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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-K/A
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AMENDMENT
NO. 1
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Mark
One
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x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2006
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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Commission
file number 1-496
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______________________________________________
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 |
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HERCULES
INCORPORATED
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A
DELAWARE CORPORATION
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I.R.S.
EMPLOYER IDENTIFICATION NO. 51-0023450
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HERCULES
PLAZA
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1313
NORTH MARKET STREET
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WILMINGTON,
DELAWARE 19894-0001
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TELEPHONE:
302-594-5000
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www.herc.com
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Securities
registered pursuant to Section 12(b) of the Act
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(Each
class is registered on the New York Stock Exchange,
Inc.)
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Title
of each class
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Common
Stock ($25/48
Stated Value)
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8%
Convertible Subordinated Debentures due August 15, 2010
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. Yes x
No
¨.
Indicate
by check mark if the registrant is not required to file reports
pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act.
Yes
¨
No
x.
Indicate
by check mark whether the Registrant (1) has filed all reports
required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934
during the preceding 12 months (or for such shorter period that
the
Registrant was required to file such reports), and (2) has been
subject to
such filing requirements for the past 90 days. Yes x
No
¨.
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the
best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any
amendment to this Form 10-K x
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition
of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨.
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes ¨
No
x .
The
aggregate market value of registrant's common stock, $25/48
stated value ("Common Stock") held by non-affiliates based on
the closing
price on the last business day of the Company's most recently
completed
second fiscal quarter, or June 30, 2006, was approximately $1.7
billion.
As
of February 23, 2007, the registrant had 116,417,693 shares of
Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement for its 2007 Annual
Meeting
of Shareholders (the "Proxy Statement"), when filed, will be
incorporated
by reference in Part III of this report.
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EXPLANATORY
NOTE
This
Amendment No. 1 to Hercules Incorporated's Annual Report on Form 10-K for the
year ended December 31, 2006 is being filed solely for the purpose of amending
Item 8 to correct a figure included in Note 13 to the Consolidated Financial
Statements. Specifically, the "$132.4 million" in the last
sentence in the third full paragraph on page 65 of the Form 10-K as
originally filed has been replaced with "$82 million". This change is
reflected on page 33 of this Form 10-K/A.
-2-
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND
REQUIRED
SUPPLEMENTARY DATA
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CONSOLIDATED
FINANCIAL
STATEMENTS
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Page
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4
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||||
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5
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8
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9
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||||
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10
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||||
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11
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||||
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12
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||||
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Notes
to the Consolidated Financial Statements:
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||||
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16
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||||
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16
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||||
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17
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||||
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18
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||||
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19
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||||
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19
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||||
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19
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||||
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20
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||||
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21
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||||
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23
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||||
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27
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||||
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27
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||||
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29
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||||
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39
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||||
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42
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||||
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42
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||||
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42
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||||
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43
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||||
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44
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||||
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48
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||||
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48
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||||
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48
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49
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49
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||||
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51
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||||
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51
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||||
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52
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||||
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54
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||||
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55
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||||
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64
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-3-
The
management of Hercules is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. Hercules’
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Because
of the inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Hercules’
management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework.
Based
on this assessment, management has concluded that, as of December 31, 2006,
the
Company's internal control over financial reporting was effective based on
those
criteria.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by BDO Seidman, LLP, the
Company’s independent registered public accounting firm, as stated in their
report, which appears herein.
/s/
Craig A. Rogerson /s/
Allen A. Spizzo
President
and Chief Executive Officer Vice
President and Chief Financial Officer
February
28, 2007
February
28, 2007
-4-
Board
of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We
have
audited the accompanying consolidated balance sheets of Hercules Incorporated
as
of December 31, 2006 and 2005 and the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity (deficit), and
cash flows for each of the two years in the period ended December 31, 2006.
Our
audits also included the financial statement schedule for the two years in
the
period ended December 31, 2006 as listed in Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and financial statement schedule. We believe that our audits provide
a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hercules Incorporated and
its subsidiaries at December 31, 2006 and 2005 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2006, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth
therein.
We
have
also audited the adjustments to the 2004 financial statements to retrospectively
apply the realignment of reporting segments as described in Note 1 and Note
27.
Also, we audited the adjustments to the 2004 financial statements to reclassify
the assets, liabilities and operating results of the terpenes specialties
business as a discontinued operation as described in Note 23. In our opinion,
such adjustments are appropriate and have been properly applied. We were not
engaged to audit, review, or apply any procedures to the 2004 financial
statements of the Company other than with respect to the adjustments and,
accordingly, we do not express an opinion or any other form of assurance of
the
2004 financial statements taken as a whole.
As
discussed in Note 24 to the consolidated financial statements, Hercules
Incorporated changed its method of accounting effective December 31, 2006 for
defined benefit pension and other postretirement plans as a result of adopting
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans”.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Hercules Incorporated’s
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our
report dated February 27, 2007 expressed an unqualified opinion
thereon.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
27, 2007
-5-
Report
of Independent Registered Public Accounting Firm
on
Internal Control over Financial Reporting
Board
of
Directors and Shareholders
Hercules
Incorporated
Wilmington,
Delaware
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Hercules Incorporated
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Hercules Incorporated’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Hercules Incorporated maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also in our
opinion, Hercules Incorporated maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
the
COSO criteria.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated balance sheets
of
Hercules Incorporated as of December 31, 2006 and 2005, and the related
consolidated statements of operations and comprehensive income (loss), changes
in stockholders equity (deficit) and cash flows for each of the two years in
the
period ended December 31, 2006 and our report dated February 27, 2007 expressed
an unqualified opinion.
/s/
BDO
Seidman, LLP
Bethesda,
Maryland
February
27, 2007
-6-
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of Hercules Incorporated:
In
our
opinion, the consolidated statements of income and comprehensive income, of
shareholders’ equity and of cash flows for the period ended December 31, 2004,
before the effects of the adjustments to retrospectively reflect discontinued
operations and the change in the composition of reportable segments described
in
Notes 23 and 27, respectively, present fairly, in all material respects, the
results of operations and cash flows of Hercules Incorporated and its
subsidiaries for period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America (the 2004
financial statements before the effects of the adjustments discussed in Notes
23
and 27 are not presented herein). In addition, in our opinion, the financial
statement schedule, for the period ended December 31, 2004 presents fairly,
in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit, before the effects of the adjustments described above,
of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
We
were
not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively reflect discontinued operations and the change in the
composition of reportable segments described in Notes 23 and 27, respectively,
and accordingly, we do not express an opinion or any other form of assurance
about whether such adjustments are appropriate and have been properly applied.
The audit of these adjustments was performed by other auditors.
/s/
PricewaterhouseCoopers LLP
Philadelphia,
Pennsylvania
March
16,
2005
-7-
|
Hercules
Incorporated
(Dollars
in millions, except per share data)
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
$
|
2,035.3
|
$
|
2,055.0
|
$
|
1,984.3
|
|||||
|
Cost
of sales
|
1,343.4
|
1,391.1
|
1,291.6
|
|||||||
|
Selling,
general and administrative expenses
|
372.2
|
382.5
|
382.1
|
|||||||
|
Research
and development
|
38.8
|
40.8
|
42.7
|
|||||||
|
Intangible
asset amortization (Note 7)
|
7.2
|
8.0
|
8.1
|
|||||||
|
Impairment
of FiberVisions goodwill (Note 3)
|
—
|
52.9
|
—
|
|||||||
|
Other
operating expense, net (Note 20)
|
25.1
|
39.4
|
26.9
|
|||||||
|
Profit
from operations
|
248.6
|
140.3
|
232.9
|
|||||||
|
Interest
and debt expense (Note 21)
|
71.2
|
89.4
|
108.7
|
|||||||
|
Vertac
litigation charges (Note 13)
|
108.5
|
15.0
|
—
|
|||||||
|
Gain
on sale of CP Kelco ApS (Note 3)
|
—
|
—
|
(27.0
|
)
|
||||||
|
65.7
|
71.3
|
116.7
|
||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
3.2
|
(35.4
|
)
|
34.5
|
||||||
|
(Benefit)
provision for income taxes (Note 9)
|
(192.2
|
)
|
(3.8
|
)
|
3.8
|
|||||
|
Income
(loss) before minority interests and equity loss (income)
|
195.4
|
(31.6
|
)
|
30.7
|
||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
(1.4
|
)
|
(1.0
|
)
|
(0.9
|
)
|
||||
|
Equity
(loss) income of affiliated companies, net of tax
|
(3.2
|
)
|
0.5
|
0.9
|
||||||
|
Net
income (loss) from continuing operations before discontinued
|
||||||||||
|
operations
and cumulative effect of changes in accounting principle
|
190.8
|
(32.1
|
)
|
30.7
|
||||||
|
Net
income (loss) from discontinued operations, net of tax (Note 23)
|
47.0
|
(6.5
|
)
|
(2.6
|
)
|
|||||
|
Net
income (loss) before cumulative effect of changes in accounting
principle
|
237.8
|
(38.6
|
)
|
28.1
|
||||||
|
Cumulative
effect of changes in accounting principle, net of tax (Note
24)
|
0.9
|
(2.5
|
)
|
—
|
||||||
|
Net
income (loss)
|
$
|
238.7
|
$
|
(41.1
|
)
|
$
|
28.1
|
|||
|
Earnings
(loss) per share (Note 26):
|
||||||||||
|
Basic
earnings (loss) per share
|
||||||||||
|
Continuing
operations
|
$
|
1.72
|
$
|
(0.30
|
)
|
$
|
0.28
|
|||
|
Discontinued
operations
|
0.42
|
(0.06
|
)
|
(0.02
|
)
|
|||||
|
Cumulative
effect of change in accounting principle
|
0.01
|
(0.02
|
)
|
—
|
||||||
|
Net
income (loss)
|
$
|
2.15
|
$
|
(0.38
|
)
|
$
|
0.26
|
|||
|
Weighted
average number of shares (millions)
|
110.8
|
108.7
|
107.3
|
|||||||
|
Diluted
earnings (loss) per share
|
||||||||||
|
Continuing
operations
|
$
|
1.71
|
$
|
(0.30
|
)
|
$
|
0.28
|
|||
|
Discontinued
operations
|
0.42
|
(0.06
|
)
|
(0.02
|
)
|
|||||
|
Cumulative
effect of change in accounting principle
|
0.01
|
(0.02
|
)
|
—
|
||||||
|
Net
income (loss)
|
$
|
2.14
|
$
|
(0.38
|
)
|
$
|
0.26
|
|||
|
Weighted
average number of shares (millions)
|
111.3
|
108.7
|
109.0
|
|||||||
|
Net
income (loss)
|
$
|
238.7
|
$
|
(41.1
|
)
|
$
|
28.1
|
|||
|
Foreign
currency translation
|
58.7
|
(72.1
|
)
|
71.1
|
||||||
|
Decrease
(increase) in additional minimum pension liability, net of tax,
due
to
|
||||||||||
|
Remeasurement
adjustments
|
85.0
|
(44.3
|
)
|
(28.2
|
)
|
|||||
|
Foreign
currency translation
|
(4.1
|
)
|
5.5
|
(1.4
|
)
|
|||||
|
Revaluation
of hedges, net of tax
|
(34.6
|
)
|
—
|
—
|
||||||
|
Other,
net of tax
|
(0.5
|
)
|
(0.3
|
)
|
—
|
|||||
|
Comprehensive
income (loss)
|
$
|
343.2
|
$
|
(152.3
|
)
|
$
|
69.6
|
|||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
-8-
|
Hercules
Incorporated
|
|||||||
|
(Dollars
in millions)
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
171.8
|
$
|
77.3
|
|||
|
Accounts
receivable, net (Note 5)
|
326.6
|
289.7
|
|||||
|
Inventories
(Note 6)
|
210.6
|
179.6
|
|||||
|
Deferred
income taxes (Note 9 )
|
70.2
|
39.3
|
|||||
|
FiberVisions
assets held for sale (Note 3)
|
—
|
202.7
|
|||||
|
Current
assets of discontinued operations (Note
23)
|
0.4
|
6.7
|
|||||
|
Income
taxes receivable (Note 9)
|
170.8
|
12.6
|
|||||
|
Other
current assets
|
34.1
|
35.5
|
|||||
|
Total
current assets
|
984.5
|
843.4
|
|||||
|
Property,
plant and equipment, net (Note 18)
|
600.4
|
535.4
|
|||||
|
Intangible
assets, net (Note 7)
|
143.1
|
142.8
|
|||||
|
Goodwill
(Note 7)
|
481.5
|
441.0
|
|||||
|
Deferred
income taxes (Note 9)
|
374.6
|
240.4
|
|||||
|
Asbestos-related
assets (Note 13)
|
87.5
|
120.7
|
|||||
|
Deferred
charges and other assets (Note 18)
|
136.9
|
245.1
|
|||||
|
Total
assets
|
$
|
2,808.5
|
$
|
2,568.8
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
205.3
|
$
|
172.9
|
|||
|
FiberVisions
liabilities held for sale (Note 3)
|
—
|
66.6
|
|||||
|
Asbestos-related
liabilities (Note 13)
|
36.4
|
36.4
|
|||||
|
Current
debt obligations (Note 8)
|
35.8
|
16.7
|
|||||
|
Vertac
litigation liability (Note 13)
|
123.5
|
—
|
|||||
|
Accrued
expenses (Note 18)
|
228.6
|
217.0
|
|||||
|
Current
liabilities of discontinued operations (Note
23)
|
—
|
2.8
|
|||||
|
Total
current liabilities
|
629.6
|
512.4
|
|||||
|
Long-term
debt (Note 8)
|
959.7
|
1,092.3
|
|||||
|
Deferred
income taxes (Note 9)
|
69.7
|
75.8
|
|||||
|
Pension
obligations (Note 10)
|
262.5
|
323.4
|
|||||
|
Other
postretirement benefit obligations (Note
10)
|
142.2
|
65.5
|
|||||
|
Deferred
credits and other liabilities (Note 18)
|
255.6
|
289.4
|
|||||
|
Asbestos-related
liabilities (Note 13)
|
233.6
|
233.6
|
|||||
|
Total
liabilities
|
2,552.9
|
2,592.4
|
|||||
|
Commitments
and contingencies (Note 13)
|
|||||||
|
Minority
interests
|
12.7
|
1.1
|
|||||
|
Stockholders'
equity (deficit)
|
|||||||
|
Series
preferred stock (Note 15)
|
—
|
—
|
|||||
|
Common
stock, $25/48 stated value (Note 16)
|
|||||||
|
(shares
issued: 2006 - 159,997,929 and 2005 - 159,984,444)
|
83.3
|
83.3
|
|||||
|
Additional
paid-in capital
|
454.9
|
548.9
|
|||||
|
Unearned
compensation (Notes 11)
|
(42.1
|
)
|
(65.7
|
)
|
|||
|
Accumulated
other comprehensive losses (Note 17)
|
(409.6
|
)
|
(387.6
|
)
|
|||
|
Retained
earnings
|
1,734.1
|
1,495.4
|
|||||
|
1,820.6
|
1,674.3
|
||||||
|
Reacquired
stock, at cost (shares: 2006 - 43,969,769 and 2005 -
47,247,344)
|
(1,577.7
|
)
|
(1,699.0
|
)
|
|||
|
Total
stockholders' equity (deficit)
|
242.9
|
(24.7
|
)
|
||||
|
Total
liabilities and stockholders' equity (deficit)
|
$
|
2,808.5
|
$
|
2,568.8
|
|||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
-9-
|
Hercules
Incorporated
(Dollars
in millions)
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
income (loss)
|
$
|
238.7
|
$
|
(41.1
|
)
|
$
|
28.1
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operations:
|
||||||||||
|
Depreciation
|
70.7
|
80.5
|
74.9
|
|||||||
|
Amortization
|
24.6
|
25.4
|
26.3
|
|||||||
|
Deferred
income tax provision
|
(157.8
|
)
|
(54.9
|
)
|
(18.7
|
)
|
||||
|
Gain
on disposals
|
(9.0
|
)
|
(11.8
|
)
|
(28.0
|
)
|
||||
|
Impairment
charges
|
3.2
|
58.6
|
9.1
|
|||||||
|
Write-off
of debt issuance costs
|
1.5
|
1.8
|
18.0
|
|||||||
|
Loss
on sale of 51% interest in FiberVisions
|
13.3
|
—
|
—
|
|||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
1.4
|
1.0
|
0.9
|
|||||||
|
Other
non-cash charges and credits
|
7.7
|
5.3
|
0.8
|
|||||||
|
Accruals
and deferrals of cash receipts and payments (net of acquisitions
and
dispositions):
|
||||||||||
|
Accounts
receivable, net
|
(17.5
|
)
|
2.9
|
(7.6
|
)
|
|||||
|
Inventories
|
(8.7
|
)
|
(3.3
|
)
|
4.0
|
|||||
|
Asbestos-related
assets and liabilities, net
|
37.1
|
61.3
|
40.2
|
|||||||
|
Other
current assets
|
5.0
|
(10.7
|
)
|
20.7
|
||||||
|
Accounts
payable and accrued expenses
|
3.9
|
28.2
|
5.0
|
|||||||
|
Vertac
litigation liability
|
123.5
|
—
|
—
|
|||||||
|
Income
taxes payable
|
(125.1
|
)
|
27.1
|
(25.4
|
)
|
|||||
|
Pension
and postretirement benefits
|
(7.9
|
)
|
(18.3
|
)
|
(23.1
|
)
|
||||
|
Non-current
assets and liabilities
|
(23.8
|
)
|
(12.8
|
)
|
(4.7
|
)
|
||||
|
FiberVisions
net assets held for sale
|
(7.9
|
)
|
—
|
—
|
||||||
|
Net
cash provided by operating activities
|
172.9
|
139.2
|
120.5
|
|||||||
|
Cash
Flow From Investing Activities:
|
||||||||||
|
Capital
expenditures
|
(93.6
|
)
|
(67.5
|
)
|
(77.4
|
)
|
||||
|
Acquisitions
and investments, net of cash recognized upon consolidation
|
(29.4
|
)
|
(4.4
|
)
|
—
|
|||||
|
Proceeds
from sale of 51% interest in FiberVisions, net of transaction
costs
|
17.8
|
—
|
—
|
|||||||
|
Proceeds
of fixed asset disposals
|
11.3
|
16.6
|
1.4
|
|||||||
|
Proceeds
from sale of minority interest in CP Kelco ApS
|
—
|
—
|
27.0
|
|||||||
|
Other,
net
|
(0.2
|
)
|
(2.4
|
)
|
(0.1
|
)
|
||||
|
Net
cash used in investing activities
|
(94.1
|
)
|
(57.7
|
)
|
(49.1
|
)
|
||||
|
Cash
Flow From Financing Activities:
|
||||||||||
|
Long-term
debt issued by FiberVisions, net of issuance costs
|
83.7
|
—
|
—
|
|||||||
|
Long-term
debt proceeds
|
22.0
|
—
|
650.0
|
|||||||
|
Long-term
debt payments
|
(142.5
|
)
|
(131.2
|
)
|
(729.5
|
)
|
||||
|
Change
in short-term debt
|
5.8
|
1.9
|
1.6
|
|||||||
|
Proceeds
from the exercise of stock options
|
37.0
|
2.7
|
5.5
|
|||||||
|
Payment
of debt issuance costs and underwriting fees
|
—
|
—
|
(7.8
|
)
|
||||||
|
Other,
net
|
5.6
|
(0.4
|
)
|
6.1
|
||||||
|
Net
cash provided by (used in) financing activities
|
11.6
|
(127.0
|
)
|
(74.1
|
)
|
|||||
|
Effect
of exchange rate changes on cash
|
4.1
|
(3.7
|
)
|
2.9
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
94.5
|
(49.2
|
)
|
0.2
|
||||||
|
Cash
and cash equivalents at beginning of year
|
77.3
|
126.5
|
126.3
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
171.8
|
$
|
77.3
|
$
|
126.5
|
||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
-10-
|
Hercules
Incorporated
(Dollars
in millions)
|
||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||
|
Unearned
|
Other
|
|||||||||||||||||||||
|
Common
|
Paid-in
|
Compen-
|
Comprehen-
|
Retained
|
Reacquired
|
|||||||||||||||||
|
|
Stock
|
Capital
|
sation
|
sive
Losses
|
Earnings
|
Stock
|
Total
|
|||||||||||||||
|
Balances
at January 1, 2004
|
$
|
83.3
|
$
|
603.4
|
$
|
(86.2
|
)
|
$
|
(317.9
|
)
|
$
|
1,508.4
|
$
|
(1,765.6
|
)
|
$
|
25.4
|
|||||
|
(Common
shares: issued, 159,984,444; reacquired, 48,992,628)
|
||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
28.1
|
—
|
28.1
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
69.7
|
—
|
—
|
69.7
|
|||||||||||||||
|
Release
of shares held by ESOP trust
|
—
|
(5.0
|
)
|
13.3
|
—
|
—
|
—
|
8.3
|
||||||||||||||
|
Increase
in additional minimum pension liability, net of tax
|
—
|
—
|
—
|
(28.2
|
)
|
—
|
—
|
(28.2
|
)
|
|||||||||||||
|
Issuances
of treasury stock, net of forfeitures
|
—
|
(29.2
|
)
|
(8.0
|
)
|
—
|
—
|
42.8
|
5.6
|
|||||||||||||
|
Amortization
of unearned compensation
|
—
|
—
|
3.0
|
—
|
—
|
—
|
3.0
|
|||||||||||||||
|
Balances
at December 31, 2004
|
$
|
83.3
|
$
|
569.2
|
$
|
(77.9
|
)
|
$
|
(276.4
|
)
|
$
|
1,536.5
|
$
|
(1,722.8
|
)
|
$
|
111.9
|
|||||
|
(Common
shares: issued, 159,984,444; reacquired, 47,842,836)
|
||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(41.1
|
)
|
—
|
(41.1
|
)
|
|||||||||||||
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
(66.6
|
)
|
—
|
—
|
(66.6
|
)
|
|||||||||||||
|
Release
of shares held by ESOP trust
|
—
|
(5.0
|
)
|
12.8
|
—
|
—
|
—
|
7.8
|
||||||||||||||
|
Repurchase
of warrants
|
—
|
(2.0
|
)
|
—
|
—
|
—
|
—
|
(2.0
|
)
|
|||||||||||||
|
Increase
in additional minimum pension liability, net of tax
|
—
|
—
|
—
|
(44.3
|
)
|
—
|
—
|
(44.3
|
)
|
|||||||||||||
|
Issuances
of treasury stock, net of forfeitures
|
—
|
(13.3
|
)
|
(8.5
|
)
|
—
|
—
|
23.8
|
2.0
|
|||||||||||||
|
Amortization
of unearned compensation
|
—
|
—
|
7.9
|
—
|
—
|
—
|
7.9
|
|||||||||||||||
|
Other,
net of tax
|
—
|
—
|
—
|
(0.3
|
)
|
—
|
—
|
(0.3
|
)
|
|||||||||||||
|
Balances
at December 31, 2005
|
$
|
83.3
|
$
|
548.9
|
$
|
(65.7
|
)
|
$
|
(387.6
|
)
|
$
|
1,495.4
|
$
|
(1,699.0
|
)
|
$
|
(24.7
|
)
|
||||
|
(Common
shares: issued, 159,984,444; reacquired, 47,247,344)
|
||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
238.7
|
—
|
238.7
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
—
|
—
|
—
|
54.6
|
—
|
—
|
54.6
|
|||||||||||||||
|
Release
of shares held by ESOP trust
|
—
|
(6.4
|
)
|
11.5
|
—
|
—
|
—
|
5.1
|
||||||||||||||
|
Repurchase
of warrants
|
—
|
(1.0
|
)
|
—
|
—
|
—
|
—
|
(1.0
|
)
|
|||||||||||||
|
Decrease
in additional minimum pension liability, net of tax
|
—
|
—
|
—
|
85.0
|
—
|
—
|
85.0
|
|||||||||||||||
|
Recognition
of funded status of pension and postretirement
benefit
plans, net of tax
|
—
|
—
|
—
|
(126.5
|
)
|
—
|
—
|
(126.5
|
)
|
|||||||||||||
|
Issuances
of treasury stock, net of forfeitures
|
—
|
(74.7
|
)
|
—
|
—
|
—
|
121.3
|
46.6
|
||||||||||||||
|
Reclassification
required by SFAS 123R
|
—
|
(12.1
|
)
|
12.1
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Conversion
of debentures
|
—
|
0.2
|
—
|
—
|
—
|
—
|
0.2
|
|||||||||||||||
|
Revaluation
of hedges, net of tax
|
—
|
—
|
—
|
(34.6
|
)
|
—
|
—
|
(34.6
|
)
|
|||||||||||||
|
Other,
net of tax
|
—
|
—
|
—
|
(0.5
|
)
|
—
|
—
|
(0.5
|
)
|
|||||||||||||
|
Balances
at December 31, 2006
|
$
|
83.3
|
$
|
454.9
|
$
|
(42.1
|
)
|
$
|
(409.6
|
)
|
$
|
1,734.1
|
$
|
(1,577.7
|
)
|
$
|
242.9
|
|||||
|
(Common
shares: issued, 159,997,929; reacquired,43,969,769)
|
||||||||||||||||||||||
The
accompanying accounting policies and notes are an integral part of the
consolidated financial statements.
-11-
Hercules
Incorporated
(Dollars
in millions, except per share data)
Hercules
Incorporated (“Hercules” or the “Company”) was incorporated in 1912 under the
laws of the State of Delaware and its shares are traded on the New York Stock
Exchange under the symbol “HPC.” The Company is a leading manufacturer and
marketer of specialty chemicals and related services for a broad range of
business, consumer and industrial applications and has approximately 4,430
employees worldwide. The Company has a broad customer base, with no single
customer representing greater than 3% of Net sales, and serves many different
markets, the largest of which include: tissue and paper towel manufacturing;
writing paper; interior and exterior paints; construction materials and energy
services. To serve these markets the Company has global manufacturing operations
which provide products to customers in more than 135 countries.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of Hercules, all
majority-owned subsidiaries where control exists, any other subsidiaries which
it controls and variable interest entities ("VIEs") in which Hercules is the
primary beneficiary. All significant intercompany transactions and profits
have
been eliminated. Investments in affiliated companies, where Hercules has a
20%
to 50% interest and where the entity is either not a VIE or Hercules is not
the
primary beneficiary, are accounted for using the equity method of accounting
and, accordingly, consolidated income includes Hercules' share of their income
or loss. Accordingly, these investments are included in Deferred charges and
other assets on the Company’s Consolidated Balance Sheets.
Use
of Estimates
Preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial
Statements and the accompanying Notes. Actual results could differ from these
estimates.
Revenue
Recognition
The
Company recognizes revenue when the earnings process is complete. This generally
occurs when products are shipped to the customer or services are performed
in
accordance with terms of the agreement, title and risk of loss have been
transferred, collectibility is probable and pricing is fixed or determinable.
Approximately 14%, 13% and 13% of the Company's revenues for the years ended
December 31, 2006, 2005 and 2004, respectively, are from consignment
inventory. For consignment inventory, title and risk of loss are transferred
when the earnings process is considered complete, which generally occurs when
the Company's products have been consumed or used in the customer's production
process. Revenues exclude amounts for value-added, sales and similar taxes.
Accruals are made for sales returns and other allowances based on the Company's
experience. Shipping and handling costs are included in Cost of
sales.
Allowance
for Doubtful Accounts Receivable
The
allowance for doubtful accounts represents an estimate of uncollectible accounts
receivable. The recorded amount reflects various factors, including accounts
receivable aging, customer-specific risk issues, country risk and historical
write-off experience. It includes, but is not limited to, a formula driven
calculation applied to the aging of trade accounts receivable balances. When
a
specific accounts receivable balance is deemed uncollectible, a charge is taken
to this reserve. Recoveries of balances previously written off are also
reflected in this reserve.
Research
and Development Expenditures
Research
and development expenditures are expensed as incurred.
Environmental
Expenditures
The
Company has ongoing expenditures for environmental related projects at current
and former operating facilities. Accruals for environmental remediation matters
are expensed when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. The Company capitalizes
environmental expenditures for projects that extend the life, increase the
capacity or improve the safety or efficiency of its facilities. In addition,
the
Company capitalizes asset retirement obligations relating to environmental
remediation liabilities that result from the normal operation of Company
facilities. The Company capitalized environmental related expenditures totaling
$8.8 million, $3.6 million and $2.6 million for the years ended December 31,
2006, 2005 and 2004, respectively.
Changes
in Accounting Principle
Voluntary
changes in accounting principles require retrospective application to the
earliest fiscal period presented. However, the Consolidated Financial Statements
reflect the specific transition requirements associated with new accounting
pronouncements,
which may not require retrospective application. Note 24
provides a summary of the financial statement effects and
required
disclosures applicable to those accounting changes implemented during the
periods presented.
-12-
Hercules
Incorporated
(Dollars
in millions, except per share data)
Cash
and Cash Equivalents
Cash
equivalents include commercial paper and other securities with original
maturities of 90 days or less at the time of purchase. Book value approximates
fair value because of the short maturity of those instruments.
Inventories
Foreign
and domestic inventories are stated at the lower of cost or market and are
valued principally on the weighted-average-cost method. Elements of costs in
inventories include raw materials, direct labor and manufacturing
overhead.
Assets
Held for Sale
When
specific actions to dispose of assets progress to the point that “plan of sale”
criteria have been met, impairments, to the extent they exist, are recognized
in
the Consolidated Statements of Operations and the underlying assets are
reclassified as assets held for sale and included in the caption Other current
assets or separately disclosed. Gains and losses on sales of assets associated
with active business operations and sites are included in Other operating
expense while those attributable to former businesses are included in Other
expense, net.
