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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2000 Commission file number: 1-71
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BORDEN, INC.
New Jersey 13-0511250
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(State of incorporation) (I.R.S. Employer Identification No.)
180 East Broad St., Columbus, OH 43215 614-225-4000
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(Address of principal executive offices) (Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
- ---------------------- -----------------------------------------
8 3/8% Sinking Fund Debentures New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 any amendment to this Form 10-K. [x].
Aggregate market value in thousands of the voting stock held by nonaffiliates of
the Registrant based upon the average bid and asked prices of such stock on
April 2, 2001: $0.
Number of shares of common stock, par value $0.01 per share, outstanding as of
the close of business on April 2, 2001: 198,974,994
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
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none none
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The Exhibit Index is Located herein at sequential pages 83 through 85.
BORDEN, INC.
INTRODUCTION
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The following filing with the Securities and Exchange Commission ("SEC") by
Borden, Inc. ("the Company") presents three separate financial statements:
Borden, Inc. Consolidated Financial Statements, Borden, Inc. and Affiliates
Combined Financial Statements and the Financial Statements of Borden Foods
Holdings Corporation ("Foods Holdings"). The consolidated statements present the
Company after the effect of the sale of (i) the Company's former salty snacks
business ("Wise") to Wise Holdings, Inc. ("Wise Holdings") and its subsidiaries
and (ii) the Company's former domestic and international foods business
("Foods") to Foods Holdings and its subsidiaries, as explained in Note 1 to the
Consolidated and Combined Financial Statements. The Company and Foods Holdings
are controlled by BW Holdings, LLC ("BWHLLC"). The Consolidated Financial
Statements are those of the Company, which is the SEC Registrant.
The Borden, Inc. and Affiliates ("the Combined Companies") Combined Financial
Statements are included herein to present the Company on a combined historical
basis, including the financial position, results of operations and cash flows of
Wise and Foods. The Combined Companies' financial statements are included,
supplementally, to present financial information on a basis consistent with that
on which credit was originally extended to the Company (prior to push down
accounting) and because management of the Company continues to control
significant financial and managerial decisions with respect to Foods Holdings.
On October 30, 2000, Wise Holdings was sold by BWHLLC. For purposes of the
Combined Financial Statements, Wise Holdings is treated as if its net assets
were distributed out of the Combined Companies ("the Wise Distribution") on
October 30, 2000. As of October 30, 2000, Wise Holdings financial guarantees
ceased. Accordingly, in the Combined Financial Statements Wise is reflected as a
discontinued operation for all periods presented (See Note 6 to the Consolidated
and Combined Financial Statements) and separate financial statements of Wise
Holdings are no longer included in Part IV of this Registration Statement on
Form 10-K. In accordance with rule 3-10 of Regulation S-X, the financial
statements of Foods Holdings are included in Part IV of this Registration
Statement on Form 10-K because Foods Holdings is a guarantor of the Company's
credit facility and all of the Company's outstanding publicly held debt. The
financial statements for Foods Holdings are prepared on a purchase accounting
basis.
2
BORDEN, INC.
INDEX
PART I
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4 - Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . 11
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . 13
Item 7A - Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . 26
Item 8 - Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . 27
BORDEN, INC. ("BORDEN") CONSOLIDATED AND BORDEN, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
Consolidated Statements of Operations, years ended December 31, 2000, 1999 and 1998. . . . . 27
Consolidated Balance Sheets, December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Cash Flows, years ended December 31, 2000, 1999 and 1998. . . . . 31
Consolidated Statement of Shareholders' Equity, years ended December 31, 2000, 1999 and 1998 33
Combined Statements of Operations, years ended December 31, 2000, 1999 and 1998. . . . . . . 35
Combined Balance Sheets, December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . 36
Combined Statements of Cash Flows, years ended December 31, 2000, 1999 and 1998. . . . . . . 38
Combined Statement of Shareholders' Equity, years ended December 31, 2000, 1999 and 1998 . . 40
Notes to Consolidated and Combined Financial Statements. . . . . . . . . . . . . . . . . . . 42
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 71
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . 71
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Item 12 - Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . 78
Item 13 - Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 79
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . 80
3
PART I
ITEM 1. BUSINESS
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The Company was incorporated on April 24, 1899. The Company is engaged primarily
in manufacturing, processing, purchasing and distributing specialty chemicals
and consumer adhesives. The Combined Companies primarily include the specialty
chemicals, consumer adhesives, Wise and Foods businesses. Corporate departments
provide certain governance functions for all business units. The Company's
executive and administrative offices are located in Columbus, Ohio. Production
facilities are located throughout the United States and in many foreign
countries.
As a result of a merger completed on March 14, 1995, the Company is controlled
by affiliates of Kohlberg Kravis Roberts & Co. ("KKR").
In 1996, the Company sold its Wise business to Wise Holdings and sold its Foods
business to Foods Holdings. As a result of the Wise Distribution in 2000, Wise
Holdings financial guarantees ceased. However, management of the Company
continues to exercise significant financial and managerial control with respect
to Foods Holdings. Foods Holdings also continues to guarantee the Company's
obligations under its credit facility and its outstanding publicly held debt
securities.
In 1995, the Company began the process of redesigning its operating structure.
As a result, management decided to divest certain businesses that did not fit
into the Company's long-term strategic plan. The businesses included in the
classification "businesses sold or distributed" for the segment data are the
printing inks business sold in 2000, the infrastructure management services
business distributed in 2000 to the Company's parent and the commercial and
industrial wallcoverings business sold in 1998 (see Note 4 to the Consolidated
and Combined Financial Statements).
As a result of the Wise Distribution and the March 13, 1998 sale of the
Company's Decorative Products business, these businesses are included in
discontinued operations. (See Note 6 to the Consolidated and Combined Financial
Statements.)
Also as part of the redesign of its operating structure, the Company has
acquired certain businesses and assets included as part of the Company's
Chemical business ("Chemical") and a business included in the Consumer Adhesives
business. In 1999, the Company also invested in WKI Holding Company, Inc.
("WKI"), an affiliate of the Company and controlled by KKR.
PRODUCTS
Chemical primarily includes formaldehyde, melamine, resins, coatings and other
specialty and industrial chemicals.
The Consumer Adhesives business manufactures and markets more than 200 products,
from school glues to home repair and woodworking products.
The Combined Companies includes the Company and its subsidiaries, together with
the Foods and Wise businesses. Foods is a leading producer and marketer
in North America of pasta, pasta sauce, bouillon, dry soups
and shelf stable meals. In 1996, Foods management announced its strategy
to focus on grain-based meal solutions and, therefore, its intent to divest all
businesses not aligned with this strategy (the "Unaligned" businesses). Foods'
principal Unaligned businesses included processed cheese, candy coated popcorn,
non-dairy creamer, sweetened condensed milk, reconstituted lemon and lime
juices, and milk powder. Certain of these Unaligned businesses were sold in
December 1997, with the significant remaining businesses sold in early 1998 and
all Unaligned business sales completed in 1999. While part of the Combined
Companies, the Wise business manufactured salty snacks, including potato chips,
pretzels and corn snacks and chips. Its Caribbean based distributorship was sold
in 1998.
MARKETING AND DISTRIBUTION
Domestic products for Chemical are sold throughout the United States primarily
by in-house sales forces to industrial users. Domestic products for the Consumer
Adhesives business are sold throughout the United States by in-house and
independent sales forces primarily to retailers and distributors. To the extent
practicable, international distribution techniques parallel those used in the
United States. However, raw materials, production considerations,
4
pricing competition, government policy toward industry and foreign investment,
and other factors may vary substantially from country to country.
The domestic Foods products are marketed primarily through food brokers and
distributors, and directly to wholesalers, retail stores, food service
businesses, food processors, institutions and government agencies. To the extent
practicable, international distribution techniques parallel those used in the
United States. Raw materials, production considerations, pricing, competition,
government policy toward industry and foreign investment, and other factors may
vary substantially from country to country. While part of the Combined
Companies, Wise products were marketed similarly to Foods products.
COMPETITION
Chemical is the leading global producer of thermosetting resins for the forest
products industry and a leading producer of thermosetting resins for industrial
and foundry applications. These resins are used to bind or coat other materials
during the manufacturing process. Chemical is also the world's largest producer
of formaldehyde and a leading producer of melamine crystal. Much of the
formaldehyde and melamine crystal materials are consumed internally to produce
thermosetting resins, with the remainder sold to third parties. Specialty inks
(sold in 2000) and UV Coatings are produced for applications in a variety of
industries. Chemical manufactures and distributes its products worldwide with
the most significant markets being North America, Europe, Latin America, and the
Asia Pacific region and, generally, holds a leading market position in the areas
in which it competes. Chemical resins are provided to a wide variety of
customers for use in the manufacture of, among other products, structured
panels, medium density fiberboard, particle board, laminate veneers, insulation
binders, automotive brakes, and to coat cores and molds in the metal casting
process. The major competitors of Chemical are Ashland Chemical, Georgia
Pacific, Nordichem, and several regional domestic and international competitors.
Price, customer service and product performance are the primary areas in which
Chemical competes.
Foods is the third largest producer and marketer of pasta in the United States
and has the leading pasta brand in Canada. Foods also maintains the leading
position in the United States and Canada premium pasta sauce market, while
holding the fourth and first positions in the total United States and Canada
sauce markets, respectively. Foods also is a leader in both the United States
bouillon and dry soups markets. Other markets in which Foods competes includes
the United States retail meal solutions market and pasta in Italy. The pasta,
pasta sauces, bouillon, dry soups and shelf stable meals businesses are highly
competitive, with competition taking place primarily on the basis of price. The
primary competitors of pasta products are New World Pasta, American Italian
Pasta , and Barilla in the United States, and Nabisco Brands, Italpasta and
Unico in Canada. Primary pasta sauce competitors are Unilever, Campbell Soup
and ConAgra. Bouillon and dry soups competitors include Knorr, Lipton and
Hormel.
