended March 31,
-------------------------
1998 1997
-------------------------
CURRENT EARNINGS (Millions of dollars)
-------------------------
Net sales $ 937 $ 986
Cost of goods sold 564 625
- --------------------------------------------------------------------
Gross profit 373 361
Selling and administrative expense 150 154
Research and development expense 52 45
Interest expense 10 10
Share of affiliate net earnings 2 3
Other income, net (3) --
- --------------------------------------------------------------------
Earnings before income taxes 166 155
Income taxes 57 51
- --------------------------------------------------------------------
NET EARNINGS $ 109 $ 104
Less preferred stock dividends 2 2
- --------------------------------------------------------------------
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 107 $ 102
- --------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE:
- Basic $ 1.76 $ 1.62
- Diluted 1.73 1.59
Common dividends $ .50 $ .45
Average number of common shares
outstanding (000's) 60,771 62,976
- --------------------------------------------------------------------
See notes to consolidated financial statements.
7
Rohm and Haas Company and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS (Subject to Year-end Audit)
- ------------------------------------------------------------------------
Quarter Ended March 31,
---------------------------
1998 1997
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Millions of dollars)
---------------------------
Net earnings $ 109 $ 104
Adjustments to reconcile net earnings
to cash provided by operating activities:
Depreciation 69 65
Deferred income taxes (8) (4)
Accounts receivable (110) (79)
Inventories (37) 11
Accounts payable and accrued liabilities (54) (61)
Income taxes payable 42 35
Other working capital changes, net 1 (3)
Other, net 23 40
- ------------------------------------------------------------------------
Net cash provided by operating activities 35 108
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and equipment (34) (58)
Dividends from (investments in) affiliates, net 9 --
- ------------------------------------------------------------------------
Net cash used by investing activities (25) (58)
- ------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 4 --
Purchases of treasury stock (27) (30)
Repayments of long-term debt (34) (1)
Net change in short-term borrowings 67 52
Payment of dividends (31) (29)
Other, net (4) (4)
- ------------------------------------------------------------------------
Net cash used by financing activities (25) 12
- ------------------------------------------------------------------------
Effect of exchange rate changes on cash -- --
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (15) $ 38
- ------------------------------------------------------------------------
See notes to consolidated financial statements.
8
Rohm and Haas Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Subject to Year-end Audit)
- -----------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1998 1997 1997
------------------------------------
ASSETS (Millions of dollars)
------------------------------------
Current assets:
Cash and cash equivalents $ 25 $ 40 $ 49
Receivables, net 827 755 920
Inventories (note d) 469 459 472
Prepaid expenses and other assets 226 143 125
- -----------------------------------------------------------------------------
Total current assets 1,547 1,397 1,566
- -----------------------------------------------------------------------------
Land, buildings and equipment 4,397 4,492 4,364
Less accumulated depreciation 2,468 2,484 2,317
- -----------------------------------------------------------------------------
Net land, buildings and equipment 1,929 2,008 2,047
- -----------------------------------------------------------------------------
Other assets 432 495 406
- -----------------------------------------------------------------------------
$3,908 $3,900 $4,019
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 134 $ 97 $ 196
Accounts payable and accrued
liabilities 594 669 606
Accrued income taxes 125 84 107
- -----------------------------------------------------------------------------
Total current liabilities 853 850 909
- -----------------------------------------------------------------------------
Long-term debt 514 509 559
Employee benefits 413 410 409
Other liabilities 266 334 371
Stockholders' equity:
$2.75 Cumulative convertible preferred
stock (note f) 123 126 129
Common stock: shares
issued -- 78,652,380 197 197 197
Additional paid-in capital 129 135 138
Retained earnings 2,404 2,325 2,111
- -----------------------------------------------------------------------------
2,853 2,783 2,575
Less: Treasury stock (note g) 837 820 646
Less: ESOP shares 136 138 144
Other comprehensive income (18) (28) (14)
- -----------------------------------------------------------------------------
Total stockholders' equity 1,862 1,797 1,771
- -----------------------------------------------------------------------------
$3,908 $3,900 $4,019
- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
(A) These interim financial statements are unaudited, but, 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 in the Statements of Cash Flows have been
restated 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, 1997.
(B) The company is a party in various government enforcement and private
actions associated with former waste disposal sites. The company is
also involved in potential remediations at some of its manufacturing
facilities. At March 31, 1998, the reserves for remediation were
$146 million, compared to $147 million at December 31, 1997.
Insurance recoveries receivable were $3 million at March 31, 1998
and $19 million at December 31, 1997, the change resulting largely
from collections in the quarter. The company is in the midst of
lawsuits over insurance coverage for environmental liabilities. It
is the company's practice to reflect environmental insurance
recoveries in the results of operations for the quarter in which
litigation is resolved through settlement or other appropriate legal
process. Recoveries typically determine coverage for both past and
future environmental spending. The amounts charged to earnings
before tax for environmental remediation, net of insurance, were
$5 million in the first quarter of 1998 and $2 million in the first
quarter of 1997. In the 1997 period, there were charges of
$27 million resulting largely from an unfavorable arbitration decision
related to the Woodland, New Jersey sites. These charges were
offset by a $25 million increase in insurance recoveries receivable
resulting from agreements reached during that quarter with certain
insurance carriers. The 1998 charge includes the aggregation of
smaller environmental accruals.
In addition to accrued environmental liabilities, the company has
reasonably possible loss contingencies relating to environmental
matters of approximately $65 million. The company has also
identified other sites, including its larger manufacturing
facilities in the United States, where future environmental
remediation expenditures may be required, but these expenditures are
not reasonably estimable at this time. The company believes that
these matters, when ultimately resolved, which may be over the next
decade, will not have a material adverse effect on the consolidated
financial position of the company, but could have a material adverse
effect on consolidated results of operations in any given year.
(C) The company and its subsidiaries are parties to litigation arising
out of the ordinary conduct of its business. The company is also
a subject of an investigation by U.S. Customs into the labeling of
some products imported into the U.S. from some of the company's
non-U.S. locations. Recognizing the amounts reserved for such items
and the uncertainty of the outcome, it is the company's opinion that
the resolution of all pending lawsuits and claims will not have a
material adverse effect, individually or in the aggregate, upon the
results of operations and the consolidated financial position of the
company.
10
(D) Inventories consist of:
(Millions of dollars)
MAR. 31, Dec. 31, Mar. 31,
1998 1997 1997
--------- -------- ---------
Finished products and
work in process $359 $352 $372
Raw materials and
supplies 110 107 100
---- ---- ----
Total inventories $469 $459 $472
---- ---- ----
(E) The components of first quarter 1998 comprehensive income are as
follows (millions of dollars):
Net income $109
Other comprehensive income,
net of tax: Foreign currency
translation adjustment (4)
----
Comprehensive income $105
----
(F) The number of preferred shares issued
and outstanding were:
March 31, 1998 2,465,614
December 31, 1997 2,522,926
March 31, 1997 2,579,842
(G) The number of common treasury shares were:
March 31, 1998 17,955,809
December 31, 1997 17,776,731
March 31, 1997 15,719,055
Dithane is a trademark of Rohm and Haas Company.
11
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ROHM AND HAAS
APPENDIX TO EXHIBIT 20
(Pursuant to Part 232.304(a) of Regulation S-T)
Graphic Description/Cross Reference
- ----------- ----------------------------------------------------------
Cover An illustration of a chemical molecule and words
"First Quarter 1998"
Pie Charts Description included in introduction to Exhibit 20
(not incorporated by reference)