Property,
Plant and Equipment and Depreciation
Property,
plant and equipment are stated at cost. The Company uses the straight line
method of depreciation. The estimated useful lives of depreciable assets are
as
follows: buildings - 30 years; plant machinery and equipment - 15 years; other
machinery and equipment - 3 to 15 years.
Maintenance,
repairs and minor renewals are expensed as incurred; major renewals and
improvements that extend the lives or increase the capacity of plant assets
are
capitalized. Upon normal retirement or replacement, the net book value of
property (less proceeds of sale or salvage) is charged to income.
Intangible
Assets and Goodwill
Intangible
assets with finite lives are amortized on a straight-line basis over the
estimated future periods to be benefited, generally 40 years for customer
relationships, trademarks and tradenames and 3 to 50 years for other intangible
assets. Goodwill is tested for impairment on an annual basis as of November
30
with any necessary adjustment charged to expense. The Company has identified
its
reporting units as Paper Technologies and Ventures and the Aqualon Group, for
purposes of applying the impairment test.
Long-lived
Assets
The
Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate carrying amounts of the
assets may not be recoverable through undiscounted future cash flows. If an
impairment loss has occurred based on expected undiscounted future cash flows,
the loss is recognized in the Consolidated Statements of Operations. The amount
of the impairment loss is the excess of the carrying amount of the impaired
asset over its fair value. The fair value represents expected future cash flows
from the use of the assets, discounted at the rate used to evaluate potential
investments.
Computer
Software Development Costs
Capitalized
computer software development costs are included in Deferred charges and other
assets in the Company's Consolidated Balance Sheets and amortized over a period
of 5 to 10 years.
Deferred
Financing Costs
The
Company capitalizes costs associated with the issuance of debt, including bank,
legal, investment advisor and accounting fees and other expenses. Deferred
financing costs are amortized over the term of the related financing transaction
using the effective interest rate method and are included in Interest and debt
expense in the Company’s Consolidated Statements of Operations.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach for accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income tax represents income taxes paid or payable for the current year plus
the
change in deferred taxes during the year. Deferred taxes result from differences
between the financial and tax basis of the Company's assets and liabilities
and
are adjusted for changes in tax rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is
more
likely than not that a tax benefit will not be realized.
-13-
Hercules
Incorporated
(Dollars
in millions, except per share data)
Asset
Retirement Obligations
The
Company records a liability at fair value for legal obligations associated
with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal operations of a long-lived asset. To
the
extent an obligation is conditional, an obligation is recognized if the fair
value of the liability can be reasonably estimated. The Company’s asset
retirement obligations principally relate to environmental remediation
liabilities associated with current and former operations that were incurred
during the course of normal operations.
For
the
purposes of recognizing obligations requiring the dismantlement of facilities,
owned properties, which have no fixed cessation date, are assumed to be in
operation for 50 years, although it could be longer. The Company evaluates
the
status of its facilities on a periodic basis and makes any necessary adjustments
to the obligations as required. Dismantlement of facilities at leased sites
is
assumed to occur upon lease termination unless it is likely that the Company
is
able to and plans to extend the term.
Foreign
Currency Translation
The
financial statements of Hercules' non-U.S. entities are translated into U.S.
dollars in accordance with U.S. GAAP. Most of the Company’s foreign subsidiaries
use the local currency as their functional currency. The Company translates
assets and liabilities of those entities into U.S. dollars using the appropriate
period end rates of exchange. Net sales and expenses are translated using the
average exchange rates for the reporting period. Translation gains and losses
are recorded in Accumulated other comprehensive losses.
Derivative
Instruments and Hedging
Under
procedures and controls established by the Company's risk management policies,
the Company strategically enters into contractual arrangements (derivatives)
in
the ordinary course of business to reduce the exposure to foreign currency
rates, interest rates and commodity prices.
The
Company's risk management policies establish several approved derivative
instruments to be utilized in each risk management program and the level of
exposure coverage based on the assessment of risk factors. Derivative
instruments utilized include forwards, swaps and options. The Company uses
forward exchange contracts and options, generally no greater than three months
in term, to reduce its net currency exposure. The objective of this program
is
to maintain an overall balanced position in foreign currencies so that exchange
gains and losses resulting from exchange rate changes are minimized. The Company
has used interest rate swap agreements to manage interest costs and risks
associated with changing rates. The Company has used forward contracts to hedge
commodity price risk. The Company uses cross-currency interest rate swaps to
hedge the foreign currency exposure associated with its net investment in
certain foreign operations. Derivative instruments are recorded on the balance
sheet at their fair values.
With
the
exception of the cross-currency interest rate swaps, the Company has not
designated any derivatives as a formal hedge instrument and accordingly, changes
in fair value are recorded each period in earnings as a component of Other
expense, net (foreign currency exposures) and Cost of sales (commodity price
exposures) consistent with the reporting of the items hedged. Changes in the
fair value of the cross-currency interest rate swaps are recorded in the foreign
currency translation adjustments component of Accumulated other comprehensive
losses. Net interest payments or receipts from the cross-currency interest
rate
swaps are recorded as adjustments to Interest and debt expense, net in the
Statement of Operations and are reflected in Net cash provided by operating
activities in the Statement of Cash Flows.
Counterparties
to all derivative contracts are major financial institutions. Credit loss from
counterparty nonperformance is not anticipated.
Stock-based
Compensation
Effective,
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) (see Note 14). The Company had previously adopted, effective January
1, 2003, Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS 123 by providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requiring enhanced disclosure regarding stock-based
compensation. The Company elected to apply the fair value recognition provisions
of SFAS 123 on a prospective basis to all employee awards granted, modified
or
settled after January 1, 2003 through the date of adoption for SFAS 123R.
Therefore, the cost related to stock-based employee compensation included in
the
determination of net income in 2005 and 2004 was less than that which would
have
been recognized if the fair value based method had been applied to all awards
since the original effective date of SFAS 123.
-14-
Hercules
Incorporated
(Dollars
in millions, except per share data)
The
following table presents the pro forma effect on net (loss) income and (loss)
earnings per share assuming the Company had applied the fair value recognition
provisions of SFAS 123 to all stock-based compensation on a retroactive
basis.
|
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
(loss) income, as reported
|
$
|
(41.1
|
)
|
$
|
28.1
|
||
|
Add:
Total stock-based compensation expense recognized in reported results,
net of tax
|
4.5
|
1.4
|
|||||
|
Deduct:
Total stock-based compensation expense determined under the
fair
value based method for all awards, net of tax*
|
5.1
|
2.8
|
|||||
|
Pro
forma net (loss) income
|
$
|
(41.7
|
)
|
$
|
26.7
|
||
|
(Loss)
earnings per share:
|
|||||||
|
Basic
- as reported
|
$
|
(0.38
|
)
|
$
|
0.26
|
||
|
Basic
- pro forma
|
$
|
(0.38
|
)
|
$
|
0.25
|
||
|
Diluted
- as reported
|
$
|
(0.38
|
)
|
$
|
0.26
|
||
|
Diluted
- pro forma
|
$
|
(0.38
|
)
|
$
|
0.24
|
||
|
*
For information regarding the weighted-average assumptions used in
estimating fair value for 2005 and 2004 see Note
14.
|
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken in a tax return. The Company is currently evaluating the impact
of FIN 48, which is to be adopted effective January 1, 2007, and does not
anticipate it to have a material impact on its consolidated financial condition
or results of operation.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements” (“SFAS 157”). While SFAS 157 formally defines
fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements, it does not require any new fair
value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is required to be adopted
effective January 1, 2008 and the Company does not presently anticipate any
significant impact on its consolidated financial position, results of operations
or cash flows.
Reclassifications
Certain
amounts in the 2005 and 2004 consolidated financial statements and notes have
been reclassified to conform to the 2006 presentation. In addition, see Note 1 regarding the Company’s realignment of its reporting
segments.
-15-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Effective
January 1, 2006, the Company realigned its reporting segments. Previously,
the
Company operated through the Performance Products (Pulp and Paper and Aqualon)
and Engineered Materials and Additives (FiberVisions and Pinova) segments.
The
Company’s new reporting structure includes three segments: (1) Paper
Technologies and Ventures (“PTV”), (2) the Aqualon Group (“Aqualon”) and (3)
FiberVisions. The Company’s synthetic lubricants business has been transferred
from Aqualon to PTV. The Company’s Pinova business has been integrated into the
Aqualon Group. In addition, the Company’s terpenes specialties business, which
was previously a business unit of Pinova, has been classified as a discontinued
operation effective January 1, 2006. As discussed further in Note
23, the Consolidated Financial Statements have been reclassified to
accommodate the reporting of this business as a discontinued operation.
FiberVisions will remain as a stand-alone segment for historical reporting
purposes.
Through
the quarter ended March 31, 2006, FiberVisions' results of operations have
been
consolidated into the Company’s Statement of Operations. As a result of the sale
of the Company’s 51% interest (see Note 3), FiberVisions is
being treated as an equity investment and the Company includes its proportionate
share of earnings and losses using the equity method of accounting for periods
beginning April 1, 2006.
Prior
period segment information included in Note 27 has been
adjusted for retrospective application of the aforementioned changes
attributable to the segments.
During
2006, the Company completed three strategic business investments for a total
of
$29.4 million including transaction costs, net of cash acquired. These included
(1) the acquisition of the guar and guar derivative manufacturing division
of
Benchmark Polymer Products, L.P. (“Benchmark”), a subsidiary of Benchmark
Performance Group, Inc. (“BPG”), as well as a loan to BPG that is convertible
into an equity position in BPG, (2) an investment for a 40% ownership interest
in the joint venture, Hercules Tianpu Chemicals Company Limited (“Hercules
Tianpu”), a manufacturer of methylcellulose (“MC”) in China and (3) the
acquisition of the 40% ownership interest not previously held by Hercules in
the
joint venture, Shanghai Hercules Chemicals Company, Ltd. (“Shanghai Hercules”),
from its partner Shanghai Chlor-Alkali Chemical Co. Ltd.
Benchmark
In
January 2006, the Company acquired the net assets of Benchmark for a total
of
$20.2 million including transaction costs plus a provisional earn-out. In
addition, the Company signed a five year exclusive agreement to supply BPG
with
guar products for polymer slurries used in oil and gas fracturing applications.
Under the terms of the purchase agreement, the Company acquired Benchmark’s
Dalton, Georgia production facility, related working capital and an intangible
asset related to the supply agreement. The acquired intangible asset of $3.7
million has a five year life. The Company recorded goodwill in the amount of
$9.7 million which is deductible for tax purposes over a period of 15 years.
In
a related transaction, the Company loaned $2.5 million to BPG. The loan, which
is convertible into an equity position in BPG, is reflected on the Balance
Sheet
as a component of Deferred charges and other assets. The results of operations
of Benchmark have been included in the Consolidated Financial Statements since
the date of acquisition and have been integrated into the Aqualon business
segment.
Hercules
Tianpu
During
the first quarter of 2006, the formation was completed for the Hercules Tianpu
joint venture with the Company contributing a total of $3.2 million in
connection with its required subscription for a 40% ownership interest in
addition to $4.4 million previously contributed in 2005 during the preliminary
formation stage. Prior to formation, the Company paid $1.7 million for the
subscription rights attributable to a 1% ownership interest of one of the other
joint venture partners as well as $1.1 million for transaction costs. Under
the
joint venture agreement, the Company has global marketing rights for the output
of the joint venture and receives sales commissions as well as royalties for
licensed technology. Operations for Hercules Tianpu began during the latter
part
of the first quarter of 2006 during which time the investment was accounted
for
as an equity affiliate. Effective April 1, 2006, Hercules Tianpu was
consolidated into Hercules’ results of operations, cash flows and balance sheet
(see Note 4) and is included in the Aqualon business segment.
Included in the net assets recognized upon consolidation was $3.5 million of
intangible assets related to land use rights with a useful life of 50 years
as
well as $2.8 million of goodwill which is not deductible for tax
purposes.
-16-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Shanghai
Hercules
During
2006, the Company acquired the remaining 40% ownership interest in Shanghai
Hercules for $3.3 million, including transaction costs of $0.2 million. The
transaction resulted in an increase to Goodwill in the amount of $1.5 million,
which is not deductible for tax purposes. As a result of this transaction,
PTV
will be able to operate with greater flexibility in the region and will be
able
to execute its expansion plans, including the development of a regional
technical and research center. As a controlled, majority-owned subsidiary,
the
results of operations and net assets of Shanghai Hercules have been included
in
the Consolidated Financial Statements and those amounts attributable to
non-controlling shareholders have been reflected as minority interests in the
Statement of Operations and Balance Sheet, respectively. Effective upon
completion of the transaction, the Company has reflected its full ownership
of
Shanghai Hercules and has included 100% of its net income in the Results of
Operations.
The
following table summarizes the fair values of the assets, liabilities and
minority interests recognized as a result of the acquisitions and consolidation
during 2006:
|
Assets
|
Liabilities
and Minority Interests
|
|||||||||
|
Cash
and cash equivalents
|
$
|
2.6
|
Accounts
payable
|
$
|
10.3
|
|||||
|
Accounts
receivable, net
|
3.9
|
Accrued
expenses
|
5.5
|
|||||||
|
Inventories
|
10.1
|
Minority
interests
|
9.6
|
|||||||
|
Other
current assets
|
0.1
|
|||||||||
|
Property,
plant and equipment, net
|
21.2
|
|||||||||
|
Intangible
assets, net
|
7.2
|
|||||||||
|
Goodwill
|
14.0
|
|||||||||
|
Deferred
charges and other assets
|
2.7
|
|||||||||
|
Total
assets
|
$
|
61.8
|
Total liabilities and minority interests
|
$
|
25.4
|
|||||
FiberVisions
On
March
31 2006, the Company completed the sale (the “Transaction” or “FiberVisions
Transaction”) of a 51% interest in its FiberVisions division to an affiliate of
SPG Partners, LLC (“SPG”). In connection with the Transaction, FiberVisions
issued long-term debt in the amount of $90.0 million and simultaneously
completed a distribution of $82.0 million to the Company and its wholly-owned
subsidiary, WSP Inc. (“WSP”) in proportion to their respective ownership
interests. FiberVisions incurred $6.3 million of costs in connection with the
debt issuance. Immediately thereafter, the Company received $27.0 million from
SPG in exchange for its 51% interest. The contribution agreement (“Agreement”)
provided SPG with an option to purchase an additional 14% interest in
FiberVisions. However, the option subsequently expired unexercised on January
31, 2007 resulting in a benefit to income of $0.2 million in 2007.
The
Agreement also provided for a maximum of $5.7 million of additional
contributions to FiberVisions based on defined performance measures during
2006
and 2007. Based on FiberVisions’ actual performance subsequent to the
Transaction, the Company was required to provide $4.5 million of additional
contributions during 2006. Based on FiberVisions’ performance projections for
2007, which continue to be challenged by raw material costs, the Company accrued
its remaining commitment of $1.2 million. This amount is expected to be paid
during the first half of 2007.
As
a
result of the Transaction closing and certain post-closing adjustments,
including $5.7 million for the performance-based contributions, the Company
has
recognized a $13.3 million loss on the transaction during 2006 as a component
of
Other expense, net reflecting the disposition of a non-operating asset held
for
sale. The loss also reflects a number of adjustments to the Company’s investment
including the realization of the currency translation adjustment associated
with
the disposed portion of the Company’s investment, a curtailment benefit, net of
special termination benefits, associated with FiberVisions’ domestic employees
that will no longer accrue service benefits under the Company’s pension and
postretirement benefit plans, certain indemnifications for income taxes, pension
and severance obligations, the settlement of substantially all of FiberVisions
third party debt obligations prior to closing, a provision for the valuation
of
SPG’s option and other transaction costs. A total of $8.4 million of transaction
costs and post-closing adjustments was paid during 2006 and the Company has
reflected $1.3 million to be paid during 2007 as a component of Accrued
expenses. As noted above, $1.2 million relates to the 2007 additional
contribution and the remaining $0.1 is for other transaction costs.
The
results of operations and cash flows for FiberVisions for the three months
ended
March 31, 2006 are included in the Consolidated Statement of Operations and
Consolidated Statement of Cash Flows, respectively, as it was wholly-owned
by
the Company during that period. Effective April 1, 2006, the Company began
recording its equity in the earnings of FiberVisions
based on its 49% ownership interest. The Company’s share of FiberVisions’ net
loss for the nine months ended December 31, 2006 was $3.4 million. The Company’s
investment in FiberVisions, as represented by the 49% interest held by WSP,
is
included in Deferred charges and other assets for $22.5 million, which
represents its fair value based on the terms of the Transaction adjusted for
equity losses during the nine months ended December 31, 2006.
-17-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
connection with its initial commitment to sell a majority interest in
FiberVisions at the end of 2005, the Company was required to test FiberVisions’
underlying goodwill asset for recoverability. The test indicated that the
carrying value of goodwill exceeded its fair value. Accordingly, the Company
recorded an impairment charge of $52.9 million effective as of December 31,
2005. The impairment charge was based on an estimate of the fair value for
the
entire division as determined by the negotiated sales price for the
aforementioned sale of a majority interest and its impact was reflected in
Profit from operations as it represented an active and fully consolidated
business during 2005.
As
of
December 31, 2005, the Company reclassified those assets and liabilities
attributable to FiberVisions as held for sale consistent with the Agreement.
The
amounts included on the Consolidated Balance Sheet consist of the
following:
|
Assets
|
Liabilities
|
|||||||||
|
Cash
and cash equivalents
|
$
|
2.6
|
Accounts
payable
|
$
|
29.9
|
|||||
|
Accounts
receivable, net
|
34.4
|
Accrued
expenses
|
7.1
|
|||||||
|
Inventories
|
20.7
|
Deferred
income taxes
|
29.2
|
|||||||
|
Other
current assets
|
9.2
|
Long-term
debt
|
0.3
|
|||||||
|
Property,
plant and equipment, net
|
92.1
|
Deferred
credits and other liabilities
|
0.1
|
|||||||
|
Intangible
assets, net
|
11.1
|
|||||||||
|
Goodwill
|
32.0
|
|||||||||
|
Deferred
charges and other assets
|
0.6
|
|||||||||
|
Total
FiberVisions assets held for sale
|
$
|
202.7
|
Total FiberVisions liabilities held for sale
|
$
|
66.6
|
|||||
CP
Kelco
On
February 12, 2004, a subsidiary of the Company completed the sale of its
minority ownership in CP Kelco ApS to a subsidiary of J. M. Huber Corporation
for $27.0 million. The book value of the Company's investment in CP Kelco ApS
had been written down to zero in 2002 as the result of an after-tax impairment
charge of $19.0 million. Net (loss) income for the month ended January 31,
2004
and the year ended December 31, 2003 was $(2.2) million and $59.3 million,
respectively. At the time of disposal, the CP Kelco ApS balance sheet was
comprised of total assets and total liabilities of $932.1 million and $816.3
million, respectively.
In accordance with the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (revised December 2003) (“FIN 46R”), the Company has identified Hercules Tianpu as a variable interest entity (“VIE”) for which the Company was the primary beneficiary. The financial statements of the Company reflect the consolidation of Hercules Tianpu effective April 1, 2006. As of December 31, 2006, the fair value of the assets in Hercules Tianpu was $52.3 million and the fair values of the associated liabilities and non-controlling interest were $43.6 million. There are no assets of the Company that serve as collateral for Hercules Tianpu. However, the Company has provided guarantees to certain financial institutions that have provided credit to Hercules Tianpu. With respect to the credit facility established primarily to finance Hercules Tianpu’s capacity expansion and working capital needs, the Company has provided a guarantee of 55% of the total borrowing. As of December 31, 2006, the total amount outstanding under this facility was $28.1 million.
The
Company maintains a 40% ownership interest in Hercules Tianpu and Aqualon has
the global marketing rights for the joint venture’s output and receives sales
commissions as well as royalties for licensed technology. Hercules Tianpu’s
operations began during the latter part of the first quarter of 2006 as the
contribution of cash and manufacturing assets was completed. As of December
31,
2006, the Company’s total equity investment in Hercules Tianpu was $11.4
million.
-18-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Accounts
Receivable, net includes trade accounts and notes receivable and amounts due
from affiliates less an allowance for doubtful accounts. Changes in the
allowance for doubtful accounts for the years ended December 31, 2006, 2005
and
2004 are as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Balance
at beginning of year
|
$
|
4.0
|
$
|
4.7
|
$
|
5.5
|
||||
|
Charged
to costs and expenses
|
3.2
|
2.3
|
5.4
|
|||||||
|
Deductions
|
(1.6
|
)
|
(3.0
|
)
|
(6.2
|
)
|
||||
|
Balance
at end of year
|
$
|
5.6
|
$
|
4.0
|
$
|
4.7
|
||||
The
components of inventories as of December 31, 2006 and 2005 are as
follows:
|
2006
|
2005
|
||||||
|
Finished
products
|
$
|
115.4
|
$
|
98.4
|
|||
|
Raw
materials and work-in-process
|
73.3
|
60.5
|
|||||
|
Supplies
|
21.9
|
20.7
|
|||||
|
$
|
210.6
|
$
|
179.6
|
||||
The
following table provides information regarding the Company’s intangible assets
with finite lives.
|
2006
|
2005
|
||||||||||||||||||
|
Accumulated
|
Accumulated
|
||||||||||||||||||
|
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
||||||||||||||
|
Customer
relationships
|
$
|
90.0
|
$
|
18.6
|
$
|
71.4
|
$
|
90.0
|
$
|
16.4
|
$
|
73.6
|
|||||||
|
Trademarks
and tradenames
|
73.9
|
15.6
|
58.3
|
73.9
|
13.5
|
60.4
|
|||||||||||||
|
Other
intangible assets
|
32.2
|
18.8
|
13.4
|
24.8
|
16.0
|
8.8
|
|||||||||||||
|
$
|
196.1
|
$
|
53.0
|
$
|
143.1
|
$
|
188.7
|
$
|
45.9
|
$
|
142.8
|
||||||||
Total
amortization expense for other intangible assets for the years ended
December 31, 2006, 2005 and 2004 was $7.2 million, $8.0 million and $8.1
million, respectively, which was included in Profit from operations. It is
estimated that amortization expense will be $7.1 million for 2007, $6.8 million
for 2008, $5.5 million for 2009, $5.3 million for 2010 and $4.4 million for
2011.
The
following table shows the activity and changes in the carrying amount of
goodwill for the years ended December 31, 2006 and 2005, by operating
segment:
|
Paper
|
|||||||||||||
|
Technologies
|
Aqualon
|
||||||||||||
|
and
Ventures
|
Group
|
FiberVisions
|
Total
|
||||||||||
|
Balance
at December 31, 2004
|
$
|
425.7
|
$
|
39.7
|
$
|
84.9
|
$
|
550.3
|
|||||
|
Impairment
|
—
|
—
|
(52.9
|
)
|
(52.9
|
)
|
|||||||
|
Reclassified
to FiberVisions assets held for sale
|
—
|
—
|
(32.0
|
)
|
(32.0
|
)
|
|||||||
|
Foreign
currency translation
|
(23.1
|
)
|
(1.3
|
)
|
—
|
(24.4
|
)
|
||||||
|
Balance
at December 31, 2005
|
$
|
402.6
|
$
|
38.4
|
$
|
—
|
$
|
441.0
|
|||||
|
Acquisitions
and investments
|
1.5
|
12.5
|
—
|
14.0
|
|||||||||
|
Foreign
currency translation
|
25.4
|
1.1
|
—
|
26.5
|
|||||||||
|
Balance
at December 31, 2006
|
$
|
429.5
|
$
|
52.0
|
$
|
—
|
$
|
481.5
|
|||||
-19-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A
summary of debt follows:
|
2006
|
2005
|
||||||
|
Term
B loan due 2010 (a)
|
$
|
375.0
|
$
|
393.0
|
|||
|
6.60%
notes due 2027 (b)
|
100.0
|
100.0
|
|||||
|
Term
notes at various rates from 5.00% to 7.16% due in varying amounts
through
2006 (c)
|
—
|
6.8
|
|||||
|
11.125%
senior notes due 2007 (d)
|
16.1
|
130.0
|
|||||
|
6.75%
senior subordinated notes due 2029 (e)
|
250.0
|
250.0
|
|||||
|
8%
convertible subordinated debentures due 2010 (f)
|
2.4
|
2.6
|
|||||
|
6.5%
junior subordinated deferrable interest debentures due 2029
(g)
|
214.1
|
217.0
|
|||||
|
Term
loans at rates ranging from 5.5575% to 5.814% due in varying amounts
through 2011(h)
|
28.1
|
—
|
|||||
|
Other
|
9.8
|
9.6
|
|||||
|
995.5
|
1,109.0
|
||||||
|
Less:
Current debt obligations
|
35.8
|
16.7
|
|||||
|
Long
term debt
|
$
|
959.7
|
$
|
1,092.3
|
|||
|
(a)
|
The
term loan, a component of the Company’s Senior Credit Facility, matures on
October 8, 2010 and bears interest at LIBOR + 1.50%, with the Company
holding the option to reset interest rates for one, two, three or
six
month periods. The weighted average rate was 6.87% as of December
31,
2006. The Senior Credit Facility is also comprised of a $150 million
committed revolving credit facility (the “Revolving Facility”) which
matures on April 8, 2009 and provides Hercules the ability, subject
to
lender approval, to borrow until April 8, 2007 an additional $250
million
in the form of an incremental term note. The Senior Credit Facility
is
secured by liens on the Company's assets (including real, personal
and
intellectual properties) and is guaranteed by substantially all of
the
Company's current and future wholly-owned domestic subsidiaries (see
Note 29).
|
As
of
December 31, 2006, the Company had $105.7 million of outstanding letters of
credit under the Revolving Facility. The remaining $44.3 million was available
for use.
The
Company's Senior Credit Facility requires quarterly compliance with certain
financial covenants, including a debt/EBITDA ratio ("leverage ratio") and an
interest coverage ratio, and established limitations on the permitted amount
of
capital expenditures.
|
(b)
|
30-year
debentures with a 10-year put option, exercisable August 1, 2007
by the
bondholder at a redemption price equal to the principal
amount.
|
|
(c)
|
Debt
assumed in conjunction with the acquisition of FiberVisions L.L.C
in 1998
and retained by Hercules prior to the FiberVisions
Transaction.
|
|
(d)
|
The
senior notes accrue interest at 11.125% per annum, payable semi-annually.
The senior notes are guaranteed by each of Hercules' current and
future
wholly-owned domestic restricted subsidiaries and matures on November
15,
2007.
|
|
(e)
|
The
Company completed a private placement of $250 million aggregate principal
amount of 6.75% senior subordinated notes due 2029 during April 2004.
The
senior subordinated notes are guaranteed by each of Hercules’ current and
future wholly-owned domestic restricted subsidiaries.
|
|
(f)
|
The
convertible subordinated debentures are convertible into common stock
at
$14.90 per share and are redeemable at the option of the Company
at
varying rates. The annual sinking fund requirement of $5 million,
beginning in 1996, has been satisfied through conversions of
debentures.
|
|
(g)
|
The
6.5% junior subordinated deferrable interest debentures due 2029
(the
"6.5% debentures") had an initial issue price of $741.46 and have
a
redemption price of $1,000. The 6.5% debentures were initially issued
to
Hercules Trust II ("Trust II"), a subsidiary trust established in
1999.
Trust II had issued, in an underwritten public offering, 350,000
CRESTS
Units, each consisting of a 6.5% preferred security of Trust II and
a
warrant (exercisable through 2029) to purchase 23.4192 shares of
the
Company's common stock. The preferred securities and the warrants
were
separable and were initially valued at $741.46 and $258.54, respectively.
The Company and Trust II accreted the difference between the initial
valuation of the 6.5% debentures and the preferred securities and
the
redemption value of $1,000 over the term of the 6.5% debentures and
the
preferred securities. In connection with the Company’s dissolution and
liquidation of Trust II in December 2004, Trust II distributed the
6.5%
debentures to the holders of the preferred securities and the preferred
securities were cancelled. The CRESTS Units now consist of the 6.5%
debentures and the warrants.
|
|
(h)
|
Includes
loans issued by Hercules Tianpu secured by liens on Hercules Tinapu’s
fixed assets for which Hercules has provided a guarantee for 55%
of the
outstanding balances. The loans are denominated in renminbi and include
a
short-term loan payable due in 2007 for approximately $5.9 million
and a
long-term loan payable due in 2011 for approximately $22.2
million.
|
-20-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During 2006, the Board of Directors authorized the Company, from time to
time,
subject to market conditions and the Company's credit agreements and indentures,
to repurchase up to $150 million of its outstanding indebtedness on the
open
market. Under this program the Company repurchased $113.9 million (book
value)
of its 11.125% senior notes. In addition, the Company acquired 5,000 CRESTS
Units for $4.2 million in open market purchases. The market value of the
6.5%
debentures and CRESTS Units repurchased were $3.3 million and $1.0 million,
respectively. The accreted book value of the 6.5% debentures at the time
of the
purchase was $3.8 million, resulting in the recognition of a $0.5 million
gain.
The $1.0 million associated with the warrants was recorded as a reduction
of
Additional paid-in capital. Also, $18.0 million attributable to the Term
B loan
was paid during 2006, of which, $14.0 million represents a prepayment.
In
December 2006, the Board of Directors approved a new authorization for
the
repurchase of up to $200 million of debt.