Prior to the Wise Distribution, Wise operated its salty snacks business in the
eastern United States, held the number two position in the market in which it
operated and was the largest regional snacks company in the United States.
Frito-Lay holds the leading market position throughout the United States as well
as the eastern United States with a market share in excess of 50%. The salty
snacks business is a competitively priced category.
The Consumer Adhesives business is the leading United States producer of
household and school glues and manufactures a full line of consumer adhesives,
including home repair products, caulks and sealants. Competition is primarily on
the basis of brand equity.
MANUFACTURING AND RAW MATERIALS
The primary raw materials used by Chemical are methanol, phenol and urea. The
primary raw materials used by Consumer Adhesives are methanol and polyvinyl
alcohol. Raw materials are generally available from numerous sources in
sufficient quantities, but are subject to price fluctuations which cannot always
be passed on to the Company's customers. The primary raw materials used by the
Foods and Wise businesses are flour, tomato products, oil and potatoes.
Long-term purchase agreements are used in certain circumstances to assure
availability of adequate raw material supplies at specified prices, for both
the Company and the Combined Companies.
5
CUSTOMERS
The Company and the Combined Companies do not depend on any single customer and
the businesses are not limited to a group of customers, the loss of which would
have a material adverse effect on their businesses. The primary customers
consist of food brokers and distributors, retail stores and manufacturers.
PATENTS AND TRADEMARKS
The Company and the Combined Companies own various patents, trademark
registrations, and patent and trademark applications around the world which are
held for use or currently used in their operations. A majority of the patents
relate to the development of new products and processes for manufacturing and
use thereof, and will expire at various times between 2001 and 2013. No
individual patent is considered to be material.
RESEARCH AND DEVELOPMENT
Research and development expenditures were $23.1 million, $23.8 million and
$18.7 million in 2000, 1999 and 1998, respectively, for the Company and $41.8
million, $43.1 million and $37.3 million for the Combined Companies. Development
and marketing of new products are carried out at the business unit level and
integrated with quality control for existing product lines.
WORKING CAPITAL
Working capital for all segments is generally funded through operations and
borrowings under the Company's credit facility.
EMPLOYEES
At December 31, 2000, the Company had approximately 3,800 employees. The
Combined Companies had approximately 5,400 employees. Relationships with union
and non-union employees are generally good.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), the Company and Combined Companies determined their operating segments on
the same basis that is used internally to evaluate segment performance and
allocate resources.
The Company and Combined Companies have a decentralized organization structure
with stand-alone businesses. Each of the business units has a separate
management team and infrastructure, and offers different products. In accordance
with SFAS 131, each business is an operating segment that is not aggregated with
another business because the economic characteristics between the businesses
differ. The businesses within the Company include a Chemical business and a
Consumer Adhesives business. The Combined Companies also include the Foods
business and the Wise business prior to the Wise Distribution. Prior to its
distribution to the Company's parent in February 2000, the infrastructure
management services business did not meet the quantitative thresholds of SFAS
131. It is included in the businesses sold or distributed classification. The
"Corporate and Other" category represents corporate functional departments.
During 1996 the Company sold options to BWHLLC on what was then all of the
common stock of the Consumer Adhesives business for 110% of the August 16, 1996
fair market value of the common stock. The options were issued at fair value
with a five-year expiration. The exercise price of the options for the Consumer
Adhesives business is $54.1 million. Management expects the 1996 options sold to
BWHLLC for Consumer Adhesives' common shares to be exercised in 2001. During
2000, additional common shares of the Consumer Adhesives business were issued to
and are held by the Company. The additional shares total 3.5 million, or
approximately 26%, of the total Consumer Adhesives common stock shares
outstanding at December 31, 2000.
In the consolidated and combined financial information that follows, the
Decorative Products business and Wise are shown as discontinued operations in
both the Depreciation and Amortization Expense chart and the Capital
Expenditures chart, prior to the sale of the Decorative Products business on
March 13, 1998 and the Wise Distribution, respectively. These businesses,
consistent with treatment as discontinued operations, are excluded from the
Sales to Unaffiliated Customers and Adjusted Operating EBITDA charts.
In the consolidated and combined financial information that follows,
The businesses sold or distributed classification includes the
Commercial and industrial wallcoverings business
through the date of its sale on April 29, 1998, the
6
Company's printing inks business through the date of its sale on
November 22, 2000, and the infrastructure management services business prior to
its distribution to the Company's parent in February 2000.
Adjusted Operating EBITDA information (as defined below) is presented because it
is the primary measure used by the chief operating decision maker to evaluate
operating results.
OPERATING SEGMENTS:
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SALES TO UNAFFILIATED CUSTOMERS:
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Foods ongoing $ 570.7 $ 536.8 $ 586.3
Foods Unaligned - 11.1 119.8
Chemical $ 1,336.4 $ 1,223.6 $ 1,235.5 1,336.4 1,223.6 1,235.5
Consumer Adhesives 147.4 100.5 92.2 147.4 100.5 92.2
Businesses sold or distributed 40.2 50.6 85.0 40.2 50.6 85.0
--------- --------- --------- -------- -------- ---------
$ 1,524.0 $ 1,374.7 $ 1,412.7 $2,094.7 $1,922.6 $2,118.8
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TOTAL ASSETS AT YEAR END:
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CONSOLIDATED COMBINED
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(Dollars in millions) 2000 1999 2000 1999
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Foods ongoing $ 872.3 $ 924.8
Chemical $1,078.8 $ 984.9 1,078.8 984.9
Consumer Adhesives 164.5 58.1 164.5 58.1
Businesses sold or distributed - 38.0 - 38.0
Combining adjustment - - (207.0) (254.0)
Discontinued operations - - - 61.8
Corporate and other 290.3 646.4 279.2 579.4
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$1,533.6 $1,727.4 $2,187.8 $2,393.0
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7
ADJUSTED OPERATING EBITDA:
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CONSOLIDATED COMBINED
----------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Foods ongoing $ 2.9 $ 13.5 $ 11.4
Foods Unaligned - 1.6 (1.7)
Chemical $ 189.7 $ 213.9 $ 183.6 189.7 213.9 183.6
Consumer Adhesives 23.2 16.9 13.6 23.2 16.9 13.6
Corporate and other (22.3) (10.7) (9.5) (26.3) (11.8) (10.3)
Businesses sold or distributed (1) 0.7 (5.2) (2.2) 0.7 (5.2) (2.2)
------- -------- -------- ------ ------ --------
ADJUSTED OPERATING EBITDA (2) 191.3 214.9 185.5 190.2 228.9 194.4
Significant or unusual items (3) (64.6) (34.2) 5.8 (65.5) 14.9 354.2
Depreciation and amortization (4) (62.4) (54.2) (50.9) (103.7) (84.6) (79.9)
------- -------- -------- ------ ------ --------
OPERATING INCOME $ 64.3 $ 126.5 $ 140.4 $ 21.0 $ 159.2 $ 468.7
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(1) Includes the Company's infrastructure management services business and printing inks business
for all periods presented and the commercial and industrial wallcoverings business in 1998.
(2) Adjusted Operating EBITDA represents net income, excluding discontinued operations, cumulative
effect of change in accounting principle, non-operating income and expense, interest, taxes,
depreciation, amortization and Significant or Unusual Items (see page 8).
(3) Includes Significant or Unusual Items shown below and page 17 of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(4) The increase in consolidated depreciation and amortization is primarily the result of the 1999
Chemical acquisitions and the 2000 Consumer Adhesives acquisition. The combined increase also
reflects the depreciation associated with Foods 1999 enterprise-wide systems implementation
and plant improvements.
SIGNIFICANT OR UNUSUAL ITEMS AFFECTING COMPARABILITY OF OPERATING EBITDA: (1)
- --------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
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(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------
Foods ongoing $ (0.9) $(23.3)
Foods Unaligned - $ 50.5 371.7
Chemical $(66.9) $(41.6) $ 5.8 (66.9) (41.6) 5.8
Consumer Adhesives (0.3) - - (0.3) - -
Corporate and other (2) 2.6 7.4 - 2.6 6.0 -
------- ------- ------ ------- ------ -------
$(64.6) $(34.2) $ 5.8 $(65.5) $ 14.9 $354.2
- --------------------------------------------------------------------------------------
(1) See page 17 of the Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information concerning these items.
(2) In 1999, consolidated includes gains on the 1996 sale of Wise that are eliminated in combined.