At
December 31, 2006, Hercules had available and unused foreign lines of credit
totaling $31.8 million and $29.3 million, respectively.
Debt
maturities are $35.8 million in 2007, $10.1 million in 2008, $11.4 million
in
2009, $372.8 million in 2010, $1.3 million in 2011 and $564.1 million
thereafter.
The
domestic and foreign components of income (loss) before income taxes, minority
interests and equity (loss) income from continuing operations are listed
below:
|
2006
|
2005
|
2004
|
||||||||
|
Domestic
|
$
|
(164.3
|
)
|
$
|
(46.9
|
)
|
$
|
(154.8
|
)
|
|
|
Foreign
|
167.5
|
11.5
|
189.3
|
|||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
$
|
3.2
|
$
|
(35.4
|
)
|
$
|
34.5
|
|||
The
components of the tax provision from continuing operations are as
follows:
|
Currently
payable
|
2006
|
2005
|
2004
|
|||||||
|
U.S.
federal
|
$
|
(64.0
|
)
|
$
|
1.4
|
$
|
(29.0
|
)
|
||
|
Foreign
|
29.6
|
40.9
|
38.1
|
|||||||
|
State
|
—
|
8.8
|
13.4
|
|||||||
|
Deferred
|
||||||||||
|
Domestic
|
(154.6
|
)
|
(48.3
|
)
|
(21.5
|
)
|
||||
|
Foreign
|
(3.2
|
)
|
(6.6
|
)
|
2.8
|
|||||
|
(Benefit)
provision for income taxes
|
$
|
(192.2
|
)
|
$
|
(3.8
|
)
|
$
|
3.8
|
||
On
October 25, 2006, the Company reached an agreement with the IRS with respect
to
its audit of the 2002 and 2003 tax years. The effect of the agreement resulted
in the reversal of certain tax reserves in the amount of $48.7 million
established with respect to the sale of the Company’s former BetzDearborn Water
Treatment business which has been reported as a discontinued operation. The
provision for income taxes attributable to discontinued operations and
cumulative effect of changes in accounting principle is:
|
2006
|
2005
|
2004
|
||||||||
|
Benefit
on loss from discontinued operations
|
$
|
(49.6
|
)
|
$
|
(3.4
|
)
|
$
|
(1.4
|
)
|
|
|
Cumulative
effect of changes in accounting principle
|
0.5
|
(1.4
|
)
|
—
|
||||||
|
$
|
(49.1
|
)
|
$
|
(4.8
|
)
|
$
|
(1.4
|
)
|
||
During
the years ended December 31, 2006, 2005 and 2004 the Company recorded items
related to the additional minimum liability of its defined benefit plans, the
impact of the adoption of Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”)
and hedging activities. The impact of the adjustments is posted, net of tax,
directly to Accumulated other comprehensive losses (see Note
17). The tax benefit (expense) of these items was as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Additional
minimum pension liability
|
$
|
(44.7
|
)
|
$
|
24.8
|
$
|
14.5
|
|||
|
Impact
of the adoption of SFAS 158
|
62.2
|
—
|
—
|
|||||||
|
Hedging
activities
|
18.6
|
—
|
—
|
|||||||
|
Other
|
0.3
|
0.2
|
—
|
|||||||
|
$
|
36.4
|
$
|
25.0
|
$
|
14.5
|
|||||
-21-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
components of the net deferred tax assets (liabilities) as of December 31,
are
as follows:
|
2006
|
2005
|
||||||
|
Depreciation
|
$
|
(82.8
|
)
|
$
|
(81.4
|
)
|
|
|
Pension
|
(1.3
|
)
|
(8.2
|
)
|
|||
|
Inventory
|
(3.1
|
)
|
(4.1
|
)
|
|||
|
Investments
|
(19.3
|
)
|
(174.3
|
)
|
|||
|
Goodwill
|
(45.0
|
)
|
(48.4
|
)
|
|||
|
Accrued
expenses
|
(2.9
|
)
|
(3.1
|
)
|
|||
|
Other
|
(7.5
|
)
|
(13.1
|
)
|
|||
|
Gross
deferred tax liabilities
|
$
|
(161.9
|
)
|
$
|
(332.6
|
)
|
|
|
Postretirement
benefits other than pensions
|
$
|
70.0
|
$
|
45.5
|
|||
|
Pension
|
87.3
|
113.4
|
|||||
|
Goodwill
|
8.4
|
7.1
|
|||||
|
Accrued
expenses
|
242.1
|
216.1
|
|||||
|
Loss
carryforwards
|
230.1
|
349.2
|
|||||
|
Credit
carryforwards
|
131.4
|
126.9
|
|||||
|
Investments
|
77.5
|
21.5
|
|||||
|
Other
|
14.2
|
24.6
|
|||||
|
Gross
deferred tax assets
|
861.0
|
904.3
|
|||||
|
Valuation
allowance
|
(335.8
|
)
|
(380.7
|
)
|
|||
|
Net
deferred tax assets
|
$
|
363.3
|
$
|
191.0
|
|||
The
reconciliation of the U.S. statutory income tax rate to the effective rate
from
continuing operations is:
|
2006
|
2005
|
2004
|
||||||||
|
U.S.
statutory income tax rate
|
35
|
%
|
35
|
%
|
35
|
%
|
||||
|
Gain
on sale of CP Kelco ApS
|
—
|
—
|
(27
|
)
|
||||||
|
Valuation
allowances
|
(3,137
|
)
|
(66
|
)
|
(66
|
)
|
||||
|
Tax
rate differences on subsidiary earnings
|
(325
|
)
|
(8
|
)
|
(39
|
)
|
||||
|
U.S.
tax on foreign dividends and undistributed earnings
|
232
|
27
|
21
|
|||||||
|
State
taxes
|
(1
|
)
|
(15
|
)
|
30
|
|||||
|
Reserves
|
(1,378
|
)
|
21
|
61
|
||||||
|
Exempt
export income
|
(36
|
)
|
5
|
(6
|
)
|
|||||
|
Tax
refunds
|
(1,396
|
)
|
12
|
—
|
||||||
|
Other
|
—
|
—
|
2
|
|||||||
|
Effective
tax rate
|
(6,006
|
)%
|
11
|
%
|
11
|
%
|
||||
Loss
carryforwards include both net operating loss carryforwards and capital loss
carryforwards. At December 31, 2006, the tax effect of such carryforwards
approximated $230.1 million. Of this amount, $130.2 million are domestic capital
loss carryforwards that expire in 2007 for which full valuation allowances
have
been established and $3.4 million are domestic net operating loss carryforwards
that expire in 2023 for which no valuation allowance has been established.
State
net operating loss carryforwards approximate $81.0 million, with expiration
dates ranging from 2007 to 2026, for which full valuation allowances have been
established. Foreign net operating loss carryforwards approximate $15.5 million
and are offset by valuation allowances of $8.5 million. Some of these foreign
net operating loss carryforwards expire as early as 2007 and others have
expiration dates that are indefinite in nature. Deferred tax assets of $77.5
million attributable to investments represents the basis difference in the
carrying value of the Company’s 49% investment in FiberVisions for which full
valuation allowances have been established. The tax effect of the credit
carryforwards approximated $131.4 million at December 31, 2006, with
expiration dates ranging from 2011 to 2026, for which no valuation allowances
have been established.
The
Company provides taxes on undistributed earnings of subsidiaries and affiliates
to the extent such earnings are planned to be remitted and not permanently
reinvested. The undistributed earnings of subsidiaries and affiliates on which
no provision for foreign withholding or U.S. income taxes has been made amounted
to approximately $82.5 million and $153.8 million at December 31, 2006 and
2005, respectively. U.S. and foreign income taxes that would be payable if
such
earnings were distributed may be lower than the amount computed at the U.S.
statutory rate because of the availability of tax credits.
-22-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company provides defined benefit pension plans and postretirement benefit plans
to most U.S. employees and some foreign employees. The
following table summarizes information about the Company’s pension and
postretirement benefit plans subsequent to the adoption SFAS 158. Certain of
the
disclosures required by SFAS 158 are not applicable (“N/A”) to the 2005
presentation.
|
Pension
Benefits
|
|||||||||||||||||||
|
2006
|
2005
|
Other
Postretirement Benefits
|
|||||||||||||||||
|
Change
in benefit obligation:
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2006
|
2005
|
|||||||||||||
|
Benefit
obligation at January 1
|
$
|
1,536.8
|
$
|
340.6
|
$
|
1,413.5
|
$
|
325.7
|
$
|
154.5
|
$
|
181.0
|
|||||||
|
Service
cost
|
11.4
|
6.0
|
12.7
|
5.4
|
0.5
|
0.8
|
|||||||||||||
|
Interest
cost
|
86.5
|
15.5
|
81.3
|
15.2
|
8.8
|
8.8
|
|||||||||||||
|
Plan
amendments
|
—
|
0.3
|
—
|
(4.5
|
)
|
—
|
(32.4
|
)
|
|||||||||||
|
Foreign
currency translation
|
—
|
35.3
|
—
|
(37.3
|
)
|
—
|
0.1
|
||||||||||||
|
Actuarial
(gain) loss
|
(17.8
|
)
|
(17.8
|
)
|
136.1
|
49.2
|
14.7
|
19.8
|
|||||||||||
|
Settlements/curtailments
|
(2.3
|
)
|
(0.6
|
)
|
—
|
—
|
—
|
—
|
|||||||||||
|
Special
termination benefits
|
1.6
|
—
|
—
|
—
|
1.3
|
—
|
|||||||||||||
|
Benefits
paid from plan assets
|
(109.0
|
)
|
(15.2
|
)
|
(101.9
|
)
|
(13.1
|
)
|
—
|
—
|
|||||||||
|
Benefits
paid from Company assets
|
(5.1
|
)
|
—
|
(4.9
|
)
|
—
|
(21.4
|
)
|
(23.6
|
)
|
|||||||||
|
Benefit
obligation at December 31
|
$
|
1,502.1
|
$
|
364.1
|
$
|
1,536.8
|
$
|
340.6
|
$
|
158.4
|
$
|
154.5
|
|||||||
|
Change
in plan assets:
|
|||||||||||||||||||
|
Fair
value of plan assets at January 1
|
$
|
1,219.3
|
$
|
256.4
|
$
|
1,176.2
|
$
|
245.7
|
$
|
—
|
$
|
—
|
|||||||
|
Actual
return on plan assets
|
165.7
|
17.1
|
105.0
|
20.9
|
—
|
—
|
|||||||||||||
|
Actuarial
(loss) gain
|
—
|
(0.5
|
)
|
—
|
14.7
|
—
|
—
|
||||||||||||
|
Company
contributions
|
30.0
|
7.5
|
40.0
|
13.7
|
—
|
—
|
|||||||||||||
|
Participant
contributions
|
—
|
0.8
|
—
|
0.9
|
—
|
—
|
|||||||||||||
|
Foreign
currency translation
|
—
|
27.5
|
—
|
(27.7
|
)
|
—
|
—
|
||||||||||||
|
Benefits
paid from plan assets
|
(109.0
|
)
|
(13.8
|
)
|
(101.9
|
)
|
(11.8
|
)
|
—
|
—
|
|||||||||
|
Fair
value of plan assets at December 31
|
$
|
1,306.0
|
$
|
295.0
|
$
|
1,219.3
|
$
|
256.4
|
$
|
—
|
$
|
—
|
|||||||
|
Funded
status of the plan
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
(317.5
|
)
|
$
|
(84.2
|
)
|
$
|
(158.4
|
)
|
$
|
(154.5
|
)
|
|
|
Unrecognized
actuarial loss
|
—
|
—
|
671.2
|
104.5
|
—
|
120.1
|
|||||||||||||
|
Unrecognized
prior service benefit
|
—
|
—
|
(22.0
|
)
|
(2.7
|
)
|
—
|
(55.4
|
)
|
||||||||||
|
Accrued
expenses
|
—
|
—
|
—
|
(0.2
|
)
|
—
|
—
|
||||||||||||
|
Unrecognized
net transition obligation
|
—
|
—
|
—
|
0.5
|
—
|
0.8
|
|||||||||||||
|
Net
amount recognized
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
331.7
|
$
|
17.9
|
$
|
(158.4
|
)
|
$
|
(89.0
|
)
|
|||
|
Components
of the above amounts:
|
|||||||||||||||||||
|
Prepaid
benefit cost
|
$
|
—
|
$
|
2.2
|
$
|
369.5
|
$
|
53.3
|
$
|
—
|
$
|
—
|
|||||||
|
Accrued
expenses
|
(4.9
|
)
|
—
|
—
|
—
|
(16.2
|
)
|
(23.5
|
)
|
||||||||||
|
Accrued
benefit liability (noncurrent)
|
(191.2
|
)
|
(71.3
|
)
|
(37.8
|
)
|
(35.4
|
)
|
(142.2
|
)
|
(65.5
|
)
|
|||||||
|
Additional
minimum liability
|
—
|
—
|
(588.6
|
)
|
(48.2
|
)
|
—
|
—
|
|||||||||||
|
Intangible
asset
|
—
|
—
|
—
|
0.4
|
—
|
—
|
|||||||||||||
|
Accumulated
other comprehensive losses
|
—
|
—
|
588.6
|
47.8
|
—
|
—
|
|||||||||||||
|
Net
amount recognized
|
$
|
(196.1
|
)
|
$
|
(69.1
|
)
|
$
|
331.7
|
$
|
17.9
|
$
|
(158.4
|
)
|
$
|
(89.0
|
)
|
|||
|
Amounts
included in Accumulated other comprehensive
losses:
|
|||||||||||||||||||
|
Actuarial
(losses) gains
|
$
|
(545.8
|
)
|
$
|
(106.6
|
)
|
N/A
|
N/A
|
$
|
(126.4
|
)
|
N/A
|
|||||||
|
Prior
service credits
|
18.2
|
17.2
|
N/A
|
N/A
|
43.0
|
N/A
|
|||||||||||||
|
Transition
obligations
|
—
|
(0.4
|
)
|
N/A
|
N/A
|
(0.7
|
)
|
N/A
|
|||||||||||
|
Total
|
$
|
(527.6
|
)
|
$
|
(89.8
|
)
|
N/A
|
N/A
|
$
|
(84.1
|
)
|
N/A
|
|||||||
|
Amortization
expected to be recognized during next fiscal
year:
|
|||||||||||||||||||
|
Actuarial
losses
|
$
|
39.1
|
$
|
4.5
|
N/A
|
N/A
|
$
|
8.9
|
N/A
|
||||||||||
|
Prior
service credits
|
(1.7
|
)
|
(0.9
|
)
|
N/A
|
N/A
|
(7.8
|
)
|
N/A
|
||||||||||
|
Transition
obligations
|
—
|
0.1
|
N/A
|
N/A
|
0.1
|
N/A
|
|||||||||||||
|
Total
|
$
|
37.4
|
$
|
3.7
|
N/A
|
N/A
|
$
|
1.2
|
N/A
|
||||||||||
-23-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Weighted-average
assumptions used to determine the benefit obligation at December
31, 2006
and 2005 were:
|
|||||||||||||||||||
|
Pension
Benefits
|
|
||||||||||||||||||
|
2006
|
2005
|
Other
Postretirement Benefits
|
|||||||||||||||||
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2006
|
2005
|
||||||||||||||
|
Weighted-average
discount rate
|
5.90
|
%
|
4.71
|
%
|
5.70
|
%
|
4.35
|
%
|
5.79
|
%
|
5.59
|
%
|
|||||||
|
Rate
of compensation increase
|
4.30
|
%
|
3.10
|
%
|
4.30
|
%
|
2.87
|
%
|
4.29
|
%
|
4.29
|
%
|
|||||||
Net
periodic benefit costs are summarized below:
|
Pension
Benefits
|
||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||||
|
Net
periodic benefit cost:
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2006
|
2005
|
2004
|
|||||||||||||||||||
|
Service
cost
|
$
|
11.4
|
$
|
6.0
|
$
|
12.7
|
$
|
5.4
|
$
|
13.3
|
$
|
5.9
|
$
|
0.5
|
$
|
0.8
|
$
|
0.8
|
||||||||||
|
Interest
cost
|
86.5
|
15.5
|
81.3
|
15.2
|
82.3
|
15.4
|
8.8
|
8.8
|
10.3
|
|||||||||||||||||||
|
Expected
return on plan assets
|
(100.4
|
)
|
(17.3
|
)
|
(95.4
|
)
|
(14.9
|
)
|
(96.5
|
)
|
(14.6
|
)
|
—
|
—
|
—
|
|||||||||||||
|
Amortization
and deferrals
|
(1.8
|
)
|
(0.4
|
)
|
(1.9
|
)
|
0.2
|
1.3
|
0.6
|
(8.0
|
)
|
(7.3
|
)
|
(8.5
|
)
|
|||||||||||||
|
Participant
contributions
|
—
|
(0.5
|
)
|
—
|
(0.5
|
)
|
—
|
(0.7
|
)
|
—
|
—
|
—
|
||||||||||||||||
|
Settlements/curtailments
(1)
|
(2.0
|
)
|
—
|
—
|
—
|
—
|
(0.1
|
)
|
(4.4
|
)
|
—
|
—
|
||||||||||||||||
|
Special
benefits/terminations (1)
|
1.6
|
—
|
—
|
—
|
1.1
|
—
|
1.2
|
—
|
—
|
|||||||||||||||||||
|
Amortization
of transition (asset) obligation
|
—
|
—
|
—
|
—
|
—
|
(0.1
|
)
|
—
|
—
|
0.1
|
||||||||||||||||||
|
Actuarial
losses recognized
|
39.9
|
4.5
|
40.7
|
3.4
|
33.9
|
3.1
|
8.4
|
6.5
|
5.2
|
|||||||||||||||||||
|
Benefit
cost
|
$
|
35.2
|
$
|
7.8
|
$
|
37.4
|
$
|
8.8
|
$
|
35.4
|
$
|
9.5
|
$
|
6.5
|
$
|
8.8
|
$
|
7.9
|
||||||||||
(1)
During 2006, the impact of these items was directly attributable to the
FiberVisions transaction and, accordingly, these items are reflected in the
loss
on the sale of a 51% interest in FiberVisions (see Notes 3 and 22)..
|
Weighted-average
assumptions used to determine net periodic benefit
cost:
|
||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
U.S.
|
Int’l.
|
2006
|
2005
|
2004
|
||||||||||||||||||||
|
Weighted-average
discount rate
|
6.00
|
%
|
4.53
|
%
|
5.75
|
%
|
5.04
|
%
|
6.10
|
%
|
5.35
|
%
|
5.81
|
%
|
5.51
|
%
|
6.08
|
%
|
||||||||||
|
Expected
return on plan assets
|
8.50
|
%
|
6.36
|
%
|
8.50
|
%
|
6.49
|
%
|
8.75
|
%
|
6.64
|
%
|
N/A
|
N/A
|
N/A
|
|||||||||||||
|
Rate
of compensation increase
|
4.30
|
%
|
2.99
|
%
|
4.50
|
%
|
2.79
|
%
|
4.50
|
%
|
2.86
|
%
|
4.29
|
%
|
4.49
|
%
|
4.49
|
%
|
||||||||||
Defined
Benefit Pension Plans
Assets
of
the Company’s defined benefit pension plans are primarily invested in U.S. and
international equity securities and U.S. and international fixed income
securities. Both the assets and the projected benefit obligations (“PBO”) of the
United States defined benefit pension plan (“U.S. Plan”) represent approximately
81% of the total plan assets and PBO for all defined benefit plans sponsored
by
the Company as of December 31, 2006. The Company uses a measurement date of
December 31 for all material defined benefit pension and other
postretirement benefit plans.
During
2006, the Company made contributions to its defined benefit plans totaling
$37.5
million, some of which were required by local funding requirements. The Company
presently anticipates making voluntary cash contributions to the U.S. Plan
of
approximately $40.0 million during 2007. Additionally, the Company anticipates
making contributions of approximately $21.0 million to its international defined
benefit pension plans in 2007.
Other
Postretirement Benefits
The
non-pension postretirement benefit plans include group life insurance coverage
and health care reimbursement for eligible employees/retirees in the U.S. and
Canada. The benefit obligation of the U.S. other postretirement benefit plan
constitutes more than 98% of the Company's consolidated benefit obligation
at
December 31, 2006 for non-pension postretirement benefits. The assumed
participation rate in these plans for future eligible retirees was 50% for
health care and 100% for life insurance. The health care plans are contributory
with participants' contributions adjusted annually; the life insurance plans
are
non-contributory for most retirees. The postretirement health care plans include
a limit on the Company's share of costs for recent and future retirees and
the
related accounting anticipates future cost-sharing changes to the written plans
that are consistent with the increase in health care cost. Participant
contributions are directly applied to claim payments and as such are not
included as contributions to plan assets. New employees are ineligible for
retiree life insurance or benefits supplemental to Medicare health
care.
-24-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The assumed health care cost trend rate as of December 31, 2006 was an initial
rate of 10% in 2007 reducing to 5.0% in 2009 and thereafter. A
one-percentage point increase in the assumed health care cost trend rate would
increase the postretirement benefit obligation by approximately $3.9 million
and
the aggregate service and interest cost components by $0.3 million, while a
decrease of the same magnitude would decrease the postretirement benefit
obligations by approximately $4.3 million and the aggregate service and interest
cost components by $0.4 million.
U.
S. Pension and Postretirement Benefit Plans
The
Company provides both funded and unfunded non-contributory defined benefit
pension plans to substantially all of its U.S. employees. During 2004, some
terms of the U.S. Plan were amended, rendering new hires ineligible and changing
the calculation formula to remaining participants from “final pay” to “modified
career average pay,” effective January 1, 2005. New employees are ineligible for
retiree life insurance or postretirement health care benefits.
The
asset
allocation for the U.S. Plan as of December 31, 2006 and 2005 and the target
allocation for 2007, by asset category, is as follows:
|
Target
Allocation
|
Percentage
of Plan Assets
at
December 31,
|
|||||||||
|
Asset
category:
|
2007
|
2006
|
2005
|
|||||||
|
Equity
securities
|
61
|
%
|
71
|
%
|
66
|
%
|
||||
|
Fixed
income
|
32
|
%
|
22
|
%
|
26
|
%
|
||||
|
Other
|
7
|
%
|
7
|
%
|
8
|
%
|
||||
|
Totals
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
Equity
securities are invested in both U.S. and non-U.S. (international) companies.
U.S. equity includes the common stock of large, medium, and small companies
that
are predominantly U.S. based. The plan did not own Hercules common stock as
of
December 31, 2006 or December 31, 2005.
Non-U.S.
equity represents equity securities issued by companies domiciled outside the
U.S. Fixed income securities include U.S. and non-U.S. government obligations,
mortgage-backed securities, collateralized mortgage obligations and corporate
debt obligations. Other investments primarily include market neutral,
long/short, and event driven-type hedge funds. Investment managers may employ
limited use of derivatives, including futures contracts, options on futures,
and
interest rate swaps in place of direct investment in securities to gain
efficient exposure to markets.
The
expected long-term rate of return on plan assets was 8.5% for both 2006 and
2005. The overall expected long-term rate of return on assets assumption is
a
function of the target asset allocation for plan assets, the long-term
equilibrium rate of return for the asset class, plus an incremental return
attributable to the active management of plan assets.
In
developing its investment strategy, the Company considered the following factors
for its U.S. Plan: the nature and relative size of the liabilities, the
allocation of such liabilities between active and retired members, net cash
flows and funded position. The Company also considers the applicable investment
horizon, historical and expected capital market return, and the benefits of
investment diversification.
The
Company manages plan assets with the primary objective of maximizing the
long-term investment return given available market opportunities and moderate
levels of risk consistent with the nature and purpose of the plan. Plan assets
are invested using a combination of active and passive investment strategies.
Active strategies employ multiple investment management firms. Managers within
each asset class cover a range of investment styles and approaches and are
combined in a way that controls market capitalization, style (growth, value,
and
core) and interest rate risk versus benchmark indices. Security selection is
the
primary means where value is added from active management. Risk is controlled
through diversification among multiple asset classes, managers, styles, and
securities. Risk is further controlled both at the manager and asset class
level
by monitoring performance against assigned return and variability
targets.
Expected
cash flows for the U.S. Plan and the Company’s other postretirement benefit
plans, including the total anticipated contributions to be made by the Company
in 2007 as well as the future benefit payments expected to be paid from plan
or
Company assets, are as follows:
-25-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Pension
Benefits
|
|
||||||||||||
|
Qualified
Plan
|
Non-qualified
Plan
|
Total
|
Other
Postretirement Benefits
|
||||||||||
|
Expected
employer contributions for 2007
|
$
|
40
|
$
|
—
|
$
|
40
|
$
|
—
|
|||||
|
Expected
benefit payments
|
|||||||||||||
|
2007
|
88
|
5
|
93
|
16
|
|||||||||
|
2008
|
87
|
5
|
92
|
16
|
|||||||||
|
2009
|
88
|
5
|
93
|
15
|
|||||||||
|
2010
|
88
|
5
|
93
|
14
|
|||||||||
|
2011
|
89
|
5
|
94
|
13
|
|||||||||
|
2012-2016
|
476
|
25
|
501
|
55
|
|||||||||
International
Pension Plans
The
International Plans are Company provided defined benefit and contribution plans
to eligible employees in Europe, Canada and Asia Pacific. The International
defined benefit Plans provide benefits based on years of service and final
average salary, except for the defined benefit pension plans in The Netherlands
(“The Netherlands Plan”) and the United Kingdom (the “U.K. Plan”) which have
both been amended to provide benefits based on a career average pay basis
effective January 1, 2006.
The
asset
allocation for International Plans as of December 31, 2006 and 2005 and the
target allocation for 2007, by asset category, is as follows:
|
Target
Allocation
|
Percentage
of Plan Assets
at
December 31,
|
|||||||||
|
Asset
category:
|
2007
|
2006
|
2005
|
|||||||
|
Equity
securities
|
58
|
%
|
58
|
%
|
61
|
%
|
||||
|
Fixed
income
|
41
|
%
|
41
|
%
|
38
|
%
|
||||
|
Other
|
1
|
%
|
1
|
%
|
1
|
%
|
||||
|
Totals
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
The
total
assets held by The Netherlands Plan and the U.K. Plan account for approximately
90% of the total assets held by International Plans.
The
Netherlands Plan's long-term target asset allocation is 58% global equity
securities which are actively managed and 42% fixed income investments (debt
and
debt-like securities, including preferred securities). The fixed income
securities are denominated in Euro and are issued and/or guaranteed by European
Monetary Union governments (mainly Belgium, Germany, France, Italy and The
Netherlands). The fixed income manager may invest on a tactical basis in
investment grade corporate bonds denominated in Euro. Investment managers may
employ limited use of derivatives, including futures contracts, options on
futures, and interest rate swaps in place of direct investment in securities
to
gain efficient exposure to markets. Derivatives are not used to leverage
portfolios.
The
expected long-term rate of return on plan assets was 6.75% for 2006 and 6.8%
for
2005, respectively. The overall expected long-term rate of return on assets
assumption is a function of the target asset allocation for plan assets, the
long-term equilibrium rate of return for the asset class, plus an incremental
return attributable to the active management of plan assets.
In
developing an investment strategy for The Netherlands Plan, the Company has
considered the following factors: the nature of the plan's liabilities, the
allocation of such liabilities between active members and retired members,
the
funded status of the plan, the net cash flow of the plan, the investment horizon
of the plan, the size of the plan, historical and expected capital market
returns and the benefits of investment diversification.
The
target asset allocation for the U.K. Plan is 50% global equity securities and
50% fixed income investments (debt and debt-like securities, including preferred
securities). The expected long-term rate of return on plan assets was 5.2%
and 5.6% for 2006 and 2005, respectively. The overall expected long-term rate
of
return on assets assumption is a function of the target asset allocation for
plan assets, the long-term equilibrium rate of return for the asset class,
plus
an incremental return attributable to the active management of plan assets.
The
Company considers the following factors in the development of its U.K. Plan
investment strategy: the nature and relative size of the liabilities, the
allocation of such liabilities between active and retired members, net cash
flows and funded positions, the applicable investment horizon, historical and
expected capital market returns, and the benefits of investment diversification.
-26-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company invests its U.K. Plan assets with a Manager of Managers, who invests
them with a broad selection of investment managers, each specializing in a
different asset class or market. This approach provides a diversified portfolio
of managers in order to capitalize on the perceived strengths of each manager
within this structure. The Company delegates responsibility for the selection
and monitoring of the underlying investment managers to the Manager of Managers.
Expected
cash flows for the International Plans, reflecting the total anticipated Company
contributions to be made in 2007 and the total benefit payments expected to
be
paid from the plan assets or Company assets through the year 2016, are
summarized in the table below:
|
Pension
Plan Benefits
|
||||
|
Expected
employer contributions for 2007
|
$
|
21
|
||
|
Expected
benefit payments:
|
||||
|
2007
|
15
|
|||
|
2008
|
15
|
|||
|
2009
|
16
|
|||
|
2010
|
16
|
|||
|
2011
|
18
|
|||
|
2012-2016
|
97
|
|||
The
Hercules Incorporated Savings and Investment Plan (“SIP Plan”) allows employees
to invest a portion of compensation in a defined contribution 401(k) plan.
The
Company's matching contributions, made in the form of Hercules' common stock
contributed through an Employee Stock Ownership Plan Trust (“ESOP Trust”) are
equal to 50% of the first 6% of the employee's contributed compensation and
vest
immediately. Shares used to fulfill the Company's matching contribution are
released at the fair market value of those shares in the period in which they
are allocated. The pre-tax difference between cost and fair market value of
these allocated shares, which was $6.4 million, $7.3 million and $8.2 million
for the years ended December 31, 2006, 2005 and 2004, respectively, is recorded
in Additional paid-in capital. Total shares allocated to fund these plan
payments were 106,977 and 103,717 for the years ended December 31, 2006 and
2005, respectively. The unallocated shares held by the trust are reflected
in
Unearned compensation as a reduction in Stockholders' (deficit) equity on the
balance sheet of $42.1 million and $53.6 million at December 31, 2006 and
2005, respectively. The unallocated shares have a cost basis of $31.625 per
share.
At
December 31, 2006 and 2005, the ESOP Trust had $28.3 million and $39.2 million
in long-term debt outstanding, respectively, under its loan agreement with
the
Company; the Company has an offsetting receivable in each year, which is
eliminated upon consolidation.
|
2006
|
2005
|
||||||
|
Allocated
|
1,200,346
|
1,458,065
|
|||||
|
Unallocated
|
1,332,965
|
1,695,387
|
|||||
|
Total
shares held by ESOP Trust
|
2,533,311
|
3,153,452
|
|||||
The
Company's SIP related expense was $6.1 million, $4.0 million and $3.9 million
for the years ended December 31, 2006, 2005 and 2004, respectively.
The
Company has recorded asset retirement obligations (“ARO”) in order to recognize
legal obligations associated with the retirement of tangible long-lived assets
and for the remediation of environmental liabilities associated with current
and
former operations incurred during the course of normal operations. Other AROs
are attributable to requirements to dismantle facilities and component assets
upon their retirement as well as returning leased property to its original
condition upon the expiration of their underlying lease terms.
The
Company has a number of AROs that are conditional in nature including those
triggered upon commitments by the Company to take certain actions, including
demolition, renovation and other retirement-related activities as contemplated
by FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement
Obligations - an interpretation of FASB Statement No. 143” (“FIN 47”). These
actions include the preparation of certain properties for sale or for
alternative uses as well as the requirement to dismantle the Company’s
manufacturing facilities in certain countries upon their ultimate retirement
or
land lease expiration dates. There are also conditional requirements for asset
component retirements in which the Company can reasonably estimate both the
amount of the required settlement as well as the range of settlement
dates.
-27-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
There
are
a number of remaining conditional AROs whereby the Company does not have
sufficient information to estimate the fair value of the liabilities because
the
range of settlement dates has not been specified by others and/or cost estimates
are not available to apply an expected present value technique. Most significant
among these unrecognized conditional AROs are those attributable to the
abatement of asbestos at manufacturing facilities, and environmental
contamination. Asbestos is present in a substantial number of the Company’s
facilities. In general, regulations in the U.S. and other countries do not
require removal or abatement unless the condition is hazardous or if the
structure or component is disturbed through such activities as renovation or
demolition.
With
respect to environmental contamination, the Company operates within the
requirements of numerous regulations at the local, state and U.S. Federal and
foreign levels regarding issues such as the handling and disposal of hazardous
chemicals, waste-water treatment and effluent and emissions limitations, among
others. From a practical standpoint, certain environmental contamination cannot
be reasonably determined until a facility or asset is retired or an event occurs
that otherwise requires the facility to be tested and monitored. In the absence
of such requirements to test for environmental contamination prior to an asset
or facility retirement, the Company has concluded that it cannot reasonably
estimate the cost associated with such environmental-related AROs. In addition,
the Company anticipates operating its manufacturing facilities indefinitely
into
the future thereby rendering the potential range of settlement dates as
indeterminate.
As
of
December 31, 2006, the Company has accrued a total of $76.3 million with respect
to AROs. Of this amount, approximately $72.3 million is for environmental
remediation associated with current and former operating sites. An amount of
$21.0 million is included in Accrued expenses representing amounts to be settled
during 2007 and the remaining $55.3 million is included in Deferred credits
and
other liabilities. The AROs have been recognized on a discounted basis using
a
credit-adjusted risk free rate. Accretion of the AROs is recorded in Other
operating expense, net for active operating sites and facilities and Other
expense, net for inactive sites associated with businesses that have been exited
or divested.
The
following table provides a reconciliation of changes in the AROs during the
period:
|
Active
Sites
|
Inactive
Sites
|
Total
|
||||||||
|
Balance
at January 1, 2005
|
$
|
7.1
|
$
|
89.2
|
$
|
96.3
|
||||
|
Impact
of the adoption of FIN 47
|
4.0
|
—
|
4.0
|
|||||||
|
Accretion
|
0.2
|
1.8
|
2.0
|
|||||||
|
Settlement
payments
|
(1.2
|
)
|
(9.0
|
)
|
(10.2
|
)
|
||||
|
Changes
in estimated obligations
|
0.3
|
3.2
|
3.5
|
|||||||
|
Transfers
of obligations
|
—
|
(4.4
|
)
|
(4.4
|
)
|
|||||
|
Foreign
currency translation
|
(0.2
|
)
|
(0.7
|
)
|
(0.9
|
)
|
||||
|
Balance
at December 31, 2005
|
$
|
10.2
|
$
|
80.1
|
$
|
90.3
|
||||
|
Accretion
|
0.8
|
1.4
|
2.2
|
|||||||
|
Settlement
payments
|
(4.3
|
)
|
(14.1
|
)
|
(18.4
|
)
|
||||
|
Changes
in estimated obligations
|
3.2
|
(1.6
|
)
|
1.6
|
||||||
|
Foreign
currency translation
|
0.2
|
0.4
|
0.6
|
|||||||
|
Balance
at December 31, 2006
|
$
|
10.1
|
$
|
66.2
|
$
|
76.3
|
||||
While
not
reflected in the table above, the Company has recognized $5.3 million for
environmental contingencies whereby it is reasonably likely that the Company
has
incurred a liability for costs associated with environmental remediation or
for
the probable settlement of related litigation. Liabilities included in this
amount are attributable to sites that the Company formerly owned as well as
sites that the Company did not have an ownership interest therein, but was
associated with activities at such sites, including landfills, waste sites
and
other similar properties.
-28-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Guarantees
In
accordance with FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), disclosures about each group of similar
guarantees are provided below:
Indemnifications
In
connection with the sale of the Company assets and businesses, the Company
has
indemnified respective buyers against certain liabilities that may arise in
connection with the sales transactions and business activities prior to the
ultimate closing of the sale. These indemnifications typically pertain to
environmental, tax, employee and/or product related matters. If the indemnified
party were to incur a liability or have a liability increase as a result of
a
successful claim, pursuant to the terms of the indemnification, the Company
would be required to reimburse the buyer. These indemnifications are generally
subject to threshold amounts, specified claim periods and/or other restrictions
and limitations. The carrying amount recorded for indemnifications as of
December 31, 2006 was $41.2 million. Although it is reasonably possible that
future payments may exceed amounts accrued, due to the nature of indemnified
items, it is not possible to make a reasonable estimate of the maximum potential
loss or range of loss. Generally, there are no specific recourse
provisions.
In
addition, the Company provides certain indemnifications in the ordinary course
of business such as product, patent and performance warranties in connection
with the manufacture, distribution and sale of its products and services. Due
to
the nature of these indemnities, it is not possible to make a reasonable
estimate of the maximum potential loss or range of loss.
Debt
and Other Obligations
The
Company has directly guaranteed up to $43.5 million of various obligations
under
agreements with third parties related to subsidiaries, VIEs and affiliates
of
which $30.4 million is outstanding. The outstanding balance reflects guarantees
of debt for terms of varying length as well as a guarantee related to a
foreign-based pension plan with an indefinite term. The Company has also
provided $2.9 million in collateral in the form of a mortgage security for
the
aforementioned pension plan. Existing guarantees for subsidiaries and affiliates
arose from liquidity needs in normal operations.
Intercompany
Guarantees
The
Company and its subsidiaries have authorized intercompany guarantees between
and
among themselves which aggregate $191.5 million, of which $179.6 million was
outstanding as of December 31, 2006. These guarantees relate to intercompany
loans used to facilitate normal business operations and have been eliminated
from the Company's Consolidated Financial Statements.
Leases
Hercules
has operating leases (including office space, transportation and data processing
equipment) expiring at various dates. Lease expense of $19.7 million, $20.6
million and $22.1 million in 2006, 2005 and 2004, respectively, is net of
sub-lease income of $5.1 million, $5.2 million and $5.4 million in 2006, 2005
and 2004, respectively.
At
December 31, 2006, minimum rental payments under non-cancelable leases
aggregated $133.4 million with offsetting subleases of $32.4 million. A
significant portion of these payments relate to a long-term operating lease
for
corporate office facilities. The minimum payments over the next five years,
net
of minimum sublease receipts, are $18.9 million in 2007, $18.9 million in 2008,
$25.7 million in 2009, $11.8 million in 2010, $11.0 million in 2011 and $14.7
million thereafter.
Environmental
In
the
ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites,
past
spills, disposals and other releases of hazardous substances. Changes in
these laws and regulations may have a material adverse effect on the Company’s
financial position and results of operations. Any failure by the Company
to adequately comply with such laws and regulations could subject the Company
to
significant future liabilities.
The
Company has been identified as a potentially responsible party (“PRP”) by U.S.
federal and state authorities, or by private parties seeking contribution,
for
the cost of environmental investigation and/or cleanup at numerous sites.
The Company becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency (“EPA”) or other government agencies or from
previously named PRPs, who either request information or notify the Company
of
its potential liability. The Company has established procedures for
identifying environmental issues at its plant sites. In addition to
environmental audit programs, the Company has environmental coordinators who
are
familiar with environmental laws and regulations and act as a resource for
identifying environmental issues.
-29-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
While
the
Company is involved in numerous environmental matters, the following matters
are
described below because they are currently viewed by management as potentially
material to the Company’s consolidated financial position, results of operations
and cash flows.
United
States of America v. Vertac Chemical Corporation, et al.,
No.
4:80CV00109 (United States District Court, Eastern District of Arkansas, Western
Division)
This
case, a cost-recovery action based upon the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA” or the “Superfund statute”),
as well as other statutes, has been in litigation since 1980, and involves
liability for costs in connection with the investigation and remediation of
the
Vertac Chemical Corporation (“Vertac”) site in Jacksonville, Arkansas. The
Company owned and operated the site from December 1961 until 1971. The site
was
used for the manufacture of certain herbicides and, at the order of the United
States, Agent Orange. In 1971, the site was leased to Vertac’s
predecessor. In 1976, the Company sold the site to Vertac. The site was
abandoned by Vertac in 1987, and Vertac was subsequently placed into
receivership. Both prior to and following the abandonment of the site, the
EPA and the Arkansas Department of Pollution Control and Ecology were involved
in the investigation and remediation of contamination at and around the site.
Pursuant to several orders issued under CERCLA, the Company actively
participated in many of those activities. The cleanup is essentially
complete, except for certain on-going maintenance and monitoring activities.
This litigation primarily concerns the responsibility and allocation of
liability for the costs incurred in connection with the activities undertaken
by
the EPA.
The
procedural history of this litigation is discussed in greater detail in reports
previously filed by the Company with the SEC. In summary, in 1999, the District
Court finalized a ruling holding the Company and Uniroyal jointly and severally
liable for approximately $100 million in costs incurred by the EPA, as well
as
costs to be incurred in the future. In 2000, the District Court allocated 2.6%
of such amounts to Uniroyal and 97.4% of such amounts to the Company. Both
the
Company and Uniroyal appealed those rulings to the U.S. Court of Appeals for
the
Eighth Circuit (the “Court of Appeals”). In 2001, the Court of Appeals reversed
the District Court’s rulings as to joint and several liability and allocation,
and remanded the case back to the District Court for several determinations,
including a determination of whether the harms at the site giving rise to the
EPA’s claims were divisible. The trial on remand occurred in late 2001.
By
Memorandum Opinion and Order dated March 30, 2005, the District Court
largely affirmed its prior findings and prior judgment against the Company
and
Uniroyal, and the prior allocation with respect to the Company and Uniroyal,
although the District Court did agree that the Company should not be liable
for
costs associated with a particular off-site landfill, and held that the judgment
should be reduced accordingly. By Order dated June 6, 2005, the District
Court entered a Final Judgment in favor of the United States and against the
Company for $119.3 million, of which amount Uniroyal has been held jointly
and
severally liable for $110.4 million, with the Company alone liable for the
difference. The Final Judgment also provided that both the Company and Uniroyal
are responsible for any additional response costs incurred or to be incurred
by
the United States after June 1, 1998, as well as post-judgment interest
running from the date of the Final Judgment. In addition, the District Court
re-affirmed its prior holding which allocated 2.6% of the $110.4 million in
response costs for which Uniroyal is jointly and severally liable, or $2.9
million, to Uniroyal. Finally, the Final Judgment found Uniroyal liable to
the
Company for 2.6% of the response costs incurred by the Company of approximately
$27.4 million, or $0.7 million. Both the Company and Uniroyal appealed the
Final
Judgment to the Court of Appeals, asserting that the District Court had
committed reversible error.
On
July
13, 2006, a panel of the Court of Appeals affirmed the Final Judgment of the
District Court. The Company requested that the panel’s determination be reviewed
en
banc,
but
that request was denied by Order dated September 19, 2006. On December 14,
2006,
the Company filed a Petition for a Writ of Certiorari with the United States
Supreme Court, requesting that the Supreme Court review this matter. No action
has yet been taken by the Supreme Court with respect to the Company’s Petition.
While the Company continues to believe that the Final Judgment should be
reversed, the Supreme Court agrees to review very few matters, and it is
therefore probable that the Company will not be successful in having the Supreme
Court agree to review the July 13, 2006 decision which affirmed the Final
Judgment. Accordingly, the Company has accrued its total net liability of $123.5
million, including interest but not including amounts for which Uniroyal has
been held liable, based on the Final Judgment, which is recorded as a current
liability at December 31, 2006. The Company will continue to accrue interest
on
this amount until such time as the Final Judgment is either reversed or is
paid.
If the Company is ultimately required to pay such amount to the United States,
an event which could occur in 2007 or thereafter, the payment of such amount
could have a material adverse effect upon the Company’s cash flows in such
annual, quarterly or other period.
-30-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Alleghany
Ballistics Laboratory
The
Alleghany Ballistics Laboratory (“ABL”) is a government-owned facility which was
operated by the Company from 1945 to 1995 under contract with the United States
Department of the Navy. The Navy and the Company have commenced discussions
with
respect to certain environmental liabilities which the Navy alleges are
attributable to the Company’s past operations at ABL. During the course of
discussions, the Navy has stated that, pursuant to CERCLA, it has spent and
anticipates spending in the future a total of approximately $76 million. The
Company has conducted an investigation of the Navy’s allegations, including the
basis of the Navy’s claims, and believes the contracts with the government
pursuant to which the Company operated ABL may provide the Company with a
defense from some or all of the amounts sought. The Company has exchanged
information with the Navy and discussions with the Navy are continuing. At
this
time, however, the Company cannot reasonably estimate its liability, if any,
with respect to ABL and, accordingly, has not included this site in the range
of
its environmental liabilities reported below.
Kim
Stan Landfill
The
Company is one of a limited number of industrial companies that have been
identified by the EPA as a PRP at the Kim Stan Landfill, near Covington,
Virginia. The EPA is seeking to have the PRPs undertake the remediation of
the
site at a currently estimated cost of $12.0 million (including EPA oversight
charges). Based on the investigation conducted to date, the Company believes
that parties not named by the EPA as PRPs may be responsible for the majority
of
the costs that have been and will be incurred at the site and intends to seek
contribution from those parties to the extent it is required to pay any monies
in connection with the site. As a result of that investigation, the Company
believes that it has defenses that would substantially reduce its exposure.
The
Company and two other PRPs are in negotiations with the EPA in an attempt to
resolve this matter in an equitable manner. The Company believes it is probable
that this matter will ultimately be amicably resolved, and the amount the
Company reasonably estimates that it will pay is included in the accrued
liability for environmental matters reported below.
Clean
Air Act Notice of Violation
On
December 23, 2005, EPA Region III issued a Notice of Violation (“NOV”) to the
Company and to Eastman Company (“Eastman”) that alleges various violations of
the Clean Air Act, primarily focused on the Act’s requirements governing
emissions of volatile organic compounds, at a manufacturing facility located
in
West Elizabeth, Pennsylvania. (In
the
Matter of Eastman Company and Hercules Incorporated,
EPA
Region III, Docket No. CAA-III-06-011.) That facility was sold to Eastman as
part of the Company's divestiture of its Resins business in May 2001. The EPA
has not specifically made a demand for monetary penalties upon the Company
and
Eastman. The Company is continuing to investigate the allegations set forth
in
the NOV, as well as any indemnification obligations that it may owe to Eastman
pursuant to the terms of the purchase and sale agreement. At this time, however,
the Company cannot reasonably estimate its liability, if any, with respect
to
this matter and, accordingly, has not included this site in the accrued
liability for environmental matters reported below.
Range
of Exposure
The
reasonably possible share of costs for environmental matters involving current
and former operating sites, including those with identified asset retirement
obligations (see Note 12), the Vertac site and other locations where the Company
may have a liability, is approximately $205 million as of December 31, 2006.
This accrued liability is evaluated at least quarterly based on currently
available information, including the progress of remedial investigations at
each
site and the current status of negotiations with regulatory authorities
regarding the method and extent of apportionment of costs among other PRPs.
The
actual costs for these matters will depend upon numerous factors, including
the
number of parties found responsible at each environmental site and their ability
to pay; the actual methods of remediation required or agreed to; outcomes of
negotiations with regulatory authorities; outcomes of litigation; changes in
environmental laws and regulations; technological developments; and the years
of
remedial activity required, which could range from 0 to 30 or more years.
While it is not feasible to predict the outcome of all pending environmental
matters, the ultimate resolution of one or more of these environmental matters
could have a material adverse effect upon the Company’s financial position,
results of operations and/or cash flows for any annual, quarterly or other
period.
-31-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Litigation
The
Company is involved in litigation arising out of or incidental to the conduct
of
its business. Such litigation typically falls within the following broad
categories: environmental (discussed above); antitrust; commercial;
intellectual property; labor and employment; personal injury; property damage;
product liability; and toxic tort. These matters typically seek unspecified
or
large monetary damages or other relief, and may also seek punitive damages.
While it is not feasible to predict the outcome of all pending matters, the
ultimate resolution of one or more of these matters could have a material
adverse effect upon the Company’s financial position, results of operations
and/or cash flows for any annual, quarterly or other period. While the Company
is involved in numerous matters, certain matters are described below because
they are currently viewed by management as potentially material. From time
to
time, management may determine (based on further analysis or additional
information that becomes available through discovery or otherwise) that other
matters are or have become potentially material to the Company. As appropriate,
descriptions of such matters will be included in the periodic report following
such determination. Occasionally, management may not determine that a matter
is
material until it has been settled or otherwise resolved. In such a situation,
that matter may not have been described in the Company’s periodic reports prior
to such settlement or resolution, but the impact of such settlement or
resolution would be reflected in the financial statements included in the
periodic report following such settlement or resolution.
Asbestos
The
Company is a defendant in numerous asbestos-related personal injury lawsuits
and
claims which typically arise from alleged exposure to asbestos fibers from
resin
encapsulated pipe and tank products which were sold by one of the Company’s
former subsidiaries to a limited industrial market (“products claims”).
The Company is also a defendant in lawsuits alleging exposure to asbestos at
facilities formerly or presently owned or operated by the Company (“premises
claims”). Claims are received and settled or otherwise resolved on an
on-going basis.
As
of
December 31, 2006, there were approximately 26,045 unresolved claims, of which
approximately 980 were premises claims and the rest were products claims.
There were also approximately 2,075 unpaid claims which have been settled or
are
subject to the terms of a settlement agreement. In addition, as of
December 31, 2006, there were approximately 528 claims which have either been
dismissed without payment or are in the process of being dismissed without
payment, but with plaintiffs retaining the right to re-file should they be
able
to establish exposure to an asbestos-containing product for which the Company
bears liability.
Between
January 1, 2006 and December 31, 2006, the Company received approximately 2,665
new claims. During that same period, the Company spent approximately $31.5
million to resolve and defend asbestos matters, including $23.1 million in
settlement payments and approximately $8.4 million for defense costs.
The
Company’s primary and first level excess insurance policies that provided
coverage for these asbestos-related matters exhausted their products limits
at
or before the end of July 2003. On November 27, 2002, the
Company initiated litigation against the solvent excess insurance carriers
that
provided insurance coverage for asbestos-related liabilities in a matter
captioned Hercules
Incorporated v. OneBeacon, et al.,
Civil
Action No. 02C-11-237 (SCD), Superior Court of Delaware, New Castle
County. Beginning in August 2004 and continuing through
October 2004, the Company entered into settlements with all of the insurers
named in that lawsuit. As a result, the lawsuit was dismissed in early
November 2004.
As
discussed in greater detail in reports previously filed by the Company with
the
SEC, the Company entered into several settlements with its insurers in 2004.
The
first such settlement involved insurance policies issued by certain underwriters
at Lloyd’s, London, and reinsured by Equitas Limited and related entities
(“Equitas”) (the “First Settlement Agreement”). As part of that
settlement, Equitas placed $67.0 million into a trust (the “Equitas Trust”)
set up to reimburse the Company for a portion of the costs it incurred to defend
and resolve certain asbestos claims. In exchange, the Company released the
underwriters from past, present and future claims under those policies, agreed
to the cancellation of those policies, and agreed to indemnify the underwriters
from any claims asserted under those policies. In addition, the settlement
provided that if federal asbestos reform legislation was not enacted into law
on
or prior to January 3, 2007, any funds remaining in the Equitas Trust would
be available to the Company to pay asbestos-related liabilities or to use for
other corporate purposes. Federal asbestos reform legislation was not enacted
on
or prior to January 3, 2007. As a result, on January 4, 2007, the Company
received as a lump sum distribution approximately $41.3 million, an amount
representing a complete liquidation of the remaining balance of the Equitas
Trust, including accrued interest, and the Equitas Trust has been terminated.
-32-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
addition, effective October 8, 2004, the Company entered into a
comprehensive confidential settlement agreement with respect to certain
insurance policies issued by various insurance companies operating in the
London
insurance market, and by one insurance company located in the United States
(the
“Second Settlement Agreement”). Under the terms of the Second Settlement
Agreement, the participating insurers agreed to place a total of approximately
$102.2 million into a trust (the “Second Trust”), with such amount to be paid
over a four-year period commencing in January 2005 and ending in 2008. In
exchange, the Company released the insurers from past, present and future
claims
under those policies, agreed to the cancellation of those policies, and agreed
to indemnify the insurers from any claims asserted under those policies.
The
trust funds have been and are continuing to be used to reimburse the Company
for
costs it incurs to defend and resolve asbestos-related claims. Any funds
remaining in the Second Trust subsequent to December 31, 2008 may be used
by the Company to defend and resolve both asbestos-related claims and
non-asbestos related claims. As of December 31, 2006, approximately $66.1
million of the $102.2 million had been placed into the Second Trust, and
the
Second Trust had a balance of approximately $13.8 million. On or about January
31, 2007, an additional $16.4 million was placed into the Second Trust.
The
Company also reached settlement agreements with additional insurers whose level
of participation in the Company’s insurance program is substantially lower than
the aggregate participation of the insurers referred to above (the “Other
Settlement Agreements”). Pursuant to the Other Settlement Agreements, the
Company has released or partially released its rights to coverage under
insurance policies issued by such insurers. The Company has received all
amounts due under the Other Settlement Agreements.
In
addition, effective October 13, 2004, the Company reached a confidential
settlement agreement with the balance of its solvent excess insurers whereby
a
significant portion of the costs incurred by the Company with respect to future
asbestos product liability claims will be reimbursed, subject to those claims
meeting certain qualifying criteria (the “Future Coverage Agreement”).
That agreement is not expected to result in reimbursement to the Company,
however, unless and until defense costs and settlement payments for qualifying
asbestos products claims paid by the Company subsequent to the effective date
of
the agreement (with credit for certain amounts spent prior to the effective
date
of the agreement) aggregate to approximately $330 million to $370 million,
with
the foregoing approximation based on various assumptions, including that there
are sufficient qualifying claims to require such payments, that for such
qualifying claims the time periods of each claimant’s alleged exposure to
asbestos products falls within the time periods covered by the participating
insurers’ policies, and that each of the participating insurers remain solvent
and honor their commitments under the terms of the Future Coverage
Agreement. The Company expects that such amounts, if required to be paid,
would be paid by the Company using monies from the above settlements and from
other sources. If and when such amounts are paid by the Company, the
insurers’ obligations pursuant to the terms of the Future Coverage Agreement
would be triggered, and the participating insurers would thereafter be required
to pay their allocated share of defense costs and settlement payments for
asbestos product liability claims that qualify for reimbursement subject to
the
limits of their insurance policies, which limits are believed to be sufficient
to cover the insurers’ allocated shares of an amount that exceeds the high end
of the reasonably possible range of financial exposure described below.
The Company will be responsible for the share of such costs and payments that
are not reimbursed by the participating insurers pursuant to the terms of the
Future Coverage Agreement, as well as for such costs and payments for those
claims that do not qualify for reimbursement under the terms of the Future
Coverage Agreement. Should asbestos reform legislation be passed, some or
all of the obligations under the Future Coverage Agreement will be suspended
for
so long as such legislation remains in effect. As of December 31, 2006, defense
costs and settlement payments for qualifying asbestos products claims of
approximately $82 million have been credited towards the range of $330 million
to $370 million noted above.
As
a
result of the above settlements, the Company is expected to have available
to it
a combination of cash and trust fund monies which can be used to pay or
reimburse the Company for a significant portion of the defense costs and
settlement payments that may be incurred by the Company with respect to its
asbestos-related liabilities. Upon exhaustion of the trust fund monies, the
Company will be required to fund such liabilities itself until such time as
the
insurers’ obligations under the Future Coverage Agreement are triggered. If and
when those obligations are triggered, the Company and the insurers who are
participants in the Future Coverage Agreement will share qualifying asbestos
product liability claims defense costs and settlement payments at varying levels
over time, with the Company typically bearing a slightly larger share than
such
participating insurers. Of note, as a result of the First Settlement Agreement,
Second Settlement Agreement and Other Settlement Agreements, substantially
all
of the Company’s insurance coverage applicable to asbestos products claims has
been cancelled (except for obligations under the Future Coverage Agreement),
and
such insurance coverage will no longer be available to cover any such claims.
In
addition and as described above, as a result of the First Settlement Agreement,
Second Settlement Agreement and Other Settlement Agreements, substantial amounts
of insurance coverage that would have been available to cover insured claims
other than asbestos products claims have been cancelled and will no longer
be
available to cover such claims.
-33-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Based on the current number of claims pending, the amounts the Company
anticipates paying to resolve those claims which are not dismissed or otherwise
resolved without payment, and anticipated future claims, the Company believes
that the total monetary recovery under the settlements noted above will provide
coverage for a significant portion, but less than a majority, of the Company’s
monetary exposure going forward for its estimated asbestos-related liabilities.
Since the settlements noted above were entered into, the Company’s insurers have
paid over $207 million to the Company and to the Trusts referred to above.
Some
of those payments have been used to pay or reimburse the Company for
asbestos-related liabilities, and some of those payments have been used by
the
Company for other corporate purposes. Based on the Company’s current claims
experience, it is possible that before the end of 2007, the Company will be
responsible for payment of a portion of its asbestos-related liabilities without
the ability to seek reimbursement from the Second Trust, and that by mid-2008,
or earlier, it is likely that the Company will be responsible for payment of
all
such liabilities until such time as the obligations under the Future Coverage
Agreement are triggered, at which point in time the Company is expected to
share
the cost of defending and settling qualifying asbestos product liability claims
with the participating insurers, with it being anticipated that the Company
will
typically bear a slightly larger share than the participating insurers. In
any
period of time, however, including after obligations under the Future Coverage
Agreement are triggered, the amounts paid by the Company in connection with
the
defense and settlement of asbestos claims versus the amounts funded and to
be
funded by settlement monies and amounts anticipated to be reimbursed by the
Future Coverage Agreement are expected to vary significantly.
In
early
2003, the Company commissioned a study of its asbestos-related liabilities
by a
recognized expert at a major national university, who is a member of the
American Academy of Actuaries with broad experience in estimating such
liabilities. Since that time, such study has been updated several times to
take into account the then most current data concerning, among other factors,
the Company’s claims and payment experience. In January 2007, the study was
updated again and, as a result, the reasonably possible exposure for these
matters as of December 31, 2006 was revised to a range of $270 million to
$770 million, which is the same as the previously established range at the
lower
end, and slightly lower than the previously established range at the high
end. Due to inherent uncertainties in estimating the timing and amounts of
future payments, the foregoing range does not include the effects of inflation
and has not been discounted for the time value of money. In addition, the
range of financial exposures set forth above does not include estimates for
future legal costs. It is the Company’s policy to expense these legal costs as
incurred. Cash payments related to this exposure are expected to be made
over an extended number of years and actual payments, when made, could be for
amounts in excess of the range due to potential future changes in estimates
as
well as the effects of inflation.