8
DEPRECIATION AND AMORTIZATION EXPENSE:
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CONSOLIDATED COMBINED
---------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Foods ongoing $ 41.3 $30.2 $ 28.1
Foods Unaligned - 0.2 0.9
Chemical $ 52.4 $45.7 $41.5 52.4 45.7 41.5
Consumer Adhesives 6.7 1.9 1.3 6.7 1.9 1.3
Businesses sold or distributed 0.8 4.2 6.1 0.8 4.2 6.1
Discontinued operations - - 2.0 6.7 7.5 8.7
Corporate and other 2.5 2.4 2.0 2.5 2.4 2.0
------ ----- ----- ------ ----- -----
$ 62.4 $54.2 $52.9 $110.4 $92.1 $ 88.6
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CAPITAL EXPENDITURES:
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CONSOLIDATED COMBINED
---------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Foods ongoing $ 46.8 $58.1 $36.4
Foods Unaligned - 0.1 1.6
Chemical $ 98.7 $66.3 $39.6 98.7 66.3 39.6
Consumer Adhesives 5.3 2.1 4.6 5.3 2.1 4.6
Businesses sold or distributed 0.1 1.2 4.2 0.1 1.2 4.2
Discontinued operations - - 1.1 4.8 8.9 10.8
Corporate and other 0.4 5.2 3.0 0.4 5.2 3.0
------ ----- ----- ------ ----- -----
$104.5 $74.8 $52.5 $156.1 $141.9 $100.2
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GEOGRAPHIC AREAS:
- ------------------
SALES TO UNAFFILIATED CUSTOMERS: (3)
- -------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------- -----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------
United States $1,042.9 $ 924.6 $ 955.1 $1,480.9 $1,330.7 $1,434.1
Canada 166.0 150.4 141.9 272.9 253.4 241.4
Other International 315.1 299.7 315.7 340.9 338.5 443.3
-------- -------- --------- --------- --------- --------
Total $1,524.0 $1,374.7 $1,412.7 $ 2,094.7 $1,922.6 $2,118.8
- -------------------------------------------------------------------------------------------------
(3) For purposes of geographic area disclosures, sales are attributed to the
country in which individual business locations reside.
LONG-LIVED ASSETS: (1)
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CONSOLIDATED COMBINED
------------------- ---------------------
(Dollars in millions) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------
United States $369.6 $374.2 $525.5 $516.0
Canada 64.6 41.9 109.5 83.8
Other International 139.0 122.7 144.5 130.4
------ ------ ------ ------
Total $573.2 $538.8 $779.5 $730.2
- ---------------------------------------------------------------------------------------------------
(1) Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
ITEM 2. PROPERTIES
- ------- ----------
As of December 31, 2000, the Company operated 29 domestic Chemical production
and manufacturing facilities in 18 states, the most significant being the
Chemical plant in Louisville, Kentucky. In addition, the Company operated 24
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foreign Chemical production and manufacturing facilities primarily in Canada,
South America, Europe, Australia and the Far East.
As of December 31, 2000, the Company operated one domestic facility in New York
and one foreign facility in Canada for producing and manufacturing household,
school and consumer glues.
As of December 31, 2000, the Foods business operated 4 domestic food
manufacturing facilities in 3 states and operated 4 foreign food manufacturing
and processing facilities located in Canada and Italy.
The Company's and the Combined Companies' manufacturing and processing
facilities are generally well maintained and effectively utilized. Substantially
all facilities are owned.
The Company and the Combined Companies are actively engaged in complying with
environmental protection laws, as well as various federal and state statutes and
regulations relating to manufacturing, processing and distributing their many
products. In connection with this, the Company incurred capital expenditures of
$0.8 million in 2000, $2.7 million in 1999 and $2.8 million in 1998. The Company
estimates that it will spend $1.7 million for environmental control facilities
during 2001. The Combined Companies incurred environmental capital expenditures
of $0.8 million in 2000, $2.7 million in 1999 and $3.2 million in 1998. The
Combined Companies estimate $1.8 million will be spent in 2001 relating to
environmental control facilities.
ITEM 3. LEGAL PROCEEDINGS
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Environmental Proceedings
- --------------------------
The Company has been notified that it is or may be a potentially responsible
party with respect to the cleanup of approximately 50 waste sites in proceedings
brought under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") or similar state environmental
laws. The Company's ultimate liability will depend on
many factors including its volumetric share of waste,
the financial viability of other responsible parties, the remediation
methods and technology used, the amount of time necessary to accomplish
remediation, and the availability of insurance coverage. While the Company
cannot predict with certainty the total cost of such cleanup, the Company has
recorded approximately $22 million of liabilities for environmental remediation
costs for these and other sites in amounts that it believes are probable and
reasonably estimable. Based on currently available information and analysis,
the Company believes that it is reasonably possible that costs associated with
such sites may exceed current reserves by amounts that may prove insignificant
or by amounts, in the aggregate, of up to approximately $16 million. This
estimate of the range of reasonably possible additional costs is less certain
than the estimates upon which reserves are based, and in order to establish the
upper limit of such range, assumptions least favorable to the Company among the
range of reasonably possible outcomes were used. In estimating both its current
reserves for environmental remediation and the possible range of additional
costs, the Company has not assumed that it will bear the entire cost of
remediation of every site to the exclusion of other known potentially
responsible parties who may be jointly and severally liable. The ability
of other potentially responsible parties to participate has
been taken into account, based generally on the parties'
probable contribution on a per site basis. No attempt has been made to discount
the estimated amounts to net present value, and no amounts have been recorded
for potential recoveries from insurance carriers.
Private actions against the Company and numerous other defendants are pending in
U.S. District Court in Baton Rouge, Louisiana, alleging personal injuries and
property damage in connection with a waste disposal site in Louisiana.
The Company is in negotiations with the New York Department of Environmental
Conservation relating to alleged air emission permit violations from 1990
through 1996 at the Company's Bainbridge, New York facility.
Borden Chemicals and Plastics Limited Partnership
- ------------------------------------------------------
In 1987 the Company's basic chemical and polyvinyl chloride resin businesses
located at Geismar, Louisiana, and Illiopolis, Illinois, were acquired by the
Borden Chemicals and Plastics Limited Partnership ("BCP"). BCP Management, Inc.,
("BCPM"), a wholly owned subsidiary of the Company serves as general partner of
BCP and has certain fiduciary responsibilities to BCP's unitholders. Under an
Environmental Indemnity Agreement ("EIA"), the Company has agreed, subject to
certain conditions and limitations, to indemnify BCP from certain environmental
10
liabilities arising from facts or circumstances that existed and requirements in
effect prior to November 30, 1987, and share on an equitable basis those arising
from facts or circumstances existing and requirements in effect both prior to
and after such date. No claim can be made by BCP under the EIA after November
30, 2002.
Other Legal Proceedings
- -------------------------
The Company is involved in other litigation throughout the United States, which
is considered to be in the ordinary course of business.
Anticipated Impact
- -------------------
Management believes, based upon the information it currently possesses, and
taking into account its established reserves for estimated liability, that the
ultimate outcome of the foregoing environmental and legal proceedings and
actions is unlikely to have a material adverse effect on the financial position
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- -----------------------------------------------------------
The Company's Annual Shareholder Meeting was held December 21, 2000. The
Company's Board of Directors was re-elected in its entirety by unanimous vote of
the 198,974,994 shares of the Company's common stock outstanding.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
- -------- ----------------------------------------------
AND RELATED STOCKHOLDER MATTERS
----------------------------------
The Company's authorized common stock consists of 300,000,000 shares with a par
value of $0.01 per share, 198,974,994 of which are issued and outstanding and
controlled by affiliates of KKR. No shares of such common stock trade on any
exchange. The Company declared $61.6 million in dividends on common stock during
2000, $64.1 million in dividends on common stock during 1999 and $59.5 million
in dividends on common stock during 1998. The Company's ability to pay dividends
on its common stock is restricted by its credit agreement with certain banks.
See Notes 9 and 13 to the Consolidated and Combined Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA
- -------- -------------------------
- -------------------------------------------------------------------------------------------------------------------
FIVE YEAR SELECTED FINANCIAL DATA
(All dollar and share amounts in millions, except per share data)
The following represents five year selected financial data for the Company and
the Combined Companies, restated for discontinued operations. See pages 8 and 16
for items impacting comparability between 2000, 1999 and 1998.