The
foregoing is based on the Company’s assumption that the number of future claims
filed per year and claim resolution payments will vary considerably from
year-to-year and by plaintiff, disease, venue and other circumstances, but
will,
when taken as a whole, remain relatively consistent with the Company’s
experience to date and will decline as the population of potential future
claimants expires due to non-asbestos-related causes. It is also based on
the results of the updated study and the status of the Company’s settlements
with its insurers, as described above. However, the Company recognizes
that the number of future claims filed per year and claim resolution payments
could greatly exceed those reflected by its past experience and contemplated
by
the study referenced above, that the Company’s belief of the range of its
reasonably possible financial exposure could change as the study referenced
above is periodically updated, and that its evaluation of the total payments
to
be received from its insurers may change depending upon numerous variables
including potential legislation and the risk that one or more insurance carriers
may refuse or be unable to meet their obligations to the Company. Moreover,
while
the
expert noted above has applied his methodology in determining the Company’s
reasonably possible range of exposures for these liabilities on a consistent
basis, other methods in practice exist which place a differing degree of
emphasis on the underlying variables used to measure asbestos-related
contingencies. Such other methods could yield significantly different ranges
of
reasonably possible exposures.
Due
to
the dynamic nature of asbestos litigation, the Company’s estimates are
inherently uncertain, and these matters may present significantly greater
financial exposures than presently anticipated. In addition, the Company
intends to periodically update the asbestos study referenced above, and further
analysis combined with new data received in the future could result in a
material modification of the range of reasonably possible financial exposure
set
forth above. As a result of all of the foregoing, the Company’s liability
with respect to asbestos-related matters could vary significantly from present
estimates and may require a material change in the accrued liability for these
matters within the next 12 months. If the Company’s liability does exceed
amounts recorded in the balance sheet sufficient to trigger the obligations
under the Future Coverage Agreement, the Company presently believes that a
significant portion of the liability it may reasonably anticipate will be
reimbursed by monies to be received pursuant to the Future Coverage Agreement.
However, there can be no assurance that such liabilities will be
reimbursed.
-34-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
findings of the updated study referenced above identified a range of the
Company’s reasonably possible financial exposure for these asbestos-related
matters. The Company adjusted its accrual for present and future potential
asbestos claims before anticipated insurance recoveries at December 31,
2006 to $270.0 million, reflecting the low end of the range noted above in
accordance with generally accepted accounting principles (since no amount within
the range is a better estimate than any other amount).
The
following table presents the beginning and ending balances and balance sheet
activity for the Company’s asbestos-related accounts for the year ended December
31, 2006.
|
Balance
January
1, 2006
|
Interest
Income/
Additional
Accruals
|
Insurance
Recovered/
Liabilities
Settled
|
Accretion/
Reclassifi-
cation
|
Balance
December
31, 2006
|
||||||||||||
|
Asbestos-related
assets:
|
||||||||||||||||
|
Insurance
receivable
|
$
|
65.2
|
$
|
—
|
$
|
(33.3
|
)
|
$
|
0.9
|
$
|
32.8
|
|||||
|
Restricted
cash in trust
|
55.5
|
3.0
|
(3.8
|
)
|
—
|
54.7
|
||||||||||
|
Asbestos-related
assets
|
$
|
120.7
|
$
|
3.0
|
$
|
(37.1
|
)
|
$
|
0.9
|
$
|
87.5
|
|||||
|
Asbestos-related
liabilities:
|
||||||||||||||||
|
Asbestos-related
liabilities, current
|
$
|
36.4
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
36.4
|
||||||
|
Asbestos-related
liabilities, non-current
|
233.6
|
23.1
|
(23.1
|
)
|
—
|
233.6
|
||||||||||
|
Total
asbestos-related liabilities
|
$
|
270.0
|
$
|
23.1
|
$
|
(23.1
|
)
|
$
|
—
|
$
|
270.0
|
|||||
The
Company, in conjunction with outside advisors, will continue to study its
asbestos-related matters, insurance recovery expectations and reserves on an
ongoing basis, and make adjustments as appropriate.
Composite
Products Antitrust and Qui Tam Matters
Commencing
in 1999, the Company was one of several companies sued in a series of civil
antitrust and related lawsuits concerning the pricing and sale of carbon fiber
and carbon prepreg products (together referred to as “carbon fiber products”).
These products were manufactured and sold by the Company’s former Composite
Products division, which division was sold to Hexcel Corporation in 1996. These
lawsuits encompassed the following: (a) a federal class action brought on behalf
of direct purchasers of carbon fiber products captioned Thomas &
Thomas Rodmakers v. Newport Adhesives and Composites,
Case
No. CV-99-07796-GHK (CTx) (U.S. District Court, Central District of
California; (b) a total of nine California state purported class actions brought
on behalf of indirect purchasers of carbon fiber products, all consolidated
under the caption Carbon
Fiber Cases I, II, and III,
Judicial Council Coordination Proceeding Nos. 4212, 4216 and 4222, Superior
Court of California, County of San Francisco; (c) a Massachusetts state
purported class action brought on behalf of indirect purchasers of carbon fiber
products captioned Saul
M. Ostroff, et al. v. Newport Adhesives, et al.,
Civil
Action No. 02-2385, Superior Court of Middlesex County; and (d) a lawsuit
brought by Horizon Sports Technologies, a company that had “opted out” of the
federal class action lawsuit referred to above and captioned Horizon
Sports Technologies, Inc. v. Newport Adhesives and Composites, Inc.,
et al.,
Case
No. CV02-8126 FMC (RNEX), U.S. District Court, Central District of
California, Western Division. In addition, the Company and the other
defendants in the foregoing lawsuits were sued in a related “Qui Tam” action
captioned Randall
M. Beck, et al. v. Boeing Defense and Space Group, Inc., et
al.,
(Civil
Action No. 99 CV 1557 JM JAH), which lawsuit was originally filed under
seal in 1999 pursuant to the False Claims Act, 31 U.S.C. Section 729 et
seq. Throughout 2005, the Company entered into agreements to resolve each of
the
foregoing lawsuits, and the results of such settlements have been reflected
in
the Company’s financial statements. At this time, all of the forgoing lawsuits
have been resolved, and all payments have been made, without any admission
of
liability. Each of the settlements was entered into by the Company in order
to
avoid the risks, uncertainties and costs inherent in litigation. In addition
to
the foregoing, two of the Company’s former customers have “opted-out” of the
Federal and California state class actions referred to above. The Company
believes it probable that the claims of these two former customers will
ultimately be amicably resolved, and the amount that the Company reasonably
estimates that it will pay is included in the accrued liability for non-asbestos
litigation reported below. Furthermore, by letter dated January 30, 2007, one
of
the defendants in the foregoing lawsuits asserted a claim against the Company
for damages as a result of the alleged anticompetitive activities alleged in
the
lawsuits described above, and requested that the Company enter into settlement
discussions. The Company intends to investigate this claim, but currently
believes it is without merit and legally defensible.
-35-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
December 2004, the Company filed a lawsuit against Hexcel Corporation
(Hercules
Incorporated v. Hexcel Corporation,
Supreme
Court of the State of New York, County of New York, Index No.04/604098) seeking
indemnification for the settlements described above. The lawsuit against
Hexcel is based on the terms of the purchase and sale agreement by which the
Company sold its Composite Products division to Hexcel in 1996. In
response, Hexcel Corporation has denied liability and has filed a counter-claim
also seeking indemnification. Both parties have filed motions for summary
judgment, but no ruling has yet been issued by the Court. No date for trial
has
been set.
Agent
Orange Litigation
Agent
Orange is a defoliant that was manufactured by several companies, including
the
Company, at the direction of the U.S. Government, and used by the U.S.
Government in military operations in both Korea and Vietnam from 1965 to
1970. In 1984, as part of a class action settlement, the Company and other
defendants settled the claims of persons who were in the U.S., New Zealand
and
Australian Armed Forces who alleged injury due to exposure to Agent
Orange. In
Re
“Agent Orange” Prod. Liab. Litig.,
597 F.
Supp. 740 (E.D.N.Y. 1984). Following that settlement, all claims for
alleged injuries due to exposure to Agent Orange by persons who had served
in
the Armed Forces of those countries were treated as covered by that class action
settlement.
On
June
9, 2003, the United States Supreme Court affirmed the decision of the United
States Court of Appeals for the Second Circuit in a case captioned Dow
Chemical Company, et al. v. Daniel Raymond Stephenson, et al.,
123 S.
Ct. 2161 (2003), where plaintiffs Stephenson and Isaacson (in a separate but
consolidated case) alleged that they were injured from exposure to Agent Orange
and that such injury did not manifest until after exhaustion of the settlement
fund created through the 1984 class action settlement. As a result of that
decision, the claims of persons who allege injuries due to exposure to Agent
Orange and whose injuries first manifest themselves after exhaustion of the
settlement fund created through the 1984 class action settlement may no longer
be barred by the 1984 class action settlement and such persons may now be able
to pursue claims against the Company and the other former manufacturers of
Agent
Orange.
Currently,
the Company is a defendant in approximately twenty-eight lawsuits (including
two
purported class actions) where plaintiffs allege that exposure to Agent Orange
caused them to sustain various personal injuries. On February 9,
2004, the U.S. District Court for the Eastern District of New York issued a
series of rulings granting several motions filed by defendants in the two cases
that had been remanded to the U.S. District Court by the U.S. Court of Appeals
for the Second Circuit on remand from the U.S. Supreme Court (In
re:
“Agent Orange” Product Liability Litigation: Joe Isaacson, et al v. Dow Chemical
Company, et al. and Daniel Raymond Stephenson, et al. v. Dow Chemical Company,
et al.
(MDL 381, CV 98-6383 (JBW), CV 99-3056 (JBW))). In relevant part, those
rulings held that plaintiffs’ claims against the defendant manufacturers of
Agent Orange that were brought in the state courts are properly removable to
federal court under the “federal officer removal statute” and that such claims
are subject to dismissal by application of the “government contractor
defense.” The Court then dismissed plaintiffs’ claims, but stayed its
decision to allow plaintiffs to obtain additional discovery and to move for
reconsideration of the Court’s decision. A hearing on the motion for
reconsideration was held on February 28, 2005. By Orders dated
March 2, 2005, the Court denied reconsideration, lifted the stay of the
earlier decision, and dismissed plaintiffs’ claims in all of the lawsuits that
were before the Court at that time. Plaintiffs have appealed those
dismissals to the United States Court of Appeals for the Second
Circuit.
In
addition, in January 2004, the Company was sued in a purported class action
filed in the United States District Court for the Eastern District of New York
by The Vietnam Association for Victims of Agent Orange/Dioxin and several
individuals who claim to represent between two and four million Vietnamese
who
allege that Agent Orange used by the United States during the Vietnam War caused
them or their families to sustain personal injuries. (The
Vietnam Association for Victims of Agent Orange/Dioxin, et al. v. The Dow
Chemical Company, et al.,
Civil
Action No. 04 CV 0400 (JBW)). That complaint alleges violations of
international law and war crimes, as well as violations of the common law for
products liability, negligence and international torts. The defendants
moved to dismiss this case on several grounds, including failure to state a
claim under the Alien Tort Claims Statute, lack of jurisdiction and
justiciability, the bar of the statute of limitations, failure to state claims
for violations of international law, and the “government contractor
defense.” A hearing on these motions was held on February 28,
2005. By order dated March 10, 2005, the Court dismissed this
lawsuit. Plaintiffs have appealed that dismissal to the United States
Court of Appeals for the Second Circuit.
-36-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In addition, in 1999, approximately 17,200 Korean veterans of the Vietnam War
filed suit in the 13th
Civil
Department of the District Court in Seoul, Korea, against The Dow Chemical
Company (“Dow”) and Monsanto Company (“Monsanto”) for their alleged injuries
from exposure to Agent Orange. These lawsuits were filed under various captions,
including Dong
Jin Kim and 9 others,
99
Gahap 84123, Il
Joo
La and 9 others,
99
Gahap 84147, and Dae
Jin Jang,
99
Gahap 84130. Following the commencement of those lawsuits, Dow and Monsanto
petitioned the court to issue Notices of Pendency to each of the
non-defendant manufacturers of Agent Orange, including the Company, in an
attempt to bind those companies to factual and legal findings which may be
made
in the Korean courts if Dow and Monsanto are held liable to plaintiffs and
sue
those companies for contribution. Thereafter, the Company was served with such
notices through diplomatic channels. In 2002, the District Court dismissed
the
plaintiffs' claims, and the plaintiffs appealed. It has been reported that
on
January 26, 2006, the intermediate appellate court in Seoul reversed the
District Court and awarded damages of $65.2 million plus pre- and post-judgment
interest to approximately 6,800 of the approximately 17,200 plaintiffs that
filed these lawsuits. The Company has been informed that Dow and Monsanto have
appealed. If Dow and Monsanto are not successful on appeal, it is possible
that
they might initiate an action seeking contribution from the non-defendant
manufacturers of Agent Orange, including the Company. Further, if the
intermediate appellate court’s decision is ultimately upheld, it is possible
that new lawsuits could be brought in Korea against the Agent Orange
manufacturers, including the Company, by other Korean veterans of the Vietnam
War.
The
Company believes that it has substantial meritorious defenses to all of the
Agent Orange-related claims described above and those that may yet be
brought. To that end, the Company denies any liability to plaintiffs, and
will vigorously defend all actions now pending or that may be brought in the
future.
Other
Litigation
The
Company is one of several defendants that had been sued by over 2,000
individuals in a series of lawsuits, including a purported class action lawsuit,
captioned Jerry
Oldham, et al. v. The State of Louisiana, et al.,
Civil
Action No. 55,160, John
Capone, et al. v. The State of Louisiana, et al.,
Civil
Action No. 56,048C, and Georgenner
Batton, et al. v. The State of Louisiana, et al.,
Civil
Action No. 55,285, all brought in the 18th
Judicial
District Court, Parish of Iberville, Louisiana. The purported class members
and
plaintiffs, who claimed to have worked or lived at or around the Georgia Gulf
facility in Iberville Parish, Louisiana, alleged injury and fear of future
illness from the consumption of contaminated water and, specifically, elevated
levels of arsenic in that water. As to the Company, plaintiffs alleged
that the Company itself and as part of a joint venture operated a nearby plant
and, as part of those operations, used a groundwater injection well to dispose
of various wastes, and that those wastes contaminated the potable water supply
at Georgia Gulf. In August 2005, the Company and several other
defendants entered into an agreement to settle these matters with the Company
agreeing to pay $1,412,000, an amount which has since been paid. On May 4,
2006,
the Court granted settlement class certification. This settlement, which was
agreed to by the Company without any admission of liability, is pending final
approval by the Court.
On
May 7, 2004, Ciba Specialty Chemicals Corporation (“Ciba”) filed a
Complaint against the Company and Cytec Industries, Inc. (“Cytec”) in the United
States District Court for the District of Delaware alleging infringement of
two
patents owned by Ciba (Ciba
Specialty Chemicals Corporation v. Hercules Incorporated and Cytec Industries,
Inc., C.A. No. 04-293 (KAJ)).
The two
patents in question are U.S. Patent 5,167,766 (issued on December 1, 1992)
entitled “Charged Organic Polymer Microbeads in Paper Making Process” and U.S.
Patent 5,171,808 (issued on December 15, 1992) entitled “Cross-linked
Anionic and Amphoteric Polymeric Microparticles.” The alleged conduct related to
the manufacture, use, sale and offer to sell of certain products of the
Company’s Paper Technologies and Ventures segment. Ciba sought to enjoin alleged
continued infringement, obtain a judgment that the defendants infringed the
patents, and obtain an award of damages and reasonable attorney’s fees.
The Company agreed to indemnify Cytec with respect to Ciba’s patent
infringement charges. On June 26, 2006, the Court issued a Memorandum
Opinion in which the Court granted the Company’s and Cytec’s motions for summary
judgment and denied Ciba’s motion for summary judgment. On July 27, 2006, the
Court entered Judgment in favor of the Company and Cytec and against Ciba.
On
August 25, 2006, Ciba filed a Notice of Appeal to the United States Court of
Appeals for the Federal Circuit. Settlement discussions with Ciba and Cytec
followed and a confidential settlement was reached in December 2006. Ciba
withdrew its appeal and, in January 2007, this matter was dismissed.
-37-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
In
June
2004, a purported class action captioned Charles
Stepnowski v. Hercules Inc.; The Pension Plan of Hercules Inc.; The Hercules
Inc. Finance Committee; and Edward V. Carrington, Hercules’ Vice President Human
Resources,
Civil
Action No. 04-cv-2296, was filed in the United States District Court,
Eastern District of Pennsylvania. The Stepnowski
lawsuit
sought the payment of benefits under the Pension Plan of Hercules Incorporated
(the “Plan”), and alleged violations of the Employee Retirement Income Security
Act, 29 U.S.C. §1001 et seq. (“ERISA”). Under the Plan, eligible retirees
of the Company may opt to receive a single cash payment of 51% of the present
value of their accrued benefit (with the remaining 49% payable as a monthly
annuity). In the Stepnowski
lawsuit,
it was alleged that the Company’s adoption in 2002 of a new interest rate
assumption used to determine the 51% cash payment constituted a breach of
fiduciary duty and a violation of the anti-cutback requirements of ERISA,
the
Internal Revenue Code and the terms of the Plan, and that its communications
to
employees concerning the new interest rate assumption constituted a breach
of
fiduciary duty. The Stepnowski
lawsuit
sought, among other things, the payment of additional benefits under ERISA
(as
well as costs and attorneys fees), and to compel the Company to use an interest
rate assumption that is more favorable to eligible retirees. In December
2005, a virtually identical purported class action lawsuit was filed in the
same
Court in a matter captioned Samuel
J. Webster, et al. v. Hercules, Inc.; The Pension Plan of Hercules Inc.;
The
Hercules Inc. Finance Committee; and Edward V. Carrington, Hercules’ Vice
President Human Resources,
Civil
Action No. 05-6404. In January 2006, the Court consolidated the Stepnowski
and
Webster
lawsuits
for discovery and trial. In March 2006, the Court certified the Webster
action
as a class action. By Order dated April 20, 2006, the Court entered partial
summary judgment in favor of plaintiffs, holding that while the interest
rate
change did not violate the anti-cutback provisions of ERISA, such change
did
violate provisions of the Plan, and ordered the Company to recalculate the
lump
sum pension benefit owed to class members by using the prior interest rate
assumption (the “PBGC” rate, which was the rate used prior to the change to the
new interest rate, as referenced above) to calculate benefits accrued through
December 31, 2001, and the new interest rate (the “30-Year Treasury Bond” rate)
for all benefits accrued after December 31, 2001. That Order also required
the
Company to make certain payments to Mr. Stepnowski and Mr. Webster, with
such
payments representing the additional lump sum benefit payable as a result
of the
adjusted lump sum calculation described in the preceding sentence, plus
interest. On October 4, 2006, the parties entered into a settlement in principle
to resolve both the Stepnowski
lawsuit
and Webster
class
action lawsuit. Preliminary approval of the settlement was granted by the
Court
on December 4, 2006. A hearing for final approval of the settlement is set
for
April 16, 2007.
The main
points of the settlement are: (1) each Class member’s lump sum will be computed
using the 30 Year Treasury Bond rate applied to all eligible service through
December 31, 2004 as the “floor,” plus 75% of the additional value gained, if
any, by using the PBGC rate for that portion of eligible service accrued
through
December 31, 2001 (the Plan’s actuaries have estimated that the “present value”
of the total settlement award is approximately $18.2 million, without
consideration of additional interest payments); (2) each Class member who
has
already received a lump sum will also receive 3% interest, compounded annually,
on his or her settlement award, from the date the original lump sum amount
was
paid until the settlement award has been paid; and (3) Defendants will pay
$0.3
million toward the fees and litigation costs of plaintiffs’ counsel. In
addition, plaintiffs and plaintiffs’ counsel have agreed to petition the Court
for an additional award which, if approved, will be credited against the
present
value of the aggregate settlement award and will reduce each Class member’s
settlement award by the same percentage. Of note, except for $0.3 million,
the
payments to be made as a result of this lawsuit will be made by the Company’s
pension plan.
Acevedo,
et al. v. Union Pacific Railroad Company, et al.,
Case
No. C-4885-99-F. 332nd
Judicial
District Court, Hidalgo County, Texas (2001), and related lawsuits, are mass
toxic tort lawsuits alleging pesticide exposure relating to operations at a
former pesticide formulation facility in Mission, Texas. There are
currently approximately 1,700 plaintiffs and approximately 30 defendants,
including the Company. Plaintiffs include former workers at the pesticide
formulation facility, and persons who currently reside, or in the past resided,
near the facility. All plaintiffs allege personal injuries and some
plaintiffs also allege property damage. The vast majority of the
plaintiffs allege residential exposure to a variety of pesticide and chemical
products as a result of leaks, spills, flooding, and airborne emissions from
the
pesticide formulation facility. It is alleged that certain of the
Company’s products were sold to or used by the pesticide formulation facility
prior to its ceasing operations in 1967. In November 2004, Defendants
filed a Petition for a Writ of Mandamus in the Texas Supreme Court seeking
to
set aside an order consolidating the claims of certain plaintiffs for trial,
and
seeking to require the plaintiffs to provide certain evidence of exposure and
injury before being permitted to proceed in court. In response, the Texas
Supreme Court issued a partial stay of the underlying litigation. In November
2005, oral argument with respect to Defendants’ Petition for Writ of Mandamus
was held before the Texas Supreme Court. No decision has yet been rendered
with
respect to that petition. The Company denies any liability to plaintiffs and
intends to vigorously defend these matters.
The
Company and others have been sued by approximately 520 former employees and
employees of third-party contractors who allege hearing loss as a result of
their having worked at plants located in or about Lake Charles, Louisiana.
The Company formerly owned and operated a plant in Lake Charles. In
July 2005, the Company and other defendants reached a settlement in
principle with plaintiffs’ lawyers which provides for the resolution of these
claims over a period of approximately two years, and since that time, a portion
of these claims have been resolved. The Company has accrued its remaining
probable and reasonably estimable liability as a portion of the amount described
in the paragraph below entitled “Amounts Accrued for Non-Asbestos
Litigation.” The lawsuits at issue are all pending in the 14th
Judicial
District Court of Calcasieu Parish, Louisiana, and are captioned as
follows: James
Allee, et al. v. Canadianoxy Offshore Production Co., et al.,
Case
No. 2001-4085, James
Hollingsworth, et al. v. Hercules Inc.,
Civil
Action No. 2001-4064, Joseph
Kelley, et al. v. Canadianoxy Offshore Production Co., et al.,
Civil
Action No. 98-2802, Robert
Corbin, et al. v. Canadianoxy Offshore Production Co., et al.,
Civil
Action No. 98-1097, Carl
Belaire, et al. v. Bridgestone Firestone Inc., et al.,
Civil
Action No. 2005-004369, Darrell
Comeaux, et al. v Bridgestone/Firestone, Inc.,
et
al.,
Civil
Action No. 2006-2242, and Howard
Dejean, et al. v. Bridgestone/Firestone, Inc., et al., Civil Action No.
2006-6276.
-38-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Amounts
Accrued for Non-Asbestos Litigation
During
the period January 1, 2006 through December 31, 2006, the Company incurred
charges totaling $12.2 million and paid $7.1 million in settlement payments
including defense costs with respect to the settlement of non-asbestos and
non-environmental litigation. The December 31, 2006 Consolidated Balance Sheet
reflects a current liability of $8.6 million for non-asbestos and
non-environmental related litigation matters, representing management’s best
estimate of the probable and reasonably estimable losses for such matters.
A
separate liability is provided for the Vertac litigation. While it is not
feasible to predict the outcome of all pending legal proceedings, it is
reasonably possible that an exposure to loss exists in excess of the amounts
accrued for these and other matters, and the ultimate resolution of one or
more
of these matters could have a material adverse effect upon the Company’s
financial position, results of operations and/or cash flows for any annual,
quarterly or other period.
Effective
January 1, 2006 (the “effective date”), the Company adopted SFAS 123R as
interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted SFAS
123R using the “modified prospective” method in which compensation cost is
recognized beginning with the effective date based on (a) the requirements
of
SFAS 123R for all share-based payments granted after the effective date and
(b)
the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the effective date. The
Company continues to use the Black-Scholes option-pricing model, which is an
acceptable option valuation model in accordance with SFAS 123R, to estimate
the
value of stock options granted to employees.
The
Company previously adopted SFAS 123 on a prospective basis for all employee
and
non-employee director awards granted, modified or settled after January 1,
2003.
Excluding stock options issued to non-employee directors which vest immediately
upon grant due to certain retirement-eligibility provisions, the Company did
not
issue any stock options to employees during 2003 and 2004. During 2005, the
Company granted nonqualified stock options to its Chief Executive Officer
(“CEO”). Those stock options have been accounted for in accordance with SFAS
123. Stock options issued to employees during years prior to 2003, which were
accounted for in accordance with APB 25, had fully vested by December 31, 2005.
Accordingly, there is no cost attributable to such options to be recorded
subsequent to 2005. During 2006, the Company issued nonqualified stock options
as well as restricted stock awards to the CEO and other management personnel.
These awards have been accounted for in accordance with SFAS 123R.
The
Company has in the past and continues to provide for the grant of stock options
and the award of restricted common stock and other market-based units to key
employees and non-employee directors under the following plans: (1) Hercules
Incorporated Long Term Incentive Compensation Plan (“LTICP”), (2) Management
Incentive Compensation Plan (“MICP”), and (3) Hercules Incorporated Omnibus
Equity Compensation Plan for Non-Employee Directors (“Omnibus Plan”)
(collectively, the “Plans”). As of December 31, 2006, 8,546,964 shares were
available for grant under the Plans as stock awards or stock option awards.
A
summary of the valuation and accounting for share-based awards granted under
the
Plans is described in further detail below.
The
compensation cost attributable to the Plans during 2006, 2005 and 2004 was
$6.6
million, $8.1 million and $3.2 million, respectively, and was recognized as
a
component of Selling, general and administrative expenses. During 2006, $0.4
million attributable to the acceleration of cost related to FiberVisions
employees was included as a component of the loss on disposition. The total
income tax benefit recognized in the Statement of Operations for share-based
compensation arrangements was $2.3 million, $2.8 million and $1.1 million for
2006, 2005 and 2004, respectively. In connection with the transition to SFAS
123R, the Company determined that it will account for the income tax effects
of
share-based compensation with a pool of windfall tax benefits (the “pool”) set
at zero upon the effective date. In addition, the Company recognized $6.2
million of tax benefits in Additional paid-in capital resulting from the
exercise of stock options and vesting of restricted stock during 2006.
Upon
the
adoption of SFAS 123R, the Company recorded a $0.9 million benefit, net of
income taxes, as a cumulative effect of a change in accounting principle to
reflect the required change in accounting policy for recognition of forfeitures
from occurrence-based to one whereby the recognition of cost is based upon
an
estimate of the total number of awards that are expected to vest over the
requisite service period for all awards. The adjustment was based on the
unvested portion of awards issued prior to 2006 that were outstanding upon
the
effective date.
The
Company issues shares from treasury stock upon the exercise of stock options
and
the grant of restricted stock awards. During 2006, the Company issued 3,559,294
shares of stock from treasury, of which 2,966,552 were attributable to the
exercise of stock options and 516,252 were attributable to the grant of
restricted stock awards. In addition, 121,993 shares were returned to treasury
stock as a result of forfeitures of restricted stock awards. Cash received
from
the exercise of stock options during 2006 was $37.0 million.
-39-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Stock
Options
Regular
stock options are granted under the Plans at the market price on the date of
grant or measurement date and are exercisable at various periods from one to
nine years after date of grant. Performance accelerated stock options (“PASOs”)
are also granted at the market price at the date of grant and are normally
exercisable at nine and one-half years. Exercisability may be accelerated based
upon the achievement of predetermined performance goals. Both regular stock
options and PASOs expire ten years after the date of grant. These awards are
forfeited and revert to the Company in the event of employment termination,
except in the case of death, disability, retirement or other specified events.
The Plans do not provide the award recipients the ability to require a cash
settlement except in the case of a standard cashless exercise
program.
The
fair
value of option awards granted during 2006, 2005 and 2004 is measured on the
date of grant using the Black-Scholes option pricing model and the
weighted-average assumptions in the following table:
|
2006
|
2005
|
2004
|
||||||||
|
Expected
volatility
|
30.10
|
%
|
28.65
|
%
|
31.22
|
%
|
||||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||
|
Expected
life (in years)
|
6.0
|
6.0
|
6.0
|
|||||||
|
Risk-free
interest rate
|
4.60
|
%
|
4.08
|
%
|
3.73
|
%
|
||||
A
summary
of outstanding stock option activity under the Plans during 2004, 2005 and
2006
is presented as follows:
|
Regular
|
Performance
Accelerated
|
||||||||||||
|
Number
of
Shares
|
Weighted-
average
Price
|
Number
of
Shares
|
Weighted-average
Price
|
||||||||||
|
Outstanding
at January 1, 2004
|
12,306,559
|
$
|
24.47
|
4,779,700
|
$
|
43.66
|
|||||||
|
Granted
|
21,000
|
14.25
|
—
|
—
|
|||||||||
|
Exercised
|
(402,855
|
)
|
11.48
|
—
|
—
|
||||||||
|
Forfeited
|
(886,820
|
)
|
33.19
|
(963,725
|
)
|
38.25
|
|||||||
|
Outstanding
at December 31, 2004
|
11,037,884
|
$
|
24.22
|
3,815,975
|
$
|
45.03
|
|||||||
|
Granted
|
224,229
|
14.01
|
—
|
—
|
|||||||||
|
Exercised
|
(200,752
|
)
|
11.53
|
—
|
—
|
||||||||
|
Forfeited
|
(2,679,349
|
)
|
33.45
|
(2,473,860
|
)
|
45.87
|
|||||||
|
Outstanding
at December 31, 2005
|
8,382,012
|
$
|
21.31
|
1,342,115
|
$
|
43.49
|
|||||||
|
Granted
|
503,430
|
12.52
|
—
|
—
|
|||||||||
|
Exercised
|
(2,966,552
|
)
|
12.29
|
—
|
—
|
||||||||
|
Forfeited
|
(1,241,595
|
)
|
32.12
|
(621,125
|
)
|
46.67
|
|||||||
|
Outstanding
at December 31, 2006
|
4,677,295
|
$
|
23.22
|
720,990
|
$
|
40.75
|
|||||||
The
weighted-average grant date fair value of options granted during 2006, 2005
and
2004 was $4.86, $5.13 and $5.38 per option, respectively. These options vest
over a period of three years with 40% vesting in each of the first two years
and
20% in the third year. Accordingly, the Company amortizes compensation cost
using the graded vesting method. The total intrinsic value of options exercised
was $17.1 million, $0.6 million and $1.0 million during 2006, 2005 and 2004,
respectively. As of December 31, 2006, there was $1.6 million of unrecognized
compensation cost related to stock options granted under the Plans. That cost
is
expected to be recognized over a remaining weighted-average period of 1.9 years.