CONSOLIDATED FOR THE YEARS 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net sales $ 1,524.0 $ 1,374.7 $ 1,412.7 $ 1,498.2 $ 2,339.6
(Loss) income from continuing operations (59.0) 55.3 23.6 17.2 44.7
(Loss) income applicable to common stock (39.7) (20.8) (11.1) 147.6 (333.1)
- -------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) income per common share
from continuing operations $ (0.30) $ 0.28 $ 0.12 $ 0.09 $ 0.23
Basic and diluted (loss) income per common share (0.20) (0.10) (0.06) 0.74 (1.67)
- -------------------------------------------------------------------------------------------------------------------
Dividends per share
Common share $ 0.31 $ 0.32 $ 0.30 $ 0.26 $ 0.08
Preferred series A 3.00 3.00 3.00 3.00 3.13
- -------------------------------------------------------------------------------------------------------------------
Average number of common shares
outstanding during the year 199.0 199.0 199.0 199.0 199.0
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 1,533.6 $ 1,727.4 $ 2,004.7 $ 2,175.3 $ 2,490.0
Long-term debt 530.5 541.1 552.0 788.3 567.2
- -------------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 126.7 $ 180.7 $ 191.3 $ 138.4 $ 277.7
Adjusted Operating EBITDA (1) 191.3 214.9 185.5 154.4 215.7
- -------------------------------------------------------------------------------------------------------------------
COMBINED FOR THE YEARS 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net sales $ 2,094.7 $ 1,922.6 $ 2,118.8 $ 3,249.9 $ 4,222.8
(Loss) income from continuing operations (28.6) 89.6 272.4 90.6 46.3
(Loss) income applicable to common stock (62.3) 7.1 94.6 131.1 5.1
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Total Assets $ 2,187.8 $ 2,393.0 $ 2,673.4 $ 2,954.6 $ 3,030.4
Long-term debt 535.8 544.1 554.6 794.9 581.8
- -------------------------------------------------------------------------------------------------------------------
Operating EBITDA (1) $ 124.7 $ 243.8 $ 548.6 $ 387.0 $ 326.2
Adjusted Operating EBITDA (1) 190.2 228.9 194.4 262.1 270.3
- -------------------------------------------------------------------------------------------------------------------
(1) Operating EBITDA represents net income, excluding discontinued operations, cumulative effect of change in
accounting principle, non-operating income and expense, interest, taxes, depreciation and amortization. Adjusted
Operating EBITDA is composed of Operating EBITDA excluding the effects of Significant or Unusual Items as shown on
page 8 and page 17 of Management's Discussion and Analysis for the years 2000, 1999 and 1998. EBITDA information is
presented because it is the primary measure used by the chief operating decision maker to evaluate operating
results and because management understands that such information is considered by certain investors to be an
additional basis for evaluating the ability to pay interest and repay debt. EBITDA should not be considered an
alternative to measures of operating performance as determined in accordance with generally accepted accounting
principles, including net income, as a measure of the Company's operating results and cash flows or as a measure of
the Company's liquidity. Because EBITDA is not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------- ------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
RESULTS OF OPERATIONS BY BUSINESS UNIT:
- -------------------------------------------
Following is a comparison of net sales and adjusted operating EBITDA by
operating segment for both the Company and the Combined Companies:
NET SALES TO UNAFFILIATED CUSTOMERS:
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- -----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Foods ongoing $ 570.7 $ 536.8 $ 586.3
Foods Unaligned - 11.1 119.8
Chemical $1,336.4 $1,223.6 $1,235.5 1,336.4 1,223.6 1,235.5
Consumer Adhesives 147.4 100.5 92.2 147.4 100.5 92.2
Businesses sold or distributed (1) 40.2 50.6 85.0 40.2 50.6 85.0
-------- --------- -------- ------- ------- --------
$1,524.0 $1,374.7 $1,412.7 $2,094.7 $1,922.6 $2,118.8
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME:
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Adjusted Operating EBITDA
-------------------------
Foods ongoing $ 2.9 $ 13.5 $ 11.4
Foods Unaligned - 1.6 (1.7)
Chemical $ 189.7 $ 213.9 $183.6 189.7 213.9 183.6
Consumer Adhesives 23.2 16.9 13.6 23.2 16.9 13.6
Corporate and other (22.3) (10.7) (9.5) (26.3) (11.8) (10.3)
Businesses sold or distributed (1) 0.7 (5.2) (2.2) 0.7 (5.2) (2.2)
---------- --------- ------- ------- -------- -------
Total Adjusted Operating
EBITDA (2) 191.3 214.9 185.5 190.2 228.9 194.4
Significant or unusual items (3) (64.6) (34.2) 5.8 (65.5) 14.9 354.2
Depreciation and amortization (4) (62.4) (54.2) (50.9) (103.7) (84.6) (79.9)
---------- --------- ------- ------- -------- -------
OPERATING INCOME $ 64.3 $ 126.5 $140.4 $ 21.0 $ 159.2 $468.7
- ----------------------------------------------------------------------------------------------------------------
(1) See page 6 for the businesses included in this classification.
(2) Adjusted Operating EBITDA represents net income, excluding discontinued operations,
cumulative effect of change in accounting principle, non-operating income and expense, interest,
taxes, depreciation, amortization and Significant or Unusual Items (see below).
(3) Includes Significant or Unusual Items shown on page 8 and page 17 of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(4) The increase in consolidated depreciation and amortization in 2000 and 1999 resulted
primarily from Chemical and Consumer Adhesives acquisitions. Combined Companies' depreciation and
amortization changes reflect that described for consolidated as well as the depreciation associated
with Foods 1999 enterprise-wide systems implementation and plant improvements, partially offset by
reductions in depreciation expense due to the sale of Foods unaligned businesses in 2000, 1999 and
1998.
CONSOLIDATED SUMMARY
Net Sales
- ----------
Consolidated sales increased $149.3 million, or approximately 11%, to $1,524.0
million in 2000 from $1,374.7 million in 1999. The increase in sales is
attributed primarily to improved volumes in the Chemical business, increased
Chemical selling prices, the impact of Chemical 1999 and 2000 acquisitions and
the May 2000 Consumer Adhesives acquisition.
Adjusted Operating EBITDA
- ---------------------------
Adjusted operating EBITDA decreased $23.6 million, or approximately 11%, to
$191.3 million in 2000 from $214.9 million in 1999. The decrease is primarily
due to increases in raw material costs in the Chemical business, that more
13
than offset the impact of improved volumes, as well as the settlement and
incurrence of various corporate liabilities and expenses.
COMBINED SUMMARY
Net Sales
- ----------
Combined sales increased $172.1 million, or approximately 9%, to $2,094.7
million in 2000 from $1,922.6 million in 1999. The increase is primarily
attributed to increased Foods volumes due to new product introductions and the
factors described above for consolidated net sales.
Adjusted Operating EBITDA
- ---------------------------
Combined adjusted operating EBITDA decreased $38.7 million, or approximately
17%, to $190.2 million in 2000 from $228.9 million in 1999. In addition to the
consolidated factors described above, Foods' adjusted operating EBITDA from
ongoing operations decreased due primarily to the absence of 1999 favorable
litigation settlements and 2000 new product launch costs, partially offset by
improvements in sauce and a reduction in administrative expenses.
2000 VS. 1999
Chemical
- --------
Chemical sales of $1,336.4 million in 2000 were up $112.8 million, or
approximately 9%, from $1,223.6 million in 1999. The most significant items
that positively impacted 2000 sales were improved volumes of higher-priced
specialty products, higher selling prices for forest products resins, primarily
in North America, two acquisitions in the United States, and one acquisition in
Europe. The most significant items that negatively impacted sales were lower
selling prices for melamine products, unfavorable currency exchange rates, and
the exit from certain non-core businesses in the United States, Latin America
and the Philippines.
Overall volume, excluding the effect of acquisitions and strategic realignment
activities, was only 1.2% ahead of prior year, but still had a positive $70.6
million impact on 2000 sales. The positive impact was driven primarily by
substantial volume improvements in UV coatings and oilfield products, which have
significantly higher per unit selling prices (as measured in metric tons)
compared to all other products. Higher volumes of melamine crystal and melamine
based resins also had a positive impact on 2000 sales. The improvement in UV
coatings primarily reflects an increase in the Company's share of the market and
market growth in demand for optical fiber. Oilfield products volume benefited
from increased drilling activity, which reflects substantially higher natural
gas and oil prices. Melamine products volume reflects increased export sales of
melamine crystal, due to tightening global supply, and increased market share of
high-pressure laminates. North America forest products volume was essentially
flat compared to the prior year and reflects aggressive competitor pricing and a
downturn in housing starts throughout the second half of the year, particularly
in the fourth quarter that offset strong housing and construction activity in
the first half of the year.
In 2000, the Company acquired the formaldehyde and certain other assets from
BCP, which provided incremental 2000 sales of $21.3 million. The second quarter
1999 acquisition of Spurlock Industries, Inc. in the United States and the third
quarter 1999 acquisition of Blagden Chemicals, Ltd. in Europe contributed
incremental 2000 sales of $12.8 million and $22.8 million, respectively.
Overall higher selling prices in 2000 had a $32.7 million net positive impact on
sales. The increase reflects generally higher selling prices globally for
forest products resins and formaldehyde, partially offset by lower pricing for
melamine crystal and melamine based resins, as well as the impact of downward
pressure on selling prices due to very competitive market conditions across all
businesses. The generally higher selling prices for forest products resins and
formaldehyde reflect the partial pass-through of substantially higher raw
material costs. The lower pricing for melamine products reflects the global
market imbalance for melamine crystal that worsened throughout 1999 and has
persisted throughout most of 2000. A substantial portion of the Company's sales
volume, especially for North America forest products, is sold under contracts
that provide for monthly or quarterly selling price adjustments based on
published cost indices for the Company's primary raw materials (i.e. methanol,
phenol and urea). During the first quarter of 2000, the costs of these raw
materials were generally lower than prior year, therefore selling prices were
generally lower; however, the cost of all three primary raw materials escalated
significantly over the last three quarters, which resulted in upward adjustments
in selling prices.
14
Unfavorable currency exchange rates, primarily in the United Kingdom and
Ecuador, had an unfavorable impact on 2000 sales of approximately $28 million.
The unfavorable exchange rate for Ecuador reflects significant currency
devaluation throughout 1999 and through May 2000 when the local currency
exchange rate was fixed to the United States dollar.
The 1999 sale of the non-strategic United States molding compounds business and
closures or sales of non-strategic businesses in Latin America and the
Philippines caused 2000 sales to be approximately $23 million lower compared to
the prior year.
Adjusted operating EBITDA of $189.7 million in 2000 was $24.2 million, or
approximately 11%, lower than prior year adjusted operating EBITDA of $213.9
million. The decline reflects a very difficult business environment, especially
over the second half of the year. A slowing economy, escalating raw material
costs, intense competitor pricing activity, and unprecedented natural gas costs
in the latter part of the year all combined to have a significant negative
impact on 2000 operating results. Substantial margin erosion and generally
higher plant operating and distribution costs were partially offset by improved
volume of higher-priced specialty products, more favorable purchasing contracts
for certain raw materials and the impact of acquisitions. Profit margins in
North America forest products were significantly impacted by the inability to
fully recover rapidly escalating costs of methanol, phenol and urea. Effective
recovery of these rising costs was curtailed by delayed pricing adjustments
allowed under supply contracts and competitive pressures to keep prices down. A
substantial amount of North America forest products sales are based on supply
contracts that provide only monthly or quarterly pricing adjustments, which
cause price increases to lag raw material cost increases during times of rising
raw material costs. Profit margins for melamine crystal and melamine based
resins were also negatively impacted by both the high cost of urea and high
natural gas cost since the melamine crystal production process consumes
significant energy. Higher plant operating costs reflect higher energy costs,
while higher distribution costs reflect increased export sales of melamine
crystal and generally higher fuel costs.
Consumer Adhesives
- -------------------
Consumer Adhesives' net sales for the year were $147.4 million, an increase of
$46.9 million, or approximately 47%, compared to 1999 net sales for the same
period of $100.5 million. The increase is primarily attributable to the May
2000 acquisition of a Canadian based business as well as an approximate 15%
increase of base business volume.
Consumer Adhesives' adjusted operating EBITDA for the year was $23.2 million, a
$6.3 million, or approximately 37%, increase over 1999 EBITDA of $16.9 million.
The increase is primarily due to higher gross margin from the May acquisition of
the Canadian based business that exceeded increases in general and
administrative and marketing expenses also associated with the May acquisition.
Higher volumes in the base business were substantially offset by higher
marketing costs and raw material and distribution costs resulting primarily from
higher natural gas and oil costs. The increase in Consumer Adhesives marketing
expense was the primary reason for the increase in marketing expense on the
Consolidated Statement of Operations.
Corporate and Other
- ---------------------
Adjusted operating EBITDA decreased $11.6 million to a loss of $22.3 million in
2000 from a loss of $10.7 million in 1999. The higher net expense, classified as
general and administrative expenses, is primarily due to the incurrence and
settlement of various corporate liabilities and expenses of $15.0 million and a
$7.6 million charge for certain benefit plan settlements, partially offset by a
$10.5 million gain on the sale of certain rights to harvest shellfish (see Note
4 to the Consolidated and Combined Financial Statements).
Businesses Sold or Distributed
- ---------------------------------
The businesses sold or distributed classification represents the Company's
infrastructure management services business and printing inks business. The
change in net sales and adjusted operating EBITDA of $10.4 million and $5.9
million, respectively, primarily reflects the distribution of the infrastructure
management services business in February 2000.
Foods
- -----
Foods' sales for the year ended December 31, 2000 increased $22.8 million, or
approximately 4%, to $570.7 million from $547.9 million in 1999. Excluding
sales of $11.1 million from Foods Unaligned businesses sold in 1999, sales from
Foods' ongoing businesses increased $33.9 million, or approximately 6%. The
increase was led by the introduction of a new line of pasta-based
microwave meals called It's Pasta Anytime. In addition, Foods'
sales improved with growth in sauce volumes as new product
introductions and expanded distribution led to increased market
15
shares in the US and Canada. These improvements were partially offset by
declines in domestic pasta and bouillon sales.
Foods' adjusted operating EBITDA declined $12.2 million to $2.9 million in 2000
from $15.1 million in 1999. Excluding the impact of Foods Unaligned businesses
sold in 1999 and a $9.3 million gain on favorable settlements of litigation in
1999, ongoing adjusted operating EBITDA decreased $1.3 million. During 2000,
Foods incurred significant product launch costs related to It's Pasta Anytime
that more than offset gross profit generated by incremental sales. These costs
included advertising, slotting fees paid to retailers to gain shelf space, and
trade and consumer promotion expenditures. As a result of the launch-related
costs, It's Pasta Anytime's adjusted operating EBITDA declined from 1999 by
approximately $22 million. The investment in It's Pasta Anytime overshadowed
significant improvements in the sauce business and decreases in selling, general
and administrative costs. Sauce's adjusted operating EBITDA improved
approximately $10 million due primarily to higher volumes in domestic and
international markets and lower raw material costs. Lower selling, general and
administrative costs of approximately $11 million were primarily due to the
absence of 1999 implementation costs associated with enterprise-wide information
technology systems and a workforce reduction program implemented in 2000.
1999 vs. 1998
Chemical
- --------
Chemical sales in 1999 decreased $11.9 million, or approximately 1%, from the
prior year. The most significant items that negatively impacted 1999 sales were
generally lower pricing, unfavorable currency exchange rates in Latin America,
and the prior year exit from certain non-core businesses in North America,
Europe and Latin America. These declines were substantially offset by improved
volumes, primarily in the North America forest products resins and UV coatings
businesses, and two acquisitions in the United States and Europe.
Significantly lower pricing, which negatively impacted sales by $76.5 million,
reflects competitive market conditions as well as contractual arrangements,
primarily in North America, that require pass-through of significantly lower raw
material costs, primarily for methanol, phenol and urea.
Unfavorable currency exchange rates, due primarily to the significant currency
devaluation in Brazil in early 1999, had an unfavorable impact on 1999 sales of
$58.0 million.
The 1998 divestitures of the North America paper resins business and Latin
America plastic films business and the 1998 closure of a European operation
caused 1999 sales to be $30.7 million lower versus the prior year. The second
quarter acquisition of Spurlock Industries, Inc. and the third quarter
acquisition of Blagden Chemicals, Ltd. contributed incremental 1999 sales of
$17.5 million and $34.1 million, respectively.
Overall volume improvement of approximately 10%, excluding the effect of
acquisitions and divestitures, had a positive impact on 1999 sales of $104.9
million, with most of the improvement coming from the North America forest
products resins and UV coatings businesses. The improved volume in North America
forest products resins is driven by continued low interest rates and strong
housing and construction activity. The improved volume in UV coatings reflects
significant demand for optical fiber.
Adjusted operating EBITDA increased $30.3 million, or approximately 17%, from
1998. The improvement is due primarily to the significantly higher volume,
including increased volume from acquisitions, but also reflects overall gross
margin improvement. Negatively impacting adjusted operating EBITDA are higher
selling, general and administrative expenses and the effect of unfavorable
currency exchange rates, primarily in Latin America. The gross margin
improvement reflects significantly lower raw material costs, which were
substantially offset by lower selling prices that reflect both contractual
arrangements, under which pricing is tied directly to raw material costs, and
continuing competitive pressures in the market. As a result of specific programs
to improve manufacturing processes and other manufacturing cost reduction and
control programs, overall plant processing costs were flat compared to prior
year.
Consumer Adhesives
- -------------------
Consumer Adhesives' net sales increased $8.3 million or approximately 9%, to
$100.5 million from $92.2 million. The increase reflects higher volume and
improved mix.
16
Consumer Adhesives' adjusted operating EBITDA increased $3.3 million or
approximately 24% in 1999 to $16.9 million from $13.6 million. The increase
reflects higher volume, improved mix and productivity improvements.
Corporate and other
- ---------------------
Adjusted operating EBITDA declined $1.2 million, to a loss of $10.7 million in
1999 from a loss of $9.5 million in 1998, principally due to higher general and
administrative expense. Lower net expense of $1.8 million due to gains on
disposal of property in 1999 compared to losses in 1998 and improved cost
management resulting in lower 1999 salary costs of $1.8 million were more than
offset by a net increase in 1999 expenses related to settlement of various
corporate liabilities and administrative expenses.
Businesses sold or distributed
- ---------------------------------
The businesses sold or distributed classification includes the Company's
infrastructure management services business and printing inks business in 1999
and 1998 and the commercial and industrial wallcoverings business in 1998 only.
Net sales and adjusted operating EBITDA for the infrastructure management
services business and the printing inks business are consistent with prior year.
The commercial and industrial wallcoverings business was divested in 1998,
resulting in no reported sales or adjusted operating EBITDA in 1999 compared to
sales and adjusted operating EBITDA of $36.7 million and $0.5 million,
respectively, in 1998.
Foods
- -----
Foods' sales for the year ended December 31, 1999 decreased $158.2 million, or
approximately 22%, to $547.9 million from $706.1 million in 1998. The Foods
Unaligned businesses sold during 1999 and 1998 accounted for $108.7 million, or
approximately 69%, of the decline. Net sales from ongoing businesses decreased
$49.5 million. The decline was driven by four key factors: 1) management's
decision to shift its promotion strategy on a portion of its pasta line to Every
Day Low Pricing, which reduced sales offset by a reduction in promotion
spending; 2) reduction in customer inventories, especially in pasta; 3)
management's decision to de-emphasize non-core, lower profit pasta brands and
channels; 4) increased competition in the foodservice and soup and bouillon
businesses.
Foods' adjusted operating EBITDA increased $5.4 million, or approximately 56%,
to $15.1 million in 1999 from $9.7 million in 1998. This increase is attributed
to the $3.3 million improvement of Foods Unaligned businesses and an improvement
in Foods' ongoing operations of $2.1 million. Most of the Foods Unaligned
businesses were sold in 1998 with all Foods Unaligned business sales completed
in 1999. When excluding $9.3 million of gains on the favorable settlements of
litigation in 1999, ongoing operating results declined $7.2 million. Lower raw
material costs and improved pasta manufacturing operations were offset by costs
associated with the implementation of new systems. Additionally, incremental
marketing investments primarily related to new products and reduced volumes
previously mentioned, contributed to the decline.
SIGNIFICANT OR UNUSUAL ITEMS EXCLUDED FROM ADJUSTED OPERATING EBITDA:
- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
--------------------------------- -------------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(Loss) gain on disposal of businesses, net $ (0.9) $ 7.4 $ 8.3 $ 3.9 $ 56.5 $380.0
Business realignment, asset
write-offs and other charges (63.7) (41.6) (2.5) (69.4) (41.6) (25.8)
------- ------- ------- ------ ------- -------
$(64.6) $(34.2) $ 5.8 $(65.5) $ 14.9 $354.2
- ---------------------------------------------------------------------------------------------------------------------
Note: See also the Significant or Unusual Items on page 8.
2000
The Company's loss on disposal of businesses primarily relates to the sale of
the printing inks business partially offset by lower than expected costs related
to the sale of the commercial and industrial wallcoverings business. The
Combined Companies gain on disposal of businesses represents the Company's loss
offset by Foods' gains of $4.8 million due to lower than expected exit costs
related primarily to the 1998 Signature Flavors sale. (See also Note 4
to the Consolidated and Combined Financial Statements.)