The total fair value of option shares charged to compensation expense during
2006 was $1.6 million.
-40-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Following
is a summary of stock options outstanding and exercisable at December 31,
2006:
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
|
Number
Outstanding
|
Weighted-
average
Remaining
Contractual
Life
|
Weighted-
average
Exercise
Price
|
Number
Exercisable
|
Weighted-
average
Exercise
Price
|
||||||||||||
|
Regular
Stock Options
|
||||||||||||||||
|
$8.50
- $11.75
|
608,150
|
5.00
|
$
|
11.13
|
608,150
|
$
|
11.13
|
|||||||||
|
$11.76
- $15.00
|
1,359,464
|
7.12
|
$
|
12.46
|
772,746
|
$
|
12.28
|
|||||||||
|
$15.01
- $25.00
|
801,686
|
3.37
|
$
|
17.21
|
776,210
|
$
|
17.20
|
|||||||||
|
$25.00
- $33.75
|
404,200
|
1.69
|
$
|
25.70
|
404,200
|
$
|
25.70
|
|||||||||
|
$33.76
- $40.00
|
1,203,945
|
1.46
|
$
|
38.54
|
1,203,945
|
$
|
38.54
|
|||||||||
|
$40.01
- $55.00
|
299,850
|
1.32
|
$
|
47.79
|
299,850
|
$
|
47.79
|
|||||||||
|
4,677,295
|
4,065,101
|
|||||||||||||||
|
Performance-Accelerated
Stock Options
|
||||||||||||||||
|
$25.00
- $37.00
|
11,075
|
2.45
|
$
|
31.16
|
—
|
—
|
||||||||||
|
$37.01
- $45.00
|
511,405
|
1.75
|
$
|
38.19
|
150,850
|
$
|
39.50
|
|||||||||
|
$45.01
- $50.00
|
197,185
|
1.33
|
$
|
47.83
|
575
|
$
|
47.25
|
|||||||||
|
$50.01
- $61.00
|
1,325
|
0.65
|
$
|
52.21
|
—
|
—
|
||||||||||
|
720,990
|
151,425
|
|||||||||||||||
The
intrinsic value of Regular stock options outstanding and exercisable as of
December 31, 2006 was $16.0 million and $12.0 million, respectively. The
Performance-Accelerated stock options did not have any intrinsic value as their
exercise prices exceeded the market value of Hercules’ stock.
Restricted
Stock Awards
Restricted
stock and other market based units are awarded with respect to certain programs
in connection with the Plans. During the restriction period, award holders
have
the rights of stockholders, including the right to vote and receive cash
dividends, if any, but cannot transfer ownership and nonvested shares are
subject to forfeiture. Restricted stock awards are recorded at the fair value
of
the Company’s stock on the grant date (measurement date). These awards are
forfeited and revert to the Company in the event of employment termination,
except in the case of death, disability, retirement or other specified
events.
A
summary
of restricted stock award activity under the Plans during 2006 is presented
as
follows:
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
||||||
|
Outstanding
at January 1, 2006
|
2,093,631
|
$
|
11.38
|
||||
|
Granted
|
516,252
|
12.47
|
|||||
|
Vested
|
(430,482
|
)
|
9.17
|
||||
|
Forfeited
|
(121,993
|
)
|
12.36
|
||||
|
Outstanding
at December 31, 2006
|
2,057,408
|
$
|
12.05
|
||||
The
restricted stock awards granted during 2006 vest based on relative stock
performance over a period of three to seven years from the date of grant.
Vesting can be accelerated to as early as three years from the date of grant
or
delayed to seven years based upon share price fluctuation with a market-based
benchmark. Currently, the 2006 awards are being amortized over a five year
period. Restricted stock awards granted in periods prior to 2006 include awards
which vest based on continuous service as well as those whose vesting can be
accelerated upon the achievement of a market-based benchmark. The total number
of restricted stock awards that are expected to vest is adjusted by estimated
forfeiture rates. As of December 31, 2006, there was $12.9 million of
unrecognized compensation cost related to restricted stock awards granted under
the Plans. That cost is expected to be recognized over a remaining
weighted-average period of 3.5 years. The total fair value of shares charged
to
compensation expense during 2006, 2005 and 2004 was $5.4 million, $6.9 million
and $3.1 million, respectively.
-41-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Amortization
of compensation cost for those awards issued prior to 2006 is based on
a normal
five-year vesting period. Consistent with prior periods, the Company will
continue to amortize the cost of these awards based on this policy unless
there
is an acceleration or deceleration event or change in estimated forfeitures,
upon which compensation cost will be adjusted accordingly.
There
are
2,000,000 shares of series preferred stock without par value authorized for
issuance, none of which have been issued.
Hercules
common stock has a stated value of $25/48, and 300,000,000 shares are authorized
for issuance. At December 31, 2006, a total of 20,708,528 shares were
reserved for issuance for the following purposes: 5,398,285 shares for the
exercise of awards under the Stock Option Plan; 8,546,964 shares for awards
under incentive compensation plans; 159,065 shares for conversion of debentures;
and 6,604,214 shares for exercise of the warrant component of the CRESTS
Units.
The
components of Accumulated other comprehensive losses are as
follows:
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Pension
and postretirement benefit plan adjustments, net of tax (1)
|
$
|
(461.3
|
)
|
$
|
(415.7
|
)
|
$
|
(376.9
|
)
|
|
|
Foreign
currency translation adjustments, net of hedging activities and
taxes
|
52.5
|
28.4
|
100.5
|
|||||||
|
Other,
net of tax
|
(0.8
|
)
|
(0.3
|
)
|
—
|
|||||
|
$
|
(409.6
|
)
|
$
|
(387.6
|
)
|
$
|
(276.4
|
)
|
||
(1)
Includes the impact of the adoption of SFAS 158 effective December 31, 2006
and
minimum pension liability adjustments prior to the adoption of SFAS
158.
The
tax
impact of charges to the above components of Accumulated other comprehensive
losses for the years ended December 31, 2006, 2005 and 2004 is summarized in
Note 9.
-42-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
2006
|
2005
|
||||||
|
Property,
plant and equipment:
|
|||||||
|
Land
|
$
|
16.4
|
$
|
10.6
|
|||
|
Buildings
and equipment
|
1,643.0
|
1,613.6
|
|||||
|
Construction
in progress
|
85.0
|
38.0
|
|||||
|
Total
|
1,744.4
|
1,662.2
|
|||||
|
Accumulated
depreciation
|
(1,144.0
|
)
|
(1,126.8
|
)
|
|||
|
Property,
plant and equipment, net
|
$
|
600.4
|
$
|
535.4
|
|||
|
2006
|
2005
|
||||||
|
Deferred
charges and other assets:
|
|||||||
|
Tax
deposits
|
$
|
3.0
|
$
|
66.1
|
|||
|
Capitalized
software, net
|
44.8
|
62.6
|
|||||
|
Prepaid
pension assets
|
2.2
|
42.8
|
|||||
|
Cash
surrender value of life insurance policies
|
22.3
|
21.4
|
|||||
|
Unamortized
debt issuance costs
|
7.7
|
10.3
|
|||||
|
Investment
securities available for sale
|
2.6
|
1.0
|
|||||
|
Equity
method investments
|
25.6
|
2.6
|
|||||
|
Other
|
28.7
|
38.3
|
|||||
|
$
|
136.9
|
$
|
245.1
|
||||
|
2006
|
2005
|
||||||
|
Accrued
expenses:
|
|||||||
|
Compensation
and benefits
|
$
|
53.0
|
$
|
37.0
|
|||
|
Current
portion of postretirement benefits
|
16.2
|
23.5
|
|||||
|
Current
portion of asset retirement obligations
|
21.0
|
21.6
|
|||||
|
Severance
and other exit costs
|
10.5
|
16.6
|
|||||
|
Income
taxes payable
|
24.5
|
14.5
|
|||||
|
Interest
payable
|
14.6
|
12.9
|
|||||
|
Current
deferred income taxes
|
11.8
|
12.9
|
|||||
|
Sales
rebate accrual
|
10.9
|
9.3
|
|||||
|
Current
pension liability
|
4.9
|
6.2
|
|||||
|
Litigation
accrual
|
8.6
|
3.5
|
|||||
|
Current
portion of deferred rent
|
3.3
|
3.0
|
|||||
|
Other
taxes payable
|
2.8
|
2.3
|
|||||
|
Other
|
46.5
|
53.7
|
|||||
|
$
|
228.6
|
$
|
217.0
|
||||
|
2006
|
2005
|
||||||
|
Deferred
credits and other liabilities:
|
|||||||
|
Non-current
income tax liabilities
|
$
|
41.7
|
$
|
95.7
|
|||
|
Asset
retirement obligations - noncurrent
|
55.3
|
68.7
|
|||||
|
Indemnifications
|
40.0
|
40.0
|
|||||
|
Deferred
rent
|
26.3
|
30.6
|
|||||
|
Environmental
contingencies
|
5.3
|
17.6
|
|||||
|
Fair
value of cross-currency interest rate swaps
|
53.2
|
—
|
|||||
|
Workers
compensation
|
13.9
|
14.6
|
|||||
|
Other
|
19.9
|
22.2
|
|||||
|
$
|
255.6
|
$
|
289.4
|
||||
-43-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
2006
A
summary
of charges incurred during 2006 in connection with restructuring programs as
well as an allocation to the reporting segments is provided as
follows:
|
Severance
|
Other
Exit Costs
|
Asset
Charges(1)
|
Total
|
||||||||||
|
Research
and development consolidation
|
|||||||||||||
|
Jacksonville,
FL
|
$
|
1.7
|
$
|
0.3
|
$
|
0.4
|
$
|
2.4
|
|||||
|
Wilmington,
DE
|
0.9
|
0.9
|
0.8
|
2.6
|
|||||||||
|
2.6
|
1.2
|
1.2
|
5.0
|
||||||||||
|
Manufacturing
rationalization
|
|||||||||||||
|
Pendlebury,
UK
|
0.4
|
0.8
|
2.1
|
3.3
|
|||||||||
|
Alliance-related
rationalization (2)
|
0.5
|
0.2
|
0.6
|
1.3
|
|||||||||
|
0.9
|
1.0
|
2.7
|
4.6
|
||||||||||
|
Business
segment realignment
|
|||||||||||||
|
Paper
Technologies and Ventures
|
6.1
|
—
|
—
|
6.1
|
|||||||||
|
Aqualon
Group
|
3.7
|
0.4
|
—
|
4.1
|
|||||||||
|
9.8
|
0.4
|
—
|
10.2
|
||||||||||
|
Business
Infrastructure Projects
|
2.9
|
2.3
|
4.4
|
9.6
|
|||||||||
|
Total
restructuring and asset charges
|
$
|
16.2
|
$
|
4.9
|
$
|
8.3
|
$
|
29.4
|
|||||
|
Paper
Technologies and Ventures
|
$
|
8.7
|
$
|
1.8
|
$
|
3.1
|
$
|
13.6
|
|||||
|
Aqualon
Group
|
3.7
|
0.4
|
—
|
4.1
|
|||||||||
|
Corporate
|
3.8
|
2.7
|
5.2
|
11.7
|
|||||||||
|
Total
by reporting segment
|
$
|
16.2
|
$
|
4.9
|
$
|
8.3
|
$
|
29.4
|
(1)
Includes accelerated depreciation and amortization of $5.1 million, and an
impairment of capitalized software of $3.2 million.
(2)
Impacts Savannah, GA, Hattiesburg, MS and Portland, OR.
Research
and Development Consolidation
This
program, which was initiated during 2004 in connection with efforts to
centralize the Company’s research and development activities into regional
centers, reflects the transfer of activities from the Jacksonville, Florida
facility to the Wilmington, Delaware research center (“WRC”). The severance
charge of $2.6 million reflects the termination of 59 employees at the
Jacksonville and WRC sites, including those that were required to provide
services through predetermined transition periods. The Company expects to incur
additional charges of $0.1 million during 2007 as certain transition activities
continue.
In
connection with this program, the Company substantially expanded and upgraded
the WRC as well as its technical staff as this site will serve as the primary
research and development facility for the Company in the Americas. The expansion
and upgrade was partially funded by a grant received from the State of Delaware
in the amount of $2.3 million, of which $1.8 million has been allocated as
a
reduction of capital additions and $0.4 million has been allocated as a
reduction of relocation expenses. The remaining $0.1 million is expected to
be
allocated to capital additions in 2007. The Company incurred $1.2 million in
relocation and other exit costs attributable to the closure and transfer of
activities and employees from the Jacksonville facility. Asset charges
associated with the program include $0.4 million of accelerated depreciation
for
the Jacksonville facility through its date of closure and $0.8 million for
certain assets at the WRC prior to their demolition or reconfiguration in
connection with the upgrade and expansion project.
PTV
Manufacturing and Alliance-related Rationalization
This
program, which was initiated during 2005, resulted in the closure of the
Company’s manufacturing facility in Pendlebury, United Kingdom during 2006.
While the majority of the workforce at Pendlebury was terminated at the end
of
2005, the Company incurred a total of $0.4 million in severance charges in
connection with the termination of 7 additional employees that were retained
through the date of closure in 2006. Other exit costs of $0.8 million were
incurred in connection
with the closure and shut-down and transfer of certain component assets to
other
European PTV facilities. Accelerated depreciation charges of $2.1 million were
recorded during 2006 while the facility was still in operation.
-44-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
During
2006, PTV signed an alliance agreement with MeadWestvaco whereby Hercules will
serve as the sole distributor for certain rosin-based sizing products currently
produced by both Hercules and MeadWestvaco. Under the agreement, Hercules
assumed MeadWestvaco’s sales accounts and services all orders. MeadWestvaco
acquired access to Hercules’ technology and is assuming production of the
products. The manufacturing transition will be phased in through 2007 and will
result in the shut-down of certain production lines at the Company’s Savannah,
Georgia, Hattiesburg, Mississippi and Portland, Oregon manufacturing facilities.
Accordingly, the Company has accelerated depreciation in the amount of $0.6
million for certain of these facilities, which will continue through the
transition period. During 2006, the Company incurred $0.5 million in severance
and termination benefits associated with 14 employees at these facilities.
The
Company anticipates $0.2 million in additional severance and termination
benefits to be incurred during 2007 as production is transitioned to
MeadWestvaco.
Business
Segment Realignment
In
connection with the Company’s realignment of its business segments, the Company
eliminated 52 positions, primarily representing sales and marketing and related
support functions, in an effort to further de-layer management and streamline
the organizational structures. This resulted in charges for severance and
termination benefits in the amount of $9.8 million during 2006. The Company
also
incurred $0.4 million in other exit costs, including contract terminations,
attributable to this program.
Business
Infrastructure Projects
The
most
significant program initiated during 2006 related to the Business Infrastructure
Projects. These projects were developed primarily as a result of efforts to
reduce stranded corporate costs resulting from the FiberVisions transaction.
The
reorganization component was essentially completed in 2006 yielding
approximately $10 million in annual savings. An additional objective of the
projects is to realign the Company’s support organization through selected
outsourcing and offshoring service arrangements such that a substantial
proportion of the underlying costs become more variable in nature. This should
allow the Company greater flexibility to scale the level of support services
required in response to changing business demands as well as provide access
to
larger service organizations that can provide a greater depth and breadth of
services. The Company anticipates an additional $7 million in annual cost
reductions to be achieved by the end of 2007 as a result of these
projects.
An
ancillary action to the project is the Company’s commitment to a significant
technical and functional upgrade of its primary information technology platform
(“IT upgrade”). As a result, the Company has begun the acceleration of
amortization of certain of its capitalized software development cost assets
as
their remaining useful lives have been reduced to coincide with the
implementation of the IT Upgrade. Total accelerated amortization to be recorded
through 2008 is expected to be approximately $19 million. In addition, $3.2
million of software development costs previously capitalized have been written
off as their utility has been nullified by the planned upgrade.
In
connection with the Business Infrastructure Projects and the IT upgrade, the
Company plans to eliminate approximately 220 positions worldwide resulting
in a
commitment to provide approximately $14 million in severance and termination
benefits as well as completion bonuses contingent upon the successful transition
of job functions and responsibilities to the outsource and offshore service
providers. The plans impact a number of business and corporate functional areas
and contemplate individual targets, milestones and scheduling. A total of $2.9
million of severance and termination benefits has been incurred through December
31, 2006 and the remainder will be incurred through individual dates of
completion, at which time cash payments will begin. While the majority of such
actions will take place during 2007 and 2008, certain actions and cash flows
will continue into 2009.
-45-
Hercules
Incorporated
2005
A
summary
of charges incurred during 2005 in connection with restructuring programs as
well as an allocation to the reporting segments is provided as
follows:
|
Severance
|
Other
Exit Costs
|
Asset
Charges(1)
|
Total
|
||||||||||
|
Research
and development consolidation
|
|||||||||||||
|
Barneveld,
The Netherlands
|
$
|
2.9
|
$
|
1.4
|
$
|
1.8
|
$
|
6.1
|
|||||
|
Jacksonville,
FL
|
0.4
|
—
|
0.1
|
0.5
|
|||||||||
|
Wilmington,
DE
|
0.5
|
—
|
0.5
|
1.0
|
|||||||||
|
3.8
|
1.4
|
2.4
|
7.6
|
||||||||||
|
Manufacturing
rationalization
|
|||||||||||||
|
Paper
Technologies and Ventures
|
1.9
|
—
|
1.1
|
3.0
|
|||||||||
|
Aqualon
Group
|
1.3
|
0.2
|
0.5
|
2.0
|
|||||||||
|
FiberVisions
|
3.4
|
—
|
1.5
|
4.9
|
|||||||||
|
6.6
|
0.2
|
3.1
|
9.9
|
||||||||||
|
Global
marketing and management realignment
|
|||||||||||||
|
Paper
Technologies and Ventures
|
12.7
|
—
|
—
|
12.7
|
|||||||||
|
Aqualon
Group
|
1.8
|
—
|
—
|
1.8
|
|||||||||
|
14.5
|
—
|
—
|
14.5
|
||||||||||
|
Corporate
support realignment
|
4.8
|
0.5
|
—
|
5.3
|
|||||||||
|
Sub-total
for continuing operations
|
29.7
|
2.1
|
5.5
|
37.3
|
|||||||||
|
Terpenes
specialties exit
|
2.4
|
—
|
5.7
|
8.1
|
|||||||||
|
Total
restructuring and asset charges
|
$
|
32.1
|
$
|
2.1
|
$
|
11.2
|
$
|
45.4
|
|||||
|
Paper
Technologies and Ventures
|
$
|
17.5
|
$
|
0.1
|
$
|
3.0
|
$
|
20.6
|
|||||
|
Aqualon
Group
|
3.1
|
0.2
|
0.5
|
3.8
|
|||||||||
|
FiberVisions
|
3.4
|
—
|
1.5
|
4.9
|
|||||||||
|
Corporate
|
5.7
|
1.8
|
0.5
|
8.0
|
|||||||||
|
Discontinued
operations
|
2.4
|
—
|
5.7
|
8.1
|
|||||||||
|
Total
by reporting segment
|
$
|
32.1
|
$
|
2.1
|
$
|
11.2
|
$
|
45.4
|
(1)
Includes accelerated depreciation of $3.5 million, asset impairments of $5.7
million (Brunswick, GA and Hattiesburg, MS) and inventory write-downs of $2.0
million (Brunswick and Covington, GA).
Research
and Development Consolidation
At
the
end of 2004, the Company initiated the first phase of its program to realign
and
consolidate research and development activities into regional centers in Europe
and North America, respectively. In connection with that program, the Company
closed its research facility in Barneveld, The Netherlands during 2005 and
terminated 50 employees and relocated remaining employees to the Company’s
Helsingborg, Sweden site, which now serves as the primary center for PTV
application activities in Europe. A total of $2.9 million in severance charges
and benefits, incurred ratably over the service period from the announcement
date through the closure, was recognized as well as an additional $1.4 million
of other exit costs related to the closure of the facility.
The
second phase of the program began during 2005 with the planned closure of the
Jacksonville facility and concurrent transfer to and expansion of the WRC as
discussed above. The Company began recognition of severance charges for the
affected employees from Jacksonville as they began their transition service
periods. In addition, certain functions at the WRC were realigned resulting
in
the termination of 10 employees and the recognition of $0.5 million of severance
charges. The Company also recorded accelerated depreciation charges for
Barneveld, Jacksonville and certain assets at the WRC in connection with phased
implementation of the plan.
Manufacturing
Rationalization
PTV
closed its Pandaan, Indonesia manufacturing facility concurrent with its
strategic realignment in the Asia Pacific region. In connection with the
closing, the Company terminated approximately 50 employees and recognized
severance charges of $0.6 million. PTV also announced its intention to close
its
Pendlebury, U.K. facility as part of its strategic realignment in Europe. As
a
result of this action, the Company recognized severance charges of $1.3 million
related to the termination of approximately 40 employees. In addition, PTV
accelerated the depreciation of its Pandaan and Pendlebury facilities while
they
remained in operation.
-46-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Aqualon
terminated 7 employees in connection with a program at its Parlin, New Jersey
manufacturing facility resulting in a charge of $0.3 million recognized during
the period in which certain energy-related assets were taken out of service.
Aqualon also accrued $1.0 million in connection with the termination of 18
employees at the Brunswick, Georgia manufacturing facility. Additionally,
Aqualon recorded an impairment charge at the Hattiesburg, Mississippi
manufacturing facility attributable to the termination of production of certain
rosins which serve as an intermediate to other finished products, as well as
$0.2 million charged as incurred in connection with the termination of a product
distribution agreement.
Primarily
as a result of declining market demand for certain products, FiberVisions ceased
production on certain lines at its facilities in North America and reduced
headcount at its Varde, Denmark manufacturing facility resulting in the
termination of approximately 80 employees and severance charges of $3.4 million.
FiberVisions also recorded write-downs in the value of certain inventories
and
spare parts at the Covington, Georgia manufacturing facility.
Global
Marketing and Management Realignment
Throughout
2005, PTV and Aqualon engaged in significant actions designed to realign their
global marketing infrastructure and de-layer management in connection with
their
strategic plans. Accordingly, approximately 80 positions were eliminated
worldwide resulting in charges for severance and related benefits of $14.5
million.
Corporate
Support Realignment
In
order
to support the various initiatives to realign and restructure the Company’s
operations on a global basis, the Company initiated several corporate actions
including the establishment of a centralized European headquarters facility
in
Schaffhaussen, Switzerland. During 2005, the Company accrued $0.5 million in
relocation costs related to this move. In addition, the Company streamlined
other support functions resulting in headcount reductions of approximately
40
employees in various functional departments including Information Management
and
Procurement. In connection with the reduction, the Company recorded $4.8 million
of severance and related benefits.
Terpenes
Specialties Exit
Primarily
as a result of the Company’s decision to exit the Terpenes Specialties business
during 2005, a total of 52 employees at the Brunswick, Georgia manufacturing
facility were terminated resulting in severance charges of $2.4 million. In
addition, certain assets directly attributable to this business were impaired
resulting in a charge of $5.2 million and related spare parts inventories in
the
amount of $0.5 million were written-down.
2004
Restructuring
charges recorded during the year ended December 31, 2004 were primarily related
to employee severance and related benefits in connection with various regional
and functional restructuring and general headcount reduction programs. Severance
charges amounted to $9.6 million in 2004, including $0.3 million of charges
attributable to the initial actions at the Barneveld facility as discussed
above. The total is attributable as follows: $7.6 million to PTV, $0.3 million
to Aqualon, $1.4 to FiberVisions and $0.3 to Corporate.
The
year
ended December 31, 2004 also included asset impairment charges of $9.2 million.
Of the total, $3.6 million was attributable to a raw material production line
at
the Hopewell, Virginia manufacturing facility, $2.9 million related to the
closure of the former Kalamazoo, Michigan manufacturing facility and $0.5
million and $0.3 million for certain lines at the Pendlebury, U.K. and Savannah,
Georgia manufacturing facilities, respectively. These impairment charges are
reflected in Other operating expense, net. The remaining $1.9 million relates
to
a write-down to fair value of the Company’s former operating facility at
Langhorne, Pennsylvania prior to its classification as held for sale. This
amount is reflected in Other expense, net. The total is attributable to the
reporting segments as follows: $3.7 million to PTV, $3.6 million to Aqualon
and
$1.9 million to Corporate.
-47-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
All severance, other exit costs and asset charges for 2006, 2005 and 2004 are
included in the Statement of Operations as a component of Other operating
expenses except those related to the Terpenes Specialties exit incurred during
2005, which are included in the results of operations attributable to
discontinued operations and the aforementioned Langhorne impairment which is
included in Other expense, net.
A
reconciliation of activity, including cash payments, with respect to the
liabilities for these plans is as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Balance
at beginning of the year
|
$
|
16.6
|
$
|
5.8
|
$
|
6.0
|
||||
|
Accrued
charges for severance and related benefits
|
16.2
|
32.1
|
9.6
|
|||||||
|
Accrued
charges for other exit and restructuring costs
|
3.8
|
0.5
|
—
|
|||||||
|
Cash
payments
|
(26.9
|
)
|
(21.4
|
)
|
(9.9
|
)
|
||||
|
Other,
including foreign currency translation
|
0.8
|
(0.4
|
)
|
0.1
|
||||||
|
Balance
at end of the year
|
$
|
10.5
|
$
|
16.6
|
$
|
5.8
|
||||
In
addition, the Company made cash payments of $1.5 million and $1.6 million during
2006 and 2005, respectively, for certain exit costs that have been charged
as
incurred and are not included in the reconciliation above.
Other
operating expense, net, consists of the following:
|
2006
|
2005
|
2004
|
||||||||
|
Severance,
restructuring and other exit costs, net
|
$
|
21.1
|
$
|
31.8
|
$
|
9.6
|
||||
|
Accelerated
depreciation and amortization
|
5.1
|
3.5
|
—
|
|||||||
|
Asset
charges
|
3.2
|
2.0
|
7.3
|
|||||||
|
Legal
settlements
|
(2.0
|
)
|
0.7
|
—
|
||||||
|
Environmental
charges
|
0.8
|
0.2
|
0.4
|
|||||||
|
Special
executive pension adjustment
|
—
|
—
|
1.6
|
|||||||
|
(Gains)
losses on asset dispositions, net
|
(6.2
|
)
|
0.1
|
1.0
|
||||||
|
Nitrocellulose
facility shutdown costs
|
—
|
—
|
6.5
|
|||||||
|
Dismantlement
costs
|
1.6
|
—
|
—
|
|||||||
|
Other
miscellaneous charges
|
1.5
|
1.1
|
0.5
|
|||||||
|
$
|
25.1
|
$
|
39.4
|
$
|
26.9
|
|||||
Interest
and debt costs are summarized as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Incurred
|
$
|
71.5
|
$
|
89.8
|
$
|
109.8
|
||||
|
Capitalized
|
(0.3
|
)
|
(0.4
|
)
|
(1.1
|
)
|
||||
|
Net
expensed
|
$
|
71.2
|
$
|
89.4
|
$
|
108.7
|
||||
Other
expense, net, consists of the following:
|
2006
|
2005
|
2004
|
||||||||
|
Asbestos-related
costs, net
|
$
|
29.0
|
$
|
44.6
|
$
|
48.8
|
||||
|
Loss
on sale of 51% interest in FiberVisions (see Note
3)
|
13.3
|
—
|
—
|
|||||||
|
Loss
on repurchases of debt
|
11.4
|
14.2
|
41.0
|
|||||||
|
Environmental
charges
|
6.5
|
7.3
|
6.7
|
|||||||
|
Litigation
settlements and accruals
|
9.2
|
19.0
|
19.2
|
|||||||
|
Gains
on dispositions of assets, net
|
(1.4
|
)
|
(10.9
|
)
|
—
|
|||||
|
Asset
impairment charges
|
—
|
—
|
1.9
|
|||||||
|
Other,
net
|
(2.3
|
)
|
(2.9
|
)
|
(0.9
|
)
|
||||
|
$
|
65.7
|
$
|
71.3
|
$
|
116.7
|
|||||
-48-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Terpenes
Specialties
In
December 2005, the Company announced its intention to exit the unprofitable
terpenes specialties business. The results of operations for the terpenes
specialties business are reported as a discontinued operation for 2006, 2005
and
2004, and accordingly, the consolidated financial statements have been
reclassified to separately report the assets, liabilities and operating results
of this business.