17
The Company's business realignment, asset write-offs and other charges represent
costs of $38.4 million related to plant closures in the United States, Argentina
and the United Kingdom. Also included is $25.3 million to exit certain raw
material purchase contracts, which extended through 2002, in order to take
advantage of opportunities that have arisen to obtain more favorable pricing.
This charge is reflected in cost of sales in the Consolidated and Combined
Statements of Operations. The Combined Companies also incurred costs of $5.7
million related to a Foods corporate workforce reduction program.
1999
The Company's 1999 gain on disposal of businesses primarily relates to gains on
the sale of the commercial and industrial wallcoverings business due to lower
than expected exit costs. In addition to the Company's gain, the Combined
Companies' 1999 gain on disposal of businesses primarily includes gains of $48.6
million on the sale of Foods Unaligned businesses due to additional proceeds and
lower than expected exit costs related to the 1998 KLIM sale. (See also Note 4
to the Consolidated and Combined Financial Statements.)
The Company and Combined Companies' business realignment charges of $41.6
million include a Chemical plant expansion project that was cancelled resulting
in the write-off of engineering, equipment and other costs of $25.0 million. In
addition, certain Chemical operations in the Philippines, Brazil, and Uruguay
were closed as part of an effort to consolidate operations, resulting in a total
charge of $16.6 million.
1998
The Company's gain on disposal of businesses relates to the sale of a Chemical
business in Latin America. The Combined Companies' gain on disposal of
businesses reflects the Chemical gain as well as gains of $371.7 million on the
sale of Foods Unaligned businesses. (See also Note 4 to the Consolidated and
Combined Financial Statements.)
The Company's business realignment charge of $2.5 million relates to the closure
of a European Chemical operation. The Combined Companies' business realignment
charges include the Chemical charge as well as charges for the closure of a
Foods plant and impairment of assets of two other Foods plants totaling $23.3
million.
NON-OPERATING EXPENSES AND INCOME TAX EXPENSE:
- ---------------------------------------------------
NON-OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
-------------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Interest expense $ 62.7 $ 63.1 $ 64.4 $ 62.7 $ 63.2 $ 65.5
Affiliated interest expense 17.0 19.1 22.8 2.4 5.3 5.4
Interest income and other (17.8) (34.8) (30.9) (15.5) (33.6) (34.7)
Investment write-downs and other charges 68.0 3.0 26.7 68.0 3.0 26.7
------ ------ ------ ------ ------ ------
$129.9 $ 50.4 $ 83.0 $117.6 $ 37.9 $62.9
- ----------------------------------------------------------------------------------------------------------------
2000 vs. 1999
- ---------------
Consolidated non-operating expenses increased $79.5 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999. The increase is
primarily attributable to increased investment write-downs from $3.0 million in
1999 to $48.0 million in 2000 (See Note 8 to the Consolidated and Combined
Financial Statements) and recording a liability of $20.0 million for potential
costs related to the financial decline of a limited partnership for which a
wholly owned subsidiary of the Company serves as general partner. (See Note 19
to the Consolidated and Combined Financial Statements) Other changes include a
reduction in interest income of approximately $15 million due to lower average
cash balances in 2000 compared to 1999 and reduced unrealized gains on an
interest rate swap of approximately $6 million, which terminated in September
2000. These decreases were partially offset by higher dividend income of
approximately $5 million from an affiliate and reduced affiliated interest
expense due to lower average loan balances outstanding in 2000 compared to 1999.
Combined non-operating expenses increased $79.7 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999. The increase is
primarily attributable to the consolidated factors discussed above.
18
1999 vs. 1998
- ---------------
Consolidated non-operating expenses decreased $32.6 million for the year ended
December 31, 1999 to $50.4 million from $83.0 million in 1998. The decrease is
primarily attributable to reduced investment write-downs. (See Note 8 to the
Consolidated and Combined Financial Statements.) Interest income and other
increased $3.9 million primarily due to the unrealized gain on an interest rate
swap which is marked to market, offset partially by lower average cash balances
in 1999.
Combined non-operating expenses decreased $25.0 million for the year ended
December 31, 1999 to $37.9 million from $62.9 million. The decrease is primarily
attributable to the investment write-downs discussed above.
INCOME TAX EXPENSE
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED COMBINED
----------------------------- ----------------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Income tax (benefit) expense $(6.6) $ 20.8 $33.8 $(68.0) $ 31.7 $ 133.4
Effective tax rate 10% 27% 59% N/M 26% 33%
- ----------------------------------------------------------------------------------------------------------
2000 vs. 1999
- ---------------
The 2000 consolidated income tax benefit primarily reflects a settlement with
the Internal Revenue Service ("IRS") and the impact of usage limitations on
foreign tax credits. As a result of a settlement reached with the IRS in the
second quarter of 2000, the Company recorded net tax expense of $5 million
consisting of valuation reserves recorded on foreign tax credits of $30 million
that are no longer likely to be utilized, substantially offset by a $25 million
reduction of amounts established for tax issues related to the divestiture of
certain segments of the Company's business that are no longer considered
necessary. In addition, approximately $10 million of income tax expense was
recorded on foreign source income because related foreign tax credits are not
expected to be utilized within the expiration period. The 1999 consolidated
effective rate reflects a higher portion of net income derived from foreign
operations and the effect of lower tax rates in foreign jurisdictions.
The 2000 combined income tax benefit primarily includes the consolidated factors
discussed above, taxes provided for anticipated divestiture liabilities and
amounts related to the IRS settlement for the sale of Foods that are classified
as discontinued operations in consolidated are classified as income tax benefit
for combined. The classification of these amounts differ between consolidated
and combined because combined does not reflect the sale of Foods as a
discontinued operation. (See Note 6 to the Consolidated and Combined Financial
Statements.) The 1999 combined effective rate reflects differences applicable to
foreign divestitures.
1999 vs. 1998
- ---------------
The lower 1999 consolidated effective tax rate reflects net income derived from
foreign operations, offset by foreign tax credits on foreign taxes paid at
significantly higher rates than the Company's effective tax rate in the United
States.
In addition to the discussion above for consolidated tax rates, the 1999
combined effective tax rate primarily reflects lower net taxes primarily
applicable to foreign divestitures.
CASH FLOWS:
- ------------
OPERATING
2000 vs. 1999
- ---------------
Consolidated operating activities provided cash of $23.3 million in 2000
compared to $71.7 million cash provided in 1999, a decline of $48.4 million.
Significant outflows compared to prior year included a decline in adjusted
operating EBITDA of $23.6 million (see page 12), a change in accounts
receivable and inventory cash flows of $40.4 million and
$11.8 million, respectively, primarily in the Chemical
business due to higher raw material costs passed through
to customers and included in inventory, a $25.3 million payment in 2000
to exit certain Chemical raw material supply contracts and lower interest income
of $15.3 million. These increased outflows were partially offset by a $14.1
million increase in trade payables primarily in the Chemical
business due to higher raw material costs, lower tax payments of
19
$26.9 million, a $3.6 million repayment received from CCPC Acquisition Corp.
for interest accrued on the loan that was repaid in 2000, a $3.7 million
payment received from Wise, upon its sale, related to its retirement benefit
plans, the absence of a 1999 payment of approximately $13.0 million to settle
certain long-term disability claims and the absence of 1999 settlement
payments of $6.4 million related to divested businesses.
Combined cash provided by operating activities of $34.0 million was $44.5
million less than the $78.5 million provided in 1999. In addition to the
consolidated factors discussed above, after eliminating the Wise receipts, the
Combined Companies had additional outflows due to further reductions in adjusted
operating EBITDA of $15.1 million and higher Foods' tax payments of $24.0
million. These additional combined outflows were offset by lower
Foods' inventory balances of $14.0 million primarily due to the use of tomatoes
Purchased in the fourth quarter of 1999, improved Foods' accounts receivable
Cash flows of $11.2 million due primarily to the absence of 1999 collection
issues associated with systems implementations, improvement in Wise operations
(classified as discontinued operations) of $9.6 million, and the absence of
1999 payments of $7.2 million related to the divestiture of Foods' Unaligned
businesses.
1999 vs. 1998
- ---------------
Consolidated cash provided by operating activities totaled $71.7 million in 1999
and $46.0 million in 1998, an increase of $25.7 million. The most significant
components of the increase include an overall improvement in adjusted operating
EBITDA of $29.4 million (see page 12), an increase of $5.4 million due to a
smaller increase in inventories in 1999 primarily in the Chemical business
caused by reduced raw material costs and inventory reduction programs, and
improvements due to the timing of trade payments of $31.3 million, all partially
offset by higher net interest and tax payments of $32.4 million.
Combined cash provided by operating activities totaled $78.5 million in 1999,
compared to cash used in operations of $33.2 million in 1998. The $111.7 million
improvement consisted primarily of an overall improvement in adjusted operating
EBITDA of $34.5 million (see page 12), improvements due to the timing of trade
payments of $38.2 million and lower tax payments of $67.5 million related to
gains on divested businesses. These improvements were partially offset by net
reduced operating cash inflows related to divested businesses and an increase in
1999 inventories of $13.0 million to take advantage of favorable supplier
pricing.
INVESTING
2000 vs. 1999
- ---------------
Consolidated investing activities used $195.7 million cash in 2000 compared to
$229.5 million cash used in 1999, a decrease of $33.8 million. The decrease
primarily represents the absence of a 1999 $50.0 million investment in the form
of junior preferred stock in WKI and an $8.9 million collection of
outstanding debt in 2000 which eliminated the Company's investment in Wise
(See Note 18 to the Consolidated and Combined Financial Statements),
partially offset by increased capital expenditures of $29.7 million primarily
for Chemical plant expansions. Divestiture proceeds of $10.9 million in 2000,
primarily from the sale of Chemical's printing inks business, were ahead of 1999
proceeds of $7.6 million from the sale of Chemical's molding compounds business.
Acquisitions in 2000 of $118.1 million by Consumer Adhesives and Chemical (See
Note 4 to the Consolidated and Combined Financial Statements) were less than
1999 acquisitions of $119.6 million for Spurlock, Blagden and the resins
manufacturing plant in Minnesota.
Combined investing activities used $253.9 million cash in 2000 compared to 1999
cash used of $266.1 million, a $12.2 million decrease. In addition to the
consolidated factors described above, after eliminating the Wise collection of
$8.9 million, the decrease in combined investing activities reflects the absence
of $23.6 million of proceeds from the 1999 sale of Foods Unaligned businesses,
partially offset by reduced Foods' capital expenditures of $11.4 million due to
the absence of the 1999 enterprise-wide system implementation.
1999 vs. 1998
- ---------------
Consolidated investing activities used $229.5 million cash in 1999 compared to
cash generated of $336.6 million in 1998, a decrease of $566.1 million. The
purchases of Spurlock, Blagden and the resins manufacturing plant in
Minnesota by Chemical used $119.6 million in 1999 compared to $14.4 million used
to purchase Sun Coast Industries, Inc. in 1998. The divestiture proceeds in 1999
include $7.6 million from the sale of Chemical's molding compounds business
compared to divestiture proceeds in 1998 of $304.8 million from the sale of
Decorative Products, $15.5 million from the sale of a Latin American plastic
films business, and $15.6 million from the sale of the
commercial and industrial wallcoverings business. Investing activity in
1998 also includes $67.6 million relating to net repayments of
20
affiliated borrowings by Foods and Wise, compared to net Foods and Wise 1999
affiliated borrowings of $2.3 million and a 1999 $50.0 million investment in the
form of 16% cumulative junior preferred stock in WKI.
The Combined Companies investing activity used $266.1 million in 1999 compared
to generating cash of $972.4 million in 1998, a decrease of $1,238.5 million. In
addition to the above, the Combined Companies' 1999 divestiture activity
reflects $23.6 million of proceeds from the sale of Foods Unaligned businesses
compared to $733.2 million in 1998. The 1999 and 1998 return from (investment
in) affiliate of ($2.3) million and $67.6 million, respectively, in the
consolidated investing flows is eliminated in the combined flows as the Foods
and Wise operations are included in the Combined Companies.
Capital expenditures for the Company in 1999 increased $22.3 million to $74.8
million in 1999 from $52.5 million in 1998. Capital expenditures for the
Combined Companies increased $41.7 million to $141.9 million in 1999 from $100.2
million in 1998. The increase is primarily the result of plant expansion
projects to increase capacity in the Chemical operations, and the implementation
of an enterprise-wide system and new product manufacturing line investments in
the Foods business for combined.
FINANCING
2000 vs. 1999
- ---------------
Consolidated financing activities generated cash of $5.0 million in 2000
compared to cash used of $319.1 million in 1999. The $324.1 million difference
is primarily due to 2000 affiliated borrowings and receipts of $86.7 million,
compared to 1999 net affiliated repayments and loans of $225.5 million (see
1999 vs. 1998). Affiliated activity in 2000 is comprised primarily of borrowings
from BWHLLC of $61.4 million and receipts from CCPC Acquisition Corp. of $56.2
million, partially offset by repayments to Foods of $31.0 million. In addition,
2000 included short-term debt borrowings of $33.3 million compared to 1999
repayments of $3.8 million. Partially offsetting these net improved inflows are
$17.6 million of increased net long-term debt repayments (primarily Industrial
Bonds) and the distribution of $10.3 million in cash temporarily held by the
infrastructure management services business for the benefit of its customers.
The $10.3 million distribution represents payroll related withholdings for which
the infrastructure management services business was liable when the business was
distributed to the Company's parent (See Note 18 to the Consolidated and
Combined Financial Statements).
Combined financing activities generated cash of $35.6 million in 2000 compared
to cash used in 1999 of $279.5 million. The $315.1 million difference primarily
includes the consolidated improvement above, excluding net affiliated inflow
differences between years related to Foods of $17.9 million, which is
eliminated, additional short-term debt borrowings of $6.3 million and additional
long-term debt borrowings of $3.0 million.
1999 vs. 1998
- ---------------
Consolidated financing activities used $319.1 million cash in 1999 compared to
cash generated of $105.9 million in 1998. The difference of $425.0 million is
primarily due to $411.8 million of 1998 affiliated borrowings from Foods,
representing proceeds from the sale of Foods Unaligned businesses, and BWHLLC,
compared to 1999 net affiliated repayments and loans of $225.5 million. The 1999
affiliated activity includes repayments to BWHLLC and Foods of $169.3 million
and a short-term loan of $56.2 million to CCPC Acquisition Corp., an affiliate
of the Company's parent, as described in Note 18 to the Consolidated and
Combined Financial Statements. The 1998 borrowings from Foods were partially
offset by repayment of a $236.0 million revolving line of credit.
Combined financing activities used $279.5 million in 1999 compared to $441.9
million used in 1998. The $162.4 million increased use of cash in 1998 was
primarily due to $236.7 million repayment of a revolving line of credit using
business divestiture proceeds and a $272.2 million distribution to a Foods
affiliate, partially offset by 1998 borrowings from BWHLLC of $134.3 million.
The 1999 financing activities include net repayment of affiliated borrowings
from BWHLLC of $123.4 million and a short-term loan of $56.2 million provided to
CCPC Acquisition Corp. (See Note 18 to the Consolidated and Combined Financial
Statements).
21
LIQUIDITY AND CAPITAL RESOURCES:
- -----------------------------------
As of December 31, 2000, the Company and the Combined Companies had $809.0
million in contractually committed lines of credit (the "Credit Agreement") of
which $714.0 million (net of $95.0 million in letters of credit) was available.
The cash held by the Company of $27.8 million and the Combined Companies of
$43.2 million as of December 31, 2000 and the cash available under the Credit
Agreement may be used for acquisitions and to fund working capital needs and
capital expenditures.
As part of the common control exercised over the Company and Combined Companies,
procedures are established to enter into borrowings between the business units
at market interest rates.
The Company's and Combined Companies' planned 2001 capital expenditures are
approximately $92 million and $102 million, respectively. The budgeted capital
expenditures include plans to continue to increase capacity in the Chemical
operations and to further invest in new product manufacturing lines in the Foods
business. The capital expenditures will be financed through operations and, if
necessary, the available lines of credit.
The Company and Combined Companies expect to have enough liquidity to fund
working capital requirements, support capital expenditures and pay preferred
dividends during 2001 and in future years due to cash from operations and
amounts available under the Credit Agreement.
In the third quarter of 2000, the Company entered into a credit agreement with
WKI to provide up to $40.0 million of short-term financing. The original
maturity date of the agreement was December 31, 2000 and was extended into April
2001. At December 31, 2000, $6.1 million was outstanding under this
agreement.
As of December 31, 2000, the Company and the Combined Companies had $198.0
million and $214.4 million, respectively, in deferred tax assets that related to
foreign and alternative minimum tax credits as well as net operating
loss carryforwards. These credits and carryforwards, net of valuation allowances
of $101.7 million and $102.3 million for the Company and Combined Companies,
respectively, are expected to reduce future tax liabilities.
RISK MANAGEMENT:
- -----------------
The Company and Combined Companies enter into various financial instruments,
primarily to hedge interest rate risk and foreign currency exchange risk. The
Company and Combined Companies also enter into raw materials purchasing
contracts and contracts with customers to mitigate commodity price risks.
FOREIGN EXCHANGE RISK
In 2000 and 1999, international operations accounted for approximately 32% and
29% of the Company's and Combined Companies' sales, respectively. As a result,
there is exposure to foreign exchange risk on transactions that are denominated
in a currency other than the business unit's functional currency. Such
transactions include foreign currency denominated imports and exports of raw
materials and finished goods (both intercompany and third party), and loan
payments (both intercompany and third party). In almost all cases, the
functional currency is the unit's local currency.
It is the Company's and Combined Companies' policy to reduce foreign currency
cash flow exposure due to exchange rate fluctuations by hedging firmly committed
foreign currency transactions wherever economically feasible. The use of forward
and option contracts protects cash flows against unfavorable movements in
exchange rates, to the extent of the amount under contract. The Company and
Combined Companies do not hedge foreign currency exposure in a manner that would
entirely eliminate the effect of changes in foreign currency exchange rates on
net income and cash flow. The Company and Combined Companies do not speculate in
foreign currency and do not hedge foreign currency translation or foreign
currency net assets and liabilities. The counterparties to the forward contracts
are financial institutions with investment grade credit ratings.
Foreign exchange risk is also mitigated because the Company and Combined
Companies operate in many foreign countries, reducing the concentration of risk
in any one currency. In addition, foreign operations have limited imports
and exports, reducing the potential impact of foreign currency
exchange rate fluctuations. With other factors being
22
equal, such as the performance of individual foreign economies, an average
10% foreign exchange increase or decrease in any one country would not
materially impact operating results or cash flow, except for Canada which
would significantly impact the Company's operating results. Although considered
unlikely, an average 10% foreign exchange increase or decrease in all countries
may materially impact operating results of the Company and Combined Companies.
In accordance with current accounting standards, the Company and the Combined
Companies defer unrealized gains and losses arising from contracts that hedge
existing and identified foreign currency exposure against commitments until the
related transactions occur. Gains and losses arising from contracts that hedge
existing assets and liabilities are offset against gains or losses arising from
the transactions being hedged. (See Recently Issued Accounting Standards section
for new rules impacting the current accounting treatment.)