The
following are the summarized results of operations for the terpenes specialties
business:
|
2006
|
2005
|
2004
|
||||||||
|
Net
sales
|
$
|
2.5
|
$
|
13.7
|
$
|
12.4
|
||||
|
Loss
from operations before income taxes
|
$
|
(2.6
|
)
|
$
|
(9.9
|
)
|
$
|
(4.0
|
)
|
|
|
Income
tax benefit on operations
|
0.9
|
3.4
|
1.4
|
|||||||
|
Net
loss from discontinued operations, net of tax
|
$
|
(1.7
|
)
|
$
|
(6.5
|
)
|
$
|
(2.6
|
)
|
|
The
major
classes of assets and liabilities of the discontinued operation in the Balance
Sheet are as follows:
|
2006
|
2005
|
||||||
|
Accounts
receivable, net
|
$
|
0.2
|
$
|
1.3
|
|||
|
Inventories
|
0.2
|
5.4
|
|||||
|
Current
assets of discontinued operations
|
$
|
0.4
|
$
|
6.7
|
|||
|
Accounts
payable
|
$
|
—
|
$
|
0.5
|
|||
|
Accrued
expenses
|
—
|
2.3
|
|||||
|
Current
liabilities of discontinued operation
|
$
|
—
|
$
|
2.8
|
|||
BetzDearborn
Water Treatment Business
During
2006, the Company reversed certain tax reserves in the amount of $48.7 million
established with respect to the sale of the Company’s former BetzDearborn Water
Treatment business which has been reported as a discontinued operation (see
Note 9).
SFAS
123R
Effective
January 1, 2006, the Company adopted SFAS 123R using the “modified prospective”
method in which compensation cost is recognized for all awards granted to
employees during 2006 as well as those awards granted prior to 2006 that remain
unvested on the effective date. Upon the adoption of SFAS 123R, the Company
recorded a $0.9 million benefit, net of income taxes, as a cumulative effect
of
a change in accounting principle to reflect the required change in accounting
policy for the recognition of forfeitures.
SFAS
158
The
Company adopted SFAS 158 effective December 31, 2006 which required the
recognition of the funded status of its defined benefit pension and other
postretirement benefit plans in the Consolidated Balance Sheet. While the
adoption of SFAS 158 did not have an impact on the 2006 Statement of Operations,
the Company was required to increase its pension and postretirement benefit
obligations, provide for deferred tax assets and record an after-tax charge
to
Accumulated other comprehensive losses included in Stockholders’ equity.
-49-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table illustrates the adjustments made to the relevant items included
in the Company’s balance sheet on December 31, 2006.
|
Before
|
After
|
|||||||||
|
Application
of
|
Application
of
|
|||||||||
|
SFAS
158
|
Adjustments
|
SFAS
158
|
||||||||
|
Deferred
income taxes
|
$
|
312.4
|
$
|
62.2
|
$
|
374.6
|
||||
|
Deferred
charges and other assets
|
185.8
|
(48.9
|
)
|
136.9
|
||||||
|
Total
assets
|
2,795.2
|
13.3
|
2,808.5
|
|||||||
|
Pension
obligations
|
206.8
|
55.7
|
262.5
|
|||||||
|
Other
postretirement benefit obligations
|
58.1
|
84.1
|
142.2
|
|||||||
|
Total
liabilities
|
2,413.1
|
139.8
|
2,552.9
|
|||||||
|
Accumulated
other comprehensive losses
|
(283.1
|
)
|
(126.5
|
)
|
(409.6
|
)
|
||||
|
Total
stockholders’ equity
|
369.4
|
(126.5
|
)
|
242.9
|
||||||
FIN
47
Effective
December 31, 2005, the Company recorded a $2.5 million cumulative effect
adjustment, net of tax in accordance with the provisions of FIN 47. The
cumulative effect adjustment includes the recognition of approximately $4.0
million in AROs and the capitalization of approximately $0.2 million in related
asset retirement costs offset by accumulated depreciation on those assets of
$0.1 million.
The
following table reflects the pro forma effect of FIN 47 on net (loss) income
and
net (loss) earnings per share as if the provisions had been in effect for the
periods presented.
|
2005
|
2004
|
||||||
|
Net
(loss) income before cumulative effect of changes in accounting
principle:
|
|||||||
|
As
reported
|
$
|
(38.6
|
)
|
$
|
28.1
|
||
|
Accretion
and depreciation
|
—
|
(0.1
|
)
|
||||
|
Adjusted
net (loss) income before cumulative effect of changes in accounting
principle
|
$
|
(38.6
|
)
|
$
|
28.0
|
||
|
Basic
and diluted (loss) earnings per share before cumulative effect of
changes
in accounting principle:
|
|||||||
|
As
reported
|
$
|
(0.36
|
)
|
$
|
0.26
|
||
|
Adjusted
|
$
|
(0.36
|
)
|
$
|
0.26
|
||
|
Net
(loss) income:
|
|||||||
|
As
reported
|
$
|
(41.1
|
)
|
$
|
28.1
|
||
|
Accretion
and depreciation
|
—
|
(0.1
|
)
|
||||
|
Adjusted
net income (loss)
|
$
|
(41.1
|
)
|
$
|
28.0
|
||
|
Basic
and diluted (loss) earnings per share:
|
|||||||
|
As
reported
|
$
|
(0.38
|
)
|
$
|
0.26
|
||
|
Adjusted
|
$
|
(0.38
|
)
|
$
|
0.26
|
||
-50-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
2006
|
2005
|
2004
|
||||||||
|
Depreciation:
|
||||||||||
|
Included
in Cost of sales and Selling, general and administrative
expenses
|
$
|
66.8
|
$
|
76.6
|
$
|
74.5
|
||||
|
Accelerated
depreciation included in Other operating expense, net
|
3.9
|
3.5
|
—
|
|||||||
|
Included
in Net loss from discontinued operations
|
—
|
0.4
|
0.4
|
|||||||
|
$
|
70.7
|
$
|
80.5
|
$
|
74.9
|
|||||
|
Amortization:
|
||||||||||
|
Intangible
assets
|
$
|
7.2
|
$
|
8.0
|
$
|
8.1
|
||||
|
Capitalized
software (normal basis)
|
15.2
|
15.3
|
15.0
|
|||||||
|
Accelerated
amortization of capitalized software
|
1.1
|
—
|
—
|
|||||||
|
Deferred
financing costs
|
1.1
|
2.1
|
3.2
|
|||||||
|
$
|
24.6
|
$
|
25.4
|
$
|
26.3
|
|||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
70.9
|
$
|
86.4
|
$
|
97.1
|
||||
|
Income
taxes, net of refunds received
|
37.6
|
18.4
|
40.7
|
|||||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Increase
in Property, plant and equipment, net related to the consolidation
|
||||||||||
|
of
Hercules Tianpu
|
$
|
19.0
|
$
|
—
|
$
|
—
|
||||
|
Increase
in Intangible assets, net related to the consolidation of Hercules
Tianpu
|
3.5
|
—
|
—
|
|||||||
|
De-consolidation
of debt issued by FiberVisions
|
90.0
|
—
|
—
|
|||||||
|
De-consolidation
of FiberVisions capitalized debt issuance costs
|
(6.3
|
)
|
—
|
—
|
||||||
|
Incentive
and other share-based compensation plan issuances
|
13.9
|
13.4
|
15.7
|
|||||||
|
Elimination
of 6.5% junior subordinated deferrable interest debentures due
2029
|
—
|
—
|
(34.6
|
)
|
||||||
|
Elimination
of investment in Hercules Trust II upon its dissolution
|
—
|
—
|
27.4
|
|||||||
The
following table shows the weighted-average number of common shares (in millions)
used in computing basic and diluted earnings (loss) per share:
|
2006
|
2005
|
2004
|
||||||||
|
Weighted-average
number of common shares outstanding - Basic
|
110.8
|
108.7
|
107.3
|
|||||||
|
Dilutive
effect of:
|
||||||||||
|
Convertible
debentures
|
0.2
|
0.2
|
0.2
|
|||||||
|
Share-based
compensation plans
|
0.3
|
1.5
|
1.5
|
|||||||
|
Weighted-average
number of common shares outstanding - Diluted
|
111.3
|
110.4
|
109.0
|
|||||||
The
effect of convertible debentures and share-based compensation plans for 2005
was
anti-dilutive as a result of the loss incurred during that period. Accordingly,
108.7 million weighted-average shares were used to determine both basic and
diluted earnings per share. The related interest on the convertible subordinated
debentures has an immaterial impact on earnings per share
calculations.
The
following table shows the number of options and warrants (in millions) that
have
been excluded from the computation of diluted earnings per share as their
exercise price exceeded their current market value:
|
2006
|
2005
|
2004
|
||||||||
|
Options
to purchase common stock
|
3.4
|
5.8
|
10.6
|
|||||||
|
Warrants
to purchase common stock
|
6.6
|
6.7
|
7.1
|
|||||||
-51-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
Company operates through two active reporting segments, Paper Technologies
and
Ventures and the Aqualon Group. A reporting segment is maintained for historical
reporting purposes for FiberVisions, of which a majority interest was sold
during 2006 (see Notes 1 and 3).
Paper
Technologies and Ventures Group: Products
and services offered by PTV are designed to enhance customers' profitability
by
improving manufacturing processes, enhancing productivity and improving overall
product quality as well as enabling customers to meet their environmental
objectives and regulatory requirements.
PTV
is
one of the key global suppliers of functional and process chemicals for the
paper industry offering a wide and highly sophisticated range of technology
and
applications expertise with in-mill capabilities which run from influent
treatment through the paper making process to paper finishing.
The
Ventures portion of the group consists of a portfolio of businesses each
targeting a family of vertical markets with a distinct set of products. Current
businesses within Ventures are pulp and biorefining, water treatment for the
pulp and paper industry, aviation and refrigeration compressor synthetic
lubricants, and building and converted products.
Aqualon
Group:
Products
offered by Aqualon are designed to manage the properties of aqueous
(water-based) systems. Most of the products are derived from renewable natural
raw materials and are sold as key ingredients to other manufacturers where
they
are used as small-quantity additives to provide functionality such as
thickening, water retention, film formation, emulsifying action and binding
power. Major end uses for Aqualon products include personal care products,
food
additives, pharmaceutical products, construction materials, paints, coatings
and
oil and gas recovery, where polymers are used to modify viscosity, gel strength
and/or fluid loss. Aqualon also manufactures wood and gum rosin resins and
is
the world’s only producer of pale wood rosin derivatives. Product applications
and markets include food and beverage, construction specialties, adhesives,
and
rubber and plastic modifiers.
FiberVisions:
FiberVisions
is one of the largest manufacturers of polyolefin staple fibers used in
disposable products like diapers and wipes. FiberVisions produces monocomponent
polypropylene fibers and bicomponent fibers comprised of a polypropylene core
and a polyethylene sheath. FiberVisions also produces polyolefin fiber and
yarn
for the industrial and textile markets used in concrete and asphalt, wipes,
upholstery and automotive fabrics, geotextile fabrics and filtration
products.
-52-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
A
summary
of reporting segment data is provided as follows:
|
Paper
Technologies and Ventures
|
Aqualon
Group
|
FiberVisions
|
Corporate
|
Consolidated
|
|||||||||||||||
|
2006
|
|||||||||||||||||||
|
Net
sales
|
$
|
1,075.3
|
$
|
890.8
|
$
|
69.2
|
$
|
—
|
$
|
2,035.3
|
|||||||||
|
Profit
(loss) from operations
|
80.8
|
187.4
|
0.5
|
(20.1
|
)
|
248.6
|
|||||||||||||
|
Depreciation
|
29.3
|
35.1
|
—
|
6.3
|
70.7
|
(1
|
)
|
||||||||||||
|
Amortization
|
14.2
|
8.2
|
—
|
2.2
|
24.6
|
(2
|
)
|
||||||||||||
|
Research
and development
|
19.1
|
18.6
|
0.4
|
0.7
|
38.8
|
||||||||||||||
|
Total
assets
|
976.1
|
756.5
|
—
|
1,075.9
|
2,808.5
|
(3
|
)
|
||||||||||||
|
Capital
expenditures
|
25.1
|
59.1
|
—
|
9.4
|
93.6
|
||||||||||||||
|
2005
|
|||||||||||||||||||
|
Net
sales
|
$
|
1,017.3
|
$
|
755.0
|
$
|
282.7
|
$
|
—
|
$
|
2,055.0
|
|||||||||
|
Profit
(loss) from operations
|
61.4
|
155.5
|
(64.9
|
)
|
(11.7
|
)
|
140.3
|
||||||||||||
|
Depreciation
|
29.6
|
33.0
|
10.9
|
7.0
|
80.5
|
(1
|
)
|
||||||||||||
|
Amortization
|
14.3
|
7.5
|
1.5
|
2.1
|
25.4
|
(2
|
)
|
||||||||||||
|
Research
and development
|
18.6
|
18.4
|
2.8
|
1.0
|
40.8
|
||||||||||||||
|
Total
assets
|
903.6
|
638.1
|
202.7
|
824.4
|
2,568.8
|
(3
|
)
|
||||||||||||
|
Capital
expenditures
|
18.7
|
37.1
|
4.2
|
7.5
|
67.5
|
||||||||||||||
|
2004
|
|||||||||||||||||||
|
Net
sales
|
$
|
978.5
|
$
|
724.6
|
$
|
281.2
|
$
|
—
|
$
|
1,984.3
|
|||||||||
|
Profit
(loss) from operations
|
84.5
|
157.9
|
(4.1
|
)
|
(5.4
|
)
|
232.9
|
||||||||||||
|
Depreciation
|
25.4
|
30.8
|
11.6
|
7.1
|
74.9
|
(1
|
)
|
||||||||||||
|
Amortization
|
13.8
|
7.7
|
1.6
|
3.2
|
26.3
|
(2
|
)
|
||||||||||||
|
Research
and development
|
19.4
|
18.0
|
2.9
|
2.4
|
42.7
|
||||||||||||||
|
Total
assets
|
1,029.2
|
676.2
|
286.0
|
728.9
|
2,720.3
|
(3
|
)
|
||||||||||||
|
Capital
expenditures
|
26.6
|
41.3
|
4.0
|
5.5
|
77.4
|
||||||||||||||
|
(1)
|
Depreciation
for Corporate is allocated to the business segments in the determination
of Profit from operations.
|
|
(2)
|
Corporate
includes accelerated amortization of capitalized software and deferred
financing costs.
|
|
(3)
|
Corporate
assets include cash and cash equivalents, income taxes receivable,
deferred tax assets, asbestos-related assets, investments, assets
of
discontinued operations and certain other assets not directly attributable
to the business segments.
|
A
reconciliation of totals provided by reporting segment to the applicable line
captions included in the Consolidated Statement of Operations is provided as
follows:
|
2006
|
2005
|
2004
|
||||||||
|
Profit
from operations from the reporting segments
|
$
|
248.6
|
$
|
140.3
|
$
|
232.9
|
||||
|
Interest
and debt expense
|
71.2
|
89.4
|
108.7
|
|||||||
|
Vertac
litigation charges
|
108.5
|
15.0
|
—
|
|||||||
|
Gain
on sale of CP Kelco ApS
|
—
|
—
|
(27.0
|
)
|
||||||
|
Other
expense, net
|
65.7
|
71.3
|
116.7
|
|||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
$
|
3.2
|
$
|
(35.4
|
)
|
$
|
34.5
|
|||
-53-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
Geographic
Reporting
For
geographic reporting purposes, no single country, outside the United States,
is
material for separate disclosure. However, because the Company has significant
foreign operations, Net sales and Property, plant and equipment, net are
disclosed by geographic region.
Net
sales
are reported on a "customer basis," meaning that they are included in the
geographic area in which the customer is located. Property, plant and equipment,
net is included in the geographic areas in which the producing entities are
located.
|
Geographic
Areas
|
United
States
|
Europe
|
Americas
|
Asia
Pacific
|
Total
|
|||||||||||
|
2006
|
||||||||||||||||
|
Net
Sales
|
$
|
897.2
|
$
|
696.0
|
$
|
214.7
|
$
|
227.4
|
$
|
2,035.3
|
||||||
|
Property,
plant and equipment, net
|
272.1
|
242.6
|
17.0
|
68.7
|
600.4
|
|||||||||||
|
2005
|
||||||||||||||||
|
Net
Sales
|
$
|
871.9
|
$
|
747.7
|
$
|
201.7
|
$
|
233.7
|
$
|
2,055.0
|
||||||
|
Property,
plant and equipment, net
|
262.1
|
233.8
|
15.7
|
23.8
|
535.4
|
|||||||||||
|
2004
|
||||||||||||||||
|
Net
Sales
|
$
|
824.1
|
$
|
761.8
|
$
|
184.0
|
$
|
214.4
|
$
|
1,984.3
|
||||||
|
Property,
plant and equipment, net
|
325.2
|
331.4
|
16.2
|
22.6
|
695.4
|
|||||||||||
The
fair
value of cash and cash equivalents, accounts receivable, net and accounts
payable approximate their carrying values primarily due to their short-term
nature. The Company’s investment securities that are available for sale include
certain relatively insignificant debt and equity securities. Changes in the
fair
value of these securities are recognized in Accumulated other comprehensive
losses. Fair value measurements for these investments are generally based on
third party quotes or the present value of expected future cash flows. The
fair
values of the Company’s debt securities is determined based on the present value
of expected cash flows related to existing borrowings discounted at rates
currently available to the Company for long-term borrowings with similar terms
and remaining maturities. The fair values of the Company’s derivative
instruments, including foreign exchange contracts and cross-currency interest
rate swaps, are based on exchange and interest rates in effect at
year-end.
The
Company has selectively used foreign currency forward contracts and currency
swaps to offset the effects of foreign currency exchange rate changes on
reported earnings, cash flow and net asset positions. The primary exposures
are
denominated in the Euro, Swedish kroner, Danish kroner and British pound
sterling. Some of the contracts involve the exchange of two foreign currencies,
according to local needs in foreign subsidiaries. The term of the currency
derivatives is rarely more than three months. The Company had net outstanding
external forward-exchange contracts to sell foreign currencies aggregating
$14.6
million and $12.8 million at December 31, 2006 and 2005, respectively. Net
cross-currency trades entered into by non-U.S. dollar denominated entities
aggregated $14.5 million and $25.8 million at December 31, 2006 and 2005,
respectively. The foreign exchange contracts outstanding at December 31,
2006 matured on or before January 28, 2007. During 2006, $1.8 million was
recorded as a component of Other expense, net representing the net loss due
to
underlying foreign currency exposures net of the impact of foreign currency
contracts. The notional amounts of the contracts referenced above do not
represent the amounts exchanged by the parties involved and thus, are not a
measure of the Company's exposure to various risks through its use of
derivatives.
The
Company also uses cross-currency interest rate swaps and during February and
March of 2006, entered into a series of floating rate cross-currency interest
rate swap agreements (the “Swaps”) and designated them as a hedge of the
Company’s foreign currency exposure associated with its net investment in
certain foreign operations that utilize the Euro as their functional currency.
The combined notional amounts of the Swaps is for $500.0 million/€ 420.2 million
and requires the Company to receive three month LIBOR + 1.50% and pay three
month EURIBOR plus an average margin at 1.59% on a quarterly basis for a five
year term. The Swaps have been recorded at fair value, with changes in value
attributable to changes in foreign exchange rates recorded in Accumulated other
comprehensive losses. During 2006, a credit of $7.1 million was recorded as
an
adjustment to Interest and debt expense representing the net amount received
from the Swaps in excess of amounts paid.
-54-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
The
following table presents the net carrying amounts and fair values of the
Company's financial instruments, including derivatives and excluding those
instruments of a short-term nature as referenced above, as well as the balance
sheet caption in which they are included at December 31, 2006 and
2005:
|
2006
|
2005
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
Value
|
Value
|
Value
|
Value
|
||||||||||
|
Deferred
charges and other assets
|
|||||||||||||
|
Investment
securities available for sale
|
$
|
2.6
|
$
|
2.6
|
$
|
1.0
|
$
|
1.0
|
|||||
|
Foreign
exchange contracts, net
|
(0.1
|
)
|
(0.1
|
)
|
(0.2
|
)
|
(0.2
|
)
|
|||||
|
Current
and long-term debt obligations
|
995.5
|
964.2
|
1,109.0
|
1,092.1
|
|||||||||
|
Deferred
credits and other liabilities
|
|||||||||||||
|
Cross
currency interest rate swaps
|
53.2
|
53.2
|
—
|
—
|
|||||||||
Fair
values of the above financial instruments are indicative of cash that would
have
been received or required had settlement been made at December 31, 2006 and
2005.
The
11.125% senior notes due 2007 are guaranteed by substantially all of the
Company's current and future wholly-owned domestic restricted subsidiaries
(the
"guarantor subsidiaries"). The Senior Credit Facility entered into in April
2004
also provides for a guarantee by each guarantor subsidiary. The guarantees
by
each guarantor subsidiary are full and unconditional and joint and several.
The
indenture under which the Company's 6.60% notes due 2027 were issued requires
such notes to be guaranteed or secured on the same basis as any other
subsequently issued debt that is guaranteed or secured. As a result, at December
31, 2006, the following wholly-owned domestic restricted subsidiaries fully
and
unconditionally and jointly and severally guarantee the Senior Credit Facility,
the 6.60% notes due 2027, the 11.125% notes due 2007 and the 6.75% notes due
2029.
|
Aqualon
Company
|
Hercules
Flavor, Inc.
|
|
East
Bay Realty Services, Inc.
|
Hercules
Hydrocarbon Holdings, Inc.
|
|
Hercules
Euro Holdings, LLC
|
Hercules
Paper Holdings, Inc.
|
|
Hercules
Finance Company
|
WSP,
Inc.
|
The
non-guarantor subsidiaries include all of the Company's foreign subsidiaries
and
certain domestic subsidiaries. The Company conducts much of its business through
and derives much of its income from its subsidiaries. Therefore, the Company's
ability to make required payments with respect to its indebtedness and other
obligations depends on the financial results and condition of its subsidiaries
and its ability to receive funds from its subsidiaries. There are no
restrictions on the ability of any of the guarantor subsidiaries to transfer
funds to the Company; however, there may be such restrictions for certain
foreign non-guarantor subsidiaries.
The
following condensed consolidating financial information for the Company presents
the financial information of Hercules, the guarantor subsidiaries and the
non-guarantor subsidiaries based on the Company's understanding of the
Securities and Exchange Commission's interpretation and application of Rule
3-10
under the Securities and Exchange Commission's Regulation S-X. The financial
information may not necessarily be indicative of results of operations or
financial position had the guarantor subsidiaries or non-guarantor subsidiaries
operated as independent entities.
In
this
presentation, Hercules consists of parent company operations. Guarantor
subsidiaries and non-guarantor subsidiaries of Hercules are reported on an
equity basis. Additionally, prior year information has been reclassified to
conform to the presentation in the Consolidated Financial
Statements.