A summary of forward currency and option contracts outstanding as of December
31, 2000 and 1999, follows. All contracts summarized for 2000 and 1999 are
entered into by the Company and Combined Companies except the European Monetary
Unit which relates only to the Combined Companies. Fair values are determined
from quoted market prices at December 31, 2000 and 1999.
- --------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- ------------------------------------------------
AVERAGE AVERAGE FORWARD FAIR VALUE AVERAGE AVERAGE FORWARD FAIR VALUE
DAYS CONTRACT POSITION LOSS DAYS CONTRACT POSITION GAIN/(LOSS)
TO MATURITY RATE (IN MILLIONS) (IN MILLIONS) TO MATURITY RATE (IN MILLIONS) (IN MILLIONS)
----------- -------- ----------- ----------- ----------- ------ ----------- ------------
CURRENCY TO BUY
WITH U.S. DOLLARS
- -----------------------
Japanese Yen (1) - - - - 29 112.42 $ 3.7 $ 0.4
CURRENCY TO SELL
FOR U.S. DOLLARS
- -----------------------
Australian Dollars - - - - 11 0.65 0.5 -
British Pound 22 1.47 $88.9 $(1.8) 35 1.61 73.1 (0.3)
Canadian Dollars - - - - 56 1.46 0.3 -
European Monetary Unit 8 0.89 6.9 (0.4) 60 1.01 14.1 0.1
- -------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 1999, amounts include option contracts of $2.5 million, with
38 average days to maturity, 111.39 average contract rate and fair value gain of
$0.2 million.
INTEREST RATE RISK
The Company and Combined Companies have utilized interest rate swaps to lower
funding costs or to alter interest rate exposures between fixed and floating
rates on long-term debt. The Company and Combined Companies do not enter into
speculative swaps or other financial contracts. As of December 31, 2000 and
1999, an interest rate swap was outstanding with a notional value of $24.3
million. Although originally entered into as a hedge, an interest rate swap
having a notional amount of $200 million was determined to no longer meet the
criteria for hedge accounting and was marked to market until its termination on
September 1, 2000.
Fair values of the swaps are independently provided using estimated mid-market
levels. Under interest rate swaps, the Company and Combined Companies agree with
other parties to exchange, at specified intervals, the difference between the
fixed rate and floating rate interest amounts calculated by reference to the
agreed notional principal amount. On average, the Company and Combined Companies
paid 10.5% and received 6.3% in 2000 and paid 10.4% and received 5.2% on the
swaps in 1999. The remaining outstanding swap as of December 31, 2000 matures on
December 1, 2002. A 1% increase or decrease in market interest rates would
result in a $0.2 million increase or decrease, respectively, in the fair value
of the interest rate swap agreement at December 31, 2000. A 1% increase or
decrease in market interest rates would result in a $2.2 million increase or
decrease, respectively, in the fair value of the interest rate swap
agreements at December 31, 1999. The Company and Combined Companies
are exposed to credit related losses in the event of
23
nonperformance by the counterparties to these swaps, although no such losses are
expected as the counterparties are financial institutions having an investment
grade credit rating.
A summary of interest rate swaps for both the Company and Combined Companies as
of December 31, 2000 and 1999 follows:
- -------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
NOTIONAL AVERAGE FAIR AVERAGE FAIR
AMOUNT TRADE TERMINATION FIXED RECEIVE VALUE FIXED RECEIVE VALUE
(IN MILLIONS) DATE DATE PAY RATE RATE (IN MILLIONS) PAY RATE RATE (IN MILLIONS)
- ------------- ----- ----------- -------- ------- ----------- -------- ------- -----------
$ 24.3 12/01/92 12/01/02 13.65% 6.7% $ (3.4) 13.65% 5.4% $ (4.4)
200.0 9/17/85 9/01/00 - - - 10.00% 5.2% (10.6)
- -------------------------------------------------------------------------------------------------------------
The interest rate on most debt agreements is fixed. A 10% increase or decrease
in the interest rate of the variable debt agreements would have an immaterial
effect on the Company's and Combined Companies' net income. The fair value of
publicly held debt is based on the price at which the bonds are trading at
December 31, 2000 and 1999. All other debt fair values are determined from
quoted market interest rates at December 31, 2000 and 1999.
A summary of the Company's outstanding debt as of December 31, 2000 and 1999
follows:
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 (1)
---------------------------------------------- -----------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
---- ---------------------------------------------- -----------------------------------------------
2001 $ 43.5 7.6% $ 43.5 $ 1.8 9.5% $ 1.8
2002 1.4 5.6% 1.4 3.3 8.1% 3.3
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 and thereafter 529.1 8.5% 404.7 536.0 8.4% 451.1
---------- ---------- --------- ---------
$ 574.0 $ 449.6 $ 541.1 $ 456.2
- ---------------------------------------------------------------------------------------------------------------------
(1) December 31, 1999 amounts reflect outstanding debt for years shown.
A summary of the Combined Companies' outstanding debt as of December 31, 2000 and 1999 follows:
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 (1)
---------------------------------------------- -----------------------------------------------
Weighted Fair Weighted Fair
Debt Average Value Debt Average Value
Year (in millions) Interest Rate (in millions) (in millions) Interest Rate (in millions)
---- ---------------------------------------------- -----------------------------------------------
2001 $ 44.1 7.5% $ 44.1 $ 2.1 7.9% $ 2.1
2002 2.0 4.8% 2.0 3.6 7.3% 3.7
2003 1.0 1.9% 0.9 0.7 0.2% 0.7
2004 1.0 1.9% 0.9 0.8 0.2% 0.8
2005 0.6 2.9% 0.6 - - -
2006 and thereafter 531.2 8.5% 406.8 536.9 8.4% 451.8
----------- --------- ---------- ----------
$ 579.9 $ 455.3 $ 544.1 $ 459.1
- ---------------------------------------------------------------------------------------------------------------------
(1) December 31, 1999 amounts reflect outstanding debt for years shown.
The Company and Combined Companies do not use derivative financial instruments
in investment portfolios. Cash equivalent investments are placed with
instruments that meet credit quality standards. These standards are established
within the Company's investment policies, which also limit the exposure to any
one issue. At December 31, 2000, the Company and Combined Companies had $11.1
million and $16.0 million, respectively, invested primarily in time deposits
with average maturity periods of 28 days and 20 days, respectively, and average
rates of 5.2% and 5.4%, respectively. At December 31, 1999, $173.9 million and
$203.0 million for the Company and Combined Companies, respectively, was
invested primarily in commercial paper, time deposits and money market funds. At
December 31, 1999, the average maturity period of the commercial paper
investments was 25 days with an average interest rate of 6.2% for the Company
and Combined Companies. The average maturity periods of the time
deposits outstanding at December 31, 1999 were 47 days and 49 days
and the average rates were 5.8% and 5.5% for the Company and
24
Combined Companies, respectively. The average rate on the December 31, 1999
money market fund investments was 5.7% for the Company and Combined Companies.
Due to the short maturity of the Company's cash equivalents, the carrying value
on these investments approximates fair value and the interest rate risk is not
significant. A 10% increase or decrease in interest returns on invested cash
would have an immaterial effect on the Company's and Combined Companies' net
income and cash flow at December 31, 2000 and 1999.
The $6.1 million carrying value of the Company and Combined Companies' loan
receivable from WKI approximates fair value as management believes the loan
bears interest at a market interest rate. (See Note 18 to the Consolidated and
Combined Financial Statements.)
COMMODITY RISK
The Company is exposed to price risks associated with raw materials purchases,
most significantly with methanol, phenol and urea. For these commodity raw
materials, the Company has purchase contracts, with periodic price adjustment
provisions. The commodity risk also is moderated through use of customer
contracts with selling price provisions that are indexed to publicly available
indices for these commodity raw materials as discussed on pages 13 and 14. There
are no active futures markets for the major raw materials used by the Company.
In addition to that described above for the Company, the Combined Companies
enter into contracts with suppliers with specified prices and volumes. There are
no active futures markets for major commodities used by the Combined Companies.
EQUITY PRICE RISK
Investments held by the Company and Combined Companies primarily consist of two
common stock equity interests received as partial consideration on the sale of
certain businesses and an investment in preferred stock of an affiliate. One of
the common stock investments represents approximately 33% of the outstanding
shares and is accounted for using the equity method. At December 31, 2000 and
1999, the unamortized excess of the Company's investment over its equity in the
underlying net assets was $16.1 and $16.5, respectively. The other two
investments are accounted for using the cost method.
The Company's and Combined Companies' investments also include certain other
partnership, subsidiary and joint venture interests.
The Company and Combined Companies review the carrying value of investments in
accordance with existing accounting guidance that requires investments to be
adjusted to fair value if the decline in value is considered to be "other than
temporary" based on certain criteria. The Company and Combined Companies
recorded investment write-downs of $48.0, $3.0 and $26.7 in 2000, 1999 and
1998, respectively.
A summary of investments as of December 31, 2000 and 1999 follows. Fair value is
based on the market stock price as of December 31, 2000 and 1999 for publicly
traded common stock. Fair value for other investments is based on other
similar financial instruments.
- ---------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
DATE VALUE VALUE VALUE VALUE
DESCRIPTION ACQUIRED (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- --------------------- --------- -------------- -------------- ------------- --------------
Equity method securities 10/11/96 $45.0 $107.8 $47.0 $62.1
Cost method securities 11/01/99 $10.0 $ 10.0 $51.5 $51.5
- ---------------------------------------------------------------------------------------------------------------
Readers are cautioned that forward-looking statements contained under the
heading of "Risk Management" should be read in conjunction with the disclosure
under the heading: "Forward-Looking and Cautionary Statements".
25
RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------