-55-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||
|
Net
sales
|
$
|
596.7
|
$
|
478.2
|
$
|
1,124.6
|
$
|
(164.2
|
)
|
$
|
2,035.3
|
|||||
|
Cost
of sales
|
417.5
|
345.7
|
744.6
|
(164.4
|
)
|
1,343.4
|
||||||||||
|
Selling,
general and administrative expenses
|
101.0
|
121.3
|
150.7
|
(0.8
|
)
|
372.2
|
||||||||||
|
Research
and development
|
19.7
|
16.9
|
2.2
|
—
|
38.8
|
|||||||||||
|
Intangible
asset amortization
|
5.9
|
0.7
|
0.6
|
—
|
7.2
|
|||||||||||
|
Other
operating expense, net
|
15.5
|
(1.8
|
)
|
11.4
|
—
|
25.1
|
||||||||||
|
Profit
(loss) from operations
|
37.1
|
(4.6
|
)
|
215.1
|
1.0
|
248.6
|
||||||||||
|
Interest
and debt expense (income), net
|
173.2
|
(103.7
|
)
|
1.7
|
—
|
71.2
|
||||||||||
|
Vertac
litigation charges
|
108.5
|
—
|
—
|
—
|
108.5
|
|||||||||||
|
Other
expense, net
|
58.7
|
6.5
|
0.5
|
—
|
65.7
|
|||||||||||
|
Income
(loss) before income taxes, minority interests and equity (loss)
income
|
(303.3
|
)
|
92.6
|
212.9
|
1.0
|
3.2
|
||||||||||
|
(Benefit)
provision for income taxes
|
(230.3
|
)
|
(4.6
|
)
|
42.3
|
0.4
|
(192.2
|
)
|
||||||||
|
Income
(loss) before minority interests and equity (loss) income
|
(73.0
|
)
|
97.2
|
170.6
|
0.6
|
195.4
|
||||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
—
|
—
|
(1.4
|
)
|
—
|
(1.4
|
)
|
|||||||||
|
Equity
(loss) income of affiliated companies
|
—
|
(3.5
|
)
|
1.6
|
(1.3
|
)
|
(3.2
|
)
|
||||||||
|
Equity
income (loss) from consolidated subsidiaries
|
263.8
|
0.5
|
(0.8
|
)
|
(263.5
|
)
|
—
|
|||||||||
|
Net
income from continuing operations before discontinued operations
and
cumulative effect of change in accounting principle
|
190.8
|
94.2
|
170.0
|
(264.2
|
)
|
190.8
|
||||||||||
|
Net
income from discontinued operations, net of tax
|
47.0
|
—
|
—
|
—
|
47.0
|
|||||||||||
|
Net
income before cumulative effect of change in accounting principle
|
237.8
|
94.2
|
170.0
|
(264.2
|
)
|
237.8
|
||||||||||
|
Cumulative
effect of change in accounting principle, net of tax
|
0.9
|
—
|
—
|
—
|
0.9
|
|||||||||||
|
Net
income (loss)
|
$
|
238.7
|
$
|
94.2
|
$
|
170.0
|
$
|
(264.2
|
)
|
$
|
238.7
|
|||||
-56-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
||||||||||||||
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
||||||||||||
|
Net
sales
|
$
|
548.9
|
$
|
491.2
|
$
|
1,175.2
|
$
|
(160.3
|
)
|
$
|
2,055.0
|
|||||
|
Cost
of sales
|
386.2
|
382.7
|
794.7
|
(172.5
|
)
|
1,391.1
|
||||||||||
|
Selling,
general, and administrative expenses
|
103.7
|
130.0
|
148.8
|
—
|
382.5
|
|||||||||||
|
Research
and development
|
19.2
|
18.4
|
3.2
|
—
|
40.8
|
|||||||||||
|
Intangible
asset amortization
|
6.0
|
1.5
|
0.5
|
—
|
8.0
|
|||||||||||
|
Impairment
of FiberVisions’ goodwill
|
-
|
52.9
|
—
|
—
|
52.9
|
|||||||||||
|
Other
operating expenses, net
|
8.0
|
9.0
|
22.4
|
—
|
39.4
|
|||||||||||
|
Profit
(loss) from operations
|
25.8
|
(103.3
|
)
|
205.6
|
12.2
|
140.3
|
||||||||||
|
Interest
and debt expense (income), net
|
173.1
|
(71.6
|
)
|
(12.1
|
)
|
—
|
89.4
|
|||||||||
|
Vertac
litigation charges
|
15.0
|
—
|
—
|
—
|
15.0
|
|||||||||||
|
Other
expense (income), net
|
72.3
|
2.4
|
(3.4
|
)
|
—
|
71.3
|
||||||||||
|
(Loss)
income before income taxes, minority interests and equity income
(loss)
|
(234.6
|
)
|
(34.1
|
)
|
221.1
|
12.2
|
(35.4
|
)
|
||||||||
|
(Benefit)
provision for income taxes
|
(100.3
|
)
|
20.0
|
72.2
|
4.3
|
(3.8
|
)
|
|||||||||
|
Income
(loss) before minority interests and equity
|
||||||||||||||||
|
income
(loss)
|
(134.3
|
)
|
(54.1
|
)
|
148.9
|
7.9
|
(31.6
|
)
|
||||||||
|
Minority
interests in earnings of consolidated
|
||||||||||||||||
|
subsidiaries
|
—
|
—
|
(1.0
|
)
|
—
|
(1.0
|
)
|
|||||||||
|
Equity
income (loss) of affiliated companies
|
—
|
(1.1
|
)
|
1.5
|
0.1
|
0.5
|
||||||||||
|
Equity
income (loss) from consolidated subsidiaries
|
102.2
|
10.0
|
(3.2
|
)
|
(109.0
|
)
|
—
|
|||||||||
|
Net
(loss) income from continuing operations
before
discontinued operations and cumulative
effect
of change in accounting principle
|
(32.1
|
)
|
(45.2
|
)
|
146.2
|
(101.0
|
)
|
(32.1
|
)
|
|||||||
|
Net
loss from discontinued operations, net of tax
|
(6.5
|
)
|
—
|
—
|
—
|
(6.5
|
)
|
|||||||||
|
Net
(loss) income before cumulative effect of
changes
in accounting principle, net of tax
|
(38.6
|
)
|
(45.2
|
)
|
146.2
|
(101.0
|
)
|
(38.6
|
)
|
|||||||
|
Cumulative
effect of change in accounting principle,
net of tax
|
(2.5
|
)
|
—
|
—
|
—
|
(2.5
|
)
|
|||||||||
|
Net
(loss) income
|
$
|
(41.1
|
)
|
$
|
(45.2
|
)
|
$
|
146.2
|
$
|
(101.0
|
)
|
$
|
(41.1
|
)
|
||
-57-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Operations
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
||||||||||||||
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
||||||||||||
|
Net
sales
|
$
|
528.4
|
$
|
474.8
|
$
|
1,131.9
|
$
|
(150.8
|
)
|
$
|
1,984.3
|
|||||
|
Cost
of sales
|
358.8
|
352.5
|
731.1
|
(150.8
|
)
|
1,291.6
|
||||||||||
|
Selling,
general, and administrative expenses
|
100.8
|
126.0
|
155.3
|
—
|
382.1
|
|||||||||||
|
Research
and development
|
19.7
|
17.4
|
5.6
|
—
|
42.7
|
|||||||||||
|
Goodwill
and intangible asset amortization
|
6.1
|
1.5
|
0.5
|
—
|
8.1
|
|||||||||||
|
Other
operating expenses, net
|
4.8
|
12.9
|
9.2
|
—
|
26.9
|
|||||||||||
|
Profit
(loss) from operations
|
38.2
|
(35.5
|
)
|
230.2
|
—
|
232.9
|
||||||||||
|
Interest
and debt expense (income), net
|
177.6
|
(59.7
|
)
|
(9.2
|
)
|
—
|
108.7
|
|||||||||
|
Gain
on sale of CP Kelco ApS
|
—
|
—
|
(27.0
|
)
|
—
|
(27.0
|
)
|
|||||||||
|
Other
expense (income), net
|
256.6
|
3.9
|
(143.8
|
)
|
—
|
116.7
|
||||||||||
|
Income
(loss) before income taxes, minority interest and equity income
(loss)
|
(396.0
|
)
|
20.3
|
410.2
|
—
|
34.5
|
||||||||||
|
Provision
(benefit) for income taxes
|
(86.8
|
)
|
38.1
|
52.5
|
—
|
3.8
|
||||||||||
|
Income
(loss) before minority interests and
|
||||||||||||||||
|
equity
income ( loss)
|
(309.2
|
)
|
(17.8
|
)
|
357.7
|
—
|
30.7
|
|||||||||
|
Minority
interests in earnings of consolidated
|
||||||||||||||||
|
subsidiaries
|
—
|
—
|
(0.9
|
)
|
—
|
(0.9
|
)
|
|||||||||
|
Equity
income (loss) of affiliated companies
|
—
|
(0.7
|
)
|
1.8
|
(0.2
|
)
|
0.9
|
|||||||||
|
Equity
income (loss) from consolidated
|
||||||||||||||||
|
subsidiaries
|
339.9
|
6.0
|
(1.6
|
)
|
(344.3
|
)
|
—
|
|||||||||
|
Net
income (loss) from continuing operations
|
||||||||||||||||
|
before
discontinued operations
|
30.7
|
(12.5
|
)
|
357.0
|
(344.5
|
)
|
30.7
|
|||||||||
|
Net
loss from discontinued operations, net of tax
|
(2.6
|
)
|
—
|
—
|
—
|
(2.6
|
)
|
|||||||||
|
Net
income (loss)
|
$
|
28.1
|
$
|
(12.5
|
)
|
$
|
357.0
|
$
|
(344.5
|
)
|
$
|
28.1
|
||||
-58-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Balance Sheet
|
||||||||||||||||
|
Year
ended December 31, 2006
|
||||||||||||||||
|
Unconsolidated
|
|
|||||||||||||||
|
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
|||||||||||||
|
Assets
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
|||||||||||
|
Current
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
89.7
|
$
|
0.5
|
$
|
81.6
|
$
|
—
|
$
|
171.8
|
||||||
|
Accounts
receivable, net
|
69.9
|
45.6
|
211.1
|
—
|
326.6
|
|||||||||||
|
Intercompany
receivables
|
68.0
|
9.8
|
(6.4
|
)
|
(71.4
|
)
|
—
|
|||||||||
|
Inventories
|
56.2
|
68.9
|
87.0
|
(1.5
|
)
|
210.6
|
||||||||||
|
Deferred
income taxes
|
57.6
|
3.2
|
9.4
|
—
|
70.2
|
|||||||||||
|
Current
assets of discontinued operations
|
0.4
|
—
|
—
|
—
|
0.4
|
|||||||||||
|
Income
taxes receivable
|
170.8
|
—
|
—
|
—
|
170.8
|
|||||||||||
|
Other
current assets
|
12.3
|
2.4
|
19.4
|
—
|
34.1
|
|||||||||||
|
Total
current assets
|
524.9
|
130.4
|
402.1
|
(72.9
|
)
|
984.5
|
||||||||||
|
Property,
plant and equipment, net
|
139.9
|
132.2
|
328.3
|
—
|
600.4
|
|||||||||||
|
Investments
in subsidiaries and advances, net
|
2,569.7
|
85.2
|
44.9
|
(2,699.8
|
)
|
—
|
||||||||||
|
Intangible
assets, net
|
131.8
|
2.9
|
8.4
|
—
|
143.1
|
|||||||||||
|
Goodwill
|
58.7
|
37.6
|
385.2
|
—
|
481.5
|
|||||||||||
|
Deferred
income taxes
|
357.1
|
—
|
19.5
|
(2.0
|
)
|
374.6
|
||||||||||
|
Asbestos-related
assets
|
87.5
|
—
|
—
|
—
|
87.5
|
|||||||||||
|
Deferred
charges and other assets
|
87.7
|
27.7
|
21.5
|
—
|
136.9
|
|||||||||||
|
Total
assets
|
$
|
3,957.3
|
$
|
416.0
|
$
|
1,209.9
|
$
|
(2,774.7
|
)
|
$
|
2,808.5
|
|||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||||||
|
Current
liabilities
|
||||||||||||||||
|
Accounts
payable
|
$
|
63.2
|
$
|
35.0
|
$
|
107.1
|
$
|
—
|
$
|
205.3
|
||||||
|
Intercompany
payables
|
2.0
|
43.4
|
26.1
|
(71.5
|
)
|
—
|
||||||||||
|
Asbestos-related
liabilities
|
36.4
|
—
|
—
|
—
|
36.4
|
|||||||||||
|
Current
debt obligations
|
20.0
|
—
|
15.8
|
—
|
35.8
|
|||||||||||
|
Vertac
litigation liability
|
123.5
|
—
|
—
|
—
|
123.5
|
|||||||||||
|
Accrued
expenses
|
119.8
|
68.3
|
82.4
|
(41.9
|
)
|
228.6
|
||||||||||
|
Total
current liabilities
|
364.9
|
146.7
|
231.4
|
(113.4
|
)
|
629.6
|
||||||||||
|
Long-term
debt
|
937.5
|
—
|
22.2
|
—
|
959.7
|
|||||||||||
|
Deferred
income taxes
|
—
|
2.0
|
69.7
|
(2.0
|
)
|
69.7
|
||||||||||
|
Pension
obligations
|
191.2
|
—
|
71.3
|
—
|
262.5
|
|||||||||||
|
Other
postretirement benefit obligations
|
139.9
|
2.1
|
0.2
|
—
|
142.2
|
|||||||||||
|
Deferred
credits and other liabilities
|
220.8
|
14.1
|
20.7
|
—
|
255.6
|
|||||||||||
|
Asbestos-related
liabilities
|
233.6
|
—
|
—
|
—
|
233.6
|
|||||||||||
|
Intercompany
notes payable (receivable)
|
1,626.5
|
(1,413.5
|
)
|
(255.0
|
)
|
42.0
|
—
|
|||||||||
|
Minority
interests
|
—
|
—
|
12.7
|
—
|
12.7
|
|||||||||||
|
Total
stockholders' equity
|
242.9
|
1,664.6
|
1,036.7
|
(2,701.3
|
)
|
242.9
|
||||||||||
|
Total
liabilities and stockholders' equity
|
$
|
3,957.3
|
$
|
416.0
|
$
|
1,209.9
|
$
|
(2,774.7
|
)
|
$
|
2,808.5
|
|||||
-59-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Balance Sheet
|
||||||||||||||||
|
December
31, 2005
|
||||||||||||||||
|
Unconsolidated
|
|
|||||||||||||||
|
|
Guarantor
|
Non-Guarantor
|
Eliminations
and
|
|||||||||||||
|
Assets
|
Parent
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Consolidated
|
|||||||||||
|
Current
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
9.1
|
$
|
1.0
|
$
|
67.2
|
$
|
—
|
$
|
77.3
|
||||||
|
Accounts
receivable, net
|
62.1
|
35.8
|
191.6
|
0.2
|
289.7
|
|||||||||||
|
Intercompany
receivable
|
68.7
|
17.5
|
21.4
|
(107.6
|
)
|
—
|
||||||||||
|
Inventories
|
52.7
|
52.4
|
76.6
|
(2.1
|
)
|
179.6
|
||||||||||
|
Deferred
income taxes
|
24.0
|
2.9
|
12.4
|
—
|
39.3
|
|||||||||||
|
FiberVisions
assets held for sale
|
—
|
138.8
|
63.9
|
—
|
202.7
|
|||||||||||
|
Current
assets of discontinued operations
|
6.7
|
—
|
—
|
—
|
6.7
|
|||||||||||
|
Income
taxes receivable
|
12.6
|
—
|
—
|
—
|
12.6
|
|||||||||||
|
Other
current assets
|
12.8
|
1.8
|
20.7
|
0.2
|
35.5
|
|||||||||||
|
Total
current assets
|
248.7
|
250.2
|
453.8
|
(109.3
|
)
|
843.4
|
||||||||||
|
Property,
plant and equipment, net
|
145.6
|
107.2
|
282.6
|
—
|
535.4
|
|||||||||||
|
Investments
in subsidiaries and advances, net
|
2,461.4
|
88.3
|
44.9
|
(2,594.6
|
)
|
—
|
||||||||||
|
Intangible
assets, net
|
137.7
|
—
|
5.1
|
—
|
142.8
|
|||||||||||
|
Goodwill
|
58.7
|
27.9
|
354.4
|
—
|
441.0
|
|||||||||||
|
Deferred
income taxes
|
361.7
|
—
|
18.3
|
(139.6
|
)
|
240.4
|
||||||||||
|
Asbestos-related
assets
|
120.7
|
—
|
—
|
—
|
120.7
|
|||||||||||
|
Deferred
charges and other assets
|
171.6
|
13.7
|
59.8
|
—
|
245.1
|
|||||||||||
|
Total
assets
|
$
|
3,706.1
|
$
|
487.3
|
$
|
1,218.9
|
$
|
(2,843.5
|
)
|
$
|
2,568.8
|
|||||
|
Liabilities
and Stockholders' (Deficit) Equity
|
||||||||||||||||
|
Current
liabilities
|
||||||||||||||||
|
Accounts
payable
|
$
|
51.5
|
$
|
16.7
|
$
|
104.5
|
$
|
0.2
|
$
|
172.9
|
||||||
|
FiberVisions
liabilities held for sale
|
—
|
51.2
|
15.4
|
—
|
66.6
|
|||||||||||
|
Asbestos-related
liabilities
|
36.4
|
—
|
—
|
—
|
36.4
|
|||||||||||
|
Intercompany
payable
|
1.5
|
60.7
|
42.0
|
(104.2
|
)
|
—
|
||||||||||
|
Current
debt obligations
|
4.0
|
—
|
12.7
|
—
|
16.7
|
|||||||||||
|
Accrued
expenses
|
76.2
|
60.5
|
80.3
|
—
|
217.0
|
|||||||||||
|
Current
liabilities of discontinued operations
|
2.8
|
—
|
—
|
—
|
2.8
|
|||||||||||
|
Total
current liabilities
|
172.4
|
189.1
|
254.9
|
(104.0
|
)
|
512.4
|
||||||||||
|
Long-term
debt
|
1,088.6
|
—
|
3.7
|
—
|
1,092.3
|
|||||||||||
|
Deferred
income taxes
|
—
|
142.6
|
72.2
|
(139.0
|
)
|
75.8
|
||||||||||
|
Pension
obligations
|
251.7
|
—
|
71.7
|
—
|
323.4
|
|||||||||||
|
Other
postretirement benefit obligation
|
63.1
|
2.1
|
0.3
|
—
|
65.5
|
|||||||||||
|
Deferred
credits and other liabilities
|
254.2
|
18.8
|
16.4
|
—
|
289.4
|
|||||||||||
|
Asbestos-related
liabilities
|
233.6
|
—
|
—
|
—
|
233.6
|
|||||||||||
|
Intercompany
notes payable (receivable)
|
1,667.2
|
(1,208.7
|
)
|
(458.5
|
)
|
—
|
—
|
|||||||||
|
Minority
interests
|
—
|
—
|
1.1
|
—
|
1.1
|
|||||||||||
|
Total
stockholders' (deficit) equity
|
(24.7
|
)
|
1,343.4
|
1,257.1
|
(2,600.5
|
)
|
(24.7
|
)
|
||||||||
|
Total
liabilities and stockholders' (deficit) equity
|
$
|
3,706.1
|
$
|
487.3
|
$
|
1,218.9
|
$
|
(2,843.5
|
)
|
$
|
2,568.8
|
|||||
-60-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||
|
Net
Cash Provided By (Used In) Operating Activities
|
$
|
166.7
|
$
|
(1.2
|
)
|
$
|
482.1
|
$
|
(474.7
|
)
|
$
|
172.9
|
||||
|
Cash
Flow From Investing Activities:
|
||||||||||||||||
|
Capital
expenditures
|
(21.3
|
)
|
(21.0
|
)
|
(51.3
|
)
|
—
|
(93.6
|
)
|
|||||||
|
Acquisitions
and investments, net of
cash, recognized upon consolidation
|
—
|
(22.7
|
)
|
(6.7
|
)
|
—
|
(29.4
|
)
|
||||||||
|
Proceeds
from sale of 51% interest
in FiberVisions, net
|
17.8
|
—
|
—
|
—
|
17.8
|
|||||||||||
|
Proceeds
of fixed asset disposals
|
1.1
|
5.9
|
4.3
|
—
|
11.3
|
|||||||||||
|
Other,
net
|
(0.2
|
)
|
—
|
—
|
—
|
(0.2
|
)
|
|||||||||
|
Net
cash used in investing activities
|
(2.6
|
)
|
(37.8
|
)
|
(53.7
|
)
|
—
|
(94.1
|
)
|
|||||||
|
Cash
Flow From Financing Activities:
|
||||||||||||||||
|
Long-term
debt issued by FiberVisions, net
of issuance costs
|
83.7
|
—
|
—
|
—
|
83.7
|
|||||||||||
|
Long-term
debt proceeds
|
—
|
—
|
22.0
|
—
|
22.0
|
|||||||||||
|
Long-term
debt payments
|
(135.7
|
)
|
—
|
(6.8
|
)
|
—
|
(142.5
|
)
|
||||||||
|
Change
in short-term debt
|
—
|
—
|
5.8
|
—
|
5.8
|
|||||||||||
|
Change
in intercompany advances
|
(71.5
|
)
|
38.5
|
(388.7
|
)
|
421.7
|
—
|
|||||||||
|
Proceeds
from the exercise of stock options
|
37.0
|
—
|
—
|
—
|
37.0
|
|||||||||||
|
Dividends
paid
|
—
|
—
|
(53.0
|
)
|
53.0
|
—
|
||||||||||
|
Other,
net
|
5.6
|
—
|
—
|
—
|
5.6
|
|||||||||||
|
Net
cash provided by (used in) financing activities
|
(80.9
|
)
|
38.5
|
(420.7
|
)
|
474.7
|
11.6
|
|||||||||
|
Effect
of exchange rate changes on cash
|
—
|
—
|
4.1
|
—
|
4.1
|
|||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
83.2
|
(0.5
|
)
|
11.8
|
—
|
94.5
|
||||||||||
|
Cash
and cash equivalents at beginning of year
|
6.5
|
1.0
|
69.8
|
—
|
77.3
|
|||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
89.7
|
$
|
0.5
|
$
|
81.6
|
$
|
—
|
$
|
171.8
|
||||||
-61-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||
|
Net
Cash Provided By (Used In)
Operating Activities
|
$
|
(4.6
|
)
|
$
|
29.1
|
$
|
(81.2
|
)
|
$
|
195.9
|
$
|
139.2
|
||||
|
Cash
Flow From Investing Activities:
|
||||||||||||||||
|
Capital
expenditures
|
(16.7
|
)
|
(26.7
|
)
|
(24.1
|
)
|
—
|
(67.5
|
)
|
|||||||
|
Investments
|
—
|
—
|
(4.4
|
)
|
—
|
(4.4
|
)
|
|||||||||
|
Proceeds
of fixed asset disposals
|
13.3
|
—
|
3.3
|
—
|
16.6
|
|||||||||||
|
Other,
net
|
—
|
—
|
(2.4
|
)
|
—
|
(2.4
|
)
|
|||||||||
|
Net
cash used in investing activities
|
(3.4
|
)
|
(26.7
|
)
|
(27.6
|
)
|
—
|
(57.7
|
)
|
|||||||
|
Cash
Flow From Financing Activities:
|
||||||||||||||||
|
Long-term
debt payments
|
(112.8
|
)
|
—
|
(18.4
|
)
|
—
|
(131.2
|
)
|
||||||||
|
Change
in short-term debt
|
—
|
—
|
1.9
|
—
|
1.9
|
|||||||||||
|
Change
in intercompany advances
|
82.2
|
(2.3
|
)
|
159.2
|
(239.1
|
)
|
—
|
|||||||||
|
Proceeds
from the exercise of stock options
|
2.7
|
—
|
—
|
—
|
2.7
|
|||||||||||
|
Dividends
paid
|
—
|
—
|
(43.2
|
)
|
43.2
|
—
|
||||||||||
|
Other,
net
|
(0.4
|
)
|
—
|
—
|
—
|
(0.4
|
)
|
|||||||||
|
Net
cash (used in) provided by financing activities
|
(28.3
|
)
|
(2.3
|
)
|
99.5
|
(195.9
|
)
|
(127.0
|
)
|
|||||||
|
Effect
of exchange rate changes on cash
|
—
|
—
|
(3.7
|
)
|
—
|
(3.7
|
)
|
|||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(36.3
|
)
|
0.1
|
(13.0
|
)
|
—
|
(49.2
|
)
|
||||||||
|
Cash
and cash equivalents at beginning of year
|
42.8
|
0.9
|
82.8
|
—
|
126.5
|
|||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
6.5
|
$
|
1.0
|
$
|
69.8
|
$
|
—
|
$
|
77.3
|
||||||
-62-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
Condensed
Consolidating Statement of Cash Flows
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
Unconsolidated
|
||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
and
Adjustments
|
Consolidated
|
||||||||||||
|
Net
Cash Provided By Operating Activities
|
$
|
155.4
|
$
|
40.9
|
$
|
490.0
|
$
|
(565.8
|
)
|
$
|
120.5
|
|||||
|
Cash
Flow From Investing Activities:
|
||||||||||||||||
|
Capital
expenditures
|
(22.5
|
)
|
(15.4
|
)
|
(39.4
|
)
|
(0.1
|
)
|
(77.4
|
)
|
||||||
|
Proceeds
of fixed asset disposals
|
0.8
|
—
|
0.6
|
—
|
1.4
|
|||||||||||
|
Proceeds
from sale of minority interest in
|
||||||||||||||||
|
CP
Kelco ApS
|
27.0
|
—
|
—
|
—
|
27.0
|
|||||||||||
|
Other,
net
|
0.8
|
(1.5
|
)
|
0.7
|
(0.1
|
)
|
(0.1
|
)
|
||||||||
|
Net
cash (used in) provided by investing
|
||||||||||||||||
|
activities
|
6.1
|
(16.9
|
)
|
(38.1
|
)
|
(0.2
|
)
|
(49.1
|
)
|
|||||||
|
Cash
Flow From Financing Activities:
|
||||||||||||||||
|
Long-term
debt proceeds
|
650.0
|
—
|
—
|
—
|
650.0
|
|||||||||||
|
Long-term
debt payments
|
(713.2
|
)
|
—
|
(16.3
|
)
|
—
|
(729.5
|
)
|
||||||||
|
Change
in short-term debt
|
—
|
—
|
1.6
|
—
|
1.6
|
|||||||||||
|
Change
in intercompany advances
|
(68.4
|
)
|
(25.2
|
)
|
(262.2
|
)
|
355.8
|
—
|
||||||||
|
Proceeds
from the exercise of stock options
|
5.5
|
—
|
—
|
—
|
5.5
|
|||||||||||
|
Payment
of debt issuance costs and underwriting
fees
|
(7.8
|
)
|
—
|
—
|
—
|
(7.8
|
)
|
|||||||||
|
Dividends
paid
|
—
|
—
|
(210.2
|
)
|
210.2
|
—
|
||||||||||
|
Other,
net
|
6.1
|
—
|
—
|
—
|
6.1
|
|||||||||||
|
Net
cash used in financing activities
|
(127.8
|
)
|
(25.2
|
)
|
(487.1
|
)
|
566.0
|
(74.1
|
)
|
|||||||
|
Effect
of exchange rate changes on cash
|
—
|
—
|
2.9
|
—
|
2.9
|
|||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
33.7
|
(1.2
|
)
|
(32.3
|
)
|
—
|
0.2
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
9.1
|
2.1
|
115.1
|
—
|
126.3
|
|||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
42.8
|
$
|
0.9
|
$
|
82.8
|
$
|
—
|
$
|
126.5
|
||||||
-63-
Hercules
Incorporated
Notes
to Consolidated Financial Statements
(Dollars
in millions, except per share data)
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Year
|
|||||||||||||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||||||
|
$
|
527.3
|
$
|
501.9
|
$
|
501.0
|
$
|
534.7
|
$
|
513.1
|
$
|
519.6
|
$
|
493.9
|
$
|
498.8
|
$
|
2,035.3
|
$
|
2,055.0
|
||||||||||||
|
Cost
of sales
|
360.7
|
337.6
|
324.7
|
351.2
|
332.2
|
353.7
|
325.8
|
348.6
|
1,343.4
|
1,391.1
|
|||||||||||||||||||||
|
Selling,
general and administrative expenses
|
91.3
|
99.7
|
90.7
|
99.9
|
92.8
|
92.7
|
97.4
|
90.2
|
372.2
|
382.5
|
|||||||||||||||||||||
|
Research
and development
|
9.6
|
10.3
|
9.4
|
10.0
|
9.3
|
10.1
|
10.5
|
10.4
|
38.8
|
40.8
|
|||||||||||||||||||||
|
Intangible
asset amortization
|
1.6
|
2.0
|
2.0
|
2.0
|
1.8
|
2.0
|
1.8
|
2.0
|
7.2
|
8.0
|
|||||||||||||||||||||
|
Impairment
of FiberVisions goodwill
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
52.9
|
—
|
52.9
|
|||||||||||||||||||||
|
Other
operating expense, net
|
7.2
|
9.7
|
8.6
|
10.4
|
4.6
|
11.1
|
4.7
|
8.2
|
25.1
|
39.4
|
|||||||||||||||||||||
|
Profit
(loss) from operations
|
56.9
|
42.6
|
65.6
|
61.2
|
72.4
|
50.0
|
53.7
|
(13.5
|
)
|
248.6
|
140.3
|
||||||||||||||||||||
|
Interest
and debt expense
|
20.7
|
22.2
|
16.7
|
22.8
|
16.7
|
22.5
|
17.1
|
21.9
|
71.2
|
89.4
|
|||||||||||||||||||||
|
Vertac
litigation charges
|
—
|
14.8
|
106.0
|
0.1
|
1.0
|
0.1
|
1.5
|
—
|
108.5
|
15.0
|
|||||||||||||||||||||
|
Other
expense, net
|
10.6
|
6.4
|
21.1
|
25.6
|
4.6
|
0.1
|
29.4
|
39.2
|
65.7
|
71.3
|
|||||||||||||||||||||
|
Income
(loss) before income taxes, minority interests and equity
loss
|
25.6
|
(0.8
|
)
|
(78.2
|
)
|
12.7
|
50.1
|
27.3
|
5.7
|
(74.6
|
)
|
3.2
|
(35.4
|
)
|
|||||||||||||||||
|
(Benefit)
provision for income taxes
|
10.7
|
(6.5
|
)
|
(27.5
|
)
|
3.1
|
14.1
|
2.8
|
(189.5
|
)
|
(3.2
|
)
|
(192.2
|
)
|
(3.8
|
)
|
|||||||||||||||
|
Income
(loss) before minority interests and equity loss
|
14.9
|
5.7
|
(50.7
|
)
|
9.6
|
36.0
|
24.5
|
195.2
|
(71.4
|
)
|
195.4
|
(31.6
|
)
|
||||||||||||||||||
|
Minority
interests in earnings of consolidated subsidiaries
|
(0.1
|
)
|
(0.4
|
)
|
(0.3
|
)
|
(0.2
|
)
|
(0.4
|
)
|
(0.3
|
)
|
(0.6
|
)
|
(0.1
|
)
|
(1.4
|
)
|
(1.0
|
)
|
|||||||||||
|
Equity
loss of affiliated companies, net of tax
|
(0.4
|
)
|
0.3
|
(0.6
|
)
|
—
|
(1.1
|
)
|
0.2
|
(1.1
|
)
|
—
|
(3.2
|
)
|
0.5
|
||||||||||||||||
|
Net
income (loss) from continuing operations before discontinued operations
and cumulative effect of changes in accounting principle
|
14.4
|
5.6
|
(51.6
|
)
|
9.4
|
34.5
|
24.4
|
193.5
|
(71.5
|
)
|
190.8
|
(32.1
|
)
|
||||||||||||||||||
|
Net
income (loss) from discontinued operations, net of tax
|
(0.6
|
)
|
(0.7
|
)
|
(0.7
|
)
|
(0.2
|
)
|
(0.3
|
)
|
(0.4
|
)
|
48.6
|
(5.2
|
)
|
47.0
|
(6.5
|
)
|
|||||||||||||
|
Net
income (loss) before cumulative effect of
|
|||||||||||||||||||||||||||||||
|
changes
in accounting principle
|
13.8
|
4.9
|
(52.3
|
)
|
9.2
|
34.2
|
24.0
|
242.1
|
(76.7
|
)
|
237.8
|
(38.6
|
)
|
||||||||||||||||||
|
Cumulative
effect of changes in accounting principle
|
0.9
|
—
|
—
|
—
|
—
|
—
|
—
|
(2.5
|
)
|
0.9
|
(2.5
|
)
|
|||||||||||||||||||
|
Net
income (loss)
|
$
|
14.7
|
$
|
4.9
|
$
|
(52.3
|
)
|
$
|
9.2
|
$
|
34.2
|
$
|
24.0
|
$
|
242.1
|
$
|
(79.2
|
)
|
$
|
238.7
|
$
|
(41.1
|
)
|
||||||||
|
Basic
earnings (loss) per share:
|
|||||||||||||||||||||||||||||||
|
Continuing
operations
|
$
|
0.13
|
$
|
0.06
|
$
|
(0.46
|
)
|
$
|
0.09
|
$
|
0.31
|
$
|
0.22
|
$
|
1.72
|
$
|
(0.66
|
)
|
$
|
1.72
|
$
|
(0.30
|
)
|
||||||||
|
Discontinued
operations
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
—
|
—
|
0.43
|
(0.05
|
)
|
0.42
|
(0.06
|
)
|
|||||||||||||||
|
Cumulative
effect of changes in accounting
principle
|
0.01
|
—
|
—
|
—
|
—
|
—
|
—
|
(0.02
|
)
|
0.01
|
(0.02
|
)
|
|||||||||||||||||||
|
Net
income (loss)
|
$
|
0.13
|
$
|
0.05
|
$
|
(0.47
|
)
|
$
|
0.08
|
$
|
0.31
|
$
|
0.22
|
$
|
2.15
|
$
|
(0.73
|
)
|
$
|
2.15
|
$
|
(0.38
|
)
|
||||||||
|
Diluted
earnings (loss) per share:
|
|||||||||||||||||||||||||||||||
|
Continuing
operations
|
$
|
0.13
|
$
|
0.05
|
$
|
(0.46
|
)
|
$
|
0.08
|
$
|
0.31
|
$
|
0.22
|
$
|
1.71
|
$
|
(0.66
|
)
|
$
|
1.71
|
$
|
(0.30
|
)
|
||||||||
|
Discontinued
operations
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
—
|
—
|
—
|
0.43
|
(0.05
|
)
|
0.42
|
(0.06
|
)
|
||||||||||||||||
|
Cumulative
effect of changes in accounting
principle
|
0.01
|
—
|
—
|
—
|
—
|
—
|
—
|
(0.02
|
)
|
0.01
|
(0.02
|
)
|
|||||||||||||||||||
|
Net
income (loss)
|
$
|
0.13
|
$
|
0.04
|
$
|
(0.47
|
)
|
$
|
0.08
|
$
|
0.31
|
$
|
0.22
|
$
|
2.14
|
$
|
(0.73
|
)
|
$
|
2.14
|
$
|
(0.38
|
)
|
||||||||
-64-
Pursuant
to the requirements of Section 13 or 15(d) 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 on March 7, 2007.
|
|
HERCULES
INCORPORATED
|
|
By:
|
/s/
Craig A. Rogerson
|
|
President
and Chief Executive Officer
|
-65-
|
Number
|
Description
|
||
|
31.1*
|
Certification
of President and Chief Executive Officer Pursuant to Exchange Act
Rule
13a-14(a)/15d-14(a)
|
||
|
31.2*
|
Certification
of Vice President and Chief Financial Officer Pursuant to Exchange
Act
Rule 13a-14(a)/15d-14(a)
|
||
|
32.1*
|
Section
1350 Certification of President and Chief Executive
Officer
|
||
|
32.2*
|
Section
1350 Certification of Vice President and Chief Financial
Officer
|
||
|
*Filed
herewith
|
|||
-66-